[Posted 7:00 AM ET]
Iraq and White House Policy
“The public won’t turn against the U.S. commitment in Iraq
merely because of casualties. But it will turn if it thinks its
leaders aren’t being honest with them about the challenges we
face or the sacrifices required to prevail.”
–Wall Street Journal Editorial, 7/7/03
The apologists for the Bush administration are slowly beginning
to back away. I began to myself in May, and, as many of you see
now, with good cause. The American people still believe the war
was justified, as I always will, but I’m not sure the vast majority
truly understands the real Big Picture.
I said from Day One that I was worried about our post-war
commitment, but for far different reasons than Democrats or
most Republicans were. The fact is the American military is not
only stretched too thin, it is perilously under-prepared for the
dangers that could lie ahead.
I wrote weeks ago that I was ticked at Secretary of Defense
Rumsfeld, who was preparing to cut and run from Iraq before
events dictated otherwise. Despite some solid progress on the
ground in recent weeks, we need far more than the 146,000
troops currently there and why anyone is surprised with retiring
General Tommy Franks’ statement that U.S. forces could be in
Iraq up to 4 years, I’ll never know. Heck, for one thing by
winning the war we now have our pick of air bases, from which
we can more easily protect our interests in the region than we
were previously able to in Saudi Arabia, for example. U.S.
forces could be in Iraq in one form or another for decades.
But think about this. The U.S. currently has about 500,000
active troops in the U.S. Army and, according to military
historian Frederick Kagan, 370,000 are already deployed around
the world. Writing in the July 7/July 14 issue of the Weekly
Standard, Kagan notes:
“The problem is that we cannot maintain such a large force in
Iraq for a year without seriously damaging the Army and
harming our ability to pursue other critical objectives.”
Kagan also writes of a subject I have brought up more than once,
one that unfortunately many of you have firsthand experience in;
this being the deployment of 200,000 reservists and members of
the National Guard. And, as he adds:
“It is time to stop pretending that the United States can prosecute
a war on terror, conduct peacekeeping operations in Iraq,
Afghanistan, Kosovo, and Bosnia, and maintain the security of
the homeland without a substantial increase in the size of the
armed forces.”
Incredibly, however, Kagan never mentions North Korea by
name. Kim Jong-Il is nuts and fully capable of a totally irrational
move, and now intelligence estimates he is proceeding full speed
ahead on his nuclear weapons program. If Kim decides to act
while we are pinned down elsewhere, it would be a catastrophe.
So even as Secretary Rumsfeld has his goal of streamlining the
military, I believe we not only have to beef up to meet immediate
needs and major threats, we also must do what we can in hot
spots such as Liberia. Regarding the latter, President Bush said
this week, “We won’t overextend our troops, period.” He’s right
on the premise, but totally wrong on policy.
What you aren’t hearing from either side of the political aisle is
the following. The United States must act as the world’s
policeman until such time as it can develop new, more far-
ranging relationships, particularly since NATO seems incapable
of pulling its share of the load. This is why I keep talking of a
new supra-alliance, including Britain, Australia, a re-armed
Japan and the largest democracy in the world, India. An alliance
that understands shared responsibilities for the protection of
human rights and, just as importantly, global trade and economic
opportunity.
As for the White House and the rapidly escalating battle over the
selling of the war on Iraq, you’ve known for weeks where I stood
on this one. We were manipulated. I called on CIA Director
George Tenet to be fired on 5/31 in this space. The following
week, 6/7, I wrote that Tenet, Rumsfeld and Vice President
Cheney may all be culpable. But outside of Tenet falling on his
sword, as he did to a certain extent on Friday, I expect little else.
The dangers we face as a people are far too great for our leaders
to jerk us around like a bunch of marionettes. I don’t care who is
in the White House, all I want is the truth.
Update: China / Hong Kong
Victory in Round One for the people of Hong Kong as Chief
Executive Tung Chee-hwa was forced to indefinitely postpone
Article 23, the anti-subversion bill that threatened many
fundamental rights for the people. A key council member
resigned and Tung had little choice but to back down.
At first, Beijing officials were silent, but by mid-week a foreign
ministry spokesman reiterated that Beijing was still determined
Article 23 become law. On Wednesday evening a smaller protest
of 50,000 was held and as of this writing, Tung seems to be
digging in. It’s a fluid situation, with another big rally scheduled
for Sunday.
