[Posted 7:00 AM ET]
The “D-word”
I was out much of Wednesday and when I checked in I had a
slew of messages concerning PIMCO’s Bill Gross and his latest
missive (pimco.com). Gross mentioned the “D-word,” some of
my friends warned, so before I read it myself I thought, “Gross is
writing about ‘Depression,’ wow.”
Alas, the ‘d’ stood only for “deflation.” Not that deflation is
good, mind you, it clearly isn’t, but what I have mused about in
the past is that if we get the double-dip in the economy that I
expect, there is a chance we go straight from slow growth to
Depression, without stopping at ‘recession.’
But, first, let’s get back to Gross. He is concerned about issues
like the refinancing boom, which is ending before a new
investment boom begins, while obscene amounts of “debt and
lack of pricing power (are) a dangerous combination.” Ergo, the
prospects for outright deflation can not be ignored.
If you are an equity investor, that wouldn’t be good for profits
and, thus, share values. Secondly, if we break the backs of the
housing bubble, even to the tune of just 5% or so, the consumer /
home owner isn’t going to be a happy camper. [In some
instances, due to no money down mortgages and excessive
tapping of one’s equity, you could actually end up in a KOA
campground.]
Look, when some of us have talked about a housing bubble (in
my case, admittedly, some 20% in appreciation ago), we weren’t
calling for a Nasdaq type crash. It’s just that so many Americans
are way overextended and don’t have a lot of equity built up that
even a 5% slide, or 3 years or so of flat values when 5% annual
appreciation was planned on, would be enough to do a number
on consumer spending patterns. Plus, if we’re in an environment
without any real pricing power, the consumer slowdown would
obviously exacerbate the deflation picture that Gross and others
are now wary of.
But wait, there’s more. This week Morgan Stanley’s Stephen
Roach (who I quoted last week on the property and consumer
bubbles) added that among his concerns was the undeniable fact
that “Europe is in trouble (and) the growth dynamic looks truly
terrible.” Plus, Roach is worried about the bursting of the $
bubble.
And then there is Japan, which this week saw its blue-chip
Nikkei stock index close below 9000 for the first time in 19 years
(it finished the week at 9027).
So, that’s your weekly “Bear Report,” at least the Big Picture
version. As for the micro view, this week we had more punk
numbers on the manufacturing front, which described a
contracting environment, while figures for the service economy
showed some signs of improvement.
Meanwhile, retail sales are clearly slowing, though despite Wal-
Mart’s reduced expectations on Monday, still show actual sales
growth, not decreases. Auto sales were up 3% in September, but
G.M.’s were down 13%. And then there was Friday’s
employment report, which certainly supplied ammunition for all
the conspiracy theorists out there. Somehow, the unemployment
rate fell to 5.6%. Sorry, I have been a defender of the
government’s integrity when it comes to economic releases, but
this is a bunch of bull. All other data point to ‘rising’
unemployment, at least by my reading of the tea leaves.
Then again, if this kind of chicanery leads to Republican election
gains come November, well, in the words of Alfred E. Neuman,
“What? Me worry?”
Speaking of the economy and the election, between now and
November 5th there are a few economic releases that I see as
being potentially market moving in a big way.
Oct. 11: retail sales
Oct. 25: various housing stats
Oct. 31: the first look at third quarter GDP
Nov. 1: October employment and manufacturing data
The figures on 10/31 and 11/1 are critical, assuming Iraq has not
overwhelmed the news by then. If GDP comes in at a projected
3% growth rate, this will make for a positive headline or two the
weekend before we go to the polls, even though you and I know
that it’s virtually meaningless since we’re in a jobless, profitless
recovery, teetering on double-dip.
Lastly, one other negative factor of note is the West Coast
lockout of the longshoremen, which is costing the U.S. economy
to the tune of about $1 billion a day and wreaking havoc on
merchants’ Christmas inventory.
