[Posted 7:15 AM ET]
“After a storm comes a calm”
–Proverb
This week you couldn’t have come up with a better set of
economic numbers; housing, consumer spending, personal
income, durable goods and, most importantly, a pick-up in
manufacturing. Throw in rising business confidence in Europe
and a stable Japan (for one week…let’s not go overboard, Mr.
Editor) and there really wasn’t much to dampen the enthusiasm.
Even technology issues like Qualcomm and Novellus were more
bullish on future prospects.
Ah, but not so fast, said the chairman of the Federal Reserve. In
his semiannual testimony to Congress, while Alan Greenspan
spoke of a U.S. economy being “close to a turning point,” duhh,
“an array of influences unique to this business cycle, however,
seems likely to moderate the speed of the anticipated recovery.”
Heck, you might be saying, when one looks at the upward
revision in 4th quarter GDP to a 1.4% rate of growth, you can
build a good case that the U.S. economy was never really in
recession in the first place since the only negative quarter was the
3rd.
But therein lies part of the problem for some, including
Greenspan and economists like Morgan Stanley’s Stephen
Roach. Because the downturn was mild, what are the real
engines for growth going forward? After all, it’s not like
housing and consumer spending fell off a cliff and are now
poised for strong rebounds. Save for a 4-week or so period post-
9/11 on the later, both have continued to rock. If they heat up
anymore the whole continental U.S. will explode in a fiery,
cataclysmic hail of ash and lava.
By now you know where I come down. I never doubted the
economy was recovering, I just question (in a big way) the
strength of it come the second half of the year. As Roach said
this week, “The American consumer will suffer a relapse later
this year,” adding, “Never in a recession have we seen
consumers spend with reckless abandon when they have such
high debt and low savings.” [CNBC]
Two other points: I think you’d all agree that we need a
turnaround in capital spending before one can contemplate an
“all clear,” and there are few signs of that, especially when one
looks at CEO surveys of future investment. Secondly, we
wouldn’t be mentioning all the bullish news if the terrorists had
been successful in blowing up the U.S. embassy in Paris, or had
al Qaeda not been caught before executing its doomsday plan on
Western interests in Singapore, to name just two examples the
public is aware of.
We should be thanking God everyday that there has been no
follow-up to 9/11. A bunch of guys with box cutters brought
down the world economy. Imagine what a well-placed dirty
bomb would do to our psyche. Thus it should be no wonder to
all of you that the Bush administration has done the responsible
thing in establishing a shadow government just in case. Yes,
rallies are great, but I continue to maintain you should keep your
powder dry.
Street Bytes
–It was a great week for the market. On a weekly basis, since
November 16 the Dow had been in a tight range between 9700
and 10300 but this week the blue chips closed up for the 5th week
in 6, finishing at 10368, a gain of 4% and the highest close since
last August. Nasdaq, however, needs to show us all a lot more
before one can get too excited, as it closed higher for the first
week in 5, though up a healthy 4.5% to 1802.
The ongoing pain in the telecom sector claims a few new victims
each week and, separately, Cisco was hit this time on an analyst
downgrade, the sound reasoning being that if the company’s
customers in the networking arena aren’t doing well, chances are
Cisco will have trouble meeting its own expectations. Then, on the
software front, after the close on Friday, Oracle announced it was
going to disappoint in its upcoming earnings release. Yes, chief
B.S. artist Larry Ellison sold his shareholders down the river.
It will be interesting to see how Nasdaq responds to this news on
Monday, seeing as it shrugged off Oracle’s poor performance on
Friday, when clearly something bad was in the air for the software
king.
Back to the market in general, there is this little issue of
valuation. Solid earnings increases for the second half of the
year are already in the pipeline, making me somewhat skeptical
we will really see a lot of positive surprises on this front.
U.S. Treasury Yields
6-mo. 1.88% 2-yr. 3.18% 10-yr. 4.98% 30-yr. 5.50%
Treasuries got whacked as the market gave far more credence to
the strong economic data than Greenspan’s moderate tone.
–Alan Greenspan: “Derivatives have provided greater flexibility
to our financial system, but their very complexity could leave
counterparties vulnerable to significant risk that they do not
currently recognize, and hence, these instruments potentially
expose the overall system if mistakes are large.”
–The Japanese stock market staged a strong rally, despite the
fact that Prime Minister Koizumi’s latest plan to deal with
deflation and the bank’s bad debt problem was panned. Some
say the market rallied, however, because regulators plan to rein
in short-sellers.
The Japanese unemployment rate did fall in January, but the
actual number of unemployed rose (they have the same statistical
quirks we have in the States).
