[Posted 7:00 AM ET]
“It’s true that Saddam Hussein isn’t the only evil tyrant in the
world. He’s not even the sole tyrant seeking or possessing
weapons of mass destruction…But Saddam Hussein is in a class
of his own, and not only because he has hideously used chemical
weapons against his own people and others. The world already
has considered his case and formed a judgment. If nations prove
incapable of enforcing that judgment, the harm will spread far
beyond the Middle East.”
–Editorial in the Washington Post
It was another momentous week on the foreign policy front as
the Bush Administration gears up for war. But the President
should go before Congress when it returns in September, lay
out the case, ask for 48 hours of debate and request authorization
to act as he sees fit. Then he can let loose the military at a time
of his choosing.
When Saddam’s foreign minister said last week that “Inspections
have finished in Iraq,” that really said it all. Iraq has already
broken every post-Gulf War requirement of behavior, so what
more do we need to act?
But, just as important, were statements made by some
Administration officials concerning nations like Saudi Arabia
and Egypt. The worm has turned, folks, far quicker than even I
thought. The Saudis aren’t cooperating in the least and as the
London Times reported, in the case of U.S./Saudi relations, in
the war on terror, neither considers the other an ally anymore. I
watched Saudi Foreign Minister Prince Saud al-Faisal in an
interview last weekend and he wasn’t even employing diplomatic
niceties. You could tell by his manner that the split is now
virtually irreversible.
In the case of Egypt, President Bush is preparing to formally
criticize President Mubarak for his treatment of university
professor Saad Ibrahim, a human rights activist recently
sentenced to 7 years in prison for doing nothing wrong. This is
the kind of confrontation American presidents in the past shied
away from, but now reality has set in and as I spelled out last
week, I’m convinced that after we prove our commitment in
taking out Saddam, yes, the Arab street will rise up, but not
necessarily in ways we have been taught that it would.
Wall Street
Long ago I labeled Federal Reserve Chairman Alan Greenspan
“irrelevant.” Looking back, it may not have been the correct
choice of words, but in saying this I was referring to the fact that
his opinions over the past few years are largely without merit.
Or, to put it more bluntly, since his correct statement on
“irrational exuberance” in 1996 (for which he then failed to offer
up the appropriate tonic, i.e., an increase in margin rates), he
hasn’t been close to calling the trend in the economy. Just a few
weeks ago, for example, he appeared before Congress and said
the economic recovery was fully intact. Then, about ten days
later, we were bombarded with all sorts of dire data to the
contrary. Greenspan also said the August 14 corporate
certification date would reveal a slew of restatements and
bombshells and there ended up being but a mere handful of the
former, and none of the latter. So from this standpoint he’s, yes,
irrelevant…certainly no Gandalf, except in age only.
Alas, Greenspan’s Fed did meet this past week and it issued a
new forecast that read in part, “Markets are weighted mainly
toward conditions that may generate economic weakness.” But
then the Board didn’t lower interest rates and the equity markets
were hit with a wicked stomach virus that saw the Dow drop
over 200 points. The next day, however, market psychology
reversed and we managed to finish higher on the week, with the
Dow Jones registering its 4th-straight advance, 33 points to 8778,
a pickup of 0.4%. Even Nasdaq can now boast of a 2-week
streak of its own, as it gained 56 points (4.2%) to close at 1361,
the index’s best mark in five weeks.
Why the reversal? Damned if I know. Certainly, respectable
earnings reports from the likes of Dell and Wal-Mart had a
positive impact, but as for the economy, the data was none too
cheery, with various readings on manufacturing showing little to
no growth (if not outright contraction), retail sales, while up
1.2%, weren’t cause for celebration, consumer sentiment remains
punk and housing starts slid for the month of July. Yes, this time
the Fed may be right.
Speaking of housing, it’s here that you could argue Greenspan’s
policies have had an impact, even though the Central Bank
doesn’t control the long end of the yield curve and, thus,
mortgage rates. More and more evidence of a housing bubble in
many parts of the country is being put forward. The average
home price on Long Island, for instance, is up 30% in one year
and the entire New York/New Jersey metro area tacked on 22%.