[Unfortunately, Hong Kong is also reeling from the city’s worst
traffic accident, ever, as 21 were killed when a double-decker
bus plunged off a bridge on Thursday.]
Wall Street
Ever since I reduced my exposure to equities from 55% to 15%
over the past two months, at times I’ve felt like Lloyd Bridges in
the movie “Airplane.” To paraphrase, boy, I sure picked the
wrong time to give up on stocks.
I have to admit I was a little down on myself earlier in the week
as the stupendous rally from the October 2002 lows continued,
particularly as I bemoaned some of the gains I left on the table by
selling Micron Technology and Calpine too soon (though both
at nice profits). Alas, on Wednesday and Thursday some form of
rational behavior returned as the markets waded through the
initial earnings reports for the 2nd quarter.
Early on, though, the markets were helped along by the latest
update from an ongoing Goldman Sachs survey of corporate IT
spending that revealed an improvement from April’s sentiment
level. Tech spending is now expected to be flat in ’03, rather
than down 3% (it was off 7% in 2002), with a new forecasted
gain of 3.5% in ’04. By week’s end other analysts were saying
positive things about Dell and Intel and the coming rebound in
PC sales, a judgment I certainly don’t quarrel with, having called
for an upgrade cycle about six months too soon. My issue is,
after this inevitable pickup, what then?
Today’s cross-currents are as dangerous as any riptides of recent
vintage. There are reasons to be optimistic, such as on capital
spending, as well as signs of a comeback in merger activity (this
week’s including EMC-Legato Systems and Yellow Corp.-
Roadway). Plus you have the positive impact of tax cuts on
consumer spending, though for the average American, the
difference in your paycheck still seems like just a six-pack’s
worth.
But on the negative side you have exploding debt levels of all
kinds, with the revelation that Iraq alone is costing us $4 billion a
month, a significant, though necessary, negative. And consumer
credit continues to rise, even as jobless claims and the
employment picture in general show few signs of improving.
Throw in a European economy that, to use a polite term, sucks,
and the ongoing threats posed by previously discussed hot spots
as well as terrorism, and you can see why I’m far from getting
too hyped up.
Finally, you have the bond market. I promise I’m not going to
go crazy until the 10-year Treasury is substantially above 4%
(it’s currently 3.63%), but I fall into the camp that likens the
activity in the fixed income arena, including massive flows into
bond funds the past three years, to the ’98-’00 tech bubble, when
you’ll recall gobs and gobs were going into the Tom, Dick &
Harry Innovative Inventions That Will Change Your Life Fund.
Robert Rodriguez (First Pacific Advisors) is one of the best bond
managers around and he told the New York Times the other day,
“It would not surprise me if we have one of the worst bond
markets on record in the next 12-18 months.”
But what if Mr. Rodriguez is wrong and interest rates stay low?
It will keep the housing sector going, for a while longer, as the
Federal Reserve so desperately wants, but chances are it will also
mean the rest of the economy remains stuck in the mud, and you
know what the result would then be for corporate profits and
equity prices given today’s hugely inflated expectations and
valuations.
There now. Just a little food for thought to add to your daily
dietary regimen, which includes statins, I presume.
Street Bytes
–Nasdaq led the way once again with the index advancing 4.2%
to 1733, while the Dow Jones rose just 0.5% (9119) and the S&P
500 tacked on 1.3% (998). The markets pulled off a rally on
Friday despite a very mediocre earnings report from G.E.
–U.S. Treasury Yields
6-mo. 0.94% 2-yr. 1.28% 10-yr. 3.63% 30-yr. 4.68%
Rates were unchanged on the week.
–Microsoft announced that its employees would no longer
receive stock options; instead getting actual shares (restricted
stock) due to the fact the options for most are substantially
underwater and suffering from the bends. But instead of reading
the 85 articles that flew off the presses concerning this
admittedly significant change in policy, here’s all you really need
to know. Microsoft is admitting that its shares won’t do much
more than perform in line with the market for the next 100 years.
–Then there is Hewlett-Packard, a company whose printer
business some of us continue to marvel at for its huge margins.
In perusing a Business Week piece, I just had to pass along that
printers (and ink jet supplies) represent 28% of total sales and
100% of profits, with ink, alone, responsible for 70% of the
latter. So once again I’m dusting off my business plan for “Mr.
