[Posted 7:15 AM]
Billy Gates…he”s our man…if Bill can”t do it…no one can!
Yippee! Woof woof woof woof!
–The StocksandNews cheerleaders
Microsoft…the “wealth creation” company. And they were at it
again this week as a simple pre-announcement, and a none too
exciting one at that, was enough to ignite a long overdue rally in
the equity markets.
But don”t you get the impression when you watch Bill Gates on
television that as he gives us that total look of disdain, he”s also
thinking, “Geezuz, these guys are chumps.”
I mean after all, through a combination of sheer brilliance and
hardball tactics, Gates and Microsoft have captured the flag.
And now, partly out of amusement, Gates and CEO Steve
Ballmer must have thought, “If we guide Wall Street to a super
conservative, lowball figure, and then we simply match it, the
market will go bonkers, especially given all the bad news lately.”
“Like lemmings to the sea?” asked Ballmer. “Like lemmings to
the sea,” Gates sneered.
And so it was that after the market closed on Wednesday,
Microsoft announced that revenues for the June quarter would be
$6.5 to $6.6 billion, versus the estimate they initially gave the
Street of $6.3 to $6.5. Now chances are that if you asked Joe 6-
Pack on an assembly line in Michigan what he thought of the
numbers he”d say, “Well, looks alright to me, but nothing to
write home about.”
Ah, but Wall Street felt differently. Now don”t get me wrong.
We had our Crash in 2000 and early 2001, and we aren”t going to
have another, and I”d like to see a rally as much as the next guy
(as my little Nasdaq position would attest to), but it was the
rationale behind Thursday”s gains that got me. Hell, the Street
even stretched an absolutely awful Yahoo earnings report into
something heroic.
So here are the facts as I see them. Microsoft”s pre-
announcement was alright. At least they won”t miss, when all
around them are. But it was not the kind of news that signals a
bottom for the U.S. economy, let alone worldwide. General
Electric, on the other hand, did hit its earnings number, but fell
short on the revenue side (which had more to do with the
unloading of some businesses than anything else). All in all, not
bad, but Jack Welch did admit that the global environment was
shaky.
But look at the other overwhelmingly disastrous news,
particularly for technology.
–Corning, the #1 fiber-optic networks provider, announced it
would miss its revenue target by a mile, that it will close 3 plants,
and is eliminating its dividend. The CEO predicted the
“unprecedented” slump may last 12-18 months. [Xerox also
announced it was eliminating its dividend.]
–Alcatel is laying off 2,500 in the U.S.
–Online advertiser DoubleClick”s CEO said, “We don”t see any
indication that ad revenue is going to pick up in the third
quarter.”
–Rambus announced its September quarter will see revenues
down 20% from the June quarter.
–Juniper Networks (a Cisco competitor) said its third quarter
sales would be unchanged from the second, while for the year
sales will be 35% below the original January estimate.
–Comverse Technology (a leader in telephone-messaging
systems) warned they would miss by a mile and said customers
have delayed purchasing new systems and upgrades.
–OpenWave (a favorite whipping boy here…and a maker of
software applications for mobile phones) fell sharply after an
analyst downgraded the shares due to slowing demand.
–Webvan, the online grocer, officially closed its doors. Sorry, I
realize no one cares on this one, least of all yours truly. But it is
amazing that they went through $1 billion faster than Texas chili
through…
–Compaq announced thousands more will be given pink slips as
it blamed a slowing European economy.
But then you have two other catalysts, aside from Microsoft, for
Thursday”s rally, Yahoo and Motorola.
Yahoo beat the Street by one penny (in earning one cent), but
revenues were down 33% from the year earlier period. This
from a “Net leader.” Yet somehow we are supposed to believe
this is a terrific growth story going forward. Oh well, enough
suckers felt that way to kick the stock up a few bucks at one
point this week.
As for Motorola, which lost 11 cents versus an estimated 12-cent
loss, revenues fell from $9.3 billion for the year ago period to
$7.5 billion. But no matter, this was great news for investors,
simply because Motorola said it was cautiously optimistic on
prospects for its handset business. I prefer to focus on the fact
that industrywide, handset sales, once estimated at 600 million
units for 2001, are now expected to come in around 370 million.