Other parts of the country, north, south and west, show similar
gains. It’s insane, but with mortgage rates at almost 40-year
lows, the bubble just grows and grows, while the membrane gets
thinner and thinner.
Without the strength in housing, and the positive impact of round
after round of refinancings and home buying, this economy
would already be back in the dumper, a fact Greenspan is all too
aware of. But does that mean housing will go the way of the tech
sector? Of course not, but for many just a 5-10% decline in
value would bring one into negative equity and that spells
disaster, or, at best, severely reduced levels of consumer
spending.
Two other items of note. The problems in the U.S. airline
industry, while largely self-made due to a bloated cost structure,
nonetheless have a deleterious impact on economic activity,
particularly when you add up all the layoffs, not just from the
likes of U.S. Air, UAL and AMR, but also the airplane
manufacturers and suppliers, including heavyweights like
Boeing, United Technologies, and General Electric. But, over
time, new players like Jet Blue emerge and in most cities the
flying customer still gets a choice, which is what free markets are
supposed to be all about. Just don’t believe those who blame
9/11 for all their problems. That’s simply not the case.
Lastly, while I’m the first one to admit I initially thought more
companies would restate earnings before the August 14 deadline,
I’m not surprised at the relative lack of new revelations when
you consider that the CEOs had little to lose by signing. The
crooks are still in place, but, just as importantly in terms of
market action, this necessary process certainly isn’t a positive
when it comes to Corporate America’s generation of profits
going forward, i.e., it’s a good move to get everyone on record,
but it has nothing to do with one’s ‘value’ judgment on a
particular stock.
Street Bytes
6-mo. 1.63% 2-yr. 2.25% 10-yr. 4.32% 30-yr. 5.09%
Historic week, as the yield on the 10-year fell at one point to
3.95%, the lowest since 1963. The two-year was trading below
2%. But then the equity market recovered so a lot of money left
the safety of Treasuries, while some traders began to wonder if
the terrific rally in the bond pits was finally over. Where do we
go from here? Back down (in terms of yield), with the next
plunge in stocks.
–Salomon Smith Barney’s Jack Grubman resigned this week,
taking with him a rolodex filled with failed telecom operations
and a severance package of $32 million, the latter including $19
million for forgiveness of a loan. According to Gretchen
Morgenson in the New York Times (as well as Thomson
Financial), between 1997 and 2001, Salomon earned $987
million in underwriting and merger fees on Grubman’s telecom
sector. And as the Journal’s Charles Gasparino has reported, the
whole game had to have been orchestrated at some level by
Citigroup chairman Sandy Weill, who, after all, in one known
instance personally forced Grubman to change his rating on
AT&T Wireless from negative to positive, in order to pick up
more investment banking business.
I have been blunt concerning Wall Street’s elite for good reason.
I can only hope that prosecutors have the guts to take this whole
era of fraud to its rightful conclusion. But when it gets to the
level of Weill et al, I’m afraid authorities will get cold feet.
After all, Wall Street’s kingpins are such philanthropists!
–Staying on the above theme, Morgenson had a separate piece
involving Salomon and the firing of analyst Kenneth Boss, who
refused to upgrade some stocks he followed, despite pressure
from investment bankers who stood to rake in underwriting fees
and other business if Boss complied with their wishes. Of course
a few weeks later, there was Sandy Weill trumpeting his new
guidelines, which prohibit pressuring the very same analysts.
–Intel’s Andrew Grove: “(The country’s) confidence in business
has been damaged and arguably lost.” And with good reason.
–Brazil: Both leftist candidates have stopped short of endorsing
the IMF bailout plan, which would force more austerity
measures. So much for the initial giddy reaction of 10 days ago.
For the opposition candidates gearing up for the October vote, it
makes far more sense to blame the government for the problems
the nation faces, than to be supportive at this point.
