11/17/10   China Tries To Prevent Overheating

Editor’s Corner

Investor Heat Map 11/17/10

China Tries To Prevent Overheating

Ron Rowland

The Federal Reserve is receiving heavy criticism for the $600 billion “quantitative easing” program announced this month.  Emboldened Republicans, prominent economists, and central bankers from places like Brazil, China and Germany are all denouncing the Fed’s move.  At this point the attacks are probably not enough to make the Fed change its plans.  It is worth noting, however, that Ben Bernanke left an escape hatch in the November 3 statement, saying the committee could “adjust” the program if circumstances change. 

On the other hand, objections based on inflation fears ran into some difficult numbers when October’s Consumer Price Index came out this morning.  Core CPI, which excludes food and energy prices, actually declined fractionally last month.  Prices for hotel rooms, cars and trucks, apparel, tobacco and some other categories showed an outright decline.  Housing starts are almost back at the early-2009 low point while real average hourly earnings fell slightly.  This is not what an inflationary economy looks like, nor is it an economy that appears to be “stimulated” by $600 billion in added liquidity.  

A better example of inflation can be found in China, where inflation is running at a 4.4% annualized pace as of October.  The main culprit is food costs.  Authorities will likely respond with some combination of higher interest rates, lending restrictions, and price controls.  None of this is good for China-related stocks, which fell hard in the last few days.  Fears of a China contraction also made many commodity prices plunge, particularly sugar, nickel, and cotton. 

U.S. bond values continued to crater.  The ten-year Treasury yield traded above 2.96% on Tuesday, its highest level since July.  The higher rates appear to be attracting investment into U.S. dollar assets, as the dollar has been climbing at the same time.  The U.S. Dollar Index is now in an intermediate-term uptrend.  Further gains for the greenback look likely, though not without a correction first.  Since gold prices are nearing a critical support level, we think a reversal in all these trends is probably coming soon.  How long it will last is another question.


Every equity category we track declined in the last week.  On a relative basis, however, there were still winners and losers.  Energy took over the top spot in the sector rankings by losing less ground than others.  The Materials sector was hit hard, but its intermediate-term momentum score puts it in second place.  Technology fell from second to fourth place, while Consumer Discretionary moved up a peg to the #3 spot.  The Utilities sector is on the bottom again, accompanied by the other “defensive” sectors as well as Financials.  Further re-ordering of the sector rankings is likely if the market pullback continues.


From a Style perspective, the recent sell-off has been an equal opportunity bear.  Relative positions in our Style categories are largely unchanged.  Small Caps and Growth control the upper half of the rankings while Large Caps and Value occupy the lower half.  There was some compression in the momentum values this week, which is notable but not very significant so far.


A revived U.S. dollar took the wind right out of the sails for most of our Global categories this week.  In a bad week for stocks, the U.S.A. still catapulted from tenth place to third place.  Pacific ex-Japan held on to the #1 spot despite worse-than-average performance for the week.  China and Emerging Markets benchmarks suffered some of the larger declines, knocking both down to the lower half of our rankings.  The U.K. gained the #2 position due mainly to losing less than those previously ranked higher.  The European Union, which just a few weeks ago was briefly at the top of our chart, is now in last place.  Even Japan is slightly ahead of Europe.


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 would enhance the connection between vegetable production and sales to stabilize supply and prices in winter and next spring. “

Yao Jian, a Ministry of Commerce spokesman (Nov 2010)




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