[Posted 7:00 AM ET]
December 8…December 12
You all know that Sunday is Saddam’s deadline for handing over
his tale of lies (released shortly, at last word), but December 12
is critical as well, particularly with regards to our pending war
with Iraq, because that is the day the European Union assembles
in Copenhagen to decide the fate of Turkey’s candidacy for E.U.
membership. Regarding the former, we now sit back and wait
for the U.S. and Britain to counter with increased intelligence for
the UN inspectors, based on Saddam’s response, while
anticipating that Team Blix will become more aggressive in its
own actions. The process will take time, of course, but any
reading of President Bush’s recent comments leaves but one
conclusion. We should be surprised if military action hasn’t
commenced by February 1st.
As for Turkey, Recep Erdogan, the nation’s de facto leader,
(he is barred from being prime minister), allowed that the
European Union had to “take the chance to unite civilizations,
not set them clashing. To do that you must give Turkey a date
for talks (on E.U. membership). Otherwise, you are fanning the
flames of the clash of civilizations.”
Erdogan is right. In its first two weeks the new Islamic
government in Ankara has taken all the right steps in terms of
political reform (continuing the path of its predecessor), while
for its part both the U.S. and Britain are screaming at the E.U. to
see the light and give Turkey the go ahead. But the Europeans
still don’t get it, as on Thursday German Chancellor Schroeder
and French President Chirac agreed that discussions with the
Turks are possible, but not for two years at the earliest!
On a related issue, it then should be no surprise that a poll in
Turkey, where 98% of the population is Muslim, reveals that
83% are against the U.S. using bases, like at Incirlik, for
operations against Iraq. Ever since the first Gulf War, when the
West, including the U.S., largely abandoned Turkey in the
aftermath, thereby accelerating an economic collapse, the Turks
have seen nothing but disdain for their nation, one which has
long had the potential to be the model for the rest of the region.
I still believe that the government, despite enormous pressure on
the home front, will give the U.S. enough of what it needs in the
coming war (like access to the airbases), but you have to
appreciate the incredible bind that Erdogan is in. And as I’m
sure the Bush Administration is constantly telling its E.U. allies
these days, Turkey could always tilt the wrong way if the West
keeps slapping them in the face. Even the hardcore, pro-West
military may not be able to prevent a slide into the abyss. Under
this scenario the best we could hope for would be a coup and
that’s not what we want.
Which leads me into another issue, President Bush’s handling of
Saudi Arabia and the terminology he uses to defend Islam in
general. I was watching televangelist Pat Robertson on ABC’s
“This Week” last Sunday, as he described Islam as a violent
religion. While the historical context that Robertson employs in
this argument might be convincing to some, friends, if our
leaders ever adopted it then the worst nightmares from the clash
of civilizations we are all trying to avoid would become reality.
It’s bad enough as it is, but the Robertson stance assures our
demise under a hail of blistering weapons.
On the other hand…President Bush is being totally disingenuous
in painting all of Islam with the broad brush of peace. While
you’ve heard the following from some circles since 9/11, it
nonetheless bears repeating; the civilized world is at war with
militant Islam, with Wahhabism, not the entire religion.
Muhammad founded Islam in AD 622. Abd al-Wahhab, the
founder of the Wahhabi movement, though, didn’t come along
until about 1,100 years later. And by my reading of history (see
“Hott Spotts,” 11/1 and 11/8/01), it was al-Wahhab’s alliance in
1745 with Muhammad ibn-Saud that truly radicalized the
movement and by 1773 a new Wahhabi-Saudi state had been
established in Riyadh.
The Ottoman Turks (bless them) conquered the Wahhabis in
1818 (using an Egyptian army), but by 1902 al-Aziz ibn-Saud
had restored the Wahhabi-Saudi political system with his
recapture of Riyadh. Then in 1932 ibn-Saud consolidated his
gains into the new kingdom of Saudi Arabia. Of course little has
changed in the succeeding 70 years. Some day soon, however,
the average American needs to be told the truth. Saudi Arabia,
as presently constituted, is the enemy.
