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Economy is recovering and profits are rising

Tuesday, October 7th, 2014

Last Friday, we had a good jobs report released. Before I talk about the employment numbers, let me comment on the participation rate, which is down to lows not seen since the late 1970s.

Years ago, we knew that baby boomers would be retiring and that the labor force would shrink. Now that this is happening, some people want to say the recovery is not as strong and that the government is making up these numbers. The truth is there are jobs being created, people are retiring and some people just don’t want to work.

If you want to harp on a declining participation rate, complain about the current administration or say these numbers are false, that’s fine. I prefer to look at the numbers and say that more people are spending and that this has improved business profits.

So yes, the economy is getting better and profits are rising.

On to the numbers. For the first time since 2008 we see unemployment at 5.9 percent. The expectation was for unemployment to remain at 6.1 percent. However, two factors caused this: First, August nonfarm payrolls were revised and increased by 38,000 jobs; second, the estimate for September’s nonfarm payrolls was 215,000 but the number came in at 248,000. Also, a jump of 207,000 was seen in service-providing jobs.

I’m also hearing concern that wage growth is low; it was flat for September after a 0.3 percent rise in August. Come mid- to late 2015, you will start to hear talk about an increase in wages putting pressure on inflation.

As the unemployment rate falls, the number of skilled workers looking for a job also falls. When this happens, employers who need to find employees will have to hire them from other companies, and the only way to do that is by offering them more money to leave their current jobs.

When this begins to happen, you will then see wages increase and concerns of inflation will be talked about in the press.

In addition to a good jobs report, we have had oil prices tumble to lows not seen in a couple of years. This, too, will be beneficial to the economy in the fourth quarter and especially this holiday season.

However, if you are holding companies that have anything to do with oil, such as drilling, you have experienced a drop in price from 25 percent to 50 percent.

Crude oil has dropped only 15 to 20 percent. The reason for the drop is large inventories and production that keeps inventories high while demand has not reduced them.

Going forward, this will change as consumer sentiment changes and people become less concerned about saving money on gas and buy bigger cars and trucks, not worrying so much about the gas mileage or what they are spending at the pump since it will be less.

Many people don’t understand that gasoline for cars and trucks accounts only for 45 percent of the oil that we use.

The other 55 percent of oil consumption is used in such things as asphalt, fertilizer, feedstock, plastics and petrochemicals, along with many other uses. As the economy improves and consumer spending increases -- as seen in the recent consumer spending report -- more oil will be used for other products than just the consumption of gasoline.

Investors also have to remember that oil is a commodity and does fluctuate within a 15 to 20 percent range. When inventories are high oil prices will drop; when inventories decline, oil prices will increase along with the stocks of oil drillers and other companies related to the price of oil.

Do not panic about the large drop in your oil-related companies. In fact, see what percent of the portfolio is oil-related companies. If it is low, this would be a good time to add to your energy positions.

With that said, investors must also remain patient. Although this could turn around in three to four months it could take up to 12 months; but again; oil prices fluctuate and right now they are down, and this is when investors should be holding tight or buying more and not consider selling at the low levels.

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