[Posted 7:15 a.m.]
zzzzz..Fed lowers interest rates half a percent!..wha? huh?..zzzzz
–The week in review
Man, talk about anticlimactic. The Federal Reserve has lowered
short interest rates one full percent in the last 4 weeks and the
market was like, yeah, so what?
And what did the Fed say in their accompanying statement? Due
to the rapidly weakening economy, it was necessary to have a
“forceful response of monetary policy.” They also said that the
weakness is not necessarily just a temporary blip on the path to
permanent prosperity.
Yes, you”d have to be a moron not to recognize that the
landscape has changed. First off, GDP growth for the 4th quarter
was 1.4%, the slowest pace since the 2nd quarter of 1995 (0.8%).
And the NAPM, which measures activity at our nation”s factories,
fell to its lowest level since 1981-82 (by one key measurement,
the production index).
Meanwhile, consumer confidence plunged to its own new
multiyear low for the month of January, a fact that Greenspan and
Company is paying particular attention to. And then there were
the ongoing layoffs by the likes of DaimlerChrysler, to the tune
of 26,000 (20% of their workforce), as they slash production up
to 15%. Plus, G.E. and Honeywell employees are now on
deathwatch as Business Week reports up to 75,000 pink slips are
in the offing.
And while few market reports contain a description of the
international economic scene, a cursory glance reveals that
Britain”s largest steelmaker, Corus, is laying off 6,000
(“redundancies,” to the civil Brits), Deutsche Bank is cutting
2,600 (mostly in Germany, but 600 in New York), and our two
key partners (whom we all too frequently ignore), Mexico and
Canada, are also beginning to see omens of a significant
slowdown.
But there are some good signs as well. Aside from the positive
impact of falling interest rates, the Fed also said in their formal
statement that “inflation is contained.” Plus, while no one
disputes that auto sales are off significantly, they are actually
stronger than expected (except at Chrysler) and gauges such as
new home sales still exhibit decent activity. Even the employment
report for January was seemingly alright (though expect large
revisions on this one down the road).
And then you have the revised projection for the federal budget
surplus over the next ten years, $5.6 trillion, or $1 trillion more
than projected just 6 months earlier. Take away obligations to
social security and you still have $3.1 trillion. Ergo, TAX CUT!
Like I said a few weeks back, the surplus is overrated, unless we
get a lot of it back ourselves.
And while I mentioned plunging consumer confidence, remember
this. We just witnessed our single largest monthly decline in this
particular indicator since October 1990. Guess what? That was
the month of the market bottom, 2398 on the Dow. And keep
this is mind. Regarding the overall economy, the 3 negative
quarters for GDP during the last recession were Q3 and Q4 1990,
and Q1 1991. The market bottom was registered, again, during
that second negative month. [Useful if you think we are now in
the midst of a true recession.]
But whither the equity markets this week? Well, the Dow Jones
digested all of the bad news and focused mostly on the good,
closing up 1.9% to the 10864 level. The Nasdaq, however, saw
its 3-week winning streak come to an abrupt end, losing 4.3% to
finish at 2660.
Disconcertingly, the two indexes collapsed Friday afternoon as
the focus shifted away from the positive Fed action and back to
earnings, i.e., they”re still abysmal, with no absolute guarantee
they will recover quickly.
I thought one statement encapsulated the attitude of complacency
that has permeated the current market environment. AOL Time
Warner said that first quarter growth will be hurt by the soft
advertising climate…but they stuck by their full-year targets.
That”s exactly what the vast majority of companies have done.
First half of the year, not so hot; second half, just fine. Oh, were
it that neat.
But now that the Fed finally has its act together, and, whether
they are aware of it or not they may end up saving the world,
should we still be very negative? Probably not. Real positive?
Probably not. There are still too many uncertainties for this guy.
I”d be surprised if all the bad news on the earnings front is already
out and there is a ton of debt out there that will continue to
restrain consumer spending. [Though as I mentioned last week,
the consumer has been resilient thus far and I still believe we”ll
have a much clearer picture of where we”re headed in just 4
weeks time.]
