Wednesday, January 12, 2011

Investing PART 10: “Know when to hold ‘em, know when to fold ‘em.”

Or, as another song says, “Tick a, tick a, timing...timing is the thing it’s true…”

PART 9’s core holdings beg the question of when to buy which stock and when to add to positions. If you are buying all the stocks at once for the next 10 or 20 years, as the big bands say “hit it.” Don’t wait, just dive in. PART 9 listed 10 or so core holdings for a buy-and-hold strategy. One of the things that kept me from posting it earlier was all the gobbly guck about a lost decade for investors (that and the ability of people to take things out of context). People get hurt listening to advice. So, until now I've always avoided making mine public. The only thing that is more dangerous than advice is letting someone else manage your money.
You shouldn't become over-reliant on index funds generally even though some are useful for reasons that will be discussed in subsequent postings. It was a lost decade for S & P 500 index fund investors as shown in the table entitled “S & P CARG through 2010,” but not for people who held stock in companies that make money producing things people want.

The table entitled “CORE” presents the "lost decade" for that ten stock. They are listed by ticker symbol. (The CORE portfolio stocks are J&J (JNJ), Pepsi (PEP), Exxon (XOM), 3M (MMM), Bank of NY Mellon (BK), Boeing (BA), Verizon (VZ), Procter and Gamble (PG), PPG (PPG), and GE (GE)). Unlike the comparison S & P benchmark which is capitalization-weighted, it shows the performance of a portfolio based on equal starting weights (i.e., same dollar value in each stock). That’s totally consistent with the recommendation to focus on your dollars not the market.

The resulting performance of the CORE portfolio makes sense since people should be happy if a portion of their money grows on average 4.9% and spins off a bit of cash (another 3%) which also grows at about 5%. In fact, in some instances they should be happy with less as long as inflation doesn't take off.

However, by presenting the performance without dividend reinvestment, the table forces you to address where the returns should go. That said, for a core portfolio, don’t discount the benefit of just having the dividends reinvested. Reinvestment facilitates relative performance comparison since the portfolio weightings change over time in proportion to total relative performance. On a stock-by-stock basis you’re also practicing an approximation of dollar cost averaging (i.e., buying a fixed dollar amount periodically regardless of whether it is 2 expensive shares or 10 shares when the price is lower).

However, the objective is to build a diversified asset mix. These ten stocks are all large caps. In a previous posting (Angels, entrepreneurs and diversification: PART 3) there is a reference to difference in performance by company size: “The Motley Fools ( … discussed some research related to the role of small cap stock in a portfolio (see: ‘Scary Stocks Worth Buying Anyway’).” Even within publicly-traded stock portion of your portfolio, you want diversification. Thus, when this large cap portfolio is growing rapidly in dollar terms relative to your circumstance, you should consider shifting some of it out of the core portfolio.

Similarly, if you looked at “S & P CARG through 2010,” you probably figured out that buy-and-hold for the first 25 years of the 35 shown in the spreadsheet would probably built a pretty big portfolio. That would have been associated with a few years during the “internet bubble” where anyone who had held stocks for ten years should have been a little uncomfortable with the dollar value build up anyway. Add to that a coupon on 20 year TIPS that was over 3.5%, and it didn’t take a market timing expert to realize that it was time to diversify into bonds. The more relevant question was whether to do it from the core portfolio or from other assets.

Anyone who was in the market then and using the dollar-value approach knows the answer. Other asset classes had built up dollar values much faster. For example, the idea of selling some Corning (GLW) to buy United Technology (UTX) or TIPS would have come automatically, but that’s one of the less “screaming at you” examples.

Another approach that has an irrational appeal to me is to set a fixed target for appreciation in the core portfolio. The target can be a percentage increase (e.g., 6, 7, 8%) or sticking to the logic of relating investments to your circumstances, a portion of your income or living expenses (e.g., be that 10% or 200%). Either approach has the benefit of automatically increasing the dollar value of the target. (My personal preference is a portion of income. It automatically adjusts to changes in your living standard).

When the cap gain beats the target without reinvesting dividends, deploy the dividends elsewhere. Alternatively, when the portfolio is down or performing below the target based just on cap gains, reinvest the dividends in the core. Also, when it has fallen short of the target, consider adding new investment capital. For example, consider making that where your IRA contribution goes that year or sell something else.

Focusing on dollars also helps you make allocation decisions within the portfolio. I trim positions not based on percent of portfolio, but instead when any position gets large relative to my circumstances. If your objective is “alpha” (i.e., beating the market), there are better strategies for rotating between sectors, but they introduce there own set of risks.

