[Posted 7:15 AM]
On Monday the National Bureau of Economic Research
announced that the record U.S. expansion ended this past March
and the economy is officially in recession. Forget that the more
common definition of one is two straight quarters of negative
GDP growth (and we”ve had just one thus far), these high priests
of academia are the guys we are told to pay attention to, so we
do. But it”s already old news (and I cover the NBER”s
pronouncement in great detail in this week”s “Wall Street
History” piece). More importantly for today, where do we go
from here? On this, experts remain divided, and it doesn”t help
when the data on the economy continues to be all over the board.
What has made the current downturn so unique is that it has been
business driven, as opposed to a more normal recession, which is
triggered by a large slowdown in consumer spending. This time
the consumer has hung in there, so the release of the Conference
Board”s final figure for consumer confidence in November,
which showed a plunge in the index to its lowest level since Feb.
”94, is significant. But then the latest readings on the housing
sector continue to show some strength in most parts of the
country, though it is far from robust.
Meanwhile, auto sales in November continued to rock, which
I guess means we”re heading towards an era of 6 cars in every
garage. And durable goods (big-ticket items, like refrigerators
and airplanes) surged as well. Plus, with energy prices
remaining at two-year lows, we can gas up our 6 cars and have
change leftover …enough to buy another car! Well, then what”s
wrong with this picture? Everything else.
The Federal Reserve released its latest survey of economic
activity across the country, by region, and the report was mixed,
at best. Yes, real estate was a bright spot, but manufacturing and
capital spending continue to plunge. And no one can take solace
from the fact that jobless claims surged anew this week, while
“continuing claims” reached their highest level in 19 years.
And any problems are not just of the domestic variety. Morgan
Stanley”s chief economist Stephen Roach commented, “One by
one, every major economy is tipping into a rare and possibly
lethal recession. It is far-reaching and deep, and much of that
has to do with the fact that we”ve become much more
interconnected.” [New York Times]
And then there are corporate profits. This week, many of the
technology companies, like Dell, reaffirmed guidance for the
current quarter and strongly hinted at improvement for 2002.
First off, it can”t get any worse or we”re talking
Depression, but when Dell cites “strong pent-up demand” for
PCs and notebooks, I have to take issue. In fact, over the past
few weeks I”ve done my own little survey of major financial
institutions (employing my old Wall Street network of friends)
and not one company is replacing its Y2K-installed desktops
anytime soon.
I have been curious whether or not corporations would use the
arrival of Windows XP to upgrade the PCs and the answer for
now is, no. To be fair, yes, eventually these will be replaced,
but not until we have a clearer signal the economy is taking off
with a return to healthy profits. For now there is absolutely no
reason to do so.
The point is this is not your garden-variety recession. What we
need, though, is really pretty simple…more time…time to work
off the excesses of the greatest capital spending bubble in the
history of the universe (sorry, I have no contacts beyond it). But
Wall Street can”t afford to be passive (you can lose your job), so
you still have those who tout the fact that happy days are just
around the corner. Which is why I respect someone like J.P.
Morgan Chase”s Doug Cliggott, who this week reduced his
model portfolio exposure to equities from 60% to 50% due to
“overly ambitious earnings estimates.” Cliggott, who is also now
recommending 25% bonds / 25% cash, maintains that there is
still “far too much optimism on the stock market.” Obviously, I
concur.
And one last item concerning a topic we thought was buried just
a few months ago, the federal budget. It was last April that we
were told the cumulative surplus would exceed $5 trillion over
the next 10 years. This week, Budget Director Mitch Daniels
forecast deficits for the remainder of the President”s term.
Now for starters, Daniels is using this information to extract
more concessions from Congress on spending, while for their
part, Democrats are saying (without merit), “I told you so,”
blaming the tax cut for the dismal new projections. But what
Daniels”s pronouncement should tell you is something pretty
simple. Yes, during times of recession you want to run deficits
in order to speed the recovery, but if we are entering a new era of
deficit spending, it”s going to be hard to keep interest rates down
because the government will once again be competing in a big
way with the rest of us when it comes to meeting our financing
needs, as they throw more and more debt onto the market. [A
simple supply / demand story.] Certainly this can impede any
recovery, or, at the least, the chances for a new bull market.
