[Posted 7:15 AM]
Now What?
6:00 AM, Thursday. I”m in the local Dunkin” Donuts, getting a
large coffee, but my mind is on a thousand other things…least of
all the coffee…so after paying I begin to walk out, not with the
java, but the tip mug! Well, let”s just say I gave the workers
there a good laugh, and I also then decided that amidst the
confusion it was time to get out the old legal pad and go through
an exercise I find myself doing about once a year. What is good,
what is bad? What are the plusses, what are the minuses?
It”s important these days to separate the war effort from the
economy, the war effort from Wall Street, and the economy from
Wall Street. Some days 2, or all 3, may be in sync, but most of
the time they won”t. You can be patriotic and believe we will
win the war on terrorism, but that alone doesn”t make you a good
investor. You can divine economic trends, but that may not
always tell you whether a particular stock or sector has seen the
bottom.
On the war front, I”ll just make this general comment (with more
to follow). I”m not convinced the American people have the
staying power and, unfortunately, I think the Bush administration
will have to show a tangible success within the month to keep us
all on board. I would also submit to you that it”s all about
Pakistan right now. 30% of its officer corps is fundamentalist.
Pray that General Musharraf can hold his country together
because the alternative is disaster.
As for Wall Street, it could be substantially event driven the next
few months. As I mentioned two weeks ago in my “protect your
capital” address, as we embark on this mission our emotions may
soar one day, only to swoon the next. Personally, I”m leading as
normal a life as possible, while being prepared for another shock.
From the attitudes of some others out there, though, particularly
market prognosticators, I get the feeling they already feel the
worst is over. I hope they”re right…but their track record is
lousy.
What”s Good?
–We have the terrorists on the run. You cannot discount the fact
that hundreds of suspects are now in custody, worldwide.
Clearly, we have already averted a few additional tragedies.
Cooperation on this front from all manner of countries appears to
be strong.
–The Federal Reserve and Congress continue to work on
additional stimulus for the economy. The $40 billion for New
York plus the additional $15 billion for the airlines is just a start.
Everyone recognizes now is not the time to focus on protecting
the surplus. [However, the final shape of the extensive package
is not yet known. I will withhold further comment until I see it.]
–Inflation is nonexistent and the Fed will continue to lower
interest rates, including another 25-50 basis points October 2nd.
–Thanks to falling interest rates (which rallied anew on the long
end this past week), more refinancings (including the editor”s)
are on the way. That”s more in consumers” pockets.
–Energy prices are down considerably from just two weeks ago.
If they stay low, not only is it a boon for consumers, it is also a
plus for the corporate profit picture.
–Overseas investors, increasingly skittish as they repatriate some
of their assets, may come flying right back if they sense stability
in the U.S. economy. Even after the attack, I believe we are still
the best game in town.
–Thus far, the banking system has been a rock of stability.
What”s Bad?
–Global paralysis: Consumer confidence is plummeting, not just
in the U.S., but across the globe.
Confidence in the U.K. is now at its lowest point since 1980 and
a staggering 64% believe the economy in Britain will worsen
over the coming 12 months. The British are also justifiably
concerned that London is the next big target.
Other countries like France are seeing consumer confidence
plunge to multi-year lows, and even the recent non-terrorist
related attack on the Swiss Parliament, which killed 14 this
week, must be having a deleterious effect on that nation”s
psyche.
The plight of Latin America is receiving zero press but the
continent is reeling, and Asia is obviously suffering from the
huge drop-off in exports to the U.S.
And then there is Japan. An unending torrent of dire news
continues to hit the nation like a brick to the face. The D-word,
depression, was increasingly used in commentaries this past
week. Some have been waiting for this moment (like yours
truly), thinking that a final washout is perhaps what Japan needs
before it can launch a true reform effort. But with the rest of the
world now teetering, I can”t see anything positive about a
depression in the Land of the Setting Sun. Unless U.S. demand
picked up for technology products, for example, Asian nations
such as Taiwan, South Korea, Malaysia, and Indonesia will see
far more pain as a result of Japan”s problems than is currently
forecast.
–Consumers in the U.S. remain way overextended. For
example, the American Bankers Association reported that 4%
of credit-card users were more than 30 days past due, the highest
since they began tracking this data in 1980. And we”ve been
covering the real estate situation ad nauseam around here. After
my note of last week on the percentage who hold mortgages with
just 10% down, a number of you wrote to point out that, of
course, there are loads of families sitting on 110%+ mortgages,
let alone the record number of home equity loans.
