[Posted 7:00 AM ET]
Take Some Risk, Will Ya?
So I open up one of my bank statements the other day and the
interest rate on the money market fund was 0.09%. I probably
had about a $40,000 balance for the month and I earned $3.00 in
interest. Of course I’ve noted that with my investment dollars
the past year, a large portion has been in cash earning similar
returns, as I’ve been too lazy to shift it into other, higher
interest alternatives. I’m just content knowing I have my capital.
But I can’t imagine what retirees, for example, are doing with
short-term rates as low as they are, and threatening to go lower
still with increased speculation that the Federal Reserve will soon
be dropping its target rate from 1.25% to either 1.00% or 0.75%.
As we’ve discussed previously, this would be the death knell for
money market instruments.
What Chairman Alan Greenspan and his band of Fed governors
are hoping we all do is take on more risk, while over at the White
House and the Capitol, the attitude is the same, as best
exemplified by the large tax package that was recently adopted.
We’re receiving gobs of fiscal and monetary stimulus, all in
the name of growth, and not just for the U.S. but across the
globe…at least that’s the goal of policy makers.
Don’t get me wrong, this is a noble objective, and as William
Pesek Jr. wrote for Bloomberg News the other day, while the
Federal Reserve is represented by 12 districts around the country,
you can consider Latin America the 13th district; Southeast Asia,
14th; China, 15th, and so on. Once again it’s up to the U.S. to pull
the wagon and, gosh darnit, time’s a wastin’.
Hey, it’s worked so far, to a certain extent. Wall Street has
witnessed a huge rally since the mid-March lows, while markets
worldwide have also tacked on about 20% over the same period.
Wealth on paper, it is hoped, leads to a happier consumer that is
more likely to part with his or her cash, while at the same time
employment stabilizes, and then rises, as business invests more
in new plant and equipment, at least that’s the plan.
But I can’t be the only one who is uncomfortable with the first
part of this equation. We’re being pushed into taking risk, like
investing in stocks, and for some of us this may be the last thing
we should be doing. Heck, it’s not great earning 0.09%, but it’s
better than losing 10%. Throw in some leverage, or a freakin’
massive terrorist attack, and you could be talking a lot worse.
Meanwhile, the Fed’s desperation continues to work its magic
with regards to the housing sector. Thanks to a flight to safety
initially engendered by problems at Freddie Mac (more later),
along with moribund economic data, long U.S. Treasury bonds
hit more new lows. Incredibly, housing, as represented not just
by construction, but also the sales process, refinancings and
refurnishings, now comprises 30% of the U.S. economy. It’s
imperative that the Fed keep the bubble going until other sectors
can carry their share of the load, but housing has been stretched
to the breaking point.
A few other notes of caution. On the valuation front, Merrill
Lynch’s Richard Bernstein had the following thought.
“The fiscal package will not give us a boom, (though) it will be a
positive. How could it not be? But can it be a big enough
benefit to justify current valuations in the stock market? My
answer is no.” [New York Times]
And you know those investor sentiment figures I’ve listed down
below since I started this column? Most of the time it’s
meaningless noise, but this week the data is historic. The spread
between ‘bulls’ and ‘bears’ among the investment newsletter
class, 58.7 / 16.3, represents the widest spread since August
1987, while the 16.3 ‘bear’ reading is the lowest since April ’87.
You all know what happened that October….cue up the fine
china hitting the floor.
Yes, this is but one of many indicators, a contrarian one at that,
but when sentiment gets to such extremes, you’d be an idiot not
to take note.
So, after the huge run-up of the past 3 months, who wants to take
up Alan Greenspan’s offer to pile further into equities? What’s
that? You’re checking your mattress? You may want to leave it
there, even at 0.09%.
Street Bytes
–The Dow Jones and S&P 500 barely eked out gains for the
week, while Nasdaq fell all of 1 point. Despite news from the
Fed’s regional survey that economic activity was still “sluggish,”
economists nonetheless raised their growth prospects for the
second half of the year to 3.5-4 percent. Friday’s market action,
though, was a little ugly thanks to the first down reading on
consumer sentiment since the end of “formal fighting” in Iraq
(use that phrase over there today and you’re likely to get a shell
in the face).
