[Posted 7:00 AM ET]
Iraq
This was the week that saw the Bush administration involve
itself in “internecine quarreling,” as the columnist Jim Hoagland
put it. The policy differences that were always known to be
simmering at the surface, such as those between Defense and
State, boiled over and it’s now each man for himself.
Unfortunately, as Hoagland added, the destructive behavior
benefits no one, least of all President Bush.
This week National Security Advisor Condoleezza Rice and
Defense Secretary Donald Rumsfeld traded barbs as Rice took
over reconstruction efforts in Iraq, while Rumsfeld complained
in an interview with European reporters that he hadn’t heard
about the move before it became public (Rice denied this was the
case).
The internal debate, including over the leak of Ambassador
Wilson’s wife’s name, comes at a most inopportune time.
Despite the casualties U.S. forces continue to take in Iraq, after
six months since the fall of Saddam some progress, particularly
with regards to the infrastructure, is being made and the press is
reporting on more of the positives.
But despite the desire on the part of the American public to see
the troops come home within the year, the mission of
reconstruction has only just begun and the administration needs a
united front. The Weekly Standard’s William Kristol once again
hit the nail on the head.
“(The) civil war in the Bush administration has become
crippling. The CIA is in open revolt against the White House,
the State Department and the Defense Department aren’t
working together at all. We are way beyond ‘fruitful tension’
and all the other normal excuses for bureaucratic conflict. This
is a situation that only the president can fix….Perhaps a head or
two has to roll. But the present condition is debilitating, and,
given the challenges facing us in postwar Iraq, in Iran, and in
North Korea, it is irresponsible to let it fester.
“To govern is to choose. Only one man can make the choices
necessary to get the administration back on course….Time is not
on his side.”
—
Wall Street
Commodities are soaring…but the Federal Reserve worries about
deflation.
The U.S. dollar hit a 3-year low against the Japanese yen…but
this is a positive for U.S. corporate profits.
The U.S. trade deficit narrowed again on rising exports…but
imports are more expensive.
Jobless claims fell and the employment picture is improving…or
is it?
Consumers keep spending…as they pile on more debt.
The Bush stimulus package – tax cuts and refund checks – has
worked…but will it continue to in 2004?
Valuations on many sectors, particularly technology, are
stretched to the max. …and no one seems to care.
Add it all up and what does it spell? V-O-L-A-T-I-L-I-T-Y.
Look for the pace of it to pick up in a huge way shortly because
the crosscurrents in today’s economic and political environment
are pronounced.
No doubt there is a lot to like these days. Earnings thus far are
solid, with many in the tech sector exceeding expectations; see
Yahoo, SAP, and Juniper Networks, to name a few. Retailers
such as Wal-Mart are witnessing strong growth and the global
recovery continues apace, particularly in Asia. Plus, the
employment picture appears to be on the verge of a recovery. If
you’re President Bush you’re pretty confident that everything
will line up by late spring, next Labor Day at the latest, and come
November voters will reward you at the polls.
This past week represented the one-year anniversary of the
October 9, 2002 market bottom and the ride back up has been a
great one. Just 300 more points and the Dow Jones would also
be back to 10000, a magic number as far as the president’s
reelection chances, at least in my opinion.
But while Democrats are going to look increasingly foolish
talking about a “disastrous economy” that will have exhibited
growth of anywhere from 4-6% in the third quarter when the
figure is released at month’s end, the question is can it last?
Maybe not. The huge rise in oil & natural gas prices the past few
weeks, for starters, will hit consumers hard, especially if we have
a cold winter, while on the jobs front there remains a palpable
sense of unease across the land, best exemplified by statements
coming from Intel chairman Andrew Grove who warned that
U.S. dominance in key technology sectors is in dire jeopardy.
The nation is under siege from countries such as India and China
that are exploiting their labor cost advantage. The big danger
here, in this high political season, is in calls for protectionist
countermeasures that inevitably lead to trade wars, inflation,
rising interest rates and a collapsing stock market.
Street Bytes
–I looked back over my notes from one year ago and ironically,
after the equity markets bottomed last October 9, a sharp rally
was precipitated by a better than expected earnings report from
Yahoo. And this week Yahoo delivered again.
Overall, stocks rose further with the Dow Jones trading above
9700 for the first time since June 2002 before settling at 9674, up
1.1% on the week. The Dow hasn’t had back-to-back declines,
incidentally, since February / March. Meanwhile, Nasdaq
finished over 1900 (1915), up 1.9%.
