Social Unrest Affecting Global Equities
The ability of public protests to bring down a longstanding regime in Egypt seems to have emboldened people elsewhere in the Middle East. Libya is particularly problematic because of its huge oil reserves and proximity to Europe. Bahrain is also a strategic concern because it is near Saudi Arabia’s top oil-producing region and houses the U.S. Navy’s Fifth Fleet. Oil traders are understandably concerned, so the price of crude soared above $100 today.
Financial markets were already growing concerned about inflation, and the jump in oil prices certainly hasn’t helped. Nor did the news today that Libya is halting half of its oil exports and expatriate workers are being evacuated. Global unrest also turned around a decline in gold prices, and we could see bullion hit new highs soon.
Additionally, the ten-year U.S. treasury yield dropped below 3.5% over the past two weeks, which suggests that “flight to safety” is for the moment a bigger motivator than “fear of inflation” for at least some investors.
As for the U.S. economy, today’s existing home sales report, showing the highest sales in eight months, might provide a little comfort but probably not. A deeper look reveals that a record-high proportion of sales are in all-cash transactions. Meanwhile the median sale price hit a nine-year low. What appears to be happening is that wealthy investors are snapping up distressed properties for investment purposes. It is not clear who they think
will buy these homes. Not, presumably, any of the millions who remain unemployed and underemployed.
Energy was already thriving and managed to increase its momentum even more since last week. The impact on energy stocks actually varies based on their exposure to the currently unstable countries. Those with heavy involvement in Libya are underperforming those whose business is in less troubled regions. Industrials is still in second place but lost some momentum and is now well behind Energy. The four-way tie we mentioned for third place last week tightened up even more. Consumer Discretionary, Materials, Technology, and Financials look like they could remain bunched together for an extended period. The bottom four sectors are also starting to form a pack, but someone has to be on the bottom. This week the loser is Utilities.
We have a new leader this week. Small Cap Growth edged slightly ahead of Mid Cap Growth to occupy the top Style position, but we wouldn’t read too much into this. The relative positions could change quickly. The broad market weakness is taking its toll across the Style segments. Typically the high-flyers undergo the largest setbacks, compressing the rankings. So far we don’t see much compression, but if a deeper correction unfolds we would expect to see the current rankings start inverting as investors seek out the relative safety of Large Cap and Mega Cap stocks.
Canada grabbed the baton from the U.S. and now sits on top of our Global Edge chart. It’s not hard to see why: the MSCI Canada Index has a 27% weighting in Energy. Nonetheless, the U.S. managed to arrest its fall and now sits in second place, not far behind Canada. Other Developed Markets dominate the middle of the pack. They too are experiencing short-term selling pressure, but so far it seems to be affecting them all more or less equally. The emerging markets categories are still the only ones with negative momentum trends. They were already struggling with inflation even before the last week’s oil price surge, which is now adding to their woes.
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.
“Central banks have a lot of experience in managing these things.”
U.S. Treasury Secretary Timothy Geithner claimed at a Bloomberg Breakfast in Washington that the global economy is in a much stronger position to handle rising oil prices than it was in 2008. (2/23/11)
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