Snap up this US share while the markets aren't watching
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Associate Editor
David Stevenson Aug 09, 2010
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The end of last week saw the usual first Friday of the month US market freak out.
That's the day when the US Labor Department publishes its latest 'non-farm payrolls' number. This shows how many jobs have been created, or lost, in America's economy.
It's a vital number. Investors watch it to gauge how fast America is, or isn't, growing. So news that 131,000 jobs were lost in July - twice as many as expected by analysts - made traders very jittery. The Dow dropped 1% in minutes, though much of the loss was later recouped. London stocks also fell.
But although the market seems at times obsessed with non-farm payrolls, there's a better economic growth guide out there. And while many investors are nervous about the US, right now one US stock offers a great opportunity...
Where America goes, we in Britain normally follow. But figuring out where the US economy is heading next is tough. That's because the country churns out an avalanche of economic stats every month. It can be very confusing. That's why the market likes to focus on what it sees as the key indicators. Monthly non-farm payrolls typically get the top billing.
The thinking is that if the US is growing jobs, everything else from consumer spending to house prices to company profits will soon be hunky dory too.
Pity then that the latest number was grim. Not only were half as many US jobs created as forecast, the previous number was revised down by 100,000. So America's total employment level is over 150,000 lower than expected just recently. The jobless rate is at a historically high 9.5%.
A 'better' key warning indicator is flashing red
But we weren't hugely surprised. That's because we've been keeping a close eye on another key employment measure. And we reckon this is a much better guide to what's really happening in the US economy. It's been flashing trouble for some time.
This warning indicator is called initial jobless claims. It shows how many Americans have begun claiming dole for the first time. Specifically we watch the four-week average, which smoothes out weekly volatility.
You can read about this here: Why the latest US jobless data should worry investors, so I'll not repeat all the details now. On the chart below you can start to see the problem.
The month-on-month change in non-farm payrolls is in red. It's now at 135,000, having plunged, in the depths of recession, to 800,000 jobs being lost. It then picked up to a 400,000 jobs gain earlier this year.
We've then compared this with the four-week moving average of those initial jobless claims - the blue line. But note we've inverted the latter. In other words, when the recession was at its worse (the big dip on the right side of the graph), new weekly claims reached nearly 650,000. They're now at about 458,000.
Source: Bloomberg
Here's the key point. The non-farm payroll numbers, the market's main focus, have been jumping around all over the place. But initial jobless claims started moving sideways, to slightly up again, from the start of this year. So it was already becoming clear back then that job creation and real economic momentum were going nowhere fast.
(In fact we've been digging around for other similar early warning economic and stock market indicators on both sides of the Atlantic. And we'll be posting these regularly on the website very soon).
Other signs of trouble for the US economy
But back to the US economy. There's plenty more bad news around on the job front when you plough through the small print. David Rosenberg at Glusken Sheff has been doing just that.
"It's imperative", he says "to keep a close eye on the household survey" (i.e. domestic jobs). "Employment here contracted by 159,000 in July after sliding in May and June. Historically the odds of three whiffs in a row without the economy either being in a recession or quickly heading into one are 50-1".
That couldn't be much clearer. For America, the chances of a double dip are very high - and growing. And the market is now cottoning on.
"To sum it all up", Rosenberg continues, "the data doesn't tell you a lot right now that's very good. It certainly doesn't give anyone a green light for [holding] cyclical stocks any more than in December 2007". And we all remember how everything went pear shaped after that.
Our conclusion is that overall, sticking with defensive shares makes as much sense as ever.
The US share to snap up now
But Rosenberg also spotlights the Fed's 'Beige Book', which details economic activity by region and industry. It's another good guide to what's really been going on. Again, there's not much to write home about overall. But there are one or two chinks of light. Technology spending is improving. Not on the back of job growth, but due to strong PC demand. And one firm that's well placed to cash in is the world's biggest chipmaker Intel (US: INTC).
While the world and his wife have been worrying about those non-farm numbers, Intel has just done a deal with the US Federal Trade Commission. The full details are too lengthy to cover fully here, but the bottom line is that Intel has agreed not to use its industry dominance to get an unfair advantage over competitors.
That may not sound great, but Intel's shares have been pulled back 15% by the uncertainty over the last four months. This deal takes this away - indeed, the ruling "seems benign and a long-term positive", says Brendan Furlong at Miller Tabak.
Sure, Intel may now grow slightly slower than before. But on a current year p/e of just 10 and a 3% prospective yield, and plenty of net cash on the balance sheet, that's surely firmly baked into the price.
Admittedly there aren't too many shares in the States I'd want to hold right now. But Intel would certainly be on my buy list.
Our recommended article for today
The economic recovery has run out of steam and the West is heading for a double-dip recession. Unfortunately, the East isn't in much better shape. Here, John Stepek explains what to buy to make sure you don't get burnt.
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