[Posted 7:00 AM ET]
“To presume somehow that it’s over or the worst is behind us is
naïve.”
–Stephen Roach, chief economist / Morgan Stanley
If you thought some of my comments from last week concerning
threats to our capitalist system were ‘over the top,’ I imagine by
Wednesday morning you weren’t quite so sure. There is a threat,
albeit small, that WorldCom, Enron, Global Crossing, Adelphia,
Rite-Aid, et al are like the canary in the mine.
It’s about politics, you see, as well as the uneasy feeling we often
have in this post-9/11 era. The Democrats now have an issue
(whether warranted or not is not the point) and they will run with
it for the November elections. Thankfully, however, what is
clear is that President Bush will do all he can to block these
efforts by getting out front on the crisis in corporate governance.
[He is currently scheduled to speak to the nation on July 9.] The
Republican lead in the House is but six seats, though, and
regardless of the President’s own popularity, his coattails will
have zero impact on congressional races.
Should the Democrats surprise the current thinking and win the
House, along with maintaining their edge in the Senate, you then
have a lame duck President. Not good when it comes to issues
like further tax reform. Instead, we’d go into reverse.
And if the economy doesn’t heat up anew (my guess is it won’t),
look for a populist-type revolt against Big Business (right now
it’s just kitchen-table, talk show chatter). That wouldn’t be good,
either.
Third, you have a labor movement in this country that has been
quiescent for a long time, and for good reason as the economy
boomed and jobs were plentiful. But, fed by a media out for
blood (and in most cases doing an admittedly admirable job),
American Labor will begin adopting more strident positions, as
they have seen some corporate CEO’s raid the company coffers
of exorbitant amounts, while requesting sacrifice from the line
worker. Labor will thus demand a bigger piece of the pie, which
will drive up the cost of American goods, making them less
attractive in this increasingly competitive global marketplace.
Lastly, and on a related note, as I’ve long warned the world
doesn’t have to always buy American, and suddenly we have
handed foreign consumers a great excuse to bash all that we have
been promoting for the past twenty years.
Of course, the war could also throw more than a wrench or two
into this scenario, not for the good.
So that’s what I meant when addressing the threat that the current
crisis in confidence poses. For sure, it doesn’t have to end up
that way, as a combination of presidential leadership and some
aggressive federal prosecutors could re-instill some faith in our
system.
But don’t underestimate the harm that’s been done, and I’m
still not convinced the ‘little guy’ fully understands the
implication of mediocre returns, at best, on his investments for
years to come. Also, from the evidence I’ve seen, the average
exposure to stocks is still exceedingly high, while many so-called
experts continue to trash cash. In the meantime, let’s hope we
get a little respite from the news cycle, a rally in the markets, and
a few big arrests on the terror front so you all can get some rest.
As for me, it’s always been my job to sleep with one eye open
and do the worrying for you.
Wall Street
WorldCom made its startling announcement – that it had
mischaracterized $3.8 billion in expenses, wiping out $1.8 billion
in profits – late Tuesday, so by Wednesday morning all eyes
were on Wall Street. But after an initial slide, the markets
recovered and finished mixed on the week. Earlier, I had dusted
off my manuscript for “Dow Zero,” but, alas, I had to throw it
back in the corner.
President Bush’s announcement just minutes before the close on
Friday that he was undergoing a colonoscopy prevented the Dow
Jones from registering a gain, as it slid just 10 points on the week
to 9243. Nonetheless, it represents the 6th-straight decline for the
Dow. Nasdaq managed to tack on 1.5% to 1463, breaking its
five-week skid.
On the economic front, the final revision for first quarter GDP
revealed a 6.1% growth rate, but that’s old news, to say the least,
like as of March 30th. Back then, us New York Mets fans
thought we had a ballclub, to put it in its proper context.
As for the now completed second quarter, estimates range from
2.5-3% growth, but it’s the performance in the 3rd and 4th I have
long questioned. And on this front, I still don’t see how you can
be real optimistic.
