Equities, playing defense - Consumer staples, an embedded free "partial crash" put option

"Defense is a definite part of the game, and a great part of defense is learning to play it without fouling." - John Wooden, American coach

In continuation to previous conversations discussing the relationship between equity versus credit we would like to point out the downward protection offered by Consumer Staples and its recent relationship with High Yield since the financial crisis of 2008/2009. We will also look at the "greatest anomaly" namely that you get superior long term returns from low volatility equities.

As indicated by a very interesting note from Societe Generale from the 26th of March from their Global Quantitative Research team entitled - Consumer Staples outperformance solely attributable to market crash protection where they indicated the following relationship with the high yield bond market:

"Over recent years, the Global Consumer Staple sector has performed more in line with the high yield bond market than the broader equity market – or indeed, the MSCI high dividend yield index. This market-beating performance has been attributed to the clamor for quality yield but we’re not convinced. Here we show that the outperformance was wholly driven, not by yield, but the ability to limit losses during periods of acute market weakness. Essentially, fund managers are not seeking yield but buying downside protection, and in a world where market shocks are more common, the resulting premium is perfectly understandable." - source Societe Generale

Consumer Staples, or how to play defense when capital preservation dominates performance:

"The chart below plots the performance of the Global Consumer Staples sector versus high yield bonds, high yield equity and the overall global equity market. As the chart shows, in recent years, whilst ‘high dividend yield’ has largely tracked the equity market, the Consumer Staples sector has more closely mirrored the high yield bond market. Not only are total returns similar, but drawdown (peak to trough losses) have also been around 35%." - source Societe Generale

"From the chart above it seems that the outperformance of high yield bonds and the Consumer Staples sector has been fairly consistent, but the relative performance versus MSCI World reveals that the bulk of outperformance came during the financial crisis of 2008/09 and the Eurozone crisis in the summer of 2011." -  source Societe Generale

"Capital preservation is a concept that many investors understand but perhaps underestimate. No doubt this is because major market declines tend to happen suddenly and on a relatively infrequent basis. This is also why market bears – as we know from experience – tend to look completely stupid most of the time. To demonstrate the importance of loss avoidance, we have taken the often quoted Consumer Staples sector as our example and we aim to demonstrate that the premium afforded to this sector and its outperformance in recent years is courtesy of downside protection." - source Societe Generale

On another note, Gary Shilling in a Bloomberg column on the 30th of January entitled - Where to Invest While Markets Remain "Risk On" also seems to favor Consumer Staples as part of an overall investment strategy:

"Consumer Staples and Food:

Items such as laundry detergent, bread and toothpaste are essentials that are purchased in good times and bad. Their producers’ equities will remain attractive. The Standard &Poor’s Consumer Staples Sector Index was up 10.8 percent last year, after a 14 percent gain in 2011. Among retailers of consumer staples, the winners may continue to be discounters, such as Family Dollar Stores Inc. U.S. used-merchandise stores have been thriving. Producers of national brands will need to continue to adapt to weak consumer incomes and high unemployment by emphasizing cheaper “value” products."

But moving back to the downside protection offered by Consumer Staples, Societe General offers some an interesting analysis on the downside premium offered by this sector:

"Firstly, we devise a strategy that invests mainly in Consumer Staples but we switch into the equity market rather than the staying in the sector during periods of major market declines. By doing this we effectively remove the drawdown protection from the sector by being totally invested in equities instead of lower-beta Consumer Staples during market pullbacks. 

So, with perfect foresight, we identify the months when the MSCI World index lost more than 3%. Then, rather than stay invested in Consumer Staples (as you should), we invested (mistakenly) in the equity market instead. The purpose here is to understand just how important capital preservation is in driving overall returns from the Consumer Staples sector versus the market by replacing the best months of relative performance with the market return. By investing in the market, and not the sector, during those periods when the market was down 3% or more effectively kills the outperformance of the sector, to the extent that the sector goes from outperforming by nearly 50% to underperforming by 20%. This in part starts to demonstrate just how important the downside protection is in driving the performance of this sector.

