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Tuesday, November 9, 2010 - 10:08
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Tuesday, November 9, 2010 - 10:08

My Shocking Prediction for 2011 -- and 2 Ways to Profit

Tuesday, November 9, 2010 - 10:08am

I don't want to bury the lead, so let me start with my prediction: the economy will add over 2 million jobs in the next 12 months.

But before we get to that, let's add some context.

To say that the job market is weak would be like saying the Saw horror movie franchise is a little gory. In fact, I'm not sure which has seen more bloodletting. Last month, The Los Angeles Times reported that 2.3 million California workers have been axed -- and that's just in the Golden State.

Nationwide, the unemployment rate has remained at elevated levels above 9.5% for 15 consecutive months, the longest such drought on record.

The last time we saw a "jobless recovery" of this magnitude was in the aftermath of September 11, 2001. According to Challenger, Gray & Christmas, more than 2.5 million jobs were lost in the 18 months following the terror attacks. At that point, it seemed as if the labor market would never get in gear.

But by January 2004, payrolls around the country were already expanding at a rate of 150,000 per month. And before long, the severe labor slump was over. We've seen this same scenario play out many times over the decades.

In May 1975, in the wake of a painful recession, unemployment climbed above 9%. But then looser monetary policy (the Fed Funds rate was slashed from 12.9% to 5.2%) brought 10 million jobs in the next three years. The same thing happened in December 1982, when unemployment peaked at 10.8% before President Reagan's tax cuts kicked in and the ensuing expansion created 10 million jobs by the end of 1985.

Interestingly, the same two catalysts that triggered those previous turnarounds will both soon be in place. In this case, money is nearly free and could get even cheaper thanks to the Fed's second round of Quantitative Easing, known as QE2. [For more, see our primer on QE2 at our sister site, InvestingAnswers.com] And I strongly suspect we'll see an extension of the Bush tax cuts in the next 60 days.

Boom and bust. Bust and boom. Even my kindergarten son could tell you what's coming next in the cycle.

Given the deteriorating balance sheets of state and local governments, I think the public sector will continue to shed jobs. [For more on that, read David Sterman's excellent analysis here.] But the private sector is a different story.

When I first began writing this article a few days ago, I was emboldened to see the ADP report showing 43,000 jobs created last month (double what economists were expecting). Now, Friday's official tally from the Labor Department revealed that the private sector actually added 159,000 positions in October -- while the figures from the prior two months were revised upward by 103,000.

Simply put, I think we've reached an inflection point. Intel's (Nasdaq: INTC) recently announced plan to spend $8 billion on new manufacturing facilities in Arizona and Oregon (which will employ up to 8,000 construction workers) could be a sign of things to come.

We still have a long road ahead to recoup the eight million jobs lost in the past two years, but it's a step in the right direction. And as we all know, the market is a forward-looking mechanism. So if you want to profit from a reversal, you need to act before concrete signs of improvement are blindingly obvious to everyone else.

If I'm right, and we do see sustained job growth of 200,000-plus each month by next summer, then there will be many beneficiaries, such as payroll processor Paychex (Nasdaq: PAYX) and Quest Diagnostics (NYSE: DGX), which handles drug screens for employment candidates.

But the two stocks below might have the most to gain.

1. Monster Worldwide (NYSE: MWW) -- Anyone who grew up in the digital age is probably familiar with the Monster brand. The firm's well-known website is a popular gathering place that connects job seekers with potential employers.

Just as eBay (Nasdaq: EBAY) brings buyers and sellers together, Monster appeals to job hunters because of the abundance of postings, and to recruiters because the network reaches a pool of 84 million potential candidates. The company's recent acquisition of Yahoo! HotJobs will only widen the firm's footprint.

Last quarter, Monster's bookings jumped +26% to $235 million. And management is expecting that rate to be maintained throughout 2011. That uptick in orders not only means stronger revenue on the horizon, but it's a clear signal that employers are ramping up hiring.

The stock has had a nice run lately, but would have to climb another +200% from here to reach its former highs near $60.

2. Robert Half International (NYSE: RHI) -- Robert Half is one of the world's largest staffing agencies and consulting firms. The firm helps fill vacancies in the accounting, finance and legal fields, billing clients for hours worked and then disbursing a portion of the proceeds to its workers -- pocketing the difference.

Last year, the company found jobs for 157,000 temp workers -- and that was in the teeth of a recession.

Whenever large companies sense an upturn (but don't want to pay the full salaries and benefits of new full-time positions), they often start by bringing in temporary help. And temp agencies have been growing briskly for months, adding 35,000 new workers in October.

This bullish leading indicator points to an improvement in the overall labor market, and Robert Half International will be one of the first to feel the winds change direction. Sales and profits plunged -34% and -85%, respectively, last year, but I suspect we'll see sharp improvements in the next few quarters.

Keep in mind, the last time we were on the cusp of a labor recovery, this stock surged +76% between April 2003 and January 2004.

Action to Take --> I see both stocks outpacing the S&P 500 next year. But don't wait too long -- as I stated earlier, I already see upbeat signs underneath the dreary headlines.

Moving into a beleaguered sector where many other investors are fleeing takes nerves of steel -- but bold predictions like this tend to reward investors the most.

[I've made 10 other predictions for 2011, which I just shared with my Market Advisor subscribers in the latest issue. To get access to all of my predictions, including how to profit, go here.]

Nathan Slaughter does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.