[Posted 7:00 AM]
2002: The Year in Review
Basically, my friends, we bought a year…we bought more time.
But when it comes to geopolitics, that isn’t always a good thing,
as in this instance two huge potential conflicts now need to be
immediately addressed, those being Iraq and North Korea.
With regards to Iraq, 2002 was simply a missed opportunity.
One year ago I wrote the following in this space (WIR 12/29/01).
“The drumbeat continues and the battle lines are being drawn,”
as I noted that a leading group of senators from both parties had
sent a letter to President Bush which read in part, “We must
directly confront Saddam, sooner rather than later.”
Let’s face it, the momentum was there but this was also about the
same time that Bush the Cowboy was in charge, as opposed to
Bush the Diplomat. In hindsight, the Cowboy act wore thin and
we didn’t begin making progress, nor deploying our forces in a
serious manner until the fall.
Alas, the U.S. is now ready to act, whether the “smoking gun”
emerges or not, and we should be surprised if Baghdad isn’t
under attack by early February. At least I will. Saddam is bound
to make an error, possibly in his handling of his own scientists,
who on the one hand are now allowed to be interviewed by the
UN weapons inspectors, per the Security Council resolution,
while on the other they are not being permitted out of the country
for just such a purpose. Meanwhile, Israeli Prime Minister
Sharon has proclaimed that Iraq is secreting its weapons of mass
destruction across the border into Syria. Between Israeli and
Western intelligence this should be fairly easy to confirm.
Additionally, if you were looking for a sign of support for the
U.S., NATO Secretary General Lord Robertson said this week
that NATO had a “moral obligation” to assist in a U.S.-led effort.
Then there is North Korea. Pyongyang shouted there would be
an “uncontrollable catastrophe” if the U.S. doesn’t negotiate with
the commies and it called on its people to become “human
bombs.” But in dismantling the UN monitoring equipment and
in booting the inspectors at a key nuclear site, North Korea
appears to have achieved the impossible, rile up the UN and the
International Atomic Energy Agency, with the latter blasting the
North for its “nuclear brinksmanship.”
The Bush Administration thus far refuses to negotiate with Kim
Jong-Il’s regime, in essence saying that it won’t sit down with a
bunch of liars, and the war of words escalates. What makes this
all so scary is the fact that Kim and his barbarians have the
potential to cross the line at any moment. Personally, I’m
worried that if they don’t get what they want, soon, Kim will be
tempted to launch a limited strike on South Korea or Japan just
to prove to the world that he can. Of course in doing so he could
take out tens of thousands. I have also written often before that
when it comes to the North, don’t be so sure the U.S. would
immediately respond to such a move with nukes because simply
from a logistical standpoint, the fallout could impact South
Korea for decades. All the more reason why the U.S. military
needs to continue to perfect the more limited, battlefield
variety weapons in its arsenal so the consequences are more
localized.
As for Japan and South Korea, they are worried Washington has
ratcheted up the rhetoric too much and particularly in the South,
anti-Americanism continues to rise, ostensibly because of
our large troop presence. I’m beginning to come around to the
belief shared by conservative William Safire that U.S. forces
should be withdrawn. They can always be re-deployed, to
Guam, perhaps, with the point being that this would preclude
them from being used for blackmail, as is the case today.
Lastly, the U.S. must now confront the once unthinkable; a
full-scale North Korean attack on Seoul, just as the war with Iraq
is underway. Regardless of Secretary of Defense Donald
Rumsfeld’s pronouncements that we can win a war on two
fronts, this would nonetheless have a staggering human cost, on
both the U.S. and its allies. It would also be depressing as hell.
Predictions
Last year at this time I wrote some of the following concerning
2002.
–Iraq would fall quickly and Iran’s students would revolt, but the
success of the latter was contingent on events in the former. For
2003? Ditto. Like most everything else, this was postponed a
year.
–The coalition will remain strong and Americans will learn of
Turkey’s crucial role. Well, the coalition did hold together and
as for the latter, we now know of Turkey’s importance, but this
relationship needs further nurturing.
–The U.S. / Russian relationship will continue to grow.
