[Posted 7:00 AM, ET]
“Let us never negotiate out of fear, but let us never fear to
negotiate.”
–John F. Kennedy, Inaugural Address, January 20, 1961
I’m convinced Secretary of State Colin Powell’s peace mission
to the Middle East was not a total failure, as so many others are
claiming. But I am also not optimistic on the future for the
region, and won’t be, regardless of any outcome achieved by
negotiation today, or tomorrow. Nonetheless, it is better to be
engaged, while at least preparing for the worst.
For now, here is what Powell spelled out, following his series of
meetings.
–Israel needs to withdraw from the occupied territories, while
further building of settlements must end.
–The Palestinian Authority must denounce terrorism and abide
by a cease-fire.
–Lebanon and Syria must apply pressure on Hezbollah to stop
trying to provoke a wider conflict with its shelling of Israel’s
northern border.
Additionally, there should be no further doubt which side the
current White House administration is on, witness Powell’s
refusal to elaborate on Israeli withdrawal dates, while the
secretary said he was “disappointed in Arafat’s performance,”
a harsh statement in the world of parsed words.
At least regarding the Lebanon issue there was some letup in the
violence after Powell’s shuttle diplomacy, while overall, Arab
leaders clearly don’t want a broader war at this time, though a
single bullet could change everything.
Powell’s mission also helped expose the broad Arab position for
what it is…a policy of state-sponsored terror and America-
bashing that will inevitably lead to the total ruination of the Arab
peoples. That’s the harsh reality, but you have to start with the
truth, before you can address the solutions.
Meanwhile, not only did Egypt’s Mubarak cancel his meeting
with Powell, but Saudi Crown Prince Abdullah may now do the
same with Bush’s invite to Crawford. At the same time, Arab
leaders are holding telethons for the purposes of supporting
extremist elements (in the guise of assisting the Palestinians),
while Hamas openly advertises for donations to purchase
weapons. At least there is a consistent message here.
As for Iraq, the clock keeps ticking as Saddam and his merry
bombmakers perfect their craft. The U.S. can’t wait forever, and
the Bush administration knows this.
Wall Street
In congressional testimony this week, Federal Reserve Chairman
Alan Greenspan couldn’t have been more explicit; he is not
going to raise interest rates until there is more clarity on the
direction of the economy. The chairman actually gave us all
some good advice in saying that you can’t get hung up on any
one economic indicator and that we simply need more time
before the all-clear signal can be issued. Those of us who have
argued there is still the potential for a double-dip now have the
Fed’s blessing.
Greenspan also said that the inflation threat remains minimal,
another reason why the Fed will maintain its wait and see posture
at its May 7 meeting, though if and when the Fed does decide to
finally hike rates, the pace may be fairly swift…at least by my
reading of the situation. In addition, while higher sustained
levels of energy prices could impact consumer spending, the
chairman didn’t seem concerned about the effect consumer debt
levels or the housing bubble would have on this critical driver of
the economy. On this I can’t agree, as I will address in more
detail below.
But while Greenspan was giving us his current thinking on all
things great and small, Corporate America deluged us with
earnings reports from every angle, the vast majority of which
confirm the chairman’s attitude…it’s too early to tell if the
inventory-led rebound will lead to a sustained, broad-based
recovery.
For their part the big guns, like Intel, IBM and Microsoft, were
quite consistent. As Intel’s CFO said, “We are not seeing any
kind of recovery yet.” While there are clearly exceptions,
particularly in the Old Economy, in many cases revenues remain
well below year ago levels, and with corporations having
seemingly cut costs to the bone, it’s still tough to see how profits
will be generated to a level high enough to warrant the market’s
stratospheric valuations. What the extended trading range of the
past few months has told you, however, is that some clear
thinking is at least finding its way onto Wall Street, which is a
good thing, painful though it may be.
So while I can’t argue that the economic outlook is far better
than it was just a few months ago, and the resilience of the
American economy and consumer deserves praise, I, like the
Fed, choose to maintain my wait and see approach, recognizing
that the train may leave the station without me. Which means,
worst case, I’ll catch the next one.
Street Bytes
–For the week, both the Dow Jones and Nasdaq broke their
respective losing streaks, with the Dow tacking on a mere 67,
0.7%, to finish at 10257, while Nasdaq picked up 2.3% to the
1796 level.
–U.S. Treasury Yields
6-mo. 1.89% 2-yr. 3.32% 10-yr. 5.20% 30-yr. 5.69%
Bonds were mixed on Greenspan’s comments that the Fed
would be holding the line, at least until June, while the tame
consumer price index lent some support.
–Real Estate: We all have our crosses to bear, whether it’s the
gold bugs, the dollar / account deficit gloomsters, or, in my case
…real estate. I thought the bubble was going to pop a full two
years ago and, alas, it has just kept chugging along, thanks to
historically low interest rates and more or less full employment.
