[Posted 7:15 AM]
“The market has lived the recovery without ever having gone
through the downturn.”
–Money manager Guy Elliffe (Jurika & Voyles)
A friend of mine told me the other day I was too negative.
Whaddya mean?! I said. [Editors are allowed to get defensive
every now and then.] I haven”t changed my forecast one bit
since the start of the year…muddle through for the Dow and
S&P, maybe a few hundred-point gain on the Nasdaq by year-
end…but I will continue to bring up the potential wildcards, both
political and economic, and I also still believe you can do just as
well in cash and bonds, for the foreseeable future, as you can in
equities.
And I liked Mr. Elliffe”s comment because it pretty much sums
up the attitude on Wall Street these days. Most folks want to
believe the worst is over, but 9 out of 10 corporate chieftains
don”t seem to agree with that premise and Fed Chairman Alan
Greenspan clearly isn”t sure himself.
This past week Greenspan gave part one of his semi-annual
testimony to Congress and he warned that the U.S. economy was
still weak and could weaken further. Oh sure, he had a few
nuggets of positive chat, like how the economic and
technological gains of the past decade will see us through to a
brighter future (or something like that), but there were far more
warnings coming out of his mouth than anything else.
Greenspan is worried about the steep slide in corporate
profitability (which leads to more layoffs) and the fact that
“softer job markets could induce a further deterioration in
confidence and (consumer) spending intentions.” In addition
“the decline in stock market wealth that has occurred over the
past year (could also) restrain the growth of household
spending.”
The positives are that we have no inflation, the Fed has been
aggressive in its monetary policy, and the chairman is pretty
confident the tax rebates could have their desired effect.
Nonetheless, Greenspan also made clear that he stands ready to
provide more additional comfort in the form of further rate
reductions.
And from the looks of things in Corporate America, he may just
be providing more relief in the very near future. As earnings
season heated up, we had IBM”s Lou Gerstner finally admit that
his company was “not immune from some of the problems that
affected many of our competitors in the second quarter.” That”s
tame. But then IBM said they expect a dramatic fall-off in their
chip business in the current quarter.
You also had tech leaders like Sun Micro, Gateway, Intel, and
Nortel all formally announce (after earlier warnings) that
revenues were down 20-36% from a year ago level. This is
staggering when you consider that back then these same
companies were boasting of future growth rates, not decreases, in
the same neighborhood. This could be said of virtually all of
tech land.
And then you have the future guidance remarks. Nortel doesn”t
see any meaningful pickup until the second half of 2002.
Vodafone is cutting investment in faster mobile-phone services.
Microsoft, after jerking us around last week in preannouncing
higher revenue, then issued its actual earnings and said the
September quarter won”t match current estimates.
But wait, there”s more. Applied Materials started off the week
by saying its business could be slow well into 2002. EMC cited
steep price-cutting for its woes (no pricing power also being a
chief concern of Greenspan”s). And in the non-tech space,
American Express announced 5,000 additional layoffs, AOL
Time Warner remained concerned about the weak advertising
market, and #2 supermarket chain Albertson”s is closing 165
stores. Even those who tried to be positive on the future, like
Intel and Nokia, saw 2nd half improvement…maybe.
So while stocks continue to hang in there (in the case of Nasdaq
I”m referring to just the past few months), the markets seem to be
discounting the notion that the U.S. economy may be in the
dumps for a good while longer, but logic tells me I shouldn”t be.
And anyone listening to Greenspan”s remarks had to be disturbed
by his comment that he didn”t see any economic contagion
around the world. He seems to be ignoring the fact that, for
example, in Asia, ex-Japan, 40% of its growth results from
exports to the U.S. And he also seems to be too sanguine on the
plight of Latin American nations like Argentina and Brazil. Plus,
if tech is going to lead us back to prosperity – and if it doesn”t,
then the world”s economic future is awful gloomy – how does
Greenspan square the fact that the semiconductor industry is not
likely to surpass 2000”s sales until 2004 (according to one trade
association), or that PC sales worldwide declined in the second
quarter for the first time in 15 years (Gartner Group)?
