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VERSACE: Silver lining to economic dark clouds — Stock bargains

- - Thursday, May 3, 2012

ANALYSIS/OPINION:

Last week, I shared my view that April would be the first down month for the S&P 500 since last November, and as we saw that was indeed the case. The culprit was renewed concern over the European economy as the U.K. and Spain entered a double-dip recession.

This was underscored by the findings of the April JPMorgan Global Manufacturing Purchasing Managers' Index (PMI) which showed the Eurozone PMI at its lowest reading in almost three years, as operating conditions deteriorated across the big-five economies (Germany, France, Italy, Spain and the Netherlands) and Greece. Not to be left out, based on the final reading for the HSBC China Manufacturing PMI, a gauge of nationwide manufacturing activity, China continued to contract in April.

Turning the lens to our domestic economy over the past few weeks, a number of indicators for housing and manufacturing have reversed course suggesting a slowdown in the recovery. This appears to have spread to job growth as April reports from Intuit and ADP suggest slower private-sector job growth in April than March.

More specifically, Intuit, a payroll-processing firm that offers insight into small-business job creation, found that only 40,000 jobs were created in April. Intuit also revised downward its March findings to 45,000 jobs from a previously reported 65,000 jobs. ADP's read on April job creation also point to a slowdown, as the firm found 119,000 private-sector jobs were added in April vs. 201,000 in March.

At the same time, the monthly job-cuts report from Challenger, Gray & Christmas Inc. showed an 11.2 percent increase in monthly job cuts during April vs. a year ago. As I tend to say, one data point does not make a trend, so let's step back and look at this job-cuts data on a year-to-date basis. So far this year, employers have announced 183,653 job cuts, 9.8 percent more than the 167,239 job cuts by this point in 2011.

A logical question would be "What does all of this mean for the unemployment rate?"

While the official Labor Department reading for April will be out Friday, Gallup recently shared the findings of its proprietary unemployment survey. U.S. unemployment, as measured by Gallup and using the government's historical April adjustment to Gallup's unadjusted number, yields a seasonally adjusted April estimate of 8.6 percent, up from 8.1 percent in March.

Heading into the Labor Department report Friday, the consensus expectation is nonfarm payrolls of 165,000 for the month and 8.2 percent for the April unemployment rate. As always for some perspective, this compares with the 120,000 nonfarm jobs added in March and that was well below the average of 246,000 nonfarm jobs added per month over the previous three months' period. While there is some question as to how job creation will fare in April vs. March, more than likely it will remain well below that of just a few months ago.

Taken together, these April employment reports coupled with housing and manufacturing data over the last few months point to the slowing nature of the domestic economic recovery. As we saw last week, the gross domestic product (GDP) for the first quarter of 2012 grew at 2.2 percent, down from 3.0 percent in the December 2011 quarter and below economists' expectations of 2.5 percent.

In my view, this will result in many investors — institutional and individual alike — revisiting the notion of "sell in May and go away." To me that equates to a great time to look for bargains, particularly for those companies that are well-positioned with my PowerTrend view of investing.

Chris Versace is editor of the PowerTrend Brief and PowerTrend Profits newsletters. Visit them at ChrisVersace.com, or follow him on Twitter @_chrisversace. At the time of publication, Mr. Versace had no positions in companies mentioned; however, positions can change.