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Markets logged another confused week bouncing between good days and bad, and ending up changing little. The week kicked off on the downside with a sharp 1.66% decline in the Nasdaq Composite. Weak manufacturing and housing data appeared to drive the sour mood, though the tech stock decline was far worse than the broader market. Going into Tuesday’s trade, a weak outlook from Hewlett-Packard (HPQ) opened the market lower. Technical buyers came in to support the S&P 500
and Dow Jones
at their 50-day moving average, driving the market all the way back to flat on the day. The bullish reversal was confirmed after hours when Dell countered HP’s downbeat outlook with a very positive profit report. Commodities caught a solid bid throughout Wednesday, which led to heavy buying interest in recently weak energy stocks. Technical traders were buoyed by the 50-day average providing support to further add buying power. Thursday brought headline excitement when social media company Linked-In launched an IPO that found substantial enthusiasm. However, the broad market was less excited, trading listlessly throughout the day to end with fractional gains. Friday morning retail reports from Gap and other retailers provided further fuel to bears that the economy is not as strong as anyone would like. However, cloud computing firm Salesforce.com soundly beat expectations. The net result was a market that broadly yawned its way through options expiration day. Liberty Media’s surprise bid for Barnes & Noble perhaps provided an offset to the downbeat retail reports. Stepping back from the week, it was a period of stabilization for the commodity sector. Treasury rates tried to break lower, but failed. The U.S. dollar tried to break higher, but failed. Stocks found support at a key technical level, taking that as a net positive despite a flat week.
On the week, the Nasdaq 100 (QQQ)
gave up the most ground, dipping 1.11% while the Russell 2000 (IWM)
dropped 0.78% and the S&P 500 (SPY)
notched a 0.32% decline. The S&P and Nasdaq remain just above their 50-day moving averages while the Russell fell just ever so slightly below its 50-day. All indexes are well above their 200-day moving averages.
Our World portfolio bounced back this week to post a barely positive 0.19% gain. Our 4-week period for the World ETF Ranking concludes with this week end. Therefore, you should rebalance next week with the new top 5 positions as shown in our World ETF Ranking.
Both our Classic and Turbo Models remain on Buy signals.
What
happened to the BRIC?
Remember the BRIC? The Brazil, Russia, India, China emergence that
fueled the 2003-2007 cyclical bull market? They have offered little
return during this most recent uptrend. After participating in the
initial run-up in September and October, they've made no progress
and some versions of the BRIC index are now negative year-to-date
for 2011. This weakness occurs despite a pretty consistent downtrend
in the U.S. dollar, as the Fed tries to keep a lid on U.S. interest
rates. Thus, the performance of the BRIC stock indexes is really
worse than it appears when adjusted for the declining U.S. dollar,
which is a boost to the emerging market stocks.
Chart 1: Russia only bright spot for BRIC stock index
The BRIC countries, at least the Brazil and Russia components, are
heavily resource-oriented stocks, surging or falling on the heels
of rising or falling commodity prices. However, outside of some
strength in Russia resulting from higher oil prices, the BRIC countries
have offered little benefit for investors. Even the slow, steady
high-yield bond etf outperforms, and with substantially less risk.
What's the problem with BRIC? Ramping inflation in these countries
has forced their central banks into aggressive rate tightening mode
and given investors reason to question the robustness of economic
growth going forward. Recall that these nation's have inflation
reading that are more sensitive to food and/or energy prices and
less so to labor prices. The U.S., on the other hand, is more sensitive
to hikes in labor rates and less so to food and energy, at least
as a broad inflation measure. Thus, our central bank (the Fed) tends
to view rising and falling commodity prices as less reliable to
build interest rate policy on. As an example of the wide rate differentials
between the BRIC countries and the U.S., consider that Brazil's
10-year Treasury bond equivalent is currently yielding over 12%
compared to around 3% for the U.S. This isn't all inflation-driven.
But Brazil and China, in particular, have been aggressive in their
approach to raising interest rates to dampen surging economic growth.
