The March jobs report out Friday morning beat expectations and stocks started the second quarter on a positive note with the Dow gaining triple-digits, and the benchmark S&P 500 rising more than 0.5%.
First, the scoreboard:
Dow: 17,792.8, +107.7, (+0.6%) S&P 500: 2,072.8, +13, (+0.6%) Nasdaq: 4,914.5, +44.7, (+0.9%) WTI crude oil: $36.70, -4.3%
The US labor market remains red hot.
In March, the economy added 215,000 jobs, more than expected, while wage gains rose faster-than-forecast and the participation rate also increased. The unemployment rate did, however, tick higher to 5% from a post-crisis low of 4.9%.
Compared to last month wages rose 0.3% in March and against the prior year wages were up 2.3%, better than the 2.2% that was forecast as February’s wage gains were also revised higher to show a 2.3% rise over last year.
Most of the gains were seen in “prime age” workers – or workers between the ages of 25 and 54 – as this cohort gained 196,000 of the 215,000 jobs added to the economy. “If the participation rate is rising and unemployment [is] basically holding around NAIRU, it gets me really bullish on how long this cycle can go,” Neil Dutta at Renaissance Macro wrote.
“If you thought recession was a 1-in-3 proposition, you should be scaling it back now.”
Basically: the US economy looks good and until we see a meaningful deterioration in the labor market things are going to stay that way.
Elsewhere in economic data on Friday, two readings on manufacturing activity showed the sector is beginning to see activity pick up again after several downbeat months.
Markit Economics’ March reading on activity hit 51.5, in-line with expectations. The Institute for Supply Management’s latest PMI reading hit 51.8, better than the 51.0 that was expected and the best reading since August 2015.
The internals of the report, however, were way better than the headline with new orders, exports, and production all increasing faster than the prior month. Employment, however, was a drag.
Commentary from respondents to the survey was also upbeat, with an executive in the plastics & rubber products industry saying, “Unemployment rate is low in our county, making it hard to find workers. We are understaffed and running lots of overtime.” Another noted that the government is spending against and an executive in the primary metals industry said simply, “Our business is still going strong.”
The final reading on consumer confidence in March from the University of Michigan also beat expectations, hitting 91.0 against a preliminary reading of 90.
Silicon Valley is a hub of engineering: computer, mechanical, and very obviously financial.
On Thursday, Elon Musk unveiled the latest creation from Tesla – the Model 3 – a mid-size, mid-priced sedan that will sell for around $35,000 (and up) and roll off the production line in a couple years.
Musk also announced that the company would begin taking pre-orders. Or something like that. Basically, you give Tesla $1,000 and you’ll get a chance to buy the car when it does become available.
But, fortunately, you don’t have to buy the car or even leave Tesla with the $1,000: you can get your money back so long as you don’t sign a purchase agreement. So for $1,000 you have a call option on buying a Tesla. Sure.
And, as Tesla’s agreement makes clear, this money is not being held in escrow or some sort of account. Tesla is taking this money and presumably doing what companies do with money. Of course, Tesla would argue this indicates there are about $10 billion in sales in the pipeline or something. But another way to see this is that Tesla didn’t get a $200 million cash infusion but added a $200 million liability to its balance sheet.
If you look at the cash raise as simply a way to meet corporate needs, The Wall Street Journal’s Charley Grant noted this will scarcely cover two months of Tesla’s needs at its current burn rate. So not a lot of help there.
As a way to convince investors there is tons of demand for a product very far away from hitting the streets of Palo Alto, Tesla’s scheme was a roaring success. And look, I am not an accountant, but it seems at least somewhat reasonable to me to consider a future wherein every single Tesla depositor backs out of the deal – especially given that, penalty-free, that is available to them – leaving the company to not backhandedly but literally tap the capital markets for $200 million.
Business Insider EIC and CEO Henry Blodget talked with Hillary Clinton on Thursday.
And among the topics addressed by Clinton was the idea of “quarterly capitalism,” or that corporate America has become too focused on short-term results at the detriment of long-term progress for the US economy.
“I am deeply distressed about quarterly capitalism because I think it is causing businesses to make decisions that are not helping the long-term profitability of American corporations or the success of our economy,” Clinton said.
