[Posted 7:15 AM]
A few definitions:
Resilience an ability to recover from or adjust easily to
change or misfortune.
Discount to take into account (as a future event) in present
calculations.
Boston Red Sox and Chicago Cubs baseball teams that haven”t
won a World Series title since 1918 and 1908, respectively.
Osama bin Laden bearded man who lives in caves and plots to
kill Americans.
Saddam Hussein man with 20 doubles who has been left alone
for 3 years, without adult supervision, while he cooks up
weapons of mass destruction that threaten the civilized world, if
not the entire planet.
—
I suppose you”ll want an explanation of the above. It”s all pretty
simple, really. The U.S. equity markets, and most of the world”s,
for that matter, have exhibited incredible ”resilience” since
September 11 (and the ensuing lows of September 21), by
rebounding back to levels not seen since prior to the attacks.
This is good.
And the markets, known to be ”discounting” mechanisms as they
look ever forward, are telling you that not only is the world in
increasingly wondrous shape, with jobs for everyone, two cars in
every Pakistani”s garage, along with global peace and
brotherhood, but also that the Red Sox and Cubs are going to
meet in the 2002 World Series! And then again in 2003!
Of course the fact that the guy with the long beard and the other
character with 20 doubles may have an eventual say in how all
this plays out doesn”t seem to bother anyone, at least equity
traders, that is. All I”ve got to say is thank God we have some
levelheaded folks in Washington and London, namely George
Bush, Tony Blair and their respective cabinets, who seem to get
it. And I imagine the Afghan opposition leader who was hanged
by the Taliban on Friday gets it as well.
I”m sorry, folks, but this war we”re in, alone, would make me
rather defensive in terms of positioning my portfolio because it
has the potential, at least in the near term, to continually deal us
one scary blow after another, which would in turn do a number
on consumer confidence.
But throw in the fact that the economic fundamentals are still on
the sick side and I have real trouble figuring out the recent
exuberance on Wall Street. Only time will tell if my cautious
stance was warranted. Worst case, if I was wrong I would have
at least retained my assets, not necessarily a bad thing.
Going back to the ways of Wall Street and its propensity to
discount the future, the U.S. economy, which I think most would
agree has to lead the world out of its current miasma, shows no
signs of a significant turnaround. So the market is betting that a
combination of lower interest rates (which may trend lower still)
and a significant economic stimulus package will be enough to
cure the hangover from the world”s biggest bubble.
To me it”s kind of like saying you stayed out drinking until
3:00 AM, were forced up at 7:00, and are now expected to be
fully recovered and eager to take the kids to their soccer games.
I don”t think so.
So what are the latest facts? First the positive…give me a
second…I”m looking. Here we are…Taiwan Semiconductor
sees a rebound in chip sales. And here”s another, many biotech
companies reported strong earnings (or lower than expected
losses), which means the sector could be poised for one of its
own classic bubbles, which suck you in and then give you just
one hour to get out at the top (so if you”re on the phone you often
miss it), before they flush your profits away.
What else was positive? The latest consumer confidence figures
at least stabilized and that”s a good thing. And Eli Lilly said it
would actually hire 5,000 sales reps over the next 3 years to
market new drugs. [Psst, buddy…check this out.]
Now on to the negative.
Durable goods orders plunged, the Federal Reserve”s
measurement of regional economic activity (the “beige book”)
revealed that the economy dropped sharply after September 11
(but then even a hamster knew that), and home resales have
plummeted. As to this last item; a topic of concern for
StocksandNews since spring 2000 may finally be cracking. And
Alan Greenspan has made it very clear that the housing market
is his #1 concern as well. It has everything to do with the wealth
effect and consumer spending, so the trends in this regard bear
careful vigilance.
But then you also had a new flood of corporate earnings reports.
Wall Street, alas, discounted them, not just in taking up most
share prices, but also in ignoring what some folks were implying
for future economic activity.
Last week I wrote that the statement from Telefonos de Mexico,
to the effect that they were reducing capital spending for next
year by at least 15%, was significant. This week Southwestern
Bell said it was slashing its similar expenditures by 20%. Intel
then hinted at cuts of 20% of its own. Meanwhile, Lucent and
AT&T tried like hell to put a positive spin on their financial
condition… and couldn”t. In the case of the former they see the
telecom equipment market worsening a further 15-20% in 2002.
