Beware the Ides of March
There is a ton going on in March and I”m now convinced that
what transpires, particularly the last 10 days, could go a long way
towards determining the future direction for consumer confidence
in the U.S. and, by extension, world financial markets, the U.S.
presidential election and finally, the Clinton legacy.
No one else has mentioned this but when you add up the Russian
presidential election, an important election in Taiwan, President
Clinton”s trip to India, the Pope”s trip to the Holy Land, the
OPEC meeting, let alone another interest rate increase by the
Federal Reserve, it is not a stretch to see that real trouble may lie
ahead.
I have wondered aloud in this space when the confidence shift
would occur. Until very recently (like Friday), investors largely
ignored rising interest rates, focusing instead on the “New
Economy.” Simply put, we kept shopping, and not just the
individual, but corporations as well. That has translated into
booming earnings and, in many cases, frothy stock valuations.
Now with Alan Greenspan”s recent pronouncements (more on
this later), investors can no longer ignore the potential for more
interest rate increases down the road. And those increases will
finally begin to bite. Mortgage rates are going up, pocket books
will be hit and, someday, before this cycle is all over, we may
finally see some inflation (outside of the current increase in energy
prices).
As confidence begins to wane, we”ll begin to think twice about
that 6-foot TV or that Ford Expedition with its 44-gallon gas
tank. Stock analysts will slowly begin to lower earnings, after
years of raising them, and then a trend will be in place.
But the real collapse in confidence, the “wild card,” could come
about as a result of a crisis overseas. Again, March could be
telling in this regard. First, Russia.
Of course we all now know that Vladimir Putin will win his
election handily on March 26. But what the hell was President
Clinton thinking when he said of Putin this week, “Based on what
I have seen so far, I think that the U.S. can do business with this
man…He is capable of being a very strong and effective and
straight-forward leader.” [CNN interview.]
Since when were American presidents supposed to stick their
necks into foreign elections? And ”based on what I have seen so
far,” which is exactly what the President is seeing, how the hell
can you tell Putin is good for America? Here”s what I see, a
report from Grozny by The New York Times Michael Gordon.
“It is hard to find a single structure in the city center that has not
been wrecked by a bomb, damaged by artillery or racked by
gunfire…Grozny looks like Stalingrad after World War II.”
And here”s what one resident, an 80-year old woman, said.
“My apartment house was bombed about a month ago. The
entire district was burned down. Now 26 of us live in the cellar
with the rats. We melted snow to get water, and I won”t tell what
we eat. The Russians searched all our apartments, took all of my
money and stole all of our food.”
And as the Russian army pursues the remaining Chechen rebels,
they are indiscriminately bombing villages. Over 400 civilians
have been killed in the past week. The rebels who may have been
hiding in the villages didn”t fire back so as not to draw fire on
inhabited areas. No matter. Bombs away.
But most disturbing were reports late in the week that the
Russians have set up “filtration” camps, an effort to round up the
Chechen males, in particular, and systematically torture them.
The military is severely restricting press access and rights groups,
as well as NATO and the European Union, have been denied the
right to check these camps out for themselves. Putin tells the
West he”s handling the situation, yet his actions say otherwise.
And speaking of the press, still no word on what happened to
reporter Andrei Babitsky.
Should Putin take Russia back to its Cold War ways, the
drumbeat in the press will be enough to depress anyone. I, of
course, will pile on as well.
[And I must add one other note. This week Israeli Prime Minister
Barak said something very unfortunate. “Russia”s action in the
fight against terrorism in Chechnya is in the interests of the rest of
the world.” Barak was equating Israel”s own fight against
terrorism with Russia”s. I hope he wishes he could take that
statement back.]
Issue two in March, Clinton”s trip to India. I said it months ago,
this is not the time to go. Tensions are rising between India and
Pakistan and it is an incredibly volatile situation. Sending an
American president over there is not the solution. Rather it
requires behind the scenes diplomacy to diffuse the tension before
an escapade like this is tried. This is classic Clinton…incredibly
reckless and a security nightmare.