Of course that has all begun to change over the past few months
and so it was with interest that I perused Jonathan Laing’s piece
in the April 15 edition of Barron’s. It’s inevitable that the real
estate market will tumble at some point (Greenspan’s comments
notwithstanding) with a commensurate negative impact on
consumer spending. The severity, however, will be determined
by whether or not most homeowners end up with a negative
equity situation following the coming correction (or crash).
Laing quotes Robert Shiller (as we have here in the past) who
says the wealth effect from housing is twice as great on
consumer spending as are comparable changes in stock market
wealth. It’s just another reason not to get too fired up over
growth prospects for the economy in the years ahead.
–Energy: If the U.S. Senate is to a large extent representative of
the feelings of the average American, then on the issue of energy
we are a truly ignorant people. How else can you explain the
lack of understanding on the Arctic National Wildlife Refuge,
the development of which was torpedoed by a procedural
maneuver this week, 54-46. The disinformation campaign
worked, and the American people will pay the price.
The proposed area for drilling at ANWR was all of the size of an
airport, a pinprick in a region that took about 30 minutes to fly
over (on a flight to Tokyo last spring). The caribou never had
anything to fear, just ask their cousins frolicking in record
numbers at Prudhoe Bay, and there is also no way that more than
a handful of Americans will ever visit this place.
Meanwhile, the U.S. now imports 60% of its oil needs. 60%!
ANWR, worst case, represented 5% of our total daily needs, a
more than significant amount. [1 million of our 19-20 million
barrel daily intake.] Total reserves, conservatively, are estimated
to be 3 billion barrels.
Senator Daschle said upon defeat of ANWR, “We are just not
going to allow Republicans to destroy the environment.” But,
Senator, aside from the fact you are once again stretching the
truth, I guess that also means Americans should continue to pay
blood money to terrorists.
I have written ad nauseum on the energy topic for years now, so
I’ll try to be as brief as possible this week. ANWR wasn’t the be
all and end all for energy independence, rather, while the
potential to positively impact the percentage we import can’t be
ignored, more importantly, the defeat of ANWR is symbolic of
the arrogance of many in this country. Go ahead, keep driving
your gas-guzzler, keep funding the Crown Prince, Saddam and
the Ayatollah, just don’t come crying to the rest of us when all
hell breaks loose again.
And ANWR isn’t the only fight on the energy front. Now, it’s
on to the Rockies and potential development of resources there,
which, even I would agree makes far less sense from an
environmental impact than ANWR ever did, and I may not
support some of the projects I will read about. Instead, as my
buddy Mark R. always tells me, what we need is a “Manhattan
Project” for energy, some of the elements of which are already
contained in President Bush’s fuel-cell initiatives, as well as, yes,
Democratic proposals for alternative energy sources. But, folks,
these are years away, as the President recognizes, and in the
meantime, it’s like we’re hopping in our cars and discovering
we’re in the midst of a carjacking. Only in this case, we”re a
deserved victim.
–Energy, Part Deux: Importantly, the return of Hugo Chavez in
Venezuela means that any thoughts of a more cooperative partner
on the energy front are likely out the window, as Chavez has
proven to be a loyal participant in OPEC’s production cuts. Plus,
what is coming to light is the fact that Venezuela’s oil
infrastructure is badly in need of massive maintenance and
modernization, the funds for which the government is unlikely to
find. So from a capacity standpoint, we can’t count on
Venezuela for much more than they are currently capable of, and
perhaps, less…which was another freakin’ reason for ANWR!
Lastly, my friend Dan L. pointed out that the early reviews on
Honda’s hybrid (part gas / part electric) are positive, while
Detroit is years away from a truly competitive entry, but then we
wouldn’t want to stop the campaign contributions from flowing
into our politicians coffers, would we?
–Telecom: Early this week, Sprint beat its earnings estimate and
the whole sector rejoiced. Stocks that were once $4 and change
soared to $6! Whoop-de-damn-do, I thought. Then Nokia came
out with its miserable report, compounding matters by lowering
guidance for sales of all things cellular. Late Friday, though,
WorldCom may have supplied the coup de grace, as it issued a
rather severe warning of its own, an event that will no doubt
move the market on Monday. As Greenspan reminded us, don’t
take one number (Sprint’s) and blow it all out of proportion.
This is a very sick industry with mammoth debt loads, overrated
products, lousy service, and huge pricing issues. Aside from
that, everything else is fine.
–Microsoft’s earnings were so-so, at best, but am I the only one
who is a bit disconcerted when technology’s all-time success
story seems increasingly dependent on sales of a video game
console, the Xbox?
