[Posted 7:00 AM ET]
Iraq
“U.S. leaders now must guard against the arrogance that comes
with success and often leads to catastrophe.”
–Editorial in Defense News, May 12
I recognize I raised more than a few eyebrows with my criticism
last week of Secretary of Defense Donald Rumsfeld. But, as we
always say around here, wait 24 hours. By Sunday, most of my
critics were undoubtedly rethinking their own positions.
Postwar Iraq has been an unmitigated disaster, and what hurts
most is the fact that we are rapidly losing our ability to reshape
events in countries like Syria and Iran, which for many of us was
as big a reason to go after Saddam as the threat posed by his
weapons of mass destruction.
Rumsfeld is finally eating some crow for his policy of cut and
run, admitting to a certain extent that the plans for stabilizing
Iraq following victory were deeply flawed. As military strategist
Ralph Peters wrote in the New York Post, Rumsfeld “want(ed)
our troops to do the occupation of Iraq on the cheap,” adding, “In
the strategic marketplace, you don’t always get what you pay for,
but you never get what you don’t pay for.”
Yet as Rumsfeld (with an assist from President Bush) scrambled
to change the leadership in Baghdad from Jay Garner and
Barbara Bodine to Paul Bremer, while finally seeing the need to
interject more troops, he still doesn’t really get it, witness
Afghanistan, where he recently complained that other nations
weren’t stepping up.
This is your excuse for the chaos in this theatre, Mr. Secretary?
If the U.S. has to do the heavy lifting, we have to do it. Of
course we’d like others like the Turks, for example, to do more
in this case, but you can’t sacrifice the objective, eliminating
Afghanistan, permanently, as a base of operations for terrorists,
simply because you’re pissed off, for crying out loud.
It’s sickening that our military in both instances performed
superbly, only to have the administrators blow it. One who does
continue to receive my support, though, is Rumsfeld’s deputy
Paul Wolfowitz, who in an interview with David Ignatius of the
Washington Post said, “I think there are people in our
government who underestimate the danger(s).” It was Wolfowitz
who formulated the doctrine of preemption following the first
Gulf War and he’s known all along the U.S. couldn’t afford a
repeat of 1991 when Americans disappeared. The result was the
mass graves you see being unearthed on an almost daily basis the
past few weeks. Wolfowitz also understands we can’t possibly
achieve success elsewhere without winning the peace in Iraq and
Afghanistan. Tragically, his boss and others don’t, until perhaps,
now.
Here’s my bottom line. While I, like many others, am frustrated
by the lack of discovery on the weapons of mass destruction
front after over 5 weeks, you have to recognize the cause was
just, as the graves clearly prove. And whether or not we actually
find containers of botulinin or sarin, Saddam was a threat to U.S.
interests, whether we’re talking 2003, 2005 or 2007. But not to
be able to then restore basic services to Iraq after this much time
has passed is unthinkable. We’re losing the peace, and that’s
depressing as hell.
Finally, this week’s multiple attacks in Riyadh, Chechnya, and
Casablanca prove that even a badly wounded al Qaeda or its
surrogates is still capable of immense harm, especially when
enablers within the Saudi regime itself, such as the interior
minister, sympathize with the cause. So many threats….so little
time.
Wall Street
The equity markets were given every possible reason to go down
and still finished up on the week, the 5th straight such advance
for Nasdaq and the S&P 500. As one who suddenly finds
himself with a 55%+ exposure to equities, thanks in no small part
to big moves in a few of my individual issues, I’m not
complaining, but I spent all day Friday worrying that I was
overexposed.
So let’s look at what was bad. Retail sales for April fell, as even
Wal-Mart issued a lackluster report, while industrial production
also declined, as capacity utilization, at 74.4%, is at its lowest
level since 1983. And then there was the news on producer and
consumer prices. Regarding the former, the PPI registered its
biggest decline since 1993, even excluding the volatile food and
energy components, while the CPI was unchanged taking the
same two into account.
One month’s numbers aren’t conclusive enough to say true
deflation is around the corner, but then again it’s more than
enough to question the assumptions on corporate profits for the
second half of the year, let alone some of the current valuations.
And regarding the key technology sector, which warrants the
attention because this is where we’ll see the first signs of any
rebound in capital spending, even as IBM was issuing cautiously
optimistic comments, Applied Materials and Intel were less so in
their own outlooks.