Issue three, the Pope”s trip to the Holy Land. I never thought I”d
say this about my Pope but this, too, is incredibly reckless. The
Vatican has totally mishandled the pilgrimage before it even
started by embracing Yassir Arafat and his vision for Jerusalem.
True, injecting politics into a trip of this sort was inevitable. But,
once again, the tenuous peace agreement between Israel and the
PLO could go up in flames. The Pope should wait…and maybe
until a new Pope enters the scene. What does this have to do
with the U.S.? A breakdown in the peace talks only encourages
Israel”s enemies, namely Iran, Iraq and Syria.
Issue four. Taiwan elects a new president. The significance here
is that all 3 candidates advocate some form of formal
independence from the mainland and a different kind of dialogue;
a “state-to-state” relationship that flies in the face of the “one
China” doctrine that has existed for decades. At least for a spell,
a further pickup in tensions will be unavoidable.
Issue five, OPEC. Geezuz, America. Calm down. Oil prices are
going to drop but the days of $11 a barrel oil and $0.90 at the gas
pump are long gone. We are so spoiled in this land of ours. The
price of crude is now back where it was almost 10 years ago. It is
interesting to note, however, that all those experts who initially
said rising oil wasn”t a problem for our economy, now are crying
wolf. The OPEC nations and key non-members such as Mexico,
have already said they recognize that the price is perhaps too
high. The last thing they want to do is contribute to a worldwide
economic slowdown. Most members of the cartel would agree
that $22-$25 is a more realistic target (and at that level, believe
me, energy stocks would perform very nicely). They will agree to
open the spigots a bit, with the result being that prices will decline
and eventually stabilize. If you own a SUV, I”m sorry you”re
currently paying more. But hey, that”s the price you pay for
polluting the air at a rate 4 times greater than a standard vehicle.
Bottom line, OPEC”s actions may actually play a positive role in
March.
Issue six, the Federal Reserve. They meet on March 21 and they will
raise interest rates again. And thus we close the circle. Rising
rates are supposed to hurt equity prices and finally they are.
—
Thursday, Fed Chairman Alan Greenspan gave his semi-annual
Humphrey-Hawkins testimony wherein he proceeded to make it
abundantly clear that the Fed was prepared to hike interest rates a
few more times (which should not be a surprise to regular
readers).
Greenspan maintained there is “little evidence” the economy is
slowing and, in spite of the continued tame inflation numbers,
“The profoundly beneficial forces driving the American economy
to competitive excellence are also engendering a set of imbalances
that, unless contained, threaten our continuing prosperity.”
And, “(The Fed) will stay alert for signs that real interest rates
have not yet risen enough to bring the growth of demand into line
with that of potential supply.” In other words, our boy is trying
awful hard to prick the bubble.
By Friday, the markets decided they had had enough. The Dow
Jones fell 300 points and the Nasdaq lost 3%. The Dow now
stands at 10219, 13% off of its all-time high level of 11722 set
just 5 weeks ago. The Dow is also now off 11% for the year as a
whole. But the Nasdaq remains about 8% ahead.
And if you have owned stocks with a “value” bent to them, I feel
for you. [I jettisoned my own value losers in the past few weeks.
Just call me Mr. Loss Carryforward.] I was glancing at the
Lipper mutual fund indexes Friday and for the one-year period
ending Thursday here are the performance comparisons.
Large Cap Growth +39%
Large Cap Value +7%
Small Cap Growth +110%
Small Cap Value +16%
I wish I could tell you when value will come back. The problem
is that if the economy finally begins to slow, the value or cyclical
plays certainly aren”t going to sprint ahead (as was the
perception, and case, this past week) but they also won”t fall as
much as the high-flying growth issues will.
As for bonds, it was another crazy week as supply issues clashed
with fundamentals. Check this yield comparison out.
