[Posted 7:15 AM]
Scene: The StocksandNews jukebox
“I can see clearly now….screech…” Oops, wrong tune. Ya got
a quarter?
“Gloom, despair, and agony on me…”
–Hee Haw
There, that”s more like it. Certainly the news was dreadful on the
corporate front, and chief executives continue to prove to the rest
of us just how clueless they all are, because it is rare to find one
who can tell you what the next two quarters are going to be like.
However, in the game of Wall Street and investing, you have to
continually separate the economy from the markets, as they are
often two different animals, and believe it or not, I felt a little
better about things this week.
But first, we did start things off in dismal fashion, as the Dow
plunged about 300 points early on, while Nasdaq traded back
below 2000, as the Street was overwhelmed by the bad news on
the earnings front. So let”s get that out of the way.
–Electronics giant ABB said it was laying off 12,000 and didn”t
see any real improvement in its business for 12 months.
–Alcatel announced it was laying off an additional 12,500.
–Lucent”s revenue for the quarter went from $7.4 billion to $5.8
billion, year-over-year, and up to 20,000 more workers will lose
their jobs. [Long-time readers know of my feelings here. Living
3 blocks from their headquarters helps put things in perspective,
as well as knowing your father worked at once-great Bell Labs
for 35 years. The whole situation is just very sad.]
–Meanwhile, Lucent spin-off Agere forecast that its own
revenue will fall 30-35% in the current quarter.
–Dupont saw a more challenging environment in the third than
the second.
–Compaq sees a lousy third.
–Hewlett-Packard warned (for the third time this quarter
alone…enough already) that its fiscal report card ending July 31
would be abysmal, as they continue to cite a weakening global
environment. [It”s almost as if H-P is screaming, “Just shoot
me!”]
–Amazon.com said it would miss current revenue estimates for
the third and fourth quarters, to which I”d ask, this is a growth
story? Even year-over-year, revenues were up just 16%. The
handwriting for this sector was on the wall this past January
when Yahoo shocked everyone with its miserable report. [Long
before that, obviously, for the also-rans.] If AOL Time Warner
acquires Amazon, which is possible down the road, don”t expect
a big premium if you are an Amazon shareholder.
–And the granddaddy of them all, fiber-optics components
leader JDS Uniphase (the company whose CEO insists on
wearing this stupid beret…or is it a dunce cap?), announced a
loss of about $652 trillion (actually, it was more like $50 billion
when you throw in the kitchen sink; excluding write-downs, $8
billion), said the world as we know it would end, cut 16,000
more jobs, and saw its web site hacked prior to the official
release of the earnings report, thus necessitating a halt in trading.
Now if I were “king for a day,” halfway through this recitation I
would have gone, “Stop! Just stop! Now Frenchie, what the hell
are you guys doing?”
On the economic front, 2nd quarter GDP came in at 0.7%, the
slowest growth rate in 8 years. True, we at least continue to
avoid recession (as classically defined…and as I said we would),
though the figure could easily be revised significantly downward
later on, but you can”t deny that the trend is very ugly. But guess
what? Otherwise the news wasn”t that bad. No…seriously.
Jobless claims fell (though it”s tough to defend this highly shaky
number in light of all the layoff announcements), home sales
continue to rock in most parts of the country (with homeowners
using their home equity loans to help keep the economy”s head
above water), and all inflation indicators remain sanguine.
Meanwhile, U.S. Steel said its industry is stabilizing (my own
figures appear to bear this out), key semiconductor players hinted
at a rebound in their sector, and we”re almost out of earnings
season and this constant stream of bad news. Plus Friday night
NBC News led off with a story telling us how bad things are.
This is great! The ultimate contrarian indicator. Ergo, we just
may be due for a nice technical bounce. In fact I feel a little
bounce in my own step even as I”m typing this.
Ah, but lest we get too carried away, any well-deserved rally will
be tempered by the fact that the rest of the world is still just
beginning to fall (Taiwan, long in the dumper, may be the
exception if the semiconductor sector truly stages a rebound),
and also because of that rather important word…valuation. We
are not going to commence a new bull market with a price /
earnings ratio on the S&P 500 of around 26. It just ain”t gonna
happen.
