For the week, 5/22-5/26

For the week, 5/22-5/26

“This is the kind of party where the guests, if deprived of the

host”s refreshment, whip out their pocket flasks and gather round

the piano to sing another round of ”Brother, can you spare a

Dime?” They are rude and undisciplined, and they won”t go

home.”

–Thomas Donlan / Barron”s

Donlan is referring to the last Nasdaq bulls…or rather the shills

you see on television. But they are a rapidly dying breed and, in

the perverse ways of Wall Street, normally you would call this a

positive, since excessive pessimism tends to be a sign that

everyone has sold that wanted to and one spark (like the Fed”s

first interest rate cut in August of 1982) could send stocks

soaring anew.

Since Wall Street is a discounting mechanism, it also holds that

the market tends to look out 6 months or so. For example, if the

economy was tanking and we had entered a recession, Wall Street

might say, “The worst is almost over. Pass me a Heineken. Guys,

I”m going shopping (for stocks).”

But this time it”s different. Since things move at warp speed

these days, the current small signs of a possible economic

slowdown could begin to cascade in an ever-increasing torrent of

bad news. And while no one has mentioned this yet, it”s not too

soon to talk about a potentially lousy Christmas season.

But to be fair, what troubles a lot of folks today is we honestly

have no clue. I believe that, just as in the case of the Nasdaq,

many elements of our economy are bubbles waiting to burst,

particularly real estate. And, in addition, many Americans carry

way too much debt which means that a slowdown could impact

confidence quickly. And always remember, the consumer

represents 66% of our economy.

And as for the Federal Reserve, the big question of the day is

suddenly, “Did they overdo it” by raising interest rates as much as

they have? Are further increases really necessary?

The quick answer is yes, maybe the Fed did overdo it…but we

won”t know that for awhile. In the meantime, the awful action in

the equity markets has to be giving the Fed even more of a

headache. True, they wanted to prick the bubble and it”s been

“Sayonara wealth effect!” But if the economic data (like the

upcoming employment report) still show significant underlying

strength, the Fed will be compelled to raise rates again at the June

27-28 meeting. And they know that there is an increasing chance

that this next move could possibly send the economy over the

edge.

And to those Nasdaq shills who keep chirping a happy tune by

proclaiming that once the Fed stops raising rates it”s clear sailing,

I say bunk. [I”ll give them a two-day rally, max.]

Investors have learned a painful lesson; valuation and earnings

matter. If Cisco were to go back to its high of $82, or Sun Micro

$106, then you can be sure that the Federal Reserve will be right

there as well, raising rates 25 basis points for every $5 rise in

Cisco stock.

It”s a delicate time. I see no reason not to continue to keep your

powder dry. And events around the world aren”t exactly

sanguine. I”m referring to simmering currency crises and the ever

present social unrest in some key developing countries. These are

the “wildcards” as I like to call them. They are the Hott Spotts

that could finish off confidence once and for all.

Bits and Bytes

–Outside of a brief flurry of positive karma on Wednesday, it was

another slow, tortuous week. The Nasdaq slide has now reached

37%, the steepest decline in the average since 1976. And, at

3025, it is off 21% for the year. The Dow, which generally

doesn”t have the valuation issues found within the Nasdaq,

continues to hold up reasonably well as it sits at 10299, off 12%

from its all-time high of 11722.

–Bonds rallied as market participants adopted a more positive

outlook on the Fed”s inflation fight, reasoning that the economy

will slow enough to prevent more significant tightening.

U.S. Treasury Yields

1-yr. 6.18% 2-yr. 6.67% 10-yr. 6.33% 30-yr. 6.06%

–Judge Jackson will rule on the Microsoft case this week and

accept the government”s recommendation that Microsoft be split

into 2 parts. Then we”ll see how quickly an appeals court will

act.

–#1 UAL announced a merger with #6 US Airways. If approved

this would result in an airline which controls 27% of all U.S.

passenger traffic. The biggest impact, however, will be the

economic one on the various hub cities like Raleigh and Charlotte

which would inevitably suffer.