For starters, WorldCom is laying off 17,000, Motorola another
7,000 and, in Europe, big corporations like Cap Gemini and
Alcatel are slashing their workforces by 5,500 and 10,000,
respectively. These aren’t small numbers and obviously
indicative of a still skittish business environment, particularly
when it comes to investing in new plant and equipment.
But, admittedly, all of the above names are in the high-tech
realm, so it’s an excuse to bring up a topic I was the first to
discuss way back on 4/29/00 in this very space. To wit:
“I have trouble with the feeling that we will always be spending
increasing amounts on every tech product imaginable
(particularly on the corporate level).”
Pretty darn good, especially since over two years later you are
now beginning to see articles addressing this very issue. I now
have the following new conclusion concerning the tech
revolution.
In a real revolution it’s the people who lead it. But this time, it
was an ‘elite’ few who convinced the rest of us schleps we
needed it all.
Turns out we didn’t, mused the editor as he banged away on his
3 ½-year-old Dell with the 386 chip that does everything I need a
PC for.
Lastly, there’s the issue of real estate. This week a Harvard
study revealed that the strength in this market could last another
20 years, largely because of positive trends in both supply /
demand and demographics. As good as my calls on the tech
sector have been since I started this site, my prognostications on
real estate have missed the mark by a mile. Granted, I’m not
alone in waiting for the bubble in this sector to burst, but I’m
more convinced than ever that I will be right here as well when I
see comments like that of the Harvard report.
Why? Because it reminds me of the Wall Street jokers who in
the spring of 2000 were trying to convince us all that valuation
didn’t matter. A little slide from Nasdaq 5000 to 1500 certainly
discredited that theory.
Yes, real estate is different, particularly in that various regions of
the country blow hot and cold all the time, while I’m admittedly
jaded because I live in a part of the country (the New York metro
area) that has been hot for some time now. But when I can get a
double on my basic townhouse in 8 years (when at a solid 3%
annual increase it would otherwise take 24 years to do so), there
is something wrong. I know all the reasons given why prices can
get so out of whack, with, obviously, low mortgage rates playing
a key role, but I also know a bubble when I see it.
Street Bytes
–U.S. Treasury Yields
6-mo. 1.74% 2-yr. 2.82% 10-yr. 4.80% 30-yr. 5.51%
[March 30: 2-yr. 3.70%…10-yr. 5.40%]
The Federal Reserve opted to hold the line on interest rates, yet
again, issuing an incredibly brief statement in doing so, one that
didn’t address the impact of the plunging stock market on
consumer confidence and / or spending, for example, while citing
an economy that was growing, but at a modest pace. In other
words, they should have stayed home and saved on travel costs.
At least Congress raised the debt ceiling, allowing my parents (as
well as all of you eligible participants) to receive their social
security checks. Of course in doing so, the Democrats happily
picked up another campaign issue, as they will blame
Republicans for the “reckless” tax cut. But you all know better,
don’t you?
–The first half of the year was the worst since 1970 for the S&P
500, -13.8%.
–Xerox announced it misstated a further $1.9 billion in revenues,
this after already paying a heavy fine for another $multi-billion
‘error’ in April. [The $6 billion figure you are seeing in the press
is deceiving. Some of it is “rolled over.”]
–$: No mystery here with the U.S. dollar sliding rather
precipitously as the WorldCom debacle and questions about the
strength of the economy gave foreign investors a further excuse
to repatriate some of their assets. The euro is basically at parity,
while the dollar fell below the 120 yen level. What was once an
orderly decline has now turned sloppy, like one of those
Motocross races you see on ESPN2. The U.S. has spun out and
the only hope is that we can get back up before we’re run over.
–It’s now earnings season and it’s possible there will be more
than a smattering of good news, particularly from the old
economy types. But cynicism is deep and the market is still
priced for 20% earnings gains in 2003, which I continue to find
way too optimistic.
