[Posted 7:15 AM]
Back on January 19, I discussed the opinion of the King of
Bonds, PIMCO”s Bill Gross, and his feeling that the U.S. dollar
was about to take a tumble, primarily for economic reasons. For
my part I added, “I would submit to you, however, that a
longstanding wild card in this space, an increasing lack of
confidence in Corporate America and our markets may well be
the trigger that pricks the dollar bubble.”
This week, in Gross”s latest missive, he writes: “The American
capitalistic model is about to come under attack and as Pogo
might put it, the problem is not Greenspan, ” The problem is us.”
Sooner or later the rest of the world – which are the true lenders
of last resort – will balk and the game will be over. The
question is not really if, but when.” [Source: pimco.com]
Back when Madeleine Albright was secretary of state, she once
stupidly uttered, “America, the indispensable nation.” Needless
to say, far more than just yours truly found this quite
disheartening. And, let”s face it, while George Bush campaigned
on the notion of a more humble America, he soon fell into some
bad habits. You”ll recall I wasn”t exactly doing cartwheels
concerning the first 8 months or so of the Bush Administration
prior to 9/11.
There are a lot of folks around the world, not just al Qaeda types,
who would like to see the U.S. fail. Salman Rushdie expressed
the following in a New York Times op-ed piece this week.
“America finds itself facing a broader ideological adversary that
may turn out to be as hard to defeat as militant Islam: anti-
Americanism, which is becoming more evident everywhere.”
Rushdie further pointed out, however, the hypocrisy of it all, as
our enemies are simply “hating most what (they) desire most.”
This is where a high-profile episode like Enron (and possibly the
developing Global Crossing story) carries a great deal of weight.
The International Herald Tribune surveyed opinion around the
world as the Enron hearings unfolded.
The Strait Times of Singapore called our political system
“legalized corruption that poses for U.S. lawmaking,” and the
IHT story added, “Given the accusations of improprieties in the
Enron collapse, newspapers in Malaysia, Thailand and elsewhere
in Asia have bristled with resentment of past U.S. pretensions to
the moral ground.”
It”s easy for many of us in this great country to just sit back and
say, oh, go screw yourself, when discussing criticism from
abroad. Long time readers know that often this is my feeling too
(see criticism of Camp X-ray). But this is a time not just for
steadfast resolve on the military front, but also diplomacy. And,
in addition, when it comes to the corporate boardroom, today the
message to some of our corporate chieftains needs to be, “Cut the
crap.” Thanks to a bloody few, we all get a black eye.
—
The above is also related to the ongoing discussion of President
Bush”s use of the term “axis of evil” in his State of the Union
Address, while describing the actions of Iran, Iraq and North
Korea. This week Peggy Noonan had thoughts similar to my
initial reaction, spelled out last week, saying she”s “not sure the
country has absorbed the implications of this.” Pat Buchanan
said Bush was “telegraphing a punch that can”t be delivered.”
In the days after 9/11, Secretary of Defense Rumsfeld explained
that this would be a “dirty war,” that the U.S. would need to get
in bed with some questionable characters to accomplish our
objectives. But what worries me is this evolving notion the U.S.
can go it alone, if necessary. Secretary of State Powell, loyal
soldier that he is, said as much this week in lining up his staff to
follow the President”s marching orders.
But it is one thing to identify nuclear reactors in Iran and take
them out as need be, it is quite another to think we can defeat the
axis without help from our allies. And regarding Iraq, I have to
keep harping on the Russian angle. There were more stories this
week on Russia”s chief concern, not just the $8 billion or so
owed it for past weapons shipments (pre-Gulf War), but also the
$20-billion plus in existing contracts that Russia stands to gain
on the energy front. Hell, let them have it in return for their help
in toppling Saddam (and as noted before it”s a similar situation in
Iran). Talk about a small price to pay for the elimination of a
major threat.
Supposedly, the U.S. is already grouping commanders
responsible for Iran and Iraq in the Gulf region, which gives you
an idea of what is to come. Vice President Cheney will be
visiting the region in March as well. There is much to be done in
this war. Civilization itself is at stake. I just hope Americans
understand the tremendous commitment the task requires, as well
as the dangers involved. But I also hope our leaders understand
we can”t go it alone, everywhere. News of the Cheney trip is
encouraging. I also hope, though, that we are cautious with some
of the rhetoric. When Ronald Reagan uttered the phrase “evil
empire,” we were dealing largely with one threat. Today”s
situation is far more complex.