–The Wall Street Journal had an inflation/deflation chart on
various items. Anything tech, like PCs, and apparel have
swooned, while healthcare, insurance and tuition costs have
soared, as you are all too aware. Regarding healthcare, it is
staggering to think that 40 million Americans remain uninsured.
–My portfolio / Energy: I owe you all an apology. Last week I
was writing about Nabors Industries, in the oil service sector, and
I didn’t even know I had purchased some. A few weeks ago I
put in a ‘buy’ order at a certain price level I’m familiar with and
the stock hit the target on a day when I was out of the office, so, I
didn’t see the trade until I got the confirm on Monday. To be
obnoxious about it, it was a good call, as the stock is already up
30% in 7 trading days. But the position is far smaller than past
ones I’ve had in the company, because of the ‘issues’ I’ve
discussed in the past, including the move to incorporate in
Bermuda. Bottom line, thanks to the big rally in energy, overall,
I’m now about 75% cash, 23% energy, 2% Turkey.
As for the price of oil itself, it rallied sharply over the week,
thanks to plunging inventories in the U.S. (particularly gasoline)
and the addition of a small “war premium.” With regards to the
gas situation, no mystery there. We’re not only driving instead
of flying, our SUVs gobble the damn stuff up! Meanwhile,
OPEC’s big meeting is in mid-September and price action
between now and then will dictate whether or not the producers
elect to increase production. Most agree that $30 oil can do real
damage on the world economy and cartel members continue to
seek a price somewhere within their $22-$28 desired band.
–Pssst…I just need to tell my friend Jimbo something. Hey,
Jim. You see that Wal-Mart is coming to Watchung? [Jim loves
Wal-Mart, as does everyone else, it would appear, and the
company continues to crank out solid earnings reports, in good
times and bad. It’s a category killer, you could say, similar to
Dell.]
–Speaking of Dell, like Cisco the week before it met
expectations on the earnings front and slightly exceeded on the
revenue side, as the company continues to gobble up market
share. But while Dell reaffirmed guidance going forward, it does
trade at a 29 multiple based on projections for the fiscal year
ending 1/04, ergo, just like so many other issues today, you can
like the company, but is there much upside?
–Applied Materials, which specializes in the equipment used to
make computer chips, sees its revenues declining in the current
quarter, further evidence that large segments of technology
remain in a desolate state.
–On the employment front, IBM confirmed it had laid off 5% of
its workforce in the second quarter (actually more than
expected), while Agere said it was eliminating an entire division
and 4,000 workers.
–AOL finally admitted some accounting irregularities, but while
small compared to the overall revenue stream, the guess here is
there is far more to be uncovered.
–Apparel manufacturer Cutter & Buck has accounting problems
of its own, but in this case we love their golf shirts so we really
don’t care.
–Charles Schwab & Co. announced it was closing a large service
center in Austin, TX, which speaks volumes about capacity in
the industry.
–Following up on my discussion of last week, the Financial
Accounting Standards Board will propose in September that
options values be disclosed quarterly, instead of the now annual
requirement. The goal is to have a unified standard by
2004/2005 that conforms with international accounting
regulations. Let the FASB do their thing and we’ll go from there
on this issue.
–An NBC / Wall Street Journal poll revealed that 70% of
investors have zero confidence in brokerage reports. I’m
surprised it’s not 90%.
–Lastly, in forecasting the future direction of the market,
incredibly, no one ever mentions anymore that we are in an
ongoing war on terror and that we are also about to wage war in
Iraq and potentially elsewhere. I watched 8 analysts Friday
evening, for example, and not one brought this up.
It is downright idiotic not to adopt a cautious stance from an
investment standpoint at this point in our history. But try finding
anyone else who feels this way. It’s why I do what I do, folks, in
trying to add “value”. I just hope that investors think twice
before throwing their hard earned money at the market. Next
week, though, I’ll tell you how I’m preparing for potentially
better times.
Middle East, Part II
Iran: Much was made last weekend of Iran’s turning over 16 al
Qaeda to Saudi Arabia. But after watching various Saudi
representatives address the topic, it’s clear this is a non-story and
there will be zero cooperation between the U.S. and Saudi
Arabia concerning the interrogation of those particular suspects.
