[Posted 7:00AM]
“2003 may usher in an era of potential lethality without
precedent in seven centuries.”
–Commentator George Will
Last weekend Colin Powell made an admission that no one in the
press seemed to pick up on, his statement that North Korea
already has 1 or 2 nuclear weapons. Heretofore, this knowledge
was always preceded by “the CIA estimates that…” Now, it’s
finally gospel throughout the Administration, instead of just with
the so-called hardliners. But the press focused instead on how
both Powell, and later President Bush himself, talked of a
diplomatic solution to the standoff, as opposed to the tougher line
on Iraq, and seemed surprised by this.
These are two totally different situations and I concur with the
handling of the North Korea predicament thus far. The problem
is our relationship with South Korea continues to deteriorate, as
Seoul’s new leadership criticizes the U.S. for “provoking” the
North, while the South’s young population has no memory of
their homeland’s destruction just 50 years ago.
Yes, the South Koreans are naïve, but it’s also hard to sit in
judgment here in America and criticize them too harshly when
we don’t know what it’s like to have thousands of artillery pieces
trained on our capital, as is the case with Seoul today. North
Korean leader Kim Jong-Il is not a stable man, though he is
skillfully playing America’s allies off Washington,
particularly in light of our buildup against Saddam. Despite what
Secretary of Defense Rumsfeld said the other week, fighting two
wars at once would be brutal and Kim knows it.
So President Bush looks to the likes of Russia and China to help
defuse the tension, even as both of them continue to play games
in the weapons proliferation department, be they nuclear or
chemical. It’s not a great situation.
The Washington Post’s Charles Krauthammer offered up a
solution; endorsing a nuclear-armed Japan as a counterbalance to
China’s, and North Korea’s, mischief, but I hardly see this as an
acceptable longer-term move given Japan’s own past propensity
for following charismatic figures. Rather it seems as if all we
can do is pursue the diplomatic route, while preparing for the
worst, and towards that end the U.S. should take two steps.
First, I repeat William Safire’s idea that we withdraw U.S. forces
from South Korea. Second, while admittedly this will have zero
immediate impact, we should follow New York Congressman
Charlie Rangel’s idea of re-instituting the draft, though Rangel
sees this as a way of avoiding war due to the fact that it would
bring conflict closer to home if some members of Congress have
sons and daughters in the military.
While I can’t recall ever agreeing with Rangel, a Korean War
veteran, but also a race-baiter, I do favor the draft idea he will
put forth in legislation this coming week. It has zero chance of
passing, but nonetheless the idea serves a number of purposes,
including lessening the pressure on our existing army reserve
system, which does a number not just on families, but also on an
increasing number of employers. Additionally, Rangel points
out, national service needs to be a shared experience, and not the
military one of today, where it’s disproportionately the poor and
minorities who serve our country…God bless them.
In the meantime, let’s hope President Bush doesn’t lose his
resolve with regards to Iraq (he won’t), while in the case of
North Korea let’s pray someone plugs Kim Jong-Il before it’s too
late.
—
On a somewhat related topic to the above, I watched a movie this
week I’ve been meaning to view for years, “Judgment at
Nuremberg,” the tale of the post-World War II trials of Nazi
collaborators. The 1961 film was nominated for 12 Academy
Awards and is worth watching solely for the brilliant screenplay
(Abby Mann’s Oscar winner) and a superb cast, including
Spencer Tracy, Burt Lancaster, Richard Widmark, Maximilian
Schell, and Marlene Dietrich. More importantly, decades later
it’s still thought provoking, especially given today’s crises in
Iraq and North Korea.
While the Nuremberg trials were wide-ranging, the story in the
movie revolves around the case of four German judges, all of
whom condemned innocents to prison or death during their time
on the bench. Spencer Tracy plays a former American district
court judge who heads up the tribunal that will decide their fate.
In the beginning, Tracy’s approach is to learn all sides. “I want
to understand,” he tells Dietrich, who plays the widow of a
German officer executed for war crimes.
You get the impression that Tracy is going to be sympathetic to
the judges. He socializes with Dietrich, who tells him, “We
didn’t know (of the atrocities).” But as the evidence to the
contrary rolls in, Tracy begins to respond, disgustingly, “No one
seemed to know.” Just as it’s tough in today’s Iraq or North
Korea to get natives to testify against Saddam’s or Kim’s
brutality, so it was in the immediate years following the fall of
Berlin.