This week the Saudis were once again scrambling to deny they
have been funding terrorists, but then our favorite Saudi
spokesman, Adel al-Jubeir, went so far as to admit that, omigosh,
some charity money may have inadvertently fallen into the
wrong hands after all. We also learned in the past few days that
the #2 man in the kingdom to the ailing King Fahd, Prince
Nayef, has been blistering the U.S. and Israel, in Arabic, of
course, going so far as to say Israel was responsible for 9/11, not
bin Laden.
In a press conference this week al-Jubeir said, “We have been
described as the ‘kernel of evil’ – the breeding ground for
terrorists. Our faith has been maligned in ways that I did not
expect Americans to ever do.”
Only those of us who are educated on the issues, Adel. But to
close the circle, the preceding represents another reason why the
West can’t abandon the Islamic nation of Turkey, at its true
moment of need.
Wall Street
In case you were wondering, I never did abandon my belief that
we could have a double-dip recession, though I’ve obviously
been tested by some of the recent readings on the economy.
Alas, us double-dippers received some fresh sustenance this
week, at the expense of the bulls, of course, as we found out the
surge in retail spending over Thanksgiving was probably a one-
shot wonder. Wal-Mart, for example, reported that on Black
Friday the company recorded is single-best sales volume, ever,
but then a few days later said its overall sales for the entire
month of November rose just 2.6%. The news from other
retailers was generally along the same lines.
We also learned that a leading gauge of manufacturing took
another header, as the pace of new orders declined. And then on
Friday the markets were jolted by the release of the employment
statistics for November, which revealed that the U.S. economy
actually lost jobs when gains were expected, while the
unemployment rate hit the headline-grabbing 6.0% level.
Meanwhile, in more “Big Picture” oriented developments, there
are increasing signs that residential real estate has peaked, while
a survey of household net worth shows that this fell 4.5% in the
third quarter to its lowest level since 1995. Of course in both
cases, the potential negative impact on consumer spending
looms.
But what I found to be perhaps most important this week were
the comments from two of the best strategists around, Merrill
Lynch’s Richard Bernstein and PIMCO’s Bill Gross.
Bernstein reduced his firm’s allocation to stocks for their model
portfolio to just 45%, saying that the equity markets were still
“highly speculative” due largely to the “unpredictability” of
corporate earnings and the ongoing risk of war. And I couldn’t
agree more with his remark that “As the stock market has risen
(following the lows of October 9) people seem to be less
demanding of the quality of earnings companies report.”
This last point has also been the chief bugaboo for Bill Gross,
who months ago used it to argue his case for Dow 5000. But
Gross has also been wrestling with the inflation/deflation issue.
It is now his conclusion that inflation will carry the day and that
the bull market in bonds is officially over.
“High levels of personal and corporate debt need to be reflated
away. Pricing power needs to be restored to rejuvenate corporate
profits. Pension liabilities need to be diluted by increases in
interest rates. State and local budgets need to be bolstered by
higher levels of taxes which are most easily obtained by inflation
as opposed to tax hikes.” [Source: pimco.com]
But I was a little mystified by some of the market commentary
following Gross’s latest missive because he really said much of the
same over a month ago, as I related in the 10/19 edition of this
column. That week he noted that a 10-year Treasury in the 4%
range was “appropriately valued.” In other words, any further
upside would be hard to come by…the bull market in bonds was
over. If nothing else, Gross is now further quantifying his earlier
comments by specifying that investors should be satisfied with 4-
5% total returns from bonds over the next several years, but he is
not calling for an actual bear market in the sector, nor is he
changing his bearish tune on equities.
So what conclusion can you draw from the opinions of these
two? Upside in equities is limited, at best, while you can expect
so-so returns on Treasuries (possibly higher if you’re prepared to
take on more risk).
Lastly, I’ll add a more optimistic note, at least compared to what
you’re used to from me. Even though I still believe we could
have a double-dip, I do feel there is a decent PC upgrade cycle
on the horizon, so I am now the proud holder of a 3% position in
a stock that could benefit if I’m right…Taiwan Semiconductor.
You know I normally don’t give out the names I’m investing in,
but since I placed TSM on my “watch list” a while back, I feel
obligated to do so in this instance. I am in no way endorsing the
whole tech sector, especially at current valuations (TSM is not
necessarily cheap, either), but aren’t you thrilled by this little
vote of confidence? Then again, if you’re a contrarian you
should know I’m already down on my position.
