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					EQUITY RESEARCH                                                                                                     U.S. Portfolio Strategy | 9 March 2012




U.S. PORTFOLIO STRATEGY WEEKLY
April showers

    OVERVIEW: The U.S. growth outlook is the most important driver of equity                                        Barry Knapp
                                                                                                                    +1 212 526 5313
    markets; while the housing market is stabilizing, household deleveraging still has
                                                                                                                    barry.knapp@barcap.com
    room to go, and several near-term restraints on the macro outlook and equity
                                                                                                                    BCI, New York
    market fundamentals remain. Major central bank easing into an improving
    economic outlook is winding down. It might take some time for momentum to
                                                                                                                    Eric Slover, CFA
    dissipate, but we would be cutting risk.
                                                                                                                    +1 212 526 6426
    FOCUS (SMALL CAPS): The Russell 2000 has underperformed the S&P 500 by                                          eric.slover@barcap.com
    roughly 4% since the beginning of February. We believe this is largely attributed                               BCI, New York
    to a pullback in monetary easing expectations. The performance has cleared
    much of this premium; we don’t recommend a short position to express a QE                                       Michael Keller, CFA
                                                                                                                    +1 212 526 2404
    view.
                                                                                                                    michael.keller@barcap.com
    FOCUS (DIVIDEND YIELD STRATEGIES): The positive performance of dividend                                         BCI, New York
    yield strategies is consistent with a falling stock market, rising volatility, and a
    deteriorating macro outlook. Dividend yield strategies are trending toward                                      Adam Sussi
    positive correlation with returns, a signpost for caution. Legging into dividend                                +1 212 526 9778
    yield exposure seems attractive.                                                                                adam.sussi@barcap.com
                                                                                                                    BCI, New York

Dividend yield strategies are trending toward positive correlation with returns,
consistent with underperformance of small caps and cyclical sector                                                  VIEWS ON A PAGE                     2

  Normalized slope coefficients, 20dma                                                         Index, 20dma         OVERVIEW                            3
  0.20                                                                                                  1.0
                                                                                                                    SMALL CAPS                          7
  0.15                                                                                                  0.8
                                                                                                        0.6
  0.10                                                                                                              DIVIDENDS                          11
                                                                                                        0.4
  0.05                                                                                                  0.2         MARKET SNAPSHOT                    14
  0.00                                                                                                  0.0
 -0.05                                                                                                  -0.2        EARNINGS                           15
                                                                                                        -0.4
 -0.10
                                                                                                        -0.6
 -0.15                                                                                                  -0.8
 -0.20                                                                                                  -1.0
      Jan-10 Apr-10        Jul-10   Oct-10 Jan-11 Apr-11            Jul-11    Oct-11 Jan-12 Apr-12
                      Div Yld, Earnings Yld, Book/Mkt, Size, Sector (L)               S&P 500 (R)


Source: Barclays Capital. Note: twenty day moving average of daily returns




Barclays Capital does and seeks to do business with companies covered in its research reports. As a
result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity
of this report.
Investors should consider this report as only a single factor in making their investment decision.
PLEASE SEE ANALYST(S) CERTIFICATION(S) AND IMPORTANT DISCLOSURES BEGINNING ON PAGE 16.
Barclays Capital | U.S. Portfolio Strategy Weekly


VIEWS ON A PAGE
                                         While U.S. growth has proven resilient to confidence shocks, it remains constrained by
                                         policy uncertainty and household balance sheet deleveraging. In addition, the economy is
                                         vulnerable to a deteriorating inflation/growth tradeoff given rising gasoline prices. In our
                                         view, the upside for stocks in early 2012 is limited. Financial repression has limited the Fed’s
                                         effectiveness, rendering it counterproductive as inflation volatility rises (and multiples fall).
                                         We believe a period of significant equity market valuation improvement can’t begin until the
                                         Fed begins the exit strategy process.

                                         Our 2012 S&P 500 price target is 1,330 and our operating EPS forecast is $103 (6% y/y)
                                                                         Full-Year 2010a              Full-Year 2011e              Full-Year 2012e
                                          S&P 500                       Level            y/y         Level           y/y          Level           y/y
                                          Operating EPS*                 $84            48%           $97           48%            $103           6%
                                          P/E                            15x             7%           13x          –13%           12.9x           -1%
                                          Index                         1,258           23%         1,260           13%           1,330           6%
                                         *Trailing-four-quarter EPS. Source: Barclays Capital


                                         We believe the U.S. elections will be far more significant to domestic investors in 2012 than
                                         concerns about Europe. Once the GOP selects a candidate and the debate about debt,
                                         deficits and the 2013 ‘fiscal cliff’ moves to center stage, the recent bounce in confidence
                                         should fade. This negative theme should continue until investors begin to discount the
                                         outcome of the elections following conventions in August.

                                         The deceleration in earnings growth along with public sector deleveraging uncertainty in
                                         the U.S. and Europe and high levels of inflation volatility leave us expecting a roughly flat
                                         multiple of 12.9x and a price target of 1330 for 2012.


                                         We favor Technology, Energy and Healthcare

                                            Technology
                                                  Energy ↓
                                           Health Care ↑
                                            Industrials ↓
 Large-scale asset purchases are           Discretionary
     a tailwind for cyclicals and a               Telecom
          headwind for defensives
                                             Materials ↓
                                             Financials ↓
                                                  Utilities ↑
                                                    Staples
                                                                Underweight    Marketweight-       Marketweight            Marketweight+      Overweight

                                         Note: ↑/↓ = increases/decreases on 12/02/11 to ratings in place since 10/20/11 or earlier. Source: Barclays Capital
                                         Overweight: The performance of the S&P 500 sector is expected to significantly outperform the performance of the
                                         S&P 500 index in the next 3–6 months. Marketweight Plus: The performance of the S&P 500 sector is expected to
                                         outperform the performance of the S&P 500 index in the next 3–6 months. Marketweight: The performance of the
                                         S&P 500 sector is expected to perform in line with the S&P 500 index in the next 3–6 months. Marketweight Minus:
                                         The performance of the S&P 500 sector is expected to underperform the performance of the S&P 500 index in the next
                                         3–6 months. Underweight: The performance of the S&P 500 sector is expected to significantly underperform the
                                         performance of the S&P 500 index in the next 3–6 months.