As for the global economic picture, it’s getting bleaker and
bleaker. Germany, Italy and the Netherlands contracted in the
first quarter with little growth elsewhere on the continent, thanks
in no small part to falling exports (more later) and employment.
For its part, Asia continues to be battered by the impact of SARS
and Japan is right back in the dumper.
Two experts I have a lot of respect for weighed in this week.
Doug Cliggott, who has nailed the U.S. equity market the past
few years, is amazed at the recent action in Treasuries,
currencies, and stocks. “One of these is going to be very, very
wrong in a violent way,” he told CNBC, with his main point
being that the huge rally in the bond market is telling you
revenue growth is slowing, a fact that equities nonetheless
ignore.
Meanwhile, PIMCO and its leader Bill Gross just completed
their annual “secular forum,” an event where Gross and the other
investment professionals look at the world from every which
angle in order to come up with a 3-5 year forecast, upon which
they then structure their portfolios. It should be no real surprise
that Gross is still talking about a global economy “fraught with
risk,” thanks to the oversized role hedge funds and derivatives
play these days, as well as the huge amounts of leverage being
employed at all levels. Breaking it down further, PIMCO’s latest
call is for 2-3% growth in the U.S., 1-2% in Europe and zippo in
Japan over the coming years. In other words, if equities weren’t
already at frothy valuations, maybe not a disaster, but the fact is,
again, stocks have priced in far more buoyancy than this forecast
for growth, or lack thereof, warrants.
Of course the above is not necessarily bad for bonds and where
Gross has changed his tune, slightly, is in the view that a true
bear market in Treasuries is years off, not 12 months. New
concerns over deflation will clearly keep the Fed from raising
interest rates until the economy is cooking.
Finally, back to yours truly, I’m going to take some money off
the table come Monday. Mr. Market has been good to me during
the rally, but it’s time to build up the ol’ cash position once
again.
Street Bytes
–U.S. Treasury Yields
6-mo. 1.05% 2-yr. 1.34% 10-yr. 3.44% 30-yr. 4.45%
The 10-year hit a 45-year low on the heels of the deflationary
PPI bombshell. The Federal Reserve next meets June 24-25, but
one shouldn’t be surprised if it acts a bit sooner. The Fed
sounded the alarm on prices and clearly won’t hesitate to lower
rates further, as long as the currency market isn’t particularly
volatile around the time it wants to act.
And to reiterate, the prospects for Alan Greenspan raising rates,
at least the rest of this year, are nil. As PIMCO’s Paul McCulley
said, “The Fed declared the doctrine of preemptive tightening to
be dead.”
–The $: The greenback stabilized this week as the prevailing
wisdom concludes that the 20%+ decline in value against the
euro, in particular, is healthy for the U.S. economy and
multinationals. No one at the Federal Reserve is complaining,
either, because a declining dollar may help reflate the economy,
since you would expect import prices to rise, except they fell in
the latest release on trade. Oh well. Anyway, if the euro
strengthens much further, an already sick European economy
will find itself on a respirator, as the currency does a number on
exporters. Ergo, the European Central Bank is under increasing
pressure to lower its own key short-term rate.
–Energy: The International Energy Agency said that SARS will
have a negative impact on the demand for crude (reduced travel,
for starters), which would be bearish for prices, normally, but at
least in the U.S., inventories remain at historically low levels and
with each passing day reality is setting in as far as Iraq is
concerned. We’re a long ways off from major production there
due to severe maintenance issues. Meanwhile, natural gas
remains above $6 and the supply/demand picture here is bullish,
both short and long term.
–Gateway, already the subject of various investigations into
accounting irregularities, now faces a criminal probe. Talking
cows was your first clue that something serious was amiss.
–An investigation by the International Herald Tribune reveals
that Microsoft has been using steep discounts, or flat out giving
its software for free, in order to keep governments and large
institutions away from rival Linux. Protecting its dominance in
such a manner may be a violation of the spirit of the antitrust
agreement.
–Remember that New York City subway fare increase of 33% I
told you about last week? Well, a judge rescinded it, so it’s now
part of the deflation story. Can I do that?
