January’s Hiring Boom Caught Economists by Surprise The U.S. added more than a half million jobs last month. Forecasters had expected less than 200,000.

(…) The January figures can be particularly hard to predict, economists say, because seasonal adjustment factors play a big role. Statistical agencies adjust all sorts of figures to make them comparable month-to-month and help people better understand what is going on with the economy. It is no surprise that employers let go of holiday workers in January or that Americans buy more hot dog buns before July 4. The question is how much more or less than typical.

On an unadjusted basis, the U.S. shed 2.5 million jobs in January. A year earlier they shed 2.8 million.

Nela Richardson, chief economist at payroll processor Automatic Data Processing Inc., said seasonally adjusted figures might be skewing true results because the current period could be different from the prepandemic economy. The seasonal adjustments are based on models developed over many years. (…)

The Labor Department considers the latest figures to be preliminary numbers and will revise them in the next two monthly reports. Then once a year, the department uses an expanded data set relying on tax records to more finely tune its estimates. It releases that update each February, alongside January numbers.

The revisions can be large. For example, a year ago, the Labor Department initially estimated 467,000 jobs were added in January 2022, on a seasonally adjusted basis, but after the latest revisions the gain was cut to 364,000.

On Friday the department said it revised the employment level for March 2022, the benchmark month, by more than 500,000 jobs, or an increase of 0.3%. The average adjusted revision over the past decade has been 0.1%, the agency said. (…)

“It is completely confusing,” said Douglas Porter, chief economist at BMO Financial Group. “We have to all be humble in how well we can forecast what lies ahead.”

Recall that last December, the Philly Fed said that the BLS’ Q2’22 payrolls numbers were overstated by 1M workers annualized, or 0.6%. Two weeks ago, the BLS Business Employment Dynamics stats concurred.

Now, the BLS tells us that March ‘22 employment level was 506k more than reported but that its Q2’22 original number was ok.

Go figure!

In the meantime, some people set monetary policies, others investment policies, often based on the former, focusing on this very statistic.

Consider:

• The establishment survey sill suggests a slowdown trend:

• Not so for the household survey:

• Establishment employment is up 3.3% YoY vs +1.9% for the household survey. Which will adjust to which?

• Lay-off announcements suggest that growth in establishment employment (payrolls) is about to turn negative:

Surging lay-offs suggest employment will weaken

Source: Macrobond, ING

• Average weekly hours also bounced back in January. They had steadily declined from a record 34.9 hours in May 2021 to their 2011-2019 normal level of 34.4 hours. At 34.7 in January, weekly hours exceed their best levels between 2011 and 2019.
• Even manufacturing hours jumped a huge 0.4 hours in January.
• Manufacturing production overtime rose 0.2 hours in January.

Increased hours may be due to good weather. The SF Fed’s model suggest the weather added about 120k jobs in January.

This while PMIs all point to recessionary conditions in manufacturing:

Production levels at goods producers also decreased at a solid pace. The rate of contraction was among the fastest since the global financial crisis, despite slowing slightly from December. (…) new orders fell at a steep rate. (…) The rate of job creation eased for the fourth month running.

The ISM said that only 2 industries reported growth in January vs 15 reporting contraction. Seventeen of 18 industries reported a decline in new orders in January.

The jump in payroll employment was especially strong in services, +471k vs +46k for goods-producers. Weekly hours were also up 0.2 hours, well above their 2011-2019 levels.

But purchasing managers surveys only add to the confusion with S&P Global’s signalling “a solid contraction [to 46.8] in business activity across the US service sector at the start of 2023 (…) [and the] pace of employment growth slowed further amid reports of cost-cutting efforts” while the ISM survey jumped 6 points to 55.2 even though “employment was unchanged for the month”.

Jay Powell is slated to speak tomorrow at the Economic Club of Washington, D.C.. The latest data confirm his view of a “very, very strong labor demand”.

However, that very, very strong demand is not translating in stronger wage growth which slipped well below 4.0% annualized in January.

Strange world!

