[The following was posted Friday at 1:00 p.m.]
“Where is the oil?…Where is the oil?…”
–Roberta Flack and Donny Hathaway…or was it…
If you”re an oil trader, you probably got nauseous this week from
all of the ups and downs. And whereas last spring and early
summer I mocked those who complained about paying a few
extra bucks at the pump…just one year after record low gasoline
prices…and I also said that it would have little impact on the
overall economy…today, I”m not so sure about the impact in the
future.
Folks, let”s see if I can sum up the dilemma. If the world
economy continues to grow, that very growth could eventually be
stopped right in its tracks by stubbornly high, or soaring, energy
prices.
This week President Clinton made the statement that, gosh darnit,
oil should be in the low $20s.
Well, gee, Mr. President. How do you accomplish that?
Why, Mr. Trumbore, you should know that the way you bring the
price down is to increase supply.
But where are you going to find the extra supply?
Why Saudi Arabia, of course.
But they are facing all kinds of internal pressure from within
OPEC not to help us. And even if they do come through, who
else then?
Ahh…ahh…
This week the latest oil inventory data showed that inventories
continue to decline to 24-year lows. And furthermore, U.S.
refineries are already running at 97%. Add to this the fact that
our energy industry is way behind in the generation of heating oil;
because they responded to the pressure last spring to refine more
gasoline…thus delaying the shift in production.
I thought last spring, when oil spiked to $34, that we would settle
down in the mid-$20s. Forget what may happen the next few
weeks as the administration scrambles to bring the price down by
possibly tapping into our strategic reserves ( a dangerous
precedent) or jawboning the Saudis to relent for a spell (until after
the election). There is, rather, the very real chance of a huge
spike this fall, particularly if we have a late October cold snap.
And if that came to pass…and recognizing that Europe and Asia
face similar problems…it would shock the heck out of the
economy and the stock market.
The Fed
Alan Greenspan and Company surprised no one in holding the line
on interest rates this week. They suggested that the rate of
growth in the economy is slowing to a pace more to their liking.
Gains in worker productivity continue to contain costs as well as
helping to hold down underlying price pressures. But, the Fed
still felt obligated to state that the risks remain weighted toward
heightened inflation pressures and, with the volatile energy
market, that was the correct position to take.
Of course, skeptics will say that the Fed also doesn”t want the
equity markets to believe they are finished raising interest rates.
A resurgent stock market would put us right back where we
started in this cycle. The wealth effect would lead to more
consumer spending and solid corporate profits. But it could also
lead to more interest rate hikes.
Stocks and Bonds
The equity markets have thus far acted admirably this week (as of
noon, Friday), with all of the major averages posting solid gains.
Volume is non-existent, but it”s summertime…and the living is
easy.
What I am watching are some of the technology bellwethers. At
$67, Cisco is still well off of its all-time high of $82 set last
spring. And at its current price, it still trades at a 90 multiple
based on 2001 earnings estimates.
But while Cisco stumbles, Sun Microsystems has been on an
incredible roll, and at $127 now carries a 97 P/E on 2001
estimates (which were recently jacked up). It bears repeating;
no one is questioning the quality of these corporations. I just
can”t build a case for issues with these valuations, especially if, as
some of the economic indicators of the week proposed, the
economy is truly slowing. [I still have my doubts…but the impact
of oil is increasingly on my brain in this matter.] If earnings
continue to decelerate, it”s awfully tough to label these stocks
screaming “buys.” And yes, Virginia, this past spring proved
valuation matters.
Bonds continued to rally as tame economic news lent credence to
the belief that the Federal Reserve is finished for this cycle.
U.S. Treasury Yields…the key 10-year is at a one-year low.
1-yr. 6.19% 2-yr. 6.18% 10-yr. 5.72% 30-yr. 5.67%
Europe
The European economic environment seems increasingly chaotic.
Germany surprised forecasters by reporting that business
confidence had tumbled and, when you represent one-third of the
Euro Zone”s economy as they do, it captures one”s attention. But
then the next day, Germany also reported that producer prices
soared in July. Basically, a horrible combination.
And yet, in the 11-nation economic zone, you still have cases like
Ireland, where the finance ministry is projecting GDP growth of
10% this year! But again, as I reported last week, with 6%
inflation.
Something has to give. You can see that the European Central
Bank is in a box. Average inflation is now well over their 2%
target (2.4% and rising). Do they raise interest rates to bring it
down…and risk killing the economy in some member states? Or
do they let inflation ride for a bit in the hope that oil prices
tumble? Considering the latter, this week non-OPEC Norway
said they can”t increase production above current levels either.
