A 2,300 Page “Rough Framework”
Today President Obama signed the Dodd-Frank financial regulatory reform bill. Despite the fact the new law is 2,300 pages long, one attorney quoted by Bloomberg said it “only provides a rough framework.” No one can be quite sure what it all means until the government issues detailed regulations to implement the new structures. Hence it is difficult to characterize the “reform” we are about to receive. The president said the law “… is designed to make sure that everyone follows the same set of rules, so that firms compete on price and quality, not tricks and traps.” The Federal Reserve, whose opacity and lack of oversight is believed by many to have largely created the present mess, will now be charged with protecting consumers.
Speaking of the Fed, chairman Ben Bernanke today told the Senate Banking Committee that the economic outlook remains “unusually uncertain.” Fortunately, he also said the Fed is “prepared to take further policy actions as needed to foster a return to full utilization of our nation’s productive potential in a context of price stability.” Any such “policy actions” obviously will not include lower interest rates, since those rates the Fed can control are already near zero. He may be referring to additional programs of buying government and private debt, but the creation of new liquidity to do this seems inconsistent with “a context of price stability.” The sad reality appears to be that the Fed is out of conventional bullets for its juice-the-economy weaponry. However, Bernanke admitted that additional measures would be considered “unconventional” and would carry potentially new risks.
The stock market was clearly not impressed with Bernanke’s performance today, with the benchmarks dropping hard following his comments. Treasury yields plumbed new lows at the same time, with the ten-year notes ending once again below the 3% mark at 2.89%. That yield had ticked above 4% as recently as early April. This suggests inflation is still the least of our worries right now. Heavy debt, high unemployment and weak consumer sales all add up to a tough environment for future corporate earnings. Stocks face a headwind that isn’t slowing down.
Sector, Style, and Global Rankings
In the past, we have emphasized that our Edge charts convey a large amount of information visually. First, the order of each list conveys the relative strength of each category. Second, the size and direction (as well as color) of each bar conveys the absolute strength of each category. Each of these two attributes are objectively derived. There is also a third but more subjective way the charts convey information – the shapes created by the combination of bars reveals information about the relative differences across the categories – what is often called dispersion. Today’s Edge charts have some interesting shapes.
In sectors, the six lowest categories are showing little or no dispersion, with a virtual six-way tie for last place. Three more are grouped together near or just below the neutral point. The only sector that currently shows any ability to differentiate itself is also the only sector with any semblance of bullish momentum: Utilities. The next tier consists of Consumer Staples, Telecom and Technology, with everything else deep in negative territory. The Utilities sector is relatively small in terms of capitalization, so we won’t be surprised if it ends up being dragged down to a point closer to all the others.
In the Style rankings, the top seven categories are all clustered together around -13. The four that are differentiating themselves are all at the bottom and are all small-cap related. Large Caps and Mid Caps make up around 90% of market capitalization and are doing poorly. Small and Micro Caps represent 10% or less of the market, but they are also the largest in numbers of stocks. Hence it is now the case that “most stocks” are performing worse than average.
The shape of the Global Edge bars is completely different. We see an almost linear falloff from top to bottom, with Emerging Markets on top and Japan on the bottom. Of course we could also say that the middle six of the 11 Global categories are showing almost no dispersion. Emerging Markets and the United Kingdom have the best relative performance but only by a hair. The world’s two largest developed markets, the U.S. and Japan, are joined by Canada in leading to the downside. Bottom line: all these differentiations are quite small. World equity markets are acting more or less in unison, and they are uniformly flat or bearish.
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.
“Just a spoonful of sugar helps the medicine go down. “
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