Folks, I have to be perfectly honest. I was prepared Friday
morning to attempt a humorous beginning to this week”s missive.
But as the carnage in the markets mounted during the day, I felt it
was totally inappropriate. I know many of you must be hurting
and I lost some myself this week.
But, at the same time, I have a job to do and it is to supply you
with commentary on the financial markets and the overall world
scene. Let me say up front that I am increasingly disturbed by
some trends I see unfolding, outside the financial markets, and
you can obviously agree or disagree with me. I do hope that my
market comments of the past few weeks got at least some of you
to rethink your holdings and maybe I saved someone out there a
few bucks. So first, here are the facts.
Year-to-date return as of Friday, March 10
Dow Jones -13.6% [9928 level]
S&P 500 -5.1%
Russell 2000 +19.6%
Nasdaq +24.1% [5048…record]
Year-to-date return as of Friday, April 14
Dow Jones -10.4% [10305]
S&P 500 -7.7%
Russell 2000 -10.1%
Nasdaq -18.4% [3320]
This past week”s Nasdaq performance was the worst for any
major index in U.S. financial history as it plunged over 25%. In
just 5 weeks the Nasdaq has now lost 34% from its all-time high.
The Dow is off “just” 12% from its high, correction territory.
On March 25 in this space I said that much of the action in the
Nasdaq was a “ponzi scheme.” I pointed you to my 3/24 “Wall
Street History” piece on the one and only, Charles Ponzi.
Hopefully you read it. And let me be clear about another matter.
The “business” of Wall Street is largely a game. Over time, if you
hold quality stocks, you can be a winner. But know one thing.
90% of the advice you get from Wall Street shills (the research
analysts) is worthless.
I hope some of you use my “Zacks” link. It gives you the
investment community”s opinion of individual issues as well as the
earnings expectations for those companies. Here”s what I
gleaned on Friday from plugging in some representative stocks.
–Cisco: 45 analysts rate it a “Buy.” 1 a “Hold” (E.D. Jones).
Meanwhile, Cisco has fallen from $82 to a low of $55 on Friday.
–Amazon.com: 20 “Buy” / 7 “Hold”
The stock has plummeted from $112 to a low of $41 Friday.
–AOL (which I own myself): 35 “Buy” / 3 “Hold”
All-time high $95, Friday low, $53
–CMGI (the big Internet holding company): All 11 “Buy”.
All-time high $163, Friday low, $50
–Microstrategies (the D.C. software outfit I have written of):
8 “Buy” / 1 “Hold” $333 to $33
–Yahoo!: 25 “Buy” / 4 “Hold” $250 to $111
So what do you see? Any “Sell” recommendations? Of course
not. Why? An analyst who has the guts to recommend selling an
issue, outright, will be black-balled from the corporation he is
negative on , his employer will lose out on future investment
banking business (like a stock underwriting), his boss (the
director of research) will be livid and eventually, the analyst
would be fired.
Using the above examples of widely held, or at least classic high-
flyers, how were you served by the Street? Pretty poorly. As a
matter of fact, less than 1% of analysts recommendations are to
“Sell”. Nope, wouldn”t be prudent. “Stocks, Mr. Client, only go
up and you can count on the ”All-Stars” of XYZ. We make
money the old-fashioned way…blah, blah, blah.”
Now let me say something about financial advisers (stockbrokers,
financial planners). I worked both for a major wirehouse as well
as a top mutual fund organization. The vast majority of them do
a terrific job and I will always have one myself. I need a coach, a
counselor, a good “listener,” as much as the next guy. And a
good adviser knows how to cut through his firm”s crap. As the
client, though, you can”t be afraid to bring these issues up. In
turn, you”ll get a straight answer.
Which leads me to the garbage I heard all week on the financial
networks (not from the anchors; some of whom, like CNBC”s
Ron Insana, are outstanding). No, I refer to the market
“strategists” who are paraded in front of the viewer. And as the
action was winding down on Friday, this one “veteran” (who has
been a staunch bull) kept telling the audience that all we were
experiencing was a “very nasty, normal correction” and that
“long-term fundamentals remain positive.”
