Fiscal Cliff Bullish For Bonds?
Summer is a perilous season in many ways. Studies have found children tend to gain weight and lose academic skills during the break from school. Now the heat, and lack of rain, is claiming another casualty: grain production.
America’s Midwest corn crop is quite literally baking in a severe drought. A similar weather pattern in Russia sharply reduced that nation’s wheat crop. The combination has pushed global grain prices through the roof. Corn is up more than 50% since mid-June. Given that corn is probably king of all Consumer Staples and wheat is crown prince, this can’t be good for consumers.
Fed chairman Ben Bernanke, in his semiannual Humphrey-Hawkins congressional testimony, said today that inflation will remain below the Fed’s 2% target zone, due mainly to falling energy prices. Food prices seem lower on his priority list than averting the “fiscal cliff” of spending cuts and higher taxes.
Bernanke no doubt relishes the chance to say Congress must “do something.” Usually he is on the receiving end of such pronouncements. With all his known policy tools fully deployed, Bernanke’s vague assurance the Fed is “prepared to take further action” sounds less sincere than ever. He might as well add it is also “prepared to create drought busting thunderstorms.”
Treasury prices rallied on Bernanke’s comments, indicating at least a few bond traders think the Fed still has bullets. The ten-year notes ended the day at 1.48%, within a hair of the all-time low set last month. Again we have the perverse situation of a nation’s debt becoming more attractive to lenders as its financial condition looks more perilous. If this continues, bondholders should look forward to a fall off the fiscal cliff. It could only help the value of their investments.
Telecom tops the sector chart again this week. The traditionally-defensive trio of Health Care, Consumer Staples, and Utilities is right behind. Telecom is a chameleon sector, favoring growth in some periods and stability in others. For now, it is wearing its defensive colors. Financials remains in fifth place but gained momentum, continuing a recovery from its June low point. Energy was the week’s big winner, jumping from last place to #6. Rising oil prices helped energy-related stocks, but not enough to reverse a bearish long-term trend. Consumer Discretionary slid further down the ranks. Materials, Industrials, and Technology now compose the lowest tier of the rankings with Technology on the bottom. Unlike Energy, Technology is still above its 200-day moving average and has trended up for most of 2012. A quick escape from the basement would be no surprise.
Micro Cap held its lead for another week. Despite being unimpressive by most indicators, the group still looks better than others. We mentioned last week that Style rotation might be unfolding in favor of an inverse-capitalization pattern. Those hints are no longer visible in the rankings. Mega Cap moved back up to the #2 spot, and we once again see strength in the extremes (Mega and Micro) and relative weakness in Mid Cap categories, which still hold three of the bottom four positions. Value is ahead of Growth in all size segments.
The Global Edge chart once again shows more red and less green than the Sector or Style rankings. Three categories turned positive since last week, but only by very slim margins. The U.S. remained in first place, followed by a rapidly-improving Pacific ex-Japan. Equity markets in Australia and Singapore get most of the credit. World Equity slipped to #3. The U.K. stayed in fourth place but improved its momentum. Zero, while hardly impressive, is still better than last week’s negative reading. Latin America made a huge jump the last few weeks; the former bottom-dweller now finds itself in the upper half at #5, thanks mostly to Brazil. Stocks there seem to have stabilized after a hard fall. Japan slipped to sixth place after missing out on an otherwise-global equity advance. Europe and China now form the bottom tier. Both have been the source of much negative attention recently. At some point, lower expectations will be “priced in” and allow a sustainable recovery. That point remains elusive for now.
“We forget that Mr. Market is an ingenious sadist, and that he delights in torturing us in different waysthemy.”
Barton Biggs, 1932-2012
Hedge fund founder, Morgan Stanley head strategist, and market prognosticator
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