1st Anniversary of the Downgrade
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This time last summer our topic was the S&P downgrade of US government bonds. We said at the time it was largely irrelevant, and the last year seems to have proved the point. Uncle Sam still has no problem borrowing all the cash it needs at the lowest interest rates ever.
Unfortunately for everyone else, the economic outlook remains discouraging. European authorities still have no solution to their ongoing currency/credit crunch and will soon have to change channels back from the Olympics. In the US, July’s jobs report was slightly better than expected. The unemployment rate ticked up to 8.3%, but nonfarm payrolls expanded by 163,000. The Federal Reserve adjourned with no policy change for now.
Corporate earnings season is largely finished. Most companies managed to stay profitable for another quarter. Sales are a different matter: Bloomberg data shows almost 60% of S&P 500 companies missed consensus second-quarter sales estimates. Remarkably, customers are still necessary no matter how “efficient” companies become.
Speaking of the S&P 500, the large-cap index recaptured the 1400 level with an almost 10% rally from the June 1 low. The March peaks are still unchallenged for now and may remain so if executives don’t find ways to drum up sales.
Treasury rates spiked after the Fed announcement, then retreated a bit, then continued to move higher. Today the ten-year bond closed at 1.64%. This is, we suspect, a correction for those who bought bonds expecting more immediate stimulus action. Rising energy prices are also a factor with crude oil back above $93. Corn, wheat, and other grains are also holding at higher levels as the Midwest drought shows no sign of easing. Summer will end eventually, but fall may not be much better.
Telecommunications lost a little momentum since our last report but remains the leading sector. Energy is moving up quickly, jumping from fifth to second place. Recovering crude oil prices gave the sector a remarkable push; Energy was on the bottom of the list as recently as four weeks ago. Consumer Staples and Health Care kept their #3 and #4 rankings, while formerly second-place Utilities dropped to sixth. Defensive sectors lost favor with investors. Technology climbed to fifth place, led by semiconductors, internet, and networking stocks. Industrials and Consumer Discretionary remain near the bottom of the list, with Materials still in last place despite a few good days.
The perfect capitalization alignment for which we have pined finally took shape this week. Mega Cap is on top, followed by the three Large Cap groups, the Mid Cap categories in the middle, then the Small Caps, and Micro Cap on the bottom. This comfortable arrangement relieves us of the need to explain any anomalies. We will, however, point out that each capitalization strata is further ordered as Value, Blend, and Growth. All 11 categories gained momentum since last week.
Pacific ex-Japan held the lead and tried hard to further separate itself from the pack. The contenders for second place are now led by World Equity, but Europe trails only by a fraction. European stocks, as well as the Euro currency, both climbed after a good week and a spectacular Friday. The EU was in last place only two weeks ago. The US is next in line, followed by the UK and EAFE. Canada gained momentum but lost relative strength and now finds itself among the laggard emerging markets benchmarks. Japan stayed on the bottom and is the only Sector, Style, or Global category with a red (negative) score this week.
It saddens me that the marketplace has gotten so bizarre.
John Smith II, retiree living in Smyrna Georgia about Knight Capital’s $440 million trading error
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