[Posted 7:15 AM]
If I told you the annualized return on your diversified stock
portfolio would be 3-5% for the next few years, would you:
A) Call a doctor.
B) Take out a third mortgage and throw that into the stock
market as well.
C) Cash in your chips, buy some bonds, and play catch with
the kids.
In the past few weeks more and more investors appear to be
heading in the direction of ”C,” but, distressingly, many also
seem more than a bit complacent. Even a good friend of mine,
one who I have always admired for his investment acumen, told
me he was sticking it out with his long-time tech holdings.
Why? I asked him. They”ll come back, he said. [I didn”t want
to argue because he was taking me to the airport. But they
aren”t.]
From time to time you”ll hear an analyst say something like,
“Tech represents only 8% of the real economy.” Or, “What
we”ve really had this year is a stealth bull market. The majority
of stocks are up.” What”s frustrating about these comments is
the fact that a lion”s share of the investment dollars continue to
pile into technology, and that”s why I spend so much time
writing about it. If in 2000, 66% of the trading volume wasn”t in
Nasdaq, then Nasdaq 5048 wouldn”t have been that important,
would it? After all, who the hell can rattle off the all-time high
for the Amex? [I haven”t a clue, nor do I care.] Concerning
tech, perhaps long-time Morgan Stanley strategist Byron Wein
put it best in a New York Times article this week.
“A moment of silence for profits. People are in denial now.
Everybody wants to believe that the good old days are going to
come roaring back, and that”s not the case.”
And if you were looking for a ray of sunshine in the sector, it
was nowhere to be found this week. Dell and Hewlett-Packard
admitted back-to-school sales sucked, with Michael Dell adding,
“Tech spending has decelerated at an alarming rate.” Applied
Materials CEO James Morgan said, “The semiconductor industry
is experiencing near historic lows in factory utilization, resulting
in further cutbacks in capital spending.” And this statement from
Corning. “The decline in telecom business has been unrelenting,
and, unfortunately, we don”t see a near-term recovery.” Finally,
there was the case of Ciena, whose earnings report was simply
hideous and the stock was possibly the worst major performer on
the week. [Not for nothing, but I wrote a terrific little piece on
Ciena in this space 2/17/01, when the stock was $95. It”s now
under $20. Just type ”Ciena” in my search function.]
Of course if all the above comments seem familiar, they are.
Week after week, day after day, it”s the same ugly news. I
hesitated to even use the quotes for this reason, but it is a ”week
in review,” after all.
And the tech debacle isn”t confined to the good old U.S. of A.
The news from overseas on this front only gets worse, with
Taiwan”s tech-heavy economy, for example, registering a
stunning 2.4% loss in 2nd quarter GDP (when “unchanged” was
the forecast).
But back in the States, the bad news wasn”t limited to
technology. Ford Motor started the week by announcing a $1
billion settlement for faulty ignition switches, going back to the
Model-T (actually, 1983-95 vehicles). Funny how the Street
forgot this, though, as the week wore on, because the company
then announced that its white-collar workforce was being
reduced by 11% and that it would fall way short of current
earnings estimates the second half of the year. Elsewhere,
another rather large non-tech, Wal-Mart, said its 2nd half would
be disappointing.
And since we”re piling on, you can”t talk about the past week
without mentioning other worrisome developments overseas.
Argentina and Brazil are teetering, with the former in particular
need of immediate (like yesterday) financial assistance. And in
Europe, the economies (and the stock markets) are all collapsing.
Then there is Japan. For starters the Nikkei is near a new 17-
year-low. 17 years! [Rounding off, 11000 to 39000 to 11000.]
And this after the market soared 4% on Tuesday because the
Bank of Japan surprised everyone with its announcement that it
would open up the monetary spigots even further in an effort to
stem the deflation that is wracking the economy. But on
Wednesday, investors in Tokyo, just like in the U.S., said, “Hey,
our Central Bank is irrelevant,” and promptly erased the gains.
Japan is also suffering from political turmoil, and I address this
below.
