A Surprise Guest

October 26, 2014

Shortly after Monday morning’s sunrise, George sat on the back deck, coffee in hand.  Some brilliant, utterly mad painter rushed around the neighborhood, dabbing the trees with what seemed like the entire palette of warm colors. Armies of invisible elves set up accent lights in the branches, highlighting the hues of rust-orange-yellow-gold.  As George absorbed the movie magic moment, a van from the local cable company pulled up on the grass alleyway behind the backyard fence. “Starting early,” George thought as he glanced at this watch.  7:30.

He opened the backyard gate to the alley, meaning to ask the service guy if repairs on the pole would interrupt his and Mabel’s service this morning.  A guy who looked too trim, too neat, and too fit to be a repairman opened the passenger door of the van and called out to him, “Sir, stay inside the yard.”  George took a step backward and looked up above.  Was there a loose wire or something dangerous?  Cable wire carried low voltage so what could be the problem?  He glanced back at the man and the van.

From the rear of the van, two men hopped out.  Like the guy in front, they were both dressed in black windbreakers over blue polo shirts, black slacks.  It was like a SWAT team of rugged fashion models.  One of the men came to the rear gate.  George stepped back another step.  The man scanned the yard to the left and right of George, looked past George at the rear of the house.  George noticed that the other two men scanned the alley, the nearby houses.  The man at the gate glanced at a phone in the palm of his hand, then looked at George.  “George Liscomb?” he asked in the commanding tone of one who routinely asks questions and expects answers.  George nodded.  “Is there a Mabel Liscomb living here?”  George nodded again.  “Is she here?” Another nod.  “Your wife?”  One more nod. “Any other residents inside the house?”  George shook his head.  The man turned his head sideways, keeping one eye on George.  “Bravo,” he called to the two other men.

From the side door another man emerged, dressed much like the others. George felt a numbness inside like he was on a movie set.  “Move back a few feet, please.”  Finally a slim figure emerged from the side of the van. The ears were the dead giveaway.  George forgot that he was still holding his coffee cup as he instinctively jerked his hand to his face.  The coffee cup clipped his lower jaw.  “Ouhhhhh,” George barked. The sudden grunt drew everyone’s gaze.  “You OK?” President Obama called out to him. The lukewarm coffee had spilled on George’s shirt but he was hardly mindful.  “Uh, yeh,” George replied.

Like four points of a compass, the four men surrounded the President as the group seemed to flow through the backyard gate.  The front man stood aside and the President held out his hand to George. “Great morning here in Denver, isn’t it,” the President said, an upbeat easygoing smile on his face. George paused briefly to figure out the coffee cup thing.  He put the coffee cup in his left hand then held out his right hand to shake the President’s hand.  What does one say to the President, George wondered.  “Good morning, President.”  Ok, that worked.  “George, is it?” the President asked? “Yeh,” George replied in a monotone.  “I was wondering if Mabel – that’s your wife? – is she here?  Is she available?”  “Uh, yeh,” George replied, “she’s in the living room.”  “May we go in?” the President asked politely. “Uh, sure.”  George had barely drunk his first coffee before spilling it.  Maybe that’s why his brain seemed to be stuck in monosyllabic mode.

The front man strode to the house.  “Maybe George should go with you and we’ll wait a moment on the deck,” the President called out.  George joined the man, who opened the rear door and glanced inside before allowing George to go through the doorway.  “Hey, Mabel,” George called out.   “Are you decent?  We’ve got company.”  He could hear her get up from her easy chair.  “Be right there,” she called back.  She appeared at the far end of the kitchen, saw the man next to George and asked, “What’s the matter, dear?”  “You’re not going to believe this,” George replied.  Already the man was moving toward Mabel.  George forewarned her.  “This guy needs to ask you a few questions.”

The man went through the same procedure with Mabel.  She answered curtly as though she were about to throw this impudent intruder out of her house.  “You have a holstered weapon.  Are you with the police?”  she asked after answering the first two questions.  From a few incidents at the high school, she recognized the bulge at the man’s side.   “Secret Service, ma’am,” the man answered. “Secret what?” Mabel asked and the man opened his windbreaker enough to see the ID badge hanging from his neck.  She looked past the man and spoke to George, “What the hell is going on, George?”  He could tell she was upset.  “It’s OK, just answer the questions,” George called back to her.  No, there was no one in the house.  Yes, she was Mabel Liscomb.  She leveled her gaze directly at the man when he asked her birthdate.  She responded quickly but in a slightly menacing tone.  “You have the audacity to ask me to identify myself in my own home!”  Then the man’s voice softened as though he were an actual human being.  “Sorry, ma’am.  Have to do my job.”  He stepped back to where George stood at the rear door.   The man opened the screen door and nodded, “It’s allright.”

