Barron’s Weekend Summary: Unemployment remains near historic lows even after the Fed's aggressive rate hikes
Cover Story:
-Unemployment remains near historic lows even after the Fed's aggressive rate hikes. What's behind the job market's resilience---and why it could last? The Fed has lifted interest rates nearly a dozen times since March 2022, to a range of 5.25% to 5.5%. Headline inflation has fallen by two-thirds, from a peak of 9.1% to 3% on a year-over-year basis, and despite a recent uptick is poised to slow further as rent prices cool. Yet, the U.S. unemployment rate sits at 3.8%, a historically low level only slightly above the 3.6% that prevailed when the Fed first began raising rates. And there is little to suggest that unemployment will head much higher soon.
Interview:
-This week, Barron’s published its interview with Ron Shaich, founder and chief executive of Panera Bread. Shaich oversaw Panera through multiple transformations, from its initial public offering in 1991 as Au Bon Pain to its sale, in 2017, to European investment firm JAB Holdings for $7.5B. He also became a key figure in the development of the “fast casual” dining sector, now valued at more than $100B. Today, Shaich is managing partner and CEO of Act III Holdings, a billion-dollar fund that invests in public and private consumer companies and restaurants. He is also chairman of and a lead investor in the Mediterranean restaurant chain Cava Group, which went public in June. in mid-September about his time at Panera, his transition from CEO to investor, his outlook for the restaurant industry, and his forthcoming book, Know What Matters: Lessons From a Lifetime of Transformations, which will be published on Oct. 24 by the Harvard Business Review Press.
Tech Trader:
-Meta looks like an AI hot pick. But, Barron’s feels there’s a problem. For investors, every utterance of the word “Meta ” is an unpleasant reminder of Zuckerberg’s commitment to the metaverse, a mammoth long shot that’s years from ever paying off. Fortunately, the Facebook founder has some other promising things up his virtual sleeve. You could see the market’s metaverse disdain playing out in real time this past week during Meta Connect, the company’s annual developer conference. Mark Zuckerberg kicked things off with the launch of the Quest 3 mixed reality headset, which goes on sale soon for $499. It’s a nice upgrade, with better graphics and sound.
The Trader:
-Three US government programs—the Infrastructure Investment and Jobs Act, the Chips Act, and the Inflation Reduction Act—will help keep the money flowing, come economic rain or shine. Together, the three represent hundreds of billions of dollars in spending and subsidies targeted at upgrading the nation’s roads and bridges, expanding domestic manufacturing of semiconductors, and modernizing the electrical grid, among many other things. The construction and engineering contractors who will be doing a lot of the planning and construction work for the forthcoming projects will be among the main beneficiaries. And three related stocks are: Sterling Infrastructure, a 2023 Barron’s Roundtable pick in January when shares were around $32. The stock has climbed 126% this year, to a recent $74. Quanta Services is up 33% this year and trades for 27 times forward earnings, versus its five-year average of around 16.5 times. Some, though, might be worth considering despite big gains. Daniel Skubiz, a portfolio manager at Ziegler Capital Management, points to MYR Group.
-BofA commodities strategists have a long-term price estimate of $80 a barrel for Brent crude, the international benchmark, which was recently trading for around $96 a barrel. WTI should follow a similar pattern—strategists and futures markets agree that oil prices won’t always be as high as they are now. Higher prices today than those expected in the future gives an advantage to those producers with the ability to drill or frack the most oil today, and those with the most productive near-term uses for their cash flow. In this sense Occidental Petroleum is worth considering. Occidental has been directing excess cash flow to pay down the $10B in 8% preferred stock it issued to Warren Buffett’s Berkshire Hathaway in 2019 to finance the purchase of Anadarko Petroleum. That’s an expensive source of financing—using today’s cash windfall to reduce it will benefit Occidental for years to come. At the same time, Berkshire has been buying up common shares of Occidental, and now owns 25% of the company.
Features:
-Given the frequency of government shutdowns in recent years, investors have largely shrugged them off as nonevents. Traditionally there has been a mild drag on economic growth for the duration of a shutdown, but growth then rebounds by a commensurate amount once Congress passes spending legislation and the government reopens. But the outlook is more worrisome this time around.
-Lawmakers in Washington are once more facing a standoff over spending legislation, leaving the government all but certain to shut down just after midnight on Sunday, Oct. 1. If that happens, an estimated 800,000 workers will be furloughed while hundreds of thousands of others will be working without pay. The vast network of government subcontractors would also be out of work, and unlike their federal counterparts, they wouldn’t receive back pay. Those lost hours of work, and the resulting hit to consumer spending, are estimated to cost the US economy $6B, according to calculations by Gregory Daco, chief economist with EY-Parthenon.
Europe:
-The athletic-gear sector rose after Nike’s earnings report. Nike’s European rivals Adidas and Puma climbed 7.1% and 7.8%, respectively. While analysts acknowledged Nike’s outlook offered some relief against a tough backdrop, they weren’t uniformly betting on the rally to continue. The performance was good enough to convince CFRA Research analyst Zachary Warring to raise his 12-month price target on the stock to $91 from $88 but keep a Hold rating on Nike. He said that at 25 times its forward earnings per share, it looks to be trading at a fair multiple. Future sales in North America were an issue for a number of analysts, with concerns about the resumption of payments on student loans. Nike, Urban Outfitters, and Foot Locker Are Downgraded.
Emerging Markets:
-No update this week
Commodities:
- Copper has dropped to $3.70 a pound, down 13% from a late January high of $4.27. The major driver of the decline is a slowdown in economies around the globe. Germany, for example, is in recession as high inflation and interest-rate increases by the European Central Bank have eaten into economic demand. China’s economic growth has slowed down, too. Copper prices are sensitive to drops in demand from lower economic activity. Consider auto makers producing fewer cars that use copper-based metal products, and home builders using less copper piping. The key is that lower copper prices may indicate industry weakness, and portend lower economic activity and a global recession, at the most extreme possibility. The metal is often dubbed as “Dr. Copper” on Wall Street because demand for it gives a read on the health of the global economy.
Streetwise:
-Jack Hough offers seven picks with market values mostly under $10B, and a predicted stock upside mostly over 20%. Axos Financial a Las Vegas holding company for San Diego–based Axos Bank, which operates mostly online, with $19B in assets, touting competitive rates and low fees. Shares trade at 1.3 times tangible book. Brunswick made a name in billiard tables and bowling pins in the 19th century but today makes boats like Boston Whaler and Sea Ray, plus motors and other components. Everyone knows WD-40 WDFC. Growth is driven by pushing into emerging markets and up-selling customers to fancier lube. Profit margins are depressed by a jump in materials costs and some lost distribution following a significant price hike, but that it expects a rebound and plenty more long-term growth. Encore Wire makes, well, wires. And cables. Encore benefits from infrastructure construction, reshoring, electric-vehicle adoption, and power-grid upgrades. Trex turns sawdust and melted plastic grocery bags into pricey boards used to make decks that can last decades. Trex says its lumber alternatives appeal to environmentalists, and that industry market share in decking can double. Jack Henry & Associates sells software, payment processing, and other technology to 1,600 small to midsize banks.