So this data dependent Fed, dedicated to slow demand, looks at this next chart and wonders what to do: the combination of solid jobs growth (blue, +0.33% MoM), a +0.3% gain in wages (black) and a 0.9% increase in hours worked produced a 1.5% MoM jump in payroll income which is now up 8.5% YoY, accelerating from +7.3% in December:

PCE inflation in the 4.5-5.0% range could result in real consumer expenditures rising 3.5-4.0% YoY at a constant savings rate, twice the Q4’22 growth rate.

The FOMC will get one more job report before its next meeting March 21-22. More or less confusion?

The WSJ’s Nick Timiraos:

Fresh signs of a hot U.S. labor market leave the Federal Reserve on course to raise interest rates by a quarter percentage point at its meeting next month and to signal another increase is likely after that. (…)

The department not only reported unusually large job growth in January but—more important for the Fed—it revised previous months’ reported gains higher, suggesting the economy had more momentum than previously anticipated.

Wage growth also was revised higher in November and December. Hourly pay for private-sector workers grew at an annualized rate of 4.6% during the three months through January, up from 4.1% for the prior three-month period.

(…) signs of any reacceleration could prompt officials to delay decisions about a pause into the summer. (…)

• Summers Sees Risk of ‘Sudden Stop’ in Economy After Jobs Surge

(…) “It’s as difficult an economy to read as I can remember,” Summers told Bloomberg Television’s “Wall Street Week” with David Westin. A key question after the jump in US payrolls is whether this is all “going to be income that’s going to be spent, that’s going to lift the economy up a bunch?” or do companies at some point conclude they have too many workers and too much inventory “and we’re going to see a fairly sudden stop.” (…)

Summers concluded, “we have to maintain a lot of agnosticism about where headed.”

What the real world is saying (FT and others):

• More than 500 tech companies have announced layoffs since July (Axios).
• Challenger Gray & Christmas estimates that U.S. employers announced more than 100,000 job cuts in January, up from less than 44,000 in December and 19,000 a year earlier.
• Ford, McDonald’s, UPS and US Bancorp have told investors that they are preparing for at least a mild US recession.
• PayPal blamed a “challenging macroeconomic environment” in announcing 2,000 lay-offs.
• FedEx said it would cut 10% of its senior ranks to align better with customer demand.
• Intel cited “macroeconomic headwinds” to explain why it was cutting the pay of its CEO and other executives and managers.

but

• Mastercard and Visa still see “a resilient consumer”.
• Same with McDonald’s and Mondelez Intl.
• Procter & Gamble sees little evidence of trading down.
• Caterpillar, the industrial machinery group that is considered an economic bellwether, said that its US market “remains relatively strong to date”.

The slowdown in Amazon trailing 12-m revenues per share growth from 35% pre-pandemic to 7% over the last 12 months (and the collapse in margins) clearly reflects the recession in goods as this CPMS/Morningstar chart shows.

And growth in real expenditures on services, expected to offset the goods recession, has slowed to a crawl at the end of 2022.

This jibes with S&P Global’s Services PMI survey:

U.S. Services PMI: Business activity contraction eases at start of 2023, but cost pressures strengthen once again

January data signalled a solid contraction in business activity across the US service sector at the start of 2023, according to the latest PMI™ data. Although easing, the fall in output stemmed from further weak domestic and external demand conditions, as new business and new export orders declined.

Firms continued to expand their workforce numbers despite another fall in backlogs of work, but the pace of employment growth slowed further amid reports of cost-cutting efforts. Nonetheless, business confidence strengthened and was buoyed by increased spending on marketing and investment in cost efficiency.

At the same time, cost inflation picked up for the first time in eight months. A sharper rise in input prices was not reflected in a quicker increase in output charges, however, as selling prices rose at the slowest pace since October 2020.

The seasonally adjusted final S&P Global US Services PMI Business Activity Index registered 46.8 in January, up from 44.7 in December and broadly in line with the earlier released ‘flash’ estimate of 46.6.

Weak client demand hampered business activity, as output fell at a solid pace. Firms noted that inflation and high interest rates weighed on customer spending, with further reports of hesitancy in placing new orders. The rate of contraction softened to the slowest in three months, however.

New business fell for the sixth time in the last eight months, albeit at only a marginal pace. The decline in new orders was linked to lower purchasing power among customers amid strong inflationary pressures.

