[Posted 7:15 AM]
Recovery
Market rally off the lows of 9/21/01 thru 1/4/02
Dow Jones +24.6% [8235 – 10259]
S&P 500 +21.5% [965 – 1172]
Nasdaq +44.7% [1423 – 2059]
It”s been a helluva stretch, hasn”t it? President Bush”s leadership
and a renewed sense of confidence among the American people
has as much to do with it as improving economic fundamentals
(of course they largely go hand-in-hand). And for those of us
who are forecasting meager gains the rest of the year (remember,
I”m not bearish, see last week, just extremely cautious…and a
realist), these next few months could really try our mettle,
because much of the news will be on the bright side (barring a
disaster on the terror front).
After all, the consumer is feeling better (at least those not out of
work), housing values are holding steady, energy prices are
down, corporate profits will have bottomed in the fourth quarter,
and manufacturing, despite continuing job losses in the sector, is
seeing a pickup in “new orders.” What”s not to like, especially
since Wall Street is supposed to be a ”discounting,” ”forward-
looking” animal?
Well, my guess is that after we go through the largely positive
”noise” of the first quarter, investors will be humming, “Is that all
there is?” and you”ll recall just how depressing that Peggy Lee
tune is.
J.P. Morgan”s Doug Cliggott (he of the Dow 8500, S&P 950
forecast for 2002) mused on CNBC Thursday evening, “Where is
the (economic) acceleration going to come from?” Traditionally,
it”s the moribund housing and consumer sectors which lead us
out of any recession, but look at today; housing has been smokin”
and the consumer bought autos in 2001 at the 2nd fastest pace in
history.
And to those calling for a robust recovery in profits, I have one
word, ”how”? We still need more time to cure the overcapacity
situation, worldwide, and it”s next to impossible for corporations
to raise prices.
On the capacity front, I had to laugh at the results of a Merrill
Lynch survey of chief investment officers, which revealed that
they are projecting a 3% increase in capital spending in 2002.
Much was made of this in the financial press this week, though
the same survey last year projected an increase of 9%, only to
have it come in at minus 1%. And with regards to pricing,
semiconductor stocks soared, partly on the news that prices in
this sector may be rising. Label me a big time skeptic on this
issue beyond the first quarter.
And then there is valuation. I”ll give this a rest until fourth
quarter earnings start flooding in (the week of 1/14 in earnest).
For now I leave it up to Mr. Cliggott to state “the market is still
extremely expensive.” Just my opinion, but upside from here is
limited to another few percent…though I”m not going to be the
least bit surprised to see temporary gains beyond that. I”m just
too dumb to try and trade it.
Lastly, remember our president recently said, “2002 will be a
year of war.” In other words, don”t get too carried away.
Street Bytes
–For the week the Dow gained 1.2%, Nasdaq 3.6%. But with
Monday being a downer, as well as the last day of the year, it
was the post-New Year”s performance that really impressed. See
returns below.
–U.S. Treasury Yields
For the record, there was a big rally on New Year”s Eve, so we
closed the year at the following levels.
6-mo. 1.82% 2-yr. 3.05% 10-yr. 5.03% 30-yr. 5.47%
Then starting Wednesday, the bond market sold off on the mostly
good news on the economy, particularly the manufacturing and
service sector surveys. And while the employment report for
December revealed further job losses (with the unemployment
rate rising to 5.8%), the picture was far better than just a month
earlier.
1/4/02
6-mo. 1.81% 2-yr. 3.17% 10-yr. 5.13% 30-yr. 5.57%
[Virtually identical yields to one week earlier.]
The consensus of Barron”s 19 economists is for a 12/31 10-yr.
yield of 5.10%.
Separately, a survey conducted by the Wall Street Journal calls
for quarterly growth in 2002 of:
0.9% (Q1), 2.4% (Q2), 3.4% (Q3), 3.7% (Q4).
–For the archives:
Final 2001 return figures for the key market averages.
Dow Jones -7.1% [Total return, including dividends, -5.4%]
S&P 500 -13.0% [Total return, -11.9%]
S&P MidCap -1.6%
Russell 2000 +1.0% [Small is good.]
Nasdaq -21.1%
Returns for the 00s – 2000 and 2001
Dow Jones -12.8% (not including dividends)
Nasdaq -52.1%
Global 2001 returns (local currency)
London FT-SE -16.2%
Frankfurt DAX -19.8%
Tokyo Nikkei -23.5%
*I have a lot more data on my “Wall Street History” link,
including an item on “seasonality” that should be of interest to
you market junkies.
–Argentina: Rodriguez Saa, we hardly knew ya. [Good thing I
didn”t waste my time figuring out who he was, eh?] So now we
have Peronista Eduardo Duhalde, whose economic policy will be
centered around a devaluation of the currency by 30-40%, thus
separating the peso from its one-to-one peg with the U.S. dollar.
