JP Morgan reported their widely anticipated earnings Friday and the losses from the London Whale trading fiasco were huge. The firm had initially pegged the losses at $1 to 2 billion but the quarterly report showed the total has bulged to $5.8 billion. And according to the CFO there may be additional losses of $700 million to $1.7 billion. Naturally the stock surged Friday, up almost 6% on the day with most news reports attributing the gain to relief that the trading loss wasn’t even bigger. The rest of the market followed the lead of JP Morgan and ended higher on the day and marginally on the week.

Friday was also the day China released its most recent GDP figures. Growth came in at 7.6% for the 2nd quarter down from 8.1% in the 1st quater and the lowest since the beginning of 2009. The ETF for Chinese stocks, FXI, rose 1.5% on the day. The rise was widely attributed to the fact that growth didn’t fall as badly as feared and on expectations of more stimulus from the Chinese government in the face of such dismal growth figures. When 7.6% growth became dismal I’m not sure but that is what all the news articles I read called it.

Eurozone industrial production numbers were released last week and showed production rising by 0.6% in May. Germany, Italy and Spain showed respectable increases month to month while French production fell. Here in the US jobless claims reported Thursday fell to 350,000 the lowest since 2008 and much less than expected. Both the European production data and the US claims data were dismissed by the bears. In the case of Europe the data is from May and things are reckoned to have worsened since then. In the case of the US jobless claims, seasonal adjustment issues were blamed for artificially depressing the weekly figures.

JP Morgan’s large trading loss was widely expected and the stock had already fallen considerably since the bank first acknowledged its hedging activities had gone awry. The fears over the size of the loss were overblown though and the stock price had to adjust higher after the news. Additionally, with all the attention on the trading loss, everyone seemed to have forgotten that JP Morgan actually runs a banking business too and according to Friday’s report, that business is doing just fine thank you very much. The retail banking unit had earnings of $2.27 billion, up from $383 million last year, credit card delinquencies were down and mortgage fees more than doubled from last year. Also lost in the shuffle of the JP Morgan news was the report from Wells Fargo which also showed robust earnings on its banking business. Wells Fargo’s stock also had a good day Friday, up over 3%.

China’s growth numbers were also a case of not as bad as feared. There has been a steady drumbeat of doom about China’s economy over the last few months and while 7.6% growth is not 10% as some have come to expect, it is hard to characterize as the end of the world either. It will certainly have an effect on the resource economies that are dependent on Chinese demand but it isn’t like the Chinese economy is contracting. The effect on the US is harder to gauge but it probably isn’t coincidence that import prices dropped 2.7% in June. Call me crazy but I find it hard to characterize a sale on Chinese goods as a negative for the US economy. Falling prices are only a problem for economists who see all price declines through the lens of the deflationary 1930s. The rest of us are fine with paying less for the things we want and need.

The economic outlook for Europe and the US by Wall Street’s seers has turned very negative over the last few months and the two reports I mentioned above evinced similar reactions from both sides of the pond – disbelief. Obviously, one report doesn’t make a trend and I don’t want to overstate the impact of either, but it is at least interesting that good news is now being dismissed as anomalous. The production numbers from Europe certainly are old news but I don’t remember anyone in May even considering the possibility that production could be doing anything but falling off a cliff. Frankly the continued emphasis on Europe as a threat to the US economy mystifies me. Yes, I know, Spain’s unemployment rate is over 25% and that has to be bad, right? Well, I suppose so if you are a Spaniard, but before you go jumping off that ledge you might want to consider that Spain’s unemployment rate has been over 10% – and over 20% at times – since the late 80s – with the exception of the housing bubble in the last part of the last decade. And Italy? Again, with the exception of the late ’00s, over 8% since the late 80s with several periods of double digits. What’s that? You don’t remember the great worldwide depression of the 1990s triggered by high unemployment in Europe? Yeah, neither do I.

Here in the US, the good jobless claims numbers were also dismissed, even by the Labor Department that produced them. The seasonal problem with the numbers relates to the yearly practice by the auto companies of shutting down for a period in the summer to retool for the new model year. This year because of good demand and relatively low inventories, the shutdowns did not come at the expected time. Maybe the shutdowns will come later this year and if so, that means at some point soon we’ll see a big jump in claims to offset this drop. Or maybe with demand strong and inventories low, the auto companies will do their retooling on the fly this year and not shut down at all. I don’t know if they can even do that but it seems to me that strong demand and low inventories is a problem a lot of companies would like to have right now. It certainly isn’t bad news and shouldn’t be dismissed so easily.

Another thing you might want to consider when perusing the macro economic data is this little nugget unearthed by MSCI way back in 2010: GDP growth and real stock market returns are negatively correlated. While it seems logical to assume that GDP and returns would be correlated – and they are to some degree – there are a lot of reasons why that isn’t always true. The most obvious I think is that economic growth is to a large degree a function of innovation and that most often happens in small non public companies which isn’t reflected in public stock market returns. Another reason is that markets are discounting mechanisms and therefore today’s prices reflect future expectations regarding growth. In that every recession in history has been followed by an expansion, investors should probably concentrate their buying attention on economies that are performing poorly today.

Expectations regarding future global economic growth right now are pretty pessimistic. Wall Street strategists are more bearish now than they were during the dot com bust or the 2008 debacle with just a 50% allocation to stocks. The last time they recommended such a light weighting to stocks was in 1997. The years from 1997 to 2000 will be remembered for a lot of things but low stock market returns is not one of them. When the worst is feared, as it was with JP Morgan and China last week, and it isn’t realized, markets have to adjust. At some point – and I think we are rapidly approaching that point – global growth expectations will be proven too pessimistic and stock prices will have to adjust, maybe dramatically.

For information on Alhambra Investment Partners’ money management services and global portfolio approach to capital preservation, Joe Calhoun can be reached at: jyc3@4kb.d43.myftpupload.com or 786-249-3773.

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