The U.S. may add as many as 300,000 jobs in March, the most in four years, setting the stage for what some economists say will be sustained employment gains.

Better weather, hiring of temporary government workers and a growing economy may bring the biggest job increases since March 2006, said David Greenlaw, chief fixed-income economist at Morgan Stanley in New York. The rise would be the second since President Barack Obama took office in January 2009. — Bloomberg.com 3/9/2010

Now one full year into the current bull market, there remains one economic issue still hanging over all other concerns: jobs.  The US economy has continued to shed jobs albeit at a slower pace, even as other economic concerns have stabilized.  To date 8.4 million jobs have been lost since the recession began in December 2007, and the rates of unemployed and underemployed remain extremely high.  All the while, the S&P 500 has advanced nearly 70% as reduced headcount has increased profitability, and pundits often speculate as to the sustainability of this jobless recovery.

Last month, the US lost 36,000 jobs, which was better than expected.  Prompted by the data, Senate Majority Leader Harry Reid put his foot in his mouth when he said on the Senate floor, “Today is a big day in America. Only 36,000 people lost their jobs today, which is really good.”  After that blunder, the report on Bloomberg.com struck us in just how optimistic it is towards March’s employment data, thanks in part to temporary hiring for census workers which could add more than 100,000 jobs this month.  However, a strategist for Goldman Sachs (GS) estimated 275,000 job gains; another economist predicted “easily” reaching 300,000.  Chief US economist at Deutsche Bank (DB) took the prize though, saying that a gain of 450,000 “can’t be ruled out.”

To be clear, there is nothing that we would rather see in this month’s report and upcoming months than strong jobs growth.  Growing employment would be a major boon to the US economy and would be a shot in the arm against the possibility of a double-dip.  However, we have to be honest with ourselves and census jobs should really be stripped out of the understanding of job growth.  The census will only employ these workers through mid-summer and then workers will go back looking for stable employment.  The rest of these cheery predictions seem to be based upon improving weather because a particularly harsh winter must be nearing an end.  There is no doubt that warming weather may boost some types of employment, but a few hundred thousand jobs being created because of rising temperatures seems to be a lot of hope and light on substance.

Of course, no one can predict the future and predictions about macroeconomic data points are extremely thorny.  As much as we would like to believe they are correct and job growth will return in robust fashion, we are a bit skeptical.  They have raised the bar for expectations, so it will be extremely interesting to see the market’s reaction when the data comes in.

“We also have the bombshell recall for Toyota that people are talking about this morning. Toyota stopping sales and production for eight models, the cars being recalled because of this sudden unintended acceleration problem as they describe it…” — Fox Business Network 1/27/2010

Toyota Motor (TM) has pulled eight popular models from the sales floor as the company confronts serious safety issues in these models.  The world’s number one automaker will halt production of certain models starting next week, until they can straighten out their issues with sticky gas pedals in these cars that can make them accelerate without warning.  Last week, Toyota recalled 2.3 million vehicles for this same problem, and an even larger recall of 4.2 million vehicles occurred in September.  Clearly, the problem remains and the models affected include: the 2009-2010 RAV4, the 2009-2010 Corolla, the 2007-2010 Camry, the 2009-2010 Matrix, the 2005-2010 Avalon, the 2010 Highlander, the 2007-2010 Tundra and the 2008-2010 Sequoia. 

In the near term, investors are rightly worried about the company losing some of its most popular models that accounted for 65% of sales for the Toyota brand (the parent company also owns Lexus and Scion brands).  There is no timetable for getting these vehicles back onto the lots and ready for sales, as they will have to be absolutely sure the faulty accelerators will have no more issues.  This 5-month long episode has been extremely damaging to Toyota’s hard-fought reputation for safety and reliability, and has caused many to wonder if Toyota sacrificed quality in order to push for being the world’s biggest automaker and meet growing demand in foreign markets like the US.

