Author Archives: Paul Irwin

Slower Job Hiring is the Result of Lower Unemployment (Final Revised Post)

Thesis: The longer time to fill job vacancies is caused by a decrease in unemployment, rather than other factors such as job personality tests.

A recent article published by the Wall Street Journal titled, “Today’s Personality Tests Raise the Bar for Job Seekers” highlights the growing importance of personality tests for hiring new candidates. “In 2001, 26% of large U.S. employers used pre-hire assessments. By 2013, the number had climbed to 57%, reflecting a sea change in hiring practices that some economists suspect is making it tougher for people, especially young adults and the long-term unemployed,  to get on the payroll.” I have personal experiences with these personality tests in applying for finance related jobs. The growth in popularity of theses assessments is surely a positive as it enables employers to better screen candidates for culture fit and to verify the candidate possesses the characteristics for that job function i.e. customer service must be able to communicate well with people. The last phrase of that excerpt I disagree with, however. Personality tests themselves do not discourage against young workers or individuals who have been unemployed for a while. The authors’ viewpoint on this aspect is very shortsighted and fails to take into consideration the type of candidate a young person or unemployed individual is compared to someone with potentially more active experience.

Furthermore, the author goes on to explain how the time it takes to fill job vacancies has been on the rise since the Recession. The author claims that personality tests make it harder for job seekers and are the cause of this issue. However, the author fails to point out how unemployment has also been on a steady decline since the Recession. We have a classic case of cause vs. correlation, and I feel like the author is badly mistaken in the claims drawn in the article. Furthermore, I would go on to make the argument that employment and time to fill job vacancies are directly correlated. Therefore, when there is higher unemployment, there are more available workers in the market, and open job positions can be filled quickly. When there are less people actively seeking a job, the time to fill those open positions will be greater. My proposed solution seems to be a more realistic logistical model than personality tests accounting for the dramatic change in time to fill job vacancies. For more information on personality tests that employers use to hire new candidates as well as what some of the largest U.S. companies look for in these results click here. I view the topic of personality tests as intriguing, but not a separator between age of potential employees or the rise in time to fill job vacancies.

Slower Job Hiring is Caused by Lower Unemployment

Thesis: The longer time to fill job vacancies is caused by a decrease in unemployment, rather than other factors such as job personality tests.

A recent article published by the Wall Street Journal titled, “Today’s Personality Tests Raise the Bar for Job Seekers” highlights the growing importance of personality tests for hiring new candidates. “In 2001, 26% of large U.S. employers used pre-hire assessments. By 2013, the number had climbed to 57%, reflecting a sea change in hiring practices that some economists suspect is making it tougher for people, especially young adults and the long-term unemployed,  to get on the payroll.” The growth in popularity of theses assessments is surely a positive as it enables employers to better screen candidates for culture fit and to verify the candidate possesses the characteristics for that job function i.e. customer service must be able to communicate well with people. The last phrase of that excerpt I disagree with, however. Personality tests themselves do not discourage against young workers or individuals who have been unemployed for a while. The authors’ viewpoint on this aspect is very shortsighted and fails to take into consideration the type of candidate a young person or unemployed individual is compared to someone with potentially more active experience.

Furthermore, the author goes on to explain how the time it takes to fill job vacancies has been on the rise since the Recession. The author claims that personality tests make it harder for job seekers and are the cause of this issue. However, the author fails to point out how unemployment has also been on a steady decline since the Recession. We have a classic case of cause vs. correlation, and I feel like the author is badly mistaken in the claims drawn in the article. Furthermore, I would go on to make the argument that employment and time to fill job vacancies are directly correlated. Therefore, when there is higher unemployment, there are more available workers in the market, and open job positions can be filled quickly. When there are less be actively seeking a job, the time to fill those open positions will be greater. My proposed solution seems to be a more realistic logistical model than personality tests accounting for the dramatic change in time to fill job vacancies. For more information on personality tests that employers use to hire new candidates as well as what some of the largest U.S. companies look for in these results click here. I view the topic of personality tests as intriguing, but not a separator between age of potential employees or the rise in time to fill job vacancies.

In a Bull Market Stocks Provide Better Returns than Bonds… Not Always

Thesis: While it is common for investors to prefer higher risk to augment returns in bullish markets, stocks do not always outperform bonds.

