[Posted 7:00 AM ET]
Iraq
Now comes the hard part, winning the peace. It’s a period when
bad news stories may appear to outweigh good ones, while each
suicide attack against U.S. or coalition forces causes a dip in
support for President Bush. Thankfully, he will see the mission
through to completion, and there’s still every reason to believe
the rewards will be great.
Just look at the reaction of the other two members of the “axis of
evil,” Iran and North Korea. Iran is now contemplating holding a
referendum on whether the nation should seek to renew ties with
the U.S., while the great scholar Bernard Lewis wrote this week
that the “Iranian people can take care of the change.” Optimists
like yours truly only hope the U.S. lends moral support once the
students start demonstrating again.
As for North Korea, clearly Kim Jong Il has received the
message, the U.S. means business. But here it’s more
complicated. Pyongyang agreed to multilateral talks this coming
week with China as an active participant, a step long sought by
the Bush administration. And even though South Korea is being
excluded from the initial dialogue (as is Japan and Russia), Seoul
has been effusive in its praise of the success in Iraq, saying it
helped pave the way for a change of attitude in the North.
So should we be popping the champagne yet? Hardly, since on
Friday, Pyongyang announced it had begun reprocessing nuclear
fuel rods, the key step towards developing nuclear weapons. The
intelligence community has doubts this is true, but our leaders
have to proceed as if it is. Blackmail remains the watchword and
the world can not rest easy until Kim’s regime is toppled.
But this is no Iraq. I noted before the war that Iraq’s generals
were “worthless.” [WIR 3/15/03] That proved to be the case, but
in the same column I wrote that their North Korean counterparts
are crazed fanatics. This is what keeps our leaders up at night.
Meanwhile, the U.S. continues to put the screws to Syria,
blocking an oil pipeline from Iraq that provided Damascus with
cheap crude, while simultaneously threatening harsh economic
sanctions if they insist on harboring the remnants of Saddam’s
regime. Secretary of State Colin Powell is headed over there
shortly to meet with Syria’s dim-witted president, Bashar Assad.
If the meeting doesn’t go well, look for U.S. special ops forces to
actively pursue Iraqis and other terrorists in Syria proper.
Of course any positive response in dealing with issues like
Hizbollah and Syria’s presence in Lebanon is a plus for Israel.
Once Palestinian Prime Minister-elect Mahmoud Abbas takes
office, Israeli Prime Minister Sharon won’t have many excuses
left not to negotiate if he can be assured Israel’s border with
Lebanon is terror free. Sharon owes Bush, but Syria and its
proxies remain the last stumbling block before any real progress
can be made here.
As for Europe and the coalition of losers, the Washington Post’s
Jim Hoagland reported that official Bush administration policy,
as espoused by Condoleezza Rice, is as follows.
“Punish France, ignore Germany, and forgive Russia.”
I have no problem with this, though there are many who ask,
why forgive Russia for its duplicitous behavior, such as in
arming Saddam and, allegedly, spying on Tony Blair?
To which I can only reply; Russia is just being Russia. The
relationship between Moscow and Washington is immensely
frustrating right now, but you have to take the good with the bad,
even if during periods like the current one finding anything good
is harder than sitting through a performance of Shostakovich.
And when it comes to the rebuilding of Iraq, the U.N., E.U.,
Britain and the U.S. all have differing opinions, whether it’s who
participates in establishing a new government, the issue of debt
forgiveness, or the lifting of sanctions. Basically, it’s a mess, but
there should be more clarity in a few weeks. In the meantime,
finding a few weapons of mass destruction would help the U.S.
cause. Let’s hope some former Saddam supporters talk. For
starters, it would be nice to shut Hans Blix up, once and for all.
Wall Street
I bring you tidings of great joy on the earnings front. Well, not
quite, but for the most part the week’s reports weren’t awful.
Few negative surprises from the likes of Microsoft, Intel and
IBM, for example, though none of these three were particularly
cheery, either, but EMC and Texas Instruments did sprinkle their
comments with rays of sunshine. So does this mean Corporate
America is set to unleash a new wave of capital spending? No.
Does it mean, however, that a bottom is in, at least for the tech
sector? Yes.
I still stick with my thesis that a hard look behind the GDP
figures for the 4th and 1st quarters will reveal that the U.S.
economy had double-dipped, but I’m more optimistic today that
a recovery is nigh. The only problem is it will be a tepid one and
it may still feel like a recession.
