Thoughts on the Employment Situation

Morningstar's Bob Johnson provides full analysis here.

Yes, the December report disappointed.  Expectations were for job growth of 150,000 but the number came out at 103,000 which is not much better than the full-year average of 94,000.  However, Bob points out that the unemployment rate dropped to 9.4% due to prior month revisions.

This LA Times article doesn't necessarily see the reduction in unemployment rate as a positive because the rate may have dropped due to workers giving up looking for jobs.  Fair point.

Either way, these mixed results continue to point to a tougher recovery phase than one might expect in an environment characterized by near 0% interest rates and massive stimulus measures.  I do think it's important to note that we have now seen four consecutive months of upward revisions.  This is a positive development that I hope continues.  It's also worth pointing out that we will not see 5% unemployment anytime soon.  We would need 5-6 years of 2.5-3 million jobs a year to get there.  Unfortunately, I think high unemployment is here to stay.

To Sell Or Not To Sell

Everyone is entitled to their opinion when it comes to Groupon.com's decision to not be taken over by Google.

However, I agree with my Taxes professor, Ira Weiss, when he says:

"You can set up your own daily deal website in an hour.  They happen to have a lead on it, but if I were them I would have sold for that price."

It's true.  Daily deal websites are a dime a dozen.  Full article here.

Top Songs of 2010

Rare non-finance-related post, but wanted to share my top 26 songs of 2010:

1)  Lil Wayne - 6 Foot 7 Foot

2)  Best Coast - Crazy For You

3)  Matthew Dear - You Put a Smell On Me

4)  Ratatat - Neckbrace

5)  Minus The Bear - Animal Backwards

6)  Toomy Disco - Age of the Jaguar

7)  Pretty Lights - Finally Moving

8)  Daft Punk - Derezzed

9)  No Regular Play - Teaser

10)  Tensnake - Coma Cat

11)  Cut Copy - Take Me Over

12)  DJ Shadow - I've Been Trying

13)  Chromeo - I'm Not Contagious

14)  Caribou - Odessa

15)  The Black Keys - Next Girl

16)  Royksopp - The Drug

17)  Blackbird Blackbird - Hawaii

18)  Aloe Blacc - Loving You Is Killing Me

19)  Bear In Heaven - You Do You

20)  Midnight Magic - Beam Me Up

21)  Arcade Fire - We Used To Wait

22)  Jose James - Blackmagic

23)  Yeasayer - Madder Red

24)  Jonsi - Go Do

25)  Cali Swag District - Teach Me How To Dougie

26)  Gorillaz - Stylo

Week In Review

The week that was:

U.S. stocks ended 2010 with strong gains, advancing for the second year in a row, as stimulus measures from the Fed and recent signs of economic improvement encouraged investors.  Corporate and economic newsflow were very slow in the last week of 2010.  Initial unemployment claims fell by 34,000 to the lowest levels since July 2008.  The decline is much greater than the 2,000 decrease expected by economists and provides further evidence that the job market is slowly thawing.  However, the news item failed to stimulate the market ahead of the new year.

The People’s Bank of China announced last weekend that it increased its main one-year lending and deposit rates by 25 basis points to 5.81%.  The interest-rate increase sent stocks downward in most markets worldwide as it seems Beijing has lost faith in other measures to rein in the rapid credit growth fueling housing and food inflation and is now resorting to increasing the price of credit.

Stocks:

The S&P 500 rose 0.87 points this week, or 0.07%, to 1257.64.  The Nasdaq Composite fell 12.73 points, or 0.48%, to 2652.87.  The Dow Industrials rose 4.02 points, or 0.03%, to 11577.51. 

For the year, the S&P 500 was up 12.78%, the Nasdaq was up 16.91%, and the Dow was up 11.02%.