It also doesn’t represent any real détente between Iran and the
U.S.
Jordan: King Abdullah, walking his tightrope with precision (just
like his father did), gave a speech to the nation spelling out that it
was up to the Iraqi leadership to avoid war. He also postponed
parliamentary elections until next year, because he was afraid
that given the current and future turmoil in the region, extremist
elements may have had an easier path to victory.
Israel: The report that Yassir Arafat is a $billionaire couldn’t
have come as a surprise to anyone familiar with the level of
corruption in the Palestinian Authority. Some sources say his
fortune could be as high as $10 billion, squirreled away in
myriad offshore accounts. What this all tells me, knowing the
truth in the story, is that the Palestinian people will revolt against
him, soon.
Other International News Items
India / Pakistan: President Musharraf reemerged to tell his people
that he would “break the back” of militant groups in his country,
but he was also adamant about a referendum for all of Kashmir,
whereas India has opted to hold a vote in September only in the
portions it controls (which means they can ‘control’ the vote as
well…India refusing to allow outside observers thus far).
Russia: President Putin called the bluff of President Lukashenko
of Belarus, as the former proposed a merger between the two
nations, an idea Lukashenko has always advocated, though he
had dreams that he would then run the combined territory
himself. Putin is saying, yeah, let’s do it, knowing he could
simply swallow it whole, Russia having 144 million people
compared to Belarus’s 10 million.
[Next week I’ll comment on new developments in the Russia –
Georgia front. It does have geopolitical overtones.]
Hong Kong: 16 Falun Gong members were convicted of
blockading a sidewalk last spring. While they won’t receive jail
time, a dangerous precedent has been set as Beijing continues to
tighten its grip. I have a real soft spot for this group, having
chatted with them on my trip to Hong Kong last year. They’re
largely harmless, though on the mainland they are turning to
more aggressive tactics. As for Hong Kong and its ailing
economy, unemployment now stands at a record 7.7%. The
bursting of the property bubble has had a devastating impact.
Zimbabwe: Over 2,000 white farmers defied government orders
to leave their homesteads, but President Mugabe still threatened
to evict them, while blasting the U.S. and especially Britain.
Mugabe called Tony Blair a “gangster, but a leading opposition
figure pleaded with the UN to intervene, labeling Britain
“spineless” for refusing to act against Mugabe. Of course that
has been the official line here for years now.
Colombia: New President Uribe declared a state of emergency
and immediately started retaliating against the rebels. Go get
‘em, Alvaro.
Venezuela: The Supreme Court dropped charges against the
April coup leaders, riling up President Chavez’s supporters.
Nigeria: Political trouble is stirring here, in the land that the U.S.
hoped would be a model for the rest of Africa. President
Obasanjo’s own supporters are turning against his corrupt ways.
It wouldn’t be much of a story, though, were it not for the fact
that Nigerian oil is vital to the U.S., particularly if the flow of
crude is disrupted from the Middle East.
Random Musings
–“History is littered with cases of inaction that led to very grave
consequences for the world.” –Condoleeza Rice. Americans
have such short memories.
–President Bush is raising campaign dollars faster than Bill
Clinton, which some of us Republicans find a bit unsettling when
you think about the kind of advertising spots the Democrats may
run this fall. Luckily, Democratic National Committee Chairman
Terry McAuliffe is such a lying crook that he mitigates any
advantage the Dems might have otherwise on this issue.
–The President’s economic forum was goofy and there is no way
any real reforms will result by yearend given the political
timetable.
–I have never had a lot of respect for Congressman Dick Armey
and I once blasted him for a statement he made a few years ago,
bragging that he didn’t have a valid passport. So when you hear
him issue cautious comments concerning an attack on Iraq, take
them with a grain of salt. This is one small-minded leader…and
I can’t wait to see him leave at the end of the year.
–More on the real estate bubble. For those of you not familiar
with the New York area, a 3-bedroom, 3-bath co-op on 5th Ave.
and 77th Street in Manhattan costs $1.85 million. A one-
bedroom apartment in this neighborhood rents for $4,000 a
month.
