Steady As She Goes

“He that won’t be counsell’d, can’t be help’d.” – Benjamin Franklin (ed.), Poor Richard’s Almanack

Was it really a case of the “Dimon Bottom?” Such is an idea that has been put forth on CNBC and other media outlets, the premise being that JP Morgan (JPM) CEO Jamie Dimon’s big stock purchase ($22.6 mm) of his own company’s stock two weeks ago changed the mindset of the market. Instead of being scared of every shadow, perhaps traders are now thinking that things aren’t so bad. $23 million isn’t chump change, after all, and one would think that Dimon, widely considered to be one of the most intelligent bankers around and probably the most hands-on, would know if something big was brewing in banking (though it ought to be noted that he did miss his own bank’s “London Whale” fiasco).

It was a nice gesture by Dimon, and I’m sure he must have some good reasons for comfort with the books of the bank he runs. However, you might do well to keep in mind a few observations, the first being that CEOs are much better market-timers when it comes to selling stock than they are when it comes to buying. Knowing that your books are in good shape is one thing, knowing where the market is going to be in a year is quite something else, as no less a luminary than Warren Buffett recently remarked.

Another point I would stress is that the impending recession and current bear market isn’t going to be like the last one. There are always commonalities, to be sure, but there are always major differences as well. As the looming recession runs its course, there will surely be some problems in credit-land, as there always are, and some institutions will get into trouble. As bad market weather develops, fixed-income markets will do their usual imitation of an ostrich. But U.S. banks are far less extended than they were in 2007, have much better capital cushions and simply aren’t going to be the epicenter of the crisis this time. No doubt some can and will suffer from banking problems from abroad, e.g. China and the EU, just as EU banks paid a heavy price for the U.S. credit meltdown. If some big enough foreign banks blow up, then all the banks will pay a price. But the U.S. is most unlikely to be at the center of the storm.

Dimon may end up wishing he had bought stock a little later, but he’s certainly rich enough to ride out a trip back to $40 or so (even less) in the price of his stock (currently in the mid-50s), then wait for it to come back. Those of you who are near retirement may have an entirely different perspective, and rightly so.

The rally last week is part of a bear-market rally that could still have some legs. Some of the economic news has been widely misinterpreted – very typical of the early stages of down periods – and last week’s reports on durable goods and GDP were right in that mode (see below). A few weeks ago I was writing nearly every week about the market being oversold, now we are out of that region. The S&P 500 finished last week by hanging onto the widely-anticipated test of the 1950 level, and there is some hope of recovering to the region of 2000, where the 150-day and 200-day averages lurk. A market-friendly employment report (good, but not too good), a dovish-sounding Fed meeting next month (the next statement is due March 16th), and a little earnings amnesia just might extend the upside trade.

But that is all it would be, an upside trade, and I am growing a little concerned at the growing number of voices who feel a continuing rebound is a done deal. Certainty about price movements invites trouble on Wall Street. Should the upside come to pass, however (it’s not as if it’s far-fetched), expect many loud voices proclaiming that the correction was all a tempest in a teapot, that the data was somehow misguided and all is about to be well for some time to come.

Don’t believe it. A good rebound will provide a nice opportunity to ease your way out of equity positions and build up a nice pot of cash to weather the impending storm. Don’t miss out on the chance, because the business cycle is nearly over – parts of it already are – and it won’t be much longer before the market has to face the music. My guess is the worst of it is still a couple of quarters away, but when it comes to bear markets, it’s better to exit a little early than to exit a little late.

The Economic Beat

The week started off quietly, with the first half mainly housing news. The existing home sales rate of 5.47mm was virtually the same as the previous month’s 5.45mm rate, though the consensus had been for something slightly less. The median price fell somewhat in the report, possibly a mix issue as the Case-Shiller report released earlier showed no change in the year-on-year rate of increase of +5.7%, though the price report was for December and the sales release was for January. Ditto for the new-home sales report, which showed the annual rate easing back to 494K (seasonally adjusted) from 544K in December. The actual trailing-twelve-month (TTM) rate has been in a narrow range of 490K-500K since July, so there was no real change in a sales rate that seems to be quite stable for now.

The durable goods report is going to be erroneously cited as a great report for some time. Take advantage of this. Seasonal adjustments resulted in a rousing 4.9% gain for January, and many have been cheerfully pointing to the “rebound” in business cap-ex spending of 3.9%.

It’s an illusion, generated by January spending declining less steeply from December than it did a year ago. The smaller decline results in the seasonally adjusted (SA) “gain,” but know this: business cap-ex spending was down 4.6% from January 2015, using unadjusted data. That’s a lot worse than the year-ago performance, when it was only down 1.1% from January 2014. The month was also the thirteenth consecutive one of negative year-on-year comparisons. The TTM total for the category is now off 4.1% from a year ago, the worst such reading since June 2010.

It’s going to take a while for the hard data to work its way into GDP, which was revised back up to a 1% run rate (SA) for the fourth quarter, versus the original print of +0.7% and expectations for a downward revision to +0.4%. The market wasn’t too cheered by the news, though, as analysts were quick to point out that the revision (a small amount of dollars, really, that gets boosted heavily by annualization) was on the back of inventory accumulation. That will probably weigh on the first quarter’s output. Going into the quarter, the inventory-to-sales ratios were at very high levels, so I’m expecting more trouble ahead from this sector.

There were signs of that trouble in some manufacturing surveys, as both Kansas City (-12) and Richmond (-4) had poor showings for their respective Fed districts. The Markit “flash” national purchasing index also declined to 51, and while it isn’t very widely followed, the direction is something to think about.

Personal income and spending seemed alright in January, with both up about 0.5%. Like employment, though, income and spending are lagging indicators. The market paid more attention to the result of the Fed’s preferred inflation gauge, “core PCE,” a gauge that excludes food and energy and focuses on what the central bank considers to be essential spending inflation. It rose to 1.7%, a big jump from last month’s 1.4%. I don’t consider the economy to be anywhere near the verge of inflation trouble, but the Fed’s target is 2%. Some traders are worried that further increases will add conviction to central bank thinking about rate increases.

Such thinking won’t get any conviction from looking at global trade. The exports of goods fell faster than imports in January, a weight on first-quarter GDP. Services will be added next week with the release of the full report on Friday.

The highlight of next week is of course the jobs report on Friday. Consensus is for something in the 190K-200K range, though that may shift a bit after Wednesday’s ADP report. Weekly jobless claims haven’t signaled any real trouble.

The week will lead off with the Chicago PMI, a report that has been fairly erratic for about a year now. It’ll be accompanied on the tape by the last housing report for the month, pending home sales, and followed by another regional manufacturing report from the Dallas Fed. The two national purchasing surveys follow with the ISM manufacturing result on Tuesday and non-manufacturing on Thursday. Factory orders round out the industrial sector on Thursday.

We’ll also see construction spending on Tuesday, a report where one should heed revisions more than the current number. The Beige Book is on Wednesday, and fourth-quarter productivity gets an update on Thursday. Monthly car sales data for January will be announced throughout the week.