[Posted 7:00 AM ET]
“Ah, hold on, John, the D&B is painting an ugly picture.”
You name it, the markets, CEOs acting badly, Washington, the
ongoing terror threat, there simply isn’t a lot of cause for
optimism these days.
Recently the New York Times ran a piece on how the average
investor is holding up in this dreadful environment and needless
to say it’s not too well. I thought one woman summed it up best.
“I’ve worked hard all my life and been a responsible citizen.
And it’s not all supposed to be threatened at this point.”
America is a great country. We are a good people. But we are
also entering a period in our history that is going to try many of
us. We will eventually emerge from this test a better nation,
like on issues of character and morality, but in the meantime,
there is going to be a lot of suffering and my heart aches for
those who have seen some of their dreams shattered.
I am also sickened to no end by the damn apologists for not only
Wall Street, but the ‘system’ as a whole.
Economist Robert Samuelson, for example, wrote this week that
“reckless investing, not reckless accounting,” was to blame for
the sliding stock market, adding, “People made bad decisions
because they were gullible or greedy, not because they had bad
information.”
What?! And this is where it gets difficult for your editor, folks.
Because if anyone has a right to say I warned you, to a great
extent, its yours truly. But my market stance over the years had
everything to do with the issue of valuation in the market. That’s
why I’ve been so cautious, and then the terror threat made me
even more so.
But for responsible people like Samuelson to utter comments like
the above is simply not dealing with the truth.
Yes, many investors got caught up in an era of “infectious
greed,” as Alan Greenspan so aptly labeled it this past week.
But, the average American was also misled by leaders of the
financial services industry and talking heads of all stripes, both in
and out of the business, who screamed that stocks were always
the investment for the long term. Just buy and hold for 5 to 10
years and you’re set. Settle back, collect 12% annually (with
dreams of far more), because that’s what stocks always do. The
fact that equities have gone through two, 15+ year periods in the
last 75 where this wasn’t the case never seemed to be part of the
equation.
Also, little did any of us realize that fraud would enter into the
picture on such a massive scale. And as Lynn Turner, former
chief accountant for the SEC, put it, “There are more than ‘a few
bad apples.’” So to the Samuelson’s of the world (and it pains
me to write this, because I used to have a tremendous amount of
respect for him in particular), don’t give me this “we were all a
bunch of idiots” garbage. Those who may have had an inkling
we were headed down the wrong road have no right to then flip
everyone off and adopt the attitude, “I’m okay, you deal with
your own problems,” because the financial devastation that some
of my neighbors and yours are facing impacts us all.
So how do we begin to get out of this mess? Alan Greenspan, a
man I labeled “irrelevant” long ago, nonetheless rose to the
occasion, somewhat, this week by giving his unstinting approval
for harsh criminal penalties for America’s corporate con men.
The thieves must be locked up quickly to send a needed message
(unfortunately, though, these cases are exceedingly difficult to
prosecute), or this nation will go absolutely ballistic, far more so
than it already has. Good, hard-working Americans were
screwed at Enron, Global Crossing, WorldCom, Tyco, et al, yet
just the sight of seeing Lay, Skilling, Fastow, Kozlowski,
Ebbers, Sullivan and Co. marched off in shackles would at least
remind everyone that America still knows the difference between
right and wrong.
And to those who are worried about overreacting and over-
regulation, don’t. There are bound to be some new excesses built
into the system, but, as I noted a few months ago, that’s what “60
Minutes” is for. I’d also say to Intel’s Andrew Grove, who wrote
a pitiful op-ed piece this week on how awful it was to be
associated with such corporate scum, don’t fret, my friend, you’ll
more than survive. I appreciate the great things you have done
and the employment you have provided for hundreds of
thousands in this country, but right now I care far more for those
who are trying to figure out a way to make their next mortgage
payment, then the feelings of men like you who are
contemplating where the next $million donation to the local art
center will go. Spare me.
