Just recently the April employment report was released by the Bureau of Labor Statistics (BLS) which showed a surprise jump in employment for the month of April of 165,000 jobs. The general consensus for the report was 153,000 jobs so the “better than expected” news was credited to the surge in the financial markets.
There has been much analysis of the data since the report with views that ranged from ebullient to dismissive. (Read more…) However, the reality is that, despite better than expected numbers in the report, employment gains to this point have been nothing more than a function of population growth. The chart below shows the 12 month average of the net change in both employment and population. As you can see there have been very few months since the turn of the century where employment has exceeded population growth.
This explains two things:
1) Why the employment to population ratio has plunged along with the labor force participation rate; and
2) That employment gains, so far, have been a function of businesses hiring only to meet the demand increases caused by an increase in population rather than from a growing economy.
The latter point is very important and relates directly to an issue that has been lurking silently in the background called “labor hoarding.”
Since the end of the recession businesses have been increasing their bottom line profitability by massive cost cuts rather than increased revenue. Of course, one of the highest “costs” to any business is labor. One way that we can measure this view is by looking at corporate profits on a per employee basis. Currently, that ratio is at the highest level on record. (Scale below is inverted for clarity)
The problem that businesses are beginning to face currently is that while they have slashed labor costs to the bone there is a point to where businesses simply cannot cut further. At this point businesses have to begin to “hoard” what labor they have, maximize that labor force’s productivity (increase output with minimal increases in labor costs) and hire additional labor, primarily temporary, only when demand forces expansion.
The issue of “labor hoarding” also explains the sharp dorp in initial weekly jobless claims. In order to file for unemployment benefits an individual must have been first terminated, by layoff or discharge, from their previous employer. An individual who “quits” a job cannot, in theory, file for unemployment insurance. However, as companies begin to layoff or discharge fewer workers the number of individuals filing for initial claims decline. This is shown in the chart below which shows the 4-month average of layoff and discharges versus the 4-week average of initial jobless claims.
However, the mistake is assuming that just because initial claims are declining that the economy, and specifically full-time employment, is markedly improving. The next chart shows initial jobless claims versus the full-time employment to population ratio.
Furthermore, if we take a look at the 4-month average of net new hires we see the same story. Net new hires is likely signaling the peak of the employment for the current economic cycle.
The issue of “labor hoarding” is an important phenomenon that is likely obscuring the real weakness in the underlying economy. Without an increase in the demand part of the equation businesses are likely to continue resorting to further productivity increases to stretch the current labor force farther to protect profitability. However, as we may currently be witnessing, businesses may be reaching the limits of what they can do to continue increasing profits at the bottom line while revenue declines at the top. The implications for the financial markets going forward are clearly negative.
The “good news” is that for those that are currently employed – job safety is high. Businesses are indeed hiring; but prefer to hire from the “currently employed” labor pool rather than the unemployed masses. The “bad news” is that for those unemployed full-time employment remains elusive and wages remain suppressed due to the high competition for available work.
The current detachment between the financial markets and the real economy continues. The Federal Reserve’s interventions continues to create a wealth effect for market participants, however, it is unfortunate that such a wealth effect is only enjoyed by a small minority of the total population – and it is primarily those at the upper end of the pay scale that have jobs.
* A new U.S. military intelligence assessment says for the first time that North Korea may have developed a nuclear device small enough to mount on a ballistic missile, but said such a weapon’s “reliability would be low”.
* U.S. federal prosecutors brought criminal insider-trading charges against a former KPMG LLP partner who the government said reaped more than $50,000 in cash and gifts, including a $12,000 Rolex watch, for providing stock tips that enabled a friend to make at least $1.2 million in illicit profits.
* The Bank of Japan’s new governor, who launched one of the world’s most aggressive monetary-easing campaigns last week, shaded his views Thursday, noting that the central bank’s ambitious inflation target is “flexible” and stressing he remains vigilant for signs that the BOJ’s massive infusions of money into the economy is causing bubbles in stock or other asset markets.