Forget semantics for a second. Yes, the Dow is down only 12%
from its high but what you have seen in the Nasdaq is a “Crash!”
[A former mentor of mine, PIMCO”s Bill Gross, did use that term
on Friday, as well.] Most others were like Louis Armstrong
singing “What a wonderful world!”
And, of course, Goldman”s Abby Cohen was on TV Friday night
saying “nothing has changed.” Wrong. A lot has changed. A
tremendous amount of wealth has been wiped out. Over time,
consumer spending will slow. And why is that so negative? Glad
you asked.
One of the pillars of this bull market has been rising expectations.
Not just unrealistic investor expectations (which have finally been
dealt a crushing blow) but Wall Street analyst expectations.
Forecasts for corporate earnings have correctly been up, up, up.
Companies made it a point to always guide analysts to one figure,
say 50 cents for a particular quarter, then amazingly, like magic,
they”d come in at 51 cents. Well gol-lee…how did they do that?
[The current issue of Business Week (4/24) points out that one
way is through the increasing use of pension fund windfalls
(through rising equity valuations) to pad earnings. What happens
when that reverses? Or how about the banks who have goosed
earnings through their venture capital holdings? Not anymore.]
Well, it”s time to think about what could happen if, suddenly,
Wall Street”s analysts begin to lower their earnings estimates,
instead of raising them. Most of them are still figuring in a rosy
scenario for years to come. A slowing economy doesn”t support
that thesis. The strong earnings we are beginning to see reported
for the first quarter obviously didn”t help much this past week.
Beginning this coming week, solid reports may cushion any
further market declines. But Wall Street is a discounting,
forward-looking mechanism. The expectations game has to
eventually be re-evaluated.
So how can the economy slow when folks like the International
Monetary Fund project strong world growth in 2000 of 4.2%?
Well, for the simple reason that they also added in their report this
week that, at the same time, the biggest risk to world growth is
the U.S. stock market. We are the buyer of last resort. The U.S.
bailed the world out of the dual financial crises of 1997 and 1998.
If we slow, it”s going to make it that much tougher for the rest of
the world. And again, that won”t be good for U.S. corporate
earnings.
And as for the Federal Reserve and their inflation watch, Fed
Governor Lawrence Meyer shook the markets early in the week
when he said that the U.S. economy was growing at an
unsustainable pace. “The threat of overheating…is much greater
today than previously.” Undoubtedly, this week”s market action
has put a damper on this theory but Friday”s consumer price
report for March was awful, the worst reading on inflation in 5
years. The Fed meets May 16 and, barring a significant drop in
the market from current levels, they have to keep raising interest
rates.
*And if you”re still not a believer that inflation is finally on the
rise, the National Association of Business Economists issued a
report, mid-week, which said, “We have seen a distinct upward
shift in pricing momentum in recent months.” 68% of U.S.
companies are having trouble finding skilled workers. 52% raised
pay in the first quarter, the highest reading since 1989. Again,
figures like these are not helpful to the equity crowd, let alone,
eventually, the bond market.
Finally, I have been meaning to mention this for years, literally,
since I started writing for my last employer in 1997. If you want
one single, solid gauge of economic activity, look in Barron”s
each week at the figure for “steel production.” You”ll find it in
the back in the Market Laboratory section. I have been keeping
track of it on scrap paper since 1990. Two weeks ago it hit an
all-time high. It”s obvious what the role of steel is in our
economy. When that starts to tick down (vs. the year-earlier
figure) that will be confirmation enough for me (and it”s less
volatile than the housing starts figure, a popular gauge of
economic activity).
