The J.C. Penney CEO Shuffle ... Out With the New ... In With the Old

J.C. Penney has fired its new 'all-star' CEO that it hired from Apple not long ago. That's not surprising.

It has replaced him with his old predecessor. That is surprising.

Warren Buffett once said something to the effect that if a 'bad' company and a 'good' CEO are joined, it's likely that the reputation of the company will remain unchanged while that of the manager will be ruined. And that's what has happened at J.C. Penney. The only twist in the story is that the prior 'bad' CEO has been rehired to fix that for which he was fired in the first place. Ah, such is life.

What's Old Is New At J.C. Penney has the story:

"The timing was surprising; the event itself less so. Given the drubbing J.C. Penney's shares and market share took during now-former Chief Executive Ron Johnson's brief tenure, it is understandable the retailer's board wanted to change direction. His departure was announced late on Monday.

But in giving former CEO Myron Ullman back his old job, the board may merely have succeeded in convincing investors the company lacks a compass.

Mr. Johnson's ambitious attempt to overhaul Penney didn't work out like he said it would. The decision to eschew sales and promotions in favor of everyday low prices turned off the store's discount-minded customer base while his "stores within a store"—branded in-store shops—have yet to bear fruit.

But it is important to remember that the J.C. Penney that Mr. Johnson joined in 2011—the one Mr. Ullman presided over for seven years—really was in need of repair. There was a reason that Penney's shares jumped 17.5% on the day in June 2011 the retailer announced Mr. Johnson would take over.

The company's aggressive discount habit had not only cut into pricing power, it had also lowered the retailer's status in consumers' eyes. Thread-worn looking stores didn't make matters any better. Then, as now, rivals like Macy's were taking away Penney's business.

There might be more reason to cheer if it seemed like Mr. Ullman was coming back to Penney with a detailed plan. But the only one he announced within Penney's news release Monday was to "immediately engage with the Company's customers, team members, vendors and shareholders, to understand their needs, views and insights."

That sounds like another round of soul searching for Penney. Frustrated shareholders will want more than that."

See also Penney CEO Out, Old Boss Back In for an analysis of just how tough a job it will be for the new old CEO, or anybody else for that matter, to successfully lead the conversion of the J.C. Penney of today into a viable retailer of tomorrow. Talk about a challenge!

Summing Up

J.C. Penney has been in deep trouble for some time now, and its sales have fallen dramatically.

One thing a business can't do without is customers.

And it doesn't look like the confidence of Penney's investors, employees or customers will improve much any time soon with Monday's firing of new CEO Ron Johnson and the rehiring of old CEO Myron Ullman.

The company is probably in even deeper trouble now, and the Board of Directors appears to be flailing about without a clue as to what to do.

Somebody definitely needs to step up and take charge before it's too late. But it's highly doubtful that Ullman will be up to getting the job done.

In any event, let's wish him, the employees and Penney's Board of Directors good luck as they try to make lemonade out of a bunch of lemons.

But in the end, of course, of course, customers will decide Penney's fate. That's how free markets work.

Thanks. Bob.

Innocence Gone ... Annette is Dead

For my fellow oldsters, Annette Funicello was a biggie during our youth. She died today.

And for you youngsters, ask someone among the oldsters to tell you about Annette and what she meant to the M-I-C-K-E-Y (why?, because we love you) M-O-U-S-E Club that we all watched so faithfully on black and white TV during the '50s.

Annette Funicello, Mickey Mouse Club Star, Dead at 70 has the news:

With The Mickey Mouse Club, 1955-1959

"Annette Funicello, the former star of “The Mickey Mouse Club,” is dead at the age of 70.

Funicello was diagnosed with multiple sclerosis in 1987 and soon after became a spokesperson for research into the treatment of the disease, which attacks the central nervous system. . . .

Funicello popped–literally popped, sideways and smiling—onto black and white living room screens, mouse ears firmly attached, announcing her name: Annette! (In block letters, it was displayed on her t-shirt, just in case, mid-show, you forgot.)

The most popular Mouseketeer in the original 1950s “Mickey Mouse Club” cast, Funicello was soon receiving 6,000 fan letters a month. Boys drooled over her. Girls rooted for her. And until her death on Monday, following a more than 20-year battle with multiple sclerosis, Annette remained swathed in innocence, untainted by scandal, a Disney star incapable of blemishing the brand.

Born in Utica, N.Y., Annette moved with her Italian-American parents to Los Angeles at age four. She was reportedly enrolled in dance classes to cure her shyness—and indeed, a shadow of insecurity always moved behind that sweet face. Discovered by Walt Disney himself–when she was dancing the lead in a local recital of “Swan Lake”—she was soon spun off into a Mouse Club serial, “Walt Disney Presents: Annette.”. . .

 

Annette Funicello in “Beach Party” (1963).

All this was happening while, in an alternative universe, Elvis rocked, Chuck Berry duck-walked and Jerry Lee crossed state lines with his underage bride. Annette’s rebellion never went beyond displaying a bit of a belly button in the series of six “Beach Party” movies she made with her lifelong friend, Frankie Avalon. . . .

Like a Norman Rockwell painting—or a Disney fairy tale—Annette continued her clean-cut path, even finding it difficult to publish her memoirs because her life was so tame. She married agent Jack Gilardi in 1965, and the pair had three children before a quiet divorce. (The kids would provide a backdrop to her Skippy peanut butter commercials, back in the days when peanuts didn’t kill.) In 1986 she married horse breeder Glen Holt, and reunited with Avalon for a Beach Party sequel and tour.

It was while filming “Back to the Beach” in 1987 that Annette first noticed the symptoms: Getting up, she had trouble gaining her footing in the sand. Rumors that she had a drinking problem—the star was spotted, wobbly, leaving a restaurant—finally led her to reveal her diagnosis in 1992. And with this bit of drama—unasked for, undeserved—Annette’s life story was suddenly saleable. Her autobiography, “A Dream is A Wish Your Heart Makes,” its title taken from a Disney “Cinderella” song, was published in 1994; Eva La Rue played Annette in the top-rated TV movie the following year.

In the next decade, first leaning on a cane, then requiring a wheelchair, her vision fading by the day, Annette, by all accounts, never lost her hopeful spirit and gentle grace. “I didn’t go public for a long time,” she told People in 1992, “because I believed people wanted to think that nothing bad ever happens to Annette.”"

Summing Up

First, we get the news of the death of Margaret Thatcher and now Annette Funicello.

That's more than enough bad news for one day.

Thanks. Bob.

Margaret Thatcher and the 'Tina' Factor

Earlier today we wrote about the recommended reasons for investing in the stock market and referred to the nickname 'Tina.' {See "Stocks for the Long Run ... The 'Tina' Factor and Financial Repression.'"}

In a different context, the 'Tina' factor was what British Prime Minister Margaret Thatcher was referring to when she declared her unwavering belief that 'there is no alternative' to a free market system for a free and prosperous self governing people.

The "Iron Lady" was one of a kind and was steadfastly opposed to socialism, communism and big government while steadfastly believing in the power of individual freedoms and responsibilities, free markets and self reliance.

Rare among politicians, she said what she meant and meant what she said.

The editorial Not for Turning is subtitled 'The woman who saved Britain with a message of freedom:'

"In that dreary winter of 1979, the piles of uncollected trash in London's Finsbury Park seemed to stretch for miles. The garbagemen were on strike. So too, at one time or another, were hospital workers, ambulance drivers, truck drivers, railwaymen. Also gravediggers: In Liverpool, corpses had to be warehoused as they awaited burial—yet another long queue that socialist Britain had arranged for its patient masses.

This was the "Winter of Discontent," when Great Britain came about as close to economic collapse as at nearly any point in its peacetime history, and it was the country Margaret Thatcher inherited when, on May 3, she defeated the Labour government of James Callaghan to become Prime Minister—the first woman in the office and 49th in a line that includes some of the greatest figures of Western civilization: Winston Churchill, Benjamin Disraeli, the Duke of Wellington, William Pitt the Younger.