–Layoffs: I am well aware that rising unemployment is often a
lagging indicator, since this is the last step of business in cutting
costs during difficult times. The unemployment rate can
continue to rise for months after we find out later that an
economic recovery has begun. That said, I don”t need to remind
you of the huge numbers of workers who are being impacted by
a single bunch of guys with knives. Layoffs were already an
issue before Sept. 11, today it”s downright sad. The little guy is
getting slammed left and right, and I would hope that Congress
does as much as possible for them in any package they may
approve. This time is different. Normal recessions don”t take
out 10-20,000 workers, per company, with one fell swoop.
–Earnings: And of course tied into the above is the abysmal
corporate earnings picture. The third quarter was already going
to be bad, but we were told just about a month ago that for many
companies, the fourth quarter was going to begin to match up
favorably with year ago periods. No longer.
–Christmas: Scroooooge. Huh? Whazzat? If you get a bonus
at all this year, chances are good it will be miniscule compared to
previous years. And unless we”ve rounded up the top 2,000
terrorists, placed them in the desert and let vultures rip their
hearts out by December, who the hell is going to be in the mood
to do a lot of shopping? I”ve already decided, sardines for
everyone. [I”ll get the crackers at Wendy”s.]
–Tax revenues: Federal, state, and local tax receipts are all
plunging; once fat surpluses are turning to deficits. And in the
case of state and municipal governments, in particular, layoffs
are inevitable.
–Business Investment: The bubble of the late 90s produced way
too much capacity, particularly in technology. In many cases
this is still years from being worked off, thus anyone looking for
a surge in capital spending needs to rethink the proposition.
[Even if Congress approves massive tax credits.]
These are just some of the issues and I realize I”ve missed a few.
So what is my conclusion? I add it all up and I have to fall in the
camp of Stephen Roach, chief economist at Morgan Stanley, who
sees no “V-shaped” recovery, but rather 1% GDP growth for all
of 2002. “The recession may be deeper and longer than anyone
thought,” says Roach. He also warns that in the case of the
massive stimulus that may be coming, “Reflating the bubble is
not a panacea for recession.”
As for my portfolio, the Dow Jones sat at 9600 before the attack.
I made my move to increase my cash position by Tuesday the
18th, with the Dow down about 700 points (over that Monday and
Tuesday) to 8900. We sit today at 8850 (8847), so call all the
succeeding action a “wash.” I”m now where I want to be. I”m
also willing to forego any rally back to 9600-10000. I”ll analyze
the situation further at that point should this occur. What I”m
most concerned about right now is not only protecting my capital
in these unique times, but also making sure I”m in a position to
catch the next authentic bull move…say from 10000 to 13000…
with something more than scraps. That”s if I remember to pick
up the coffee rather than the tip mug next time.
Street Bytes
–U.S. Treasury Yields
6-mo. 2.23% 2-yr. 2.82% 10-yr. 4.58% 30-yr. 5.41%
[I used to always show the 1-yr. because many adjustable rate
mortgages are based off it. But I really should have been
including a shorter-term maturity.]
With further cuts in interest rates on the way Tuesday, the bond
market refocused on the awful earnings reports coming out from
corporate America, as well as the lack of inflation, and decided
that the long end got a little carried away the prior week with an
inflation scare that is still way down the road.
For his part Fed Chairman Greenspan urged Congress to move
cautiously on any stimulus package. He is worried that too much
of one will push interest rates higher and choke off the only
stable element of the overall economy right now, housing.
–The equity markets just concluded one disastrous third quarter.
Here is the damage.
Dow Jones -15.8%…worst point loss ever, over 1650.
S&P 500 -15.0%…worst since 1987.
Nasdaq -31.0%…2nd worst ever.
And to think the carnage would have been far worse without the
past week”s rally. The quarterly statements that investors see
over the coming days certainly aren”t going to make for good
reading, nor will it make many want to take that special trip, or
buy a new car, if they were previously on the fence with that
decision.
–For the week the Dow Jones gained 7.4% to 8847, while the
Nasdaq picked up 5.3% to close at 1498.
–Renaissance Cruises filed for Chapter 11, the first victim in this
industry.
–Both AOL Time Warner and Primedia further reduced
forecasts for advertising revenues in 2001. And as a follow-up to
my comment of last week, some experts are now predicting that
spending will decrease in 2002 as well.
–For the first time since 1975, there were no IPOs in the month
of September.
