“There is an almost surreal quality to the present boom. What we
get (in the stock market, most prominently) is a tug of war
between wild optimism and instinctive caution.”
–Economist Robert Samuelson
Label me wildly cautious, instead. So what did we learn this
week, one in which the Nasdaq continued its recovery, gaining
6% to finish at 3860 (still 15% from its all-time high), and the
Dow Jones lost 110 points, or 1%, to close at 10733?
It was a week filled with more wild swings, especially Monday”s
Nasdaq plunge of 300 points before a strong rally at the close of
the session seemed to propel it forward the next 4 days. It was
also a week in which trading volume was the lightest it has been
all year, perhaps a sign that a few folks actually got scared out,
eh?
Corporate profits continued to pour in from all precincts. First
Call reports that 73% of the companies in the S&P 500 who have
released their earnings have exceeded expectations, with those
earnings up some 23% year-over-year, a super rate no matter what
kind of microscope you put them under.
But the big financial news of the week was contained in two
economic reports. GDP for the first quarter rose 5.4%, down
from the 4th quarter”s sizzling 7% rate, but obviously still robust.
And then there was the Employment Cost Index (a measurement
of labor costs) which rose 1.4% for the quarter, the strongest rate
in 10 years. Couple these with the higher-than-expected March
Consumer Price Index report and economists can no longer say
inflation is not a problem. It”s kind of like that classic Bill Cosby
story, “The Chicken Heart.” ”It”s outside your house…thump
thump…thump thump…It”s at your front door…thump
thump…thump thump.”
Folks, the wage pressures I have wondered aloud about are finally
materializing. Employee benefit costs are rising substantially.
Full employment, and the accompanying lousy service, is having
an impact. And the Federal Reserve is just going to keep raising
rates again, and again, and again…thump thump.
The Fed next meets May 16 and, because of this week”s numbers,
there is increasing talk they may break out of their 25 basis point
(one-quarter of one percent) incremental maneuvering and go for
50. But before we get too carried away, the Fed will see data on
productivity and employment (both this coming week) as well as
another CPI report just before they settle down to whack us. My
guess is they still just go 25. Whether it”s 25 or 50, however,
isn”t as important as where, and when, it all ends. With a Fed
Funds rate currently at 6%, some economists, such as those at
Goldman Sachs, are looking for at least another 100 basis points.
Much to Greenspan”s dismay, the American consumer has
sloughed off the first 5 increases, all since last June 30. Part of
that has to do with the fact that long interest rates have actually
declined this year and mortgage rates, on an historical basis,
aren”t too scary yet. But perception rules Wall Street and, as I”ve
been harping on for weeks now (just call me “Harpee”), at some
point the Street is going to look around and say, ah, what if the
economy really does slow? What does that do for future profits?
And a comment on a common refrain heard the last year in
particular. “Even if the economy slows, corporate America still
has to spend on technology in order to keep pace.” Yes…and no.
If the economy slows and Co. X still increases its spending on
technology, profits fall (or at least they don”t rise anywhere near
the previous growth rate). If profits fall, analysts cut their ratings.
If analysts cut their ratings, then the share price plummets. If the
share price plummets, shareholders get pissed (as do employees
with stock options).
And something else is beginning to find its way into our thinking
(or at least that of your editor). The average Jane and Joe
doesn”t need an 800mhz chip in their PC. It runs just as well at
400. [And, in my case, I post these articles on a PC with a
166mhz chip, now 4 years old, and there is absolutely no need for
me to have any more power. What you do need is more memory,
however.] Corporations, in assessing what they need to really
upgrade, may begin to realize this as well.
Sure, if your e-biz is expanding you continually need more servers
but what else do you need (aside from traditional customer
service!)? You see, I have trouble with the feeling that we will
always be spending increasing amounts on every tech product
imaginable (again, particularly on the corporate level). And when
you are a corporate executive trying to meet earnings
expectations you may not just blindly keep spending.
….unless because of the recommended Microsoft breakup we”re
all screwed.
The federal government seeks to separate Microsoft into two
companies, one controlling the Windows operating system, the
other, applications like Office and the Internet browser. Bill
Gates would have to choose who to work for and which one gets
to keep the Microsoft name (and stock symbol). Microsoft will
fight it in the courts and, with the ongoing revolution in new
products, the legal standing seems increasingly weak. I”ll have
more on this next week.
Street Bytes
–Bond prices took it on the chin this week due to the inflation
numbers. U.S. Treasury rates:
1-yr. 6.16% 2-yr. 6.67% 10-yr. 6.22% 30-yr. 5.96%.
