[Posted 7:15 AM]
“We wage a war to save civilization itself…let”s roll.”
–President George W. Bush, 11/8
Earlier in the week, President Bush also could not have laid it out
in starker terms, bringing up the direct threat of nuclear weapons
in a speech to Central and Eastern European leaders. Yes,
civilization is at risk. Happy holidays.
But, despite my recurring nightmares, I”m trying like heck to
find positive developments. For instance, a few weeks ago I
wrote that the coalition may surprise us, and, while popular
support for the war effort may be slipping in almost every nation,
the governments themselves are stepping up in a big way. In
recent weeks we have learned of new commitments of military
support from the likes of Italy, Germany, France, Japan, Turkey,
Czech Republic and Poland. While the U.S. wants ultimate
control, we are still going to need all the help we can get come
next year when attention hopefully can turn from Afghanistan
to Iraq. As of today, I”m confident the respective leaders will
stand strong, even in the face of protests on the homefront.
Remember, these are smart folks, with access to the highest
intelligence. They understand the big picture, even if their
people don”t.
Since I said from day one that I would spare you of any
commentary on the warfront, nonetheless, it certainly seemed
like a good week for the U.S. over in the land of rubble. Which
means I get to focus on the economy and the Federal Reserve
instead.
In announcing the 10th interest rate cut of the year, 50 basis
points, which took the target fed funds rate to 2%, or its lowest
level in 40 years, the accompanying statement read in part.
“Heightened uncertainty and concerns about a deterioration in
business conditions both here and abroad are dampening
economic activity…risks (remain) weighted mainly toward
conditions that may generate economic weakness.”
On the plus side, the Fed added, “long-term prospects for…the
economy remain favorable and should become evident once the
unusual forces restraining demand abate.”
After the announcement the equity markets shot up for the better
part of two days, until late Thursday afternoon when it was as if
someone shouted, “Hey, wait a second. Do you guys realize how
high we are? [Quizzical looks all around.] And that the
economic fundamentals are still pretty brutal? [Slowly, a few
heads begin to nod.] Well, then let”s get real. [Sell!]” At least
in the eyes of this reporter, some sanity returned at week”s end.
And just what are the fundamentals telling us? Alan Greenspan,
himself, is focused like a laser beam on housing, because he
knows this is the last big prop for the overall economy. It was
for this very reason that the Treasury”s move to suspend 30-year
bond sales in an attempt to drive the 10-year and mortgage rates
down, obviously had the blessing of the Fed Chairman as well.
They are both pinning their hopes on one last round of
refinancing, praying that homeowners will then spend the
savings to help get things rolling again.
The other item that Greenspan focuses on is consumer
confidence. Friday”s Michigan sentiment readings revealed a
slight rise this month over last, a positive. And if confidence
continues to pick up, spending will follow.
Back to housing, while refinancings can be a source of extra
cash, the fact is that in many key regions new home sales are
plummeting (30% from year ago levels in California, 35% in the
Washington, D.C. area) and, in the case of Manhattan, actual
prices are falling (15% since 9/11).
The Wall Street Journal had a lead story on Wednesday
concerning comparisons between the Japanese and U.S.
economic experiences of the past 10+ years. One of the key
elements for the collapse in Japan was the crash in real estate
and, as I”ve noted in this space for almost two years now, I
marvel at those who think values in most parts of America are
rational. They aren”t, and if our market begins to recognize this
fact, any recovery we keep hearing about will be short lived.
The Journal story also mentioned that Japan”s inability to right
itself was also due to too much consumer and corporate debt, as
well as its current bout of deflation.
While U.S. government finances are in super shape compared
with Japan (total debt is only 30% of GDP here, as opposed to
130% there), you can”t say the same for the consumer and
business in the States.
And then there is the issue of deflation. The U.S. producer price
index (which measures prices at the wholesale level) for October
registered its largest decline ever, falling 1.6%. Even if you take
out the volatile energy component, the decline was steep.
Which means one thing; not only is there no inflation, there also
is no pricing power. And where pricing power is nonexistent,
corporate profits are sure hard to come by. Our equity markets,
on the other hand, are already discounting a solid recovery on the
profit front in 2002. I beg to differ.
Internationally, at least the European Central Bank got its act
together this week and lowered its own key short-term interest
rate one-half percent (as did the Bank of England). But the move
is also telling you just how worried the ECB is over the health of
the European economy and, in fact, it stated that global
conditions were worse than expected. In Germany, for example,
factory orders plunged and unemployment continues to rise.