Of course there are so many other issues to deal with. Like the
fact the stock market is rigged. As I alluded to last week, it is
now a truism that 50% of the recent volume in the markets is
related to program trading, which has nothing to do with market
fundamentals, good or bad. This is wrong. It’s a casino. This
isn’t investing, and it isn’t the way free markets are supposed to
work either. Pure and simple, it’s bulls—.
Second, the market remains grossly overvalued. Label the
following, “Beating a dead horse, part XXV…or…a trip to the
glue factory.”
Last week we discussed the issue of earnings and the
wonderfully rosy forecasts for 2003, such as $60 in earnings for
the S&P 500. After the carnage of this past week, one in which
the S&P finished at around 850, you are bound to see all kinds of
folks say, hey, 850 / $60 is a price / earnings multiple going
forward of around 14, the market’s historical average. To which
I’d immediately muse, yeah, which means the market is just as
likely to rally from here as it is to go down further.
But what if the earnings don’t materialize? For starters, we
already know they won’t, because corporations are just
beginning to restate them, particularly in light of the August 14
SEC deadline. More importantly, however, is my point from last
week. How are you going to grow earnings by 20% or so (the
approximate amount needed to get to ‘there’ from ‘here’) if in so
many cases Corporate America’s revenues are declining!
Just this week, Eli Lilly, EMC, AMD, Apple, IBM, Sun Micro,
Ericsson, Motorola, Nokia, Intel…to name a few…reported
revenues that were substantially lower than year ago levels, in
some cases by 30-40%. As for Intel, ponder this. The
company’s revenues are about the same as three years ago, yet
even after the announcement that 4,000 are about to be laid off,
they still have 16,000 more employees than they did in 1999.
And it’s not like Corporate America is telling you that things will
turn around soon. They don’t have a clue, but I do. They won’t.
Or as Ben Stein and Phil Demuth wrote in the 7/15 edition of
Barron’s, what we are witnessing today is the “Great Depression
in profits.” I would add that it is not a stretch, particularly if the
last leg of the stool, real estate, goes, to say it could be a Great
Depression in more than this. So I’ll leave you with a canary in
the mine, way down south of the border. Argentina, where 50%
of the people are now living below the poverty line in what was
once one of the most vibrant economies in the world. No, as
some strategists are saying, this isn’t the 8th or 9th inning of the
bear market. Try the 4th, and it can’t be called on account of
darkness.
Street Bytes
–First off, let me correct a stat floating around out there. The
Dow Jones has not fallen 9 weeks in a row (Rukeyser started it
all last week with his first error). The week of 7/1, the Dow rose,
but Nasdaq fell. The previous one, Nasdaq rose and the Dow
fell. Now then…don’t you feel a little better?
No wonder you don’t, because this week saw the worst
percentage decline for the Dow since September, off 7.7% to
8019 (lowest since October ’98), bringing its two-week decline
to 14.5%. Nasdaq’s losing ways stand at 16 out of the last 19
weeks, another 4% hit, with the index at 1319, a 5-year low and a
dubious distinction shared with the S&P 500, which lost a
whopping 8% of its own to the 847 level. The broad-based S&P
is now off 44.5% from its 2000 all-time high. You don’t even
want to know Nasdaq’s loss. [74%]
And as if we didn’t already have enough worries, the dollar
collapsed to its lowest level since February 2000 against the euro
and a 1 ½-year low against the yen. No doubt about it, money is
finding any passage it can out of the country, and it won’t soon
return.
–U.S. Treasury Yields
6-mo. 1.72% 2-yr. 2.42% 10-yr. 4.52% 30-yr. 5.32%
Treasuries were actually little changed on the week. In his
congressional testimony, Alan Greenspan said the Federal
Reserve had raised its growth target for the year to 3.5-3.75%,
though he quickly added that further terrorism or more
accounting revelations could impact the forecast (which is never
right, anyway). As for interest rates, the Fed will remain on hold
the rest of 2002, that much seems clear, unless it opts to ‘ease’
further in the face of a continued crisis in the financial markets.
