[Posted 7:15 AM]
Dear Earthling:
“Persistent erosion in current and expected profitability, in
combination with rising uncertainty about the business outlook,
seems poised to dampen capital spending going forward. This
potential restraint, together with the possible effects of earlier
reductions in equity wealth on consumption and the risk of
slower growth abroad, threatens to keep the pace of economic
activity unacceptably weak.”
Signed,
Your friends at the Fed
—
Thanks, guys, and especially you, Mr. Greenspan. You finally
seem to get it.
And make no mistake, folks, they finally do and you”ll read no
Fed-bashing from me this week. In shocking the Street with its
half-point reduction in short-term interest rates, their 4th such
move since the start of the year, Greenspan and Co. also noted
“the risks (remain) weighted mainly toward conditions that may
generate economic weakness in the foreseeable future.”
But while the tone of the statement was none too cheerful, one
must always separate economic reality from market action, and
Wall Street loved it. What a rally, as the Nasdaq completed its
best 10-day stretch in history (thru Thursday), soaring a
stupendous 33%, before falling slightly on Friday to close at
2163, up another 10% on the week. And the Dow Jones had its
best week since last June, gaining 4.5% to finish at 10579.
So is it real? Yes. Or rather, was. When I put my Nasdaq 100
trade on three weeks ago, I really thought we had a shot at a
spectacular rally. So I”m looking for about 2400 (if I”m
fortunate enough), and then I”m out of there. As for the Dow,
I”ve never had a problem with its level. [After all, I said the
Dow and S&P 500 would finish somewhere between up or down
5% this year, when I made my forecast for 2001.] And I also
feel that barring an international explosion of some sort; we”ve
seen the lows. It”s just that I also see middling overall returns for
years to come. A decent stretch here, a lousy one there. Add it
all up and you get…eh.
What is different, however, from the atmosphere of just 3 weeks
ago, is that the phrase “met lowered expectations” is now viewed
with wild euphoria. And until Friday”s pullback it didn”t matter
whether corporate executives were gloomy or sanguine about
future prospects, the market gave a boost to all, especially tech
shares. But what was actually said?
IBM reported solid first quarter profits and reaffirmed its targets
for all of 2001. Chairman Lou Gerstner also took a little shot at
the competition. “Many in our industry have gotten a bit carried
away over the last few years by the exaggerated expectations for
the Internet world.”
But Apple”s Steve Jobs, appearing on “Moneyline,” said he
didn”t understand how other executives could be so positive on
the second half. He had no clue.
Hewlett-Packard warned again, announced it was slashing 3,000
management positions, and said that the situation in Europe was
worsening, yet, they also felt sales had bottomed.
Intel announced that revenue fell 16% from the first quarter of
2000, but they were optimistic about the second half as they saw
signs of “stabilization.”
Fiber optics king Nortel Networks issued an absolutely awful
report, hinting that the world was about to end; possibly an
asteroid.
But Microsoft was solid, while Ericsson was gloomy and Nokia,
“confident.”
And then there was Cisco. Holy cow. Can a company miss its
targets any worse or what? In warning that its fiscal 3rd quarter
(4/28) was going to see a staggering 30% drop in revenue from
February”s forecast of a 5% decline, Cisco”s John Chambers
acknowledged that “we never built models to anticipate
something of this magnitude.” Well what were your guys doing,
John, sniffing glue?
But Cisco wasn”t finished. In addition, they will write off $2.5
billion in inventory (a greater sum than the GDP of some nations,
I imagine) admitting that they got left holding the bag on long-
term contracts with companies now going out of business or
reducing spending. Added Chambers:
“This may be the fastest any industry our size has ever
decelerated.”
Which reminds me of the term “creative destruction.” The new
world is about change and being able to adapt to it. New
technology immediately makes that which it replaced obsolete.
Learn to play the game or die.
Back to the economic front, what did the Fed know and when did
it know it? We”ll have to wait for further clarification, but what
we do see is a Fed concerned with the continued slide in
consumer confidence, something which will only be exacerbated
by mounting layoffs, as well as the other issues that simply won”t
go away anytime soon, i.e., the crash in capital spending,
overcapacity, and huge debt loads.
