I'm so hungry for good news on investing, the economy and the stock market that I even dreamed that
Microsoft (Nasdaq:MSFT) decided to give all shareholders a special, $3 a share dividend. In the dream I remember wishing I owned some shares. I must be careful what I eat before I go to bed these days.
We recently learned that President-elect Obama's economics team is planning a fiscal package as big as $700 billion over the next two years. We are going to wait for the details to see how this is going to impact our base case macro forecast.
Suffice it to say that the cornerstone of the stimulus this time around will likely be infrastructure, not tax rebates. The key for investors is where these outlays will be concentrated, which, in turn, means identifying the areas of the capital stock that have been the most underinvested in recent years. After sifting through the data, we believe that the prime candidates will be hospitals, waste management services and passenger transit.
And now the best recent news of all?
We learned that the Fed made the December FOMC meeting a two-day affair instead of one (December 15-16). The market is already sniffing out a 50 basis point rate cut. However, now that the Fed has de facto embarked on the process of quantitative easing, perhaps the need for a two day meeting was to iron out a more aggressive plan to revive the credit markets and the economy. The only areas that have posted increases in spending over this unprecedented four-month decline in spending have been pharmaceuticals (+7%), telecom services (+3%), medical care services (+5%) and mass transit (+26%) – all other forms of transportation, from rail to bus to air fell at a 19% annual rate.
As Chairman Bernanke suggested in several speeches he gave back in 2002 and 2003, one of the deflation-fighting strategies would likely involve Fed action to nurture lower rates at the longer end of the yield curve. Perhaps this prospect is behind the rally in the 10-year note yield and long bond to cycle lows.
Merrill Lynch's David Rosenberg concurrs. "This would fit in very well with our ongoing strategy of focusing on equity sectors that have income-generating characteristics like utilities, health care and telecom services; these sectors also screen very well in a negative nominal GDP growth environment."
This would benefit ETFs like the Utilities Select Sector SPDR (NYSE:XLU), iShares Dow Jones US Healthcare (NYSE:IYH) and our favorite telecommunication company Verizon (NYSE:VZ) which at $30.40 a share sports a 5.75% dividend yield.
