A PUNCH IN THE GUT

This morning's job report caught many off guard.  While the expectation was job creation of somewhere in the 200,000 range, the actual number came in at a paltry 88,000.  The futures market immediately took note and dropped a full percentage point on all of the major indices within 60 seconds of the release.   Looking beyond the headline numbers, it is hard to find any silver linings.  The labor participation rate (those actually in the work force) dropped to its lowest level since 1979 and there are now a record 90 million Americans that are no longer even looking for work.  The labor participation rate comes in at 63%.   The increase in the number of people leaving the work force actually served to reduce the headline unemployment rate illustrating how irrelevant this number has become.  It should also be noted that retail lost jobs while professional services gained jobs in line with previous months.  The lost retail jobs have nothing to do with sequestration and have everything to do with the increase in payroll taxes and consumers having less to spend.  Job losses having to do with sequestration will primarily hit the government jobs and the private sector professional service jobs.  Those potential job losses will begin to show up in months to come.  The numbers do not bode well for future reports. 

Where does this leave us?  It will be interesting to see where the market closes today and where it is after Monday's close.  Often the knee jerk reaction of the market is reversed within a day or two so we shall see.  If there was a shock needed to get those thinking about selling to sell, today's release is as good a reason as we have had in a while.  Alternatively, many had come to believe that the Fed was beginning to think about scaling back their asset purchases (taking away one of the biggest drivers of the market increase over the last 4 years).  However, today's numbers throw cold water on any thoughts that the Fed will be done any time soon.  Perhaps traders would rather have an accommodating Federal Reserve than a growing and vibrant economy.  We shall see.  Earnings start coming with Alcoa's release next week so traders will have much to digest over the next few weeks.  As our recent newsletters have pointed out, the last three years have started much the same with large gains in the first quarter and large corrections in the second quarter.  Are we getting ready to see a repeat of the last few years?  Time will tell. 

Chart of the Day - Which countries have recouped all financial crisis losses?

Chart of the Day - Which countries have recouped all financial crisis losses?

BAM Market Wrap

SAME SONG DIFFERENT VERSE?

DOW HITS RECORD HIGHS

Can it last?

A couple of interesting articles.

High on Steroids

Then and Now

IS THIS IT?

Our most recent newsletter indicated that a correction was likely.  Is the selling of yesterday and today the start of the long-awaited correction to the great start this year?  With just over an hour left in trading, a few significant trading levels have been breached.   For the S&P, the 20 day moving average at 1507 was crossed early in the trading session and the Dow has fallen below the psychologically important 14,000 level with yesterday's losses.  The S&P was below 1500 earlier today but is trying to rally back above that important level.  Often, the last 30 minutes of trading gives a good indication of where the market wants to go so we will be watching the close carefully.  The bulls will need to finish with some strength in order to quell the losses.  As we have discussed recently, a correction along the lines of 5-7% would be normal considering the recent advance and, indeed, would be healthy for the longer term prospects of the market as it would give a good entry point for some of the money still left on the sidelines. 

Many in the financial press are pointing to the release of the Federal Reserve minutes yesterday as the cause for the recent selling.  While the minutes were a little unsettling as some of the members indicated disagreement with the continued easy money provided by the Fed, we don't believe the minutes were all that significant but rather just a reason for those nervous about the steep rise in the markets to take some of their profits. 

Watch the close for whether or not the correction has started or if this is just a little profit taking. 

WHY ACTIVE MANAGEMENT?

In times when the market is moving up on a steady basis, we are often asked why not just use a buy and hold approach?  It is a very good question and one that the financial media often espouses.  It should be noted that the financial media is largely supported by the advertising dollars of the financial industry which would love nothing more than for investors to buy their funds and hold to perpetuity!  However, not to be completely jaded, let's take a look to see if the buy and hold mantra holds true in actual real life situations. 

Let's say that an investor has $100 to invest and an 8 year time frame.  Furthermore, let's assume that the markets follow the usual trend of 3 up years for every 1 down year.

The market returns are:

Yr. 1     10%
Yr. 2       5%
Yr. 3     15%
Yr. 4    -25%
Yr. 5     15%
Yr. 6       5%
Yr. 7      15%
Yr. 8     -15%

Adding up the returns it appears that you have made 25%.  However, the math works much differently.

Yr 1	$110.00
Yr 2	$115.50
Yr 3	$132.83
Yr 4	$99.62
Yr 5	$114.56
Yr 6	$120.29
Yr 7	$138.33
Yr 8	$117.58

In actuality, because of the effect of losses on the portfolio, the value has gained only 17.58% over the 8 years. Furthermore, it does not matter in which year the losses occur - the results remain the same.

With active management, the advisor seeks to capture some portion of the gains while avoiding the losses.  What would happen if an investment professional were able to capture 75%, 60%, 50% and 40% of the gains in the up markets while avoiding 75% of the down markets?


                      75%         60%         50%         40%

Yr 1	107.50	106.00	105.00	104.00
Yr 2	111.53	109.18	107.63	106.08
Yr 3	124.08	119.01	115.70	112.44
Yr 4	116.32	111.57	108.47	105.42
Yr 5	129.41	121.61	116.60	111.74
Yr 6	134.26	125.26	119.52	113.98
Yr 7	149.37	136.53	128.48	120.82
Yr 8	143.77	131.41	123.66	116.28

As you can see from the table above, capturing as little as 40% of the gains in the up years would yield almost the same level of portfolio gains over the 8 years as a buy and hold investor.  Furthermore, a huge benefit of the active management approach would be the lessened stress and ability to sleep through the bad markets without seeing your portfolio drift down 10, 15 or 25% not to mention the unfortunate investor that had a need for his/her assets in the midst of a bad year like year 4.  Oftentimes, a picture is worth a thousand words.

 


So to answer the question posed by this post - why active management?  Why would an investor choose any other way?  Over time the benefits speak for themselves and Bills Asset Management has a 20 year history of effectively employing active management techniques.

BAM MARKET WRAP

THE TIMES THEY ARE A-CHANGIN'