“This is the kind of party where the guests, if deprived of the
host”s refreshment, whip out their pocket flasks and gather round
the piano to sing another round of ”Brother, can you spare a
Dime?” They are rude and undisciplined, and they won”t go
home.”
–Thomas Donlan / Barron”s
Donlan is referring to the last Nasdaq bulls…or rather the shills
you see on television. But they are a rapidly dying breed and, in
the perverse ways of Wall Street, normally you would call this a
positive, since excessive pessimism tends to be a sign that
everyone has sold that wanted to and one spark (like the Fed”s
first interest rate cut in August of 1982) could send stocks
soaring anew.
Since Wall Street is a discounting mechanism, it also holds that
the market tends to look out 6 months or so. For example, if the
economy was tanking and we had entered a recession, Wall Street
might say, “The worst is almost over. Pass me a Heineken. Guys,
I”m going shopping (for stocks).”
But this time it”s different. Since things move at warp speed
these days, the current small signs of a possible economic
slowdown could begin to cascade in an ever-increasing torrent of
bad news. And while no one has mentioned this yet, it”s not too
soon to talk about a potentially lousy Christmas season.
But to be fair, what troubles a lot of folks today is we honestly
have no clue. I believe that, just as in the case of the Nasdaq,
many elements of our economy are bubbles waiting to burst,
particularly real estate. And, in addition, many Americans carry
way too much debt which means that a slowdown could impact
confidence quickly. And always remember, the consumer
represents 66% of our economy.
And as for the Federal Reserve, the big question of the day is
suddenly, “Did they overdo it” by raising interest rates as much as
they have? Are further increases really necessary?
The quick answer is yes, maybe the Fed did overdo it…but we
won”t know that for awhile. In the meantime, the awful action in
the equity markets has to be giving the Fed even more of a
headache. True, they wanted to prick the bubble and it”s been
“Sayonara wealth effect!” But if the economic data (like the
upcoming employment report) still show significant underlying
strength, the Fed will be compelled to raise rates again at the June
27-28 meeting. And they know that there is an increasing chance
that this next move could possibly send the economy over the
edge.
And to those Nasdaq shills who keep chirping a happy tune by
proclaiming that once the Fed stops raising rates it”s clear sailing,
I say bunk. [I”ll give them a two-day rally, max.]
Investors have learned a painful lesson; valuation and earnings
matter. If Cisco were to go back to its high of $82, or Sun Micro
$106, then you can be sure that the Federal Reserve will be right
there as well, raising rates 25 basis points for every $5 rise in
Cisco stock.
It”s a delicate time. I see no reason not to continue to keep your
powder dry. And events around the world aren”t exactly
sanguine. I”m referring to simmering currency crises and the ever
present social unrest in some key developing countries. These are
the “wildcards” as I like to call them. They are the Hott Spotts
that could finish off confidence once and for all.
Bits and Bytes
–Outside of a brief flurry of positive karma on Wednesday, it was
another slow, tortuous week. The Nasdaq slide has now reached
37%, the steepest decline in the average since 1976. And, at
3025, it is off 21% for the year. The Dow, which generally
doesn”t have the valuation issues found within the Nasdaq,
continues to hold up reasonably well as it sits at 10299, off 12%
from its all-time high of 11722.
–Bonds rallied as market participants adopted a more positive
outlook on the Fed”s inflation fight, reasoning that the economy
will slow enough to prevent more significant tightening.
U.S. Treasury Yields
1-yr. 6.18% 2-yr. 6.67% 10-yr. 6.33% 30-yr. 6.06%
–Judge Jackson will rule on the Microsoft case this week and
accept the government”s recommendation that Microsoft be split
into 2 parts. Then we”ll see how quickly an appeals court will
act.
–#1 UAL announced a merger with #6 US Airways. If approved
this would result in an airline which controls 27% of all U.S.
passenger traffic. The biggest impact, however, will be the
economic one on the various hub cities like Raleigh and Charlotte
which would inevitably suffer.
