What a Difference a Dollar Makes

May 18, 2010

Six or eight months ago, the head of China’s central bank was giving angry press conferences talking about curtailing purchases of U.S. Treasury securities. Today a Chinese news site, Xinhuanet.com, reports that China’s buying of U.S. Treasuries is rising. In fact, the Chinese now love our bonds:

The March increase was the largest one-month gain on record. It surpassed the old record of a net increase of 135.8 billion dollars in May 2007.

They are probably impressed with the administration’s newfound fiscal discipline and the stern budget cuts being proposed by Congressional leaders. :) Oops. None of that has happened, or is likely to. So what’s up?

What’s up is the U.S. dollar! Suddenly fiscal discipline is immaterial. As the dollar goes higher against other currencies, the Chinese are making money on their investment.

Courtesy: Yahoo! Finance

Currency markets run on pure relative strength. A currency is only as good as the economy backing it-and even though those of us in the United States can see problems with our economy, from the outside it is clearly in better shape than most of our competitors. This is one reason why it may be a big mistake to be too parochial about your investment universe. The market is global even if your portfolio isn’t. It makes sense to widen your investment horizons, to look for returns wherever they are.

1 Comment | Markets, Tactical Asset Alloc, Thought Process | Permalink
Posted by Mike Moody

The Wellspring of Relative Strength

May 18, 2010

Relative strength investors had an excellent Q1 this year. In order to continue to generate returns from relative strength, discipline and patience are required. But news items and temporary issues can cause investors to take their eyes off the ball. As Zacks Investment Research put it:

Even though the market no longer seems to care about mundane things like earnings and revenues when there are such exciting things like a debt crisis in the cradle of democracy, this has been a very good earnings season.

In their recap of the current quarter’s earnings, Zacks goes into mind-numbing detail, sector by sector, for a large number of factors. Obviously they believe the market has been good because earnings have been good. When you examine the sector data, you will notice that quite a number of the strongest sectors in terms of relative strength are also sectors with really good earnings and positive estimate revisions.

Wow. What a shock! Sometimes when I read articles about relative strength or momentum, the writer makes it sound like a mindless exercise in buying whatever is going up, as if the stock or asset had no reason to appreciate other than group mania. But things typically don’t go up for no reason-keep in mind there’s always an informed investor on the other side of the trade too. If the fundamentals are strong, there’s often strong demand for the asset-and that’s usually where the relative strength comes from.

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Posted by Mike Moody

Off the Mark

May 18, 2010

For your “Why I Use Trend Following” file:

From the Harvard Business Review:

For the past quarter century, equity analysts’ earnings-growth estimates have been almost 100% too high. Their overoptimistic projections have generally ranged from 10% to 12% annually, compared with actual growth of 6% (excluding the spike in growth from 1998–2001), according to McKinsey research. Only in strong-growth years such as 2003 to 2006 did forecasts hit the mark.

HT: Crossing Wall Street

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Posted by Andy Hyer

Relative Strength Spread

May 18, 2010

The chart below is the spread between the relative strength leaders and relative strength laggards (universe of mid and large cap stocks). When the chart is rising, relative strength leaders are performing better than relative strength laggards. As of 5/17/2010:

The sharp decline in the RS Spread during much of the first half of 2009 has transitioned into a flat spread, which may be setting the stage for a more favorable environment for RS investing.

1 Comment | Markets | Permalink
Posted by Andy Hyer