The Day Ahead: Getting in Gear for the Back-Half

 | Jun 10, 2013 | 8:00 AM EDT  | Comments
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There is no value in discussing the May employment number, and that is the stone-cold truth. At this point, all I can hope is that investors have put in critical thought over the weekend and come to an educated set of conclusions that they'll use in tailoring their portfolios. Here are a few of my own conclusions.

First, ideally the labor-force participation rate should grow in tandem with jobs. That is presently not the case, so don't get swept into the notion that 2014 will be ripe for profit-killing higher interest rates. The reality is that job seekers (and I see this firsthand in the horrifically mediocre resumes I receive) either lack the skill set to fill areas where employment is expanding, or they view open jobs as being beneath them. Ultimate read: When it comes to operating expenses leveraged to hiring decisions, it's unlikely we'll see a spike any time soon. In the meantime, this remains a benefit to companies' operating-profit margins.

Second, a moral victory of sorts is that we won't see any shift in the Fed's quantitative-easing policy via Federal Open Market Committee meetings. Instead, Fed members will probably dictate future policy through speeches -- so keep a schedule of those on hand.

Third, the first reduction in monthly bond buys will likely take place at the October FOMC meeting, given that the economy appears set to avoid an employment downdraft. As a result, for Fed members trying to establish themselves as frontrunners to succeed Chairman Bernanke, the Jackson Hole, Wyo., economic symposium will become fertile ground for a comment-bomb drop.

Those are the baseline opinions I have established and communicated to clients this weekend. But, this aside, I'm now looking to get positioned correctly for the back-half of the year. I do believe there are opportunities out there on the long side -- as well as disasters that nobody is seeing at the moment.

So, this week, I am putting myself through a rigorous exercise: talks and meetings with up to 15 companies in order to learn, learn, learn. I cannot share the list of firms because, hey, I know the ideas will be thieved. But I can send along a few of my preparatory questions. Keep these in mind when you're considering whether to ride a recent losing position or to maintain exposure to a name that's up 20% year-to-date, down from a 25% gain two weeks ago. Remember, keep your eyes on the back-half of the year.

Analytical Checklist

• What are three upgrade items going into new homes, given this intense price rise across many markets and community builds?

The goal: With mortgage rates now more volatile from week to week, I'm looking for plays that have less direct contact with those rates.

• For a post-bust homebuilder, at what mortgage rate could price appreciation and backlog growth begin to materially slow?

The goal: This is an attempt to trip up an executive on whether recent rate fluctuations have negatively impacted their second quarter.

• What are the average unit retail-price assumptions for the second half?

The goal: It's critical to source whether a retailer has been successful in raising prices this year with little to no impact on same-store sales. The tailwind of cost deflation, notably in cotton, will level off in the second half of the year.

Quickie Spotlight

I admit it: Back when I had to do so, I despised covering the uber-boring oilfield-service stocks. Yet I am still aware of what to look for in the sector, and I recently suggested a client rotate out of Enbridge (ENB) and into Baker Hughes (BHI).

Here's the boiled-down thesis, which you can use as a starting point for deeper analysis: Baker Hughes could get a ramp in earnings beyond the second quarter due to slightly more favorable pricing and better operating efficiencies within its business. The risks on this name include continued sluggish rig-count growth in the U.S. and startup expenses in certain international businesses.

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