• Shares of IMAX (IMAX) jumped almost 12% on Friday after rumors surfaced that Sony (SNE) and Disney (DIS) may be preparing to make a bid at a price of at least $40 per share for the company.
• Amazon.com (AMZN) reported that sales on Cyber Monday following Thanksgiving increased by 44% from the same day in 2009, with orders coming in at 13.7 million compared with 9.5 million items last year.  Amazon’s third-generation Kindle e-reader product is now the best-selling item in the company’s history.  AMZN shares are up 62% over the trailing six months.

Bonds:

End of week bond yields:

2 Year yield = 0.59%, down 6 bps from last week.

3 Year yield = 0.97%, down 11 bps from last week.

5 Year yield = 2.00%, down 4 bps from last week.

10 Year yield = 3.28%, down 10 bps from last week.

30 Year yield = 4.33%, down 13 bps from last week.

• Muni bond mutual fund outflows have reached $9.5 billion in December alone.  The fund redemptions have caused forced selling by fund managers while many individual investors have been selling to due to fear driven by headline including Meredith Whitney’s 60 minutes interview.  This action in the muni market may present a buying opportunity for investors that find themselves in a high tax bracket.

What to look for next week:

9:00 AM          Monday           ISM Manufacturing Index

7:30 AM          Thursday         Jobless Claims

7:30 AM          Friday              Employment Situation

Time To Jump In To Muni Bonds??

If I were an investor in a high tax bracket (which I am not), I would suggest owning municipal bonds due to the various tax and diversification benefits.  The mounting budgetary problems of US states and local governments have been well-documented and have led to a large-scale sell-off in municipal debt recently.  This may present an opportunity to buy muni funds at a more reasonable price.  Bill Gross certainly thinks so, as documented here.  

However, the skeptic in me wonders if his $4.4M purchase is merely an advertisement for PIMCO's muni funds.  Additionally, even though we've seen a nice selloff thus far, I think munis have much further to fall as states continue to struggle.  I would not be a buyer quite yet.

When the time comes to invest in this asset class, I do like VWITX.  I also think there will be opportunities aplenty to buy at a discount in the closed-end fund space.

Are Markets Efficient?

David Booth thinks so, as explained in this FT article.  I tend to agree with a lot of what he says, especially quotes like this:

“If you look in the mirror and you don’t see Warren Buffett, you’re probably better off in an index fund.”                 -David Booth 

Week In Review

The week that was:

During a holiday-shortened week, stocks were mostly down as investors awaited Black Friday results from the retail sector.  In other news, European sovereign debt worries have resurfaced in recent weeks.  An agreement on aid to Ireland of about $113 billion is expected to be finalized later this weekend.  Portugal and Spain appear to be ready to take their turn in the sovereign debt spotlight next.  Spain’s funding needs are far larger than those of Ireland or Greece, as it is the fourth-largest economy in the euro zone.  Over the next three years, Spain will need approximately EUR 350 billion to roll over existing debt and fund deficits.

Expert network firms, which help investors do deep research by connecting them with consultants, have found themselves in the middle of a massive insider-trading investigation.  Federal authorities are conducting a criminal probe to find out whether inside information was passed along by consultants who work for these expert networks.  Major investment firms like Janus, Wellington, Citadel, and SAC have received subpoenas in the case.

According to the Labor Department, the number of U.S. workers making an initial claim for unemployment benefits dropped last week to a seasonally adjusted 407,000, the lowest level since July 2008.  The decline was considerably bigger than what analysts had expected.  The number of unemployed works who were already receiving benefits fell to 4.18 million, the lowest rate in two years.

Stocks:

The S&P 500 fell 10.33 points this week, or 0.86%, to 1189.40.  The Nasdaq Composite rose 16.44 points, or 0.65%, to 2534.56.  The Dow Industrials fell 111.55 points, or 1%, to 11092.00. 

• Bank of America (BAC) might be on the hook for billions of dollars because of mortgage-documentation problems it took on when it acquired Countrywide Financial in 2008 according to testimony from a recent lawsuit.  BAC stock was down 8.25% on the week.