And just as the UN recently released a report of foreign
involvement in Saddam’s weapons buildup, so it was in 1948
that a German defense attorney could proclaim, “Where is the
responsibility of the American industrialists who helped Hitler
deliver his armaments and profited by them?” The lawyer,
played by Schell (who won the other Oscar awarded to the
picture), then concludes that the “brutalities were brought about
by extremists…only the few knew.”
Eventually, Burt Lancaster, one of the four on trial, has pangs of
guilt and addresses the court.
“Where were we when the cattle cars were being brought into the
towns?…Maybe we didn’t know the details, but if we didn’t
know, it was because we didn’t want to know.”
Finally, Tracy has had enough, even with Lancaster’s confession,
and sentences them all to prison.
Throughout Iraq and North Korea today you have tens of
thousands with full knowledge of the crimes being committed
against their own people, yet the stories of defectors are few, as
the people of these two countries, along with the likes of
Zimbabwe, Iran, Syria and countless others live under this reign
of terror, an unimaginable fate to you and me.
The mission of the United States and those who support it is
clear. Defeat tyranny, just as heroes from Roosevelt and
Churchill to Reagan and Thatcher did. But we live in a time
where we can’t do it all alone. The weapons of today, and
tomorrow, require help from within, too. We can’t afford the
conditions that establish too many more Nuremberg trials. For
millions that would mean we failed.
Wall Street
After a sloppy end to 2002 on Monday and Tuesday, Wall Street
roared to one of its best opening-day performances in history,
thanks in large part to a key reading on manufacturing which
reflected a surge in activity in December. Inventories are lean,
so eventually you have to restock store shelves and showrooms,
but it would be foolish to place too much emphasis on one
number.
Earlier in the week the latest reading on consumer confidence
fell and the final numbers for December retail sales should be
awful.
Now, however, it’s earnings season and it promises to be an
eventful one, as Home Depot demonstrated at week’s end with
its warning of less than expected profits for the foreseeable
future. On the positive side, many companies have ratcheted
down expectations to such a degree that beating by a penny or
two seems more likely in a majority of instances. Whether or not
the market will then reward them is another matter, particularly
since I find it hard to envision a scenario where the
accompanying statements are full of bullish views for the first
few quarters of the year.
And if you’re looking for signs of a pickup in capital spending,
Goldman Sachs is saying think again, as its research points to a
1% decline in this area for 2003. Most others still forecast
minimal gains.
This coming week, though, all eyes will be on President Bush as
he unveils his up to $600 billion, 10-year economic stimulus
program, filled with reductions in taxes on dividends, accelerated
rate cuts and other goodies, including possible aid to states
suffering from massive budget deficits. All nice things, I grant
you, but beyond an initial reaction of a day or two, I doubt these
will have a real impact on both the markets and the economy.
There are far weightier items on the plate.
And one of the big non-geopolitical ones is the escalating
healthcare crisis in this country, whether it’s prescription drugs
or striking doctors in West Virginia, soaring insurance costs or a
possible strike by some G.E. workers tired of seeing more and
more of their pay go to insurance costs. No one has a good
answer, without totally busting the budget, but one issue needs to
be tackled immediately, that being tort reform. From this all else
flows.
Street Bytes
–S&P 500…..Nasdaq
’95..+37.4%…+39.9%
’96..+23.1%…+22.7%
’97..+33.4%…+21.6%
’98..+28.6%…+39.6%
’99..+21.0%…+85.6%
’00…-9.1%….-39.3%
’01..-11.9%…-21.1%
’02..-22.1%…-31.5%
Quite a stretch.
–The period just ended marked the first 3-year loss for the
market averages since 1939-41. There was only one time in
the 1900s where the averages fell 4 years in a row, 1929-32.
[See my “Wall Street History” link for further information.]
–The Dow Jones’s return of –15.0% (including dividends) in
2002 was its worst since 1977; with the S&P 500’s –22.1% its
worst since 1974.
–December was dreadful, minus 6.2% and 6.0% for the Dow and
S&P 500, respectively, and the worst since 1931, while Nasdaq
suffered a similar fate, -9.7%, and its worst since inception back
in 1971.
