Dividend Value

October 13, 2011

Arguments rage about whether the stock market is expensive or cheap on a fundamental basis. I have no real opinion here since I’m not an expert in fundamental analysis. But I was impressed by a recent note from Bespoke Investment Group that pointed out that more than half of the stocks in the S&P 500 have dividend yields that are higher than the 10-year Treasury!

Source: Bespoke Investment Group

Granted, a 4% dividend won’t feel like much of a cushion if the market declines another 20%, but it’s tricky to argue that stocks are overvalued relative to bonds. It will be interesting to see how this is resolved, but in the meantime more and more investors are looking for their income in the equity market.

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Double Dip Doubter

October 13, 2011

Eddy Elfenbein makes the point at Crossing Wall Street that a double dip recession is unlikely due to the large positive yield spread between the 2-year and 10-year Treasury. As he points out, recessions are generally preceded by an inverted yield curve. On the chart, that would require the spread to drop below the zero level.

More than two weeks have passed since Eddy’s original post and during that time lots of economists and pundits have come out in favor of a recession call. The complicating factor is that the Bernanke Fed has essentially nailed short rates to the floor, so it is difficult to judge where the 2-year Treasury would trade if it were free-floating. However, I will observe that the current yield spread is still about 193 basis points. The yield curve really hasn’t flattened over the past couple of weeks despite all of the negative yammering.

We’ll see how things go over time, but it seems to me that a double dip recession is not a foregone conclusion.

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Fund Flows

October 13, 2011

The Investment Company Institute is the national association of U.S. investment companies, including mutual funds, closed-end funds, exchange-traded funds (ETFs), and unit investment trusts (UITs). Members of ICI manage total assets of $11.82 trillion and serve nearly 90 million shareholders. Flow estimates are derived from data collected covering more than 95 percent of industry assets and are adjusted to represent industry totals.

Fund flows, like the market, have been pretty erratic as of late. For the first time in a very long time, it was taxable bond funds that had the biggest redemptions for the week.

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No One is Happy

October 13, 2011

If you need a graphic representation of how unhappy the American public is, take a look at the latest Gallup Poll results from their annual governance survey. Here are Gallup’s key findings:

  • 82% of Americans disapprove of the way Congress is handling its job.
  • 69% say they have little or no confidence in the legislative branch of government, an all-time high and up from 63% in 2010.
  • 57% have little or no confidence in the federal government to solve domestic problems, exceeding the previous high of 53% recorded in 2010 and well exceeding the 43% who have little or no confidence in the government to solve international problems.
  • 53% have little or no confidence in the men and women who seek or hold elected office.
  • Americans believe, on average, that the federal government wastes 51 cents of every tax dollar, similar to a year ago, but up significantly from 46 cents a decade ago and from an average 43 cents three decades ago.
  • 49% of Americans believe the federal government has become so large and powerful that it poses an immediate threat to the rights and freedoms of ordinary citizens. In 2003, less than a third (30%) believed this.

The whole article is eye-opening. People were not happy with the government after Watergate, but they are far more disgusted now. Gallup has a nice table in response to the question, “On the whole, would you say you are satisfied or dissatisfied with the way the nation is being governed?”

gallup No One is Happy

Source: Gallup

If 81% of Americans—majorities of both political parties—are dissatisfied, that means 19% are happy with how things are going. Has anyone actually met one of the 19%?

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