[Posted 7:00 AM ET]
Indonesia
At this moment in time, no story is more important when it
comes to the war against evil than Indonesia and its struggle
against what I previously quoted President Megawati as saying
was the “terrifying threat…(the) blind fanaticism of Muslim
militants.”
Unfortunately, the events of the past week showed her to be
rather prescient, but as awful as the al Qaeda inspired bombing
of the Marriot Hotel in Jakarta was, I did see a glimmer of hope
in the reaction two days later to the sentencing of Jemaah
Islamiyah terrorist Amrozi, one of the masterminds of last year’s
Bali bombing that claimed 202 lives, including 88 Australians.
First off, if you don’t believe in the devil, you need look no
further than Amrozi, the “smiling bomber,” who when sentenced
to death by firing squad, wheeled in his chair with that heinous
grin of his and gave his supporters two thumbs up. It was a
bloodcurdling moment, and I’m surprised his victims’ families
also in attendance didn’t take his head off right there. But in the
streets of Jakarta, the vast majority of the people lauded the
sentence and only wished Amrozi had no right of appeal.
As the largest Muslim nation in the world, one with a myriad of
other internal problems, it is critical that the government succeed
in its efforts to root out and identify the terror leaders. The U.S.
and its allies must also offer all possible support, as best
exhibited by the Australians, who have an obvious vested interest
in the region.
There is no clearer example in the world today of the battle
between good and evil, the Islamic Fundamentalists vs. the
peaceful adherents of the version of Islam that the vast majority
of the people follow. If Indonesia is lost, God help us all because
the war will become even far more deadly than it already is.
You have to feel for the poor people here who want to fight back,
whose daily struggle is tough enough without the threat that
keeps foreign investors from building plants and offering
employment. This volatile nation, along with neighbors in the
region such as the Philippines, needs your prayers. The devil can
not win.
Wall Street
Another solid week on the economic front, highlighted by the
best readings on the service economy in 6 years, along with data
that showed productivity (amount produced for each hour
worked) had soared in the 2nd quarter. Throw in the fact that the
figures on jobless claims continue to improve, retail sales at the
chain store level are solid (best exemplified by Wal-Mart’s
positive comments), and a far better tone in the bond market and
you had the setting for a great week in equities as well.
But stocks went nowhere, and in some cases down significantly,
so what’s the story? Well, I’m no Alfred Einstein, as Archie
Bunker was wont to say, but it looks like the markets long
discounted the more positive tone on the economy and now
stocks are seeking further confirmation, particularly in terms of
the employment data, before taking the indices to substantially
higher levels.
Yes, the “jobless recovery” is what’s sticking in everyone’s craw
and even though corporate CEOs appear to be far more confident
these days, which means you’d think a real pickup in capital
spending isn’t far away, the fact is this still might not translate
into real employment gains, and as we’ve covered extensively in
this space the past few weeks, the trends for both blue- and
white-collar jobs don’t look that great.
In fact a piece in USA Today talked of the financial services
industry alone moving 500,000 jobs overseas in the next 5 years,
while those remaining in America will continue to see their
benefits slashed. This is the new reality, and it’s more than a bit
troubling for a lot of us.
At least there are further signs economic activity around the
globe, with a few notable exceptions (such as Italy), is perking
up, though we’re a long ways off from a new boom and I would
still argue that the world’s hot spots should never be far from any
investor’s mind.
As for the bond market, it settled down some at week’s end after
further excessive volatility earlier on. Prospective homeowners
have been spooked and are rushing to lock in new home
purchases and mortgages before interest rates spike anew. As for
refinancing activity, it died weeks ago. Not that the 10-year
Treasury couldn’t dip back below 4%, but should this occur it
would be a fleeting opportunity because the longer-term trend is
definitely higher.
Street Bytes
–For the week the Dow Jones treaded water once again,
finishing up 0.4% to 9191, while Nasdaq registered its second
straight weekly decline, down a significant 4% to 1644, for the
first time since February / March of this year. The market for
tech stocks in particular is still generally highly overvalued, and
even when companies report better than expected news, both
traders and investors expect more.
