[Posted 7:15 AM]
[WARNING: The following is a Black Diamond commentary.
If you are looking for positive news, you won”t find it here.]
—
“Just remember the sunshine, always follows the rain…
Wrap your troubles in dreams, and dream your troubles away.”
–Bing Crosby, 1939.
Oh, don”t you know there are a lot of investors out there who
wish they could dream their portfolio away. I read an article on
Bing Crosby a few months ago and it was touting the boxed set,
“Bing Crosby: His Legendary Years…1931-1957 / MCA,” as
being the definitive collection of the underrated Crosby”s work.
Well, I finally found it this week (and heartily recommend it),
but as I”ve been playing the earlier tunes in the office I keep
thinking, so this is what folks were listening to during the
Depression! And can it happen again?
On numerous occasions I have argued that we would avoid
recession, only as classically defined (two quarters of negative
GDP growth in a row), but that if housing ever truly cracked,
we”re talking Depression. “Go directly to Depression…do not
pass recession…do not collect $400.” Yet all of us have
marveled at the strength of both housing and the consumer
during this increasingly wicked downturn. But whether it”s
housing or consumer spending that goes first, it really doesn”t
matter, for if one cracks, the other will surely follow.
Sorry to start out on such a suicidal note, but geezuz, if you can
find a ray of sunshine in any of the week”s business news, you”re
a better man than me. Oh, sure, there were some minor notes,
such as another reported increase in consumer spending, but the
hard news from both corporate America and overseas was
dreadful. Here is a brief sampling.
—3M Chairman James McNerney Jr. “My view is that the next
5 years are going to look tougher than the last 5 years.”
McNerney is one of the first to go that far out; the significance to
me being that the vast majority of investors, while lowering their
expectations for maybe a year, still probably feel that happy days
will return in short order.
–Chipmaker AMD warned it would earn 3-5 cents in the quarter
just ended, not 27 cents, as was the consensus estimate. A slight
miss!!
–Data storage king EMC announced it would miss its quarterly
revenue target by 20%! [Shares in EMC, one of 2000”s “must
haves,” hit $105 last September 25. They closed Friday at $22.]
–Marconi, the U.K.”s largest phone-equipment maker, predicted
just this past May that they were well positioned to weather the
tech storm. Seven weeks later they announced, “Demand fell off
a cliff in Europe the last 7-8 weeks.” The shares lost 50% in one
day.
–Leading chipmaker Hitachi announced it was shutting down its
plant in Japan due to lack of demand for its product in mobile
phones.
Those are just a few of the higher profile company specific
items. Worldwide, global chip sales are down 30% year-to-date,
Japan is in recession (with the risk of worse), Germany is sliding
at an accelerating rate, Britain and France have the chills, Latin
America has a worsening fever, developing Asia has a flu no one
seems to talk about, and Canada, well, they have Nortel.
Publisher Mort Zuckerman had the following in his editorial for
U.S. News.
“For the first time since World War II, the slowdown is being led
by a collapse of capital spending. When that happens, no amount
of cheap money will spur new investment until we work off our
excess supply.”
To which I would add that on the supply / inventory front, it also
comes down to the decision making on the other end. Does the
corporate executive commit to buying a product he or she may be
able to get by without until they feel more confident about the
future?
And addressing Zuckerman”s issue of cheap money spurring new
investment, let me add some meat to my flippant remark of last
week that the Fed is increasingly irrelevant. As banking maven
and author Martin Mayer has pointed out recently, what makes
the Federal Reserve”s job more difficult is the fact that whereas
in the old days, let”s say until the past 20 years or so, companies
relied on banks for financing to the tune of perhaps 60%, today,
the proprietors of the new economy sell bonds or equities in the
open market and only about 20% is through more traditional
bank loans.
In other words, whereas the Fed”s actions on the short end of the
yield curve (the only segment they control) used to influence
60% of capital formation and corporate behavior, today it”s but 20%.
Additionally, Alan Greenspan and Co. must be exceedingly frustrated
that after lowering short-term interest rates 2.75%, long rates are
actually up. And, of course, it”s the long end that influences most
mortgage and consumer credit rates.
