Oh, God, please don't make me do it. The U.S. stock market's extraordinary, positive reaction to a nonfarm payrolls report that was about 50% below expectations -- with only 245,000 jobs created in November -- forced me to go to the BLS website and actually read the report. This is a horrible report. While some financial news networks attempt to spin it positively, I instead, try to find investment implications. As I mentioned in yesterday's RM column, virtually no one does this type of analysis when the market hits all-time highs. Finding inflection points is the way to produce returns above systemic market returns, or alpha.
This report paints a picture of an American labor market that has been fundamentally, not temporarily, changed by the Covid-19 crisis. The jobs report is composed of two surveys, the Household Survey and the Establishment Survey. Most observers focus on the Establishment Survey and that is where the "jobs" number is found. With a nonfarm employment increase of 245,000 persons in November versus the revised figures of 711,000 in October and 610,000 in September, there is no spinning the fact that job growth has slowed dramatically in this country. The average work week remained unchanged overall and actually declined in manufacturing, as did manufacturing overtime, and the U.S. is just continuing on this path to making nothing and importing everything from China.
At $29.58 vs. $28.34 in November 2019, average hourly earnings provided one of the few positive takeaways from this report. Labor is not in short supply overall, as the number of persons marginally attached to the labor force remained at 2.1 million in November and the number of people who want a job but are not in the labor force actually increased by 338.000 to 7.1 million.
As John Mellencamp once sang, "ah, but ain't that America." This report paints a picture of a job market that has slowed dramatically with underemployed folk everywhere, yet employers still having to pay more for the folks who can do the jobs that are actually open. It also paints a picture of a labor force with an inherent mismatch between skills and opportunity, and that is the worst of all worlds. It's stagflationary. Not enough new jobs are being created to juice the economy, but employers are being forced to pay more to keep the folks that currently work for them.
Yesterday I promised some short ideas, and this depressing jobs report certainly offers some. This report shows a country that is in transition to a work-from-home, order-everything-online economy. As much as I think Amazon (AMZN) and Zoom (ZM) are overvalued, the latter much more so than the former, I am certainly not shorting them today. Always use fundamental, subjective analysis to inform your mathematical, objective stock analysis.
Who loses here? Well, physical retailers, restaurants and entertainment venues that require physical attendance. Yes, you are saying, "thanks, Jim, we knew this," but let me tell you, the stock market NEVER figures out the depths of "down" correctly. The bond market is much better at this. I am seeing AMC Entertainment Holdings (AMC) quoted at $3.56 today. If I were still on the sell-side, I would give it a price target of $0.00. Similarly, Invesco has an ETF, the Dynamic Leisure and Entertainment ETF (PEJ) , that has nearly regained its February level. That's delusional. PEJ's number one holding is Hilton (HLT) , at 5% of the fund, and you should go check your nearby Hilton-owned hotel if you think that is an attractive business now.
So that's my call. Peter Lynch famously said, "The worst mistake an investor can make is thinking a stock that has gone down can't go down further." He's a smart guy. There will be more pain to come for the hospitality, leisure and entertainment sectors, and the stock market will figure that out sooner rather than later. Hedge your longs with shorts on companies whose business is quite literally drying up. You will be happier in 2021 for having done so.