06/09/10   Good For Government Motors, Not So Good For American Workers

Editor’s Corner

Investor Heat Map: 6/9/10Good For Government Motors, Not So Good For American Workers

Ron Rowland

Today Bloomberg reported that General Motors and Ford are taking steps to move more vehicle production to Mexico. The reasons are not complicated: At around $4 an hour, Mexican workers cost a fraction of what U.S. auto workers expect, unionized or not. Of course the complicating factor here is that GM still exists only because we, the taxpayers, bailed it out at enormous expense over the last two years. We did this ostensibly to save American jobs. Not coincidentally, the U.S. government expects to soon spin off its 61% ownership stake in GM. With the political pressure off, the again-independent company will be free to maximize its profits by outsourcing its operations elsewhere. Exactly who has been helped by this giant financial fire drill? We aren’t quite sure.

The Russell 2000 Small Cap Index this week finally joined the other major benchmarks in dropping below its 200-day moving average – long-term downtrend territory. This may finally be the beginning of a relative strength shift back toward blue chips. Daily volatility remains elevated across the board. In fact, volatility is itself in major bull market territory, something not many asset classes can claim right now. Moreover, recent volume patterns continue to show that stocks are weak. Volume is generally high on the down days and mild on rally attempts.

The big economic news of the last week was the May unemployment report, which analysts missed badly. The official unemployment rate held steady at 9.7%, but new private-sector job creation is back near zero. Small businesses are especially reluctant to hire anyone. The Fed’s Beige Book, released today, was as sanguine as ever, describing slight improvements in the job market in most parts of the country but few other optimistic signs. The housing market is suffering badly from the end of the home-buyer tax credit program and tight mortgage availability. Economic recovery remains mild at best.

Problems in Europe are keeping the U.S. Dollar strong, driving Treasury rates down and sending gold to new highs. The Euro broke below the 1.20 level against the greenback and more than a few people are suggesting parity is possible within a year. The ten-year Treasury yield stands at 3.187% as of today’s close. We suspect the 3% level will be broken before long. Gold is probing against resistance in the $1,250 area and has enough upside momentum to probably break out soon. Where it will peak is the next question.

Sectors

Our sector rankings were scrambled this week. Telecom is now on top of the chart while the former #1, Consumer Discretionary, slipped to third place and had a big drop in momentum. We see signs that investors are turning more defensive in their equity preferences. Consumer Staples rose to #2 and Utilities to #4. Health Care also improved its relative ranking. Energy had a good week and moved up from the bottom of the rankings. Industrials and Materials were hit hard, with Materials now last in the race.

Styles

Our Style rankings saw a major reordering. For months we have seen an inverted cap weighting pattern, with Micro and Small Caps in the lead followed by Mid Cap, Large Cap, and Mega Cap. This week Micro Cap plunged from first place all the way to tenth. The bottom three spots are now held by Small Cap and Micro Cap categories. Meanwhile the three Mid Cap groups hold the top three spots. Large and Mega Cap hold the middle ground. The shift toward larger cap stocks is another sign investors are becoming more defensive.

International

The Global rankings stayed mostly the same both at the top and bottom of the chart. Canada, China and the U.S. still hold the first three spots. The U.S. lost a little momentum while the other two were about the same as last week. Europe remains under pressure and is still in last place by a considerable margin.


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.


Attaining Long-term fiscal sustainability will be difficult.

Ben Bernanke, Fed chairman


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