Greek Tragedy Postponed
Public officials around Europe are scrambling to do something about Greece, which finds itself with a lot of debt and a shortage of revenue. Furthermore, Greece is not the only problematic part of the Eurozone: Portugal, Ireland, Spain and maybe others face similar difficulties. Taxpayers in France and Germany – who will probably get the biggest share of the bill for any bailout – can legitimately wonder where this road will lead. On the other hand, French and German banks are on the hook for much of the Greek debt. A default will create problems for everyone. The most likely near-term outcome is the same sort of “extend and pretend” strategy that U.S. commercial lenders have honed into an art form. This won’t work forever, but it can buy some time.
Financial markets were roiled by the Greek debt crisis. Speculators placed heavy short positions in the Euro currency, gold prices pulled back, and the dollar jumped. Stock benchmarks extended their short-term downtrend, though the last three days brought a little bit of stability to the S&P 500. Nonetheless, the market correction that began on January 20 is still underway and further downside seems likely. We expect higher than normal volatility as traders react to rumors and hints from Europe.
In prepared testimony today, Fed chairman Ben Bernanke outlined the much-awaited “exit plan” from his currently loose policy. He appears inclined to use the interest rate paid to banks on their excess reserves as a new tool against inflation. Enticing banks to keep more cash on deposit at the Fed would indeed restrain lending activity. At the same time, it would give banks an even bigger incentive not to make private loans. This seems to conflict with the administration’s stated goals – but they have unspoken goals, too. First among these is the need to keep the government afloat. Bernanke’s plan is essentially a way of diverting bank deposits into the Treasury in an attempt to avoid a Greece-like liquidity crisis for the U.S. We wish him luck.
Treasury rates seem to be recovering from the year-end downturn. Today the ten-year bond yield touched the highest point in more than three weeks, closing at 3.69%. Recent Treasury auctions were not as well-subscribed as those of last year, despite some flight-to-quality buying from Europe. The U.S. ability to issue debt at such favorable rates is running into difficulty even as the budget deficit appears to be mounting even higher. This may be related to the Bernanke proposal described above. A cash-hungry government needs new sources of liquidity – and your bank account is high on the list.
Momentum scores have turned negative for all sectors except Health Care, which is only slightly in the green. Even though Consumer Discretionary and Consumer Staples are in slight downtrends, they must be considered the strongest sectors right now on an intermediate-term basis along with Health Care. Relative rankings were largely unchanged this week; the most noticeable move was a jump by Technology into the top half of the table. Telecom remained on the bottom and is now back where it was in November, having given up all its year-end gains. In fact, Telecom and Financials are both essentially flat over the last six months. Energy and Materials were hurt by falling resource prices and the strengthening dollar.
Last week we noted the lack of variance in the Style rankings. The spread from best to worst narrowed even more this week, and now all the categories are red. They are, however, faring better than the Sector benchmarks thanks to added diversification. With the rankings so tightly bunched we could see big relative-position changes, but for now Mid Caps continue to hold the top spots.
The European Union took over the bottom spot in our Global Edge chart as problems in Greece and elsewhere rattled equity markets. Both the EU and China are now showing negative six-month returns. Canada climbed up the ranks, which seems a little strange. The Canadian Dollar has actually weakened against the greenback, and the dominant energy and materials sectors have not been performing well. Canada is apparently preferable to other places. Japan remains on top despite headline-grabbing problems at Toyota (TM).
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.
“Prosperity is no just scale; adversity is the only balance to weigh friends.”
Plutarch, Greek Philosopher
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