It’s that time of the year again when we look back at how our Dec 31, 2010 BNN predictions fared. BNN December 31, 2010

2011 was a year marked by uncertainty and volatility, to say the least.  With only a few more days to go, 2011 thus far has given investors a rough ride with many feeling bruised and battered.  The swings were sharp while the down days dominated the headlines.

2011 YEAR IN REVIEW

Investors began the year with high hopes.  The recovery was on firm footing and the worst of the great recession was supposedly behind us.  More than 70% of the corporations continued to beat analyst earnings expectations and CEOs revived investor optimism boosting guidance numbers and forecasted profitability.

With greater confidence, both the US Fed and the Bank of Canada started to embark on tighter fiscal policy; ending stimulus programs such as QE2 and raising interest rates from historical lows.  With an ever increasing positive outlook for the global economy, the Canadian dollar appreciated to a high of 1.0607 against the US greenback on July 26, 2011.

Then August 3^rd hit and what a difference a week makes. Who knew back then that the year would eventually be defined by economic turmoil, the topple of three European governments and a grassroots protest against Wall Street that spread worldwide.

Investor misery began with an unprecedented US debt downgrade – the result of a dysfunctional US government and a political unwillingness to resolve key issues such as debt reduction and tax planning in spite of an eleventh hour agreement. This was then sharply followed by fears of a Greek default and the eventual realization that the whole Euro zone was dangerously at risk.

A fiscal disaster a decade in the making for “too big to fail” countries such as Italy and Spain conjured up memories of Lehman Bros and its swift descent into oblivion.  At about the same time, economic forecasters started to slash their forecasts for worldwide growth, down from 3% to the 1-2% range.

In the four business days leading up to August 11th, the US stock market was down 600 points for two consecutive days (equivalent to a daily loss near 5.5%), which was then followed by two consecutive days of 400 points up.  Never before had the Dow Jones had four consecutive days of 400 price movements, irrespective of direction.

By October 4th, the Toronto Stock Exchange and S&P 500 were down 21% and 16% respectively from their 52 week highs.  Since those October lows, the markets have crept back.  The S&P 500 is now flat on the year while the TSX is down 11%.

DEC 31, 2010 BNN TOP PICKS BNN December 31, 2010

Our top picks for 2011 established on the Business News Network (BNN) with Frances Horodelski were:

• McDonalds (MCD)
• Pepsi (PEP)
• National Oilwell Varco (NOV)
• Deer Co. (DE),
• Caterpillar (CAT)
• Finning (FTT)

The stocks were chosen for their dominant brand and competitive position, emerging market potential, history of dividend increases, proven management expertise, and strong fundamentals.

If the group was purchased in equal weight the total return would have been 2.4% excluding the impact from currency.

By comparison the TSX is down 11.0% and the S&P 500 is up 1.0%.

HOW GOOD WAS OUR 2011 FORECAST

In our Dec 31, 2010 interview, we mentioned that we were modestly bullish.  We expected a year of slow growth and modest gains for the market.  Furthermore, we felt that investors needed to approach the upcoming year with caution.

We specifically liked McDonalds for its conservatism and its potential for upside surprise.  In the interview, we felt the company had a high probability of achieving an overall total return of 8% between dividends and capital gains, We also liked the company for its emerging market business, a common theme amongst all our stock picks.

As Frances alluded to in the interview, McDonalds did not seem to be an exciting stock pick.  We agreed and let it be known that it was unlikely to produce the type of ‘home run’ that many investors look for on a show like BNN.  That being said, McDonalds turned out to be one of the top performing stocks in the Dow Jones Industrial Average returning well over 22% in 2011.

Our worst performer turned out to be Finning which was down 17%.  The company’s problems had less to do with the economic shift and more to do with poor implementation of an enterprise wide supply chain system.  We continue to recommend Finning as a good long term buy as its business metrics and fundamentals remain sound.  (Note: We continue to own stock in Finning)

INTEREST RATES SPIKE PREDICTION

Our prediction in the interview that interest rates could suddenly spike 400 basis points at any time, interesting enough, did prove true for many on the globe – as Italy, Spain and Greece found out.  While Greece is a basket case, Italy and Spain are highly A rated countries.  Even France, which is rated AAA, the highest credit rating possible, saw a 120 basis points jump in November (equivalent to a 50% rise) — something that would have been unheard of only a few months ago.