The good news is that industrial production rose last month after
five consecutive down ones, and the housing and auto sectors,
while slipping, are still strong in historical terms. Plus, the latest
report on consumer prices was once again tame, with core
inflation running at just a 2.7% clip.
But 2.7% would be too strong for the European Central Bank. The
European Union”s own inflation rate is just 2.6%, but that
remains above the ECB”s target of 2.0%, so, the ECB refuses to
lower their own interest rates, even if economic activity across
the continent continues to slow.
Which brings us back full circle to my initial point of some six
months ago. Alan Greenspan needed to save the world. Foreign
nations require a strong U.S. economy to export their goods to, in
large part merely to pay off their massive debts. We”re still the
world”s economic engine, and by acting on interest rates the way
the Fed did this week, and by lowering again this coming May
15, they may just help avoid a global recession. But it”s sure
going to be tight, and we aren”t getting any help from the
Europeans.
Street Bytes
–The short end of the Treasury yield curve reacted positively to
the move by the Federal Reserve. The longer end didn”t, as
inflation concerns for the long-term seeped in. This isn”t a
contradiction from earlier statements, the feeling being that
maybe the Fed”s aggressive action will eventually allow the
economy to strengthen faster than originally anticipated. The
other reason for the rise in 10-and 30-year bond yields was
simply the move from fixed income back into stocks.
U.S. Treasury Yields
1-yr. 3.84% 2-yr. 4.23% 10-yr. 5.28% 30-yr. 5.79%
–Energy: While technology stocks soared again this week,
energy issues stalled as the hot money flooded into tech like the
homecoming for a son who had been off to war. Seeing as I had
just revived my own personal stake in all things oily, I felt like
the little brother who was left standing in the doorway as the
parents went to greet the returning hero. [This is my attempt at a
Pulitzer.] Hey, what about me? After all, while tech will no
doubt roar if investors become convinced that the economy is
ready to grow at a 3% clip again (I”m sure as heck not saying it
is), energy is where the consistent earnings are today. And
remember, boys and girls, if you personally believe the economy
is recovering, that, too, is good for the energy story. I just have
to add, again, that the big money in the sector has been made, but
there”s also nothing wrong with a 10-20% return.
This week, gasoline futures soared when the 3rd largest refinery
in Britain went up in flames. It impacted 8% of Britain”s supply
and was one of our prime sources of gasoline as well. Plus the
headline grabbing $2 a gallon stories are out there for all to see
and hear, most of which ignore the fact that it has nothing to do
with OPEC, rather it”s all about expensive environmental
restrictions and a total lack of refinery capacity in this country.
Good news on the energy front came from Iran”s oil minister,
who said global supplies should outstrip demand in the second
quarter.
–I”ve written about the following countless times before, but it
bears repeating. From columnist David Ignatius:
“Beware the telecom crisis. Like an earthquake, it has already
caused enormous damage at the epicenter. And the financial
shockwaves are only beginning to radiate outward to the rest of
the global economy.”
Since 1996, $650 billion in debt has been accumulated in this
Industry, and this week, Winstar Communications filed for
Chapter 11. There is a lot more where that came from.
–Don”t cry for me, Ar-gen-ti-na…dah dah dah dah…dah dah…
[I forgot the words.] Actually, this coming week could spell
disaster unless the government can sell some bonds as part of its
new economic recovery plan. And a crisis here would definitely
have an impact on our own financial markets, if only briefly.
–High-powered attorney Peter Angelos (owner of the Baltimore
Orioles) is now targeting the mobile phone industry, filing class
action suits on behalf of those claiming a link between cell
phones and brain cancer. Heck, I hardly use mine, but I might as
well sign up and collect $millions!
–In case anyone cares, Abby Cohen….oops, I already labeled
her “irrelevant.” Sorry, Abby.
–Gannett, the giant newspaper chain, noted that help-wanted
advertising was falling precipitously, a leading economic
indicator.
–Since I have badmouthed the business prospects for
OpenWave, the Internet software provider for mobile phones, it”s
only fair that I mention that its latest “pro-forma” earnings were
well received by Wall Street (along with everything else this
week) and the shares rallied to $41 at one point. But, in comical
fashion, Lehman reiterated its “strong buy,” while lowering the
price target from $120 to $40. OpenWave”s chairman was on
CNBC again (the third time I”ve caught him over the past few
months), only for this appearance he didn”t mention that his
software can beep you for a sale on cappuccino at Starbucks.