And then there is the plight of the currency. The weak euro,
while helping exports, is increasing the cost of imported goods.
So, in a nutshell, currency gyrations and inflation rates have been
non-factors in our own markets for quite a long spell. That may
be about to change. And the first place you”ll notice it is in our
bond market.
Russia
In the aftermath of the Kursk tragedy, it would appear that
Russian President Vladimir Putin has weathered the storm. In
large part, this is not only because there aren”t any real
alternatives to his leadership, but also because for years now, the
average Russian (not the one dancing in the disco with 6
prostitutes and 6 bodyguards) is slowly dying…both literally and
figuratively.
You may have seen the official government report which admitted
that the Russian population is continuing to shrink. Think about
that. We”re not talking a falling population because of a dearth of
babies ( a la what confronts nations like Italy and Japan), Russia”s
is falling primarily because of poverty and disease (along with a
low birthrate). Quite simply, a vast portion of the nation is
drinking itself to death.
And who can blame them? Since Gorbachev and perestroika, all
manner of promises have been made…none kept. A select few
have prospered, the balance of the people are worse off.
It”s hard for Americans to understand when a poll comes out
showing a majority of the Russian people want a return to the
days of old…not Gorby or Yeltsin, but Brezhnev.
In an already depressed nation, the Kursk was a blow to the solar
plexus. It”s as if the rest of the world was looking down on them
saying, “You guys are truly pitiful,” and the Russian people
understanding the truth in the message.
I mentioned last week that what worries Westerners is the
seeming lack of regard for human life among Russia”s leadership.
That”s what all the lies and obfuscation pointed to in the
immediate aftermath of the disaster. According to one military
source, Putin knew within hours that all were dead, yet he acted
in the manner in which he did.
Opposition leader Boris Nemtsov, a friend of the West but,
unfortunately, with a limited base of support, said this week,
“Putin doesn”t like people…he doesn”t feel (their) soul.”
Folks like myself wouldn”t keep harping on this crumbling nation,
one that is really no different from any of the backwards Asian
republics of the old Soviet Union, except they have nukes. And
the handling of the Kursk should cause great concern, particularly
in Europe, because the lack of safety and control was never more
apparent.
Other International News Highlights
Iraq: The new U.N. weapons inspection team is almost ready to
go in. Unlike the previous ones, which were dominated by U.S.
and British inspectors, this one has representatives from 19
nations, all accountable to Secretary General Kofi Annan.
So we all know the drill. Saddam won”t cooperate and then the
U.N. Security Council will have to decide how to respond. I
imagine the will to fight is virtually non-existent. But we have an
election coming up in this country. What will Bill do? What will
he do.
[Friday morning, Germany”s secret service announced that they
had evidence of a facility 25 miles outside Baghdad which is
producing ballistic missiles. They are of the short-range variety,
currently, but Germany is concerned about their own security
down the road.]
Iran: President Khatami (the good guy) conceded he can”t protect
press freedoms. The slide towards another revolution continues.
Middle East Peace: Israeli Prime Minister Barak suffered another
blow as his chief-of-staff resigned. The Knesset returns in
October and will undoubtedly call for new elections.
Meanwhile, Syria”s foreign minister announced that his country is
urging the Palestinians to take a hard-line on the fate of
Jerusalem. [As are all Arab leaders.] Assad Jr. takes his first field
trip abroad shortly, to Egypt. Beware “review boxes,” mused the
editor.
Spain: Two more policemen were killed by Basques separatists,
bringing the total to 11 this year. This whole mess garners zero
coverage in America. Just understand that it is ripping Spain
apart.
Nigeria: President Clinton arrives today. As you”ve read in this
space, his previous African adventures have been a disaster. But I
can”t fault him for promoting democracy in Nigeria. We need this
nation to adopt a leadership role in West Africa.
But, separately, within the past week the administration will have
authorized American training for Nigerian soldiers (to act as lead
peacekeepers in hot spots like Sierra Leone) as well as the
Colombian military. The significance is that both countries”
military forces have been involved in gross human rights abuses.
So it kind of hearkens back to the 60s and early 70s when our
own CIA fomented trouble with forces that weren”t exactly
wholesome. But your editor approves of the current assistance in
both of these cases, messy as they may be.
Northern Ireland: Not for nothing, but it was a bad week in the
land of Clinton”s main foreign policy achievement. The primary
trouble involves infighting between Protestant guerrilla groups. 3
were killed in Belfast. But, to be fair, it probably has more to do
with turf wars and the drug trade than the actual peace process.
