[Posted 7:15 AM]
Well, as a nation we have a lot to be thankful for these days. To
put it bluntly, we haven”t been attacked again by the evildoers.
And, let”s face it, that obviously has everything to do with the
better mood on Wall Street these days, as well as the fact that an
increasing number of ”experts” are beginning to tout a solid
economic recovery in 2002, certainly by the second half of the
year at the latest.
Heck, if you tell me that the worst is over with this war on
terrorism, then I have to say that 2002 could be alright as
well, at least in terms of economic activity. While this past week
was bereft of fresh news on the economy (thus, I”m keeping the
opening mercifully brief), we did see further indications in the
jobless claims figures and the latest on consumer confidence that
things may not be quite as gloomy as they appeared to be just
one month ago. And while this week wasn”t as good as the prior
one in terms of the war effort, we didn”t have a lot of bad news
either.
But when it comes to the performance of the stock market, I
simply can”t ignore big picture issues like tremendous
overcapacity in many industries, mammoth personal and
corporate debt levels, fuzzy math on the earnings front, a housing
market which is now stagnating, rising interest rates, state
budgets swimming in red ink (an aggregate of $50 billion by one
estimate), soaring insurance costs, and zero pricing power.
And then there is the issue of valuation. Today”s levels are
absurd, unless you”re satisfied with low total returns going
forward from here. Which still begs the question, where are
the earnings going to come from?
For my money there is no better overall strategist than PIMCO”s
Bill Gross, and, as he notes in his latest missive
(pimcofunds.com), the most you”ll see on the earnings front for
the foreseeable future is “4-5% per year: count on it.” And that”s
assuming there are no more attacks that crush confidence anew.
Of course we can only pray that is the case.
As for me, while I have increased my equity exposure slightly,
I”m still focused on preserving my capital. Don”t get sucked up
by a new wave of euphoria (though, admittedly, these next few
weeks are historically a strong period), unless you know
something I don”t know…which is unlikely.
Street Bytes
–U.S. Treasury Yields
6-mo. 2.04% 2-yr. 3.16% 10-yr. 5.00% 30-yr. 5.38%
Except on the very short end, yields continued to rise, and with
mortgage rates back near 7%, so much for Fed Chairman Alan
Greenspan”s hope that a final round of refinancings will help
spur the economy. Consider that the 10-year Treasury (the key
barometer for establishing mortgage rates) was at 5.11% on
12/31/00 and now, after 10 rate cuts, is virtually unchanged.
Statistics like the retail sales # of two weeks ago were critical in
turning the bond market around and with succeeding economic
indicators being generally better than expected, the odds of an
11th cut in rates when the Fed next meets on December 11 are
now 50/50 at best. More importantly, looking out to 2002, the
market is telling you that the easing cycle is over and that the
next trend in rates will be up.
–Despite 4 fairly volatile trading sessions, when all was said and
done the equity indexes were up just slightly, with the Dow
Jones adding 0.9% to close at 9959, while the Nasdaq tacked on
0.2% to finish at 1903. All eyes will be on the Dow Monday
morning to see if it can launch a final assault on 10000 (barring a
negative news event over the weekend).
–Energy: The price of light sweet crude finished almost $1.00
higher, but the actual swing on the week was about $3, if you
look at North Sea Brent which was trading all week. Our energy
markets were closed Thursday and Friday, but for now the story
is all about Russia.
Up until Friday morning, it appeared that non-OPEC Norway
and Mexico had convinced Russia”s private energy companies to
go along with sizable production cuts, as OPEC had requested
before they, themselves, would cut any further in an effort to
boost prices. Alas, as of this writing, Russia was still balking,
though they said they”d review their own situation again in a few
weeks. The seven companies in Russia don”t want to lose
market share to the competition in their own nation, let alone
collectively against #1 overall producer Saudi Arabia. But, as
they say, it”s a fluid situation.
The real issue, however, is not necessarily production quotas
(though, when adhered to, they can at least help keep prices from
sliding), but rather the global demand picture (as well as winter
weather conditions), and if the U.S. and Europe were to have any
kind of economic rebound in 2002, the price of crude should rise
as currently bloated inventories are sopped up. And speaking of
inventories, the weekly figures going forward will be critical.
