[Posted 7:00 AM ET]
“There is a crisis of confidence today about corporate earnings
reports and the credibility of chief executives. And it’s
justified.”
–Warren Buffett / New York Times
The Great One continued, in his Wednesday op-ed piece.
“CEOs want to be respected and believed. They will be – and
should be – only when they deserve to be. They should quit
talking about some bad apples and reflect instead on their own
behavior.”
If you thought I was harsh with my own recent comments on the
topic, I bet by mid-week you were having second thoughts. I
made the following comment back on January 26 of this year
concerning Enron.
“The tentacles reach far into the executive offices of many of
Wall Street’s leading firms.”
This week the Senate Banking Committee held hearings looking
into the connection between Enron and two of its bankers,
Citigroup and J.P. Morgan, specifically regarding some of the
secret partnerships that allowed Enron to hide massive amounts
of debt from its balance sheet. Senator Carl Levin called it all
“an accounting sham,” as the two institutions supplied some $8.5
billion in financing in exchange for fees.
Of course the leaders of both Citigroup and JPM denied any
wrongdoing. They were just doing what everyone else does,
after all, and merely following existing accounting standards. It
was a despicable performance.
But as Buffett alluded to, whether or not the actions were
criminal is not necessarily the point. The fact is they deceived
the investing public and when you see these guys on television
make all sorts of excuses you just want to scream. ‘No, you can’t
do that!’
There’s a dirty little secret on Wall Street among those who work
there, including yours truly during my 16 years in the business.
This kind of garbage goes on every single day, both in bull and
bear markets. It’s just that at this point in the cycle the public is
allowed a little glimpse, and it isn’t pretty.
President Bush stumbled on the truth the other day when he said,
“My attitude on Wall Street is they’ll buy you or sell you,
depending upon if it’s in their interest.” Not exactly
Wordsworth, but you get the point.
Of course there are tons of good people in the industry, and I
don’t want e-mails on how vital the Street is to our capitalistic
system. Yes, I know that. But it’s the nature of the business that
pulls an inordinate number of conniving SOBs up to the top.
Unfortunately, as Buffett himself knows all too well, in the last
five years more than just Wall Street’s titans fell under the spell,
and if you think this episode of corporate chiefs acting badly will
pass quickly, you’re sadly mistaken.
—
After reading the above you shouldn’t be surprised then when I
say that the stock market’s stupendous rally on Wednesday, with
the Dow Jones registering its best day in 15 years, does not mark
the bottom and the start of a new bull market. But I will advance
my baseball analogy of last week to say we’ve moved to the 5th
inning from the 4th in this historic bear move.
Why? Well, there were some positive developments, starting
with the very public arrest of Adelphia Communications’
executives and then Congress’ efforts at finalizing corporate
governance legislation, which begins to address the bad practices
of the Bubble.
That leaves us to grapple with the economy. If you believe that
the U.S. consumer will merely shake off the tremendous hit to
their savings, and you believe that business confidence will
return in a big way, and that there will be no war with Iraq or
future hits on American soil, or that the spiraling deficits we are
now witnessing at both the state and national level are but a
short-term issue, then you’re probably a bull.
But, my, that’s an awful lot of faith, when weighed against what
seems to be common sense. Some highly respected Wall Street
figures (yes, there are a few), like Goldman’s Bill Dudley and
Morgan Stanley’s Stephen Roach, as well as Yale economist
Robert Shiller hold that the above risk factors, and others (like
real estate), will keep us in a funk for quite some time.
For example, Roach opines, “Consumers who are savings-short
and overly indebted are going to have to pull back and it’s going
to be a multi-year retrenchment.” [Gretchen Morgenson / New
York Times]
Shiller adds, “I just don’t believe all these earnings. If you don’t
believe them, then P/E ratios are really high. Investors are not
going to tolerate that.” [Daniel Altman / New York Times]
Lastly, some strategists love to say that “no one is buying the
fundamentals” and they can’t understand why there is such a
“decoupling” between the economy and the markets. That’s
because the economy will fall back, guys. And while equity
markets are entitled to more than a few bear market rallies, we’ll
eventually settle into a trading range, well below the highs from
just a few months ago, with investors seeing no real
improvement in their portfolios. Consumer spending will
continue to slacken off, the housing boom will screech to a halt,
and bears will be manning neighborhood checkpoints. Have
some honey available. They may let you pass through without
incident.
Street Bytes
–For all the talk of a comeback in the markets, it was far from a
complete one. While the Dow Jones gained 3.1% to close at
8264 (still 420 points below the close of just two weeks earlier),
Nasdaq fell another 4.3% to 1262. The index has had only 3
winning weeks in the last 20!
