[Posted 7:00 AM ET]
“No, no, you can’t do that!”
I’m not a happy camper these days, folks. Some people I have a
great deal of respect for, like columnist Robert Samuelson,
continue to play the role of apologist for the behavior of
Corporate America and Wall Street and, frankly, it’s sickening.
Actually, when you lay out the events of the Bubble, what you
find is that more than a mere handful were dirty; starting with
Congress, Wall Street, the accounting industry and the executives
running many of our nation’s leading companies. Yet the public
backlash has been minimal, to date. Eventually, that will change,
which doesn’t bode well for those seeking 10% yearly returns on
their 401(k)s.
But to use one example in the news more than a bit lately, while I
feel for those innocent employees of Arthur Andersen who are
now seeking employment, to say that they shouldn’t have to pay
for the sins of a few isn’t exactly facing the truth.
PBS’ “Frontline” once again soared with its expose on Andersen,
Enron et al this past Thursday and, as a friend and I discussed
after the broadcast, even our Wall Street-tinged eyes were
opened wide to the tales of abuse. The program also featured
many former SEC officials and the message was clear. The
whole system is corrupt.
Last week, former SEC Chairman Arthur Levitt said the
following in a speech.
“(The accounting industry) will do everything possible to protect
their franchise, and will do so with little regard for the public
interest…Enron is not an aberration…(What is troubling is) the
uncovering of accounting irregularities, inflated balance sheets
and outright corporate deceit and malfeasance.”
As Levitt concluded, it is a “culture of gamesmanship.”
In the case of Andersen, of course, it wasn’t just Enron, but
others like Sunbeam and Waste Management, more episodes
replete with outright fraud.
“Frontline” was also devastating to members of Congress,
particularly Senators Lieberman and Dodd (the former at least
had the guts to be interviewed), as well as Congressman Billy
Tauzin, all of whom continually blocked legislation which would
have expensed stock options, as well as prohibiting accounting
firms from acting as consultants for their audit clients, the major
conflict of interest in the case of Enron and others just coming to
light.
The past few months I have done a lot of work on some of the
characters of the 1920s for my “Wall Street History” link. Men
like Albert Wiggin, Charles Mitchell and Richard Whitney, who
acted in a most unethical manner during the run-up to October
1929. As market historian Charles Geisst wrote of this era:
“(Even though only one served any actual jail time), once
charged, many of the bankers found that public opinion held
them in the same company as mobsters.”
Yours truly has used the term ‘mobster’ rather loosely the past
few months, in describing the actions of the Kozlowskis of the
world, but there is no better label to slap on today’s dirtballs.
Once the public makes this connection, punishment will be swift
and severe.
Is there any light at the end of the tunnel? Sure. But it will take
time…years…before the clouds clear. In the meantime, the
much-criticized SEC Chairman Harvey Pitt has proposed a
strong accounting oversight board, while Senate Democrats say it
isn’t enough. As an act of Congress supercedes anything the
SEC does, Pitt is at their mercy.
But as Pitt and Congress work on reforms, some Wall Streeters,
particularly Morgan Stanley CEO Philip Purcell, are lobbying
Congress to restrict the states’ ability to pursue those violating
securities laws (such as the action New York’s attorney general
took against Merrill Lynch). It reeks.
As for lessons learned from the past, one can draw important
distinctions between the 1920s and today’s illicit behavior. What
is often forgotten about the decadent 20s is the fact that many of
the transgressions on Wall Street were technically legal, like
insider trading, so the offenders were often guilty of nothing
more than an extreme lapse of basic ethics. Today, though, in
cooking the books, inflating earnings, trading on inside
information, one just wants to grab the offenders and say, “No,
no, you can’t do that!”
Treasury Secretary Paul O’Neill, by all accounts a model CEO
when he was running Alcoa, said those abusing our trust “should
be hung from the very highest branch.” The American public
should be demanding that the corrupt CEOs, accounting
chieftains, and, I suspect it will be discovered, a few members of
Congress, should not just be thrown in some minimum security
facility, but rather treated like common criminals, you know,
with their very own “Bubba.” The system must be cleansed of
the abuse that, left unchecked, threatens our very capitalistic
society. I hear John Gotti’s cell is empty. Let’s start there.