Street Bytes
–For the week, the Dow Jones lost a little over 100 points, 1.1%,
to close at 9851. Dow 10000 is proving to be a bit of a barrier.
Nasdaq picked up 1.4% to finish at 1930. For the month of
November, Nasdaq was up 14%, one of its best monthly
performances ever. [Nasdaq also has now had 4 straight up
weeks, the first time this has occurred since, oops, March 2000.]
The dominating factor on the week was, of course, Enron. More
on this later. In addition, the aforementioned positive profit
pronouncements from some in the technology sector also spurred
action in various issues. Cisco, for example, is once again
slightly above the psychologically important $20 level.
–U.S. Treasury Yields
6-mo. 1.77% 2-yr. 2.83% 10-yr. 4.75% 30-yr. 5.27%
Bonds regained much of what they had lost the previous two
weeks, as the jobless claims figures, the ongoing carnage in the
manufacturing sector, as well as Enron”s problems and the
resultant flight to quality, spurred the sharp rally. Suddenly,
sentiment has changed once again and now bond traders expect
the Federal Reserve to lower rates another 25 basis points when
they convene on December 11. Fed governor Lawrence Meyer
helped, in his own right, when he said earlier in the week that the
Fed shouldn”t hesitate to cut interest rates further. And lastly,
while the revised report on third quarter GDP is already ancient
history, plus it”s a lagging indicator, nonetheless a 1.1% drop is a
headline grabbing number which can”t possibly help the
confidence level of our overseas partners, who are praying for a
recovery in the U.S. that might help spur their own economies.
–Europe: Overall growth in the eurozone was just 0.1% in the
third quarter. This week France reported a big drop in business
confidence to an 8-year low, while unemployment continues to
rise. And, in keeping with my recent comments on the coming
conversion to the euro, 400,000 French bank workers are
threatening to walk off the job January 2nd, the first day for the
euro currency, which would be rather disruptive, I imagine.
–Japan: The banks are in the process of taking loan-loss charges
of $51 billion in the most concerted effort to date to clean up the
bad debt mess, which is killing the potential for new investment.
And many companies that have been holding out are finally
biting the bullet and laying off significant numbers of employees.
In some respects you can say that the country is at least taking
the necessary initial steps to restructure the moribund economy.
Meanwhile, retail sales plunged 2% in the latest recording period
and industrial production fell to its lowest level in 13 years.
Plus, the government mangled the two mad cow cases so the
panicked populace is reduced to eating those awful seaweed
pretzels. Is it any wonder then that the credit rating on the
Japanese government”s debt was reduced again?
–China: “Factory for the world,” in the words of the
Washington Post”s Clay Chandler. China continues to suck jobs
and investment from Japan and other countries around the globe.
And check out these enlightening numbers. Since 1990, China
has attracted $321 billion of the $719 billion in direct foreign
investment in Asia. As for exports, they were $249 billion in
2000 and are projected to rise another 6% in 2001, while in
Japan, exports were $477 billion in 2000, but will fall 15% this
year. You can quickly see when these two will cross if these
trends keep up, and there is no reason to believe they won”t.
–Turkey: The IMF has increased its total commitment to Turkey
to a record $29 billion. While it claims there is no pressure from
Washington to support Turkey because of the war on terrorism,
clearly there is. So is there somewhat of a double standard when
it comes to Argentina? Perhaps.
–Argentina: As I write this, the nation is in the midst of an
authentic bank run, as on Friday the citizenry was scrambling to
convert pesos into dollars, for fear of a debilitating devaluation.
The stock and bond markets plummeted this week to 10-year
lows and the IMF threatened to cut off its support as the
government struggles with a plan that would avoid full default on
its debt obligations. Plus the ruling coalition is disintegrating by
the hour. All of this has everything to do with my recent
thoughts on emerging markets.
I noted in this space on 11/17 that for the first time in a decade,
net investment was flowing out of developing nations. This
week economist Robert Samuelson wrote that the emerging
markets bubble popped, which creates a new set of problems.
“Declining inflows are offset by outflows to repay old loans or
capital flight…if (the emerging nations) can”t borrow, there may
be more defaults.” Count on it.
–Enron: And when the above comes to pass, there will be
land mines galore that many of our leading institutions don”t
want you to know about. I thought about this as I watched Enron
collapse this week. Think about the parallels.
