[Posted 7:00 AM]
Greetings, friends, from Continental Flight 25 from Shannon,
Ireland to beautiful Newark, N.J., close to the home of
StocksandNews. I’ve been away all week on my 15th or so golf
excursion to the Emerald Isle and frankly have been out of touch
with some of the events in the world, let alone the financial
markets. So forgive me for this irregular review of the week’s
events and understand that I recognize I’m missing a lot that’s
happened.
For starters, I’m sitting on a 757 with two empty seats next to
me, which means I’m a happy camper but it also tells you
something about the state of international air travel these days.
Maybe now, post-Iraq, it will finally rebound, at least outside
SARS infected areas.
Anyway, I’ll get around to some of the bigger world news stories
later on, but first, all of Ireland was abuzz this week over the
situation in Northern Ireland, specifically, the feud between
British Prime Minister Tony Blair and Sinn Fein’s Gerry Adams,
the latter being head of the political wing of the IRA. I have
written of “The Troubles” on many occasions before, and I
recognize it is exceedingly difficult at times to sort through the
details, but here is the best summary I can come up with of the
contest of wills that boiled over this week.
Elections for a general assembly in Northern Ireland were to be
held May 29 for the purposes of establishing not only a power-
sharing agreement between the Catholics and Protestants, but
also, similar to the “road map” for Israel and Palestine, to put
into effect various “confidence building” measures. This, it is
hoped, would lead to the gradual withdrawal of British troops
from the North and, one day, ‘home rule’ versus ‘direct rule’
from London.
But in a dramatic, some would say anti-democratic, move, Tony
Blair canceled the election, postponing it to autumn at the
earliest. Even ally Bertie Ahearn, prime minister of Ireland, was
dismayed by the move.
I make no judgment on whether this was the right call but here is
what’s happening. Gerry Adams and the IRA have made a
number of statements over the past 3 weeks concerning the
IRA’s intentions to stand down and end all paramilitary
activities. This was a precondition for the election as well as
cooperation from Protestant Ulster Unionist Party leader David
Trimble. You’ll recall that the Assembly was suspended last
year due largely to the fact that in the eyes of Blair, Trimble, et
al, the IRA wasn’t moving fast enough to disarm.
But in the words of Adams, the IRA now “would” and “should”
end all “military actions” and “activities,” including training,
beatings, exilings and intimidation. Blair, however, insisted that
Adams substitute “will” for “would” and “should,” so back and
forth the two went all week until the suspension announcement
on Thursday.
Blair’s point (in which Trimble concurred) was that without this
assurance from the political wing of the IRA, the election would
be a sham, leading to a chaotic situation where the extremists on
both sides, including the wicked Reverend Ian Paisley’s DUP,
would fill the political vacuum with violence.
Meanwhile, Adams was furious over the word-splitting, saying
that existing statements should stand on the merits…simply, trust
us.
Why should those outside Ireland, the North, and Britain care
about all this? Because the IRA could break its self-imposed
ceasefire at any moment and Adams, with strong terrorist roots
himself, may not be capable of preventing this. Frankly, it would
also be depressing and, from a political standpoint, have a huge
impact on Tony Blair’s own future, all at a time when the U.S.
continues to need its staunchest ally.
Wall Street
Great week for stocks, even as some of the economic news
continued to augur otherwise, on the expectation that a solid
post-war rebound in business activity and corporate profits is on
the horizon. The S&P 500 and Nasdaq rose for a 3rd straight
week, with Nasdaq now at a 10-month high (1502). [The Dow
closed up over 3% to 8582.] Even my own portfolio, thanks in
large part to a nice move in the electricity-generation play I put
on 3 weeks ago, is now close to 50% equities, the highest it’s
been in at least two years.
One thing is certain, consumer confidence is better now that the
main hostilities in Iraq are over, but at the same time business
confidence levels are still at multi-year lows, not just in the U.S.
but abroad as well. And Friday’s employment report, revealing
that the unemployment rate is at an 8-year high, 6% (which still
underestimates the true rate), is indicative of a labor market that
isn’t likely to spring back anytime soon. Manufacturing, for
example, contracted for a 33rd straight month in April.
