[Posted 7:00 AM ET]
What’s Really Important
Excuse me for being a bit more cynical than usual in this period
leading up to the election. Yes, I wish 44 million in this country
didn’t have to go without health insurance, though I’m not sure
how much I’m willing to pony up to lighten the burden of others;
I care about cultural values but at a basic level simply wish
Americans treated each other with more respect than they
currently do; I care about education, but I’d start with teaching
our kids some basic history and not letting them out of high
school until they understood it; I’m against the Bush
administration”s policy on stem-call research.
I want a strong defense; clean government; transparent financial
markets; clean air and water, but also a balanced environmental
policy that allows for drilling in the Arctic National Wildlife
Refuge (to cite but one example); low taxes and dramatically
reduced domestic spending with the states picking up the
responsibility in many areas.
But, you know, none of the above means anything unless our
nation is secure and I’m cynical because our system of
government, with all its entrenched special interests and the
emphasis on winning elections first and serving the people
second, is not an ideal one for today’s war on terror. More on
this thought later.
Last Sunday on “This Week,” George Will said “This is not an
election where Americans basic freedoms are at stake” and he
went on to talk of the similarities in policy initiatives, when you
strip out the sound bites, between George Bush and John Kerry,
as on Iraq, trade, and tax cuts (Kerry would reduce the corporate
rate, after all). As Will added, “Robert Rubin is not exactly
Lenin.”
But at the same time I couldn’t agree more with Patrick
Buchanan when he labeled the Democratic convention a “fraud,”
at least in terms of the party’s core makeup – virulently anti-war,
anti-Bush – and the rhetoric then presented to us.
Columnist David Brooks of the New York Times weighed in this
morning on John Kerry’s speech.
“What an incoherent disaster….For every gesture in the direction
of greater defense spending, there are opposing hints about
reducing our commitments and bringing the troops home. He
proves in the speech that he can pronounce the word ‘alliances,’
and alliances are important, but alliances for what? You can’t
base an entire foreign policy on process….
“And it all brings back the memories of Kerry the senator. For
though convention viewers may not be aware of it, Kerry has
actually had a career since his four months in Vietnam – mostly
in the Senate. It’s not true that Kerry is a flaming lefty (he’s a
genuine budget hawk and he voted for welfare reform), but he
was wrong on just about every major foreign policy judgment
of the last two decades.”
Republicans were told this week that President Bush “misled”
the American people regarding the war in Iraq so let me reiterate
that I strongly disagree and I don’t think for a minute that leaving
Saddam in power would have been a good thing.
Of course the president made some colossal mistakes, well
catalogued in this space, and U.S. credibility is at an all-time
low. But I’ll tell you what’s about to hit us in the face…Iran.
And it will be further proof that we, the West, had to begin to
effect change in this entire region before the fundamentalists
totally took over. If not now, when?
The mullahs are desperate. They not only don’t want the Iraqi
experiment with democracy to succeed, they desire a full nuclear
arsenal. So what came out of the region this week, on the heels
of my comments last review?
The U.S. and Israel, as well as France, Germany and Britain are
all in agreement that Iran restarted its weapons program in total
defiance of the UN and the International Atomic Energy Agency.
Iran is pursuing its quest to enrich uranium which would leave it
one step removed from terrorizing the world, especially when
one considers the proxies Tehran could line up to act on its
behalf.
In the next few weeks the IAEA is going to be issuing a new
report that promises to be tough and then in September the full
board will gather to decide on the next step, probably action in
the Security Council which would then spell out, yet again,
who’s with us and who’s against us. Meanwhile, next week
Europe will hopefully weigh in and with conviction.
The timetable is faster than once thought and there is the chance
that Israel could act before the West does. Where the U.S.
suffers, of course, is in losing credibility over the WMD issue. It
hurts the White House big time. Margaret Thatcher would say
“it’s no time to go wobbly,” yet there was renewed talk this week
of pulling U.S. forces out of Iraq sometime in 2005. I know I’m
repeating myself, but the future is grim unless we keep the heat
on, now more than ever.