As noted before, the hope is that rising exports (which
devaluation would render far cheaper) will help lift the economy
out of its nearly 4-year recession. But the flip side is the
following; 80% of loans and mortgages are in dollars, so at a new
exchange rate of 1.4 your once $500 monthly salary is now
worth $360, making it far more difficult to make payments (the
level of which remains the same), and that”s if you even have a
job, seeing as unemployment is now 18% and rising. In other
words, a new round of violence is not out of the question.
–China: We”re #6, we”re #6! Jubilant Chinese massed in
Tiannanmen Square (slight exaggeration) to celebrate the fact
that China is today the world”s 6th-largest economy, passing
Italy. China now trails only the U.S., Japan, Germany, U.K. and
France. Exports, however, a large driver of economic activity in
the country, are sliding due to weakness across the globe.
–Euro: The currency introduction got off to a solid start (save for
the fact Italians forgot to load 15% of their ATMs), though some
of the “europhoria” seemed a bit excessive, if you ask me.
Nonetheless, you cannot merely dismiss the potential positives,
particularly for those countries (excluding France and Germany)
whose own currencies did not have a strong identity on the world
market. Now they are part of a greater whole. And the euro
brings the continent closer politically, but therein lies a potential
problem – “Governments by the politicians and for the
bureaucrats.” [Steven Erlanger / NYT]
So the economic benefits could over time be outweighed by
fractious politics. After all, in the now hoped for creation of a
European state, the people should be asking themselves, “Hey,
did I have a say in selecting these faceless plutocrats?” The
answer, for the most part, is “No.”
But in the shorter-term, the fate of the euro depends on economic
growth, or lack thereof. And until it consistently outgrows, or
just keeps pace with, the U.S., the dollar, not the euro, will
remain the world”s “reserve currency.” In the meantime, watch
what happens with elections in France (May) and Germany
(September) for signs of acceptance of the new European order.
[For the record, the euro finished up its first week in circulation
at $0.89. For its 3-year bookkeeping history, the range is $1.17 –
$0.82.]
–U.K.: Both the U.S. and U.K. have a similar situation, the
consumer has been carrying the respective economies the past
few years, though whereas the U.S. just had a lousy Christmas
shopping season, Britain had its best in 14 years. And both
countries now face staggering consumer debt levels, with British
monetary authorities warning of a bubble, thus the hint that they
may soon be raising interest rates. [Regardless of whether it is
right or not to do so, it does point out the difference between
non-euro Britain and the European Central Bank. If Britain was
part of the euro-community, it would be at the mercy of ECB
policy.]
–Energy: It would appear that much of OPEC is implementing
the production cut, though compliance between it and non-OPEC
nations who also agreed to cut their own production is not the
main point these days. [For you op-ed junkies out there, the New
York Times” Thomas Friedman wrote an incredibly stupid piece
this week, totally ignoring world economic activity in the pricing
of crude. Stick to discussions on Israel, Mr. Friedman.] It”s
about the global economy and the weather. On the latter front,
weather in North America (except for the South this week) is
simply ”normal,” and we need a good 7-10 day stretch of brutal
cold to really begin to work off bloated inventories. Natural gas,
for example, plunged to $2.25 on the week. But, if we get any
kind of growth in the world economy, oil and gas prices will
stabilize around the $20 level, or a bit higher, before the next
really big ”up” move occurs, due, in part, to the large decrease in
drilling activity for new supply we have witnessed recently.
As for my own positions in the sector, my natural gas / service
play took a hit for the above-mentioned reason. Funny, all the
analysts are now warning that 4th quarter earnings in the service
sector will be lousy. No kidding, Sherlocks. I told you this
weeks ago and said the stocks had gotten ahead of the
fundamentals. But at the same time, the analysts aren”t looking
ahead. If the economy grows, so will demand for energy. Ergo,
the outlook is still solid, or, as Doug Cliggott added the other
day, there is “fantastic value in the energy sector,” particularly
after this last dip (my opinion).
–The “divisor” on the Dow Jones average adjusts periodically.
All you need to know is that a $1 price move in a Dow 30 stock
now moves the average 7 points.
–Enron: Remember how upset I was when Senator Jim Jeffords
left the Republican Party? [WIR, 5/26/01 – brilliant, I might
add.] Some know-nothings on the topic (see William Kristol)
acted like it didn”t matter. Well look who”s in charge of the
committee that will be grilling Bush administration officials on
the Enron debacle. Democrats. And, fellow Republicans,
unfortunately we now deserve what is coming. The investigation
should be sweeping in scope and heads should roll. It is not an
overstatement to say that the people”s confidence in Wall Street
in general is at stake. Both employees and investors need
reassurance that this crap can”t happen to them.