So not only are the Fed”s actions having limited if no effect on
the consumer, the Fed has virtually zero impact on corporate
America”s capital spending plans.
For their part, how then does the consumer stay so sanguine?
I”ve been tempted to run around the local mall, shouting, “Don”t
you all understand how awful things are?” but I really don”t need
to get arrested right now. And let”s face it, even after a pretty
dismal employment report for the month of June, the official
unemployment rate in America is still an historically low 4.5%.
Consumer spending is holding up because most of us still have
jobs. Why here”s Ross Perot. “It”s just that simple, Brian.”
Thanks, Ross. But, in addition, as Goldman economist Bill
Dudley says, unless the stock market turns around in a significant
way, the reverse “wealth effect” will finally kick in, even with
the arrival of the tax rebate checks, which may simply end up in
the bank, or used to pay off debt, the last thing the Bush
administration intended.
Geezuz, Mr. Editor, don”t you have anything positive to say?
Ah, not really. All I”m hearing recently is that earnings
comparisons may improve in the 4th quarter and I”m supposed to
be excited by that? One just has to listen to AMD”s warning this
week, where they brought up the issue of severe pricing
pressures, to know that in most market sectors increasing profits
will be hard to come by. And even if the comparisons are
respectable, what then of valuations, which in the technology
sector, at least, remain exceedingly high?
Alas, there is some legitimate good news. Inflation is just not a
problem. But maybe DEFLATION is…d”oh!!!
Street Bytes
–Thanks largely to the awful news on the earnings front, the
Dow Jones declined for the 7th straight week (believe it or not, its
longest such streak in 20+ years), 2.4%, to 10252. The Nasdaq
barely closed above 2000 (2004), losing over 7%.
–Bonds were largely unchanged, though yields declined a bit on
the short end of the curve on renewed optimism that the Federal
Reserve could be forced to reduce interest rates further.
U.S. Treasury Yields
1-yr. 3.53% 2-yr. 4.13% 10-yr. 5.37% 30-yr. 5.74%
–As a follow-up to my comment of last week that “there is no
next big thing,” Barron”s has an interview in the July 2 issue with
long-time technology fund manager Paul Wick. Says Wick:
“It is going to be a very slow gradual recovery from this tech
funk. The PC market is mature…We are at a pause in wireless-
handset demand because there are no new features in the new
phones that really will entice people to upgrade…(And as for the
networking and telecom segment), rather than being in neutral,
they seem to be in reverse. And you”ve got this huge glut of
long-haul capacity in the U.S. and Western Europe, and that is
going to take a long time to bleed off. And with the Internet,
there are still plenty of companies – who knows how many? –
that are going under.”
Wick goes on to say, however, the positives are in the videogame
and automotive market. Like I said, in other words there is no
next big thing.
–UAL announced it was shelving its merger with US Air over
antitrust concerns. It”s really more about the economy. UAL
realized it was paying far more than the current environment
warrants.
–As you would expect, Microsoft spokespeople say the company
will not accept breakup as a remedy for its antitrust violations.
Yet this week the state attorney generals were continuing to act
as if they will still wage the fight to make breakup a reality. This
case is far from over.
–The current issue of Grant”s Interest Rate Observer has a
scathing column on IBM and its seeming ability to “materialize
earnings growth.” Competitors in IBM”s seven principal
business lines have all warned, yet IBM itself has held fast. The
story played no small role in Big Blue”s tumble on Friday.
–There was so much talk of a potential summer rally earlier this
week, both on the airwaves and in print, that you just know
everyone is dying on the advertising front. Bad news is a tough
sell.
–Don”t you yearn for the days when a company would miss
estimates by just a penny and still get clocked? These companies
today that are missing by a mile don”t leave anything to the
imagination! It”s kind of like the difference between the Sports
Illustrated swimsuit issue and Penthouse…not that I would know
the difference myself. [And here come the e-mails……..]
