Isn’t “Recapitalize” The Same As “Bailout”?
Good news from Europe! Authorities are starting to acknowledge reality. The question is no longer whether Greece will default, but how the default will be managed and contained. A report late Tuesday that Europe is looking for ways to recapitalize its banks drove U.S. markets sharply higher.
Short-term traders, by their very nature, are inclined to shoot first and ask questions later. Reacting to such news by covering short positions is understandable. Nevertheless, it takes only seconds to realize that “recapitalize” is simply a euphemism for “bailout”. Most analysts have already concluded an effective bailout is probably not possible. The issue is how the loss will be split between banks and taxpayers, and we still have no good answer.
The U.S. has its own question marks. Second-quarter GDP was revised upward, postponing any official declaration of a double-dip recession. Most people don’t care because they still haven’t seen an end to the first recession. Ben Bernanke’s sobering testimony to Congress was probably intended to communicate the Fed chairman “gets it”. We continue to believe there is not much the Fed can do whether they “get it” or not.
Stock market direction in the next few weeks will depend heavily on quarterly corporate earnings reports. A few upside surprises would certainly be helpful. Where they will come from is unclear. Few businesses seem likely to post unexpectedly impressive profits without sharp recoveries in employment and real estate prices. Neither is in the cards right now.
Treasury rates stayed in their trading range, with the ten-year yield swinging back and forth near the 2% level. Gold prices seem to have stabilized above $1600 following the recent correction. Crude oil’s break below $80 may be the best clue to the global economy’s direction, and it’s not bullish.
As you might expect in a generally nasty market, all our sector categories lost momentum from last week. The relative positions were mostly unchanged. Utilities stayed on top of the pile but joined everyone else by flipping into a negative trend. Consumer Staples held on to the #2 spot. From there the picture gets progressively worse. Technology suffered a severe setback and now seems unlikely to provide any upside leadership. Materials, Energy and Financials are still the three worst sectors, but Financials looks somewhat less dismal in comparison to the other two. Energy sliced right through August support levels and now faces formidable resistance to recovery. Materials has an RSM rating of -90, which means its intermediate trend points down at a 90% annualized rate. This is obviously unsustainable, but it will take a lot of courage to buy into a sector that has lost 25% in the last two months and more than 20% in the past year.
Alignment by market capitalization (i.e. size) is still the order of the day in our Style rankings. The Growth/Value distinction is losing significance; Value overtook Growth in the Small and Mid Cap segments but maintained a slight edge among Large Caps. All eleven style categories undercut their August losses and touched new 52-week lows in the past few days. Volatility remains extraordinarily high. On Tuesday, iShares Russell Micro Cap ETF (IWC) finished the day with a 7.4% gain after an exceptional 45-minute closing rally. This was the second-best day IWC has posted since its 2005 inception. Its best day, incidentally, was in October 2008 and did not mark a bottom. In fact, IWC went on to lose 41% in the next hundred days.
Japan kept its lead over the second-place U.S. mainly by keeping its losses smaller than other regions. Relative stability in the Yen also helped. After staying firmly entrenched in last place for months, Europe finally moved out of the basement. Unfortunately, this happened not because European stocks gained any momentum (in fact the RSM fell from -85 to -88) but because four other categories got even worse. Europe may own the headlines, but China is looking even weaker. The category’s most popular ETF, iShares FTSE China 25 (FXI), plunged -11.8% in a week. This pushes its recent loss to -34% and leaves FXI more than -54% below its 2007 peak.
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.
“There is no secret at all that European authorities and the European Commission are all working together on a plan to bring more official capital, more public-sector capital, into the banking sector.”
Antonio Borges, IMF’s European Department Head, 10/5/11
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