Of course it didn’t help that Iraq itself had a bad week. The
kidnappings are having a more deleterious impact than even the
car bombs. And while you and I, and our president, can say
“stand firm on terror” to the foreign governments and companies
whose citizens are being abducted, what would you do if you
were director of the Jordanian outfit who saw two of his
employees kidnapped, and then received a death threat from
the father of one? [Specifically, the father threatened to chop off
the director’s head unless he complied with the demands.]
And then at week’s end the council slated to meet to select a new
interim Iraqi parliament postponed its loya jirga until August 15,
at the earliest, over security concerns. I can’t say I blame them,
but it’s another blow.
However, Saudi Arabia, concerned for its own safety, is
proposing an Arab force to work alongside the Iraqis. Many
Iraqis don’t want this, though it’s a step in the right direction.
Prime Minister Allawi, in attacking the “forces of evil,” said:
“We are going to suffer casualties. I call upon the leaders of the
Arab and Islamic countries to close ranks. It is our fight. These
are people who claim to be part of Islam. They are not. They
claim to be part of the Arabs. They are not.”
Finally, to close the circle, I have this to say about the 9/11
commission’s report. John Kerry said the panel should continue
its work and he promised to enact all of its recommendations.
For his part, President Bush will soon begin issuing executive
orders where permissible. This is a start but as I noted above our
system does not allow us to act quickly in all aspects and it’s the
hope here that President Bush goes to the American people to do
what I’ve long called for. Explain again what we’re up against.
Level with the people that it is going to cost great sums of
money…and then spend it, immediately. Before we hold
hearings on the newly proposed intelligence structure, at least
secure the borders, ports, nuclear and chemical plants as best we
can. We owe this much to future generations of Americans and
to do otherwise virtually guarantees failure.
Wall Street
The market finally rallied after 5 straight down weeks for both
the Dow Jones and S&P 500 (4 for Nasdaq) as traders chose to
focus on the positives over the negatives. Existing home sales,
for example, were up in June, a pleasant surprise after the
previous week’s data that new home sales were way off, and two
readings on consumer confidence showed gains. But the figure
for June durable goods (big ticket items), while up, wasn’t as
strong as expected and the first preliminary reading on GDP for
the second quarter came in at only 3% (though the final Q1
figure was raised to 4.5%).
And then you have energy, with the cost of crude hitting another
high, over $43 thanks to the Yukos situation and the other usual
suspects including Nigeria, Venezuela and Iraq. Globally, it’s
the same story. Where do you come up with the supply to meet
still surging demand? [Read my “Wall Street History” piece for
more insight on this topic.] One immediate issue in this arena is
the August 15 election in Venezuela. The potential for mass
civil disobedience is great and this would severely impact
production, Venezuela being a prime supplier to the U.S.
And let’s take another look at real estate. I was reading a
Washington Post story on the local D.C. area market. Just like in
New York and California, to cite two obvious examples, the
Washington / Virginia / Maryland suburbs are in nosebleed
territory. Townhomes that sold for $275,000 three years ago are
now going for $525,000. Yet one local expert observed,
“Current price levels are sustainable (and) supported by the
fundamentals.”
No they’re not. Ian Morris, chief economist for HSBC securities
is more on the mark, in my humble opinion. “The bubble
psychology has manifested itself in very rich valuations. House
prices relative to income, rent, replacement-cost and home equity
have set new highs. Twenty states that account for half of the
population look shaky.” [Bloomberg News]
Again, prices don’t have to collapse to have a major impact on
our economy. It’s about the flipside of the wealth effect and
those who are leveraged way beyond what would be deemed by
others to be prudent.
Alan Greenspan’s Federal Reserve Board created this bubble and
now it’s in a box. To use a golf term, they never should have
gone low (1% on the federal funds rate) in the first place, but it
stoked real estate at a time when both the consumer and
corporations were cutting back. Real estate (and to a lesser
extent tax cuts) saved the economy from entering a deep
recession vs. the mild one we experienced.
But now when the Fed wants to raise rates, real estate’s
contribution is on the verge of flat-lining, at best, and the
pronouncements from many companies on the capital spending
front for the remainder of 2004 are less than rosy. Inflation also
isn’t the issue it once was, outside of selected commodities, and
the Fed is increasingly going to look like a band of idiots if they
keep raising rates in the face of a decelerating economy. After
August’s meeting, where they’ll hike another 25 basis points, I
think they should stop because the fundamentals won’t warrant
any further moves.
