[Posted Monday Aug. 30, 7:00 AM…I’ll return to my normal
7:00 AM ET, Saturday routine next week.]
I spent the past five days in Ireland, participating in an overseas
member golf tournament at Lahinch, one of the world’s great links
courses. But this meant there was no way I could do a column in
the normal time slot. Western Ireland (County Clare) is perhaps
the worst part of the world for Internet access, or so it seems, as
the hotels haven’t modernized on the telecom front. Anyway,
you’ll have to forgive me for this abbreviated review. Also
understand I didn’t pick up a newspaper for two days, believe it
or not.
What I did see in terms of Wall Street and the global economy
was increasing talk of a housing bubble. Britain reported new
home loans registered the biggest drop in a decade and since
betting is legal here, on all manner of things, there has been a
surge in wagering on a housing crash, with the majority saying
home prices in the U.K. will fall by 8% next year. Just last
Tuesday, economists Robert Shiller and Karl Case wrote an op-
ed in the Wall Street Journal on the situation in the U.S. In their
own survey work of the Boston, Los Angeles and San Francisco
markets, Shiller and Case found that a startling 28% of home
buyers in 2004 expect 20% annual appreciation for the next 10
years. The two then conclude:
“A bubble occurs when exaggerated expectations of future price
increases generate unusual demand either by people who fear
being priced out of a market or by investors hoping to make a lot
of money fast. A bubble is a self-fulfilling prophecy for a while,
as successive rounds of buyers push prices higher and higher.
But the willingness to continue to pay higher and higher prices is
fragile: It will end whenever buyers perceived that prices are no
longer going up. Hence, bubbles carry the seeds of their own
destruction. Only time is needed for the bubbles to end.”
Elsewhere on the economic front, the big story was the
continuing slide in the price of oil to the $43 level, primarily on
the easing of tensions in Najaf. $43, though, is still darn high
and as PIMCO’s Mohamed El-Erian pointed out in Barron’s, the
exporting beneficiaries are turning their petrodollars into U.S.
Treasuries, a big reason why interest rates have been tame in the
face of renewed tightening by the Federal Reserve.
This coming week we have the August employment report. If
it’s weak, not only does that help the Kerry campaign but it will
be hard for the Fed to then raise interest rates at their September
21 meeting. Meanwhile, the durable goods number for July was
up a promising 1.7%, but Wal-Mart announced back-to-school
sales in August were tepid while new home sales fell 6.4%.
Nonetheless, various Fed governors have issued optimistic
appraisals of the economy.
Finally, on a political note, the White House was hurt by figures
from the Census Bureau showing the number living on poverty
in America has risen while 45 million now go without health
insurance, both boons to the Kerry campaign. I just wish we’d
all stop talking about Vietnam and focus instead on Iraq, Iran,
North Korea, Taiwan, energy and other important domestic
items. Hopefully the candidates will comply, beginning this
week in New York.
Street Bytes
–It was a dull week in the markets with little real news, though
the broader averages all staged rallies with the Dow Jones up
0.8% to 10195 while Nasdaq added 1.3% to 1862.
–U.S. Treasury Yields
6-mo. 1.78% 2-yr. 2.48% 10-yr. 4.22% 30-yr. 5.02%
Rates were once again basically unchanged as bond traders
mark time until Friday’s jobs figures.
–Citigroup is facing another massive lawsuit for its role in the
collapse of Enron, this time to the tune of $2.5 billion for alleged
fraud. The investment bank has already set aside $6.7 billion to
pay for earlier legal actions.
–Deutsche Bank Securities agreed to pay $87.5 million as a
penalty for its role in the stock research scandal. Deutsche Bank
had failed to turn over internal e-mails during the original
investigation into Wall Street over a year ago.
–Related to the above two cases is the fact the big Wall Street
firms are losing an increasing share of the high net-worth
market (in this instance defined as individuals with $10 million
and up), with the share dropping from 37 to 30 percent. The
chief reason cited by this group of investors is perceived
conflicts of interests, best epitomized by the research scandal as
well as the likes of Enron and WorldCom. [Bloomberg News]
–A friend of mine in his 50s asked me to take a look at his
portfolio and it was distressing to see what his advisor, from a
big Wall Street shop, had selected for him. 8 of the 10 stocks
were tech-related and then he owned 8 equity mutual funds,
many of which were aggressive and had overlapping portfolios.
Unfortunately, like so many others, he bought into these issues in
1998-99 and was obliterated. It didn’t have to be this way and it
ticks me off to no end just how awful, and irresponsible, some of
the brokerage advice is. It’s also but another example for those
perhaps less sophisticated. You’re better off just sticking to an
index fund for your equity exposure, along with reading this
column for some balance.
–My portfolio: I remain 75% cash / 25% equities. Haven’t had a
chance to check on the cash stuffed in coffee cans at George
Washington’s headquarters in Morristown, New Jersey since my
return from Ireland. I assume it’s still there.
