Mega techs flex their growth muscles

Mega tech to the rescue

The mega techs flex their growth muscles, raising all boats. Alphabet Inc (NASDAQ: GOOGL) came in after the close last night with a beat top & bottom - and a 20-to-1 stock split kicker -  and is up 8% today and is now up 2.7% for the year.  Then Advanced Micro Devices, Inc. (NASDAQ: AMD) reported another strong quarter along with aggressive stock repurchases during the recent market pullback.

Perhaps many growth stocks were trading at very optimistic valuations, in particular, those with no profits yet. Some are even trading at high multiples of revenues, which left them vulnerable to a higher interest rate environment which acts to discount future cash flows to meaningfully lower values.

But the mega tech does produce massive current accounting profits and cash flow. They buy back their shares in the billions of dollars per year. They are much less vulnerable to theoretical discounting of future cash flows when valuing.  Just as important, despite their huge size, these mega tech companies continue to produce strong growth on both the top and bottom lines while simultaneously making huge investments in the future.

Perhaps their primary vulnerability is their continuing success and growth, which leaves them vulnerable to anti-competitive legislative claims. If those ever get traction, investors should have plenty of notice.

The point here is that investors will continue to pay up for growth, especially for companies that generate large free cash flow today. This is more important than ever for stock investors because these mega techs dominate the indexes and set the tone of the entire market.

A recovery in Apple and Google and AMD puts the wind at the back of the rest of tech, the rest of growth names, and the market in general. It reduces the fear of systemic risk that inflation and higher interest rates have brought this year. These strong earnings announcements have resulted in the best four-day run in the market in a year. More important earnings announcements are waiting in the wings.

Labor shortage

The economic news this week was mixed. The Institute of Supply Management (ISM) announced on Tuesday that its manufacturing index slipped to 57.6 in January. Since any reading above 50 signals an expansion, the ISM manufacturing report for January still showed a healthy expansion. Fully, 14 of the 15 industries surveyed in January reported that they were expanding. Ironically, the only industry to report a contraction in January was Paper Products, possibly because to hoarding of toilet paper has ceased.

The Labor Department reported that 4.3 million workers, which represents 2.9% of the workforce, quit their jobs in December. Naturally, this high quit rate is now complicating the payroll statistics, since technically, the workforce briefly shrinks until these workers find new jobs. There are now a whopping 10.9 million job openings in the U.S., so an acute labor shortage persists.

The biggest shock so far this week happened on Wednesday when ADP reported that private payrolls declined by 301,000 in January. This is the first time that ADP reported negative private payroll growth since December 2020.  According to ADP, the leisure and hospitality sector was hit hardest and lost 154,000 jobs, due to fears of the Omicron variant.  Interestingly, the trade, transportation, and utilities sector lost 62,000 jobs in January.  I am sure in the wake of the ADP report that most economists are revising their January payroll estimates lower.  Naturally, if the workforce continues to shrink, it may put the Fed in a bit of a pickle, since unemployment is one of their Congressional mandates.

Coffee beans

Plates and mugs produced to commemorate Queen Elizabeth II's Platinum Jubilee are being sold as unusual collector's items due to misspelling the event as "Platinum Jubbly." The dishes were made by a manufacturing company in China and were meant to be sold in British stores in celebration of the queen's 70th year on the throne. Wholesale Clearance is selling the entire stock of 10,800 misprinted plates, mugs, and tea sets for $43,817.76.