2010Nov28 Job Creation? Yes!

 

Economy:

 

On Monday, the Fed continues its policy of pumping money into our economy under its permanent open market operations (POMO). Presumptively, adding money to create a new “wealth effect” that encourages consumption and keeping interest rates low that encourages borrowing will create jobs. It’s working! It’s just not working in the U.S.

 

Dell Corporation just borrowed $1.5 billion at historically low rates. In regulatory filings, Dell claimed that the money won’t be used outside of the U.S. However, money is fungible. It frees up other capital facilitating Dell’s days later announcement of $100 billion to be spent in China over the next ten years. That will create a lot of jobs. China is not alone as all of Asia has been benefitting from the flow of investors and corporations seeking better returns in the face of current Fed policies.

 

The Fed has a history of intervention on monetary issues with global implications. It provided reassurance to the markets in the mid-90s with the Mexican Malaise, in ’97 with the Asian Contagion, in ’98 with the Russian Ruble and in ’08 with our Financial Crisis. With $1.7 trillion already injected into our economy without the expected results, the Fed is trying to justify the next $600 billion as creating one million jobs over the next two years. That is $600,000 per job! Even adjusted for exchange rates, Dell Corporation can probably do that at a much lower cost to the tax payer if federal policies were friendlier.

 

The increase of 151,000 jobs in the November 5^th jobs report is miniscule compared to the 15 million jobs lost since the beginning of the recession. Neither the Fed nor Congress can create a policy that will replace Boomer’s transition from spending on children to saving for retirement. The X-Gen is too small in number to fill the gap in spending or taxes.

In 2012, we will get another uptick in our adolescent population, and their parents will be spending money. It will look as though the extended recession has finally died. It will only be a three year hiatus before our dearth of births exerts its inevitable influence on the economy.

 

Hope exists for the U.S. unlike any other Western economy. The Y-Gen is larger than the Boomers. They are entering the age of marriage. They will soon be buying starter homes, having children, maturing in their careers and increasingly consuming everything a growing family needs. They will re-start our economy.

 

Stock Market:

 

A weak economy no longer means a weak stock market. Corporate profits are no longer anchored to a company’s home country except for utilities and health services which are local. Otherwise, nearly 50% of S&P-500 earnings are generated globally. Building portfolios around U.S. market data can lead to significant errors in assumptions about expected returns.

The “new economy” requires a major change in asset allocation and perspective for today’s investors. Flexibility is essential in today’s global market. Buying a cheap, but lousy, stock in a secular bull market often benefitted from generally positive

trends. Cheap, however, is never fully revealed until after its damage has been inflicted on a portfolio. This is the “value trap.”

 

Cheap stocks are often deserving of their price due to real operational, managerial or product problems. Investors retain poor portfolio holdings because they remain cheap – a.k.a, a good “value.” Sir John Templeton’s position of waiting ten years to be proven right about a value stock is not a luxury most can afford. (After all, he was investing other people’s money).

 

Selling weak positions and keeping winning positions is the opposite of rebalancing an asset allocation driven portfolio. Yet, that is the most likely process to capture returns. Relative strength avoids the value trap by continuously eliminating underperforming positions and quickly limiting losses. The downside is that some trends fail to persist after attracting capital creating a “whipsaw.”

 

“When the facts change, I change my mind. What do you do, sir?”  - John Maynard Keynes

 

Our plan is “the plan will change.” What is your plan?

 

Relative strength measures the price performance of a stock against a market average, a selected universe of stocks or a single alternative holding. Relative strength improves if it rises faster in an uptrend, or falls less in a downtrend. It is easily applied to individual positions in your portfolio and to sectors and asset classes.