[Posted 7:15AM]
Whither the economy? It”s still withering.
From Morgan Stanley”s Stephen Roach, Wall Street”s guru of the
month.
“We are going to go through at least a 3-year period where
growth will be surprisingly sluggish.”
An extended period of malaise and cynicism, as I”ve described it.
And, for every positive, like the trend in short-term interest rates,
a resilient consumer, and a tax cut, you have loads of negatives,
like the ongoing recession in manufacturing, a rapidly
deteriorating overseas environment, sick corporate earnings,
enough debt to paper the Louvre ten times over, and, yes, the
same aforementioned tax bill.
On the last issue, commentator David Brooks perhaps put it best.
“Rarely has such a tax cut had so little social effect.” I don”t
mean to belittle the $300-$600 checks that we”ll all receive by
Labor Day, but what ticks me off is the phase-in, phase-out,
loophole-larded nature of the legislation. Tax simplification?
Forget it. This thing is a monster, as the press will do a great job
uncovering over the coming weeks. I still dream of a day when
all men and women, black and white, rich and poor, will
understand that a true flat tax, without 99.99% of our current
deductions, is the way to go.
To be fair, of course there are some real positives, particularly on
the IRA / 401 (k) front (though it takes 5-7 years to gain the full
benefit), estate taxes, and the marriage penalty (hey, maybe I”ll
get married!). And, obviously, getting the rates down is a
positive. But beyond that, while it”s certainly better than
nothing, my guess is the economic impact is minimal.
And for those who feel compelled to throw all their cash into the
stock market, I would just urge you to take a quick glance around
the world. Whether you”re talking Europe, Asia, or Latin
America, there aren”t many rosy economic scenarios being
painted right now (actually, I can”t think of one). It”s not disaster
yet, mind you, but it”s no salsa concert either.
To sum up, the positive impact of the Fed”s rate cuts and the tax
bill will be overcome by excess capacity in all things tech, no
pricing power (ergo, lousy profits), and huge debt loads. Balance
it all out and it spells…succedaneum.
Wall Street
Sun Micro set the early tone this week when it pre-announced
that it would miss already lowered expectations for its current
quarter. Most importantly, Sun said, “Demand in Europe has
really tailed off more than we thought.” And tech powerhouse
EMC announced another round of layoffs. Couple these with
other stories (some covered below) and the market had enough
evidence to realize that the turnaround in corporate profits may
take longer to materialize than originally anticipated. Certainly,
that”s the viewpoint of the likes of Morgan”s Roach and Doug
Cliggott of J.P. Morgan (2000”s best strategist).
The market did recover on Friday somewhat to limit the damage
on the Dow to just 15 points, as it closed at 10990. The Nasdaq
still gave up 4.5% on the week to finish at 2149.
Street Bytes
–U.S. Treasury Yields
1-yr. 3.60% 2-yr. 4.20% 10-yr. 5.37% 30-yr. 5.70%
PIMCO”s Bill Gross, the best when it comes to forecasting
interest rates, recently issued his long-term outlook, which calls
for the 10-year Treasury to trade in a narrow range of 4.5-6.5%
thru 2005. PIMCO is sanguine on inflation, largely because it
sees little growth in the U.S. economy over the bulk of this
period as well.
–Firestone fired another missile at Ford this week, touting a
study purportedly showing that the Ford Explorer has serious
design flaws.
–Energy: Reader Dan D. sent me an interesting idea the other
day. Dan recently returned from 3 years in Germany, where
energy costs are about double what they are in this country. Dan
has decided we should issue tax credits for businesses that may
be suffering during the current price spike, while penalizing
(taxing) individuals for their selfish lifestyle choices, i.e., the
purchasing of vehicles like the Ford Expedition. Geezuz, I was
almost nailed by one of these behemoths this week, and since the
streets aren”t made of the same non-stick material that is
employed on a George Foreman Grill, I don”t know how they
would have peeled me off the asphalt! The service would have
had to be held right there…in the street. But I digress…
This week witnessed the “Battle of California,” Davis vs. Bush;
12 rounds, 3-knockdown limit. I”d call it a draw, setting up a
lucrative rematch.