FEARS ABOUT INFLATION

Inflation was a concern highlighted as a key risk in 2011.  Admittedly, neither Canada nor the US had to deal with runaway inflation in 2011.  As a result, fixed income type investments maintained their values for the most part.  Preferred shares, REITs, and 10 year investment grade bonds continued their returns of 3-5% on average with little fanfare.

However, we continue to believe the risk of inflation remains.  Canadians are now starting to see inflation rear its ugly head.  Both national newspapers (National Post and Globe and Mail) in Canada reported on December 20th that food inflation in Canada is now running at a 20 year high and the “era of cheap food” is coming to an end.  Inflation should definitely remain a key risk for investors with medium to long term horizons.

Next week we look at our 2012 Market Forecast.

Jeff Kaminker

www.frontwater.ca
www.fwcapital.ca

As an options trader and as a specialist in risk management, I often get annoyed when I read about risk mitigation strategies in any number of business newspapers and magazines. Rare is the case where I read an insightful article on the use of options strategies, particularly the protective put, to manage volatility within one’s portfolio.

All too often, authors focus on asset allocation as the primary mechanism for managing risk. In order to preserve capital, low risk investors should overweight fixed income products like GICs, government bonds, investment grade bonds, and underweight equities.

To further this argument, authors often display historical chart information to graphically illustrate the steadiness and consistent returns from bonds over the last twenty, even thirty years.

Problems With Relying On Asset Allocation

There are a number of problems I have in relying on asset allocation as a risk mitigation tool. First, only two years ago, we laid witness to the fact that all asset classes were hit hard. It did not matter if you held investment grade bonds, junk bonds, small cap stocks, preferred shares, or blue chip stocks in your portfolio, everything took a beating. Asset allocation did not turn out to be the safe haven that many thought and counted on.

Is Fixed Income Really A Safer Haven?

The second issue that I find bothersome is the assumption that fixed income is a steady eddy asset class over the long run. Many investors are oblivious to the fact that we have been in a declining interest rate environment for the last thirty years. Interest rates have dropped from twenty percent to one or two percent. So is it any wonder that bonds have done so well – it is simply a function of falling interest rates — as interest rates go down, bond prices go up.

On that note, one has to question a historical bond chart, even one with thirty years of history, if it is statistically representative.
Now that interest rates are slowly creeping up from their all-time lows, it could get very ugly, very quickly for bond holders. Unfortunately, I foresee a lot of seniors taking it on the chin once this bond bear market kicks in — especially those seniors being advised by their bank mutual fund salesperson to buy into bond mutual funds.

Capital Preservation At The Risk of Inflation

Finally, the third issue I have with the ‘bond safe haven’ argument is that few advisors make mention of the risk of inflation. And in today’s high commodity price environment, I fear too many investors are exposed to inflation risk – specifically the loss of purchasing power.

It does an investor little good to earn 3 percent on a long term government bond if inflation is running at 4 percent. True, the investor is almost certain to see his initial cash outlay returned as the bond matures, but the investor will have lost in real purchasing power. Unfortunately, too many investors associate capital preservation with the likelihood that cash is returned all the while ignoring the risk of inflation.

Problem With Laddered Bond Strategies:

That brings us to the next type of business news article which discusses the benefits of a laddered bond strategy. In a laddered bond strategy, an investor owns a number of different bonds, each with various maturities. Some bonds mature earlier and some mature later. Presumably, if interest rates rise, the bonds that mature earlier can be re-invested in potentially higher yielding bonds. Thus the exposure to inflation and higher interest rates is diminished.

On paper, the strategy sounds great. One problem though: in this low interest rate environment, the returns from this strategy are lousy.

The Protective Put

All of which brings me to the protective put strategy.

The concept of an index put is very simple. It is very much like insurance with the added benefit that it trades on an exchange. Unlike ‘asset allocation’ which did little to shelter portfolios against an outright collapse in the financial markets, puts most certainly protect investors against extreme market events.

Furthermore, puts give conservative investors much more leeway in bumping up the equity portion of their portfolios. Generally, it would be unheard of for a conservative investor to assign more than 65% of his portfolio towards equities. But with put protection in place, an investor has the flexibility to increase the equity portion towards even 80% with the knowledge that an effective hedge is in place should the market collapse.

