Two World-Shaking Events on the Horizon

Stocks have struggled in the first week of September as the investment world has held its collective breath over two stunning, incendiary, world-shaking events on the horizon:

— Apple’s launch of a new iPhone that might potentially, in a best case scenario, hopefully, allow it to catch up, at least partially, with mobile phone innovation that its Android and Windows competitors have already achieved.

— The initial public offering of Alibaba, a Beijing-based website that sells more stuff to Chinese consumers every day than Amazon.com and eBay combined, and is probably just as much secretly loathed by its customers but loved by analysts.

The concern by market participants have been something along the lines of, well, if these are the two best companies in the world right now, maybe we should just put all our funds to work in them and forget about companies like 3M (MMM), which just makes Post-It notes and industrial adhesives, abrasives, and auto sealants (just a partial listing of its products starting with “a”), and United Technologies (UTX), which just makes helicopters, jet engines and commercial air conditioning systems.

Should we forget about companies like United Technologies?

While analysts are pondering and pontificating on such mysteries of the universe, the market has stumbled around like a drunk sailor on leave in a crooked country with uneven streets. Utilities have been leading the way, giving the proceedings a very defensive feel.

One of the big problems for bulls, besides the looming Apple and Alibaba deals, is that mid-market retailers keep getting the stuffing knocked out of them. It’s almost as if that abundant job growth we were hearing about earlier this year has never materialized and people aren’t spending their money on cool clothing and toasters anymore.

Friday was a tough session for board-short makers and retailers, as an example, with Quiksilver (ZQK) down 25 percent on an unexpected second quarter loss and flat operating earnings on a 10 percent revenue shortfall, while Zumiez (ZUMZ) lost more than 8 percent on an analyst downgrade and pessimism about same-store sales growth.

Pretty gnarly, man. Put that together with the wipeout at higher-end home goods store Williams-Sonoma (WSM) last week after a profit warning, and it is beginning to look like the malls are open but nobody’s home.

Plus even Gap Stores (GPS) reported an unexpected 6 percent drop in comp store sales at its Gap brand outlets. The word from the retailer behind the Banana Republic and Old Navy brands, as well as many competitors, is that the retail environment is getting much more “promotional” — industry jargon that sounds good on the surface but actually means a lot of 40 percent-off sales, which torch profit margins.

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The anomaly of the bunch, and the undisputed leader in the consumer discretionary space at this point, is Nike (NKE), which is an affordable luxury not much different than Starbucks (SBUX).

For $199, or $225 if you don’t shop around, which is admittedly pricey, you can get the new Air Jordan XX9s this week for a whole lot less than the price of an image watch, car or suit. Nike is just killing it right now in the marketplace and its shares, even at a new high, are neither overvalued nor overbought. What a kick.

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Now, about that jobs report Friday. Let’s think about it now that the smoke has cleared.

Wall Street was disappointed with the August jobs report on Friday morning, which featured the weakest payroll gains of the year. Expectations were high heading into the report, considering that until that point we have seen the best pace of job creation since the 1990s. Over the last five months, the economy has added 243,000 jobs per month. Compare that to last month’s result of just 142,000.

Moreover, the unemployment rate dropped back to 6.1 percent from 6.2 percent. A drop like that would normally be good news. Yet it’s being driven by folks dropping out of the workforce. And that’s bad.

Digging deeper into the details of the report, however, two silver linings emerge.

Yes, the headline payroll gain is the smallest we’ve seen since January’s 113,000 result (which has since been revised to 144,000). But analysts are quick to look past the weak result since over the last few years, payroll gains have suffered an odd dip in August and September. According to Philippa Dunne at the Liscio Report, this is a result of a data collection problem in the education industry near the start of the school year. Basically, people don’t answer the census call correctly because they’re not around. This can happen; it’s not a joke.

As a result, I expect the number to be moved higher towards 180,000 when it’s all said and done; not awesome, but not a disaster either.

The second and more important takeaway is that the report contained more evidence of a tightening in the job market that may very well support higher wages in months to come. Which means more money to shop at Zumiez and buy Nikes.

The drop in the unemployment rate to date has been driven by the short-term unemployed finding work. What remains in the available “pool of labor,” as economists like to call job seekers, are those that have been out of work for a while. This is a less easily assimilated group of workers, since many have seen skills atrophy or were trained in industries that are no longer in demand. Yes, I’m looking at you, compact disc and DVD factory workers.

Currently, wage inflation for production and nonsupervisory employees is growing at a 2.5 percent annual rate. A 3 percent rate would be considered more normal. At the current pace, we should see that within the next nine months, according to Gluskin Sheff economist David Rosenberg.

If so, it’ll be great news for regular families and in turn, will support the economy through higher retail sales, increased home prices, and less reliance on debt.

This might be the right time to shut your ears on the siren calls of Apple and Alibaba, and instead act like the contrarian you need to be in your heart of hearts, and start gingerly loading up on Quicksilver, Zumiez, Williams Sonoma and Gap while they are out of favor.

Best wishes,

Jon Markman

P.S. Don’t miss out on Martin’s new Q&A video that addresses your questions! It was posted just yesterday, click here to view now! You will also be able to catch up on the urgent video briefings that he posted last week.