[Posted 7:00AM ET]
The Economy and Wall Street
Perhaps my biggest forecasting mistake was the claim that we
were witnessing a bubble in U.S. housing values, going back to
’99-’00, though over the past year or so I have turned down the
volume on this issue out of a sheer sense of embarrassment. I
clearly underestimated the ability of the Federal Reserve to do its
part in maneuvering interest rates ever lower in order to keep
homes not only affordable, but as a source of cash through one
refinancing after another.
Oh sure, as the Economist magazine blared this week, U.S. and
British real estate (along with that of Ireland, Australia, Spain
and the Netherlands) is “seriously overvalued,” but I’m tired of
crying wolf. What everyone has to concede these days, however,
is that without the still roaring housing market and its positive
impact on the consumer, the economy would be in a toxic waste
dump.
Of course the Fed has been trying to keep housing afloat as it
waits for business spending to pick up and shoulder its share of
the burden, while the Bush tax cut now supplies its own fuel.
Throw in a new alternative to Viagra that could soon be on the
market and we’re suddenly so stimulated, the only thing that can
stop us is a massive coronary.
Looking at the facts, this wasn’t that bad a week on the economic
front. Aside from a renewed surge in homebuilding, two
readings on consumer confidence and sentiment were up
strongly, the expected post-war bounce, while retail sales showed
some signs of life and the Chicago Purchasing Managers Index
rose.
On the other side of the ledger, importantly, the labor picture
remains punk, auto sales and other big ticket items are declining,
and personal income was unchanged, the latter being an indicator
that I feel doesn’t get the attention it deserves.
You also had the revelation that the Bush administration was
trying to bury a report that the Treasury Department put together
which shows massive budget deficits for as far as the eye can
see, as the government gets swamped by future obligations for
retirement and health care. But for now the White House is
betting through its tax cut package that enough momentum in the
economy will be built up by November 2004. A continuing rally
in equities wouldn’t hurt voters’ moods, either.
And a rally is what we are getting, with the major averages all at
6-12 month highs. Nasdaq has now rallied over 40% from its
October lows. Of course at the same time many of the market
leaders are now massively overvalued.
I have to note my own market forecasts for yearend 2003, as
spelled out last 12/28 in this space.
Dow: 9200 [Currently 8850]
S&P 500: 995 [963]
Nasdaq: 1600 [1595]
These represented gains of 10-20%, but the reason why I wasn’t
more excited by this prospect is for the simple reason that after
the declines of 2000-2002 this is nothing. Sure, it helps salve the
wounds and perhaps put a little bounce in your step, but it’s also
not enough to throw caution to the wind and dump all your
money into stocks, especially in a world fraught with unknown
dangers.
Yes, the market could trade higher from here, but I’m content
with my recently reduced 45% exposure to equities, with the rest
in cash, not bonds. If the economy truly takes off, my energy
holdings will more than participate (they’ve outperformed until
this past week), while if the broad averages rocket ever higher,
I’ll sit in my seriously overvalued home, with my historically
low mortgage, waiting to go…….SHORT!
The President’s Week
President Bush’s ambitious road show began on Friday and there
is little I can say prior to posting this column. After trips to
Poland, Russia, and the G-8 summit in France, the President
wades into the Middle East morass as he attempts to impose his
will, and the ‘road map,’ on Palestinian leader Mahmoud Abbas
and Israeli Prime Minister Sharon.
At least Abbas and Sharon are already talking and both sides
have labeled the initial exchanges positive, but obviously there is
little historical precedent to warrant great optimism. For his part,
Abbas has strongly hinted that Hamas may approve of a
ceasefire, while Sharon has called the “occupation” a “bad thing
for Israel, for the Palestinians and for the Israeli economy.” Such
an admission was startling, especially coming from a hardliner
like him.
Back to Bush, both he and British Prime Minister Tony Blair
face intense criticism at the G-8 on the issue of Iraq and the
failure to turn up a true smoking gun on the weapons of mass
destruction front, let alone the path of the U.S. dollar and its
withering impact on an already tottering European economy.
The dollar’s fall has exacerbated a dismal employment picture.
For example, Germany’s unemployment rate is 10.7%, France’s
9.3%. And of course you have the personal animosity between
Bush and French President Jacques Chirac, which can’t be
papered over in a 30-minute chat.
Street Bytes
–U.S. Treasury Yields
6-mo. 1.08% 2-yr. 1.32% 10-yr. 3.36% 30-yr. 4.37%
The U.S. dollar stabilized this week, and I remain in the camp
that the slide has been reasonable, especially in light of the prior
multi-year runup. But the movement has still been enough to
exacerbate trade tensions, which is a theme we’ll hit on further
after the G-8 confab.