In the interview, Clinton relays a story about an executive that told her if they were given the ability to invest on a 5- or 10-year horizon but would lose “a penny” on their stock price they wouldn’t take the deal.
Now, I’m sure a conversation like that happened, but surely the prospect of being able to make prudent investment decisions over a decade-long period with the support of shareholders who would lose up to $0.10 per share – unclear if it was a penny a year or not but we’ll assume the worst here – can’t be that bad.
And as we noted, Clinton is on the side of BlackRock’s Larry Fink here, which, when you need political capital in the corporate space, is as good an ally as any.<
The thing is: a lot of companies are run poorly. And as Clinton also added in her commentary, this is really about how do we incentivize investors and executives to act in there interests not only of shareholders right here, right now, but their industries and the US economy over the long run. It’s a hard question and, being a lawyer, Clinton thinks the law is a place to look here.
Activist investors, on balance, get a bad name mostly because they are, necessarily, know-it-alls jet setting into a corporate setting about which they’ve read but probably not handled themselves and declaring they know best. Sometimes they do. Sometimes they don’t.
And while the inside of the business and financial press might want to unpack sort of “what we talk about when we talk about shareholder activism,” Clinton’s target audience – a general election voter – is likely to see the logic in, “Thinking big-picture is better than thinking short-term.”
SEC chair Mary Jo White has some thoughts on unicorns.
Speaking at Stanford on Thursday, White said that basically unicorns – or tech companies valued over $1 billion – get a lot of attention but actually pose risks we sort of assume away since the investors in these companies are thought, in many cases, to be more sophisticated than average.
“From a securities law perspective, the theory behind the private markets is that sophisticated investors do not need the protections offered by the robust mandatory disclosure provisions of the 1933 Securities Act,” White said.
“So, if those participants choose – with eyes wide open – to invest in private companies at valuations that may be ethereal or overinflated, who loses when the truth behind inflated valuations is revealed? I think we all do. Not just the VC and private equity funds, but also smaller retail investors and the next Stanford student whose great idea needs funding, but investors are unwilling to take a bet on her because they were burned last time. To better understand what I mean, we need to look more closely at how these deals are done and structured, as well as the downstream effects on other market participants.”
White adds (all emphasis mine):
At the SEC, the questions we are asking do not fundamentally differ from the questions we ask about all transactions. They include whether the information supplied to investors is accurate and complete – that is, whether it accurately reflects the performance and prospects of the company. Making sure that is so becomes more compelling when the transactions are smaller and the investors are more retail. And, for those involved in advising, investing and nurturing unicorns, there is an important related question – how do $1 billion valuations affect all of the relevant investors – both those investing in the unicorn round, and those that came before and after, whether in private or public transactions.
It is axiomatic that all private and public securities transactions, no matter the sophistication of the parties, must be free from fraud. Exchange Act Section 10(b) and Rule 10b-5 apply to all companies and we must be vigorous in ferreting out and punishing wrongdoers wherever they operate. In the unicorn context, there is a worry that the tail may wag the horn, so to speak, on valuation disclosures. The concern is whether the prestige associated with reaching a sky high valuation fast drives companies to try to appear more valuable than they actually are.
Nearly all venture valuations are highly subjective. But, one must wonder whether the publicity and pressure to achieve the unicorn benchmark is analogous to that felt by public companies to meet projections they make to the market with the attendant risk of financial reporting problems.
An idea we’ve stolen here from Bloomberg’s Matt Levine is that private markets are the new public markets. And so White, being a public-market regulator, talking at length about private markets further blurs that distinction.
And I think the upshot of this talk is basically: We in Washington notice that some of our most prominent companies operate under more opaque reporting structures because their investors are deemed to be smarter and, are we so sure?
Of course those investors will say that government officials meddling in their affairs can’t ever know as much as they do. The government, in contrast, could say you’re only operating under this structure because you know that we know there’s something you’d rather not disclose.
Because as White notes, this isn’t only about the private companies and their investors but also these companies’ competitors, many of whom may be public companies operating under those rules.
It’s a thing that’s out there, at least.