–The Fed cracked down hard on PNC Financial for trying to
hide bad loans through separate entities, a la Enron. While no
civil penalties were issued, the action was extremely harsh as
now virtually all of PNC’s actions must be approved by regional
Fed authorities. Shares in the stock fell 15% in just one day,
even though the financial shenanigans have been known for
months.
–The AP reported that there are substantial conflicts of interest
at that holier than thou institution known as CALPERS
(California Public Employees’ Retirement System), the largest
public employee pension fund in the land. For example, some
board members personally own shares in companies that
CALPERS invests in. That’s a no-no, folks. It can lead to front-
running, buying the stock before the fund does.
–Citigroup’s Salomon unit is under scrutiny for handing out
special deals on IPOs to corporate executives, particularly of
companies Salomon wanted to do investment banking business
with. While not necessarily illegal, it is unethical, especially
when you consider that the same folks were then allowed to
“flip” the shares after an immediate windfall, as opposed to the
trading restrictions placed on the retail investor, i.e., the little
guy. [Though in the case of most IPOs, no classic little guys
ever had the chance to buy them in the first place.]
–Economist Arthur Laffer opined in the Journal that equities
were undervalued by 48%. The guy is nuts.
–Merrill Lynch’s chief strategist, Richard Bernstein, on the other
hand, is not only good, he’s been right with his market calls for
the past few years, so when it comes to picking a true bottom in
the stock market, his comment that we’ll finally reach it when no
one is talking about the market at all – when there’s a total sense
of apathy – is worth listening to.
–My portfolio: I added another 2% or so to my energy position
this week, so I’m about 80% cash, 18% energy / oil service, 2%
Turkey (which rebounded). Why would I buy any energy these
days, in light of an economy that could once again be tipping
over? Well, I’m counting on a little pop from the upcoming war
with Iraq and, strictly from a valuation standpoint, the stocks I
own are also reasonably priced. [I did buy the issue I alluded to
last week, on the heels of a better than expected earnings report.]
–Yes, officially, inflation is non-existent, and many are now
worried about outright deflation (rightfully so), but,
compounding the problems of those parents who have seen their
portfolios obliterated is the ‘inflationary’ impact of huge tuition
hikes at many of our nation’s schools, such as Rutgers (+9.9%)
and the University of Pittsburgh (+14%). Regarding the latter,
my parents both graduated from there and the tuition increase
gives new meaning to an old school cheer that used to
reverberate throughout the campus, “Yea, Pitt, sock it to ‘em!”
–So all the media types are atwitter over the changes at AOL,
including the resignation of #2 Bob Pittman. To me, though, it’s
just another story, and so we place it far down the list. The
Washington Post did have an extensive series on AOL’s
accounting practices, which, like so many others, were on the
aggressive side as they sought to boost revenues following the
merger with Time Warner. Criminal? No. Unethical and
another example of the decline in morality and ethics in America
these days? Definitely.
–Of all the companies reporting earnings this week, perhaps the
most pleasant surprise was the announcement by Nextel that it
had the first profit in its 15-year history, with revenues actually
up nearly 30%. So we salute this battered company.
–The little guy gets screwed again, or so will be the case with
WorldCom employees who were recently let go, as the company
files for Chapter 11. The chance of them receiving their full
severance (if any, in most cases) is nil. And that’s why all
Americans should be outraged. But for the grace of God go I.
–This week Johnson & Johnson and Eli Lilly joined Schering-
Plough as being among those pharmaceutical manufacturers that
are having problems with some production facilities, i.e., you
think you’re having a prescription filled for some anemia
medication and you could be receiving Flintstones vitamins.
[J&J’s share price collapsed $7 on Friday.]
–In another development on the drug front, Pfizer is acquiring
Pharmacia, in a mammoth deal valued at around $60 billion. The
two will have a combined R&D budget of some $7 billion, with a
television ad budget of $643 billion.
