Ball of Jobs Confusion, Hot Data Day, Yield Curve Curveball, Amazon Deep Dive

Aug 10, 2023

What has been a rather busy week finally will culminate here on Friday at 08:30 ET, when the Department of Labor's Bureau of Labor Statistics releases its twin employment surveys for July. Just as was the case one month ago, traders, investors and economists will come into these BLS survey results in a somewhat guarded state after the ADP Employment Report on private-sector job creation for June had printed at a far stronger level than was expected.

On Wednesday, the ADP print for June hit the tape at 324,000 new jobs versus estimates for about 190,000. Almost a month ago, the ADP print had shown 497,000 private-sector jobs created in May, easily beating expectations for about 225.000 positions. The outsize beat a month ago really wasn't reflected in the BLS Establishment Survey's Non-Farm Payrolls print for May job creation that landed at 209,000 new jobs. That was below expectations at the time.

Even with the ADP report's eventual downward revision for May to 455,000 jobs, what always has been true remains crystal clear. The ADP Employment Report and the BLS survey results do not seem to run together. There are some years where over a moving 12-month average the ADP and NFP totals seem to run rather close to one another, but not in real time from month to month. Clearly, at least one of the two is -- or perhaps both are -- consistently incorrect. It gets only more confusing when one takes into consideration the BLS Household survey that showed 273,000 more employed persons in May than in the prior month. So, for June, either 455K, or 209K, or 273K new jobs were created. Maybe all three missed the mark...

Check this out: From March through May (three months), the ADP Employment Report has shown total private sector job creation of 1.013M million new positions, or 3337K per month. Over that same period, the BLS Establishment Survey (Non-Farm Payrolls) shows job creation of 809K positions, or 269K per month, while the BLS Household Survey shows an increase in employed persons of 102K, or just 34K per month. That's right. June put the Household number for job creation back into positive territory for its three-month running total. Didn't hear all that much about negative job growth on TV, did we? So, my friends, has the economy added 1.013 million new jobs over the past quarter, or was it 809K, or was it just 102K? How can we trust anything we see from any source when this is what we see?

For whatever reason, both financial markets and the financial media seem to take the Establishment Survey's Non-Farm Payroll print as gospel when it comes to job creation even though we have three surveys that supposedly track this metric and all three tell a very different tale in regard to the current depth of labor market health. As traders and investors, it means regardless of where the actual truth may lie, that we must anticipate and react to the NFP print because this is what the keyword-reading algorithms that control price discovery will react to, not just for equities, but for debt securities, commodities, currency exchange rates and, of course, fed funds futures markets as well. Enjoy the day, gang. Enjoy the data. Trade off of it. Just don't take anything as indisputable.

On Thursday morning, that same BLS released second-quarter numbers for Non-Farm Productivity that easily beat the street at +3.7% (quarter over year, seasonally adjusted annual rate), as second-quarter Unit Labor Costs underwhelmed at +1.6% (q/q, SAAR). Can this be? Is labor becoming more efficient and productive than expected while also costing their employers less than projected? Heck, that's a positive for economic activity. So are Factory Orders for June that printed at month-over-month growth of 2.3%, which beat estimates and made June the strongest month for this series since February 2021.

In addition, the ISM Services PMI survey for July hit the tape on Thursday morning, still expanding even if decelerating a little. That's seven straight months of headline-level expansion for the services sector of the US economy, which amounts to about three quarters of the entire pie. New Orders remain healthy. Employment still grew but slowed to a crawl. However, Prices reaccelerated to the upside. That could be a problem.

In response to the hotter-than-expected economic data for the day as well as the inflationary "Prices" component, within the ISM Services PMI, yields at least further out on the curve popped once again. The pop came just after having done so earlier in the week in response to Fitch's downgrade of US debt and the Treasury Department's announcement of needing to borrow considerably more dough at considerably increased cost.

On Thursday, the probability for a November rate hike moved up to about 35% in Chicago as the Ten-Year Note sold off rather sharply, putting that yield at 4.18% by day's end. The Two-Year Note barely moved. On Thursday, those two yields moved closer together as the slope of the curve managed to steepen. Look at August...

Perhaps this chart better illustrates what I am trying to show you. This is a chart not specifically of price or yield, but of the spread between the yields of the US Ten- and Two-Year Notes...

Maybe Bill Ackman is on to something. Maybe the yield curve is correcting due to downward price pressure on the long end, rather than on monetary policy inspired upward price pressure on the short end.

What does this all mean? That's hard to say. The economy could slow. Then again, over the long term, is not free-market pricing relative to the nation's difficult fiscal condition a longer-term positive? Maybe, maybe not... depending on one's definition of positive. However, I am pretty sure (I think) that this is the way it is supposed to be. Normalization? Not even close, but headed there if we do not screw this up. That said... We'll probably screw this up.