Actually, as you know it all comes down to the issue of price
caps right now, to which columnist William Safire states the
obvious (but if I used it without attribution, I”d feel like Joe
Biden).
“High prices invite fresh supply and restrict demand, which then
lowers prices.”
It”s just that simple, and guess what? Prices for electricity are
coming down. Not that it will be a straight line, mind you, but
the free market will once again prevail. Or, to paraphrase the
fake reverend, Jesse Jackson, “Soon, the point will be moot!”
–What moves stock prices? I get a kick out of those who focus
solely on the money supply…as if that is what impacts them.
Wrong. Believe me, Joe Six-Pack and Betty Expedition, who
together make up 66% of the U.S. economy, aren”t focused on
M2 and M3 before they make their next purchase. Sure, money
supply can have a bearing on interest rates (but not always),
which, in turn, may move the markets, but I like this quote out of
“Grant”s Interest Rate Observer,” citing author and money expert
Martin Mayer on the topic of the Fed and creating credit.
“There remains a mystery to haunt the dreams of central bankers,
because nobody knows why monetary stimulus becomes
consumer price inflation in one country and asset inflation in
another.”
In other words, focus on what really matters; items such as
earnings expectations, consumer and business sentiment, and
trends in interest rates.
–On the topic of the chip sector in Asia, Barron”s Leslie Norton
quotes an analyst in the region. “In chips, I”m seeing price
deflation in every single area, from game machines, to PCs, to
hand-held devices. And China has the capacity to expand in
every area from aluminum to textiles.”
–Headline in the Journal. “Lawsuits Flood China”s Securities
Industry: Shareholders Allege Rife Manipulation.” I ask you,
again, why would you ever invest in emerging equity markets?
It was also announced this week that private capital flows to the
developing nations are drying up at a record clip. Not good for
those who live in these countries.
–Malcolm McLean, who founded McLean Trucking and, more
importantly, Sea Land Service, died this week. McLean was one
of the most important figures in American business of the past
century, for it was he who introduced containerized shipping,
which revolutionized all industry. [While in Hong Kong, I
learned that sailors hate going there…because the docks are so
damn efficient. There”s no time to play!]
–Wow, here”s something the mutual fund industry needs to keep
quiet. For the 5-year period ending May 31, the S&P 500 has
returned 15.1% on an annualized basis, beating all 21 equity
categories as determined by Lipper; large or small, growth or
value, tech or international.
–There was much hoopla over a report earlier in the week that if
you took out 75 stocks (like Lucent, Cisco, and Nortel)
representing 25% of the S&P”s market cap, stocks have
performed just fine, thank you. The promoter of this study
received the publicity he sought. Of course no one stated what
has been my bone of contention. All the money was flowing into
those 75 issues, folks! You can”t just eliminate them. That”s
where the pain is! That”s like saying, if you take out the Lakers
last 19 games, they look kind of average.
–Speaking of pain, Lucent evidently backed out of its proposed
deal with Alcatel because it wasn”t going to be a merger of
equals. The stock continued to slide afterwards. Ironically, right
across the street from Lucent”s N.J. headquarters, Tyco was
acquiring medical products manufacturer C.R. Bard. [I live
blocks from here…lots of cars get stolen from the C.R. Bard lot,
just to add a little human interest to this story.]
International Affairs
Israel: Just 24 hours ago I was prepared to write that the “level
of violence has been fairly muted this week.” Then BAM!
Another horrific suicide bomb, this time in Tel Aviv, and the
death toll has reached 18. Israeli Prime Minister Sharon thus has
no other choice but to break his ceasefire pledge and retaliate
with full force.
On the Palestinian side, the probable heir to Yasser Arafat, Faisal
Husseini, died of a heart attack this week and Arafat quickly
blamed the death on a teargas incident from two weeks earlier.
Husseini was a moderate in the PLO. Arafat then issued a warning
to his people that Israel was preparing to go to all-out war.
But it was the Palestinians (evidently Islamic Jihad) who struck
first with the disco attack. It”s all so very, very sick and
another example of how in this world, we basically hate each
other. Time to light another candle.
China / Taiwan: There are two ways I see this whole situation
playing out. China isn”t close to having real invasion capabilities
(like sealift) so they could lob a few missiles onto Taiwan”s
airfields, crippling its ability to defend itself, and then sue for
peace, or they can continue with the creeping, silent coup that is
currently taking place.