But I will try to end this opening monologue on a positive note.
As many have cited the past few weeks, at least the U.S. is now
taking the right steps. While I question the efficacy of the Fed”s
actions, as well as the Fed”s overall relevance these days, they
are aggressively lowering rates. And while I dislike the form and
shape of the tax cut, it”s certainly better than the alternative.
Lastly, Corporate America is seldom shy when it comes to
restructuring, as painful as it may be for those affected.
Unfortunately, policy inertia exists outside the U.S. This should
be the debate in Genoa among the G-8:
Ask not what the U.S. can do for you. Ask what you can do for
the global economy.
Street Bytes
–For the week the Dow Jones picked up 0.4% to close at 10576.
Nasdaq lost 2.7% and now sits at 2029. The S&P 500 lost 0.4%
to 1210.
–On 12/31/98, the S&P 500 was at 1229; Nasdaq, 2192. That”s
over 30 months of nothing. You would have been better in cash
and bonds.
–U.S. Treasury Yields
1-yr. 3.42% 2-yr. 3.94% 10-yr. 5.12% 30-yr. 5.54%
If you are looking for good news, mortgage rates should begin to
come down again as the longer end of the curve has rallied in a
big way the past few weeks. So refinancings could pick up
anew.
–The Journal had a story that money managers are looking at
Internet opportunities in Europe, specifically online gambling
stocks. Like I”ve said, there is no new thing.
–While the U.S. is being urged by its G-8 partners to do more to
pull the wagon when it comes to the world economy, the U.S.
can of course argue that Europe and Japan are the ones who need
to do more. This week the E.U. reported the inflation rate for
June was down to 3% on an annualized basis. True, it”s still
above the 2% target rate, but with Europe”s economy in a funk,
stimulate the damn thing with further interest rate cuts. Or,
as columnist David Ignatius writes, “If they gave a ”Herbert Hoover
Award” for policies that could intentionally turn a slowdown into
a depression, my nominee would be the (E.C.B.”s) president,
Wim Duisenberg.”
And you have to question German Chancellor Schroeder for
sticking to his government”s austerity course when growth in the
economy there is about 1%.
–I feel obligated from time to time to add a bit on the U.S.
dollar. For those of you who don”t follow this stuff too
regularly, but may be wondering what all the discussion is about
these days concerning our strong currency, just remember that
the downsides of a sharp drop in the greenback (which is what
some corporate chiefs in the U.S., as well as foreign governments
want) are that it would boost the cost of importing things
(sending the Fed on inflation watch) as well as make U.S. stocks
less attractive for foreign buyers.
–Energy: Oil and natural gas hit 14- and 15-month lows before
rallying some at week”s end. [Thankfully, my beloved little
driller staged a strong relief rally of its own.] OPEC is making
waves that it will cut production before its next formal meeting
in September, possibly at an emergency session in August. The
slowing global economy and bulging inventories may necessitate
the action. You”ll recall that OPEC wants to keep its basket of
crude within a $22-$28 price band and earlier this week that
basket was below $24.
But you all know what the energy game comes down to in the
U.S. and that”s the weather. The major population basins on the
East and West coasts have had temperate summers thus far. But
that can change and then demand for products like natural gas
would once again soar. In the meantime, lower energy prices not
only help corporate profits, they also can keep the global
economy”s head above water. OPEC knows this. They”re just
going to try and manage the price as well as they can. The bet
here is that they will be successful.
As for California, thanks to the state”s recently signed long-term
energy contracts, with the slide in the cost to generate electricity,
now the state is paying well above market rates. But as much as
I dislike the policies of Governor Gray Davis, it”s also not fair to
go on and on about how the state cut a bad deal for itself. Should
California be in the energy business to the extent they now are?
Of course not. But, long-term, did they lock in favorable or
unfavorable prices? Only time and the weather will tell.
