America's Brexit or Biotech Moment?

Patti Domm of CNBC reports, Jobs growth expected to be better, but Trump, Clinton could weigh on market:
October's jobs report showed a gain of 161,000 jobs in October, and while it won't have an immediate bearing on the Fed's next interest rate decision, it's one last economic pinata for the final days of the presidential election.

Economists expected to see 175,000 nonfarm payrolls. There were 156,000 jobs reported in September, and that number was revised higher to 191,000. The unemployment rate fell to 4.9 percent from 5 percent.

Market strategists are quick to point out that the jobs report comes just days after this month's Fed meeting, and the Federal Open Market Committee will have the November employment report and other fresh data to consider at its Dec. 14 meeting. The Fed is widely expected to hike rates for the second time in 10 years in December, if financial conditions and the economy are strong enough.

The jobs data, therefore, would've probably been more use to Donald Trump and Hillary Clinton in the campaign arena if it had been either very weak or very strong.

"If it's anything like the GDP report, it helps her. … If it's a good number, he'll say it's fake. If it's a bad number, he'll have a field day with it," said Greg Valliere, chief global strategist at Horizon Investments. Valliere on Thursday said the number would be more important for Clinton than Trump. "First of all, she needs something to deflect attention away from the slump she's in."

Economists viewed the data as about in line with expectations. The unemployment rate held steady, and the report revealed a tightening labor market with the highest wage increases - 2.8 percent - in the current economic cycle.

Stock futures rose slightly after the report Friday morning, and Treasury yields held mostly steady though the 2-year yield initially inched higher. Stocks on Thursday were lower for an eighth day, the longest losing streak in the S&P 500 since October of 2008. The S&P fell 9 points to 2,088, breaking key support at 2,097 and now just 6 points above its 200-day moving average. The Dow was down 28 at 17,930, a four-month low.

"I think as a notion, there's less emphasis on the employment report over the election results," said Ian Lyngen, head U.S. rate strategist at BMO. "You do have a presidential election that could in and of itself tighten financial conditions. I'm not quite surprised by the lack of interest in the employment series."

The move up in polls by Trump, amid new revelations about the FBI's investigation into Clinton emails, has helped flatten the yield curve, said Lyngen. Markets have been wary of a Trump presidency since he is less of a known factor, and some of his positions, such as on trade, are seen as potentially harmful to the U.S. and global economy. But while the markets have been somewhat comfortable with the idea of a Clinton victory, there is also concern that she would be weakened by ongoing investigations by the FBI and potentially by Congress.

"The markets are scared you could see a material tightening of financial conditions without the Fed doing anything," said Lyngen. Fed watchers have said the likelihood of a Fed rate hike in December would diminish dramatically if markets react violently to the election.

The jobs number, however, does have a chance of being a bright spot.

"Retailers are hiring a little earlier than they were. They have pulled ahead hiring to try to compete. It's a sign of a tighter labor market," said Diane Swonk, CEO of DS Economics. She was looking for about 190,000 jobs, aided by online retailers that have already been adding staff to distribution centers ahead of the holidays.

"Consumer confidence surveys show the current situation is fine. Employment is fine. It's the expectations that have deteriorated, which you could expect to see, given how ugly this election has gotten," said Swonk.

Bank of America Merrill Lynch was looking for 170,000 nonfarm payrolls.

"That's kind of like a Goldilocks number right now. It looks like the labor force participation rate has finally turned higher. If we can mark time with an unemployment rate of 5 percent and decent job growth for a while, it's the best thing that could happen to this economy. It's one of the better stories in the economy right now," said Ethan Harris, chief global economist at Bank of America Merrill Lynch, before the jobs report. "People are coming back to work. Wages are starting to pick up. I think the labor market is going to confirm it's one of the bright spots right now."

Goldman Sachs economists said they were looking for 185,000 jobs. The economists noted that much of the slowing in September was focused on state and local government employment, education and health care employment. Those areas added just 14,000 jobs in September, down from their 12 month average of 61,000. "A partial rebound in these sectors — with other sectors steady — would be enough to lift payroll growth into the high-100K range," they wrote in a note.

Besides the employment report, there are also earnings from Duke Energy, Humana, NRG Energy, PG&E, Madison Square Garden, FirstEnergy, NGL Energy Partners, Shutterstock and Virtu Financial before the bell. Berkshire Hathaway reports after the market close.

There are three Fed speakers to watch Friday, and the most important will be Fed Vice Chairman Stanley Fischer, who speaks on a panel at the IMF at 4 p.m. Atlanta Fed President Dennis Lockhart speaks at 9:30 a.m. at a realtors conference, and Dallas Fed President Rob Kaplan speaks at a bank forum in Mexico City.
It's Friday and I thought I would take a break from covering pensions and look more at markets right before the big US presidential election on Tuesday.

