*We will return 9/28. Sorry. After five years,
I”m taking my first week off.
[Posted 7:00 AM ET]
“We don’t want the smoking gun to be a mushroom cloud.”
–Condoleezza Rice
In his titanic speech to the United Nations on Thursday,
President George W. Bush blasted the body for its failure to
enforce existing sanctions on Saddam Hussein, while Bush
labeled Saddam “a grave and gathering danger.” We aren’t
merely inching closer to action, the U.S. is barreling forward like
a bobsled and pity the fool who happens to be standing in the
way of the initial assault.
The President has vowed he will seek a final UN Security
Council resolution within weeks (probably one), after which
Congress will be asked to debate and grant its own approval
before recessing for the November elections. It’s not
inconceivable, then, that we could still be at war with Iraq by
November. One thing is for sure, however, as Richard Perle
noted months ago, President Bush will not be standing before the
American people for his State of the Union address in January
without at least having commenced operations. The sense of
urgency is becoming palpable.
But before moving on I need to dispatch with a few issues. In
this space on 9/22/01, two days after his address to Congress
following the attacks, I wrote, “President Bush was very careful
not to mention Saddam Hussein, but there can be no doubt that
Saddam is the ultimate target.” So it should come as no surprise
to those of you who have been with me these many years that I
am amused with those on the Left who have been saying, why
the sudden rush to evict Saddam? Actually, it would be
laughable, were it not so serious.
But you also know I have been harsh in my criticism of how the
diplomatic effort was being conducted the past six months or so.
I have been arguing it was time for creative, and downright dirty,
diplomacy. Dark, smoke-filled, vodka-laced rooms wherein the
U.S. is cutting deals – and checks – with the likes of Russia and
Turkey. Folks, it was a no-brainer. Despite Russian President
Putin’s recent bluster, he needs money far more than foreign
policy influence right now and the U.S. has it. Plus, on a
different, yet related, matter, it is simply criminal that we aren’t
doing more to clean up Russia’s own weapons stockpile (Nunn-
Lugar). As far as anyone can tell, the Kremlin has been sincere
on this front so Congress should give them the $s and get this
done before more nuclear material, than has already inevitably
been acquired, is passed over the transom to the evil ones.
As for Turkey, they owe us $4 billion for some weapons
shipments and would like to see this forgiven in exchange for
support. Give it to them. What an incredibly small price to pay
to have their Islamic backing against Iraq. Alas, the government
in Ankara is once again fighting amongst themselves leading up
to the critical November 3 vote and this has become a more
complicated issue.
But back to the Russian front, lo and behold, what did I see this
past Wednesday? Why if it wasn’t Undersecretary of State John
Bolton, right there in Moscow, looking to cut deals. Better late
than never…perhaps a good, old-fashioned, dirty deal, as in the
U.S. may merely huff and puff if Russia attacks Chechen rebels
holed up in Georgia, in return for Moscow’s tacit support at the
UN (which would drag France into the fold). So we’re making
progress.
The second issue concerns America’s apathy. On Monday I
watched a local New York reporter’s story from Seattle and the
growing cynicism concerning 9/11 outside the New York area, in
particular. It’s not surprising, really. Some farmers in parts of
the Midwest and Southwest, for example, are not only far more
concerned with the drought, they can’t envision a threat to their
very existence. In a recent poll, by 3 to 1 Americans were more
concerned about the economy than Saddam. And, sad to say,
I’m sure there were some Americans disgusted with the coverage
of the ceremonies on Wednesday. As one Seattle resident
summed up, “We need to move on.” I understand how this
comment can be generated, it just means the rest of us rely even
more on our leaders to do the right thing, as President Bush
clearly is. Yes, it is time to move on…to Baghdad…and finish
the job once and for all.
—
Some other thoughts on the coming war. Many of my
conservative friends have enjoyed blasting Secretary of State
Colin Powell for his seeming pacifism. I have never been one of
them. Bush assembled an all-star foreign policy and defense
team, one with warriors as well as statesmen. Now it’s Powell’s
time to shine, and he will, as he puts together a resolution that
will not just pass the muster of the UN Security Council, but also
the U.S. Congress.
