[Posted 7:15 AM]
What do you get when you’ve had a once moribund economy
that suddenly displays nothing but up arrows? A rally in the
stock market and hyper bond traders.
It’s actually a pretty simple story this week. Whether it was
news on productivity or labor costs, a national survey of business
activity or February’s employment report, everything came up
roses. Come to think of it, trees and flowers in the New York
region are blossoming 6 weeks ahead of schedule due to the mild
winter, so maybe we shouldn’t be too surprised.
Friday’s job numbers topped all the other good news as 66,000
positions were created when further job losses were expected.
The unemployment rate fell for the second consecutive month,
down to 5.5%, hardly the kind of figure you see in a recession,
which, of course, data tells us we left far behind last year, that’s
if we ever had one in the first place, but I’m starting to make
things more difficult than they need to be.
The stock market rejoiced, with the Dow Jones rising for the 4th-
straight week (and 6 in 7), +2.0% to heights not seen since July,
10572. Nasdaq had its best week since September, +7.0% to
1929 (uh oh, bad karma alert), but this barometer is still below
its 12/31/01 close of 1950.
Economists are now scrambling to up their estimates for growth
in the first quarter to the 3-4% range, and it can be assumed that
barring a terrorist incident or the unexpected in the Middle East,
the replenishment of once depleted store shelves and auto
showrooms will allow for a similar figure in the second. Then
what?
Well, you know where I stand, but I’ll give it a rest for a week,
except to say to any new readers that I look for the economy to
fall anew, which doesn’t necessarily mean recession; just a quick
two-quarter pop and then a long stretch of blahhhhhh.
So here we sit, with markets having recovered after February’s
lows, which had been fueled by the likes of Enron and Global
Crossing, and the bulls are once again peering over the stockade
fences, checking to see if the coast is clear before they bust
through and find the microphones. That’s alright. It’s what
makes things interesting.
No, issues like overcapacity and still rising debt levels can wait
for this week, but one longtime positive, housing, has to be
noted because of the picture in the bond pits.
Bond traders were none too pleased with the cheery news on the
economy or from Fed Chairman Greenspan’s revised testimony
before a Senate committee, wherein he was more positive on the
recovery than he had been just one week earlier. Treasuries, by
some measures, are in the midst of their worst stretch in a
decade. For example, this week alone the yield on the two-year
rose to 3.55% from 3.18%, while the 10-year, critical for setting
mortgage rates, closed at 5.32%, well above the previous week’s
figure of 4.98%. Of course rising rates could spell an end to the
housing and refinancing booms, both of which helped keep the
economic slowdown of ’01 from becoming something far more
ugly.
But as the fixed income market convinced itself that the strong
economic data mandates that the Federal Reserve increase short-
term rates as early as March 19, I choose to defer to the position
of PIMCO’s Paul McCulley, who posits that Greenspan will hold
the line for quite some time in order to ensure that the recovery
truly takes hold, particularly because inflation is still not an
issue. [PIMCO’s Bill Gross is no longer so sure this will be the
case, on the other hand.]
Lastly, a few additional points on the investing environment in
general.
–As I’ve noted in recent reviews, if you believe that the recovery
is for real, corporates, not Treasuries, are the place to be. Per last
week’s discussion, the former roared back, even as Treasuries
were being slammed, for the simple reason that if the economy
grows you have a better chance of servicing your debt load.
It’s a gross generalization but Treasuries are tied to inflation
expectations, corporates the economy.
–Valuation: I actually saw some signs of rationality this week,
but it shouldn’t surprise you that I also think many prominent
names are once again priced for perfection, and the last time I
checked, Islamic fundamentalists weren’t exactly acting like
model citizens. In other words, ye who seek perfection shall not
find it in this life; at least not the next few decades. I’m dead
serious. I also believe in preservation of capital.