But the real issue these days is the global slowdown. Back in the
summer of 1997, Thailand”s surprise devaluation of its currency
barely hit Wall Street”s radar screen. But before long we had a
massive meltdown in Asia and all emerging markets.
Forget the problems in Argentina, which are no doubt serious for
today”s emerging markets investor (I told you all ten times to
stay clear of this sector), Singapore is 2001”s Thailand.
This week the Singapore government announced that the
economy is now in recession. Just a month or so ago the
economy here was supposed to grow 1.5% in the second quarter
(having been reduced from 3.5%), but suddenly it fell almost 1%
instead. And then on Friday the Taiwanese government halved
growth estimates for 2001. Just a slight adjustment. Throw in a
shaky Malaysia and an Indonesia that not only has economic
problems but also the Wahid impeachment mess to deal with,
and you can see how the latest contagion has already begun.
And folks this is all happening at light speed.
On May 24 I posted the following figures as part of a “Hott
Spotts” piece on Asia. It bears repeating.
Electronics Exports as a % of Total Exports
Singapore 64%
Philippines 61%
Malaysia 58%
Taiwan 46%
Korea 38%
Thailand 36%
[Source: Asia Week]
Those are pretty big numbers, aren”t they? When the U.S.
catches cold, Asia gets pneumonia.
Ex-Japan (which is on life-support), Asian GDP is expected to
rise 3.9% in 2001, half of 2000”s pace. At least that was the
most recent forecast. It could be 2% or lower when all is said
and done. And while 2 or 3% growth sounds OK, it”s not. These
economies need to grow consistently at 5,6,7 and 8% rates, not
just to begin to get back to pre-”97 levels, but also to deal with
exploding populations. 2 or 3% is basically a recession in
emerging markets land, and if you start posting negative
numbers, that”s depression territory.
Ironically, China can play a major positive role here. [I should
have given you a “good news” alert. Sorry.] They avoided the
problems of ”97-”98 and if the country can keep its own growth
rate in the 8% neighborhood (it”s slipping now, however),
domestic demand could help bail out the rest of the region. So
three cheers for the Commies!
[China is also an increasingly important market for U.S. tech
companies. For example, it accounts for 5% of Cisco”s sales and
14% of Oracle”s (in the latter case, including Hong Kong and
Taiwan).]
So while I don”t want to minimize Argentina”s problems, you get
an idea of where the real concern should lie. Regardless, an
emerging markets blowup anywhere is bad. Capital flows, which
never recovered from pre-”97 levels, have dried up.
But what do Bush administration officials have to say about the
current environment? Last weekend Treasury Secretary Paul
O”Neill told his G-7 finance minister buddies that the U.S. will
grow at 3% in 2002. Coupled with the fact inflation remains
under control (which the latest producer price index report bore
out), that would be an excellent environment for stocks, I”d be
the first to admit. Slow growth plus low inflation is always the
perfect tonic. [The Fed is under no pressure to raise interest rates
under that scenario.] But O”Neill also said, “The evidence of
contagion is not in Asia or emerging markets.” I respectfully
disagree.
President Bush”s main economic advisor, Lawrence Lindsey,
was far less sanguine. Maybe we eke out 1% growth in the third
quarter and 2% in the fourth, but that”s a best-case scenario, he
said. Lindsey also saw unemployment topping 5% (it”s currently
4.5%). While 5% is still historically low, I virtually guarantee
that attaining this figure would do a number on consumer
sentiment and spending because the media will have a field day,
especially if the Condit-Levy story is history by then and there
aren”t any more shark attacks on little boys stories to beat to
death.
Well, there you have it. I”m far from convinced the economy has
hit bottom (though I”m anxious to see the impact of the tax
rebates on the consumer) and, as I”ve always said, you ignore the
rest of the globe at your own peril. And while there is no doubt
the U.S. will be the nation to lead the world out of this mess, we
aren”t ready to accept that role. And Bill Gates is probably
thinking, chumps.
Street Bytes
–The Dow Jones rose 308 points, or 2.8%, to the 10560 level,
with the bulk of the gain coming during Thursday”s 237-point
rally. It was the first weekly advance for the average in 8 weeks.
The Nasdaq tacked on 4%, 80 points, to 2084.
