[Posted 7:00 AM ET]
Where I Stand
The good thing about StocksandNews is I’m always picking up
new readers. Conversely, I’m also losing some. One of my
chief frustrations in writing something that goes a bit against the
grain is that newcomers are left without the context of the remark
unless they plow through the archives. Thus, from time to
time I find it necessary to review long-held beliefs as a way of
illuminating current thinking. This is one such time.
By the political labels of the day, I plead guilty to being a
“neocon.” More specifically, long before 9/11 I fell into the
camp of current Deputy Defense Secretary Paul Wolfowitz, who
was the first back during the Bush 41 administration to espouse
the theory of preemption; going after evildoers before they can
attack the United States.
I grew increasingly impatient, though, in the spring of 2002
when George W. Bush and his team did not go immediately into
Iraq to destroy Saddam’s regime and his weapons of mass
destruction, but as the year went by I accepted the diplomatic
efforts that I agreed were necessary before the U.S. could launch
a war.
Of course by February of this year, like a majority of Americans
I was frustrated by the lack of support from the likes of France
and Germany, concluding that time was running out. Action was
required, and when it seemed imminent I fell in the cakewalk
camp, writing that the conflict would be “measured in days and
weeks, not months.” On this count, after a shaky first week
some of us declared victory.
But after the fall of Baghdad in April, things started to go wrong.
Back on March 29 I had “wondered if the troops aren’t stretched
too thin.” Then, much to my dismay, after Saddam was toppled
it was clear Secretary of Defense Rumsfeld was looking to cut
and run. [Don’t believe for a moment the official backpedaling
that has taken place since.]
This flew in the face of my long-uttered stance that winning the
peace wasn’t just going to be difficult, the important thing was
getting the American people to understand that the U.S.
commitment needed to be a long one and that tremendous
sacrifices would be required.
Unfortunately, the daily violence we are now witnessing in Iraq
isn’t a surprise to me, rather it’s the administration’s total failure
to spell out the post-Saddam mission that is. We need to catch a
break or two, like in capturing Saddam or finding a significant
WMD cache, otherwise Bush’s still high approval rating will
begin to plummet.
You’ll recall I was overseas when the President landed on the
aircraft carrier and declared a formal end to fighting in Iraq.
Flying home, not having seen a tape of it, I wrote that this
smacked of “triumphalism.” I then backed off the following
week, but I should have stuck with my initial reaction. It was
correct, as recent events have proved.
And let me add the following to the discussion on weapons of
mass destruction and what I see as a lack of candor by the White
House, especially considering some of the comments made both
prior to and after the war. All I want is the truth, and if a mistake
was made, such as an intelligence failure, admit it.
America likes a winner, but I also know how quickly the people
can turn and this is what bothers me. If the trust that is still
evident today begins to erode, then the next time the U.S. is hit
with a major attack, faith in our leadership will go up in a puff of
smoke. The result is anarchy.
Wall Street
No mystery here these days, it’s all about the Federal Reserve.
Chairman Alan Greenspan and the gang get together on Tuesday
and Wednesday to ponder the state of the economy and as every
commentator and pundit said this past week, and as you’ll hear
all weekend, the issue is whether they choose to lower their
target short-term rate 25 or 50 basis points (1/4 or ½ percent).
As of this writing the consensus is tilted toward 50, though
recent economic data seems to argue for 25.
As for the figures, the measure of leading economic indicators
was up, while both the New York and Philadelphia regional
surveys of manufacturing activity showed signs of improvement.
Housing starts were solid, again, and the core consumer price
index rose, the latter a positive development as we need some
inflation to ensure corporate profit growth.
Throw in the record stimulus from the Fed and the all-time lows
in interest rates, a tax cut that is about to start putting more
money in most of your pockets, as well as the continuing benefits
of a weaker dollar (unless you’re traveling overseas) and
recovery seems assured.
So why is the Fed worried? They obviously still aren’t
convinced that this will be so and thus they’re prepared to take
out more insurance. What’s particularly important for the
markets is the statement accompanying the coming move, so we
all sit back and wait. Can you stand the excitement?
Street Bytes
–For the week equities rallied strongly Monday and then held on
to a fraction of the gains, with the S&P 500 climbing 0.7%, it’s
9th up week in ten. The Dow and Nasdaq also rose again, up
0.9% and 1.1%, respectively.
But check out these closing numbers.
Dow Jones…9200 [My year end prediction, 9200]
S&P 500…995 [ My prediction, 995]
Nasdaq…1645 [My prediction, 1600]
Six months to go, however.
–U.S. Treasury Yields
6-mo. 0.83% 2-yr. 1.18% 10-yr. 3.37% 30-yr. 4.44%
The long end of the yield curve was whacked on the stronger
economic news. If growth comes in at 4% for the second half, as
a few analysts anticipate, inflation will quickly become a real
concern. The short end, however, held onto most of its recent
gains due to the Fed’s coming move, though they are likely to
back up further if the Fed only goes 25.
