[Posted 7:15 AM ET]
Holy Week – The Middle East
I have noted before that the scary thing about this new world of
ours is that no one knows where we’re headed. No one. It’s not
enough for Americans to say we will prevail. The war on terror
is one that will last decades, if we’re lucky, and there certainly is
no guarantee that the United States will always have leadership
in the White House like we do today, let alone the impact of
political changes among some of our major allies.
By the time many of you read this, the situation on the ground in
the Middle East may have changed considerably. For now,
though, here are the facts from the past week’s momentous
events.
–The 22-nation Arab League held its sham summit in Beirut.
Egypt’s Mubarak didn’t attend because Israel would not allow
the PLO’s Arafat to do so, while Jordan’s King Abdullah feigned
illness and also chose to skip it. So the United States’ two best
allies in the region (among the more major players… sorry,
Bahrain) failed to show.
–On Wednesday, a wanted terrorist affiliated with Hamas blew
himself up at the Park Resort Hotel in Israel’s Netanya, killing
21 at the start of Passover. Other bombings and terrorist
incursions claimed at least another six Israeli lives within 48
hours, equivalent to about 1,300 deaths in the U.S. Syria’s Assad
failed to condemn the massacre.
–Thursday, the Arab League, after 50+ years of opportunity,
finally recognized the existence of Israel and offered “normal
relations” in exchange for withdrawal from Arab lands held by
Israel since 1967. It also called for a “fair solution” to the
explosive Palestinian refugee issue. At the same time, the
despicable dictators of the desert planted sloppy kisses on the
Iraqi representative and welcomed his nation back into the fold.
Iraq, in turn, signed a non-aggression pact with Kuwait and I
swore I saw Neville Chamberlain floating about the hall.
–Friday, Israel labeled Yasser Arafat an “enemy,” blasting its
way into his compound and “isolating” him. Then early Saturday
A.M., the UN Security Council, joined by the U.S., approved a
resolution calling for Israeli withdrawal from Palestinian
cities. This is where we currently stand.
Meanwhile, in an interview this week with the Washington Post,
Israeli Prime Minister Ariel Sharon said he was really most
concerned with the threat posed by Iranian-backed Hezbollah in
both Syria and Lebanon. We know for a fact that at least short-
range missiles have been supplied to the terrorists, right on
Israel’s border. It is also clear that, as the New York Times
reported in an extensive article, Iran’s alliance with Arafat is far
more complex than the recently captured arms shipment. The
reformers in Iran are tragically losing out to the hard-liners once
again. Iran is also financing and arming Hamas and Islamic
Jihad.
Regarding Iraq, in interviews last weekend Vice President
Cheney was characteristically blunt in his assessment and said
connections between al Qaeda and Saddam were certainly
possible. He also labeled the recent New Yorker piece by Jeffrey
Goldberg, one that detailed Saddam’s prior chemical weapons
use, “devastating.” British Prime Minister Tony Blair is coming
to the U.S. this week to lay out what British intelligence knows
about Saddam’s weapons programs, though some say he can’t
definitively tie Saddam to 9/11. Nonetheless, it will be
increasingly clear that the U.S. and Britain are ready to roll
within months if need be.
Separately, the U.S. and Russia have been working closely on a
new Iraqi sanctions regime. What’s particularly encouraging in
this regard is the apparently growing realization that Russia and
France may be seeing the light, i.e., that a post-Saddam Iraq will
be good for business. As I’ve noted before, particularly as it
relates to Moscow, if I’m President Bush I offer assurances that
Russia can drill to its heart’s content, just as long as the Butcher
of Baghdad and his compatriots are eliminated.
That’s your up-to-the-minute report on events in the region. For
now I’ll leave aside other issues, such as potential civil war in
Jordan, which has a huge Palestinian problem of its own, as well
as a probable civil war in Israel, if the settlements are ever
dismantled as part of some grand peace plan. On a personal note
all I know is I was sitting in church Thursday night feeling more
than a bit depressed about the world situation. It’s not just
enough to pray to your God, either. Pray that America’s leaders
and those of our allies receive His guidance. Otherwise, all that
follows is totally irrelevant.
Wall Street
It was a quiet week, as befits a holiday-shortened one. The
economic data that was released, however, continued to offer up
mostly positive evidence that the recovery continues apace,
witness the latest readings on consumer confidence, which rose
sharply. The government also announced that GDP in the fourth
quarter rose a higher than first estimated 1.7%. While this is
looking in the rearview mirror, it certainly buttresses the
arguments of those who say the U.S. economy was never even in
a recession. Most projections for first quarter GDP now stand at
4% plus.