U.S. Treasury interest rates (a battle between a flight-to-quality
and an inflation scare this week):
1-yr. 6.05% 2-yr. 6.26% 10-yr. 5.87% 30-yr. 5.79%
—
Now it”s time to address another potential negative. I was
listening to the Imus radio program Monday morning when tennis
commentator Bud Collins came on to describe the U.S. Davis
Cup victory over the Czech Republic. What caught my attention
was Collins candid comments about fan reaction to the Czech
team. The Americans were ugly and, as one with roots in the
Czech Republic (as well as Slovakia) I was offended. The U.S.
played the wrong national anthem for them and we handed the
Czechs the flag of the Netherlands. Then, when we won,
Sampras, Agassi and Coach McEnroe did their obnoxious flag-
waving victory dance. As Collins said, we weren”t talking U.S.
vs. U.S.S.R. circa 1980. The Cold War with the old
Czechoslovakia is long over. They are now NATO allies!
Why bring this up? Because you need to couple this story with
one the New York Times Suzanne Daly recently ran, a piece on
the growing anti-Americanism in Europe. I have railed about this
in the past (but not recently) and I have the perfect excuse to
bring it up again. You can sit back and say, “Who gives a blank.”
But remember this, THE WORLD DOES NOT HAVE TO
ALWAYS BUY AMERICAN. It”s a lesson that back in 1998
Bill Clinton, Robert Rubin and Larry Summers ignored. As we
“saved the world” we also sowed the seeds of discord later on .
We ran around the world with our “We”re #1″ schtick and it
sickened a lot of foreigners…and me.
Europeans, and increasingly elsewhere, view the U.S. as a society
“ruled by profit” and an unchecked global force aimed at
dominating the world. Let me be clear. I do not necessarily
agree with that analyses. But it”s the perception that should
worry you. For example, we made total jackasses out of
ourselves with all of our screaming over rising oil prices and the
world took notice.
It has been the perception of rising earnings, forever, that ruled
our equity markets the last few years. Just as that may be starting
to change, the perception of the “ugly American” could begin to
heat up as well. It needs to be turned around and you do it
through diplomacy. We desperately need a new set of leaders
that are firm, yet humble. At times in the recent past that has
been sorely lacking.
Wall Street Bytes:
–As I continue to bash investing in emerging markets (hey, no
one said I had to be the new ambassador of good will!), further
proof. For the 10 years ending 3/31, the average emerging
markets mutual fund was up 7.3% on an annualized basis. The
average short-intermediate U.S. government fund increased 6.6%.
Why the heck take the risk?
–Ignorant investor question of the week, from a CNBC viewer to
a portfolio manager. “With technology involved in every facet of
our life, why have some firms downgraded the sector?” Because,
Cisco selling at 170 times earnings made absolutely no sense!
Not because technology, in and of itself, is bad.
–I am trying to hide this thought in the commentary as best as I
can. Wait until the real estate market crashes, probably in 2001.
Look around your own neighborhood. Better yet, keep looking
to San Jose. Is it right that policemen and teachers have to live in
homeless shelters because they can”t afford an apartment? Of
course not. And the situation will be corrected, just like the
technology sector”s froth was.
–Moral Hazard: Well, I”m going to give this short shrift. But a
subject that has increasingly bugged me is the fact that the new
Financial Services Reform Act was designed to make it easier for
Wall Street to create financial behemoths. Yet, at the same time,
the laws of human nature have not been repealed. In other
words, we are creating institutions that are “too big to fail.” A
situation where the actions of one or two rogue traders, given the
correct set of circumstances (along with the burgeoning use of
leverage through derivatives), could lead to the failure of one of
those institutions and that could have catastrophic consequences
if it occurred in an already skittish environment. [I definitely
don”t think this will be the case today. But over the coming years
the risks will grow considerably.]
–What I don”t do with my own personal finances. No margin
accounts and no use of credit cards to trade stocks.
–And what do I really think will happen next week in the
markets? Monday may not be that bad, by the close, but
regardless, I prefer to look ahead about 1-2 months. We will see
lots of violent rally attempts but I”d be surprised to see the
Nasdaq finish over 4500 on any given day. Over the same period
the Dow could be in a wild range of 9000-11000. But once the
economy really begins to slow, it will be even tougher for either
index to hit new highs for quite a spell. There you have it. I”m
now out on the limb. Throw a beer up, please.
