The G-20 Has No Money
The meeting of G-20 finance ministers in London is probably the least-reported business news of the last week. This may be because not much happened except for a pledge to throw more money at our problems. Coming from a group of leaders whose governments don’t actually have any money, this promise is worth less than the fancy paper on which it was printed. Any cash they inject will have to come from higher taxes, new debt, or currency debasement. Traders apparently think the last option is most likely, since the U.S. dollar plunged and gold rose sharply.
Labor Day weekend opened on Friday with the unwelcome news that the U.S. unemployment rate had risen to 9.7%, the highest since 1983. Lest anyone forget, it was only 7.2% as recently as December 2008. Both these figures understate the employment problem: the broader “U-6” measure that includes those who have given up looking for work and those who are working part-time for economic reasons is now 16.8%. Add to that the unknown but very large number of workers who have taken involuntary furloughs, pay cuts and reduced hours, and the total percentage of unemployed and under-employed workers is almost certainly more than 20%. In some regions it is much higher. These are the customers of corporate America, whose spending is supposed to restore prosperity. Forgive us for being skeptical.
The stock market seems not to believe any of the above. A strong rally over the last week brought the S&P 500 back over 1000 and near the August high. Some pundits are calling today the six-month anniversary of the new bull market. Bears remind us that next week marks the one-year anniversary of the Lehman Brothers collapse, also known as the straw that broke the financial bubble’s back. The S&P 500 needs to gain 22% from here in order to regain its pre-Lehman value and more than 50% to make a new high. However you choose to define it, a new bull market for many will require overcoming the losses.
As noted above, the dollar is breaking lower. Meanwhile, and not coincidentally, interest rates are bouncing higher. The ten-year Treasury yield dropped as low as 3.29% last week and traded today above 3.53%. Chinese officials are again making noise about the dwindling value of their dollar holdings and threatening to take their business elsewhere. Actually it was more than a threat – the Chinese Ministry of Finance said on Tuesday it would issue 6 billion yuan worth of government bonds in Hong Kong. This was the monetary equivalent of a shot across the bow; the amount was too small to have an impact but the message was clear. Whether China truly has any better alternatives for its excess reserves is known only to them. They may simply be maneuvering for a better yield. If so, they’re getting it.
The Sector categories normally move in unison, directionally if not in magnitude. This week was an exception. Three sectors showed a decrease in momentum, one made a strong increase, and the others had a small increase. Materials was the big gainer, jumping 13 points and taking over the top spot. The Financial sector was the big loser, but its previously large lead allowed it to fall only to second place. The other losers were the classic defensive sectors of Health Care and Utilities. We are watching closely to see which sectors are first to hit new 52-week highs, something that could start happening by the end of this month. Technology is probably the leading contender at this point.
Last week our Style categories had momentum scores ranging from 30 to 51. This week the range is 30 to 50. Not much changed despite a significant dip and rally in the broad market benchmarks. Mid Caps occupy three of the top four spots with Mid Cap Value hanging on to first place. The Small Cap and Large Cap categories are spread through the bottom two-thirds of the table.
The momentum of the U.S. market was almost unchanged for the one-week period, though the sharp fall and then rise left some traders with whiplash. The weakened dollar and strong gains in overseas markets made the U.S. fall considerably in relative strength, however. Pacific ex-Japan held on to the top spot while China’s latest surge lifted it out of last place. Other emerging markets also performed well. Japan slipped to last place, the only global region to actually lose momentum this past week. Election results in Japan have the potential to create some action, but as yet we see no big changes.
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 desire of gold is not for gold. It is for the means of freedom and benefit.”
Ralph Waldo Emerson
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