Fed Lends to Hogs and Cats
Daily stock market volatility seems to be on the upswing again. The last week brought sharp moves in both directions, culminating in today’s 249-point gain in the Dow Jones Industrial Average. Attributing such gains to any particular news item is always tricky. The media linked today’s action to signs that European authorities are determined to support the Euro and put an end to the region’s debt woes. We’re sure this is true, but determination and ability are two different things.
Other news was positive, too. The ADP monthly employment report said U.S. employers added 93,000 jobs in November. Official numbers from the Labor Department will be out this Friday. Manufacturing activity in China increased at the fastest pace in seven months. The Black Friday weekend along with Cyber Monday were successful, or at least not disappointing, for retailers. The Federal Reserve’s quarterly Beige Book, released today, suggested the nascent economic recovery is proceeding well in most parts of the U.S.
Also today, the Federal Reserve finally identified the beneficiaries of its special lending facilities, totaling about $3.3 trillion, during the 2007-2009 credit crisis. The U.S. subsidiaries of European banks were high on the list, as were Bank of America (BAC) and Wells Fargo (WFC). These sort of make sense, but the Fed also propped up companies like Caterpiller (CAT) and Harley Davidson (HOG). General Electric (GE) received $16 billion in support from the Federal Reserve. We know this only because Congress forced the Fed to release the info. The Fed still refuses to name the banks that borrowed from the original “Discount Window” program, despite being ordered to do so by courts. Lending under that program was at least $110 billion at one point in October 2008.
The ten-year Treasury yield touched a four-month high today, ending at 2.96%. Signs of hope in Europe and elsewhere may make U.S. government debt relatively less attractive as a safe haven, though we continue to think those hopes are weak at best. On the other hand, gold is bouncing back nicely from its recent correction and is not far from new all-time highs. This seems inconsistent, so we won’t be surprised to see one or more of these markets reverse soon.
The top three sectors stayed the same as last week: Energy, Materials, and Consumer Discretionary. Oil, gold and other commodities were strong despite a rising dollar, while Consumer Discretionary was helped by strong holiday shopping reports. Industrials edged ahead of Technology for fourth place. Financials and Utilities sank a bit deeper into the red zone.
Dispersion between the Style groups increased again, with the strong getting stronger and the weak getting weaker. Small Cap Growth is still on top of the pile. Micro Cap and the other Small Cap segments are close behind. Large Cap Value and Mega Cap are tied at the bottom. This is in part related to their exposure in Financials, the weakest sector. Large Cap Blend (the S&P 500, in other words) has been at the low end of its recent range in contrast to Small Cap Blend (the Russell 2000), which has been closer to the high end of its range. The Russell 2000 is attempting to break out of that range to the upside today.
Canada, the U.S., and Japan are on top of the world again this week, but the three-way tie has been broken with Canada now in the leadership spot. Strength in the Energy and Materials sector gave Canadian stocks a boost. Four of our international categories slipped from green to red this week. China, EAFE, and the U.K. went from slightly positive to slightly negative. Europe plunged, separating itself from the pack on the downside. The impact of European debt problems on the Euro currency is at the heart of the continent’s problem.
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 see this not as the end of a process but really a significant step forward in opening the veil of secrecy that exists in one of the most powerful agencies in government. “
Senator Bernard Sanders, author of the provision on Fed disclosure ( Nov 17,. 2010)
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