–2002 was the worst year for stock mutual funds since 1974,
down about 22% on average. [Are you tired of the word ‘worst’
yet?]
–New York Stock Exchange volume rose approximately 20%
over 2001, but Nasdaq’s fell around 7%.
–International markets also took it on the chin. Incredibly, the
worst performer was Germany and the Frankfurt DAX, which
fell 43.9% in local currency terms. Tokyo’s Nikkei dropped
another 19%, while oil-heavy Russia gained 40%. But the
biggest winner, both large and small nations, was Zimbabwe, up
120%, thereby proving that bad guys can finish first…and that
sucks.
–U.S. Treasury Yields
12/31/01
6-mo. 1.82% 2-yr. 3.05% 10-yr. 5.03% 30-yr. 5.47%
12/31/02
6-mo. 1.21% 2-yr. 1.58% 10-yr. 3.82% 30-yr. 4.78%
For the record, 1/3/03
6-mo. 1.23% 2-yr. 1.77% 10-yr. 4.02% 30-yr. 4.95%
As you can see, rates soared the first two days of 2003 on the
heels of the improved manufacturing picture, as well as a decent
gain in construction spending. As for a forecast for the next 12-
months, PIMCO’s Paul McCulley does not see the Fed raising
rates all year, with the 10-year next December at about 4.25%.
If true, not a disastrous one for bonds, with minimal losses on
principal. The consensus outlook for GDP is in the 3-4% range,
with improved strength in the second half of the year.
–The U.S. $: On a trade-weighted basis, the dollar fell 16% in
2002, a substantial decline but, most importantly, an orderly one.
Over the course of the year, corporate scandals in America
certainly didn’t give foreigners a great deal of confidence, nor in
the latter half of ‘02 did the increased talk of war. European
flows into the States collapsed, but at least Asia’s remained
steady.
Clearly, the Bush Administration hasn’t stood in the way of the
decline, though it would be foolhardy to say publicly that it
favors such a policy, even as it helps U.S. manufacturers sell
their goods overseas, with many of our largest companies
gaining a majority of their sales from outside the U.S., such as
IBM (59%) and Applied Materials (71%), to name two
prominent examples.
Of course any discussion of the dollar contains all kinds of
caveats and contradictions, as well as the usual talk of the current
account deficit. For example, a weaker dollar means
that import prices in the U.S. will rise, making domestic goods
more competitive, while also allowing some producers to raise
their own prices, so this can be inflationary.
Currently, you also have the issue of both Japan and the U.S.
wanting weaker currencies to aid their export sectors, so
something has to give here, as the recent strength in the euro vs.
the dollar seems a bit unwarranted given the fact that Europe’s
economy is in the dumper worse than the U.S.
Well, I guess you expect a bottom line so here’s your editor’s
guess. The dollar will, over time, slide a bit more versus most
major currencies, but if the war in Iraq goes as well as expected,
look for a sharp rally in the greenback, due to the positive impact
the result could have on both the U.S. consumer and capital
spending. Should North Korea become more than a war of
words, however, or should the U.S. suffer a serious terrorist
attack, obviously all bets are off.
–More 2003 forecasts: Aside from the ones I listed last week,
Merrill Lynch’s Richard Bernstein is calling for a year-end Dow
of 8200, 860 for the S&P 500. In other words, down from
today’s levels of 8600 and 908. I was about to list Abby
Cohen’s, but then I thought, why? But with regards to UBS’s Ed
Kerschner, who I noted last week was the worst forecaster
around, he has toned down his expectations, finally, and sees an
S&P 500 of 1025 by 12/31. “We’re in for a prolonged period of
modest earnings growth,” he says. Too late for those investors
who previously thought he knew what he was talking about.
As for my own predictions, now that 2002 is over, with my Dow,
S&P and Nasdaq targets of 9200, 995 and 1600 (as stated last
week), that means I’m calling for gains of 10%, 13% and 20%,
respectively. That may sound pretty good, but even if I was
right, particularly with regards to Nasdaq, whoopty damn do.
Most of the Nasdaq money came in between 3000 and 5000, still
a sickening cry from 1600.
And as for the ol’ portfolio, I’m pretty good at picking ‘stop’
points, both to buy and sell. This week I came within a penny
of being ‘stopped’ out of Taiwan Semiconductor before the issue
rallied back 7%. It’s still way off, though, from where I bought
it and remains just 2% of my overall portfolio. Energy is back
to 26% and the rest is cash.
