NOLTE NOTES

Friday’s reaction to the employment report was somewhat of a surprise, given that fewer job losses were “created”, however what spooked everyone was the big jump in the unemployment rate. The report left a sour taste in investor’s mouths, given the good news from the merger front (Verizon and Alltel) as well as good numbers from Wal-Mart (the “main” recipient of the rebate checks). Energy prices were in full retreat earlier in the week, but that reversed with a vengeance by the end of the week, as oil prices rose by their largest daily amount ever. There were plenty of places to place the blame for the jump in prices, however the reality will be ever-higher pump prices over the summer, cutting a bigger hole in consumer’s pocketbooks. Given the jawboning over the past week about the weak dollar, the Fed talked about keeping rates at present levels and may have talked themselves into a corner, as by the end of the week, the dollar had rolled over and with the weak employment report lower interest rates became a distinct possibility once again. The economy seems to be taking a back seat to the drama that is unfolding in the commodity markets – so keep an eye on energy prices and Monday’s market open.
We thought this week would be a toss-up, instead by Friday it threw up. For the week our indicators really didn’t move too much, but we are seeing a bit more volume with the recent decline than we have seen in a while, indicating that investors may be much more interested in cashing in and asking questions later. We have been watching the range between 1370 and 1425 that has contained the market since April. The 1350 level marks the halfway point of the rally from the March bottom that should contain any market decline if the market were bullish. However a break of 1350 could open the doors to another retest of the lows at 1270. Given the expectations currently built into the markets (shallow recession, real estate/financial problems mostly over) it is beginning to look to us that not only is another trip to 1270 very likely, but a breaking of that level is becoming more real as well. The next important resting spots would be 1225-1235 and then 1170 – at which point the markets begin looking pretty reasonable. If the markets are going to make a bullish stand, it had better come fairly early Monday; otherwise it could be a long and very hot summer.
Bonds wound up higher (and yields lower) even as commodity prices rose on the week. The comments from the Fed, effectively telling the markets they will not be cutting rates again has put the Fed in a box with the recent release of weak economic data. The model has not turned positive, although it was close last week – if commodity prices could continue their recent decline. While discussions ranging from Congress to the corner gas station about why prices have increased so much (see Friday’s move of $11) has created a secondary market in guessing how much speculation is embedded in the price of oil today. Centering around $30/bbl, IF speculators vacate oil, we could see prices once again approach $100/bbl, however our bet is for significantly higher prices before we get back to $100/bbl.