Global Equity Markets: Signs of Exhaustion; What US Outperformance Means

Bespoke Invest has an updated table of the year-to-date and the month-to-date performances of global equity markets.

I will only show the year-to-date chart.

The month to date chart you can go directly to Bespoke here

Only 18 out of the 78 countries or 23% of the countries in Bespoke’s tally posted positive returns from April 15 to May 15 2011.

Major economies and the BRIC bourses have all been in the red. But the BRIC has underperformed the G-7.

ASEAN bourses largely outperformed most of the world.

On a year to date basis the picture changes; about half of the global equity markets are still in the black or registered positive gains.

Nevertheless the continuing weakness in the markets as a result of many political events is likely to weigh on the above standings.

Again, y-t-d the G-7 economies have outclassed the BRICs, while ASEAN bourses remain slightly above the mean.

Venezuela's Stagflation

An irony is that Venezuela whom just popped out of the recession leaped 10% in May to grab the 2^nd spot.

Venezuela’s recovery could merely be statistical considering that the country, despite being an oil exporter, has now been rationing electricity in the face of rolling brownouts.

Nationalization policies have led to a material drop in foreign investments that has contributed to such social blight.

Venezuela’s inflation at 22.9% has hardly been affecting stock price levels.

I’d say the so-called Venezuelan outperformance is a result of government’s money printing in preparation for 2012 Presidential elections.

Venezuela looks more like the movie The Curious Case of Benjamin Button. Venezuela stagflationary environment has exhibited an interesting phenomenon of a rising stock market amidst a recessionary environment and high unemployment.

As stated before, for me, the Venezuela's Chavez regime seems like a prime candidate for Zimbabwe 2.0.

Implication of the Changes in the Ratio of Emerging Market-US Equity

Yet the outperformance of the US relative to Emerging Markets should be seen from the bigger picture.

Again chart above courtesy of Bespoke.

EM bourses have largely bested US markets at the start of the recovery or since November 2008 until its peak on November 2010 (see red trend line).

Presently such trend seems to have reversed. (see blue line which forms a wedge)

I am not sure if this means that EM would start underperforming over the coming months or if this represents plain consolidation or a pause prior to the next up leg. Although I am inclined to think the latter.

Besides it’s no good news to suggest that the US outperforms the world considering that globalization has been reducing the US share contribution to the global economy. (in 1960 US share is 39%, in 2009 it was 24.23%)

This only implies that perhaps tightening of money conditions could have been taking hold outside the US, and may affect the global economy, which appears to be exhibited by current stock market performances. And this may eventually will get transmitted to the US.

One would further note that the previous market top in 2007-2008 was defined by a consolidation phase between the EM economies and US markets before the Lehman crash in October 2008 (see green oval).

So while home biased US managers see this as good news, this ain’t one for me.

Let me be clear: This isn’t a case to be strongly bearish yet. Although this should serve a yellow flag, which requires more confirmation or falsification.

Greece Default Risk At New Record, No Contagion

The default risk of Greece, represented by the Credit Default Swaps (CDS), has just traded at new record highs.

The elegant chart and subsequent table below from Bespoke Invest.

With the current surge, Greece has now supplanted Venezuela as the riskiest nation with the likelihood of a default, as shown below.

Additional comments

1. The credit risk table shows that it has been a bipolar world. Emerging markets have mostly been down (diminishing perception of credit risks), since December 31, 2009, while developed economies have been up (higher credit risks mostly from the after effect of the 2008 crisis).

2. The Greece episode which used to haunt the world markets (in 2010) appears “contained” or has become uncorrelated today.

(from stockcharts.com) Move along, nothing to see here

So far the Euro, the Europe’s Stoxx 50 (Stox50) and major global equity index (DJW) has virtually ignored the Greece rumpus unlike in 2010.

The lessons:

This highlights the dynamic where:

Past performance do not guarantee future outcome.

Markets learn to discount risks.

Global central bank’s flooding of money has so far temporarily masked whatever credit woes that have plagued the PIIGS.

It’s a complex market with variable interplaying factors. Oversimplification leads to misdiagnosis

President Obama’s Use of Regime Uncertainty and the Political ‘Government Shutdown’ Blackmail

All of a sudden, President Obama embraces the Austrian perspective of Regime Uncertainty (Robert Higgs).

