01/23/13   House Puts Salaries On The Line

Editor’s Corner

Ron Rowland

The House of Representatives today voted to eliminate the debt ceiling entirely – until May 19 (about four months).  The suspension will presumably give lawmakers additional breathing room in their long-term budget negotiations.  The Senate has indicated they will pass the bill without any changes and send it on to President Obama for the final signature.  Yes, they kicked the can yet again, but this time with an added twist: the bill requires both the Senate and the House to adopt a budget resolution by mid-April.  It also contains provisions to withhold lawmakers’ pay until that objective is achieved, or until the end of the 113th Congress, whichever comes first.

We’re still in the early stages of earnings season.  Only about 15% of companies have reported so far, but more than 70% of those announced earnings ahead of estimates.  Revenues are also coming in better than expected, although not at the same frequency as earnings.

Earnings reports for the Technology sector are off to a good start with Google (GOOG) and International Business Machines (IBM) setting a positive tone.  Unfortunately, this was also true three months ago when the prior quarter’s results were revealed, yet the sector’s performance was a major disappointment in the fourth quarter.  Maybe this time will be different.

Economists have been looking to the housing sector as potentially being a growth engine once again.  Indeed, housing activity fueled economic growth for years, possibly decades.  However, it suffered a role reversal the past five years, receiving much of the blame for the country’s economic turmoil.  Those hopes for renewed strength occasionally encounter some headwinds.  For example, economists were expecting existing home sales to jump by 2.0% in December.  Instead, they fell by 1.0%.  Still, the performance of stocks in the homebuilder industry are among the strongest in the market.

Meanwhile, stocks continue to trend upward from their late-December pullback.  Boeing (BA) shares have become quite volatile lately as technical problems are causing much of the new Dreamliner 787 fleet to be grounded.  Boeing’s earnings release and conference call is scheduled for January 30, so company officials have two weeks to get to the heart of the problem and determine the impact on future earnings.

Investor Heat Map: 1/23/13

Sectors

Sector leadership is remaining consistent so far in 2013 with the top-four not letting any of the others break into their exclusive club.  There was some shuffling of positions among the three on top, but as the Sector Edge Chart reveals, the difference between first place and third is barely measurable.  Materials and Industrials take the top two spots this week, each moving up a position.  Financials, our former leader, slipped two places to third.  Consumer Discretionary held on to its fourth place slot.  The middle tier members increased their momentum this week, which helped to distance them from the laggards.  Energy climbed ahead of Real Estate and is now challenging Health Care.  The bottom three also saw some shifting while keeping their membership intact.  Technology and Utilities each climbed a spot, and Telecom now claims last place.

Styles

It’s getting crowded at the top of the Style Edge Chart with four categories vying for the lead.  When scores are tightly compressed like this, it often leads to dramatic changes in the relative rankings.  That is not the case today as Small Cap Value and Small Cap Blend continue to hold their first and second place positions.  Small Cap Growth moved up one place to make it a Small Cap trio at the top.  The Mid Cap threesome still holds the middle ground, although the Micro Cap category slipped two places to be in their midst.  Strength starts to decline rapidly as we get near the bottom where the relative weakness of Large Cap Growth and Mega Cap can easily be seen.  Value continues to be favored over Growth in all capitalization segments.

Global

Once again, we have China and Europe trying to separate themselves from the rest of the world.  China is #1 and Europe #2, not just in the Global rankings but across all 33 of our equity categories.  While the top two have maintained their relative positions, there has been some shifting among the other regions.  Pacific ex-Japan jumped from sixth to third as strength in Australia and Hong Kong outweighed the recent weakness in Singapore.  Latin America held steady in fifth and Emerging Markets in seventh as World Equity climbed two notches to sit between them.  The U.S. climbed a little further out of the basement, moving up two positions to eighth.  Japan was the big loser this week, tumbling five positions to land in ninth.  Both stock and currency movements are becoming quite volatile for Japan.  The consensus among analysts seems to be the yen will fall further and Japanese stocks will rise, but it appears these trends will not be smooth.  Canada moved up out of last place, which is now occupied by the U.K.  Keeping its own currency, instead of adopting the euro, has been beneficial to the U.K. the past few years.  The country is now considering separating itself from the European Union entirely.

 

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.

 


“The recent theme seems to be early weakness overcome by afternoon buying.”

Ryan Larson of RBC Global Asset Management


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