Terminal Stock Market Slipping Away from Investors

By: Paul_J_Nolte

The nearer your destination, the more you slip slide away. Another week of weakness in the markets, punctuated by a one day rally (just to keep everyone honest) has put many investors in a rather foul mood. Just when the markets looked as though they had put in a bottom back in November, here we are again at critical point – looking like we will slip slide away toward much lower levels. The talk of the past week centered on the nationalization of the banks, just as the taxpayers took a 36% position in Citigroup, on top of their already dominate position in AIG, Fannie Mae and Freddie Mac.

To make matters worse, housing prices do not look as though they are stabilizing anytime soon and overall economic growth was ratcheted significantly lower to the worst quarter since 1982. With unemployment figures due on Friday, expected to surpass 600,000 newly minted unemployed individuals, it will require a Herculean effort by the markets to avoid slip sliding significantly below the November lows. If the great Oracle of Omaha's crystal ball is fuzzy, what chance do mere mortals have in these turbulent times?

Like the first big college test, the markets are embarking upon their first full-fledged test of the 740-750 zone that was the lows of November, just below the lows of 2002 when the markets last bottomed. There are a few glimmers of hope in the sea of doom, but it look as though the lows may only provide tender resistance as the markets embark upon setting new multi-year lows. Volume and the net number of advancing to declining stocks as well as the number of new lows continue to hold above the old lows, but just barely.

The weekly data is less forgiving, as it already points to new lows in the net number of advancing stocks. Various parts of the markets have provided a safe haven during the markets vicious declines, gold and oil during the '73-74 decline and small cap/real estate investment trusts (REITS) during the 2000-'03 decline. Today bonds are providing the only safe haven and then only treasury bonds as corporate bonds have the dark cloud of illiquidity surrounding them. Whether commodity prices, international investing or small stocks – they all have been beaten badly and within a few percentage points of the broad market. Although this situation will not last forever, we are increasing our exposure to bonds and reducing some equity holdings.

Treasury prices have declined over the past couple weeks as the government begins to auction off large hunks of the deficit – funded by Treasury bond issuance. While there remains a relatively healthy demand for Treasury securities, there is a worry that global investors will shun these holdings, as they already own bucketfuls. The rise in bond yields is not yet enough to entice investors out of stocks to the safety of bonds, however even a small positive return is looking mighty good vs. the large negative numbers being generated by the equity markets. As bonds are maturing in client portfolios, we are buying bonds that mature no more than 5 years out for two reasons; first, in a rising rate environment it allows us to capture higher current yields and second, when the equity markets turn, we want cash available for investment.

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.

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.