TedCo Software Financial Matters Blog

The May job numbers seemed good, but were really bad news. The recovery had been producing steady real job growth, and on the surface the May numbers looked great with total non-farm employment up 430,000. The unfortunate truth was that the vast majority of those new jobs were census workers whose jobs are to last only a short time. Hiring by private employers was quite small (+41,000) and few real jobs were created. Unemployment dropped to 9.7%, but most of that improvement was due to census hiring. The market responded to the ugly truth behind the happy numbers negatively, as was expected.

Last week June’s numbers were released. It was an unpleasant decline of 125,000 non-farm payrolls reported. However, this includes the layoff of 225,000 census workers. Private sector payrolls increased to 83,000, more than double last month. This is really good news, though the private sector needs to add more than 100,000 jobs a month just to keep up with population growth. Also, the unemployment rate dropped to 9.5%, though this is not particularly good news as the drop is mostly a result of workers becoming discouraged and giving up. The market responded negatively to the good news.

The market is not a great indicator in the short term. Sometimes the market treats bad news as neutral and good news as good news. Not right now though. Right now the market treats good news as neutral and bad news as bad. Don’t expect a nice uptick in stocks until the market shakes the blues.

Let’s get back to the unemployment rate. This number is an important indicator of mood and economic activity, but it is a bit deceptive. The rate is a measure of the percentage of people who have or want a job and don’t have a one. A person is said to want a job if they have actively looked for work in the prior four weeks. This is supposed to weed out those people who do not want to return to the workforce. In an extended downturn (or slow recovery) a number of workers become discouraged and quite looking. The drop in the unemployment rate is more a result of a reduction in those who are actively seeking work rather than a real increase in total employment.

The headlines will cover these signs of weakness, trumpeting the poor showing as compared to the average post-war recovery. However, this slow recovery, particularly in employment, was what we saw for the last two recoveries (1991 and 2002). We may need to adjust our expectations; the jobless recovery may be the new normal in the information age. It is neither good nor bad, it is just the way it is. Unless you need a job, then it is just bad.

Jim Heitman, CFP®, is a writer, speaker, Certified Financial Planning practitioner in Southern California, and the founder of Compass Financial Planning – a fee-only planning and money management firm.

On the bright side: oil prices are still low. Other than that there is not a great deal to be happy about in the equity markets. My last “hedge now” signal lit up last week, so expect some rough travel ahead.

So what is going on? The market is reacting to a number of issues. As I mentioned in an earlier post the market has been looking for an excuse to drop back some, and the world has given it plenty of excuses.

The latest bugbear is the Hungarian debt crises. Fears of contagion and an unraveling of Eastern Europe dropped the Euro to new recent lows. (As a note, this last drop puts the Euro back into the middle of its long term average.) If Hungary goes under it will be, well, mildly disturbing. While the world watches Hungary the real danger continues to reside elsewhere, particularly Spain. If the real estate bubble pops there soon then Europe is in a world of hurt and it will impact us here in the US. The RE bubble in Spain is going to collapse; the question is one of timing.

The US jobs report was disappointing. There was little private sector hiring. Most of the big number of reported new jobs were census jobs. The jobless rate dropped largely because many of those who had become encouraged and re-entered the job market were disappointed and promptly exited (though the real rate of unemployment did drop a very small amount). Weekly hours are up, as are temp workers; all good signs. The pattern of recent (1991-92 & 2001-02) recessions has been little job growth until well into the recovery. The history of big job growth early in a recovery is mostly a post-WWII phenomenon. The sad reality is that a jobless recovery is the historical pattern reasserting itself. Why did this report upset the markets so much? First, the market is looking for excuses to drop. Second, people have little sense of history.

We are still in a recovery and a double-dip still appears unlikely. This recovery, however, could be the weakest in a long time (I’m still hoping for better).

Be glad if you are not in Europe.

Jim Heitman, CFP®, is a writer, speaker, Certified Financial Planning practitioner in Southern California, and the founder of Compass Financial Planning – a fee-only planning and money management firm.