Foreign Affairs
Iraq: Aging Ayatollah al-Sistani led a remarkable display of
people power that resulted in Moqtada al-Sadr finally
relinquishing control of Najaf and the Imam Ali shrine, thus
ending weeks of intense fighting here. Al-Sadr’s militia,
however, once again slipped away amongst the teeming masses
that arrived from all corners of the country after al-Sistani pled
for a settlement. Before the agreement, Richard Hart Sinnreich,
a military historian, had this comment in an op-ed for the
Washington Post.
“As events in Najaf reveal, military operations in Iraq continue to
fall between two levels, destructive enough to provoke Iraqi
resistance but not ruthless enough to suppress it.”
Both al-Sistani and al-Sadr undermined the government of Prime
Minister Allawi and for his part al-Sistani will now exact a price
for his role as “peacemaker,” to the detriment of the Sunnis and
Kurds.
Russia: Days before a presidential election in Chechnya, two
commercial aircraft were brought down within minutes of each
other by Black Widows, Chechen women who have lost their
husbands in the war. The two boarded separately and at the last
minute, and no one stepped forward to inquire of their bodies in
the aftermath. This and the fact explosives were found on both
aircraft leaves no doubt as to who was responsible. 90 were
killed and the Russian people were initially upset the government
of Vladimir Putin refused to call it what it was, another in a
series of terrorist attacks related to the Chechen fiasco. What’s
also particularly scary about this latest episode is the growing
evidence that the Chechens have hooked up with al Qaeda.
On a related issue, I played golf this week with a U.S. professor
who teaches regularly in Russia and he agrees with me that the
1999 apartment bombings that claimed over 240 lives were
orchestrated by the Federal Security Bureau to garner support for
a second war on the breakaway republic.
As for the Russian economy, in the wake of the Yukos affair and
growing capital flight, Marsha Lipman had the following
comment in the Post.
“In Putin’s Russia, government control has increasingly become
an end in itself, not a means to achieve ambitious economic
goals. As in the late Soviet Union, mediocre bureaucrats are in
control, while those with skills, talents, high ambitions and,
especially, critical opinions are treated with distrust. If Putin
ever had a strategic economic vision for Russia, it has been
blurred by his Soviet background.”
China: I recently wrote of the following in my “Hott Spotts”
column, but as more figures come out it’s important to note how
China has become such a huge net importer of food due to the
fact it can’t feed its own. China faces huge shortages down the
road if it fails to figure out how to operate its agricultural
sector more efficiently. For example, in just the first half of
2004, imports rose 62.5% to $14.35 billion, with the U.S.
accounting for $5 billion of this. [Obviously good for our
farmers.]
South / North Korea: According to Defense News, the U.S. and
South Korea are having problems over the Pentagon’s troop
withdrawal plan. Washington is looking to draw down 12,500
by next year, but Seoul wants to delay the move until 2006 or
2008, assuming there’s a resolution in the North Korean talks by
then.
Meanwhile, Kim Jong-il’s reputed main wife (he has three,
loosely defined), Ms. Koh, died of cancer and there are worries
over the psychological damage this will have on Kim, Dear
Leader, who supposedly adored her.
Singapore: Talk about long speeches, new Prime Minister Lee
Hsien Loong gave his first address to the people, three hours
worth, and included a warning to Taiwan not to press its drive for
independence too far. Lee said “There is a real risk of
miscalculation and mishap.”
Random Musings
–As the Republican convention gets underway, President Bush
has been receiving more encouraging news on the poll front. The
anti-Kerry ads have had a devastating impact and surveys show
the senator’s military service is no longer a prime reason to back
him, though the same polls reveal that a majority of the
American people believe President Bush should disown the
spots. But as William Kristol of The Weekly Standard wrote,
“Kerry invited his fellow veterans to ‘bring it on,’ so they have.”
And it was former senator Robert Dole who blistered Kerry,
surprising some of us in the process.
“One day he’s saying that we were shooting civilians, cutting off
their ears, cutting off their heads, throwing away his medals or
his ribbons, the next day he’s standing there, ‘I want to be
president because I’m a Vietnam veteran.’ Maybe he should
apologize to all the other 2.5 million veterans who served. He
wasn’t the only one in Vietnam…And here’s, you know, a good
guy, a good friend. I respect his record. But three Purple
Hearts and never bled that I know of. I mean, they’re all
superficial wounds. Three Purple Hearts and you’re out.”
–Vice President Cheney came out against a constitutional
amendment banning gay marriage, saying it’s up to the people
and the states; a break from his boss’s stance.
–Lots of press in the British Isles on the bizarre tale of Lady
Margaret Thatcher’s son Mark, who was arrested for his alleged
role in a coup plot to take over the government of Equatorial
Guinea. Supposedly, the conspirators would then have divvied
up the vast natural resources of this nation that has a large
amount of oil in particular.
–The last time New York City voted for a Republican president
was Calvin Coolidge.
–A check of voting records shows 46,000 are illegally registered
in both New York and Florida. According to the New York
Daily News, one gentleman has voted twice in four presidential
elections.
