[Posted 7:15 AM]
Remember when the Federal Reserve lowered interest rates on
January 31st? The accompanying statement spoke of the
economic weakness being not necessarily just a temporary blip,
thus the economy required a forceful monetary response.
Then, just two weeks later, Alan Greenspan gave some testimony
to the fact that the economy is not in recession, the world isn”t
going to hell, but that there is still a substantial risk of business
and consumer confidence tumbling anew. So he wants to have it
both ways. And, by the way, a full reading of Greenspan”s
statements over the past year or so reveal him to be nothing more
than your average Wall Street economist. If you still think he
walks on water, you”re sadly mistaken.
Now understand that discerning the future is never an exact
science, particularly today, but Wall Street is looking for a
confident, steady hand. Just as importantly, really, the world is
too. That”s not what they are getting.
I did, however, note with interest two of the chairman”s thoughts
in his testimony. First, it received little press that he believes
social security may not be the problem for retiring baby boomers
we once thought it would be. That”s a spectacular positive if it
proves to be true. And, second, in response to New Jersey”s
rookie Senator Jon Corzine, who asked if a portion of the
treasury”s surplus should be invested in index funds, Greenspan
gave him a look that said, “What, are you out of your freakin”
mind?!” The conflicts of interest would be enormous, with the
government fawning all over one group of companies versus
another, leading to front-running, a reduction in access to capital
markets for the non-favored companies, etc. That Corzine, Mr.
Wall Street, couldn”t see this boggles the mind.
So what did we learn this week? Retail sales and housing starts
are strong, and inventories are being slashed (good). On the
other hand, producer prices soared (though most feel the figure
for January was an aberration), the latest consumer confidence
reading continued to plummet, industrial production keeps falling,
and inventories are being slashed (bad…yes, both good and
bad…by slashing inventories you”re cutting production, thus
throwing people out of work…but it”s good from the standpoint
that the seeds of the next recovery are being sown, as production
will inevitably pick up to restock now depleted shelves).
But then there was the ongoing saga on the earnings front, as
explained in more depth shortly. So we”re still left with the same
picture. A probable profits recession, a capital spending crunch, a
money crunch for some credits, a volatile stock market that is
nonetheless churning in place, and a still seemingly
accommodative Federal Reserve.
Regarding the latter two, the Dow Jones gained a measly 18
points on the week to close at 10799, while Nasdaq, after a
strong start, ended the week with a thud, down 1.9% to the 2425
level. [After its first 3-week winning streak since August, the
Nasdaq has now fallen 3 weeks in a row.]
As for the Fed and bond land, the consensus on the future
direction of interest rates varied wildly over the course of the
week. In the end, the feeling reemerged that Greenspan and
Company will lower rates another 50 basis points (one-half
percent) when they next meet March 20.
U.S. Treasury Yields
1-yr. 4.81% 2-yr. 4.71% 10-yr. 5.10% 30-yr. 5.46%
Technology
A funny thing happened on the way to the tech recovery. Ciena,
a leading network equipment manufacturer, posted great earnings
and guided analysts up to 75 cents for the full fiscal year. On
Thursday I glanced at the share price just as it hit $94, a level
which proved to be its high for the day. Huh, I mused. Let”s get
out the old calculator. $94 divided by 75 cents gives you a price /
earnings ratio of 125. Wow, that”s high, I said to myself. But I
thought the telecom industry was in the dumper? Now granted,
some think Ciena has invented a better mousetrap, but 125 in a
lousy industry environment didn”t make a helluva lot of sense to
yours truly.
A few hours later, after the close, telecom giant Nortel announced
another huge round of layoffs, citing “a faster and more severe
economic downturn (that will extend) well into the 4th quarter of
2001.” Shares in Nortel, which hit $32 on Thursday, traded
below $20 on Friday.
Who is closer to the truth, Ciena or Nortel? Probably Nortel.
And if Ciena”s right, should they still be trading at a 125 multiple?
Only if growth is superlative, and how they achieve that in
today”s environment is a huge question mark.
