06/29/11   Banks Win, Greeks Lose

Editor’s Corner

Investor Heat Map: 3/26/11Banks Win, Greeks Lose

Ron Rowland

The latest Greek bailout plan moved closer to reality as the government clinched parliamentary support for a widely unpopular austerity program.  Public anger is not particularly surprising: banks will receive a huge gift and Greece’s population will lose much of its accustomed benefits.  Ultimate resolution has simply been postponed.

The reforms that are proving so difficult in Greece will be necessary elsewhere, too, including the U.S.  Our size and leadership position give us more maneuvering room.  How much more remains to be seen.  Unless the White House and Congress reach an agreement to raise the debt ceiling, the U.S. could begin defaulting on Treasury obligations by early August.  President Obama hinted today that a compromise may be near. 

We must admit that Treasury bonds are not acting like loans whose issuer is near default.  Even with the ten-year yield above 3% again, rates are still at historic lows.  Short-term T-bills are paying only slightly more than zero.  Several factors are at work, including economic weakness, reduced supply, and new regulations forcing money market funds to reduce their average portfolio maturities.

Domestic stock benchmarks look a little better.  The S&P 500 moved up and is still above its 200-day moving average.  Economic indicators remained mixed.  May pending home sales look better at first glance, but not so much when you consider the easy comparison with a year ago when the homebuyer tax credit was expiring.  Consumer Confidence posted a third decline in four months and is now at the lowest level since last fall.  Retail sales look set to stay sluggish for a few more months at least.

Finally, we should note that Arlene, the first tropical storm this season worthy of a name, is now in the Gulf of Mexico and is likely to make landfall tonight.  We have reached the time of year when energy traders start paying close attention to weather forecasts.  Unlike the Missouri and Mississippi River basins, the Gulf Coast region could certainly use some rain – but we may not like what comes with it.


Health Care reclaimed the top spot in the sector rankings and Telecom is only a fraction behind.  Consumer Discretionary, which was in the bottom half of the chart only a few weeks ago, is now in third place.  Consumer Staples slipped to #4, thanks mainly to weakness in sector behemoth Proctor & Gamble (PG).  In fifth position, Utilities is the last sector with a positive momentum reading this week.  Technology bounced off the bottom but still looks very weak.  Energy was volatile, slammed by the IEA announcement of a 60 million barrel release from strategic petroleum reserves.  Financials retook last place but regained some strength today as Bank of America (BAC) seemed near a settlement on mortgage paper liabilities.  Visa (V) and Mastercard (MA) spiked late in the day on favorable news regarding swipe fees.


A week ago all 11 style categories were in the red.  Two of them have now moved out of the negative zone, though not by much.  Small Growth made a huge relative leap from #10 all the way to #1, but with the rankings so tightly compressed we would not read much into the move just yet.  Mid Growth improved its momentum score to zero, which in this market is enough to capture second place. Mega Caps are still on the bottom, which is odd in a time of general anxiety but probably due to disinterest in the multinational banks and energy conglomerates.


Big changes in currency exchange rates drove most of the moves in our Global rankings this week.  All categories are still negative, but the U.S. moved back atop the list – the best of a bad lot.  In second place, Japan almost finished a bottom-to-top journey.  Japan hasn’t really improved – and in fact is still well below its pre-tsunami level – but managed to hold steady in June and received a slight currency boost.  On a relative basis, that makes the performance of Japan above average.  Former leaders U.K. and Europe dropped to the bottom half as the Greek drama took a toll on European financial institutions as well as the Euro currency.  Emerging markets, including China and Latin America, moved into the upper half of the chart.  The material-heavy categories of Canada and Pacific ex-Japan (i.e. Australia) are hovering at or near the bottom of the list.  They seem likely to stay there until commodity prices move back into a long-term uptrend.


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 yellow light is flashing but it hasn’t been a red light yet…”

President Obama, describing the debt ceiling deadline, June 29, 2011


© 2011 AllStarInvestor.com All Rights Reserved. Protected by copyright laws of the United States and international treaties. Nothing in this e-mail should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investment advice. Any investments recommended in this letter should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company. All Star Investor employees, its affiliates, and clients may hold positions in the recommended securities.

Distribution is encouraged. Please do not alter content.