[Posted 7:15 AM]
“Lord, Lord! how subject we old men are to this vice of lying.”
–Shakespeare / Henry IV
You didn”t think I read Shakespeare, did you? Actually, I don”t,
but I finally had an excuse to thumb through my “Dictionary of
Quotations” when I couldn”t find the full lyrics to the Castaways
1965 hit, “Liar, Liar.”
Look, I know Wall Street is a “discounting” mechanism and that
investors attempt to project 6-9 months down the road, as in the
case of those who are currently bullish and say that by early
2002, the global business climate will be greatly improved, and
with that earnings. Heck, I have a few investment bets of my
own that would profit from such an experience, just don”t tell me
things are good when they aren”t! Or is it that some of
America”s corporate titans aren”t exactly singing a happy tune,
but rather the Street hears only what it wants to?
True, 95% of Americans who feel like working still are, but
when a telephone equipment company like Tellabs announces
that its revenue will be $500 million, not the projected $800
million, or when telecom Level 3 reduces its own revenue
expectations for fiscal 2002 by 29% and lays off 27% of it
workforce in one fell swoop, you can”t convince me a turnaround
is in the air.
And it”s not just the amazingly overbuilt telecom sector that is
suffering. Europe”s 2nd-largest chipmaker, Infineon, said this
week it saw no recovery, while back here business travel is
absolutely falling off a cliff. Lastly, the Financial Times
reported that DaimlerChrysler plans to cut capital expenditures
by 40%.
No, what gets me are the positive comments emanating from the
likes of AOL, Oracle, and Cisco, where executives seemed far
more optimistic on the future health of their companies” business
and the overall economy than is warranted by the facts. Maybe
lying is too harsh a word, but ”disingenuous” fits.
And I just couldn”t believe all the happy talk on the
homebuilding front this week. We are going through a global
slowdown in a world of globalization, with no recovery in sight.
The unemployment rate may start rising sharply and with
personal debt now at an all-time high – 14% of take home pay
goes to pay down debts – I don”t see how the two remaining
pillars of this economy, consumer spending and housing, can
continue to hold up. We already know what happened to capital
spending.
But, alas, there is some good news. Next week the Federal
Reserve will offer up its 6th rate cut of the year (the guess here is
50 basis points), the tax rebate checks will soon be in the mail,
and, perhaps the best news of all if you care about the whole
global picture, is the decline in energy prices. Regarding the
latter, I have long argued that stubbornly high prices would kill
growth around the world, particularly in the developing nations.
Oh well, this is how I end up with the same old conclusion. A
market stuck in neutral for some time to come.
As for the action this week, man, what a great one to have taken
off. The Dow fell for the 5th consecutive week, but lost just 19
points to close at 10604 (3 of the Dow”s weekly declines have
been of the infinitesimal variety), while Nasdaq gained a
whopping 6 points to finish at 2034. Volume did pick up, primarily
because many money managers appeared to be rebalancing their
portfolios.
Street Bytes
–U.S. Treasury Yields
1-yr. 3.32% 2-yr. 3.90% 10-yr. 5.12% 30-yr. 5.58%
Big rally on conjecture that the Fed will lower rates 50 basis
points, the slowdown is entrenched, inflation isn”t an issue, and,
on Friday afternoon, a late flight-to-quality over renewed
tensions in the Middle East.
–The European Central Bank decided to hold the line on its own
interest rates, even though a slowdown far more rapid than they
predicted is staring them in the face, as well as the fact that while
inflation is currently running above the target rate, the ECB”s
own officials have said that by 2002 inflation would be way
down.
–Brazil and Argentina are really struggling and more potential
turmoil in their respective credit markets looms. [Every now and
then I need to mention this so that some of you don”t get the
impression I ignore everything below Mexico. Retail sales on
the Falklands are also plunging.]
–The SEC took the unusual step of announcing it was
investigating four companies for abusing the use of “pro forma”
results, in other words, stating “everything but the bad stuff.”
