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The Independent Investor: Made In America Returns
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The number of manufacturing jobs in this country has been growing over the last two years. Factories have added 300,000 jobs since 2009. In the first month of this year alone manufacturers have added 50,000 jobs, which was the biggest monthly increase in a year. Those numbers are positive and a good start but let's keep the gains in perspective.
Despite this recent progress, it still leaves us with 5.5 million fewer factory jobs than in July 2002 and 12 million less than we had in 1990. I don't believe we will ever recapture the number of manufacturing jobs the U.S. enjoyed back in the glory days of the 1950s. Remember that back in the day (right after WWII), America was practically the only nation left standing. As such, we had little in the way of competition and accounted for 40 percent or more of the world’s manufactured goods.
Over the next several decades, as both Europe and Asia rebuilt its export capacity, the U.S. experienced a dramatic loss of market share in everything from electronics to autos. Plants closed, jobs were lost and the country went through a wrenching reallocation of resources. But by the late 1990s, America had reinvented itself and emerged as the leader worldwide in high-value industries such as pharmaceuticals, software, aerospace and other sectors.
The emergence of China, India and other emerging markets as low-cost producers of everything from toys to tin cans at the turn of this century triggered an exodus of American jobs as multinationals rushed to establish a foothold in these markets. However, that wave is receding as a combination of economic forces erodes these countries cost advantages. Ten years ago, a factory worker in China made 58 cents an hour. Today, wages are over $3 and are expected to double in the next three years. In India, although a worker may make only half what his American counterpart is making, if you factor in other costs such as productivity, transportation, rising real estate prices, duties and supply chain risks, it now makes more sense to make some goods here.
In addition, the global manufacturing process is increasingly focused on the production of high-value products and as such, labor costs are becoming less of an issue. For example, although labor is becoming more expensive in China, multinationals know that simply shipping the production of those goods to cheaper labor markets such as Vietnam, Indonesia and Mexico is not a viable alternative. These nations lack the infrastructure, skilled labor force, domestic supply networks and ability to produce on a large scale that is necessary to capture those sorts of manufacturing opportunities.
One example of that close to home is a friend’s experience in Vietnam. Several years ago she had attempted to set up a small factory to manufacture and export high quality hand bags from Vietnam. She found that even the most skilled and experienced Vietnamese textile factories were incapable of making a consistent quality product on time. Imagine the problems a Wal-Mart would have in the same area.
"Over the next five years the total cost of production for many products will only be about 10-15 percent less in Chinese coastal cities than in some parts of the U.S.," predicts a Boston Consulting Group study done in August of last year. At the same time, China and India are focused on increasing domestic consumption of goods and services as opposed to simply exporting as much as they can.
More and more of our multinationals are planning on supplying this huge consumer market with the products it now produces in-country for export. Under those circumstances, it makes economic sense to bring some of their production output back home in order to satisfy U.S. demand.
In the meantime, our work force has become lean and mean. America is now considered a "lower-cost" country by many foreign multinationals that are willing to build plants and equipment here. They realize that U.S. workers have had no wage inflation for years and are far more productive and flexible than other competing work forces worldwide.
If the dollar weakens over the coming years, there could come a day when appliances, televisions, computer equipment, furniture, machinery and plastics could once again be produced in this country. Who would have thought?
Bill Schmick is an independent investor with Berkshire Money Management. (See "About" for more information.) None of the information presented in any of these articles is intended to be and should not be construed as an endorsement of BMM or a solicitation to become a client of BMM. The reader should not assume that any strategies, or specific investments discussed are employed, bought, sold or held by BMM. Direct your inquiries to Bill at (toll free) or e-mail him at wschmick@fairpoint.net . Visit www.afewdollarsmore.com for more of Bill's insights.
The Independent Investor: Out of the Tank, Into the Bank
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In some parts of the country, prices at the pump have fallen below $3 a gallon. Nationwide gas prices hovered at $3.61 this week. That's not cheap, but it is a heck of a lot better than paying $4 a gallon or more.
