[Posted 7:15 AM]
“Foreign policy today is everything…trade, politics, finance…
and the president has to be deeply involved if it is to come
together.”
–Republican Senator Chuck Hagel
This week the news networks were forced to cover President
Bush”s first European adventure, and on the whole I thought the
president acquitted himself well. Of course there was much
discussion of Europe”s displeasure over some of Bush”s policies,
namely on missile defense and his trashing of the Kyoto Treaty
on global warming.
It would be easy for Americans, viewing the criticism on these
and other topics to say, “Who gives a damn? Who needs
Europe?” Unfortunately, as frustrating as Europe can be to deal
with, we do need to work with them, even if it”s to protect the
continent from itself.
Following are some comments on the relationship, representative
of those opinions that got lost in the largely liberal coverage of
the week”s events.
“America is not Europe. America was created as an escape from,
and antidote to, Europe. American ”unilateralism,” as its critics
call it, has not produced anything like perfect leadership. But
there are worse ”isms” than unilateralism, and three are
imperialism, fascism and communism. A century of American
resolve, often in the face of European disdain, created a continent
where not one of these lives as a serious force. Not bad.”
–Michael Kelly / Washington Post
“The European Union, which can”t even prevent genocide on its
own frontier, prances round the world sticking its nose into areas
where it either knows nothing (Korea) or lacks the will to make
any useful contribution (Palestine). Welcome to the age of the
ugly European.”
–Mark Steyn (Canada”s National Post / Wall Street Journal)
“(Europe”s foreign policy is so weak), it is a default anti-
Americanism. To the extent that Europe does widen its horizons
and play a world role, it is increasingly defining its foreign
policy simply by being different from – and opposed to –
America…If this tendency were to continue unabated, it could
mean the end of the Atlantic alliance.”
–Fareed Zakaria / Newsweek
Comments like these are certainly no surprise to yours truly, as I
look for major problems down the road within the European
Union itself, let alone with its handling of the U.S. relationship.
Regarding the latter, while France and Germany, among others,
oppose President Bush”s missile defense plan, Spain and Italy
appear to support it (as do non-E.U. Poland and Turkey…as
well as our mates down under in Australia). But in the case of
France and Germany, while they both agree there is an emerging
threat from rogue nations with missiles, they want an
international conference to deal with proliferation instead.
At the same time, the E.U. wants to build an independent rapid
deployment force, but use NATO”s weapons. And they desire
this independence while slashing their own military budgets.
Consistency is not the union”s forte.
Additionally, Europe has the issue of how to expand the union,
whose main purpose is to act as a trade bloc (as opposed to
NATO which is a defensive alliance). And so it was that last
December, the 15 members of the E.U. got together in Nice and
signed a treaty that attempted to lay out a framework by which
new member states would be added. Essentially, this was a plan
for nations like Hungary, Poland, and the Czech Republic (all
slated to join by 2004), as well as 9 others including Slovenia,
the Baltic States, and Romania. The existing E.U. membership
wasn”t going to require that their national legislatures ratify the
Nice Treaty, the bureaucrats at the E.U. would simply act alone
and do as they pleased, all, that is, except Ireland.
Understand that the Nice document was hurriedly written on
some cocktail napkins (the E.U. officials had to bop over to
Monaco, mind you, for some evening entertainment) and it
assumed that the treaty would be officially ratified at the end of
2002 so that expansion could then proceed. Ireland, however,
insisted that it be brought before the people in a referendum. The
E.U. was like, “whatever,” while Ireland”s government said “no
problemo,” and a date was set for the people to go to the polls,
where they would dutifully vote “yes.” But, as it turned out there
was a problemo after all. Last week, Irish voters turned down
E.U. expansion by a 54-46 margin, rocking the continent to its
core.
Why would the good people of Eire do such a thing? Those who
voted down expansion gave two reasons. First, they were
worried that the E.U.”s proposed rapid deployment force would
threaten Ireland”s traditional neutrality, but, more importantly, it
came down to money.
And as much as I love the country, it”s a tad selfish if you ask
me. Ireland, after all, has received some $25-$28 billion in E.U.
subsidies since 1973, funds that, yes, they were more than
deserving of given the nation”s history. But long before the
government in Dublin got its act together on the tax front, which
has since been instrumental in attracting foreign companies to
Ireland, E.U. subsidies were helping to modernize the nation”s
infrastructure. Without an improved transportation network, for
example, there are no Intel or Compaq plants. But now some of
the Irish are concerned that if less wealthy nations were admitted
to the E.U., Ireland would have to share its portion of the
subsidies with countries like Lithuania and Romania.
