02/18/09   Greenspan Accepts the Inevitable

Editor’s Corner

Greenspan Accepts the Inevitable

Ron Rowland

Stocks are having another bad week.  On Tuesday the Dow came within a whisker of breaking below its November low, and today’s choppy action, which briefly took the index below 7500, indicates the test is still ongoing.  Bank stocks are being pummeled;  talk of “nationalization” is starting to spread outside the blogosphere and into the halls of power.  Senator Lindsay Graham was the first one on the dance floor, and now even Alan Greenspan is accepting the inevitable.  His only caution, in an interview with the Financial Times, was that “senior debt” of the banks should be protected.  Greenspan always chooses his words carefully; the fact that he specified “senior” debt is a strong hint that non-senior bank bondholders could face a total loss.  Common shareholders will probably share the same fate.  On the other hand, Greenspan is now on the payroll of PIMCO funds, whose chief Bill Gross is not shy about talking his book.  There could be other motivations behind Greenspan’s comments.
The rest of the market is not quite as weak as the banks, but few companies are prospering as the economy sinks deeper into recession.  The latest frightening data point is January housing starts, which plunged 16.8% from the prior month and 56% year-over-year.  Today the president announced a new program to help homeowners who are in danger of default, but by most measures housing prices are still much too high.  Propping them up simply prolongs the pain.  Tomorrow and Friday we will get more clues about how fast the deflationary spiral is accelerating as January PPI and CPI figures are released.
With fear spreading once again, Treasury bonds and gold are returning to their role as refuge of choice for investors around the globe.  The dollar is strong but only because all other currencies are in even worse shape.  Junk bonds (or “High Yield” bonds if you prefer, but we think “junk” is more accurate) are breaking down along with equities.  Municipal issues remain toxic as the financial crisis slams state and local governments.  California and Kansas have gone so far as to delay tax-refund checks to their own citizens, i.e. voters.  Any legislature desperate enough to take that suicidal step will not hesitate to stiff its bondholders.  There is a reason for those impressive yields you are seeing in muni land right now.
Health Care is atop our sector rankings but is having trouble getting past resistance formed by highs of the last four months.  Technology is holding onto the # 2 spot.  Utilities are in third place but broke down significantly in the last week.  In fact, every sector is in some stage of breakdown.  Even Consumer Staples seem to have lost their “defensive” allure.  Financials, Industrials, and Materials are still on course for oblivion.
A pattern is taking shape in the Style Edge rankings: the three Growth categories are on top while the three Value categories are on the bottom.  Large Growth, Mid Growth, and Small Growth are all holding above the January lows.  Their Value counterparts are more of a mixed bag, with Large Value looking more vulnerable than Mid Value and Small Value.  The previously strong (on a relative basis) Mega Caps are now straddling the midline of our rankings.
World markets are still showing extreme volatility.  China is rolling over to the downside again, while Japan and the rest of Asia are plumbing new depths of despair.  Latin America is still the best region but keeps hitting resistance, similar to the Health Care sector action.  Canada is unable to sustain a rally while the U.K. and EU are breaking down further.  


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.

“Wall Street’s graveyards are filled with men who were right too soon.”

William Hamilton


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