Markets, jobs – wild ride in ‘momentum’ economy!

Let’s talk about momentum in markets first, and then get into the philosophy of ‘growth’ for growth’s sake and it’s impact on the job markets and on the economy.

If we look at what’s driving stocks right now, it’s all about momentum according to Ford Equity Research. The best performing stocks have one thing in common…momentum. If this seems silly (sort of like saying the people who are most fit do lots of excercizing) I’d agree at first glance, but it’s not that simple. What’s significant is that stocks exhibiting dividend growth (momentum), earnings growth (momentum) , and estimate revision are all moving up in tandem – this is not always the case. During the 2000 tech bubble there was no correlation at all between stock price appreciation and earnings….after all for really hot IPO’s there were no earnings to speak of.

Characteristics of best and worst performing stocks (Ford Equity)

Best:
price gain-past year, 5-yr dividend growth, 1-qtr eps growth, value/momentum
model, 1-mo change in fy2 estimates

Worst:
normal pe/5-yr average, net profit margin, peg ratio, pe based on normal eps,
beta(high)

On the flip side, there’s also an aversion to ‘expensive’ stocks which in my opinion is very good news indeed. This confirms my prediction months ago that there’d be an increase in market breadth (less focus on resources, precious metals) and those sectors that were being totally ignored (Health Care for example) were poised to see some action.

Momentum was once the darling of the technical analyst (chartists) but in the past decade or so has been adopted by hedge funds, quantitative-oriented money managers and even retail investors because the data is so readily available and computer-based Market screening tools cheap and ubiquitous. In my younger days, if I wanted a feel for earnings prospects I had to actually travel to a company’s offices and ask questions.

I’ve lived by the philosophy that the best returns are still earned by those of us who spend all of their time (a few professional fund managers still do it the old fashioned way) getting invested in stocks, sectors or asset classes before momentum is evident (go long early, or for those evil short-sellers, try to short the stock or asset just before the bottom falls out due to a downward revision in earnings or other bad news). Early in my career I (like others) did my own quant research and discovered that you actually could still make good money buying securities even after the momentum (especially in profitability) became evident. Although you’re a bit late, you’re not too late! But back then information travelled pretty slowly – and getting invested before most of the herd wasn’t too difficult. This may or may not (probably not) be true today, since information moves faster than food through your bowels on a Mexican vacation.

An recent article in the Globe & Mail listed some ‘momentum at a reasonable price’ stocks which included Bombardier (+35.7% so far this year), Canfor Pulp Fund (+32.%) and even Telus (+22.0% year-to-date). Surprised? In the U.S. market, stocks with the strongest rebound from their 52-week lows (spectacular triple digit returns) include Tiffany & Co., National Semi-Conductor and even Harley-Davidson (I ride the bike, but didn’t buy the stock….idiot eh?). Respectable showings by Alcoa, Abbott Labs and Adobe Systems serve to further illustrate my point. These babies weren’t getting much respect by the talking heads on TV, and I sure didn’t see many sell-side analysts banging the table on them a year ago or since.

A note of caution though – getting into a momentum play too late can spell disaster. Take this quote from my recent book to heart:

“The stock price of a company goes up because people are buying it. In fact, the price of anything goes up because there are more buyers than sellers. Understanding this dynamic will go a long way to improving your investment results.”

If you still own the momentum play when the whole world has bought into it….there’s nobody left to buy more of it (only the existence of many willing buyers creates good momentum) and suddenly there’s a mob of potential sellers (desperate sellers cause bad momentum).

The insatiable appetite our society has for “momentum” does create opportunities – jumping on the band wagon early really works (personally, I’d still rather be driving the wagon). But it also has created the wild ride (aka volatility) that puts ever-increasing stress on the financial system not to mention our livelihoods (jobs). As hinted at in previous postings – the urge to splurge is causing huge swings in almost everything, and was the prime cause of the financial crisis (a willingness, or rather an eagerness to lend and borrow in order to generate even more growth). Unfortunately, once momentum turns negative, the panic to avoid even a brief bout of negative growth is frantic. This panic (selling hysteria) becomes a self-fulfilling prophecy – witness Research in Motion, Portugal, Spain and now Italy.