Serbia: NATO may be making a big mistake. Last week I
discussed the upcoming presidential election (September 24)
where Milosevic is seeking a new term. So the U.S. and NATO
have blasted it, saying the process isn”t fair. Yet a poll this week
shows Milosevic trailing a ragtag opposition coalition. So we
should be embracing, not castigating. If the opposition actually
pulls off an upset, NATO is on record as saying the election is a
sham. We look like idiots…not for the first time…and give Slobo
an excuse to stick around…and launch a coup in Montenegro to
boot.
Mexico: President-elect Vicente Fox is touring North America,
promoting his idea for a European-style open border. Ah, not
yet, Vicente. But I admire your brazen leadership. It”s what
Mexico needs.
China: The government arrested 130 evangelicals this week,
including 3 Americans. Kind of funny how God is now a major
part of our own presidential campaign, yet our leaders are
speechless when it comes to criticizing the Communists.
And a little note about the future. China announced that they will
be aggressively trying to refill their strategic petroleum reserve.
There are many different ways to interpret this, but the main fact
is that China is now a net importer of oil. Short-term, this just
adds to the bullish case for crude, in general. Long-term, 10
years from now, you can see why some claim that the next big
war will be fought in Asia, over natural resources.
This Week in Politics
First the post-Democratic Convention polls:
Newsweek, 48-42 Gore
CNN / USA Today, 47-46 Gore
Voter.com / Battleground, 45-40 Gore
ABC / Washington Post, 46-44 Gore
Reuters / Zogby, 44-41 Gore
And in the key states of Michigan and California, Gore leads 44-
42 and 50-37, respectively.
While it”s important to note that all of these surveys are from
samples of 1,000 or less, nonetheless, it was just two weeks ago
that Bush was leading the same national polls by anywhere from 6
to 19 percent. Republicans have to face facts…obviously, Gore”s
convention performance worked. And many American women
seemed to love “the kiss.” [Oh brother.]
But, unlike many of the polls and pundits, I have consistently
maintained this race is going down to the wire and it”s going to be
won or lost, state by state.
While Gore”s “populist” appeal seemed to resonate, Bush had a
tough week, some of it self-inflicted…most of it media-
generated.
One campaign theme that Bush needs to change is his description
of a “hollow” military. Heck, you can talk all you want about low
morale, low pay, and misguided policy directives (as I have), but
our military is not hollow. There isn”t another nation even close
to our capabilities and the vast majority of the American people
understand this. Calling it hollow is not a winning argument.
I think the people also understand, however, that because of the
low morale, low pay or a combination thereof, our military is
rapidly losing its best men and women, i.e., our fighter pilots
going commercial. This is a critically important issue, unless
Americans are now prepared to accept more casualties in future
conflicts. And we all know that”s not the case.
But, most importantly, you can have a debate on the military
which ties it to our foreign policy and the vast commitments we
have made during the Clinton administration. Bush is touching on
this but not in the right way. Oh well, you all know that foreign
policy is not high on the voters list of crucial issues in this crisis-
free, Nasdaq-driven era in which we live. Back to education and
taxes, Governor Bush, as much as it pains me to say it.
Young people: There were some fascinating statistics this week
on the voting patterns of the young.
Back in 1972, when 18-year-olds were first granted the right to
vote, 50% of 18-24-year-olds voted in the presidential election.
By 1996, that total had plummeted to 32%. Current polls
indicate it could be as low as 28% this year. They don”t feel
connected and they tell us that government doesn”t have their
interests at heart, so why bother?
But what are their interests? From what I hear, the environment,
sweat shops, fighting poverty and disease, making money.
Nothing wrong with that.
So why don”t they vote? Many of them are spoiled. The 18-24-
year-old age group was born between 1976 and 1982, which
means they began to understand the world around them between
1986 and 1992 (being generous). Ex- the Gulf War and network
Scud Studs, what have they had to worry about?
Of course, we all should hope the world scene remains as placid
as it has been…particularly as it relates to American interests. I
just wish the 70% or so of the young people who may not vote
this year would spend a little time thinking about America and its
history.
And on a lighter note, Rob Long wrote an op-ed piece in the Wall
Street Journal on a different topic, but it contained this gem in
describing America”s youth. Long was shopping when he
confronted, “(a) depressingly young man behind the register. He
smiled the blank, slack-jawed smile of his generation, the smile
that says, ”Dude, I didn”t understand a word of what you said,
but, like, don”t explain it to me, okay?””