The U.S. dollar was a market-moving factor as well this week, as
U.S. Treasury Secretary Paul O”Neill reiterated that the
administration believes in a strong currency, and that he was
optimistic on the economy”s prospects. So, of course, the dollar
fell, largely because O”Neill and Company have yet to win the
confidence of the investment community worldwide. The
decline in the greenback remains orderly, however, and most
U.S. multi-nationals should at least benefit on the earnings front.
I”m still not concerned about the fall, because I don”t see the
alternatives as being any better. And after my bit on the
upcoming euro conversion last week, Steve B. reminded me that
there would most likely be a spending spree in Europe at year-
end, as folks rush to get rid of the ”old” currencies. Gold may
even be a beneficiary of this coming chaos (and this process
might have commenced with the recent rally in the precious
metal, though gold has faked us out many times before).
Certainly the “bad guys,” as Steve puts it, need to convert to
dollars or gold or cubic zirconium, anything, before the first of
the year.
So here I”ve been going on and on about everything that is
wrong, both here and abroad, yet the market, as represented by
the Dow Jones, hasn”t collapsed. Why? Well, outside of tech,
there is some good news. The American consumer continues to
step up to the plate and do his or her patriotic duty, which is to
spend their cash. And from the sentiment readings, most of you
are still feeling pretty good, all things considered. Bless you.
Plus the price of your #1 investment, your home, continues to
rise (at least in the vast majority of the nation), so you feel good
about that as well.
And then there is the issue of rapidly falling interest rates the
past few weeks, which is going to lead to another round of
creative refinancings. The fact that there is no inflation (as
exemplified by the largest drop in consumer prices in 15 years
for the month of July) is a major reason why the bond market has
been so compliant of late. But because the overall economic
landscape is so awful, it is expected that the Federal Reserve will
lower rates even further on Tuesday.
Lastly, there is one thing that I find increasingly troublesome.
One part of me (the official forecast one) says that somehow we
will get through this period without a major recession (by
classical definition) or financial panic. But the other part of me
thinks it could be disastrous. [That”s the part that keeps focusing
on indicators like sky-high real estate values.] I don”t see
anything in between. Muddle through…or disaster. And another
reason why I can”t totally dismiss the latter conclusion is the
issue of our president. I know I”ll lose some of you with this
comment, but George W. is, shall we say, severely lacking in
intellectual capacity. Should a real crisis come up, I”m not so
sure he can rise to the occasion. The majority of the polls,
however, say that the American people have faith in him. And
there is no doubt President Bush is a good man, and I will still
continue to judge each policy independent of my deep-seated
fear. Let”s hope I”m wrong.
Street Bytes
–For the week, the Dow Jones managed to escape with “only” a
1.7% loss, closing again within its new, tight trading range of
10200-10600…10240, to be exact. But the Nasdaq is breaking
through one resistance level after another, as it now sits at 1867,
just 230 points above the April low of 1638. Meaning that those
with aggressive growth portfolios have basically given back all
of the gains since the spring. It”s performance like that which
will gradually lead to more investors simply throwing in the
towel, and, perversely, that”s really what the rest of us should
want. Total capitulation. But as noted in the past, the Nasdaq is
near that point which I just think would be devastating for the
long-term psyche of virtually all. Personally, I was out of tech
all through 1999 and 2000, and then this past spring I purchased
a small position in the Nasdaq QQQ”s with the index at 1950, on
its way to 1638. It was supposed to be just a trade. And when I
was in Asia in May, I had an opportunity to cash in for a nice
profit, but I thought I”d wait until I got home. Dumb move.
Now, I”m holding on for a while longer, and may just end up
taking a tax loss.
One other note, the S&P 500 is also at a 4-month low, not a good
sign.
–U.S. Treasury Yields
1-yr. 3.26% 2-yr. 3.65% 10-yr. 4.84% 30-yr. 5.42%
Due to the aforementioned reasons, yields plummeted, in the
case of the two-year to another all-time low. With the Fed funds
rate currently at 3.75%, you can see what the bond market is
telling you as far as the Fed”s next move(s). Plunging stocks are
also helping the flight to quality mentality. As one who has
recommended a specific bond fund, PIMCO Total Return, which
is now about 19% ahead of the S&P 500 year-to-date, I also feel
obligated to say that in the case of this portfolio, understand the
big money has been made. But if you believe as I do that equity
returns will be limited for some time to come (outside of the
occasional rally), there is nothing wrong with 5% or so until the
economic picture is far clearer. And as I feel obligated to reveal
from time to time, I still own my corporate bond (high-quality
junk) portfolio, and remain quite content with it. But you must
know what you own in this sector.