–Qualcomm is at $66. Just about 5 months ago it stood at $200
and appeared on the verge of taking over the world. Today,
newer shareholders are reduced to drinking Blatz.
–Web companies are shedding employees at an increasingly rapid
clip (if they aren”t going out of business altogether). Here at
StocksandNews, though, we have a lifetime employment
guarantee. Actually, as the owner / editor I don”t care how much
you complain about my conservative rants. I will not fire myself!
China
President Clinton received his parting gift, a ”yes” vote on
permanent normalized trade status for China when the House
approved the measure 237-197. [For you trade junkies out there,
NAFTA passed 234-200 in 1993.] 164 Republicans backed the
President along with 73 Democrats, the latter immediately
becoming targets of organized labor in the fall.
For its part, China was mildly pleased, enthusiasm being tempered
by the fact that the trade bill allowed for the establishment of a
commission that would monitor human rights in China, a
provision that they blasted as being an interference in their
internal affairs. [And they”re right!]
But in the words of Senator Jesse Helms, “I wouldn”t advise the
Clinton administration to pop the champagne corks just yet!” You
see, it has long been a foregone conclusion that once the House
passed the legislation, approval in the Senate (still required) was
automatic.
Well, some senators like Fred Thompson (R-TN) and Bob
Torricelli (D-NJ) want to add their own provisions, like a
commission to monitor China”s weapons trade. So stayed tuned,
the Senate may make Clinton sweat it out for awhile (technically,
they have until late August). In the meantime, it could mean that
China will have to stay on its best “worst” behavior until final
passage is secured, i.e., a Tiananmen Square massacre of Falun
Gong adherents would not be a smart thing.
Russia
The more you see of President Vladimir Putin in action, the more
there is not to like. Recently, the Kremlin was host to one
Dragoljub Ojdanic, Milosevic”s defense minister. So who is
Ojdanic and why should you give a damn? Well, ol” Drago has
been charged with war crimes by the U.N.”s Hague tribunal. In
other words, Russia, as a U.N. member, had an obligation to
arrest the dirtball. That”s simply international law. Instead, he
moved freely about Moscow and Putin even gave him a $100
million loan guarantee to take back to Slobo.
And then I read where Russia”s Supreme Court is looking into
whether Stalin”s police chief, the notorious Lavrenti Beria, should
be “rehabilitated,” meaning future historical references would be
mostly positive. Now all Beria did as head of the NKVD (the
predecessor to the KGB) was order the execution of hundreds of
thousands (at least). Then, after Stalin”s death in 1953, Beria
himself was executed for treason. If the rehabilitation of Beria
goes through, then you might as well go straight to “Who Wants
to be a Millionaire.”
Regis: For $1 million Bill, Vladimir Putin is a) a friend b) a
hockey player c) a cabdriver d) a man to be feared.
Bill: D, a man to be feared.
Regis: Final answer?
Bill: Final answer, Rege….Ding-Ding-Ding!
But Russia does have some legitimate problems that the West can
empathize with. Islamic fundamentalism continues to spread in
Russia”s former Central Asian states while Afghanistan sends its
rebels over to help the Chechens. Putin has threatened air strikes
in Afghanistan unless the ruling Taliban government uses its
influence with Osama bin Laden to stop the human flow to
Chechnya. Should Russia follow through on its threats, the West
will only be able to sit back without comment since it would be
exactly what we have already done ourselves.
Finally, on the economic reform side, Putin proposed a 13% flat
tax, clearly adopting a strategy long promoted by one Stephen
Forbesyanov.
Japan
Boy, the land of the setting sun really can”t get its act together.
First off, the Nikkei closed the week at 16008. Again, while
commentators like to say the index is at its lowest level in a year,
I prefer to say it”s at the same level as 8 years ago.
Then the government announced they left out economic data that
would have showed a lower figure of “growth” for the fiscal year
ending March 31. Of course it was politics that got in the way of
the truth.