And when you look at the whole telecom sector, how many times
have we discussed the mammoth debt levels that players, both
large and small, have taken on to build out networks for which, in
the case of mobile wireless in particular, I see limited use?
This week, France Telecom spun off Orange, its wireless unit, and
the reception for the IPO was awful. European companies have
taken down at least $200 billion in debt for licenses and system
upgrades, but the growth in demand is slowing.
A few weeks back I was discussing the issues behind OpenWave,
the Internet software company which touts that you will be able
to walk by a Starbucks and be beeped about a sale on cappuccino.
And others tout how their wireless devices will allow you to make
hotel and plane reservations. Wake up! Maybe if you”re a
businessman on the go it”s of some value, but for the average
American, it has none, zippo, nadda.
I saw an article about Ericcson”s new web phone. It cost $600,
not including voice and web service. That would be at least an
additional $100 a month. There”s a big difference between the
advent of the automobile (everyone eventually needed one), color
television (had to have it), the PC (had to have it), cell phone (not
a necessity, but a good thing to have in an emergency), and these
new wireless features (the vast majority just don”t need them,
ergo, they won”t buy them; double ergo, where”s the revenue to
pay down the debt?).
It takes time for reality to set in. I suspect I”m early in this call
but a year from now, a slew of companies will be crushed even
further than today by overly optimistic expectations. All you
need to know is that mobile phone sales growth is already
slowing considerably.
But back to the broader telecom issue and debt. This week
Lucent was downgraded to a level just above junk by S&P and
Moody”s. Now they”re having trouble rolling over their short-
term credit line. [They need to find $2 billion by next Thursday
or they are reduced, further, to “junk.”]
The big problem with Lucent and others of its ilk is vendor
financing, whereby loans were extended to startups so that they
could then acquire their gear. One analyst is now estimating that
5-10 percent of carriers will go under over the coming year. My
guess is that it”s more like 15.
But, in conclusion, your editor maintains his overall muddle-through
outlook. I questioned the doom and gloom talk in early January
and while we are in the midst of a profits recession, we may still
skirt an economic one. At the same time, however, the huge debt
loads and ongoing capital spending crunch will limit any upside.
Street Bytes
–Conseco, the financial services giant, is being accused of
falsifying loan records. Just another crooked player in an
increasingly corrupt world. And as I mentioned last week, each
time a story like this hits, the 52% of Americans who currently
invest in the stock market slowly lose a little more confidence.
–Prudential received a lot of press for downgrading Amazon to a
“sell.” Good for them.
–Lehman analyst Dan Niles on the problem facing today”s PC
industry. “(In upgrading) you”re not getting a huge amount more
for your money.” The box you bought two years ago is about all
you need. For its part, Dell continued to disappoint and provided
no real guidance for the future. At least they”re being honest.
–The $: I have purposefully stayed away from a lot of alarmist
talk on the dollar and the impact of a sliding one on our stock and
bond markets. Every few months the cry goes up, “Watch out,
the dollar is about to collapse, funds will be repatriated,
interest rates in the U.S. will rise, blah blah blah.” And then
everyone realizes that the dollar is still king.
Oh, some day the greenback will run into serious trouble, but we
should have ample warning. For now, however, Treasury
Secretary O”Neill took some heat for a comment he made to a
German publication that the U.S. was not pursuing a strong dollar
policy. However, O”Neill has also said, correctly, that a strong
dollar is the result of a strong economy. If our economy truly
tanks, and, as one would expect then, there are better alternatives
elsewhere, well we”ve got a problem.
–Energy: We”ll see if the oil markets react significantly to
Friday”s late action in Iraq come Monday. On the California
front, there were a number of stories laying out the case that the
generators of California”s electricity were taking more power
plants than normal out of service, which would result in higher
energy prices. The industry continues to deny the claims and no
hard evidence has yet emerged that the generators were doing so.
Meanwhile, what has emerged is the fact that California”s idiotic
system of buying power meant that the state was sometimes
purchasing 33% of the next day”s needs on the spot market. In a
rising price environment, you”re going to get killed.
