[Posted 7:15 AM]
The “Week in Review,” now available with 0% financing!
—
Well, we made it through another week, folks. Whether you
want to admit it or not, for the foreseeable future, that”s how
many of us will increasingly look at our lives. And going
forward we will have good weeks and bad weeks; gauging
success or failure by the war effort, your own job situation,
anxiety level, or the movements in the financial markets and the
impact on your portfolio.
And when you look at this past week, one couldn”t be
encouraged with the picture being painted by the latest economic
data. The nation”s gross domestic product declined by 0.4% in
the third quarter, a popular measurement of consumer confidence
hit a multi-year low, consumer spending (see consumer
confidence) fell at the fastest rate in 15 years, manufacturing has
now declined for 15 months in a row (and shows little sign of
bottoming), housing is slipping, defaults are rising, layoffs are
soaring at the highest clip since Jimmy Carter was attacked by a
rabbit, and the official unemployment rate climbed from 4.9 to
5.4%.
Regarding Friday”s gloomy jobs data, of particular concern is the
fact that the employment picture for the once robust service
sector took a huge hit, due, in large part, to the aftershocks from
9/11 and the severe decline in air travel and tourism.
What can be done to stem the tide? Thinking you”d like the truth
rather than Wall Street spin…not much. Sure, the Federal
Reserve is doing all it can in lowering interest rates to stimulate
economic activity, and the Treasury “shocked the world” by
nixing future 30-year bond auctions, thus ensuring that mortgage
rates will stay low, which in turn should encourage one last
round of refinancings; but, beyond that, we have something
called a war to deal with. And as we”ve all learned this is not
only a war unlike any other, it could be with us in one shape or
form for decades to come.
Now then, who wants to open a margin account and bet the ranch
on the stock market? I didn”t think so.
And it”s not that the problems are exclusive to the U.S., of
course. Economically, we are close to being able to say that the
whole world is in recession, and the targets of the terrorists are
not confined to the U.S. either, as any Israeli or Pakistani
Christian would tell you.
Finally, last week I wrote of the post-9/11 rally in the equity
markets and how many market participants seemed to be
discounting the potential for any more bad news, ever. And
many still seem to be ignoring the fact that in this new world, we
are adding financial costs of a magnitude as yet to be determined
(though I say it will be “staggering”), in areas such as security,
property and casualty insurance, and medical premiums, to name
a few. While at the same time many more may begin to see a
real decline in their primary asset, real estate, which negatively
impacts the “wealth effect” and one”s willingness to spend.
Yes, in the future it”s all about good weeks and bad weeks. How
was yours?
Street Bytes
–After a horrendous start to the week, with the Dow Jones losing
420 points in the first two days, the markets bounced back to
close with minimal losses; the Dow off 2.3% to 9323, Nasdaq
losing 1.3% to the 1745 level. Nasdaq is still comfortably above
its pre-attack mark of 1695, while the Dow is 280 points below.
–U.S. Treasury Yields
Just to give you a sense of what happened this week.
10/26/01
6-mo. 2.08% 2-yr. 2.62% 10-yr. 4.52% 30-yr. 5.27%
11/2/01
6-mo. 1.93% 2-yr. 2.47% 10-yr. 4.35% 30-yr. 4.95%
*And I”ll throw in 12/31/00 for further comparison. The 2-yr.
was at 5.09% and the 10-yr. 5.11%.
Of course the big reason for the historic moves in the bond
market (at one point the 30-yr. traded as low as 4.67%) was the
stunning announcement on Wednesday that the Treasury was
discontinuing auctions in the 30-yr. bond. Undersecretary of the
Treasury Peter Fisher said, “We do not need the 30-yr. bond to
meet the government”s current financing needs, nor those we
expect to face in coming years.” In the blink of an eye the yield
on the long bond fell from 5.22 to 4.88%.
The thought is that after we get through our current economic
malaise, and the Treasury takes care of what it expects will be
one-time charges (like to rebuild lower Manhattan), the nation
will resume its growth path and the surpluses will once again
come flooding in. Oh, were it that easy.
