Once upon a time, Detroit ruled. The Motor City was pumping out more automobiles and more R&B hit songs than any place on earth. Per-capita income for the residents of Detroit was the highest in the nation, and it was the envy of the industrial world. However, that was a long, long time ago. Times have changed. The former fourth-largest city in the country has seen its population decline by 60% and the number of manufacturing jobs shrink by 90%. The city contains an estimated 78,000 abandoned structures, and blight is rampant. The tax base is now a shell of its former self and cannot support the liabilities acquired during the good times.
Last week, Detroit filed for bankruptcy, claiming more than $18 billion of liabilities. The city became number one once again by filing the largest municipal bankruptcy ever. It will take months or years to untangle this mess and see who ultimately pays the price. The municipal bond market has held up fairly well since Detroit took action, although a case could be made the market took its lumps in June or that the real damage is yet to come. Either way, it’s probably a good time to review your muni bond holdings to understand your exposure to other cities that could potentially default.
Gold perked up the past couple of weeks. The gains are welcome to current holders, but they haven’t been enough to even put the one-year downtrend in jeopardy, let alone break the two-year downtrend. Still, with central banks running their money printing presses at full throttle, it would seem that a sustainable rally in gold prices is inevitable.
The 10-year Treasury yield has been consolidating back around the 2.5% level the past couple of weeks after running up to a nearly two-year high in early July. Bond investors are watching the 2.72% peak established on July 5 closely, as breaching that will likely trigger further selling. Meanwhile stocks keep pushing higher. Unfortunately, instead of bringing happiness to traders, higher prices just seem to add to their concerns. The thinking goes that the longer we go without a correction, the bigger the correction will eventually be.
We’re hesitant to call it sector rotation, but there is certainly evidence of sector shuffling this week. Financials reasserted itself as the leader, climbing up from the #3 spot. Last week’s top sector, Consumer Discretionary, now heads up a tightly packed four-way race for the second place spot. Others in contention are Health Care, Telecom, and Industrials. The names within the top five places are the same as a week ago; they’ve just had some minor changes to their relative positions. Energy posted good gains for the week and now leads the group of lagging sectors. The defensive categories of Consumer Staples and Utilities are next. The big mover this week was Technology, which plunged from sixth place to last. Disappointing earnings from Google (GOOG) and Microsoft (MSFT) took the wind out of the group’s sail, but Apple (AAPL) is trying to turn things around today.
Momentum readings across the various Styles remain strong. There is noticeable improvement in strength among the middle ranked categories while the upper and lower extremes held steady. Micro Cap stocks continue to provide the leadership, and the three Small Cap categories follow. Large Cap Value jumped ahead of the Mid Cap categories this week, breaking up the trend toward an inverse-capitalization alignment that has been developing for weeks. Mega Cap and Large Cap Growth swapped places at the bottom, with Large Cap Growth in last place this week.
If you were to compare today’s Global Edge chart with the one from last week, the first thing you would probably notice is there are fewer red pixels this week. The names and quantity of regions in the red haven’t changed, but they’ve seen a large reduction in the magnitude of their weakness. Japan remains at the top of the list, and the U.S. narrowed the gap slightly between itself and Japan. The next five categories had tapering momentum readings a week ago, but they all have similar strength today. A weak U.S. dollar contributed to the gains in this group, and Canada was the biggest beneficiary with help from its currency and large energy sector exposure. Emerging Markets, China, and Pacific ex-Japan are now on the verge of flipping back to positive trends. Latin America posted one of its best weeks in many months, but it still has far to go before it can shake off the effects of its steep decline in May and June.