–Yes, at the appropriate time I will get bullish.
International
“The administration has been adept at keeping the American
people in a complacent torpor: Raising the national conscience
about the sorry state of the world will take time.”
–Robert Kagan
Say a prayer of thanks that we don”t have an international crisis
right now. You want to see a real crash? Remember, we
continue to rely on world leaders to act responsibly. As time
goes on, the odds are increasingly against us being able to
maintain a relatively placid environment.
China / Taiwan: The government in Beijing arrested 200 Falun
Gong supporters in Tienanmen Square while Annette Lu,
Taiwan”s VP-elect, issued a formal declaration of independence,
at which point China”s foreign office called her “the scum of the
country.”
Many of you probably saw the 4/9 “60 Minutes” segment on the
potential for information warfare between nations. In the 4/17
issue of “Defense News” there is an interview with Taiwan”s
Cabinet Minister Chong Pin Lin. Chong is concerned that China
would contemplate a missile attack, as I”ve warned, “a
concentrated barrage of 200 or 300 missiles (with the goal of)
destroying all the ports, airports and highways. Then they would
use amphibious operations coupled with sabotage, a very
important leg of their operation, to force our leaders to accept
their terms.”
But, Chong then discusses what could happen when China”s
information warfare capability is better. What threat would then
be posed?
“The threat they pose is mainly to the U.S., via the use of
electromagnetic pulse weapons to attack aircraft carriers (by
fusing their integrated circuits).”
Right now, Chong feels Taiwan can combat cyber warfare but,
“There are 1,500 to 2,000 Russian technicians in China today
helping (them) on cruise missiles, guidance systems and, perhaps,
electromagnetic pulse weapons.”
Commenting on the current talks between China and Israel,
Taiwan”s Defense Minister Tung says, “If Israel helps mainland
China build AWACS, it will threaten not only Taiwan but the
entire security situation in Asia.”
Russia: Despite the popularity of President Vladimir Putin, the
Russian people remain extremely pessimistic about their future.
72% think the economy is very bad, 28% think it is poor.
Zero…that”s right…zero, think it”s getting better. 91% believe
that the opportunity to find work is worse than under
communism. [Source: U.S. News & World Report] The central
government”s total revenue is $25 billion, one-third less than the
budget for New York City. $25 billion for the military, social
services and law enforcement.
So President Putin has his work cut out for him. On Friday, he
led the Duma to approve the START II Treaty. This was initially
approved by the U.S. Senate in 1996 but has been held up by the
Communists in Russia”s parliament. START II would slash
nuclear warheads on each side to about 3,000 (from its current
level of 6,000) by 2007. The problem is that Russia insists the
ABM (anti-ballistic missile) Treaty of 1972 remain in tact, while
the U.S. wants to amend it to allow our missile defense system.
So what it does is set up a possible summit between Clinton and
Putin (June?) to hash out the differences. Meanwhile, Putin goes
to Britain on Sunday to meet with Prime Minister Blair who has
already said of Putin, “His vision of the future is one that we
would feel comfortable with.” I will choose to reserve judgment.
[And I will use the Monday space in “Bar Chat” to tell the
ongoing tale of Chechnya.]
North / South Korea: In a positive development, the presidents of
North and South agreed to meet this coming June for the first
time since the Korean War. [A meeting had been set for 1994 but
the North”s Kim Il Sung died at that time.] South Korea”s Kim
Dae Jung is a former dissident who suffered for years during the
South”s military dictatorship, thus he comes to the peace game
with a lot of credibility. But it was hoped that the announcement
would have a favorable impact on the South”s key parliamentary
elections this week. It didn”t. Kim received a minimal bounce,
thus placing his economic reforms in some jeopardy. On the issue
of the summit, the North obviously needs massive financial aid
but both sides should go slow. The last thing the South needs is a
massive exodus from the North into Seoul. I promise, however,
to turn real positive if events warrant it. Certainly, our 37,000
troops stationed on the tensest border in the world [along with
Kashmir”s] hope this attempt at peace is for real.