–From time to time I should mention that my criticisms of Wall
Street, in general, do not normally extend to the mutual fund
industry, though on the issue of false advertising and the Bubble,
it deserves more than a bit of the blame. But what ticks me off
these days are the fund company executives who get on the air
and flat out lie about their redemption levels. Any stock fund
with the word “growth” or “technology” in its label, for example,
is hemorrhaging, which is obviously a major cause of the
continued market declines and something that will stifle any
authentic attempts to rally. [By the way, the worst offender in
this game is Jack Brennan of Vanguard.]
–Shares in Capital One Financial were obliterated to the tune of
40% on Wednesday, as banking regulators demanded changes in
accounting practices, including an increase in its reserves for bad
loans, Cap One being a leader in the subprime market. So after
the hammering, it was only natural to look again at the
company’s advertising slogan, “What’s in your wallet?” As my
friend Johnny Mac replied, “Not much, if you owned the stock.”
Actually, these weren’t even close to the words Johnny used, but
I’m trying to retain my International Web Site Association
license, you understand.
–On Friday, CNBC spotlighted “New Innovations.” Sorry, there
aren’t any of real consequence, outside the medical field. I
thought everyone already knew that.
International Affairs
Iraq: British Prime Minister Tony Blair is once again on board,
as he said there are “rough linkages” between Baghdad and al
Qaeda, while adding that the risks from Saddam’s weapons of
mass destruction are “enormous.” There should be little doubt
that British intelligence has picked up information over the past
year that the U.S. didn’t have and its why Blair has generally
been supportive.
As for President Bush, while I agree congressional debate on the
topic of an invasion would be useful, particularly to better
educate the American people, I also can’t help but think back to
the tremendous support that even Congressman Gephardt and
Senator Daschle gave the President just weeks ago. The point
being that if the U.S. could employ any element of surprise, with
the implied backing of key congressional figures, Bush should be
able to do as he sees fit.
Turkey: Critical to the above, of course, is Turkey and it now
appears early elections will be held in November, but this means
an Iraqi operation in, say, October, potentially causes real
problems on the domestic front. But Turkey’s leadership said all
the right things last week as Assistant Secretary of Defense Paul
Wolfowitz was in the country to gauge support for the upcoming
conflict. They won’t stand in the way, and the U.S. will also
need to step up with financial aid, including critical backing for
the $16 billion IMF bailout.
Israel: While the Palestinians resumed their bombing campaign,
a long rumored practice, that of some Israelis selling weapons or
ammunition to the very same terrorists was exposed this week, as
5 settlers (including 4 soldiers) were arrested for allegedly selling
ammunition to the Palestinians in the Hebron area.
Afghanistan: More conflicting stories as to whether or not bin
Laden is dead. But pursuant to my veiled criticism of General
Tommy Franks of a few weeks back, this week the Journal’s
Robert Bartley used the same example I did, that of Abraham
Lincoln, in discussing how Lincoln often made changes within
his military leadership. But Bartley didn’t have the guts to use
Franks’s name in the piece.
Pakistan: Probably the worst job in the world these days is to be
Pakistan’s ruler. Admittedly, however, many of President
Musharraf’s problems are of his own making, such as the failure
to adopt real democratic change or rein in the Islamic militants in
Kashmir. But Musharraf and the prosecutor in the Daniel Pearl
case deserve credit for gaining the convictions and death
sentence for the ringleader. It could, however, be overturned on
appeal.
China: I still feel this will be a big story again this fall, as
President Jiang Zemin’s successor is selected. For his part,
though, Jiang will remain in the picture in one form or another.
Meanwhile, both Taiwan and the mainland have been ratcheting
up the rhetoric on the military front.
But then there is the issue of the Internet in China, and this week
Yahoo signed a pledge to help the communists purge the Web of
all content that the government deems subversive, a topic I raised
last February following my trip to Taiwan, though then it was
AOL’s complicity that I railed against. AOL and Yahoo, two
symbols of freedom being used in the Commie crackdown on
dissent. They represent the worst of America and another
example of corporate greed. Last week I said Yahoo was a “dead
stock,” but I also congratulated it on being a survivor. I’d like
to take the latter back, please.