***

Thatcher died in London Monday, at age 87, having earned her place among the greats. This is not simply because she revived Britain's economy, though that was no mean achievement. Nor is it because she held office longer than any of her predecessors, though this also testifies to her political skill. She achieved greatness because she articulated a set of vital ideas about economic freedom, national self-respect and personal virtue, sold them to a skeptical public and then demonstrated their efficacy.

Consider economic policy. Britain in 1979 had a double-digit inflation rate, a top income tax rate of 83% and rising unemployment. Public expenditures accounted for 42.5% of GDP. There were price, dividend, currency and wage controls, although the last of these were flouted by trade unions on whose support the Labour government depended.

 

Margaret Thatcher, 1984

The government accounted for about 30% of the work force. The state controlled most major industries: . . . . What was left of a private economy was smothered in red tape.

Most British policy makers of the time had no real grasp of economics: no idea what caused inflation; no idea how to run state-owned enterprises (much less that government shouldn't run businesses at all); no idea—beyond increasing civil-service rolls—how to create jobs. Worse, the cluelessness was bipartisan. . . .

Thatcher was different, an "instinctive conservative" whose economic philosophy drew from her father's observations of stocking a grocery. Her memoir recalls her youthful wonder at "The great complex romance of international trade which recruited people from all over the world to ensure that a family in Grantham could have on its table rice from India, coffee from Kenya, sugar from the West Indies." She had also, with her cabinet colleague Keith Joseph, spent years transforming those instincts into practical theories for governance.

And so it went for the next 11 years, as Thatcher and her government stopped printing excess money to kill inflation, cut marginal tax rates to unleash private incentives, privatized public housing so the poor could own their own homes, did away with currency, price and wage controls to eliminate the distortions they imposed on the economy, curbed runaway spending and sold off one state asset after another so they might be competently and profitably managed.

All this was done despite sharp short-term economic shocks and in the teeth of immense resistance, particularly from trade unions. In 1984, the coal miners union of Arthur Scargill went on strike for nearly a year. Similar strikes had brought past governments to their knees, but Thatcher, in a feat of immense courage and political skill, remained immovable and eventually won public opinion to her side. As she had famously said of herself a few years earlier (without being believed), "the lady is not for turning."

But staring down labor unions was the least of it. In March 1979, a faction of the Irish Republican Army murdered Airey Neave, her campaign manager. Eleven years later, they murdered Ian Gow, her former private secretary. There would be IRA outrages at the Harrods department store, in London's Hyde and Regent's Parks, in Enniskillen, Northern Ireland, and, in October 1984, at the Grand Hotel in Brighton, where Thatcher was herself the principal target. None of this cowed Thatcher, who understood that the main threat IRA terrorism posed wasn't so much to British sovereignty in Northern Ireland as it was to the very concept of majority rule.
The same went for the Falklands. Critics of that war paint it as a display of jingoism, carried out chiefly for Thatcher's political convenience. Yet the issues at stake were larger than the possession of some rocky and frigid islands in the South Atlantic. Would Argentina's unprovoked aggression be resisted or rewarded? Would 1,800 Falklanders—loyal to the Crown, English-speaking—be consigned without real protest to foreign rule and dictatorship?

There should never have been any serious argument over these questions, but there was. And looking back, it's remarkable how much Thatcher was willing to risk in a fight lesser statesmen would as soon have skipped. Britain lost six ships and suffered hundreds of casualties in the war. But in fighting Thatcher showed that Britain was prepared to defend its rights, its interests and its principles—intangible assets of nationhood that had once made the country great.

These assets served more than Britain. Thatcher understood that Britain's fight was also the West's, and vice versa. So she agreed, over massive protests, to the stationing of U.S. nuclear cruise missiles at Greenham Common as a counterforce to the Soviet SS-20; and she agreed to let the U.S. launch air strikes from British bases against Libya, in retaliation for Moammar Gadhafi's terrorist campaigns in Europe. In summer 1990 she steeled President George H.W. Bush after Saddam Hussein had invaded Kuwait: "This is no time to go wobbly."

Deeper than this was Thatcher's sympathy with what is best in America: freedom, enterprise, opportunity, optimism and the urge for self-improvement. No doubt this reflected Thatcher's background as a grocer's daughter who'd risen on her own talent and effort. . . .

***

Thatcher came to power when Britain and the West were in every kind of crisis: social, economic, moral and strategic. Along with Ronald Reagan and Pope John Paul II, she showed the world the way out. She believed in the inherent right of free men to craft their own destinies, and in the capacity of free nations to resist and overcome every kind of tyranny and injustice.
These were the right beliefs then as now. She was the right woman at the right time."

Summing Up

There will never be enough leaders like Margaret Thatcher.

She spoke the truth, stood up for freedom and accepted the consequences of leading without bowing to the polls and thereby making a mockery out of leadership.

To repeat, the Lady Thatcher always said what she meant and meant what she said.

Today the world is very much in need of but missing that kind of simple and straightforward tell-it-like-it-is-do-the-right-thing leadership.

As is the U.S.

And that's too bad for all of us.

That's my take.

Thanks. Bob.

Georgia Teachers Union ... "Do as We Say, Not as We Do"

The now very public Atlanta school testing cheating scandal is a big deal, and there are many 'teachable' lessons to be learned therefrom.

Never missing an opportunity to 'educate' the public, some of the leadership of the teachers union and government run school administrative bureaucracy have been commenting openly on the unfair nature of the proceedings and the underlying causes of the cheating.

In The Tests Made Them Do It, subtitled 'The teachers union explains the Georgia cheating scandal,' the union makes its case:

"The great Georgia teacher cheating scandal is by now well known, but we can't let it pass without noting the reaction of the teachers unions and public-school bureaucracy. They say the fault lies less with the teachers than with the testing.

"Tragically," says American Federation of Teachers chief Randi Weingarten, "the Atlanta cheating scandal harmed our children and it crystallizes the unintended consequences of our test-crazed policies."

"When test scores are all that matter, some educators feel pressured to get the scores they need by hook or by crook," adds Robert Schaeffer of the National Center for Fair & Open Testing. "The higher the stakes, the greater the incentive to manipulate, to cheat." He adds that "politicians' fixation on high-stakes testing is damaging quality and equity."

So the pressure of "high-stakes testing" made dozens of teachers gather from 2005-2010 at what the indictment calls "cheating parties" or use exacto knives and lighters to secretly open and reseal plastic-wrapped test booklets. And it must have been the test craze that caused the defendants to erase incorrect student answers on state standardized tests and falsify the results.

As it happens, the much-maligned test craze also meant that the inflated test scores helped administrators accumulate performance bonuses as valuable as $580,000 in the case of Atlanta schools chief Beverly Hall, according to the indictment.

The accused teachers deny the charges, but somehow we doubt their lawyers will be using the test-made-them-do-it defense in court. More than 80 educators have already confessed, and some of them will testify for prosecutors. Meanwhile, if your kids are ever caught cheating and blame the tests, you'll know where they got the excuse."

Summing Up

Rather than focusing on improving academic results, the teachers union leadership instead wants to eliminate testing which reveals those results.

Maybe the NCAA basketball finals tonight shouldn't have a scoreboard. And maybe the preliminary games shouldn't have kept scores either. That way everybody wins.

And all the coaches, teachers and others can receive an "A" for their efforts, as can all the "players" and students.

And nobody ever has to improve his performance. Until a real competitor comes along, that is.

Such as people who are receiving real educational experiences and knowledge that they can apply in the workplace of the future.

In that case, guess who wins?

So maybe keeping score is important after all. And maybe we need to use an ACCURATE SCORING SYSTEM with good coaches and impartial referees as necessary parts of the action, too.

That's my take.

Thanks. Bob.

Stocks for the Long Run ... The 'Tina' Factor and 'Financial Repression'

The stock market has been on a strong run the past few years. In fact, due to low interest rates, weak real estate prices, declining commodity prices and a depressed gold market, stocks are pretty much the only game in town now.