On the issue of deflation vs. inflation, just remember that if some
of the forecasts of 4-5% growth for the second half of the year
prove to be correct (I’m more in the 2% camp), bonds will be
absolutely crushed, the housing boom will end, and stocks could
crater, the latter before stabilizing on the heel of better than
expected earnings. But I’m jumping way ahead of myself.
–Energy: OPEC holds what is turning out to be a critical
meeting on June 11. What will be Iraq’s new role? Will Iraq
eventually pull out, thus throwing the cartel into a state of
turmoil? And what will Iraq’s production be by year end? As to
the last question, U.S. experts are saying production will be
somewhere between 1.3 and 1.5 million barrels per day in just 4
weeks, on the way to 3.5 mmbd by 2004. Maybe so, but it is
clear the post-war looting of the fields and offices set back once
grandiose plans.
But let’s say Iraq is at 3.5 mmbd in 6 months or so (personally, I
doubt it). Will this extra supply help collapse oil prices? It all
depends on the state of the world economy. If optimists are
right, and growth is strong in the second half, with Asia gaining
steam as well, then the extra supply could be sopped up. If the
global picture is still sluggish, however, prices would come
down.
In the here and now, inventories remain tight, and it’s not just in
the U.S., but Europe as well. This is why the price of crude and
natural gas, for example, remains stubbornly high.
–Japan: The Tokyo Nikkei index finished at its best level since
February, as Prime Minister Koizumi defended his reform plan.
Separately, Japanese banks, tired of underperforming
investments in local stocks, as well as non-existent yields, are
increasingly turning to U.S. securities.
–Microsoft and AOL Time Warner agreed to settle litigation
over AOL’s Netscape browser. Microsoft will pay AOL $750
million (which AOL said it would use to reduce debt), while the
two agreed to collaborate on Internet and digital media
opportunities. Meanwhile, Steve Case is looking to spin off the
AOL division, but he may no longer have the clout to effect the
change.
–Shares in eBay, Amazon, and Yahoo continue to become more
and more overvalued. But don’t short them yet, at least in my
opinion. There’s still too much positive momentum. [Wait until
the charts turn a bit.]
–The NASD reports that arbitration cases against brokers are
skyrocketing.
–CSFB’s Frank Quattrone declared “I’m innocent” at his hearing
on obstruction of justice charges. Unfortunately, Quattrone’s
trial date was set for September, denying us all some needed
summer entertainment.
–And the NASD, busy beavers these days, also charged former
Merrill Lynch analyst Phua “Forever” Young with issuing
misleading, overly bullish reports on Tyco while he was covering
the company. Young was in Tyco’s pocket, as he stupidly
admitted in some emails.
–Schering-Plough faces indictment on obstruction of justice
charges with stories of possible document destruction. The
potential penalties could be severe.
–An FDA advisory panel may be close to approving Levitra, a
Bayer / GlaxoSmithKline drug that will compete with Viagra, as
long as the FDA is convinced the side effects, such as the risk of
heart attack, aren’t too great. Well for crying out loud, I heard
one report that you can, err, err, anyway, for 36 hours! I think
Monty Python would have had fun with this one.
–I knew this would happen. I denigrated taking your mother to
Wal-Mart for Mother’s Day, and sure enough, my friend Jimbo,
a huge Wal-Mart fan, did just that, though he admitted she was
unimpressed.
–Internet provider Earthlink said spam is up 500% in the past 18
months. I thought the other figures we’ve been getting were low.
–How does Bose get away with charging the same $349 for its
Wave Radio the past 10+ years when the prices for competing
electronics products have plummeted? Are we all really that
stupid?
–Your editor owns 4 Bose radios.
–From time to time I’ve owned shares in Rowan, an oil driller (I
currently own some), and I always enjoy the comments from
chairman C.R. Palmer, one of the greats. Mr. Palmer is retiring,
but in his first quarter report, among his musings on corporate
governance was the following:
“I think it is wrong when a member of management is ‘fired’ for
leading a failed strategy, and then is paid a ‘termination bonus.’”
–My portfolio: Last week I told you that I sold my ‘calls’ on
Micron Technology. I thought I made a good move and it
looked that way for a few days, then zoom! Up about 15%,
which is what I left on the table. Doh!
International Affairs
Iran: The Bush administration has suspended contacts with
Tehran, adopting a more active policy of covert action to topple
the regime, though as yet this isn’t the official party line. And
this is one instance where the world community, specifically the
International Atomic Energy Agency, could be a big help in
spelling out the threat posed by Iran’s nuclear program. Even
Russia applied a little pressure on the issue of the disposition of
the nuclear fuel.
