Let’s take a look at some major headlines. Topics include OPEC’s production cut, the recent jobs and consumer sentiment reports, and Altria’s investment in a marijuana company.
By Kris Rosemann
OPEC and its allies have reportedly agreed to cut crude oil (USO) production by 1.2 million barrels per day from October production levels as the baseline. The agreement will last for six months and will be reviewed once again in April. OPEC member nations, with the exception of Iran, Libya, and Venezuela, will lower output by 800,000 barrels per day, while Russia and other allies will reduce production by 400,000 barrels per day. The production cut agreement comes shortly after news broke that the US became a net exporter of oil for the first time since the Department of Energy was formed in 1973 in the week ending November 30.
Higher oil prices may be playing a role in the volatility in US markets late this week, and the much anticipated jobs report released December 7, which may have garnered such attention due in part to the bright spotlight placed on the Fed and its commentary of late. The unemployment rate held steady at 3.7% in the month of November, but nonfarm payroll employment rose by 155,000, which came up short of expectations for 200,000 jobs added. The Fed will undoubtedly be taking the state of employment into consideration as it deliberates over the trajectory of future rate hikes and how to convey its conclusions to the general public.
Despite the number of jobs added, consumer sentiment remains strong, and the Index of Consumer Sentiment was unchanged at 97.5 in the December 7 report from the November report. The Sentiment Index has been above 90 for two years now (January 2017 to December 2018), and the University of Michigan noted that the last time the Sentiment Index was consistently above 90 as long as it has been for this go-round was from 1997-2000. The driver of this sentiment, however, is growing employment and wage growth, which explains why market observers are focused on jobs reports. If jobs and wages continue to grow, so too should spending, regardless of rising prices and interest rates.
Simulated newsletter portfolio idea Altria (MO) has pulled the trigger on breaking into the marijuana market with an agreement to take a 45% stake in Cronos Group (CRON), a leading global cannabinoid company based in Toronto. The deal is valued at ~$1.8 billion and will include a warrant to acquire additional ownership of up to 55% in full in addition to the right to nominate four directors to Cronos’ board. It also raises an interesting question as to whether some sort of collaboration may ultimately be in the works should Altria continue its reported pursuit of privately-held e-cigarette maker Juul.
The agreement will allow Altria to take part in the emerging cannabis sector and creates a significant growth opportunity in an adjacent business that should be complementary to its core tobacco business, which has been suffering from volume declines for some time now as the number of smokers in the US recently hit a record low. Such a deal was viewed as inevitable by many and appears to be a natural extension of the tobacco business as the legalization of marijuana for recreational use continues to gain steam across the US with Michigan the most recent state to approve such use. Cronos should benefit materially from Altria’s scale and expertise in areas such as intellectual property development, regulatory science, government affairs, compliance, and brand management. We are of the opinion that the marijuana market will continue to be shaped in a meaningful way by inevitable regulatory hurdles, and growth may very well not be unfettered in that regard.
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Kris Rosemann does not own shares in any of the securities mentioned above. Some of the companies written about in this article may be included in Valuentum’s simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.