Puts: The Concept Of Insurance

As mentioned, puts are equivalent to insurance. Like insurance, there is a cost to a put. A buyer of a put pays cash to the seller in what is known as the option premium. What is kind of neat is that the put premium is liquid and trades on an exchange. Investors can buy and sell put premiums exactly in the same manner that they buy stocks (eg. enter a ticker symbol, enter a price, and click ‘buy’ or ‘sell’)

Like many types of insurance, there is an expiration date associated with a put. After the expiration date, the put no longer trades and is considered terminated.

Put premiums appreciate in value when the market drops and decrease when the market goes up. But, put premiums cannot go below zero. Upon expiration, the put will be “in-the-money” and have monetary value, or it will be worthless.  Keep in mind, that the maximum amount that a buyer can lose is the put premium. The buyer cannot lose more than what he paid for the premium.

One More Feature: The Strike Price

In addition to an expiration date, puts are described by a strike price. The strike price enables investors to further customize the level of protection.

For example, if the TSX is trading at 14,000, an investor may choose a put with a strike price of 14,000. That particular put protects the investors against a market drop below 14,000.  Another investor, however, may choose to insure his equity portfolio at a lower strike price, say 13,000. Here, the investor has protection but only if the index falls below 13,000.

Why would an investor choose a strike price of 13,000 versus 14,000, one might ask?  The answer is cost. A put with a lower strike price costs less than one with a higher strike.

Having the ability to buy insurance at various strike prices gives investors a tremendous amount of flexibility in tailoring a risk strategy.  Some investors may be fine with a marginal drop in the market but want protection to kick in only in the event of a catastrophic event. Those investors are more likely to choose a strike price below current market levels – say 13,000. Other investors may want a higher amount of protection and choose a higher strike price that is more in line with the current market – say 14,000.

Volatility and Put Premiums

While both expiration dates and strike prices affect put premiums, volatility is the most important factor in determining relative value.  This is why many option traders track a volatility index called the VIX in order to assess the relative value of options.
When volatility is low, option traders know the cost of the put premium is relatively cheap. Likewise, the reverse is true. If volatility is high, put premiums become relatively more expensive.

Intuitively, this makes sense. Investors are more fearful in highly volatile markets and are therefore willing to pay more for insurance in order to protect their portfolios.

With investor sentiment bullish and the VIX trading at near lows in Jan & Feb 2011, Frontwater loaded up on 2012 protective put options on the TSX, DJIA, and S&P 500. This week we were rewarded. As stocks dropped, the index puts that we bought increased in value and our portfolios only suffered marginal paper losses. With insurance in place, not only were we able to avoid knee jerk reactions but we were positioned to take advantage of the first weekly drop in several months and added to our equity positions at depressed levels.

Admittedly, we bought the puts from a purely risk management perspective and not because we had a crystal ball that could possibly forecast the political unrest that would break out in the Middle East or that a terrible natural disaster would hit Japan.

That said, we complement ourselves for recognizing the most cost efficient way of managing risk at the time was through the use of put options. The protective puts offered great value, enabled us to comfortably maintain a higher level of equity allocation (close to 80%), and then positioned us to further take advantage of a market drop.

Option strategies can be a powerful risk management tool within one’s portfolio. All too often they get dismissed as being ‘too sophisticated’ for the average investor which draws my ire. True there are many complex option strategies but buying a put is a very simple investment strategy and insurance policy at the same time.

Jeff Kaminker

President, Frontwater Capital

Do you know what your investments cost? You would think that the collapse of worldwide markets would have provided a wake-up call to both governments and investors, but that’s not the case.

As a Portfolio Manager for private wealth individuals in Canada, I come across many intelligent and sophisticated individuals who have little, if any clue as to their all-in management fees with their current adviser. Truth be told, you’d probably need a forensic accountant to discover how much your investment adviser really earns from managing your money.

The problem is that all-in fee structures are just not transparent, and the Canadian government (unlike other governments in the UK, U.S, Australia) has shown little interest in forcing the industry to simplify its communication of management fees.

The reality is that very few Canadians realize just how much degradation occurs within their investment portfolios as a result of profits being siphoned out via “management”, “trading”, and “trailer” fees into the hands of financial advisers and the financial institutions that they work for.

