Wednesday, September 30, 2009

Finding a Job May Be Getting Easier Than It Looks

"Sept. 29 (Bloomberg) -- Employment in the U.S. is rebounding at a “significantly faster” pace than seasonally adjusted data on jobless claims would suggest, according to Oscar Gruss & Son Inc."
First, some definitions -

Seasonally Adjusted Data:
Observations over time modified to eliminate the effect of seasonal variations. For example, students tend to flood the job market in the summer after graduating, increasing the number of workers seeking employment.

Continuing Jobless Claims: The number of U.S. residents collecting state unemployment benefits. Usually, people who have worked full time are eligible for 26 weeks of regular state unemployment benefits.

A very optimistic report.
What this news report/analysis is saying is that seasonally adjusted data on continuing jobless claims shouldn't be trusted and that unadjusted continuing jobless claims should be looked at:
“Our assumption is that the sheer brutality of the current cycle has caused the statisticians to cease to trust the ‘raw’ data and therefore fall into the trap of abusing the process of seasonal adjustment.”
My question is this: Since when have statisticians EVER trusted 'raw' data?

In Oscar Gruss & Son Inc.'s attempt to paint a positive picture of the U.S. economy and the employment picture, they've decided to look at unadjusted continuing jobless claims (to the left) versus the more accurate seasonally adjusted continuing jobless claims (to the right).

In Intro to Econometrics, we always learned that you always have to adjust numbers such as employment data for seasonal change. For example, if we were looking at an ice cream vendor, it's obvious that they would sell more ice cream in the summer versus the winter. Comparing the sales of ice cream in the winter versus the summer would be like comparing apples to oranges. It makes a whole lot of sense to adjust for the seasons.

Likewise for any employment data, students flood the job market in the summer. Summer tends to be slower for job recruitment. People tend to take holidays in the summer (and perhaps hold off looking for jobs).
It sure makes a whole lot of sense to seasonally adjust continuing jobless claims.

Looking at the subject title: "Finding a Job May Be Getting Easier Than It Looks", I can't help but think that it might not be so true after looking at the seasonally adjusted chart. Rather, if I had to look at the charts above and make my own title, I'd headline with this:

"Finding a Job Remains Difficult as Trend Of Job Losses Remains Flat"

Friday, September 25, 2009

Muscling With The Markets

"The market wasn't agreeing with my view. But rather than listening and being patient, I tried to muscle it. It was a classic case of thinking I knew more than the market...I was so badly hurt that all I could do was lick my wounds and get the hell out of there. Not only did I lose a lot of money, I missed a great opportunity."

- Yra Harris, Praxis Trading, from Inside the House of Money, Steven Drobny
I've had some down time recently and have been reading Inside the House of Money, put together by Steven Drobny. It interviews hedge fund managers/traders who have the style of investing known as Global Macro, which is essentially investing in everything, from stocks to bonds to commodities to trees. You get the point, they invest in anything! (Pretty badass, if you ask me)

So I read an interview with Yra Harris, a veteran trader on the Chicago Mercantile Exchange, and came across the quote above, and it got me thinking.

Is it possible that right now, with the stock markets rallying roughly 50-60% from its March '09 lows, that my continued pessimism is like "muscling" with the markets? Is this the classic case of thinking that I knew more than the market? Am I missing something?

After reading a lot today, I find that the most prevalent bullish case in finance media and blogs is nonetheless still that the "global governments are pumping lots of money into the system" and that monetary policy drives the markets. As I argued in my previous two posts, this pumping of money into the system is neither effective due to the reduced risk taking of the financial sector nor will it be healthy for the economy since it increases risks of high inflation. If there are other stronger bullish arguments, somebody tell me please!

After some evaluation, I believe that while my fundamental argument is still intact, my timing is off. I don't think I'm still a bear simply because I'm arrogant or too proud or anything like that. I sure wouldn't mind a happy-go-lucky bullish market.

I'll need to continue honing my entry points into the market as I gain experience in trading.

Monday, September 21, 2009

CNN: Americans are $2 trillion wealthier


"The soaring stock market accounted for much of the gain. Stock holdings rose by 22% to $6.3 trillion, while mutual funds' value jumped 15% to $3.7 trillion, according to a Federal Reserve report released Thursday"

So most of this wealth gain in the past months was because of the stock markets. How do I read this?

Well, it illuminates why America's savings rate is so low (roughly in the low single digits now) - the indicator for "savings" does not account for American money in stocks.

What I want to know is, will this increase in wealth mean more U.S. consumption, which accounts for something like 2/3 of GDP?

Will people forget that just less than a year ago the US financial system was at the brink of collapse?

