Mosaic Global Perspectives

MosaicGlobalPerspectives FundamentalandTechnicalAnalysis,butMostlyJudgment

WillS&P500ProfitMarginsGetSqueezedin2011? Figure1

S&P500OperatingMargin

1 2%

95

1 0%

80

8%

65

6%

50

4%

35

2% 0% -2 %

WeekEnding2/11/2011

20 Source:Standard&Poor’sandInstituteforSupplyManagement

5

2 00 0 0 0 2 00 0 0 1 2 00 0 0 2 2 00 0 0 3 2 00 0 0 4 2 00 0 0 5 2 0 06 0 6 2 00 0 0 7 2 00 0 0 8 2 00 0 0 9 2 01 0 1 0 2 01 01 1

Story of the Week   Economic Update   Glob Global alL Lea eadi ding ngI Ind ndic icat ator ors s  Asse Asset tAl Allo loca cati tion onS Str trat ateg egy y  Equities    Fixed Income   Commodities   Currencies  

1 2 3 4 5 10 11 12

S & P 5 5 0 0  O p e r a t in in g  M a r g i n  (L (L H S ) ISMMfg.PricesPaid,Rolling 3-MonthAvg.(RHS)

Figure1,thedebateisgettinglouderaboutwhetherprofitmarginscan expandfrom8.5percentin2010totheconsensusestimateof9.0percent in2011.Thewake-upcallseemedtogainmomentumafterlastweek’s reportthattheJanuaryISMManufacturingPrices-Paidcomponentsurged Dow DowJo Jone nes sIn Indu dust stri rial alA Avg vg.. to81.5,thehighestlevelsinceJuly2008.Thisweek’sdisappointing S&P 500 earningsreportfromKraftfollowedearlierreportsfromProctorandGamble Russell 2000 aswellasColgate-PalmolivethatrisinginputcostswouldcontinuetoweighNasdaq onprofits.For2011,thegapbetweenexpectedearningsgrowthof15 percentandrevenuegrowthof7percentimpliesasharpriseinoperating S&P 500 (TR) margins.ThosewhoviewthecurrentforwardP/Eof13.8Xasreasonable Russell 2000 (PR) shouldbecognizantofthisbuilt-inmarginforecast.Thismatters,sincea50EAFE (PR) USD basispointchangeinmarginsisthoughttoproducea$4changeinEPS. Euro Stoxx 50 (PR) EUR Let’sreviewtheprimaryfactorsthatinfluencemargins. FTSE 100 (PR) GBP Nikkei 225 (PR) JPY Emer Emergi ging ngM Mar arke kets ts( (PR PR) )US USD D Hang Seng (PR) HKD

Laborcostsaremuchmoresignificanttothebottomlineformost companiesthanchangesincommodityprices.Lowerpayrollsandother cost-cuttingmeasureshavebeenapowerfulleverforboostingprofit 10-Year Treasury margins.Caseinpoint,thefourthquarterECIshowedthatwagesand salariesrosebyaveryanemic1.7percentonayear-on-yearbasis,while 2-Year Treasury the2.6percentriseinproductivityledtoa0.6percentdropinunitlabor 10-Y 10-Yr. r.L Les ess s22-Yr Yr. .Sp Spre read ad costs.Webelievethatcompanieswillincrementallystarttoincrease Mood Moodyy'sA 'sAaa aaC Cor orpo porrate* ate* payrollsandwagegrowthastheeconomycontinuestogrow.Thiswould Mood Moodyy'sB 'sBaa aaC Cor orpo porrate* ate* obviouslyservetooffsetcontinuedgainsinproductivityandlimitmargin expansion.Thatsaid,it’snotabadsignforacompanytoaddemployeesinOil (WTI) Mar 11 ordertomeetasustainableincreaseindemandfortheirproducts. Gold (Comex) Feb 11 Themarketispunishingthosecompaniesthataremostdependentonraw materialsinordertoproducetheirgoods.Theconsumerstaplessectoris thoughttobethemostvulnerabletomargincontraction,andcomprises10 percentoftheS&P500.Theconsumercyclicalsectorislikelytoface headwindsaswell,andmakesup11percentoftheindex.However,the 16percentweightingofthefinancialsectorisexpectedtobethedominant driverofthemarginexpansionstoryin2011,asbanksreducetheir  Please see , Page 6

EUR/USD AUD/USD USD/JPY

12,2 12,273 73 1,329 822 2,809

11,8 11,824 24 1,276 775 2,687

11,5 11,578 78 1,258 784 2,653

1.5% 2.7% 0.0% 0.7% 1.1% 0.6% -3.4 -3.4% % -4.5%

2.9% 1.8% 2.1% 3.6% 1.0% 1.0% -5.9 -5.9% % -6.0%

5. 5 .9% 4.9% 4.0% 8.3% 2.8% 3.7% -5.2 -5.2% % -0.9%

3.63% 0.83% 280 280bp bpss 5.31% .31% 6.25 6.25% %

3.64% 0. 0 .74% 290 290bp bpss 5.21 5.21% % 6.19 6.19% %

3.29% 0. 0 .59% 270 270bp bpss 4.96 4.96% % 6.05 6.05% %

85.58 1,360

89.03 1,348

91.38 1,421

1.36 1.00 83.43

1.36 1.01 81.98

1.34 1.02 81.09

*Closinglevelsasof2/10/11.Source:FederalReserve

M o s a i c  M a r k e t  R e s e a r c h ,  L L C K e v i n  A .  L e n o x ,  C F A W e b s i t e : M o s a i c m a r k e t r e s e a r c h . c o m [email protected] m a i l : K l e n o x @ M o s a                                 Fundamental i c m a r k e t r e s e a r c h . c o m and technic

EconomicUpdate Figure2 Ÿ

Ÿ

Ÿ

U.S.WeeklyUnemploymentClaims

4-WeekMovingAverage,SA Figure2, nitialunemploymentclaimsdeclinedtoa surprising 383K last week, the lowest in 2-½ years. The four- 700,000 weekmovingaverage weekmovingaveragedecreased decreasedby16,000to415.5K by16,000to415.5K,butisstill ,butisstill 600,000 slightly higher than a month ago. Figure 5, employment is a 500,000 laggingindicator,butcompaniesarewellpositionedtoaddjobs.  Wednesday’s Wednesday’s 10-year 400,000 auctionwasmet auctionwasmet withconsiderable withconsiderabledemand.Thebid/cover demand.Thebid/covercame came 300,000 inat3.23,andP/D’sonlytook28percentoftheofferingversus 39 percen percent t in Januar January. y. Thursd Thursday’s ay’s 30-yea 30-year r auction auction had a fairly fairly 200,000 Source:Dept.OfLabor strong strong bid/co bid/cover ver of2.51, but the 4.750perce 4.750percentcoupo ntcoupon n wasthe 100,000 highest in over three years. Figure 3, it’s positive to see this 2000 2000 2001 2001 2002 2002 2003 2003 2004 2004 2005 2005 2006 2006 2007 2007 2008 2009 2010 2011 2011 week’s higher higher coupon for the 30-year Treasury along with a flattening 10s30s curve. This points to a strengthening U.S. economywithoutincreasinglonger-datedinflationexpectations. U.S.TreasuryYieldSpread Figure4,thebroadM2 Figure3 30-YearLess 30-YearLess 10-Year Yield money supply for January showed growth at a non-worrisome 1.75 seasonallyadjustedannualrateof4.3percentduringthepast12 months. The monetary base has increased in December and 1.50 JanuaryduetotheQE2bondpurchases.Moreimportantly,the slightly more than $1 trillion in excess reserves is still not 1.25 circulating.However,inflationarypressurescouldbuildquicklyif  1.00 banksdecidedtoaggressivelyexpandtheirloanportfolios. 0.75 Factory Factory gateprices increased increased 1.0 percent from December, pushing the annual rate to 4.8 0.50 percent,accordingtotheOfficeofNationalStatisticsinLondon. 0.25 Source:S t.LouisF ederalRe serve Prices were expected to have increased by 0.6 percent in 0.00 December, and may lead to a faster-than-expected response 2007 2008 2009 2010 2011 fromtheBoE.Inputpricesincreasedby1.7percentinJanuary, andincreasedtheannualrateto13.4percent,thehighestsince October October 2008. Stagflatio Stagflation n and margin margin compression compression will be very Figure4 M2MoneySupplyandExcessReserves,Monthly ubiquitoussubjectsintheU.K.thisyear. 1,400 9,000

PPIy/y,6.1%

.