1-yr. 6.24%, 2-yr. 6.63%, 10-yr. 6.49%, 30-yr. 6.16%
The short end continued to rise in response to Greenspan”s
statements while the 30-year rallied anew amidst dwindling supply
as well as a flight to quality on Friday. 6.24% on a 1-year,
guaranteed instrument, may not look too shabby, for once, in
comparison with returns on equities over the same period.
And I must add one important political note to Greenspan”s
testimony this week. While he continues to recommend that
Congress first priority should be to pay down the debt, he also
reiterated that if part of the surplus were spent otherwise, tax
reduction was more prudent than increased spending. Now watch
both parties continue to “spin” it to win it.
More International
Iran: One can not overestimate the importance of Friday”s
parliamentary vote. While final results are not known as of this
writing, it seems readily apparent that youth has been served and
the reformers did very well. More on this next week.
Northern Ireland: What is worrisome about the latest barrier to
peace in this troubled land, the IRA”s refusal to turn in their
weapons, is the sudden friction between the Irish Prime Minister
Bertie Ahearn and his British counterpart Tony Blair. Renewed
violence seems almost inevitable.
Austria: In a Newsweek interview, Austrian Freedom Party
leader, Jorg Haider, was asked if he was worried about economic
sanctions from other European nations. For example, Belgium is
advocating that their nation”s skiers stay away from Austria.
“If the Belgian skiers want to boycott us for ”moral” reasons, then
we”ll get more Dutch skiers – because the Belgians and Dutch
dislike each other. There”s no disadvantage for us.”
Haider”s Party advocates an end to immigration in Austria.
Similarly, Spain is suddenly having problems of its own. In the
southern part of the country violence against North African
immigrants, “Moors,” has been widespread.
Africa: At a conference on this disastrous continent, President
Clinton finally said what he and other leaders should have said
years ago. Regarding the AIDS crisis gripping the land, “We
shouldn”t pretend that we can give injections and work our way
out of this. We (instead) have to change behavior, attitudes.”
Idiotic tribal customs are destroying the people.
And in the Congo, where six nations are now slugging it out, a
video was taken by an aid group of the fighting between the
Hemu and the Lendu tribes (the war within the war). Victims
were disemboweled and some were missing their brains.
Meanwhile, Jesse Jackson is nowhere to be found.
The Caucasus: Talk about an environmental disaster, the cyanide
spill from a gold mine in Romania is wiping out all life in the
Tisza and Danube rivers downstream from the mine. Due to
incredibly lax standards, this is a bad taste of things to come in the
old Eastern bloc nations.
Japan: I have written recently of the problem with the massive
debt load that the government has to deal with. This week,
Moody”s rating service said “it will be extremely difficult in the
medium term for the present government or future governments
to deal with this very large burden.” They may lower their debt
rating for the government which hurts their prestige and forces up
borrowing costs. However, there is no danger of default.
WTO / Trade Update: Malaysian Prime Minister Mahathir
expressed a common sentiment in the developing world. He is
“frightened” by the growing power of global corporations, some
of which “are more powerful than mid-sized countries.” Now
Mahathir is a total dirtball but his views are closely followed
among the Third World nations. Also, by definition the number
of nations that fall under the category “least developed” – the
world”s poorest nations – has risen from 25 to 48 since 1971.
This Week in Politics
Of course in my Ides of March discussion I could have included
Super Tuesday, March 7. But first South Carolina. And if Bush
were to lose today, he”s toast. Recognizing that most of you will
read this after the results come in, nonetheless, for the sake of
having fun, I”ll go with Bush to win the primary. What was
interesting in the last poll taken by NBC was the fact that Bush
was favored over McCain, 57-27 by voters who called themselves
Republican. But in this primary voters can cross over and
McCain was garnering the Independents by a 3 to 1 margin.
Bush has been spending money at a record clip in an effort to beat
back the McCain insurgency. The $70 million he had raised? $50
million is gone. This was the Bush campaign”s worst nightmare.