The agency did not release the names, however. One can”t help
but wonder if one is a company that begins with an ”A,” ends in
”.com,” and whose name is also that of a famous South American
river.
–Charles Schwab on the Internet-trading debacle: “I should have
taken my 39 years of experience and said, ”This is not
sustainable.”” [Wall Street Journal] It is amazing that no matter
how much experience you have on Wall Street, and investing in
general, you never stop learning…and making mistakes.
–The talks between AOL and Microsoft over their strategic
partnership broke down; leaving items such as the integration of
AOL software into Windows XP unresolved. Microsoft doesn”t
need AOL…but neither do 99% of us need Windows XP.
–And then there is the ongoing decimation of Lucent and Nortel.
I asked my friend Harry K. in Toronto what kind of coverage
Nortel”s 90% plunge in its share price has garnered. I was
informed that it is basically gavel-to-gavel. Lucent, on the other
hand, has received nary a Nightly News mention, and it”s only
one of the most widely held issues in America. Harry is also
wondering what the meaning of S&P Canada”s “A stable” rating
on Nortel debt is? “Is that as in ”Shut the stable door, the horse
has gone?””
–Business Week had a tale for the times concerning Harvard
business professor Clayton Christensen, the New Economy guru
who wrote the best-seller “The Innovator”s Dilemma.”
Christensen, riding his wave of popularity, set up a mutual fund
to test out his theories. It closed after he lost 64% in less than
one year.
–The London Times reported that hedge funds and investment
banks face losses of at least $3 billion as a result of their
arbitrage plays in the G.E. – Honeywell deal. [Other sources say
just $1 billion.] And I realize I”m in the minority here, but I just
don”t think this whole episode has as dire a consequence for the
world trade picture and U.S. – European relationships as
everyone else does. The arbitrage losses, on the other hand,
could be serious.
Of far more import, however, may be a late-breaking
development concerning a WTO ruling against the U.S.
involving a business tax break that saves companies like Boeing
billions of dollars a year. The decision could result in the
imposition of massive penalties against the U.S., though there is
an appeals process. We”ll have far more on this next week.
–Big Five accounting firm Arthur Andersen settled with the
government for $7 million over its fraudulent handling of Waste
Management”s books. As part of the deal, the firm also has to
change its name to Bunco Andersen.
–Gannett reported that help wanted advertising collapsed 20% in
the first half of the year, 27% in April alone.
–Energy: The Federal Energy Regulatory Commission (FERC)
mandated limited price caps on wholesale electricity prices, not
just in California, as expected, but in 10 other Western states as
well. The power suppliers immediately said the move would
discourage new plants as well as consumer conservation. With
the recent plunge in energy prices across the board, only time
will tell if the government”s act of “regulatory aggression” (Jim
Grant”s phrase) is warranted.
The other issue in California is the state government”s action to
sign long-term contracts for its purchases of electricity. One has
to be fair in this instance. While California today is suddenly
paying way more than the spot market, no one knows if
Governor Davis locked the state into paying for power at higher
prices 10 years down the road. But one can make an educated
guess that if the power-building boom which is now underway
continues, California residents will have received a bum deal.
And perhaps the biggest issue has to do with some of the
contracts being “take or pay,” requiring California to purchase
power for 5-20 years whether needed or not.
And back to the governor, after obtaining his price caps Davis
went to Congress asking that FERC be mandated to ask the
power companies to refund the state for the amount California
officials say they were overcharged. Geezuz, he”s irritating.
As for energy share prices, they took a pounding (as did some of
your editor”s holdings in the oil drilling arena). Inventories for
oil and gas continue to rise, which means that prices will fall, a
good thing.
What frustrates those of us dabbling in the sector is the fact that
at least for the time being, future earnings potential is being
ignored. Undoubtedly, the reports of massive portfolio
rebalancing also have some validity. So to paraphrase Mr.