                                         We have maintained a slight cyclical bias after scaling back to begin 2012; Technology,
                                         Energy, and Healthcare should outperform; Staples, Utilities, Financials and Materials should
                                         lag.
9 March 2012                                                                                                                                               2
Barclays Capital | U.S. Portfolio Strategy Weekly


OVERVIEW

                                                April showers
                           Barry Knapp               The U.S. growth outlook is the most important driver of equity markets; while the
                   +1 212 526 5313                   housing market is stabilizing, household deleveraging still has progress to make, and
         barry.knapp@barcap.com                      there are several remaining near-term restraints on both the macro and equity
                       BCI, New York                 market fundamentals.

                     Eric Slover, CFA                The period of major central bank easing into an improving economic outlook is
                   +1 212 526 6426                   winding down. It might take some time for the momentum to completely dissipate,
          eric.slover@barcap.com                     but we would be cutting risk.
                       BCI, New York
                                                We’re not gonna’ party like it’s 1995
          The U.S. equity market is             After an impressive start to 2012, the U.S. equity market is beginning to show signs of
        beginning to show signs of              vulnerability. This supports what seemed intuitive; the ‘Great Deleveraging Cycle’ is not
                           vulnerability.       complete. Central banks can facilitate an orderly deleveraging process, but they cannot
                                                prevent the process itself. Rising energy prices, a deceleration in central bank easing,
                                                slowing earnings growth, political risk in the developed world and the Middle East, and
                                                overzealous financial sector regulatory policy all point to a 2012 unlike 1995, when the S&P
                                                500 rose for eight months without more than a 2 ½% correction, on its way to a 34% gain
                                                for the year.


Figure 1: The data surprise index has been falling,                            Figure 2: … however, relatively robust labor reports have, in
highlighting constraints on domestic growth prospects …                        part, kept a positive bias to the market implied outlook

 Index                                                                           3m/3m % chg
                                                                                 saar
  0.20                                                                           10
  0.15                                                                             8
                                                                                   6
  0.10
                                                                                   4
  0.05                                                                             2
  0.00                                                                             0
 -0.05                                                                            -2
                                                                                  -4
 -0.10
                                                                                  -6
 -0.15                                                                            -8
 -0.20                                                                          -10
      Jan-11           May-11               Sep-11        Jan-12                     00 01 02 03 04 05 06 07 08 09 10 11 12
                            US Data Surprise Index (5d ma)                                                  Payroll Proxy 3mma   3m

Source: Barclays Capital                                                       Source: Haver, BLS, Barclays Capital


  We believe the most important                 We’ve argued throughout the post-crisis period that the U.S. growth outlook is the most
    driver of equity markets is the             important driver of equity markets, not domestic monetary strategy, public policy or
  U.S. growth outlook, which isn’t              external factors. Even last fall, when the European experiment seemed to be crumbling,
  likely to soften much until April.            improving data in the U.S., following a spike in market implied recession risk, pushed stocks
                                                erratically higher. While we see numerous constraints to continued improvement in
                                                domestic growth -- the U.S. data surprise has been falling and 1Q12 GDP forecasts are at
                                                risk -- the relatively robust labor, auto and chain store sales reports have kept a positive bias
                                                to the market implied outlook. An early Easter probably ensures at least another month of
                                                decent retail sales and, consistent with the last couple of years, the labor data have started


9 March 2012                                                                                                                                    3
Barclays Capital | U.S. Portfolio Strategy Weekly


                                           strong, but in 2010 and 2011 it began to soften in the 2nd quarter, implying the outlook isn’t
                                           likely to soften much until April.

       There are several near-term         Longer term, we believe household balance sheet deleveraging and bottoming in the
      restraints on both macro and         housing market, as evidenced by negative regional house price correlation, provide strong
      equity market fundamentals.          underlying support for U.S. growth. However, while the housing market is stabilizing,
                                           household deleveraging still has progress to make, and there are several remaining near-
                                           term restraints on both macro and equity market fundamentals. In the interest of brevity,
                                           here is a list of looming issues with brief explanation.

                                               •     Energy prices: The ongoing debate is which matters more; the price level or rate of
                                                     change. While the rate of change’s effect on confidence is important, cash flow is
                                                     king in a deleveraging cycle. The rise in prices is offsetting the improvement in the
                                                     household financial obligations ratio, leaving the median consumer struggling.
                                                     Nominal consumption has been stable throughout the recovery, but energy price
                                                     spikes have led to drops in real PCE (i.e., 4Q09 and 2Q11). The stock market is
                                                     pointing to a similar episode; the relative weakness in transports, industrials, small
                                                     caps and the unexpected drop in ISM are leading indicators of a coming decline in
                                                     real PCE, at least they were last year at this time.


Figure 3: While the housing market is stabilizing, household              Figure 4: Higher energy prices are offsetting the decline in
deleveraging still has progress to go                                     the household financial obligations ratio ,,,,,

  %                                                                           %
                                                                                                Gasoline & Motor Oil / Income Before Tax
 80                                                        75              16            14.6         Household Income Quintiles
                                                                           14
 70
                                                                  64       12     10.2
 60
                                                    57                     10                           8.5
 50                                                                          8                                        6.8
                                                                                                  6.0
                                                                             6                                  4.8                 5.2
 40                             44                                                                                            3.6
                                                                             4                                                                   2.9
                                                                                                                                          2.1
 30                                                                          2
 20                                                                          0
      80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12                               Lo               2             3             4           Hi
                             Mortgage Debt / Nominal GDP                                        2010: $2.60 avg price       2012e: $4.00 avg price

Source: FRB, Haver, Barclays Capital                                      Source: BLS, EIA, Haver, Barclays Capital


                                               •     Public Policy: As long as the proportional delegate GOP primary drags on, we are in
                                                     a political sweet spot. The four candidates continue to debate items such as cuts
                                                     in corporate and individual taxes, the elimination of government agencies, the
                                                     number of oil wells drilled on Federal land, and how quickly the budget can be
                                                     balanced, all constructive commentary for equities. When the GOP settles on a
                                                     candidate, the debate should be far less favorable for business and investor
                                                     sentiment. Issues such as the 2013 ‘fiscal cliff’ and unsustainable entitlement
                                                     programs will quickly come back into focus.