–Just when it looks like Global Crossing is finally going to get
the full congressional spotlight shone on it, something else crops
up…this time, WorldCom. One of these days, however,
executives will get grilled. The company has now admitted to
shredding documents, a la Enron, but while some Enron
employees learned this week that the bankruptcy court has
approved further severance, it’s my understanding that the
Global Crossing workers fired last December, shortly before the
Chapter 11 filing, still haven’t seen the first dollar of monies
promised them. For this alone, CEO Gary Winnick should get a
one-way ticket to Karachi with an “I love NY” t-shirt.
–Argentina: The lot of these poor folks only worsens and a new
collapse seems a certainty. Violence broke out again and two
were killed by police.
–Energy: OPEC announced it was sticking with its current
production quotas throughout the third quarter, even as some
members cheat on the targets. Meanwhile, with oil still hovering
around $25 (for the full basket…the price I quote each week is
for the most expensive grade of crude), many non-OPEC producers
have an incentive to pick up any slack, so OPEC is slowly losing
more market share…which makes us all very happy.
–Arthur Andersen was WorldCom’s auditor, as well as the chief
bookie for another telecom currently under the microscope,
Qwest. Add them to the likes of Enron, Sunbeam and Waste
Management and you can see why some of us are shedding few
tears for this organization, which will have played no small part
in the flight out of U.S. assets by foreigners, let alone our own
financial distress.
–It was last May 11 in this space that I wrote of my disgust
regarding CNBC and the actions of their reporters concerning
WorldCom. You’ll recall they shamelessly hyped the shares up
to $2.50, because, I suspect, the hedge funds played them like a
Stradivarius. Then look what happened.
–CNBC’s Mike Huckman, on the other hand, deserves mega
credit for a fantastic job in tracking down sleazeball telecom
analyst Jack Grubstake, err, Grubman. It was great theater and
as I wrote back on January 26, concerning the unfolding Enron
scandal, “…the media will play a larger-than-life role in it all…
Heck, careers will be made, so there are more than enough
incentives for them to dig deep.”
–UAL is asking for a $1.8 billion loan guarantee from Uncle
Sam. Next year at this time, they’ll be asking for another $1.8b.
–For the archives (and to help me with my research), Adelphia,
the 6th-largest cable company, finally filed for Chapter 11.
–The brokerage firm Piper Jaffray was fined after an investment
banker threatened to drop research coverage of a biotech
company if they didn’t allow Piper into the underwriting group
for a stock offering.
–According to reports, Salon.com has just 3-4 months of cash
left.
–My portfolio: I bailed out of my junk bond position last week,
about 3 weeks later than I should have, so I’m now 85% cash
(zero bonds), with most of the remainder in two energy positions.
I did one other move this week, which I’ll address in “random
musings.”
The Middle East
President Bush did the right thing in his historic speech on
Monday (see “Hott Spotts”) as he addressed the Palestinian –
Israeli conflict. His remedy, the removal of Yasser Arafat and a
call for democracy in the region, was not a popular one among
the monarchical Arab leaders, nor was it in the wimpy salons of
Europe, but history will judge it to be the proper call.
And, as Bush said, it’s up to the Palestinians to take the first
steps, which was music to Israel’s ears, while the President, later
in the week at the G-8 summit, issued an explicit warning that if
the Palestinians don’t have a change in leadership, or, if a new
leader emerges not to our liking, monetary aid to any Palestinian
regime will be withheld.
So what was Arafat’s reaction? “Hey, Bush wasn’t talking about
me,” he said, in announcing he was running for reelection in
January. Even Egyptian President Mubarak said, no, Bush
wasn’t calling for Arafat’s removal, while all European leaders
except Italy’s Berlusconi noted that it was up to the Palestinian
people to decide who their leader should be.
As for the situation on the ground it remained explosive and
President Bush gave the terrorists an excuse to ratchet up their
own rhetoric. But it’s time for the U.S. to stay the course and act
on principle.
More International Affairs
Iran: The New York Times’ Tom Friedman has been in Iran for
a number of weeks, filing reports on the battle between the
clerics and the reformers. I haven’t commented on his columns
because as yet there has been nothing new in his work, other than
what I already told you long before he found religion.
