Big Business
Following are some survey figures from the September 11 issue
of Business Week.
–73% of Americans think that business executives get paid too
much.
–74% feel that Big Companies have too much power and
influence.
And, given the following statement: “In general, what is good for
business is good for most Americans”…47% agree, 49%
disagree. By comparison, in 1996, 71% agreed, 28% disagreed.
This, frankly, is what Al Gore is trying to tap into. And the
Bridgestone / Firestone / Ford debacle only reinforces the belief
that corporate America is insensitive to the concerns of the
public. Republicans have their work cut out for them.
So what of the targets of Big Drugs and Big Oil?
Well, you can see what”s happening on the prescription drug
front. Cures be damned. We want cheap drugs. Of course,
without a profit incentive, do you really think the big drug
companies will be as proficient in discovering ways to alleviate
pain and suffering?
And as for Big Oil, I”m waiting for the next congressman (aside
from Michigan”s David Bonior) to recommend that the oil
companies have an excess profits tax placed on them. You want
to see a real oil crunch? Complete with rationing and freezing
senior citizens?
I”ve said it before and I”ll say it again. We have no one to blame
but ourselves when it comes to today”s skyrocketing fuel prices.
We should open up more of Alaska for exploration, tomorrow.
[In the interest of full disclosure, I have had a 19-month long
financial stake in the energy sector.]
Oil and the World Economy
One long-time energy analyst said, “This is the scariest market
since the summer of 1973. I don”t know how we”re going to get
out of the mess we”re in.” I”ll tell you, in a moment.
The CFO of Apache, a large oil and gas exploration company
commented, “Relative to any point in the last 20 years, I have
never seen supply and demand as tight as it is today.”
Oil prices hit 10-year highs this week, trading over $35 before
profit-taking ahead of the OPEC meeting drove it back to $33.70.
The oil ministers meet in Vienna on Sunday to decide how much
to increase production. The consensus is that a 1 million barrel
boost is needed. OPEC, scared to death that if they open the taps
too much prices will plummet anew, will probably agree to
around 700,000. At this level, oil could fall but would most likely
settle above $30. [If they agree to less than this, uh oh.]
As I”ve written all year, though, the real problem is that only
Saudi Arabia (and to a lesser extent Kuwait) has the excess
capacity to help the world out. The other nations are already
running full tilt and non-OPEC members like Norway are as well.
And by now you should all be convinced of the coming heating oil
debacle. Supplies are down some 40% from last year. Heck, it
was already cold enough in the New York area to turn on the
heat for a few days this week (I resisted). And natural gas prices
are at all-time levels as well.
But there are those who say that we really have nothing to fear,
that the impact of oil on our overall economy is so much less than
20 years ago. I can”t disagree with that, but to act like $35 or
higher oil doesn”t matter is absolutely crazy. At this level, it”s not
just the consumer who gets hit, it is also the corporations, i.e.,
Dupont”s profit warning this week which blamed higher energy
costs for the coming slide.
So, to answer the analyst who asked how we get out of this mess,
it”s pretty simple…recession.
Just a little awhile ago I expected our own economy to resume its
upward path this fall after the current slowdown runs its course.
That could still happen, a scenario which contains its own distinct
plusses (better earnings) and minuses (probably higher interest
rates). But it won”t happen unless oil prices decline substantially
from current levels. And since the world can produce only so
much crude today, it doesn”t take a rocket scientist long to figure
out that a significant global slowdown could be in the cards.
I remarked last week about the situation in France, where the
fishermen, protesting higher oil prices, blockaded the ports.
Initially, the government had reached agreement with them, but
then this week France”s truckers blockaded refineries, resulting in
rationing and chaos. Similar incidents are occurring in Spain and
Britain.
And what was OPEC”s response to European pleas for help?
Hey, cut your taxes. Taxes comprise 73% of the cost of petrol in
France. In all of the European Union, the average is 68%.
European governments can”t slash taxes without making up the
revenues elsewhere. [This is where the new European Union
complicates matters considerably. It is more difficult for
individual nations to address their unique problems without
messing with the whole.] Do you think the people would go for
higher income taxes, especially after their governments have been
finally lowering them for the past few years?
And in Asia, there are clear signs that high oil prices are beginning
to bite. But wait…there”s more…what do China and Sudan have
in common? You guessed it, oil. Or rather, Sudan has it, China
wants it.