But these days, no discussion of Japan seems complete without a
new story on the meat packing industry. This time it concerns
Japan’s largest dealer, Starzen, which repackaged inexpensive
meat as top-quality.
–Which got me thinking about Gateway computer and its latest
pronouncement that losses for 2002 will be greater than
expected. Perhaps it should repackage its cows into Dell PCs
and see if they can get away with it.
–EBay admitted its first real mistake in its attempt to auction off
the world, announcing it was shutting down its experiment in
Japan due to zero “traction.” Of course if they had become
known as that nation’s #1 reseller of mislabeled meat, everything
might have been different.
–Argentina: There was a spot of good news, as President
Duhalde negotiated a key revenue sharing agreement with
provincial governors, a step toward gaining international
assistance. But then you have the situation where something like
500,000 government employees haven’t been paid in over a
month, while access to bank accounts is still severely restricted,
so it should be no wonder that on Thursday protesters hurled
“excrement” at Congress, with banners reading “Put the s—
where it belongs.” Mah-velous.
–Money manager Laszlo Birinyi, whose track record is worthy
of great respect, told CNBC the other day that program trading
was at an all-time high. In addition, in describing how difficult it
is to invest in the current market, he said that Wall Street’s
member firms and traders do 3Xs the volume of the mutual fund
companies. In other words, whereas mutual funds preach long-
term investing, shareholders of both funds and individual stocks
are consistently subjected to the “noise” created by the huge
amount of money flowing in and out of the casino, irrespective
of economic or company trends.
–The Hewlett-Packard / Compaq merger vote is in 3 weeks and
it’s still too close to call. Personally, I like Lexmark printers and
Dell PCs more, so I couldn’t care less.
Energy: It’s pretty simple, if you believe in any kind of economic
growth, the energy sector should perform well, though many of
the stocks in the group (excluding the Enron / Calpine types)
have already had a solid move. In addition, over the coming
months the oil & gas markets will be subject to rumors, and
facts, concerning military action in the Gulf. Beyond that, you
also have the situation between Russia and Saudi Arabia and the
battle between the two for market supremacy.
Separately, we wish California Governor Gray Davis well
(actually, we don’t, but my ‘delete’ key is stuck) in his quest to
get the Feds to cut the state some slack regarding last year’s
spike in energy prices, which caused Davis to panic and lock in
what now appear to be ridiculously expensive long-term
contracts. Davis, of course, is running for reelection and success
or failure could hinge on this issue.
–My portfolio: I remain about 30% energy (though not as
optimistic from a valuation standpoint on my particular
holdings), 5% Turkey (up slightly on this position) and the rest
cash and junk bonds. Regarding the latter, the fund I have
invested in is down 1% (on a total return basis) for the year,
thanks to the credit issue in today’s Corporate America. But, as I
told you when I put this latest position on, I’m just trying to beat
1.5% money market yields, so I’m willing to accept some NAV
volatility for the 8.5% distribution rate on my “high quality”
junk. If you believe the economy’s recovery is sustainable (a
point on which I obviously have personal doubts), you should be
backing up the truck on corporates after the hit they’ve taken.
However, if you don’t know about investing in these bonds, let
alone the junk variety, please enlist the aid of a financial advisor
before jumping in.
–Columnist / author Michael Lewis on Enron’s Sherron
Watkins. “All she really did is beg her boss to orchestrate an
artful cover-up so she could continue to make lots of money.”
–The Bush administration should be finding more dollars in the
budget for the SEC to hire more examiners. Democrats will use
this issue against the Republicans in the fall.
–With the clamor in the telecom industry for congressional relief
on the broadband front, it is important to remember some facts.
In 2000 (the last available data) the average household paid
$1,900 for local / long distance, cable TV, cell phone, and
Internet dial-up. The simple fact is many households question
the need to spend an additional $20-$40 a month on broadband.
So as economist Robert Samuelson writes when it comes to
exploring this particular segment of the telecom market, “Lots of
American companies have huge debts, ample unused capacity
and cloudy sales outlooks. Hold the champagne.”
International Affairs
Israel: Everyone is falling all over themselves as a result of Saudi
Crown Prince Abdullah’s peace proposal, which would require
Israel to give up its territory gains from the ’67 war in exchange
for Arab recognition and security guarantees. Of course the
skeptic in me has to consider, among other things, the fact that
Israel would still always have to deal with missiles pointed at it
from all sides, including from farther and farther away. Any
letup in the violence, though, is obviously welcomed by all
parties.
