It is most definitely all about oil.
That’s what the market told us this week as stocks stayed volatile on crude’s bullish close above $104 on Friday.
The latest round of “how high can oil go, cha-cha-cha” comes at a precarious time, just as the economy produces its best month of jobs in over a year.
Friday’s closely-watched jobs report contained many glimmers of hope. 220,000 private-sector jobs created. 30,000 Federal jobs eliminated. Unemployment rate drops to 8.9%. January and December figures revised higher.
That is a very encouraging signal from the economy. It’s what triggered the rally on Thursday, the market just went ahead and priced in a good jobs report based on the better-than-expected number from ADP on Wednesday.
The Fed was also there to support the market, reporting that 12 of its 15 regions saw economic growth in January and early February. Throw in some good data on manufacturing on strong corporate and consumer demand, and it was a pretty solid week on the data front.
But by Friday the conversation had shifted back to oil, sending socks into the red for the day and wiping out a good portion of Thursday’s gain after crude spike into the close. At $104 a barrel and $4 for a gallon of gas, investors are worried about the impact rising energy costs will have on consumer spending and corporate earnings.
So for the time being it’s a dog fight. On one side you have more signs of an economic recovery, and on the other side you have oil trading over $100 with a history of extreme volatility. Who will flinch first, nobody knows.
Safe Havens-Gold
In addition to watching oil leap for higher ground over the last two weeks, we’ve also noticed a renewed emphasis on safe haven assets. And the one that has taken center stage is gold.
This is a familiar role for our shiny little friend, frequently thrust into the spotlight as the world contemplates its own demise.
The latest rush to safety sent gold jumping to a new all-time high, with investor interest returning on political conflict in the Middle East and financial weakness in the Euro Zone.
And when you throw in the general long-term trend of global currency devaluations as countries look to print their way out of debt, it’s easy to see why gold remains a popular safe-haven investment.
But there are a number of different ways to invest in gold. You can buy gold stocks, consisting of regular and junior miners. You can buy an ETF that tracks the price of gold tick for tick. Or you can buy a basket of gold stocks, sort of like a mutual fund to help diversify your holdings.
Here are our top three picks in the category.
Top 3 Gold Stocks
Yamana is a Canadian gold miner with a market cap of $9.5 billion. The company is heavily invested in South America, with mining operations in Brazil, Chile and Argentina. In the world of gold miners, this is a midsized name in a fairly uncrowded field. The biggest company in the industry is Freeport-McMoRan, with a market cap of $49 billion. Yamana is a pure play on the price of gold, with a higher beta. That means it should be up more than gold when gold is up and down more than gold when gold is down. Owing an individual gold miner is considered a more aggressive way to play gold.
Market Vectors Junior Gold Miner (GDXJ)
In the world of gold miners you have regular miners and junior miners. The regular miners are much more established companies, industry and global leaders. But the junior miners are much more speculative, traditionally high-volatility stocks due to many undefined variables. But that also means more upside. And with a trend of consolidation in mining, these smaller guys remain targets as takeovers. So with GDXJ consisting of a basket of junior gold miners, it is a great way to diversify your exposure to a volatile bunch with lots of upside.
This ETF is designed to track gold prices tick for tick. That can be incredibly useful in a situation like we discussed above in oil, where gold stocks trade lower in spite of gold prices moving higher. This ETF is a way to counter that trend. The gold ETF won’t have nearly as much upside of a gold miner, but it’s an effective way to diversify your gold strategy.
One for the Road
Intercontinental Exchange (ICE)
The “ICE”, as it’s called, was basically the country’s first all-electronic futures exchange. The company’s entry into the market came at a good time, just as futures and trading in general were seeing big gains in volume. Years down the road, there has been a strong wave of consolidation, with industry giant CME Group scooping up a number of its smaller competitors. That leaves the ICE as one of just a handful of free-standing exchanges left in the market. But with a market cap of $9 billion and tail winds of increased derivatives regulation, ICE looks uniquely positioned to benefit from the trend.
Updates
VeriFone stepped up and reported excellent Q4 results on Wednesday after the bell that gave shares a nice 10% boost the following morning. This is the company that specializes in electronic financial transactions, making those swiper machines and software for debit/credit payments. VeriFone noted that it continues to see strong demand in Latin America while successfully transitioning into higher-margin services and software. The company also went ahead and raised its full-year guidance, another nod to the Street that the industry trend remains strong.
CPL posted another strong week, with shares breaking higher in the weal market on Friday to hit a new 52-week high. Like we’ve discussed before, this stock has a fat 7.4% dividend, so when the market gets nervous and looks for shelter, this is a good place to find it.
With crude at the top of the headlines, we should definitely talk about our energy stocks..
Out of our three stocks, Transocean Ltd (RIG) was the only one that finished the week in the green. This ties into what we talked about above with commodity stocks following the market and not the commodity. That weighed on our other two energy stocks Cimarex Eenrgy Corp (XEC), a domestic explorer, and Baker Hughes (BHI) , our energy services company. Neither was down big, but it’s an interesting example of how a general outflow from stocks as an asset class will touch even the strongest sectors and names.
Owning an oil ETF would be a way to counter that effect because its performance is tied directly to the price of crude. So if crude goes up 2%, so does your oil ETF. Power Shares DB Oil (DBO) and United States Oil (USO) are two common names in the space.
But that short-term weakness in some of our engy stocks is no cause for concern, because the long-term trend is at our back. So as crude continues to trade at a premium let’s look for our energy stocks to do the same.
That’s all for the week, but before we sign off here are a few articles worth taking a look at.
The first talks about soaring demand for agriculture while the second discusses the recent good news on the jobs front.
Jobless Rate Falls to Two-Year Low
Other than that, we need more technology and small caps in the portfolio, so that’s what we’ll be on the lookout for this week.
Your Investment Partner,
Mike