–Energy: The price of natural gas has moved as much on the
weather recently as on the inventory picture. The cool
temperatures this month in much of the country have lowered
demand, but next week the northeast finally experiences some
real heat, so the demand for the product will soar. As for crude
oil, which remains above $30, an increase in inventories was
offset by talk OPEC’s own production may have dropped a bit.
–Warning: The following is more than a bit self-serving, just like
some of the above, but if you can’t be self-serving on your own
web site, when can you be?
WIR 4/5/03: “Of course I’m already on record as saying we’re in
a second recession, now, we just won’t know it until the official
types who examine these things say so down the road.”
WIR 4/19/03: “I still stick with my thesis that a hard look behind
the GDP figures for the 4th and 1st quarters will reveal that the
U.S. economy had double-dipped, but I’m more optimistic today
that a recovery is nigh. The only problem is it will be a tepid
one…”
Fast-forward to this past week and a statement on Wednesday
from the National Bureau of Economic Research (the “official
types” I referred to above).
“Because of the divergent behavior of various indicators, the
NBER’s Business Cycle Dating Committee believes that
additional time is needed before interpreting the movements of
the economy over the past two years.”
Ah ha! Well, almost.
–In looking at the future of the U.S. auto industry, I come down
on the side that forecasts big-time trouble. From a profit
standpoint, for example, it doesn’t help that the average incentive
for 2003 is up to $4,400 vs. $3,150 in 2002. Separately, you
have the situation that G.M. faces in China, as reported by the
Journal, with China possibly ripping off a new model G.M.
planned on introducing in the country. Looks like a pure case of
industrial espionage to me. And it wouldn’t be the first time, as
followers of the Loral / Hughes / China missile scandal know.
–Tyco admitted accounting wrongdoing for the 5th time in 7
months. Shares rose following the announcement.
Unbelievable.
–Asia’s institutions and private investors have purchased some
$32 billion of U.S. agency debt, such as the securities of Freddie
Mac, in the 1st three months of 2003. At any given time, these
same folks hold about 1/3 of this paper. [Source: William Pesek
Jr. / Bloomberg] Of course the recent uncertainty over Freddie
Mac’s books doesn’t give investors a warm, fuzzy feeling and
they could pull the plug at any time. Let alone the fact that as the
Journal re-emphasized on Friday, Freddie Mac is overflowing
with derivatives. My point on the latter has always been, it’s not
the amount of exposure, it’s the simple fact that not all of the
people overseeing these positions are that smart.
–G.E. reached agreement with its unions on a new labor
contract, with the company continuing to pay 82% of an
employee’s healthcare costs, a more than generous benefit. G.E.
also reaffirmed its earnings guidance for 2003, the share price
having suffered earlier in the week on rumors it would lower its
outlook.
–Boeing lost out to Airbus for a $12 billion order from Emirates
Airlines.
–Charles Schwab reported that trading volume for its customer
base was up 20% in May, with the 1st ten days in June running at
an even better pace. This won’t last.
–Jean-Claude Trichet was named the next president of the
European Central Bank, after having been cleared of fraud
charges. Jean-Claude Killy would have been a better choice.
–Oracle upped its hostile bid for PeopleSoft, in Larry Ellison’s
latest attempt to destroy a competitor. Ellison is bad for
America, but, as noted last week, his actions have been great for
SAP.
–Eastman Kodak is the latest to blame SARS and “geopolitical
tensions” for a severe profit shortfall. In this case, it’s a lame
excuse. Technology is passing them by.
–Brazil: Note to my readers here. A lot of policy makers are
wondering why President da Silva spent all of one day in
America. Lula appears to be doing a good job with the economy,
but this is awfully shortsighted on his part.
–My portfolio: And then there were two. Less than 3 weeks ago
I had 6 positions in the energy sector. Now I have 2. As the
sector was rallying, I raised my ‘stops’ on 3 of them and all were
hit during this current period of underperformance in the group.
So I’m suddenly down to about 15% in equities, 85% cash. [For
new readers I peaked at 55% stocks in May.] This will change,
however.
–HSBC has adopted an embarrassing new policy, according to
an internal memo put out by the CEO. All employees are
strongly urged to reimburse the company for personal phone
calls, paying by check. Great place to work, eh?
–Lastly, Nextel is the new sponsor of NASCAR’s top series, the
Winston Cup. This has zero impact on the Goodyear Havoline
Coors Chex Mix StocksandNews.com entry.
International Affairs
Iran: Back on April 19 in this space I noted a comment by the
great scholar Bernard Lewis.
“(The) Iranian people can take care of the change.”
From my review of 12/28/02:
“Last year at this time I wrote….the following concerning 2002.
