What looked to be a decent week went out with a whimper as poor employment numbers sent the market lower. For the week, the Dow rose 0.6%, the S&P inched higher by 0.3%, and the Nasdaq climbed 1.6%. Treasury bonds rose on economic worries (prices were up, so yields fell). The news also sent gold sharply higher, up nearly 4%. Oil neared $100 per barrel after dipping into the $80’s two weeks ago, yet closed the week up 1.3% at $96 per barrel.
Source: MSN Moneycentral
The week started out on a fairly bright note, continuing the rally from the previous week. There was even some decent news to support the rally. Sales at retail companies like Gap, Macy’s, and Target in June were much better than expected.
Also, the ADP employment report (an employment report that precedes the important government employment report. The ADP figure is derived from the activity of firms using the ADP payroll service) was surprisingly strong, resulting in solid gains in the market.
Unfortunately the tide turned on Friday. The non-farm payroll employment report released that morning was terrible, frankly. Economists were predicting a number north of 100,000 new jobs last month, but the actual number was just 18,000. Also, the prior two months were revised much lower, painting an even weaker jobs picture.
The resulting unemployment rate now stands at 9.2%, up from 9.1% the month before. When considering the underemployed (either working part time or gave up looking for work), the figure is over 16%.
While this news is bad, we see a more troubling trend brewing. The labor force (the amount of people actively working or looking for work) keeps heading lower and now stands at a new 25 year low. Also, the average length of unemployment stands at an all time high of almost 40 weeks.
As you can see in the chart on the right (it may appear small, but the bottom axis is years beginning in 1948 and the vertical axis measures weeks. Chart courtesy zerohedge.com), the recent figures dwarf any other time in recent history. We are becoming a society of the perpetually unemployed. Countless government programs have been established to alleviate the burden on the unemployed, but we see it as making things worse and the chart supports that.
There have been many excuses why unemployment is persisting. On Friday alone we heard that it is due to the debt ceiling not being raised. And lack of infrastructure spending (although we just spent hundreds of billions for that purpose). And an inefficient patents process. And greedy companies hoarding cash. We even heard the number justified by the Labor Secretary Hilda Solis saying that President Bush only averaged 11,000 jobs per month during his tenure.
All these reasons are ridiculous and show how out of touch our decision makers are. Uncertainty on future rules, regulations, and taxes plays a part in preventing hiring. However, certainty of bad policies is even worse. In our business, for example, we know that our costs and regulations are increasing due to the recent passage of the Dodd-Frank bill. Countless other industries are facing similar situations. With these negative certainties and looming uncertainties, it makes companies less likely to invest in new hires.
The other factor preventing hiring is a lack of demand for products or services. That’s were the government thinks they should step in – increase spending to increase demand. We see the problem with demand is simply that people don’t have the money to spend like they used to.
Just look at your own budget – you’re spending more on things like gas and food which prevents spending elsewhere (stemming from a decline in the strength of the dollar due to massive government printing and spending). New and increased fees in things like your bank account take another cut (thanks to Dodd-Frank). Our power bills are more than double what they were a year ago (and a recent EPA announcement assures us that they will continue to increase. Link to story).
These may be just a few small examples, but when multiplied by millions and millions of people, it begins to add up. Many people simply don’t have the money to spend like they used to.
When government thinks it knows best and tries to help, it creates unintended consequences that we are beginning to see. Until this changes, we don’t see employment making a measured improvement.
Next Week
Next week will be very busy as earnings season kicks off. The aluminum maker Alcoa gets the ball rolling on Monday and several banking companies will close out the week. Corporate profits have been the bright spot that has fueled the market rise so far. There are worries now that an increase in costs will weigh on earnings. We thought this last quarter, too, although it never really materialized. Either way, next week will be very important.
There will also be several economic reports that we will be watching. Late in the week we will get data on the producer and consumer price indexes (PPI and CPI), which gives us a read on inflation. With the decline in gas prices, it is believed that they will show little inflation.
Investment Strategy
The markets continue to bounce around, but it was reassuring to see them hold the level from the prior week despite the poor employment report. However, we are not making any big bets as earnings season approaches. Earnings have been solid up to now, but we worry that the negative aspects of the economy may begin to take their toll on earnings. At this point, we feel it is too risky to make any large bets on the general market and are very cautious.
Finding good individual stocks could be a good play at this time. As value investors by nature, we like to buy things that look to be cheap or trading at a discount (using industry jargon, we like to have a margin of safety).
We have enjoyed investing in smaller stocks that are uncorrelated to the movements of the market and economy. These aren’t big positions in our portfolio and can be risky, but it is nice seeing stocks move on fundamentals rather than being pushed around by big investors and high frequency traders.
Outside of these small stocks, if we were to put new money to work, in equities we are focused on large cap higher-quality stocks, particularly companies with operations overseas. We like commodities for the long term and weakness could present a buying opportunity.
TIPs are important as we expect inflation to increase (although we will revise our outlook for these securities if any changes are made to the CPI measurements), while U.S. Treasuries are a sector we are very bearish (pessimistic) on as we think yields will increase over time and is looking more likely as QE2 has ended. Municipal bonds are important and there are some nice yielding bonds out there now (try to avoid muni funds and buy the actual bond if possible).
Finally, international stocks are facing many headwinds, most notably, slower growth and inflation. Still, if we had to put new money in, we favor developed international markets as opposed to emerging.
These day-to-day and week-to-week fluctuations have little impact on positions we intend to hold for several years or longer. Our short and medium term investments are the only positions affected by these weekly and monthly changes.