CPIy/y,5.3% RetailSalesm/m, 0.5% PPIm/m,0.9% CPIm/m,0.3%

CPI CPIy/ y/y, y,4 4.0 .0% %

ZEW, ZEW,2 20. 0.1 1

1,200

8,800

1,000

8,600

800

8,400

600

8,200 Source:F ederalRe serve

400

PhillyFed,20.8 InitialClaims,401K RetailSalesm/m, 0.6%

8,000 JanJan-09 09 AprApr-09 09

Jul-0 Jul-09 9

Oct-09 ct-09 JanJan-10 10 AprApr-10 10

Jul-1 Jul-10 0

Oct-10 ct-10 JanJan-11 11

PPIm/m,0.6%

ExcessReservesofDepositoryInstitutions,Millions(LHS)

 The Q4 earnings season is entering the final stretch as 371, or 74 percent of the S&P 500 reportsarein reportsarein thebooks.Positiveearnings thebooks.Positiveearningssurprisesremai surprisesremainstrong nstrong at70percent,accordingtoBloomberg.Excludingfinancials,energy andbasicmaterialshavethestrongestearningsgrowthat52and 45 percent percent respectivel respectively. y. In contrast, contrast,healt health h careand care and utilitieshave utilitieshave the the weakest weakest earnin earnings gs result results s with with 6 percen percent t and and 1 percen percentt respectively.Overall,Q4earningsareprojectedtogrow28percent, 15 percent percent ex-financia ex-financials ls on a year-overyear-over-year yearbasis. basis. Revenues Revenues are trackinghigherby8.9percent,9.4percentex-financialsonayearover-ye over-yearbasis arbasis. . For 2011,earni 2011,earnings ngs are expect expectedto edto increa increase se by approximately 15 percent to $96.18, according to Standard and Poor’s.

M2,Billions(RHS)

Figure5

CorporateProfitsAfterTaxandTotalPrivatePayrolls

117,500

1,400

115,000

1,200

112,500

1,000

110,000

800 800

107,500

600 600 Source:S t.LouisF ederalRe serve

105,000

400 400

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Total Private Payrolls, Payr olls, Thousands, Monthly, Monthly, SA (LHS) Corporate Profits After Tax  With   With IVA & CCAdj., Billions, Quarterly SAAR (RHS)

[email protected]                                  Fundamental and technic

GlobalLeadingIndicators  F i n a n c i a l  C o n d i t i o n s

Libor-OIS Spread (3M)

A s s e t  P r i c e s  &  E c o n o m i c  D a t a

Above Average

Widening

Euribor-OIS Spread (3M)

Elevated

Range-Bound

SHIBOR (1M)

Elevated

Narrowing

U.S., 2-Year Swap Spread

Low

Narrowing

Elevated

Range-Bound

Moo Moody's dy's Baa Baa-A -Aaa aa Seas Season one edCo dCorp rpor orat ate e

Low Low

Narro arrowi win ng

High Yield - Corporate

Low

Narrowing

Europe, 2-Year Swap Spread

Australian Dollar

Elevated

Range-Bound

Copper

Extended

Strengthening

Emerging Mkt. / S&P 500 RS

Average

Weakening

Glob Global alS Sma mall ll/ /L Lar arge geC Cap apR RS S

Abov Above eAv Aver erag age e

Rang Rangee-Bo Boun und d

GlobalCycl GlobalCyclicals icals/Glob /GlobalDef alDefensiv ensivesRS esRS AboveAvera AboveAverage ge

Strengthening Strengthening

Taiwan ExportO tOrders

Above Ave Average

S Sttrrengthe thening ing

PMI PMIMf Mfg. g., ,As Asia iae exx-Jap -Japan an

Abov Above eAv Aver era age

Stre Stren ngthe gtheni ning ng Strengthening

U.S., Equity

Average

Lower

PMI Mfg., Europe

Above Average

Europe, Equity

Average

Lower

Belg Belgian ianI Ind ndus ustr tria ial lSu Surv rvey ey, ,Mfg Mfg..

Below BelowA Ave vera rage ge Str Stren engt gthe heni ning ng

Currency

Average

Lower

U.S. .S.In Init itia ial lU Unemp nemplo loym ymen ent tC Claim laimss

Elev Elevat ated ed

Impr Impro ovin ving

U.S. ECRI WLI (level)

Average

Neutral

Aver Average age

Stre Strengt ngthen hening ing

Above Ave Average

S Sttrrengthe thening ing

XBD / S&P 500 RS

Average

Neutral

Europe, Sov. and Fina inancialC lCDS

Ele Elevated ted

Narrowing ing

Ÿ

Ÿ

Ÿ

Ÿ

Inaggregate,financialconditionsintheU.S.and Europeportrayaverysanguineattitudetowardriskoriented assets.Atthispoint,thedeclineinemergingmarketequities hasnotresultedinaheightenedsenseofriskaversion. : The U.S. Libor-OIS spread has been gradual gradually ly wideni widening ng each each week since since the beginni beginning ng of the year.Thisdoesnotappeartoreflectaheightenedlevelof  riskaversion,sincethethe3-monthforwardFRA/OISlevels have have been gradua gradually lly narrow narrowing ing over over the past past 5 weeks. weeks. In Europe,theEuribor-OISspreadwidenedslightlythisweek, and and is near near the the uppe upper r end of its its four four-w -wee eek k rang range. e. The The 1month SHIBOR rate narrowed to 5.11 percent this week compared to 8.13 percent on January 31, according to Bloomb Bloomberg erg. . This This levelis levelis stilleleva stillelevated ted, , sowe’llcontinueto sowe’llcontinueto monitorthisrateforadditionalinsightregardingliquidityand creditconditions. The U.S. U.S. 2-year 2-year swap spread spread contin continues ues to stay within a narrow narrow range. range. The European 2-year swap spreadwidenedforthesecondconsecutiveweek,andhas movedtowardtheupperendofthefive-weektradingrange. In the U.S., the spread between various high yield and corporate bond yields narrowed slightly this week, as record-bre record-breaking aking issuance is being met with seemingly insatiabledemand. TheVIXdeclinedslightlyagainthisweek,butthe Russell 2000 volatility index (RVX), closed at the lowest levelsincelateDecember.Volatilityalsoremainssurprising lowontheEuroStoxx50index. : Europe EuropeanCDS anCDS spread spreads s widene widened d slight slightlythisweek, lythisweek, butremainwellbelowthelev butremainwellbelowthelevelsseeninearlyJanu elsseeninearlyJanuary.The ary.The AMEXB/Dindex(XBD),strengthenedversustheS&P500 this this week, week, after after two consec consecuti utive ve weeks weeks of traili trailing ng return returns. s. Thebroaderfinancialsectorhasbeenverycloselymirroring theS&P500sincethebeginningfortheyear.

