[Posted 7:15 AM]
No one ever said it would be easy…to avoid a recession, that is.
And I can”t help but attempt to oversimplify the past 4 months or
so. For example, recall my little steel indicator, which, long
before the experts did, foretold last fall”s economic slump. Then
early this year, it indicated surprising pockets of strength,
particularly in the auto sector. So, I took this data, plus the all-
important fact that the U.S. consumer was hanging in there, and I
deduced that somehow we would avoid recession, as classically
defined…two down quarters of economic activity in a row.
And last week”s release of first quarter GDP, up 2%, while likely
to be revised downward later, nonetheless increased the odds that
we will skirt recession. But the second quarter is off to an awful
start…which means it comes down to the third, in all likelihood.
But back to the here and now. Not only does manufacturing
continue to slide (and, you”ll recall, a few weeks ago I noted the
steel indicator was slipping anew), but now the service sector is
taking it on the chin and the only question seems to be what
boxing commission”s rules are we under? Is there a 3-
knockdown limit, or can we continue to get slapped around as
long as we get up before the count?
Friday”s awful employment report for April, the worst in 10
years, also saw the unemployment rate rise to 4.5% for the first
time since October ”98. And it”s probably headed to over 5%,
before all is said and done. [To be fair, however, 5%, let alone
4.5%, is still historically very low.]
What should also be particularly worrisome is the fact that those
two pillars of strength in the first few months of 2001, auto sales
and consumer spending, are clearly now moving in the wrong
direction, which leaves the final leg in our 3-legged stool, real
estate. All I have to do is look at my own 22-unit townhouse
development, which historically has seen limited turnover (1-2
units, max, per year), now with 4 sold or on the market in just a
matter of weeks. Everyone is trying to cash in at the top (I have
some smart neighbors, but, of course, where they roll their profits
into is another story). How long can real estate stay up? I
thought it would have collapsed a year ago. If it were to go,
today, we”d be in a heap of trouble.
Alas, now that the Federal Reserve clearly has to continue
lowering interest rates, not just on May 15, but probably beyond
that, a new reduction in mortgage rates may help stave off
disaster in the real estate sector.
And what of overseas? Any help there? Well, manufacturing is
taking a hit in Germany, France, and Italy; with Germany and
Britain also lowering their overall growth forecasts for the year.
Additionally, the European Central Bank continues to hold
interest rates steady, so no help on that front, either. And in
Asia, Taiwan”s largest semiconductor manufacturer will operate
at only 50% capacity in the second quarter, rather telling, to say
the least.
Yes, folks, we are far from being out of the woods. But there”s
the economy…and then there”s the market, and the latter
continues to show amazing resilience. Or maybe it”s just an
incredible amount of optimism on the future, where your editor
feels little is truly warranted.
Both the Dow and the Nasdaq simply shrugged off the awful
economic news, and what will obviously be a shaky earnings
scene for longer than many would have expected, and decided to
focus on…focus on…geezuz, what were these guys focusing
on?!
The Dow closed at 10951, up 1.3%, for its 4th-straight weekly
advance, while the Nasdaq tacked on 5.6% to finish at 2191, its
highest weekly close since late February.
Actually, the markets were once again expecting the Fed to lower
the funds rate another half percent on May 15, and possibly more
later on. True, the Fed”s action should eventually have a positive
impact (as in potentially preventing a crash in the real estate
market, for example, and I gave up Fed bashing with the last
surprise cut), but if you nonetheless think it”s off to the races
again, you need a long vacation.
No, I will continue to side with the Masters, Warren Buffett and
PIMCO”s Bill Gross, who feel that a 5% average return on
equities is about all you should expect for the next few years.
[My own portfolio remains about 20% stocks, mostly energy,
with 80% in cash and bonds. I am also far more optimistic on
corporate bonds than Gross is.] That doesn”t mean we can”t have
some great rallies along the way (like the one we are in the midst
of…and it”s why I continue to hold onto my Nasdaq QQQ trade),
but eventually folks will look around and say, “The P/E is what?
