[Posted 7:15 AM]
Recognizing that there is nothing more important than success in
the war on terrorism, nonetheless we still have something else
rather important to deal with from week to week, that being the
current state of the American economy and the financial markets.
These last two weeks have been chock full of data for the
discerning investor. And once again, if you are a bull you can
find sustenance in the fact that jobless claims fell significantly
for the last recording period and that industrial production didn”t
fall nearly as much as expected, while once bloated inventories
are being worked off at a record clip, meaning that we are setting
the stage for a recovery as store shelves and car lots are
replenished.
But even in the good news, I can show you the bad. Sure, after
14 months of decline, manufacturing is leveling off, but when I
see a capacity utilization rate of just 74% (61% for the
technology sector), as well as artificially inflated auto sales due
to massive incentives, I”ll be damned if I can build a case for a
robust recovery (where the consumer continually buys what is
being put back on the shelf), nor can I build a case for a big
pickup in capital spending with capacity utilization rates at or
near all-time lows.
So, casting aside some “semi” positives, we”re left with
negatives. Retail sales declined 3.7% in November, for the
steepest slide in 10 years of keeping this statistic, and then you
had a veritable plethora of warnings on the corporate earnings
front, both tech and non-tech. To wit…
Lucent announced its revenue for the current quarter will fall
dismally short of projections and some 30% below the prior
quarter. It also issued a dire forecast for future capital spending
in the telecommunications sector, so it should come as no
surprise that shares in the stock fell about 25% on the week.
Qwest Communications then backed Lucent”s cap spending
appraisal, when it said it would cut its own expenditures another
25% below already reduced target levels. Then you had optimal
networks leader Ciena, a Lucent competitor, state that the
company would lose, not earn money, as projected, in 2002,
which kind of sucks if you were betting the other way.
But wait, there”s more…Applied Materials issued a negative
outlook of its own, while Oracle”s Larry Ellison was out there
once again, this time following a slightly less-than-expected
earnings report, saying all was well and his company was well-
positioned for a big rebound, only this week investors merely
yawned and sold, more out of disinterest and mistrust of Ellison
than anything else.
But, as I mentioned earlier, it wasn”t just technology taking it on
the chin, as Bristol-Myers and Merck disappointed with their
earnings forecasts, though the former wasn”t beaten up on the
news (Merck, however, was). And in financial services,
American Express and Aetna warned on their operating results.
I also had to laugh when an expert popped up and said that the
fall in jobless claims revealed a “labor market that was
stabilizing.” Who was he getting his information from, George
O”Leary? All I know is that Qwest announced it was laying off
7,000; Amex 6,500; Aetna 6,000; and Applied Materials 1,700.
Add all this up and you”re right back to the central issue in any
discussion of the markets, can you justify current prices based on
the outlook for earnings?
Morgan Stanley economist Stephen Roach noted this week that
the U.S. would witness a “disappointing recovery stretching into
2003,” there will be no “V”, and that, globally, the situation is
the same. So, pursuant to my thoughts in my last piece, I
continue to blow off Wall Street”s latest party. That proved to be
the right move, at least this go around.
Street Bytes
–For the week, all the major indexes recorded their worst
declines since the lows of 9/21, with the Dow Jones falling 2.4%,
to close back below 10000 at 9811, while Nasdaq broke a 5-
week winning streak in losing 3.4%, to finish at 1953. The
constant stream of earnings warnings, which gave investors
pause on their own forecasts for the resumption of real economic
growth, was the main culprit.
–U.S. Treasury Yields
6-mo. 1.81% 2-yr. 3.13% 10-yr. 5.18% 30-yr. 5.58%
Notice how earlier I didn”t even mention the fact that the Federal
Reserve lowered interest rates an eleventh time this week. No, I
didn”t forget, it”s just that the Fed is irrelevant, at least until they
start raising rates, though that isn”t in the cards anytime soon.
What was significant in the statement accompanying the Fed”s
move was the ongoing concern that, “Economic activity remains
soft…(adding)…to be sure weakness in demand shows signs of
abating, but those signs are preliminary and tentative.”