* J.C. Penney Co Inc has hired bankers at Blackstone Group for advice on how the department-store chain can shore up its fast-eroding stockpile of cash, people familiar with the matter said.
* The board of Nasdaq OMX Group Inc slashed the bonus of Chief Executive Robert Greifeld following the exchange group’s botched handling of the Facebook Inc stock-market debut.
* Eli Lilly and Co plans to lay off about 1,000 sales representatives in the United States, in a major restructuring that aims to cut the drug maker’s costs in preparation for generic competition that will face two of its biggest-selling products, according to a person familiar with the matter.
FT
Portugal could struggle to avoid a second bailout even if it is granted more time to repay its existing bailout loans by eurozone finance ministers meeting in Dublin on Friday. The head of Royal Bank of Scotland’s Japanese investment bank is set to step down as Japanese authorities move to sanction the UK-based lender in connection with the manipulation of benchmark interest rates. ()
Standard Life Investments (SLI), one of BP’s largest shareholders, attacked the company’s current pay policy for its potential to reward bosses for meeting unchallenging targets. High street retailer Marks and Spencer played down speculation that it was a bid target for Qatar on Thursday as it posted a seventh consecutive quarterly fall in underlying general merchandise sales, though the outcome was slightly ahead of expectations.
Kazakhstan miner ENRC replaced the US law firm it hired to investigate whistleblower allegations of fraud in the company’s overseas assets. The company confirmed it had parted ways with Dechert and hired Fulcrum Chambers.
Spanish telecom operator Telefonica SA and Dutch group KPN are set to reopen talks over sharing their mobile networks in Germany.
NYT
* Cyprus must soon raise 13 billion euros ($17 billion) – nearly twice the amount the government thought it would have to come up with just a month ago – to keep its debt and deficit from spinning out of control and to meet the terms of a 10 billion euro ($13.1 billion) international bailout.
* The number of Americans filing new claims for unemployment benefits fell more than expected last week, easing fears of a marked deterioration in the labor market after a surprise stumble in job growth in March.
* U.S. retailers reported that a benchmark sales figure rose slightly during the month as shoppers held back on spending because of cold weather across the nation, particularly in the Midwest and East Coast, and continued fears about the economy.
* A multibillion-dollar consulting industry came under the spotlight in Washington on Thursday, as lawmakers questioned the quality and independence of companies that guide banks through regulatory scrutiny.
* U.S. federal prosecutors revealed a brazen two-year insider trading scheme involving Scott London, a former senior partner at the accounting giant KPMG, and a longtime friend.
* J.C. Penney Co Inc has hired the Blackstone Group to help it raise cash, people briefed on the matter said on Thursday, as the embattled retailer seeks a turnaround after replacing its chief executive.
Canada
THE GLOBE AND MAIL
* In a paper released Thursday, Diana Carney, top researcher at a progressive think tank in Ottawa, said climate change has become the “third rail” of Canadian politics, with the government using it so aggressively as a “wedge issue” that reasonable debate has been lost. And she placed the blame squarely at the feet of Prime Minister Stephen Harper.
Reports in the business section:
* Telus Corp of Vancouver has entered talks to buy privately held Mobilicity in a deal that sources say could value the target at between C$350 million ($346.14 million) and C$400 million.
Meanwhile, Public Mobile – the smallest of the three independent wireless companies that launched operations in 2009 and 2010 – has hired investment bankers to find a purchaser.
* Toronto Mayor Rob Ford received a “high-level” briefing on Porter Airlines’ controversial plans to transform the city’s downtown airport into a national hub two months before the official announcement.
The meetings were not included in the city’s lobbyist registry. In an e-mail to The Globe and Mail on Thursday, a Porter Airlines spokesman blamed the omission on an “administrative oversight,” and said the registry has since been updated.
NATIONAL POST
* Dr. Suresh Katakkar, the northern British Columbia (B.C.) doctor who earned a community’s praise for employing unapproved medical treatments in a last-ditch effort to save a 34-year-old woman, has been accused of repeatedly causing “preventable harm” and even unnecessary death because of his unconventional methods.
