Shortwoman.com

I hate to sound like Cassandra, but I think it would be a bad idea for the regulatory Powers That Be to allow the recently announced merger of J.P. Morgan and Bank One.

In the plus column, this merger creates America’s second largest financial institution, behind Citigroup (which you may or may not recall was the result of merging Citibank and Travellers, an insurance concern, in a merger only made possible by Phil Gramm ramming through legislation to make it legal). The combined entity will have 90 Million credit cards out there. They would also have about 2300 branches across the nation, combined, serving most areas of the country. The combined company expects to save several billion dollars over the next few years. But the benefits boil down to “bigger is better.” Oh, and lets not forget all the fees the investment bankers will earn on this and the cascade of mergers it is likely to start.

Now the minus column. The combined company will have to figure out how to consolidate 111 mutual funds undoubtedly with overlapping holdings and goals, and wildly divergent fee schedules. They will also have to get two very different management teams to work together — never an easy task. In the end, about 10,000 people will lose their jobs in the consolidation. The local economy in Chicago and New York City may well be adversely effected.

That is to say nothing of the impact on the customers: ordinary people like you and me who have credit cards, bank accounts, and brokerage accounts at Bank One, J.P. Morgan, and the companies they own. We can expect new credit card user agreements, and we cannot expect them to contain more favorable terms. We can also expect higher fees and interest rates, because competition is reduced. The end consumer will probably not benefit at all. Don’t try to bluff by saying how convenient it will be that you can go to “your” bank anywhere in the country. Bank laws vary enough from state to state that if you relocate, you will still be better off shopping for a new bank, unless you like dealing with a 5 day out-of-state check hold on your paycheck.

And frankly, everything I have said depends on things going well and working out as planned. It does not allow for what might happen when your credit card, bank, mortgage, and brokerage information end up in one place. It does not consider what might happen to the J.P. Morgan/Chase/Bank One mortgage portfolio should it turn out there really is a “housing bubble.” It assumes there is no creative accounting at either firm — and do not presume to say that banks are heavily regulated, not only because banks have been known to fail too, but also because energy and telecommunications are heavily regulated too.

Yet somehow you can bet this will be approved. And it won’t turn out as marvelously as everyone expected. Let’s hope it isn’t as bad as it could be.

I know I briefly mentioned this point earlier in the week, but the matter has gotten worse.

There is seriously bad news on the employment front. First, we had the unemployment report, released yesterday. Because this link only contains the current information, allow me to post the important bits for the benefits of those who might read this in the future. For the week ended January 3, 2004, seasonally adjusted initial claims — the widely reported number — were up 14,000 to 353,000. However, there were actually 546,823 new unemployment claims that week, up 30,431. Now, I don’t know about you, but I think it’s more important to know that there were over half a million people who applied for unemployment checks for the first time, 3,724,660 total claims, and 765,570 making claims under a Federal program for the relatively long term unemployed last week than to harp on “seasonality.”

Now, please scroll down with me to this chart, as taken directly from the DOL link above:

States with an Increase of More than 1,000

That’s right, the increase in people laid off in Michigan alone was more than the seasonally adjusted rise in first time claims. First time unemployment claims in Michigan rose by a number just short of the entire undergraduate student population at the University of Michigan Ann Arbor campus. The increase in new claims in Wisconsin alone exceeded the seasonally adjusted rise in first time claims, and the Pennsylvania numbers were only slightly better.

There is the first part of the answer to the great economic question: How come the economy looks great on paper, but seems so lousy to me and everybody I know? The stuff on paper is a lie.

But wait, there’s more. It seems that the economy created about 1,000 jobs last month. That falls short of economists’ expectations of 140,000. That is an error of over 99%; an error most of us who still actually have jobs would get fired over. Yes, gaining a thousand jobs is better than losing them — although in a nation of 292 million people, a thousand jobs is a rounding error. But still, a thousand jobs created falls well short of the 100,000 needed just to keep up with additions to the labor force and 200,000 needed to really reduce unemployment.

Hold on, you say, unemployment did drop, from 5.9% to 5.7%. Yes, yes it did. That’s because about 430,000 unemployed people gave up even looking for work. They are now termed “discouraged workers” as opposed to merely “unemployed.”

If enough people get “discouraged,” we’ll have full employment.

