[Posted 7:00 AM ET]
Iraq
“Time is not on our side. Deliverable weapons of mass
destruction in the hands of a terror network, or a murderous
dictator, or the two working together, constitutes as grave a
threat as can be imagined. The risks of inaction are far greater
than the risk of action.”
–Vice President Cheney, August 26
Last week I wrote I was increasingly impatient and rued the fact
that President Bush kept saying he was “a patient man,” a theme
he persisted on echoing this past week. Alas, our Vice President
and Secretary of Defense Rumsfeld began to lay the real case for
a preemptive action against Saddam Hussein and it would appear
that as I also hoped for, the President will be seeking
congressional authority of some kind before proceeding.
But there are more than a few troubling aspects to the crisis we
find ourselves in. As I noted last week, while Americans
understand the threat Saddam poses, they are losing their will to
fight and it doesn’t help when commentators like Chris Matthews
(MSNBC’s “Hardball”) say that Saddam “doesn’t pose a mortal
danger to the U.S,” in replying to words used earlier by Cheney.
After all, says Matthews, he couldn’t possibly destroy the U.S.
Every time I hear something like this I’m incredulous. Can
Saddam obliterate America today? No. But will he have the
ability to wreak nuclear havoc within two years, if he doesn’t
already possess the bomb? Yes. To those of Mr. Matthews ilk,
then, you mean to tell me that if a nuclear weapon (or large
chemical or biological device) went off in one of our major
cities, America wouldn’t change in any way? Are you freakin’
nuts? A couple of dirtballs took down two tall buildings, part of
another, and drove a plane into a field, yet still managed to kill
3,000 and the effect was enormous. And think about this. As
one expert noted this week (whose name escapes me…I
apologize), all Saddam, or those acting as his proxies, has to do
is place a weapon in a U.S. warehouse and wait for the
appropriate time to blackmail us, let alone detonate it. [Of
course there’s no reason to preclude any of the other scenarios
we all have become accustomed to over the past year…and
earlier, if you were reading this column.]
But when it comes to critics of the Administration and its
handling of the Iraqi issue, I do agree that while the United States
can go it alone, it would be far better to have allies alongside us.
Perhaps the biggest reason is to help provide cover for the
following legitimate policy issue.
If the U.S. launches a preemptive strike, what’s to preclude India
from attacking Pakistan (a far more immediate threat, at least in
New Delhi’s mind), or China attacking Taiwan, or, even on a far
smaller scale, Russia invading Georgia under the guise of
cleaning up the Chechen rebel threat?
We need allies, if nothing else, to show the rest of the world this
isn’t just the action of a lone cowboy. And so it’s fair to say, as I
did last week, that the Administration deserves a failing grade
thus far on this front, but there is still time. As Deputy Secretary
of State Richard Armitage said, “When the U.S. lays out a public
case…we expect to have a fair amount of international support.”
Let’s hope this proves to be the case.
The two most vital allies right now are Britain and Turkey (not
Saudi Arabia), and in both cases there are “issues.” British
Prime Minister Tony Blair is being pounded by the pacifists in
his own Labor Party, while Turkey has a volatile election slated
for November 3rd, which is of far more concern to yours truly
than fallout from a “wag the dog” scenario with our own
November vote. If Bush spells it out properly, the American
people won’t care if we attack in October or late November.
Those in disagreement are voting Democrat anyway.
As for our Arab “friends,” folks, I may be proved wrong (and,
believe me, once this gets started, there are far greater concerns
than a pundit’s ego), but I find them increasingly irrelevant,
outside of their obvious ability to create short-term chaos.
Egyptian President Mubarak, in expounding on the potential for
war in Iraq said, “No Arab leader would be able to control
explosions of public anger.” That may not be such a bad thing.
And then there was Saudi Prince Bandar, down in Crawford,
chastising our President for even thinking of going after Saddam.
You know how I feel about this creep, and I was frankly
disgusted by the Administration’s description of the meeting as
one between two old friends. To digress a moment, this has been
a problem for well over 20 years now, under both Republican
and Democratic presidents. To a certain extent, figuratively
speaking, all American leaders have been on the take with Saudi
Arabia, and it’s time for that to change.
Lastly, back to the issue of coalitions and the art of diplomacy.
Michael Hirsh has a terrific essay in the September/October issue
of Foreign Affairs. Following are two of his broader
conclusions.
“Vacillation between engagement and withdrawal is a chronic
problem in U.S. foreign policy, but under the current
administration it is especially striking. The impression it creates
abroad is deeply damaging and has benefited America’s Islamist
enemies.”