–Energy: OPEC opted to maintain production at current levels,
as Iraq is coming back on stream with its own 2 million barrels a
day of production. While the price of crude rose this week,
largely due to the first bullish news on inventories (at least if
you”re “long” energy) in months, the fact is that with the
worldwide slowdown appearing to accelerate, current supplies
are more than adequate to meet demand. But OPEC desperately
wants to keep the oil price around $25 (for a basket of various
blends), so its next move may be to cut production levels when
they meet in September. It all depends on overall economic
activity, yet one still can”t ignore any tensions in the Middle
East. For the most part, OPEC ministers have successfully
avoided being swept up in the Islamic movements of their native
lands. Saudi Arabia, though, has begun to crack with some of its
anti-Israel statements, and others may follow.
Longer term, the worldwide demand picture for energy is still a
very bullish one. Just one item from this week should help
convince you of this. China announced they were going to build
43 new airports, many of which will be in the Western
hinterlands in an effort to spur development. I read something
like that and think, boy, that”s a lot of jet fuel. [I also think, boy,
war in Asia over natural resources is inevitable.]
Finally, the New York Times had an interesting piece on the big
shortage in qualified workers for the domestic energy business.
So to the parents out there, encourage those high school seniors
and college freshmen of yours to study geology. That may be
about the safest profession around when it comes to job security.
–The European Central Bank refused to lower interest rates this
week, despite the increasingly dour economic picture on the
continent, and announced that it wouldn”t do so “for some time.”
These guys are truly pitiful, as is the whole euro structure.
You”re beginning to see how difficult it can be to coordinate the
hopes and dreams of 12 very different nations. [Sweden, not a
euro member (but an E.U. one), actually raised interest rates this
week! Maybe they got it all wrong? “Let”s see, if bond prices
are going down, yields are going down…or is it, if bond prices
are going down, yields are going up? Oh, let”s just flip a coin.”]
–G.E.”s earnings report, scheduled for Thursday, looms large.
–To my friends in the securities industry (whose bosses are
frantically trying to block this gloomy site), you can still have a
very successful year if you do just one thing. Sell PIMCO”s
Total Return Bond Fund, the only specific investment idea I”ve
endorsed. When it comes to bonds, manager Bill Gross is king.
I know…I worked with the man.
–Lastly, as I watched the markets tumble on Friday, I had a
flashback to the Friday before the Crash in October 1987. That
day was a tough one as tension was building that an outright
calamity could be just around the corner. Then over that
weekend, Treasury Secretary Baker had some rather caustic
comments for the European Central Bank and its leader, helping
to precipitate the Crash. This weekend, current Treasury
Secretary O”Neill will be attending a G-7 meeting of finance
ministers in Rome. O”Neill is not afraid to speak his mind. Let”s
hope he doesn”t say anything goofy relating to the dollar.
International Affairs
China: President Jiang Zemin said the Communist Party would
accept businessmen, a rather radical departure. But Jiang added
the party would still be based “on workers, farmers,
intellectuals…but it is also necessary to accept those outstanding
elements from other sectors of the society.” Of course, there are
many hard-liners who are rather upset with him over this matter.
And then you have the whole Falun Gong issue. Did 15
members commit suicide in Chinese prisons, as the government
claimed, or were they tortured to death, according to Falun Gong
officials? This story erupted on Thursday and to say some of the
reports were irresponsible is an understatement. The AP
reporter, clearly a toady of Beijing, didn”t even question the
government”s angle. The fact is that families have not been
allowed to see many of the bodies, with some even being
cremated before they arrived to pick them up. And a U.S. State
Department spokesman properly cast serious doubt as to the
veracity of the Chinese government”s claim.
Falun Gong and the issue of imprisoned U.S. citizens evidently
came up as part of the conversation President Bush had with
Jiang this week, but there were conflicting reports as to whether
or not one or two of the 30 currently in jail for various charges of
espionage were being brought to trial.
But, heck, Beijing will win the 2008 Olympic Games bid so who
cares?!
Japan: The Nikkei index had its lowest weekly close since March
as the economic crisis deepened. The latest Bank of Japan
business sentiment indicator continued to decline, as the
slowdown in the U.S. will obviously limit the purchase of
Japanese goods by American consumers.