But the best news of the week was the heavy rain and snow that
the West Coast received, thus helping to replenish the reservoirs
come spring.
The Military
Recently, a group of U.S. senators sent a letter to President Bush
which said, in part, that the readiness level of our armed forces
was perilously low and that immediate funding is required.
“That force could be called on to act at any time and it must be
ready.”
Bush later authorized an increase in funding to begin to attack
pay and retention issues, but the debate over the fate of big ticket
items is now just getting started.
Now what happened off Honolulu may not have much, if
anything, to do with “readiness,” but it has a helluva lot to do
with common sense, and, more importantly, foreign policy.
You know how much I love the men and women who serve us all
so ably, but, guys, we can”t keep making these mistakes. And I
have yet to hear anyone tie similar incidents together. For
example, there was the case of the air force jet which sliced the
cable car wire in Italy, killing scores. There was the incredibly
stupid bombing of the Chinese embassy in Belgrade (for which
the CIA shares the blame). There are the ongoing problems with
our troops in Okinawa, a critical base for projecting U.S. power
in Asia. And now the submarine mishap.
I”m not talking accidents here. These aren”t instances of a fighter
plane on routine maneuvers crashing into a civilian installation.
Unfortunately, those sorts of things are a fact of military life. But
all of the above mistakes were highly preventable.
And this comes at a crucial period in our history. The U.S. is the
lone superpower. Most nations look to us for leadership, but
what they are increasingly seeing is a nation full of itself and, to
foreign eyes, one with little seeming regard for the interests of
others. Rightly or wrongly, that”s the impression given off by
these incidents.
Of course I”m not referring to the current administration, which
has barely had time to hang their coats. I”m convinced that the
tone at the top today is of a more humble nature. But you can see
the price we pay in prestige when we go through an 8-year period
like the one just passed.
Former Secretary of State Albright once uttered the now
famously ugly phrase, “America, the indispensable nation.” There
is a difference between leadership and hubris. Leadership is
Secretary of Defense Donald Rumsfeld facing our allies head on
and explaining why the U.S. feels compelled to shield its interests
from a potential missile attack. Hubris is bombing the Chinese
embassy or calling the Japanese “wimps,” like our commander in
Okinawa did recently.
The Japanese have every right to be upset with the U.S., and why
the Navy didn”t come out with the truth, immediately, is beyond
all comprehension. It”s going to take awhile to patch up relations
and as much as we may be frustrated by their economy, we need
them to be a stabilizing force in the Pacific region.
One final thought, this week Treasury Secretary O”Neill said of
our relations with Japan and the economy in particular, “It”s
important not to give a government-to-government lecture that
says we”re smarter than everyone else.” At least he gets it.
International Affairs
Israel: Prime Minster Barak had been prepared to hand over 95%
of the West Bank and all of Gaza, a division of Jerusalem and the
removal of some Jewish settlements from Palestinian areas. Of
course, that is no longer on the table. Now Sharon scrambles to
form his government, of which Barak may end up as defense
minister, so that he can present a united front against the
Palestinians. And after the tragic bus attack, one wonders if
Arafat gets any sleep at night.
Iraq: The U.S. sent a necessary message to Saddam Hussein on
Friday that we won”t tolerate our pilots being threatened. But the
fact we had to pull off a pretty heavy raid is also telling in that we
were responding to Iraq”s increased ability to take out American
and British forces. So the bigger issue should be whether we
continue with, what to me, has been a failed policy. We need
inspectors on the ground, but Saddam has used allied airstrikes as
a pretext for generating sympathy for the Iraqi cause. Saddam is
winning and Colin Powell et al know this. It is going to take
some brilliant diplomacy to get the Arabs back on our side in this
one.
[You may be wondering why I, of all people, have relegated this
episode to so far down the list. As much as this column focuses
on the “wildcards” which can shatter consumer confidence, thus
the tie- in, as of this writing I simply don”t think it is that big a
deal. Yes, we should expect a lot of bluster over the coming
days, however, and Bush did mishandle the congressional side of
it.]
