[Posted 7:15 AM]
“God gives us free will.”
–Cardinal Theodore McCarrick
“Never before in America have so many people died saving
others.”
–Mayor Rudolph Giuliani
We were certainly reminded in 2001 that man does have the
ability to choose between right and wrong. We were also
reminded, thankfully, that the human spirit can overcome evil.
The only problem is that in our modern age, far more than a
simple majority is required to ensure the safety of the good folks.
Last week on “Meet the Press,” Tim Russert asked Rudy Giuliani
if anything surprised him in the way the New York City police
and firemen reacted to the attack on the Twin Towers. “To tell
you the truth, nothing,” said the mayor. In a similar vein, if you
have been with me all these years, you know I wasn”t surprised
by 9/11, only in the way it was carried out. As I wrote in this
space on 9/8, concerning national missile defense, “severely
limiting NMD…is exhibiting a faith in humanity that is far from
rational.” God gives us free will.
I also wrote on 9/8 of my trip to St. Patrick”s to pray for George
W. Bush, though little did I know the real reason why. Back in
the fall of 1999, I was harsh in my criticism of then candidate
Bush for not knowing the names of some world leaders,
including, ironically, Pakistan”s Musharraf. I was right to do so
at the time, but our president post-9/11 has performed splendidly.
More importantly for the future, you can also see he “gets it.”
But looking back on 9/11, it was amazing the speed at which vast
sections of the world economy were brought to their knees, and it”s
a lesson that can never be forgotten, especially, to be a bit
insensitive about it, when positioning one”s portfolio. And as
Morgan Stanley economist Stephen Roach added after the attack,
“The very underpinnings of globalization are at risk.” Thanks to
the worldwide dragnet, we haven”t had any follow-up incidents
to further test the theory. Unfortunately, sometime in the future
we undoubtedly will.
But for now, the action in the financial markets post-9/11
(actually, post-9/21) reflects the resilience of investors, as well as
improving fundamentals. Consumer confidence has returned (by
one measurement to levels not seen since August) and other
indicators such as housing continue to rock on, as Americans are
obviously confident enough to make major financial
commitments.
What about 2002? If you tell me that the U.S. will not see
another serious attack, I”ll tell you that the recession is basically
over, but future growth is highly limited by the same
fundamentals I have discussed ad nauseum…overcapacity,
gigantic consumer and corporate debt, and lack of pricing power,
being some of the most obvious.
—–
Thinking Outside the Box
Just a few random thoughts on what could be the big events /
themes of 2002:
–We are in the midst of a clash of civilizations, even though few
want to believe it, and I fully understand that our political leaders
dare not utter this. I can.
–There is no “next big thing.” Sorry, folks, being able to gauge
the milk supply by remote control is not it.
–Iraq will fall quickly, once we”ve made the commitment to oust
Saddam. There will be a hairy moment or two, however,
possibly with heavy casualties. Meanwhile, students in Iran will
revolt unless they see true democratic change by July. [Much
here will be tied to the speed of events in Iraq.]
–The coalition will remain strong. And the rest of the country
will learn what you faithful readers already know of, the crucial
role of Turkey. [I will also make money on my Turkey
investment.]
–A key Middle Eastern leader will be assassinated. [Yes, I was
surprised it didn”t happen in 2001.] This would obviously
complicate matters concerning the war on terrorism.
–The U.S. / Russian relationship will continue to grow. I was
correct in being optimistic on this front last spring, long before
the rest of the crowd. I have invested in Russia. Embrace the
change. Don”t listen to naysayers on this one.
–By year”s end it will be China, China, China…if not sooner.
The leadership change that will take place is a cataclysmic event,
though it doesn”t have to be a negative one.
–Much of Latin America will witness increasing turmoil.
–The Japanese economy will finally totally implode, all will fall
to the ground and then, one by one, the people will begin to pick
themselves up. At some point in 2002, Japan could be the
investment opportunity of the year.
