[Posted 7:15 AM]
As I”ve noted before, one of the purposes of this column is to
keep you abreast of all that can go wrong. Sure, it gets kind of
depressing from time to time, but no one said life was a cakewalk
and, as far as the “stocks” portion of this site”s name, hopefully I
have helped some of you avoid a portfolio bomb or two. And
every now and then I also find it necessary to take a step back
and reexamine the Big Picture.
$25 Oil
I”ve always said one ignores foreign affairs at your own peril,
and today is no exception. Surprisingly, and thank God for
this, from a national security standpoint Russia and China should
not be our immediate concerns. While this can all change in the
blink of an eye, we suddenly have a situation where, for various
reasons, the leaders of both countries are saying rather
complimentary things about President Bush, quite a change from
just six months ago. Russia recognizes how badly they need stable
to good relations with the U.S., while China is preoccupied with
the perilous internal transitions taking place on its economic and
political fronts, as well as noting the positive role the U.S.
consumer can play in lessening the potential for domestic strife.
Sure, we”ll have to put up with some harsh talk from time to time,
particularly concerning the issue of missile defense, but take it
for what it is, rhetoric.
No, right now we have a bigger issue, and the other day
President Bush stumbled upon it (though I guarantee you he has
no clue why it is important). A reporter asked the president to
comment on OPEC”s latest production cuts and the cartel”s goal
of $25 per barrel oil. Bush said he thought $25 was a fair price
and some in the media howled, “How can he say that? How can
he give in to OPEC”s wishes?” Well, I”ll tell you how.
Awhile back I addressed this issue, one which never seems to be
part of the discussions in Washington, nor among our media
elite. But in light of recent events, it”s important to bring it up
again. We need $25 oil to prevent the moderate Arab states from
imploding. If oil were to fall back to the $10 level of just 3 years
ago, with its devastating impact on government revenues, the
odds of Islamic extremists toppling the moderate regimes
increases dramatically, and this would mean not only Saudi
Arabia, but also non-OPEC / non-oil producing nations like
Egypt and Jordan, who receive considerable aid from their
wealthier OPEC brethren.
What is so scary about the current situation in the Middle East is
that in all the nations surrounding Israel, you have massive
poverty and populations seething with hatred; hatred not just
towards Israel but also the West, as well as their own leaders
whom they see as ignoring their plight. It”s hard for many in the
U.S. to understand how there can be such “poverty” in nations
with so much oil wealth, but it exists, and from these hotbeds
emerge tomorrow”s terrorists.
For decades Arab leaders ignored their people. All oil wealth
was sopped up by the ruling families, the common folk be
damned. Needed infrastructure projects, like for schools, roads,
and water treatment went begging, and the Arab world fell
further behind the surging economies of the West. But now, with
two generations of restless populations, and a third on the way,
these same Arab leaders can not possibly rest easy. Many, like
in Saudi Arabia, have been rushing to make up for years of
neglect. They now recognize they must diversify their
economies and find jobs for their people, before their own heads
are lopped off. But, of course, it”s largely too late. The
schoolchildren aren”t taught about the virtues of capitalism,
rather they learn about the history of Hamas, Islamic Jihad, the
PLO, Saddam…and to hate all things Israeli or American.
It”s a race against time, and we can”t just tip over the hourglass
to start over. Moderate Arabs, wherever we can find them, need
the West”s help. These 12-year-olds who are growing up
learning how to become suicide bombers, somehow need hope
for a better life. Good schools, new roads, new housing…
everything. But how can we assist in this process? Congress is
currently reducing the level of foreign aid, while in the case of
nations like Egypt, we see how much of the past assistance has
simply gone down a rathole. The only thing we can do is to help
maintain the price of oil around $25. The Arabs are then
satisfied, it doesn”t crush the global economy, and America”s
energy producers are able to explore for the future. For it”s the
future that is even more worrisome. One would hope the West
becomes less and less dependent on OPEC, but this means fewer
petrol dollars for the Arab world…and more social unrest among
the disaffected. If the U.S. government chooses to become more
energy independent, and as Europe potentially relies more on
Russia for its energy needs, the moderate Arabs have less than a
decade to take advantage of the current revenue picture and
create more diversified economies. A pipedream? Probably.
