News, Asset Classes & Charts

April 12, 2007 by  


By Bob Wood, Muslim Media News Service (MMNS)

As I am about to write this week’s column, I note that this is the first Friday of the new month. And that brings to light a news item that warrants mentioning. This is the time of month when the Bureau of Labor Statistics (BLS) announces new job growth for the previous month, so this one reports the jobs number for March.

I see that TV financial promoters are absolutely giddy with the news of “that strong new jobs number,’’ coming in at 180,000 and resulting in an unemployment rate of 4.4%! Of course, in prior periods of strong economic growth, that new jobs number would have been rather disappointing. Such a number represents barely keeping up with new entrants into the work force.

But the jobs information could be even more disappointing — if the real truth behind those numbers leaked out. And, by now, you’re hopefully thinking, “Leave it to those market Bears to dig for the whole story, rather than just the announced headlines.”

So yes, I’m looking at the actual BLS report, and I see the stated number of new jobs created in the U.S. economy in March. Of course, the actual BLS release is 25 pages long! What we hear in the news is that headline number, since that is where the promoters focus. And they’d like you to believe that in all those 25 pages, the headline number is all that is really worth mentioning.

But wouldn’t you like to know what else lurks in those 25 pages, offering support for the headline number? I certainly do, so, of course, I read on. One thing I’ve learned to check in the report is the CES Net Birth/Death Model, where the Birth/Death table is shown. This method is used for “ginning up” those job creation numbers.

And what I find on that page shows, once again, that the BLS didn’t actually identify and count 180,000 new jobs in March. The Bureau identified about 52,000 new jobs — and assumed that another 128,000 new jobs must have been created — and will show up later. This estimate is based on how many small businesses have failed and how the work they did will be picked up somewhere else, which “should” result in the creation of new jobs to replace those lost by failed businesses!

Furthermore, the unemployment rate, announced at a very strong 4.4%, which signals something close to ‘’full employment,’’ means that anyone who really wants a full-time job can easily find one. Yet, to me, that figure seems at odds with the number given for the average work week, about 34 hours/week for workers included in the survey. So I move on to Table A-12 of that 25-page report and find on line U-3 that the unemployment rate is, in fact, 4.4%. But a couple lines below, I see an entry on line U-6, showing that counting all those people whose first choice is finding full-time work but can’t find it, for some reason, would push the unemployment rate to 8.0%! Isn’t it strange that these other statistics are never mentioned in the TV reports?

Of course, the usual marketing “spin” is at work here, i.e., the ‘’strong jobs report’’ surely means that the economy is vibrant and in no need of a Fed rate cut. And neither is there a need to worry about a housing market melt-down. No, there’s nothing to worry about here, folks! Yet haven’t stocks rallied in past weeks on hopes that the Fed would cut interest rates, which would lower bond yields and thus make stocks look more reasonably priced?

But I’m sure that even if promoters did talk about the real jobs numbers instead of those hyped-up headline numbers, they would still find some way to point out how the news surely bodes well for pending rate cuts from the Fed and how this portends a major buying signal for stocks.

I think my other topic for this column also shows how financial media promoters can do disserve to investors, and that has to do with choosing asset classes. Those individuals who manage their own, or even other people’s, investment portfolios must have a basic set of rules to guide their decision making, especially during times of stress in the markets. In front of me, taped to one of my computer monitors are several reminders. One, perhaps the most important, simply says ‘’Asset Class.’’

By that term, I mean that many different asset classes are available to choose for investing. The most widely promoted classes are, of course, large-cap, mid-cap or small-cap stocks, of either the growth or value variety in our domestic markets. Other choices include international stocks of different sizes, domestic and international bonds, and stocks or bonds in emerging markets. Then add in precious metals, energy and other commodities, and you get the idea.

Traditional portfolio management involves building a portfolio using several different asset classes in an effort to diversify risks, as well as add exposure to higher-yielding alternatives like small-caps and emerging markets stocks. And this is the method you hear promoters touting most frequently.

Of course, frequent readers of this column know that I think this method makes no sense at all. I find the better way is seeking out only the best few options from that wide list and loading up on those. I exclude the others that seem to offer the least potential for gains based on valuation.

One of my recent favorite asset classes has been precious metals, meaning gold and silver. So now that we’ve honed in on that group, which stock or mutual fund would you choose as the best ones to include?

First off, if you choose the right asset class, you can expect to be very pleased with performance results whether you select individual stocks or mutual funds. Which stocks or mutual funds you choose actually matter little in the long-run. In fact, you could probably throw darts at a page full of different stock or mutual fund options and still choose well!

If my approach seems to make no sense based on what you’ve always heard about stock ratings, analyst upgrades or Morningstar ratings, spend a little time with any chart program to see what I mean. The chart function on the Yahoo! Finance page will work, and we can do this exercise together.

To start, enter a symbol for one gold fund. I’m entering one from Fidelity that I have used, FSAGX. Then add symbols for any other four funds in the same sector. For this exercise, I’m using EKWAX, VGPMX and TGLDX. Let’s start with a six month chart.

Note the best performing fund and the worst one. Then extend the chart to a one-year version. While one or the other fund wins the performance derby in each time period, notice the close correlation of all funds.

Another thing to note is that the fund showing better performance is typically the one holding the least amount of client money. When choosing among several similar funds in an asset group, choose the smallest one in terms of assets managed. I find that smaller funds beat the larger ones — most of the time.

Now, let’s look at gold stocks, where the work gets easier. Again, I find little, if any, difference in which ones to choose. Build your beginning six-month chart for five of the largest gold mining stocks, including NEM, GG, ABX, MDG and AU. Now extend those charts to one-, two- and five-year versions. Do you see what I mean? What also helps when looking at stocks is going back and looking again at the six-month chart and choosing the two worst performers over the short term. Note how they always seem to catch up, over the long-term, with the more recent winners.

This method seems to work well in the energy sector, too. Build a chart, and enter the symbols XOM, COP, CVX and BP. Check which stock led after the past year, and then look at the best performer over the past five years. Do you find BP at the bottom on all versions of these charts? That reading would, to my thinking, make that troubled producer look like the best pick among this group.

Typically, I would opt for the smallest company in each group, judging by market cap. The potential always exists for smaller companies to be bought by larger rivals, and growth is easier to maintain in smaller companies. But using that charting tool might be just as useful.

The charting method tends to work well in any asset class or stock market sector you might choose for investing. As a general rule, you won’t find much difference in the stocks or funds you pick. Of course, Wall Street promoters would like you to think that enough difference exists to keep you trading in and out as actively as possible.

For me, identifying the best asset classes means finding the best buys to hold for a long time. And over a long time, I find little value in trading one for the other. But if you must choose among mutual funds, choose the smaller over the larger. And for stocks, find the short-term losers in the group. Try hard to look past the short-term “noises” that have caused those stocks to lag and, instead, focus on the long-term potential of the group.

Today, I’ve shared my ways of looking at the news, asset classes and charts. My ways don’t make the news, but they do seem to work for me.

Have a great week.
Bob

Bob Wood ChFC, CLU Yusuf Kadiwala. Registered Investment Advisors, KMA, Inc., invest@muslimobserver.com.
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