LGR Financial Newsletter
Volume I, Issue 2 (Released On January 16, 2014)
Fidelity Investments hosted an event at BC last night, in which I participated. The event is a “two minute stock pitch drill” event where everyone who participates gives a two minute stock pitch, and the Fidelity representatives provide immediate feedback. I thought that it would be useful experience, and did a buy pitch on T-Mobile (Ticker symbol: TMUS). This was my second time giving a stock pitch, the first earlier this year for BC’s investment club, and it was a great experience.
Wolves do live on Wall Street:
In other news, go see “The Wolf on Wall Street” (Don’t worry, no spoiler alert!). The movie gives an excellent portrayal of the Wall Street broker mentality. Behind that mentality is the fact that over 90% of investors still lose money (at least in the long term), and this 90% is almost completely comprised of “mom and pop” investors (small speculative traders or retail traders). Evidence suggests, and believe me there is evidence to back this up, that these trades almost always reflect the complete wrong decisions at the worst possible times, made with steadfast belief that they are correct. One might suppose that those with the least amount of information make the wrong decisions, but there is more to it.
In reality, most receive too much information (albeit bad information) rather than too little. The real people to blame those giving all the advice to those unfortunate investors, typically reporters on financial television or stockbrokers. Most who are paid to give advice benefit from giving bad advice, because all reporters and many stockbrokers make money regardless of the accuracy of their advice. “The Wolf on Wall Street” portrayed the Wolf (Leonardo DiCaprio), a stockbroker who sold penny stocks (some of the riskiest investments) without caring whether the stock went up, simply because he earned a 50% commission from each sale he made. While the movie is fictional, and regulations have since been added, the movie gave an excellent window into the Wall Street mentality toward retail investors. A stockbroker’s main goal is to convince you to keep your money in the market, not to sell your stocks, because the longer your money is in the market the more trades you will make (and the larger the commission your broker will earn). As a result, stock brokers are incentivized to encourage their clients to take risks, even at the worst possible time. The Wolves remain on Wall Street.
… And What About The Labor Market?
The financial media has been clamoring for months that the unemployment rate in the U.S. is dropping, and that the job market is improving, but unfortunately the reality of the labor market is not quite so rosy. My view of the issue: the problem is HOW the unemployment rate is calculated, not whether the rate is reported accurately. Here’s an insight from one (very persuasive) commentator, Geoff at BillCara.com, on the recent drop in the unemployment rate from 7% to 6.8%:
“The jobs report was a major miss on Friday with only 74,000 added. Because people are leaving the labor force, the headline unemployment rate dropped to 6.8%, so I guess we simply ignore that number. John Williams at Shadowstats.com has a different unemployment rate, of 23.3%.
So; how does he come up with a number so drastically different from the headline number? From his website (with emphasis added):
‘The seasonally-adjusted SGS Alternate Unemployment Rate reflects current unemployment reporting methodology adjusted for SGS-estimated long-term discouraged workers, who were defined out of official existence in 1994. That estimate is added to the BLS estimate of U-6 unemployment, which includes short-term discouraged workers.
The U-3 unemployment rate is the monthly headline number. The U-6 unemployment rate is the Bureau of Labor Statistics’ (BLS) broadest unemployment measure, including short-term discouraged and other marginally-attached workers as well as those forced to work part-time because they cannot find full-time employment.’
Please note that as both government data sets have been in decline, showing an improving headline number for the mass consumption, that William’s alternative number has been rising, showing a deteriorating job situation over the same time period. Of course, those of us who live in the real world know which data is true.
There are some drastic differences between the two rates (6.8% and 23.3%), but I am more inclined to agree with the later as it falls in line with the following chart:
That chart shows the “Civilian Labor Participation Rate,” and we can see that the rate is in a state of major decline (very bad and in complete opposition to the standard unemployment figure, which suggests the jobs market is strengthening). In simple terms, the Labor Participation Rate chart shows that fewer people today participate in the labor market.
Unfortunately, the Fed ties its Quantitative Easing (QE) policy to the unemployment rate. QE strongly supported the market. If the Fed extends the program past its end date (the first rate hike is still planned for 2015), that would be bullish for the stock market. If the Fed says that QE will only cease when the job market improves, will the Fed take the Civilian Labor Participation Rate into account?
So, the irony: the only way QE could end is for the Fed to disbelieve the Bureau of Labor Statistics, and ignore the dreadful true state of unemployment, as shown by the Civilian Labor Participation Rate, and allow themselves to focus purely on the unemployment rate that is talked about so frequently on financial television. Bottom Line: it is very unlikely that the Fed will stop QE completely, although they will most likely continue to taper their purchases, and the stock market will most likely receive support from all the “liquidity” being pushed into the market by the Fed.
Put another way: the Fed has used every weapon it’s got, and true unemployment has resisted improvement so the Fed will most likely continue QE to try and stimulate the economy, but (as usual) the people receiving the greatest benefit will the investors.
If you have any questions about this Issue of my Financial Newsletter please fill out the form below. I also appreciate receiving any comments you might have about what you just read, and I encourage you to send me ideas for topics that you would like to see me write about in the future. Thank you for reading!