[For those who don’t understand the UN process, the Security
Council has 15 members, with 9 votes required to approve a
resolution…but no vetoes from the 5 permanent members: U.S.,
U.K., Russia, China and France. The other ten have two-year
terms and currently are: Bulgaria, Cameroon, Colombia, Guinea,
Ireland, Mauritius, Mexico, Norway, Singapore and Syria.
Getting the 9 won’t be a problem, particularly with Russia
seemingly on board. China will also follow, because
President Jiang Zemin is making a highly anticipated (for him, at
least) visit to the Crawford ranch in late October and there is no
way he will spoil the moment with intransigence on the issue of
Iraq, plus we already cut a deal with him on the terrorist front.]
The other item to address is “commitment.” As recently as 1991,
the U.S. abandoned its commitment to the opposition in Iraq and
thousands were slaughtered. This time will be different. You
can see it in Bush’s eyes. If it isn’t, though, I reserve my right as
an American to be all over him like a cheap suit.
Because you see, my friends, the ‘good’ people in Tehran and
elsewhere are watching. When they are convinced the U.S. is
sincere and in it for the long haul, Iran will fall in weeks, then
Syria, Egypt and even Saudi Arabia. [Jordan, due to the
Palestinian dynamic, is a different situation, I believe. Hard to
tell.] So behind the storm clouds I see hope. I just suspect that
our President will require lots of exercise to stay focused, while
the American people, and Congress, may finally be asked to
sacrifice. We better be up to the challenge.
The Economy
Sorry, sports fans, but your editor looks at this week’s data and
still sees a double-dip on the horizon. Sure, the figure on August
retail sales was solid, even taking out autos, while producer
prices remained tame (actually not good, more later). Add these
two up and it’s a big ‘whoop de damn do’ from me, particularly
when weighed against the negatives. To wit:
Jobless claims are rising anew, and employment prospects almost
always impact spending patterns, despite the recent uptick in
retail sales. The latest consumer confidence numbers were also
abysmal, though there is this disconnect, at least for now,
between plunging confidence and still strong housing and auto
sales.
For the bottom line, though, we turn to the Federal Reserve’s
own survey of regional economic activity (the Beige Book) and
its latest readings were summarized in the statement: “The
growth of economic activity has slowed in recent weeks.”
Factories are struggling, labor markets blow.
As for housing, foreclosures are now at record levels, so despite
the boom, clearly many are going in way over their heads. It
doesn’t help when the traditional ‘20% down’ mortgage has gone
the way of mini-skirts. Now you just have to show a little ankle
to get one. [Sorry, that was totally inappropriate and I await
sanctioning.]
On the more micro front, industrial giant Honeywell announced
it is cutting its earnings estimate for the balance of the year, the
second such reduction in about two months. That’s about all you
need to know about the current environment.
Except, if we are to believe that Fed Chairman Alan Greenspan
is still relevant (perhaps your opinion, not mine), Mr. Bubble
(double entendre intended) told a congressional committee this
week that “deficits risk a return to high interest rates and low
levels of investment.”
Actually, this is something we all know is a problem down the
road, but the chairman also advocates restraining spending,
which isn’t what you do during a recession (or a torpid
environment like today’s). Plus, more importantly, he’s ignoring
the fact that spending on the defense / homeland security front
will continue to soar (lots of dirty deals, remember), as they
should. What this all tells me, though, is that it will also be
another sore point for stocks, severely limiting any rally
potential. As for current interest rate policy, the Fed meets
September 24 and seems intent on holding the line at the current
1.75% level for federal funds.
Street Bytes
–The major averages all declined slightly for a third straight
week, with the Dow losing 1.4% to the 8312 level, while Nasdaq
lost 4 points (0.3%) to 1291. Traders in the New York area, at
least, were simply emotionally drained from the events of the
week, as were the rest of us, yours truly included.