Maybe there will be jobs on the Moon.

Today, President Bush announced an initiative to help illegal alliens get jobs here in the United States. This was announced with rhetoric of “There is an economic need, and it is important that we have an immigration policy that meets those economic needs,” and “So many illegal immigrants are in the country, we need to find a way to resolve that problem in a compassionate and productive way,” and how this proposal would “match willing workers with willing employees.” Or, briefly summarized, “they are here, they are cheap, we may as well make them legal.”

Meanwhile, a research and analysis group released a report concluding that there were 1,236,426 job-cut announcements in 2003. Please remember that these figures do not include all the unannounced job cuts at all the small businesses that do not put out press releases. This same report concluded that there might not be substantial job growth in this country until 2008. It would seem that announced job cuts for 2004 are already off to a roaring start.

Now, please consider last week’s unemployment data as released by the Department of Labor. The data in that url will be replaced with more current figures as time goes by, so please let me point out the relevant numbers for the week ended December 27, 2003. The widely reported number for first time unemployment claims was 339,000. However, this was a seasonally adjusted number.* There were actually 516,501 who followed through on the unpleasant task of walking into the unemployment office and filing a first time claim. Even this figure does not include those who lost part time jobs, professionals who feel small check is not worth the time it takes to fill out the paperwork, and students who might have finished a college degree (and the associated student work placement) in December.

This same Department of Labor is currently trying to finalize rules that would effectively eliminate overtime pay. That’s right, they want to cut the income of our hardest working families, and curtail the creation of new jobs while they are at it: your Lumberghian boss will not hire a new person full time and give them benefits when he can simply make all his existing employees work harder. Your Senator needs to hear from you now.

So let me make sure I understand this correctly. We are in a “jobless recovery,” the Department of Labor is pursuing “reforms” that will thwart job growth, well over a million people were put out of work in “announced layoffs” alone last year, half a million people applied for unemployment benefits in the last week of December, and President Bush wants to normalize the status of illegal aliens working in this country?

That makes less sense than Britney Spears’s ephemeral marriage.

*Much thanks to Seeing the Forest for pointing this out.

It is January, and that means a parade of financial experts giving their personal opinions — I mean predictions — regarding the new year.

Almost inevitably, one will say that this will be a year where small cap stocks outperform the big ones: that buying stock in relaticely small companies will make you more money than a nice, diversified S&P 500 or Dow 30 index fund. I have listened to this claptrap for a half dozen years now. Here is why it is still wrong.

First, investing in small cap stocks is a dicey game of cat and mouse for small investors. Doing it sucessfully depends on finding a small company that is publicly traded, and hoping some fund manager finds it and buys large quantities of it later, driving up the value of the shares. Oh yes, it also depends on your finding this needle in a haystack without being played by some pump and dump scammer, who tells you that XYZ Corp is the up and coming thing shortly after buying it himself, and sells it shortly after enough foolish people buy it so as to drive up the price.

The second flaw in the “year of the small cap” theory is the chart they will toss up in their defense. It will be a chart of a stock index called the Russell 2000. Russell takes the 3000 biggest cap companies, calls the top thousand a big cap index, and the lower 2000 a small cap index. The first problem with this is that there are over 6000 publicly traded companies, meaning there are 3000 companies smaller than any of those in the Russell 2000.

But wait, there’s another problem with the Russell 2000, and it has to do with being the bottom 2000 of the top 3000. There are two separate schools of stock market thought that say nothing more than Newton’s first law of motion: things tend to keep going the way they are going. Both Momentum Traders and Technical Analysis adherents will tell you that stocks going up are likely to keep going up, and stocks going down are likely to keep going down, although they differ substantially on the details.

Stocks in the Russell 2000 that do well gain market cap, and graduate to the Russell 1000. On the other hand, stocks in the Russell 1000 that do poorly drop in market cap and end up in the Russell 2000. If I were designing an index to decline, it would look a lot like this. It might well go up short term, as it did in 2003, but do not get to thinking the Russell 2000 is a long term investment.

Remind me to republish this post next January.

The economy is great. All the numbers say so, right? So it must be true. GDP is up, way up. Despite all the unemployed people you know, the official unemployment rate is under 6%, so what’s the problem?

