February Job Gains Clears The Way For Fed Rate Hike This Week; Crude Realities For Oil; Some Bio-Pharma Plays That Could Have Blockbuster Potential
Where The Jobs Are……..And, Aren’t
Friday’s Non-Farm Payrolls report released by the Bureau of Labor Statistics showed that the number of net new jobs created in the U.S. in the month of February, came in at 235K, which was at or near consensus forecasts of 235K – 240K; and the unemployment fell from 4.8 percent to 4.7 percent. The private sector saw an increase of 227K new jobs, while the government payroll grew by 8K. In an encouraging sign, Construction jobs saw the most gain – +58K; followed by Health Care at +32.5K; Manufacturing at +28K; while Leisure & Hospitality saw a gain of +26K. Mining saw an increase of 9K jobs. The retail sector, which seems to be largely in a death spiral — due to the Amazon effect — saw a loss of 26K. Weekly jobless claims are at a 44 year low. Labor participation remains weak, though it did rise to 63 percent of those eligible to work. In an article in the March 11, 2017 New York Times, the publication noted that “a broader measure of unemployment — which includes millions of Americans who have given up work, or are working part-time; but, would prefer full-time work — dropped to 9.2 percent in February, still high — given how tight the labor market looks.”
In the aftermath of this latest key piece of economic data, most economists and investors believe that the U.S. Federal Reserve will raise interest rates at the conclusion of their 2-day meeting at 1400 GMT Wednesday afternoon (March 15, 2017). Jan Hatzius, Chief Economist at Goldman Sachs told CNBC during an interview Friday, that the firm believes that Wednesday will be the first of three rate hikes this year. Mr. Hatzius said it was a close call as to whether the Fed would raise rates three, or four times; but, that they are staying with their forecast of three rate hikes; but, leaving the door open for a fourth rate hike — if POTUS Trump gets his corporate tax reduction in place and economic growth accelerates toward three percent GDP.
A rate hike Wednesday is already baked into the cake as they say,. What investors and traders will be looking for in Ms. Yellin’s statement and news conference on Wednesday is the number and pace of future rate hikes in 2017. A more aggressive/hawkish statement and outlook could spark the most anticipated stock market pullback that I can remember. But, Ms. Yellin is a dove; and, it is doubtful that her statement will be overly hawkish. Amey Stone, writing in this weekend’s Barron’s, noted that “market disruption from European elections [first in France, then Germany] , federal budget negotiations, and foreign central bank policy changes [currency manipulation], could all create market volatility [and uncertainty] that could give the Fed reason for pause,” and result in fewer, and/or a slower pace of future rate hikes. And, we shouldn’t overlook geopolitical uncertainty, especially with respect to the North Korean nuclear issue and the fact that South Korea just impeached their president.
Bottom line: Outside of something totally unexpected from Ms. Yellen on Wednesday, the market has already priced in a rate hike and should react positively to that outcome. Anything much more hawkish, or dovish, is likely to portend selling of stocks. A failure to raise rates — which no one expects — would worry investors that the Fed sees something worrisome that they don’t see; or, a too hawkish future rate hike strategy would raise concerns of an overly aggressive Fed. In either case, stocks would likely selloff and gold would likely rise sharply. But again, no one is expecting either of those positions from Ms., Yellen on Wednesday afternoon.
Financials, which are up 24 percent since Mr. Trump got elected; but, if the Fed is on pace for three rate hikes, and we get lower corporate taxes, this sector has a lot more room to run. The credit card companies and community banking sector will also remain attractive.
Crude Realities: Oil Skids To A Loss
Kopin Tan had an article in this weekend’s Barron’s with the ominous title: “Oil’s Slide Portends Trouble,” and in the recent past, he would have good company on that thought. It’s sometimes dangerous to say ‘this time it’s different; but, I do believe that’s true for a lot of reasons — more on that later. Mr. Kopin writes that “energy has just a 6.4 percent weighting in the S&P 500 index,less than half of the percentage it made in that index a decade ago at 15 percent. “So, no one expects oil’s current struggles to slow the [this current] bull market’s ride,” he wrote.
“Crude oil prices have more than doubled in the past year; and — until last week — had defied gravity, in the face of mounting oil supplies,warm winter temperatures, and increasingly speculative bets” Indeed, “its remarkable resilience had some analysts wondering if Saudi Arabia might be propping up prices ahead of the initial public offering of its state oil behemoth, Saudi Aramco. Traders,” Mr, Tan wrote, “whether stocks, or oil deserved the moniker, “Mr. Teflon.”
However, crude reality struck last week as the ‘black gold’ “suffered its biggest one-day drop in thirteen months,”Mr. Tan wrote. “The setback occurred after U.S. stockpiles increased for a ninth straight week to yet another record, now about 528M barrels. The selloff took Brent Crude down 8.1 percent last week; while U.S crude fell below $50 for the first time since November. Energy stocks, last year’s top performing sector, are down about 8 percent this year in a rising market. prompting Evercore ISI strategist Dennis Debusschere to upgrade the sector, arguing its decline, “relative to oil prices appears overdone.”
“In order for oil to go up another $10, or $15 a barrel after last year’s big run, you’d need another big OPEC production cut, or global growth; and, traders may feel that in the short term, the easy money has already been made,” said Jason Ware,Chief Investment Officer at Albion Financial Group.
There are ;lots of reasons that oil is having some difficulty, at least here in the short-term. For one, we have had a very strong run in ‘black’ gold prices since their lows in the low $20s. And, as noted earlier, the mild winter temperatures haven’t exactly been bullish for oil. Add to that the fact that there has been a steady rise in the rig counts in the Gulf of Mexico;and an over-supply glut that will still take some time to decline. The move to electric cars, solar panels, green energy, and greater fuel efficiency have also contributed to the pressure on oil prices. Having said all that……
Mr. Debusschere may want to talk to his colleague, Doug Terreson, Evercore ISI Head of Energy Research, and the number one Integrated Energy Analyst on Wall Street in 2016, and the number 2 analyst 16 times. Mr. Terreson told CNBC on Friday that he believes the low in oil prices are likely in this price range. He said he wouldn’t be surprised if oil could move as much as $5 lower; but, if that happens, Mr. Terreson would be backing up the truck to load up (my words, not his, but he is bullish). Mr., Terreson said he is Overweight Shell, with a price target of $64, Philips 66 with a $103 target price; and, Marathon Oil with a price target of $58. Mr, Terreson also sees Brent trading at a peek of $60 in 2017; and, $65 in 2018. Nothing to write home about; but, in a range that is highly conducive to good economic growth to come.
Bio-Pharma Sector Remains Hot; Portfolio Up 22 Percent Year-To-Date
You can do all the =research you want and have the best algorithmic software available; and, there are still no sure things on Wall Street. Sometimes, you find yourself in the right place, at the right time, and have a bit of luck in your favor — and, a recommendation from a friend. Put that all together and you get 22 percent gain thus far in 2017. NVDA has certainly been a winner and I am likely to buy back in — perhaps this week. But, my winners that I am still sticking with include: KITE, BLUE, ACAD, SRPT, and BLCM. I also had a good week with AUPH, which I am out of for now; and CATB, which I still own.
Other stocks that I have either owned or would like to own — if I had the available funds in my portfolio include: FaceBoolk, Alibaba, Nvida, Adobe, Amazon, Netflix, Alphabet, Palo Alto Networks, Fortinet, CyberArk, Amgen,and GWPH. All for now. It is getting late. V/R, RCP