And then there”s the energy situation…
The Bush administration seems to understand that as bad as the
current problem is in California and other western states, it can
get a lot worse this summer. And guess what? It”s largely about
water.
In the Pacific Northwest, hydroelectric dams account for 75% of
their power (and 20% of California”s). But the current water
supply is now just 50% of normal, due to significantly below
average rain and snowfall, and, to make things worse, California
continues to be a winter drain on hydropower when it normally
needs it most in the summer. So we can talk all we want about
state and federal government solutions, but unless the northwest
gets a slew of storms, the whole region can go the way of the
poor salmon…otherwise soon to be floundering on some barren
rocks.
In the meantime, after a bitter battle in the California legislature,
Governor Gray “We”re losing power!” Davis signed a stopgap
measure whereby the state is now heavily into the electricity
game. While California can now sign long-term contracts with
power generators, it still has to buy up electricity on the spot
market (at far greater prices) in order to keep the lights on short-
term.
And Davis enacted some sweeping conservation measures (it”s
about time) while Californians can look forward to future rate
increases, especially since it will now be easier for the Public
Utilities Commission to raise rates because they have to guarantee
that there is enough revenue to pay off the new bonds that the
state will have to issue. Did you get all that?
Actually, I”m trying to be an optimist here. Deregulation,
California-style, was a failure. The state will now have to see to
it that more power plants are built, whether people want them in
their backyards or not, while consumers conserve and pay more.
And, critically, corporate chieftains need to regain some
confidence that the state is a good place to do business in the
long-term.
Those are just a few thoughts for today. You and I would go
nuts if I tried to come up with a weekly dissertation on this topic.
I will add, however, that I received a good note from OB who
passed along sentiments to the effect that the utilities and power
generators are in essence playing a giant shell game to the
detriment of the consumers. On the surface, you can say that this
attitude ignores the reality that Californians need to face facts.
But on the other hand, at week”s end there were rumblings in
investment circles concerning this topic so I need a little more
time to do some homework before I comment further next week.
Street Bytes
–It was another good week in the bond market, at least until
Friday”s strong employment report (in terms of job creation, not
the actual rate of employment) put a damper on the bullishness.
U.S. Treasury Yields
1-yr. 4.69% 2-yr. 4.63% 10-yr. 5.15% 30-yr. 5.51%
There is no better interest rate forecaster in the business than
PIMCO”s Bill Gross and he is calling for the Fed to drop the
federal funds rate even further, to 4.0% from its current 5.5%
level.
–Chrysler”s UAW contract mandates that line workers receive
95% of base pay through 2003 in the event they are laid off.
With all due respect, buy beer stocks!
–Glowing article in the Wall Street Journal early in the week on
how Cisco has masterfully managed expectations during the
recent market turmoil. They may have spoken too soon. The
stock fell $3 on Friday as the Street anxiously awaits Cisco”s
earnings report this coming Tuesday.
–As part of its $5.6 trillion surplus forecast, the Congressional
Budget Office is estimating annual GDP growth of 2.8% over the
next ten years, a fair estimate.
–Meanwhile, for 2001, the IMF has reduced their previous
forecast for worldwide growth from 4.2% to 3.5%. They project
2.5% in the U.S., 3.0% in Europe. I think both would be real
pleased with those numbers should they hold up.
–And back to the budget outlook in the U.S., there”s a big debate
over the impact of capital gains and the surplus. While last year
was a lousy one in the markets, I suspect I wasn”t the only one
who, nonetheless, is reporting large gains from positions
originating back to ”99 or earlier. Having just received the
depressing call from my accountant, I can now say that 2 or 3
government employees owe their jobs to yours truly. Just get to
work on time, O.K. fellas?
The point being that as I look at it, we could have a negative
surprise on the tax receipt front when we get around to next
year…but a big positive surprise for 2000.
–Denmark generates 13% of its electricity through wind power.
–It”s simply too much how the big web plays, Yahoo, eBay, and
Amazon, rally for a few days, only to fall back. Some investors
just don”t want to believe that the stocks are either grossly
overvalued given current growth prospects (the case with Yahoo
and eBay) or they may not survive (Amazon).