                                               •     Earnings Season: The equity market powered through less-than-impressive 4Q11
                                                     earnings reports on the back of falling European contagion risk. We think 1Q12
                                                     earnings, beginning in mid-April, won’t be much better. The broad trend
                                                     continues to be slowing earnings growth due to mid-cycle factors; our primary
                                                     concern, however, is margins. Our margin diffusion index has fallen below the


9 March 2012                                                                                                                                           4
Barclays Capital | U.S. Portfolio Strategy Weekly


                                                         boom/bust line because of deterioration in early stage sectors such as consumer
                                                         discretionary and technology. The sector most vulnerable in 1Q12 is industrials.
                                                         Our operating margin diffusion index is falling faster than net income margins,
                                                         likely due to a loss of top line momentum from slowing emerging markets growth.
                                                         At 1375 we believe the market is discounting 10% earnings growth in 2012, a level
                                                         that seems unrealistic after investors see 1Q12 earnings reports.


Figure 5: Our margin diffusion index has fallen slightly below               Figure 6: Industrials look most at risk for 1Q12; net margins
the boom/bust line                                                           haven’t fallen as fast as other margin measures

 %, 3mma                                                                       %, 3mma
 80                                                                            90

 70                                                                            80
                                                                               70
 60
                                                                               60
 50
                                                                               50
 40
                                                                               40
 30                                                                            30
 20                                                                            20
      93     95     97      99      01   03   05       07    09    11               93     95    97      99      01   03   05     07   09   11
                     SPX: Net Mgn Diffusion            Oper Mgn                          IND: Net Mgn Diffusion        Oper Mgn        Gross Mgn

Source: FactSet, Barclays Capital                                            Source: FactSet, Barclays Capital


                                                   •     Monetary Policy Tailwind: Complicating factors in the inflation outlook (e.g.,
                                                         gasoline prices) have the Fed effectively on hold until June—absent a serious near-
                                                         term deterioration in the growth outlook—debating the merits of sterilized large
                                                         scale asset purchases. The logic similar to that behind the original Operation Twist;
                                                         a fear of a run on U.S. gold reserves during the Bretton Woods fixed exchange rate
                                                         era precluded increasing the monetary base. The 2012 version of Operation Twist,
                                                         in contrast to QE2, was not initially followed by a sharp drop in the dollar and
                                                         broad rise in commodity prices. Sterilized QE would also avoid increasing the
                                                         monetary base, thereby reducing the risk of a drop in the dollar.

                                                         There are likely to be technical problems with sterilized QE. The banking system
                                                         needs excess liquidity for regulatory purposes and it is no longer clear that
                                                         purchasing agency MBS is plausible. There has been a tightening of the agency
                                                         market since the decision last September, which we advocated, to reinvest MBS
                                                         paydowns into MBS rather than Treasuries. We expect the Fed will struggle with
                                                         near-term communication (next week’s meeting) as it probably needs to
                                                         acknowledge improving current conditions, while maintaining concerns about the
                                                         outlook, keeping QE3 on the table. The risk of the market focusing only on the
                                                         current conditions assessment, reacting similarly to the Humphrey Hawkins
                                                         testimony (sending stocks, gold and real treasury rates down and the dollar
                                                         higher), seems elevated. With ECB President Draghi taking a step back from ECB
                                                         accommodation at Thursday’s press conference, it seems the Fed, ECB and Bank
                                                         of England are all on hold, at least in the near term.

                                                   •     Europe: The three year LTROs have likely pre-refunded ~18 months of unsecured
                                                         debt maturities. However, this implies a greater percentage of banking system
                                                         assets is encumbered, negative for the rest of the capital structure from senior

9 March 2012                                                                                                                                       5
Barclays Capital | U.S. Portfolio Strategy Weekly


                                                     unsecured debt to equity. We expect to see additional evidence of deleveraging,
                                                     including slow bank credit growth, particularly in countries with both current and
                                                     now capital account deficits (Spain, Italy, Portugal and obviously Greece). February
                                                     service sector PMI reports in Italy and Spain were weak, heightening this concern.
                                                     The political environment seems likely to take a turn for the worse as well. Brussels
                                                     is already under pressure from the right as Spain balks at sharp fiscal adjustments.
                                                     In April, the pressure from the left could become extreme if the French election
                                                     unfolds as the polls would currently imply and the new President doesn’t
                                                     dramatically shift his positions.


Figure 7: Large Fed purchases of agency MBS may not be                   Figure 8: The 3 yr LTROs likely pre-refunded ~18 months of
plausible given a tightening of that market                              unsecured maturities , but a greater percentage of the
………………………….                                                              banking system is now encumbered

 2012 Supply Forecast ($bn)                                                  %
 450                                                                       350
 400
                                                                           300
 350
 300                                                                       250
 250                                                                       200
 200
 150                                                                       150
 100                                                                       100
  50
   0                                                                        50
 -50                                                                         0
                 Pre Op Twist                   Post Op Twist                         Est LTRO borrowing / 2012 Sr unsec debt maturities
    Net Issuance     Fed Paydowns       Treasury Sales   GSE Run-Offs                 Netherlands      Germany        France    Italy   Spain

Source:, Barclays Capital Agency MBS Research                            Source: Barclays Capital Fundamental Credit Research


  It might take some time for the           A common denominator in several of these broad areas of risk is the month of April. With
        momentum to completely              the markets sending numerous signals that 2012 is not 1995—weakening relative
       dissipate, but we would be           performance of small caps and cyclical sectors, gold falling, energy prices increasing and
                         cutting risk       real 10 year treasury rates rising—we believe the period of major central bank easing into an
                                            improving economic outlook is winding down. It might take some time for the momentum
                                            to completely dissipate, but we would be cutting risk. Our thoughts on how to approach
                                            small caps and dividends follow.




9 March 2012                                                                                                                                    6
Barclays Capital | U.S. Portfolio Strategy Weekly


SMALL CAPS

                                         Small-cap performance & Fed policy expectations
                                             The Russell 2000 has underperformed the S&P 500 by roughly 4% since the
                                             beginning of February. We believe this is largely attributed to a pullback in monetary
                                             easing expectations. The performance has cleared much of this premium; we don’t
                                             recommend a short position to express a QE view.

