[Posted 7:15 AM]
As we”ve explored the U.S. economy over the past few years, I
have discussed three overriding themes in looking at the Big
Picture: housing, consumer confidence / spending, and debt.
[Other items such as capacity utilization, valuation, and inflation
I”d include as more ”micro” issues.] A strong housing market
and a confident consumer prevented a total collapse in economic
activity, even as Corporate America was slamming the brakes on
capital spending. And while debt levels rose to historic highs for
both the individual and corporation, the positive impact of the
first two outweighed this future negative. For its part, September
11 crushed the global economy for a few months, but signs of
normalcy were in the air by year”s end.
But while the world has stabilized in many respects, those calling
for a robust recovery beyond a quarter or two I suspect are sadly
mistaken. True, the housing sector, on the whole, is still a
positive, but this week”s release of a decline in consumer
sentiment may have been our canary in the mine. After a sharp
rebound, it”s possible confidence is slipping anew, not just
because of the news of financial skullduggery from the likes of
Enron and Global Crossing, but I would suspect also from a
growing realization that many Americans are tapped out.
Back in the late 1990s and early 2000, when the nation”s pitiful
savings rate was discussed, experts would correctly point out that
the figures didn”t include capital gains on one”s portfolio. Well,
as many have unfortunately noticed, those gains have been wiped
out. Now you”re probably thinking, “No kidding, Sherlock,
we”ve known that for a while.” Maybe so, but it”s a fact of
investing that a majority of people hang on to the belief that their
losers will quickly turn around for at least a year or so, before
throwing in the towel for good and lowering their expectations. I
learned this through my years of examining cash flows in the
mutual fund industry. Strong past performance aided sales well
beyond the point where the portfolio manager, or, more
appropriately, the sector or style fell out of favor. Then all at
once investors realized their investments weren”t performing as
expected and they abandoned ship (which in many cases is
actually a good, contrarian signal…but not this time).
Less than 18 months ago, market leaders like Sun Micro (9/1/00,
$65, now $9), Oracle (9/1/00, $46, now $16) and EMC
(9/25/00, $105…$13) were the darlings that everyone just
needed to have. Hold them forever, get rich, buy a third house.
And then you had the second tier, more speculative names like
Juniper Networks ($245 on 10/16/00, now $11).
I used to get a kick out of those who would say, yeah, but
technology is only a small part of the overall market. To which
I”d muse, but where is the money going? Into these issues, not
the small cap value stocks. But while the erstwhile high-flyers
still attract a large share of the daily volume, overall, activity is
far less than before (especially when you take out event stocks
like Enron, Tyco and Worldcom, which trade huge amounts, but
not because the news is positive).
The point being, March 10 will represent the 2nd anniversary of
Nasdaq 5048. Since then it has been basically straight down hill.
Most investors are now working on their third straight year of
negative returns. It”s depressing and it has to finally negatively
impact confidence and spending; the wealth effect, in reverse.
And this is no garden-variety cycle we are going through. While
the consumer held up his end of the bargain for as long as
possible, Corporate America, once seen incapable of doing
anything wrong, now can”t do anything right. Just look at what
happened on the telecom front.
According to an article written by Clive Mathieson in the
London Times, between 1998 and 2001 telecom operators and
companies spent more than $1 trillion on communications
equipment and infrastructure, up to half on fiber optic networks.
But because supply will outstrip demand for years to come, up to
$500 billion of this investment may never be recovered, amid
reports that some systems are being sold for as little as 10 cents
on the dollar.
And as Mathieson points out, even those interested in buying on
the cheap (awaiting the day when demand matches supply) are
hamstrung by their own existing massive piles of debt. Wouldn”t
you know, it”s companies like Enron, Global Crossing, Qwest,
Worldcom, and Cable & Wireless that are today”s headline
stories, let alone more traditional companies like Tyco that have
either collapsed under huge debt loads, or are under a cloud of
suspicion as to whether or not they can continue to meet existing
obligations.