–The European Central Bank has to act soon. Inflation is
coming down in the euro nations, below 3% on an annualized
basis now, but like the Federal Reserve and the Bank of Japan,
the ECB has lost a ton of credibility by its illogical maneuvering
over the past few years.
–An executive at homebuilder Toll Brothers. “Frankly, if a year
ago you told me the Nasdaq was going to lose half its value and
you”d have the volume of layoffs you read about in some of the
larger companies, I would be surprised to think the (housing)
market is as strong as it is.” [Source: George Jordan / Star-
Ledger] Yup, sure is a surprise to me as well.
–Direct Wall Street employment accounts for 5% of New York
City”s jobs, but 20% of its wages. Clearly, with the problems on
the Street today, this has an impact on almost every facet of
business in the entire New York Metro region, starting with the
pricking of the real estate bubble (it”s already happening in
Manhattan and the Hamptons). Banking giant Felix Rohatyn
told the New York Times, “(The situation on Wall Street) is
brutal, and it”s going to be very brutal.”
–Midway Airlines filed for bankruptcy, as the level of business
travel continues to plunge. But the Zeppelin is back!
–Lucent rewarded its former CEO with a massive severance
package, including $5.5 million in cash, I guess for a job poorly
done.
–Schwab has seen its trading volume plummet 40% year-over-
year, about 60% from the peak levels of March 2000 (3/10/00 –
Nasdaq 5048).
–The Industry Standard, the leading Netzine, went belly up, as
ad revenues fell 70% in one year. At the height of the dot-com
craze, the magazine was so heavy it was standard issue for
municipal police departments, for use in riot control.
–Bank of America is the biggest player to exit the “subprime
lending” business, one which preys on the poor and ignorant.
This started out as a sleazy way to make money during an
economic boom. In a downturn, however, it”s a good way to lose
your shirt, and your reputation.
–The golf phenomenon is history, if you didn”t already know
this. Another property owner, American Golf (which operates
mostly through National Golf Properties), defaulted on its debt.
Play is down 5% from year ago levels, and the market for houses
on the courses is nowhere near as strong as the overall
environment for real estate.
–Oil services giant Halliburton is the latest victim of the asbestos
litigation crisis. Halliburton”s exposure results from its
construction units. Some analysts are trying to convince us that
the ultimate liability is not too significant. I would just say, be
careful. Halliburton thus joins W.R. Grace, USG Corp., and
Owens Corning, among others.
–Goldman Sachs was the latest to call the bottom in the chip
sector…only to see the bottom drop out.
–Microsoft lost its court bid to delay the remedy phase of its
antitrust case. A penalty trial will begin soon, which may force
Microsoft to make changes to Windows XP before its hoped for
October 25 launch date, just what they were trying to avoid.
And, as stated in prior weeks, this hurts others in the sector who
are praying XP is the catalyst to jumpstart their own sales.
–Advertising spending of all stripes continues to collapse, and
“experts” seem surprised. AOL Time Warner, for one, took it on
the chin this week, largely because of this issue.
–“Hit me!” Whap! “Ugh.” The preceding was the sound of
Cisco and Oracle shareholders, who keep riding the stocks up to
$20, only to hit the canvas again. They”re clearly punch-drunk.
–Energy: OPEC said it would not reduce production further this
year, beyond the announced September 1st cuts. On the price
front, natural gas firmed, while crude oil dropped.
International
Israel: The consensus has been reached. Israel needs a short 4-
or 5-day war to blitz the Palestinians, and then erect a wall to
define the boundaries. And one would think this operation could
commence at a moment”s notice. It is increasingly irritating, to
this editor, the twisted rhetoric that is coming out of the State
Department (though I am not abandoning Colin Powell). While
State always has to take a more diplomatic tact than, say, the
Defense Department, it is time to unequivocally state our support
for Israel against the Arafat regime.