France: Thank God Jacques Chirac escaped an assassination
attempt last Sunday. A neo-Nazi nut job got uncomfortably
close to pulling it off.
Greece: Just last week I mentioned how Greek police had
uncovered a large arms cache belonging to the November 17
terrorist group. This week authorities finally captured the
founder in a spectacular coup for the government.
Paraguay: Troubles in Latin America aren’t just limited to
Argentina, Venezuela, Colombia, Brazil, Uruguay and Peru. No
sir, now it’s Paraguay that has witnessed major unrest over a
plunging economy (largely due to the problems of its neighbors).
*As an aside, shares in Pepsico collapsed on Friday in part
because of their dire forecast for sales in Latin America.
Northern Ireland: In a stunning, out of the blue, development, the
IRA issued a straight forward apology to relatives of civilians
killed in the Troubles by the IRA over the last 30 years (650 of
their 1,800 victims). But everyone is trying to figure out what it
all means? The best guess is that Sinn Fein (the political wing of
the IRA) demanded the apology as the IRA lost any shred of
credibility that they were mere freedom fighters with the
discovery of ties to Colombia’s FARC guerrilla force. It was
severely hampering Sinn Fein’s ability to be a player in the peace
process. Protestant Unionists, however, remain unconvinced by
the gesture.
Morocco / Spain: Oh, were all conflicts this easy. Spain won its
game of “capture the flag” with Morocco over the little island the
size of a WorldCom exec’s mansion. No casualties, though the
goats on the island will be passing down the tale for generations
to come. “Bahhh?” “Bahhhh.”
Random Musings
–In the 1990s, Republicans received corporate donations in the
amount of $636 million, Democrats – $449 million. As
columnist Michael Kelly puts it, “The average voter may be
excused for concluding that we know, as the old joke has it, what
the politicians of both parties are; we’re just arguing about the
price.”
–Polls on President Bush’s job approval range from 62-72%
(with the former being the Zogby pool, in my opinion a truer
reflection of sentiment). Separately, a Washington Post / ABC
News survey found 88% of Americans blame greedy corporate
executives as the main source of our problems in the financial
arena.
–House Minority Leader Gephardt thinks the Democrats could
gain 30-40 seats this fall. Watch your wallet.
–As a follow-up to last week’s comments on New Jersey Senator
Jon Corzine, Dave Boyer of the Washington Times ran a piece
on Wednesday that read in part:
“…Goldman Sachs, the firm that Mr. Corzine left as chairman in
May 1999, has been a target of class-action lawsuits and
accusations by a former broker who complained to the SEC that
the investment house engaged in a scheme to force unwitting
investors to pay artificially high prices for certain stocks.”
Corzine, of course, claims he knew nothing of the kind. Nor
does his successor Henry Paulson, with Paulson now leading the
charge to clean up Wall Street.
And then there’s Citigroup’s Sandy Weill, who this week had the
temerity to say that with regards to the issue of stock options, he
proposes that they should be expensed for the top five executives
in a firm. A good idea? Maybe. But why are we even listening
to a man like this after he squirreled away $hundreds of millions
in option gains himself?
Oh, but the apologists will say (especially New York’s elite),
what philanthropists folks like Weill are. No…no, no, no. If the
Street hadn’t been caught with its pants down, the same crap
would have continued for years to come. This cleansing process
is painful, very painful, but it must continue. In the meantime, I
really wish that all of Wall Street’s chieftains would take a back
seat for a while, and let their supposedly independent boards
decide their fate. The last thing we need are ideas from these
guys.
–Please, I beg you, Thomas White, secretary of the Army and
former Enron executive, resign! You’re killing us.