Iran: Much to the consternation of the civilized world, 13 Jews
went on trial this week, accused of spying for the U.S. and Israel.
This has been a worry for the past year and points out a stark fact
of life in Iran. Despite the recent parliamentary gains by
reformers, the hard-liners control the essential functions of
government, including the courts and the army. By Thursday, the
trial adjourned until May with the announcement that 4 of the
defendants had confessed. There is no jury. The judge rules all
and they could receive death sentences. Meanwhile, the world
watches.
Austria: The government pleaded with the European Union for an
end to sanctions. France accused Austria of blackmail. This all
stems from the fallout from the elevation of the far-right Freedom
Party.
Peru: Peruvians went to the polls this week and it got ugly.
President Fujimori sought a 3rd-term when clearly their
constitution was meant to limit the head of state to two. To
avoid a run-off with the populist candidate, Toledo, Fujimori
needed 50%. There were massive irregularities at the voting
booths so the U.S. said, Yoh, Fuji, you better end up with under
50% or we cut off financial aid. Fujimori then magically finished
with 49.8% and he and Toledo have a run-off in June. The
country was on the brink of total chaos last week. The next few
bear watching as we now have a ton of enemies (Fujimori”s
supporters) in a country which has done a great job in helping to
eradicate the drug trade (albeit it was shifted to…Colombia!)
Colombia: Check out the 4/13 edition of “Hott Spotts” for a
detailed look at the players in this crumbling nation. The debate
over giving military aid to this country is heating up. Colombia
and Venezuela supply this hemisphere with as much oil as we
import from the Middle East. Also, there is a very real danger
that the civil war in Colombia will spill over into Venezuela, Peru,
Ecuador and Panama. A disruption in the oil supply is a distinct
possibility.
Briefly…This Week in Politics
A USA Today / CNN poll surprisingly showed George Bush with
a 50-41 lead over Al Gore. In a 3-way race with Pat Buchanan,
Bush leads 48-42-4.
Columnist David Ignatius had a powerful article on the 1996
presidential campaign and foreign influence. Only this time, it
wasn”t China but rather Russia. It seems that American financier
and Clinton fundraiser, Roger Tamraz, in trying to secure an oil
pipeline deal in the Caucasus, met with two of Boris Yeltsin”s top
aides (this much is a fact). Also not in dispute were discussions
of contributions to Yeltsin”s own ”96 presidential campaign.
What is less clear is whether or not there was a quid pro quo
arrangement. Did money then in turn flow to Clinton”s re-
election bid? A serious question that Ignatius says begs for a
formal investigation.
Elian Gonzalez
I was actually all set to do quite a bit on the boy this week, but
market events took precedence. So a few thoughts.
–My friend MR and I are still trying to figure out how attorney
Greg Craig (representing Juan Miguel) fits into the puzzle. After
all, he was Clinton”s lead attorney during the impeachment
proceedings. What is the angle?
–Janet Reno is despicable. She has time to samba with Gloria
Estefan (twice) but couldn”t find 15 minutes for prosecutor
Charles Labella and his memo on the ”96 China / Democratic
Party fundraising scandal. Reno also made the following
statement this week. “Responsible authority is knowing when to
take action.” (Waco, Ms. Reno?)
–According to attorney Craig, Juan Miguel says of the Justice
Department, “Why can”t you enforce your laws?” After all that
you have witnessed, can you argue with that?
–Me and Congresswoman Maxine Waters, perfect together.
[Just kidding, my right-wing friends.] But I totally agree with
Ms. Waters on one issue, that video of Elian smacks of child
abuse. It”s sickening. It should remind everyone of the Chinese
when they used to trump up photos and videos of Mao swimming
down the Yangtze.
–Millions are starving in Ethiopia and this time it”s not the
Ethiopian government”s fault. A dozen children a day are dying
in some villages. And I”m supposed to care about Elian?