–The S&P 500 closed Friday at 1040. To give you a sense of
just how badly some experts missed it, following were the
original S&P targets for yearend 2001. Abby Cohen, 1650.
Jeffrey Applegate / Lehman, 1675. Ed Kerschner / UBS
PaineWebber, 1715. The S&P finished 2000 at 1320 and, heck,
to be honest even I said the index, as well as the Dow, would be
up or down 5% this year.
Going forward there are still some big differences in opinion. JP
Morgan Chase”s Doug Cliggott (who has been correctly bearish
for almost two years) has cut his estimate of earnings on the S&P
500 for 2002 to $40-$45, but Deutsche Bank”s Ed Yardeni is at
$55, meaning Yardeni sees a V-shaped recovery as a certainty.
But I have to go with Cliggott (no surprise to you, I”m sure) who
reasons, “Given the poor fundamentals for U.S. equities and the
already high exposure the American public has to stocks, we
think the asset allocation out of stocks that began in early 2000
may have quite a bit further to run.”
–Energy: OPEC is in a box. They want to hold the price of
crude in a $22-$28 band and unofficial U.S. government policy
is in concurrence that $25 is alright with them. But the laws of
supply and demand are once again taking over, so at one point
this week West Texas Intermediate traded below $22 a barrel
(meaning the “basket” was substantially lower than that), the
lowest level in two years, before rallying back above $23 by
week”s end. [The 15% single-day drop in crude on Monday was
the largest since 1991, 1/17/91 to be exact, the beginning of
Operation Desert Storm.] Assuming a global recession really
takes hold, let alone the plummeting demand for jet fuel, there is
no way OPEC can attain its $25 target without drastically
reducing production yet again (after 3 prior cuts this year). The
unity that has been a hallmark of the cartel for almost three years
now is beginning to fray. Saudi Arabia doesn”t want to add to
the West”s economic woes, while hard-liners such as Iran and
Venezuela would like to see a more hawkish stance. Bottomline,
when they all met in Vienna this week, they agreed to hold the
line on production until a clearer picture of the global economy
emerges. Of course any negative for OPEC is a huge plus for the
world, as stated above.
What I found funny this week (not laugh out loud funny, mind
you) were the slew of downgrades, midweek, for the oil service
and drilling sector, which meant, of course, that share prices
would take off, and beginning Thursday afternoon they did just
that. These companies have already seen their shares fall 66%
over just the past 6 months. But as bullish as I want to be in this
area, long-term, I still need to see evidence of an economic
recovery before I commit substantially more investment dollars
other than my one remaining holding.
A Little Market History Lesson…from your editor
In the 10/1 issue of Newsweek, columnist Jane Bryant Quinn
was commenting on the current war on terrorism and the
markets.
“Stocks could turn around fast if we see an early success. After
American troops landed in Kuwait in January 1991, the market
jumped 18% in 4 weeks.”
Geezuz, get your facts straight! American troops didn”t “land” in
Kuwait in January 1991, the bombing campaign for Operation
Desert Storm began on January 17. The 100-hour ground war to
liberate Kuwait commenced on February 24.
Using ”weekly close” figures, here are the facts.
January 18, 1991
Dow Jones 2646 (it closed at 2398 back on 10/12/90)
London FT-SE 2102 (FT-SE was 2100 on 10/12/90)
March 1, 1991 (one day after a ceasefire was declared)
Dow Jones 2909
London FT-SE 2386
December 6, 1991 (arbitrary, but telling…the market did take off
shortly thereafter)
Dow Jones 2886 (yes, lower than 3/1/91)
London FT-SE 2388
The point being that while the economy was in recession, yes,
the markets rallied, largely because the U.S. exhibited real
resolve in leading a coalition which successfully amassed a
500,000-man fighting force in Saudi Arabia. But after we had
accomplished our goal, for a long spell it was like, “Eh, now
what?” as we refocused on the iffy economic environment, and
as President Bush saw his 90% approval rating simply melt
away.
Ms. Quinn went on to write that capturing Bin Laden was worth
“2,000 points on the Dow. Maybe 2,500.” It”s definitely worth
something, that”s for sure, but one expects more responsible
journalism.
The War
It”s tough these days forming a coherent opinion weekly, let
alone each day. Case in point, Saudi Arabia.
