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Should the Fed Increase Rates at The September Meeting?

Tuesday, September 13th, 2016

The JOLTS numbers were released last week and came in very strong.

JOLTS, which stands for Job Openings and Labor Turnover Survey, is one of our favorites to analyze. Job openings set a record up 4% from last month, to 5.87 million.

This shows employers are looking for new employees. Total hiring was only up 1% to 5.22 million for July. The spread between the growth in job openings and the growth in total hiring shows employers are having a hard time finding qualified applicants.

Another factor is many employees have not seen the benefit of leaving their current job in light of a better job; this can be seen by a quits rate of 2.1% that was unchanged.

With all the job openings, employers could increase the potential wages for employees to attract them from their current jobs. This has a positive impact on wage inflation for the economy, and overall was a bullish report.

The big question is what does this mean for the Fed? With a looming September meeting, we believe a rate hike is likely, as data has been strong.

Many economists believe traders are over discounting the likelihood of rate hike this month. Fed members Williams and Lacker have both recently voiced their support for the strong data and a rate hike.

There has been some chatter regarding concern over the upcoming election, but this should not deter a data-dependent Fed.

Today's company of the day is Verizon Communications Inc. (VZ).

The current price is $53.71 and 52-week range is $42.20-$56.95. Verizon pays a very nice dividend of 4.3% and uses 63.8% of earnings to pay that out.

This has been a popular case for investing in Verizon lately, but let's take a deeper look at the numbers.

Sales over the last 12 months have been relatively flat, as they were only up 0.88%. EPS rose 46.6% during the same timeframe, which was most likely due to an accounting issue and would warrant some further research, as that is a substantial increase.

The biggest concern for Verizon comes with the balance sheet. To start matters off, the company has no price/tangible book value.

The alarming numbers come with the debt, as total debt/equity is a staggering 518.2%. Long-term debt/equity is also very concerning at 482.9%.

The company's low current ratio of 0.61 shows they may not be able to pay off the short-term debt that is coming due, and they may have to refinance that debt instead. This means if we have a period of rising interest rates, the company's interest expense could increase and would hurt earnings.

Looking forward to December 2017, estimated EPS of $4.04 gives us a target sell price of $66.66.

While the target price looks okay, we would still stay away from this company due to the high debt.

Do you have a question or a company you would like us to take a look at?
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