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JPMorgan Warns S&P Fair Value Is 2,500 If Inflation Shocks Do Not Fade Away

JPMorgan Warns S&P Fair Value Is 2,500 If Inflation Shocks Do Not Fade Away

Last week, when discussing the latest Bank of America Fund…

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This article was originally published by Zero Hedge

JPMorgan Warns S&P Fair Value Is 2,500 If Inflation Shocks Do Not Fade Away

Last week, when discussing the latest Bank of America Fund Manager Survey, we pointed out that yet another paradox had emerged: on one hand, Wall Street professionals were the most overweight stocks since 2013, while on the other virtually nobody was expecting a stronger global economy in the future, an unprecedented divergence between these two data sets the likes of which has never once been seen in survey history.

How does one make sense of this historic gap? Well, one doesn’t – this is just Wall Street goalseeking any and all scenarios to make it seems that being all in risk is the only possible trade, and the only way this particular goalseek does not blow up is if the finance bros also “believe” that inflation is transitory (something not even the Fed is doing anymore), as a persistent inflation would lead to a painful repricing of all asset classes sharply lower. That’s why despite sharply higher than expected October inflation data, a majority of FMS investors acknowledge that inflation is a risk but only 35% think it is permanent while 61% think it is transitory…

…while a net 14% of investors now expect global inflation will be lower, the lowest level since the onslaught of COVID-19 in Mar’20. In other words, 51% of investors expect lower inflation while 37% expect higher inflation.

Setting aside how laughable Wall Street’s delusion with “transitory” inflation has become when it is by now painfully obvious that prices will not revert to previous levels and at best will see the pace of galloping increase moderate somewhat, although in light of persistent wage growth one can just as easily argue that inflation will keep surging for years, the bigger question is what happens when the day of reckoning comes and Wall Street’s conviction of transitory inflation comes crashing down – say we get another 2-3 outlier CPI prints; forcing Wall Street to stop ignoring the imminent threat posed by surging inflation.

Trying to answer this question is JPMorgan quant Nick Panigirtzoglou, who in his latest Flows and Liquidity note titled “What if the rise in inflation volatility persists?” note (available to pro subs in the usual place) looks at what would happen to stocks if inflation volatility surges.

The reason why is because as the Greek strategist explains, in his longer-term fair value framework for 10y real yields and the S&P 500, “inflation volatility is an important input as a proxy for term premia in the former and for risk premia in the latter.”  And with upside inflation shocks in the US and UK in the last week, JPMorgan notes that “the question of the persistence of inflation has again featured heavily in our discussions with clients” while the steep rise in inflation readings “has also raised questions over inflation volatility.”

In other words, what does a rise in inflation vol imply for real rates and equities? To answer this question JPM updates its long-term fair value model for 10y UST yields and the S&P 500.

First, some background: Turning first to the former, the JPM model values the 10y real yield as a function of the real Fed funds rate, inflation volatility as a proxy for term premia, and three major components of net demand for dollar capital: from government, corporate and emerging market issuers. The bank measures these as the government deficit, the corporate financing gap (the difference between capex and corporate cash flow), and the EM current account balance, all as a % of US GDP.

In theory, higher deficits by governments and corporates (ought to) exert upward pressure on yields as overall demand for capital rises, while external surpluses of EM countries ought to push US yields lower due to repayments of dollar-denominated debt and/or dollar asset accumulation by their central banks.

In the JPM model, inflation volatility has a significant influence given a coefficient of 0.75. In other words, a 100bp increase in inflation volatility would put 75bp of upward pressure on 10y real yields. The next chart shows the 5y moving average of US CPI volatility over time, which shows that inflation volatility has already risen markedly, from around 0.6% in 1Q21 to 1.6% after the October CPI release. According to JPM, this metric looks likely to rise further, potentially to around 2.2% during 1H22 based on the bank’s economists’ inflation forecasts before starting to drift lower.