From the Washington Post, (hat tip Russ Roberts)

At a town hall meeting near Philadelphia on Wednesday, President Obama warned that the uncertainty of a shutdown could slow the economic recovery.

“Companies don’t like uncertainty, and if they start seeing that suddenly we may have a shutdown of our government, that could halt momentum right when we need to build it up — all because of politics,” Obama said.

Of course, the use of uncertainty here is all about political convenience. This have been predicated on the ongoing battle over proposed budget cuts from the Republicans.

The administration appears to use “government shutdown” as leverage to negotiate to prevent or mitigate these.

Graphics from Cato’s David Boaz

Yet what is being argued looks inconsequential relative to the budget (government spending) gains over the years.

And based on the Cato’s graphics, the Republican proposal would seem not as a NET reduction, but rather a reduction of expansion.

As Jacob Sullum of the Reason foundation writes,

The cuts represent less than 2 percent of the total budget, less than 4 percent of the deficit, and less than 5 percent of discretionary spending, which rose in real terms by 75 percent from 2000 to 2010 and by about 9 percent in each of the last two fiscal years.

Yet the administration is trying to spook (blackmail) the public with the prospects of mayhem from a prospective government shutdown.

US government shutdowns have not been rare.

Below is a table from Bespoke Invest showing previous shutdowns.

Bespoke writes, (bold highlights mine, table above from Bespoke)

“funding gaps in the federal government are hardly rare. While we all remember the two shutdowns in 1995, there have actually been a total of 17 shutdowns going back to 1975. However, due to their length as well as changes in federal law over the years, not all funding gaps are created equal. For starters, of the seventeen funding gaps highlighted, only eight lasted longer than three days. In other words, in most cases the shutdown was a one day affair or else it occurred over a weekend.

“As shown in the table, however, funding gaps prior to 1980 all lasted one week or more, and then from 1980 to 1995 all funding gaps lasted three days or less. The reason for this change is the fact that beginning in 1980 the US Attorney’s Office ruled that any time there was a funding gap, non essential federal agencies were required to begin terminating activities and ‘shutdown.’ Once that opinion was issued, funding gaps took on added urgency forcing lawmakers to come to an agreement. This is why the shutdown in 1995 was so notable.

Bottom line:

This serves as a lucid example that when it comes to cutting government (privileges) in terms of spending and control, you can hear the shrill of cry OUCH from politicians! Even if the proposed spending cuts seem inconsequential or even perhaps symbolical.

And in desperation or as a political maneuver, politicians employ various ‘strawmen-bogeyman’ tactics to scare the wits out of the public so that the public would be stampeded to approve their desires.

As former US President John Adams once wrote [The Foundation of Government],

Fear is the foundation of most governments; but it is so sordid and brutal a passion, and renders men in whose breasts it predominates so stupid and miserable, that Americans will not be likely to approve of any political institution which is founded on it.

Milton Friedman’s 4 ways money is spent

Stripping away control and spending other people’s money is so addictive that politicians can’t seem to do away with it and would fight heaven and hell to avoid it.

Update: Bespoke appears to have been proven right, a deal has been reached according to marketwatch.com. Details have yet to come in.

I Told You So Moment: Emerging Markets Mounts A Broad Based Comeback!

Early this year, I was told that I did not predict the ‘correction’ in emerging markets.

Of course, I didn’t. I have to admit I am just human. I can’t predict or KNOW ALL events (human or environmental) that may affect the financial markets over the short term.

I won’t even pretend to do something close to it.

The expectation of omniscience is sheer absurdity. Sometimes some people (who have been mostly wrong in reading the markets) just like to engage in nitpicking, perhaps to look for company (misery loves company) or to look for conversation (signaling).

As an avid watcher of markets based on the boom bust cycle, I always say that NO trend moves in a straight line and have argued repeatedly on this space that the so-called unpredictable spontaneous events (MENA political crisis and Japan’s calamities) represented no less than profit taking. [But who would listen to uncontroversial non-faddish non-current event related ideas?]

And that I further argued that emerging markets, including the Philippine Phisix, will eventually move higher once uncertainty would have been discounted to as risk.

Well I guess, broader signs suggest that I’ve been right all along...