Of course some of the above are also prime examples of financial
malfeasance, alleged or otherwise. And if you didn”t think this is
beginning to take a toll on investors” psyches, you probably also
think Robert Mugabe is a great statesman.
I had to laugh at a CNBC guest host the other day who said that
the accounting games as perpetuated by Enron were a rarity in
Corporate America. Bull. They”re the norm, at least with
those high profile companies that have commanded the lion”s
share of investor dollars. And while few of the questionable acts
may have been actually illegal under the letter of the law, the
little guy has taken it up the butt because the earnings figures
they have based investment decisions on were, as Archie Bunker
would have put it, “Crapola.” Whether it was Qwest and Global
Crossing swapping network capacity and booking it as revenue,
or companies hiding acquisitions from the public, historians
won”t look kindly on this era, which is winding down to an
inglorious end. And one other thing…President Bush said 2002
would be a “year of war.” By July, I suspect we”ll fully
understand the implications of this statement
—
Some of you may have caught Vice President Cheney Friday
afternoon giving a speech to the Council on Foreign Relations.
When the issue of Iran came up, he said that he was “deeply
disappointed” over recent developments in the country. Last fall
there was some hope that reformers could continue to gain
influence in government, but today Cheney is mincing few
words, saying the Iranian government was clearly committed to
destroying the Mid-East peace process, was more active than
ever in its sponsorship of terror, and was bent on developing
weapons of mass destruction.
So, let”s see. First we need to topple Iraq. Then Iran. This is no
walk in the park, folks. But we have to do it because the
alternative is unthinkable. And time is of the essence. Forget
these CIA reports that talk about ballistic missiles not being
ready for 8-10 years, we have to assume it”s more like 2-3, and
act as if it”s one.
But to those who think the United States can go it alone, they”re
wrong. And while I believe that once the U.S. is committed, Iraq
will fall quickly, we not only have to be prepared for Saddam”s
last parting shot, we also need to have a clue who is going to
replace him.
I”ve probably bored some of you to tears with the same
discussion, week after week, so I”ll try and keep the following as
brief as possible. Suffice it to say the cooperation of Russia and
Turkey is critical. And regarding the former, I was heartened to
see a report this week that a deal between Russia and the U.S. is
now in the works. Washington may guarantee Russia”s
economic interests in Iraq if it fully supports the U.S. in the
U.N. and through other means. My guess is the same
arrangement could eventually be worked out concerning Iran.
Russian President Putin is putting oil on the agenda for his
summit with President Bush in May and undoubtedly we will
come up with something satisfactory to the Kremlin.
May is a key month, as well, because the U.N. Security Council
is slated to meet on the Iraqi sanctions regime. Russia”s support
in whatever the U.S. decides to do will be paramount. For these
reasons, I don”t see how the U.S. can act until after this time.
[Besides, we have more than a bit of mopping up to do in
Afghanistan (where events in the past few days reinforced what a
mess this place is), we need time to rebuild our armaments, and
the troops need to be redeployed.]
Back to Iran, this week you saw the largest anti-U.S.
demonstration in that nation in over 20 years. “Moderate”
President Khatami, referring to Bush”s “axis of evil” line, said
Iran would not stand for “U.S. insults and trumped up charges.”
As Cheney said, optimism that Iran”s reformers will win the day
is waning. What I fear is that at some point an attempt at “people
power” by the students will fail tragically.
Lastly, many of you have heard the disparaging comments of our
European allies concerning the “axis of evil,” unilateralist
approach of the Bush administration and think, “Who gives a
damn?” It would be a mistake for our leaders to adopt this view.
I uttered this last spring, in my criticism of the Bush policy
concerning Kyoto (more on the global warming pact later). We
can yell and scream at the Europeans all we want, and our
position may be right (as it is concerning Iraq), but at the end of
the day we need the Europeans, not only as allies, but as trading
partners. To think otherwise ignores the fact that American jobs
are at stake (and you can make the same point about most of the
other trade blocs as well). It”s a time for strength and diplomacy.