But the alternative is unthinkable.
As for today, the moderates may be powerless to hold their
people back when it comes to the Israeli / Palestinian issue.
They know a wider conflict only hurts them in the long run, but
they are under increasing pressure from the men in the street.
Leaders like Mubarak and King Abdullah face the risk of
assassination every day for their temperate words. No one wants
a war, but after the events of this week, a full-scale conflict is
what we”ll probably get.
And as I”ve long wondered, just what will kill the still relatively
positive consumer sentiment in this country? Yes, grinding
layoff announcements eventually take a toll. And while the
above discussion isn”t what strategists like Barton Biggs are
referring to when they say final “capitulation” by the consumer –
and the equity investor – is almost inevitable (and actually
desirable in the long run when it comes to launching the next bull
market), there exists the potential for nightly news coverage from
the Middle East the likes of which we haven”t seen in a long
time.
Alas, there are other concerns, of a far more non-violent nature.
Wall Street struggled for a time this week because of the release
of the Federal Reserve”s report on the nation”s economy, called
the “beige book.” While we already knew the bad news, the
findings still made many want to reach for the airsickness bags.
The economy is putrid. Manufacturing weakness continues,
“orders for back-to-school and Christmas merchandise (are)
running lower than last year in anticipation of slower sales,” and
the slowdown overseas is worsening. The bottom line is if you
are expecting an improving corporate profit picture, one which
validates already historically high price / earnings multiples, you
may be waiting a long time.
Certainly Cisco wasn”t a source of mirth and merriment. As I
wrote last week, I don”t know what some folks were thinking
before the network equipment giant announced its latest earnings
report. Revenues for the quarter were down 25% from a year
ago and the current quarter may be down as much as 5% more
from that ugly level. CEO John Chambers, once Mr. Sunshine,
said no one knows when the economy and capital spending will
bottom out. And he is not optimistic on Cisco”s overseas
prospects. [Curiously, Chambers did see growth in Latin
America. Someone must have handed him one of those antique
maps which showed “New World.”]
$ $ $ $ $
Corporate America is doing its part in trying to talk the U.S.
dollar down, and thus help exports. And the greenback is
declining, so far in an orderly fashion. It would be easy,
however, to be an alarmist and say a collapse is on the way, with
overseas investors dumping their U.S. securities on an already
skittish Wall Street. Some day that will happen. But as for today
you still have to ask yourself, why would they do that? Where
would they go? And, after all, there is the mess that is coming in
January, the euro conversion.
The European Central Bank must be scared to death. This isn”t a
Y2K hoax, this is real. You”ll begin to hear much more shortly
on this topic, but if you haven”t been following it, here”s a simple
example.
In Italy, rounding off, it currently takes about 1900 Italian lire to
equal one euro. And let”s say the average Italian worker is
currently used to getting a monthly pay check of 5 million lire.
Suddenly, that will drop to 2630 euros. This will have a
deleterious psychological effect on the Italian consumer. ECB
authorities are also duly worried about counterfeiting (in Italy,
for instance, the Mafia will rule the roost). Picture you”re a
merchant and you suddenly are given a new currency in which to
transact business. How the heck can you tell if you”re receiving
a “good” bill or not? It takes time to recognize these things.
Which is a roundabout way of saying, those looking for the dollar
to tumble, certainly can”t use the euro conversion process as a
cause.