–In case you’re wondering why I took a shot at Larry Kudlow
last week, it’s because of his excessive optimism. Of course we
know that America is far and away the best place on earth, but
too many times he sounds like a used-car salesman and if you
listened to his tripe the past few years it would have cost you
dearly. His economic ideas make sense, but he should stop
giving advice on the stock market.
–Energy: As expected, the inventory picture saw huge
drawdowns this week, as the full impact of the ongoing strike in
Venezuela finally hit our refineries. Inventories are at 26-year
lows, which coupled with the war fears continue to keep oil
above $30. Crude, as measured by W. Texas Intermediate,
finished 2002 at $31.20 (and was back up to $33 by week’s end),
meaning it hasn’t been below $25 since April. For his part,
Venezuela’s President Chavez is attempting to replace the
strikers, appealing to their patriotism, though a call to Brazil for
help in this regard was not successful.
–China: Like clockwork, the government announced the
economy grew at 8% for the full year, though it admitted 7%
growth is needed to absorb those displaced as the nation
modernizes, as well as to employ new workers entering the labor
force.
–J.P. Morgan Chase settled with 11 insurers over Enron surety
bonds and announced it is taking a total charge of some $1.3
billion, much of which is earmarked for future lawsuits. So in
other words, despite all its public denials, JPM is finally
admitting it has a real credibility problem.
The same day, Thursday, that J.P. Morgan was releasing its
news, Senator Carl Levin of the Permanent Subcommittee on
Investigations released his own statement.
“Enron’s deceptions were shocking, and equally shocking was
the extent to which respected U.S. financial institutions like
Chase, Citigroup and Merrill Lynch helped Enron carry out its
deceptions and mislead investors and analysts about the
company’s finances…These financial institutions weren’t
victims of Enron; they helped plan and carry out Enron’s
deceptions in exchange for large fees or favorable consideration
in business deals.” [Source: Jessica Sommar / New York Post]
–Program trading (computer generated strategies having little to
do with actual economic or individual company fundamentals)
accounted for 32.5% of all NYSE volume in 2002, versus just
19% in 1999. This casino action doesn’t do the little guy one bit
of good and it certainly adds to the lack of confidence in the
overall system.
–Sleazeball Update: Global Crossing chairman Gary Winnick
resigned on New Year’s Eve to devote full time to the building
of his 50-million square foot mansion. Meanwhile, reports show
that WorldCom’s Bernie Ebbers was extended $1.3 billion in
bank credit for the purposes of indulging Bernie in his myriad
outside interests, such as timberland and yachts. That was $1.3
billion, or 13,000 $100,000 home equity loans. Lastly, Tyco’s
outside auditors issued their final report on the company’s
accounting practices. No “systemic fraud,” said David Boies’s
team of crack, $800/hour financial sleuths. We were supposed to
take comfort in this, I guess, and the share price was rewarded.
Frankly, the whole thing is a disgrace.
–By the way, the same Tyco investigation revealed that
chairman Dennis Kozlowski spent $100,000 for a 13-day stay in
London. Hey, you know what we say around here, a man’s gotta
eat!
–The Tokyo stock market was open just half a day on Monday,
closed the remainder of the week. I kind of like that schedule.
–The only investment I have continually recommended in this
space for almost 4 years is the PIMCO Total Return Fund,
managed by Bill Gross. The A shares returned 9.7% in 2002,
pretty damn good. 4 or 5% for ’03, though, is perhaps more
appropriate, which is still nothing to sneeze at.
–Some are now predicting that Alan Greenspan will leave before
his term expires June 2004 in order to give President Bush more
time with a new Fed chairman before the presidential election.
Mr. Bubble turns 77 this March.
–CNBC guest host David Simon, a hedge fund operator,
haughtily said the other day, “Professionals (knew) Wall Street
research was a joke.” Once again, the little guy takes it up the…
–U.S. bankruptcies of public companies hit a record $368 billion
in 2002, up from $259 billion in 2001, the biggest of which was
WorldCom’s $104 billion.
–The Sierra Club is introducing its own line of “socially
responsible” mutual funds. Don’t know if one will be labeled the
Ranger Rick Fund. Or how about the Ansel Adams Fund, which
would specialize in companies producing only black and white
photographs?