And the economy is only going to do that? What the…”
Lastly, as positive as the action has been in the equity markets,
recently, in the end we are still at the mercy of the consumer, and
obviously confidence is shaky. That”s why this site will continue
to spend a lot of time on the “wild cards,” because, heaven
forbid, if one of the world”s leaders decides to do something
irresponsible, confidence…and the markets…will collapse faster
than a building that has been hit by an earthquake in India or
Turkey.
Street Bytes
–Alan Greenspan made some optimistic comments this week to
a meeting of bond professionals…as opposed to bail
bondsmen…telling the group that we should continue to see
large budget surpluses, thus allowing the Treasury to pay down
more of the Federal debt. Which, of course, would mean the end
of employment for the bond professionals, who, upon hearing
this, strung the Fed chairman up until he promised to keep
enough paper around for them to play with. He was then
released, unharmed.
–This week, the short end of the yield curve rallied on renewed
expectations of further interest rate cuts, but the long end
suffered on Friday (though still reflecting gains on the week) as
the aggressive Fed policy could eventually lead to a future
pickup in inflation. The rally in stocks also contributed to the
losses on the 10 and 30-year.
U.S. Treasury Yields
1-yr. 3.75% 2-yr. 4.14% 10-yr. 5.20% 30-yr. 5.68%
–Knight-Ridder, the 2nd-largest newspaper publisher, announced
that advertising revenue continues to tumble. Said the chairman,
“I have never seen a fall-off as sudden or as steep as this one.”
–Jim Grant, “Grant”s Interest Rate Observer,” puts out the most
thoughtful newsletter around (and most expensive…I”m paid up,
Mr. Grant!), and he had a comment the other day regarding the
asbestos litigation that continues to claim victims, like W.R.
Grace. Recently, ABB, the Swiss electrical equipment
manufacturer, revealed that it had a previously unknown asbestos
liability in the U.S. So Grant”s had one of its reporters call G.E.
General Electric…get it? Obviously, if ABB has an exposure,
G.E. must have one as well…somewhere.
What Grant”s doesn”t discuss is the critical issue. Congress has
to act immediately before any more corporations like Grace are
impacted. We must put a stop to this frivolous B.S. that is
destroying some of America”s best companies. Just imagine if
someone did target G.E.? While it seems inconceivable,
obviously ABB wasn”t counting on being potentially under the
gun. Also remember, Depressions can come about because of
bad government, including lack thereof.
–So I get my home cable bill this week and it rose 10%! $61 for
basic and “The Sopranos;” over $700 a year. I don”t see how
some families can afford it.
The Wall Street Journal had a good series of articles on
Thursday, detailing what a disaster the “Telecom Reform Act of
”96″ has been. It was supposed to spur competition and reduce
rates. The exact opposite has happened.
Energy
Let”s start off by summarizing the main points from Vice
President Cheney”s presentation on the energy picture in this
country.
–We need 1,300 to 1,900 new power plants over the next 20
years to meet projected demand.
–It has been 20 years since the last new refinery was built.
–Drill in the Arctic National Wildlife Refuge. The freakin”
caribou will survive. [Cheney didn”t say “freakin”,” actually, but
you know he wanted to.]
–“The potential crisis we face is largely the result of short-
sighted domestic policiesùor, as in recent years, no policy at
all.” Sound familiar?
–We need to come up with a new nuclear power effort, as well
as employ “clean-coal” technology.
–And Cheney had some tough comments on the issue of energy
conservation, which riled up the environmentalists. [Actually, I
would have handled this a little more carefully.]
“To speak exclusively of conservation is to duck tough issues.”
There are no quick fixes. Yes, as the president later stated with
regards to California, we all still have to do our best to conserve
(the editor wrote to his SUV-driving friends), but to think it is a
cure all, forget it. I can guarantee you one thing, if conservation
does have a significant positive impact on overall energy usage,
that would also probably mean demand is down because the
economy is tanking!
And back to the caribou huggers (watch out for disease if you do,
by the way), Mort Zuckerman, publisher of U.S. News, had the
following comment.