One stock that failed to crash the party was General Electric, as
its earnings report for the third quarter was less than exciting,
particularly on the revenue side, up just 2%. For a company with
a presence in all sectors, all countries, 2% is more than a bit
mediocre. It also speaks to the issue of profits, which are still
being attained to a great extent through cost-cutting rather than
rising sales. Throughout the economy, pricing power remains
largely non-existent.
–U.S. Treasury Yields
6-mo. 0.99% 2-yr. 1.64% 10-yr. 4.27% 30-yr. 5.18%
The 10-year traded up to the 4.35% level before settling back.
The core producer price index for September was unchanged but,
again, the government’s statistics mangle the true inflation
picture when it comes to big items such as healthcare, property
taxes and college tuition. And the bond market largely shrugged
off increased talk on the current account deficit front.
–Energy: As noted earlier, oil and natural gas prices are soaring
anew, with the latter spiking back over the $5 level on the heels
of an inventory report showing reduced stockpiles just as the
Canadians start throwing cold fronts at us. [Not that yours truly
has a problem with this, being the holder of 3 energy issues.]
–Office vacancy rates nationwide continue to rise, while there
are increasing signs residential real estate in once hot markets is
cooling. It’s about time!
–Some experts now say China’s economy is really growing at
10-11%, rather than the stated 8%. If so, this bubble will end
like all the rest…badly.
–Inflation watch, part deux: The price of my Dunkin’ Donuts
breakfast rose 7.7%, while Mark R. reports that Ragout pasta
sauce climbed a stupendous 26%!
–Yahoo reported third quarter revenues were up 43% and the
company beat expectations on the bottom line by a penny to 10
cents a share. The Street rejoiced and the stock closed the week
at $43. For all of 2004 the company is projected to earn 50
cents. Call it 60, just to be generous. That’s a price / earnings
multiple of 70+….on next year’s earnings. EBay and Amazon
also rose in sympathy and their own valuations remain on the
ridiculous side. But you short them at your peril because there is
just too much momentum and it certainly seems likely that the
sales figures for Christmas will be strong, too. Actually, that’s
about when you may want to take a stab at buying some ‘puts’
following the best possible news.
–Internet-directory services company LookSmart didn’t fare
nearly as well as Yahoo, as Microsoft pulled out of a licensing
agreement that heretofore represented 68% of LookSmart’s
revenue stream. Ergo, shares plunged 50% and the company
changed its name to LookElsewhere.
–La-Z-Boy warned on earnings. You know what? Part of the
problem with this company is the product is too good. I mean,
when was the last time you put your La-Z-Boy out with the trash?
–Some classic dirtballs of days gone by re-emerged in the news
this week, including former Qwest CEO Joseph Nacchio, who
was forced to disgorge $400,000 (chump change) in IPO profits
resulting from New York Attorney General Eliot Spitzer’s
“spinning” investigation (receiving shares in hot offerings in
exchange for future investment banking business). Citigroup
doled out the largesse here, but they’ve already been slapped
around (not enough). For some reason Nacchio is forced to give
the money to two New York law schools, which I guess they
then use to play the S&P Futures market in an attempt to turn it
into $800K. We also learned that Qwest is the subject of a broad
grand jury investigation into its overall telecom acquisition
scheme.
–Then there is software giant Computer Associates. The chief
financial officer and two other senior executives were forced to
resign following new allegations that the company was cooking
the books on the issue of revenue recognition. If you’re thinking,
“Haven’t we seen this movie before?” you’re right. And
incredibly, CEO Sanjay Kumar remains in power, counting his
money.
–This week we learned that Dick Grasso’s two chief lieutenants
at the New York Stock Exchange had their own deferred
compensation funds to the tune of $22 million, plus they each
earned $3.6 million plus in salary and bonus for both 2001 and
2002. One of the two, Catherine Kinney, wears elegant clothing
as she rings the bell and shakes hands so it only seems fair that
she be compensated in such a manner as befits a queen.
……………cough cough……….hack hack.
–And the NYSE specialist system came under renewed attack
from AIG chairman Hank “I didn’t play for the Tigers”
Greenberg, as he basically called for computers over humans
when it comes to making markets. He does have a point.
Computers don’t take cigarette breaks, nor do they require
expensive clothing.
–John Crudele of the New York Post reported that
DaimlerChrysler chairman and former NYSE board member,
Juergin Schrempf, was afraid to resign in the days before Grasso
himself did because Schrempf was worried that Grasso would
negatively impact DaimlerChrysler stock. In other words, just
clean out the whole freakin’ mess, install a few Dell computers,
and turn the building into a giant museum of financial history.
Throw in a few theme bars and a crack den for added effect.