If we repeat the exercise but this time for a threshold of -5% or more (which happened 12% of the time), we find that the sector performs in-line with the market. This suggests to us that the value of the put option offered by the Consumer Staples sector protects investors from monthly declines of 5% or more i.e. you can generate market performance and be insulated to a degree from major market shocks." - source Societe Generale

"Let’s explain things a little differently. Imagine a strategy where one invested in the market most of the time but (with perfect foresight) switched into the Consumer Staples sector during months when the market fell by 3% or more. By comparing this strategy to the performance of Consumer Staples sector we can measure the protection being offered and, as we show below, see that this strategy outperforms the Consumer Staples sector, implying that the better performance of the sector is not sufficient to compensate the investor when markets decline by 3% or more. But what happens if we switch to investing in the sector during months when the market fell by 5% or more?

While our strategy invests in the market 88% of the time and in the sector just 12% of the time, its performance almost perfectly matches the overall performance of the Consumer Staples sector. Hence our assertion that the sector is primarily a market index with a put option attached, much in the same way we describe another quality measures such as Merton’s balance sheet model and Piotroski’s F-score." 

Societe Generale concluded their note with the following important point relating to the limitation of the protection offered by Consumer Staples:

"Of course the Consumer Staples sector does not fully protect the investor as it too can fall, but historically by only 60% of the market fall. Valuing our put option is difficult. But with the incidence of months when the market fell by 5% or more being twice as common in the last 15 years than in the previous 25 (see below), this put option has become more important to investors. As we have stated on numerous occasions, understanding drawdown risk and capital preservation qualities is paramount to understanding what an asset is worth. With the events in Cyprus still ringing in our ears, that has never been more relevant than today." - source Societe Generale

The downward protection from Consumer Staples can be illustrated from the following Bloomberg graph highlighting the performance of Consumer Staples versus Consumer Discretionary and Financials since October 2007 until October 2012:

Another way in protecting a portfolio is investing on ETFs such as the PowerShares S&P Low Volatility Portfolio for protection from stock-market swings as indicated by Charles Stein in his Bloomberg article from the 20th of March - ETF Beating Markets With Gains Less Price Swings:

"Investors who bought PowerShares S&P 500 Low Volatility Portfolio for protection from stock-
market swings when it debuted almost two years ago got an unexpected bonus: They also made more money.
The $4.1 billion exchange-traded fund, which owns the 100 stocks in the Standard & Poor’s 500 Index with the lowest volatility, gained 30 percent since its inception on May 5, 2011, compared with 21 percent for the benchmark U.S. index. The ETF, the largest of its kind, achieved that performance with about 70 percent of the volatility in the index, giving it a risk-adjusted return double that of the market, according to the BLOOMBERG RISKLESS RETURN RANKING." - source Bloomberg

Of course, no real surprise looking at the composition of the index detailed in the article and the "defensive theme" of its components:

"In the low-volatility index, utilities represented 31 percent of the portfolio, compared with 3.4 percent in the regular U.S. benchmark, and consumer staples accounted for 24 percent, versus the index’s 11 percent at the end of February, according data from Standard & Poor’s. Information technology, which represents 18 percent of the S&P 500, made up 3.6 percent of the low-volatility portfolio.
Among the biggest individual holdings in the PowerShares ETF are Johnson & Johnson and PepsiCo Inc., the two stocks in the S&P 500 with the lowest volatility over the past year --10.1 and 10.4, respectively. Johnson & Johnson, based in New Brunswick, New Jersey, advanced 21 percent in the 12 months ended March 15, and Purchase, New York-based PepsiCo climbed 18 percent." - source Bloomberg.

In terms of top contributors to the performance, in continuation to our "defensive them" the article indicated Consumer Staples as the top performers:

"The biggest contributor to the ETF’s performance over the past year include H.J. Heinz Co., the Pittsburgh-based ketchup maker being acquired by Warren Buffett’s Berkshire Hathaway Inc. and 3G Capital Inc., portfolio data compiled by Bloomberg show. Hershey Co., the Hershey, Pennsylvania-based candy company, was the second-biggest." - source Bloomberg

We indicated early in our conversation we would look at the "greatest anomaly" namely that low volatility stocks have provided the best long-term returns. In addition to Societe Generale's point on the defensive features of low-volatility stocks such as Consumer Staples, they also provide the best returns as indicated in the same Bloomberg article from Charles Stein:

“The long-term outperformance of low-risk portfolios is perhaps the greatest anomaly in finance,” Harvard Business School Professor Malcolm Baker wrote in a 2011 paper in Financial Analysts Journal.

When S&P designed the low-volatility product, it traced the history of the index back to 1990 in a process known as backtesting. The numbers showed that over three, five years and 10 years, the low-volatility index had a higher total return than the S&P 500.