–A group in Germany continues to do research on those who
attempted to flee communism between 1946 and 1989. 985 were
killed. 176 died trying to cross the Wall (which was built in
1961). Most Americans can’t begin to appreciate this.
–New York City police and firemen are seeking a big pay raise
and no one deserves it more than them. They haven’t received a
raise of any kind in years and the City is offering a small one due
to the current budget woes. I have a simple solution. Fire all
other city employees, except the sanitation men, starting with the
entire Board of Education (which Mayor Bloomberg is already
working on) and give the savings to our heroes. Actually, you
don’t even need a mayor. Just rotate the police and fire
commissioners every six months or so.
–Today in Washington there is to be a march for reparations.
Organizers will eventually file a lawsuit against the government
later in the year. I first warned of this years ago and it’s going to
be ugly. I’ll probably have more next week.
–Now that Charlton Heston will be fading into the sunset, Dan
L. is calling for hard rock legend Ted Nugent to take over
Heston’s leadership position at the NRA. For you older folk out
there who don’t know who Nugent is, let’s just say this would be
a highly entertaining choice, if not an enlightened one.
–Ask me if I’ll care whether or not the baseball players go on
strike. I’m a Mets fan, after all.
–How pitiful is it that Mayor Anthony Williams of D.C. was just
fined $277,000 for 5,500 violations of election law? His
campaign staff collected thousands of forged signatures, thereby
denying him a spot on the ballot in his run for reelection, so now
he has to go the write-in route. As some political commentators
have noted, it’s amazing that Williams didn’t have the skill to
recognize that this is Politics 101. Have enough of an
organization to at least get your name on the friggin’ ballot!
–Howard French wrote a good piece in the New York Times on
Japan. His conclusion is that the ongoing decline in the nation
means it’s increasingly irrelevant.
–Remember Michael Newdow, the guy who brought the suit
concerning the Pledge of Allegiance? I criticized him at the time
for dragging his 8-year-old daughter into the case to satisfy his
ego. Turns out he is the estranged father of this out-of-wedlock
child and the mother is now speaking up. As you could have
suspected, the girl never had a problem with the pledge. So it’s
now time to give Newdow the chair, unless you can come up
with a more appropriate punishment.
–Last week we had some fun with our own Dr. Bortrum’s
column and the coming ice age, but there are some real-life items
that, while not foretelling a surge in winter clothing, are unsettling
nonetheless. For starters the UN released a report on the 2-mile
thick cloud of toxic ash that is severely polluting an area from
Afghanistan to Sri Lanka, while drastically affecting the weather
in much of Asia. The composition of the cloud is man-made;
including ash from forest fires set to clear the land, agricultural
waste and fossil fuels, all combining to form a “cocktail of soot.”
And this lovely cloud could easily move to a neighborhood near
yours within a week’s time.
Meanwhile, drought conditions are worsening across much of the
globe, from India and Pakistan to about two-thirds of America
and on up into the Canadian wheat belt, while global warming
has not only been a potential cause of the spread of West Nile, it
may also be responsible for Dengue Fever in once unthinkable
parts of Japan. In Tokyo, for example, the air temperature has
increased 5 degrees since 1900, compared to just one degree for
the rest of the planet.
Separately, the first half of 2002 was the warmest the Northern
Hemisphere has seen in 143 years.
Lastly, you have the disastrous, historic floods of Central and
Eastern Europe. My heart goes out to those suffering (I have
roots in the Czech Republic and Slovakia) and the loss in cultural
treasures could be enormous. While a rich nation like Germany
can surely take care of its own, some of the others need our help
and the U.S. government must step up to the plate, quickly. It’s
not only the right thing to do, we could use a little favorable
press in that part of the world.
–Obesity update: U.S. News had a cover story on Americans’
eating habits these days. Here’s an incredible stat. The average
serving of popcorn at a movie in 1957 had 3 cups of corn.
Today, the serving contains 16 cups.
