Turning the corner into a bad neighborhood

Last week U.S. jobless claims rose to levels not seen since November of last year.  Specifically, the Department of Labor reported yesterday that folks newly filing for unemployment benefits rose by 12,000 last week to a level of 500,000.

What about the four-week moving average?  Jobless claims rose by 8,000 to 482,500, their highest level since December of last year.

Average: Clearly this is not the trend that anyone wants to see; except employers, obviously.  The “game of chicken” I described awhile back continues unabated.  Consumers won’t spend until employment improves, and businesses won’t hire until spending improves.  So here we sit.  Isn’t this fun?  Unfortunately, consumer will power will break before business will power breaks.  Barring an outside influence, like government stimulus, it looks like the economy is headed south again.  So we have turned the corner…but into a bad neighborhood.  One filled with fear and growing paranoia.  Ouch!

The degree of the slowdown is going to be dictated by just how much of an emotional catharsis consumers feel they need to go through.  The silver lining that I have been talking about for almost two years now is that folks are getting their financial houses in order.  Yes, many people are declaring bankruptcy, or way behind on their mortgage payments.  However, many of those folks were living at, or beyond, their means…and for years.  American budgets resembled American waistlines…and for years.  Unfortunately, just as an overweight body is an unstable vehicle for a healthy life, an overweight economy is an unstable vehicle for a nation.

What to do as an equity investor?

• You can sell while things are still stable and sit in cash and wait for the storm to blow over.

• You can sell your business interests (i.e. stocks) and find other places to deploy your cash.

An example would be in markets not in the first world, say Brasil or India.  Both of these nations have growing economies that are not quite integrated with the first world apparatus.

Another example would be in real estate, where prices are very, very low and not likely to get much lower.  Commercial real estate is probably a better bet at this point because businesses that have struggled have probably already gone under.  Whereas if the employment situation in the U.S. gets worse, then residential real estate prices are likely to go lower faster than commercial real estate.  An ideal vehicle would be a real estate mutual fund focusing on commercial property.  Dividends are often paid by these funds, too.  Income is a good thing, especially when capital gains are tough to come by.

• You can invest in businesses that are themselves invested in long-term trends whose force of momentum will not be swayed as much by gyrations in the economy.  Examples of long-term trends are cleaner energy (fossil fuels are becoming just that), cleaner water (my favorite long-term trend), consumer technology (iTechnologies), and health care (remember that aging population).

This is actually my preferred place to be.  I hate being in cash unless I feel businesses are massively overvalued.  And I don’t feel that U.S. businesses are massively overvalued.  If I were in cash and waited until there was a certainty of appreciation then it would be too late.  My personal preference for a long time horizon means that I don’t look at my personal equity values very often.  This keeps anxiety to a minimum.  Instead I keep up with my companies and make sure that they are continuing to make intelligent business decisions.

What should you do?  Listen to your intuition or let your comfort guide you.  If you are uncomfortable right now then find comfort.  It’s that simple.

Importance grade: 10; there is no more important economic or investment number in the world than U.S. jobless claims right now.  The employment situation in the U.S. is not getting better.  That means that businesses are finally responding to the sphincter clench of the U.S. consumer.  Here we go…to where I don’t know.

Jason