Signature Update: GDP Beats Expectations 10-29-2009

October 23, 2009 Edition, Volume III

Inside Signature Update

The Market – Corporate Dividends Paying Off
The Economy – 3^rd Quarter GDP Beats Expectations
The Takeaway – It’s Tough to be a Bear in the Midst of a Recovery

THE MARKET – Corporate Dividends Paying Off

Dividend yielding stocks have fared better in the market recovery than most others. In today’s market a stock yielding a solid dividend is representative of a solid company – and that’s gold in an uncertain market.

Not only can investors consider the dividend yield when it comes to evaluating overall investment performance, but there’s mounting evidence that dividend paying corporations are better able to secure credit capital and take advantage of growth opportunities. While many others are unable to obtain the funds needed to fund inventory, payroll, and capital expansion, corporations with strong balance sheets and good cash flow continue to enjoy the ability to leverage growth as opportunities arise.

Though today’s credit markets are more liquid than they were even three months ago, banks and capital market firms continue to exercise caution with any type of lending; only their best customers are able to secure needed capital at preferred rates. The phenomenon won’t soon disappear and the longer the disparity exists the more difficult it will be for firms with weaker balance sheets to compete.

The Economic Cycle Research Institute’s gauge of future domestic economic activity hit a 5-year high at the end of September, marking the indicator’s highest pace since 1967. Firms with access to capital will benefit by this growth while others will be less able to compete. Investors interested in benefiting from growth opportunities may find greater strength in a more risk averse environment by looking at dividend yielding equities in the coming months.

THE ECONOMY – 3^rd Quarter GDP Beats Expectations

The best news the labor market could have possibly received came Thursday morning as the US Department of Commerce announced 3^rd quarter GDP gains of 3.5%; 2/10ths higher than expectations. Pessimists are clamoring the gain is due largely to ‘cash-for-clunkers’ and inventory builds, but when autos and inventory adjustments are stripped away the gain holds at just under 2% - higher than expectations.

The Department of Labor reported total jobless claims at 5.96 million – a difficult number by any measure. With unemployment almost certain to breach 10%, how is it that today’s reports represent a meaningful inflection point for the labor market? Employment only begins to improve after growth resumes. Initial improvement comes for those already employed, finding jobs more secure than they may have been 1-2 months ago; next comes a return to full employment for those experiencing a cut back in hours; and finally, businesses begin to hire to meet growing needs.

Though today’s GDP number is meaningful, and many are citing an ‘end to the great recession’, we still have an all-important retail season to get through and 4^th quarter results to digest before we’ll see real improvement in labor markets. For most, that’s more important than any other figure or report.

THE TAKEAWAY – It’s Tough to be a Bear in the Midst of a Recovery

The markets were under pressure this week as ‘Bears’ anticipated a lower-than-expected GDP report – even Goldman Sachs weighed in suggesting the figure wouldn’t breach 3% - they were wrong and Thursday’s markets were up sharply. It’s tough to be a Bear in the midst of a recovery.

Even though the much needed ‘Top Line Sales Growth’ discussed in last week’s Signature Update hasn’t materialized across the board, sufficient gains have been made to keep markets near the 10,000 level on the DOW. Look for additional strength through the remainder of the year.

The Federal Reserve has begun to draw back on overall market liquidity as the economy, credit and housing markets appear to have seen their worst. This accounts for some modest and temporary stabilization in the dollar, but it will be many months before the Fed will have the luxury of increasing market interest rates. Investors making trades against the dollar may find short-term benefit, but be careful of being caught short as monetary policies change.