Schwab, “Why didn”t I take all of my experience and just wait
two weeks?” Now I have to eat pasta and drink cheap beer until
share prices recover. Drat!
–Junk bonds: Or eat lots of junk food. I also took a hit on my
junk bond position, but I”m still up on a total return basis. I have
urged anyone investing in this sector to make sure they stick to
“quality” junk. If you didn”t heed the advice, it”s too late now.
And if your fund is loaded with telecom, you may want to gather
the kids around and break it to them gently. [And while they”re
distracted, have your spouse disconnect the cable…you”ll need
the savings.]
–Airlines: May ended up being the worst revenue month in at
least 20 years for the industry as business travel, which
comprises two-thirds of airline sales, plunged.
International Affairs
Israel: Prime Minister Sharon continues to exercise restraint in
the face of growing opposition from Israel”s hardliners. The
latest travesty involved an ambush of Israeli soldiers, which left
two dead on Friday. Sometimes one can”t help but think of the
late Yitzhak Rabin and the fate he met for his heroic stance.
Russia: Columnist Charles Krauthammer labeled President
Bush”s performance in Europe “velvet-glove unilateralism…be
nice, but be undeterred.” Regarding the president”s effusive
statements following his first meeting with Russian President
Putin, though, opinion was decidedly mixed. Actually, while
yours truly strongly feels it”s important to have some kind of
personal chemistry between our two leaders, I also don”t disagree
with Republican Senator Jesse Helms”s statement that
“prematurely personalizing this relationship only underscores the
incentives (Putin) has to reorient Russia”s domestic and foreign
policy goals.” Helms added that Putin is stamping the “jackboot
of repression” on Russia”s press. Democratic Senator Joe Biden
said, “I don”t trust Mr. Putin.”
And you do need to be worried when the New York Times runs
two almost identical pieces utilizing the same quote. “Rarely
have the two nations” leaders so surpassed the limited
expectations of their meeting.”
But as I wrote last week, all they did was begin to stake out
positions on issues like missile defense, and way too much was
made of Putin”s harsh words regarding this topic later in the
week. We”re just at the beginning of a long, long process. And
Bush needs to study more Russian history.
What should really worry everyone, however, is something I
addressed in Friday”s “Bar Chat;” the issue of 5,000 U.S., and
Russian missiles remaining on hair-trigger alert. I always felt
that the worst of Bill Clinton”s many lies was his statement
following one of his summits with Boris Yeltsin, wherein the
president said that for the first time American children could go
to sleep at night knowing that the threat of nuclear war was
virtually non-existent because the two nations no longer targeted
each other. It simply wasn”t true. The fact is that we must
address this issue immediately and the first thing we have to do
(I realize I”m repeating myself here) is to help the Russians
upgrade their early warning systems to prevent an accidental
strike.
Iran: With the indictment on Thursday of those accused of
masterminding the Khobar Towers bombing, the 1996 terrorist
attack which claimed the lives of 19 American servicemen, the
administration laid the blame at the foot of Iran, without
specifically charging any Iranian individuals. So the question
becomes, how do we go forward in our relationship with the
government in Tehran? We have a reform-minded president
there who received over 75% of the popular vote two weeks ago,
yet he”s a man who remains hamstrung by the radical clerics who
refuse to allow him to implement the changes that would bring
about a stronger democracy. Somehow, we need to open the
diplomatic channels or an opportunity to help the nation turn
things around may slip away, with devastating consequences.
Former congressional leader Lee Hamilton and ex-defense
secretary James Schlesinger suggested the following in an op-ed
piece the other day. Relax our sanctions on Iran as they pertain
to the business community, not regarding weapons proliferation.
Otherwise, we are “ignoring the Iranian people”s clear call for
reform by simply maintaining and renewing existing unilateral
sanctions. And an opening to Iran now would make it harder for
those Iranian leaders who oppose reform to make the U.S. a
scapegoat for Iran”s problems.”