A tough primary fight that depletes the coffers before they even
start the general election campaign (assuming they get that far).
But if you watched Tuesday”s Republican debate, you”d probably
agree with me that the way both McCain and Bush looked, Al
Gore emerged the winner. What a horror show.
Nationally, McCain continues to gain ground. While Bush still
leads 53-33, that is a substantial pickup and really doesn”t
accurately reflect the groundswell for McCain. Al Gore is
whipping Bradley, incidentally, by a 64-25 vote.
But better to focus on Bush / Gore, McCain / Gore. According
to Zogby (generally recognized as the best), the Bush / Gore race
is a virtual dead heat while McCain would beat Gore, 50-38.
So, even if Bush wins South Carolina, on Tuesday it”s Arizona
and Michigan. Bush and his backer, Michigan Governor John
Engler, have staked just about everything on the latter.
In New York, the Rudy Giulliani / Hillary race is dead even. Go
figure. While in New Jersey, former Goldman Sachs CEO and
Democratic candidate for the Senate, Jon Corzine, made the
following statement. “I”m interested in people and that”s why I”m
a Democrat.” I can see it”s going to be fun having him around.
Donald Trump dropped out of the Reform Party race. Did you
notice it just wasn”t the same after he dropped his arm candy,
Melania Knauss? But this just in…Melania is back! I”ll keep you
posted.
Note to Tim Russert: Stop calling quotes from 1982 and ”83
“current.” [Sorry, that”s for “Meet the Press” junkies.]
In the Republican debate, John McCain brought up the name of
Loral Chairman and #1 Democratic Party contributor, Bernard
Schwartz. Seeing as the Justice Department seems to have
forgotten that they were investigating Schwartz for potentially
passing weapons secrets on to the Chinese, it was good to see his
name surface again. If McCain wins the nomination you can be
sure he will press this issue into November.
And to McCain and Bush, stop whining about the other”s
negative ads. You”re both wimps on this count. [I watched the
PBS / American Experience episode on the Alexander Hamilton /
Aaron Burr duel of 1804. Now that was real negative
campaigning.]
Random Musings
–New Jersey Wildlife Update: We now have 80,000 Canada
Geese, soon to be 160,000. These foul birds dump 40 tons of
waste on our state each day! They are polluting the drinking
water, clogging up the sewage systems and impeding the accuracy
of my golf shots. They should all be shot, along with the deer, to
feed the needy. But I just heard of an organization called the
“Coalition to Prevent the Destruction of the Canada Geese.” Oh
brother.
–As I alerted you to, two weeks earlier, Maude Flanders (“The
Simpsons”) died a tragic death last Sunday. She was eulogized as
one who “didn”t grab our attention with catch phrases.”
–The Pentagon estimates its computer networks are hacked
about 250,000 times a year, 500 of which are considered serious.
–According to a survey, one person in 10 admits dating someone
he or she had never met until the moment their cars idled together
in traffic. The successful ones must have been using Mr.
Microphone.
–Ever wonder who is going to replace Louis Rukeyser? Not that
I”m forcing him out or anything. But my personal choice would
be Michael Holland. He has the same brand of humor, obviously
knows his stuff, and heck, Holland just seems like the kind of guy
you”d like to have a beer with. He”s that rare bird, a Wall Street
success story who doesn”t take himself too seriously.
–The following is probably more appropriate for “Bar Chat” but I
was upset at a piece Peter Golenbock wrote in the Wall Street
Journal concerning the passing of Dallas Cowboys legend Tom
Landry. Golenbock wrote of the “shoddy” treatment Duane
Thomas received and he called Thomas a “superstar.” Duane
Thomas was no superstar. His rookie year he had 800 yards
rushing but 4 years later, the chronic malcontent was out of
football having amassed a whopping 2,038 yards for his entire
career.