The best example of this last point was the price action in leaders
Cisco Systems and Taiwan Semiconductor. Cisco CEO John
Chambers said he is “seeing a number of potentially positive
signs of economic recovery,” his most bullish remarks in years,
yet shares in Cisco fell about $1.60, or close to 10% from its
recent highs. Chambers’ comments weren’t good enough as
actual revenues, along with projections of future ones, were less
than exciting.
In a similar fashion, Taiwan Semiconductor was very bullish on
recent activity, good for those looking for signs of a global
resurgence, but the stock still sold off a bit. Again, valuation is a
major concern, as well as the sustainability of the hoped for
recovery.
–U.S. Treasury Yields
6-mo. 1.02% 2-yr. 1.69% 10-yr. 4.27% 30-yr. 5.23%
A major reason why bonds rallied at week’s end (though they
sold off sharply again at the close on Friday) was the better
acceptance for the latest round of Treasury auctions, but thanks
to the booming federal deficit, there will be far more of its kind
down the road, i.e., massive amounts of supply, and while this
might not spell disaster if enough buyers can be found, it
certainly isn’t a bullish factor.
Alas, the Federal Reserve meets this coming week and all eyes
will be on its statement following an expected decision to hold
the line on rates. Greenspan and Co. have some damage control
to do after jerking the bond market around with its talk of
extraordinary moves to keep long-term rates low.
–Argentina: Paul Blustein had an excellent piece in last
Sunday’s Washington Post concerning the role of the investment
banks, such as Citigroup and J.P. Morgan Chase (as well as some
European cohorts) in the collapse of the Argentinian economy. It
boils down to a simple issue. Just as in the U.S., the banks only
cared about the fees being generated and not whether the bond
deals they were forcing down authorities’ throats were good for
the country. But as Blustein reports, the new administration in
Argentina is thus far ruling out doing any new business with the
banks that screwed it in the late 90s / early 00s, even as the
economy begins to pick itself off the ground. Hopefully, the
leadership can stick to their solid principles.
Brazil: Lawmakers here passed some important legislation on
pension reform, designed to reduce benefits while cutting the
federal deficit, an important precursor to sustainable growth. But
once again, the adage of waiting 24 hours applied as the lower
house scaled back the cuts significantly, leaving experts to
wonder if any true change had taken place. It’s a dilemma faced
by governments all over the world these days, how to take care
of an aging population and its longstanding entitlements.
Spain: Add this nation to the list of countries witnessing a
housing boom that could shortly turn into a bust. In all my trips
to Ireland, for example, I would hear constant stories of the more
well-to-do there buying vacation homes in Spain, but until I read
a piece in the Wall Street Journal this week I didn’t have any
idea that housing starts in Spain over 2002 were more than in
Britain and France combined. “Tiii-ny bub-bles……..”
–Merrill Lynch must be a lousy place to work these days, what
with all the turmoil in the higher ranks. The latest to ‘retire’ at
the ripe old age of 41 is Arshad Zakaria, whose claim to fame
was putting together partnerships for corporations that helped the
latter avoid taxes. And I know I’ve mentioned this before, but
for you “This Week” junkies, Arshad is the brother of Fareed,
who appears on the program along with being a regular
contributor to Newsweek.
–And speaking of corporate tax shelters, the Journal had another
enlightening, and appalling, piece on how many of the large
banks have been avoiding $billions (cumulatively) in state taxes
through sham investment funds created by the good people at
KPMG. The sole purpose of these vehicles was to get out of
their obligations, such as in the case of Bank of America to the
tune of $750 million from 1999 through last May. Oh yeah,
Corporate America is really cleaning up its act.
–Tenet Healthcare should be shut down, but the federal
government is letting it off easy with a $54 million fine for
unnecessary medical procedures in its Redding, CA facility, and
with the additional caveat that the company is neither denying or
admitting its guilt; a copout that needs to be eliminated in
judgments of this kind, though prosecutors would argue you’d
never reach timely decisions in cases like this if the loophole
wasn’t offered, which is also the alibi in so many Wall Street
investigations. Meanwhile, the State of Florida has launched its
own inquiry into Tenet’s Medicaid reimbursement practices.