There are some who say the Irish vote against Nice represented a
simple distrust in government. Columnist George Will, for
example, writes:
“(Ireland is) sand in the gears of the Brussels-based machine
working to atomize European peoples, to grind nations into a
dust of individuals that can be more easily blown about by winds
issuing from Brussels.”
Perhaps. But now the E.U. is faced with potential referendums
in France and Austria, whose anti-immigrant factions may
demand the opportunity to at least have a say on expansion. As
for the current Irish government led by Bertie Ahearn, it has
major egg on its face and told the E.U. Commission that the
country needs a lengthy cooling-off period before another
referendum is held by year-end 2002.
And all this maneuvering has everything to do with trade and the
economy. For example, do you think applicant nations such as
Hungary and Poland, who looked to Ireland as a role model,
want to do business with them? Will they retaliate and refuse to
accept Irish goods? And do you see how the European Union,
broadly defined to include the whole continent, could quickly
become the European Disunion?
So while President Bush is arguing his own agenda, Europe”s
politicians have one ear pointed at him and the other at their
people. There is a ton going on, both above and below the
surface, and none of it is helping a struggling global economy.
Finally, you have the issue of the G.E. – Honeywell merger and
the refusal of the E.U. Commission to approve it, even in a
drastically scaled down version. As G.E.”s Jack Welch said,
“You are never too old to get surprised.” [A statement that can
be applied to risk management and the stock market. Never,
ever, have 100% of your assets in equities at a given point in
time.]
It”s tempting to make more of the apparent scuttling of the deal
than is warranted. Certainly, it wasn”t a positive for our markets
on Thursday when it looked like the merger was off. And
American executives can”t be pleased at the message the E.U. is
sending.
On more than one occasion in this space, I have stated that bad
government can lead to economic and market calamities. But in
this instance, G.E. moves on and Honeywell would get a new
suitor.
Of greater concern to me, actually, as far as a manifestation of
anti-Americanism, is Boeing”s potential loss of a $4 billion sale
of F-15s to South Korea, as Seoul remains upset with the Bush
administration over our policy towards negotiating with North
Korea. And South Korea is also one of the countries Bush
targeted for dumping steel on our markets.
There…you may now grab a beer because we”re heading to the
sorry action on…
Wall Street
Periodically, the Federal Reserve releases what it calls its “beige
book,” a summary of economic conditions around the country.
The official definition for “beige” is: “a pale dull yellowish
brown.” Boy, if that doesn”t describe the current state of the
economy, both here and abroad, I don”t know what does.
Another word that fits, however, is “putrescent,” defined as
“rotting.”
The beige book survey revealed, “Most districts report that
economic activity was little changed or decelerating in April and
May.” Among the many more specific worrisome findings was
that consumer spending is softening, and, of course, it has been
the consumer, as well as the housing market, which have been
the only real pillars keeping the economy from pancaking down
to the basement.
One pillar that clearly wasn”t built up to code is telecom. Build
it and they will use, had been the motto in this sector. And make
sure you build it with other people”s money. Only one problem,
they built too much, like by a factor of 15. Here are some of this
week”s comments and developments concerning the current
environment in tech from some once high-flying leaders.
JDS Uniphase: “The business downturn has been rapid, steep and
unprecedented.” [JDSU shares, which hit $153, 3/7/00, traded
below $11 this week.]
Nokia: “Consumers are spending less on mobile phones.”
Lucent: Debt cut to “junk” status. Avaya spin-off reduces its
workforce by 11%.
Nortel: “The market is contracting at an alarming rate.” [Nortel,
a focus of this space last week, announced another 10,000 job
cuts…bringing the total this year to a staggering 30,000. And the
company is taking a $19 billion loss in the current quarter…I”ll
give you a second to digest that…$19 BILLION!!!!! Gulp.]
Philips Electronics NV: “We have seen no signs that point to a
recovery” in the chip market. [Philips is Europe”s #1 consumer
electronics manufacturer.]
And even this little sampling of fact and opinion reveals just how
deep the pain is in the tech sector, not just in the U.S. and
Canada, but overseas as well. In telecom, the losses through
bankruptcies now are on par with the S&L crisis of the 1980s,
meaning they will shortly exceed them. In dealing with the
current debt issue, it”s like walking through a Chechen minefield,
you know you”re going to step on one, it”s just a question of
whether you lose a foot or the whole leg.