Street Bytes
–The equity markets finally turned lower, with the Dow Jones
falling 2.8% to 8645, while Nasdaq lost almost 4% to 1422.
Both the Dow and Nasdaq traded over key levels, 9000 and
1500, Monday morning before reversing. Friday’s market action
was interesting in that following the release of the punk
employment figures, news broke of the resignation of President
Bush’s two key economic advisors, Treasury Secretary Paul
O’Neill and Lawrence Lindsey. Stocks rallied on the news, after
tumbling out of the gate, as the Street has been clamoring for
change at the top. Traders were never enthralled with the duo, to
say the least, and it’s believed that a more business/investor
friendly economic agenda is now in the offing.
–U.S. Treasury Yields
6-mo. 1.25% 2-yr. 1.87% 10-yr. 4.09% 30-yr. 4.98%
Interest rates declined on the back of the dour economic news of
the week, particularly since it probably precludes the Federal
Reserve from reversing course anytime soon.
–The economies of the 12-nation euro zone grew at an abysmal
1.2% rate in the third quarter, while Germany’s unemployment
rate now sits at 10%. The European Central Bank added it up
and finally cut its short-term interest rate target by 50 basis
points (0.50%).
–The Bush Administration is exploring a number of economic
stimulus programs, including major reforms of the tax code.
With the coming changes in Bush’s inner circle, a broad-based
plan will undoubtedly emerge, possibly including changes in the
taxation of dividends, which would obviously be a boon for
dividend-paying stocks.
–The Wall Street Journal reported that Amazon.com was issuing
misleading clothing recommendations, which Amazon then
admitted it was doing. The endorsements were “not based on the
purchasing history of Amazon customers as viewers of the web
site were led to believe.” Frankly, I’m shocked…shocked!…that
Amazon would lie about anything.
–I was sitting in the theater earlier in the year, watching a trailer
for Disney’s “Treasure Planet,” and I thought, boy, this will
suck. Now it’s out and Disney has already recognized it will
take a bath on this $140 million production, forcing the company
to lower its earnings forecast just weeks after issuing a favorable
one.
–The actions of rogue stockbroker Frank Gruttadauria will end
up costing his last two firms, SG Cowen and Lehman Brothers,
some $100 million, as clients who were duped by this dirtball
receive restitution. This is a huge sum for this kind of case, but
in a similar vein, as New York Attorney General Eliot Spitzer’s
investigation winds down, and as Wall Street’s biggest firms
await their punishment in the conflicts of interest scandal, the
real worry for the Street is the impact of ongoing individual
investor suits. The Spitzer/SEC mandated penalties pale in
comparison to the potential liabilities that still lie ahead.
–It appears doubtful that UAL could have avoided bankruptcy,
even if the machinists had initially accepted a new labor package,
but as I said last week it was incredible that the union didn’t
understand they were consigning their hard-earned stock to the
trash heap, let alone more of their jobs then might otherwise have
been the case.
–Energy: Crude oil is at its best level in 5 weeks, despite a large
pickup in inventories in the U.S., though this weekly figure is
extremely volatile. You would think that colder-than-normal
weather in much of the country will help supply a floor for crude,
but for this week the more important elements to the story had to
do with our imminent war in Iraq, as well as the mess down in
Venezuela. Regarding the latter, a large supplier of oil to the
U.S., the nationwide strikes spread to the energy business, an
event wacko President Chavez hadn’t counted on.
–My portfolio: Despite the poor performance of the overall
equity market, my position in the energy sector gained ground,
so I now have about 24% here, 73% cash, and the
aforementioned 3% in tech.
–Computer Associates: Guess what? This week we learned that
founder Charles Wang made a $40 million donation to the State
University of New York / Stony Brook out of company coffers,
even as the school’s president was on CA’s board. Of course this
massive conflict of interest wasn’t disclosed to shareholders, and
it’s further ammunition for your editor’s long-held position that
the improper use of “charitable” funds is a scandal of huge
proportions in this country.
–AOL Time Warner’s America Online division sees a 40-50%
decline in advertising and e-commerce revenue for 2003. And
did I mention the company is also helping the Chinese
government round up dissidents?
