[Posted 7:00 AM ET from Oklahoma City]
Remember how years ago, long before 9/11, I used to tell you
how I had nightmares about North Korean missiles slamming
into our country? This was the genesis of my “sleeping with one
eye open” mantra. And wasn’t it funny how just last week I felt
compelled to bring up an old theme of mine, missile defense and
the threat from rogue states such as the Commies operating out
of Pyongyang? We won’t always be able to retaliate with nukes,
(due to Seoul’s proximity) I said, making a missile shield all the
more necessary.
So what did we learn this week? That North Korea has had an
active nuclear weapons program for years, and chances are good
that it has at least one or two nukes ready for launch. In other
words, the plot thickens.
What should we make of the North’s sudden admission, when
confronted with the evidence by our troubleshooter two weeks
ago? [The White House sat on the revelation for a while.]
Perhaps an administration official put it best in a Washington
Post piece. “(The admission) has promise. It has opportunity. It
has dangers.”
You probably won’t be surprised if I opt to focus on the dangers.
For starters, suddenly our two closest allies in Asia, Japan and
South Korea, are subject to nuclear blackmail. Of course the
United States is as well, particularly since we aren’t sure, yet,
whether the North’s missiles could reach Alaska or California
with a nuclear warhead.
Obviously, the timing couldn’t be worse, with our current focus
on Iraq and al Qaeda. But for now there is little more to say until
the Administration and our allies figure out the next step. In the
meantime, I note that in a series of comments from back in the
summer of 2000 (see archives) I scoffed at those who didn’t
believe a threat from North Korea actually existed. Instead, I
was pounding the table on national missile defense, asking, how
could we possibly trust the evil ones not to cross the line when it
came to all forms of weapons of mass destruction? It was
suicide to think otherwise.
Alas, this week also witnessed the 4th-straight success in the
NMD program. If you have a bright child at home who seems to
have an aptitude for science, please steer them to this effort. It’s
the highest goal…saving America and our way of life.
—
Editorial in the Washington Post, concerning the carnage in Bali.
“The Saturday bombings, coming as they did two years to the
day after the USS Cole was bombed in a Yemeni port, are a
reminder that Western interests, particularly American interests,
are always in the crosshairs of terrorists. The attacks are also a
sobering reminder that the war against terrorism is in its early
stages, that more attacks against American interests and targets
can be expected and that to the extent this country becomes
distracted from the overriding demand to break the back of
terrorism, we do so at our own peril.”
The sight of the bomb blast was enough to make you sick. It was
revolting. It was despicable. And while my heart goes out to the
victims and their families, I ache for the good people of Bali,
who sought nothing more than to lead a peaceful life in their
tropical paradise. Once again, whether it’s a financial crisis, like
in 1997-98, or terrorism, the little guy seems to suffer the most.
Who knows if Indonesia’s President Megawati could have
prevented the attack had she heeded the warnings. What we do
know is that she is a pitiful figure at a time when her nation is
crying for leadership. Here are some of the comments I wrote
about this idiot last year.
WIR 9/22/01: “The name Megawati is a misnomer…this is not
one of the brighter bulbs on the planet, a scary thought as she
heads up the largest Muslim nation.”
WIR 9/29/01: “…the danger is that President Megawati is in
way over her head and when the shooting starts in earnest in
Afghanistan, we could have a real problem here.”
No wonder Western nations are now withdrawing their personnel
and urging tourists to stay home, leaving the poor shopkeeper,
the bartender, the maid…all screwed.
Iraq
“If Iraq gains even greater destructive power, nations in the
Middle East would face blackmail, intimidation or attack. Chaos
in that region would be felt in Europe and beyond…those who
choose to live in denial may eventually be forced to live in fear.”
–President George W. Bush
As of this writing, there is hope the UN Security Council will
finally approve a resolution the Bush Administration can
swallow…albeit barely. Unfortunately, this step was necessary,
even as the UN once again proved what a disgrace it can be.
But as the inspectors go back and the war clock ticks down, CIA
Director George Tenet reminds us that the domestic threat is just
as bad as it was last September. Despite the huge gains we have
made these past 13 months, we are as vulnerable as before.
Finally, if you believe the military planners, the window of
opportunity for taking down Saddam by conventional means is
probably only through February. If inspectors get in shortly
maybe it’s December, assuming Saddam gives us a reason, as he
invariably will.