And there is also nothing new in Mossad’s latest assertions that
Iran continues to develop long-range missiles capable of hitting
Europe and, eventually, America, let alone the short-range
weapons already being made available to Hezbollah in both
Lebanon and Syria.
I am, however, still optimistic that Iran could yet be a huge
positive surprise this year (as I wrote in my 12/29 year-end
predictions…most of which will probably fall miserably short),
as the students rise up (Friedman sees chances of this also). I’m
also assuming, however, that the U.S. has some serious secret
negotiations going on somewhere and I also continue to urge that
we play the Russian oil card to the hilt to secure Putin’s support.
But time is running out. Like with Iraq, the weapons of mass
destruction will soon fall into the hands of the terrorists, if they
haven’t already.
Russia: President Putin scores again, as Russia has become a full
member of the G-7, now G-8. Undoubtedly, you’ll read all kinds
of op-ed pieces on what a joke this is, given the clique is
supposed to represent the world’s most developed economies,
but I say, who gives a damn? What’s most important today is the
fact that the G-8 has agreed to fund a $20 billion project over the
next 10 years to help Russia decommission its nuclear, biological
and chemical stockpile; vital for the security of us all.
Turkey: The sickly Prime Minister Ecevit continues to toy with
his nation, as he now claims he will fill out his term, which
doesn’t expire until April ’04. If there was a viable successor it
wouldn’t matter, but the political situation in Turkey is fractured,
to say the least, and the danger is that the chaos may hurt U.S.
efforts to go after Saddam, let alone Turkey receiving the final
$16 billion in desperately needed IMF aid that is contingent on
stability. Plus, Turkey is leading the Security Force in
Afghanistan and I’m worried that if the West doesn’t step up and
pay for this effort, a simple way of saying “thanks,” the military
may pull them home. Speaking of the military, there is also
obviously a chance they could directly interject themselves into
the political process, more so than they already have.
North and South Korea: Word is coming in of a gun battle
between the two navies, with a South Korean vessel sunk and
four killed. This is obviously a developing story. More next
week.
Zimbabwe: Granted, President Robert Mugabe now has major
competition for our year-end “Dirtball of the Year” award among
both al Qaeda and U.S. CEO’s, but he once again proved himself
to be a fierce rival as this week he formally made it a crime for
Zimbabwe’s 2,900 remaining white farmers to pursue their work.
They also have about 45 days to leave the country.
What is so unbelievable about this latest move is that the nation
is in the midst of a severe drought with major food shortages, so
by removing its lone source of food production, Mugabe is in
effect sentencing tens of thousands of his own people to death.
Malaysia: President Mahathir, a surprise stalwart in the war on
terror, announced he will be stepping down in 2003 (he’s 76).
At least he has picked a successor who is said to favor his
policies.
Peru: Wow, President Alejandro Toledo, who took over just last
July, has only a 15% approval rating. Talk about making a poor
first impression.
Random Musings
–The Washington Post had a scary front page story on Thursday,
detailing the concerns of the Bush Administration regarding
terrorist attacks from cyberspace. For example, al Qaeda could
coordinate a conventional explosion with an attack on our
response systems, like in shutting down water or electricity
supplies.
Separately, I saw an NBC report on guns that are disguised as
cellphones, yet capable of firing 4 bullets. They have been
discovered in Europe and evidently customs in Colombia
recently found a box of them, as well. You don’t have to stretch
your imagination too far to see the danger here.
–The Supreme Court has been a bunch of busy beavers, as this
week it approved the school voucher system, as well as drug
testing in schools. As for the latter, forget the athletes, I’d go
after every home economics student and the illicit trade in hash
brownies.
–Concerning the uproar over the Communist judges for the U.S.
Appeals Court in San Francisco and the ‘initial’ decision to ban
the Pledge of Allegiance due to the Establishment Clause of the
U.S. Constitution, talk radio and television has already beaten
this issue to death. Yes, it’s truly idiotic and another canary in
the mine, come to think of it, but where is the scorn for Michael
Newdow, the fellow who filed the suit, when it comes to the fact
he is using his second-grade daughter as a pawn in his own little
game? This is the worst form of child abuse and her life is now
ruined. For this he should be indicted.
