Unemployment and the stock market explained

The big news last week centered on the August jobs report, which was disappointing to say the least. Non-farm payrolls were unchanged in August but down 58,000 including revisions to June/July. The consensus expected a gain of 68,000. The unemployment rate remained unchanged at 9.1%.

U.S. stocks tumbled 2% on Friday in reaction to the news, as headlines showing zero jobs growth in August fueled investor concerns. And while the August numbers are certainly not attractive, there are a few underlying factors we would like to draw your attention to.

One of the reasons August’s numbers were so weak has to do with the Verizon strike, now over, that temporarily sidelined 46,000 workers. Were it not for that strike, private payrolls would have been up 62,000 including revisions. As it stands, workers on strike are counted as unemployed when they go on strike and are added as newly employed when they go back to work. Now that they have returned to work, a future employment report will show an increase of 46,000. It’s strange how the system works isn’t it?

There was also some positive news in Friday’s report. Civilian employment, an alternative measure of jobs that includes start ups, increased 331,000 in August, which is very encouraging. In general, when new businesses are starting up and hiring workers, it means the wheels of capitalism are turning in the right direction.

If you only look at the totals, it’s easy to say there was no employment growth in August, which is how most of the headlines read. But if you take time to look below the surface, a more balanced picture emerges. Much of August’s weakness can likely be attributed to financial turmoil in Europe, large swings in the stock market, and lawmaking that has brought much uncertainty to the hiring arena.

Although recession fears are still lingering, recent reports on auto sales, manufacturing and consumer spending suggest that the economy is still growing, albeit slowly. We believe future jobs reports will reflect that.

ECONOMIC CALENDAR: Monday – U.S. Holiday: Labor Day Tuesday – ISM Non-Mfg Index Wednesday – Beige Book
Thursday – BOE Announcement, ECB Announcement, International Trade, Jobless Claims, EIA Petroleum Status Report
Data as of 09/02/2011 1-Week YTD 1-Year 5-Year 10-Year
Standard & Poor's 500 -0.24 -6.65 7.69 -2.09 0.36
Dow -0.39 -2.91 8.92 -0.39 1.30
NASDAQ 0.02 -6.50 12.7 2.62 3.74
MSCI EAFE 0.08 -9.42 2.35 -2.58 2.14
10-year Treasury Note (Yield Only) 2.19 N/A 2.63 4.73 4.82

Notes: All index returns exclude reinvested dividends, and the 5-year and 10-year returns are annualized.
Sources: Yahoo! Finance, MSCI Barra. Past performance is no guarantee of future results.
Indices are unmanaged and cannot be invested into directly. N/A means not available.

HEADLINES:
Bank of America Corp. and 16 other big banks have been hit with multiple accusations of securities-law violations and negligence in a series of lawsuits tied to more than $50 billion in mortgage securities. The lawsuits, filed late Friday by the Federal Housing Finance Agency, accuses lenders of selling bad mortgage securities to government-sponsored housing companies Fannie Mae and Freddie Mac.

The euro came under significant pressure in European trading Tuesday, pulling down other sentiment-sensitive currencies, such as the pound and Australian dollar, with it. A steady flow of negative newsflow out of the euro zone pushed it down about 0.6% – a big move for a major currency – against the dollar.

Though oil prices fell to near $88 a barrel Friday, crude has jumped about 16% since August 9th, bolstered by signs industrial production in the U.S. continues to expand. The Institute for Supply Management said Thursday that U.S. manufacturing grew for the 25th straight month while analysts had expected a contraction.
About 70,000 households and businesses along the Eastern Seaboard who lost power during Irene remain without it a week after the storm.

Markets trying to figure out where the economy is headed

A recent article from the New York Times that was reprinted by CNBC, likened the late-2000s recession to an earthquake, and recent volatility to aftershocks. The article said: “Like earthquakes, financial crises seem to be accompanied by aftershocks, like the one we’ve been living through this week.
They can feel every bit as bad as the crisis itself. But economic history and academic research suggest they can set the stage for a sustainable recovery — and eventual sharp stock market gains.” We found this to be a particularly fitting illustration, and a valid point.

