Wall Street
There was an interesting piece that crossed the Reuters wire last
weekend, an interview with Yale Professor Ray Fair. He
commented that the Federal Reserve is dealing with the most
delicate market scenario in history. The main premise being that
too much “wealth effect” has been baked into the market and that
if inflation really did pick up, the Fed would raise interest rates
substantially higher, even if it meant a market crash.
But fear not, Fed Chairman Alan Greenspan made his semi-annual
appearance before the Senate Banking Committee on Thursday
and he said what everyone wanted to hear. The economy was
slowing and there was a good chance we would see a soft
landing. Stocks and bonds took off on his testimony.
In fact, the Fed”s projections for 2001 would be just perfect.
GDP of 3.25-3.75% with 2-2.5% inflation. So if you want to
make an educated investment decision, looks like clear sailing
ahead, right?
Well, while no one disputes that the economy has slowed, I”m
increasingly in the camp that says this may be only a temporary
lull. A look around the world should give one a pretty good
feeling, economically. [Politically, it”s a mess, but until we have a
real crisis, confidence should remain high.]
And, as has been the history of this record economic expansion,
past dips in performance have not been long-lasting.
Inflation is out there. The consumer price index for the first 6
months of 2000 has risen at an annualized rate of 2.6% vs. 1.9%
for the comparable period last year. And while energy prices
appear to have peaked for the time being, if the economy picks up
speed again over the coming months, I don”t see how we can
avoid seeing most inflation gauges above 3%. And while 3% may
seem comfortable to you and me, it isn”t to the Fed…because they
can”t let it get to 4.
But we will learn a lot more this coming week when figures for
consumer confidence, employee costs and the first # for 2nd
quarter GDP are released, as well as Greenspan”s second round
of testimony, this time before the House Banking Committee.
Bottom line, while the Fed may not raise rates in August, it is still
way too early to declare “all clear.” And, of course, Greenspan
threw all of his usual caveats into his comments. So, on Friday
the markets backed off.
For the week the Dow Jones lost 79 to finish at 10733, while the
Nasdaq declined 3.6% to close at 4093.
Aside from Greenspan”s remarks, the market was dominated by
news on the earnings front. Since way back, I have never
questioned the earnings outlook for the first half of 2000 and the
raw #”s continue to be strong.
But while stocks like Sun Microsystems and IBM reported
figures (and/or outlooks) that were well received, others like
Lucent and Agilent were pummeled. Which leads me to a topic I
promised to discuss at length…
Valuation…
My problem has never been with the market level of the Dow
Jones (or the valuation of much of the S&P 500). It”s the Nasdaq
that bugs me. But let me give you both sides of the valuation
argument.
Ed Kerschner, noted strategist at PaineWebber (and a man who
has called this bull market as well as anyone), wrote a
commentary this past May 30 wherein he said that “in the long
run, only two things determine stock prices: earnings and P/E
(with P/Es, in turn, a function of expected earnings growth). So a
very fast growth rate is worth a very high P/E multiple. In a low
inflation environment, the S&P 500, which has a 7% secular
earnings growth rate, is worth a 30X P/E (its current trailing 12
month multiple). A 15% growth stock is worth a 65X P/E. And
a 20% growth stock is worth a 106X P/E.” [I apologize I can”t
replicate the accompanying charts.]
Now the historical market multiple on the S&P 500 is about 14.
So you see his point that stocks growing faster than the market as
a whole deserve to be rewarded as such.
But the other side is represented in an article which will find its
way into every history book on the Great Nasdaq Bubble of
1999-2000, Jeremy Siegel”s piece in the March 14 edition of The
Wall Street Journal.
At the time, the Nasdaq was just beginning to crater from its all-
time peak of 5048. Siegel, one of the preeminent market
historians, and author of “Stocks for the Long Run,” writes:
“History has shown that whenever companies, no matter how
great, get priced above 50 to 60 times earnings, buyer beware…
“But many of today”s investors are unfazed by history – and by
the failure of any large-cap stock ever to justify, by its subsequent
record, a P/E ratio anywhere near 100.”