Wall Street
If you ever wanted to know just how dumb Wall Street’s trading
community is, all you had to do was read some of the
explanations for Tuesday’s explosive 346-point rally. Many said
it was because the U.N. had agreed on a new inspections regime
with the Iraqis. This was simply laughable, as any reader of this
column knows. Even Hans Blix, the head of the U.N.
commission that is to monitor Iraqi compliance, knew it was a
joke, as he later agreed to U.S. and British demands to hold off
until a new resolution (and guidelines) are developed.
Anyway, the Street once again gave up the whole, spectacular
advance, and then some. I hope none of you were suckered in,
not necessarily by the rally itself, but rather the reasoning behind
it. [The legitimate cause was “short covering.”]
For the week the major indices fell for a 6th-straight week, with
the Dow Jones now down to 7528, its lowest level since 11/97,
while Nasdaq is at a staggering 1140, a mark not seen in over six
years. Only the S&P 500 resides barely above its July low (800
vs. 797). Equally disturbing is the simple fact that the “pros” are
controlling the action, which is feeding the intra-day volatility.
The “little guy” doesn’t stand a chance.
Street Bytes
–U.S. Treasury Yields
6-mo. 1.54% 2-yr. 1.79% 10-yr. 3.66% 30-yr. 4.71%
–Note to my broker / financial planner friends, you have my
sympathy as your clients receive their third quarter statements.
For the record, following an abysmal 13.7% drop in the S&P
for the second quarter, the major averages were shelled even
further in the third.
Dow Jones: -17.9%
S&P 500: -17.6%
Nasdaq: -19.9%
–But speaking of financial advisors, I heard from one of my
favorite planners and fellow Wake Forest alum, Kate L., who
along with hubby Doug, runs a great practice in upstate New
York. Kate took me to task (in a nice fashion) for last week’s
note on 5-year equity returns, while I slammed the whole “stocks
for the long run” mantra. Of course if you held stocks for almost
any period longer than, say, 10 years, you usually outperformed
bonds (taking into account dividends), but my point has been that
each era is different and what irked me most about the Bubble
was the almost universal disregard of the “valuation” issue.
[Kate and Doug missed that trap.]
Going forward I’ll stick with my belief that we are still forming
the parameters for what will be a broad trading range while, yes,
in any particular year stocks could easily outperform bonds.
But, since I’m accused of being Dr. Gloom all the time (granted,
it’s deserved), check out my 10/4 “Wall Street History” piece
and its look at pre-election year returns. It’s pretty impressive,
though I’ll be withholding my own specific comments on 2003
for later in the year.
[*Also, strangely, none of you have questioned why, if I promote
bonds, I personally have 75%+ cash, 0% bonds, and have been
this way for over 7 months. One, I’m lazy in looking for a short-
term bond alternative. Two, from a risk-reward standpoint, I
prefer to sit on the cash, for now.]
–If you are looking for an authentic, broad-based rebound in tech
spending, forget it. All you needed to hear this week was EMC’s
pronouncement that “the IT spending environment continues to
be brutal.”
–If you think U.S. equity markets have had a rough ride, the
Dow Jones’ leading European stock index was off 35% in the
first 9 months of the year, with Frankfurt’s blue-chip DAX off
46% in that time.
–The U.S. savings rate is now up to 4%, which is a good thing,
unless you want a booming economy and continuing high levels
of consumer spending. Ergo, a negative for stocks, particularly
as this rate rises further…as it will.
–The SEC, NASD, New York’s attorney general, and the NYSE
are teaming up in the fight to clean up Wall Street and its
conflicts of interest. Those of us who hope the existing
investigations are but the tip of the iceberg count on the
exuberance of mid-level prosecutors (who see this as their big
career opportunity) to carry the water for us schleps.
Meanwhile, Enron’s Andrew Fastow captures our “Dirtball of
the Week” award, as it is now clear that his fraud and conspiracy
operation was even more widespread than initially believed.