The real problem is we should be going from 2 to 2.5%, not 1 to
1.5%. Aside from the fact savers are getting screwed, the Fed
still has little room to maneuver when the global economy flips
…and it will.
Street Bytes
–The Dow rose 1.8% to 10139, the S&P gained 1.4% and
Nasdaq picked up 2.1% to 1887. Don’t go crazy though, folks.
Hold onto your wallets.
–U.S. Treasury Yields
6-mo. 1.75% 2-yr. 2.68% 10-yr. 4.47% 30-yr. 5.20%
The 10-year broke over 4.60% before rallying on the less than
expected number for 2nd quarter GDP.
–The Yukos saga continued with this week’s action including
the issuance of an arrest warrant for a large shareholder and close
aide to Mikhail Khodorkovsky on murder charges. The
government also threatened to force Yukos to suspend
production early in the week but a firestorm of criticism, and a
new spike in prices, led to a change in thinking. As of this
writing, however, there is still no resolution regarding the fate of
this oil giant. Longer-term, the Kremlin is proving it’s above the
law. Who will be willing to take risks and invest in Russia’s
future?
–Japan’s industrial production fell in June as tech companies
ratcheted down expectations for the remainder of the year.
Sound familiar?
–China’s producer prices rose 6.4% in June. This should be the
peak.
–Bill Clinton had a good point in his speech on Monday; that
being the U.S. shouldn’t be in a position where both Japan and
China are financing our deficit. Probably only 5% of Americans
recognize the inherent problem here, but you all should. When
the music stops, you’re on your own finding a chair.
–The situation with UAL and its various pension funds is getting
ugly as now the Pension Benefit Guaranty Corp., which would
have to fill the breach (at about 60 cents on the $dollar should
UAL formally terminate the plans), claims UAL illegally secured
its most recent $500 million loan on conditions not permissible
by law.
–Italy’s Prime Minister Berlusconi won a battle over pension
reform in parliament. Currently, Italians can claim a full state
pension at 57, assuming 35 years of work. Now, beginning in
2008, you’ll have to be 60. That’s one small step for entitlement
reform in Italy, one giant leap for Europe…if they choose to
make it so.
But regarding Europe overall, Jeffrey Garten, dean of Yale’s
School of Management, had the following opinion in Business
Week.
“The EU’s economic and social model is broken. It’s not just
that this past decade has been one of anemic growth and double-
digit unemployment for the Continent, nor that projections are
for a continuation of the same. More fundamentally, Germany,
France, and Italy – which together account for over 60% of
activity in the euro area – will be unable to compete with the
U.S. on one side and China on the other. They are stuck in a
time when it was an asset to have cozy banking relationships,
permanent job security, and sky-high government-financed
entitlements.”
Garten then quoted a strategist in Geneva, who lambasted
European politicians.
“They are cowards because they have not leveled with European
citizens about how dire their circumstances are. Europeans have
been deluded into thinking that incremental policy changes will
work.”
–On an average day, about 25% of Norwegians are absent from
work, according to a story in the New York Times by Lizette
Alvarez. Officials in Norway are rightfully concerned their once
vaunted work ethic is collapsing. It turns out the average
Norwegian is off an incredible 4.8 weeks each year…not
including vacations! In other words, thanks to its oil wealth and
a lopsided social safety net, Norway is one fat, happy nation.
But the flip side in Europe is Portugal. The Portuguese are the
hardest workers, taking an average 1.5 weeks off. So here’s how
I’m using this information. I vow to put 1% of my investable
assets in Portugal as both a show of support and because I want
to make money. [Or I’ll go there and spend the 1% on food and
drink. Decisions, decisions.]
–Royal Dutch Shell was fined a collective $150 million by the
SEC and UK regulators for cooking its books.
–Four executives of supermarket king Royal Ahole were
indicted for overstating earnings to the tune of $800 million.
–Incredibly, Canadian telecom equipment giant Nortel warned
for the 98th time, in this instance saying the 1st half will not be as
strong as the company recently contended it would. Nortel still
hasn’t finished the internal investigation into its accounting
issues. The shares tanked anew.
