Category Archives: Recent Market Action

Facebook’s first day

May 18, 2012 By in Recent Market Action, Stock ideas Tags: , , , , , , 1 Comment

I’m writing this at about 3pm, so the trading day isn’t over.  Several aspects to the FB IPO are already notable, though.

The stock opened at $43 and quickly reached a high of $45.  It then dropped to the IPO price of $38, where it met stiff resistance.  It now seems to be settling in at around $40 (note: I have a limit order in for today a tiny amount at $38.25).

1.  The day before yesterday the underwriters announced that the FB offering would be increased by 25% from an already hefty size.  This virtually always has the effect of tempering any first-day appreciation of the stock.

We should assume this was the main purpose of the move.

It isn’t clear if in this case the number two reason was:

–to accommodate holders chomping at the bit to sell or

–to ensure that the stock wouldn’t reach a crazy-high price in the first few days of trading and then collapse.

2.  The extra stock comes predominantly from selling shareholders, not from new shares issued by FB.  Normally that’s a bad thing, because the market argues (reasonably) that employees and venture capital investors know a lot more about the true worth of their firm than the rest of us do.

But the dynamics of this case aren’t so crystal clear.  The more new stock that’s issued by FB itself, the more Mark Zuckerberg’s margin of voting control over the company shrinks–and the less able he is to sell shares in the future and still maintain his voting majority.  This is not a worry for today or tomorrow, but Zuckerberg may have been quite happy to encourage employees or early investors to sell more.

3.  It’s not well-known, but underwriters have a short period of time in which they’re legally permitted to “stabilize” the price of a new issue (read:  step into the market and prop the stock up so it won’t fall below the IPO price).  That appears to have occurred with FB shortly before noon.

…not a great sign.  It raises the question of what will happen to FB next week, when the stabilization period expires and underwriters can’t stabilize anymore.

4.  The stock didn’t open until around 11am.  “So what,” you say.  That’s normal for a “hot” IPO.  Historically, that’s true.  But the brokerage industry trade association, FINRA, changed the IPO rules late last year so buyers can only place limit orders (that is, ones that specify a maximum price) before the first trade.  This eliminates market orders (ones where the buy price is open-ended) and should make the process of finding an initial market-clearing price much simpler. So a ninety-minute delay before opening is a lot.

5.  There are continuing reports of problems with trading in FB.  No one seems to know why.

the April 2012 Employment Situation report

May 7, 2012 By in economics, employment, Employment Situation report, Portfolio management, Recent Market Action, Strategy Tags: , , , , , , , Leave a comment

the report–+115,000 net new jobs

Before the opening of stock trading on Wall Street last Friday, the Bureau of Labor Statistics of the Labor Department released its monthly Employment Situation report for April 2012.  According to the ES, the US economy added 115,000 new jobs last month.  That was made up of +130,000 net new positions in the private sector, offset by -15,000 layoffs by state and local governments.

While a reasonable performance, the figure was substantially weaker than both the median estimate of domestic economists (which was for a gain of around 160,000 new jobs) and the stellar performance of the winter months, whose gains comfortably exceeded 200,000 each.

revisions were positive

Job additions for February were initially reported as +227,000 (+233,000 for the private sector, -6,000 for the public).  That figure was revised up in the March report to +240,000 (+233,000 private, +7,000 public).  The final numbers, reported in the April ES, were revised up again–to +259,000 (+254,000 private, +5,000 public).

Job gains for March were initially reported last month as +120,000 (+121,000 private, -1,000 public).  The April revision boosted that figure to +154,000 (+166,000 private, -12,000 public).

Taking February and March together, April revisions boosted the number of net job additions during those months by 53,000 (+66,000 in the private sector, -13,000 in the public).

Wall Street was disappointed

Investors had been hoping that the April ES would reestablish the more favorable job gain trend of last winter, or at least show that the low reading in March was a fluke.  Arguably, the +34,000 upward revision of the initial March figures did that.  But all eyes–or at least those of short-term traders–appear to have been focused entirely on the current month figures instead.

As a result, the S&P 500 declined by 1.6% for the day.

why the slowdown in job growth?

Three explanations appear to be on offer:

1.  The US economy is doing the same thing it did in 2010 and 2011, lurching into a “seasonal” deceleration in economic growth.

2.  The unusually warm winter weather in normally cold regions of the US allowed an early start to what’s normally springtime work. Construction or home renovation, for instance.  This shifted job creation ordinarily seen in March or April into January and February.  If so, what we’re seeing now is temporary payback.  The real job growth trend is +160,000/+180,000 new positions a month.

3.  A third possibility comes from a Goldman report I’ve only read about in a Gavyn Davies blog for the FT. The idea comes from Okun’s “Law,” the suggestion that changes in the workforce move in line with the rise and fall of GDP.  In the Great Recession, argues Zach Pandl of Goldman argues, layoffs were much heavier than the fall in GDP warranted.  Similarly, during the recovery, job gains have been a lot greater than a tepid economy would justify.  However, we’ve recently reached the point where all the “extra” workers shed by companies during the downturn have been rehired.  Therefore, from this point on job gains will again move in lockstep with rises in GDP.  In other words, they won’t be much to write home about.

does it matter for investors?

