10/22/08 Retesting the Lows
Retesting the Lows
The best news we have this week is that the 10/10 intraday panic lows are still holding. Technical analysts think a retest of the bottom is necessary before a sustained uptrend can develop. The retest is in process, but until that process successfully completes we may be in for more scary days. The euphoric gains of 10/13 were totally reversed by 10/16. Multi-hundred point down days are becoming almost normal for those who watch the markets daily. One bullish point is that we are seeing a series of higher intraday lows (see 10/10, 10/16, and 10/22), but the corollary pattern of higher intraday highs is conspicuously absent. Volatility indicators also remain at historic highs, meaning there is still tremendous fear among investors.
The federal bank bailout (or rescue, if you prefer) has been decidedly non-specific from its inception, but it now appears that the government has changed its plan from buying distressed assets to injecting equity capital directly into banks. Theoretically this will have more impact since banks can leverage the new equity into trillions of new loans. The problem is the banks seem uninterested in making new loans. Indeed, the heads of the nation’s largest banks were practically forced into taking cash during a Paulson-convened meeting at the Treasury Department. It now appears they will use their cash to finance acquisitions of smaller banks. Exactly how helpful this will be remains to be seen. Corporate takeovers are usually feasible to the extent that cost-saving synergies exist on both sides of the deal. Another word for synergy is “Employees who can be laid off.” It is not clear to us how adding to the unemployment rolls will help avert recession.
Treasury yields pulled back sharply in the last week, with the 10-Year rate dropping from its high of 4.109% on 10/15 to a low of 3.605% today. Central banks continue to flood the credit markets with liquidity. Overnight interbank rates like LIBOR have pulled back from their peaks but are by no means back to normal. The dollar rallied today, which is probably more a function of weakness in other currencies than any sense of confidence in the dollar. The British Pound is especially soft right now, while the Japanese Yen is climbing.
Sector relative strength is largely unchanged in the last week. One exception was the rise of Utilities in our rankings. This sector has shown high correlation to Energy in recent years, but that relationship may be starting to break down. Consumer Staples and Health Care are still the least-dangerous sectors while Basic Materials remains very risky.
Mega Caps are on top of the chart again this week, probably because shell-shocked portfolio managers whose mandates prevent them from leaving equities are gravitating to the well-known names. Now is no time to be a hero by taking more risk than is absolutely necessary.
Japan is on top of the world, but unfortunately it is a falling world. Having spent the better part of two decades trying to unwind their own real estate bubble, Japanese banks are in a better position than many others around the globe. We will not be surprised to see Japan emerge from the global recession first and again take a leadership role in the world economy. Unfortunately for everyone, we may have to wait a long time to see it. Relative strength improved slightly for most international markets but the momentum remains firmly negative everywhere.
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 expectation bar is set pretty low when your benchmark is the Great Depression.”
BTIG’s Chief Marketing Strategist (from Barron’s 10/20/08)
Muni Bonds: The New Cash (SHM)
It’s hard to deny we’re in a difficult market right now. Unless you’re in 100% cash – and have been for 6+ months – then you’re feeling the pain. Such is life for an equity investor. Although equities tend to have attractive multi-year growth rates, there is always risk.
That’s why investors have been taking a second look at bonds, specifically municipal bonds. Affectionately called ‘munis’, municipal bonds have enjoyed a resurgence among retail investors. According to the Financial Times, when California offered a $5 billion bond sale last week, mom and pop investors bought a significant portion of the debt.
This event underscores something happening in households across the land. Those with cash don’t want to risk it in the market – they want alternatives. Investors are buying munis for three (3) reasons:
- Munis Have High Yield & No Taxes in Difficult MarketsMunicipal bonds are unique investment vehicles. They offer yields, but the interest is not taxed by the IRS. That way, the “effective” yield for the muni is often higher than on taxable bonds. Moreover, as prices for munis have been falling, yields have been rising. Barron’s reported one advisor saying, “Yields are staggering.” This makes municipal bonds attractive to many investors.
- Munis Are Relatively Safe InvestmentsWhen you’re buying a muni bond, you’re actually loaning to a state/local government or their agencies. Although cities can go bankrupt – thus preventing you from receiving back your initial investment – at least we can vote on governors and mayors. As a result, munis are a safer investment than many corporate bonds. Munis are one way for investors to find safety in this market.
- Investors Want Something CheapEven though cash has been a safe place this year, keeping cash is not always attractive. Psychologically, we know nothing happens when we leave cash in CDs or savings accounts. Interest hardly does anything for you, especially after taxes and inflation. That’s why investors are still looking for places to park their investments. With municipal bonds yielding above treasuries, they seem to be one alternative to do-nothing cash.
After surveying the market, we found a muni bond ETF to be a great candidate for our Pick of the Week. The SPDR Lehman S-T Municipal Bond ETF (SHM) is one of the best places to invest in munis today. One quick note about the name of this ETF: SHM is not a Lehman Brother’s product (Lehman Brother’s filed for bankruptcy last month.) It simply tracks the benchmark established by Lehman. In case you’re wondering, Barclay’s is rumored to be replacing the Lehman benchmark with their own brand.
SPDR Lehman S-T bond has some of the benefits of holding bonds outright and some benefits of holding an ETF. For one, you collect the yield of the bonds. Right now, SHM is yielding +2.7%. Second, price swings on this ETF are not nearly as wild as equities. Although you can still gain or lose, SHM has been relatively stable. Finally, you can buy or sell this ETF at any time. You don’t have to wait for any of the munis to reach maturity or get a penalty for selling early. For a stable investment, go with SHM.
All the best.
Keep in mind, the Pick of the Week is usually intended for aggressive investors. Don’t risk money you can’t afford to lose. You will need to decide when (and if) it is time to sell.
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