On Friday, the Bureau of Labor Statistics (BLS) reported that November non-farm payrolls advanced 32% to 321,000 from 243,000, nearly 40% higher than consensus estimates of 230,000 and well above the average monthly gain of 224,000 over the prior 12 months. The number of unemployed was unchanged at 9.1 million.
Much of the gains looked to be in retail, which jumps up towards the end of every year, then quickly plummets during the following first quarter. However, this report was a significant anomaly compared to the other recent employment reports. ADP recently reported a 10.62% month-over-month drop in non-farm payrolls, which was a 15.14% decline from a year ago. The four-week moving average of initial claims for unemployment rose 1.61% the week of Nov. 29.
Yesterday's JOLTS report (Job Openings and Labor Turnover Summary) from the BLS confirmed things are getting better, but it was only by a hair. There was little change in job openings on the last day of October, at 4.8 million vs. 4.7 million in September, and hires and separations were little changed. Until there are some corroborating data points, we think it is wise to discount Friday's report.
Versace risked more gloating this morning by sending Hawkins notes on the Toll Brothers (TOL) miss on fourth-quarter earnings. Although revenue of $1.35 billion did manage to surpass expectations of $1.32 billion, earnings per share came in at only $0.71 when Wall Street was looking for $0.72. Earlier in the year, Versace was optimistic on the sector. Hawkins, on the other hand, has been fairly negative on homebuilders, waiting for an improvement in the percentage of the population that is employed as well as higher household income levels.
Recent employment reports are giving her more reasons for optimism, but she's still wary of hoping for too much holiday magic in the sector. Neither believe big gas savings will translate into down payments on new homes, meaning it's all about jobs and wages.
The morning wasn't all lumps of coal as Costco Wholesale (COST) reported EPS of $1.12, beating expectations by $0.03, with a 7.4% increase in revenue that missed expectations by $50 million. Comparable-store sales grew 5%, all of which fits nicely with our theme of the cash-strapped consumer. Other discount retailers have enjoyed some holiday cheer of late, with Wal-Mart Stores (WMT), Target (TGT), Dollar Tree (DLTR) and Dollar General (DG) all delivering gains in the past month, rising 6.6%, 13.5%, 9.9% and 6.3%, respectively.
While shoppers are watching their pennies this holiday season, Hawkins has been "grinching" over a seemingly "abusive" relationship between the Federal Reserve and the big banks -- bail them out then hit them with an onslaught of massive fines. According to a global banking study by the Boston Consulting Group, legal claims against the world's leading banks have reached $178 billion since the financial crisis, with heavy fines now seen as a cost of doing business, a cost ultimately born by shareholders, with no banking employees or executives facing charges for wrong-doing.
Apparently this has evolved into the refrain from Human League's 1981 hit "Don't You Want Me," which says: "But don't forget it's me who put you where you are now, and I can put you back down too." Versace is convinced Bowling for Soup's "1985" is Hawkins' theme song. Yesterday, the Fed passed a proposal for risk-based surcharges on the eight U.S. banks with $50 billion or more in assets, a.k.a. "too big to fail." Basically this is a hike in the required capital cushion, which ironically happened the same day that, with barely 48 hours left to avoid another government shutdown, a 1,603-page bill was filed by Congress to provide $1.1 trillion to fund the government through September 2015. Hawkins suggests that Green Day's "Walking Contradiction" suits Capitol Hill these days.
The increased lending oversight by the Fed, which ironically has made it difficult for even former Chairman Ben Bernanke to get a mortgage, and seemingly endless fines are ongoing headwinds to financials. The sector has been priced with expectations for interest rate hikes in 2015, but if there is significant dollar strengthening (as we've discussed here in weeks past), continued weakness in commodities and declining inflation prospects, the Fed may hold off on its long-promised hikes. Just look back to the Asian Crisis of 1997-1998 to see a time when a hawkish-biased Fed left rates unchanged until the fall of 1998, despite GDP growth of 4% and unemployment falling to 4.5%.
If rates remain unchanged, we think the big banks will look rather overpriced at today's levels. Wells Fargo (WFC), JPMorgan Chase (JPM) and Citigroup (C) have enjoyed respective year-over-year share price increases of 27%, 13.9% and 8.3% based, in part, on expectation of higher rates. JPMorgan, alone, is likely to need more than $20 billion in additional capital to comply with the Fed's new requirements and, according to calculations by KBW, the requirement would cut into its return on equity by about 1.1%.
Separately, according to the Yale Confidence Index, individual investors are less confident that the equity market will be up over the next year than at any time in the last 14 years. So far, December is unlikely to give them holiday cheer. Global stocks around the world fell yesterday, with China's Shanghai Composite Index experiencing its sharpest correction in five years, whipsawing from a 2.4% gain at one point to close down 5.4%, led by financials and energy. The pullback was driven in large part by a tightening of collateral rules for equity margin and repo operations, which drains liquidity from the markets, but was implemented in hopes of promoting a more transparent municipal bond market.
Versace also wants to point out that in the wake of Sony (SNE) being hacked, perhaps even celebrities need to enroll in LifeLock (LOCK).