We saw a slightly mixed performance from stocks this week, with the averages trading well into the green before a disappointing jobs report on Friday killed the party. For the week, the Dow, S&P500 and NASDAQ all closed marginally in the red.
Stocks traded strong for most of the week leading into Fridays jobs report as expectations for a decent number buoyed the market. But with the economy adding a total of 0 private and public sector jobs in August, the weakest showing since September of 2010, the mood quickly soured, sending stocks sharply lower and pushing the averages into the red for the week.
While that is bad news on the surface, here is the twisted dynamic that is taking hold on the Street. Every time we get bad data, the probability of monetary stimulation from the Fed and fiscal stimulation from the federal government increases, creating a peculiar environment where bad news is good.
That didn’t play out on Friday, with investors punishing stocks for a lousy jobs report, but how else can you explain the big rebound in the averages over the last two weeks that came in the face of some fairly lackluster economic data?
Clearly, the market is beginning to price in support from the Fed, which told us just last week that it was prepared to act on any further economic weakness. Weak jobs report on Friday anyone?
And don’t forget the Obama jobs plan, set to be announced on September 8. I keep hearing the words “shock and awe” on this one, with the current administration now confronting the reality that if unemployment remains at current levels everyone will be looking for a new job next year.
So for the time being, the market once again turns to the Fed and the federal government for more support. No doubt that is controversial and unsustainable territory, but like it or not, it should support both economic growth and asset prices.
Updates:
In spite of Friday’s pullback, there were plenty of good stocks that closed the week well in the green.
Crude touching $90 on Thursday for the first time in almost a month gave Cimarex Energy (XEC) a nice boost, closing the week with a 5% gain. Energy stocks have generally been weak over the last month as investors shifted into less growth oriented segments of the market like utilities and consumer staples. But here’s what’s interesting about that dynamic. While a great exploration stock like XEC fell 21% in August, earnings projections were down a meager 3.5%. That means that little has changed on the fundamental side, energy companies are still making gobs of money with crude trading between $85 and $90. So from a valuation perspective, stocks that fall on fear with little change in earnings present a buying opportunity.
We also saw that stronger energy trade show up in Baker Hughes, Inc. (BHI), outpacing the market with a 3% gain for the week. We saw the same dynamic discussed above show up in BHI, with shares down 23% in August. But unlike XEC, where earnings estimate were down a bit, we actually saw estimates increase for BHI. So once again, for the value investors of the world, opportunity is at hand.
We heard some very big news from Brazil this week, with the emerging-market juggernaut cutting interest rates by a half point. That is a very big deal for two reasons. The first is that is that lower interest rates will juice the Brazilian economy, which is good for stocks and asset prices. The second is that the country had been raising rates for the last 18 months to combat inflation. So this represents a “policy change,” which for all the non-econ nerds of the word means that there will be more rate cuts coming down the line. So if you were waiting for some fundamental catalyst to jump into the Brazilian trade, this is your chance.
That powered the Brazilian ETF iShares MSCI Brazil Index (EWZ) to a weekly gain of 5%. It also gave CPFL Energy (CPL), the Brazilian electric utility, a nice boost, closing the week with a 3% gain in addition to its hefty 5% dividend.
Blackstone Group (BX) was also in the game this week, adding 6% as shares continue to recover from a sharp selloff in early August. There has been a buzz building on the Street that Washington is currently planning to make another run at stimulating the housing market. Lower interest rates, cram downs and raising conforming loan standards are all on the table. Whatever form it takes, housing stimulation is good for BX, which as a private-equity firm has significant exposure to credit performance and both commercial and residential real estate. And if President Obama comes out with a “shock and awe” jobs plan, which supports the consumer, look for BX to get a big boost because of its large commercial real-estate holdings.
But the big winner of the week was none other than the gold stocks, with Double Gold (DGP) and Market Vectors Junior Gold Miners (GDXJ) both adding 6.6% as gold continues to rebound from last week’s sell off. The gold trade is still looking strong, with prices closing the week at $1,887, less than $30 away from the all-time high of $1,920. So until that changes, this is still the greatest trade on the Street and a good place to look for outsized gains.
That’s all for this week, but until next time, here is a good article discussing how companies are enticing new shareholders with robust dividend payments. Keep in mind, interest rates are in the gutter right now, so if you can buy a great company and get paid 4% to 5% for owning shares, you are looking at a powerful investment. Enjoy.
Your Investment Partner,
Mike