“Americans must now embrace what might seem a contradiction
in terms: a more inclusive exceptionalism, which recognizes that
what separates the United States from the world is no longer
nearly as significant as what binds it to the world.”
Wall Street
“I thought we’d have a pretty good profit recovery, but I’ve had
to lower my numbers.”
–Prudential Securities strategist Ed Yardeni in Friday’s Wall
Street Journal.
I like Mr. Yardeni, but what have I been telling you all year?
The earnings projections have to come down, while even at
current levels it should be easy to see that any upside in the U.S.
equity market is severely limited. That’s been my story and I’m
sticking to it. The price earnings multiple on a stock, as well as
on the market as a whole, continues to be the single best
determinant of value the Street has created. All the other
garbage is merely noise.
The best strategist of the past few years has been Doug Cliggott
(formerly of J.P. Morgan Chase, now at some dinky operation by
choice, whose name escapes me) and on CNBC this week,
Cliggott reaffirmed his bearish views, even in light of the
drubbing the indices have already taken, moves that he correctly
forecast.
Cliggott now says that looking back, we simply got too generous
with price/earnings multiples, while for today and beyond, the
expected rate of return on equities will be “very, very low…
quite close to zero,” as the economy exhibits “very, very slow
growth.” No gobbledygook from Mr. Cliggott, no sirree Bob.
Cliggott also went on to explain that one of the props for the
recent rally in the markets, pension rebalancing (out of bonds,
into stocks) is over, while from an economic standpoint, the only
sectors that are really performing are interest rate sensitive autos
and housing. As far as these two are concerned, how much
better can it get?
In looking at the week’s economic data, the news was mixed.
On the positive side was the aforementioned strength in housing,
while orders for big ticket items that fill the homes, like washers
and dryers, along with autos and aircraft (extra long driveways),
rose at an 8%+ clip in July. The Chicago Purchasing Managers
index also rebounded, a healthy sign.
But as far as negatives, we had more punk readings on consumer
sentiment, the already noted slashing of earnings (which will
pick up when Wall Street’s full cast of clowns, err, characters,
returns next week, I imagine), and, most importantly, continuing
signs from the key tech sector that all is not well.
Regarding this last point, while the economy can grow at a 2-3%
rate without tech tagging along, it certainly can’t do much more
than that without CEOs across all spectrums having the
confidence to pick up their rate of capital spending on
technology, and this week all we heard from the likes of Sun
Micro, Intel, Hewlett-Packard and Nortel was that CEOs and
CFOs from these outfits saw “no improvement in IT spending”
(Sun).
The week also featured the formal indictment of WorldCom CFO
Scott Sullivan, as well as the disclosure of documents from
Salomon Smith Barney (a division of Citigroup) relating to the
allocation of shares in hot IPO issues to executives at WorldCom
and other companies that SSB was obviously trying to gain
investment banking business from. WorldCom’s Bernie Ebbers,
in particular, pocketed $millions from the process…$10.6 mm, to
be exact.
But was it illegal? Probably not, especially if you’re angling for
a conviction, as opposed to a slap on the wrist for bad ethics.
This is, after all, as we’ve been told for years (and as yours truly
saw firsthand in one of my Wall Street positions) the way all the
firms operate. In essence, take care of that 20% of your book
(whether it’s a retail or investment banking client) that supplies
80% of your revenues (or has the potential to). It’s a pretty
generic principle for all business, actually. But what pisses
people off with the Salomon Smith Barney revelations, given
today’s overall environment, is the fact that it just further
reinforces how the rich get richer, and the poor get poorer. As
many have said this week, this IPO crap was nothing but
kickbacks, while the little guy got screwed.
Some conservative political/social commentators, like Kevin
Phillips, have been railing for years about the coming class
warfare in America (a theme long the domain of Democrats).
Most of us, though, have just shaken our heads when this issue
has come up and it’s because the average American has a sense
of fairness. We live in the best country on earth, we have as
much freedom and opportunity as anywhere else, and even the
minorities don’t begrudge the wealthy because they, themselves,
aspire to the same measurement of success.
But when it’s clear that much of the accumulated wealth at the
top of many corporations in America was attained through
corrupt, unethical, and perhaps criminal behavior, that’s where
we all draw the line. You and I are willing to play by the rules,
but those that merely “gamed” the system should be heaped with
scorn and abuse until they receive their just punishment, both in
this world and in hell.