U.S.I U.S.ISM SMMfg. Mfg.Ne NewO wOrde rdersrs-toto-Inv Invent entory ory U.S. .S. ISM Mfg. fg. Headline ine Ÿ

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Overal Overall, l, our our leadin leading g indica indicator tors s suppor support t a continuationoftherecentstronger-than-expectedtrendin globalgrowth.Thecyclicalsectorscontinuetooutperform, but but commod commodity ity induce induced d inflat inflation ionary ary pressu pressures res are intensifying throughout many of the emerging market countries.Webelievethattheeconomiccycleisinamore mature phase that will likely be more favorable for the moredevelopedcountriesandlargecapcompanies. :TheAussieremainsrange-bound, butthepatternisrevealingaslightbiastothedownside. The The curr curren ency cy stru struggl ggled ed agai again n at at the the 102 102 area area of  resistance, and is now precariously near the 50-day movi moving ng aver averag age. e. Coppe Copper r seem seems s to to be form formin ing g a consoli consolidat dation ion patter pattern n sofar inFebruary, inFebruary, but the chartis chartis positive.Thedemandpatternforearly2011willbecome more visible next week, when reports are expected to show the amount of copper purchased by China in advance of the week-long Chinese Lunar New Year. However,thenear-te However,thenear-termpricepatt rmpricepatternwillbemoreheavil ernwillbemoreheavilyy influenced by trends in risk appetite than the ongoing bullis bullish h case case about about struct structura ural l supply supply constr constrain aints. ts. Case Case in point,stocksofcopperinLMEwarehousesareatasixmonth month high, high, while while signs signs of demand demand destruc destructio tion n are becomingmorevisible. : The S&P 500 has been consistently stronger than the Emerging Markets index (EEM (EEM) ) sinc since e earl early y Novem Novembe ber. r. Persi Persist stent ently ly high high commodity-inducedinflationisincreasinglyproblematicin many many emergi emerging ng econom economies ies as inflat inflation ion expect expectati ations ons are becoming more pronounced. The relative strength of  globalsmall globalsmall caps caps versus versus large large caps caps has turned turned positi positive ve again in February, February, behind growing growing investor investor sentiment. Globally, Globally, the cyclical cyclical sectors sectors continue continue to be consistent consistently ly strongerthanthedefensivesectors. :  The ECRI’s ECRI’s U.S. U.S. Weekly Weekly Leadin Leading g Index (WLI), jumped to 130.2 this week, the highest reading since May, according to the Economic Cycle ResearchInstitute.

[email protected]                                  Fundamental and technic

AssetAllocationStrategy Ÿ

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: Collectively, our series of financial conditions and global leadin leading g indica indicator tors s are rarely rarely as overwh overwhelm elming ingly ly positi positive ve as they they are againthisweek.Theconsistencyofperformanceinmanyriskoriented asset classes has been impressive, and this has served to further reinforcethetrend.Complacencyisperhapsthebestwordtodescribe the current attitude among market participants. It’s important to recognize when such conditions exist, and remain watchful for a potent potential ial change change in the the fundam fundament ental al outloo outlook. k. Our Our “Finan “Financia ciall Conditions”sectiononpage3,isasampleofthenearly20factorsthat westudyforearlycluesaboutpotentialchangesinriskaversion.Over thepast12years,thesefactorshaveprovidedanearlysignalbefore majorinflectionpointsintheequitymarkets.Thesefactorsprovidethe foundation for the level of risk in our portfolio. Currently, financial condit condition ions s remain remain favora favorable ble for our thesis thesis of global global growth growth and proprocyclicaltiltswithintheportfolio. :Astheearningsseasonbeginstowinddown,weliketolook at revisions being made to earnings at the sector level. Recently, analystsappeartobe analystsappeartobe raisingtheirestimat raisingtheirestimatesfortheenergy,materi esfortheenergy,materials als and technology sectors. In contrast, the defensive sectors have generally received slightly lower revisions. The consumer staples sectorwilllikelybethefocalpointregardingmargincontraction.Our tacticaltilts tacticaltiltstowarddevelope towarddevelopedmarkets dmarketsandlargecapstocksremainin andlargecapstocksremainin place.Basicresourcesandcyclicalsarestillthepreferredsectors.

3% Euro Europe pe

Jan. 7

3% Long USD

3% (All)

Jan. Jan.1 14 4 U.S. U.S.La Larg rge eCa Cap p

6% U.S. U.S.S Sma mall llCa Cap p

6%( 6%(All All))

Jan. 28 Cash

5% Asia ex Japan

5% (All)

Feb. 11 Long U.S. dollar

5% Cash

Cash

5%

Large Cap

35

11

46

Mid Cap

6

0

6

Small Cap

4

-4

0

EAFE

13

-5

8

Europe

0

2

2

Japan

0

0

0

Diversified

2

-2

0

Large Cap

U. S .

Diversified

Defensive

Equity Income

Large Cap - E/W

EAFE

Asia ex Japan

Financial ial

Dividend Growth

Asia ex Japan

0

0

0

Mid Cap

Europe

Latin America

Cyclical

Total Return

Latin America

0

0

0

Small Cap

Japan

Frontier

Resources

Capital App. Treasuries

0

0

0

Core Bond

35

-35

0

Corporate

0

15

15

High Yield

3

0

3

TIPS

2

5

7

EM

0

0

0

Global REIT's

0

0

0

Volatility

0

0

0

0

5

0

5

Energy

Overweight

Positive

Above Avg.

Refining

Coal

Mate Materi rial alss

Over Overwe weig ight ht

Posi Positi tive ve

Abov Above eAv Avg. g.

Chemi hemica cals ls

Meta Metals ls/M /Min inin ing g

Indu Indust stri rial alss

Over Overwe weig ight ht

Pos Posit itiv ive e

Abov Above eAv Avg. g. Cong Conglo lome merrate ate

Tech Techno nolo log gy

Over Overwe weig ight ht

Pos Posit itiv ive e

Hig Highest hest

Neut Neutra rall

Neut Neutra rall

Below BelowA Avg vg..

Movie Movies s& &Ent Ent..

Auto AutoMf Mfg. g.

Abov Above eAv Avg. g.

Toba Tobacc cco o

Drug DrugS Sto tore ress

Cons Consum umer erC Cyc yclic licals als

Cons Consum umer erS Stap taple less Unde Underw rwei eigh ghtt Nega Negativ tive e

Air Airline line

Semi Semi. .Eq Equi uip. p. Comm. omm. Equi Equip. p.

Health lth Care

Overweigh ight

Negativ tive

Average

Equipment

Biotec tech

Telecom

Underweight Negative

Lowest

Wireless

Integrated

Utilities

Underweight Negative

Low

Gas

Electric Ÿ

Financials Ÿ

3%

Nov. Nov.1 19 9 U.S. U.S.La Larg rge eCa Cap p

Neutral

Neutral

Low

REIT- Retail

Di Diversified

:Ourpositioningwithinfixedincomeremainsunchanged for the fourth straight month. We’re maintaining an underweight positionwithintheassetclassalongwithahighconvictiontacticaltilt toward the A - BBB credit range. We still see an unfavorable asymmetricrisk/rewardratioforTreasuries,agenciesandmuni’s.

