Dividend Gems Opening Statement, August 2012

Over the past few months we have discussed our anticipation of weakness in the Consumer Discretionary sector. At the same time, we felt that Consumer Staples would gain momentum after lingering a bit during the first part of the year. By June, we saw compelling evidence of these expectations.

But blind sector rotation is rarely if ever a profitable strategy, because there will always be securities that deviate from sector movements dictated by the economic cycle. McDonald’s serves as a perfect example. Although McDonald’s was the top performer in the Dow in 2011, it has thus far underperformed in 2012.

McDonald’s is often categorized as a Consumer Staple, but we feel it has a considerable Consumer Discretionary component as well. Regardless, because most of its profits and profit growth arise from outside the U.S., we forecast shares to correct in late 2011. This early guidance and that given since shares retraced have thus far turned out nicely. But the correction in shares has subtracted from the performance of the Consumer Staples sector.