For years I have railed against investing in emerging markets
(my recent investment thoughts on Turkey and my Russian oil
play notwithstanding) because of the lack of accounting
standards, as well as other concerns. Well, what the heck is the
difference between this line of reasoning and the way Enron
treated its own corporate books? Talk about shady accounting
and fuzzy math! And, as I”ve warned, Enron is not alone. To a
great extent the whole bubble was built on accounting chicanery
and the collusion of Wall Street”s analyst community, which, by
the way, in the case of Enron registered another embarrassing
performance.
Just two months ago, with Enron stock still in the low $30s, 15
analysts rated it a ”strong buy,” 3 a ”buy,” and just one a ”hold.”
60 days later we have one of the biggest implosions in Wall
Street history and one share won”t even cover a call from a
payphone. If this had been simply the story of a baseball team
collapsing in the stretch drive of a pennant race, it would be
laughable. Instead, the loss of wealth in Enron employee
retirement plans is a tragedy; the actions of its executives,
criminal.
–Energy: Commentator Jim Hoagland. “(As energy prices fall)
Americans must guard against being lulled once again into false
complacency over a commodity too volatile for its own good.”
Of course we will, but it”s still worth pointing out from time to
time. Actually, prices were stable this week for the first time in
months. But it”s also the time of year when your editor checks
the 10-day forecasts in selected cities across the country, daily, to
gauge how his natural gas play may fare. The price for this
commodity once again is below $3, but my weather sources tell
me…cold weather is on the way by December 15! Yee-hah!
Sorry, my portfolio is optimally positioned for misery.
–UAL is going to ask its employees to take a pay cut. As much
as deflation talk has come up recently, there really has been no
need for real concern, yet, because wages are still rising. That”s
why UAL”s move, sure to be emulated by others in the airline
industry (with strikes a consequence), needs to be watched very
closely.
[On the other hand my friend M.R. called up all excited the other
day when he saw that “Jeopardy” was doubling the value of its
squares. “Inflation!” he shouted.]
–If you take out the volume on Enron this week, trading activity
is really beginning to dry up.
–Advertising continues to slide. Time Inc. is closing 3
publications, including an excellent one, AsiaWeek. But it was
interesting that in announcing its disappointing third quarter
results, Kmart said it had cut advertising too much.
–Traffic at the malls was off 7% from a year ago over the
Thanksgiving holiday, while “discount” and “sale” are the two
most visible signs in retailers” windows.
–Bank lending is at a 30-year low. Q: Knowing this, how the
hell can we have a strong recovery? A: We can”t.
–I have been musing about Wall Street”s and Corporate
America”s exposure to derivatives for some time. With the
Enron debacle, we”re about to find out just how bad it can get, or
am I just all washed up on this subject?
–Friday”s employment report is going to be huge.
International Affairs / The Coalition
As we mop up in Afghanistan over the coming weeks, still
expecting a bump or two along the way, the question becomes
what”s next? Iraq is the big target, but we shouldn”t be surprised
to see action beforehand in the Philippines or Somalia, for
example. The al Qaeda cells in the Philippines have a potentially
destabilizing impact on neighboring Malaysia and Indonesia, if
allowed to grow, and in Somalia, al Qaeda evidently has some
training facilities which, as the Journal reported this week, may
be targeted by Ethiopian troops working in conjunction with the
U.S. [Rumsfeld said this coalition against terror would at times
make for some strange bedfellows.]
Joseph Fitchett, writing in the International Herald Tribune, did
identify a potential problem, that being the fact that the coalition
members who have committed forces are not too pleased they
aren”t being consulted about any phases of the operation in
Afghanistan. You can see why the U.S. is doing this, but it”s an
issue that bears watching as we attempt to keep as many of the
nations on board as possible.
Iraq: What do I really think? It won”t be that difficult to topple
Saddam. Secretary Powell said that President Bush”s strong
words the other day sent a “chilling message.” And I suspect we
are ramping up production of our ”daisy cutter” bombs, which
would be particularly effective against troops massed in the open
desert.
Former U.N. chief arms inspector Richard Butler said Bush has
more than enough evidence to act now against Iraq, but it would
appear we will set deadlines for Saddam concerning the return of
inspectors, while we convince some of our allies that all we need
is for them not to interfere.
But you may be wondering why I haven”t mentioned Turkey yet?