Regarding Amazon, they released their earnings report and the
big admission was that they won”t come close to their earlier
revenue target for 2001, a stark admission for a company that is
supposed to be one of the great growth stories in a “growth”
industry. But you know why I really pick on Amazon? It”s Jeff
Bezos. The kindest thing I can say about him is he”s
disingenuous.
–Early in the week Charles Schwab asked its employees to take a
few Fridays off, without pay, for the good of the company. But
then they realized they had some legal issues so they had to make
the policy voluntary.
Which means that for the first time in corporate history you could
have the following conversation.
Boss: “Did Jim come in today?”
Assistant: “No. He told me he couldn”t stand the place and was
going fishing.”
Boss: “Gosh, I love that kid.”
–The U.S. savings rate fell again in December.
Mad Cow
USA Today”s front page on Monday was basically devoted to
mad cow, as well as the story I touched on last week concerning
CWD (chronic wasting disease) and its impact on elk both here
and in Canada. Scientists, however, continue to assure us that
there is no way CWD will jump to humans.
In Europe, beef consumption is now down 27% since October
because of mad cow and the E.U. has vowed to incinerate 2
million suspect cattle by the end of July. [“Would you like that
well-done or incinerated?”]
And in Britain, you”ll recall that the prions (deformed proteins
that make up the real danger), which can lie dormant for years,
are virtually indestructible, meaning, that you shouldn”t reuse
surgical instruments. So doctors have canceled 60,000 non-
urgent tonsil operations until the government can supply proper
disposable ones.
International Affairs
Middle East: The election is Tuesday and Prime Minister Barak
refused to step down in favor of former prime minister Shimon
Peres, even though polls showed that a race between Peres and
Ariel Sharon was even, while Barak trails Sharon by about 20
percent. [Israeli law allowed a change in candidate up until
Friday.]
Violence has picked up again. And, of course, it didn”t help
matters when Yassir Arafat called Israel”s actions “fascist,” just
one day after a joint statement on the outcome of the latest round
of peace talks was rather upbeat. So with a Sharon victory
virtually assured, we all now await to see which Sharon will
emerge as Israel”s leader; peacemaker or hawk.
China: The government is in the midst of a furious effort to
reshape the debate over the Falun Gong movement. I have been
writing a series of pieces on the Tiananmen Square massacre of
1989 for my “Hott Spotts” link and the parallels are eerie. In
both cases, the Chinese leadership”s main concern was (is) the
evolution of a full-fledged political movement. This week the
public was shown a documentary on the 5 Falun Gong members
who set themselves on fire in Tiananmen Square two weeks ago.
As you can imagine, they were portrayed as crackpots (and they
may very well have been so…sadly, one victim was a 12-year-old
girl).
Of primary concern to China today is their bid for the 2008
Olympics. And it will be interesting to see what kinds of first
signals the Bush administration will send over the coming weeks,
particularly with regards to the proposed missile shield and our
defense of Taiwan.
Russia: Well, President Bush reached out and touched President
Putin this week. Bush refused to say what they talked about but
undoubtedly the missile shield was on the agenda. Russia has
threatened all kinds of countermeasures if the U.S. goes through
with NMD, such as withdrawing from START II and redeploying
multiple warheads on their ICBMs.
Meanwhile, there is the issue of NTV, the last remaining
independent television network. First Ted Turner and, now,
George Soros, want to buy into the station to help maintain its
independence from the Kremlin. This week, for the first time,
Putin said he had no objections. But while he talked a good
game, we await his actions.
And from a Russian medical journal, the following statistics:
–The murder rate in the country is now 4Xs that of the U.S.
[It used to be about one tenth ours.]
–Only 10% of Russians are born healthy these days.
–66% of deaths of men 20-55 are alcohol-related.
Iran: 3 intelligence agents were sentenced to death for the
murders of 4 dissident writers two years ago. So this was a
victory for reformers, right? No. The verdict was seen as a
whitewash since clearly the murders were ordered by higher ups,
possibly the Ayatollah. Now the case is closed. And the very
next day, after these sentences were handed down, 2 more
journalists and a reformist lawmaker were arrested.
