Aberration in Clear Thinking by JP Morgan

by: Michael Shedlock posted on: June 08, 2008 | about stocks: DIA / JPM / QQQQ / SPY / WMT    
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on Friday morning, with unemployment jumping the most since 1986 (see May Jobs: Unemployment Skyrockets to 5.5%) I thought there was absolutely no way to put lipstick on this pig.


I was wrong. Check out this amazing call: Buy Stocks as Investors 'Misread' Jobs, JPMorgan Says.
The biggest rise in the unemployment rate since 1986 is an "aberration" and investors who sold equities today are "completely misreading" the outlook for economic growth, according to JPMorgan Chase & Co.

The Dow Jones Industrial Average fell as much as 412 points today after the Labor Department said the jobless rate increased by half a percentage point to 5.5 percent, the highest since October 2004, as an influx of students into the workforce drove the biggest jump in teenage unemployment since at least 1948.

"The surge in unemployment is probably an aberration," Thomas J. Lee, the New York-based chief U.S. equity strategist at JPMorgan, said in an interview. "It's not because there were fewer jobs, it's because there were more people looking for jobs. Stocks are completely misreading the situation."

Lee, 39, wrote in an e-mail that "stocks should be up" after the report, which also showed payrolls fell by 49,000 in May, a smaller decline than economists surveyed by Bloomberg News had forecast.

"Surges in unemployment happen at the end of the cycle," Lee said.
"Stocks Will Rally On The Report"

Anyone can get that kind of call wrong. Predicting day to day stuff is very fraught with error. Instead, I am calling Lee for thinking this is the "end of the cycle". In my opinion that is a horrendous call.

Consumers are 75% of the economy. They are tapped out, foreclosures are rising, banks and financial companies are laying off workers, airlines are laying of workers, and many real estate agents have have not made a sale for months.

Wal-Mart Capital Spending At Low End Of Estimate

Market_watch is reporting Wal-Mart sees growth both in U.S., overseas.
Chief Financial Financial Officer Tom Schoewe also said it's "highly likely" that Wal-Mart's capital spending this fiscal year will be at the low end of its previous estimate of $13.5 billion to $15.2 billion, helping the company generate free cash flow to put back to its business.
Today, service sector jobs came close to contracting. Only government jobs saved the day. Wal-Mart, Target, Home Depot, etc have all cut back on expansion plans. Wal-Mart has repeatedly scaled back plans even though it is in a relatively favorable position given consumer's desire to shop thriftier.

I wish Pollyannas like Lee would once come out and explain where these jobs are going to come from. Or even why they are going to come. The Shopping Center Economic Model Is History. How can Lee not see that?

Furthermore, banks are tightening credit because they have to. The FDIC is expecting a wave of bank failures. And then there is this not so trivial problem of $5 Trillion Hidden Off Bank Balance Sheets.

Those assets will come back on bank books, and when they do it is going to cause more shareholder dilution, and there will also be less lending. This was the biggest credit boom in history fueled by insane lending practices. A 30 year boom is not corrected in 6 months of pain.

5.5% is not going to mark the top in unemployment, and I doubt 6.5% does either. Housing is not going to bottom for years. There is no source of jobs, and without jobs exactly how are consumers going to keep spending and how are corporations going to make money?

Dow Weekly Chart



click on chart for sharper image

If that neckline breaks (and there is every fundamental reason to believe it will), we are looking at a potential decline to 10,000. The S&P could easily fall back to 1200. And there is no guarantee it stops there.

This was a once in a lifetime credit binge. To expect anything other than a once in a lifetime credit bust is being far too Pollyannaish. There was indeed an "aberration" today, an "aberration" in clear thinking by Thomas J. Lee, chief U.S. equity strategist at JPMorgan.
This article has 12 comments! Add yours below...
Michael Shedlock

Michael Shedlock

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This article has 12 comments:

  •  
    moonbat1775
    Jun 08 08:05 AM
    To complete the perfect storm are the huge global warming taxes on the horizon and new social spending to compensate for the damage done by that invention from hell called fractional reserve banking.