Street Bytes
–For the week, the Dow lost 1.5% to close at 10416. Nasdaq
was unchanged at 2029.
–U.S. Treasury Yields
1-yr. 3.44% 2-yr. 3.87% 10-yr. 5.10% 30-yr. 5.54%
Bonds were basically unchanged. Certainly the short end of the
curve is anticipating further rate cuts by the Federal Reserve.
And the ugly GDP number did nothing to dispel that notion.
–Social Security: [Because private investment accounts are
being proposed, I”ve decided to elevate the topic from the
“Random Musings” category to “Street Bytes.” And in a few
weeks I will be devoting some space to the issue in “Hott
Spotts.”] I have to side with many Democrats on this one
because the Bush commission”s initial draft report was clearly
designed to scare us. The final copy did say social security was
“unsustainable” in its current form, as opposed to the first use of
the word “broken.” But folks, I still just don”t get it. Sure, you
can roll out all the demographic facts, but we are looking for
complex solutions for what should be a fairly easy problem.
Maintain benefits (though perhaps tweak them by not continually
raising them at the exact inflation rate), slowly increase the
retirement age another two years, and, just as importantly, nix the
private investment account idea and increase the contribution
limits on IRAs (at a faster schedule, and higher level, than the
new tax bill calls for). No one ever mentions what is the most
obvious fact in this whole debate. We already have private
savings accounts! Are we all that stupid? Yeah, there is much
more to the debate and I”ll spare you all for now. But watch out
in about 2 weeks.
[This week”s “Wall Street History” piece is devoted to the
genesis of the Social Security Act of 1935.]
–Heard on CNBC, strategist Joe Battipaglia: “Investors have
gotten over the bubbles that have brought them down over the
last year.” Oh, were that so, Joe.
–By one estimate the total “notional” value of all derivatives in
the world is said to be about $95 trillion. This in no way reflects
actual exposure, which is virtually impossible to come up with,
let alone define, but it gives you a sense of what”s floating
around out there (just ask American Express after its own
experience). Now by comparison the world”s total GDP is
approximately $30 trillion. [Source: Marc Faber]
–Energy: As expected, OPEC announced that it would reduce
production by one million barrels a day, as the Saudi oil minister
said the cartel was heading towards a crisis, with demand
diminishing while supply is excessive. The energy sector firmed
up on the news, but it really all comes down to the economy as to
the future of oil and natural gas prices and, yes, the weather. The
recent drop in share prices for the group was tough for yours
truly to stomach, but I”m more convinced than ever on the profit
potential for many of these stocks going forward.
[Here in New York we have had a great summer with little heat.
On Tuesday, though, we had a more typical day and Con Ed, the
local utility, saw record usage and was fairly close to breaking. I
can”t imagine what would happen if we strung 5 straight awful
days together, like is normal in these parts. The point being, we
do have a crisis in this country. Maybe we need a massive
blackout to kick-start the Bush energy plan once again. And it
would also lead to a new baby boom, and increased consumer
spending.]
–The median home price hit a record $152,600 in June, a fact
that continues to surprise me. However, a man I have a great
deal of respect for, PIMCO”s Paul McCulley, did mention awhile
back that he thought we would see one final spike in home prices
nationwide before the bubble burst. And in the economic
prediction game, in baseball terms, PIMCO is like Rogers
Hornsby, with everyone else swinging like Mario Mendoza.
[McCulley isn”t then calling for a total collapse…which is what
I”m watching for. Perhaps this makes me Cleon Jones.]
–There were conflicting comments on the advertising market:
Viacom”s Mel Karmazin said the worst was over, while the
latest industry reports forecast that spending for 2001 will
decline year-over-year for the first time since ”91, and that 2002
may not be much better.
–Exxon Mobil earned about $4.5 billion in the second quarter,
but because oil prices have been falling, no one complained. Is
this a great country or what?
–Moody”s projects that the default rate on junk bonds will peak
early next year. As you know I own a slug of junk (it”s high-
quality crap, mind you) in my own portfolio. It”s done just fine
this year and if you believe we avoid recession, corporates could
provide a nice opportunity. But first make sure you know what”s
in the portfolio. [Since you also know of my connection to
PIMCO, understand that I am more bullish on junk than Bill
Gross currently is. However, the day that Mr. Bond says junk is
okay, a big portion of the gains may already be in. You don”t
really think he”s going to start buying at the same time as the
rest of us schleps, do you?]