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Nocurrentallocation. ThePMIcyclecontinuestofavor commod commoditi ities, es, and and we prefer prefer broadbroad-bas based ed implementation at this level. Our views on specificcommoditiesaretypicallyimplemented viafocusedexposureintheequitymarkets. Initiatinga5percentallocationtoa longU.S.dollarposition.Seepage11.

Cash

Treasury /A /Agency

Non-Callab lable

Nominal

U.S.D .Dollar lar

Global REIT's

Ind IndustrialMe lMeta talls

USD

Shor Shortt-Te Term rm

A-AA A-AAA AC Corp. orp.

Call Callab able le

Floa Floati ting ngR Ra ate

NonNon-Do Doll llar ar- G7

Volatility

Precious Metals

EUR/USD

Intermediate

BBBC BCorp.

S Sttrructured Note

TIPS IPS

Non-U.S.D .Dollar lar

Energy

USD/JPY

Long-Term

High Yield

Puts / Calls

CPI Notes

Emerging Mkts

Grains

AUD/USD

[email protected]                                  Fundamental and technic

S&P500Sector&FundamentalData S & P  5 0 0  T o t a l  R e t u r n  ( % )

S & P  5 0 0  E a r n i n g s  E s t i m a t e s

1.46%

2.91%

11.37%

5.90%

12

-0.09%

4. 4.94%

17 17.83%

8. 8.95%

Energy

35.75

41.39

107%

16%

13.35

Materials

4

0.75%

2.83%

13 13.23%

3. 3.66%

Materials

13.07

16.54

84%

27%

15.02

Industrials

11

2.95%

5.84%

17.95%

9.05%

Industrials

18.20

20.48

28%

12%

15.83

Technology

19

0.58%

2.97%

11.49%

7.86%

Technology

26.28

30.40

50%

16%

14.4

Consumer Cyclicals

11

3.52%

4.29%

10.52%

5.76%

Consumer Cyclicals

17.98

20.03

64%

11%

15.33

Consumer Staples

10

0.95%

0.58%

3.50%

0.61%

Consumer Staples

19.45

21.18

6%

9%

14.36

Health Care

11

0.07%

0.59%

4.99%

2.76%

Health Care

28.87

32.55

9%

13%

11.49

Telecom

3

1.75%

1. 1.93%

6.47%

0.63%

Telecom

7.40

7.84

2%

6%

16.08

Utilities

3

0.73%

0. 0.93%

3.43%

2.24%

Utilities

12.58

13.18

9%

5%

12.32

16

2.89%

2.10%

14.75%

7.19%

Financials

14.99

18.23

241%

22%

12.53

Energy

Financials Source:Standard&Poor’s

Source:Standard&Poor’s,dataasof2/8/11

S & P  5 0 0  S e c t o r  O v e r v i e w , C o n t .

S & P  5 0 0  S e c t o r  O v e r v i e w Ÿ

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We’remaintaininganoverweightposition in both energy energy and basic materials materials based on favorable favorable financial conditions, improving global growth trends and strong strong fourth fourth quarter quarter earnings. earnings. Recently, Recently, analysts analysts have been raising their earnings estimates estimates for both of these sectors. Energy:Thetrendswithintheenergysectorremain favora favorable ble, , and this this sector sector continu continuesto esto lead lead the S&P500. The The more more cyc cyclic licall ally y sensit sensitive ive oil/ga oil/gas s equipme equipment nt and services industry is our preferred area of concentration within this sector. Basic Materials: The sector sector has been trad tradin ing g in line line with with the the mark market et over over the the past past mont month. h. The The rotationintochemica rotationintochemicalscontinue lscontinuestogain stogain momentum, momentum,while while our basket of copper-rela copper-related ted stocks is rolling rolling over. Not surprisingly, the charts of iron ore stocks appear to be weakening as well. Our bias remains toward the global growth growth oriented oriented commodity commodity chemicals and agriculture agriculture companies.However,it’stimetoavoidcopperandironore. Thepositivebackdropofimprovingglobalgrowth trends trends remain remain a positive positive catalyst for global cyclicals. cyclicals. It appears that the market is transitioning toward the “ISM peak-t peak-to-5 o-50” 0” stage. stage. The The tactic tacticall ally y overwei overweight ght positi position on remains in place for both the industrial and technology sector sectors s while while we remain remain neutra neutral l on the the consum consumer er discretionarysector. Industrials:Afternoticeablylaggingthe S&P 500 for four weeks, the DJTA surged 3.7 percent higher while oil prices declined by a similar percentage. Also, Also, the transp transport orts s outper outperfor form m the aerospa aerospace ce & defens defense e indust industry ry for the first first time time in six weeks. weeks. Theglobal growth growth oriented oriented conglomerat conglomerate’s e’s and heavy constructi construction/mi on/mining ning companies remain well positioned in this environment. Technology:Thissectorhastradedinlinewiththemarket sofarin2011,andcontinuestomaskthe12percentyearto-date return of the Philadelphia Semiconductor index. Strong fourth quarter earnings (see page 12), and rising earnings estimates should provide a solid fundamental underpinningforthissector.

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Wecontinuetofavorafocusedpositionin the higher beta semiconductor stocks, particularly on a moreeven-weightedbasis. ConsumerCyclicals:Consistent with our ISM cycle indicator, we’re maintaining a neutral weightinginthissectordespitestrongconsumerspending patterns.Thesectorrosebyanimpressive3.5percentthis week,ledmostlybythemediaindustry.Ourmorethorough review of the sector did not reveal a pattern that would indicatethecurrentrallywouldpersist. ThecurrentstageoftheISMcyclealongwith lacklu lackluste ster r earnin earnings gs and and commod commodity ity-in -induc duced ed margin margin pressures should present continued headwinds for the defensivesectorsofthemarket.Weremainunderweightin eachsectorexcept healthcare. healthcare. Consumer ConsumerStapl Staples:Margin es:Margin pressu pressures res due due to higher higher input input costs costs will likely likely be a significant significant headwind for this sector throughout throughout 2011. Comparatively lower revenue growth only adds to the difficultyinmaintainingmargins. HealthCare:Thissector contin continues ues to signif significa icantl ntly y trail trail the market market due primar primarily ily to the poor performanc performance e of the pharmaceut pharmaceutical ical industry. Pharma accounts for nearly 50 percent of the sector weighting, and masks the strong outperformance of the manag managed ed care care prov provid ider ers s and and medi medica cal l equi equipm pmen entt companies. Our tactical tilt toward the managed care industrycontinue industrycontinuesto sto benefitfromthecurrentenvironm benefitfromthecurrentenvironment. ent. Telecom & Utilities: These two sectors have the lowest expected growth rate for both revenues and earnings in 2011.Inaddition,arisinginterestrateenvironmentposes anotherpotentialheadwindfortheserate-sensitivesectors. Thissecto Thissectorhastrade rhastradedin din linewiththeS&P500 linewiththeS&P500 since late December. The large commercial banks are generallyoutperformingthesectorduetoimprovingcredit conditionsandasteepyieldcurve.Also,increasesinM&A, underwritingandstrongerretailflowsarecontributingtothe relativestrengthofthebroker/dealersversusthesector.GS hasnowtrailedthesectorsincelateNovember.Thetactical tiltstowardthesetwoindustriesremaininplace.