George joined Mabel in the kitchen as the group on the deck flowed through the rear doorway, keeping the President protected.  “Mrs. Liscomb,” the President greeted her with a warm smile, “good to meet you.  You wrote me a letter a few months back, didn’t you.”  Mabel stuttered.  Had he ever hear Mabel stutter, George wondered.  “I-I-I-I-did I?  I can’t muh-member,” Mabel answered.  “You had some good ideas that I’d like to talk to you about, if you have time?”  Mabel nodded.  George could see that she was recovering quickly from her shock.  She was good at that.  The habits of a high school principal asserted themselves and Mabel told the President, “I’m flattered that you are interested, of course.  Why couldn’t your staff make an appointment?”  Geez, George thought, she’s using the command voice with the damn President of the U.S.  He noticed that each member of the security detail had moved to a window.  George glanced to his right and saw that one had gone into the living room.  The fourth guy – had he gone up the stairs to check the bedrooms?

“I was supposed to be golfing with your Senator Udall but he had to cancel,” the President explained.  “I offered to appear at a fundraiser with Diana DeGette but her staff said she’d have to get back to us.  I don’t seem to be too popular for this election.”  Mabel made a brushing gesture.  “Don’t worry about it.  Same thing happened to Eisenhower ,Reagan and Bush at the midterm of their second terms,” Mabel told him.  “With a recession still going on, Mamie Eisenhower was a lot more popular on the political circuit leading up to the ’58 mid-terms.”  “Oh, Michelle is on everyone’s dance ticket,” the President replied.  “Me, not so much.  The quarterback takes the blame when things go wrong.  When things go right, it’s the offensive line that gets the credit.  Just part of the game, I suppose.”

“Well, come on in and sit down,” Mabel turned toward the living room.  In a brief exchange, Mabel and the President had become buddies of a sort.  George still wasn’t sure how it happened but each of them had recognized something in the other that they both had in common.  Mabel sat down in her favorite chair, then motioned the President to sit on the couch nearby.  She turned to George and said, “Do you want to make some coffee? I think I took the last of the first pot.”  George nodded. “Yeh, I haven’t even had my first cup.”

The President was different in person.  When interviewed on 60 Minutes, he had showed a casual aloofness that George didn’t like. The folded legs, the studied composure didn’t ring true for George.  Now, here in this living room, he sat, legs unfolded, leaning slightly forward in an attentive pose, earnestly having a conversation with Mabel.

For the next hour Mabel discussed education policies with the President. She didn’t like the implementation of educational standards. Yes, she understood the desire for uniformity.  No federal department can understand local educational needs. Too much politics in education already.  Washington makes it worse.   “How did you come to read my letter?” she asked.  “Kind of a mistake,” the President replied. “It should have gone to Arne’s people but it got in my pile by mistake. I left it on the table and Michelle saw it.  She told me, ‘you need to hear this.  This woman’s been there her whole life.  She understands.  You’re not hearing this in Washington.’  And, to tell you the truth, it’s just been sitting in the policy pile for months.  The first thing I found out as President – probably every President faces this quickly – is that there is never enough time to get to everything on his plate.”

George stayed out of the living room for much of the time, preferring to give Mabel the opportunity to discuss her ideas with the President.  He actually served coffee to the President. The kids wouldn’t believe it when they told them. There was a woman out on the deck, talking into the air.  “Do you want some coffee,” George asked. Had she been there all along?  “No, thanks.  You’re Mr. Liscomb?” she asked.  “George,” George nodded.  “Sherry, personal assistant,” she shook his hand.  George started to invite her in but she held up her hand and started talking to the air again.

After too short a time, the assistant came in, excused herself, leaned over and whispered something in the President’s ear.  The President stood up. “I’ll have to go.  It was wonderful meeting you and talking with you, Mrs. Liscomb,” he said and bowed slightly.  Mabel rose up from her chair, “A great pleasure, Mr. President, and thank you for your insights,” Mabel responded and – you gotta be kidding me, George thought – did a slight curtsy.  The President laughed.  George shook hands with the President, then they were gone.  “Holy mackeral,” George said as he sat down on the couch. “I’m sitting in the same seat as the President of the United States.  It’s still warm.”  Mabel gave him a look.  “Oh, damn!” George remembered.  “We forgot to take a picture!”  They both laughed.  George ran out on the back deck, hoping that they had not driven away yet but the van was gone.  The story of a lifetime and no picture to prove it.

Then George remembered that he had hit the buy button the past Friday.  He sat down at the computer. The market had opened up that morning slightly lower but several earnings reports were positive.  Apple and IBM were scheduled to announce earnings after the close.  Later that day, Apple’s earnings and sales were above consensus estimates. To offset Apple’s upbeat numbers, IBM announced a chilling quarterly report. For the 10th consecutive quarter, revenue at the technology giant had declined.  The death blow: earnings for 2014 were projected to be less than 2013’s earnings, something that hadn’t happened since 2002.  This stalwart of so many institutional portfolios was continuing to stumble.  If September’s Existing Home Sales, due to be released the following morning, declined any further, Tuesday could be a seriously down day.

George woke up again before sunrise on Tuesday.  Mabel was already awake as usual.  Thankfully, sales of existing homes  showed a bounce back in September to an annual pace of close to 5.2 million homes, the benchmark for a healthy churn.