I wrote last fall that China can just keep cutting deals with
Taiwan”s business elite, and, over time, win control of the
economy and eventually influence the selection of a president
favoring reunification. After my trip to Hong Kong two weeks
ago, I also believe that this is exactly what”s taking hold there.
Business is more than eager to deal with Beijing, only in the case
of Hong Kong, China already has its hand-picked political leader
in place.
But aside from the human rights ramifications, why should you
really care what goes on in Taiwan? Well, Mark Landler of the
New York Times wrote a rather important piece, detailing a
frequent theme of these columns. Taiwan”s computer
subcontractors are increasingly moving their operations to the
mainland (as are Hong Kong”s businesses), which means that
leading U.S. manufacturers such as Dell and Gateway, who
outsource to Taiwanese companies, will be increasingly dealing
with an adversary of the U.S.
Landler quotes Morris Chang, chairman of Taiwan
Semiconductor, one of the world”s largest chipmakers. “If in the
future, China were to stop shipping I.T. products, that could shut
down a large part of the I.T. industry in the U.S.” [Where have
you seen this before?]
Chang goes on to say, however, that this is unlikely because
China cannot afford to jeopardize its own economic growth.
Reporter Landler agrees. They”re both wrong.
My point has always been that the rest of the world would
continue to deal with China, even if the U.S. didn”t (or if China
didn”t allow it). That”s the reality of it all. If the coup is
bloodless, it”s a risk worth taking, if I”m an aging Communist
worried about my legacy.
Taiwan”s companies manufacture 53% of the world”s laptops
(41% of which are shipped to the U.S.). That”s just one example.
It”s all about the economy.
Two other notes on the China front. Per my recent Hong Kong
comments, this week China announced it will bar a U.S. warship
from entering there, the first such occurrence since September
1999 in the aftermath of the embassy bombing in Belgrade.
And then there is the lead on a front page Washington Post story
Friday.
“China Plans War Games Off Taiwan: Thousands of Chinese
soldiers are massing opposite Taiwan for their biggest military
exercises in several years…an official Chinese Web site reported
today.”
Ah, guys? I wrote about this last week! [Kind of embarrassing,
don”t you think?]
Russia: There was a positive development here this week, for
those of you who would like the Russian economy to turn
around. President Putin replaced the CEO of natural gas
behemoth Gazprom with his own crony. What”s good about this
is it shows Putin may be committed to true reform. Gazprom
accounts for a huge percentage of Russia”s revenues and it is
critical to the politics of the whole region.
Putin is attempting to send the signal that by installing his own
executive, he is going after the massive corruption that exists
within the company (so that the national treasury may finally
receive its fair share of the tax revenue). But, politically,
Gazprom is equally important. For example, Germany receives
37% of its natural gas from its pipelines. And you”ll recall that
Gazprom has been used as a weapon in the past, when the
pipeline to Georgia was shut off because the government there
wasn”t sucking up to Moscow.
Europe understands that Gazprom is its own OPEC. Unless they
diversify away from them, Gazprom can be wielded like a club.
What”s ironic about this last bit is that while environmentalists in
the U.S. decry any effort to drill for new sources of energy here,
in Europe they are promoting exploration virtually everywhere!
J. Robinson West, a former Interior Department official, writes
that, for example, France produces high-sulphur petroleum in the
Paris Basin; while Norway, the Netherlands and the U.K.
produce oil and gas in fishing grounds. As he concludes,
“Nowhere outside the United States would fields of world-class
potential be withheld from exploration.” You hear that, ye
caribou of the Arctic?
And in another matter pertaining to Russia, the Washington Post
had the following editorial comments on the continuing war in
Chechnya, which is officially off the world”s radar screen.
“Why should a government that wages such a war, suppresses
information about it and rejects legitimate international efforts to
monitor its human rights violations be welcomed at the annual
summit meeting of the rich democracies?”
Good question. Bush and Putin are slated to meet in two weeks
and I”m sure Chechnya will be put on the back burner (though
look for State Department spokesmen to act like it was a major
point of discussion…the spin game, mind you). No, Bush will
be focusing on incentives he wants to offer Putin in return for
scrapping the ”72 ABM Treaty. Putin will then say, “Nyet,” for
now, but should accept any help we can give Russia concerning
its abysmal early warning radar systems, which is a nuclear
accident waiting to happen.
