The October Surprise?

Akin Oyedele of Business Insider reports, Huge Miss on Jobs Report:
The US economy added 142,000 jobs in September, fewer than forecast.

Economists had been expecting the economy to add 200,000 jobs.

The unemployment rate held steady at 5.1%, a seven-year low.

Average hourly earnings were flat month-over-month in September, below expectations for 0.2% growth.

Ahead of this report, economists had noted that August and September nonfarm payrolls prints had been revised higher most of the time over the past decade. The August print, however, was revised lower to 136,000 from 173,000 in Friday's report.

Economists had noted that the broad-based slowdown in the manufacturing sector, partly because of the strong dollar and slower exports, would most likely show up in this report. Manufacturing employment fell 9,000 in September, versus expectations for no change.

Mining employment also fell, as healthcare and information added more jobs, according to the Labor Department.

The labor-force participation rate, which measures the share of Americans over 16 who are working or looking for a job, fell to 62.4%, the lowest since October 1977.

The year-over-year projection for hourly earnings growth, at 2.4%, was the most bullish forecast for wages in this economic cycle. Wages missed, at 2.2%.

In September, the Federal Reserve held off on raising its benchmark rate for the first time in a decade, citing global growth concerns and a labor market that needed further improvement. After the jobs report, Fed fund futures reflected only a 30% chance that the Fed would lift rates in December and a 52% probability for March.

Stock futures nosedived after the report — all three major indexes lost more than 1%, and Dow futures shed as many as 200 points. The yield on the 10-year benchmark Treasury note fell below 2% for the first time since the market sell-off on August 24.

Here's what Wall Street was expecting for the jobs report:
  • Nonfarm payrolls:+200,000
  • Unemployment rate: 5.1%
  • Average hourly earnings, month-over-month: +0.2%
  • Average hourly earnings, year-over-year: +2.4%
  • Average weekly hours worked: 34.6
I don't know why economists are so shocked to see the pace of job growth in the United States is decelerating. The mighty greenback, the rout in commodities and China's big bang are all weighing on the U.S. economy. Moreover, when a record 94.6 million Americans are not in the labor force, it's not a sign of economic prosperity and strength.

Although some think the weak jobs numbers are masking a strong economy, the truth is the jobs picture is even worse than you think. The U.S. economy may be in relatively better shape than the rest of the world but it's far from firing on all cylinders and the risks of another downturn are high which is why Bridgewater's Ray Dalio is worried about what happens next. In my opinion, the Fed's big decision a couple of weeks ago has been vindicated and it's right to fear deflation coming to America even if it will never publicly admit it (I warned you about this possibility a year ago).

As far as stocks, bonds and commodities, the knee-jerk reaction following the September jobs report was swift (click on image):

Stock futures reversed course and got slammed, the yield on the 10-yield Treasury fell below 1.94%, the US dollar declined spurring commodities like oil higher. Gold rallied partly because the US economy isn't doing as well as anticipated and some big investors think the Fed's next big move will be more more quantitative easing (QE), not a rate hike.

What do I think of all this? To be honest, not much. I maintain my views which I clearly outlined in my recent comments on a looming catastrophe ahead and who gets the last laugh on stocks.

If anything, I'm now more convinced than ever that the Fed won't make the monumental mistake of raising rates this year and that now is the time to load up on risk assets, especially biotech which got massacred last month, hitting major indexes and the healthcare sector very hard.

I want you all to stop listening to investment gurus scaring the crap out of you and start paying attention to markets, focusing on the sectors that have been leading us higher because they are in a secular bull market. If you look at the charts of healthcare (XLV) and biotech stocks (IBB and XBI), they got hit very hard in September but are coming back strong (click on images below):

Notice how the large (IBB) and small (XBI) biotech indexes have already crossed above their 400-day moving average and the smaller biotech shares are rallying hard on Friday as they are the ones that got clobbered the most in September. The healthcare index (XLV) is also close to crossing over its 400-day moving average (healthcare is a mix of big pharma, big insurance plans, big biotech and medical equipment stocks).

Again, this to me is very positive and if this momentum continues, it represents a change in market sentiment and risk-taking behavior. Importantly, with the Fed out of the way for the remainder of the year, I would ignore Carl Icahn's dire warning and load up on risk assets right now. Just make sure you pick your spots carefully as some sectors will rally and fizzle quickly or not participate while others will surge higher and make new highs (mostly tech and biotech).

I could be wrong, markets are crazy in October (or so everyone is conditioned to believe) but I think the big October surprise will be a huge rally that continues into the first half of next year. The bears love talking about "bull traps" but if you ask me, September was a huge "bear trap" and all these short sellers shorting this market and sectors like biotech are in for a lot of pain in the months ahead.

In fact, as I'm ending this comment, markets are staging a dramatic reversal on Friday and the small biotech companies I trade are surging higher (click on image):

Admittedly, I got clobbered in September along with many other biotech investors but I didn't panic, added more to my core positions and I'm sitting tight here (I'm better at buying the big dips than selling the big rips!).

But it's not just biotechs taking off on Friday. Check out the big moves in emerging markets (EEM), Chinese (FXI), Energy (XLE), Oil Services (OIH), Oil & Gas Exploration (XOP), Metals & Mining (XME) and solar (TAN). Below, a list of ETFs I track and how they performed on Friday (click on image):

It's clear that with the Fed out of the way, smart money is betting big on a global recovery (click on image below):

All of the stocks above are still in a downtrend but they can bounce big from these levels if market sentiment shifts and risk appetite increases (could be a violent countertrend rally).

Below, Rich Ross of Evercore ISI explains why biotech stocks are on their way back up from a recent plunge. And Len Yaffe, Stoc*Doc Partners, discusses key areas in the biotech industry, and his top stock picks.

Third, Jim McCaughan, Principal Global Investors CEO, says buying on setbacks is a promising strategy in U.S. equities. McCaughan is more cautious on emerging markets in the near term.

Lastly, Scott Minerd, CIO with Guggenheim Partners, discusses the jobs number and the markets and gives his best investing ideas, including investing in Spain (EWP) and Brazil (EWZ). Great comments on global liquidity trends, listen to this discussion.

We shall see what positive or negative surprises October has in store for us but one thing you should all be made aware of is James Bond is ditching his classic, straightforward martini for a dirty martini, combining vodka, dry vermouth, a muddled Sicilian green olive, and a measure of the olive’s brine (great choice!).

Hope you enjoyed this comment and wish you all a great weekend! Please remember to kindly donate and/or subscribe to this blog at the top right-hand side and support my efforts to bringing you the very best insights on pensions and investments. Thank you!!