And when you talk about equity returns and some of the big
boys, as in those listed above, from a valuation standpoint, even
with a recovery in earnings the market has limited upside.
Meanwhile, regarding the economic fundamentals, capacity
utilization remains at 75%, hardly a figure from which strong
profit growth flows. HSBC did a study of this key barometer and
the actions of the Federal Reserve under Alan Greenspan’s
stewardship. Historically, the Fed hasn’t raised interest rates
until the figure hits 82%, and we would appear to be a long ways
from that day. The chairman, who next gathers his minions May
6, continues to have every incentive to hold the line on short-
term rates in an attempt to keep long rates down as well, which
in turn helps refinancings. But the news on the refi front is not
good, as the pace of applications has slowed considerably.
As for Congress and the battle over a stimulus package, the
House is at $550 billion and Chuck Grassley’s Senate stands at
$350 billion. Republican Grassley, the new public enemy #1 at
the White House, is adamant he’s not budging from the 350
figure. You can almost hear him scream in pain all the way up
here in New Jersey, as his arm is being twisted like a pretzel by
Karl Rove.
Finally, we can’t ignore the impact of SARS. While there was
good news that a vaccine could be in the future, the fact is the
economic fallout in Asia and potentially Canada is doing a
number on the growth projections of those most impacted.
Singapore, for example, has slashed its forecast for GDP in ’03
from 3.5% to 2%, at best, with some saying it will be closer to
0.5%. And picture Hong Kong, where over 1,000 restaurants
have closed, or Cathay Pacific Airlines, which is threatening
to shut down its entire operation as it expects capacity rates to
eventually hit 20% on its routes.
But the key is China, and getting accurate information from
authorities here is difficult, to say the least, though the
government admitted this week that SARS is spreading to the
hinterlands, which when one looks at a map means India lies in
the path (India having already reported its first confirmed case
this week).
Put it all together and you can reach only one conclusion. The
news on this front will get far worse before the vaccine becomes
available to the masses, and an already fragile global economy
can ill afford mass isolation.
Street Bytes
–A solid week for the equity markets, with the Dow Jones’s
1.6% rise to 8337 understating the broader market’s returns, as
the S&P 500 gained 2.9%, while Nasdaq added 4.9% to 1425 on
the strength of the aforementioned better than expected earnings.
Volume also picked up some, an encouraging sign, and flows
into stock mutual funds are at the highest levels in a year.
–U.S. Treasury Yields
6-mo. 1.19% 2-yr. 1.68% 10-yr. 3.96% 30-yr. 4.89%
Largely unchanged on the week, as the benefits of a tame CPI
and the punk news on the manufacturing front were offset
somewhat by a falling dollar.
–Energy: All eyes will be on OPEC this week as the cartel, sans
Iraq since they don’t have any new representation as yet, meets
in Vienna to adopt new production cuts in an attempt to keep the
price of crude in the mid-to-upper $20s. One of the problems
OPEC faces is the status of Venezuela, which this week
announced its own production was back up to 3.2 million barrels
per day, after months of severe shortfalls due to the nationwide
strike. Venezuela’s stated OPEC quota is 2.8 million, but the
government argues it is merely playing catch up, with oil
revenues critical to any economic recovery.
–Canada: This is the only developed nation that continues to
raise benchmark short-term interest rates over concerns that
renewed growth will stoke inflation (now running at over 4%),
but SARS still has the potential to do a number on the economy
and Canada is also dependent on a pickup in the U.S., home to
85% of its exports.
–Kirstin Downey had a good piece in the Washington Post on
the issue of the difference between employee and executive
pension plans, where the latter are protected as the rank-and-file
see their own benefits slashed. At week’s end we had another
example of this with the revelation that 45 AMR execs are
protected even if the company goes under (AMR gained a
reprieve Wednesday when the last union capitulated, thus staving
off bankruptcy for a while). The unions are furious and feel
double-crossed, but late Friday the executives relented and
pulled the plan. [As I write this, a few of the details are sketchy.]
No one who believes in our economic system can complain too
bitterly about executive compensation as long as it appears to be
fair, but it’s when the little guy gets shafted while the elite run
them over with their Hummers that the rest of us just want to
scream, “This is bull—-!”
–On another compensation issue, the other day I wrote that
Lucent’s Patricia Russo was granted total comp of $29 million
for ’02, most of which was in the form of stock grants. This
figure was according to the New York Times. Since then I have
seen two others, both of which were closer to $10 million.