Based on JPM calculations, the increase in inflation volatility that has already taken place would push up 10y real rates by 75bp. And if inflation vol drifts further to 2.2% it could put an additional 40bp of upward pressure on real rates. In this risk scenario where inflation vol proves persistent and is fully incorporated into term premia in rate markets, it would suggest a fair value for the 10y UST real yield of +40bp.

As a quick aside, JPM here asks why do real yields remain so low, which as a reminder is the market’s $64 trillion question as we discussed in “The Most Important Question For The Market Is Identifying The Driver Behind Record Low Negative Real Rates”? JPMorgan’s response is that this is partly because markets price in negative real policy rates even a decade out. This is shown in the next chart which depicts 1m forward USD OIS rates starting in mid-December of each year and the 5-10y ahead inflation forecast from Consensus expectations.

This pricing also stands in contrast with JPM economists’ own revised Fed forecast of a start of the hiking cycle in September 2022 and quarterly 25bp hikes thereafter at least until real policy rates reach zero (2022 US economic outlook, Feroli et al, Nov 17th). This would
suggest policy rates reaching 2% by mid-2024 and potentially 2.5% by end-2024.

Meanwhile, the broader bond market has – similar to the BofA Fund Manager Survey respondents –  looked through the rise in inflation volatility thus far, “treating it as a transitory shock.” However, as Panigirtzoglou warns, “if inflation volatility remains elevated, say fluctuating around 1.5-2% for a prolonged period, this could start to put more meaningful upward pressure on term premia.” This could further be compounded by the Fed’s taper, given that one of the channels that QE operates through is via suppressing term premia.

Bonds aside, what about the implications of a rise in inflation vol for equities, the one asset class which seems impervious to absolutely all negative newsflow and is only dependent on how much liquidity central banks will inject at any one moment?

Well, as the JPM strategist notes, he had argued previously that equity markets have effectively looked through not only the surge in inflation vol but also the the rise in real GDP volatility, given the significant policy support from fiscal and monetary authorities. Effectively,
following policy measures to smooth the impact of the pandemic on incomes and avoid a situation where disorderly markets, particularly credit markets, amplify the shock, equity markets focused more on the eventual recovery in earnings than on the near term vol shock. Indeed, after the Q2 2020 real GDP contraction in excess of 30% and the Q3 2020 expansion of a similar magnitude, the volatility of GDP readings has been markedly more modest – this is shown in Figure 6 with the red line, which excludes 2Q20 and 3Q20 from the exponentially weighted real GDP volatility calculation. In other words, the run rate of real GDP volatility, while still above pre-pandemic levels, has already shown signs of normalizing.

So how have equity markets processed the other vol shock, that of inflation? The next chart shows how JPM’s fair value model would look like with three different scenarios applying after 1Q20.

  • The first, shown in as the grey dotted line, mechanically applies the headline increase in both real GDP and inflation vol.
  • The second scenario looks through the shock in real GDP vol but incorporates the headline increase in inflation vol, shown as the black dotted line.
  • The third and final scenario (red dotted line) assumes markets look through both the real GDP vol shock as well as the rise in inflation vol.

Since the blue line – which is the actual S&P500-  has been tracking the red dotted line, it suggests that equity markets have looked through both volatility shocks, effectively assuming both will prove to be temporary.

As noted above, the run-rate of real GDP vol excluding the 2Q20 and 3Q20 swings around the trough of the pandemic-induced recession has already shown signs of normalizing, which suggests that markets looking through the real GDP vol shock has been a reasonable approach.

And while it is clear that consensus is, as in the case of the FMS, that any kind of economic shock will be transitory, is it equally reasonable for both equity and bond markets to look through the inflation volatility shock? 

According to JPM, this ultimately depends on the nature of the current inflation shock. As the bank recent argued in last week’s J.P. Morgan View last week, a big reason behind the inflation vol has come from energy prices and re-opening components, such as used and rental cars, vehicle insurance, lodging, airfares and food away from home, undoubtedly more affected by the Delta variant waves, and the fading of these drags has generated a rebound in services activity that is sparking a normalization in prices (at least until the current spike in cases leads to another round of lockdowns as we have already seen in Austria).