“Embrace the change,” I wrote. This has come to pass, but I
have more below.
–By year’s end it will be China, China, China. Nope, missed
this one…unless you’re talking about the potential for global
economic dominance, which I wasn’t referring to last year.
–Much of Latin America will witness increasing turmoil. Bang
on.
–The Japanese economy will finally implode. Missed it.
–There is no “next big thing.” And for 2003 there still isn’t.
There were other predictions, most missed, like my annual one
concerning the assassination of a Middle Eastern leader. But I
guess the big thing I would say for the upcoming year is another
ongoing theme in this space, that being IF the Bush
Administration shows true commitment once operations
commence against Saddam, I still feel the mood in the Arab
street will, after an initial adverse reaction, be favorable to
Western interests. While as for bin Laden and al Qaeda, we can
only pray that the coalition continues to disrupt the terrorists as
well as it has since 9/11. With one or two exceptions (notably
Bali), we have been truly blessed.
Wall Street 2003
The consensus has developed that growth in the U.S. economy
next year will be in the 3-4% range. This sounds pretty good,
and it’s not a double-dip, but it’s also not enough to create a ton
of new jobs. Coming out of a recession, or even a Greenspan
“soft spot,” growth should be at a higher pace.
As for yours truly, I do still see a double-dip on the horizon,
coupled with a lousy profits picture. With regards to the latter,
certainly not the 14% rate of growth now forecast. Aside from
the geopolitical issues, we also have some very fundamental ones
that will keep the economy from sprinting ahead.
Perhaps the biggest problem is the fact that any economic
stimulus that the Bush Administration may come up with will be
more than offset by the rapidly deteriorating fiscal position in
virtually every state in America. The federal government may
giveth, but the states will taketh away…and then some.
Additionally, while deflation is still a crippling potentiality, some
of the major expenses faced by the average American family,
such as health care and property taxes, continue to soar. Add in
the fact that if you’re elderly and reliant on your savings, now
earning a whopping 1%, you have a distressing scene.
But wait…there’s more. Clearly, the abysmal picture for retail,
where even mighty Wal-Mart issued a sad sales report for the
Christmas season, does not augur well for the future as it’s a sign
the consumer is not only jittery about the economy, war, or their
job, they are also plainly tapped out.
The only thing that has saved us is the ongoing boom in housing,
which nonetheless has begun to show signs of wear in some parts
of the country. Yes, low interest rates, while the bane of those
on fixed income, have been sweet for home buyers and those
looking to refinance, and this positive cannot be ignored. It
certainly has saved the economy from collapse.
But someday this will change and if capital spending hasn’t
picked up by then, a double-dip by any name is guaranteed.
Of course if our friends stepped up to the plate now and again,
your editor wouldn’t be so cautious in his outlook, but when it
comes to Europe and Japan, forget it. They are basically totally
reliant on the American consumer to bail them out from their
own ugly predicaments. And then there is Latin America, which
is hurtling towards the past, an inglorious one at that.
Oh well, things can’t be that bad, can they? Maybe the global
economy, including that of the U.S., will merely settle into what
economist Robert Samuelson calls the “New Stagnation.” Then
again, that’s still putrid.
—
And now, the moment you’ve been waiting for, the 2002
StocksandNews “Dirtball of the Year.”
When I saw that Time magazine had selected 3 whistleblowers
as its “People of the Year,” the thought crossed my mind that
maybe I could pick 3 dirtballs for our award. But I wasn’t
thinking of Saddam or Osama because, thankfully, their
actual impact was not as severe as could have been anticipated at
the beginning of 2002. In other words, you don’t receive the
dirtball designation for just tying up forces. Unfortunately, these
two will be back this coming year.
But then I seriously considered Egyptian President Hosni
Mubarak and Saudi Prince Bandar, the former for his allowing
the anti-Semitic diatribe “The Protocols of the Elders of Zion” to
run on Egyptian state television, while for his part, Prince Bandar
is deserving of consideration for his decades of duplicitous
behavior as he strides among Washington’s elite, including past
U.S. presidents who have been complicit in his ugly game. But
these two still don’t meet my stringent requirements.
