The consensus among leading economists was that we will get a rise in non-farm payrolls up to 545,000 for the month of November. The lowest guess was 306,000. But the actual number was only 210,000. Hardly anyone gets this figure right or even gets close to it. Forget that. The important thing is despite a softer payroll number, which will likely be revised higher (as the past four have) it is trending at more than double pre-pandemic levels. Add to that the unemployment rate had a big fall (4.2%) accompanied by a big fall in underemployment rate.
Remember one of the prerequisites for a Fed hike is ‘maximum employment’. So what is maximum employment? Nobody knows. All we know is that in the past 70 years of recorded history, there are only five periods in the US economy where the unemployment rate has been this lower. We already know that they have exceeded their other objective on prices meaning price stability. So yesterday’s report should pave the way for a faster path to Fed rate hikes.
So, what is this doing to the stock markets? The ultra-high multiple, high-growth tech stocks are getting punished big time. Why is it so? Higher interest rates tend to bring about lower valuations. When analysts start plugging in a higher discount rate into their cash flow models, they will get a lower price target - in some cases much lower.
That’s why I have emphasized so much in the past why it is very important for your investments to be cash flow positive and debt-free. Companies like Twilio are getting hit big time. It has fallen from $457 in Feb to $248 now. I picked Twilio because it is a stock that we have discussed much in my previous reports; Growth stocks, in general, have been running for cover. Even Freshworks has taken a big hit. Whereas a company like Tanla Platforms has been edging higher as they are cash flow positive and completely debt-free plus awaiting some positive partnership engagements.
If the retreat in the markets turns out to be a riot, I don’t think Tanla will hold up on its own and go higher. The contagion impact will rub into Tanla as well but in my opinion, provide golden buying opportunities.
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Abraham George is a seasoned investment manager with more than 40 years of experience in trading & investment and multi-billion dollar portfolio management spanning diverse environments like banks (HSBC, ADCB), sovereign wealth fund (ADIA), a royal family office and a hedge fund. Currently, he is setting up a hedge fund where foreign citizens can invest in Indian growth stocks like Tanla operating in hyper-growth markets like CPaaS.