“Iraq would fall quickly and Iran’s students would revolt, but the
success of the latter was contingent on events in the former. For
2003? Ditto.”
There is still hope and the Bush administration is finally doing
the right thing in letting the students and dissidents know in no
uncertain terms that they have our support, while recognizing
that a preemptive military move is not an option for the time
being. But a Russian research group said Iran would have a
nuclear weapon within 3 years and as President Bush said, the
West can’t tolerate this possibility.
Meanwhile, former Iranian President Rafsanjani urged the U.S.
to negotiate, claiming Iran could then positively influence the
process between Israel and the Palestinians. Ah, I don’t think so.
While in Paris, French authorities launched a massive sweep
against an Iranian opposition / terrorist group, which France later
claimed was planning to attack Iranian embassies in Europe.
Israel: French Foreign Minister de Villepin blocked an E.U.
effort to blacklist Hamas, giving the rest of us another reason to
blackball France. An incredulous British Foreign Secretary Jack
Straw said, “Hamas is trying to blow up (the road map),” while
later in the week Secretary of State Colin Powell said no progress
can be made until Palestinian Prime Minister Mahmoud Abbas
finishes off the terrorists, to which Abbas whimpered this would
cause a civil war, as he scampered under a table.
[On a related matter, Harry K. passed along another of those wire
service dispatches from the region that label terrorists like Hamas
and Islamic Jihad “militants.” Whether it’s Dow Jones, Reuters,
or AP, they’re all the same. Even suicide bombers are
“militants” when they attack Israelis, but “terrorists” if they kill
Americans. It’s b.s.]
Russia: Elena Bonner, widow of Andrei Sakharov, wrote a
powerful op-ed in the Wall Street Journal discussing the
forgotten war in Chechnya. 180,000(!) have been killed and
350,000 displaced, a staggering 50% of the prewar population.
As for President Putin, he not only has his hands full here, but as
Mark Medish reported in the Financial Times, there is an
urgency to diversify the economy away from energy and defense.
It didn’t help that two high-profile members of the defense
establishment were gunned down on June 6.
You know, switching gears a bit, while I have been all for
engagement with Moscow, I don’t understand the rush in
investment circles to throw gobs of dollars into this country.
You’d be far better off waiting for the result of December’s
parliament vote and next spring’s presidential election before
committing further funds. But I do hope I can write next year
that I’m investing some of my own money here.
Jordan: King Abdullah’s supporters won a convincing victory in
elections for a new parliament, the previous one having been
disbanded by him two years ago. Of the 110 seats, 15 will likely
be held by Islamists, while 6 have been reserved for women.
The King still holds the ultimate power, but the process is
nonetheless a positive step. Incidentally, the U.S. could learn
from Jordan in one respect. A public holiday was declared so
everyone could vote. When you think about it, while some of us
are continually pissed at the commercialism of, say, Veterans
Day and Memorial Day, Election Day is the one time Americans
should be celebrating our economic vitality. Vote and then whip
out the plastic to your heart’s content. Then the next day around
the office water cooler the conversation would go something
like this.
“How much did you spend yesterday?”
“$3,400!”
“Get outta here! On what?”
“Stuff.”
“Get outta here!”
Turkey: The Bush administration is upset with the Ankara
government, which continues to hold extensive talks with Syria
and Iran. A foreign ministry spokesman told Defense News that
“we must safeguard certain political balances in the region.”
Well, whose side are you on? Long-time readers know of my
support for Turkey, but I grow weary with the government’s
seeming lack of intelligence.
Zimbabwe: The Washington Post had an editorial suggesting that
South Africa cut off the power to Zimbabwe, which they
basically control, as a way of toppling Robert Mugabe’s regime.
Another great idea….but we’re tired of nothing happening. God
continues to look down and just shake his head.
Czech Republic: 77% of the citizens who voted approved the
nation’s entry into the European Union.
Argentina: New President Nestor Kirchner has been cracking
down on corruption at all levels of government, a gutsy move,
winning him the plaudits of the little people.
Malaysia: I’ve made no secret of the fact that there is a part of
me that admires Prime Minister Mahathir, ostensibly because he
told George Soros to stick it during the Asian Crisis of ’97-’98.
True, he’s an autocrat, but from time to time I find myself
sympathetic to his cause. Mahathir is about to retire, however,
and he is concerned that his country will find itself under the
thumb of Islamic extremists when he departs. But on Thursday
he gave one of his final speeches and warned his people of the
threat from the West as well, blaming our culture, while
declaring that Malaysia, like Iraq, could be a target. The
transition of power here bears watching later in the year,
particularly since despite his prickly attitudes Mahathir has been
a supporter in the war on terror.