Meanwhile, as the target on federal funds was lowered to 1.75%,
the lowest in 40 years, longer rates remained disproportionately
high, and largely unchanged on the week, so Greenspan and Co.
continue to be blunted in their drive to squeeze out one last round
of home refinancings to help stimulate the economy.
The Fed next meets on January 29-30, a lifetime these days. The
world could have changed all over again by then.
[I get a kick out of Wall Street”s experts, who earlier in the year
were all telling us, “Of course you all know, harumpf harumpf,
that Fed rate cuts take 6-9 months to work their way into the
economy.” Now, that 6-9 has magically become 12-18. “Of
course you all know…”]
–It has been 25 years since asbestos was banned, yet the lawsuits
keep multiplying. To be clear, there are some victims who
obviously deserve benefits for exposure to the cancer-causing
material, but the vast majority of today”s cases are nothing but
fraud. The key is the X-ray that plaintiffs are required to submit
in order to prove their exposure. But as U.S. News reported this
week, in one suit only 16 of 439 X-rays held up under scrutiny,
yet most of the 439 will receive damage awards. Basically,
juries say, “Oh, there”s a spot, that”s going to develop into
cancer,” even when the odds of this occurring are extremely
small. In another recent case, 6 plaintiffs were awarded $25
million each and they weren”t even sick! The X-rays only
revealed they stood an increased chance of “getting sick.”
Congress was set to act on this abomination last spring and then
it got tabled. You see the impact, today, on share prices for
many corporations as the trial lawyers circle overhead, looking
for the next target and lenient judicial district.
–Energy: Not to beat a dead horse, or to cap another well, but we
still need some real growth in the economy and normal winter
weather before we”ll see a sustained rally. Regarding the latter,
maybe, just maybe, our Canadian friends will send down some of
their precious cold to warm the cockles of us energy investors.
[Yeah, that last line made little sense, but it felt great writing it.]
Actually, my friend Harry K. up in the Great White North can”t
find the cold anywhere either. But both of us have it on good
authority that, finally, after Christmas, look out.
On the production side, the Russians are jerking OPEC around
and no one knows where it will all shake out yet, except that over
the next 2-3 years Russia is determined to replace Saudi Arabia
and become Tsar of the Derricks. And being a current investor
in Russia (in a relatively small way), I say, you go, Vladimir!
Of course I”m purposefully omitting the wild card in all this; a
potential escalation in the fighting in the Middle East. I”d prefer
to see my portfolio gains come the old fashioned way, as a result
of getting the fundamentals right, rather than through human
suffering.
–The Wall Street Journal has been running some op-ed pieces
vigorously touting broadband as the cure-all for America”s
economic ills. I tend to side with economist Robert Samuelson;
it”s all a crock.
–Ad spending declined 8% in the 1st 9 months of 2001. The two
biggest spenders, G.E. and Philip Morris, reduced 28 and 21
percent, respectively. AOL increased 12% over the same time
period.
–The European Central Bank estimates that the growth rate in
the E.U. will be a mere 0.7% in 2002, but that inflation will skid
to only 1.1%, meaning the ECB has a lot more room to ease
interest rates.
–The Bank of England is warning British consumers to watch
their spending. Debt levels are soaring and the BOE
appropriately fears the bursting of a bubble. Separately, the
British Postal Service is planning to lay off 30,000 employees.
–Japan: Machine orders are at a 14-year low, business
confidence continues to fall, bankruptcies are rising, deflation
worsens and doubts over the survivability of the banking system
grow by the day. Other than all this, everything is just hunky-
dory.
–Wall Street bonuses are expected to be down 30-50%. While
few outside this industry are crying for my former brethren, it
does mean reduced spending, and a car not purchased here, or a
home not built there, means fewer jobs.
–The power producers such as Calpine and Dynegy continued to
take it on the chin in light of the Enron debacle. Wall Street
finally woke up and said, “Just what do these guys do?” “Ahh, I
dunno.” “Oh #@&$, sell!”
International Affairs
Israel: In a recent poll, 85% of Palestinians support violence
against Israel, while 71% of Israelis favor “massive retaliation
against the Palestinian Authority.” The week started with Yassir
Arafat blaming the U.S. for coming down on the side of Israel
(very perceptive, Yassir), while Secretary of State Powell, in his
strongest denunciation yet, questioned Arafat”s credibility. “The
Palestinian people ought to be asking their leaders, ”Where does
this take us?” And the answer is nowhere.”
