10/01/08   The Bottom Is Closer Than A Week Ago

Editor’s Corner

The Bottom is Closer Than a Week Ago

Ron Rowland

In last Wednesday’s commentary we said: “If no bailout plan is passed this week, and the world does not end on Monday, the sense of urgency will be gone. At that point all bets will be off.” As it developed, the bill did not pass, and indeed went down in flames during market hours on Monday. Investors were not pleased and demonstrated this with a sharp sell-off that by some measures was the worst day since October 19, 1987. Like a phoenix rising from the ashes, however, a somewhat modified bill is set to be voted on by the Senate tonight. The political pressure to “do something” is obviously enormous. Whether the “something” that gets done will actually have the desired effect on the markets remains to be seen. No matter what happens, it is probably safe to say we can expect more extreme volatility.

Today a new quarter begins. Among other things, this means that the next few weeks will bring the normal stream of corporate earnings reports. Economic data suggests that few companies will announce banner results; the better question will be whether analyst forecasts turn out to be too optimistic, too pessimistic, or on target. Look for companies to blame the quarter on Hurricane Ike, credit market shortfalls, energy prices, and anything else that comes to mind. The public’s growing intolerance for overly generous executive compensation might also make for some interesting conference calls.

The short-term credit markets remain in a near-frozen state, with banks reluctant to lend to anyone riskier than the U.S. government. As a result, Treasury yields remain low while all manner of non-sovereign debt is historically weak. Treasury securities are turning out to be the investment of the year for 2008, no matter what maturity you might have picked. Frantic to guarantee the return of their money, investors have ceased to care about the return on their money. Four-week bills have traded at close to zero interest at least twice in the last month. We suspect it will happen again. Even the ten-year Treasury yielding only about 3.7% is turning into a surprising value.

Where is the bottom for equities? “Closer than it was a week ago” is as specific as we care to get. The turning point will no doubt be crystal-clear in hindsight, but here in real time the indicators are mixed. Volatility gauges like the VIX suggest that fear is at historically high levels, but fundamental measures applied to individual stocks suggest there is still very little under-valuation in the market. The fact that markets are now at the mercy of inherently irrational politicians is an added complication. The rules could change at any time. In this environment, the best advice is to stay defensive and nimble. It is truly a time when anything can happen.


Intermediate-term downside momentum accelerated for all sectors except Consumer Staples, which managed to hold its slide to the same rate as last week. Lost in all the focus on the Financials has been a serious deterioration in the Materials sector. The prime culprit appears to be the steel companies. Market Vectors Steel Index Fund (SLX), an ETF specializing in that niche, lost about 50% of its value in the last three months. As noted above, corporate earnings will be pivotal in determining the near-term direction for all sectors. At this point the bears appear to be in charge.


As with sectors, all the style categories are now showing intermediate-term downtrends. Small-Cap Value had been holding on to a little upward momentum but is now heading down along with everything else. Mega-Caps managed to move up in relative strength, which probably reflects recent short-term strength in Energy and Financials that is quickly fading away.


The International picture is ugly. We could use more colorful words but you get the point. Emerging markets, particularly China and Latin America, are crashing. This is not surprising coming after several years of astonishing gains, but the reality is always hard for each new generation of investors to believe. It is interesting to note that, as bad as the markets have been in the U.S. recently, the rest of the world is doing far worse. The U.S. and Japan are actually the leaders, a fact that ought to tell you something.


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.

“None of us came here to have to vote for this mud sandwich…
You all know how awful it is…I didn’t come here to vote for bills like this.”

John Boehner (b 1949)
U.S. Congressman, House Minority Leader, & Supporter of Failed Bailout Bill


Stay with Cash, Swiss Cash: FXF
Brandon Clay

Pick of the Week: FXF


It’s been a tough month for the markets. Two weeks ago we recommended you get a portion of your investments into cash. Hopefully you followed the advice. Considering what’s happened in the last few days, we’re doing something similar today. It’s too dangerous to speculate on many things in this difficult market. Cash is still a solid investment when everything else is teetering.

However, this time is slightly different. Instead of moving into American cash, we think there’s a better place for your hard-earned dollars. Switzerland, the world’s piggybank, looks like the best place to park your cash at the moment. We think the Swiss franc outweighs the U.S. dollar for the intermediate term. Let me explain.

Reason #1: A Swiss Safe-Haven

Switzerland has a well-deserved reputation for stability in times of distress. Landlocked, this alpine nation has been protected by many external threats. They have remained neutral since 1815 on a European continent embroiled in wars at the same time. They have remained a stable democracy, in a region known for periodic totalitarian flare-ups. They have remained financially strong, even while many neighbors have suffered through economic unrest.
Investors see the Swiss franc as a strong currency in economically uncertain times. Their ample gold reserves and fiscal discipline continue to undergird the franc. Cash is still king. We just think Swiss cash is better than American cash right now.

Reason #2: The Bush-Paulson Bailout Will Probably Pass

Despite our reservations about the Wall Street bailout, it will probably pass in the next few days. On Monday, the bill lost by a few votes in the U.S. House of Representatives. However, political momentum is growing for some form of the original bill to pass Congress. Once that happens, Bush will immediately sign it to the cheers of thousands of bankers. We expect the dollar to weaken as a result.

As the U.S. receives a U.S. taxpayer-cash infusion, other currencies should gain against the dollar. The Swiss franc looks like a good candidate to benefit. Unlike the euro, the franc is not weighed down by weaker economies in Europe. Swiss banks should also get a boost with more U.S. deposits, thus strengthening their currency.

Reason #3: The Swiss Economy Should Benefit in the Near Term

Unlike the United States government, the Swiss government is known for its fiscal discipline. In addition, they don’t depend on foreign debt like the U.S. Treasury. As a result, investors gravitate toward stable markets like Switzerland during times of distress. More investment leads to economic stimulation. This, in turn, will help strengthen the franc.

Although we don’t expect a booming Swiss economy, we expect a stable Swiss government and currency. More importantly, it should be better than the U.S. for the next few quarters, possibly even the next few years.

The Best Place to Get the Swiss Franc

There are several ways to buy the Swiss franc. One way is through ETFs. We think the best way to capitalize on a rise of the Swiss franc is with CurrencyShares Swiss Franc Trust (FXF). This ETF tracks the franc in dollars with a low expense ratio. That saves you confusing transactions in the foreign exchange market. This ETF trades around 200,000 shares a day, giving you ample opportunity to enter and exit your position. If you want to stay with cash, go with Swiss cash. The best place to do that is with FXF.

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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