Amazon (AMZN) and Apple (AAPL) , which are part of the Action Alerts PLUS portfolio, each released their respective quarterly financial results on Thursday evening. In full disclosure I am long both, Apple for a long time now, Amazon just by virtue of overnight trading activity. So, that one is new, and not yet large. For the three month period ended June 30, Amazon posted GAAP EPS of $0.65, well above the consensus view and up from a loss of $0.20 a share for the year-ago comp. Revenue printed at $134.383 billion, good for growth of 10.8% and almost $3 billion better than had been projected.

As revenue grew 10.8%, the cost of sales increased 4.4% as operating expenses increased 7.5%. That left operating income at $7.681 billion (+132%) as operating margin improved from 2.74% to 5.72%. After accounting for interest and taxes, the bottom line improved from a loss of $2.028 billion to net income of $6.75 billion.

Regionally, North American sales grew 10.9% to $82.546 billion, producing an operating income of $3.211 billion (up from -$627 million). International Sales grew 9.7% to $29.697 billion, producing an operating loss of $895 million, a big improvement from a loss of $1.771 billion.

By business unit, Online Stores grew revenue 4.2% but missed, Physical stores grew sales 6.4% and beat, Third Party Sellers increased revenue by 18.1%, beating expectations, as Subscription Services grew 13.5% and Advertising Services grew 22%. Both beat the consensus view.

That leaves AWS. Amazon Web Services grew sales by 12.2% to $10.14 billion, producing an AWS-specific operating income of $5,365 billion (-6.1%) on an AWS-specific operating margin that dropped from 28.95% to 24.23%.

Amazon has generated operating cash flow of $61.8 billion for the past 12 months, up 61% year over year. Free cash flow for the trailing 12 months improved to an inflow of $7.9 billion compared to an outflow of $23.5 billion for the trailing 12 months ended June 2022. Excluding principal payments of finance leases and financing obligations, these numbers become an inflow of $1.9 billion and an outflow of $33.5 billion. Still positive for the current "past" 12 months.

Glancing at the balance sheet, Amazon ended the quarter with a cash position of $63.97 billion and inventories of $36.587 billion, putting current assets at $140.482 billion. Current liabilities landed at $148.238 billion, which would put Amazon's current ratio at an unenviable 0.95. Its quick ratio stands at an even uglier 0.70. However, there are unearned revenues of $14.522 billion listed as current liabilities. As these are not financial liabilities at all, once omitted, Amazon's current ratio rises to about 1.04. Not wonderful, but worthy of a passing grade. Given the inventory-driven nature of Amazon's retail business, we can overlook the quick ratio, as we would for most retailers.

Amazon does have long-term debt of $63.092 billion on the books, which seems gigantic, but is slightly smaller than its cash balance, so we really cannot make that a mark against Amazon. This balance sheet is not a glaring weakness.

Clearly, CEO Andy Jassy has turned a corner. The retail business has cut costs and needs to keep cutting. AWS kept on growing at a respectable pace even with the inroads made against this business in terms of market share by Microsoft (MSFT) , Alphabet (GOOGL) and Oracle (ORCL) .

I am mixed on what I think about Amazon and its relationship with generative AI. We know that adopting AI capabilities for AWS and its other businesses will drive operating expenses higher. It should then act as a tailwind in the generation of revenue -- keyword, "should."

Amazon's current quarter guidance is strong, which is why I got myself involved. Amazon sees net sales at $138 billion to $143 billion, which would be growth of 9% to 13%. The street was looking for roughly $138 billion on that metric. As for operating income, Amazon provided guidance so wide you could drive a truck through it -- $5.5 billion to $8.5 billion, which at the low end would be growth of more than 100%. Speaking of the low end, $5.5 billion is what Wall Street broadly had in mind.

The shares potentially appear to be headed for at least a 61.8% Fibonacci retracement of the entire November 2021 through early January 2023 selloff.

AMZN has found support at its 50-day simple moving average and likely will take back its 21-day exponential moving average this morning. I am seeing the halfway-back point at $134 as my pivot. That puts my target price at $154. My panic point would be a surrender at that moving 50-day line.

Happy Jobs Day, everyone ! Rock on.

Non-Farm Payrolls: Expecting 200K, Last 209K.

Unemployment Rate: Expecting 3.6%, Last 3.6%.

Underemployment Rate: Last 6.9%.

Participation Rate: Expecting 62.6%, Last 62.6%.

Average Hourly Earnings: Expecting 4.2% y/y, Last 4.4% y/y.

Average Weekly Hours: Expecting 34.4, last 34.4 hours.

13:00 - Baker Hughes Total Rig Count (Weekly): Last 664.

13:00 - Baker Hughes Oil Rig Count (Weekly): Last 529.

No public appearances scheduled.

Before the Open: (D) (.47), (ESNT) (1.49), (LYB) (2.30), (XPO) (.61)

(AMZN, AAPL, GOOGL and MSFT are holdings in TheStreet's Action Alerts PLUS portfolio. Want to be alerted before the portfolio buys or sells these stocks? Learn more now.)

At the time of publication, Guilfoyle was long AMZN, AAPL and MSFT equity.

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