Our country’s employment numbers this morning point to an anemic recovery, so say the economic pundits. Private companies added 71,000 new jobs (expectations were for an additional 90,000 jobs) last month while overall employment fell by 131,000 jobs. Government payrolls shrank by 202,000 (143,000 jobs were slashed by the Census Bureau). The unemployment rate stands at 9.5%.
The employment report is a bit misleading at first glance. The Census jobs were going away as soon as the Census was done. Consequently the cut in government payrolls should not be a big surprise. We would hope that government payrolls shrink further as the economy improves and private hiring increases (in the interest of full disclosure we are big supporters of less government, not more). Private hiring did increase but below what was expected – perhaps we will experience another jobless recovery. We would add that year to date private hiring has increased by 559,000 new jobs (Moody’s Economy.com 8/6/2010).
Corporate earnings have been increasing; this fact is often overshadowed by the employment report. After the second quarter earnings season, 74% of the reporting companies beat their bottom line (net income) estimates and 58% of the reporting companies beat their top line (sales or revenue) estimates. Only financial service companies (think banks) did not share in this growth.
Companies are making money. Corporate earnings jumped 47% in fourth quarter 2009 and 52% in first quarter 2010. The positively sloped Treasury bond yield curve is allowing for growth – to wit Cadbury Schweppes (CSG) bought Kraft, Sanofi-Avantis (SNY) is in talks with Genzyme (GENZ), Catepillar (CAT) is buying Electro-Motive Diesel and Barnes & Nobe (BKS)l may be acquired by Microsoft (MSFT), Amazon (AMZN), Walmart (WMT) or another company by the time you read this.
The economy is improving – this is borne out by the improving Gross Domestic Product numbers. GDP reflects our consumption, investment spending, government spending and net exports. Or as you might remember from Economics 101: GDP=C+I+G+ (E-M). As the late President Kennedy said “We’re all Keynesians now.” You can see the rebound in GDP below (from the Bureau of Economic Analysis):
So, we think the market’s pessimistic attitude is overdone. We don’t see any inflationary problems over the next six months to maybe a year. We think the Federal Reserve will need to keep interest rates low for the next six to twelve months as well. We like big name dividend paying companies – for example we just added McKesson to our portfolio (symbol MCK). Look around the next time you are visiting someone in a hospital – you’ll see their products in use.
On the fixed income side we are keeping our bond maturities inside of a year. We just don’t think that we are getting compensated enough to justify extending maturities. Even though our inflation outlook is pretty benign, once inflation rears its ugly head the resulting interest rate increases will hurt.
To sum, we are reminded of that great quote from the Oracle of Omaha (aka Warren Buffett – actually we are reminded of this quote almost daily) to “be fearful when others are greedy and to be greedy when others are fearful.”
We are greedy.