When Siegel wrote the piece, Cisco, Sun Micro and Oracle, for
example, were all at highs and had P/Es in excess of 100 (based
on trailing 12 months).
“Once a firm reaches big-cap status – ranked in the top 50 by
market value – its ability to generate long-term double-digit
earnings growth slows dramatically.”
So far, in the 4-plus months since the article, Siegel”s theory has
begun to take shape. But where are we today?
I”ve picked 6 leading, market bellwether, technology issues. Next
to each is the projected P/E based on 2001 earnings estimates and
Friday”s closing share price. If you”re in the camp that says the
economy will slow, in earnest, perhaps the earnings estimates are
too high.
Cisco – P/E 97
Oracle – 83
Sun Microsystems – 79
Again, this is for 2001, not 2000 earnings. And for Sun, I took a
revised earnings forecast issued this Friday of $1.32 (as estimated
by a leading analyst who, interestingly enough, also set a $130
price target…a 100 P/E).
And all three of these companies are projected to see earnings per
share growth of around 30% in 2001 and 25% or so in fiscal
2002…a gradual deceleration befitting their mammoth size.
In all three cases, I would submit the upside is limited.
Now the other three companies and their projected 2001 P/Es.
JDS Uniphase – exactly 200…$134, 2001 EPS est. of $0.67
Rambus – 225
Yahoo! – 238
All of these are leaders in their fields…no one is questioning that.
But they are not only priced for perfection, they are priced for
nirvana!
These latter three are also no longer startups. I”m sure Professor
Siegel would agree with me that it”s hard to build a case for
investing in them. And if these stocks ever really disappoint, a la
Lucent, you are looking at a 40-50% hit in one day.
Street Bytes
–The bond market, worried two weeks ago that the Fed was
going to raise interest rates again, has now decided Greenspan
gave the “all clear.” That is until the next bad piece of data.
Long interest rates are at their lowest levels in 3 months.
1-yr. 6.03% 2-yr. 6.31% 10-yr. 5.99% 30-yr. 5.79%
–Oh Ca-Na-Da!….According to my records, for the first time in 5
years the benchmark Toronto Stock Exchange 300 has finished
a week ahead of the Dow Jones.
–Columnist / Economist Paul Krugman made an obvious point (I
put it this way because I”m mad for not saying it myself earlier),
that being how calmly Americans are taking the recent rash of
foreign takeovers. Part of the reason is racism, whether we want
to admit it or not. European acquirers are not seen to be as
sinister as the Japanese were in the 80s. The other reason is
because back then, Japan really was viewed as a threat to our
livelihoods. The Japanese model seemed invincible. But the real
reason we don”t care about the latest foreign invasion is because
times are so good.
–Speaking of Japan, the Bank of Japan didn”t raise interest rates
on Monday, as had been rumored, but probably will in coming
months. Corporate Japan has fretted this will, of course, crimp
already feeble earnings.
–Do you want a couple of examples of how bad things are in dot-
com land? CDNow, once trading at $35, received a takeover
offer from Bertelsmann for around $3. And DrKoop.com is
receiving some kind of offer as of Friday afternoon. The market
is telling you that if it”s real, the company may fetch about $2. It
once traded at $45. In the words of NBA player Derrick
Coleman, “Whoopty damn doo.”
–The German government unleashed a series of major tax
reforms, lowering corporate rates from 40% to 25% while
dropping personal rates as well. The changes should have a huge
positive impact but they are phased in over too lengthy a period
of time.
–Energy: My oil stocks got whacked this week. Back to Blatz
Beer for this guy. [If you don”t see a column next week that
means I was poisoned.] The Saudis are releasing some crude, just
how much is unknown, and oil fell $3 to below $29. It needs to
go even lower but, frankly, it is very difficult to land the price
perfectly at the $25 target set by the Kingdom. Continued
volatility for the energy issues.
By the way, Alan Greenspan said that soaring energy prices
helped to reduce spending. That”s a crock. Impact earnings?