Last weekend on all the Sunday talk shows, officials such as
Colin Powell were pressed on a Washington Post report that had
Saudi Arabia denying the U.S. the ability to direct airstrikes from
a key base on its territory. Monday and Tuesday”s op-ed pieces
were then loaded with recriminations directed at the Saudi
regime. But by Tuesday afternoon, the Saudis had cut off
diplomatic relations with the Taliban, leaving Pakistan as the
only nation to maintain diplomatic ties with the government in
Kabul. Suddenly, Saudi Arabia was back on board. [And late
Friday it would appear they have also granted permission to use
the key air facility.]
But the Saudi story goes far deeper. As much as I have written
in this space on what a moderate presence Saudi Arabia is in the
region (along with Egypt and Jordan), it”s more complex than
that.
The fact is that while we talk about states like Iran, Iraq and
Syria as harboring terrorists, Saudi Arabia and Egypt are perhaps
the biggest culprits.
In an article for Newsweek, Fareed Zakaria writes of an Arab
newspaper editor who was the last to interview Bin Laden some
6 months ago. The editor saw about 200 of Osama”s bodyguards
and aides…all were Saudis (as is Bin Laden himself).
The Saudi royal family believes in, and promotes, an extreme
form of Islam, “Wahhabism,” meaning that they not only export
oil, they also export fanaticism. And of course, we”re learning
more and more about the “charities” the government contributes
to.
So are the Saudis truly with us or against us? The 4 or so figures
who rule the nation are with us as long as it serves their
purposes, it”s that simple. And while some oil revenues will
continue to be spent on public projects, which benefit the
citizenry and the modernization effort, other funds are being
channeled to groups like al Qaeda. It”s a similar situation in
Egypt, only they rely heavily on the U.S. and its Arab brethren
for handouts. Confused? You should be. Do you begin to see
where this is all headed? As President Bush has stated, we”re
going to have to think outside the box more. Regimes are going
to have to be toppled. Let”s hope it occurs on our terms and not
theirs.
And speaking of the coalition, Iran certainly remains intriguing.
For over a year now I have written of the ongoing “revolution” in
the country. Use of the term may have raised a few eyebrows
since civil war is not an issue today. But in just the past 10 days
you get a better sense of what I”m referring to. One moment the
British foreign secretary is holding historic talks with the
democratically elected President Khatami, who then issues
statements of support for the war on terrorism. The next moment
the hard-liners, led by Ayatollah Khamanei, are blasting the U.S.
So while Iran (predominantly Shiite Muslim) is still united in
seeing the Taliban (Sunni Muslim) toppled, the revolution within
the country continues and like so many other places in the
Middle East, the question becomes, does the internal situation
deteriorate or does change take place peacefully?
A few other coalition tidbits: Turkey appears to be on board in a
big way and has not only granted the U.S. full access to its
airspace, but has also offered to help train opposition forces in
Afghanistan.
And in Italy, the government has pledged its full support,
including the use of troops. So far so good, until Wednesday,
when right-wing Prime Minister Berlusconi said Western
civilization is superior to Islam. Specifically, Berlusconi said:
“We must be aware of the superiority of our civilization, a
system that has guaranteed well-being, respect for human rights
and – in contrast with Islamic countries – respect for all religious
and political rights, a system that has as its values understandings
of diversity and tolerance.”
Well, needless to say when you”re trying to build a coalition with
the Arab world, Berlusconi”s remarks don”t make President
Bush”s task any easier, especially when the prime minister went
on to talk about “conquering” Islam.
Meanwhile, tensions are rising in the largest Muslim nation,
Indonesia. Anti-U.S. protests have been growing despite calls
for calm from the most influential religious leaders. As noted
earlier, the danger is that President Megawati is in way over her
head and when the shooting starts in earnest in Afghanistan, we
could have a real problem here.
Russia / China
Russian President Putin has thus far been extremely supportive
and there is no doubt the Russians can supply U.S. armed forces
with valuable intelligence. For their part, the Chinese remain
more concerned with the impact the war on terrorism will have
on its economy. And another victim of Sept. 11 is the
cancellation of Bush”s trip to Beijing in October, one in which he
was also going to visit Tokyo and Seoul. The president will still
travel to Shanghai for an economic forum.
Lastly on the international scene, one must continually keep an
eye on the situation in Israel. Foreign Minister Shimon Peres
finally met with Yassir Arafat and less than 24 hours later
widespread fighting erupted again. Prime Minister Sharon has
been miffed at the demands the U.S. is placing on him in an
attempt to reduce tensions while the war on terrorism is being
fought. Sharon, of course, says, ”We”ve been fighting this war
for decades.”
Random Musings
–Another instance of someone who doesn”t “get it.”
