“I”m feelin” so groovy now,
That people are finally gettin” together”
–Friend and Lover (“Reach Out Of The Darkness”)
The historic developments on the Korean peninsula this week
were certainly highly encouraging. And let me be the first one to
say that South Korea”s Kin Dae Jung may have wrapped up the
Nobel Peace Prize. He deserves the lion”s share of the credit for
his aggressive efforts in opening up the door to the reclusive
North (a la Nixon and China).
The reason why I spend so much time on international ”hot spots”
is because these are the wildcards. While most Americans are
oblivious to the world outside our borders, astute investors
should always keep an ear to the ground (or read this site)
because a major flare-up in one of these areas would do a number
on consumer confidence and officially spell a death knell for the
bull market.
Where should we be continually vigilant? Just a handful of
places. Russia, China/Taiwan, India/Pakistan, Iran/Iraq and
Korea. But now, as to the latter, we may be able to take a
momentary breather.
So what did Kim Dae Jung and his counterpart, Kim Jong Il,
accomplish? Of substance, little. And what did the North give
up? Nothing. But the change in atmosphere is palpable. Kim D.
said upon his return to Seoul, “The danger of war on the Korean
peninsula has disappeared” and that “Reunification is not for the
future but for the present.”
Overly optimistic? Perhaps. Out of the question? Maybe not.
While all you are likely to see this year are some long anticipated
family reunions, cultural exchanges, and, vital to the North,
massive economic aid, the tone has been set.
North Korea”s Kim J. has proved he is no dummy. [Though he
still looks awfully creepy.] And he is going to prove to be quite a
formidable opponent in any future negotiations with the U.S.
It”s clear that what Kim wants is to open up North Korea in the
same manner that we have witnessed in China. He desires an
economically vigorous, politically repressive nation. And he
certainly wants to maintain his military might.
And while the U.S. will now ease sanctions, with American
corporations lining up with the rest of the world to get a piece of
the North”s infrastructure projects, we still have to be concerned.
Kim Dae Jung is 75. He is a friend of the U.S. and he
understands the necessities of maintaining our 37,000 troop
presence in his country. But who will follow him? And Kim Jong
Il will spend every meeting with the South”s leaders pounding the
table that the U.S. must go. If we are eventually forced out, we
lose more than a little influence in this crucial region.
Who would fill the vacuum? China, Japan and Russia. And when
you throw in South Korea, well, you have quite a competition.
The problem is we may have our face pressed up against the
glass, crying to be let in, and no one may hear us.
And what of the North”s missile program? No way Kim J.
negotiates it away. In fact, just as I predicted last week, reports
are now surfacing that when Russian President Putin visits
Pyongyang next month, he will cut a secret deal with the North to
form some kind of joint cooperation agreement between the two
on these very weapons of mass destruction.
So, in conclusion, the imminent danger of war across the DMZ
may have been greatly reduced. But now a titanic power struggle
will emerge over who will have the greatest influence in the
Pacific. And, given the historical animosities that exist between
the major players, this is where you are going to have your next
world war. Enjoy the peace while you can.
Russia
“I cannot forecast to you the action of Russia. It is a riddle
wrapped in a mystery inside an enigma.”
–Winston Churchill
Actually, the Clinton administration should feel as if it just
received a giant wedgie. You have North Korea trying to drive a
wedge between ourselves and South Korea while, at the same
time, Putin is traipsing around Europe attempting the same with
our European allies.
Here he just had a summit with President Clinton, agreeing that
there was a legitimate ballistic missile threat to be concerned with.
Then, days later, he gives an interview to a German newspaper
where he says the following:
“The threat of missiles from ”problem countries” in the Middle
East or in the Asian region invoked by the U.S. does not exist in
principle, neither today nor in the near future.” And he continued
to say he would rip up all of the arms control treaties with the
U.S. if we proceed with a missile defense.
But then a few days later he gives speeches in Madrid and Berlin
where he talked of a joint Russian-NATO missile system (but I
thought there wasn”t a threat?) as he sought to portray Russia as
the natural ally of Germany and the New Europe while depicting
the U.S. as insensitive to European concerns.