Harvard’s Baker said market data going back to the 1930s show that low-volatility stocks have delivered about the same returns as market indexes, a result that contradicts the notion that higher risks translate to higher rewards. “In this case you are taking less risk, but not giving up any return,” he said in a telephone interview.

Investor Behavior

Other studies have come to similar conclusions, according to Joel Dickson, a senior investment strategist at Valley Forge, Pennsylvania-based Vanguard Group Inc., who said finance scholars have a hard time explaining the mismatch. Most theories attempting to explain it revolve around investor behavior.

Because people are overly smitten with fast-growing, glamorous companies, they bid up the prices of those stocks to the point where future returns suffer, said Dickson.

Dickson offers a caveat. When stocks soar as they did in the 1990s, low-volatility holdings can underperform for long stretches, said Dickson, a senior investment strategist at Valley Forge, Pennsylvania-based Vanguard Group Inc. “As an investor you have to be willing to stomach periods

when this strategy gets killed,” Dickson said in a telephone interview.

In the nine years ended Dec 31, 1999, a period in which stocks gained 21 percent a year, the S&P 500 Index returned more than twice as much as its low-volatility counterpart, according to data compiled by Bloomberg. It also outperformed after accounting for price swings, with a risk-adjusted return of 32 percent, compared with 20 percent for the low-volatility index." - source Bloomberg

We therefore disagree with Gary Shilling, Consumer Staples are not purely a "Risk-On" strategy given that as indicated by Bloomberg:

"In the nine years ended Dec 31, 1999, a period in which stocks gained 21 percent a year, the S&P 500 Index returned more than twice as much as its low-volatility counterpart, according to data compiled by Bloomberg. It also outperformed after accounting for price swings, with a risk-adjusted return of 32 percent, compared with 20 percent for the low-volatility index." - source Bloomberg

But, Consumer Staples are mostly a defensive play that can outperform during phases of "Risk-Off" which we have been experiencing on numerous occasions since the financial crisis of 2008:

"The low-volatility index did best in times when stocks fell, such as 2000 to 2002, and in 2008, according to S&P data. In 2008 the low-volatility index fell 21 percent compared with 37 percent for the S&P 500." - source Bloomberg.

On a final note, in relation to the differences between equity and as posited by our good friend Paul Buigues, Head of Research at Rcube Global Macro Research in his post "Long-Term Corporate Credit Returns":

"Equity is an infinite claim on the free cash flows generated by a company. Due to the inherent uncertainty of future cash flows, relying on a pure valuation framework to predict equity returns is often a disappointing experience, for both specific companies and equity as an asset class.

Corporate debt, on the other hand, is generally a finite claim on a predetermined stream of cash flows (coupons + principal repayment)."

Corporate credit is a much simpler bet than equity, especially for investors that hold credit instruments until maturity. For instance in High Yield as indicated by our friend Paul "initial spreads explain nearly half of 5yr forward returns" (even for a rolling investor (whose returns are also driven by mark-to-market spread moves). 

When it comes to yield the PowerShares ETF has a dividend yield of 2.78 percent compared to 2.13 for the S&P 500 Index, according to data compiled by Bloomberg, so could it be that after all Consumer Staples in  the equity space are a much more simpler bet, in similar fashion to corporate credit? One has to wonder...

"Right is its own defense." - Bertolt Brecht

Stay tuned!

Japan - the rise of the Kagemusha

KAGEMUSHA = "Man who pulls the strings or exerts influence behind the scene"

- Source(s): Japanese-English dictionary.

Looking at the meteoric rise of the Japanese Yen versus the US Dollar in conjunction with a rising Nikkei index and receding credit spreads, with the latest endorsement of Mr Kuroda for the Bank of Japan governor and with Mr Iwata and Mr Nakaso for deputy governor, we could not resist but to use a reference to probably one of our most favorites films of all time, namely Kagemusha, by the legendary film director Akira Kurosawa.

In Japanese, "Kagemusha" is a term used to denote a political decoy. While the movie is set in the Sengoku period of Japanese history, it tells the story of a lower-class criminal who is taught to impersonate a dying warlord in order to dissuade opposing lords from attacking the newly vulnerable clan. Looking at the growing vulnerabilities of Japan, we wonder if the very aggressive Japanese quantitative stance, is not used as a deterring policy to dissuade speculators from attacking it or merely an internal political ploy relating to the upcoming upper elections in July, or if there is more to it.

