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NOLTE NOTES September 19, 2011

|Includes: Fastenal Company (FAST), SPY

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 (NASDAQ: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.