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  • Nolte Notes for the week of January 9th 2012
    What is in the past won’t hurt you…or so the financial markets believe. European debt problems are but a glimmer in the rearview mirror and the market began the year looking on the bright side of life. The US economic data continues to demonstrate some modest strength, as the employment report looked good all the way around. Manufacturing reports showed better than expected data as well as vehicle sales, indicating the consumer has opened their purse a bit and begun spending. While spending is not at rip roaring pace, the purse strings have been loosened a bit, however sustainability is the larger question. One monthly report that is distressing is the federal tax deposits, made via payroll deductions. After contracting at a 10%+ year over year rate late in 2009, they gained strength through early 2011 and again turned lower. At the end of 2011, these payments are slightly lower than a year ago. If employment is indeed getting better, than why are collections declining? Since the tax “holiday” has been in force for over a year, that impact should be negated. This series last began weakening late in 2006, well ahead of the economic decline. The current slowing is a year old and bears watching as the year unfolds. More meetings are set in Europe for more discussions and could impact stocks again this week.

    As outlined in last week’s missive, expectations for equity weakness early in the year should give way to a nice second half rally that once again puts stocks near the beginning of the year levels. So far, the punch higher on the first trading day of the year masked the blasé trading the remainder of the week. One Wall Street mantra dictates that: so goes the first week, goes the month and the year. If that is to hold this year, we may have seen all the excitement for the year! It will be more instructive to see how stocks trade as earnings season begins in a few weeks. Also, the economic data, while good, needs to continue to build toward more normal levels. Cited in many places is the “bearishness” of investors and cash on the sidelines that should push stocks higher in the months ahead. While I don’t have reliable data on “sideline” cash, sentiment readings from individual investors (AAII) and institutional sentiment readings show the most bullish since early 2011, around the time/levels of the market peak. While stocks and euphoria can continue further, don’t be fooled by negative “attitudes”, they are well above apathetic levels and bordering on ebullient. Could be hard for sustained rallies to persevere in this environment.

    Bond investors keep on keeping on as the bond market indicators point to still lower yields ahead. The model uses a plurality of the evidence from bonds, utilities and commodities. Commodity prices have been in sharp retreat since summer, when commodity prices were up over 40% on a year over year basis, are now down 10% vs. year ago levels and nearly 14% from summer. Meanwhile, corporate bonds and utilities remain positive; although the yearlong rally in utilities may be nearing an end and so too could end the bullish configuration for bond prices. Historically, first portions of the year have been poor for bonds until May, when bonds have historically performed better. We’ll see if this year tracks the historical tendencies. As with stock prices, Europe will hold the key.

    It has been awhile since looking at the various industry sub-groups beneath the broad sectors of the markets. For instance, driving the strength in the consumer staples have been tobacco and some of the non-durable (think P&G and Church & Dwight) while the soft drink portion (thanks to weakness in Pepsi: PEP vs. Coke: KO) has been more about one stock than the group as a whole. Checking out the rankings of the sub-groups by their performance over a variety of periods in the past year shows rather eclectic top groups: from pipeline companies to railroads, from tobacco to industrial suppliers. On the strength of Amgen (AMGN) the biotech group leads all sub-groups. AMGN is essentially unchanged for the past five years, while earnings are up by 50% over that period. Now selling for roughly 12x 2011 earnings, valuations are among the lowest in the history of the company. Granted earnings are not growing as fast as they were in the 1990’s, however even an average multiple on 2012 earnings could push the stock toward $75 from a current price of $65. After trailing the market for the past three years, the stock could have a 6-12 month period of superior performance vs. the index similar to the last time in 2008.

    The stocks markets have been performing begrudgingly better after the opening hours of 2012. Many of the popular “plays” of utilities, consumer and healthcare may begin giving way to technology, energy and even financial stocks. However, Europe continues to hold the key to long-term performance. Bond investors may experience a rough few months as yields back up on the heels of better economic data. This too may be short-circuited by European news.