Iraq: Saddam Hussein has been currying favor with the
downtrodden masses throughout the Middle East by giving
$10,000 checks to the families of each of the 340 Palestinian
victims of the fighting with Israel; the “martyrs” to the cause.
Libya: Thankfully, one of the two Libyans was found guilty of the
Lockerbie bombing. And it”s important to note, and thank, the
hundreds of police and security experts who worked tirelessly to
establish a link between tiny fragments of a cassette-player to
those involved. But, conspiracy theories aside, there are still a
ton of legitimate loose ends involving not just Libya”s Gaddafi,
but also the potential involvement of players like Iran and Syria.
For his part, Gaddafi remains as defiant as ever. No doubt, there
is a special chamber in Hell reserved for him. All any of us good
people can hope for is that the U.S. and Britain stand firm
concerning his country. But as for pursuing the case any further,
that looks doubtful. May the families of those affected by Pan
Am 103 at least find some peace in the verdict.
Congo: This week, in the land of evil and violence, the Hema and
Lendu tribes clashed in one village. 250 died. One man”s head
was chopped off and paraded on a spear. In Washington,
Congo”s new leader, 29-year-old Joseph Kabila (they keep
changing his age), visited with Secretary of State Powell. I”m
sure Powell was thinking to himself, “Nope, won”t see that cat
again.”
Indonesia: As I”ve reached the conclusion that 90% of the
world”s leaders are corrupt, it should come as no surprise then
that major corruption charges were formally lodged against
President Wahid, setting the stage for a lengthy impeachment
trial. Just when you thought you knew someone.
Colombia: The right-wing paramilitaries (labeled the “defense
forces”) are responsible for more massacres than the rebels over
the past year. Recently, they killed 24 avocado farmers, most of
whom had their heads crushed with heavy stones and a
sledgehammer. [I apologize for being so graphic in the case of
this country as well as Congo, but it”s simply the truth.]
Ecuador: A few months ago a group of oil workers, many from
the U.S., were kidnapped by what was thought to be a Colombian
rebel force. One of the Americans was found shot to death this
week, a 30-year employee of oil drilling concern Helmerich &
Payne. A note was attached to the man”s body. “I”m a gringo.
For nonpayment of the kidnapping of company HP.” The
Ecuadorean government now believes the murder is the work of
common criminals, not the rebels. With hundreds of U.S.
employees in Ecuador”s oil fields, if I”m an executive I”d abandon
the region. And that”s the last thing an already critically sick
economy needs.
India: What can you say? The devastation is unbelievable and if
the government doesn”t quickly get its act together, regarding the
relief effort, they will be taken out.
In all fairness, however, it”s tough for anyone to plan for a
cataclysmic event of this magnitude.
Europe: According to a recent Louis Harris survey, 61% of
French and Germans are “unsatisfied” with the way Europe is
organizing itself, a significant increase over the past year. And
52% of the folks in 8 E.U. nations are against giving up their own
currencies. [Source: Jim Hoagland] This will be interesting to
watch.
Germany: The government is attempting to get the Supreme
Court to ban the National Democratic Party (the neo-Nazis).
Commented the Interior Minister, “With its racist, particularly
anti-Semitic and anti-peace propaganda, and the revival of Nazi
ideas, the (party) damages Germany”s image.” Too bad we can”t
ban it worldwide.
Norway: Neo-Nazis killed a black youth in Oslo this week.
Balkans: President Kostunica hinted that Slobodan Milosevic
could be arrested for economic crimes such as corruption and
money-laundering. This would avoid having to turn him over to
the war crimes tribunal, something Kostunica doesn”t want to do.
And the situation in Kosovo took a turn for the worse as 20
French troops were injured when they tried to break up clashes
between Serbs and Albanians in the Wild West town of Mitrovica.
I will be writing the exact same thing, oh, 5 or 10 years from
now.
Viewpoint from Outside
My friend MR passed along a piece from an acquaintance of his
who currently resides in Senegal, but has also lived in many
different countries over the years.
