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WSJ - Why Dividend Stocks Aren't the New Bonds/plus a few more weekend reads

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  • RON ROWLAND COMMENTARY

    Editor's CornerInvestor Heat Map - 2/1/12
    Of Comfort, Confidence, and Sentiment
    Ron Rowland

    Is the economy shrinking? No, at least according to last week’s fourth quarter GDP report. It may be there soon, though, since the present anemic growth has historically been followed by recession more often than not.

    The question might better be posed to consumers, of course, since it is their financial decisions that ultimately matter. In fact, the question is posed to consumers quite frequently. Their answers are tracked in benchmarks like the Bloomberg Consumer Comfort Index, the Reuters/University of Michigan Consumer Sentiment Index, and the Conference Board’s Consumer Confidence Index. Their answers vary; in the last week alone, headlines revealed rising “sentiment” but stumbling “confidence” even as “comfort” edged up.

    Sentiment, confidence, and comfort look positive for the S&P 500. The index turned back last week as it approached the 1335 level but is now making another try. Earnings news is proving neutral or positive, enticing buyers back into equities.

    The Fed’s decision to extend near-zero interest rates into 2014 may have something to do with the stock market’s strength. Gold is still bouncing higher after the late-2011 lows. Ten-year bond yields remain at safe-haven levels, closing below 1.8% Tuesday.

    Finally, a note on Europe: authorities in Greece claim to be very close to a new deal with private creditors that will adjust interest rates on government debt based on future GDP growth. Now concern is turning to Portugal where yields are beginning to climb to Greece-like levels. Austerity in Spain pushed GDP into negative territory for the last quarter of 2011. Unemployment is still high across the Eurozone. We don’t have survey data, but the population in Europe sounds neither sentimental, confident, nor comfortable.

    Sectors
    As we thought might happen, Financials lost the sector lead after a brief visit. The group jumped today, however, and still has bullish momentum. Materials recaptured first place, not only among sectors but across all 32 equity categories. Commodity-related equities are moving higher despite difficulty encountered by the industrial metals in sustaining their recent uptrend. Industrials stayed in second place. Technology moved up a notch to #4 amid much chatter about the impending Facebook IPO. We will have to wait a few months to see whether the social media giant has a stock more like Google (GOOG) or Groupon (GRPN). Consumer Discretionary slipped a notch, essentially trading places with Technology. Consumer Discretionary and Health Care kept up their good performance. Utilities improved a bit. Energy, Consumer Staples, and Telecom all lost ground, with Telecom remaining in last place. In fact, the bottom five categories are still in the same relative positions as last week.

    Styles

    The Style rankings are starting to show some dispersion again. This is what we often see when a major rotation gets underway. The top and bottom groups have to crossover each other in that process, creating a period of little differentiation that may be ending. The inverse-cap pattern is still in effect; Micro Cap is on top with the three Small Cap categories just below. Large Cap Value - which was anomalously strong last week - fell to last place. Meanwhile Large Cap Growth moved out of last place to the middle of the pack, essentially switching places with its Value brother. Growth is now favored over Value at all capitalization levels.

    Global

    China lost some momentum but held on to its top global market ranking. Emerging Markets and Latin America swapped places as Latin America’s advance encountered some resistance. The U.S. held steady at #4. Last week’s big six-way tie broke up somewhat. Pacific ex-Japan separated itself to the upside thanks to strength in both Materials and the Australian Dollar. World Equity, Canada, Europe, EAFE, and the U.K. remain tightly bunched. Japan extended its stay in the basement for another week. An upward move in the Yen brought no intervention this time, which is just as well since past interventions had little effect. Currency strength helped offset some of the weakness in Japanese equities but not enough to move Japan off the bottom.
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