*The two-year rose to its level from 6.36% one week prior.
6.7% ain”t too shabby from a risk / reward standpoint.
–Due to the tech rally this week, once again, valuations on many
major companies are way out of whack. Back again, next week,
with the tale of the tape.
–Another giant hedge fund manager, Stanley Druckenmiller of
George Soros shop, left the business…forced out.
–An article in the Wall Street Journal said many mutual fund
organizations are abandoning emerging market mutual funds.
Which means I won”t have to rail against investing in them any
more.
–Another Journal story spoke volumes about the current
investment climate. Some workers at AT&T, able to purchase
shares in the company”s spin-off of its wireless unit, are taking
out second mortgages and raiding their retirement accounts to
buy into the offering. What the hell are you guys doing? I can
virtually guarantee that not one of these folks had a financial
advisor. No one worth their license would possibly recommend
that course of action.
–Day traders, of which there are now probably less than 50,000,
control 17-18% of the trading volume on the NYSE and Nasdaq
and account for 75-80% of all online trading.
–Jeff Bezos, Amazon.com founder, told Barron”s Mark Veverka,
“If you were to ask me what our biggest mistake was last year, it
was not putting a formal practice in place.” What? No business
plan? No model? Actually, I don”t have one either.
The Really Important Stuff
A child psychologist observed Elian playing with some toy
soldiers this week, provided for the purpose of seeing whether he
acted aggressively due to the raid last weekend. By all reports,
the soldiers survived and could now probably be auctioned off on
eBay. But far more important were some stories involving real
soldiers of the ex-Soviet bloc nations.
I try oh so hard to keep you ahead of the curve here at
StocksandNews. Last week I wrote of arms control and, sure
enough, the drumbeat started on Monday with an op-ed piece in
the New York Times by Russian Foreign Minister Igor Ivanov.
But more on this later.
From various accounts I pieced together the following, all
transpiring in a 7-day period.
–During military exercises, a Russian missile hit a Ukrainian ship.
Luckily, it was a dummy warhead and no one was killed.
–A Russian missile was test-fired in Kazakhstan, went off target,
and missed an apartment complex by a matter of yards.
–A Ukrainian missile was test-fired and, much to the chagrin of
the residents, hit a complex in Kiev, killing 3.
Conclusion? Maybe we don”t have anything to worry about as
far as Russian intransigence in the future? As for our neighbors in
Canada and Mexico, they have a problem.
But here”s the real issue. The Russian general in charge of
procurement was interviewed by “Defense News” and, by his account,
the level of maintenance for all weapons systems is almost laughable.
Every weapon or military vehicle has an expiration date, unless
properly maintained and upgraded. For example, Russia”s top
fighter aircraft are currently due to be non-operational by 2010.
70% of Russia”s military satellites are already past their
guaranteed life (which means blind spots in their radar system and
an increasing possibility of mistakes).
The Russian army spends just $1 billion, total, on procurement
versus $90 billion for the U.S. The Russian armaments chief said
he hasn”t been able to procure ammunition for 10 years!
Obviously, this means reduced training, vital for today”s high-tech
conflicts. All the Russians can do is focus on extending the
service life of equipment that is not already obsolete. And the
chief worry in Moscow these days is the growing belief that
Russia can”t win even one regional conflict (i.e., Chechnya), let
alone a large-scale engagement.
So you might be thinking, “Good. Why should we worry about
Russia?”
[And you should also be thinking, who in their right mind could
possibly want to invest there? A specter raised by their
government”s release of rosy GDP figures coming off of a
depression-level bottom. But some fools never learn. See
George Soros.]
Well, one reason to worry is the prospect of President Clinton
giving away the store at upcoming arms control talks. I discussed
the situation last week but now you better understand why Russia
is so eager to cut a deal. They can”t afford to maintain the nukes
they have and they desperately need to shore up their
conventional fighting capability before Estonia”s army marches
through Red Square.
So with this as background, here is the current Russian position
as delineated by Foreign Minister Ivanov:
“Having ratified the package of START II and the ABM
agreements, Russia has done its part. The ball is now in the court
of the U.S….Everyone should be aware that the collapse of the
ABM treaty would have a destructive domino effect for the
existing system of disarmament agreements….If the U.S.
withdrew from the ABM treaty, Russia would not be bound by its
strategic arms reduction obligations.”