As we have argued in our conversation "If at first you don't succeed":

"Looking at Prime Minister Shinzo Abe's first major policy initiative to end deflation and "boost" growth by announcing a cool 10.3 trillion yen fiscal (USD 116 billion dollars for now...) "stimulus" program, we could not resist but refer to W.E. Hickson's proverb which became colloquial "If at first you don't succeed".In a "Central Banks" world dominated by the "Sorcerer's apprentice" aka Dr Ben Bernanke and our "Generous Gambler" aka Mario Draghi, with impeding July elections in Japan, Abe's "fiscal alkaloid" shot, is no doubt politically motivated in order for the Liberal Democratic Party to gather support ("rising asset prices") before the upper elections in July." 

In Japan, courtesy of "Abenomics" we do have "lift-off in risky assets" or "Risk-On" that is; as indicated in the below graph we have been monitoring, displaying the USD/JPY exchange rate, the Nikkei index and the credit risk Itraxx Japan CDS spread (inverted) - source Bloomberg:

Not only has the "Kagemusha" managed to lift risky assets, but he also has managed to reduce the perception of risk in credit spreads as indicated by the significant fall in credit spreads for many Japanese companies as displayed in the below graph from CMA part of S&P Capital IQ:

Exporters from Toyota Motor Corp. to Nintendo Co.  have all raised their profit forecasts boosted by  a yen that has slumped nearly 16% against the dollar since mid-November, which is increasing the value of their overseas sales. In fact car manufacturer Toyota is seeing a windfall from the falling yen as reported by Keith Naughton and Craig Trudell in Bloomberg in their article from the 12th of March entitled - Toyota Boosted by Yen Detroit Sees as $5,700-Per-Car Bonus:

"Toyota Motor Corp., which last year overtook General Motors Co. to become the world’s largest automaker even as its profit margins lagged behind the industry, is riding a weakening yen that has Detroit executives concerned.

The yen has fallen 17 percent against the dollar since Oct. 31 as Shinzo Abe, who became Japan’s prime minister in December, advocated for the decline to improve his country’s economy. The currency’s slide gives Toyota and other Japanese automakers a financial gain on every car, which they can use to cut prices, boost ads and improve products. Morgan Stanley estimates the currency boost at $1,500 per car, while the Detroit automakers contend the figure is $5,700 per vehicle.

“We’re concerned about what the long-term ramifications are,” Joe Hinrichs, Ford Motor Co.’s North American chief, said last month at a Cleveland engine factory the automaker is expanding. “Our workers and our businesses should not be disadvantaged by governments intervening in currencies.”

Asked about the swooning yen last week at the Geneva Motor Show, Sergio Marchionne, chief executive officer of Chrysler Group LLC and Fiat SpA, told Bloomberg Television: “We didn’t need this, to put it bluntly. It’s going to make life tougher.”

The yen’s impact is already falling to the bottom line. Toyota last month raised its profit forecast by 10 percent for the fiscal year ending March 31, to 860 billion yen ($9 billion), a five-year high. That would more than double the previous year’s profit and signal a complete comeback from the global recalls and 2011 Japanese earthquake that shook Toyota’s standing as a leader in earnings, sales and quality." - source Bloomberg.

Not only Toyota is reaping the benefits from a boost in exports from a falling yen but its employees too are benefiting from increased bonuses as indicated by Bloomberg:

"The CHART OF THE DAY shows bonuses in 2012 and this year for workers at Toyota, Honda Motor Co., Nissan Motor Co., Hitachi Ltd. and Mitsubishi Heavy Industries Ltd. The world’s largest automaker agreed yesterday to the proposal by its union for a 2013 average bonus of about 2.05 million yen ($21,375) per employee, or about 5.9 months of base salary, the most in five years. Honda raised its bonus to 5.9 months from 5 months a year earlier, according to data compiled by Bloomberg. Japanese exporters are paying higher bonuses after the yen weakened to its lowest level against the dollar since August 2009. Abe called for business leaders’ help in fighting deflation that’s persisted more than a decade, and last month asked companies to raise salaries as part of annual wage negotiations with unions."  - source Bloomberg.

On top of that, as indicated by the weekly inflows report from Bank of America Merrill Lynch, this week has seen record inflows in Japan equity funds:

"

Record $2.0bn inflows to Japan equity funds (since 2002 in absolute terms and 

8 straight weeks).

 On the other hand, appetite for EM equity funds beginning to fade ($0.5bn redemptions) after 24 straight weeks of inflows." - source Bank of America Merrill Lynch, The Flow Show, 14th of March 2013.