The Economy and Wall Street
Of course all of the above discussion also has everything to do
with Wall Street and our nation”s economic health. Regarding
the former it was a lousy week.
On the economy, while there were more positive signs, such as
rising factory orders, the week also brought news that growth in
the service sector appears to have stalled, the stimulus package
was shelved (it would have helped some) and we clearly have a
credit crunch when it comes to the banking sector”s willingness
to lend. In other words, chances grew that the rebound we are in
the midst of not only may be tepid, it could be virtually non-
existent once we get through the restocking of store shelves and
auto showrooms.
And then you have this double-edged sword, the revelation that
December saw a sharp drop in consumer debt, after a record rise
in November. The good news is that Americans may finally
recognize that enough is enough and have now decided to cut
back on their borrowing while increasing savings. If the trend
continues, however, it would also mean the consumer isn”t
spending, again, imperiling any recovery.
As for the outlook from some key corporate chieftains, the week
could have been much worse if G.E. hadn”t reiterated its earnings
forecast for 2002. [I”ll bet you my Lew Alcindor rookie card that
by the 3rd quarter they are paring it.] But then you had Cisco,
which while handily beating estimates for its last quarter, also
revealed it was still decidedly cautious going forward. The
stock, which rallied from $18.60 to $19.40 on the earnings
figures in after hours trading, finished the week below $17 when
the less than exciting forecast hit home.
On the week, the Dow Jones lost 1.7% to finish at 9744, while
Nasdaq had its worst performance, off 4.8% to 1818, since the
week of 9/17. Both averages now stand at 3-month lows.
Street Bytes
–U.S. Treasury Yields
6-mo. 1.81% 2-yr. 2.92% 10-yr. 4.89% 30-yr. 5.39%
The short end of the yield curve rallied on the belief, at least for
this week, that the pace of any rebound will be slow and that
there is now a renewed chance of the Federal Reserve once again
cutting the funds rate when they convene in March.
–Japan: The Nikkei hit a new 18-year low, around 9400, before
closing the week at 9686. Prime Minister Koizumi”s approval
rating is down to 45-50 (depending on the survey) from 70%+.
The government still refuses to utter the word, “crisis.” But I
have to comment on a remark CNBC”s Mark Haynes made this
week when someone was comparing the current environment in
the U.S. to the Japanese market of the late 80s and the
succeeding decline of the past 12 years. “That bubble was
absurd,” Haynes harrumphed. What the hell do you think ours
was all about? The Nasdaq wasn”t absurd? You had people
buying companies based on the # of hits on a web site, when no
one even knew what a hit was!
–Argentina: Yes, it matters. Banks were given an extended
holiday, meaning once again the people couldn”t access their
money, as the government came up with the plan to convert $
loans into pesos at below market rates, thereby ensuring that
banks could face billions in further losses.
–Enron: The most significant event of the week probably wasn”t
the hearings, but the announcement that the Justice Department
was stepping up its own investigation. Pursuant to past
comments, you are just beginning to understand the involvement
of Wall Street in the Enron mess. True, simple conflicts of
interests are not always illegal, but wait until we get the word on
all these silent investors in the secret partnerships. You can be
sure some Wall Streeters are playing a shell game with their own
assets right now.
–With the banking sector having taken it on the chin recently,
one has to wonder, in particular, about J.P. Morgan Chase.
Aside from mistakes like on Enron, Argentina and its venture
capital unit, it does need to be noted from time to time that its
exposure to the derivatives market was $29.3 trillion as of year
end (notional value…it”s not quite as bad as it looks and
sounds…but it”s a huge real exposure nonetheless), while its
combined net credit exposure is in the neighborhood of $94
billion. [Source: “Grant”s Interest Rate Observer,” 12/7/01.]
If, and I must emphasize, ”if”, the U.S. (and within hours the world)
has a true banking crisis, it will be the result of an operation like
JPM”s. I had this thought as I was writing my latest “Wall Street
History” piece on the May 1931 collapse of Austria”s
Creditanstalt Bank, which played a key role in plunging the
world further into the Great Depression. Just another reason,
sports fans, to always sleep with one eye open, just as we do at
StocksandNews.
