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Friday, June 06, 2008 5:51 PM

Aberration In Clear Thinking By JPMorgan

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This 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.

Mike "Mish" Shedlock
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