B’s Ink Supplies.” Look for a kiosk near you.
–I have been slamming the impact of the dividend tax cut ever
since this was first proposed and now we have the initial evidence
I was right. For the first half of 2003, the 356 S&P 500
companies that paid a dividend gained 10.2%, while the non-
dividend outfits rose 28.7%. These numbers also speak to the
speculative activity that has snuck back into the market during
this period.
–Energy: Fed Chairman Alan Greenspan went to Capitol Hill a
second time to discuss the coming crisis in natural gas, and once
again the price of the commodity promptly plummeted. Granted,
this had everything to do with a continuing improvement in U.S.
inventories, but it does make the chairman look silly for a day or
two. No doubt he’s right long-term, though. Meanwhile, crude
oil continues to hover around the $30 level, long after it was
supposed to fall post-Saddam. Why? Well it doesn’t help that
Iraq’s own production ‘may’ hit 1.5 million barrels per days by
year end, a far cry from the 2.5 mmbd pre-war level. Sabotage
and looting are to blame. But at least Russia’s production is up
9%, surprising yours truly, while the nation’s proven reserves are
up 23%. Obviously, good U.S.-Russian relations in the future
are critical, particularly if the Middle East remains unstable.
–You might believe SARS was overblown, but don’t tell that to
Hong Kong or Singapore. Singapore announced its economy fell
4.3% in the second quarter due largely to the virus, while in
Hong Kong SARS is responsible for plunging office rents,
among other items, that are projected to fall about 30% in 2003.
Even G.E. blamed SARS to a certain extent for its so-so quarter.
–China, on the other hand, still saw industrial production rise
16% year-over-year even after the negative impact of SARS.
–Shares in Altria, owner of Philip Morris USA, fell sharply after
an Illinois appeals court threatened to reinstate a $12 billion
deposit for a jury award, which previously had threatened to
throw Philip Morris into bankruptcy. Altria is also having
problems with its Kraft Foods division, after two key executives
suddenly left, while trans fats were discovered in the parking lot
at company headquarters.
–I have never knocked Yahoo, only questioned its valuation, so
it’s no surprise to me that the stock fell sharply after announcing
that its 2nd quarter earnings just met expectations of 8 cents a
share. Otherwise, the story was good as Yahoo raised revenue
estimates for the balance of the year. But the company is still
grossly overvalued, even after a 10% drop by week’s end on the
news, trading at a price earnings multiple of 66 based on 2004
estimates.
Of course the very same story applies to Amazon and eBay,
though these two held onto the lion’s share of recent gains. I
wouldn’t touch any of the three with a 10-foot pole.
–The average cable rate was up 8.2% in 2002. And you have to
wait like two years between seasons of “The Sopranos” for
crying out loud.
–The administration is screwing around with the way
corporations fund their pensions in another attempt to inflate
stock prices before November 2004, after which the White
House would then slam the door as the market tanked anew.
–MCI, formerly WorldCom, slashed revenue projections for
2005, yes, 2005, by $3 billion. That’s $3 billion less than they
projected just 3 months earlier. Separately, as part of the final
settlement for accounting fraud, WorldCom will pay $750
million to both shareowners and bondholders. I believe you get
wristbands if you want to wait in line.
–And in another high-profile bankruptcy, creditors in Enron will
receive 14-18 cents on the dollar, a pitiful sum. [Common
shareholders were previously wiped out.]
*Correction: Thanks to Joshua P. for noticing that I had
inadvertently written 1,000 hours instead of 1,000,000 hours
worked for Enron’s attorneys in a blurb last week. I made the
change but it was wrong for two days. Joshua also mentioned
that he and his wife had visited the new National Constitution
Center in Philadelphia over the holiday weekend and they highly
recommend it.
–In the ongoing congressional tussle over asbestos legislation, a
Senate committee finally approved a bill that would end asbestos
lawsuits by creating a privately funded financial trust fund of at
least $108 billion to be paid out over 27 years. But trial lawyers,
who line Democrats’ pockets and count John Edward as their
patron saint, are screaming bloody murder, or something to that
effect, so there is still some question whether supporters will
muster enough votes to override a potential filibuster.
