It is of little wonder that investors are tossing their hands up in the air when looking at investment performance or economic data, what look’s promising on the surface is fraught with danger below (like the oil spill?). Early week data regarding homes was mixed, as refinancing activity was strong (for those that can!), and industrial production was surprisingly strong. However, that was trumped by initial jobless claims hitting 500,000 this past week (the arbitrary line between economic contraction and expansion), while two Fed reports from NY and Philadelphia were both very disappointing. The Dow, after Tuesday’s close was up over 100 points, finished the week with a thud, down 90+ points and leaving a bad taste in investor’s mouths going into the weekend. The usually manic/depressive markets seem even more so of late leaving investors with a queasy feeling about the upcoming (usually) weak months of September and October. At this point of an economic recovery (it is one, yes?) there should be a bit more investors can point to showing strength. However, even at this late date, much of the data remains frustrating similar to a year ago.

When looking behind the headline numbers, last week was somewhat of an anomaly in that the OTC market (technology stocks) rose on the week yet more stocks fell than rose for the week. On the NYSE, the averages declined, yet more stocks rose on the week than fell. Interesting information, likely not signifying anything other than the week looked a bit better than the headlines. Some of the trends in the markets have yet to change, volume remains rather modest although it is rising on days when the markets decline. Many of the averages are trading below their very long-term averages (not a healthy sign), while bonds continue to rally. So while many of the signposts in the markets and economy are showing weakness, the averages continue to “hang in” – tension that is likely to be broken either by the economic figures improving or markets declining to meet the less than stellar economic/market numbers. Once Labor Day passes, we should see some fireworks.

The discussion of bubbles everywhere (from tech to real estate to stocks and bonds) is looking more like a Lawrence Welk’s bubble machine! From my way of looking at things, a bubble (and it’s ending) usually means investors not only lose purchasing power (adjusting for inflation) but also lose money, where the investment is well below (usually 50%+) initial purchase price. Those bashing bonds are making the same claims. Here it gets a bit fuzzy. While investors may lose purchasing power individual bond investors have locked in a certain positive return to maturity. Where the argument has some validity is for bond fund investors, as there is not a future certain maturity date, where declines in net asset value may never be recovered. Interest rates can’t go down forever and eventually they will rise, however we will need to see stronger and sustainable economic growth before that happens. So far, that day remains in the very elusive and uncertain future.

While the basic material sector is showing improvement, now ranked sixth among the nine sectors, however much of that strength is coming from the precious metals, while groups like paper, coal and steel are showing weakness. Analysis of the precious metals (specifically gold) is as animated as those about a bond bubble. The stocks are priced about equal to the underlying bullion, however historically the stocks have sold for a 20-80% premium to bullion prices. So if the relationship reverts to the more normal relationship, buying stocks and selling bullion should be profitable. Don’t take that to the bank, as the relationship has been out of whack since the financial crisis two years ago. Since that time, the relationship has centered on the one-to-one ration than the normal range. The commodity group remains ranked among the top quartile, however they have been slowly sliding lower over the past two months. Coal and steel have been among the more volatile groups within the basic materials group and are now ranked near the bottom of the weekly list. If the precious metals do weaken, then I would expect the basic materials to do likewise, following the more cyclical parts of the markets that have already been declining with weaker economic data.

Very little over the past few weeks has shaken my concern regarding the lack of sustainable economic growth and lack of catalysts for significantly higher stock prices. And so the trading range persists. High quality large-cap remains cheap, but it too is locked in a range. Bond yields may rise in the coming weeks, if only to take a break from the steady decline. However there is little in the economic data pointing to a change in the trend to still lower yields ahead.

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.