Alongside subdued domestic sales, new export orders also decreased in January. The rate of contraction in new business from abroad quickened and was among the sharpest since May 2020. Service sector firms stated that global economic uncertainty and high inflation in key export markets weighed on export sales.

Cost pressures intensified in the opening month of 2023, thereby bringing an end to a seven-month sequence of easing input price inflation. Higher cost burdens were often linked to increased material prices, but service providers also commonly mentioned upticks in wage bills. The rate of cost inflation was historically elevated, but the second-slowest since November 2020.

Efforts to boost sales and remain competitive reportedly hampered firms’ ability to hike output charges in January, despite a marked rise in input prices. The rate of charge inflation was broadly in line with the long-run series average, and the slowest since October 2020. The pace of increase in selling prices moderated for the ninth successive month.

Employment across the service sector increased further during January, thereby extending the current sequence of job creation that began in July 2020. That said, the pace of growth slowed to only a slight pace. Efforts to rein in costs and challenges retaining staff at the current salary level reportedly hampered workforce numbers.

Meanwhile, service providers registered another monthly decline in backlogs of work in January. The rate of contraction was modest overall and matched that seen in December.

Finally, business optimism improved at the start of the year. Service sector firms recorded stronger expectations regarding the outlook for output over the coming year. Hopes of greater new orders, investment in cost-saving methods and increased spending on marketing were often linked to positive sentiment.

• But it does not jibe with the ISM Services PMI: Outside the pandemic, the ISM Services has never risen so much in one month.

New Orders

Employment

Confused? Join the club!

S&P Global explains how its PMI-Services survey differs from the ISM in this article. The main points in my view:

The first, and most striking, difference between the two surveys is that of sector coverage. While the S&P Global PMI for the service sector only includes data provided by companies operating in the US services economy, encompassing a variety of consumer, business and financial services which are provided by the private sector (or otherwise charged for), the ISM services PMI in fact covers any activity other than manufacturing.

The ISM definition therefore includes construction, utilities, agriculture, retail and various aspects of government administration, many of which can blur, dampen or distort the picture of the health of the services economy. Public sector activity, in particular, will tend to dampen any business cycle trend, especially any downturn in private sector activity, hence its exclusion from the S&P Global survey. (…)

Survey respondent bases are different in terms of company size, with S&P Global stratifying its panels not only by sector contribution to GDP but also ensuring an appropriate mix of small, medium and large firms within each sector. In contrast, ISM data are based on ISM members and as such are likely to be biased towards larger companies, with small- and medium-sized firms under-represented.

As smaller firms often behave differently to larger firms during different stages of the economic cycle, or in response to policy changes or international economic conditions, it is important for any survey to ensure robust representation of all different enterprise sizes.

FYI, government employment has been very volatile since mid-summer. It jumped by 74k employees in January after -9k in December, +62k in November and +15k on average in Sep-Oct.

What about earnings, guidance and revisions, investors’ real world?

EARNINGS WATCH

From Refinitiv/IBES:

Through Feb. 3, 250 companies in the S&P 500 Index have reported earnings for Q4 2022. Of these companies, 69.6% reported earnings above analyst expectations and 27.2% reported earnings below analyst expectations. In a typical quarter (since 1994), 66% of companies beat estimates and 20% miss estimates. Over the past four quarters, 76% of companies beat the estimates and 21% missed estimates.

In aggregate, companies are reporting earnings that are 1.3% above estimates, which compares to a long-term (since 1994) average surprise factor of 4.1% and the average surprise factor over the prior four quarters of 5.3%.

The actual earnings growth of the 250 companies that have reported so far is -4.5%. After the first 263 Q3 reports, earnings were up 2.4%.

Of these 250 companies, 65.2% reported revenue above analyst expectations and 34.8% reported revenue below analyst expectations. In a typical quarter (since 2002), 62% of companies beat estimates and 38% miss estimates. Over the past four quarters, 73% of companies beat the estimates and 27% missed estimates.

In aggregate, companies are reporting revenues that are 0.9% above estimates, which compares to a long-term (since 2002) average surprise factor of 1.3% and the average surprise factor over the prior four quarters of 2.5%.

