All Things in Moderation

Vital Statistics:

Stocks are higher after the ADP jobs report came in gangbusters. Bonds and MBS are flat as we head into a day with 5 Fed speakers.

The ADP jobs report came in stronger than expected, with 230,000 private sector jobs added in September. This is well higher than the 180,000 estimate the Street has penciled in for Friday’s report.  The market will be focusing on the wage data more than the payroll data with the employment situation report, however.

Mortgage applications were flat last week as we head into the seasonally slow Q4 and Q1 time of the year. “Rates were little changed last week, following the most recent [Federal Open Market Committee] meeting where the Fed announced another rate hike based on the health of the economy and job market as expected, “said MBA Associate Vice President of Economic and Industry Forecasting Joel Kan. “Short-term rates have been increasing but long-term rates have held steady, which should not pose too much of a headwind to home purchase activity, especially given the potential demand from demographic factors.”

The ISM Non-Manufacturing Index hit a record high last month(albeit only going back to 2008). We saw a huge jump in the employment index of almost 6 percentage points, and continued strength in new orders. Tariff worries have taken a step back, and prices are rising, but not uncontrollably. Labor shortages were mentioned as an issue.

Mortgage fraud risk is increasing, as higher home prices encourages buyers to pad their financial situation to qualify for a loan. There are online services which will produce fake pay stubs and answer VOE calls, (for “novelty” purposes of course). This is in addition to the other more typical ploys, which include holding out a rental as owner-occupied. Most of the risk in in the wholesale, not retail channel, and we are nowhere near the liar loans of the bubble days. Worst places for fraud risk: NY and NJ, where glacial foreclosure timelines add insult to injury.

They’re still worried about deflation. Charles Evans said that inflation hasn’t gone up as much as the Fed would like. Fiscal policy is very pro-cyclical at the moment, and the expansion is long in the tooth.

The Tesla saga has taken another interesting turn. The SEC thought they had a settlement with Musk over the infamous 420 tweet (where he tweeted that he was planning to take Tesla private at $420 a share price, and that he had financing lined up).  The SEC sued him for making false statements that impacted the share price, and he got off relatively light, with a fine to be shared with the company, and a requirement that he step down from the Board for 2 years. Now, Musk is telling the Board that he will quit the company if they don’t fight for him. One thing is for sure: getting into public spats with the SEC is generally not good for your stock price.

I am surprised Amazon stock is holding up given the announcement yesterday. Although the company declined to provide any financial guidance, it is hard to see how the company escapes without a significant bite in its earnings. To make matters worse for the company, cash flow will be impacted as employee bonuses for many workers will now be paid in cash versus stock. AMZN earnings last year: $3 billion. AMZN stock compensation last year $4 billion. I guess bulls on AMZN are betting that this holiday shopping season is going to be so great that the increased costs don’t matter. But a company trading at 78x expected earnings doesn’t have a lot of margin for error, especially if its cost structure is going to more closely mirror that of its bricks-and-mortar competitors. I am sure the politics behind the announcement will be a fascinating tale.

Filed under: Economy, Morning Report |