–G.E. Capital, which generates 40% of the parent company’s
profit, is slashing 7,000 jobs. Elsewhere on the labor front,
Nortel and Corning are both reducing their workforces by an
additional 4,000, while Sun Micro is laying off 1,000.
–Japan’s credit rating was cut again, as S&P cited continuing
lack of progress on reforming the banking mess. Nonetheless, a
lot of folks hung their hat on Alan Greenspan’s sanguine remarks
concerning a possible turnaround. True, if the U.S. recovery is
for real, Japan’s exporters will benefit, but the debt bomb will
keep ticking.
–Why do I spend so much time on Nasdaq and a discussion of
technology, to the detriment of other sectors? Because that’s not
only where any future growth above “trend” is supposed to
originate, but also because it’s where a large share of the money
flows are, particularly in the big cap names. For example, on
most days the 5 most heavily traded issues on Nasdaq account
for 20% of the overall volume on that exchange, as investors
either frantically try and pick the bottom, or simply trade for a
point or two. Conversely, as you’ve noticed from the return
figures at the end of this column, small and mid-cap issues
have outperformed for a long stretch, helped along not just by
more attractive valuations, but also because investments in the
two market segments are in more stable hands.
–Hewlett-Packard is claiming victory in its proposed merger
with Compaq. What’s increasingly clear, however, is the
likelihood that H-P CEO Carly Fiorina acted rather badly during
the proxy process. The criminal investigation continues.
–Arthur Andersen broke off talks with the Justice Department.
–EBay had another outstanding quarter, which gives us a further
excuse to discuss valuation. With the company now forecast to
earn 75 cents for the year, while the stock is at $54, it would
appear more than richly priced, but at least some sanity is
returning. Just last December the shares were at $72.
–Gateway’s sales are down 50% from a year earlier, though part
of the reason for this is the closing of some foreign operations.
Mooo.
International
Russia: At least 24 Russian soldiers were killed in two separate
Chechen rebel attacks this week. While the main government
offensive has been over for some time now, these incidents point
out the danger that awaits Coalition forces in Afghanistan.
Japan: The nation’s leading opposition figure is advocating that
Japan develop a nuclear force to counter the threat from China, a
call that can’t be dismissed out of hand, especially in the
corridors of Washington. You can’t blame some in Japan for
feeling this way, but it points out how involved the U.S. will
need to be in Asia’s security, or the region will see an
unprecedented arms race and war.
China: Meanwhile, Hong Kong’s unemployment rate hit a record
7%, as this experiment in “one China, two systems” continues to
fail miserably, a fact that shouldn’t be lost on the folks on
Taiwan. It’s not a stretch to say that Hong Kong is devolving
into an authoritarian state, the latest example of which being the
case of activist Harry Wu, who this week was denied entry.
Pakistan: George Will had a good piece on the trade situation
with Pakistan and the ongoing issue of textile quotas. If we
expect President Musharraf’s cooperation in the war on terror
(weak as some see it to be), and, Lord knows, we need all the
help we can get in this theater, the least we can do is permit the
shipment of some sheets. But, the textile lobby is strong, as is
the steel lobby, as are the lumberjacks, and so once again the
critical foreign policy agenda is hijacked by the special interests.
We will pay for this in lives.
France: The first round of presidential voting is Sunday with the
top two vote-getters, presumably Chirac and Jospin, emerging
for the runoff. But there is a growing possibility that Jean-Marie
Le Pen, the far right extremist, will gain a rather scary percentage
of the tally. As Le Pen’s views on the Holocaust are despicable,
this will be another sign as to just how serious a threat the anti-
Semitic behavior in Europe truly is.
Latin America: Colombian President Andres Pastrana wrote the
following in an op-ed piece for the Washington Post.
“America’s foreign policy agenda is today focused on the
Mideast. But across Latin America, poverty and social turmoil
are on the rise. Colombia’s struggle against terrorism and drugs
and Argentina’s economic crisis are not insular issues, but major
strategic ones shaping the future of the Americas. Washington
must remain engaged in the region’s challenges and
opportunities, even as it leads the global campaign against
terrorism. At issue is the survival of democratic states and
societies in our hemisphere. All of the Americas have a stake in
the outcome of this struggle.”
Pastrana is right on all counts. I have long argued the continent
is a powder keg, though I’ll admit I was surprised the economic
problems in Argentina didn’t spread elsewhere…yet. [Late
Friday, the government closed the banks indefinitely to halt the
ongoing “run.” Stay tuned.] As for Colombia, imagine a
presidential campaign (Pastrana is ineligible) where every
candidate is a target, with one escaping a serious bomb blast just
this week.
Meanwhile, with the return of Hugo Chavez in Venezuela,
tensions between the two neighbors are once again on the rise.
Here I wrote last weekend that Chavez’s ouster offered hope on
the Colombian civil war front and then 24 hours later we are
right back to square one. Chavez is harboring FARC guerrillas
and eventually Colombia needs to take them out. If Hugo
doesn’t see the light, soon, the U.S. may find itself involved
militarily.
