Closer Look at Unemployment

The Unemployment numbers in the United States have remained high for 2 years and all the stimulus spending have not been able to bring it down. While the unemployment rate has always been known to economist as a trailing statistic to GDP it is still not tolerated to be this high by the American public for this long.

Looking more closely at the numbers we can see that the bottom three industries with the highest unemployment rate are construction at 20.6% of the industry is unemployed making up 12.1% of all unemployed persons, manufacturing with 10.6% of the industry and 10.9% of all unemployed, and the leisure and hospitality industry with 12.2% of the industry unemployed making up 10.7% of the total. The best performing industries are financial services, education and health care, and government jobs.

What the government of the United States needs to do is look at each of these areas and address how the numbers got there and what needs to be done. Manufacturing is the hardest sector to fixed. It is entirely based on supply and demand, the government stimulus will not directly impact this industry. A large reason for remaining stubbornly high is companies that laid off worker during the 2008 recession realized that by making a smaller workforce more productive it didn't need to have as many employees as it earlier thought. Manufacturing jobs will not be coming back in the near future. These employees need to be retooled to work in other areas or new manufacturing jobs need to be created by new technologies and products. One thing the government could do is encourage research and innovation. I would even go as far as new government investment on the scale of the "Manhattan Project" needs to happen but for a civil purpose.

Hospitality and leisure jobs will come back in time. Right now Americans are not taking vacations like they used to because of the unemployment and weak economy. In time these jobs will come back, the economy will recover and Americans will go back to taking vacations, I am not worried about this sector. The IEA recently released 60 million barrels of oil to drive prices down which is a temporary fix that might encourage a few families to take that vacation but will not make a significant improvement in my opinion.

Construction unemployment can be easily linked to the housing bubble burst. The housing market still hasn't recovered and the United States will not see new housing developments being built in the near future. The construction industry is where the government can step in and make the biggest difference. The government needs to reintroduce public works projects like those of the Great Depression. Obviously they can't go back to dam building but there are new projects to update America's infrastructure like repairing what was done last time such as roads, bridges, and water systems. Also new technologies like fiber optics and high speed rail could be funded by the government to create thousands of jobs. To pay for this the government needs to look at what it is spending today on unemployment benefits, what it could make from taxing those now employed workers, and any income the rails, toll roads, and any other income sources. As more jobs are created through infrastructure spending, manufacturing jobs should follow closely and leisure jobs just after that.

There, thanks to ideas from FDR and Eisenhower we just fixed the economy.

Week of June 20th:

Big news this week: New federal funds rate comes out in the United States on Wednesday. Expected to be between 0 to 0.25% change. I don't expect it to change much. The rate is already very low however the Feds might want to keep money flowing between banks to avoid another Lehman Brothers crisis where the banks stop lending to each other. It is still way to early to worry about controlling inflation so rate will not go up, this will also panic the markets. Rates should stay where there are.  Friday durable goods orders and GDP numbers come out. Look for these to either fall short or surpass expectation. If either of these happen the markets should react appropriately. GDP growth is expected to be at 1.9% and I think the economy is in a faster recovery mode than 2%. The dollar is strong, Japan is rebuilding and housing starts were higher than expected.

Now stocks to watch for,
The biannual Paris Air Show took place over the weekend where Boeing (BA $74.16) preview the longest plane every to fly the 747-8. It still seats less than its rival Airbus (EAD.PA $21.44) A380 but it is more fuel efficient and today that is starting to matter more. Boeing was the clear winner at the show. It filled out new orders for the new 747 as well as orders for the brand new 787 Dreamliner, which will start flying commercially this fall. After Airbus has been stealing the market for the last 3 years it looks like Boeing will own the next few with their fuel efficient fleet. I would recommend Boeing and sell Airbus.

With the Greek Debt Crisis still not begin solved the markets are not going to be bullish this week. However for those of you in the United States, stocks and the dollar should fair better than their European counterparts. I do not have and specifics but look for American manufacturing companies that buy a lot of their raw materials overseas. The strong dollar should help them purchase more goods for the same about of money as they did last quarter. I like US Steel (X $41.07) this week on that news.


 

OPEC: Cartel Breakup?

Last week, talks between member nations of the Organization of Petroleum Exporting Countries (OPEC) were described as the worst ever as the Saudi representative commented. The group could not come together and set a target production for the future. Could a breakup of OPEC be in the future?

OPEC is a cartel no matter how much they hate being called one. They limit the production of crude oil to keep the prices high. It is well known that member countries could produce more than the allotted monthly quota OPEC gives to each member. Recently Saudi Arabia increased its production when Libya ceased production due to the ongoing conflict. The recent talks broke up because some members wanted to increase production to bring prices down while other, mostly countries without excess capacity that do not want to see prices and profits fall.