But we all know what”s coming down the pike. Israel will
launch the attack (after further provocation), the U.N. will be up
in arms, and then we”ll await the reaction from Israel”s Arab
neighbors. And this is where it gets exceedingly difficult. After
my discussion of last week concerning Arab moderates and how
we can offer some support simply by helping to keep the price of
oil around $25, Egypt”s foreign minister was in Washington this
week, where he lectured:
“In all the gulf countries, you should take a look at what is being
said about the U.S. in the mosques…(Current U.S. policy will
result in the) growth of fundamentalist trends in the region.”
[Source: NY Times]
So you see the box we”re in. Morally, how can we not support
Israel, while at the same time pleading with the moderate Arab
governments to keep the level of rhetoric down? But, we also
have to understand that the extremists are inches away from
taking total control of the region. For instance, concerning the
relationship between Yasser Arafat and Hamas and Islamic
Jihad, a senior Israeli army officer told the Washington Post,
“Whenever you let a tiger go free out of its cage, at a certain
moment the tiger itself decides what will be the next prey.”
Lastly, how the heck can the American and Canadian
governments allow many of the terrorist web sites to be based
here? And don”t give me this censorship garbage.
Japan: Continuing…what a mess. As Frederic Smoler writes in
the current issue of American Heritage, Japan “(has) an aging,
stagnant, and paralyzed economy with an ”industrial policy” (that
is) a disaster.” And a recent science article in the New York
Times addressed the whole issue of lack of innovation. Many of
Japan”s leading “thinkers” (my term) are “steeped in Confucian
ideals of age grade promotion and piety towards seniors, and a
generalized penchant for seeking incremental advancement of
knowledge at the expense of bold experimentation.”
And then you have Prime Minister Koizumi, upon whom many
of us placed great hope. Koizumi went ahead with his visit to
Japan”s Shinto monument to militarism, Yasukuni, only he
couldn”t have screwed it up any worse. First, he failed to keep
his word (big in Japan) to visit on 8/15, the anniversary of
Japan”s surrender. Instead, he paid a super quick visit on 8/13,
because he wanted to lessen the criticism from China and South
Korea. But the fact is he visited the shrine (which among the 2.5
million Japanese soldiers honored there are WW II war criminals
like Tojo), anyway. So he is being attacked on all sides and his
leadership abilities are now seriously called into question at a
time the nation needs him to stand up more than ever. The only
good thing that can be said is that most of Japan”s public schools
are rejecting that awful textbook which whitewashes the nation”s
past.
Russia: You have to love the communists over at the New York
Times. Here is a line from a lead editorial this week.
“Washington needs to make more serious efforts to negotiate a
deal with Moscow.” Huh? Actually, while I”m increasingly
optimistic (as you may have gathered over the past few weeks)
on the future of U.S.-Russian relations, one also has to be a
realist. To address the Times” remark, here is Secretary of
Defense Donald Rumsfeld.
“(The Russian position on missile proliferation and NMD) is
basically: ”Look America, you establish a policy of remaining
vulnerable to ballistic missiles while we are protected by a
missile defense system in Moscow (part of the ABM Treaty) and
while we continue to work with (the likes of) China and Iran and
Iraq and various other countries, with respect to proliferating
some technologies that are not very helpful to the rest of the
world.” [Source: Reuters]
But despite the rhetoric on both sides, by all accounts Rumsfeld”s
meeting in Moscow this week went well. Foreign Minister
Ivanov said, “We took a very energetic step forward,” while
Rumsfeld vowed the U.S. will drastically reduce its nuclear
force, regardless of Russia”s opinions on NMD. Clearly, as
noted before in this space, everyone is gearing up for October
and the next Bush-Putin summit. I”m optimistic, but I don”t have
blinders on. Just understand that from time to time harsh
statements will be made on both sides. It”s all part of the game.
Finally, there is a huge opportunity for the cause of U.S.-Russian
relations in the Middle East. Both governments have agreed to
work together to apply pressure on the parties to the conflict. As
the U.N. Security Council opens debate on Monday, Russia
should side with the U.S., a major step forward.