What was encouraging, however, was the action on Friday. It
was normal. We could use a few weeks of normal behavior,
simply to allow everyone to catch their breath.
–U.S. Treasury Yields
6-mo. 1.67% 2-yr. 2.21% 10-yr. 4.38% 30-yr. 5.31%
The two-year tumbled to new lows, as did mortgage rates,
though the latter has almost run its course in terms of benefiting
the economy.
–From time to time, my friend Mark R. and I have supplied you
with fodder for “inflation watch,” but, as I’ve also written, I want
to be clear I’m not crying wolf (Mark is), since I can’t fight the
official government statistics. Additionally, the poor action in
the price of gold (the rally is finis…over), as well as my overall
feelings on the economic outlook, call not for inflation, but rather
the growing threat of deflation.
All this aside, there is no doubt that some costs are skyrocketing,
like last week’s example of tuition increases. So I liked what the
New York Post’s John Crudele wrote this week on the topic.
“The government keeps inflation down by not fairly representing
price increases on items like property taxes and health insurance,
and greatly understates the rising cost of housing.”
There is a tremendous incentive to do this, of course, and that is
the fact the federal government then has less to shell out in
entitlements. So Crudele’s conclusion is that the President
should be forced to sign the books, just like we are now
demanding of our CEOs.
–The news that the world’s biggest manufacturer of computer
chips for other companies, Taiwan Semiconductor, was
drastically scaling back its capital spending plans was
devastating to the tech sector on Thursday. But even more
important, longer-term, were the actions of Verizon and
Telefonica, which, in cutting the chords with Internet firm
Genuity and Nortel, respectively, sent a real clear signal. The
Web and wireless revolutions have come to a screeching halt.
The costs in no way rationalize potential benefits. Across
Europe, for example, everyone appears to be abandoning once
overly ambitious (and wildly expensive) plans for the 3G
wireless standard that was to be the magic elixir. I’ve been
telling you for over 3 years this would be the case. Now, not
only is no one going to give a damn about being able to watch a
movie over their handheld, but we still can’t even make a simple
cellphone call without static. Case closed. Go back to perfecting
the wheel. Maybe a new kind of cheese wheel with video on
demand in the center.
–Dick Grasso: After 9/11, I blasted NYSE chairman Grasso,
calling his rhetoric “pitiful” (WIR – 9/15) and proclaiming that
he acted “like a used-car salesman” (WIR – 9/22). Needless to
say, I received a few negative comments from friends on the
Street when I wrote this, but it’s time to revisit the issue, as
Grasso appeared on every program imaginable the past week.
He actually said something on “Meet the Press” that went against
his normal P.T. Barnum act, when he told Tim Russert that we
need to address the “terrorism in the boardroom.” No argument
here, though even I thought that was over the top.
But then Grasso was right back to his old self, proclaiming on
“Today” that the market “will rise from the ashes and go to
higher highs.” A totally irresponsible comment from a man in
his position.
So now we move to Thursday morning, when on CNBC famed
short-seller Manny Asensio dropped this stick of dynamite onto
Grasso’s lap.
“(Grasso) is a front man for the mob that stole Americans
savings” and he’s nothing but a “stock promoter.”
Wow, that took guts. I wish I had said it first.
–Now do you see why I was so critical of Citigroup’s Sandy
Weill last week? The CEOs of the Street’s leading firms should
be lopped off across the board, because they were all in on the
scam. To pass the blame down to underlings and client
accountants, as men like Weill now do, doesn’t cut it.
And I’ll tell you another issue I’m wrestling with these days.
You may have noticed an almost anti-philanthropy attitude from
yours truly (I’m not referring to examples like Bill and Melissa
Gates’s foundation and its tremendous work in Africa). I’m
working on a theory you won’t find anywhere else, that’s for
sure, but I believe part of our problem in the corporate
boardrooms had to do with the need for executives to give
themselves enormous pay packages in order to feed their
egomaniacal need for public adulation. It’s a work in progress,
you understand, but I’ll have more over coming weeks. Suffice
it to say, for now, that when you saw interviews with the
townspeople of Coudersport, PA, home of Adelphia, folks said
the Rigas’s were so “philanthropic.” They were freakin’ crooks!
If I looted a firm of $600 million to meet some margin calls, I
could also probably afford to drop a $1 million in the community
theatre’s coffers. To be continued.
–Back to the banks, famed money manager Michael Price said
he wouldn’t touch Citigroup or J.P. Morgan because they were
nothing but “black boxes.” Regarding the latter in particular, Jim
Grant has railed for years about JPM’s derivatives position, and
in this era of one collapse after another, what about the
counterparties to all of these transactions?