George checked earnings stats at Zacks.  Before the opening bell, the staffing giant Manpower, announced better than expected earnings.  Although sales declined in some areas, McDonald’s earnings were 10% more than expectations.  Aircraft giant Northrup Grumman reported better than expected earnings as well. Yahoo reported earnings that were more than double the consensus.  Most of the extra profits came from the sale of shares that it owned in Alibaba’s IPO.  The market opened up sharply, closing the day with a 2% gain.  Their son, Robbie, called that evening and they told him all about the visit from the President. “How many pics did you get?  You should put them up on Facebook,” he told them. “We forgot,” George informed Robbie. “Daaaad,” came the exasperated reply.  “Well, we’re old people. We’re not used to recording every event in our lives, I guess.”

On Wednesday, the Bureau of Labor Statistics announced that inflation had grown 1.7% in the past year, in line with expectations.  The Federal government closes its fiscal year at the end of each September.  Each October, the Social Security Administration sets the inflation adjustment to Social Security checks for the coming calendar year.  A 1.7% increase meant an average $20 increase in monthly benefits.  For too many seniors depending on Social Security as their primary source of income, the low annual increases in payments did not keep up with increases in drug and food costs.  Retired folks on the lower rungs of the economic ladder then had to apply for food stamps to make up for the low yearly increases in benefits.

Dow Chemical surprised to the upside as did industrial manufacturers Graco and General Dynamics.  The positive mood on Wall Street was interrupted by the news of an attack on the Canadian Parliament.  George was cleaning leaves out of the front gutter when Mabel opened the door to tell him the news.  The market reacted negatively to the news but did not give up all of Tuesday’s gains, a positive sign.

On Thursday, the BLS reported that new claims for unemployment had risen slightly the previous week but that the four week average had fallen to the lowest level in 14 years.  Positive earnings reports from 3M and Caterpillar, both of whom had a large international customer base, propelled the market higher, trading above the range of Tuesday’s rally.

On Friday, September’s new home sales of 467,000 were the best of the recovery.  August’s robust sales figures were reduced by almost 50,000 to a revised 466,000, giving George a WTF frown.  A 10% revision?  The drug manufacturer Bristol Meyers and consumer giant Colgate reported higher than expected earnings.  Ford surprised with significantly higher than expected earnings but the details in the report were not encouraging.  Revenues in both North and South America had declined and Ford expected flat earnings growth for the full year.  The market gained almost 1%.  In the past seven trading days, it had gained back all the ground lost the six days prior, closing near the level of October 8th.

For 2-1/2 years, each decline had been followed by a sharp upturn.  “Buying on the dip” had become a often used phrase.  Anticipating a bounce with each dip, investors had been coming back into the market after a short decline.  Since mid-September, investors who had bought in on the bounce had been disappointed when the market continued to decline.

Despite all the positive earnings reports, George was still concerned that stock valuations were just a bit on the high side.  Earnings gains, as well as the growth in profit margins, were becoming slower.  There had been two brief fallbacks in 2013, and already three fallbacks and a correction of more than 5% in 2014.  Frequent small fallbacks were healthy for the market, shaking out excess optimism.  The last real correction – a 10% decline in price – had last occurred in May 2012.  The market of the mid-2000s had gone for several years without a 10% correction and that did not end well.  George worried that the Feds low interest policy, kept in place for almost six years, gave investors too few choices and herded them into the riskier stock market. Gotta stay watchful, he thought.

Wild Ride

October 19, 2014

On Monday, Mabel met for lunch with several friends, both active and retired teachers, to celebrate a new inductee into the Million Mistake Club.  Mabel had once explained it to George, “It started a few decades ago when Mr. Densmore – he taught trigonometry at the school – commented one day in the break room that he had passed the two million mark.  He was probably in his late fifties, early sixties at that time. I had only a few years of teaching under my belt at that time and was still trying to get comfortable in the job.  Mr. Densmore – funny, I don’t think I ever called him by his first name and I can’t remember what it is right now – anyhow, he just seemed to flow so easily into the job.  It was like he wore the job as easily as he wore those old suit jackets he had.  Students that I had discipline problems with in my class behaved well in his class.  I was still trying to figure out the quiet command thing that can make or break a teacher.  He just seemed to make it all look so easy.  I asked him what the two million mark was.  He said it was the number of mistakes he had made in his lifetime.  It didn’t seem possible because it just seemed to me, being fairly new to the job, that he didn’t make any mistakes.  Well, except for his taste in clothes.  He would sometimes wear brown pants with a gray jacket which seemed to emphasize his age.  Mr. Densmore calculated that he made at least a hundred mistakes a day.  Joan – she taught sociology – said that no adult could survive if they made that many mistakes in a day.  Gary, the biology teacher, said that at the cellular level, our bodies probably made at least that many mistakes a day but we correct most of them before the mistakes turn into cancer or we get sick.”