The Middle East
President Bush was all set to unveil his peace proposal
advocating a provisional Palestinian state, even though Israeli
Prime Minister Sharon had already rejected the idea, when
Palestinian terrorists unleashed another wave of brutal attacks.
Sharon responded:
“It’s interesting to speculate what kind of Palestinian state they
are talking about,” as he retaliated by adopting a new policy of
retaking parts of the West Bank and holding them until the terror
ceases.
Israel is also proceeding with the building of a fence along the
entire length of the West Bank, but that means 200,000 Jewish
settlers in the West Bank could be isolated, so the far-right is
none too pleased with this consequence.
But I also couldn’t help but think about Saddam Hussein and
what is inevitable to anyone with half a brain these days. It’s
only a matter of time, perhaps months, before he passes along his
weapons of mass destruction to Hamas, Hizbollah, Islamic Jihad
or any other likeminded operation to use on the Israelis, the U.S.
or both.
In a similar vein, last Sunday Bob Woodward wrote a much-
publicized piece in the Washington Post reporting on President
Bush’s new marching orders to the CIA to take out Saddam.
This is nothing new, but what I found telling about the discussion
the next 24 hours was the solid support that Democratic leaders
Richard Gephardt and Tom Daschle gave for the operation,
which should tell you one thing. We have overwhelming
evidence, not only that Saddam is building weapons of mass
destruction, but also that he is preparing to use them, with a
human cost that would be catastrophic. So we light a candle and
pray our leaders are favored with the courage to move on the
Butcher of Baghdad.
Wall Street
The losing streak has reached 5 for the Dow, Nasdaq and S&P
500, with the latter two essentially at post-9/11 lows. The Dow
Jones declined 2.3% to 9253 (its 9/21 low was 8235), Nasdaq
lost 4.2% to 1440 (9/21 – 1423), while the S&P fell 1.8% to 989
(9/21 – 965).
Clearly, it’s all about lack of faith in Corporate America, as well
as the unnerving thought that the next al-Qaeda attack could be
literally anything and anywhere. Since the spring of 2000, each
rally has been an opportunity to sell (as was Monday’s 200-point
Dow advance), and I fail to see one compelling reason to buy the
market as a whole, though I will continue to look for trading
opportunities (I remain 85% cash / bonds).
If we didn’t have the confidence issue to deal with, however,
while terrorism would always be on this guy’s mind, the
economic fundamentals look O.K., for now, as this week’s data
revealed renewed vigor in the housing industry, while a regional
manufacturing survey (Philadelphia) showed signs of strength in
that sector. Yes, the U.S. economy is a resilient sucker.
But at the same time you also have new profit warnings from the
likes of Apple and AMD…and then there’s Oracle.
If ever there was a company whose corporate logo should reside
next to the definition of ‘disingenuous’ in the dictionary, it’s
Larry Ellison’s operation. Early in the week they announced
they beat earnings estimates for the last quarter and the stock
shot up $1 in after hours trading to over $10. But an hour later,
the company said visibility was still “very limited” and they were
cautious for the second half outlook. Sell! Oracle finished the
week at $8.10, an incredible percentage swing.
Simply put, capital spending isn’t coming back anytime soon,
while Wall Street’s analysts are expecting earnings for the S&P
500 to increase 19-20% in 2003. If this were to be the case, and
the war progressed without a hitch, I could guarantee a solid rally
of 20% or so in the next 12 months. Now ask me if I believe this
will come to pass.
No, instead we’ll all just sit back and wait for the next shoe to
drop, whether it’s a terrorist incident or another CEO led off in
handcuffs, while increasing hordes of foreign investors pull their
money out of the U.S. and take it home with them.
“Trust” can only be earned over time. “Confidence” is a state of
mind. Show me an investor with the latter these days and I’ll
show you one not living in the real world.
