Rally Finds Resistance Again
This week we have good news and bad news. First the good news: the U.S. stock market, as measured by the S&P 500, has rebounded some 21% from the 11-year low it set last month. By some definitions, this move constitutes a new bull market all by itself. Some key sectors like financials and real estate were up even more than the benchmark. Not feeling especially bullish? Perhaps you haven’t heard that the automotive industry may be rescued, or that the new Administration intends to create jobs by spending a trillion dollars on infrastructure projects. These appear to have been the prime catalysts for newfound optimism. Hopeful investors began to chatter about a “tradable rally,” but as of today their rally is encountering resistance.
The bad news is: everything else. In last week’s analysis, we suggested that the November unemployment report could be surprising, and indeed, it was. The unemployment rate now stands at 6.7%, and if you add in part-time workers and discouraged jobseekers that have stopped looking, the actual rate could be more like 12%. Jobs are disappearing rapidly in every sector of the economy as consumers find ever-more-creative ways to spend as little money as possible. The Great Depression metaphors become more plausible every day as an over-leveraged economy adjusts painfully downward.
The deflationary trend is pushing commodity prices (gold being an exception) dramatically downward. Crude oil is below $44 and approached $40 last week. Gasoline prices at the pump are averaging $1.63, levels not seen in several years, and down dramatically from the $4.11 peak less than five months ago. This is good news in one sense, but it is not nearly enough to overcome the other consequences of the massive global economic slowdown that brought prices down so far in such a short period.
These same factors also created two historic events in the bond market. On Tuesday, the auction for four-week Treasury bills ended with a yield of zero: yes, zero. Investors are so desperate for safety they are now willing to accept no appreciation at all. Soon afterward, the three-month T-bill rate actually went negative for a brief period, meaning people are willing to pay for the safety of Treasury paper. While the Federal Reserve has not yet officially adopted ZIRP – Zero Interest Rate Policy – the market is rendering the Fed’s target rate irrelevant. The long end was also affected: 30-year bond yields dropped to historic lows near 3%. This is in part due to year-end window dressing by institutions that will proudly disclose portfolios stuffed with safe, boring government securities, but the amount of fear in the market clearly remains very high.
Today the Wall Street Journal reported that the Federal Reserve is asking Congress for authority to raise money by issuing debt. This is odd because the Fed already issues its own debt: it is called “dollars” and (if you are lucky) there is some of it in your wallet right now. As always, the Fed’s plans are mysterious, but this is a potentially alarming development. Is the “lender of last resort” itself in need of a capital infusion? Is Bernanke laying the groundwork for some sort of alternative currency? We doubt any answers will be forthcoming, but this story bears watching.
Finally, a note about municipal bonds. Goldman Sachs (GS) angered politicians around the nation today when it recommended credit-default swaps to hedge against exposure to the debt of eleven financially-challenged state governments. Unlike the federal government, states cannot run perpetual deficits and some are having great difficulty balancing their books as the recession cuts into tax revenue. Defaults are not out of the question and individual investors may want to reconsider their exposure to the states Goldman named. They are: CA, CT, FL, HI, IL, MA, MI, NJ, NV, OH, and WI.
Telecom continued to climb the charts and is now the # 2 domestic sector in our momentum rankings. Consumer discretionary also made a big jump as some retailers reported not-as-bad-as-expected results. Technology is also moving up though we are not quite sure why. The sector average was up markedly, reflecting overall market strength and causing the defensive sectors like Utilities and Health Care to lose relative strength.
Relative strength in our Style rankings was unchanged this week, with Mega Cap and Large Cap categories still on top. There was an across-the-board improvement in absolute terms, however. There was also more convergence in the relative strength of the style categories, with the difference between best and worst shrinking even more. These are both encouraging signs, but it is still too early to draw any conclusions.
We have a new leader in the Global Edge rankings. China now tops the list, having vaulted itself out of the basement in a remarkably short time. In fact, China currently has the least-negative momentum we have seen in several months. Commodity-producing regions are still suffering, with Canada and Latin America trading off the two bottom spots.
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.
“Don’t limit investing to the financial world. Invest something of yourself, and you will be richly rewarded.”
Founder (Charles Schwab Corp.)
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