“The argument over oil vs. environmentalism is too important to
be decided by slogans and slick imagery. The mating habits of
129,000 caribou are obviously of concern. But so is the welfare
of 281 million Americans.”
People over animals! Here here. Though now that we”ve
learned that dolphins have recognition capabilities, maybe we
should amend that to “People and dolphins over animals!” But I
digress.
In the world of today, this week, energy prices tanked early on
with the news that inventories for all crude products were rising,
when a continuing decline in these levels was forecast. But later
in the week, prices rose anew as some major refineries around
the world had production problems (for example, a power failure
in Venezuela impacted one key facility there). Energy shares
were smashed after a number of downgrades, something I get a
kick out of because, quite candidly, I understand this sector”s
behavior better than they do. [My 2000 tax bill proves it.]
As noted many times before, yes, the big money has been made,
but that doesn”t mean you can”t still earn highly competitive
rates of return going forward. And certainly the earnings stream
for most energy-related outfits is significantly more predictable
than, say, technology. What you do have to watch for is
valuation. Earlier in the year, I sold one of my positions because
I simply couldn”t rationalize the P/E.
And, yes, we need oil prices to come down or the feared global
recession could materialize. If the prices fall, the odds of staving
off economic Armageddon are greatly increased and “fairly
valued” oil stocks will be excellent holdings for years to come.
It”s the economy, stupid.
But as for California, and the Northeast, it”s the weather,
Heather. Here on the east coast, we had 90-degree temperatures
six weeks earlier than last year. If this is what June, July, and
August are going to be like, big problems lie ahead.
International Affairs
Japan: While I want to believe that new Prime Minister Koizumi
will be able to truly reform things in Japan, the bureaucracy is so
well entrenched that I have my doubts. His radical proposals
would result in much pain, meaning there is a real question as to
whether the people would put up with them. That”s with regards
to the economy.
In other areas, Koizumi may be able to effect major change. His
announcement that he will seek to amend the constitution to
allow for direct popular vote of the prime minister would be a
real slap at the “old boy” network. But it”s in terms of the
military that Koizumi proposes sweeping reform. Here, too, the
1947 constitution, which limits Japan to a “self-defense” force,
would have to be amended to allow Koizumi”s goal of a real
army with offensive capabilities. Needless to say this wouldn”t
be welcome in China or South Korea. And, despite nationalist
rumblings the past few years, most Japanese still don”t want a
more powerful force.
The U.S., on the other hand, would welcome the change, as we
have wanted Japan to shoulder an increasing share of the
regional security burden. And I was struck by Koizumi”s
defense of his military strategy.
“If Japan is invaded, not being fully-equipped and prepared is
politically irresponsible.”
That”s the same reasoned approach proponents of a National
Missile Defense take. Sure, there are no guarantees that NMD
will ever work, but how the hell as a political leader can you not
at least try to defend your people against all manner of attack?
U.S. / Russia: President Bush won general praise for his outline
of a missile defense plan. Since we are far from a final proposal
I won”t waste a lot of time on it here. What is encouraging is
that the administration clearly understands they need to consult
with our allies, as well as Russia and China. For his part,
Russian President Putin had conciliatory remarks.
Bush also hinted at a strategy enumerated on during the
campaign, that being an eventual deep reduction in the number of
strategic warheads, perhaps unilaterally, something the Russians
find compelling since they would love to reduce their own
stockpile as they can”t afford the one they have. Bottom line, it”s
new thinking for a new era.
What I got a kick out of were the comments from the likes of
2004 presidential candidates Joe Biden and John Kerry, blasting
the Bush agenda. On one hand they say it”s ludicrous to think
we can prevent a ballistic missile attack, while on the other it is
their very U.S. Senate that has yet to even approve the START II
Treaty, which would significantly reduce the existing levels of
warheads that the U.S. and Russia possess.
In another matter, the case of American John Tobin is worth
following, as far as U.S. – Russian relations are concerned, or
maybe the U.S. will sacrifice him in order to “save the bigger
picture.” Tobin, 24, has been sentenced to 3 years in prison on
drug charges, despite police acknowledgement that they made up
the evidence.
