THOMAS NOGALES FINANCIAL, LLC
June 2007 Update
The S&P500 is at 1530 on 31-May-2007

This page can be linked to at   ( www.thomasnogales.com/emails/2007-6.htm after July 1, 2007.

The Thomas Nogales Financial Market Alert Timing Model is in the stock market.  Since our last buy signal in February 2003, the S&P has risen 85%.

Year to date, the S&P500 index is up 8.7% and the TNF Balanced Portfolio is up 5.5% (with half the stock market risk.)

  Here’s the year to date performance of the TNF Balanced Portfolio by asset class.

As of 5/31/07

Market Alert Model
The TNF core model is used to time large cap stocks. It’s currently IN the stock market. Stocks are ok to hold. Inflation is under control.  Stay invested with proper diversification.

Year Ahead Timing Model
The YAT model is used to indicate periods of buy opportunities within the Market Alert Model’s timing cycle. The TNF Market Alert Model always trumps the YAT model. The YAT model is positive with a good probability the S&P500 will be higher one year from today.

Interest Rate Model
The TNF Interest Rate model is negative on interest rates and long bonds.  

Stock Trends
The S&P500 is now at a record level after many years of catching up after the crash.

The market is moving for two reasons. The economy looks like it will strengthen later in the year. I see no sign of a recession on the horizon. Another major factor is the inflow of private and Asian cash into stocks. As I've stated several times over the last year, at some point China and other countries will re-circulate their trade dollar holdings into world stock markets and this would be supportive of stock prices. This money is generically called Sovereign Wealth Funds or SWF. The amounts are staggering - we're talking over $2.5 trillion dollars. The cash pools are expected to grow by $500 billion each year going forward. Nations have now handed portions of their cash hoards over to private firms to invest.

Over the last few months, US long rates have risen from 4.5% to near 5%. I suspect it's because the SWF money is moving out of fixed income and into stocks.

This money is not cause for concern just yet. The S&P is not over-priced. The small cap growth stock sector though has quite high PE ratios. REITs are also not cheap but I'm not ringing a panic bell because I can't time that sector.

Historically, foreign money has been slow to buy US stocks when they are priced cheap and tends to enter at higher prices. The same pattern holds for artwork, land, and most other assets I can think of.

The TNF Balanced portfolio is now trailing the S&P500 for the year and that should be the normal condition. Over twenty-five years, the portfolio has trailed the S&P500 by a little over 2% a year in annual returns. Keep in mind, the portfolio is only 50% in stocks so its returns are fantastic on a risk adjusted basis.

I'm watchful going forward. If this SWF money continues into stock markets, we could see gradually rising long rates alongside rising stock prices. We can ride up stock prices and also ride up interest rates by holding a money market fund for fixed income. It's wise to maintain a balanced and safe portfolio at this point. My models have nailed this cycle right so far so let's enjoy it as long as is prudent.

Risks will increase greatly if too much money surges into stocks too fast. But, with US economic growth looking good into the second half of 2007, this market could run for quite a while.

I predicted this course of events some months ago in my September 2006 e-letter. When Congress passed the 2006 Pension Protection Act, it struck me as incongruous that the law required all public and private pension funds to be fully funded within seven years. Where would the money come from? If firms paid into their pension funds out of their profits, this would depress capital spending and employment. That would be bad for the economy and the politicians.

Then I started wondering how a politician could fix the game. The mega-billion pension shortfalls could be made up in two ways. First, the pensions could be made whole if companies started paying up out of profits. That's very unlikely in my opinion. Second, they could put nothing into their pension funds but make things whole if stock prices somehow rose dramatically. Now, that's a solution corporations and the super-rich would like!

In short, I believe the SWF funds flow and the Pension Protection Act are companion policies. The process of Asian money entering stock markets is being choreographed by world governments. China will be allowed to buy increasing percentages of American corporations as a way of recycling US trade deficits. Warren Buffett warned about this a couple years ago and it's coming to pass. The politicians will effectively sell off America to cover their huge budget shortfalls and monumental fiscal incompetence.

Does it amount to market manipulation? I wouldn't call it that but I'd certainly say it's damn safe to be holding the S&P500 through year-end. We could see a small correction but I think the backlog of investable cash will likely push stocks higher. As US rates rise, at some point, fixed income will compete with stocks and choke off the stock market. It all depends on how much money moves into stocks and how the economy fares in the year ahead. These variables are difficult to forecast with accuracy.

You don't want to be in long term US bonds. Get into short term issues and stay put until the cycle turns.

As for the sell-off of America, it's a waste of time to write your congressman because the goose is already cooking in the pot. Let's just hang around for dinner, and maybe a small desert, and then we'll excuse ourselves from the table and let the pigs gorge until the slaughter.

Interest Rates
The TNF Interest Rate Model has been correct on rates since going negative in 2004. Investors have made more in a money market fund than holding long term bonds. I don't see any change soon in the model's position so we'll maintain our fixed income investments in a +5% cash account. This isn't a bad return.

Housing
I look for residential housing prices to be fairly firm through year-end but with a lot of local market variability. After that, it looks dicey. Homeowners on the fiscal ledge will be ok until employment weakens. At that point, the stream of defaults and foreclosures could become a flood. We're not at the tipping point yet. If I had a house and had to sell, I'd do it over the next six months. That's a very general forecast and about as far as my research can project. Moody's and S&P both see 8% price declines over the next 24 months. I can't disagree but think the bulk of declines will come when the business cycle finally weakens and unemployment rises.

Since the TNF stock model went positive in February 2003, the S&P500 is up 85%. That's fantastic. And, you didn't have to pay a nickel for this little e-letter. Now, some would say you get what you pay for, but we'll see if that's true when the cycle turns. Meanwhile, let's play it careful going forward because we don't want to give any of that 85% back.

Best Regards,
Thomas Nogales Financial, LLC    (www.thomasnogales.com)
Tom Gleason, Manager & Researcher

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Disclaimer:.
Investing involves risk and the future performance of the models cannot be guaranteed. TNF is not a registered investment advisor and nothing published by TNF should be considered personalized investment advice. Any investment recommendations made by TNF should be made only after consulting with your investment advisor and only after reviewing the prospectus or relevant financial statements.  TNF does not receive any compensation for mentioning stocks, funds, or financial products.