–If you think America may have lost a generation of investors,
look at Europe. This was really its first one, and it’s shattered
just as bad as our latest generation was.
–But Asians are a different breed. From the International Herald
Tribune and an interview with a stockbroker in Hong Kong.
“It is strange the way Americans see stocks as a source of
guaranteed fixed income. To most Asians, the stock market is
for gambling, like horse racing.”
–Strategist Lazlo Birinyi, one of the better ones around,
reiterated his opinion that the current market environment (going
back to the beginning of the year, essentially) is still far too
complex for the average investor and that the odds are stacked
against you. No one looks long-term, including the fund
managers you place your faith in, as the market constantly rotates
from one sector to another.
–I continue to get a kick out of those investment mavens who
say “the return on cash is less than the inflation rate?” So? I
kind of like the fact I still have most of it around.
–On March 14, 2000, just days after Nasdaq peaked at 5048,
professor Jeremy Siegel wrote his prescient op-ed piece in the
Journal on the valuation bubble in the technology sector. It will
go down in history as one of the great calls. So I read with
interest his decidedly more bullish column in Thursday’s edition,
where he labeled valuations “reasonable,” even when based on
tougher accounting standards. “Amid all this gloom, the market
looks very inviting to me indeed.” For traders, professor, only
for traders.
–My portfolio: Once again, I added about 2% to my energy
holdings, but thanks to depreciation in the sector, at week’s end I
was still roughly 80% cash, 18% energy / oil service, 2% Turkey.
FYI…I have never owned one of the energy trading firms, like
Enron, Dynegy or Williams, unmitigated disasters, all, and I have
been able to avoid other blowups in the sector, thus far.
–Well, you won’t see many mutual fund companies touting 3- and
5-year track records on their equity offerings, that”s for sure.
–Speaking of funds, I took some personal pride in seeing the
news that PIMCO’s Total Return Fund could very well become
the largest single mutual fund in America; barring a huge rally,
surpassing even Fidelity Magellan and Vanguard 500.
Particularly between 1996 and 1998, my job at PIMCO was to
run around the country and make sure everyone knew the Bill
Gross / fixed income story. Oh, it was lonely at times, being the
only presenter at an investment conference that was pitching not
just diversification, but doom and gloom (my personal touch),
while everyone else was swept up in equity mania. By the time I
left in February ’99, the story had really begun to take hold and
now, especially since spring 2000, my old friends are rockin’ and
rollin’. They deserve it.
And for those who aren’t too happy with the performance of their
financial advisor these days, I have a simple, one-item checklist.
If you are hearing of bonds as an investment alternative for the
first time in just the past few months, find another one. But if
your advisor / broker was showing you something like Total
Return Fund, long ago, he or she is a keeper.
–Property prices in Hong Kong are down 60% since October
’98. Of course the new Commie influence isn’t helping matters.
–From Scott P. in Melbourne, Florida, “Viva la shorts!”
Actually, Scott, like many of you is concerned about the pension
fund shortfalls in Corporate America. When the market was
rockin’, gains aided earnings. Now we’re in reverse, but, as
Warren Buffett added in the above op-ed piece, “(corporations
need to) quit recording illusory pension fund income.”
–AOL’s accounting is now being investigated by the SEC,
following the Washington Post series. Yours truly certainly isn’t
surprised. After all, just three years ago the investment
community suckered many into thinking that a ‘hit’ on a Web
site would translate into thousands of dollars. Remember
Yahoo’s early reports? A ‘hit’ wasn’t even a ‘visitor,’ folks.
Separately, in its Q2 earnings release, AOL announced its online
e-commerce revenue had plummeted 42% in the quarter.
–Tyco, shares plunging on Thursday due to rumors of an
imminent bankruptcy filing, rallied upon the announcement that
it was hiring Motorola’s president to replace Dennis Kozlowski.
–Hershey Foods, or rather the trust that runs the company, has
essentially put itself on the market. You should find it near the
peanut butter; the only combination that works for me.
–In December, Merrill Lynch’s Stanley O’Neill will become the
first African-American to head a major Wall Street firm. He’s
probably just as dirty as the rest of ‘em.
–Some of the reporting on market statistics has been horrible the
last few weeks. Case in point, the Wall Street Journal, which
noted that in “1968 the Dow traded above 1,000 (and) failed to
close above that level again until 1984.” Oh, where does one
start?