Street Bytes
–Full U.S. Treasury Yield Recap
6-mo. 2.02% 2-yr. 3.55% 10-yr. 5.32% 30-yr. 5.71%
–Steel: Commentator Jim Hoagland. “An air of ruthlessness is
useful in dealing with enemies on a battlefield. It is
counterproductive when dealing with allies on the environment,
rules of trade or strategic stability.”
Regarding the rules of trade, certainly President Bush’s move to
levy 8-30% tariffs on steel imports was a poor one, motivated
solely by political interests, chiefly the vote in Pennsylvania,
West Virginia, Ohio, Indiana and Illinois. As the Journal opined:
“No one pretends an economic rationale exists; the industry
hasn’t modernized despite 30 years of protection. Even Bill
Clinton felt this was one political calculation he had to forego for
the good of the entire U.S. economy. This is President Bush’s
worst day so far.”
I also have to laugh when some of my friends on both sides of
the aisle proclaim that it is in our national security interest to
have a strong steel industry. Do you really think Japan, South
Korea, Thailand, China, Russia, the E.U., Brazil, Argentina,
Mexico, Canada and Turkey, to name more than a few, would all
collude against us? And we already have more than a few
successful mini-mills in the U.S., which will now be hurt by the
new rules. I agree with George Will, in saying that the tariffs,
which will raise consumer costs on many products, are
“economically indefensible.” This wasn’t exactly “Profiles in
Courage” stuff.
I’d like to believe, however, this issue won’t explode into the
kinds of trade wars I have long written of in this space, it’s just
too early to tell. But one thing is for certain, it doesn’t help the
war on terror, and, after all, I thought that was our President’s
overriding mission.
–Japan: Isn’t a rigged market great? That’s exactly what we
have in Japan, as a crackdown on short-selling, an infusion of
liquidity, and government mandated purchases of equities into
state-run companies and pension plans has helped fuel a
stupendous 25% rally in about four weeks in the Tokyo Nikkei
Index, up to 11,885. The reason for this behavior is the fact that
March 31st marks the close of the fiscal year and the banks,
loaded with enough debt to confound most super computers,
need to see a Nikkei of 10,000 in order for many to stay solvent
(or else they’d have to formally mark down their portfolio
holdings, meaning some would then fall below minimum capital
requirements to remain a bank…at which point they could go
into the meat re-labeling business, I guess).
As for the Japanese economy, one can find shreds of evidence
that it is near a bottom, as inventories have dried up (similar to
what happened in the U.S.), which could augur a pickup in
manufacturing. But the nation is still in recession, capital
spending (also like the U.S.) is still in the dumper and you do
have this none too small matter of debt. Either Prime Minister
Koizumi’s government is going to institute painful, long-term
reforms or the economy will totally collapse at some point…it’s
the law of gravity.
–Energy: OPEC and Russian oil officials got together, with
OPEC pleading for Russia to hold the line on production. It’s
extremely doubtful they will, especially with the higher prices
we’ve seen the past few weeks (oil being at its highest levels
since September). But, as for the bigger picture, of course the
economic recovery is good for all things crude and gaseous.
[Also, for those who follow the ‘rig count,’ the latest figure is
1,108 vs. a year earlier total of 1,692, incredibly bullish when
you gauge the supply prospects.]
Add it all up and we continue to like energy stocks around here,
though as I’ve mentioned lately the fundamentals probably need
to catch up with valuations, as some of the stocks have already
run quite a bit.
Meanwhile, it would appear that the prospect of drilling in the
Arctic National Wildlife Refuge is dead. May a herd of disease-
ridden caribou descend on the homesteads of those shortsighted
folks who just don’t get it.
–Yes, the dollar is becoming a bigger issue, witness the recent
repatriation of assets into the Japanese markets. But is it time to
panic? You could have built the case years ago that it was, and
been wrong. We’ll just keep following it around here and have
lengthier comments next week.
–The HP-Compaq merger received a boost when a proxy
research firm, ISS, recommended that shareholders vote “yes.”
Of course ISS is not to be confused with the ISI, Pakistan’s
intelligence agency, which, since it’s still loaded with
fundamentalists (as opposed to technicians) may have approved
the deal as well.