You”ll recall from my piece two weeks ago that China announced
it was going to build up its strategic petroleum reserve. China
also happens to be a leading partner in Sudan”s large oil fields.
Nothing really wrong with the picture so far, right? Just a normal
international trade situation.
Well, Sudan is still in the midst of a 17-year civil war that has
killed some 2 million people. Add to this the fact that the
Christian rebels in the south, the victims in this struggle, are now
advancing on the oil fields. The ruling National Islamic Front
(NIF) needs the oil to finance its military.
With all of this in mind, there were various reports this week that
should scare the heck out of any geopolitical scientist. China is
reinforcing the NIF with its own troops in order to protect their
oil interests. The best estimate is that they have thousands there,
labeled as security forces. The rumor is that they could eventually
have a ton (I hesitate to use the number I saw in the London
Daily Telegraph…suffice it to say it would astound you). Yes,
China is in Sudan.
One leading human rights campaigner told the Telegraph, “If with
foreign help the NIF regime crushes all opposition, we will have
entrenched in the heart of Africa a militant Islamist regime aimed
at spreading terrorism throughout the continent. It”s unbelievably
serious for the future of democracy in Africa and could happen in
the next few weeks.” The Christians are going to get crushed.
From time to time I mention how we have been remarkably
fortunate that even “bad” leaders have acted reasonably, i.e., as
awful as Saddam or Kim Jong-Il may be, they haven”t totally
gone over the edge (using weapons of mass destruction), yet.
But Sudan has been active in military procurement and is adding
missiles to its arsenal. Just another reason for a national missile
defense in this country.
And one final point on Sudan, veteran reporter Nat Hentoff of
the Village Voice asked why Jesse Jackson has been so silent on
the slavery issue in Sudan (as did I this past spring). I think back
to last fall, when Jesse wasted his time defending some jerks in
Decatur, Illinois who were suspended after getting into that ugly
fight at a high school football game. Hentoff reports that some
200,000 Christians are essentially slaves of northern Sudanese
masters.
Understand that Hentoff has a reputation as a staunch defender
of liberal causes. But do you know who he was praising this
week? Another Jesse. Jesse Helms. And look for Helms to hold
very public hearings sometime this fall. The perfect tie-in is the
debate on permanent normalized trade status (PNTR) for China.
Lastly, on the issue of China, did you catch Mike Wallace”s
interview with Chinese President Jiang Zemin? After seeing it, do
you trust Zemin? I didn”t think so. I”m still for granting China
PNTR, but we go in with both eyes wide open.
Wall Street
Most of the talk on the Street the past four trading days (ex-
Labor Day) concerned oil. But the week also marked the end of
respective 5-week winning streaks for both the Dow Jones and
the Nasdaq. The Nasdaq was pummeled to the tune of 6% and is
back below the 4000 level (3979). The Dow”s losses were
minimal, just 17 points, and the average stands at 11221.
There was lots of talk of an economic slowdown and the potential
impact on corporate profits. We are now in the midst of the
precarious earnings warning season, and next week could be
particularly volatile.
Some big cap technology names suffered through some pain, with
Oracle losing $6, Cisco over $4, Intel over $8, and high-flyer
Juniper Networks (a competitor of Cisco) tumbling $24. Thus, I
don”t feel as compelled to give my valuation speech right now.
But I want to digress from the normal routine to discuss…steel.
If you ever wondered how I put together this weekly diatribe, I
generally fill up two sides of paper with chicken scratch that I try
and make sense of at the end of the week. And I start filling it up
as soon as I post the previous piece. But each week, the first
thing I write on my sheets is “steel.” I throw it in the upper right
hand corner and it sits there all week, looking forlornly at the
editor who then totally ignores it.
I think I”ve mentioned my secret economic indicator only a few
times since I began writing this column. But you need to know
that for over 10 years now, I have kept track of it (as reported
weekly in Barron”s). After all, I don”t care what kind of high tech
economy we are in, you still need steel…and it”s needed
worldwide.
I used to work at PIMCO Funds, where I had the opportunity to
work with PIMCO”s leader, the inestimable Bill Gross, Mr. Bond.
I once asked Bill about 3 years ago what economic indicators,
aside from the standard ones we all know of, he looked at to
gauge a sense of the overall environment and the first thing he
mentioned was my beloved, but neglected, steel.
So about 3 weeks ago, Gross was on CNBC and the anchor
asked him what led him to his conclusion that the economic
slowdown may be for real. Gross said, among other things, that
he noticed that steel production was leveling off, and even falling.