On the monetary policy front, the Federal Reserve next meets on
Tuesday and with all the crushing economic data from last week,
almost everyone now expects the Fed to lower its target for
federal funds another one-half percent to 2.0%. As you can see
from the yield on the 6-month above, the market is counting on
the move, and then some. I”ve been careful not to join the chorus
of those who say that the whole U.S. economic picture is
beginning to resemble Japan, but ask me my opinion again in
January.
–J.P. Morgan Chase”s Doug Cliggott has been the best market
strategist over the past few years and Cliggott had an extensive
interview in the Sunday Times last weekend, wherein he
reiterated his bearish stance. In fact, he is calling for the S&P
500 to slide back to 800 (from its current 1087) by spring.
Folks, were that to happen it would not only be devastating to
your portfolio, it would also put another nail in the coffin for the
economy, sending it straight to the crematorium. “It was such a
good boom,” witnesses would sob. Seriously, the impact on
consumer spending, as well as business investment, would be
huge.
Cliggott focuses on two main variables; commodity prices and
capital spending. Both continue to tumble and, until they turn
around, he won”t become bullish on the ultimate driver of equity
prices, earnings. And when Cliggott looks at today”s stock
market, he sees one that is way overvalued given his dour
outlook for future corporate profits. True, lower interest rates
make stocks more attractive, but you still need earnings and,
today, where are they going to come from?
–S&P estimates that 200 companies will default this year on
about $100 billion of debt, compared with 117 and $42 billion
last year. With banks now increasingly fearful to lend, it should
come as no surprise then that the president of the National
Association of Manufacturers, Jerry Jasinowski, says, “This
credit crunch is now the #1 impediment to recovery.” [S&P also
estimates that 60% of the defaults will be coming from bonds
issued between 1997-99.]
–Total Asian non-performing loans are now estimated to be $2
trillion, or 30% of the region”s GDP. [Wall Street Journal]
–And then there is Japan. The central bank stated that the
economy is not likely to rebound until March 2003. How”s that
for optimism? Industrial production fell a huge 2.9% in
September and, similar to the U.S., the jobless rate rose to 5.3%
with its biggest monthly increase in 34 years…way back when
Japanese movies were poorly dubbed and Rodan was battling
Mothra. And, longer-term, you have the issue of Japan”s soon-
to-be shrinking population. The number of Japanese grew by
just 1.1% over the past 5 years and the trend is down from here.
In other words, how are they going to pay for the entitlements
owed the elderly? Scrip?
Additionally, you still have ongoing trade issues. U.S. Trade
Representative Robert Zoellick commented this week, “I have
been, frankly, extremely disappointed by the lack of Japanese – I
wouldn”t expect leadership – but even respectable followership.”
Ouch!
–In Europe, French business and consumer confidence plunged,
while in Britain, housing prices fell (not encouraging for the
U.K.”s own wealth effect). Meanwhile, Alcatel, a large
European phone-equipment maker, announced 10,000 additional
layoffs and further stated, “We don”t see a rebound for the first
half of 2002. Beyond that, we don”t see anything.”
–No one seems to care that Argentina announced it would soon
default on about $95 billion of its debt. The markets just
yawned, with the exception being Spain, where the bank
exposure is huge. This is a big mistake. Drink some coffee and
wake up. An event like this, in today”s environment, is not to be
ignored.
–The government and Microsoft finally reached an agreement in
the antitrust case, and the 18 states that had sued the company
would appear to be ready to concur with the settlement.
Microsoft will no longer be able to retaliate against computer
makers who opt to promote rival software, but beyond this the
penalties seemed light. All you need to know is that you will
continue to be able to buy a decent product at a fair price.
This never should have gone on as long as it did. Bill Gates,
himself, deserves 25% of the blame for his courtroom behavior,
and Bill Clinton”s Justice Department deserves the other 75%.
–Cisco reports earnings after the close on Monday. There were
rumors the past few days that they would beat the 2-cent
estimate. If so, the stock would still trade at a ridiculous
multiple.
–Back to debt, Leo Hindery, CEO of Global Crossing, said that
U.S. telecoms may never repay 80% of the $900 billion they are
responsible for, and this total excludes the financing by big
equipment makers, like Lucent, of new carriers (extending credit
for gear). Obviously, if you believe this then connect the dots to
Europe and its own mammoth debt loads in the sector.