The issue of timing is far more important for the part of your portfolio that is not core holdings. That will be addresses in future postings.

Most important of all, set a target. If you don’t have an objective, you won’t achieve it.

Sunday, January 9, 2011

Investing PART 9: One version of the “Unfinished symphony”

The widows’ and orphans’ stock portfolio

The buy and hold strategy referenced in PART 1 uses mutual funds. I don’t like mutual funds because of their expense, and I consider bond funds a “fool’s game.” Almost all mutual funds are precluded from addressing the most important question which is asset class mix (i.e., rebalancing).

Thus, when a friend asked me, “What’s a good mutual fund to buy and hold?” I ducked the question with a flip response. All the previous postings on investing provide the context I would have had to discuss before giving any serious investment advice. I also would have wanted to discuss leverage.

So my flip response was to note J&J and Pepsi as buy and hold alternatives. (All links relevant to stocks referenced are at the end of this posting). He knew it was a flip comment. For most people it would be too risky to own just two stocks. For younger people, say his kids or his nephews, I wouldn’t worry about their just owning J&J and Pepsi, assuming they would add other positions over time. Diversification is a real risk-reducing factor for long term investors. But, you don’t need a mutual fund to achieve it.

To illustrate, before I knew my grandmother as Grandma, she was the classic widow with children. They lived exclusively off of her investments. This was back before Social Security. She was a self-taught investor and a good one. The types of stocks mentioned here are either the same stocks she held or the same type of stocks, thus the name, widows’ and orphans’ stock portfolio. These stocks also constitute a darn good selection for a major portion of a retirement portfolio especially in an IRA where the dividends would be shelters from our ever-greedy tax man. The object is make money and these companies do.

Within large cap stocks, about 80% of the benefit of diversification can be achieved with as few as 5 or 6 names. About 90% can be had with 10 and 98-99% with 20. But, the logic of the entire buy and hold strategy is, “I don’t want to worry about it.” So, the selection has to meet the 10, 20, or 30 year test and provide diversification. But, that’s just stocks, and, you’ll see, it’s only large cap at that. I’ll discuss other assets in future postings.

“Why start with large cap US stocks?” you ask. We’ve changed musical genre again so we can set Katy Perry’s “Don’t look back” aside. In PART 7 I promised to update the Compound Average Rate of Growth (CARG) table for the S & P. As it turned out, I was also asked to show it adjusted for inflation. The data are available in “S & P CARG through 2010.”

Basically it shows that US large cap stock have a fairly stable return over long periods when dividends are allowed to compound. That’s a pretty big hint. It is particularly important to note how little a year or two between start dates matters to the rate of return over a long period. Is it really worth giving up the return on a diversified portfolio for a year or two to try to get a better entry point? Well, not if you’re planning for 10, 20 or 30 years out.

Add to that the simple truth that most people know more about these companies than they think. People know whether the products are good. They know how the products fit into their budget. They may know whether employees generally seem happy. People let confusing the stock with the company intimidate them. Sure stocks can get overpriced, and buying at market tops will cost you money. However, if you’re talking about a portfolio, generally, not all the stocks will be overpriced at the same time. Large cap US companies are a good place for an individual investor to start.

What you’ll notice about this posting is that it discusses a totally different set of assets from ones mentioned when talking about trading. The most important consideration in investing is your time frame. You depend upon my investments for short-term cash generation and long-term investments. Thus, you should think about short-term trades (although maybe not as short-term as the reader I refer to as the trader) and long-term investments (essentially holding where hopefully the holding is 10 plus years). I’m much more comfortable with holdings (and more successful).

The approach of clearly deciding whether you are buying as a long-term investment or trading reflects some basic truths about forecasting. The WALL STREET JOURNAL, Weekend Investor, January 8, 2011, had an interesting article on the topic entitled “Making Sense of Market ForecastsBy Jason Zweig. While the article missed a few points and misinterpreted some others, it’s a good read.

Points it missed included errors in the measurement of what’s being forecast and, even more importantly, whether the statistic being forecast represents anything other than noise. Also, when talking about forecast error, he overlooks an important characteristic of forecast techniques. Forecasters refer to the trumpet in forecast error. Error doesn’t increase linearly with time. Confidence bans that reflect the model’s statistical characteristics increase at an increasing rate. Thus, while he accurately describes the characteristics of most forecasts, he misses some of the causes. The missed points are no big thing.

