“Think of it this way. Lower oil prices are to America what low labor prices were to the BRICs!”... Sara Eisen, CNBC

As most of you know I was in New York City most of last week seeing institutional accounts, doing media and speaking at various events. One of the media appearances was to co-host CNBC’s “Closing Bell” on Tuesday, with the sagacious Sara Eisen, who unsurprisingly gave me the quote of the week. The quote was, “Think of it this way, lower oil prices are to America what lower labor costs were to the BRICs!” For the most part, the balance of the week was spent seeing institutional accounts where I was repeatedly asked about the declining oil prices and if that was going to kill the capital expenditure cycle along with the recent employment gains. My response was, “I don’t believe it!” Our energy team, which I consider to be one of the best on the Street, came out with a MAJOR “call” a few weeks ago stating, “We think crude oil prices are in a bottoming phase.” Plainly I agree, although oil prices have subsequently gone lower than I have been expecting. To this point, I spent a few nights last week at Bobby Van’s across from the entrance to the New York Stock Exchange, where I tipped copious glasses of wine with the good folks of Friends of Fermentation (FOF). In attendance were CNBC’s Bob Pisani and his new producer Jill, the always brilliant Arthur Cashin, a number of portfolio managers (PMs), prime/floor brokers, analysts, etc. I actually promised to send my friend Stan Salvigsen’s treatise titled “The Inflation Handbook,” written when Stan was at Cyrus Lawrence in the early 1980s, to Arthur. Nevertheless, the consensus of the good folks at FOF was that oil prices are indeed in a bottoming phase. If correct, this implies buying the Energy complex into year’s end could prove to be the trade of the year for 2015.

In attendance at FOF was charter member Eric Kaufman, founder and portfolio manager of VE Capital, who knows more about the Master Limited Partnership space (MLPs) than anyone I know. Eric has been telling me for years to avoid the “upstream MLPs,” and to invest in the “midstreams,” and that advice has been spot on! Eric thinks that during tax-loss selling season we are going to get a sentinel chance to buy the high yielding “midstream MLPs” at bargain prices; and, I agree. Also in attendance at Thursday’s FOF was the eagle-eyed economist Joe Brusuelas, who recently joined McGladrey as their Chief Economist after years at Bloomberg. I actually had a conversation with Michael Bloomberg when I was at Bloomberg last week to do some media, and as I understand it, the question du jour was, “Who is responsible for the departure of the best economist we have ever had?” Best economist indeed for at Thursday’s FOF confab Joe told me his number for Friday’s employment number was 320,000. To be sure, Friday’s figures were hard to argue with regarding their strength. Such strong figures were not anticipated by me, although I continue to think the economy is stronger than the surface figures suggest.

Speaking to the employment numbers, the headline figure showed November payrolls increased by an eye-popping 321K versus the expectation of a +230K “print.” Even considering the government’s tweaking of the seasonal adjustments, it is hard to argue Friday’s report was not strong. Moreover, the previous two months were revised upward by 44K. Also encouraging was that average hourly earnings rose by +0.4% (vs. the +0.2%E), and are now up +2.4% YoY, while the average work week expanded to 34.6 hours for the best reading since May 2008. There were some negative discussions from the talking heads about the continuing low workforce participation rate of 62.8%, but as I have said in past missives, I think this is a structural event and thereby nothing to worry about. To wit, there are somewhere between 10,000 and 15,000 baby boomers retiring daily, depending on whose figures you want to use, and that impacts the participation rate. There is also a continuing surge in the folks joining the disability rolls, and many of the millennials are self-employed, both of which negatively affect the participation rate. Further, 10 years ago if you committed a felony 30 years prior, nobody could find out about it. Well, they can find out about it now given the much more stringent background checks, and this too is negatively impacting the participation rate by keeping people off of the employment rolls. The bottom line is the slack in the workforce is dissipating and wage growth is likely to rise in the years ahead.

While I met with numerous institutional accounts, there were two that really stood out. The hour and a half I spent with my friend Phil Orlando at Federated was one of them. The Federated gang from Pittsburg and Boston were also dialed in for a two-way discussion that drew remarkably the same conclusions. Profits should strengthen in 2015, as should the capex cycle, and I believe Phil’s boss (Stephen Auth) targeted 2350 for the S&P 500 (SPX/2075.37) for 2015, which would be consistent with my “up” 10% - 12% in 2015. Every year Mr. Auth’s year-end target price for the SPX is higher than most and every year he seems to be right. It will be interesting to see if he uses that 2350 target in this year’s “roundtable.”

The other interesting meeting was with the folks at Prudential who manage their real estate assets. David Hunt is the CEO of Prudential Investment Management and Marc Halle is one of the portfolio managers. As readers know, our fundamental real estate team is fairly sanguine on the homebuilders currently, believing they have out-run their fundamentals. We are, however, continuing to play that space with the second derivative name Weyerhaeuser (WY/$35.53/Strong Buy). The REITs are another story. Pru’s Marc Halle began by noting the REITs are probably in a sweet spot with commercial properties already contracted for years to come. He likened it to a bond where you look at duration. In a REIT, hotels, since they rent on a night-to-night basis, have a duration that is very short and can re-price quickly. Obviously office space, malls, etc. have a longer duration. He thinks REITs on average yield 4%, will get ~4% internal growth and achieve somewhere between 2% - 3% external growth. That implies a 10% - 12% total return, which is what I forecasted for the SPX this year and what I am looking for in 2015. Marc believes European real estate is expensive with “cap rates” below 5% and that there is no turnaround for France any time soon. He likes the East and West Coast properties in the U.S. and said that Middle America is his favorite Emerging Market (EM). Speaking to EMs, Marc favors Hong Kong and Japan with potential returns of 30% to 35%. Some of the names from our REIT Priority List that have Strong Buy ratings from our fundamental analysts are: American Residential Properties (ARPI/$17.59), Kite Realty (KRG/$27.34) and Sovran Self Storage (SSS/$85.54). Or, you can just buy Marc’s mutual fund, the Prudential Global Real Estate Fund (PURAX/$24.76).

The call for this week: So far the early month weakness has failed to show up, which typically sets the stage for the Santa Clause rally. I have repeatedly stated that it is tough to sell stocks off in the ebullient time-frame between Thanksgiving and the New Year. It can happen, but it is pretty rare! As Joe Slavin, another FOF member, writes, “We have a large number of stocks breaking above past tops to new all-time highs. All-time highs leave just two types of sellers, shorts and profit takers [meaning] stocks can accelerate [on the upside]. These breakouts, and neutral trending bullish [trends] are not necessarily at buy junctures, however both patterns can drive the [equity] markets higher quickly. Add to this the number of bullish names versus bearish [names], and the odds favor we trade to the upside.” Plainly, I agree! This morning, however, there is price weakness with the SPX preopening futures off 6 points at 6:00 a.m. as oil falls again, Italy is downgraded, China’s November imports shrink, German industrial output falls short of expectations, Japan’s economy softens, and the U.S. dollar trades higher. All of this caused one savvy seer to exclaim, “If Santa fails to call, the bear will roam on Broad and Wall.”

© Raymond James

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