The U.S. stock market has been in a bull market for over five years now, rallying from 2009 lows after the Great Recession. The year 2015 has been no exception as stocks have rallied even in the face of a rising U.S. dollar. A weak dollar makes equities look more appealing to increase returns as stock prices are denoted by the dollar, so they have an inverse relationship. The U.S. dollar has seen its largest price rally in a long time as it has rallied over 21.8% in the past 10 months. This odd rally is considered a black swan – an event that is highly unlikely to occur and is multiple standard deviations away from the norm. Black swan events make it possible for unusual returns for investors, kinda like Treasury bills outperforming stocks in a bull market. Treasury bills are considered a safety net, and investors flock to purchase them in times of strife or market decline as they provide a safe, guaranteed return.

In a recent article by the Wall Street Journal titled, “Buying U.S. Currencies with Foreign Denoted Currencies Pays Off,” many trades are highlighted that outperform the U.S. stock market as defined by the returns of the S&P 500. The most profitable trade is buying U.S. 10 year treasuries with the Euro. While the U.S. dollar has prospered, the Euro has had a dramatic decline due to financial turmoil in the region. The article does a good job explaining the unlikelihood of the trade, “Thanks to a roaring dollar rally and a world-wide grab for ultrasafe government bonds, one of the keenest bets in financial markets over the past year has been one that isn’t typically associated with outsize returns: buying U.S. Treasury debt with foreign currencies.” What is even more shocking is the returns that some of these trades have fetched, especially compared to the benchmark index during such a prosperous time. “Investors buying Treasury debt in euros earned a total return of 36.7% over the past 12 months, reflecting price gains and interest payments, according to Barclays PLC. The same investment would have earned 23.9% in Japanese yen, 19.8% in British pounds and 16.9% in Swiss francs.” So not only do the returns either rival or top the benchmark index, but they also carry much less inherent risk. Alpha investors seeking to mimic returns while taking on less risk would be delighted with such returns. For an elaborated definition of alpha, check out Investopedia on the topic. Alpha has become increasingly popular amongst hedge funds, and this trade highlights some of the successes to the strategy.

Detroit on a Comeback (Revised Post #4)

Thesis: The city of Detroit is making an aggressive comeback to return as a booming technological big city rampant with entrepreneurship.

It’s March, which means it’s time for March Madness and all the glory that comes with it. Recently, University of Kentucky had a comeback win against Notre Dame, propelling them into the prestigious Final Four. At some points throughout the game, it seemed as if Kentucky was destined for failure and wouldn’t be able to rise to success. For more information on that historic game check out this article by USA Today. Such a great sports comeback made me draw a parallel to an epic economic comeback currently in the making: Detroit. In 2013, the City of Detroit filed for Chapter 9 bankruptcy, and has since been striving to improve its image and the economic viability of the city. Less than two years later, Detroit is no longer bankrupt and continues to make economic advancements.

The City of Detroit is taking a three pronged approach to improvement. The three most significant sources of economic improvement are public, civil, and private funding.  An article by the Fiscal Times quotes Bruce Katz of the Brookings Institution on this new era of financing: “What is emerging is a new kind of metropolitan finance where public-private and civic capital comes together to basically build and grow economies,” Katz said in an interview. “Right now, all we have to describe public finance in cities is [municipal bonds], which is just access in capital markets for infrastructure. But I think the way cities really do grow across many dimensions – not just infrastructure – is through this aggregation of public, private and civic capital” (Fiscal Times). The modern economy is enabling Detroit to raise capital in non-traditional ways.

Quite possibly the largest economic impact for the City of Detroit is private funding, namely from billionaire founder of Quicken Loans Danny Gilbert and from the Ilitch Family. Mr. Gilbert has been speedily acquiring and developing property throughout the City in an attempt to eliminate blight that has been a detriment to the once great city. Mr. Gilbert also encourages residency and population growth in Detroit by offering a stipend for his employees who choose to relocate and live Downtown. On the other hand, the Ilitch Corporation has been a longer-standing supporter of the rehabilitation of Detroit. Their legacy started with the success of Little Caesars Pizza and continued to grow with the success of their sports teams. Between the two entities, over $2 billion have been invested into the city, according to the Detroit Free Press.

An additional article by the Fiscal Times discusses the issue of blight and other methods for eliminating it which can be read here. Another major private financing for the city is Rocket Fiber – ” an ultra-high-speed Internet and TV service for central Detroit, will offer advanced broadband in a major boost to the city’s technology startup scene. The hope is that it will entice more upscale residents to the area” per the Fiscal Times. In recent years, Detroit has become a hub for start-up companies, in part due to the cheap real estate prices in Detroit. Many successful start-ups have launched bringing in national attention to the region for that very reason. With a focus on technology companies, the new high speed broadband infrastructure may be just the boost needed to spur Detroit to new heights. We may be witnessing one of the greatest economic comebacks of a major city in the history of our great nation.

