Bond Rally Steepens The Curve
U.S. stocks popped higher in the first half of this week, pushing the S&P 500 above the 1150 mark and out of the congestion zone where the index had been trapped the last few weeks. The action is clearly bullish, suggesting more short-term gains are probably coming, but we would still like to see more trading volume. The rally is what it is, however. Bears are on the defensive. Their best hope is for the impending earnings reports to be unexpectedly dismal.
We have said many times that real estate, particularly residential property, is key to economic recovery. An unfolding legal battle may stretch the pain out even longer. Major mortgage lenders are facing allegations of fraudulent home foreclosures. Much of it revolves around legal paperwork not being properly vetted as banks faced an onslaught of defaults the last two years. The large banks have been forced to suspend foreclosure actions in many states and are under pressure in others.
This is a problem not only for those banks but for everyone else, too. Housing cannot recover until the large inventory of bank-owned properties is liquidated. That process is now facing even more delay and uncertainty. Possibly the pressure on mortgage lenders will fade once the politically-charged election season passes, but the banks clearly have another big challenge on their hands.
Central banks around the world are upping the ante on the Federal Reserve’s willingness to “stimulate” growth with further inflation. This is one reason stocks have been strong despite generally pessimistic economic news. It also explains the series of new all-time highs seen in the gold market. When investors see that currencies are being intentionally debased, they naturally flee to hard assets like gold and other commodities.
The bond markets are a little more complicated. Inflationary policy should, in theory, drive interest rates higher. Instead we are seeing a sharp drop in rates, especially at the shorter end of the curve. The net effect is that the yield curve is steepening. The difference between ten-year and thirty-year Treasury yields today reached 1.32 percentage points, the highest since Bloomberg began tracking the data in 1992. The ten-year notes ended today at a yield of 2.399%, breaking below the August 25 intraday low of 2.419%. This indicates the bond rally could continue. The short end can’t fall much further, though. The two-year notes now yield only 0.375%.
The top four sectors all held on to their places this week: Materials, Telecom, Consumer Discretionary and Technology. Since Telecom is often lumped in with Technology and both are near the top, the Tech sector is getting most of the attention right now. Energy, helped by a bounce in crude oil prices, climbed the ranks from #9 up to #5. Financials are still on the bottom but did manage to gain some momentum since our last report.
Last week we noted a clear delineation between Growth and Value, with Growth having a significant advantage. This pattern remains in place but may have weakened a bit. Large Growth was overtaken by three smaller-cap groups and now sits at the midpoint of our intermediate-term relative strength rankings. This happened in part because of a big jump for the Micro Caps, whose RSM value rose from 18 last week to 28 today. Large Value is still at the bottom of the list, with Mega Cap and Large Blend doing only slightly better.
We have a three-way tie for first place on the Global list. Pacific ex-Japan, which had previously been the undisputed leader, was joined by the resurgent Emerging Markets and Latin America benchmarks. This is not necessarily bad news for Pacific ex-Japan bulls; the group is still trending sharply higher. We simply have some other regions joining the party. China (which is also part of the Emerging Markets category) gained quite a bit of momentum but remains in the bottom half of the chart. Japan, the U.S. and Canada are on the bottom of the pile once again.
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.
“We believe the accuracy of the factual loan information contained in the affidavits was not affected by whether or not the signer had personal knowledge of the precise details.”
Statement from JPMorgan Chase regarding allegations of faulty foreclosure paperwork
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