ThinkInvesting's  Instablog

There is a lot of buzz on the US economy and financial markets this morning. And the news is like a punch to the kidney. Unless of course you are refinancing your home or on the hunt for a new one. But, I will get to that in a moment.

The morning began with China's PMI (Purchasing Manager's Index) falling to 50.4 in May, resulting in the worse number this year. A number below 50 is a sign of contracting or decelerating growth. HSBC's measure of China's factory sector contracted for a seventh straight month to 48.4. This might result in China cutting its reserve ratio or exploring more fiscal spending (maybe some form of QE). Both present real problems, since China does not want to increase inflation more than necessary.

Then came the US jobs report. Economists expected 158,000 new jobs to be created for the month of May. However, the economy added only a paltry 69,000 new jobs causing the unemployment rate to bounce to 8.2 percent. This is the first jobless rate increase in nearly a year. Labor force participation remains near 30-year lows. And, not to beat a dead horse, but the rate of "discouraged workers" increased to 14.8 percent from 14.5 percent in April. Its obvious the economy has come to a stall on job growth, but how bad is it? Well, to put things into perspective, most economists believe we should be adding anywhere from 150,000 to 200,000 jobs per month just to keep the unemployment rate flat. And, we should have more jobs than when the recession began because more people are entering the workforce as they reach the working age each month.

Additionally, there is big concern about the drop in the 10-yr US Treasury yield. This well known and followed yield sank below 1.5%, a drop to all time historical lows. So what does this mean? Well, the 10-year is so important because it is used by economists as a leading indicator of the growth and stability of the economy. This would suggest that the signs are still very grim. There is hearsay that the government could implement another round of bond purchasing from the Federal Reserve. A concern, however, with such a move is sending the US economy into a period of stagflation. Stagflation occurs when growth slows while inflation simultaneously quickens. This would be a dilemma for policymakers since rates would continue to be depressed with no where to go. Rates can't go much lower and the Federal Reserve would be left with only "hope" in its arsenal. Hope that growth will eventually pick up and inflation won't run a muck.

Source: US Department of Treasury

treasury.gov

Lastly, let me end with some potential good news. Despite stock prices are in free fall, treasury yields are declining... Wait! That's it! Treasury yields declining can be a good thing, at least for those looking to make a big purchase or refinance a big purchase. The biggest purchase most people make in their lifetime is their home. And now, is a great time to look at what interest rate you are paying. Go ahead and dig up your mortgage statement and while you are at it, consider finding any other financial statements that are tied to a debt, ie. auto, boat, home appliances. Right now, you have the ability to finance a 30 yr fixed mortgage for as little as 3.56%. Consider that for a moment. Borrowing someone's money at 3.56% for 30 years. That's unheard of and if you ask anyone from 'Generation X' if they thought that sounded good, I bet you'd get an astounding - Yes!

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The financial world has a lot of sayings and jargon that can make anyone's head spin. Terminology like derivatives, indices and asset classes can make learning about the industry a little "unBEARable". But if your like me, a little history lesson can always be interesting. You may have thought, what does Wall Street mean when they talk about a 'bull' or a 'bear'?

The actual origins of these terms are hazy. The expressions are used to describe either the attitude of a person or the sentiment of the general stock market. A "bear" is someone who believes the market or stock will go down in value while a "bull" is a person who believes the market or stock will rise. A bull or bear market is defined as a 20% drop or rise from the most recent peak or trough. The term "bear" dates back to the 17th century when bearskins were sold as a trade. The bearskin salesman would sell skin that they didn't yet have. Kind of like a farmer who speculates on future agriculture prices (cattle, grain, etc.), the bearskin salesman would speculate the price of the bearskin to drop as they received it from the trappers. The trappers would make any profit, or spread, between the cost and sale price of the skin. This is how the salesman became known as a "bear" and why a drop in prices in the market is known as a "bear market". The "bull" became known as the opposite of a "bear" due to the popular fights that took place in early California between a bull and a bear. This was a gruesome contest introduced by the Spanish during the 1850's California gold mining days. At the time it drew in many spectators but the following was short lived.

