The week ahead: The book on jobs

If it’s the first week of the month, all anyone on Wall Street cares about is Friday’s jobs report. So let’s start at the end of the week and work our way forward.

The Employment Situation Report, as the Bureau of Labor Statistics likes to call it, lands at 8:30 on Friday morning. Wall Street is looking for 190,000 new jobs created and a 5% unemployment rate.

It’s worth noting that the unemployment rate peaked at 10% in September 2009, and since then, the economy has added 12.5 million new jobs.

unemployment

Should the jobs report roll in as expected, and there are no serious signs of an economic downturn, then you can probably expect the Federal Reserve to bump up its key fed funds rate from zero to 0.25% at its December meeting.

Just to build up the excitement for the Friday jobs report, we have the ADP employment report on Wednesday, expected to show 183,000 private-sector jobs, and the jobless claims report on Thursday. Jobless claims have hit a 42-year low.

Naturally, there are all kinds of reasons why the Fed might not raise rates, starting with the labor force itself. If we look at U6, a far broader measure of unemployment, we see that measure is down sharply, too. But it’s still at levels not seen since May 2008.

 

Another reason for the Fed to worry is the slowdown in the manufacturing sector — evidence of which is seen in today’s Chicago Purchasing Manager’s report. When the index is below 50, manufacturing is in recession territory. Unfortunately, the index swooned to 48.7 in November from 56.2 in October.

Much of the drop in manufacturing can be traced to the soaring dollar, which is approaching parity with the euro. Fairly soon, one dollar will buy one euro. This is great if you’re touring the continent, but lousy if you’re selling grinders to Germany. A rising dollar makes U.S. goods more expensive overseas.

A rate hike will simply keep the dollar high. Money flows to the country with the safest and highest interest rates, and the U.S. is pretty much the world champion there. The U.S. two-year Treasury note yields just 0.99%, but that’s worlds better than the German two-year bond, which yields -4.15%.

Higher interest rates won’t help the housing market, either, which is about as flat as an Ohio lawn. Pending home sales rose just 0.2% in October.

It’s hard to imagine that the Fed won’t hike rates next month, however. They have all but said they will in recent statements, and Wall Street will be terribly disappointed if the Fed doesn’t push up rates just a bit.

 

 

 

Crazy in the short term

Wall Street likes to think of the stock market as a long-term, dispassionate discounter of the economy and corporate earnings. And in the long term, it more or less is.

Jonathan_G_Meath_portrays_Santa_ClausIn the short term, however, it’s a howling hodgepodge of emotions that plunges on trivial news and soars on the thought of roasting turkey — as it probably will today.

Investment sages have long noted the tendency of the stock market to rise before significant holidays, such as Christmas, Thanksgiving and the Fourth of July. For those with patience, discipline and a taste for paying short-term capital gains taxes, buying before a major holiday and selling the day after is a reasonably lucrative strategy. According to The Stock Trader’s Almanac, the week before Thanksgiving is now up 18 of the past 23 years on Dow Jones industrial average.

Christmas season is even better. “December is the number one S&P 500 month and second best for DJIA since 1950, averaging gains of 1.7% on each index,” writes Jeff Hirsch, editor of the Almanac.  Small-cap stocks typically start to rally in early December. And in years when stocks don’t show a gain between Dec. 24 and the second trading day of the new year, the new year typically isn’t very happy.

Why the December rallies. Some try to explain bursts of consumer spending, which is quite possible, while others note that companies often set their budgets for new equipment in the new year. But really, it’s just because the Christmas season is a festive time for nearly everyone. And in the short term, that’s enough to give stocks a boost.

 

 

An oil play for ravin’ cravens

Last weekend, I filled my tank for less than $30, something that hasn’t happened since I had hair. For anyone who uses petroleum products — that would be just about everyone — the drop in oil prices is good news.

