03/12/14   45-Month Streak Ends

Editor’s Corner

Ron Rowland

People have been leaving the workforce in droves.  In calendar year 2013, the number totaled 2.9 million.  Whether the exits were due to frustration or personal choice, the monthly exodus was relentless.  Additionally, the quantity of people leaving consistently outpaced the number of people finding jobs.  In fact, it had been that way for 45 straight months.  However, that streak ended in February when more people landed new jobs than dropped out of the workforce.

Weather was also a factor in the February report.  This bit of news should not come as a surprise to anyone living in North America this winter.  Although there were more people with jobs, not all of them could get to their jobs.  Snowstorms closed roads, factories, and even entire cities.  As a result, the average number of hours worked declined.

Employment reports are notorious for their anomalies, and February was no exception.  Despite the fact that more people found jobs than left the workforce, the unemployment rate rose from 6.6% to 6.7%.  Although 264,000 people joined the workforce, not all of them found jobs.  Being in the workforce does not equate to being employed.  In February, the ranks of the unemployed grew by 223,000.

Last week we reported on the Ukraine-Crimea-Russia situation.  Tensions are still running high, but it is no longer the lead story of every newscast.  The latest twist involves an upcoming referendum for Crimea to secede from Ukraine and become part of Russia.  The legality of such an event remains unclear, especially given the existing disagreements on what constitutes a legitimate government for Ukraine.  This story is far from over.

Meanwhile, China experienced its first domestic corporate bond default.  Chaori Solar Energy Science & Technology of Shanghai could not make its $14.7 million interest payment this week.  While the amount is relatively small, Moody’s claims it is the first time any Chinese company has defaulted on a mainland traded bond.  There is always a first time, and now Chinese bond prices and yields must account for the possibility of default.

Investor Heat Map: 3/12/14


Most sectors lost strength since last week’s report.  Health Care remains on top, although its margin of safety has nearly evaporated.  Materials moved up a notch to claim the second spot, while both Technology and Consumer Discretionary followed along to grab third and fourth.  Industrials climbed two spots thanks to strength in transportation stocks.  Real Estate took a tumble in the rankings, dropping four places to sixth.  Absolute performance was not as bad as the decline in relative strength, but the sector did experience a sharp fall at the open on Friday following the release of the employment report.  The Financials sector posted the best improvement for the week and climbed two spots.  Utilities fell again, this time dropping to eighth.  Energy and Consumer Staples are neck-and-neck near the bottom, while Telecom continues to occupy the basement.


Micro Cap was able to maintain most of its momentum while the Small and Mid Cap categories tended to see drops.  As a result, there is now a significant gap between top-ranked Micro Cap and second-place Small Cap Growth.  The next four categories of Mid Cap Growth, Mid Cap Blend, Small Cap Blend, and Mid Cap Value are in the same relative order as a week ago.  However, their weakening produced increased compression and allowed Small Cap Value and Large Cap Growth to be lumped into this sizable middle tier grouping.  The three Large Cap categories are bunched near the bottom just above Mega Cap, emphasizing the market’s preference for smaller company stocks.


The U.S. held its top ranking among the global categories despite recent weakness in the dollar.  Europe moved up a notch to second place by falling less than other regions.  World Equity, EAFE, Canada, and Pacific ex-Japan seemed to move in lockstep and improved their relative rankings as a group.  The improvement for these five categories came at the expense of the U.K., which plunged five places from second to seventh.  The British Pound took a hit on Monday, contributing to the downside action in U.K. stocks.  Japan and the three developing country categories remain in negative trends.  China’s exports posted an 18% year-over-year decline in February when a 5% gain was expected.  This added to recent economic concerns, and it increases the probability of China replacing Latin America as the worst-ranked category.  Russia does not have its own category in our global rankings, but it would be at the bottom if it did.  Russia ETFs dropped more than 5% over the past week, adding to the country’s already dismal performance.


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.


“The report showed solid job growth in February despite clearly negative effects from the weather. It suggests the jobs numbers should improve as the weather gets better.”

Dean Maki, Barclays Chief US Economist, 3/7/14


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