[Posted 7:00 AM]
“They haven’t seen their incomes go down. They’ve seen their
retirement savings go down.”
–Republican pollster Frank Luntz
And so it was that President Bush unveiled his economic growth
plan, which Democrats keep trying to label an inadequate
“stimulus” proposal. While I don’t disagree with it, as least as I
understand it today, I am unnerved by the Administration’s focus
on getting America’s investors to take on more risk through
investing in the stock market, with all kinds of proponents
talking of a 10%+ bump in share prices should the package go
through as is.
Sure, we’ve already had about half of that in just the first 7
trading days of 2003, but the discussions surrounding the tax
plan say nothing about the risks that are still out there. I’ve
stated in this space on more than one occasion that I believe our
war against Saddam will go well, with the added dividend of
regime change shortly thereafter in Iran, but I’ve also said that to
act on this supposition by throwing gobs of money into equities
is gambling, not investing.
Here are two specific examples I’ve noted in the past. Months
ago I said I put Continental Airlines on my personal watch list,
but that I couldn’t invest in it until the shooting started, at the
earliest, because the airlines could take another major hit due to a
further increase in the terror threat against the U.S. There could
be a significant period of time where a decent percentage of the
flying public opts to stay grounded.
In a similar vein, I wrote of how I snapped up my profits in
Turkey in the euphoria surrounding the election there, but was
looking to reenter only after I saw how the probable war with
Iraq was proceeding, Turkey being a potential victim, as well as
a longer-term beneficiary. Again, I’m touting investing versus
gambling. Throw in the ongoing uncertainty over North Korea
and it forces me to issue my now quarterly statement of caution.
Go ahead and make educated investments in equities, but if you
do so in a big way, first ask yourself, “If all hell breaks loose on
the geopolitical front, is my family protected? Will I be able to
sleep at night?” If you pass this self-examination, fine. I just
wish some of the strategists and pundits out there would tack this
on to their own comments from time to time.
Yes, I do think the market will finish up in 2003 (10%-20%
depending on the index), but this is based on my belief that the
international picture will clear up in a way that the majority of
Americans, and investors, will take to be positive. Remember,
despite all the talk about getting back into the market, it’s
sentiment and confidence levels that will still drive things,
longer-term, not just tax and growth proposals. The cynicism
that is plaguing the average investor will not disappear in a flurry
of hype. It will simply take time, perhaps lots of it.
This was a most interesting week, I grant you, with more than the
usual crosscurrents. Just in the technology arena alone you had
software giant SAP and storage king EMC both issue positive
comments on the revenue front, which gave the market a lift, but
then you also had Apple Computer chairman Steve Jobs, who in
an appearance on CNBC was asked about the overall corporate
spending environment. Jobs had a look on his face like he was
about to cry, as he replied, “Corporations are not spending.”
On a macro level in terms of the broader economy, we learned
this week that retail sales for the holiday season probably
increased in the neighborhood of 1%, 0.5% if you use a measure
including both November and December. Not that good, sports
fans. In fact, downright lousy, though shares in retail stocks held
up because the news was already priced in. It was also reported
that consumer debt levels unexpectedly fell in November, which
while good for household balance sheets, isn’t a great thing if
you were counting on the consumer to keep reaching into their
wallets.
Meanwhile, a measure of factory orders showed continued
weakness, while on Friday the latest figures on employment were
miserable, reflecting another huge job loss for December.
Regarding the latter, it doesn’t help that you still have
announcements from the likes of AT&T and Alcoa, reporting
3,500 and 8,000 new layoffs, respectively.
But to end this section of my weekly review on a somewhat
positive note, the likes of Morgan Stanley’s Byron Wien and
CNBC’s Larry Kudlow are forecasting large gains in the coming
months and years; 25% in the first half of ’03 according to Wien,
40% in two years if you follow Kudlow’s advice. As for me, I’m
prepared to give up the first 1,000 points just to be sure.
Iraq
While we all pray for a coup in Baghdad, or at least a smoking
gun, when it comes to Saddam neither has presented itself. UN
inspections chief Hans Blix received a lot of heat this week for
merely stating the truth, they haven’t found anything yet, at
which point conservatives such as Charles Krauthammer took the
opportunity to blister anew both Blix and Secretary of State
Colin Powell. Cool your jets, guys. There is no doubt that some
of us wish we had taken care of the problem a year ago, when
support for military action in this country was far greater, but the
Bush Administration made this bed and now we all have to sleep
in it. I’m as frustrated as the next guy, especially since without
presenting the evidence, us hardliners can’t be surprised that
public support for military action is eroding.