Wall Street
Thank God I don’t have to produce “The Day in Review.”
Summarizing the week in the manner I do has driven me close to
the brink as it is. I couldn’t help but think of this as Wall Street
had one of its more volatile 5-day periods, with stocks soaring
one day, plunging the next, then skyrocketing anew with each
earnings report or economic statistic, while bonds suffered
through a near record fall.
Am I surprised? No. I’ve been writing that we would eventually
settle into a broad, multi-year trading range, 7000-10000 for
arguments sake, with most stocks fairly or slightly undervalued
at 7000, overvalued at 9000, and euphoric at 10000, before
reality hits and stocks are slapped back down. But this week, for
once I don’t have to attribute the good days all to short-covering.
Instead, there were some rational explanations, such as
respectable earnings from the likes of IBM and Microsoft.
Granted, in the case of both they handily beat already dampened
down expectations, so in other words they are mastering
the new game of “Look how awful we…oh, whaddya know?
We came in better than we thought we would!” But IBM and
Microsoft, at current levels, aren’t necessarily overvalued so you
won’t hear any primal screams from this guy.
But you also had companies like Merrill Lynch and Eastman
Kodak, whose strong earnings came solely as a result of cost-
cutting (albeit they did a great job in this area), not because of a
pickup in revenues. So herein lies the fact that if you are looking
for solid growth early in 2003, forget it, because when it comes
to the employment front, clearly Corporate America isn’t going
to go through the pain, only to turn around 3 months later and
say, “Give me your tired, your poor, your out of work yearning
to earn a good salary with a dental plan.” Nope. Ain’t gonna
happen.
And then there is this issue of credit quality, or the ongoing
credit crunch, perhaps best exemplified by the likes of Sears and
Ford. The former saw its shares slammed $10 (from $34) in one
day as it missed its earnings forecast by a mile due to a surge in
delinquent cardholders. As for the latter, S&P placed Ford on
credit watch, due to the fact its business model is failing and it
has $22 billion in debt due next year. Ford may find a way out
of its mess, but it won’t be easy. S&P also downgraded General
Motors, thanks to its massive pension liability…something you
are now all too familiar with.
You know, I kind of feel like Charlie Brown, who once asked
Linus what the true meaning of Christmas was, only for me, I’m
trying to figure out what the true meaning of each rally is. I want
to believe there are sound fundamentals behind it, like this
extraordinary housing bubble that keeps going and going, but
instead I see a consumer on the brink of shutting down,
corporations that are still doing all they can to pare back, a global
economy that is in intensive care and, most importantly, an
unsettling political environment with all manner of dastardly
weapons waiting for a few evil doers to pick them up and release
the whirlwind. So enjoy these rallies we’ll get from time to time,
pare down your debt as best you can, have that water and Chex
Mix handy, and keep your fingers crossed. It’s a crazy world,
enough to make one sigh from time to time, “Good grief.”
Street Bytes
–The Dow Jones and S&P 500 registered their best gains in
more than a year, up 6% to 8322 and 884, respectively. Nasdaq
soared another 6.4% to 1287. But I have to throw out a few
figures to add a bit of perspective to the giddy rhetoric of the past
week or so.
S&P 500…closing levels.
7/23/02…797…8/22/02…962 (+21%)
10/9/02…776…10/18/02…884 (+14%)
If we get back over 962, then we can talk. [The editor is being
coy. At that level, he may go ‘short.’] Also, remember that on
8/22 the Dow Jones was over 9000.
*Check out my “Wall Street History” piece of 8/16/02, where I
detail the rallies of the 1929-32 bear market. There were 12
individual days during that period with gains in excess of 6.5%
…as the Dow fell from 381 to 41.
–U.S. Treasury Yields
6-mo. 1.66% 2-yr. 2.05% 10-yr. 4.11% 30-yr. 5.06%
Worst week in the bond pits in 7 months as the asset allocators
held sway. Bonds had previously soared as stocks tanked, so the
moneymen took their profits in the former and repositioned their
portfolios. Of course there was also some plain old swapping
from bonds to stocks as the rally gained strength. More in a bit.
