Headlines: Spain Out, Greece Back In
The good news for European investors is they can forget about Spain for a few days. The bad news is Greece and France provide new subjects for worry.
Greece, you may recall, escaped the headlines in February by agreeing to harsh austerity measures in exchange for bailout funds. Greek elections last weekend created serious doubt on that agreement; parties opposed to budget cuts took some 70% of the votes. Whatever coalition government emerges seems unlikely to maintain the nation’s present course.
Why does this matter? If Greece won’t play ball, one of two things must happen. Either Germany and other lenders back down from their stern “Greece-must-pay” positions, or Greece will default and exit from the Euro currency union. Our bet is on default, though not without weeks or months of dramatic negotiation.
Meanwhile, French voters defenestrated Nicolas Sarkozy and chose Socialist Francois Hollande as their next president. Hollande’s strident anti-capitalist, pro-government-spending rhetoric indicates German-style “austerity” is not what French voters want.
Equity benchmarks, while down significantly, are holding above technical support levels so far. New reports this afternoon that the European Financial Stability Facility will give Greece at least one more bailout tranche helped. Yet we still see rotation toward defensive sectors. A temporary drop in ten-year U.S. treasury yields below 1.8% is another sign investors seek stability. Falling crude oil and gold prices reflect lower economic growth expectations. Yes, Spain is out of the headlines… but the headlines are still there.
Consumer Discretionary kept its top ranking, but only by a fraction. Health Care moved up from third place to score a virtual tie for today’s lead sector. Within these broader groups, retailing, leisure, and homebuilders lagged, while biotechnology managed a slight gain. The Financials sector slipped to third place and is in serious danger of falling behind #4 Consumer Staples. Utilities continued to strengthen and now occupies fifth place. Technology fell in both absolute and relative terms and now shows negative momentum, as do Industrials, Materials, and Energy. Crude oil’s break below $100 put additional downward pressure on energy-related equities.
Momentum in either direction has all but disappeared from the Style rankings. The categories are all squeezed between +6 and -6. What we are seeing is a battle between the short-term negative action of the last week and the longer-term positive results of the last several months. The winner is yet to be determined. For the moment, Mega Cap is on top, followed by Large Cap Growth and Large Cap Blend. The three Mid Cap categories are bunched in the middle of the pack. Four categories – Micro Cap and the three Small Cap groups – show slight negative trends. Small Cap Growth is once again on the bottom after a short one-week reprieve.
The top four Global categories are the same as last week: the U.S., U.K., Pacific ex-Japan, and World Equity. Only the U.S. has a positive momentum score, thanks mainly to a strengthening dollar. Canada, facing the double whammy of weak energy prices and a declining currency, slipped down the ranks to ninth place behind EAFE, China, Emerging Markets, and Japan. Latin America moved out of last place but still looks shaky. The EU is again on the bottom following electoral results in Greece and France.
“Greece has to be aware that there is no alternative to the agreed consolidation program if it wants to remain a member of the euro zone.”
European Central Bank Executive Board member Joerg Asmussen, May 9, 2012
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