The Federal Reserve’s low interest-rate policy has been called a war on savers. That seems pretty accurate to me. Currently you can earn a whopping 0.248% (national average) on a three-month certificate of deposit (with a $10,000 minimum). Want to make a decent return — say, something as magnificent as 1%? Forget a 12-month CD. The yield is just 0.556%. Willing to go out two years? The national average for a two-year CD is just 0.875%. To add insult to injury, the headline inflation rate for 2011 was 3%; the core rate (which excludes increases in the prices of food and fuel) was up 2% for the year. No matter which inflation rate you use, all of those CDs lost value in 2011.

No wonder, then, that dividend stocks paying more than 3% (so an investor at least stays even with inflation) are among the hottest stocks on the market. In a year when the Standard & Poor’s 500 Index managed a return of just over 2%, a not-especially-stellar drug company like Merck returned 8.9% — because it paid a dividend of better than 4%. Verizon Communications, in not a particularly good year for phone companies, managed a 17.6% total return — because it paid more than 5%. Pipeline master limited partnerships such as Oneok Partners, with a dividend yield of 6%, returned 51% for the year. Another master limited partnership, Magellan Midstream Partners, returned 27%.

I don’t see any reason that dividend stocks with yields above 3% won’t turn in another stellar performance in 2012. After all, the Federal Reserve just guaranteed that savers won’t be able to make 2% even if they buy seven-year Treasury notes. And, looking at the number of financial advisers and gurus that I see praising dividend stocks, I think 2012 could be even better for anything with a pulse and a yield.

Dorsey Wright currently owns Verizon and Oneok Partners.  A list of all holdings for the previous 12 months is available upon request.  Past performance is no guarantee of future returns.

Over the past two and a half years, relative strength leaders have had similar performance to the relative strength laggards.  Using history as a guide, we expect this spread to eventually resume its upward trend.

In the past, when I’ve tried to schedule our window cleaners they have always been able to come within two days. Despite the still-slow economy, the first available appointment this time is not for three weeks.

“Why?” I ask. The owner says that during the worst of the recession his firm had enough clients to survive, but barely; smaller, less efficient companies died off. Now that demand for cleaning has increased, his own customers are coming back; and the customers of the now-defunct companies are hiring him too, so he’s swamped with business. Recessions kill off inefficient firms; but at least in this case, those that survive come out stronger than before.

Relative strength is a good tool for sorting out the winners from the losers.  Companies that have been hit hard from the lingering recession often show weak relative strength, while companies that have managed to power through tough times and grow despite it are often leaders.

Last week’s performance (1/23/12 – 1/27/12) is as follows:

RS laggards had another strong week last week.

Source: Calculated Risk  (click on chart to expand)

Maybe the world isn’t ending after all.  One never knows exactly how investors will respond to economic data, but movement from low levels to consumer sentiment to high levels of consumer sentiment is usually associated with decent equity markets.  The best entries tend to occur when sentiment is very poor—i.e., investors are perhaps overly pessimistic.

Numerous academic studies have confirmed that, when measured in periods of approximately three to 12 months, past investment winners tend to keep on outperforming while past losers tend to keep underperforming.

Momentum is not simply a US phenomenon. A recent study² covering equities in 23 countries from November 1989 to September 2010 found evidence of strong momentum returns in North America, Europe and Asia Pacific; only Japan was an exception. Another study tracking the largest 100 stocks in the British market from 1900 to 2009 found that a portfolio comprised of the 20 best performers over the prior 12 months outperformed the worst performers by 10.3% annually³.  The same authors found momentum in 18 out of 19 markets, dating back to 1975 in larger European markets and 1926 in the US.

Momentum is not confined to portfolios of individual stocks – it exists in a variety of asset classes. A recent study⁴ has found that momentum exists in government bonds, commodities and currencies as well as country equity indexes. Momentum has also been found in corporate bonds⁵ as well as the financial futures market⁶.

The article is well-footnoted.  I recommend you read the original, which I linked to above.  The article does a good job discussing both the pros and cons of relative strength.  For example, the author points out that:

…there are prolonged periods where stocks with positive momentum underperform the market.  Despite an overall annualized premium of 3.9%, there have 22 periods where stocks with positive momentum have underperformed the market by greater than 5%, with durations as long as several years.

Although investors have a marked tendency to abandon strategies when they underperform for a period of time, that might not be a good idea with relative strength.  Despite periods of underperformance, long-term results have been remarkable:

The $1.00 investment in momentum stocks grew to $67,309, nearly 30-times larger than the $2,321 earned in the S&P 500. [August 1927 to July 2011]  For long-term investors, this outperformance has been remarkably enduring. In 99.6% of the 10-year rolling periods since July 1937, momentum stocks have outperformed the S&P 500. [my emphasis]

Investors have a lot of choices when it comes to selecting an investment strategy, but not many have been as well validated over as long a period of time in multiple markets as relative strength.

All of our social problems arise out of doing the wrong thing righter. The more efficient you are at doing the wrong thing, the wronger you become. It is much better to do the right thing wronger than the wrong thing righter! If you do the right thing wrong and correct it, you get better!

Since the origination of Modern Portfolio Theory in the 1950s, academics and practitioners have been polishing it up and implementing in better and better ways.  It may just have been a case of getting more efficient at doing the wrong thing—and the wronger it got.  After 2008, even many of its supporters began to acknowledge that there were problems with its implementation.

This recognition has fueled a rush to the new magic potion, tactical asset allocation.  If tactical asset allocation is indeed the “right” thing, it should work out better than doing something wrong.  Yet there are significant challenges in the design and execution of a systematic tactical asset allocation process as well.  I think going forward, it’s going to be important to distinguish between marketers who are trying to exploit the latest fad and practitioners who have a well-thought-out and well-executed process for tactical asset allocation.

—-this article was originally published 11/13/2009.  It’s hard to do the right thing right, but don’t settle for doing the wrong thing righter!

Source: Ed Yardeni   (click on image to expand)

Ok, so the developed world isn’t really boosting oil demand.  There could be a lot of reasons for that besides a lack of economic growth: conservation, increased efficiency, substitution of other energy sources, etc.  But emerging markets—wow!  The financial crisis was barely a blip in oil demand.

Money will go wherever it is treated best–and it tends to seek out growth.  Markets are global and your portfolio should be too.