–We have a new public enemy #1 at StocksandNews….Apple
Computer. Those new commercials advertising its music service
have to be the most irritating of all time.
–Forrester Research estimates that online retail sales will
account for 4.5% of total sales in 2003.
–Personal bankruptcies rose 7.4% for the 12 months ending
March 31. Not a good thing, sports fans.
–Bear Stearns used an analyst to promote an IPO, the very thing
the global research settlement, of which B.S. is a part, prohibited.
–Sad story in the Journal concerning LTV and the slashing of
retirement benefits following its bankruptcy. This has happened
all across America, with innumerable companies. You plan for
your retirement assuming you’re going to receive your promised
pension and healthcare benefits, only to have them gradually
taken away. It’s a gigantic issue, but one that is brushed away
when some, like our President, say they are optimistic about
America’s future. Hey, I want to be an optimist, too, but there is
something called “reality,” whether it’s on the terror front or
managing one’s personal finances. Doom and gloomers aren’t
invited to a lot of parties, but I’ll take the straight talk of Sam
Nunn and Richard Lugar, for example, on the future threats we
face, versus a lot of banal happy talk. But I digress.
–Cisco Systems received some positive analyst comments this
week. This is one stock where I have little problem with the
valuation, assuming the #’s we’re being given are honest.
–Dell stumbled following its earnings release because it didn’t
exceed expectations, though the company continues to rock and
roll. It’s just a little pricey. It did finally break through my key
$30 barrier, however.
–Martha Stewart may soon be off the hook for her alleged
obstruction of justice in the ImClone case, but she could still face
insider trading charges. And have you seen promos for the NBC
movie, “Martha Inc.”, this coming Monday? Wow, she can’t be
too fired up about this one.
–Lastly, gold has been rallying recently thanks in large part to
the falling dollar, which makes it cheaper for foreigners to buy,
as well as the general uncertainty across the globe. And I just
saw where 9 University of Georgia football players have been
declared ineligible by the school for selling their SEC title gold
rings. So the question is, did they sell too soon, or are they
brilliant market timers?
International Affairs
Middle East: Secretary of State Powell’s trip to the region was a
disaster. Israeli Prime Minister Sharon refuses to budge on the
settlement issue, a key to the ‘road map,’ new Palestinian Prime
Minister Abbas hasn’t begun to crack down on terrorists, Egypt’s
Mubarak told Powell off, and then the secretary toured the
devastation in Riyadh.
In Israel itself, a definitive poll revealed that only 36% of Israelis
support the road map, with 29% opposed and 35% undecided,
but I’m going to defer further comment until I see the statements
following Sharon’s visit with Abbas, today, as well as a key
meeting Sharon is holding with President Bush on Tuesday.
Bush is walking a tightrope and he’s beginning to lose his
balance.
Iran: U.S. and Iranian officials have been holding low-level
meetings in Geneva to discuss postwar plans in Iraq. But before
anyone gets too excited, both Ayatollah Khamenei and President
Khatami rejected all reports that ties between the two countries
are about to be restored. Instead, with increased discussion on
the part of the West about Iran’s burgeoning weapons programs,
things could heat up quickly.
India: Prime Minister Vajpayee seems committed to cementing a
legacy as statesman as he announced he will be making an
historic visit to China next month to attempt to patch up
differences between the two; this on the heels of his overtures to
Pakistan. And guess what? My 1% equity position in India is up
3% already. I may have to celebrate with a curry dish or two.
South Korea: Talk about a non-event. President Roh came all
the way across the Pacific to visit America for the first time, only
to hold totally inconsequential talks with President Bush. It was
kind of like, “Hi.” “Hi.” “What’s your name?” “George.
What’s yours?” “Noh. But it’s spelled ‘Roh.’” “Cool. Want to
tour the White House?” “Nah. I have to go.” “Alright. See ya,
Roh, err, Noh.”
On a different matter, South Korean military officials claim the
North is training cyber terrorists, which makes sense considering
the fact that the South is the most wired nation in the world.
China / SARS: The government is now threatening any SARS
patients who willfully spread the disease with execution. And
remember weeks ago when I mentioned the 2008 Olympics
could be at risk? The launching of the official marketing
campaign for the Games has now been postponed. This will
become a big issue by early next year, with many calling for an
alternate site by then. If so, it’s a disaster for China.