So here's the question du jour for individual savers and investors? Does a sharp decline in stock prices lie ahead for stock prices or are dividend paying blue chip stocks still the right place for long term investors?

Well, the right answer to that question is generally to stay with stocks, and it's even more the 'right answer' this time. In fact, stocks are about the only appropriate place for long term investors to put their money today.

And a big part of the underlying reasoning is attributable to government policy in the form of 'financial repression,' meaning simply that the government is financing its growing debt and also trying to stimulate economic activity by keeping interest rates below the rate of inflation.

This in turn benefits debtors and encourages risk taking behavior by market participants while also making owning government or other debt worth less over time. It's in effect a way of rewarding borrowers and penalizing lenders. That's just another reason why investing in bonds is not a good idea for individual investors.

Hence, individual savers and investors now have something being called the 'Tina' factor to consider, which simply argues that 'there is no alternative' to stocks.

The Stock Market and the 'Tina' Factor editorial is subtitled 'Margaret Thatcher's refrain that 'there is no alternative' prompted a nickname that could be applied to investors:'

"Ernest Hemingway once said "the first panacea for a mismanaged nation is inflation of the currency; the second is war. Both bring a temporary prosperity; both bring a permanent ruin. But both are the refuge of political and economic opportunists."

Papa Hemingway saw more than his share of political fraudsters in his day, and he captured a central truth—profligate fiscal policies have generally led countries to extricate themselves from their difficulties through sleight-of-hand rather than true reform. A more modern form of inflation—financial repression—is being undertaken today.

Here the wayward state seeks to pay negative real interest rates on its debt and thus, it hopes, allow inflation to chip away at its principal over time. Savers pay the price. Today, the Federal Reserve is the instrument of this surreptitious wealth tax—buying roughly 60% of the net new issuance of Treasurys in 2012—and the main reason why an investor in a money-market fund can only get 0.02% on his cash while inflation is close to 2%.

That helps explain why the first quarter of 2013 saw both the Dow Jones Industrial Average and the S&P 500 hit record highs. Investors are taking the "Tina" approach to common stocks: In the late 1970s British Prime Minister Margaret Thatcher was nicknamed "Tina" for her response to critics of her steadfast support for free markets—"There is no alternative." With the world's global central banks closing off all other exits, savers are turning into Tinas. Ultimately there may be no alternative for investors seeking returns above the rate of inflation.

The good news is that there are more than a few common stocks that can realistically be seen as good proxies for what was previously thought to be unassailable returns on sovereign debt. After Uncle Sam's debt was downgraded in August 2011, insuring the bonds of 55 private companies was cheaper than insuring U.S. Treasury debt. Today, 27 companies could claim to be better credit risks than the U.S., and a stunning 126 have lower bond-insurance rates than those charged for French sovereign debt.

With the number of public companies shrinking and the pool of triple-A credits dwindling, it wouldn't be difficult to see a new "nifty 50" of sorts, with investors putting more and more money to work in a relatively narrow list of companies that can provide what the Fed and other central banks are taking away. Companies like Merck and McDonald's might not have the authority to tax American citizens or possess nuclear weapons, but they do possess something the federal government doesn't have—money. All can boast of dividend yields that greatly exceed what an investor can earn on 10-year U.S. Treasurys. For Merck and Chevron, the yields are greater than for 30-year government paper.

There has been much recent talk of a "great rotation" into equities from other asset classes, but such a rotation is in its infancy, if it is truly happening. The weekly data for 2013 indicate that equity-fund sales are up meaningfully in the early part of this year, but the phenomenon would have to last longer than three months to signal a bona fide shift in the attitude toward risk.

There is even less evidence to suggest that fiduciaries like pensions and endowments have started to use the long equity portion of their portfolios to make up for some high-profile, short-term misses. It is not uncommon to see large public-pension funds and endowments with allocations to alternative assets of 40% to 50%, while less than 30% rests in public equities. . . .

All of this suggests that the length and magnitude of the current rally might be far greater than what a skeptical public expects. It's hard to say what would be an appropriate multiple for the broader stock market when risk-free rates are negative in real terms. But here's the likely answer: higher than you might think."

Summing Up

The case for long term ownership of stocks is always a strong one.

Today it's even stronger.

Well run companies are in better financial condition than most governments, and they also pay dividends whose yields are higher than the yields on government bonds.

And for stock investors, there's also the additional kicker of both inflation adjusted share price and cash dividend growth over time as well.

There are no guarantees, of course, but the presence of the 'Tina' factor, when added to the prospects for solid long term earnings gains by blue chip companies, bring us about as close as we will ever come to being presented with the opportunity to make a no brainer investment decision.

That's my take.

Thanks. Bob.

Chicago Politics, Finances and Public Sector Pensions ... Mayor Between a Rock and a Hard Place

The rubber is hitting the road in Chicago with respect to funding pensions for public employees.

The city's mayor and the rest of the politicians don't know what to do, and the taxpayers, school officials and public sector union officials apparently aren't going to be able to agree on what must be done either.

Higher taxes, fewer city services and workers and a less expensive retirement program for public employees will all be a necessary part of the eventual answer to the problem, but how to get there is the question for which nobody currently has the answer. It looks like a political stalemate, and that's certainly no solution. Not even a political one.

Chicago Mayor Rahm Emanuel Faces Pension Conundrum describes the ongoing dilemma as follows:

"Mayor Rahm Emanuel . . . is grappling with one of the nation's biggest municipal-pension shortfalls, setting up a showdown with labor unions as he stakes his first term on reshaping city government.

The former chief of staff to President Barack Obama inherited a retirement system for teachers, firefighters and other city workers that is underfunded by almost $24 billion—and the bills are starting to come due.

Under Illinois law, the city schools in coming months must resume regular payments to the teachers retirement system at a cost of $404 million a year, or nearly 8% of current Chicago education spending. Mr. Emanuel also faces a state mandate to more than double payments to the pension funds for police, firefighters and other unions.

If these payments were funded by property taxes, his administration estimates residents would face a 150% increase—an option Mr. Emanuel says he won't consider.

His other options also are tough. Mr. Emanuel could try to reach agreements on benefits cuts with individual unions, though such efforts so far have fallen flat. Or he could bypass unions by persuading the Illinois legislature to trim pension benefits for city employees and current retirees or give the city the power to do it.

Much of this could come to a head in the next two months as the legislature grapples with its own huge state-worker pension problems and Mr. Emanuel is pushing for Chicago to be part of any resulting legislation.

Mr. Emanuel's assessment: Workers are paying into a retirement system that makes unrealistic promises, and the city is offering benefits it can't pay. "The system today as constructed is not honest to the employees and is not honest to the taxpayers," he said in a recent interview. . . .

Mr. Emanuel's national reputation and the city's long history as a cradle of organized labor could make Chicago a key battleground as public-sector unions fight to fend off attempts to claw back benefits. . . .

His relationship with several unions has been rocky. Last month, police sergeants overwhelmingly rejected a pension deal the Emanuel administration saw as a model. The mayor faced off with the teachers union last September in a seven-day strike that didn't address the ballooning pension costs but instead concerned teacher evaluations and layoffs tied to school closings. More recently, the teachers led a pushback against the mayor's plan to shutter more than 50 schools. . . .

Mr. Emanuel says that pension costs loom over any progress the city makes. Within three years, his administration estimates, annual pension costs for city workers other than teachers will reach $1.1 billion, compared with less than $500 million this year, squeezing services from tree trimming to police patrols.

"There's a set of choices. Reform pensions and continue to be able do other things that are essential for a great city—or make pension payments and do certain things to the rest of the budget that are not part of a great city," Mr. Emanuel said. . . .

Chicago has chronically underfunded its retirement systems, setting its annual contribution to the pension funds through a state formula rather than amounts set by actuaries. For the teachers fund, the schools were allowed to pay less than actuaries required. Data from the Boston College study show Chicago on average contributed less than half of what actuaries required between 2007 and 2010, while the vast majority of the cities and counties it looked at paid 100% or more.

