[Posted 7:00 AM ET]
We start off this week with the best description of the crisis in
corporate governance you are likely to find. Unfortunately,
aside from here, the only other place you’ll see it is on the
White House web site, because the mass media didn’t deem the
following from President Bush’s speech of 7/30 newsworthy
enough to publish the full text.
“America’s system of free enterprise, with all its risk and all its
rewards is a strength of our country, and a model for the world.
Yet free markets are not a jungle in which only the
unscrupulous survive, or a financial free-for-all guided only by
greed. The fundamentals of a free market – buying and selling,
saving and investing – require clear rules and confidence in
basic fairness.
“The only risks, the only fair risks are based on honest
information. Tricking an investor into taking a risk is theft by
another name. Corporate executives must set an ethical tone for
their companies. They must understand the skepticism
Americans feel and take action to set clear standards of right
and wrong. Those who break the rules tarnish a great economic
system that provides opportunity for all.
“Their actions hurt workers who committed their lives to
building the company that hired them. Their actions hurt
investors and retirees who placed their faith in the promise of
growth and integrity. For the sake of our free economy, those
who break the law – break the rules of fairness, those who are
dishonest, however wealthy or successful they may be, must pay
a price.”
It’s too bad we can’t always separate the politics out from this
issue, but what the President outlined is exactly the problem we
face, as well as the solution.
This week we saw further evidence that Wall Street itself is
dirty and in need of a power wash, as Merrill Lynch officials
were paraded before the Senate Banking Committee looking
into the Enron debacle. As you would expect, Merrill denied
any wrongdoing, as did Citigroup’s Sandy Weill and J.P.
Morgan Chase’s CEO William Harrison in written statements to
the investigating senators.
What’s particularly galling, especially for one who worked on
Wall Street, is the claim by top executives that they didn’t know
what the investment banking departments were doing with a
large, high-profile, fee-producing client. They did. They had to
in almost every instance. That’s the way it works. But was it
criminal? Maybe not, and that’s the frustrating part for the rest
of us.
In the meantime, institutional investors and individual
shareholders alike will file lawsuit after lawsuit against the big
investment banks and it bears repeating what famed investor
Michael Price said the other week when it comes to outfits like
Citigroup. To a certain extent “they are black boxes.” No one
really knows quite yet the true scope of potential exposures.
You know, last Saturday morning I was rushing to catch a flight
after posting this piece and while sitting on the plane I thought,
have I been unfair in some of my remarks concerning a few of
Wall Street’s icons? The conclusion was…hell no. I stand by
every caustic comment of the past few weeks.
The Economy and the Market
As you know I’ve been a “double-dip” kind of guy (not that
there is anything wrong with this) since early in the year,
explaining consistently that my concern with the economy
wasn’t the first half of 2002, but rather the 3rd and 4th quarters.
Just last week I also wrote:
“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.”
But, heck, little did I know that the economic news to follow
would be as bearish as it turned out to be:
A key U.S. manufacturing index fell sharply and is suddenly
back near ‘contraction’ levels, construction spending declined,
consumer confidence continues to tumble, the July employment
report was lousy, and it was revealed that consumer spending
(kind of important, they say) rose only 1.9% in the second
quarter, versus a 3.1% increase in the first and 6% in the 4th
quarter of 2001. Ergo, the trend is not your friend.
But the kicker was the data for GDP, and this showed that
instead of the hoped for 2.5% jump in the second quarter, the
U.S. economy grew at a minuscule 1.1% annualized rate.
Furthermore, Q1 was revised down from 6% to 5%, and we also
learned that in 2001, the first three quarters were all negative,
instead of just one as previously reported. So no matter how
you slice it, the latter stages of the vaunted Clinton Boom, that
George W. Bush inherited, was largely smoke and mirrors, as
some of the accounting shenanigans have also proved. The only
thing saving us is housing, and on this front, much to my
surprise, there is one last surge in refinancings. But there are
also growing signs in many parts of the country that we have
finally topped out in, this, Alan Greenspan’s last ditch effort to
not only avoid a double-dip recession, but far worse.
Which means one thing. Morgan Stanley economist Stephen
Roach, as well as Merrill’s chief investment strategist Richard
Bernstein have been right in their gloomy assessments.
