by Louis Navellier
June 8, 2021
I was happy to see that Zoom Communications (ZM) announced on Tuesday that its fiscal first-quarter revenue surged 191.3% to $956.2 million compared with the $328.2 million it reported in the same quarter a year ago. During the same period, the company’s earnings soared 722.2% to $227.4 million, or 74 cents per share, compared with $27 million or 9 cents per share last year. Excluding extraordinary items, Zoom’s operating earnings were $1.32 per share. The analyst community was expecting revenue of $910 million and operating earnings of 99 cents per share, so the company posted a 5.1% revenue surprise and a 33.3% earnings surprise. For the fiscal second quarter, Zoom provided both revenue and earnings guidance that was higher than analyst estimates. The company is a market leader, and its positive fiscal first-quarter surprise and bullish second-quarter guidance bode well for the overall stock market environment.
I should add that the Reddit crowd resurfaced last week, squeezing short sellers in AMC Entertainment and other “meme” stocks. These dramatic short squeezes just demonstrate how illiquid the stock market can be and how Citadel’s algorithms cannot handle any significant surge in trading volume. This bodes well for June’s Russell realignment, since it should push trading volume up for many good growth stocks.
Navellier & Associates owns Zoom Communications (ZM). We do not own AMC Entertainment (AMC). Louis Navellier and his family own Zoom Communications (ZM) personally via Navellier managed accounts.
How Will the Global Monetary Inflationists Handle REAL Inflation?
Due to ongoing supply chain bottlenecks and surging global demand, inflation is now a global problem. The Organization for Economic Cooperation & Development on Wednesday announced that consumer prices in its 36 nation members rose at an annual pace of 3.3% in April, the largest increase since October 2008. In the Group of 20 (G20) countries, inflation is even hotter, running at a 3.8% pace through April.
Last Tuesday, a group of us at Navellier had a conference call with our favorite economist, Ed Yardeni – appropriately using ZOOM technology. It seemed to Ed, as well as to us, that most modern economies – most of Europe, Japan, and now the U.S. – are using Modern Monetary Theory (MMT), which includes almost unlimited money creation while pushing interest rates down to zero to minimize the cost of debt service. It will be interesting to see how these countries practicing MMT will respond to rising inflation. Even China now seems ready to jump on the MMT bandwagon to keep its economy growing.
China’s official purchasing managers’ index (PMI) slowed a bit to 51 in May, down from 51.1 in April. Some Chinese manufacturers have a unique way of dealing with surging raw material prices, namely refusing to accept new orders, and considering shutting down operations. According to The Wall Street Journal, the hope among many Chinese manufacturers is that if they delay orders or slow production, they will be able to ride out the price rise without major losses until commodity prices normalize or global demand ebbs. Naturally, this is a dangerous strategy, since customers can look for other suppliers, which will likely help boost business in emerging rivals like Indonesia, Malaysia, South Korea, and Vietnam.
A strong Chinese yuan is also starting to impact China’s competitiveness. The People’s Bank of China is now forcing Chinese banks to boost their level of foreign currency reserves from 5% to 7%, effective June 15th in the first reserve rate hike since 2007. In the past year, the yuan has risen approximately 13% against the U.S. dollar. There is no threat that China will devalue its yuan soon, but by boosting reserves of foreign currencies, China hopes the yuan will naturally weaken, relative to its major trading partners.
The Friday Jobs Report Was Anemic Once Again, But it is a Woefully Incomplete Estimate
On Friday, the Labor Department announced that 559,000 payroll jobs were created in May, which was substantially below the economists’ consensus expectation of 675,000 jobs. This is the second month in a row that the Labor Department has been substantially below the ADP private payroll report, which is raising some eyebrows, since ADP does actual payroll processing and is historically more accurate.
The Labor Department revised its April payroll figure up to 278,000 from the 266,000 previous estimated last month. Frankly, I expected a larger revision than that, but the good news is that the unemployment rate declined to 5.8% in May, down from 6.1% in April. Average hourly earnings rose 0.5% in May to $30.33 per hour and hourly earnings have risen 2% in the past 12 months. The economy still has almost eight million fewer workers than pre-pandemic, so filling that gap is obviously one of the Fed’s top goals.
In February 2020, the labor force participation rate was 63.3%, but in May 2021 it was only 61.6%, so it will be interesting to see if all the jobs lost since the pandemic will eventually return. Due to massive productivity gains since the pandemic, it is possible that some jobs will never return. It is also possible that some older workers have decided to retire, which would naturally lower the labor participation rate. For younger workers, as soon as the supplemental unemployment benefits are lifted in all states, I suspect that many more idle workers, now collecting unemployment insurance, will return to the workforce.
In sharp contrast to the Labor Department totals, ADP announced on Thursday that 978,000 new private payroll jobs were created in May, which was substantially higher than economists’ consensus expectation of 680,000 jobs. ADP also revised April’s private payrolls down to 654,000, down sharply from 742,000 initially reported. Leisure and hospitality posted the largest sector gains with 440,000 private payroll jobs. Overall, the service sector gained 850,000 jobs in May, while manufacturing created 128,000 private payroll jobs. Naturally, the strong May ADP report makes one question the much weaker Friday report.
The Labor Department also announced on Thursday that weekly jobless claims declined to 385,000 in the latest week, down from a revised 405,000 in the previous week. Unfortunately, continuing claims rose to 3.771 million compared with a revised 3.602 million in the previous week. Interestingly, California, Illinois, Kentucky, and Pennsylvania all reported higher initial unemployment claims, so even though weekly unemployment claims have fallen for five straight weeks and are now at a 14-month low, there are still some structural unemployment issues causing continuing unemployment claims to keep rising.
Turning to the ISM activity reports, the Institute of Supply Management (ISM) on Tuesday announced that its manufacturing index rose to 61.2 in May, up from 60.7 in April. The new orders component improved to 67.6 in May (up from 64.3 in April). Clearly, current production bottlenecks persist, so new orders are piling up, due to ongoing supply shortages. Overall, the manufacturing report was positive.
On Wednesday, ISM announced that its non-manufacturing (service) index slipped to 62.7 in May, down from its all-time high of 63.7 in April. Since any reading over 50 signals an expansion, the May reading is very strong. The supplier deliveries component surged to 66.1 in May (up from 61 in April), while the prices component rose to 76.8 in May (up from 74 in April). This is signaling that higher service costs are likely forthcoming. Fully 16 of the 17 service industries that ISM surveyed expanded in May.
Finally, the Fed’s Beige Book survey was released last Wednesday in preparation for its next Federal Open Market Committee (FOMC) meeting on June 15. The survey noted that economic growth increased at a “moderate pace” and that vaccination rates, as well as states lifting restrictions, helped to spur more economic growth. The Beige Book survey also cited brewing inflation from wage pressure as well as higher prices for goods. Specifically, the survey said, “Strengthening demand…allowed some businesses, particularly manufacturers, builders, and transportation companies, to pass through much of the cost increases to their customers.” On labor costs, it said: “Overall, wage growth was moderate, and a growing number of firms offered signing bonuses and increased starting wages to attract and retain workers.”
I should add that the Atlanta Fed revised its second-quarter GDP estimate up to a 10.3% annual pace, up from a 9.3% annual pace previously. The Atlanta Fed will next revise its GDP estimate today (June 8th).