Japanese equities have returned 13.1% in the past three months, making fourth spot, while Greece equities have returned 27.4% and taken the number one spot (no surprise there for us, after all there is life and value after default...).

And if you had read our January conversation "If at first you don't succeed" you would not be surprise by the performance:

"One could as well play Japan equities more aggressively by buying Japanese bank stocks given that the recovery in stock prices will lift the value of the Japanese banks' equity investments and will substantially reduce their impairment losses they have been booking in their regular YTD results. We told you this several times, but, remember, a bank is a leverage play on the economy, it is the second derivative of a sovereign. As we indicated in the "Fabian Strategy", the big beneficiaries of the "magic tricks" in 2012 have been European Banks. Could the big beneficiaries of 2013 be the Japanese banks? One has to wonder..."

In relation to our January call on Japanese bank stocks, we have long argued that a bank, are more than a beta play. Given Japan returned to growth in the fourth quarter with an annualized GDP growth of 0.2% in the three months through December compared to an expected 0.4% contraction,(bolstering the Kagemusha's campaign in ending 15 years of deflation), we thought playing Japanese financials was not a bad idea after all. In fact we are not the only ones to think about this, as Deutsche Bank's Yoshinobu Yamada recent note on the Japanese Banking sector on the 8th March entitled - Time to revisit "common sense", has been validating our views. Domo arigato!

"A turning point for trends Investors that are not positive on Japanese banks offer common sense reasons built up over the past several years, namely the sustained downtrend in domestic lending and loan spreads. This perspective holds that even as value plays, Japanese banks are not appropriate as long-term holdings without prospects for growth. However, we think recent macroeconomic data indicates that the time has come to reconsider this "common sense"." - source Deutsche Bank.

We hate sounding like a broken record but, no credit, no loan growth, no loan growth, no economic growth and no reduction of aforementioned budget deficits (our case for Europe...), but in the case of Japan we beg to slightly differ and Deutsche Bank's note is indicating the following in relation to credit growth:

"Lending growth at major banks picking up pace:

According to the Principal Figures of Financial Institutions (preliminary) released by the BoJ on the 8th, the domestic average lending balance at all banks rose 1.9% YoY in February to a total of ¥402.4trn (figure below).

Growth has been gradually accelerating since turning positive in November 2011, increasing to 1.4% in December 2012, and 1.6% in January 2013. City banks (major banks) are the category attracting attention. Though lending growth turned positive only in December 2012, lagging all banks by about a year, it improved to 1.1% by February. After the Lehman Shock in September 2008, lending at city banks increased as they became an alternative to the CP market, but turned negative in September 2009 and fell -4.7% by Nov-Dec 2010. We think recent lending growth for both major and regional banks is primarily due to residential mortgages and loans to large companies, while loans for SMEs continue decreasing. Many observers hold that lending demand for large companies is not related to economic recovery factors, due to recent increases in loans to power companies and M&A related. However, if deflation turns to inflation, it will make sense for large companies to use leverage. Though this does not mean lending demand in Japan is surging, we think it at least indicates a need to revise the common sense notion that domestic lending is on a sustained downtrend." - source Deutsche Bank

But one might wonder if boosting employees bonuses and the recent surge in Japanese lending will be enough to defeat the deflationary illness which has been plaguing Japan as indicated in this Bloomberg graph:

"The most lending by Japanese banks since May 2009, fueled by record liquidity, has yet to reverse

more than a decade of deflation, underscoring the challenge facing the next Bank of Japan governor.

“Just expanding the injection of money won’t help,” said Masamichi Adachi, senior economist at JP Morgan Securities Asia in Tokyo and a former BOJ official. The next governor needs to show how he’ll improve the transmission mechanism by which extra monetary easing translates into rising prices, he said.

 The CHART OF THE DAY tracks how the gauge of consumer prices excluding fresh food and energy has been negative every month since January 2009, even as M2 money supply rose to a record. Meanwhile, bank lending excluding trusts in January rose to the most in 3-1/2 years, data compiled by Bloomberg show." - source Bloomberg.

While in the aforementioned movie, the Kagemusha successfully fooled concubines and grandson by impersonating his daimyo Takeda Shingen, in a fit of overconfidence, he attempted to ride Shingen's spirited horse.  He fell off, and, those who rushed to help him saw that he did not have their lord's battle scars, and was finally revealed as an impostor. 