And then there is the case of Vladimir Gusinsky, chairman of
Media Most, the only television network in Russia not under
Kremlin control. This week Gusinsky was arrested and placed in
prison (without charges). In a handwritten note from his cell,
Gusinsky said his arrest “means a return to the totalitarian past,
complete with gulags.” [Late Friday he was released, but is
still facing charges.]
Now Gusinsky is one of Russia”s oligarchs and, thus, no angel.
But the Kremlin is using “police state tactics” (Washington Post).
And the arrest took place while Putin was out of the country,
setting off an exchange that certainly would have stumped even
Churchill.
First, Putin claimed he knew nothing about the arrest. Officials in
Moscow said that was impossible. Then former prime minister
Primakov said, “I see the hands of the ”special forces” in the
move.”
Another former leader, Mikhail Gorbachev, said, “I think this is
an attempt to get at the president who is carrying out serious,
hard reforms.”
Putin”s inner circle is comprised of two constituencies. The
former KGB staff that he hired which wants a return to a regime
with a controlled press (call it a dictatorship if you want) versus
the former members of Yeltsin”s staff who Putin was forced to
accept (at least temporarily) in order to win Yeltsin”s favor. The
latter group supports the oligarchs. Neither side is good. As one
analyst put it, Putin is either weak and not in charge or the main
persecutor of dissent.
Earlier in the week Putin had given a speech wherein he said in
part, “(After 10 years), now we know how difficult it is to reform
the economy and the social sphere, to create the democratic
institutions of a civil society.” All the more difficult when you
trample on a free press.
But wait, there”s more. In another of his speeches in Germany,
he blasted NATO, proclaiming that the membership sought by the
Baltic states “is a reckless act posing a major strategic challenge
to Moscow.” [On the issue of NATO expansion, I have to admit
the West is wrong. More time should elapse before we keep
rubbing Russia”s face in the mud.]
And then there is an issue that Congressman Benjamin Gilman
wrote of in a Friday op-ed piece. Unbeknownst to many, the
U.S. quietly agreed to allow Russia to reschedule its debts with us
for a 5th time! Now there was a period when I favored such
action, particularly at the height of the ”98 crisis. But today,
Russia is funding dictatorships in Cuba, Belarus and Yugoslavia
while finding the money to mount its campaign in Chechnya.
With oil at $32, Russia is raking it in. Pay up!
Wall Street
For the second week in-a-row it was a quiet one, with all of the
major indexes finishing up or down less than 2 percent. You can
ignore Friday”s 265-point slide in the Dow Jones (to the 10449
level) because there were all kinds of extraneous factors involved,
primarily the re-balancing of the S&P 500 and triple witching in
the options markets.
The Nasdaq lost only 14 points for the week to close at 3860, still
1200 off of its all-time high water mark of 5048.
Economic data for the week continued to foretell a slowdown in
the economy, as figures for retail sales and housing starts were
down. And inflation indicators were tame, too. But let”s face it,
as many have pointed out after the fact, the release of the
consumer price data for May was a crock of (fill in the blank).
We were supposed to believe that energy costs for the month
were basically unchanged. What freakin” planet are our keepers
of the data on ?! If we don”t see a correction in the energy
calculation next month, then there is something awfully fishy in
Denmark, err D.C. And I really hate to admit it, but as we
approach the November election, what is to prevent some poorly
paid bureaucrat from accepting a little Hubbel-like hush money to
massage the numbers?
This coming week is going to be a slow one, save for the OPEC
meeting in Vienna (more on this later). And so it”s on to the
Federal Reserve confab of June 27-28. It certainly looks like the
Fed will take a break from raising interest rates further. So far, so
good. The economy is behaving just like they want. And with
the lag effect of all the prior rate hikes, we just have to sit back
and see what the figures tell us in July and August.
