03/21/12   Equity Managers: Own Apple or Explain Why Not

Editor’s Corner

Investor Heat Map: 3/21/12Equity Managers: Own Apple or Explain Why Not

Investors looking for dividends may want to consider a stock we recently discovered.  It is called “Apple”, and the ticker symbol is AAPL.  Based on recent results, it also seems to have good growth potential.

We say this tongue-in-cheek, of course.  Apple is actually well on its way to being the only stock that matters.  As we noted last week, the numbers are astounding.  AAPL shares gained 541% in the last five years, 77% in the last twelve months, and 48% so far in 2012.  The company is the largest publicly-traded equity on the planet by a considerable margin over second-place ExxonMobil (XOM).  Market capitalization is $562 billion vs $405 billion for XOM.  To all that, we can now add a $2.65 quarterly dividend, according to Monday morning’s announcement.

With Apple now creating noticeable distortions in various benchmarks, we are reminded of a similar situation in Cisco (CSCO) more than a decade ago.  We do not doubt, however, that Apple shares could move considerably higher still.  Every portfolio manager on the globe who does not own this stock is under intense pressure to buy, and the lack of a dividend is no longer an excuse. 

Meanwhile the bond market also has some interesting action.  The ten-year Treasury yield climbed all the way up to 2.4% Tuesday before backing off a bit today.  Technically, there is plenty of room for the move to continue.  Yields would have to climb to 3.2% to break the five-year downtrend.  That scenario would leave bondholders thinking the world had ended, of course.  We aren’t predicting any such move; we mention it to illustrate the danger of complacency for fixed-income investors.

Economic data remains mixed, but analysts seem to be giving it a somewhat more negative spin.  As with AAPL and Treasury bonds, recent sharp moves in stocks open the door for corrections and/or consolidation near current levels.  Winter is officially over and was very kind to equities.  Now we will see what Spring brings to the markets.


Financial Services moved up from third place to unseat Technology for sector leadership.  Many indicators now show Financials in an “overbought” stage.  Such conditions can endure or even intensify but will eventually be resolved.  As for Tech, momentum actually increased last week even as the sector underperformed when compared to Financials.  Consumer Discretionary again rounded out the top three sectors and remains in a strong, steady uptrend.  Industrials recovered and is now trying to move above year-old resistance levels.  Health Care, Consumer Staples, and Telecom comprise the middle of the pack.  Energy slipped down the rankings again, even with crude oil holding above $100 and rising gasoline prices.  Materials stayed in its sideways pattern as concerns remained over a China slowdown.  Utilities – which was the star performer in 2011 – is proving to be the laggard of 2012, having gone nowhere in the last five months.


Momentum improved in all eleven Style categories the past week.  The rankings also moved closer to a size-based alignment, a move that has been underway for more than a month.  Dispersion is still very low, however, with all categories tightly bunched with momentum readings between 31 and 41.  Mega Caps rule the roost, followed by Large Cap Growth.  Mid Cap Growth slipped from third to sixth place, falling behind Large Cap Blend and Large Cap Value.  Capitalization seems to be taking on more importance than the Growth/Value designation.  Micro Caps are an anomaly.  If size is the driving factor, we would expect the smallest equities to be near the bottom, or at least headed in that direction.  Instead, the category improved from #8 to #4.


The U.S. kept its top ranking for another week but faces competition from a recovering Europe.  The troubled Continent moved up to second from fourth.  Is the uptrend sustainable?  Opinions vary.  Recent liquidity events helped European markets step back from the abyss, but the fundamental backdrop is little changed.  The World Equity benchmark stayed in third place, followed by EAFE, as the largest equity markets continued showing good relative strength.  Japan held on to the #5 spot.  Some analysts now think Japan represents good value, but no one seems to be rushing in just yet.  Latin America slipped behind the U.K. while Pacific ex-Japan and Canada each moved up a step.  Emerging Markets took a big drop, thanks mostly to China – which is now the only one of our 32 sector, style, and global categories with negative momentum.  Many China funds fell 6% or more in the last week, and some entered long-term downtrend status.



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.

“In analyzing U.S. corporate earnings and stock-market trends, apples-to-apples comparisons may now require tossing out the Apple.”

Wall Street Journal article by Jonathan Cheng and Brendan Intindola 2/15/12


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