As to the $1 trillion (that”s 12 zero”s) in bad debts the Japanese
banks are carrying on the books, a Goldman, Sachs analyst said,
“Unwinding the bank crisis will be very difficult, at a time that
we remember that unwinding a much smaller crisis in Thailand
in 1997 had vast global implications.”
Prime Minister Koizumi is in one tough spot. You”re beginning
to see others use the word I did when he took office. Real
reform, with a massive rise in unemployment, could spell
Depression.
And then there is the issue of the U.S. serviceman accused of
rape on Okinawa. We have 26,000 troops stationed on the
island, and, unfortunately, in any group of that size there are
bound to be some troublemakers. But with the recent accusation
it”s time once again for the press to miss the facts. Of course,
there are lots of Japanese on Okinawa who want the U.S. troop
presence out of there. But, as I pointed out on 5/26 in this space,
I saw a survey while in Asia that “shows more Okinawans favor
the U.S. presence on the island than oppose it.” I have yet to see
anyone mention this fact.
Israel: There was little real news to report. Thankfully, the
death toll was at about the lowest level since the troubles started
last September, but Israel is beginning to lose its hard won
support of the past few weeks over its continuing assassination
policy.
Egypt: Republican Senator Mitch McConnell sent a signal to
Egypt that U.S. aid is not a handout. While Egyptian President
Mubarak has been of help in past peace efforts, he also continues
to allow the government-backed press to incite violence against
both Israel and the U.S. Enough is enough.
Iraq: In a big defeat for the U.S. and the U.K. (as well as
Secretary of State Powell), efforts to modify the existing U.N.
sanctions on Iraq failed. Just a month ago, it was hoped that
tighter controls over equipment with military applications could
be placed in exchange for easing the flow of consumer goods.
Alas, the Russians, long-time allies of Iraq, said “nyet” and the
old oil-for-food program remains in place. Iraq owes Russia $8
billion for past arms sales. If President Bush can get Russian
President Putin to turn around on this issue, that would be a big
positive for the future of U.S. / Russian relations. But don”t hold
your breath.
Iran: ENI, the Italian energy firm, formally announced a deal
with the Iranian government to explore Iran”s oil fields, thus
breaking the sanctions that the U.S. has imposed on both Iran and
Libya. Washington can impose penalties on non-U.S. companies
investing in the energy sector in either country. But, there is no
way President Bush will do that, especially because, 1) his
administration is reconsidering the whole Iranian situation, and,
2) with the recent election of Italian Prime Minister Berlusconi,
Bush has a soulmate.
Separately, the Washington Post reports that Iran”s clerics got
caught off guard by “cybermania.” “Bar Chat” is big among
intellectuals in Tehran, so I”m told.
Russia: President Bush may trust him, but President Putin
nonetheless went merrily about his media crackdown, including
the storming of an independent radio station shortly before they
were to interview visiting French President Chirac. A rather bold
move, yes?
Europe: From time to time we try to be well ahead of the curve
here and in the case of the issue of immigration in Europe, I have
given you quite a head start. This week the German government
released a report which advocates a new national policy, touting
the fact that Germany, due to its projected decline in population,
needs to add 50,000 immigrants a year or face severe labor
shortages. This is quite a statement, considering Germany”s past
history. And they”re right. National elections are held next year
and the government wanted to get the dialogue started early,
especially in the face of figures showing a 59% rise in far-right
crime in 2000.
Elsewhere, ABC News had a report on the growing problem in
countries like Poland and Italy with racial taunting at soccer
games. To say the least, the abuse of black players has become
ugly indeed, and it”s even directed at those on the locals” own
squads.
And in Britain, it is increasingly clear that recent racial strife is
being instigated by the British National Party, one with fascist
roots. The BNP, which is garnering 10% plus in some local
elections, argues that Asians are receiving funds (like for
subsidized housing) that should instead go to whites.
It”s easy to think, so what the heck does this have to do with the
financial markets, Mr. Editor? Everything, mon frere. The
slowdown in Europe is accelerating much faster than anyone
expected. If you are a German or Brit who is suddenly thrown
out of work, the immigrants become the target, and pictures of
violence don”t exactly make for a nice photo spread on the old
Chamber of Commerce brochure.