And in Belgium, Sabena Airlines went belly up. Now granted,
bloated Sabena deserved to fail, but it isn”t a good thing for its
12,000 employees who now face a job search, nor is it good for
the 50,000 workers in support industries that are impacted.
Lastly, on the issue of the suddenly infinitesimal short-term
interest rates that we now have in this country, with 3- and 6-
month T”bills below 2%, Bill Gross (manager of the PIMCO
Total Return Fund, as well as overseer of a gazillion in other
bond assets) introduced the “paradox of thrift,” that being
the problem now faced by retirees living on fixed income who
today have even less to spend in the form of income, which is
just another factor to weigh when you”re calculating just how
robust a recovery we might eventually have. Last week, in my
discussion of Japan, I touched on the coming crisis in caring for
the elderly in the country, where there is no source of non-
pension income due to Japan”s zero percent rates. Those who
say we can”t possibly duplicate the Japanese experience may want
to remember this example and sleep with one eye open… just as
we”ve been doing here at StocksandNews, even prior to 9/11.
Street Bytes
–The rally from the September 21 lows continued, with the Dow
Jones now sitting 3 points above its 9/10 closing mark at 9608.
For the week the Dow gained 3%. The Nasdaq finished at 1828,
up almost 5%, for its highest weekly close since August 24. The
predominant feeling is that with all of the monetary as well as
fiscal stimulus coming down the pike, recovery can”t be far
away. Regarding the fiscal side, however, Congress is really
jerking us around, including a Senate proposal just loaded with
pork, including a proposal for funding of removal of poultry
waste. What”s that old saying, you can”t make chicken salad
out of chicken @#$%?
–U.S. Treasury Yields
6-mo. 1.81% 2-yr. 2.42% 10-yr. 4.30% 30-yr. 4.87%
Rates continue to tumble. The yield on the 6-month is telling
you that the market still expects further cuts from the Fed by
year-end. The next scheduled meeting for the FOMC is
December 11. By that time a ton of additional economic data
will be available to the Fed governors.
–On Thursday afternoon, a breathless reporter for CNBC was
wrapping up the day”s action. “With yields as low as they are,
people HAVE to look at stocks!” No they don”t. Hey, I”m not
thrilled with 2% money market rates, either, but I have my
principal. So I eat more pasta, it”s good for you.
–Energy: It certainly was an interesting week in the oil patch as
Saudi Arabia stepped forward in an attempt to save OPEC from
totally losing its clout. When the cartel meets on November 14 it
is now expected that it will announce production cuts of up to 1.5
million barrels a day. That”s all well and good, but the issue is
really compliance. OPEC is cheating on its current production
quotas to the tune of 700-800,000 barrels, so any further
announced production cut needs to be discounted some. And on
Friday, non-OPEC Russia surprised a few folks (including yours
truly) by saying it would cut its own production in sympathy.
I would take this latter move with a grain of salt, as well, because
Russian oil companies don”t have a great history of compliance
either. Jawboning, however, can certainly be an effective
way to move prices and crude oil did rise back to the $22 level at
week”s end, but that”s still only where it was just two weeks
earlier.
[I increased my own energy stake to 20% by acquiring shares in
a refiner, a more conservative way to buy a little insurance in
case I”m wrong about the economy. I also continue to feel that
of all the market sectors, even in an era of reduced global
demand, many of the oil stocks have reasonable valuations. The
whole group had a strong week and it”s back to premium beer for
the kid.]
In other energy issues, legislation that would expand drilling to
the Arctic National Wildlife Refuge remains stalled. Senator
John Kerry, who is running for president in 2004, said, “(Drilling
in ANWR) will do nothing to enhance our national security at
this moment in time.” I respectfully submit that Kerry lacks
vision.
And then there is Governor Gray Davis of California, who
screwed up royally during his state”s energy “crisis,” lining up
long-term contracts which mandate that the state pay $69 per
megawatt hour, when today”s spot energy market is priced
around $19.
But there”s always wind power and U.S. News had an extensive
story on the topic in this week”s issue. If I had known the
Dakotas were such fertile ground for this soon to be burgeoning
industry, I would have been buying up farmland while I was out
there last month. [Don”t worry, I”d use just a little for the giant
turbines. I”d plant wheat chex on the rest of it.]