The actual revenues growth of the 250 companies that have reported so far is 5.3%. After the first 263 Q3 reports, revenues were up 11.7%.

Inflation averaged 7.1% in Q4’22 (core +6.0%) vs 8.3% in Q3 (core +6.3%).

For Q4’22,

• the estimated earnings growth rate is -2.7% [-2.2% on Jan. 6]. If the energy sector is excluded, the growth rate declines to -7.0% [-6.7%].
• the estimated revenue growth rate is 4.6% [4.1%]. If the energy sector is excluded, the growth rate declines to 3.7% [3.3%].

For Q1’23,

• the estimated earnings growth rate is -2.5% [1.0%]. If the energy sector is excluded, the growth rate declines to -4.3% [-1.1%].
• the estimated revenue growth rate is 1.5% [2.5%]. If the energy sector is excluded, the growth rate declines to 2.0% [2.6%].

Analysts are thus saying that a 1.5% gain in revenues will result in -2.5% decline in earnings when, in Q4, +4.6% revenue growth translated into -2.7% in profits.

This while inflation on both revenues and costs is well above 4%. Morgan Stanley’s Mike Wilson says that “80% of S&P industry groups are seeing cost growth in excess of sales growth”. He continues:

“We think margin pressure is what will drive the downside we are expecting in 2023 earnings—as inflation falls companies will struggle to cut costs as quickly as pricing power erodes. We have already seen margin trouble for a number of companies that have reported 4Q earnings and we only expect the issue to heat up as we move further into the year. EBIT margins for 2023 have fallen 1.2% for the S&P 500 since the end of last year. The industry groups that have seen the biggest margin downside are Autos, Energy, and Capital Goods. Net margins for 2023 have fallen 1.5% for the S&P 500 since the end of last year.”

Source: Morgan Stanley via John Mauldin

Estimates are slowly being revised down across the board since mid-December…

  

…increasingly encouraged by official corporate guidance. Thirty-nine companies have pre-announced Q1’23, substantially fewer than the 52 that had pre-announced at the same time during Q4. But more companies have guided negatively whereas many others have simply decided not to offer any guidance at this time. Not a good sign.

Note that Factset’s compilation shows that 43 companies have offered guidance for Q1’23 with 37 negative and 6 positive (86% negative vs 5 and 10-year averages of 59% and 67% respectively).

Factset also says that 251 companies have issued guidance for the current fiscal year with 129 negative and 122 positive (51% negative).

The Hottest Sectors of the Reopening Are Now Driving a Wage Slowdown Things are starting to look more normal

(…) Here’s a look at the annualized pace of change in average hourly earnings for production and nonsupervisory employees across various time frames:

So what’s behind this decline?

Sectors that exerted the fastest upward pressure on overall wages during the economic reopening over the last two years are now driving the deceleration.

As you can see in the chart, there were massive spikes in leisure and hospitality, education and health services, professional and business services, retail trade, and transportation and warehousing. Those five categories have now come sharply off the boil. Meanwhile the categories where the contribution to total wage growth was always more muted — for example construction or wholesale trade — are still somewhat elevated, but don’t change the picture much for overall wages. (…)

States Are Flush With Cash, Which Could Soften a Possible Recession Rapid recovery, federal stimulus leave state finances in historically strong shape

States will hold an estimated $136.8 billion in rainy-day funds this fiscal year, according to the National Association of State Budget Officers, up from $134.5 billion a year earlier, when they represented 0.53% of gross domestic product, the highest in records going back to 1988. This year’s figure would represent roughly 12.4% of their total spending.

Unlike the federal government, most state and local governments must balance their budgets every year. That means that a fall in tax revenues must be offset, most often by cutting spending and laying off workers, which exacerbates economic downturns. Healthy reserves could make such cuts unnecessary. (…)

Moody’s Analytics estimates 39 states have the reserves necessary to offset all the revenue expected to be lost in a relatively mild recession. Four more are within striking distance.