How deeply this safety issue will affect future car buyer decision to look at Toyota is unknown, but the quicker they can fix these issues and put this episode behind them the better.  From an investor’s perspective, this will surely cause a dip in revenue and the longer factories sit with nothing to produce the worse the damage will be to the bottom line.  One analyst at Deutsche Bank (DB) estimates that this will cost the company between $446 million and $502 million each week that sales are suspended.  This comes on the heels of Toyota reporting a record loss of 436.94 billion yen in its fiscal year ended last March.  Analysts’ estimates show the net loss narrowing considerably for fiscal 2010, but those estimates will clearly come down following this setback.

At Ockham, we downgraded Toyota to Overvalued in mid-December, but this stance had nothing to do with the ongoing safety concerns.  The price had appreciated into the mid-$80s which was simply too high given their fundamentals of sales and cash earnings.  Even though Toyota overtook General Motors as the world’s number 1, it was because Toyota’s sales were less bad, only falling 13% worldwide thanks to strength from Cash for Clunkers and the extreme weakness due to GM’s bankruptcy.  This unprecedented suspension of sales for some of its most popular models only reaffirms our stance that TM would need to see its stock fall significantly in order for us to view this stock as is a good long term investment.

“Now we’re hearing a lot about a whisper number at the moment that needs to be beaten and Goldman suffered on the back of that recently. Now, Deutsche Bank is the latest German bank. The shares over in Germany are down 4% and that’s despite them putting out a surprise statement which blew away expectations. They have tripled the net profit in the third quarter.” — CNBC’s Squawk Box 10/21/2009

Despite solid quarterly results out of two of the largest banks in the world, both Deutsche Bank (DB) and Wells Fargo (WFC) are selling off in midday trading.  We wrote about a similar instance with Goldman Sachs (GS) (An Enlightening Day for Goldman) last week, where the investment bank reported a great quarter that topped earnings estimates by 25% and yet the stock fell victim to the rumor mill calling for a higher number.  In each situation the banks have handily beaten analysts’ projections and in the case of Wells Fargo they broke a record for third quarter profit, yet the market is not satisfied.  This sort of behavior seems to suggest that these stocks are overvalued thanks to overly exuberant expectations.

 Wells Fargo had an outstanding quarter reporting EPS of $.56 cents, which beat analysts’ expectations by about 50%.  The press release touted a record breaking third quarter profit as well as record year to date profits of $1.69 per share.  Revenue was also solid as it was flat from the record breaking second quarter results.  The performance was driven by mortgage underwriting and servicing income, a business shrouded in doubt as mortgage applications are down in the absence of available homebuyer tax credits. 

In the case of Wells Fargo, probably the most distressing portion of the results is the increase in net charge-offs to $5.1 billion or 2.5% of average loans (up from 2.11% sequentially).  The worst of the non-performing loans were in the consumer loans, and were not related to commercial real estate.  This may continue to worsen as joblessness is a thorn in the side of this recovery, nowhere is this more true that Wells Fargo’s base California.  Furthermore, the statement from WFC suggested that the peak in charge offs would likely come in the first half of 2010 and decline through the rest of the year.

For Deutsche Bank, the quarter was solid but not earth shattering, as they brought them to market more than a week ahead of schedule.  The company reported pretax profit of EUR1.3 billion, which was slightly ahead of analysts’ expectations of EUR1.2 billion.  The bank failed to offer much detail on the breakdown of the results, and its shares fell because some whispers had called for a more impressive quarter.  In addition, there is a contingent that believes Germany’s largest lender may need to raise additional capital which would likely dilute shareholders.

It seems that for many banks these days, simply beating the analysts’ estimates will not cut the mustard.  The underlying concerns that have weighed on our valuations of major banks for some time are starting to pervade the psyche of the market.  A shift in risk tolerance seems to have taken place to some degree and will be something we will continue to monitor.  Our valuations went negative on most of these banks prematurely in June based on bad loans still cluttering the balance sheet and questionable earnings power going forward.  We can admit to being early on that call, but that view seems to be more prevalent in this quarter than in the previous two.

