U.S. Job Gains Surge in October

The Labor Department released its monthly jobs report this morning, which showed the U.S. added 271,000 jobs in October, shattering the average economist estimate of 185,000 gains. This represents the largest gain since December of last year. Employment gains were strong in retail, construction, and business and professional services. Of the 271,000, 268,000 were created in the private sector, while the government hired 3,000. The under-employment rate, which is the number of people working part-time involuntarily, ticked down to 9.8%, the lowest measure since 2008. Perhaps most impressive, wage growth accelerated nicely, rising to an annualized rate of 2.5%. This has been one of the key metrics that has not moved too much in the past, so a strong wage growth number signals a healthy labor market.

These numbers became a “good news is bad” type of scenario in that the market now sees a higher likelihood that the Federal Reserve will raise interest rates in 2015. Numbers like these would normally send the market higher. Today, however, the market was relatively flat and even opened down. Bank stocks rose on the possibility of a rate hike, as they stand to benefit from improving net interest margins or “spreads”. The futures market is now pricing the “odds” of a December rate hike around 72%, up from just above 50% last night. Even Chicago Fed President Charles Evans, typically considered to be the most “dovish” member of the FOMC, acknowledged the strong jobs numbers. He stated this morning that he will keep an open mind for hiking rates in December.

Earnings Roundup:

Though somewhat of a “light” week, several companies did release their quarterly earnings this week. Below is a brief summary of just a few notable companies that reported this week:

Qualcomm (QCOM) reported a 44% year over year drop in earnings as sales of smartphone chips fell and licensing patents in China continue to be a headwind. The company announced they will continue to cut costs as they see further pressure in the future on these segments. Overall, the company earned a profit of $0.67 per share, lower than analyst estimates. Qualcomm also announced they will no longer issue profit forecasts, leading some analysts to wonder if the worst is yet to come. While there are certainly headwinds, the company’s cash position continues to improve and acquisitions remain a possibility. Should the “black cloud” of China lift, the company sees a lot of growth opportunities in the market.

Walt Disney Co (DIS) announced it earned $1.20 per share in the most recent quarter, surpassing the average estimate of $1.14 per share. Past fears of slowing cable network revenues were put to rest, at least for this quarter, as ESPN boosted profits by 30%. The consumer products division saw an 11% rise in revenues, while the ABC broadcast division gained 1%. Disney’s parks and resorts division saw a 7% profit increase, though this was held back by a few parks around the world. With the new Star Wars movie coming out, and the product sales that will accompany it, Disney is looking to finish the year strong, though it remains to be seen if they will outperform analyst expectations on this front.

Quanta Services (PWR) stated yesterday that the company earned $0.30 per share, matching analyst estimates. The stock has been under pressure due to adverse weather conditions and regulatory issues that have delayed revenues coming into the company. However, the outlook from Quanta’s management was upbeat and seems to indicate that, while headwinds do exist, Quanta has weathered through most of the storm. Its backlog now sits at $800 million. The company has used the recent dip in the stock price as an opportunity to buy back over $1 billion in stock.

Though hundreds of companies are scheduled to report earnings next week, they are mostly smaller, less well-known names. A few notable companies scheduled to report next week are: Hertz Global (HTZ), Priceline Group (PCLN), Applied Materials (AMAT), Cisco Systems (CSCO), and Viacom (VIAB).

Investing in your Company’s Stock:

Investors who work for a publicly traded company often decide to invest in their company’s stock. Putting stock options aside (as they are a form of compensation), investors may have the option to purchase company stock within their retirement plan (401(k), for example) or may look to purchase the stock outright in their brokerage accounts. For the sake of this discussion, we will review the retirement plan side of investing, as it is generally the topic that comes up most in conversation.

There are many different factors one must consider when determining whether or not to purchase their company’s stock within a retirement plan:

1. What is the outlook on the stock itself? While it may seem obvious, a great company does not necessarily mean the stock is great. We have seen many instances in the past where, though the company is terrific, its shares are simply overvalued. It is often hard for investors to separate the two, as avoiding the shares may seem to suggest that they are not being loyal to their company. Furthermore, investors may think their impact on the company’s profits is larger than it actually is, thus giving them a “rosy” picture outlook. However, if the stock is not one that has a favorable outlook, it may be best to avoid purchasing the shares.
2. Does your company offer the shares within your 401(k) to be purchased at a discount? While this is not overly common, this option does exist to some 401(k) participants. Should the shares be offered at a discount, it can be advisable to invest some money into the stock; that is, assuming the shares are not overvalued by more than the discounted amount. This concept is just like getting a “match” in your 401(k); you can think of it as “free money”.
3. How is your overall portfolio invested? When evaluating portfolios, it is advisable to look at the full financial picture. Therefore you should look not only at the 401(k) account, but also at existing brokerage accounts, cash in bank accounts, and real estate holdings. If your 401(k) represents your entire financial savings, it may make more sense to keep this portfolio as diversified as possible, allocating a small percentage (or zero) to the company’s stock. Even if the 401(k) is only a small fraction of your overall net worth, a well-diversified portfolio is more appropriate for most investors and thus it is not advisable to overly concentrate in one security.
4. What is your time horizon? As investors get closer to retirement, the general rule of thumb is to reduce the overall risk of the portfolio. This may mean lowering the percentage invested in the company stock or not investing in the company altogether. If the investor has a longer time horizon, it could make sense to invest a percentage of each paycheck into the company shares. Over time, the purchases will “dollar cost average”, spreading out the market timing risk of purchasing the shares. A good method to safeguard against becoming too concentrated is to rebalance the account annually and reduce the size of the position to a set target if necessary.

Assuming it makes sense to invest in the company’s stock, it is still generally not advisable to invest a significant amount of your portfolio into any one company’s stock. There are a few reasons for this:

1. Stocks, in general, are inherently risky. Investing too much of your portfolio into one security increases these risks. Just as we recommend a diversified portfolio and to avoid investing too much into one particular stock, the same holds true to your company’s stock.
2. You already have company-specific risk by working for the company itself. This is a less obvious consideration but still an important one. If your company is doing very well and generating good profits, the stock may increase in value. You also may be likely to receive a larger bonus or some additional funds from a profit-sharing plan. Thus, when times are good, you are doing very well. However, when the reverse is true, you could become overly exposed if you have a high percentage of your portfolio invested in the company’s stock. The stock might decline in value and you may also receive a smaller bonus (or no bonus at all). While admittedly an extreme example, Enron employees, on average, had nearly 62% of their 401(k) assets in the Enron stock right before it crashed. This probably seemed hard to pass up because the shares had been doing very well in the late 90s. However, as we know, the company collapsed and the shares became worthless. Overnight, entire 401(k)s were wiped out AND employees were out of a job.

As you can see there are many moving parts to this consideration. Therefore, it is difficult to determine a hard and fast “percentage” that is acceptable to invest in. The overall percentage to invest in a company’s stock will vary from person to person and from company to company. The above is just a few considerations when choosing whether or not to invest in your company’s stock.

Paradigm Office Open on Veteran’s Day:

Though Wednesday November 11th is Veteran’s Day and the banks and post offices are closed, the equities markets are open regular hours (though bond markets are closed). Paradigm employees will be in the office regular hours on Wednesday.

 

This publication is provided as a service to our clients and associates of PFA solely for their own use and information. The material is derived from sources believed to be reliable but its accuracy and the opinions based thereon are not guaranteed and have not been verified. The content in this publication is for general information only and not intended to serve as individual investment advice. You should seek independent advice from a professional based on your individual circumstances.