11/18/09   Dollars Always Come Home

Editor’s Corner

Dollars Always Come Home

Ron Rowland

Asia is the focus this week as President Obama toured the region and met with various leaders. He spent a considerable amount of time in Beijing. This should surprise no one, given the ever-closer connection between China and the United States, financially and otherwise. Cynics portray the trip as Obama going hat-in-hand to beg for the Chinese to keep financing the U.S. federal deficit. There is some element of truth to this, but it is also true that the relationship goes both ways. The Chinese need us, too. Their entire economy revolves around exports to the West; this is why they have such enormous dollar holdings. The money we spend at Walmart flows across the Pacific, through the Chinese economy, and then back across the sea to Washington and from there to assorted recipients who spend it at Walmart, thereby closing the circle. Various parties – American, Chinese and more – skim off a few pennies at each stop along the way. China needs for Americans to keep spending our money on Chinese-made stuff; if we do, the dollars will find their way home.

Will we keep spending? Of course we will, but not as freely as in the past. Economic data continues to show an economy that is stagnant at best. Today’s data on October housing starts was unexpectedly weak with single-family starts completely reversing a much-vaunted gain in September. Slow activity in construction permits suggests that a renewed building boom is not likely. In a speech Monday, Fed chief Ben Bernanke repeated his mantra that inflation is not a near-term threat, an assertion supported by a rise of only 0.3% in the Consumer Price Index last month. On an annualized basis, CPI fell for the eighth consecutive month in October.

Why, then, are stocks continuing their upward march? One reason is that the weak dollar is making it cheaper for foreigners to invest in U.S. assets. Another is that corporate earnings are holding up better than we thought possible. We remain troubled, however, that so much of the profit margin is a result of layoffs and other cost-cutting rather than sales growth. Sharp gains in worker productivity indicate that business is squeezing more labor out of those who remain on the payroll. Notwithstanding what may be very high long-term costs for this strategy, the S&P 500 is consolidating a breakout of the October peak. Stocks appear set to move higher in the intermediate term.

Anyone who thinks gold can only go up in the presence of inflation may want to re-think that position. The yellow metal set new price records above $1,100 this week. If this were any other market, we would probably say it is overbought, but gold doesn’t always play by the rules. The ten-year Treasury yield ended today at 3.366%, a level it has crossed many times in the last six months. The government is still having no difficulty selling all the paper it wishes at historically attractive rates. Whether buyers will be happy in the long-run remains to be seen.

Sectors

Materials held on to the top sector ranking and distanced itself further from the pack. Technology climbed back into second place and is now #1 on a risk-adjusted basis. Telecom managed to edge back into positive territory but is still on the bottom of the list, with Utilities right above.

Styles

Large Cap Growth increased its lead over the other Style categories, leaving the next six in a virtual tie for second place. Small Cap is lagging and Micro Cap is lagging even more, though the smallest companies did manage to move back into a slight intermediate-term uptrend over the last five days.

International

As has been the case for most of the year, Latin America owns the top spot in our Global Edge chart today. The United Kingdom moved into the second-place slot, helped by a surging British Pound. The U.S., Canada, and developed markets in general are all near the bottom of the list. Other than Japan, however, all are performing well and making strong advances. Japan is a different story: its momentum reading is negative, indicating that it is weak in both absolute and relative terms.


Note:

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.


“With enough inside information and a million dollars,
you can go broke in a year.

Warren Buffett


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