[Posted 7:00 AM ET]
The Coming War
House: 296-133
Senate: 77-23
President Bush couldn’t have asked for a better scenario as both
houses of Congress overwhelmingly approved a resolution
granting the President authorization to use force “as he
determines to be necessary and appropriate in order to defend the
national security of the United States against the continuing
threat posed by Iraq.” Once again, I note the contribution that
House Minority Leader Richard Gephardt played, as even Senate
Majority Leader Tom Daschle was forced to line up behind the
President, though Daschle was more concerned about getting the
election debate refocused on the state of the economy.
But as Gephardt said, very simply, the debate is an “issue of life
and death,” and while I respect the right of others to have
differing opinions, for the life of me I’ll never understand why
just 13 months after 9/11, some seem to want to get hit over the
head again and again until they ‘get it.’
Now, however, the President and his team need to wrap up a new
resolution with the UN Security Council, while it appears, as of
this writing, that both France and Russia require a little more
handholding (as well as more energy concessions) before they
join with the U.S. and Britain in authorizing force should
inspections fail, as they will. We’ll get their support, eventually,
it’s just taking a little more time than some of us hoped it would.
It was a poor week for the broader war on terror, as it was
confirmed the French oil tanker off Yemen was, indeed, the
victim of a probable al-Qaeda attack, while al-Qaeda was
responsible for the shooting death of a U.S. marine on exercises
in Kuwait. More ominously, #2 al-Zawahri popped up on a
videotape which the U.S. government says was produced in just
the past few weeks. There had been some hope that he was dead,
while at least for this week there was also evidence that Osama
himself may still be alive.
With al-Qaeda reemerging as a force, and with the battle between
the U.S. et al and Iraq imminent, the impact on the U.S. economy
and Wall Street can not be underestimated, even as most
financial types attempt to do so. But I’ll conclude on the same
hopeful note I have consistently echoed since 9/11. The U.S.
won’t just defeat Saddam, we will also see the start of revolution
throughout the region, only it won’t be the dire sort most fear.
Iran’s ayatollahs will be toppled, while Syria, Saudi Arabia,
Egypt and others face change on an unprecedented scale. This
will occur, though, only if the U.S. shows true commitment…and
spends huge amounts of money. Far easier said than done, given
the fickle nature of the American people following the successes
of post-World War II and the Marshall Plan. This is one instance
where our nation’s overall lack of knowledge on world history
and foreign affairs can hurt us, and it’s why I’ll feel compelled in
the months ahead to continue to use this pulpit to pound away at
the truth.
Wall Street
You’d like to think that the Street rallied on Thursday and Friday
because traders realized that better days are ahead due to the fact
that Saddam’s days are numbered, but that would be ascribing to
this group a level of intelligence far greater than is the case. This
aside, I’ll stick with my pronouncement that all we are currently
witnessing with regards to the equity markets is the
establishment of parameters for a broad trading range,
specifically 7000-10000. Yet on Wednesday, when all was dark
and Depression loomed, the Dow Jones closed below 7300.
“Heck,” I thought, “so much for 7000!” Nasdaq finished the day
at 1114 and the S&P 500 hit 776. For the latter, this matched the
July low, meaning that the S&P was the last holdout (the Dow
and Nasdaq having already established new multi-year marks).
Well, the S&P made a stand Thursday morning and then it was
off to the races, as equities broke a sickening 6-week slide, which
had seen the Dow, for example, decline 18% in that period.
For the week both the Dow and S&P 500 gained 4.3% to 7850
and 835, respectively, while Nasdaq climbed 6.2% to 1210.
No one who follows the markets with any regularity can be
surprised. We have had a slew of rallies since the market peak in
early 2000, with some of the best single days in Wall Street
history, all while $8 trillion was being wiped off investors’
statements.