The equity markets barely budged, with the Dow, S&P 500 and
Nasdaq all trading down 0.3% or less. The Dow closed at 10403,
while Nasdaq has now declined 3 weeks in a row and sits at
1845.
But while the economy may be improving, it’s the sustainability
of the recovery that is being called into question. Valuation is
still a big issue and over the next few weeks we will begin to
receive evidence as to whether today’s high price/earnings
multiples are in the least bit warranted as corporations begin to
report results for the first quarter. Wall Street is counting on a
rebound in profits over the course of the year in the area of 16-
17%. Any indication that these projections may be hard to attain
and the market could be expected to tumble.
One impediment to a robust earnings recovery is rising interest
rates, which obviously eat into the bottom line. Rates have been
steadily climbing, until this past week, as bond traders expect the
Federal Reserve to at least begin taking back the stimulus
provided post-9/11. But this week 3 Fed officials issued very
sanguine comments on the inflation front, which helped to stem the
slide in the bond pits, though one just has to look at the
negative impact of soaring energy prices to call into question the
health of these same Greenspan mouthpieces.
Crude oil is now above $26 a barrel for the first time since last
September and prices at the pump have been rising at the fastest
clip in history (10% in just 2 weeks). As one who follows this
sector closely, I’d be disingenuous if I didn’t add that prices are
still at historically low levels, however, it’s the trend that is so
disconcerting, particularly if your rosy profit scenario counted as
a positive $20 oil and $2 natural gas (currently $3.25) for the
foreseeable future. High valuations in most market sectors are
based on a perfect recovery with rising demand and zero
inflation. Any deviation makes it all suspect.
Street Bytes
–U.S. Treasury Yields
6-mo. 2.10% 2-yr. 3.70% 10-yr. 5.40% 30-yr. 5.80%
Bonds were unchanged on the week, as the aforementioned
musings of Fed governors led market participants to dampen
down expectations for an increase in the fed funds rate come
May 7.
But, on the inflation front, one must separate government fiction
from reality. While personally I am not yet a true inflation hawk,
I can’t ignore some of the facts. So, herewith is our latest edition
of…
INFLATION WATCH: I asked Mark R. to help me accumulate
some further statistics.
*UPS teamsters rejected a wage pact which offered a 30%
increase over the life of the contract.
*The price of a head of lettuce has more than doubled in just the
past few months.
*Classic French Bordeaux is up 15-25%, though it’s good for
you, as opposed to iceberg lettuce, which has zero nutritional
value.
*Allstate raised homeowner insurance premiums some 20%,
standard across the industry, while you are all well aware that
medical insurance and prescription costs are soaring on the order
of 25%.
Add in the aforementioned hike in energy and you may be asking
yourself, then why are the official government inflation figures
still so tame? I’ll answer that next week.
–In an obviously related vein, gold is attempting to break out
again, finishing the week at $303, the highest level in 7 weeks.
That earlier rally failed, as have all the others over the past few
years. This time may be different. The geopolitical situation is
none too clear and there has been aggressive buying by many
Asian individuals, particularly in Japan. Whether gold is rising
as a potential inflation hedge, fear of a collapsing dollar, or
simply because of the war on terrorism, isn’t as important right
now as the fact it is rallying. A breakout above $310-$320
would make true believers out of a lot of us.
–Japan: After staging a strong rally, Tokyo’s Nikkei index has
now declined 3 weeks in a row. This week marked the end of the
fiscal year, but with the Nikkei still above 11,000, banks, in
particular, were bailed out from having to mark down their
securities holdings. [10,000 being a magic threshold.] So
despite the recent 7% slide, the government’s efforts to prop up
the market the past two months worked. But now there is a
different issue, that being the fact that on April 1st, deposit
insurance on bank accounts with more than $75,000 (at current
exchange rates) goes away, so it will be interesting to see what
depositors do in the case of the shakier institutions. Pulling their
funds out now that the safety net has been removed will
obviously exacerbate the problems with the more troubled
banks…in the end, actually a good thing. But in the short-run,
no one likes “bank runs,” and that’s possibly where we are
headed.
–Argentina: It hasn’t been receiving a lot of press the last few
weeks, but the picture here continues to grow bleaker as the peso
has been going through convulsions. Unrest is growing once
again, and U.S. companies are suffering further with
$-denominated debt.