It also means that, as Robert Kagan wrote in an op-ed piece
recently, Colin Powell could be a most effective weapon in
dealing with our more prickly allies. He is universally respected
and this is his time to earn his place in the history books.
Street Bytes
–The market largely brushed off the growing list of accounting
irregularities, until Friday, choosing to take to the woodshed
individual debt-bombs like Qwest and Worldcom, or IBM, with
the New York Times report that its books aren”t pristine, rather
than tarnishing the whole market. What everyone should be
worried about is the growing threat of an out and out credit
crunch. These days, banks don”t want to lend to already heavily
indebted corporations, yet these very same companies are now
turning around and drawing down the credit lines the banks
never thought they”d have to make good on. Ergo, were this
practice to spread, companies, no longer able to access the
commercial paper market to satisfy short-term needs, may
attempt to build up cash through other methods, meaning that
some banks (and investors) could be in for an unpleasant
surprise.
For the week the Dow Jones still managed a gain of 1.6% to
9903, but Nasdaq fell for the 5th week in 6, losing 0.8% to close
at 1805.
–U.S. Treasury Yields
6-mo. 1.83% 2-yr. 2.94% 10-yr. 4.86% 30-yr. 5.37%
Yields were virtually unchanged across the board. Earlier in the
week, relative strength in retail sales led to a pullback in the bond
market, but Friday”s low producer price report, as well as the slip
in consumer confidence and a soft figure on industrial
production, led to a rally on the hope that the Federal Reserve
will not be forced to raise interest rates any time soon.
–Japan: Prime Minister Koizumi said he was pushing ahead with
reforms, but then his own finance ministry squelched hopes of
any drastic steps. The Nikkei did manage to climb back over
10,000 (10,048…and ahead of the Dow) for the first time in 3
weeks. March could be a particularly volatile month as
corporations close the books for the fiscal year. And then you
have the ongoing saga of Snow Brand Food, which I wrote a few
weeks back had mislabeled imported beef as domestic in order to
gain government subsidies. Now they have admitted they were
doing the same thing with pork. Geez, these guys are disgusting.
I wouldn”t buy any Snow Brand mushrooms if I were you.
–Argentina: Shortages in the stores are widespread as importers
/ wholesalers hold off until they see where the exchange rate
settles down. Which means there exists the potential for further
unrest.
–Venezuela: Dictator wannabe President Chavez, his popularity
plummeting, decided to devalue the currency to prop up exports.
This also means that foreign companies doing business in
Venezuela will get slammed, just as they did in Argentina,
because they will be converting bolivars into fewer dollars, for
example. Such is the case with electricity generator AES, which
took a huge hit on Friday. As for Venezuela”s military, despite a
few renegades, they have pledged their support to Chavez…but
that could change in a minute.
–Energy: “60 Minutes” missed the boat with a piece last Sunday
talking about our dependence on Saudi oil. John Brown, CEO of
British Petroleum, correctly said “(The U.S.) can never be oil
independent,” but no one mentioned the positive role Russia can
play. Brown, who was touting exploration opportunities in the
Gulf, also said the Arctic National Wildlife Refuge should be
developed (of course BP has an this interest in this).
But in a somewhat related issue, this week President Bush
unveiled his counterproposal to the Kyoto Treaty. Even his
critics on the international front gave the report some credit for
detail, even if they disagreed with the substance. What this
proved to me is that if Bush had done this last spring, the U.S.
wouldn”t have taken nearly the hit it did from the global
community. A little ”spin” would have gone a long way, instead,
Bush got a black eye.
Of course whether you agree with the science on global warming
or not isn”t really the point. As I mentioned earlier, in those
moments when war is on the backburner as far as world
attention, it comes down to trade and the economy. The easiest
thing the U.S. can do right now to foster some goodwill is show
our seriousness on the environmental front and come up with
stricter fuel efficiency standards. The image of the U.S.
recklessly careening about in its SUVs, gobbling up the world”s
oil, isn”t a good one and we can”t afford to simply tell others to
“stick it.”