–A federal appeals court has barred the FCC from following
through with plans to allow cable companies to exclude rivals
from selling competing Net services over their lines. [For
example, AOL could now demand access to Comcast’s
broadband pipes.] This is a big deal. Cable operators would face
the same competitive pressures that the phone companies do
today, though it also takes away the financial incentive for the
cable companies to expand their broadband networks.
–My portfolio: For crying out loud, why didn’t anyone tell me
to hold on to my India Fund position just one more week? The
darn thing rose another 10% in the five days since I sold it.
International Affairs
Russia: Another fascinating week that started off with Kremlin
lackey Akhmad Kadyrov winning the election in Chechnya with
80% of the vote. Of course this whole process was correctly
described as a “farce” by many since there was no real
opposition. And it should be a bit disconcerting that with Russia
supposedly a thriving democracy these days, the Kremlin
claimed turnout for the vote was 83% when it was probably more
like 20%. I mean, c’mon guys.
Oh, but Moody’s takes Russia seriously when it comes to
handing out ratings on government debt and the agency upgraded
Russia to investment grade status, a huge positive when it comes
to raising capital.
I once made good money here about two years ago, Lukoil, and I
know that the stock market has been soaring in 2003, but I
wouldn’t touch it if you paid me these days and if you’ve noticed
the tone of my pieces concerning this nation over the past 6
months or so you shouldn’t be surprised.
Doesn’t Moody’s understand? The KGB is back and President
Vladimir Putin needs to be watched carefully. [I don’t trust
President Bush to do so.] Russia is totally dependent on oil and
while I have noted this could be a positive if U.S.-Russian
relations are stable in terms of a non-Middle East source of
crude, Russia is also fully capable of wielding its energy weapon
as well as Saudi Arabia does. For now, though, the country is
pumping away, helping to hold down the price, actually, while
raking in the revenues.
Russian ambassador to the U.S. Yuri Ushakov wrote an
obnoxious op-ed piece in the Washington Post, blaming some in
our country for their “outdated views of Russia.” No, Mr.
Ambassador, all I see is a slide backwards after years of
significant progress. Even Europe is increasingly concerned, and
with good reason, as it reads of a new Russian strategic doctrine
of preemptive nuclear strikes on nations it deems a threat (a
position Foreign Minister Ivanov denied…yet it’s in writing).
And Ivanov told the U.S. that Russia expects us to abandon our
military bases in Uzbekistan and Kyrgyzstan once the war in
Afghanistan is over. Not that this is likely anytime soon, for
obvious reasons, but you know who is pulling Ivanov’s strings…
a distinct corps of hardliners in the Kremlin, both ex-KGB and
military leaders who despise all things American. Are you
listening Moody’s?
Turkey: In a big reversal of policy, the Turkish parliament voted
overwhelmingly, 358-183, to send 10,000 troops to aid in the
peacekeeping efforts in Iraq, the first major Muslim nation to do
so. An $8.5 billion loan offer from the U.S. certainly helped, but
one can not underestimate the positives of this move, which
came a lot sooner than I expected.
However…as I’ve been writing for weeks, the Iraqi Governing
Council doesn’t want the Turks in Iraq due to historic
animosities, so it could be some time before the troops roll in.
Israel: The military launched an attack inside Syria for the first
time in 30 years, targeting a suspected Islamic Jihad and Hamas
training camp in retaliation for the suicide bombing in Haifa that
claimed 19 lives. President Bush reiterated his support of Israel,
while Palestinian leader Yassir Arafat and prime minister-
designee Qureia argued over a power-sharing arrangement.
There were also rumors as to the state of Arafat’s health. All I
know is that he looked terrible on television the other
day…which is a most welcome development.
Iran: Leaders here continue to dispel any notions that the regime
is plowing ahead with its nuclear weapons program. The
October 31 deadline for full compliance on inspections as set by
the International Atomic Energy Agency is obviously critical and
it only makes sense that Iran, similar to Saddam’s actions when
U.N. inspectors were on the ground there, will do as little as
possible while placating the IAEA.
But in a blow to the hardliners, the Nobel Peace Prize was
awarded to Shirin Ebadi, a female lawyer (former judge) and
human rights activist. This was a great choice.
China: The launch of the country’s first manned space flight is
slated for October 15. I’m surprised the rocket doesn’t have Bill
Clinton’s picture on it, Uncle Bill undoubtedly being responsible
for some of the technology involved.
North Korea: Pyongyang is attempting to ban Japan from the
next round of talks on its nuclear program. Ain’t gonna happen.
Japan: Of course the above is but another reason why Japan
should go nuclear. Separately, as expected Prime Minister
Koizumi has called for parliamentary elections on November 9
as he seeks a renewed mandate for his reform agenda.