As for the fundamentals, it was a week full of good and bad
noise, err, news. For starters, let’s remember what has been
holding up the U.S. economy the past few years. Consumer
spending (particularly autos) and housing (with its corollary,
refinancings). Now we face the plain truth that these stalwarts
are cracking. Housing, for example, I can finally officially
declare has peaked in the New York area. That doesn’t mean it’s
going down right away, mind you, but when Trader George tells
me on good authority that 64 homes are now for sale in the
small, but exclusive, New Jersey community of New Vernon, I
call that a top. And when at the same time consumer spending
declines for the month of September, with individual retailers
like J.C. Penney, Federated Department Stores and Kohl’s
reporting sales shortfalls, I call that trouble. Plus, when you
throw in the fact that the corporate bond market was in a total
state of disarray through much of the week due to weakening
credits and the undeniable fact we simply are swamped with debt
at all levels, it’s kind of like a Jackson Pollack painting…a
freakin’ mess.
So what turned it around? Believe it or not, we were given the
excuse on Thursday that Yahoo’s earnings report played a big
role (more later). Yahoo? Gimme a break. But, legitimately,
Aetna blew away its earnings forecast and then on Friday
morning, G.E. didn’t surprise investors with its report, while,
a “respected” follower of IBM (using the term loosely) said he
saw a pickup in capital spending for Big Blue, even as just about
every other tech-related company (except Intel) continues to
warn that future prospects remain grim.
But, once again, short-covering was the real reason for the
rebound, as the pros whip the little guy to and fro. In this kind of
environment it’s tough to stay focused on the Big Picture. Well,
I am, and in this world of incredible uncertainty, “caution”
remains my watchword, even as I try to see the light at the end of
the tunnel.
Street Bytes
–U.S. Treasury Yields
6-mo. 1.57% 2-yr. 1.82% 10-yr. 3.78% 30-yr. 4.80%
Another tame report on producer prices, while the Journal
reported at length on a prime topic of the past few weeks, at least
among the better strategists like PIMCO’s Bill Gross, that being
the issue of China and its leading export…deflation.
–Utilities got crushed this week, as too many outfits like Texas
Utilities and Allegheny Energy revealed more news on failed
ventures into energy trading land. And you thought utilities were
a safe haven? Only cash is, my friends. Preferably, as Sally
Brown once said, “in $10s and $20s.”
–ISI’s Nancy Lazar is still calling for 4th quarter growth in GDP
of 4%, thanks to a “good holiday season” fueled by savings from
further home refinancings. It’s normally foolish to go against
ISI, but I can’t believe this forecast. Most other strategists are
frantically lowering 4th quarter guidance to between 2 and 2.5%,
which, as we’ve discussed before doesn’t generally translate into
increasing profits.
–Back to General Electric, the company reiterated that this was
the most difficult economy they have faced in years and it won’t
reveal its outlook for 2003 until December.
–The Bush Administration underestimated the impact of the
dockworkers lockout, or else it clearly would have done more to
prevent it beforehand. It will take weeks to work off the
backlog.
–Deutsche Telekom is laying off 55,000 workers over the
coming years, in case you were thinking of moving to Germany
to become a phone repairman.
–The great strategist Ned Davis is most concerned about the
ticking debt bomb.
–Remember Alan Greenspan? You know, the Fed chairman
who used to tout how great financial derivatives were? Well,
this week while soaking in the tub, Mr. Bubble had a brainstorm,
which he passed on to a group of bankers. Derivatives, it now
seems, are “prone to induce speculative excesses.”
–Brazil: Luiz da Silva captured 46% of the vote last Sunday,
short of the 50% required to avoid a runoff, but when the second
round is held October 27, “Lula” will kick butt. Then, the
world’s financial community will sit back and observe what he
does next with the nation’s huge debt burden. Many experts
predict he will see the light and do all he can to continue to make
payments on it. I, on the other hand, believe he will seek to
restructure it, even with the knowledge that such a move would
kill badly needed foreign investment. On a related note, investor
George Soros warned this week that all of Latin America faces a
devastating financial crisis.
