[Posted 7:00AM ET]
The Economy
In an NBC / Wall Street Journal poll released this week, only
28% of Americans thought that cutting taxes was the best way to
improve the economy, though no one seems to have a palatable
alternative. Congress nonetheless passed a $350 billion stimulus
package ($20 billion of which goes to the states), a victory for
President Bush even if his own original plan called for $726
billion and the full elimination of the double taxation of
dividends.
So the question now is will this be enough to kick start the
economy? On balance, no, because any gain will be offset by tax
increases at the state and local level. Some businesses, however,
will take advantage of the new incentives on the capital spending
side and that’s a good thing.
But those who may choose to belittle such a scenario (see
Democrats) are missing the point. Just as in the first Bush tax
cut of 2001, this one should help keep the economy from totally
tanking. And optimists certainly have some ammunition in the
fact that the Federal Reserve will not be raising interest rates the
rest of 2003, keeping mortgage rates at or near all-time lows,
while any significant rally in the stock market could help out
with the wealth effect. Personally, though, a “muddle through”
environment is what I see.
On the stock front, no doubt dividend paying issues, such as
utilities, benefit with the reduced 15% tax rate, but when it
comes to the broader averages, I see it only as a net mild positive
and much of the impact has already been priced into the market.
As for the deficit, here’s my view. If the U.S. fulfills its mission
on the terror front and in nation-building (more below), you ain’t
seen nothing yet when it comes to deficits. But if we shirk our
global responsibilities, the U.S. is destined to be hit hard and any
one attack can sink the economy. The only hope is that in
wracking up the deficits, today, somehow we are laying the
groundwork for a sustainable recovery down the road that
provides positive surprises on the revenue front, while also
helping to ensure a safer world.
Lastly, I did a piece for this week’s “Wall Street History”
column on the Tariff of 1828. Back then, Virginia Senator John
Randolph characterized what came to be known as the “Tariff of
Abominations” as a measure truly concerned with no
manufacturers except the manufacture of the next president.
With the 2004 election less than 18 months away, President Bush
is betting any benefits accruing from the stimulus package help
in manufacturing his reelection.
Iraq / War on Terror
I have a tremendous amount of respect for Indiana’s Republican
Senator Richard Lugar, who this week wrote an op-ed piece in
the Washington Post echoing many of the themes I’ve
emphasized recently regarding U.S. efforts in Iraq. Following
are a few of Lugar’s thoughts.
“An Iraq transformed from tyranny to democracy can be a
springboard to promote democratic reforms throughout the
region and to end the pattern of autocracy and oppression that
characterizes so many Arab governments….
“But transforming Iraq will not be easy, quick or cheap. Clearly,
the administration’s planning for the post-conflict phase in Iraq
was inadequate. I am concerned that the Bush administration
and Congress have not yet faced up to the true size of the task
that lies ahead, or prepared the American people for it….
“The public and Congress need to know what we’re getting into.
….I want to see evidence that the administration is in this for the
long haul to create a stable, democratic Iraq, and to acknowledge
that this will place a significant burden on the American people.”
I have long argued that the cost of commitment would be the true
sacrifice Americans would have to pay for removing Saddam and
anyone else in the region who fails to get the message. But I
have also doubted Americans’ patience. In the same NBC / Wall
Street Journal poll noted above, a separate question revealed that
57% are opposed to spending $60 billion in Iraq. That’s
troubling, after just six weeks, especially when the final cost will
be more like $100 billion+.
I seldom agree with the New York Times’ Thomas Friedman, but
I do with regards to his musings on this topic earlier in the week.
“Our security and standing in the world ride on our getting Iraq
right. If the Bush team has something more important to do, I’d
like to know about it.”
Thankfully, the President and British Prime Minister Tony Blair
won a major battle in the U.N. Security Council Thursday as our
former detractors voted 14-0 (Syria got lost trying to find the
room) to grant the U.S. and Britain authority over Iraq’s political
and economic affairs until a new government is in place. And at
least the new regent, Paul Bremer, seems to have his priorities
right in Baghdad, it’s just pitiful that the electric and water
systems still haven’t been repared.
Finally, we have the terror issue. Al Qaeda directly targeted the
U.S., Britain, Australia and Norway (for goodness sakes),
through a message reportedly taped by #2, al-Zawahiri. Al
Qaeda threatened something big, while Saudi Arabia for the first
time increased its cooperation with the U.S., though I’m not
about to go overboard on this last point.