–Some of the financials reported better than expected earnings,
thanks to the aforementioned cost-cutting in the case of Merrill
Lynch, while Citigroup was helped by its consumer and credit
card business. [Others such as Bank of America also saw big
pickups in revenues due to their credit operations.] But with
Citigroup, the longer-term issue in my mind remains the
enormous legal liabilities that they face. It’s tough to quantify
the extent of the damage, though, as well as the timing of the
coming drain on reserves. The highly publicized suit just filed
by the New York State pension fund is but one example, as
further conflicts of interest between Citigroup and its clients (in
this instance WorldCom) are revealed.
–Fannie Mae reported that it expensed some $1.4 billion in
derivatives. There’s more where that came from.
–A Los Angeles Times investigation concludes that the fraud
case with Global Crossing is about to blow wide open.
–A poll of investment sentiment showed that if Americans were
given $1,000 to spend or invest, only 29% would invest in the
stock market, down from 66% in April 1998…a solid contrarian
indicator.
–The Journal had a good piece on how Motorola has played
games with its accounting, taking “special charges” 15-straight
quarters in order to paint as good a “pro-forma” picture as
possible, even though the company’s operations blow.
–Housing: A friend of mine is the top real estate attorney in my
area and I was asking him this week about the local market (the
suburbs of New York). Scott said that he initially thought the
market peaked 4 months ago, but there has been one last surge.
In fact, it’s a mania unlike any he has seen to date. Values are
relative, but one house went on the market for $1.8 million and
had 5 offers the first day above that figure. Another 30-
something couple purchased a home for $3.6 million with little
down (what is the bank thinking?) and Scott knows the guy is
then going to gut it. It’s insane. The debt folks are putting on,
with an uncertain job market (particularly in the New York /
Wall Street area) is amazing. Despite these anecdotes, I’ll still
say values have now peaked, but I have been so wrong in this
area, I lay myself before the court and beg for mercy.
–More reports coming out on how Goldman Sachs aggressively
pursued Salomon Smith Barney analyst Jack Grubman, not
because his analysis was brilliant, but solely because he could
bring in investment banking business. Nothing illegal, per se,
only it reeks because current Goldman chairman Henry Paulson
was one of the first last spring to chastise the Street for its lack of
ethics, while yours truly knew he was just as dirty as the rest. As
was Paulson’s co-chairman at the time of the Grubman
recruitment, New Jersey Senator Jon Corzine… “The Man Who
Bought An Election.”
–Another mea culpa…this time to the folks in California for my
remarks during the state’s energy crisis belittling the manner in
which it was handling the mess. With the guilty plea in the case
of a senior Enron trader, it’s obvious that games were played
which resulted in far higher prices than were warranted by the
markets at the time. On this charge, however, I worked out a
plea bargain, granting me six more mistakes over the coming
year.
–Ebay had another strong quarter, but the company is finally
warning that growth at existing rates will be increasingly hard to
come by. The company also announced it expects earnings of
$1.02-$1.05 a share in 2003. Call it $1.10. That means at $55,
eBay is trading at a 50 multiple, going out a year. In other
words, it’s overvalued. Should it ‘miss’ one quarter in’03, we’re
talking a $30 stock.
–Inflation Watch…an irregular exclusive of StocksandNews,
even though ‘deflation’ is the bigger concern. A study in New
Jersey revealed that property taxes increased an average of 7%
last year (Star-Ledger), the largest such hike since 1990. [New
York City’s are about to rise 10-25%.] Meanwhile, nationwide,
health insurance premiums are up 13% (New York Times), while
Mark R. reports that his clients have seen long-term disability
insurance rise close to 100%. Yes, the official statistics reveal
that inflation is nonexistent, and in vast segments of the economy
this is the case, but regardless of which figures you tout, the fact
is that the above very real costs will lead to one thing,
particularly if incomes don’t rise commensurately (or real estate
values), that being a reduction in consumer spending.
–Nothing’s being said the last week or so, but the West Coast
dockworkers aren’t exactly working at a fevered pitch to relieve
the cargo backlog that resulted from the recent walkout. Nothing
like a little ‘sloth’ to impede the recovery.
–While Wall Street fiddles, Brazil burns. Another chaotic week
for its financial market as they wrestle with the coming Leftist
presidency.
–Energy: OPEC said it would hold production at existing levels
for the foreseeable future, at least until war starts. At $28, the
price for the official “basket” of crude, oil is still in the cartel’s
$22-$28 preferred band.