Earlier this year, Mr. Emanuel's administration and leaders of the police sergeant's union reached a preliminary four-year contract with a 9% raise in total. In exchange, union leaders pledged to support efforts at the state level to solve the pension issue by reducing cost-of-living increases for current retirees, raising the retirement age and increasing worker contributions.

Union members rejected the deal by a 6-to-1 margin last month, with rank-and-file officers pushing the sergeants to shoot it down. For some officers, the deal belied the mayor's statements that he wanted to work with unions to resolve the pension shortfall. "To me, being a partner shouldn't mean my way or the highway," said Mike Shields, president of Chicago's largest police union."

Summing Up

Chicago doesn't have the money to fund its pension obligations.

Chicago taxpayers can't afford to double or triple their property taxes just to fund the pension deficiency.

Chicago taxpayers don't want to give up city services in order to fund public employee pension shortfalls.

Public sector employees don't want to accept anything less than what they've been promised, even though what they've been promised is unaffordable to the taxpayers.

Meanwhile, the rest of Illinois is in a similar world of hurt regarding these identical issues.

So are many of the rest of America's cities and states.

As a result, Chicago's mayor is between a rock and a hard place. But then again, so are we all.

Stay tuned. This one will not have a happy ending for anybody concerned.

There's simply not enough money to do that.

That's my take.

Thanks. Bob.

Widely Varying State Unemployment Rates Tell an Interesting Story

The unemployment rate in the U.S. is 7.6%. But that's the average.

For example, the unemployment rate in California and Illinois is much higher at 9.5% and 9.6%, respectively, while at the other extreme, Nebraska's rate is 3.8% and that of North Dakota is 3.3%.

It's like the man who has an overall average temperature even though he has one foot in the freezer and another on the hot stove. On average he's ok, but he sure doesn't feel all that well.

Of course, an average national unemployment rate of 7.6% is still pretty bad, but it's not nearly as bad as 9.6%.

And the more interesting question revolves around why unemployment rates in the various states differ so much.

States of Depression says this:

"It's true enough that the U.S. economy is slowly recovering, but job growth has been uneven across the country. While employment in the South and West is improving, the jobs engines in Northeast and Midwest have stalled—and in some cases are in reverse.

According to the February state jobs report, . . . unemployment in Illinois has ticked up to 9.5% from 8.9% in the last year. The jobless rate has also increased to 8.7% from 8.3% in Indiana and to 7.2% from 6.9% in Wisconsin. The major exception to the jobs regression in the Midwest is Ohio, where the rate has dipped to 7.0% from 7.5% thanks in part to an inchoate shale boom.

Michigan is also doing marginally better than a year ago, helped along by a recovering auto industry.

Meanwhile, New Jersey (9.3%), New York (8.4%) and Connecticut (8.0%) remain stuck in neutral. Their unemployment rates are virtually unchanged from a year ago while Pennsylvania's has risen by a half-of-a-percentage point to 8.1%. Unemployment in Maine (7.3%), Massachusetts (6.5%) and New Hampshire (5.8%) is better than in other Northeastern states, but no better than it was a year ago. Rhode Island's jobless rate has plunged to 9.4% from 10.7%, but remains the highest in the Northeast.

The only other states to experience such a steep drop were California (to 9.6% from 10.8%), Florida (to 7.7% from 9.0%) and Nevada (to 9.6% from 11.8%). Not coincidentally, they were among the states that lost the most jobs during the recession and experienced the sharpest declines in real estate values. All three states have been helped by the Federal Reserve, which has propped up their housing markets with low interest rates and purchases of mortgage-backed securities.

Farm belt states such as Nebraska (3.8%), Iowa (5.0%), Kansas (5.5%) have also been helped by the Fed's loose monetary policies, which have kept commodity prices high. However, the real dynamos of the recovery, have been fossil-fuel rich states like North Dakota (3.3%), South Dakota (4.4%), Wyoming (4.9%) and Montana (5.6%). Still, it says something that the only states doing well in the Obama economy are those with an abundance of highly-valued natural resources."

Summing Up

The states are indeed laboratories of experimentation and innovation.

States with an abundance of natural resources and farm belt states are doing well. However, most other states are continuing to struggle.

The future employment story in America will be all about the private sector, innovation, risk taking  and the resultant job creation, coupled with a reformed tax system.

It won't be about the government knows best gang taking actions aimed at 'saving the middle class' or taxing the job creators more heavily.

That's simply not the way the free market system works, and the employment situation today in the fifty states makes that point very directly.

That's my take.

Thanks. Bob.

Got A Mortgage? ... Own Some Bonds or CDs? ... Consider Paying Off the Mortgage Early

We live in a period of historically low interest rates. As a result, the interest rate on mortgages is also at historic lows today.

On the other hand, the interest rates we receive on investments in bonds and CDs are even lower than the rates being charged on our mortgages.

So what do we do? Pay off the mortgage early, that's what.

Thus, the simple answer to what to do with a low interest rate mortgage today is to strongly consider paying off that mortgage early.

Because if we are paying 5% in interest on the mortgage and only getting 3% or perhaps closer to zero on our savings, we'll be saving lots of money by reinvesting that money and paying off the mortgage debt early.

So now let's look at the reasons why it makes sense to do so.

Pay Off That Mortgage Now! makes the common sense based case for accelerating mortgage payments as follows:

"Want to beat the Treasury market? Pay off your mortgage.

Repaying a mortgage early offers, in essence, a risk-free return in the form of the interest saved. Nowadays anyone with a mortgage of 4% or 5% can earn more by repaying the loan than by investing in bonds, which have been rallying for most of the past three decades.

Repaying a mortgage also offers flexibility. If interest rates rise, investors can stop paying extra toward a mortgage and devote that money to higher-yielding instruments. . . .

The concept of "deleveraging," or reducing debt, isn't new. Five years ago, as the economy was shrinking and the stock market was tanking, homeowners began to rethink the amount of debt they carried. Banks reported strong interest in "cash-in" mortgages, which allow people to pay down their principal and reduce their interest rates at the same time.

The problem: People who took money out of their stockholdings to pay down their mortgages missed out on some or all of the stock market's historic rally since 2009.

A better way to deleverage is to use money earmarked for bonds, not stocks, to repay a mortgage.

The strategy makes the most sense for older investors and those who are otherwise investing in low-yielding bonds. But it might work for younger investors as well.

While mortgage rates are low, bond yields are even lower. The average interest rate on an outstanding mortgage was about 4.9% at the end of last year, according to data from the Bureau of Economic Analysis. That is far higher than the 1% in annual interest investors are earning on bank deposits and money-market accounts, or the 2% they are earning on 10-year Treasurys. At those rates, investors probably won't even keep up with inflation over the long term. . . .

Recently many investors have been responding to the collapse in interest rates by taking on increasing amounts of risk, such as buying "junk" bonds issued by less-creditworthy companies. But those carry bigger risks.

Older people tend to have more money in bonds and bank deposits, so the strategy of repaying a mortgage instead of keeping it in bonds is especially good for them.

But younger investors also might want to consider repaying at least some of their mortgage using money they otherwise would invest in bonds, simply because repaying the mortgage offers a higher rate of return than that available in the bond market. If conditions change, they can always put more of that money back into bonds.

What about using money earmarked for stocks to pay down a mortgage? Even here, the case isn't all bad. Sure, the market is rallying—but that could make for lower returns in the future.

What's more, numerous studies have shown that most investors earn far lower average returns than the overall stock market because they are unable to handle the volatility and end up selling when stocks fall, only to buy again after they have recovered. They might be better off, in practical terms, taking the secure return from repaying their mortgage.

But aren't mortgages great tax shelters? Yes and no. Traditionally, one argument in favor of holding a mortgage has been that borrowers can deduct the interest payments from their taxable income.