Which leaves us with Zimbabwe’s Robert Mugabe, the 2000
winner, to once again step forward. Two years ago I wrote of his
“virulent racism” and how he had “single-handedly buried his
nation’s economy, (thus sentencing) his people to a poverty
which no human should be forced to endure.”
What’s changed since? Not much, except the situation is far
worse. While the West and his fellow African leaders continue
to dither, Mugabe’s dictatorship now threatens millions with
starvation.
Last week, Village Voice columnist Nat Hentoff weighed in.
“Where is Nelson Mandela? Where in this country are
women’s groups; the black and white clergy that organized
against slavery and gang rapes by government militia in Sudan,
editorial writers and the clamorous commentators on cable
television? Where is Jesse Jackson?
“…I have yet to hear of any demonstrations on college campuses
to help children in Zimbabwe who are going hungry because
their parents are in the wrong political party, or of protests (in
support of) girls and women being raped for political reasons.”
Yes, Robert Mugabe…dirtball. Someone please show him the
door, before he becomes a three-time winner.
Sleazeball(s) of the Year
First off, the distinction between a dirtball and a sleazeball is a
simple one. Dirtballs kill people and often have weapons of
mass destruction. Sleazeballs are creeps who take your money,
act like they own the world, yet normally aren’t charged with
murder. Last year the sleazeball award went to the executive
committee of Enron, while little did we know that within months
the floodgates would open onto the corporate governance
scandals that would dominate the news. This week, U.S. News
and World Report handed out a “Corporate Rogue of the Year”
to Tyco’s Dennis Kozlowski and I certainly can’t argue with the
selection. Others, such as Global Crossing’s Gary Winnick,
Enron’s Andy Fastow, and Adelphia’s John Rigas, are but a few
of the other deserving nominees.
But the real sleazeballs of 2002, as some of us already knew
from our prior work experience in the industry, were Wall
Street’s chieftains, best personified by Citigroup’s Sandy Weill,
all of whom colluded to perpetrate a $multi-trillion dollar fraud
on the American investor, particularly during the final stages of
the Nasdaq Bubble.
I’m sick of all the apologists for the Street who blame everything
on the little guy and his lack of sophistication when it comes to
the casino that is the U.S. equity market. Yes, there were many
who simply couldn’t help themselves while throwing common
sense out the window, but there were far more who were flat out
lied to and that’s fraud, people. Wall Street’s leading men knew
full well what was going on at all levels, as they then proceeded
to cash out their $mega-million dollar bonuses to buy planes,
boats, and museum wings.
Nobel laureate Gary Becker, who writes a regular piece for
Business Week, said that what the past year proved was the
resilience of the American economy in the face of the corporate
scandals, a point I can’t disagree with, but then he said only a
small fraction of the 16,000 publicly owned corporations were
corrupt. Wrong. Only a small fraction were caught, Mr. Becker.
Street Bytes
–What a crummy Christmas week, at least the first half of it, as
stocks resumed their decline, with the indexes falling for the 3rd
week in four. The Dow and S&P 500, at 8303 and 875,
respectively, are at their lowest levels since mid-October. For
Nasdaq, at 1348, late-October. Volume was atrocious and the
exchanges should have shut down Thursday and Friday.
–U.S. Treasury Yields
6-mo. 1.22% 2-yr. 1.61% 10-yr. 3.81% 30-yr. 4.78%
Just when you thought the great bull market in bonds was over,
global tensions and a sloppy equity market led to a renewed
flight to quality.
I’ll have year-end statistics and comparisons next week, as well
as a comment or two on the dollar, which had another lousy
week against most currencies.
–The Euro Zone: Much of Europe appears on the verge of falling
back into recession, while labor strife threatens Germany,
France, Italy and Ireland, for starters. The German economy
probably grew at less than 1% in ’02 and the prospects for ’03
don’t look any better. Meanwhile, the pension systems across
the continent are a mess, an example of this being the fact that
most French stop working at 58, though at that age odds favor
them living at least another 20 years.
