U.S. Treasury Bonds – Good As Gold
We begin with two questions. 1) What major asset class was the subject of unprecedented fear and worry in the last two weeks? 2) What major asset class outperformed all others during that period? Strangely enough, both share the same answer: Long-term U.S. Treasury bonds.
A media fixation on the federal debt ceiling and possibility of a U.S. default or credit downgrade seems to have actually increased demand for government bonds. The ten-year yield fell from 3.2% in early July to just 2.6% today. Why, one might ask, do so many people want to lend their money to a government whose own leaders were preparing for imminent financial doom?
We think the answer is that doom was never really a possibility. Facing a hard deadline and unthinkable consequences, the politicians had to reach some compromise. Investors never doubted the U.S. would remain the planet’s most credit-worthy borrower. Treasury bonds may not be a “safe haven” in an absolute sense, but they are definitely among the “safest available” compared to alternatives.
The end (for now) of Washington drama means we can get back to more basic challenges. Economic indicators and earnings reports suggest recovery is not just around the corner after all. That 1.9% first quarter GDP growth that had everyone so excited was revised down to a meager 0.4%. This makes the 1.3% second quarter number more than a little bit doubtful. The July employment numbers, due out this Friday, should be interesting.
Other than Treasury bonds, the only other asset class with any bullish momentum is gold, which is now trading above $1,660. In many respects, gold is simply another currency – but gold has a relatively fixed supply that places it beyond political manipulation. This is a particular advantage right now. We suspect it will remain so.
Our relative strength chart is noticeably less bullish than last week. In fact, it’s not bullish at all except for Energy, which held on to its top ranking and (for now) a slightly positive momentum score. Utilities climbed to #2 on the list only by having a smaller-than-average loss. The third-place Consumer Staples sector also looks less than impressive. Technology, which had been in second place as recently as last week, fell back to fourth and seems likely to slide further. We’ve long thought Consumer Discretionary’s outperformance in a weak economy could not be sustained, and now others are adopting that viewpoint. Health Care, Financials and Industrials own the bottom of the list. Our Industrials benchmark has dropped more than 13% in the last four weeks.
A week ago every Style category was on the positive side of the momentum scale. All have now turned negative – and outright bearish in some cases. The relative rankings did not change so dramatically. We still see a preference for defensive categories, but only because their losses have been slightly smaller than other groups. Mega Cap moved up to first place, forcing Large Growth down to second. Large Value, which was on the bottom just last week, is now in the upper half of the chart. The lower two-thirds of the list are tightly bunched, but someone has to be in last place. This week’s loser is Mid Cap Value.
Of a combined 32 equity categories in our Sector, Style and Global rankings, the strongest momentum is currently in Japan. A closer look is less encouraging. A breakout attempt two weeks ago failed miserably, and benchmarks are still well below the pre-tsunami February peak. It doesn’t take much to be in first place these days – or even second. Emerging Markets jumped to #2 while declining sharply to the low end of a 10-month trading range. The U.S. is in the bottom half of the chart after surrendering its #3 position to Pacific ex-Japan. Latin America stocks, which have been in misery for months, broke down further and little support is in sight. Europe fell below its January intraday low in today’s trading and still owns the bottom of the rankings.
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.
“The US is not living within its means, shifting the weight of responsibility to other countries and in a way acting as a parasite.”
Vladimir Putin, Russian Prime Minister, August 2011
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