And it wasn”t just techs, as even the likes of General Mills and
Hershey announced they were closing plants, Sears said it was
laying off 4,900 and Eastman Kodak shares hit an 11-year low as
they are handing pink slips to an additional 4,000. That”s all
just for starters.
What it boils down to is the following. There is no doubt that the
impressive snapback in the markets is a help when it comes to
consumer confidence and, perhaps, will result in more spending
over the coming holidays than originally anticipated. There is
also no doubt, though, that stocks as a whole are way overvalued
(much more next week) all over again, especially given the
already solid earnings gains forecast for 2002. Or are you one
who believes that all of the “sleeper cells” have been rounded up,
Saddam is not a menace, and the events of September 11 and its
aftermath are just a bad dream?
Street Bytes
–All the major averages rose for the 4th week out of the last 5,
with the Dow gaining 340 points (3.7%) to close at 9545, while
the Nasdaq added 97 points (5.8%) to finish at 1768, or almost
75 over the pre-9/11 level. The big day was Thursday when,
despite continuing lousy news on both the economy and
corporate profits, the averages staged a huge reversal, in the case
of the Dow some 285 points worth.
–U.S. Treasury Yields
6-mo. 2.08% 2-yr. 2.62% 10-yr. 4.52% 30-yr. 5.27%
With all of the dire news on the economic front it certainly
shouldn”t surprise anyone that Treasury yields continue to
plummet. Undoubtedly, the Federal Reserve has room to reduce
interest rates even further when they meet on November 6.
Meanwhile, in euroland, the European Central Bank held its own
rates steady once again. While the Fed has lowered 9 times this
year, the ECB has acted on just 3 occasions as the bourse
remains on inflation watch, even though at an existing EU rate of
2.5% it shouldn”t be a concern.
Coming this week, first estimate for third quarter GDP and the
employment report for October.
–A UBS / PaineWebber survey revealed that 73% of investors
say now is a good time to invest, the highest level since March…
which was not a good time to invest.
–Lockheed Martin won out over Boeing for the contract to
develop the new Joint Strike Fighter. So now we know at least
Lockheed Martin employees will be working the next few years.
I”d go to them if you”re looking for a loan.
–I liked the lead on a Friday Journal article concerning Enron.
“Rarely have so many analysts liked a stock they concede they
know so little about.” Personally, I never spent a second looking
at it, but like others I marveled as it soared. Alas, today Enron”s
fate resembles that of Icarus.
–Disney is asking many of its full-time employees to voluntarily
cut back 20% in their workweek. What hasn”t been revealed is
that if you don”t comply, you are forced to listen to “It”s A Small
World…” for 24 straight hours.
–Many advertising executives now don”t see a recovery in the
ad sector until 2003.
–Treasury Secretary Paul O”Neill is concerned that the insurance
industry, which will weather the attacks of 9/11, would not be
able to support repeated claims without government backing.
Ka-ching ka-ching. Watch your wallet. The flipside is that
insurance premiums are already skyrocketing. Ka-ching ka-
ching. And watch corporate profits…or lack thereof.
–The current level of auto sales incentives obviously are
unsustainable and will have to end soon, meaning that 2002
could be a troubling year for the industry.
–Some good news. Margin debt is roughly half the level of
March 2000 and is dropping fast.
–Coors announced net income for the third quarter was up 13%,
but sales were down slightly from year earlier levels. I feel
personally responsible because when I was in Montreal during
this period, I drank local beers, whereas if I had stayed with
Coors, total sales would undoubtedly have exceeded the mark.
–Amazon.com issued another in a series of lousy earnings
reports. It was over a long time ago for this “life-changing”
company. Call them…irrelevant.
–Energy: While crude inventories continue to rise, prices
stabilized this week, and in the case of natural gas, rallied. The
latter is now back over $3 and was a major reason why oil
drillers and service companies staged a stirring rebound (more
later). OPEC, thanks to a big push from Venezuela”s President
Chavez, may yet attempt to cut production again, or at least
ensure that its existing production targets are complied with. A
decision could be made as soon as October 29, or November 14
at the latest. Meanwhile, recent events certainly should aid the
administration”s push for a comprehensive energy plan, and in
that regard I just want to reinforce some facts.
