12/02/09   Window-Dressing is Underway

Editor’s Corner

Window-Dressing is Underway

Ron Rowland

Most markets moved higher in the last week but still lost some upward momentum. The big news, of course, was the request by state-owned Dubai World to renegotiate some of its debt payments. Coming as it did during a thin holiday market – which may not have been a coincidence – the story sparked a brief sell-off in emerging markets equity and debt. Losses were reversed once traders decided this was not the beginning of yet another credit crisis. Anyone who has seen the glittering new construction in Dubai knows it must be highly leveraged, so we are not convinced the story will end happily. For now, however, the worst-case scenarios seem to have been avoided.

The S&P 500 Index continues to flirt with both sides of the 1100 level. The Dow Jones Industrial Average has held above 10,000 for about four weeks now, but there is no guarantee it won’t dip below again. In fact, there is a high probability it will drop back into four-digit territory at some point. As noted above, momentum is slipping in the major benchmarks. Year-end window dressing is well underway for many portfolio managers. Those fortunate enough to be ahead of their benchmarks are not eager to let that edge slip away. For “absolute return” managers this means raising cash, for “relative return” managers it means making your portfolio look more like the S&P 500. We suspect another big move is coming after some consolidation, but we could see more weakness first.

Economic reports still mostly fall into the “not as bad as it was” category. The Federal Reserve’s beige book, released today, suggests the economy is stabilizing and may be improving slightly by some measures. Of course this is the same Fed that created the housing bubble and then failed to see the recession coming, so we are not sure why anyone pays attention to what they think. Reports from the Black Friday/Cyber Monday retail sales frenzy were generally less than impressive. Consumers snapped up the deeply-discounted promotional items but were not enticed into buying higher-margin goods. More ominously, the proportion of sales paid by credit card fell sharply from prior years. Frugality appears to be foremost on consumer minds this year, and that’s not good news for retailers.

The Dubai scare, brief though it was, caused a pop in the U.S. dollar and a dip in Treasury yields, along with a spike in equity volatility. Interest rates headed back up as the new week opened, with the ten-year Treasury ending today just above its 200-day moving average at 3.323%. Banks and institutions that want to go into year-end with “safe” assets on their books are probably behind some of the Treasury purchases. A similar pattern was seen at the end of 2008 but is not quite as pronounced this year. Spot gold prices crossed above $1,200 this week to yet another all-time high. There is no doubt the gold market is frothy, but as yet there is no sign of a breakdown.


Materials kept the top sector spot but lost some of its bullish momentum. Health Care moved up to #2, not because of a strong improvement but because other sectors pulled back. Technology slipped from second place to fifth but still looks quite healthy. Energy slid further down the list while Financials displaced Utilities on the bottom


Our relative Style rankings were mostly unchanged in the last week. A bias toward Large Cap remains in effect, with Mid Cap in the middle of the curve and Small Cap toward the bottom. Micro Caps, still in last place, slipped back into a negative intermediate-term trend.


Japan had a huge week, gaining +5.1%, mostly due to a surging Yen. The Yen exchange rate climbed 2.6% in the last five days and has gained more than 6% against the dollar in the last five weeks. Japan has been lagging badly for most of the year but seems to be resuscitating itself lately. Time will tell if the surge is sustainable. On an intermediate-term basis, Latin America is still the strongest region and Japan is still in last place. The U.K. dropped from #2 to #4. Canada made a strong move back into the top half of the chart and could move higher soon.


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.

“Canada is like your attic, you forget that it’s up there, but when you go, it’s like “Oh man, look at all this great stuff!”



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