It was also weird last Sunday that Saudi Ambassador Prince
Bandar blew off both ABC’s “This Week” and “Meet the Press.”
George Stephanopoulus failed to bring it up, while Tim Russert
once again showed why he’s the best in the business, peppering
fill-in Adel al-Jubeir (Saudi foreign policy advisor) with
questions concerning Bandar’s no-show; bringing up the
ambassador’s “erratic behavior” and “frequent absences from
Washington.” Bandar later emerged during the week to say he
had a gut feeling the U.S. was about to take a big hit. If you’re
not troubled by this dirtball, you should be. [In the interest of
fair disclosure, former FBI Director Louis Freeh defended
Bandar in an op-ed piece this week. But you’ll recall that Freeh
wasn’t exactly Elliot Ness while in charge.]
Street Bytes
–The equity markets finally saw their winning streaks snapped,
though the damage wasn’t extensive, with the Dow and S&P 500
sliding about 1%, while Nasdaq declined less than 2%. [Closing
figures listed below.]
–U.S. Treasury Yields
6-mo. 1.07% 2-yr. 1.34% 10-yr. 3.34% 30-yr. 4.26%
Heck, I just refinanced recently at 5.75% and if I had waited a
few weeks I could have received 5.35%. [My guy was so busy
he came to my home on a Sunday afternoon to do the
paperwork.]
The U.S. dollar hit new lows against the euro thanks in no small
part to Treasury Secretary John Snow’s comments last weekend
that the 20%+ decline over the past year or so has been “fairly
modest.” The Bush administration has orchestrated the fall in an
attempt to boost exports and the economy. For now it’s working,
as there hasn’t been a panic out of U.S. stocks and bonds.
–Energy: Prices stabilized around the $29 level for West Texas
cheese and $6+ for natural gas, as any good news on the lifting
of sanctions in Iraq was overtaken by both the increased terror
threat and a further tightening of inventories in the U.S. And not
for nothing, but it’s been a miserable spring in much of the
country, with many of us keeping the heat on long after we
normally do. As for summer, Crain’s New York Business has a
very important piece if you’re bullish on natural gas, in
particular.
Headlined “Electricity Use Soars,” the article points out that
New York’s major utility, Con Ed, estimates that over 200,000
new air conditioners are being purchased each year in its service
area. In the old days, many New York apartments had a single
AC unit. Now everyone wants one in each room, ergo, increased
demand. The recent housing boom also contributes to the issue,
as do all of the new electronic gadgets we use. Meanwhile,
natural gas fuels most of the power plants. [Con Ed doesn’t
foresee any service problems this summer, however, look out
2004, especially if the economy has recovered by then.]
–Japan: The government nationalized the 5th-largest bank,
Resona, bailing it out with about $17 billion in funds while
guaranteeing deposits, in an attempt to stave off a “systemic
crisis.” Thus far it’s worked. The Bank of Japan, though, is
trying too hard to prop up the yen in order to aid exports.
Normally these moves fail.
–In a huge verdict, a Florida appeals court overturned a $145
billion judgment against the tobacco industry, due to the
“egregious” behavior of plaintiffs’ attorneys, which it is hoped
will set a precedent for future class-action suits of all kinds.
Tobacco stocks rallied big time on the news.
–In a separate ruling, the U.S. Supreme Court ruled in favor of a
Maine law which forces the drug companies to offer discounts to
those lacking insurance coverage. Big Pharm took a hit.
–Shares in Genentech soared 40% on word that the company’s
experimental drug Avastin could become a major treatment for
colon-cancer patients, in combination with standard
chemotherapy. We’ll keep our fingers crossed on this one.
–MCI settled with the SEC for a record $500 million in the
WorldCom fraud case. Investors may receive one or two free
phone calls in return for losing a fortune on the stock.
–If you strongly believe the U.S. could get hit by another major
terrorist attack, the last thing you want to do is invest in airline
stocks.
–G.E. is battling with some of its unions which are being asked
to shoulder a larger portion of their healthcare benefits, a
common theme, of course, these days, and the unions are
threatening June strikes.
–Corporate insiders have been big sellers of stock, normally a
lousy signal.