–Way back on 4/29/00 in this space, I wrote what a huge mistake
it was for those AT&T employees who were taking out 2nd
mortgages to buy into the initial offering of AT&T Wireless. I
was reminded of this when the stock traded this week around
$9.25 (before rebounding to above $11). Those employees
bought in at $29.50.
–Despite Friday”s last hour rally, the average investor has taken
another huge hit these past few weeks. Forget Enron and Global
Crossing, there are far more employees who have seen their own
pension plans decimated. It”s a tragedy of huge proportions and
it”s also another reason why I remain steadfast against
privatization of Social Security, even for a small portion. Social
Security is one of the few programs in America that works. You
can bitch all you want about the tax side of the equation, but
without the fixed benefit that many of our elderly receive, they”d
have nothing. They must be able to rely on that. As far as how
the heck the government is going to fund the program when the
Boomers start retiring in 2011 and beyond, it”s all about growth
in the economy, folks. And frankly, the war on terrorism could
continue to rear its ugly head at the most inopportune times in
this regard.
–Elan Pharmaceuticals: Being investigated by the SEC.
Global Crossing: Ditto…the SEC and the FBI.
PNC Financial: The Federal Reserve came down hard on it.
Allied Irish Bank: The FBI.
Mullah Omar: The U.S. Military.
Hey, isn”t it nice to know your tax dollars are actually being put
to proper use sometimes?
–Speaking of Global Crossing, as mentioned earlier this is a
developing story. For now, one of the crimes is that employees
who were laid off around Christmas and promised a respectable
severance package, never received their first check as the
company filed for Chapter 11 protection. A good friend who
was one of those pre-Christmas victims tells me that those
employees who remained, and have since been given pink slips,
may actually receive severance since the company now has some
cash to play with. But the other folks still get nothing. This is
what Camp X-ray is for, my friends.
–On 1/26, I disparaged Amazon for being “disingenuous” when
it comes to its public releases, a reason why I have trouble
treating company officials with respect. Well, Mark Veverka of
Barrons, who has covered the Amazon story better than anyone,
had another good piece in the 2/4 edition regarding Amazon”s
continuing lack of clarity on its filings and balance sheet
disclosures. Then the Wall Street Journal had a piece
questioning Amazon”s true liquidity picture. Since its ”glowing”
earnings report, Amazon shares fell from $15 to near $11, though
late Friday they bounced back to $12.50.
–You know that Ameritrade commercial where the two dorks
talk of buying Changko Wireless at $25 and change? Well, it”s
now trading at $2.
–Gold soared to 2-year highs and closed comfortably above
$300, mostly, it would seem, on supply/demand factors, as well
as the usual “safe haven” fallback position. One of these days
gold bugs will finally be right. Maybe more significant is the
fact that individual purchases by Japanese increased 54% in the
fourth quarter, due to the crumbling collapse in confidence
regarding their own financial sector. It”s easy to build a case that
that sentiment is spreading, at least in the past few weeks.
–60% of settlement dollars in asbestos cases go to the attorneys.
[Source: Doron Levin / Bloomberg] Camp X-ray should be
overflowing with more than al Qaeda by now, I think you”d
agree.
–Wal-Mart is now the world”s largest company in terms of sales,
$218 billion in annual revenue, thereby surpassing Exxon Mobil.
And the discounter”s January same-store sales rose 8%. Yes, put
Sam Walton and his successors right up there with Henry Ford
and Bill Gates in the Hall of Great American Success Stories.
–On the other hand, cereal maker General Mills warned that its
earnings would fall short of expectations. You”ll recall that last
week Kellogg”s beat the Street, thanks in large part to its Keebler
division. Which once again warrants the statement, it”s all about
the elves. And they”re good archers, too.
–Not a good week for the Irish, as Elan Pharmaceuticals
continued to tumble on accounting concerns while Allied Irish
Bank fell prey to a rogue trader in Baltimore who lost a
staggering $750 million (more than the U.S. has committed to
the rebuilding effort in Afghanistan…to put it into perspective).
