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The employment report this morning was a big surprise for everyone, especially me. A GAIN OF 2.5 MILLION JOBS! That’s with the backdrop with the period of the survey 30 million people were getting jobless benefits. The markets are celebrating however I did a little digging into the data. Businesses were told to exclude anyone who didn’t get paid in April and with the 3.8 million PPP loans (Paycheck Protection Plan) totaling over $500 billion businesses put people back on the payroll as required with the loans in late April and early May. The largest job gain increases were seen in businesses that at the time of the survey on May 12th were actually shut down due to the pandemic. Dentists, personal laundry services, and food service and drinking places, apparel manufacturing were likely PPP loan recipients. The big gains were notably with food service and drinking places which validates my belief the PPP was used to keep workers.
The problem I see is that the PPP loans will start to run out and getting back to normal creates a timing issue. Typically when there is economic shock unemployment goes up and the rehiring of workers goes slower since businesses try to push existing workers to do more until they feel more comfortable to hire. The first wave of layoffs were more blue-collar workers and temporary workers that hits lower incomes and the second wave will soon hit the white-collar workers supervisors/managers who make higher wages. I saw an email from a business today that sums up generically what many companies are going to be deciding in the coming weeks. “We will have difficult decisions after June 30. The most important will be to reduce expenses through cuts in staffing costs. These may include layoffs, reduction in pay levels for all employees in including corporate staff, or reduction in hours. We may put off CAPEX and maintenance projects unless necessary.”
There are also some questions regarding how the BLS data has been calculated and I there could be a huge revision in the coming months:
If the workers who were recorded as employed but not at work for the entire survey reference week had been classified as “unemployed on temporary layoff,” the overall unemployment rate would have been higher than reported. This kind of exercise requires some assumptions. For example, first one needs to determine how many workers might be misclassified. There were 5.4 million workers with a job but not at work who were included in the “other reasons” category in May 2020, about 4.9 million higher than the average for May 2016–2019. (While this category contains misclassified workers, not every person in this category was necessarily misclassified. The average for recent May estimates was 549,000 employed people with a job not at work for “other reasons.”)
One assumption might be that these additional 4.9 million workers who were included in the “other
reasons” category should have been classified as unemployed on temporary layoff. If these workers
were instead considered unemployed on temporary layoff, the number of unemployed people in May (on a not seasonally adjusted basis) would increase by 4.9 million from 20.5 million to 25.4 million
President Trump is as you would expect is taking full credit and multiple victory laps on Twitter and with an hour-long press conference. I just love it when he thanks himself on Twitter. Considering last month 20 million jobs were lost a bounce of 2.5 million is a positive headline but perhaps the PPP support which will be ending in the coming month could have pulled forward better data and risk for Trump is the possibility we won’t see enough jobs gained by the election. “This is not a V recovery… it’s a rocket ship…” Classic line
The markets have bounced a lot more than anyone expected and has priced in a full recovery almost like nothing ever happened. The current S&P multiple is anyone’s guess with guidance withheld by companies for Q2 guidance and people are trying to look out (or into a crystal ball) for 2021 with estimates similar to 2019 which would still be a 20-year high multiple. The other day I mentioned on a note what might be the next Fed response with the markets back to highs. Next week we will hear from the Fed heads which might give some clues if they will back off of some stimulus.
There is also a new generation of stock traders who fully believe stocks only go up too. Bar Stool Sports CEO is “day trader Dave” live on Twitter is the poster child for this behavior for millions of Robinhood traders. I’m seeing some signs of speculation only seen in the later innings of a rally. Stocks that have no business that has stocks go from 1 to 12 and back down within a few days, stocks that rip higher like Hertz that just declared bankruptcy with worthless equity or stocks that have similar symbols to recent winners moving higher. These traders only are chasing the greater fool theory. Lastly, it’s easy to see the speculative risk when the put-call ratio at .43 earlier today which is at similarly low levels as seen at the highs in February. The “message board” crowd…
Another sign of make-believe is trading in Apple. The majority of the Apple stores have been closed for most of the quarter and the stock is hitting all-time highs. “On it’s way to a $2 trillion valuation” from $1.4 trillion currently. I keep thinking about the high inventory data we saw with Q1 reports from AT&T and Verizon, it’s impossible Apple could have sold down the inventory enough and with the much-anticipated launch of the 5G phone now rumored to be pushed out a quarter missing the important holiday season, how is this stock a buy here and at a historically high 26x earnings?
Airlines, retail, and restaurant stocks have been very strong with the reopening hopes but they have a lot of structural problems and social distancing rules limiting the number of passengers, shoppers, and diners will not help profitability but traders are snapping them up like tomorrow everything will be back to normal. I’ve been bullish on financials one of the best sectors in the past month and even they are starting to get too far extended.