Many have argued that oil above $100 is not sustainable. I believe Saudi Arabia and other member who want to increase production understand this. Western Europe, China, the United States, and other oil importers will seek other sources of energy with prices this high. For example,  ethanol, a gas substitute costs about $3.50/gallon without government subsidies. When oil prices are higher than $80 is when ethanol becomes economically sustainable. OPEC needs to maintain prices so that the importing countries do not seek new technologies that make oil obsolete. While they may bring in record profits now in the future there may be much less demand for oil.

Take this game theory for example
Assuming what they product now is 28,985/month (April 2011 total production in 1000's of barrels) and a barrel of oil's price remains constant.
 

	Increase Production	Keep Production
Present	35,000 barrels/month @ $70	28,985 barrels/month @ $100
Future	35,000 barrels/month @ $60	28,985 barrels/month @ $40

Their profits will look like this

Profits
Present	$2.45 billion/month	$2.8985 billion/month
Future	$2.1 billion/month	$1.1594 billion/month
Total	$4.55 billion/month	$4.0589 billion/month

This is a very rough explanation of oil markets, there are many other factors but basically you can see it is in OPEC's best interest to keep prices where the importers don't search for alternatives.

So I believe OPEC will begin to either raise production to bring down prices or the countries that understand the game I just explained will leave the oil's allocation and begin to produce on their own. There is another game to explain cheating cartels which I will not get into but ultimately a cartel is only good until someone cheats, that is, produces more than what is agreed upon. For the cheater, record profits will be made as the price remains high due to low supple but soon others will realize the cheat has happened and also begin producing more and the cartel is no more. In this example I look to Saudi Arabia as the cheater, they have the most excess capacity and the best relations with the West. I stand by my $80 barrel by the end of summer, it might even go lower.

June 13th Preview

A look back at last week: Last week the market as a whole was sold off and lost about 1.7%. For my picks I was bullish on DE and POT while bearish on LCC. DE beat the street and stayed flat due to a rise in the price of corn. US supply of corn came out this week and my prediction for a tight supply was right, corn prices shot up on flooding concerns. POT faired similarly and was flat on the week. I strongly suggest getting in on these two stocks. LCC was down 8.9% on the week, considerably more than the market due to low traffic and high fuel costs. I'd say I went 3 for 3 last week on my picks.

June 13th-17th
Last week was the 6th consecutive week the major indexes lost on the week and I believe  market is oversold. However I believe because of the news coming this week the market will go depending on how the news is. There is a lot of big news this week. Retail sales and PPI (inflation) numbers come out on Tuesday that, if better than expected could cause the market to rally through the week. Wednesday more inflation (CPI) and industrial productions numbers come out. I expect industrial production to be worse than expected because of a strong dollar, causing US goods to be more expensive and imports to be cheaper. I expect inflation to higher than expectations, oil has remained steady but agricultural products will be more expensive than before as I explained last week. Thursday the last big news comes out for housing starts, I expect 0 houses to be started as the housing market is still in very bad shape. This news will not move the market unless it is better than expected. Look for Monday, Wednesday and Friday to be winning days for the US market.

Last week I talked about corn and how its getting to be too late to plant it, this week let's quickly talk beans. Farmers window to put their cash crop, corn in the ground is closing fast. Farmers are not going to leave the fields bare so less profitable soybeans will be planted across the United States. Bean supply will exceed demand this year look for falling prices of soybeans.

Pandora Internet Radio releases its IPO on Monday. Getting in on an IPO requires you to know somebody but you can get in on the hype of it. Most people who get in sell on the open and make a few dollars doings so. Look for Pandora (P) to sharply rise on the open, start to come back down, and go back up again but I wouldn't ride this stock for more than a day or two.

 Railroads are a great stock to get if you are not in one yet. Warren Buffet likes them so much he bought my favorite railroad, Burlington Northern and bundled it into Berkshire. My pick in the railroads is CSX (CSX 73.48). It has been relatively unaffected by natural disasters this year because it is located mostly on the Atlantic coast. I would stay away from Canadian National Railways (CNI 75.13) because it has been crippled by Mother nature and bad luck. They are diverting much of their traffic around their main lines, particularly in the Dakotas due to flooding and next the had a derailment in Northern Minnesota on an already congested line. I still think railroads are strong but CSX is the leader.

This week will be exciting on Wall Street and could go either way. Be sure to pay attention to those economic reports coming out and make your decisions off them. Also this week I will talk about OPEC and the talks or lack of them between members and what that means for the price of oil. Expect that post on Thursday.