Street Bytes
–U.S. Treasury Yields
6-mo. 1.66% 2-yr. 2.15% 10-yr. 4.14% 30-yr. 4.93%
No change on the short end, rally in the long maturities. The
latest feeling is that the Federal Reserve will hold the line on
interest rates, again, when they next meet in a few weeks. As for
Chairman Alan Greenspan, he gave a truly pitiful speech on
Friday wherein he said, don’t blame me for the Bubble. Nope,
nothing the Fed could do. To which I mused, who asked you for
a comment on this topic at this point in time in the first place?
You know what it was like? Those last days of William
Jefferson Clinton (which, unfortunately, have extended well into
2002). Clinton spent his final months working on his legacy, at
least how he wished historians to see it.
Now we have the same thing, it would appear, with Greenspan.
Let’s face it, while few are actually blaming him for the Bubble
itself, he clearly blew it when it came to adopting policies that
could have softened the landing (because we may have been
gliding in from a lower altitude). Friday’s oration represented
the rantings of an old man whose best days are long past. It’s
time to pin the nametag on the ol’ windbreaker.
–Wall Street’s winning streak was broken this week, with the
Dow Jones losing 2.4% to 8663, while Nasdaq took a solid 4.8%
hit to the 1315 level. The action the past few weeks has been
commensurate with a market establishing the parameters of a
trading range, in my opinion, and with the coming 9/11 jitters
and increased talk of war, it doesn’t strike me as a great time to
throw caution to the wind.
–Energy: Word is that OPEC will raise its official production
target by up to 750,000 barrels per day at its September 19
meeting, despite reservations from the likes of Kuwait and Iran,
both of whom would like to see production remain at existing
levels. But while you’d expect crude prices to fall on the news,
they didn’t. Why? Because OPEC is already cheating on the
existing targets to the tune of 1.7 million barrels, that’s why. The
bigger immediate issue is Iraq, of course, and if you believe $4-
$5 of today’s current price (nearly $29) is a war premium, you
ain’t seen nothing yet.
There are about 40 potential scenarios as to how the war will
play out and I’ll give you more of my personal opinion over the
coming weeks. For now, I’m sticking with my 20% position in
the energy sector because of the coming conflict, but I’m also
prepared to dump it all if (a) the price spike is to the $40 or so
level, or, (b) if victory in the war is swift without any real supply
disruptions. In the long run, however, it’s economic
fundamentals (and the weather) that will carry the day in this
sector, with the supply/demand picture in the Asian economies,
particularly in China, probably making for the difference
between a rough stabilization point of $15 or $25.
[Note: The rest of my portfolio remains 2% Turkey, the balance
cash.]
–The Financial Times reported that some Argentine legislators
solicited bribes from the international banking community in
order to prevent passage of a bill that would have cost the banks
further $billions. The banks refused to pay up, while such action
certainly doesn’t make one want to take further risks in the land
of the gaucho.
–Venezuela’s GDP dropped a whopping 9.9% in the second
quarter.
–As for Brazil, the same banks that were nearly shaken down by
Argentina have assured the Brazilian government that they will
keep open the existing corporate lines of credit, though I
wouldn’t expect any new ones, which is eventually what the
nation needs to grow out of its problems.
–China is taking baby steps in allowing foreign stakes in some
state-controlled enterprises, but you can bet the restrictions will
be severe, like 85-year holding periods.
–Inflation Watch: Frankly, we’re more concerned with deflation
these days, but our intrepid reporter Mark R. checks in with the
fact that he paid $14 for a cup of coffee at a Laguna Nigel resort
this week (another boondoggle for M.R.).
–The Congressional Budget Office, in slashing the estimated
surplus for its already notoriously poor 10-year forecast, did
reveal that tax revenues are declining at the fastest pace in 56
years.
–Coinstar, the company that makes the machines where you
deposit your coins and get money back, disputed the conclusions
of a research report that said the company’s growth rate was
slowing. That aside, personally, I have about ten coffee cans
filled with coins, but I’m too embarrassed to take them to my
local supermarket where the Coinstar machine resides. It would
be just my luck that a few neighbors would catch me.
“Pssst, look, there’s Brian Trumbore. Boy, his business must
really be suffering. Don’t you feel sorry for him? Oh hi, Brian.”
“Ah, hi, ladies. Err, just cleaning out the car!”
–Philip Morris raised its quarterly dividend to 64 cents, meaning
at today’s share price the yield is 5%. Not too shabby. I don’t
own any, myself, but it’s now on the old “watch list,”
particularly if we have one of those down 500-point days that
create opportunities for the nimble.
–The investigation into Global Crossing is about to heat up.
More fun and games in America’s executive suites.