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S&P500,TechnicalsandValuation Figure6

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 Figure 6, the S&P 500 has increased5.9percentsofarthisyear,andclosedatthehighest level since June 19, 2008. The MACD line and McClellan Oscillator both have an upward bias, and the A/D is still trending higher. The percentage of stocks in the S&P 500 abovetheir50-daymovingaverageincreasedfrom78percent from from 82 percen percent t this this week. week. Figure Figure 7 (3rd (3rd box from from top), top), The nearly4percentdropinoilpricesthisweekplayedalargepart in in the the impr improv ovin ing g rela relati tive ve stre streng ngth th of of the the Dow Dow Jone Joness Transportationaverage. : Figure Figure 7 (top), the Russell Russell 2000 has strengthene strengthened d relative relativeto to theS&P the S&P500 500 in February,and February,and global smallcapsremainstrong.Ourjudgmentisthatthecomparative valuation gap and current stage of the PMI cycle is more favorableforlargecaps.

Figure7

ContinuedfromPage1 allowancesforbaddebts.Also,thetechnologyandenergysector accountfor31percentoftheindex,andareexpectedtopost strongearningsgrowth. Manycompanieshavereducedtheir interestexpensebyeitherreducingorrefinancingdebt.Also, lowercorporatetaxes,andadditionalsharecountreductionsfrom sharebuybacksandM&Acanalsoservetosupportmargins. Ourassessmentisthattherewillbeamargin squeezewithincertainindustries,butitwillnotbepervasive.We findthecurrent9.0percentmarginforecasttobeoverly optimistic,andthinkthatmarginsaremostlikelytosettleinthe 8.3to8.5percentrange.Inthatcase,EPSincreasesbyonly7or 8percent,not15percent.ItalsotakestheforwardP/Efrom13.8 to14.8.Ofcourse,strongertop-linegrowthwouldhelptakesome ofthepressureonmargins.

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CoreEAFE Figure8

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Figure Figure 8,the EAFE EAFE index(EFA index(EFA as theETFproxy),thepreviouslevelofresistanceat$60,hasnow becomealevelofsupport.Thetechnicaltrendssuggestfurther upsideinthenear-term.Figure9,theNikkei225andFTSE100 bothdisplayedpositiverelativestrengthcomparedtotheEAFE indexforthesecondconsecutiveweek.Europeanbanksheldup wellagainthisweekversusbroaderEuropeanindices,despite modestwideningofseveralEurozonecredit-relatedspreads. Eurozone:  Last week’s EU summit revealed several key unresolved issues to be settled before the final summit on March 24-25 in Brussels. CDS spreads widened modestly this week due to a lack of progress, according to Markit. However, the ECB did provide support by buying Portuguesedebt.ThepersistentlyhighbondyieldsinPortugal, Ireland Ireland and Greece Greece suggest suggest skepticismthat skepticismthat the March summit summit will will delive deliver r a compre comprehens hensive ive soluti solution on for the debt debt crisis crisis.. U.K.: U.K.: TheBoEleftratesunchangedthisweek,hopingthatinflationary pressures prove temporary while economic growth remains uneven.InflationisnearlytwicetheBoE’starget,butrecenttax increasesandspendingcutsappearedtoslowtheeconomyat theendoflastyear.Clearly,therisksofstagflationappeartobe growing. Japan:TheNikkei225hasgained3.6percentsofarin February,asthewidening2-yearratedifferentialsandstronger appetiteforriskhashelpedweakentheYen.TheNikkeiisalso benefiting from a reallocation trade from emerging market equitiestothedevelopedmarkets. Implementation:Weremain tactic tacticall ally y underw underweig eight, ht, but but with with a focus focus on broadbroad-bas based ed Europeanexposurewithatilttowardthecyclicalsectorsofthe market market. . Althou Although gh strong strong in Januar January, y, Japan’s Japan’s economi economic c growth growth remains comparatively weak to other developed countries. In addition, any sort of risk-off event could cause the Yen to strengthen due to its safe-haven status. As such, we remain underweightJapaneseequities.

Figure9

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EmergingMarkets Figure10

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Figure10,theEmerging Figure11 Markets index (EEM as the ETF proxy), declined by nearly 2 percentthisweek,andfellbelowthehead-and-shouldersupport level level of $46. $46. There’ There’s s a meanin meaningfu gful l suppor support t level level at $45, $45, which which held held thisweek,butthechart thisweek,butthechart looksheavy looksheavy.Figure .Figure 11, the Hang Sengindexalsobouncedfromakeylevelofsupportat22,500. Figure 11 (middle), shows the accelerating decline in relative strengthoftheMSCIEmergingMarketsindexversustheMSCI World index. Asset flows from emerging markets funds fell dramat dramatica ically lly to $3 billio billion n last last week, week, in compar compariso ison n to the jawjawdropping$7billionthepriorweek,accordingtodatafirmEPFR Global. Global. Heightened Heightened geopolitica geopolitical l risk along with intensifyi intensifying ng inflationarypressureshaveraisedtheriskpremiumforthisasset class.Fromatechnicalstandpoint,thisweek’ssharpdeclineof  the bellwether Kospi and TSE indices point toward continued sellin selling g pressu pressure. re. A sharp sharp bounce bounce from from such such overso oversold ld levels levels is verypossible,butwouldnotbeabuyingopportunity.  The The poor poor relati relative ve perfor performan mance ce of China’s China’s financialsectorandelevatedSHIBORlevelsareindicativeofa more more diffic difficult ult econom economic ic enviro environme nment nt than than the the consens consensus us forecast.Ourassessment,isthatthePBOCisbehindthecurve inaddressinginflati inaddressinginflation,andthatthepublici on,andthatthepublicizedinflat zedinflationratesare ionratesare understated.Assuch,inflationwillprovetobemoreproblematic thanexpected.Thelonger-termeconomicgrowthpotential,and thestructuraldynamicsofthisregionremaincompelling.But,this has been been a very very crowde crowded d trade, trade, sowe’recontent sowe’recontent towait for a moreopportunisticentrypoint.   Collec Collectiv tively ely, , the the global global PMI PMI cyc cycle le remains favorable for commodity producing countries, but the overal overall l enviro environme nment nt is lookin looking g more more late-c late-cycl ycle e than than the consensusforecasts.CanadaandAustraliaonceagainhavethe best relative performance of the commodity focused countries thatwefollow,whileRussia(RSXastheETFproxy)istheonly emergingcountrystilltradingaboveits50-daymovingaverage.

