This Week in Barrons – 8-6-2017:
Yes Virginia, the 4.3% unemployment number is fake news. I say that because on Friday, we received the latest Non-Farm Payrolls Report that revealed that the U.S. created 209,000 jobs in July. But before you high-five each other, 158,000 of those jobs were created via the fictitious birth-death model. We learned from the Morningside Hill study that 81% of those fictitious Birth/Death jobs are NEVER converted into real jobs. But that still resulted in 81,000 jobs being created in July – right? Well, the devil’s in the details. The report went on to show that 54,000 full-time positions were eliminated, while another 393,000 full-time positions were converted into part-time positions. From my point of view, any employment model that loses 54k full-time jobs and converts another 393k full-time positions into part-time ones is not a good one. Then I wondered, with over 100m people dropping out of the labor force (many wanting back in) and if the above picture is any hiring indication – is there a conclusion here? Looking back over the past 6 months of Non-Farm Payrolls Reports:
For the past 6 months, we are averaging only 62,000 real jobs being created each month. When I add to that number the 300,000 baby-boomers that are retiring each month, that means corporations are NOT filling 238,000 monthly human vacancies. But is there something much bigger at work? For example: If small business is the engine to our country’s growth – are we failing to grow our small businesses? Factually:
- The number of jobs created by businesses less than 1 year old has decreased by almost 50% from the 1990’s.
- With the rate of business formation slowing dramatically, the pace of business closures now outpaces business births for the first time.
- Long-established companies now represent a larger share (over 70%) of all U.S. firms. That wouldn’t necessarily be a problem, except that research has shown that young businesses account for nearly all net new job growth. Older businesses, by comparison, tend to collectively shed from their payrolls almost as many workers as they add.
Millennials have the best shot at leading an entrepreneurial recovery, as by 2020 they will represent the largest age segment of the U.S. population. However, millennials aren’t starting nearly as many new enterprises today as baby boomers were creating when they were the same age. In fact, the rate of business formation by Americans ages 20 to 34 has fallen sharply since 2010. Currently: 51% of entrepreneurs are between 50 and 88 years old, 33% are between 35 and 49 years old, and 16% are under 35 years old. That in part can be attributed to home ownership among millennials (traditionally a prime source of savings and potential collateral) plummeting during the financial downturn of 2008. Also, the ever-growing mountain of student debt has left many young adults without the savings they might have put toward a business venture.
Finally, entrepreneurship education is at an all-time low. Currently, only 4% of the businesses started each year make it into their 2nd year. 76% of these entrepreneurial failures are directly attributable to managerial incompetence. The good news is that the entrepreneurial climate could be changing – whether our universities want to admit it or not. As SF reported this week, the largest VC in the technology sector (Kleiner Perkins Caufield & Byers) is shutting down its seed-stage investment arm. As other firms follow suit, young entrepreneurs could actually be forced toward the ways of old: learning how to sell to real customers and grow organically – rather than thinking their first step is raising money via pitching to bunches of bankers/investors.
If these employment tasks sound daunting, don’t worry NASA is currently hiring a Planetary Protection Officer – salary up to $187,000. The job description includes: “making sure humans don't contaminate planets, moons, and other objects in space, and to help prevent any alien microbes from spreading to Earth.” I hear Will Smith is updating his resume.
“Market bubbles are everywhere.”… Allan Greenspan
The Bank of International Settlements (BIS) warned on June 24 that markets have become “irrationally exuberant – as a result of a riskier FED on a diet of high liquidity, inflated asset prices and depressed market rates.” FED chair Janet Yellen has also noted that stock market valuations look rich by historical standards, and that the FED is going to begin to ‘start selling down’ its balance sheet with more details to follow in September. To complete the trio, ECB President Mario Draghi also signaled that Eurozone risk has shifted away from deflation, leaving bonds to look expensive. So three warning shots were fired, leaving me to assume that this most recent lunge forward in stock prices is creating the necessary headroom when the FED shifts from buyer to seller.
We're extended, and we’ve gone over a year without a 3% wiggle. This week we saw: auto sales decrease across the board, credit charge-offs rise sharply, and tax receipts (profits) come down 5% since the second quarter of 2015. Wells Fargo continues to be a story within itself, and to reinforce the mass amount of dishonesty that must breed within that banking culture. I have never seen a major company so dishonest, so disrespectful of corporate integrity, and so criminal with their customers. Last week, in addition to defrauding and stealing from a few million people via fake accounts and made up charges – they admitted to yet another ‘error in judgment’ as another 800,000 more bank customers were improperly charged for auto insurance. Tim Sloan, the new CEO of Wells Fargo said (in typical, insulting banker speak): “We need to take responsibility for our mistakes.” What Tim should do is jump on his corporate jet, take his $25m salary, and spend the next 20 years knocking on customer doors and apologizing to every single person Wells Fargo has ripped-off – all the while also offering to do their dishes and clean their bathrooms.