–U.S. Treasury Yields
6-mo. 0.84% 2-yr. 1.07% 10-yr. 3.10%* 30-yr. 4.17%
[*Last week I inadvertently had a yield on the 10-yr. of 3.56%
when it should have read 3.35%. Thanks to Pete M. for picking
this up.]
The consensus has built that at the next Fed meeting, June 24-25,
the Board will lower rates at least 25 basis points. Certainly on
the face of it, punk news on the economic front warrants it, but
the market could also easily get spooked by the fact that the Fed
is running out of ammunition.
–Freddie Mac, the #2 mortgage lender, rocked the Street when it
fired 3 top executives, including the CEO whose lack of
“candor” came into question. Freddie has said it would be
restating earnings for the past few years, though the new CEO
said there was no fraud. To which Wall Street yelled, “Fraud!”
and promptly took the shares down $9.
What scares everyone is that Freddie and its larger sibling,
Fannie “Be Tender” Mae, have always promoted the fact they are
“government-sponsored entities” (GSEs), and it is implied that
the institutions are too big to fail, ergo, should one have a
blow-up in its operation, the U.S. government would be forced to
come to the rescue in order to prevent a full-scale financial
meltdown.
But the biggest immediate concern is what, if anything, is wrong
with Freddie Mac’s derivatives portfolio? You’ll recall that
Warren Buffett has long called derivatives “weapons of mass
destruction,” and as an SEC investigation and Justice Department
criminal probe examine the books and the admitted manipulation
of earnings (ironically, to smooth them out so as to reduce
volatility in the eyes of shareholders), Wall Street will be focused
on any information pertaining to Freddie’s exposure.
Finally, it didn’t help matters when it was disclosed that the
departing chief executive is slated to receive a $24 million
severance package, though this was written into his contract back
in 1990.
–It seems obvious that the big, immediate winner in the
business-application software war between Oracle and
PeopleSoft (and tangentially J.D. Edwards) is actually SAP, as
confusion is sowed among business owners while Oracle’s manic
Larry Ellison goes after PeopleSoft with his hostile takeover bid;
the latter having rejected the offer as PeopleSoft’s own merger
partner, J.D.Edwards, sues Oracle. Got it? I didn’t think so,
which is why SAP hopes to pick up the pieces in this service
intensive business. [I have to admit a huge bias here. Aside
from my longstanding disdain for Ellison, I have a good friend at
SAP who I hope gets to kick some butt in this environment.]
Separately, Oracle announced better than expected earnings and
revenues for its latest quarter, though the revenue increase was
due to the falling dollar, not necessarily a turnaround in business
spending….a fact that tended to get lost in the moment.
–Energy: Fed Chairman Greenspan strode before Congress and
in a rare departure from his normal fare warned of the crisis in
the supply of natural gas, one that will only get worse over the
coming years since there is no short-term fix. Importantly,
Greenspan discussed issues such as the tradeoff between
environmental and energy concerns, saying the U.S. can’t
encourage environmentally friendly natural gas and then protest
the development or importation of it. Of course the next day it
was learned that natural gas inventories had soared and the price
fell 9%, back below $6. As Britain’s favorite American, Homer
Simpson, would have observed, “Doh!”
The Fed Chairman is right, however, and those of us with heavy
exposures to the sector applauded with gusto. Plus once the
northeast gets its first heat wave, the shortage issue will re-
emerge and the price will surge. As for crude oil, it climbed
above $32 before falling back to close at $30.65, with OPEC
announcing it would hold the line on production for the time
being until it saw what became of Iraq’s return to the oil market.
Lastly, Merrill Lynch’s Bernstein said that the energy sector,
unlike technology and the overcapacity afflicting it, still suffers
from “tremendous underinvestment,” another positive for oil &
gas stocks, one would think.
–China: Shanghai tycoon Zhou Zhengyi, the 11th-richest man in
China, according to Forbes, has been implicated in a massive
fraud involving China’s 2nd-biggest bank, whereby Zhou
received questionable loans in excess of $230 million. This is
another example of the dangers in China’s banking system.