“Russia proposes to the U.S. that we jointly develop a program
that would prevent the proliferation of missiles and missile
technologies or remove incentives for acquiring them. [Editor:
Before you say, “Well, that”s reasonable,” remember that our next
space shuttle flight is for the express purpose of ”righting” the
international space station because the Russians couldn”t afford to
do their job and get the next stage in the station up there.]
…(The) START / ABM package, is, in effect, our invitation.”
There you have it. The trap has been set and a desperate Clinton
may take the bait.
You know who I will eventually listen to at the end of the day?
Two senators, one from each side of the political aisle.
Republican Richard Lugar and former Democratic Senator Sam
Nunn. They are the two experts with the most credibility. But
let”s first see what the administration does. At week”s end they
laid out a proposal whereby we would convince Russia to allow
the U.S. to build a limited missile shield. But not a larger one
down the road. If this is the final proposal (which would be
coupled with further reductions in warheads by both sides), in
undiplomatic terms, it sucks. Anyway, Senator Jesse Helms has
already vowed to block any treaty that comes before his Foreign
Affairs Committee. There will be much more in the coming
months on this hot issue. And meanwhile, the Russian army
continues to get ambushed in Chechnya while it rejects a UN
Human Rights Commission probe over its behavior there.
More International
China / Taiwan: For a country that wants to be admitted to the
World Trade Organization, China sure doesn”t make it easy to
want to see that. Clearly, if you”re walking through Tianamen
Square and you get a leg cramp, don”t try stretching it out.
You”ll probably get thrown in jail as an adherent of Falun Gong.
Over 100 were arrested this week for doing just that.
Meanwhile, the government in Beijing continued to saber-rattle
ahead of the inauguration of Taiwan”s new president, Chen Shui-
Bian. In light of this, the U.S. Senate has opted to delay a vote
on selling arms to Taiwan in order not to ratchet up tensions. For
every conciliatory comment made by a Chinese government
leader, there are two harsh ones.
And in an op-ed piece, Gary Schmitt and Tom Donnelly wrote
that as few as 50 missiles could cripple the 3 airfields where
Taiwan keeps all of its advanced fighter jets (their main line of
defense). Then China could sue for an agreement to their liking.
Iran: Well, we said it wouldn”t just be a walk in the park when the
reformers won a majority in last February”s parliamentary
elections. The hard-liners still in charge of the courts (and the
army) have shut down at least 14 pro-reform newspapers,
including one run by the brother of the moderate President
Khatami. 200 students rioted on Thursday to protest the recent
moves.
Zimbabwe: The situation here just gets worse. This week,
opposition party followers became the targets (both white and
black) of President Mugabe”s vicious campaign to avert defeat at
the polls in May. The opposition threatened violence of their own
while Mugabe”s police are restricting the movements of all
parties. Some of Mugabe”s ministers went to Britain seeking
compensation for land that is being taken from the white farmers.
Britain has offered to help out but only when the violence
subsides. The meeting was a bust.
Malaysia / Philippines: 20 foreign tourists were kidnapped by
Filipino Muslim extremists from a diving resort in Malaysia, the
latest victims of a new wave of kidnappings for ransom.
Colombia: And speaking of kidnappings, this nation”s star soccer
player, Andres Estrada, was kidnapped by guerrillas. Colombia is
out of control. The President gave in to one rebel group and
essentially turned over a massive amount of land to them while
the larger of the 2 main forces fighting the central government
said that it will kidnap all business leaders unless the President
gives in to their demands. Whether we like it or not, we are
going to be involved here, deep, within a year.
Mexico: Interesting presidential election coming up July 2. After
71 years in power, the ruling PRI Party faces its stiffest
opposition from Vicente Fox who is rising rapidly in the polls.
Italy: Mama Mia! The 58th post World War II government was
sworn in this week!
Europe
For all of the potential the continent has, there are some daunting
problems and the currency being used by 11 nations, the Euro,
doesn”t help matters.
First off, Anne Swardson (Washington Post) wrote of the
looming retirement crisis in Europe, a theme echoed by others
over the past few years. It is projected that by 2025, one-third of
the population will be pensioners, covered only by government-
financed pension programs, creating a tremendous drain on
governments and their children. It”s a far bigger problem than
what we have in the U.S.
While the population in America has been rising, and is projected
to continue to do so, not one country in the Euro Zone is having
enough babies to meet the replacement rate of 2.1 per family.
[For example, between 1995 and 2050, Italy”s population will
shrink from 57 to 41 million.]