“One thing we have seen recently as we work and live in the
choice garden spots of the world is the increasingly important
attention being ascribed to the goings-on in the U.S. This is not
because events are any more fascinating, animated or ridiculous
than elsewhere, but because those events have greater impact on
an ever larger portion of people on the globe. That implication is
that the U.S. will need to pay increasing attention to how it lives
up to the high expectations other countries place on them. The
U.S. is condemned to have its institutions, elections, individuals
scrutinized with a microscope whether it likes it or not, and more
people want to have a say in it than being shut out from it.”
[I would add, this is where Colin Powell can have a tremendous
positive impact.]
Random Musings
–It had to have been a first. Last Sunday, both the Washington
Post and the New York Times had glowing front page stories on
the Bush transition, with each quoting Democratic figures like
Senator Chris Dodd. “We were all raised by mothers who told us
we had our chance to make a first impression. The first few days
are certainly encouraging. And a first impression can last you
awhile.”
–Watching Vice President Cheney on “Meet the Press” I thought,
this guy is so good you don”t even know when you”re being spun.
But I must say I have an uneasy feeling about the Wall Street
Journal report that Cheney”s old company, Halliburton, has an
office in Tehran, in clear violation of U.S. policy. American
corporations are not allowed to have operations in Iran while the
sanctions are in place. While CEO of Halliburton, Cheney
vigorously opposed sanctions because he, like every other oil
executive, worried how European companies were grabbing all
the business opportunities and that when Iran finally mended its
ways, it would be too late for U.S. corporations to profit. But
whether you like a policy or not, the law is the law.
–Bill Clinton: Hey, he keeps putting himself in the news! So
now he wants taxpayers to foot the bill on some $700,000 in
office space, though on Friday he said he”d pick up half through
his foundation. Frankly, I”ll believe it when I see it. [And as I go
to post, Bill and Hillary are scrambling on the gifts they received.]
Of course, Clinton apologists will say that, heck, New York office
space is expensive. But did Bill have to pick THE most
expensive property in the whole city?
Meanwhile, our former president is about to embark on his new
career as a vitally important public speaker when he gets
$100,000 for telling his Morgan Stanley Dean Witter audience on
Monday, “We did a lot of good. We did a lot of good.”
Having attended a ton of similar conferences in my prior career,
where all kinds of mildly entertaining folks held forth, I can
honestly say not one of them added any real value. Sure, it was
nice seeing folks like Colin Powell and Newt Gingrich (when the
latter was ”hot”), but you end up going back to your room
afterwards, thinking, “If I”m not taking anything away from it,
why don”t they just bring out a good comedian or magician?”
And since Wall Street still obviously has tons of money to burn,
Al Gore is getting $75,000 for his first post-VP speech, this time
to a UBS Warburg group.
–Baltimore Raven Ray Lewis had the following comment after
the Super Bowl. “If you put this in a storybook, no one would
ever believe it.” Got that right, bro. In a lot of other countries,
you”d already be 6-feet under.
And am I the only one struck by the fact that Lewis”s two co-
defendants for the double murder were both at the Super Bowl?
There”s something sick about that, especially since one was in
rapper Jay-Z”s luxury box.
And here”s a statement bound to offend someone in my audience.
When is a public figure, like Jesse Jackson or a gutty broadcaster,
going to comment on black males who allow themselves to be
branded (a la the Ravens” Ben Coates) by one of the black
fraternities?
–So I was in Washington, D.C. for a few days this week,
ostensibly to go to the Smithsonian in order to remind myself how
ignorant I am on a variety of topics. But I also have some other
observations.
I walked past the White House a few times and didn”t see one
protester. [I really wanted to interview a few.] But on a related
topic, there has been much discussion of reopening Pennsylvania
Avenue, the shorter side of the White House property. Security
folks, however, are convinced that a car bomb attack would
become far too easy if it was. Instead, it”s currently an unsightly
pedestrian mall. And on Sunday there were a bunch of 20-
something guys playing street hockey there. Street hockey! In
front of the White House! I felt like taking them out. [Just a
joke…Mr. Secret Service Man.]