City and county governments have also been able to pad their reserves thanks to recovery and stimulus programs. Comprehensive data on local government finance isn’t available yet, but New York City boosted its reserve funds to $8.3 billion in fiscal year 2023, or 11.1% of revenues. Both figures are the highest ever. Los Angeles and Chicago have also directed more money to rainy-day funds.

State and local governments together make up 11% of total spending in the U.S. economy. They account for about 13% of total payrolls, more than manufacturing, construction, retail, or leisure and hospitality. (…)

A broader measure of state reserves, which includes all unspent funds, whether stored in specified rainy day funds or not, will amount to 24.7% of total spending this fiscal year, down from 31.7% in 2022, according to NASBO forecasts. By contrast, states held just 8.9% on average between 2000 and 2020. Most state fiscal years run from July 1 to June 30. (…)

State and local governments are 505k employees short vs pre-pandemic. State and local government wages rose 8.8% since 2019 but remain about 8% lower than private wages which have risen 12.3% since 2019.

SENTIMENT WATCH

Goldman Sachs remains in the no-recession camp but David Kostin sees the need for what-if scenarios:

The combination of limited upside in our base case and substantial downside risk if the economy dips into recession makes for a challenging distribution of outcomes for US equity investors, especially relative to the alternatives. If resilient economic activity data catch down to the more negative recent survey data and investors assign increased likelihood to a hard landing scenario, US equities would face meaningful downside.

We estimate the S&P 500 would fall to 3150 in a recession scenario, driven by a combination of falling earnings estimates and a much lower P/E multiple (14x vs. 18x today). This would represent a nearly 25% decline from the current level.

Beyond recession, another downside risk is that inflation continues to slow, but fails to approach the Fed’s target. This dynamic could lead to even tighter monetary policy and higher interest rates. Finally, as we discussed last week, the debt ceiling represents a potential risk to US equities later this year. While the reaction to debt limit “close calls” has been mixed, the 2011 experience witnessed a sharp 17% drawdown in US stocks.

FOMC/Powell

National Bank Financial produced the best summary of last week’s FOMC/Powell event: A gentle hike with an end in sight

SERVICES PMIs

Eurozone economy grows for first time since June 2022

The S&P Global Eurozone Services PMI Business Activity Index signalled a return to growth in services output during January, rising to 50.8, from 49.8 in December. Overall, this marked the first reading above the crucial 50.0 mark that separates expansion from contraction for the first time since July 2022. That said, the increase in business activity was marginal.

The increase in total activity was mainly supported by companies’ efforts to clear their backlogs of work, which fell for the third month in succession. January survey data also signalled a broad stabilisation in new business volumes, however, ending a six-month sequence of decline.

Improvements to capacities were also highlighted by continued jobs growth. Service sector employment increased in January, extending the current sequence of jobs growth to two years. The rise in workforce numbers was moderate and the fastest since last October.

There was also an improvement in the growth outlook, with confidence strengthening to an eight-month high.

On the prices front, input cost inflation eased to a 13-month low but was historically sharp overall. Despite an alleviation in cost pressures, selling charges were raised to a greater extent than in December.

China: Service sector activity rebounds as pandemic restrictions recede

The seasonally adjusted headline Business Activity Index increased from 48.0 in December to above the neutral level of 50.0 at 52.9 in January. This signalled the first expansion of Chinese service sector activity for five months, and one that was solid overall. Companies frequently linked the increase in activity levels to the rollback of pandemic measures across the country and a recovery in customer demand.

As was the case for activity, overall new business increased for the first time in five months. The modest upturn in new work was supported by higher customer numbers, particularly with the relaxation of rules around travel, but also improved foreign demand. Though mild, the increase in new export business was the joint-quickest since April 2021.

There was evidence that the pandemic did continue to impact operations, however, as staff absences due to rising COVID-19 case numbers contributed to a reduction in staffing levels. There were also reports of companies trimming their workforce numbers due to efforts to control costs. That said, the rate at which employment fell was the slowest for three months and only marginal.

A combination of rising sales and pandemic-related disruptions, most notably staff absences, drove a further increase in backlogs of work during January. Though moderate, the pace of accumulation was the fastest seen since May 2022.