These beautiful looking charts from Bespoke Invest reveal that Emerging Markets have been making a HUGE broadbased comeback!!!!

If you want to know what’s keeping up this streak, well, I would suggest for you to study the Austrian Business Cycle Theory (ABCT). While there are other boom bust cycle theories too such as George Soros, Hyman Minsky, Charles Kindelberger et.al., all of whom are relevant, I would say that the Austrians have mostly nailed it.

Of course, the ABCT isn’t mainstream thinking (which means there are attendant social ‘conformity’ risks that goes with it and that you won't need credentialism as CFA or an MBA for this but simply go to mises.org for self study--as I--or take Mises academy online course).

And neither is the ABCT about the Holy Grail investing (which is why you won’t see or predict the interim volatilities).

Global Equity Markets: China Grabs Second Spot (In Terms Of Market Cap)

In February of this year, China surpassed Japan as the second largest economy in the world.

Recent events have likewise altered China’s ranking in the global equity markets (in terms of market capitalization) where China has snatched the second place from Japan.

The US remains on top as the largest equity market in the world, but has seen a steady decline in terms of market share. Most of this decline has been due to the outperformances of many emerging market bourses.

According to Bespoke Invest, (table and charts from Bespoke)

Japan's stock market declined nearly 20% in the days immediately following the tragic earthquake that hit the country on March 11th. While Japanese equities have bounced back a bit, the fall allowed China to surpass Japan in terms of percentage of world market cap.

...As shown, the US continues to hold onto the number one spot by a wide margin at 30.43%. Japan had the second largest market cap in the world at the start of the year, but China has now surpassed Japan and currently ranks second. China currently makes up 7.38% of world market cap, while Japan makes up 7.05%. The UK ranks fourth at 6.49%, followed by Hong Kong (4.77%), Canada (4.38%), and France (3.59%).

The following charts depict on the long process of how China surpassed Japan...

Basically the divergent performances can be seen as Japan’s stagnation vis-a-vis the Chinese juggernaut.

China’s elevated ranking in the global equity markets has aligned with her economic standing relative to the world--a manifestation of shifting wealth distribution.

A Tally of The Impact of Japan’s Disaster On Global Stock Markets

Japan’s triple whammy of nuclear-earthquake-tsunami has likewise slammed on the world’s stock markets.

Developed economy stock markets which earlier this year had outperformed the world have been the hardest hit, and are now laggards

Here is an update of the performances of the world’s bourses since Japan’s disaster struck.

According to Bespoke Invest,

The average year to date stock market performance of the 79 countries listed has now turned negative (-2.20%). The average performance of the countries since 2/18 is -4.38%. As shown, Japan is down the most since 2/18 with a decline of 16.13%. Germany and France rank 2nd and 3rd worst with declines of 12.29% and 11.08% respectively.

Most of the world’s market has turned red. Although some like the BRICs (except Brazil) and ASEAN has been little scathed so far.

However, with the way the markets have been performing overall (I mean, currencies, bonds, commodities, stocks), I suspect that Japan’s calamity has only instigated and could be masking the unseen driving force behind the series of downdraft.

And it’s called the TIGHTENING of the monetary environment—as many EM central banks have been raising interest rates while authorities of developed economies seem to be conditioning the markets of the same prospective actions despite the calamity. I’d like to see more evidence on this.

“I Told You So!” Moment: Oil-Stocks Correlation Breakdown

Great graphic from Bespoke Investment

Bespoke Invest writes,

As shown, the correlation between the stock market and oil remained positive up until just recently, but the breakup between the two has been swift and extreme. At the moment, the one-month correlation between the two stands at -0.70.

As to whether US stocks will continue to fall as oil prices move higher or if the current retracement can be interpreted as just as a normal correction has yet to be determined or resolved.

Putting on too much emphasis on the present action of the US equity markets could mislead because these markets seem to be digesting on new information or simply undergoing a normal profit-taking environment. Remember, no trend moves in a straight line.

Bottom line: the oil-equity causal relationship can't be read as a reliable indicator.

Global Stock Market Update: Advancers Still Dominate

Here is an update of the performances of world stock markets courtesy of Bespoke Invest.

From Bespoke

Just over 30% of the countries shown are down so far this year. Bangladesh has been the worst performer in 2011 with a decline of 23.69% year to date. The country was the 2nd best performer in 2010 behind Sri Lanka with a gain of 82.79%. With its uprising this month, Tunisia is the only other country down more than 10%.

