Stocks opened Wednesday's session markedly lower, with the steep selloff driven largely by fear-mongering geopolitical moves out of North Korea and sharply lower oil prices. Continued concerns around China and worries about Fed tightening in the face of global instability also appear to be keeping buyers at bay.
Last night, North Korean officials announced that it detonated its first hydrogen bomb in a provocative move that -- although viewed with skepticism -- nevertheless thrusts the enigmatic nation back into the spotlight at a time when global geopolitical tensions are already sky high (as a reminder, over the weekend we learned Saudi Arabia had severed its diplomatic ties with Iran).
This brings us to this morning's major drop in oil prices (with West Texas Intermediate down 4% and Brent crude down 5%), which is tied to the notion that the Saudi Arabia-Iran standoff will hamper cooperation among OPEC members to curtail production, thereby diminishing chances for the current supply glut to abate anytime soon.
On the domestic supply front, the Energy Information Administration's weekly crude inventory report, released this morning, echoed the same trend posted by the American Petroleum Institute last evening ¿ a larger-than-expected drawdown in crude, which is positive for the oil trade, but also larger-than-expected builds in gasoline and product inventories, which is negative for the oil trade. Despite the drawdown in crude stockpiles, prices remain unstable as the market remains focused on the bigger picture, namely the ongoing global supply problem, which is likely to be exacerbated by tensions in the Middle East.
On a brighter note, ADP's monthly employment report indicated that roughly 260,000 new private sector jobs were added in December, up from a downwardly revised 211,000 increase (from 217,000) in November. Reflecting a recurring theme, services accounted for the vast majority of job gains (234,000), while goods-producing jobs showed a more-modest increase (23,000).
The report effectively validates expectations for a December increase of more than 200,000 in nonfarm payrolls, set to be released Friday morning. If true, this would likely put the Federal Reserve on track to raise rates once again in March. We'll have more insight into the Fed's thinking later on this afternoon, following the 2:30p.m. ET release of the FOMC's December meeting minutes.
Since the markets opened Monday, the Dow and S&P 500 are down by roughly 475 points and 2.5%, respectively. Our update from Nov. 10 -- which discussed both our domestic and international concerns -- is the reason we have subsequently raised and held onto historically high levels of cash (around $150,000) in our portfolio. While we continue to view the United States as the most stable economy on a relative basis, we remain concerned about rising rates in the face of both internal and external structural economic deficiencies.
The Fed's 25-basis-point December rate hike -- while seemingly insignificant on the surface -- ups the ante for future rate hikes and sets us on a path toward an upward sloping trajectory in rates throughout the balance of this year. The Fed's reliance on a strengthening job market as the primary basis for its monetary policy decisions fails to take into account the severe, persistently low levels of inflation. Global instability -- both on an economic and geopolitical level -- serves to compound the negative impact of higher rates.
In the Action Alerts Plus portfolio, our worst performers include our energy names -- particularly EOG Resources (EOG) and Occidental Petroleum (OXY) -- as well as a smattering of names exposed to China -- WhiteWave Foods (WWAV), Starwood Resorts (HOT) and Dow Chemical (DOW). Our best performers include two names that received key upgrades this morning -- Lockheed Martin (LMT) and Walgreens Boots Alliance (WBA), with the latter set to report tomorrow morning. Our high cash balance has provided a crucial buffer amid the sweeping selloff. We are inclined to stay away from energy until the geopolitical environment stabilizes, but we view WWAV and DOW as compelling despite their exposure to China, as each stock offers structural upside (WWAV for its takeover premium and scarcity value and DOW for its impending, transformative strategic transaction).
We will be actively monitoring our portfolio and will consider gently adding to positions on an opportunistic basis. More specifically, we would consider adding to Allergan (AGN) below $275, Bank of America (BAC) below $16, Biogen (BIIB) below $285, Costco (COST) below $150, Cisco Systems (CSCO) below $25, Starwood Hotels below $63, Dow Chemical below $48, Jack in the Box (JACK) below $70, Kraft Heinz (KHC) below $70, PayPal (PYPL) below $33, Stanley Black & Decker (SWK) below $100, Walgreens Boots Alliance below $80 and WhiteWave Foods below $37.50.
In each of these cases, our "trigger" price sits below our cost basis. As Jim Cramer emphasized in his book Get Rich Carefully, it is crucial to avoid violating one's cost basis on a holding -- a practice which naturally instills investors with a level of discipline and patience.