–Congratulations to eBay for another solid earnings report. But
somehow an online auction house”s success doesn”t say anything
about the overall state of the economy, or the Net for that matter.
After all, an economy is supposed to grow by selling new stuff,
not in exchanging old crap.
–Speaking of crap (as you can readily see I won”t be submitting
this particular piece for Pulitzer consideration), the shenanigans
taking place in Corporate America with regards to its accounting
practices only gets worse. If you can decipher today”s earnings
reports, go straight to the head of the class. I”ll remain in my
back row seat, staring out the window, trying to decipher it all.
It”s simply a bunch of B.S., I tell ya.
–Microsoft is appealing the federal appeals court ruling up to the
big guys, the Supremes. It”s a way to delay the mandated relief
proceedings until after the rollout of Windows XP in late
October.
–The Journal had an important piece on Merrill analyst Henry
Blodget and a case that the firm recently settled for $400,000
with an individual investor who claimed he was wronged by
Blodget”s unwarranted excessive enthusiasm. The precedent has
now been set. I would urge all New York based analysts to sell
their Hamptons” estates, though be aware that the market is
already saturated with sellers.
International Affairs
Genoa: Due to the timing of the summit and the posting of this
column, I will have to delay comment until next week. In the
meantime, we get to watch the “anarchists and hooligans” do
their thing. I give President Bush credit for blasting the dirty,
dumb a-holes who are causing the crisis and my heart goes out to
the poor people of Genoa whose livelihoods are being destroyed.
No one will ever want to host these events again.
Israel: Israeli Foreign Minister Shimon Peres told Egyptian
President Hosni Mubarak early in the week that “war is not an
option” when it comes to dealing with the Palestinians. The
problem is that the situation is really out of the hands of
moderates like Peres, as the killing of 3 Palestinians by Jewish
extremists on Thursday would attest to. Militants on both sides
simply rule the day (and I”m sure you all saw that awful video of
Palestinian suicide bomber camps for 12-year-olds).
Former Israeli Prime Minister Barak, in his first public statement
since his humiliating defeat at the polls, said “We won”t have a
peace agreement with Arafat.” You can forget peace with
anyone right now. It”s increasingly looking like war is a
foregone conclusion.
And in Egypt, as I”ve mentioned before President Mubarak
constantly has to watch his backside and this week his
government arrested 25 from the banned Muslim Brotherhood
who would like nothing more than to take him out.
China / Russia: Russian President Putin and Chinese President
Jiang Zemin concluded their “Good Neighborly Treaty of
Friendship and Cooperation.” Now granted, there is a triangular
thing going on between these two and the U.S., but I for one
don”t think the treaty is that big a deal. After all, China is a
rising power, Russia one in nukes only. And both of them need
the U.S.
For its part, China did $115 billion in trade with America in
2000, and just $8 billion with Russia. But Moscow is supplying
China with its most sophisticated weaponry and for that China is
thankful (while Taiwan is fearful), but there are some who say
that given Russia and China”s historical animosities, Moscow
should be careful just how much they give the Chinese military,
and to that end, Russia is also arming India, China”s enemy. It”s
all rather complex, and, if I may so, fascinating.
On the missile defense issue, China and Russia will voice their
extreme displeasure but President Putin made it very clear this
week that he won”t plan any joint action with China to counter
U.S. moves on this front. He also had some flattering remarks
concerning his relationship with President Bush.
And so in Genoa, when Bush and Putin meet it will be round two
on NMD and the fate of the ABM Treaty. But the two also need
to discuss the issue of Iraq and Russia”s refusal to go along with
the U.S. / British proposal that would have increased controls
over weapons flowing into Iraq in exchange for humanitarian
relief. As columnist Jim Hoagland noted, “(Putin) is more firmly
in Saddam”s corner than ever. That”s a dark spot that should
jump out on any X-ray of any soul.”
A few final notes on China. A U.S. professor was convicted of
espionage but then expelled, the best possible resolution of a bad
situation. This was China”s way of saying they don”t want a
breakdown in Sino-American relations. And in Taiwan, 57% of
the people want the island to co-host some 2008 Olympic events.