–Britain: The government, on the recommendation of Chancellor
of the Exchequer Gordon Brown, as well as the majority opinion
of Prime Minister Tony Blair’s cabinet, has opted not to seek
approval for adoption of the euro, though the door has been left
open for a referendum in ’04 assuming the opinion polls begin to
tilt more in favor of such a move. Today, most surveys show
about 60% of Britons against. [Denmark and Sweden remain the
other two European Union nations using their own currency.]
Brown says certain reforms are necessary, first, to prepare
Britain for the inevitable economic disruptions, let alone the
issue of the nation’s huge housing bubble.
–Crime Blotter: Two former Lucent executives face charges for
pumping sales, while in a similar vein 3 former Dynegy
executives were indicted for fraud and an ex-Network Associates
officer pled guilty to charges of overstating revenue and
earnings.
–But there were bigger stories on this front this week as Guidant,
the world’s largest maker of heart devices, pled guilty to10
felony counts for failing to disclose defects in stents that
contributed to 12 deaths. The company was also fined $92
million.
–And then we have former ImClone CEO Sam Waksal, who
received a sentence of 87 months with no parole, along with a
fine of $4 million, for insider trading. This sends a terrific signal
to the rest of America’s corporate chieftains; act in an ethical
way or pay the price.
–As for Waksal pal Martha Stewart, Christopher Byron, the
definitive chronicler of all things Martha, had the following take
in the New York Post:
“It is truly sad that the business career of one of America’s
greatest entrepreneurs should have reached this point. But it will
surely be sadder if, at the end of it all, even the prosecution of
Martha Stewart were to have served no useful purpose, becoming
engulfed instead in the deafening cry of her victimization.
“This case stands for one thing, and one only – and people need
to remember that as the volume gets cranked up in Stewart’s
defense: Regardless of whom you are – from a factory floor
worker in a print shop to a superstar celebrity with your own TV
show – you cannot lie to government officials and expect to get
away with it.”
–Lastly, on the malfeasance front, two independent
investigations looking into the WorldCom debacle have
concluded that former CEO Bernie Ebbers had to have known of
revenue recognition shenanigans, so we eagerly await a massive,
110-count indictment of the bearded one.
–The Paine Webber name is no longer. Gone. Poof.
–Earnings confession season….Motorola and Texas Instruments
both blamed profit warnings on SARS for shortfalls in Asia.
–As more people catch on to the tax treatment of dividends
under the new act, they’ll be scrambling for help from their
accountants. Folks, it’s not as simple as the 15% rate on
dividends would imply. There are all kinds of provisos.
–The Pension Benefit Guaranty Corp., which insures pensions of
bankrupt U.S. companies (while distributing vastly reduced
benefits), is contemplating moving a larger portion of its own
assets from equities to bonds, according to the Financial Times,
due to what it perceives as a far more volatile environment for
equities compared to past history. Of course it is also saying that
overall investment returns need to be scaled back further.
–My portfolio: I sold one of my energy issues, having set a
‘stop’ on the price (at a profit), so I’m down to four holdings
representing about 35% of my assets.
International Affairs
Middle East: I could easily regurgitate my comments of last
week. Palestinian leader Mahmoud Abbas is “entirely out of his
element” and the aftermath of President Bush’s peace initiative
“could be even bloodier than what we’ve witnessed the past few
years.” This week’s carnage that took the lives of over 35 started
with the unprecedented joint terrorist attack by Hamas, Islamic
Jihad, and Arafats’s Aksa brigade and went down from there. As
William Safire (New York Times) observed, the terrorists are
dragging the Palestinians into a civil war, which it is clear an
overmatched Abbas has no chance of winning.
On the Israeli side, much has frustrated me over the years; the
ultra right-wing and its passion for building settlements being
primary. At the same time, Israel has to retaliate, even though
we all know the result is the same, death begetting more death.
I get tired writing of this conflict because nothing ever changes.