For his part, Roach, smelling blood and a place in Wall Street
history (which would be well-deserved) continues to pound
away at themes like “the American consumer is in denial…and
they keep spending out of overly inflated assets.” While on
the corporate side, if business spends out of earnings, and the
earnings don’t materialize, you won’t see any rebound in capital
investment, which doesn’t bode well for employment.
As for Bernstein, who focuses on the investment side of the
equation, he has been correctly bearish (or, at best, cautious) for
years, and this week he lowered his 12-month target for the
S&P 500 to 960 (it closed the week at 864, and 2001 at 1148, to
put it in its proper context). The market will continue to be
“capped on the upside by valuation,” he said. That should be a
rather familiar theme to readers of this space over the past few
years.
Street Bytes
–On a week that started with great promise, the Dow Jones only
eked out a gain of 0.6% to 8313, nonetheless, it’s second
straight weekly advance for the first time since March. The
S&P 500 picked up 1.3%, but Nasdaq continued to fall, down
1.1% to 1247. Nasdaq is now on another losing streak of five
weeks in a row, and a staggering 18 out of 21.
–U.S. Treasury Yields
6-mo.1.58% 2-yr. 2.00% 10-yr. 4.29% 30-yr. 5.22%
You’re reading those rates right, 2% for the two-year (it traded
below that level on Friday). There is growing talk in the bond
pits that the Federal Reserve must consider another rate cut,
soon, while Goldman Sachs has gone so far as to say that the
federal funds rate will decline to 1% from its current 1.75%
target. It might be the only way to hold up real estate, but I
can’t see it helping the equity markets one lick. Panic City,
would be the message. It’s also unclear whether it will force
banks to get off the dime and start lending again. As more than
one expert as said, the banking system has seized up. That isn’t
good, sports fans.
–Much was made of the fact that after Monday’s 2nd 400+ point
rally in the Dow Jones in 4 days, it was the best performance for
any 4-day period since April 1933…October 1974 for the S&P
500. Alas, after the action at week’s end, who gives a damn.
–President Bush achieved an important victory in Congress this
week, as the Senate followed up on the House’s lead to approve
“fast-track” trade authority, essentially granting the President
the ability to negotiate trade pacts without having Congress
chop them up. Now if he’d only withdraw the steel tariffs, we’d
be getting somewhere.
Of course a big target of the new trade legislation is Latin
America. But here it may be too late as the situation is spiraling
out of control, despite assurances by Treasury Secretary O’Neill
that the U.S. will not stand in the way of further aid to Brazil
and Uruguay. The Washington Post ran a front page story on
Thursday titled “Economic Crisis Swells in South America.”
Funny how everyone is coming to their senses on the region,
about 8 months too late. Western investment has not only dried
up, corporations are shutting down operations left and right,
while political instability spreads. Not a time to be rushing
down wearing a New York Yankees cap. America is not held in
high repute these days, virtually anywhere on the continent.
–“The squeeze on U.S. pension funds has the potential to be the
defining U.S. financial crisis of the 2000s, like the savings and
loan squeeze of the 1980s.” [Bob Prince / Bridgewater
Associates and Business Week] The issue is most U.S.
corporations assume 9%+ annualized returns on their funds,
obviously a tough nut the past few years. Warren Buffett’s
Berkshire Hathaway assumes a 6.5% return, and the Oracle of
Omaha has been urging others to be more realistic as well.
The problem is a simple one to understand. Assets are falling,
liabilities are rising, so, in order to make up the shortfall,
corporations will have to cut capital spending, another obvious
impediment to future growth.
–Stanley Works is abandoning its controversial effort to
reincorporate in Bermuda. I now await a similar decision from
Nabors Industries, a company that I have had success with twice
over the years, but sold last spring when they announced that
they, too, were making their way to sunnier climes. I was upset
that they did this in the face of a surly public – I’ve learned not
to regard ‘arrogance’ as a strong character trait – and as it
happened, the shares have now dropped from $46 to $27 (also
because of fundamentals in the volatile oil & gas drilling sector)
and it’s back on my radar screen.
–According to a survey in the Financial Times, the top
executives of companies like Enron, Global Crossing and
WorldCom that went bust took $3.3 billion in compensation
over the past few years, while 100,000 employees lost their
jobs.
