You've made it. Friday. December Jobs Day!
How much can we trust the monthly Non-Farm Payrolls number reported by the Bureau of Labor Statistics? This one print, drawn from the BLS Establishment survey, is usually taken for granted by many economists and the financial media as the "key" metric for monthly job creation. This is even though other monthly data points such as the ADP Employment Report for private employment and the employed persons count drawn from the BLS Household survey often show drastically different (usually it seems lower) totals.
For example, just one month ago, Non-Farm Payrolls showed growth of 263,000 (221,000 private) positions, while the ADP report showed an increase of 182,000 and the Household survey showed a contraction of 186,000 employed persons. These discrepancies had been a regular monthly occurrence throughout 2022, with an almost intellectually insulting insistence by those with a public voice on blindly choosing only to use the most optimistic series among the three as evidence of a beyond-tight labor market.
Incredibly under-covered in the media was that the Philadelphia Fed on Dec. 13 went so far as to revise second-quarter US Non-Farm Payroll growth for that period down to just 10,500 in aggregate from the more than 1.1 million originally reported in the monthly Establishment survey. So why do we look forward to this report when even the Philly Fed has stated that there was almost no job creation whatsoever during the second quarter of 2022 after we were led to believe that job creation was strong during that period? Your guess is as good as mine.
Maybe this bothers me because I am a trained economist who, when young, thought that statistics actually represented facts. Maybe this should bother all of us. It's almost as if someone, somewhere had an agenda. I know, I know. That's just silly talk. My bad.
We Have a Situation
The economy by many metrics that could make up a list almost too long to print is driving off of a cliff. The Federal Reserve Bank in its effort to stamp out consumer inflation is apparently blind to the fact that year-over-year inflation has peaked and is likely to drop more rapidly than many understand as we progress through 2023. The Fed has also been blinded by what it sees as tight labor conditions (which are a known lagging indicator) being supportive of this consumer inflation.
The Fed, and many others to be fair, fail to interpret this failure of labor markets to deteriorate as rapidly as the rest of the economy for what it is: A symptom of what had truly been a shortage of labor coming out of peak post-pandemic conditions. Private employers have been slow to shed human resources as these resources had been scarce for so long. That page is turning. We see news from the likes of Salesforce (CRM) and Amazon (AMZN) that missed that Challenger Job Cuts report for December, by the way. Just looking at the fundamentals of both companies, it does not take long to understand that this is likely Round One for both companies. There will be more cuts across corporate America and many employers will go through more than one cycle of layoffs.
Timing the coming recession will be difficult. I have heard everything from later this quarter out to 2024 as a date for an overt onset of contracting economic conditions. We know that S&P 500 earnings estimates for 2023 are too high. The consensus view likely needs to fall to something as low as $190 from the $233 where this view started the year. As corporate profitability sags and as short end of the curve debt securities compete with equities for capital flow, these equities will become less valuable and valuation metrics will reflect this reality.
Remember, the federal government is going to need to roll over some $6.4 trillion in maturing sovereign debt this year at much higher rates. Don't think for a minute that corporations and business entities that engorged themselves on nearly free credit for years will be immune to this condition. These entities will either pay more to borrow or curtail operations. There is no choice C. It's A or B.
In Other News...
-- The US House of Representatives is now "0 for 11" after three days of balloting in its attempt to select a new Speaker. Republican Kevin McCarthy of California, the majority leader, has made no progress through these first 11 votes as a core group of about 20 conservative members of his own party continue to oppose his selection.
-- Russian President Vladimir Putin has ordered his military forces in Ukraine to cease fighting for 36 hours starting Friday (today) at noon, local time. The Orthodox Christmas truce, which was called for by the patriarch of the Russian Orthodox Church, is largely seen by Ukrainian forces and strategic advisers as an attempt by Russian forces to reset, resupply, refit and reorganize operations. The Russian military has lost a rough 40% of the territory seized earlier this year back to Ukrainian forces.