Of the G7 countries, Italy ranks first, followed by France (+6%), the US (+2.57%), Germany (+2.22%), and Japan (+1.14%). The UK ranks second to last of the G7 countries with a gain of 0.74%. Canada ranks dead last and is the only G7 country that is down year to date (-0.69%).

Looking at the BRICs, China continues to struggle with a year-to-date decline of 4% after falling 14.31% in 2010. India is also struggling with a decline of 6.62%, but unlike China, India saw nice gains last year. Russia is currently the top performing BRIC country with a year-to-date gain of 5.39%, and Brazil is just barely in the black at +0.12%.

My comments

Trading Places. Many of last year’s top performers are at the bottom and that includes the Philippines. Whereas many of last year’s laggards are on the upper echelon of the winner’s bracket (Italy, Spain, Greece).

Tailwind. Some of last year’s topnotchers continue to sizzle (Sri Lanka, Ukraine, Estonia), while some of last year’s tailenders continue to trail (Bermuda, Dubai, China).

Definitely NOT A Bear Market. With 30% of global equities down, the obverse side is that 70% of global equities are up. In short, gainers still dominate.

Developed world outpaces major Emerging Markets. It’s yet too early to say that this will be the central trend for the year. Though I wouldn’t bet on it.

Web Revolution. Bespoke links to a New York Times site which shows of the video that triggered the People’s Power revolution in Tunisia. The link here. It’s amazing to see how political events are being shaped by the web.

How Global Equity Markets Performed in 2010

Here is the tabulation of the final returns of global equities for the year 2010 (based in local currency; courtesy of Bespoke Invest)

Contrary to the prognostications by the mainstream, most equity markets posted positive gains. (Double dip, where?) Only 19 national benchmarks suffered losses or 22% out of the 83. Again this may seem like a rising tide phenomenon.

While emerging markets peripheries led gainers, some developed economies such as Denmark and Sweden posted significant gains of over 20%, whereas Austria, Norway and Germany posted above 15% increases (European crisis anyone?).

More on Europe: Obviously the tailenders had been those directly hit by crisis—Greece Spain and Italy. But the divergent performances between crisis and non-crisis economies suggest of insulation and not of a contagion—again which the mainstream significantly misread.

The top 10 represented a mélange of emerging markets. Nevertheless the rankings can be seen in the following order: South Asia, Eastern Europe, Southeast Asia and Latin American EM’s.

The Philippine Phisix ranked 11th.

G-7 and BRICs had mixed performances. The race of 2010 belonged to the EM peripheries.

For 2011, I don’t think there would be much of a difference, except that I expect BRICs, who dominated 2009, to vastly improve their showing this year and possibly close on the gap with EM peripheries.

I certainly don't share the opinion that developed countries with all its internal tethers to outperform EM economies (periphery or the BRIC).

Global Equity Markets Update: Peripheral Markets On Fire, Philippines Grabs Lead In ASEAN

Here is a nice update on the performances of global equity markets from Bespoke Invest

Says Bespoke Invest,

At the moment, the average 2010 performance of the 81 countries listed is +12.19%. As shown, Sri Lanka leads the way with a gain of 97.16%. Bangladesh ranks 2nd at 74.88%, followed by Estonia (62.46%), Lithuania (49.56%), and the Philippines (43.54%). Of the G-7 countries, Germany has done the best with a gain of 11.30%. Canada ranks 2nd at 7.24%, and the US ranks third with a gain of 6.78%. Japan has been the worst performing G-7 country with a decline of 13.15%. Italy and France are both down still for the year as well.

Of the BRIC countries, India is leading the way with a gain of 17.18%. Russia ranks 2nd at 11.08%, followed by Brazil (+4.84%) and then China (-7.51%).

Additional observations:

Only 17 out of the 81 bourses are in the red. This includes the crisis affected PIIGS, China (whose bourse has been repeatedly under siege from her government aimed at curtailing her inner ‘bubble’ demons) and Vietnam (agonizing from high inflation)

Another way to see this is that global inflationism has led a rising tide lifting all boats phenomenon

It’s been a tight race among peripheral emerging markets led by South Asia, Eastern Europe and Southeast Asia.

