August Jobs Report Disappoints As Powell Must Consider Taper Question!
“Before the reward, there must be labor. You plant before you harvest. You sow in tears before you reap joy.” – Ralph Ransom
Over the next three days, the United States will celebrate Labor Day to appreciate the role of workers in our country. The nature of employment in our country continues to evolve, and as technology and innovation changes the skill set for workers, citizens have to adapt to the fast moving requirements of the private sector. Over the last twenty years, intellectual capital has displaced natural resources as what is most valued by society. It is highly probably the trend will continue, although it remains to be seen about whether intellectual capital is now valued too highly and natural resources are too cheap. In the meantime, there is much excitement about the electrification of society and the movement to a transportation sector revolving around electric motors versus the internal combustion engine. On the corporate front, the cloud computing era and ability to slice and dice data massive pools into workable sets which can be fully monetized has been taking place for quite some time. Markets have rendered their judgement on it’s worth by rewarding data based companies with the most value of all companies (Amazon, Microsoft, Facebook, Google, Adobe, etc). For investors, the labor involved with evaluating different asset classes and companies is an analytical and intellectual exercise. It involves no physical labor, which is vastly different than what Labor Day was created for. I am not diminishing the role of physical work in our society as without it, many valuable activities never take place, especially regarding physical infrastructure (buildings, roads, bridges, tunnels, towers, airports, dams, ports). As such, over the weekend it’s important to acknowledge physical labor but keep an eye on the future as I suspect intellectual capital will continue to be rewarded at far higher levels.
In the markets this week, yesterday’s August jobs report badly missed expectations, coming in at 235k versus 750k. Much of the miss is being attributed to the rapid rise of the Delta variant of Covid, and the service and leisure sector showed non existent job gains, especially in restaurants and travel. Those sectors were leading the way in June, so the overall impact is dramatic. On the earnings front, market leaders Zoom, Crowdstrike, and Okta generally disappointed, as did Docusign. An octogenerian in the technology sector, HP, actually beat estimates. With the summer over, next week should start to see increasing volumes, although the Jewish new year will diminish trading a bit. Let’s turn to some political questions, shall we?
With unemployed workers having Federal benefits ending this week, more attention will get paid to growing the economy and the current administration’s plans for doing just that. Right now, it appears that spending money is their main plan, and raising taxes on the corporate sector and wealthy individuals to support the massive outlays. Last week, Democrats proposed taxing stock buybacks as a way to help raise money for all the spending they want to do. For any student of finance, a basic tenant is shareholders are indifferent between receiving a dividend or having the company buy back stock. A good management team would simply substitute a dividend for the stock buyback to eliminate paying the ‘buyback tax’. Astute investors also know a really important metric is how well management allocates capital to create future profit growth. The chances of a stock buyback tax getting through the Senate without reconciliation is going to be minimal as 10 Republican votes are probably nowhere to be found. As is the case for the 3.5 trillion dollar budget package, all roads lead through Mr. Manchin and Mrs. Sinema. With Mr. Manchin penning an editorial in the Wall Street Journal this week about a timeout, liberal Democrats are going to have to realize Manchin and Sinema aren’t going to be browbeaten into supporting the spending orge they so desire. In the meantime, I hope you enjoy Labor Day weekend.
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