According to Panigirtzoglou, who like his quant colleague Marko Kolanovic has traditionally been extremely bullish on stocks and bearish on cryptos – because any agent of the establishment system can not possibly support both fiat-driven and digital gold-based assets –  these volatile components “should ultimately stabilize and the accompanying volatility they have induced should fade.” Of course, this is almost completely wrong, just as wrong as Goldman’s monthly inflation forecasts for all of 2021, and JPM does in fact admit that it could be wrong conceding that “there has been some upward pressure on inflation readings beyond these components, pointing to some persistence in inflation risks.” Then again, in keeping with the bank’s bullish mandate, Panigirtzoglou concldues that “provided these persistent pressures do not also become more volatile, or provided market participants have confidence that central banks will respond to contain these pressures, markets can still look through inflation volatility.”

However, in a surprising reversal from the bank’s uniform and stbborn bullishness, the JPM quant acknowledges there is risk that inflation volatility could stay elevated for a longer period, which could eventually feed through to markets pricing in higher term premia and risk premia that would put upward pressure on real yields and downward pressure on equities.

The outcome for stocks? An S&P500 which collapses to its “fair value” of 2,500 as all those inflation and GDP shocks that the market has so eagerly ignored so far, turn out to be persistent, and crush risk assets.

However, before anyone goes and accuses JPMorgan of being bearish, Panigirtzoglou emphasizes “that this is a risk scenario, not a  baseline view.” Translation: “this is what will happen, we just don’t want to tell our bullish clients just yet.”

Tyler Durden
Sun, 11/21/2021 – 21:00






Author: Tyler Durden

Economics

Stockman: A (Bad) Tale Of Two Inflations

Stockman: A (Bad) Tale Of Two Inflations

Authored by David Stockman via Contra Corner blog,

Our paint by the numbers central bankers have…

Stockman: A (Bad) Tale Of Two Inflations

Authored by David Stockman via Contra Corner blog,

Our paint by the numbers central bankers have given the notion of being literalistic a bad name. For years they pumped money like mad all the while insisting that the bogus “lowflation” numbers were making them do it. Now with the lagging measures of inflation north of 5% and the leading edge above 10%, they have insisted loudly that it’s all “transitory”.

Well, until today when Powell pulled a U-turn that would have made even Tricky Dick envious. That is, he simply declared “transitory” to be “inoperative”.

Or in the context of the Watergate scandal of the time,

“This is the operative statement. The others are inoperative.” This 1973 announcement by Richard Nixon’s press secretary, Ron Ziegler, effectively admitted to the mendacity of all previous statements issued by the White House on the Watergate scandal.

Still, we won’t believe the Fed heads have given up their lying ways until we see the whites of their eyes. What Powell actually said is they might move forward their taper end from June by a few month, implying that interest rates might then be let up off the mat thereafter.

But in the meanwhile, there is at least six month for the Fed to come up with excuses to keep on pumping money at insane rates still longer, while defaulting to one of the stupidest rationalizations for inflation to ever come down the Keynesian pike: Namely, that since the American economy was purportedly harmed badly, and presumably consumers too, with the lowflation between 2012 and 2019, current elevated readings are perforce a “catch-up” boon. That is, more inflation is good for one and all out there on the highways and byways of main street America!

You literally can’t make up such rank humbug. Even then, what the hell are they talking about?

The shortest inflation measuring stick in town is the Fed’s (naturally) preferred PCE deflator, but here it is since the year 2000. The 21 years gain is 1.93% per annum; and the 9-year gain since inflation targeting became official in January 2012 is 1.73%. Given that the PCE deflator is not a true fixed basket inflation index and that these reading are close enough to target for government work anyway, even the “catch-up” canard fails. That’s especially true because given the virtual certainty of another year or two of 4-6% CPI inflation, even the cumulative measures of inflation will register well above the Fed’s sacrosanct 2.00% target.