–Japan: At one point the Nikkei index traded down to the 8200
level, another 19-year low, before finishing the week at 8529,
still 1,000 points below the mark of just two weeks earlier. But
there are some rumblings that maybe, just maybe, Japan is finally
ready to tackle its bad debt problem, which is preventing the
banks from lending to new businesses and thus playing a huge
role in the stagnation that has afflicted the economy for over 10
years now. True, we’ve heard this only about 564 times before,
but Prime Minister Koizumi recently appointed a hard-ass
reformer to the finance ministry and we now wait to see what
actions the government and the Bank of Japan take. Of course,
no pain, no gain, and if Japan did allow some of its largest
institutions to go under, in the short run at least, that’s more
unemployment and a further deepening of the recession. It’s for
this reason that past Japanese leaders have failed to take action.
I’m beginning to think, however, that this time may be different.
Then again, I believe Godzilla lives.
–The Euro Zone: You’ll recall that when the 12-nation Euro
group got together, a “stability pact” was agreed upon, whereby
nations are to adhere to maximum deficit levels, among other
guidelines. Well, thanks to the sorry economy, France has
already announced they will exceed their targets for 2003. Let’s
see, that took, oh, about two years for the group to screw it up.
–Intel CEO Craig Barrett castigated corporate executives with
the following comments at a presentation in Seville, Spain.
“Stop feeling sorry for yourself. The future’s bright. Just go out
and do something about it…I have never been more optimistic
about the future of our industry than I am right now.” Barrett
looks for a recovery in capital spending by early 2003, at least on
the PC side. Whatever, but I beg to differ that his industry’s
future has never been brighter.
–PepsiCo reported solid earnings, thanks to increased sales of its
soft drinks and snack foods. So it should also come as no
surprise, then, that the latest findings in the Journal of the
American Medical Association reveal that 31% of American
adults are obese, compared to just 15% back in 1980.
–Yahoo announced that revenues were up 50% from a year ago,
as it beat the Street on earnings by a penny. [Church Lady:
“How conveeeenient!”] Oh, but to give Yahoo its due, we’re
glad its clearly a survivor, I just have a problem with the same
old issue that’s bothered me on 80% of all U.S. stocks since the
end of 1998, that being ‘valuation.’ Yahoo is slated to earn 22
cents in 2003. Let’s be super generous and call it 30 cents. The
shares rallied on the good news and closed at $13. So at $15,
let’s say, that’s a multiple of 50 based on excellent ’03 results.
I’m not going to rant and rave that this would be outrageous,
because in certain market environments, like post-Saddam
euphoria, anything is possible. But if you don’t see upside as
being limited, you’re crazy.
–PIMCO Total Return Fund, the only investment I have ever
recommended on this site (besides cash) is now formally the
largest fund around, exceeding Vanguard’s 500 Index offering.
Remember, sports fans, in the bond business size is good, and for
your diversified exposure to the bond market, this Bill Gross
managed investment is still your best bet.
–Lucent is laying off an additional 10,000 workers over the
coming year (some of this was previously announced), which
means employment at the company with the crappy front lawn
will have declined from a peak of 123,000 (155,000 by another
count) just two years ago to 35,000. Lucent also had its debt
ratings cut at the close on Friday, which means that the
remaining 35,000 won’t be able to rest easy either.
–My portfolio: I didn’t know that one of my oil drillers has a
small portion of business in Libya until I read a piece in Barron’s
last week. I can’t say I’m pumped about this, but I’m holding it
for now. Overall, I remain about 77% cash, 20% energy (one
refiner, four drillers / service cos.) and 3% Turkey.
–Shares in United Airlines hit a 40-year(!) low this week, as
bankruptcy still appears imminent.
–But the stock price of Lexmark rose on stronger-than-expected
results. We love Lexmark at StocksandNews, as its printers are
far superior to Hewlett-Packard’s. In fact, this weekend I’m
going to throw my freakin’ H-P out the window and buy another
Lexmark.
–There were just 7 IPOs in the third quarter, the lowest tally
since 1980, while job losses continue to pile up on Wall Street,
thanks in no small part to this IPO figure.