However, when he gets down to what to do about it, he reaches some conclusions that should be viewed with the same skeptical eye you should apply to forecasts. The first relates directly to the short-run and long-run issue. He states, "If you are a long-term investor, you should accept that short-term market moves aren't predictable, and there is little point in adjusting your portfolio in response. In most cases, long-term averages of past returns—while far from perfect predictors—are probably a better guide than long-term forecasts of future returns." That's a conclusion about the long-run that underlies much of this posting.

The problem comes in the setup for this statement. He contradicts himself. He talks about a phenomena economists know as persistence, the tendency for things moving up to continue moving up and visa versa. He concludes "this kind of momentum surfing is best left to traders." That's his basis for stating "you should accept that short-term market moves aren't predictable." Well, trading and investing aren’t incompatible as long as you’re always clear about which you’re doing.

In the section entitled "Average many different forecasts," things get down right dangerous. He states, "Forecasts from different sources tend to draw on varying information and divergent methods, so their errors will frequently offset one another." There is a very dangerous assumption built into that statement. While often true, there is no reason to believe the forecasters errors will be randomly distributed. That same assumption, that forecast errors would be normally distributed, had a lot to do with why the experts underestimated the housing crisis. Always understand the assumptions the forecaster is making. Further, always, always, always look hard for reasons why errors wouldn't be independent of each other. It is when errors compound that catastrophic errors occur.

The approach here is to buy with a ten year horizon and hopefully to leave the selection alone for ten years. This portfolio is designed for a ten year -plus time frame. Thus, the reason for holding these assets is important. Selling them would only be due to a fairly important change in the company or the world.

Academic studies indicate that ten stocks get you in the neighborhood of 90% of the benefits of stock diversification within large cap stocks. The diversification reduces company risk (management screw ups) and industry risks (buggy whips to autos). Country risk can be reduced by owning companies with global franchises (Brazil verses US economic performance is a good example because Brazil has collapsed at a time the US was booming and it grew right through some US financial crises). You’ll hear people talk about currency risk in global companies, but you want currency exposure unless you think the dollar has some divine right not to fluctuate.

Also, dividends that grow are important. They mitigate inflation risk and reduce the risk from overall stock market fluctuations (a form of liquidity risk). If the market goes down when the dividends go up, who cares – you’re not selling for ten years. You can use the dividends to buy more shares. Or, if you live on the dividends and one company cuts its dividend, the growth in the other nine helps to protect your cash flow. Whenever anyone talks about buy and hold, listen closely to what assumptions they make about dividends. Some of the critics of buy and hold ignore dividend growth or ignore dividends totally. I think they are pimping for the brokers and trying to generate trading commissions. An unbiased look at the data is pretty supportive of the viability of buy and hold.

That said, here’s a list with some comments.

1) J&J - I can’t figure out a single stock that can substitute for J&J’s combination of consumer non-durable, drug, and medical devise exposure. J&J is well-run, conservatively financed with a strong balance sheet, their brand management is exemplary (some of their brand names have become product categories), and they pay a nice dividend.
2) Pepsi – Beverage and snack food exposure. It gave me fast food exposure also when I bought it. They hadn’t spun off YUM yet. But, I didn’t immediately replace the fast food exposure when they spun off YUM which was unfortunate since both YUM and McDonald’s have done well. (They would have been the logical holdings). Later I purchased a little McD on the side for the portfolio.
3) Exxon – Chevron is an alternative with a bigger dividend. If you believe oil is the fuel of the past, buy one of these companies anyway. They are hydrocarbon processors as well as miners/drillers.
4) 3M – no one can figure out what 3M is. So the company has decided they need a good ROI and dividend to get investor attention; it works and it is a great company strategy from a shareholder’s perspective.
5) Bank of NY Mellon - or Berkshire Hathaway – Both are weird financial service companies for sure, but the financial service industry is tricky. I wish Mellon still had a retail bank, but Mellon is the firm purely in the financial services space that I feel most comfortable with for an intended ten year holding period. Berkshire isn’t a pure financial service play, but under the hype, it has a big financial service component. Even in troubled times you need to include at least one financial firm. Mellon has a dividend which they cut during the financial crisis. Berkshire doesn’t have a dividend and thus didn’t make this portfolio.
6) Boeing – Unfortunately it has headline risk. But as a stock and as a company, it belongs. It has a business cycle that is totally out of synchronization with everything else.
7) Verizon – Is it a telephone utility, a cell phone, an internet delivery, or a cable company competitor? Don’t care what it is: it is well-run and well-positioned. It also has a nice dividend. While Boeing has its own cycle, Verizon tends the follow the inverse of the cycle for many of the other stocks on this list. Because of the dividend, it is sensitive to interest rate cycles over short-to-intermediate time horizons.
8) P&G or Colgate – One could cycle between Procter and Gamble, Clorox, Kimberly Clark and Colgate Palmolive and probably make a profit. But, that’s a lot of work for the marginal return over any one of the individual stocks. They tend to move together so if you don’t like P & G, pick one of the others.
9) PPG – It is a conservatively-run chemical company. The chemical industry is a tough business, but their staying power is illustrated by the little story at the end of this posting.
10) GE or United Technology – For the long-term you want companies that can survive bad managers. GE is doing that right now. The alternative United Technologies is better run right now and more of a pure industrial play, but GE will survive Immelt. Some day United Tech will be run by someone like Immelt who can’t admit he is in over his head.