The recent underperformance in           After outperforming the S&P 500 by 5% in January, the Russell 2000 has underperformed by
small caps has coincided with an         4% since the beginning of February, only recently stabilizing. Small caps are more sensitive
    underperformance of cyclical         to market volatility and economic cycle; their underperformance must be considered in the
                            sectors      context of broader risk reduction or a loss of economic momentum. The sharp
                                         underperformance of small caps led the selloff in the S&P by nearly a month.


                                         Figure 9: The sharp underperformance of small caps is often a precursor of things to
                                         come

                                           Ratio                                                                                            Index
                                           1.60                                                                                             1,400
                                                                                                                                            1,350
                                           1.55
                                                                                                                                            1,300

                                           1.50                                                                                             1,250
                                                                                                                                      ?     1,200
                                           1.45                                                                                             1,150
                                                                                                                                            1,100
                                           1.40
                                                                                                                                            1,050
                                           1.35                                                                                             1,000
                                              Mar-10      Jun-10     Sep-10    Dec-10    Mar-11    Jun-11       Sep-11   Dec-11    Mar-12
                                                                      Rel Performance: Smalll / Large Cap (L)        S&P 500 (R)

                                         Source: FactSet, Barlcays Capital


                                         In January 2011, small caps had a similar period of underperformance, while the broad
                                         market moved higher, which we believe signalled a near-term top in the S&P 500 was
                                         approaching. Even so, on the back of a QE supportive statement from Chairman Bernanke,
                                         the Russell 2000 outperformed by more than 6% over the next two months despite a
                                         pullback in the S&P and stalling of the relative performance of cyclical to defensive sectors.
                                         On the surface the drivers of underperformance are not clear, but a deeper dive reduced
                                         some factors and reinforced others. We believe the underperformance can be largely
                                         attributed to a pullback in monetary easing expectations; the January payrolls report and Mr.
                                         Bernanke’s testimony marking the peak and rapid acceleration in underperformance,
                                         respectively. We are cautious on risk and small caps, but the recent relative performance
                                         suggests to us that much of the QE premium has cleared, and we don’t believe a short
                                         position in small caps is the appropriate way to express a QE view

                                         The January Effect
 Historically there is not a bias to     Before we get to fundamentals, we’ll acknowledge technicals. The January effect, the well
the downside in February and/or          documented seasonal driver of relative small cap performance (see Blume and Stambaugh
                            March        Biases In Computed return: An Application to the Size Effect), is credited with providing a
                                         consistent boost to small cap stocks in January. Our analysis finds a very large, positive and

9 March 2012                                                                                                                                        7
Barclays Capital | U.S. Portfolio Strategy Weekly


                                         statistically significant coefficient for January (see table 10). The coefficient in February
                                         while positive, is insignificant; leaving us unable to conclude the sell-off was a reversal of
                                         the January Effect.

Figure 10: The coefficient in February is insignificant, we’re unable to conclude the sell-off was a reversal of the January Effect
Month             Jan          Feb      Mar            Apr          May    Jun           Jul    Aug         Sep           Nov        Dec

Coefficients       4.4          1.9      0.7           (0.2)        1.2    3.6           1.1     0.7        1.8           0.8        0.6
P-value %          0.2         17.9     64.3           88.3         39.0   1.0        43.1      59.8       19.8           55.7       69.4
Source: Fama-French, Barclays Capital


                                         Size or sectors?
  Sector bias is clearly not driving     A rogue sector could explain underperformance particularly given the sector weight
     small cap underperformance          differences across indices; however, this is not the case. All sectors and industry groups in
                                         the Russell 2000, both market and equal weighted, have recently underperformed their
                                         respective matches in the S&P 500. The technology sector was an outsized source of large
                                         cap outperformance; however, AAPL added 350bps to the sectors’ outperformance.
                                         Stripping out AAPL, the value weighted small cap tech sector still underperformed by
                                         ~500bps, but in-line with other sectors. Equal weighted performance is generally uniform.

                                         Figure 11: All sectors and industry groups in the Russell 2000 have recently
                                         underperformed. Equal weighted performance is generally uniform
                                                                                                   Relative returns

                                                                                  Value         Equal          Value              Equal
                                         R2000                                   weighted      weighted       weighted           weighted

                                         Sector                                    12/31/12-2/2/12                  2/2/12-3/7/12

                                         Consumer Discretionary                    4.4           4.4              (2.2)            (3.4)
                                         Consumer Staples                          7.7           5.4              (2.4)            (2.1)
                                         Energy                                    5.0           4.2              (2.9)            (2.8)
                                         Financials                                (0.2)        (2.0)             (4.2)            (4.9)
                                         Health Care                               6.8           8.0              (2.2)            (2.9)
                                         Industrials                               3.9           2.4              (2.8)            (3.8)
                                         Information Technology                    2.9           4.0              (8.0)            (4.9)
                                         Materials                                 7.7           4.6              (3.0)            (3.2)
                                         Telecommunication Services                11.6          9.8              (3.8)            (3.8)
                                         Utilities                                 3.7           3.2              (2.2)            (2.8)
                                         Total                                     4.8           4.4              (4.1)            (3.9)
                                         Source: Barclays Capital


                                         Valuations
                                         Long-term relative valuations for small versus large cap equities are rich, but in our
                                         normalized valuation model, they did not hit one standard deviation from the mean, as was
                                         the case in 2011 (see USPSW: A small (cap) problem that might get big 4/29/11). Absolute
                                         valuations were higher as well, with forward PE multiples of 20x; following the recent small
                                         cap selloff, multiples sit at 18x (down from 19x),




9 March 2012                                                                                                                                8
Barclays Capital | U.S. Portfolio Strategy Weekly


                                         Monetary policy
         The pattern of small cap        Small caps are sensitive to monetary policy accommodation; in the 1980’s, 1990’s, and
performance around these dates           2000’s small caps outperformed leading into Fed policy normalization thereafter
       follows that of other asset       underperforming (see USPSW: It ain’t over till it’s over 3/11/11), In a normal cycle you
           classes that are highly       would expect small caps to react to potential adjustments to the fed funds rate, but in the
  responsive to monetary easing,         ZIRP (Zero Interest Rate Policy) era, instead they react to changes in the probability of
         such as precious metals         further accommodation. Three instances highlight this point particularly well; recently the
                                         2/3/12 January payrolls report and the 2/29/12 Humphrey Hawkins address, and in early
                                         2011 the 1/26/11 FOMC statement. The near-term perception of Fed accommodation was
                                         altered—reduced in Feb 2011 and increased in Jan 2011—and small cap equities responded
                                         accordingly. The pattern of small cap performance around these dates follows other asset
                                         classes highly responsive to monetary easing, such as precious metals, metals & mining
                                         stocks and Treasuries. The extension of the decision timeframe, (probably until June) likely
                                         induced a reduction in risk.