Russia: Reporting in the New York Times, Michael Wines had a
piece this week regarding the Federal Security Service (the
successor to the KGB) and the evident reinstatement of a scary
policy from the past; the right to accuse someone, anonymously,
of crimes against the state. During Stalin”s reign of terror this
was a tool that helped turn neighbor against neighbor. It would
be as if I called the secret police and said, “Sergei is badmouthing
Putin.” This is a powerful way to subjugate the people.
I have stated in this space that President Putin is an emerging
dictator, but he”s going about it ever so cautiously, one step at a
time. Certainly, this latest policy, stuck in a footnote that took
reporters one week to find, is a bold, calculated maneuver.
Secretary Rumsfeld has minced no words in his few short weeks
on the job. On issues like missile proliferation, Rumsfeld has said
the Russians are spreading the technology all around. The
Russians deny it. Throughout history, the Russians have been
great liars.
A cold chill is sweeping through Russian – U.S. relations and I
can just see it now. The press in this country will blame the Bush
administration for being increasingly confrontational. And I”ll
probably write that if the Clinton administration didn”t have its
head up its butt, the future state of affairs I envision wouldn”t
seem so unusual.
The Russians need to be continuously told that we know what
they are up to and if there is going to be a flashpoint over the next
2 or 3 years, it could very well be over the nation of Georgia.
And then there”s Ukraine, another potential flashpoint, not as
much for the U.S. as it is for Europe. President Kuchma is facing
calls to step down as the opposition proclaims he was responsible
for the murder of a leading journalist last fall, an act which
audiotapes evidently prove. But Putin was in Kiev this week,
offering his support, which was only natural since the Russian
president is looking to put parts of the old empire back together.
Europe: The European Union was once just a trade bloc. Today,
it is becoming more of an independent voice on security matters.
With the talk of a separate European rapid reaction force that
would fall outside NATO”s jurisdiction, the concern is that the
EU could one day cut a separate security deal with Russia, not a
far-fetched thought, particularly if the next round of European
elections favors the far left. And the other risk to NATO then
would be a Congress which may wonder why we are funding it
when Europe has its own force?
Iran: There was a series of protests and clashes last week
between students and the hard-liners. President Khatami weighed
in as well: “Those who claim a monopoly on Islam and the
revolution, those with narrow and dark views, are setting
themselves up against the people.” That took a lot of guts for
him to say this. The presidential election is in June. Let”s hope
he survives.
Serbia: The government is closer to arresting Slobodan Milosevic.
The debate remains whether or not to turn him over to the war-
crimes tribunal. Separately, Albanian terrorists blew up a bus in
Kosovo carrying Serbs, killing 7. The remote controlled device
had allowed two buses of Swedish peacekeepers to pass over it
prior to the intended target. This is a major escalation in the
terror campaign.
China: Amnesty International issued a report saying that torture is
“widespread and systemic.” A minor positive is the Chinese
government”s recent exposure of some of the incidents of torture.
But it is clearly still a sanctioned policy, particularly with regards
to Falun Gong. Confusion reigns in Beijing.
Mexico: President Bush made the right move in traveling to
Mexico first. Much to be gained, little to be lost.
Colombia: 9 teenagers were shot to death while on a 7-day hike
in a national park, one that is far removed from the civil war
gripping the country; which is why this senseless case has the
nation on edge even more than would otherwise be expected.
Random Musings
–Me: I wrote my first “Week in Review” for the PIMCO Funds
web site back in November 1997. It was about five paragraphs
long. Well, one thing led to another and when I struck out on my
own two years ago, I really thought I was going to write a book
or two (one to make money, the other to give something back to
my community). The web site was initially a way of staying
“fresh” and keeping my weekly reviews online. “Bar Chat” was
simply an excuse to give folks another reason to check out the
site.
Then I created the monster when I added “Hott Spotts” and
“Wall Street History.” Heck, I thought, might as well write about
what interests me.
