[Posted 7:15 AM]
“States like (North Korea, Iran, and Iraq), and their terrorist
allies, constitute an axis of evil…These regimes pose a grave and
growing danger…The price of indifference would be
catastrophic…
“I will not wait on events, while dangers gather. I will not stand
by, as peril draws closer and closer. The United States of
America will not permit the world”s most dangerous regimes to
threaten us with the world”s most destructive weapons.”
–President George W. Bush, State of the Union, January 29
While America may be getting back to normal, in the words of
Tim Russert, clearly President Bush “wants the nation to feel a
sense of anxiety.” Bush also reminded us that there are tens of
thousands of terrorists out there (100,000 went through al Qaeda
training camps, for starters) and on Thursday, Secretary of
Defense Rumsfeld warned that the next wave of attacks are
likely to be “vastly more deadly.”
So aside from continuing to sleep with one eye open, what”s the
real lesson in all of this? Apart from the human element of
danger, you are playing financial roulette if you maintain an
investment portfolio that is largely equities. And while we have
learned over the past few weeks how prevalent accounting
chicanery may be, we also can not lose sight of the fact that
another act of terrorism could send an economy, on the verge of
recovery, right back to the depths of despair.
The best advice I can give is two-fold: to the best of your ability
know what you own, and, second, always ask yourself, ”If the
worst case scenario were to unfold, would it cause a drastic
change in lifestyle and would my family be protected?”
The U.S. Economy
From the Federal Reserve”s Open Market Committee, 1/30:
“The outlook for economic recovery has become more
promising (but) the risks are weighted mainly toward
conditions that may generate economic weakness in the
foreseeable future.”
Actually, the above remarks are more suited for a discussion on
expectations for the stock market, something like, ”Earnings
should begin to recover, but with most sectors already overpriced
from a valuation standpoint, by any historical standard, upside
from here is limited. And then there is always the threat of
another attack, which could lead to a new decline in consumer
and business sentiment.”
As for the raw data, yes, the economy is recovering. Confidence
continues to rise, housing keeps booming, personal spending is
up and inventories are tumbling (which means shelves will have
to be replenished). But for reasons I have delineated so often
before, the chief ones being overcapacity, lack of pricing power,
huge debt loads and no ”new thing,” after a pop fueled by the
inventory situation, growth will be muted and a double-dip can
not be ruled out.
Wall Street
Of course concerning the economy and consumer sentiment, we
also have this issue of Wall Street and a crisis of confidence,
which really hit home on Tuesday as the markets tumbled on the
perception that Enron is far from the only case of financial
manipulation. Stocks ranging from energy trader / pipeline
operator Williams Cos. to Tyco to Cendant to Irish
pharmaceutical king Elan were all accused of playing with the
books. And then you had the case of PNC, where the Federal
Reserve took the extraordinary step of mandating that they
restate earnings, this after auditors signed off on Enron-type
partnerships which removed loans from PNC”s balance sheet.
As for Enron itself, one of the keys to the story is ever so slowly
being revealed, that being who else, aside from Enron
management, was involved in these shady partnerships with
names like Chewco and JEDI? We now know that, for starters,
some Merrill Lynch senior executives were in on it, though to be
fair, it will take some time to figure out if any securities laws
were broken. Meanwhile, Enron is stonewalling Congress in
failing to comply with its requests for more information. This
week it all may become a bit clearer when former chairman Ken
Lay, among others, testifies. It could be great theatre.
As for Lay, there was his wife Linda, in her “Today Show”
interview, standing by her man and portraying him,
unintentionally, as one of the biggest ignoramuses in the history
of Corporate America. According to Linda, hubby knew
nothing. We also learned, though, that when Kenny was a
little tot, his family was so poor, “one Thanksgiving they had
cold cuts instead of Turkey.” If they were Oscar Mayer, I hope
he checked the expiration date.
At another point Linda also said that she knew her husband
would be found innocent of any wrongdoing, because she
believed “God is good.” Let me tell you something, honey, God
couldn”t give a damn about Kenny.
Japan
We”re moving the topic up the list of priorities this week because
the day of reckoning is nigh. Kenneth Courtis, vice chairman of
Goldman Sachs Asia, had the following comments on Japan”s
dire financial situation at the start of this week”s World
Economic Forum (as reported by the Herald Tribune).
