Someday this rally’s gonna end.

And when it does we’ll be happy we’ve focused on high-quality companies with solid business models that generate relatively predictable cash flows.

But until it does, let’s enjoy it.

The Dow Jones Industrial Average closed lower on Friday, March 15, 2013, ending a 10-session winning streak that was the iconic index’ longest since another 10-day run that ended on Nov. 15, 1996.

The Dow posted an 11-trading-day streak that ended on Jan. 3, 1992. Its longest winning streak ever was the 14-day run that ended June 14, 1897.

And it’s just the ninth time in its history that the Dow has closed at an all-time high for eight days in a row.

That being said, the Dow gained just 2.85 percent during its recent run, the weakest showing for such a streak since 1964.

The end of the streak is not necessarily the end of the rally, although vigilance at times like these pays. And it appears that the market is getting either too comfortable or too complacent, as the Chicago Board Options Exchange Volatility Index, better known as the VIX, has settled into its lowest level in six years.

Sentiment, meanwhile, is turning decidedly positive, as the regular American Association of Individual Investors Bulls index rose to a six-week high of 45.4 from 31.1, while Bears fell to 32, a four-week low, from 38.5.

Our stance is dictated by our buy-under targets, not momentum in either direction.

Gathering data from all over the world does indeed suggest that the global economy is getting its legs back underneath it after nearly a half decade of stumbling.

Strengthening economies and rallying markets fly in the face, too, of perma-bears who for years now have predicted an imminent implosion of both. The numbers are only just beginning to tilt favorable, and there’s still enough back-stepping going on for us to maintain a generally defensive bias. Call us eternal optimists. But we’d rather have been that since March 9, 2009, rather than striking our snarky-cool cynic pose and missing out on what’s either simply an epic rally or the turning of the cycle to a new long-term bull market.

Australia, for example, posted its biggest employment gains in 13 years this week, beating estimates by more than seven times. The 71,500 new jobs created in February is the equivalent of 1 million in the US.

Australian consumer sentiment rose in March to match the December 2010 recent high and Australian housing prices were up 3.8 percent in the fourth quarter of 2012 compared to the third quarter, as it appears the Reserve Bank of Australia’s (RBA) interest rate cuts are finally having an impact.

Receding sentiment in favor of yet another RBA rate cut in April has pushed the Australian dollar off a five-month low.

In the US, retail sales posted the biggest increase in February in five months, rising a seasonally adjusted 1.1 percent, 1 percent excluding the auto sector. Expectations were for 0.7 percent gains overall and ex-autos.

The US Dept of Labor, meanwhile, reported that weekly claims for jobless benefits declined to 332,000, the second-lowest weekly reading in the post-Great Recession period.

And the National Federal of Independent Business Small Business Optimism Index ticked up by 1.9 points in February to 90.8.

Across the pond, in the fourth quarter of 2012 unemployment in the euro zone fell to its lowest level since the first quarter of 2006, and Germany’s DAX is within 1.07 percent from its own all-time high.

Spain’s one-year borrowing costs tumbled to their lowest level since the Greek debt meltdown in 2010 at an auction on Tuesday where the government sold more bills than it planned.

Here’s the rest of the story.

About half the US retail sales increase took place at gas stations, reflecting higher prices at the pump. Sales were up 0.6 percent excluding gas stations, and 0.4 percent minus autos and gas.

And gas spikes drove the Consumer Price Index higher in February, accounting for almost three-quarters of the 0.7 percent rise the Bureau of Labor Statistics this week. That’s the biggest increase since June 2009. At the same time, core CPI–which strips out food and energy–rose by a just 0.2 percent.

The Producer Price Index was up by 0.7 percent, mostly due to a 3 percent increase in energy prices in February.

The University of Michigan Consumer Sentiment Index fell to a preliminary reading of 71.8 for March, the lowest level since December 2011. The consensus forecast was for the index to tick up to 78 from 77.6 in February. That qualifies as a big miss, and it could be a product of both higher gas prices and disgust with Washington politicians and their inability to resolve the “sequester.”

Manufacturing output in the UK declined 3 percent year over year versus a forecast decline of 1.5 percent, while euro zone industrial production for January was off by 1.3 percent year over year. In Greece this measure of economic activity declined 4.8 percent year over year in January.

Italian borrowing costs rose in the first bond auction since a credit rating downgrade last week that highlighted the economic risks of the country’s current political stalemate.

Earnings season Down Under–outside the Basic Materials space–was largely positive, with dividend growth for 33 companies in the AE How They Rate coverage universe. We have details in the comments part of each company’s entry in the How They Rate table. Dividend growth was particularly good for Portfolio Holdings, as Roger Conrad notes in this month’s Portfolio Update.

Over the long term stock prices will follow the dividends paid by underlying companies higher. We’ve concentrated on high-quality businesses with solid track records in the Portfolio, as a means of providing stability against inevitable downturns and of participating in rallies such as the one we’re enjoying.

We’re not about to throw money at the rally, however, which is why we strongly advocate sticking to our buy-under targets. There will be a correction that brings our favorites back closer to buying range.