Meanwhile, Hazama Corp., a general contractor, asked for $3.7
billion in debt relief. Earlier, Sogo, a retailer, asked for $6 billion
in debt forgiveness. As to the latter, a senior executive upon
making the announcement killed himself. [That”s one thing I like
about Japan. Here in the U.S., you do a lousy job (see Jill Barad
of Mattel) and you get $50 million walking money.] Japan
continues to have major problems reforming their stagnant
economic system. Said one expert of the Hazama and Sogo
cases, “It would be better to let those companies fail.”
Lastly, there is the case of Prime Minister Mori whose
government had to call a snap election for June 25 in light of the
death of former prime minister Obuchi. So Mori is giving a
speech this week and he says, “Japan is a divine nation with the
emperor at its core.”
You have to understand this was a rather loaded statement in
light of the fact it alluded to Shinto religious philosophy, reviving
pre-WWII and wartime ideology. So when this was pointed out
to the none too swift Mori, he apologized but didn”t retract it.
Suddenly his government, thought to be a shoo-in, may have a
fight on its hands.
And believe it or not, I have connected some dots and I”ll now
give you the truly Big Picture.
This summer the Pentagon conducts its annual war games. In the
past, 90% of the battle scenarios were “Eurocentric” for obvious
reasons. Today 50% are Europe. 50% Asia. All kinds of plans
are drawn up for the potentiality of an India / Pakistan conflict, a
North Korean implosion, etc. But to gauge what our experts are
most worried about all you need to know is the scenario behind
the most extensive game.
Since the Pentagon often doesn”t like to use actual names of its
projected aggressors, this year”s massive fake battle involves a
“large East Asian nation” taking over Siberia (and all of its natural
resources) from a weak Russia with the U.S. basing warplanes in
Siberia to defend Russian interests. Obviously, the aggressor is
China.
But at the same time, the U.S. is growing increasingly concerned
that Japan may not follow the U.S. lead in a future crisis of this
sort. And clearly statements like Mori”s can not be reassuring.
[If you have any doubts about my reasoning, ask one of your
neighbors who fought in the Pacific. And also thank them while
you”re at it.]
Africa
Writing in the Sunday Times magazine, Jeffrey Goldberg
commented, “In Africa, the American government, with the
apparent approval of the American people, appeases evil in ways
that would make even a Chamberlain blanch.”
Right on, except I think only 1% of the people know what”s
going on in the first place. For example, I saw a CBS News
report from Sierra Leone that correctly blasted the U.N. for its
incompetence but then failed to mention a very salient point. It
was the U.S. (Albright and Jackson) who brokered the disastrous
peace plan of 7/99. This week, the mutilated bodies of 6 U.N.
troops were discovered and there are reports that rebel Foday
Sankoh won”t be tried for war crimes. Instead, Sankoh may be
party to a new deal, arranged through Liberia”s murderous leader,
Charles Taylor.
Ethiopia / Eritrea: The former has 62 million people, the latter 4
million. Guess who”s winning the war? Eritrea has withdrawn
from territory taken in a 1998 conflict but Ethiopia seems bent on
wiping out Eritrea”s armed forces once and for all.
Nigeria: The West hopes that this nation emerges as a true
regional power, capable of containing conflicts like that in Sierra
Leone. But the nation has its hands full with ongoing violence
between Christians and Muslims which claimed another 100 lives
this week.
And then there is…
Israel / Lebanon: I detail the history of Israel”s occupation in
southern Lebanon in my 5/25 edition of “Hott Spotts.” The
pullout from the territory this week was chaotic but fulfilled one
of Prime Minister Barak”s campaign pledges. So what happens
next? The 9-mile buffer separating Hezbollah and northern Israel
is no longer. The Israeli army left lots of munitions behind, and
even some tanks, which quickly fell into the hands of the bad
guys.
