High Correlations: We’ve Been Here Before

April 30, 2012

There has been a lot of talk in recent years about the rising correlation among US stocks. High correlations potentially make it harder for stock-pickers to really stand out and a commonly expressed fear is that this condition is the “new normal.” With that backdrop, consider the chart below that shows the correlations of large-cap US stocks going back to the late 1920s.

Source: iShares

Yes, correlations are higher today than they have been for decades, but the market has experienced periods of high correlations before-notably in the aftermath of the Great Depression. I think the explanation is pretty straightforward-when investor trading is primarily driven by “macro” concerns, the correlations tends to be high and as those fears subside, correlations tend to drop.

In a glass-is-half-full mindset, I find it encouraging that our Technical Leaders Index (PDP) has outperformed the S&P 500 over the last 5+ years notwithstanding the rising correlations (from 3/1/2007 - 4/27/2012, PDP is +17.08% while the S&P 500 is +0.01%). It may be possible for that margin of outperformance to expand once the correlations again begin to subside.

See www.powershares.com for more information about PDP.

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Weekly RS Recap

April 30, 2012

The table below shows the performance of a universe of mid and large cap U.S. equities, broken down by relative strength decile and quartile and then compared to the universe return. Those at the top of the ranks are those stocks which have the best intermediate-term relative strength. Relative strength strategies buy securities that have strong intermediate-term relative strength and hold them as long as they remain strong.

Last week’s performance (4/23/12 – 4/27/12) is as follows:

High relative strength stocks posted strong gains for the week and finished ahead of the universe.

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Job Growth Surges

April 30, 2012

According to the Wall Street Journal, job growth at US multinationals has been surging for the last two years…overseas.

Thirty-five big U.S.-based multinational companies added jobs much faster than other U.S. employers in the past two years, but nearly three-fourths of those jobs were overseas, according to a Wall Street Journal analysis.

Those companies, which include Wal-Mart Stores Inc., WMT +0.12% International Paper Co., Honeywell International Inc. and United Parcel Service Inc., boosted their employment at home by 3.1%, or 113,000 jobs, between 2009 and 2011, the same rate of increase as the nation’s other employers. But they also added more than 333,000 jobs in their far-flung—and faster-growing— foreign operations.

Economists who study global labor patterns say companies are creating jobs outside the U.S. mostly to pursue sales there, and not to cut costs by shifting work previously performed in the U.S., as has sometimes been the case.

The reason is simple—there is more growth overseas than in the US. Companies naturally desire to be close to their customers, so they put operations nearby to serve them. If you decide to distribute Pepsi in Mongolia, that has to be done by Mongolians. It’s not a matter of evil corporations exporting jobs overseas—there’s just no way for that job to be done in the US.

When I read articles like this, it makes the argument that some type of global macro strategy needs to be part of a core portfolio. We no longer have the investment luxury of staying completely within our borders, figuring that the best returns available can be captured here. The world is changing and global is the new core.

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