Looking at the growing current account for Japan has reported by Bloomberg in Japan Returned to Growth in Fourth Quarter in Boost for Abe, one can wonder if eventually this Kagemusha's strategy will successfully reverse Japanese woes:

The current account recorded a third monthly deficit in  

January after a 4.7 trillion yen surplus last year, the smallest 

in comparable data that goes back to 1985. “We expect the current account to continue deteriorating as rapid population aging reduces saving rates and prompts the country to draw down on its net foreign assets, Izumi Devalier, a Japan economist at HSBC Holdings Plc in Hong Kong, said in a research report this week. This ‘‘will have significant ramifications for Japan’s ability to continue funding its ballooning deficits domestically.’’ - source Bloomberg

Eventually, the Takeda clan, behind the Kagemusha plot, is completely destroyed at the battle of Nagashino in 1575. At the end of the film, the thief used as a decoy, the Kagemusha, witnessed the battle and at its end he is the last one to hold up the Takeda banner. In a final show of loyalty, he takes up a lance and makes a futile charge against Oda's fortifications, ultimately dying for the Takeda clan. The final image is of the Kagemusha's bullet-riddled body being washed away down a river, next to the flag of the Takeda clan but, that's another story...

"If you keep your sword drawn and wield it about then no one will dare approach you and you will have no allies. But if you never draw it, it will dull and rust and people will assume that you are feeble." - Hagakure, The Book of the Samurai, Yamamoto Tsunetomo.

Stay tuned!

Assets Volatility and the US dollar - the end of the post Lehman era?

"The illiterate of the future will not be the person who cannot read. It will be the person who does not know how to learn." - Alvin Toffler 

While we recently touched on the dollar's appeal whenever there was a pullback in our conversation "Time for a pullback? Get some greenbacks!", many pundits are commenting on the radical change in the trend of the US dollar in recent weeks. It seems the US dollar is reacting as a "Risk-On" asset on the back of the recent raft of positive economic data coming from the United States, as well as benefiting from the "Quantitative race" led by the Bank of England and the Bank of Japan as well as the difficult economic situation in Europe. A few strategists are concluding that it marks the end of the the post-Lehman period and a return to a more normal macro environment.

The evolution of the Dollar Index (blue line), Volatility 1 year ATM (At the Money) for the S and P500 and the Eurostoxx 50 (red lines) since 2009 - source Bloomberg:

"The Dollar Index, which Intercontinental Exchange Inc. uses to track the greenback against the currencies of six U.S. trade partners, has climbed about 3.9 percent this year on signs of a broadening economic recovery, after declining 0.5 percent in 2012. Based on Bloomberg Correlation-Weighted Indexes, the dollar climbed 3.3 percent this year, making it the second-best performer after Sweden’s krona among 10 developed-market currencies. The Dollar Index rose for a fifth straight week through March 8, its longest rally since June, as American employers added more jobs last month than economists forecast, adding to signs the U.S. recovery is outpacing other developed nations." - source Bloomberg - Dollar Rally on U.S. Growth Endorsed by Jen as BNP Sees Reversal

In at a recent note from Bank of America Merrill Lynch entitled "Sweet spots and sellers's strikes", from the 14th of March, one can notice in the below graph displaying their GFSI, (being their global risk index integrating volatilities, credit, money markets, etc) falling towards 2007 lows while the DXY (Dollar index) is breaking away:

"Higher US Dollar & Lower Volatility = End of “New Normal” But without a doubt the biggest worry to investor positioning right now would be a reversal in the strong US housing and consumer story. Happily the latest US retail sales data allay such fears, and the leadership of the US in The Great Rotation remains ongoing. This is best seen by the decisive end to the post-Bear Stearns, deflationary relationship of strong dollar and higher volatility (Chart 3)" - source BAML

"It was just six years ago that the share price of Lehman Brothers reached an all time high. And less than five years after the investment bank declared the largest bankruptcy in US history, US stock indices are at new all-time highs. Thanks in great part to Ben Bernanke and other central bankers, Wall Street is once again riding high.

The big question is, can stocks hold or extend these highs? Our asset allocation is skewed toward a view that yes, equities can extend their gains over the course of 2013. But we also continue to think the probability and durability of that outcome would be improved by a “healthy pullback”." - source BAML

As far the DXY is concerned, it looks like since the beginning of the year, the Greenback has definitely staged a comeback!

"You can use all the quantitative data you can get, but you still have to distrust it and use your own intelligence and judgment." - Alvin Toffler

Stay tuned!