07/13/11   Ireland’s Turn In The Hot Seat

Editor’s Corner

Investor Heat Map: 7/13/11Ireland’s Turn In The Hot Seat

Ron Rowland

Last week Portugal, this week Ireland.  Moody’s downgraded government debt in both nations and both look like they will default without some kind of bailout.  From the debtor’s point of view, default could be the best option at this point.  The lenders think differently and are working furiously to avoid the possibility – or at least provide a sugary coating to make it palatable.

Just to make Europe even more interesting, Italy has a bond auction tomorrow that may fail in the absence of outside intervention.  An intervention might save the auction but only at the cost of intensifying pressure elsewhere.  Then Friday, European regulators will release results of bank stress tests.  The near-failure of some institutions may already be priced into the markets, but reaction will still be closely watched.

Meanwhile, the U.S. economic recovery remains muted at best and possibly non-existent, if June’s unemployment data is any indication.  Employers, both public and private, are simply not hiring even as millions remain out of work.  Washington remains paralyzed by a Kabuki-style debate about the debt ceiling that appears more and more likely to end with yet another temporary bandage.  Meanwhile, Treasury prices appear to be assuming a nearly 100% probability the ceiling will be raised, supporting the argument that it’s all just theatre.

Much ado was made today of Ben Bernanke’s congressional testimony.  The Fed chairman left open the possibility of additional stimulus.  His prepared remarks specifically said policy could also become “less accommodative,” so we’re not sure why anyone felt encouraged.  Bernanke made no promises and seems well aware his options are quite limited.

Amidst all the above, gold prices climbed to a new record above the previous peak last spring.  Bullion is overbought by some technical indicators, but gold is more than just a metal.  Gold is a currency, and right now a debasement-proof currency looks more and more attractive. 


Consumer Discretionary remained the leading sector for another week, but it lost some of its bullish momentum.  Meanwhile Consumer Staples moved up the ranks to third even without gaining any significant strength.  If the defensive tilt of a few weeks ago resumes, we should see these two sector trends cross each other in opposite directions soon.  Telecom is still in second place.  Financials remains in last place and is still the only sector in an intermediate-term downtrend.  That downtrend worsened this week as traders again became nervous about banking system contagion. 


Small Cap Growth is still the top-ranked Style category.  We continue to see a sharp distinction between Growth and Value.  Growth now holds three of the top four spots while Value is in three of the bottom five.  The lowest-ranked group is Large Cap Value, home to many members of the Financial sector.  Large Cap Value is also the only Style category with a negative momentum score, albeit not by much.


An early-week selling squall spread around the globe but did not treat all regions equally.  Europe was hit the hardest, with the late-June rally now completely vaporized.  China suffered a similar fate.  Japan’s pullback was relatively modest – enough to let Japan increase its first place margin in the Global rankings.  The U.S. is the only other category with positive momentum today.  Canada jumped from tenth to fourth as commodities trends turned bullish.  Emerging Markets, Latin America, and EAFE all flipped negative.  China had a dismal week but still moved off the bottom because Europe had an even worse week.  The E.U. benchmark is now in last place globally.


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.

“Not raising the debt ceiling is like going on a spending spree and not paying the bill.”

David Ben Bernanke, Federal Reserve Chairman, 7/13/11


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