Back in February, I warned readers that gas prices were going higher. At that time oil was flirting with $102 a barrel. It ultimately reached $110 before falling to as low as $84 this week. The driver behind this decline is global oil consumption, which fell to 88.5 million barrels a day by the end of April from 90.4 million in late December and is still falling.
Two factors have impacted energy prices. A slowing global economy has reduced demand for oil at the same time that supplies have been rising over the last 12 months. In addition, the "fear factor" in energy prices has been alleviated somewhat. Have you noticed that Iran has disappeared from the headlines recently?
For months the tension between that Middle Eastern state and the rest of the world fueled fears of a major oil disruption. Investors applied a risk factor of almost $25 a barrel on that possibility. Today, with tensions easing, energy prices have come down to what I consider a sustainable level. For some time I have argued that the proper price of oil should be about $85 a barrel. At that price, I believe that oil prices accurately reflect supply and demand and longer-term global economic growth.
But that does not mean prices won't fall further. Commodities prices of all kinds rarely remain stable and often over or under shoot target levels. Economic growth prospects are being ratcheted down in Europe, where a recession is under way. In Asia, China is the main consumer of oil and its economy is slowing as well. In North America, we are also experiencing a decline in economic growth.
OPEC, according to its economic forecast, expects global oil demand to continue to slow to 87.47 million barrels per day this quarter before firming a little in the third and fourth quarter. Part of that future demand will come from Japan, which has shut down most of its nuclear reactors as a result of the Fukushima accident. As a result, we could potentially see oil prices trend a bit lower to around $75 a barrel before stabilizing at my $85 level.
That's good news for consumers. Every one cent decline in the price of gasoline generates about $1.2 billion in extra spending. Consumers are nervous, however. The soft patch we are experiencing in the economy has been accompanied by a slowing of job growth. Consumers, I suspect, may decide to save rather than spend this windfall gain at the pump. They are painfully aware that short-time gyrations in oil and gas prices are not something that you can count on and can reverse at any given time.
Bill Schmick is an independent investor with Berkshire Money Management. (See "About" for more information.) None of the information presented in any of these articles is intended to be and should not be construed as an endorsement of BMM or a solicitation to become a client of BMM. The reader should not assume that any strategies, or specific investments discussed are employed, bought, sold or held by BMM. Direct your inquiries to Bill at (toll free) or e-mail him at wschmick@fairpoint.net . Visit www.afewdollarsmore.com for more of Bill's insights.
@theMarket: What Were They Thinking?
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In hindsight, the market's expectations made little sense. Why would European Central Bank (ECB) President Mario Draghi, speaking earlier this week, announce a new stimulus package prior to the outcome of Greek elections on June 17? If the moderates win, and there is a 50-50 chance they will, then there may be no need for any kind of immediate stimulus.
Granted, the declining economic picture in Greece certainly helps the anti-austerity, pro-growth, radical opposition party. Unemployment is now at 21.9 percent. The economy shrank yet again in the first quarter as a result of spending cuts and taxes. GDP is now declining at a 6.5 percent annual rate. But miracles do happen and the moderates could prevail in next Sunday's elections, despite the dreadful state of the country's economy. But the ECB is certainly going to refrain from doing anything that might influence that election — including any stimulus initiatives.
Here in America, the buzz was that Chairman Ben Bernanke was going to announce another stimulus package or extend the Fed's present stimulus "Operation Twist," (which ends at the end of this month). Once again I thought this kind of speculation was coming out of left field. In his testimony on Capitol Hill on Thursday, Bernanke delivered a carefully balanced view of the economy without any new stimulus announcements. Instead, he reiterated (as he has done in every Fed statement) that the central bank stands ready to intervene if necessary.
What both Bernanke and Draghi did say was there is a strong and immediate need for politicians on both continents to step up to the plate and deliver on their policy responsibilities. Reading between the lines, we should understand that central bank intervention (without fiscal action) becomes less and less effective. Bernanke said as much to his audience in the Q&A section of his appearance before the Joint Economic Committee of Congress.
Obviously the markets got it wrong this week, although the hope and a prayer stimulus stories did provide the excuse to push the S&P 500 index up almost 3 percent. To those expecting a snap-back rally, like me, the point is that the markets were oversold and due for a bounce; how we got there is immaterial.