It is clear now what a pivotal role the Federal National Mortgage Association (FNMA or Fannie Mae) and the Federal Home Loan Mortgage Corporation (FHLMC or Freddie Mac) played in the economic meltdown we are living through. These government run and supported entities encouraged the creation and sale of bad loans, purchased the same from vendors, then re-packaged the toxic waste and re-sold the loans to others (like Wall Street) who again re-packaged the toxic waste and convinced still other people to buy. Everyone who dealt with this junk got burned, and many more besides. The government owns a fair chunk of the blame for this mess (this goes back decades; both parties had a hand in this). Wall Street does too, as does Main Street. Plenty of blame to go around, but these Federally Sponsored Corporations are in the middle of the failure.

Freddie and Fannie, however, have the backing of the Federal Government (who can always raise taxes or print money to cover its bills). These two mortgage monsters have sucked in about $146 billion (that’s $146,000,000,000.00). One millionth of that figure would pay off my mortgage and leave enough to install solar. Worse, the bleeding is far from over. We easily have another $150 billion or so to shovel in this hole before we see bottom. The administration has committed to supporting them until 2012.

So if they had such a hand in the economic mess, why is there no urgency for reform in Washington? The Republicans have signaled a desire to move ahead, phasing out the mortgage giants in five years or so. The Democrats don’t trust the markets to fill the gap. The Federal Housing Administration (FHA), Freddie, and Fannie originate or purchase 90% of all new mortgages. Some changes will come and the government agencies will shrink, though not by much and not quickly. It would cause such turmoil if they just disappeared that it is unlikely that you will see them go. Also, these are very well connected agencies with many friends in DC.

What does this mean to you? With the federal agencies shrinking and private lenders tightening the mortgage lending market will remain subdued into the foreseeable future. It won’t get easier to get a mortgage anytime soon.

Jim Heitman, CFP®, is a writer, speaker, and Certified Financial Planning practitioner in Southern California.

European debt issues are dominating the headlines, and those problems are serious, but the Europeans are not the only ones swimming in the debt pool. Excessive debt is a global reality and most of the developed nations are playing the game hard. Really very few nations operate in the black, mostly oil producers. Many emerging economies have kept control of the debt load. It isn’t that it can’t be done by developed nations; Norway operates in the black, and Canada and Australia carry very reasonable debt loads. China carries little debt, and has huge reserves (however, they have significant infrastructure issues that will need to be addressed in the next decade).

So who’s overspending? Greece, obviously, and all the bailouts are likely to accomplish is to ease the sting of an eventual default. Spain, Portugal, Ireland, and Italy are in some trouble, and Germany, France, the UK, and Japan are spending way too much. Japan and the UK control their own currency so expect efforts to devalue. The Euro is already at a four year low and likely to continue to drop versus the dollar.

What about the US? We are in slightly better shape than our G7 partners (or is it G8 now?). Our debt load is somewhat lower than others (as a percent of GDP), but out deficit spending (as a percent of GDP) is near the top and presents a real danger.

Over the long run the problem must be resolved with a mix of higher taxes and less government spending. That will have a depressive effect on the economy. If the same effect happens to many economies world wide then you can expect slow going for the world economy. That means slower job growth and smaller fixed returns on investments. The sad truth about debt is that somebody always pays. When the debt is your country’s then that somebody is probably you.

One of the sad things here is that a politician who says that we have to radically reduce spending to pay off the debt is probably not getting elected. Nobody likes the sad-sack downer guy, even when he is right.

Jim Heitman, CFP®, is a writer, speaker, and Certified Financial Planning practitioner in Southern California.

In “Wall Street CEOs defend pay practices” you will read one of the best similes for what Goldman Sachs did when it sold mortgage-backed securities and then bet against them in the market.

Phil Angelides is Chairman of the Financial Crisis Inquiry Commission which is investigating the causes of the financial crisis of 2007–2010.