And while I write of President Putin”s emerging dictatorship, the
liberals and reformers in Russia continue to gravitate towards
him. Why? According to an op-ed piece by Jackson Diehl,
while Putin “may have autocratic tendencies…he also offers the
prospect that the economic lawlessness that they find so
frustrating can finally be reined in.”
Israel: Prime Minister Sharon is taking heat in some corners for
using his son as a special envoy to Yasser Arafat. Sounds fine to
me. But then Sharon issued some harsh statements defending the
settlements, which the diplomat in me says, cool the rhetoric
right now. On the Palestinian side, it was a tough week as in one
day, 6 of 7 deaths were a result of their own bombs, destined for
use against Israel.
China: They continue to play hardball over the spy plane. After
agreeing to U.S. inspections to see if the plane could be flown
home, the Chinese gave our people all of a few hours to look it
over. This weekend their visas expire. It”s also clear that the
Chinese did gain some intelligence despite the crew”s best
efforts.
While in Taiwan, President Chen Shui-bian said Beijing”s recent
actions “lead us to believe that China is indeed a threat to the
Asia-Pacific region.” Chen is coming to the U.S. this month, in
another controversial move, as this will further infuriate the
Chinese.
North Korea: The European Union has launched its own talks on
missile proliferation with North Korea”s Kim Jong-il. This is the
future, an increasingly independent European foreign policy that
refuses to blindly follow the U.S.”s lead. The Bush
Administration, of course, has already said it basically doesn”t
trust the North and that we should be cautious in the relationship,
unlike the more aggressive engagement followed by the Clinton
team.
So what happens while Kim is negotiating with the EU? Friday
morning the papers all carry the story that Kim had pledged to
keep the moratorium on missile testing in place. But later, it
comes to light that he also said North Korea would continue to
sell missiles to anyone who can pay for them. Why should we
trust this rogue? Why should we always expect him to act
responsibly, i.e. his missiles facing Seoul?
Iraq: Columnist Jim Hoagland reports that Saddam Hussein is
desperately trying to bag an American pilot. The number of
missile firings over the no-fly zones has picked up considerably
recently.
Balkans: Violence flared anew in Macedonia, as 10 Macedonian
security forces were killed by ethnic Albanians. There has also
been extensive rioting in the cities. It”s easy to ignore this but
it”s really as much of a tinderbox as Kosovo was, as far as
drawing other nations like Albania, Greece and Bulgaria into the
conflict.
Congo: An extensive survey of the land by a reputable
international agency has reached the staggering conclusion that
in just the last 32 months, up to 3 million have died in the Congo
as a result of the civil war. This is greater than the 2 million
estimate for the long-running conflict in Sudan. Said one expert,
“The mortality is so outrageously high that even if the numbers
were half that, the rate is still outrageously high.”
Most of the victims are not from the fighting itself, but rather
disease and famine. Could the Clinton Administration have done
anything to prevent this cataclysm? Maybe not. But what were
our ambassadors on the ground telling the State Department all
this time? And it”s hard to forget Clinton”s photo-op African
adventure, claiming that the U.S. would do all it could in the
future to help the nations most needing it.
Philippines: President Gloria Arroyo called a “state of rebellion”
as violent protests erupted over the arrest of former President
Estrada. At least 6 were killed. Even Arroyo”s supporters,
however, are increasingly uneasy over the direction the political
process in Manila is headed. The president of the Senate spoke
of the dark side of people power. “There is a danger now that if
you mass 100,000 or one million people on the streets, it can
topple the government.” [Source: Mark Landler / New York
Times] The last week in this nation has also set back economic
development, years.
Indonesia: Speaking of nations moving backwards, President
Wahid is closer to being impeached.
Mexico: Just an update. A few weeks ago it looked like
President Fox had scored a major victory in negotiations with the
Zapatista rebels. Now the rebels have rejected the pact, claiming
the Mexican parliament watered it down too much. Fox can”t
buy a break. He has so much potential but he has an intractable,
politically corrupt system to work with. Which is why you also
can”t get too optimistic about Prime Minister Koizumi and his
reform efforts. He faces a similar problem.