Next week will bring us over 30 S&P companies reporting earnings with Amazon’s August 11th report looming overhead. Friday will bring us the latest in inflation numbers, and the path toward the FED shrinking their $4.2T treasury bond and mortgage-backed securities portfolio will be delivered in September. I’m looking for another rally to new highs starting later in the week, but only if the SPX (2,476) remains over 2,450. If we see a strong break below 2,450 with follow-through below 2,440, then we should conclude that the top has been made, and a multi-month pullback toward 2,300 has begun. I expect the pullback to set up the next rally phase toward 2,600 in 2018.
Above is a condensed chart of the largest winners and losers within the DOW – year-to-date. The chart displays how many points the stock itself gained, and its corresponding point contribution to the DOW’s rise to new highs. Last week the S&Ps (SPX = 2476.83) and the NASDAQ (QQQ = 143.65) did a lot of nothing. The financials (XLF) are holding up the S&Ps while Apple (AAPL) continues to support the NASDAQ. Although ‘big tech’ and the Russell (IWM) are moving lower, if the XLF can remain above 25 – then the SPX has a clean shot to make it to 2,500. However, if the XLF and AAPL start to roll over – they could cause some serious sell-side activity. If Apple (AAPL) breaks down – look at buying the August 11th QQQ Strangle for $0.41 = (Buying the 141.50 Put and the 145.50 Call for $0.41).
What’s scary to me is that many of the natural market correlations are breaking down. For example: the financials are rallying AND the bonds are rallying. This doesn’t make sense because as bonds rally – interest rates fall. Falling interest rates go directly against the FEDs initiatives and also are bad for financials. So, having both rally doesn’t pass the ‘smell test’ and beaks a natural correlation. Another example is that money managers are buying junk bonds (HYG) and Argentinian debt (that has defaulted more times than I care to count) before buying Ford – a stock that is paying a 5.5% dividend. This warped ‘search for yield’ is distorting a lot of natural market correlations.
Stocks to watch:
- This week Apple’s (AAPL) earnings propelled the DOW to breach the 22,000 mark. Apple also announced that production of the iPhone8 is on schedule and slated to launch in September. It also plans to release a new version of its smartwatch by the end of the year that will be able to perform many tasks without needing an iPhone to be in range.
- Amazon (AMZN) and many competitors are set to present their earnings next week. Video is one of Amazon’s biggest investments, and is expected to exceed Netflix's spend (NFLX) for the year.
- Facebook (FB) is seeing rising advertising revenues pushing its stock price closer to the $175 mark. The social media giant will soon begin to sell a home-based video chat device – with a laptop-sized touchscreen and built-in smart camera technology.
- Netflix (NFLX) is battling for supremacy with Amazon in the lucrative market of India. The online streaming service will air two new original TV shows that will cater to local viewers. One of the new series, "Again" is a supernatural female-led detective series set in New Delhi. Marisha Mukherjee (of ABC’s ‘Quantico’) will be the writer of the show.
- Google (GOOGL) shares were down most of the week. Although their second-quarter revenue grew by 21%, the cost to get that revenue grew by 28%.
- Flexion Therapeutics (FLXN) is developing a long-lasting corticosteroid injection (Zilretta) that may significantly improve pain in patients suffering from osteoarthritis of the knee. Once FDA approved (expected on Oct. 6), FLXN patients would shift to quarterly corticosteroid shots as treatment to avoid pain and to eliminate knee replacement surgery.
- Keryx Biopharmaceuticals (KERX) received FDA approval on Auryxia for use in chronic kidney disease patients on dialysis. FDA will soon analyze (decision by Nov. 6) if there is a possibility to use the med in patients who are not on dialysis. If approval is granted, Auryxia's sales could exponentially increase.
- Cara Therapeutics (CARA) is a marijuana stock, but is also a painkiller in chronic kidney disease patients with uremic pruritis. Cara is planning to meet with the FDA very soon to discuss the design of a pivotal phase 3 trial that could begin prior to year's end.
- American Express (AXP) – Bullish with financials (XLF) strong,
- Alibaba (BABA) – Bullish with a run into earnings:
o Sell the August 11th – 147 / 149 Put Credit Spread, or
o Buy the August 18th – $150 straddle,
- Nvidia (NVDA) – Bullish, with a run into earnings,
- Amazon (AMZN) – Bullish, has come down and running into earnings,
- YY Inc. (YY) – Bullish, with run into earnings, and
- D.R. Horton (DHI) – Bullish, with a run into earnings.
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Please be safe out there!
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