–U.S. Treasury Yields
6-mo. 1.67% 2-yr. 2.04% 10-yr. 3.91% 30-yr. 4.77%
Long end rallied again on the heels of a further flight to quality
with the war talk and weakness in equities. The tame PPI didn’t
hurt, either, nor did Alan Greenspan’s strong hint of no imminent
Fed action.
–Corporate Governance: Financier Felix Rohatyn told the New
York Times’ Gretchen Morgenson that corruption in the
financial system is endemic, adding, “This is not just about a
bunch of rogue CEOs,” though one of same is former Tyco CEO
Dennis Kozlowski, aka the “philanthropist.” Kozlowski, along
with two other Tyco officials, was charged with stealing $170
million directly from the company, as well as receiving the
benefits from various stock manipulations to the tune of $430
million. Amazingly brazen fraud. Of course none of these
actions, which paid for homes, among other things, was ever
disclosed. Next up, Gary Winnick and his Global Crossing
operation, appearing at a congressional committee near you
(Sept. 24) as Winnick is asked to provide information on his
dealings with Qwest Communications.
Yes, when history looks back on this whole chapter, they’ll find
there was roughly a 4-year window (1998-2001) where a
plethora of America’s CEOs ran roughshod in accumulating
personal wealth, thereby creating this new class of ‘super rich’
that in most cases acted far more egregiously than anything the
Mob ever did, let alone the crony capitalists of most emerging
nations. This is a dark, dark time for the history of American
business, but I can only hope that the nation’s prosecutors and
district attorneys continue apace to root out this evil once and for
all…at least until the next bubble.
–And then there is former G.E. hero, Jack Welch. At week’s
end, wife Jane had subpoenaed G.E. corporate records, as part of
her divorce proceedings, to determine the extent of retirement
perks that Mr. Welch has been receiving. For her part, Jane is
currently getting $35,000 a month for living expenses, a mere
$420,000 a year, but my guess is she’ll settle for a hike to
$80,000 per, plus use of…oh, forget it. And to think I met them
both at the Vatican (hey, I have a picture of them!) and wrote
nice things about Jack. Can’t get ‘em all right, that’s for sure.
–Energy: Saudi Arabia began the week by shelving plans to
have Western investment in its natural gas fields, primarily
because the Saudis wouldn’t guarantee an investment return of
15%, which is what companies like Exxon Mobil require if they
are to plow $billions into these massive projects.
On the inventory front, supplies continue to tighten, with
inventories at their lowest levels in 18 months. But for this to be
a real concern we need continuing economic growth
(worldwide), which is currently more than a bit iffy, or a cold
winter in North America, or major supply disruptions as a result
of the attack on Saddam.
There is no doubt that a ‘war premium’ of $4-$5 is in the current
price of close to $30, but when the shooting starts (or slightly
before), you’re likely to see far more and then we’ll all wait to
see what happens next. If all goes well, then you would expect
crude prices to crash (and with it energy share prices), but soon
thereafter, you could see them spike right back up if victory
helps to relieve anxiety and bolster economic activity, even as
supplies are increased as well. Plus, again, you have Old Man
Winter to deal with, though, admittedly, he’s been more like Pee
Wee Herman the last few years.
A friend and I were talking about why oil stocks haven’t been
performing better despite the higher prices for crude and there
are two primary reasons. The integrateds (Exxon, Chevron et al)
are no better than you or I in predicting the future direction of
prices these days and therefore are afraid to commit to increased
capital spending for new or existing projects, while for their
part, the drillers / service companies have largely disappointed
on the earnings front. All this aside, my guess is we’ll begin to
see improvement with third quarter numbers and once we get a
positive surprise or two, these issues could rally regardless of the
price swings in the commodity.
–Sticking with energy, Lukoil’s CFO was kidnapped in Moscow
on Thursday. Lukoil is the Russian energy giant that I
mentioned I once invested in. This is all part of a new round of
violence directed against corporate officials here and it doesn’t
give one a warm, fuzzy feeling if you were contemplating
investing in this nation. [I’m heading over in November for a
little due diligence myself. “You have the wrong man. I am not
a Russian oligarch! Just a money losing American web editor.”]
