Worst Week Ever for US Economic Indicators?

Bespoke had a good summary of last week's economic data.  All of the data was negative with the exception of the Q1 revised GDP and Personal Spending numbers which came in as expected.  This is precisely one of the two-headed monster that I noted we are dealing with in our Week 22 Performance post.

Although this is just one week's worth of data, the mood in the markets is decidedly down.  In cases like this it is often best not to fight the tape and stay on the sidelines which is what we have been doing in the DWCM Fund.

Week 22 Performance.......Crushing Jobs Report

We've seen this picture play out the last two years as May rolls in we see the equity markets take a tumble and the job machine slow way down.  The equity markets on Friday were already poised to open sharply lower but then came the May jobs report.  A gain of 69k vs. expectations of 125k to 150k.  To add insult to injury the April jobs number was revised down from 115k to 77k.  The unemployment rate ticked up to 8.2% from 8.1%.

Right now we are dealing with a two-headed monster; the uncertainty regrading Europe and a steady stream of data showing a slowing US economy.  During the 2008 financial crisis I can recall plenty of discussion around the decoupling of economies theory.  I was not buying that theory then just like I am not buying that theory now.  In essence the belief is that even if one economy slows say Europe or China the US economy can keep moving ahead.  We live in such an interconnected world that I just can't see how this theory holds water.

Supply chain lines are so global now that we buy and ship goods from China, Europe, and elsewhere and they likewise buy and ship us goods.  When our economy slows we have less money to spend on goods which can cause China to slow.

So that brings us to this current market.  In days like Friday everything gets sold even the good companies.  But how do you know if a stock that looks cheap today won't get cheaper tomorrow?  You don't know.  So we see the following three options which we have emphasized in previous posts

1. Get to the sidelines and stay out of the equity markets
2. Look to add positions that you want to own long-term
3. Run with what you currently have and don't put any new capital to work

These are just a few of the high level guidelines that you could follow.  For example at DWCM we are looking to add to our long-term positions but at a slower pace.  What we mean by that is that if we wanted to buy 500 shares of a company we may buy that position in smaller pieces, say 250 shares this week watch how the market responds and then buy the remaining 250 shares at a later point.  This strategy helps you scale into a position and protect you if the stock heads lower.

So what should an individual investor do?  You first have to look at your own specific financial situation and goals you are looking to achieve.  Your risk profile along with your goals should be driving your investment decisions despite the panic going on around you.  The ten year yield on bonds dropped down to 1.5% on Friday as people rushed into the so-called safe haven of US  treasury bonds.  Most people thought that the yield on the 10 year couldn't go any lower especially sitting at around 2%.  US treasury bonds are now being considered as the next great asset bubble ready to burst.

We didn't make any moves within the DWCM fund this week.  Although there are some positions that we would like to add to, sometimes it is better to just sit back and see how things play out.  Both the DJIA and Russell 2000 moved into negative territory for the year.  The NASDAQ and S&P 500 are both trying to hold onto positives gains for the year.

Even though the past few months have been rough on all equity markets as well as the DWCM fund we are still clearly in the black for the year with a positive 12.8% return beating all four major equity market benchmarks.  Our three favorite sectors include agriculture, fundamentally solid dividend payers, and selected technology names.

The Week Ahead

One issue with the trading action from last Friday was that there was no attempt by the market to rally at virtually any point especially during the last 30 minutes of trading.  What this means was that no one was compelled or saw any bargains to bring them back into the market.  This is seen as a very bullish indicator.  

With no news from Europe over the weekend it is hard to try to judge what Monday's trading day will look like.  You could very well see an oversold bounce as you could see continued weakness.

One asset class to keep your eye on this week is Gold.  Earlier last week Gold was trading as any other risk asset.  But then on Friday it started trading as a currency of last resort which we usually see during crisis situations.

• Mon -  Factory Orders
• Tue -  ISM Non-Mfg Index
• Wed -  Productivity and Costs
• Thu -  Productivity and Costs,  Bloomberg Consumer Comfort Index,  Ben Bernanke Speaks
• Fri -  International Trade,  Wholesale Trade

DreamWorks Capital Management Update
REGISTER NOW for the quarterly seminar "401k & 403b Rollovers, You have Options" on Monday June 18th at The Community House located in Birmingham, MI.  The event is free and you can register by calling TCH at 248-644-5832 or you can email me directly at pfenner@dwcmllc.com.  We hope that you will consider this great event and learn more about the services we offer here at DWCM.

