1) Total job losses were just 35K versus expectations of -50K. We mentioned that jobs growth would return in Q1 and there is little doubt in my mind that this number would have been in the green were it not for the Winter storms. Of course, the more important aspect of this jobs rebound is to keep it in perspective. We lost 7MM+ jobs during the course of this recession. Using the prior recovery as framework, it would take 86 months (2016) to get back to where we were before the recession began. The last jobs recovery was nothing to sneeze at. If you recall, it was the one thing President Bush continually hung on as an economic positive. This is going to be a long recovery folks.
Don’t get too excited about these “better than expected” jobs reports. In the grand scheme of things there is still a lot of pain out there on Main Street. The jobs data has more interesting implications, however. We’re now seeing a troughing in unit labor costs. This has been the largest cost cutting operation in corporate America since 1948. It’s been truly remarkable and corporations should be commended for staying lean and prudent. It’s coming to an end though.
Unfortunately, this means corporations are no longer cutting costs via employment cuts at the rate they have been. While the cost cutting has been a good sign, this turn in labor costs will hurt profit growth going forward barring a sizable return in revenue growth (revenues grew 1.1% ex-financials last quarter). As we’ve mentioned previously, this is shaping up to be a year that is characterized by H2 earnings disappointments. This jobs data (as it turns positive) supports this thinking. Interestingly, analysts are boosting their estimates at just the wrong time (as the rebound in corporate profits begins to slow its pace).
The jobs data also has important implications for the Fed. This positive jobs report means the Fed is going to be encouraged and pressured to raise rates & end their liquidity programs sooner rather than later. While global rate increases have already started its likely that Bernanke will begin to feel the pressure due to the improving employment situation. As previously noted, tightening phases are rarely a positive for stocks.
2) A big part of me wonders if the only viable trade in this market isn’t to ride the coattails of JP Morgan, BlackRock, Goldman Sachs and the other big banks who have been driving liquidity via their gifts from the Fed. All of them have targets of 1200+ on the S&P 500.
3) We haven’t had a short bias (except for one brief short in June of 2009) throughout the duration of the 70% rally. With sentiment turning overwhelmingly complacent in recent weeks and a deteriorating earnings outlook I feel comfortable moving to a medium sized short bias on the back of today’s bullishness. The Russell 2,000 has rallied over 16% on the back of a move that has taken it higher in 16 of the last 18 sessions. This is high beta greed at its best. Even more remarkable is the move down in the VIX. The VIX has now traded lower in 17 of the last 18 sessions and is spiking lower as the Russell hits a new high. I am approaching this in the same manner in which I approached the June position – with the understanding that the upcoming earnings season is likely to be positive (there is at least 1 more quarter of very easy analyst comps) and investors will account for that appropriately. Although the risk/reward isn’t perfectly ideal these are the kind of situations I lie in wait for.