Particularly in the field of energy, European companies are
looking to break into Iran”s vast market and as the Journal
reported this week, Italy”s ENI will probably be the first to
ignore U.S. prohibitions. America should take a shot as well, a
test case. But I will also understand when, as a result of Khobar,
many in Congress will call for retaliation rather than diplomacy.
Japan: The Bank of Japan stated, “Looking at our economy, the
adjustment phase is intensifying as output has fallen dramatically
due mainly to a drop in exports.” In other words, recession #4 is
taking hold, while Prime Minister Koizumi”s plans to solve the
bad bank loan problem are gradually being revealed as he sets up
the country for the pain that is to come. Separately, the trade war
between China and Japan is heating up.
China: As part of the ongoing dilemma the Chinese government
faces over the reform of its inefficient state-owned companies,
John Pomfret reported in the Washington Post that while 15
million have been laid off from such operations, 60 million more
are still considered surplus. The government is deathly afraid of
the unrest that would result if they eliminated those positions
today.
North Korea: All you need to know about this mysterious
country is the fact that leader Kim Jong-il still has not honored
his promise of a year ago to set a date for visiting South Korea.
All else flows from this single failure to act. And while the Bush
administration is trying to restart talks on missile proliferation,
the North said it refused to open negotiations on its 1.1 million
strong conventional force, 650,000 of which are within miles of
the South Korean border.
E.U.: After the violence in Sweden last weekend, who would
want to host any E.U. / WTO / G-8 affair? The 1999 WTO
meeting in Seattle was a watershed event, every gathering since
having been targeted by the anti-globalization movement,
particularly by those who don”t like to bathe, the so-called
anarchists.
Per last week”s discussion, the E.U. did set a firm timetable for
the enlargement of its club, meaning that Ireland”s voters will
need to have a change of heart on the issue for nation”s like
Lithuania and Slovenia to have a shot at membership. The
bigger issue for Europe down the road is how much freedom the
individual populations want to give up to a bunch of faceless, un-
elected bureaucrats who can”t possibly have their interests at
heart. And to use the British as an example when it comes to the
adoption of the euro, is it any wonder that about 70% of the
country is against it? [For this reason, don”t look for Tony Blair
to try and ram it down his people”s throats any time soon.]
And back to the issue of “Who wants to be a meeting planner?”
the next G-8 summit is to be held in Genoa, Italy on July 20.
Due to credible security threats, there is a very real possibility
that it will be staged on a warship, rather than at some ornate
palace. [Italy”s own First Lady has already said she refuses to
attend because of the threat.] In the past, hosting one of these
events was a way to put your city on the map and attract tourists
and commerce. Today, it”s as if you walk around with a sign on
your back reading, “Hit me.”
Northern Ireland: Extensive rioting broke out in Belfast, the
worst round of fighting in 3 years. After last week”s comments
in this space, ask me if I”m surprised? The battle started when
Protestants threw rocks at Catholic girls leaving their primary
school. Very civilized. The real issue is the IRA claims they
won”t disarm until the British “live up to their side of the
bargain,” that is withdraw far more troops than they already
have. [On Friday the Brits announced that 1,600 additional
forces were being sent to the North instead.] One local woman
was asked her impressions. “If the peace process breaks down,
all this hatred on the street will become normal again.”
Pakistan: General Musharraf, who took over in a coup back in
the fall of 1999 (my how time flies!), added the title of president
this week to legitimize his rule as he prepares for his big summit
meeting in India. A neat trick, if you can get away with it.
Turkey: Another consequence of a changeover in the U.S. Senate
is the fact that Senator Biden will probably attempt to block arms
sales to Turkey over lack of progress on Cyprus reunification
talks. Biden is forgetting your editor”s lessons on this vital
nation. On Friday, the Turkish parliament banned an Islamic
party that already held seats in the assembly.
Ukraine: The pope has embarked on a risky trip here in his latest
attempt to mend fences with the Orthodox Church.