Yes, stocks, and companies, rise and fall, that”s all part of the
free market. But when fraud is involved, as I suspect will
eventually be proved, then we become no different than some
emerging market, where cronyism is the order of the day and
accounting standards are non-existent.
–One cannot ignore the fact that state and municipal finances are
abysmal. Here in the New York area, for example, we are
witness to the task ahead for the Big Apple, where across-the-
board job cuts are coming. It”s a similar picture elsewhere.
–U.S. corporate debt: $4.9 trillion, a record.
U.S. consumer debt: $7.5 trillion, a record.
International Affairs
India / Pakistan: Troops are dug in, eyeing each other, waiting
for word from their leaders. I cannot overemphasize that one
more terror attack against India, over the next few weeks, and it”s
all-out war. But if Pakistan”s President Musharraf can exercise
his influence and get the militants to cool it, war will be avoided.
He at least continues to say the right things and Musharraf also
told his intelligence service to stop doing business with terrorist
groups. Of course many of the agents won”t, but we desperately
need a cooling-off period here.
As for the Indian side, the bellicose defense minister said, “We
could take a (nuclear) strike, survive and then hit back.” He then
reminded his listeners that India has over 1 billion people and
Pakistan just 140 million. It doesn”t exactly give one a warm and
fuzzy feeling now, does it? At least India does recognize that a
battle between these two would create a seeming state of war
against Islam in general. And then there is China. British Prime
Minister Tony Blair is in the region this weekend to remind the
players that China would immediately be in the mix (check your
map) should war break out.
[For those of you not too familiar with Kashmir and the genesis
of the whole India-Pakistan conflict, I have a good piece up on
my “Hott Spotts” link.]
Turkey: The government”s Security Council (comprised of
leading politicians and military leaders) is looking to impose
even harsher restrictions on “political Islam,” which would
involve shutting down even more religious schools, as well as
businesses fronting for militant organizations. When he was
running for president, George W. Bush was often heard to say,
“What would Jesus do?” In Turkey it”s, “What would Ataturk
do?” Crack down further, wrote the editor whose own
investment in this country rose fairly substantially this week.
And for those like the Times” Friedman (bad week for him in this
space) who continue to believe we will have to go it alone with
regards to Iraq, they are all so wrong.
For starters, Turkey will be the lead peacekeeping nation in
Afghanistan, once the U.S. and Britain exit the scene, because, as
U.S. officials say admiringly, the Turks aren”t afraid to fight, if
necessary. And with regards to Iraq, the U.S. will make it worth
Ankara”s while to go along.
Some of you have written to remind me of Turkey”s dire
financial strait. [I appreciate the articles, by the way.] No doubt,
the economy is a basket case of Argentinian proportions, as I saw
firsthand last April in my travels to Istanbul. But it”s just too
important to fail and if the coalition lets it, it will be sending a
horrible signal to the entire Muslim world and those regimes we
will be attempting to encourage to follow the reform path. No, it
was Donald Rumsfeld who said just a few weeks ago, “We need
more Ataturks.” Right as usual, Mr. Secretary.
Southeast Asia: Malaysia has been arresting terrorists with links
to al Qaeda and evidently they were bent on toppling the
government, while from time to time we also need to remind
ourselves that what goes on in neighboring Indonesia matters in a
big way when it comes to the world economy. The Straits of
Malacca (which takes you between Indonesia and Malaysia,
where you can then go on up to China / Japan or over to the U.S.,
without a gigantic, costly detour), for example, is the busiest
shipping lane in the world. And, thinking outside the box, it”s
another reason why our coalition partners in the war on terrorism
are vital. The day may come when German or French vessels are
helping the U.S. and its Asian partners protect this vital seaway.
We can”t be everywhere, you know.
Israel: Violence has dropped sharply. That”s a good thing. And
the Israelis intercepted 50 tons of weapons most likely bound for
the Palestinians.
Zimbabwe: As part of his plan to steal the March election,
President Mugabe is granting 100,000 blacks more white
farmland, meaning, more starvation.
Random Musings
–Finally, there are some voices of Islamic reason emerging in
the mainstream press.
Mohammed Ayoob / Professor at Michigan State [NY Times]
“In many immigrant communities (in America), political
discourse is carried over from home countries and grounded in
longstanding ethnic or national discontent. Political causes are
labeled Islamic even when they have no connection to Islam.”
[In other words, you”re American. Act it.]
Pervez Amir Ali Hoodbhoy / Pakistani Professor [Washington
Post]
“Of the 48 countries with a full or near Muslim majority, none
has yet evolved a stable democratic political system. In fact, all
Muslim countries are dominated by self-serving corrupt elites
who cynically advance their personal interests and steal
resources from the people.” [Right on, bro. They”re all massive
failures, except to a certain extent Turkey and Malaysia.]