Last week saw the first bullish #”s on this front in quite some
time and that helped establish at least a temporary floor on
prices.
On a related matter, I saw some interesting statistics on the rig
count in the U.S. Currently it sits at 986, down from 1,064 a
year ago. The all-time high is 4,530 from back in 1981, with the
low being just 488 the week of 4/23/99. Oil shares bottomed in
February of ”99, so you can see why falling #”s in this category
give me goose bumps. On the week, most energy-related share
prices rallied sharply.
–The global picture: In Asia, the current economic situation is
about as mixed as you can get, with South Korea exhibiting
growth of 1.8% in the third quarter (better than expected), while
Taiwan”s economy fell 4% over the same period and is now in
the midst of the nation”s worst recession ever. And then there is
Japan, where institutions compete weekly to see who can depress
the citizens more. It was the Bank of Japan”s turn this time.
“Adjustments in economic activity are becoming more severe.”
6 straight months the BOJ has cut its outlook. [Seriously, the
first time they raise it could be a watershed day in the markets,
though, granted, we”re not holding our breath.]
In Europe, Germany”s GDP fell in the third, with business
confidence hitting an 8-year low. But Britain is keeping its head
above water. Meanwhile, so little is being said here in the U.S.
about the coming euro conversion (January 1st) that I guess
everyone thinks it will go smoothly. Cough…cough. Maybe the
experts are right. Cough…cough.
And in Latin America, yes, watching Argentina is like being
witness to a slow motion train wreck, as the government
scrambles to avert a full default. Yet no one really seems to care,
but, as I”ve pointed out countless times, investment flows into
emerging markets have totally dried up, and, in some cases,
reversed. That”s not good for the global economy going forward
because it virtually guarantees one or two big disasters a year,
even during otherwise good times.
–The airline industry: Just how bad is it? Now we know that
UAL has massive problems and there are concerns over its
ability to survive. Certainly, if you are looking for good signs,
long-term, it doesn”t help when UAL announces it is taking
delivery on only 24 of 67 jets previously ordered. But it”s
broader than UAL. Boeing”s Phil Condit has told some that the
industry may need anywhere from 28-42 months to get back to
pre-9/11 traffic levels. And others estimate that Boeing and
Airbus, combined, could lose 1,000 sales. Economist Robert
Samuelson extrapolates out that at a conservative $100 million
per plane, that”s $100 billion in lost sales.
But Samuelson also wonders just how much our habits have been
permanently damaged? “Although the jet age isn”t over, it has
opened a new and more discomforting chapter,” he writes in the
11/26 issue of Newsweek. “Jet travel altered the way Americans
lived…more than, say the Internet has. By enhancing mobility,
jets – like railroads in the 19th century – advanced a truly national
market.” Ten weeks after 9/11, I know an awful lot of people
who aren”t particularly fired up about taking their next flight.
Samuelson, and folks like Condit, are telling you the recovery
could be long in coming.
–Phillips and Conoco are merging to create the #6 integrated oil
company in the world.
–Xerox announced its turnaround was on track to produce a
profit in 2002. Copy? Roger that.
–Business Week”s 11/26 cover story on corporate accounting is
one of the best. When you really analyze the bubble of the
Nineties, one which was built in part on huge ”reported” earnings
gains, much of the rise was really an illusion, as corporations
now write-off sizable amounts of company assets. In other
words, wiping away the gains from years earlier.
–It”s customary to blab on and on about the start of the holiday
shopping season. But anyone who tells you they know how
strong it”s going to be, today, is simply full of it. By December
10, we may have a decent idea.
–I saw a poll from American Century investments where the
average investor still doesn”t have a clue when it comes to
investing in the bond market. So while I have done this from
time to time, I feel obligated to remind everyone that when you
invest in junk bonds (as I have done recently, for a second time
this year), the performance of them is contingent more on the ups
and downs of the overall economy than actual changes in interest
rates. If the economy improves, the ability of below investment
grade corporations to meet their debt service rises, thus the
market is willing to place a higher value on the bonds
themselves. If the economy were to stay mired in recession,
many companies issuing junk bonds would see the value of that
paper fall, as investors become increasingly worried about the
viability of the corporation itself.