–U.S. Treasury Yields
1-yr. 3.52% 2-yr. 4.08% 10-yr. 5.23% 30-yr. 5.63%
The short end was basically unchanged but the 10- and 30-year
saw a flight to quality as Argentina”s problems took center stage.
The tame PPI report and falling energy prices also lent some
strength to the long end.
–On Monday the press had a stunning revelation. The average
401(k) balance actually declined in 2000! Everyone started
foaming at the mouth, from the business channels to the network
newscasts. Of course one could have written the story back on
January 1st. For the record, it was the first time this has
happened in the 20-year history of the accounts and the average
balance dropped from $46,800 to $42,000.
–As I”ve noted often in the past, one issue that should worry the
average investor is the breakdown over the past few years in
standardized corporate accounting, and the reporting thereof.
You”ve seen scandals in large corporations like Xerox, and you
have the accounting gymnastics employed by the likes of
Amazon and Yahoo. This week there were a slew of articles on
the topic. Put it all together and it only helps to erode investor
confidence. It would be a great topic for “60 Minutes” this
fall…that would put it on everyone”s radar screen for sure.
–Energy: The following is cathartic for yours truly. Please bear
with me. Back on March 10 I wrote, “In the interest of full
disclosure, while I am still bullish on the energy group, I sold
two of my positions this week as they ran up because I felt that
from a risk / reward standpoint, the big gains were in. I may
unload my last position next week (which I then did)…(but) if
the energy issues were to then correct, on the order of 20%, I”d
probably hop back in.”
So what happened? I sold one issue (if you”re new to the site, I
don”t mention the individual names I”m investing in) tied to
natural gas at $62.50 and it traded below $31 this week. I didn”t
step back in along the way because I was leery of the valuation.
I also sold an integrated oil company at $38 and it was at $32
earlier in the week, and I sold a driller at $32 and…in April
began to buy it back at, first $29, and later, $28. Big mistake. [I
also bought a small oil company in April which I told you was
more of a California play and it is still up.]
Here I was, telling you that I was also focused on the prospects
for worldwide growth, or lack thereof, the economies have since
fallen off a cliff, demand for energy is sliding, and I kept the
driller. It”s my first mistake in this sector since I started my big
play in February ”99. But it came down so fast the past few
weeks, and I thought it was fairly valued when I bought it, that I
now insist on holding on to it. Oh well, by yearend any losses
may come in handy.
All of this means that energy is now about 23% of my portfolio,
my Nasdaq QQQ is 6%, and the rest remains cash and corporate
bonds. Some of you must wonder why I still have the QQQ
position? Well, it started out as a trade and since I”m still up
slightly on it, I have decided to hold it. As gloomy as I am I
don”t believe Nasdaq will hit new lows. [If it does, Katy bar the
door.] And the index is so volatile it can hit my target of 2400 in
a matter of days. So I press on.
Meanwhile, back to energy, inventories continue to rise (with the
exception of gasoline) and the International Energy Agency
reduced its forecast for global demand, as you would expect
given the current environment. [Of course lower energy prices
are of particular benefit to some of the very emerging markets
that are having the most trouble.] It”s been a rough stretch for us
energy bulls. During my daily jog I must spend half my time
thinking about the sector. Someone has to!
–Jobless claims rose to a 9-year high, but consumer sentiment
rose as well. Which means one thing. We”re becoming more
and more like the French.
–Polaroid, one of the most recognizable names in corporate
America, is hanging by a thread.
–G.E.”s Jack Welch need not worry about his legacy. It is more
than secure. He”s simply been the best corporate leader of his
generation.
–Microsoft did make some other important news on the week.
First, in a concession to the recent federal appeals court ruling
that reaffirmed Microsoft had engaged in monopolistic practices,
the company announced that it will allow computer makers to
remove the Internet Explorer browser and replace it with a
competitor”s icon on the main screen of the new Windows XP
operating system. And then New Mexico became the first of 19
states to settle with them, a surprising and positive development
for those in Redmond. If other states rapidly follow New
Mexico”s lead, that would definitely be a major positive as it
helps to finally clear the deck.
–On the mergers and acquisitions front, Comcast has offered to
purchase AT&T”s cable operations. Around here we hate
Comcast because they refuse to give us the Fox News Channel.