–Bonds…the real story: Two weeks ago, I wrote the following
concerning my substantial cash position. “From a risk-reward
standpoint, I prefer to sit on the cash (vs. bonds), for now.” Yes,
I have long touted PIMCO’s Total Return Fund, managed by Bill
Gross, but for various reasons I have personally been holding
cash as opposed to bonds since about March and I have given up
probably about 3% in doing so. Up until this past week it was
more like 5%, but then bonds got crushed.
I have to continually remind myself that in writing this weekly
column, I’m addressing about 30 different audiences; from
business execs and Wall Street types, to homemakers and policy
makers. From New York to California, and from London to
Shanghai (I know where the traffic is coming from).
The bond story, particularly Total Return’s high quality,
diversified portfolio, has been a layup for years now, and if you
followed my advice (even if I, myself, was playing in other fixed
income sectors like junk, from time to time), you have profited
handsomely. You’ve also slept better.
But it’s now possible that the great bull market in bonds, which
commenced in 1982, is over. Bill Gross himself said this week
that a 10-year Treasury in the 4% range was “appropriately
valued.” Investors in bonds, particularly in long-term Treasuries,
got whacked with the week’s price movement, as they were
reminded that net asset values can indeed drop.
But as Gross would say, just because the bull market is over, it
doesn’t mean a new bear market has commenced either. If you
believe world economic growth will remain moribund for years
to come, as Gross and others believe (like yours truly), then
bonds will eventually settle into a narrow range, while investors
basically earn the coupon (or distribution rate, in the case of
bond funds).
Perhaps the Total Return Fund earns investors 3% or so over the
coming year (just a guess, folks), instead of the 7% plus that
many have become accustomed to in recent years. And as I told
an inquiring reader this week, if you want an idea of the
downside risk, you can look to 1994, a brutal year for bonds
within the long-term bull trend. Total Return Fund lost 4% that
year (depreciation in NAV plus dividends).
So I hope I’ve cleared things up for those concerned that the
prices quoted in the paper for their bond holdings have come
down a bit. I would also add that if you believe that the economy
is truly turning around and that this recovery is long lasting, then
corporate bonds are the place to be. For this, though, you need to
ask your financial advisor for specific recommendations.
–And an addendum to the above: After this week, the articles
will be flying fast and furious that investors were piling into
bonds and bond funds at the worst possible time, just as rates hit
their lows. To some extent there is truth in this, but only if you
had no idea what you were buying, or didn’t understand the
impact of rising rates on a specific portfolio…the term is
“duration.” Again, ask your financial advisor. If they can’t
explain the concept to you, fire ‘em.
–China: GDP for the third quarter came in at 8.1%. Amazing
how it always seems to be around that 8% figure, isn’t it? Why
it’s simply uncanny that a few days after a quarter, they can tally
up production across such a vast land.
Sarcasm aside, there is no doubt that China’s exports are
booming, but huge swaths of the economy remain underwater
(drowning millions). Ergo, count me in the camp that says China
continues to cook the books.
–My friend Johnny Mac was a highly successful Wall Street
trader in his day (now he’s living in a fortified bunker in
Pennsylvania), and he has a simple adage for those times when
Wall Street stages a huge rally, even if the news picture looks
bleak. “If the Street want to buy, nothing else matters.”
–My portfolio: My 20% equity position in energy issues
participated nicely this week, so it’s now about 22% of my
portfolio. The drillers have perked up and are threatening to
break out of a narrow 2-3 month range. The rest of the portfolio
is in cash and the position in Turkey, which has had a nice run
and is now at 4% of my holdings.
International Affairs
Israel: Prime Minister Sharon and President Bush met this week
to discuss how Israel will retaliate should Saddam lash out
against it. Bush made it clear he doesn’t expect (or demand)
Israel to sit back and take it. What a lot of us wonder, though, is
if Hussein launches a chemical attack on a major city, would
Sharon respond with nukes? We are assured that the U.S. and
Israeli militaries will be in constant contact with each other and
that the U.S. will do all it can to knock out the scuds before they
are fired.
Separately, I don’t often agree with the New York Times’
Thomas Friedman, but the following from one of this week’s
columns expresses my sentiments as well.
