While the focus on the recent June jobs report was on the number of job losses and the unemployment rate, the average workweek and average weekly earnings data was also not very encouraging. The average workweek fell to 33 hours, down 0.1 hours, taking it to its lowest recorded level going back to 1964 (see Business Week article). While hourly earnings remained flat, the shorter workweek caused average weekly earnings to also fall from $613.34 in May to $611.49 in June. With employed full-time workers scheduled for what is looking more like part-time work, consumer spending and consumer confidence will most likely continue to suffer. This will no doubt put pressure on consumer discretionary stocks and make the prospects of a jobless recovery more likely. Given that companies tend to increase the workweeks of existing employees, and even offer overtime to such employees before taking on the expense of hiring and training new employees, it may take a long time before consumer spending once again reaches the levels required to bring the average workweek back to normal hours. As a result, it may be a while before the Friday noon traffic is caused by workers once again going out for a business lunch, and not simply going home early for the week.
Hedge funds posted their first inflows in nine months (see BarclayHedge article, free registration required). Based on a survey of over 1,200 hedge funds, it is estimated that the hedge fund industry gained $1.4 billion in May, or 0.1% of total assets. Nonetheless, funds-of-funds and CTAs are still experiencing outflows. Fund-of-funds, which did not do as good a job as expected picking hedge funds in order to justify their extra layer of fees, lost $5.2 billion, or 1.0% of assets in May. This makes their twelfth straight monthly outflow. Below is the hedge fund asset flow data by strategy for May 2009 (source: BarclayHedge, see article, free registration required). Next to fund-of-funds and managed futures, event driven strategies saw the biggest outflows. Equity long-short, fixed income, and multi-strategies saw the biggest inflows.
ALPS has launched a new Equal Sector Weight ETF of ETFs (EQL) that provides an equal weight position in each of the nine Select Sector SPDR ETFs (see IndexUniverse article). The fund rebalances the sector positions every quarter. The attraction of the fund, beyond not needing to invest in nine different ETFs in order to get sector diversification, is that it is designed to avoid over-investment in “bubble” sectors that may have run-up too far, too fast. When their strategy was back-tested over the last 10 years, the EQL strategy of reducing the spread in sector returns outperformed the S&P 500 by more than 3% per year. The EQL ETF charges 0.55% in annual expenses, which includes the assumed 0.21% in expenses for the underlying nine Select Sector ETFs. The EQL ETF sounds like an interesting and useful product, although it is not entirely clear how accurate one can measure when to reduce exposure to bubble sectors going forward.
There was an interesting interview on CNBC today with Ken Chenault, CEO of American Express. While Chenault spent half of the interview discussing the AXP brand and strategy, he also spent time discussing the economy in general, and credit card legislation specifically. Instead of simply pumping the economy and his company, Chenault was more sober and direct. In particular, during the first few minutes he mentioned that while recent government actions have produced stability and are giving signs that could potentially lead to "green shoots," it is too soon to call this a recovery. Around the 7:30 min mark he also comments on the proposed credit card reform. While he believes that some type of reform is necessary, he does not agree with some of the proposals regarding risk-based pricing, which could stifle growth and limit credit for those who may need it the most. As written, he is yet not convinced that the current proposed legislation will have a positive impact on the economy.
While Chenault has a dog in the fight, and company interest in the legislation, I believe he is right to expand the argument to the broader economy. While restricting the ability the price risk would reduce an extra source of revenue for the credit card companies, the impact on retail sales will also be negative, significant, and ultimately detrimental to growth (see previous post). Beyond the lost of revenue due to lower rates and fees, the inability to effectively manage risk can not be discounted, or its effect on helping to measure, control, and regulate systemic risk (see previous post).