12/16/09 Ben Bernanke, Cover Boy
Ben Bernanke, Cover Boy
As expected, the Federal Reserve kept interest rates unchanged today. There had been speculation about a softening in the pledge to keep rates “exceptionally low” for an “extended period,” but the committee statement retained that language. Also unchanged was the Fed’s forecast that inflation would stay “subdued” for some time. Given that the Fed is the prime source of inflation, this is one area in which we respect their forecasting abilities. Their veracity we are not so sure about, though the decision by Time magazine to anoint Ben Bernanke its Person Of The Year and weekly cover model makes us think he may be trustworthy after all.
The horribly-misnamed Troubled Asset Relief Program, or TARP, found itself with some extra cash this week as the last major participants repaid the Treasury for the government’s stock purchases. Leading troubled asset holder Citigroup (C) gained a little freedom as it raised $20 billion from private investors for the express purpose of repaying TARP. The salient question here is who is free from what? Citi and its peers are not free from “too big to fail” status; the precedent is now clear that Washington will not allow major banks to default. Nor are the taxpayers free of the obligation to bail out Wall Street in various ways, some obvious and some not. The bankers are, however, now free of certain annoying executive compensation restrictions. The fact that the repayments occurred just in time for year-end bonus season was hardly coincidental.
Claims by some that the government actually turned a profit on its Citigroup investment depend heavily on the definition and time frame of “profit.” The Internal Revenue Service quietly issued exemptions, conveniently timed with the TARP repayments, allowing Citigroup alone to claim some $38 billion in tax savings that would otherwise have been lost. This is lost revenue to the government, and by most fair calculations is worth far more than the Treasury earned from TARP. Whether the IRS put a bow on the package and included a suitably-sectarian Holiday card is unclear.
The S&P 500 is still hitting new 2009 highs as the year winds down, though momentum is clearly slowing. Treasury yields have climbed back into the 3.6% area for the ten-year bonds. Crude oil prices had been pulling back but now seem to have found some support. ExxonMobil (XOM) sniffed an opportunity in the natural gas business and acquired XTO Energy (XTO). Not unlike the big banks, Big Oil may be realizing that the easiest growth path from here will be in gobbling up smaller competitors. If the idea spreads to other sectors, 2010 could turn out the be a banner year for mergers and acquisition
Major sector rotation is underway, jumbling our rankings and making leadership difficult to pinpoint. Consumer Discretionary is now on top of the list, but not because of any great success by retailers. Indeed, that group continued to lose strength against both the sector and the broader market. Big media and entertainment stocks seem to be taking the lead. Disney (DIS), for instance, has more than doubled from its March 2009 low. Telecom slipped back to second place after catapulting from last to first in the previous three weeks. Utilities is still in third place with a nice low-volatility uptrend. Health Care, Industrials, Technology, and Materials hold the middle ground on a relative basis but are all strong in absolute terms. Financials and Energy are the laggards for now; a diversified approach that simply omits those two sectors may be a strategy to consider.
We see rotation in the Style categories this week as well. Mid Caps moved to the forefront, grabbing three of the top four spots. Micro Caps are still the weakest group and separated from the pack further. A year-end Small Cap rally could shuffle the rankings even more in the next few weeks. We should note, however, that every category other than Micro Cap is showing annualized positive momentum of 20% or more. We would not be aggressively bearish under these conditions.
Latin America kept its stronghold at the top of our Global Edge chart. Emerging Markets is next, followed by the U.S. There was some minor shuffling at the bottom as Japan moved up and Europe moved down. We notice that world market movements, while still highly correlated to currency strength, appear to be responding to other factors as well in the last few weeks. Concerns about Greece and Dubai so far appear not to be having a negative impact on other markets. Capital flows quickly to where it is needed and can leave just as quickly.
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.
“Old mufflers never die, they just get exhausted“
Joke of Unknown Origin
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