As for the judge in this ruling who offered, what is the difference
between “under God” and, let’s say, “under Zeus?” I got to
thinking. Zeus would be pretty effective right about now.
“DEN-NIS KOZ-LOW-SKI?!”
“Whawhawhawhat, Your Deity?”
[ZAPP!]
–Regarding my liberal comment on the environment last week,
while it’s not popular to say anything positive about Richard
Nixon these days, nonetheless, I prefer to think that there is a
little Nixon pragmatism in me (Nixon having been responsible
for enactment of the Clean Water Act in 1970, as well as many
other environmental initiatives). But, don’t worry, I’m still for
drilling in ANWR… which is the very definition of pragmatic,
isn’t it?
–Speaking of environmentalism…and issues like Kyoto…what
is making the Bush Administration’s job tougher on the
international cooperation front these days is we are losing our
moral authority. That’s why Kyoto and the recent farm
legislation, let alone Enron, WorldCom et al, can be so crippling
to an agenda that few connect it with, the war on terror.
I keep harping on this topic because obviously nothing is more
important. Just a few years ago, not catching one particular
terrorist may have resulted in the deaths of no more than 10 or
20. These days, not doing so can cost thousands of lives.
–As for the issue of trade, last year, months before 9/11, I wrote
quite a bit on globalization, urging the U.S. to do even the
minimum in helping the poor nations of Africa and Asia. I wrote
of the hypocrisy in policies (Clinton and Bush’s) where those
working in sweatshops, for instance, are condemned, even
though it is the only job they can find, let alone their only means
of support, while at the same time we are slamming the door to
foreign textiles in order to protect uncompetitive businesses in
key congressional districts. [I have just upset my friends in
North and South Carolina…judge me in total!]
So this week, Nicholas Kristof wrote a terrific piece in the New
York Times. Our priorities (particularly the liberals’)
are so screwed up, he noted, that he yearned for the day when
garments would come with the label “Proudly Made in a Third
World Sweatshop.” Hear, hear.
[And, of course, the G-8 summiteers in Canada did zero to
improve trade access for Africa.]
–Back to the corporate governance issue, Congress finally
approved a budget increase for the SEC, though it’s sickening to
listen to all the rhetoric, from both sides of the aisle, when many
of these characters bear direct responsibility for our current mess
in failing to pass accounting reform legislation back in 1994.
But only 1% of the electorate knows this, so it was a smart move
by them, right?
–Nationwide, the murder rate rose 3% in 2001, the first increase
in a decade. Look for Democrats to use this.
–Iran increased the minimum age for marriage for girls from 9(!)
to 13, while for boys it went from 14 to 15. Look for Democrats
to use this.
–One of the most touching scenes of the week was watching
former Cardinals pitcher Darryl Kile’s 5-year-old son throw out
the first pitch following his father’s funeral.
–Another was a piece ABC Sports did on golfer Jeff Julian, who
missed the cut last week in Hartford in what may have been his
last appearance on the PGA Tour. You see, Julian has ALS, Lou
Gehrig’s disease. Imagine, the symptoms started in his neck, his
speech is slurred, but he has enough mobility to swing a golf
club, so he soldiered on. Sadly, you know that this won’t be for
much longer as the disease will shortly wrack the rest of his
body. To the Julian family, you are in our prayers.
–A few weeks ago I wrote that the World Health Organization
was calling for an emergency meeting to address the potential
dangers in eating french fries, potato chips and other foods with
similar cooking processes. Well, the scientists convened last
week and decided that the issue was serious enough to warrant
further study, this after at least four European ones all found
dangerous levels of a carcinogen, acrylamide, in fries and chips.