–This $4 billion penalty imposed on the U.S. by the WTO is not
as big an issue as it’s being played up to be. Europe, which has
the right to levy sanctions, will most likely reach a compromise
with the U.S. over tax breaks that some American corporations
were granted. But it makes for a good headline.
–I finally figured out why the auto and housing sectors are
continuing to rock, while virtually everything else remains in the
tank, or, at best, tepid. When you buy your 3rd car, you need a
new house. When you buy your 4th, you purchase a vacation
home and leave a car there.
–Insider “selling” at the home-builders, incidentally, is at record
levels, about as clear a sign as any that the housing boom may
finally be close to peaking, admittedly, more than two years later
than yours truly thought it would.
But in most other industry groups, insider “buying” is at its
highest levels since November, though before you get too
excited, the Dow back then was at 9900 and Nasdaq 1900, i.e.,
the shares are probably down big time.
–Spending on advertising appears to have bottomed, but that
doesn’t mean it takes off from here either.
–Margin debt is at its lowest level in 4 years, a minor positive.
–At the height of the Bubble in 2000, Lucent had 155,000
employees, Nortel 94,000. By 2003, the figures could be 40,000
and 35,000, respectively. Incredible. And these are good, high-
paying jobs, not like that of a web editor.
–Now get this. C. Michael Armstrong, CEO of AT&T, is chair
of the Business Roundtable’s task force on domestic security. Of
course this is the same guy whose previous CEO position was at
Hughes Electronics, where Armstrong was part of an
investigation into selling missile secrets (along with Loral) to the
Chinese. Unfortunately, the congressional committee looking
into this situation dropped the ball (just my opinion).
–Enron’s Andrew Fastow has his own “charitable foundation.”
Like I’ve been saying, they’re all such philanthropists!
–The International Herald Tribune had a report on Friday,
projecting that half of all European licenses for third-generation
(3G) cellphone services will never be used. That would be $50
billion (!) down the drain. Goodness, gracious. And totally
predictable.
–New York Stock Exchange Chairman Dick Grasso, the target
of much abuse in this space, failed to properly disclose his stock
ownership in Computer Associates (where he is a board
member). Lawyers for the company said it was a simple
mistake. Nonetheless, I consider it another case closed and a
dirtball uncovered.
–Finally, PIMCO’s Lee Thomas, an expert on global markets,
had some interesting things to say in his August missive
(pimco.com), which you’ll soon see dovetail with much of what
I’ve been writing lo these many years. In part:
“During the Bubble years of the late 1990s, many managers lost
track of their guiding star, economic fundamentals. Rather than
searching for fundamentally cheap securities, fund managers
opted for the latest fad and fashion…
“Some managers were easily seduced by analysts, the Sirens of
Wall Street. The Street does not profit when a money manager is
successful in finding undervalued securities. The Street profits
from trading volume. Wall Street analysts act like shills,
encouraging managers to bet often, not necessarily to bet
wisely.”
International Affairs
Just two extra notes this week…
Spain: I’ll admit that I have paid this nation’s problems with its
Basque separatists short shrift, but it was extraordinary this week
when parliament voted 295-10 to ban the Batasuna Party for 3
years. The best analogy would probably be to compare this act
to Britain banning Sinn Fein. Batasuna is the political arm of the
militants, ETA, who in their campaign for a separate Basque
homeland (carved out of northern Spain and southern France)
have killed about 800 in terrorist attacks since 1968. Of course
you’d now expect ETA to attempt to step up its operations and if
the situation spirals out of control, it would obviously do a
number on Spain’s tourism industry, as well as potentially
impact foreign investment. So we wish the government in
Madrid well in its efforts to crush the group.
Japan: Prime Minister Koizumi is slated to travel to North Korea
for a summit next month, a potentially significant event.
Random Musings
–The Saudi government is contemplating donating Kentucky
Derby winner War Emblem to the families of the victims of 9/11.
Granted, if the stud fees are part of the deal, it could be lucrative,
but while I’m no marketing or P.R. genius, this is simply a
dreadful idea.
–I realize there has never been any doubt where the New York
Times’ interests lie, but even I was floored that reporter Richard
Oppel felt compelled to describe individual anti-Bush placards
on a campaign stop, including one that read “Send the Twins to
Iraq.” This is America’s newspaper of record? Both Oppel and
his editor should have been suspended. Then again, the Times
has commie-pinko Howell Raines as editorial page editor, so what
do you expect?
–The Wall Street Journal dedicated an editorial to blasting U.S.