–The CFO of Coinstar resigned. Guess she was too embarrassed
to take her tin cans of coins to the grocery store, just like your
editor is.
International
Israel: Events here have certainly been overshadowed by Iraq
and North Korea recently, and I obviously haven’t commented
much on the renewed violence, myself, mainly because to me the
big story is the January 28 election here, the results of which will
set the tone for the coming year, along with any military action
against Saddam. Until then, there isn’t much to add.
China/Taiwan: The first direct commercial air transport links
between the two since 1949 are being established. While
limited, this is a positive development.
Turkey: One of the bigger stories of the week involved Turkey’s
de facto leader, Recep Erdogan, and his criticism of his Turkish-
Cypriot counterpart, the elderly Denktash, for the latter’s
obstinate behavior in talks over the future of Cyprus. Erdogan
told him to get off his butt and sign a deal in order to advance
Turkey’s E.U. application. This kind of confrontation never
occurred before and is an encouraging sign in the eyes of your
editor. Erdogan may formally become prime minister shortly
after a February 5 election that will seat him in parliament.
Russia: Authorities claim the horrific attack on the government
building in Grozny, Chechnya, was partially the work of a
terrorist affiliated with the Muslim Brotherhood, based in Egypt.
The group denied responsibility.
Yemen: 3 American Baptist missionaries were killed by a lone
terrorist, as the policy of hitting “soft targets” (such as the hotel
in Kenya) intensifies.
Britain: Prime Minister Blair announced that he has no plans to
hold a referendum on the euro until after the next election…2006
at the latest. Of course he’d have to win it first.
Liberia: The Washington Post had a story on the extensive
European investigation looking into the connection between al
Qaeda and the diamond trade, particularly post-9/11. African
leaders such as Charles Taylor of Liberia are deeply involved in
the illicit financing, Taylor personally receiving $1 million for
his efforts. Thanks to my friend Harry K., an expert in the field,
my “Hott Spotts” link delved into some of the same issues back
in the summer of 2000 (see archives, 7/27/00 and 8/17/00).
Kenya: Having ruled in a corrupt manner since 1978, Daniel arap
Moi was finally forced to step down in a democratic election.
That the vote took place with minimal problems is a major plus.
Whether or not the new leader, Mwai Kibaki, cracks down on
bad behavior, though, is probably nothing more than a dream.
Random Musings
–North Carolina Senator John Edwards announced his candidacy
for the vice presidential nomination in ’04. That’s what he’s
really running for, you know, and he’d probably make for an
attractive #2 on any ticket. But Richard Gephardt is now
formally in the race and my money is on him. He can appeal to
those party regulars likely to vote in primaries.
–My home state of New Jersey is contemplating a hike in the
state income tax; only for the rich, of course. This kind of step
will be repeated over and over again across the land, as the
states’ budget needs take center stage and negate any positive
impact from the Bush economic stimulus plan. This class
warfare crap also has to stop.
–I know I raised a few eyebrows in refusing to select a “Person
of the Year” for 2002, but we don’t reward individuals for mere
‘thoughts’ or ‘strategic thinking,’ such as in the President’s
superb speeches at West Point or the UN, which spelled out a
more vigorous foreign policy. We do reward results, and as I
said last week, I hope that by the end of the year we can say
Bush is the recipient for 2003.
–The Saudis really are bastards. The story broke this week that
Riyadh may let the U.S. use our high tech base there in any
attack against Saddam after all. Of course, if this is true it means
that we spent $millions on a new ops center in Qatar
unnecessarily. But we had no choice.
–Years ago I complained how the U.S. government was ignoring
the main issue of the day, at least to some of us, that being the
transfer of missile secrets to China. Last year, Loral finally
admitted to wrongdoing and paid a $20 million fine. Now, the
State Department has formally accused Boeing and Hughes
Electronics Corp. of passing along secrets, a serious move on the
part of State equivalent to an indictment with over 120 separate
charges. This chicanery, which took place during the Clinton
Administration, is tantamount to treason in my book, though I’m
not sure individuals will ever end up paying the price as they
should. Remember, this is the same technology that could have
long been passed to North Korea and then on to other rogue
nations, let alone the fact it helped speed up China’s own
capabilities.
