11/25/09   Pristine Balance Sheets for Year-End

Editor’s Corner

Pristine Balance Sheets for Year-End

Ron Rowland

This holiday week brought a lot of economic data that may not be getting the attention it deserves. As is often the case, the reports can be spun in either direction. The U.S. Gross Domestic Product for the third quarter, initially reported last month at a gain of 3.5%, was revised downward to 2.8%. Future revisions are likely to bring the number down further. Since much of the growth came from unsustainable stimulus items like cash-for-clunkers and the homebuyer tax credit, the case for recovery is not as strong as some may have thought.

Today’s weekly unemployment report showed a drop in the number of initial jobless benefit claims as well as continuing claims, yet only on a “seasonally adjusted” basis. This simply means fewer people lost their jobs than normally do at this time of year. The raw data showed an increase in the number of claims. New Home Sales also beat expectations. A key number to watch is the “months of supply” which measures how long it would take for all the available homes to be bought at the current sales pace. This figure dropped to 6.7 months, not far above the long-term average around six months. The bad news is that sales are occurring only with the help of tax incentives, historically low mortgage rates, and lower listing prices. There is also a substantial “shadow inventory” of pending foreclosures and vacant homes not yet listed for sale. This overhang is likely to keep housing prices depressed for a long time.

The S&P 500 has been bouncing around the 1100 level for the last six weeks, unable to stay above for more than a few days in a row. Intermediate and longer-term trends are still positive, however, indicating an upside breakout could happen soon. The U.S. Dollar continues to get shellacked in foreign exchange markets. Dollar bulls have been hanging their hopes on the fact that global capital really has nowhere else to go, but with the Euro breaking higher it looks like a new safe haven may be taking shape. Minutes from the November FOMC meeting reveal that Fed officials seem pleased the dollar’s decline has been “orderly.” In other words, they have no intent of doing anything to stop it.

Gold is getting very comfortable above $1,100 and seems set to move even higher. Both trends – arguably two sides of the same coin – are gaining momentum and could continue for some time. One of the key factors is falling interest rates. The ten-year Treasury yield stands at 3.28% today and closed below its 200-day average for the first time since May. Interest in Treasury auctions has been very high as institutions try to end the year with safe, liquid, pristine balance sheets. It could turn out to be a replay of last year once the year-end snapshot is in the rearview mirror. How much of this will be unwound in January is unclear at this point; we may not know until then whether the trends are driven by liquidity concerns or something more fundamental. Bearish dollar sentiment seems to be reaching extremes, but sentiment can stay extreme for a long time.


The Materials sector is the place to be when the dollar is falling, at least this time. Five other sectors are nearly tied for second place: Technology, Health Care, Consumer Discretionary, Industrials, and Consumer Staples. Everything else is well behind though even the worst sector, Utilities, is showing positive momentum. If one is afraid Materials are frothy, diversification among the five secondary leaders might be a good strategy right now. Technology’s low volatility leads us to think its uptrend is particularly sustainable.


The Style rankings are mostly unchanged since last week, still stratified along capitalization lines. Large Growth and Mega Cap are sharing the top spot while Micro Cap is in last place, holding onto a fractional uptrend. The market is favoring Growth over Value for Large and Mid Cap stocks, but not for Small Caps.


Latin America remains on top of the chart, hitting new 52-week highs but losing some of its strong momentum over the last week. The same can be said about most regions, in fact. The primary exception is Japan, which is separating from the pack to the downside by ever-larger margins. Speculation earlier this year that Japan, with its banks somewhat immune from Western turmoil, might provide some leadership now seems laughable in hindsight. Japan may yet have the last laugh, but we see no signs of improvement yet.


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.

“Individuals selected for inclusion in the restructuring program.

Bloomberg internal memo, listing 123 employees laid off
from their recent BusinessWeek magazine acquisition


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