Are We Better Off Today Than Two Years Ago?

Two weeks from now Americans will head to the polls to vote in what has been billed as “the most important election of our lifetime.” That may be a bit of hyperbole, but it will no doubt be one of the most important – maybe not as important as the previous one in 2016, but certainly a close second.

Since then, there have been some huge changes in the financial markets and the economy, nearly all of them wildly – and demonstrably – positive. CNBC was nice enough to quantify them the other day in this chart, and the numbers are startling.

I’ll just mention a few:

  • S&P 500: Up 32% since the 2016 election.
  • Average hourly earnings: Up 5%, to $27.24 from $25.88.
  • Nonfarm payrolls: up 4.4 million, to 149.5 million from 145.1 million.
  • Unemployment rate: 3.7%, down from 4.9%.
  • Consumer confidence: up 37 points, to 138 from 101.
  • Corporate tax rate: 21%, down from 35%.
  • Assets held by the Federal Reserve: down 6%, to $4.22 trillion from $4.52 trillion.

Needless to say, there have been some negatives: Continue reading "Are We Better Off Today Than Two Years Ago?"

Moment of Truth Approaching on Iran Sanctions

OPEC’s market monitoring committee met on September 23rd to assess conditions just about six weeks before new U.S. Iran sanctions go into effect, targeting Iran’s oil sector. Buyers and sellers are in the process of finalizing their loading programs for November, and so this assessment is of particular importance as to the question of whether oil supplies will be adequate once those sanctions go into effect.

The market focused on the lack of public discussion of President Trump’s demand on Twitter last Thursday for OPEC to increase supplies to get prices down:

"We protect the countries of the Middle East, they would not be safe for very long without us, and yet they continue to push for higher and higher oil prices! We will remember. The OPEC monopoly must get prices down now!"

However, Saudi Energy Minister Khalid al-Falih was quoted as saying, "Our plan is to respond to demand. If demand [for Saudi crude] is 10.9 million b/d you can certainly take it to the bank that we will meet it. But the demand is 10.5 million b/d or 10.6 million b/d. I think October will be more than this."

Iran Sanctions
Source: AFP

In a more recent news story, it was reported that Saudi Arabia and its allies discussed adding 500,000 b/d to supply. Saudi Aramco plans to add 550,000 b/d of new capacity in the Khurais and Manifa oilfields in the fourth quarter of 2018. Continue reading "Moment of Truth Approaching on Iran Sanctions"

IBB - Stealth Bull Market Unfolding

The iShares Nasdaq Biotechnology ETF (IBB) which serves as a proxy for the biotechnology cohort has finally broken out to a 52-week of $122 against its 52-week low of $100 in May. This 20%-plus appreciation over the summer has largely gone unnoticed while some individual companies have soared even higher over this same period. The biotechnology cohort has been decimated over the past 2-plus years over the drug pricing debate while serving as a political punching bag. To be fair, the entire pharmaceutical supply chain became a victim of harsh political rhetoric as share prices fell across all companies involved in this space in any capacity. The biotechnology cohort has been largely ignored in this massive bull market and appears relatively cheap in comparison to other sectors. As the confluence of abating political threats, drug pricing certainty, merger and acquisition activity and continuity of the current health care backdrop, this cohort has witnessed a stealth bull market. This uptrend is likely to have legs as valuations remain compelling and many names have become value stocks.

Furthermore, as the raging bull market continues into frothy territory, downside risks continue to mount. Bank of America is predicting an end to the current bull market run and in less certain times pharma companies will benefit. Individual names within the sector have demonstrated incredible strength as of recent such as Regeneron (REGN), Bristol Meyers (BMY), Allergan (AGN), Celgene (CELG), Johnson & Johnson (JNJ) and Amgen (AMGN).