Random Musings
–Politics: I liked the column by the Journal”s Paul Gigot on the
“two George W. Bushes.” “One is the president of high
principle, the other is the ruthless political pragmatist.” Bush is
increasingly infuriating many in his own party who can”t keep up
with the inconsistencies in policy, best exhibited in the decision
to halt the bombing on Vieques without any consultation
whatsoever.
Meanwhile, a New York Times / CBS News survey (yes, a
communist push poll), revealed that Bush”s approval rating is
down 7%. That”s not a big deal. What is (if you”re an elephant)
is the fact that only 46% view Republicans favorably, down 8%
in a short period of time. Thank you Karl Rove.
And then you have the federal budget. The cap on discretionary
spending is supposed to be $661 billion but as of now the figure
comes in at $900 billion, thanks to the porkers down in
Washington.
On the patients” bill of rights, the issue is whether or not
individuals will be allowed to sue their HMO in state and federal
court, or, just the latter…a huge difference. Given that HMO”s
rival the Taliban in the court of public opinion, many just say, “I
should be able to sue whomever and wherever.” To those
harboring this opinion, I”d urge you to look at what”s happening
these days regarding asbestos litigation, which threatens to topple
some of America”s greatest corporations. Unfortunately, the
longer Bush holds firm on this issue (denying the right to sue in
state court), the worse it will be for the Republicans in 2002.
The vast majority of Americans don”t like to read up on issues
and take what they do see or hear at face value.
Two last items. First, the Republicans did gain a nice victory by
winning a special election for a Virginia House seat. Second,
Republicans have finally wised up and recognized that it makes
zero political sense not to mandate increased fuel efficiency
standards for SUVs.
–AIDS: The prime minister of Mozambique said the people of
Africa must change their behavior when it comes to tackling the
disease. “AIDS is not like smallpox or polio.” There have also
been some significant developments on the corporate front as the
likes of Coca-Cola and DaimlerChrysler have instituted
sweeping programs to help their workers in nations like South
Africa. [Bill and Melinda Gates also kicked in $100 million.]
Of course the companies recognize that at its present pace, the
Cokes and Chryslers of the world won”t have any labor pool to
draw on unless they launch an all-out offensive now.
–For the past few years I”ve been fearing this day. All of us
have our favorites from the entertainment world and Carroll
O”Connor was mine. In my opinion his performance as Archie
Bunker was simply the best ever, on television or film. And I
guess part of my affection for O”Connor, himself, stems from the
fact that off screen he seemed like such a good, genuine man.
When asked once if he minded the intense association with
Archie Bunker and the constant attention he replied, “I love it.”
Sadly, his latter years were filled with sorrow over the suicide of
his son as a result of drug use. We”ll miss you, Mr. O”Connor.
You were brilliant.
–A Pew Research Center poll revealed that 52% of Americans
are dissatisfied with the direction of the country, 43% satisfied.
Just six months ago it was 55-41 the other way. Additionally,
44% feel the divide between the haves and have-nots has grown.
I”m surprised it”s not much higher. It”s not all about money,
either. To me it”s a loss among many Americans of common
decency and respect.
–And then you have something like the following, which
occurred Wednesday in Paterson, N.J.
“Five Paterson teenagers (ages 13 to 17) were in custody last
night in the unprovoked beating death of a homeless man who
was punched and kicked by as many as 20 youths a day earlier.”
The victim, Hector Robles, was minding his own business.
I was beginning to moderate my opinion on the death penalty.
Something like this makes me want to expand its use instead.
–In 9 days, Tropical Storm Allison met the water needs of the
entire country for one year.
–Pirate attacks on ships are up fivefold since 1990, with 72
killed in incidents last year, compared to only 3 in 1999. The
waters off Indonesia are the most dangerous, largely because
half of the world”s freight passes through this region. Be careful
when you open the door next Halloween.
–It costs $35,000 to buy a komodo dragon on the black market,
but a buttock lift will set you back just one-tenth of that, $3,500.
