01/25/12   Obama Unveils New Bank Bailout Plan

Editor’s Corner

Investor Heat Map: 1/25/12Obama Unveils New Bank Bailout Plan

Ron Rowland

A two-day Federal Reserve policy meeting ended today with, not surprisingly, no change in interest rates.  The committee statement contained a couple of interesting items.

First, the Fed amended its previous promise to keep rates “exceptionally low” until mid-2013.  That pledge now extends to late 2014.  This is presumably designed to influence the yield curve.  The second change is murkier.  Previously, the Fed said it would “employ its tools” as necessary to help the economy.  Today’s statement replaced that phrase by saying the Fed may “adjust” its securities holdings.  This is obviously more specific than the threat of unnamed “tools.”  Maybe Ben Bernanke finally noticed his toolbox is empty.

President Obama’s Tuesday night State of the Union speech had another interesting nugget.  He proposed to let struggling homeowners refinance into lower-rate mortgages owned by the Federal Housing Administration.  Whether the plan will help any homeowners is debatable, but it will most certainly help the banks by removing troubled loans from their balance sheets.  Contrary to its class-warfare rhetoric, the administration is still dreaming up new ways to bail out bankers.  This may explain some of the financial service sector’s recent strength.

U.S. stocks continued to rally after breaking above October’s peak earlier this month.  Momentum in the S&P 500 is strong as earnings season continues.  The ten-year Treasury yield moved above 2% for the first time this year last Friday.  It swung wildly today between 2.07% and 1.92% before closing at 2.01%.  While rates are still historically low, demand for bonds appears to be waning as investors gain confidence in stocks.  Gold climbed after today’s Fed announcement while crude oil hovered near the $100 mark.

Sectors

Financial Services, epicenter of the 2008-2009 bear market, now has more intermediate-term momentum than any other key sector.  Do banks have an “all-clear” signal?  No – we still see many reasons for concern.  At the moment, though, the sector’s trend is bullish.  Both Materials and Industrials slipped to make room for Financials at the top.  Consumer Discretionary climbed to fourth place thanks to a revival by retailers and continued short-term strength in home builder stocks.  Technology is close behind and may be on the rise after strong quarterly reports from Apple (AAPL), IBM (IBM), and Microsoft (MSFT).  Health Care held on to its bullish momentum but slipped down a notch on a relative basis.  Energy is struggling to break above resistance.  Utilities and Telecom both dipped into slightly negative momentum while Telecom remained in last place.

Styles

We are beginning to see a new pattern in the tightly-packed Style rankings.  As recently as a month ago, the table was nicely aligned with market capitalization.  The story then changed to Value-over-Growth with size playing only a secondary role.  Now we see an inverse-capitalization theme.  Micro Cap is on top followed by the three Small Cap categories.  The bottom three positions are held by Large Cap groups along with Mega Cap.  Large Cap Value is out of place in this scheme but is part of a four-way tie in the middle of the pack.  A slight weakening in Large Cap Value or strengthening in Mid Cap would complete the new regime’s formation.

Global

A steady uptrend over the last month or so helped China seize the lead away from U.S. stocks this week.  We are not sure the leadership will last very long, however; China is hitting strong resistance at its September/October highs.  Latin America moved up to #2 but also faces overhead resistance.  The Emerging Markets benchmark – not surprisingly since it is dominated by China and Latin America – is now in third place.  Unlike those ranked ahead of it, the U.S. has already overcome last quarter’s high point and could recover its lead soon.  The top four categories are followed by a near six-way tie consisting of World Equity, Pacific ex-Japan, Canada, the U.K., EAFE, and Europe.  Improvement in Europe pushed Japan down into 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.


“Voting against the action was Jeffrey M. Lacker, who preferred to omit the description of the time period over which economic conditions are likely to warrant exceptionally low levels of the federal funds rate.”

FOMC Statement 1/25/12


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