Instead, he fell back on the “if you”re late for a flight” example.
He”s also now admitting that because of technical problems, the
U.S. mobile Net market is a mess.
–When I mentioned Kozmo.com”s demise last week, I didn”t
realize that the outfit went through some $280 million of venture
capital funding in 3 years. Goodness gracious! Actually, that”s
still just one A-Rod and $30 million in meal money.
–Dot-com success! Two online travel service providers,
Expedia and Travelocity.com, reported profits for the past
quarter. Good for them. And eBay”s report was strong…it”s just
the valuation on the stock that is once again outrageous.
–And speaking of valuation, a Nasdaq of 2500 or so would mean
that the market leaders are all incredibly overvalued, just as in
days of yore, even if the economy starts to improve.
–And online customer service could not be worse. I have been
trying for 3 months to get my name off a list, emailing the proper
contact daily, and I finally received a reply back this week. “We
are looking to hire more people to take care of the load.” No you
aren”t. You”re going out of business.
International Affairs
China: Talks between the U.S. and China over the fate of the spy
plane were fruitless this week. I agree with those who say that
we don”t want the Chinese to be able to use it as a future trophy
(a la North Korea and the Pueblo). And at least American
officials held firm on the issue of the continuation of our
intelligence-gathering flights.
But, more importantly, this was really a scarier week than the
two prior ones. We witnessed a hardening of the rhetoric and
one has to wonder just who is in charge in Beijing. And in
China”s treatment of dissidents, the situation is only getting
worse.
First off, I mentioned last week that there was to be a vote on a
U.S.-sponsored UN resolution condemning China”s human rights
policies. Alas, for the 11th straight year, China, with Russia”s
help, used a procedure to prevent the issue from even coming to
a vote. It”s despicable, and this week China arrested another
high-profile dissident, a U.S. citizen of Chinese origins, on
charges of espionage. Meanwhile, the U.S. State Department
took the extraordinary step of warning all Chinese-born travelers,
who may have echoed anti-government thoughts over the past
few years, to stay out of China, especially those who have
recently been in Taiwan. And what really ticks me off are those
who still support Beijing receiving the 2008 Olympic games.
The Olympics should not be mixed up with international politics,
they say. Are you nuts?! Why should China be rewarded? Yes,
I am still a proponent of free trade with them, but that doesn”t
mean we stop speaking up on issues the Communist goons may
find offensive.
In the next two weeks, the Bush Administration may announce
what weapons we are going to sell to Taiwan. For their part,
Taiwan is handling this hot button issue well in not pressing
Washington, which would only inflame tensions. But look for
China to go ballistic when the U.S. steps up to the plate to do the
right thing.
And then there is the recent reaction of our Asian “allies” to the
spy plane incident. Strategist Ted Galen Carpenter wrote of the
complex nature of the relationship between the U.S. and, say,
Japan or South Korea. These and others want the U.S. as an
insurance policy, but they also don”t want China pissed at them
and thus jeopardize trade relations.
And speaking of Japan and South Korea, the flap over the
textbook continued, with more harsh remarks from the South
Korean foreign minister. Words. “Very sorry.” To parents who
may have kids entering high school or college, don”t be afraid to
steer them into International Affairs, History, and Political
Science. We will need all the diplomatic help we can get over
the next few decades.
Middle East: This was not a good week. The Palestinians have
adopted a new policy of shelling Israeli villages (and Arafat
continually denies he has anything to do with it), while Israel
attacked a Syrian radar station, killing 3 Syrian soldiers, in
retaliation for a Hezbollah attack which took the life of an
Israeli soldier. In the case of the Syrians, who have 35,000 troops
in Lebanon and obviously could put a stop to Hezbollah guerrilla
action if they desired, it was their first casualties since 1996.
Syria”s new leader, Bashar al-Assad, issued a warning to Israel.
And the U.S. also warned the Israeli government that events are on
the brink of spinning totally out of control. Of course, when Ariel
Sharon was elected prime minister, he said that “the rules of the
game have changed,” so no one should be surprised at his actions.