Afghanistan: Two competing warlords battled it out in an
extensive fight that claimed about 50 lives. But I thought
Secretary Rumsfeld told us the conflict here was over long ago?
the editor mused.
Pakistan: Secular violence between Sunnis and Sh’ias continues
to escalate, while the military tested a new version of its
medium-range missile that is capable of hitting India with a
nuclear warhead.
Britain: Former foreign secretary Robin Cook’s explosive diaries
revealed that Prime Minister Tony Blair admitted Iraq had no
WMD two weeks before the war, further sharpening the debate
in the country over No. 10 Downing Street’s prewar
maneuvering.
Random Musings
–President Bush is embarking on a dangerous trip to Asia as he
takes part in the Asia-Pacific Economic forum in Bangkok. This
meeting has been on al Qaeda’s target list for some time now.
–Canada lost two of its soldiers in Afghanistan, while a military
attaché from Spain was killed in Iraq. We remember their
sacrifices.
–California: I’m not one to change my initial predictions, though
I was only mildly surprised to see Gray Davis get recalled. I also
still have major problems with the process itself, but as a ‘states
rights’ man I have to respect the outcome, I guess.
That said, I think the Washington Post put it best when it
described Arnold Schwarzenegger’s campaign as “insultingly
substance free.” Personally, you can imagine I would have voted
for McClintock and I can’t see where he’s hurt by sticking it out
as he did. A Senate race against Barbara Boxer would be most
entertaining and I can tell you now McClintock will receive a
little financial support from yours truly when he opts for this
contest.
Much has already been written concerning the impact of
Schwarzenegger’s victory on President Bush’s chances in the
state in ’04. Between Arnold and McClintock, the Republican
gains among blacks and Hispanics were quite striking, for
example. But unless the new governor proves to be a huge
success, the carryover is minimal. Having said that, any
economic recovery in the U.S. will obviously help California as
well, with Schwarzenegger and Bush both benefiting.
–I kept my promise not to joke about Arnold’s candidacy. But
I’ll tell you who is most impacted by the victory. NBC News
anchor Tom Brokaw. My word, it’s embarrassing listening to
him try and pronounce the name. As for Maria Shriver, she is
now free to eat a cheeseburger. I urge her to go to Wendy’s and
make it a triple.
–Presidential candidate Bob Graham was the first to drop out.
This guy is as qualified as they come, and he understands the big
picture in the War on Terror, but he sure is a quirky sort.
–Good to see Wesley Clark get kicked around the other day at
the latest Democratic debate. He’s peaked.
–Big blow to Republicans with the ’04 retirement of Oklahoma
Senator Don Nickles. One of my favorites.
–So I’ve had this crummy toaster for about 15 years and for the
last 14 thought of replacing it. But this week I said, “Trumbore,
it’s finally time for a new one” and I went to Williams-Sonoma
and purchased the best toaster in the world, the KitchenAid Pro
Line model. I mean to tell you, it has all kinds of lights and
beepers and …basically, it’s the best appliance I’ve ever owned.
Beer and toast at my place!
–Some of you around the country will get a kick out of this. The
New York Times had a piece on the cost of sending a child to
local preschools. One in Short Hills, N.J. charges $13,780.
Goodness, gracious.
–According to Runner’s World, only 29% of our nation’s youth
participate in daily physical education classes. I bet the Short
Hills preschool doesn’t have any, but I’m sure they teach the kids
how to download music.
–Something tells me that if those thugs who kidnapped New
Hampshire Senator Judd Gregg’s wife could do it all over again
they’d have picked someone less visible.
–Sorry, sports fans. I only occasionally listen to Rush Limbaugh
when I’m driving long distances and my life isn’t about to
change because he has a problem to deal with.
—
God bless the men and women of our armed forces.
God bless America.
—
Gold closed at $374
Oil, $31.97
Returns for the week 10/6-10/10
Dow Jones +1.1% [9674]
S&P 500 +0.9% [1038]
S&P MidCap +1.3%
Russell 2000 +1.3%
Nasdaq +1.9% [1915]
Returns for the period 1/1/03-10/10/03
Dow Jones +16.0%
S&P 500 +18.0%
S&P MidCap +25.0%
Russell 2000 +35.5%
Nasdaq +43.4%
Bulls 55.9
Bears 22.5 [ Source: Chartcraft]
*One year ago, the ratio was 31.0 bulls / 39.1 bears, bottoming
the following week at 28.4 / 43.2…in other words, it was the
contrarian indicator it’s designed to be. And now?
Have a great week. I appreciate your support.
Brian Trumbore