And then there was New York Attorney General Eliot Spitzer’s
suit against Worldcom’s Bernie Ebbers and other executives, as
he sought return of ill-gotten IPO gains (at least in Spitzer’s
mind), while at the same time Global Crossing’s Gary Winnick,
appearing before a congressional committee, pledged to give $25
million back (of the $500-$750 million he made on personal
stock sales), though he denied any insider trading; this after the
memo from Winnick’s predecessor, Leo Hindery, was revealed
to show that Winnick was fully informed of Global Crossing’s
looming problems long before they were made public.
–Energy: Hurricane Lili was actually the big story on this front
this week, as there were well-founded fears the huge refinery
complexes of Texas and Louisiana would be shut down for a
spell. Alas, to be technical about it, there was colder water near
the coastline, which caused Lili to lose quite a bit of its punch
before it hit shore, much to the dismay of the networks who sent
tons of personnel to the Gulf Coast to cover a disaster that,
thankfully, didn’t materialize.
Thus, oil slipped below $30, though now we can return to
concerns about Iraq and the increasingly dismal inventory
situation, though the latter should be rectified some now that the
weather has cleared for the refineries to accept more crude.
–Forest Labs reported that its earnings picture was brightening
thanks to strong sales of its anti-depressant drug. In other words,
it really, really works!
–Shares in Cisco Systems traded below $10 for the first time
since 1998, which had anyone still holding Cisco from the $60-
$80 level scrambling for Forest Labs’s product.
–Veritas Software’s CFO resigned after it was revealed he didn’t
possess the Stanford MBA he claimed to have. Pitiful.
–General Motors announced it faces a $9.1 billion pension
shortfall ($12.7 billion including non-U.S. operations), which
will definitely have an impact on profits down the road.
–Retailer Aeropostale went public last May, after which I wrote
(WIR 5/18), “I have no idea what the financials are for the
company, but I do know that I’ve never seen a customer in one
of its stores.” So this week Aeropostale warned on its earnings
and the stock promptly lost 50% in one day. Significantly, the
company noted that it is seeing a marked decline in mall traffic,
which doesn’t bode well for the overall Christmas season.
–The New York Times ran the following headline on Monday.
“PC Makers Hit Speed Bumps; Being Faster May Not Matter.”
I got a chuckle out of this, since for years I have commented that
you didn’t need the latest PC to run the basics, which is all 90%
of us use a PC for. In fact, way back on 4/29/00 I wrote, “I
have trouble with the feeling that we will always be spending
increasing amounts on every tech product imaginable
(particularly on the corporate level).”
–Speaking of PCs, Dell raised its revenue outlook, slightly, for
the quarter ending 10/31, thanks solely to increased market share.
The stock rallied a bit on the news, but then settled back to the
$25 level. The fact is that Dell is still estimated to earn $0.96 for
the year ending Jan. ’04. In other words, Dell isn’t exactly
cheap, and it thus should be no mystery that the company has
been stuck in a $22-$30 range for the past 12 months.
–Fannie Mae claimed it successfully reduced its exposure to
falling interest rates, a matter that has been spooking the markets,
while Fannie also reiterated it would meet its profits forecast.
Frankly, I don’t believe them.
–Follow-up: Last week I made fun of a particular Gateway
commercial. This week they blew out their advertising agency
…a $180 million account.
–We pity Advanced Micro Devices, AMD, which has a good
product, but no matter how hard it tries to keep up with Intel, the
company continually falls woefully short. This week they
announced revenues for the third quarter would be about 20%
short of a projection given just last July, and the stock sank
below $4 (it was over $45 in 2000).
–Dow Chemical warned, largely due to higher oil prices.
–Inflation / deflation watch: Sure, I opened with a deflation
story, and I can’t ignore the formal numbers, but we all also
know that many other costs, like property taxes, healthcare, and
college tuition keep skyrocketing. Mark R., back in the inflation
camp, reports that slacks at Joseph Bank (sorry, Mark, now the
whole world knows) have gone up from $135 to $175, while
David Ledbetter golf shirts are now priced at $69, up from $59. I
keep telling Mark that he’s spending way too much on the latter
product. [I bought a slew in Ireland for less than $20.]