During the 1990s domestic demand for energy rose 17%, yet
domestic production increased just 2%. And on the issue of
ANWR (the Arctic National Wildlife Refuge), I am continually
sickened by the ill-informed, who keep saying that development
there would meet only six months of our energy needs. First off,
it is more like 9-24 months, but that would be if we didn”t
produce a single drop anywhere else in the world! Don”t ever
bring this up with the tick-ridden caribou lovers, though, they”ll
just stammer. ANWR is a vital insurance policy.
In the meantime we obviously must do more, not only on the
auto fuel efficiency front – where both government and the
individual have been such wimps – but also alternative energy
sources. My friend Dan D. will be happy I even mention
hydrogen-based opportunities (hydrogen being “the holy grail of
fuels”), but, heck, I even saw this week that in Pennsylvania they
opened up a second wind farm.
–My portfolio: Thankfully, my 15% stake in energy has been
soaring recently. But, no, I didn”t buy more because of my
stance on the overall economy. Back in February 1999 I nailed
the bottom of the energy cycle, literally, within hours and
profited handsomely. I then pared back through 2000 and the
first two months of 2001, only to stub my toe on one issue when
I got back in too quickly around April. I then sold that particular
stock at a loss.
I also noted a while back that one issue I sold in February at $63
and bought back recently at $26, was last trading at $20 a few
weeks ago. Today it sits at $33 and therein lies part of my
problem. I”m used to buying stocks after there has been some
basebuilding, even if for just a few weeks. The oil driller /
service sector, however, has been a giant ”V” all year. I”ve
always tried not to chase stocks and I”m not ready to do so today.
If the sector were to rock on from these levels, well, I”ve missed
it. I”ll try and find something else. Meanwhile, my 15% (now
higher) should participate.
Which leads me to another stock I refused to chase, and thus
didn”t buy, my “spec” issue from last week. I have never
recommended individual investments on this site (except for
PIMCO Total Return Fund), but a promise is a promise so here
goes.
On Friday, October 19, I was attempting to purchase the Turkish
Investment Fund at $4.10 a share. That day it hit $4.12 and no
lower. This week it closed at $4.60 (after trading at $4.75) and I
did not move up my bid.
Having traveled to Turkey last April, as well as studying the
country as much as I have, I”m convinced that within two years
you”d make a nice profit. Oh, sure, there are huge risks, which I
do not need to enumerate here because I”d just be rehashing
every “Week in Review” of the past few years. This is for your
play money, folks, and it is very thinly traded (plus it”s at a
premium to net asset value). To tell you the truth I wish I hadn”t
mentioned this and I take zero responsibility for the pick going
forward. Again, I don”t currently own it myself, but I could get
into it at any time.
Lastly, on the editor”s portfolio, if I become convinced of a
genuine economic recovery, I will put a portion of my cash back
into the junk bond market.
Congress and the Economy
The House passed a mammoth stimulus package by a whopping
2 votes, 216-214. The Senate is looking at a more reasonable
plan and there will be a battle royal when the two versions go to
conference, which means, by the way, it may be quite a while
before the president is actually signing something.
The House bill is laden with ill-advised business incentives.
Aside from the fact that elimination of the corporate alternative
minimum tax benefits a select few, the proposed increases in the
amount that can be written off for new investments is ludicrous
for the following reason. As economist Robert Samuelson
opines, with industrial capacity at 75.5% in September, what
companies will invest in new plant & equipment when demand
hasn”t picked up? [Probably the same idiots who were
expanding plants in March 2000, I guess.]
Instead, give the consumer all the breaks. After all, we represent
two-thirds of the economy so it”s our decisions that matter. But
some like Larry Kudlow argue that it”s business that does the
hiring. Well, good, I guess that means they”ll temporarily fill up
a spanking new factory in Butte, Montana, only to have to shut it
down two years later.