Then, after 10 Israelis were gunned down in the horrific bus
attack, the Israeli Cabinet issued a statement, which included the
following:
–Chairman Arafat has made himself irrelevant as far as Israel is
concerned…
–The government holds the Palestinian Authority and its leaders
directly responsible for the miserable living conditions of the
Palestinian People. The government will do whatever possible to
help the civil population.
So while Hamas and the other terrorist groups work on
integrating chemicals into their suicide attacks, the question
remains, what does a post-Arafat regime look like? Actually, we
know it probably won”t look too good, but at least Israel would
then know exactly who it is dealing with, at which point a final
climactic conclusion to the conflict is possible.
Believe me, I”m not saying this is desirable, it”s just a theory, but
should this come to pass, the bigger issue then becomes, how do
Egypt and Syria respond, and would Jordan face a Palestinian
uprising of its own? That”s all just for starters. You obviously
then have Iranian missiles in Lebanon, as well as Saddam.
ABM / NMD
As expected, President Bush gave the required 6-month notice
that the U.S. was abandoning the 1972 Anti-Ballistic Missile
Treaty in order to pursue a national missile defense program,
which the treaty would have prevented, at least to the extent the
U.S. desires to see NMD progress to. Bush, in explaining that
NMD was necessary because of the realities of the new world,
said, “We know that the terrorists, and some of those who
support them, seek the ability to deliver death and destruction to
our doorstep via missiles. And we must have the freedom and
flexibility to develop effective defenses against those attacks.”
Reaction in China and Russia was muted; due in no small part to
the extensive notice the U.S. gave both. President Putin, while
calling the U.S. action a mistake, added, “The decision…does
not pose a threat to the national security of the Russian
Federation,” and that it would not affect the warming
relationship between the two. China”s reaction was just as mild,
and the state press even noted the events of 9/11 as being a
reason for America”s move. [This was actually a startling
statement, coming from Beijing.] President Bush has offered
immediate weapons talks with China and they have accepted.
Sure, we won”t always get off so easy, but you certainly know
where I stand on this whole issue. To those who are against
NMD, all I have to say is, how the hell can any U.S. president
not at least attempt to defend the American people from every
possible delivery system for a weapon of mass destruction? And
after 9/11, I have zero patience with anyone who still doesn”t get
it.
Russia: On a similar matter, one of my favorite topics has been
the issue of helping Russia with its early warning satellite
system, which in its current form can easily lead to a false
reading and possible retaliation for a non-existent attack. This
week a Russian general said that the radar only covers one-third
of the country effectively. He then used the example of
President Putin flying to the Far East, with Russia not being able
to track the plane for hours.
Turkey: Defense Secretary Donald Rumsfeld stated in the
Economist magazine, “We need more Ataturks. We need more
Muslim nations to stop teaching that Western culture is bad.”
[Seeing as I just completed a series on Ataturk for my “Hott
Spotts” link, I was quite pleased with this remark.] And this
week the government in Ankara announced a joint venture
between the state-owned oil company and the Kurds in northern
Iraq to explore for oil on Kurd territory, another hopeful sign in
that these two just concluded a 15-year conflict. [These are the
Kurds that are headed by the lead Iraqi opposition leader and
who could obviously play a major role in any effort to expel
Saddam. There are, however, conflicting reports as of this
writing as to exactly where the exploration is to take place.]
India: After the terrorist attack on Parliament, Prime Minister
Vajpayee told his people that this act would precipitate the final
assault on terrorism, a “do or die battle.” All indications point to
an extremist group tied to the conflict in Kashmir. Late Friday,
the Indian government directly blamed Pakistan for harboring the
terrorists. Of course, as a result of the actions in Afghanistan,
India has been aggressively pursuing relations with the Northern
Alliance, erstwhile enemies of Pakistan, while it”s now easy to
forget that Pakistan was the major backer of the Taliban. Ah,
yes, it”s fascinating stuff, and more than a bit scary.
North Korea: U.S. News reports that the North Korean army is
the only one in the world that requires its troops to be vaccinated
against smallpox, which should answer the question as to
whether or not North Korea is a threat on this front.