I prefer to focus, however, on Blix’s statement that he is “not
satisfied” with Iraq’s compliance. Therein lies a potential pretext
for war. And while a report from a British newspaper has Prime
Minister Tony Blair urging President Bush to wait months in
order to let the inspections play out, I prefer to focus on French
President Jacques Chirac’s statement that the nation’s military
needs to be prepared for anything. I’m still hopeful Chirac will
prove me right when I said last spring he’d be there when we
need him…that’s ‘hopeful,’ not delusional.
But there is one item even I can’t help blasting the Bush
Administration on and that’s its handling of Turkey. I warned
long ago that we needed to engage this country aggressively.
Turkey got the shaft following the first Gulf War and it’s this
memory that has shaped attitudes in the nation ever since. I still
have confidence in the new Islamic government, but I see why
they are being obstinate, especially in the face of polls showing
80%+ of the Turks against war.
Turkey’s economy was hammered in the early 90s, not just
because of corruption, but also because we abandoned them,
both financially and in failing to change our trade policies to
allow them to sell some freakin’ rugs and textiles!
Today, it’s only belatedly over the past few months that the
Administration has begun to talk dollars. Basically, we’re
willing to give $4-$5 billion, plus a substantial low interest loan,
while Turkey is asking for $25 billion. [I told you this would be
the true cost, and sacrifice, in the war on terror.] Certainly a
compromise can be reached somewhere in the middle, but it’s
frustrating to view the seeming lack of understanding on the part
of some in the Bush camp.
As of this writing Turkey said it won’t step up and allow U.S.
ground troops until the UN signs off on war, which means our
military can’t even prepare the bases for them. It never should
have reached this point.
North Korea
Senator John McCain has labeled Kim Jong-Il a “sociopath,”
which I’m sure warms Kim’s heart, and this week the North did
little to dispel its ugly image. But at least there is some
movement to engage, though the U.S. refuses to make
concessions, while Kim demands them.
We did begin to see a change in tone from the South Koreans,
though, so we’ll hang our hat on this positive. The government
in Seoul has finally come to the realization that allowing all the
anti-Americanism to spread is probably not in their best interests,
so at week’s end various officials were writing op-ed pieces in
support of the U.S.-South Korean relationship. The latest poll
shows that 53% of the people dislike the U.S. (it was 15% in
1994), but this breaks down to only 26% of those over age 50,
yet 75% of those in their 20s.
Lastly on this topic, North Korea derives its revenue from the
sale of missiles and drugs. Regarding the latter, those very
effective anti-drug commercials that you see on television should
incorporate this fact. Granted, that would be a bit inflammatory,
I suppose, but the public needs to know the truth.
Street Bytes
–On the week, the Dow and S&P 500 rose 2.1% each, to 8784
and 927, respectively, while Nasdaq climbed another 4.4% to
1447. The Dow is up 5% thus far in 2003, while Nasdaq has
climbed 8%+.
–U.S. Treasury Yields
6-mo. 1.23% 2-yr. 1.76% 10-yr. 4.13% 30-yr. 5.09%
There was a lot more talk on the dollar front, thanks to comments
PIMCO’s Bill Gross made in his monthly newsletter
(pimco.com). Gross is increasingly concerned about the current
account deficit, and, let’s face it, while the Bush tax plan has a
lot to like, if the U.S. economy doesn’t grow out of the deficits
we’ll undoubtedly wrack up the next few years, we have a
potential time bomb. Simply, how will we finance the
burgeoning debt without the Federal Reserve being forced to jack
up interest rates in an attempt to keep foreign capital in the
States? And if this happens, it isn’t good for stocks. As it
currently stands, however, despite dire warnings of a market
meltdown due to the declining dollar, funds are still flowing into
equities, albeit with not much enthusiasm on the volume front for
the aforementioned sentiment reasons, but at least there are more
‘buy’ tickets than ‘sell’ orders.
And when it comes to the dollar, it’s not as if Europe and Japan,
to name two, welcome a stronger currency against the greenback
because their own economies are even worse off than the U.S.
and their exports are less attractive to consumers given the dollar
weakness.
–I’m going to hold off on commenting extensively on the Bush
growth plan, except to say that the dividend exclusion issue is, as
the Administration has framed it, one of fairness. Similarly, it’s
also why I favor the elimination of the death tax. What is
exciting to yours truly, though, are prospects for further reforms
to the tax code should Bush emerge victorious in ’04, as we
progress towards a true flat tax, he wrote dreamily.
But we still have this explosive issue of the alternative minimum
tax, one which the Administration seems to want to pretend
doesn’t exist. While on the other hand, I was very encouraged
by the President’s remark that we have to tackle the “lawsuit
culture” in America. Amen, Mr. President.
–Energy: Oil dropped precipitously to below $31 by mid-week,
but then rallied some to close at $31.68, still off from the
previous week’s $33 level. The volatile inventory picture
improved somewhat and OPEC (with cooperation from non-
OPEC producers such as Russia) announced it would produce at
least 1 million barrels a day more to help alleviate supply
pressures brought on by the continuing turmoil in Venezuela, as
well as potential disruptions from a war in the Gulf.