The spectator sport of fighting between the bull and the bear has been known as the other possible origination of the famous expression. During a fight, a bull and a bear are characterized by a specific fighting style. The "bull" is recognized for thrusting its horns in an upward movement towards its opponent. This is similar to a rising market or stock. On the other hand, a "bear" will swing its claws in a downward motion. This led to the bull referring to an upward market and the bear as a downward market.

The history of the Dow Jones Industrial Average (DJIA) dates back to May 26, 1896. Since then, there have been 28,920 "bull" calendar days in the market to 11,380 "bear" calendar days in the market. This has equated to 30,254 point gains versus 19,042 point losses in the Dow. *

So what are you? Are you a "Bull" or a "Bear"???

SOURCES: WSJ Market Data Group; ''The New York Stock Exchange: The First 200 Years,'' Greenwich Publishing Group; Doug Short, vice president of research, Advisor Perspectives

There are many ways to take your money and invest it for the future. Many will argue whether it should be "blue chips", emerging markets, commodities or numerous of other asset classes. But within the many classes to which one can invest, there have always been to specific approaches to investing- value and growth. Now I don't recommend one over the other. In fact, a good portfolio will have value and growth within each of the major assets classes, ie. small cap value, small cap growth, etc. You will even find the opportunity to invest in many asset classes through a combination of both value and growth, which would be called a "blend" (small cap blend). But, to focus on the traditional sense of value and growth, that is what I will focus on in this post.

Let's start with value investing. Value investing is theoretically looking for stocks that are undervalued. This involves a strategy for selecting stocks that trade below their intrinsic value. It is most usually done by using some form of fundamental analysis which may incorporate the book value or price-to-earnings multiple of the company being analyzed. These analysts believe the markets overreact to both bad and good news which can cause for the price of the stock to be out of line with the long term fundamentals of the company. Investors can look at this as a way to profit if the price of the stock is under priced or possibly short the company if it is overpriced (shorting being a way to make money off the stock if the price goes down).

Warren Buffet, chairman and CEO of Berkshire Hathaway, is a well-known figure in value investing. His mantra has been to find an outstanding company at a sensible price. Over the last 25 years, his way of investing has put him at a level above all others when it comes to investing in value stocks. He taught under Benjamin Graham (founder of value investing) who is known for his "margin of safety" rule which basically classifies value investing as buying a company at a large enough discount to make up for any marginal error in the price. It is important to note that value investing is completely subjective. While they look at current assets/earnings of a company, most value investors place little emphasis on the future growth potential of a company.

Warren Buffet, chairman & CEO of Berkshire Hathaway

A growth stock is a company whose earnings are expected to grow at an above average rate compared to other companies in the same industry or the overall market. Those who invest in these stocks will presumably invest even though the price-to-earnings ratio may be higher resulting in a more expensive share price. However, seeking out a company due to an expectation of a future growth rate can lead to a potential liability within the growth style of investing. Leading up to the tech boom of the late 90's, many technology stocks were purchased based on speculation of future growth only to drastically drop in price. Therefore, growth investors have tended to follow a viewpoint of looking for companies with high growth rates priced at a reasonable valuation. This concept was adopted by Peter Lynch who managed one of the largest mutual funds in history- the Fidelity Magellan fund.

Although both styles of investing provide their own winning case, it is important to consider your own investment personality. This will include your risk tolerance, time horizon and personal objectives for investing. This way you can determine whether you are more a value or growth investor. Most experts will agree that it would be wise to be invested in a little of both. This goes back to the saying, "don't have all your eggs in one basket". Choose diversification, that's my opinion. (click to enlarge)

Below is a good link at how to be allocated based on your time frame until retirement- Source Morningstar:

corporate.morningstar.com/US/documents/M...