Yes. But as I”ve proved to you before, you shouldn”t be
canceling a vacation because of rising gas prices. And now,
wouldn”t you know it, pump prices are tumbling in the very
Midwest where we were forced to endure countless network
news reports just a month ago.
–My steel production indicator has reached its lowest level since
last February. Just a summer vacation blip? Or something more.
Stay tuned.
Russia / G-8
“Pssst…pssst…hey, Tony, over here, it”s Vladimir.”
I imagine that Russian President Vladimir Putin is buttonholing
the leaders at the G-8 meeting in Okinawa, and he has just one
goal in mind; drive a wedge between the U.S. and its allies.
Putin already had a very busy week. First, he went to Beijing
where he signed a joint agreement with China”s President Jiang
Zemin wherein the two stated that the “presence of a missile
threat is totally unjustified.” Of course just a little while ago
Putin told President Clinton that he agreed a threat did exist.
Most importantly, the Russians and Chinese agreed to cooperate
in their efforts to “defy U.S. hegemonism,” a common theme of
my reviews the past few months. And Russia announced it would
come to China”s aid should the latter attack Taiwan.
A China expert in Tokyo commented this week that reactions to
the missile defense system are “probably the most important
issues we have been facing since the collapse of the Soviet Union,
because they are already contributing to the formation of a new
kind of alliance system, and are therefore likely to shape the
international system of the future.”
So after making nice with China, Putin then headed across the
Yellow Sea (that”s your geography lesson for the week) to
Pyongyang, the capital of North Korea, where he was kissed
repeatedly by North Korea”s leader Kim Jong-Il. [The pictures
were comical. Putin looked like the little boy who was
embarrassed to be hugged by his grandmother.] “Yeah, yeah.
Let”s get on with it,” you imagined him saying. And Putin
convinced Kim to agree to abandon the North”s missile program
if other nations would provide rockets so North Korea could
pursue a space initiative.
Now you should be thinking, what the heck does North Korea
want with a space program when their people are eating dirt? Of
course it doesn”t take a true rocket scientist to understand that if
the West were to give the North booster rockets for the purposes
of placing satellites in space, the same rockets could be used to
carry warheads.
So, we”ll see if the West”s leaders, particularly those in the U.S.,
are truly morons and agree to this. [As of this morning, they
were correctly skeptical.] For Putin, however, it could be another
PR coup. “Hey, I got Kim to abandon his ballistic missile
program, why does the U.S. need a missile defense for a
threat that doesn”t exist?”
But while Putin creates mischief overseas, there are signs his
popularity within Russia is slipping. The approval rating for his
domestic policies has actually fallen from 57 to 39 percent and
inflation is accelerating.
And the battle against the oligarchs continues to heat up. Now
everyone agrees they are a rather nasty, brutish bunch who do not
have the people”s best interests at heart. This week, the most
visible business leader, Boris Berezovsky, resigned his seat in
parliament to launch a new opposition movement. He”s so
despised the effort seems doomed to fail.
But it”s the strong-arm tactics that Putin is employing which
worry even communist leader Gennadi Zyuganov.
“Either we respect democratic methods and observe fundamental
human rights or everything will turn into a brawl. We agree that
there is a need to fight corruption and to strengthen the authority
of the state, but in the name of what? In order for five new
people to be in charge of everything?” [Source: Dimitri Simes]
This, of course, would be dictatorship.
Missile Defense, continued
After my piece of last week on how we may have to rethink our
whole defense policy of obliterating a nation that has the temerity
to strike us first, I saw a quote from Republican Senator Jon Kyl
of Arizona.
“Would we really incinerate every Iraqi because of some action by
Saddam Hussein? I”m not sure we would, and I”m not sure we
should.” [Source: Eric Schmitt / Sunday Times]
However, Kyl doesn”t go on to echo what my main point is. We
can”t incinerate Iraq (or Iran or North Korea) because we will
inevitably devastate friendly neighbors like Turkey or
South Korea. But you can see how the debate is shifting.