Meanwhile, my friend Harry K. is concerned about the prospects
for deflation and the impact on the overall economy, a la Gross.
But while the costs of Kraft macaroni & cheese would
undoubtedly fall, in such a scenario, he sees no reason not to
hunker down today with a few cases, along with batteries for the
flashlight and some Canadian lager. [And Happy Birthday,
Harry.]
–My portfolio: No changes.
–Troubled J.P. Morgan Chase is going to be firing 20% of its
investment bankers over the coming month. There are still other
problems to be revealed here, aside from plunging profits.
–Philip Morris was hit with a $28 billion judgment. Yes, with a
‘b’. Many facets of our judicial system are in need of a drastic
overhaul, don’t you think?
–Last week I didn’t comment on Lucent’s problem with the
rogue researcher, who apparently faked his work, because I
suspected our own “Dr. Bortrum” would have some thoughts on
this matter. He does and I urge you to read his excellent column
on the subject.
Iraq
“There are times when caution is retreat and retreat is
dangerous.”
–British Prime Minister Tony Blair
So last Sunday I’m flipping between the Ryder Cup coverage
and ABC’s “This Week,” when on the latter I catch Democratic
Congressman Jim McDermott proclaim from Baghdad, “(Bush)
would mislead the American people to take us into war,” while
lecturing the audience that we should take Saddam at his word.
Holy cow (or something to that effect), I mused. That’s freakin’
treason, in my book. Needless to say, I then eagerly awaited
George Will’s comments a few moments later (as over on NBC
the U.S. team was rolling over at the Belfry), whereupon Mr.
Will didn’t disappoint, calling McDermott’s interview the “most
disgraceful performance by an American lawmaker in my
lifetime.”
Thankfully, the vast majority of Americans hold more
realistic views of what our President is doing, including a large
number of House members, who this week approved a
congressional resolution on Iraq which grants President Bush
virtually everything he sought. House Minority Leader Richard
Gephardt deserves a lot credit for standing by Bush, and I’m
more than happy to give it to him. Among the top leadership in
both houses, only Senate Majority Leader Tom Daschle is a
holdout, though I suppose the President’s speech Monday
evening will persuade Daschle to change his tune (if he hasn’t
before then), or he risks being marginalized well before his
formal campaign for president even begins.
As for the U.N. Security Council, aside from the aforementioned
inspections sideshow, Russia is inching closer to the hardline
position of the U.S. and Britain (thanks to guarantees from the
U.S. involving oil…surprise, surprise), while France continues to
pout. Bush should fly to Paris, hug Chirac, tell him how much
he loves him and I guarantee you, Chirac would break in a
nanosecond.
More International Affairs
India / Pakistan: The two nations decided to stage an air-show
Friday, as they traded missile test launches.
Turkey: The critical election is just one month away, but this
week the government lifted the death sentence on the Kurd
leader Ocalan. I have written extensively on this issue before
and, as one looking to invest heavily in the country at a future
date, it is extremely important. Personally, I’d put the man to
death, but the government took this action as a major step toward
possible European Union membership, with the E.U. having
demanded that Turkey abolish its death penalty. I’ll have more
on this over the coming weeks…hey, it’s my money I’m about to
invest, after all.
Saudi Arabia: Congressman Dan Burton has stepped up the pace
of his long-running investigation into the kidnapping of U.S.
children, with Burton blaming the State Department for failing
to act. It’s also quite apparent that the Saudi worm,
spokesman Abel Al-Jubeir (whom you have seen on television a
lot this past year), is an inveterate liar. But then I knew that the
first time I saw him.
Brazil: The presidential election is Sunday…a big one. Should
Luiz da Silva win, as expected, you can be sure international
banks with huge debt loads in this country will be scared to death
that “Lula,” despite claims to the contrary, could impose a
moratorium on future debt payments.