–WorldCom will be emerging from Chapter 11 as early as
September and plans on re-adopting the name MCI, a smart
move even if we really don’t give a damn around here. But their
competitors certainly do, because the newly revamped MCI will
be operating without the bulk of the debt that WorldCom had
amassed, making it a fierce competitor. Is this fair; a company
that was rife with fraud emerging a stronger entity? Of course
not. In fact it sucks, unless you happen to work there. And to
top it all off, former CFO Scott Sullivan was indicted on more
charges of cooking the books.
–Barron’s cover story this week was on how overvalued the
Internet Big 3, Amazon, eBay, and Yahoo are, a topic often
covered in this space. Now two years ago the story may have
had some impact, but as I’ve written recently the stocks simply
have too much momentum for investors to make money
‘shorting’ them, as much as some of us would like to. Yours
truly wasn’t surprised that two of the three rose further this
week despite the negative commentary.
–We do give Amazon’s Jeff Bezos some credit, however, for
recognizing that with a net worth already in excess of $7 billion
he doesn’t need anymore, Bezos having paid himself just
$81,000 last year.
–I promise my Latin American readers that I’ll spend more time
covering the region than I have recently, but for now it’s
important to acknowledge that the Brazilian economy is doing
far better than I expected following the election of Socialist Luiz
da Silva. I still say on issues of foreign policy he’s a loose
cannon, but his financial austerity plan is getting a good
reception in the markets, while exports are rising sharply. It’s
nice to have some good news from this region.
–The floor of the New York Stock Exchange was thrown into a
state of turmoil Wednesday with word that a specialist who
makes a market in G.E. had been removed from his post, with
others also under investigation for the practice of “front-
running,” wherein the specialist, upon receiving, say, a large
institutional order to ‘buy,’ opts to place his own ahead of it,
knowing the larger ticket will hike the price of the stock.
Add this to the other problems of the past few years, like the
issue of corporate governance, and it’s no wonder the little guy
has zero confidence in the integrity of our financial markets. It
bears repeating that this is Third World stuff. And who’s in
charge at the NYSE? Why if it’s none other than our favorite
weasel, Dick Grasso; the same man who recently thought it was
a great idea to have Sandy Weill on the board of directors at the
exchange.
And then you have the case of board member Ken Langone, who
is being charged with inflating commissions at his boutique
investment banking firm in exchange for oversized allocations of
hot IPOs during the height of the bubble. For example,
Langone’s brokers charged $8 a share instead of what was then
the norm, 6 cents. Most of these deals were with CSFB, which
has had more than its share of problems these days. Overall, it’s
a real crisis, folks, but Grasso’s departure would be a good first
step in regaining investors’ trust.
–Meanwhile, Sandy Weill’s Citigroup issued a solid earnings
report for the quarter thanks in large part to its retail banking
franchise, while Merrill Lynch achieved its better than expected
earnings because of ongoing massive cost-cutting, even as
revenues continue to slide. Merrill has reduced its work force by
30% since 2000.
–Here’s some valuable information for those of you who may be
contemplating running ads on a web site. I have been involved
with a leading pay-per-click service to attract new readers over
the years, for example, using the keyword “news.” Well, my
latest report reveals that in one of my particular categories the
clickthrough rate is 0.12%, the lowest it’s ever been. In the old
days, ’99-’00, the industry talked about rates of 1-2%. I’m going
to continue with the service, in one form or another, for various
reasons, but you can see how in many cases a campaign of this
sort is worthless.
–AOL has been filing a series of class action lawsuits against the
dozen major purveyors of spam. The company has received over
8 million complaints from users/members over the years. Many
of you have remarked to me that spam continues to get worse
and worse.
–China’s GDP rose over 9% in the first quarter thanks to surging
exports, far above the estimated 7.5%. But per our earlier
discussion we now wait to see the impact of SARS, assuming the
government comes close to telling the truth. Now that’s a dumb
statement, isn’t it? China?
–Continental Airlines reported another gigantic loss for Q1, but
they did express some optimism about renewed demand. The
stock rebounded strongly on the forecast. Going back months
before the war I mentioned I had Continental on my watchlist,
though I added I couldn’t possibly buy it until long after the
shooting started due to the fact that the shares, like all airline
issues, would plummet. Well, they did and have since recovered
following the victory, but did I act? No. To tell you the truth I
was too busy and the stock got ahead of me. Or maybe it’s my
age. The ol’ reflexes aren’t what they used to be. As for the
price of Continental today (around $7.50), I think it’s gotten a bit
ahead of itself, but if it keeps running I’ll just have to smile. It’s
a great company with a super CEO and it would be good for my
home region if Continental kicked butt.