Commenting on the threat of a biological attack, a reporter for a
major publication wrote, “Besides, anyone who unleashes a
plague is guaranteed to provoke unprecedented moral outrage
and retaliation.” That”s so incredibly stupid, I really don”t know
why I”m protecting the author.
–Former Labor Secretary Robert Reich. “There”s no patriotism
in being a spendthrift, no heroism in exposing one”s family to
unwarranted financial stress.”
–Commentator Ben Stein (yes, the same Ben Stein). “We have
been living in a dream world about our investments. Just as it”s
our duty to guard our country, it”s our duty to guard our family”s
financial future…Reversion to the mean is a law, not a choice.”
[Source: Barron”s]
–Foreign affairs expert Robert Kaplan. “Domestically we
operate under the rule of law, while the wider world is an
anarchic realm where we are forced to take the law into our own
hands…wars will go on, because beyond the liberal elites,
humanity is as divided as ever.”
–Political commentator Michael Barone. “This is World War
III.”
–I was reading an article discussing the generally lousy job
prospects for today”s college seniors and I just have to say, hey
kids, don”t sweat it. I graduated in 1980, a rather gloomy time
(pre-“Morning in America”) and I grabbed the first job I was
offered, a clerk / typist at an insurance company paying $175 a
week. It was the perfect introduction to the workplace and after
staying two years, I received my first opportunity on Wall Street.
Just go out there and get to work. The rest will take care of itself
in good time.
–Now that the Taliban has decided to drop its ban on growing
opium, if you”re thinking of taking up heroin about now, you
may want to wait a few weeks, because prices are coming down,
friends. As for those who might be on heroin as you”re reading
this column, you can start budgeting accordingly.
–The British press is funny. The people are 90% behind
America”s efforts, but the media elites are even more liberal than
our own, if that”s at all possible. So I”m reading this Times of
London opinion piece from last Saturday (9/22) and the writer is
making fun of Rudy Giuliani for probably not knowing anything
about London”s experiences during the Blitz. In fact, the writer
wondered “if Rudy knew what the Blitz was?” You a-hole. I
heard Giuliani on September 12 say he was reading up on the
Blitz! When I caught this I was absolutely astonished. Rudy
was / has been working 20-hour days (he held those hours for his
previous 7-plus years as well) and he found time to read!
The man is truly amazing.
And speaking of the mayor, the compromise he is trying to
broker on extending his term just 3 additional months is perfect.
But candidate Fernando Ferrer, who I told you previously is
backed by Al Sharpton, refuses to go along. While I don”t think
Ferrer will emerge victorious in November, believe me, if he
does New York is truly doomed. My conservative friends may
be shocked, but I”m now for Mark Green. [Rudy may still find a
way to run himself if Ferrer doesn”t wise up.]
–Update: Religion. After my comments of last week I should
tell you that all is well with my local church. Everyone now “gets
it.” And in an extraordinary visit to Central Asia, Pope John
Paul II stated, “I wish to reaffirm the Catholic Church”s respect
for Islam, for authentic Islam: The Islam that prays, that is
concerned for those in need…Hatred, fanaticism and terrorism
profane the name of God and disfigure the true image of man.”
The Pontiff”s chief spokesperson then commented on America”s
potential response to the attack. “If someone has done great
harm to society, and if there is a danger that if he remains free he
may do it again, you have the right to apply self-defense for the
society you lead, even though the means you choose may be
aggressive and necessarily imply deaths.” Yes, the force used
should be “proportionate” and avoid “innocent deaths.” But as
the spokesman concluded, Pope John Paul II understands that for
a political leader like President Bush, “it is more prudent to act
than to be passive.”
My pope has spoken in an amazing tone. Never was there a
clearer case of the “good fight.”
God bless our president and the men and women of our armed
forces.
God bless America.
—
Gold closed at $294
Oil, $23.43
Returns for the week, 9/24-9/28
Dow Jones +7.4%
S&P 500 +7.8%
S&P MidCap +6.9%
Russell 2000 +6.9%
Nasdaq +5.3%
Returns for the period, 1/1/01-9/28/01
Dow Jones -18.0%
S&P 500 -21.2%
S&P MidCap -16.4%
Russell 2000 -16.3%
Nasdaq -39.3%
Bulls 33.7% [Lowest since 8/97…but one year later the Dow
was unchanged.]
Bears 42.1% [Highest since 10/98…good.]
Have a great week. I appreciate your support.
Brian Trumbore