                                         Figure 12: Small cap performance around these dates follows that of other asset classes
                                         highly responsive to monetary easing
                                          Relative Returns                             2/3/2012                   2/29/2012                 1/26/2011

                                         Probability of easing                          Lowered                      Lowered                     Raised

                                         Sectors                                    -1wk           +1wk        -1wk         +1wk          -1wk        +1wk

                                         S&P 500 (Operating Basis)                   0.0           0.0          0.0           0.0          0.0            0.0
                                         Russell 2000                                2.0           (0.5)       (0.7)         (2.4)        (3.1)           1.2
                                         CBOE Market Volatility Index               (3.7)          1.6         (2.0)         18.3         11.1         (1.0)
                                         SPDR S&P Metals & Mining ETF                0.7           (3.0)       (1.7)         (6.8)        (4.2)           5.1
                                         Gold (NYM $/ozt)                            1.3           (3.0)        1.0          (4.4)        (2.3)        (0.7)
                                         US 10Y T-Note Yield (TPI)*                 17.8           11.0         7.3          12.4         22.4            11.3
                                         Source: FactSet, Barclays Capital. Note: Treasury performance is absolute, not relative


                                         A good time to get small?
      While we would suggest on          If the indications of slowing market momentum, weakening macro data, public policy
     caution at current levels if a      uncertainty around the general election or geo-political risks lead to a correction small caps
  growth scare unfolds, investors        would typically underperform. Still, looking at the probabilities and up/downside payouts of
     should consider legging into        retesting the lows and the recent highs, there is a case for an asymmetric payoff in favor of
                        small caps       small caps. So, while we would suggest caution at current levels, if a growth scare unfolds,
                                         and small caps continue to underperform, investors should consider adding small cap
                                         exposure.

                                         Figure 13: Looking at the probabilities and associated up/downside of relative performance
                                         retesting the lows and the recent highs there is an asymmetric payoff in favor of small caps
                                          Index                     Price 3/8/12     Recent Highs            % chg             8/22 lows            % chg

                                          Russell 2000                  807                 830                2.9                  651             -19.3
                                          S&P 500                      1365                 1370               0.4                 1124             -17.7
                                          Difference                                                           2.5                                   -1.7
                                         Source: Barclays Capital




9 March 2012                                                                                                                                                     9
Barclays Capital | U.S. Portfolio Strategy Weekly


DIVIDENDS

                                         Dissecting dividends: Signpost for a market drop?
           U.S. Portfolio Strategy           The outperformance of dividend yield strategies is consistent with a falling stock
                  Eric Slover, CFA           market, rising volatility, and a deteriorating macro outlook. Dividend yield strategies
                 +1 212 526 6426             are trending toward positive correlation with returns, a signpost for caution. We
         eric.slover@barcap.com              recommend paring risk and legging into dividend yield exposure.
                    BCI, New York
                                         Historically, periods of profitable dividend yield strategies (e.g., buying the top 20% of high
               U.S. Equity Product       yielding stocks and selling the bottom 20%) are consistent with a falling stock market, rising
                    Management           volatility, and a deteriorating macro outlook. Despite the underperformance of dividend
                      Gavin Smith        indices and the highest yielding stocks, dividend yield strategies are trending toward
                 +1 212 528 6139         positive correlation with returns, consistent with underperformance of other market
       gavin.smith@barcap.com            measures, such as small caps and cyclical sector. Along with the rising price of oil and
                    BCI, New York        gasoline, these signals in early 1Q11 and 2Q11 served as signposts for the deteriorating
                                         market conditions, which ultimately led to strong outperformance from dividend yield
                                         strategies.

These signals served as signposts
                                         Figure 14: Dividend yield strategies are trending toward positive correlation with returns.
  in early 1Q11 and 2Q11, for the
                                         These strategies have performed with a falling stock market, rising volatility and a
 deteriorating market conditions,
                                         deteriorating macro outlook
    which ultimately led to strong
   outperformance from dividend            Normalized slope coefficients, 20dma                                                              Index, 20dma
                    yield strategies        0.20                                                                                                       1.0
                                            0.15                                                                                                       0.8
                                                                                                                                                       0.6
                                            0.10
                                                                                                                                                       0.4
                                            0.05                                                                                                       0.2
                                            0.00                                                                                                       0.0
                                           -0.05                                                                                                       -0.2
                                                                                                                                                       -0.4
                                           -0.10
                                                                                                                                                       -0.6
                                           -0.15                                                                                                       -0.8
                                           -0.20                                                                                                       -1.0
                                               Jan-10     Apr-10     Jul-10     Oct-10     Jan-11     Apr-11     Jul-11        Oct-11   Jan-12    Apr-12

                                                        Div Yld, Earnings Yld, Book/Mkt, Size, Sector (L)                 Div Yld (L)            S&P 500 (R)

                                         Source: FactSet, Barclays Capital. Note: twenty day moving average of daily returns


                                         Following the outperformance of high yielding stocks and sectors such as utilities in the
                                         3Q/4Q11 downturn, we’ve fielded a number of client questions on different dividend yield
                                         strategies. Against this backdrop, we thought it would be well founded to examine the value
                                         of investing in dividends. In this note we dissect dividend strategies and outline various
                                         implications for investors, including:

                                             Historical performance of various dividend yield strategies and the economic states in
                                             which they outperform;

                                             Examine the explanatory power of dividend yield and when this power is consumed by
                                             other effects such as size, value and sectors;




9 March 2012                                                                                                                                                  10
Barclays Capital | U.S. Portfolio Strategy Weekly


                                             Evaluate the signal from the performance of dividend yield strategies and what it infers
                                             about the state of the markets and economy. Is this a precursor for a drop in the
                                             market?