The ruling was to be Thursday, so on Tuesday I decided to play
it from an investment standpoint and bought “puts” on
McDonald’s (betting on the stock going down). Coincidentally,
WorldCom hit Tuesday after the close so I ended up selling my
position for a nice profit before the report was even issued (after
which McDonald’s rose slightly because it wasn’t definitive).
Bottom line, it’s still potentially a huge issue.
[I also want to thank my broker, and friend, David P., for
efforting the transaction. I couldn’t have done it without him.]
–In other health news, there is strong evidence that a diet high in
vitamin E is good for preventing Alzheimer’s.
–At the risk of sounding like William Safire when he puts on his
“wordsmith” hat, what is it with our society’s sudden overuse of
the word “exactly.” Someone makes a statement and the response
invariably is, “exactly.” It’s freakin’ lame.
I don’t mean to get off on a rant here, but back in my college
days I used to finish some sentences with the reflexive, “You
know what I mean?” People who do this don’t even know they
are saying it, or they’d obviously stop.
So one day I’m in a poli-sci class and I used it in response to a
question and my professor shot back, “Mr. Trumbore, no I don’t
know what you mean!” Of course, I could have taken this two
ways, since I hadn’t read the assignment, but, anyway, since then
I’d be surprised if I’ve ever used it, know what I’m sayin’?
–Speaking of my alma mater, Wake Forest, I’m proud of the fact
that our 5 senior basketball players all graduated, and in 4 years.
Great job, guys. But, boy, did you see the interviews with some
of the players selected in this week’s NBA draft? Goodness,
gracious. Thank God they can play some hoops because we
certainly don’t want them screening bags…know what I’m
sayin’?
[One notable exception is Duke’s Jay Williams, who, it should
come as no surprise, can count two loving parents in his corner.]
–In the clearest example I can think of to teach the lesson of
“always chew your food,” the Star-Ledger reported that a leading
New Jersey mob figure choked to death on a piece of lobster,
which, come to think of it, provided a bit of comic relief for the
lobster kingdom, an otherwise sorry lot.
–Martha Stewart’s broker, Peter Bacanovic, is known in New
York social circles as a “walker” for escorting older women to
parties. Your editor, single, needs to explore this potential
revenue generator for the site.
–With Oprah discontinuing her book club, everyone is coming
out with their own reading lists. So, as a service to
StocksandNews readers, I figured I might as well do the same.
Following are a few suggestions.
“The Miracle Mets” by Maury Allen, “The Seinfeld Scripts,” and
“The Best of Calvin and Hobbes.”
–And on the 365,898,432,142nd day, the Lord surveyed the
world scene and said, “Sorry, you all show me nothing.”
Exactly.
—–
God bless the men and women of our armed forces.
I pledge allegiance, to the flag, of the United States of America.
And to the republic, for which it stands, one nation, UNDER
GOD, indivisible, with liberty and justice for all.
—–
Gold closed at $314…not a good sign.
Oil, $26.86
Returns for the week, 6/24-6/28
Dow Jones –0.1% [9243]
S&P 500 +0.0%…miniscule gain
S&P MidCap –0.3%
Russell 2000 +0.3%
Nasdaq +1.5% [1463]
Returns for the period, 1/1/02-6/28/02
Dow Jones –7.8%
S&P 500 –13.8%
S&P MidCap –3.7%
Russell 2000 –5.3%
Nasdaq –25.0%
Returns for the 2nd Quarter
Dow Jones –11.1%
S&P 500 –13.7%
Nasdaq –20.7%
Bulls 42.4%
Bears 36.4% [Source: Investors Intelligence]
Correction: Last week, in the first paragraph, I absentmindedly
wrote “Paul” Samuelson when I meant “Robert” Samuelson.
[Vitamin E deficiency, I guess.] Since they are both economists,
you may not have picked up the difference, but on Monday
evening I was reading Robert’s latest in Newsweek and suddenly
had a pit in my stomach. “Oh no, you didn’t,” as I scrambled for
the computer.
I only bring this up because I pride myself on the accuracy of
these columns. Please accept my apology.
Have a great week and a safe Fourth. I appreciate your support.
Brian Trumbore