–According to published reports, Fannie Mae faces far higher
losses, in volatile interest rate environments, than originally
estimated due to its humongous derivatives exposure. One
professor in New York who has long studied the issue said
Fannie Mae’s “math is bogus.” Of course it was Warren Buffett
who first labeled derivatives “weapons of mass destruction.”
I’ve always argued that not only are there two sides to every
trade, not all the folks on the various derivatives desks are that
smart. Hell, as Long-Term Capital proved, even Nobel Prize
winners can screw it up.
–The NASD is proposing rule changes for the brokerage
industry that would force brokers to disclose which fund
companies participate in ‘revenue-sharing,’ along with showing
clients whether the broker received an incentive to sell a
particular offering.
Once again, this is an issue near and dear to my heart, having had
personal extensive experience in this game during my days in the
fund business. Many of us were in essence ‘held up’ for extra
fees by the brokerage firm honchos, or we couldn’t obtain the
shelf-space in an incredibly competitive marketplace. There was
nothing illegal here, mind you, but no one was forced to disclose
the nature of the payments.
You can be sure that the fund companies would, in the long run,
welcome fuller disclosure because it would put added pressure
on the brokerage firms to do away with the practice. This, in
turn, would make it easier for the funds to reduce their fees.
–Speaking of mutual funds, Barron’s ran an absurd piece in the
8/4 edition that touted the Top 100 funds, as chosen in a Value
Line survey utilizing weighted performance over a number of
years. What was ridiculous is that the #1 fund, according to the
work, was Third Millennium Russia, a tiny $19 million offering
investing in, obviously, one of the most volatile places to put
your money in these days. The reporter also said zippo about the
current political crisis in Moscow and the battle between the
Kremlin, the oligarchs and the last vestiges of a free press.
Potential investors were ill-served in a big way.
–Last June 28 in this space I compared the scandal in South
Korea over the corporate bribes that passed between the likes of
Hyundai and the North Korean government to Watergate, and
this week you saw why I could make such a claim as the son of
the founder of Hyundai, who was also a top executive at the
company, hurled himself off the 12th floor of a building. He left
a note that read in part, “Sorry for being a stupid man and for
doing a stupid act.” [South China Morning Post] Needless to
say, South Koreans were stunned and the fallout from this entire
investigation will resonate for years to come. Yes, it is this
nation’s Watergate.
–Microsoft is battling with the European Union once again, as
the E.U. issued new claims that the company hasn’t mended its
ways on the antitrust front. The key to this latest tussle, though,
is not the imminent $1 billion or so fine, but the attempt by the
E.U. to force Microsoft to turn over some of its intellectual
property, to which a certain finger would seem to be the
appropriate reply.
–The Internet stocks are finally breaking down a bit, while eBay
is being forced to cough up $29.5 million in a patent
infringement suit.
–The Justice Department claims that Sprint overcharged it by
some $2.6 million.
–The battle between MCI and AT&T over improper billing and
routing of calls heated up, with each countering the other’s
accusations. I see a crank call war in the future between these
two.
–The Journal reported that some magazine publishers appear to
be overstating the subscription figures, far more than normal, in a
clear attempt to maintain advertising revenue at high levels (rates
being based on such data). So just add this industry to the
corporate governance issue. Or, more broadly speaking and to
paraphrase Dickens, “Are there no prisons? Are there no
workhouses for these dirtballs?”
–My portfolio: Nothing has changed. 15% equities (3 positions;
2 energy-related, 1 India), 85% cash (primarily in $10s and
$20s).
International Affairs
Iraq: A deadly week, amidst growing evidence terrorists such as
al Qaeda are operating in the theatre. Depressing, but the United
States must stay the course.
Israel: The situation is seriously deteriorating, even if the still
relatively low casualties, post-ceasefire, argue otherwise. Last
weekend Yassir Arafat showed that he was powerless to expel 17
al-Aqsa terrorists holed up in his compound, while Israel killed 2
Hamas figures, thereby encouraging the first full-scale revenge
attack since the ceasefire was implemented. Then you had the
shelling of Israel by Hizbollah, the first action of this kind in 7
months.