Meanwhile, Taiwan’s SARS crisis deepens, despite officials’
best efforts. And while we’re on the topic, it needs to be noted
that all healthcare workers across the impact zone are real heroes,
putting their own lives in grave danger to help their fellow man.
Russia: The lower house of the State Duma approved the nuclear
disarmament treaty that the U.S. Senate earlier voted for. Now
the upper house needs to do the same. Secretary Powell held
talks with President Putin that went nowhere on the permanent
lifting of sanctions on Iraq, with Putin adding that U.N.
inspectors should be allowed back in to check on Iraq’s WMD,
something the U.S. is loath to do. In other words, this
relationship is going nowhere fast and we now await the
reception President Bush receives in St. Petersburg in just two
weeks.
Britain: Chancellor of the Exchequer Gordon Brown has
recommended that Britain hold off on adopting the euro because
he sees too much economic turbulence, at this time, if the nation
did so. Prime Minister Blair is giving the rest of his cabinet until
June 9 to form their own opinions.
Argentina: In one of the wimpiest moves of all time, former
President Carlos Menem opted to quit before Sunday’s runoff
election, because he didn’t want his undefeated election record
tarnished. Jerk. Instead, Nestor Kirchner, governor of
Patagonia, with its whopping population of 200,000, steps
forward to run a nation of 40 million.
France: The country was hit by massive strikes to protest the
government’s proposals to reform the pension system. Austria
also experienced walkouts related to the same issue. Europeans
will receive zero sympathy from Americans on this one. The
welfare state is crumbling and with birth rates well below the 2.1
replacement level, over the coming decades the crisis will
deepen, toppling one government after another and fueling unrest
in the streets. Not exactly what foreign investors like to see
when placing their bets.
Separately, French officials are bitching about U.S. statements on
France’s complicity in Saddam’s regime. Too bad, mon freres.
South Africa: A study was released that showed income in black
households fell 19% between 1995 and 2000. Political
liberation, in other words, didn’t help in this area. And in Cape
Town, the average life expectancy for blacks is now 40 due to
AIDS.
Random Musings
–Sorry, I still can’t get too worked up over the debate on a tax
cut because there is still a long way to go in reconciling the
Senate’s $350 billion package with the House’s $550 billion
version, neither of which will really do much to stoke growth.
That said, I definitely favor most of the House plan’s proposals,
particularly the establishment of a 15% maximum rate on both
dividends and capital gains, though as far as stimulus the whole
debate on the dividend tax exclusion is ridiculous, as are all the
forecasts of the impact on the equity markets should it be rolled
back.
I have always favored slashing personal income tax rates further
with the hope that some day we get a truly flat tax, while
eliminating virtually all of the deductions, let alone 100% of the
tax shelters that clever investment bankers create to the detriment
of the rest of us schleps. Steve Forbes has almost all the right
ideas on this front, sadly he’s just not the right messenger.
As for the whining coming from the states, they overspent in
almost every instance during the boom and now they’re paying
the piper. Unfortunately, we all suffer from rising taxes of all
kinds at the state and local level, but this doesn’t mean the
federal government should bail them out. We have an election
system for this very purpose. Maybe folks will start taking more
of an interest in it.
–A CBS / New York Times poll showed that only 47% are
confident in President Bush’s ability to manage the economy but,
overall, 67% still approve of the job he’s doing. More
worrisome for Democrats is the answer to the question, which
party has a clearer vision for the country? By a 53 / 40 margin,
the public says Republicans. I guess the other 7% are Know-
Nothings. Finally, only 41% favor tax cuts at this time.
–NATO Secretary General Lord Robertson, a good man.
“I’m very worried about anti-Americanism because I think it is
deeply corrosive to a relationship that is critically important for
the overall security of the world.
“These attitudes….have to be tackled head on. If they’re not,
then the future is bleak indeed.
“If they continue to be criticized in that unreasoning and emotive
way then I see disengagement being the outcome and that being
much more dangerous to all of us than American involvement or
interventionism.”
[Source: BBC News]
–Margaret Thatcher, in a rare speech the other day in New York.
America and Britain face “a pervasive culture of anti-
Westernism” that needs to be challenged. “There are too many
people who imagine that there is something sophisticated about
always believing the best of those who hate your country, and the
worst of those who defend it.”