–Back to Crook Street, the SEC is likely to file civil charges vs.
J.P. Morgan Chase in the Enron case, while Morgan Stanley
faces charges in the awarding of hot IPO shares to its investment
banking clients. We’re shocked!!!
–My portfolio: The drillers are weathering disappointing
earnings reports thus far as most of the company’s make
optimistic statements about future performance. Overall, I’m
now about 35% energy, including a new play in the electricity
generation area, 5% Telecom New Zealand and, as of 10 days
ago, 3% technology, with this latter position being a slightly
aggressive Jan. ’05 call option. And I’m actually up on it! The
balance is cash.
International Affairs
India / Pakistan: In a gutty move, Indian Prime Minister
Vajpayee became the first Indian head of state in 16 years to visit
Kashmir, declaring “guns cannot solve problems.” Pakistan
welcomed the tone.
Northern Ireland: In an explosive development, an official report
resulting from a 14-year investigation has found evidence that
British Army intelligence and the Royal Ulster Constabulary
worked with Protestant guerrilla groups to kill Roman Catholics
in the late 1980s. The findings come the same week that the IRA
issued a statement, details of which have yet to be fully released,
concerning possible disarmament and renunciation of violence,
though it will be expected that Protestant militants do the same.
Both are needed to reestablish the Assembly that was suspended
last fall.
Zimbabwe: The powerful Roman Catholic Church here finally
blasted President Robert Mugabe and this simple act could play a
large part in bringing this thug down. I’m getting good vibes that
Mugabe will soon be hung in the town square.
Indonesia: The leader of the terrorist group Jemaah Islamial has
been formally charged with terrorism and treason for his role in
the Bali bombing.
Canada: The nation continues to serve its 10-minute major in the
penalty box, as President Bush cancelled a scheduled visit in
early May while inviting Australian Prime Minister John Howard
to the ranch instead, as a reward for Howard’s unstinting support
in the war.
Random Musings
–Various polls have President Bush’s approval rating now
ranging between 71 and 77 percent, and according to a Wall
Street Journal survey 63% now agree with a policy of preemptive
strikes. But, only 49% approve of the President’s tax cut plan.
This is as good as it’s going to get for Bush and he needs to
capitalize as quickly as possible to secure his domestic agenda,
because Congress will be shutting down before you know it as
Election 2004 begins to take center stage. Aaghh!!
–British Prime Minister Tony Blair’s conviction on Iraq paid off
as the latest London Times poll showed the British people now
view “taking military action” as the right thing to do by a 64-24
margin.
–The war whipped up the arms race, according to Defense
News, as all manner of countries rush to purchase items like anti-
tank weapons and night vision equipment. Russian officials say
that rumors of its own arms pipeline to Iraq was great publicity
for them and business is booming.
–From Jim Hoagland. “The Arab media, politicians and
intellectuals portray their people collectively as victims the
whole livelong day.” Amen, brother.
–The terror threat level was lowered this week, which gives me
another excuse to praise the efforts of Britain, Spain, Singapore,
Italy and, yes, even France and Germany in helping the U.S. roll
up terrorist networks. We have made tremendous strides against
the likes of al Qaeda and it ticks me off to no end when I hear the
civil libertarians whine about how one or two have been
innocently imprisoned in the various sweeps our government has
conducted. No one likes to see innocents harmed and it’s hoped
that any government steps up in a big way to right any wrongs
when this proves to be the case. But at the same time, how can
the crying weenies complain about John Ashcroft, for example,
when the proof is in the pudding…not one serious attack in the
U.S. since 9/11. And while the likes of the Bali bombing are
gut-wrenching, even these have been limited in the grand scheme
of things. Hell, SARS has now killed as many as terrorism since
that fateful September day.
I obviously hesitate to write about any good news in this regard,
because at the same time future terrorist actions are inevitable.
It’s the degree of these that we hope we’re getting a handle on.
In the meantime, John Ashcroft’s legacy seems secure and for
this we should all be thankful. Roll on, Mr. A.G.
–On a related issue I watched most of the PBS series “Avoiding
Armageddon,” though there was nothing new that hasn’t already
been covered in this space, or on “Frontline” for that matter.