You also had a big decline in the U.S. dollar vs. the euro this
week to levels not seen since February 1999. While this is good
for U.S. multinationals, who have an ability to sell their goods
more cheaply across the pond, it also brings to mind the thoughts
of Morgan Stanley’s Stephen Roach, who has long argued that a
global rebalancing is in order, away from a U.S.-centric growth
dynamic. I don’t totally buy this, especially since the rest of the
world is currently taking on gas worse than the U.S., but
certainly trade patterns, in particular, bear watching over the
coming months. Roach has also been among those warning of
the huge twin deficits; the U.S. federal budget and the current
account gap.
Yes, it’s true the equity markets often anticipate economic turns
months ahead, but if you ask central bankers around the world if
they’re real confident, the answer is no. Federal Reserve
Chairman Alan Greenspan did say a 2nd half rebound was in the
offing, but at the same time he noted the Fed was prepared to
lower interest rates further if necessary. The Fed, the European
Central Bank and the Bank of England all meet this coming week
and the comments from the three should be telling.
Lastly, you have the global research settlement on Wall Street,
wherein 10 of the largest brokerage houses are formally forking
over $1.4 billion to the states and regulatory authorities, with
$400 million of it earmarked for investor restitution. I have
praised New York Attorney General Eliot Spitzer throughout this
whole process because if it hadn’t been for him, no real light
would have ever shone on Wall Street’s shady and fraudulent
practices. And Spitzer did the best he could with this accord, but
you all know that $400 million works out to about $8 an investor.
My advice is to look for Coors Light on sale at $4 per six-pack.
The saving grace, if you have a legitimate beef with your broker
and the firm’s research, is that CSFB, Citigroup’s Salomon
Smith Barney unit, and Merrill Lynch were all cited for
“fraudulent” behavior, ergo, ambulance chasers, start your
engines. By some estimates another $3.5 billion may eventually
be paid out in claims, giving you enough to take your significant
other to Denny’s and a movie….maybe an ice cream cone
afterwards.
Thus ends a sad, sad chapter in the history of Wall Street. Yours
truly, and I know many of you, are upset that some of these
characters aren’t going to jail. Citigroup’s Sandy Weill, for
example, won a guarantee that he won’t be prosecuted. Wall
Street is still very dirty, but when the right opportunity comes up,
individual investors can make money, while long-term investors
normally do alright, as long as you understand the risks inherent
in your portfolio. But here’s the bottom line: The myth that U.S.
markets are fairer and more equitable than any in the world has
been shattered. And that’s sad, for it speaks to our character and
values as a society. Like I’ve said before, you just want to shake
these guys and scream, “No, asshole, you can’t do that!”
Street Bytes
–U.S. Treasury Yields
6-mo. 1.14% 2-yr. 1.55% 10-yr. 3.92% 30-yr. 4.83%
[I’ll have more comments on the bond market next week.]
–What’s this? Tyco reported another $1.1 billion in accounting
fraud? I’m shocked!
–WorldCom and Enron are now seeking tax refunds for taxes
previously paid on fraudulently inflated earnings. Despite what
you might think, however, the law is clear; they are owed it.
Unbelievable.
–Economist Robert Samuelson on executive pay in America:
“CEOs justify their compensation by saying they get what ‘the
market dictates, just like everyone else.’ Rubbish. Their market
is highly artificial…an artificial welfare system designed to
ensure that even mediocre top executives do well – and everyone
else receives repeated chances to make a fortune.”
You know, you read this and you can’t help but think this is what
is wrong with the old boys’ network in both college and
professional sports, as the same coaches are shifted from school
to school, or from one NBA team to another, for example. It’s
also why you have a paucity of black coaches.
–Stories on Wi-Fi (wireless technology) are proliferating these
days, as the tech industry furiously searches for the next “killer
app.” More venture capital money is flowing into it than any
other sector, which means one thing…only the strong will
survive and many investors will be deeply disappointed.