We also have to face facts that for the long-run health of the
economy, some folks who receive tax cuts should be using the
extra cash to pay down debt, thus helping to ensure a more-
lasting recovery down the road. And the cuts have to be across
the board. After all, the richest fifth of households account for
38% of total consumption.
The Coalition
“Fighting this war in half measures will only give our enemies
time and opportunity to strike us again.”
–Senator John McCain / Wall Street Journal
Russia: Crawford, Texas…November 12-14…be there. As I”ve
been writing for some time now, the most positive developments
on the foreign affairs front have to do with the evolving U.S.-
Russian relationship. And from the talk in Shanghai last week,
the potential for major breakthroughs on arms control and missile
defense, for starters, grows ever stronger.
The short-term issue is whether or not there is enough time
before ”Crawford” to conclude at least draft agreements.
Obviously, the U.S. defense and national security teams are
occupied on another rather important matter, and it”s their advice
that is needed with regards to the main items on the table, for
example, how far will our military establishment allow President
Bush to cut strategic warheads, perhaps even unilaterally. And
on missile defense and the ABM Treaty, Bush stated in
Shanghai, “(The terrorist attacks) make it clearer than ever that a
cold war ABM Treaty that prevents us from defending our
people is outdated, and I believe dangerous.” Putin is ready to
give in on ABM, but this week strategists in Moscow gave him
heat for not extracting enough from the Americans. It was this
tough talk which probably led to the announcement by Secretary
Rumsfeld on Thursday that the U.S. was delaying some NMD
tests that may have been in violation of the treaty.
And just a follow-up on my “thinking outside the box”
comments of last week (the positive take on things). I can
envision a scenario where the U.S. asks for Russia”s help in
getting the Iranian government to expel terrorists from its land.
In turn, Iran, with its new relationship with the West (post- this
move), becomes the leading figure in the region, particularly
after we finish off Iraq. What”s in it for Russia is formal
permission from the U.S. to sell the country all manner of
conventional arms, with the U.S. also looking the other way
when it comes to Moscow”s influence in Central Asia. What”s in
it for the U.S. is our energy companies get access to the huge
Iranian oilfields and the region ends up being more stable than
today. Just a thought.
Saudi Arabia: The Kingdom continues to be in a state of denial
as to its citizens” involvement on September 11. And while some
reports say they are rounding up extremists, one on Thursday
said no one in fact was actually arrested. As with everything
involving this secretive place the truth lies somewhere in
between. What we do know is the rulers refuse to freeze the
suspected terrorists” assets, making them the only significant
player to maintain that stance. And to get an idea of the “word
on the street,” the Wall Street Journal had an article quoting a
Saudi student. “Our anger at the U.S. is deep-seated. It goes
back to the Gulf War. Saudi Arabia is a rich country whose
economic deterioration started with the arrival of the
Americans.”
[“Nothing in the world is more dangerous than sincere ignorance
and conscientious stupidity.” –Martin Luther King]
Syria: While this nation is on the U.S. “sponsors of terrorism”
list, and for good reason, the government in Damascus is also
afraid of Osama bin Laden and has not, like its Arab brethren,
been giving him a platform in the government media. It was in
1982, after all, that the late President Assad leveled a stronghold
of the Muslim Brotherhood, killing 20,000.
So in the case of Syria you have a classic example of how this
“shifting” coalition may work. The government is probably
supplying the U.S. with significant intelligence regarding al
Qaeda. But at the same time they continue to harbor Hamas and
Hizbollah, both bent on destroying Israel. At what point (in
2002) will the U.S. then pressure Syria to boot out the terrorists
(including out of Lebanon…just as in the potential case of Iran
and all the others), or face retribution? And will the U.S.
maintain the will to carry forward with President Bush”s mission
statement. “You”re either with us or against us.”
China: I am a bit disconcerted that President Bush had fruitless
discussions with China”s Jiang Zemin in Shanghai on the issue of
Taiwan. While my opinion over the past year has evolved to one
of a “silent coup” approach, rather than military action between
the mainland and Taiwan, Jiang”s lack of any reassurance should
give one pause. The leadership succession in Beijing slated for
next year is a huge issue. Jiang, 75, wants to maintain ultimate
control, even as he steps down from the presidency (ala the role
of Deng Xiaoping in his later years).