Nonetheless, it did present a great summary of the threats we
face, chief of which is still securing the former Soviet Union’s
arsenal, then Pakistan’s, then…
–Scott P. passed along another gem from Senator John Kerry,
this time from a policy forum that he was speaking at. In case
you didn’t know it, affirmative action is “the single most
important issue in the U.S. today.” Actually, maybe one of the
networks can have Kerry and Howard Dean do a series of
debates this summer, as a replacement for one of its comedies.
–I have to admit, when I first heard about the looting of Iraq’s
National Museum I thought, “Big deal.” Understand that I have
been to a slew of similar museums over the past few years and
have zero desire to see one more vase, plate or ancient fork.
Most of the time the exhibits bore me to tears.
But when I read a description of some of what was taken, like a
gold harp from the year 2000 B.C. (that’s pretty cool), I had a
change of heart. At the same time it’s also increasingly clear that
the looting was really an inside job and I suspect that over time
most of the truly valuable items will be recovered.
The whole episode does give me an excuse, though, to address
something that’s been bugging the heck out of me. Clearly, since
the U.S. military has been mapping out targets and key facilities
in Baghdad since the end of the Gulf War in preparation for a
future action, they should have known to station a few soldiers at
the museum if for no other reason than that the artifacts represent
a form of currency through which terrorists could finance their
operations.
And once, just once, I’d like to hear a U.S. official admit a
mistake. The military operation was masterful, but there are
times at the press briefings, and with interviews, where we’re all
treated like a bunch of schmucks.
–Aside from the contributions of Britain and Australia in Iraq, I
noted a while back the work of Poland’s commandoes but
haven’t since because their own government seemed
embarrassed by it. I said they shouldn’t be. I hope the soldiers
are now welcomed home with the respect and honor they
deserve. And thanks for the fighter jet order, friends! Also, it’s
time to acknowledge the contributions of both Czech and Slovak
troops now in the theatre, helping with the identification of
weapons of mass destruction, among other things.
–17% of my traffic is from overseas, with China a solid #2,
followed by Canada, the UK, and Australia. I appreciate all of
your support, my foreign amigos, especially since I imagine a
good deal of you vehemently disagree on some issues I raise.
[Then again, maybe they’re just tuning into “Bar Chat.”]
–From the Wall Street Journal comes word of a survey revealing
that 9% of Americans wait more than 2 hours after purchasing
foods before refrigerating them. Goodness, gracious, I hope
none of you fall in that category. Micro-organisms explode after
just 20 minutes in most cases.
–Follow-up: Good buddy Jeff B. spotted Andy Rooney last
Saturday at a Westport, CT coffee shop. Yes, he was wearing a
windbreaker, but no nametag.
–Comedian Dennis Miller: “Saudi Arabia is the Eddie Haskell
of the Middle East.”
–Two million U.S. students took a weapon to school last year.
Lovely.
–There’s every reason to believe that West Nile Virus will be an
even bigger story this summer than last.
–Aussies continue to cut back on their beer consumption. Say it
ain’t so, mates!
–Michael Jordan hung it up for good. He is a superstar with
true class…but it needs to be said that Kobe Bryant is already as
good, if not better, than Jordan was in his prime.
–Hearing of the POWs release last Sunday morning was a
beautiful way to start the day. It’s why some of us keep praying
for the safety of those who serve in Iraq and Afghanistan. A
little positive energy can go a long way.
–Finally, it seems appropriate this Easter season to honor the
many relief workers from around the world. Their efforts often
get obscured by the ‘politics’ of the moment, but no one can
deny that those aligned with the U.N., Red Cross, or religious
groups like the Jesuits (with whom I’m most familiar), are doing
God’s work and, maybe, even if for but a fleeting moment, they
brighten the prospects of those who can only dream about the
kinds of daily comforts you and I have. A Blessed Easter to all.
—
God bless the men and women of our armed forces. Bring them
home safely.
God bless America.
—
Gold closed at $327
Oil, $30.55…nice rally.
Returns for the week, 4/14-4/18
Dow Jones +1.6% [8337]
S&P 500 +2.9% [893]
S&P MidCap +2.6%
Russell 2000 +3.3%
Nasdaq +4.9% [1425]
Returns for the period, 1/1/01-4/18/03
Dow Jones -0.1%
S&P 500 +1.6%
S&P MidCap -1.7%
Russell 2000 +0.2%
Nasdaq +6.7%
Bulls 50.6%
Bears 30.3% [Source: Investors Intelligence]
Have a great week.
Brian Trumbore