–The State of New Jersey has charged Sears with widespread
fraud in the handling of its car service division. This isn’t the
first time Sears has been accused of not making repairs or
trumping up unnecessary work.
–J.P. Morgan Chase saw its debt rating cut, not a good sign if
you’re thinking the coast is clear. Nope…the fog is still rolling
in.
–Goldman’s Abby Cohen lowered her 12-18 month price targets
on the S&P 500 and Dow Jones to 1150 and 10800, respectively.
Now while I disagree with these forecasts, the point is
predictions such as these are now irrelevant. Cohen, like 99% of
her peers, has been wrong for so long any shred of credibility has
evaporated. And when I say 99% I mean those forecasting both
‘long’ and ‘short.’ Even a bear like David Tice, who looks great
these days, was totally wrong for years leading up to the bear
market, and would have cost investors loads of money had you
followed his earlier strategies before the stars lined up in his
favor. No one called the full cycle right except the great Doug
Cliggott.
–Sorry, I can’t get excited by the FCC’s blockage of the
EchoStar-DirecTV merger based on antitrust grounds, but since
it was an $18 billion deal, it deserves this brief mention.
–Fitch rating service reported that 40% of all junk bonds issued
between 1997 and 1999 are now in default.
–Energy: Inventories continue to decline and it appears that
colder than normal weather is in the cards for parts of the country
next week. This gives us holders of energy stocks a warm, fuzzy
feeling. And just a note about Russia, part of the reason why it is
so worried about action in Iraq is the fear that eventually oil
prices will plummet. Russia bases its whole fiscal budget on the
price of oil, in the case of the current one using a benchmark of
$21.50 per barrel. The ‘basket’ of crude is currently around $28.
–Allow me to inject a “random musing” as I transition to a Street
Byte. Citigroup’s Sandy Weill, J.P. Morgan Chase’s William
Harrison, and Motorola’s Christopher Galvin are all members of
Augusta. Why would you want to hang out with these losers? In
fact, the only Augusta members I’d like to have a beer with are
Pete Coors (I’m assuming he travels with complimentary six-
packs), Warren Buffett and Arnold Palmer.
This week the Wall Street Journal ran another excellent piece
(Charles Gasparino in the lead) on the whole relationship
between Salomon Smith Binkey analyst Jack Grubman and
Citigroup chairman Sandy Weill. It’s not even a question
anymore that Weill put undue pressure on Grubman to play
around with his ratings in order to gain more investment banking
business. In other words, Weill is dirty.
Separately, commenting in a USA Today report on Merrill
Lynch and its huge legal liabilities, commentator Larry Kudlow
opined that Merrill’s top two, David Komansky and Stanley
O’Neill, should resign, adding, “The fish rots from the head
down.” Of course the same could be said about Weill and other
Street chieftains. That is the only way we will really begin to
restore any semblance of investor confidence. Here’s hoping
New York Attorney General Eliot Spitzer and crew continue
their vital mission.
International Affairs
Northern Ireland: Last weekend, British police conducted raids
on Sinn Fein headquarters, with one minister being arrested
under suspicion of aiding and abetting terrorism. Protestant
leader David Trimble, head of the power-sharing arrangement,
called for the ouster of Sinn Fein itself. Now, Britain is taking
over the government this coming Monday in a huge blow to the
1998 Good Friday Accords.
Meanwhile, down in the Republic, voters will be going to the
polls on October 19 to approve European Union expansion. The
same electorate earlier voted down the “Nice Treaty,” but now it
appears proponents have the votes. It’s a complicated deal, but if
the Irish were to say ‘no’ again, then technically, E.U. expansion
is null and void and it would spur one helluva fight.
But why would they do so? Subsidies, my friends. Ireland, after
all, has been the leading recipient of E.U. largesse (well-
deserved, as I’ve noted often before) and, coupled with a terrific
corporate tax policy, it’s a reason why the Celtic Tiger has been
such a success. Now the economy is finally slowing and many
don’t want to have to share their subsidies with the likes of
Poland, Hungary, and the Czech Republic. Hopefully, this view
won’t carry the day.
