The week ahead

Only two things matter in this first week of the new year: China and jobs. And China, frankly, isn’t looking too good.

The market plunged at the open Monday on news that Chinese manufacturing was far worse than Wall Street expected. The Chinese purchasing managers’ index fell to 48.2 last month, vs. 48.6 in November, it’s 10th consecutive decline. When the index is below 50, the manufacturing sector is in recession.

The Chinese stock market took one look at the numbers and promptly plunged 7% before circuit breakers kicked in. Wall Street took a sober look at the Chinese market’s reaction and promptly panicked. The Dow Jones industrial average is down 318 points, or about 1.8%, as I write this.

China takes these things seriously: So seriously that Chinese CEOs are starting to mysteriously disappear. If I were a Chinese CEO today, I’d be hastily packing my bags.

The stalling Chinese economy will weigh heavily on the U.S. market, since so many U.S. companies have been counting on China for increased sales and growth. So today, the stock market will be digesting this news, and discounting stocks across the board.

fredgraphAfter that, Wall Street will spend the rest of the week fretting about jobs. And there are all sorts of indicators to watch in the run up to Friday’s jobs report. (Which, for the record, is expected to show 200,000 new jobs in December, vs. 211,000 in November.)

  • Tuesday is motor vehicle sales, which should show fairly robust growth in what was once the nation’s largest employers. Analysts are expecting fairly robust gains in December, thanks to low gas prices and the prospects of modest raises in 2016. Another factor: The average U.S. auto is more than 11 years old. Cars age better than they used to, but there’s a lot of pent-up demand for new cars.
  • Wednesday is the ADP Employment report, which is a pretty good predictor of how the Friday jobs report will turn out. The consensus on the report, which excludes government jobs, is for 190,000 new jobs in December.
  • Thursday is the volatile weekly unemployment claims report, has ticked up to the highest levels since July, when the numbers flirted with lows unseen since the Nixon administration. Another important report is the Challenger Job Cut Report, which measures mass layoffs. Many companies choose to lay off employees just in time for the holiday season, so it should be an interesting report.

 

Going on a bear hunt

Just as there’s something riveting about seeing a giant lizard stomp through a major metropolitan area — New York, Los Angeles, Tokyo — it’s also fascinating to watch the bears romp through the major market indexes.

Godzilla, of course.
Godzilla, of course.

An official bear market begins with a 20% loss. (A correction is a 10% to 20% loss, and an annoyance is anything below that). Right now, the S&P 500 isn’t even in correction territory. But as of yesterday, 115 stocks in the S&P 500, or 23%, were down at least 20% from their 52-week highs.

If you own one of these stocks, it’s a bit like watching your new car squashed like a tin can. But if you’re thinking of owning one of these stocks on a scratch-and-dent basis, some are pretty interesting.

As you can imagine, most of the stocks with big green footprints on their backs are energy companies, such as ExxonMobil, now selling at $77.42 a share, down from its 52-week high of $100.31. Dividend yield: 3.56%.

But ExxonMobil has actually held up pretty well. Apache Oil got squashed to $47.69 from $102.55. And perennially snakebit Chesapeake Energy was compacted to $8.21 from $27.24.

The price of all these stocks, of course, depends on the price of oil, which is now flirting with $43 a barrel. Until oil settles down, it’s pretty hard to argue for a bottom for energy stocks. (Those with long memories will recall that oil traded below $17 in 1998.) Rather than trying to time the bottom, it might be better to wait for a bit of an upswing.

But a few interesting stocks are showing up on bear market list, including:

  • Nucor, the generally admired steel maker, now at $45.29, down from its 52-week high of $58.56. Dividend yield: 3.2%. Part of the reason for the company’s tumble is that China’s appetite for steel is falling, and the economy hasn’t been growing as quickly as some would like. Nevertheless, the company is highly cost-efficient and has a 3.3% dividend, so you get paid — a bit — to wait for business to turn around.
  • Wal-Mart, down 21% from its 52-week high. China’s currency devaluation, announced today, would make some of Wal-Mart’s products cheaper, and low gas prices should translate into higher sales at the nation’s largest retailer.
  • Intel, down 24% from its most recent high. Semiconductor prices have been drifting down this year, while investors have been slamming semiconductor stocks with a hammer. Intel, at least, pays a 3.2% dividend. More aggressive investors might consider Micron, down, 49%.
  • Franklin Resources, the San Mateo-based mutual fund powerhouse. The complex is noted for its bond management, and the Puerto Rico default has been no help at all to the stock. Nevertheless, the company has strong international and domestic stock funds, and typically has a robust profit margin — all thanks to you, investors!

Bear in mind that combing through the new lows list is just the beginning of your research. There’s nearly always a compelling reason for a stock to fall, and it rarely has anything to do with radioactive lizards. But if you’re looking for some relative bargains among high-quality stocks, this might be a good place to start.