–IBM purchased the consulting arm of Pricewaterhouse-
Coopers, this after PWC was going to take the division public as
an independent company operating under the name of
“Monday,” after former Chicago Cubs outfielder Rick Monday.
[I was just informed Rick Monday had nothing to do with the
failed plan. Never mind.]
–General Electric announced it would be treating stock options
as an expense, though in its case the impact on earnings should
be negligible. Of more import for G.E., however, is how to
continue to maintain earnings growth in the face of a global
economy that is basically stuck in neutral, with half of the car
hanging over the cliff.
–Two weeks ago we noted that shares in Johnson & Johnson
had taken a big hit on talk of an investigation into one of its
manufacturing facilities. Well, the stock has rallied back to the
tune of 25%, due to new product developments and government
approval of its stent technology. This is one instance where
bottom fishers were rewarded.
–The Justice Department is formally looking into the mess that
is AOL Time Warner’s accounting. Have a great time, fellas.
–Disney warned that theme-park attendance will be below
expectations in the current quarter. Hell, it’s the irritating song
“It’s a Small World” that has finally gotten to everyone after 40
years. I went through that ride in 1964 and it has had a
debilitating impact on my thought process.
–You know who acts like an exchange official should? Nasdaq
chairman Wick Simmons, a good, honest man. Not like his
NYSE counterpart, snake oil salesman Dick Grasso.
–My portfolio…and energy: Needless to say, the dire economic
news didn’t play well in my now reduced position of 16% in the
energy sector (the balance is 82% cash, 2% Turkey). I sold my
riskiest of 4 plays for a 30% loss after a merger fell through that
would have expanded its business and I was no longer
comfortable with the company’s debt level. That was on
Tuesday, yet by Friday it had dropped another 25%. [One thing
I’m pretty good at is selling, but on this one I should have exited
even earlier.] I then bought into a stronger issue in the same
group.
Yes, my current position in oil flies in the face of my own
feelings on the economy, but, with the exception of the spec
play that I just jettisoned, I still feel my positions (accumulated
over just the past few months at levels 40-50% below their
highs) make sense from a valuation standpoint…though I’m
obviously less certain given the week’s data. More importantly,
though, is the impact on prices given a war with Iraq, which is
coming.
But I also feel obligated to comment on Exxon Mobil, which
received a ton of press as a Dow component after missing its
projected earnings number. The stock fell almost 10% on the
news, which didn’t surprise me one bit. Why? Exxon hasn’t
been cheap, from a valuation standpoint, in years, and it’s why I
have never owned it. If it falls much further, however, I could
be a buyer.
–Auto sales were one of the few bright spots on the economy
this week, jumping in July. But 0% financing doesn’t translate
into profits.
–Qwest Communications announced it would restate earnings
for 1999-2001. Something about crooked accounting. Former
CEO Joseph Nacchio, a guy I blasted in this space last June 22,
walked off with $227 million for the same 3-year period.
–It’s truly embarrassing how the authors of “Dow 36,000,”
Kevin Hassett and James Glassman, are back out defending
their book at this time. Glassman even said in one interview
that he still thought we’d see 36,000 by the end of the decade,
meaning about 20% annualized returns from this point forward.
A friend of mine once gave me this piece of crap, which I threw
in the closet without cracking it open, but I just glanced through
the book for the first time, only to be greeted with this opening
quote from Emily Dickinson.
‘Tis sweet to know that stocks will stand
When we with Daisies lie –
Oh, brother. Emily Dickinson! She freakin’ lived from 1830-
86 and was a recluse all her life. Nice work, guys. Here are
some tickets to Guantanamo.
–Inflation Watch (an irregular feature of StocksandNews): Ace
reporter Mark R. has uncovered the fact that McDonald’s ‘2-
for’ sale on breakfast sandwiches is up 11% in one year. Of
course if the economy keeps falling, we’ll all be reduced to
eating egg sandwiches at home!
–As you know, I have CNBC on all day (unless there is a car
chase on Fox) and, frankly, I never want to see another
worthless, CEO interview. In fact, with CNBC’s plunging
ratings, my suggestion for the normally slow month of August
would be for the network to just run the ticker tape with news
headlines, while the ‘Yule Log’ burns in the background. It’s
too soon for Christmas music, though, so maybe “Dueling
Banjos” from the film “Deliverance” would be appropriate.