First, concerning the US jobs report, even though job creation came in below expectations, the focus is on the wage increases but I'd like everyone to stop and reflect whether these wage gains are sustainable or doomed to peter out in the months ahead and start declining again.

I think it's safe to assume that these wage increases are as about as good as it gets right before the election. I always read Warren Mosler's analysis of economic data as he cuts through the nonsense and focuses on key long-term trends.

Brian Romanchuk's quick comment on the US labor market also discusses why the labor market is far from overheating. And Gerard MacDonell went through the job charts and states:
Employment growth has slowed in recent months, but the labor market continues to tighten, this month led by the broader measure of unemployment.  Wage growth is now finally quickening in a way that matters for income and for the Fed. Because of the former, the labor income proxy continues to look decent.  It is now being driven more by wages than by jobs growth, which is a later-cycle type thing.  It is not yet to the point where it is “dangerous.”  Rather, taken in isolation it favors the Fed tapping the brakes in December, not that they have been pressing on the accelerator that hard! But mostly, it means that the blah expansion is still moving along.
Blah is right, notice how the bond market is yawning with the yield on the 10-year US Treasury note declining to 1.77% on Friday after the jobs report. Clearly the bond market isn't worried about increases in wages being sustainable and fueling higher inflation expectations.

However, barring some post-election crisis, the best wage growth in seven years should be enough to seal the deal for a much anticipated Fed rate hike in December (click on image);

Still, given the Fed's game changer last month, a rate hike is far from certain and there is a lot that can happen from now till the Fed meeting in December, including a Trump victory which some think will be "America's Brexit moment", unleashing hell on markets.

I don't know if Trump will etch out a victory on Tuesday but I agree with 'Black Swan' author Nassim Taleb, there is much ado about a Trump presidency:
Taleb said Trump is not as "scary" as people make him out to be.

"In the end, Trump is a real estate salesman," Taleb said. "When you elect real estate salespeople to the presidency, they're going to try deliver something."

Because of that, Trump probably won't do anything apocalyptic, Taleb said.

The author further said he is against the two-party system and is voting for neither Trump nor Hillary Clinton. He said, however, that whoever wins won't make nearly as much of a difference as people think.
I tend to agree with Taleb on this, a vote for Hillary Clinton will essentially be a vote for the status quo and a vote for Donald Trump sounds a lot scarier than it actually will be (President Trump will be very different from candidate Trump but his ego stays so if he manages to pull off a victory, he definitely doesn't want to be remembered as the worst president to ever hold office).

But I think investors need to look past the US election, the latest jobs report and the Fed to understand the bigger picture out there.

Earlier this week, I discussed lessons for Harvard's endowment, where I noted that in their latest report (it was a video update), "A Recipe For Investment Insomnia," Francois Trahan and Michael Kantrowicz of Cornerstone Macro cite ten reasons why markets are about to get a lot harder going forward :
  1. Growth Is Likely To Slow ... From Already Low Levels
  2. The Risks Of Zero Growth Are Higher Today Than In The Past
  3. The U.S. Consumer No Longer The Buffer Of U.S. Slowdowns
  4. The World Is Battling Lingering Structural Problems
  5. A U.S. Slowdown Has Implications For The World's Weakest Links
  6. The Excesses Of China’s Investment Bubble Have Yet To Unwind
  7. Demographic Trends In Japan ... An Insurmountable Problem?
  8. Central Banks Have Reached The Limits Of Monetary Policy
  9. Slower Growth Is The Enemy Of Portfolio Managers
  10. P/Es Are Hypersensitive To The Economy At This Time
I also mentioned Suzanne Woodley's Bloomberg article, The Next 10 Years Will Be Ugly for Your 401(k), so don't be too harsh on your hedge fund managers (even if most of them stink) and other active managers struggling in this tough environment.

Why am I mentioning this? Because we are all going to wake up on Wednesday with a post-election hangover and all these structural and cyclical issues that Francois Trahan and Michael Katrowicz highlight are still going to be with us.

Having said this, I'm not bracing for a violent shift in markets just yet and think there may even be a post-election relief rally regardless of who wins.

Where do I see the biggest relief rally ahead? Where else? In healthcare (XLV) and especially biotech (IBB and equally weighted XBI), the two worst performing sectors this year going into the election (click on image).

While some think the bad news will only get worse, I'm bullish on healthcare and more specifically biotech. Bryan Rich of Forbes also thinks it's time to buy healthcare stocks and more importantly, legendary investor Julian Robertson, founder of Tiger Management, sees tremendous upside in biotech stocks right now. The billionaire told CNBC in a recent interview that fears of what could befall the sector under a Clinton presidency are overdone.