Street Bytes
–The Dow Jones staged a decent rally on Friday, which helped
to limit the loss on the week to 96 points, or 0.9%, with the index
closing at 10416. But the Nasdaq collapsed below 2000, losing
5.3% on the week to finish at 1956, the lowest week-ending
figure since April 13. I am still of the belief that Nasdaq will
avoid falling to its spring low of 1630. But if we do, I think that
would be devastating for investor confidence. I also don”t
believe that we need to retest historical market multiples of 14 or
15 on the S&P 500 (the current trailing 12- month P/E is closer to
26) before we see a respectable rally. But what the current
valuations do tell you is that when we finally see some positive
signs on the economic front, upside will be severely limited.
–U.S. Treasury Yields
1-yr. 3.32% 2-yr. 3.68% 10-yr. 4.98% 30-yr. 5.50%
Bonds staged a big rally on the heels of the ugly beige book, the
surprising producer price report (which actually hinted of
deflation) and the feeling that the Federal Reserve is a lock to
lower interest rates further on August 21.
–Analysts covering Intel are forecasting another price war in the
chip sector, which isn”t good for profits – but is for consumers,
so hold off on that PC purchase for another month.
–Energy: Oil and gasoline inventories continued to fall, but are
still above last year”s levels, while natural gas inventories remain
robust, with the price hovering around the $3 mark, down from
$10 this spring. And I just have to add that I was watching Mark
Shields on my favorite program, “The Capital Gang” (which if
you know when this is on, it reveals way too much about the
editor), and there he was again, railing about the oil companies”
windfall profits. Mr. Shields continually forgets that this same
industry employs hundreds of thousands in good, high-paying
jobs, and if they aren”t profitable, we don”t drill, and if we don”t
drill, Mr. Shields”s lights go off.
–Much was made of the improvement in the U.S. productivity
figure, which rose more than expected. Of course the fact is it
rose because workers were fired, while hours worked were about
the same. So if it once took 3 workers to make a widget, today it
may only take 2 (or 2.8). But if you”re looking for corporate
profits, this doesn”t mean a heck of a lot in today”s environment.
Or as PIMCO”s Paul McCulley adds, you still need something on the
demand side.
–Ralph Lauren / Polo sales were up 22% for the recent quarter.
Despite my dire forecasts, the bull run in pretentious behavior
continues.
–Jupiter Media Metrix projects that spending for online
advertising will only hit $5.7 billion this year, down from their
previous estimate of not so long ago, $7.3 billion.
–Worldwide semiconductor sales are now forecast to fall 26%
this year.
–Late Friday, Oracle admitted its software sales will be far
weaker than projected less than two months ago.
–Merrill Lynch”s Chief Economist Bruce Steinberg sees GDP
growth of 4% for the U.S. in 2002. If he”s right, the markets will
certainly hang in there. But ask me if I think he”s right.
–You know those Liberty Medical commercials with Wilford
Brimley, where he”s riding a horse in the beautiful Rockies?
Turns out Liberty”s parent, Polymedica, is under federal
investigation for mail and Medicare fraud in that same Liberty
unit. “I”m a crook, and I know how important it is to take my
medicine.”
–Gateway is looking to exit Europe and Asia, including the
closure of a large plant in Dublin. Those of you waiting for the
Irish real estate bubble to burst (like the editor) can view this as
another clear sign of things to come.
–Microsoft has asked the Supreme Court to step in and reverse
the antitrust case on the grounds that because of Judge Jackson”s
behavior, the original findings of fact should be dismissed. Of
course the appeals court, while blasting the judge, also
reaffirmed Jackson”s antitrust conclusions. But Microsoft may
be able to successfully delay any final decision on the part of the
High Court (if they accept it) until after the release of Windows
XP. And Microsoft is now allowing manufacturers to offer XP-
equipped machines before the original October 25 release date.
Late Friday the U.S. Justice Department weighed in, urging the
appeals court to reject the attempt to send the case on up to the
Supremes, instead urging the lower court to act quickly in
mandating penalties.
–State tax revenues continue to slide. I know this isn”t
earthshaking, but it”s all part of the trickle down effect that
impacts consumer spending.
–My portfolio: I remain 70% cash / bonds, 30% equities (mostly
energy).
