Job Market
We may start to see a slight cooling in the labor market, which could cause the Fed to reduce their trend of raising interest rates. Private companies such as Indeed and ZipRecruiter are hearing from companies that are looking for workers that they are worried about the risk of over hiring. Online recruiting companies are seeing postings for jobs fall, but they are still above pre-Covid levels. It's also important to note that companies can recruit through other avenues such as word of mouth, job fairs, and help wanted ads. Companies may not use online services exclusively for their hiring needs. It is still important to watch any news that comes out about the job market and analyze all the data that comes out from different sources.
Big Banks
Today SVB Bank, also known as Silicon Valley Bank, was closed by regulators. At first thought this sounds scary since this is the first bank closure since Washington Mutual back during the Great Recession. But when one digs under what assets this bank held, it is no surprise as they were very speculative. The assets of $212 billion pale in comparison to JP Morgan Chase with $4 trillion in assets but also the quality of assets or the lack thereof is what caused the bank's failure. Many of the assets were for either venture capitalists, or startup companies in the risky tech and life science world. The bank was also very loose with its valuations, where they would loan on the equity value before the stock would even go public. They also went as far as to loan against wineries wine inventories, which accounted for 2% of the asset value of the bank.
It is important to note that when the economy slows down that is when all the speculative businesses come to light. It is important to understand that the big banks will not follow this road, because they base loans on true assets and also income.
Stock Buybacks
The 1% excise tax that the government imposed this year on companies for doing stock buybacks has not seemed to change the course of companies buying back their stock. Through February 17th, $220 billion of stock buybacks were authorized by companies which was an all-time record. We continue to support stock buybacks by companies as long as they are buying their stock back at a good price and not borrowing money to implement the buyback.
Jobs Report
The headline jobs number of 311,000 easily topped the estimate of 225,000 but marks a slowdown from January's level of 504,000. Leisure and hospitality remained strong with an addition of 105,000 jobs. With this solid number, the sector is now just 2.4% or 410,000 jobs below the February 2020 level. Other areas of strength included health care and social assistance (+62,800), retail trade (+50,100), government (+46,000), professional and business services (+45,000), and construction (+24,000). Information was the weakest group as payrolls declined by 25,000 and transportation and warehousing also had a decline of 21,500. The unemployment rate came in at 3.6%, which was above the expectation of 3.4%, but the participation rate increased to 62.5%. This was the highest level since March 2020, but still remains below the pre-pandemic level of 63.3%. On the inflation front, I was happy to see the increase in average hourly earnings of 4.6% missed the estimate of 4.8%. While this is higher than last month's 4.4% gain, most of 2022 saw gains of over 5%. Overall, the report may have been too optimistic for the market and could fuel further fears of more rate increases. I do continue to believe the labor market will continue to see gains, but at a much softer rate than the last couple of years. There's nothing that really concerns me in this report.
Sustainable Companies
This past weekend, Barron's magazine came out with their top 100 most sustainable US companies. The companies are ranked on five key criteria. The first one being how they treat their shareholders, second how they treat their employees, third how they treat their customers, fourth what they do in their community, and lastly, the effect they have on the planet. I am not into ESG investing, on the other hand I believe companies should do the right thing when it comes to people, their community, and the environment. We would never hold a business in our portfolio that was using child labor or that intentionally pollutes our waters. The top three companies were as follows: number one Clorox CLX (last yr #2), number two Intel INTC (last yr #1), and third on the list was Kimberly Clark KMB (last yr #23). To view the other 97 I would recommend going to barrons.com
Government and Inflation
For the first time ever, I think I agreed with something Senator Elizabeth Warren said when asking Fed Chairman Powell during his recent testimony what he would say to the 2 million people that could lose their jobs by him raising rates. Would you talk to the 2 million people who could lose their jobs? It’s not a pleasant thought as it's almost like a sacrifice for the economy. Chairman Powell pointed out that he has few tools to slow inflation and to help with the problem they need to raise rates. It is a shame that the government will not act themselves to reduce regulations or other things they can do to increase production that would increase supply and bring down prices, a larger supply would mean lower prices. This is something the Fed cannot do but the government should do!
China’s Real Estate Market
It appears that perhaps China’s real estate market could be turning around. In a recent report new home sales in February for China increased 14.9% from their top developers. That was the first time they have seen growth from their top real estate developers in 19 months.
Oil Companies
Oil companies have made a lot of changes over the last couple of years and are being run more as a business looking at profits and cash flow rather than just production. It was estimated in 2019 that 15% of executive bonus compensation was based on production goals. By 2022 that was just 6%. The companies are now looking more at free cash flow which 18% of the incentive will come from hitting those goals, up dramatically from 7% back in 2019. There are also more incentives now for hitting environmental, health and safety goals. This will probably hurt production going forward with estimated growth of only 3% this year. Looking at it from a business perspective, it makes more sense to run your business based on cash flow and profits, rather than just production.
Farming in the US
Farming in the United States is a big business. The net cash from farm income according to the Department of Agriculture is expected to be about $151 billion this year. The US still leads the world in corn production with the biggest production coming out of the state of Iowa. Maybe that’s part of the reason since 2000 farmland values in the state have gone from $2,000 per acre to nearly $12,000 per acre. Technology and biotechnology have helped the US keep food costs low and well below Europe and other places around the world. By the use of hybridized plants, they are better at handling a drought and able to succeed on half the amount of rain just 15 years ago. Computers can also predict the performance of genetic traits and then breed the most promising seeds for lab and field testing. The result is seeds that can resist pests and make do with less spraying. Unfortunately, at this time, I cannot find any way to invest to take advantage of this going forward. But we will keep looking.