China / Taiwan: Taiwan”s GDP disaster makes it all the easier
for Beijing to proceed with its silent coup. Taipei”s business
leaders are increasingly taking their action to the mainland.
President Chen Shui-bian is having a tough time convincing the
Taiwanese that independence is the way to go.
North / South Korea: After South Korea”s President Kim Dae
Jung won a Nobel Peace Prize for his efforts to normalize
relations with the South”s bitter enemy, the leaders of the two
countries haven”t talked since March. Kim D. is increasingly
despondent over his failure to bring the two together and fingers
are being pointed at the Bush administration for its early hard-
line against Kim Jong-Il. But the U.S. has recently made it quite
clear it would discuss anything on Lil” Kim”s mind. It”s up to
the dictator, who at last report was still training it back home
from Moscow.
India / Pakistan: Pakistan”s President Musharaff (he”s not a real
president, but he plays one on TV) banned two extremist groups,
saying, “Our threat emanates from within.” He also signed a
new anti-terrorist law and vowed to hold parliamentary elections
in October 2002. [StocksandNews will skip this one, thank you.]
But, meanwhile, violence has picked up since the summit
between Musharaff and India”s Vajpayee, with Vajpayee blasting
Musharaff once again this week. So after all that goodwill, it”s
getting kind of tense for the umpteenth time in the region with
wandering nukes.
Macedonia: A shaky peace agreement was signed. Now NATO
has to gather up the Albanian rebels” weapons. This is where it
really gets sticky.
Northern Ireland: A new deadline has been instituted for
September 24, at which point there will either be the
announcement of new elections or a new power-sharing
arrangement. After this development last weekend, the IRA then
withdrew its bogus weapons decommissioning offer. Two days
later, 3 IRA members were arrested in Colombia for training
guerilla fighters (and testing new arms). One of the three has a
strong tie to Sinn Fein”s Gerry Adams. Any shred of credibility
the IRA had is now out the window, while Sinn Fein must
scramble to remain a force. Adams”s upcoming visit to Cuba
won”t help.
Zimbabwe: Another awful week for the white farmers, and
President Mugabe appears to be intensifying his “land reform”
campaign. Of course the “war veterans” are in the process of
destroying all their own food, so they”ll starve. It”s sick. But
many of the farmers are also British citizens and Britain has
about had it. Don”t be surprised if there is some kind of military
action to at least rescue the farmers who are being illegally held.
Canada: Evidently there was a conference on water this week in
Sweden. [I wonder what brand was served on the tables?] What
is worrisome for the future is the prospect that 2.7 billion people
may face severe water shortages by 2025, and it”s not just Africa
and the Middle East. Much of southern Europe is also at risk.
But Canada has lots of water, so the question the Canadians need
to address over the coming years is, do they sell it? President
Bush has already expressed a desire to purchase some. If I”m
Canada, I work out a plan quickly, before we send the troops in.
This could be Bush”s Grenada.
Random Musings
–Much was made of some European polls, which show
widespread disapproval of President Bush”s foreign policy.
Folks in Britain, France, Germany, and Italy give former
President Clinton a 40- to 60-point higher rating than Bush. But
in the reporting of this story, many failed to mention that Bush”s
numbers are no different than any new American president,
including Clinton.
–President Bush appears set to accept a 6% increase in
discretionary spending for the 2002 federal budget, a total cave,
and another broken promise. [It should be 4%; Clinton”s last
budget was at 8%.] And Bush is making a huge mistake if he”s
forced to tap into the Social Security trust fund, even if it”s for a
$billion or two. The American electorate won”t remember that
the Democrats were responsible for most of the discretionary
spending increase. They”ll only recall that the president touched
Social Security.
[I have posted some opinions from both sides of the Social
Security debate on my “Hott Spotts” link, 8/8 and 8/15. I will
have some conclusions in this space next week.]
–Economist Paul Krugman: “The Bush tax cut is exactly the
kind of fiscal policy that you would expect to…have a
depressing effect on the economy.” Huh? Without it, some of us
are eating gruel, in the current environment.