–The saga of New Jersey’s despicable Governor James
McGreevey continues. In an August 22 op-ed piece for the New
York Times, McGreevey, in defending his resignation and his
refusal to allow a special election by stepping down before
September 3, wrote:
“Moreover, security concerns in light of the heightened level of
terror alerts surrounding the Republican National convention also
argue for continuity of leadership.”
This from a guy who hired Golan Cipel to be his homeland
security advisor. New Jersey Democratic Senator Jon Corzine
then concluded on “Meet the Press” the same day that “I do think
there’s a crisis of confidence with regards to government in the
state.” But then Corzine defended top McGreevey fundraiser
and billionaire developer Charles Kushner, saying he had “done
lots of good things for the people of New Jersey.” Just shoot me.
Following is a small passage from a report by Robert Rudolph
and John P. Martin of the Star-Ledger, the state paper.
James O’Toole, a career cop, was approached by Kushner to
participate in a blackmail scheme.
“Kushner explained the long running feud with his brother,
Murray, that had divided the family into two camps. Esther and
William Shulder stopped working for Kushner Cos. and sided
with Murray.
“O’Toole said Kushner then proposed videotaping Shulder in an
extramarital encounter and said he wanted to convince his sister
that her husband was unfaithful and drive him from the family.
Kushner insisted it was legal.
“The cop said he was stunned…
“O’Toole said Kushner gave him $10,000 cash and told him to
find a prostitute willing to lure Schulder into the trap. But
O’Toole said he and his brother were reluctant to recruit
anyone…
“O’Toole said he stalled for weeks, repeatedly telling Kushner he
couldn’t find a woman for the job.”
Kushner then took matters into his own hands and now he will be
serving 18-24 months in prison. Yet Senator Corzine, who has
received major dollars himself from Kushner, says Kushner is a
good man. That’s all you need to know about our future
governor, as it’s clear Corzine will seek the office himself next
year, assuming McGreevey doesn’t step down by September 3.
–Ann Woolner had the following comment on the Electoral
College for Bloomberg News.
“Those who think the Electoral College is good for America say
it forces candidates to campaign in states and in rural areas where
they wouldn’t otherwise go, and that it gives minority interests
bargaining power. If that were true, why are two-thirds of the
states – big ones, little ones, rural ones and urban ones – ignored
by presidential candidates?”
Good point, though I haven’t made up my mind how I really feel
on this one.
–I have a lot of readers in Argentina so it’s a good time to
congratulate this nation for its gold medals in men’s soccer and
basketball. As for the U.S., the women shined, taking gold in
softball, soccer and basketball, while the U.S. men choked their
way to a bronze in the latter. We also acknowledge Misty May
and her beach volleyball victory. Gotta love Misty, right guys?
And another round of applause for the Greek government for
staging the Games without major incident, even if the Greek fans
were often boorish.
–The Irish got all excited over their gold in an equestrian event,
the nation’s only medal. It’s funny seeing the reaction in the
smaller countries to such an achievement. It’s so often a huge
deal, while many Americans couldn’t give a damn about some of
our own success, including yours truly.
–After 16 trips to Ireland since 1989, needless to say I’ve seen
some changes, almost all for the better. The road system is
improving, for one thing, yet the country hasn’t lost its charm.
The economy overall continues to grow, too, but here there are
signs it’s being bit by outsourcing. One leading textile
manufacturer is moving its operations to China, throwing out up
to 400 in the process, while I saw a furniture maker also
decide to outsource to China. High-wage Ireland is going to
struggle some from time to time in this super-charged
competitive world of ours.
Over the years I’ve developed some real friendships in my
adopted town of Lahinch, including a fellow who runs the
sweater shop where I’ve dropped oodles of cash. Donogh said
the Irish are getting too greedy. It’s expensive to come here,
that’s for sure. Rental car prices, for one, are outrageous, and the
restaurants appear to have formed a cartel, jacking prices
together. So the concern is Ireland is losing its way, in this
respect, and if it doesn’t watch out tourism will fall.
But guess what was a pleasant surprise for yours truly this go
around? No smoking in the pubs. I awoke the first morning and
my clothes didn’t reek.
Finally, Edvard Munch’s “The Scream” best exemplified my golf
game this past week.
—
God bless the men and women of our armed forces.
God bless America.
—
Gold closed at $405
Oil, $43.18
Returns for the week 8/23-8/27
Dow Jones +0.8% [10195]
S&P 500 +0.9% [1107]
S&P MidCap +1.0%
Russell 2000 +0.7%
Nasdaq +1.3% [1862]
Returns for the period 1/1/04-8/27/04
Dow Jones -2.5%
S&P 500 -0.4%
S&P MidCap +0.5%
Russell 2000 -0.9%
Nasdaq -7.1%
Bulls 39.6
Bears 30.2 [Source: Investors Intelligence / Chartcraft…the
percentage of bulls is the fewest since mid-October 2002,
another good contrarian sign. The market bottomed on 10/9/02,
with the S&P 500 reaching its closing low of 776.]
Thanks for your patience this week. Heck, after all I’ve only
missed one of these in over 5 ½ years.
Brian Trumbore
