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The big news Friday morning was the much-anticipated jobs report, which came in below expectations for around 172,000 new jobs, delivering only 156,000, a decline from the upwardly revised 167,000 new jobs in August. On the plus side of the report, average hourly wages rose 0.2% and average weekly hours worked rose to 34.4, both in-line with expectations.
On the negative side, full-time jobs fell by 5,000 with part-time jobs rising by 430,000 and, even worse, the number of multiple job holders rose to the second-highest level in 10 years. The only time that metric was worse was in August 2008 when the financial crisis was in full swing. If we look at the types of jobs gained in September, more than half were in minimum-wage type positions, (retail and hospitality, to name a two). Taking a step back to look at the longer-term picture, the U.S. has added roughly 1.7 million jobs in the food services and drinking space while losing 1.5 million higher-paying manufacturing jobs, which helps explain why income levels have remained stubbornly low. To use the language of Corporate America, job creation has been a mixed issue that is constraining wages and the overall economy.
Following Friday's job report, the Atlanta Fed updated its GDPNow forecast for the third quarter, dropping it to 2.1% from the recently reduced 2.2%. This forecast has now fallen from an initial 3.6% on Aug. 3 to 3.5% at the end of August to 3.0% in mid-September to 2.4% by the end of September to today's 2.1%. That's certainly not the vector we like to see when examining the economy.
It isn't just jobs that are disappointing. Nine years after the financial crisis began, credit and debt loads are again making headlines. For the first nine months of 2016, commercial bankruptcy filings in the U.S. jumped 28% compared to the same period in 2015. In September alone, U.S. commercial bankruptcy filings soared 38%, the 11th month in a row of year-over-year increases, according to the American Bankruptcy Institute.
In August, according to the Federal Reserve, commercial and industrial loans outstanding at all banks in the U.S. fell 0.3% (which translates into a 3.8% annualized decline). That's the first month-to-month drop since October 2010, which had marked the end of the collapse of credit during the Financial Crisis. Bankruptcies are rising and loan volume declining -- typically signs that the "credit cycle" has ended.
The one area we aren't see the growth in debt we would expect with such low rates is in housing. Earlier this week the Mortgage Bankers Association revealed that purchase applications fell 0.1% in the last week of September and are now down 13.8% from this time last year. A few weeks ago we noted that retail sales for the stuff people put in their homes were not consistent with a robust housing market, so this is further confirmation that housing isn't quite what the headlines indicate.
The overall debt problem isn't just a domestic situation either. According to the International Monetary Fund, global debt has reached a record-breaking $152 trillion, with the level of new borrowing substantially outpacing global growth in recent years, rising from 200% of GDP in 2002 to 225% in 2015. Two-thirds of that is held by the private sector, but for all the talk we've heard of brutal "austerity measures," sovereign debt arising from government deficit spending has also ballooned.
This week the British pound hit a five-year low against the euro and a 31-year low against the U.S. dollar. The U.S. dollar Index soared to its highest level since July, driven by rising U.S. Treasury yields that have risen from the July lows of 1.37% to more than 1.7%, while precious metals have been taking a pounding with gold losing over 7% over the past month and front-month gold futures fell under its 200-day moving average. Friday the pound experienced a "flash" crash, losing 6% in just two minutes, though it later recovered most of that loss. This event highlights our concern that all the new regulations have left foreign exchange markets with much less liquidity, making for more volatile conditions.
Much of the recent market weakness has been driven by market chatter concerning how the pace of monetary ease is decelerating, as central banks shift their focus to helping the struggling banks restore some profitability with expanded net interest margins. We are hearing whispers of ECB "tapering," which we suspect is in no small part due to the struggles of Deutsche Bank (DB) . Also, the Bank of Japan is now targeting the yield curve rather than its balance sheet. Meanwhile, back home, the Fed hawks have been circling with Richmond Fed President Jeffrey Lacker arguing that anything over 100,000 in Friday's payrolls sets the stage for a hike coming sooner rather than later. My how things have changed: There was a time when 100,000 print was time for stimulus! We do wonder if Lacker has seen the updates for the Atlanta Fed's GDPNow we mentioned above.
So now the talk is all about rising interest rates, but in our view, rates really just can't move up all that much because, as we mentioned earlier, there is so much debt out there that even a slight increase will cause debt-service costs to rise significantly, which puts yet another headwind to already weak economic growth. We suspect these moves in yields are more likely to be temporary wiggles that soon self-destruct as growth outlooks battle those rates back down. Yes, but those talking heads on financial television keep insisting that the U.S. economy is getting back on its feet! Oh really? Take a look at gross domestic income in the U.S., which has been decelerating for the last six consecutive quarters.
While higher rates would please savers who would certainly like to receive better yields on their savings and banks would be better off with a bigger net interest margin, neither would be improved by further slowing economic growth that would result from higher borrowing costs in a world saddled with so much debt. Keep in mind that in July 2012 the 10-year U.S. Treasury yield fell below 1.5% to then double to more than 3% by January 2014 to then drop back again to below 1.4% in July.
Today the S&P 500 is priced at around an 18.3x forward price-to-earnings multiple versus the 15x 10-year average for a P/E ratio that is 1.8 standard deviations above the norm. Meanwhile, analysts remain negative on the companies that they cover with the net analyst earnings revision spread moving solidly into negative territory over the past few weeks, after having peaked near zero in September. (Remember that readings below zero indicate more negative than positive EPS revisions over the trailing four weeks). We've been vocal that expectations for earnings in the second half of the year were overly robust for the S&P 500. And while we've seen fewer negative pre-announcements so far this quarter relative to earlier this year, last night Honeywell (HON) trimmed its outlook, and odds are it won't be the only company to do so.
On a more positive note, warnings from companies are on the decline. As of the end of September, the net number of warnings was the least negative it has been as of the end of the third quarter going back to 2010. This could bode well for the markets because historically, when the bar is set low for earnings season with a negative spread, the S&P 500 typically sees a positive performance during the season.
We've had a few other bits of positive news this week with Wednesday's ISM Non-Manufacturing report coming in exceptionally strong. Expectations were for the headline index at 54.0, while the actual level broke right on through to 57.1, making it the biggest beat relative to expectations for the entire recovery and the largest one-month increase in the history of the survey, which started in 1997! September also saw the largest one-month increase for the combined Manufacturing and Services sectors in the U.S. economy. However, this comes after a horrid August report, but gives us reason to hope that August was a summer soft patch. Breadth was also solid, with all 10 components of the index back in expansion territory and nine out of 10 up for the month.
Next week is the official kick-off earnings season, but we won't have any Growth Seeker stocks reporting until the following week. This week we started to build a position in Universal Display (OLED) , which has been roughly flat since we added it. Shares of Fortinet (FTNT) were the weakest performers in the portfolio, but given that it has managed to generate billings growth and net margins that beat the competition, we aren't overly concerned with this week's move and suspect we will see solid results when the company reports its September quarter results. Shares of Dycom Industries (DY) were the strongest performers, up nearly 2% for the week by Friday afternoon. We suspect that Sunday's second presidential debate could potentially increase market volatility on Monday if we get more fireworks than in the first one, so we'll be looking to take advantage of weaknesses where we would like to build up existing or add some new positions to the portfolio.
Please follow us on Twitter @GrowthSeekerTST, and keep those questions and other comments coming.
-- Lenore Hawkins and Chris Versace are co-portfolio managers of Growth Seeker.
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