–And speaking of corporations with questionable future
prospects, there is the sad case of Enron, which had to scramble
to get an extension on $690 million in debt that was coming due
this week. Needless to say, the proposed merger with Dynegy is
in some trouble.
More importantly for Enron”s employees, however, is the story
that has come to light concerning the company”s 401 (k) plan.
You”ll recall that Enron stock was trading over $80 as recently as
February. Unfortunately, employees accumulated over half of
their plan assets in Enron shares. Then the stock collapsed and
the employees got killed.
But to compound matters, on October 17, with the shares still
at $32, the company froze the assets in the pension plan because
of a change in administrators (a fairly common event in 401 (k)
land). For a month, as news suddenly hit about Enron”s
mounting financial problems, and with the stock collapsing to its
current level of $5, employees couldn”t access their accounts
during the changeover. The losses are huge. And down the road,
President Bush”s close personal relationship with Enron CEO
Kenneth Lay may hurt the president.
International Affairs / The Coalition
Al Qaeda: Last Sunday”s Times of London had a piece
discussing a post-bin Laden world. It is estimated that 80% of
the terrorist network remains outside Afghanistan. Said one U.S.
source for the article, “In fact, we are expecting something pretty
horrible here (in the U.S.) precisely because of the developments
in Afghanistan.” Remember, the cells don”t communicate with
each other and while it”s not unreasonable to assume we have
severely disrupted many of al Qaeda”s plans, and, it may not be
unreasonable to expect some cells to await orders from a new
leader, the bulk of the terrorist network could easily be on auto
pilot. Happy holidays.
Russia: Both British Prime Minister Tony Blair and NATO
secretary general Lord Robertson are in favor of an enhanced
role for Russia in NATO. What”s being proposed is not full
NATO membership (yet), but a 19-plus-one format whereby
Russia would have a say in some security issues.
As to the U.S. / Russian relationship, while little was said during
the Crawford summit about the critical issue of the safekeeping
of Russia”s weapons usable nuclear material, Condoleezza Rice
assured Tim Russert last week that the topic was a priority. The
New York Times and others have been screaming that the U.S.
isn”t spending enough money on the project, but Rice said it”s
how you spend it that matters (and here at StocksandNews we
always side with Condi).
Another item I have brought up here before, how Russia can help
in dealing with Iran and Iraq, is clearly being discussed at the
highest levels. Russia wants to protect its oil interests in both
nations. Fine, let them have their fair share, just help us topple
the regimes.
Saudi Arabia: Former long-time intelligence chief Prince Turki
(who is still in good standing with the royal family) said in an
interview that Saudi Arabia supports a coup in Iraq, but no
attack. This will be the position throughout the Arab world, but
the U.S. has been non-supportive of Iraqi opposition forces over
the past 10 years, a costly mistake. Anyway…
Iraq: The U.S. is beginning to lay out its case for action against
Saddam. Colin Powell is trying to get the U.N. to tighten
military-related sanctions (while lessening civilian ones) but the
U.N. (mainly Russia) is balking. Then you have Assistant
Secretary of State John Bolton”s comments at an international
conference in Geneva this week.
“The U.S. strongly suspects that Iraq has taken advantage of
three years of no U.N. inspections to improve all phases of its
offensive biological weapons program.” And as to how the U.S.
may proceed, given this knowledge, Bolton was none too subtle.
“While the United States is not prepared at this time to comment
on whether rogue states may have assisted a possible al Qaeda
biological weapons program, rest assured that the United States
will not rely alone on treaties or international organizations to
deal with such terrorist groups or the states that support them.”
The stage is being set, perhaps sooner than even I expected.
[Bolton also singled out North Korea, saying “(it has) the
capability to produce sufficient quantities of biological agents for
military purposes within weeks of a decision to do so.” Just
another reason to sleep with one eye open.]
Britain: Support for the bombing campaign in Afghanistan has
slipped to 51%, according to a Guardian poll (though hopefully
soon this will be irrelevant). Separately, Zimbabwe”s Robert
Mugabe blamed British-sponsored “terrorists” for recent
opposition violence in his country. Gosh, I hope this is true.
Germany: Chancellor Schroeder, one of the real assets in the war
thus far, portrayed the pacifism of his ruling coalition partner, the
Greens, as being built on “nostalgia and denial,” adding,
“Leadership means doing the right thing and that you set the
course.”