International Affairs
Israel: Palestinian leader Marwan Barghouti called for a change
in leadership of the PLO from his jail cell, “after failing in their
rule and responsibilities in this decisive battle.” Barghouti, who
was once thought to be Arafat’s successor (despite his own
terrorist past), wants to see the change accomplished in a
“democratic and legal way,” but weeks ago Arafat postponed the
previously scheduled January 20 vote.
China: The New York Times’ Nicholas Kristof wrote that the
U.S. is “blindsided” by the rise of China. I don’t necessarily
agree that we are, certainly at least at the government level, but I
do like his line that the nation is proving that “It’s possible for
China simultaneously to torture people and enrich them.”
Australia: Count me as one of Prime Minister John Howard’s big
supporters. This week he advocated first strikes against terrorists
and called for a formal change in the UN charter to allow this.
International law has “to catch up with the new reality.” Next
time you look at a world map, my fellow Americans (which is a
weekly assignment, by the way), glance at Australia and remind
yourself just how vital an ally they are and can be.
Zimbabwe: The population here is down to 11.6 million from a
peak of 14.5 million. Mugabe and AIDS, a deadly combination.
Random Musings
–A Harvard University poll of undergraduates nationwide had
69% favoring military action against Saddam. 67% oppose
reviving the draft.
–In doing some work on the Iran-Iraq war of the 1980s, I read a
comment by historian John Esposito that hopefully has
application for today. One of the conclusions one could draw
from the conflict was the fact that modern Iraqi and Arab
nationalism proved stronger than the common religious
affiliation, Islam. In the case of the West and its problems in the
Arab world today, believe it or not that’s good. State-to-state
conflicts would be a helluva lot easier to deal with than an
explosion on the “Arab street.”
–Jackson Diehl (Washington Post) quoted Czech President
Vaclav Havel, who has been as much a stalwart in the war on
terror as any other world leader, and his justification for
intervention.
“I have usually leaned toward the opinion that evil should be
combated in its germinal stages rather than in its developed form,
and also toward the belief that human life, human freedom and
human dignity represent higher values than state sovereignty.”
I wish Havel was 20 years younger and in better health. We’ll
need this kind of vision for decades to come.
–A Washington Post poll of registered Democrats reveals that
49% favor Al Gore for 2004, versus 10% for Joe Lieberman and
6% for John Kerry. As for Kerry, talk about a pitiful candidate,
if you watched his performance last Sunday on “Meet the Press,”
where he basically launched his candidacy for the nomination,
you had to be totally underwhelmed. Folks, there is nothing
there. He has no real positions, which, of course, is the problem
with all the Democrats in the mix right now, with the possible
exception of Joe Lieberman.
–David Gergen wrote a powerful piece in U.S. News concerning
the escalating healthcare crisis in this country. The number of
uninsured is up to 41 million and as costs soar, many states are
facing a severe shortage of doctors, thanks to federal reductions
in Medicare and Medicaid reimbursements, let alone the
malpractice insurance debacle. But at the same time, one key
report cited by Gergen concludes “tens of thousands die from
medical errors each year.” Separately, I received an interesting
note from a long-time reader who, like many of you, is getting
his prescriptions filled in Canada, saving about $3,000 a year.
There are of course no easy answers, but this is also what we
send our representatives to Washington for.
–Allow me to offer some advice to the Bush Administration on
the environment. It is making a huge mistake in rolling back
portions of the Clean Air Act to protect the aging power plants of
the Midwest, just as it is incredibly stupid to allow Detroit to
dictate what mileage standards they are comfortable with.
Whether it’s replacing poison-belching smokestacks or getting
the auto industry to go from 24 to 28 miles per gallon, if you are
the President in this instance you have to say this is the way it’s
going to be, now do it.
But on the other hand, environmentalists have to compromise on
issues like drilling in the Arctic National Wildlife Refuge, where
the debate continues to be wildly distorted. Friends, we’re
talking about an airport-sized piece of land, within an overall
region that takes at least one hour to fly over (as I did on a trip
last year to the Far East). And as I wrote this spring, the figure
that opponents of ANWR throw about, that it would only supply the
U.S. with 3 months of our petroleum needs, is deceiving. That
is 3 months if we literally couldn’t access another drop of oil
from any other source in the world, including the rest of the U.S.