North Korea: It’s blue crab season (through June….I just learned
this), which means the North sends its fishing vessels into South
Korean waters. In today’s environment, however, a small
incident can mushroom into a far bigger one.
Separately, Defense News reported on a war game, Bold
Sentinel, that was recently conducted by a Washington think
tank. It kicked off with satellite intercepts warning that North
Korea was preparing an underground nuclear test, while South
Korean intelligence indicated the North would soon export either
nuclear fuel or a completed bomb.
“As the (all-star) mock panel digested the warnings, more bad
news flowed in: The North detonated its subsurface nuke, and
delivered nuclear material or a weapon to a foreign capital.”
Recognizing the test would help mobilize world opinion against
Pyongyang, the panel shifted attention to the exported material or
weapon. The U.S. administration was hamstrung by its “limited
knowledge about the North’s Stalinist regime and its inability to
penetrate key installations shielded from attack in mountain
caves….”
“In the end, a dark outcome was deemed more likely than a
peaceful one: The United States may well have to go to war,
which would assuredly kill countless South Koreans, to
decapitate a regime that could endanger countless more
worldwide.”
This is just one reason why you’re not likely to see me with
much more than 50% in equities at any one time. Sleep tight.
China: I have noted recently that China is a solid #2 (behind the
U.S.) in terms of traffic for StocksandNews. I have to admit I
get a charge out of this, and am thus deeply dismayed to learn
that officials in Beijing have arrested 4 for engaging in
“subversion” on the Net by writing articles critical of the
government. Each will receive a prison term ranging from 8-10
years. Just another travesty, and another excuse for me to rant
that the U.S. not only has to blast China, when appropriate, but
also openly support Taiwan.
Zimbabwe: The coming period could be a climactic one, as the
opposition has called for a week-long strike, while the army has
threatened a brutal crackdown on dissidents. But the most
significant item of the past week involves Irish rocker Bob
Geldof (“Band Aid”), who has long been involved in the African
continent and various humanitarian causes. Geldof lashed out
against President Robert Mugabe.
“He is engaging in state-sponsored terror and famine and that
cannot be allowed. He is a shame on the face of Africa.”
Geldof also lit into the European Union for its inaction, thus
earning StocksandNews’ “Person of the Week” award.
Saudi Arabia: Let’s hope that the surprise move by the Kingdom
to allow FBI agents to interrogate terror suspects is a sign of a
true change in official policy. But we’ve learned not to hold our
breath.
Russia: The biggest obstacle to U.S.-Russian relations these days
is President Vladimir Putin’s bid for reelection next March,
preceded by critical parliamentary elections in December. Putin
continues to have major problems with the hardliners, forcing
him to appease them, while toying with the U.S. more than he
probably wants to. Of course this also speaks to his character, or
lack thereof.
Turkey: The military is beginning to make waves, with the top
general expressing concerns about the “Islamization” of the new
government.
Peru: Boy, this place is a mess. President Alejandro Toledo (no
relation to PGA Tour player, and former boxer, Esteban Toledo)
declared a 30-day state of emergency to deal with nationwide
strikes by teachers, farmers, and health workers, all fighting for
more pay. Toledo’s approval rating is a whopping 14%.
Canada: Prime Minister Chretien, a k a Chirac Lite, blasted the
Bush administration on all levels. Just ignore him, my American
friends. He isn’t representative of a vast majority of the
Canadian people. As for Toronto and SARS, what the relapse in
this city proves is that next winter the disease is coming back
with a vengeance across the globe.
Random Musings
–In doing a piece on Bob Hope for another link on this site, I
researched Hope’s 1944 USO show to the Pacific base of
Pavuvu. There he entertained a group of Marines shortly before
many of them, over 1,500, were killed on the tiny island of
Peleliu. What struck me is that Peleliu was a colossal
intelligence failure for the U.S. Not only did the battle prove to
be totally unnecessary, America’s military leadership was told
the fight would be a 2 to 3 day affair when it proved to be 4
months. You read something like this and you can’t help but
think about other intelligence failures over the years, including
overestimating the Soviet economy during the Cold War.
There’s also a parallel to today, as Republicans are loath to admit
that the moral justification for the war on Iraq, Saddam’s
weapons of mass destruction, may have been another in a series
of critical misjudgments.
Let me first reiterate, though, that in my opinion the war was
justified on issues other than WMD, and as I wrote recently,
Saddam still posed a huge threat to U.S. and Western interests,
regardless of whether it was 2003 or 2007. Additionally, looking
at the Big Picture, I still believe this is the first domino, if we
stay the course, towards positive change throughout the region.