–Lastly, there is the weather. Yes, it”s a major wild card as we
progress through the first half of 2002. The reservoirs in the
New York area are at 44%, when they should be 77% this time
of year. And the latest long-range forecast is for very dry
conditions over the next month or two. Just remember I told you
first. Come late April-early May, this vital region for the
nation”s commerce will face a major crisis with severe economic
ramifications. Plants will be shut down, workers laid off,
activities curtailed, all as we are supposed to be emerging from
the recession. And I haven”t even mentioned July and August.
International Affairs…the week in review
India / Pakistan: Indian Prime Minister Vajpayee told his people
early in the week that “war is being thrust on us.” Pakistan”s
President Musharraf proclaimed to his countrymen, “your
military is ready.” But, as much as I”ve described this as a “hot
spot” for years now, I suspect that both sides will step back from
the brink, barring another terrorist attack such as what we
recently saw on India”s parliament, or an assassination of either
Vajpayee or Musharraf. Regardless, the historic conflict over
Kashmir will continue for years to come. Meanwhile, the
biggest contribution the U.S. can make over the ensuing weeks
and months is to get the two leaders to adopt some confidence-
building measures.
For his part, President Musharraf has surprised all of us with his
leadership since September 11 and, in the same speech this week
wherein he spoke of the nation”s readiness for war, he also
addressed the issue of Islamic extremism. “Leave aside
tolerating other religions,” he said, “we refuse to accommodate
views of various sects in our own religion.”
Russia: Reporter David Broder wrote of the Bush
administration”s “Christmas gift to the nation,” a renewed
commitment to helping secure Russia”s nuclear materials. And
Russian President Putin allowed his citizenry to quiz him during
a wide-ranging nationwide telecast this week. It was an
impressive performance. Separately, on the issue of Iraq, Russia
is still owed $8 billion, which is why they are against U.S.
action. To which I say, give them the majority of the new oil
projects in a new, free Iraq.
Turkey: The story of a leading general who is against the U.S.
going after Saddam received quite a bit of play this week. Not to
worry, fellow Turkophiles. What many of the same articles
failed to bring up is the fact that the government just extended
U.S. and British rights to Incirlik airbase for another 6 months,
from which all the missions patrolling the northern no-fly zone
originate. They”ll be there for us; the generals and politicians
just need to make some noise for public consumption concerning
the issue of the Kurds in northern Iraq. And Prime Minister
Ecevit will be meeting with Bush in what should be a highly
visible forum in Washington around January 16. However, I do
increasingly worry that Turkey is the perfect place for a major
terror attack, even if Muslims would be the primary victims.
North Korea: The commies sent a spy boat out to test Japan”s
defenses and the Japanese navy took matters into its own hands,
resulting in the deaths of 15 North Koreans. The only reason
why the incident is worth mentioning is because it was just a few
years ago that the North test-fired its new ballistic missile by
shooting it over Japanese territory, which scared the hell out of
the whole region. Of course you also have to wonder when
leader Kim Jong-il, he of the month long train trip to Moscow,
will simply crack up. And then it”s “Washington, we have a
problem.”
Nigeria: Not for nothing, but Nigeria, with sub-Saharan Africa”s
largest Muslim population, is threatening to implode. This week
extremists, who have been imposing Sharia law in the north,
assassinated the nation”s attorney general. We desperately need
Nigeria to be a leader on the continent. Fat chance of that
happening anytime soon. [It”s also a potential new hideout for al
Qaeda.]
Europe…the euro
Madame and monsieur, introducing les euro. Whoopee! Oui
oui! By the end of 2002 you”ll be sick of discussions on the new
currency”s impact on the European economy. Many points will
be made over and over again (just like I do with energy and
Japan), but, let”s face it, it”s tres important!
For the record, the following are adopting the euro: Austria,
Belgium, Finland, France, Germany, Greece, Ireland, Italy,
Luxembourg, Netherlands, Portugal and Spain. Britain,
Denmark and Sweden are the E.U. nations that are sitting it out
on the sidelines, for now.
