An Ominous Tone for the Rest of 08?
It’s official: Fannie Mae (FNM) and Freddie Mac (FRE) are now in conservatorship, which is slightly better than bankruptcy. The weekend announcement of the government intervention created a brief rally on Monday. Too brief, in fact. For many indexes, the day’s high was established in the first few minutes of trading. We noted a couple of weeks ago that September can set the tone for the remainder of the year. So far, the tone is ominous. Every major index is showing a loss in September. As expected, volume has returned, which tends to validate the declines. International markets are especially weak, and strength in the U.S. dollar amplifies their losses.
There are pockets of strength though, and in surprising places. Banks are showing gains for the month, as are retailers. As bad as things are in the financial sector, some analysts believe that a bottom for that group is now in place. It appears the majority believes otherwise, hence the surprise. Likewise, with unemployment jumping above 6%, many investors are struggling to understand the gains in retailing stocks. We suspect that lower gasoline prices are at play here.
Crude oil appears destined for a return to double-digit prices. Today, the price traded below $102 before closing above $103. However, Hurricane Ike is moving into the Gulf of Mexico with the potential to add a storm premium to oil prices, so we don’t anticipate $99 oil until Ike is no longer a threat. Lower-priced oil is a double-edged sword. It is potentially bullish for the equity markets because the expense ledger for companies and consumers will see an improvement. The psychological impact of oil below $100 can also be a positive. It is potentially bearish because it implies that global growth is slowing.
Bonds have had a turbulent week, and that is understandable since the U.S. Treasury added almost $6 trillion in mortgage debt to its books. It may have been a bumpy ride, but the trend is still quite bullish for Treasury securities. Yields continue to drop and are now at 3.64% for 10-Year and 4.22% for 30-Year Treasury bonds. Needless to say, mortgage-backed securities also advanced sharply this past week.
Consumer Discretionary held on to the top spot in our sector rankings, while Materials remained at the bottom. The downside momentum accelerated sharply for Materials, Energy, and Technology. Losses are mounting, and now many are looking for the oversold bounce. If and when it comes, that bounce will be welcomed with open arms by investors holding long positions. Financials climbed in our rankings even after giving back all of their Fannie & Freddie bounce.
The downside market action took its toll on our style rankings, leaving only Small Cap Value showing positive momentum. Mid Cap Growth is especially weak, and its performance suffered again this week due to high exposure to the Technology sector.
Emerging markets, especially Latin America, were pounded this week. iShares MSCI Emerging Markets (EEM) lost more than -9% while iShares S&P Latin America (ILF) plunged more than -12%. Downside momentum has now reached unsustainable levels, suggesting that panic selling is in control. A bounce is likely to begin soon, but a bounce does automatically translate to a new rally.
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.
“I made the most of the opportunities I had.”
Chad Ocho Cinco (b 1978) Cincinnati Bengals NFL Wide Receiver
Officially changed his last name from Johnson to ‘Ocho Cinco’ – a hat tip to his number ’85’
A Respected and Diversified Healthcare Pick: JNJ
Whenever we make our Pick of the Week, we spend some time looking at a few factors. For instance, when we review a company, we look at the history of the organization and the market where the company competes. In addition, we look at the overall health of the sector compared to the economy. These factors have become increasingly important in the last few weeks.
With almost every equity struggling, it’s sometimes hard to pick a company that won’t go down -10% in the next week. This is one of the reasons we chose our first short pick last week (and why we’re still behind it). Still, we’re usually optimists when we approach the market. Our bias has been proven time and again as equities typically go up over time. Today, we found another reason to be bullish.
Big Pharma Rides Again
Most of you know we favor Healthcare during a downturn. It’s no surprise we like digging around the sector to find a company worth mentioning. However, we did not expect to find this large-cap on our short list. After a slow start, it’s picked up steam in the 3rd quarter.
Johnson and Johnson (JNJ) is a 122-year old company. This New Brunswick, New Jersey-based company has come a long way since corner drugstores sold their baby powder. Beginning as a pioneer in sterile medical supplies, they expanded into pharmaceuticals and related consumer products. Over the years, they’ve released ubiquitous brands such as Band-Aid, Rogaine, Listerine, Tylenol, even Splenda. Johnson and Johnson has become a household name.
Johnson & Johnson is a Healthcare company with deeper product lines than just Band-Aids and Rolaids. The company is divided into three segments: Consumer, Pharmaceutical and Medical Devices & Diagnostics. Their strong brand presence undergirds their consumer products, especially in a weak market. In addition, investors expect their pipeline of new drugs to support future growth in that division. Finally, their reputation precedes them in nearly every venture they undertake, a vote of confidence for the future of the company.
This Year’s Most Respected Company
On Monday, Barron’s released its annual survey of professional investors on the world’s most respected companies. Johnson and Johnson placed first, a position it also held back in 2006. Once again, 74% of respondents said they ‘highly respect’ JNJ due to strong management and a commitment to a sound business strategy. Investors feel good about JNJ, and they’re willing to buy the company.
Perhaps the most important aspect of JNJ is how well it’s performed in the last year. As other companies have been humbled by the market, JNJ has withstood the headwinds of a downturn. JNJ has risen +16%, an astounding bounce for such a large company in this market. Technically, JNJ just broke out of 3 ½ year congestion last month. Right now, it appears that break will hold. We expect JNJ to go even higher. For a solid Healthcare pick in a strong uptrend, go with JNJ.
All the best.
Keep in mind, the Pick of the Week is usually intended for aggressive investors. Don’t risk money you can’t afford to lose. You will need to decide when (and if) it is time to sell.
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