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Though it may seem like we're treading water, we're actually rotating our sectors.

3 weeks into Q1 earnings that have generally been strong the "safety" sectors have fallen back out of favor and the usual suspects (Tech, Finance) are back in favor, joined by Contstruction, Media and Industrials, which have come back in favor.  With the cyclicals moving up, it's odd that materials are not and, if the rally is real – that's a sector we'll expect to see improvement in.  

To some extent, I'm worried that we are confusing increased efficiency for a good economy.  Automation and AI are driving earnings gains while sectors that actually serve the consumers like Travel,  Retail, Personal Goods, Real Estate, Utilities, Telcos – even Healthcare – are falling off because, as I noted earlier in the week, consumers have less and less disposable income.

You can have an earnings recovery without actually selling more stuff and that's what's going on now but, ultimately, you can't grow if you don't sell more stuff and Trump's Tax Cuts have done nothing to improve the buying power of the consumers that ultimately drive this economy.  Sadly, as we may see today, you can have a nice economic recovery without having to hire people these days.

Woops – there goes another couple of million jobs!  

Honeywell says their robot will unload 1,500 cases per hour, enough to replace 6 workers with just one worker overseeing 3 or 4 robots so let's say 15 $35,000 workers ($525,000) replaced by 3 $200,000 robots ($600,000) and one $60,000 superviser (though I guess the workers had a superviser too) but the robots are a once in 5 years cost and work 3 shifts a day so really you're replacing 45 workers ($1,575,000) per year with $150,000/yr in robot expenses.  See how great corporations can do while humans are being discarded?

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That's how we're seeing all these companies, without the benefit of having more sales, dropping more and more money to the bottom line and we're only in the very early stage of this automation cycle – like the beginning of the Industrial Revolution – which led to World Wars 1 & 2! 

The industrial revolution did wonders for America in the early 1900s and, in the Roaring 20s, the stock market flew to record highs as automation brought in incredible corporate profits and workers who protested, like Sacco and Vanzetti, were quickly vilified by the Press (in their case executed), which had been co-opted by the Top 1%, who also had their own politicians in power to maintain the status quo and to utilize the military and the police to keep the workers in check while their jobs disappeared.  

That worked like a charm – until 1929, when the lack of consumer buying power finally became a problem and then the whole thing collapsed like a house of cards.  Is this time different?  The Oligarchs are back in charge and we're once again celebrating an era in which machines will make about 50% of the work-force obsolete.  It took us 15 years and a World War to recover from the Depression caused by the first Industrial Revolution – what will it take to recover from this one?

Again, this is early in the cycle, we could still have a good decade of growth before things fall apart but Honeywell is at trade shows now with this robot and those jobs will start disappearing next year as well as millions of other jobs in other industries – it's a race against time to see what breaks down first.  

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Meanwhile, Corporate Profits aren't that exciting, coming in at just 2% growth with 71% of the S&P 500 reporting.  It's just that we had such low expectations that this seems like a good thing.  Also, keep in mind this is Earnings PER SHARE and, as usual, the S&P has been reducing their share count by buying back record amounts of their own stock –$806Bn in 2018– which is 4% of the total index so 4% of the 2% growth in EPS is due to buybacks!

This year, buybacks are looking to be well over $1Tn, which is 5% of the GDP of this entire country!  When you break it down, over 1/4 of all shares purchases in the market are just companies buying back their own stock.  By doing so, in addition to raising EPS, they create an artificial scarcity of their own shares while also boosting the apparent demand for those shares – it's a hampster wheel that just keeps on turning but God help us all if the hampster ever gets tired.  

8:30 Update:  263,000 jobs were added in April, well over the 195,000 expected and Unemployment, at 3.6%, is the lowest it's been since 1969 – just before the recession of the early 70s.  Average Hourly Earnings grew at an anemic 0.2% which is strange since you would think people would get raises if labor is tight but, again, machines are taking over.  Still, it's all good news for the stock market so the rally should continue off this news.

Have a good weekend, 

  • Phil