The biggest culprit of portfolio degradation is the Canadian mutual fund industry itself. Mutual funds became popular in the 60’s and 70’s as investors realized that they could access and tap into professional portfolio managers via a pooled set of funds.

Admittedly, the concept was a good one. The problem today is that financial institutions have bastardized the concept. Thanks to the large fees attached to most mutual funds, investors are almost guaranteed to under perform the market, while bearing most of the downside risk. Meanwhile the mutual fund companies rake in their profits regardless.

Mutual funds are not the only ones offering fees that are out of proportion to the value of services received.

Many high net worth investors turn to professional investment managers for tailor made, customized investment solutions. Under this scenario, investors will often pay an investment fee to the firm. One immediate tax advantage that private wealth firms have over mutual funds is that investment management fees are tax deductible whereas mutual fund management fees are not. The “tax deductible” feature enables high net worth individuals who use portfolio managers, to presumably get better quality and service at lower costs.

These are difficult times for private wealth management firms, more so with the larger ones, as they have high operating costs and large overhead to maintain. A sharp depreciation in the value of portfolios and a migration of assets from high-margin products to the safety of deposits, money market products and government bonds, has eroded profits for many of these large firms.

Leave it to the financial services industry though to figure out innovative ways to disguise higher fee structures and market ill conceived products.

At many large firms, an incentive exists for wealth managers to churn accounts in order to generate trading fees and commissions. These commissions often serve as a drag on the portfolio and directly convert client principal into fees and commissions for the broker and firm.

Higher trading commissions are often overlooked and downplayed by private wealth firms as simply small, immaterial costs within a ‘Buy and Hold’ portfolio. Make no mistake, high trading fees eat into profits over the long run. Furthermore, it compels portfolio managers to take a “Buy and Hold” philosophy even if the situation does not call for it. It is difficult enough for a portfolio manager to slim positions when the market is in free fall, but it’s that much tougher of a decision if he knows that the account will be further eroded by trading fees. Thus, clients are often left holding the bag much longer on poor performing stocks.

“Proprietary” or “Structured” products have become the next step in the evolution of financial offerings. Most of these are marketed by large financial institutions under the veil that an investor can somehow get the best of all worlds. In truth, these products represent one more way for financial institutions to surreptitiously filter money out of the hands of investors and into their pockets.

The Globe and Mail (”Why Investors Can’t Have It Both Ways” By John Heinzl) recently exposed one such structure product marketed by the Bank Of Montreal,called the BMO Blue Chip GIC. The bank marketed the GIC as a low risk investment with the potential for large rewards — basically, a “too good to be true” offer. In fact, by the time, you go through all the fine print, an investor, in all likelihood is guaranteed to generate very low returns. The probability of there being some significant upside was highly remote yet the marketing materials clearly focused on the absolute best case scenario.

Structured products have become so bad that the Securities Exchange Committee (SEC) in the U.S. has launched an investigation into financial institutions who have over charged individual investors for structured notes while failing to disclose fees, and potential conflicts of interest.

Unfortunately, we are unlikely to see a similar investigation here in Canada. If we have yet to tackle clear abuses within the mutual fund industry, it is apparent that there is little appetite by the government to pursue further misrepresentations within the marketplace.

When I walk into a casino, I know over time I am guaranteed to lose. Most Canadians know this too. What they don’t know is that the same applies to the Canadian financial industry.

Under the deal, RehabCare stockholders will receive $26 in cash and 0.471 Kindred shares for each of their shares. Kindred plans to issue about 12 million shares in connection with the transaction. The deal also includes the assumption of about $400 million in debt.

That will award Rehab shareholders a 37.4% premium to the company’s closing share price on Monday of $25.47. Rehab shares have traded as high as $31.93 and as low as $15.88 over the past year. Kindred will receive financing from J.P. Morgan Chase, Morgan Stanley and Citigroup Inc. and also assume $400 million in RehabCare debt.

The deal will create the largest “post-acute” health company in the country, with more than $6 billion in revenue and operations in 46 states.

RehabCare posted fourth-quarter earnings of $17.1 million, or 69 cents a share, up from $655,000 or 3 cents a share, a year earlier. The year-earlier period included $7.2 million in charges related to its 2009 acquisition of Triumph Healthcare. Revenue jumped 36% to $339.3 million. Analysts had predicted a per-share profit of 61 cents on $344 million in revenue.