Meanwhile, Syria now holds sway over all of Lebanon. Will
President Assad manage to control the guerrillas and keep them
from launching cross-border attacks? How will the Christians
who were left behind be treated by the Islamic terrorists? Bottom
line, in the perverted maneuverings of the Middle East, Israel now
has more of a leg to stand on when they retaliate for attacks on
the northern villages. There will be no other way to classify
Hezbollah”s transgressions as anything but an act of war. This
wasn”t the case when you had Israeli troops occupying a
sovereign land.
Israel / Palestine: Last week I blasted the corrupt PLO. This
week the 5/29 issue of Newsweek had the following comments
from a Palestinian: “The (Palestinian) Authority is like the 40
thieves and Arafat is Ali Baba. We got rid of the Israeli
occupation. Now we are under Palestinian economic
occupation.” Said another who was beaten after an anti-
corruption demonstration, “It”s a Mafia state.”
Peru: The presidential runoff is taking place as scheduled on
Sunday, this despite the withdrawal of opposition candidate
Alejandro Toledo who claimed the election would have been
rigged. President Fujimori will win his 3rd term and then the
international community will come down hard on him.
Venezuela: Postponed their presidential elections due to
computer problems.
Poland: Government is about to collapse and former communists
could fill the void. Economic change has been fast and
furious…but maybe too fast.
Pakistan: Sources say they appear to be preparing for a nuclear
test. The government denies it.
Iran: Reform President Khatami marked the 3rd anniversary of his
election with a fiery speech against the hard-liners as he called for
freedom and democracy. Hope he”s wearing a bullet-proof vest
under his cloak.
Missile Defense
A heated debate will take place this fall between Bush and Gore
as to what our missile defense policy should be. Strategist Robert
Kagan describes what may happen if the U.S. didn”t have a
proper system in place.
“The U.S. could find itself less and less willing to undertake the
risks that come with global leadership. Adversaries would be
emboldened by American timidity; and friends would begin to
look elsewhere for their security. The ties that bind America to
its allies would loosen. [i.e., see previous discussion on Japan.] In
time, the fabric of the international order, now dependent on
American military power and an American will to use it, would
unravel altogether.”
What it comes down to is something like the following. Iran or
Iraq develops the ability to wipe out Munich or Paris. Would
Congress approve an invasion and would Europe support us,
knowing that the price of doing so may be the destruction of one
of their cities? Without getting into a lot of details (which I will
save for an upcoming series on arms control for “Hott Spotts), if
we develop an anti-missile system and share it with our allies, we
may be able to avoid the blackmail.
This Week in Politics
So thank God we have a 22nd Amendment to the Constitution
limiting our presidents to 2 terms. Otherwise, clearly Clinton
would be running again but at least a survey showed that by a 57-
39 margin voters would turn him away. The President does still
have a 59% approval rating, rather extraordinary in the eyes of
your editor.
And it is equally extraordinary that we have a sitting president,
sworn to uphold the laws of the land, who could be disbarred
from his home state, a state in which he had once served as its
attorney general. Clinton was guilty of “serious misconduct,”
charged the 6-judge Arkansas Supreme Court panel. And you
just know that Al Gore was squirming as the recommendation
was handed down.
Later in the week, Clinton and Gore presided over two
Washington fundraisers that took in a record $26.5 million in
“soft money” donations. Gore says he”s anxious to reform the
system.
But the way things are going for Albert, he may not get that
opportunity. George W. laid out a bold defense initiative and,
coupled with prior proposals on social security and education,
whether you agree or not with the specifics, Bush is the merchant
of change, not Gore. And the China vote hurt Gore immensely.
Just a few percentage points shift to trade hawks Ralph Nader or
Pat Buchanan could cost Gore key states like Michigan in the fall.
Elsewhere, in the New York Senate race, a poll shows that after
just one week of campaigning, Rick Lazio is in a dead-heat with
Hillary. Both are vying for the 20% that is undecided. 40% are
virulently anti-Hillary, 40% are hard-core pro-Hillary.
