For the financial markets, it’s becoming obvious that Europe presents a much bigger problem than the United States. In fact, we got a fairly encouraging data point on the U.S. economy Tuesday morning, when the Institute for Supply Management said its gauge of activity in the service sector ticked up to 53.3 in August, from 52.7 in July.
Economists were predicting a drop to 51. The dividing line between expansion and contraction is 50.
If the service sector (three-quarters of GDP) can keep its head above water, the nation has a fighting chance to avoid the double-dip recession Wall Street currently dreads.
On the other hand, the European situation has reached a delicate stage. If Italy can quickly enact a credible package of fiscal-reform measures (a vote by the Italian senate is slated for this evening), it would go a long way toward easing fears that the “Greek contagion” might be spreading.
However, there’s no time to lose. Deposits are already quietly slipping out of European banks. (The banks hold huge amounts of the continent’s sovereign debt.) Italy must act immediately, or investor confidence will erode further.
Last Friday, I suggested waiting for the S&P to dip to 1,150 before resuming your stock purchases. The index traded as low as 1,140 yesterday, so you could have done some nibbling. Given the unsettled news background, though, I suspect we’ll get more buying opportunities below 1150 in coming days and weeks. Take your time and put new money to work on market weakness only.
Here’s one name to buy if it drifts back down just a bit. I recommending selling BP (NYSE:BP) seven months before the Deepwater Horizon oil spill crushed the shares in April 2010. Today, most of BP’s liabilities from the incident are known and provided for. The company has also put new, more safety-conscious management in place.
At less than 6X this year’s estimated earnings, the stock is extremely cheap compared with other international oil firms (Exxon (NYSE:XOM) 8X, Chevron (NYSE:CVX) 7X). BP yields a generous 4.6%, too—and there’s no UK withholding tax on your quarterly dividends, making the shares suitable for your retirement account.
Buy BP at $36 or less. I’m targeting $50-$55 within a year.