                                         Performance of dividend strategies: Is it state dependent?
                                         Do dividend yield strategies consistently add value for investors? To answer this question,
                                         we focus on three basic strategies: 1) High Dividend Yield vs. Low Dividend Yield; 2)
                                         Dividend Payers vs. Non-Dividend Payers; 3) High Dividend Yield vs. Non Dividend Payers.
                                         The rolling 12 month averages of monthly returns are shown in Figure 15.

                                         Figure 15: Average Monthly Returns to Dividend Strategies
                                          Period                                  Payer v Non Payer              Hi v Lo               Hi v No Pay

                                         Last 12 Months                                 1.22%                    0.60%                    1.50%
                                         Last 2 Years                                   0.44%                    0.30%                    0.56%
                                         Last 5 Years                                   -0.06%                   0.07%                    0.05%
                                         Last 10 Years                                  -0.12%                   0.11%                    -0.07%
                                         Last 20 Years                                  -0.08%                   0.10%                    -0.06%
                                         Whole History                                  -0.27%                   0.06%                    -0.25%
                                         Source: Fama-French, Barclays Capital.


     While all three dividend yield      While all three strategies have generated positive returns over the past two years, the
       strategies have generated         longer-term effectiveness is not apparent. These strategies have had large swings of
    positive returns over the past       positive and negative returns. This raises the question of whether performance is dependent
       two years, the longer-term        on market or economic states. To explore this possibility, we identify five common variables
    effectiveness is not apparent.       used to classify market or economic states: the return to the stock market, change in 10y
                                         Treasury yields, NBER recessions, VIX, and the ISM. Figure 16 paints a clear picture of when
                                         dividend yield strategies perform— falling markets, rising volatility and a deteriorating
                                         economic outlook.

                                         Figure 16: Dividend yield strategies average monthly returns in different states
                                                                                        Payer v Non Payer              Hi v Lo             Hi v No Pay

                                         Stock Market Return > 0                               -1.80%                  -0.90%                -2.15%
                                         Stock Market Return <= 0                              1.98%                    1.47%                2.55%
                                         Change 10y Tsy > 0                                    -1.10%                  -1.21%                -1.71%
                                         Change 10y Tsy <= 0                                   1.62%                    1.80%                2.41%
                                         NBER Recession = 0                                    -0.37%                  -0.02%                -0.38%
                                         NBER Recession = 1                                    0.14%                    0.38%                0.14%
                                         VIX < 20 and Increasing                               0.37%                    0.15%                0.39%
                                         VIX >= 20 and Increasing                              1.49%                    1.02%                1.90%
                                         VIX >= 20 and Decreasing                              -1.49%                  -0.71%                -1.83%
                                         VIX < 20 and Decreasing                               -0.42%                  -0.53%                -0.70%
                                         ISM <= 50 and Increasing                              -1.03%                  -0.17%                -1.10%
                                         ISM > 50 and Increasing                               -0.43%                   0.07%                -0.40%
                                         ISM > 50 and Decreasing                               0.43%                    0.08%                0.39%
                                         ISM <= 50 and Decreasing                              0.68%                   -0.03%                0.59%
                                         Source: Fama-French, ISM, NBER, Haver, Barclays Capital. Note: Stock market from 1926, 10y Tsy from 1953, VIX from
                                         1986, ISM from 1948




9 March 2012                                                                                                                                             11
Barclays Capital | U.S. Portfolio Strategy Weekly


                                         Is it really dividends?
   We question whether dividend          Our previous analysis demonstrated that the performance of a basic dividend yield strategy
  yield is simply a proxy for other      could be explained by macro variables that capture the state of the economy and the level
  common stock characteristics.          of investor risk aversion. These state variables are associated with periods when we would
                                         also expect investors to have strong sector preferences (e.g., cyclicals vs. defensives) or
                                         perhaps risk preferences (e.g., small cap vs. large cap). With this in mind we question
                                         whether dividend yield is simply a proxy for other common stock characteristics.

                                         To disentangle these confounding effects, we run cross-sectional regressions to examine
                                         the ability of dividend yield to explain the cross-section of returns before and after
                                         controlling for other effects. Specifically, we run the following regressions:

                                          Returni ,t = α t + Dividend Yield i ,t + ε i ,t                                                                 (1)

                                                                                                            N −1
                                          Returni ,t = α t + Dividend Yield i ,t + Sizei ,t + Valuei ,t +   ∑ Sector Dummy
                                                                                                            D =1
                                                                                                                                 D
                                                                                                                                 i ,t   + ε i ,t          (2)


                                         where Return is the 1 month stock return; Size is the log of market capitalization; Value is
                                         the log of book-to-market; and Sector Dummy is equal to 1 if the stock belongs to sector D,
                                         otherwise 0. We define the ten sectors using the 2-digit GICS codes. Figure 17 charts the
                                         rolling 12-month average of the coefficient on dividend yield. We then re-run equations (1)
                                         and (2) on a daily basis, with a focus on the last year.

 Other factors such as size, value
                                         Figure 17 (Rolling 12-month average of the coefficient on dividend yield): A regression of
  and sectors can explain a good
                                         cross-sectional returns highlights returns explained by dividends and others factors
        deal of returns. A strategy
 controlling for these unintended          Normalized slope coefficients, 12mma
  exposures reduces the dividend            2.0                                                                                                       2.0
                 strategy volatility
                                            1.5                                                                                                       1.5
                                            1.0                                                                                                       1.0
                                            0.5                                                                                                       0.5
                                            0.0                                                                                                       0.0
                                           -0.5                                                                                                       -0.5
                                           -1.0                                                                                                       -1.0
                                           -1.5                                                                                                       -1.5
                                                  92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
                                                    Div Yld, Earnings Yld, Book/Mkt, Size, Sector (L)              Div Yld (L)           Difference (R)

                                         Source: Barclays Capital. Note: twelve month moving average of monthly returns


                                         As Figure 17 highlights (see the series labelled ‘Difference’), other factors at times explain a
                                         good deal of returns. A strategy controlling for these unintended exposures reduces the
                                         strategy volatility and outperforms a simple ‘uncleansed’ strategy in down markets. In the
                                         recent January rally, the explanatory power of other variables is particularly evident, with
                                         defensive sectors and larger cap stocks contributing to negative returns (see Figure 18
                                         below).