Of course we also added “Lamb” and “Dr. Bortrum,” the latter an
eccentric sort, the former a crazed illustrator who doubles as my
brother.
And then thanks to the help of my friends at CSI, this whole
operation runs pretty smoothly from a technical standpoint. [Any
problems can always be blamed on the incredibly fragile
infrastructure we call the worldwide web.] There”s just one
problem, I haven”t found time to work on my books.
So what”s your business plan, some of you must muse? Beats the
heck out of me! Oh sure, I have some thoughts, and I”m
appreciative of a relationship I have with BuyandHold.com. But
right now, during these chaotic times for content providers, I”m a
survivor. And no one is breathing down my neck, wondering
what happened to their money. It”s all mine, ba-bee.
I was going to make all sorts of comments about the Net in
general, but I”ll let most of them (all vicious) pass for now.
Except I have to add this. Knowing that I have the smartest
readers on the web, you share with me the appreciation for all the
web has to offer. It”s tremendous being able to read newspapers
from around the world, for example, or to check out sports scores
from your alma mater. But the dark side of the web is something
our society is going to have to tackle. Being able to access
bomb-making recipes isn”t what this great invention was intended
for. And you may also be surprised to learn that for my more
academic research, I rely solely on old-fashioned books.
And when it comes to dealing with many of the web outfits, I”m
continually struck by the arrogance of those who are supposed to
be consultants or in customer service. I recently had occasion to
sign up for 3 services and I wasn”t able to complete the
application on any of them, due to technical glitches. Then, when
I emailed all of them for help, I didn”t hear from a soul for a full
week. In my days in the securities business, you never went home
for the day until you returned the last call. [Actually, that was
more my own principle, not that of the whole industry.]
Oh well, just thought some of you would be curious as to what
the heck goes on around here. Read and write, write and read.
Watch lots of news (and the Simpsons) and then start the routine
all over again. StocksandNews has survived its first two years,
and I plan on being the last one standing, if necessary. And
believe me, through it all, I greatly appreciate all of your support.
–Bill Clinton: With good reason, President Bush is trying to get
the media, and, by extension, the people, to focus on his agenda
and not Bill Clinton”s disgraceful exit. But I”m convinced more
than ever that we need to get to the bottom of things. It will hurt
in the short run as partisan rhetoric flares anew, but we must
cleanse ourselves of this man who so sullied the prestige of his
office and our nation.
And isn”t it funny how Clinton”s poll numbers are suddenly
plummeting? No, it isn”t about attempting to steal some china
and furniture. It”s about this total contempt that Bill and Hillary
have for this country.
And as for the president and Marc Rich, we may never know the
truth, but we have to try. Otherwise, what the hell do we stand
for?
A few weeks back, when Clinton left office, I noted how my
friend Jim said that the president”s admission of guilt, in his
agreement with the special prosecutor in the Lewinsky matter,
was better than any Aesop”s fable when it comes to teaching the
difference between right and wrong to his children. History will
not look kindly on us unless justice is pursued. President Bush
will just have to be patient while the former First Liars get their
comeuppance.
–The landing of the Near Shoemaker satellite on the asteroid
Eros was an amazing accomplishment and provides me with
another excuse for saying that I hope President Bush sets a bold
goal of landing a man on Mars by 2010. No way he does this,
I”m just fantasizing.
–And let me be the first one to say that the reason why Tiger
Woods has gone winless in his last 7 starts is because he dumped
his girl! Look for them to be back before Augusta.
–In 2000, 59 people overdosed in America from the painkiller
OxyContin, a drug normally used to treat terminally ill cancer
patients. Evidently, when it”s ground up it has an effect like
crack.
–I read the New York Times every day because it”s my job to get
all viewpoints. They do still cover the international scene about
as well as anyone but then, of course, there is the garbage.
This week, the editor in charge of the Op Ed page allowed some
loser by the name of Harold Holzer to submit a piece comparing
the Clintons” gift-laundering (my term) to those gifts that
Abraham Lincoln accepted. At the end of this incredibly
ridiculous piece, Holzer mocked “Honest Abe.” Someone just
indict this guy, please!