But thanks to the collapse of interest rates, that tax break isn't worth as much as it used to be. Homeowners paying 3.7% interest on a $200,000 loan can deduct a maximum $7,400 from their taxable income—less than the standard tax deduction, which they can take without even itemizing. Unless they have significant other deductions, the mortgage-interest deduction might not be worth holding on to. . . .

There is one other benefit to repaying your mortgage—sheer simplicity. It is a benefit often played down by financial experts, but many ordinary homeowners prize it.

Some people who repay their mortgages and stop itemizing deductions might find they save money, avoid risk and have a lot more spare time every year around tax season."

Summing Up

So there you have it. Everything is relative, including interest rates.

If we receive less in interest income than we pay in interest expense, it makes sense to pay off our loans with the money otherwise invested in bonds and CDs.

It's just a simple common sense and financially attractive approach to get out of debt and save money at the same time.

And by doing so, we can still maintain the flexibility to reverse course at a later time if interest rates rise sufficiently to make fixed income investments an attractive investment again.

That said, we won't hold our breath in anticipation of seeing substantially higher interest rates anytime soon.

So let's consider taking better control of our finances by giving ourselves a break and paying down our current relatively 'high' interest rate mortgage debt.

That's my take.

Thanks. Bob.

Youth Unemployment and Underemployment Is a Tragedy ... We're Starting to Look Like Europe

Youth unemployment is a huge problem in America today. That said, youth underemployment may be an even bigger one.

And then there's the problem with too much debt associated with student loans and the likelihood that lost employment opportunities early in adulthood will translate into a lifetime of low earnings. All in all, it's not a pretty picture. It's downright ugly, in fact.

And lest the oldsters think that it's not a problem for them, consider this. It's the workers who pay for the entitlements received by the retired among us. But let's not dwell on the oldsters herein. Let's instead stay with the developing tragic story about todays' young Americans.

Far too many of our young people have received too little education, incurred too much student debt and as a result of the weak economy, are now enjoying too few good job prospects. And when they are able to land jobs, they're often low paying jobs for which they're 'overqualified.' And unfortunately, that may turn out to be a structural and not a cyclical problem. If so, even a recovering economy won't solve the unemployment and underemployment issues of our nation's youth.

So while our 'don't-have-a-clue' politicians debate what to do about raising taxes, making government 'investments,' and saving Medicare and Social Security, our youngsters who will become tomorrow's leaders are struggling to get a foothold on the future. Really struggling, as a matter of fact.

Youth Unemployment at 22.9% reviews the employment numbers and reveals the alarming amount of youth unemployment and underemployment that exists today:

"22.9%: The unemployment rate for Americans under age 25, adjusting for the decline in the labor force since the start of the recession.

Perhaps no group has been hit harder by the recession and grinding recovery than the young. The official unemployment rate for those under age 25 is 16.2%, more than double the rate for the population as a whole. In percentage terms, unemployment has fallen far more slowly for young people than for the wider population.

Those figures actually understate the severity of the problem, however. The government only considers people “unemployed” if they’re actively looking for work. People who stop looking—whether they’re retired, in school, raising a family or living on friends’ couches — are instead considered “not in the labor force,” even if they would prefer to work given the opportunity.

When the recession began in December, 2007, 59.2% of the under-25 population was in the labor force, meaning they were either working or looking for work. Today, that figure has fallen to 54.5%. That may not sound like a big drop, but it makes a huge difference. If the so-called participation rate had remained unchanged, there would be 1.8 million more young people in the labor force today than there actually are. Counting those people as unemployed, rather than out of the labor force, would push the unemployment rate up to 22.9%. That’s only a hair better than the 23.9% youth unemployment rate in the euro zone, and has shown only very modest improvement during the recovery.

The decline in the participation rate among the young can’t all be attributed to the recession. Labor force participation among young people peaked at just under 70% in 1989, and has trended downward ever since, primarily due to rising rates of college attendance.

The decline accelerated during the recession, as many young people sought refuge in college or other forms of education or training. In a normal cycle, that might have worked out well, leaving a generation of highly educated workers ready to re-enter the job market when the economy recovered. Instead, they have been graduating into a labor market that remains deeply challenged, especially for those without much work experience. To make matters worse, many graduates are carrying hefty debt burdens, and those who can find work are often being forced to low-skill jobs.

The youth participation rate has largely flattened out over the past three years, but it fell again in March."

Summing Up

Unemployment is a big problem among the young. However, underemployment may be an even bigger one. It's estimated that nearly 50% of employed college graduates are working in jobs that tradtionally don't require a college degree.

As a nation, we need to pay close attention to the plight of the young. The U.S. is beginning to resemble Europe in many ways, and that's not good. In fact, it's very bad.

In our own country, too many experience inferior educational opportunities, beginning in K-12 and continuing through college. And college costs too much too.

And too many incur burdensome student loans along the way which become unaffordable as either the kids drop out of school, graduate without a job or have to take jobs which don't require a college education and therefore don't pay enough for the students to properly service their loans.

The economy is struggling, and we all have a stake in the outcome. If our kids don't get a decent start in life, we're heading in the wrong direction as a nation.

And this much I know. More government spending by the government knows best gang is not the answer.

In fact, the bigger the role of government becomes (look at public education and health care, for examples), the worse our problems will become.

That's my take.

Thanks. Bob.

Have Stock Prices Peaked or Not? ... That Is the Question

The stock market has performed well the past few years and it's been especially strong the past few months. Now we're hearing noise about whether the prices have gone up too much too fast, and if it's time for a sell-off.

If history is a reasonable indicator of what may lie ahead for stock prices, things look good for further appreciation over the next few years, interrupted, of course, from time to time by events which lead to short term declines. Let's review why things look good.

Still at a Trot, This Bull May Have Farther to Go analyzes the current market's price level in terms of history:

"FOR the last four years, market watchers have bemoaned the muted economic recovery, with its sluggish growth, tepid job creation and continuing investor fears.

 

 

Yet the qualities that have kept the animal spirits from returning to Wall Street may explain why today’s bull market, which turned four years old this month, has outlasted the average rally. . . . 

 

“Like a marathoner who didn’t start out at a full sprint, will this bull have more stamina?” asks Sam Stovall, chief equity strategist at S&P Capital IQ. “My belief is this rally could end up lasting longer.”

 

Bull markets do not typically die of old age, but rather from the side effects of a lengthy rebound, market analysts say. Those include an economy that begins to overheat and a sense of overconfidence that develops among companies, consumers and investors, leading to risky behavior.

 

At the peak of the average bull market since World War II, gross domestic product was accelerating at an annual rate of 4.2 percent, according to a recent analysis by Mr. Stovall. By contrast, the most recent G.D.P. report found that the domestic economy grew by a mere 0.4 percent annual rate in the fourth quarter of 2012.

 

Market peaks also tend to show other characteristics: unemployment tends to fall below 5 percent, as companies race to hire; around 60 percent of investors say they are “bullish,” according to sentiment surveys; and the price-to-earnings ratio for the Standard & Poor’s 500-stock index jumps above 18.

 

Yet today, unemployment — though it has been drifting lower — is still at an uncomfortably high 7.6 percent. Only 38 percent of investors recently surveyed described themselves as bullish, according to the latest poll by the American Association of Individual Investors. And the stock market’s P/E ratio, based on the last 12 months of profits, stands below 16, which is close to the historical average.

 

“No doubt, circumstances have improved from a year or two ago, but I don’t get a sense that there’s much excess yet,” said James W. Paulsen, chief investment strategist at Wells Capital Management.

 

There are other signs that “we’re far from the levels of overconfidence that produce the types of excesses that beget a downturn,” Mr. Paulsen added. He noted, for instance, that investors were not overextending themselves by betting on the riskiest segments of the stock market. Household finances are improving. And the ratio of debt payments to disposable personal income is about as low as it has been since the early 1980s. . . .

 

To be sure, there are some signs that Wall Street firms and Main Street investors are starting to embrace risk-taking again.