–Qualcomm is at $66. Just about 5 months ago it stood at $200

and appeared on the verge of taking over the world. Today,

newer shareholders are reduced to drinking Blatz.

–Web companies are shedding employees at an increasingly rapid

clip (if they aren”t going out of business altogether). Here at

StocksandNews, though, we have a lifetime employment

guarantee. Actually, as the owner / editor I don”t care how much

you complain about my conservative rants. I will not fire myself!

China

President Clinton received his parting gift, a ”yes” vote on

permanent normalized trade status for China when the House

approved the measure 237-197. [For you trade junkies out there,

NAFTA passed 234-200 in 1993.] 164 Republicans backed the

President along with 73 Democrats, the latter immediately

becoming targets of organized labor in the fall.

For its part, China was mildly pleased, enthusiasm being tempered

by the fact that the trade bill allowed for the establishment of a

commission that would monitor human rights in China, a

provision that they blasted as being an interference in their

internal affairs. [And they”re right!]

But in the words of Senator Jesse Helms, “I wouldn”t advise the

Clinton administration to pop the champagne corks just yet!” You

see, it has long been a foregone conclusion that once the House

passed the legislation, approval in the Senate (still required) was

automatic.

Well, some senators like Fred Thompson (R-TN) and Bob

Torricelli (D-NJ) want to add their own provisions, like a

commission to monitor China”s weapons trade. So stayed tuned,

the Senate may make Clinton sweat it out for awhile (technically,

they have until late August). In the meantime, it could mean that

China will have to stay on its best “worst” behavior until final

passage is secured, i.e., a Tiananmen Square massacre of Falun

Gong adherents would not be a smart thing.

Russia

The more you see of President Vladimir Putin in action, the more

there is not to like. Recently, the Kremlin was host to one

Dragoljub Ojdanic, Milosevic”s defense minister. So who is

Ojdanic and why should you give a damn? Well, ol” Drago has

been charged with war crimes by the U.N.”s Hague tribunal. In

other words, Russia, as a U.N. member, had an obligation to

arrest the dirtball. That”s simply international law. Instead, he

moved freely about Moscow and Putin even gave him a $100

million loan guarantee to take back to Slobo.

And then I read where Russia”s Supreme Court is looking into

whether Stalin”s police chief, the notorious Lavrenti Beria, should

be “rehabilitated,” meaning future historical references would be

mostly positive. Now all Beria did as head of the NKVD (the

predecessor to the KGB) was order the execution of hundreds of

thousands (at least). Then, after Stalin”s death in 1953, Beria

himself was executed for treason. If the rehabilitation of Beria

goes through, then you might as well go straight to “Who Wants

to be a Millionaire.”

Regis: For $1 million Bill, Vladimir Putin is a) a friend b) a

hockey player c) a cabdriver d) a man to be feared.

Bill: D, a man to be feared.

Regis: Final answer?

Bill: Final answer, Rege….Ding-Ding-Ding!

But Russia does have some legitimate problems that the West can

empathize with. Islamic fundamentalism continues to spread in

Russia”s former Central Asian states while Afghanistan sends its

rebels over to help the Chechens. Putin has threatened air strikes

in Afghanistan unless the ruling Taliban government uses its

influence with Osama bin Laden to stop the human flow to

Chechnya. Should Russia follow through on its threats, the West

will only be able to sit back without comment since it would be

exactly what we have already done ourselves.

Finally, on the economic reform side, Putin proposed a 13% flat

tax, clearly adopting a strategy long promoted by one Stephen

Forbesyanov.

Japan

Boy, the land of the setting sun really can”t get its act together.

First off, the Nikkei closed the week at 16008. Again, while

commentators like to say the index is at its lowest level in a year,

I prefer to say it”s at the same level as 8 years ago.

Then the government announced they left out economic data that

would have showed a lower figure of “growth” for the fiscal year

ending March 31. Of course it was politics that got in the way of

the truth.