–Tokyo”s Nikkei index hit a 16-year low this week. Goodness
gracious. London”s FT-SE was at its own 33-month low before
rallying at week”s end.
International Affairs
Japan: Prime Minister Koizumi is keeping his fingers crossed
that Sunday”s parliamentary elections go strongly in his favor.
He needs a mandate to begin implementing his economic reform
program, though some are beginning to worry just how painful it
will be. In economic news, consumer prices fell for a 23rd
consecutive month in the Tokyo metro area.
But it”s on the military front where the Japanese seem to be
spending an increasing amount of their time. Defense News
reports that officials are wary of Chinese naval incursions into
Japanese waters. Should this continue it will only help Koizumi
in his efforts to reshape Japan”s defense forces. At the same
time, however, China is particularly upset at the prime minister”s
scheduled trip to a shrine which honors Japan”s war dead. What
was once off limits to Japan”s leaders, the site enshrines the
memory of 14 soldiers (among others) who were convicted of
war crimes during World War II. It is this ongoing insensitivity
to the past which continues to rankle the likes of China, as well
as North and South Korea.
China: It was a busy week for authorities here. First, Beijing
blasted a high court ruling in Hong Kong which granted
residency rights to a boy born in Hong Kong to a mainland
Chinese mother. China threatened the court”s authority,
which obviously would be unsettling if there was any real follow
through. And then the government convicted, sentenced, and
paroled two more U.S.-based academics for allegedly spying for
Taiwan. From the evidence it certainly appears that the
professors were doing normal research and you can imagine the
unease in China among its intellectual community. But at least
they were released prior to Secretary of State Colin Powell”s
arrival.
For his part, Powell will not only be trying to further normalize
U.S.- China relations, but also express our concerns over joint
China – Russian action on the military development front. And
so the “triangulation” play is in full swing among these three
nations. Of course the master at this game was Richard Nixon.
Lastly, China has its hands full with its economy, as it tries to
damp down unrest while instituting its painful reforms. If you
begin to hear more and more reports of problems in the
hinterlands, that”s probably as good a signal as any that the U.S.
should get its guard up even more, because the government in
Beijing would be forced to turn to nationalism as a way to
placate the masses.
Russia: Meanwhile, I wonder what the people of Moscow think
when they see National Security Advisor Condoleeza Rice
meeting with Russian officials to lay out the framework for
future arms and missile defense talks between Presidents Bush
and Putin? [Personally, I think it”s fantastic.] In the preliminary
discussions both sides argued they wouldn”t budge from their
main positions; the U.S. is going to continue to conduct tests on
NMD, while Russia does not want to abandon the ABM Treaty.
The two leaders next meet in Shanghai in October (reinforcing
the triangulation thing) and my guess today is we can expect a
real breakthrough there; large cuts in each side”s nuclear arsenal
in combination with Russia allowing the U.S. to circumvent
ABM. Then the debate in Washington will be whether the U.S.
has left itself vulnerable, while in Moscow Putin”s critics will
decry his giveback on NMD. [The big “blink,” however, will be
when Bush allows Putin to do what he wants with former Soviet
republics.]
Finally, Treasury Secretary Paul O”Neill, who should have his
own theme song, “The Happy Wanderer,” continued his
optimistic talk, this time on the prospects for Russia”s economy.
Hell, it”s all about energy, and the U.S. wants a piece of Russia”s
vast resources. Nothing wrong with that, and if it helps the
Russian people, we”re all better off. Vladimir Putin is no angel,
but he is a pragmatist. Maybe there is a true window of
opportunity here.
North Korea: And then there is certifiable nut job, Kim Jong-Il.
This week the North Korean leader embarked on a one-week
journey across Russia before he ends up in Moscow next week
for discussions with Putin. Evidently, he”s not even getting out
of the train along the way, let alone the fact that officials in
Moscow have no idea what his itinerary is. Meanwhile,
Secretary of State Powell said the U.S. would like to meet with
Kim to discuss anything that may be on his mind. “So how was
that train ride?” “Good.” “Great. Now about your nukes…”
“Russia is very big.”