Meanwhile, on the diplomatic front, Israel released 330
Palestinian prisoners, to which Palestinian Prime Minister Abbas
said it wasn’t nearly enough, with about 7,700 Palestinians in jail
before the first group was sent home. Of course how the hell can
you expect Israel to release those who are nothing but
murderers? I wouldn’t.
And then we have the controversy over the security fence.
According to some reports, the Bush administration has
threatened to withhold $1 billion in loan guarantees if the fence
continues to cut through parts of the West Bank, while some
Americans, such as publisher Mort Zuckerman basically argue,
‘Why support a peace process at all if you can’t trust the
Palestinians?’, referring to the fact that Abbas, after all, is a long-
time colleague of Arafat.
That’s the crux of the matter. You either believe a realistic peace
is possible or not. I don’t, but that doesn’t mean Israel should
continue with moves such as the settlements. As for the wall, I
haven’t made up my mind yet on this one.
North Korea: Kim Jong Il and his parliament received 100% of
the vote in a recent election with a 99.9% turnout among eligible
voters. No, seriously. But of more immediate import are the
coming talks between Pyongyang and the 5 nations opposed to a
nuclear power on the Korean peninsula. While one hopes that
some sort of negotiated settlement can be worked out, the reality
is Kim will never give up his existing nuclear weapons, so we’re
potentially stuck, best case, with a North Korea that has
anywhere from 2-5 nukes already, an intolerable situation in
today’s world. So it begs the question, “Does the U.S. have the
troop strength, with all the divisions that are already scattered
around the globe, to act in a decisive manner if called upon
in order to avoid massive casualties?” The answer is no.
Liberia: Only time will tell, but I still strongly believe the U.S.
and the Bush administration missed a huge opportunity by not
sending troops in here 4 weeks ago before the situation
deteriorated anew. This week you saw the tremendous reception
West African peacekeepers (mostly Nigerians) received, with as
yet no attacks on these forces. True, the latest ceasefire is
tenuous as President Charles Taylor plays out his final hand, but
the television coverage back in the States should have been of
cheering crowds for American soldiers with, let’s face it, a
secondary opportunity for votes amongst Black Americans come
November 2004.
Then again, maybe I’m all wrong in this regard because a New
York Times survey said that 82% of African-Americans urged
the U.S. to stay out of Liberia. Talk about ignorance, the same
old arguments ‘against’ are trumpeted. 20% of active service
members are black (vs. 13% of the overall population), they’ll be
the victims, blah blah blah.
“I don’t like the fact that a segment of the population that is
poorer and darker bears this particular burden,” said one
participant in the poll.
For starters, correct me if I’m wrong, Mr. Idiot, but don’t we
currently have an all-volunteer army?
Iran: Douglas Frantz of the L.A. Times reported that Iran will
have nuclear weapons far faster than most experts think, 2 years
or so, which actually has been the line from Israeli intelligence
even as the CIA sticks to the 4-5 year range. Regardless, time
flies and on this issue, just as in North Korea, the sands of the
hourglass are dwindling to a precious few. And with Iran
receiving help from Russia, China, Pakistan and North Korea,
the task is daunting. We need a revolution here, quickly.
Britain: Lots of stories these days. Prime Minister Blair’s
Labour party polls at just 34%, the lowest reading since 1987,
while Blair’s own approval rating has slipped below 50%.
[London Times] And the Times had another report that Blair and
Chancellor of the Exchequer Gordon Brown have worked out an
agreement that Brown take over for the prime minister midway
through the next parliament.
But of more immediate concern is the stark reality that Blair’s
support of President Bush and the war on terror, coupled with the
fact that Britain has become a safe haven for senior Arab
terrorists who are even receiving government benefits, has placed
the nation squarely in the crosshairs. The next serious attack
could just as easily occur in London as in New York or
Washington, and with the same devastating impact on the global
economy.
Random Musings
–In a Washington Post op-ed piece, Condoleezza Rice discussed
the administration’s policy in the Middle East, though she said
little of real import. But while we all know the following
statistics she cited, they do bear repeating nonetheless.
The Middle East region is made up of 22 countries with a
combined population of 300 million, yet it has a total GDP less
than that of Spain, which has a population of just 40 million.
When will the people get this into their heads and demand
change?