As for the action on the Street this week, volatility picked up but
it wasn”t because of the plethora of economic data, rather it was
another spate of dismal earnings warnings, such as those above,
as well as the quarterly expiration of options and futures.
For the week the Dow Jones lost over 350 points, 3.2%, to close
at 10623. But it was in the Nasdaq that the pain was greatest as
the index posted its worst weekly loss of the year, 8.4%, and now
sits at 2028, over 3000 points from its all-time high of last year.
The reports on the health of the economy revealed more of the
same. The slowdown continues unabated (best exemplified by
the 8th-straight monthly decline in industrial production) while all
of the inflation indicators were benign (for this we give thanks,
Dear Lord). Certainly, there is just cause for the Federal Reserve
to lower interest rates even further when they meet June 26-27,
which will give us all a chance to say once again, “Of course, it
takes 6-9 months for the Fed”s actions to work their way through
the economy!” And then some will say in response, “Yeah, but
what about Japan? Its interest rates are basically zero and they”re
probably back in recession.”
The truth lies somewhere in between. Yes, the Fed”s rate cuts
will eventually have a positive impact, but it may only be to
lessen the pain, not contribute to the start of a new bull market.
As you saw this week with the latest batch of dire forecasts, there
is quite a bit of doubt as to just when things will begin to turn
around. And I don”t know how one can be particularly
optimistic when the rest of the world appears to be just beginning
their own slowdowns, which also means the editor sees no reason
to change his summer forecast…one best characterized by
malaise and cynicism.
Street Bytes
–U.S. Treasury Yields
1-yr. 3.40% 2-yr. 3.98% 10-yr. 5.24% 30-yr. 5.68%
The difference between the 2- and 30-year, 170 basis points, is
the widest in 7 years. The shorter end of the market is basically
discounting a half point reduction in rates at the next Fed confab.
But the longer end isn”t convinced that inflation wouldn”t come
back if and when the economy picks up anew.
–Energy: You got a good look at what a change of power in the
Senate can mean this week as the Democrats launched an
investigation into how the Federal government responded to
California”s energy crisis. Of course the timing is interesting
since prices are now declining at a rapid pace, to the point where
San Francisco remains the only metropolitan region in the U.S.
where the average price at the gas pump exceeds $2. The
national average is now $1.73 and should continue to decline as
the ongoing pickup in inventories works its way through the
system. And California”s electricity costs are falling quickly as
well. Nonetheless, the Federal Energy Regulatory Commission
appears ready to enact further price caps, in addition to the ones
imposed by the state, much to the chagrin of the Bush White
House. You won”t get a big argument on this matter from me.
California”s deregulation plans are to blame for this whole mess,
but the free market (the caps are minor) is now doing its best to
rectify the situation. That said, it still comes down to Mother
Nature as to whether or not California survives the summer without
large scale problems. [I”ll address the state contracts issue next
week.]
That”s the short-term. Long-term, both for California and the
rest of the country, we still have major issues, unless you”re in
the survivalist camp. Mort Zuckerman, publisher of U.S. News,
summed it up best this week.
“Those like former President Carter who suggest that we have no
oil crisis because worldwide supplies are adequate miss the
point. What matters most is who controls the supply and how
they can manipulate prices.”
Until this nation makes a real commitment to true energy
independence, anything can happen. [See Jack Welch above.]
Lastly, from 1970-98, gas consumption on cars in America
increased 6.4%. For vans, SUVs, and light trucks the increase
was 311.0%. [Source: Transportation Department] If I”m a
European, I wave that in front of our face.
–American homeowners are falling increasingly behind on their
mortgage payments.
–Office rents fell for the first time since 1993 in the first quarter.
–G.E. Capital has hundreds of millions at risk in loans to ailing
telecoms, but, according to the Financial Times, this represents
less than 10% of its overall lending exposure.
–Philip Morris spun off a portion of its Kraft Foods division in
the second largest IPO ever (next to AT&T Wireless). While the
offering price exceeded the original price band, the aftermarket
action was poor. It didn”t take long for investors to realize that
Chips-Ahoy! are stale.
–Amazon stock has been falling steadily as it”s apparent the core
business has been stagnating.
–Polaroid is decimating its workforce to the tune of 25%. As my
friend George said, “It”s just sad…very sad.”
–I”m not going to waste any space on the hearings taking place
in Washington this week to overhaul the securities industry”s
ethics. As far as the investing public”s perceptions of Wall Street
these days, you”re talking a Marshall Plan would be required to
turn it around.
–There is growing concern that state budgets are in for a rough
stretch due to the economic doldrums, and this will only make
recovery that much harder.
