Richard Bernstein

Four Things You Probably Don’t Know

Richard Bernstein Advisors LLC520 Madison Avenue28th Floor New York, NY 10022212-692-4000

www.rba-llc.com

Four Things You Probably Don’t Know

We continue to believe that we are in the earlier phases of a much more normal bull

market than most investors realize. By our reckoning, stock markets have four phases:

1. Denial: The bull market can’t happen. Shouldn’t be happening. Won’t continue.

2. Acceptance: Fear of missing out leads investors to increasingly participate.

3. Brainwashing: New investment world. The bull market is never going to end.

4. Bear market: The end of investing as we know it.

The current bull market in the US that began in March of 2009 seems to be mired in

Phase 1. Most investors can’t believe that it is happening or don’t believe that it can last

much longer.

Because of this fear and disbelief, there are a number of important facts that investors

seem to be ignoring. Here are just four:

#1: The US dollar troughed in 2008.

Although the consensus seems to be that the US is “debasing” its currency, few seem to

have noticed that the US dollar actually troughed in 2008 and has been appreciating for

more than two years. As Chart 1 shows, the DXY Index, plotted using weekly data for the

last ten years, bottomed on St. Patrick’s Day 2008.

November 17, 2010

Chart 1

Four Things You Probably Don’t Know

Richard Bernstein Advisors LLC520 Madison Avenue28th Floor New York, NY 10022212-692-4000

www.rba-llc.com

2

#2: Industrial America is heating up.

Many of our proprietary indicators look at changes in economic or financial indicators,

because financial markets tend to move not on “good or bad”, but rather on “better or

worse”.

Accordingly, we regularly examine changes in capacity utilization rates in 55 different US

industries. A year ago, only 11 of those 55 industries were experiencing improving

capacity utilization; today, that number has risen to 46. This does not mean that those 46

industries are experiencing full-fledged bottlenecks that result in significant pricing power.

But it does indicate that production is improving. (One would expect to see production

bottlenecks in the latter stages of the economic cycle, and they may yet come, but it

would be very unusual to see such bottlenecks in an early- to mid-cycle period such as

the current one.)

Chart 2, which shows 12-month changes in capacity utilization rates for 55 industries,

strongly indicates to us that the US economy is not heading for a double-dip. Capacity

utilization continues to increase, not decrease, across a broad range of businesses.

Chart 2

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Source: Richard Bernstein Advisors LLC, FRB

Four Things You Probably Don’t Know

Richard Bernstein Advisors LLC520 Madison Avenue28th Floor New York, NY 10022212-692-4000

www.rba-llc.com

3

#3: Positive revenue surprises are increasing in the US, but negative EPS

surprises are growing in EM.

Corporate profits have been much stronger than most analysts forecasted a year ago,

and are now near their record high as a proportion of national income. It seems odd to us

that investors have not regarded the rebound in corporate profits as a bullish

development. In fact, most investors still believe that corporate profits are growing only

because of cost cutting.

Profit cycles typically begin with a period during which profits growth is driven by

improving productivity, and the current cycle was no different. As profit cycles mature,

revenues typically begin to grow as well. Again, this cycle seems no different.

It is well known that over 70% of S&P 500 companies reported positive earnings

surprises during the latest reporting period. What is less well known is that, according to

Bloomberg, over 50% of S&P 500 companies reported positive revenue surprises for the

same period.

Investors appear to be caught up in the prevailing emerging-markets euphoria because,

evidently, they have not noticed that emerging markets produced the largest proportion of

negative earnings surprises during the latest reporting period -- according to Bloomberg,

40% of reporting EM companies, which is roughly twice the proportion found in the US.

Table 1

Revenue and EPS Surprises by Global Region (as of 11/15/10)

Positive

Revenue

Surprises

Positive EPS

Surprises

Negative

Revenue

Surprises

Negative EPS

Surprises

MSCI Japan 37% 49% 50% 29%

MSCI EM 53% 46% 34% 40%

Russell 2000 53% 56% 33% 33%

S&P 500 53% 71% 33% 20%

MSCI ACWI 55% 59% 37% 31%

MSCI Europe 69% 63% 29% 30%

Source: Richard Bernstein Advisors LLC, MSCI, Bloomberg

Four Things You Probably Don’t Know

Richard Bernstein Advisors LLC520 Madison Avenue28th Floor New York, NY 10022212-692-4000

www.rba-llc.com

4

#4: The US recovery is relatively “normal”.

The current path of US GDP in this recovery is much more normal than most investors

realize and is, in fact, largely retracing its paths following both the 1990 and the 2001

recessions. Although both those recoveries were weak by post-WWII standards, the

current overall economic recovery is not at all unusual. Note in Chart 3 how closely the

current recovery matches those of the past two recessions

As Charts 4 and 5 indicate, the stock market tends to follow the path of corporate profits,

and that is indeed the case with this recovery. Of the ten post-WWII economic

recoveries, seven corporate-profits cycles were stronger than the current one, and three

were weaker. In stock market terms, three were stronger and seven were weaker.

