Cinco De Mayo

Decent numbers today as the ADP report indicated that surveyed businesses added 32,000 jobs versus a street consensus of 30,000 and a prior revised 19,000 (up from a -23,000). The service sector added 50,000 jobs while the construction sector pared 49,000 jobs. Factories added 29,000 workers. The street will now eagerly await Friday's Nonfarm Payrolls report. The street consensus is calling for the job growth of 189,000 (100,000 in the private sector). This is not much above the pace necessary to keep up with population growth, but it sure beats the alternative.

The big question is: "When will job growth be sufficiently robust to significantly reduce the unemployment rate?" That could be some time in coming as productivity gains, troubles in Europe and a strengthening dollar (which increases prices of U.S.-made goods) threaten to curb both economic and job growth.

If the strength of the U.S. dollar persists, interest rates will remain low on both ends of the curve. Long-term rates are influenced by inflation expectations and pressure. A stronger dollar means it takes fewer dollars to buy goods and services. That is disinflationary (deflationary in the extreme). Since a strong dollar is disinflationary the Fed would likely keep short-term rates low in such a scenario as raising short-term rates would only exacerbate disinflationary pressures. Rising rates will be a long and drawn-out process which probably won't begin until the end of the year.

As one economist reminded me last month: "We must realize that the absolutes in this recovery will likely be lower than to what we have become accustomed." Peak growth is likely to be milder than observed during the last two bubbles. The unemployment rate is unlikely to see a 5 handle (maybe not even a 6 handle). Fed Funds will not have to be raised very high to manage inflation and growth (this would mean LIBOR rates remain relatively low). Inflation should remain under control thanks to a U.S. economy which is relatively better than those of its trading partners.Today the treasury announced that it is shrinking the size of next week's new debt issuance. The reduced supply should help keep rates in check.

The folks are rioting in Greece. Greeks are protesting austerity measures by demonstrating, rioting and even setting fire to a building in Athens. Austerity measures required of Greece to receive EU and IMF aid are being met with anger. This behavior is not going to play well among the citizens of nations who are doing the bailing out. Political backlash in these countries could jeopardize a Greek aid package. There is a growing sentiment around the street that a debt restructuring may lie down the road, even with the current rescue plan. Too big to fail may not prevail.

With rates at or bear historic lows and the prospects good for some degree of rising rates, investors are asking where on the curve they should invest. The knee-jerk response is to stay short. That could be a problem if the Fed raises rates gradually and not very high. However, overweighting the very long end of the curve in search of yield carries its own risk. The answer, in my opinion, is to ladder two-years to 10-years and to overweight the belly of the curve (5 to 7 years). Doing so should give investors an attractive average yield, permit investors to roll up with higher short-term rates should the Fed become aggressive and still earn high income from the 10-year area of the curve should rates remain tame. I would not venture out past 10-years at this time. This includes preferreds (fixed or floater).