Nor do some Irish and other E.U. members want to share
subsidies with the likes of…..
Turkey: This week my beloved Turks suffered another
humiliation as the racists in the E.U. refused to accept Turkey’s
formal candidacy into the rapidly expanding club. Yes, there are
very legitimate concerns, particularly in Germany, which is
having problems with massive immigration from Turkey, but
despite all the noise, it boils down to the fact that the E.U. is not
willing to accept a Muslim nation into its coffee klatch.
As I’ve reported over the past few months, Turkey has bent over
backwards to appease the E.U., including the abolition of its
death penalty, as well as the granting of minority rights to the
Kurds. People forget that thousands of Turks lost their lives in
war with the Kurds, a conflict unlike any other faced by an E.U.
member.
Just as importantly, however, is the fact that Turkey has been a
loyal NATO ally, is currently leading peacekeeping forces in
Afghanistan, and is of immense importance in the coming
campaign against Saddam. For its part, the U.S. applied all the
pressure it could on the E.U. to accept Turkey’s candidacy, yet it
failed, because you can’t do these freakin’ things at the last
minute, guys!
Turkey is 98% Muslim, while it”s also the one true democracy in
the Arab World. It is far from a perfect country, but it is
obviously a shining example compared to the other hellholes in
the region. We should be so lucky as to have the likes of Iran,
Iraq, Syria and Saudi Arabia emulate the Turks and their system
of government. But now many in the country are understandably
frustrated, and anti-Western sentiment is growing. It didn’t have
to be this way. [Note: I am still planning on placing a larger
investment here than I currently have. I just need to see what
happens with the November 3rd vote and the war on Iraq.]
Israel: The Sharon government caught heat for the Gaza raid
early in the week that killed 14, but in this instance, it seems
pretty clear Hamas was using civilians as human shields.
Meanwhile, Israeli soldiers dismantled one illegal settlement on
the West Bank…just 100 or so to go.
Finland: Breaking news on the probable terrorist attack in this
peaceful country that killed seven. Too soon to tell, though,
what is really involved
Random Musings
–John Keegan, one of the great military historians of our time,
commenting on President Bush and the war on terror. “The
President has committed his country to a fearsome duty. It will
never go away.”
–PBS’ “Frontline” dealt with national missile defense this week
and, as usual, it was a balanced presentation. For new readers, I
have written extensively on this subject over the years, both in
this space and “Hott Spotts” (see archives), but what continues to
get me is the failure of anyone (including on this particular
program) to even discuss the following; the United States won’t
always be able to retaliate to a surprise nuclear attack in kind.
Why? Well, the case for NMD (which I’m a big supporter of)
has always been that we need a shield to protect us from the
threat posed by the likes of North Korea.
Opponents say, however, that North Korea would never launch
such a ballistic missile attack because they’d be leaving their
calling card and the U.S. would then obliterate them. But the
fact is that the North Korean capital, Pyongyang, is only about
100 miles from Seoul, and we couldn’t possibly risk contaminating
our friends with the fallout. [Smaller battlefield type nukes
are being developed which could alleviate this problem.] Just
something to keep in mind and all the more reason why we need
the shield. Many, like our own Dr. Bortrum, don’t think it’s
possible. I say we have to try to make it work and we can’t
afford to take the chance that a nut case won’t cross the line.
It’s also another reason why the costs of national security, for
all manner of threats, will be absolutely astronomical, if we
are to begin to do the job right.
–When I made my disparaging comments on former FBI director
Louis Freeh last week, I didn’t realize he was appearing before a
congressional committee on Tuesday, wherein Freeh blamed
Congress for not approving bigger budgets and refused to
apologize for any of the bureau’s obvious shortcomings.
Unfortunately, as was the case during his entire 8-year run,
Congress once again largely gave him a pass.
