The Day Ahead: So Unprepared, It's Scary

 | Nov 05, 2012 | 8:00 AM EST  | Comments
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After this past weekend -- one that, for me, was characterized by waiting in line at a gas station for three hours and having no sugar-free Red Bull available at the local stores -- pardon me if I sound on edge. This disgruntled market hasn't helped matters: Just as I dusted off my contrarian (bullish) cap for the first time in a while, the major indices chose to voice their disappointment. Yes, over the weekend there was as much negativity on the market and the jobs report as there was coverage of the recent Hulk Hogan scandal. So I want to shift these feelings of stress, anxiety and energy to you, the investor, as you try to make sense of life post-election. The problem I have is that, in my heart of hearts, I know the following is true.

● You probably have no list of stocks to buy or sell if President Obama wins.

● You probably have no list of stocks to buy or sell if Republican nominee Mitt Romney wins.

● You probably haven't read or listened to at least 20 third-quarter earnings calls, so as to prepare to jump into the action -- long or short -- post-election.

● All year you have heard the ins and outs of fiscal cliff, yet it's unlikely you've sat back and thought on a very deep level on how its slowly unfolding nature will impact investments in your portfolio.

● You are likely lacking in investment theses at your disposal from which to find new post-election ideas. (Quick: Will you buy or sell Transocean (RIG) if Obama wins? Exactly.)

How am I instinctively aware of this sad degree of preparation, you ask? Rather simple: I have human clients that ride or die with me; I talk to executives; and I troll the Internet to gauge investor sentiment and positioning to an extent that would make many qualified for the insane asylum. I have played the younger version of Bob Proctor, and considering I am Johnny Helpful, here is your final crash course of last-minute pre-election notes.

I don't want you to be unprepared, twiddling your thumbs, come Wednesday morning. It's going to be war in the markets; money that has been parked on the sidelines will be lured in to play in order to make year-end wagers. Eat or be eaten. Come correct, or take your ball and go home.

Statistics That Won't Go Away

No matter who wins the election, over the next three months we'll see minimal improvement on the below statistics. So investment selectivity is paramount -- do not buy garbage. I continue to imagine a fourth-quarter earnings season in which most U.S. and European companies see only modest sequential improvement in sales and profit, and initial 2013 outlooks that are only in line, or are below already-slashed estimates.

● In the U.S., jobs numbers are 4.3 million below the prior cycle peak, and I sense a permanent underclass has emerged that will serve as a perpetual wet blanket to consumer spending.

● The unemployment rate has only been below 8% twice in the past 44 months, and this continues to weigh on the minds of spending plans of businesses and consumers.

● According to The Economist, real median weekly earnings have fallen 5% since President Obama entered office. Federal Reserve policy is not fully transmitting outside of housing, and lower-paying jobs are coming in conjunction with rising product prices from 2010 through early 2012.

● Companies are sitting on $1.5 trillion in liquid assets, and that won't get dispensed until the fiscal cliff is resolved. (Note that a good bunch of these assets are domiciled overseas).

But, even as you keep the above in mind, here are three emerging investment themes.

Favor the companies doing more with less, and those with direct housing exposure.

Good examples here are Whirlpool (WHR) and carpet maker Mohawk (MHK). They're churning out new products and have higher price points, and they're enjoying moderating inflation. They've also streamlined manufacturing and production procedures.

Favor sector standouts that want to keep standing out.

Starbucks (SBUX) shares responded quite well to the company's latest earnings report. The earnings call was even more impressive, however, in terms of global plans for new store openings and remodeling; the ability to reignite U.S. sales at first signs of consumer-spending weakness; and the pace of fundamental change in Europe. (A shift to licensed stores is a positive.) Also, the ensuing 12 months stand to be deflationary, which will help bring own coffee-bean costs.

Favor consumer-product companies that are successfully passing on price increases, as inflation is subdued.

I think you could snag Clorox (CLX) at a slightly cheaper price, but the stock is going on my watch list. Although volumes were mixed in the quarter, another three months of pricing gains have caught my attention, given the sea of price competitiveness to drive meager volume gains in consumer products. This is encouraging to see as consumers continue to trade down -- companies had clearly needed get more price competitive in the third quarter. It's also a positive given that input inflation is not running rampant.

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