ANOTHER MISS IN THE JOBS DATA

December’s job’s data was another shocker.  Nonfarm and private sector job creation was 50% lower than the forecasted amount.  The unemployment rate fell to 3.9% versus the 4.1% consensus view.

The labor participation rate (LPR) met expectations rising to 61.9% from November’s 61.8% level.  Average hourly hours were 50% higher than expected and year over year is up 4.7% versus the expected 4.2% increase.  Did the Fed Minutes forewarn of this?

Perhaps the worst-case scenario for the Fed is an acceleration in nominal wages but a drop in real incomes or what is playing out over the past several quarters.

In my view, the biggest shock was the huge increase in the household survey, the one that produces the unemployment rate shows a large gain of 650,000.

The major difference between non-farm payrolls (establishment survey) and the household survey (unemployment rate) is that the establishment survey calls the largest businesses and asks how many people they have hired (fired) during the reference period.  The household survey calls residences and asks whether they are working—includes sole proprietorships and the like.

The trend has been a large increase in the household survey thus suggesting small business is alive and well.

During the last era of 4% growth of 1996-2000, 90% of job creation occurred in small businesses defined as companies employing less than 399 workers.  Is this again occurring?

September 2021 FRB Chair Powell stated that national income has peaked for this cycle, the result of the expiry of enhanced unemployment benefit that paid 52% or the recipients more not to work rather than work.  That has not been the case as national income is still rising, perhaps the result of the surge in sole proprietorships and the like.

Equites were initially mixed on the data but sold off mid-day, perhaps the result of surging interest rates.

In my view a subject that has received little attention is the explosion of option call buying.  According to Options Clearing Corp, around 39M call options have traded daily on average in 2021, rising 35% from 2020 and is the highest level ever.

Retail investors represent more than 25% of total options trading activity due to access via commission free brokers.  Activity is/was largely concentrated in the largest capitalized names.

This is inherently bullish until it ends.

Second is the massive amount of margin debt.  According to FINRA, margin debt was up more than 25% year over year and is now at a record percentage of GDP.

Many times, I have commented about the massive concentration of funds in a few names.  Last week I referenced a Sundial Capital Research report stating that roughly four in every ten companies in the NASDAQ composite has seen their market value cut in half from their 52-week highs, a drubbing that started in mid-October when the Fed began to telegraph a change in monetary policy.

I rhetorically ask what happens to the indices if selling commences in the largest capitalized names, selling that could perhaps be exacerbated by the inability to forward roll equity call options amplified by record margin debt, selling primarily the result of surging interest rates and an illiquid market?

Many times, I have commented Main Street could outperform Wall Street for the first time in at least 10 years. [Note:  2021 both performed about the same utilizing accepted value {Main Street} and growth {Wall Street} proxies]  The employment data is suggesting that such is possibly occurring.  Recent stock market activity is also validating this observation.

What will happen this week?  The S & P had the worst start of the year since 2016.   However, the carnage is not as bad as the suggested.  According to Bloomberg, about 70% of the S & P 500 advanced last week.  The weakness was primarily concentrated in the issues that dominate the indices.

Treasuries had their worst start in over two decades according to Bloomberg, a major reason for the weakness in the mega sized companies.

Earnings season commences on Friday with the release of several mega sized financials.  How will the results be interpreted?

The economic calendar is comprised of various inflation statistics such as the CPI, PPI and Import prices.  Also released are retail sales and the Fed’s Beige Book.

Last night the foreign markets were down. London was down 0.04%, Paris down 0.36% and Frankfurt down 0.27%.  China was Japan down 0.03% and Hang Seng up 1.08%.up 0.38%,

The Dow should open flat but NASDAQ futures re off another 0.4%.   The 10-year is off 3/32 to yield 1.78%.

 

The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. This material is being provided for informational purposes only. Any information should not be deemed a recommendation to buy, hold or sell any security. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. This report is not a complete description of the securities, markets, or developments referred to in this material and does not include all available data necessary for making an investment decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. If you would like to unsubscribe from this e-mail distribution, please reply to this e-mail and indicate that you wish to unsubscribe in your response.