The Middle East
One can’t help but be a little dizzy from all the disparate
opinions being ‘leaked’ to the press concerning the Bush
Administration’s plans to confront Saddam. At times I lose
confidence that the U.S. will act before yearend. At other times
I feel we will. I’m now back in the latter camp in a big way,
especially after the President’s performance with Jordan’s King
Abdullah at his side.
Earlier in the week, Abdullah was running around Europe
saying things like Arab trust in the U.S. was at a new low, while
urging that President Bush tackle the Israeli-Palestinian issue, to
the point of real progress, before venturing further afield. I
can’t blame the King. He has a ticking Palestinian time bomb
on his own hands to deal with.
But when His Majesty got to Washington, Bush couldn’t have
made it more clear; the U.S. will do what is in its best interests
…period.
Sure, the debate is heating up, and this is healthy. The weight
of the evidence, however, increasingly lies with the Rumsfeld /
Cheney brigade, and it would appear the Administration is
within weeks, perhaps, of laying out an irrefutable connection
between Saddam and al Qaeda, which seals the butcher’s fate,
once and for all.
Arab affairs expert Fouad Ajami had the following thoughts in
U.S. News, concerning the policy of containment favored by
those opposed to an invasion, and his comments also pertain to
the Palestinian issue.
There is too great a risk in maintaining the status quo in both
Iraq and Palestine. “Containment’s advocates offer no
assurance that the ruler in Baghdad will always play the
containment game and, with weapons of mass destruction at his
disposal, not strike at a moment of his own choice.”
It’s really that simple. As for the status quo, non-democratic
leadership in the Middle East, columnist Jim Hoagland had this
observation.
“In a time of Middle Eastern turmoil that calls for giants of
spirit and vision, the region is affiliated with pygmies who
cannot see beyond their own immediate interests.”
More International Affairs
Iran: Israeli intelligence, which has zero incentive to be
conservative in its estimates, says that it will be 5 years before
Iran has a nuclear bomb. [The U.S. says 7…Iraq is undoubtedly
much sooner.] Nonetheless, unless Russia cools it with its plans
to build more nuclear reactors in Iran, pre-emptive action may
be taken against the main plant that is already being built.
Meanwhile, the hardliners in Iran are fighting back and a sweep
of dissidents was conducted this week.
Turkey: The nation took a major step towards possible
admittance into the European Union when parliament voted to
abolish the death penalty. This is an encouraging sign, though I
personally don’t agree with the change in policy. More
importantly, along with other reforms to be adopted this keeps
Turkey on a pro-West path. Additionally, the early election is
now set in stone for November 3rd. I may be increasing my
investment here, shortly, if I can convince myself that our action
in Iraq won’t severely impact the Turkish economy for more
than a few months.
North and South Korea: The two are evidently going to resume
peace talks, and the Commies want to break bread with the U.S.
and Japan as well. Load up the grain!
Congo: After over two million deaths, yes, 2 million, a peace
treaty was signed between Congo and Rwanda, ending their 4-
year war. Now for those of you with a scorecard at home, this
was the conflict pitting Congo, Zimbabwe, Namibia and Angola
vs. Rwanda, Burundi and Uganda. I can’t even begin to fathom
what went on here, and I also can’t recall more than one or two
news stories on the carnage from an American television
network. Something about Gary Condit type stories, I guess.
Random Musings
–“Week in Review,” 6/29/02:
“If the economy doesn’t heat up anew (my guess is it won’t),
look for a populist-type revolt against Big Business (right now
it’s just kitchen table, talk show chatter).
“…You have a labor movement in this country that has been
quiescent for a long time, and for good reason as the economy
boomed and jobs were plentiful. But, fed by a media out for
blood (and in most cases doing an admittedly admirable job),
American Labor will begin adopting more strident positions, as
they have seen some corporate CEO’s raid the company coffers
of exorbitant amounts, while requesting sacrifice from the line
worker.”
Not bad, in light of this week’s presentation outside Wall Street
by the AFL-CIO’s John Sweeney. Labor wants “standards of
basic decency,” said Sweeney, and he denounced “corporate
criminals and their co-conspirators in Washington.”