–Energy: The ongoing strike in Venezuela may not have hit
U.S. inventories yet, but it will, while the prices you are paying
at the pump are ticking up. But I, for one, have always heavily
discounted this oil “tax” that everyone likes to talk about, unless
you are a trucker, or in the airline industry. True, it hits profits in
other industries as well, like the chemical manufacturers, but as
for the U.S. consumer, if you are delaying a trip to the mall
because it might cost you all of 40 cents more, then you’re not
one of the smarter bulbs on the planet. Everyone loves to
complain, but in my book, this part of the equation is not an
issue.
That said, yes, if oil stayed in the $30 range for months on end,
then of course it’s not good on a macro level for a global
economy struggling to gain its footing. For its part, OPEC has
this $22-$28 price band they want to adhere to, but they won’t
open the spigots further until the weighted basket of crude trades
above $28 for 20 consecutive days.
As for the cries to open up the U.S. Strategic Petroleum Reserve,
I wouldn’t do that yet, though this latest price spike does give
ammunition to those of us who don’t understand the opposition
to drilling in the Arctic National Wildlife Refuge.
–2003 market predictions: Last week I mentioned that Doug
Cliggott nailed his 2002 forecast (Dow 8500, S&P 950), while
calling for Dow 7000, S&P 750 in 2003. In looking at some of
the others, Laszlo Birinyi, normally one of the better strategists,
is calling for Dow 8800 in ’03 (though he was way too bullish in
’02, missing his number by a mile).
The consensus of 67 market prognosticators for a Business Week
survey looks for a 12/31/03 Dow of 9870, S&P 1050, and
Nasdaq 1700. Of course the consensus the past few years has
been way too upbeat. For example, this same survey last year
had an average forecast of 1300 for the S&P.
My award for worst forecaster, however, has to go to UBS’s Ed
Kerschner. It was back in the spring of 2000 that Kerschner tried
to convince us all (unfortunately, he was successful with some)
that price/earnings multiples at 100 or more were not irrational, a
notion I duly slammed at the time. Meanwhile, at the end of that
year, Kerschner remained upbeat and called for an S&P 500
close on 12/31/01 of 1715…it finished the year at 1148. Then for
12/02, he projected the S&P would end up at 1570…try today’s
875. You know what? I haven’t seen his forecast for 2003, but
if I were him I wouldn’t bother.
As for your editor…
–My portfolio / predictions: Last year I said the Dow would
finish 2002 at 10500, the S&P 500 1225, and Nasdaq 2100,
which meant that for the second straight year I was calling for
5% gains in the major indexes. That was my way of saying that
from a risk/reward standpoint, I saw no reason to load up the
boat with equities.
True, I was wrong, but I was better than 95% of the others out
there and with my 70-75% cash position the bulk of 2002, along
with my selective forays into energy, I made money for the third
straight year, even as the rest of the market swooned.
So, for 2003 I now call for Dow 9200, S&P 995 and Nasdaq
1600. But as I like to say, it’s how we get there that makes it
interesting, while also supplying the raison d’etre for “Week in
Review.”
As for individual positions, my energy holdings took a hit on
Friday so I’m about 73% cash, 25% energy and 2% tech. I also
mentioned a while back that I was looking to “short” Amazon
(and eBay) at some point. Well, this Thursday and Friday,
Amazon cracked, but I was so tied up with another matter (which
you’ll learn of next week) that I didn’t have the time to act. I
said don’t short it before Christmas, however, and this was right.
–With the market stretch of the last 3 years, it should be no
surprise that some fund companies have taken it on the chin,
particularly the “growth” shops. For example:
Equity Assets
Putnam: Q3 ’00…$194 billion…Q3 ’02…$86 billion
Janus: Q3 ’00…$164 billion…Q3 ’02…$66 billion
Alliance: Q3 ’00…$41 billion…Q3 ’02…$20 billion
Of course this measures not just depreciation, but also
redemptions.
[Source: Investment News / Kanon Bloch Carre]
–For 2002, once again Lucy Van Pelt’s investment adage “All I
really want is real estate,” was sound advice. It’s more or less
been that way since Lucy first uttered those words to Charlie
Brown back in 1965.