–Former Enron CFO Andrew Fastow was indicted on 31 more
counts of being one of the great sleazeballs of our generation.
Fastow’s wife was also charged, in her case for filing false tax
returns and money laundering, among other things. But, hey,
they were such great givers to charity!
–Interesting piece in the international edition of Newsweek. The
government in India is continuing to discourage the age-old
tradition of gold being a large part of one’s dowry upon
marriage, because it is draining away family income. Indians
spend $8 billion a year on gold, 2% of the nation’s income. 1/5th
of all the gold sold worldwide is bought here. So, sports fans, if
you are betting heavily on gold as an investment, just beware that
part of the demand side to the story could be about to go pffft.
–Ever hear of the Daily Planet, the brothel in Melbourne,
Australia? Well, this week it went public, listing its shares on
the Aussie stock exchange. The owner hopes to pay a hefty
dividend, so I’ll have to wait to see what emerges from Congress
as far as the taxation of dividends (let alone treatment of income
from foreign sources). Could be a terrific money market
alternative.
–Speaking of money markets, if the Federal Reserve lowers
interest rates any further, you will ‘owe’ your fund company for
the privilege of being an investor, as expenses eat up your final
0.25% return.
–Continental Airlines’ flights may be only 60% or so full, but
the stock soared as I was winging my way back, up $2 to $12. I
returned my pretzels, maybe that helped. [Actually, the stock
was upgraded by a leading analyst.]
–My friend Harry K. says CSFB’s Frank Quattrone looks like
Saddam…………developing……….
–Regarding my story on Lexmark last week, both Jimbo and
Charles K. reminded me that the real case study for business
school is how you manufacturer a $99 printer, while getting
consumers to buy $39 cartridges.
–And now for your Irish business update. Since I started going
to Eire in 1989, I have witnessed some staggering changes. Back
then, unemployment was at 20% and the economy was going
nowhere fast. But the implementation of a 10% corporate tax
rate for foreign companies setting up shop here, let alone the
prudent use of massive E.U. subsidies, helped lead to the boom;
the roar of the Celtic Tiger. Year after year, Ireland has been
cranking out 8-10% growth rates and in my yearly trips over I
have seen the emergence of a new class of very wealthy Irish
entrepreneurs, most in their 20s and 30s. Years ago, emigration
to America stopped, as the youth recognized they had better
opportunities at home than in New York or elsewhere.
Of course over the same time I’ve been writing it all has to end
at some point, as I selfishly hoped for a real estate crash so I
could scoop up a townhouse near my favorite golf course,
Lahinch, for the equivalent of a few pints. Alas, I may not see a
true crash, but clearly the Irish economy has peaked, at least for
the time being.
Growth in property prices, for instance, has hit a plateau in many
parts of the country. Over the last 5 years, it’s amazing to think
that the average home in Ireland rose 20% per year in value
(according to various government sources I read over the week).
Now, in many neighborhoods, price appreciation is more in the
6-10% range, while other regions are flat. But even here you
have the staggering story of home values in Dublin, where in one
district they rose 68% last year alone!
In the Dublin tale, though, lie the seeds of a bubble. All of the
world’s leading corporations moved into the area, it seemed, over
the past 10 years, including the leading technology names. Aside
from the tax incentives, companies took advantage of lower labor
costs and a highly educated workforce.
But now, huge growth is coupled with a still archaic
infrastructure, including the roads. Why did this one
neighborhood in Dublin see a 68% increase? Because it is an
easy commute to some top companies. As the suburbs are
pushed further and further out, the quality of life for those who
have to shuffle into Dublin is getting worse and worse.
So what you saw this week was Dell making an announcement
that it was shifting more of its call center activity to India
because it’s cheaper, but with company officials also citing the
poor infrastructure in Ireland. Dell wasn’t alone. Canadian
contract manufacturer Celestica closed shop, having once
employed 1,000, while Lucent announced it was shutting its
operations, too. Throw in the spillover into industries that
support these companies and you begin to see the scary potential
for an old-fashioned “bust.”
To be fair, the announcements for just this week weren’t all bad.
