Morning Word – The “R” Word

by Enis July 6, 2012 9:27 am • Commentary

Dan’s MIA until later this morning, picking his daughter up from summer camp.  Nice gesture from our resident TV star.

So payrolls surprisingly missed, as everyone ratcheted up their expectations after the strong ADP employment report.  This was the 4th straight miss relative to consensus estimates, only the 4th time that has happened in the past 10 years.  The previous occurrences were Jan 2008 to Apr 2009 (yes, it missed for 15 straight months, you would think the economists would have adjusted their estimates, incredible), June 2007 to Oct 2007, and May 2001 to Sept 2002.

The main takeaway for me is that payrolls consistently miss expectations either at the start of a recession (like the June 2007 to Oct 2007 and the first half of 2008 examples) or at the end of a recession when all the bad news becomes priced in (the 2002 and 2009 examples).  We are of course of the opinion that this recent run of misses is an example of the former.  You will likely be hearing the “R” word, Recession, much more in coming months.

In the meantime, the market’s level of complacency baffles me.  As earnings season begins in earnest next week, we’ll get a sense of what kind of expectations are priced into stocks.  Samsung reported a nice earnings beat last night, but the stock closed down 2% in Korean trading.  This “priced for perfection” theme is what I expect to see throughout earnings season in the U.S. as well.  And for those stocks that miss, look out below.

One last point about banks.  The European fear has always been one of financial contagion to the rest of the world.  Policymakers have a done a good job preventing that (though I’m not sure they didn’t just delay the day of reckoning).  But through their support for banks, policymakers have created a political punching bag.  The recent LIBOR scandal’s escalation shows that politicians are likely to become more aggressive in attacking banks.  My JPM short thesis is based on this increased scrutiny, and JPM had a breakdown from the $36 level yesterday.



It reports earnings next Friday, but the general march of news continues to be negative.  FERC is investigating JPM for electricity price fixing, and the LIBOR scandal could spread to them as well.  I continue to believe that JPM will make a new low in the coming months, as it no longer has the unconditional support of the decision-making elite.  Holding the Aug 36 puts and the Jul 31 puts for now.