Japan: Writing in the New York Times, Herbert Blix, author of
the Pulitzer-winning “Hirohito and the Making of Modern
Japan,” said that new Prime Minister Koizumi”s nationalist
tendencies are moving his government “toward a period of
heightened ideological conflict that can only make economic
reform more difficult.”
On the economy, there was more awful news as it becomes
increasingly apparent that the banks” bad loan problem is far more
severe than anyone thought. But Koizumi can”t do anything until
the upper house elections in July. He will be coming to the U.S.
at the end of June for a meeting with Bush. I would expect
Koizumi to be as pro-American as any Japanese leader we have
seen in years.
Africa: It”s hard to tell how Secretary of State Powell”s trip really
went because the media coverage is so damn slanted. Powell did
urge Africa”s aging leaders / dictators to step down, for the good
of the democratic process. That took some guts, particularly
when the target of the remarks is sitting next to you. And he
pledged to appoint a special envoy to Sudan. But it was on the
topic of AIDS that everyone wanted to hear what Powell had to
say. One of his statements, “(AIDS) is a problem of family and
culture,” didn”t go over too well. To which I would say to his
detractors, “You can”t handle the truth!” In the end, give Powell
credit for convincing the Bush administration that Africa should
be a priority on the foreign policy agenda.
Britain: When I saw the race riots in Oldham this week, I
thought, “Huh…just as expected…only the more serious
problems will still develop in France, Germany, and Austria.”
As I”ve written often in the past, much of Europe is unprepared
to handle the issue of illegal immigration, and the problem will
only worsen as the economy does.
In another matter, it appears that there has been a new foot-and-
mouth outbreak, but it is being hushed up due to the June 7
election. Farmers are worried this second strain is far more
virulent.
France: Oui oui! Former foreign minister / dirtball Roland
Dumas was convicted on corruption charges this week as part of
the mammoth Elf Aquitane scandal. The oil giant was used as a
personal slush fund by everyone from the late President Francois
Mitterand (reasoned conjecture) on down. Dumas”s mistress was
also convicted. You”ll recall that Mitterand”s own mistress was
right there at his funeral, next to his wife. Ahh, the French!
NATO: Led by Germany and France, NATO ministers refused to
even admit there is a threat of a missile attack from a rogue
nation…let alone offer support for our national missile defense.
The Germans have the most to worry about, a strike from Iran.
Iran: President Khatami faces reelection on June 8. The
reformist has pledged to strive for increasing democracy, but the
economy is in an absolute shambles, with 16% unemployment.
Hey, but Iran did test a new fancy, schmancy missile this week!
This has to count for something! [Also, see above.]
Indonesia: Parliament elected to proceed with impeachment
hearings on President Wahid, but these may not occur until
August. They are hoping that Wahid will step down beforehand.
Alas, as of this writing, the near blind cleric is vowing to fight
on. Tick tick tick.
Philippines: Not that this nation is any better off. The latest
resort kidnappings certainly don”t make you want to get out of
your chair and go, “Honey, let”s take the family to the
Philippines this year!” Let alone the businessman looking to set
up a plant somewhere in Asia. [Even your editor is ruling out a
trip there. I got close enough two weeks ago.]
Nepal: So the Crown Prince had a dispute with his mother over
his selection of a bride. He then killed a bunch of people,
including his parents. I think he was really upset over the fact a
blind man climbed Mt. Everest and he couldn”t.
Politics
[You can skip this if you want…I won”t be offended.]
I was reading a column by Robert Samuelson the other day
wherein he discussed the fact that he has been more or less
incorrectly bearish on the U.S. economy for the past 3 years.
But, in explaining his position, he said something that also goes
to the heart of what I strive to do with this column.
“I aim to provide a different perspective. If I”m saying what
everyone else is saying, it”s a waste of time. On the other hand,
being different for the sake of being different is morally and
intellectually bankrupt.”