–The proposal to cap the amount one can invest in a single
company in their 401 (k) is a poor one. Government”s job isn”t
to protect us from our stupidity.
–Some good news on the asbestos front, as both Halliburton and
McDermott received favorable rulings. But then you had the
bankruptcy filing by Kaiser Aluminum, due in part to its own
liabilities. All in all, though, at least over the past few weeks
some federal judges are getting religion.
–Internet research group Jupiter Media Metrix reported that its
events revenues (like for industry conferences) fell to $102,000
from $8.2 million one year earlier. Oh, I”ll never forget my first
and only Net conference in the fall of ”99. I never met a more
pompous group in my life.
–Speaking of a-holes, Lehman broker Frank Gruttadauria turned
himself in, after bilking clients of anywhere between $125 and
$300 million.
–While I have never owned Dell stock, I love the product and
this week the company issued a solid earnings report, touting a
pickup in consumer PC demand. But they were wishy-washy
about the future and so we once again have a situation where if
you”re an investor, you have to look at the valuation. Assuming
Dell earns 75 cents as currently projected over the coming 12
months, and using today”s $27 share price, that gives you a P/E
of 36. Of course earnings could come in better than expected,
and Dell is constantly gaining market share, but at what level is
this ”cyclical” company overvalued? I”ll leave that up to you.
–Per my report of last week, concerns over J.P. Morgan Chase
and its credit rating mounted, though the share price held up.
–From Donald Coxe / Harris Investment Management: “We
were told during the 1990s that it was ”The Clinton Bull Market,”
which meant all those wonderful things that were happening in
the economy, technology and the stock market. We now know
that it really was ”The Clinton Bull Market,” because so much of
it was based on enthusiasm, overenthusiasm, distortions, lies and
sheer bull.”
–I just caught “Wall Street Week” and no one, neither Lou, his
panelists, or his guest, mentioned that one of the risks in the
current environment is the fact we are at war. Unbelievable.
International
President Bush is embarking on a key trip to the Far East this
week, visiting China, South Korea and Japan.
China: A national security ministry document was leaked which
revealed an official government policy of persecuting Christian
church members. The Vatican announced this week that more
priests and bishops have been arrested (and some tortured).
China also launched a new crackdown on Falun Gong. The
timing of all this is curious considering the Bush visit. Bush will
be tough in private discussions on the matter.
South Korea: President Kim Dae Jung”s “sunshine policy” with
North Korea has not worked out as hoped, and now Bush has
complicated things with his inclusion of North Korea in his axis
of evil. I would expect major protests in Seoul during the
president”s visit.
Pakistan: President Musharraf must have enjoyed his stay in
Washington, as he was granted $200 million in aid, handed some
debt relief, and told U.S. – Pakistan military ties would be
resumed.
Turkey: Which means that if I”m Turkey, crucial to any war
against Iraq (and possibly Iran), I”m saying, “Hey, what about
us?”
Austria: Well whaddya know? Far-right, Freedom Party leader
Jorg Haider said he is walking away from politics, this after an
uproar caused by his trip to see Saddam Hussein, your basic
career breaker.
Random Musings
–So I was watching some of the campaign finance reform debate
the other day on C-Span and much of it was comical. Let”s face
it, some of our representatives are real buffoons (J.D. Hayworth
comes to mind…sorry, my conservative friends). But I do love
the call-in segments. “Janesville, Minnesota.” “Hi.” “Hi.”
“Hi.” “Hi.” And then there is Congresswoman Sheila Jackson
Lee, who actually changed outfits between 7:00 and 9:00 PM.
Now she is truly a piece of work, as The Weekly Standard has
chronicled the past few weeks. Evidently Lee uses a government
car and driver to chauffeur her one block to work and when she
was on the Houston City Council, “her staff would routinely call
the airport”s operations office to let them know she was on her
way but ”running late.”” That was the signal to have the folks
lined up to assist Lee with her bags, her car, and anything else
the queen may have required.