International Affairs
Israel: In some respects this was one of the worst weeks. Prime
Minister Sharon was adamant in advocating the expansion of
Jewish settlements, while Israel bulldozed homes owned by
Palestinians. And last week Syrian President Assad spoke of all-
out war.
It”s the last point that has begun to sink in (but not in our
financial markets). Every major newspaper had a story this week
on the increasing talk within Sharon”s government that Israel
should launch an all-out offensive on the West Bank and Gaza,
with the express purpose of destroying the PLO once and for all.
Said one Israeli cabinet minister, “We are sitting on the edge of a
volcano, and the volcano could explode any moment now.”
So far, Sharon is the one holding the hardliners back, and some in
the military are concerned that if you liquidate Arafat, whoever
replaces him will be far worse.
Clearly, Israel is just waiting for the next large-scale suicide
attack before proceeding. The question then would be how
would Israel”s neighbors respond? Neither Egypt, Jordan or
Syria could possibly want a fight. That”s part of Israel”s
calculation. But then an Islamic militant will take a shot at
Egypt”s Mubarak or Jordan”s King Abdullah and the conflict
enters a totally different realm. Were this to happen, Wall Street
would no longer be able to ignore it.
China / Taiwan: So will the 2008 Olympic bid temper China”s
behavior? Opinion is all over the board. Former U.S.
ambassador James Lilley says that under the glare of the
spotlight, China will be forced to rein in its human rights abuses,
while in a lead editorial the Washington Post observed that while
some feel that the Olympics will open up China to more
democracy, just as the Seoul Olympics did, “it seems just as
plausible that the critics who cite the example of the 1936
Olympics in Berlin will be right – that the games will prove a
platform for a dictatorship to strut its regimented athletes and
nationalist agenda before the world.”
The real key, at least for the foreseeable future, is China”s
succession struggle. And then there is Taiwan. The dynamics of
the relationship between the two is changing rapidly, and I don”t
think the Bush administration really is prepared.
Taiwan”s stock market hit a 7-year low on Friday and, as
mentioned earlier, the government slashed its growth forecast in
half, a rather significant development. Times are tough and with
the fall in demand for Taiwan”s chief export, computer chips, the
outlook is poor. The people are increasingly miffed at the
government of Chen Shui-bian. But what should particularly
worry policymakers is a poll I saw in the New York Times. 33%
of the Taiwanese people now favor reunification with the
mainland. This is the highest reading ever.
It is ironic that among Taiwan”s young people, in particular,
China itself is now viewed as the land of opportunity, and I have
written on countless occasions that despite the political divisions,
Taiwan”s business leaders are flocking to the mainland. And this
week Taiwan”s opposition party, which favors good relations
between the two, held a formal meeting in China with Chinese
government officials. Said one of Taiwan”s leading political
figures, “The mainland would be quite happy to let this situation
continue. They figure maybe Taiwan will collapse by itself.”
And here is the U.S., basically coming out and saying we would
defend Taiwan if attacked by China, as well as offering all
manner of sophisticated weapons, while attitudes in Taiwan itself
are changing so rapidly they may not want our support. And as
for the weapons, most people on Taiwan already feel that with
the severe economic slowdown, how can the government
possibly afford them?
But if the Taiwanese people want an idea of what it would be
like to live with Beijing acting as “Big Brother,” they need only
look to the example being set in Hong Kong. While there hasn”t
been any doubt that Beijing pulls the strings here, this week
Hong Kong legislators voted to formally allow China to fire
Hong Kong”s leader. The people of Hong Kong have absolutely
no say in who leads them. So China will eventually make the
same offer to Taiwan that Hong Kong has. “One country, two
systems.” Unless the economy in Taiwan picks up substantially
over the coming year, the people may say, “Yeah, I”ll buy that.”
2008 may witness Taiwanese athletes marching with their new
mainland brethren, all under one banner.
Russia: President Putin solidified his grasp on power by pushing
through legislation that eliminates Russia”s smaller political
parties, a rather autocratic gesture, don”t you think? But in an
extraordinary move, Russia”s acting commander of forces in
Chechnya admitted that troops committed “widespread crimes.”
Putin vowed a crackdown but it hurts his image among human
rights activists.