Columnist Charles Krauthammer summed up the latest
escalation. “(Arafat) will keep the fires burning. And these fires
are the real problem. They threaten to undermine the single most
important American objective in the Middle East: prevention of a
regional war. (Yet it is Arafat”s) fondest wish to bring Syria and
Lebanon, Iraq and Iran, Egypt and Jordan into his war with
Israel.”
Finally, back to the UN Commission on Human Rights. While
China was able to block the resolution condemning its own
practices, of course Israel was condemned for its
“disproportionate” use of force in the Palestinian territories. The
U.S. was virtually alone in voicing its dissent. And that great
paragon of virtue, Algeria, equated Israel”s actions to
“Auschwitz and Dachau.” Let”s see, Palestinian parents throw
their kids into harms way, while Israel gives advance notice that
it is about to bomb a Palestinian security headquarters, which is
being used to promote terrorism.
Russia: Last Sunday the Kremlin formally took over the
remaining independent television station, NTV (the workers
attempted to move to another outlet, but the goons moved in on
that operation as well). The anchor on the air at the time was cut
off in mid-sentence, a move which the Washington Post labeled
“grossly anti-democratic behavior.” No kidding. You were told
a long time ago in this space that Vladimir Putin was going to
morph into a dictator. It”s happening, right on schedule.
France: Whaddya know. After last week”s comment, this week
Prime Minister Jospin threatened to introduce legislation that
would levy fines on companies that lay off workers. Zut alors!
Britain: London is gearing up for what could be hairy May Day
protests. Separately, the government has declared that the foot-
and-mouth epidemic is finally under control. Now the finger
pointing has really begun. Was the slaughter necessary?
Ukraine: The U.S. has granted asylum to a former presidential
bodyguard who implicated President Kuchma in the murder of a
leading journalist (a story we have covered here). A gutsy move
on our part, and obviously not good for relations between the two
nations…until Kuchma is toppled! You”re toast, Leonid.
India / Bangladesh: That”s right. Not Pakistan. Bangladesh. As
in George Harrison”s “Concert for Bangladesh.” Only this week,
after 30 years of peaceful co-existence between the two
(Bangladesh was granted its independence in 1971), they
clashed over a disputed border village, each claiming it for their
own. Now India should be ashamed. Bangladesh lost only two
of its soldiers; India, 16.
Iran / Iraq: Iran fired 56 Scud missiles at opposition camps in
Iraq, yet killed only one. Is there a dumber weapon in the world?
Of course if they are tipped with chemicals, it”s a different story.
Mexico: The New York Times had a scary piece on how the
nation is running out of water (as are many countries around the
world, like Israel). But in Mexico, what does exist is often toxic.
Hell, we worry in the U.S. about levels of arsenic, in Mexico
93% of the rivers and streams are polluted and the aquifers are at
dangerously low levels. Mexico City”s, for example, is being
used up so quickly that many of the buildings are sinking or
tilting. And only 14% of all Mexican municipal and industrial
wastewater is treated.
Colombia: The situation here appears to have taken a real turn
for the worse as peace talks have broken down, the paramilitaries
and rebels shoot it out, and the government seems helpless to do
anything. Or is the record just skipping?
Random Musings
–New Jersey politics: OK…let”s see. Our acting governor, a
Republican, was the subject of a scathing front page New York
Times piece on his days as township attorney, including one item
where he influenced officials to drop plans for a youth soccer
field because his relatives held out hope of developing the
property. Then there is our former attorney general, turned State
Supreme Court justice, who is about to go through impeachment
proceedings over his handling of the racial profiling case that has
garnered the state such great publicity. And lastly we have
Democratic Senator, and former boyfriend of Bianca Jagger,
Robert Torricelli (the “Torch”), who is still being investigated
over his ”96 senatorial campaign. Only this time the FBI raided
his home, looking for evidence tying him to illegal gifts. He”s a
U.S. Senator and they”re searching his house. I”d say he”s guilty.
No need to prove it in court. Next…..
–I do understand how some feel Timothy McVeigh should not
be executed because it only makes him a martyr. But I still feel
we must do it. Nonetheless, in the interest of fair play, I hereby
include a comment from Cardinal McCarrick of Washington (a
man I know and admire greatly, and one whom I had the pleasure
of being with in Rome recently).
