Thursday, November 9, 2017

Stock Market Overview -- Updated Economic Conditions

Key turning point for employment numbers? 

The September employment situation showed a loss of 33,000 non-farm payroll jobs, the first decline since September 2010.

The decline could be mostly caused because of the recent hurricanes; however, both July and August revisions reflected an additional loss of 38,000 jobs. After revisions, job gains have average just 91,000 over the past three months.

There was a steep employment decline of 105,000 in food services and drinking places, likely reflected by the impact of hurricanes Irma and Harvey, but the question remains if we are at a key turning point, since this area of employment can reflect overall changes in economic conditions.

Is the Bureau of Labor to Statistics (BLS) altering wage data? 

The recent BLS employment report showed an annual increase in average weekly earnings up a whopping 2.9%, above the 2.5% expected, and above the 2.5% reported last month. On the surface, this was a great number, as the 2.9% annual increase was distorted by hurricanes, and was the highest since the financial crisis.

However, it becomes clear that the BLS altered the numbers, and may have simply hard-coded it's spreadsheet with the intention of goalsetting a specific number.
The average weekly earnings for goods producing and private service-producing industries, which are the only two subcomponents of the total private line hourly earnings were at -0.8% and -0.1%, respectively. The BLS reported that somehow the total of these two declines were an increase of 0.2% -- what fabrication!

This undermines not only the labor inflation narrative, but it puts into question the rest of the overall labor data, and whether there are other politically-motivated, goal-setting "spreadsheet" errors.

Companies announcing spinoff, a corporate action that typically occurs at major stock market tops. 

Corporate executives are grasping to keep shareholders happy, as they continue to announce plans to shed or consider spinning off current business units.

The number of completed US spinoffs increased to near-term peaks in late-1999 and early-2008, just before or around the last two major stock market tops. A bear market begins when stocks fall 20% or more from a recent high -- a decline not seen, since this bull market began in March 2009. 

The current high valuations support spinning off or divesting assets, especially when equities are highly valued and additional growth is difficult or improbable.

Completed spinoffs in the US rose to 88 in late-1999 and dropped off to 80 in early-2000, when the dot-com bubble burst, and fell to 55 in 2001. Furthermore, the number of completed US spinoffs rose from 24 in late-2007 to 30 in early-2008, before dropping to 17 in 2009, when stocks hit their lowest point during the financial crisis.

The total value of completed US spinoffs by year has also tended to climb just around stock market tops and before the market crashes.

The value of US spinoffs completed in 2000 nearly tripled from the prior year to $97 billion, and roughly double from 2006's level to $170 billion in 2007, just ahead of the financial crisis. In 2008, the total value edged lower to about $166 billion, before dropping to $54 billion in 2009.

The total value completed deals has once again started to pick up, reaching a recent high of $177 billion for 43 completed US spinoffs in 2015.

The value of spinoffs this year are still below where they were in the prior two years, but it's still too early to determine whether this past week's US spinoff announcements of an additional $23 billion will continue the rest of the year and into 2018.

Some have argued that spinning off nonessential business units helps a company focus, while allowing the spinoffs to generate profits more efficiently.

Spinoffs maybe back again; however, divestitures (including spin off and sales) are being driven by the need for companies to return to their core area of competence, and creating more focus on their strategic goals. The market is expecting and rewarding companies for their actions, just like they did in the past, before or at major stock market tops.

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