“I think the international community should see this for what it
is, and that is the biggest economic and financial crisis in any
major economy since the 1930s. And the crisis is not just
economic and financial. It is fundamentally political and resides
in the inability of (Prime Minister) Koizumi and of Japanese
society to make decisions about its future. The vested interest in
the status quo remain powerful, and so no real decisions are
being made.”
Courtis estimates that bad debts in the Japanese banking system
represent a staggering 25% of the country”s entire GDP.
Separately, retail sales have now declined 9 straight months,
manufacturing employment has fallen 9 straight years (!) and
unemployment obviously continues to rise. Add to this all the
figures I listed in last week”s column and the fact that the Tokyo
Nikkei index is back below 10000 (9791…and below the Dow
Jones for the first time since 1957) and you can see why there
should be more than a bit of concern.
But wait, there”s more. The public brouhaha over the dumping
of Foreign Minister Madame Tanaka did Koizumi no good
because it showed he was kowtowing to the bureaucrats, the very
officials who have held Japan back for the past decade. [The fact
that Tanaka was flaky is beside the point.] And when you look
at the demographics for Japan, it is more than a bit sobering.
Officials now estimate that the population will peak in 2006 at
128 million. By 2050 it could decline to 100 million. Ergo, how
the heck will they pay for all the entitlements and pension
benefits? They need a massive influx of immigrants, but the
culture won”t allow it.
Street Bytes
–For the week, the Dow Jones picked up 67 points, 0.7%, to
close at 9907. But Nasdaq lost 1.3% to finish at 1911.
Nonetheless, an impressive showing after Tuesday”s 250- and
50-point declines in the Dow and Nasdaq, respectively. And
while I couldn”t care less about the January barometer – as the
month goes so goes the year – for the record, in January the Dow
declined 1.0%, S&P 500 -1.6% and Nasdaq -1.7%.
–U.S. Treasury Yields
6-mo. 1.87% 2-yr. 3.09% 10-yr. 4.98% 30-yr. 5.40%
The Fed opted to hold the line on interest rates after 11 prior
cuts, focusing on the sunny side of things, which seems
appropriate. After all, even 4th quarter GDP actually came in at
0.2%, so by classic definition the only down quarter was the 3rd
and you need two in a row for a recession by that benchmark.
It is now hoped they keep rates steady for a spell. It”s not like
the Fed has to worry about inflation, and that”s the boys” primary
job, fighting inflation, not managing the stock market.
PIMCO”s Paul McCulley notes that with the boom in housing
and autos, most consumers should now feel quite sated, meaning
these two crucial sectors can”t be counted on to provide much
upside in the future. But for those like yours truly who keep
thinking the consumer can”t possibly have the wherewithal for
further spending, I have to acknowledge a comment veteran
money manager Frank Cappiello made on “Wall Street Week”
two weeks ago. [Paraphrasing] ”I have been following the
markets for 32 years and for all the times the consumer were
supposedly “tapped out,” they found a way to spend.” We”ll see
if he”s right, but I just keep looking at the massive debt levels
and shake my head.
–An influential analyst raised his earnings estimate for 2002 on
Intel to 73 cents. Shares in Intel rallied a bit and closed the week
at around $35 for a price / earnings multiple of 48 on this classic
”cyclical” story. As they say in the trading pits, “Yours.”
–I”d comment on the action in Tyco but I”ll be damned if I have
any clue as to the truth, and therein lies the problem with today”s
environment, boys and girls.
–The exodus of financial firms from the Wall Street area
continues, with this week”s most visible example being Morgan
Stanley”s decision to move some operations to Westchester
County, NY. It”s the only prudent thing to do in this new world
of ours. And forget the threat of a 9/11 type-attack, it also just
doesn”t make sense to have all your operations connected to the
same telecom system, important when you consider the potential
for cyber-attacks in the future, let alone a bankruptcy of one the
telcos.
–Speaking of telecom and bankruptcy, in the largest one to date
in this sector, Global Crossing filed for Chapter 11, while
agreeing to a takeover by two foreign interests. Equity holders
will receive zero, zip, nada.
–Market historian Edward Chancellor, in a New York Times op-
ed piece last Sunday, commenting on Enron.
“In its hubris and attending hype, in its focus on earnings
instead of ethics, in its insistence that it is unique and
unprecedented…Enron stands as the quintessential Internet
company.”
“One of the characteristics typical of a bubble, and especially
typical of the Internet bubble and Enron, is blinding arrogance.”
“Enron was the quintessential ”weightless company” of the
Information Age.”