The workers retire far earlier in Europe than in the U.S. The
effective retirement age for U.S. men is 63.6 years. In Italy it”s
60.6, France 59.2. And there are few private alternatives to
supplement the European worker”s government pension, for
instance, 401Ks are illegal in France.
Enter the Euro, which has been sliding precipitously of late.
Under this system, all 11 countries are in essence to operate as
one economy. This week, the European Central Bank raised
interest rates in an unsuccessful effort to prop up the currency.
The ECB said they also needed to fight rising inflation, but it risks
cutting off growth in some of its member nations.
And when you look at the looming pension crisis, you can see
how the Euro mechanism may yet prove to be a disaster (as was
feared by the detractors before it was introduced). Nations like
France and Italy are going to be left with the hard choices of
raising taxes, substantially, and/or cutting spending to meet
retiree”s needs. The policy adopted could be in direct conflict with
the overall “good” of the other Euro countries. You get the
picture. It may look like Picasso”s “Guernica.”
Henry Kissinger on the Legacy of Vietnam
[From an op-ed piece in the May 1st issue of Newsweek]
“The conclusions that many in the Clinton administration – and in
the liberal community – have drawn from the Vietnam War
present a profound challenge to traditional American foreign
policy. They treat the cold war as a misunderstanding, if not an
American creation. They recoil before the concept of national
interest and distrust the use of power unless it can be presented as
in the service of some ”unselfish” cause – that is to say, as
reflecting no specific American national interest. On many
occasions and many continents, President Clinton has apologized
for actions of his predecessors that stemmed from what he
derogatorily describes as cold-war attitudes. But the cold war
was not imaginary; profound issues of survival and national
purpose were involved.”
“…Vietnam bequeathed a new generation divided into two
camps: one in search of riskless applications of our values,
another in an erratic quest for a focal point for our national
strategy. It is not that this generation is obsessed by the debates
over the war in Indochina, with which it is largely unfamiliar. Nor
does it have feelings of guilt about a doctrine of self-interest,
which it pursues strenuously in its economic activities. But it has
little knowledge of history or of national policy and hence lacks a
sense of direction in the international political arena. It is tempted
by the Clintonian concept of riskless global gratification and the
belief that the hardheaded pursuit of economic self-interest will
ultimately produce global reconciliation.”
“…Economics will not provide a substitute for a national
strategy. The globalized world will emerge only through
dislocations and tensions, both within and among societies. The
nation-state, which remains the unit of political accountability for
solving these crises, is itself in a process of transition. In many
regions of the world, it is breaking down, either into hitherto
ethnic entities or by joining larger regional groupings. And the
proliferation of weapons of mass destruction represents a political
challenge faced by no previous society.”
In other words, we ignore international affairs at our own peril.
Elian What”s His Name
I have long broken with my conservative brethren on this one.
I never viewed it as more than a child custody case. And a
Republican senator who I wish Bush would consider to be his
running mate, Nebraska”s Chuck Hagel, summed up my feelings
in a piece on Friday.
“By U.S. law, the boy should have been placed in the custody of
his sole remaining parent as soon as Juan Miguel arrived on
American soil…and then let the courts decide. It”s not about
Castro or Cuba.”
Of course, because it”s the Clinton administration you can”t help
but wonder about some of the corollary aspects of the case.
Florida Democratic Senator Bob Graham said Clinton “lied” to
him about the issue of the house being stormed. Deputy Attorney
General Eric Holder lied beforehand about the use of force.
Some of us are still trying to figure out why Clinton”s
impeachment counsel, Greg Craig, is Juan Miguel”s lead attorney.
Yes, does Castro have anything on Clinton? After all, Clinton did
mention to Monica that he felt his conversations were being
tapped by a foreign intelligence service.
But at the same time, there aren”t a lot of positive things I can say
about the Miami “family.” I tend to believe the stories that
Elian”s mother really just wanted to be with Lazaro. And now
we”ve learned that Donato Dalrymple, the man holding Elian for
his class photo the day of the raid, really wasn”t his fisherman
savior (it was his now estranged cousin). Which means Donato
could do a commercial. “I”m not a real fisherman, I just play one
on TV.”
Yes, it is one screwed up case. I love Peggy Noonan and William
Safire but I don”t go along with their ballistic comments in this
instance. I”m far more concerned with the campaign finance
scandal and whether or not the administration also held back key
emails (the latest investigation).
And finally, as for Elian himself, he was heard to be screaming,
“Que Pasa! Que Pasa!” when he was whisked away, making him
a natural spokesperson for QUEPASA.com!
