FRIDAY FEBRUARY 3, 2012
8.3%
The Department of Labor released the unemployment report for January and the numbers were interesting. On face value, the numbers were strong. The rate dropped from 8.5% to 8.3%, the lowest rate since February 2009. The 243,000 increase in jobs was the strongest in nine months and exceeded just about every forecast. Stocks rose 156 points and the yield on the 10 year Treasury increased to 1.92%.
But when you dissect the numbers, there are some statistical games going on. First, the DOL made a "seasonal adjustment" that increased the numbers. The bigger statistical aberration involved the labor participation rate,something discussed before in this blog. The size of the workforce is essentially the denominator to the number of jobs numerator. As people enter and leave the workforce, the denominator changes. In January, an astonishing 1.2 million left the workforce! And since these people left the workforce, they no longer count. The main reason for the drop in the unemployment rate is this 1.2 million change in the workforce. This is not exactly a sign of a robust economy.
Nonetheless, the increase in jobs in January is a strong positive and is yet another step in the economic recovery. But we need to pay less attention to the headlines and more to the details.
POSTED AT 04:26 PM
WEDNESDAY FEBRUARY 1, 2012
Two markets...two tales
The bond and stock markets are telling two distinctly different tales.
The stock market, as measured by the S&P 500, is up 5.58% this year. Stocks seem to be telling us that the economic story is an improving one. It has concluded that any fall out from Europe will not dramatically impact the U.S.
The bond market is telling a far more pessimistic story. The 5 year Treasury note is trading at a yield of .72%, a historic low! The 10 year Treasury yields only 1.82%, barely 10 basis points from its all time low yield. This is a story of fear, Euro collapse and pending economic weakness.
Which market is right? My heart says the stock market because it is a more optimistic story. But my mind says the bond market as it has a better track record at predicting the economy. As Valentine's Day approaches, let's hope the heart is right!
POSTED AT 03:14 PM
MONDAY JANUARY 30, 2012
The Dividend Play
The big winners in 2011 were the multinational companies with decent dividends. The S&P 500, where these companies reside, posted a modest 2.11% gain last year while all of the other equity assets classes posted losses for year. Developed and emerging market stocks posted double digit losses. It is no secret that 2011 was a scary year for investors, one of the most volatile on record. The nice dividends paid by large cap stocks became increasingly attractive relative to the paltry yields in fixed income. For example, McDonald's saw its dividend yield decline from 3.2% to 2.8%, even after raising its dividend, as the stock price appreciated by nearly 31%. Not bad. Even after the decline to 2.8%, MCD still provided more income than the 1.85% of the 10 year Treasury. But does this mean the dividend play has run its course? Not necessarily.
First, one of the nice features of these multinational companies is that they are multinational. That means they are not dependent on one economy to carry the day. European weakness can be offset by strength in Asia or the U.S. Given the host of troubled spots around the world, this economic diversification is very valuable.
Second, the Federal Reserve Bank announced last week that it will keep interest rates low through the end of 2014! Many pundits are quick to state that investors, after 12 grueling years for stocks, have abandoned the stock market. To some extent, they may be right. However, are investors who gave up on stocks going to be happy with another 2 years of no return in fixed income. After all, locking in a negative inflation adjusted ten year return by buying a 1.85% ten year Treasury note doesn't get one to a secure retirement very fast! Suddenly, buying a high quality stock with a dividend yield in excess of the 10 year Treasury that gives you some hope of price appreciation looks pretty attractive. The Fed has told us this is unlikely to change any time soon.
One note of caution. Washington D.C. Last week at his State of the Union speech, President Obama made his case to raise taxes on capital, that is capital gains and dividends. Regardless of one's political positions on these taxes, a higher tax rate on capital gains and dividends, currently at 15%, would be, on the margin, a negative for these stocks. By reducing the after-tax expected return for stocks, investors would likely move assets to more tax friendly asset classes such as municipal bonds.
So is the high dividend play over? I doubt it. There is still plenty of things to worry about and these stocks will remain an attractive flight to quality trade, particularly with interest rates providing such weak competition. However, beware the political rhetoric of the Presidential campaign, as capital is being treated as a dirty word!
POSTED AT 10:08 AM
THURSDAY JANUARY 26, 2012
If you want less of something, tax it!
If you want less of something, tax it! That is the economic theory that gives us "sin" taxes on all of the vices: booze, cigarettes, cigars, etc. As a society, we have collectively deemed boozing and smoking to be bad, for one's health and the nation's healthcare finances. So, we place rather large taxes on a six pack of beer, a bottle of wine and a pack of cigarettes to create an incentive to quit the expensive, unhealthy habit. In fact, in places like NYC, the taxes on cigarettes are so high that a black market has developed!
Apparently, there are politicians in Washington that have deem capital to be a vice of "the rich" and are seeking to increase taxes on capital, i.e. capital gains and dividends. Interesting. It seems an inopportune time to be raising taxes on capital. With a struggling economy, a European debt crisis and 8.5% unemployment, why would anyone want less capital in the economy? If you tax it, you get less of it! And that fact doesn't change if the motivation to increasing the taxes on capital is "fairness."
As as late Jack Kemp said, "you can't have capitalism without capital
POSTED AT 05:27 PM
THURSDAY JANUARY 19, 2012
The EPA
The EPA...the Employment Protection Agency...protecting Americans from employment across the fruited plains!
POSTED AT 09:02 AM
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KEN ENTENMANN, CFA
SENIOR VICE PRESIDENT AND
THE DIRECTOR OF INVESTMENT MANAGEMENT SERVICES
Ken is a Senior Vice President and the Director of Investment Management Services at Alliance Bank, N.A. He has more than 25 years of investment experience and oversees the management of assets totaling $1 billion. He holds a B.S. in Applied Economics and Business Management from Cornell University and an M.B.A. from the William E. Simon Graduate School of Business Administration at the University of Rochester. He has also earned his Chartered Financial Analyst designation. He is a member of the Executive Committee of the Trust Division of the New York Banker's Association. He is also a director of the Central New York Community Foundation.
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