Northern Ireland: Power-sharing leader David Trimble resigned,
as expected, meaning the Protestants and Catholics have 6 weeks
to piece together an alternative government before the British
have the right to enforce a return to direct rule.
Austria: As a follow-up to last week”s remarks, under the tightest
security ever in Salzburg, the World Economic Forum went off
with few hitches. The police, who had threatened heavy use of
force against the anarchists, instead herded them onto a secure
train and sent them to Vienna before they could cause a problem.
But in writing this last sentence, I did have a certain sense of
unease.
Zimbabwe: The unions held a 2-day strike over the government”s
70% fuel price hikes. At least two were killed, but, so far, the
violence has been muted (by African standards). Now think
about it. 70% of the people live in poverty, the fuel is hiked
70%, followed by bus fares rising 70%, and on top of this you
have a 60% unemployment rate. How can Mugabe still be in
charge?
Venezuela: Another follow-up, this concerning last week”s
discussion on President Chavez. Due to his handling of Peruvian
spymaster Montesinos, Chavez is facing increasing pressure
from opposition leaders in Venezuela to come clean on whether
or not he helped to hide Montesinos since December. And the
opposition wants the 30,000 videos (that the spymaster allegedly
has) checked to see if Venezuelan government officials were
involved in the massive Peruvian corruption scandal.
Random Musings
–Yes, when you think about it, this whole patients” bill of rights
argument in Congress is ridiculous. It does nothing to address
the 42 million in America who remain uninsured, but, if folks are
allowed to sue in state court, that figure will only rise to 50
million or higher (my educated guess).
Senate Majority Leader Tom Daschle was at it again on “Meet
the Press.” Daschle told Tim Russert that people were running
up to him at home saying “Thank you” on the patients” rights
issue. That”s such B.S., albeit expected, but it”s what turns us all
off from politics. There aren”t 10% in America who truly
understand what the bill is all about. [And to be quite honest, I
don”t know if I can put myself in that 10%.]
On a different matter, the Senator said the Democratic-controlled
Senate would employ the “same fiscal discipline we
demonstrated in the Clinton administration,” which I guess
means that discretionary spending, supposed to have been capped
at an increase of 4%, but which rose 8% in the 2001 budget, will
continue to spiral out of control. [Republicans are far from
blameless on this matter as well.]
And while I”m ranting on this issue, my friend MR and I seethe
every time we hear a legislator accuse an opponent of “cutting”
spending when it was still an increase. For example, if you spent
$1 million in 2000 and your opponent wants $1.2 million in
2001, but you settle for $1.1 million in the final budget, that”s a
freakin” increase, not a cut! Anyone who calls it a cut should be
fined the difference.
–Johnny Davis, tell us what kind of pacemaker Vice President
Cheney is wearing? That”s a Medtronic Gem III DR, Brian.
–There was an article in the local paper that 40% of high school
kids were on medication of one kind or another. 40%! What the
heck are these kids on? They don”t all have legitimate medical
problems, that”s for sure.
–I have to admit, folks, I have censured myself more than once
over the past few weeks, knocking out “draft” comments on what
I see as a very disturbing trend in the reporting of developments
in the field of medicine. We are being hyped to death.
There is no doubt we have made tremendous strides in some
areas, but we are also masters at creating false hope. And I can”t
help but refer to a comment I made a few weeks back concerning
Dr. Michael Gottlieb, who first identified the HIV virus.
Gottlieb doesn”t think we will have a truly viable AIDS vaccine
until at least 2021! That”s just one example. What”s troubling is
that in the meantime we have endless stories of BioX and BioY
coming up with cures, the share prices skyrocket for a day or
two, and then they fall back. It”s all a confidence scheme. And
then there”s the issue of which diseases get all of the research
dollars? Which are more important than the rest? Well, I”ve
probably just ticked off many of you, but it”s as close to the truth
as I can come to.
–I saw a story about how specially trained dogs aid hunters in
South Africa in tracking down leopards. The dogs chase the
leopard up a tree and then the hunters kill it. This isn”t hunting!
I eagerly await the next “leopard kills hunter” story.