Of course the euro is supposed to help in the integration of the
European economy so that it will be more competitive on the
world scene. Eventually, it should lead to reduced costs for both
manufacturers and consumers, as well as make for easier travel
between nations (for both goods and humans). It should, in a
nutshell, spur activity.
But, Europe is still far from one economy, despite a single
currency, and no longer can a government address its own
economic problems through monetary policy, because there is
now only one authority, the European Central Bank. So, for
example, if inflation were running wild in Ireland, the monetary
authorities in Dublin would be powerless and couldn”t just raise
interest rates in an attempt to quell it. Only the ECB can now do
that, and, under this scenario, may not want to raise rates because
of the adverse impact on the majority of the other euro nations.
Each country also still has different tax policies and labor
regulations, which over time may be a good thing as some
governments and workers wise up to the realities of a new day,
but, in the meantime it can lead to major strife, particularly in
times of economic stress.
And then you have the immediate issue of counterfeiting and
money laundering. It will take some time before shopkeepers
and consumers are comfortable with their new toy and the
evilcurrencydoers (new word alert) are already hard at work,
stealing hologram plates, for example, to create bills that the
untrained eye won”t recognize as bad. [Actually, under that real
life example, the trained eye wouldn”t either!]
Plus, the new 500-euro note (about $450) is being introduced.
You don”t think there are more than a few folks sitting in
basements across the continent trying to make these, do you?
And then you have the situation that until the end of February,
most nations will still accept the old currencies, so you have this
artificial bubble where all the mattress money (placed there to
avoid taxes…a very European thing) is coming out of hiding to
be spent before it becomes worthless.
Lastly, if you don”t think the euro will cause tension, particularly
during inevitable global slumps, consider this. 89% of
Europeans feel attached to their country, only 56% to Europe.
Street Bytes
–The bias during the holidays is to the upside and this week was
no exception. The Dow picked up 100 points, 1.0%, to close at
10136, while Nasdaq gained 42, or 2.1%, to finish at 1987.
We”ll wrap up the year next week, following Monday”s action.
–U.S. Treasury Yields
6-mo. 1.81% 2-yr. 3.16% 10-yr. 5.11% 30-yr. 5.54%
As you can imagine, trading volume in both the stock and bond
markets was minimal. Bonds were basically unchanged.
By way of comparison, however, here are a few figures of note.
12/31/99
2-yr. 6.24% 10-yr. 6.49%
12/31/00
2-yr. 5.09% 10-yr. 5.11%
After 11 Fed rate cuts, the 10-year now stands exactly where it
was a year ago. And, since that is the rate which most fixed
mortgages are pegged to, I”d say Mr. Greenspan failed
miserably. But housing figures continue to say otherwise, so the
joke”s on me, I guess.
[The consensus expectation for the U.S. economy calls for
growth of 2.5% in 2002; 0.4% in the first quarter and on up from
there. The same experts see an inflation rate of 2.2%. Source:
Business Week.]
–Forecasts: Of course, 90% of Wall Street”s analysts weren”t
even close when it came to their projections for 2001. UBS
PaineWebber”s Ed Kerschner, for example, pegged a yearend
2001 S&P 500 of 1715 (we currently stand at 1161). And Abby
Cohen called for a 12/01 S&P of 1650, with 7-8% earnings
growth. The latter will probably have declined in the
neighborhood of 16% by the time the 4th quarter numbers pour
in. But it”s still fun to play the game so for 2002…
Kerschner: S&P 500 target of 1570
Cohen: 1350
Laszlo Birinyi: 1300
Tom Galvin: 1375
Ed Yardeni: 1300
Doug Cliggott: 950 (Dow 8500)
The consensus of the 50 strategists polled by Business Week
called for an S&P 500 of 1300 and a Dow Jones of 11100 by
12/31.
Last year yours truly said the Dow and S&P would be up or
down 5%, which was my way of saying cash and bonds were the
saner alternative, but I did expect the Nasdaq to finish up a few
hundred points to 2800, though not because I thought it deserved
to be at that mark. So I missed the latter by a wide margin, but,
all in all, for the Dow and S&P I was better than most. As for
2002, I”ll say the S&P will be at 1225 yearend, the Dow at
10500, and Nasdaq 2100. However, getting there will be a story
unto itself. [After all, this is why we have a “Week in Review,”
isn”t it?]