Miscellaneous
–For the 3rd time, Attorney General Reno declined to name a
special prosecutor to investigate potential abuses involving Al
Gore and the ”96 campaign. Folks of my ilk can rant and rave all
they want, but the majority of the people want this whole issue to
go away. For my part, when I go into the booth on November 7,
in the back of my mind will be the statement, “I did not know this
(temple) event was a fund-raiser.”
–The New York Times ran a screaming op-ed headline the other
day. “Stop Arguing and Start Debating.” Oh, puh-leeze.
“Survivor” attracted 51 million Americans (yeah, I watched it
myself). The debates will garner a fraction of that. The three that
are scheduled are enough. But to those of us who give a damn,
the format is critical. None of this town hall stuff and one of
them should be dedicated to foreign policy.
–Regarding Social Security, Al Gore said there was no way he
would raise the retirement age. I guarantee you that if he”s
elected, that will be a “read my lips…no new taxes” type
statement. Raising the retirement age is the easiest and most
equitable way to tackle the problem (and you can still “means
test” it). But this would require leadership. That”s tough to find
in today”s America.
Random Musings
–Open water has been discovered at the North Pole; a possible
sign of global warming as some scientists say this couldn”t have
happened in the last 50 million years. No word on the fate of Mr.
and Mrs. Claus.
–David Schippers was the counsel to the Republicans on the
House Judiciary Committee. He has just come out with his book,
“Sellout,” that goes into the impeachment proceedings.
According to Schippers, Senate Majority Leader Trent Lott
opened his first meeting with Judiciary Chairman Henry Hyde by
saying, “Henry, you”re not going to dump this garbage on us.”
Lott and many of his fellow Republicans were spineless. Hyde”s
crew had guts. “Sellout” is the perfect title.
–Jack Nicklaus summed up the aura surrounding Tiger Woods.
“Tiger not only has the ability to be so much better than the other
guys, but the other guys are not sure they can win.” Exhibit A…
Davis Love.
–To my friends in Texas, hang in there. 60-plus days without
rain in some parts. I might have to ship my Y2K supply down
there.
–Back to golf, and the television coverage of the P.G.A. Didn”t
it seem like every other commercial was about E.D.? I imagine in
some households the conversation went like this.
10-year-old Joey: Dad, what”s erectile dysfunction?
Dad: Ahh, not now, Joey. Tiger”s putting.
I”m a prude. Some of these commercials are virtually
pornographic.
–I have a new checkout girl from hell at my grocery store. She
hasn”t scanned the person in front of me correctly once. But this
does afford me the opportunity to peruse the tabloids, where I
saw this in the National Examiner. “Chelsea to Mom: Don”t
Dump Dad!”
–So do you want to know the real reason why 17-year-old Albert
Gore III was hidden at the convention? It turns out that on
August 12, young Albert was clocked doing 97-mph in a 55-mph
zone at a North Carolina beach community. I guess he didn”t
learn much when he almost lost his own life due to being hit by a
car.
–A new independent study reveals that today”s baseball is juiced,
big time. They are reportedly 3 Xs more lively than the ones hit
by Babe Ruth and Roger Maris. [They supposedly contain a
larger rubber core.] I wrote in one of my Bar Chats this week
that there is also increasing evidence the players, themselves, are
juiced. Up to 30% may be on steroids…which the NFL bans, but
baseball doesn”t. The game is suffering.
–Heard on the radio, “Donate your car to the Heritage For The
Blind.” Might as well throw in a cell phone. Wouldn”t make any
difference.
Gold closed at $274.10
Nymex Crude Oil, $32.03
Returns for the week, 8/21-8/25
Dow Jones +1.32%
S&P 500 +0.99%
S&P MidCap +1.52%
Russell 2000 +1.86%
Nasdaq +2.86%
Returns for the period, 1/1/00-8/25/00
Dow Jones -2.65%
S&P 500 +2.53%
S&P MidCap +19.48%
Russell 2000 +4.03%
Nasdaq -0.65%
Bulls 43.5%
Bears 33.7%
Note: Next week”s review will NOT be posted until Monday
morning, September 4th. Due to a little overseas vacation your
editor is taking, I will also not be doing new articles for “Hott
Spotts” and “Wall Street History,” but if you want to know more
about the Battle of Little Big Horn, check out “Bar Chat,”
starting Monday. Also, “Dr. Bortrum” will continue,
uninterrupted.
*Congratulations to my broker and friend, DP, on the birth of his
first daughter, Alexandra!
Brian Trumbore