–Nike acquired Converse, makers of the Chuck Taylor All-Star
brand. I can’t help but repeat a statement I made when Converse
last declared Chapter 11 in 2001, as I pointed out that when I was
a kid I bought Keds because they offered better arch support.
Hey, Mom was paying. What did you expect me to do?!
–Shares in Coinstar plummeted after the company announced an
end to a 9-year relationship with Safeway. Personally, I’m still
too embarrassed to take my own coins into a supermarket to
deposit in one of Coinstar’s machines.
–We note the passing of economist and market historian Charles
P. Kindleberger, 92, who wrote one of the great books on Wall
Street, “Manias, Panics, and Crashes: A History of Financial
Crises.” A must have for any serious investor. Kindleberger
also helped direct the Marshall Plan.
–This just in……….UBS (PaineWebber) strategist Ed Kerschner
is leaving the firm. Kerschner will forever be known for his
pronouncement in the spring of 2000 that valuations didn’t
matter, one of the truly idiotic statements in financial history.
International Affairs
Israel: Another quiet week….this is good. But Palestinian Prime
Minister Abbas is facing increasing pressure from within for not
being tougher on Israel when it comes to prisoner releases.
Meanwhile, Iran admitted it has finished testing a midrange
missile with a range of 930 miles, more than enough to hit Israel
or U.S. interests in the region. Of course, who is to say Iran
wouldn’t stick a nuclear warhead on it? They could just buy one
from North Korea.
Russia: The U.S. is questioning the arrest of the large Yukos
shareholder I wrote of last week. It’s another instance of
harassment for political purposes, and it has to be coming from
the very top. Again, do not put investment dollars in this country
until we see what happens following, first, December’s
parliamentary vote, then March’s presidential election.
As for the Chechen terrorist attack at the rock concert last
Saturday that claimed 14 lives, at least security at the gate
recognized the problem before the women could get inside. As
soon as I learned of this tragedy, I immediately thought back to
my own experience in Moscow last November, where I walked
into the Bolshoi Theatre on two occasions without seeing any
security presence whatsoever. It was winter (for Moscow), we
all had heavy coats on, and anyone could have brought in
weapons or detonated a bomb.
Zimbabwe: What a disaster. President Bush totally wimped out
in endorsing South African President Mbeki’s non-existent
efforts at brokering a political settlement in Zimbabwe.
Opposition leader Morgan Tsvangirai was livid when he heard
Mbeki talking about negotiations. What freakin’ negotiations?
he asked. President Mugabe is trying Tsvangirai for treason,
after all.
Afghanistan: 20% of the nation’s GDP still comes from the drug
trade. Each morning the citizens rush to their windows, or throw
open their tent flaps, to hear the sounds of the little boys
shouting, “Poppies! Poppies for sale!”….. “Young lad?” “Yes,
sir?” “You know the opium in Ahmed Hamid’s store window?”
“Do I ever.” “Fetch it for me, boy, and here’s a couple
Benjamins for your trouble.”
Oh, and the U.S. Drug Enforcement Agency has two, count ‘em,
two agents covering all of the country.
Turkey: The Turks have finally lost me. This country can suck
you in for a while, but then you inevitably wake up to your
senses. This week the U.S. and Turkish governments got into an
ugly row when the U.S. arrested 11 Special Forces that were
reportedly attempting to carry out a plot against a Kurdish leader
in Iraq. Cooperation between the two countries is now non-
existent. Turkey is teetering on the brink and its leaders, both
civilian and military, better get their act together before the
nation implodes.
Saudi Arabia: Damn, this place is frustrating…and treacherous.
Last week we were told the top terror suspect blew himself up
and that’s what I reported. Then by Monday officials said he
died in a gunfight. Typical.
Pakistan: What has become clear since last week’s review is that
the Sunni attack on Shiite Muslims in Quetta that killed 47 or so
was meant to destabilize the country. It was also a message to
President Musharraf not to involve himself with the West,
Musharraf having just returned from his trip to the United States
and Europe.
Mexico: President Vicente Fox suffered a resounding defeat in
mid-term congressional elections, with his PAN (National Action
party) losing further ground to the PRI, the guys who ruled for 7
decades before Fox won the election in 2000. Fox has been a
huge disappointment and doesn’t have one economic reform to
point to, though to be fair he has received zero support from
President Bush since the two exchanged their initial high-fives.
