The Day Ahead: Brace for the Jobs Report

 | Jul 01, 2013 | 8:00 AM EDT
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Happy Monday. I hope the weekend was chock full of positive energy after one heck of a week for trading. (Not investing -- who does that anymore?)

We all know folks will again be on edge this week, and I can't blame anyone for feeling that way. We are seeing #FedWords impact stock prices to a robust degree, most recently in that crazy Friday selloff. Within the books enshrined in the "Investing 101 Hall of Fame," there are simply no chapters titled "How to Analyze the Federal Reserve," so we are all making up strategy on the fly.

Nevertheless, as we head into the June jobs report Friday, I want to outline the most plausible scenarios. Keep in mind that the consensus is calling for a headline of 170,000 new positions.

1. Headline in line with estimates, upward revisions to prior months, lower unemployment: A rational investor should be rooting for a strong economy. However, if you are long stocks, this outcome would be the worst possible option, as it would support Bernanke's June 19 comments on potential "tapering" of quantitative easing. It would also discredit words from Fed officials last week, which had soothed upset markets. The scary thing is, we have no clue if this employment growth is self-sustaining as the Fed continues to pump its $3 trillion balance sheet with assets.

In this scenario, among the winners would be consumer discretionary names -- companies boasting low levels of debt -- as they would benefit from better consumption trends, and we'd have new assurance that the latest lofty consumer-confidence figures are not toppy. Another beneficiary would be the financial sector, which outperformed a good percentage of groups a week ago.

Among the losers, meanwhile, would be industrials. After all, these companies are leveraged to emerging markets, and their debt rolls over at higher rates. Also on the losing side would be utilities, which show high debt levels -- and whose slow growth would now be accentuated in investors' eyes.

2. Headline in line with consensus, upward revisions to prior months: This would point to a stronger-than-expected economy, and an expectation that June will probably be revised higher -- so the Fed would likely be clear to taper QE.

3. Headline below consensus, modest upward revisions: This one would be tricky, but I think stocks would rise on the idea that mortgage-rate creep had begun to hit the economy in June. If the Fed doesn't stay the course with QE, it will risk stamping out "green shoots."

Quick Hit: Kohl's

Turning to individual stocks very briefly, you might want to rock some research on Kohl's (KSS). Although I have not liked the company for a long time, I did notice inexplicably long, Black Friday-type lines of customers in a couple of stores I checked this past weekend. As I watched those American dollars being spent on Chinese-made goods, I considered the following.

1. Parents may be stocking up on back-to-school styles at July 4 promotional prices. If this is the case, retail comparable-store sales could be subpar in August and September.

2. Are J.C. Penney's (JCP) newly reinstalled promotions losing in a renewed battle with Kohl's? (Note: My firm, Belus Capital Advisors, launched coverage of J.C. Penney with a buy rating on June 24. The stock has risen 9.48% since that time.)

3. Heads of household may be buying summer basics for the family to take on vacation. If that's the case, you may want to dig deeper into online vacation-travel plays such as Priceline (PCLN) and Expedia (EXPE). You may even want to take a look at the airlines, given the downtrend in jet fuel prices that began in February.

4. Perhaps baby boomers are stocking up in order to look good when they visiting homes down south and possibly shell out a down payment. Don't scoff -- many boomer clients of mine have begun to set a two-to-three-year plan to move to states with lower costs of living and, of course, with a warmer climate.



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