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FixedIncome Figure12

U.S.TreasuryYields

Figure13

4.50

Moody'sBaa Moody'sBaa - Aaa Corporate CorporateBon BondYiel dYield,bps d,bps

400

4.00

350

3.50

300 250

3.00

200

2.50

150 2.00

100

Source:St.LouisFederalReserve

1.50 Jan-10

50 Apr-10

Jul-10 10-Yea -YearU rU.S. .S.T Tre rea asury sury

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Oct-10

Source:St .LouisFe deralRes erve

Jan-11

0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

2s10 s10s

  Figure 12, the 2s10s curve narrowed by 10 basis points this week to 280 basis points. The 2-year Treasu Treasuryyield ryyield increa increased sed by9 basispoint basispoints s whilethe whilethe 10year year yield yield fell fell by 1 basis basis point. point. The overal overall l patter pattern n of a rising 2s10s curve in conjunction with a rising 10-year yield reflects reflects a strengtheni strengthening ng economy. economy. Maintaining Maintaining shorter than benchmark levels of duration remains in placeasthebiasremainstowardhigheryields. We view view a grad gradua ual l upwa upward rd tren trend d in the the 10yearTreasuryand2s10sasbullishforeconomicgrowth, but but bear bearis ish h for for gove govern rnme ment nt pape paper. r. Year Year-t -too-da date te,, Treasu Treasurie ries s are are laggin lagging g sector sector within within the the Barcla Barclay’s y’s AggregateBondindex.Wecontinuetoavoidthissector. :MBSaremaintainingabidasarelativevalue trade trade for for banks banks versus versus Treasu Treasurie ries. s. Aside Aside from from this this constituency,therisk/rewardratioremainsunattractive.   Intermediate-term corporate bonds at the lower range of investment investment grade status status remains remains our highest convic convictio tion n sector sector within within the the fixed fixed income income univer universe. se. Favorable financial conditions, strengthening economic growth growth trends trends and strong strong net inflow inflows s repres represent ent a better better investment climate for the credit oriented sectors. The sweetspotofA-toBBBpaperislessratesensitivethan higher higher grade grade paper, paper, and trades trades at a more more attrac attractiv tive e risk risk premium than high yield. Figure 13, the Moody’s Baa minus Aaa corporate bond spread continues to narrow, but remains far above secular levels. The high yield marketcontinuestobethebestperformingsectorofthe fixe fixed d inco income me mark market et, , but but rela relati tive ve valu valuat atio ions ns are are increasingly increasingly less attractive. attractive. The current current spread spread over investmentgradepaperremainsnearsecularlowsaround 300 basis points. Through January, global high yield issuance has been 61 percent higher than the same period in 2010, according to the Financial Times. A correspondingsurgeofnetinflowsintotheassetclassare already resulting in less restrictive bond covenants. In addition,we’reseeingmorecasesofbondproceedsbeing usedtofunddividendsandsharerepurchases,ratherthan strengtheni strengthening ng the balance sheet. sheet.  Our non-consensus non-consensus view is that returns in 2011 are likely to be from the coupon,but coupon,but notfromadditionalspreadcompr notfromadditionalspreadcompression ession.The .The neutral neutral weighting weighting reflects reflects strong strong fundamentals fundamentals, , but an increasinglyunfavorablerisk/rewardratio.

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  Municipals have recovered this month from veryoversoldconditions,butthepersistentweeklyoutflows frommutualfundsarelikelytolimitfurthergains.Thatsaid, higherincomeinvestor higherincomeinvestorscanselectivel scanselectivelyfindveryattracti yfindveryattractive ve TEY’s TEY’s as compar compared ed tobroad-bas tobroad-based ed munici municipal pal ETF’s. ETF’s. We continuetofindmuni’sunattractiveonafundamentalbasis, and envision several bouts of headline risk persisting throughout2011. Our basket basket of emergi emerging ng market market debt fundscontin fundscontinueto ueto beresilient beresilient. . Atthispoint, Atthispoint, outflo outflows ws have been at a much more measured pace than their equitycounterpart.Tobefair,theconstituentsandaverage creditratingofthesefundsaredifferentthanmanyexpect However,it’slikelyamatteroftimebeforeinflationand/or geopoliticaleventscausetheriskpremiumtorise.Thisisa verycrowdedtradewithmassiveinflowsoverthepastyear from what we surmise are predominantly weaker hands. Thestrongdesiretostretchforhigheryieldshaveledtoan under-appreciation of risk, and the downside is greater than many expect. The structural fundamentals remain comp compel elliling, ng, but but we’re we’re cont conten ent t to to wait wait for for a more more opportunisticentrypoint. We’re We’re expect expecting ing global global intere interest st rates rates to rise rise in 2011,butthekeyiswhetherratesriseinassociationwith improving improving economic economic growth growth or increasing increasing inflationar inflationaryy pressures.Commodit pressures.Commodity-indu y-inducedprice cedprice inflationcontinuesto inflationcontinuesto buildaroundtheworld,butmoreacutelyinmanyemerging market countries. The United Nation’s Food Price Index reached a record high in January, Brent crude futures closed closed slight slightly ly over over $101 $101 and many many PMI report reports s showed showed record growth rates of input costs. Meanwhile, the U.S. TIPS TIPS spread spread and forwar forward d breake breakeven ven rates rates reflec reflect t a sangui sanguine ne view view of inflat inflation ion. . Continu Continued ed high high levels levels of  unem unempl ploy oyme ment nt, , subsub-pa par r wage wage grow growth th and and high higher er productivity levels have served to limit the effects of  inflat inflation ion. . This This paints paints the pictur picture e of potent potential ially ly rising rising rates rates dueto econom economic ic growth growth rather rather than than inflat inflation ion. . The market market may also also sense sense that that the chances chances of QE3 have have lessen lessened ed considerably as growth trends have improved. We do expectnextweek’sPPIrepo expectnextweek’sPPIreporttoshowaslightl rttoshowaslightlyfaster yfasterrise rise inintermediategoods.

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Commodities Figure14

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Figure14,DJ-UBSGrainindexcontinuestobe the leading leading commodity commodity sector. Strengtheni Strengthening ng demand amid long-term structural supply constraints provide a solidfundamentalunderpinningforthesector.Thebroader CRBindexhasincreasedby1.5percent,ascomparedto the 5.9 percen percent t total total return return for the S&P 500. The global global econom economic ic cyc cycle le contin continues ues to favor favor commod commoditi ities, es, and our preferredallocationinvolvesbroad-basedexposurewitha biastowardtheagriculturesector. HighGradeCopperwasbasicallyunchangedthis weekasitconsolidatedlastweek’sbreakouttorecordhigh levels.Reportsareexpectedtobereleasednextweekthat show show the levelof levelof Chines Chinese e demand demand for copper copper before before the week-longChineseLunarNewYear.Strongglobalgrowth trends, trends, expectation expectations s of continued continued supply constraints constraints and increasinginvestment increasinginvestment demand remain remain themantr the mantra a forthe bullish bullish case. case. However, However, our basket of copper copper mining companies companies is reflecting reflecting pronounced pronouncedweaknes weakness s relative relative to the the physic physical al commod commodity ity. . In additi addition, on, stocks stocks at LME wareho warehouse uses s have have risen risen from from just just under under 350,00 350,000 0 to 396,95 396,950 0 tonnes tonnes since since mid Decemb December. er. It’s It’s our belief belief that that these these two two factor factors s point point a height heightene ened d chance chance of a correc correctio tion. n. The latest latest Commod Commodity ity Future Futures s Tradin Trading g CommissionCOTreportshowedanincreaselastweekof  4,749netlongcontractsbynon-commercialnetspecsto 29,460,whileproducersincreasedtheirnetshortposition byonly443contractsto33,230contracts. U.S.corn reserves reserves areapproa are approachingtheir chingtheir lowest levels levels in15 years, years, raisin raising g fearsof fearsof rising rising prices prices for foods foods like like meat meat becaus because e corn corn is used used to feed cattle cattle and chickens. The demand for corn is also increasing more thanexpectedduetoagrowi thanexpectedduetoagrowinglivest nglivestockindus ockindustryinmany tryinmany oftheemergingcountries,asthegrowingmiddle-classare addingmoremeattotheirdiet.Soybeansappeartoface severe severe supply supply constr constrain aints ts as well due to strong strong demand demand from from China, China, but but not not quite quite as acute acute as corn. corn. We’re concernedthatthesharprallyinroughrice,akeysource offoodinAsia,couldleadtoleadtoafoodcrisis.