Moreover, importantly, pray tell what did this really accomplish for the main street economy?

On the one hand, savers and fixed income retirees have seen their purchasing power drop by 39% since 2000 and 18% since 2012. At the same time, wage workers in the tradable goods and services sectors got modest wage gains with uniformly bad spill-over effects. To wit, millions lost their jobs to China, India and Mexico etc. because their nominal wages were no longer competitive in the global supply base, while those that hung on to their domestic jobs often lost purchasing ground to domestic inflation.

Consequently, the chart below is an unequivocal bad. It is the smoking gun that proves the Fed’s pro-inflation policies and idiotic 2.00% target is wreaking havoc on the main street economy and middle class living standards.

Loss of Consumer Purchasing Power, 2000-2021

In short. the group-think intoxicated Fed heads, and their Wall Street and Washington acolytes, are hair-splitting inherently unreliable and misleading numbers as if the BLS inflation data was handed down on stone tablets from financial heaven itself. At the same time, the rampant speculative manias in the financial markets that their oceans of liquidity have actually generated is assiduously ignored or denied.

We call this a tale of two inflations because the disaster of today’s rampant financial asset bubbles is rooted in pro-inflation monetary policies which are belied by both theoretical and empirical realities, which we address below.

First, however, consider still another aspect of the inflationary asset bubble which is utterly ignored by the Fed. In this case, the group think scribes of the Wall Street Journal inadvertently hit the nail on the head, albeit without the slightest recognition of the financial metastasis they have exposed.

We are referring to a recent piece heralding that private-equity firms have announced a record $944.4 billion worth of buyouts in the U.S. so far this year. That 250% of last year’s volume and more than double that of the previous peak in 2007, according to Dealogic.

As the WSJ further observed,

Driving the urge to go big are the billions of dollars flowing into private-equity coffers as institutions such as pension funds seek higher returns in an era of low interest rates. Buyout firms have raised $314.8 billion in capital to invest in North America so far in 2021, pushing available cash earmarked for the region to a record $755.6 billion, according to data from Preqin.

As the end of the year approaches, big buyouts are coming fast and furious. A week ago , private-equity firms Bain Capital and Hellman & Friedman LLC agreed to buy healthcare-technology company Athenahealth Inc. for $17 billion including debt. A week earlier, KKR and Global Infrastructure Partners LLC said they would buy data-center operator CyrusOne Inc. for nearly $12 billion. And the week before that, Advent International Corp. and Permira signed an $11.8 billion deal for cybersecurity-software firm McAfee Corp.

The recent string of big LBOs followed the $30 billion-plus deal for medicalsupply company Medline Industries Inc. that H&F, Blackstone Inc. and Carlyle struck in June in the largest buyout since the 2007-08 financial crisis.

Needless to say, these LBOs were not done on the cheap, as was the case, oh, 40 years ago. In the case of AthenaHealth, in fact, you have a typical instance of over-the-top “sloppy seconds”. That is, it was taken private by Veritas Capital and Elliott Management three years ago at a fulsome price of $5.7 billion, which is now being topped way up by Bain Capital and Hellman & Friedman LLC in the form of an LBO of an LBO.

According to Fitch, AthenaHealth had EBITDA of about $800 million in 2020, which was offset by about $200 million of CapEx or more.That means that at the $17 billion deal value (total enterprise value or TEV), the transaction was being priced at 28X free cash flow to TEV.

That’s insane under any circumstances, but when more than half of the purchase price consists of junk debt ($10 billion out of $17 billion), it’s flat out absurd. The reason it is happening is the Fed’s massive financial market distortion: Bain Capital and Hellman & Friedman are so flush with capital that it is burning a hole in their pocket, while the junk debt is notionally so “cheap” that it makes a Hail Mary plausible.

But here’s the thing.