Turkey: The IMF has approved $10 billion in funding for 2002,
but the government is saying it needs help on $5.6 billion this
year. The economy remains a basket case (as the currency
has fallen 55% in value), but by now you all are sick of my
opinion pieces on how important the health of this country is
these days.
Turkey must also help itself, however, in the political realm and
over the coming weeks the long simmering dispute over the issue
of Cyprus is going to come to the forefront. Turkey invaded the
island nation in 1974 and it”s been partitioned ever since. Greek
Cyprus (the south) is soon to become a member of the European
Union, while Turkey”s own membership application flounders.
Should southern Cyprus be granted EU status, Turkey may
decide to formally annex the north, which would be a bad move.
[FYI…per capita income in the south is $13,000; in the Turk-
controlled north it is just $3,000.]
Jordan: Once again, the intelligence service here has evidently
thwarted terror attacks, this time against two resort hotels. The
Al Qaeda code name for the operation was “big wedding.” From
here on, I would suggest that all of you refrain from using this in
planning any of your own celebrations.
India: The home minister told parliament, “We”ve driven home
the point that so far as India is concerned, our western neighbor
(Pakistan) has been the principle source of terrorism.” Now,
now, you two need to get along, remember?
Philippines: Fighting between Muslim rebels and government
troops broke out on the island of Jolo, claiming more than 100
lives. I really thought the U.S. would have landed marines in
support of the Filipino military by now.
Israel: As expected, Colin Powell said in his speech on Monday
that Israel and the Palestinians must return to the framework of
the Mitchell plan and that Israel must end its occupation of the
West Bank and Gaza, while recognizing the legitimate
grievances of Palestinians (i.e., the settlements). As for Yassir
Arafat, he must hunt down the terrorists, with Powell adding,
“The intifada is now mired in the quicksand of self-defeating
violence and terror directed against Israel.” Meanwhile, polls in
Israel show 59% supporting the creation of a Palestinian state
(36% opposed).
Random Musings
–Professor Eliot Cohen, writing in the Wall Street Journal,
opined that “This is not a war against ”terrorism,” but rather
against ”militant Islam.” It will not be won soon.” Cohen goes
on to discuss why we need to go after Saddam.
So many people these days are afraid to tell it like it is. I
remember watching the National Prayer service on Sept. 14 and
CNN”s Judy Woodruff, who had Reverend Franklin Graham
alongside to help describe the scene. Graham made some
forthright comments on militant Islam that even I was a little
uncomfortable with. Oh, believe me, he spoke the truth, I just
knew that he would get in trouble…and he did.
Franklin Graham hasn”t backed down since, offering that Islam
has some troubling strains of thought. It comes down to
Wahhabism, which regular readers of this column are now well
aware. At the same time, we all understand why the
administration has to offer up the ”love your neighbor” talk.
They have no choice, really, but that doesn”t mean I have to hold
back. For now, though, let me just say I was sickened to see
Saudi ambassador Prince Bandar at the right side of President
Bush during Monday”s Ramadan dinner at the White House.
Bandar and the House of Saud are letting Wahhabism run
rampant throughout the region. We are going to have to begin
condemning this policy in no uncertain terms, or the ”war on
terrorism” will be a shallow one with unspeakable consequences
down the road.
–There is one positive development the past few weeks
regarding public opinion in the Middle East and Pakistan. As
Newsweek”s Fareed Zakaria points out, the level of pro-bin
Laden demonstrations has been far less than many had
anticipated.
–Commerce Secretary Don Evans is one of the administration”s
leading cheerleaders, so the other day he said that the economy
was primed for a rebound if we would just shop. “People ask all
the time, what can I do, what sacrifices can I make for my
country?” said Evans. ” ”Go back to the stores,” I tell them.””
Now it would be disingenuous of me to knock such talk, since I
said directly after 9/11 that it was more patriotic to buy a Dell PC
(as I did) than to buy shares in Dell stock. But at the same time,
if you are loaded to the gills in debt and have little savings, going
shopping and rubbing the #”s off your credit cards is pretty lousy
advice. I know the World War II generation must be having a
good laugh. They had to make real sacrifices in their way of life,
but, so far, we are being asked to sacrifice our own financial
condition for the betterment of the nation.