–9 northeastern states, from Maine to Maryland, have sued the
federal government over the Bush Administration’s relaxation of
air-pollution regulations, which basically give aging power
plants a pass when it comes to installing cleaner technologies. I
noted a few weeks ago that this and similar moves on the
environment will hurt Republicans at the polls down the road.
The suit just helps keep the issue in the spotlight and, frankly,
I’m all for it.
–But speaking of the environment, when I was out in Wyoming
and Montana this fall I mentioned that the land certainly seemed
big enough to accommodate energy interests as well as ranchers.
So last Sunday’s N.Y. Times had a front-page story on the
growing war between the two. Ranchers can do little to stop a
driller from exploring on his property, particularly for coal-bed
methane (natural gas), but while I’m on the side of the energy
companies in most instances, in this case if Big Gas can’t be a
more responsible steward of the ranchers’ land, then the penalties
should be severe. It’s inexcusable, for example, not to control
the runoff, which then does a number on the water quality, let
alone the damage to the cattle that then end up on your dinner
table.
–A Pacific cyclone, with winds of over 200 mph, destroyed two
islands in the Solomons chain (northeast of Australia). Having
visited similar territory in Micronesia, I can picture what the
survivors are going through. Let’s just say they aren’t concerned
with paying a few more pennies at the pump to gas up their SUV.
–Over the last 20 years, Texas has executed 298, the most of any
of the 13 states who have sent at least one to the gas chamber.
Not that there is anything wrong with this, mind you.
–Speaking of death, the final tally on the number of murders in
New York City for 2002 was 580, versus a peak of 2,245(!) in
1990. But this year has started off with a bang, particularly if
you are up to no good. Police killed 4 suspects in the first two
days, though each incident seems justified. One guy pointed an
authentic looking handgun at an undercover cop’s head. The
policeman’s partner killed the man and it was only then they
realized it was a toy, though you’d never know it from seeing the
pictures. Of course the victim’s relatives are complaining and
whining, “He was such a good boy.” Yeah, right.
–There are 20 million white-tailed deer in America, up from
500,000 in 1900. You’re reading those numbers right. Now if
we knew the meat was disease free, killing about 19 million of
these giant rodents would certainly help feed the hungry.
–It now seems that each Christmas week, as the depleted
network staffs look for filler, we have a slew of stories about the
endangered Florida manatee. It’s the winter equivalent of the
summer forest fire stories. But I do sympathize with the
manatees, which I imagine would be regulars of StocksandNews
if they had web access, but the Florida property owners who
want to build docks for their pleasure craft have a point as well.
Of course the compromise is quite simple; only allow canoes.
–The Wall Street Journal reports that many women are now
eschewing a daily shampoo. Huh.
–Lastly, I have some pretty big news, at least as it pertains to my
business career. Remember how Victor Kiam used to say of
Remington, ‘I liked the product so much I bought the company?’
Well, I’ve been working with CSI MultiMedia, a Perth Amboy,
NJ-based design group, for almost four years now and guess
what? I bought it. Don’t worry, dear readers, this won’t
drastically affect my work on StocksandNews. The only change
is that from time to time I’ll need to take a week off from “Wall
Street History” and “Hott Spotts.” “Week in Review” and my
hard-hitting “Bar Chat” will continue as is, along with our other
links. Wish me luck. This is a big move for yours truly, and get
used to seeing the CSI logo on these pages. To my new
employees, let’s rock and roll!
—
God bless the men and women of our armed forces.
God bless America.
—
Gold closed at $351…highest since 1997.
Oil, $33.08…highest in two years.
Returns for the week, 12/30-1/3
Dow Jones +3.6% [8601]
S&P 500 +3.8% [908]
S&P MidCap +2.8%
Russell 2000 +1.6%
Nasdaq +2.9% [1387]
Returns for 2002
Dow Jones -15.0% (including dividends)
S&P 500 -22.1% (including dividends)
S&P MidCap -15.5%
Russell 2000 -21.6%
Nasdaq -31.5%
*We’ll resume year-to-date figures next week.
Bulls 48.3%
Bears 25.3% [Source: Investors Intelligence…if you’re a
contrarian, this almost 2-to-1 bull/bear ratio is still far too
optimistic.]
Have a great week. I appreciate your support.
Brian Trumbore