Which perhaps makes this an appropriate time to say to you all, I
will do my best not to beat the Olympics issue to death…it is 7
years away after all. But it”s only natural that 2008 will come up
every time Beijing is accused of another human rights violation.
Iran / Iraq: Not for nothing, but these two have been arguing
vociferously in the U.N. the past few weeks over the issue of
weapons of mass destruction. Each is accusing the other of
harboring them. I know what you”re thinking. I had the same
thought. But remember that renewed conflict between these two
would spell $50 oil in our country.
Japan: It seems as if each day either the Bank of Japan or the
government issues a statement saying the Japanese economy is
worsening. Geezuz. The people know how bad it is, what
purpose does it serve for the government to remind them daily?
[Thankfully, here in the U.S., we get most of our doom and
gloom during earnings season. Or in this space.] And as if Japan
didn”t have enough problems over its insensitive middle school
history textbook, now North Korea is slamming them. At least it
would appear that Japanese teachers are having second thoughts
about using the book (they don”t have to choose it).
North Korea: Meanwhile, there is a regional security meeting in
Vietnam this week and Secretary of State Powell was to meet
with North Korea”s foreign minister to begin to lay the
groundwork for new missile proliferation talks. Alas, the foreign
minister said he was “too busy.” And on Friday, the little
commies threatened to cancel all existing agreements with the
U.S. over last week”s missile defense test. Which means one
thing. We should not be surprised if North Korea test fires its
long-range missile, in violation of existing accords. Should they
do this, they know we will probably come running with more aid.
India / Pakistan: Much was made over the fact that talks between
the leaders of these two countries suddenly broke off without any
kind of formal statement over Kashmir (the border region
claimed by both). But the talks had been extended to a third day
and at least there is a framework for further discussions. So
that”s a positive.
The negative is that, similar to the situation between Israel and
Palestine, it”s the hardliners who often set the agenda. Pakistan”s
militants say armed struggle is the only way to settle the dispute.
Indonesia: President Wahid”s impeachment hearings are set to
begin on Saturday. Just step down, boy, and spare your nation.
Separately, parliament granted Aceh province, scene of large-
scale sectarian violence, the right to implement Muslim Sharia
law. Excuse me for a second…I need to call my travel agent…
Remi? You know that trip you set up for Aceh?
Random Musings
–The great Robert Bartley of the Wall Street Journal on
government and taxes. “Ever since mankind came down from
the ice floes, tribal chiefs have always looked for any excuse to
claim more of what the people produce.”
–Timing is everything. You all know where I stand on the
energy issue, particularly long-term, but the administration”s
timing couldn”t have been worse in this regard. The combination
of a slowing economy and no major heat waves in the population
centers have conspired to do a number on the White House”s
energy plans. And Vice President Cheney looks like a fool when
he gives a speech saying “conservation is a must,” just months
after belittling it. Of course the Dems aren”t buying it and they
control the Senate. Another instance of the Jeffords effect.
–USA Today / Gallup survey: 47% will use the tax rebate to pay
off bills. 32% will save or invest it. Only 17% will spend it.
–The U.S. military is in deep trouble and needs massive funding
if we are simply to meet our responsibilities around the world.
Were North Korea to invade the South tomorrow, or China
launch an attack on Taiwan, we simply aren”t prepared. And
President Bush is doing an awful job, especially in light of his
campaign promises. The Weekly Standard”s Robert Kagan is
urging Defense Secretary Rumsfeld and Deputy Secretary
Wolfowitz to resign in protest. I wouldn”t go that far, but our
president better find religion soon on this matter.
–The Washington Post had a front page story on the proliferation
of nail salons. [We have 3 on a single block in my small town.]
In the Washington area alone there are a staggering 11,000. The
big issue is the potential health hazard, as many of these
establishments aren”t properly licensed and often reuse dirty
implements. Yuck. Just a public service announcement, girls,
from your editor.
