Archive for November, 2013

Fabled Diversification

Friday, November 29th, 2013

Aesop’s fable about not putting all your eggs in one basket has been construed as, among other things, a strong recommendation for diversification. This ancient author actually was trying to illustrate how the calamity resulted from carelessness rather than conveyance, but that’s the way things go. The young lady in Aesop’s tale of woe would have been better off heeding Andrew Carnegie’s advice, “The wise man puts all his eggs in one basket and watches the basket.” Nevertheless, here at Atlas we adhere to the principle of reasonable diversification when employing your (and our) wealth.

Diversification to your team here at Atlas consists primarily of domestic and foreign equities and fixed income instruments. We track, and could employ, certain currencies and commodities, but their recent dismal performance has kept us away from them to our benefit. Every dog has his day, they say, but those last two just can’t hunt right now.

Should we remain as diversified as we do, or might we hew more to Mr. Carnegie’s line of reasoning? To answer that we turn to some of the most intelligent investors in today’s financial world. The major global banks hire the brightest and the best, so how do they invest? Just read the latest headlines. These folks have manipulated the mortgage market. They have manipulated interest rates. They have manipulated currencies. They have manipulated precious metal prices. They have manipulated prices at utilities, and the list goes on. What stronger argument for diversification could one find? (by J R)

Third Quarter Productivity and Unit Labor Costs

Wednesday, November 27th, 2013

Nonfarm businesses increased their productivity in the third quarter by 1.9 percent according to the Bureau of Labor Statistics. This measure of efficiency is comprised of two components, output and hours worked. Output increased by 3.7 percent, while it only took 1.7 percent more hours to generate the added production. Year-over-year, productivity has stagnated; this is partially due to second quarter productivity being revised lower to 1.8 percent from 2.3 percent. In the last twelve months, output has increased by 1.8 percent, as has the number of hours worked in the economy.

Hourly compensation was up an annualized 1.3 percent for employees of nonfarm businesses in the quarter. Year-over-year, it has increased by 1.9 percent, so the most recent tally is slower than the average of the past three quarters. One standout on a quarterly and year-over-year basis is the nondurable manufacturing category; here, pay increased 3.3 percent on an annualized basis for the quarter and 2.8 percent over the last four quarters.

Combining the output per hour and compensation per hour yields the unit labor cost. The labor cost per unit of output declined by 0.6 percent in the third quarter as hourly output improved faster than hourly compensation. In the last year, the unit labor cost has grown by 1.9 percent.

Increased productivity allows the economy to grow without stoking the embers of inflation. If employees are not being used efficaciously, the result may be a shortage of supply which would likely drive up costs. In theory, the added productivity by firms should lead to better income statements causing increased wealth to owners of firms, and it may also lead to capital investment (equipment), both of which should help the virtuous portion of the business cycle. With any luck, the year-over-year productivity stagnation in the third quarter will prove to be an anomaly. (by C. Cox)

Happy New Fiscal Year!

Tuesday, November 26th, 2013

After narrowing the gap between government income and expenditures in fiscal year 2013, the new fiscal year is off to a good start. According to the monthly release from the Treasury Department, the nation began the year with a 23.7 percent smaller deficit than 12 months ago. With any luck, the shortfall will continue shrinking as the year wears on.

The smaller deficit was created by improvements in both components of the equation. First, government outlays fell from a year ago. Spending dropped 4.5 percent from last October to $2.91 billion. Government receipts were higher. The $1.99 billion in receipts (mostly taxes) is 7.9 percent higher than October 2012. While income taxes are the largest portion of the government’s inflows, they were lower than this time last year. However, taxes paid by corporations were higher, as was the amount of money collected for retirement receipts and social insurance.

Assuming the economy continues to grind forward, the beltway will be sent additional revenue from the growing aggregate income in America. The spending side of the equation is much less certain. Congress’ infighting has only managed to postpone any real solution. The next attempt at an actual budget will be at the beginning of the new calendar year when the temporary resolution expires (January 15th), just weeks before the debt ceiling is expected to be reached (February 7th). Happy New Year! (by C. Cox)

October Employment Situation

Monday, November 25th, 2013

In October, employers added to their payrolls even as the leaders in Washington D.C. sent folks home. Following the 168,000 new hires in September (upwardly revised from 148,000), 204,000 new jobs were added to the labor market in October. Oddly enough, the unemployment rate moved higher to 7.3 percent from 7.2 percent in the prior period. The turmoil in the beltway may cause the various tallies in the Bureau of Labor Statistics’ report to be revised in the months ahead.

Because of the temporary nature of the government layoff, those sent home by the beltway should not have shown up in the unemployment ratio. The government knew they would be back to work, so their short-term absence did not impact the number of workers on the payroll. However, it is worth noting that the temporary layoff category increased by 448,000 for the month. With the federal employees returning to work, much of the ephemeral uptick should be reversed in the next employment report.

Recent labor market challenges continued. The long-term unemployed (those jobless for 27 weeks or more) was nearly unchanged at 4.1 million. The number of involuntary part-time workers remained elevated at 8.1 million. The labor force fell by 720,000, causing the labor participation rate to decline to 62.8 percent from 63.2 in the prior period.