Separately, this week a drug gang effectively shut down the city
of Rio de Janeiro by blocking streets and traffic in a protest
over prison conditions. Kind of makes you want to cross Rio off
the old travel plans, doesn’t it?
Germany: Businessmen are clamoring for Chancellor Schroder to
change his tune on Iraq, because the economic impact of the
stance is already being felt…exporters are suffering.
New Jersey and Robert Torricelli
Boy, it wasn’t a great week for my state, that’s for sure. But let’s
start off with a few definitions.
Mistake: a wrong action or statement; to blunder in the choice of.
Lie: an untrue statement made with intent to deceive.
Fraud: deceit, trickery.
Now I would respectfully submit that there is a rather large
difference between a ‘mistake’ and a ‘lie’ or ‘fraud.’ This
argument, however, seems to have been lost on Senator Robert
Torricelli, one of our two dirtball representatives in what has
historically been an august body, the other being Jon Corzine.
In a truly pitiful performance, Torricelli dropped out of his
Senate race. [I told you last week it was over, but I also assumed
he would see his candidacy through to election day.] The Torch,
whose police file will now grow like Pinocchio’s nose, tearfully
pleaded:
“I have not done things I was accused of doing,” adding, “When
did we become such an unforgiving people? When did we stop
believing and trusting in each other?”
Oh, shut up. We forgive people for mistakes, like a traffic
incident, or making a wrong investment call, not for holding the
public trust in such contempt, as you have, while committing
what any sane person knows were outright criminal acts.
Torricelli then had the temerity to bring up his mentor, Bill
Clinton, as an example of “courage” in standing up for what he
thought was right. Torch said, as for himself, he wished he could
have soldiered on the way the former president did (gag…cough
…cough…help me, I’m choking!).
You know, I have tried not to be shrill and talk radioish (new
word of the week) when it comes to Clinton and his
responsibility for the decline in America’s moral fiber. But,
for instance, can you place the blame on him for the disgusting
behavior of our youth (like in the explosion in oral sex in our
middle schools)? Yes, absolutely. Is Clinton, though,
responsible for all the bad behavior in our corporate boardrooms?
No, that’s clearly a stretch.
But here you have Torricelli, one of the sleaziest characters in
the history of American politics, making the case for all the
Clinton haters for years to come. Knowing Billy Boy, though,
he’s probably eating it up.
So now New Jersey is going to hold what is clearly a fraudulent
election, Torricelli having dropped out long after the actual
deadline for withdrawal (51 days vs. his 36). I couldn’t,
however, expect the New Jersey Supreme Court to simply allow
Republican Doug Forrester to run unopposed and, thus, I can’t
argue with the ruling that allowed the Dems to substitute former
3-term senator Frank Lautenberg in Torch’s place. I don’t like it
one bit, but I’m also trying to be realistic.
What I can only pray for is that enough of my fellow citizens see
the light and dismiss the Lautenberg candidacy out of hand,
because if he were to win, the Republicans would clearly be
right to protest the result. [Some early polls already show
Lautenberg in the lead.]
Lastly, this whole fiasco is related to the corporate governance
issue in the respect that many of our corporate chieftains and
their lackeys, similar to Torricelli, simply gave us all the
finger when it came to making decisions between ‘right’ and
‘wrong.’ As I’ve said before, you just want to shake them
and scream in their face, “No! You can’t do that!”
Unfortunately, the only solace we can take away from this lousy
period in our nation’s history is the knowledge that the
miscreants will all go to hell.
Random Musings
–PBS’ “Frontline” had another outstanding program Thursday
evening, a documentary based on the life of FBI special agent
John O’Neill, a maverick who tailed Osama bin Laden for 6
years and was, essentially, on the verge of cracking al Qaeda,
only to be hamstrung along the way by the FBI bureaucracy.
O’Neill was forced into retirement in the summer of 2001 over a
procedural matter, became director of security at the World
Trade Center, and died in the collapse of the South Tower.