–How many times do investors have to get hit over the head with
the likes of Cisco, Oracle, and Sun Micro? They “rally” to $20,
and fall back to $15-16. Rally to $20, fall back to $15. Rally to
$20…
More International Affairs
Israel: CIA Director George Tenet brokered a tenuous 6-week
“cooling-off period,” after which Israel and the PLO would look
into implementing the Mitchell Report. Both sides are very
lukewarm about the ceasefire.
Russia: As I post this, the outcome of the Bush – Putin meeting
is not known. Bush will press Putin to dismantle the ABM
Treaty and back us on missile defense. Putin will express his
profound misgivings. But at least the negotiating positions
should be formally staked out and then real diplomacy takes
over…we hope.
Former Senator and arms control expert Sam Nunn put forward a
few proposals of his own in an op-ed piece this week. Stability
is eroding rapidly within Russia when it comes to control of all
its weapons of mass destruction. One important issue Nunn says
we can help the Russians on immediately is something dear to
my heart, the early warning systems that are in such disrepair,
meaning that without quick action, an accidental “reading” seems
almost inevitable.
Within Russia itself, there is increasing examination of Putin”s
first 18 months. On the whole, it isn”t good. What emerges is a
very indecisive leader who has stalled out on economic and legal
reforms, has clamped down severely on the press, has revitalized
a Cold War security apparatus (whether he meant to or not), has
further bungled the war in Chechnya and has a military which is
in total disarray. Other than that, he”s done alright.
China: Very quietly, the U.S. and China reached a final trade
agreement, paving the way for formal WTO access. And this
may be part of the reason why President Jiang Zemin was less
belligerent than normal concerning our proposal for NMD when
he met with President Putin in Shanghai this week.
But the dark side keeps emerging when it comes to human rights.
China”s High Court ruled that laws to prevent subversion, which
carry lengthy prison terms, can be used against followers who
distribute leaflets deemed anti-government. The court then
concluded the death penalty could be used against Falun Gong.
This is beyond belief to me, as it should for all of you. For its
part, Hong Kong”s CEO reiterated this week that he also thought
Falun Gong was a dangerous cult, but he stopped short of
banning the group, as it is on the mainland.
Lastly, there was a story that China was selling arms to Cuba.
Forgive me if on this topic I”m underwhelmed as to the
importance.
Japan: It is almost a certainty that Japan”s economy is once again
in recession. After reporting that first quarter GDP was negative,
the government minced no words in saying that the outlook
going forward continued to worsen. What”s particularly
worrisome is that President Koizumi will find it increasingly
difficult to initiate his talked about austerity program with the
country already in such awful shape.
Philippines: The government has vowed to crush the rebels who
continue to behead foreign tourists. If casualties start mounting
on the government side, it will be interesting to see how the
people react.
Zimbabwe: Thar she blows! The country, that is. Mugabe”s
government imposed 70% fuel price hikes…like the people can
even afford a liter to begin with! Watch South Africa to see how
they respond to the inevitable explosion that is coming here.
[The “over / under” is 3 months.]
Northern Ireland: Separate from the earlier discussion, Protestant
hardliners secured big gains in Britain”s recent parliamentary
elections, thereby jeopardizing the Easter Peace Accords. What
gets me is how the American press continues to give Bill Clinton
tremendous credit for his work on the peace process here. I told
you years ago it was a joke. The background for the “Troubles”
is centuries old and the issue will remain unresolved for centuries
to come.
Switzerland: While not a member of the European Union,
surprisingly, Swiss voters, by a 51-49 margin, approved the
arming of their country”s soldiers in international peacekeeping
missions, a clear break with their longstanding neutrality policy.
This was a victory for a government that is desirous of more
integration with Europe.
Random Musings
–Bush strategist Karl Rove is in hot water over a meeting he
held with Intel executives last March, at which time he owned a
fair amount of stock in the company. Since I”m not a fan of Mr.
Rove and feel he has hurt the president with some of his advice, I
hope this issue mushrooms!
–The president did gain his 2nd big legislative victory with
Senate passage of an education reform bill that gives Bush most
of what he sought. But as for his first achievement, the tax cut, I
was talking to my accountant this week and he echoed the
thought of many in his profession…the alternative minimum tax
is going to be a nightmare…so much for tax reform.
[Separately, U.S. News is reporting that Education Secretary Rod
Paige will resign, after the education bill is formally signed by
the president. He is very upset that the Bushies didn”t involve
him in the crafting of it.]
–Congratulations to Californians for a non-energy related matter.