Challenging 2016, Recovering 2017 and IBB’s Resurgence in 2018

After a banner year in 2015 for the biotech ETF, the cohort sold off in a dramatic fashion falling from $138 to $89 or a 37% decline. The healthcare sector had been faced with an uncertain and volatile political backdrop. As President Trump and other political pundits vowed to bring down drug prices and increase scrutiny over the sector, IBB found its footing and set a floor near the $89 level. The ~$90 level was tested a handful of times in 2016, and it was evident that many of these political threats were being priced-in after its sharp and sustained sell-off. This sharp decline and subsequent floor coincided with heated political rhetoric aimed at the collective cohort of healthcare and more specifically biotech companies. I strongly felt that these events were extraneous and would eventually subside without any significant impact on the underlying stocks within IBB. I felt this politically induced sell-off presented a great buying opportunity considering the ~40% decline and extraneous pressures. I had written about such opportunities throughout 2016 during the market sell-off and the Brexit, respectively (Figure 1). I felt that these were great entry points for any long-term investor that desired exposure to the biotechnology sector. Ostensibly, many of these stocks were trading at multiyear low P/E ratios and as a cohort (gauged via the IBB proxy) looked to be less sensitive to tweets/threats as IBB continued to test the ~$90 barrier throughout 2016. 2017 saw a nice recovery and posted a ~20% gain, and 2018 is shaping up to posting another double-digit annual return thus far the index is up ~14% YTD. Biotechnology remains one of the few sectors that money has yet to rotate into now that retail has caught fire.
Continue reading "IBB - Stealth Bull Market Unfolding"

Oil Price Spike Will Most Likely Be Averted

Uncertainties for the balance of 2018 imply that stocks could fall sharply or be adequate. As a result, prices may spike or drop into the $50s, depending on what unfolds.

President Trump has sway over Saudi Arabia and the other Gulf producers. He can also fine-tune the implementation of sanctions on Iran and waivers to them. I’m expecting he will do whatever he has to, to avert a price spike going into the November mid-term elections.

July Production Changes

OPEC estimated in its August Monthly Oil Market Report (MOMR) that its crude production in July averaged 32.323 million barrels per day (mmbd). That was about 40,000 b/d higher than in June. The “compliance” level with the 2016 deal dropped to 97%, the first time less than 100% in nearly a year.

Saudi Arabia’s production was reduced by about 52,000 b/d, but that was more than offset by gains of 79,000 b/d in Kuwait and 69,000 b/d in the UAE.

Iran’s production fell by 56,000 b/d while Venezuela’s output dropped 48,000 b/d. Libya’s output also dropped by 57,000 b/d. Continue reading "Oil Price Spike Will Most Likely Be Averted"

Should The Fed Be Above Criticism?

I suppose it was just a matter of time, but Trump Derangement Syndrome (TDS) finally hit the bond market last week.

According to some experts, last week’s nearly 10 basis point jump in long-term Treasury bond yields was at least partially due to the president’s unprecedented and impertinent statement that he didn’t like the fact that the Federal Reserve was raising interest rates.

For the past two years, the financial markets have been an island of blissful ignorance, totally disregarding all of the nonsense swirling around the White House, whether real or invented. The S&P 500 has risen about 30% since Donald Trump’s election despite all of the clouds hanging over his presidency, from alleged collusion with the Russians to the Paul Manafort thing to Stormy Daniels to surrendering American sovereignty to Vladimir Putin.

But now apparently the president has finally stepped in it deep enough to rattle the markets.

Last week the yield on the benchmark 10-year Treasury note rose seven basis points to close the week just below 2.90%, its highest weekly close in a month. The yield on the 30-year bond jumped 10 bps to 3.03%, its highest level since June 26. According to the Wall Street Journal, some of that rise was due to Trump’s comments about Fed policy, neglecting to mention that the yield on the 10-year German government note – the European benchmark – was also up sharply last week, up nine bps on the week to 0.37%, its highest level since June 20.

So what did Trump say about the Fed that was so disturbing that it led some bondholders and traders to dump Treasury bonds and German Bunds? Continue reading "Should The Fed Be Above Criticism?"