–We note the passing of Russ Berrie, founder of Russ Berrie &
Co., who was constantly on CNBC hawking his teddy bears,
including this past Christmas Eve. Then the next day he died of
a heart attack. Like West Virginia’s Powerball winner Jack
Whitaker said, any day he wakes up he feels like he’s won the
lottery. Whitaker, who almost seems too good to be true (heck,
the guy is perfect!), added, “I’m not lucky, I’m blessed.”
–Evidently, far from perfect is Ford’s Crown Victoria, which it
would appear has a propensity to erupt in flames when hit from
behind. Ford is being sued by the City of Dallas, while recently
here in the New York area a state trooper was killed when his
parked vehicle was hit and burst in flames.
–Citigroup declared it was taking a charge of $1.5 billion to
wipe the slate clean of all its past transgressions, including the
impact of future class-action suits. Yes, when it comes to Wall
Street, it’s just that simple.
–The arthritis drug Celebrex may not be all it’s cranked up to be,
at least according to the New England Journal of Medicine.
Celebrex might not protect sufferers from bleeding ulcers.
Pharmacia and Pfizer, which both market the drug, fell 4% on the
news. It should also be noted that Celebrex has the most
irritating commercials on the air, which could be another cause
of ulcers.
–The IPO (initial public offering) business dried up in 2002, $27
billion vs. a peak of $80 billion in 2000.
–Struggling McDonald’s is going to be changing the recipe for
its hamburgers, adding more spices to liven ‘em up. Or they
could leave as is, raw, and try selling it as McSushi.
–All this economic stimulus talk, particularly as it pertains to
dividends, is worthless. The market next year will trade almost
solely on sentiment and geopolitical events.
–Sorry, fellow conservatives, but Larry Kudlow’s act grows
weary.
–And let’s face it, many investors are simply sick of stocks.
International
Iran / Russia: This wasn’t a good week for U.S. / Russian
relations as Moscow announced it would help Iran speed up
completion of one nuclear facility while hastening production of
a second, both of which Washington contends could be used to
build nuclear weapons. When it comes to Russia the past few
years (going back to the Yeltsin era), it’s two steps forward, one
back. The U.S. gets Moscow’s support on the Security Council
and with regards to increased oil exports, but Russia, still
searching for that post-Communist identity, has to rile up
Washington on an issue like Iran, even though President Putin
knows his future lies solidly with the West, not some freakin’
ayatollahs in Tehran.
In a different vein, Putin has been telling the Russian people for
months that the war in Chechnya is basically over, but then
another terrorist act like Friday’s truck bombing in Grozny,
which killed at least 45, brings everyone back to reality.
Turkey: As expected, the parliament amended the constitution to
allow AKP / Islamist leader Recep Erdogan to eventually
become prime minister, an office he had previously been banned
from attaining. Separately, U.S. officials are meeting in Turkey
to get a handle on the government’s support, or lack thereof, in
the coming war with Iraq.
Germany: A commission is looking into allegations that
Chancellor Schroeder and his economic ministers manipulated
the numbers during the recent election campaign in an effort to
make things look far better than they actually were.
Brazil: Luiz da Silva, “Lula,” takes over on January 1st, but his
initial cabinet selections are being panned, as he chose some
businessmen with shady pasts.
Random Musings
–Last year George W. Bush was an easy choice for
StocksandNews “Man of the Year,” with Rudy Giuliani and
Condoleeza Rice as my runner-ups. For 2002, though, I don’t
see one. I could give it to the President again, since he towered
over the political landscape, but what truly momentous actions is
he responsible for? Gaining a 51-49 edge in the Senate doesn’t
qualify. No, with the real unfinished business in Iraq, I’ll save
his selection for 2003. That’s right, folks. No one came up with
a cure for cancer, terrorism is still very much part of the national
psyche, and we didn’t land a man on Mars. Nope, no award this
year. Plus the economy sucks and I need to save the money
otherwise spent on the plaque.
–Animal of the Year: In 2001 it was rescue dogs in a runaway.
Thankfully, their services weren’t needed as much this year as
they were in ’01, so we’ll go with the dolphins that are currently
being trained by the U.S. Navy to combat terrorism in the
harbors and high seas.