The relative performances of BRIC and G-7 bourses have been mixed.

The Philippines has eked out a marginal lead from Indonesia (this is based on local currency. For the moment I don’t have access to dollar based returns)

Global Stock Markets Update: Peripheral Markets Take Center Stage

Going into the last quarter of the year, Bespoke Invest has a great snapshot of what has been happening in global stock markets.

From Bespoke Invest, (bold highlights mine)

The average year to date change for all 82 countries is 5.39%, while the median change is 2.23%. The S&P 500's year to date change of -1.24% is obviously below both of these. The US currently ranks 53rd out of 82 in terms of 2010 performance. At the top of the list is Sri Lanka with a 2010 gain of 73.69%. Bangladesh ranks second at 49.37%, followed by Estonia (41.94%), Ukraine (40.86%), and Latvia (40.26%).

India has been the best performing BRIC country so far this year with a gain of 4.33%. Russia ranks second at 1.42%, Brazil ranks third at -2.43%, and China is down the most at -18.97%. Canada is currently the top G7 country with a gain of 3.26%. Germany and Britain are the other two G7 countries that are up year to date, while Japan is the G7 country that is down the most year to date (-13.58%). Overall, Bermuda has seen the biggest losses this year with a decline of 38.25%. Greece is the second worst at -24.56%.

Additional comments:

1. Global stock markets are MOSTLY higher from a year-to-date basis, be it in terms of average or median changes or in nominal distribution (53 up against 29 down). This hardly evinces of the ballyhooed “double dip”.

2. The best performance has been at the periphery (as previously discussed), particularly in emerging South Asia, the Baltic States (Estonia have been a favourite since she has adapted a laissez faire leaning approach in dealing with the most recent bubble bust) and ASEAN.

This appears to be manifestations of the “leash effect” from policy divergences.

3. The BRICS has underperformed, but that’s because of last year’s outperformance. This excludes China, whose markets have repeatedly been under pressure from government intervention. I expect the BRICs to likewise pick-up, perhaps at the end of the year or in 2011 (perhaps including China).

4. Major East Asian economies have likewise underperformed. But this appears to reflect on the actions of major OECD economies.

Overall, what we seem to be seeing has been a spillover dynamic from the prodigious liquidity generated from coordinated global monetary policies into the peripheral markets. It’s the impact of inflation on asset prices on a relative scale. In addition, this also reflect signs of the allure of inflation’s “sweet spot” phase, especially for the peripheral markets.

As a caveat, while stock markets do resemble some signs of “decoupling”, such divergences can be deceiving.

Decoupling can only be established once the US goes into a recession while peripheral markets and their respective economies ignore this.

Yet, I doubt this will occur.

Asia-US Stock Market Decoupling?

Here is Bespoke’s comment on the correlation of Asia and the US which has been seen by many as “diverging” (bold emphasis mine)

we highlight the number of times over rolling 50 trading day periods that the S&P 500 has gone in the opposite direction of the S&P Asia 50 Index. Historically, the average number of trading days that the US has gone in the opposite direction of Asia over a 50-day period is 22. That means that the US trades in the same direction as the Asian markets on a daily basis about 56% of the time. As shown in the chart, this indicator does fluctuate from low levels of correlation to high levels of correlation, and we just ended a period where the two were trading in tandem with each other more often than not. Over the last 50 days, however, the two have gone in the opposite direction 22 times, which is right inline with the historical average.

My observations:

1. This only shows that there is still a meaningful correlation (56%) between the actions of Asian stock markets and the US markets.

2. This only validates our view that Asia has outperformed more than decoupled with the US.

3. Decoupling is a theme that has yet to be “proven”.

4. Globalization means more integration in many aspects of life-trade, finance, investment, labor, knowledge and even culture and etc...

In short, the underlying trend of globalization is more of convergence. Thus decoupling runs to the contrary.

While there remains to be many aspects that can construed as “local” (regulations, political framework, political trends, taxes, compliance costs, and etc...), financial markets are likely to show signs of greater degree of correlation than in the past where globalization had been less of a factor.

5. Decoupling is a misplaced focus. The crux of the matter is to determine the main drivers of the current and future economic growth of the world.

Fact is, there is more than just Asia or the US, there is the entire Emerging market spectrum and also Europe.