So here for your own edification is a sample of what you would
find if you had the numbers. I will post about five years worth in
my next Wall Street History column, for those of you who may be
interested.
What I have here are two sets of numbers. The first number is
steel production for ”99, the second for 2000. You”ll quickly
recognize the trend.
1999 2000
6/4 1991 – 2309
6/11 1964 – 2223
6/18 1825 – 2223
6/25 1942 – 2305
7/2 1971 – 2254
7/9 1986 – 2243
7/16 1900 – 2242
7/23 1948 – 2125
7/30 1982 – 2097
8/6 1885 – 2168
8/13 2014 – 2149
8/20 2009 – 2015
8/27 1995 – 2068
9/3 1970 – 2125
9/10 1992 – 2078
*The actual numbers reflect about a two-week calendar delay.
U.N. Millennium Summit
Well, as of this writing, it would appear that all of the world”s
leaders got out of New York safe and sound. Someday we”ll hear
how the New York City Police foiled 20 different plots.
Seriously.
And what was accomplished? Zippo, zilch, nada. Nothing ever
is…but we still need the organization.
President Clinton did try, for what is potentially the last time, to
get Barak and Arafat to resurrect their peace talks. I believe a
Palestinian “source” whose comments I read this week. Yassir
Arafat has grown to loathe Bill Clinton and there is no way he
wants to give Clinton the satisfaction of a deal. He is, however,
perfectly content to give it to Gore or Bush. September 13 is the
original deadline for declaring Palestinian statehood. All
indications are that Arafat won”t cross that bridge yet. For his
part, Barak is struggling to hold onto power.
India and Pakistan didn”t meet. Pakistan”s Musharraf said he sees
no hope that peace talks will be held anytime soon.
Embarrassingly, while the U.N. was in session debating the role
and formulation of future peacekeeping missions, 3 U.N. aid
workers were killed in West Timor. You”ll recall that it was East
Timor that was recently granted independence and the U.N. is
currently administering the peace there. But the West is where
the militias are hiding out and Indonesian President Wahid, still
hanging on by a thread, is powerless to stop them.
And then there was the case of North Korea”s delegation, which
never made it to New York. As they were boarding an American
Airlines flight from Frankfurt to New York, AA officials body-
searched them because they were from a nation which is on the
State Department”s list of those who sponsor terrorism. Stupidly,
State hadn”t informed AA about the North Koreans travel plans.
Obviously, regardless of what you think of North Korea, in this
instance they should have been treated with diplomatic kid gloves.
But, instead of sloughing off the whole matter and making their
point in New York, the Koreans flew back home in a huff with
the North Korean ambassador to the U.N. issuing his final
thoughts. “The price for this provocative act will be quite
expensive.”
Elsewhere Around the World
Spain: The president here called the Basques, “Nazis.” I don”t
know if I”d travel to Basque country anytime soon.
Iraq: Columnist Jim Hoagland (one of the best) wrote that
Washington has urged the new U.N. weapons inspectors to delay
going back into Iraq because it “would create a climate of
confrontation at an inappropriate time.” But I…I…don”t
understand. Just because we have an election in this country…
Japan: Current estimates are that the economy will have grown a
whopping 0.7% when the 2nd quarter figures are announced next
week. Awesome job, wrote the editor with dripping sarcasm.
And think of this. 65% of government revenues now go to
service the nation”s debt…and that figure is rising. One more
year and the whole place could blow.
Colombia: So the U.S. aid is beginning to funnel in as we try and
prop up the teetering President Pastrana. As I mention in my 9/7
“Hott Spotts” piece, my own fear is that Venezuelan President
Chavez may eventually make some sort of move to capture a little
territory if the situation deteriorates any further. Chavez is
already chummy with the guerrilla forces in Colombia and allows
them to use Venezuela as a sanctuary.
Separately, Colombian officials uncovered a sophisticated
submarine that was being built in the Andes (it was in 3 pieces for
easier shipping to the coast) by the drug cartel. The sub is
capable of transporting a cool 200 tons of cocaine. I”m assuming
it was intended to be used just in time for the festive holiday
season in Miami.