Israel: Former Prime Minister Netanyahu emerged to blast Prime
Minister Sharon for his policy of restraint. Sharon”s Likud Party
(of which Netanyahu was the former leader) is increasingly upset
over the lack of progress, as the tit-for-tat violence continued this
week.
And now water is emerging as a critical issue. [It always has
been in Israel, it”s just that the mainstream media in America has
yet to pick up on it.] Israel”s shortage is getting worse and the
nation may have to rely on Turkey for supplies. [See folks? It
all keeps coming back to Turkey.]
Lastly, on a totally different note, an Israeli parliamentary
committee urged a boycott of conductor Daniel Barenboim for
playing a Wagner tune at a music festival; Wagner being Hitler”s
favorite (he also fancied Bruckner, though the stories always fail
to mention this). Which reminded me of a Barenboim concert
that I attended while a student at Wake Forest. He was
conducting the Orchestre de Paris at the time and I must say I
have never walked out of a classical concert with the opinion I
had that evening. The orchestra sucked.
Spain: Basque terrorists have begun targeting tourists. Luckily
for one community, the bomber blew herself up before she hit a
hotspot. And police managed to foil another bomb attempt at
Malaga”s airport.
Macedonia: Boy, the ruling Slavs have come to despise NATO,
because they think it is favoring the ethnic Albanians in the latest
conflict. Thankfully, though, each time the situation is about to
totally blow, they pull back from the brink.
E.U.: Only 45% of the people living in the European Union trust
the European Commission, and only 48% believe E.U.
membership is a good thing for their country (only 29% feel this
way in Britain). [Source: David Ignatius]
Indonesia: President Wahid is no longer. After being a squatter
in the presidential palace, he decided to pack it in. So the new
president is Megawati, the daughter of the country”s first
president, Sukarno. She is popular among the masses, largely
because her father was, but she is not known to have a real keen
intellect. At least the transition thus far has been a peaceful one.
Sri Lanka: I have a saying around here at StocksandNews, a car
bomb going off in Sri Lanka has absolutely no bearing on how
you or I lead our lives. But a car bomb going off in Tel Aviv
might. And so it is that over the years I have said zippo about
the long civil war here. But, alas, even Sri Lanka makes ”Week
in Review” this time, not because what happened on Wednesday
should mean anything to us (it doesn”t), but rather the suicide
attack by the Tamil rebels on the international airport was as
brazen as they come, with the insurgents taking out 5 Airbuses
and 8 military craft.
National Missile Defense
New York Times columnist Thomas Friedman is a darling of the
Left as he has built himself up to be America”s foreign policy
conscience. Sometimes I do find myself agreeing with his
positions, but in the case of missile defense he is way off base.
What opinion-makers like Friedman like to say is that the U.S.
has far greater threats to its national security, like a bomb sitting
on a tanker in Long Beach Harbor, or, as he wrote the other day,
cyberterrorism. Of course these are both tremendous threats, but
that doesn”t mean you ignore the ballistic missile one either.
Friedman writes that by abandoning the ABM Treaty, and
proceeding with NMD, Washington would be trashing MAD, the
principle of mutual assured destruction which has worked so well
in the past. He points to the fact that Saddam used poison gas in
his war with Iran but wouldn”t dare use it against the U.S. during
the Gulf War because he knew he”d be obliterated. “(Today”s)
rogues are already deterred by classic deterrence,” says
Friedman.
But in reply I would have to repeat something I”ve written in this
space many times before. How can we possibly expect the
world”s tyrants to always act responsibly in the future? How can
we possibly believe that leaders like Saddam and Kim Jong-Il
will continually go to the edge without going over? And how
could America”s leaders make this same assumption, when their
primary duty is to protect the American people?
Two other points. This week we had the stories on Saddam and
his increasing efforts to shoot down a U.S. spy plane…or any
plane for that matter. Did you know Iraq can now fire its anti-
aircraft missiles 70,000 feet in the air (where our planes cruise)?
This is advanced technology, folks, so you”re only fooling
yourself if you think today”s rogues won”t have the ability to hit
the U.S. with a ballistic missile in a shorter period of time than is
now thought.