This is a generic case: the Fed’s radical low interest rate policy is systematically driving the allocation of capital to less and less productive uses. And clearly private equity sponsored LBOs are the poster boy, owing to the inherent double whammy of misallocation described by the WSJ above.

On the one hand, capital that should be going to corporate blue chip bonds is ending up on the margin in private equity pools as pension funds, insurance companies and other asset managers struggle to boost returns toward exaggerated benchmarks inherent in their liabilities.

At the same time, private equity operators are engaged primarily in the systematic swap of equity for debt in LBO capital structures, such debt taking the form of soaring amounts of junk bonds and loans.

The higher coupons on junk debt, in turn, attract more misallocation of capital in the debt markets, while at the same time grinding down the productivity and efficiency of the LBO issuers. That because the hidden truth of LBOs is that on the margin they are nothing more than a financial engineering device that strip-mines cash flows that would ordinarily go into CapEx, R&D, work-force training, marketing, customer development and operational efficiency investments and reallocates these flows to interest payments on onerous levels of the junk debt, instead.

That’s the essence of private equity. The underlying false proposition is that 29-year old spread-sheet jockeys at private equity shops tweaking budgets downward for all of these “reinvestment” items—whether on the CapEx or OpEx side of the ledger—know more about these matters than the industry lifetime veterans who typically man either public companies, divested divisions or pre-buyout private companies—before they are treated to the alleged magic of being “LBO’d.”

In fact, there is no magic to it, notwithstanding that some LBO’s generate fulsome returns to their private equity owners. But more often than not that’s a function of:

  • Short-term EBITDA gains that are hiding severe underling competitive erosion owing to systematic under-investment;

  • The steady rise of market PE multiples fueled by Fed policies, which policies have drastically inflated LBO “exit” values in the SPAC and IPO markets.

So at the end of the day, the Fed’s egregious money-pumping is fueling a massively bloated LBO/junk bond complex that is systematically curtailing productive main street investment and therefore longer-term productivity and economic growth.

And, of course, the proceeds of buyouts and junk bonds end up inflating the risk assets, which are mostly held at the tippy top of the economic ladder. And that’s a condition which has gotten far worse since the on-set of Greenspanian “wealth effects” policy in the late 1980s. As shown below, between Q4 1989 and Q2 2021:

  • Top 1%: Share of financial assets rose from 21.0% to 29.2%;

  • Bottom 50%: Share of financial assets fell from 7.2% to 5.6%

Meanwhile, the good folks are WSJ saw fit to provide a parallel analysis that further knocks the Fed’s lowflation thesis into a cocked hat. In this case, the authors looked at the average domestic airline ticket price and found that it is about the same today as 25 years ago, $260 today versus $284 in 1996.

And that’s before adjusting for cost inflation. So the question recurs: How is it possible that the airline industry hasn’t increased ticket prices in over two decades while its fuel and labor costs, among others, have been marching steadily higher?

As the WSJ noted,

It isn’t possible really. Most of us are paying a lot more to fly today, thanks to a combination of three covert price increases.

First, airlines have unbundled services so that fliers pay extra for checking luggage, boarding early, selecting a seat, having a meal and so on. The charges for these services don’t show up on the ticket price, but they are substantial.

Second, the airplane seat’s quality, as measured by its pitch, width, seat material and heft, has declined considerably, meaning customers are getting far less value for the ticket price.

And third, many airlines have steadily eroded the value of frequentflier miles, increasing costs for today’s heavy fliers relative to those in 1996.

Now, did the hedonics mavens at the BLS capture all these negative quality adjustment in airline ticket prices?

They most decidedly did not. As shown below, the BLS says ticket prices have only risen by 5.6% during the same 24 year period or 0.23% per annum. But you wonder with jet fuel costs up by 294% during that period and airline wages higher by 75%—why aren’t they all bankrupt and liquidated?