–My site traffic in California has been rising steadily, for which
I am most grateful, but for the life of me I’m having real
problems with the recall process here. It’s also incredible that it
suddenly has evolved into a race between Gray Davis and Arnold
Schwarzenegger, but then the adage “wait 24 hours” was never
more applicable than here, and doing so could make comments
on this race moot. One thing I do pledge is not to use any cute
nicknames through October 7.
But I have to tell you, friends; just from personal observations,
I’m not that enamored with Arnold. Though at the same time,
maybe his shtick would work. [He certainly steamrollered Matt
Lauer on “Today” Friday morning.] And maybe Californians
will accept a prescription for pain, coming from him, which is
the only one that will work in the long haul.
I guess my problem is I don’t think he’s sincere. Then again, I
was hoping Eddie Haskell would run, so that makes me a
hypocrite. To be continued.
–Nationally, in the Democratic race for president, as Howard
Dean graced the covers of Time and Newsweek his poll #’s
continued to rise.
NBC / Wall Street Journal
Lieberman…25%
Kerry…14%
Dean…12%
USA Today / CNN / Gallup
Lieberman…17%
Gephardt…14%
Dean…14%
Kerry…12%
–Seriously, is there really someone out there who would vote for
Carol Moseley Braun?…………..I didn’t think so.
–The Episcopalians elected the 1st openly gay bishop in its
history, Reverend Gene Robinson, so the church will now split
and everyone will be miserable, just as some of us Roman
Catholics have become following the scandals that have
rocked our own dioceses.
–On the issue of gay marriage, I hereby put it to bed as far as
this column is concerned. It’s up to the states.
–A luxury condo development under construction in San Diego
was torched by the Earth Liberation Front causing some $20
million in damages. These shadowy a-holes are one attack
away from killing scores of people. When caught, they deserve
life in prison; the death penalty should any innocents die. They
are terrorists and need to be treated as same.
–Which is why when I see all these stories on how Attorney
General Ashcroft is asking his associates to get tough on judges
who hand down lenient sentences, I say “Right on.” Ashcroft
has become such an easy target in some circles, while I give him
an ‘A’ for his overall performance thus far. In fact, in all
seriousness, in my opinion he is #1 in the administration.
–I just lost some readers with the above comment. C’est la vie.
–The British Journal of Ophthalmology reports that wearing a
tight necktie can raise the fluid pressure in the eye, a leading risk
factor for glaucoma. So those having trouble keeping casual
dress at work should get a hold of this study and throw it on your
boss’s desk.
And with this news I’m reminded of baseball great Ted Williams
and his book “My Turn at Bat,” wherein the one thing I
remember from the tome is how much he hated neckties. Of
course Williams was known for his super-human eyesight. See
the connection?!
–Cover up…West Nile Virus is exploding across the nation. If
you see a dead crow on your mailbox, that’s a pretty good sign
you’re next.
–I spent some time in Detroit this week, with the main purpose
being to see the world’s worst baseball team, the Tigers. And it
was a success in this regard, as I witnessed 7-2 and 9-3 drubbings
at the hands of the Oakland A’s.
But just a little travel tip from your editor. Check out the newly
revamped Henry Ford Museum in Dearborn. One of the best
I’ve been to in the world. [For a fuller description, see the 8/7
edition of “Bar Chat.”]
–China announced it would land a man on the moon by 2020.
Pssst…yoh, President Hu, save your money. There’s nothing
there. Mars is where it’s happening, my friend. Red seas, movie
stars.
—
God bless the men and women of our armed forces.
God bless America.
—
Gold closed at $356
Oil, $32.18
Returns for the week 8/4-8/8
Dow Jones +0.4% [9191]
S&P 500 -0.3% [977]
S&P MidCap -1.6%
Russell 2000 -3.0%
Nasdaq -4.2% [1644]
Returns for the period 1/1/03-8/8/03
Dow Jones +10.2%
S&P 500 +11.1%
S&P MidCap +12.6%
Russell 2000 +18.5%
Nasdaq +23.1%
Bulls 51.2
Bears 20.8 [Source: Chartcraft. Figures for 6/13: 60.2 / 16.1]
Have a great week. I appreciate your support.
Brian Trumbore
