Special Report: 7.2.2009

Posted by TED Magazine on Thursday, July 02, 2009

Ripping the Green Shoots Out by the Roots

By Joe Salimando

Being a realist means you never get the chance to end-zone dance. In 1996, seeking to preserve capital, I dumped my family’s stock holdings. But the market soared! At social events in 1998-1999, people talked “the market.” I could, in these conversations, have said:

• “You’re all fools. Get out while there’s still time!”
  
  
• “The end is near. Buy dried food, water, and ammo.”
  
  
• “Your stocks are up 37%. I am 100% in bonds. I’m obviously an idiot! I must plead with you, oh wise ones—tell me what to do!”

In other words, I could poop in the pool (alienating everyone)…or shut up.

Then, of course, the end came. The NASDAQ index, once over 5,000, fell to 1,100. In late 2002, with the Dow down from 11,700 to 7,200, I should have been partying and celebrating, right?

Except: It was impossible to talk up my success. Why? When the subject of investing came up then, you heard:

• “I don’t look at my statement when it comes in.”
  
  
• “I bought Cisco at 60. I’ll sell when it gets back there.”
   
• “My retirement just got pushed out another four years.”

Hearing such in early 2003, would you tell someone that your investments were UP compared with 1996? No. So I shut up.

The kicker: It happened all over again, in housing and stocks, from 2003 to present. Jeepers!

Evaluate Yourself

Someone who zigged (twice!) at the right time(s) may not be ready for a Moonshot.

Guys who got things right did NOT remain geniuses. Of these, Robert Prechter (Elliot Wave Theory) is my favorite. He got something BIG really right (1987). More recently, he said the DJIA would plummet to 400. You don’t see Bob on CNBC anymore!

Another example: Warren Buffet stuck to his guns in 1997-2001 when (despite mucho abuse) he shunned technology stocks. He’s no one-trick pony, proving adaptable—modifying the Graham-and-Dodd “value investor” approach (to invest in companies “with a moat” even when they have high relative valuations).

But: After saying derivatives were dangerous, Buffet sold a massive index put option (a derivative), which may not turn out okay for his company.

THE POINT: Does the fact that I’ve been mostly out of stocks for 13 years mean that I know something? Nope.

But:

• I think the “green shoots” stuff is a bunch of crap.
  
  
• I am more afraid of Ben Bernanke than Barack H. Obama.
  
  
• I fear that BHO will in 2010 reappoint Bennie.

Sidebar: Why Not Trust a Professional?

At some point, I tired of investing the family savings myself. I went to a number of professional investment advisors for help.

1. A guy who seemed to make sense in local Saturday morning radio investing talk shows (a local investment pro). I went in to see him. First, our money clearly was a mere bag-of-shells (to his firm). Second, he was incredibly confident…not arrogant, precisely, but damn close.

I felt he might take a fall. I’m not sure what happened.

2. A guy named on our accounts at a big brokerage. I spent 3.5 hours with him. He almost had me convinced to do something I wouldn’t otherwise do (buy a stock mutual fund). This was, maybe, 2004. My stomach began to hurt, and, as a vegetarian, I never have indigestion.

My basic decision when my capacious gut is uncomfortable with a decision is to wait. SO: I waited. In a short period of time, the guy (who said he’d care for our savings as if it were his own) lost interest.

In fewer than four months, he moved on to another brokerage.

3. I called another fellow at another place. This was maybe 2005. I faxed him what we owned (mostly gold, silver, bonds, and cash). In a 15-minute phone call, the guy told me to sell the gold so he could put my family in stocks. This violated Rule No. 1 of investing (there aren’t many rules): Sell your losers, let your winners run. Why sell the shiny yellow stuff? Perhaps it had something to do with generating commissions for him…?

I ran from that fellow. It turned out to be a really good decision.

Sorry about this diversion. Distribution executives reading this might well say—“you’re a miserable ink-stained wretch, you don’t have enough money to matter, just give it to a broker and shut up already.”

Not a viable option, it turned out, for me—and not for those who trusted Bernie Madoff, Allan Stanford, and many lesser lights of the financial world.

Examine the Evidence

Of course, the stock market (and other markets) do not run on logic. But this is a business-oriented website, not TheStreet.com; let’s look at facts. Were there actual “green shoots,” we’d expect to see green data, right?