–Good signs for the advertising industry. $9 billion in
commercial television time has already been purchased for the
new season, versus $8 billion at this point in ’02.
–Granted, I understand higher valuations on many stocks are
warranted with interest rates as low as they are, but the trailing
price /earnings ratio on the S&P 500 is still 34, for crying out
loud.
–Wal-Mart reported that its Mother’s Day sales were
disappointing. You’re supposed to take your mother to lunch,
just as yours truly did, not freakin’ Wal-Mart. Yeesh.
–The New York Post reports that NYSE Chairman Richard
“Dick” Grasso earned around $15 million each of 2000 and
2001, before his pay was cut to $10 million in ’02.
–I can’t stand George Soros, and really don’t give a damn what
his investment strategy is, but for those who do he announced
he’s been shorting the $ and buying gold.
–The SEC is beginning to look into the mutual fund industry as
another potential conflict of interest, focusing on the issue of
how brokers and their firms are compensated. This is little
understood by many in the investing public, but, alas, yours truly
has intimate knowledge of the topic due to my past experience in
the business. Clients need to know that in many cases brokers
have an incentive to sell both in-house and select outside funds.
I’ll weigh in further at the appropriate time as the SEC continues
its investigation.
–Unfortunately for mutual fund holders, the new tax bill doesn’t
address the issue of phantom capital gains, whereby one is forced
to pay taxes on gains they never benefited from. As the industry
has correctly noted, this is a big issue and hopefully a separate
piece of legislation will rectify it.
–My portfolio: I sold some stock on Monday morning, just as I
said I would, unloading my lone tech position at a handsome
profit, and just in time as it turns out. [Now I’ll tell you. I
owned ‘calls’ on Micron Technology.] Then on Wednesday I
sold out my position in Telecom New Zealand, again, at a nice
profit. Regarding this second move, I have to admit that for the
first time I sold a stock because of concerns on the terror front. I
simply wanted to raise more cash and it has nothing to do with
my opinion on NZT. So I’m now about 45% equities (95% of
which is energy) and 55% cash.
International Affairs
Israel: 5 terror attacks in 48 hours derailed, temporarily, any
peace discussions, including the postponement of Prime Minister
Sharon’s meeting with President Bush. But Bush appears ready
to become even more personally involved, with a trip to the
Middle East looking increasingly likely in June in an attempt to
get Israel and the Palestinians to formally implement the ‘road
map.’ For his part, Sharon gave a qualified endorsement of it.
Of course you have terrorists like Hamas that have long
vowed not to let the peace process go forward.
Iran: Conflicting reports on whether the ruling mullahs are
lending support, and giving refuge, to al Qaeda leaders or placing
them under arrest. Of course I believe the former to be the truth.
The U.S. and its allies must do all they can to foment revolution
by aiding the democratic forces already in place in Iran. We
blew it last year, but then you already knew that.
North / South Korea: The North opted to escalate tensions with
the South once again, this time threatening Seoul for supporting
the U.S. and its tough stance. And echoing a long-held theme in
this space, a U.S. official told Defense News that the North
Koreans “are nuts; they’re not what you would call rational
actors. They are ideological and convinced we’re out to get
them. If, God forbid, we have to fight that scenario, we’d have
to use different techniques.” Think nuclear.
Separately, President Bush received the commitment he was
looking for in sticking to a hard line against Pyongyang from his
meeting with Japanese Prime Minister Koizumi on Friday.
SARS / China / Taiwan: I wrote a few weeks ago that it was a
“travesty” how China was preventing Taiwan from receiving
World Health Organization help in dealing with SARS. Beijing
eventually allowed two WHO representatives to travel to Taipei,
but then this week the WHO denied Taiwan simple “observer”
status to a key meeting, as it buckled under pressure from China.
Disgraceful.
To digress a bit, the U.S. has to publicly state what every
American needs to know. We support Taiwan, even as we play
around with the ‘one China’ policy. In other words, President
Bush has to come down hard on the side of Taipei for not only
WHO membership, but also in coming to Taiwan’s aid in the
event of an attack from the mainland. Everything is
interconnected. The administration, though, would argue it
needs China’s support on North Korea, which is definitely the
case, but not stepping up and supporting Taiwan is equally
important in the long term, let alone the immediate concerns over
SARS and public safety.
