02/24/10   Consumers Lose Confidence

Editor’s Corner

Investor Heat Map: 2/25/10Consumers Lose Confidence

Ron Rowland

1100 appears to be the new number to watch for the S&P 500. It was in this area that the index broke down in late January, and now it is having trouble climbing above that zone of resistance. Longer-term momentum is still bullish, but we won’t be surprised to see another sharp downturn in the near future.

Hopes for economic recovery took a hit on Tuesday with the release of an unexpectedly bad Consumer Confidence Index. Usually these reports can be interpreted either way, but it is hard to put a bullish spin on this one. Both current conditions and future expectations plunged. The reasons are no mystery: unemployment remains high, asset values are still falling, and a general consumer malaise has a solid grip on the national mood. New home sales are now at the lowest rate since record-keeping began in 1963. The free-spending consumer is nowhere to be found.

Today Fed chairman Ben Bernanke appeared on Capitol Hill to make his twice-yearly economic report to Congress. Now is a good time for him to do some explaining. Investors were mystified by last week’s hike in the rarely-used Discount Rate to 0.75%, which was followed by vigorous denials that the Fed is making any monetary policy change. Bernanke’s explanation is that they wish to nudge banks back toward reliance on private capital. We wish him good luck on that.

On one point, though, Bernanke is probably right: the present loose-money policy is not going to change in the foreseeable future. Raising interest rates when unemployment is so high and inflation is invisible in most sectors (health care being a notable exception) would be truly foolish. Bernanke is well aware that the #1 beneficiary of low interest rates is the U.S. government, which borrows more money than anyone else in the world. He needs to keep that train in motion.

Treasury bond yields have pulled back a bit with the ten-year bond rate dropping to 3.69% today vs. 3.74% a week ago. The U.S. Dollar is still trending up against most currencies despite significant daily swings. This is, in turn, heading off a recovery attempt in the gold market. On the other hand, gold is holding above last summer’s breakout to record prices above $1,000, which is probably a long-term bullish sign.


Consumer Discretionary is still the top sector in our momentum rankings. Industrials moved past Health Care into second place, based largely on strength in airline and other transport stocks. Health Care is still healthy, though, actually gaining momentum in the last week despite being displaced in relative terms. Consumer Staples is in third place. At the bottom of the list, Energy replaced Telecom this week. These two, along with Utilities, are the only sectors with negative intermediate-term trends right now.


We have a little bit of divergence developing in the Style Edge chart. Two groups appear to be forming: Micro Cap, Small Cap and Mid Cap are all close to each other and well ahead of the Large Cap and Mega Cap categories. Micro Cap and Small Value are in a close tie for first place on the list, while Mega Cap is the clear laggard.


North America owns the global rankings. Canada and the U.S. are in first and second place, and they are also the only ones with positive momentum scores. Australia, in the form of Pacific ex-Japan, is in third place, but with the U.K. far down the list we can’t claim the English-speaking world is on top. Japan remains above average and seems to be treading water instead of showing leadership. Toyota’s recall problems aren’t helping. Europe is on the bottom of the chart as the E.U. wrestles with debt problems for some of its members and debt exposure by the rest. China is still decidedly negative. The world’s growth engine obviously can’t do it all alone and needs to take a break.


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.

“They do not have the expertise gained from the failures it took to produce the original. We need not be concerned. We need only continue as always, making our improvements.”

Kiichiro Toyoda, 2nd president of Toyota in the 1930s


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