There are two or three others you could substitute to suit your style. McD as mentioned, Sysco, Abbott Lab, and Wells Fargo come to mind, but it doesn’t matter too much. You might throw in a tech company to update the list, but in tech I’m not a good source for ideas. I got Microsoft and Intel at good prices, but I haven’t a clue as to how long I’ll hold them.

I think how I learned about PPG is funny because it illustrates just how easy it is to overlook an opportunity if you aren’t looking for it. It is also indicative of why PPG is on this list.
My grandmother use to talk about PPG. That should have been enough, but it took more to get my attention.
Grandma gave some of her stocks to each daughter (sort of a dowry). My mom got some PPG. Well, along the way my parents ended up selling all their stocks, or so they thought. My mom had a habit of “putting things in a safe place”.
Well, PPG occasionally paid a stock dividend. My mom dutifully put in a safe place. However, as she often did, she forgot where the safe place was. With time she forgot she had the shares. (After all it was only 20 shares and who knew where it traded back then). So, when everything was sold, these shares were overlooked.
When she died, knowing her habit of forgetting things she put in one of her safe places, we went through everything. Inside the cover of an old book were these 20 shares. (We also found a few thousand dollars in other books, some in silver certificates and some evidently printed in the 40’s and 50”s. Growing up during the depression, she used inside of books as her version of stuffing it in a mattress).
Well, we called the PPG’s trustee to inquire about the 20 shares. We wanted to determine whether they had actually been replaced or sold by book entry. The trustee asked why we had never responded to their letters. Since mom didn’t know she owned the shares, she never told them where she lived. Except for the initial dividend right after she moved, the dividend checks were never mailed since they kept coming back to the trustee. Eventually the checks were cancelled. But, the stock had split two-for-one three times. The 20 shares she lost were now 160 shares paying a 3 or 4% dividend, I forget which.
If you want a case for buy and hold and an illustration of the power of compounding, do the math on that. Since then, I studied the company and followed its performance. I’m embarrassed to admit that it took an accident to wake me up to what has been a strong and stable performer.

Now, you might ask, “Why is this posting an unfinished symphony?” Well, this is only relevant to one objective and only covers one narrowly-defined asset type. So, there’s more to come. Perhaps it should be called “A Bridge Over Troubled Water.” It sure felt like one at various times.

Stock references in the order mentioned:
J&J (JNJ), Pepsi (PEP), YUM (YUM), McDonalds (MCD), Exxon (XOM), Chevron (CVX), 3M (MMM), Bank of NY Mellon (BK), Berkshire Hathaway (BRK-B), Boeing (BA), Verizon (VZ), Procter and Gamble (PG), Clorox (CLX), Kimberly Clark (KMB) , Colgate Palmolive (CL), PPG (PPG), GE (GE), United Technology (UTX), Sysco (SYY), Abbott Lab (ABT), Wells Fargo (WFC), Microsoft (MSFT), Intel (INTC)

Saturday, January 8, 2011

Investing PART 8: “Pump up the volume.”

Yes, a little rap.

Now we can pump up the volume since previous postings have made us armed and dangerous. So, let’s look at another, and more sensible, discussion of asset allocation (i.e., rebalancing, to use the terminology I’ve been using). BARONS had an interesting interview dated Friday, December 31, 2010, “The Charms of Cash” by Lawrence C. Strauss. It’s worth reading to reinforce things you already know and for the challenge of finding practices you can and should avoid. Looking at both the plusses and minuses results in some interesting guidelines and a conclusion that is very different from the interviewee’s.