Nelson Peltz disclosed he’s offering to buy discount retailer Family Dollar Stores for $55 to $60 a share in cash.

Peltz said last year that he believed Family Dollar’s shares were undervalued, and he said he would discuss with the company ways to improve operating performance.

Family Dollar shares ended the regular trading session at $43.96 a share.

At $60 a share, a buyout would cost Peltz $7.6 billion, based on Family Dollar’s recent share count of 126.4 million shares.

Peltz said in a regulatory filing that he also offered Howard Levine, the Family Dollar CEO, an opportunity to participate in a company buyout.

Peltz’s investment firm, Trian, “also advised Mr. Levine that in their view, the ultimate decision of whether the Issuer should be sold should be determined by the Issuer’s shareholders,” according to the regulatory filing.

Trian owns nearly 8% of Family Dollar’s shares, according to today’s SEC filing.

Sanofi is paying $74 a share, or $20.1 billion, plus a contingent value right, or CVR—a pledge of additional payment of up to $14 a share if Genzyme meets certain sales and manufacturing targets. Genzyme shareholders will get extra money if Lemtrada, Genzyme’s experimental treatment for multiple sclerosis, makes it to market and achieves certain sales. Shareholders will receive additional money if Genzyme restores manufacturing to certain levels at the plant that has experienced problems.

Acquiring Genzyme gives Sanofi its own dedicated research team in the U.S., and better links to other U.S. research partners in academia and the biotech industry, Mr. Viehbacher said Wednesday.

“Although the opportunities [for research collaborations] are global, it is still true today that the most numerous opportunities are in the U.S.,” he said during a webcast with shareholders held at Genzyme headquarters. “To work collaboratively we felt we really needed to have a stronger presence here in the U.S., particularly on the research side.”

Genzyme also gives Sanofi more know-how in biological drugs, which are proteins made in living cells. Biological drugs have been among the most effective treatments discovered in recent years, making it crucial for companies to have expertise in the area.

The deal was announced as Genzyme said its fourth-quarter earnings surged as the company continues to recover from manufacturing problems that temporarily shut down its main production site in 2009. The plant is the sole source of Genzyme’s top-selling products, Gaucher’s disease treatment Cerezyme and the Fabry disease drug Fabrazyme, which are recovering from shortages that stemmed from the shutdown. In the quarter, Cerezyme sales more than doubled on increased shipments, while Fabrazyme sales were up 6.2% as supplies improved. Genzyme reported a profit of $471.9 million, or $1.76 a share, up from $23.2 million, or 9 cents a share, a year earlier.

Sanofi said Genzyme will keep its name and operate as a separate unit focused on rare diseases, an area Genzyme has specialized in. Mr. Viehbacher said he planned to “keep the identity of the company, keep everyone in the company but still achieve some synergies.”

A joint integration steering committee will be co-chaired by Mr. Viehbacher and Henri Termeer, who will resign as chairman and chief executive of Genzyme when the transaction is completed.

Sanofi for years was staunchly French, focusing much of its drug research in its home country. But since Chris Viehbacher took over as chief executive in 2009, the company has been widening its research net in an effort to improve its drug development. Mr. Viehbacher, a citizen of Canada and Germany, has struck more research partnerships with outside academic groups and biotech companies, and in December hired a new head of R&D—Elias Zerhouni, the former director of the U.S. National Institutes of Health.

Wall Street Journal

Federal Reserve officials modestly upgraded their outlook for growth last month, but indicated little inclination to lessen their extraordinary support for the economy this year.

Fed policymakers boosted their projections for 2011 growth in U.S. gross domestic product to between 3.4% and 3.9%, up from the 3% to 3.6% they estimated in November, according to the forecasts released Wednesday along with minutes of the meeting of the central bank’s Federal Open Market Committee in January. Increased consumer spending, stronger exports and a boost from the tax-cut package approved in December all contributed to the brighter outlook.
The officials, however, voted unanimously at the meeting to leave intact their $600 billion bond-buying program given the slow improvement in unemployment and inflation.

Despite the improved growth forecast, “the pace of the recovery was insufficient to bring about a significant improvement in labor market conditions, and measures of underlying inflation had trended downward,” the minutes said.