Meanwhile, the much-maligned U.S. State Department came
down hard this week on a leading Chinese conglomerate,
imposing strict sanctions for its supplying missile technology to
Iran. This has major implications, but China is loath to retaliate
against its most important trading partner.
Thailand: On a related note concerning SARS, the government
here will give $100,000 to any foreign tourist that becomes
infected with it while vacationing in Thailand, matching an
earlier offer from Thai Airways. So if you’re hard up for cash….
Congo: Millions have died in the 5-year war here and over the
past few months, action has heated up once again. This week
two unarmed (why?) U.N. monitors were butchered amid reports
that warring tribes are decapitating and cannibalizing their
victims. There’s nothing more to say.
Zimbabwe: Australia’s Foreign Minister Alexander Downer
called on Zimbabwe’s ruling party to force out President Robert
Mugabe. “The country can’t even import paper and ink to print
bank notes,” Downer said. “These dictatorships are all the same.
They are pig-headed and unable to accept any criticism of the
regime.” George Bush and Colin Powell should also be publicly
stating that Mugabe must go. Then again, one smart bomb
would do the trick. Hell, even a dumb one would get the job
done.
Indonesia: The government has launched an all-out offensive
against the separatist rebels in oil-rich Aceh province. There will
likely be claims of atrocities but it’s an action that had to be
taken. I applaud it.
Philippines: President Gloria Arroyo, a personal fave around
here, came to Washington and will now formally accept U.S.
troops, on top of the existing advisors, in the fight against Islamic
militants. Arroyo emphasized that her nation sought to tighten
its relationship with the U.S. and encouraged other Asian nations
to do the same.
Slovakia: A referendum on E.U. membership was held, with
92% supporting it. Luckily, 52% of eligible voters turned out,
50% being required to make it official.
Poland: Regarding the above, the government here holds its own
referendum on the E.U. June 7-8 and there are major concerns
the 50% turnout threshold won’t be met. 65% back membership,
but opponents could simply stay home if it’s felt this is the best
way to defeat the measure. Apathy is another critical factor,
fueled by an 18% unemployment rate.
Turkey: Greek Cypriots will now be allowed to travel to Turkey
for the first time in about 40 years, as Ankara takes another
positive step in brokering a true piece on divided Cyprus.
Meanwhile, Turkey continues to suffer economically for its
intransigence over Iraq, as the U.S. pulls out of bases like
Incirlik, which had provided a local stimulus.
Random Musings
–You have to feel for Morocco, a solid ally of the U.S. in the
war on terror. Now Western interests are fleeing, including the
film industry that was using the country for location shooting.
And then there’s Norway. It helps the U.S. out in Afghanistan
and immediately gets targeted.
–Disgraced New York Times reporter Jayson Blair is openly
talking about his potential book deal. I’m tellin’ ya, indict the
SOB so he can’t profit from it.
–I’m conflicted as to whether or not I’ve been too easy on
Deputy Defense Secretary Paul Wolfowitz for our problems in
post-war Iraq.
–One of the major reasons why New York City faces such a
huge budget crunch is the fact that the average city employee
earns $24,000 in fringe benefits, far in excess of what is normal
in the private sector. Therein lies 75% of the problem.
–Thanks to Dan D. for forwarding Senator Richard Shelby’s (R-
AL) flat tax proposal introduced May 13. Shelby’s work calls
for a 17% rate when fully implemented. Quoting from S.1040:
“The legislation would also eliminate the many marginal rates,
all itemized deductions and credits, the alternative minimum tax,
and the taxation of Social Security benefits. In place of itemized
deductions, each taxpayer would be given a standard deduction
of $12,790, or $25,580 in the case of a couple filing jointly.
Taxpayers would receive an additional $5,510 standard
deduction for each dependant. Therefore, a family of four would
need to make over $36,600 before they would pay a single penny
of taxes.”
Senator Shelby: “Were a flat tax in place now, taxpayers would
file a return the size of a postcard, and every American would be
taxed equally and at the same rate. Rather than spending hours
poring over convoluted IRS forms, or resorting to professional
tax assistance, the flat tax allows taxpayers to determine their
taxes quickly and easily. The flat tax would decrease the cost of
compliance to the government, and would save taxpayers time
and money.”