Forget sentiment indices (like NEMA’s EBCI and the ISM’s two monthly index readings). Let’s look at actual data in shipping. After all, if it will be bought and sold, it must first be moved around, right?

April truck tonnage (U.S.)—ATA says it was awful, the worst year-over-year comparison since November 2001. It offers numbers monthly, with a one-month lag.

Railcar loadings (U.S.)—The AAR says year-over-year comparisons have chugged along at -17% to -20% for most of 2009. Look here to see weekly releases (which are relatively timely). The numbers haven’t improved recently.

Air freight (planet Earth)—The IATA says it isn’t better (monthly reports).

  Baltic Dry Index—This actually has improved dramatically (but is still horribly beneath its highs or even its mid-point). BDI reflects international goods shipped over water. Maybe this is more about China and India than anything else.

Not much of that is green, right? Taken as a whole, it’s maybe somewhat yellow, with a serious tinge of red. 

Word-of-mouth evidence from electrical contractors (and distributors) is negative. Of course, you expect that now, even if things are improving—the electrical piece of a construction project isn’t significant when the project gets underway.

Still, what I’m hearing is that large electrical contractors plan layoffs this summer (of field people). Why? There are few (or no) projects lined up to keep crews busy.

What About the Employment Number?

The number of newly unemployed dropped in May, according to Bureau of Labor Statistics numbers. This encouraged some to believe that green shoots were really a-sprouting! Does May’s decline in the number of employed, from month after month of 600,000 or so—to 345,000—mean something?

That depends.

1. Some say unemployment is a “lagging” rather than a leading indicator. If that’s so, May’s report hints that the worst is already over. 

2. Others think the unemployment number isn’t “lagging” as we plunge further into this economic morass; sure, it may well lag when a recovery finally begins. One commentator noted that the number 345,000 is still a fairly rotten number.

3. Barry Ritholtz of The Big Picture had an interesting post that looked at one key ignored element of the May unemployment report. It’s ugly!

Personally, I’ve been surprised by the big (600,000 and up) monthly unemployment numbers. Even 345,000 seems significant. Why?

1. Yes, construction sheds/adds workers quickly, in response to the ebb/flow of business. But that’s NOT great. It is one reason that construction productivity is static over 20-plus years and is just awful compared to all other businesses. Also: Construction margins are terrible; keep people you don’t need and you’ll certainly soon go belly-up.

AND: Construction is not a major U.S. employer!

2. Residential construction has already taken its hit. Uncounted illegal aliens have been laid off, as have many citizens. This contributed to 2007-08 unemployment increases (these people are probably seeing their unemployment benefits run out right about now).

It’s unlikely we’ll see big new layoffs from homebuilders and their subcontractors.

3. There is still a looming skilled worker shortage. For non-construction businesses, laying people off right now isn’t necessarily smart. There have been stories in the business and mainstream media about businesses trying to “distribute’ the pain…via furloughs, pay cuts, bonus slashes, and the like.

Smart companies will avoid losing people who may prove valuable later.

Despite all that, the U.S. shed 3 million workers in 2008-2009. It’s not good for those people, of course. And it is a surprise to me.

Given all of that as background, the loss of 345,000 jobs in a month seems UNwonderful…something other than evidence of “green shoots.”

Conclusion: The stimulus money isn’t at flood tide (at least, not yet!). Housing foreclosures remain a problem. Banks have $1 trillion deposited with the Fed, instead of loaned out (creating jobs). Commercial real estate is on the verge of creating new woe-laden headlines.

Caution is the watchword; decision-makers are scared. Green shoots are unlikely to “take root” and thrive…for at least several quarters…if not years.

	Joe Salimando of EFJ Enterprises is a consultant, web content provider, and wordsmith based in Oakton, Va. To contact him, call 703-255-1428. See also The EleBlog.
Personal Disclaimer: The appearance of the ambling pachyderm is indicative of the writer’s obsession with elephants, not his political leanings.
IMPORTANT NOTE: THIS COLUMN REFLECTS ONLY THE OPINIONS OF ITS AUTHOR AND DOES NOT REFLECT THE OPINIONS OR POLICIES OF NAED, TED MAGAZINE, OR THE ADVERTISERS ON THE TEDMAG WEB SITE.