    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.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
    Jan 11 11:42 AM | Link | Comment!
  • NOLTE NOTES September 19, 2011
    It is déjà vu all over again! Greece, which has been in the news regarding their debt problems for the past 2 years, is now the reason for the 5%+ rally in stocks last week as their debt issue is no longer. Due to concerted efforts between the US and European banks, enough paper has been provided to allow bills to be paid for another few months. Greek government officials spent their weekend to figure out ways to demonstrate they too were serious about cutting their budget down to size. However, as with past efforts, the work of the past week by central banks around the world are likely to be unraveled in a few weeks and we’ll all be back where we started from…again. Back at the US economy, very little good can be said about the economic reports of the week just past, as nearly all pointed to still slowing or lower economic growth than many expected. Given the very low GDP report of the second quarter, it is hard to fathom that the third quarter will be all that great when preliminary figures are released next month. Since there will be little in the way of meaty economic data, all eyes will be on the special two day Fed meeting that could result in actions to help prop up the US economy.

    The strong rally of the past week has put many of the short-term momentum indicators in “over bought” territory, indicating at least a rest is likely. However, questions about the underlying conviction of this past week (especially tied to the “Greek solution”) leave the markets still vulnerable to at least a modest decline. What has yet to leave the markets are volatility, with 100+ point moves in the Dow in two-thirds of the trading session since the first of August, investors struggling with trying to guess the next move for stocks. The SP500 currently sits right at the August 31st high (1218) and has spent a fair amount of time just below 1150, so a fairly neat trading range has been in place since early August. Further, above the market is 1250, which marked the March and June bottoms that may provide another resting spot for stocks. Short-term momentum remains positive, but as we’ve seen over the past few months, that lasts until the next market open. The question remains open as to whether the current decline is merely a rest, like last summer, or something more significant like 2008. The next few weeks could provide an answer, but right now it is too hard to guess.

    The worst performing group last week in the equity markets was basic materials, the building blocks of the economy. Commodity prices fell just as much as equity prices rose, providing some support to bond investors that inflation pressures may be easing a bit. Although the government inflation reports showed many measures of inflation getting stronger in recent months, bond investors continue to bid prices higher and yields ever lower. Still seen as a “safe” investment, the treasury market remains the safe haven for money in troubled markets. Unless and until there is a clearer idea of a long-term solution for Greece and the US deficit, bond yields may remain relatively low for quite some time.

    Given the big jump in stock prices, expectations would be for a similar jump in the “risk-on” groups, like materials, industrials and energy – indicating that investors believe that economic growth is at hand. Unfortunately only the industrials, boosted by aerospace, rails and suppliers like Fastenal (FAST) managed to outdo the SP500. Granted the defensive side didn’t outdo the broad averages either, with technology and consumer services (led by airlines and hotels) leading the markets higher. However, when looking into the trends beneath the daily or weekly swings, the defensive sectors continue to pace the markets. The only modest change occurring over the past few weeks has been strength in the technology group, especially in semi-conductors. This may point to a resurgence in technology spending as corporations continue to try to do more with less (meaning staff). While we cheer the European “solution” investors are voting with their dollars that last week’s success may be this week’s failure. Add size to the defensive tilt of portfolios, as the largest stocks (the top 100) are doing better than the remainder of the SP500. The very large companies that can survive a credit-starved recovery are replacing the decade leader of the’00’s – small cap stocks. In addition, many of the very largest companies are sitting on a stockpile of cash that is likely to be used to either buy back shares or increase dividends to shareholders, both having the potential to raise stock prices.

    The strong rally of last week put the market at the best level in five weeks, but whether it can go much higher may depend upon what is said by not only the Fed, but officials addressing Greece debt issues. We remain cautious, as the markets have been turning viciously and quickly over the past few weeks. Bond investors should take continued comfort from a still strong desire to “keep money safe”.