It’s no secret that dizzying stock market moves in recent weeks have been difficult to stomach. Think of all the events we’ve had to face leading up to this – controversy in Washington over the debt ceiling, Standard & Poor’s downgrade of America’s prized credit rating, renewed fears about European debt, and a gut-wrenching plunge in the stock market. The uncertainty of everything culminated in the wild ride we took last week.

To recap: On Monday the Dow Jones Industrial Average fell almost 635 points, then rose nearly 430 points on Tuesday, only to see another drop of almost 520 points on Wednesday. Helped by some positive earnings results, the Dow soared 423 points Thursday and another 125 points on Friday. By week’s end, the benchmark index had closed at 11,269 and shed only 1.5% for the week. The S&P 500 Index logged similar performance.
You might want to take a deep breath after reading this paragraph.
Do we expect a measure of volatility to continue? There is a good possibility that it will, at least for a time. As long as confidence in the global economy and government policymakers remains shaky, markets are likely to be volatile. Even so, we still believe that fundamentals are strong, and we know that successful investing is a long term project undertaken with risk and uncertainty. Equity markets do not move in a straight line, and neither do economic recoveries. Despite being painful, volatile periods like this historically run their course and then come to an end. To quote an ancient proverb, “this too shall pass.”

ECONOMIC CALENDAR: Monday – Empire State Mfg Survey, Housing Market Index
Tuesday – Housing Starts, Import and Export Prices, Industrial Production Wednesday –Producer Price Index
Thursday – Consumer Price Index, Jobless Claims, Existing Home Sales, Philadelphia Fed Survey, Leading Indicators

Data as of 08/12/2011 1-Week YTD 1-Year 5-Year 10-Year
Standard & Poor's 500 -1.72 -6.27 8.79 -1.39 -0.10
Dow -1.53 -2.66 9.20 0.33 0.82
NASDAQ -0.96 -5.46 14.5 4.38 2.82
MSCI EAFE -1.56 -7.37 6.98 -1.45 2.06
10-year Treasury Note (Yield Only) 2.56 NA 2.73 4.97 5.02

Notes: All index returns exclude reinvested dividends, and the 5-year and 10-year returns are annualized.
Sources: Yahoo! Finance, MSCI Barra. Past performance is no guarantee of future results.
Indices are unmanaged and cannot be invested into directly. NA means not available.

HEADLINES:
Italy's government has approved sharp budget cuts demanded by the European Central Bank despite regional opposition to the move. Italian officials said Friday the austerity measures include $28 billion in cuts next year and $35 billion in 2013.
The number of Americans claiming new jobless benefits fell to a four-month low last week, the Labor Department said in its weekly report, providing a ray of hope for the nation’s battered economy. Initial claims for state unemployment benefits fell 7,000 to a seasonally adjusted 395,000, the Labor Department said, the lowest level since early April. Economists had expected a reading of 400,000.

The tumbling price of crude oil this month and signs of falling fuel demand point to lower U.S. gasoline prices ahead, though consumers will have to wait for savings to trickle down to the pump. After reaching an almost three-year high of $3.97 a gallon in early May, U.S. retail gasoline prices have fallen nearly 30 cents on a combination of lower oil prices and flagging sales in the important summer-driving season.

The Securities and Exchange Commission has asked credit rating agency Standard & Poor’s to disclose who within its ranks knew of its decision to downgrade U.S. debt before it was announced last week, as part of a preliminary look into potential insider trading, people familiar with the matter say.

Important Perspective on Recent Market Events

As you are surely aware, following Tuesday’s debt ceiling compromise, attention quickly shifted to whether the government has what it takes to solve its budget problems. Add to this the fact that Italy is now in the forefront of debt problems in Europe and anemic economic news has been pushing investor sentiment downward, and you have a near-perfect recipe for a stock market correction. And a correction – defined as a 10% drop from recent highs – is exactly what we experienced last week as major indexes erased their gains for the year. At times like this, we are wise to view events in the proper context and avoid letting brief periods of negativity derail our long-term strategies.