I use this because in my comments of last week on the whole Jim
Jeffords affair, I fear I was misinterpreted regarding my line, “I
don”t blame Jim Jeffords one bit.” Chalk it up to major sleep
deprivation as I was writing this upon my return from Asia at
2:00 AM. But on everything else regarding this topic I stand
firm. President Bush needs to understand he wasn”t elected with
a rousing mandate. He really has none at all. And, to repeat, it”s
his aides who are failing him miserably. For example, I found
the following in the 5/14 issue of the Weekly Standard (also
referenced in part by Tim Russert on “Meet the Press”). In an
article titled “Revenge is a dish best served with milk,” by Sam
Dealey, Dealey writes that the administration was increasingly
upset over some of Jeffords”s positions.
“Last month, the White House exacted an ounce of retribution.
On the same day that the president was dining with Democrat
John Breaux in an effort to woo him into a compromise (on the
tax bill), the White House neglected to invite Jeffords to an event
honoring a Vermonter as Teacher of the Year. A Bush
spokeswoman denied it was intended as a snub.
“Granted, it wasn”t a big thing. But White House and Senate
sources say it was a taste of things to come for Jeffords. ”The
White House is not giving specifics,” says a senior GOP source.
”But there”s a one -or-two-year plan to punish him for his
behavior. And it”s stuff that may hurt him, but stuff that”s not
going to draw a significant amount of attention. So they”re going
to get him.””
Folks, I subscribe to the Weekly Standard and I know that this
piece had to be written around May 7, the point being that many
in the Bush camp act like they didn”t learn of Jeffords” possible
defection until May 21 when Senator Olympia Snowe called the
White House to warn them. If that”s true, it”s an example of
incredible arrogance. Karl Rove and Company blew it.
Each party has to deal with divergent viewpoints, whether it”s
Jeffords or McCain on the Republican side, or donkeys like
Breaux or Zell Miller. That”s politics! Live with it! Most
importantly, you want the labels “Rep.” or “Dem.” to remain in
front of the senator”s name. And when you have a 50-50 Senate,
that”s all that matters. That”s why I can rant that the Bush
administration gets an ”F” for this whole episode. For me to say
otherwise would be intellectually bankrupt.
Other comments, from Republicans, on this issue:
–Conservative columnist Michael Kelly. “Right now the
country is split down the middle ideologically and probably
moving slightly in the Democrats” direction. That means
competence will decide who will emerge as the majority party.
Uh oh.”
–Ken Duberstein, former Reagan chief of staff. “You”ve got to
treat these senators as teacher”s pets, not as if you were a truant
officer.”
–Senator Chuck Hagel. “There is an arrogance here (in the
White House) that cost the Democrats control in 1994. When
you”re arrogant, you get sloppy and don”t pay attention and that
is when you get replaced.”
–Senator Olympia Snowe, sharing the frustration of many in my
home region. “You cannot lose Republicans in the Northeast and
be a national majority.”
More Political Musings
–The Joint Chiefs of Staff is none too pleased with President
Bush”s weak request for increased military spending. They are
right. Bush is wrong.
–Well whaddya know…I defend the efforts of America”s park
rangers and this week Bush announces a $5 billion program to
upgrade our national parks (actually, it was really an old
plan…but who”s counting?). This is a step in the right direction,
but I didn”t see any funding for increasing the pay of the rangers!
–Fat cat GOP donors are fuming. You”ll recall that Vice
President Cheney had an event “thanking” them, yet it turns out
that the $100,000 donors didn”t get anywhere near the access that
evening that the $250K club did. To which I say, too bad,
suckers. Ever since last fall, when the GOP failed to support my
man Bob Franks in his Senate race against Jon Corzine, I have
said you”re foolish to contribute anything to the parties directly.
You have zero control over where your bucks go, most of which
just supports phone banks.
No, give your money directly to the candidates themselves (as I
am doing again for Franks”s current gubernatorial bid). Give
$1,000 to 100 GOP or Democratic individual candidates, if you
want to throw around that kind of money. Most won”t do this,
however, because they want that picture of themselves with their
arm around Bush or Daschle for their den.
–Speaking of the South Dakota senator, the other day Tim
Russert exposed the new Majority Leader for what he is…a
weasel.
–9 senators and about 45 House members didn”t vote on the final
tax bill. Where were they? Well, it was Memorial Day
weekend, after all. So much for doing the people”s business.