“During manias, there is a tendency for businesses to be
managed for the immediate gratification of speculators rather
than for the long-term interests of investors.”
Some of the above may seem obvious to many of you, but we
always need reminding, don”t we? Chancellor (author of the
excellent tome, “Devil Take the Hindmost: A History of
Financial Speculation”) also quotes the British economist Walter
Bagehot (1826-77). “The good times…almost always engender
much fraud. All people are most credulous when they are most
happy…almost everything will be believed for a little while.”
–In the above quote on “instant gratification,” Chancellor certainly
could be referring to the prevalence of stock options.
Economist Robert Samuelson weighs in. “Stock options foster a
corrosive climate that tempts many executives…to play fast and
loose when reporting profits.”
–Bubble tidbit: @Home paid $6.7 billion for portal Excite back
in 1999. Infospace and iWon paid $10 million for Excite”s remain-
ing assets this past November. [Business Week]
–Congratulations to Xerox and new CEO Anne Mulcahy for
what appears to be an authentic turnaround.
–Argentina: GDP is now projected to decline 5% in 2002, a
hefty number. And to give you a sense of how bad things were
in December, sales at shopping malls in December were off 35%.
Meanwhile, Fleet Boston took a $500 million charge for its
exposure to the country.
–G.E. CEO Jeffrey Immelt said the company”s order book for its
plastics division remain weak, suggesting the world economy
isn”t anywhere near what could be called a robust rebound.
–Energy: Monday and Tuesday were two of the best weather
days we are liable to have all year in the northeast, which means
that inventories for all things ”crude” kept rising.
[And in case you”re wondering, no, I have never invested in an
”energy trading” company. All of my holdings in the sector have
been oil & gas drillers / service outfits or refiners.]
–Kellogg”s earnings rose, thanks in large part to its acquisition
of elfin cookie king, Keebler. Those elves do good work, know
what I”m sayin”?
International
Axis of Evil: While readers of this space certainly know where
President Bush was coming from in focusing on North Korea,
Iran and Iraq, I”m not so sure the vast majority of the American
people understood why them and not others. Therein lies my
problem with his choice of words. The Colin Powell side of me
still sees things we must attempt on the diplomatic front
concerning the North and Iran, while obviously we can”t allow
either one to keep their missile works going. But we can”t just
take out suspected plants without a more specific warning or
ultimatum (only the Israelis can attempt this). This isn”t the CIA
going into a hotel room in the dead of night and blowing away 3
terrorists.
And with regards to North Korea, Bush”s pronouncement really
riled up the South Koreans unnecessarily, especially prior to his
trip to the region in two weeks, while I guess I”m the only one
who continues to think Russia can be of help concerning Iran.
And regarding the latter, while we want the Iranian people to rise
up against the clerics, I”m not so sure this was the way to go
about it. I”ll have more thoughts on this next week.
As for Iraq, Americans need to understand that action is not
imminent, for reasons I have noted before. It will take time, both
diplomatically and militarily, to mount the final effort. We are
stretched thin as it is.
Russia: The government made it clear it wants a formalized
treaty regarding the reduction of nuclear warheads and that the
U.S. must clarify that it is not simply ”storing” but destroying
them. Talks between the two sides were nonetheless cordial this
week and the Bush administration, which originally said all that
was required was a handshake, now appears willing to craft a
document. The standard argument among conservatives is that
in the past, formal treaties often led to an increase in nuclear
weapons, not a decrease, so that treaties, in and of themselves,
don”t matter. Boy, that is the kind of Cold War thinking that is
pure idiocy. We need the freakin” treaty so we can hold the
Russkies” feet to the fire. What did President Reagan say? “Trust
but verify.” You won”t get that with a handshake.
Israel: Prime Minister Sharon admitted Israel should have taken
out Yassir Arafat when he was in a sharpshooter”s scope back in
1982, while the New York Times” Tom Friedman summed up
my feelings on the whole settlement issue. “(They) are a cancer
for the Jewish people.” Separately, the Israeli government was
ecstatic that President Bush named Hamas and Hezbollah at the
top of his list of the “terrorist underworld.”
Saudi Arabia: A survey of men age 25-41, conducted within the
country back in mid-October, found 95% supported bin Laden”s
cause, in case you need further convincing that this war on terror
will last all of our lifetimes. Of course this poll figure gives the
Saudi royal family pause, and if you think it is still an ally of the
U.S. in the true sense of the word, you are sadly mistaken.
