WEEKLY ECONOMIC ANALYSIS: September 4th, 2009

Provided by TEAM Financial Services

"I hope for an America where neither "fundamentalist" nor "humanist" will be a dirty word, but a fair description of the different ways in which people of good will look at life and into their own souls."
- Edward "Ted" Kennedy

Items for discussion

The monthly jobs report is one of the most closely followed figure released by the federal government. It is released at 8:30am the first Friday of each month, which happened to be this Friday morning. The headline unemployment number is the one most widely reported in the mainstream media, and hit reached 9.7% this month. Our experience is that most of the media, including the business media such as CNBC, does a pretty horrible job of explaining these numbers and what they may mean.

First, the numbers are based on a lot of statistical models created by people working at the Bureau of Labor and Statistics (BLS). We’ve chronicled this in the past, so we won’t beat a dead horse this week. The biggest issue we have is the use of what is known as the “Birth/Death Model”, which is the BLS’s attempt to model for small business creation and destruction during the business cycle. We have no idea how they calculate this fantasy number, but it doesn’t pass the smell test. This “model” has assumed that hundreds of thousands of jobs have been created by small business during the most severe economic contraction since the Great Depression.

In addition, the headline number, also referred to as U-3, is the number politicians have stressed over the past 15+ years. This figure has been tortured to exclude workers who stop looking for a job – not because they don’t want to work but because they become discouraged. It also does not account for the under employed, which is people who are working part time only because they cannot find a full time job.

The BLS does release a more comprehensive figure for unemployment called U-6, which was reported to be 16.8%, which we believe is far closer to reality. Interestingly, this number is not included in the official press release and must be located on the BLS website under “alternative measures of labor utilization”.

As bad as this number is, many forget that unemployment tends to be a lagging economic indicator. It is very typical for the unemployment rate to continue to rise during the initial stages of an economic expansion, as employers are reticent to take on the cost of new labor until their confidence that a recovery is more durable.

It is human nature to allow current conditions to cloud one’s judgment as to what is likely to occur in the near future. This kind of unemployment environment is truly a tragedy for many families in the US. However, this gloom does not preclude the possibility or, as we believe, the likelihood that an economic recovery that is much stronger than most expect will take hold later this year and into 2010.

As we’ve been arguing for weeks, we don’t believe the recovery will develop into a long expansion due to the artificial nature of the government’s massive involvement in propping up so much of the economy. This, along with some long term structural issues, suggests that the employment situation is not likely to reverse to the point of being a real economic strength. We expect the job situation to improve and unemployment to stabilize, but we unfortunately do not expect a robust recovery in jobs growth.

Market/Economic Climate

TEAM has not commented much recently on one of our core secular investment themes for our clients – precious metals equities. This industry took center stage this week, as gold and silver prices firmed up and related stocks skyrocketed. We remain extremely bullish on the industry over the next several years and continue to have a very heavy overweight to it – though the sector is infamous for vicious short term corrections. We’ve been fortunate enough to acquire a decent number of new clients over the past two years, and this has provided us with the opportunity to see how many other firms have their clients invested.

While this is anecdotal, we’ve seen near zero exposure to commodities in general, with precious metals also absent. We find this instructive, as bull markets typically don’t end with so little participation from investors. One need only have seen all the portfolios we saw in 1999 and 2000 that were riddled with large cap growth mutual funds and technology stocks to see this phenomenon. We’d expect commodity and precious metals related investing to become far more widespread before what we believe to be a long term bull market concludes.

The stock market reached an oversold level on a short term basis late this week. The character of the bounce will be instructive as to whether a deeper correction is in the cards. We believe a deeper correction in the 5-7% range is more likely than not, but we still see no significant signs of a major market top. We continue to carry a modest amount of portfolio hedges to balance out a significant overweight in commodities and related equities.

Humor for the Weekend

Weekly Economic Analysis newsletters are provided by TEAM Financial, and are written by TEAM's Chief Investment Officer, James L. Dailey. Visit TEAM's website if you want to receive weekly economic updates right in your inbox - Click here.