Well, former CIA director James Woolsey did, himself, in an op-
ed piece this week on confronting Iraq.
“We do need help, but only one government is critical – Turkey.
The Turkish government fears a split-up of Iraq and worries that
a separate Kurdistan in what is now northern Iraq would exert a
gravitational pull on Turkey”s Kurds. This problem should be
manageable by working with the Iraqi opposition to guarantee
Iraq”s future borders and to give Turkey a role in guaranteeing
stability in the north and in obtaining access to the oil fields
there.”
Bingo, Mr. Woolsey. It also needs to be noted that the U.S. and
Russia reached agreement on the extension of the existing U.N.
sanctions against Iraq, the oil-for-food program. Thanks to our
newfound relationship, by June 1 Russia has agreed to toughen
the sanctions regime in order to make it more difficult for Iraq to
obtain military equipment.
Israel: Despite the presence of U.S. negotiators in the region,
violence flared anew and Prime Minister Sharon is holding
Yassir Arafat directly responsible. If the U.S. war wasn”t going
on, Arafat would be taken out (just my educated opinion).
However, since President Bush needs Israel”s support and
cooperation, big time, when it comes to the issue of Iraq, Sharon
won”t act rashly if he”s convinced the U.S. will do his dirty work.
And certainly the issue of what to do if Iraq retaliates against
Israel is being discussed. Separately, Israel can”t be pleased at
the sophistication of the weaponry that the U.S. continues to sell
to Egypt.
India / Pakistan: At least 18 were killed in clashes this week over
Kashmir.
North Korea: North and South Korea border guards exchanged
fire on Tuesday, just 25 miles from Seoul. The incident was
termed “accidental,” but what if it was an “accidental” firing of
an artillery piece towards Seoul? The Bush administration wants
to press for inspectors in the North during its current campaign,
but what any discussion of North Korea points out these days is
how incredibly stretched U.S. forces are.
Canada: Officials are looking to review all 35,000 refugee
claimants across the country. A large portion of the applications
are simply filled with lies, including false claims of being
assaulted by “terrorists” as a reason for seeking asylum.
Random Musings
–Support for the war is still sky high in the U.S. 81% support
action against other countries, while 60% favor the use of
military tribunals. President Bush”s approval rating remains at a
stupendous 89%. Aside from recognizing the cause is just,
Americans clearly appreciate Bush”s conviction.
–Concerning the issue of cloning, I will keep my comments to a
minimum, but with regards to the latest developments, George
Will said it was another example of “science running ahead of
the law,” while the head of the German doctors” association
described the U.S. research as a “nightmare, that has now
unfortunately become reality.” Advanced Cell Technology is
attempting to allay everyone”s fears by saying its work is all
about “therapeutic,” not “reproductive” cloning.
–Ed Bradley did a good job last Sunday on “60 Minutes” with
his piece on the 300,000-strong Arab population of Dearborn,
Michigan. One of those interviewed said that terrorists were “not
part of our community.” Well, that”s a bunch of bull, as readers
of this space know. After all, about 6 weeks ago I wrote of the
Muslim cleric who claims 80% of the mosques in the U.S.
espouse Wahhabism, the language of Islamic extremists. So
even if you call it 25%, it”s safe to say that among the 300,000 in
Dearborn, there exists a virulent cell or two. And certainly the
FBI”s regional director has every right to be very concerned, as
he clearly appeared to be on the program.
–The New York Times” Thomas Friedman, regarding Islam,
writes that the future depends on mainstream Muslims” “ability
to reinterpret their past.” To which I”d add, sometimes a few
well-placed daisy cutter bombs speed up the process.
–Actor Ian McKellen, who plays Gandalf in the upcoming “Lord
of the Rings,” commented in a Times interview: “It”s like if you
were playing Jesus Christ – never of course would I recommend
this to an actor, because everybody who plays Jesus Christ ends
their career with that performance…” You know, he”s right.
Look at Jeffrey Hunter. [“King of Kings” is one of the Trumbore
Brothers” favorite flicks.]