First a plus, let’s look at some sage wisdom that the interview brings out. Note that the theme of the interview is let cash build up when their isn’t an attractive investment. If you read the discussion of cash in PART 4 of this series you may have noted agreement with the theme of cash as an alternative to bad investments.

However, there’s a minus associated with this wisdom; let’s call it a caveat. PART 7 had the statement “The deadly flaw in EVERY discussion of rebalancing and market timing that I’ve seen hinges on the interpretation of the statement that rebalancing should reflect current conditions. They all focus on the wrong current conditions, namely market conditions. What is far more important is your condition.” Addressing YOUR conditions introduces two problems.

It is hard to over emphasize the first caveat. There is a minimum level of cash you should always have available. That minimum is determined by your cash flow requirements. Thus, cash would build from there if you can’t find attractive investments. Personal financial advisors stress having a rainy day fund. It applies equally to an investment portfolio and a household. (See PART 3 for a discussion).

The second caveat harkens back to “Wall Street Doesn’t Run the World.” That posting stressed that investment options for an individual aren’t constrained the way money managers are constrained. That’s true of timing and the range of investments an individual can make. In the interview, the interviewee is limited to considering three asset classes: stocks, bonds, and cash. You’re not.

He doesn’t consider non-public businesses. Despite recent news about Facebook, they’re not an option for many investment managers. Commodities are available in multiple forms. Real estate in the form of equity in your home is one of the most widely-distributed assets. There is little doubt many Americans were, and probably still are, under invested in real estate equity in their home. Similarly, it isn’t clear whether he includes REITs when he says stocks. Options can be used to hedge risk and make money.

Finally, just to add an investment that people don’t often think about, in the discussion of the flash crash, “The day the computers panicked PART 3,” I mention placing purchase orders at below current market prices. Specifically, the statement was “The …technique is a buy order with a price limit that is “good until canceled.” One has to remember the order has been placed and treat it as money spent.” One could argue that the technique implies letting cash build up, but I view this as a way to deploy capital and deploying capital is investing. So, bottom line he may have to let cash build up. You shouldn’t have to.

Now let’s get back to another bit of sage wisdom in the article. This time it’s a little more subtle than the cash issue. In response to one of the questions the interviewee starts his answer with: “In absolute return-oriented portfolios…” Remember in the discussion of “quilt chart” in PART 1, the references aren’t to relative returns. They are to positive returns. Getting a positive return should always be the objective. Not a positive return on every asset class, but on the total portfolio. That is going to require a broad range of assets, and it may not be possible to determine what the return is using mark-to-market accounting. Non-public assets can’t always be marked-to-market. (For further discussion see “Angels, entrepreneurs, and diversification: PART 2”).

There is a point that is even more important than re-highlighting asset classes beyond stocks, bonds and cash. Seeking a positive return contradicts the argument for cash. Cash is a sterile asset. At best it’s a shelter and a bad one. If you’re an investor, cash is, in a way, an admission of failure or at least an admission that looking for additional options is too much work.

It’s worth noting that for most people for most of their life an almost risk free real estate investment option exists. It arrives each month in the form of a mortgage payment request. They can increase their equity with an extra payment. It doesn’t matter whether the house price goes up or down. The additional payment builds equity. You own more real estate than if you didn’t make the payment. Further, you don’t know what you’ll get for your house until you sell it. So, the excuse that there aren’t any investment opportunities is nonsense.

There is another point where the interviewee highlights yet another item that is worth stressing. He makes the point “People, if they could just be a little bit more patient, would do a lot better by buying and holding cheap assets and waiting for the market to come around.” The implications of that simple statement deliver a double whammy.

First, the discussion of different types of asset presented above can make investing sound very complicated. Goodness sakes, we’re talking stocks, bonds, non-public businesses, mutual funds, options, real estate, and good-until-cancelled stock orders. Do we all need to become rocket scientists, too?

If it were that complicated, I certainly wouldn’t try it. It would be a rare investor who could claim to be too confident of their valuations across all these asset classes. However, it would be equally unusual for someone comfortable with one of these asset classes to be helpless when it comes to the other. Remember the goal is to make a positive return (i.e., absolute return) not beating every market (i.e., alpha). So, perfect timing in each market is less important than being in the right asset classes most of the time.

Put another way in modern portfolio terms, make sure you have the asset mix that puts you on the right risk-return frontier. Sure, others may get a higher return by taking more risk. If you want to aspire to higher returns, you can make larger reallocation changes (i.e., make bigger timing bets) or change the asset mix toward more volatile potentially higher return assets. By contrast if you use returns through the cycle and target a specific rate of return, you can be pretty sure of achieving the target return.