Japan: As the economy slides further into the abyss, the people
remain firmly behind Prime Minister Koizumi, with the latest
poll showing 62% support his proposed reform package, even if
it means significant new layoffs. [Of course that opinion could
change quickly if it”s enacted.]
But Japan continues to frustrate its neighbors, particularly China
and South Korea, over its refusal to revise the controversial
history textbook which whitewashes the massacre at Nanjing as
well as the 35-year Japanese occupation of South Korea. For its
part, Seoul suspended military contacts with their Japanese
counterparts.
And then I was reminded of another fact about Japan. Less than
1% of its people are foreign born. Plus, with a child replacement
level of only 1.39, how the heck is its economy going to grow?
Lastly, I”m getting miffed over the latest Okinawa incident. Yes,
it”s horrible (if the Marine is truly guilty). We”re sorry. We”ll
do our best to keep it from happening again. But, geezuz, who
are you to point fingers at the U.S. after the incredible atrocities
you inflicted on innocents throughout the last century? And in
the case of the accused, the U.S. is properly concerned over the
criminal justice system the young man will be subjected to.
Britain: More racial violence in the city of Bradford, instigated
by the National Front Party that I wrote of last week.
Northern Ireland: Protestant militant groups are backing away
from the Good Friday accord, while the IRA won”t disarm until
British troop strength is reduced significantly and the police
force is reformed. Ergo, increasing violence. I write about it
because it”s news. Not because there”s a solution.
Jamaica: The front pages of Britain”s newspapers were chock full
of warnings for British tourists to stay away, this after the
Jamaican military had to quell the latest political violence that
claimed 25 lives last weekend. Every few years violence flares
anew and it sets the island back another five.
Bulgaria: Something rather historic is happening here. Ex-King
Simeon, who was banished in 1946, has been named the new
prime minister (the power slot) of Bulgaria. His party recently
won a general election and Simeon now becomes the first ex-
monarch to regain political power in post-Communist eastern
Europe.
Genoa Summit: The G-8 gets together here on July 20, amid talk
of Islamic suicide attacks. Security is basically on a war footing.
I”d say it”s time to go to video conference calls…except that all
of the participating parties may not yet have their broadband
connections.
India / Pakistan: History making summit this weekend as
Pakistan”s President Musharaff travels to India, with the issue of
Kashmir being most prominent. The trip legitimizes Musharaff”s
illegitimate rule.
Kenya: President Daniel arap Moi urged his people to abstain
from sex for at least two years to curb the spread of AIDS.
Iran: As I guessed last week, President Bush won”t penalize
foreign oil companies for investing in Iran (or Libya), even
though sanctions prohibiting such action remain in place and
American energy companies aren”t allowed to participate. The
U.S. outfits are obviously furious, as well they should be.
Random Musings
–President Bush is moving ahead with a national missile defense
test site(s) in Alaska, despite Russian claims that it violates the
ABM Treaty. Of course it does, Sergei. Another test takes place
today, Saturday.
–Senator John McCain”s campaign finance reform effort died in
the House on Thursday. Regardless of what you hear, both
Republicans and Democrats are to blame. [I was never really for
the thing, in its current form.]
–Bush is labeling Democrats “obstructionists.” Well, yeah, Mr.
President. As I said immediately following the Jeffords
defection, this is what you get with Democratic control of the
Senate. You should have thought this through a little better.
–And the budget process is once again a mess as discretionary
spending explodes. USA Today reported that $500,000 has been
approved for a project at the National Swine Research Center for
the purposes of finding a way to reduce the stench from pig
manure. “It”s a real problem,” said the director of the facility.
Tell me about it.
–No word on whether hot dog king Takeru Kobayashi (he of the
50 wieners in 12 minutes) is still alive. As Jimbo pointed out to
me, when you look at the video Takeru took an incredibly high
number of tiny bites, whereas Americans tend to deploy the two
bites per dog approach. We have a lot to learn and little time
before next year.
–Israeli scientists may have discovered a test for mad-cow
disease. But what village would want their residents to take it?
One positive and the whole town would go nuts.
–OK. Here we go. Tom Brokaw is in the midst of a 10-week
vacation, which I hope helps explain why NBC Nightly News
has become the Gary Condit network. While the boss is away,
the idiots will play.