So am I calling for a disaster? No. But I”ll repeat something I
wrote in this space 12/30/00, the harsh reality of which is finally
beginning to hit home.
“Gone are the days when investors see 20-30% returns as their
constitutional birthright. And gone are the days when tech in
general is viewed as a panacea for all of our problems.”
–My portfolio: I am currently about 32% in energy (a refiner, a
natural gas / service play, and a Russian oil co.) and 5% in
Turkey (two issues). The balance is cash and ”high-quality” junk
bonds. I”m going to sit tight for a while.
My recent oil play has worked out far better than I anticipated (I
really think the stocks are ahead of the fundamentals so I”m more
than a bit leery), however, I also suspect the cold weather in the
northeast will finally begin to sop up the bloated inventories. As
for my junk bond position, if the economy grows at 2% it will
work out very well. Lastly, until I mentioned a specific
opportunity in Turkey a few months ago (sorry, I”m not repeating
it), the only investment I have felt comfortable in naming is
PIMCO”s Total Return Fund, managed by the best in the
business, Bill Gross. It”s a diversified bond portfolio that, once
again, outperformed the S&P 500 in 2001. [As of 12/28, by a
mere 19%!] If your financial adviser recommends that you put a
portion of your assets in bonds, bring up this choice (though I”d
be shocked if he or she didn”t do so first).
–Energy: Speaking of crude, as expected OPEC is slashing
production 1.5 million barrels per day and is relying on non-
OPEC Russia, Norway, Mexico et al to reduce another 450,000,
as part of a concerted effort to get the price of oil back into the
$22-$28 range. No one expects full compliance, of course, least
of all from Russia. More importantly for the price of crude and
natural gas is the pace of global economic activity and, yes, the
weather.
Two final points on energy: If you are an energy bull, you can
take comfort in the ongoing decline in the rig count (good for the
supply side of the equation). Secondly, you know what worries
me as far as the bullish case I try and lay out week after week?
It”s the timing of the toppling of Iraq. IF there is a smooth
transition in that country (Saddam and the whole family ousted),
Iraq will soon be pumping oil like crazy, which means
potentially way too much supply vs. demand. You can also say
the same for Central Asia and new oil and gas activity in that
region. At some point I may have to fully exit the sector that has
made me a bundle of cash these past 3 years.
–Japan: Seriously, what follows is new data, I swear.
Unemployment hit 5.5%, the highest level since Tokyo was
established as the capital of Japan during the Tokugawa
shogunate (1603-1867). Consumer prices fell in November for
the 27th straight month (that, boys and girls, is deflation).
Industrial production hit a new 14-year low (a massive 1.8%
drop), and the currency continued to collapse. Regarding the
yen, again, the government is counting on the rest of the world to
sop up the country”s cheap goods. If the world economy were to
recover in earnest, this could be the case. On the other hand,
neighbors like South Korea aren”t real fired up that its own
products are increasingly priced out of the Japanese market.
–Argentina: The new president is Rodriguez Saa (sic) and I
have no freakin” idea who he is. If you do, you win 400 pesos,
though spend them quickly before they are devalued. And
devaluation seems to be a certainty, while the new government
has halted payments on $130 billion in debt until they can wring
out concessions from the creditors.
–Holiday retail sales are coming in at flat to up 2%. But if you
take out Wal-Mart, they are flat at best. I don”t care what you
read or hear, it was a dismal shopping season and with all of the
discounts being offered, the obvious question is, where are the
profits?
–Much was made of the holiday traffic at Amazon and Yahoo.
To say the least, I remain underwhelmed. And we”re fast
approaching the two-year anniversary of Yahoo”s all-time high.
On 1/4/00, the shares traded at $250 (today they”re $18).
