You've got to trust your instinct
And let go of regret.
You've got to bet on yourself now start
'Cause that's your best bet.
- 311 "All Mixed Up"
Yes, this morning was a 311 type of morning for me, as I analyzed the non-farm payrolls form report from the comfort of sunny Sao Paulo. It's actually cloudy here today, but that's just another indication that, as in the title of the song that I was quoting, things are all mixed up.
This was an awful report. Full stop. Yes, after Wednesday's cratering 300k job decline in the ADP private payrolls survey, this morning's headline figure of 467,000 jobs created -- versus the consensus estimate for a gain of 150,000 jobs -- may have seemed like a big bonus. In truth, this report was exactly what market bulls did not want to see.
In January, average hourly earnings for all employees on private nonfarm payrolls increased by 23 cents to $31.63. Over the past 12 months, average hourly earnings have increased by 5.7 percent. In January, average hourly earnings of private-sector production and nonsupervisory employees rose by 17 cents to $26.92. (See tables B-3 and B-8.)
The average workweek for all employees on private nonfarm payrolls fell by 0.2 hour to 34.5 hours in January. In manufacturing, the average workweek edged down by 0.1 hour to 40.2 hours, and overtime edged up by 0.1 hour to 3.3 hours. The average workweek for production and nonsupervisory employees on private nonfarm payrolls decreased by 0.2 hour to 33.9 hours. (See tables B-2 and B-7.)
In the words of the immortal Cosmo Kramer, "yamahama." You couldn't open up Funk & Wagnalls and find a better definition of "stagflation" than that. The bond market is, rightly, freaking out this morning, with the yield on the 10-Year UST note hovering at 1.9% as of this writing. That yield has not been above 2% since the end of July 2019, but watch out. We are heading that way now, with a bullet.
So, how do you play this?
Reduce exposure to tech stocks. Amazon (AMZN) gave the Nasdaq a nice reprieve from the Meta (FB) blues last night. That said, AMZN did lose more than $1.5 billion at the operating income line in fourth quarter 2021 just "being Amazon." Amazon Web Services and Rivian (RIVN) made up the difference and produced bottom-line outperformance. Amazon was no silver bullet, just a company that for some reason employs 1.6 million people (!) around the world, trying to pass through an increase in Prime. I am undecided now if I will renew. I find their televised content to be underwhelming, but I love getting my stuff the next day.
Everything else in tech besides AMZN? Be very, very, very careful. Really. This stock market just cannot handle 2% interest rates. Believe that. Nearly free money is the Powell/Yellen bubble's main/only source of inflation. And, yes, inflation hurts people. These chardonnay-sipping, unelected technocrats will wait till March to do a token 25 basis point Fed Funds rate raise. Meanwhile, the actual grown-ups who run the Bank of England did 25 bps this week and four of the nine committee members actually voted for 50 bps.
Unchecked inflation is a cancer. Okay, it's not as bad as social media -- as I noted in yesterday's column -- but it is pretty nasty, and acts as a regressive tax. Those who can afford it the least pay for it the most. It's terrible, but Jerome "inflation is transitory'' Powell and Janet "Ken Griffin paid me $750,000 to give speeches to Citadel (this is a matter of public record)" Yellen just do not care.
These people are just going to serve their masters on Wall Street (I worked for large global banks for more than a decade) and fiddle while Rome (Georgia) burns. But they do control the purse strings, so you have got to keep playing inflation in your portfolio. My HOAX basket of 10 unloved hydrocarbon names is up more than 40% vs. my benchmark, Cathie Wood's sinking (ARKK) , in its six weeks since inception, and, dammit, I am not going to change now.
Just make sure that you own companies (i.e., the ones that underlie the stocks) that produce positive cash flow in excess of their cost of capital. This is called creating economic value. My most recent report for OHM Research here in Sao Paulo showed Twitter (TWTR) produced negative economic value (CFROA) for the past seven quarters. Man, I can't wait until that Twitter earnings report next Thursday. I will be really nice, I promise!
Read the tea leaves. Take a little off the table. Watch out for your family. God knows the Fed isn't.