“Memo to Israel’s supporters: Just because there are anti-Semites
who blame Israel for everything that is wrong does not mean that
whatever Israel does is right, or in its self-interest, or just. The
settlement policy Israel has been pursuing is going to lead to the
demise of the Jewish state. No, settlements are not the reason for
the Israeli-Palestinian conflict, but to think they do not
exacerbate it, and are not locking Israel into a permanent
occupation, is also dishonest.”
Turkey: This week it appeared that many opinion-makers were
finally beginning to see the light when it came to Turkey and its
European Union candidacy, something yours truly has been
commenting on since December ’99, as a perusal of my archives
reveals. On Thursday the Wall Street Journal addressed the topic
in an editorial that, frankly, I did a better job of explaining in last
week’s review. But I add this from the Journal piece.
“Imagine what Turkey, if given the same support by Europe that
Greece received, could do to help restore stability in the Middle
East. Once again, European prejudices may have cost the
continent a historic opportunity.”
Significantly, Britain has also now stepped to the fore in a big
way, as members of Tony Blair’s cabinet make the case for
Turkey’s candidacy.
As for the upcoming election, the Islamist party (AKP) continues
to make gains, so the West is worried. I, however, am confident
this is not the same party that wreaked havoc in ’96 and ’97,
when the military forced it out of power. The AKP has pledged
to fight corruption (Turkey’s main bugaboo) and work with the
IMF on a sound fiscal policy (actually, taking the IMF’s advice
is the worst possible thing to do), while it pledges to grovel at the
feet of the racist E.U. in order to smooth the way for eventual
membership.
But while I’m not scared by the AKP, I’m also not foolish
enough to place my long-discussed big bet here until I see what
the AKP actually does. And I sure as hell won’t load the boat
until we blow Saddam out of the water. Turkey is also a huge
terrorist target right now and a well-placed bomb in its crowded
bazaars would make Bali look like child’s play. So I sit and
wait…itching to invest more…yet willing to give up the first 50-
75% move to ensure I’m doing the right thing.
[One other item, Prime Minister Ecevit voiced opposition to U.S.
action in Iraq, but as of November 3rd he is history. The
Islamists aren’t keen on it, either, but they’ll acquiesce to curry
favor with the U.S., I believe.]
India/Pakistan: Good news here. Both sides are pulling back
troops from the border (except in Kashmir), lessening the threat
of war somewhat. As for the election in Pakistan that selected a
new parliament, the Islamist, anti-American parties scored
surprising gains. One radical group captured about 20% of the
seats; not a good thing since it calls for the removal of U.S.
troops from Pakistani soil.
Serbia: So the nation holds a presidential election and fewer than
50% turn out, thereby invalidating the vote. That’s the thanks
the West gets for freeing them of Milosevic…ungrateful, err,
Serbs.
Colombia: This is falling well below the radar screen, but you
have to picture that this past week witnessed the worst urban
warfare in 20 years, as the rebels battled the army in Colombia’s
2nd-largest city, Medellin. U.S. military support grows, as it
should.
Random Musings
–Columnist Jim Hoagland (Washington Post), commenting on
“globalizations double whammy.”
“Technology continues to pull nations toward interdependence.
The communication revolution compels us to be more aware of
the rest of the world. But increasingly, it is an awareness of risk
that dominates the Zeitgeist of international economics and
politics, and not opportunity.”
–Last week I commented on Jimmy Carter’s Nobel Peace Prize
and the cheap shots the selection committee took at President
Bush. Columnist Michael Kelly (Washington Post) weighed in
that either Bush #41 or #43 should have been the recipient. After
all, they liberated Kuwait and Afghanistan, “no small feat,”
while one could easily argue that not one of Carter’s adventures
has resulted in a country being any better off than when he got
involved. Is Haiti any better? Or the Middle East, for that
matter?
–I didn’t think I’d have to write about Harry Belafonte two
weeks in a row, but his disgusting performance on Larry King’s
program the other day warrants further comment. King tried to
give Belafonte an “out” as far as his vicious criticism of Colin
Powell, but instead Mr. Calypso started ranting about the plight
of the residents of South Central, Los Angeles, and how the folks
who call it home live “lives as degrading as anything slavery
produced.” What?! It was whitey’s fault, of course, along with
his lackeys like Powell and Condoleezza Rice, the latter a new
target of Belafonte’s.