Thoughts on Raising the Minimum Wage

Thesis: raising the minimum wage has many socially beneficial aspects, but does not bring about the positive economic impacts as assumed by many.

I recall walking to class as a sophomore at the University of Michigan and walking past a group of protesters. There was a large group of nearly fifty people protesting to raise the minimum wage. It was the beginning of the semester and a presidential election was right around the corner, with the economy (including raising the minimum wage) as one of the most critical points of debate. On the surface, it seemed like a very notable cause – raising the minimum wage to help bridge the gap between the villainized 1% (the wealthiest 1% of Americans) and the lower class. However, I was surprised by the economic facts that followed from raising the minimum wage.

Firstly, a large percentage of minimum wage laborers are teenagers that live in a household which makes six figures or more. Now while many minimum wage workers do not fall under this demographic, it still shows the ineffectiveness of raising the minimum wage to benefit the lower class. The reason raising the minimum wage is such a hot topic currently, is because many large U.S, corporations are making the move to raise their own company minimum wage despite local and federal regulation. Walmart was one of the early movers, which paints the company in a bright light as it can be viewed that they value their employees. An article by CNBC published today announced that McDonald’s has followed suit and is raising their minimum wage to over $10/hour. However, even the raise by McDonald’s won’t have even as great of an impact as it appears. According to the CNBC article, “The hike-which will start in July-applies to 90,000 workers at corporate-owned restaurants but not employees of franchisees, McDonald’s said. Franchisees operate nearly 90 percent of the 14,350 U.S. McDonald’s restaurants and set their own wages.” This dilemma highlights the importance of federal action as opposed to simply corporations making their own changes for minimum wage increase proponents.

But there are further implications of raising the minimum wage. Simple labor supply graphs depict the negative effects that raising the minimum wage entails.

As you can see from the graph from thismatter, an increase in the minimum wage causes a decrease in labor quantity. As a nation, we have battled so hard to decrease unemployment since the financial crisis. It would seem like an inopportune time to raise the minimum wage (consequentially raising unemployment), considering we only very recently have attained a level deemed appropriate by the Federal Reserve. Additionally, the Fed plans on raising interest rates which will put a damper on the economy. Therefore, it seems inappropriate to raise the unemployment rate nationally at this junction.

Detroit on a Comeback

Thesis: The city of Detroit is making an aggressive comeback to return as a booming technological big city rampant with entrepreneurship.

It’s March which means it’s time for March Madness and all the glory that comes with it. Recently, undefeated University of Kentucky had a comeback win against Notre Dame propelling them into the prestigious Final Four. At some points throughout the game, it seemed as if Kentucky was destined for failure and wouldn’t be able to rise to success. For more information on that historic game check out this article by USA Today. Such a great sports comeback made me draw a parallel to an epic economic comeback currently in the making: Detroit. The City of Detroit filed for Chapter 9 bankruptcy, and has since been striving to improve its image and the economic viability of the city.

The City of Detroit is taking a three pronged approach to improvement. The three sources of improvement are public, civil, and private funding.  An article by the Fiscal Times quotes Bruce Katz of the Brookings Institution on this new era of financing: “What is emerging is a new kind of metropolitan finance where public-private and civic capital comes together to basically build and grow economies,” Katz said in an interview. “Right now, all we have to describe public finance in cities is [municipal bonds], which is just access in capital markets for infrastructure. But I think the way cities really do grow across many dimensions – not just infrastructure – is through this aggregation of public, private and civic capital” (Fiscal Times). The modern economy is enabling Detroit to raise capital in non traditional ways.

Quite possibly the largest economic impact for the City of Detroit is private funding, namely from billionaire founder of Quicken Loans Danny Gilbert. Mr. Gilbert has been acquiring property throughout the City of Detroit in an attempt to eliminate blight that has been a detriment to the city. An additional article by the Fiscal Times discusses the issue of blight and other methods for eliminating it which can be read here. Another major private financing for the city is Rocket Fiber – ” an ultra-high-speed Internet and TV service for central Detroit, will offer advanced broadband in a major boost to the city’s technology startup scene. The hope is that it will entice more upscale residents to the area” per the Fiscal Times. In recent years, Detroit has become a hub for start-up companies, in part due to the cheap real estate prices in Detroit. Many successful start-ups have launched bringing in national attention to the region for that very reason. With a focus on technology companies, the new high speed broadband infrastructure may be just the boost needed to spur Detroit to new heights. We may be witnessing one of the greatest economic comebacks of a major city in the history of our great nation.

