01/18/12   Got Drachma?

Editor’s Corner

Investor Heat Map: 1/18/12Got Drachma?

Ron Rowland

U.S. stock benchmarks built on the January rally, with the S&P 500 closing above 1300 today for the first time in almost six months.  Gains have been broad-based the last few days with most sectors participating and the laggards having only minimal losses.

A casual observer might think the bullish behavior is connected with earnings season.  If so, it is partly because analysts created lower expectations since last quarter.  In October, Wall Street expected 15% earnings growth this quarter.  Now the consensus is only 7%.  We are still early in the cycle though, making further generalizations difficult at this point. 

Just before the long weekend, S&P downgraded its sovereign debt rating for nine European countries.  This was followed Monday by a cut for their erstwhile savior, the European Financial Stability Facility.  The downgrades appear to have had much the same impact as similar action did for the U.S. last August.  Rather than higher borrowing costs, at least some of the affected governments were able to sell debt at even lower interest rates.  The main thing this tells us is that no one cares what S&P thinks any more.

One place in Europe where rates aren’t falling is Greece.  Negotiations with lenders are underway, but bond traders seem to think a default is imminent.  Germany and other neighbors are not near as frantic about the possibility as they were a few months ago – which suggests their plans for an orderly dissolution of the Euro currency are probably complete.  Get ready for a return of the Greek Drachma.

The world’s preferred safe haven is still the U.S. for now.  Ten-year Treasury yields here are holding below 2% and show no hints of moving much higher.  Economic data was generally good since last week.  December retail sales ticked up since last year with notable strength in automobiles.  Consumer sentiment improved, as did an index of homebuilder confidence.  We are dubious the current strength can continue much longer, but for now we won’t fight the tape.


The Industrials sector held on to the first-place position it seized last week and gathered even more bullish momentum.  Materials is not far behind, though, after jumping from #5 to #2 since our last report.  Financials fell to third place as resistance near the October peak proved formidable.  Health Care picked up a little steam but still slipped back to the fourth-place position.  The week’s worst-performing sector was Energy.  Lower crude oil prices are no doubt a factor, but energy-related equities actually began sliding a few days earlier.  We will see in the next few days whether crude’s move back over $100 helps the oil stocks.  Utilities – which not long ago had a firm grip on the top sector position – is now almost in last place, just one rung off the bottom of the list.  For now, at least, Telecom is still the lowest-ranked sector.


Equity Style categories remain packed into a tight range with little dispersion from top to bottom.  This allows odd phenomena, such as the Large-Cap Sandwich.  Large Value is in first place and Large Growth is on the bottom.  We also have a strange pair near the middle of the pack with Mega Caps and Micro Caps right next to each other.  Mega Cap is probably being held back by a large Energy allocation.  Value is still ahead of Growth at all cap levels.


This week’s Global picture should please anyone who likes symmetry.  The number and magnitude of positive categories is nearly a mirror image of the negative ones.  The U.S. is still on top, but China is moving up quickly.  In fact, China had the best weekly performance of all 32 equity categories we track.  Latin America and Emerging Markets moved up to third and fourth places, respectively, after both turned in above-average performances.  Canada held steady near the middle of the pack.  The U.K. slipped from #2 last week all the way to #7 now.  This was partly due to a weakening pound, but the emerging-market surge was a bigger factor.  Pacific ex-Japan gained some relative strength but is still in a bearish trend.  Japan slid further down the ranks while Europe continued to hold a death grip on the bottom rung of the ladder.


Note: The charts above depict both the relative strength and absolute strength of various market sectors, styles, and geographic locations on an intermediate-term basis. Each grouping is sorted (top to bottom) by relative strength. The magnitude of the displayed RSM value is a measure of absolute strength, which is our proprietary method of measuring and reporting the intermediate-term strength as an annualized value.

“You can strongly argue that the rating cut had been well-anticipated. I would say that if we see a second rating agency following the S&P, then that could perhaps have a stronger impact on France.”

Jamie Searle, Interest-rate Strategist at Citigroup, January 17, 2012


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