Donaldson Capital Investment Policy Committee Meeting
2/01/10

For the past two weeks or so the market has reacted to very positive earnings and GDP news in a very unexpected and negative way. Q4 2009 earnings and revenue news is better than expected – much better. Q4 2009 GDP change came in at +5.7%, more than a full point higher than consensus. Further, it wasn’t just inventory rebuilding. In fact, inventories actually continued to decrease in Q4, although at a significantly reduced rate. The consumer spending element of Q4 GDP was better than expected.

Yesterday the Senate approved Ben Bernanke for a second four-year term as Chair of the Federal Reserve. As late as last Friday that approval was in doubt, as a number of senators announced they would not support him. However, the White House put on a full court press over the last week and garnered enough support for the second term.

The vote was 70 for and 30 against approval. The negative votes were the most in history for a chairman, a vivid illustration of the bad blood that still exists between Congress and the Fed.

The was other good news today:

I have heard from several reliable sources, and it has been reported in the news that President Obama and key members of his staff were on the phones with senators this weekend selling Ben Bernanke for another term as Fed Chief. So far the news looks good that they were successful.

Bernanke's reappointment seemed to be in doubt on Friday as two Democratic senators, Russ Feingold of Wisconsin and Barbara Boxer of California, said they would vote against him. Fears spread quickly that a wave of populism among other senators might doom Bernanke's chances.

A number of prominent Democrats have signaled that they will not support Fed Chairman Ben Bernanke's re-nomination to the Fed. They say they want to purge the government of anyone who had a role in the banking crisis.

If the analysts are right, over the next few weeks, US corporations will report higher quarterly earnings on a year over year basis or the first time since October of 2007 .

The better earnings will largely be driven by the big banks. If you recall, the fourth quarter of 2008 was just a disaster for the big banks, as they were forced to take huge write offs in their mortgage businesses. Even though many big banks are still struggling, some have turned the corner and will show huge gains.

For many years, I have begun each year with a back-of-the-envelope analysis of the prospects for stocks, bonds, and the economy in the coming year. In this first look, I am only interested in how my views compare to the published consensus estimates. The reason is simple--many studies have shown that the consensus view is almost always wrong. So, in effect, the one place investors can be sure that the financial and economic markets are NOT going is where the current consensus is now pointing.

Stocks have moved a long way since March and there are many analysts that are calling for a correction of these gains. We are not in that camp.

Optimism is in short supply among many analysts regarding the Christmas selling season this year. Indeed, economists are predicting that Christmas sales will fall for the second year in a row.

I have written and spoken about the Hidden Power of Rising Dividends compared to bonds for nearly 20 years. Yet, I find that many people do not grasp and retain the concept. The primary reason for this is that most people think of stocks as investments you trade and bonds as investments that you hold to maturity. If you would think of stocks as more like bonds, however, a new vision of the power of stocks as income producers comes into view. For example, let's compare Johnson and Johnson (JNJ) common stock with a 10-year US Treasury bond.

With only few companies left to report earnings for the third quarter, some striking trends are apparent in the data.