And in Saudi Arabia, Crown Prince Abdullah (the de facto ruler)
“(Terrorists) have claimed to support the Arab and Muslim
nation and this nation was the first victim of their mischief and
acts. Therefore it is the duty of all Muslims to unequivocally
condemn all terrorist acts clearly and without any vagueness and
to condemn all those who support them.” [Yes, this is a bit of
the pot calling the kettle black, but it”s a start, though we still
have a long way to go.]
–To wit, pursuant to my warnings on the Wahhabi extremist
influence within America”s borders, Bob Woodward wrote in
Sunday”s Washington Post of the 150 separate investigations the
U.S. government has launched into groups and individuals, with
officials conceding the “presence is far broader than previously
known.”
–While in Canada, officials admit they are grossly unprepared
for terrorist attacks, especially when compared to preparations in
the U.S.
–Captured documents reveal that al Qaeda has been training
units to assassinate Middle Eastern leaders sympathetic to the
West (which it goes without saying would include Egypt, Jordan
and Saudi Arabia).
–The trial of Zacarias Moussaoui, the “20th hijacker,” is already
threatening to become a nightmare for the U.S. government.
Some kind of ”accident” in jail before the October start date is
really preferable.
–If you are skilled at cultivating poppies and you were just laid
off from your American job, head to Afghanistan, young man.
With the fall of the Taliban, you can make a decent living
supplying heroin to the addicts of the world, and you get to meet
real-life warlords! [Paid for by the Pashtun Development Corp.
Ali Abdullah, president.]
–There was some final good news for Rudy Giuliani. The # of
murders in New York for 2001 was just 642, down from over
2,000 at the height of the previous David Dinkins administration.
[By contrast, Jamaica had a record 1,140 homicides last year, and
it has a population of only 2.6 million, just 30% that of New
York”s. Ergo, come to New York, blow off Jamaica.]
–Daniel Henninger / Wall Street Journal: “Tom Daschle, no
matter how smooth, gives the impression of a cat lying patiently
in wait.” Brilliant.
–Brazil has had trouble with rain and killer mudslides the past
few weeks, so when a 35-year veteran weatherman predicted that
Rio would have heavy New Year”s rains, and the bad weather
didn”t materialize, the Brazilian government called the
forecaster”s warnings “irresponsible” and they will now bring
him up on charges which carry a penalty of 6 months in jail.
Which means two things: Brazil isn”t as developed as you may
have believed and, second, if my severe drought prediction of
this coming spring and summer fails to materialize, I will flee the
country before authorities can catch up with me.
–Buddy, the real story: Now it can be told. Former first dog,
Buddy, was really a drug-sniffing agent for the DEA, assigned to
find out the truth on past rumors concerning Bill Clinton. So
with Clinton out of town, Buddy took it upon himself to snoop
around. But, then, despite all of his undercover training, he
chose to revert back to his roots, chasing cars and trucks. Here at
StocksandNews, we mourn Buddy”s passing. We were so close
to finally cracking Clinton”s past wide open.
–Czech President Vaclav Havel in his New Year”s message
concerning the events of 9/11 hoped the attacks would help
“awaken to life all the forces of good that are slumbering within
humanity.”
–According to a Washington Post / ABC News survey, 8 in 10
are more hopeful than fearful about what 2002 holds. 6 in 10 are
confident about the world.
–As one who is convinced we should have an aggressive goal to
land a man on Mars soon, I enjoyed Sam Donaldson”s 2002
prediction that our radio telescopes will finally pick something
up this year; we are not alone. That, my friends, would unite us
all quicker than anything.
–Finally, we honor the Special Forces soldier, Sgt. First Class
Nathan Ross Chapman, 31, who was killed in action in
Afghanistan on Friday. The other day on another link I
had the story of Staff Sergeant Barry Sadler, the composer of the
1966 hit, “The Ballad of the Green Berets.”
“Silver wings upon their chest
These are men – America”s best.”
God bless President Bush and the men and women of our armed
forces.
God bless America.
—–
Gold closed at $279 and finished 2001 at $279.
Oil, $21.62 highest level in 8 weeks. 12/31/01: $19.84
Returns for the week, 12/31-1/4
Dow Jones +1.2%
S&P 500 +1.0%
S&P MidCap +0.7%
Russell 2000 +1.2%
Nasdaq +3.6%
Returns for the period, 1/1/02-1/4/02
Dow Jones +2.4%
S&P 500 +2.1%
S&P MidCap +1.9%
Russell 2000 +2.2%
Nasdaq +5.6%
Bulls 49.0%
Bears 27.5% [Source: Investors Intelligence]
Have a great week. I appreciate your support.
Brian Trumbore
