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Stormy Weather Ahead
New York: June 06, 2011
By John Stephenson

Markets stumbled badly this week while Treasuries rallied as investors grew concerned about the slowing U.S. economy, a sovereign debt blow-up in Europe and the lack of growth in Japan . The latest broadside to hit the markets was U.S. payroll data, showing the slowest path of growth in the last eight months, a disappointing slowdown. The jobless rate also unexpectedly climbed to 9.1 percent in May, the highest level this year. Stocks fell on concern that a weak job market might hurt consumer confidence, whose spending makes up 70 percent of the economy.

As recently as a few weeks ago, economists were predicting that the non-farm payroll report would show solid employment gains. Some economists had called for more than 300,000 new jobs in May, a monthly total only recorded twice since the beginning of 2006. Most had settled on a more likely reading of 170,000 new jobs in May, a growth rate that's fast enough to keep ahead of increases in the working population from new graduates and immigration. But Friday's release of a paltry 54,000 new jobs helped usher in a pall over markets.

Many believe that a significant portion of American unemployment is now chronic. Evidence suggests that many unemployed workers are unqualified for the available jobs and the collapse in house prices is keeping workers from moving to take jobs elsewhere.

The stock market's mood only darkened during the past week after Moody's Investor Service, a rating agency, said it would put the U.S. government's AAA credit rating under review for a possible downgrade should lawmakers fail to raise the country's debt ceiling.

Japan 's economy has been wobbled by a tsunami and the fallout from Tokyo Electric Power Co's crippled Fukushima Dai-Ichi nuclear power plant. The natural disaster killed thousands and shuttered auto and manufacturing concerns across the country. And while a massive reconstruction effort may help spur an economic recovery, the economic data dribbling out of the world's third-largest economy wasn't particularly encouraging.

Also weighing on the market were the ongoing sovereign debt problems in Europe . Both the government and the banks of Greece are feeling the wrath of markets as they have struggled with depleting deposits and increases in non-performing loans. With Greece 's debt likely to mushroom to 157 percent of the gross domestic product in 2011 and insufficient tax revenue to pay off its debt— Greece is up against a wall. For some, an outright default of Greek debt is not only possible, but likely.

But for now, an immediate Greek sovereign debt crisis has been averted as the International Monetary Fund and the European Union officials have agreed to an enhanced Greek bailout package to avert the country's slide to default. Greece already had signed on to a €110-billion (USD$155 billion) bailout in May, but the country needed to secure another €65-billion to avoid defaulting on its debt.

The news from the global manufacturing sector was equally bleak, with purchasing managers' indices from China to the U.S. falling in May, further reinforcing the view that the world's industrial economy is slowing. While Japan 's slump may prove to be a temporary setback, Europe and America 's efforts to rein in budget gaps could slow future growth more noticeably. Add to that India 's and China 's efforts to curb inflation by restricting credit growth and optimism for a quick snap back in global industrial activity begins to fade.

With the economic forecast calling for stormy weather in the months ahead, investors should high-grade their investment portfolios by exiting the shares of small undercapitalized resource companies. In troubled times, stable dividend paying stocks should become the mainstay of investors' portfolios as they pay investors to wait for the storm to pass.

For my money, I like the stocks of electric and gas utilities, pipelines, telecommunications companies and regional banks, all of which offer solid dividends with the potential for capital appreciation. Pipeline and utility companies often are granted monopoly service territories and, in exchange, their rates are set by a public utility commission. And while the public utility commission will limit the upside that utilities can charge their customers, the regulated structure caps all of their downside. As an investor, you will benefit from holding solid dividend paying stocks such as these, regardless of whether or not the economy goes up, down or sideways.

StephensonFiles is a division of Stephenson & Company Inc. an investment research and asset management firm which publishes research reports and commentary from time to time on securities and trends in the marketplace. The opinions and information contained herein are based upon sources which we believe to be reliable, but Stephenson & Company makes no representation as to their timeliness, accuracy or completeness. Mr. Stephenson writes a regular commentary on the markets and individual securities and the opinions expressed in this commentary are his own. This report is not an offer to sell or a solicitation of an offer to buy any security. Nothing in this article constitutes individual investment, legal or tax advice. Investments involve risk and an investor may incur profits and losses. We, our affiliates, and any officer, director or stockholder or any member of their families may have a position in and may from time to time purchase or sell any securities discussed in our articles. At the time of writing this article, Mr. Stephenson may or may not have had an investment position in the securities mentioned in this article
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