Increasingly volatile markets is the more obvious symptom of our momentum driven society, but volatile markets have an impact on the rest of the economy and therefore jobs. If you dig into very old employment reports, you’ll find that occupations in financial services were described as being more stable than most others. Government jobs would also fall into that category. Look what’s happened in recent years:

Understandably, since it was and is a ‘financial crisis,’ the financial services industry has experienced a contagion of mass layoffs around the globe. The ‘crisis’ was certainly the catalyst, but I would argue that productivity improvements in recent years in both information management and transactions technologies were creating a paradigm shift that contributed to huge windfalls (government policies designed to fuel housing growth contributed as well) in the sector – and those windfalls provided a whole bunch of extra money to waste gambling in capital markets. Don’t we pay the same (or more) fees to get service from a bank machine instead of a tellar? Don’t we apply and manage our mortgage and loans online? Don’t we invest our savings online? All of this means fewer people need to be on their payroll. Downsizing that should have been conducted methodically and gradually, and would have been if it weren’t for the (momentum) windfalls financial institutions believed they were making, now had to be done all at once in desperation. All those folks – many recent CFA’s and university graduates – looking for careers in financial services might want to reconsider their options. Even older portfolio managers like myself are being replaced by those dreaded algorithms.

Following the bursting of the tech bubble and subsequent recession (2000 – 2003) it was extremely difficult to get a job at any technology company…..and it remained difficult for several more years. There was job growth (see chart) in other segments (like housing, resources and financial services) of the North American economy, but how many computer programmers fresh out of school at the time were prepared or qualified to go to work mining the oilsands in northern Alberta?

Even now there is evidence of slow but improving job growth. Perhaps a snapshot of the past month might give us some insight into where the job action “is” and also which sectors of the economy are doing okay in this environment. Keep in mind that despite the crappy housing market and high unemployment, corporate profitability in the U.S. is in fact booming.

Note that ‘current’ data shows that jobs relating to ‘financial activity’ as well as ‘government’ and of course ‘construction’ are still suffering declines. “Main Street” America appears to have survived and may indeed thrive, while “Wall Street” and “Pennsylvania Avenue” still have much fat to trim. Do you think the increase in ‘travel and leisure’ jobs might have something to do with so many former financial services employees and government workers deciding to vacation with their severance pay?

At the risk of oversimplifying, the western world’s obsession with ‘momentum’ caused the tech bubble, the housing bust and financial crisis, and has contributed to the resource boom and likely a significant resource bust somewhere down the road.

A byproduct of our love affair with momentum is increasing volatility in our everyday lives, which has become as commonplace as divorce. But can the global economic structure that exists continue to cope with the growing level of stress? Can individuals continue to cope? Certainly the job market is showing signs of stress. We seem to repeatedly ‘grow’ ourselves right out of our jobs. Do you suppose the gentleman pictured in this photo is emotionally and financially prepared to become a waiter or camp counselor?

Then again, maybe there’s a reason our kids seem so irresponsible and willing to hop from job-to-job in the blink of an eye – perhaps evolution is hard at work and the next generation is better suited to the ‘momentum economy’ that is evolving. Hmmm…

It isn’t all bad! Momentum ‘fever’ is largely responsible for the rapid advances we’ve enjoyed in technology and productivity; the quantum leap in both the standard of living and the quality of life for a substantial and growing portion of modern civilization. That’s the good news.

The bad news is what happens when our lust for growth can no longer be satisfied? Can the global economy be managed in a more static or no growth scenario? The Roman Empire managed growth remarkably well, but when it could afford to grow no longer, the system that had evolved proved not at all suited to managing a static empire. The empire was then a sitting duck for the invading barbarian hordes.

Anyway, enough babble. This volatility isn’t going away anytime soon, and is likely to continue to become more extreme (now that Asia too has caught the momentum bug) so the best we can do is try to profit from it. How? Work to develop skills and adopt tools that will help you anticipate momentum – up or down – and be ready to drop those skills and tools for new ones as soon as they don’t seem to be working anymore. Making a living, investing your money and maybe even your love life will become like the movie: Fast and Furious.

ONE UGLY FELLOW

About Mal Spooner

Malvin Spooner is a veteran money manager, former CEO of award-winning investment fund management boutique he founded. He recently authored A Maverick Investor's Guidebook which blends his experience touring across the heartland in the United States with valuable investing tips and stories. He has been quoted and published for many years in business journals, newspapers and has been featured on many television programs over his career. An avid motorcycle enthusiast, and known across Canada as a part-time musician performing rock ‘n’ roll for charity, Mal is known for his candour and non-traditional (‘maverick’) thinking when discussing financial markets. His previous book published by Insomniac Press — Resources Rock: How to Invest in the Next Global Boom in Natural Resources which he authored with Pamela Clark — predicted the resources boom back in early 2004.
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