–On top of the scary Conagra beef recall on Friday, there was
another disconcerting item, in the form of an op-ed piece in the
New York Times the same day. Written by Michael Pollan, the
bottom line is that corn is literally in everything we eat, starting
with corn-sweeteners (obvious), but also animal protein, which
then finds its way into corn-fed beef, chicken and pork, even
salmon, as well as chips, muffins, you name it. The problem is
researchers are now wondering if this is another cause of the
huge pickup in obesity, along with a surge in Type 2 diabetes.
So as my friend Dan L. suggested, maybe it is time to go back to
the 50s diet of meat and potatoes (assuming the former is e-coli
and corn free). Throw in some Zocor (assuming it’s also the real
thing) for the cholesterol and you’re set!
–On a related topic, I was reading the High Plains Journal, my
attempt to keep up with America’s farmers, and saw that the state
of Texas is receiving $4.6 million from the USDA to strengthen
the security of Texas’ farming and ranching food production
systems. You see something like this and it simply reinforces the
daunting task we have throughout the country. Anything and
everything are targets.
–And then there is the story, as reported in Time, that the
government is very worried about our nation’s water supply, but
not necessarily from the threat of chemicals being dumped into,
say, the reservoirs for New York City, because the amounts
required to wreak havoc are so huge. No, the real threat is in
bombing the actual pumping stations and stopping the flow of
water, cold.
–The kidnapping and death of 5-year-old Samantha Runnion is
the worst case of its kind I can remember because of her friend’s
description of the moment of abduction, as Samantha was
“dragged kicking and screaming.” It tears you apart, while at the
same time leaving those who are against the death penalty
without a leg to stand on.
–While I recognize the Spann family didn’t receive the justice
they sought in the John Walker Lindh case, in this instance I
have to agree with the Bush Administration in that Lindh’s 20-
year plea bargain prevented a media circus if he had gone to trial,
as well as a huge distraction at a most inopportune time.
But after seeing Lindh’s father compare his son to Nelson
Mandela, I really wish we could give both Lindh parents a 20-
year sentence of their own. Don’t give me this free speech
garbage, the whole family is a bunch of traitors.
–Thank God we have some great allies in the war on terror. This
week the oft-ridiculed Canadian Navy captured some al Qaeda in
the Arabian Sea, while Spain arrested 3 suspects with videos of
American targets.
–Did you catch any of Bill Clinton’s AIDS speech in Barcelona?
[Mark R. called me in a rage, to make sure I saw it on C-Span.]
There he was, like days of yore, biting his lip as he told of having
a picture of an AIDS victim in his White House office, a constant
reminder of the suffering, he said. At this I had the image of
Monica, doing her thing, while the Chief Dirtball looked at the
photo as he talked to world leaders.
–I’ve wrestled with how to place the blame for many of our
problems on Bill Clinton. Some of it seems just so obvious, but
I’ll let a long-time reader Jeff S. weigh in on the issue.
“Isn’t it ironic that the decade’s biggest CEO was the biggest
scum of them all; one who committed fraud for sex and power.
No one, from Enron to Andersen to WorldCom, was led and
screwed by a bum any more despicable than Bill Clinton.”
–We all need a long vacation, away from the headlines and the
market. Maybe the Europeans had it right, after all. Class
dismissed.
—
God bless the men and women of our armed forces.
God bless America.
Gold closed at $323
Oil, $27.83
Returns for the week, 7/15-7/19
Dow Jones –7.7%
S&P 500 –8.0%
S&P MidCap -5.2%
Russell 2000 -6.6%
Nasdaq –4.0%
Returns for the period, 1/1/02-7/19/02
Dow Jones –20.0%
S&P 500 –26.2%
S&P MidCap -17.1%
Russell 2000 -20.9%
Nasdaq –32.4%
Bulls 35.4%
Bears 39.6% [Source: Investors Intelligence]
Note: Check out Part II of my History of the Bubble, which you
can find on my “Wall Street History” link.
Have a great week. Pet a dog. You’ll feel better.
Brian Trumbore
