Deserve a Bailout?
This week’s action brought the S&P 500 back up to the middle of its 2 ½ month trading range and back above the key 50-day and 200-day moving averages. On the other hand, today’s high also brings the index to short-term resistance in the 930-932 area. Some consolidation may be necessary if a breakout is to be sustained.
Corporate earnings reports look bullish so far, or at least are being spun that way in the media. Year-over-year comparisons are dismal but investors are looking ahead to the future. To no great surprise, Goldman Sachs (GS) reported yet another monster quarter. Johnson & Johnson (JNJ) topped estimates because consumers are buying more Listerine mouthwash and Neutrogena skin cleansers. We suspect this represents a switch away from premium brands in favor of J&J’s supermarket distribution channel. Growth forecasts at Intel (INTC), while impressive, also suggested newfound public frugality. Inexpensive “netbook” computers are all the rage and business technology spending was weak.
Just when many thought the bailouts were behind us, along comes CIT Group (CIT) with claims of imminent doom for its small-business customers unless it too is given billions. If CIT is rescued by taxpayers, the definition of “Too Big To Fail” will ratchet sharply downward; CIT is not even remotely in the same league as Bank of America (BAC), for instance. A bailout for this company will make it ever-harder to let any company of any size fail, not to mention bankrupt states like California . A high-level debate about these points seems to be underway in Washington . The Obama Administration will either cave in to the business lobby or realize it needs to draw the line.
Minutes from the June FOMC meeting, released today, reveal that the Fed saw the economy as “weak and vulnerable” at the same time it decided to refrain from further asset purchases. The committee judged the effects of such a move would be “uncertain,” which we think is probably another way of saying “We’re out of bullets.” The Consumer Price Index rose 0.7% last month mostly due to higher gasoline prices, even as the twelve-month change in CPI marked its biggest decline since 1950 at -1.4%. With energy prices now in retreat it looks like deflation may again gain the upper hand, though a sharp upside reversal in Treasury yields this week suggests inflation is still a short-term threat.
Our sector rankings have a symmetric appearance today, with the bullish momentum in Technology, Health Care and Consumer Staples mirrored by respective weakness in Energy, Telecom and Industrials. In other words, Technology is roughly as strong as Energy is weak. On a relative basis Technology is still the strongest sector (and was strong again today) but is followed by more traditionally defensive sectors. Telecom made a notable drop from last week due to possible new regulatory actions aimed at wireless companies.
Large Cap Growth moved up into first place, ahead of Small Cap Growth, while both categories lost some of their momentum. The Value categories are still monopolizing the bottom three slots. At the same time, dispersion among the style-based groups is still relatively low. The best category, Large Cap Growth, has an RSM score of 11 while the worst, Small Cap Value, has an RSM of -5. A difference of only 16 points is subject to quick change if investor risk preferences begin to shift.
Our Global Edge rankings have not changed much since last week. China and Emerging Markets are still on top, with China leading by a significant margin. The various developed world benchmarks are still running well behind. Canada and Latin America slipped to the middle of the pack as their materials-heavy economies lagged along with the commodity markets.
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.