Looking at the weekly charts, healthcare and biotech stocks are at key levels and need to resume an uptrend or else it's game over for them (click on images):

Now, the key thing to remember is the healthcare ETF (XLV) is made up of big pharma, large health insurance and medical equipment companies and a few big biotechs, the Nasdaq Biotechnology ETF (IBB) is made up of mostly large cap biotechs and is cap weighted and the SPDR S&P Biotech ETF (XBI) is made up of smaller, riskier biotechs and is an equal weighted ETF.

So when biotech stocks sell off hard like they have been doing over the past month, it's typically the smaller and riskier biotech stocks that decline the most and surge the most when a relief rally ensues. Large biotech stocks can get clobbered too but typically not as much as the smaller, more speculative ones.

I track over 500 biotech stocks and to illustrate my point, these were the biotech stocks that got whacked the hardest on Thursday (click on image):

You will notice individual names that got destroyed and this obviously impacts the ETFs. The XBI declined more than the IBB (again, smaller and riskier biotech shares move more abruptly both ways) and only the ZBIO which is an ultrashort ETF rallied hard on Thursday (I use this one as a contrarian indicator as to when to start dipping into biotech again).

On Friday, biotech shares are rallying hard, so all these shares that got whacked yesterday are up big today (click on image):

So what? What is the point of all this? Biotech shares are inherently risky and they've been clobbered all year and move like yo-yos.

True, but as someone who trades biotech, I can tell you there are huge opportunities to make serious money especially for biotech funds that specialize in the sector.

All this to say that going forward, I'm still bullish on biotech (even if Hillary Clinton wins!) and think the top biotech funds and hedge fund managers (like Steve Cohen) are going to make off like bandits.

For most people who have low risk tolerance, I recommend sticking to the healthcare (XLV) and biotech ETFs (IBB and equally weighted XBI) instead of picking individual names which can drop 50%, 60% or more on any bad news.

Leo, don't you look at other sectors and stocks? Of course, I track thousands of stocks across many sectors and industries, always trying to find great opportunities. I also track top funds' activity every quarter and dig deeper into understanding their top holdings (Q3 will be out in two weeks).

Lastly, I regularly look at the YTD performance of stocks, the 12-month leaders, the 52-week highs and 52-week lows for all the major exchanges. I also like to track the most shorted stocks and highest yielding stocks in various exchanges and I have a list of stocks I track in over 100 industries/ themes to see what is moving in real time.

And my biggest theme of all? You guessed it, DEFLATION!! This is why I don't read too much into the increases in wages from the latest US jobs report knowing all too well the risks of global deflation are not fading.

What else? As I discussed in my comment on bracing for a violent shift in markets:
My thinking has not changed much, I still think we're headed for a long period of debt deflation but there are always going to be tradeable opportunities in these markets if you know where to plunge (and which sectors to steer clear of).

This brings me to the BAML report at the top of this comment. I remain highly skeptical of a global economic recovery and would take profits or even short emerging market (EEM), Chinese (FXI),  Metal & Mining (XME) and Energy (XLE) shares on any strength. And despite huge volatility, I remain long biotech shares (IBB and equally weighted XBI) and keep finding gems in this sector by examining closely the holdings of top biotech funds.

And in a deflationary, ZIRP & NIRP world, I still maintain nominal bonds (TLT), not gold, will remain the ultimate diversifier and Financials (XLF) will struggle for a long time if a debt deflation cycle hits the world (ultra low or negative rates for years aren't good for financials).

As far as Ultilities (XLU), REITs (IYR), Consumer Staples (XLP), and other dividend plays (DVY), they have gotten hit lately partly because of a backup in yields but mostly because they ran up too much as everyone chased yield (be careful, high dividend doesn't mean less risk!). Interestingly, however, high yield credit (HYG) continues to make new highs which bodes well for risk assets.
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Below, Richard Ross, Evercore ISI managing director and head of technical analysis, goes to the charts to explain why he foresees healthcare heading lower.

Also, uncertainty around politics has affected healthcare stocks' performance but they have rallied in the past, says Stifel's Chad Morganlander.

Third, Max Wolff of 55 Capital and Craig Johnson of Piper Jaffray discussed biotech with Eric Chemi late last week.

Lastly, Julian Robertson, Tiger Management founder, recently discussed opportunities in biotech, Apple, self-driving cars, and Netflix. Good discussion, well worth listening to his views as he raises many excellent points.

America's Brexit moment? Blah! More like America's biotech moment but just in case I'm wrong, remember to always hedge your bets and never risk more than you can afford to lose because when it comes to biotech, there are great opportunities but the volatility will make you sick to your stomach.