–You know what I really think? Aside from the fact we are still
working off the excesses of the bubble, which simply takes time,
we also have no clue where we are really headed. That”s
worrisome, if I”m right. It”s also why my equity exposure
remains at around 30%.
International Affairs
Israel: Prime Minister Sharon came to Washington for his 4th
visit since President Bush took office (Arafat, lips quavering,
awaits his first invite) and reiterated that, yes, he does expect to
see a Palestinian state as part of any final peace process. But
earlier in the week, Foreign Minister Shimon Peres told U.S.
officials and anyone else who would listen that Hezbollah is in
possession of about 8,000 missiles in Lebanon, courtesy of Iran.
We”ve known of this threat for a long time, but not to this extent,
and for the dovish Peres to be the messenger is more than a bit
significant. Peres added that his intelligence confirms that Iran
and North Korea are working together on a long-range missile
capable of hitting North America. So it should be no surprise,
either, that the war of words between Iran and Israel heated up
this week.
Iran: CIA Director George Tenet said the reformist movement
seemed to be losing momentum; worrisome, if true. [The
incident on Friday where Britain”s choice of ambassador to
Tehran was rejected by the clerics confirms Tenet”s thinking.]
And there seems to be no doubt that al Qaeda is using Iranian
turf to regroup.
Iraq: Saddam”s latest ploy is to pretend he will allow weapons
inspectors back in, knowing that he can resume his shell game
(and after buying 4 years” worth of time to hide the major
facilities).
Russia: Progress continues to be made towards an arms reduction
pact, which would be signed in Moscow in May when Bush
travels there. Meanwhile, there appear to be clear connections
between Zakarias Moussaoui (the 20th hijacker) and Chechen
rebels, thereby bolstering Russia”s claims on this front. [Russia
also doesn”t understand why the U.S. supports Saudi Arabia,
which finances the Chechen militants. Needless to say, they
have a good point.]
But a recently released CIA document, questioning Russia”s
intent regarding non-proliferation of missile technology, really
pissed off the generals in the Kremlin. Is the CIA correct? Yes,
though now is not the time to discuss this in public! President
Putin will be increasingly pressured by the hard-liners and asked,
just what are we getting in return for our cooperation with the
U.S.? This is where Henry Kissinger would have shined.
Turkey: The IMF will dole out $12 billion more in aid, making
Turkey the largest IMF benefactor ever, because “progress is
impressive.” [The Istanbul Exchange promptly sold off, in a
classic “buy the rumor, sell the news” reaction. My own
positions are now basically flat, after an earlier run up.]
Separately, the New York Times reported on a 1998 terrorist
plot, hatched in Germany, with the goal of destroying Ataturk”s
mausoleum (which would be comparable to taking out the White
House or the Capitol). Germany is home to 2 million Turks,
many of whom would love to wreak havoc on the secular
government in Ankara. It”s my big worry as I monitor my own
investment in this country.
Saudi Arabia: In an editorial, the Washington Post had the
following comment. “The religious intolerance and lack of
political freedom built into the Saudi system creates an
environment where social frustrations tend to be expressed in the
terms of Islamic extremism.” Nothing necessarily new, but it
needs to be hammered home daily. So then you had Prince
Turki, the former Saudi intelligence chief, tell Tim Russert that
we should have seen the “Imams in Mecca and Medina condemn
9/11.” That”s part of the freakin” problem. Non-Muslims aren”t
allowed in Mecca and Medina to hear what is being said. Plus I
wouldn”t believe Turki or any other Saudi official anyway.
India / Pakistan: Pakistan”s President Musharraf said of India”s
refusal to hold talks over Kashmir, it is “brinksmanship at its
most dangerous.” For its part, India isn”t budging until Pakistan
hands over 20 terrorists on a list that they provided Musharraf.
Zimbabwe: President Robert Mugabe: “Whatever (British Prime
Minister) Blair tries to do, we will not back down…Down with
Britain.” Get the commandos ready.
Nigeria: President Obasanjo warned that the ethnic violence in
his nation has the potential to take the whole country down.
Yup, it basically has already.
Venezuela: Air Force Colonel Pedro Soto (no relation to former
Cincinnati hurler Mario Soto) showed some real guts in publicly
denouncing President Chavez. At first he was arrested, then the
government was forced to release him as a large protest
developed. For his efforts, Soto may receive honorable mention
for “StocksandNews Man of the Year.”