There are powerful simplifying strategies. Previous postings have discussed diversification across time. My observation is that what the interviewee alludes to is more than just inpatience; it’s an inability to grasp the power of diversification across time and a tremendous level of insecurity.

For those who want more current music, Katy Perry in “Teenage Dream” says: “And don't ever look back, Don't ever look back.” Now, I’m pretty sure she isn’t talking about investing. However, it has it’s applicability as investment advice. Once you discard the anchor of the past, the issue becomes what should your reference point be. Well, it is not the present except at the very moment when you sell. At all other times, it’s when you plan to sell. Inpatience is irrelevant until when you plan to sell. So, is mark-to-market accounting.

To illustrate with an approximation of a teenage dream, consider a young investor planning to retire some day. For the retirement portfolio, does it matter what the portfolio is worth over the next 20-25 years? Not a bit. So, a major simplifying strategy is for the investor to buy whatever he or she thinks will be worth the most 20-25 years from now. That just doesn’t change that much.

The other advantage of thinking out 10, 20 or 30 years is that it eliminates the nonsense of over confidence. It forces you to confront the uncertainty that is inherent in reality. It encourages you to think about asset mix as a hedging strategy since only a rare fool thinks he or she knows what the world will look like in 10, 20, or 30 years. The only thing you can truly know about the future is that you have to plan for it. If you don’t, you still get what you planned for: namely nothing.

I said simplifying strategies, so you have every right to expect more than one. I already mentioned another one in connection with cash. Specifically, targeting a value rather than a portion of the portfolio works fairly well. The dollar value of the target depends on personal circumstances. For example, a guideline like stocks can’t exceed X times my cash flow requirement can make sense. (Note: technically I’m using stocks as a proxy for assets with a given risk profile, especially volatility. It would be an estimated probability of default with bonds). Another guideline more appropriate as you approach or are in retirement would be a ratio of cash flow from the asset to your living expenses.

Interestingly, these types of guidelines have a tendency to indirectly result in fairly good market timing without having to call market turns. Adjustments will occur less frequently than if you try to time the market, but rates of return aren’t savaged. Besides, it will all make sense to you, which helps.

One more simplifying strategy. This one flies in the face of a lot of financial planning advice that ignores the “you” in your portfolio. Many advisers say treat all your investments as one big portfolio. That makes sense from the portfolio’s perspective. The portfolio has only one objective. I would venture a guess you have multiple objectives.

Don’t be afraid to segment into multiple portfolios for different objectives. There is no need to plan for 10 or more years for all of your portfolio, and it’s equally silly to plan your entire life based on what you think will happen over the next few months.

There’s another nice thing about segmenting your portfolio and setting dollar targets. Once you have cash and are on track in your retirement portfolio that’s good for 10, 20, or 30 years, new investment options can be considered. Previously, I mentioned options. Well options are out for a portfolio constructed based on forecasts of the value in ten years. They inherently involve a forecast of shorter run timing (i.e., when the level is achieved). Usually, with options, the forecast has to be right within no more than a 3 year horizon and even less for most options. (Technically they also involve an implicit forecast of volatility and interest rates). They’re an investment field of their own, but also useful when hedging.

One still has to review the overall portfolio from the perspective of balancing the different objectives. Most importantly, once your cash cushion is in place, make sure you aren’t neglecting objectives.

Wednesday, January 5, 2011

Reality and the jobs numbers

Sometimes they get it right. We can hope.

Last month on December 6th the issue was “Jobs numbers verses reality.” The BLS jobs number was wrong. This month could be different. The private ADP number is out and all indications are Friday we’ll see a BLS report that adds a few hundred thousand jobs to the number of people we think are employed and may even be working.

That shouldn’t be a surprise. As stated last month, there was clearly something wrong with BLS’s season adjustment for November. The interesting thing to look for will be whether the employment increase BLS will report is a gain in December or a revision of November.

For those who see political conspiracies everywhere it is interesting to note that the undercount in December coincided with the hearings on extending the 99 week emergency unemployment benefits. I’m amused by the conspiracy theorists. They seem to be part of a massive delusion that government is always in control of its every activity right down to the details. I hate to pop anyone’s bubble, but governments make mistakes. It’s very likely someone just got the number wrong. That they were out of touch with the private economy around them shouldn’t be surprising: they’re government employees after all.

This month the news in the employment report released on Friday will be in the sector detail and the household survey.