The rate of input cost inflation picked up for the first time in five months in January, with firms often commenting on higher raw material, staff and fuel expenses. That said, the upturn in cost burdens remained mild overall and weaker than the series average. Average prices charged by service providers meanwhile continued to rise only slightly. While some firms looked to pass on higher operating costs to clients by raising their fees, others mentioned that pricing power was constrained by efforts to attract new business.

  

Nonfarm Productivity and Unit Labor Costs

• Nonfarm productivity increased in Q4 (+3.0%, qoq ar), and the year-over-year rate decreased 0.4pp to -1.5%. Unit labor costs—compensation divided by output—increased in Q4 (+1.1%, qoq ar), and the year-on-year rate decreased 0.7pp to +4.5%.
• Compensation per hour increased at an annualized 4.1% pace in Q4, and the year-on-year pace declined by 1.0pp to +3.0%. Our wage tracker now stands at +5.2% (yoy) in Q4 (vs. +5.6% in Q3). (Goldman Sachs)

This the YoY chart, looking bad:

And the QoQ chart, looking better:

Vehicles Sales Increased to 15.74 million SAAR in January Wards Auto estimates sales of 15.74 million SAAR in January 2023, up 17.6% from the December sales rate, and up 4.2% from January 2022.

• Ford Sees US Car Prices Falling 5% This Year as Rebates Rise “Through the year, particularly in the second half, you’ll start to see prices come down through higher incentives.”

US Offices Reach 50% Occupancy for First Time Since Pandemic Hit

An index of building occupancies in 10 major metro areas increased 0.9 percentage points to 50.4% in the week ended Jan. 25, according to security firm Kastle Systems. All of the cities tracked by the company — including San Francisco, Chicago and Austin, Texas — reached return-to-office levels of 40% or above, which was also a post-pandemic first.

Most of the cities tracked saw their occupancy hold steady or rise, including New York, where it increased to 47.5% for the week, and San Francisco, which rose more than two percentage points to 45.9%. Austin had the highest level, at almost 68%, while the San Jose, California, area that includes much of Silicon Valley was the lowest, at 41%. (…)

Toronto’s Housing Market Enters Deep Freeze With Sales Falling

Just 3,100 homes were sold in Canada’s largest city in January, the lowest number since April 2020, shortly after the country went into its first Covid-19 lockdown. (…)

With so little action in Toronto’s market in January, the benchmark price for a home edged down 0.2% from December to roughly C$1.08 million ($810,000), the report showed.

The benchmark price was down 14% from a year earlier.

Despite the recent pullback, buyers are still facing a much more expensive market than a few years ago, with prices 28% higher than before the pandemic. (…)

Fewer sellers put homes on the market in January, with new listings falling 3.7% from a year earlier. But inventory still piled up: 9,299 properties were for sale, more than double last year’s total.

January is often one of the slowest months for the real estate market broadly, as many people wait until spring to do deals. Even on a seasonally adjusted basis, sales were down 49% from a year ago. (…)

ECB Raises Interest Rate by Half Percentage Point

The European Central Bank on Thursday raised its key rate to 2.5%, its fifth large increase in a row, and signaled it would enact another half-point rate increase in March. That leaves the ECB some way behind the Fed, which raised rates to 4.5% to 4.75% on Wednesday, and the Bank of England, which increased rates by a half percentage point to 4% earlier Thursday. (…)

“We know that there is an element of catch-up…we know that we have ground to cover,” Ms. Lagarde said. The ECB intends to raise rates by another half percentage point in March, to 3%, and could continue to raise rates after that, she added. (…)

In contrast, the Bank of England signaled Thursday that it might soon pause increases as the U.K. economy falters. The BOE said further rate rises are possible, but only if inflation threatens to be high for longer than it currently expects it to be. (…)

EARNINGS WATCH

Apple, Other Tech Giants Pressured as Demand Cools The iPhone maker reported disappointing quarterly results that ended its three-year streak of sales and profit records, capping an earnings season in which the world’s biggest tech companies mostly struggled to shake off a broad slowdown.

