If we are now in recession, this is the most bizarre one in history. It is a recession where the first thing people do is rush out and buy a new car. That is what the sales figures for General Motors showed this morning, up an impressive 19.8% in September. The results were even better for Volkswagen (+36%) and Chrysler (+27%).
The data suggest that corporate managers start loading up on new inventories in this recession. That is what the Institute of Supply Management (ISM) suggests, with their index up from 50.6 to 51.5 last month. Managers also hire new people in this Frankenstein of a recession. Adding up the nonfarm payrolls for the past three months, there is a substantial gain in the newly hired by the private sector. This was further confirmed by the weekly jobless figures, which delivered a blockbuster decline of 37,000 to 391,000 in their latest report, a multi month low. Only the government is still taking the ax to employment, both at the federal and the local level.
Want to know what else our new recessionary consumers do? They buy diamonds. I was doing some early Christmas shopping at Tiffany’s (NYSE:TIF) over the weekend, and the sales person told me that they were running out of diamonds, especially the high end kind over two carats especially favored by the wealthy. Also, when I flew into the Netjets Center in San Francisco on the way back from Las Vegas, I had never seen it so crowded. I’m talking packed with Gulfstream V’s, not Cessna 152’s. Not only are the rich getting richer, they are doing so at an accelerating rate.
Could it be that the recession exists only in the stock market and other investable assets? If there is, so be it. That is the world in which I inhabit, and right now it is screaming not only recession, but Great Depression. Price is truth, and my world, price action trumps fundamentals every day of the week, as my recent performance has so copiously demonstrated.
Let me give you an alternative explanation here. A modest 2% GDP growth rate is forcing a permanent downshifting of price earnings multiples from its historic 10-22 range to a more subdued 8-16 range. Investors are happy to pay premiums for an outsized future, not the more subdued and austere one we are now facing.
That means we could see more downside before the bloodletting is over. If your assumption is that the S&P 500 delivers $100 a share in earnings in 2011, then an eight multiple takes us as low as 800 in the index on a spike down. Granted, this is an extreme view, but given the recent dismal price action, one that cannot be dismissed. Looking at the dire close today, 1,050 in the (SPX) seems to be a done deal, and perhaps $55 for the (NYSEARCA:IWM). Until then, I’ll be shopping for more diamonds.