–John Bollinger, a respected market technician, said on CNBC
this week that the U.S. stock market could trade sideways for the
next 10 years. In other words, buy a high-grade corporate bond
(for a little extra yield over Treasuries) and check back around
2011. I”ll take care of your yard work.
–I was surprised the Journal didn”t have a piece on the whole
“seasonality” issue, that being that investing in the six months
from 11/1-4/30 is far superior to the period 5/1-10/31.
Specifically, if you invested $10,000 in the S&P 500 in 1950
only between 5/1-10/31, and put it back each succeeding period,
you would have less than $10,000 left today (thru 10/31/01).
Yes, that”s right. While that same $10,000 invested between
11/1-4/30 would have yielded around $327,000. [Note: These
#”s could be drastically different from what you may have seen
just last year because we have had significant negative returns
for both accounting periods since then, and remember, you are
compounding past figures. I”m also rounding off.]
And since 1950, there has never been a 20% gain for the period
5/1-10/31, while there have been 8 such 20% advances from
11/1-4/30. [Source: Yale Hirsch”s “Stock Trader”s Almanac.”]
–United Airlines reported its worst loss in history in the third
quarter, $1.2 billion.
–Ford ousted CEO Jacques Nasser and replaced him with
William Clay Ford, Jr. I just don”t understand; Nasser seemed to
be doing such a good job…cough cough.
While auto sales have been running at a record clip because of
0% financing, Ford, for example, is losing $1,000 on every car
and truck they sell (not all due to the incentive). The flip side, of
course, is that next year could be miserable, for the simple reason
that we”ve already bought.
–Honda”s net income actually rose 45% in the quarter. That”s
Honda, official car of StocksandNews. [We”re selling out for
extra site revenue.]
–Campbell Soup Co. reported strong sales as people are stocking
up, like yours truly. Nothing wrong with a little insurance, I
always say. No word on Chex Mix sales yet.
–Boeing is speeding up the pace of its massive layoffs.
–CVS is closing 200 drugstores. I wouldn”t buy the last candy
in these stores if I were you.
–My portfolio: I said last week I wasn”t “chasing” anything and
this week I stood pat. I remain about 85% in cash as my larger
energy play gave back some profits.
OPEC
Is OPEC dead? Not yet, but I”d say it has cutaneous anthrax and
there are a lot of folks out there who couldn”t care less whether
or not antibiotics are made available. The price of crude
continued to slide this week, to a 27-month low, and OPEC is
frantically trying to shore it up, at least to the lower end of its
ideal $22-$28 price band. But one problem; OPEC needs
cooperation on the production front from non-OPEC giants
Russia, Norway, and Mexico. In the past these nations would
often go along with the cartel”s wishes since higher and/or stable
prices were in their best interests as well. Today, it”s almost as if
the three are giving the sheikhs the one-digit salute. “What?
You want us to cut? Go screw yourself,” and OPEC doesn”t
know how to react. Its market share has suddenly slipped to
35%, from the 40% level, and OPEC”s ability to influence prices
is waning as the other three just keep pumping away. And for its
part, Russia is looking to aggressively increase production, not
just maintain existing levels. [My own Russian oil play was
more than a bit timely, by the way. And I just glanced at the
cover of the 11/12 issue of Business Week. It”s all about Russia,
Putin and oil. We were well ahead of the curve on this issue,
friends.]
Here I”ve written all those pieces on how important $25 oil is to
the stability of those OPEC countries in the Middle East, which
still remains the case, but post-9/11, you won”t get too many
sympathetic ears, including yours truly. If the price of oil were
to continue to drop, and revenues dried up in nations like Saudi
Arabia, the case for social upheaval grows ever stronger.
Of course falling oil prices are a huge positive for the world
economy. I”m sure you”re like me when you fill up the tank
these days. Holy Cow! Look at how much change I”m getting
back. It”s a beautiful thing. And the good times on this front
should continue (baring a Middle East embargo) as inventories
keep rising due to the aforementioned overproduction and the
global slowdown.
Back to Russia, another of the stories of the week that flew
below the radar was Exxon Mobil”s announcement that they have
signed a $4 billion joint venture with Russia to develop oil & gas
properties. That”s just the start, folks. Amazing. One year
earlier we were worried about Central Asian pipelines and
keeping new supply from passing through Russia, today we are
practically embracing such initiatives. It”s about the clearest
example of this brave new, scary, exciting, depressing world we
live in. Keep an open mind and you may spot an opportunity
before the “herd” does.