–There is nothing I can add on the sniper case. It’s such a
tragedy…and scary as hell. Let’s all pray that the killer(s) is
caught today and the good people of the Washington area can go
about their lives, as is their right. We also pray this is the work
of a kook(s), and not al-Qaeda type terrorists, as many of you
have written me.
–Jimmy Carter was awarded the Nobel Peace Prize. I’m not a
fan of the former president, but what the hell. What really pisses
me off, however, is the reasoning given by the Leftists in
Norway. If you read their comments they seem most impressed
by Carter’s Camp David Peace Accords, circa 1979(!), than
anything else he’s done. Of course the committee then goes on
to slam the Bush Administration for its own lack of success in
the Middle East, as well as its policy on Iraq.
–The Chicago City Council demanded that all companies doing
business with the City reveal any past ties to the slave trade and
pay reparations. Of course this is simply extortion. [For its part,
StocksandNews has no ties of its own to said trade.] On a related
matter, singer Harry Belafonte, whose last hit was, oh, 45 years
ago, compared Colin Powell to a plantation slave. Powell has
too much class to respond in kind, unlike your editor.
You know why I bring these two items up and why I’m miffed?
This week my friend Trader George and I were musing about the
2008 election and we came up with an interesting ticket,
Condoleezza Rice and George Pataki. The fact is we’re two
regular white guys who would vote for a black woman for
president in a heartbeat, because Ms. Rice, in our minds, is
eminently qualified. Yet in some circles, whites of my ilk
( read “conservative”) are branded racists. Oh, I have far more to
say, but I need to censor myself.
–The U.S. Supreme Court opted not to review New Jersey’s
senate race debacle. I said last week that I had thrown up my
arms and accepted the fact that while Robert Torricelli broke the
rules, there was little we could do about it. I was just being a
realist, at this point in time, but I certainly understand comments
like that of long-time reader Scott from Melbourne, FL (who
obviously has experience in these matters) when he says, “(In the
New Jersey) Court’s ruling, Democracy, as a means and an
example of governing, has suffered another hit below the belt
given the total disregard for the rule of law which the Court’s
purpose is to uphold.” Already, we are seeing other states take
opportunities to suddenly change the election statutes in mid-
stream. It sucks…and it’s depressing. And as my broker/friend
David P. said this week, it’s also part of the Clinton legacy.
–This week most of us learned that the average West Coast
dockworker earns about $100,000 a year, with a benefits package
of $42,000 to boot. I’m now rethinking my career path.
–The Mars candy family has yet to adopt me, despite the
tremendous free publicity I gave them last week for their new
“Cookies & Snickers” product. I’m disappointed, to say the
least, and it’s another reason why I need to think hard about
becoming a longshoreman.
—
God bless the men and women of our armed forces. You’re
increasingly in our thoughts.
God bless America.
—
Gold closed at $317
Oil, $29.37
Returns for the week, 10/7-10/11
Dow Jones +4.3%
S&P 500 +4.3%
S&P MidCap +3.1%
Russell 2000 -0.9% [Doh!]
Nasdaq +6.2%
Returns for the period, 1/1/02-10/11/02
Dow Jones -21.7%
S&P 500 -27.2%
S&P MidCap -21.1%
Russell 2000 -29.4%
Nasdaq -37.9%
Bulls 31.0% [Lowest since ’94…good contrarian indicator,
though, to be honest, this wasn’t the case back then. The market
went nowhere for a long spell.]
Bears 39.1% [Source: Investors Intelligence…remember, there
is roughly a 10-day lag from the survey to when I’m posting
these figures.]
Note: Next week I’ll be reporting to you from Oklahoma City,
as I commence a “Discover America” tour covering six states in
two weeks; from Oklahoma and the Panhandle through
Colorado, Wyoming, Montana, and the Dakotas. Actually, it
doesn’t really start until Friday, but this is my way of saying the
column may be slightly delayed next Saturday due to travel.
*I have been posting President Bush’s key speeches on Iraq on
my “Hott Spotts” link. If you or your friends forget why we’re
about to go to war, check them out.
Have a great week. I appreciate your support.
Brian Trumbore