Mabel had paused then, a catch in her throat. “Anyway, on my 28th birthday, several of the teachers, including Mr. Densmore, chipped in for a catered lunch.  Roast beef, some wonderful Italian pastries, potato salad, ice cream.” Mabel paused on her trip down memory lane.  “Security in the schools today.  Probably couldn’t have caterers come in without some planning weeks in advance.”  She went on with her story.  “Instead of wishing me a happy birthday, they inducted me into the million mistake club.  For the first time in my short career at the point, I felt like I was going to make it.  It changed how I taught.  I was no longer trying so hard to get everything just right.  I would discuss the wrong answers on tests with the students.  Why was it wrong?  No, Lee was not the general of the union army that won the battle at Gettysburg.  But what if Lee had been the general of the union army?  How did each army differ and so on.  The A students who were good at memorization stretched their imaginations, their analytical skills.  The C students started taking more interest in the class, participated more in discussion.  The stigma of wrong answers was less.  It became more about learning from our wrong answers.  I would occasionally take time to review episodes in the history of wrong answers, like phlogiston.”

“What’s that?” George asked.  “For a long time people speculated that it was the substance that caused things to burn,” Mabel responded.  “Wow,” George nodded.  “They didn’t know about oxygen yet.  You know, that’s the heart of risk assessment.  Learn from our mistakes.  The insurance business is just one long rocky path through mistakes in figuring out where the risk is, the degree of risk and how to reduce the risk.”

Monday was the Columbus Day holiday and there wasn’t much good economic news to stem the deepening pessimism in the market. Fears over the spread of Ebola just added to the darkening mood.  Mabel would be furious with him if they lost any more money so George sold the two remaining ETFs he hadn’t sold a week or so before.  If he had anticipated this pessimism, why hadn’t he bought an ETF that shorted the market?  The really good employment report in the beginning of October had made him less sure about his earlier forecast of lower prices.  Then he considered – again – buying the 20 Year Treasury ETF but everyone else had been doing that for the past ten days or so and the price was near $121 a share, up about 6% – 7% in the past few week.  Geez, George thought. The buying demand for safety has gotta slow down pretty soon.

Tuesday dawned brighter than Monday’s close but then came the release of a report  from the International Energy Agency forecasting that oil demand in 2014 would be 22% less than previously forecast.  Industrial production in the Eurozone was tepid.  George was surprised that the market finished near Monday’s close.  Maybe this was the end of the downturn in prices.  Like so many retail investors, George had probably sold at the bottom on the previous day.  Of little note to the world that day was the fact that George finally cleaned up the wasp nests above the door to the shed.  There were only two wasps buzzing around so George didn’t feel like a mass murderer.  Where did wasps go for the winter?

On Wednesday morning, George forgot to check the market or economic news before going out to clean up the rock garden.  With all of their money now in cash, George had turned his attention to his seasonal chores.  The climbing vine had shed most of it’s leaves.  The ash tree nearby had shed half of its leaves as well.  As George picked leaves out of the ground cover and other perennials in the garden, he wondered whether he should cut down the climbing vines.  He had planted them years ago to prevent the neighbor’s dog from jumping the fence during lightning storms in the summer.  The dog had died and the vines had spread.  Before lunch, Mabel came out onto the back deck. “George, honey.  The market is going crazy.”  “It’s OK,” George replied, assuring her, “we’re out of the market.”  “Oh,” the worry in her voice evaporated. “Well, just thought you’d want to know.”  Yeh, just wanted to let me know, George thought wryly. He wondered how many money managers had been fielding calls from clients who were worried about a meltdown like the fall of 2008. “Mrs. Jones, the SP500 is only down about 5 or 6 percent from its September peak,” they might tell their clients.  “But I heard that the Dow had dropped 200 points yesterday,” the client might say.  To older clients, anything more than 100 points was big. “Yes, but 200 points is just a bit more than 1%.  And remember, the Dow is only a part of the stock market.”  Yes, the firm is taking prudent care of your money, Mrs. Jones.   Put phone down.  Next phone call from another worried client.

Employment and retail sales are the top two economic reports that consistently set the tone of the market.  When the mood is pessimistic, it doesn’t take much negative news to send things into a tailspin. Wednesday’s retail sales report wasn’t bad but it wasn’t good.  Strong auto sales in August had led to expectations that total retail sales would decline in September.  The decline was just a teeny tiny more than expected, contributing to the wave of selling.  The core retail market without auto sales showed 3% year on year growth.

Part of the decline was because gas prices had been falling, producing less revenue.  What the market wanted to see was that the American consumer was taking that money saved on gas and spending it on back-to-school items, or a fall wardrobe.