Thanks for indulging me. This is what I’d personally like to see,
instead of the increasingly confusing B.S. we have today.
Should President Bush, however, receive a second term,
something on these lines is distinctly possible.
–Mad Cow: Years ago I spent a lot of time on this topic, when
Europe was having its crisis, but I won’t do the same regarding
the discovery this week of a diseased cow in Canada, at least not
just yet.
What is worrisome, though, is that days into the investigation of
how this could have occurred, the Canadian government seems
more confused than ever and as of this writing has no clue if the
8-year-old’s offspring found their way into the food supply, let
alone where the damn cow came from. This particular episode is
the first of its kind in 10 years in North America. But let’s wait
another week to see what develops.
Harry K., my friend in Toronto, says “I dunno – SARS, Mad
Cow, West Nile….this whole thing is getting a bit too Biblical
for me.” Harry would like to see Ebola afflict the House of
Commons, however. And if you thought Karl Rove was king of
the presidential photo op, how about Canadian Prime Minister
Chretien and his staging of one in an Ottawa restaurant, eating
beef? [Incidentally, West Nile was detected in Ottawa this
week, while Toronto may have had a resurgence in SARS.]
–The last time I checked, the “wealthy” buy the cars, boats, and,
yes, planes that employ millions in our economy. I thought
that’s what we wanted.
–72% of residents rate New Jersey a good to excellent place to
live. [Source: Star-Ledger poll] 84% take “a lot” or “some”
pride in living here. Now you know why Christie Whitman
resigned from her office at EPA to come back home. Or am I
reading too little into the move?
–As a follow-up to the story on the pillaging of our oceans, in
one recent raid on a fishing vessel, investigators discovered 32
tons of shark fins for shark fin soup. It’s estimated that 18,000
sharks were killed for this single haul. I never thought of myself
as a raging environmentalist, but I vow never to eat this dish.
–Ah, but then you have the supersalmon and the threat these
“Frankenfish” pose. Supersalmon could wipe out its natural
cousins, eating or breeding with them. This film will be Rated R.
–An Ethics of American Youth survey reveals that 3 of 4 high
school students admitted to cheating on at least one test. And as
if that’s not disturbing enough, an incredible 38% acknowledged
stealing something from a store. Future Wall Street kingpins!
[Source: U.S. News]
–U.S. News’s “Washington Whispers” column notes that Teresa
Heinz Kerry (wife of the Senator) is tired of the criticism she’s
facing. “If Republicans don’t shut up, warns one of her friends,
she’ll give Kerry a war chest that would dwarf anything
President Bush could collect.” Bring it on, babe. Just hold the
ketchup.
–Let’s see. Fox is going to have a new show, “American
Junior.” I’m waiting for “Washed Up and Middle-Aged
Americans.” Yeah, I’d audition for that.
–Here’s what bugs me about LeBron James and his $90 million
contract with Nike. He hasn’t done anything! And did you see
the “brothers” at his press conference? What a joke.
–As for Annika Sorenstam, she answered the call. Good for her.
But she didn’t make the cut, and despite entertaining us all for
two days, part of her has to be thinking, what did I really prove?
–Need an idea for the ol’ wine selection this weekend? This
week the White House held a state dinner for President Arroyo.
Two wines were served: A 2001 Pride Mountain Viognier and a
2000 DuMol Pinot Noir “Finn,” both from California. But no
San Miguel, a huge diplomatic faux pas, if you ask me.
–Finally, Bob Hope turns 100 on May 29. Happy Birthday to
one of the truly great Americans.
—
God bless the men and women of our armed forces. In
remembering those who gave their lives for our country, “Think
not only of their passing, but remember the glory of their spirit.”
God bless America.
—
Gold closed at $368…big rally continues.
Oil, $29.16
Returns for the week, 5/19-5/23
Dow Jones -0.9% [8601]
S&P 500 -1.2% [933]
S&P MidCap +0.5%
Russell 2000 +0.9%
Nasdaq -1.9% [1510]
Returns for the period, 1/1/03-5/23/03
Dow Jones +3.1%
S&P 500 +6.1%
S&P MidCap +5.8%
Russell 2000 +9.2%
Nasdaq +13.1%
Bulls 56.0
Bears 20.9…lowest since February ’92…contrarians take note.
Have a great week. I appreciate your support.
Brian Trumbore