A snippet at the end of this article gives us an indication of the answer to this question:

"At the same time, consumers continue to pay off their bills. Household debt shrunk by an annual rate of 1.7% in the second quarter, the fourth consecutive decline. Debt loads had never contracted until the current downturn.

Businesses are also pulling back on the debt they carry. Debt contracted at an annual rate of 1.8%, the second decline in a row.

Governments, however, are loading up on debt as they try to prop up the economy. Federal government debt ballooned 28.2%, the fourth straight increase, while state and local governments increased their debt levels by 8.3%"

Two things I see from this:

Debt Decrease = Lower potential for GDP growth
More Government Spending = Crowding out of private investment

Both are not good for the U.S. Economy.

Tuesday, September 8, 2009

This Ain't A Happy First Post

The following is a chart of the last 12 months of the Dow Jones Industrial Average, with some of my preschool drawings on it.

A quick look at the title of this post and the drawings on the chart and you can reckon that this is not a happy first post on what I see brewing in the US markets (with consequences to other international markets, of course).

Let's start off with some of what a random assortment of optimists are saying:

  • “Leading indicators are now strongly suggesting that a U.S. labor market recovery is just around the corner, with commensurately bullish implications for spending,” Barclays said in a note to clients this week.
  • "For stock traders, low interest rates act like oxygen fueling a fire."
  • "Interest rates are ridiculously low and will remain that way until inflation starts to pick up. When that will be is anyone’s guess as this relates to the second point about the believability of government figures. So if the Fed is banking on inflation, you should too. Bonds, money markets, and other fixed income vehicles are out. Stocks and commodities are in."
  • “Looking at the survey results in aggregate, we believe the stage is set for the world economy to gradually recover, driven in part by relatively benign inflation, rolling impacts from global stimulus packages and improving credit conditions,” UBS said in a note to clients this week

Essentially what a lot of the smarter optimists are saying is that with interest rates so low, money flooding into the markets, and government intervention, the economy has no where else to go but up. This is a la Milton Friedman's famous quote: "Inflation is Always and Everywhere a Monetary Phenomenon"

This concept is good, logical, and has been ably applied to previous cases. But as we've all seen, this recent financial crisis is not like other cases. The Fed can't just lower interest rates, provide monetary stimulus, pour money into the financial institutions, and solve this problem. You need a working financial system and this is where I think this crisis is critically different from previous cases.

Banks globally are cutting down on risk. The drivers behind this trend are basically government regulation and severe losses that banks took from the crisis. And with less risk taken, this means less money being lent out. As we all learn in Intro to Macro Principles, the money multiplier function of the banks is critical to the expansion of money supply and economic expansion. And right now, with banks cutting down on risk, increasing their tier one capital, the money multiplier is not being put to use.

So what needs to happen? Banks need to actually increase risk. Businesses then get more money to spend on expanding their capital and labor. More people will become employed to create more goods and provide more services. People will spend more. And then finally, we will gear back into economic expansion.

I need to stop reading stuff like this:

G20 toughens bank capital standards

Sat Sep 5, 2009 9:09am EDT

LONDON (Reuters) - Group of 20 finance chiefs agreed on Saturday to back a U.S. plan for banks to hold more and higher quality capital.

--some parts skipped--

"Banks will have tighter constraints on the high quality of core Tier One capital," the source said. "This means banks will have to hold more capital and higher capital to act as a buffer."

Under Basel II, a bank must hold at least 8 percent in capital, of which at least half must be in the form of top quality Tier 1 assets such as equity. Since the credit crunch, banks have become much more conservative and are holding much higher levels of Tier 1 capital.

Until I start reading more about the financial sector taking more risks and actually lowering their capital ratios, I'm not buying this ferocious rally that started in March. Volume was low in the most recent rapid rally in July and we're about to hit into some resistance. The path of least resistance is downwards.

You Ain't Right Until Everyone Says You Are

Hi Everyone!

This is my first blog post ever, but it is not the first time I have written about my opinions on the financial markets. I wrote first to my father and brother, who are both also interested in finance, and coincidentally after a few emails my brother suggested to me to start my own blog. Alas, as suggested by the title of this blog, it will cover generally what I feel like is going on in the financial markets, things I read in the press, and my market outlook.

In my own opinion, it's critical to know what the press is saying, not necessarily for the accuracy of what they say, but to know what the mainstream mindset is. A person can be correct with their views on the fundamentals of the economy and the market, but if nobody else thinks so, that person is, well...actually wrong! More simply put, you ain't right until everyone says you are.

For me, what drives the markets is this simple equation:

Economic Fundamentals x Market Mindset = What Moves The Stock Market

Now, onto my first commentary...