Last week saw some rather noteworthy moments besides mouthfuls of juicy turkey, between the decision by the grand jury in Ferguson to not indict, and in the chasm formed between OPEC members over the decision to not cut production. The decision created two camps: the struggling nations, such as Venezuela, desperate for a cut to boost prices in order to help their national balance sheets, and those nations with deep, rather flush pockets that can endure lower prices for some time, likely hoping to hurt future U.S. shale production.
Oil prices plunged 7% on Friday to below $68 per barrel, which is great news for consumers at the pump, but the reality that the continuing decline looks to us to be more demand driven is a grim sign for economic growth. Monday's $2.39 rally in oil prices was contradicted by the 1.4% drop in the Market Vectors Oil Services ETF (OIH), telling us that Wall Street has little confidence in the near-term future of oil services.
Keep in mind that the energy sector has been one of the few sectors in the economy to provide high-paying jobs, so as oil prices fall, payrolls will be threatened. Last week, we learned that initial jobless claims rose to 313,000, a 7.2% increase from the prior week and a break in the 10-week streak of claims below 300,000. We are watching this closely as it could be indicative of an upward trend in jobless claims. In fact, just this morning, ADP reported that private sector job creation came in at 208,000 vs. expectations of 222,000. What makes the ADP report so important is that November has historically seen an increase in employment. This year is seeing the first drop for the month of November since 2008, and the lowest number for the month since 2010.
Today, we also learned that while productivity was up, unit labor costs fell 1.0% in the nonfarm business sector and fell 1.3% in the manufacturing sector. Good news for margins, bad news for income levels, which translates into an even more cash-strapped consumer. This is consistent with the decline in mortgage applications for the second week in a row, down 7.3%.
We believe it is likely that capital spending numbers going forward will come in below expectations, given that the energy sector has been responsible for about 1/3 of S&P 500 capital spending in recent years. With less capex, there will be less demand for credit from corporates, which will likely keep central banks decidedly dovish. As we mentioned in early November, energy companies represent more than 15% of the Barclays U.S. Corporate High-Yield Bond Index, up from 4.6% in 2005. With the dramatic fall in oil prices, we are likely to see more bankruptcies, which could trigger wider spreads. This would in turn affect the ability for corporates to engineer jacked-up EPS growth.
Meanwhile, large cap stocks keep making new highs, with the S&P 500 trading at 16x 2015 consensus EPS expectations, which are built on the view that earnings will grow nearly 8.9% year-over-year, according to data from FactSet. That's the highest growth rates since 2011, and we believe it to be rather aggressive as we see growth around the globe slowing materially. Per today's Business Roundtable survey findings, CEOs are a bit less optimistic about the direction of the economy and have plans to cut business investments in the upcoming months. Today, we learned that U.S. third-quarter productivity was up 2.3%, just shy of 2.4% expectations, but November ISM Non-manufacturing Index rose to 59.3 from 57.1. This collection of data gives us a slightly mixed bag on future growth potential.
One way to take advantage of falling oil prices would be through energy-intensive economies such as Japan, India, the Philippines and Taiwan using ETFs such as iShares MSCI Japan ETF (EWJ), WisdomTree India Earnings Fund (EPI), iShares MSCI Philippines ETF (EPHE), and iShares MSCI Taiwan ETF (EWT).
Lower energy prices will improve trade balances and domestic growth prospects. In addition, the financial engineering that has become standard in the U.S., thanks in part to excessively low interest rates, has been kept to a minimum in these markets. There is a reduced risk of a shock from significant earnings disappointments.
Versace would also suggest looking at companies that consume vast quantities of oil and gas as part of their business models, such as Delta Air Lines (DAL) and Southwest Airlines (LUV) as well as Ryder Systems (R), J.B. Hunt Transport (JBHT) and others.
On Nov. 19, we mentioned the problems in Ferguson could push for deployment of body-worn video cameras for police forces throughout the country, and we suggested TASER International (TASR) as a way to participate in what we felt could become a national trend. Since then, TASR has shot up 16.4% as of yesterday's close, thanks in part to President Obama's request for $75 million in funding for police body cameras. As of mid-day today, the stock had fallen a bit to just over 9% up from Nov. 19. We suggest that investors place a protective stop on this one to lock in gains on a least a portion of their investment.