More International Affairs
Israel: One other note, there is a report circulating that Yasser
Arafat will attempt to form a coalition Palestinian government
including Hamas and Islamic Jihad, because the Palestinian
people demand it. Oh brother.
China: An article in the Washington Post discussed in detail the
torture practices being employed against Falun Gong, in the
government”s ongoing efforts to crush the group. Imagine being
forced to squat on a floor for days at a time, or having to stand
against a wall for 9 days. Authorities have decided that without
the threat of violence and torture, Falun Gong would thrive. The
campaign seems to be having its desired effect.
But the communist regime is mostly focused on two other
paramount events. The upcoming transition of power in 2002,
and the impact of China”s admission to the WTO. [Yes, you
could also throw in the Olympics.] The State Planning
Commission issued a warning about the latter, as increased
competition will lead to massive layoffs in inefficient state-run
businesses. China is hoping, though, that increased foreign
investment will blunt the impact of greater competition.
North Korea: Kim Jong-Il assured Russian President Putin that
he would observe the missile test moratorium until 2003. But
Kim refuses to restart talks on the issue with the U.S.
Meanwhile, North Korea owes the Russian government $billions,
so since they can”t repay the loans in cash, Kim is going to send
thousands of workers to work in Siberian logging camps… “free
labor” for loans. The North has done this in the past, and you
can imagine the brutal conditions in these establishments.
And to show you how “helter-skelter” Kim is, he told Putin that
he is demanding U.S. troops withdraw from South Korea, even
though he had previously told South Korean President Kim Dae
Jung he didn”t mind them being there. It”s also worth noting that
after last weekend”s summit with Putin, Vladimir didn”t see Kim
again. I can just hear Putin now, “Geezuz, get me away from
that creep.”
Latin America: Anthony Faiola had an interesting piece in the
Washington Post on how many in this region are now beginning
to doubt the benefits of capitalism and free markets. After a
surge in democracy over the past 10+ years, many of the Latin
American economies are now tanking. 3 in particular,
Argentina, Brazil, and Venezuela, should be of great concern to
the U.S. for their potential to wreak havoc on their neighbors.
There is no doubt that the economic problems many of the
nations face could lead to a collapse in the political structure.
And on the social front, crime is absolutely soaring. In
Venezuela, for example, police have been unable to identify any
suspects in a terrorist bombing campaign which appears to be
trying to drive a wedge between the government of President
Chavez and the powerful Catholic Church (the church having
been a prime target). Despite its vast oil wealth, Venezuela has
massive unemployment (just like its Arab OPEC brethren) and
the people are increasingly restless. Brazil”s crime problems,
on the other hand, are due in large part to systemic corruption.
In many towns gangs rule the streets while the police simply
ignore criminal activity, mostly because they are paid to look the
other way (and also because their own salaries are pitiful).
Meanwhile, the IMF and the U.S. are cobbling together support
for an Argentina / Brazil rescue package. At least Mexico is
hanging in there, but then they just had 3 bombings of Banamex
branches, due to the pending takeover by Citigroup.
Iran: It was a tough week for supporters of reform and President
Khatami. His inauguration was delayed 3 days, in humiliating
fashion, while the hard line clerics forced the parliament to
accept the clerics” candidates for the all-powerful Guardian
Council, a body which can slap down any measures the
parliament may adopt. So you have Khatami, who received 77%
in a nationwide election just a few months ago, battling against
the Ayatollah. But with 14% unemployment, Khatami”s efforts
should be focused on economic change, and instead he has to
waste his time on political reform.
Macedonia: This is flying under the radar, big time, but as with
everything else involving the Balkans, the chaos here has the
potential to explode at any moment. Monday is a crucial date as
the parties in the conflict are supposed to sign a peace treaty.
Northern Ireland: I have been fortunate in my professional life to
have worked for some very wise men. One long-time boss had
what he called his “24-hour” rule. If you want to say something
that may be a bit controversial, wait 24 hours. [Unfortunately,
with this column”s deadline, it”s not always possible.]