–Beer drinkers rejoiced at news of the latest study showing that
beer is good for you. And each one supplies 2-6% of the daily
requirement for B-vitamins! Personally, though, I wouldn’t
recommend 16-50 cans a day to meet your needs. Mix in some
frosted Cheerios instead.
–Bet you didn’t know this. Medicare pays for penile implants,
to the tune of $20 million the past five years.
–Back to B-vitamins, if you live in New York and go to a bar or
restaurant for your fix of same, you won’t be able to light up
while doing so, since Mayor Bloomberg has proposed banning
smoking in all restaurants and bars, for starters. I never used to
care that much about this topic, until the evidence on the
dangerous effects of secondhand smoke came out, so I really
can’t feel too sorry for those with this habit who are now
miffed they can’t light up just anywhere. It also cracks me up
how no one ever comments on the loss in worker productivity
during the course of the workday. It’s not like smokers come in
earlier and leave later to make up for the time spent outside. Or
am I wrong?
–Turkmenistan’s leader, Saparmurat Niyazav, a k a Akbar
Turkmenbashi (you really don’t know if I’m spelling these
correctly, do you?), is expanding his cult of personality to
include the renaming of months in the year, beginning with
January, which will now be known as “Turkmenbashi.” Remind
me to cross this country off my to-do list.
–We like Elvis here at StocksandNews. In fact I saw him just
the other day at Dunkin’ Donuts.
–I have known of the controversy at the University of North
Carolina for some time now, but didn’t find it worthy of any
comment. After receiving a note from my Wake Forest
classmate, Phil W., however, I now feel obligated to throw in my
two cents.
As you know, incoming freshmen this year are required to read a
book on the Quran before arriving on campus, for the purposes
of an initial group discussion. Now all of us had a similar task –
at Wake we had to read “One Day in the Life of Ivan
Denisovich” – but did Chapel Hill have to pick this particular
book, especially at this time? Certainly not. But is it really a big
deal? No. Here’s why.
You arrive on campus, kick your parents out after they’ve
clothed and fed you for the prior 18 years and just helped you
move in, and then you assemble for dinner with the ‘study group’
that first evening to discuss the book. At a certain point you’re
called on for an opinion, you probably say something stupid, you
get antsy after one hour, you’re dismissed and that’s the last you
think about the friggin’ assignment the rest of your life.
–As a follow-up to Mark R.’s brilliant idea of getting into the
screened porch business, especially in light of the spread of West
Nile virus, Mark and I (I’m now latching on…in search of
income) have decided that we could contract the work out to the
Amish, because you know what they say, “The Amish do good
work.” Hell, you think Dell Computer manufacturers its own
PCs? Yup, the Amish do it.
–Attention “Lord of the Rings” fans. The second installment,
“The Two Towers,” premieres December 18. The trailer is
awesome. I also saw “Signs” last weekend and have successfully
knocked off 4 aliens in my own home since then.
–Finally, Thursday night I’m channel-surfing when I come
across Larry King and his interview with Julia Child on her 90th
birthday. At one point Larry asked her if she had ever cooked a
bad meal and Julia replied, “Of course, just like Tiger Woods the
other day (meaning his 81 at the British Open).” Is she cool or
what? Ms. Child, we wish you another happy 90 years. Folks
like you are what makes life special.
God bless the men and women of our armed forces. We
remember Sgt. Christopher Speer of Albuquerque, who died
from wounds suffered in a clash in Afghanistan.
God bless America.
—
Gold closed at $314
Oil, $29.33…highest since last September.
Returns for the week, 8/12-8/16
Dow Jones +0.4%
S&P 500 +2.2%
S&P MidCap +3.1%
Russell 2000 +1.9%
Nasdaq +4.2%
Returns for the period, 1/1/02-8/16/02
Dow Jones -12.4%
S&P 500 -19.1%
S&P MidCap –11.5%
Russell 2000 –18.9%
Nasdaq -30.2%
Bulls 38.5%
Bears 37.4% [Source: Investors Intelligence]
Have a great week. I appreciate your support.
Brian Trumbore
