[Posted 7:15 AM]
StocksandNews had the opportunity to listen in on discussions
this past week between Chinese Foreign Minister Lu Zer and
U.S. Ambassador Joseph Prueher.
Lu: Chinese government demands a full apology! We will
accept nothing less.
Prueher: Get outta here, dirtball. We have nothing to apologize
for.
Lu: If U.S. doesn”t apologize, we will have to put the pilot on
trial.
Prueher: You do that and we”ll collapse your economy faster
than you can say 2008 Olympics.
Lu: Well…what about saying you”re very sorry?
Prueher: Yeah, yeah…very sorry…whatever.
What we witnessed in China is simply a harbinger of things to
come. Personally, I”m not upset at how this whole episode
ended. From the notes I”ve received, however, I understand why
some of you feel like we caved. But there are other issues
coming down the pike…and soon.
As Fareed Zakaria wrote in the Washington Post, we must
remember that “(China) is being run by an aging regime that is
trying simultaneously to modernize its vast country, gain
influence in the world and preserve its own power.” They will
just keep testing us more and more, and, as I describe later,
always remember that China”s neighbors are scared stiff, for both
military and economic reasons.
Americans don”t overanalyze words like Asians do. “Whatever”
is a word commonly used to end our arguments. And most of us
don”t sit around brooding about our nation”s past. Our concerns
lie largely in the future. But issues important to China always
start with a recitation of humiliating days of yore. The future is a
way to expunge the past. Again, to this we reply, whatever.
Well, on some issues we have to do more than utter that one
word. Every now and then we have to think of more than just
ourselves. And starting April 18 we have an opportunity to do
just that as a UN vote on a U.S.-sponsored human rights
resolution condemning China is held in Geneva. If the U.S. were
to back down, it would be outrageous. The persecution of the
academics and religious groups in China must stop. It won”t, of
course, regardless of the vote, but the world needs to still stand
up and condemn them. The U.S. must lead.
Then, in just a few more weeks, the Bush Administration will
have to decide what weapons to sell Taiwan. We should sell
them everything they want, China will just have to deal with it.
Taiwan is not the aggressor here. They simply want the
capability to defend themselves. Their 23 million people are not
about to initiate a fight with the mainland”s 1.3 billion. If the
U.S. was to back down on our commitment to defend Taiwan,
forget the message sent to Taipei, imagine the reaction in Seoul
and Tokyo. But I would be shocked if Bush did so. The
Administration has already announced that there will be a shift in
strategic thinking, away from Europe and towards Asia. Not to
aid Taiwan”s defenses flies in the face of that.
But what of the Chinese side? We should have some good clues
shortly. Negotiations over the fate of the plane will be telling,
and the angle that its media takes will be as well. Also, we will
see if China cracks down further on dissidents and Falun Gong.
President Jiang Zemin is in a precarious position and the
nationalist military is on edge. Nationalism, in general, is
flourishing, thanks to the sanitized version of foreign policy
matters that the people receive.
And remember the following. China is just as dangerous in a
weakened state as they are in a strong one. Either through an
economic collapse or a major change in leadership, chaos would
be the result.
But even if we announce a major weapons sale to Taiwan
tomorrow, it will be years before the systems are integrated
efficiently. China is obsessed with bringing Taiwan directly into
its orbit and they could seize it today if they so desired. By
launching some missiles and taking out Taiwan”s airfields, they
effectively control the island and could sue for peace. And as
we”ve discussed before, they kill our economy.
But wouldn”t the consequences of such action be an American
response? Maybe not, at least in China”s mind. Recall a quote
from last week”s column, that of a Chinese military source.
“The People”s Liberation Army genuinely feels that Americans
can”t tolerate death.”
Obviously, throughout our history we have often proved
otherwise, but China may gamble that this is no longer the case.
As a relative of one of the spy plane crew said this week, “Too
many people in this country forget that freedom is not free.”
—
And there are other developments in Asia worth following.
Japan: Reports on the economy released Friday paint an awful
picture, and it”s increasingly apparent that the nation is headed
towards another recession as the latest recovery plan, which is
designed to encourage banks to write off their bad loans and
unload their crossholdings in equities, is getting a lukewarm, at
best, reception. To get a sense of just how bad things are, take
the example of real estate. Since the bubble burst, commercial
property in Tokyo is down 75%, while residential is off at least
50%.
But there were two other developments that point to the
problems facing today”s Asia. First, Japan imposed steep tariffs
on Chinese farm products as a way of protecting the politically
influential, yet incredibly inefficient, Japanese farmer. Of course
this does nothing for the Japanese consumer.