–Japan: Ughh. You keep thinking it can”t possibly get worse,
and it does. Prime Minister Koizumi would appear to be more
concerned with his wavy hair than the plight of Japan”s
economy, which is now in the midst of its worst stretch in 20
years. The banks” bad loan problems were in the spotlight this
week as Mizuho Holdings, the country”s biggest bank, said its
own non-performing loans were double…double…the amount it
earlier announced. Of course institutions like this aren”t
originating new loan activity anymore, so it”s as if the whole
country has ”seized up.” And it doesn”t help consumer
confidence when the mishandling of one case of mad cow has
decimated the entire beef industry because the government
screwed up inspections in a highly publicized fashion.
–With the possible exception of Chile and Mexico, Latin
America is a basket case. A resolution to Argentina”s debt crisis
would appear to be a ways off and, despite what some may think,
Argentina”s problems can have a significant negative impact on
the whole region. It”s not just whether or not the crisis spreads to
Brazil, it has everything to do with investors” aversion to risk and
investing in all emerging markets in the future. [A leading
business leader in Brazil told the Washington Post, “We see the
global recession turning into a mighty snowball that just seems to
be growing and growing.”]
The more the investment flows dry up, obviously, the tougher it
is for these countries to survive, economically. And, taking it
one step further, if the economies collapse then, particularly in
the case of Latin America, all the progress we have made in
institutionalizing democratic reforms in the region over the last
20 years could go out the window. Can you say junta? There”s
certainly a history down there to deal with.
–J.P. Morgan Chase estimates worldwide growth in 2002 will be
a mere 1%. Anything under 2% is really a recession in the
global scheme of things.
–Robert Shiller, economist and author of “Irrational
Exuberance,” says that there is “strong evidence” that trends in
housing prices have far more effect on consumption than the
wealth effect from stocks. With housing sliding now in many
parts of the country, the potential impact on the economy is huge.
–Trade: Over 140 nations are attending the WTO talks in Qatar,
an event that marks the formal entry of China into the club (as
well as Taiwan). More importantly for now, however, will the
stark differences between the industrialized and developing
nations be finally addressed? Many of the former continue to
subsidize items like textiles and agricultural products, which then
limit the imports from developing nations, while the developing
countries want to be able to skirt issues like drug patents,
claiming that “knock-off” drugs are the only way they can afford
to combat diseases like malaria or AIDS, which, in turn, severely
impact economic growth. These negotiations come at a critical
time; we all know that one result of a shrinking global economy
is the emergence of protectionism.
–Following are the rallies off the lows for some leading tech
players, including the highs set Thursday before the market
reversal and Friday”s close. [Rounding off a bit.]
Cisco $11 – $20 – $19
EMC $10 – $16 – $15.50
Intel $19 – $30 – $28
Oracle $10 – $16 – $15
Sun Micro $7.50 – $14 – $13
Cisco”s earnings report, wherein it reported better than expected
numbers, was certainly a major positive, but the stock didn”t
crack the psychologically important $20 barrier. And you know
what I think of it from a price/earnings standpoint.
–The Microsoft settlement with the government isn”t a done deal
yet, as many of the states have rejected it as not being tough
enough with regards to the remedies. We all grow weary.
–Another wild and crazy week for Enron. First it announced it
was restating its earnings going back to 1997. In the words of
Roseanne Roseanadana, “Never mind.” Incredibly, Enron stock
was trading at $80 as recently as this past February. Well, if you
still own it, you will walk away with only around $10, because
Dynegy is now taking it over at that price. [Assuming it gets all
the appropriate approvals. And as Yogi might say, it isn”t done
until it”s done.]
–More signs of the brutal retrenchment in the advertising
market. Disney (ABC-TV) said it saw “no visible signs of
recovery” for the segment. [Also, as you”d expect, Disney
reported miserable earnings for the quarter as attendance at its
theme parks has slid precipitously.] Meanwhile, Business Week,
in announcing staff cuts, reported its advertising income has
plunged 37% from year ago levels.
–The Hewlett-Packard / Compaq merger is in serious jeopardy,
as the Hewlett and Packard clans blasted H-P CEO Carly
Fiorina”s leadership and vision.
–Lands” End reported strong earnings. Around here this is one
of our favorite companies. That”s Lands” End…the official
apparel outlet of StocksandNews.
–The default rate on junk bonds is at its highest level in 10 years.
–There is no “next big thing.”
International Affairs / The Coalition
Russia: It”s summit time and President Putin said this week that
the U.S. and Russia could reach agreements quickly on reducing
the level of our respective nuclear arsenals. A compromise on
ABM also seems to be a certainty. Putin, despite his high
approval ratings at home (around 70%), is taking a huge risk.
