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R I V E R P O I N T |
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R E P O R T |
February 2006
Bernanke
delivers his first economic report to Congress.
Federal Reserve Chairman
Ben Bernanke made his debut before Congress on Wednesday, February 15, 2006,
and demonstrated his continuity with Alan Greenspan’s interest rate
policies. However, unlike his predecessor, he often gave succinct and blunt
answers to questions from members of Congress and refused to comment on many
politically contentious issues.
When asked whether an
“inverted” yield curve foreshadows a recession, Mr. Bernanke
responded, “the inverted yield curve is not
signaling a slowdown.” When Mr. Greenspan was asked the same question in
late 2005, he responded “history suggests that that is usually or has
been a forward indicator for softening economic activity. . . .I suspect,
however, that we have changed the structure of the flow of funds and the
relationships amongst the various interest rate tranches
by maturity such that I’m not sure what such a configuration . . . would
mean.”
At RiverPoint, we are
appreciative of Mr. Bernanke’s short and candid responses. We agree that the inverted yield curve is not
signaling an economic slowdown at the present.
However, we do believe that the economy is likely to slow during the
second half of the year and into 2007.
When asked about Social Security,
President Bush’s tax cuts and many other politically sensitive questions,
Mr. Bernanke indicated that it was not appropriate for the central bank chief
to comment on such non-monetary policy issues. We agree. And when asked by Alabama Representative Artur Davis “whether tax cuts ought to take into
consideration the impact on income inequality,” Mr. Bernanke responded,
“These are value judgments. There’s no scientific way to answer
your question. . . .This is what the people have elected you to do, and clearly
it’s your responsibility.”
Back to monetary policy
and the economy, Mr. Bernanke did indicate that the economy has snapped out of
its year-end slowdown, and recent business activity suggests the economy
remains on track although inflation and other risks persist. The Federal
Reserve expects the economy to grow around 3.5% in 2006 and just over 3% in
2007. Bernanke made it clear that fighting inflation was a top priority and
that “stable prices promote long-term economic growth by allowing
households and firms to make economic decisions.” The Fed expects
inflation to average around 2% this year and next, excluding food and energy.
All in all, we believe
the new Federal Reserve chairman did a nice job and clearly distinguished
himself as his own person. The financial
markets reacted positively to his comments as the Dow Jones Industrial Average
broke through 11,000 for the first time since 2001. The next Federal Reserve meeting is scheduled
for March 27th and 28th at which time we expect the Fed
to raise interest rates for the 15th consecutive time. At RiverPoint Capital Management, we are
forecasting for the Federal Reserve to raise interest at the next two meetings
bringing the federal funds rate to 5%. After that, unless economic activity
strengthens significantly, we would expect the Feds to move to the sidelines.
Investment strategy for investors seeking a
higher level of income now or during retirement!
As the need for income increases during retirement,
many investors will often shift assets from stocks to bonds in order to
generate a higher level of income and reduce their overall level of risk. When
structuring their fixed income portfolios, investors generally focus on a
ladder of individual bonds with maturities ranging from 1 - 10 years.
Individuals in high tax brackets generally focus on municipal bonds because
they often provide a higher after-tax return.
However, with the recent changes in the tax laws in
which dividends are only taxed at a 15% federal tax rate, RiverPoint Capital
Management is encouraging investors to re-examine this strategy. With five-year
municipal bonds yielding 3.2% and many “blue chip” stocks and other
securities yielding 4% or more, high yielding stocks may prove a better investment.
A portfolio of high yielding common stocks could
provide several advantages over a traditional fixed income portfolio such as
higher after-tax income, a growing stream of income and capital appreciation. A
fixed income portfolio provides no opportunity for income growth or
appreciation if the bonds are held to maturity. In addition, purchasing power
erodes annually as inflation rises.
Historically, many stocks have consistently grown
their dividends on an annual basis at a rate in excess of inflation. As
dividends grow, it is likely the stock price will appreciate providing an even
higher total return to investors. In the last 60 years, almost half of the
total return of the S&P 500 has come from dividends. At RiverPoint we are
strongly encouraging our clients to carefully evaluate their asset allocation,
and for those willing to assume some additional risk, albeit small, they should
consider increasing their allocation to high yielding stocks and reduce their
allocation to bonds.
The following is a brief list of a few stocks with
above average yields: Altria (4%), Bank of America (4.5%), BP Amoco (3.2%),
Cincinnati Financial (3%), Chevron (3.2%), Citigroup (4%), Diageo
(4.5%), Energy Transfer Partners (6%), Enerplus (9%),
Inergy (8%), Key Bank (4%), Merck (4.2%), New Zealand
Telecom (6.5%), Unilever (4%) and US Bancorp (4%).
Trivia – Can you name this
school?
Only
six universities have an endowment greater than this K-12 school. The school
was started in 1909 for orphans in _ _ _ _ _ _ _,
Answer: Milton Hershey School
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Market Summary |
2/28/06 |
YTD Price Change |
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Dow Jones Industrial
Average |
10,993 |
+2.6% |
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Nasdaq Composite |
2,281 |
+3.5% |
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Standard &
Poor’s 500 Index |
1,281 |
+2.6% |
For information about
RiverPoint Capital Management or to view our report archive
visit us at www.riverpointcm.com.