But it also needs to be noted that this week the Saudi ambassador
to the U.N. blasted Israel, and, on an equally important issue,
Abdullah himself remains against extending the war on terrorism
to Iran and Iraq, adding, “Iran is contributing to stability in the
region.” Ah, I don’t think so.
Iraq: But speaking of Iraq, March will be a busy month on this
front as Vice President Cheney visits 11 countries in the region
to drum up support for the next step and, significantly, after
waffling for a few months, British Prime Minister Blair appears
to be fully on board, while U.S. munitions factories are said to be
running 24 hours a day in the rush to replenish stock used on
Afghanistan.
Canada’s intelligence service contributed in its own way with the
pronouncement that Iraq “appears determined to acquire a
nuclear capability at the earliest opportunity.” I’ll still go with
my prediction that the U.S. won’t move before June, but one
can’t preclude the idea that reports like those emanating from the
Washington Post, wherein they say it will take 6 months to gear
up, could be part of a disinformation campaign to lull Saddam
into a false timetable.
Of course whether it’s April, June or September, not only
Britain’s, but Russia and Turkey’s support will be critical as
well; Russia for its moral suasion (particularly in the U.N. and
Arab world) and Turkey militarily.
Russia / Georgia
Since I was writing about the situation in the Republic of
Georgia long before it popped into the mainstream press this
week, here is something I wrote on 11/3/01, within a general
discussion on Russia.
“Not that there aren’t other problems to worry about, such as a
potential invasion of Georgia by Russian forces. On Thursday,
Georgian President Eduard Shevardnadze, the heroic figure from
the glasnost era, ‘fired’ his government because of massive
corruption. This is a big story because Georgia has increasingly
harbored Chechen rebels and now Russia has a legitimate gripe
for launching military action. I suspect the West will look the
other way if this comes to pass.”
Now we learn that the U.S. will be sending advisors to Georgia
for the very purpose of training Georgian forces to deal with the
al Qaeda elements hiding out on the border with Chechnya. Was
I far off? No, and while Russia is publicly expressing some
concerns that U.S. troops will be involved in combat on their
border (we won’t), such talk is simply for public consumption
because clearly Russia should be pleased at these developments
(and there is little doubt the Bush camp consulted with the Putin
clan beforehand). The U.S. can help Georgia do Russia’s dirty
work and Washington will now keep its criticisms of Moscow’s
actions in Chechnya to a minimum since we are admitting that,
as Russia has long told us, the region is a viper’s nest of
terrorists. [Remember, folks, in this new era, some ‘human
rights’ will unfortunately be sacrificed in the fight to save
civilization. Nothing to be proud of, just a fact of life these
days.]
India / Pakistan: Back in 1985 I worked in India for about a
month and, forgive me since I’ve written about this before, I
couldn’t help but think of this brief experience again this week. I
saw some pretty nasty stuff when I was there (as well as
beautiful things) and I used to lie awake at night trying to figure
the place out. I don’t know if anyone ever will.
India has such immense potential, but for each leap forward, like
in its tremendous strides on the software production front, it is
also a place where acts of the worst human cruelty on earth are
an all too frequent occurrence. Such was the case this week, as
over 240 died as a result of clashes between Hindus and
Muslims. About half of the victims on both sides were burned
alive. Of course the new flare-up has the potential to spill over
into Pakistan, particularly with regards to the Muslim dominated,
and disputed, province of Kashmir. In Pakistan itself, it will be
curious to see how quickly the government turns over the chief
suspect in the murder of Danny Pearl. Pakistan’s intelligence
agency, despite President Musharraf’s attempts to cleanse the
leadership of its most extremist elements, is obviously still a
negative force for change in this country. As I’ve long noted,
this is a reason why Musharraf should always sit with his back to
the wall.
China…and AOL: After my week in Taiwan, I caught up on my
reading here and saw that on February 22 the Wall Street Journal
ran an editorial which said in part about China, “The character of
the political environment is changing whether the ruling party
wants it to or not. Beijing has lost its ability to ignore or forcibly
manipulate public opinion.” Wrong.
I prefer to think more along the lines of scholar Michael Ledeen,
who this week had an opinion piece in the Journal. “(China is) a
maturing fascist regime.” It’s a single-party dictatorship and,
while I heartily supported WTO entry because, first and
foremost, it was inevitable, the moves taken by the leadership
towards a more capitalistic society mean nothing when it comes
to the real issue on the mainland. As Ledeen puts it, “Chinese
leaders often proclaim a peaceful intent, yet they are clearly
preparing for war.”