Early in the week my drillers took a real hit and it’s been
frustrating how they can’t break out of a narrow trading range
going back to mid-August. The problem is the major integrateds,
like Exxon Mobil, don’t want to initiate any large projects until
they get a better handle on the global economy and see more
price stability. It may be months before the picture becomes
clearer and, as I’ve written before, $22-$24 is really the optimal
level, for both economic activity as well as the producers and
drillers. Then again, in the world of crude, things seldom work
out so neatly.
[My portfolio: 25% energy, 3% tech, and 72% cash.]
Finally, Japan is in the process of committing to a huge pipeline
project linking it to Russia / Siberia, which would help wean not
just Japan but the entire region and the U.S. away from Middle
East oil. [The U.S. could easily ship from facilities in Japan.]
–News that California Governor Gray Davis has proposed some
$8 billion in tax increases, along with spending cuts to fill a
projected $35 billion budget shortfall, gives you some sense of
just how tough it is for the Bush growth plan to have a truly
positive impact. Any benefits from Washington can be offset by
the States’ huge problems.
–Online retail sales rose a solid 28% during the holiday season.
–Spam, junk e-mail, costs U.S. businesses $8.9 billion a year in
lost productivity and increased costs for new servers (that is
unless you’re the one selling the server).
–So here I’ve been beating up on UBS’s Ed Kerschner for his
stock prognostications for 2001 and 2002, when I could have
been picking on his colleague, Mary Farrell. Thanks to Barron’s,
it was pointed out this week that Farrell, a regular panelist on
“Louis Rukeyser’s Wall Street,” had a Dow prediction of 13750
for 2002. Try 8342. A slight miss.
–At my Lions Club meeting this week, the topic turned to
Home Depot (after we toasted the new heart healthy alcohol
study). Boy, if this group is any indication, Home Depot’s
problems are even worse than I thought. All are in agreement,
including yours truly, that the shopping experience totally sucks.
–Merrill Lynch has laid off 26% of its workforce, and in an
excellent piece by Landon Thomas Jr. of the New York Times,
it’s pointed out that through some of the cuts (far more than other
major brokerage firms on a percentage basis), Merrill seems to
be saying it’s “no longer bullish on America.”
Separately, Merrill suffered a major defeat in a federal appeals
court ruling, whereby offshore partnerships that Merrill had set
up around 1990 for then American Home Products were declared
to be a “sham.” One of those in charge at the time was Arshad
Zakaria, now current head of investment banking at Merrill. He
is the brother of Fareed Zakaria, by the way, for you “This
Week” and Newsweek junkies.
–Gateway warned of another lousy quarter. It’s time to put this
company out of its misery, hopefully through a merger that saves
as many jobs as possible.
–Last week I mentioned that investors in the PIMCO Total
Return Fund could reasonably expect 4-5% on their investment
in 2003 (no guarantees, remember), and then the next day in the
Sunday Times, manager Bill Gross reiterated this, 4-5%.
–Shares in Pre-Paid Legal Services plunged 25% on Monday
due to a drop in membership. I don’t really understand the
company, but I just note this because a fellow I met in a tavern in
Medora, North Dakota gave me a sales pitch on the company last
November. I’m glad I didn’t bite. Beer was tasty, though.
–If you’re noticing a theme here you’re right.
–The electrical workers union at G.E. has formalized its strike
plans, two days beginning January 14, all over the increased
share of their healthcare that they are being asked to shoulder.
–The National Association of Securities Dealers, along with the
SEC, is investigating the issue of “breakpoints” on mutual funds
and whether brokerage firms are holding back on them, i.e., let’s
say at a certain investment level your up front commission
should drop from 5.5% to 4.5%, some firms could be charging
the full 5.5%. For their part, the fund companies are innocent in
this matter.
–The FCC has ruled that the regional bell operating companies
no longer have to subsidize the competition when it comes to
sharing local networks, a potential big boost for the RBOCs.
–Wal-Mart is entering the financial services industry, beginning
with items like processing wire transfers, money orders, and
payroll check cashing. It’s interesting to note that 20% of Wal-
Mart customers don’t have a bank account, which probably
means the same 20% avoided the crash in Nasdaq.
International
Israel: The nation fell victim to another double suicide bombing
last Sunday that left 23 dead. Meanwhile, the countdown to the
January 28 vote is getting ugly, with allegations flying that Prime
Minister Sharon and his two sons accepted bribes. Sharon
vehemently denied the charges.
Iran: The mullahs are rushing to get their nukes before the U.S.
goes in to change the regime. It’s frustrating to some of us that
the Bush Administration didn’t publicly support the students last
fall at the height of their protests. A huge mistake, in my book.