One last pick: Buy blink-182 tickets because they are the greatest band ever and tour with My Chemical Romance. These tickets will be a hot commodity

Week of June 6th

Recap of last week. My picks were WY up SI up and PKN down and I am excited to report I was three for three. Also I was especially excited when MSNBC's Jim Craemer endorsed WY on his show Mad Money, good to see Jim is taking tips from my blog.

For the week of June 6th to the 10th.

Employment data came out last week for the month of May and it wasn't great. Unemployment ticked up to 9.1% and the economy added 54,000 jobs. I think the cause for the rise in unemployment has to be more people entering the search for jobs again. This is good news if you look at it like more people expect the economy to be improving and more jobs to become available. This week the big news everyone is looking for is the International Trade report. Expectations is that trade will be worst than last month but I think the actual numbers will beat expectations thanks to a weak dollar.

It's summer time and that means summer vacations, well usually. Consumer confidence is near all time low levels and discretionary income is hard to find. In the United States the vacation industry and those closely associate with it will be hurting. Las Vegas, Cancun, Disney, are all going to be hurting. More specifically airlines are getting hard especially with oil where it is. I would sell airlines associated with the US market with limited international exposure. The airline I think is worst off is US Airways (LCC $8.89). They are the least efficient of the sector and are over exposed to the United States market. Airlines that may fare better would be European based airlines where "holiday" is a bigger tradition and vacations may be taken more than in the United States.

One thing I observed this week is corn. Pretty exciting right? This year is shaping up to be a very bad year for all agricultural stocks. With the floods, tornadoes, and cold springs the crops haven't gotten in the ground yet across the United States. Corn needs to be in the ground very early in the season or else it doesn't have enough time to grow. Corn prices should be higher this year which makes farmers who got their crops in the ground very happy because they will be getting a very good price. Look for farmers to be buying the new John Deere tractors towards the end of summer/early fall. Buy Deere now before this is reflected (DE $81.95). Other agricultural supporters should also do very well with these high prices such as fertilizer suppliers like Potash (POT $55.17). Buyers of corn will be the losers these high prices. Corn is used in almost all foods as high fructose corn syrup so any major buyer of corn should be seeing high prices if they haven't locked in prices already.

Well this is what I will be watching this week. Let me know what you think. Shout out to Jim Craemer, next time you take my stock tips I want credit and $100.

Debt Ceiling: To Raise or Not to Raise

Recently all the talk has been about the United States reaching their $14.3 trillion debt ceiling. Moody's rating agency just announced today that the Aaa rating of the US's short term credit would be under review if no significant improvement had been made in reducing spending or raising the debt ceiling by this July. The government of the US is gridlocked with the conservatives stressing more spending cuts and no raise in the debt ceiling while the liberals want the debt ceiling raised. Both sides are stressing the need to run a surplus to reduce the deficit but lets just look at the debt ceiling.

Politics aside I think the debt ceiling need to be raised and the United States' Aaa credit rating needs to be maintained at all costs. The debt ceiling has been raised 8 times since 2000 and I agree that this trend needs to be stopped however it should be stopped buy reducing the deficit through raising income and cutting spending and not by setting a limit and risking default on our debt. While keeping the debt ceiling where its at does not mean a default is imminent is does mean a review of a credit and I do believe the will lower our rating. If the rating falls from its current Aaa rating it would make paying off our debt even harder. As we saw in corporate examples, companies ran in the red because of cheap credit as a result of their good credit rating. AIG was operating by paying off old debt with new debt until its rating was lower and new debt suddenly cost a lot more than the old debt they were trying to pay off. I realize this is only one factor in AIG's collapse but it is a good example of what could happen to the US.

Last year, 2010, the United States payed $413,954,825,362.17 in interest expense. The total debt from 2010 was $13,561,623,030,891.79 this gives an average interest rate of 3.05% for the year 2010. A downgrading of US debt would cause interest rates they pay on their debt to raise. a 1% raise of rates on 2010's debt would equal $135,290,907,400 more in interest rate expenses or an extra 1% of the US GDP for 2010. This is something the United States cannot maintain for much longer. This year the US debt is $14.7 trillion and I expect for the first time will hit 100% of GDP. The debt ceiling needs to be raised to avoid a downgrading with the stipulation that this will be the last raise and that major reduction measures will be enacted.

All is not doom and gloom when you take it in perspective. The United States is still far from becoming a Japan. Japan has  225% of debt to GDP while the US is flirting with 100%. Even on the list of the worst of countries debt-wise the United States is still behind the world average and ranks 36 out of 128 on the ranks behind the United Kingdom and Germany. Obviously this scaled is skewed towards the debt heavy countries but it shows the United States is not alone in sovereign debt crisis. The entire world needs to look and its spending and revenues and realize what is a maintainable level of debt/surplus is.