At this point in the news cycle, we suspect most people are tired of reading about Europe. We are not eager to write about it, either. So here is a quick summary: Spanish banks were bailed out. Spain’s government is on the hook to pay it back. Government bond yields went up, not down. Spain and Italy are mad the ECB won’t help. Greeks will vote this weekend. No one knows what will happen next.
Now, on to the more interesting subject of today’s Senate appearance by Jamie Dimon, head of JPMorgan Chase (JPM). Mr. Dimon was summoned to explain his bank’s recent $2 billion trading loss before a group of Senators who were far more interested in making themselves look vigilant than actually trying to understand how it happened.
Alabama Senator Richard Shelby, for instance, said “This committee has a responsibility to ensure that banks do not put taxpayers at risk.” As the Senator must know, banks put taxpayers at risk by their very existence. The Treasury has been on the hook for deposit insurance for decades. More recent bail-out programs put taxpayers at even greater risk, with the agreement of both political parties.
In reality, then, Sen. Shelby and his peers fully support allowing banks to put taxpayers at risk, and they have been doing so for years. Likewise, Mr. Dimon has no problem accepting the government’s support. He vigorously defended JPM’s right to take massive risks under the guise of “hedging.” The entire event was a theatrical production, not a real inquiry, but both sides seemed pleased afterward. JPM shares rallied nicely.
Economic data is still mixed. Retail sales in the U.S. declined for a second month in May, while other reports show small businesses gaining a bit of confidence. Speculation abounds on what will come from next week’s Federal Reserve policy meeting. Traders are hoping for more stimulus. The ten-year Treasury yield ended at 1.60% today, up sharply from 1.44% on June 1 but still at historic lows.
Seven days from now, we will know how Greeks voted, we will know what the Fed decided, and we will probably know a few more nuggets, too. The answers will create new questions.
We see a little more green on the Sector graph today. Utilities stocks still have more bullish momentum than anything else. Now, however, Telecom is moving up as well thanks to good performance coming from AT&T (T) and Verizon (VZ). Consumer Staples and Health Care also recovered into mildly positive territory and are ranked third and fourth. Consumer Discretionary held on to the #5 slot. This group held the lead for a long time this year; the present consolidation could allow it to come roaring back if the economy strengthens. Technology, Industrials, Financials, and Materials huddled even closer together in the bottom half of the chart. Energy is still on the bottom, however, and the gap is getting bigger despite some stabilization in crude oil prices.
The Mega Cap category still shows negative momentum, but it nevertheless tops the Style list again today. We suspect this will be the first Style group to turn green if markets move higher. Mega Cap and Large Caps still hold the lead, again occupying the top four positions on our list. Further down the ranks, the Mid Cap and Small Cap segments are starting to mingle but remain within a tight range. We now see Value ranked ahead of Growth at all capitalization levels. Whether this means anything is not yet clear; the differences at this point are too small to have much significance.
The Global categories, while all still negative, have sorted themselves into three distinct segments. The first tier includes the U.S. on top followed by the U.K., World Equity, and Pacific ex-Japan. The U.S. has been on top of the list since early March. Below this we see a clump consisting of Japan, EAFE, Canada, and Emerging Markets. Canada looks stable despite weakness in energy stocks. The bottom echelon is a global-spanning trio with China, the EU, and Latin America. China’s rate cut seems to have helped equity prices there, though we do not yet see a stable uptrend. Latin America allowed Europe to escape last-place ranking.
“We’re going to just keep playing this game until there’s some final outcome of what’s going to happen with the euro. Europe is a total disaster.”
Tom Wirth, Investment Officer Chemung Canal Trust, June 12, 2012
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