Market corrections are not unusual events. From the market lows of July 2010 to the highs of April 2011, the S&P 500 was up over 26% without experiencing a correction. To put that 26% run-up in perspective, the best 20-year time period for the stock market was 1948-1968, and the market only returned an average of 8.4% annually during that period. This illustrates that we were overdue for a correction. During recovery periods, stocks are prone to sudden declines in value. Unexpected drops in the market can be painful, but they are part of the healing process.

In our assessment, the turmoil of recent weeks reflects the fact that fear is still dominating investor sentiment. What are people afraid of? While there are several factors that could be cited, we believe debt problems domestically and abroad are in the forefront.

While it is true that European countries have spent themselves into a corner, correcting this mistake will be good for long term growth, not bad. While some financial institutions may face losses in the process, the minimal level of European exposure U.S. banks have, makes them well equipped to face this challenge. Our research tells us that the odds of significant damage to the U.S. economic system resulting from European debt failures are very low.

Closer to home, although S&P downgraded the nation’s bond rating from AAA to AA+, Moodys Investors Service took the opportunity to reaffirm the United State’s AAA rating. The U.S. now has a split rating from the two largest ratings agencies. The third-largest ratings agency, FitchRatings, also agreed with Moody’s AAA rating.

In confirming the AAA rating, Moody's recognized that the budget compromise is a first step toward achieving long-term fiscal improvement. The legislation passed on August 2nd calls for $917 billion in specific spending cuts over the next decade and established a congressional committee charged with making recommendations for achieving a further $1.5 trillion in deficit reduction over the same time period.
Successful investing is a long term project undertaken with risk and uncertainty. Equity markets do not move in a straight line, and neither do economic recoveries. We wish we had the ability to trade every move, but that just isn’t possible. We encourage you to tune out the media fanfare and remember that we have been through much worse. Please try to see recent events in context and do not allow them to disrupt your long term financial objectives.

ECONOMIC CALENDAR: Tuesday – Productivity and Costs, FOMC Meeting Announcement Wednesday – EIA Petroleum Status Report, Treasury Budget
Thursday – International Trade, Jobless Claims Friday – Retail Sales, Consumer Sentiment, Business Inventories
Data as of 08/05/2011 1-Week YTD 1-Year 5-Year 10-Year
Standard & Poor's 500 -7.19 -4.63 6.53 -1.25 -0.12
Dow -5.75 -1.15 7.21 0.36 0.89
NASDAQ -8.13 -4.54 10.4 4.29 2.26
MSCI EAFE -8.47 -5.90 3.19 -1.36 1.91
10-year Treasury Note (Yield Only) 2.81 NA 2.91 4.90 5.16

Notes: All index returns exclude reinvested dividends, and the 5-year and 10-year returns are annualized.
Sources: Yahoo! Finance, MSCI Barra. Past performance is no guarantee of future results.
Indices are unmanaged and cannot be invested into directly. NA means not available.

HEADLINES:
Treasury Secretary Timothy F. Geithner will not be stepping down, a Treasury Department official said Sunday, ending speculation that the key Obama administration advisor was preparing to resign.

It was announced Friday that the Postal Service lost $3.1 billion in the April through June period and could be forced to default on payments due to the federal government when the fiscal year ends in September. Several bills designed to change the law governing the post office, an independent government agency, are pending in the House and Senate.

After reaching a near-record $3.98 in May, tumbling in June, and rising throughout the month of July, gasoline prices finally settled around $3.70 a gallon in early August.

The job market strengthened in July, a welcome piece of good news that sharply contrasted other recent data pointing toward an economic slowdown. Employers added 117,000 jobs last month, easily topping the 75,000 gain economists surveyed by CNNMoney had predicted. And the unemployment rate improved slightly to 9.1%.

AN EXCERPT FROM MY LATEST BOOK, CAN I RETIRE
LIVING BETTER FOR LESS

Since you’re a few years off from retiring you should begin enhancing your savings by reducing your expenses, this way you can also lower the amount required after you retire. The less you need for your retirement income, the more you can save for the unexpected. Knowing by how much you can lower your living expenses all depends on your needs but you can reduce your expenses three different ways:

- Find a cheaper alternative to getting what you already need. This refers back to the section on comparison-shopping, as it’s not just for food or clothing, it relates to car insurance, travel, vehicles, and gasoline as well. If you can get what you require for a lower price than your retirement income will be lower than what has been estimated thus far.