–Former Boeing CFO Michael Sears pled guilty to deceiving the
U.S. government on a $23 billion contract for air tankers; a deal
that involved a former Pentagon official who has also pled guilty.
Former CEO Philip Condit, though, has not been accused of any
wrongdoing, yet.
–The administrator for Parmalat’s bankruptcy is suing Citigroup,
alleging the investment bank covered up Parmalat’s true
financial state and encouraged investors to buy Parmalat’s bonds
anyway. Of course that’s exactly what Citigroup did…it’s what
they all do.
–And Citigroup is one of four firms, the others being Deutsche
Bank, Goldman Sachs and Miller Tabak, that were fined $5
million each for scalping bond investors who bought and sold
corporate paper. One excuse for the misbehavior was that the
positions were in “distressed bonds” that are normally illiquid.
But the mark-ups were often 10%+! The great Wall Street rip-
off continuuuuuues.
–The SEC has launched an ‘informal’ inquiry into Krispy Kreme
and possible conflicts of interest in various facets of the
operation. The stock continued its slide from its high of $50 to
$15. As for yours truly, I noted the other week that I have two
glazed doughnuts each morning. These are from Dunkin’
Donuts, not Krispy Kreme. I am not a target of this particular
investigation.
–Google announced that it plans on selling its IPO for $108-
$135 a share, giving it the same market value as McDonald’s.
For the 1st six months of 2004, Google also stated its revenues
were roughly in line with Yahoo’s. That’s all you need to know.
Yahoo is still overvalued, Google will be shortly as well.
–In a merger in the contact-lens industry, Cooper Companies is
acquiring Ocular Sciences, but you still wear just one in each
eye. I’m afraid some may think otherwise.
–Refiner Valero Energy, a company I know a thing or two about
(hint, hint), reported spectacular earnings for the 2nd quarter and
in discussing prospects for 2005, chairman Bill Greehey said
“It’s easy to see why we are so confident that 2005 will be
another outstanding year for Valero.” Boy, just from a PR
standpoint, and Sarbanes-Oxley, I wouldn’t have used the word
‘outstanding.’ He’s setting himself up for a fall. [The preceding
was basically for the archives.]
–Speaking of oil, Exxon Mobil earned a cool $5.79 billion for
the quarter, or about 8,627,000,000,000,000 Turkish lira.
Seriously. [$1 = 1,492,000 lira. They have a saying in Turkey.
“Everyone’s a millionaire!”]
–Moody’s cut AT&T’s debt to junk status, meaning that only
folks like Fred Sanford would touch it. Moody’s cited
“relentless” competition in the telecom sector.
–The U.S. levied tariffs on shrimp imports from Brazil, Ecuador,
Thailand and India to combat dumping, with the Commerce
Department ruling the four were selling it at “less than fair
value.” I’ve gotta tell ya, ever since the voice for Charlie Tuna
passed away, the fish have been, er, voiceless. I mean what does
the other side say?
–Inflation Update: Corporate CEO pay among the top 500
companies in America rose 22% in 2003. [Wha? That’s
inflation!] Perhaps more to the point, our staff reporter’s favorite
vodka, Elephant, has risen about 15% in the past year. [In this
instance it’s probably best to protect the man’s identity.]
–But here’s an example of disinflation. My property taxes for
the next year are rising at only a 3.2% rate.
–My portfolio: I added a little to my Singapore position and a
beaten down software stock. But don’t read too much into this.
I’m about 77% cash, 23% equities.
Foreign Affairs
Pakistan: The leader of the African embassy bombings of 1998
was arrested here. Pakistan has now captured 500 al Qaeda,
according to them, including Abu Zubaydah and KSM. You just
wonder how much longer President Musharraf can walk this
tightrope.
China: A Paris-based press freedom outfit blasted both Yahoo
and Google for allegedly cooperating with the Chinese
government in its efforts to censor certain sites, a topic I
broached years ago. It’s a disgrace. For example, over there if
you type in “Taiwan or Tibet independence” the true sites
addressing the topic would be blocked. Meanwhile, China is
punishing those Taiwan businessmen seen as supporting
independence by restricting their access to mainland
opportunities, which means there are others who are towing
Beijing’s line and not necessarily acting in their nation’s best
interests.