For those working, average pay was slightly higher, but the workweek did not change. The average hourly earnings for all employees stands at $24.10, up $0.02 over September. Year-over-year this measure has increased by $0.52 or 2.2 percent. The average workweek for all employees was unchanged at 34.4 hours.

The labor market remains strained. The unemployment rate, perhaps the most watched economic indicator, is trending lower despite this month’s setback, but the improvement is merely an arithmetic phenomenon caused largely by the shrinking labor force. Employment is one of two mandates Congress assigned the Federal Reserve. The symptoms presented by this portion of the economy only serve to buttresses the central bank’s argument for being extraordinarily accommodative. Atlas doubts much change will come from the central bank even as reins are handed over to a new chairperson. (by C. Cox)

Fed Magic

Friday, November 22nd, 2013

Portfolio design, implementation, and monitoring is not an extremely physical occupation. I don’t need a hammer or a backhoe, a casting net or castanets. Mostly I just sit and think. Truth be told, occasionally I just sit. No doubt there are many ways to describe such work. If I understand the principle correctly, inertia is a term one might apply.

Inertia can be really cool when discussing the old idea that a body at rest tends to stay at rest, etc. Magicians use it to great effect when they rip a tablecloth off a fully set table without causing the silver, glass, and china to come crashing onto the floor. That can be quite an impressive demonstration. But it doesn’t hold a candle to what we have been seeing play out in the equity markets lately.

Since Lehman folded years ago, almost taking the world financial system with it, our Federal Reserve has done everything it could think of to keep liquidity flowing. Low rates and quantitative easing have been cornerstones of their efforts and, in the past, any suggestion they may begin tapering off these measures has created such angst in the markets that things did seem about to crash. The Fed would then decide a policy in motion needed to be kept in motion.

Most recently, reports regarding U.S. employment and GDP both came out suggesting our economy was gaining strength at a faster clip than had been imagined. The question was asked, “Could things be getting better fast enough to allow the Fed to stop its stimulus?” Oddly enough, the immediate answer was a sharp drop in asset prices as the forces fearing a change in direction reacted with a gasp quite akin to that you would hear when the magician first pulls off the cloth. Then, equities began to reclaim their most recent highs. Are investors seeing that the tableware is in fact stable and we can all still sit at the table for an honest feast rather than the bags of fast food our central bank has been forced to serve for the last four years? (by J R)

September Trade Balance

Thursday, November 21st, 2013

The imbalance between imports and exports grew in September according to the U.S. Census Bureau. Widening from $38.7 billion in August to $41.8 billion in the final month of the third quarter, the shortfall is the highest since May of this year. This small monthly deterioration is not large enough to impact the overall improving trend of our trade deficit, which has been in place since around the beginning of 2012.

The components of the equation appear symptomatic of the global economy. America’s exports fell. There are many signs that our trading partners are not growing as quickly as the U.S., and this is one such anecdote. Our country managed to import more goods and services, led by goods excluding petroleum. Firms imported more capital equipment, consumer goods came in at a faster pace, and industrial supplies and materials also expanded. America seems to be stronger relative to our trading partners.

Evidence of a sustained American recovery continues to be revealed. However, the pace of the recuperation remains tepid, with the growth rates of many indicators not seeming strong enough to ward off possible external disruptions. In the absence of such a shock, the economy is likely poised to keep growing, but Atlas persists in being concerned about the fragile nature of the expansion. (by C. Cox)

Third Quarter Preliminary GDP

Wednesday, November 20th, 2013

Output continued growing in the third quarter as America’s Gross Domestic Product (GDP) advanced by an annualized 2.8 percent according to the Bureau of Economic Analysis. This pace is faster than the final estimate of the second quarter’s pace which was tallied at 2.5 percent when annualized. The rate of change was larger than the estimates of even the most optimistic economists polled by Bloomberg. The consensus anticipated 2.0 percent and those on the high end of the range were looking for just 2.7 percent.

Quibbling may seem petty here, but there were flies in the ointment. Consumption slowed in the period; the 1.5 percent increase fell short of matching the second quarter’s 1.8 percent uptick. This matters because these expenditures make up roughly 70 percent of the economy. Inventories increased; while this adds to the GDP total, unless firms are stocking up in preparation for an expected uptick in consumption, companies may have misjudged the amount of spending Americans were willing to do between July and September. Even the capital investments by firms slipped from 4.7 percent growth in the second quarter to 1.6 percent in the third quarter. One bright spot was found in residential investment which managed to increase by 14.6 percent versus 14.2 percent in the prior period.

More good news was found in net exports and government spending. Exports continued to grow, improving by 4.5 percent (still less than the 8.0 percent in Q2), but imports only ticked up 1.9 percent causing the trade deficit to fall in the period. Consumer weakness probably led to the slower import growth. Finally, government spending fell; those concerned about government deficits and debts will find this comforting even if it subtracts from the nation’s output. (by C. Cox)