Residential real estate site Zillow.com released a discouraging report on the future of the housing market in the United States.  The web site compiles information regarding home prices, mortgage values, tax rates, and other important information and has become a leading authority on residential real estate.  Among the findings of Zillow’s analysis is that nearly one-quarter of all U.S. mortgage holders are now underwater on their mortgage loans.  Declining home values are of course the culprit and could continue to fall through at least the next year.  They estimate that by mid-2010 that number could continue to rise and reach about 30%.  This prediction is actually a great deal better than the opinion expressed just last week by analysts at Deutsche Bank (DB) , which claimed that as many as 48% of mortgage holders could be underwater as prices continue to fall through early 2011.

Homeowners are being hurt by price declines. The estimated median value for single-family houses slid to $186,500 in the period, a 12 percent drop from a year earlier and the 10th consecutive quarterly decrease, the Seattle-based real estate data service said in a report today.

“The negative-equity rate will rise and spin off more foreclosures,” Stan Humphries, Zillow’s chief economist, said in an interview. “I see a substantial downside risk to prices and don’t think we’ll see a bottom until the middle of next year.” — From an article by Dan Levy, Bloomberg.com

This analysis certainly puts a damper on many of the housing green shoots that have partially fueled the recent rally in equities.  The rate of declines in home prices does seem to be stabilizing, and that is not to be dismissed.  However, this report is further confirmation of our bearish stance on the residential construction industry.  The twenty stocks that we cover in this group have appreciated an average of 73% over the last six months.  However, the significant supply glut of unsold homes will continue to put pressure on these homebuilders.  At current sales rates, the supply of homes on the market right now would last about 9.4 months, which is more than twice the average supply level from 2000-2005.

Luxury homebuilder Toll Brothers (TOL) will report earnings Wednesday, and analysts are expecting to see a loss of $.32 per share ex-items.  We see no catalysts for a turnaround in TOL or its competitors, and we continue to rate most in the sector as Overvalued.

The world’s largest meat producer, Tyson Foods (TSN), reported a very respectable third quarter performance on Monday evening.  Far better than last year’s 3 cents per share of EPS, Tyson reported 35 cents this quarter, even beating consensus analysts’ estimates by 50%.  Sales fell almost 3% for the quarter, but the company more than made up for that with increased prices and stringent cost management.  Sales of chicken was a bright spot accounting for 36% of revenue, but pork and beef divisions also turned a profit.  Tyson was able to reduce inventory and working capital for the second straight quarter in anticipation of potentially soft demand for meat in the fiscal fourth quarter.  Two weeks ago, shares were sent downwards because of an analysts call that demand for chicken will likely fall in the next quarter.  The market’s response to yesterday’s positive quarter has thus far been a little bit tepid, as shares are up only 2% in morning trading.

Tyson became a stronger company over the last quarter, as earnings were great and sales were decent.  The company reduced debt over the previous quarter by $152 million.  The company’s balance sheet is much improved over where it was just a year ago.  Through the first nine-months of this fiscal year Tyson has produced nearly 20 times the amount of cash flow from the same period last fiscal year.  Reducing inventory has helped this metric greatly, but so has lower feed and SG&A costs. 

The recent analysts’ calls for lower demand for chicken in the quarter ahead took a toll on the stock sending shares down 9% in a day, but it seems a strange time for this prediction.  The Deutsche Bank (DB) analyst claims the lower feed costs will contribute to greater chicken weight as demand is faltering, and industry experts believe that July and August are expected to be weak.  However, you could make the argument that because of the prior inventory reductions, a greater yield on cheaper input prices in not a bad thing at all.  In my research, I have not come across why the analysts are expecting demand to be weak in the late summer months.  Personally, I think of those months as prime grilling season.  Furthermore, with the economy showing significantly positive signs of recovery, I would expect more consumers will be eating meat products and could be more price elastic than in the last few months to boot.

This quarter’s results are a positive sign for the direction of Tyson, and if the price slips much further than it could be a real opportunity.  Our most recent ratings change, was from Overvalued in the $13-$14 range to Fairly Valued recently.  We can see now that the company is in better position than we expected them to be when we had the negatively valued.  We will likely maintain the stock as our neutral rating, unless it slips to around $10 per share, which could be wishful thinking at this point.  The fundamental trends are moving in the right direction, and even though the value play is not exactly what we are looking for; we think the stock has the potential to be at $14 in the coming months.