The answer, of course, is that the BLS numbers are a bunch of tommy rot. Adjusted for all the qualitative factors listed above, airline tickets are up by a hell of a lot more than 0.23% per year. Yet the fools in the Eccles Building keep pumping pro-inflation money— so that the private equity game of scalping main street cash flows thrives and middle class living standards continue to fall.

CPI for Airline Fares, 1996-2021

Moreover, the backdoor prices increase embedded in airline fares are not unique. These practices are also common in other industries, whether it’s resort fees in hotels, cheaper raw materials in garments and appliances, or more-stringent restaurant and credit-card rewards programs. As the WSJ further queried,

Consider the following comparison: Which one is cheaper, a 64-ounce container of mayonnaise at a warehouse club that costs $7.99, or a 48-ounce bottle of the same brand at a supermarket for $5.94?

Most people will guess the warehouse club because of its low-price image. If you do the math, the price per ounce is roughly the same. But if you consider that the warehouse club requires a separate mandatory membership fee, the customer is actually paying more per ounce at the warehouse club.

Known as two-part pricing, the membership fee camouflages the actual price paid by customers—and is behind the success of Costco,Amazon and likely your neighborhood gym. (A gym’s initiation fee, a landlord’s application or administrative fee, and an online ticket seller’s per-transaction processing fee all serve the same purpose.)

Yet this is just a tiny sampling of the complexity of providing apples-to-apples pricing trends at the item level over time—to saying nothing of proper weighting of all the items that go into the index market basket.

The implication is crystal clear. As per Powell’s belated recant on the “transitory” matter, the Fed doesn’t know where true inflation has been or have the slightest idea of where it is going.

So the idea of inflation targeting against an arbitrary basket of goods and services embodied in the PCE deflator, much of which consists of “imputations” and wildly arbitrary hedonic adjustments, is just plan nuts.

They only “inflation” measure that is in the proper remit of the Fed is monetary inflation—-something at least crudely measured by its own balance sheet.

On that score the Fed is a infernal inflation machine like no other.

And for want of doubt that the resulting massive asset inflation and rampant financial engineering on Wall Street that flows from Fed policies is wreaking havoc on the main street economy, note this insight from the always perceptive Bill Cohan:

AT&T bought TimeWarner for a total of $108 billion, including debt assumed, and three years later agreed to spin it off it to Discovery for—what?— $43 billion in stock, cash and assumed debt. By my calculation, that’s a $65 billion destruction of value in three years. That’s not easy to do.

He got that right. At the end of the day these massive accounting write-offs are just a proxy for the underlying economic destruction.

As we said, a tale of two inflations. And neither of them imply anything good.

Tyler Durden
Fri, 12/03/2021 – 14:00








Author: Tyler Durden

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Economics

Fisker Is One to Buy, But Not Quite Yet

It’s stalled, but can it motor higher? The stock in question is Fisker (NYSE:FSR) and its in-tow FSR stock.
Source: T. Schneider / Shutterstock.com
And…

It’s stalled, but can it motor higher? The stock in question is Fisker (NYSE:FSR) and its in-tow FSR stock.

Source: T. Schneider / Shutterstock.com

And based on what’s happening off and on the FSR price chart, the best course of action is to use those optionable safety features sometimes forgotten to avoid being a crash test dummy. Let me explain.

Sell the news? It could be that simple in shares of FSR. But you never know either, well until it’s too late.

Three weeks ago Fisker investors got a first glimpse of the company’s luxury Fisker Ocean electric vehicle (EV). And sell they did, with only gratuitous hindsight making it appear that selling the news was the singular course of action to take.

The fact today is FSR stock has managed to shed nearly 20% since unveiling its inaugural EV at the LA Auto show, despite receiving accolades for the vehicle.

Fisker’s Awarded With Profit Taking

The EV “asset-light” auto designer took home a prized ZEVAS Award for zero-emission vehicles in the category of “best crossover vehicle” priced under $50,000. Nice, right? I like to think so.

