The Boring Portfolio

CHICAGO, July 5, 1996 -- If you've been out on the yacht (or maybe working the day shift at Wendy's) and haven't heard the news yet, please note that the Labor Department reported this morning that the U.S. unemployment rate dipped to a six-year low of 5.3% in June. Payrolls of non-farm employers grew by 239,000 to 119.5 million last month.

Hot sectors included retail jobs, almost half of which were in bars and restaurants (you lucky Wendy's worker, you) and the services sector, including "temporary help, hotel, auto repair, engineering and management services jobs," according to the report. Construction employment was also strong. Manufacturing jobs slipped by 7,000 in June, however.

Workers' average hourly earnings rose by 9 cents to $11.82 last month -- the largest gain in the 31 years that the stats have been collected. In the past year, average hourly earnings have risen by 3.4%.

Horrors. On cue, the bond market bid up the interest yield on the 30-year Treasury well past the psychologically significant 7% level (to 7.19%), as bond traders concluded that this latest indicator of a strengthening economy would prompt the Fed to raise interest rates to quench inflation. The Federal Open Market Committee is scheduled to meet next on August 20, but some gooroos were hypothesizing that the Fed might not wait until then to raise rates.

Meanwhile, stocks sold off in the expectation that the suddenly higher yields of alternative investment vehicles (such as bonds or money market accounts) would pull money out of equities and into those alternatives.

If you have the sensation that this is deja vu all over again, you're correct, of course. We've had post-macrostats market implosions at least three times this year already ... and each time buyers have stepped in to snap up the bargains. Let's see what happens next week.

As for today's employment report, I have no intention of insisting that the market is wrong because it doesn't agree with me. At the same time, though, I really do wonder what the big deal is.

Most obviously, there's the question of whether a decently growing workforce being paid a modestly higher wage is necessarily such an unmitigated disaster for corporations, and thereby stocks. In particular, as the market reels over news that American workers are being paid a whole nine cents more per hour, one might at least consider whether perhaps they're worth it. That is to say, has productivity risen more or less in line with wages this year? Answer: Quite possibly. It's a sure bet that few if any traders considered this possibility this morning, though.

Then there's the deeper question of what today's nonfarm jobs data actually mean. I realize it's a warm Friday in July, but please focus for a minute on the following numbers from today's Labor Department report:

a) The number of jobless workers last month fell by 388,000 to 7.06 million.

b) The number of job holders grew by 148,000 to 126.61 million.

c) The civilian labor force, which includes all job holders and job seekers, shrank by 241,000 to 133.67 million.

My point is this: It appears that the *primary* reason the number of jobless workers (and thereby the unemployment rate) fell so much is because 241,000 folks left the labor force entirely.

After all, to be "officially" unemployed, you have to be: (a) out of work and (b) available for work if a job turns up. Last month, nearly a quarter-million people said, in effect, "I don't want no job." And that, at least as much as the 148,000 net new job holders, is why the nominal unemployment rate was so low for June.

Of course, people leave the labor force for all kinds of reasons: they retire, have babies, cash in their Iomega stock and move to Maui, and so forth. But when there are *net* 241,000 more people leaving the labor force than there are joining it, it suggests that the employment picture is, at a minimum, a bit more complicated than the headlines indicate. Perhaps a lot of folks have simply given up trying to land a job?

The punchline (and thank you for persisting this far) is that if the size of the labor force had remained unchanged from last month, then the overall unemployment rate would have been: 1 - (126.61 million workers / 133.91 million labor force) = 5.5%, or precisely what Wall Street had been anticipating, according to news reports.

"Fine, Boring. But can we please get to the stocks?"

Of course. In terms of the big picture, the DJIA flopped 115 points on Friday, with every one of the 30 Dow stocks losing ground. On the broader market, the S&P 500 fell 2.23%, while the NASDAQ index slipped 1.96%.

Each of the Boring Portfolio stocks also declined in Friday's abbreviated trading session. But with 20% of the Borefolio currently sitting in cash, its loss was a bit less than the market indices: minus 1.77%.

For the week, the Borefolio fell a bit less than half a percentage point, while the NASDAQ lost 2% and the S&P subtracted 2.25%.

Despite the drubbing on Friday, three Borefolio stocks managed to end the week higher than where they began it: our two "groups" (Borders and Shaw) and, perhaps surprisingly, Green Tree Financial. I say, "perhaps surprisingly" because stocks in the financial services group were among the hardest hit in Friday's sell-oof -- I mean sell-off. On second thought, maybe "sell-oof" is more descriptive.

Indeed, Green Tree was the Borefolio's largest percentage loser on Friday, shedding more than 5% in value in a matter of three hours or so. The small-cap holdings (Shaw, Prime Medical, and TXI) held up relatively well, each losing only a fraction.

Well, that's about it for today and this week. Maybe I'll head over to Lake Michigan and see what's cookin' there.

(c) Copyright 1996, The Motley Fool. All rights reserved. This material is for personal use only. Republication and redissemination, including posting to news groups, is expressly prohibited without the prior written consent of The Motley Fool.

Transmitted: 7/5/96