Zimbabwe: On Thursday, President Robert Mugabe briefly
detained the main opposition leader as Mugabe prepares to rig
the March elections. And President Dirtball said this of British
Prime Minister Tony Blair (Britain having been the former
colonial ruler of Zimbabwe). “Blair was a troublesome and
difficult little boy. He is still that. We are dealing with liars,
crooks, and intellectual frauds.” A few British commandos could
rid the region of Mugabe, and, in the name of peace and human
rights, it should be encouraged.
Britain / Northern Ireland: London is under high alert this
holiday season, for fear of IRA splinter group attacks.
Meanwhile, Sinn Fein”s Gerry Adams is traveling to Cuba next
week to meet with Castro, an incredibly stupid move.
Venezuela: 95% of businesses joined this week”s work stoppage
to protest the economic policies of President Chavez, who
responded by donning his military fatigues and giving Marxist
speeches to the poor. He is totally out of control, telling the
nation”s business leaders to “beware, you will regret (this) for the
rest of your life.”
[Not for nothing, but back on 12/18/99 in this space, I wrote the
following after Chavez”s election. “Chavez, a self-professed
lover of that great leader, Fidel Castro, will now potentially be
making noise for at least the next decade.” Shorten that by two
years.]
Argentina: It seems to be just a matter of time before massive
civil unrest takes hold. This week witnessed the first signs of
real discontent over the government and the collapsing economy.
For months I have been warning that we ignore the problems of
Latin America at our own peril. The Journal opined, “The
success that was once Latin America is unraveling by the day.”
Venezuela, Argentina, Colombia…just for starters. And the
continent has become a real hotbed for terrorist organizations.
Random Musings
–As I watched Osama bin Laden, my immediate reaction was
one of concern for all of us going forward. I was comparing bin
Laden”s demeanor with that of the pictures of Saddam Hussein.
In the videos we see of the Butcher of Baghdad, you can tell his
own generals are scared to death, for fear they are about to be
plugged. [Remember, when you view the generals seated around
the conference table with Saddam, they aren”t carrying loaded
weapons. Saddam doesn”t allow that.]
But what got me in watching Osama was his totally relaxed
manner, as well as of those around him. With Saddam, you can
build a case that aside from his sons, he is really all alone. 5 or 6
strategically placed daisy-cutters and Iraq may roll over. But
with Osama and crew, the chilling part is that there are thousands
who will continue his mission long after the maggots are feasting
on his demented brain.
Foreign affairs expert Daniel Pipes estimates that 10-15% of
Islam”s 1.3 billion adherents espouse “radicalized Islam.” Of
course that doesn”t mean 150 million are prospective bin Ladens,
but by the most conservative estimate there are a minimum of
30,000 Al Qaeda members outside of Afghanistan (plus those
who have now escaped).
But has the global dragnet disrupted future terrorist plans?
Undoubtedly. Can we still stop everything? Of course not. Can
we thus afford to let down our guard? Never.
–From historian Frances Fukuyama. “Muslims interested in a
more liberal form of Islam must stop blaming the West for
painting Islam with too broad a brush, and move themselves to
delegitimize the extremists among them.” [Newsweek]
–After the release of the video, how sick are you of those in the
Arab world that are still in a state of denial?
–Dana Milbank, reporting in the Washington Post. “What
happens if D.C. is hit by a terrorist attack, taking out the
President, Vice President, Congress and the Supreme Court?” It
obviously is a possibility, a massive nuclear or biological event,
and currently there is no real mechanism in place. Some
legislators are drafting bills that would not only allow governors
to appoint senators (which they already can), but also adopting a
constitutional amendment, which would allow governors to
select representatives. Others say governors should be in the line
of presidential succession (probably ranked by population).
–I lost all respect for House Majority Leader Dick Armey (who
announced his retirement this week) when he said two years ago
that he was proud he had been overseas only once and bragged
he didn”t have a valid passport. World events since have
revealed his small-minded thinking to be Neanderthal in scope.
Good riddance.
–Boy, did you see Hillary on “Meet the Press” last week? She
was all sweetness, refusing to take the bait on John Ashcroft and
other normally hard-line issues. And she “fully supports the idea
of military tribunals” for those like Mullah Omar and bin Laden.