Meanwhile, Hazama Corp., a general contractor, asked for $3.7

billion in debt relief. Earlier, Sogo, a retailer, asked for $6 billion

in debt forgiveness. As to the latter, a senior executive upon

making the announcement killed himself. [That”s one thing I like

about Japan. Here in the U.S., you do a lousy job (see Jill Barad

of Mattel) and you get $50 million walking money.] Japan

continues to have major problems reforming their stagnant

economic system. Said one expert of the Hazama and Sogo

cases, “It would be better to let those companies fail.”

Lastly, there is the case of Prime Minister Mori whose

government had to call a snap election for June 25 in light of the

death of former prime minister Obuchi. So Mori is giving a

speech this week and he says, “Japan is a divine nation with the

emperor at its core.”

You have to understand this was a rather loaded statement in

light of the fact it alluded to Shinto religious philosophy, reviving

pre-WWII and wartime ideology. So when this was pointed out

to the none too swift Mori, he apologized but didn”t retract it.

Suddenly his government, thought to be a shoo-in, may have a

fight on its hands.

And believe it or not, I have connected some dots and I”ll now

give you the truly Big Picture.

This summer the Pentagon conducts its annual war games. In the

past, 90% of the battle scenarios were “Eurocentric” for obvious

reasons. Today 50% are Europe. 50% Asia. All kinds of plans

are drawn up for the potentiality of an India / Pakistan conflict, a

North Korean implosion, etc. But to gauge what our experts are

most worried about all you need to know is the scenario behind

the most extensive game.

Since the Pentagon often doesn”t like to use actual names of its

projected aggressors, this year”s massive fake battle involves a

“large East Asian nation” taking over Siberia (and all of its natural

resources) from a weak Russia with the U.S. basing warplanes in

Siberia to defend Russian interests. Obviously, the aggressor is

China.

But at the same time, the U.S. is growing increasingly concerned

that Japan may not follow the U.S. lead in a future crisis of this

sort. And clearly statements like Mori”s can not be reassuring.

[If you have any doubts about my reasoning, ask one of your

neighbors who fought in the Pacific. And also thank them while

you”re at it.]

Africa

Writing in the Sunday Times magazine, Jeffrey Goldberg

commented, “In Africa, the American government, with the

apparent approval of the American people, appeases evil in ways

that would make even a Chamberlain blanch.”

Right on, except I think only 1% of the people know what”s

going on in the first place. For example, I saw a CBS News

report from Sierra Leone that correctly blasted the U.N. for its

incompetence but then failed to mention a very salient point. It

was the U.S. (Albright and Jackson) who brokered the disastrous

peace plan of 7/99. This week, the mutilated bodies of 6 U.N.

troops were discovered and there are reports that rebel Foday

Sankoh won”t be tried for war crimes. Instead, Sankoh may be

party to a new deal, arranged through Liberia”s murderous leader,

Charles Taylor.

Ethiopia / Eritrea: The former has 62 million people, the latter 4

million. Guess who”s winning the war? Eritrea has withdrawn

from territory taken in a 1998 conflict but Ethiopia seems bent on

wiping out Eritrea”s armed forces once and for all.

Nigeria: The West hopes that this nation emerges as a true

regional power, capable of containing conflicts like that in Sierra

Leone. But the nation has its hands full with ongoing violence

between Christians and Muslims which claimed another 100 lives

this week.

And then there is…

Israel / Lebanon: I detail the history of Israel”s occupation in

southern Lebanon in my 5/25 edition of “Hott Spotts.” The

pullout from the territory this week was chaotic but fulfilled one

of Prime Minister Barak”s campaign pledges. So what happens

next? The 9-mile buffer separating Hezbollah and northern Israel

is no longer. The Israeli army left lots of munitions behind, and

even some tanks, which quickly fell into the hands of the bad

guys.