Jonathan_G_Meath_portrays_Santa_ClausHow good? Really, really good, according to Tom Kloza of the Oil Price Information Service. According to his estimates, Americans will have about $8.22 billion more to spend in the 40 shopping days before Christmas in 2015 when compared to last year. If you compare that to 2013, when gas was far more expensive, the savings is $16.3 billion. (Gas prices peaked in July 2007 at $4.11 per gallon).

Those who heat with gas or heating oil have similar reason to rejoice. Natural gas prices have fallen to near their all-time lows, and at just above $3 per thousand cubic feet, they are nearly 50% lower than their recent high of $6 per thousand cubic feet. Heating oil, too, is nearly 50% below its recent highs.

For investors, the news is terrible, since profits in the energy sector have dropped some 66%. But let’s dry our eyes for the oil companies for a moment: After all, many of the major oil stocks look cheap, at least measured by their yields and their price to earnings ratios.

If you’re tempted by oil prices, yet at heart a coward, there is a milquetoast play on oil: Treasury Inflation-Protected Securities, or TIPS. The price of a TIPS rises with inflation, and the Treasury uses the headline number for inflation, which includes energy.

Using the headline number, inflation rose by exactly zero the past 12 months. If we look at the current 10-year TIPS yield and subtract it from the 10-year Treasury note yield, we see that Wall Street anticipates inflation to average 1.6% the next decade.

Should oil prices rise back to the $60-$80 range, as analysts expect, then current TIPS prices are probably underestimating inflation. In other words, TIPS should perform better than high-quality 10-year bonds.

Are you going to get rich from TIPS? Heck, no. TIPS are purely for those terrified of both stocks and inflation. But if you’re looking for something a bit less appalling than your other bond choices, a TIPS fund might be your best bet.

 

 

The week ahead

Despite the turkey-shortened week, there’s a fair amount on Wall Street’s calendar.

Male_north_american_turkey_supersaturatedToday at 10:00 we have existing home sales for October. The consensus estimate is for a 5.51 million seasonally adjusted rate, according to Calculated Risk.  September’s home starts were 5.55 million.

Bear in mind that the seasonal adjustments in colder areas in winter are fairly large. Two new home starts in Maine in late November would be two more than most people would expect.

Tomorrow is gross domestic product. We live in a big country with a big economy (about $18 trillion), and the Bureau of Economic Analysis usually takes three swipes at the number. The advance estimate for the third quarter, adjusted for inflation, was 1.5%. Tuesday’s release will be the second cut, and the consensus is for an improvement to a 2.1% annual rate, still below the 3.9% pace in the second quarter.

Keep an eye on the implicit price deflator, which is the Federal Reserve’s favorite inflation indicator. It was running at a 1.8% pace in the last release, just below the Fed’s 2% inflation target.

Also on deck Tuesday: The Conference Board’s index of consumer confidence. In this economy, confidence is everything. We won’t know the effects of the recent terror attacks in Paris until the next release, however.

Wednesday, initial jobless claims report for work at 8:30. The measure has been hitting 42-year lows and, at least judging by lines at airline ticket counters, low staffing is starting to affect company performance. Seriously, get to the airport early.

Also on Wednesday:

  • The University of Michigan weighs in with its own consumer confidence measure, which is expected to be unchanged from October.
  • New home sales roll in at 10:00 Wednesday, in case you’re bored making pies. Consensus is 499,000 for October, vs. 468,000 for September.
  • Finally, the Energy Information Administration weighs in with its petroleum inventory status, which is expected to show that, hey boy howdy, there’s a lot of petroleum on hand. The average price of gasoline hit $2.07 today, down from $2.82 a year ago and an all-time high of $4.11 per gallon on July 17, 2008.

Thursday and Friday: We’re done, unless you get excited about the Baker-Hughes rig count, which is actually pretty interesting. The markets are closed Thursday, as they should be, and the stock market calls it a day at 1:00 on Friday.

As for earnings: 478 companies in the Standard and Poor’s 500 stock index have reported third-quarter earnings so far, according to S&P Capital IQ. Thanks mainly to punk earnings in energy, S&P 500 earnings are down 1.48% from last year

On deck this week: Tysons Foods (estimated at 88 cents per share), HP (97 cents) and Deere (75 cents).