On the earnings front, it is “warning season” so if a corporation is
going to miss its number, it might as well confess now, take its
punishment, and move on. Nevertheless, no one is predicting that
the second quarter will be nothing but strong, with First Call
projecting earnings growth of 22% in the S&P 500. It”s the 3rd
quarter and beyond that matters and this week some regional
banks like Wachovia warned that they have an increasing problem
with their loan portfolios. So yes, Virginia, some corporations do
have too much debt. And what of individuals? Following is a
commentary from Ian Campbell on the current investment
environment:
“When an asset bubble builds it can defy conventional
analysis…Only after they deflate are they easily analyzed. The
effects are pervasive and often take years to overcome.
Consumers and companies suddenly find they are less wealthy,
and cut spending. Growth falls and unemployment rises.
Property prices tend to fall. Property owners may find that their
homes are worth less than their mortgages. Debt imposes a
burden that many can not bear.”
Meanwhile, the bond market lapped up the tame economic data
and rallied across the curve.
U.S. Treasury Yields
1-yr. 6.07% 2-yr. 6.36% 10-yr. 5.97% 30-yr. 5.87%
Street Bytes
–Last week, in my rush out of town, I have to admit I didn”t
write an especially cogent statement of position on Microsoft so,
as is my prerogative, I am giving myself a second chance.
Are Justice and the state attorney generals on a giant ego trip, as
economist Robert Samuelson described it? Yes.
But did Microsoft blow it? Yes.
Did MSFT lie and use hardball tactics that clearly crossed the
line? Yes.
Should this whole case have been settled by severely penalizing
MSFT for past transgressions? Yes, but just a huge fine.
Should MSFT now be broken up? No.
Do I want to learn a new operating system? No.
Does Windows suck? Yes.
Can I survive generally lousy software? Yes, with little change in
my lifestyle.
Am I already sick of Bill Gates”s smirk on my television screen?
Yes.
Are Microsoft”s best days yet to come? No. And on this last
point, when I mentioned last week that its “glory” days were
over, I meant that I didn”t see it being anymore than a tech
market performer and, if you are going to place a big bet on the
tech sector, I strongly recommend investors choose a diversified
technology fund, rather than trying on your own to come up with
the next Microsoft, Cisco, or Rambus. That”s my opinion and
I”m sticking to it.
But there is a quote from a recent speech by Treasury Secretary
Lawrence Summers that I should place into my archives
concerning technology in general. It warrants attention.
“An information-based world is one in which more of the goods
that are produced will have the character of pharmaceuticals or
books or records, in that they involve very large fixed costs and
much smaller marginal costs [i.e., it costs a lot to write software
but not much to make an extra copy]…[This] means that the only
incentive to produce anything is the possession of temporary
monopoly power – because without that power…the high initial
fixed costs cannot be recouped. So the constant pursuit of that
monopoly power becomes the central driving thrust of the New
Economy.”
–Authorities broke up a massive securities fraud operation
involving all 5 New York crime families. Tony Soprano was
NOT implicated, thus ensuring that my Sunday television
schedule will not be impacted.
–I write about nations like Indonesia as extensively as I do
because unrest in these countries can lead to a domino effect in
the emerging markets whereby investors flee, the economies
collapse, the emerging middle class is once again reduced to
eating bugs and, eventually, U.S. corporate earnings can be
impacted leading to a falling domestic stock market. [When I
look at myself in the mirror each morning, this is my mantra…It”s
called negative reinforcement.]
Well, this week the Journal had a piece on a Merrill Lynch report
that labels Southeast Asia”s recovery as “increasingly fragile as
domestic troubles and signs of weakness within the U.S. (the
leading market for their exports) drives investors away.”
–Oil: My favorite topic. Yes, it was back to premium beer at the
Trumbore homestead this week as crude continued to surge. And
yes, rising fuel prices could play a role in our presidential election
if it contributes to a slowdown which begins to throw people out
of work. Yes, the price of oil matters.
But for those looking for relief at the pumps, keep in mind that 7
of 10 OPEC nations are already operating at full capacity, i.e., it”s
unlikely OPEC can / will increase production enough to lower
prices in a big way (to say below $25).
Once again, the U.S. is paying for its reliance on foreign oil. We
just never learn. OPEC meets next Wednesday and look for them
to increase production 500,000-1 million barrels; again, not
enough to put a significant dent in prices unless the world
economy were to begin to slow, which isn”t in the cards just yet.