–The New York Times reports that Bush is grooming Tom
Ridge to be vice president, assuming Cheney steps down after
the 2004 election. Now months ago I said Cheney would
announce after the mid-term election next year that he wasn”t
going to continue as Veep, but I would suggest that Bush name
Condoleezza Rice as his running mate. [Actually, while I”m
musing, it”s not far-fetched that Cheney and Rice would reverse
roles. All of us want Cheney around in some capacity, but
concerns over his health make him a liability on the actual 2004
ticket.]
–The press really is unbelievable sometimes. Adam Entous, a
Reuters commie, had this account of the president”s Ramadan
dinner. “Bush bowed his head but did not close his eyes during a
prayer offered by the Imam.” Huh?! Of course Mr. Entous is
trying to shape opinion; why, the president must not care!
–Somehow after 9/11, those incredibly pretentious Polo / Ralph
Lauren commercials are even less appropriate than they were
before.
–Here are some good statistics on the number of foreign students
in the U.S., courtesy of Diane Jean Schemo / New York Times.
548,000 are currently attending schools in the U.S. (74,000 in
California alone), with 16,000 being from those nations that
appear on the State Department”s ”sponsors of terrorism” list.
Now today, university presidents are all up in arms over the
government”s proposals to limit student visas, particularly from
Middle Eastern countries. This shouldn”t come as a great
surprise since many of our institutions of higher learning are run
by commie-pinko types, but the fact is that while only 3.4% of
all college students pay full tuition, 8% of foreign students do,
ergo, the schools have a major financial incentive to maintain the
status quo.
And you also have the case where foreign students make up a
large proportion of the graduate school population, so the
academicians claim that you would also be severely hampering
important research projects. [At Carnegie Mellon, for example,
47% of doctoral degrees in ”99 went to foreigners.] Well, you
can imagine how we feel here at the home office of
StocksandNews. Personally, I”m more concerned with “dirty”
bombs going off in our country than with a few research projects.
–All the angst over the military tribunal option granted President
Bush is absolutely ridiculous. And it”s many of my fellow
conservatives who are causing the biggest problems. We”re
talking about our national security, people. Wake up! Actually,
with each passing day I wish they”d expand the uses for the
tribunal, like to include those running red lights in their SUVs
while using their cellphone. Or, as my buddy Jimbo mentioned
the other day, why not use the tribunal for idiots like the fellow
in Atlanta who caused all the problems at the airport two weeks
ago? Or how about the couple in my condo development that”s
complaining about all the American flags flying in our complex?
Yes, you read that right. Assemble the tribunal!
–From C.R. Palmer, chairman of energy outfit Rowan. “As an
old-time cattle rancher in south Texas once told me after four
months of drought, ”the good news is, tomorrow we”ll be one day
closer to rain.””
–Congratulations to my Oklahoma friends Gene and Karolee
who have had a great year with their farm. I”m proud of you.
–Did you catch George Carlin”s new comedy special for HBO?
What an embarrassment. His act has been reduced to endless
vulgarity and I can just imagine what Bill Cosby would say.
–I saw where grade inflation is so rampant at Harvard that only
6% of students receive C, D, or F. Which reminded me of
Peppermint Patty, who the other day got a Z- on a test. I could
relate to that.
–In a recent poll, 50% of those surveyed found a free alternative
when a site asked them to start paying for content. Hmm, mused
the editor.
–Speaking of this site, I”ve had a tough stretch in dealing with a
hacker (not necessarily of the site, itself, but the servers we are
connected to). Thanks for your patience while we take care of
this problem.
Gold closed at $273
Oil, $18.96
Returns for the week, 11/19-11/23
Dow Jones +0.9%
S&P 500 +1.0%
S&P MidCap +1.3%
Russell 2000 +1.6%
Nasdaq +0.2%
Returns for the period, 1/1/01-11/23/01
Dow Jones -7.7%
S&P 500 -12.9%
S&P MidCap -6.5%
Russell 2000 -5.2%
Nasdaq -23.0%
Bulls 46.9%
Bears 28.6% [Source: Investors Intelligence]
Have a great week.
God bless our president and the men and women of the armed
forces.
God bless America…land that we love.
Brian Trumbore