–In following the “Puffy” Combs trial, I picked up two new
terms. “Cannon,” which means a large gun, and, “bust off,”
which means to fire your cannon! I hope you all feel as
enlightened as I do. And I”m sure you share my grief in noting
that Puffy and J-Lo (Jennifer Lopez) are no longer an item.
–We should dump Ground-Hog Day and adopt Pitchers and
Catchers Day, to celebrate the imminent arrival of spring, instead
of the unknown length of winter. Ground-hogs are losers,
anyway, nothing more than wolverine wannabes.
–And speaking of wildlife, there was another study that the Great
Pandas are inching closer to extinction, with only about 1,000 left
in China”s wilds. Earth to pandas. Change your diet! Heck, man
went from eating grass and roots to filet mignon (until mad-cow),
the pandas have to move away from bamboo. Chex Mix, that”s
the solution.
–I haven”t said much about the tax cut idea because there isn”t a
heck of a lot to add right now. It just gets me how the
Democrats say the rich would use their tax cut to buy a new car,
while the poor could only afford a new hubcap. I prefer to think
that if the rich buy a new car, the poor keep their job.
–Mad-Cow: True, there still hasn”t been one identified case of
the disease in the U.S. and maybe we”ll luck out. But nations like
Germany, Italy, and Spain thought they had avoided the scare as
well. Now, the financial impact is devastating segments of the
European economy. I thought Carlta Vitzthum summed it up
perfectly in the Wall Street Journal this week in a piece on Spain.
Since January 1, 17 cases have been identified when the threat
was supposed to be non-existent.
“Suddenly, Spaniards are realizing that mad-cow disease didn”t
exist before simply because nobody had looked for it.”
The U.S. has started its search. Panic awaits if we find it. And
you should know that in Canada this week, officials are
increasingly concerned that testing there has been lax.
–Columnist William Safire correctly blasted President Bush for
not holding a formal televised press conference as yet.
–Timothy McVeigh opted not to put his fate in Bush”s hands.
Execution is still slated for May.
–And lastly, your Yak update. Yak herding could be the next
”big thing!” Well, why not? Pregnant yaks fetch $3,500 and a
female calf goes for $2,000. With the tough market in cattle the
past few years, the market for Yak is heating up. Just ask rancher
Jack Simmons in Washington State, the proud owner of 12.
“They look like a buffalo, they have a tail like a horse, and they
grunt like a pig. If they were behind a building or something and
they got to grunting, you”d swear to God there was a couple of
old sows out there.” [Source: AP] Yaks…the grunting oxen.
Gold closed at $258
Oil, $29.16
Returns for the week, 2/12-2/16
Dow Jones +0.2%
S&P 500 -1.0%
S&P MidCap -0.1%
Russell 2000 +0.5%
Nasdaq -1.9%
Returns for the period, 1/1/01-2/16/01
Dow Jones +0.1%
S&P 500 -1.4%
S&P MidCap +0.5%
Russell 2000 +3.3%
Nasdaq -1.8%
Bulls 57.8%
Bears 30.4% [Source: Investors Intelligence]
Notes:
–I have a special trip planned for this week. Heading to Rome
for the consistory and elevation of the new cardinals, thanks to
my friends at the Jesuit Mission Bureau in New York. One of
their own, Avery Dulles, receives the honor. Father Dulles is the
son of John Foster Dulles.
But this also means that I seriously doubt the “Week in Review”
will be posted next Saturday, unless I can obtain a reliable
Internet connection. So, sorry, regular Saturday and Sunday
viewers. Check in anyway, but it looks like first thing Monday
morning the 26th. It”s bound to be worth the wait; “Holy Week”
at StocksandNews.
–And don”t forget to check out our new “Web Tips,” listed under
the heading “Articles.” Thanks to Tony and Amy at CSI
MultiMedia for updating these for me. I virtually guarantee you
won”t find these anywhere else, at least in its easy-to-read format.
Have a great week!
Brian Trumbore