And as for the hue and cry against Big Oil…and, by inference, my
beloved little drillers, geezuz, do we now have an investment
climate where we are allowed to only reward those who lose a
ton of money, or trade at multiples of 150? The oil companies
have been suffering through a long profit drought. Let my people
go!!
Margin debt has fallen to $241 billion in May, down from a
record high of $278 billion in March, a positive sign.
More International
–Syria: A man on the street in Damascus commented about his
fallen leader, Hafez al-Assad. “He was a messenger from God for
Syria.” Oh, give me a freakin” break. How about this. “Hafez
Assad was a messenger from the Devil!” This guy was horrid, yet
there was President Clinton saying how much he respected him.
Now I recognize there is such a thing as diplomatic niceties, but
c”mon.
So where does Syria go from here? Certainly there is cause for
cautious optimism with the elevation of Assad”s Western-
educated son, 34-year-old Bashar. But the big issue is can
Bashar survive? The Assad”s are members of the Alawite Muslim
sect which constitutes only 12% of the population.
–“60 Minutes” may have blown it in believing an Iranian
“defector” regarding Iran”s involvement in the Pan Am 103
bombing. Both the FBI and CIA say the source is not credible.
As you would expect, CBS sticks by their story.
–Zimbabwe: Parliamentary vote is still slated for June 24-25.
The U.N. is so confident the vote will be fair, it pulled out of the
process (said the editor with dripping sarcasm). Zimbabwe”s
foreign minister said, “We condemn everything the U.S. and
Britain are doing and if it is going to be a war between blacks and
whites, so let it be.”
–South Africa: I saw a big article on the plight of the South
African stock market and there wasn”t one mention of AIDS and
the demographic implications on the nation”s economy. If your
average life expectancy is declining to a projected 35 years of age,
it seems to me that would be important. Where are you going to
get your workers and / or who is going to buy your products?
–Japan: Key parliamentary elections also on June 25. Japanese
ministers have been receiving packages containing minuscule
amounts of radioactive powder with notes warning that nuclear
material is finding its way to North Korea. A harsh reminder of
the Aum Shimri cult”s nerve gas attack in 1995.
–Kosovo: 500 citizens have died in ethnic strife since NATO
peacekeepers moved in. And in Montenegro, Serb opposition
leader “Count” Vuk Draskovic survived another assassination
attempt. So here is my guess at the scenario that might play out.
Serb terrorists take out some peacekeepers, NATO”s resolve
starts to waffle a bit and Milosevic then goes after Montenegro”s
West-leaning government. Then he sits back and observes
whether or not the West cares and is willing to risk casualties.
Meanwhile, Russia, having just loaned Milosevic $100 million,
breaks with the NATO force.
–Mexico: Crucial presidential election on July 2 between the
long-time ruling PRI candidate, Francisco Labastida, and the
PAN upstart, Vicente Fox. Should Fox lose in a close vote, you
can be sure there will be cries of fraud as well as violence.
–Britain: Prime Minister Tony Blair is not getting the expected
“baby bounce” in the polls and the British electorate seems to be
tiring of the seeming lack of direction within his government.
Blair, you”ll recall, came in as a Clintonesque ”change merchant,”
proposing a “Third…New Way of governing,” yet there seems to
be little behind the facade. Or, as the National Post”s (Canada)
John O”Sullivan put it:
“Vagueness is at the core of the Third Way philosophy. It is a
verbose emptiness. And the more Mr. Blair and Mr. Clinton
speak, the clearer it becomes that they have nothing distinctive to
say. The British people, watching Mr. Blair founder on
television, began to realize that last week. The American people,
watching the Dow, have yet to tumble to Mr. Clinton”s essential
inconsequentiality.” [Courtesy HK]
Los Alamos
On Friday afternoon, the two missing hard drives were found
behind a copy machine in the very same restricted area from
which they supposedly were taken. It seems clear that someone
put them back and the FBI is labeling it a criminal investigation.