For what it’s worth, I think there’s a small effect from warm winter weather in the ES data but the rest of the apparent weakness in March and April is a fluke–probably having to do with the seasonal adjustments Labor Department economists make to the raw data.

That’s not the important investment issue, though.  We all have to ask ourselves how much difference having the correct explanation for the April jobs figures makes for our equity investment strategy.  After all, we’re back to record-high levels of real GDP in the US even with a high level of unemployment.  The long-term unemployed are a political and social problem.  They aren’t necessarily a stock market one.

I can think of two ways in which interpretation of the ES results makes a difference:

–in the (unlikely, to me) case that the US economy is beginning to stall, or even to shrink a bit, a defensive stance is called for

–if there’s going to be negligible job growth in the US from this point on, then the strategy of 2009-2010 of emphasizing emerging markets and domestic firms that cater to the global affluent will likely be the right way to go.

Otherwise, the pattern of market action over the past eight months or so is going to continue–slow but steady outperformance by IT and by consumer discretionary firms that appeal to the broadest spectrum of domestic customers.

Bond Environment, 2Q12 (ii)

April 27, 2012 By in Bond Environment, currency effects, Current Market Thoughts, Portfolio management, Recent Market Action, Strategy Tags: , , , , , , , , , , , Leave a comment
This is the second installment of the current bond market outlook of Denis Jamison of Strategy Managers, LLC.  The first installment appeared yesterday.
Free money…
…at least until 2014 according to the Federal Reserve. They just about guaranteed they will maintain the current zero to 0.25% Federal Funds rate until early 2014.
When the financial crisis began to unfold in 2008, the Federal Reserve responded by flooding the monetary system with credit. Now, they have a new gambit in their efforts to push consumers and businesses toward more spending – a low interest rate guarantee. The Fed seems to be taking the role of the real estate salesperson getting you to buy a house you can’t afford by offering a temporarily low mortgage rate or the car dealer looking to reduce inventories by providing zero percent financing. As Yogi Berra said after seeing back-to-back homers by Maris and Mantle, “it’s déjà vu, all over again.” Wasn’t it the mispricing and misallocation of capital that got us here in the first place?
Excess liquidity creates bubbles either in the real economy or the financial markets. Right now, the benefits of low interest rates and surplus central bank credit have flowed to the financial markets and the big commercial banks. Market participants know the Fed is behind the curve on its interest rate policy. Based on a formula derived by Stanford University economist John Taylor, the current short-term interest rate should be 0.65%. That, however, is based on trailing core CPI of just 1.9% and the current unemployment level of 8.2%. It’s reasonable to assume that core CPI will trend higher -CPI including food and energy prices is already 2.7% – and the unemployment rate will gradually respond to 2%-plus GDP growth. If you plug 2.25% inflation and 7.5% unemployment into the professor’s formula, you come up with a Federal Funds target of 1.8%. How we get there from here is anyone’s guess. But it’s very hard to get the air out of bubbles – financial or otherwise – without a pop.
Go Straight Ahead
When you reach $5 trillion, make a sharp left. That appears to have been the roadmap for the federal government’s debt expansion. From 1970 until 2008, the outstanding debt grew about 3.5% yearly and reached about $5 trillion. (In the Fifties and early Sixties, the annual increase was less than 1 %.) Direct federal government debt is now $10.4 trillion or about 68% of nominal GDP. (This only includes public debt outstanding. It doesn’t include the $4.7 trillion of inter-government holdings – otherwise known as the Social Security Trust Fund – theoretically owed by the federal government .) With the government’s debt burden growing at 11% a year and nominal GDP expanding 4% to 5%, debt could top GDP within six years.
That’s the point of no return – the debt trap. From that point forward, the cost of funding the national debt will grow faster than the economy.
There are only two ways to escape the debt trap: budget austerity or currency devaluation. So far, our elected officials appear to be unwilling to address the first alternative – and for good reason. Most of the money is spent on folks who vote. Social Security, Medicare and Medicaid account for 44% of total outlays. The defense budget grabs another 24% and social welfare spending – mostly going to state and local governments – claims another 12%. That’s 80% of the total. (Meanwhile, the small 6% slice going to pay the interest on the national debt will likely balloon over the next few years.) Devaluation is tricky – but much more doable. If inflation can be pushed higher, the nominal value of everything real goes up and the actual value of debt goes down. It’s worth remembering from 1974 through 1981, nominal GDP grew at a 10% annual rate despite two recessions. Little of this growth was real – inflation adjusted GDP averaged just above 2% a year –but it sure lowered everyone’s debt burden.  In that regard, it’s worth citing a quote from Adam Smith, “All money is a matter of belief.”
Keeping a Low Profile
We continue to keep the effective maturity of our clients portfolio’s below that of their benchmarks. This served us well during the March quarter and the accounts tended to outperform their benchmarks. It is worth noting, however, that a bearish stance in a bear market does not necessarily mean you make money. Good relative performance does not mean good absolute performance. During 2011, long-term U.S. Treasury bonds returned nearly 30% and the mortgage market recorded an 8% gain. We expect most of those outsized increases to be reversed this year. Given the low absolute level of coupon income for most bonds, even a small increase in interest rates will translate into a negative total return. The current year promises to be quite difficult for most bond investors.

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