So it would be rather faulty to “tunnel” on to just two variables when life is dynamic, complex and multifaceted.

Inflation’s Sweetspot: Jitters Over Debt Crisis Subside

At the start of the year, financial markets, particularly in developed economies, had been jittery over the contagion effects of the debt crisis in the PIIGS area led by Greece.

Now, such concerns appears to have reversed, as highlighted by the table below from Bespoke Invest, which covers 5- year CDS swap prices and includes the ‘four problematic’ US states.

According to Bespoke,

European countries rank first through fifth in terms of decline since July 2nd. Belgium has seen default risk decline the most at 30.1%. Belgium is followed closely by Spain (-29.1%), Italy (-27.3%), and France (-26.2%). The four US states highlighted are Illinois, California, New York, and New Jersey. All four states declined roughly 20%, with California decline the most (-22.3%) and New Jersey declining the least (-18.6%).

In terms of default risk levels, Venezuela ranks highest, followed by Argentina, Greece, and Dubai. The four US states highlighted aren't too far from the top of the list and have higher default risk than countries like Spain and Italy. The US, Germany, Australia, the UK, and France currently have the lowest default risk.

Ah, behold the seductive ephemeral wonders of inflationism!

Global Price Earnings Growth (PEG) Ratios

For enthusiasts of financial ratio fundamentals here is a nice table depicting on the country price earning growth ratios (PEG), courtesy of Bespoke Invest.

The methodology, according to Bespoke Invest,

"The PEG ratio is used for individual stocks as a valuation measure that factors in growth rates. It is calculated by dividing the company's P/E ratio by its growth rate. Many investors would rather own a company with a high P/E ratio and an even higher growth rate than a company with a low P/E ratio and an even lower growth rate. A PEG ratio of one or less is typically viewed positively.

"A few years ago, we decided to apply the PEG ratio to various countries by dividing estimated GDP growth into the P/E ratio of the country's main stock market index. Many developed countries have low P/E ratios, but they also have low GDP growth, while developing countries may have higher market valuations as well as stronger GDP growth. Investors may find PEG ratios more useful than simple P/E ratios when determining asset allocations for various countries.

And Bespoke's outlook,

``Russia and China have the lowest country PEG ratios at 1.86 and 1.90, respectively. Russia has a very low P/E at 8 and decent estimated GDP growth at 4.3%. China, on the other hand, has a rather high P/E ratio at 19.24, but its GDP growth is also very high at 10.10%. The US is right in the middle of the pack with a PEG of 5.07. Our neighbors to the south rank just above the US with a PEG of 3.85, while our neighbors to the north rank just below the US at 5.67.

``The US does have the best PEG ratio in the G-7, so US investors looking for developed country exposure might be better offer staying right at home. European countries have exceptionally high PEG ratios because of their mediocre valuations and low growth rates. Australia and Spain both have negative PEGs -- Australia because it has a negative P/E and Spain because it has negative GDP growth."

Here is Asia's country financial metrics equivalent based on the table from ADB's Capital Market Monitor.

The table was updated last April, however with little changes in the marketplace (this view is based on the Philippine setting) the estimates should be relevant.

And here is the expected annual economic growth for Asia, again based on ADB's estimates.

Applied to the Philippines, since the estimated GDP number is 4.6% for 2011, then at 14.7 PE ratio as of April, thus PEG is at 3.2.

Since PEG is a relative measure, this makes the Philippines 'pricier' relative to her Asian peers but more 'affordable' relative to developed economies. Therefore, cheap or expensive depends on which country is used as basis of comparison. In behavioral finance, this is called the "contrast principle".

What The Distribution Of S&P 500 Sector Weightings Seem To Say

Bespoke has a nice depiction in the distribution of weightings among different sectors constituting the US S&P 500.

