Kick the Can and Hope for Change

01/31/2013 11:22 am EST


Genia Turanova

Editor, Leeb Income Performance

So far, January has delivered some pretty encouraging economic and political news, but it will all hang in the balance in May when Congress will once again looks at the debt ceiling, notes Genia Turanova of Leeb Income Performance.

We have just had another week of upbeat news that should continue to propel the markets forward.

US jobless claims fell unexpectedly to a five–year low, with new applications for unemployment insurance declining by 5,000 to 330,000 in the week ending January 19. It’s the lowest figure for this measurement since the same week in 2008, according to the US Labor Department.

The median forecast among economists had been much higher, at 355,000 new claims, as indicated by the results of a Bloomberg survey. While seasonal factors alone reportedly account for this major decline in new jobless benefits applications, even if that is the case the news is still quite good.

Another kind of good news also dominated headlines: The US House of Representatives passed a bill that would temporarily suspend enforcement of the nation’s $16.4 trillion debt limit through May 18. This means the US Treasury Department will be able to continue to issue new bonds to cover federal obligations until May 18.

On May 19, the bill would reset the US debt limit to a higher level reflecting any additional borrowing in the interim. But even then, the US would not face another “fiscal cliff,” as the bill would also enable the Treasury Department to deploy “extraordinary measures” to fund operating liabilities, probably through most of July.

While 111 House Democrats and 33 Republicans opposed the bill (naysayers characterized the compromise as a mere gimmick to avoid dealing with the fundamental issues now)—it does require Congress to at least take some responsibility for starting to bring the US fiscal crisis under control.

Specifically, by mid–April, both the House and Senate would be required to pass a formal budget resolution—something they’ve failed to do since 2009. Such a resolution is necessary to establish a framework for federal budgets; in its absence, the US government has been running “on fumes,” in a manner of speaking, for the past four years.

But this year things look like they’ll be different. The bill would impose a penalty on members of either or both houses if their legislative body fails to produce a budget resolution. To be precise, it would dock pay for all those legislators whose house missed the deadline.

No matter how briefly their paychecks would be withheld, rank and file House and Senate members will probably be quite averse to foregoing their $174,000 annual salaries. Ditto for the minority leaders at $193,400, much less the majority leaders at $223,500.

In other words, this bill has more gumption to it than any fiscal legislation that has come out of Congress in quite some time. A few analysts might consider such news buoyant, if not downright excellent. In any case, we think it’s very good.

But we also have a word of caution this week, especially for investors prone to consider buying stocks chiefly for their yield. It is never a good idea to use a single metric to assess equities (or bonds).

We never recommended this stock, but as far as yields go, Finland’s Nokia (NOK) makes our case all too dramatically. For the first time in 20 years, the company announced plans this week to cut its annual dividend in order to solidify its cash position in the face of declining sales.

The lesson is painfully clear: metrics other than yield should always be used if you consider an investment. And as a general rule of thumb, healthy companies do not pay dividends much higher than their industry average, much less the average market yield.

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