Week of September 10, 2007

The Markets
 
If there’s one thing Wall Street doesn’t like, it’s negative surprises and last Friday, the Labor Department unleashed a doozy.

The Labor Department reported that non-farm payrolls fell by 4,000 in August. That was the first decline since August 2003 and was much lower than the estimate of an increase of 115,000 that Wall Street economists expected, according to a survey by MarketWatch. This heightened concern that the economy might not be as strong as had been hoped.

Based on the news, stocks fell from the opening bell on Friday and stayed down the entire day. It’s typical for investors to react in a knee-jerk fashion when material, unexpected news occurs. However, we need to keep in mind that one month’s data does not constitute a trend. Barron’s Magazine wryly pointed out that, “A negative monthly payroll report has predicted 12 of the last four recessions.”

We’ll be looking for additional clues in the economy to determine whether the August payroll data was an anomaly or the start of an economic reversal. One clue may come on September 18th when the Federal Open Market Committee meets. The Fed has said they will do what is necessary to help keep the economy chugging along. If they cut the federal funds rate at that meeting, it may be a sign that they think the economy needs a shot in the arm. The Fed’s action (or inaction) on that day will be very closely scrutinized by market watchers. Stay tuned.
 

Source: Yahoo! Finance, Barron’s past performance is no guarantee of future results.  Indices are unmanaged and cannot be invested into directly.  Three-, 5-, and 10-year returns are annualized.  Assumes dividends are not reinvested.

ARE THE STOCK MARKET AND BEAUTY CONTESTS RELATED? In his 1936 book, The General Theory of Employment, Interest, and Money, the economist John Maynard Keynes wrote:

Professional investment may be likened to those newspaper competitions in which the competitors have to pick out the six prettiest faces from a hundred photographs, the prize being awarded to the competitor whose choice most nearly corresponds to the average preferences of the competitors as a whole; so that each competitor has to pick, not the faces which he himself finds the prettiest, but those which he thinks likeliest to catch the fancy of the other competitors, all of whom are looking at the problem from the same point of view.

Keynes believed that individual investors should take a cue from these newspaper beauty contest participants. Instead of trying to pick stocks that you think are good values, he said you should try to pick stocks that all the other investors—i.e. the market—will think are good values. More specifically, the market represents the average opinion of all investors. The key to beating the market, according to Keynes, is to be one step ahead of the market by correctly identifying how the average opinion of all investors will change in reaction to changing events.

I know that is a mouthful to chew on. The gist is, current stock prices reflect the average expectations of all investors. If you can identify when the average expectation embedded in the stock will change, you may be able to make money. We call this the surprise factor. Based on last Friday’s stock market decline in reaction to the payroll numbers, it looks like very few people anticipated the surprisingly low number.

Maybe this theory is just that—a theory—and not really that practical.

WHILE PRODUCTIVITY LEVELS HAVE INCREASED WORLDWIDE over the past decade, wide gaps remain between industrialized nations and most others. However, South Asia, East Asia, and Central and Southeastern Europe (non-European Union) have begun to catch up. According to the International Labour Office (ILO)’s new report, “Key Indicators of the Labour Market,” the U.S. leads the world by a hefty margin in labor productivity per person employed in 2006. This comes despite a rapid increase of productivity in East Asia where workers now produce twice what they did a decade ago. Specifically, the U.S. posted $63,885 of value added per person employed in 2006, followed at a considerable distance by Ireland (U.S. $55,986), Luxembourg (U.S. $55,641), Belgium (U.S. $55,235) and France (U.S. $54,609).

However, there’s a catch. Americans work more hours per year than workers in most other developed economies. To be fair, measured as value added per hour worked, Norway has the highest labor productivity level (U.S. $37.99), followed by the United States (U.S. $35.63) and France (U.S. $35.08).

Weekly Focus – Read for the Record on September 20th

Have you heard about Jumpstart’s Read for the Record campaign? It’s a national effort designed to raise public awareness about significant discrepancies in children’s language acquisition and literacy skills by encouraging hundreds of thousands of children and adults from across the country to read the same book on the same day.

Best regards,

Fredrick J. Livingston, CLU, CFP

Securities offered through LPL Financial, Member NASD/SIPC

* The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.

* The Dow Jones Industrial Average is a price-weighted index of 30 actively traded blue-chip stocks. 

* The Nasdaq Composite Index is an unmanaged, market-weighted index of all over-the-counter common stocks traded on the National Association of Securities Dealers Automated Quotation System.

* Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.

Brain Teaser Answer:  It contains the numbers one to nine, in alphabetical order.