• Alphabet Posts Drop in Ad Revenue Net income fell 34% to $13.6 billion in the quarter

• Amazon Warns of Slower Growth Sales at the company’s online-stores segment, which includes product sales primarily on its flagship site and digital media content, fell by 2% [marking four out of five quarters of year-over-year declines].

• Starbucks Reports Record Quarterly Revenue The coffee giant missed profit expectations and noted inflationary challenges.

• Ford Posts $1.3 Billion Quarterly Profit, Misses Full-Year Guidance Supply-chain disruptions slowed production at the car maker and caused it to miss its annual goal.

Big Tech Didn’t Quite Clear the Bar Apple, Amazon and Google results disappoint and show tough year is still ahead

Apple, Amazon.com and Google parent Alphabet Inc. all reported December quarter results Thursday afternoon that showed the effects of the weakening global economy across most of the companies’ diverse business lines. These include online advertising, cloud-computing services, e-commerce and tech gadgets such as smartphones, laptops and smartwatches. These are big businesses, totaling nearly $1.2 trillion in revenue for the three companies in 2022 [and 13.7% of the S&P 500].

That combined revenue grew by just 7% for the year compared with 28% in 2021 and 21% for the prior year. But the weakness wasn’t just on the top line. Operating margins for the three averaged a decline of 3 percentage points in 2022. Microsoft showed a similar pattern, reflected in its own December quarter results. (…)

Thursday’s results all showed weakness in key areas, none of which seem likely to turn around quickly. Apple’s iPhone revenue fell 8% year over year to about $65.8 billion, which was about 3% below Wall Street’s targets. The smartphone still accounts for more than half of the company’s business, and supply of the high-end Pro models was severely constrained by problems in China during the quarter. The company also saw significant revenue declines in the Mac and wearables businesses. As a result, Apple’s total revenue missed Wall Street’s consensus forecast by 4%, the widest such margin in at least five years, according to FactSet.

Amazon managed to beat Wall Street’s targets for revenue and operating income for the fourth quarter. But its forecasts for both lines in the March period were below expectations, while its AWS cloud business followed a similar track to Microsoft’s with a notable deceleration in growth and profits during the fourth quarter. AWS revenue of $21.4 billion missed analysts’ targets by 2%, while the segment’s operating margin of 24% was its lowest in more than five years.

Google, meanwhile, posted a rare drop in advertising revenue on a year-over-year basis, while growth in its burgeoning cloud business missed analysts’ targets. (…) The operating margin for Google’s Services segment, which reflects its ad business, was 31% for the fourth quarter—down 6 percentage points from the previous year’s fourth quarter. 

All three voiced some guarded optimism for 2023 on their respective calls, but none offered a forecast for the year ahead—and Apple and Google won’t even project for the quarter now under way. (…)

• Constant Currency (The Information)

If revenues are measured excluding the impact of foreign exchange changes, they don’t look quite so bad. Apple execs, for example, said on the earnings call that revenue would have grown if not for foreign exchange rates. And that lines up with the rest of big tech’s results. Take a look:

• Amazon’s revenue would have risen 12% instead of 9%.
• Alphabet’s revenue would have risen 7% rather than 1%.
• Microsoft’s revenue would have risen 7% rather than 2%. 
• Meta Platforms’ revenue would have grown 2% rather than dropping 4%.

Yet, companies with international sales exposure continue to outperform as the US dollar softens. (The Daily Shot)

• John Authers:

(…) Across markets, this looks like a classic “short squeeze” as the stocks that had taken the biggest hit have seen the biggest rebound. For one nice illustration, this chart shows the performance of S&P 500 members for the year so far, on the vertical axis, and from August’s brief high to 2022’s year-end on the horizontal axis. The biggest fallers in the last downdraft of 2022 are the biggest gainers in this rally, with Tesla Inc. in the vanguard:

(…) And indeed, if this isn’t a short squeeze it looks an awful lot like one. John Roque of 22V Research points to a series of startling successes during this rally, which have all the hallmarks of an indiscriminate liquidity-driven rally. Non-profitable tech stocks are up 17% in the last five days, he says, and 27.5% in 2023. Meanwhile, high beta momentum is also up 17% for the week, and 28% for the year to date, while the most heavily shorted stocks have done better still, up 15% in five days and 29% for the year.