Taiwan is China”s for the taking right now. One of the scary
parts of our action on terrorism, for example, is the clear fact that
today we are ill-prepared to fight a war on a second front in Asia
(Taiwan or Korea).
Good Guys: Finally, while many of us pooh-pooh the military
contributions of Canada, Australia, Italy, France, and Germany,
just to name a few, thinking outside the box, the respective naval
forces are critical in helping to protect both the Suez Canal and
the Persian Gulf. True, the U.S. and Britain will do the heavy
lifting, but without our friends” resources, we”d both be stretched
even more than we already are. Of course, when it comes to Iraq
who will stay? For this week, at least, I am going to be
optimistic on this front (though Tony Blair, himself, may face
real criticism at home over a march on Baghdad). I feel many of
the above will continue to support the U.S. with vital naval
support in the next phase.
Just one note on Iraq itself. As the connection to hijacker
Mohamed Atta grows, it”s also important to cite a UN human
rights group report, which reveals that “persons who had
allegedly insulted (Saddam Hussein) have had their tongues
amputated without trial.”
Israel
The latest opinion polls reveal that 70% of Israelis agree with
Prime Minister Sharon”s tough stance, as does your editor.
Arafat refuses to arrest the militants on Israel”s list, preferring to
issue banal statements, like that which outlawed the military
wing of the Popular Front for the Liberation of Palestine, while
conveniently forgetting to follow through. Even moderate
Shimon Peres said of Arafat this week, “A leader who is not
ready to take risks is not really a leader.” At the same time,
while you and I recognize why the U.S. is pressuring Israel to
reduce the level of violence because of the coalition, we have to
make clear who is at fault here.
Random Musings
–The Times of London reports that Osama bin Laden most likely
has nuclear materials, enough, at least, to make a crude (“dirty”)
bomb. Kind of important, if true, don”t you think?
–“Detonated in Manhattan, a relatively small bomb – say 15
kilotons in yield, equivalent to the one used on Hiroshima –
could immediately kill 100,000 and cause another 100,000
deaths in the lingering aftermath.” –Defense expert Bruce Blair
/ New York Times
–Islam “is a fighting faith, not everywhere willing to live
peaceably in a world of many faiths…(And) for all the Quran”s
pious homage to equality, it is an equality in submission, and
none are more in submission than Muslim women.” –Michael
Skube / Washington Post
–“The Muslim world today is full of bigotry, fanaticism,
hypocrisy and plain ignorance…What is needed is a critique of
Islam as an existential reality…We should start with condemning
(the) attacks without ”ifs” and ”buts.” –Amir Taheri / Wall Street
Journal. [I wrote this last week in a more direct manner, but a
little positive reinforcement is part of the educational process
around here.]
–“Another holdover from peacetime is the non-compliance of
Saudi Arabia and Egypt with the Advance Passenger Information
System (APIS). There are roughly a hundred international
airlines that fly into the United States. Ninety-four of them
participate in APIS, which involves wiring a manifest to U.S.
authorities, once a flight is in the air, so that passengers” names
can be checked against various U.S. government watch lists.
Saudi Arabia still refuses to participate, and one of its diplomats
explains why. ”At this time, hundreds of Saudi citizens are being
detained and questioned with regard to the hijackings,” he says.
”A lot of them are innocent people. That number would probably
quadruple.” So Saudi planes continue to offload their
uncheckable passengers day after day, with no complaint from
the United States. Wouldn”t want to offend our ally, after all.”
–The Weekly Standard
–John McCain on last week”s “Meet the Press.” “It”s important
to use humor in these tough times.”
–I summarize the historic events that took place in Northern
Ireland this week on my “Hott Spotts” link. If you didn”t hear
any details, I urge you to read it.
–Fed Chairman Alan Greenspan. “Terrorism poses a challenge
to the remarkable record of globalization.” Yup, and it also
poses a deadly challenge to civilization itself, Mr. G.