    Hopefully, by 2012, the public will be sick of business as usual and elect Ron Paul. He will take us moderately and prudently away from the brink.
  •  
    optionsgirl
    Jun 08 09:54 AM
    Good article, Mish Shedlock. You are like the canary in the coal mine! But what are you investing in? Precious metals?
  •  
    notsosmart
    Jun 08 10:25 AM
    My Website
    buy tuna.at least you can eat.
  •  
    icandoitdon
    Jun 08 01:44 PM
    this economy and this market needsa cleansing and i think they'll both get it for the reasons michael points out.

    jp morgan and all other invetment banks are in the business of selling optimism. they're useful only in rising markets and only because a rising tide lifts all boats.



  •  
    MonHo
    Jun 08 02:21 PM
    What a gloom and doom! DOW at 10,000! No way. I very much doubt it will go blow 11,500 at best.

    Analytically, we can justify anything. Even the the drug trials. As for me, it is my gut feeling.
  •  
    vaduz
    Jun 08 02:52 PM
    My Website
    i agree to this good article. lets go short and not long.
  •  
    Johnc
    Jun 08 09:19 PM
    I like the article and I think the issues raised will take us back to March lows (demonstrating that the last two months was a bear market rally). However, I think we should be looking to pick up long positions if the SPX can hold above March lows. While there is bad news a plenty, very little of it is new. It just takes a while for it to sink in. However, now that it is starting to sink in (and we'll see that process over the next few weeks), it will be time to swim against the crowd.

    I am talking my own book, of course, and hope that someone will be kind enough to lift my GLD at 100 (missed it last time around).
  •  
    kotika98
    Jun 09 04:19 AM
    JP Morgan analyst makes a valid point that the surge is due to the schooyear ending in May, with all those high-school graduates technically becoming "unemployed"... What do you say? The second point he makes is that the rises in unemployment come at the end of the cycle, which is absolutely true... last time sky came crashing down in 1990, the unemployment peaked long after economy was already growing. Well, this time we dont know if it has peaked, really, maybe it will continue rising to 8% in the next year or so, but personally i dont believe it possibly could.
  •  
    kotika98
    Jun 09 04:19 AM
    JP Morgan analyst makes a valid point that the surge is due to the schooyear ending in May, with all those high-school graduates technically becoming "unemployed"... What do you say? The second point he makes is that the rises in unemployment come at the end of the cycle, which is absolutely true... last time sky came crashing down in 1990, the unemployment peaked long after economy was already growing. Well, this time we dont know if it has peaked, really, maybe it will continue rising to 8% in the next year or so, but personally i dont believe it possibly could.
  •  
    punk_ash
    Jun 09 05:06 AM
    I shorted enough last year, but if you are shorting you are playing with fire. Can you imagine if even a single big bank reports that there will be some write ups of all the write downs that have been done, Dow could rally 1000 points that day alone. who cares about the economy, stocks are based on the earnings and corporations are in a great shape compared to 2000 and 1990. Time to go long, slowly that is, one piece at a time...
  •  
    User 207388
    Jun 09 11:37 AM
    I have now been through 3 recessions and now I'm experiencing #4. I just love those who act as if this is the worst. Its not even close to the early 80's nor the early 90's, but is worse than 2000.

    None of these recessions ended until there were serioius, not 20%, pricing corrections in housing. The key note has always been the vacation spots particularly in condos. When you can buy a 250,000.00 condo in Myrtle Beach for 125,000.00 we will see the beginning of commerce once again. Until then, the jury is out on how bad this can get.

    There are pockets where real estate building and sales are doing exceptionally well. I'm making 20 times more money than I ever have by moving 100 miles away from my home market. Its out there, you've just got to go find it.
  •  
    hownow
    Jun 09 01:34 PM

    Lee still has some catching up to do with Citigroup stalwarts

    tinyurl.com/55cxeg
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