And when I walked by the Old Executive Office Buildling, my
first thought was, look, that”s where the Clintonistas trashed all
the computers!
–By 2020, 83.6% of the world”s population will be in developing
countries. In 1970 it was 73%.
–In South Africa, a single lightning bolt killed 14 people in a
park. And speaking of electricity, according to Harper”s
magazine, 544 Russians were electrocuted in 1999 while trying to
steal power lines and cable. I guess they haven”t heard of the old
squirrel test.
–Two clammers died off the New Jersey coast. I noticed at the
Smithsonian that 70 fishermen die, each day, around the world.
–The Wall Street Journal had a piece this week on “rules”
that Donald Rumsfeld has developed over his 40-year career, both
in government and the private sector. I particularly liked two of
them.
“Learn to say, ”I don”t know.””
“The most important things in life you cannot see – civility,
justice, courage, peace.”
–According to the Washington Post, the Pentagon has been
holding extensive war games concerning a conflict in space. The
2017 threat comes about when a smaller country is threatened by
a larger one, i.e., China attacks, or threatens to attack, Taiwan,
while at the same time China is attempting to destroy or jam our
missile warning and surveillance satellites. Left unsaid in the
report is that China will have this capability thanks in no small
part to the beneficence of the folks at Hughes and Loral.
Whatever happened to that investigation, anyway?
–Happy 90th Birthday, President Reagan! I venture to say I”ve
read at least 10 articles on him the past few days; some favorable,
some not so favorable. No doubt, this is one of the most
intriguing individuals of the past century. He was a man of strong
principle, yet incredibly aloof and detached. A man who would
rather watch “Sound of Music” than read a briefing book on the
economy. Heck, he already knew what he wanted, why bother
with the details?
But while the press kept wanting us, the American people, to be
disgusted with such seeming indifference, the vast majority of us
shouted back, “He”s a man of character, principle, and dignity.”
Barry Goldwater once said what set Reagan apart from other
presidents was his “humility.” And compared to the man who just
left the oval office, there can be no doubt that Ronald Reagan was
always more concerned with results than personal glory.
[I feature Reagan and his handling of the air traffic controllers
back in 1981 in this week”s edition of “Wall Street History.” I
will also have some historical notes on Reagan and the decade of
the 60s in Monday”s “Bar Chat.”]
–Finally, every time I”m in D.C. I stop by the Vietnam Wall and
look up John Geoghegan, a 24-year-old lieutenant who was a
victim of the first major battle of the war, Ia Drang, back in
November 1965. I read about him in Lt. Gen. Harold Moore”s
gripping “We Were Soldiers Once…and Young.” Geoghegan”s
death was stark. He was shot through the head while trying to
rescue one of his wounded men. At least he didn”t suffer. When
I”m at the Wall I think mostly about the families and the hurt they
must still feel.
And then I walk over to the Lincoln Memorial, marveling for the
umpteenth time at the brilliance of his Gettysburg Address.
“…The world will little note nor long remember what we say
here, but it can never forget what they did here. It is for us, the
living, rather to be dedicated here to the unfinished work which
they who fought here have thus far so nobly advanced…”
Lastly to the Korean War Memorial, where there is the following
inscription which sums up the best of America.
Our nation honors
her sons and daughters
who answered the call
to defend a country
they never knew
and a people
they never met.
Gold closed at $267
Oil, $31.19 [It rose $1.37 on Friday alone.]
Returns for the week, 1/29-2/2
Dow Jones +1.9%
S&P 500 -0.4%
S&P MidCap -0.1%
Russell 2000 +0.5%
Nasdaq -4.3%
Returns for the period, 1/1/00-2/2/00
Dow Jones +0.7%
S&P 500 +2.2%
S&P MidCap +0.3%
Russell 2000 +3.6%
Nasdaq +7.7%
Bulls 61.0% [Highest since June ”99…more next week.]
Bears 30.0% [Source: Investors Intelligence]
Note: Colin Powell was speaking to the personnel at the State
Department the other day when he mentioned that he had a
favorite web site, refdesk.com. You can find it now under my
“News and Sports” link.
Have a great week!
Brian Trumbore