Try Jan. 18 and 19, 1966, as well as Feb. 9 and 10 of the same
year, for the Dow first trading above 1,000…but it failed to close
at that level. It didn’t close above 1,000 until November 14,
1972 (peaking at 1,051 on Jan. 11, 1973). After the ensuing bear
market, the index then closed above 1,000, again, on March 11,
1976. Finally, after bottoming at 776 on August 12, 1982, the
Dow closed above 1,000 on October 11, 1982. So you can see,
the keepers of Wall Street’s official record blow.
–As expected, WorldCom formally declared Chapter 11,
becoming the largest company in U.S. history to do so. This
coming week, some senior executives will be indicted; at which
point the nation should stop what it’s doing and cheer.
International Affairs
Israel: The Bush Administration was correct in calling the Gaza
attack against the military leader of Hamas “heavy-handed,” and
you can see from the Israeli peoples’ own reaction that it was a
colossal mistake. Not that the Sheik was blasted to hell, mind
you, but rather because of the civilian loss of life, especially
children.
Yes, I’m well aware of the terrorist acts this guy was responsible
for, but I thought this was a job for commandos. It seemed to
be similar to actions the Clinton Administration used to take, or
rather inaction. Fire from above, take no casualties below. Now,
Israel will pay an even steeper price.
On a different matter, former Middle East envoy Dennis Ross
wrote an important piece on the matter of Hezbollah’s missile
buildup in Lebanon. If President Bush is to be a man of his word
(this is my opinion), he eventually has to take these out. I’m
assuming this is what he meant when he said the U.S. would
fight the terrorists wherever they may be. And this is exactly the
kind of pre-emptive action he talked about in his important
speech at West Point last month.
Iraq: Saddam Hussein announced he will be holding a
referendum in mid-October for a new 7-year term. Back in
October 1995, he won 99.96% of the vote on turnout of 99.47%.
Seriously. You mean you don’t believe the Iraqi government?
Iran: The Bush Administration has reportedly abandoned
attempts to work with President Khatami and will appeal to the
people more directly to rise up against the regime. It’s received
so little press in the U.S., but pro-democracy demonstrations
have become a staple of everyday life throughout the nation.
What worries many is the inevitability of bloodshed on a massive
scale if, as seems likely, the hard-liners beat back any more
serious attempts to topple them. President Khatami, the
‘reformist’ who is simply a puppet of the clerics, responded to
the change in tone at the White House by proclaiming that the
“U.S. is steering a frightening course toward war.”
Meanwhile, the New York Times had a scathing piece
concerning the bombing of a Jewish community center in Buenos
Aires, back in 1994, which killed 85. It has always been
suspected that Iran backed the action, now the Times reports that
Iranian defectors confirm this. Even more troubling is the
accusation that former President Carlos Menem was paid
$millions by Tehran to keep quiet.
China: Pursuant to my comments of last week concerning
President Jiang Zemin and his reluctance to leave the stage, the
Washington Post reported that there are growing concerns the
transition of power slated for later in the year will not be a
smooth one, and that has serious ramifications for the entire
region.
Zimbabwe: The UN asked President Mugabe to reverse his land
redistribution program, because half his people face starvation,
but he refused.
Turkey: Oh, that daffy Prime Minister Ecevit. And believe me,
he is truly daffy, like loco. On Sunday he decided to backtrack
on everything he had said the previous week to Assistant
Secretary of Defense Wolfowitz concerning Iraq. Now, he
uttered, he wasn’t for the invasion and, furthermore, there
wouldn’t be early elections in November either. But on
Wednesday, Ecevit returned to his senses and said he wouldn’t
prevent an early vote after all.
Greece: The government announced they had uncovered plans
that the November 17 terrorist group had designs on attacking
NATO peacekeepers passing through Greece on their way to
Kosovo. It would appear the recent large-scale arrests of
November 17 members disrupted the operation.
Random Musings
–President Bush desperately needs a higher market. In a Wall
Street Journal / NBC News poll taken on Tuesday (before the
rally), 49% didn’t feel Wall Street was free and open. The
Justice Department needs to keep cuffing people, the market has
to rally and the economy needs to remain on a growth path,
otherwise Richard Gephardt’s prediction of a 30-40 seat gain in
the House may not be so far-fetched. But then there’s Iraq and a
potential “October Surprise.”
–As both Republicans and Democrats spent last weekend at
various retreats with corporate donors, the New York Times said
it took particular “chutzpah” for New Jersey Senator Jon
Corzine, having assumed a leadership role in the fight against
corporate abuse despite having been such a high-profile Wall
Street insider himself, to then spirit away on a corporate jet to
Nantucket for the Dems’ donor reception.