The result has been stagnating stock indexes while the U.S.'s easy
money continues to support stock prices.
Chart 2: Domestic markets outperforming the higher-risk
BRIC
To be fair, all the major stock indexes have been flat of late.
Weakening commodity prices have raised questions about the firmness
of global economic growth. Industrial metals prices are often viewed
as foreshadowing global economic growth. Those prices have come
unglued in recent weeks. Already modest U.S. growth has not offered
much help, though it has kept the Fed's foot heavy on the U.S. dollar.
The correlation between industrial metals, the U.S. dollar, and
BRIC stocks is reasonably clear from the Chart 3 below:
Chart 3: Industrial metals and U.S. dollar impact BRIC stock
The earthquake in Japan accelerated concerns of global economic
slowing. The reality of those concerns will become more visible
in coming weeks as companies report earnings impacted by the quake.
In the short-term, South Korean stocks were boosted by the quake
as rebuilding will benefit South Korea's heavy industrial complex.
However, softness remains elsewhere in emerging market land. So
much so that the forward P/E ratio is a paltry 9.3 assuming just
under 15% earnings growth. The trailing P/E is a mediocre 13. (Those
meager numbers demonstrate the impact of the secular bear attitude
on stocks, where investor enthusiasm wanes and P/E ratios trend
lower. We'll review the state of the secular bear in a future Weekly
Update.)
Thus, despite a rally in commodities and weakish U.S. dollar, emerging
market stocks have been laggards for several months now. With stocks
currently biding their time and emergings being a cheap stock class
on a valuation basis, it does appear that the cyclicall bull market
could give a future lift to emerging market stocks. The most recent
run in late March, however, lasted all of two weeks before succumbing
to renewed concerns about inflation and rising interest rates in
emerging countries. The rally in commodities, then, is a mixed blessing
for emerging market stocks and perhaps has become more negative
than positive. It fans fears of higher rates more so than higher
growth given current investor mentality. If that attitude prevails,
emerging market stocks might take awhile to really get off the mat.
While value investors might be salivating over emerging market stocks,
the trend is clearly flat to nowhere right now. We'll await a new
uptrend, then look to our World ETF Ranking to offer ideas for where
strength in occurring. Right now, that strength looks to be centered
in South Korea, among the major emerging market economies. Check
out our World ETF Ranking for weekly updates to where the global investment
action is focused.
Question:
What is the IMF?
This week's arrest of IMF chief Dominique Strauss-Kahn put the IMF
in the regular news headlines as opposed to its regular posting
in more arcane finance publications. The International Monetary
Fund (IMF) was set up in 1944 to help stabilize the global financial
system after World War II. It continues that role today, providing
liquidity to improve the efficiency and minimize the systemic surprises
in the global monetary system. Recently, the IMF has been a leading
player in working with the European Central Bank (ECB) to resolve
sovereign debt problems in Greece and Portugal, et al. Thus, we
can think of the IMF as working with governments on issues of government
debt, primarily, and perhaps getting into issues of currency as
well.
The IMF is sometimes confused with the World Bank. Also created
at the Bretton Woods conference in 1944, the World Bank's role is
to help nations develop. Thus, it's finance work tends to be aimed
at poorer countries looking to improve the economic growth and efficiency.
The World Bank can provide assistance as well as funds for these
aims. Thus, the World Bank's work is more focused on economic development
and the citizens, if you will, of a nation, rather than its government
finances.
The IMF and World Bank are both comprised of all the world's nations
as members with each nation funding each organization. The size
of the funding has an influence on the voting structure of the institutions.
Thus, it has been that Europeans and Americans have been at the
helm of these organizations in the past. With the increasing economic
clout of China, Brazil, India, Russia, et al. there are calls for
broader leadership in these global financial institutions. It would
seem only a matter of time before this occurs, as it likely will
in all other global bodies.
Warm wishes and until next week.
The TimingCube
Staff
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