No sooner had President Bush left China when a foreign ministry
spokesman “warned Taiwan it would ‘eat their own bitter fruit’ if
they continued to push toward ‘incremental independence.’”
[Erik Eckholm / New York Times]
And what does all of this have to do with AOL and my rather
cryptic comments of last week concerning my personal Net
experience in Taiwan? Everything. And thanks to an article by
Ethan Gutman in the Feb. 25 issue of The Weekly Standard, I
can add some meat to the story. Gutman’s piece is titled “Who
Lost China’s Internet?” and it helps to confirm many of my own
suspicions as I sat in my hotel room in Taipei, trying to logon.
Years ago, you’ll recall how America’s leaders in the field, like
AOL, were battling to establish themselves in China. As
Gutman writes, “Western companies fell all over themselves
bidding for its favor. (But in doing so) AOL, Netscape, and Sun
Microsystems all helped disseminate government propaganda by
backing the China Internet Corp.”
Don’t believe this garbage that the Net is a force for freedom in
China. As I wrote last week, the government uses it solely for its
own purposes, and increasingly that is for stirring up nationalism,
with Taiwan and the U.S. being the two chief targets. Those who
try to circumvent the rules run the risk of arrest, and, with
regards to AOL, Gutman says it “is quietly weighing the pros
and cons of informing on dissidents if the Public Security Bureau
so requests; the right decision would clearly speed Chinese
approval for AOL to offer Internet services and perhaps get a
foothold in the Chinese television market.”
When I got home I called AOL to ask if they had an access
number for Taiwan, knowing that there was just the one listed for
Taipei, which my hotel told me was pulled last June but remains
on AOL’s site. The customer service guy immediately said,
“Yes, it was pulled,” then, curiously, he goes, “Oh no, there is
one listed and it says it’s working.” I knew otherwise.
I don’t know if the Taiwanese government is hindering AOL (I
just throw this out in my attempt to be fair), but you can draw
your own conclusions. Taiwan, the democracy, has zero
working access #’s with AOL; China, the dictatorship, now has
over 50. [By the way, Thailand has 115.] Author Gutman didn’t
mention the Taiwan situation in his piece and is being made
aware of this. I would also remind you that as China persecutes
religious “dissidents” whom Jiang labeled lawbreakers in his
press conference with President Bush, AOL might have had a
hand in tracking them down.
[Separately, regarding China, I have been a long-time supporter
of Henry Kissinger and his brand of diplomacy so I was
disappointed to see that in the release of new material from his
secret 1971 trip to Beijing, he casually mentioned the U.S. would
be willing to give up Taiwan for better relations with the
mainland. When confronted with this fact this week, he
expressed regret. As historians point out, knowledge of this
would have been a huge issue with the American public and its
acceptance of the whole China mission had we known that
Kissinger was laying Taiwan on the negotiating table.]
Colombia / Venezuela: The civil war is rapidly intensifying in
Colombia, especially after FARC (the rebels) kidnapped a
presidential candidate. Meanwhile, in the past I cautioned that
Venezuela’s President Chavez could someday use the conflict in
Colombia to enhance his own regional stature, i.e., he was
harboring FARC in border regions between the two countries.
Now, with Colombian President Pastrana’s firm declaration of
war and the world supporting his position, Chavez has had to
stop playing games and is now criticizing the rebels.
Canada: Looks like the U.S. and Canada will not go to war after
all over the lumber trade dispute, one in which the U.S. is at
fault. Bush and Prime Minister Chretien appear set to reach a
settlement on the issue, which is costing U.S. consumers because
of high tariffs being slapped on Canadian lumber. [Yes, I know
some jobs in the U.S. are at stake, but if we keep talking “free
trade” out of one side of our mouth and utter “protectionism” out
of the other, in the long run we’ll all be losers. Anyway, this
lumber dispute clearly violates NAFTA.]
Zimbabwe: The opposition leader, Tsvangirai, was charged with
treason. The presidential election is March 9-10. It could be
chaos.
Angola: Long-time rebel leader Jonas Savimbi, a truly awful
person, was killed this week. The 25-year civil war in Angola
has claimed a staggering 500,000 lives.
Random Musings
–As I was going through San Francisco airport last Sunday,
Senator Jon Corzine was on the television discussing his 401(k)
reform proposal, whereby employees would be limited to a 20%
exposure to the employer’s stock. I never questioned Corzine’s
right to run for the Senate in my home state back in 2000, but
from my writings at the time, you knew I wasn’t too thrilled that
he simply bought the election by spending $60 million. [Come
to think of it, more than the GDP of Afghanistan, I imagine.]
