Stocks Rise On Bad Jobs Report; LinkedIn And Tesla As Safe Havens

Includes: MSFT, TSLA
by: Vahan Janjigian, CFA

The stock market is on a mission. Unlike Jake and Elwood Blues, however, the market is not on a mission from God. The market's mission is simply to go higher no matter what the news. It's not an easy mission, yet the market is succeeding. Friday's action is a good case in point.

Most economists agree that the July employment situation report, which came out Friday morning, was a big disappointment. Yet despite an initial selloff, stocks rallied and actually closed higher for the day. No doubt, investors were betting that the Fed would have to postpone thoughts of tapering.

According to the jobs report, non-farm payrolls rose by just 162,000 in July. That was well short of expectations. Furthermore, payroll figures for May and June were revised down. While it is true that the unemployment rate fell from 7.6% to 7.4%, the improvement came for all the wrong reasons. The labor force shrank even though the population increased. Indeed, 240,000 people dropped out of the labor force. Once again, there were more people who threw in the towel than there were people who actually found work.

And what kinds of jobs did the job finders find? Unfortunately, not very good ones. The economy is not creating the kinds of high-paying, high-skilled jobs you would expect in a robust, vibrant economy. Instead, the economy is creating low-paying jobs that don't require much in the way of skills. Many of the jobs aren't even full time. One of the most active areas of hiring is in food services and drinking places. If you want to be a waiter or bartender, you have a decent shot at finding a job. But if you want to put that college degree to work, you're going to have a tougher time finding something that matches your skills.

That wasn't all the bad news in the jobs report. Average weekly hours fell, average overtime in manufacturing fell, average hourly earnings fell, and average weekly earnings fell. Is Obamacare to blame? Perhaps. Even though the mandate for businesses to provide health coverage for employees has been postponed by a year, many small businesses still consider 50 employees as the limit they don't want to breach. That's when they become subject to the law. This can't be good for job creation.

The market's persistent rise is beginning to remind me of the late 1990s. Of course, things are not as crazy now as they were back then. For example, some of the best-performing stocks in the 1990s were the ones that had no earnings and (in hindsight) no real business plan. The average price-earnings ratio on the S&P 500 rose rapidly to more than 40 before the bubble burst.

Today, the average P/E ratio is a more modest 20; yet that's still well above the historical average. And while many companies are posting strong profits, much of the earnings growth is being generated from cost cuts and not from sales growth. It's not quite like the 1990s, but some stocks have reached bubble-like levels. Take LinkedIn (LNKD). It's a great company. The stock is up 105% year to date. LNKD has a $26 billion market capitalization and is selling for more than 100 times expected 2014 earnings! That certainly seems bubbly. Or take Tesla Motors (NASDAQ:TSLA). The company makes a great car, the stock is up 307% year to date and the market cap has reached $16 billion. TSLA sells for more than 135 times expected 2014 earnings!

These stocks are clearly expensive. Maybe too expensive. They are pricing in expectations for incredible long-term growth. Chances are the stocks will go higher before they come back to earth. After all, that's what momentum is all about. Don't forget that by late 1998, there were plenty of economists warning that the stock market was ready to burst. They were eventually proved right, but not before the bubble got much bigger.

Today's market is not in a bubble, yet there are definitely some bubble-like stocks out there. Only time will tell if LNKD and TSLA are two of them. For the time being, however, they seem to be a safe haven. In the 1990s, they would have been called "new economy" stocks. These are the kinds of stocks investors turn to when they don't like the overall economy. After all, there's a good chance that the guy who buys a Model S is not the same guy who just got a job as a part-time waiter.