And then there will be a recovery after that.

Portfolio Update

Through the first six weeks of 2013 the average Australian Edge Portfolio Holding is up 6.4 percent. Conservative Holdings have risen 7.9 percent, Aggressive Holdings 3.7 percent.

Beneath those numbers are some stellar performances, such as Amalgamated Holdings Ltd’s (ASX: AHD, OTC: AMGHF) 21.3 percent return, Wesfarmers Ltd’s (ASX: WES, OTC: WFAFF, ADR: WFAFY) 17 percent gain and a 16.9 percent comeback by SMS Management & Technology Ltd (ASX: SMX, OTC: SMSUF).

And there are the not so stellar, mainly five Aggressive Holdings now underwater for the year.

We’ve pointed out this dichotomy in the past between the commodity price-sensitive Aggressive Holdings and Conservative Holdings, whose earnings aren’t directly impacted by resource swings. And this month the gap once again opened a bit.

One likely reason is renewed speculation that China’s economy is slowing down and that demand for Australia’s resource wealth will wane. That talk had died down earlier in the year. But bears are again apparently out in force, and resource stocks have suffered.

We’ve also seen a changing of the guard at several large natural resource companies, including Aggressive Holdings BHP Billiton Ltd (ASX: BHP, NYSE: BHP) and Rio Tinto Ltd (ASX: RIO, NYSE: RIO). Both companies have seen long-time CEOs get the axe, largely the consequence of huge past acquisitions that haven’t yet paid off.

Finally, the Australian dollar-US dollar exchange rate has been moving in the wrong direction–at least from US investors’ point of view–since late January. After hitting a 2013 high of better than USD1.06, the Australian dollar has dropped to a level of about USD1.03, after touching a March 4 low of USD1.01.

Every dip in the Australian dollar means a corresponding decline in the US dollar value of Australian stocks, as well as the US dollar value of dividends paid. And while the year-to-date impact hasn’t been that extreme, it has shaved roughly a percentage point off our returns thus far in 2013.

Portfolio Update has the latest on our 25 Holdings, including the nine that raised dividends during the recent reporting season.

In Focus

It’s been touted in the Australian press as a potential AUD20 trillion boon to the domestic economy and the solution to energy problems Down Under.

The dimensions of the find have headline writers in the Great White North contemplating the diminution of the Canadian oil sands in the global crude reserve scheme.

It’s yet another factor for Organization of Petroleum Exporting Countries (OPEC) to consider, in addition to recent developments in the US, as the cartel finds its way in a rapidly evolving energy environment.

The share price of the company that owns 100 percent of drilling rights has gone parabolic, rising from AUD0.54 on the Australian Securities Exchange (ASX) on Nov. 1, 2012, to a close of AUD2.85 on March 14, 2013.

Excitement around Linc Energy Ltd (ASX: LNC, OTC: LNCYF, ADR: LNCGY) began to build in November for another reason: The company was reported to be in talks with Russian billionaire Roman Abramovich about a possible combination of efforts on Linc’s coal-to-liquids program.

This news obscured an Oct. 31, 2012, Australian Financial Review report that Linc had engaged Barclays Plc (London: BARC, NYSE: BCS) to help it “sell…shale gas assets.”

Linc didn’t confirm until Dec. 20 that it was indeed seeking potential partners for development of its petroleum assets in the Arckaringa Basin, which, it noted then, had “excellent resource play potential” based on internal technical analysis. This announcement provided more momentum for Linc’s share price.

The Abramovich story drove the stock past AUD1. The Barclays confirmation pushed it near AUD2.

It sits where it does now–approaching AUD3–because of what happened on Jan. 23, 2013: Management released the results of an independent petroleum engineering report that confirmed Linc’s Arckaringa resource compares favorably in terms of “total organic carbon (TOC) levels, permeability, porosity and thickness” to prolific US unconventional petroleum plays, including the Bakken Shale and the Eagle Ford Shale.

In Focus details a couple ways to play an emerging energy story in the Land Down Under.

Sector Spotlight

We recommended Ausdrill Ltd (ASX: ASL, OTC: AUSDF) in the August 2012 In Focus feature as one of our favorite non-Portfolio companies. In the September 2012 In Focus, which was all about members of the How They Rate coverage universe that raised dividends during the reporting period for fiscal 2012 final results, we discussed Ausdrill because it boosted its final payout for the fiscal year by 23.1 percent, bringing the full-year increase to 20.8 percent.

The primary obstacle preventing us from adding Ausdrill to the AE Portfolio had been the lack of active quotation for the stock on the US over-the-counter (OTC) market.

It remains a difficult game, picking winners in the resources space, given the still-high level of global economic uncertainty. But companies with high exposure to production as opposed to the capital-investment cycle; with blue-chip clients under long-term contracts; and with records of performance over time are solid bets. Ausdrill, based on its operating results, meets all these criteria.

And now the stock is being actively quoted on the US OTC market, which means it’s available for execution by all but the most in-the-weeds brokerages, under the symbol AUSDF.