- Eliminate debts and unnecessary expenses. As already discussed, it is important to reduce your debts as far down as they can go and cut costs on expenses that are not needed. What counts as an unnecessary expense all depends on the person. Most people like to drink beer or wine but that doesn’t mean you have to drink the most expensive bottle out there. Find a cheaper made beverage that still
tastes just as good and save what’s left over for other, more important things.
-
Move to where the cost of living is cheaper. Moving from a big city is an expense in and of itself, especially if you rely on public transportation. However, it can end up costing you more to live there than in the boonies, especially since the cost of homes in smaller places is nowhere near as high as they are in the city. This is because there are more people per square inch living in cities than there are living in towns or the boons. There’s a reason people prefer living in Brooklyn and commuting to New York City each day, and it’s not because they love the hassle of public transit.

Living on a modest income as a retiree is doable. The average amount recorded as of late that those retired are living off of is about $25,000 a year, which is 50% less than the normal family living on an estimated $47,000 per year. The problem is that those of heading into the luxury of retirement are living in a much different economy that your grandparents or even your own parents. The recession has made things more challenging for all, thus why even those who had planned for contingencies had to find a way to increase their retirement income and some had to go back to working for a while before things settled back down.

Although not intending to frighten anyone when I say this, the fact of the matter is that the economy is still not yet fully recovered from the recession and another one is a possibility in the future. That is why it is important to try and live off of as little as you actually need right now and plan for the possibility of needing more after you retire than originally thought of. You’re retirement budget should be realistic and factor in any possible contingencies from needing long-term medical care, to being pulled back into an economic slump.

Most market observers believe debt ceiling will be raised

With less than two weeks until the August 2 deadline for raising the debt ceiling, investor focus has been glued to the debate. Lawmakers have been negotiating ways to cut spending and raise the nation’s borrowing limit for months, but there is still no articulated path forward. Treasury Secretary Timothy Geithner said Sunday on CNN's State of the Union, "We're almost out of runway. We're not nowhere, but we're almost out of runway." In the days ahead, markets around the world will be looking for reassurance that the U.S. political system can compromise on solutions for the greater good.

Helping to balance uncertainty in Washington, last week was one of surprisingly positive earnings reports that lifted major indexes to weekly gains. The Dow rose more than 1% and the S&P 500 and Nasdaq more than 2%. Analysts also cited relative progress on both the U.S. debt ceiling issue and the ongoing European debt crisis as partial reasons for the positive results.

This week promises to be a busy one both for stocks and economic reports.180 companies in the S&P 500 are scheduled to report quarterly financial results; the August 2 deadline for raising the debt ceiling is rapidly approaching; and Friday will bring the first official report on second-quarter economic growth.

With everything featured in the headlines right now, we understand that you may have some concerns about how your investments could be affected. Please rest assured that we are closely monitoring all relevant activity and will keep you informed about any steps that need to be taken. At the same time, we would like to reiterate that we do not believe now is the time for drastic action. If you have questions or would like additional information, please feel free to contact us. We are always here to lend a hand.

Data as of 07/22/2011 1-Week YTD 1-Year 5-Year 10-Year
Standard & Poor's 500 2.19 6.95 23.0 1.69 1.11
Dow 1.61 9.53 22.9 3.34 1.99
NASDAQ 2.47 7.76 27.3 8.30 4.09
MSCI EAFE 3.44 5.38 21.5 1.95 3.49
10-year Treasury Note (Yield Only) 2.91 NA 2.93 5.05 5.11

Notes: All index returns exclude reinvested dividends, and the 5-year and 10-year returns are annualized.
Sources: Yahoo! Finance, MSCI Barra. Past performance is no guarantee of future results.
Indices are unmanaged and cannot be invested into directly. NA means not available.

HEADLINES:
The dollar fell as U.S. lawmakers failed to agree on raising the nation’s $14.3 trillion debt ceiling. America’s currency weakened against the Swiss franc, yen and euro.

