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  • Nolte Notes for the week of Oct 25 2010 0 comments
    Oct 25, 2010 2:01 PM | about stocks: FISV
    Both Ben Bernanke and Tim Geithner are talking around the 800-pound gorilla in the room: the dollar. Bernanke made no reference to it in his discussions regarding the economy, as he focused upon the very low inflation and employment rates. The Fed solution is to embark upon further monetary easing, or putting additional dollars into the financial system. At the G-20 conference of finance ministers in South Korea, Geithner indicated that it is in the best interest of the US to have a strong currency, BUT it would be really nice if the Chinese would allow their currency to depreciate. While acknowledging that a country cannot depreciate their way to prosperity, the policies of the US are having the effect of depreciating the dollar. The consequences of the lower dollar have been showing up in commodity prices, from oil to gold and from grains to cotton. Also, as earnings have been coming in, those companies with large overseas revenues are doing very well vs. those focused primarily on domestic markets. Even the multi-nationals, in their comments to analysts, are highlighting the better international environment vs. domestic economy. Ultimately investors will become very nervous about this international game of chicken.

    Another week, another gain and the markets continue to look like they are in need of a breather. While stocks did decline dramatically on Tuesday, those losses were erased quickly as investors dismissed the Chinese rate hike and looked instead toward further easy monetary policy in the US. Many of the momentum indicators are at high levels, both on a daily and weekly basis, however the net number of advancing stocks continues to trudge higher. Until the markets are driven higher by few issues (higher market, lower net advancing stocks), whatever decline occurs in stocks is likely to be rather short-lived. One other big of good news is that rotation has begun to take place in stocks, as investors sell off groups that have been doing well and rotating toward different groups. This rotation allows the markets to “self-correct”, keeping the overall averages moving higher, led by different groups. We are seeing signs of fatigue in some former leaders, like utilities and telecom and renewed leadership in materials and consumer cyclical stocks (think retail). As demonstrated during Tuesday, the market remains susceptible to dramatic and short-term declines, however until proven otherwise, the slow, steady rise in stocks is likely to continue.

    Bonds continue to gyrate wildly around roughly 2.5% on the 10-year bond. Investors are seemingly comfortable accepting this return in what many are starting to believe is a Japanese style economic malaise that could last yet another 10 years. The key to the complacency is the still high and suffocating debt that is being carried by the government and investors alike and an insistent Fed that will push additional dollars out the door in the weeks ahead. The dollar has a role in this as well, as a lower dollar is making many good more expensive (see above), creating inflation in various parts of the economy, while none seems to exist in others. We are beginning to see some companies announce price increases in goods/services that may be the tip of the inflation iceberg that could make fixed income investing very treacherous in the years ahead.

    A look at the groups demonstrates the changes outlined above into the more cyclical parts of the economy. Auto, airlines and hotels are now among the top groups in the ranking, replacing household goods, brewers and toys. Even the Dow, a more cyclical index, is ahead of the SP500 in the rankings as well. In trying to find names/groups that may lead the markets in the future, I will scour the bottom of the pile looking for groups on the move higher. This week, as in weeks past, the financial and home-related issues remain mired at the bottom, as it has been for the past two years. One area that is moving up the charts a bit is “financial administration” or companies helping with payroll, money movement etc. One that has been moving smartly higher is Fiserv (NASDAQ:FISV) and is approaching all-time highs, needing to break 60 to do so. Another that is beginning to outperform, although has had a flat chart pattern for much of the past six years is ADP. A good dividend supports the stock and it is very near the high for the year. A target of $50 would match the ’07 highs and provide a very good total return if achieved.

    While the equity markets look to continue their march higher in the weeks ahead, there could be a showdown somewhere down the road as governments race to debase their currencies to gain an economic edge. Companies tied to the global economy should continue to do well. Bond investors may continue to be rewarded in the short-term, however longer-term will struggle to make a positive return. For now, we still like the 5-7 year maturities.

    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: None
    Themes: Bonds, S P, DOW, China, Fed Stocks: FISV
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