So then, how can the numbers be that good and yet, up close, things look so bleak? How come all the State governments are cutting and scraping and scrounging to make ends meet? How come we still on a semi-monthly basis get these heartbreaking stories of family working as hard as they can and still struggling? Or worse, pounding the pavement and still can’t find work more than part time and barely exceeding minimum wage? At what point is there enough anecdotal evidence that we start trying to find data?

The official unemployment numbers undercount millions of people who want jobs. The 4.9 million people who took part-time jobs to put food on the table until something full time (maybe even *gasp* with benefits!) don’t count. the 9.6 million people who call themselves “self-employed” regardless of whether or not they are actually making a living don’t count. The 1.9 million people (up 20% from last year) who have been out of work so long they aren’t looking real hard anymore — “discouraged workers” — don’t count. People who decided to go back to school, update their skills, and live off loans or other student financial aid don’t count. People who have signed on with a “temp” agency, picking up temporary work and possible “working interviews” don’t count. People who have managed to get themselves declared “disabled” regardless of their ability to work don’t count.

It’s a lot less work to just say that you only count if you lost a full time job, are not employed in any way, and are seeking a new full time job. Two out of three isn’t good enough.

Oh yeah, and it seems that jobs aren’t getting any easier to come by. Nevertheless, we have political candidates who are convinced that somehow jobs can be created by tax incentives and home ownership. Sorry, people being able to afford houses is the result of a good economy, not the cause.

Best New Year’s wishes from the ShortWoman. Have a very nice New Years Eve, and be vigilant but don’t panic! Unless of course you see someone carrying an almanac.

Diversity is a good thing. Diversity in nature makes all the different plants and animals in a given area into a sustainable ecosystem; a pond of nothing but frogs would not last long. Diversity in your assets buffers you against market drops; a portfolio of nothing but Enron stock would not make a good nestegg. Diversity in the workplace keeps businesses from making stupid cross-cultural mistakes; a Yom Kippur grocery sale would go over about as well as the apocryphal sale of the Chevy Nova in Spanish speaking nations.

Sometimes we try to impose artificial diversity — or artificial lack of diversity. For example, we plant a field of nothing but corn because it would be terribly confusing to separate ripe corn from ripe potatos; we accept the premise that this situation is unsustainable without human intervention. Or, we implement a program to insure that a school has a student population more closely mimicing the overall American population.

As the State of the Union address approaches, you will be hearing more about Bush’s ideas for the “ownership society,” an idea he has actually been building towards for some time. The short version of this policy is that not only is diversity good, but it is a good idea for all kinds of people to own things: “that American workers aspire to be owners — of stock for their retirement, homes, businesses, good health insurance, and skills they need to navigate multiple changes of jobs and careers.” And who is stupid enough to disagree with that thesis? Particularly if there is not much talk about the actual proposals?

Recent Fannie Mae ads are already towing the line on this issue. Those of you who have been reading the ShortWoman for a while know my opinion of such warm, fluffy idiocy. Again, the central idea is that everybody should own a house. Anybody foolish enough to ask why is greeted with a stare of disbelief and a speech about tax deductions and biggest asset the typical American has and stability. Never mind the tax deduction being smaller than the money spent, never mind a mortgage being the biggest liability the typical American has, never mind that quite simply there are reasons people might not want or need to own real estate. Indeed, although new legislation would help 40,000 low-income families with the downpayment on a house, these people are the most likely to find themselves buried under a house in serious need of Norm that they can neither afford to fix nor sell.

Unfortunately, when the Administration speaks of “ownership,” they really mean it in the therapist’s definition: “responsibility.” When you “take ownership” of something, you are “responsible” for it, responsible for needed changes to it. The Administration does not want you to just own your house, they want you to own your retirement (privatize social security, an idea which should have been completely debunked by this chart); they want you to own your healthcare; they want the unemployed to take responsibility for finding a new job. Here’s the problem: “For starters, the very people who lack the decent health insurance, the money for retraining, and the secure nest eggs are short of adequate earnings from which to take out savings. So most of the tax breaks, like the rest of the Bush tax program, will go to people who don’t really need them, while those who rely on genuine help will come up short.”

They aren’t interested in you owning assets; they are interested in you being responsible for liabilities. If the Administration had any stake in broad ownership of actual property, they would encourage more policies that promote small business, a proven wealth generator that even creates jobs.