Just some ideas for you folks who have everything.
–Pulitzer prize-winning historian Joseph Ellis (“Founding
Brothers”) had to admit this week that he was making up stories
about having served in Vietnam, when he was really teaching at
West Point during the period in question. So it”s time for yours
truly to come clean. I was NOT the second baseman on the 1986
Mets world championship team.
–The Oxford English Online Dictionary has now legitimized
Homer Simpson”s “D”oh!” I was using “Doh!” years before it
was cool to do so…only these guys are telling me I”ve been
spelling it wrong. I demand a hearing. Get me Johnnie Cochran.
–Yak update: [Why? Some readers demand it.] The wild yak
has great lung capacity and even its blood cells are designed for
high elevations. The cells are evidently 3 times more numerous
than those found in cattle, thus increasing the yak”s ability to
carry oxygen. [Actually, if you are a long distance runner, you
could inject yourself with yak cells and Olympic doctors
wouldn”t know how to test for it…kind of like the blood-doper
Lasse Viren of Finland in the ”72 and ”76 Olympics, eh?]
–Kids, regarding the above comment, please don”t try this
without discussing it beforehand with your parents.
–And I just glanced through the latest issue of Business Week
where I found a piece concerning scientists in Australia who”ve
developed a vaccine that cuts the amount of methane gas
produced by sheep and cattle – thus lowering greenhouse gas
emissions (yaks are also a major culprit, sad to say). As reported
by Becky Gaylord, “Farm animals produce so much of the stuff
in normal digestion that it accounts for 14% of Australia”s total.”
[The figure is 50% in New Zealand!] A new market for Gas-X!
–According to the Star-Ledger newspaper, thus far in 2001 the
Dow Jones has risen each of 11 Mondays following an
appearance by Tiger Woods on the PGA Tour. Tiger is playing
this weekend in New York.
–So I”m reading the High Plains Journal and looking at articles
on “stripe rust” and “karnal bunt” (both enemies of wheat) and
I”m thinking, geezuz, you won”t read any complaints from me on
farm subsidies.
–I don”t solicit you for anything on this site, for which I know
many of you are grateful, but I need to make two exceptions to
this policy.
First, the Civil War Preservation Trust, a worthy organization
that buys up land for the purposes of saving our battlefields as
national monuments and parks, is seeking $15 million from the
federal budget, after which they will match the same amount
through private donations, to purchase more land around sites
like Shiloh. But it is felt that President Bush”s support is needed
to get the funds approved and Bush is said to be leaning towards
it. Drop Bush or your congressman a line in support.
And lastly, this past Sunday, Father”s Day, the New York area
suffered a huge loss when 3 firefighters died battling a blaze in
Queens. The tragedy is compounded by the fact that they left a
combined 8 children behind and if you saw the funerals on
Thursday and Friday you couldn”t help but be touched by the
awful sense of loss the respective families face.
The New York Post, through the offices of the Uniformed
Firefighters Association, has established a fund for the families
of John Downing, Brian Fahey and Harry Ford. I am sending a
donation and hopefully some of you from the New York area
will consider joining me.
The Astoria Fire: Post Heroes Fund
c/o Uniformed Firefighters Association
204 East 23rd St.
5th Floor
New York, NY 10010
—
Gold closed at $273
Oil, $26.83
Returns for the week, 6/18-6/22
Dow Jones -0.2%
S&P 500 +0.9%
S&P MidCap -0.6%
Russell 2000 -1.3%
Nasdaq +0.3%
Returns for the period, 1/1/01-6/22/01
Dow Jones -1.7%
S&P 500 -7.2%
S&P MidCap -2.1%
Russell 2000 +1.1%
Nasdaq -17.6%
Bulls 51.0%
Bears 30.6% [Source: Investors Intelligence]
Thanks for your support. If you live in New Jersey, don”t forget
the primary on Tuesday!
Next week the mid-year review as well as your editor”s report
card.
Brian Trumbore