And then there is that little controversy I mentioned a few weeks
ago concerning the junior high school history textbook, an issue
that just won”t go away. In fact, it got considerably worse this
week.
South Korea and China are fuming, with the former recalling its
ambassador to Japan for only the 3rd time since World War II, an
incredible move in the annals of Japanese-South Korean
relations. It was just 3 years ago that the two nations had
appeared to set a new tone of mutual respect and cooperation and
they are to co-host the 2002 World Cup soccer matches.
The West is getting a crash course on Asian sensitivities and
we”ve learned how important the written word can be. In the
case of South Korea they are upset (and rightfully so) that Japan
continues to gloss over its 35-year occupation of the country
(1910-1945), with Japan calling it warranted by international
law. On Friday, the Japanese nationalists behind the textbook
told South Korea to stick it, even as South Koreans are now
beginning to boycott Japanese goods.
But then there is the issue of North Korea. What bothers defense
officials in the U.S. is the realization that despite the supposed
thaw in relations between North and South, North Korea has
been building up, not withdrawing, its forces near the DMZ. As
the Wall Street Journal noted, within 90 miles of the border the
North has 700,000 troops, 8,000 artillery pieces (the real
problem), and 2,000 tanks. And I was reading in Defense News
that for the first time in 10 years, North Korea is modernizing its
tank force, including giving them the ability to move through
water up to 18-feet in depth.
Now to be balanced about it all, clearly the North”s conventional
forces can”t come close to matching up against anything the U.S.
or South Korea would throw at it, but it”s the buildup that is
worrisome. And, regarding the artillery, which could obliterate
Seoul in an instant, what would be in the shells should they
decide to start a war? A reasonable reading of the situation
would tell you that the North would throw its chemical and
biological arsenal at the South.
So here in Asia you have the five major players (well, four
economic ones, including Taiwan, and one solely military)
fighting for position in the figurative sense, thus far. But you see
how important language is and how trade is increasingly used as
a weapon. You can also see how a strong U.S. economy is
crucial to peace in Asia over the long haul. Without a market for
their goods, conflict seems inevitable. They all hate each other,
which requires me to say the following again: Alan Greenspan
needs to understand he can play no small role in saving the
world.
Wall Street
The Dow Jones finished the week at 10126, up 3.4%, for its
highest close in 5 weeks. And the Nasdaq had its second best
week ever, up 14% to 1961. Wall Street, ever known for its
discounting powers, decided that the equity markets had already
factored in all of the worst possible news for corporate America
and it was time to look ahead, to a day when all Americans,
black and white, rich and poor, Christians and Jews, would
celebrate the return of boom times…and a new bull market.
But on the economic front, jobless claims continued to rise,
retail sales were weaker-than-expected (though crummy March
weather in most parts of the country had something to do with
it…and April kind of sucks as well), and consumer confidence
took another hit. Plus you have more specific items like
mortgage delinquencies reaching their highest level since 1992
and the continued accumulation of cash…cash that won”t be
spent on consumer goods, or, in the case of corporations, cash
not used for expanding plant and equipment.
But there were some slight hints that we may be close to a
bottom, if it wasn”t already reached. You had comments from
Dell, which said Europe is not freezing its spending on
technology. And while EMC disagreed, warning that its own
business in Europe was slipping, they also said at the same time
that its major customers in the U.S. had finished reducing their
tech budgets. And on Thursday, Nortel provided a lift when it
reported the inventory picture was brightening.
And there was the continued happy talk from some of the
members of the Federal Reserve, including two who called for a
return to 2-3% growth by the 4th quarter. Were that to be the
case, with inflation still low, that”s a darn good atmosphere for
stocks…not great, though, or else we”d be right back in our
valuation bubble. So the tug of war continues. Wall Street is a
forward-looking animal and a continuation of this week”s rally
would go a ways in returning some modicum of consumer
confidence, but a realist has to keep coming back to some very
important issues. Massive debt loads in key portions of our
economy (particularly telecom), a real estate market that is
beginning to fray in some areas, overcapacity, a long-term
energy problem, and, something you”ll see a lot more of,
growing anti-Americanism.
Street Bytes
–It was a terrible week for the Treasury market. Despite some of
the down economic numbers, there was the growing feeling that
the Fed may not lower interest rates much more beyond the May
15 meeting. Talk of an inter-meeting cut has all but vanished.
And, of course, when stocks rally as they did the past few days,
it”s stiff competition for bonds.