Random Musings
–Barron’s columnist Jim McTague had an intriguing story in the
6/16 edition on a paper that is about to be released by scholar /
economist Michael Boskin. Boskin’s theory is that IRAs and
other tax-deferred accounts should generate $12 trillion in tax
revenues by 2040, which would handily take care of any Social
Security funding issues. These #’s are not part of any
government calculations today. Of course the flip side is that
politicians and voters keep reducing the tax rates upon
withdrawal. Just something to chew on the next time you’re
stuck in traffic or can’t fall asleep.
–Israel is #3 in the world in arms exports behind the U.S. and
Russia.
–The head of British Intelligence told an audience this week that
a dirty bomb attack was “only a matter of time.”
–You know, there are some issues I refuse to bring up in this
space, but this Canadian government push to legalize same-sex
marriages is…………oh, never mind. I imagine most of you
already know where I stand.
–How quickly can you become a resident of California? I
understand it only costs $3,000 to file as a candidate for governor
should the Gray Davis recall petition go through.
–Remember, your editor told you first back on April 5 that
Teresa Heinz would “torpedo” hubby John Kerry’s presidential
ambitions. She gave another wacky speech this past week that
left her audience mumbling.
[I just had a vision of her causing World War III if she was First
Lady.]
–I now admit I may have underestimated Howard Dean’s appeal,
though I’m not alone in this regard. But if Democrats are foolish
enough to nominate him, they’re then accepting a 62-38 pasting
come November ’04. [And how about his kid? Hey Howard,
what did your son know and when did he know it?]
[For you junior presidential historians out there, I had to look this
up. Richard Nixon defeated George McGovern 60.6% to 37.5%
in ’72 (520-17 in the electoral vote), while Ronald Reagan bested
Walter Mondale 59% to 41% (525-13) in ’84. Heck, while I’ve
got the book out….LBJ beat Barry Goldwater 61.1% to 38.5%
(486-52) in ’64 and Bush 41 took Michael Dukakis 53.4% to
45.6% (426-111) in ’88.]
–I haven’t read a word of the Harry Potter books as I don’t have
the time, you understand. But I can’t help but take note of the
fact author J.K. Rowling is likely to earn $85 million from book
#5, including $4 in royalties for each copy. You have to admire
that.
–Then there’s the Segway. I’ve said all along that Dean
Kaman’s invention would be a flop. Maybe they’ll end up
selling more than a few, but just a little warning to those who
may decide to use one on a sidewalk where I’m walking. If you
hit me, you’re toast.
–There….now that I’ve got that out of my system, some good
news for all the whale lovers out there. The International
Whaling Commission has declared it’s for conservation, whereas
in the past it just managed whaling. Japan, however, has
threatened to leave the commission if severe limits are imposed,
to which I say, someone find Godzilla. We have another mission
for him.
–Speaking of Japan, Tokyo is now the most expensive place in
the world to work and live. Moscow is #2.
–Back to the whales, did you see that the blue whale population
in the Antarctic may actually be on the increase? Yup,
researchers estimate that there may now be 1,500 in the waters
there. But before you celebrate with your favorite bottle of beer,
to put this in perspective, back in 1929-30, some 30,000 were
killed.
–I’ll give Hillary a break this week, except I loved columnist Jim
Brady’s description of her in Crain’s New York, “Our Lady of
the Pantsuits.”
–On Thursday night I watched a very disappointing PBS
documentary on the DJs of FM Radio, a little retrospective on
the formatitive years of the medium and the overrated guys and
gals who spun the discs. What ticked me off was that this one
well-known New York DJ said that back during this period AM
radio “didn’t acknowledge the Vietnam War.” Not quite. I grew
up listening to WABC-AM and every Sunday night they’d reveal
the casualty count for the week. “200 Americans were killed;
2,000 Vietcong.” “Good, we’re winning,” I thought, my 11-
year-old innocence still intact.
–June 25 is the centenary of George Orwell’s birthday. I was
doing a little reading on him this week and found this quote from
“The Road to Wigan Pier.”
“It is brought home to you….that it is only because miners sweat
their guts out that superior persons can remain superior.”
—
God bless the men and women of our armed forces.
God bless America.
—
Gold closed at $356
Oil, $30.82
Returns for the week 6/16-6/20
Dow Jones +0.9% [9200]
S&P 500 +0.7% [995]
S&P MidCap +0.4%
Russell 2000 -0.0%
Nasdaq +1.1% [1645]
Returns for the period 1/1/03-6/20/03
Dow Jones +10.3%
S&P 500 +13.2%
S&P MidCap +12.7%
Russell 2000 +17.4%
Nasdaq +23.2%
Bulls 60.2%
Bears 16.1% [Source: Investors Intelligence / Chartcraft…
another record spread and low in the # of bears.]
Note: I’m rushing to catch a flight so please forgive any errors I
may have missed in proofing. I’ll probably have a unique story
or two for you next week.
Have a great one. I appreciate your support.
Brian Trumbore
