Spain Into The Vortex
As expected, corporate earnings reports lead the news this week. Market reaction to the quarterly announcements is always hard to decipher. We can’t know what is actually making investors react. Are they happy because the company showed improvement or because the news was better than forecast. Are they angry because the company reported losses or because they were expecting a rosier announcement? And what are the expectations? Everyone knows the official analyst forecasts, but unsourced “whisper numbers” are always in the background.
With that caveat, we will say that earnings so far look better than we expected. Companies are showing actual revenue growth. Not much growth, but still growth. At the same time, key stocks like Intel (INTC) may have a hard time justifying growth-like valuations much longer. A long-overdue correction in Apple (AAPL) isn’t helpful, either.
Spain has moved comfortably into its new role as the vortex of European fears. Tomorrow’s government bond auction will be closely watched, but private debt is also troubling. A report from the Bank of Spain today classified Euro 143.8 billion in Spanish loans as “non-performing.” As we saw in Greece and Italy, the real number is probably much higher. Leadership denials notwithstanding, some large Spanish banks and possibly the government itself will need bailouts – and soon.
Not coincidentally, U.S. Treasury bonds are once again showing fortress-like strength in comparison to all other sovereign debt. The ten-year yield slipped below 2% again today after going as high as 2.4% in recent weeks. Investors seem remarkably unconcerned about inflation. Crude oil retreated after today’s supply data, although consumers still face historically high fuel and food prices. Bank lending activity is climbing, both for real estate and business loans, even as banks continue to buy every bond in sight.
Maybe Apple (AAPL) isn’t the only tech stock after all. Technology, as a sector, still tops this week’s chart despite a much-bewailed Apple downturn. Its lead over Consumer Discretionary is down to a sliver, though. The second-place sector, driven by Retailing and Homebuilder stocks, has been trending upward for months and is now gaining additional strength from the Leisure segment. A closer look suggests the added momentum originates in casino stocks. Financials are in third place, followed by Consumer Staples and Health Care. Industrials and Materials recovered into mildly positive territory. Materials had an impressive week, in fact, but is still stuck in a trading range. Telecom and Utilities still look unattractive, but Energy is the main basement-dweller. Energy is the only sector trading below its 200-day moving average.
The week brought little change in the general alignment of our Style categories, but there are some interesting anomalies. Large Cap Growth is in first place while Small Cap Growth is last on the list. This illustrates the market’s current preference for Large Cap over Small Cap while also rendering the Growth/Value distinction somewhat irrelevant. Mega Cap slipped out of the lead but is still a close second. Mid Cap Growth improved to third place. As was the case last week, the three Small Cap categories are last on the list. All three did, however, manage to move from slightly negative to slightly positive.
Markets worldwide had a better week, but the U.S. is still on top. Second place is now held by Pacific ex-Japan, which is mainly Australia. The region’s impressive climb up the ranks in recent weeks is interesting because there was no strong rally. Simply posting smaller declines during the early-April downturn allowed Pacific ex-Japan to move almost to the top of the world. World Equity slipped to third place. The U.K. jumped from #8 to #4 as the British Pound gained against the dollar. Japanese equities also had the benefit of recent currency gains and are in fifth place. Emerging Markets and EAFE, both broad international benchmarks, seemed to find support in the recent pullback. China moved off the bottom to take eighth place. Canada, Latin America, and the E.U. own the bottom of the list.
“Everyone, even the Eskimos, knows that bad loans in Spain are going up.”
Antonio Ramirez, Keefe, Bruyette & Woods banking analyst 4/17/12
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