Unemployment reports released in the U.S. and Germany this week highlighted the continuing contrast in job creation between the two countries in the wake of the global financial crisis.
Bad news in the U.S.
In the U.S., according to the AP, the jobs report released Friday showed that unemployment rose to 9.1%, as the American manufacturing sector grew at its slowest pace in 20 months in May.
Better news in Germany
In contrast, earlier this week Bloomberg reported that Germany posted its 23rd straight monthly drop in unemployment, with its unemployment rate dropping to 7% in May, the lowest since Germany's reunification in 1991.
Job growth in Germany driven by manufacturing exports
Bloomberg noted that recent job growth in Germany had been driven by exports of manufacturing goods such as cars made by BMW, and industrial equipment made by Siemens AG (SI).
A key difference between Germany and the US
In a previous article ("Why U.S. Unemployment Remains So High"), we referred to a Financial Times article ( “German Spirits Sky High as industry soars”) that noted how German labor market policies limited layoffs during the worst of the global financial crisis. The graphic below, which accompanied that article, shows that while manufacturing output suffered a steeper correction during the financial crisis in Germany than in the U.S., the correction in German manufacturing employment (and total employment) was much milder.
In the U.S., by contrast, manufacturing companies shedded significant numbers of jobs during the worst of the downturn. An article last month in Fortune ("Caterpillar is absolutely crushing it") offered an example: by January of 2009, that article noted, Caterpillar, Inc. (CAT) had cut 35,000 jobs, out of a workforce of 120,000.
A look at the hedging costs of two of the companies mentioned above
Of the three manufacturing companies mentioned above, two -- Caterpillar, Inc. and Siemens AG -- trade in the U.S. In the table below, I've listed the costs of hedging them against greater-than-20% declines over the next several months, using the optimal puts for that. In addition, for comparison purposes, I have listed the cost of hedging the SPDR S&P 500 ETF (SPY) and the iShares MSCI Germany Index ETF (EWG) against the same declines. First, a quick reminder about hedging with optimal puts.
Optimal puts
Optimal puts are the ones that will give you the level of protection you want at the lowest possible cost. With Portfolio Armor (available in Seeking Alpha's Investor Tools store, and as an Apple iOS app) you just enter the symbol of the stock or ETF you’re looking to hedge, the number of shares you own, and the maximum decline you’re willing to accept (your threshold), and then the app uses its proprietary algorithm to scan for the optimal puts.
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Symbol | Name | Cost of Protection (as % of position value) |
(CAT) | Caterpillar, Inc. | 5.98%** |
(SI) | Siemens AG | 5.10%** |
(SPY) | SPDR S&P 500 | 1.48%* |
| (EWG) | iShares MSCI Germany Index | 6.90%** |
*Based on optimal puts expiring in December, 2011
**Based on optimal puts expiring in January, 2012
**Based on optimal puts expiring in December, 2011
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
