05/01/13   Blame It On Government

Editor’s Corner

Ron Rowland

The Federal Reserve left interest rates unchanged at the conclusion of today’s FOMC meeting.  Information theory suggests the lower the probability of a given outcome, the higher the quantity of information that particular result conveys.  Therefore, the Fed’s action (lack of action may be more appropriate) on interest rates today contained very little information. 
The Fed will continue purchasing Treasury securities at $45 billion per month and mortgage-backed securities at $40 billion per month.  These will continue until the labor market improves substantially, and the amounts may increase or decrease to adjust for labor market or inflation changes.  Regarding the economy, the Fed believes it is experiencing moderate growth with inflation coming in under target.  However, the Fed admits there is downside risk to its economic outlook.
In the Fed’s view, fiscal policy is restraining growth.  There is little more it can accomplish with monetary policy.  In other words, the Fed is pointing its finger at the Government and away from itself.  CNBC calculated the “cost per job created” from stimulus spending during the first quarter of 2013 and over a longer period.  In both cases, the result was about the same – job creation has cost more than $500k per job.  The calculation methodology hasn’t been scrutinized yet, but if it turns out to be reasonably accurate, then it would appear job creation has been a highly inefficient and costly process.

Investor Heat Map: 5/1/13


Rotation within the defensive groups pushed Utilities from third to first this week as Health Care dropped out of the leadership role.  Telecom held its second place spot, and Real Estate moved up two places to grab third.  Consumer Staples rounds out the top-five, providing this upper tier with a clear defensive tilt.  Utilities, Health Care, and Consumer Staples are the traditional defensive sectors, having been pigeon holed as such for decades.  We like to think of Telecom and Real Estate as being semi-defensive, part-time defensive, or perhaps even new-age defensive groups.  Additionally, they are the second and third highest yielding sector categories, each paying out 3.5% or more.  Only the Utilities sector spits out dividends at a higher rate, currently about 4.0%.  Therefore, today’s three highest ranked sectors based on momentum also happen to be the three highest yielding ones.  With the 10-year Treasury yielding less than 1.7%, investors are favoring income-oriented stocks.  Technology, Energy, and Materials were all registering negative trends last week, but the rally of the past week pushed them all to the plus side today.  Energy now sits in last place.


The Style rankings are very compressed with only seven points separating first place Mid Cap Value from last place Small Cap Value.  If you are familiar with how the traditional 9-square Style Box is constructed, then you are aware these two ranking extremes are actually in adjoining squares.  This is an example of what can happen when rankings are compressed – strange relationships may develop.  Even though there is little difference in today’s momentum scores, all categories within each capitalization segment managed to cluster together.  The three Mid Caps are on top, closely followed by the three Large Caps.  The Small Cap trio is stuck on the bottom.


All categories of our Global rankings are showing improvement versus a week ago, and Japan remains the leader by a considerable margin.  This is a good example of how our Edge Charts provide additional value.  A traditional relative strength ranking might list Japan first and EAFE second, but it would not provide an easy means of seeing how far out in front Japan really is.  Compare this to today’s Sector and Style rankings, which have little or no difference between first and second place.  Pacific ex-Japan had a good week, climbing two places to third.  EAFE knocked the U.S. out of second place and down to fourth.  It was a good week for the U.S. but an even better one in nearly every other corner of the world.  Europe’s score went from slightly negative to quite healthy over the past week.  Emerging Markets also managed to flip from negative to positive.  China, Latin America, and Canada are the only three categories still showing negative momentum.  Canada was the best performing region for the week on strong gains in its currency and equity markets.



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 Committee will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability.”

FOMC statement of 5/1/13


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