Street Bytes
–U.S. Treasury Yields
6-mo. 1.78% 2-yr. 2.84% 10-yr. 4.77% 30-yr. 5.40%
The Federal Reserve Board meets this coming week and will opt
to hold the line on interest rates. The core consumer price index
rose 0.2% in May so the “official” gauge reveals no imminent
problems.
But, as the Wall Street Journal pointed out in a piece this week,
the real world can be quite different. The latest example is the
increase in tuition at many state schools, upwards of 25% for this
coming academic year.
I receive notes all the time on inflation in everyday products and
services, so I’m certainly not going to argue with the evidence.
At the same time, though, all I can do is say, “Yeah, but…” Stories
like 25% tuition hikes don’t move the markets on a day-to-day basis,
but they do eventually have a cumulative impact on consumer
spending, especially in a moribund economic environment,
which is what I suspect we will have the second half of 2002 and
into next year.
–The $: After stabilizing for the past month, the dollar suddenly
plunged anew at week’s end. Despite the generally solid economic
data, there was renewed fear that the long reign of U.S. assets
was over. The euro is now at a 2-year high against the
greenback, while the yen is at its highest level in 7 months. The
decline is still orderly, but it seems inevitable that a rush for the
door is coming. It’s what triggers this that is anyone’s guess.
–Europe: As a follow-up to my comments on the UK last week,
the government announced that housing continues to soar, but
both the inflation rate and retail sales declined in May, thereby
giving the Bank of England some room on interest rates.
Elsewhere, across the continent the recovery is stagnant, though
core inflation here is now running at a 2.7% rate, above the
ECB’s target of 2%.
–Japan: The Nikkei suffered through its worst week in 15
months and now sits at 10354, the lowest level since February.
So much for the much ballyhooed rally. Prime Minister Koizumi
continues to be beset by political infighting, scandal and his own
lack of leadership.
–Latin America: Moody’s lowered its credit rating on Brazil,
causing another sharp decline in the equity market as well as the
currency, while Uruguay was forced to float its own coinage (a
devaluation) in order to compete with the cheaper goods of
Argentina and Brazil. Contagion has hit and those of us who
spoke of it last winter and were ridiculed are about to have the
last laugh.
–Another follow-up to last week when I praised Ireland-based
Ryanair. Some of its pilots have gone public with complaints
that they are severely overworked, which, of course, has safety
ramifications. [Many are flying six segments a day.]
–Speaking of airlines, no jokes concerning Southwest Airlines’
renewed policy of charging double for overweight passengers on
crowded flights. There are only losers in this situation and I can
just imagine the problems at the gate as some passengers will
invariably raise hell.
–The government launched an investigation into price-fixing
among computer memory chip manufacturers Infineon,
Samsung, Micron and Hynix.
–Qwest CEO Joseph Nacchio was forced out. One of the
cockiest SOBs around, Nacchio took in a cool $87 million in
total compensation last year, even as his company flopped.
–Shares in Tyco crossed $16 this week (off its low of $8.25 the
previous one), though they closed around $14 as the company
struggles to come back from Dennis Kozlowski’s reign of terror.
Among the latest revelations, an outside director, whom
Kozlowski plied with a $20 million finder’s fee for a particular
acquisition, refuses to give the money back, while a top Tyco
attorney received a $10 million interest-free loan to buy a home
in Deer Valley.
–So did you receive your e-mail from Amazon, the one
announcing the reduced requirement for free shipping ($49 per
order)? Under Jeff Bezos’s signature, Amazon admits “It will be
very expensive for us.” So I’m thinking, an already grossly
overvalued stock is even more so today. Or am I missing
something?
–Asbestos hasn’t been in the news as much recently, after a
flurry of mostly positive developments on the legal front, but the
fact remains that 200,000 claims are still pending and the total
estimated cost remains at around $200 billion. Dying from an
asbestos-related illness is a horrible, painful way to go, but at the
same time it is a crime that attorneys have glommed onto an
issue where 98% of the claimants will never even get sick.