–Newsweek got a look at the investigation of an al Qaeda
suspect, Hassan Almrei, who is being detained by Canadian
authorities. “Material downloaded from Almrei”s personal
computer…includes pictures of box cutters, hand grenades, a
jumbo-jet cockpit, decapitated Russian soldiers and a portrait of
Osama bin Laden on horseback. Almrei denies any connection
with terrorism.” Folks, this is exactly what the military tribunal
is for. Next…
–A report in Defense News relates how the cannibalization rate
for spare parts on U.S. fighter jets is 30%, while the average age
of Air Force aircraft has risen from 13.4 years in 1990 to 22
today. Thank God accidents have been held to a minimum.
–Speaking of Bill Clinton, the evidence continues to mount that
his administration was incredibly derelict on the terrorism front.
The Financial Times reported on Friday that Sudan, in an effort
to emerge from its cave, offered to hand over suspects and share
intelligence months before the embassy bombings in ”98.
Clinton spurned the offer.
–Donations to emergency food banks are down 30% since 9/11.
–The Journal had a story on the policy against beards in many
prisons because they can hide contraband, like Kalashnikovs. So
some inmates are suing. Said one, “If our lawsuit wins, a lot of
us will grow beards to follow the prophet Muhammad. This is
his way of life.” Now that”s something I didn”t realize was in the
Koran.
But you know, this whole thing got me thinking about Al Gore
and his beard. And how about the Smith Brothers? I mean their
cough drops taste good and all, but do they really help? And
what are they hiding in their beards?
–Did you catch artist Thomas Kinkade on “60 Minutes”?
Kinkade says Picasso was overrated. He”s right. You know who
else is overrated? Giotto.
–A crash study has found that the Ford Explorer receives $5,400
worth of damage in a collision at just 5 mph. No word on
whether it also rolled over at that speed.
–Read off the wires: “An Ohio company is recalling 60,000
wooden candle holders because they can catch fire when candles
in the holders burn down to the bottom of their wicks.”
–Progress. I”m no longer dreaming of nuclear attacks, but
instead, I”m having nightmares trying to figure out the rate of
retail sales this Christmas season.
–Baseball commissioner Bud Selig said he was worried about
the sport”s massive debt load. [See Enron Field.]
–There is absolutely no truth to the rumor that StocksandNews is
rummaging through Enron”s furniture.
–“Bottom of the third, on a beautiful night for baseball here at
Enron Field. Craig Biggio leads off. Omigod! The shareholders
are storming the field!” “This could get ugly, Vern.”
–President Bush reiterated there would be no ceasefire during
the Olympics. It also doesn”t appear as if the Taliban”s bobsled
team will be competing.
–Microsoft and Apple are now battling over who should supply
PCs and software to the nation”s schools. I say, get rid of the
computers and give every kid a good American history book
instead.
–Due to the recession, StocksandNews has to cancel its holiday
party.
–Friday was a gloomy day for many of us. The death of George
Harrison just makes you feel so old…
–Which was the feeling I had the day after my 25th high school
reunion, held last Saturday. It was a great time, but I was also
kicking myself for not keeping in touch with some of my
classmates, many of whom I have known since 2nd grade. And
perhaps I spent too much time the day after thinking about how I
have led my life thus far.
But I also thought that all the Good Lord asks is that you do the
best you can. Just keep plugging away, try and do the right
thing, and never stop thinking about how lucky you are to live in
America.
–And when you have dinner tonight, give a toast to Johnny
“Mike” Spann, and explain to your kids what a great American
this first casualty of the fighting in Afghanistan was. As his
father related, Mike said upon joining the CIA, “Someone has
got to do the things no one else wants to do.” I”ll forever be
appreciative of those like him. Now he”s regaling the World
War II and Vietnam vets, I imagine. And they”re telling him a
thing or two about Bastogne and Ia Drang.
God bless our president and the men and women of the armed
forces. Keep rolling.
God bless America.
—–
Gold closed at $274
Oil, $19.44
Returns for the week 11/26-11/30
Dow Jones -1.1% [9851]
S&P 500 -1.0%
S&P MidCap +0.1%
Russell 2000 +0.5%
Nasdaq +1.4% [1930]
Returns for the period 1/1/01-11/30/01
Dow Jones -8.7%
S&P 500 -13.7%
S&P MidCap -6.4%
Russell 2000 -4.7%
Nasdaq -21.9%
Bulls 46.0%
Bears 27.0% [Source: Investors Intelligence]
Have a great week. I appreciate your support.
Brian Trumbore