Hell, Strom Thurmond managed to vote.
–Victims of Democratic control in the Senate: No drilling in
ANWR, no new nuclear power plants, and minimal funding of
NMD…just the opposite of what Mr. Editor wants.
–Deep down, you know John McCain wishes he”d run as a 3rd
party candidate last fall.
–Look out state budgets. New Jersey suddenly faces a whopping
deficit because it was way too optimistic in projecting revenues
from capital gains. Dumb dumb dumb. What it really spells is
potential trouble for the nation”s GOP governors, heretofore a
source of pride for us elephants.
Random Musings
–If you missed NBC”s incredible special on Pearl Harbor last
weekend, you can catch it on CNBC tonight, Saturday. It”s a
must see.
–Hiram Mendow died at the age of 107. Mendow once
defended Al Capone, way back in 1929, and worked up to the
age of 102. In 1993, on his 100th birthday, his wife of 75 years
was asked if he should retire. “Retire? I always tell people that I
married Hiram for better and for worse, but not for lunch.”
–Yes, I”m well aware of Rudy Giuliani”s personal problems.
He”s still been an awesome mayor.
–The percentage of U.S. workers ages 45 to 54 without a
retirement account: 55%. 55 to 64: 53%. This is truly scary.
[Source: U.S. News]
–As one who has bored you to tears with my writings on
weighty topics like missile defense, you can imagine that I don”t
consider Jenna Bush”s problems to be worthy of the lead on “The
Today Show,” as it was Thursday. I feel sorry for her, having
not exactly been glued to my study carrel when I was in school.
But, yes, I guess it is news, especially if she doesn”t wise up
soon.
–Serious crime has leveled off after 8 years of decline. Must be
Bush”s fault. [You just know that will be part of the 2002
Democratic campaign commercials. The film is being cut this
weekend.]
–On January 20 in this space I wrote that Timothy McVeigh may
have some kind of “twisted end game.” This current bid for a
stay of execution isn”t what I had in mind then, but it is twisted,
and the FBI is totally to blame.
–Remember as you”re watching all of the wildfire stories this
summer that it is probably footage from 1995…or 1975. You”d
never know the difference, unless you pay particular attention to
car models. “Gee, Mr. News Producer, what are we going to
lead with tonight?” “Get out that ”85 wildfire footage from
California, Bob. Americans eat this stuff up.” “But what about
the Chinese takeover of Hong Kong?” “Wildfire, I said!”
–Those in opposition to the site of the World War II memorial
point to the beautiful tidal basin and a soon to be obstructed line
of sight from the Lincoln Memorial to the Washington
Monument. With all due respect (which really means, ”Since
you”re all full of it…”) when I was walking around that area this
past January, the tidal basin was a mess and in a total state of
disrepair. It looked like crap. They should cover it over with
those 12-foot ready-made gardens you”re beginning to see
advertised on TV. And they could use the water from the basin.
Now that”s conservation!
–So how are you going to spend your $300 tax refund? [And the
government is praying you spend it…in lieu of burying it in a tin
can.] Actually, since 2.3 million Americans die each year, the
government does run the risk of blowing $700 million, due to
faulty records. As for me, I figure I can buy about 17 cases of
Coors Lite, or 13 of a premium brand. Decisions, decisions.
–47% of big companies now review employee e-mail. 63%
monitor Net usage. Which is why I could go all porn and
employees would be protected. “Oh, I see Jimmy is just reading
StocksandNews. I thought it was something else.”
–Looking at Sam Donaldson”s rug the other day, I couldn”t help
but wonder if it was beaver or yak?
Gold closed at $268…so much for the rally.
Oil, $27.93
Returns for the week, 5/28-6/1
Dow Jones -0.1% [10990]
S&P 500 -1.4%
S&P MidCap -1.1%
Russell 2000 -1.4%
Nasdaq -4.5% [2149]
Returns for the period, 1/1/01-6/1/01
Dow Jones +1.9%
S&P 500 -4.5%
S&P MidCap +2.0%
Russell 2000 +3.8%
Nasdaq -13.0%
Bulls 47.4%
Bears 34.0% [Source: Investors Intelligence]
I appreciate your support.
Brian Trumbore
