March 11, 2023 | Jobs Report, Big Banks, Stock Buybacks, Oil Companies & Causes and Solutions of a Big Tax Bill

Jobs Report

The headline jobs number of 311,000 easily topped the estimate of 225,000 but marks a slowdown from January's level of 504,000. Leisure and hospitality remained strong with an addition of 105,000 jobs. With this solid number, the sector is now just 2.4% or 410,000 jobs below the February 2020 level. Other areas of strength included health care and social assistance (+62,800), retail trade (+50,100), government (+46,000), professional and business services (+45,000), and construction (+24,000). Information was the weakest group as payrolls declined by 25,000 and transportation and warehousing also had a decline of 21,500. The unemployment rate came in at 3.6%, which was above the expectation of 3.4%, but the participation rate increased to 62.5%. This was the highest level since March 2020, but still remains below the pre-pandemic level of 63.3%. On the inflation front, I was happy to see the increase in average hourly earnings of 4.6% missed the estimate of 4.8%. While this is higher than last month's 4.4% gain, most of 2022 saw gains of over 5%. Overall, the report may have been too optimistic for the market and could fuel further fears of more rate increases. I do continue to believe the labor market will continue to see gains, but at a much softer rate than the last couple of years. There's nothing that really concerns me in this report. 

 

Big Banks  
Today SVB bank also known as Silicon Valley bank was closed by regulators. At first thought this sounds scary since this is the first bank closure since Washington Mutual back during the Great Recession. But when one digs under what assets this bank held, it is no surprise as they were very speculative. The assets of $212 billion pale in comparison to JP Morgan Chase with $4 trillion in assets but also the quality of assets or the lack thereof is what caused the bank's failure. Many of the assets were for either venture capitalists, or startup companies in the risky tech and life science world. The bank was also very loose with its valuations, where they would loan on the equity value before the stock would even go public. They also went as far as to loan against wineries wine inventories, which accounted for 2% of the asset value of the bank. It is important to note that when the economy slows down that is when all the speculative businesses come to light. It is important to understand that the big banks will not follow this road, because they base loans on true assets and income.

 

Stock Buybacks 
The 1% excise tax that the government imposed this year on companies for doing stock buybacks has not seemed to change the course of companies buying back their stock. Through February 17th, $220 billion of stock buybacks were authorized by companies which was an all-time record. We continue to support stock buybacks by companies as long as they are buying their stock back at a good price and not borrowing money to implement the buyback. 

 

Oil Companies
Oil companies have made a lot of changes over the last couple of years and are being run more as a business looking at profits and cash flow rather than just production. It was estimated in 2019 that 15% of executive bonus compensation was based on production goals. By 2022 that was just 6%. The companies are now looking more at free cash flow which 18% of the incentive will come from hitting those goals, up dramatically from 7% back in 2019. There are also more incentives now for hitting environmental, health and safety goals. This will probably hurt production going forward with estimated growth of only 3% this year. Looking at it from a business perspective, it makes more sense to run your business based on cash flow and profits, rather than just production. 

 

Harrison: "Big tax bill? Here’s some causes and solutions.”