[Source: London Times]
–17 of 32 European tourists held hostage in Algeria were
rescued by Algerian army commandos, but the fate of the other
15 is uncertain.
–According to a piece in the journal Nature, a 10-year study of
the oceans reveals that 90% of predatory “big fish,” like
swordfish, marlin, and sharks, have been lost to industrial
fishing. The fish lobby, led by Charlie Tuna, is disputing the
claim, but there seems little doubt the findings are close to the
truth. The only long-term solution is the establishment of large
fish parks, off limits to all fishing.
–We have had so much rain in the eastern half of the country the
past few months that a resurgence in West Nile Virus seems a
certainty. Here in New Jersey, I’ve already seen gigantic
mosquitoes. They don’t call it the state bird for nothing.
–New York City Mayor Michael Bloomberg is making every
mistake in the book. Hell, he even mispronounced Joe Torre’s
name the other day at a commencement ceremony, calling him
Tor-rez. As commentator Robert Novak put it, the Big Apple
has suddenly turned into a “soaring disaster.” Sales and property
taxes are surging, while Bloomberg refuses to confront the
entrenched municipal unions for givebacks, a la what the major
air carriers have been forced to do. Both businesses and
residents will pack it in as the city implodes. The damage done
also has little to do with 9/11, it’s largely self-inflicted,
especially since the municipal budget relied too heavily on Wall
Street for revenues.
–Here’s my take on the fiasco surrounding the New York Times’
former reporter Jayson Blair. The paper has obviously been
badly scarred, but I will continue to read it for its general news
coverage. It’s just another source, especially on international
affairs, and most of us with half a brain are smart enough to
know when we’re being spun, as opposed to the preferred
straight reporting.
But like many of you I’m stunned that Blair was allowed to make
so many mistakes. Any of us in our respective careers would
have been dismissed after about 3 or 4, let alone the 50+ that
Blair was allowed. Thankfully, it appears that New York law
will forbid the asshole from cashing in on a book deal, assuming
authorities bring fraud charges, as they should. Blair severely
impacted the lives of many in his fabrications.
Then you have the case of former New Republic reporter
Stephen Glass. I mean this creator of fiction made my skin crawl
as I watched his interview on “60 Minutes” last Sunday; simply
one of the truly detestable people on the planet. Here’s hoping
his tell-all book quickly finds its way into the ‘remainders’
category. And can you believe that Georgetown Law School
admitted the creep after knowing of his background? What a
disgrace.
–Three cheers for Poland and its large commitment to
peacekeeping efforts in Iraq. The leadership even had the
temerity to ask if Germany wanted to join them, under Polish
control. Oh, baby, you gotta love it. So here’s your weekend
assignment from your editor. Buy something made in Poland.
I’m going to get some Zywiec, a tasty beer, to do my part.
–So I’m channel-surfing the other night and caught ESPN’s
coverage of the World Series of Poker. Any card player would
have loved this and the packaging of it in two hours was superb.
Next year this should be on network prime time and I bet the
ratings would be huge. Actually, I’ll kick it $10,000.
–Geezuz, how many women did JFK actually bed while he was
president?
–Finally, if you aren’t a golf fan, you need to become one in the
next few days because women’s superstar Annika Sorenstam is
attempting to make the cut on the PGA Golf Tour as she tackles
the men at Colonial. It’s going to be interesting. I’ll say she
shoots 75-76, missing the weekend, but far from embarrassing
herself.
—
God bless the men and women of our armed forces.
God bless America.
—
Gold closed at $354…highest weekly close since February.
Oil, $29.14…uh oh, we could get more gas pump stories!
Returns for the week, 5/12-5/16
Dow Jones +0.9% [8678]
S&P 500 +1.2% [944]
S&P MidCap +0.6%
Russell 2000 +0.3%
Nasdaq +1.2% [1538…highest in almost a year]
Returns for the period, 1/1/03-5/16/03
Dow Jones +4.0%
S&P 500 +7.3%
S&P MidCap +5.3%
Russell 2000 +8.3%
Nasdaq +15.2%
Bulls 54.4
Bears 23.9 [Source: Investors Intelligence]
Have a great week. I appreciate your support.
Brian Trumbore