The Census Bureau released manufacturing and trade sales data for August that showed a 4.5% year-over-year increase in sales but a 5.7% increase in inventories.  People were not buying as much as distributors were anticipating.  This only seemed to confirm fears that growth in consumer spending might be slowing down.  As though being routed by an opposing army, traders ran for the rear lines.  The SP500 dropped 4% by midday.  As George checked quotes on the SP500 ETF, SPY, he saw that it had climbed up from a bottom near 182.  He was tempted to put a buy order in, taking advantage of an afternoon rally.  Transportation stocks were bouncing up as well.  IYT, the iShares ETF, was bouncing off a midday bottom, indicating that money managers were buying in after the 14% decline from the mid-September highs.  Then George remembered that he had already tried his hand at these really short term trades.  From genius to dunce in a day, he had found that it was not good for him temperamentally.  Plus it took an hourly vigilance that he wasn’t willing to give.  One more report of Ebola in the U.S. could send this market into a dive within a few minutes. He closed the lid of his laptop.  By the end of the day, the Dow Jones had swung more than 600 points. After dropping about 4% during the day, the SP500 closed down only .7% from its previous day close.  Fresh troops in the rear had rallied at the end of the day.

Thursday’s release of October’s Housing Market Index from the National Assn. of Homebuilders showed a reversal of six months of rising sentiment.  More data from the Eurozone indicated that the entire region might be headed back into recession.  Sound the retreat alarm!  The market opened up about 1.5% lower.  Once again the troops in the rear pressed forward to the battle line as attention turned to several positive reports.

New claims for unemployment were near historic lows, prompting a discussion that had been missing for several years: when would unemployment get low enough to generate some wage growth?  George remembered Mabel’s Million Mistake Club earlier in the week.  Decades ago, unemployment levels below 5 or 5-1/2% were thought to be inflationary. This target level was called NAIRU, the Non-Accelerating Inflation Rate of Unemployment. At low levels of unemployment, workers could bargain for higher wages which pushed up the cost of products which pushed up prices which led workers to demand more wages, ad infinitum.  Like the “law” of gravity, this theory of unemployment and inflation had been regarded as solid by both investors and policy makers.  Theories are tested in the passage of time.  During the 1990s, unemployment dropped and did not spark inflation.  Economists scrambled to explain the phenomenon with global trade adjustments to their models. In the 2000s, unemployment fell below 5% and inflation remained tame by historic standards.  More adjustments to the models, more explanations of how the theory was still true. It is still a controversial topic.  (1998 article on NAIRU by Nouriel Roubini )

In addition to the positive employment news, Industrial Production grew in September, notching a 1% monthly gain, and rising back into the sustainable growth zone of 4 – 5%, year-over-year.

“Fix Bayonets, men!” came the call as the greenies beat back the morning onslaught from the reds. Greenies were days when the market closed higher than it opened, red the opposite.  George wondered if some set or prop designer for CNBC would come up with a Civil War soldier set for the talking heads to play with on camera when the market clash over valuation was particularly intense. As a kid, he’d been so disappointed that all the great battles like the Alamo had already been fought.  Santayana’s Mexican legions had rushed forward on the plains of Texas as the small band of brave Texans like Davey Crockett and Jim Bowie prepared for the onslaught.  The good ole days when life was exciting – and much shorter.

Friday was the last day of October option trading. The release of new Housing Starts for September, and strong earnings from G.E. and Morgan Stanley prompted a flood of buy orders at the opening bell on Friday.  The previous months housing starts had been volatile, rising up strongly in July, then falling a lot in August, and now up more than 6% in September.  On a year-over-year basis, September’s starts were up almost 18%.

George was not as awed by the housing data.  The declining peaks of year-over-year percent gains in new housing starts would probably continue.  Friday’s upswing continued shortly after the open when the latest consumer confidence numbers revealed a rising sentiment based on  improvements in employment and lower gas prices.  The price had crossed above both the open and closing prices for the past two days.  Could be a fake out but George hit the buy button. The earnings season would be in full swing next week.  

Zorro Moon

October 12, 2014

Last Sunday, George and Mabel flew back to Denver from Portland.  They took a bus shuttle from the terminal to long-term parking and discovered that neither of them could find the parking stub which indicated which section they had parked in.  Mabel dutifully looked through her purse.  “I know you kept the stub, George, but I’ll look anyway.”  Mabel remembered details like this so George knew she was probably right. “I should have put it in my wallet and it’s not there,” George replied.  They asked to be let out at the main exit booth.  The attendant told them to go inside the office where they met a nice man with a patient look.  His English was barely accented with the round vowels of Spanish.  “My name is George.  How can I help you?” the attendant announced.  “Hey, that’s my name too,” George replied, as though each of them belonged to a brotherhood.  “Well, we seem to have lost our ticket stub and we can’t remember where we parked our car,” George told him.  “What day did you come in?” the other George asked.  “Last Monday, about 7:30 in the morning.”  The attendant’s face adopted an odd stillness, his eyes looking far away. “That was a busy morning.  We were parking in GG and HH at the far end of the lot.”  Both George and Mabel were amazed at the man’s memory and said so.  The attendant smiled graciously.  He pulled a set of keys from a hook on a key board, picked up two of their bags and led them to an idle shuttle parked near the office.  At the far end of the lot, the attendant drove slowly down one row until they reached the edge of the lot, then drove down the next row.  Mabel was the first to see their car. “There it is!” she exclaimed.  George gave the attendant a $10 bill, thanking him for his help.  The attendant nodded graciously, then drove back toward the office.  “There’s someone with  a remarkable talent working at a parking lot,” Mabel remarked.  “I think our schools do a terrible job of helping students discover their own talents.   The structure of our society, our economy – it could uncover and use these talents better.”

