Ben and Barack Have Your Back
Signals from the Fed, the White House, the Treasury, and just about every other central bank and government around the world are pointing toward the same conclusion, which can be summarized in two words: “Easy Money.” Monetary policy will stay loose. Public money will flow freely. “Systemically important” financial institutions will be protected from failure at all costs. The light is green, and everyone should just step on the gas.
In hindsight, last week’s Fed statement may have revealed too much. By defining specific criteria by which it intends to make decisions – namely capacity utilization, i.e. unemployment – the Federal Reserve lost much of its ability to influence the markets. Ben Bernanke may as well have said “We’ll raise rates only when unemployment drops.” Great news. Since we all know that unemployment isn’t dropping, we also know what the Fed is going to do. This presumes, of course, that the Fed was telling the truth and won’t change its mind, neither of which is necessarily a good assumption. Nonetheless, the all-clear signal brought buyers out of the woodwork for all manner of risk assets. Stocks and bonds surged, the dollar plunged, and gold moved above $1,100. Whatever you feel like buying, go ahead and do it. Keep buying as long as you can see a line at the unemployment office. Ben and Barack have your back. Unfortunately this green light applies to traffic in both directions, making collisions only a matter of time. (We apologize for mixing so many metaphors, but they were necessary to make our point.)
The S&P 500 bumped up against resistance today near its October peak. If our thesis above is correct, stocks should break out to the upside soon. The Technology sector has already done so, and others are close behind. There appears to be a close correlation between a stock’s bullish potential and its overseas exposure. This is not surprising given the rampant dollar weakness. Tim Geithner made a show of telling reporters he wants a strong dollar but is doing absolutely nothing to bring about any such thing, which is probably beyond his ability anyway. There is a reason that the dollar is the cheapest major currency on the planet right now, and it is spelled D-E-B-T. There being no plans to do anything about the debt, the dollar is unlikely to get anything more than a trading bounce.
Bond markets were closed for Veterans Day today. Treasury rates remain in the trading range with which everyone seems happy right now. Auction activity is allowing the government to gradually extend its average maturity and lock in historically low rates, an adept move which might buy some time for the economy to recover. That is probably what the powers-that-be are hoping, in any case. We should all hope for the same.
Last week we projected that Financials and Health Care would turn into negative trend territory soon. Neither did so. In fact they strengthened in both absolute and relative terms. Materials jumped from fourth to first place, easily dethroning Energy. Consumer Staples replaced Discretionary in second place while Technology kept its #3 position. Telecom and Utilities still hold the bottom two slots, though both improved somewhat in the last few days.
The orderly capitalization and style ranking that we mentioned last week is still in effect, relatively speaking, and all categories gained momentum. Only Micro Cap remains in an intermediate-term downtrend. We must admit that for now the Style rankings are inconsistent with the increasing risk appetite noted above, but this could change quickly. For the moment, Large Growth is still in first place.
It was a big week for global markets. Even Japan managed to notch a tiny increase in momentum, but not enough to lift it out of last place. Latin America surged, more than doubling its RSM score. Other markets outpaced the U.S., leaving us near the bottom of the list along with Canada. Latin America, Pacific ex-Japan, and the United Kingdom are still the strongest three world benchmarks, thanks in large part to the plunging greenback.
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’re very important…I’m doing God’s work.”
Lloyd Blankfein, CEO, Goldman Sachs
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