And then there is this headline from the July 24 issue of Defense
News.
“U.S. Missile Defense System Pushes President a Step Back”
Ironically, I had watched the classic film “Seven Days in May”
last week, where the head of the U.S. Joint Chiefs of Staff
attempts a coup over a disarmament treaty that has been signed
by the American president and the then Soviet Union.
Of course you watch it, draw interesting parallels and then say to
yourself, “At least we don”t have to worry about that these
days.”
Or do we? Reporter David Wood explains that in the event of a
national emergency, as Americans should know, our leadership in
Washington is rushed to a secret bunker called Site R.
The command and control center is part of an effort “to secure a
cherished American political principle: Elected civilian leaders are
in charge, not the military – especially in wartime.”
But the proposed national missile defense system changes all of
that. With NMD the system “would have to react so quickly to
the threat of incoming warheads that its military operators would
have to make the decision to fire.”
“Thus,” Wood explains, “the decision to go to war, perhaps the
most grave that a democracy can face, would be removed from
the president in the Oval Office and given instead to an unknown
military officer sequestered in an underground command post.”
“Warheads could detonate on American soil in minutes. So, it
would require a snap decision under enormous pressure, based on
what little could be learned about the apparent attack.”
Evidently, the White House was caught unprepared when Wood
asked who would be in charge.
Under the old Cold War scenario we would most likely wait for
an actual detonation, let the smoke clear and assess at that time
before ordering a counterattack. This is called the “ride-out”
option.
NMD increases the pressure for a quick-draw response. And
regardless of the system in place, as missile expert John Pike said,
“There just won”t be any time for mere human meddling.”
More International News
Mexico: So President-elect Fox wants to increase the number of
legal immigrants to the U.S. But now the studies are coming out
which show that the poverty rate among Mexican immigrants
already in the U.S. is 33%. [Source: Professor George Boras]
That”s bad enough but if we ever get that economic downturn I
called for two years ago (the editor said sheepishly), Americans
would not be as tolerant as most are now when they realize the
Mexicans are sopping up the social services.
Africa / AIDS: The U.S. has now agreed to spend $1 billion on
helping sub-Saharan Africa battle the disease. At the same time, I
was struck by a statement Al Gore recently made at the NAACP
convention. “I have made more trips to Africa than I”ve made to
Asia.” So why did it take almost 8 years, Mr. Vice President, to
recognize the staggering AIDS problem? [Note to Republican
leaders: This stirring question would be perfect for the debates.]
China / WTO: The Senate is not going to take up the issue of
Permanent Normalized Trade Relations with China until
September. Senators Thompson and Torricelli are trying to
attach a rider to the bill whereby China”s missile export program
would come up for annual review. Fed Chairman Greenspan, in
his own Senate testimony, said this was a bad idea. Butt out, Mr.
Chairman, and stick to interest rates.
Camp David: Nothing to comment on. But it will be interesting
to see if Clinton cuts short his G-8 trip. [This just in…he will.]
Iran: The government test-fired a new medium-range missile that
is capable of reaching Israel or U.S. troops stationed in Saudi
Arabia. However, our intelligence experts reassure us that the
actual threat doesn”t exist for a number of years. I guess we just
sit around until then.
Iraq: The old battle between former UNSCOM Chairman Richard
Butler and his weapons inspector Scott Ritter has flared anew.
Ritter, the former hard-ass, now claims (according to Butler) that
Iraq has been “qualitatively disarmed.” Butler vehemently
disagrees, citing facts such as Iraq”s force of 20 to 30 Scuds and
their own test-firing of medium-range missiles. [This is why we
call Iran and Iraq “rogue” nations. They just love to fire giant
bottle rockets.] Butler also argues that Iraq”s chemical and
biological capabilities have been rebuilt.
Colombia: Expect more stories like the following as the U.S.
prepares to become more heavily involved in this nation”s civil
war. This week 13 officers were killed in a provincial town after
surrendering to rebels. The rebels then executed them. Message
delivered.