There are certainly more than a few Stalinist types who aren”t
fired up about this sudden tilt to the U.S.
Hopefully the summit will also address one of my pet themes in
this space over the years, that being the issue of helping Russia
with its decaying early warning satellite system in order to avoid
an accidental nuclear war. If you watched PBS” “Nova” program
last week, you know what I”m talking about. Arms control is
great, but this other issue should be the primary one for today.
There”s just way too much room for error.
Pakistan: President Musharraf showed great courage in leaving
his country at this time to visit with Tony Blair and George Bush.
Musharraf also muzzled the Taliban ambassador, disallowing
any further broadcasts from Islamabad. And Pakistan”s foreign
minister addressed the issue of U.S. bombing and the death of
any innocents thusly. “Never in history has so much care been
taken to reduce civilian casualties as much as possible.”
Turkey: The government, faced with 80% disapproval among the
people for the U.S. campaign, nonetheless gave its blessing for
bombing during Ramadan. And columnist William Safire
echoed a regular theme of your editor; that being that the U.S.
should encourage Turkey to invade Iraq. Let”s roll.
Iran: Secretary of State Powell may be meeting face-to-face with
the Iranian foreign minister at the U.N. this week. Powell”s
counterpart is known to be relatively moderate and the secretary
may ask Iran to turn over a leading terrorist. The response will
be rather telling. Iran is, however, withdrawing 700 military
advisers from several countries, but they also blasted Turkey for
contributing troops to the coalition.
Jordan: King Abdullah is a good man in an incredibly tough spot,
and this week on a state visit to Britain, he told parliament that
he was there as a representative of the “too-rarely-heard Arab
majority.” Abdullah then said that the current conflict was “a
different kind of war. There is a military dimension, which must
be exercised with caution, but always with unflinching resolve.”
He added that he had no problem with bombing during Ramadan.
A gutty performance.
Germany: The nation”s participation in the war, which would
mark its first fighting mission since WW II, is not guaranteed as
of this writing. Chancellor Schroeder is having trouble with the
Green Party, a major part of his ruling coalition. But Germany”s
Foreign Minister Fischer, a Green Party member himself and an
ex- protest leader, has been a rock of strength, calling it “fatal” if
Germany, and Europe, did not join the U.S.
And outside the war effort…
Taiwan: The government took the bold step of lifting a 50-year
ban on direct trade and investment with China. Previously,
Taiwan”s businessmen were severely limited in the amount they
could invest on the mainland, so, consequently, they were forced
to rout the investments through a third country…to the tune of
$60 billion, currently. The move was not only political but it
was also viewed as another attempt to bolster Taiwan”s
staggering economy.
Northern Ireland: The coalition government survived, barely, a
test of its leadership as Protestant hard-liners tried to oust David
Trimble as First Minister. Trimble held firm.
Nicaragua: Former Sandinista president, Daniel Ortega, was
defeated in his bid to regain the top spot. We are very happy
with this development.
Random Musings
–Fouad Ajami / Foreign Affairs: “Those were not Afghans who
flew into those towers of glass and steel and crashed into the
Pentagon. They were from the Arab world, where anti-
Americanism is fierce, where terror works with the hidden winks
that men and women make at the perpetrators of the grimmest of
deeds.”
–Fred Hiatt, writing in the Washington Post, cited a prescient
1984 speech by then Secretary of State George Schultz, who
warned of the very threat we face today. Hiatt opined:
“(We face) a Muslim world where any U.S. action could make
things worse, but where not acting is guaranteed to be dangerous.
A world in which the terrorists are far stronger than they were in
October 1984; in which it is at least imaginable that America”s
enemies could take possession of the world”s richest oil fields (in
Arabia) and a working nuclear arsenal (in Pakistan), and
combine those with an anti-American ideology of considerable
appeal. Democracies, as Schultz warned, aren”t good at
imagining the worst of their adversaries. They also cannot well
prepare for terrible dangers that seem highly improbable.”
–The post 9/11 delays at our border crossings with Canada and
Mexico are severely impacting the local, as well as national,
economies. For example, what was once a 10-minute wait at the
border between Detroit and Windsor, Ontario, is now more like 2
hours. To give you a sense of the issues involved and the
snowball effect of the delays, 1,600 Canadian nurses work in
Detroit”s badly understaffed hospitals, but with the new commute
time, they could easily quit their jobs. [Business Week] And
Newsweek”s Fareed Zakaria writes that whereas in the past,
inspectors spent an average of 2 minutes on each truck at this
same crossing, today it is often taking 5 inspectors 3 hours to
fully check out one loaded 18-wheeler. Add it all up and you see
how American business is moving from ”just-in-time” inventory
to ”just-in-case” stockpiling. [This could also lead to major
discrepancies in the overall inventory figures going forward.]