Of 540 cancer cases the veteran oncologist treated during a short stint in Prince George, eight resulted in “severe, preventable patient harm” and four involved “potentially preventable treatment related death,” according to a report by the B.C. Cancer Agency released Thursday.
* A Canadian man serving a 31-year sentence for a murder in the U.S. has sued his victim’s widow after she effectively blocked the inmate’s bid to be transferred from a Washington State jail to a prison in Canada.
FINANCIAL POST
* Canadian Imperial Bank of Commerce, Canada’s fifth-biggest bank, agreed to buy Atlantic Trust Private Wealth Management from Invesco Ltd for C$210 million to expand its wealth-management business in the U.S.
* Richard Moore, a former managing director at CIBC World Markets and UBS Securities, is facing allegations he “was abusive of the capital markets” and “misused confidential informationfor his personal profit” when he purchased shares in a company after inadvertently learning about a proposed takeover through an email.
China
CHINA SECURITIES JOURNAL
- China’s railway investment reached 54.5 billion yuan ($8.80 billion) in the first quarter of 2013, up 28 percent from a year earlier, as construction activities accelerated. According to the national plan, China will invest 520 billion yuan in railway infrastructure this year and 5,200 km of new lines will be put into use.
SHANGHAI SECURITIES NEWS
- Central Huijin, a unit of China’s sovereign wealth fund China Investment Corp, has spent about 200 million yuan ($32.28 million) this year to raise its stakes in major state-owned banks Industrial and Commercial Bank of China , Bank of China and Agricultural Bank of China. Huijin has completed the fourth round of share purchases in four major state-owned banks on April 9 and has not said whether it will launch a new round.
SHANGHAI DAILY
- The inventory of quality office space in 14 major Chinese cities may surge 80 percent within the next four years and some second-tier cities may suffer from an oversupply, according to research by real estate services provider CB Richard Ellis.
CHINA DAILY
- China’s ocean watchdog has vowed to ban offshore projects that cause marine pollution. Xu Guodong, deputy director of the environmental protection department of the State Oceanic Administration, said developers of offshore projects must hand in a marine environment influence report and if the report does not pass evaluation, the project would be blocked.
PEOPLE’S DAILY
- Due to a severe drought in Yunnan, the Agricultural Bank of China said it will increase loans to the farm sector to combat drought and support spring ploughing in the province.
Fly On The Wall 7:00 AM Market Snapshot
ANALYST RESEARCH
Upgrades
Commerce Bancshares (CBSH) upgraded to Market Perform at Raymond James Home Depot (HD) upgraded to Buy from Hold at Jefferies Kraton Performance (KRA) upgraded to Buy from Neutral at SunTrust Pinnacle Entertainment (PNK) upgraded to Buy from Hold at Deutsche Bank Protective Life (PL) upgraded to Strong Buy from Outperform at Raymond James Rite Aid (RAD) upgraded to Outperform from Market Perform at Raymond James
Downgrades
Callaway Golf (ELY) downgraded to Market Perform from Strong Buy at Raymond James Coca-Cola (KO) downgraded to Neutral from Buy at Davenport Dr Pepper Snapple (DPS) downgraded to Neutral from Buy at Davenport Equity Lifestyle (ELS) downgraded to Hold from Buy at Cantor Euronet (EEFT) downgraded to Neutral from Buy at Sterne Agee FIS (FIS) downgraded to Neutral from Buy at Sterne Agee Fiserv (FISV) downgraded to Neutral from Buy at Sterne Agee MasterCard (MA) downgraded to Neutral from Buy at Sterne Agee Medical Properties Trust (MPW) downgraded to Underperform from Neutral at BofA/Merrill Microsoft (MSFT) downgraded to Outperform from Buy at CLSA PepsiCo (PEP) downgraded to Neutral from Buy at Davenport Reed Elsevier (RUK) downgraded to Hold from Buy at Jefferies Visa (V) downgraded to Neutral from Buy at Sterne Agee
Initiations
