Foreclosures on Hold From Coast to Coast
The foreclosure investigations that we mentioned last week have now expanded to all 50 states. The attorneys general will conduct a coordinated probe into banks and mortgage companies that allegedly used false documents and unverified signatures to justify thousands of home seizures. Bank of America (BAC), the largest U.S. mortgage lender, has suspended foreclosures nationwide. This is good news for anyone who was going to lose their home soon, but it could also delay resolution of the whole mess even further.
Meanwhile, minutes from the Federal Reserve’s September policy meeting, released on Tuesday, show that the Fed wants to stimulate the economy by creating higher inflation expectations. Note that this is not the same as creating higher inflation. The logic seems to be that if the public comes to expect more inflation, then our collective behavior will change and actual inflation will be unnecessary. This sounds to us like a plan that could very easily spin out of control. On the other hand, nothing else they have done seemed to help, so maybe it is worth a try.
Earnings season is underway. Corporate results have been generally impressive; JP Morgan Chase (JPM) and Intel (INTC) were the two most recent big names to beat expectations. Unfortunately, good earnings do not necessarily lead to higher stock prices; both JPM and INTC declined today and badly lagged the market over the last week. The S&P 500 jumped again today and seems intent on challenging last spring’s peak around 1220. Benchmarks are approaching overbought conditions, however, so we may see a correction or at least some consolidation first.
Bonds retreated a bit after a solid run over the last month. Today the ten-year Treasury yield ended at 2.43% after touching a 21-month low of 2.34% last Friday. The U.S. Dollar continues to slide as investors grow more certain the Fed will inject additional monetary stimulus by year-end. This is helping stocks as well as commodities, particularly gold. SPDR Gold (GLD), the most popular bullion ETF, hit yet another new high today.
Last week Telecom was hot on the heels of Materials in the race for the top of our sector momentum rankings. Telecom is still performing well, but now Materials – home to all manner of commodity-related and agricultural stocks – is the undisputed leader. Energy also kept climbing as the federal government lifted its Gulf of Mexico drilling moratorium. Technology slipped back as one of the smaller cloud computing players warned of disappointing results, but the tech sector is still trending higher. The defensive trio of Utilities, Consumer Staples and Health Care are still together near the bottom of the rankings, with only Financials ranked lower.
Small Cap Growth kept its place as the top-ranked Style category for another week. More dramatically, Micro Cap has surged from last place to second place over a three-week span. The leading ETF in this group, iShares Russell Microcap (IWC), has advanced more than 17% since its August low, indicating investors are willing to take on more risk. Growth is still favored over Value at all capitalization sizes; all three Growth categories are in the upper-half of our rankings while all three Value categories are in the lower-half. Large Value and Mega Cap, which in some ways are two sides of the same coin, are almost tied for last place.
Our Global rankings have been singing the same song for months now: Emerging Markets are better than Developed Markets, assuming your base currency is the greenback. This is still the case as relative rankings had little change over the last week. Pacific ex-Japan is still on top, and Japan is still on the bottom. Stimulus efforts by the Bank of Japan have not helped much, but the BoJ is not backing down. A generally rising tide (i.e. a weak dollar) helped every region, including Japan, to gain momentum since our last report.
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.
“I think the BOJ [Bank of Japan] should consider a policy of reflation before restabilizing at a low inflation rate.”
Ben Bernanke in 2003
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