But what irks me now about the man is how because of his Wall
Street experience he has planted himself into the 401(k) debate
as if only he knows best how to handle the program, post-Enron.
More importantly, his proposal to limit the company option
smacks of hypocrisy, especially coming from a man who made
his fortune largely in one company, Goldman Sachs.
And even more telling, here is what I noted in this space back on
10/28/00, which you can find in my archives.
“The (N.Y.) Times, in a stunner, endorsed Republican Bob
Franks… ‘Mr. Corzine is arguing that a confidentiality
agreement with Goldman Sachs, the investment firm he once
headed, prevents him from telling New Jersey voters the specific
sources of the money for this tidal wave of personal spending.
But New Jersey’s voters did not sign an agreement with
Goldman Sachs, and they have a right to know how a
multimillionaire candidate amassed the wealth that enables him
to spend almost $2 million a week on advertising.’”
I’m assuming Mr. Corzine made his money legitimately, but
particularly because of his past, he has no right to tell us how we
can make, or lose, our personal fortunes.
–The following is serious and not meant to be cute, but when
Matt Lauer interviewed an advisor to the family of Danielle Van
Dam the other day (before the 7-year-old’s body was
discovered), he asked the gentleman what lessons were to be
learned from this tragedy. Without hesitating the advisor said,
“Lock your doors.”
–The Vegas and London oddsmakers should be establishing a
‘book’ between former Nets’ star Jayson Williams and former
Enron CEO Jeffrey Skilling. An excellent bet would be, “Who
will serve more time in the box, until he gets his mind straight?”
as the warden in “Cool Hand Luke” might have put it.
–As the whole American CEO excessive compensation issue
garners more and more publicity, those of us in the U.S. need to
understand that crap like this contributes to the anti-American
feeling around the world. One pooh-poohs it at their danger. To
an outsider, it makes us all look like a bunch of arrogant SOBs.
–Some prisoners at Camp X-ray have been on a hunger strike to
protest one of the terrorists’ being stripped of his turban; turbans
not being allowed because they could hide weapons. One report
said it was “not known whether (the) prisoner was aware of
orders, or was deep in prayer.” Prayer? “Dear Allah, help me
kill Americans.”
–There was a time when I really enjoyed CNN’s “Crossfire”
(Robert Novak being on the editor’s favorite people list, along
with Arnold Palmer, Mike Piazza, Pamela Anderson, oops…),
but now the story is that James Carville and Paul Begala will
split duties on the “left.” Of course my “Top Three Least
Favorite People” list, excluding folks like Saddam, contains Bill
Clinton, Carville and Begala. So I think I’ll be watching “Access
Hollywood” during this time slot.
–Well, folks, remember the more innocent time, pre-9/11, when
we wrote of the noble yak? The yak is back, thanks to an AP
story on Wednesday. There are currently 2,000 head of yak in
the U.S. vs. 96 million head of cattle, so they have some catching
up to do. But with yak’s great taste (between beef and veal) and
its nutritional benefits, it’s only a matter of time before even we
are serving yak in the StocksandNews commissary. Maybe
Gateway should repackage its cows as yaks, if my Dell idea
doesn’t hold up in court.
–Scientists now believe there are massive amounts of ice on
Mars, meaning two things; the Martian Olympic squad would be
a heavy favorite in speed skating and I would also expect the
men to be able to perform quintuple lutzes.
–Finally, Randall Wallace, director of the new Vietnam movie
“We Were Soldiers” (which if the movie is anything like the
book, it will be great) spoke to Mick LaSalle of the San
Francisco Chronicle on how the film is a tribute to all soldiers
who fight wars.
“I think it’s vital that we all hate war but be able to embrace
soldiers. Sept. 11 reminded us there’s such a thing as evil, and of
the value of the individual who says, ‘Somebody’s gotta pick up
a rifle and stop them, and it might as well be me.’”
God bless the men and women of our armed forces.
God bless America.
—
Gold closed at $298
Oil, $22.40
Returns for the week, 2/25-3/1
Dow Jones +4.0%
S&P 500 +3.9%
S&P MidCap +3.8%
Russell 2000 +2.9%
Nasdaq +4.5%
Returns for the period, 1/1/02-3/1/02
Dow Jones +3.5%
S&P 500 -1.4%
S&P MidCap +1.4%
Russell 2000 -2.1%
Nasdaq -7.6%
Bulls 46.8%
Bears 31.9% [Source: Investors Intelligence]
Note: The new picture is of yours truly at the Martyrs” Shrine in
Taipei, though not from the day the Americans arrived.
Have a great week. As always I appreciate your support.
Brian Trumbore