9 March 2012                                                                                                                                                 12
Barclays Capital | U.S. Portfolio Strategy Weekly


                                         What do dividend strategies tell us about the current state?
    We would be wary a pattern           Dividend yield strategies are trending higher after weakness during the January rally.
      similar to early 2011 when         Positive returns from these strategies are consistent with a falling stock market, rising
       dividend strategies quietly       volatility and a deteriorating macro outlook. The S&P 500 is showing signs of pause, and
   outperformed as the S&P 500           while volatility remains subdued, short-term measures of correlation are rising and the ISM
 traded in a range for nearly two        has shown signs of weakness. A continued sharp move higher in dividend yield strategy
                         quarters        performance should coincide with a selloff. However, we would be wary of a pattern similar
                                         to early 2011 when dividend strategies quietly outperformed as the S&P 500 traded in a
                                          range for nearly two quarters, failing to break the top-end of the range and ultimately falling
                                          to 1100 (Figure 18).

                                         With performance of dividend yield strategies added to the list of cautious signals from the
 We recommend paring back risk
                                         market, mixed macro data and a pause in monetary policy accommodation expectations,
   and legging into dividend yield
                                         we recommend paring risk, legging into dividend yield exposure seems attractive. Dividend
                          exposure
                                         yielding strategies that limit unintended exposures to other factors such as beta, size, value
                                         and sector effects would reduce short-term volatility effects.


                                         Figure 18 (Rolling 20-day average of the coefficient on dividend yield): We would be
                                         wary of a pattern similar to early 2011 when dividend strategies quietly outperformed as
                                         the S&P 500 traded in a range for nearly two quarters

                                           Normalized slope coefficients, 20dma                                                              Index, 20dma
                                            0.20                                                                                                     1.0
                                            0.15                                                                                                     0.8
                                                                                                                                                     0.6
                                            0.10
                                                                                                                                                     0.4
                                            0.05                                                                                                     0.2
                                            0.00                                                                                                     0.0
                                           -0.05                                                                                                     -0.2
                                                                                                                                                     -0.4
                                           -0.10
                                                                                                                                                     -0.6
                                           -0.15                                                                                                     -0.8
                                           -0.20                                                                                                     -1.0
                                               Jan-10    Apr-10      Jul-10     Oct-10     Jan-11     Apr-11     Jul-11        Oct-11   Jan-12   Apr-12
                                                        Div Yld, Earnings Yld, Book/Mkt, Size, Sector (L)               Div Yld (L)         S&P 500 (R)

                                         Source: FactSet, Barclays Capital. Note: twenty day moving average of daily returns




9 March 2012                                                                                                                                              13
Barclays Capital | U.S. Portfolio Strategy Weekly


MARKET SNAPSHOT

Figure 1: Price performance                                                         Figure 2: Relative performance, total return
                     As of                                                           Ratio                                                                Ratio
Index              03/08/12       1wk, %       3m, %         12m, %     YTD, %
                                                                                     1.15                                                                  1.15
Discretionary         345           0.4         13.1          11.9       11.8
Staples               342           0.3           5.2         11.5       1.9         1.10                                                                   1.10
Energy                552           -0.8          7.8         -3.6       5.9         1.05
                                                                                                                                                            1.05
Financials            199           -0.6        15.4         -11.9       13.4
                                                                                     1.00
Health Care           419           0.0           9.0         9.8        4.3                                                                                1.00
Industrials           317           -0.5        11.3          -1.0       8.5         0.95
Technology            474           -0.3        14.3          11.5       15.5        0.90                                                                   0.95
Materials             231           -1.8          9.5         -4.1       9.3
                                                                                     0.85                                                                   0.90
Telecom               131           0.6           5.8         3.9        1.0
                                                                                          3/9/10         9/9/10           3/9/11       9/9/11
Utilities             177           0.0           1.6         7.9        -3.4
                                                                                                     Rel Perf: Cyclical / Defensive Sectors (L)
S&P 500               1,366         -0.3        10.7          3.3        8.6
                                                                                                     Rel Perf: S&P 600 (small) / S&P 500 (large) (R)
Russell 2000          2,004         0.5         11.6          -2.2       8.8
Note: S&P 500 sector indices. Source: FactSet, Barclays Capital                     Source: FactSet, Barclays Capital

Figure 3: Valuation multiples
                                                                        Valuation Metrics (as of 03/08/12)
                   P/Earnings       P/Earnings                         Div Yield                    P/Sales                          EV/EBITDA     EV/EBITDA
Index                 LTM              NTM     Div Yield LTM             NTM         P/Book          LTM            P/Sales NTM         LTM           NTM
Health Care           14.5             11.9         2.1                  2.4           2.5            1.2               1.2             7.5           7.5
Technology            14.7             13.0         1.0                  1.1           3.5            2.4               2.2             8.1           7.3
Staples               16.0             14.9         2.9                  3.2           3.7            1.0               0.9             9.5           9.1
Industrials           14.5             13.0         2.2                  2.5           2.8            1.2               1.1             9.6           8.9
Telecom               17.3             16.8         5.6                  5.6           1.9            1.1               1.1             5.7           5.6
Financials            13.1             10.8         1.7                  2.1           1.0            1.4               1.6              --            --
Materials             13.7             12.7         2.1                  2.2           2.5            1.2               1.1             7.3           6.8
Discretionary         17.0             15.0         1.4                  1.7           3.3            1.1               1.0             8.3           7.7
Energy                11.3             10.8         1.8                  2.0           2.0            0.9               0.9             5.1           4.9
Utilities             13.6             14.2         4.2                  4.3           1.5            1.2               1.2             8.0           7.7
S&P 500               13.9             12.7         2.0                  2.2           2.2            1.3               1.2             8.1           7.6
Russell 2000          22.4             17.4         2.3                  2.2           1.7            0.9               0.9             9.3           8.2
Note: S&P 500 sector indices. NTM is comprised of bottom-up consensus estimates from FactSet. *Valuation score is the renormalized sum of normalized relative
valuation metrics expressed in common units of standard deviation away from the mean (z-score) since 1973. Source: FactSet, Barclays Capital.