Speaking of Defense
Raytheon Intelligence & Space announced this week that it had selected the LM 400 "bus" which is manufactured by Lockheed Martin (LMT) to build a missile tracking satellite for the US Space Force. Space Systems Command has selected two designs, one by Raytheon (RTX) and the other by Millennium Space Systems to build up a planned constellation of sensors in MEO (Medium Earth Orbit) to detect and track ballistic and hypersonic missile launches.
This is the Pentagon's plan to put extra "eyes" on hypersonic missile launches, capabilities and developments made by potential adversaries. Medium orbit permits a more close-up view than what the US is currently using while still tracking more real estate than could LEO (Low Earth Orbit) satellites. Raytheon had been the winner of a contract of still-undisclosed value to develop prototype satellites, ground systems and data processing capabilities relative to hypersonic missile defense.
As for Lockheed's part in this, the LM 400 is its most flexible satellite bus (about the size of a typical kitchen refrigerator) that can be tailored for almost any space-based mission. The LM 400 features greater propulsion and is more operable in comparison to other satellite buses in its class.
Separately, Raytheon Technologies is said to be considering the sale of an actuation unit (within the Collins division) that manufactures products that include flight controls. The unit could fetch as much as $1 billion if a transaction is completed.
I may have already shown you the smaller cup with handle pattern that ran from August into November, outlined in purple. If I did, I missed the forest for the trees. Raytheon has developed a much larger cup with handle pattern stretching from April into December (drawn in blue) with a $102 pivot. Relative strength is better than neutral, while the stock's daily moving average convergence divergence (MACD) appears set for a bullish crossover. The stock has the support of the 50-day simple moving average (SMA) and has sat upon its 21-day exponential moving average (EMA) all the way from mid-October into the present. I have a current target price of $117 on RTX based on this pivot with a panic point of $96. which would be a break of that 50-day line.
As for Lockheed Martin, the gains that we made off that double bottom reversal that roared past pivot in October appear to have matured. The stock seems now to be resolving a small period of consolidation to the downside. Both relative strength and the daily MACD appear to concur as the stock has recently lost both the 21-day EMA and 50-day SMA.
If you're with me, these defense names carried you over the past year as you struggled elsewhere. It may be difficult to let go. I'm not telling you to, at least not completely. Just remember that you may need to be at a higher cash level soon and as your winners move sideways to lower, that is where your piggy bank is. I have taken a few shares off. I remain long. I will re-add the shares on any approach of the 200-day line or a retaking of the 50-day line on momentum.
December Employment Situation (08:30 ET)
Non-Farm Payrolls: Expecting 200K, Last 263K.
Unemployment Rate: Expecting 3.7%, Last 3.7%.
Underemployment Rate: Last 6.7%.
Participation Rate: Expecting 62.1%, Last 62.1%.
Average Hourly Earnings: Expecting 5.0% y/y, Last 5.1% y/y.
Average Weekly Hours: Expecting 34.4, last 34.4 hours.
Other Economics (All Times Eastern)
10:00 - ISM Non-Manufacturing Index (February): Expecting 55, Last 56.5.
10:00 - Factory Orders (Nov): Expecting -0.8% m/m, Last 1.0% m/m.
13:00 - Baker Hughes Total Rig Count (Weekly): Last 779.
13:00 - Baker Hughes Oil Rig Count (Weekly): Last 621.
The Fed (All Times Eastern)
11:15 - Speaker: Atlanta Fed Pres. Raphael Bostic.
12:15 - Speaker: Richmond Fed Pres. Tom Barkin.
15:30 - Speaker: Atlanta Fed Pres. Raphael Bostic.
Today's Earnings Highlights (Consensus EPS Expectations)
Before the Open: (GBX) (0.49)
(LMT and AMZN are holdings of Action Alerts PLUS. Want to be alerted before the portfolio buys or sells these stocks? Learn more now.)