–Some benchmark levels:
12/31/99
Dow Jones 11497
Nasdaq 4069
12/31/00
Dow Jones 10786
Nasdaq 2470
12/28/01
Dow Jones 10136
Nasdaq 1987
–Here”s to Peanuts” Lucy Van Pelt, who in “A Charlie Brown
Christmas” says “All I really want is real estate.” Seeing as this
was first uttered in 1965, it proved to be a wise choice. I wonder
what she thinks of natural gas these days?
–Man, I keep waiting for the real estate bubble to burst. Yes,
one of my poorer calls.
–One issue that would derail the U.S. stock market, or at least
severely limit its upside over the coming year or two, is overall
loss of confidence in the market itself. Led by the most visible
examples of market manipulation and financial alchemy, CSFB
(and its $100 million fine for mishandling hot stock offerings)
and Enron, it is increasingly clear to the educated that much of
the stock bubble of the 90s was fueled by funny accounting and
major conflicts of interest (see Internet analyst Henry Blodget).
If the uneducated ever catch on (and a story or two on “60
Minutes” may be all that is needed), then the Street will have a
major problem.
–Sports fans…I have a ”Super Bowl and the Markets” piece up
on my “Wall Street History” link, long before others do so, and
with more data than you”ll find anywhere else.
–Lastly, as I wrote immediately after 9/11, buying stocks to be
“patriotic” is insane. Sure, if you did so, you made out well
because of the rally after September 21st. But buy stocks based
on fundamentals, not out of a sense of patriotism. And buy them
if you can afford to take the risk inherent in stock ownership.
Random Musings
–From Robert Bartley / Wall Street Journal:
“The Hasidim and Bob Jones don”t teach airplane hijacking, and
while bin Laden certainly does not represent all of Islam, it is
true that Islam has a problem. The open education and political
pluralism that succeed in the modern world do not fit easily in a
religion founded by a prophet who commanded armies and ruled
territories, expanded by military conquest, teaches that the
rightful should rule, and resents its decline from world primacy.”
–The story of shoe bomber Richard Reid is a warning to all
Americans who refuse to believe that Wahhabi extremists,
infiltrating our nation”s mosques, are a clear and present danger.
Reid, himself, was a member of a supposedly moderate mosque
in the U.K., but this once petty criminal obviously fell under the
spell of foreigners who are using Britain as a base of operations.
The same thing is happening here. Nothing that may occur over
the coming years should be a surprise to any of you.
–A young female passenger on a recent flight from Singapore to
London most likely died from “economy class syndrome,” deep
vein thrombosis. [AP] Remember to exercise your legs on long
flights.
–George Will wrote a column concerning Lynne Cheney”s
efforts to ensure that our schools, including our leading
universities, teach American history, because the pitiful level of
study today is leading to a “dilution of nationality itself.” Will
also quotes James Madison, “A well-instructed people
alone…can be permanently a free people.”
[I have covered this topic extensively in my “Bar Chat” link and
on 1/3 I will reprint a quiz from 2000 concerning our students
appalling lack of basic knowledge.]
–Bill Clinton recently had a conference call with his supporters
inquiring as to how he could get “back in the game.” As George
Will (S&N”s guest commentator) said on “This Week,” “The
man”s self-absorption is wider than the Grand Canyon.” And I
thought Gloria Borger (U.S. News) also broke the issue down to
its true essence. “If the TV crawl had pictures, Clinton would be
constantly jogging along the bottom of your screen.”
–Oklahoma kicked 6 field goals en route to a thrilling 18-17
victory over Texas. Oops, sorry, Oklahoma beat Texas in terms
of executions in 2001, 18-17.
–StockandNews Awards for 2001
Man of the Year: President George W. Bush. Honorable
mention – Rudy Giuliani and Condoleezza Rice. History will
show that Rice is the prime source of Bush”s strength and
conviction concerning the war on terrorism. She is clearly giving
him the chilling truth, that which he can”t ignore.
Ally of the Year: Britain. 2002 predicted winner – Russia or
Turkey.
Animal of the Year: Rescue dogs. Or, as my friend Johnny Mac
always says, “You don”t see any rescue cats!”
