Tower Private Advisors
- Waiting for Godot (always wanted to use that one) or waiting for a correction that just won’t happen
- Lousy Payrolls report but Unemployment Rate falls to 7.3%!
Capital Markets Recap
A few peregrinatons on Syria and the White House…
First, on Syria, it was Nathan Rothschild, in 1810, who was credited with the phrase, “buy at the sound of cannons,” suggesting that the start of war and conflict is a good time to buy stocks. Indeed, a reputable firm we pay lots of money to, but which gets cranky when it sees its name in a blog post has done analysis of all post-World War II conflict and has found that, with the exception of one, returns after four months have been high-single-digits positive. Second, and somewhat related to Syria, the President’s having a tough time rallying support for action in Syria. Third, it appears that the President would like to nominate Lawrence Summers as the next Fed Chairman, but that presently looks like a long shot. That brings me to an email from Cumberland Advisors this week that referenced a sharp-penciled guy, Jeff Saut, from Raymond James, who has said that, “a President in trouble is a market in trouble.”
So, we have “a President in trouble;” we’re in a seasonally-difficult time of the year (sell-in-May-and-go-away is in effect until November;) the debt ceiling issue is likely to come to a head in the next couple of months; and I’ve probably missed a few things. Every other investor is “looking for a pullback” or worse, and, yet, the market doesn’t oblige. Is it a matter of, you just wait, we’re gonna get our due, or something else. I don’t know. I’d be inclined to chalk it up to under-invested investors if various surveys didn’t suggest that households have heavier than average allocations to stocks. I don’t think this is a great rotation into stocks, and that demand keeps stocks well bid, because the back up in interest rates has created some very interesting opportunities in fixed income (see my Indiana municipal bond example, below.) Hold a gun to my head and force me to cough up an answer…okay, it’s the Fed. All eyes are on the Fed–and they should be. Take away William McChesney Martin’s punchbowl, and markets are in trouble.
But why trust me?
- A couple of surveys released this week showed that “many investors don’t trust financial advisers.” That was lead-in to an article citing two surveys. One found that only “53% of clients believe investment management companies do what’s best for them,” and another, called the Forgotten Investor Survey, “discovered that only 15% of the people participating trusted financial advisers.”
- And why should they? This week the Wall Street Journal published a story that showed that large money managers are given access to different municipal bond information than is available to most investors.
- Increasingly more Americans don’t retire at 65. That’s what a Washington Post story said. See my comments below on the labor participation rate, which shows the smallest labor force as a percentage of the population since 1978. Guess what the only group is with an increasing participation rate…yep, Baby Boomers. As usual, they’re screwing up things for the rest of us.
- In a marriage of two technology deadbeats, Microsoft said it would buy Nokia’s handset business. ‘Know what’s coming up on September 9? Apple’s iPhone announcement. When’s the last time anyone cared about a Microsoft announcement? Deadbeats.
While there was a long list of economic datapoints released this week, only one really mattered, and that was today’s Non Farm Payrolls report. In the category of popular financial words in 2013, “duration” has edged out “taper,” but only by a little bit. No, in this case taper is not a candle, rather it’s Federal Reserve talk for tapering the pace of bond purchases. The Fed has said it will keep interest rates low for an extended period of time, and has even mentioned using the unemployment rate as a target. As the unemployment rate is part of the Non Farm Payrolls report, it’s eagerly awaited, all the moreso since Chairman Bernanke indicated the tapering process would begin in September, but that it would sensitive to the economy. Signs of a stronger economy would ensure that tapering would start; signs of a weaker economy might give them pause.
Well, today’s Non Farm Payrolls report was weaker than the headline suggested. The headline was that 169,000 jobs had been added in August and that the Unemployment Rate had fallen to 7.3%. That suggested the Federal Reserve would be more likely to taper than not, and that’s how the S&P futures responded. After the dust had settled and folks had read beyond the headlines it seemed that tapering might not be such a slamdunk, and markets responded. Here’s S&P futures from late last night.
What was behind the headlines were these things. First, July’s increase of 162,000 jobs was revised downward to just 104,000. Second, the 6,000 manufacturing jobs that were added? Oops, those weren’t added; in fact, we lost 16,000 manufacturing jobs. The 7.3% Unemployment Rate? Well, that takes a bit more explaining, but the fall from 7.4% was the result of a contraction in the Labor Force, which is the number of folks working or willing to work. In August, that number fell by (-)362,584, while the number of unemployed (without a job but willing to work) fell by (-)182,278. That means that as a percentage, the employment rate was higher and, thus, the unemployment rate, lower. Another way to put the folks who comprised the 362,584 drop? They gave up–dropped out.
Here’s a graphical look at the Labor Force Participation Rate, or the percentage of the population aged 16 and over, either working or willing to work. This is not good. For just a minute ruminate on the consequences of a drop of a few basis points–after all, the chart below peaks at 67.3% and has fallen a little more than 4%. It’s back at late ’70s levels.
If the participation rate were what it was just at the end of 2011–64%–the labor force would be higher by 1,967,680! Using the participation rate at the peak…10,084,360 higher!
So, we added 176,000 jobs in August. So, what? The age 16+ population grew by 204,000 in August.
Everything I’ve read suggests that today’s report won’t dissuade the Fed from beginning its tapering program in September, but as Bill Gross, of PIMCO tweated today, the Fed is more likely to “tinker than taper.” One thing is for sure in my estimation, yields shouldn’t be as high as they are with the economy as weak as it is.
How high are yields?
Bought today: A-rated Indiana general obligation municipal bond: 4.58% yield to January 2024 maturity. That’s an 8.01% taxable equivalent yield for an Indiana tax payer in the top income tax bracket.
Not much happening. Job Openings and Labor Turnover Survey (JOLTS) out on Tuesday; Initial Jobless Claims on Thursday; Producer Price Index on Friday.
Graig P. Stettner, CFA, CMT
Chief Investment Officer
Tower Private Advisors