The Float

The April Jobs Report

This morning the U.S. Department of Labor released its initial job creation numbers for April (a below-expectations 88,000) and revised its numbers for February (down 3,000 from the initial report) and March (down 23,000 from the initial report). The unemployment rate inched up from 4.4 percent to 4.5 percent. Four points about all this...

1. These reports tend to be revised and re-revised over time, so it's important not to take them too literally. But the broad secular trend of relatively weak job creation in the post-2001 recovery remains firmly intact.
2. For market participants, the first derivative of any major economic news is how it might affect the Fed, which holds its next rate-setting meeting on Wednesday, May 9th. This report doesn't seem especially consequential for Bernanke and Friends, and most observers (including Interlake) expect no change in the fed funds rate and minor changes if any in the language the Board of Governors uses to explain its decision.
3. Below the headline numbers, the most interesting data point in the April report is the loss of 41,000 jobs in general merchandise stores. Could this be a sign of emerging consumer weakness? We've learned not to underestimate the staying (i.e., buying) power of the American consumer. But at some point, continuing weakness in real estate will have some effect on consumer spending. Not necessarily a disastrous effect, but a negative one. A pullback in retail employment may indicate that some such effect is now underway.
4. By these initial estimates, construction employment fell by a relatively mild 11,000 jobs in April. But with so many undocumented workers in the industry, we think official statistics on construction employment tend to understate things--in both directions. When the industry is weak and weakening, as it is now, we won't see the full pullback in employment because undocumented construction workers are not tracked and reported as fully as their legally employed counterparts. The point: We'd guess that the underlying reality in construction employment is significantly weaker than an official loss of 11,000 jobs might suggest.

Source

Mark Felsenthal, "U.S. adds 88,000 jobs in April, jobless rate up," Reuters, May 4, 2007

Managing Retirement Account Distributions

Over at Marketwatch, Robert Powell offers a solid overview of various issues concerning the challenging rules governing distributions from retirement accounts.

As everyone knows, these issues are going to be front and center for the next few decades as the Boomers enter their "required minimum distribution" years.

We should remind our younger readers that Roth IRAs do not require distributions when you reach the age of 70 1/2 (or any other age), which is one reason we like the Roth vehicle so much. If your employer hasn't begun to offer a Roth option in your 401(k), ask for it. It's a relatively simple addition to the company's retirement plan.

Source

Robert Powell, "Best Ways to Avoid RMD Mistakes," Marketwatch, May 2, 2007

A Meta-Post

This blog entry is about...blogs. Actually, it's a reference to a Reuters story about blogging economists. Anyone interested in the broad contours of the blogosphere should enjoy it.

Source

Emily Kaiser, "Blogging economists draw cyber-crowds," Reuters, May 2, 2007

Wednesday Reading

A few interesting items in the news this morning...

• Thirsty world captures investors' attention
• Overseas competition: Affluent investors fret over U.S. losing its edge
• No Satisfaction: Why What You Have Is Never Enough (WSJ subscription required)
• Do Your Homework (or Buy an Index Fund)

Peter Bernstein on Risk and Return

Over at MarketWatch, Jonathan Burton has a tidy little interview with Peter Bernstein, one of the leading minds in the investment world and the author of Against the Gods: The Remarkable Story of Risk. Key topics include the distinction between alpha (i.e., manager return) and beta (i.e., market return). At Interlake Capital Management, the separation of alpha and beta is the fundamental basis for our investment work.

Major institutions have been running money this way for some time; when tailored to individual investors' unique circumstances, it makes great sense for them too. At the core of alpha-beta separation is the idea that investors should know what they're paying and get what they pay for. Too often mutual funds sell manager skill but deliver only market returns (minus costs and tax inefficiencies, which tend to add up quickly).

We're working on a white paper on the drawbacks of conventional mutual funds, so we'll have more on this topic soon.

Source

Jonathan Burton, "Alpha and bets: Investment consultant Peter Bernstein, on sharpening your portfolio's edge," MarketWatch, April 30, 2007

Bogle Off the Mark on ETFs

In its April 30, 2007, issue, BusinessWeek excerpted a few hundred words from The Little Book of Common Sense Investing, Jack Bogle's latest contribution to the world of personal finance and money management. As many of you know, Bogle founded Vanguard Group in 1974 and is often regarded as "the father of the index fund" (as BusinessWeek puts it).

In the BusinessWeek excerpt, Bogle blasts the exchange-traded fund (ETF) as "a wolf in sheep's clothing" and an invitation to excessive trading by naive investors. We can't do justice to Bogle's entire argument here, we have tremendous respect for him and his investor-friendly efforts over the years, and we've written about excess in the ETF marketplace here and here. But we think he gets a few important things wrong in his criticism of ETFs.

First, his complaint about excessive trading is only as true as a given investor allows it to be. There's nothing inherent in the structure of an ETF that compels trading activity. By facilitating timely, flexible trading (through intraday pricing and the opportunity to sell shares short, for example), ETFs add a level of flexibility investors should welcome--as long as they don't abuse the privilege! But, again, that's a function of the investor, not the investment vehicle.

Second, he writes that ETFs' "tax efficiency should be higher, [but] actual practice so far has failed to confirm theory." We're not sure what actual practice Bogle is referring to here, as our experience has been that ETFs are exceptionally (often completely) tax-efficient. This advantage is a function of the process by which ETF shares are created by institutions and traded between investors (as opposed to the mutual fund process of creation and redemption by the fund company, followed by the distribution of realized net gains to all shareholders, even those who have held shares throughout the year).

Third, Bogle blasts sector-based ETFs...because investors buy and sell them too rapidly. "Could there be speculation going on here?" Bogle asks. Yes, there could be speculation going on here. Welcome to the financial markets! Surely Mr. Bogle knows that the speculative behavior of millions of individual and institutional investors is one reason index funds tend to outperform big, diversified, actively-managed mutual funds.

Fourth, Bogle writes that "sector ETFs as a group are virtually certain to earn returns that fall well short of those delivered by the stock market." But what sane investor would seek to replicate the broad market using sector funds? That isn't the point of these vehicles. The point is to make a bet (or hedge a bet) on a specific part of the broad market. To take one obvious example: Investors who have owned energy and utility ETFs for the last three or four years have done quite nicely. That said, Bogle is right to warn investors not to pile into the best-performing sectors after they've had big runs. That's good advice, and it applies equally to mutual funds, ETFs, and individual securities.

Jack Bogle has done investors many favors over the years. But his latest effort misses the mark in several important ways. There are nuggets of solid advice in this excerpt, but Bogle's broader argument against ETFs is weak. His problem isn't--or shouldn't be--with these excellent investment tools; it's with those who misuse them.

Source

John C. Bogle, "What's Wrong With ETFs?" BusinessWeek, April 30, 2007

The Fiduciary Difference Back in the News

Late last week, a consortium of fee-only investment advisors and the Consumer Federation of America released the results of a survey exploring investors' understanding of the difference between brokers and investment advisors. We've written about this issue here, here, and here.

In this latest research, two familiar findings stand out:

• Most investors don't understand the difference between brokers (i.e., salespeople) and fee-only investment advisors (i.e., fiduciaries).
• If investors did understand the difference, they'd be more likely to work with fee-only investment advisors.

See this item in Investment Advisor for the details.

Source

Kathleen M. McBride, "Investor Forecast: Fog," Investment Advisor, April 26, 2007