–As for the campaign finance issue itself, you all understand
Shays-Meehan changes little, and parts of it are downright
unconstitutional concerning the issue of free speech. So we”ll
have ample time to comment further over the coming years. But
perhaps George Will put it best, in pointing out the hypocrisy of
a system that supplies massive subsidies for the likes of
agriculture or the steel industry, at taxpayer expense of course,
but the same government wants to limit voluntary contributions
to the candidate of your choice.
–Speaking of politics, my good friend, Bill L., was upset I
haven”t mentioned the fact that Democratic National Committee
Chairman Terry McAuliffe turned a $100,000 investment in
Global Crossing into $18 million. Well, I did mention the other
week that every time I see McAuliffe I feel dirty, so now by
printing his name I have to wash up. [Whether or not McAuliffe
did anything illegal is beside the point. Next time you watch him
pontificating on money and politics, just remember his
grubstake.] As for why Global Crossing isn”t gaining more
traction in Congress, blame it on the fact that both parties have a
lot to lose on this one. Bush #41 is involved, after all, even if in
an innocent way.
–Princess Margaret was cremated, joining 70% of her fellow
countrymen in this practice. Japan leads the world at 98%.
–Jimbo called me from the road the other day to give me a
drought update as he passed one of New Jersey”s reservoirs. But
the cellphone connection was so awful that when I hung up, my
first reaction was, who the hell would spend bucks on a web-
enabled phone when you”ll never get connected? We have a
long, long way to go on the tech front in this realm. As for the
drought, everyone in the New York area is talking about the
impending disaster. We have had a whopping 4 inches of snow
where I live this winter. And when that first heat wave hits,
probably mid-April, the remaining water will go whoosh! [The
sound of water evaporating.] Of course GM just announced it
was laying off 1,100 from a New Jersey assembly plant, thus
joining Ford”s similar move, which makes two plants that were
part of my original drought emergency scenario. So while these
closings weren”t water-related, others will be.
–From commentator Stephen Schwartz: “Difficult as it may be
for our leaders to say it in public, it is increasingly clear that
Saudi Arabian Wahhabism is part of the ”axis of evil” – and
possibly the most dangerous part.” Right on, bro.
–I wonder if Jeff Skilling sent a valentine to his mother, Betty?
Did you see what she told Newsweek? “When you are the CEO
and you are on the board of directors, you are supposed to know
what”s going on with the rest of the company.” Cut him out of
the will, Betty. Your son”s a dirtball.
–Speaking of Enron, far be it for me to defend any of the
defenseless, but the Washington Post correctly ripped Congress
for forcing executives to publicly take the 5th. I understand
those who say that it is all part of the important process of
cleansing the system, but it”s a bit like the pot calling the kettle
black.
–Sherron Watkins is no angel.
–NBC figure skating commentator Tom Hammond: “The love
affair between skating fans and Todd Eldredge is still very much
alive.” Wrong. The guy choked, again.
–The U.S. judge gave Russian skater Alexei Yagudin a perfect
6.0 for presentation in the men”s figure skating finals, a smart
move since, as previously noted, we need Russia”s help against
Iran and Iraq. As for the Canadian pairs controversy, now that
the Russians are miffed a second gold was handed out, expect the
issue of Canada to be high on the Bush-Putin agenda in May.
“Oh c”mon, Vladimir, Canadians are good people,” Bush will
plead. “No matter,” Putin will say. “We attack at dawn.”
–Remember, folks, in Latin America wars have been started by a
simple soccer game.
–Finally, this week marks the 3rd anniversary for
StocksandNews. I actually wrote my first “Week in Review” for
PIMCO Funds back in November 1997 and haven”t missed one
week since. I respectfully submit there is no better chronology
of this period, anywhere. But allow me to answer some of the
questions you have had for me over the years.
Why did I leave a great position to do this? Actually, I was
going to write two books, but decided I”d keep the ”Week in
Review” going, so I started the site. Four months later I expanded
it greatly and now I”m consumed by it all. As for the book
projects, I”ll get to them, one of these days.