A Los Angeles research group has reached the conclusion that
the state now has the 5th-largest economy in the world, passing
France. Oui oui!
–I am a convert to the theory of global warming, after years of
skepticism. But it is kind of funny that the earth”s temperature
has risen all of one degree Fahrenheit in the last 50 years.
I just can”t say I could feel the difference.
–So you all probably saw the study, which shows that the
average American family with a child born last year can expect
to spend $165,000 for food, shelter, and other basic necessities
over the next 17 years. [$233,000 adjusted for inflation.] But
there is a solution to this issue; move to Indonesia and live in a
shack, eating insects, for just $1,012. Add $25,000 for cable.
–Good for Theresa Earnhardt, widow of NASCAR great Dale,
for winning her court battle over access to his autopsy photos.
It”s just a shame she had to put up with such a sick bunch that
wanted to put them on the Internet.
–Sorry, but I”m continually amazed at what the networks
consider to be newsworthy, particularly on the nightly newscasts.
The other day, NBC took the time to show President Clinton
playing golf on a course in Britain when he realized there was a
wedding reception nearby, so he went over to pose for pictures
with the bride and groom, all captured on video of course or I
wouldn”t be wasting this space. That”s news?!
And while we”re at it, the networks feel compelled to come up
with a new medical story each night, in NBC”s case, “Lifeline.”
Folks, did you ever think how idiotic this all is? The average life
expectancy is rising, but ever so slightly, because of cleaner
water, air, and better hygiene, not because of all these new drugs
and treatments.
I”m not poking fun at medications that have made certain
conditions easier to live with, but every single day there is
something we are told to watch out for…like this week”s story on
Vitamin C. Or one week we”re told coffee is bad, the next week
it”s good. Or that scientists are close to cures for every disease
known to man, yet we essentially live to be the same age as
before.
So as a public service to you all, here is the official
StocksandNews formula for leading as healthy and long a life as
your genes will allow.
Don”t smoke, try and keep the weight down, jog or walk 3 or 4
times a week (as much for your mental health as your physical
well-being), eat a balanced diet, take one multi-vitamin a day,
and drink one or two beers or glasses of wine each evening.
Oh…and also stay away from heroin and LSD, plus never have
100% of your money in equities. Now if you follow these simple
guidelines, you stand a pretty good chance of exceeding your life
expectancy. [Cubs and Red Sox fans unfortunately have to
subtract 18 months. And if one of the teams wins the Series this
season, subtract 3 years, because your nerves won”t be able to
take it.]
–Despite the fact energy prices are coming down in California,
there is still quite a bit of animosity between California officials
and Texas energy executives, who have been accused of ripping
the state off. So you know how in times of economic and social
distress, some of us like to say, “What this country needs is a
good war!” It would certainly get the factories humming
again…though Texas could cut off California”s electricity…
advantage Texas!
–President Bush called Africa a “nation” this week. That”s
alright. I was watching Tom Brokaw Friday night and he said
“President Bush is on his way to Moscow to meet with Russian
President Putin.” Ahh, Tom? They”re meeting in Slovenia.
[Tom writes his own material, you know.]
–I don”t know about you, but when I heard that Bush was halting
the bombing of the island of Vieques in 2003, all I could think of
was how do I get tickets? Talk about a “Grand Finale.” That
should be quite a show!……………and here come the e-mails…
–And now for your yak update: Wild yak herds travel on snow
in single file, carefully stepping on footprints left by the lead yak.
Clearly, this is better form than exhibited by Europeans waiting
in line for a bus.
–Lastly, I”m not even going to attempt to transition gracefully
into this topic, but like most Americans I”ve already forgotten
about Timothy McVeigh. But I do have to acknowledge Larry
Whicher, a relative of one of the victim”s, who said after
viewing the execution that justice in the United States was
“tough, but fair.” It has to be in order to preserve our freedoms,
he said. No one I heard put it better. And for all of us, it”s also
time to move on.
Gold closed at $272
Oil, $28.51
Returns for the week, 6/11-6/15
Dow Jones -3.2% [10623]
S&P 500 -4.0%
S&P MidCap -4.2%
Russell 2000 -3.2%
Nasdaq -8.4% [2028]
Returns for the period, 1/1/01-6/15/01
Dow Jones -1.5%
S&P 500 -8.0%
S&P MidCap -1.5%
Russell 2000 +2.4%
Nasdaq -17.9%
Bulls 49.0%
Bears 29.6% [Source: Investors Intelligence]
Happy Father”s Day to all of the Dads out there!
Brian Trumbore