–Ordinarily I wouldn”t do this, but I received a note from a
Canadian National Railway (CN Rail) employee who wrote to
tell me that the company”s recent earnings gains come largely on
the backs of its engineers and conductors, who are being kept
away from the home terminal for inordinate amounts of time. As
the reader notes, CN Rail employees already have just about the
highest divorce rate in the nation, so, after checking out the
complaint as best I could, I just want the Canadian brotherhood
of local engineers to know I”m with them.
–The UN says that 9 million, globally, will lose their jobs in the
tourism industry.
–“Idiot of the Week” award goes to CNN”s Bob Franken who,
during a Defense Department briefing, inquired of Secretary
Rumsfeld why it was that the press wasn”t allowed along with
the special ops forces. “You mean parachuting in with them?”
asked an incredulous Rumsfeld. When Franken answered in
the affirmative, Rumsfeld added, “I find the request incredible.”
So do we.
–Ramadan Schmamadan. Bombs away during “holy month.”
–I”m stocking up on canned soup in case there is a food scare, as
Senator Bill Frist, himself, expounded on during the “Today
Show” the other day.
–First off, to my U.S. Postal Service friend, E.C., hang in there,
buddy. I must say, though, that I am getting a kick out of those
who now say e-mail will be their only mode of communication in
the future. Yeah, until the inevitable cyberattacks hit and crush
the whole network. No, I”m still doing my Christmas cards this
year, for example. And I would hope that you all do the same.
We need to help these good men and women in their time of
need. Otherwise, tens of thousands could be out of work. So get
cracking on that list. [And let”s pray this anthrax scare is
relatively isolated.]
–Please don”t give to the Bill Clinton / Martin Sheen (and, yes,
Bob Dole) sponsored “Families of Freedom Fund.” I shouldn”t
have to explain any further, but allow me to quote from a New
York Times piece on Thursday. “Prince Bandar bin Sultan, the
Saudi ambassador, has enjoyed direct access to presidents since
he arrived in Washington in 1983. President Clinton and Prince
Bandar sometimes met in private, without even the knowledge of
White House or State Department officials.” Now you know
what I think of the Saudis these days, and Prince Bandar bin
Dirtball, specifically. No, if you live in the New York area and
had a few victims in your local community, do what I did the
other day. As a follow-up to a point from last week, I sought out
the police chief in the town where I live and we decided,
together, what was best. I now know that 100% of my
contribution is going to help a victim”s family that is really
struggling.
–Former CIA Director James Woolsey, who served in the early
years of the Clinton administration. “(They) started with public
relations and worked backwards.”
–Back to terrorist threats of today, the Fed”s beige book also
revealed that we are buying more bottled water. Now I wish I
hadn”t dumped my Y2K stash. [Actually, I think I washed my
car with it, I had so much.]
–Here at StocksandNews we are already washing our hands
frequently because of all the Bill Clinton stories we come across.
You always feel so dirty afterwards.
–AT&T announced it is putting its huge headquarters in Basking
Ridge, NJ up for sale. I”m thinking I”ll lay low for a while and
let the big guys pass on it, then, acting out of desperation, Ma
Bell will accept my offer of $27,500. Yes, the new world
headquarters of StocksandNews!
–Finally, the great British historian Paul Johnson wrote a book in
1997 titled “A History of the American People,” which I refer to
frequently in doing research for other pieces on this site. So I
was thumbing through it the other day and came across the
following.
“This book is dedicated to the people of America – strong,
outspoken, intense in their convictions, sometimes wrong-headed
but always generous and brave, with a passion for justice no
nation has ever matched.”
Not a bad appraisal for these troubling times.
God bless our president and the men and women of our armed
forces.
God bless America.
—
Gold closed at $278
Oil, $22.05
Returns for the week 10/22-10/26
Dow Jones +3.7% [9545]
S&P 500 +2.9%
S&P MidCap +4.1%
Russell 2000 +3.0%
Nasdaq +5.8% [1768]
Returns for the period, 1/1/01-10/26/01
Dow Jones -11.5%
S&P 500 -16.3%
S&P MidCap -9.6%
Russell 2000 -9.3%
Nasdaq -28.4%
Bulls 43.0%
Bears 32.0% [Source: Investors Intelligence]
Have a great week. I appreciate your support.
Brian Trumbore