Sitting at his desk Sunday night, George mulled over the same thought that had distracted him on the flight from Portland.  Should he sell some or all of their stock holdings?  Two indicators said yes, another said maybe, one said this was temporary.  While on vacation, he had not compiled his makeshift index based on the monthly Purchasing Managers Index.  ISM, the publishers of the index, had released the services sector figures that past Friday.  He pulled up the latest report, then input the figures into his spreadsheet.  The index seemed to have peaked in September at a very robust reading near 70, rising up a few points from an already robust reading in August.

This composite of economic activity was a “stay out of trouble” indicator, giving buy and sell signals when the index rose above and below 50.  The last signal had been a buy signal in August 2009 when the SP500 was about half its current value.  Before that, the previous cue had been a sell signal in January 2008, a month after the official start of the recession.  Because employment and new orders were the largest components of the index, a chart of just these two components of the services sector reflected the larger composite.

So, the American economy was strong and Friday’s employment report had been a positive surprise. What seemed to be worrying investors was weakness over in Europe.  But Europe had been nearing recession for a few quarters now and that had not worried investors during the past year and a half.  Yes, no, yes, no decisions swirled around in George’s head.  Should he wait till the market opened Monday morning and see what the mood was?  Well, what if it was rather flat?  What would that tell him?  As Yogi Berra said, when you come to a fork in the road, take it.  So George did.  He put in an order to sell half of their stock holdings, essentially taking both forks of the road.

On Monday the market opened up above Friday’s close, indicating that a number of investors had put their buy orders in over the weekend after the positive employment report.  Active traders took the market back down below the level of Friday’s close.  In 1970s lingo, it was “negative vibes,” or negative sentiment in normal speak.

The Federal Reserve announced that they would begin publishing a labor market index that compiled 19 different labor market indicators to give an overall report card on employment.  The index was first proposed in a working paper published in May and the Fed was cautioning that the index was not “official.”

A chart of the various components of the index showed the correlations of each component with overall economic activity in the country.

The Fed provided a permanent link to a spreadsheet that they would update each month.  It was  a zero-based index.  Readings above zero meant overall conditions were improving; below zero, conditions were deteriorating.

The market opened up Tuesday with the news that Germany’s industrial output had dropped 4% in August.  A key leader and consistent performer, Germany was the Derek Jeter of the Eurozone.  As every baseball fan knows, if Derek was not producing, the whole team was in trouble.  The whole team in this analogy was the world.  The IMF revised their global growth rate for 2014 from 3.4% to 3.3%.  Quelle horreur!  Never mind that Tuesday’s JOLTS report showed the most job openings since 2001 when China was admitted to the World Trade Organization and started sucking jobs from the U.S.

Tuesday evening, George and Mabel watched the full moon, the Hunter’s moon, when it was about 30 degrees above the eastern horizon.  Clouds had obscured the moon when it was first rising and really big.  Wisps of clouds still drifted across the pale disk.  “It’s a Zorro moon,” George remarked.  “Zorro would go out on a night like this and undo the oppressive plans of the evil comandante.”  Mabel laughed.  “We’ll rename it the Zorro moon, then.  All those calendars we get each year will have to be changed.”  “Yeh, what’s with that?” George asked.  “No one ever sends a pamphlet of favorite quotes or prominent dates in history.  Just calendars.”

Mabel set her alarm to get up at 4:15 AM so she could watch the lunar eclipse.  She woke up about 7:30 that morning, disappointed that her sleeping self had turned off the alarm without even bothering to notify her lunar eclipse watching self.

On Wednesday afternoon, the Federal Reserve released the minutes of the September meeting of the Open Market Committee, the group within the Fed that that determined interest rate policy.  The sentiment of the Committee was rather dovish, and the stock market rallied up sharply in the last two hours of trading.  Still, the close was not as high as the opening price on Monday, two days earlier.  Volume was the highest it had been since August 1st and should have been confirmation that sentiment had reversed to the positive.  George was still cautious.

The market is essentially an argument over value.  The difference between each day’s high and low price indicates how much investors are arguing. The 5-day average of that difference was now double the 200 day average and rising.  George had learned that bigger arguments usually led to lower prices.  He had enjoyed a nice run up in 20-year Treasuries during the summer but then got out in mid-September.  Now two thirds of his investing stash was sitting on the sidelines in cash.  Treasuries had rallied, proving that it was difficult, if not impossible, to time the market.  Something George didn’t like was the relatively small movement in the price of Treasuries as the stock market rallied.