–That 21-year-old New Jersey girl, Susanna Thomas, who was
arrested, and then released, by Italian police for alleged activities
during the Genoa G-8 summit, is no innocent. And the police
are receiving way too much criticism for their tactics. Yes,
some of them were clearly sloppy, and in one instance, tragic, but
look at what the “anarchists” did to the city of Genoa. Here”s
hoping Ms. Thomas stays in Vienna with her little “Austrian
Publix Theater” group. [Actually, since her home in New Jersey
is about 15 minutes from here, I better be careful or I”m liable to
wake up to my own personal street theater some morning.]
–Speaking of Austria, there has been an awful streak of tunnel
crashes on its Alps road network. Which reminds me of my
favorite song from “Sound of Music”…. “Climb e-very moun-
tain…a-void the tun-nels…”
–Last week I commented on mad-cow disease and the possible
link to scrapie. This week researchers at the University of San
Francisco said they may be close to a cure for variant CJD
syndrome, the technical name for the affliction.
–Fidel Castro actually said something very wise the other day.
Celebrating his 75th birthday in Venezuela, he commented on the
attributes of swimming. “(It) is the best exercise. You know
why? Because life came out of water and we”ve all got a bit of
fish in us.” Separately, it turns out that scientists in the U.S. have
discovered that zebra fish share a lot genetically with humans.
And, seriously, there are some who feel this may be of more
value than stem cell research.
–The Zambian archbishop whose marriage scandalized the
Vatican, has now left his wife and returned to the church. His
penance is 6.45 million “Our Fathers.”
–StocksandNews is not thrilled by the rumor that Queen
Elizabeth will grudgingly allow Prince Charles to marry Camilla
“Parker Brothers” Bowles. Instead we side with the Queen
Mother on this one. In fact, the Queen Mum is one cool chick.
But back to Charlie, I was really hoping for Elizabeth Hurley.
[The board of StocksandNews disavows the above politically
incorrect statements by the editor.]
–On Wednesday, the news networks felt obliged to try and
figure out what that huge shark gathering off the Florida coast
was all about. Since this site has covered the animal kingdom
better than any other, and since we have long warned the animals
are gearing up for an all-out offensive, StocksandNews had
exclusive access to the meeting, which was comprised of bull,
hammerhead, and nurse sharks.
Bruno Bull Shark: “Listen, guys. We have to lay low for a
while. After taking that kid”s arm off, the Feds are on to us.
Any more screw-ups and they”ll be dropping depth charges.”
Heinrich Hammerhead: “Bruno”s right. Let”s get out of the Gulf
and move on up to New Jersey. The water is dirtier and murkier
up there and they won”t be able to track our activities.”
Nina Nurse Shark: “Me and the girls need to finish up some
business in South Beach. We”ll just be a few days behind.”
Bruno: “Fine, but be careful. So it”s agreed. We meet off
Asbury Park in two weeks.” [To be continued.]
–Finally, as noted last week, the yaks are spending August in
Crawford, TX with the Bush cattle. We caught up with the
president during a trip to Albuquerque, where Bush was touting
his education program.
S&N: “How are the yaks getting along down at your ranch?”
Bush: “Well, as you know, yaks are truly noble. And I like all
noble creatures, including humans. And yaks like the outdoors…
I think that”s important. I like the outdoors. It”s good for you.
To work outdoors is good for the soul. And I can see their soul
…and I trust them.”
S&N: “The yaks, Mr. President?”
Bush: “Yes, I trust the yaks. They are a hard-working people.”
S&N: “The yaks?”
Gold closed at $281…highest in months.
Oil, $26.68
Returns for the week, 8/13-8/17
Dow Jones -1.7% [10240]
S&P 500 -2.4%
S&P MidCap -0.6%
Russell 2000 +0.0%
Nasdaq -4.6% [1867]
Returns for the period, 1/1/01-8/17/01
Dow Jones -5.1%
S&P 500 -12.0% [24% off its peak]
S&P MidCap -4.1%
Russell 2000 -1.6%
Nasdaq -24.4%
Bulls 49.0%
Bears 29.1% [Source: Investors Intelligence]
Have a great week. I appreciate your support.
Brian Trumbore