The Budget / Congress
The U.S. federal budget surplus for fiscal 2001 came in at $127
billion, the second highest on record (2000”s was $237 billion).
But excluding social security, it was actually a $33 billion
deficit. And that”s the good news. It is amazing that just this
past spring the Bush administration estimated the 2001 surplus
would be $281 billion.
I cite these figures because anyone playing the market, buying a
new home, or trying to refinance, needs to understand how
quickly the budget picture can change. Just as tax revenues
poured in faster than expected in the late 90s and 2000, revenues
are now dropping precipitously (28% in September over 9/00, for
example), both on the corporate and individual level, and this has
an impact not just in Washington, but every state budget as well.
And almost all of this was before 9/11.
Spending is now exploding, and, as budget director Mitch
Daniels put it, “Circumstances have changed radically.”
As for Congress and the hoped for stimulus package, which will
undoubtedly ensure a fiscal 2002 deficit, including social
security, the House and Senate proposals are far apart. Hell,
they”re far apart on airport security, too. In other words, the days
of bipartisanship are over and it”s business as usual. The only
problem with this is that whereas in the past it really didn”t
matter too much what Congress did or didn”t do, today it does.
The War and the Coalition
Russia: Foreign Minister Igor Ivanov said, “The situation in the
world is changing, and our relations with the U.S. are changing.
In the framework of these changes we are ready to discuss new
parameters of strategic cooperation.” Yes, momentum is
building for the upcoming summit between Presidents Bush and
Putin. It now appears likely an arms deal will be signed and that
Russia will not stand in the way of further testing on a national
missile defense system. These are exciting times, in this realm at
least. We shouldn”t be surprised if sometime in 2002 Russia also
becomes, in principle, a member of NATO.
And you even had a statement this week from the British foreign
secretary offering his support for Russia”s struggle in Chechnya.
Human rights be damned. And because the world has changed,
even I, who once blasted Russia for its actions in the breakaway
republic, would be in agreement. We need to focus on the bigger
picture these days, and that”s survival. Russia is a critical new
ally going forward.
Not that there aren”t other problems to worry about, such as a
potential invasion of the nation of Georgia by Russian forces.
On Thursday, Georgian President Eduard Shevardnadze, the
heroic figure from the glasnost era, “fired” his government
because of massive corruption. This is a big story because
Georgia has increasingly harbored Chechen rebels and now
Russia has a legitimate gripe for launching military action. I
suspect the West will look the other way if this comes to pass.
Britain: The nation is beginning to come to grips with a stark
reality. Britain is loaded with Islamic extremists. The Times of
London quoted a student, “All Muslims in Britain view
supporting the jihad as a religious duty. All of us are ready to
sacrifice our lives for our beliefs.” This is incredibly depressing,
and just points out, again, how widespread the sentiment is.
[Separately, a London-based group is reported to have been
involved in the assassination of Northern Alliance leader
Massood, who died on September 15.]
I started a series on Wahhabism for my “Hott Spotts” link and
one of the issues I will be addressing this coming week is the
belief that up to 80% of American mosques espouse the same
radical brand of fundamentalism that is touted by both bin Laden
and the Saudi government. The 80% figure, put forward by a
highly respected moderate cleric based in the U.S., is beginning
to receive wide coverage. But let”s say it”s a gross exaggeration.
What if, instead, it”s still 30 or 40%?
Meanwhile, back to Britain, Prime Minister Blair received
criticism from his own press for his extensive travels in the
Middle East because nothing was accomplished. I disagree. In
meeting with dirtballs like Syria”s Assad, he is helping to frame
the debate; are you with us or against us? It also helps to show
everyone just how difficult this war will be.
Saudi Arabia: One leading newspaper early in the week had the
following. “The air strikes on Afghanistan have taken on grave
destructive dimensions to reach the level of mass annihilation of
civilians.” Later in the week, though, a key Saudi minister
actually offered up a statement of support for the U.S. Well
blow me over.