Millenials and Home Buying

Thesis: Millenials are more attracted to renting apartments and will not shift towards purchasing homes anytime soon.

I recently read an article titled “Rising Rents are Finally Forcing Millenials to Buy Houses” by Bloomberg. The article is interesting and analyzes why millenials may be inclined to purchase homes instead of renting, but I believe there are a few missteps. The first misstep deals with the following alaysis: “Expect the open-house crowds to skew a little younger during this year’s spring homebuying season. Millennials made up 32 percent of the U.S. housing market in 2014, up from 28 percent two years earlier, and have pulled ahead of the older Generation X as the largest segment of buyers, according to the National Association of Realtors” (Bloomberg). Millenials are defined as people born between 1980 and 2000. So 25% of that generation is age 20 or younger by definition. I don’t know many 20 year olds going out and buying homes. Therefore, by definition, it would make sense for more and more millenials to purchase homes year over year as they become of age. The Bloomberg article fails to address such a point. Such a figure is easily observable in rental rates, which the article does point out: “The U.S. rental vacancy rate hit a 21-year low at the end of last year, according to the Census Bureau, giving landlords leverage to charge more” (Bloomberg). Rental vacancy at a 21 year low shows that there is a demographic shift away from buying houses early to renting for longer periods. There are many societal changes that explain such a phenomena. Firstly, millenials have lived through the financial crisis and have seen what can happen to homeowners when they are not in a strong enough financial position to own their own home. Secondly, millenials tend to get married significantly later than earlier generations so the need or desire to own a house is pushed back later in life. Furthermore, the article’s analysis that landlords are able to charge higher prices for rent is very short sighted and will only be a short run outcome. New apartment construction is also heavily on the rise which will curb rental prices as delineated in this article by costar. The medium and long term effects will represent excess demand for apartment rentals which will be met by an increase in supply as developers are flocking to the space to capitalize on the excess demand. All in all, millenials are not shifting towards home buying just yet.

Chinese Investment

Thesis: Investment by foreigners (notably China) damages the economy in many ways.

I was born and raised in metro Detroit, Michigan, and have been familiar with the economic situation of Detroit for many years. In 2013, the city of Detroit went through bankruptcy on the public front. However, in the private realm, there were (and still are) two major proponents for the city. Their names: Mike Ilitch and Danny Gilbert – two billionaires who have been pouring their money and resources into rebuilding Detroit. They have done everything from purchasing casinos, buying buildings, knocking down blighted homes, and creating jobs through their various entities. When one of these two billionaires acquire property in Detroit, they actively improve the buildings and surrounding area in an effort to help revitalize the city. But this is not the case for all investors. Many Chinese investors purchase real estate in Detroit simply due to the low cost, but then do nothing to improve the property. So while some activist investors are aiming to improve Detroit and revamp the local economy; other investors are simply buying and holding hoping others will do the work for them. In an article by Forbes titled, “China’s Newest City: We Call it ‘Detroit”” it discusses the attraction of Detroit properties to Chinese investors.

My first example was one that hit close to home and contained some economic impacts that are less robust than my next argument, but nonetheless prevalent. An article by Bloomberg titled, “China Wants to Buy Europe” discusses how aggressive Chinese investors are being in foreign markets. “Until 2011, China was mostly a receiver of European investment, but then the debt crisis drove down asset prices. Some governments became desperate to privatize, and venerable corporations got less picky about potential investors. Chinese buyers acquired Volvo in Sweden, a large stake in Peugeot Citroen and fashion house Sonya Rykiel in France, the Piraeus Port in Greece, Pizza Express restaurants and the upscale clothing maker Aquascutum in the U.K. Chinese investment increased exponentially” (Bloomberg). Essentially, before the financial crisis, companies were able to be picky about where they received credit. Once the credit markets dried up, they needed to look for outside investors where the Chinese were aggressively investing.

Chinese M&A activity

The preceding image taken from the Bloomberg article does an excellent job depicting Chinese investment. The large increase in investing in the EU is concerning, due to the current financial position of the EU. The increased investment by the Chinese will increase their net exports (thereby decreasing net exports of the EU) which will have a further compounding effect on the EU. So China’s increased investment in the EU is further crippling an area that is already struggling on many fronts as evince by the near parity of the U.S. dollar and the Euro. That being said, if the Eurozone does make it out of the crisis, it is quite possible that these Chinese investors bought at the bottom.

