In normal times, by which I mean before actions of the Federal Reserve became the only data point that mattered, the monthly ISM report was important because it was the first broad-based look at the most-recent month's data.

Now that the Fed's taper has begun - right about the time that the uncertainty of the impact of Obamacare implementation was at its peak, curiously enough - the ISM data seems to have taken on importance once again. I must say that I did not see that coming, but since guessing at the Fed's actions every six weeks and ignoring all intervening data was so all-fired boring, I suppose I am glad for it. Looking at economic data and trying to figure out what is happening in the economy is more like analysis and less like being on The People's Court trying to rule on a he-said, she-said case where the hes and shes are Federal Reserve officials. And that is welcome.

That being said, the January ISM report isn't one I would necessarily place at the head of the class of importance, mainly because it is January. Still, it was an interesting one with the Manufacturing PMI dropping 5.2 points, matching the steepest decline since October 2008. The New Orders subindex plunged to 51.2 versus 64.4 last month, and Employment and Production indices also declined significantly. It's clearly bad news, but I would be careful ascribing too much value to any January number - especially one based on a survey.

Also standing out in the report was the increase in the (non-seasonally adjusted) "Prices Paid" subcomponent, to 60.5. the jump was initially somewhat surprising to me because as the chart below - which I tweeted shortly after the number - seems to show, we have had a jump in Prices Paid that is not being driven by a concomitant jump in gasoline prices - and Prices Paid is predominantly driven by gasoline prices.

However, as I noted in that tweet, the Prices Paid index is measuring the rate of change of prices (the question posed to purchasing managers is whether prices are increasing faster, slower, or about the same as the month before), so just eyeballing it may not be enough. The chart below plots the 3-month change in gasoline prices versus the ISM Prices Paid subindex. What you can see is that the first chart is slightly deceiving. The change in gasoline prices has accelerated - back to zero after having been declining since February of 2013. And "unchanged" gasoline prices is roughly consistent with about 60 on the Prices Paid indicator. So, this isn't as much of a surprise as it looked like, initially.

Still, whether it was the data or because of continued concern about emerging markets (though the S&P fell nearly as far in percentage terms as did the EEM today, leaving open the question of which is following which), stocks didn't enter February with much cheer. But never fear, I am sure there is "cash on the sidelines" that will come charging to the rescue soon.

The past week has given a great illustration of one important difference between the price behavior of equities and commodities. That is that stocks are negatively skewed and positively kurtotic, while commodities are positively skewed and negatively kurtotic. That is to say, in layman's terms, that stocks tend to crash downward, while commodities more frequently crash upwards. This happens because what tends to drive severe movements in commodities is shortages, where the short-term supply curve becomes basically vertical so that any increase in demand pushes up prices sharply. Exhibit one is Natural Gas (see chart, source Bloomberg), where inventories were above normal as recently as October and now are the lowest in a decade.

Exhibit two is Coffee (see chart, source Bloomberg), where drought in Brazil has lifted coffee prices 8-9% today and 35% from the five-year lows set in November. There's an awful lot of coffee in Brazil, I understand, but there may be less this year.

In my view, stocks remain very expensive even after this quick 5.75% loss (-2.3% today). Obviously, less so! Commodities have outperformed stocks by basically remaining unchanged, but remain very cheap. Bonds have rallied, as money has shifted from stocks to bonds. This is fine, except that 10-year notes at 2.57% with median inflation at 2.1% and rising is not a position to own, only to rent. The question is, when investors decide that it's time to take their profits in bonds, do they go to cash, back to equities, or to commodities? If you are one of the people mulling this very question, I have another chart to show you. It is the simple ratio of the S&P to the DJ-UBS (source: Bloomberg).

I think that makes where I stand fairly clear. If both stocks and commodities represent ownership in real property, and both have roughly the same long-term historical returns (according to Gorton & Rouwenhorst), then the ratio of current prices should be a coarse (and I stress coarse)relative-value indicator, right?

But let's shift from the long-view lens back to the short view, now that a retreating Fed makes this more worthwhile. I am not sanguine about the outlook for stocks, obviously (and here's one for the technicians: for the first time in years, exchange volume in January was higher than last year's January volume). However, bulls may get a brief reprieve later this week when the Employment Report is released. Yes, it's another January data point that ought to be ignored or at least averaged with December's figure. And that's the point here. Last month's Employment Report showed only a 74k rise in Nonfarm Payrolls. That weakness was likely due to the fact that the seasonal adjustments (which dwarf the net number of jobs, in December and January) assumed more year-end and holiday hiring than actually occurred. But the flip side of that is that if fewer were hired in December, it probably means fewer were fired in January. Thus, I expect that the 185k consensus guess for new jobs is likely to be too low and we will have a bullish surprise on Friday. That might help the bulls get a foothold...but it is a long three trading days away.

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