–Future obit: Arthur Andersen, 2002. Thanks to its role in
Enron, in particular, Andersen is losing clients left and right,
including 4 of its top 5. Additionally, should the U.S. Justice
Department decide to indict the firm, a distinct possibility, it’s
really over. Even a rumored plea bargain won’t help much.
–Bill Gross’s PIMCO Total Return Fund (a diversified bond
portfolio) beat the return on the Vanguard 500 for the 5 years
ending February 28, +8.6% (annualized) vs. Vanguard’s +8.4%.
I suspect it will be more than competitive, again, over the next 5.
–Wireless stocks staged a big rally, but be careful if you’re
playing it. The fundamentals are still abysmal in my book, even
if some players were able to obtain more secure financing this
week.
–In closing 284 stores as part of its restructuring under Chapter
11, Kmart is laying off 22,000, or about 10% of its workforce.
This was actually good news, as some thought it would be far
worse.
–New Jersey Senator Jon Corzine’s attempt to cap the
percentage of company stock one can own in his or her 401(k)
is dead. To quote Nelson from “The Simpsons,” “Hah, hah.”
–The IPO market is off to its slowest start this year since 1991.
International
Israel: How can one really add anything to the discussion at this
point? It’s all been said hundreds of times before, and after the
recent stretch of violence it’s also easy for outsiders to get
desensitized to the whole situation. Israelis correctly say, for
example, that it’s important to note that a suicide attack taking
out 5 would be equivalent to one that killed 300 in the U.S. The
death toll since September 2000 is now approaching 1,400…with
over 1,000 being Palestinian. Staggering. And now we have this
Arab peace charade. It pains me to write this but frankly, I
marvel at Israelis who consistently hold out hope, knowing that
some weapons of mass destruction are already available to its
enemies, with more on the way.
Iraq: Vice President Cheney embarks on his 11-nation Middle
East mission to drum up support for military action against Iraq,
at least that’s the real objective, if not the stated one. As for
Britain, Prime Minister Blair is having a tough time selling
parliament on the reasons for supporting aggressive steps against
Saddam. At least Foreign Secretary Jack Straw, who’s been a bit
of a wimp lately, said “Let no one, especially Saddam, doubt our
resolve.” Meanwhile, U.N. Secretary General Kofi Annan (he of
the frequent appearances in the Sunday Times Style Section) is
pushing a new inspections regime, which we know would simply
be a shell game, but this leaves the U.S. in a bit of a box in that it
may have to accept inspections for a spell before proving its
point that a move on Baghdad is warranted. Bottom line, it’s
another reason why imminent action is probably not in the cards.
[Ongoing operations in Afghanistan don’t help, either, in this
regard.]
China: The commies announced they were increasing military
spending by 18% to about $17 billion (the U.S. spends $380
billion, by comparison), but most experts agree the ‘official’
Chinese figure is understated by up to 5 Xs. Of course the rapid
expansion of China’s military capabilities is troubling to Taiwan,
especially since the general agreement is that in just 5-7 years the
mainland will have a tremendous advantage over the island
democracy. Separately, Premier Zhu Rongji, in a speech to
parliament, wasn’t as bellicose in his remarks concerning Taiwan
compared to years past.
But in my ongoing diatribe against AOL and its dealings with the
Chinese government, this week I turn to Tina Rosenberg and her
piece last Sunday in the Times magazine wherein she has a
passage that hit home with yours truly.
“When China jails bishops and censors the Internet, American
execs say nothing – or they echo the Communist Party line…
China (asks) Internet service providers and Internet cafes to
police users.” Said one Human Rights Watch official, “We
failed miserably to get any company to say a word, privately or
publicly.”
That’s what I’ve been talking about, folks. It’s a damn disgrace.
Russia: As I surmised last week, President Putin publicly
supported U.S. military aid to Georgia saying, “If anyone wants
to help us (fight terror), we would appreciate it.”