Secondly, folks like Friedman never mention another key issue I
have often mused about. I”m not so sure we would nuke Iraq or
North Korea if the situation warranted such a response. Where
does the fallout go? Heck, Sweden had fallout from Chernobyl,
and that was obviously nothing compared to the effects of a
nuclear bomb or two. Think about South Korea. Would we
really risk contaminating them, in attacking the North?
This is why we need NMD. Suitcase bombs and cyberterrorism
may be the more prevalent threats of the future, but a Saddam
Hussein threatening a ballistic missile strike on the U.S., when
they know we can”t knock it down, is a great form of blackmail.
And tomorrow”s nut jobs may not always want to hide under the
cloak of invisibility that a suitcase bomb would allow. They may
prefer the television cameras.
*This week Italy”s Prime Minister Berlusconi came out in full
support of NMD. “We will always be next to the U.S. in order to
take part in this discussion.” A toast to you, Silvio.
Kyoto: A new preliminary agreement on global warming was
struck without the U.S. But in order for it to become effective,
55 countries responsible for 55% of global greenhouse emissions
must ratify the accord. None of the world”s largest developed
nations have yet to do so (with the goal for final approval being
year-end 2002).
G-8: After the chaos in Genoa, the next summit will be held in a
somewhat secluded resort in Alberta. Host Canada has vowed it
will be a greatly scaled-down affair. Now on one hand you
might be thinking, well the protesters can easily make their way
to the place (near Jasper), but you”re forgetting Canada”s secret
weapon to repel any attacks from anarchists…Grizzly Bears!
Bring ”em on, boys.
Globalization: This week”s “Hott Spotts” is devoted to the issue.
I just have to add here that obviously the hooligans get all the
attention…and deserve none…but there are some legitimate
beefs from groups like the Sierra Club and organized labor.
The term “globalization” makes it sound like it”s all black and
white, when this is the most complex issue we will face over the
next 100 years. So while I slam the dirtballs who wreak havoc at
the summits, understand that I am sensitive to the plight of a steel
worker in West Virginia who has lost his job because the U.S. is
importing cheap Korean steel. And to give another example, you
can”t just issue a blanket condemnation of all the world”s
“sweatshops” when in many instances this is the only job the
poor in that particular country can get. So you see, in just these
two cases, how complex it all is.
Random Musings
–Nathaniel Brazill, the 14-year-old killer of a middle school
teacher, received 28 years in prison when he deserved life
without parole. This is no kid. He”s a cold-blooded killer who
showed absolutely no remorse throughout his trial.
–In Cincinnati on Thursday night, a white policeman killed a
black man, the first such incident since April”s riots. Writing in
U.S. News this week, John Leo described the scene in the city
since the spring”s troubles. Aside from this week”s case, the
police are so intimidated that arrests are off 50% and shootings
are way up in the 3 months since compared to a year ago – 77
gunshot victims versus 11 last year. Traffic stops are down
55%. That”s what you call de-policing. Of the 15 black civilians
killed by Cincinnati”s police in the past 6 years (now 16…a
major reason for the protests, according to the leaders), the
Cincinnati Enquirer said 11 seemed justified (as did Thursday”s),
with the other 4 raising serious questions. Meanwhile, city
convention business has plummeted and the whites are fleeing.
It”s a sad tale.
–And sticking to the StocksandNews crime blotter, there is the
case of Lizzie Grubman, publicist for Britney Spears, among
others, who ran over 16 people in the Hamptons a few weeks ago
after allegedly blasting the bouncers at a nightclub as “white
trash.” The treatment of Ms. Lizzie has been quite telling. New
York magazine, for instance, noted that some of those injured
were not white trash, but rather “A-listers.” Columnist Michael
Kelly summed up Grubman”s plight.
“Pity Miss Grubman…How was she to know that it was
impermissible to run over white trash? Miss Grubman knows
what we all know. There is ”us” – ”us” in the VIP rooms, ”us” in
the VIP schools, ”us” in the VIP jobs. And there is not-us, the
white trash, and there are very different rules for what each can
do to each.”
