U.S. Economic Numbers: A Tale Of 2 Solitudes

 |  Includes: AGU, CF, DIA, GDX, GLD, NGD, RYN, UFS
by: Chris Damas

The U.S. Non-Farm Payrolls number for August released by the Bureau of Labor Statistics showed no net new jobs created for the month.

Market pundits had been expecting 75-100K. The July payrolls number was revised down from 117K to 85K and June from 46K back to 20K after originally being reported at 18,000.

Therefore, there was a net loss of 58,000 jobs in the United States since the June revised figure was released. A lot of the job loss was from government. Private non-farm payrolls edged up 17,000 in August, following a 156,000 gain in July and 75,000 increase in June.

Any way you slice it, August was a dismal result and the DJIA (NYSEARCA:DIA) bellwether extend yesterday’s 120 point loss, with futures pointed down 170 in pre-market trading. On Thursday, the market had opened to the upside and by 10am was up 100 points, hitting a post August collapse high of 11,715, buoyed by the widely-followed Institute for Supply Management Manufacturing Survey index which came in at 50.6.

10 of 18 manufacturing industries reported growth in August, in spite of the crisis over the US debt ceiling and possible default. The market breathed a sigh of relief that the ISM number was better than the 48.5 expectation and not less than 50, which would have signified economic contraction.

What are we to make of this apparently schizophrenic economic and stock market action? It’s simply a tale of two solitudes. Or as Charles Dickens wrote in his classic "A Tale of Two Cities"...

It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair.

The payrolls number, along with the recent plummeting value for US Consumer Confidence, take the economic and employment pulse of the average Joe/Jill on Main Street.

But broad U.S. manufacturing data points to apparent industrial health, weak Philidelphia and Richmond regional surveys aside. U.S. internationally focused corporations continue to thrive, benefiting from lower labor costs (because of the high unemployment discussed above), a lower U.S. dollar, and lower energy prices of late.

Think British multinational companies after the domestic economy faded during the 70’s. Resiliently selling abroad even as their own population is mired in misery..I argued over a year ago during the first act of the Euro credit crisis, that the top ten DJIA movers sell more than 50% of their goods and services outside of the United States (save for Boeing and its defense contracts).

It has been a long time since one could truthfully say, “What’s good for General Motors (NYSE:GM) is good for the nation”. Unless the nation happens to be China. We’ve been bearish on the consumer side of the US stock market before and during the August panic attack, (see BNN TV interview dated August 18).

Although U.S. consumer spending in July was buoyant (up 0.8% nominally), July numbers are now ancient history and it’s the August numbers that are going to determine market direction. The ISM sectors that showed growth in August included wood products, food and paper products.

We continue to buy companies we like when the market focuses on the lousy state of the U.S. consumer and worker (as in today’s numbers). We think it is more important to be following Indian and Chinese consumer demand than U.S. employment numbers.

Fertilizer and farm inputs such as Agrium (NYSE:AGU) and CF Industries (NYSE:CF), specialty cellulose maker Rayonier (NYSE:RYN) and paper/pulp producer Domtar (NYSE:UFS). We are trading these stocks, buying on weakness and selling on strength, but are generally long due to the cheap valuations and dividends forthcoming. Domtar and Rayonier go ex-dividend on September 13 and 14 respectively. Domtar and CF have a share buyback in place.

We are recent converts to the gold (NYSEARCA:GLD) parade. It appears undeniable that a tipping point has been reached in over-extended sovereign debt loads. We wrote about the certitude of a Greek default last year, and no merger of two banks is going to solve the Hellenic descent into debt Hades.

We like the iShares Global Gold ETF which owns Barrick (NYSE:ABX), Goldcorp (NYSE:GG), Newmont (NYSE:NEM) and other major producers. A similar but U.S. traded alternative would be the Market Vectors Gold Miners ETF (NYSEARCA:GDX). We have been buying New Gold (NYSEMKT:NGD) in the $13.70 US area for a more growth-oriented gold play.

On today’s terrible jobs number – about a decade ago I was siting in a McDonald's (NYSE:MCD) in downtown Toronto wolfing down my favorite (fries and McNugget's) and struck up a conversation with the fellow at the table beside me. Turns out he was an economist with the BLS and he gave me a rundown on how they gather the jobs numbers. Since then I have had a healthy suspicion as to their accuracy. The maximum statistical error on the payrolls number in any given month is + or – 100,000.

The market often overreacts to headline preliminary estimates that will be revised back towards the mean. The unemployment rate provided uses a different, more accurate methodology, and in August was unchanged at 9.1%. Therefore, the market may soon find some solace in early October as August jobs could easily be revised upwards again.

The recent rally off the August bottom, and now sharp downturn, reflect the varying insights into two different parts of the U.S. economy - anemic consumer spending (recent auto sales aside) punctuated by signs of continuing international demand for select US manufacturing goods and robust top DJIA mover earnings. The general market averages should continue to trade in a volatile range rather than rally strongly to new 2011 highs, as many bulls are arguing.

Disclaimer: The information above was disseminated to clients and subscribers of The BCMI Report and/or The BCMI Flash anywhere from 12-48 hours before appearing on Seeking Alpha.

Disclosure: I am long AGU, CF, NGD, RYN, UFS.