So, while I was off in Poland for research, the U.S. jobs report for October arrived.
The econo-types spun off into a tizzy. The Wall Street strategists followed suit. Bunches of commentators and talking heads jumped aboard the crazy train, too.
They all rushed out their knee-jerk analysis insisting that the October jobs report, which showed America gained 271,000 jobs, was the linchpin that will now see the Federal Reserve raise interest rates at the December meeting.
If so, expect some volatility in emerging-market stocks.
If not, expect to see the dollar sell off and a new, longer-term rally begin in emerging-market stocks.
And I am quite confident you know my opinion here.
The cheerleaders are wrong. One happy jobs report does not a healthy economy make. And anyway, that happy jobs report hides a bit of nightmare in that it’s loaded with a flock of crummy jobs.
In short: The October jobs report will not lead to a rate hike in December.
And that means we are on the cusp of some strength in our Profit Seeker portfolio.
Can’t Argue With the Facts
So let me tell you a bit about the wondrous jobs report that has so many observers so giddy…
Nearly two-thirds of the jobs created in October were in low-wage occupations: wholesale and retail trade; education and health care services; leisure and hospitality; and so on. And of the biggest category to see jobs growth (professional and business services, with 78,000 jobs), a huge chunk were temporary.
That’s not the résumé of a strong economy. It’s just more proof that on the S-curve of economic life, America has plateaued as a nation. I’m not saying that to disparage my country; it’s just that facts are what they are … and the economic facts of life here at home do not justify a rate increase.
Nor do dollar facts.
The greenback’s strength, as I have pointed out previously, is causing a world of hurt inside America’s biggest companies. Nearly half the profits inside the S&P 500 constituent companies come from overseas sales. And the strong dollar is slamming those sales. Companies all over America are reporting weaker profits. Overall, the S&P’s earnings are expected to shrink a bit by the time the third quarter ends.
Federal Reserve board members are wise enough to know this. They’re wise enough to see that despite the number of jobs America is creating, the jobs themselves are not the sort that build a middle class or allow the average worker to live a comfortable life. They’re jobs that keep people barely above poverty. The Fed is wise enough to know that raising U.S. interest rates just as our biggest trading partners (Europe, China and Japan) are cutting rates and flooding their systems with more and more currency, would strengthen the dollar substantially, crushing profits all across the S&P. That would lead to an earnings recession, and a downdraft on Wall Street, which would play through consumer sentiment here at home … and that would have direct, consequential and, ultimately, negative impacts on an economy that is not as robust as the cheerleaders imply.
And then there are the negative impacts of a stronger dollar overseas. Again, as I’ve pointed out previously, foreign companies have taken on massive amounts of dollar debt because of cheap U.S. interest rates. If the buck continues to strengthen, then those companies face a one-two punch: The cost of repaying their debt would rise at the exact same moment their home currencies fall in value relative to the dollar. So they have to use more and more local currency to buy the dollars they need to repay more expensive debt. Those are the ingredients for a currency crisis.
The Fed doesn’t want to be responsible for another crisis.
So, to me, there is simply no way the October jobs report indicates that we’re all set for liftoff with U.S. interest rates.
And for that reason I believe we will finally see a bit of a tailwind in our Profit Seeker portfolio.
Escape the Blood in the Streets
The market is so certain that hike will happen in December that if it doesn’t, there will be blood.
The dollar will sell off. And emerging markets will reclaim some of their lost mojo.
Thing is, many of the companies we own continue to report strong results. Their stock prices do not reflect their fundamentals but rather an environment warped by Federal Reserve policy (though it’s a policy that cannot be unwound without causing all manner of damage, as I’ve explained).
Ultimately, the Fed needs a weaker dollar. And it will engineer a weaker dollar by holding off on raising rates.
One of our stocks that I particularly like is CP All (Thailand: CPALL, buy up to 52 Thai baht). It’s the company that runs 7-Eleven and Makro, two of the leading convenience-store chains in Thailand. The company recently reported net profits that increased nearly 21% on sales that were up 9.6%. That’s on a year-over-year basis for the third quarter.
Through the first nine months of 2015, sales were up even more (almost 10%) while earnings were up more than 28%.
Gross-, net- and cash-flow margins all expanded, and same-store sales (an industry measure of stores open at least a year) rose 1.6% in the quarter, and have been positive all year, reversing the negative trend of 2014.
And through the first nine months, CP All added 491 new stores, well on its way to opening 600 by the end of the year. Its goal: 10,000 stores by the end of 2018, up from 8,618 today.
Operations are clearly fine at CP All. The shares have essentially flatlined, however. We’re up about 1.6% overall, and that means the stock is still a very good buy at this point. The Thai baht is one of the currencies that should strengthen when the dollar weakens, and CP All is one of the blue-chip Thai companies that will see interest from the institutional crowd who searches for high-quality companies to own as emerging markets catch a new tailwind.
So, I recommend you grab shares of CP All at current prices, or add to your position if you already own the stock. The shares are currently at 50 baht. Pay no more than 52 baht (US$1.45).
Until next time, keep a global view…
Jeff D. Opdyke
Editor, Profit Seeker