Syria: The New York Times reported that the CIA has held
intelligence meetings with their Syrian counterparts and there has
been some cooperation. But then when Blair visited Damascus,
President Assad “ambushed” his guest, blasting the U.S. and the
bombing campaign, while lecturing the West on the Israeli-
Palestinian issue; one man”s terrorist is another”s freedom fighter
and all that garbage.
Pakistan: Major questions, and no easy answers. Did Pakistan”s
nuclear scientists give secrets and/or materials to bin Laden?
There certainly is evidence some of them are not only hard-line
fundamentalists, but also met with al Qaeda, if not Osama
himself. On the other hand, Pakistan has turned over key
suspected al Qaeda members, including one connected to the
USS Cole bombing. Meanwhile, are thousands really crossing
into Afghanistan to fight with the Taliban? And after 16
Christians were gunned down the other day in church, can the
government prevent further horrific massacres?
Turkey: Significantly, they are offering 90 Special Forces troops
to the war effort, the first such contribution from a Muslim
nation. [The Turkish Investment Fund inched back closer to my
original target purchase price. Be patient, my son, said the
cleric.]
Israel: Foreign Minister Shimon Peres in an interview with Lally
Weymouth of the Washington Post and Newsweek.
Q: Didn”t you meet with Arafat and talk to him about arresting
terrorists?
Peres: Yes. An (Israeli) woman (Sarit Amrani) was killed (on
Sept. 20) by a group of terrorists in Bethlehem. The head of the
group was Atef Abayat. I went to Arafat and said, “Put him in
jail because he plans to do more of the same.” Arafat said he
would arrest him. The next day, this person appeared on Israeli
television, and said he was never investigated. So, I said to
Arafat, “You are making a mockery of yourself and of me.”
Then, the head of Arafat”s security forces called me and said, “I
swear by God that he is in jail.” Two days later (Oct. 18),
Abayat was killed driving a jeep. It”s a matter of credibility.
Q: He was killed by Israelis?
Peres: If he had been in jail, he would not have been killed.
Peres also said that “Iran is the center of terrorism,” and that
Hizbollah leaders have been to the country recently. Which
leads me to…
Iran: Scholar Michael Ledeen wrote the following in a Journal
op-ed piece this week. “An event of world-historical potential is
underway in one of the largest and most powerful countries of
the Middle East, yet almost no one seems to have noticed.” I beg
your pardon, Mr. Ledeen. We sure have here. I was using the
term “revolution” long before anyone else. Ledeen is right,
however, that change could be coming far more quickly than
anyone has anticipated, as the burgeoning middle class, that
freely elected a reform-minded parliament, clashes with the
clerics.
But Ledeen fails to mention Russia even once in his piece, an
important omission, to say the least. I continue to believe that,
working together, the U.S. and Russia can help to enact positive
change in Iran, and it”s Russia that may be able to get the clerics
to see the light and toss the terrorists out. Pipe dream? Perhaps,
but this is what the new U.S.-Russian relationship is all about.
“You help us here and you get all the conventional weapons
business you want,” may one day be the line parroted by Colin
Powell.
Nigeria: Since 1999, 5,000 have died in religious clashes. Islam
is spreading rapidly throughout all of sub-Saharan Africa. Over
the coming years a massive clash of civilizations will envelop the
continent. Another reason to move to New Zealand. [Sponsored
by the New Zealand Tourist Bureau.]
Indonesia: The dim one, President Megawati, will be tossed out
in 6 months, at least that”s the guess here. Of course this would
mean that two presidents were shown the door in about one year,
not exactly the way democracy is supposed to work. In
Megawati”s first state of the nation address, she called for a
bombing halt during Ramadan. Earlier in the day there was a
massive fistfight in the legislature. The U.S. has only essential
personnel left in Jakarta and I honestly don”t see how the nation
can avoid total chaos.
Random Musings
–Undersecretary of State John Bolton is worried “there will be
use of a weapon of mass destruction…Had these people had
ballistic missile technology, there is not the slightest doubt in my
mind that they would have used it.”
–Secretary of Defense Donald Rumsfeld. “(There is a) sense of
urgency…New threats have arrived, quite literally, at our
doorstep…and other, more dangerous, threats are rapidly
emerging.”