Nigeria: It happens so frequently it”s almost not news. But the
death toll from 2 recent oil pipeline explosions is at least 280.
The natives collect oil from leaks in the pipeline. Of course,
someone invariably drops a match and poof!
Austria: The European Union is exploring the issue of lifting
sanctions on member-nation Austria. You”ll recall they were put
in place last winter when Austria”s far-right Freedom Party
became a partner in the government”s ruling coalition. France is
adamantly opposed to lifting them. Look for more fireworks
before this is all finished. France and Italy, in particular, face
internal threats from their own right-wing movements and they
need to be careful what signals they send to their respective
electorates.
Hott Spotts: The July 20 piece profiles Northern Ireland. Next
week, “Diamonds.”
This Week in Politics
“(The Republicans) huge tax scheme…will stimulate higher levels
of economic growth.”
–Vice President Al Gore, speaking this week to the Democratic
National Committee in Kansas City.
I had to re-read this when I first saw it because it is the first time I
have ever seen a politician say he was anti-growth.
Gore went on to declare that if the economy is too hot, that
would be inflationary, force interest rates up and kill the stock
market. So we can elect a President and Fed Chairman, all rolled
into one!
If this is where Gore wants to take the debate, Republicans
should be ecstatic.
The House and Senate continued on their merry tax-cutting ways,
understanding, of course, that many of the bills will not be able to
overcome President Clinton”s vetoes. But the Republicans have
their campaign issues.
Regarding the estate, or death tax, commentator Robert Novak
put it best.
“Taxed when you make it. Taxed when you invest it. Taxed
when you die.”
The whole class-warfare issue is coming to the forefront. If you
are reasonably wealthy, you”re supposed to feel guilty.
I know how I lose a reader or two each week when I discuss
politics. But decisions our politicians make impact our lives on
many different fronts. However, in the interest of bipartisanship,
I won”t discuss Al Gore”s appearance on “Meet the Press” last
week, except to say that Tim Russert made him look like a fool.
Both Bush and Gore are now battling it out for the post-
convention “bounce.” Since the Republicans go first, look for
Gore to name his veep pick a few days after the Republican
convention in an effort to steal Bush”s thunder.
As of this writing, John McCain made some waves by announcing
he may be interested in the #2 slot after all. But it increasingly
looks like former Defense Secretary Dick Cheney could be the
choice, heart problems and all.
The Democrats, for their part, are enlisting the support of
Caroline Kennedy who will give a prime time address to the
convention, a rare appearance for this classy woman. Actually, a
brilliant move.
–I”m not going to comment on Hillary”s alleged anti-Semitic slur.
That would be participating in the “politics of destruction.”
–IRA Reform: This week the house approved legislation to
increase the maximum contribution on an IRA account from the
current $2,000 to $5,000 (over three years) as well as the
maximum 401(k) contribution to $15,000 (over five years).
–Senator Paul Coverdell (R-GA.), seemingly in good health, died
of a brain hemorrhage this week. He was a close confidant to
George W. and will be missed.
Random Musings
–I guess it”s a reflection of the great times we live in, with
prosperity widespread and the nation at peace, that one of the big
issues to emerge is traffic safety. First, the fact that increasing
numbers of Americans ignore red lights, resulting in 800 deaths a
year and, second, the dangers resulting from the fact that our
automobiles have become personal offices, often at speeds of
65 mph.
I haven”t made many calls from my own cell phone while
speeding about. [Personally, I have found playing air guitar to
Thin Lizzy”s “The Boys Are Back In Town” to be far more
dangerous.] But it sure seems like a no-brainer to ban the
practice. You all know it should be done. And it cracks me up to
hear about the states and towns that will now start public service
campaigns on the dangers of driving while talking on the phone.
“If you are discussing the fate of Jerusalem, make sure you pull
over first.”
Accidents happen. But I can”t imagine what it would be like to
lose a loved one because someone ran a red light while
coordinating their next business appointment. That”s not an
accident. That”s manslaughter.