Investors outside the U.S. own $4.51 trillion in U.S. Treasuries, or about 50% of the marketable government debt outstanding, according to the Treasury Department.
Last week marked the first anniversary of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Dodd-Frank’s crucial innovation was to identify sources of systemic risk in the banking system, and to provide regulatory tools to lessen the problem.
A year after the bill became law, it still has many critics and champions.

Two coordinated terror attacks in Norway have left at least 92 dead. Flags are flying at half-staff and the Army is patrolling the streets in a city that just endured its worst peacetime attack in history. Our thoughts are with them.

Everything you wanted to know about the debt ceiling and its impact

Balance the budget; curtail spending; reduce debt – three aspects of simple fiscal management. At one time or another, nearly every American has done these things to keep their financial house in order. Now it’s the government’s turn. Trouble is, the powers that be haven’t agreed on how to do it. Meanwhile, all the posturing in Washington is fueling investor frustrations as experts warn that failing to raise the debt ceiling will have disastrous consequences. Why is this such a complicated issue? And perhaps more importantly, why does immediate action need to be taken?

At a fundamental level, the problem is that the U.S. government spends more money than it takes in (See Chart). In order to cover the bills, it borrows money, thus the national debt. In theory, the debt ceiling is supposed to help Congress control spending, in reality, it isn’t working. Since 1962, the ceiling has been raised 74 times, ten of which have occurred since 2001.

What is the debt ceiling anyway?

It is a limit set by Congress on the amount of debt the federal government can borrow. The limit applies to debt owed to the public (e.g. U.S. bond holders) and debt owed to federal government trust funds such as those for Social Security and Medicare.
How high is the debt ceiling right now? The ceiling is currently set at $14.294 trillion. The country's accrued debt reached that mark on May 16, 2011. Currently, Treasury Secretary Timothy Geithner is taking various measures to allow the government to continue borrowing until August 2nd.

What now?

Nobody knows for sure how things are going to play out and the uncertainty is frustrating to say the least. Here are a few of the options that are currently being debated:
1) Do nothing.
This is not an option we want to see elected. If no action is taken, the Treasury will not have authority to borrow any more money. And since the government borrows to make up the difference between what it spends and what it collects, funds would not be available to pay the country’s bills.

Failure to act would create serious economic repercussions. At a minimum, a default would hurt U.S. bonds, the dollar, and investors' portfolios. And while a total government shutdown is unlikely, many who depend on government checks – from active-duty soldiers, veterans, and federal workers to name a few – could find their mailboxes empty. Which payments would be delayed is not known, but any choice would cripple parts of the economy and anger many groups of Americans.

Agree on a plan to reduce the budget deficit and national debt.
A package of $4 trillion in spending cuts and revenue increases is widely considered by fiscal experts to be the only way to start reining in the runaway U.S. debt. In this respect, the key issue is not just that a deal be made, but that it qualifies as a long-term solution.

Two key ratings agencies have said they expect policymakers to agree on a plan to meaningfully reduce the debt. Moody's Investors Services said Wednesday it would likely change its outlook on U.S. debt from “stable” to "negative" unless "substantial and credible agreement is achieved on a budget that includes long-term deficit reduction." Standard & Poor's went farther on Thursday by announcing there is a fifty percent chance it would downgrade the U.S. within 90 days if a credible agreement is not reached.

And while most Americans understand that changes need to be made, the politicians can’t agree on what those changes should be. To quote the president, “The American people are sold” on the idea of balancing spending cuts with tax increases. The problem is members of Congress are dug in ideologically.”


Even if the government agreed to cut all discretionary spending it wouldn’t make up for half of the deficit. Even eliminating social security and all defense spending would barely cover the deficit. And of course, that can’t be done. So as you see, policy makers have a serious challenge on their hands.

2) Raise the debt ceiling again.
Most experts agree that policymakers will raise the debt ceiling. If for no other reason, because the consequences of not doing so are too great. If the debt ceiling is breached, interest that the government pays on its debt will rise, pushing the deficit even higher.