Russia: [I dropped them in rank, reflecting their reduced
status…just kidding, Moscow.] President Putin used his U.N.
appearance to promote a proposal for an international ban on the
militarization of space. In this vein, Geoffrey Forden wrote a
super piece in the New York Times explaining one of the untold
stories of the Russian nuclear force, that being the problem of
their aging early warning satellites. These satellites represent the
best way to avoid an accidental nuclear war. We have previously
learned, after the fact, of near misses, such as the Russians
misinterpreting a Norwegian scientific launch to be an attack on
Russia. And, it”s true that often a flock of geese looks to the
radar like incoming missiles. With satellites, though, you have a
vital check on any suspected attack. Without them, look out.
Forden proposes that the U.S. pay for the Russians to launch 5
new satellites. It”s much better than the existing joint detection
centers. Why would the Russians believe that what we are
showing them on our own computers is the real story?
[The preceding is why I only sleep about 4 hours a night.]
Meanwhile, Putin and Japanese Prime Minister Mori met over the
fate of 4 teeny, tiny islands, the Kurils, taken by the Soviets in
World War II. Japan wants them back and, in any other era,
Putin may have quickly obliged. But these are no ordinary times
so Putin said, “Nyet,” for the simple reason that he feared a
nationalist backlash.
It was also revealed that Putin has a secret media fund in the
Russian budget, obviously to be used to silence critics. Tycoon
Boris Berezovsky refused to sell his share of a television station
to the Kremlin, per their request. [Picture the White House trying
to tell CBS to give them control…oops, bad example.]
Berezovsky, instead, placed his interests in a blind trust, away
from the Kremlin”s prying hands.
And while Putin was in New York, it came to light that
Chechnya”s parliament speaker has been missing for 4 months.
Russian authorities say they have no idea where the fellow is.
Sources in Chechnya say he was tortured to death by the
Russians. Very civilized.
Finally, a German newspaper, citing Russian intelligence sources,
said the Kursk was blown up by a Russian missile fired from a
destroyer.
[Just watched Putin on “Larry King.” Between Putin and Jiang
Zemin, the U.S. has two tough cookies to deal with. Foreign
policy should be a major issue in our own political campaign.]
APEC: Stands for Asia-Pacific Economic Cooperation group and
it includes nations like Thailand, Indonesia, South Korea and
Malaysia. The bottom line is that, post-Asian crisis of 1997, these
nations still have massive structural problems in their economies.
And to throw in an investment tidbit, I have always argued that
investing in emerging markets is a total waste (equities that is;
fixed income presents some unique opportunities) and I have
stated such in various newspapers and journals.
So, here”s the latest. Through Thursday, year-to-date the average
emerging markets mutual fund is down 12%. And, for the last 5
years, the annualized return on these funds is a whopping 1.8%.
For the same period, a good short-term bond fund would have
returned 5.4% a year. You get the picture. Better for you to
stick your “risk capital” into a quality, diversified U.S. technology
fund.
This Week in Politics
First, the presidential election polls.
ABC / Washington Post: 47-47
CNN / USA Today: 47-44, Gore
Reuters / Zogby: 46-40, Gore
In the past 4 elections, the candidate ahead at Labor Day has
gone on to win.
But regarding the electoral college, we have the following.
NBC: Gore 199, Bush 188, Tossup 151
U.S. News: Bush 209, Gore 194, Tossup 135
Knight Ridder: Bush 214, Gore 161, Tossup 163
At this stage, the keys are going to be Michigan, Ohio,
Pennsylvania and Missouri (Missouri has picked every
presidential winner since 1960).
On the congressional front, President Clinton holds all the cards
and will win the fall budget battle as Republicans look to avoid a
shutdown before the election. The consensus seems to be that
Clinton will win more dollars for education and anti-crime while
the GOP will have to wait on pet tax projects like the marriage
penalty and estate taxes (the latter formally defeated this week).
The GOP will, and should at this point, give in on the minimum
wage issue. And then there is PNTR for China, a rather
contentious item, to say the least. September 30 is the deadline
for 13 spending bills.
No action is likely to be taken on prescription drugs because Gore
wants this as a campaign issue.
New Jersey
Sorry, folks. If you don”t live in my state, you may want to skip
down a bit. But I can hold back no longer. There are two races
here I need to comment on.
First, the Senate race between Republican Bob Franks and
Democrat Jon Corzine. I need to say up front that I am giving my
financial support to Franks. He is a good man with vast
experience in government who has served the people of this state
well.
As for Corzine, within the last three days two episodes have come
to light which help to define his character. One involved a 1998
“open spaces” referendum. Corzine said he voted for it. It turns
out he hadn”t voted at all in that particular election. The other
involved a referendum on building a major league baseball
stadium in 1987. Corzine said he had voted against it. It turns
out he hadn”t voted. [Source: Star-Ledger.]