But to those who think President Bush is a shoo-in for 2004, an
opinion I shared until just a few weeks ago, I wouldn’t be so
sure. While no Democrat in the field today seems capable of
challenging a still popular President, we have a long ways to go.
What was once thought to be a strength, the administration’s
determination on the war on terror, could turn out to be an
Achilles heel during the campaign.
It’s not just Democratic Congresswoman Jane Harman, a senior
member of the House Select Committee on Intelligence, who is
saying “This could be the greatest intelligence hoax of all time.”
Republican chairman Porter Goss is echoing similar sentiments.
U.S. credibility is at stake and where it’s going to hurt our
beloved country is when action is required against the likes of
Iran. I have a pit in my stomach on this one. I mean for crying
out loud, we didn’t even hit a bunker with the opening salvo
against Saddam, according to a general now on the scene. It was
never there!
Let’s pray we eventually find a true smoking gun, or at least the
documentation that proves the Bush / Blair case. In the
meantime, the President must fire CIA Director George Tenet, to
begin to control the damage.
–Our heart goes out to the families of those killed in that tragic
plane crash in Turkey that took the lives of 62 Spanish
peacekeepers, returning from their work in Afghanistan.
Unfortunately, Prime Minister Aznar was heckled at a service for
the victims.
–Al-Jazeera fired its chief executive. There had been persistent
rumors that 3 Iraqi agents were working at the network. No
word, either, on whether Osama bin Laden has been elevated to
the top slot.
–Former CIA Director James Woolsey (who would make for a
good replacement for Tenet, though he’s smart enough to turn it
down) said that Americans need to worry about things that don’t
go boom, such as drug tampering, while Business Week reports
that the division of Homeland Security responsible for cyber
security is a total mess, with one key figure after another
departing out of frustration.
–The terror alert level was lowered Friday, which means you can
eat your Chex Mix. No need to hoard it.
–“American Idol” had its little scandal over the vote count, now
it turns out the final result of the “Eurovision Song Contest” may
have been rigged. The Russians are protesting that Tatu, the two
self-described lesbians that I have written of in the past, were
robbed of the top slot. From what I understand, the Irish vote,
pro-Tatu, was excluded from consideration because of poor
connections. A Turk, Sertab Erener, won. And that, sports fans,
is undoubtedly the last time I mention the results of this event.
–Motorcycle deaths in America are up 50% the last 5 years,
thanks in large part to all those aging riders who’ve lost their
reflexes.
–And if you like to smoke pot while riding on your Harley, you
may be able to do it in Canada, which just decriminalized small
amounts of marijuana. Now you’ll just get a ticket and a fine.
The U.S. government is pissed and threatens stricter border
controls for Canadians trying to bring truckloads of weed, SARS,
and Mad Cow into our country.
–I have more readers in Virginia than any other state in the U.S.,
so to the rest of you, indulge me while I praise the residents,
specifically the Spotsylvania County Board of Supervisors, for
having the wisdom to block the planned rezoning of a large
section of the Civil War battlefield of Chancellorsville for
development. For those of us trying to preserve our nation’s
history, this was a great victory. And kudos to the Civil War
Preservation Trust, an organization worthy of your charity
dollars.
–Speaking of America’s history, Bill Clinton is once again
trying to roll it back in his own inimitable way, this time giving
another speech on the 22nd Amendment to the U.S. Constitution,
the one limiting presidents to two terms. But it’s not about him,
he assures us.
–Here’s my take on that new study that claims those kids
spending their childhoods playing video games end up with
better visual skills than the rest of us schleps. I call it the “beer
test.” Who would you rather have an adult beverage with? A
guy who spent his early years playing with his Game Boy, or one
who was out playing baseball or shooting hoops? I rest my case.
–As my buddy Johnny Mac said, it’s nice to have an NBA Finals
where you can root for both teams. And I can’t be the only one
who thought Steve Kerr’s performance for San Antonio the other
night was one of the great ones in all of sports.
—
God bless the men and women of our armed forces.
God bless America.
And to my friends in China who continue to rail against the
system, putting yourselves at personal risk, you’re in my
prayers.
—
Gold closed at $365
Oil, $29.56
Returns for the week, 5/26-5/30
Dow Jones +2.9% [8850]
S&P 500 +3.3% [963]
S&P MidCap +4.4%
Russell 2000 +5.4%
Nasdaq +5.7% [1595]
Returns for the period, 1/1/03-5/30/03
Dow Jones +6.1%
S&P 500 +9.5%
S&P MidCap +10.4%
Russell 2000 +15.1%
Nasdaq +19.5%
Bulls 53.8
Bears 22.0 [Source: Investors Intelligence]
Have a great week. I appreciate your support.
Brian Trumbore