Now you have surely noticed that your editor hasn”t covered the
Condit situation. Long time readers will also recall that I didn”t
cover Elian to any great extent. Here”s why.
With “Week in Review” I aim to cover not just the week”s
events, particularly as they may relate to the financial markets,
but also to provide a look ahead to foreign policy issues that may
eventually impact our overall well being. Of course you
understand that I am also building quite an archive, a real history
unlike any other, and so there are some issues where it”s
necessary to throw in a line or two, as much for my reference as
yours.
But when something like Elian or L”Affaire Condit comes
around and the issue is saturation bombed, what can I possibly
contribute to the discussion? Zippo.
NBC”s Brian Williams started the newscast the other day with
“In a story that has gathered increasing attention…” Why? You
guys created it.
But there is a different problem here. I just realized that CBS
News and the New York Times are the two big outlets that have
downplayed the story. And StocksandNews. Aaghh! More next
week.
–You won”t believe this, but last week I complained about CNN
Headline News”s use of two anchors and this week they
announced they are going to 4.
–A survey of employees revealed that our main gripe is we lack
time for reflection (Business Week). I”m taking a moment now
to reflect on Headline News having 4 anchors.
–Business Week also had an item on the huge glut that has
developed in upscale golf courses. This is part one in the
collapse of the real estate bubble. Separately, I saw where golf
play is down this year. So much for the Tiger effect.
–After last week”s comments on the medical front, I have some
good news. More and more legitimate studies show that
religious people live on average 7 years longer than other
Americans. And they reveal that “absent prayer” is also
effective. Many scoff at this last bit, but there have been solid
results from prayer groups praying for total strangers in coronary
care departments. [Source: Jeff Levin and Richard Morin /
Washington Post.] Maureen Reagan is back in the hospital and
not doing well. Say a prayer for this good woman.
–In the midst of Argentina”s severe financial problems, Bill
Clinton gave a speech there urging educators and businessmen to
wire every school. Somehow I don”t get the feeling that folks in
Buenos Aires are taking to the streets shouting “We want
broadband!”
–The situation in Klamath Falls, Oregon is totally absurd, but
not surprising. Conservationists have shut off the water to the
region”s farmers, meaning they can”t irrigate their fields, and the
losses now exceed $200 million. No, instead we have found it
necessary to save the suckerfish, under the Endangered Species
Act.
–At the same time we have now learned why chimps are smarter
than most humans. This was confirmed this week when it was
announced that scientists in Ethiopia had discovered human-type
bones from 5.8 million years ago, one million older than any
other known fossils. The significance of the date is that this was
the period when there was a split between the lineage to humans,
and the one that produced chimps.
Humanid: “So, wanna go my way?”
Chimponoid: “No thanks. You guys are looking pretty stupid. I
think I”ll become a chimp, thank you.”
–And astronomers have detected signs of water on a distant star,
which supports the theory that planetary systems outside our own
might be able to support life. The only problem is that the star is
500-light-years away, and one light year is 6 trillion miles.
Which means that it would take one SUV, averaging 15 miles to
the gallon, 400 billion gallons…times 500…to get there. We”ll
obviously have to find more efficient means.
–Yak update: I just don”t understand all this Condit coverage…
oh, where were we? Your yak update. Thanks to buddy Dan L.
for passing along some invaluable new information. The only
sound you”ll get out of a yak is a grunt, which it makes when it is
“agitated, hungry, or calling their young.” Which I guess means
that yak young are not very responsive…because they know
mother is agitated.
Susie Yak: “Hey, Yuri, your mother is calling you.”
Yuri Yak: “I know. But I”m going to wait awhile until she
calms down.”
Gold closed at $267
Oil, $26.59
Returns for the week, 7/9-7/13/01
Dow Jones +2.8%
S&P 500 +2.1%
S&P MidCap +1.2%
Russell 2000 +1.5%
Nasdaq +4.0%
Returns for the period 1/1/01-7/13/01
Dow Jones -2.3%
S&P 500 -7.9%
S&P MidCap -1.4%
Russell 2000 +1.5%
Nasdaq -15.6%
Bulls 51.0%
Bears 25.0% [Source: Investors Intelligence. For
contrarians, this is way too low…if you”re a bull.]
Have a great week. I appreciate your support.
Brian Trumbore