–Oh don”t you know that NBC was fired up, so to speak, over
the big Wyoming / Jackson Hole fire. “Inside the lines…,”
“What”s shaping up to be the worst fire season ever.” Every
damn year is the “worst ever.” Believe me, I”m certainly not
belittling the brave efforts of the firefighters, but it gets a little
tiresome having this constantly presented as ”world news.”
Actually, I”m concerned for the bears. They haven”t phoned me
yet.
–Now as for Mount Etna, that”s spectacular. But more
importantly, the Philippine volcano, Mt. Mayon, could impact
our weather if it keeps up. Like make it colder. Like, you know,
we”d use more energy. Like my oil stocks would go up. [In this
world, there are the “hip,” and those of us who own oil stocks.]
–My buddy MR is foaming at the mouth again over his
admittedly excellent idea, the screened-in porch business. After
discovery of the West Nile virus in Florida, he knows that
Floridians (especially the older ones) will start panicking. Of
course I tried telling MR that everyone already has a screened-in
porch down there, but he had loaded up the truck and is presently
heading down I-95.
–Hmm, let”s see, Gary Condit. What do I say? Hey, did you
catch his brother? Kind of a scary dude, if you ask me. But in
listening to his attorney”s story, the poor guy was rounded up
without real probable cause simply because the media fingered
him. And as for the latest videotape that the Levys released,
wherein they were interviewing Chandra, man, that was creepy.
And then you have the creepy Pentecostal minister and his lie
and, geezuz, somebody find the girl so the rest of us don”t have
to deal with all this.
–Last week I wrote of the record number of nail salons that are
springing up across America. [I must say, girls, you all do look
sharp.] This week the Star-Ledger here in New Jersey had its
own front page story detailing the fighting that has erupted
between the Korean and Vietnamese proprietors of this trade. If
it escalates to hand-to-hand…ouch!
–Headline News goes to its new format on August 6th. 82
anchors, new graphics, it…may…change…your…life!
–Wow, when I praised Montreal the other day, little did I know
it”s basically the stolen car capital of North America. 200 cars
were taken from the airport last year, compared to 65 at LAX and
just 4 at Boston”s Logan Airport. [Source: U.S. News] And not
for nothing, but the Canadian government is acting rather
belligerent towards the current U.S. administration. We all
should want a peaceful takeover, after all.
–I didn”t feel the least bit compelled to comment on Katharine
Graham”s death in last week”s column, but I did catch some of
her funeral, and it was just another reminder of why I can”t stand
the Washington establishment. Of course in some respects Mrs.
Graham was a heroic figure, but I can”t exactly gush over
someone who used to spend months preparing guest lists for her
elitist soirees. Me? I”d rather have a six pack with my friends in
Oklahoma.
But David Gergen did have an interesting comment regarding the
rapid end to an era of classic journalism which we are witnessing
today; the demise of the likes of Cronkite, Sevareid, Wallace,
and Brinkley, for example. What we have these days is pitiful
compared to the giants of yesteryear. I”m sure most of you
would agree with Gergen when he says “Our public discourse is
in a serious slide.”
–Geezuz I”m tired of looking at CEOs on CNBC. When I see
one these days, I immediately switch to the Weather Channel.
[Unless they”re in the oil business…those are good, down to
earth folks, know what I mean?]
–And what I learned on the Weather Channel the other day may
astound you. For each acre of land (about the size of a football
field for you urban dwellers) there are approximately 500,000
earthworms. I bet the CEOs don”t know this.
–Yak update: Yup, nothing but highbrow stuff here. And what
we learn this week, boys and girls, is the fact that wild yaks
normally gather in groups of 10-30. Which means that when
they are transplanted to tense, urban settings, you often find
police having to go, “Alright, you yaks. Break it up.”
Gold closed at $267
Oil, $27.02
Returns for the week, 7/23-7/27
Dow Jones -1.5% [10416]
S&P 500 -0.4%
S&P MidCap +0.1%
Russell 2000 -0.6%
Nasdaq -0.0% [Fractional loss…2029]
Returns for the period, 1/1/01-7/27/01
Dow Jones -3.4%
S&P 500 -8.7%
S&P MidCap -1.1%
Russell 2000 +0.3%
Nasdaq -18.0%
Bulls 52.6%
Bears 23.7% [Source: Investors Intelligence]
Have a great week.
Brian Trumbore