Meanwhile, Syria now holds sway over all of Lebanon. Will

President Assad manage to control the guerrillas and keep them

from launching cross-border attacks? How will the Christians

who were left behind be treated by the Islamic terrorists? Bottom

line, in the perverted maneuverings of the Middle East, Israel now

has more of a leg to stand on when they retaliate for attacks on

the northern villages. There will be no other way to classify

Hezbollah”s transgressions as anything but an act of war. This

wasn”t the case when you had Israeli troops occupying a

sovereign land.

Israel / Palestine: Last week I blasted the corrupt PLO. This

week the 5/29 issue of Newsweek had the following comments

from a Palestinian: “The (Palestinian) Authority is like the 40

thieves and Arafat is Ali Baba. We got rid of the Israeli

occupation. Now we are under Palestinian economic

occupation.” Said another who was beaten after an anti-

corruption demonstration, “It”s a Mafia state.”

Peru: The presidential runoff is taking place as scheduled on

Sunday, this despite the withdrawal of opposition candidate

Alejandro Toledo who claimed the election would have been

rigged. President Fujimori will win his 3rd term and then the

international community will come down hard on him.

Venezuela: Postponed their presidential elections due to

computer problems.

Poland: Government is about to collapse and former communists

could fill the void. Economic change has been fast and

furious…but maybe too fast.

Pakistan: Sources say they appear to be preparing for a nuclear

test. The government denies it.

Iran: Reform President Khatami marked the 3rd anniversary of his

election with a fiery speech against the hard-liners as he called for

freedom and democracy. Hope he”s wearing a bullet-proof vest

under his cloak.

Missile Defense

A heated debate will take place this fall between Bush and Gore

as to what our missile defense policy should be. Strategist Robert

Kagan describes what may happen if the U.S. didn”t have a

proper system in place.

“The U.S. could find itself less and less willing to undertake the

risks that come with global leadership. Adversaries would be

emboldened by American timidity; and friends would begin to

look elsewhere for their security. The ties that bind America to

its allies would loosen. [i.e., see previous discussion on Japan.] In

time, the fabric of the international order, now dependent on

American military power and an American will to use it, would

unravel altogether.”

What it comes down to is something like the following. Iran or

Iraq develops the ability to wipe out Munich or Paris. Would

Congress approve an invasion and would Europe support us,

knowing that the price of doing so may be the destruction of one

of their cities? Without getting into a lot of details (which I will

save for an upcoming series on arms control for “Hott Spotts), if

we develop an anti-missile system and share it with our allies, we

may be able to avoid the blackmail.

This Week in Politics

So thank God we have a 22nd Amendment to the Constitution

limiting our presidents to 2 terms. Otherwise, clearly Clinton

would be running again but at least a survey showed that by a 57-

39 margin voters would turn him away. The President does still

have a 59% approval rating, rather extraordinary in the eyes of

your editor.

And it is equally extraordinary that we have a sitting president,

sworn to uphold the laws of the land, who could be disbarred

from his home state, a state in which he had once served as its

attorney general. Clinton was guilty of “serious misconduct,”

charged the 6-judge Arkansas Supreme Court panel. And you

just know that Al Gore was squirming as the recommendation

was handed down.

Later in the week, Clinton and Gore presided over two

Washington fundraisers that took in a record $26.5 million in

“soft money” donations. Gore says he”s anxious to reform the

system.

But the way things are going for Albert, he may not get that

opportunity. George W. laid out a bold defense initiative and,

coupled with prior proposals on social security and education,

whether you agree or not with the specifics, Bush is the merchant

of change, not Gore. And the China vote hurt Gore immensely.

Just a few percentage points shift to trade hawks Ralph Nader or

Pat Buchanan could cost Gore key states like Michigan in the fall.

Elsewhere, in the New York Senate race, a poll shows that after

just one week of campaigning, Rick Lazio is in a dead-heat with

Hillary. Both are vying for the 20% that is undecided. 40% are

virulently anti-Hillary, 40% are hard-core pro-Hillary.

