Brennaman’s Four Points for the Week

I started writing these for my friends and clients.  I thought I would share these items each week with a wider audience.  Please let me know what you think.

Brennaman’s Four Points for the Week 

1.       The Gross Domestic Product (GDP) numbers that we observed last week were at first glance quite disappointing.  With the numbers approaching 0 at .1% growth for the 1^st qtr. of the year, many prognosticators were blaming the weather, the crisis in Ukraine and a general malaise that is generally associated with our slow recovery.  I agree that all three are evident in the low numbers but the drop from 2.6 in the 4^th qtr. of 2013 conveys a certain reluctance on businesses to stretch for growth when the overall environment is uncertain as to taxes, market growth both domestically and foreign, and the U.S. consumer still unwilling or unable to resume outsized spending while still deleveraging from high levels of debt.  Perhaps the revised GDP numbers at the end of this month will shed additional light.

2.       As a contrast to the dismal GDP growth rate, we witnessed a dramatic increase in new job creation for the month of April, driving the unemployment rate down to 6.3 from 6.7%.  This is a good directional movement and much a needed boost to consumer sentiment.  The fly in the ointment if you will is that nearly as many people (mostly older, long term unemployed) continue to leave the job market (actively searching for work or take lower paying jobs to fill the breach).  The pie in the sky numbers that we are adding new jobs at a rate not seen since the peak in  2008 (pre-recession) belies the fact that wage levels are still significantly lower than 5 years ago and the labor participation rates continue to decline.  This last is driven in part by the long-term unemployed dropping form the workforce but also by the fact there are not enough new jobs for recent high school and college graduates.  The number of new jobs that need to be created to fill this gap is closer to a number of 425K each month.  The Federal open Market Committee (FOMC) still sees the need for quantitative easing and remains committed to keeping interest rates low through the end of 2015.  We shall see.  Inflation is lurking.

3.       There appears to be an increase in corporate governance emerging.  Berkshire, General Motors and Pfizer are among the companies with shareholders and boards questioning the leadership actions taken by CEO’s in the conduct of their companies’ business.  Surprisingly enough there is still not a widespread discussion of the salaries these individuals are making even though their operational results are faltering.

4.       Ponder now the question as to when we should buy bonds versus staying with dividend paying stocks?  I am still in the camp that we are still waiting for the rising interest rate cycle to begin (“Waiting for Godot?”).  For the client with a time horizon of 5-7 years the S&P dividend yield is 2.06 versus the yield on the 5 year U.S. Treasury bond of 1.68%, stock dividends can be compelling.  The decision is a question of the level of risk the investor is willing to take not just how much yield she/he is getting for the move.  I think it is a discussion worth having with my clients.