–I am an ardent anti-Communist and, compared to the
congressmen who are currently railing against Cuba, I have real
experience, having visited my relatives in Czechoslovakia at the
height of the Cold War. I know what it”s all about. But geezuz,
send this kid back so we can re-deploy the TV cameras to cover
something truly important.
Random Musings:
–Look for President Clinton to scramble, big-time, and issue a
slew of executive orders if he doesn”t get his way on pet policy
issues.
–Former North Vietnamese Army commander-in-chief, Vo
Nguyen Giap, came forward as we approach the 25th anniversary
of the fall of Saigon (4/30). Giap, a brilliant military leader, told a
group of Americans that the U.S. should help rebuild his nation.
We should tell him to stick it.
–The CIA fired the intelligence officer responsible for our
bombing of the Chinese embassy in Belgrade. China still insists
on a bigger investigation.
–The tragic accident of the Osprey aircraft that claimed 19
servicemen was probably the result of the shift from airplane to
helicopter mode. Said one expert, “It”s not the best helicopter
and it”s not the best fixed wing aircraft. So why would I fly it?”
–Let me be the first to say that Juan Miguel Gonzalez bears a
striking resemblance to Vladimir Putin. Well?
–The New York Times reported that the intelligence agency
responsible for analyzing satellite imagery had a massive
computer failure last August. Basically, we were blind for days
and are fortunate that we had no crises to deal with. The
breakdown occurred during installation of a new system. Left
unsaid is 1) whether those who installed it left any “backdoors,”
thus leaving them the ability to enter at will without being seen
and 2) during a real crisis, we wouldn”t be able to see troop
movements, missile preparation, etc. if the system is down.
–School violence: Youth homicide arrests declined 50% from
1993 to 1998. Yet, thanks to our sensationalist media, 70% of
Americans think a school shooting could happen in their
communities even though a child has a 1 in 2 million chance of
being killed in a U.S. school. Almost 70% in another poll felt
children were getting more violent.
I have been jaded about our youth, myself. Not being a parent,
it”s easy to get that way. But I went to two high school track
meets this week (along with just 3 parents) and after observing
the kids, I feel better about the state of our youth.
–You know that E*Trade commercial where the guy has “money
coming out of the wazoo?” After the past few weeks market
action, they may need to re-shoot it. He could be hugging a
toilet.
–Surveillance video shows that Congressman Patrick Kennedy
did indeed have contact with a security guard at Los Angeles
International Airport when his bag wouldn”t fit through the metal
detector. Which also means that he would have tried to cram this
oversized monstrosity into an overhead bin, so, if he hadn”t hit (or
pushed) the security guard, he would have nailed a stewardess.
*Any experienced traveler has to agree with me. Hey, but he”s a
Kennedy! [Actually, poor choice of words above…but I can”t
seem to edit it!]
–I”m currently running a series of radio spots where I discuss this
new “century.” I”m receiving a lot of notes complaining that year
“0” is the end, not the beginning of a century. I humbly
apologize. Don”t ask me to cut a new spot.
Gold closed at $282
Nymex Crude Oil, $25.57
Returns for the week 4/10-4/14
Dow Jones -7.2%
S&P 500 -10.5%
S&P Midcap -12.4%
Russell 2000 -16.4%
Nasdaq -25.3%
Returns for the period 1/1/00-4/14/00
Dow Jones -10.4%
S&P 500 -7.7%
S&P Midcap -3.1%
Russell 2000 -10.1%
Nasdaq -18.4%
Bulls 56.9%
Bears 26.7% [Source: Investors Intelligence. 10-day lag.
Contrarian indicator.]
Note: The new site is being unveiled shortly. There may be one
or two kinks but these will be ironed out quickly. I hope you
enjoy the additions. Thank you to my friends at EquityInsights.com
for the market monitor. And you will notice a logo for
“BuyandHold.com” on the home page and elsewhere. This is a
growing relationship that I will have more on later.
Hang in there, gang!
Brian Trumbore