–All this while New Jersey’s other senator, Bob Torricelli, was
in the news, only constituents here in the Garden State weren’t
allowed to hear his closed door testimony at the Senate Ethics
Committee hearing looking into his dealings with a convicted
felon. Compounding matters, he’s up for reelection this fall.
The evidence against Torricelli for accepting illegal gifts is
overwhelming, that is, if the Senate wants to see it that way. Fat
chance anything of substance will happen, though.
–I know it’s popular to like Jim Traficant, because he was
different and outrageous, but, c’mon, he was a crook. See ya.
Now back to Torricelli…
–I hope you understand that none of my seemingly “anti-
business” comments of recent vintage are directed at the
backbone of American society, the small business owner. After
all, I’m a small business owner!!!
–Ireland’s population now stands at 3.9 million (not including
the 1.7 million in the North), which represents the highest in
modern history. The low was 2.8 million in 1961, but since
1996, thanks to the booming economy, the nation has seen net
growth. It’s still hard to imagine, though, that back in the 1840s,
before the Famine of 1845-51, the population was 8.2 million.
Bet you could win a few pints on that one. Go ahead…I’ll wait.
–As a follow-up to my item last week on the fear that terrorists
will blow up water pumping stations, thanks to an informed
source (J.P.), I learned that a CEO of a large water distributor in
Southern California is very concerned over the fact he has
hundreds of miles of unpatrolled aqueducts linking the region to
the Colorado River. To make matters worse, it will take another
2-3 years to install the appropriate sensors and defense
mechanisms. The economic loss would be staggering.
–Speaking of water, or lack thereof, Phil W. passed along some
pictures of the deepening drought situation in North Carolina.
Lakes are bone dry, but, even more importantly, if parts of the
Mid-Atlantic don’t get substantial rain soon, local governments
will be forced to shut businesses down, which, you’ll recall, had
been my fear up in the New York region this past spring.
–The Chicago Tribune ran a piece that should scare the hell out
of everybody, that being that of 103,000 U.S. hospital deaths in
2000 linked to infection, some 75% were preventable. Medical
care is pitiful, and unsanitary facilities, germ-laden instruments,
and physicians and nurses who forget to wash their hands are the
culprits. I’ll never forget when I asked a local doctor friend how
a young patient had died at a large hospital in town and she said,
“You don’t want to know.” Part of that 75%.
–We’ve had so much bad news on the child front lately, that it
was refreshing to see the actions of 7-year-old Erica Pratt of
Philadelphia. Yes, I know this case is really screwed up, with
different relatives and drug gangs potentially involved, but this
little hero looks like she’s about to light up the world. Let’s hope
she gets the chance to follow her dreams.
–I got together this week with my good friend Father Bill of the
Jesuit Mission Bureau in New York. He is the one responsible
for my involvement in Micronesia. It was a wide-ranging
discussion, including my concerns over the use of the limited
funds I have donated over the years, in light of the problems
facing the Catholic Church. And we also talked about Father’s
trip to Barcelona for the World AIDS Conference. He happened
to be in the audience when Tommy Thompson was so rudely
treated. Even Father Bill was “pissed.” But on the issue of the
church in general, I haven’t commented since my single remark
on 3/23 in this space and I hadn’t planned on saying anything
further, except that Father left me with these words that I pass
on to my fellow Catholics.
“Don’t let them take it away. It’s your church.”
Father Bill, I was touched by this. And I was so pleased you
were proud to wear your collar. We’ll get through it, which
is clearly the message being sent by the Pope in Toronto this
week.
God bless the men and women of our armed forces.
[Hang in there, Ft. Bragg. Lean on each other.]
God bless America.
—
Gold closed at $304… hope you enjoyed the rally.
Oil, $26.54
Returns for the week, 7/22-7/26
Dow Jones +3.1%
S&P 500 +0.6%
S&P MidCap –1.2%
Russell 2000 –1.0%
Nasdaq –4.3%
Returns for the period, 1/1/02-7/26/02
Dow Jones –17.5%
S&P 500 –25.7%
S&P MidCap –18.1%
Russell 2000 –21.8%
Nasdaq –35.3%
*For you market junkies, you may want to jot down the intraday
lows from Wednesday, which are now key numbers to follow on
a technical basis.
Dow Jones…7532
S&P 500…775
Nasdaq…1192
Bulls 37.1%
Bears 40.2% [Source: Investors Intelligence…despite the talk of
growing gloom, these figures are not as bearish as you’d like to
see at a market bottom.]
Have a great week. Some of you wrote to say you don’t have a
dog, so you petted the cat instead. That’s no substitute. Find a
dog.
And, as always, I appreciate your support.
Brian Trumbore