Flat U.S. Wages Help Fuel Rebound in Manufacturing

What is great for American corporations and their bottom lines isn't necessarily great for US workers especially those in the manufacturing segment.  It's been noted over the past year the rise or call it the stabilizing of US manufacturing has been a key piece in the recovery [see man vs machine: jobless recovery] albeit a merger one at that is the US economy.


Companies have now found it more profitable to manufacture more items in the US rather than China or other places around the world.  As China has seen somewhat rapid increases in labor costs of the past year plus, US wages have been stagnant.  When you combine those flat wages with productivity improvements and with either no or reduced shipping costs it adds up that the US is a good place to be.


It will be interesting to see how this trend will play out.  Spending a great deal of my time in the manufacturing sector I first saw jobs move to Mexico and then to China.  Although I think that the jobs coming back to the US is great I just wonder if the cost will be to much to bear over time?


Via the WSJ here

• The wage lag is a key factor contributing to the rebounding competitiveness of U.S. industry. A recent uptick in factory employment and the return of some production to U.S. shores from abroad both added jobs that probably otherwise wouldn't exist. But sluggish wages also are squeezing workers' incomes and spending. That, in turn, hurts retailers who target middle-income earners and restrains the vigor of the economic recovery.
• "The U.S. has held manufacturing wages in check while there has been strong wage growth in China and moderate wage growth in Mexico," says economist Gordon Hanson of the University of California, San Diego, referring to two of the U.S.'s biggest lower-wage competitors.

• With unemployment still high and global competition intense, employers have the upper hand in asking unions to relax work rules and restrain, or reduce, wages and benefits. Scores of U.S. companies have negotiated two-tier contracts with unions that allow them to pay new hires less than existing workers or otherwise restrain wage and benefit costs.
• After a 35% decline in the number of U.S. manufacturing jobs between 1998 and the trough in 2010, the total since has risen by 4.3% to 11.9 million in April.
• Across the country, earnings for production and other nonsupervisory workers in manufacturing averaged $19.15 an hour in April, 3.2% below their recent March 2009 peak and back to where they were in 2000, adjusted for inflation, the Bureau of Labor Statistics says. In contrast, average hourly earnings for all private-sector production and nonsupervisory workers across the economy have risen 5.3% to $19.72 since 2000.
• At the Vaughan-Bassett Furniture Co. plant in Galax, Va., where 635 workers make wooden bedroom furniture, workers went without any raise for two years. At the end of 2011 they got a 3% raise, on average. That isn't enough to keep up with the 7%-plus increase in consumer prices over those three years. Starting pay today for hourly workers in the nonunion plant is about $9 an hour, plus health insurance and other benefits. The most experienced typically get $14 to $15, plus benefits.

• In 2010 and 2011, new hires by manufacturers of durable goods, those meant to last three years or more, were paid an average of 0.3% less than workers who were newly hired in 2007 and 2008, adjusted for inflation, according to an analysis of government data by Jesse Rothstein of the University of California, Berkeley. New hires in nondurable manufacturing were paid 1.7% less.
• Despite their near-death experiences of recent years, the Big Three U.S. auto makers still pay some of the highest wages in manufacturing, but the average is declining.General Motors Co., Ford Motor Co. and Chrysler Group LLC have a mix of veteran workers making around $29 to $33 an hour in base pay; recent hires earn $16 to $19, according to the Center for Automotive Research, an Ann Arbor, Mich., research group.
• Amid complaints of "skill shortages" from U.S. manufacturers, workers with highly sought-after skills are doing better. Alle-Kiski Industries, a Leechburg, Pa., machine shop, cut wages for the operators of the computer-controlled machines that shape metal parts by about 5% in 2009 when orders slumped. Partly to keep those workers from leaving for other plants, the company since has increased pay about 20%, to an average of about $18 an hour, says Kevin Hartford, the company's president. Employment at the plant has risen to 37 from a low of 22 in 2009.

Young, Educated and Seeking Financial Security

This report put out by the Heldrich Center for Workforce Development at Rutgers University finds that the young and educated seek financial security at the top of their goal list. As you can see from the graph below the young and educated are not the only group ranking financial security high on their list.