 

For example, although merger-and-acquisition activity among domestic companies is still far off its 2006 highs in dollar terms, the actual number of deals hit a record number last year. . . . 

 

“Yes, you saw some big, splashy deals in M.& A., but I still think we’re in the nascent stages of all of that,” said Mark D. Luschini, chief investment strategist at Janney Montgomery Scott.

 

As for individual investors, they have started to return to equity funds. Although they yanked a net $281 billion from stock mutual funds in 2011 and 2012, fund investors have poured a net $64 billion into stock portfolios this year through March 20.

 

Still, market analysts point out that even with these impressive inflows, bond mutual funds continue to pull in more money. “The fact that bond funds still enjoy higher flows than equities is not indicative of a love affair with stocks,” said Duncan W. Richardson, chief equity investment officer at Eaton Vance. “This is far from euphoria — this is just puppy love.”. . .

 

Historically, interest rate increases by the Fed have been a bull-slayer. But Ben S. Bernanke, the Fed chairman, is on record promising to keep short-term rates low until at least mid-2015. The central bank would need to see a rapidly improving job market or evidence that inflation is spiking before raising rates, market watchers say. . . .

 

For inflation pressures to start building, wage pressures would have to intensify and factory capacity would have to be stretched. That typically happens only after manufacturing capacity utilization hits 80 percent and the unemployment rate falls below 7 percent, said James T. Swanson, chief investment strategist at MFS.

 

Right now, capacity utilization is at 78 percent and unemployment is at 7.6 percent. Still, Mr. Swanson said, it’s not inconceivable that at today’s pace of economic growth, the levels he described will be reached by year-end. That would usher in a much different market climate, perhaps one not so hospitable to an aging bull."

 

Summing Up

 

Of course, nobody knows what will happen to stock prices in the short run.

 

Still, both the market's current valuation and outlook are quite favorable over the long haul.

 

Thus, the best idea for individual investors is to stay the course, remain in stocks and enjoy the ride for the next several years, if not the next few months.

 

As long as economic growth continues at a moderate pace and inflation and interest rates remain low,  then housing will get stronger, jobs will increase and increasing consumer demand will keep the economic indicators improving. That in turn should help stock prices to grow as well.

 

Things look good for investors willing to take the short term hits and stay the course. The long term direction is up.

 

Thanks. Bob.

The Shrinking Labor Force and Unemployment ... The "Sequester" Has Nothing to Do With It ... Ideas Matter ... Free Lunches are Never Free

Political spinsters are already trying to blame the sequester for yesterday's lousy jobs report. In a word, that's crapola.

Perhaps the recent 2% payroll tax hike isn't crapola though, although it's an example of workers paying for non-working retirees. It's also illustrative of the negative effects that taxation on workers has on consumer demand, the nation's income, economic growth and jobs creating ability.

The same weakening effect is equally true for future tax initiatives which will be implemented to fund the various public sector pension liabilities that are woefully underfunded today.

And the same debilitating impact of taxation is also true for the future consumer spending that won't occur because of the debt servicing obligations, both public and private, which will be required to return many of our private individuals', cities', states', and nation's fiscal affairs to some semblance of sanity and stability.

So the economy is stuck between a rock and a hard place. Only by focusing on private sector investment and sustainable economic growth will we be able to lead ourselves out of the financial mess we've created with the ongoing 'help and leadership' of our government knows best gang, of course.

Making Work Not Pay well describes the myriad of financial problems facing America today:

"In a trend that has defined this weakest of all modern economic recoveries, the jobless rate keeps falling but largely because the labor force keeps shrinking.

The unemployment rate fell to a new four-year low of 7.6%, from 7.7% in February. Good news, except the main reason for the decline was that nearly half a million Americans (496,000) left the civilian labor force. They retired, quit working, went back to school or gave up looking for work.

The economy created a net 88,000 new jobs, 95,000 in private business. This means that for every unemployed American who found a job in March, about five left the labor force. If the Obama Administration can convince another three million or so Americans to leave the job market, the President will be able to hail "full employment.". . .

The average job growth for the last four months is 181,000, and 169,000 over the last year. Nonetheless, in the 45 months since the recession ended, job creation has averaged 113,000 fewer jobs a month than in a normal recovery, according to Congress's Joint Economic Committee.

If job creation had kept pace with a typical expansion, about 4.2 million more Americans would be collecting a paycheck. . . .

Some analysts on the left are blaming this on the modest sequester spending cuts, but you can't find much evidence for that in the March report. Federal civilian employment fell by 2,200 but state and local government jobs climbed by 7,000. The Post Office lost 11,700 jobs in the month, but it also lost $15.9 billion last year.

The sequester certainly can't explain the pullback in private hiring. For that you have to look to Washington's regulatory and tax squeeze that has put a risk premium on hiring. The payroll tax rose by two-percentage points in January, and small business owners were clobbered with an income tax hammer.

Employers also say that new costs and uncertainty about the Affordable Care Act are making them cautious. The rule that small firms with more than 50 employees are subject to new health mandates is capping employment at restaurants, hotels, factories, retailers and the like at 49 workers. Retail trades lost about 24,000 jobs in March.

The deeper concern is the continuing decline in the share of Americans who aren't working or even looking for work. The civilian labor participation rate fell again in March to 63.3%. That's 0.5-percentage points lower than a year ago, and it's a stunning 2.4-points lower than June 2009 when the recovery began. . . .

It's important to understand how striking this job-participation collapse is. Labor participation fell or stayed flat in the recessions of 1973-75, 1981-82 and 1990-91, but then rebounded and kept climbing in the expansions that followed. The bursting of the tech bubble and the minor recession of 2001 knocked about a point off the peak rate of 67.3% in April 2000, but even after the Great Recession ended in June 2009 the rate was 65.7%.

Has the great American work ethic suddenly vanished? Doubtful. A more likely explanation for the shrinking workforce is a failing education system that doesn't give young adults the skills they need to compete in the information economy.

Another probable culprit is the rapid expansion of government payments—jobless insurance, food stamps, Medicaid, disability and various tax credits—that provide millions with an alternative income to getting a job. Research by Casey Mulligan of the University of Chicago and others shows that the generosity of federal benefit programs means that workers face very steep financial disincentives to take a low-wage job. The benefits phase out as they begin to work.

Whatever the causes, this is lost human capital that isn't realizing its full potential or contributing to national well-being. It also means that fewer workers will have to finance the rapidly arriving retirements of the baby boom generation. One of Mr. Obama's favorite talking points is "making work pay," but his tax and welfare policies are shrinking the workforce precisely when we need more workers to pay for the entitlements he doesn't want to reform."

Summing Up

Ideas matter.

And the idea that more government spending is the cure to our nation's financial problems is a terrible one. The Keynesianism based multiplier concept that $1 of additional governement spending will translate into $1.50 of additional economic growth is simply wrong. Politically popular perhaps but wrong.

Free lunches don't exist. Somebody always pays for what we eat. Always.

So as more of us Americans receive an inferior education and then enter the work force later and with fewer skills and fewer opportunities, and as more of us Americans exit the work force earlier with generous retirement payments or "safety net" subsidies, our economic problems will become worse. To repeat, somebody always pays for what we eat. Always.

Look at Europe, Chicago, Detroit, Illinois, California or any number of other "working or not working" situations for clear and convincing examples as to why 'not working' either does or doesn't pay, depending on how we choose to view the picture.

As Pogo said, "We have met the enemy and he is us."

That's my take.

Thanks. Bob.

Labor Force Participation Rate ... Why It's Important and Why It's Worrisome as Well

Yesterday we heard a lot about the importance of the labor force participation rate.

Because of its impact on our nation's economic health and well being, we'll discuss the labor force participation rate more fully and what it all means today. We'll begin with a basic explanation of why tracking and understanding the changes in the U.S. labor participation rate from time to time are essential points of information for all Americans. And then we'll move the conversation forward to why it's at a disturbingly high level currently as well what this portends for future U.S. economic growth.

