03/27/13   Cypriot Antidote Worse Than The Illness

Editor’s Corner

Ron Rowland

Banks in Cyprus are scheduled to reopen tomorrow after being closed since March 15.  In case you missed the news, depositors there are being forced to bail out the very banks they entrusted with their savings.  Banks are supposed to be standard-bearers of safe keeping.  When selecting a bank, the primary variable should be the interest rate you will earn on your deposit instead of what portion of that deposit is subject to confiscation.  Given the events now unfolding in front of us, what rational thinking person will ever again make a deposit into a Cypriot bank?  The banks were saved from failure, but the antidote is worse than the illness – the cure will kill them.

The Cyprus government is preparing aggressive actions to curb the flow of cash out of the country.  These “capital controls” include a limit of €3,000 cash per person when leaving the country, suspension of credit-card purchases for items outside the country’s borders, credit-card transaction limit of €5,000 per month, no early withdrawal of fixed-term deposits, and check cashing restrictions.

However, it’s beginning to appear these actions are too little, too late.  Loopholes have been found and exploited the past 10 days.  Reuters reports that while banks have been closed in Cyprus, “The two banks at the centre of the crisis – Cyprus Popular Bank, also known as Laiki, and Bank of Cyprus – have units in London which remained open throughout the week and placed no limits on withdrawals. Bank of Cyprus also owns 80 percent of Russia’s Uniastrum Bank, which put no restrictions on withdrawals in Russia.  Russians were among Cypriot banks’ largest depositors.”  The result will be a larger levy on the deposits that still remain. 

Knowing that 40% of earlier deposits were just confiscated, what interest rate would you require from a Cypriot bank before making a substantial deposit?  If you come up with a number, then ask yourself how will the bank be able to pay you that interest?  Who could they possibly lend to at an even higher interest rate in order to remain in business?  We’re not 100% convinced these banks will reopen tomorrow, but even if they do, they are already doomed to failure.

As a result, the good old U.S. Dollar is looking mighty fine to global investors today, and Treasury securities are up strongly.  One would think that this turmoil would spark a rally in gold, but so far that hasn’t happened.  As we said before, Cyprus does not have a very large physical or economic footprint.  However, it is destined to become a large chapter in the history of financial policy blunders.

Investor Heat Map: 3/27/13


There’s been a huge shake-up in the Sector rankings this week, and the lineup is taking on a much more defensive flavor.  Consumer Staples surged from sixth all the way to the top.  Granted, the top six positions were relatively compressed a week ago, and even more so today, but that large of a jump to secure the lead is quite remarkable.  Health Care moved up one place to second, which along with Consumer Staples and Utilities defines the “defensive” trio of sectors.  Financials, last week’s leader, slid to third.  Consumer Discretionary and Utilities remained tied for fourth.  Industrials took a spill, slipping from second to sixth, but it is still grouped with the leaders from an absolute strength perspective.  The bottom five are the same as last week, although with some minor reshuffling.  Energy, Real Estate, and Telecom all climbed one spot as Materials fell three places.  Technology continues to occupy the basement.


From top to bottom, all eleven Style categories are in the same relative order today as a week ago.  The lineup became slightly more compressed but not abnormally so.  Strength is currently defined as a reciprocal of market capitalization.  Micro Cap, representing the tiniest stocks, is on top.  The polar opposite, the Mega Cap group, is firmly on the bottom.  In between, the falloff in strength from Small Caps to Large Caps is clearly visible, although the Mid Caps are interspersed.  The Value versus Growth distinction is somewhat conflicted.  Value wins out over Growth for Large and Mid Caps, but Growth is favored for Small Caps.


Global regions is where the market is currently making the largest distinction between the leaders and the laggards.  Among Sectors, the momentum spread between the top and bottom is 24 points.  For Styles, the difference is compressed to just 15 points.  In the Global rankings, the gap between first place Japan and last place China is 64 points, more than four times the spread found in the Style rankings.  Adding alpha to a global equity allocation is currently as simple as overweighting Japan and underweighting China.  However, given the dismal performance of Japanese stocks for most of the past 23 years, many international portfolio managers are timid about overweighting the country.  The U.S. is solidly in second place, and the remaining developed market categories are next in today’s lineup.  Notable changes among these regions include EAFE’s drop from third to fifth and Europe slipping into a negative trend.  The bottom three spots are still held by the developing market categories with China maintaining a firm grip on last place.



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.


“We are in no position to give you the exact amount this moment, (but) it’s about 40%.”

Panicos Demetriades, Cyprus Central Bank Chief, referring to the amount that will be taken from large deposits at Bank of Cyprus 3/26/13


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