I bring this up because in the case of Northern Ireland,
everybody and their mother on Monday was praising the IRA”s
pledge to destroy, or “decommission”, their weapons. What a
breakthrough, most experts shouted. Just wait 24 hours, I
thought. And sure enough the next day Protestant leader David
Trimble blasted the IRA proposal for its total lack of details.
Now I”m far from a Trimble fan, but in this instance he”s right.
There are no details. And now the British government has done
the right thing and “suspended” the coalition government
authorized by the Good Friday Accords. They”re practically
back to square one. But at least a little hope survives.
India: A couple was hanged in an Indian village this week
because they had an inter-caste relationship. This nation has so
much potential, but they will be held back until they begin to
address some appalling traditions, just as we were forced to do in
the U.S. Back in 1985, I worked for a spell here. At one point I
was in the lovely home of my host, sitting on his veranda,
overlooking the peaceful river, when Sanjay clapped vigorously.
Way off in the distance, I heard the sound of boys running. Out
of breath, they soon stood before their master. Sanjay wanted his
shoes. They were a few inches from his feet. The boys handed
them to him and ran off. I wanted to scream.
Zimbabwe: Government-sanctioned violence against white
farmers has picked up again. President Mugabe threatens to
become a two-time winner of StocksandNews”s “Dirtball of the
Year” award, an honor that most sane leaders should want to
eschew.
Somalia: The warlords are accusing Ethiopia of launching cross-
border attacks. StocksandNews would support Ethiopia in any
future conflict.
Cambodia: The government has finally agreed to prosecute the
surviving leaders of the Khmer Rouge (leader Pol Pot having
died in 1998). From 1975-79, an estimated 1.7 million
Cambodians were either executed or starved to death. But as
was the case years after the fall of the Berlin Wall, some of those
responsible for the genocide are now “respected” members of the
Cambodian leadership.
Random Musings
–There are just a few topics I refuse to comment on, one being
abortion. I will, however, say this about the stem cell debate.
My heart went out to Michael J. Fox as I watched him on the
“Today Show” Friday morning. And I admired him for his
balanced comments concerning President Bush”s statement on
Thursday night. The president”s proposal is a start, but if you are
one who wants to just go hog-wild with the research, without
considering some of the ethical issues, I hope you at least
caught some of the quack scientists attending the cloning
conference in Washington this past week. There you had doctors
representing the “Raelians,” a cult that believes we are
descended from aliens. I want to go on but in the back of my
mind is my former boss”s voice, “Wait 24 hours, Brian.”
–President Bush is being hammered by the media for his
vacation, which is just nuts. If you think a president ever has a
day off you”re a Raelian.
–North Korea”s Kim Jong-Il stopped through Moscow again on
his train trek back across Russia. He stayed at the luxurious
Metropol Hotel, where we learned his presidential suite was
prepared to rigorous specifications, including Kim”s request for
additional clocks so that he “can at any moment find out exactly
what the time is.” And there are some who don”t think we need a
missile shield?!
–When it comes to wildlife and endangered species, I hope you
understand where I”m coming from, despite my occasional
sarcastic remarks. I couldn”t give a damn about the snail darter,
or the 100,000 deer in New Jersey, but we should do what we
can to save the grizzlies, for example. It”s all just common sense
to me. And then you have the case of the Japanese and their
penchant for killing whales. This week they completed their
latest hunt, taking 158 for “scientific research,” 70 more than last
year, and including 8 giant sperm whales. This “research”
simply ends up on restaurant tables. Yes, I may just have to give
a donation to the appropriate environmental group. And I”d love
to report some day that a whale has swamped one of these boats.
–The average CNN viewer is 64. And as for CNN”s “Headline
News,” now I”m trying to figure out what all the talk of 4
anchors was about? I still just see one when I”ve turned it on.
[And no matter what time I view it, I always see Judy Fortin. I
think she”s been cloned. Maybe she”s a Raelian.]
–Maureen Reagan, RIP. I always liked her.