Time for a little trimming

Somewhere, there has to be a tombstone with the inscription, “It seemed like a good idea at the time.” If you have an investment idea that hasn’t panned out, you should send it off to the financial boneyard before the year ends.

rockwellFor example, let’s say you’d decided back in January that oil stocks seemed awfully cheap. And they did! After all, oil had had fallen to $53,45 a barrel at the end of 2014 from $95.15 at the start.

Unfortunately, it often gets darker before it gets pitch black, as legendary investor Peter Lynch was fond of pointing out. Oil closed at $39.38 yesterday, thanks to overproduction and falling demand in China and Europe. Oil company earnings have fallen 66% this year, and the average energy fund has fallen 17.21%.

Is oil relatively cheap? Sure. Are oil companies screaming bargains? Maybe, if you can answer the question of where oil prices will be in the next few years. (Bear in mind that oil has been below $40 a barrel 62% of the time since 1986, and that the average price of oil since 1986 is $42.87 a barrel.)

Sure, you may just have been early. But on Wall Street, “early” is another word for “wrong.”

If you’re investing in a taxable account, selling now can at least make your losses a bit more palatable. Losses can reduce gains dollar-for-dollar, so if you’ve gotten an annoying capital gains distribution from your mutual fund, you can be slightly less annoyed. And if you’ve sold a stock or a fund for a gain, you can reduce your capital gains taxes.

If you have more losses than gains, you can deduct up to $3,000 from your income, which will also reduce your taxes. If you’ve really gotten smacked, you can carry over additional losses into the 2016 tax year.

If, after all this misery, you still feel positive about oil — or whatever mistake you’ve made — you can wait 30 days and reinvest in the same stock or fund. It’s unlikely oil will be back up to $80 by then.

 

 

The latest

Late posting today, but in the meantime, here’s my latest for Morningstar on energy Master Limited Partnerships, which are an interesting yet complicated investment for income investors.

And if you’re interested in Warren Buffett — who isn’t interested in Warren Buffett? — here’s my latest for Money magazine on four Buffett stocks that would make value investors sob. 

And here’s a plea for any WordPress wizards: How do you make links go from most recent to oldest? Ping me at johnmwaggoner@gmail.com.

 

Beyond the zero bound

Some things in life are just a mystery. What happens when you Xerox a mirror? If you were in a Volkswagen traveling at the speed of light, what would happen when you put the headlights on? Why would anyone buy a government bond with a negative interest rate?

mstThe answer to the latter is particularly intriguing. Just this morning, Germany auctioned a two-year government bond yielding -0.38%. Germany now joins Belgium, France, The Netherlands, Japan and Sweden in offering negative two-year rates. Belgium, Germany and The Netherlands will pay you less than nothing on their five-year bonds. The Swiss 10-year bond yields -0.35%.

Why buy a bond with a negative yield? In the words of Will Rogers, it’s because you’re less concerned with the return on your money than with the return of your money. You figure losing a little money over two or even five years is better than what could happen in other investments. By all measures, this is a dour outlook for Europe by the bond market.

From a government’s point of view, this is one heck of a deal, and raises the intriguing question of whether the government can reduce its debt burden by issuing debt. (Governments usually roll over their debt, rather than pay it off. It’s one of the many ways a government budget differs from a family budget).

On a more practical level, negative interest rates typically guarantee that your currency will fall vs. other, similarly creditworthy countries with higher interest rates. This is certainly the reason for negative rates in Switzerland: The Swiss franc had grown so strong as to be a drag on the economy. For exporters like Germany, a lower currency is a wind at the back of exporters, making German goods cheaper abroad.

And for countries whose economy needs a boost, negative rates gives them the chance to borrow on insanely favorable terms and use the proceeds to rebuild infrastructure — roads, schools, airports and other civic improvements. So far, however, most countries have cut back spending in weak economic times, making the economy weaker. Perhaps the bond market is onto something.