U.S. Treasury Yields
1-yr. 4.11% 2-yr. 4.34% 10-yr. 5.16% 30-yr. 5.60%
*By comparison, the 1-yr. closed at 3.88% the previous week;
2-yr., 4.06%.
–Once again, the European Central Bank held the line on its own
interest rates. These guys are as clueless as Greenspan.
–Energy: Oil prices hit their highest level in 7 weeks and the
cost of gasoline is rising, as the supply picture tightens for the
latter before the summer driving season. Natural gas inventories
are already at worrisome levels…for next winter! But each
market is so different and I still suspect that oil and gasoline will
peak sooner than later. For example, there was an article in
Friday”s Journal discussing a topic I brought to the table last
week, that being cheating on production cuts by OPEC”s
members. And if the global economy just muddles through the
summer, then any increases in petroleum prices should be
modest. Natural gas is a different story. It could be tight
throughout. As for California, Governor Davis reached
agreement with Southern California Edison to buy its
transmission lines, thus avoiding another bankruptcy filing as in
the case of the other big utility, Pacific Gas & Electric. PG&E
customers are okay, the creditors and shareholders may not
be…only time will tell.
–My portfolio: Just four weeks ago, I mentioned how I had
closed out my last energy position, after a two-year run in the
sector, because I thought the big money had been made and I was
concerned with some of the valuations. I also said that if I saw a
20% pullback in the group, I might hop back in. Well, that 20%
move occurred in all of 3 weeks, so I weighed back in again (but
only after they were on their way up), though this time the issues
I bought account for only about 18% of my portfolio. And one is
a little on the speculative side as its fortunes depend to a large
extent on the ability of California”s utilities to pay their bills.
Again, however, the big money in energy has already been made.
Overall, I”m now at 23% equities (my 5% Nasdaq QQQ position
having bounced back to breakeven), with the rest in cash and
corporate bonds. And as I think upside in stocks remains limited
for years to come, I may not be making too many other moves.
–Mutual fund giant Putnam is laying off employees for the first
time in its 64-year history. What makes this newsworthy is that
Chairman Larry Lasser received a $33 million bonus for 2000.
–Online delivery service Kozmo.com locked up its bicycles.
1,100 workers have to find new forms of transportation.
–Action in Yahoo stock cracked me up this week as the
company announced that they had earned one penny, down from
an original estimate of 13 cents last December. But Wall Street
bid the stock up because Yahoo beat its new estimate of flat
earnings. It didn”t seem to matter that revenue was 22% lower
than the comparable period last year. And Yahoo also
announced the first layoffs in its 7-year history. But, most
importantly, the company decided to drop the hard-core
pornography outlets from its shopping channels.
–Meanwhile, Amazon successfully reassured the Street that they
weren”t going out of business, so the stock rallied. But their core
business in items like books and movies is expected to grow by a
miniscule amount. So where”s future growth going to come
from? And, anyway, these guys have a track record that is less
than exemplary when it comes to financial disclosure.
–Michael Dell, as quoted in Business Week. “The concept of
the Internet appliance has been an economic disaster.”
–Folks like E*Trade continue to slash their advertising budgets,
in their case by 50%. StocksandNews, on the other hand, is
eating this stuff up because we”re waiting for ad rates to plummet
further so we can get 4 weeks of radio spots for the price of 2!
–Just looked at my steel indicator and it”s slipping! Uh oh. I”ll
have more on this next week.
–Venture capitalist Andy Kessler had an important op-ed piece
in the Journal, discussing the fact that relatively simple
technologies, like an antenna, will make much of today”s overly
expensive networks obsolete. The message was intended for
bloated companies like Lucent.
–Motorola reported its first operating loss in 15 years as mobile
phone sales plummeted 29%. Pager sales also fell. But Research
in Motion Ltd., makers of the Blackberry pager and e-mail
devices, said its sales remain strong. Which means one thing,
Blackberry is the model of choice for drug dealers. In fact, 4 out
of 5 dealers recommend Blackberry for their clients who use
drugs. [Source: American Drug Dealers Association.]
–Northwest Airlines reached agreement with its mechanics
union, thus averting a strike. One down, at least three to go.
More International Affairs
Middle East: The pace of conflict picked up again as Israel
aggressively moved into Palestinian-controlled territory for the
purposes of wiping out neighborhoods that have been used to fire
on Israeli settlements. Bulldozers were brought in and nothing
was left behind. Obviously, this only inflames the situation,
though I can”t fault the Israelis. At the same time, they need to
hold off on building more of their own settlements.
Balkans: It”s not getting much play but here we go again. Now
recall that as part of the Dayton Peace Accords, Bosnia was
divided into a Serb mini-state and a Croat / Muslim federation.