This week also saw a renewal of harsh talk on the military front,
with Taiwan’s President Chen Shui-bian calling for a new
submarine fleet (the existing one is pitiful), something the U.S.
has been pushing as well, while Commie officials appear to be
targeting 2006 as the year when war could be waged unless Chen
backs off his plan to hold a referendum on a new constitution at
that time.
Israel: Prime Minister Ariel Sharon acceded to the mandates of
the Israeli Supreme Court and will run the security fence closer
to the 1967 borders, thus reducing hardships on the Palestinians.
But 100,000 Israelis protested Sharon’s plans to pull out of Gaza.
Meanwhile, Palestinian Prime Minister Qureia, in another pitiful
display, gave in to Yassir Arafat and agreed to stay on after
resigning earlier over the lack of reform in the Palestinian
Authority. So Qureia thus becomes StocksandNews’ “Toady of
the Week” / Middle East edition.
Russia: A defense ministry study found that deaths not related to
military action were 500 in the first half of this year, with
suicides up 38% at 109. The bulk of the other 400 or so are tied
to hazing, a vicious tradition in the Russian Army. [Many of the
suicides are obviously tied to the hazing as well.] Separately, a
poll revealed that 70% of Russians haven’t used a bank since the
1998 financial crisis. The head of the research firm observed,
“Confidence in our financial institutions has been disgraced by
our history.” [Moscow Times]
–Afghanistan: Hamid Karzai announced he will be one of about
20 candidates for president in the October 9 election. Violence
leading up to this vote could impact the U.S. election a bit,
depending on the severity of it.
–Mexico: Emigrants sent a record $7.9 billion home the 1st half
of 2004. The total was $13.4 billion for all of 2003. To put this
in perspective, even 2003’s pace was greater than the amount of
direct investment into the country. Each year, 300,000 Mexicans
leave for the U.S. [L.A. Times]
Brazil: The country announced it will begin shooting down drug
planes. Crime has been spiraling out of control in the big cities
as the drug lords overwhelm the local police, who are corrupt to
begin with.
Random Musings
–Convention / Campaign Tidbits:
John McCain, had he run as the 3rd party candidate I hoped for,
would have won this election.
Good grief. The hip hop community is attempting to gear up the
vote. Oh yeah, we want these uneducated jerks to go to the polls.
Then again, I probably shouldn’t lose sleep over this one. Every
four years we talk about young people finally caring enough to
vote and then only about 30% of 18-24-year-olds actually do.
I got a kick out of all the hoopla surrounding Illinois senate
candidate Barack Obama. I seem to remember Julian Bond
making a similar impression back in 1968 and that proved to be
the high point of his political career. No doubt Obama has a
bright future, but he’s now going to be on a national stage and
the knives will be out. And looking out to 2008 (assuming Kerry
loses) or 2012, it really makes no sense to put him on the ticket
in the veep slot since the black vote is already wrapped up.
My friend Johnny Mac mused, “I wonder how Edwards the Elder
feels about having his life portrayed as a loser?” [Johnny and I
both like Mr. Edwards. He just seems like a real down to earth
fellow. And what’s wrong with being a foreman in a mill?
Nothing.]
I know I’ve said this about 40 times before, but it is totally
despicable that Al Sharpton receives even one minute of air time.
Anchor Tom Brokaw isn’t afraid to voice his opinion as he
rapidly approaches the end of his career, immediately pointing
out after Hillary’s little speech that she didn’t use the word
‘husband’ once.
Best convention speech I ever heard is still Mario Cuomo’s 1984
masterpiece. [This doesn’t mean I ever supported him…it was
simply a great address.]
Sorry, I’m not a Teresa Heinz fan, but I’ll be fair the rest of the
way, as long as she is. I thought Alexandra Kerry was very
effective. Chris Heinz, though, is the kind of cocky guy I
wouldn’t give the time of day to.
Tipper Gore had a major wardrobe malfunction and I was
surprised it received so little attention. Goodness gracious,
woman, you’re 55. Where’s your dignity? [In case you missed
it, it appeared she wasn’t wearing a bra. And thus we wrap up
our exclusive convention coverage.]
–Economist Robert Samuelson, writing in the Washington Post,
discussed the idea of two Americas and John Kerry’s “squeeze”
theme.
