05/05/10   Greek Banks in Flames

Editor’s Corner

Investor Heat Map: 5/5/10Greek Banks in Flames

Ron Rowland

As predicted, elements of the Greek population are not responding well to the austerity plan imposed in exchange for an international debt relief package. Protestors set fire to a bank in central Athens where three people were found dead. The protest came after the government announced a second set of public worker wage cuts, a pension freeze and a new sales-tax increase. The cuts were mild in comparison to what private-sector workers around the world have endured the last two years, but the rioters obviously do not see it that way.

The word “contagion” is spreading rapidly in the news media, often accompanied by words like “debt” and “serious.” We heard at least one comparison to Ebola virus. The medical consequences may be less severe, but there is no doubt parts of Europe face a major economic ailment. Portugal seems like the top candidate to be the next victim. Yield spreads are also rising for Spain as bond investors realize it will not be possible to bail out everyone. Without the ability to float their currencies, Euro member states lack some of the options the U.S. enjoys. We expect the situation to get worse before it gets better.

World markets retreated on the European news. In a broad sell-off, the S&P 500 dropped to levels not seen since March. Many benchmarks are entering an oversold condition, but 2008 proved that such conditions can persist much longer than most people think. Volatility picked up; the Volatility Index (VIX) is back up to the area last explored in the January/February correction. The last week consisted of five volatile days, two of them up and three down.

The U.S. Dollar is proving to be a prime beneficiary of the Euro troubles. This is pushing Treasury bond yields sharply lower. Today the ten-year bond rate briefly fell below 3.5% and ended the day at 3.55%. We will not be surprised to see it head down to the 3.3% area or lower if the Euro stays weak. Gold is surprisingly steady in the face of the strong dollar. This suggests the metal still retains some of its safe-haven allure. We may see a new gold high after a period of consolidation.

Sectors

The top three sectors are still Consumer Discretionary, Industrials and Financials. There was a little bit of shuffling in the middle of the chart as Telecom moved above Energy. In absolute terms, all sectors lost momentum over the last week with the sector average dropping from a score of 25 to 16. The good news is that overall momentum is still positive. The bad news is that all the sectors have room to drop a lot more before they find bottom. Health Care and Consumer Staples are still on the bottom of our chart, but both are looking up in the short-term.

Styles

After widening the prior week, the Style momentum spread moderated somewhat in the last few days. Only 41 points now separate the best and worst categories. The relative rankings stayed mostly constant: Micro Cap and Small Cap on Top, Mega Cap and Large Cap on the bottom. All categories lost a little momentum since our last issue, reflecting the general market weakness, but all things considered held up well.

International

The majority of our International ranking categories have now slipped into intermediate-term downtrends. Only the U.S. and Canada remain in bullish territory. Pacific ex-Japan, which includes Australia, lost ground thanks to a new mining tax Down Under. China is trying to cool off its still-booming economy without raising interest rates via an assortment of interesting techniques. None of it was enough to lift China out of next-to-last place. Europe kept its firm grip on the bottom as the EU markets and the Euro currency both remained weak.


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 Biggest Obstacle to a Greek Bailout May Be Greece

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