–And then there is the case of Charles Schulz (both Landry and
Schulz are eulogized in my 2/14 “Bar Chat”) and New York”s
Cardinal O”Connor. This week Congress authorized that both
should receive Congressional Gold medals for their contributions
to society. But I noticed that one congressman, and only one,
had voted against both measures. It turned out to be Texas
Republican, Ron Paul. So I e-mailed my displeasure to
Congressman Paul and he immediately replied. He explained that
each medal costs American taxpayers $30,000 to mint and that it
was unconstitutional to use public funds in this manner. He
attached the Congressional Record which showed that he had
asked every congressman to contribute $100, instead, to pay for
the medals themselves. Paul said no one agreed to this. I still
greatly disagree with his actions, but I respect him for not
ducking my inquiry.
–Speaking of Congress, I also noticed during Greenspan”s
Humphrey-Hawkins testimony Vermont Representative Bernie
Sanders. Sanders has an “I” next to his name to identify himself
as a true “Independent,” rather than a Republican or Democrat.
Geezuz, I don”t know why they don”t just change it to “C” for
Communist. This guy is one scary dude. He was all bothered
about the inequities between the rich and poor in America which,
I grant you, is a little disconcerting. But Sanders asked
Greenspan, “How do we do away with this disparity of wealth?”
Greenspan stood his ground. The wealthy get to keep their
money out of Sanders” hands, at least for another week.
–SEC Chairman Arthur Levitt, like Alan Greenspan, has issued
numerous warnings on the booming market which have
continually been ignored…but I haven”t, I haven”t! Anyway, this
week Levitt said, “My sense is that many investors have become
more emotional than intellectual about their investment decisions,
and this is the time to point out to them the importance of
analyzing carefully rather than impulsively…Any way you look at
it, many of today”s valuations seem to defy traditional
explanation.” [You tell ”em, Arthur.] Finally, “It is fair to say
that the biggest threat to future prosperity is when people lose
perspective.”
–From Goldman Sachs Vice Chairman Robert Hormats, when
asked if taxpayers deserve to get the surpluses back as tax cuts.
“No. Taxpayers benefited from the debt; they got lots more
services than they paid for.” Of course, Mr. Hormats, this
assumes that 100% of government programs are efficient and
effective. I beg to differ and this smacks of eventual income
redistribution to me. So folks, maybe you should watch your
wallet after all. And look for a new Communist Party ticket
of Hormats and Sanders in 2004.
–Arnold Palmer shot 72 in the first round of this week”s Senior
Tour event. That was better than Tom Watson, Ray Floyd and
Lanny Wadkins. I”m tellin” ya, Arnie”s gearing up for the
Masters!
–Finally, a last note about Charles Schulz. I saw “Garfield”
creator Jim Davis on the tube and he mentioned that for many
kids, reading those Holt, Rinehart “Peanuts” books was the way
many kids learned how to read. Whenever I was home sick from
school, my Mom would get me one of them. Couple that with a
little jell-o and a good Mets game and I was quickly on the road
to recovery.
Linus: After you”ve died, do you get to come back?
Charlie Brown: If they stamp your hand.
Gold closed at $307
Nymex Crude Oil, $29.50
Returns for the week, 2/14-2/18
Dow Jones -2.0%
S&P 500 -3.0%
S&P Midcap -1.0%
Russell 2000 +1.6%
Nasdaq +0.4%
Returns for the period, 1/1/00-2/18/00
Dow Jones -11.1%
S&P 500 -8.4%
S&P Midcap -1.3%
Russell 2000 +8.1%
Nasdaq +8.4%
Bulls 53.7%
Bears 26.9% [Source: Investors Intelligence]
Coffee Mugs – Folks, we are almost out. If you haven”t ordered
yours, click on the icon in the upper right hand corner. By
Tuesday morning, the offer will be over. Don”t all rush to sell
them on eBay.
And, as always, I appreciate your ongoing support. Keep
spreading the word.
Brian Trumbore