Afghanistan: It’s important to note those supporting the U.S. in
Operation Anaconda; Canada, Australia, Denmark, France,
Germany and Norway. We’ll need more of their help down the
road.
India: It’s easy to forget that India has the second highest
concentration of Muslims in the world (next to Indonesia),
some147 million. Extremists in the Hindu majority would like to
drive them out (like to Pakistan), so the intermittent cycle of
violence that we have been witnessing will continue for decades,
making this still the world’s true nuclear flashpoint.
Colombia: A senator involved in negotiations with the rebels was
killed by them. While the U.S. is supporting Colombia’s efforts
on the drug front, it’s time for Bush and Congress to change
existing policy and allow aid to go to more than just drug
interdiction. Hell, this is a major war against terrorists just hours
from the U.S. Let’s stand up to the bastards.
Zimbabwe: The vote is underway…Mugabe’s supporters
threaten violence, of course.
Switzerland: The little watchmakers finally decided to enter the
modern world, officially ending its neutrality in becoming the
190th member of the U.N. So on this special occasion we’ve
brought back the cast of “Hee Haw” …Saa-lute!
Random Musings
–Alexander Stille of the Times had a piece concerning Islamic
scholars, who are reexamining the Koran and beliefs like the one
which has virgins awaiting good Islamic martyrs as their reward
in paradise. The scholars now believe that the correct
interpretation is that the virgins are really “white raisins” (a
prized delicacy in the Middle East) of crystal clarity. It is hoped
that soon Islamic youths all over the world will soon say, “I’m
going to blow myself up for some freakin’ raisins?! Forget it.”
–According to a now well-publicized Gallup survey, 53% in the
Muslim world have an unfavorable opinion of the U.S. and,
incredibly, only 18% feel Arabs carried out 9/11. So it’s time to
pull out the old Webster’s and look up the formal definition of
“ignorant”: “resulting from or showing lack of knowledge or
intelligence.” Next, let’s turn to the definition of “scary”….
–Wall Street Journal editor Holman Jenkins Jr. wrote the
following concerning the World Trade Center and plans for its
redevelopment. “How we end up feeling about September 11 is
likely to be shaped by events yet to come.”
–Regarding the above, events such as a dirty bomb are yet to
come and if you don’t want to be brought back to reality, skip to
the next item. On Thursday the Times had an article written by
James Glanz and Andrew Revkin concerning recent
congressional testimony on the dangers posed by objects such as
cobalt bars, commonly found in food irradiation equipment as
well as medical devices. The head of the American Federation
of Scientists said that one bar exploding at the southern tip of
Manhattan and with the proper wind conditions could
contaminate an area up to Central Park, which would force the
entire impacted region to be closed…for decades…a la
Chernobyl. Decades. Think about it. Any responsible corporate
leader has to keep this potentiality in mind, for starters. [While
the immediate deaths from such a blast would be minimal, the air
would contain levels of radiation far exceeding government
standards and officials would have no other choice but to
evacuate. Cleanup is virtually impossible.]
–South Da-ko-ta here I come…
–Along those same lines, the Washington Post reported last
weekend that the administration has placed hundreds of sensors
in the D.C. area, as well as our nation’s borders, for the purposes
of detecting potential nuclear and bioterror devices. “Clearly the
sense of urgency has gone up,” said one official.
–New York City does have some ongoing good news to report.
The murder rate for the month of February continued a
downright spectacular trend, just 32, the lowest single month in
the Big Apple since September 1962.
–Now I’m no expert on Massachusetts politics, but I saw a story
whereby Salt Lake City Games CEO Mitt Romney is
contemplating a run in the GOP primary for governor against
incumbent Jane “not too” Swift. The article said it would be
tough for Romney. What am I missing here? Romney not only
did an awesome job with the Olympics, but from the little I’ve
observed, Swift is pitiful.