The other race involves the congressional district in which I live.
I mentioned last week that I had met candidate Mike Ferguson”s
father in Ireland. I promised the father I would do all I could to
help his son.
This week I met Mike and his wife at an event for Bob Franks.
While we haven”t had a chance to talk much, he shares the bulk of
my political viewpoints. Mike is receiving my support.
And the Star-Ledger newspaper has the following take on his
opponent, Maryanne Connelly.
“She is the leading contender to win this year”s award as New
Jersey”s sleaziest candidate, an achievement indeed.”
Religion and Politics
In a Newsweek poll, 51% of voters think religion should play a
bigger role in public life. Only 12% say it should play a smaller
role.
Since I was away while Joe Lieberman was making his more
forceful pronouncements on the issue of religion in America, I
thought I”d supply you with an opinion from a Republican,
theologian Michael Novak.
“I love what Senator Lieberman is doing…think of it. Civilization
requires civility – men and women who hold that other women
and men have something important to say. That, in turn, requires
belief in the deeper proposition that, underneath everything, there
is truth to be discovered and evidence to be attended to , because
at the end of the day everything finally makes sense and is headed
somewhere decent and good. That proposition enables civilized
people to trust to argument with one another in the confidence
that truth will win out; its absence compels barbarians to rely on
clubs. And the Hebrews taught the human race that truth is not
an abstract noun but another name for a person, a divine presence
capable of infinite insight and creative decision.”
Joe Lieberman can say what he wants. I wouldn”t compare
Clinton to Moses…but what the heck. I only wish the media
would stop its hypocritical coverage of the issue. And therein lies
the problem.
Random Musings
–CNBC”s audience is rather wealthy, as you can imagine.
Median household net worth is $981,000.
–I was forwarded a piece by Charley Reese of the Orlando
Sentinel that, after watching the MTV Music Awards on
Thursday, ties in nicely with today”s pop culture. Reese was
writing about the awful treatment that the Boy Scouts received at
the Democratic Convention.
“It”s a heck of a note when the Boy Scouts are viewed by so
many liberals as a bad organization while those people have
nothing to say about the obscenity, profanity and violence that
pours out of the entertainment industry like sewage out of a
busted pipe.” See Eminem.
–According to one survey, half of all Canadians now describe
themselves as “mainly” or “essentially” the same as Americans
through economic and cultural integration. Many in the country
now question whether there will be a Canada in 25 years. Hang
in there, my Canadian friends.
–Maurice Greene, the world”s fastest human, hits a top speed of
27 mph.
–U.S. News had a scary story for those of you who spend a lot of
time on the interstate highway system. Because of low pay in the
trucking sector, an increasing amount of those behind the 18-
wheelers bearing down on you at 80 mph are illegals…with
obviously zero experience.
–There were 4,000 emergency room incidents for the month of
August involving Scooters. Stick them on the interstate and you
have a bigger problem.
–Al Gore took 8 classes at Vanderbilt Divinity School. He
flunked 5 of them. Gore didn”t graduate from law school, either;
Bush received his MBA from Harvard. [Sources: Bill Turque,
“Inventing Al Gore,” Jennifer Braceras / Boston Globe]
–The World War II Memorial has been delayed again. Some
don”t like the design. Geezuz, just like a family photo can mean
more than anything in the world, give our dying Vets
something…quick. It”s for them, not some freakin” planning
board. The amount of fumbling going on with this is pitiful.
Gold closed at $277
Oil, $33.63 [Hit $35.40]
U.S. Treasury Yields
1-yr. 6.17% 2-yr. 6.09% 10-yr. 5.73% 30-yr. 5.70%
[Bond market was spooked early in the week by the soaring oil
price.]
Returns for the week, 9/4-9/8
Dow Jones -0.2%
S&P 500 -1.7%
S&P MidCap -0.8%
Russell 2000 -1.2%
Nasdaq -6.0%
Returns for the period, 1/1/00-9/8/00
Dow Jones -2.4%
S&P 500 +1.7%
S&P MidCap +22.3%
Russell 2000 +6.1%
Nasdaq -2.2%
Bulls 47.7%
Bears 31.8% [Source: Investors Intelligence]
And next week, we will be unveiling a little contest. Start honing
your Dow Jones prognostication skills.
Thanks to HK and Mike for passing along great stuff.
Brian Trumbore