Bonds:

End of week bond yields:

3 Month yield = 0.14%, up 3 bps from last week.

6 Month yield = 0.19%, up 2 bps from last week.

2 Year yield = 0.52%, up 1 bps from last week.

30 Year yield = 4.21%, down 3 bps from last week.

What to look for next week:

9:00 AM          Wednesday     ISM Manufacturing Index

9:00 AM          Thursday         Pending Home Sales Index

7:30 AM          Friday              ISM Manufacturing Index

International Investing with ETFs

Not to pat myself on the back, but after reading this post on Turkey's outperformance as compared to other emerging markets, I couldn't help but feel good about being right about this post from months ago.

Allright, enough with the back-patting.  The point is that TUR has had a great run and it might be wise to trim part of that position.  From a long-term perspective, however, TUR fits into the international equity portion of a portfolio nicely.  I am currently targeting at least 50% of my portfolio overseas.  I achieve that allocation through a combination of VEA, VWO, GWX, RWX, EWX, country ETFs like TUR, and ADRs.

Global Debt Levels

Here is an interesting graph from the Economist comparing debt levels worldwide from 1932 to 2009:

A Logistics Dream Stock-Pick

I have a friend who works in supply chain management.  This friend is quite fond of himself and often assigns himself nicknames to support his ego.  After finishing a project recently, he proclaimed himself to be "The Logistics Nightmare."  While self-proclaimed nicknames can often be humorous, the business of logistics is no laughing matter.  In an increasingly complex global economy, improvement in economic performance can oftentimes be directly attributed to improvements in supply chain management and logistics, which leads me to the topic of this post:  a leading company in the logistics space.   


Expeditors International of Washington, Inc. (EXPD) has benefited over the last year from a global rebound in freight shipping, but has further room to run and is well-positioned over the long-term as a global leader in shipping logistics.  The company is characterized by a high quality management team, a strong balance sheet, high free cash flows, high return on invested capital, and a sustainable competitive advantage.

EXPD is involved in the business of providing global logistics services.  More specifically, EXPD consolidates and forwards air and ocean freight, acts as a customs broker, and provides additional services like distribution management, vendor consolidation, cargo insurance, and purchase order management, and customized logistics information.

In the air freight and ocean freight areas of the business, EXPD acts as a freight consolidator/forwarder by purchasing cargo space from airlines and ships on a volume basis and reselling this space to its customers at lower rates than the customers could obtain directly from the airlines or ships.  EXPD does not own an asset-intensive fleet of ships or planes, and is able to focus on the complex task of modern international shipping.  Clients benefit from EXPD’s ability to tap into lower shipping rates negotiated by a large-volume broker.  Air freight services account for approximately 1/3 of revenues, while ocean freight services account for approximately 1/4 of revenues.

Customs brokerage and other services account for the remaining 40% or so of revenues.  EXPD acts as a customs broker by helping importers to clear shipments through customs.  Specifically, it helps the importing firm by preparing documentation, calculating and assisting with duties payments, arranging inspections with governmental agencies, and arranging for delivery.  Clients benefit by not having to deal with these complex tasks.  Major customers include Cisco, Wal-Mart, Toyota, and Nike.  However, client concentration is low as no customer comprises more than 5% of revenues.

EXPD’s competitive advantage is derived from strong relationships with suppliers and buyers that have been developed over a long time period.  EXPD also benefits from its vast network, operating 255 sites on six continents.  Competitors seeking to copy the strategy will find it tough to replicate due to the necessity of high volume at each site in order to pay for the reach of the network.

Additionally, EXPD has a strong corporate culture and a high quality management team which has been able to implement the right incentive structure firmwide.  Every employee is treated like a salesperson, and is compensated based on the profitability of their regional office.

In terms of financials, EXPD has no long-term debt and holds a substantial cash cushion of $1 billion.  Return on invested capital has been greater than 30% over the past five years.  Market cap is around $11B currently.   

EXPD stock price has not been very volatile in the last year.  Due to this low volatility there have been few opportunities for entry at a cheap price, but I would suggest an entry at any price lower than $50 if possible.

In conclusion, investors with a long-term perspective should benefit from owning EXPD as part of a diversified portfolio.