Dirtball of the Year: Bin Laden. But should he be dead and
unable to accept his award (gosh, we hope this is the case), then
the runner-up, Robert Mugabe of Zimbabwe (last year”s winner),
can claim it. This February / March, Mugabe should be back in
the news in a big way as he tries to steal the presidential election.
Sleazeball(s) of the Year: The executive committee at Enron.
Jerk(s) of the Year: John Walker”s parents. Honorable mention –
Reporter Helen Thomas.
And a special plaque goes to the “Man least likely to suffer fools
gladly,” Donald Rumsfeld.
–Of all the figures from the world of entertainment that died in
2001, I have to note the passing of Carroll O”Connor, the best
television actor in history…period.
–To my friends in the postal service, in case you missed it,
Cardinal McCarrick (whose elevation I personally witnessed in
Rome this past February) made a special point to say on “Meet
the Press” last week, “I am so proud of the postal workers.” We
all are. You came through in a big way.
–The awful wildfires near Sydney, Australia are unfortunately
claiming a lot of koala bears. Some of these fires are arson-
related. Turn the perpetrators over to the croc hunter.
–When it comes to profiling, Australia has an official policy of
caring not one bit for “political correctness.” Another reason to
love the Aussies.
–Kudos to the Weather Channel for playing Christmas music,
post-Christmas. You guys rock!
–Come in Buffalo…Buffalo…can you read me?
–George W. Bush, who received just 8% of the black vote in
November 2000, is currently receiving 66-80% approval ratings
(various polls) from the same folks. Obviously this won”t last
come 2004, but if he somehow retained 15%, the Democrats are
toast.
–From Robert Samuelson: “The technology that we promote as a
benefactor to humankind can also be its nemesis. Air travel,
modern chemistry and biology, cyberspace and nuclear energy
all pose immediate threats. What ties us together can tear us
apart and destroy us.”
–Those of you who are not from the New York area really only
know Rudy Giuliani by his actions following the attack. But
what you also need to understand is that this was a truly
remarkable mayor long before, the likes of which we certainly
won”t see for a very long time. He was a 24-hour mayor. I mean
to tell you, the man never slept, and, with each and every
emergency that a big city faces, he was always there. Most
importantly, the bottom line is that he leaves the city in far, far
better shape than when he took over. But I also have to be blunt,
no city could take a second blow, New York included.
–Laura Bush: “I got the idea that we were just a country that
complained – you know, we had everything, but nothing was
ever quite right. After what happened on September 11, all those
things seemed so trivial, and what seemed important were our
loved ones.” [U.S. News]
I couldn”t agree more and I hope our spirit of unity prevails. But
there is one hint that it is fraying, at least spiritually. Remember
all of the stories of soaring church attendance in the immediate
aftermath of the attacks? It is right back to pre-9/11 levels today.
–Finally, what we”ll all remember most about 9/11 is the
heroism displayed by New York City”s rescue workers,
especially those 343 firemen who lost their lives. And we must
never forget the image of those who were running up, while the
rest were going down. We have been a people searching for
heroes, and we found them.
God grants us free will and our character was tested. We passed,
but we will be tested again.
God bless President Bush and the men and women of our armed
forces.
God bless America…how lucky we are to be living here.
—–
Gold closed at $276
Oil, $20.41
Returns for the week, 12/24-12/28
Dow Jones +1.0% [10136]
S&P 500 +1.4%
S&P MidCap +2.6%
Russell 2000 +2.0%
Nasdaq +2.1% [1987]
Returns for the period, 1/1/01-12/28/01
Dow Jones -6.0%
S&P 500 -12.1% [-10.9%…total return]
S&P MidCap -0.4%
Russell 2000 +2.1%
Nasdaq -19.6%
Bulls 48.4%
Bears 27.3% [Source: Investors Intelligence]
Note:
Don”t forget that I have both ”print” and ”archives” links,
which can be found at the top or bottom of each article.
Happy New Year, friends. As always, I appreciate your support.
Brian Trumbore