Political Briefs
Two quick notes: The Republicans smashed the all-time single
fundraiser record when they took in $21 million Wednesday at a
Washington gala.
And in New York, Mayor Rudy Giuliani disclosed he had
prostate cancer. While he takes a week or so to decide on
whether he will continue his Senate bid, the guess here is that he
stays in. Should he opt out, however, Congressman Rick Lazio
stands ready and willing to fill the void. I didn”t like the way
Lazio acted the past few months but it does seem he could
present an even more formidable challenge to Hillary, for the
simple reason that he is not nearly as “toxic” as Rudy can be. *If
Rudy does drop out, the $20 million plus he has raised to date can
not be turned over to another candidate, but it can be given to the
state Republican Party for general purposes.
More Random Musings
–At Monday”s annual White House Easter Egg Roll, President
Clinton said he had been informed that he and Hillary were the
only President and First Lady to participate in the event 8 years.
Don”t remind us.
–An hour after the shooting at the Washington National Zoo,
which, like every similar matter, received way too much national
press, Vice President Gore proclaimed, “We really have to have
mandatory child-safety trigger locks.” Wouldn”t want to miss an
opportunity, would we, Al? The shooter will be tried as an adult.
–Actor Pierce Brosnan”s son suffered serious injuries in an auto
accident last weekend. He may be paralyzed (last I heard). The
first reports said he was 13-years-old. Later in the week, I saw
one that said the boy was 16. Regardless, I didn”t hear anyone
say, “What the hell was the kid doing with a drunk 19-year-old at
3:45 in the morning!” Nice parenting, Bond.
–Some members of the Saudi royal family were fired on by
followers of a man who had been recently arrested for sorcery
(one policeman guarding the palace was killed). Also this week, a
Sudanese man was beheaded after he was convicted of “black
magic.” Beware “Psychic Friends Hotline.”
–I saw the following. “There were unconfirmed reports that
foreign cargoes of heating oil were heading for New York
Harbor.” AAGHH!
–In a Newsweek poll, 84% of American adults say they believe
that God performs miracles. 48% claim to have witnessed one.
–A settlement was reached with the families of the 20 victims of
the 1998 Marine ski-lift accident in Italy. Each one will receive
$2 million, 75% paid by the U.S., 25% by Italy. I only bring this
up because I can”t figure out why Italy would pay anything in this
matter?
–New York restaurant tip: Secretary of State Albright took her
Russian counterpart Ivanov to “Lespinasse” this week.
–New York Knicks (and I guess other teams) basketball players
now punch each other hard in the chest as a way to get psyched
up before the game. So, in the evolution of sports, and society,
we have gone from the now arcane high five, to chest thumping,
to slugging each other in the sternum. Look for this new, idiotic
fad at a high school or college near you next winter.
–I hope you filled out your census because you don”t want to
take a chance that the census workers going door-to-door are
accompanied by INS agents.
–The Puerto Rican island of Vieques could be a real flashpoint
shortly. This has been a U.S. Navy bombing range for years and
now protesters are camping out in the line of fire. So, that means
the FBI and other agencies (with U.S. Naval support) will have to
forcefully remove them.
–The following two headlines appeared next to each other in my
paper the other day and I offer them without comment.
“Gay Partnership bill passes the Vermont Legislature”
“Court bans Ohio motto as endorsement of Christianity”
–Home runs continue to proliferate in baseball. And only one-
third of ethnic Albanians in the U.S. (out of 14,000) have agreed
to go home. Which means just one thing, “Albanians dig the
long ball!”
Gold closed at $275…Cubic Zirconium, $284…another bearish
sign.
Nymex Crude Oil, $25.70
Returns for the week, 4/24-4/28
Dow Jones -1.0%
S&P 500 +1.3%
S&P Midcap +4.6%
Russell 2000 +5.1%
Nasdaq +6.0% [For the month the index lost 15.6%]
Returns for the period, 1/1/00-4/28/00
Dow Jones -6.6%
S&P 500 -1.1%
S&P Midcap +8.4%
Russell 2000 +0.3%
Nasdaq -5.1%
Bulls 50.9%
Bears 29.3% [Source: Investors Intelligence. Delayed
reaction to market downturn of two weeks ago.]
Notes: Reminder, if you are printing the articles, click on the
“printer friendly” link at the bottom.
Check out the 4/26 and 4/28 editions of “Bar Chat” for a little
history on the fall of Saigon.
Keep those cards and letters coming!
Brian Trumbore