–Inflation / Deflation Watch: See, we’re slowly transitioning to
“Deflation Watch,” but reporter Mark R. doesn’t know this yet.
This week, Mark reports Armour Bacon is up 20% over last year,
while, on the more serious side, there is no doubt that benefits
costs continue to surge, along with property/casualty premiums
and real estate taxes, to name just a few. But on the other hand,
we still can’t ignore the message being given by the official
government data, including the latest report on producer prices,
which reveals that core prices are down 0.3% over the last 12
months. Ergo, it’s tough to generate profits in this kind of
environment and even more worrisome is the possible emergence
of a trend that has afflicted Japan for years. As Van Eck’s Joe
Foster put it, “Consumers are learning to wait for price
concessions.”
–The West Coast longshoremen have now been without a
contract since July 1st and if they ever do walk out, this would
obviously have a further deleterious impact on the overall
economy.
–Business Week had a scathing article on Merrill Lynch’s
involvement in the formation of Enron’s secret partnerships.
–A Rand report revealed that, if left unchecked, the asbestos
liability mess could extend to 85% of the U.S. economy.
–Tech: 3 major suppliers of semiconductors, chips, and phone
equipment, Philips, Taiwan Semiconductor, and Lucent, all
reported negative news ranging from drastically reduced revenue
projections to large cuts in capital spending and further layoffs.
In the case of Lucent, up to 15,000 more employees may lose
their jobs.
–Ford reported a bit of good news, proclaiming that it would
generate a small ‘profit,’ not a ‘loss’ as estimated for the current
quarter. But this begs the question, is this the best they can do in
an environment for auto sales that may be close to peaking for
years to come?
–Here at StocksandNews we couldn’t care less about Martha
Stewart and her problems. We all have our own of a far more
serious nature.
–Speaking of far more serious, that description fits the SEC’s
ongoing investigation into the hedge fund industry. As noted
before, this is another classic case of money rushing into the
latest ‘hot’ sector, and for many the experience will end badly.
–Citigroup Chairman Sandy Weill, in his latest attempt to save
his own ass, removed Michael Carpenter as head of investment
banking.
–Finally, I received a note concerning some of my conclusions
in recent “Wall Street History” pieces, specifically as to my
market outlook. So, in light of the fact that PIMCO’s Bill Gross
recently said that fair value on the Dow Jones is 5000 (though he
wasn’t necessarily forecasting this), I’ll just say that I continue to
believe we are in the midst of laying out the parameters for a
broad trading range, say 7000-10000, that we could operate
within for years to come (depending in large part on the war on
terrorism, of course). Gross, like yours truly, Doug Cliggott and
others, has been harping on the earnings / valuation front for
years now, and with the revelations we have seen the past 9
months on the corporate governance issue, how the hell can you
trust what you’re being told, anyway?
Having said that, it doesn’t mean the markets will always act
rationally and move to an historic norm of, say, 14 Xs earnings
(if we ever have confidence in the numbers). In fact, when I
ventured a guess for 2002, I said that the major indices would
rise 5%, after two awful years, not because they deserved to, but
rather that’s just the way I thought sentiment would play out.
[This was still far more conservative than 90%+ of the ‘name’
strategists.] But, clearly, in a punk economy, with profits hard to
come by, upside remains severely limited, which means that
from a risk-reward standpoint, you’re still nuts if you heavily
overweight equities, unless you’re in contrarian-type plays. As
for my own portfolio, I remain 76% cash, 20% energy and 4%
Turkey. With apologies to John McLaughlin, Gob-ble Gob-ble!
International Affairs
Afghanistan: It is an utter disgrace that the world community has
totally reneged on its promises of aid to rebuild this nation. But
then that is par for the course, and it’s why the aftermath of our
operation against Saddam needs to be watched closely.
Israel: Yasser Arafat began the week by denouncing acts of
terror, but didn’t call off attacks against all Israelis, so the talk
was worthless (as is everything else the little rat has ever said).