These files contained not just all of the U.S. plans for
counteracting a terrorist nuclear attack, but also contain the
design plans for U.S. AND Russian warheads. Every American
has a right to be extremely upset over this incredible
breach of security.
It took officials at Los Alamos one month before they advised the
FBI of the missing files. Senator John Warner, who has
mellowed considerably over the years, was absolutely livid as he
took to the Senate floor and thundered, “This happened on
(Energy Secretary) Richardson”s watch!” Richardson, after the
Wen Ho-Lee fiasco, had assured Congress that our nuclear
facilities were now secure. And yes, incredible as it seems,
scientists with proper clearance did not even have to sign a log to
access these Top Secret files.
This Week in Politics
–The latest polls continue to show George Bush with an 8-10%
lead over Al Gore. And, in a surprising trend, Bush wins 46-41
when people were asked who could best manage the economy.
That helped to send Gore on his current “prosperity” tour. As he
crisscrosses the country, his speeches are peppered with pilfered
lines from none other than Ronald Reagan.
–Gore was in my home state of New Jersey this week,
campaigning with Senate candidate Jon Corzine. Reporter Ron
Marsico of the Star-Ledger captured the scene as the two stopped
in a diner.
“Howdy. How ya doing?” Gore said with a Tennessee drawl that
has become more pronounced since last year.
–Gore”s presumptive veep nominee, Energy Secretary
Richardson, can start looking for a job in the private sector. The
mess with the Los Alamos files has ended the quest. Plus
Richardson has not been able to prevent rising oil prices, a second
strike against him.
–Gore replaced campaign chairman Tony Coelho with Commerce
Secretary Bill Daley. The campaign released a statement that
Coelho left for “health reasons.” Coelho really left because he is
a walking investigation.
–Gore unveiled his tax cut plan, less than half that proposed by
Bush. But Gore is going to have a tough time convincing the
people that Bush”s plan is “a risky scheme” when it is reported
that the projected budget surplus could be as much as $1 trillion
higher than originally estimated.
–But in New York, a New York Times / CBS poll has Hillary
with a 44-39 lead over Rick Lazio. Lazio could be damaged by a
report that he profited from the takeover of brokerage firm Quick
& Reilly. Basically, Lazio bought aggressive ”call options” just
weeks before the takeover a few years back, turning roughly
$2,000 into $16,000 in a short period of time, while
coincidentally, Quick & Reilly executives were contributing
substantial amounts to Lazio”s campaign coffers.
The SEC never investigated the activity, and there may not be
anything illegal about the transactions, but the appearance of
impropriety is there for all to see. Best case, Lazio”s profit
cancels out Hillary”s cattle futures gain as an issue. Worst case,
the press will attack until Hillary ekes out a 51-49 victory.
–In the interest of full disclosure, I have officially contributed to
the New Jersey Senate campaign of Republican Bob Franks. For
this reason I will temper my Jon Corzine remarks as I struggle to
retain my objectivity.
–Finally, the House voted to repeal the inheritance tax by 2010.
Hip hip hooray! And the vote, as it stands, is veto proof.
But…lest we all get too giddy, there is a ton of political
maneuvering left before this issue is put to bed.
Random Musings
–A detailed study on the death penalty showed that 2 out of 3
convictions were overturned on appeal, mostly because of serious
errors by incompetent defense lawyers (another example of full
employment?) or overzealous police officers and prosecutors who
withheld evidence. The report also reached the conclusion that
the appeals process takes as long as it does because the system is
fraught with error. And the study shows there is no reduction in
the homicide rate in states with capital punishment.
But there is also no proof that one innocent has been put to death
which should lead folks to believe that, with all of its
imperfections, the system does work. It just seems that there is a
better national standard that could be applied.
“If there be any doubt…death must be ruled out.”
–Sonny Cochran
–The World Health Organization says 14,000 people die each
year in the U.S. from drug resistant microbes that infect them in
hospitals. And, in a related matter, the world continues to build
up a resistance to common antibiotics. For example, in India,
typhoid was typically cured with a 3-drug cocktail. Today, that
no longer works. So the next time we hear of a natural disaster in
that region, the final toll could be staggering.