Trade Representative Bob Zoellick for the steel tariff fiasco. It’s
not Zoellick’s fault. Blast Wonder Boy Karl Rove instead.
–On the other hand, the Journal noted that if you order
“Argentine” beef in a restaurant, it’s probably not from there,
since this product was banned last year due to the country’s foot-
and-mouth problem (as opposed to my own occasional
incidences of foot-in-mouth disease). Actually, your
Argentine beef may really be from Australia. “Mooo, mate!”
–So each year I watch the MTV Music Video Awards in a pitiful
attempt to stay current…and hip…but I gotta tell you, I thought
Thursday’s show was awful (except for Springsteen’s opening
bit). And a note to younger readers who may have caught it, if
the Hives are the latest old-fashioned rock act, I feel sorry that
you didn’t catch the groups of the 60s and early 70s. As I
watched this Swedish import, I kept thinking the Dave Clark
Five would have brought the house down.
But for another opinion, Friday morning I asked two kids who
work at the Dunkin’ Donuts where I get my coffee what they
thought. Now picture, they dress like they’re members of the
Crips street gang, but they treat me well and we small talk about
missile throw-weight and such. Anyway, I said, “What did you
think of the show?” “Corny, man. Corny.” There you have it,
from a most objective audience.
And how about some of the girls outfits? I imagine Britney,
Christina, and Shakira had a real cat fight afterwards. Lastly, it’s
amusing how Rudy Giuliani has injected himself into every event
in America this past year. No doubt, he’s a master, and no doubt,
he’s running for president. Which year is still subject to debate.
–South African President Thabo Mbeki lectured the West on
combating poverty at this week’s conference on the environment,
calling the division in the world between the haves and have
nots, “global apartheid.” I’m all for significantly increasing the
level of foreign aid, especially to fight poverty and disease, but
I’d first demand that the recipient governments ensure the funds
actually go to the intended projects (which, of course, they can’t
do) and, second, that before Mbeki lectures us any further, he
show some real guts and call for the removal of neighbor Robert
Mugabe.
–Why does everyone insist on writing “pre-empt” and “pre-
emption?” It’s “preempt” and “preemption.” No freakin’
hyphen. And while we’re at it, if it’s “telephone,” it’s
“cellphone,” not “cell-phone.” And why can’t anyone decide
between Yasser, Yassir, and Yasir? Actually, hopefully in a few
months we won’t have to worry about this last one.
–While we’re ranting here (in honor of Dennis Miller’s last
performance on HBO), someone tell Chris Matthews to shut up.
Geezuz. If you have a guest on your show, give them a chance
to talk!
–On Thursday, “Today” led off with 4 stories on child
abductions. I’m sorry if this seems insensitive, but I can’t be the
only one sick of the coverage. These are local, not national,
stories, which should be covered by local newscasts only. No
wonder Americans don’t know squat about the world.
–Al Sharpton was on “Meet the Press” last week. All of
America got to see the real deal. He’s simply a buffoon. But
just a little advice to the Rev. If you’re thinking of running for
president, it’s probably a good thing to disassociate yourself
from Louis Farrakhan’s comment that Bush was worse than
Saddam. [Sharpton refused to do so.]
–Am I excited the baseball strike was averted? No, I’m ready
for pro football (I was ready for college football, until my alma
mater, Wake Forest, lost its first game to Northern Illinois.
Drat!), and if baseball doesn’t tackle the steroid issue in an
honest way, the sport and its beloved record book are forever
tarnished.
–In my part of New Jersey, nail salons are replacing liquor
stores. Sad. Very, very sad.
—-
God bless the men and women of our armed forces.
God bless America.
Gold closed at $313
Oil, $28.98
Returns for the week, 8/26-8/30
Dow Jones -2.4%
S&P 500 -2.6%
S&P MidCap -2.4%
Russell 2000 -2.3%
Nasdaq -4.8%
Returns for the period 1/1/02-8/30/02
Dow Jones -13.6%
S&P 500 -20.2%
S&P MidCap -12.8%
Russell 2000 -20.0%
Nasdaq -32.6%
Bulls 45.7%
Bears 31.5% [Source: Investors Intelligence…wow, I’ll have far
more on the gyrations here next week. But again, remember,
there is a lag between the figures and the actual newsletter
forecasts.]
A special thanks to Tony P., instrumental in building this site for
me, as well as offering guidance and support over the years.
Tony is off to bigger and better things and I wish him the best.
Happy Labor Day. Have a great week.
Note: Next Saturday’s column will not be posted until Noon ET.
Brian Trumbore
