A Collective Sigh of Relief
4/02/08
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Editor's Corner 
A Collective Sigh of Relief
Ron Rowland
You could almost hear the sigh of relief yesterday as equity markets put the dismal returns of the first quarter behind them. As if deciding to start the second quarter on fresh footing, the Dow surged 391 points and the Nasdaq jumped by more than 83 points.
After the collapse of Bear Stearns (BSC) a couple of weeks ago, many investors were concerned that Lehman Brothers (LEH) might be the next domino to fall. Some of the credit for yesterday's impressive rally can be attributed to Lehman's plan to improve its balance sheet with a $4 billion convertible preferred stock sale. Additionally, Ben Bernanke said today that the Fed does not expect a repeat of the Bear Stearns problem.
The biggest obstacle facing the stock market today is investor perception. US economic reports will likely get much worse before they start getting better. It is hard for investors to commit capital when each new economic report indicates further weakening. However, even though there are often short-term market reactions to economic reports, the two are typically not highly correlated. This is because a double-lag effect is at work.
First, the reports themselves are reporting on what has already happened, whether it was a couple of weeks or more than a month ago. That delay introduces a lag. The official declaration of a recession typically occurs more than six months after the actual onset. Secondly, the stock market is a leading indicator. It starts to decline before the economy slows down, and it starts to advance well before the economy improves. The combination of these two lags often results in a stock market that starts moving up just when the public becomes "convinced" that the problems are serious.
Economic reports are likely to get worse. Housing foreclosures are likely to increase. Many more employees are likely to be let go. These are the perceptions that currently haunt investors. However, these are often the very same perceptions that create bottoms in the stock market. It is hard to see how the economy will crawl out of this mess, but eventually it will. The groundwork is now being laid.
Sectors
Two more sectors flipped to the green side this week, bringing the overall count of sectors with positive intermediate-term trends to four. Although this is certainly encouraging, it is not enough evidence to declare a new bull market. The six sectors still registering negative trends are also larger in magnitude, which tends to drag the average down. Consumer Staples remains atop our list and is joined by Energy, Industrials, and Materials. Telecommunications and Health Care continue to occupy the bottom two spots, even though the Financial sector gets the majority of the negative press coverage.
Styles
Very little change occurred in our relative strength style rankings this week, although most categories had an improvement in absolute strength. For now, none of the styles are sporting year-to-date gains nor are they in an intermediate-term uptrend. Both conditions could quickly change if the early April rally continues.
International
Mexico surged this week, helping Latin America stay atop our global rankings. The European Union jumped up to the #2 spot as investors gained confidence that the large European banks would put the sub-prime mess behind them. Both European and Japanese equities made impressive strides despite currency headwinds created by strength in the US dollar. China and Southeast Asian markets are in rapid recovery mode, although they are still among the weakest. If they can keep up the pace, their rankings should start to improve soon.
Note: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.
"You try to be greedy when others are fearful - and fearful when others are greedy."
Warren Buffett Chairman, Berkshire Hathaway
Pick-of-the-Week
Industrials Climbing, Global Growth Rising: IR
Brandon Clay
This week, Ben Bernanke finally admitted to recessionary concerns. It may seem counter-intuitive, but investors should start planning for the next expansionary cycle. As Ron pointed out in his column, the government reports on events in the past, while markets move well ahead of facts. It's time to invest accordingly.
Industrials have risen in our rankings in recent weeks. As you probably know, we like to invest in the strongest sectors. We think Industrials are on their way to the top. Taking their cue from global demand, SPDR's Industrials ETF (XLI) has banked a healthy +5.8% in the past 52-weeks. We anticipate even more activity in the coming weeks.
Surveying the horizon of industrial companies, there are a several worthy of note. However, the most promising is Bermuda-based, Ingersoll-Rand (IR). A global leader of broad-based equipment offerings, Ingersoll-Rand is positioned to capitalize on the next phase of development like no other company in its sector. This is a stock you want for the next 12 months.
Here's why.
Currently taking in $14.4 billion a year with a $12 billion market capitalization, Ingersoll-Rand is a gem of a company. In recent years, they have streamlined their historically heavy machinery product lines into goods more profitable in a global economy. Think golf carts for Dubai's oil sheiks -- industrial refrigerators for China's growing urban population -- locks for new commercial property in burgeoning Latin America. IR has positioned itself by offering hard goods to areas that need them most.
And they're eyeing even more opportunities abroad. Ingersoll Rand recently opened up a 100,000 sq. ft. engineering facility on the outskirts of Bangalore, India. This move demonstrates their dedication to cost-effective research and development. IR's recent acquisition of Trane's HVAC business underscored their commitment to expand global services. They knows that China and India have millions of workers who would rather work in air-conditioned factories than in sweat shops. These cash-rich countries can finally afford such amenities. Ingersoll Rand will be there to fill the orders.
Ingersoll-Rand is a 100+ year old company. It has weathered tumultuous markets before. It will weather them again. In recent weeks, IR reiterated expectations to exceed Wall Street estimates for 2008. This bodes well for the current market environment.
The daily chart is suggesting a healthy bounce out of congestion for IR stock. Today's pull-back should give you a good entry on future potential for this global industrial leader. IR is well-situated to gain as the global markets rebound.
All the best.
Note:
Keep in mind that the Pick of the Week is usually intended for aggressive investors. Don't risk money you can't afford to lose. You will need to decide when (and if) it is time to sell.
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