It’s also time for Bush to have another sit down with our friend
Vladimir Putin. “Yoh, V-man, cut the crap with regards to the
Iranian nuke projects. But can I interest you in more oil?”
Random Musings
–Goodrich announced, without admitting guilt or responsibility,
that it will help the state of California clean up perchlorate, a
component of rocket fuel that has been discharged into the water
systems of about 22 states at last count. This is along the lines of
my complaint last week concerning the energy companies and
the ranchers in Wyoming and Montana. And then PBS’
“Frontline” ran a show on workplace dangers, including more
examples of chemical companies who knowingly broke
environmental laws in disposing of some of their material. I’ve
become more and more of an environmentalist over the years (a
pragmatic one, I’d like to think) and I suspect I’m not alone. We
have to start locking up the offenders for lengthy periods to send
the right message. You just can’t do this stuff, a-holes.
–Engineering teams are mapping out landmarks like the Statue
of Liberty, the Capitol Building, and Mount Rushmore, so that
they can be rebuilt in the event they are destroyed in an attack.
–The January 13 issue of Business Week had a disturbing note
concerning the pilots of air-tankers used for fighting forest and
brush fires. Since the federal government outsources this work,
the pilots can’t get affordable life insurance from the independent
contractors they fly for. Last year, 6 pilots died while
undertaking this extremely dangerous work and they are now
defecting in droves, as you can imagine the impact on the
families left behind. Congress must act to rectify this situation
…another instance of simple fairness.
–My buddy Jimbo said we already have a winner for “Dirtball of
the Year” in Newark’s Sherry Murphy, the woman responsible
for the horrific murder (though not charged as yet in this regard)
and child abuse case that hit the headlines this week. Just flip
the switch and wipe her off the earth.
But the Star-Ledger had an article on Friday that exposed the
incredible stupidity of Newark officials. Check this out.
In March 2001, Ms. Murphy was sentenced after admitting to
stealing over $36,000 from a Newark housing complex that she
was managing. Now that isn’t a small piece of change, at least
by my way of thinking. So what was her punishment? One day
in jail (on arrest), 4 years probation (which she continually
violated), 100 hours community service and…$50 a month
restitution! $50 a month?! You start doing the math. Then
again, with Newark’s school system a shambles, maybe the
prosecutor and judge are products of it.
–Al Sharpton is formally throwing his hat in the ring for the
Democratic nomination for president, saying he is “probably
more qualified than any other Democrat seeking the White
House.” I’m sure party bosses were thrilled with this statement.
Then again, Sharpton could wrap up the “ignorant” vote.
–And then there is Senator Tom Daschle and his decision not to
run for the top slot. I guess he figured it would be tough to find
enough Native Americans who could then vote 2 or 3 times each
for him.
–While I have become a convert to theories on global warming, I
do have to note that with the record killer cold in Russia and the
surrounding area this winter, the Baltic Sea may freeze over for
the first time since 1948.
–The journalist assigned to the Raelian cloning story said that he
wasn’t given access to the family so he dropped the project,
leaving the rest of us to wonder, “Yeah, but what about the alien
spokeswoman?”
–The premiere of “Joe Millionaire” generated huge ratings, even
more than the premiere of the first “Survivor” and “American
Idol.” I notified Fox of my availability for “Joe Web Editor,” but
have yet to hear from them.
–Finally, thank God for sports, the perfect release from the
problems of the everyday world. We’ve been fortunate in the
New York area to have had a lot of exciting football these past
few months, even if Giants fans are still in mourning. I know for
my part that it has given me an excuse to talk to people I never
would have otherwise. Sports brings communities closer
together, whether it’s Austria’s excitement over its alpine skiers,
Kenya’s over it’s marathoners, or Australia and its swimmers.
It’s also why I get so upset when I see school districts shutting
down various athletic programs due to lack of funds. Get them
from somewhere else, I say, like the computer club.
—
God bless the men and women of our armed forces.
God bless America.
—
Gold closed at $354
Oil, $31.68
Returns for the week, 1/6-1/10
Dow Jones +2.1%
S&P 500 +2.1%
S&P MidCap +0.9%
Russell 2000 +1.6%
Nasdaq +4.4%
Returns for the period, 1/1/03-1/10/03
Dow Jones +5.3%
S&P 500 +5.4%
S&P MidCap +3.2%
Russell 2000 +3.5%
Nasdaq +8.4%
Bulls 47.8%
Bears 27.8% [Source: Investors Intelligence]
Thanks for your kind notes regarding my acquisition of CSI
MultiMedia.
Next week I’m coming to you from Los Angeles. There’s a story
there, but you have to tune in to find out just what it is.
Brian Trumbore