Still, in walking the aisle alongside FSR’s hefty bearish population of nearly 28% and investors caught taking profits, shares were up a near picture perfect 80% in just two months leading into the auto event.

So there’s that, right? I suppose.

As well and for FSR investors yearning for additional reasons driving the stock’s price contraction, fingers can be pointed at inflation fears, Fed-speak and most recently, the covid-19 Omicron varient in recent days.

It’s fair enough to say and see that many other EV plays such as QuantumScape (NYSE:QS) or Lucid Motors (NASDAQ:LCID), as well as other higher multiple growth plays have been hit by those macro irritants, putting them in the same miserable boat as FSR stock investors.

But it’s likely just a bump in the road when it comes to Fisker.

The thing is if you’re going to make a play on the next Tesla (NASDAQ:TSLA), investors would be hard-pressed to do much better than FSR stock, within the framework of an EV startup that’s yet to put the rubber to the road.

And I’m not alone in thinking that about Fisker shares.

InvestorPlace contributor Will Ashworth notes Fisker’s Ocean series has what I’ll just call the goods under the hood once production commences next November.

And with sales pegged at $2.2 billion for 2023, FSR’s forward price-to-sales ratio near 3x appears to an attractive value proposition for a growth stock of Fisker’s caliber.

FSR Stock Weekly Price Chart

Fisker (FSR) topping within bullish channel with shaky looking stochastics
Click to Enlarge
Source: Charts by TradingView

When it comes to owning FSR, I see a couple different ways to position for vastly-reduced risk and an eye on holding for a few years.

First, if shares can continue to retreat towards $15 – $16.75, purchasing FSR stock on weakness makes sense. This area has channel and Fibonacci support to back up the buy decision.

As well, a currently bearishly-crossed and overbought stochastics should, at a minimum, be in neutral territory. It could also be more opportunistically flattening or even generating a bullish buy signal, if shares were to decline into the support zone.

Like Will, I don’t anticipate FSR will see $10 again given its valuation and sales forecast. And if it did, it could mean some serious missteps by the company and more of a trap for buyers than of actual value.

That being said, I’d attach any potential purchases with a stop loss. Based on today’s channel, but also appreciating trader missteps have happened in the past like last October’s, $12.50 – $13 looks about right.

Alternatively, a fully-hedged bullish vertical or collar strategy rather than exiting on a technical failure might be considered.

Lastly, and given the reality that charts can sometimes turn on a dime, I’d simply watch for a stochastics crossover. A momentum move higher is always possible in a name like FSR.

Should that occur, placing an intermediate-term collar whose strike structure mimics an out-of-the-money bull call spread and adjusting the position over time is one way to avoid becoming a crash test dummy and hopefully enjoy some future vroom, vroom in FSR stock.

On the date of publication, Chris Tyler did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Chris Tyler is a former floor-based, derivatives market maker on the American and Pacific exchanges. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.

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Economics

Unemployment Falls to 4.2 Percent in November as Economy Adds 210,000 Jobs

The rise in the index of aggregate hours would be equivalent to more than 630,000 jobs with no changes in workweeks.
The post Unemployment Falls to 4.2…

The rise in the index of aggregate hours would be equivalent to more than 630,000 jobs with no changes in workweeks.

The unemployment rate fell 0.4 percentage points in November, even though the economy added just 210,000 jobs. The drop in the unemployment rate went along with an increase in the employment-to-population ratio (EPOP) of 0.4 percentage points, corresponding to a rise in employment of more than 1.1 million in the household survey. The unemployment rate had not fallen this low following the Great Recession until September 2017.

The 210,000 job growth in the establishment survey is slower than generally expected, but it is important to note that it went along with an increase in the average workweek. The index of aggregate hours in the private sector increased by 0.5 percent in November. This would be the equivalent of more than 630,000 new jobs, with no change in the workweek.

This fits a story where employers are increasing hours since they are unable to hire new workers. We are seeing a reshuffling of the labor market where workers are looking for better jobs and employers are competing to attract workers, especially in lower paying sectors.