And now it’s clear he has lost approval within the Palestinian
parliament. Separately, Deputy Secretary of State Richard
Armitage placed Hizbollah on the “A-list” of terrorists, which
tells you that the Bush Administration will eventually train its
guns on the guerrilla camps in Lebanon and elsewhere.
Germany: Chancellor Schroeder appears to be leading in the
latest polls, as his pacifist stance on Iraq has won over voters.
But following the September 22 election, Germany will still be
Germany, and, as John Vinocur wrote in the International Herald
Tribune, “(It) is confronted by more than a largely inflexible
labor market and high wage costs. It also faces an internal
cultural bias against doing anything that called for give-backs in
hard times from the secure German world that provides Europe’s
greatest number of vacation days for workers, vast pension and
health benefits, and a state whose activities represent about half
the gross national product.”
Lastly, polls in Germany reveal that anti-Semitism is rising, but
not in the former East German region as you’d expect, rather,
disturbingly, in the West.
Austria: He’s baaack. Jorg Haider, that is. Haider, the Nazi
sympathizer, regained control of his Freedom Party, following a
leadership struggle that saw the party exit the ruling right-wing
coalition. New elections will now be held.
Canada: An important report was issued that concluded the
Canadian military is on the verge of total collapse. It doesn’t
help that the nation spends just 1.1% of GDP on defense. There
was a time not too long ago when Americans would shrug at this
kind of news, but we better not now, because with Canada’s
extensive coastline, for starters, it’s a worry when you’re trying
to keep out terrorists.
It also doesn’t help when Prime Minister Chretien grants an
interview wherein he says America and the West are partly to
blame for 9/11, while in Montreal this week, there was a nasty
riot as former Israeli prime minister Benjamin Netanyahu
prepared to give a speech. 650 Palestinian protesters fought with
police. Just super.
Random Musings
–To those who say the U.S. can’t do both, deal with Saddam and
al-Qaeda at the same time, they’re full of it. [If this were
true…start digging your grave.] The arrests this week in Buffalo
(to be announced later) and Pakistan (where a top Qaeda official
was captured), prove that the U.S. is still focused, and with
international cooperation like we received from Italy this week,
the war can be successfully waged on two fronts. As for the
Italians, this week they arrested 15 suspected terrorists, thereby
earning StocksandNews’s coveted “Friend of the Week” award.
–While Rudy Giuliani justly garners praise for his actions in
leading New York on 9/11 and in the immediate months after,
current Mayor Michael Bloomberg deserves credit as well. He’s
doing a solid job and his anniversary ceremonies were
appropriate, well-designed and quite moving.
–Peggy Noonan had a column quoting Rosalyn Carter, who said
of 9/11, “God is weeping too.” In August, I wrote that with
regards to Zimbabwe, God must be thinking, “Take Mugabe
out!” Since the West hasn’t, He’s weeping anew.
–Every time I see Madeleine Albright, I can’t help but think of
her comment when she was secretary of state, “America, the
indispensable nation.” The international community has blasted
the Bush Administration for its ‘unilateralism,’ but any blame
should also be addressed to the Clinton folks, whose press
on the foreign policy front was far better than was ever
warranted.
–The Muslim world has been an abject failure since the decline
of the Ottoman Empire (something you see first hand when you
visit places like Istanbul), but with all the talk of what is
contained in Arab textbooks these days, it behooves the West to
increasingly use Ataturk as an example of a successful, modern
Islamic leader. [Yeah, I’ve mentioned this countless times
before, but, thankfully, we get new readers all the time.]
–It’s easy to talk of Scott Ritter as being a traitor to his country
with his recent support of Iraq and Saddam. The shrill dialogue,
though, is best left to talk radio and television. But in watching
his interview on “Today” this week, I can’t help but wonder if
Ritter isn’t a double, or triple, agent. This is one of the most
complex individuals you’ll ever come across and to those who
point to his acceptance of $400,000 from an Iraqi organization,
I’d reply, that’s peanuts. He undoubtedly has received far more,
but, also remember, he has had access to certain Iraqi officials
and sites that no one else has. How can you be so sure this
information isn’t being passed back to the U.S.?
