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Still believe interest rates could be headed higher in 2007. While the economy does seem to be slowing and a recession is a possibility by early 2008, we expect the twelve month rate of inflation to accelerate in the second half of 2007.

We see little fundamental appeal in bonds at current yield levels, but would not be surprised if yields still drifted a bit lower in the next month or two—if only because so many players are positioned for the opposite.

Although the markets continued to trend higher for much of the month, the steep losses on February 27th reminded us all again what a good dose of market volatility felt like. Feel better now?

Market breadth moved down in tandem with stock market indices, but is not showing any divergences. All advance/decline lines were making new highs just before the downturn, and bull markets do not end with advance/decline data posting new highs.

Quantitatively, we have found that option trading volumes provide good, contrarian information on investor sentiment toward market groups.

We have modified our Small Cap and Mid Cap Growth versus Value methodology, improving the algorithm for distinguishing between growth and value to make the components more reflective of these sectors.

Beginning this month, we’ll be distributing a new research publication: Leuthold’s Small Cap Groups. The core of this new publication will be a 15 factor, small cap group selection model based on our time tested, and highly successful, Group Selection (GS) methodology (with a few twists).

Fresh LBO screen run in February 2007.

The $8.1 billion going into open-end U.S. stock funds is a good sign that individual investors had been warming up to the U.S. stock market recently, although recent stock market volatility could change all that.

We still believe interest rates are headed higher in 2007. Investors have sought the safety of U.S. Treasuries amid concerns of slowing economic growth and sub-prime jitters, sending ten year T-Note yields to their lowest level since December 2006.

Inflation pressures have not yet abated and we believe that bond yields could tick up later this year, as those pressures eventually flow through to the CPI. 

This month’s “Of Special Interest” examines the issue of rising inventory levels. Aggregate inventory levels for U.S. manufacturers have risen to within 1% of previous highs recorded in early 2001. If sales momentum continues to lose steam, expect inventory correction to take hold later this year.

The biggest change within the GS Scores this past month has been the strong improvement in Health Care groups. In response to this, we added to our Health Care exposure with a new group position in Managed Health Care.

Even though it is entering its sixth year, the Industrial Metals play is not over. It seems to be entering its third and last act, an act that could run for at least another 18 months.

Doug Ramsey steps in as guest commentator in this month’s “View From The North Country” to highlight what we currently see as the bullish arguments for the stock market and contrast those with the bearish arguments.

The U.S. stock market continued to track higher during the first month of the year, despite the fact that individual investors continued to watch from the sidelines.

A look at the GS Scores for the broad Energy sector in light of the recent decline in crude oil prices. Today, only one of the Energy related groups is rated Attractive, while 3 are Neutral and 3 Unattractive.

Relatively low interest rates combined with strong earnings growth and a build up of corporate cash has created a perfect environment for LBOs. Jim Floyd created a quantitative screen back in February 2006 that attempts to uncover the most attractive LBO stocks.

To supplement our traditional short interest models, we have developed a long-term, normalized measure of short interest that is intended to “self-adapt” to the institutional changes unfolding in short selling.