Running Out Of Rubber Bullets
With the start of a new quarter comes a new corporate earnings season. The analyst consensus compiled by Bloomberg News predicts profits for S&P 500 companies fell 1.8% in the second quarter. If this happens, it will be the first time since 2009 that corporate America failed to deliver bottom-line growth.
Another area with little growth is employment. The June BLS report last Friday showed an increase of only 80,000 nonfarm jobs, well below projections. Slight gains in the average workweek and average hourly earnings suggested employers are squeezing more work out of current employees rather than hiring new workers. Combined with the corporate earnings picture, this makes us think layoffs and other cost-cutting measures have reached their limits, at least in large companies.
Today’s release of the June Federal Reserve minutes had a similar conclusion. The central bank is running out of options in its mission to keep inflation and unemployment within acceptable ranges. Something has to give way. In the Fed’s case, the consequence will be more inflation and/or more unemployment. A third option would be for the Fed to add new bullets to its policy belt, but there doesn’t seem to be any whispering on the street quite yet about what that could be.
Meanwhile, the bullets in Madrid were rubber as police fired into a crowd of anti-austerity protesters. Spanish Prime Minister Mariano Rajoy – initially thought to have emerged victorious from the late-June European summit meeting – jolted his nation back to reality with another package of tax increases and spending cuts. The measures were apparently in the fine print of Europe’s E100 billion Spanish bank bailout. On the other hand, bankers and bondholders are very happy with Rajoy’s implementation of the plan.
The U.S. Treasury today auctioned $21 billion in ten-year notes at the lowest yield ever: 1.459%. If bondholders are concerned about the “fiscal cliff,” they have a strange way of showing it. Germany also broke a record today, selling ten-year sovereign debt at a 1.31% yield.
Investors continue to pour money into the relative safety of the U.S. and German governments. Paradoxically, citizens of both nations are very unhappy with, and distrustful of, those same governments. Who will win: bondholders or voters? Maybe someday we will know.
The sector rankings show little change since our last report. The relative positions are exactly the same, in fact, and we see only minor changes in intermediate-term momentum. First-place Telecom widened its lead over everything else. Consumer Staples gained a little steam while Health Care slowed down a bit, leaving the two in a virtual tie for second place. Takeover activity in managed care stocks may give that niche a little boost. Utilities rounds out the top four, giving the rankings a clearly “defensive” tone. Financials and Consumer Discretionary still have slightly positive momentum but could easily slip into the red soon. Economic weakness also shows up as a theme, with Industrials, Materials, and Technology all continuing to lag. Energy still holds the last-place position but partially closed the momentum gap. Crude oil prices are still trending down but are no longer in free-fall.
We see more signs of transition in the Style chart today. A tentative new alignment is taking shape in which “smaller” equals “better.” Micro Cap stocks hold a clear lead in relative strength, with the three Small Cap benchmarks right behind. Mega Cap moved from third down to fifth to make room for the new regime. The lower half of the rankings are still jumbled, but for now Large Cap seems to be winning. The Mid Cap categories are clear laggards, holding three of the bottom four slots. Mid Cap Growth and Mid Cap Blend are the only two Style categories with negative momentum. Overall we see a slight preference for Value over Growth, but the trend is not yet strong enough to justify any action.
The U.S. is once again the only Global category with its head above water, although breathing would be much easier with a snorkel. A surge in the greenback against the Euro and Pound was very helpful. World Equity and Japan swapped places to second and third, respectively, though both now show slightly negative momentum. The U.K., Pacific ex-Japan, and EAFE held their ground in the next three positions. Canada improved a bit and moved ahead of Emerging Markets. Latin America, Europe, and China remain in the bottom three positions. This trio has formed the bottom tier for some time now, taking turns in last place. Presently, Latin America is making an effort to separate itself from the other two, but success is far from certain. Mexico, the region’s bright spot, is not big enough to pull the rest of the region out of the quicksand. Europe had another miserable week and may replace China on the bottom by our next update.
“We have very little room to choose. I pledged to cut taxes and now I’m raising them. But the circumstances have changed and I have to adapt to themy.”
Spanish Prime Minister Mariano Rajoy, July 11, 2012
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