It’s about common sense, but us Republicans can’t afford to get
all smug about 2004 and beyond based on our success in
November. Sure, the war on terror will, and should, continue to
be the prime election issue at the presidential level, but as a party
we are super vulnerable on the issue of the environment and thus
far we’re blowing it.
–Ah, the power of “60 Minutes.” Thanks to a recent piece many
of you probably viewed concerning Mississippi and its penchant
for handing out ridiculous punitive damage awards, like in
asbestos cases, the Mississippi legislature actually enacted some
tort reforms. As the Journal opined, “If reform can happen there
it can happen anywhere.”
–This past week “60 Minutes” had an excellent segment on Title
IX, the 1972 legislation that mandated “proportionality” between
the sexes when it comes to college athletics. Men are fighting
back, as they’ve seen many of their programs eliminated, such as
wrestling, swimming and tennis, all folded in favor of something
like women’s lacrosse, or even rowing. Women say any rollback
could “jeopardize all the gains they have made.” What? You
think I’m going to weigh in on this deadly issue? Oh well, let me
just say that the surge in women’s sports is great, but when
female lacrosse or rowing teams are created at the expense of
long-existing men’s programs, that’s wrong.
–Moscow flashback: Russian mobsters are the world’s worst
blackjack players. Random musings…con-tin-ues.
–A new study of data taken from the latest federal census reveals
that ½ of the additions to the labor force in America during the
1990s were immigrants (both legal and illegal). Without this
influx, our economy would have significantly underperformed,
though immigration does negatively impact the lowest-paid
American workers.
–If Bill Bratton can turn around the Los Angeles Police
Department and win the war against the street gangs, he’s headed
to Washington as senator, if that’s what he wants. Nationwide,
the sudden resurgence in gang-related violence is scary. We also
need to recognize, though, that 90% of these kids who join the
gangs are nothing but losers, not society’s victims, as some
proclaim. To say otherwise is a copout.
–Roone Arledge, RIP. Those of you who didn’t grow up during
the heyday of “Wide World of Sports” really missed something.
What I’ll remember is the show was the first to cover events like
skiing and auto racing, introducing us to places such as
Innsbruck and Monaco, but I’ll also fondly recall barrel-jumping
from Lake Placid. Anything making it onto the program was
suddenly big stuff.
–Scientists now say that Mars couldn’t possibly have supported
life as we know it, because the planet’s wet periods “only lasted
centuries or thousands of years,” and this is too short a time to
make a difference. Well, I most vociferously disagree with this
conclusion and I see this as another excuse to send the
snowboarders into space to find out the real truth.
–My buddy Jimbo passed along the results of an Austrian study
that revealed that those males who log “3,000 miles yearly, or an
average of more than 2 hours a day, six days a week” of
mountain biking face infertility. You know, when you read
something like this there is but one reply, Jimbo’s. “Who the
heck rides a mountain bike 3,000 miles a year?”
–All of Britain is abuzz as First Lady Cherie Blair was forced to
come clean with the truly embarrassing revelation that she
allowed a convicted con man to help her buy some properties.
Cherie initially lied about the true nature of the relationship.
Husband Tony should now exile her to Gibraltar, forcing her to
fend off those nasty monkeys that hang out on the rock.
—
God bless the men and women of our armed forces.
God bless America.
—
Gold closed at $327…a potential breakout…see my latest “Wall
Street History” piece.
Oil, $26.93
Returns for the week of 12/2-12/6
Dow Jones -2.8% [8645]
S&P 500 -2.6% [912]
S&P MidCap -1.9%
Russell 2000 -2.4%
Nasdaq –3.8% [1422]
Returns for the period of 1/1/02-12/6/02
Dow Jones -13.7%
S&P 500 -20.5%
S&P MidCap -13.4%
Russell 2000 -18.8%
Nasdaq -27.1%
Bulls 51.0%
Bears 25.0% [Source: Investors Intelligence]
Did I ever tell you I hate winter? Have a great week. I
appreciate your support.
Brian Trumbore