Bespoke writes,

``Technology is currently the biggest sector in the index at 18.9%, and it has been the biggest since it overtook the Financial sector early on in the financial crisis. There has been quite a bit of movement in sector weightings in recent years. At the bear market low in March 2009, the Financial sector made up just 8.9% of the index. It has charged back since then and has nearly doubled its weighting to 16.3%. Consumer Discretionary, Industrials, and Technology are the only other sectors that have increased their weightings during the current bull market. Health Care has really dropped off, going from 16.1% at the bear market low to its current level of 11.8%. Energy has also dropped quite a bit from 14.3% to 11%. There are now five sectors with weightings that are between 10.5% and 11.8%. Utilities, Materials, and Telecom continue to have very low weightings, and combined they still make up less than the 7th largest sector. The performance of any of these three sectors has a very minimal impact on the overall direction of the market." (bold emphasis added)

Some observations:

-The steady growth of the technology sector, and its apparent leadership today appears to reflect on the fast evolving US economy into the information age.

-The recent upsurge of the financial exhibits massive inflationism

-who says the US consumer is dead? Consumer discretionary outperformed the others, second only to financials based on the changes on March 2009 and the current

-the growth of in the industrials also suggest that the US economy is seeing some 'progress'

-at the current circumstance, there is a tight competition in 5 sectors: health care, consumer staples, energy, consumer discretionary and industrials, where I think energy has been underappreciated.

Update On Global Stock Market Performances

Bespoke has a nice update on the performances of global stock markets as of June 9th...

Bespoke Invest notes,

``While most of the world is struggling, there are 8 countries that are within 1.7% of 52-week highs. Sri Lanka, Chile, Bangladesh, and Venezuela are all basically at 52-week highs. Of the G-7 countries, Germany and Canada are closest to their 52-week highs at about -6%. The US ranks third out of seven at -12.74%, followed by Britain (-13.41%), France (-16.41%), Japan (-17.26%), and Italy (-23.63%). It's not surprising to see Greece the farthest from its 52-week high at -50.15%. Other key countries that are more than 20% away from their 52-week highs include Russia, China, and Spain.

``In terms of year to date performance (local currency), Bangladesh ranks first at +36.59%, followed by Estonia (32.86%) and Sri Lanka (31.87%). Of the G-7, Germany is doing the best with a decline of just -0.05%, followed by Canada at -1.74% and the US at -4.49%. Of the BRIC (Brazil, Russia, India, China) countries, India is holding up the best so far in 2010 with a decline of 4.62%. Brazil ranks second at -6.67%, followed by Russia at -7.54% and then China at -21.15%. Greece (-33.44%), Bermuda (-28.33%), and Spain (-26.55%) are down the most of any countries year to date."

I'd like to point out that the Philippines has been ranked 8th based on the change from a 52-week high. And that major ASEAN economies appear to defy the global selling pressures by posting year-to-date gains and seem within 'striking' distance from the 52-week highs.

I'd also like point out that Venezuela which suffers from stagflation is nearly at the 52-week high (who says stocks are about the economy?).

Meanwhile the top performers on a year to date basis have mainly been frontier markets whose subset are South Asia, Africa, and some CEE economies.

Of course one surprise is Denmark, the only major "developed" economy, who seem to have diverged from the fate suffered by her contemporaries. The Danish equity index is up 16.41% (y-t-d) and is just 6% away from the 52 week high. Denmark appears unruffled by the recent most Euro pressures.

Overall, although the general backdrop is one of "tidal" flows, there are apparent emerging incidences of "decoupling" especially visible among emerging markets.

Update on Global Stock Markets

Here is a rundown of the performances of select stock markets around the world.


The table, from Bespoke, is calculated in US dollar and local currency terms, but ranked according to returns based on the US dollar.

According Bespoke,

``European equity markets look much worse in terms of dollars given the weak performance of the Euro so far in 2010. Spain is down 21.06% in local currency year to date, but it's down 32.36% in dollar terms. It's been a tough, tough year already for Spain. Italy is down the second most in dollars of the countries highlighted at -28.22%. China, which pegs its currency to the dollar, is down 18.96% in yuans this year, which is the second worst when looking at local currency performance. Mexico and Malaysia are the only two countries that are up year to date in dollars. Sweden is the only country up in local currency. Finally, Germany is the fifth worst country year to date in dollars, yet it's the second best in local currency. Oh the Euro. Don't worry Germany, the US can certainly feel your pain."

The Philippine Phisix as of Friday's close was up 6.55% both in local currency and US dollar terms, that's because the Peso has almost been unchanged at 46.19 where at the end of 2009 it was at 46.2. This should make the Phisix one of the top performers.

While it is true major markets are down, this seems hardly a replica of 2008.