Figure15

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COMEX gold increased 0.9 percent this week to closeat$1,360perounce.Thecombinationofpotentially escala escalatin ting g politi political cal tensio tensions ns and and increa increasin sing g signs signs of  inflat inflation ion create create a favora favorable ble enviro environme nment nt for gold. gold. Gold Gold is recoveringfromlossesinJanuary,asimprovingtrendsin risk risk appeti appetitesaw tesaw invest investors ors fleein fleeing g gold gold as a safe-h safe-have aven. n. On a techni technical cal basis, basis, gold gold is bumpin bumping g into into resist resistanc ance e at 1,370, 1,370, but the fluidsitua fluidsituatio tion n inthe Middle Middle East East will will likely likely dictat dictate e the near-te near-termtrend rmtrend. . The latest latest CFTC COT report report showed an an increase last week of 15,899 net long contracts to 167,093 by non-commercial specs, while producers increased their net short position by 16,714 contractsto209,911contracts. ICEBrentforMarchdelivery,rose1.6percenttoclose closedat$101.43.Thismarkedthehighestweeklyfrontmonth close since September 26, 2008. The threat of  spreading civil unrest, declining crude supplies from the North North Sea and China’s China’s dire dire need need for diesel diesel should should keep keep prices firm in the near-term. Figure 15 (WTI, cash), the more frequently quoted WTI NYMEX contract for March delivery,fell3.9percentthisweek,tocloseat$85.58.U.S. crudeinventoriesroseby1.9billionbarrelsto345.1million barrels,thefourthconsecutivebuild.Gasolineinventories increasedby4.7millionbarrels,thesixthstraightweekly build. This week’s Brent-WTI spread spiked to a record $16.24 on Thursday, and closed the week at $15.85, according according to Reuters. Reuters. This spread spread has doubled in just threeweeksduetoBrentbeingmoresusceptibletosupply risks and the supply glut at Cushing. The incremental deman demand d is is comi coming ng from from the the prod produc ucin ing g coun countr trie ies, s, particularlyChina,duetocontinuedgovernmentsubsidies. The latest CFTC COT report showed an increase last weekof12,799netlongcontract weekof12,799netlong contractsto165,508contr sto165,508contractsby actsby non-commercialspecs,whileproducersincreasedtheirnet shortpositionby24,776contractsto221,010.

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Currencies Figure16

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  Speculators increased their short positions againstthedollaragainthisweektothehighestlevelsince Octobe October, r, accord according ing to Commod Commodity ity Future Futures s Tradin Trading g Commis Commissio sion n data. data. We view view this this as a crowde crowded d trade trade that that couldunwindquicklyinthewakeofanyrisk-offeventthat results in flows to the buck as a safe haven. More importantl importantly, y, stronger-t stronger-than-ex han-expected pected economic economic growth growth trendsintheU.S.,couldleadtoacontinuedriseinyields thatfurthersupportthegreenback.Assuch,we’reinitiating a5percentallocationinabroad-basedlongdollarposition. Figure16, Figure16, theEurofinishedtheweekbasical theEurofinishedtheweekbasically ly unchanged versus the greenback to close fractionally below the key level of support at 1.36. Last Friday’s announcement of an interim EU summit on March 11, indicatesthattheleadersremainfarapartonanumberof  issues.Asanexample,theECBfavorsallowingtheESFS to directly buy government bonds or lend money to countries so that they could directly buy the bonds. Germanyremainsopposedtothisapproach.Atthispoint, the the cloude clouded d assess assessmen ment t of EU fundam fundament entals als amid amid strengthening U.S. economic data leads us to conclude thattheEuroshouldweakenversusthedollar.Thisweek’s COT report showed a decline of 5,200 net spec long positi positions ons after after three three weeks weeks of gains, gains, and the overal overall l net longspecpositionremai longspecpositionremainselevate nselevatedat34,734,thehighe dat34,734,thehighest st levelsinceearlyNovember. TheEuroappreciatedby1.6percentversusthe Swissiethisweekascomplacencyandpositivesentiment persis persist.Trends t.Trends in risk risk aversi aversion on are the primar primary y driver driver for thispair,butthisweek’s4to5percentwideningofseveral EU financial financialand and periphery peripheryCDS CDS spreads spreads wentunnoti went unnoticed. ced. At this juncture, we don’t see a catalyst for continued streng strengthin thin the Euro Euro untiltheMarch untiltheMarch 24-25summ 24-25summit. it. Inthe meanti meantime, me, any any sort sort of risk-o risk-off ff event event could could lead lead to meaningfulappreciationofCHFasasafehaven.

Figure17

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Figure17,theAussiefellslightlythisweekto close close at par par versus versus the the dollar dollar, , and and is precar precariou iously sly positioned at the 50-day moving average. This week’s employmentreportshowedthat24,000jobswerecreated inJanuary,butthatincludedareductionof8,000full-time jobs. jobs. The unempl unemploym oyment ent rate rate remain remained ed at 5 percen percent t as expected. Our assessment is that the economy was showing showing signsof signsof a slowdo slowdownbefor wnbefore e the floods floods,and ,and the increasing likelihood of slower growth in China should serve to keep the RBA in a wait-and-see mode. As a result, result, lower interest rate expectation expectations s may provide provide another potential headwind for the pair. However, this week’s COT report showed spec long positions had increasedto71,979contracts,thehighestsinceApril.The market market is still still being being driven driven by powerf powerful ul specul speculati ative ve and carry-related trends, but this pair looks to have a very unfavorableasymmetricrisk/rewardratio.  The dollar strengthened by 1.8 percent this week versus versus the Yen toclose at83.46. at83.46. Strong Strongergrowt ergrowth h trendsintheU.S.iswideningthe2-yearratedifferential, andthecurrentspreadsuggeststhatthepairshouldtrade aroundthe86.0level.We’veheardseveralexplanations for the ongoing dislocation between this cross and the rate differential, but we’ll avoid a stake until visibility improves.Also,anyunexpectedriskoffeventwouldlikely resultinsignificantYenappreciationasasafehaven. TheCablewasslightlylowerthisweekversus thedollar,andisrestingatakeysupportlevelat1.60.We wereexpectingthepairtostrengt wereexpectingthepairtostrengthenduringthepasttwo henduringthepasttwo weeksinthewakeofthesurprisinglystrongPMIreports that countered the weather-induced weakness seen in December.Inaddition,Friday’sPPIoutputcameinat1.0 percent for the month of January as compared to the consensu consensus s estima estimate te of 0.5 percen percent. t. The combin combinati ation on of  stronger growth and inflation should produce a more bullishcaseforthecableasinvestorsraisetheirinterest rateexpectations.Thisweek’sCOTreportremainsbullish as spec net long positions have increased for the fifth consecutiveweektothehighestlevelssinceNovember.