Amphenol (APH) initiated with a Hold at Jefferies Apollo Global (APO) initiated with an Outperform at Wells Fargo Clean Harbors (CLH) initiated with a Buy at Stifel Finish Line (FINL) initiated with an Underweight at Piper Jaffray Foot Locker (FL) initiated with an Overweight at Piper Jaffray KKR & Co. (KKR) initiated with an Outperform at Wells Fargo Marcus (MCS) initiated with a Buy at B. Riley Caris Michael Kors (KORS) initiated with an Underperform at CLSA Nike (NKE) initiated with a Neutral at Piper Jaffray Numerex (NMRX) initiated with a Buy at Needham Oaktree Capital (OAK) initiated with a Market Perform at Wells Fargo Republic Services (RSG) initiated with a Hold at Stifel SanDisk (SNDK) initiated with a Market Perform at BMO Capital Tata Motors (TTM) initiated with an Outperform at Oppenheimer Waste Connections (WCN) initiated with a Buy at Stifel Waste Management (WM) initiated with a Hold at Stifel Wesco Aircraft (WAIR) initiated with a Hold at Jefferies
HOT STOCKS
J.C. Penney (JCP) hired Blackstone (BX) to assist in raising capital, DJ reports Paulson & Co. to vote for MetroPCS (PCS), Deutsche Telekom (DTEGY) merger Sallie Mae (SLM) sold residual interest in federally guaranteed student loan trust Harris (HRS) cited uncertainty surrounding sequestration in cutting Q3, FY13 views KKR (KKR) acquired Alliance Tire Group, terms not disclosed DreamWorks Animation (DWA) acquired IP for iconic Troll franchise Netflix (NFLX) CEO Hastings said 4B hours of content watched over last three months eBay’s (EBAY) PayPal acquired Iron Pearl, terms not disclosed LinkedIn (LNKD) acquired Pulse, news reader and mobile content distribution platform, for about $90M Teleflex (TFX) received FDA clearance for ISO-Gard Mask
EARNINGS
Companies that beat consensus earnings expectations last night and today include: Bank of the Ozarks (OZRK)
With the realization that Microsoft’s (MSFT) new Windows 8 software will not reignite computer sales, attention is shifting to the company’s next big effort to regain relevance: Windows Blue, the software project which has yet to formally defined, the Wall Street Journal reports
Of the hundreds of millions of dollars paid each year to compensate physicians for pharmaceutical marketing and research efforts, Pfizer (PFE) and GlaxoSmithKline (GSK) are cutting back. In addition, layoffs of pharmaceutical-sales representatives and patent expirations for big-selling drugs have resulted in fewer sales calls on doctors, the Wall Street Journal reports
World shares declined today as investors locked in profits at the end of what was set to be the second best week of the year for stocks, while the dollar held near a four-year high against the yen, Reuters reports
No fewer than three Wall Street analysts this week wrote reports about the possibility of the biggest banks breaking themselves up to increase profitability, signaling that investors may be more willing to embrace an idea that is still toxic to some lawmakers in Washington, Reuters reports
Apple (AAPL) and Samsung (SSNLF) are being beaten on price in the fast-growing Indian smartphone market by a couple of aggressive local competitors, fueled by Indians buying their first smartphone to surf the Internet, which will be accessed by more than 300M people by 2017, Bloomberg reports
Gold swung between gains and declines as it headed for a third weekly drop in London on speculation a strengthening U.S. economy will curb demand for a protection of wealth. Prices are down 7% this year on rising optimism that the U.S. will help lead a global economic recovery, Bloomberg reports
SYNDICATE
BGC Partners (BGCP) files to sell 2.81M shares of common stock for holders CaesarStone (CSTE) 7.75M share Secondary priced at $23.25 Chuy’s (CHUY) 3M share Secondary priced at $33.00 Credit Acceptance (CACC) 1.5M share Secondary priced at $105.00 Durata Therapeutics (DRTX) 7.15M share Secondary priced at $7.00 Evertec (EVTC) 25.263M share IPO priced at $20.00 Rally Software (RALY) 6M share IPO priced at $14.00