Powell and Rice need to, in Belafonte’s words, “live up to a
higher moral standard.” “Where is Colin Powell’s conscience?”
he asked. Where the hell is Jesse Jackson’s and Al Sharpton’s?
Then, addressing President Bush, the entertainer with the devil
horns sneered in his best Gollum impersonation, “Stop bullying
the world…that is not civil.” Then he hopped back on the
slavery train. “Most of who we are was shaped by slavery.”
I’m reminded of a line from a song by Travis Tritt. “Here’s a
quarter… call someone who cares.”
–So which way is the election going to go on November 5? Less
than 3 weeks away, and it’s still too close to call. Back in the
early summer I guessed that the Republicans would suffer on the
corporate governance issue. Then Iraq took center stage. So will
the electorate vote their pocketbook or send a message of support
to the White House? A rally to the Dow 9000 level would help
lift spirits a bit, I imagine, but this is still just a mid-term
election. People are voting for their congressmen and senators,
not George Bush, and I don’t have a clue what the result will be.
–I do know that in New Jersey, Republican Doug Forrester is
now a longshot. It will be a victory for the Torch, after all. And
as if we didn’t already have enough problems in my state, there
are credible accusations that our State Police superintendent is
tied to the Mob in a big way.
–Our prayers go out to our great ally, Australia, which lost far
too many of its young people in the Bali attack…at last count
around 120.
–One thing is clear. With the military commitments we face in
the near future, along with the potential for action in Southeast
Asia down the road, this nation is going to have to re-institute the
draft, partially because we also must do a better job of securing
our own borders.
–Related to the above, however, is the plight of Mexican illegals,
who in some parts of the country have become the backbone of
the economy. As the Journal opined the other day, President
Bush owes it to Mexico’s Vicente Fox to grant existing ones
legal status, while working out a better solution for future
workers.
–A Marist poll revealed that 70% of voters in America hope
Hillary doesn’t run for president. Oh, c’mon. Let’s have some
fun.
–Pilgrim Pride was forced to recall 27 million pounds of cooked
deli products for fear it contained listeria. Separately,
applications to law schools are up 15% in just one year, thanks to
the punk economy, which means that in about 5 years, expect an
explosion in suits involving those claiming to have contracted
listeria…it will be called the “listeria hysteria.”
–According to the Iraqi government all 11,445,658 eligible
voters affirmed their devotion to Saddam in the election granting
him a new 7-year term. Zero votes in opposition. Not even one
hanging chad, or an accidental vote for Buchanan.
–Finally, I lost a good friend this week, Harry Bingham. Back in
the days when I was at PIMCO Funds, Harry sub-advised a
precious metals offering for us and we got to know each other
quite well. Later on, it also just so happened I was the only
defender of keeping this fund in the PIMCO family, even as gold
was out of favor for long stretches and assets were low.
Basically, once I flew the coop, the fund was eliminated.
But PIMCO had been a small, small part of Harry’s career. He
was one of the true giants in his field, with his last 15+ years
having been in the employ of Van Eck Global. He was also one
you could share a laugh with over an adult beverage or two.
I’ll miss him. He was a good man and loved by all.
—–
Gold closed at $313…Harry could only hold it up so long.
Oil, $29.60
Returns for the week, 10/14-10/18
Dow Jones +6.0% [8322]
S&P 500 +5.9%
S&P MidCap +5.5%
Russell 2000 +5.4%
Nasdaq +6.4% [1287]
Returns for the period 1/1/02-10/18/02
Dow Jones -17.0%
S&P 500 -23.0%
S&P MidCap -16.8%
Russell 2000 -25.6%
Nasdaq -34.0%
Bulls 28.4% [Wow…remember, there”s a delay.]
Bears 43.2% [Source: Investors Intelligence]
Note: Off to see the Oklahoma City Memorial. It’s my second
trip here in about two years. On Sunday I hit the Panhandle to
visit my friends, the Bakers. I asked Karalee if she minded that
I’ll be dressed casually. “Brian, Gene has one suit and that’s for
funerals.” After Sunday, though, who knows where the road will
take me? Tune in next week to find out. Actually, if you see a
Mustang with Oklahoma plates in Wyoming, honk. I’ll buy you
a beer.
Have a great week. I appreciate your support.
Brian Trumbore