G.E. could be on the verge of building a large research facility
here, but overall, by one common measure of GDP, growth in the
economy was up only 0.6% for all of 2002, down 2.3% in the 4th
quarter.
So it’s hard to say the Celtic Tiger is still roaring and tourism
isn’t helping, down 12% since 2000. But we’ll see if this new
breed of entrepreneurs can come up with the needed
improvements to ensure future growth rather than a prolonged
period of stagnation, or worse. Meanwhile, both the golf and the
people are still terrific.
SARS
The only way to describe Beijing these days is panic and chaos,
as the SARS epidemic has forced the government to close
schools, markets, and shopping malls, while the surrounding area
also grinds to a halt. Just on Monday, the news on the SARS
front looked a little better, as the virus appeared to be contained
in many nations. But by Tuesday, we realized that the situation
in China, including Hong Kong, is verging on catastrophe,
particularly for China’s once booming economy.
Think about Shanghai, which thus far has officially reported few
cases, though world health officials know the problem is more
severe. Hundreds of western businesses could pull out of the
entire region, while Japanese leaders are contemplating
repatriation of some 15,000 employed in Shanghai alone. And as
of today, the news from Hong Kong was far from good. Along
with over 150 deaths here to date, you have the scary reality that
some patients are now relapsing, as the treatments fail to take
hold in some instances. This isn’t good, folks, especially for
those who now believe that while the epidemic could lessen in
intensity over the coming months, there’s no assurance it won’t
reappear this winter in a more virulent form.
One of my golfing buddies this week is a doctor and a group of
us were talking about SARS over a few pints the other night. He
stated the obvious; the worst problem about it is we just don’t
know yet what’s really involved. More importantly, this is the
tip of the iceberg. The mask suppliers should do very well. And
keep washing your hands.
International Affairs
India / Pakistan: Huge potential positive, as the two nations have
agreed to restore full diplomatic ties and hold talks. Indian
Prime Minister Vajpayee is 78-years-old and seeking a legacy of
peace. Pray he achieves his goal.
Iraq: I missed President Bush’s dramatic arrival on the USS
Abraham Lincoln to deliver his address to the nation on the
ending of hostilities in Iraq, but my initial reaction is I wish he
hadn’t taken the risk. I realize the President is taking them every
day he pokes his head out, but was this really necessary?
Furthermore, we still don’t have any weapons of mass
destruction nor a thigh bone from Saddam, so I’m not sure the
triumphalism was appropriate. On the other hand, as Bush said
we are winning the war on terror, and for this we should all be
proud and thankful.
But in Iraq we have a long, long way to go, as events in Fallujah
pointed out this week. The shooting of protesters there, even
though evidently warranted, didn’t play out well in the rest of the
world. This isn’t a criticism, it’s just the reality of the situation.
I said a few weeks back that the headlines from Iraq wouldn’t be
as rosy once Baghdad was taken, but at the same time we have to
stay the course and see this through. Then we can give ourselves
a grand parade.
Israel / Palestine: New Palestinian Prime Minister Mahmoud
Abbas took office and said many of the things both Israel and the
U.S. wanted to hear in his inaugural address, but then hours later
one of Yassir Arafat’s terrorist organizations launched a deadly
suicide attack in Tel Aviz, in the latest effort to sabotage the
peace effort. Israel then retaliated, as is its right, but
unfortunately some innocents were caught in the crossfire, thus
providing more fodder for the Arab press…and this ugly cycle
goes on and on and on.
Nonetheless, the U.S., E.U., Russia and the U.K. released the
long-awaited road map to peace, but both sides don’t like it. The
first phase calls for an “unconditional cessation of violence” by
the Palestinians and an Israeli pullout from areas occupied since
the renewed fighting between the two. These steps are to happen
simultaneously, which means it’s virtually impossible since
Abbas, while generally respected in the West and Jerusalem,
doesn’t seem to have the power and force of personality to tell
the terrorists to cease and desist. Look for another suicide attack
timed to coincide with Secretary of State Colin Powell’s visit to
the region on May 8 when he visits both Abbas and Israeli Prime
Minister Sharon.