You know what? As a friend with similar political leanings to
mine said, “How can you disagree with this?”
Forget the issue of where the AFL-CIO’s union dues go, that
doesn’t matter right now. No, Sweeney has shrewdly picked up
on the hot topic of the day, that being it’s criminal that workers
from WorldCom, Global Crossing, Enron et al don’t receive the
appropriate severance pay; let alone the pain and suffering
they have gone through with the loss of their retirement
savings. If Labor plays its cards right, they’ll begin to make
up for the losses of the past 20 years…and that will NOT be
good for the rest of us, long term.
–Malaysia’s Prime Minister Mahathir has made some pretty
strong comments concerning the current situation with the
Islamic faith. This week he said the following in an op-ed piece
for the International Herald Tribune.
“What is the state of the Muslim world today? I don’t think it
would be wrong to say that the Muslim world is at its lowest
ebb, and is probably continuing to decline.”
“Not a single Muslim country is to be found among the
developed nations of the world…the Muslim world is
hopelessly weak and backward.”
But, on a more militaristic note, Mahathir decried the “inability
to invent and produce weapons to instill fear in the enemy and
defend ourselves.”
An interesting man, always worth listening to.
–I like Treasury Secretary Paul O’Neill because, as Kate L.
wrote the other day, “It’s nice to finally have someone in his
role that has integrity.” So it was fun to see O’Neill fight back
against the unrelenting attack from a predecessor, Robert Rubin,
now vice chairman at that bastion of moral probity, Citigroup.
And speaking of Rubin, don’t expect the Democrats to call him
to testify on his Enron relationship. Republicans can bitch all
they want, but they have only themselves to blame. Why?
Because I’m the one who told you first that the Jim Jeffords
defection would be a disaster when it came to Senate
committees.
–Pope John Paul II just did more for the struggling Indians of
Mexico than any government official would ever do, as a result
of his trip to that country this week. In the game of life, it’s
actions like these that truly matter…how you treat your fellow
man.
–Long-time reader Steve B. passed along news on the federal
budget deficit, which is skyrocketing again as you all know. By
my back of the beer coaster calculation it is now approaching
55% of GDP, versus just 30% about 18 months ago. By
contrast, Japan, I believe, remains at around 130%. But as
Steve’s info points out, the real shame of it all is that the $360
billion in annual interest payments we are spending to service
this tremendous load is matched up against only $51 billion for
the Department of Transportation, or, my pet cause, only $14
billion for NASA, the latter being important because, as Carl
Sagan once reminded us:
“In the long term, even if we were not the descendants of
professional wanderers, even if we were not inspired by
exploratory passions, some of us would still have to leave the
Earth – simply to ensure the survival of all of us.”
–My home state of New Jersey is no doubt as corrupt as they
come, which is why in our Senate race of 2000 I argued so
strongly for Republican Bob Franks, who then lost to Jon
Corzine, because Franks is one of the few honest politicians
around. But the other day, the New York Times’ ultra-liberal,
elephant killer Paul Krugman began a column with the
revelation that New Jersey has been a good state for scandals.
Great, I thought, he’s going to rip Corzine and Robert
Torricelli, our two embarrassing representatives in the Senate.
After all, his own paper has been as tough on Torricelli as
anyone (amazingly).
Wrong. Instead, Krugman bashed former Governor Christie
Whitman for her budget policies (which she does deserve some
heat on) and didn’t write one word about the now disgraced
Torricelli, who this week was “severely admonished” by the
Senate Ethics Committee.
Regarding the man known as the “Torch,” this was the best we
could have hoped for (just trying to be a realist) and it is a stern
rebuke, but then Torricelli took to the Senate floor and
continued to deny he really did anything wrong (in accepting all
manner of gifts in return for influence), while on Thursday he
rolled out a television ad apologizing, though he was still lying.
But you know what? He’ll be reelected, that’s just the way
things are here. Buy someone a couple of free meals, as
Corzine notoriously did during his despicable campaign, and
you win a voter for life.
[For the best political cartoon you’ll find on the Torricelli
matter, see our own “Lamb in Command,” August 2nd.]