Declines in Unemployment Largest for Disadvantaged Groups

Nearly every demographic group saw a drop in unemployment in November, but the falls were largest for the groups that face labor market discrimination. The unemployment rate for Blacks fell by 1.2 percentage points to 6.7 percent, a level not reached following the Great Recession until March 2018 and never prior to that time. For Hispanics, the decline was 0.7 percentage points to 5.2 percent.

The unemployment rate for workers without a high school degree fell by 1.7 percentage points to 5.7 percent. By contrast, the unemployment rate for college grads fell by just 0.1 percentage points to 2.3 percent, 0.4 percentage points above its pre-pandemic low. The 5.7 percent rate for workers without a high school degree is 0.7 percentage points above the pre-pandemic low, although the monthly data are highly erratic.

The unemployment rate for people with a disability fell by 1.4 percentage points to 7.7 percent, while the EPOP rose by 1.1 percentage points to 21.5 percent. The latter figure is almost 2.0 percentage points above pre-pandemic peaks, indicating that the pandemic may have created new opportunities for people with a disability.

Share of Long-Term Unemployment Edges Up

The share of workers reporting they have been unemployed more than 26 weeks edged up slightly to 32.1 percent. It had been falling rapidly from a peak of 43.4 percent in March. It was under 20.0 percent before the pandemic hit. On the plus side, the share of unemployment due to voluntary quits increased by 1.0 percentage points to 12.5 percent. This share is still low for a 4.2 percent unemployment rate, but the high share of long-term unemployed depresses the share attributable to quits.

Wage Growth Still Strong for Lower Paid Workers

The average hourly pay of production workers is up 5.9 percent year-over-year. It has risen at a 6.6 percent annual rate comparing the last three months (September to November) with the prior three months (June to August). For restaurant workers the gains have been even larger, with the average hourly wage for production workers up 13.4 percent year-over-year, although the annual rate of growth slowed to 5.7 percent comparing the last three months with prior three months. Wages for the lowest paid workers are far outpacing inflation.

Manufacturing and Construction Both Add 31,000 Jobs in November

This continues a pattern of strong job growth in these sectors. Employment in construction is now down 1.5 percent from pre-pandemic levels, while manufacturing employment is down 2.0 percent.

Employment Lagging in Hard Hit Sectors

By contrast, employment is still lagging in the hardest hit sectors. The motion picture industry shed 3,400 jobs in November. It is now down 21.9 percent from pre-pandemic level.

Low-wage sectors are clearly having trouble attracting workers. Nursing and residential care facilities shed 11,000 jobs in November. Employment is now down 423,700 jobs (12.5 percent) from pre-recession level, accounting for most of the drop in health care employment. Childcare lost 2,100 in November, while home health care lost 300 jobs.

Retail lost 20,400 jobs in November. Employment in the sector is now down 1.1 percent from pre-pandemic levels; although the index of aggregate hours is up 1.1 percent.

Restaurants added just 11,000 workers, while hotels added 6,600. However, the index of aggregate hours for the leisure and hospitality sector (which comprises the two industries) rose 0.6 percent. This corresponds to a gain of almost 800,000 jobs with no change in the length of the workweek.

State and Local Governments Shed Another 27,000 Jobs

State and local government employment is now down 951,000, or 4.8 percent from pre-pandemic levels. This is almost certainly a supply side story, where these governments cannot easily raise pay to compete with the private sector in attracting workers.

Overwhelmingly Positive Report

This is another overwhelmingly positive report. The unemployment rate is more than a full percentage point lower than what CBO had projected before the passage of the American Recovery Plan. The most disadvantaged workers are seeing the greatest benefits in pay and employment opportunities. The economy looks to be very strong as long as another surge in the pandemic doesn’t derail it.

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The post Unemployment Falls to 4.2 Percent in November as Economy Adds 210,000 Jobs appeared first on Center for Economic and Policy Research.


Author: Karen Conner

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