More Evidence On Liquidity Driven Markets

We have long asserted that markets have hardly been driven by 'fundamentals' but by either rising or ebbing tides prompted by inflation and inflation fueled psychology.

Today's market downside volatility appears to be showing the same manifestations in the US markets.

Let me quote Bespoke (bold highlights mine)

``One day in early April, 93% of stocks in the S&P 500 were trading above their 50-day moving averages while 7% were below their 50-days. Now the exact opposite is true -- 7% are above their 50-days, while 93% are below. And just like the reading rarely stays above the 90% level for long, it also rarely stays below the 10% level. As shown in the chart below, the indicator is currently at its lowest level since March 2009 when it hit 5%. During the depths of the collapse in late 2008, the reading got down to zero percent. At this point, investors have to decide whether or not they think things could get as bad as they did in late 2008."

So whether an upside or a downside, we seem to be seeing the same dynamics--where most of the movements of stock prices seem to be reflecting ebbs and flows of liquidity rather than individual performances based on micro dynamics.

To consider, US markets are deeper and more sophisticated as to supposedly exhibit more market pricing efficiencies, yet they appear to remain prone to changes in liquidity levels.

How much more with bourses of the lesser developed markets.

This reminds us of a quote from the legendary trader Mr. Jessie Livermore in Edwin Lefevre classic the Reminiscences of a Stock Operator

``Nowhere does history indulge in repetitions so often or so uniformly as in Wall Street. When you read contemporary accounts of booms or panics the one thing that strikes you most forcibly is how little either stock speculation or stock speculators today differ from yesterday. The game does not change and neither does human nature."

Yet, this seems to be another affirmation of our Machlup-Livermore paradigm

Global CDS Update: Greece Worries Seem Increasingly Insulated

Again we have a nice update from Bespoke Invest on the state of sovereign credits, as measured by the Credit Default Swaps (CDS), as worries over Greece has recently resurfaced.

In contrast to the last episode where markets reacted violently on concerns over Greece's credit standings, today's second round of the Greek drama has seen the markets seemingly discounting the issue or has insulated the problem.

According to Bespoke, ``New concerns over Greece have caused sovereign debt default risk for the country to spike to its highest level of the crisis. But while the last spike in January caused global equity markets to pull back, this time investors (especially in the US) don't seem too worried about it. To quote the phrase that former President George Bush struggled so much with, "Fool me once, shame on you. Fool me twice, shame on me." (emphasis added)

Here are some possible reasons: the markets realizes that a resolution of the Greek dilemma is at hand (and current spike is a temporal issue), contagion risks from Greece may have been exaggerated, the markets are increasingly jaded or hackneyed over the issue and or lastly, inflationism has eclipsed other issues or has transitioned to be the most dominant theme.

As shown above the Greece problem is largely isolated.

Only four countries have seen increases in the cost of insuring debt: aside from Greece, from a reference point of February 2010, only Chile (perhaps due to the recent earthquake), Vietnam and Egypt.

Nevertheless, relative comparisons are dependent on "reference point" used, where a biased conclusion can be arrived at.

For me, the best part of the table above is to use the start of the 2008 or the last column as reference, as 2008 was the culmination of the bear markets via a collapse in October.

From that point we see emerging markets as Kazakhstan, Turkey, Brazil, Colombia, Peru, Indonesia and the Philippines as the 'best performers' considering that the respective CDS prices have only had marginal increases compared to the rest which has seen CDS rates more than doubled.

US Stock Markets: Rising Tide Lifts Most Boats And Is Overbought

This looks to be another proof of the effects of inflationism.

The broad market has essentially been rising, which gives credence to the "rising tide lifts 'all' (most) boats" phenomenon.
Bespoke Invest has a wonderful series of charts expressing these developments.

The first one deals with the general market where 90% of component issues have risen above their 50-day moving averages, shown above. And Bespoke also has a breakdown on the % on a per industry basis here.

Nevertheless, current string of gains has made the entire market, as represented by all 10 sectors, as "overbought".

This implies that a natural correction should be expected anytime soon.

But as a caveat, such retracement isn't likely to herald the return of the bear market as perma bears have been craving for.

Yet, it's not that I am bullish with US stocks or her economy, instead I see this a formative phase of a new bubble cycle panning out.