–There are worries in the UK that sheep may have been infected
with mad-cow, but they can”t know for sure, yet, because such a
diagnosis is virtually indistinguishable from scrapie. We may
learn more in a month or so. You”ll recall that scrapie has
impacted livestock in parts of the American frontier. So while
this issue received zero publicity in America this week, that may
be about to change.
–Thanks to Josh P. for passing along a paper by Travis Norsen
of the Ayn Rand Institute. Commenting on nuclear power,
Norsen writes, “The opposition to (it) represents a political, not a
scientific, viewpoint. The anti-nuclear groups, and the broader
environmentalist movement of which they are a part, are
fundamentally hostile to capitalism and production.”
–It”s not just America West that is losing unaccompanied
children, Air Canada has too. But I”ve seen these kids and they
are obviously old enough to read – like if the stewardess says you
are heading for Ontario, California, but your boarding pass reads
San Diego, the solution to the word problem seems pretty simple.
–The latest census data reveals that New Jersey has passed
Connecticut and now leads the nation with an average median
family income of $54,000. Of course our real estate taxes are
absolutely outrageous.
–I never did come clean on how I handled my tax rebate. I
threw it in the checking account, where it”s going to pay for my
humongous August utility bill. Not even a cent for premium
lager. Sad, very sad. [We finally had our heat wave, but
somehow we barely avoided a major power failure in this region.
Oh, but we were real close and the utility companies scrambled
to find extra sources. Those who don”t think we have an energy
crisis in this country, at least with the power grid, are nuts.
[“Nuts” is the word of the week. Last week it was “stupid.”]
–So while Tom Brokaw has been on his 10-week vacation,
NBC”s Nightly News audience has been drying up. Brian
Williams didn”t cut it as a replacement, so this past week we had
Katie Couric. I”m sure some of you have enjoyed commenting
on her daily change of outfits between the Today Show and the
Nightly News. Personally, I think she looked better in the
morning.
–You know those Goodwill / Salvation Army drop-off sites?
They have a real problem now, with folks placing dead animals
in the bins. Aside from the fact it”s disgusting, and the offenders
should receive five years in prison, it”s costing the organizations
hundreds of thousands of dollars.
–The most predictable line in Bill Clinton”s $12 million
autobiography. “I worked every day as hard as I could for the
American people.” StocksandNews is establishing the “over /
under” on sales at 19,000 copies.
–Since the networks are having so much fun covering things like
shark attacks, why don”t we let the zoo animals out for the month
of August? Incidentally, there is no formal yak update this week.
They were sent down to Crawford, TX for a little R&R of their
own with the Bush cattle.
–20,000 prostitutes in the Netherlands (where they can legally
ply their trade) are protesting the fact that they can”t open up
commercial bank accounts, which would then allow them to
deduct condoms and sex toys as business expenses. The banks
counter that not only is being a prostitute a risky profession, it is
also controlled by organized crime. Now the position the banks
are taking seems to be about the only sane one I”ve ever seen
coming out of the land that gave us wooden shoes.
–Neanderthals are no longer believed to be our cousins.
Scientists now feel that we are separate species, Neanderthals
having made a conscious decision to go their own route when we
asked them to join us in the evolution game. Alas, they then died
off 25,000 years ago. So I guess you could say they screwed up.
Gold closed at $274…rally, primarily on the backs of the weaker
dollar.
Oil, $28.05…but OPEC”s “basket” is just around $25.
Returns for the week, 8/6-8/10
Dow Jones -0.9%
S&P 500 -2.0%
S&P MidCap -2.6%
Russell 2000 -2.4%
Nasdaq -5.3%
Returns for the period, 1/1/01-8/10/01
Dow Jones -3.4%
S&P 500 -10.0%
S&P MidCap -3.5%
Russell 2000 -1.7%
Nasdaq -20.8%
Bulls 46.0%
Bears 27.0%
Have a great week. And, as always, I appreciate your support.
Brian Trumbore