On Thursday, the market dropped quickly on news that German exports had dropped almost 6% in August. By the end of the day, the SP500 index had lost about 2%.  Bears saw an opportunity to hawk their books warning of the coming collapse of the global economy.  “Is the end near?  Next we go to Doug Munchie of Funchee Crunchie Capital.  Doug, tell our audience some companies that you think will do well as the coming global meltdown approaches.” Doug is looking sharp in a $300 white shirt and a $200 blue and red tie. “Good morning, Megan.  For our cautious clients, we recommend gold Lego blocks.  Our clients can construct many creative projects with their gold while they sit out the collapse.” “Thanks, Doug.  When we come back, we’ll talk to a priest who claims that holy water can cure Ebola.”

By the time he died, George thought, he will have heard at least 1 million hustles.  “Doctor, do you know the cause of Mr. Liscomb’s death?”  “Yes, he suffered from Bullshitis, the accumulation of a lifetime of blather.  A person’s brain becomes clogged and shuts down.”

The decline continued on Friday, bringing the SP500 back to the price levels of late May.  The closing price touched the 200-day average.  For long term investors, the next week might be a good  opportunity to move some idle cash into stocks. If the downturn became a serious decline, the 50 day average would cross below the 200-day average in a few weeks or so.  That crossing was called the Death Cross, a serious shift in sentiment.

Watching the news later that evening, Mabel asked, “We’re fine?”  “We’re fine,” George replied. Then he changed the subject to their recent visit to Oregon.  “I wish could be close to the ocean and yet not have all the dampness.”  “It’s called southern California,” Mabel quipped.

A Busy Week

October 5, 2014

On Monday George and Mabel flew to Portland, Oregon so Mabel could attend a teacher conference in Eugene on the development of strategies and practices for online learning.  “How’d you get invited?  You’re retired,” George had asked a few months earlier.  Mabel had spent many years both as a teacher and high school principal.

“The conference is focused on post-secondary education, but Lorraine thought I would be interested and wangled me a spot.” Her friend Lorraine was a department chair at a local community college. “I might be able to give her some perspective from the high school level as these kids make the transition to college courses.”

They had to get up early to make the morning flight.  Retired people should only get up this early when they are having a colonoscopy, George thought.  After the conference, they planned to spend a few days on the Oregon coast, which they were both looking forward to.  They sat in the Denver airline terminal awaiting the boarding call.  George couldn’t understand most of what they said.  Millions of dollars to build an airport and the contractors seemed to have bought the cheapest speakers through somebody’s Uncle Harry who knows a guy who’s got a connection with some exporter in Malaysia. Airline service had become little more than a subway in the sky.  In fact, the speakers sounded just as bad as the ones used in New York subway cars.  “Gate 23, now pre-boarding …” came out of the speakers as “Ateleeteehoweeornayhinienegetcrispbeergoremekeens.” Passengers, please get in the metal tube, sit down and be quiet.  The metal tube will go up in the air and deposit you at your destination.  Transportation for the masses.  The future has turned out slightly different than the one imagined at the New York World’s Fair in 1964.

In Portland they rented a car and drove down to Eugene.  Settling down in their hotel room, George was pleasantly surprised to find they had good wi-fi reception.  The market had been up but had closed below Friday’s close, indicating that there was still more negative sentiment to come.  Personal income in August had gained 4.3% above the level of August 2013.

That bit of good news was offset somewhat by a report from the National Assn. of Realtors that year-over-year pending home sales were down a little bit more than 2% in August.  This confirmed last week’s housing reports and made it unlikely that tomorrow’s Case-Shiller report on home sales would have any positive surprises.

Tuesday morning, George slept in while Mabel got up early to go to the nearby conference at the University of Oregon.    He missed the free breakfast at the hotel but the woman at the reception desk pointed him to a nearby coffee shop that served egg croissants and a good cup of coffee. The sun broke out on the short walk to the coffee shop, brightening George’s mood.  Despite the mid-morning hour, a number of people sat in the coffee shop working on their laptops.  West coast time was three hours behind New York so half of the day’s trading had occurred before many Oregonians had started work.

The Case-Shiller home index showed that home prices in 20 metropolitan areas had declined for the third month in a row.  Year over year gains were still positive at 6.7% but the pace of growth was slowing. Last Friday’s Consumer Confidence survey from the U. of Michigan had been positive and rising.  A separate Confidence survey by the Conference Board was positive but showed a declining sentiment on worries about employment and income.

In the afternoon, he drove near the campus to meet Mabel.  The campus was an artist’s rendition of what a college was supposed to look like.  Shade trees dotted the grounds between the grand buildings of gray stone.  Lawns and bushes were clipped but didn’t look overly manicured.  The concrete walkways that led from one building to another were well maintained but showed the typical wear of traffic and a wet climate.  The ghosts of mankind’s great minds and talents would feel comfortable on these grounds and in these halls.

Mabel introduced George to several colleagues attending the conference.  Most attendees were teachers and administrators in their forties and fifties.  For 300 years, teachers and students had gathered in  a classroom in what was called face-to-face education.  Students prepared for class at home at various times outside of the classroom but the daily routine of classes centered the educational activity of the students.  Online learning was a new phase in distance learning, attempting to blend the broader educational training of traditional colleges and universities with the asynchronous methods of the correspondence schools of the past century.