I also have little sympathy for the Palestinians. The people have
watched Yassir Arafat steal billions in aid money that was
earmarked for them, yet nonetheless wallow in self-pity. But
then throughout history others have failed to act when victimized
by the likes of a Stalin, Mao, or Castro.
This vast experiment we call humankind is still in the clinical
trial phase, you could say, and there’s no guarantee in the end
that the patient will survive.
Iran: Last year I criticized the Bush administration for failing to
openly support the student-led protests. But this week, as
demonstrations against the Ayatollah flared anew, the White
House and the State Department took to the airwaves. There is a
sense of urgency over Iran’s nuclear weapons program and it’s
not just the U.S. that is concerned, as Japanese officials arrested
five for aiding Iran’s missile efforts, while Britain is applying
new pressure of its own.
North Korea: One of the other members of the “axis of evil”
issued new statements that it was prepared to go ahead with its
own nuke program, though it added a twist, saying that this
would allow Pyongyang to reduce spending on conventional
forces while using the savings to feed the people. Similar to the
situation with Iran, South Korea and Japan are coming together
to adopt a hard line favored by Washington.
China: The Financial Times reported that President Hu Jintao
will shortly introduce a series of radical constitutional reforms
that strengthen private property, but at the same time the changes
will also further institutionalize one-party dictatorship.
Burma: Thankfully, it would appear dissident Aung San Suu Kyi
was uninjured in the attack about two weeks ago on her
followers. For a week, the thugs in Rangoon had not allowed
anyone to see the former Nobel Peace Prize winner. President
Bush is slated to visit neighboring Thailand in October and the
fate of Burma’s military rule will undoubtedly be high on the
agenda.
Zimbabwe: Opposition leader Morgan Tsvangirai is back in jail,
awaiting a verdict on his trial for treason, while President Robert
Mugabe once again blasted Britain, charging it with fomenting
revolution. Well I sure as hell hope it is!
Poland: As I wrote a few weeks ago, it was feared that turnout
for Poland’s referendum on E.U. membership would fall below
the required 50% level, thus invalidating the vote, but 60% of
registered voters ended up going to the polls with 80% of these
approving the move, a huge victory for the government, the
people, and the U.S., coincidentally; Poland being one of
America’s new, best friends. Pope John Paul II called E.U. entry
“an act of historic justice.”
Pakistan: The rapidly deteriorating situation here is flying largely
under the radar these days. For example, 12 Shia police cadets
were recently killed by Sunni extremists as sectarian violence
spreads.
WMD / Iraq: According to the latest Wall Street Journal / NBC
News poll, 60% of Americans still feel weapons of mass
destruction will be found in Iraq. But I can’t get over how some
of my fellow right-wingers refuse to even acknowledge the fact
that the American public was misled with some of the statements
coming out of the administration. When Tim Russert showed a
clip of President Bush’s State of the Union address to
Condoleezza Rice on “Meet the Press,” Rice, in referring to
Bush’s declaration on the smuggling of uranium from Niger,
which later proved to be false, said, “Of course it was a mistake.”
I guess that’s a start.
The issue boils down to whether or not you believed there was an
urgency to go to war when we did. One opinion being advanced
is summed up by an editorial in the London Times. Research,
yes; weapons, no. Clearly, Saddam had his small, dispersed labs,
but was he merely waiting for sanctions to come off before
starting his program in earnest? Eventually, we’ll find those who
will shed some light on the real truth.
In the meantime, you have conservative William Kristol, who
while “very skeptical” that WMD will be found (in any great
number), says any “misstatements were made in good faith.”
But, he adds, when official U.S. policy is one of preemption, the
government must have good intelligence to implement it.
–President Bush is about to achieve another huge political
victory with imminent passage of a prescription drug benefit
under the Medicare program. In denying Democrats an ’04
campaign issue, it’s a masterful stroke. As far as how we pay for
it, well, let someone else worry about that, he wrote, facetiously.