–I started writing about the drought situation in the New York
area early last fall, long before anyone else, as I worried about
the implications for the economy as we pulled out of a slowdown
in 2002. This week New Jersey declared a statewide drought
emergency, having just completed the driest February on record
(a whopping half-inch of precip). By some estimates the region
needs 29 inches to get back to normal, and we generally receive
just 3-4 inches a month. Again, we’re talking the potential for
plant closings, reduced shifts, and layoffs. That’s why it matters.
And to my friends in the area, it wouldn’t be a bad idea to start
buying an extra bottle of water with each shopping trip. You just
know shortages are coming.
–This current mission of the space shuttle to upgrade the Hubble
telescope is really a big deal. Hubble is one of the truly great
successes of our entire space program and what we’ve learned
from its operation is awesome. Of course you know what this is
leading up to…my monthly appeal to start sending manned
missions to Mars. I’ve decided snowboarders would make for
good candidates since they have the right attitude.
–Investigators looking into the last days of the Clinton
administration have discovered that an aide granted a group of
American Indians status as a tribe, 3 days after he left office.
The act itself is a crucial step as it means they can then apply for
numerous federal benefits. But what makes it more of a story is
the fact the aide backdated the documents 3 days to 1/19, while
Clinton was still in office. Yup, the example is set at the top.
On a somewhat related note, Ken S. in Nebraska wrote to tell me
that the source of my yak reference from last week, an AP story,
had received quite a bit of play in his state. So then after reading
the Indian bit, I got to thinking. Maybe the representatives of
StocksandNews should apply for tribal status…we’d call it the
“Yak Nation,” most people in these parts not knowing what a
yak is.
–Speaking of Indians, last October I wrote of my South Dakota
adventure and in a “Bar Chat” column (10/8/01) described my
little excursion through the Pine Ridge Indian Reservation to see
Wounded Knee. I thought the place was rather depressing in
spots, but little did I know exactly how much so until I read in a
Journal article this week that the average life expectancy on Pine
Ridge for a male is just 48, the shortest such figure in the
hemisphere outside Haiti. Now I could go on and on about how
sad this is, but, selfishly, now I’m glad I got out of there alive!
[Check the archives, the story is pretty good.]
–Indulge me for a few moments while I address my classical
music fans. I just have to share an experience some of you will
appreciate. I’ve always been an avid listener of Rachmaninoff,
but never heard a live performance of his work, so I went to see
the St. Petersburg (Russia) Philharmonic perform his Piano
Concerto No. 3 at Carnegie Hall this week. This particular piece
is deemed by many to be the most difficult for any concert
pianist and I have to tell you, it was one of life’s great moments.
Yefim Bronfman was his name, and when the work reached its
rousing conclusion, we all leaped out of our chairs and roared (as
did Yefim), a reaction unlike anything I have ever experienced.
God bless you, Mr. Bronfman.
–Lastly, this week America received a reality check with the
casualties from the fighting in Afghanistan. We honor Bradley
Crose, Jason Cunningham, Matthew Commons, John Chapman,
Philip Svitak, Marc Anderson, Neil Roberts and Stanley
Harriman. Stanley’s wife Sheila, poised beyond belief, appeared
on the “Today Show” and said her husband “just wanted to make
a difference…He died for you.” Let’s hope all of us never forget
this.
God bless the men and women of our armed forces.
God bless America.
—
Gold closed at $290
Oil, $23.84
Returns for the week, 3/4- 3/8
Dow Jones +2.0% [10572]
S&P 500 +2.9%
S&P MidCap +4.3%
Russell 2000 +4.5%
Nasdaq +7.0% [1929]
Returns for the period, 1/1/02-3/8/02
Dow Jones +5.5%
S&P 500 +1.4%
S&P MidCap +5.8%
Russell 2000 +2.3%
Nasdaq -1.1%
Bulls 47.9%
Bears 29.2% [Source: Investors Intelligence]
Note: I’m traveling for a few days and may not be able to
respond quickly to your requests and messages.
Have a great week. I appreciate your support.
Brian Trumbore