Plus, she even gave an incredibly tepid defense of her husband
and the former president”s own battle against terrorism. All of
which means one thing; Bill and Hillary are splitsville. [Heck,
Bill was golfing with the New York Jets” owner”s estranged wife
the other day…according to the New York Post.]
–Clinton national security advisor Sandy Berger whined that the
Clinton administration couldn”t go after Osama because “we
didn”t have the support of Pakistan, Uzbekistan, etc.” following
the ”98 embassy bombings. That”s because you had such a
lousy secretary of state.
–Rudy Giuliani on the fate of John Walker. “I could feel sorry
for him and still string ”em up.”
–General Norman Schwartzkopf, on the principle of forgiveness
for those who have abetted terrorism. “I believe that forgiving
them is God”s function. Our job is simply to arrange the
meeting.” [Thanks, Leah.]
–Well, the Southeast and Northeast are finally receiving some
rain. Nonetheless, StocksandNews remains on drought watch.
This is what we do.
–Senator John McCain. “The Enron situation is going to be a
big, big scandal.” [Republicans beware.]
–Message on an American bomb dropped on Al Qaeda. “For
those whose dreams were taken, here are a few nightmares. This
is gonna shine like a diamond in a goat”s ass.”
–Authorities busted a large-scale, nationwide campus ring,
which specialized in pirating software, including programs such
as Windows XP. Investigators believe some software executives
may also be involved (perhaps seeking revenge against prior
employers). This is the kind of stuff that really pisses me off.
Send the kids to Camp Rhino, right after U.S. forces leave.
–As New Jersey”s communities finally face up to the burgeoning
deer problem, I get a kick out of the animal rights folks, like the
woman in a nearby town who said the other day that “she abhors
the sight of deer carcasses being carted away.” I”m assuming she
prefers to have them sticking through her windshield.
–Speaking of wildlife, Mike H. passed along a piece from
William F. Buckley, on drilling in the Arctic and existing
conditions at Prudhoe Bay. Buckley quotes a local resident of
the area. “Grizzly bears, like caribou, aren”t frightened by oil
exploration. They consider Deadhorse the Paris or New York of
the North Slope; they come in to see the sights, perhaps grab a
little dinner, even to catch a show.” Heck, put ”em to work up in
ANWR.
–My friend Tony was caught in a typical New Jersey traffic jam
the other day and called in. “Life was easier in many respects in
the days of the horse and buggy,” he remarked. “Yeah, and the
ale was stronger too,” I could only reply.
–This isn”t a good holy season for Pope John Paul, as he watches
the Holy Land go up in flames. I”ve been thinking a lot about
him lately, and I see where his New Year”s message will include
a passage discussing how countries have a moral and legal right
to defend themselves, the right to wage “just wars.” But this
man of peace, who, in my humble opinion, had more to do with
the fall of communism than anyone else, is being forced to suffer
in his final days. Something to think about, the next time you”re
sitting in church, staring at the cross.
–Lastly, President George W. Bush. “We have a chance, if we
take it, to write a hopeful chapter in human history.”
Roll on, Mr. President. And God bless you and the men and
women of our armed forces.
God bless America.
—–
Gold closed at $278
Oil, $19.23…decent rally back from the depths on Friday.
Returns for the week, 12/10-12/14
Dow Jones -2.4% [9811]
S&P 500 -3.0%
S&P MidCap -2.3%
Russell 2000 -2.1%
Nasdaq -3.4% [1953]
Returns for the period, 1/1/01-12/14/01
Dow Jones -9.1%
S&P 500 -14.9%
S&P MidCap -4.9%
Russell 2000 -2.5%
Nasdaq -20.9%
Bulls 43.4%
Bears 28.3% [Source: Investors Intelligence]
Note:
Last spring I adopted the policy of changing my picture at the top
of this piece every few months or so, because I always get tired
of seeing the same photo, decade after decade, for other
columnists. And so it was that this past August I posted the
one of myself at Pearl Harbor (from my visit last May). Then
came 9/11…and now how can I replace it? I won”t, of course,
until I have the chance to take something as appropriate.
Have a great week. I appreciate your support.
Brian Trumbore