–I have an easy solution to the Olympic skating scandal, which
took a new turn this week with the revelation that a Russian
mob figure organized the whole fiasco. Eliminate both pairs
and ice dancing from the competition. And while they’re at it,
get rid of synchronized swimming and race walking from the
Summer Games.
–Bill Clinton announced in a speech to a Jewish group in
Toronto that if Israel were attacked by Iraq, he’d pick up a rifle
and fight to the death to defend the country. Seriously, he really
said that. Now forget about his draft-dodging past, this is also
the guy who was notorious for abandoning his friends while in
the White House. You want this creep in your foxhole? Where’s
my defibrilator?……Clear!!!
–You know, Jesse Jackson is so ‘over,’ it’s not even worth
commenting on his “peace mission” to the Middle East, one in
which he met with leaders of Hamas.
–I was in New England during the episode with the beached
pilot whales on Cape Cod, so I saw lots of local coverage. But
when the same whales beached a second time the very next day,
I lost a lot of respect for them. Yes, we hereby nominate the
pilot whale species for StocksandNews’ “Idiot(s) of the Year”
award.
–A U.S. Secret Service agent was suspended for scrawling anti-
Islamic slurs on a calendar in a suspect’s home. Houston, we
have another idiot. Actually, it’s scary reading about our Secret
Service. The force is riddled with incompetents, let alone the
fact that the male agents apparently try to ‘bed’ every female
that breathes over in the White House. Sad to say, it’s not the
same force that once took a bullet for President Reagan.
–Here’s something the Secret Service would like, however. In
an attempt to keep more students in on-campus housing,
Michigan State is putting hot tubs in a newly renovated dorm. I
see a reality television program in the works.
–The Wall Street Journal had a sub-headline the other day,
“Roadkill at historic high.” Personally, I beg to differ,
particularly as it pertains to squirrels. My observation is that
they are getting smarter when it comes to looking both ways
before crossing the street. [They’re still a little weak on timing,
however.]
–Charles K., in reply to an issue I have no problem beating to
death, that being the poor quality of calls on cellphones, came
up with his own pet peeve that I’m sure you’ll all agree with.
“I’ve long wondered why we can put a man on the moon (and
bring him back), but we still can’t put lane markings on streets
that we can see in the rain at night.”
Darn right, Charles. Roadkill have complained about this, too.
And for this submission you win a year’s supply of
“StocksandNews 8% Beer,” which is fermenting as I write.
–My good friend John H. wrote to say, “Don’t forget to smile
once in a while, Brian. It’s still good to be alive in America.”
John, don’t worry, I certainly understand that, but I still have to
be a realist, and, after all, I’m the one who has offered to sleep
with one eye open so the rest of you can relax. [Jimbo says I
really should make this a fee service of StocksandNews,
something my attorneys are looking into.] On a different note,
congratulations, John and Alyson, on the birth of your twin boys.
They’re going to grow up under the loving care of two great
parents.
–Lastly, I woke up Sunday morning to the news of the rescue of
the coal miners in Somerset, PA, which brought a tear to my eye
when I saw the film of the men being brought up from their own
personal hell. As many of you are aware, some of my relatives,
including a grandfather I never got to know, were coal miners
just 15 miles from this accident, so I can appreciate, somewhat,
what the community must have felt.
President Bush said it was an example of the “great spirit of
America.” No doubt…and so we give thanks.
God bless the men and women of our armed forces, as well as
the hardworking laborers who are the backbone of our society.
God bless America.
—
Gold closed at $307.
Oil, $26.84…actually still up on the week, thanks in part to late
turmoil in Venezuela.
Returns for the week, 7/29-8/2
Dow Jones +0.6%
S&P 500 +1.3%%
S&P MidCap +0.7%
Russell 2000 –1.5%
Nasdaq –1.1%
Returns for the period, 1/1/02-8/2/02
Dow Jones -17.1%
S&P 500 -24.7%
S&P MidCap –17.5%
Russell 2000 –22.9%
Nasdaq -36.0%
Bulls 38.3%
Bears 36.2% [Source: Investors Intelligence]
Note: Next week I’ll wrap up my thoughts on philanthropy and
the excesses of the Bubble. It’s bound to ignite a forest fire or
two.
Have a great week. I appreciate your support.
Brian Trumbore