–Hopefully the Saudis will be able to produce the rumored video
of Saddam executing an opponent. Approval among Americans,
as well as the international community, for an invasion would
soar.
–Here’s the solution to the Florida problem, regarding the
citizens intelligence, or lack thereof. Force them to secede from
the Union, which would then allow Floridians to launch an attack
on Cuba (500 alligators would do the trick…preceded by an
embargo on auto parts for ’53 Chevys). After accomplishing
their goal, and following three years probation, we’d welcome
the now expanded entity back into the fold…provided at least
51% pledge to vote Republican.
–In a much simpler time, I often wrote of the “noble yak,”
which all started when I noted the tale of a massive blizzard in
the Gobi Desert. But I received distressing news this week from
Michael M. in Denver, who reports that the yak which was
residing in the zoo there has not been seen over the past year.
We both fear the worst.
–When I was in Slovenia this spring, I described the tough
character of the men there, so I wasn’t surprised to see this week
that a Slovene completed a swim of the entire length of the
Mississippi River…2,360 miles…going 11-12 hours a day.
–With the anniversary of 9/11, we honor the good people of
Gander, Newfoundland, who opened up their arms to the 6,600
whose flights were diverted following the attacks. It’s also a nice
story that many of these same passengers have now made
donations to various causes in the Gander area, even though
townspeople asked for nothing.
–Speaking of Canada, my friend Harry K. from up north passed
along some of the following personal thoughts:
“I want to thank America. Thanks for the music, the movies, the
Declaration of Independence, the Bill of Rights. Thanks for
protecting democracy around the world. Thanks for picking up
the tab for the United Nations, despite its being taken over by
Third World socialists and moral relativists that want to lay the
world’s problems at your feet – maybe they’ll grow up someday.
Thanks for NFL football, for the personal computer, for your
countless scientific and medical innovations. Thanks for staring
down the Soviets and ending the Cold War. Thanks for letting us
Canadians shelter under your nuclear umbrella. Thanks for
protecting the world from the communists. Thanks for the
globalization that promises to bootstrap poor nations from the
poverty trap, if only the socialists would get out of the way.
Thanks for your capital markets that make it possible for so
many new technologies, industries, infrastructure projects and
even hare-brained government initiatives around the world to be
financed. Thanks for putting up with our politicians, who can
think of no other way to define themselves and our nation than
by slagging the United States….and thanks for expanding
everyone’s horizons by going to the moon, just to prove it could
be done.”
–Lastly, Misha Ushakov, an 8-year-old boy in Moscow, signed a
9/11 condolence book at the U.S. consulate. “I feel sorry for
America,” he said later. “We should take the people who did
that by the collar and throw them somewhere far away…
somewhere in outer space so that we would never see them
again.” [AP]
Bless you, Misha. I wish it was that easy. But let’s get it on.
The sands of the hourglass are dwindling to a precious few.
God bless the men and women of our armed forces.
God bless America.
—
Gold closed at $317
Oil, $29.81
Returns for the week, 9/9-9/13
Dow Jones -1.4%
S&P 500 -0.5%
S&P MidCap -0.9%
Russell 2000 -0.4%
Nasdaq -0.3%
Returns for the period 1/1/02-9/13/02
Dow Jones -17.1%
S&P 500 -22.5%
S&P MidCap -13.9%
Russell 2000 -20.2%
Nasdaq -33.8%
Bulls 40.9%
Bears 35.5% [Source: Investors Intelligence. That spike in the
bullish reading two weeks ago proved to be another contrarian
indicator.]
Note: Folks, going back to my days at PIMCO, it’s been almost
five years of writing ‘week in review’ without one break.
Regardless of where I was in the world, I got it done. Alas, I’m
heading to Ireland this week with 3 of my PIMCO friends and,
knowing what hotels I’m staying at, connecting to the Net will be
virtually impossible. So, I’m taking my first week off. I know
you’ll understand. Back with you on September 28, at which
time I’ll include market data for both periods.
*But you know what? Check in anyway next week, just in case.
Thanks for tuning in. I appreciate your support.
Brian Trumbore