–And elsewhere in Africa, 300 have been killed in a “witch-
hunt” the past few weeks in Congo. The witches are accused of
casting spells and poisoning people. The official word from the
area is that “witches are believed to use blood to liberate
themselves from normal physical constraints so that they can
travel at superhuman speeds.” Maybe…or are they just looking
to get out of a margin call?
–That dual anchor system being employed by CNN”s Headline
News is incredibly goofy.
–Anthony Soprano Jr., a k a Robert Iler…method actor.
–Food tip from the editor: I heartily recommend Hormel”s Fully-
Cooked Fast ”N Easy Bacon Strips. Toss ”em on any dish for
added flavor. That”s Hormel…official bacon of StocksandNews.
–In winning the Greater Hartford PGA Tour event last weekend,
Phil Mickelson prepared by not touching his clubs the whole
preceding week. Instead, he was “mentally rehearsing and
visualizing” his shots. Sounds like witchcraft to me. If
Mickelson goes to the Congo, he”s cooked.
–The Star-Ledger had the following headline the other day.
“Dust clouds filled with bacteria travel from Africa to America.”
Focus on the dust angle, the preponderance of which in our
atmosphere is currently due to Africa”s ongoing drought. Does
this ring a bell?
From “A Charlie Brown Christmas.”
Charlie Brown to Frieda (who has been complaining about the
filthy Pig Pen): “Don”t think of it as dust. Think of it as maybe
the soil of some great, past civilization. Maybe the soil of
ancient Babylon…You may be carrying soil that was trod upon
by Solomon.”
Pig Pen: “Sort of makes you want to treat me with more respect,
doesn”t it?”
Brian Trumbore: “Darn right! Stop complaining, Frieda.”
Well, you all know those last lines were deleted by Charles
Schulz. And Frieda later sued her HMO in state court for
misdiagnosing the bacteria that made her violently ill, thereby
winning damages of $150 million.
–Remember the name Takeru Kobayashi, the Japanese man who
ate an absolutely unbelievable 50 hot dogs (with buns) in 12
minutes at the annual Nathan”s Fourth of July contest. This
wasn”t just a doubling of last year”s record total of 25, rather, as
Johnny Mac told me, this should be a call to arms for America.
As he puts it, “We are supposed to be the most self-indulgent
gluttons ever to roam the earth…yet we get embarrassed by some
131-pound foreigner.” J Mac is right. It”s time for a patriotic
NFL lineman to step forward and challenge Kobayashi. And
personally, I rank his achievement right up there with the greatest
of all time. Tiger winning the 2000 U.S. Open by 15 strokes?
Forget it. This is far bigger.
–Yak Update: Country music giant Chet Atkins”s biggest hit was
“Yakety Axe,” a 1965 tune about a Yak ax murderer who
terrorized Tibet, or so legend would have it.
–My friend Jimbo and I exchanged pleasantries on the Fourth.
He was musing about the heroic actions of the Founding Fathers,
as well as those of the generations that followed, and we got to
thinking about what our generation”s true calling is? As Jim
said, one of his biggest challenges is trying to decide where to go
on vacation, and on a weekly basis whether he should play golf
or tennis! I feel that we do have an important calling. We need
to explore space, far more than we already are. Start lining up
those missions to Mars…and when one fails, just go…Next!
–Finally, I was watching a Fourth of July piece on a guy named
Willie from Arkansas. Willie was clearly a simple man, but he
had his small home painted in red, white, and blue. Willie”s
explanation? “It”s a holiday every day I get up.” Baby, you
gotta love it!
Gold closed at $266…sliding anew.
Oil, $28.21…late week spike up.
Returns for the week 7/2-7/6
Dow Jones -2.4% [10252]
S&P 500 -2.8%
S&P MidCap -3.0%
Russell 2000 -5.8%
Nasdaq -7.2% [2004]
Returns for the period, 1/1/01-7/6/01
Dow Jones -5.0%
S&P 500 -9.8%
S&P MidCap -2.5%
Russell 2000 -0.1%
Nasdaq -18.9%
Bulls 50.0%
Bears 25.5% [Source: Investors Intelligence…must be a
mistake. I”ll comment further next week.]
Brian Trumbore