–San Francisco is building special rent-subsidized apartments for
city teachers since they can”t afford the obscene rental and home
costs in the area. Just another sign that the real estate bubble
must pop.
–Support for the British royal family is at an all-time low. For
the first time, less than 50% say the country would be worse off
without the monarchy.
–After a protracted legal battle, Richard Nixon”s estate received
$18 million for his White House tapes. Attorneys get half and, as
the law now stands, the rest will help pay off his estate taxes.
–The average first year salary for a Harvard MBA grad will be
$140,000.
–In a horrific tragedy, dogs in Nashville, IN mauled a 71-year-old
female census worker to death. Not to belittle this, but it
reminded me that when I was selling books door-to-door in
Oklahoma back in the summer of ”78, I was bit by a dog as I
approached a house. And then the owner didn”t even buy a book!
–George Trofimoff, a retired Army Reserve colonel, was arrested
for spying for the Soviets for some 25 years. He had access to
Top Secret information while stationed in Germany. Germany
actually arrested him in 1994 but didn”t have enough evidence to
convict him. I hope this dirtball didn”t have one restful sleep
since then, knowing he was being tailed.
–Italy pardoned Pope John Paul II”s assassin, Mehmet Ali Agca,
after 19 years. The Pope had long since forgiven him. Agca was
immediately extradited to Turkey and imprisoned for a murder he
had committed there. We never learned who really was behind
the attempt on the Pope.
–The awful incident in Central Park last Sunday really is sad in
that, once again, it helps to tarnish the great job that Rudy
Giuliani has done for New York when it comes to reducing crime.
But, of course, the real truth doesn”t get out. Anyone from the
New York area knows that the one day all year to avoid
Manhattan is the Puerto Rican Day Parade. Every dirtball in the
tri-state area comes out of their hole for this one. Next year, the
police should launch a giant sting operation and arrest a few
thousand all at once. [And, of course, there are millions of
good citizens watching the parade, as well.]
–A Pew Research Poll found that only 31% of younger adults say
they enjoy keeping up with the news. Separately, across all age
groups, back in 1994, 74% reported watching a news broadcast
or news-based program on television the preceding day. Today,
that figure has plummeted to 55%. In 1987, 71% viewed an
evening network newscast. Today it”s 50%. Only 17% of those
younger than 30 watch a nightly broadcast.
Now, of course, many are getting their news from the Net (about
50%) but the survey also points out how the networks don”t get
it. The puff news that passes for hard stuff is a joke. On
Wednesday, NBC News didn”t have a follow-up report on the
missing Los Alamos hard drives. That day, a Senate panel had
grilled Energy Department officials and it was important news.
So what does NBC show instead? Their 50th “in depth” study of
weather patterns this year (when in doubt, talk about the weather
in the year 2104), plus, an all-important story on why red traffic
lights are so long. I kid you not.
The one encouraging item in the Pew study was that newspaper
readership has declined only slightly.
–And remember, NBC did a recent “in depth” piece on what to
do if you win the lottery.
–Back to what”s important. Scientists have discovered that the
Neanderthal”s diet from 28,000 years ago was 90% meat and
10% hydrolyzed soy and sodium erythorbate (actually, I”m
guessing on the latter two). “Modern humans were probably
more efficient in terms of their organization, but the Neanderthals
were very close,” said one researcher. So if someone calls you
“Neanderthal,” just say, “Why thank you very much!”
–NBC News, in depth, parallel parking.
Gold closed at $289
Nymex Crude Oil, $32.33
Returns for the week, 6/12-6/16
Dow Jones -1.6%
S&P 500 +0.5%
S&P MidCap +0.3%
Russell 2000 -1.8%
Nasdaq -0.4%
Returns for the period, 1/1/00-6/16/00
Dow Jones -9.1%
S&P 500 -0.3%
S&P MidCap +11.7%
Russell 2000 +1.8%
Nasdaq -5.1%
Bulls 49.1%
Bears 33.6% [Source: Investors Intelligence]
Brian Trumbore