And in New Jersey, all we can say here is holy cow! Democrat,
and former Goldman Sachs CEO, Jon Corzine, has now spent
about $34 million on his Senate primary campaign. Folks, by
comparison the all-time spending record for a primary was $8
million by New York”s Charles Schumer. The spending record
for an entire Senate race is $30 million by Californian Michael
Huffington. As for the race itself, Corzine now leads his
challenger, Jim Florio, 56-30. In March, Corzine trailed by 22
points before the money started flowing. Totally obscene.
California congressman David Dreier floor-managed the
Republican side during the final China debate. He”s also dating
Bo Derek. David, my man!
Should Pat Buchanan receive the Reform Party nod, it certainly
would be entertaining if he worked his way into the presidential
debates this fall. But he has a big problem…Ralph Nader. How
can you keep Nader out of the debates when he polls the same as
Buchanan? For this reason, it will be easy for the debate
commission to leave out both since there”s no way you”ll see all 4
on the same stage.
Random Musings
–ABC expects to take in anywhere from $300-$600 million from
“Who Wants to be a Millionaire” next season. They are
receiving $400,000 for a 30-second spot, each hour has 14 of
these and the total profit per episode will be in excess of $4
million.
–Maryland prosecutors were forced to drop the Linda Tripp
wiretapping case.
–According to Harper”s magazine, in 1998 the ratio of the
number of Americans killed in traffic accidents to the number
killed by medical errors was 1:1.
–The issue of the death penalty will become a big one in the
presidential campaign thanks to the Illinois decision to suspend
executions and the fact that George W.”s Texas leads the nation
in carrying out death sentences.
This week we had the brutal murder of 5 Wendy”s employees (all
were executed). As of this writing, two suspects have been arrested.
U.S. Ambassador Felix Rohatyn wrote a column the other day
describing how in Europe (where the death penalty is illegal in
Euro nations) they don”t understand why we allow such a cruel
and immoral practice to persist.
My simple response is, give me one good reason why the
Wendy”s killers should live? All of this hand-wringing comes
from the same folks who sat back and watched as 800,000
Rwandans were massacred.
–Harvard economist Jeffrey Sachs writes that for just $8 a year
from every American we could save millions of lives in Africa
from the scourges of malaria, AIDS and TB. The cost
breakdown would be $10 billion a year of which the U.S. would
pick up $2 billion (for the $8 per person). If vaccines can be
developed the costs would come down. Economically, the
disease burden cripples the continent”s development efforts. But
will our politicians lead a charge that is morally right and fiscally a
drop in the bucket? Of course not. And if you are at all religious
and believe that someone is keeping score, a big ”F” for America.
–I caught a little of the China trade debate and the congressional
rhetoric can really be quite comical. Democratic Congressman
Ron Klink said, “22,000 Pennsylvania workers sacrificed their
jobs on the altar of free trade with the NAFTA agreement.” Ah
Ron, that was 1993. Are you saying these 22,000 have been
sitting around drinking beer (Rolling Rock, I hope) for 7 years
while the nation is in the midst of boom times?
And then there is the call-in segment of C-Span, the part where
the moderator doesn”t offer an opinion. Now I could have fun in
that role.
Caller: “If this thing passes, what is going to happen to all of our
jobs?”
Me: “They”re gone…let”s go to Bob in Milwaukee.”
Gold closed at $275
Nymex Crude Oil, $30.00
Returns for the week, 5/22-5/26
Dow Jones -3.1%
S&P 500 -2.1%
S&P MidCap -2.5%
Russell 2000 -4.7%
Nasdaq -5.5%
Returns for the period, 1/1/00-5/26/00
Dow Jones -10.4%
S&P 500 -6.2%
S&P MidCap +3.0%
Russell 2000 -9.4% [25% from highs]
Nasdaq -21.2%
Bulls 46.0%
Bears 32.4% [Source: Investors Intelligence]
*To the Veterans, you are in my thoughts every day.
Brian Trumbore