The nation's total output is a function of the totality of three factors: (1) the total number of people employed in relation to the total working age population; (2) the number of hours these employed people are working; and (3) how productive these people who are working are in each of those hours worked, or how much more output is generated per hour of work compared to a prior point in time.

Thus, it all starts with how many people are employed in relation to the total population, because unless there's employment, there are no hours worked and no productivity gains to be considered.

Workforce Dropout Number Is Worrisome for Labor Market explains the problem with the current U.S. labor force participation rate in simple language:

"Friday's disappointing employment report underscores just how tough it still is to find a job. But perhaps even more worrisome is how few people are even trying.

The share of the population that's either working or looking for work, a metric known as the participation rate, fell to 63.3% in March, its lowest level since 1979. Nearly half a million Americans dropped out of the labor force in March, the biggest one-month decline since December 2009.

The participation rate doesn't get as much attention as the better-known unemployment rate, but many economists consider it a better gauge of the labor market's long-term health. The jobless rate only counts people who are actively looking for work; it ignores the millions of Americans who have given up looking entirely.

Plenty of people are also leaving the labor force for more benign reasons. Six of every 10 workers who drop out each month had jobs the month before—in other words, they are retiring, going back to school or quitting work to raise children. The aging of the baby-boom generation means the participation rate would have fallen in recent years even if the last recession had never happened.

But demographics alone can't explain the downward trend. March's labor force decline was concentrated not among retirement-age baby boomers but among those under age 25, who accounted for nearly half of all drop-outs. The participation rate among those under 25 has fallen below 55%, from just under 60% when the recession began. That reflects to some degree the long-run increase in college attendance, but the big one-month drop also suggests young people are struggling to find work in the still-shaky economy.

Among those in the middle of their working lives, the downward trend is milder but still unmistakable. The participation rate for so-called prime-age workers—those between 25 and 54—was 81.1% in March, the lowest level since 1984. There is no benign explanation for that decline: The number of prime-age workers counted as "unemployed" has fallen by 731,000 in the past year, but just 166,000 of those workers found jobs; the rest simply gave up looking.

The shrinking labor force has long-term implications for the U.S. economy. Economic research has shown that the longer people stay out of work, the harder it is for them to find jobs—thus many of the recent drop-outs will likely never return to the labor market, even as millions of baby boomers are poised to retire. Barring a rapid economic acceleration that leads to a hiring surge, that will leave a smaller share of the population supporting the economy.

At the same time, many of those who do return to work will be forced to take jobs that pay far less than the ones they held before the recession, while many young people have missed out on early-stage career opportunities that are critical to earnings later in life. For them, the scars of the recession are likely to last long after hiring eventually rebounds."

Summing Up

We absolutely have a jobs crisis in America.

Unfortunately, the politicians are too busy playing games to come to grips with the need to (1) emphasize private sector growth by reforming the tax code to stimulate private sector investment, (2) facilitate the development, sale and efficient distribution of our nation's abundant domestic energy resources and (3) enact the necessary legislation to bring our long term entitlements spending under control.

If we did those three things, the economy would grow, deficits would shrink, our long term financial situation would improve, consumer demand would pick up and jobs would increase.

And all along the way, the U.S. labor force particpation rate would increase, thereby causing a substantial increase in our nation's employment and rate of economic growth.

It's really all that simple, and it must be done at some time, so why not now? Politics, that's why.

That's my take.

Thanks. Bob.

One More Look at Unemployment Rate ... The Broader U-6 Rate Paints an Ugly Jobs Picture

It's bad enough that only 88,000 new jobs were created last month and that the unemployment rate still stands at a high 7.6% after ticking down from 7.7% the prior month.

On the surface, there's better news when looking at the broader calculated rate of unemployment for the month of March. Although the broader U-6 rate fell by 0.5% to 13.8% for the month, that's really bad news, too. Please read on to learn the reasons why that's the case.

Bad News: Broad Unemployment Rate Tumbles explains why what on the surface appears to be good news is actually bad news:

"Unemployment rates dropped for the wrong reasons in March. The main U.S. rate ticked down to 7.6%, while a broader rate that includes discouraged workers tumbled 0.5 percentage point to 13.8%.

The drop in the main unemployment rate was driven by a huge drop in the number of people in the labor force. The unemployment rate is based on the number of unemployed — people who are without jobs, who are available to work and who have actively sought work in the prior four weeks. The “actively looking for work” definition is fairly broad, including people who contacted an employer, employment agency, job center or friends; sent out resumes or filled out applications; or answered or placed ads, among other things. The unemployment rate is calculated by dividing the number of unemployed by the total number of people in the labor force.

This month the number of unemployed dropped by nearly 300,000, but it doesn’t appear that most of them found jobs. That’s because the number of employed people also tumbled by more than 200,000. Both numbers dropped because the total number of people working or looking for work tumbled. The labor force participation rate fell to 63.3%, the lowest level since 1979 when women were still just beginning their move into the labor force.

The issue is even starker in the broader unemployment rate, known as the “U-6″ for its data classification by the Labor Department. That includes everyone in the official rate plus “marginally attached workers” — those who are neither working nor looking for work, but say they want a job and have looked for work recently; and people who are employed part-time for economic reasons, meaning they want full-time work but took a part-time schedule instead because that’s all they could find.

In March, the rate dropped even further than the headline number to its lowest level since 2008. That was due to a huge drop in the number of people working part time but wanting full time work. . . .

The big drop in the labor force and underemployed workers suggests that the long-term unemployed are getting discouraged and dropping out of the labor force. The number of those unemployed for more than six weeks dropped in March, indicating many are just giving up. The longer one is unemployed, the harder it becomes to find a job."

Summing Up

The news on the employment front is bad no matter how we look at it. And this is despite a drop in the calculated unemployment rates, both as narrowly and more broadly defined as well.

In simple language, there are fewer people who are labeled as unemployed, simply because there are more people who have grown discouraged and dropped out of the work force.

For the month of March, it appears that ~500,000 people simply gave up looking for a job.

And sadly, perhaps they had a good reason to give up looking.

That's my take.

Thanks. Bob.

Unemployment Rate Drops as Labor Force Participation Rate Drops ... What It Means

The nation's unemployment rate last month fell from 7.7% to 7.6%.

The labor force participation rate fell 0.2% to 63.3%, its lowest point since 1979.

See U.S. Economy Adds Just 88,000 Jobs which is subtitled 'Unemployment Rate Falls One-Tenth of a Percentage Point to 7.6%.

So what does this combination of a falling unemployment rate and falling labor participation rate mean? Unfortunately, nothing good.

Jobless Data May Throw Market a Curve uses this simple example to tell the story:

"The unemployment rate could drop as much in the next 12 months, by 0.6 percentage point, as in the last 12, even if the economy only gained 107,000 new jobs a month. That would be so if workforce participation fell at the same rate as it did during the previous period.

But if participation recovered to year-ago levels, the economy would have to add 251,000 jobs a month for the unemployment rate to fall at the same pace. Clearly, the same jobless rate can mean drastically different results for the economy."

Summing Up

The lower the number of people working in the U.S., the lower the nation's total economic output, aka GDP, will be.

And the lower the labor force participation rate compared to the total working age population, the fewer total number of people there are that are working and seeking to find work.

Mathematically, however, the smaller the total labor force is as calculated, the lower the official unemployment rate will be for any given total number of people who are working.

Hence, a lower reported unemployment rate results when people drop out of the labor force due to becoming discouraged about the prospects of finding employment. For purposes of the unemployment calculation, they simply disappear.

Hence, we can arrive at the mathematical result of a lower unemployment rate, a weaker economy and a lower than desired level of GDP at the same time. When that happens, we report a lower unemployment rate even while the economy stays sick. And that's exactly what is happening.

Accordingly, the most important employment number to watch each month is not the unemployment rate. Instead it's the number of new jobs that have been created. And the sad fact is that we're not coming anywhere close to creating enough jobs in America today.