Some Fed policymakers have raised the prospect of scaling back the purchases of longer-term Treasury securities, now scheduled to run through June, if growth prospects improve significantly in coming months. But most of the committee appeared to show little interest in such a move.

“A few members noted that additional data pointing to a sufficiently strong recovery could make it appropriate to consider reducing the pace or overall size of the purchase program,” the minutes said. “However, others pointed out that it was unlikely that the outlook would change by enough to substantiate any adjustments to the program before its completion.”

The Fed officials still could change their minds, if events unfold differently than they expect. “Members emphasized that the committee would continue to regularly review the pace of its securities purchases and the overall size of the asset purchase program in the light of incoming information…and would adjust the program as needed,” the minutes said.

Despite mounting worries about rising prices for oil, grains, metals, and other global commodities, central-bank officials continue to expect very slow increases in the U.S. consumer-price level. They forecast overall inflation of 1.3% to 1.7% in 2011, barely up from the 1.1% to 1.7% they estimated in November, based on the Commerce Department’s price index for personal consumption expenditures. Excluding food and energy prices, inflation is expected to be between 1% and 1.3% this year–well below Fed officials’ informal target of just under 2%.

Some Fed officials said at the meeting that climbing commodity prices, along with higher prices for imported goods, posed risks for higher inflation. But others noted that the pass-through to consumers “had generally been fairly small,” the minutes said. “Some participants expressed concern that in a situation in which businesses had been unable to raise prices in response to higher costs for some time, firms might increase them substantially once they found themselves with sufficient pricing power.”

Fed officials estimated that the unemployment rate in the final quarter of the year would be between 8.8% and 9%, a slight improvement from the 8.9% to 9.1% projected at their prior meeting.

Policy makers indicated stronger confidence about the durability of the recovery, and less concern about the possibility of a persistent decline in the consumer price level, or deflation. Officials “generally agreed that the downside risks to their forecasts of both economic growth and inflation―as well as the odds of a period of deflation―had diminished,” according to the minutes.

For months, we at Frontwater Capital, have been saying: stay away from government and investment grade bonds. When cash rich companies like, IBM, Microsoft, Pepsi, Walmart, and McDonalds can issue debt at yields near or below 1% for 3 years, you have to question the intelligence of the bond market. Finally, this December, it seems as if we got the correction that we have been looking for.

We are now starting to see the beginning of a massive exodus out of bonds and bond funds, and inflows back into the stock market. Bond mutual funds had the biggest client withdrawals in more than two years in December as a the flight from fixed-income investments accelerated.

U.S. bond funds in particular experienced withdrawals of $8.62 billion in the week ended Dec. 15, up from $1.66 billion the week before. The withdrawals were the largest since the week ended Oct. 15, 2008, when investors yanked $17.6 billion from bond funds.

And in spite of the Federal Reserve’s pledge to buy $600 billion in assets to revive the economy, we continue to see a net selloff in Treasuries as 10 year note yields have jumped to 3.35 percent, up from 2.49 percent.

So, is the bond bubble bursting. We certainly think so. Even at these new levels, yields look desperately low while continuing to carry a whole lot of risk as signs of an economic recovery and a stock market rally increase speculation that interest rates may rise.

The US unemployment rate attracts a great deal of media attention, especially during recessions and tough economic times. Generally, the national unemployment rate is defined as the percentage of unemployed workers in the total labor force. It is widely recognized as a key indicator of labor market performance.

One misconception about the unemployment rate is that it is derived from the number of people filing claims for unemployment insurance (UI) benefits. But the number of UI claimants does not provide accurate information on the extent of unemployment, since people may still be jobless after their benefits run out, while others may not be eligible for benefits or may not even have applied for them.

Counting each and every unemployed person on a monthly basis is also be a very expensive, time-consuming and impractical exercise.

Therefore, the U.S. government conducts a monthly sample survey – known as the Current Population Survey (CPS) – to measure the extent of unemployment in the nation. The CPS has been conducted monthly in the U.S. since 1940. The CPS sample survey targets approximately 60,000 households, or about 110,000 individuals. This sample size is deemed to be representative of the entire US population. A typical household that is included in the survey is interviewed monthly for four consecutive months and then again for the same four calendar months a year later.