Britain: Prime Minister Tony Blair has declared that the foot-
and-mouth contagion is basically over, and he should be formally
calling elections for early June. The campaign to date has been
fueled by charges of racism as well as anti-immigrant rhetoric.
One Member of Parliament described the British as a “mongrel
race.”
Globalization / May Day
Ah, May Day. In many countries it”s a time to celebrate the
worker. But the past few years, May Day has also been a time
for all the world”s dirtballs to gather and wreak havoc in the
name of globalization bashing. Commentator Alasdair Palmer
had his own take in Sunday”s Times of London, regarding the
protesters who call themselves anarchists.
” ”Anarchism” isn”t a protest against multi-nationals,
globalization or economic growth. It is simply shorthand for
enjoying smashing things and people, and a way of making it
sound respectable.” And the rioters are also nothing but
“virulent bigots.”
While Tuesday”s protests across Europe were generally
manageable, you still had your basic mix of anarchists, leftists,
and, in the case of Germany, neo-Nazis. Of course the scum”s
behavior masks the real issues behind globalization, many of
which I have addressed in this space before. For a different
opinion, I respectfully submit excerpts from a recent speech by
Pope John Paul II. [The Pontiff is on a gutsy trip to Greece this
weekend, in an attempt to heal a 1,000-year rift with the Greek
Orthodox Church.]
“Globalization must not be a new version of colonialism.”
Different lifestyles and cultures have to be protected as the
business and trade world shrinks.
“Globalization often risks destroying these carefully built-up
structures, by exacting the adoption of new styles of working,
living and organizing communities. The market imposes its way
of thinking and acting and stamps its scale of values upon
behavior. What is happening is that changes in technology and
work relationships are moving too quickly for cultures to
respond,” making “social, legal and cultural safeguards” of vital
importance.
We need to ensure that “the winner in this process will be
humanity as a whole, not just a wealthy elite that controls
science, technology, communication and the planet”s resources to
the detriment of the vast majority of its people.”
Ethics are the key. They come from within man and should
develop independently of the world”s superpowers. According to
John Paul II, real ethics would emphasize the value of each
individual human, which “must be an end and not a means.”
[Source: AP / Reuters]
Random Musings…semi-organized edition
–It”s not worth wasting a lot of time on the Congressional budget
process until actual legislation is signed, though certainly the
road looks bright on the tax side, as we await the final form of
the $1.35 trillion cut. But I have to comment more extensively
on one of my favorite topics, the increase in maximum allowable
contributions for IRAs and 401Ks. This week the House
overwhelmingly approved a gradual rise in the IRA limit from
$2,000 to $5,000, and for 401Ks, from $10,500 to $15,000. This
is what everyone should focus on. Not the Bush social security
plan! Ever since he proposed private savings accounts I have
labeled it one of the dumber ideas in our nation”s history.
People, the IRA and 401K IS your private savings account! And
the system is already in place. Social security is the best
government program we have ever come up with. Does it need
to be fixed, though? Yes. Should we all be subjected to
increasing payroll taxes? Of course not. But to ensure social
security”s viability, all we have to do is raise the retirement age!
And to encourage private savings, just keep increasing what I can
put in my IRA! Yes, it is that simple.
–The members of the UN Commission on Human Rights voted
to kick the U.S. off the panel for the first time since we helped
establish it, back in 1947. Now you can bitch all you want about
the UN, but from time to time we still need the organization.
However, this is a case where the Bush Administration”s
bungling of the Kyoto Accords gave the UN”s hypocritical a-
holes an excuse to expel us (there were other reasons as well).
So, among the new members are those stalwarts of human rights,
Sudan, Sierra Leone, and Uganda.
–The Palestinians became the latest to ban “Zionist” Pokemon
characters because they look “suspiciously Jewish.” Of course,
these are the same folks who send their own children out into the
street to threaten Israeli soldiers, and then wonder why they
attend so many funerals.
–The San Francisco Board of Supervisors voted to pay for city
employees to have sex changes, becoming the nation”s only
governmental body to do so. Is this a great country or what?!