“It is like going back to the Roman Colosseum. I think that
we”re watching, in my mind, an act of vengeance, and vengeance
is never justified. Vengeance belongs to God…He”s the master
of life.”
The cardinal admits that a great number of Catholics probably
still favor capital punishment.
–Now you know why I thought the Bush Administration”s
handling of the Kyoto Accords a few weeks ago was such a
disaster. That set the tone for the current debate over the
environment and now they couldn”t be backpedaling faster on all
manner of issues…and it was all so preventable. The
Republicans are doomed in 2002 if they don”t repair the breach
now. This is a topic that resonates with the soccer moms. And
note to the Wall Street Journal. You guys couldn”t be more
wrong on this issue. Heck, Corporate America is taking the lead
and changing its own policies. They aren”t waiting around for
Washington to act. All I”m saying is keep the lines of
communication open.
–As for the demonstrators in Quebec, geezuz, just take a bath.
Actually, I”m disappointed that our Canadian friends haven”t
unleashed one of their greatest assets, the grizzly.
–At the welcome home ceremony for the spy plane crew,
Washington Governor Gary Locke said, “America held her
breath,” awaiting the return of the 24. No we didn”t! America
was incredibly complacent.
–Rapper Jay-Z was arrested in New York on weapons charges
and his posse claimed there is a policy of racial profiling against
the rapper community. You mean there shouldn”t be one?!
–Mississippi voters decided to keep their old flag, with the
Confederate battle cross, by a 2-1 margin. I thought it was “fall
back, spring ahead!”
–A Wayne State University law professor died after one of
twelve cocaine-filled balloons he was carrying in his body burst
while on a trans-Atlantic flight. I”m tellin” ya, we can send a
man to the moon but we can”t make a reliable prophylactic.
–It”s “Web Site Sweeps Week”…which means you get some
bonus musings.
–So Homer Simpson has once again fallen into bankruptcy and
he goes to the bank to withdraw his last funds.
Manager: “Ah sir, your life savings…”
Homer: “Hmm…I see it”s in bill form…excellent.”
–I”m sure you all saw the latest study on drinking and heart
disease; once again it proves that one or two a day is good for
you. But the expert I heard said, “One or æso.”” I guess it all
depends on what the meaning of “so”…is.
–Finally, scientists are exploring the origins of the haze that
currently envelops an area stretching from the Rockies to the
Midwest. They say it could be the result of a violent dust storm,
which originated in Mongolia! Ring a bell? This is the very
storm from last January (“Week in Review,” 1/13) that gave us
our introduction to the noble Yak! Is it some kind of an omen?
Or, is the energy self-sufficient Yak, now being bred
domestically in the foothills of the Rockies, sending us a
message of another kind?
Gold closed at $265…rally…another opportunity to sell the class
ring.
Oil, $27.28
Returns for the week, 4/16-4/20
Dow Jones +4.5%
S&P 500 +5.0%
S&P MidCap +3.9%
Russell 2000 +2.6%
Nasdaq +10.3%
Returns for the period, 1/1/01-4/20/01
Dow Jones -1.9%
S&P 500 -5.9%
S&P MidCap -4.5%
Russell 2000 -3.5%
Nasdaq -12.0%
Bulls 44.7%
Bears 42.5% [Source: Investors Intelligence. The # of bears has
increased to levels not seen since Oct. ”98. Taking into account
a one-week lag in this data, you can see why every now and
then this is a good contrarian tool.]
Note: In a few hours I am embarking on a little adventure to
Istanbul. It”s been a bit shaky over there recently, which means
that the next review should be interesting, to say the least. As
always, however, I will also be at the mercy of the Internet gods
(who are a rather surly bunch). If you don”t see anything next
Saturday morning, it probably won”t be up until Monday
morning, April 30th. If you don”t see anything April 30, uh oh.
You know what the toughest thing about going to Turkey is?
The exchange rate is about 1.2 million lira to the dollar, which
means my dinner bill could be 100 million! After a few pops of
Turkey”s finest libation, this will be quite confusing.
Have a great week! I appreciate your support.
Brian Trumbore