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Q4Earnings,Cyclical Exxon Mobil Chevron ConocoPhillips Occidental Petroleum Apache Anadarko Petroleum Devon Energy Schlumberger Halliburton National Oilwell Varco

XOM CVX COP OXY APA APC DVN SLB HAL NOV

Jan. 31 Jan. 28 Jan. 26 Jan. 26 Feb. 17 Jan. 31 F  Feb. 16 Jan. 21 Jan. 24 Feb. 3

105,186 51,825 1,929 5,063

89,841 47,588 1,803 4,382

17% 9% 7% 16%

1.85 2.64 1.32 1.47

1.27 1.53 1.20 1.35

46% 73% 10% 9%

2,691

2,417

11%

0.29

0.46

(37%)

9.067 5,160 3,172

5.744 3,686 3,134

58% 40% 1%

0.76 0.68 1.05

0.65 0.53 0.94

17% 28% 12%

Du Pont (E.I.) Dow Chemical PPG Industries Praxair Air Products & Chemical Monsanto Alcoa Freeport-McMoRan Nucor Newmont Mining

DD DOW PPG PX APD MON AA FCX NUE NEM

Jan. 25 Feb. 3 Jan. 20 Jan. 26 Jan. 21 Jan. 6 Jan. 10 Jan. 20 Jan. 27 Feb. 24

7,742 13,771 3,379 2,623 2,392 1,830 5,433 5,603 3,854

6,814 12,466 3,116 2,407 2,174 1,697 5,652 4,610 2,938

14% 10% 8% 9% 10% 8% (4%) 22% 31%

0.5 0.47 1.24 1.25 1.35 0.02 0.24 3.25 (0.04)

0.44 0.18 0.85 1.09 1.16 (0.02) (0.27) 2.15 0.18

14% 161% 46% 15% 16% "P" "P" 51% "L"

General Electric United Technologies 3M Emerson Electric Fedex United Parcel Service Union Pacific Boeing Caterpillar Deere

GE UTX MMM EMR FDX UPS UNP BA CAT DE

Jan. 21 Jan. 26 Jan. 25 Feb. 1 Mar. 17 Feb. 1 Jan. 20 Jan. 26 Jan. 27 Feb. 16

41,377 14,864 6,709 5,535

41,046 13,979 6,122 4,828

1% 6% 10% 15%

0.36 1.31 1.28 0.63

0.27 1.15 1.30 0.55

33% 14% (2%) 15%

13,421 4,410 16,550 12,807

12,377 3,754 17,937 7898

8% 17% (8%) 62%

1.08 1.56 1.56 1.47

0.75 1.89 1.77 0.36

44% (17%) (12%) 308%

Apple Computer Hewlett-Packard Intel IBM Cisco Systems Qualcomm Microsoft Oracle Google EMC

AAPL HPQ INTC IBM CSCO QCOM MSFT ORCL GOOG EMC

Jan. 18 Feb. 22 Jan. 13 Jan. 18 Feb. 9 J Jan. 26 Jan. 27 Mar. 24 Jan. 20 Jan. 25

26,741

15,683

71%

6.43

3.67

75%

11,457 29,019 10,407 3,348 19,953

10,569 27 27,230 9,815 2,668 19,022

8% 7% 6% 25% 5%

0.59 4.18 0.27 0.82 0.77

0.40 3.59 0.32 0.62 0.74

48% 16% (16%) 32% 4%

8,440 4,889

6,674 4,100

26% 19%

7.81 0.29

6.13 0.19

27% 53%

Walt Disney Amazon Comcast Time Warner Directv Ford Motor Home Depot Lowe's Target McDonalds Coach Macy's lNordstrom Abercrombie & Fitch Darden Restaurant

DIS AMZN CMCSA TWX DTV F HD LOW TGT MCD COH M JWN ANF DRI

Feb. 8 Jan. 27 Feb. 16 Feb. 2 Feb. 23 Jan. 28 Feb. 22 Feb. 23 Feb. 24 Jan. 24 Jan. 25 F Feb. 22 Feb. 17 Feb. 16 Mar. 24

10,716 12,948

9,739 9,519

10% 36%

0.68 0.91

0.47 0.85

45% 7%

7,812

7,210

8%

2.41

1.83

32%

32,500

34,800

(7%)

0.30

0.43

(30%)

6,214 1,264

5,973 1,065

4% 19%

1.16 1.00

1.11 0.75

5% 33%

Marriott

MAR

 

Feb. 14

Starwood Hotel

HOT

 

Feb. 3

1,340

1,246

8%

0.52

0.51

2%

Carnival

CCL

 

Dec. 21

3,497

3,282

7%

0.31

0.24

29%

Harley Davidson

HOG

 

Jan. 25

917

764

20%

(0.18)

(0.63)

"L"

Tiffany

TIF

 

Mar. 21

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Q4Earnings,Defensive&Financial Proctor & Gamble Colgate-Palmolive Coca-Cola PepsiCo Kraft Foods Wal-Mart CVS Caremark Walgreen Altria Group Philip Morris

PG CL KO P EP KFT WMT CVS WAG MO PM

Jan. 27 Jan. 27 Feb. 9 Feb. 10 Feb. 10 Feb. 22 Feb. 3 Mar. 22 Jan. 27 Feb. 10

21,347 3,978 10,494 18,155 13,773

21,027 4,081 7,510 13,297 10,597

2% (3%) 40% 37% 30%

1.11 1.24 0.72 1.05 0.31

1.01 1.21 0.66 0.90 0.44

10% 2% 9% 17% (30%)

24,771

25,822

(4%)

0.80

0.79

1%

5,927 17,807

6,014 17,008

(1%) 5%

0.44 0.97

0.35 0.81

26% 20%

Pfizer Merck Bristol-Myers Squibb Eli Lilly Amgen Johnson & Johnson Abbott Labs United Health Medtronic Baxter International

PFE MRK B MY LLY AMGN JNJ ABT UNH MDT B AX

Feb. 1 F  Feb. 3 Jan. 27 Jan. 27 Jan. 24 Jan. 25 Jan. 26 Jan. 20 Feb. 22 Jan. 27

17,561 12,094 5,111 6,187 3,841 15,644 9,968 24,030

16 16,537 10 10,093 5,033 5,934 3,809 16,551 8,790 21,784

6% 20% 2% 4% 1% (5%) 13% 10%

0.47 0.88 0.47 1.11 1.17 0.70 1.30 0.94

0.49 0.79 0.47 0.91 1.05 0.79 1.18 0.81

(4%) 11% 0% 22% 11% (11%) 10% 16%

3,498

3,470

1%

1.11

1.03

8%

AT&T Verizon Qwest Communications Century Link American Tower

T VZ Q CTL AMT

Jan. 27 Jan. 25 Feb. 15 Feb. 15 F  Feb. 23

31,361 26,395

30,708 27 2 7,091

2% (3%)

0.18 0.93

0.46 0.22

(61%) 323%

Southern Co. Exelon Dominion Resources Duke Energy NextEra Energy

SO EXC D DUK NEE

Jan. 26 Jan. 21 Jan. 28 Feb. 17 Jan. 25

3,771 4,500 3,667

3,511 4,148 3,176

7% 8% 15%

0.18 0.96 0.63

0.31 0.92 0.63

(42%) 4% 0%

3,410

3,660

(7%)

4.30

4.05

6%

JPMorgan Chase Bank of America Wells Fargo Citigroup US Bancorp Goldman Sachs Morgan Stanley Berkshire Hathaway Metlife American Express

JPM BAC WFC C USB GS MS BRK.B MET A XP

Jan. 14 Jan. 21 Jan. 19 Jan. 18 Jan. 19 Jan. 19 Jan. 20 Feb. 28 Feb. 9 Jan. 24

26,722 12,439 21,494 18,371 4,721 8,642 7,807

25,236 11,559 22,696 5,405 4,376 9,615 6,836

6% 8% (7%) 240% 8% (10%) 14%

1.12 -0.37 0.61 0.04 0.49 3.79 0.43

0.74 -0.60 0.08 -0.33 0.30 8.20 0.18

51% (38%) 663% "P" 63% (54%) 139%

12,838 4,093

12 12,341 3,645

4% 12%

1.14 0.88

0.96 0.59

19% 49%

S o u r c e :   C o m p a n y  W e b s i t e s

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