September 7, 2016

The major stock market averages opened lower. The Dow and SPX are currently down 48 pts & -.2%, respectively. Tech & energy sectors are modestly higher but the defensive sectors are in the red. Over the last couple of months, we’ve seen utilities, consumer staples and telecoms lose momentum, whereas the tech sector has clearly begun to lead. The VIX Index is currently trading at 12 suggesting very little volatility over the next 30 days. And the VXTLT, which measures fear in the Treasury bond market, is also very low. Bonds are little changed on the day and have been trading in a very tight range over the last month. Yields are showing no sign that the Federal Reserve is preparing to hike interest rates. Indeed, some of the latest economic data have been rather negative (ISM business activity surveys).  

WTI crude oil is trading slightly lower to $44.70/barrel. We heard from a few energy companies today suggesting the industry is still in retrenchment mode. Deep water driller Ensco (ESV) plans to retire 60 floating drilling rigs by the end of next year and says it won’t spend any money on building new rigs. Base salaries for new hires have been cut. Phillips 66 (PSX) cut its 2018 profit and capital spending outlook. Baker Hughes (BHI) is clearly focused on reducing expenses and says it is on track to exceed the $500mil cost cutting target for 2016. Finally, Marathon Oil (MRO) will continue to sell off “non-core” assets as the company prepares to be profitable at $50/barrel oil.  

Leon Cooperman of Omega Advisors was interviewed by CNBC last week and he noted some abnormalities in the current market environment. Chief among these abnormalities is interest rates. If the labor force and worker productivity were growing, you would expect much higher interest rates. So rates are signaling that economic growth is slow. “We have to accept the reality that if interest rates belong where they are, that’s a slow growth world [and] returns on equity are going to be lower than they were historically.” So Mr. Cooperman seemed to suggest that the Federal Reserve isn’t really to blame for ultra-low interest rates; they are simply a natural consequence of slow growth. That’s why he sees the stock market as fully valued. But rates will not be low forever and growth won’t languish forever. “Everything is cyclical,” he says. And he believes “the market understands that interest rates are going to be higher” in the future. A set of gradual, modest interest rate increases by the Fed won’t upend the market or the economy, but could cause a small correction or a “several month pause.” But Mr. Cooperman doesn’t see a bear market or recession in the near future and expects US stocks “should grind higher through 2017 and, perhaps, in the years thereafter.”  

The Job Openings and Labor Turnover Survey (JOLTS) report showed a pretty strong job market in July. New job openings climbed to 5.87 million, which is at least a 10-year high. Overall hiring rose to a 3-mohth high of 5.23 million. The quit-rate also edged up, suggesting workers feel secure enough to look for better jobs. 

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