Fox, in essence, became another victim of 9/11, but that was a
short-sighted policy shift on the part of the White House.
Random Musings
–I don’t believe in the recall process out in California, but I do
understand the anger towards Governor Gray Davis. And no
wonder the budget resembles a toxic waste dump. For the
benefit of those like myself who haven’t been witness to all the
events of the past few years, here’s all you need to know. In
2002, Davis authorized a 33.7%, 3-year pay raise for prison
guards, then the union representing them turned around and gave
the governor a $250,000 campaign contribution. [Glenn Ellmers
/ The Weekly Standard] That stinks, my friends. But I’m not
convinced the precedent set by a recall is really in our long-term
interests.
–Speaking of sinking fast, I always knew a major hurricane
could wipe out the New Orleans area due to it basically being
under sea level, but until I saw an ABC News piece the other
day, I didn’t realize how much of the land all around is also
sinking. Geezuz, my Cajun friends, build a wall or something,
fast. Time’s a wastin’.
–I was watching some video on the European Parliament and
reached one conclusion. What an unimpressive leftist lot these
folks are.
–89% of Canadians believe they have a better quality of life than
in the U.S.
–George Will on Vermont: “It’s really just a commune.”
–A headline in U.S. News read “A Nation of Pirates,”
concerning the penchant for Americans to download, often
illegally, movies and music. Call me old-fashioned, but I still
buy everything. However, a British survey claims that when it
comes to music, at least, downloaders actually buy more CDs.
As for movies, Hollywood is scared to death and the poor
performance of some “blockbusters” this summer is but a
harbinger of things to come as the availability of bootlegged
copies on the Net, along with the spread of broadband, grows.
–There’s increased talk of Rudy Giuliani running against Hillary
in 2006 for her New York Senate seat, which tells me Hillary is
definitely running for president in 2004.
–A New York woman, Deserrie Cortes, no relation to the
Spanish Conquistador, married 27 times in a scam that helped
allow illegal immigrants become legal aliens. It’s a stretch, but
the terrorist task force has to make sure there isn’t more to it than
this.
–The television talk shows can really crack me up, especially the
likes of Chris Matthews and “Hannity and Colmes” for
constantly force-feeding Al Sharpton, a simple thug and hood, on
us. And this week I’m watching Matthews as he wrapped up an
interview with author Ann Coulter. “You’re cute…you’re
beautiful…” Geezuz, Chris, get a freakin’ room. Of course any
guy saying this in the workplace would be fired, let alone sued.
–The World Health Organization estimates that 8% of all
medicines are fakes. No word on whether vitamins like
Flintstones are also fake, but if the label reads “Larry
Flyntstones,” that’s a clue.
–I learned a new term on the Weather Channel the other day….
“Derecho,” which has to do with straight-line wind damage.
Practice using it in a sentence with your spouse or significant
other. “Honey, I’m sick of your complaining. You’re creating
Derecho.”
–The New York Times reports that hot pants are making a
comeback, though women wearing them are often mistaken for
hookers.
–Happy Birthday to Gerald Ford, who turns 90 on Monday,
joining John Adams, Herbert Hoover and Ronald Reagan.
–Americans were asked the following for a survey? “Would the
Founding Fathers be pleased with today’s America?” 50% said
‘yes,’ 48% ‘no.’ I say a resounding ‘yes’ ….and we should all
go down to the local tavern and quaff an ale to celebrate our
success.
–I’m posting this week’s column from Pittsburgh (Greensburg,
PA), as I’m in town for a family wedding. Guards will be posted
in case the Pirates’ Randall Simon decides to show up.
—
God bless the men and women of our armed forces.
God bless America.
—
Gold closed at $345
Oil, $31.28……..Claudette had something to do with the rise.
Returns for the week 7/7-7/11
Dow Jones +0.5% [9119]
S&P 500 +1.3% [998]
S&P MidCap +1.9%
Russell 2000 +3.8%
Nasdaq +4.2% [1733]
Returns for the period 1/1/03-7/11/03
Dow Jones +9.3%
S&P 500 +13.5%
S&P MidCap +15.6%
Russell 2000 +23.7%
Nasdaq +29.8%
Bulls 56.5%
Bears 18.5% [Source: Investors Intelligence / Chartcraft]
Have a great week. I appreciate your support.
Brian Trumbore
