The Day Ahead: Game On

 | Dec 07, 2012 | 8:00 AM EST
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"What everyone knows is not called wisdom." -- Wang Xi

Talk to me. What do you know at this point in time? Do you know a couple buzzwords on the fiscal cliff? Do you know the most recent comment from House Speaker John Boehner that moved the hands and books of the few remaining floor traders? Do you know all the cool stuff on what's apparently the single most important enterprise on Mother Earth -- a company more vital than every market ever created -- that company called Apple (AAPL)? What do you know for real? Is it this entire bunch of surface analysis that gets disregarded as soon as the next day's trading commences?

News flash: You'd better have an arsenal, or a playbook that contains the deeper thinking that is a requirement to kicking butt in any investing backdrop -- but especially the current one, which is full of potential pitfalls, but also opportunity. Since I am a cool customer, allow me to share what I know.

1. There are at least three relevant scenarios inherent to the November employment report.

2. The majority of market players have no clue of the definition of earnings power

3. In the bigger picture, you should learn to deal with subdued growth in the first half of 2013, regardless of whether the U.S. economy is hinting at surprising "resilience." The perma-bulls love this term, but I don't, as it creates unrealistic expectations of economic output and puts investors into a complacency trance on risks.

Today, we'll focus on what to know from the November employment report.

Scenario One: Jobs Miss Consensus by a Wide Margin

I think a sub-50,000 gain, the number folks are whispering about, is the worst-case scenario -- but I don't believe it will happen. At first, I thought that a wide jobs miss would equate to politicians joining hands to realize that their bickering is destroying the economy, since stocks would rally on the expectation of an imminent deal. But, upon further inspection, if the jobs number does score a large miss that gets pasted all over the weekend papers, it could be read differently. Namely, it could be interpreted as saying fiscal-cliff fears are permeating business-planning to a stronger degree than what's been captured in other macroeconomic reports, yet pols remain at a stalemate -- thus triggering stocks to go down the tubes.

Scenario Two: Jobs Report Muddle Dance

I cringe at the word "muddle" coming out of my mouth (#antijargon). But, that aside, let's say nonfarm payrolls grow in a range of 50,000 to 75,000 -- which is where I am at. Business conditions would be perceived as not fully capturing the effects of the cliff, and hope would spring that Sandy has been the culprit and the U.S. economy is hanging tough. Politicians would view the Federal Reserve as helping matters next week.

Ah, but do you see the problem here? It would mean subpar growth before the cliff, which could handoff to weakness in December macroeconomic reports -- and, of course, fourth quarter pre-earnings announcements. It would also mean the meandering of politicians, as well as weekend airwaves filled with posturing, the latter of which had subsided in the past couple of days.

After an initial pop in the markets, I envision if a "muddle report" (grr) is received we give back the gains into the close. The key thing to watch are the post-jobs-report comments by both sides of the aisle. "Muddle report," plus a mental breakthrough by the GOP, could be cause for legitimate optimism into a Fed meeting.

Scenario Three: Jobs Report Hulk-Hogan Strong

In a normal world, headline growth above 100,000 is usually cheered. However, we are most certainly not in a normal world. There would be two outcomes here. First, the economy would be seen as able enough to avert recession in the first quarter of 2013. This would be considered a fundamental positive by the markets. Unfortunately, optics of the report could very well strengthen the hand of the Democrats and have them play hardball on entitlement spending -- and then the market would freak out on a possible delay of a "fiscal cliff" deal. Stocks would then react negatively.

In case you didn't realize, scenario analysis is decisively skewed toward an unfavorable risk-reward scenario. There'll be no wandering from the bear forest for yours truly.

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