03/14/12   Banks are A-OK, Says The Fed

Editor’s Corner

Investor Heat Map: 3/14/12Banks are A-OK, Says The Fed

Tuesday’s bank stress test results can be summarized in two words: “All Clear.”  At least that is what traders heard when the Federal Reserve said 15 of 19 top banks would remain solvent even in an “extremely adverse” economic scenario.  The Fed aBanks are A-OK, Says The Fedlso signalled bank dividends and stock buybacks – which largely disappeared after the 2008 crisis – were no longer taboo.  Banks immediately began announcing plans for both.

Money was already beginning to flow away from safety and toward risk.  The stress-test news accelerated the trend, as did an FOMC statement leaving the door open for further monetary stimulus.  Of course, as usual for Fed statements, nothing was promised or ruled out, so the real intent is unknown.

Technology stocks are another big influence.  In fact, looking at Apple (AAPL) gives us flashbacks to 2000-2001.  The hockey-stick pattern is more and more apparent even on log-scaled charts.  Consider this: on the day after Thanksgiving 2011 – the so-called “Black Friday” – AAPL shares closed at $ 363.57.  Today, in the middle of Spring Break, they went as high as $594.72, for a 64% gain in less than four months. 

For the sake of discussion, let’s concede that Apple makes great products, has wonderful growth prospects, and the economic background looks positive.  Does this really justify the recent sharp gains?  Maybe so, but clearly another factor is that AAPL is now a “must-own” stock for every portfolio manager in the world.

Apple shares could move higher still if portfolio managers find themselves needing to invest additional cash.  And they may, since capital is obviously looking for better returns than the bond market can offer.  The ten-year Treasury yield broke out of its four-month range and climbed as high as 2.29%.  A concurrent drop in gold is further evidence that the ranks of safety-first investors are shrinking.  We hope they are right.

Sectors

Today’s sector rankings show the market leaders are gaining momentum and separating themselves from the pack.  Technology, Consumer Discretionary and Financials all posted excellent weekly results.  The trio resides firmly on top of all 32 Sector, Style and Global categories.  Technology is moving up thanks not only to Apple but also IBM, Microsoft (MSFT), Intel (INTL), Cisco (CSCO), and others.  Consumer Discretionary’s strength is driven by retailers and home builders.  Financials seemed to be fading a few weeks ago but began to perk up last week.  Tuesday’s stress test news created an upside explosion.  Dividend and buyback news added fuel to the fire.  Industrials, Health Care, and Consumer Staples now form a second sector tier.  Energy lost relative strength as crude oil prices stabilized.  Materials had a good week but still slipped down the ranks.  The Utilities sector remained on the bottom.

Styles

The Mega Cap category is again on top, which seems a bit unusual in the current context.  The biggest-name stocks typically have a more defensive flavor, but they are leading the way higher even as investors take on more risk.  The ascent of AAPL to world’s largest stock is no doubt part of the reason.  Another explanation may be that investors lack confidence in the rally but do not want to miss it.  The rest of the upper half consists of Large Cap/Mid Cap in the Growth and Blend flavors.  Large Cap Value slipped but may improve if the Financials sector continues to move up.  Small Cap Value and Small Cap Blend are still the laggards, with Mid Cap Value, Micro Cap, and Small Cap Growth only a little bit better.

Global

The U.S. expanded the lead acquired last week.  A rising dollar helped domestic stocks pull away from the pack.  Emerging Markets is still the main challenger for now.  Latin America took a tumble, falling from third to seventh place.  Regional behemoth Brazil has stalled out and seems unable to establish new highs.  Europe moved up to fourth and shrugged off news that Greece bond restructuring would trigger a credit event.  Japan slipped a notch to fifth as equity gains were offset by a falling yen.  China keeps trying to push ahead but is still lagging other regions.  Resource-intensive benchmarks in Canada and Pacific ex-Japan are again on the bottom.

 

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.

“The first step is wanting to give money back to shareholders — that’s the easy step for them. The harder step is to start taking more risk and lending to the economy. That is the most critical thing because we need this recovery to continue to build steam. It hasn’t yet gone from being fueled by liquidity to being fueled by fundamentals.”

Mohamed El-Erian, Pimco CEO, March 14, 2012


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