–In the New York area, low- and middle-income homeowners
are defaulting on their mortgages at an alarming rate. [New
York Times]
–Volume on the equity markets has been slowing to a crawl.
Some firms, such as ABN-Amro, are shuttering their operations.
On the other hand, corporate bond volume is rising, as
companies rush to lock in longer term financing in the face of the
severe crunch in the commercial paper markets. But by having
to pay higher rates, it also impedes earnings.
–PIMCO’s Bill Gross, in an interview with the New York
Times.
Q: Which big issuers of commercial paper effectively
communicate with investors?
A: I couldn’t name one big issuer…that does this now.
–It really is amazing how many articles are still being written
about the “great advances” in Net-enabled technology that are
coming to a hand near you. Let me remind these intrepid scribes
(who I cynically believe represent 50% of the market for these
products) that until you can assure crystal clear sound quality on
a simple cellphone call, there is absolutely no way you can really
begin to talk about the next generation of products. [In a word,
cellphone reception, I think you’d all agree, sucks.] Oh sure,
everything looks great in a test, but the reality is the connections
won’t work on a consistent enough basis for Net-enabled devices
to warrant the huge extra costs. That’s the first point.
The second is, I still fall back on the obvious. Who the heck
really needs much of this stuff? [I’m referring to all hand-held
devices, outside of e-mail services.] Of course the industry is
scrambling to convince everyone we do, this after spending $tens
of billions building out networks for which there is little real
demand. What they seek is a government bailout (including the
broadband cable guys). Tough. It’s called capitalism. You lose.
Lastly, you have the new British study that reveals that driving
while on a cellphone is far more dangerous than driving drunk.
Americans should be up in arms that a federal law banning such
a practice hasn’t been passed.
–Were you in the right sectors and funds for the 3-year period
ending 3/28? [Annualized returns]
S&P 500 -2.4%
Large Cap Growth -6.5%
Large Cap Value +2.7%
Small Cap Growth +9.8%
Small Cap Value +20.5%
Short-term Bonds +5.6%
Science-Technology -8.4%
[Source: Lipper. Of course past performance is no guarantee of
future success, or lack thereof.]
–Reed Slatkin, co-founder of Earthlink, was formally charged
with masterminding a Ponzi scheme which defrauded 800
investors (including Greta Van Susteren, she of the new face) of
some $590 million. Slatkin was able to do most of this through a
normal dial-up. Imagine what he could have accomplished with
DSL?
–Arthur Andersen’s CEO, Joseph Berardino, resigned before
employees could put him through a shredder.
–In case you needed even more evidence as to the carnage in
technology you have the case of Juniper Networks. The Cisco
Systems wannabe reported first quarter revenue in 2001 of $332
million. The company is now estimating that for the same period
in 2002, revenue will be just $120-$125 million.
–Louis Rukeyser was relieved of his duties well before his June
28 contract expiration, thanks to his warranted diatribe last
Friday. In response, Uncle Lou called Maryland Public
Television officials, “graceless idiots.”
Trade / Foreign Aid
President Bush told the Monterrey conference that the U.S. was
prepared to step up its aid to the developing world by $15 billion
over the coming 3 years, but that he also wasn’t about to pour
money down a rathole. Bush added, “to be serious about fighting
poverty, we must be serious about expanding trade.”
Good enough, but on the trade front, Bush has been more than a
bit hypocritical lately, particularly with his irrational decisions on
imposing tariffs on both imported steel and Canadian lumber.
While you can not call the early response to such ill-conceived
actions a full-blown trade war, retaliation by the European
Union, China, Canada and Brazil needs to be nipped in the bud,
immediately.
It also bears repeating that most of us should recognize that the
war on terror is supposed to be the paramount issue of our day,
so why does President Bush risk splitting the coalition over some
votes in West Virginia and Pennsylvania? Just another reason
why we are forced to sleep with one eye open.
On a related issue, Democrats clearly didn’t distinguish
themselves either this week, when they chose last Saturday’s
radio address to blast Bush for going to Latin America, saying he
was doing nothing more than courting the Hispanic vote. For
starters, these days an American president needs to be on the
road constantly, in my opinion, drumming up support for the
war. Domestic policy, with the exception of Homeland Security,
takes a backseat. The Democrats continue to look very small.