It’s dangerous, as ever, to try to get in the way of a wall of liquidity. But unless that liquidity succeeds in keeping the economy afloat, the risk is that asset prices will sink.

• Day Trading Army’s Grip on Stock Market Is Tighter Than in Meme Stock Era

Unbowed by losses of more than 50% in their favorite stocks last year, individual traders are storming back to stocks like Carvana Co. and crypto-related products as the market staged a rebound that added almost $2 trillion to equity values in January alone.

With professional investors mostly staying on the sidelines, the foray is boosting retail’s market presence. Trading orders from the retail army in stocks and exchange-traded funds accounted for 23% of the market’s total volume in late January, above the previous high of 22% reached during the 2021 meme mania, according to JPMorgan Chase & Co. estimates derived from public data on exchanges. (…)

Familiar retail-trading favorites, like Bed Bath & Beyond Inc., AMC Entertainment Holdings Inc., and DraftKings Inc., are once again being hyped on social media platforms.  (…)

The Roundhill MEME ETF (ticker MEME), debuted in 2021, has advanced roughly 40% this year, compared with a nearly 9% gain in the S&P 500. (…)

• Call volume is acting similarly:

@danny_kirsch

• YTD performance (The Market Ear): MEME +40%, most shorted +32%, NASDAQ +16%, SPX +8%. Pain is huge as people must buy back low quality shorts.

Refinitiv

S&P 500 Large Cap Index – 13/34–Week EMA Trend (CMG Wealth)

The Unusual Crew Behind Tether, Crypto’s Pre-Eminent Stablecoin The stablecoin has become a lucrative business at center of crypto economy

Tether Holdings Ltd. operates a $68 billion stablecoin at the heart of crypto’s alternative financial universe. Far more tether trades each day than bitcoin.

Yet the company’s founders and owners are an unusual bunch with scant experience at that scale of finance. One founder was a child actor turned early crypto investor. Another founder and top shareholder practiced plastic surgery before turning to electronics importing and then crypto. One newer owner has gone deep into British politics.

A group of four men has controlled 86% of Tether Holdings, according to a cache of documents reviewed by The Wall Street Journal. (…)

The firm releases little information about itself, much like the rest of the crypto industry. It has never disclosed its ownership structure, the details of how its assets are managed and how it would prevent a wave of redemptions from toppling the cryptocurrency. When questions were raised by investors about its lending programs, it refused to disclose the borrowers or the collateral they posted. Secrecy, lack of experience and little regulation have emerged as risks for investors at other crypto companies. (…)

Tether appears to have become a lucrative investment, due largely to rising interest rates. If Tether’s nearly $68 billion asset portfolio is paying 4.5% a year, roughly what short-term Treasurys are yielding, the company is taking in about $3 billion a year. Tether coins pay no interest. (…)

ABCD…ESG!

Ariel Investments Raises $1.45 Billion for Debut Private-Equity Fund The Chicago asset manager plans to acquire or establish minority-led suppliers for major U.S. corporations

(…) The vehicle’s strategy is an unusual twist on the typical private-equity playbook of buying companies, improving them financially and reselling them. Project Black aims to buy midmarket companies that aren’t minority owned, convert them into certified minority-led businesses and position them as suppliers to large corporations. The fund will also invest in companies with Black and Latino management and work to secure contracts with big firms.

U.S. companies have in recent years pledged to increase the amount of money they spend with minority-owned vendors and suppliers, in part to help alleviate the nation’s racial wealth gap. Between the beginning of 2020 and March 2022, U.S. businesses committed to spend at least $50 billion with minority- and women-owned suppliers over the next decade, according to a report last year from consulting firm McKinsey & Co.

Those pledges have often proven difficult to carry out. A paucity of minority-owned vendors and logistics companies presents a major challenge, said Les Brun, chairman and chief executive of Ariel Alternatives, who leads Project Black.

“The problem was that diverse firms didn’t exist at a scale that could take advantage of the opportunity,” he said. (…)

US accuses China of flying spy balloon over sensitive military sites

• “Significant Threat To National Security”: US Air Force Warns Over Chinese Corn Mill In North Dakota