    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.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
    Jan 09 1:26 PM | Link | Comment!
  • Nolte Notes for the week of January 31 2011
    Investors have heard inflation is not a problem in the economy and that Fed Chairman Ben Bernanke believes inflation is not likely to spurt higher anytime soon. However, when looking around the world, while headline inflation may indeed be very calm, food inflation is rising quickly. Cases in point are in Tunisia and Egypt, where rioting in the streets, initially centered on higher food costs, has morphed in Egypt into civil unrest that threatens the current government and President Mubarak’s tenure in office. That development was pointed to as the prime mover behind Friday’s market decline, erasing the slowly cultivated gains from the entire week as well as reversing declining energy and gold prices. The economic and earnings data last week were at least supportive of stock prices, as economic growth has surpassed the prior peak, making this now an expanding economy rather than a recovering economy. The Fed is not impressed; keeping interest rates at their current zero level for the foreseeable future as they lean heavily on their one tool to solve all the economic ills.

    Friday’s decline pushed the averages lower for the week, however more stocks actually rose on the week than fell. While good news for last week, reactions to the events in the Middle East are likely to trump any economic or company specific news as trading begins on the last day of the month. It is as though the market was a balloon looking for a pin that has now been found in Cairo. Very bullish investor sentiment figures combined with a begrudgingly steady flow of investment dollars from those wanting to jump on the 20%+ rise from August had to end sometime, the events in the Egypt were merely a catalyst for what had been building over the past 4-6 weeks. It will now be left to the corrective activity to help determine and shape what is to follow. Expectations are for a violent but short correction as investors reassess their global views. Volume will be a key component during the correction, as there have been recent signs of expanding volume during up days and some contraction in volume during market declines. Whether volume trends reverse over the course of the next few weeks will be important in determining whether investors are more interested in selling at any price or willing to take a more wait and see approach to unfolding events in the Middle East. Based upon both Friday’s activity and what is likely to unfold during the early portion of the week may take the starch out of some bullish sentiment to a more neutral position.

    Bonds investors have had a rough ride so far this year, with yields all over the map as economic growth in the US continues to unfold countered by still weak housing and employment data and finally with a rush into the “safe haven” treasury securities on Egyptian unrest. The bond model remains mired in negative territory as commodity prices continue to rise and bond yields remain elevated. The only positive member of the five I track is the utility average and that is hanging on by a thread. Bond prices have been mired in a trading range for some time as the 10 year bond has been traveling between 3.25% and 3.50% for the past five months. For now, even with the “safe haven” scare of the Egyptian crisis, rates are not likely to make it back down to the prior lows below 3%.

    Next week’s notes will have a bit more detail on the asset class model that looks at using long-term strength in various asset classes to determine how best to invest an equity portfolio. The reversals in the prior strong classes such as commodities and small cap stocks have not yet changed the model significantly, however given the huge runs they both have had, some decline is expected. However to trigger a sell for the small-cap index (as an example) a decline of over 10% would need to be registered from current prices. The last time this occurred was in April ’10, when the small-cap index fell by 16% over four months before reversing and recently surpassing that April high. One of the keys to the model is the use of bonds and cash comparative returns against the equity indices. When bonds (and especially cash) begin to outperform equities, it is a sign that the equity run maybe over. Bonds did perform better but given the quick and strong reversal in late August by equities, the initial expectation for a dominant bond market only lasted for a few months instead of the more usual 10-16 month period. Currently equities are in control and bonds don’t look to be taking the performance lead anytime soon.

    Given the tumultuous end to the week, I would prefer standing aside until some of the dust settles, however this week will also end with the unemployment report that may provide some additional insight into just how long the “jobless recovery” may last. Bonds comments are little changed as they remain in a fairly wide trading range and either very strong economic data or crumbling countries are likely to be the only things to break them from their range bound behavior.

    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.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
    Jan 31 3:18 PM | Link | Comment!
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