International Affairs, continued…
Afghanistan: Suicide bombers are not just confined to the Israeli-
Palestinian conflict. The Times of London reports that the
Taliban are preparing some 300 to carry out guerrilla warfare
against the U.S. and coalition interests in the country and
surrounding region. Separately, Canada’s intelligence service
warned its own countrymen that al Qaeda cells in Canada still
pose a very serious threat.
Pakistan: President Musharraf, in his annual address to his
people, emphasized his cooperation with the U.S. Some, though,
doubt the extent of his support for the war. The answer lies
somewhere in between. Those who downplay Musharraf’s
effectiveness simply can’t ignore the fact that, startlingly, the
U.S. now has a military presence on Pakistani soil. On the other
hand, there is also no doubt Musharraf does not have full control
of his security apparatus, which is why the trial of Daniel Pearl’s
killer(s) will be quite telling in its outcome.
Kashmir: Lost in the troubles of the Middle East the past few
weeks, Kashmir certainly has not gone away as a major flash
point. Both India and Pakistan continue to have massive
numbers of troops on the border and on Thursday and Friday,
some 25 were killed in various clashes.
China: The issue of the visit to the U.S. by Taiwan’s defense
minister 3 weeks ago continues to irk Beijing to no end. In
retaliation, China blocked a U.S. warship from docking in Hong
Kong. Meanwhile, with each passing day labor trouble continues
to spread, particularly as those that have been laid off, or who
have recently retired, find that their promised safety net has
massive holes in it.
Random Musings
–Pope John Paul II’s health continues to weaken and in light of
the recent turmoil within the church, some Vatican insiders are
now calling for the pontiff to step down. No pope has
voluntarily done so since the 13th century.
–Back on 11/18/00 and 4/14/01, I commented on the coming
battle over reparations. It’s now officially here, as the first
lawsuits were filed this week against Aetna, CSX and Fleet
Boston. It is inevitable that the media will eventually have a
field day with this topic and some of the arguments will prove to
be more than a bit divisive, particularly as public officials are
forced to take a stand. Just my opinion, but it may equal the
abortion issue in its impact at the polls down the road.
–The reports from Florida regarding the potential connection
between anthrax and some of the 9/11 hijackers seems pretty
compelling, but I’m disturbed at the FBI’s reaction. Cut the
bureaucratic crap, guys, and start acting like Efrem Zimbalist, Jr.
–Tom Hundley of the Chicago Tribune had a piece on the wave
of nostaligia for Mussolini among some Italians, this after the
recent election of Prime Minister Berlusconi, who has forged a
right-wing alliance. Berlusconi is one of our staunchest allies in
the war, but he needs the Fascist element to maintain a
parliamentary majority. In other words, just as Donald Rumsfeld
said from day one, the world is no longer black and white, and
our fight against evil may from time to time make for some
strange bedfellows.
–According to Business Week, 51% of the adult population in
the U.S. now has at least some college education vs. 40% in 1991
and 33% in 1982.
–New York Post columnist John Podhoretz on Halle Berry’s
acceptance speech. “(She was) so out-of-control that you
worried she might actually have to be carted off the stage in a
straitjacket.”
–It sure was a rough 24-hour stretch for the entertainment
industry in losing Dudley Moore, Milton Berle and Billy Wilder
all at once. Said Buddy Hackett of Berle and his pioneering
efforts on television, “No one knew how to do anything until he
did it.”
–The Denver Aquarium is the first such facility to close in the
country due to its high debt load and declining attendance.
Looks like there is one cartilaginous fish to blame…you guessed
it, those conniving loan sharks.
–Good news! 70-90 million doses of smallpox vaccine were
discovered in a drug company’s freezer in Pennsylvania. Also
found were some Swanson’s TV dinners from 1965 and Jimmy
Hoffa.
–Finally, George Will quoted author Steven Weinberg. “The
effort to understand the universe is one of the very few things
that lifts human life above the level of farce, and gives it some of
the grace of tragedy.”
God bless the men and women of our armed forces.
God bless America.
—
Gold closed at $303
Oil, $26.31
Returns for the week, 3/25-3/29
Dow Jones -0.2%
S&P 500 -0.1%
S&P MidCap +1.0%
Russell 2000 +0.8%
Nasdaq -0.3%
Returns for the period, 1/1/02-3/29/02
Dow Jones +3.8%
S&P 500 -0.1%
S&P MidCap +6.5%
Russell 2000 +3.7%
Nasdaq -5.4%
Bulls 51.6%
Bears 29.7% [Source: Investors Intelligence]
Have a great week and a Blessed Easter.
Brian Trumbore