Well, now the Croats want to break away and are pulling their
troops out of the joint military force. Separately, a Russian
peacekeeper was killed in Kosovo, with Russia blaming the
Albanians.
South Africa: Another stampede…47 died at a soccer match
when 120,000 tickets were sold for a stadium which seats
70,000.
France: Globalization was a dirty word this week as protests
erupted over the closure of 18 Marks & Spencer department
stores (they”re a British chain). Politicians now want a law
against layoffs. How very French. “And I suppose you”ll want
Christmas off too, Pierre.” “Actually, Lord Byron, we also get
August.”
Britain: Two-thirds of Easter holiday goers canceled their
domestic trips because of the foot-and-mouth scare. It”s not
necessarily the government”s fault, in this case, rather the local
communities are closing off the walking paths and parks because
the villagers don”t want their farmers ravaged by the disease.
And racism has reared its head in the case of Britain”s Chinese
community, which feels it”s being labeled a scapegoat for the
spread of foot-and-mouth. Chinese restaurants are being
boycotted. Maybe it”s just because the fortune cookies are stale?
Well?!
Iran: A large group of dissidents was rounded up. Parliament
summoned the intelligence chief to explain his actions. In Iran,
you are held without access to lawyers or contact with relatives.
Random Musings
–The Budget: President Bush sent up his $2 trillion budget
proposal, but the details are mainly talking points at this stage.
In many regards, bipartisanship is already over. Per his earlier
pronouncements, Bush is attempting to contain the rate of growth
in federal spending at a highly reasonable 4%. But, as the
Journal put it, “To hear the shouting this week, you”d think the
Beltway was being put on starvation wages.”
I always get a kick out of these discussions. Heck, here at
StocksandNews it becomes necessary to do a little belt-
tightening of our own from time to time. One week we may
switch from imported to domestic beer, another we”ll eat power
bars at lunch instead of dining out. Obviously, at the slightly
larger scale of multi-billion dollar budgets, if you can”t find some
savings, you”re lying. And if you”re going to increase the budget
in some areas like defense, education, and healthcare more than
4%, ipso facto, other areas get cut…but in many cases the actual
level of spending is still growing. Deal with it, bureaucrats.
Bush can”t cave on this one, but I doubt the 4% target will stick.
–New Jersey: Not for nothing, but if you”re a Republican in my
state it looks mighty bleak this year, one in which we select a
new governor. Christie Whitman”s departure meant that we have
an acting governor who, we find out later, has a closet filled with
skeletons, particularly when it comes to real estate.
And then there is the ongoing racial profiling hearings involving
our former attorney general and now sitting State Supreme Court
justice. The guy is like Joe Isuzu. And seeing as he was a
Whitman appointee, her legacy is rather tainted.
But, as a very informed source told me this week, you ain”t seen
nothing yet. There is all manner of dirt to toss around for both
parties. The only problem is that it is probably best suited for
“Bar Chat.” Stay tuned.
–Mad cow, foot-and-mouth, oh my! We read a lot here at
StocksandNews and on the agricultural front my best source is
often “High Plains Journal.” So I saw where Mexico sacked 14
of 16 chief border inspectors for corruption. These are the guys
controlling what livestock gets into our country. So how does
that make you feel about our ability to contain disease?
–And then there is the EPA”s long-awaited, 10-year plus study
on the health effects of dioxin contained in our own livestock and
poultry. According to the Washington Post, the final report,
slated to be released in a few months, paints a horrible picture of
the food industry, claiming that the levels of dioxin (a byproduct
of burning plastics and medical waste) in parts of our food
supply may contribute to cancer.
–The Weekly Standard”s Jackson Toby had a suggestion
pertaining to the issue of school violence. Troubled kids (of a
certain age) should be allowed to drop out. They could then get
a job…but it would also be made clear that the door is open for
them to return.
–NASA is trying again with the launch last weekend of the Mars
Odyssey. As the mission commander noted, “Going to Mars is a
tough job, it”s not like going to grandma”s house for the
weekend.” Know what I”m sayin”!
–If you have any doubt about Tiger Woods”s desire to keep
playing competitively beyond, let”s say, age 35, all you have to
do is look at his buddy Michael Jordan. Whether Jordan comes
back or not, it”s clear he is bored to tears. Nothing he tries from
here on matches up with the thrill of competing at such a high
level. Tiger must already know that and it”s why he”ll still be
winning Majors at age 45 or older.