So what happens next? As I said last week, we are getting close to a bottom. A good guess would be a low somewhere around 1,250 on the S&P 500 Index over the next few weeks. I'm sorry I can't be more precise, but it is a tough market and there are a lot of moving parts that aren't easy to decipher.
For example, China cut its key interest rate this week by 0.025 percent. Investors took that as a positive sign, hoping that it signaled a round of further cuts in the months ahead. Since growth in China (or the lack thereof) is vitally important to global growth prospects, investors were bolstered by the development. However, a slew of economic numbers are being released this weekend in China. Some China watchers worry that the data will be much worse than expected. If so, investors won't take kindly to that news on Monday.
Then there is the meeting this weekend between Spanish authorities and finance ministers of the EU. News sources believe that Spain will ask the EU's help in bailing out Spain's troubled banks. Bottom line: it is all noise that will insure that markets will remain volatile over the next week. Strap on your seat belts and welcome to summertime in the stock markets.
Bill Schmick is an independent investor with Berkshire Money Management. (See "About" for more information.) None of the information presented in any of these articles is intended to be and should not be construed as an endorsement of BMM or a solicitation to become a client of BMM. The reader should not assume that any strategies, or specific investments discussed are employed, bought, sold or held by BMM. Direct your inquiries to Bill at (toll free) or e-mail him at wschmick@fairpoint.net . Visit www.afewdollarsmore.com for more of Bill's insights.
@theMarket: Fraught With Peril
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Much of Friday's downside action occurred within the first few minutes of the market opening. That is usually the case, leaving most investors no choice but to bear the brunt of the decline. The stock markets in Europe were already falling on their own set of economic woes when the Commerce Department announced that U.S. unemployment rate ticked up from 8.1 percent to 8.2 percent with the economy adding the fewest jobs in over a year.
This was only the latest in a series of disappointing economic numbers that indicate our stop and start economy is slowing once again. Readers may recall that as far back as April, I warned that we could see a slowing in the already moderate growth rate of the economy for a variety of reasons. It was why I advised investors to begin taking profits and getting defensive in the face of the first quarter rally.
As of today, we have basically given back the entire gains of that rally since the beginning of the year. Those who had followed my advice have booked their hefty gains and are sitting on the sidelines. That strategy has paid off.
So here we are at an extremely critical level on the S&P 500 Index. The 200 Day Moving Average has traditionally triggered a change in investment attitudes by many market participants. If the 200 DMA is broken to the downside decisively, it is usually a sell signal. If, on the other hand, the S&P moves above that level and stays there for more than a day or three, it is usually a buy signal. Today that 200 DMA is at 1,284. We are slightly below that level as I write this.
Remember that we are talking art not science, so give that theory a bit of leeway. For example, many times markets reach the 200 DMA, break down through it for a few days and then bounce back above it. So don't go out and sell everything if over the next two weeks we find market averages stay slightly below that magic line in the sand.
Since we won't find out the fate of Greece until after their second round of national elections on June 17, there can be no closure around the immediate concerns of global investors. Will Greece stay in the Euro? If not, what will happen and how will that impact the European Community overall? Yes, "fraught with peril" seems to be an apt description when discussing Europe in June.
So it seems logical that markets will find it difficult to stage any kind of meaningful rally until we know what lies in store for us. Given that markets usually discount the worst in an unknown environment, I suspect that what we are witnessing right now is that discount mechanism at work. In other words, investors are selling the rumors.
That leaves an interesting possibility for what comes after the Greek elections. If traders are selling now, then usually they will buy back on the news, no matter how dreadful it is. I have often stated that markets can deal with the facts, either good or bad. But markets can't cope with the unknown and today there are more unknowns out there than there are leaves on a tree.
We do know that Europe is trouble. We do know that economic data in China, the engine of global growth, continues to weaken and now the U.S. appears to be slowing. We also know that last year's Fed stimulus "Operation Twist" is slated to close at the end of this month.
