01/19/11   Mr. Hu Goes To Washington

Editor’s Corner

Investor Heat Map: 1/19/11Mr. Hu Goes To Washington

Ron Rowland

Red Chinese flags sprouted in Washington D.C. this week as China’s president Hu Jintao made an official visit to the U.S.  At the White House welcoming ceremony the two leaders exchanged standard pleasantries before getting down to business.  The Chinese government has agreed to buy 200 airplanes from Boeing (BA) for $19 billion.  Other deals reportedly include a railway contract for General Electric (GE), a plan for Cummins (CMI) to produce a hybrid bus, and a joint venture between Honeywell (HON) and a Chinese appliance maker.

For his part, President Hu highlighted moves to turn the yuan into a global currency, calling the present dollar-dominated monetary system a “product of the past.”  Hu and Obama then met with a group of high-profile business executives from both countries. 

Earnings season is now underway in the stock market.  The quarter-over-quarter and year-over- year comparisons keep getting tougher as the economic recovery (such as it is) continues.  Early reports from the technology sector, including Apple (AAPL) and IBM were impressive.  Moreover, profit growth is being driven by revenue increases as well as cost-cutting.  On the other hand, Goldman Sachs (GS) saw a 52% drop in earnings, suggesting that “doing God’s work” does not pay as well in some years as it does in others.

The Euro surged against the U.S. dollar in the last week, posting one of its strongest short-term rallies in years.  New European debt offerings went better than expected, which helped both the Euro currency and European equities.  The continent’s debt problems are far from over, but a quiet period may be here for a while.

Treasury bonds in the U.S. rallied a bit today as stocks pulled back.  The benchmark ten-year notes ended the day with a yield of 3.34%.  The Federal Reserve also chose today to buy $7.7 billion in Treasury paper, continuing its plan to inject $600 billion into the economy by the middle of this year.  Yield spreads indicate inflation expectations are still significant.  On Tuesday, the spread between two-year and thirty-year Treasury yields was as much as 4.01%, a record.

Sectors

Energy took the top sector position away from Materials this week with plenty of room to spare.  Crude oil prices were fairly flat so the strength in energy-related equities would seem to be due to other factors.  Possibilities include the potential for higher oil prices down the road and anticipation of favorable earnings reports.  A weakening dollar is typically good for materials, but that was not the case this week.  The upper half of the list is rounded out by Industrials, Technology, and Financials.  The fall of Consumer Discretionary to the bottom part of the list is notable.  This sector was a driving force for much of 2010’s market rally as consumer spending came back from the brink.  Now there seems to be some question of whether retail sales can continue to recover or will have to settle for new growth from lower levels.  Utilities and Consumer Staples are tied in last place for the second week in a row.

Styles

Micro-Caps are still on top of our Style rankings as relative strength continues to reflect an inverse-capitalization pattern.  One downside to following a momentum approach is that the strongest categories often take the brunt of any declines.  This was evident today as Micro-Caps declined 3.3% while Mega-Caps held their losses to about 0.6%.  A similar relationship developed across the cap-size spectrum today.

International

Currency fluctuations again played a major role in determining our Global rankings this week.  The Euro had one of its strongest rallies in years.  CurrencyShares Euro (FXE), an ETF that tracks the Euro exchange rate against the U.S. Dollar, surged 4.3% in just seven market days.  The Euro’s gain serves to enhance gains in European equities, boosting many Europe-focused funds to weekly returns of 7% or more when expressed in dollars.  In the process, Europe catapulted itself out of last place (and a negative trend score) to move ahead of Latin America in today’s list.  Nonetheless, the U.S. managed to regain the top spot.  Yen strength allowed Japan to hold steady for the week.  The opposite happened in Canada, where a weak currency dampened equity strength.  The U.K. jumped to 4th place as the Pound gained on the greenback.  China slipped to last place.


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.


“We both stand to gain from a sound China-U.S. relationship, and lose from confrontation.”

Chinese President Hu Jintao


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