On Wednesday came further confirmation that the growth in housing sales and construction was slowing.  Year-over-year construction spending had increased 5% but the growth had declined for 9 months.  George thought this was a fairly normal cycle but the market reacted negatively, dropping more than 1% by the end of the day.

European Central Bank head Mario Draghi announced that they would continue to keep interest rates low to help spur the non-existent growth or decline in many European countries.  The private payroll processor ADP reported job gains of 215,000, slightly above expectations.  The Institute for Supply Management (ISM) showed a slight decline from the robust growth of the previous month but overall a very positive report.

Wednesday evening after the conference had concluded, George and Mabel had dinner at a restaurant with two women who had attended the conference.  The conversation was lively, the food a bit pricey for the quality but George enjoyed the evening.  For the past two days he had encountered many young people, reminding him of his college days decades before.

“I’ve decided I want to be 20 years old again, only not as dumb and inexperienced,” George quipped. He remembered sagely pronouncing that Fitzgerald’s novel, The Great Gatsby, was about social classes that no longer existed in America and was irrelevant. Somehow he had survived his own poor judgment.  He did want to jump high in the air once again, twisting toward the basket and snapping a 3-point shot at the basketball net.  The losses in physical vitality were offset by the gains in sagacity, George hoped.

On Thursday, George and Mabel woke up early (again! two times in one week!) to drive out from Eugene to the Oregon Coast.  At the Oregon Dunes they walked through coastal rain forest, then dunes, then a less dense strip of rain forest, then beach and ocean. “I get smaller the more I walk,” he told Mabel.  “What do you mean?” she asked.  “We walk through places like this, they’re like landscapes, I guess you could call it, shaped by this wind around us, the ocean out there,  and underneath our feet the earth is shifting about.  It’s like we’re teeny tiny bacteria walking on the ridges of paint left by some artist’s brush.”

Mabel smiled, “Well put.”  She paused.  “With the physical classroom, students and teachers can have field trips out to the Oregon dunes.  How do we take that and put it in an online environment?” she wondered.  George glanced at her.  “Someone has brought the conference to the beach, I think.” Later, they stopped off for a coffee in the old town of Florence before ending the day in Yachats where they stayed at the Overleaf Inn.

I could get used to this, George thought, checking the market news from his balcony while the last streaks of sunset and orange turned to purple and gray out over the ocean.  The BLS reported that the 4-week average of new unemployment claims had fallen below 295,000.

Levels lower than this had occurred rarely – in early 2006, 2000 and the winter of 1987-88. Yet there was no dancing in the streets.

Instead, investors focused on the 10% drop in factory orders for August.  Most of the decline was due to volatile aircraft orders, which had surged in July followed by an equal drop in August. The market remained flat.

On Friday, George and Mabel walked several miles on the 804 trail, a sometimes dirt, sometimes asphalt path that ran for many miles along the Oregon cliffs.  They ate at the Drift Inn that evening.  Good food.  “You think there’s much work for younger folks around here other than the tourist industry?” he asked Mabel.  “I doubt it,” she replied. “We’ve seen a lot of twenty-somethings working at hotel reception desks, waiters, waitresses, the coffee shop in Florence.  They can’t be making a lot of money.  Still it is lovely here”, she mused.  “Could be more sun, ya know?”  George nodded.  “We’re kinda spoiled in Colorado,” he said.

When they returned to their hotel room later that night, a stiff wind blew off the ocean, bringing with it a bit more chill than either of them had packed for on this trip.  George checked the monthly employment data released that morning by the BLS.  Job gains had surprised to the upside at almost 250K but the market had still closed below Wednesday’s opening price and was still below the 10-day average. He pulled up some FRED data to get a snapshot of the relative health of the labor force seven years after the start of the recession.   The results were rather chilling – or maybe it was the dampness of the Oregon coast that he was unaccustomed to.  In seven years the number of employed people had grown just 1% – not 1% annually but 1% total for the entire time.

2.6 million more people were working part time because they could not find full time work. The number of underemployed had grown almost twice the 1.4 million new jobs created in seven years.

The unemployment rate had dropped below 6% in September but even that bit of positive news did not look so good when George pulled up the historical snapshot of unemployment since the recession began.

The rate had risen more than 1% in those seven years.  Despite all the talk of recovery, the surge of stock prices from the lows of 2009 and the rise in home values, the labor market was still wounded.

“Why don’t you help me figure out where we’re going to stay tomorrow in Newport?”, Mabel asked.  “One of my friends suggested the Elizabeth St. Inn.”
“Fine with me.  I want to see the Aquarium if it’s open,” George replied.  “Hey, check out the moon.”  Then he put on his windbreaker, pulled a blanket off the bed and went to sit out on the balcony.  Through the shifting clouds, moonlight shone softly on the water below.  Mabel, taking a cue from her husband, tugged a blanket from the second bed, wrapped it around her and sat with him.