The basic definitions used for compiling labor statistics are quite straightforward:

* people with jobs are employed
* people who are jobless, looking for jobs and available for work are unemployed
* people who are neither employed nor unemployed are not in the labor force

The definition of “workforce” is meant to include all those who are either employed or unemployed. Those who are not in the labor force – comprises of people who have no job and are not looking for one, such as students, retirees and homemakers.

The criteria for being considered to be unemployed are rigorous and well-defined. For example, actively looking for work includes such measures as contacting prospective employers, attending job interviews, visiting an employment agency, sending out resumes, responding to job advertisements and so on.

Hence, out of work people who only partake in passive methods of job searching such as attending a training course or scanning the job advertisements in newspapers, would not necessarily be considered unemployed by the US government.

By now, you can begin to see the emerging controversy around the definition of unemployed. The following situations are examples of individuals who would not fit the official definition of “unemployed” as they would be deemed “not in the labour force”.

A single mother who has been unemployed for three months, but is unavailable for work for the past two weeks in order to care for her sick child, would be classified as “not in the labor force.

On the flip side, a sales executive with a family to support and bills to pay has been unable to find full-time work after six months of unemployment. He finally takes up a three-month contract that entails only six hours of work a week. Even though this person is only working temporarily in a position that under utilizes his skill set, he would be considered “employed” by the government.

The strict definition of unemployment more often than not results in understating the magnitude of the actual unemployment situation. It is therefore advisable to look beyond the headline unemployment number, as it may not convey the whole story.

No matter the category: gold, silver, copper, uranium, wheat, sugar, cocoa if it was a commodity, it pretty much kicked butt in 2010. Any way you slice it, commodity prices erupted on the backend of 2010.

Gold was the clear standout in 2010. It traditionally has been viewed as a classic shelter investment, often used as a hedge against inflation. That kept it idling for much of the decade before the global financial crisis emerged in 2008. Then, as central banks started taking dramatic actions to stimulate their economies, gold starting moving higher as interest rates dropped to record lows and some currencies fell in value. That led some investors to predict higher inflation is inevitable. Other precious metals, like silver, also moved higher.

On Friday, gold closed at $1,421.40 an ounce, 31 percent higher for the year after an almost uninterrupted climb since January. This was also the 10th consecutive year in which gold appreciated. Gold should continue to rise well into the second half of 2011. Political instability, such as military tensions on the Korean peninsula, coupled with further stimulus plans and bailouts in Europe mean gold’s safe-haven status will keep it in high demand.

Industrial metals, used to make everything from computer parts to automobile engines, also gained as global consumption and manufacturing started to recover. Copper in particular surged more than 40 percent, rising from just over $3.00 a pound to close the year at $4.4470.

Meanwhile, 2010 marked one of the most profitable years ever for farmers in the U.S. Midwest. Smaller reserves of corn and soybeans this year couldn’t satisfy ever-growing global demand, sparking a price rally over the summer that has yet to abate. Wheat prices also climbed as droughts, fires and heavy rains around the world slashed the amount of grain for harvest. With Russia’s post-fire grain export ban likely to remain in place throughout 2011 and European exports expected to be exhausted in January, the U.S. looks increasingly likely to be the supplier of last resort in the coming year.

Grains and soybeans closed higher on Friday. March wheat rose 9.5 cents to settle at $7.9425 a bushel, March corn rose 13 cents to $6.29 a bushel and March soybeans added 27 cents to close at $14.03 a bushel.

Oil prices ended the year at levels many analysts considered unachievable just six months ago as oil surpassed $90 a barrel this month and remained above the threshold to close the year at $91.38 a barrel. Increased demand from China and India has also helped stoke the rise in oil and energy prices in the second half of the year. Oil prices hit a low around $70 a barrel late in May as traders worried that debt problems in Europe and high unemployment in the United States would keep economic growth stagnant and energy demand low. But increasing demand in the developing world has changed all that.

Undoubtedly, the jump in commodity prices has been driven by China’s seemingly insatiable demand for raw materials and speculators betting that they could profitably ride the momentum higher. Investors are looking to get out of the dollar, and stocks have run up so much that commodities are looking like a good alternative. Expect further price increases, and volatility to continue well into 2011.

Jeff Kaminker