North Korea: Pyongyang reiterated that it would stop its nuclear
weapons program, but only if the U.S. dropped its “hostile”
attitude towards it, a non-starter and laughable. But U.S.
diplomats see a possible opening.
China is now observing firsthand how the actions of its
rambunctious neighbor and sometime ally can negatively impact
its own plans, both militarily and economically. So behind the
scenes Washington and Beijing are discussing how to force the
collapse of the regime, through sanctions, blockades or other
means. There is no telling if Beijing will in the end cooperate,
but the U.S. can offer all kinds of economic incentives for China
to do so.
Saudi Arabia: The U.S. is moving its central command center
from Saudi Arabia to Qatar, a good move discussed in this space
a while back. It takes away al Qaeda’s rallying cry; that
Americans are trampling on Islam’s most holy sites.
Nigeria: At last report, disgruntled oil workers were holding 97
foreign nationals on some rigs. Nigeria’s navy has been
mobilized to rescue them. Bet you didn’t know they even had
one.
Argentina: Former President Carlos Menem qualified for a run-
off in his comeback bid to return to the highest office.
Random Musings
–The last few flights I’ve taken I’ve noticed the pilots are taking
off at a far steeper angle than they used to. I assume one reason
is the threat of a shoulder-fired missile. Then again, maybe I’m
just being paranoid, though this week FBI Director Robert
Mueller reiterated that the threat from al Qaeda and others
remains as serious as before and that America will be attacked in
the future, but then you already knew this.
–41% of Americans with travel plans to France have either
canceled or amended them in some way. The French
government is slated to launch a PR campaign in the States
shortly, which may only make it worse if the people in the spots
have a lousy attitude.
–British researchers say that dogs may be able to detect prostate
cancer in humans. Tests have shown that with training, the dogs’
sense of smell can be more effective than some standard medical
tests for the disease. [Pooch sniffs urine samples, I feel obligated
to add.]
–31 European tourists in Algeria, once feared dead, are now
supposedly being held by terrorist groups.
–According to reports, at least another 40 people have died of
side effects from the gas Moscow authorities used to quell the
Chechen hostage taking at the theatre in October of last year.
About 130 died in the original “rescue.”
–So I was in Ballybunion for a few days this week, the town
being home to the world famous golf course that bears its name.
I may have mentioned last time I was here that a statue of Bill
Clinton was erected a few years ago to commemorate his visit to
the club, though the statue itself is nowhere near it, curiously.
Anyway, the mere mention of his name in a pub is always
enough to elicit a response from the locals and it’s a good
conversation starter. But, boy, those poll readings you read
about where President Bush isn’t faring well in Europe certainly
appear to be true. The venom is directed at him, big time, these
days, while Clinton for the most part is still seen as a loveable
rogue. Of course my whole problem with Bubba has to do with
selling missile secrets to the Chinese more so than Monica. But I
did make some ground this week in my friendly arguments with
the townsfolk. How can you like Clinton, I asked, when he
cheats at golf the way he does? Most nodded in agreement. I
also pointed out that his statue in the town square was covered
with bird dirt. No one seemed to be rushing to wash it off.
—
God bless the men and women of our armed forces.
God bless America.
—
Gold closed at $341
Oil, $25.67…much more next week.
Returns for the week, 4/28-5/2
Dow Jones +3.3% [8582]
S&P 500 +3.5% [930]
S&P MidCap +4.0%
Russell 2000 +4.9%
Nasdaq +4.8% [1502]
Returns for the period, 1/1/03-5/2/03
Dow Jones +2.9%
S&P 500 +5.7%
S&P MidCap +3.7%
Russell 2000 +6.4%
Nasdaq +12.5%
Bulls 48.3
Bears 29.2 [Source: Investors Intelligence]
I’m still catching up on your emails. Ireland is the only place
where I don’t take my laptop, because accessing the Internet in
some of the rural spots is still virtually impossible.
Have a great week. I appreciate your support.
Brian Trumbore
