03/04/09   Lines In The Sand Washed Away

Editor’s Corner

Lines In The Sand Washed Away

Ron Rowland

Equity markets rose today after breaking down badly in the last week.  The selling pressure washed away a wide variety of lines-in-the-sand: Dow 7,000, the 700 level in the S&P 500, the November 2008 lows for most benchmarks.  Media reports used terms like “losing hope” and “surrender.”  One brokerage firm suspended publication of its weekly buy-list due to lack of ideas.  We would like to say that all the negative sentiment indicates the bottom is near.  We are keenly aware, however, that any sort of “buy the dips” strategy has been catastrophically ineffective for the last six months.  There’s a bottom out there somewhere, of course.  Experts like Doug Kass and Steve Leuthold think it is here.  Time will tell if they are right.
 
The economic data stream remains unrelentingly bad.  In the U.S., 4th quarter Gross Domestic Product was revised downward to -6.2% from an initial estimate of -3.8%.  Today’s ADP employment report indicated a loss of 697,000 private sector jobs in February, more than estimated.  If confirmed by Friday’s official report, it will be the largest monthly job loss since 1949.  As predicted, the automakers are again teetering on the edge of collapse.  Sales are falling closer and closer to zero, and it seems only a matter of time until massive layoffs hit Detroit.  Housing prices are still in free-fall nationwide, with the previously stronger regions now starting to crack.  General Electric (GE) is the latest blue chip to come under attack.  Last week the company cut its dividend, and its coveted AAA credit rating grows more absurd by the day.
 
Against this foul tide, the Obama administration has proposed an assortment of palliative measures but no real solutions.  Washington appears fixated on saving the large banks from collapse.  Admittedly, the failure of Citigroup (C) would be disruptive and costly, but as far as we can determine, there are no better alternatives.  Propping up the banks with copious amounts of taxpayer money simply delays the inevitable.  This is crystal-clear to stock traders who now regard Citi shares as little more than call options on the next bailout announcement.  The repeated official statements that Citi and its peers are “well-capitalized” have become laughable.  Everyone knows better.  Yet the Treasury insists it is all nothing more than a “liquidity problem” which can be resolved by throwing more money at the banks.  We do not know how it will all end, but we are sure it will not be pretty.
 
Today’s rally was sparked by news that China will shortly unveil a new economic-stimulus plan.  This is why Energy and Materials were two of the leading sectors on the day.  It is also why Treasury bonds fell so hard.  Every penny the Chinese spend on their own infrastructure is a penny they will not be using to buy American T-bonds.  This is no small issue.  Somebody needs to step up to the plate and buy $2 trillion or so of U.S. debt in the next year; otherwise all the plans of mice and men will fall apart.  We continue to think this will end with major inflation, but the timing remains elusive.  For now, Treasury yields remain historically low which suggests deflation is still the greater threat.
 
Sectors
 
Health Care has been the strongest sector, relatively speaking, for a long time.  No more.  The Obama administration’s reform proposals did a number on managed care, pharmaceutical, and biotechnology stocks, dropping Health Care all the way down to # 4 in our chart.  Technology is now on top, but there is nothing strong about it.  A major proxy for Financials, SPDR Financials ETF (XLF), is now 80% below its peak value.  Can it get worse from here?  Unfortunately, yes.
 
Styles
 
You know times are bad when the best Style category, Large Growth, is declining at a -81% annualized rate.  It gets worse from there.  Microcaps had a particularly bad week, even worse than Large Value and Mid Value, though all remain in the bottom half of the chart.  Conversely, Mega Caps moved up the ranks at the expense of Small Growth. 
 
International
 
China is again on top of the Global rankings but only in relative terms.  Every market on the planet is trending downward at a rapid rate.  Once again, we are hearing chatter than China will be able to decouple from the rest of the world and go its own way.  We will reserve judgment and note that today’s massive rally accomplished nothing more than to bring China funds back where they were four days ago.  The EU and UK are still on the bottom of the chart, afflicted with both economic weakness and currencies that are losing value against the dollar.  Oddly, Emerging Markets are doing far better than developed markets.  We wonder if this may be because their banking sectors are less leveraged than is common in the industrialized world.  If so, internal growth could allow some emerging markets to recover faster than average. 

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.


Dow 7000 Celebration Party Today on CNBC.”

CNBC (Feb 13, 1997)


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