As for the Bush administration’s handling of the region thus far,
let alone the whole Chavez affair, it hasn’t been a good stretch
and we have a ton of fence mending to do. While there was
nothing wrong with meeting with those who would eventually
attempt to topple Chavez, the perception (even if misguided) that
we gave the green light to the failed coup hurts relations
throughout the region.
Chavez had, after all, been elected in a free vote, so our future
entreaties for democracy in Latin America will have a hollow
ring to them. Lastly, who feels like investing in the region? I
don’t see any hands.
Random Musings
–Here’s a reason not to watch the new Phil Donahue show, as if
you needed one. In a Sunday Times magazine interview,
Donahue responded to the question, “What would you ask
President Bush?”
“Mr. President, when you say we are going to root out terrorists,
hunt them down, dead or alive, is it realistic to expect to do that
with bombs that threaten innocent people? Is the memory of
those who died in the World Trade Center honored by killing
more innocent people? Are we not creating more martyrs? And
most important, Mr. President, will this make our children
safer?”
Uh, Mr. Donahue? I don’t know what world you’re living in, but
in mine, we aren’t targeting innocents. Otherwise, it’s kill or be
killed.
–In Russia, Vladimir Putin’s 13% flat tax is largely responsible
for revenues increasing 47% in one year from the personal
income tax. So, after many of you have just slaved over your
own tax forms, join the flat tax cause…just like in Russia. [Now
who would have thought just 15 years ago one could write this
with a straight face? Maybe there is hope after all.]
–You’ve all read the stories that certain antibiotics are being
overprescribed, now comes proof we’re in deep trouble, as a
number of students with strep throat at a Pittsburgh school were
found to be resistant to a common drug that has heretofore
always killed the bacteria.
–Folks, I know this column sometimes reads like one big “red
alert,” but, seriously, for those of you who are traveling to
Europe this summer, think twice about getting on any organized
American tour buses. I’m going over myself in a few weeks and
won’t be taking the kinds of excursions I took just last year. Hire
out drivers, if you can.
Additionally, I just think that at times the major cities of Europe
may resemble the worst of the turbulence of the 60s, whether it’s
related to labor strife in Italy or extremist elements in France.
–In Finland, if you are caught speeding the ticket is based on
your income. Recently, there was the case of the Nokia
executive who was fined $103,000 for doing 46-mph in a 30-
mph zone (it was later reduced to $5,200). Teema Salanne, a
NHL star, was fined $40,000 for reckless driving. Which means
one thing. Now is the time for money-losing Web editors to
travel to Finland and just go crazy.
–Ordinarily, I wouldn’t talk local politics this early in the year,
but this week Andrew Cuomo really made an ass of himself.
Cuomo, running in New York’s Democratic primary for
governor, officially commenced his campaign by attacking
Governor George Pataki for his lack of leadership following
9/11. Not only was it a cheap, totally unwarranted shot, Cuomo
has now made himself eligible for StocksandNews’ “Jerk of the
Year.”
–A Florida woman contracted mad cow, but because the 22-
year-old has lived most of her life in Britain, it is not thought she
picked it up in the U.S. Nonetheless, there must be more than a
few folks, like with America’s beef industry, who are dripping
fat.
–Speaking of livestock and Florida, Al Gore was on stage again,
this time sweating like a pig, as he exhorted his followers at the
state Democratic convention. “I think Bill Clinton and I did a
damn good job,” Mr. Gore said, getting himself in a lather and
“practically shouting,” as a New York Times report had it.
–The average life expectancy in South Africa is expected to drop
to 38 by 2010, with 30% of the country’s workforce HIV-
positive by 2005.
–Lastly, it was a tough week for Coalition forces in Afghanistan,
as two accidents took the lives of 8, and so we remember…
Americans: Brian Craig, Justin Galewski, Jamie Maugans,
Daniel Romero.
Canadians: Marc Leger, Nathan Smith, Richard Green,
Ainsworth Dyer.
God bless the men and women of our armed forces.
God bless America.
—
Gold closed at $303
Oil, $26.38 [$3 rebound on Venezuela and lower inventories.]
Returns for the week, 4/15-4/19
Dow Jones +0.7%
S&P 500 +1.3%
S&P MidCap +1.4%
Russell 2000 +0.4%
Nasdaq +2.3%
Returns for the period, 1/1/02-4/19/02
Dow Jones +2.4%
S&P 500 -2.0%
S&P MidCap +8.2%
Russell 2000 +5.9%
Nasdaq -7.9%
Bulls 54.8%
Bears 28.4% [Source: Investors Intelligence]
Have a great week. As always, I appreciate your support.
Brian Trumbore