And until we reach a consistent level of 300,000 new jobs each month, which is a very long way off, there's no reason to feel very good about what's happening in the U.S. economy.

That said, there is some good news from today's weak employment report. We can anticipate that the Federal Reserve will keep interest rates at historic lows for a very long time to come.

And oil prices are showing declines again today as well, falling another 0.6% to $92.65 in afternoon trading. That's roughly a total 5% drop in oil prices in the last three days. Consumers will benefit.

What all that means to me is that it's still a very good idea to stay invested in blue chip dividend paying stocks for the long run, regardless of any short term stock market declines.

At least that's what I'm doing.

Thanks. Bob.

Economists React to Lousy Jobs Report ... Bad but Not Awful

'Punch to the gut': Reactions to March jobs report has this insight from several economists about today's disappointing employment news for March:

"Here are reactions from analysts and others to Friday’s jobs report showing the U.S. economy added just 88,000 jobs in March, far less than economists had expected.

• “The modest 88,000 increase in non-farm payrolls in March is further evidence that the U.S. economy is undergoing another spring slowdown, albeit from a pretty rapid pace of growth in the first quarter.” — Paul Ashworth, chief U.S. economist, Capital Economics.

• “Today will be another unhappy day for a recently unhappy equity market, and a positive for bonds, as investors adjust to a slowing pace for U.S. growth.” — Avery Shenfeld, CIBC WM Economics

• “This jobs number probably isn’t the fault of the sequester. But it’s evidence that the economy can’t take the sequester right now.” — Ezra Klein, Washington Post writer, ‏@ezraklein

“This is a punch to the gut. This is not a good number. And I think now you’re going to interestingly start seeing a lot of discussion about maybe the sequester’s a bigger deal than people thought it was.” — Austan Goolsbee, former chairman of President Barack Obama’s Council of Economic Advisers, in an interview on CNBC.

• “The president’s policies continue to make it harder for Americans to find work. Hundreds of thousands fled the workforce last month and unemployment remains far above what the Obama administration promised when it enacted its ‘stimulus’ spending plan.” — House Speaker John Boehner.

• “We don’t think there is enough signal here to conclude the US economy is wobbling, rather it appears that the underlying trend has not improved as much as the January-February data suggested. It almost goes without saying that this will leave Fed policy in full force for now despite the decline in the unemployment rate.” — Julia Coronado, BNP Paribas.

• “The weaker payroll number was also supported by the 206k decline in household employment and the 496k decline in the civilian labor force. This mix of data when combined with a mixed deal on the work week and a 0.3% decline in hourly earnings suggest that the labor market is not going to lift the economy into a self sustaining trajectory. The wide inflation adjusted trade deficit report for February will also get the Bulls very concerned about their 3% Q1 GDP projections. I expect they will temper these to 2%.” — Steven Ricchiuto, chief economist, Mizuho Securities USA.

• “Moderate payrolls growth

Positive revisions

Weak household survey

Declining unemployment

= A disappointing report, but not dreadful.

B/B-” — Justin Wolfers, professor of economics & public policy, University of Michigan"

Summing Up

More to come later.

That said, weak is weak.

Still, the economy is still growing but not a disaster.

There's no U.S. recession ahead but no solid recovery is in sight either.

That's my take.

Thanks. Bob.

Bad News on Jobs Front

The unemployment numbers have just been released for March, and they contain bad news for the economy and jobs growth.

While the unemployment rate ticked down from 7.7% to 7.6%, jobs growth was a low 88,000 compared to a forecast of nearly 200,000.

The drop in the unemployment rate was actually bad news as well as it resulted from a fall in the labor force participation rate again.

So we have lots of debt, high unemployment and not enough consumer demand. It looks like a long slog ahead.

U.S. economy creates 88,000 jobs in March has the breaking news:

"The economy generated just 88,000 jobs in March - the smallest gain in 10 months - and more people dropped out of the labor force, adding to a fresh pile of evidence that the pace of hiring in the United States has slowed.

The unemployment rate fell a tick to 7.6% from 7.7%, the lowest rate since December 2007, but the decline stemmed from fewer Americans looking for work, according to Labor Department data. The jobs report fell well short of Wall Street forecasts. . . .

Employment gains for February and January, however, were both revised higher and people who do hold jobs put in more hours, Labor said Friday. The number of new jobs created in February was revised to 268,000 from 236,000, while January's figure was revised up to 148,000 from 119,000.

The biggest increase in hiring in March occurred in professional services (51,000) and health care (23,000). Retailers and government trimmed employment. Average hourly wages edged up 1 cent to $23.82, reducing the 12-month increase to 1.8%. The average workweek rose 0.1 hour to 34.6, a sign that workers are putting in more overtime.

The participation rate, a measure of health in the labor market, slid again to 63.3%, marking the lowest level since 1979."

Summing Up

The news on the jobs front is not good news, of course, but nevertheless, it's always best to know where things stand.

With ongoing high fiscal deficits and debts, accompanied by high unemployment and increased payroll taxes, it's likely that weak consumer demand will continue for a long time to come.

As a result, people will continue to drop out of the work force and unemployment will remain far too high.

We'll have more to say later.

Thanks. Bob. 

March Unemployment Report Due Out This Morning ... More Private Sector Jobs = More Consumer Spending = More Economic Growth = More Income = More Government Tax Receipts = Lower Deficits and So Forth

We're awaiting the March unemployment numbers which will be released at 8:30 am Eastern time this morning.

The unemployment rate is expected to remain at 7.7% and expectations are that new jobs created during the month just ended were approximately 200,000. See Job Market Remains a Wild Card in Recovery Picture.

Meanwhile, the consumer has certainly come through in 'winning fashion' by spending at a strong pace throughout the first quarter. That's a hopeful sign of more good things to come for the remainder of 2013.

In a reference to basketball's March Madness and the surprising performance of Wichita State in the NCAA tournament thus far, Consumers Are Wichita State of U.S. Economy discusses consumer spending growth in Q1:

"The consumer sector has become the Wichita State of the first-quarter economy. Against all odds, they keep playing on.

Maintaining that momentum into the spring, however, may be difficult unless businesses add jobs at a faster pace.

Consumers were supposed to slow their spending in the first quarter under the burdens of rising tax rates, higher gasoline prices and general uncertainty about government finances.

Instead, households increased their purchases at healthy clips in January and February. After adjusting for prices, real consumer spending grew at a 3.0% or so annual rate so far in the first quarter. . . .

Since the consumer sector accounts for the bulk of demand in the U.S. economy, the first-quarter strength has busted the forecasts of most economists, along with assists from faster inventory building and stronger construction spending. . . .

J.P. Morgan Chase said they now estimate real gross domestic product grew 3.8% last quarter, up from their previous 2.7% estimate and far above the 0.4% gain in fourth-quarter GDP.

While some of the revision reflects faster construction spending, the JPM group writes, “most of this revision is due to stronger-than-expected consumer spending data reported last Friday.”

The first-quarter spending spree, however, isn’t the first step in a new trend. Consumers will have to adjust eventually to lower take-home pay. The Washington sequester is cutting government outlays and jobs. Even an earlier-than-usual Easter may add strength to March retail sales but at the expense of April.

What could be a game-changer to the consumer outlook? Faster job growth.

The next read on the U.S. economy will come Friday with the release of the employment report. Economists think nonfarm payrolls grew 200,000 in March. That is a solid number, but it may not shift the outlook since the increase would be less than the 236,000 new jobs created in February."

Summing Up

So far, so good.

And lower gasoline prices should lift consumer spirits during the spring and summer, along with a better housing market.

If the private sector jobs number this morning comes in surprisingly favorable (over 200,000 new jobs) or at least not disappointingly poor, that could add further impetus to consumer spending as well.

In any event, if the government knows best gang just doesn't screw things up too much, we seem to have entered a slow but lasting period of stable economic growth.

And while we're at it, let's hope too that Wichita State doesn't disappoint its upset minded fans tomorrow.

Stay tuned.

Thanks. Bob.