Throughout his career, particularly the last few years, O’Neill
was blocked by FBI Director Louis Freeh, as well as Deputy
Director Thomas Pickard. Regarding Freeh, let me remind you
what I wrote in this space last May 25.
“I seem to be one of a handful that recognize that former director
Louis Freeh was an abomination and is the one who should bear
the blame for the organizational chaos that inhibited our
intelligence gathering prior to 9/11.”
I now urge that Freeh be grilled by Congress, indicted by the
Justice Department, convicted and locked up for the rest of his
days. I also urge similar treatment for Pickard. As for agent
O’Neill…RIP, hero.
–Kate L. submits that StocksandNews should have an award for
“Most Underrated Leader”…Condoleezza Rice. No argument
here. I also hope to vote for her in 2008.
–Speaking of the 2008 presidential election, are you tired of
seeing Rudy Giuliani yet? I love the guy but, geezuz, I wish he’d
take a break.
–Since I’ve slammed philanthropists this year, at least those who
we found out were corporate dirtballs, it’s only fair that I note the
passing of media mogul Walter Annenberg (former owner of TV
Guide). In his latter years, Annenberg gave away about $2
billion, mostly on education. He was a model for others.
–Here’s a feel good story that in an admittedly very small way
nonetheless holds out hope for the future. The Chinese
government has sent the zoo in Kabul two lions (along with other
animals) to replace the legendary Marjan, the poor beast that was
brutalized by the Taliban. Then again, the lions are probably
fitted with listening devices, since if I’m holding secret talks in
the Afghan capital, what better place to conduct them than at the
zoo!
–A deputy director in New York Mayor Bloomberg’s
administration was fired for taking lengthy cigarette breaks, like
69 minutes before lunch. Goodness, gracious. Stick that in Alan
Greenspan’s productivity figures.
–This is my first opportunity to congratulate the Europeans for
winning the Ryder Cup, a well-deserved triumph. I’d also rather
party with them.
–Spam, junk e-mail, now makes up 38% of all e-mail traffic, up
from just 8% one year ago. On a related topic, I had a little
incident this week, which may have resulted in some of you
receiving a strange e-mail from yours truly. Well, it wasn’t
meant to be, but I had stupidly opened up an attachment that I
thought was from a friend, and, lo and behold, it was a virus. So
I apologize to any of you who fell for the trap, or hadn’t updated
your anti-virus protection, as was my case. Unfortunately,
because of this incident, even though I have rectified the
situation in my various offices, I won’t be opening any
attachments that you forward. Sorry, because some of you pass
along great information.
–John Walker Lindh was sentenced to 20 years in prison. His
wacko parents should have received 25.
–Lastly, I love cookies, and I’m always on the lookout for a
great, store bought product, so I have to issue a plug for the new
“Cookies & Snickers,” manufactured by Mars Inc. Now each
cookie provides you with 4% of your daily fiber requirement, so
if you eat all 10 in the box, that’s 40% right there! [Granted, that
would also equate to 150% of the recommended maximum for
saturated fat…but who’s counting.] More importantly, I was so
taken by this product that I was hoping to invest in it.
Unfortunately, you all know that Mars is a private company, but
since it’s located close to my home, I’m thinking that I’ll stand
outside the headquarters for a few days in the hope that one of
the reclusive Mars $billionaires adopts me.
—
God bless the men and women of our armed forces.
God bless America.
—
Gold closed at $323
Oil, $29.62
Returns for the week, 9/30-10/4
Dow Jones -2.3%
S&P 500 -3.2%
S&P MidCap -5.3%
Russell 2000 -3.8%
Nasdaq -4.9%
Returns for the period, 1/1/02-10/4/02
Dow Jones -24.9%
S&P 500 -30.3%
S&P MidCap -23.5%
Russell 2000 -28.8%
Nasdaq -41.6%
Bulls 38.0%
Bears 38.0% [#’s are correct. Source: Investors Intelligence]
Have a great week. I appreciate your support.
Brian Trumbore