This commentary is for informational purposes and is not investment advice, an indicator of future performance, a solicitation, an offer to buy or sell, or a recommendation for any security. It should not be used as a primary basis for making investment decisions. Consider your own financial circumstances and goals carefully before investing. Past performance cannot guarantee results.
Source: MSN MoneycentralThe week started out on a fairly bright note, continuing the rally from the previous week. There was even some decent news to support the rally. Sales at retail companies like Gap, Macy’s, and Target in June were much better than expected.
Also, the ADP employment report (an employment report that precedes the important government employment report. The ADP figure is derived from the activity of firms using the ADP payroll service) was surprisingly strong, resulting in solid gains in the market.
Unfortunately the tide turned on Friday. The non-farm payroll employment report released that morning was terrible, frankly. Economists were predicting a number north of 100,000 new jobs last month, but the actual number was just 18,000. Also, the prior two months were revised much lower, painting an even weaker jobs picture.
The resulting unemployment rate now stands at 9.2%, up from 9.1% the month before. When considering the underemployed (either working part time or gave up looking for work), the figure is over 16%.
While this news is bad, we see a more troubling trend brewing. The labor force (the amount of people actively working or looking for work) keeps heading lower and now stands at a new 25 year low. Also, the average length of unemployment stands at an all time high of almost 40 weeks.
As you can see in the chart on the right (it may appear small, but the bottom axis is years beginning in 1948 and the vertical axis measures weeks. Chart courtesy zerohedge.com), the recent figures dwarf any other time in recent history. We are becoming a society of the perpetually unemployed. Countless government programs have been established to alleviate the burden on the unemployed, but we see it as making things worse and the chart supports that. There have been many excuses why unemployment is persisting. On Friday alone we heard that it is due to the debt ceiling not being raised. And lack of infrastructure spending (although we just spent hundreds of billions for that purpose). And an inefficient patents process. And greedy companies hoarding cash. We even heard the number justified by the Labor Secretary Hilda Solis saying that President Bush only averaged 11,000 jobs per month during his tenure.
All these reasons are ridiculous and show how out of touch our decision makers are. Uncertainty on future rules, regulations, and taxes plays a part in preventing hiring. However, certainty of bad policies is even worse. In our business, for example, we know that our costs and regulations are increasing due to the recent passage of the Dodd-Frank bill. Countless other industries are facing similar situations. With these negative certainties and looming uncertainties, it makes companies less likely to invest in new hires.
The other factor preventing hiring is a lack of demand for products or services. That’s were the government thinks they should step in – increase spending to increase demand. We see the problem with demand is simply that people don’t have the money to spend like they used to.
Just look at your own budget – you’re spending more on things like gas and food which prevents spending elsewhere (stemming from a decline in the strength of the dollar due to massive government printing and spending). New and increased fees in things like your bank account take another cut (thanks to Dodd-Frank). Our power bills are more than double what they were a year ago (and a recent EPA announcement assures us that they will continue to increase. Link to story).
These may be just a few small examples, but when multiplied by millions and millions of people, it begins to add up. Many people simply don’t have the money to spend like they used to.
When government thinks it knows best and tries to help, it creates unintended consequences that we are beginning to see. Until this changes, we don’t see employment making a measured improvement.
Next Week
Next week will be very busy as earnings season kicks off. The aluminum maker Alcoa gets the ball rolling on Monday and several banking companies will close out the week. Corporate profits have been the bright spot that has fueled the market rise so far. There are worries now that an increase in costs will weigh on earnings. We thought this last quarter, too, although it never really materialized. Either way, next week will be very important.
There will also be several economic reports that we will be watching. Late in the week we will get data on the producer and consumer price indexes (PPI and CPI), which gives us a read on inflation. With the decline in gas prices, it is believed that they will show little inflation.
Investment Strategy
The markets continue to bounce around, but it was reassuring to see them hold the level from the prior week despite the poor employment report. However, we are not making any big bets as earnings season approaches. Earnings have been solid up to now, but we worry that the negative aspects of the economy may begin to take their toll on earnings. At this point, we feel it is too risky to make any large bets on the general market and are very cautious.
Finding good individual stocks could be a good play at this time. As value investors by nature, we like to buy things that look to be cheap or trading at a discount (using industry jargon, we like to have a margin of safety).
We have enjoyed investing in smaller stocks that are uncorrelated to the movements of the market and economy. These aren’t big positions in our portfolio and can be risky, but it is nice seeing stocks move on fundamentals rather than being pushed around by big investors and high frequency traders.
Outside of these small stocks, if we were to put new money to work, in equities we are focused on large cap higher-quality stocks, particularly companies with operations overseas. We like commodities for the long term and weakness could present a buying opportunity.
TIPs are important as we expect inflation to increase (although we will revise our outlook for these securities if any changes are made to the CPI measurements), while U.S. Treasuries are a sector we are very bearish (pessimistic) on as we think yields will increase over time and is looking more likely as QE2 has ended. Municipal bonds are important and there are some nice yielding bonds out there now (try to avoid muni funds and buy the actual bond if possible).
Finally, international stocks are facing many headwinds, most notably, slower growth and inflation. Still, if we had to put new money in, we favor developed international markets as opposed to emerging.
These day-to-day and week-to-week fluctuations have little impact on positions we intend to hold for several years or longer. Our short and medium term investments are the only positions affected by these weekly and monthly changes.
This commentary is for informational purposes and is not investment advice, an indicator of future performance, a solicitation, an offer to buy or sell, or a recommendation for any security. It should not be used as a primary basis for making investment decisions. Consider your own financial circumstances and goals carefully before investing. Past performance cannot guarantee results.
