4 Megatrends Hidden by Headlines

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 |  Includes: GLD, IWM, MDY, SPY, XLI
by: Igor Greenwald

I turned off my TV yesterday, boycotting news of Middle East revolutions and Japanese disasters. Instead, I listened to the market for a change, its message written large in the excellent heat maps available at Finviz.com. The market always has a lot to say, though recently it’s been drowned out by the global turmoil.

But now that the first quarter is all but done ― now that stocks have corrected but not (so far) caved ― it's worth discerning the big picture painted by the recent price action. Here's what I found:

1. Global Economic Growth Is on Track

A reasonable proxy for global growth, the Industrial Select SPDR ETF (NYSEARCA:XLI) has not only noticeably outperformed the market since the start of the year — gaining 5.9%, versus 3.6% for the SPDR S&P 500 (NYSEARCA:SPY) — it’s actually slipped a bit less over the last month, when economic worries were most prevalent.

Another tell: Gold (NYSEARCA:GLD), which is largely used as jewelry or as a store of value, is flat on the year, badly trailing commodities with industrial uses, be they silver (SLV, up 17% this year), gasoline (UGA, +16%), food (DBA, +4.8%), or a generalized commodity basket (GSG, +7.2%).

For all the talk of large-cap outperformance, small caps ((NYSEARCA:IWM)) and especially midcaps ((NYSEARCA:MDY)) have handily beaten the large-cap proxy, SPY. What’s more, among the midcaps and the small caps, growth has fared better than value. These are not tell-tale signs of a looming economic slowdown.

2. The Energy Boom Is Still ... Booming

The Energy Select Sector SPDR (NYSEARCA:XLE) is up 14% year-to-date, and if you want to blame it on high (possibly temporarily high) oil prices, I would point out that natural-gas producers (NYSEARCA:FCG) have gained no less, despite persistently depressed natural-gas prices.

Notwithstanding the threat of diminished European subsidies, solar energy stocks (NYSEARCA:TAN) have risen 13% in 2011. Post-Fukushima, nuclear stocks (NYSEARCA:NLR) are down more than 6% on the year, though the post-meltdown scare already seems to be giving way to some bargain-hunting.

Among leveraged exchange-traded funds, the Direxion Daily Energy Bull 3X Shares (NYSEARCA:ERX) shines with a 41% gain year-to-date, and looks attractive on the next pullback that doesn’t invalidate the basic premise.

Following petrodollars abroad has also generated good results: Canadian (NYSEARCA:EWC) and Russian (NYSEARCA:RSX) stocks are up 7% year-to-date.

3. The European Debt Crisis Is Easing

Compare the 15% year-to-date gain by Spanish (NYSEARCA:EWP) stocks, and Italy’s (NYSEARCA:EWI) 13% renaissance, with 14% drops for India (NYSEARCA:INP) and Chile (NYSEARCA:ECH). French and Dutch equities are sitting 7% to 8% higher on the year.

Europe is easily the best-performing continent, and some of its best-performing US-traded proxies testify to its broad strengths:

  • Shire (SHPGY), a U.K. drug maker whose healthy research pipeline has been rewarded with a 24% rally this year.
  • Norway’s Statoil (NYSE:STO), up 17%.
  • And then there’s Italian leather sofa maker Natuzzi (NYSE:NTZ), which has jumped 24% this year. In the September-ending quarter, sales were up 36% in Europe and 41% in the Americas.
  • SAP (NYSE:SAP), the German software maker appealing a multibillion-dollar legal award to rival Oracle (NYSE:ORCL), is up more than 15% in 2011, while the plaintiffs’ stock has barely budged.

4. Stagflation Threatens in the Longer Term

That’s the implication of AT&T’s (NYSE:T) $39 billion overpay for rival T-Mobile, which looks set to turn the U.S. wireless-subscription market into a comfortable duopoly, with third-place Sprint (NYSE:S) surviving on crumbs from the table Ma Bell will share with Verizon (NYSE:VZ).

AT&T paid 29 times earnings for its prize, yet one analyst intimated it could recoup the entire outlay from synergies (read: pink slips, other cost cuts, and price hikes.)

So while the stock of T-Mobile's parent Deutsche Telekom (OTCQX:DTEGY) soared Monday in recognition of its “enormous” coup, AT&T’s edged up as well. It’s buying all those future synergies with help from a $20 billion bridge loan from JP Morgan Chase (NYSE:JPM).

In an unrelated development, that bank has just cut rewards for its debit-card users. JP Morgan, of course, got bigger and more powerful during the financial crisis by gobbling up the remains of Bear Stearns and Washington Mutual.

AT&T is using the same playbook, getting bigger in a way that should significantly increase its pricing power vis-à-vis consumers.

Other publicly traded companies have also grabbed market share in recent years, in part by wielding their cheap cost of capital as a weapon. All of this probably means S&P 500 margins won’t absorb as big a hit as some people expect, as the big boys merrily pass on their higher costs.

But in the longer run, this pricing power could make the U.S. economy less competitive.

Don’t buy it? Check your cellular bill.

Full disclosure: I own shares of Cameco (NYSE:CCJ), Freeport-McMoRan (NYSE:FCX), Market Vectors Junior Gold Miners ETF (NYSEARCA:GDXJ) and iPath Dow Jones UBS Grains Total Return Sub-Index ETN (NYSEARCA:JJG).