–In a New York Times op-ed, Niall Ferguson wrote of the
“Decline and fall of the Protestant work ethic in Europe.” As the
American economy surges ahead of Europe’s (albeit these days
in relative terms), you have examples such as the fact the average
German works 22% less than his American counterpart, while in
Northern Europe, less than 10% attend church at least once a
month; the latter indicative of why much of Europe doesn’t
understand America’s faith-based president.
–According to the latest New York Times / CBS News poll,
New York Mayor Michael Bloomberg has a 24% approval
rating, the lowest in the 25-year history of the survey. 60% of
New Yorkers now feel life has gotten worse in the city over the
past year, even as crime continues to fall. Bloomberg lacks the
common touch and is incapable of relating to the little guy,
according to a vast majority of the respondents.
–Episcopalians in New Hampshire elected the first openly gay
bishop, anywhere, in the worldwide Anglican community. Not
that there is anything wrong with this.
–David Brinkley and Gregory Peck, RIP. These two exuded
class, and in the case of Brinkley he definitely had something to
do with my love of news and world affairs. As for Peck, I’ll be
joining millions in pulling out the video of “To Kill a
Mockingbird.”
–The potential recall of California Governor Gray Davis appears
imminent, an extraordinary story, assuming the needed 900,000
signatures are collected over the next few weeks. But I
wondered if a recall was really a needed remedy for the massive
problems the state faces, so I did some reading on the issues and,
yup, recall the guy. And recall the Assembly, while you’re at it.
–I always felt I had the smartest readership in this business, so I
sure as hell hope none of you have been keeping prairie dogs as
pets. As my buddy Harry K. commented, “What’s next?
Wolverines?”
–So my friend Father Bill, of the Society of Jesuits, just returned
from a conference in Mozambique. If you thought the job
prospects were rough here, the unemployment rate there is 70%.
–Trader George and I were musing about the chaos across the
African continent these days and wondered where Jesse Jackson
and Al Sharpton were when it comes to this issue? Then again,
Sharpton has been in the news locally these days for bouncing
checks. It is absolutely amazing to some of us that this charlatan
is actually taken seriously in certain circles.
–Terrific human interest story involving 53-year-old golfer Tom
Watson, in the hunt at the U.S. Open this weekend, and his long-
time caddy Bruce Edwards, who is suffering from ALS, Lou
Gehrig’s disease. Even if you don’t follow golf, try and catch
some of the action today or Sunday.
–And then there is Hillary. I realize that every time I rip Ms.
Clinton I lose some readers, and I will never understand the
polls, such as this week’s USA Today / CNN / Gallup survey
showing 53% of Americans with a favorable view of her, even as
56% say she is lying about Monica and Hillary’s first knowledge
of Bill’s infidelity. With 58% of women regarding Hillary
favorably, it comes down to a Battle of the Sexes issue, in many
respects, and on this I feign ignorance.
I watched both the Barbara Walters and Larry King interviews
this week (the former was lousy, the latter terrific) and I can still
only conclude that Hillary, like hubby Bill, keeps playing us for
chumps. Perhaps her worst line was, “What I regretted most
(about the investigations) were all the innocents caught up in
(them).” Just a bald-faced lie, as any reporter of the era would
tell you.
And then there was this gem, when King asked Cruella about her
“vast, right-wing conspiracy” comment and what would have
happened had the tables been turned. “No, the Democrats
wouldn’t do that.” Barf….err, Bork.
For me, what it all boils down to is one issue; that being the fact
that both Hillary and Bill honestly feel the country needs them.
Obviously, some of you agree.
—
God bless the men and women of our armed forces.
God bless America.
—
Gold closed at $357
Oil, $30.65
Returns for the week, 6/9-6/13
Dow Jones +0.6% [9117]
S&P 500 +0.1% [988]
S&P MidCap -0.4%
Russell 2000 -0.9%
Nasdaq -0.1% [1626]
Returns for the period, 1/1/03-6/13/03
Dow Jones +9.3%
S&P 500 +12.4%
S&P MidCap +12.2%
Russell 2000 +17.4%
Nasdaq +21.8%
Bulls 58.7%
Bears 16.3% [Source: Investors Intelligence / Chartcraft]
Have a great week. I appreciate your support.
Brian Trumbore