–Muhammad el-Baradei, director of the International Atomic
Energy Agency. “We are not just dealing with the possibility of
governments diverting nuclear materials into clandestine
weapons programs. Now we have been alerted to the potential of
terrorists targeting nuclear facilities or using radioactive sources
to incite panic, contaminate property, and even cause injury or
death among civilian populations.”
–Senator Joe Lieberman gets it. He is the biggest proponent of
action against Saddam in the whole Congress.
–I have no problem with the government issuing its heightened
terror alerts. I would expect, however, that should they have
more specifics as to a particular threat, they would then pass it on
to us. [You know, like if Dennis Rodman was reported to be
heading east, I”d take appropriate precautions.]
–Saudi Prince Alwaleed (whose $10 million check to the Twin
Towers Fund was rejected by Rudy Giuliani).
“In Saudi Arabia, we were shocked to learn that some of our
countrymen could commit such an atrocity…A decade ago,
America came to our assistance to deter the terrorism of Saddam
Hussein. We cannot forget that sacrifice, and we shall always
remain grateful.” [NY Times]
Yeah, right. And did you see this sleazeball on “60 Minutes” last
Sunday? Or Iraq”s Tariq Aziz, for that matter? If there is one
American in this country who viewed both stories and thinks
either one was telling the truth, I”d like to meet them.
–Tony Blair, on the war effort in a speech to the Welsh parliament.
“It is important we never forget why we are doing this, never
forget how we felt watching the planes flying into the Trade
Towers. Never forget those phone messages, never forget how
we felt imagining how mothers felt telling children they were
about to die, never forget the guts of the firefighters and the
police who died trying to save others.”
–Jonetta Rose Barras is a political columnist. She had the
following comment as part of an op-ed piece in the Washington
Post.
“Sifting through my radio calls, black-oriented Web sites, my
reporting on the question, and the comments made at Howard
and elsewhere, what”s clear to me is that many blacks have the
following concerns: a general distrust of the government and
Bush; fear that heightened powers awarded to Attorney General
John Ashcroft will metastasize with deadly results for blacks;
worries that a sustained ground offensive will mean large
numbers of black casualties; questions about Bush”s overly broad
definition of ”terrorism” and ”terrorist”; and a general belief that
this country”s foreign policy is biased, resulting in racist actions.
…Many also say that on the surface this appears to be a war to
annihilate terrorists, but that it”s generally about market
economics, and more specifically about oil; it”s always about oil
when America goes dancing in the Middle East.”
I hope you find the above as amazing as I did, another poor,
ignorant soul.
–That was a truly great moment when President Bush threw out
the first ball on Tuesday night at the World Series.
–Election Day: I have never been more disinterested in my own
state”s gubernatorial race as I am with the one in New Jersey, but
then I told you last spring I didn”t care after my man, Bob
Franks, lost in the primary. Yeah, I”ll vote for Bret Schundler,
but I”m more anxious to see the selection of cookies that the high
school kids have baked at my polling station.
–They say it”s a great time to be a mobster, since the FBI”s
attentions are diverted elsewhere. [The preceding career tip was
brought to you by the good folks at StocksandNews.com.]
–“Idiot of the Week” award goes to the unidentified female
reporter who asked Secretary Rumsfeld, “Do we have military
personnel helping to target, and, if so, can you tell us where?”
Rumsfeld just grunted in disgust.
–The teenage unemployment rate rose to 15.5% in October.
May I suggest school?
–I was watching Attorney General Ashcroft explain how anyone
who perpetrates a hoax, like for anthrax, can receive up to 20
years in prison. Too bad this wasn”t in place during the Internet
bubble, as the analysts and corporate executives spread false
hopes about their stocks.
Gold closed at $280
Oil, $20.18
Returns for the week, 10/29-11/2
Dow Jones -2.3%
S&P 500 -1.6%
S&P MidCap -1.6%
Russell 2000 -1.3%
Nasdaq -1.3%
Returns for the period, 1/1/01-11/2/01
Dow Jones -13.6%
S&P 500 -17.7%
S&P MidCap -11.1%
Russell 2000 -10.4%
Nasdaq -29.3%
Bulls 43.2
Bears 33.7 [Source: Investors Intelligence]
Have a great week. I appreciate your support.
And God bless America.
Brian Trumbore
