Stock Market Buying Value on the Dips

By: Paul_J_Nolte

Meet the new boss, same as the old boss – we don't get fooled again. Instead of lyrics to a Who song, it could easily be applied to Tim Geithner's unveiling of the new TARP plan. The market reaction is the same as that of previous Treasury chief Paulson. The rolling out of the initial TARP plan saw the markets embark upon a breathtaking dive that culminated with the first market bottom in mid-November. Let's hope that Tuesday's swoon does not follow the same path.

Economically little has changed for the US, although retail sales seemed to improve some, but the prior months were revised lower erasing the indicated gain. The coming week is loaded with housing news, from starts (which could approach a mere 500,000 units annually) to the housing index that has remained at all-time lows. The only bounce the markets saw last week related to news that the administration will be looking at providing some relief for homeowners (or owers) that are behind on their loans. The sound and fury emanating from Washington sounds eerily familiar – just don't stand there do something – anything!

The markets looked to have turned the corner, having bumped up against important resistance at 880 and momentum seemed to be in the bullish camp. That idea got toasted with Tuesdays Dow near 400-point decline – again pushing the SP500 back toward the 800-support line. As we have mentioned in the past, a decline through 800 would open the door to a “formal” retest of the November lows around 750. A break of that level could morph into a full blown crash scenario that may find a resting spot anywhere between 600 and 640, taking away roughly one-third of the gains from the 1982 lows. While possible, we are not yet putting too much weight on that outcome.

Any decline below 750 we will be stepping up our purchases of equities, as they would be valued at levels that have only been seen once or twice in over 80 years – truly a rare buying opportunity. Of course with the markets listening more to Washington than to corporate or economic data now stand the chance of completely losing faith in capitalism, when in fact the loss of corporate morality should be front and center. Will moderation in the markets continue over the coming weeks or will it be a race to the bottom? Could be an interesting end to February.

As we have been projecting for the last few weeks, the bond model has once again flipped negative, indicating interest rates are likely to continue their recent rise into the future. Obvious concerns over the printing of more money, pushing short-rates to zero and tossing shovel-fulls of money into the economy may spur inflationary fears at some point in the future. However, with consumers and financial institutions hanging onto every dollar instead of injecting into the economy, inflationary fears may be overblown at this time. In fact, we are seeing a contraction in the Fed's balance sheet, indicating they are already pulling back on some of the record stimulus injected over the past three months.

By Paul J. Nolte CFA
http://www.hinsdaleassociates.com
mailto:pnolte@hinsdaleassociates.com

Copyright © 2009 Paul J. Nolte - All Rights Reserved.
Paul J Nolte is Director of Investments at Hinsdale Associates of Hinsdale. His qualifications include : Chartered Financial Analyst (CFA) , and a Member Investment Analyst Society of Chicago.

Disclaimer - The opinions expressed in the Investment Newsletter are those of the author and are based upon information that is believed to be accurate and reliable, but are opinions and do not constitute a guarantee of present or future financial market conditions.

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