–Another study seems to definitively show that music and
proficiency in math go hand-in-hand at an early age. And the
impact of listening to classicists like Mozart or Lawrence Welk
does not, surprisingly, extend to other disciplines.
–Last week I blasted Professor Harold Bloom for his idiotic
comments on Harry Potter. This week a Professor Hugh Kenner
said Potter stories were perfect for new readers. #1, kids think
they”re fun to read, or, as Kenner puts it, the worst thing is for
kids to think they”re “reading some god-damned assignment.”
Gosh, I wish I had this guy in school.
–My comment on the Florida tobacco verdict of last week,
wherein I supported Big Tobacco, drew fire from an old friend.
But while Jimbo blasted me, he did have a thought I could agree
with. Said Jim, “I would be willing to relieve the tobacco
industry from the liabilities they have assumed for themselves if
they would teach deer and geese to smoke and chew, thus
eliminating these species in the next 20 years.”
–Newsweek reports that the new craze in these collapsible
scooters (like the “Razor”) has developed into a $200 million
industry. And I agreed with the thoughts of one pediatrician who
said, “Anything that gets kids away from Nintendo and TV and
the computer and gets them outside is very good.”
–Back to traffic. My friend Liz S. was recently transferred from
the west coast of Florida to Austin. She reports that fewer folks
run red lights in Austin because they are simply smarter. Equal
time for Florida residents next week.
–Back to deer (from last week): NBC reported that there are
now 30 million white-tailed deer in America. They cause one
million auto accidents which result in 200 deaths, annually. And
if the deer start using cell phones…
–The Wall Street Journal reported on Monday that real estate has
now peaked in Silicon Valley. This actually could be a highly
significant economic indicator going forward. But the New York
Times had a story telling of the ongoing free-for-all in the
Hamptons. Some of the new mansions have hot tubs which can
be turned on with cell phones.
–Half of the world subsists on less than $2 a day.
–Princeton scientists surpassed the speed of light. Geezuz, you
don”t stand a chance if you get hit!
–Special Investigator John Danforth has ruled that the
government bears no responsibility for the Waco disaster. I said I
wouldn”t comment further until Danforth put together his report.
He is as trustworthy as they come. I believe him and hopefully
this puts it to rest. Of course, among some Americans it won”t.
–Britain”s Queen Mother was feted this week in preparation for
her 100th birthday (August 4th). She is a true hero for the courage
she displayed during World War II. So happy birthday, Queen Mum.
Can I buy you a pint?
–Thoughts on HBO”s program on baseball, “When It Was A
Game,” which focused on the sport in the 60s.
As the various guests mentioned, it was a great time to be a fan.
The players stayed with their teams and you got to know them
more intensely. [Of course it was awful for the players as they
were paid dirt.]
Bob Costas summed it up: “What we saw made a deeper
impression.”
And growing up one of the great memories I have was of our
family trips to visit the relatives in the Pittsburgh area. My Uncle
Cop owned an old-fashioned country store with one of those big
candy counters. It was always the next to last stop before we
headed home (the last stop being my cousin”s gas station).
Uncle Cop would give me a whole carton of Topps baseball cards
for the long trip. Boy, I was in heaven…but he hated the way I
threw out that awful stick of gum. As Costas said, if a card was
stuck to it, the aroma would last three centuries.
Gold closed at $280
Nymex crude oil, $28.56
Returns for the week, 7/17-7/21
Dow Jones -0.7%
S&P 500 -2.0%
S&P MidCap -2.5%
Russell 2000 -3.7%
Nasdaq -3.6%
Returns for the period, 1/1/00-7/21/00
Dow Jones -6.6%
S&P 500 +0.7%
S&P MidCap +13.4%
Russell 2000 +3.6%
Nasdaq +0.6%
Bulls 50.9
Bears 31.8 [Source: Investors Intelligence]
*In my Wall Street History piece of 7/21, I update the Investors
Intelligence story.
As always I appreciate your support.
Brian Trumbore