Along with full fiscal 2012 results Ausdrill announced a 23.1 percent increase to its final dividend to AUD0.08 from AUD0.065; its fiscal 2012 interim dividend, announced in late February 2012, was AUD0.065, up from AUD0.055 for the prior corresponding period.

All that being said, Ausdrill once again posted solid operating results, this time for the six months ended Dec. 31, 2012. Based on fiscal 2013 first-half results, management’s forecast for the balance of the year, the record of dividend stability and growth and the stock’s increasing availability to US-based investors, we’re adding Ausdrill to the AE Portfolio Aggressive Holdings.

The first of our two Sector Spotlights for March details Ausdrill Ltd, a new addition to the AE Portfolio Aggressive Holdings.

AGL Energy Ltd (ASX: AGK, OTC: AGLNF, ADR: AGLNY) continues to show resilience in the face of multi-front attacks, not just surviving but thriving as similar companies, notably  fellow AE Portfolio member Origin Energy Ltd (ASX: ORG, OTC: OGFGF, ADR: OGFGY), struggle, on the strength of well-timed acquisitions, efficient project development and solid customer service.

AGL is holding firm against regulatory headwinds, making good use of invested capital and adding retail customers despite the best, perhaps desperate, efforts of its main competitors. Financial numbers and operating metrics continue to affirm AGL’s status as a Conservative Holding, even as Origin Energy’s travails establish in dramatic relief why it’s an Aggressive Holding.

“Making wealth slowly” is a good way to describe AGL as an investment. The stock has trailed the broader S&P/Australian Securities Exchange 200 Index over the trailing 12 months, its 20.6 percent total return in local terms from March 15, 2012, through March 14, 2013, surpassed by the broader market’s 23.2 percent overall gain.

AGL, a charter member of the AE Portfolio, has posted a US dollar total return of 36.9 percent since Sept. 26, 2011, respectable but underperforming the S&P/ASX 200 (49.2 percent) and the S&P 500 (38.8 percent).

But over the five years ended March 14, 2013, AGL has generated a total return of 91.7 percent in local terms compared to the S&P/ASX 200. In US dollar terms, meanwhile, AGL is 112.2 percent to the positive, including dividends, versus a gain of 35.5 percent for the S&P 500.

During the longer, five-year window AGL hasn’t cut its dividend but has raised it seven times, including the recently announced interim payout of AUD0.30 per share, which is higher by 6.7 percent than that declared in respect of fiscal 2012 first-half results.

And despite a difficult operating environment, AGL delivered robust results for the six months ended Dec. 31, 2012.

AGL Energy is the subject of this month’s second Sector Spotlight.

News & Notes

The Aussie’s Upward March: The Australian dollar has bounced off a five-month low versus the US dollar on solid economic news and more interest from foreign investors seeking to diversify their holdings.

GDP: The Australian Bureau of Statistics (ABS) reported March 6 that the economy in the Land Down Under expanded at a rate of 0.6 percent during the last three months of 2012 compared to the July-through-September period. ABS data show that gross domestic product (GDP) grew by 3.1 percent during the 12 months ended Dec. 31, 2012.

The annual figure of 3.1 percent is basically in line with Australia’s long-term trend rate of growth. And it means that the “Lucky Country” has now posted 21 consecutive years of GDP growth, which is something no other economy in the developed world can match.

From China to Australia: A report by the accounting firm KPMG and the China Studies Center at Sydney University found that Australia remains the No. 1 destination for China’s foreign direct investment (FDI) at USD49 billion, which is 13.2 percent of the total. Investment in Australia by Chinese entities increased by 21 percent in 2012 compared to 2011.

The Dividend Watch List: The Dividend Watch List includes updates on How They Rate companies that announced dividend cuts during fiscal 2013 first-half earnings reporting season Down Under as well as those that reduced earnings guidance in recent weeks. It also includes those that cut payouts during their most recent reporting period but that don’t report based on a July 1-to-June 30 fiscal year or a calendar-year basis.

The ADR List: Many Australia-based companies that list on the home Australian Securities Exchange (ASX) are also listed on the New York Stock Exchange (NYSE) or over-the-counter markets as “sponsored” or “unsponsored” American Depositary Receipts (ADR).

Here’s a list of those companies, along with an explanation of what these ADRs represent.

How They Rate

How They Rate includes 111 individual companies and four funds organized according to the following sectors/industries:

• Basic Materials
• Consumer Goods
• Consumer Services
• Financials, including A-REITs
• Health Care
• Industrials
• Oil & Gas
• Technology
• Telecommunications
• Utilities
• Funds

We provide updated commentary with every issue, financial data upon release by the company, and dividend dates of interest on a regular basis. The AE Safety Rating is based on financial criteria that impact the ability to sustain and grow dividends, including the amount of cash payable to shareholders relative to funds set aside to grow the business. We also consider the impact of companies’ debt burdens on their ability to fund dividends. And certain sectors and/or industries are more suited to paying dividends over the long term than others; we acknowledge this in the AE Safety Rating System as well. We update buy-under targets as warranted by operational developments and dividend growth.

In Closing

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David Dittman
Co-Editor, Australian Edge

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