–Speaking of germs, researchers at Harvard Medical School are
reporting that the first entirely new type of antibiotic in 35 years
has been beaten by the staph supergerm in little more than one
year after being introduced. [AP] Staph is already developing
resistance to the main reserve antibiotic, vancomycin.
–And speaking of research centers, forget the Sports Illustrated
cover jinx. We have a new one far more important in the grand
scheme of things. This week U.S. News and World Report had
its annual issue of the best hospitals in America. Johns Hopkins
was #1. On Thursday the federal government prohibited the
medical center from testing on humans after the death of an
asthma test subject.
–Canada: I spent a few days in Montreal this past week. What a
nice city. Great people, good food, and super beer. But I have to
tell you, as I was checking in at Newark, it took me 10 minutes
before I realized I had parked myself in the “domestic check in”
line. Now what does that tell you (aside from the fact the editor
can be absent-minded)? Yup, Canada should merge with the
U.S. Now if Quebec wants to go its own way, fine. They could
perhaps be a territory. Otherwise, it makes too much sense.
45% of business executives in Canada now favor adopting the
U.S. $. The Canadian dollar isn”t called the “loonie” for nothing.
Meanwhile, President Bush is the first president that I can
remember who has broached a delicate issue with our great
friends. How about sending us some of your water for the
parched Southwest?
–New Zealand was once again in the news over the nation”s
fight to cut greenhouse emissions, specifically those emanating
from its own livestock. Scientists feel New Zealand is
particularly susceptible to global warming so they are frantically
trying to develop remedies for their gaseous cows and sheep.
Seriously, in 5 years we could be talking about U.N. programs to
distribute Gas-X.
–CNBC had a story on Thursday that Sara Lee was recalling
products because of salmonella concerns. We were then told the
particular items had expiration dates of June 27 and July 4. It
was July 19. Throw the freakin” stuff out! Geezuz. “Honey,
this cheesecake looks all moldy and smells. You want any?”
–Thanks to the emergence of stories like the latest terror threat in
the Gulf and the Baltimore tanker fire, the Chandra Levy / Gary
Condit tale was reduced to the second or third slot on nightly
newscasts.
Here”s my brief take on it. First, I agree with my friend Liz S.
who says Condit should resign simply for the act of having an
affair with an intern, against all the rules of Congress. It”s really
a despicable act. Somewhere along the line our government
institutions need to have higher standards. If you don”t like it,
don”t run for office.
Nonetheless, there are going to be an awful lot of red faces when
this is finally resolved, but, as in the case of Richard Jewel, any
public embarrassment on behalf of our media representatives will
last, oh, maybe 24 hours.
–And how about that search in Rock Creek Park? Man, they
actually found some running shoes and a basketball. I was
hoping they”d uncover my brother”s Pete Rose rookie card. He”s
been complaining about this for over 30 years. But maybe PBS
can do a new series, “This Old Park.”
–Yak update: Yaks “groom themselves, scratch, clean their
hooves, and even open grain cans.” Heck, if they can open grain
cans, surely they can also open beer bottles. Just a thought, but if
you sent your kids to summer camp and you”re looking for some
help serving guests at your annual shindig, a yak could be just
what you need. Just watch the horns.
Gold closed at $269
Oil, $25.94
Returns for the week, 7/16-7/20/01
Dow Jones +0.4% [10576]
S&P 500 -0.4%
S&P MidCap +0.2%
Russell 2000 -0.4%
Nasdaq -2.7% [2029]
Returns for the period 1/1/01-7/20/01
Dow Jones -2.0%
S&P 500 -8.3%
S&P MidCap -1.2%
Russell 2000 +0.9%
Nasdaq -17.9%
Bulls 52.5%
Bears 23.2% [Source: Investors Intelligence. This is the lowest
level since April ”98…at which point the Dow fell 13% in
6 months. That”s why it”s called a contrarian indicator.]
Have a great week. I appreciate your support.
Brian Trumbore