–Program trading is back with a vengeance, accounting for
around 30% of daily volume, and it’s only getting worse. Which
gives me an excuse to remind you once again, if you are putting
in mutual fund tickets, just be careful. You can get whipsawed
big time.
–The Journal had an interesting piece on the impact of a
declining stock market on consumer spending. Many of those
interviewed said they were scaling back at home by dumping
their cable. The Net is next, or a further delay in the installation
of broadband. Which means that those telecom companies,
already in huge trouble because of massive debt loads and slow
acceptance of DSL from a cost / benefit / service standpoint can’t
possibly survive.
–Here’s what I think about the whole Martha Stewart deal. She
says her “stop-loss” instructions were oral. Now I’m trying to
give this woman the benefit of the doubt but she’s, first, too
smart, and, second, had been a broker herself, so she knows that
if you really want to set a stop, you don’t just do it orally. On
Friday we also received word her Merrill broker was suspended.
Yup, it doesn’t look good for Ms. Doily.
International Affairs
Afghanistan: Turkey is now in charge of the Security Force,
having taken over for Britain. It’s a big moment for them and
helps to show the Muslim world that the U.S. is not simply at
war with Islam. Of course it’s a war against Wahhabism, but
that’s a different story. As for the Loya Jirga, while it’s nice
to have Karzai in charge, at least in Kabul, clearly the warlords
are still very much in control outside the capital.
Meanwhile, al-Qaeda is targeting secular governments and, as
noted before, Turkey is on the list. Separately, the London
Times reports that the FBI is now worried the arrest of Jose
Padilla may be a signal to al-Qaeda operatives to launch attacks.
In hindsight, his capture was too easy and they now believe
Padilla knew he was being tailed for quite a while, yet did
nothing to try and run.
Morocco: This country’s contribution to the war on terror has
been exemplary of late, as they helped to round up some more
key al-Qaeda. Hell, even Syria is cooperating with the U.S. with
regards to one big suspect. As Secretary Rumsfeld said from day
one, this war is going to make for strange bedfellows.
Philippines: The leader of terrorist organization Abu Sayef was
killed by Filipino soldiers Friday, hopefully the beginning of the
end for these assassins. We toast the military. Get me a San
Miguel.
Europe: The decline of the Left continues, as the issues of crime,
illegal immigration and the stagnant economic situation are
foremost in voters’ minds. With the Socialists having been
crushed in France, all eyes turn to Germany and its September
election. Conservative Edmund Stoiber, leading in the polls, has
vowed to make immigration the prime issue, though he is
attempting to disassociate himself from Neo-Nazi types.
Random Musings
–The U.S. is flooding the world market with farm products such
as corn, wheat, and rice, fallout from the recently signed farm
bill. The rest of the world is rightfully miffed at the massive
subsidies being doled out in the States, just another harmful
distraction in the war on terror.
–If you are looking for conservative rhetoric on the environment
in this space over the coming years (yeah, I’ll be around that
much longer), you won’t find it here. I’m becoming more pro-
environment as I rapidly age (witness my latest picture from
Istanbul above). I totally disagree with much of the talk from the
right in this regard and wrote last year that the U.S. was making a
big mistake in not going along with the Kyoto Accords.
Yes, I know all the arguments and recognize the treaty is flawed,
particularly as it relates to China and India, but you will never
convince me that making an honest effort to meet limited
standards cannot be accomplished in this country. For starters,
we have to have the guts to hold the auto industry’s feet to the
fire.
Why bring this up now? In scaling back the Clean Air Act, the
Bush Administration is making a huge mistake in allowing the
utilities and refiners to delay plant enhancements that would
increase pollution controls. As more and more evidence emerges
that the crap we’re spewing in the air is having an adverse impact
on our planet, it’s also just a matter of common sense.
As for those who say, well, complying with the old Clean Air
Act or Kyoto will cost American jobs I say, bunk. In the
instance of the latter, that’s the very reason why you sign Kyoto,
so you can jack the rest of the world up against the wall and say,
look, a-holes, we’ll do our share only if you do yours. But you
obviously can’t accomplish a thing if you’re sitting outside,
while the rest of the world has an excuse to blame America.
