9% Unemployment Coming?

*****In Monday’s Daily Profit, I wondered whether the rally that began Friday, October 10, would last. On Tuesday, after the Dow’s record 936 point jump, I told you I was still skeptical.
I think stocks just validated that skepticism.
All week, I’ve focused on two critical themes: earnings and unemployment. But I didn’t expect such a swift reaction to all the doom and gloom about recession and earnings from investors.
These things usually take time. And earnings have been pretty good so far. I figured we’d at least have to wait for a major corporation to come out and say business is horrible before the selling renewed in earnest.
But investors are in no mood to take any chances. And I can’t say I blame them.
Wednesday’s drop was the biggest percentage loss since the crash of ’87. And it appears to have been sparked by a retail sales report showing sales dropped 1.2% in September.
*****What we have here is a total lack of optimism. Usually, when one economist says we’re in a recession, another will say we’re not. One analyst might upgrade a company, and another might downgrade it.
Not these days.
Now the only dissenting opinion you’ll hear is simply more negative. If one economist says recession, the next will say depression.
Take that September retail sales report. Given what was going on in the stock market, that consumers weren’t feeling too perky shouldn’t come as a shock. But there is no one, not one analyst or talking head, willing to suggest that the consumer might bounce back for the holiday shopping season.
I wonder how they’ll react when the October retail sales report comes out. It’s virtually guaranteed to be worse than September’s.   
One of the signs that a bear market is ending is when stocks no longer sell-off on bad news. That’s usually understood to mean that whatever the bad news, it’s priced into stocks. We’re clearly no where near that point.
*****Like many of you, I was around for the bear market of 2001-2002. The summer of 2002 was unlike any sell-off I’d ever seen. I thought the 1,944 point drop on the Dow in 12 days of July 2002 was as bad as it could get.
Until now.
Back then, unemployment was one of the main catalysts. The unemployment rate hit 5.7% in November 2002. It’s past that now. And some are forecasting unemployment to hit 9%.
There’s no way to sugarcoat 9% employment. That would be disastrous. But it’s important to understand that investors are trying to price that possibility into stock prices right now.
It’s also important to understand that the attempts to price an uncertain economic future into stock prices can create opportunity.
One stock I’ve been using to illustrate such opportunity is Chesapeake Energy (NYSE:CHK). Chesapeake is one of the biggest natural gas suppliers in the U.S. It’s got 10 trillion cubic feet of verified reserves. That’s a real asset that will always have value.
The stock has fallen from a high of $74 to $16, where it currently trades. Chesapeake’s forward P/E currently stands at 4.3. That’s cheap, no doubt. And there’s a reason for it. Energy prices in general are down. And Chesapeake doesn’t have a ton of cash to fund operations, so it’s dependent on credit markets. Obviously, that’s not good. But on the other hand, it’s not likely Chesapeake has to rely on impossible-to-value assets to back any lending. It’s got solid assets that feed a necessary market. So while there are still risks with the stock, they’re not comparable to some of the risks in the financial sector.
*****Speaking of energy prices, you’ve probably noticed the drop in oil prices and the subsequent drop in prices at the pump. Here again, traders are trying to price in an uncertain economic future.
We know that demand for oil is falling as the global economy slows down. So cheaper gas is a bit of a double-edged sword. On the one hand, we can all use some relief from high gas prices. But the reason for the fall is the same as the reason for the fall in stock prices.
It might seem a little counter-intuitive to cheer for higher oil prices, but recall that during the bull market from 2004-2007, oil prices ran higher along with stocks.
The biggest concern now is that OPEC will attempt to cut production to drive prices higher when the global economy doesn’t support higher prices. In fact, OPEC has already cut production and it hasn’t affected prices. Inventories continue to rise in the U.S.
Venezuela’s Hugo Chavez is trying desperately to get OPECV to make further cuts. After all, his political power is dependent on his ability to give Venezuela’s petro-dollars to his people. Let’s hope cooler heads in OPEC realize that oil prices should reflect demand and not false production limits.