07/01/09   Stabilization Yes, Recovery No

Editor’s Corner

Stabilization Yes, Recovery No

Ron Rowland

Time flies when you are having fun, and 2009 is now halfway into the record books. Someone who was incommunicado for the last six months and now sees only the year-to-date returns might conclude it has been a boring year so far. Annual numbers hide the volatility that left many investors gasping for breath at various points in the first two quarters. For instance, in early March the S&P 500 had fallen as much as 25% while benchmarks of financial and real estate stocks were off 40-50%. The turnaround since then was truly extraordinary.

Earlier this week Bernie Madoff was sentenced to 150 years in prison following a series of sad stories from victims of his Ponzi scheme. Some would suggest that this indicates the justice system is finally getting tough on white-collar crime. They forget that Madoff was not discovered by regulators. In fact, his crimes went on right under their noses for decades. He was caught only when market losses finally collapsed his house of cards. Having allowed the cows to escape, regulatory agencies are now hastily closing all the wrong doors while even bigger gangsters loot the public purse to prop up their failing financial empires. Madoff deserves his punishment, but no one should rest easy as a result. Wall Street is as dangerous than ever.

Economic data continues to suggest some stabilization but little hope of a strong recovery. The ISM Manufacturing Composite rose in June, with the biggest increase in production since August 2003. Lest anyone get too excited, keep in mind this represents a bounce from near-depression conditions only a few months ago. Employment trends are still negative: today’s ADP report estimated that 473,000 private-sector jobs were lost last month. Tomorrow’s non-farm payrolls report will add further detail, but clearly there is no sign businesses are about to embark on a hiring spree. Not coincidentally, consumer sentiment remains weak.

Treasury bonds are much improved from a few weeks ago when the 10-year rate hit 4%. Now it is back below 3.6% and still in a short-term downtrend. The Federal Reserve is trying to keep rates down in order to stimulate mortgage activity, but it isn’t working. Refinance applications plunged 30% last week, according to the Mortgage Bankers Association, and the index is now at its lowest point since last November. New-purchase applications were also down though not as dramatically. Low rates alone are obviously not enough to convince people to take on a new mortgage in this economy. The interest rate is irrelevant if you cannot afford the payments or are burdened with other debt.


Stocks marked a strong advance in the last week, with June 23 establishing at least a short-term low. This positive action prevented more sectors from flipping over to red as we thought might happen. Energy is still the only sector with negative intermediate-term momentum. Health Care continued to climb the charts and in the last two weeks has moved from last place up to the # 2 spot. Technology still has a lead, but the margin is shrinking. There is an odd mix at the bottom of the rankings with Energy, Industrials, Consumer Discretionary, and Consumer Staples all showing sub-par momentum.


Mid Caps advanced the most this past week, allowing them to edge slightly higher in the rankings. Small Caps generally outperformed Large Caps, putting additional distance between the two groups. Growth still has the edge over Value at all capitalization levels.


The Global Edge rankings look a little strange with the World Equity category at the bottom. In theory, this category represents a combination of all the other groups so it should never be at the top or the bottom – but there it is. Why? The benchmark for this category is iShares S&P Global (IOO), which is a mega cap ETF representing the entire world. What this really tells us is that large cap stocks are lagging on a worldwide basis. Note also that the bottom half of the chart includes all the “developed” countries, which is just another way of saying that large caps are underperforming. Case in point: the UK dropped in the rankings and was overtaken on a relative basis by Latin America, Emerging Markets and Canada. China remains on top of the list. The U.S. dollar seems to have resumed its downtrend after a brief correction, which should be positive for most non-US equity categories.


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.

“You know what, rip me off once, shame on me.  But twice?  I’m coming after you and taking back what’s mine.”

William Darrell “Billy” Mays, Jr. (1958-2009)


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