–In case you are new to the site, the editor was being facetious
with his above comment.
–Someone was trying to sell the door from the scene of the
Amadou Diallo shooting on eBay. Diallo”s parents got eBay to
take it off. I am officially raising my estimate of idiots in
America from 47% to 51%, with no margin of error.
–Woh…have you seen the commercial for the new
“Powerwagon”? They show it hauling things like logs with ease.
Looks pretty cool. But I think the manufacturer is missing the
boat. Many of us would use it just to haul beer!
–Dennis Tito, Mr. “I love space.” I mentioned in the 12/1/00
edition of “Bar Chat” that I know this man, professionally. I
didn”t say what I think of him then. Well, it”s not much. Tito
represents the worst of our self-indulgent society. I was
watching one of his sons on the “Today Show” the other morning
and the kid said that his father has proved that you can do
anything in life, if you just set your mind to it.
Not quite, squirt. This isn”t a matter of someone with wealth
who built a fancy home or spent $80,000 on a car. That”s
acceptable behavior. No, this is a guy who broke the rules! He
did what he wanted, whether it violated NASA”s regulations or
not.
You know what Dennis Tito is saying to all of us? “The hell
with you.”
And you know what else? I guarantee you that no member of
“The Greatest Generation” would ever do something like this.
–Which on a related topic leads me to a discussion of Bob
Kerrey. I wrote a few months ago of my latest trip to the
Vietnam Wall. But all you really need to know is that I have 3
prized possessions. A little metal chariot given to me by a
cabdriver in India, an airline liquor bottle filled with coconut oil
(a gift from a poor woman in the South Pacific, who I hope to see
again shortly), and another little bottle filled with sand from
Omaha Beach. Collectively, they are a reminder to me of the
best of the human spirit.
I graduated from high school in 1976, so serving in Vietnam was
not an issue with me. But I go to places like Normandy and the
Wall because I am still amazed at what many of you out there
have done, for me, really, as well as the entire nation.
I like Bob Kerrey. I have said so in this space. Who the heck
knows what really went on with that incident that CBS and the
New York Times chose to vilify him for. What I do know is that
in the case of the main enemy, the Vietcong, they were awful,
nasty people, who, if you believe in God, aren”t resting easily
today.
I”m in no position, either, to try and explain the mistakes that can
be made under the “fog of war.” What I do know is that I will
forever be grateful for the brave service of men like Bob Kerrey.
Gold closed at $266
Oil, $28.36
Returns for the week, 4/30-5/4
Dow Jones +1.3%
S&P 500 +1.1%
S&P MidCap +2.0%
Russell 2000 +1.9%
Nasdaq +5.6%
Returns for the period, 1/1/01-5/4/01
Dow Jones +1.5%
S&P 500 -4.1%
S&P MidCap +0.1%
Russell 2000 +1.9%
Nasdaq -11.3%
Bulls 45.7%
Bears 40.2% [Source: Investors Intelligence]
Note: Well, I”m off again. Turkey was spur of the moment.
This next trip has been long planned. I leave this week for
Tokyo, Hong Kong, Guam (3 separate times) and a little island
between Guam and Manila, Yap. It”s the latter destination that is
the main focus. I”m going back to see some friends I visited a
number of years ago. All I”ll say is that the purpose is church-
related.
I have been very fortunate during these adventures to be able to
continue with my weekly reports. Somehow, the technology has
held up. But one of these days my luck is bound to run out.
Next week”s report, from Tokyo or Guam, should be a normal
one. It”s the following review, 5/19, which is bound to be quite
different, as I will have been on a very isolated island for most of
the period. 5/26 will come to you from Honolulu, where, by pure
coincidence, I will be as the movie “Pearl Harbor” debuts.
Lastly, you may have noticed that the endorsement from “Online
Investor” magazine that appeared at the top of this space for
months is no longer there. Unfortunately, I was just notified that
they have ceased publication. These folks were awesome in their
treatment of this site and I will forever be grateful to the staff.
Have a great week and, as always, I appreciate your support.
Brian Trumbore