“The appeal is widespread, precisely because so many people
feel – or fear – it. Kerry can also offer superficial solutions: new
tax write-offs for college tuition; new subsidies for health
insurance; promises to cut dependence on costly foreign oil.
Similar solutions have been offered before and, had they worked,
wouldn’t be needed again. The other advantage of focusing on
the middle class is that it distracts from dealing with the poor.
Here, Kerry has made some proposals (particularly for health
insurance), but his emphasis remains on the bigger political
target.”
And on the issue of why Americans often feel insecure,
Samuelson offers up this explanation.
“Americans’ obsession with advancement, though easy to
satirize and full of drawbacks, is both a measure of freedom and
an engine of economic vigor. It encourages risk-taking and hard
work. Unfortunately, it also creates stress. The economy
involves other double-edged bargains. In America workers are
more easily fired than in Europe; this too elevates insecurity.
But Europe’s job protections discourage job creation (because
firms know they can’t easily shed unneeded workers).”
–I can’t wait until after the election when I vow to go back to the
simpler things in life, like watching “Emeril.” I was tired of the
convention coverage at one point and flipped him on for the first
time in ages… “We get a lot of requests for these pan sauces
…let’s add some hot sauce here to kick it up a few notches!”
[Woo Woo!] Now that’s what I’m talkin’ about.
[I also flipped on Martha at one point, who was instructing us on
how to make Velcro strips for our television remotes. This I
don’t need.]
–I was reading in the Los Angeles Times that one big
beneficiary of U.S. military largesse and strategic redeployment
is Guam, not that I didn’t already know this. But having spent a
lot of time on the island, and with the locals being some of the
nicest people in the world, I forgot how much real estate here has
collapsed thanks to a horrific typhoon and the Asian financial
crisis of 1997-98. I only bring this up, folks, because if you’re
looking for a tropical paradise, good condos can be had on a
beautiful beach for about 50% of their 1991 price. Just watch out
for the brown tree snakes. [The author of the article
conveniently forgot to mention this potential deal breaker.]
–According to the International Maritime Bureau, acts of piracy
are off 20% thus far in 2004 vs. 2003. Indonesia is the worst
place with 50 attacks. 20 have occurred in the Strait of Malacca.
30 have been killed thus far in ‘04. A friend of mine, Manny,
told me the other day about an experience he had off Ecuador
years ago when pirates boarded his small boat. He thought he
was a goner when he could only produce $36. I would add you
should never mislabel your catch. If pirates ask for red snapper,
don’t give them scrod and say it’s snapper. You’re just asking
for trouble.
–Fashion mogul Donatella Versace is in drug rehab. I’m
shocked!
–New research reveals that Napoleon may have died from
having too many enemas.
–When I brought up the comic strip “For Better or For Worse”
last week, I mused about daughter Elizabeth and her new
motorcycle. Little did I know this week that Mrs. Dingle would
have a stroke. So my friend Jeff B. and I implore Lynn Johnston
to bring back the laughs. We have enough depressing stuff to
deal with.
—
God bless the men and women of our armed forces.
God bless America.
—
Gold closed at $393
Oil, $43.80………..YIKES! [You all may want to start drilling
in your backyards. You might strike it rich, a la Jed Clampett.]
Returns for the week 7/26-7/30
Dow Jones +1.8% [10139]
S&P 500 +1.4% [1101]
S&P MidCap +1.3%
Russell 2000 +2.2%
Nasdaq +2.1% [1887]
Returns for the period 1/1/04-7/30/04
Dow Jones -3.0%
S&P 500 -0.9%
S&P MidCap +0.5%
Russell 2000 -1.0%
Nasdaq -5.8%
Bulls 51.1
Bears 22.3 [Source: Investors Intelligence. I was reading Alan
Abelson’s column in the 7/26 edition of Barron’s and he pointed
out that there have been something like 93 (by now) weeks
where bulls outnumbered bears…more than any time in the bull
market of the 90s. I haven’t had a chance to verify this, but it’s
interesting. And yet another reason why I’ll continue to post
these numbers.]
Note: Read Dr. Bortrum’s column, if you aren’t already doing so
on a regular basis. He’s having a tough time with chipmunks.
Have a great week. I appreciate your support.
Brian Trumbore