Random Musings
–Malaysian Prime Minister Mahathir: “Muslims have deviated
from the fundamentals of Islam and have abused the teachings in
order to justify their personal greed and ambitions.” We need
more talk like that from political leaders in the Islamic world.
–President Bush said the Geneva Convention applies to the
Taliban prisoners, but not al Qaeda terrorists. I accept that.
–U.N. Secretary General Kofi Annan: “The forces of envy,
despair and terror in today”s world are stronger than many of us
realized.” Ain”t that the truth.
–Bill Gates told the World Economic Forum that the rich aren”t
giving back enough. He deserves a ton of credit for being one of
the few who have really made a difference.
–Fed Chairman Alan Greenspan said that his love of all things
statistical started with his passion for baseball averages. There”s
nothing like it, that”s for sure. Kids growing up knowing that 4
for 11 is .364 are way ahead of the game in my book.
–So I”m watching PBS” “Frontline” Thursday evening and the
story on the porn industry, and there is AT&T Chairman C.
Michael Armstrong, porn king, because of AT&T Broadband”s
distribution of borderline illicit programming. Of course I bring
this up because I”m also convinced Mr. Armstrong wasn”t
exactly Mr. Clean while he ran Hughes Electronics, with the
probable exchange of missile secrets to the Chinese on his watch
(along with Loral). So at the end of the day, you”d have to say
C. Michael hasn”t exactly been a poster boy for the best of
America.
–Nassau County, NY (out on Long Island), has long had massive
fiscal problems, so now the county executive has proposed that
residents making over $100,000 be taxed to close the budget gap.
It”s time to add Nassau County to the axis of evil.
–Speaking of evil, it turns out that chief Enron dirtball, Andrew
Fastow, attended high school in the community where I currently
reside. [I”ve given up on hiding my location, after all of the Lucent
references over the years.] Yes, of all the schools in America,
my cool, little town will increasingly garner some lousy
publicity. [Though 99% of the students at NPHS go on to
college.] Needless to say, it”s created quite a buzz in these parts.
Fastow”s parents suddenly moved away last October,
coincidentally, down to Houston to be closer to their son,
according to notes left with friends.
–The murder rate in New York City for the month of January
was 36, the lowest single month since they began keeping
records in 1962. [Paid for by the New York City Tourism
Bureau.]
–In 2006, a spacecraft is slated to be launched for a mission to
Pluto. It will take a decade to get there. I hope I”m not the only
one who is continually blown away by this stuff.
–Hats off to the Salt Lake City Olympic Committee for a great
Opening Ceremony. And to the Mormon Tabernacle Choir, your
rendition of “The Star Spangled Banner” was the best I”ve ever
heard. We pray for a safe Olympic Games.
–Finally, this week Ronald Reagan turned 91. Every time I see a
clip of him saying, “Mr. Gorbachev, tear down this wall,” I still
get goose bumps.
And in honor of this great president and American, I”d like to
end with the conclusion to his 1964 stump speech (see the 2/8
edition of “Bar Chat” for the full text).
“You and I have a rendezvous with destiny. We will preserve for
our children this, the last best hope of man on earth, or we will
sentence them to take the first step into a thousand years of
darkness. If we fail, at least our children and our children”s
children will say of us we justified our brief moment here. We
did all that could be done.”
Words to live one”s life by. God bless you, Mr. President.
—
Gold closed at $304, a rally of $18 on the week.
Oil, $20.26
Returns for the week, 2/4-2/8
Dow Jones -1.7%
S&P 500 -2.3%
S&P MidCap -1.7%
Russell 2000 -2.8%
Nasdaq -4.8%
Returns for the period, 1/1/02-2/8/02
Dow Jones -2.7%
S&P 500 -4.5%
S&P MidCap -2.5%
Russell 2000 -4.5%
Nasdaq -6.7%
Bulls 48.5%
Bears 28.9% [Source: Investors Intelligence]
God bless the men and women of our armed forces.
And to my brother, Happy 50th Birthday! Heh-heh.
Have a great week, all, and thanks for your support.
Next week. My 3rd anniversary address, without use of a
teleprompter.
Brian Trumbore