And in New Jersey, all we can say here is holy cow! Democrat,

and former Goldman Sachs CEO, Jon Corzine, has now spent

about $34 million on his Senate primary campaign. Folks, by

comparison the all-time spending record for a primary was $8

million by New York”s Charles Schumer. The spending record

for an entire Senate race is $30 million by Californian Michael

Huffington. As for the race itself, Corzine now leads his

challenger, Jim Florio, 56-30. In March, Corzine trailed by 22

points before the money started flowing. Totally obscene.

California congressman David Dreier floor-managed the

Republican side during the final China debate. He”s also dating

Bo Derek. David, my man!

Should Pat Buchanan receive the Reform Party nod, it certainly

would be entertaining if he worked his way into the presidential

debates this fall. But he has a big problem…Ralph Nader. How

can you keep Nader out of the debates when he polls the same as

Buchanan? For this reason, it will be easy for the debate

commission to leave out both since there”s no way you”ll see all 4

on the same stage.

Random Musings

–ABC expects to take in anywhere from $300-$600 million from

“Who Wants to be a Millionaire” next season. They are

receiving $400,000 for a 30-second spot, each hour has 14 of

these and the total profit per episode will be in excess of $4

million.

–Maryland prosecutors were forced to drop the Linda Tripp

wiretapping case.

–According to Harper”s magazine, in 1998 the ratio of the

number of Americans killed in traffic accidents to the number

killed by medical errors was 1:1.

–The issue of the death penalty will become a big one in the

presidential campaign thanks to the Illinois decision to suspend

executions and the fact that George W.”s Texas leads the nation

in carrying out death sentences.

This week we had the brutal murder of 5 Wendy”s employees (all

were executed). As of this writing, two suspects have been arrested.

U.S. Ambassador Felix Rohatyn wrote a column the other day

describing how in Europe (where the death penalty is illegal in

Euro nations) they don”t understand why we allow such a cruel

and immoral practice to persist.

My simple response is, give me one good reason why the

Wendy”s killers should live? All of this hand-wringing comes

from the same folks who sat back and watched as 800,000

Rwandans were massacred.

–Harvard economist Jeffrey Sachs writes that for just $8 a year

from every American we could save millions of lives in Africa

from the scourges of malaria, AIDS and TB. The cost

breakdown would be $10 billion a year of which the U.S. would

pick up $2 billion (for the $8 per person). If vaccines can be

developed the costs would come down. Economically, the

disease burden cripples the continent”s development efforts. But

will our politicians lead a charge that is morally right and fiscally a

drop in the bucket? Of course not. And if you are at all religious

and believe that someone is keeping score, a big ”F” for America.

–I caught a little of the China trade debate and the congressional

rhetoric can really be quite comical. Democratic Congressman

Ron Klink said, “22,000 Pennsylvania workers sacrificed their

jobs on the altar of free trade with the NAFTA agreement.” Ah

Ron, that was 1993. Are you saying these 22,000 have been

sitting around drinking beer (Rolling Rock, I hope) for 7 years

while the nation is in the midst of boom times?

And then there is the call-in segment of C-Span, the part where

the moderator doesn”t offer an opinion. Now I could have fun in

that role.

Caller: “If this thing passes, what is going to happen to all of our

jobs?”

Me: “They”re gone…let”s go to Bob in Milwaukee.”

Gold closed at $275

Nymex Crude Oil, $30.00

Returns for the week, 5/22-5/26

Dow Jones -3.1%

S&P 500 -2.1%

S&P MidCap -2.5%

Russell 2000 -4.7%

Nasdaq -5.5%

Returns for the period, 1/1/00-5/26/00

Dow Jones -10.4%

S&P 500 -6.2%

S&P MidCap +3.0%

Russell 2000 -9.4% [25% from highs]

Nasdaq -21.2%

Bulls 46.0%

Bears 32.4% [Source: Investors Intelligence]

*To the Veterans, you are in my thoughts every day.

Brian Trumbore