Figure 4: S&P 500 net EPS revisions                                                 Figure 5: Equity risk premium (to real IG credit yields)

 Index                                                                               %
    60                                                                               13
                                                                                     12
    40                                                                               11
                                                                                     10
    20                                                                                9
                                                                                      8
      0                                                                               7
                                                                                      6
   -20                                                                                5
   -40                                                                                4
                                                                                      3
   -60                                                                                2
                                                                                      1
   -80                                                                                0
                                                                                     -1
  -100                                                                               -2
          05     06        07       08       09         10        11     12               76       81          86       91     96      01         06      11
                 Net Revisions: S&P 500, 13wk ma                    4wk ma                              Real Credit ERP             Mean           +/- SD

Source: Barclays Capital                                                            Source: Barclays Capital


9 March 2012                                                                                                                                                    14
Barclays Capital | U.S. Portfolio Strategy Weekly


EARNINGS UPDATE

                                                484 companies, 99% of the S&P 500 market cap, have reported 4Q11 results. 56% have
                                                topped revenue estimates and 67% earnings. Aggregate earnings results have exceeded
                                                estimates by 3.8%, and revenues have beaten by 1%. Blended revenue growth is 8.2% and
                                                earnings growth is 6.5%; excluding Energy, revenue growth is 8% and earnings 5.7%.
                                                Blended margins are down 15 bps y/y, up 4 bps excluding Energy and Financials.


Figure 1: Earnings are exceeding estimates by 3.8% and                            Figure 2: 67% of companies have beat earnings estimates
revenues have beaten by 1%
                           Revenues, Surp %              Earnings, Surp %
Sector                     3Q11       4Q11               3Q11        4Q11           %
DIS                         1.0         0.0               2.0         4.8           90             82    82 79
                                                                                                76    74       74 74 73 76 73
STA                         2.2         0.2               1.4         0.4           80
                                                                                             67                               67
ENR                         4.8        (0.4)              7.2         (0.3)         70 59 59
FIN                         2.6       11.2               17.2         1.0           60
HLC                         1.4         0.9               5.1         2.5           50
IND                         0.6        (0.7)              4.6         7.9           40
TEC                         0.3         1.1               3.2         9.0           30
MAT                         2.4         1.0               3.8         3.7           20
TEL                        (0.2)        0.9               6.3        (11.5)
                                                                                    10
UTL                        (5.7)       (9.0)              4.1         4.2
                                                                                     0
SPX                         1.7        1.0                6.1         3.8
                                                                                            3Q08
                                                                                                   4Q08
                                                                                                          1Q09
                                                                                                                 2Q09
                                                                                                                        3Q09
                                                                                                                               4Q09
                                                                                                                                       1Q10
                                                                                                                                              2Q10
                                                                                                                                                      3Q10
                                                                                                                                                             4Q10
                                                                                                                                                                    1Q11
                                                                                                                                                                           2Q11
                                                                                                                                                                                   3Q11
                                                                                                                                                                                          4Q11
SPX ex-FIN                  1.6        (0.1)              4.1         4.2
SPX ex-ENR                  1.1        1.3                5.8         4.4
                                                                                                                 S&P 500 % Positive EPS Surprise
SPX ex-FIN,ENR              0.8        (0.1)              3.5         5.1
Source: FactSet, Barclays Capital                                                 Source: FactSet, Barclays Capital
Note: Actual results relative to consensus estimates (actual / estimates -1)      Note: Number of companies that beat estimates as a percentage of total



Figure 3: S&P 500 4Q11 blended revenue growth is 8.2% and earnings growth is 6.5%
                                    Revenues, $Bn                                Earnings, $Bn                                                       Profit Margin

                                            4Q11                                    4Q11                                                                  4Q11
S&P 500 sector           4Q10 (A)          (Blend)         y/y %      4Q10 (A)     (Blend)                y/y %                4Q10 (A)                  (Blend)                  y/y ppt

DIS                          323             349            8.1           21.3       22.6                    6.1                      6.6                    6.5                  (0.12)
STA                          388             415            7.0           24.4       25.1                    2.8                      6.3                    6.1                  (0.24)
ENR                          346             379            9.4           26.8       29.9                  11.7                       7.7                    7.9                   0.16
FIN                          251             283           12.8           33.4       32.1                  (4.0)                  13.3                       11.3                 (1.98)
HLC                          284             299            5.3           26.7       28.4                    6.3                      9.4                    9.5                   0.09
IND                          270             286            5.8           21.8       24.9                  14.1                       8.1                    8.7                   0.63
TEC                          254             284           11.7           48.5       56.1                  15.5                   19.1                       19.7                  0.64
MAT                          80               86            7.2           5.8        5.0                  (14.0)                      7.3                    5.8                  (1.44)
TEL                          71               78            9.6           4.3        3.1                  (28.7)                      6.1                    3.9                  (2.12)
UTL                          76               77            2.1           5.6        5.7                     1.7                      7.3                    7.3                  (0.03)
SPX                        2,343            2,536           8.2          218.6      232.7                   6.5                       9.3                    9.2                  (0.15)
SPX ex-FIN                 2,092            2,253           7.7          185.2      200.6                   8.3                       8.9                    8.9                   0.05
SPX ex-ENR                 1,997            2,158           8.0          191.9      202.8                   5.7                       9.6                    9.4                  (0.20)
SPX ex-FIN,ENR             1,746            1,874           7.3          158.4      170.7                   7.8                       9.1                    9.1                   0.04
Source: FactSet, Barclays Capital




9 March 2012                                                                                                                                                                                     15
Barclays Capital | U.S. Portfolio Strategy Weekly


ANALYST(S) CERTIFICATION(S)
I, Barry Knapp, hereby certify (1) that the views expressed in this research report accurately reflect my personal views about any or all of the subject
securities or issuers referred to in this research report and (2) no part of my compensation was, is or will be directly or indirectly related to the specific
recommendations or views expressed in this research report.
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9 March 2012                                                                                                                                                16
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