Dightman Capital - Global Market Monitor : developed markets

Productivity Growth vs. Demand Growth

Brian Dightman — Wed, 30 Dec 2009 20:33:00 GMT

After a tremendous rally from lows hit in March, stock investors want to know if the rally will continue into 2010. Leading economic indicators produced by the private firm, Economic Cycle Research Institute (ECRI), suggest the economic expansion that started in the 2^nd quarter of 2009 will continue well into 2010. Their most recent comments suggest an improved job market may only be a few months away. We won't have to wait long for clues, several employment reports will be released in the first full week of January.

An improved job market could be a near-term catalyst to help stocks move to higher ground. But don't expect unemployment back in the 5-7% range anytime soon. If economic growth brings unemployment down by half a percentage point per year, a figure used by Lakshman Achuthan of ECRI as historically relevant going back many decades, strong employment numbers will not be reached until 2020. With the U.S. economy growing more slowly in recent decades, a lower unemployment number may be elusive for an even longer period of time.

Structural changes in the job market have seen some manufacturing jobs permanently eliminated, jobs that will not come back in a recovery, largely due to productivity increases. If productivity growth is higher than demand growth, the imbalance results in job losses unless structural changes are made to the employment market. Ironically, all the political talk about health care cost being too much of our GDP is exactly wrong under this scenario. Yes, we want our health care dollars to go as far as possible but for long-term replacement of manufacturing jobs industries like healthcare, education, and finance are logical areas for private market job expansion.

Lakshman expects more frequent recessions in the coming decade than we saw in the last two or three. Part of the reason has to do with the difficulty in smoothly withdrawing stimulus funds. If they are pulled back to quickly we could fall into another recession; to slowly and surging inflation may develop.

The business cycle expansion that started in Q2 2009 appears firmly rooted to carry us into at least the first half of 2010. This should bode well for stocks, but after an amazing run from 2009 lows it is difficult to gage how much more upside they may produce. Most of the rally took place before October. From March 9^th through September 30^th the S&P 500 gained 56%. From September 30^th through December 21^st it has gained only 5.4%. It looks like the S&P 500 will be up around 25% for 2009. The market consolidation over the last few months may ultimately turn out to be just what the market needs before moving higher in 2010.

As we close out 2009 another shift appears underway. After declining most of the year the U.S. dollar staged a sharp rally in December, up over 4%. Surprisingly the S&P 500 delivered gains (they have been inversely correlation since March) for the month but international stocks struggled. Both developed country and emerging market stocks show small declines. A strong dollar is often bearish for U.S. stocks. There are many inputs at work in the markets and as Wilbur Ross said recently on CNBC, "Now that the value of information has gotten to be about zero, there's an overload, and I think what's gonna be the end result is the value of expertise is gonna go to infinity. Because it is harder and harder for people to digest all these inputs, let alone make sense out of them, let alone translate them into investment decisions."

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I remain cautiously optimistic about stock returns in the first half of 2010. The action of leading stocks has improved somewhat in December which improves the likelihood stocks will break out of the current trading range. I believe deflation has moved off the table for the time being and inflation is generally contained. At present stock investors appear willing to discount ongoing credit market issues and place more emphasis on somewhat improved economic measurements.

All of this is subject to change depending on fiscal and monetary policy action, not to mention potential credit market surprises. For now we can be grateful for the gains the market presented us with in 2009; Dightman Capital in on track to produce a very strong year for all three of our growth strategies.

Have a Wonderful New Year!

Rally Continues

Brian Dightman — Wed, 26 Aug 2009 20:58:00 GMT

The rally that started mid-July looked like it was about to end only a month later. On Monday, August 17^th, continued selling from the Friday before looked like the start of a correction. The S&P 500 was down 3.26% during the period on consecutive increases in volume. By the end of the week, however, the market reversed course again hitting new highs for the year on above average volume (which was subject to August options expiration). Since then the market has not been able to follow-through and trading looks weak. But the breakout last Friday was impressive and the bias for the time being is to the upside.

In terms of sector performance, Financials continued to lead but Technology underperformed and Consumer Discretionary came in just below the S&P 500 over the last 5 trading days. The S&P 500 is represented as the horizontal 0 baseline. Returns above the centerline have outperformed and those below have underperformed the S&P 500 during the period.

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In terms of major U.S. markets, small cap companies have led over the last 5 days and the NASDAQ has underperformed the S&P 500.

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Internationally, Germany and France are leading and significantly outperforming the S&P 500.

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Stocks are overbought and could correct at anytime, but the likelihood there is more upside is very good over the months and quarters that follow.

Will Stock Market Gains Hold?

Brian Dightman — Tue, 16 Jun 2009 23:43:00 GMT

As the pattern of global economic data of less negative numbers continues, a shift may be taking place in asset pricing. Two possible reasons among many:

1) Asset prices are taking a break from the rapid appreciation realized since March

2) Economic data needs to move from less negative to positive as a catalyst for continued appreciation from current levels

In terms of asset prices, most of the month of June has been spent consolidating. Consolidation is a normal process and can be very bullish. Unfortunately, market action recently has led to price declines. My first course of action is to try and gauge whether we are going to experience a normal pullback or something more aggressive.

Commodity markets were a big part of the rally from March lows. Due to their sensitivity to the U.S. Dollar, we might be able to find near term price clues by comparing the two assets.

In the Chart below, the top window shows the daily price for the U.S. Dollar reversing up after the decline that started in mid-April. The bottom window shows the relative strength ratio between broad commodities (Powershares DB Commodity Index, DBC) and the U.S. Dollar ($USD). An upward sloping line indicates the first symbol is stronger than the second. The trend turned flat in early June and has a slight downward bias. A move past $82 on the U.S. Dollar may signal further weakness in commodities. So far oil has been able to hold most of its recent gains but strength in the dollar would be negative for crude oil prices.