–And then there is the polluting of our bodies, as in baseball’s
massive use of steroids. As I’ve noted elsewhere on this site, I’m
sick of the desecration of my favorite sport and the sacred record
book. It is going to be an ugly scene, come August, as the
players threaten another walkout, the owners fiddle, and the fans
finally strike themselves. The fact that the Players Association
won’t accept testing for steroids, while the NBA and NFL do, is
insulting to our intelligence.
But I also got a kick this week out of some of the letters in Sports
Illustrated, responding to the magazine’s expose on steroid use a
few weeks earlier. Many of the fans fear for the players’ health.
Why? I couldn’t give a damn about the health of someone who
is ingesting garbage. I care about people afflicted with cancer,
diabetes, Parkinson’s – the truly innocent victims. Am I going to
cry if Mark McGwire dies at an early age after juicing himself up
to beat the home run record? Hell no.
Finally, the players’ inability to recognize that they have a
certain responsibility to set an example for our youth is also
shameful. By all indications steroid use in high school is soaring
and baseball is partly to blame. That’s just my opinion…I could
be wrong.
–Two baseball scores from this week. Yankees 20 Colorado 10;
Colorado 14 Yankees 11. Add Coors Field to the list of items to
be banned.
–In the interest of full disclosure, I did purchase a few copies of
Lynne Cheney’s new book, “America: A Patriotic Primer.”
Also, thanks to Paul J. for reminding me that the title of Bill
Bennett’s new tome is “Why We Fight.”
–Jimbo reports that one fallout from 9/11 is the fact that his 5-
year-old is now treating everything as a weapon, which makes
for some interesting scenes at the dinner table.
–The federal government estimates that one-third of all cancer
and heart disease could be prevented if we simply ate less, as the
issue of “supersizing” came to the fore last week. The restaurant
industry, on the other hand, says they are not only giving the
customers what they want, but that Americans need to exercise
more. Of course in the 90s the same consumers also wanted
supersized stock market returns.
–Ralph Nader on corporations, the ad campaigns and the
exploitation of children. “The commercialization of childhood is
a pervasive form of electronic child molestation.”
–It was good to see NBC slam Democratic National Committee
Chairman Terry McAuliffe for his duplicitous behavior on
campaign finance reform. Of course McAuliffe should already
be in jail for past transgressions.
–So I’m trying to figure out why M&Ms adopting the color
purple is a news story. But wait, there’s more. CNBC is doing a
piece on Crayola adding new colors of their own.
–Astronomers discovered, 3 days after the fact, that planet Earth
had a near miss with a soccer field sized asteroid. Now you may
think that missing us by 75,000 miles is not a big deal, but
consider that the moon is 239,000 miles away and you realize
just how close the call was. No word on whether the FBI’s
Minneapolis field office had identified the intruder weeks earlier.
–Speaking of space, Cindy Crawford would like to go into orbit
aboard a Russian spacecraft. Coincidentally, your editor started
Russian lessons this week. Huh.
–Lastly, more news on Mars and the belief that at one time there
were massive rivers on the red planet. Of course there may still
be some water today, so we renew our call for an immediate
series of manned missions (I always thought snowboarders were
the best candidates). But if Mars did ever have some sort of
civilization, one that met an untimely demise, how did it all end?
You guessed it, accounting irregularities.
—–
God bless the men and women of our armed forces.
God bless America.
Gold closed at $325…if it can’t move in this environment, it
never will.
Oil, $25.82
Returns for the week, 6/17-6/21
Dow Jones –2.3%
S&P 500 –1.8%
S&P MidCap –0.9%
Russell 2000 +0.4%
Nasdaq –4.2%
Returns for the period, 1/1/02-6/21/02
Dow Jones –7.7%
S&P 500 -13.8%
S&P MidCap –3.4%
Russell 2000 –5.6%
Nasdaq -26.1%
Bulls 40.8%
Bears 35.7% [Source: Investors Intelligence]
Have a great week. I appreciate your support.
Brian Trumbore