–Last November I mentioned that there was a movement afoot to
pay reparations for past injustices to Black Americans. I”m
assuming many of you saw the “60 Minutes” piece on the topic
last week. Slowly but surely, the level of debate is rising.
Proponents point to similar examples, such as reparations for
Holocaust victims as well as Japanese-American detainees
during World War II. As for me, I will continue to just report on
the topic as needed. But, with this week”s unrest in Cincinnati, I
imagine you”d have a rather spirited debate there.
–Lou Dobbs is returning to anchor CNN”s “Moneyline.” The
most overrated journalist in the business is going to receive a
new contract worth $4 million, annually.
–If you”re a CNBC junkie, you have to get a kick out of those
men who call in and feel compelled to comment on the female
anchors, like Maria Bartiromo. Last week this guy goes, “Hey,
Maria, you”re still looking good!” Ah, buddy? Something tells
me that didn”t quite work.
–Monica Larner of Business Week had a piece on an Italian
study, which revealed that 70% of businessmen admit to having
an affair in the workplace, usually with their secretary. 80% of
Italian women polled said that a romance at work helps them
“work better.” StocksandNews has no secretaries. We may not
work better, but we work smarter.
–The Netherlands” parliament approved a measure making it the
first nation to sanction euthanasia. This isn”t about pulling the
plug on someone who”s on life-support. This is assisted suicide.
If I read the restrictions right, a 16 or 17-year-old kid”s parents
can”t prevent it, though two doctors must concur. So as I see it,
you could quickly figure out which doctors take a liberal reading
of the law and poof…you check out. You can be sure we”ll have
more on this topic. I know a few folks I”d like to send over there
with a letter of recommendation.
–I asked my friend EC, a postal worker, to give me his opinion
on the financial situation that now threatens Saturday deliver.
“A recent report indicated that the USPS wasted more than $1
billion over the last four years. Whew! Imagine if this happened
in the private sector. Postal t-shirts, Olympic sponsorship, phone
cards, terrible real estate deals, etc. etc. I think it comes down to
accountability. Mismanagement. Poor vision. The answer
always seems to be a stamp increase. The people I deal with for
the most part have been terrific. But for how long? I have a
feeling no matter how good service is, people will start to
question value, and that is dangerous. Obviously there has to be
cost cutting but it has to be TOP down. Senator Fred Thompson
said recently, ”The post office would have broken even if they
hadn”t paid themselves a couple of hundred million in bonuses,
and that speaks for itself.” Ditto. It gets harder to put the
uniform on every day.”
Hang in there, EC.
–A panel of scholars has just ruled, 12-1, that it was Thomas
Jefferson”s younger brother, Randolph, who fathered all of those
children, not our 3rd president after all. So get off his case!
–Your heart goes out to the people of North Dakota and those
elsewhere in the region who are impacted by the current
flooding. Having had to endure the same conditions in 1997, you
can imagine the flight out of the area. As Johnny Mac wrote me,
it may be time to go back to “territories.”
–Matt Lauer was interviewing the father of one of the spy plane
crew members and he asked the question, “As a father, was there
a moment when you wished the U.S. would just apologize so
your son could come home?” “No. I”m glad we didn”t
apologize,” said the father. You should have seen the
disappointment on Lauer”s face when he didn”t get the answer he
was looking for.
–I noticed that the military transport plane that took the crew to
Hawaii had emblazoned on it, “The Spirit of Bob Hope.” Bob
Hope…patriot.
–And if you saw the pictures of Lt. Shane Osborn as he spoke to
the crowd at Hickham Air Force base, you had to get a little
choked up. The best our country has to offer.
–Finally, as you gather at services on Sunday, remember the 7
American soldiers who lost their lives in that helicopter crash in
Vietnam while on a mission to recover remains from the war.
Leave no one behind, is the motto. God has a special place for
them.
Gold closed at $260
Oil, $28.25
Returns for the week, 4/9-4/13 [4 trading days]
Dow Jones +3.4% [10126]
S&P 500 +4.9%
S&P MidCap +6.2%
Russell 2000 +4.7%
Nasdaq +14.0% [1961]
Returns for the period, 1/1/01-4/13/01
Dow Jones -6.1%
S&P 500 -10.4%
S&P MidCap -8.1%
Russell 2000 -5.9%
Nasdaq -20.6%
Bulls 44.5%…contrarians rejoice! It”s coming down.
Bears 37.0% [Source: Investors Intelligence]
*I have a table of bull / bear readings going all the way back to
1990 on my “Wall Street History” link.
Happy Easter and Passover! I appreciate your support.
Brian Trumbore