Chart 3

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0 1 2 3 4 5 6 7 8 9 10 11 12

GD

P In

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Quarters Past Trough

Economic Growth Emerging from Recessions

Dec-49

Jun-54

Jun-58

Mar-61

Dec-70

Mar-75

Sep-80

Dec-82

Mar-91

Dec-01

Jun-09

Source: Richard Bernstein Advisors LLC, NBER, BEA

Chart 4 Chart 5

-30%

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Dec

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Mar

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Sep

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Mar

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Dec

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Recession Trough

S&P 500 Performance 16 Months After Recession Troughs

Source: Richard Bernstein Advisors LLC, Morningstar

0%

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Recession Trough

Corporate Profits* Growth after Recession Troughs

Source: Richard Bernstein Advisors LLC, NBER, BEA*Computed after-tax, with IVA & CCA adjustments four quarters after trough.

Four Things You Probably Don’t Know

Richard Bernstein Advisors LLC520 Madison Avenue28th Floor New York, NY 10022212-692-4000

www.rba-llc.com

5

This cycle’s wall of worry

Phase 1 of a market cycle is typically characterized by the proverbial “wall of worry”,

when investors tend to overlook or ignore relevant facts (like those presented here)

supportive of market performance, and we think that is clearly the case today.

Richard Bernstein is chief executive officer of Richard Bernstein Advisors LLC.

Nothing contained herein constitutes tax, legal, insurance or investment advice, or the

recommendation of or an offer to sell, or the solicitation of an offer to buy or invest in, any

investment product, vehicle, service or instrument. Such an offer or solicitation may only be

made by delivery to a prospective investor of formal offering materials, including

subscription or account documents or forms, which include detailed discussions of the

terms of the respective product, vehicle, service or instrument, including the principal risk

factors that might impact such a purchase or investment, and which should be reviewed

carefully by any such investor before making the decision to invest. Specifically, and

without limiting the generality of the foregoing, before acquiring the shares of any mutual

fund, it is your responsibility to read the fund’s prospectus. Links to appearances and

articles by Richard Bernstein, whether in the press, on television or otherwise, are provided

for informational purposes only and in no way should be considered a recommendation of

any particular investment product, vehicle, service or instrument or the rendering of

investment advice, which must always be evaluated by a prospective investor in consultation

with his or her own financial adviser and in light of his or her own circumstances, including

the investor's investment horizon, appetite for risk, and ability to withstand a potential loss

of some or all of an investment's value. Investing is an inherently risky activity, and

investors must always be prepared to potentially lose some or all of an investment's value.

Past performance is, of course, no guarantee of future results.

Four Things You Probably Don’t Know

Richard Bernstein Advisors LLC520 Madison Avenue28th Floor New York, NY 10022212-692-4000

www.rba-llc.com

6

INDEX DESCRIPTIONS:

The following descriptions, while believed to be accurate, are in some cases abbreviated

versions of more detailed or comprehensive definitions available from the sponsors or

originators of the respective indices. Anyone interested in such further details is free to

consult each such sponsor’s or originator’s website.

Indexes are not available for direct investment.

DXY Index: International Currency Exchange (ICE) US Dollar Index. The ICE US

Dollar Index, indicating the general international value of the USD, averages the

exchange rates between the USD and six major world currencies, using rates supplied by

some 500 banks.

S&P 500: Standard & Poor’s (S&P) 500 Index. The S&P 500 Index is an unmanaged,

capitalization-weighted index designed to measure the performance of the broad US

economy through changes in the aggregate market value of 500 stocks representing all

major industries.

MSCI ACWI: MSCI All Country World Index (ACWI). The MSCI ACWI is a free-float-

adjusted, market-capitalization-weighted index designed to measure the equity-market

performance of global developed and emerging markets.

MSCI EM: MSCI Emerging Markets (EM) Index. The MSCI EM Index is a free-float-

adjusted, market-capitalization-weighted index designed to measure the equity-market

performance of emerging markets.

MSCI Europe: MSCI Europe Index. The MSCI Europe Index is a free-float-adjusted,

market-capitalization-weighted index designed to measure the equity-market

performance of developed European markets.

MSCI Japan: MSCI Japan Index. The MSCI Japan Index is a free-float-adjusted,

market-capitalization-weighted index designed to measure the equity-market

performance of Japan.

Russell 2000: Russell 2000 Index. The Russell 2000 Index is an unmanaged,

capitalization-weighted index designed to measure the performance of the small-cap

segment of the US equity universe. The Russell 2000 Index is a subset of the Russell

3000® Index.