U.S. Oil Consolidation is Around the Corner (Revised Post: #3)

Thesis: With the recent drop in crude oil prices, smaller U.S. shale companies are going to start being acquired at a rapid clip by larger rivals.

Crude oil prices dropped form over $100 a barrel to the low $40’s per barrel and are now hovering around $46 a barrel. The reason why prices were able to drop so severely is because the United States (a typically heavy importer of oil) experienced a boom in shale by a process known as hydraulic fracturing. These reserves added to the global supplies resulting in an oversupply of crude oil causing the price to drop. Furthermore, OPEC (the largest oil producing organization in the world) decided not to cut oil production in the region (which was the typical policy in order to keep prices elevated). Now you may be wondering why OPEC would execute such a plan. Many producers in that region can drill and get oil out of the ground around $10 a barrel, so even at $46 a barrel they remain profitable. Now the U.S. shale companies have a much higher cost of drilling and getting oil out of the ground. The most efficient can manage $40 a barrel, but the norm is closer to $50 a barrel, and many can’t even produce at those levels according to an article published by CNBC.

Many small U.S. companies set out on oil exploration projects and used leverage (or debt) to finance the projects. But now, the price of crude oil is below their drilling costs to get it out of the ground. So they are highly leveraged, not capable of making net profits, and are unable to attain financing from the credit markets. So why would anyone want to acquire one of these companies? The answer: their oil reserves and land. Large oil giants such as Exxon Mobil XOM or Chevron CVX are able to purchase these smaller, struggling companies at an incredible discount right now. They have the capital and pipelines to continue operations and can boost their oil reserves by purchasing these smaller companies. A Bloomberg article titled “Get Ready for Oil Deals: Shale is Going on Sale” mentions some of the top buyout targets. The reason why now is the time for deals to start occurring is because crude oil has been below $60 a barrel for all of 2015 and prices below $50 a barrel for half of that time frame. So these smaller companies have experienced an entire quarter of producing at losses with no medium term catalysts for crude prices to rally in sight. The main tradeoff is that the smaller companies get to avoid bankruptcy or further share price decline while the larger companies who can tolerate the losses in the short term receive a big discount in acquiring oil reserves.

S&P 500 Due for a Pull-back

Thesis: I believe that the S&P 500 is set up for a market correction in the coming months.

The S&P 500 has been setting all-time highs recently on strong earnings data from U.S. corporations, an improving economic background highlighted by reduced unemployment, and a rallying U.S. dollar against other currencies. The last point, however, is not necessarily a good thing for the market. For example, U.S. exports appear more expensive in foreign countries, which can negatively impact future earnings, causing the market to decline. Furthermore, Europe is in a dire financial position, with many countries at risk of defaulting on all their debts. Now these are foreign issues, but they have negative impacts back home, as well. For example, U.S. companies cold hold bonds of foreign countries. Then if those countries default on their debt, the U.S. bond holder is negatively effected.

Speaking of defaulting on debt, The U.S. is facing a similar scenario while the U.S. budget is spiraling out of control. An article by Yahoo Finance discusses the U.S. debt ceiling and how it could prove to be an issue in the near future. When the U.S. government shut down in 2013, there were approximately $2 billion in damages done. It is worth noting that the stock market slid during that period, as well. If the government does in fact shut down, or there is any sort of delay in addressing the U.S. debt ceiling, don’t be surprised if we see the S&P 500 retraces and gives up many of the gains it has recently earned.

Further evidence that a correction is imminent comes from traders. Options traders have driven up the prices for S&P 500 puts, which is a bearish bet meaning they make money when the S&P 500 goes down. Another article by Yahoo Finance highlights the trades that have been made recently and claim that traders are paying for cash protection. An interesting aspect of the article mentions that options for S&P 500 puts are at similar levels to before the financial crash of 2007. That is a very concerning figure, but the article goes on to mention some analysis to alleviate fears. One reason is that recent regulation makes it difficult to be a seller of these puts since you need to have the capital on your balance sheets. Therefore, big banks aren’t able to enter these trades “naked” per say and provide liquidity to the market. Nonetheless, the amount of buyers and demand for these puts suggest traders believe the market is going to decline, why else would they pay such a premium for downward protection?