Federal Reserve Chairman Ben Bernanke was on Capitol Hill Thursday, warning that failure by Congress to raise the debt ceiling would create "a calamitous outcome." Global confidence in U.S. Treasuries and the nation's AAA credit rating are among our nation's greatest economic assets, and according to Bernanke, "Losing that credit rating would be a self-inflicted wound". It would also be bad news for the labor market, the Fed chairman explained, which is an area of growing concern since the June jobs report showed hiring slowed to a crawl. In short, failing to raise the debt ceiling would be bad news all around.

It is our hope that a combination of efforts involving raising the debt ceiling and implementing a plan to begin reducing the deficit will be agreed upon promptly.

What are we doing in the meantime?

We have determined that it is too risky to try and predict what the outcome of this situation will be, and if we get a prediction wrong, it could cost our clients money.

Overall, we have confidence that some sort of agreement will be reached and we do not think now is the time to take drastic action. We realize it may not be especially reassuring for you to hear this, but we believe it is the best choice.
Rather than reacting too conservatively or aggressively, we continue to maintain that a balanced approach to investing, including diversification and maintaining long-term vision, is the best way to weather storms like this. We will, however, keep a close eye on the situation and monitor how any developments have the potential to affect your portfolio.
If you have any questions or concerns, please don’t hesitate to reach out to us. It is a pleasure serving you.

Jobs needed, for US Markets

Three things were on the minds of investors last week – jobs, jobs, and jobs.
U.S. Stocks posted broad losses on Friday as investors digested a disappointing June jobs report that showed hiring virtually stalled last month. The Labor Department's report showed the U.S. economy created only 18,000 jobs, a fraction of the 120,000 that economists predicted. At the same time, the unemployment rate rose to 9.2% from 9.1%, rather than declining as hoped.

Interestingly, the government's employment report came as a sharp contrast to two better-than-expected reports released Thursday on the job market, which helped U.S. stocks rise sharply. Payroll processing company ADP said private jobs grew rapidly in June – a figure that was much higher than anticipated and more than four times higher than May’s numbers. (ADP measures only private jobs, while the Bureau of Labor Statistics measures both private and public sector jobs.)

So on Thursday, positive jobs reports were good for stocks, while on Friday, negative jobs reports were bad for stocks. Why is everyone so focused on the nation’s employment picture? Put simply, the U.S. is a consumption economy. When Americans spend money on things like cars, clothes, and eating out, our economy grows. When people don’t have gainful employment, they spend less, companies earn less, and slower economic growth ensues. For these reasons and more, the jobs picture commonly affects stock market performance.

In the weeks ahead, investors will shift their focus to the health of Corporate America as companies start reporting earnings for the second quarter. Many expect that strong earnings and outlooks will help compensate for weak jobs data, and will reinforce that the recovery is still progressing.

ECONOMIC CALENDAR: Tuesday – International Trade, FOMC Minutes Wednesday –Import and Export Prices, Ben Bernanke Speaks, EIA Petroleum Status Report, Treasury Budget
Thursday – Producer Price Index, Retail Sales, Jobless Claims, Business Inventories
Friday – Consumer Price Index, Empire State Mfg Survey, Industrial Production, Consumer Sentiment


HEADLINES:

Betty Ford, the former first lady whose triumph over drug and alcohol addiction became a beacon of hope for addicts and the inspiration for her Betty Ford Center in California, died at age 93 on Friday. Her death was confirmed to The Associated Press by Marty Allen, chairman emeritus of the Ford Foundation. The former first lady died at the Eisenhower Medical Center in Rancho Mirage. Other details of her death were not immediately available.

The last shuttle thundered into orbit Friday on a cargo run that will close out three decades of both triumph and tragedy for NASA and usher in a period of uncertainty for America's space program.

South Sudan became the world's newest country Saturday with a raucous street celebration at midnight. South Sudanese citizens, international dignitaries and the world's newest president are convening in the new country capital of Juba to celebrate the birth of a nation.

European Union President Herman Van Rompuy has called a meeting of top EU policy makers Monday to discuss plans for a second bailout package for Greece, EU officials said on Sunday. The gathering comes as Europe continues to struggle with a contentious issue: whether and how Greece's private-sector creditors should share the burden when the anticipated second aid package is doled out to the debt-burdened country.