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Market Outlook

US Jobs Revised Lower For A Full year! A Stunning Change. 

The U.S. economy created 818,000 fewer jobs than originally reported in the 12-month period through March 2024, the Labor Department reported Wednesday. 

https://www.cnbc.com/2024/08/21/nonfarm-payroll-growth-revised-down-by-818000-labor-department-says.html

As part of its preliminary annual benchmark revisions to the nonfarm payroll numbers, the Bureau of Labor Statistics said the actual job growth was nearly 30% less than the initially reported 2.9 million from April 2023 through March of the following year. 

That’s about 65,000 less per month.  

For the most part, the Feds are aware and cognizant of revisions – not a new trend. In fact, this is a preliminary estimate. The final revision will be issued in February 2025. 

But the magnitude may be a little surprising. 

https://seekingalpha.com/news/4142166-job-growth-payrolls-preliminary-benchmark-revision

Job growth in the U.S. through March is expected to have been much weaker than estimated, which could spur calls for deeper interest rate cuts amid concerns that the Federal Reserve may have waited too long to start its easing cycle. 

The Bureau of Labor Statistics is expected to issue a preliminary benchmark revision to payroll growth for the 12 months ending March on Wednesday at 10 am ET. 

Economists at Wells Fargo expect the reading to be at least 600,000 weaker than initially estimated. JPMorgan expects a decline of about 360,000, while Goldman Sachs said it could be as large as a million. 

The revision may have some impact on Fed Chair Jerome Powell’s speech at Jackson Hole on Friday, given the Fed’s dual mandate of promoting maximum employment and stable prices. 

A large downward revision “could reignite concerns around a weaker employment picture,” said Charu Chanana, head of FX strategy, Saxo. “This is something that Powell may need to address, and if the jobs report on September 6 shows significant weakness, it could bolster the case for a 50-basis point rate cut.” 

“The revision shouldn’t alter our views of the current labor market too much as the direction and general magnitude of this revision has been known for some time, but a particularly bad revision would reinforce the case for easing,” said 22V Research’s Peter Williams. 

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Market Outlook

The Japanese Carry Trade Implosion 

The Japanese market dropped over 10% overnight over the collapse of the carry trade – basically for decades, traders and hedge funds would borrow cheaper in Yen (lower interest rates), deploy in USD (higher interest rates) and leverage their trades for maximum gain. As long as interest rates moved in the same direction in both countries it worked for the most part. However, last week the Japanese central bank raised interest rates – strengthening the Yen, but even as the Feds sat put, treasury yields crashed from around 4.25 to 3.75 in a short period, the biggest fall from 4.10 to 3.75 occurred in 3-4 days. 

US Futures are down over 2%, continuing the sell off from Friday. 

I don’t believe anyone in our group trades or trades on margin. However, I do want to reinforce some things we spoke about in the past two weeks. 

Not catching a falling knife. I had spoken about this last week and how the Doom Loop from algo traders could continue, the same principle goes for carry traders, and plenty will be shaken out today but we can’t predict when this will stop completely. The VIX (Volatility or Fear gauge) has risen to 52.  

Continue playing defense – In the past month, since I sold some 15-20%, the vast majority of recommendations have been holds and only buy on dips, so defense remains key. 

We’ll take a further look towards the end of the day. 

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Technology

Rivian (RIVN) Analysis: $11.30 – Avoid Until Signs of Stability Emerge

source:rivian

The situation is even worse than expected with only 57K vehicle production for 2024 – no growth, production cuts, workforce cuts, hardly breaking even at gross levels.

Here is the company’s outlook, which inspired no confidence.

“For 2024, we expect our total deliveries to be derived from our existing order bank as well as new orders generated during the year. Our full year targets rely on an improvement in order rate driven by our planned go-to-market strategies. The conversion of our existing order bank to sales can be impacted by several factors including delivery timing, location of order, monthly payments, and customer readiness. Our order bank has notably reduced over time as deliveries more than doubled in 2023 versus 2022, and we have incurred cancellations due to macro and customer factors.”

Conference call, filled with underwhelming guidance and management’s approach to addressing the current challenges, the business model was questioned – do they even need a new plant? The sheer magnitude of the projected shortfall and the apparent lack of more decisive action is also baffling.

There is a lot of risk in the current market environment, particularly given the required $5 billion investment in conjunction with the new Georgia plant to facilitate the production of Rivian’s mass-market R2 vehicles.

Categories
Finance/banking

Blackstone at $125: Why I’m Holding Amid Real Estate and China Risks

Signage is seen outside the Blackstone Group headquarters in New York City, U.S., January 18, 2023. REUTERS/Jeenah Moon

Blackstone $125 Hold. 

The easy money has been made and the real estate and China exposure makes me a little cautious.

Blackstone (NYSE:BX) is the world’s largest alternative asset manager with over $1 trillion in assets under management, and that does give it competitive advantages of brand recognition, scale, network and large amounts of data.

That said, the fee business went nowhere in the last 10 years,  from 6.8Bn to 7.3Bn at a CAGR of less than 1%.

Capital Gains was the real story, in 2021, it made $14Bn! and in 5 other good years, it made between $2Bn and $3Bn each year. Not surprisingly, the 1-year, 5 year, and 10% performances were very impressive at  39%, 284% and 317%

When investors put their money into BX, they thus have to live with considerable ups and downs in the company’s profits — depending on the performance of the assets BX manages, there will be better and weaker years.

Forecasts: Consensus estimates are calling for 20% earnings growth and mid-teens revenue growth for the next 3 years, and the good revenue growth forecast suggests that these will be quality fee-based earnings.

I want to highlight two risks, 

  • Real Estate is 40% of Fee-based asset management and 45%+ of total managed assets.

This is from management’s last earning call.

“Real estate…will have a number of negative headlines coming out over the year. And so, what happens is, I think investors tend to take their time in terms of pivoting back to the space…so, there’s caution… it will take a bit of time on both the institutional and the individual investor side…it will take multiple quarters of strong performance where people say, hey, I’m comfortable doing this.”

  • The China exposure, from an analysts report.

“Furthermore, recent news reports indicate that BX’s CEO remains very close with the Chinese leadership and appears set to double down on his investments in the country, further increasing BX’s risk in the current environment and prompting us to grow even more bearish on the stock at its current price. While BX does not disclose its AUM exposure to China in its filings, it is evident that the company has a substantial – and growing – presence in the country.”

Valuation – Compared to its longer-term averages at 25X earnings it is about 20% overpriced, but then so is everything else…forward returns would likely be mediocre.