–A CNN / Time poll of registered democrats had Joe Lieberman
and John Kerry at 16% each, Richard Gephardt 10%. But if you
add Hillary to the mix, she receives 30%, Lieberman and Kerry
13%.
–Another prediction for 2003: The current investigation into
Halliburton’s accounting when Dick Cheney was CEO will be
his ultimate undoing for ’04, even if Bush wanted to keep him
around. Which makes for one interesting selection for the
President. I always thought it would be Condoleeza Rice, but
that would make it difficult for the Bush clan to then elevate
brother Jeb for 2008, assuming Condi desired the top slot.
Others are already talking about Bill Frist for veep, but he,
too, has the Jeb issue to deal with since he may want to run
for president himself. So why not Colin Powell, who has no
designs on the White House? True, conservatives wouldn’t like
it, but it’s Bush they’re voting for anyway.
–Following the posting of last week’s column, I learned of the 7
German peacekeepers killed in a helicopter accident in Kabul.
It’s been easy to slam the nation and Chancellor Schroeder, in
particular, for his stance on Saddam, criticism that is well-
deserved, but we do note the contribution the Germans have
made in Afghanistan.
–The front page of Thursday’s Wall Street Journal had a story on
my favorite Indian reservation, Pine Ridge in South Dakota,
labeling it “one of America’s most dysfunctional places.” After
traveling through it in 2001, I know of this firsthand. The
government pumps a ton of money into these reservations and
most of it is squandered. In the case of Pine Ridge, half live in
poverty and 75% are unemployed. You know, folks, the plight
of our Native Americans is not always Washington’s fault. I
should add, however, that in the case of the Journal piece, the
local high school principal is trying to make a positive
difference. He should start by teaching his students how an
American election is supposed to be conducted, the Pine Ridge
sleazeballs having cooked the books in November’s senate race.
–Bill Gates, Sr., is leading the fight against repeal of the estate
tax. Gates claims it would lead to the development of a
permanent aristocracy. I take the opposite view and see the issue
as one of simple fairness, with the money having already been
taxed a gazillion times. But Gates does have a point and it
makes for an interesting philosophical discussion, though I don’t
see myself ever adopting the opponents’ view.
–A line from last December’s year-end wrap-up that still applies
today. Gloria Borger / U.S. News:
“If the TV crawl had pictures, (Bill) Clinton would be constantly
jogging along the bottom of your screen.”
–One line I wish President Bush would lose, “I’m a
compassionate person.” Alright already. We got the point, now
get an extension for unemployment benefits. The Democrats are
having a field day on this.
–Senator Orrin Hatch, expressing the sentiments of many
Republicans like yours truly, said he was tired of the line “Only
Democrats care about minorities. That’s pure B.S.” You da
man, Orrin.
–No, I don’t believe in the cloning story. But what I do know is
that this strange group’s spokesperson, Brigitte Boisselier, looks
like an alien hooker.
–You know what I watched the other day for the first time in
over 30 years? “March of the Wooden Soldiers.” Now I
remember why it took me so long to catch it again. The three
little pigs gave me the creeps.
–Once again, in light of the not so vibrant economic picture,
StocksandNews is holding the line on any price increases for
2003.
—
God bless the men and women of our armed forces.
God grant our leaders strength to do the right thing in the coming
year.
God bless America.
—
Gold closed at $349…the rally continues.
Oil, $32.72…highest in over two years.
Returns for the week, 12/23-12/27
Dow Jones -2.5%
S&P 500 -2.3%
S&P MidCap -1.5%
Russell 2000 -0.7%
Nasdaq –1.1%
Returns for the period, 1/1/02-12/27/02
Dow Jones -17.1%
S&P 500 -23.8%
S&P MidCap -15.9%
Russell 2000 -21.4%
Nasdaq -30.9%
Bulls 49.4%
Bears 26.5% [Source: Investors Intelligence]
Happy New Year! Here’s to a safe one throughout 2003.
And happy 75th birthday to our own Dr. Bortrum! Soon he’ll be
shooting his age. Ahem.
Brian Trumbore