Afghanistan: With the warlords continuing to slug it out, you get
a clear picture just how awful this place truly is and what a
daunting task it will be to secure any kind of real, terrorist-free
peace. As for Hamid Karzai, his 15 minutes of fame is almost
up. Plus that cape seems very impractical, don”t you think?
Nigeria: The death toll from the explosions at the military arms
dump in Lagos is anywhere from 600-1,600. Many drowned in a
canal in an attempt to flee the conflagration. What is most
upsetting to those impacted is that it would appear the
government is doing nothing in the recovery effort. And the U.S.
is hoping to turn Nigeria into a model nation for the rest of
Africa? Fat chance.
Zimbabwe: Parliament formally passed a bill that gags the
independent press from covering President Mugabe”s opponent
in the March election. Mugabe is racking up major early points
in the “Dirtball of the Year” contest. In fact, should he take the
crown for 2002, as a two-time winner we may rename it after
him.
Random Musings
–I did have to scratch my head regarding one line in the State of
the Union. “In this moment of opportunity, a common danger is
easing old rivalries. America is working with Russia, China, and
India in ways we never have before to achieve peace and
prosperity.” Why the heck is India, the world”s largest
democracy, lumped in with the other two? Count me befuddled.
And India isn”t exactly doing cartwheels over this mention.
–I will not suffer fools gladly when it comes to the issue of
national missile defense. President Bush discussed the key to
this topic, the potential for blackmail. The problem the
administration has, however, is that it always presents NMD in a
vacuum. Bush needs to discuss it in a total context of, “Look, we
have to do everything, protect the borders, the harbors, etc., as
well as come up with a workable defense to guard against the
coming threat from ballistic missiles.” The current rhetoric is
striking too many as ”either / or.”
–An editorial in the London Times noted that a vast majority of
folks in Britain have concluded the war on terrorism is basically
over. “They would be wise to revisit that assumption.”
–The U.S. is already committed to giving Afghanistan about
$700 million in aid. By comparison, Mexico receives just $35
million and Turkey $3 million.
–Veteran columnist David Broder, on the current generation of
capitalists.
“These people have become too clever, too artful for their own
good…or for this society”s sake.”
–For the archives, you cannot call the detainees in Guantanamo
“POWs” under the Geneva Convention because they do not
represent a country, they don”t wear uniforms, and they target
civilians. As President Bush said in remarks this week, “These
are killers…these are terrorists.”
–A professor, Anders Henriksson, put 10 NYU students through
a little history quiz the other day. As reported by John Tierney in
the Times, only one of the 10 knew that World War I ended in
1918. I haven”t read the education bill that Bush and his buddy
Teddy put together, but if an American history course isn”t
required of all college students, then the $28 billion (or whatever
it cost) will simply go down the tubes.
–The surface temperature on Pluto ranges from minus 370 to
minus 395 degrees Fahrenheit. Something tells me that if this
were the case in the northeast, we wouldn”t have such a huge
inventory overhang when it comes to natural gas. I”d also
probably wear my scarf, missing in action this winter.
–Teamsters President James Hoffa was in the box of honor at
Tuesday”s State of the Union. Of course the Teamsters are
traditionally a Democratic constituency, yet Hoffa was there
because of his support for drilling in the Arctic National Wildlife
Refuge. Which tells me one thing. That”s where his father is
buried!
–Alan Keyes had a Q&A in the Sunday Times Magazine,
wherein he was asked who he would choose to attend his
dream party. Keyes”s list included Socrates, Jesus Christ,
Lincoln, Tocqueville and Tolkien. Me? I”d invite Johnny
Carson, Dean Martin, Jackie Gleason, Arnold Palmer, Don
Rickles and Babe Ruth.
–Oh, and Sophia Loren.
—–
Gold $286
Oil, $20.38
Returns for the week, 1/28-2/1
Dow Jones +0.7%
S&P 500 -1.0%
S&P MidCap -0.6%
Russell 2000 +0.1%
Nasdaq -1.3%
Returns for the period 1/1/02-2/1/02
Dow Jones -1.1%
S&P 500 -2.3%
S&P MidCap -0.8%
Russell 2000 -1.7%
Nasdaq -2.0%
Bulls 51.6%
Bears 26.8% [Source: Investors Intelligence]
God bless the men and women of the armed forces.
God bless America.
I appreciate your support.
Brian Trumbore