–The New York Times had an interesting piece on the issue of
antibiotics, 70% of which in the U.S. are fed to healthy livestock
for “growth promotion.” “The use of antibiotics in animal
production increases the risks of contracting drug-resistant
infections from eating animal products.”
–The U.S. is attempting to fight back on the propaganda front.
After Al Jazeera aired bin Laden”s latest video, the network
allowed a 15-minute rebuttal by a former U.S. ambassador to
Syria and Algeria who speaks fluent Arabic. And MBC, another
Arab station, broadcast a rare hour-long interview with Saudi
Arabia”s former intelligence chief, wherein he voiced solid
support for the American effort. It”s at least a start.
–Queen Elizabeth II: “In the words of Edmund Burke, ”the only
thing necessary for the triumph of evil is for good men to do
nothing.””
–Boy, that New York mayoral race turned into the nastiest affair
anyone around here has ever seen. Both candidates hardly
distinguished themselves. But what it did prove was that Rudy
Giuliani”s endorsement carries far more weight than Bill
Clinton”s, and at the end of the day, isn”t that what really
matters? [Sorry I endorsed Green. I always knew he was sleazy,
but he really outdid himself this time.]
–Speaking of Traitor Bill, thanks to my buddy George for
pointing out a story in the Washington Times by Joseph Curl
concerning Clinton”s speech at Georgetown this past
Wednesday. And now, the former president:
“Here in the United States, we were founded as a nation that
practiced slavery, and slaves quite frequently were killed even
though they were innocent. This country once looked the other
way when a significant number of Native Americans were
dispossessed and killed to get their land or their mineral rights or
because they were thought of as less than fully human. And we
are still paying a price today.”
[There you have it, your explanation of 9/11.]
“This is not a perfect society but it is stumbling in the right
direction.”
[What an ass.]
And as Curl further reports, Clinton said the entire issue of the
day revolves around “the nature of truth.”
“This battle fundamentally is about what you think about the
nature of truth,” he said, noting that God has imposed on us the
inability to ever know “the whole truth.”
As I wrote years ago, we just need one deathbed confession and
then we can put the man on trial. A volunteer is needed.
–Remember, no sex from sunrise to sunset during Ramadan.
But I was just thinking, it was pretty clever of those who
established this rule to hold Ramadan when the days are shortest.
–Watching the Northern Alliance and its cavalry, one way the
U.S. could help would be to send over our Triple Crown
participants from the past few years. “Down the pass they
come……”
–Dateline: Mazar-e Sharif. Northern Alliance soldiers celebrate
their great victory (at least we hope it was) by shooting their
guns in the air. The next day, General Ayub comments, “Where
is all of our ammunition?”
–Watching the U.S. military”s 15,000-lb. “Daisy Cutter” bomb,
the one that creates a crater about 5 football fields wide, I
couldn”t help but think this would be a terrific way to take care
of New Jersey”s Canada geese problem. I suspect one of those
behemoths would hasten their permanent exit, as word spread
among the feathered folk that we mean business. Evacuating the
human population from the target area, however, could create its
own problems.
–Finally, I noticed the following by Richard Snow, editor of
American Heritage magazine. Back in April 1862, the Union
army had suffered a horrific first day at the Battle of Shiloh
(which would claim a staggering 23,000 casualties over the two
days of fighting).
Brig. Gen. William Tecumseh Sherman sought out his
commander, Gen. Ulysses S. Grant.
“Well, Grant, we”ve had the devil”s own day, haven”t we?”
“Yes, but we”ll lick ”em tomorrow, though.”
God bless our president and the men and women of our armed
forces.
God bless America.
—
Gold closed at $278
Oil, $22.22
Returns for the week, 11/5-11/9
Dow Jones +3.1%
S&P 500 +3.1%
S&P MidCap +2.1%
Russell 2000 +1.2%
Nasdaq +4.7%
Returns for the period 1/1/01-11/9/01
Dow Jones -10.9%
S&P 500 -15.2%
S&P MidCap -9.2%
Russell 2000 -9.4%
Nasdaq -26.0%
Bulls 41.7%
Bears 33.3%
And to all of the Veterans out there, you have my undying
gratitude. For those no longer with us…
Think not only upon their passing
Remember the glory of their spirit.
Brian Trumbore
