More Jobs Being Shed

Initial claims for unemployment insurance jumped to 516K from last week's 484K (revised up from 481K). This is the highest level of new claims since the spike right after 9/11.

The 4-week moving average of initial claims rose to 491K from 478K and has now exceeded the peak of the 2001 recession. It is also and is fast closing in on the peak of the 1991 recession.

The numbers were far worse than the consensus of economists had been looking for (479K). Continuing claims looked even worse rising by 65K to 3.897 million, the highest level since 1983. Typically these figures will peak at the very end of a recession.

At this point the National Bureau of Economic Research (NBER) has yet to declare that we have entered a recession. I am however, confident that the will soon, most likely dating the start to July, although a strong case could be made for last January as well. (The stimulus checks fed growth in the second quarter and could complicate that dating.)

I would also note that the effect of hurricane Ike has almost all dissipated from the weekly claims numbers, so this does not look to be transient.

In short, when the November jobs report comes out in early December I expect it to be much worse than the November report. I’m penciling in a loss of 300K jobs for the month (versus 240K in November). I frankly would not be shocked if the number is even worse than that, perhaps even as high as 350K. I suspect the economy will continue to lose jobs until at least July of next year.

People who get laid off in November do not tend to make jolly Santas. Even Wal-Mart Stores (WMT), which reported 10% EPS growth for the third quarter warned that fourth-quarter estimates were too high.

Wal-Mart is likely to gain a huge amount of market share this holiday season, so what does that say about all the firms that are going to lose market share. Best Buy (BBY) also warned, even though its biggest direct competitor, Circuit City (CCTYQ) has filed Chapter 11 and is likely to be liquidated rather than reorganized.

Traditionally, the day after Thanksgiving (Black Friday) is the busiest shopping day of the year. This year I suspect that one might be able to hear a pin drop in many malls.

Among the stocks that would top my list to stay away from in the retail area would be specialty stores like Hibbert Sports (HIBB). I would also avoid the department stores such as J.C. Penny (JCP), Macy’s (M), Saks (SKS) and Dillard’s (DDS).

If you feel you must have some retail exposure in your portfolio, I would stick to the supermarkets, think Kroger (KR) and Safeway (SWY), because people do have to eat. Furthermore, many Americans will be eating more at home and less in restaurants. (Avoid just about everything but McDonald's (MCD)).

People do not have to buy sweaters, jewelry or perfume. Make sure the holdings in your portfolio provide (make or sell) things or services that people NEED, instead of things people might WANT. Remember also that in hard economic times, people discover that many of their "needs" really are wants.

For example, people need to eat, so in addition to the supermarkets, consider names like Del Monte (DLM), Kraft (KFT) and Sara Lee (SLE). Toilet paper and diapers is still likely to be a need, so Kimberly Clark (KMB) would not be a bad pick. People will still need to clean, potentially making Unilever (UN) a stock worth considering.

Read the analyst report on DLM

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