12/21/11   Realtors: “We Wuz Wrong”

Editor’s Corner

Investor Heat Map: 12/21/11Realtors: “We Wuz Wrong”

Ron Rowland

If you follow the housing market, today’s news was a “DOH” moment. The good news? Existing home sales rose in November to a ten-month high. Unfortunately, the bottom from which the bounce is measured was “revised” considerably downward.

What happened? The National Association of Realtors said the sales figures it has reported since 2007 were too high by an average of 14%. A divergence with similar data collected by the Census Bureau forced the real estate lobby to “rebenchmark” its numbers. Nevertheless, home prices do seem to be finding some kind of bottom. Working off the housing inventory will still take time, particularly since growth is now concentrated in multi-family dwellings.

While the American Santa Claus tries to decide which chimneys to ignore, imposters at the European Central Bank delivered a 439 billion-euro gift to the continent’s financial sector. The three-year, low-interest loans added up to almost two-thirds of next year’s maturing bank debt. This may stave off a liquidity crisis, especially since a similar auction is scheduled for February. The debt burden is far from eliminated, however.

The fact that Europe’s banks took far more loans than analysts had anticipated provoked some uncomfortable questions. Borrowing from central banks is something private bankers have historically shunned lest they look “unstable,” which is why the Federal Reserve went to great lengths to hide its actions in 2008-2009. Either European bankers seem less concerned about appearances, or they are in even worse trouble than we thought.

The European mess, combined with a few bad earnings reports, prevented U.S. stocks from a meaningful follow-through of Tuesday’s sharp gains. The S&P 500 stands about 8% below this year’s high and will be lucky to end 2011 with a small gain. Gold prices stabilized after a rough decline the prior week, but U.S. Treasury securities and the U.S. dollar remain first on holiday wish-lists around the globe.


Tuesday’s massive stock rally didn’t improve the appearance of our sector rankings. Defensive sectors hold the top three spots. Consumer Staples is still #1, followed closely by Utilities. Rising volatility in Utilities seems not to be deterring yield-hungry dividend investors. Health Care rose from sixth to third-place, driven by strength in pharmaceuticals and biotechnology. Industrial stocks are hanging tough in the upper half; the sector seems to have successfully isolated itself from the far-weaker Energy and Materials after being joined at the hip with them the past few years. Technology slipped a little and seems likely to lose more momentum after an earnings warning by Oracle (ORCL). Financials remained near the bottom while moving up a notch, displaced by short-term weakness in Energy.


The Style rankings are so compressed that drawing conclusions about relative strength is probably fruitless. There really are no discernible patterns. Small Cap Value and Mega Cap lead the list despite almost no history of such identical behavior. With Micro Caps right behind Mega Cap, the two categories at opposite ends of the capitalization spectrum are tied for second place. The one sign of order is that Value is favored over Growth within each size strata, but this could be purely random selection. Large Cap Growth joined Mid Cap Growth and Mid Cap Blend with a negative momentum score. However, with the readings all in a range between +7 and -9, it is probably safe to say all the categories are more or less neutral.


Last week we described the U.S. as “a small speck of green in an otherwise red global sea.” The color has not yet changed, but you will need a very hi-resolution monitor to see any green pixels in today’s +1 reading. Only a surge in dollar strength kept our domestic benchmark in the lead. The U.K. remained in second place and should be able to stay above-average if the pound can hold on to Tuesday’s big rally. China moved up the ranks, Latin America slipped, and Japan remained wedged in between. Europe stayed on the bottom for another week as a magical debt solution remained elusive.


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.

“In our view, the ECB is still too optimistic on growth next year and is likely to revise its estimates down meaningfully in the coming months.”

Morgan Stanley report, December 2011


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