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June 2010 Commentary

June 4, 2010


This is how today’s employment report could best be described. While new jobs of 431,000 would normally be welcomed the expectation was for 520,000. What makes it dirty is the distortion caused by the hiring of government census workers that added 411,000 temporary jobs. It really muddied up the report. What the markets will find disappointing is private payrolls (some would argue with good reason that these are the jobs that really matter) in May rose only 41,000. In April private payrolls rose 231,000 and in May they rose 174,000. All in all this was a very disappointing report in spite of the average hourly work week increasing from 34.1 hours to 34.2 and increasing hourly earnings increasing from $22.50 to $22.57. 

On a broader front the USA looks like the flavor of the month! The euro, as of this writing, is quoted at $1.206 (it takes $1.206 US to buy 1 euro). Several years ago, July of 2008 in fact, we were at our weakest when the quote reached $1.58 to the euro. You may remember this due to super models, recording artists and athletes demanding that their contracts specify payment in euros as opposed to dollars. Our ten year treasury bond yield is currently at 3.25% (for those of you keeping score the spread between 2 and 10 year treasury bonds is at a positive 253 basis points), Italian 10 years are at 4.2% thanks to European Central Bank intervention (aka quantitative easing) with Greece at 6.25%. The German 10 year Bund wins the prize standing at 2.7%. And now of course another country is entering the sovereign debt crises as Hungary is cries for help.

A very interesting factoid comes from a survey conducted by the Federal Reserve Bank of Atlanta. Much as been said about the difficulty small businesses have had getting loans from banks, in fact it is reported by the Fed that loans to non-financial businesses shrank by $326 billion last year. Is it a problem of supply (i.e. banks will not lend) as many think or of demand (business will not borrow)? The Atlanta Federal Reserve polled 311 small businesses in its region and found that only 11% reported unwillingness by banks to lend. In excess of 30% reported that they had sufficient cash on hand; over 25% reported that sales did not warrant a loan and over 20% responded that they did not need credit. This probably speaks to the weak private payroll job growth: small business sees no need to borrow and expand if their sales do not warrant it.

We like emerging market equities as an asset class.  The International Monetary Fund has forecasted 6% annual Gross Domestic Product growth for the emerging markets. We can see more growth and we can see less growth but we see positive growth.  It will not take much in terms of fund flows into emerging market equities to push up valuations by double digit percentage rates. We still like high-quality US equities such as Pepsi, Colgate and IBM to name a few. We are avoiding small-cap companies both here and abroad.       

We are still keeping our bond maturities very short – less than a year. The only exception is Treasury Inflation Protected Securities. Here we are going out ten years. We don’t know when inflation will raise its ugly head (actually we think we will see it in about two years) but we want to be in TIPS before that happens. An easy way to watch the TIPS market is thru and exchange traded fund appropriately tickered as TIP. So there is your TIP for the day!

Finally, per the Trader’s Almanac, October will see the start of this administration’s third year in office – usually coinciding with a very good U.S. stock market. We are not suggesting cause and effect but the coincidence is very strong. Depending on who is counting on average the Dow Jones Industrial Average has been up 14.5% during this third term period.

Erick Zanner

JDM Investment Counsel

Information contained herein has been obtained from sources believed to be reliable, but are not guaranteed. This article contains the opinions of the author and is subject to change without notice and is not a recommendation of any particular investment product or security.