“I’m just going to be blunt with you,” Angelides told Lloyd Blankfein, CEO of Goldman Sachs. “It sounds to me a little bit like selling a car with faulty brakes and then buying an insurance policy on the buyer of those cars.”

One thing that concerns most people who live and work on Main Street is that Wall Street’s greed is sucking money out of small towns across America. After being bailed out by those who live on Main Street, Big Banks continue to flout the rules of fair play.

Just last week The Washington Post reported “AIG executives’ promises to return bonuses has been largely unfulfilled“. Today, one reads “GMAC Said to Discuss U.S. Aid Package of $3 Billion or More“, which would be a third bail out of GMAC, Inc. And just last week, reports surfaced that Citibank was able to buy it’s way out of TARP because the US Government granted it a $38 billion tax benefit, “The Mother of All Tax Breaks“!

If you have money in one of Wall Street’s banks, it’s clearly time to rethink where you keep it.

“Move Your Money: A New Year’s Resolution” describes a movement afoot in this country for people who live on Main Street to move their money home. Nearly every community in this country has one or more local, community banks or credit unions. Unlike Wall Street banks, community banks and credit unions tend to be very involved in their local communities. They make loans based on conservative lending standards and they tend to keep money in their community.

Learn more about this movement by reading “Move Your Money: A New Year’s Resolution” or by visiting the Move Your Money web site at: http://moveyourmoney.info/ The Move Your Money site has a video and a quick way to find financially sound community banks located near you.

If enough people do this, it may be the one thing that simultaneously helps your local community, sends a message to Wall Street and gets the attention of the U.S. Government.

Paul Farrell, of MarketWatch.com offers what may become the classic editorial indictment against Goldman Sachs. “Goldman’s secret moral pathology: 15 symptoms of a Wall Street disease destroying democracy and capitalism” details 15 ways Goldman may be ripping the heart out of the American financial system and the Federal government.

If you want to see an eye-opening, visual presentation of the spread of unemployment across the United States, take a look at “The Decline: The Geography of a Recession“.

It’s a perfect example of how a graphic presentation, in this case an unemployment map, can explain a phenomenon so much better than words.

A common question in discounted cash flow analysis is, “What should I use for the discount rate?”

An easy answer is, “Ask your Chief Financial Officer (CFO) for the discount rate applicable to your particular capital budgeting project.”

However, you may be with a smaller company that has no CFO. Or perhaps you just want to use Discounted Cash Flow Analysis Calculator to play with a few ideas before you share them with others.

In either case, one of the best sources of information about discount rates is the Federal Reserve Bank of St. Louis’ Economic Research web site at: http://research.stlouisfed.org/fred2/categories/116

There you’ll find the current and historical Treasury Bill Rates for 1-Year Treasuries, 3-Month Treasuries, 4-Week Treasury Bills and 6-Month Treasury Bills. For each bill, you’ll find a historical chart (with recession bars, if you wish) and the latest reported observations. You’ll also find links to the FRED graphing tool. (And you’ll probably be surprised at how low the discount rates are in our current economic environment.)

For most discounted cash flow analysis, you will not go too far astray if you use the auction discount rate on the 6-Month Treasury Bills. That discount rate should approximate the rate of return your firm will receive on short-term investments. And that’s probably why you’re doing discounted cash flow analysis — to determine if your capital budgeting project will yield a better return than what you will earn by investing in an interest-bearing instrument instead.

Where do many experts go for economic data? If you think they have access to data sources that many laypersons don’t know about, you’re probably correct.

However, there are excellent sources of financial and economic data available to all of us. I’d like to introduce you to FRED®, the Federal Reserve Economic Data web site.

FRED® is a database of 20,068 U.S. economic time series which you can download in several formats for manipulation on your own computer. The categories include banking, business/fiscal, consumer price indexes, employment and population, exchange rates, gross domestic product, interest rates, producer price indexes, U.S. financial data and regional data.

In other words, FRED® offers more economic data than most of us have time to explore. And that’s why we need economic experts. However, “expert” doesn’t mean “perfect” or even “accurate”. When you want to check up on the experts, you can always check FRED®