I find myself looking at columns I wrote a year ago and they are eerily similar to what I am writing today. As such, it would be wise to remember that under these worsening set of circumstances last year, markets and economies declined until central banks both here and abroad announced another set of stimulus measures that sparked huge stock market rallies. It happened last summer as well as the summer before that.
I expect the same will happen again this year, which is why I advised readers to sell in April and reserve the cash. We are not quite ready to invest that money yet but we are getting close. Keep reading and remain patient.
Bill Schmick is an independent investor with Berkshire Money Management. (See "About" for more information.) None of the information presented in any of these articles is intended to be and should not be construed as an endorsement of BMM or a solicitation to become a client of BMM. The reader should not assume that any strategies, or specific investments discussed are employed, bought, sold or held by BMM. Direct your inquiries to Bill at (toll free) or e-mail him at wschmick@fairpoint.net . Visit www.afewdollarsmore.com for more of Bill's insights.
Independent Investor: Treasury Bonds at Historic Lows
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On Wednesday, interest rates on our government treasury bonds spiraled downward once again as investors, deeply fearful of events in Europe, sought a safe haven for their money. Both the U.S. dollar and Treasury bond prices spiked higher as investors shunned risk.
Fears of a systemic sovereign credit failure in Europe were to blame. This "risk-off" trade pushed the Euro to its lowest levels in two years while yields on sovereign debt in countries like Spain, Portugal and Italy soared. At the same time, Germany, Europe's most stable economy, saw the interest rate on its 10-year government debt fall to all-time lows. In a sense, our Treasuries are simply along for the ride as global investors seek to shed their European investments.
In tumultuous times, individual consumers in the United States can simply put their money in a bank or buy CDs in order to protect it. Large institutions who are seeking safety can't really drive up to their local ATM and dump billions in a checking account, so they use U.S. Treasury bonds instead.
These big players are buying these bonds that are effectively yielding a negative rate of interest after inflation. In other words, these institutions are paying the U.S. government a small amount of interest just to keep their money safe. In times like these it's worth it to them.
Unfortunately, if you are an individual retiree who has their money invested in U.S. Treasury bonds, you also have a problem, especially if you are depending on the income from bond interest to maintain your retirement life-style. It will become extremely difficult to make ends meet since, like those large institutions, you too will be receiving a negative rate of interest on your investments. At the same time, your costs of living continues to go up and up. Gas, food, medical costs, etc. are all climbing higher but your income stream is going down.
But for another class of consumers, those Americans who may be fortunate enough to qualify for a mortgage, the decline in Treasury rates may help them lock in a lower rate for a loan. However, borrowers beware.
Many home buyers erroneously believe that their mortgage rate is tied to the interest rate of U.S. Treasuries. They are not. Mortgage rates are tied to an index of mortgage bonds called mortgage backed securities (MBS). Mortgage lenders watch MBS rates closely. Consumer rates are priced according to what the MBS rates are doing over time.
"Over time" are key words. It means that lenders will only reduce consumer rates if they are convinced that the MBS rates have the staying power to remain at a lower level for a sustained period of time. Lenders will not pass on those lower rates to you, the consumer, until they are convinced that the drop in MBS rates is not simply a short-term spike caused by events in Europe this week (as an example).
So although Treasury rates dropped to historic lows this week, mortgage rates improved only slightly. The conventional 30-year fixed rate didn't move at all. Mortgage borrowers will need U.S. Treasury rates to remain at these levels or go even lower before the MBS market responds in kind. Only then, will consumers see a pass-through in mortgage rates. This could take weeks to accomplish.
So what economic meaning should we read into these "historic lows" in Treasury bond interest rates? Well, I guess that without our much maligned, deficit-ridden country and its Treasury bonds, the world would be a much scarier to place to invest. Take that Darth Vader!
Bill Schmick is an independent investor with Berkshire Money Management. (See "About" for more information.) None of the information presented in any of these articles is intended to be and should not be construed as an endorsement of BMM or a solicitation to become a client of BMM. The reader should not assume that any strategies, or specific investments discussed are employed, bought, sold or held by BMM. Direct your inquiries to Bill at (toll free) or e-mail him at wschmick@fairpoint.net . Visit www.afewdollarsmore.com for more of Bill's insights.