Am I making money? Well, let me put it to you this way, I”m in
better shape after three years than I thought I”d be, but it”s not
because of the site, which right now is a major money loser. I
was fortunate to make some good investments in 1999 and 2000.
Do I have a business plan? Are you kidding? I would have
ripped up about ten by now.
How come you don”t reveal your favorite stocks? Well, aside
from the fact that there are licensing concerns, I gain nothing by
letting you in on my personal picks, and I could lose a lot. And
unlike some of my competitors, I feel far more personal
responsibility for your financial well-being than you can
imagine. Having said this, I will match my record of general
market commentary these past few years with anyone”s.
[The one investment I have consistently had no qualms in
recommending is the PIMCO Total Return Fund, which should
be the core bond holding in everyone”s portfolio. I know the
manager, I know the philosophy and discipline, and over any
three-year period you should earn a highly competitive return
versus other conservative alternatives.]
Why do you write for this particular column “Posted 7:15 AM,”
when I can sometimes access it a bit earlier? Because I am
frantically trying to make last minute changes and at some point
one just has to ”post” it. I try to give myself 30 minutes to clean
it up as best as I can before 7:15. It”s not always easy editing
your own material, and I appreciate your understanding when I
misspell something or get the apostrophe wrong.
Rambling along…I initially felt that there was a real need for this
piece in particular and there was nothing like it, a concise report
of the week”s events in both the financial world as well as
foreign affairs. My feeling has always been that many of you are
too busy with your own job and family responsibilities and that it
would be nice to have one single source to turn to, in order to
keep abreast of what”s truly important in the world. I feel like I
have accomplished that. But where I have done a poor job is in
getting my message out to the right markets, and I hope to rectify
that over the coming year or so.
[Along these lines, I had to make the tough decision this week to
cut out one “Bar Chat,” in order to free up more time to pursue
site-related ventures. From time to time I may also have to skip
a week or two of some of the other columns, but never this one.]
I”ve learned a lot through this experience, that”s for sure. It”s too
bad I can”t give myself graduate school credit, or offer it to you.
Regular readers should feel like you are well equipped to tackle
the issues of the day; you know enough about everything to be
dangerous, I guess you could say. [And what I can”t impart, our
own Dr. Bortrum normally can.]
Speaking of the eccentric Bortrum and my brother Harry, we all
would like to take this opportunity to thank you for your ongoing
support. I value the information many of you pass on, even if I
sometimes don”t have the opportunity to personally thank each of
you. I also appreciate that when you and I disagree, we can
choose to do so without rancor. Believe me, when I first started
this site, it took a while getting used to the hate messages.
Thankfully, there are far less these days (oops, I shouldn”t have
said that).
And I”d like to thank my friends at CSI MultiMedia for
maintaining the site. Operationally, the Net can be one
frustrating medium, and CSI does its best to keep this show up
and running.
If nothing else, I hope I”ve instilled in some of you a curiosity
about the world. I wasn”t writing articles on Islam back in 1999
for nothing, and while you may not agree with some of my
current foreign policy viewpoints, give them time. [You also
know I”m the first to admit when I”m wrong.]
Speaking of curiosity, I am taking off in a few hours for Taiwan,
just a quick journey to get a better handle on this promising, yet
volatile part of the world.
So thanks for checking in each week. It is greatly appreciated.
God bless the men and women of the armed forces. Always keep
them in your thoughts. There are many more rough days ahead.
God bless America.
—–
Gold closed at $298
Oil, $21.50…highest since 11/9
Returns for the week, 2/11-2/15
Dow Jones +1.6%
S&P 500 +0.7%
S&P MidCap +0.9%
Russell 2000 +0.6%
Nasdaq -0.8%
Returns for the period, 1/1/02-2/15/02
Dow Jones -1.2%
S&P 500 -3.8%
S&P MidCap -1.6%
Russell 2000 -3.9%
Nasdaq -7.4%
Bulls 47.4%
Bears 29.5% [Source: Investors Intelligence]
*Due to travel, I won”t be able to respond to most of your notes
and requests until I return.
Brian Trumbore
