[Posted 7:00AM ET]
China / Hong Kong / Taiwan
I’m writing this on the Fourth, as Americans celebrate their
independence and liberties, one of which is my right to say
anything I feel like, within reason, to criticize my government as
I see fit, for example.
But chances are good that had I been in China the past few years
and attempted to do a “Week in Review” from the heart,
complete with calls for the leadership’s removal, I would have
been locked up and probably tortured.
And so it is that I ask for the indulgence of my American readers
this week as I start out with the biggest news story of the past 7
days, and just possibly the harbinger of a brighter future for
many in China.
I have been writing recently about the attempt of the Beijing
regime to impose on Hong Kong an act called “Article 23,” an
anti-subversion statute that could become law as early as this
coming week. Article 23 would make it easier for Hong Kong
authorities to arrest and charge citizens with treason and for
stealing state secrets. In other words, a giant step backwards.
Hong Kong’s chief executive (similar to our governor) is Tung
Chee-hwa, a toady of Beijing. As of this writing he has vowed to
enforce the act.
So on Tuesday, those in opposition organized a protest,
expecting 100,000 to turn out. Instead the best estimate was
500,000 brave Hong Kong residents, marching for simple human
rights and freedom of expression. Reading some of the accounts
was exhilarating for yours truly and we pray the citizens can beat
back those seeking to oppress them.
The reaction in Beijing? Nothing, at first, but then on Friday the
Politboro held an emergency session, the results of which are
unknown at this time. You can bet word is spreading of what is
happening in Hong Kong, the territory that China took over from
the British in 1997. The communists also happen to be in the
midst of a renewed power struggle between Jiang Zemin, who
retained control of the key military commission following his
“retirement,” and President Hu Jintao, who I still view with some
hope. Hu, after all, wants to open up the media a bit on the
mainland, but many of his reform efforts are being blocked by
the hardliners still subservient to Jiang.
But here’s what really got me excited. Statements out of Taiwan,
such as that from President Chen Shui-bian who told his
countrymen, in effect, ‘See, China talks about one country, two
systems in Hong Kong for at least 50 years. But they are
breaking the promise in just six.’ China has always offered
Taiwan the same deal. It would be suicide then for Taipei to take
it and all of Taiwan’s political parties were in agreement this
week, labeling Article 23 a fraud.
Folks, I’ve been to both Taiwan and Hong Kong in the past two
years and no finer people you’ll meet in the world. The U.S. and
its allies cannot allow Hong Kong to slip into the authoritarian
grip of desperate communists in Beijing. China is dirty-dealing
once again, and we shouldn’t be afraid to speak out. I also
wouldn’t put one investment dollar into the country until the
system breaks. Unfortunately, Corporate America has already
made its bed there, and as I’ve pointed out countless times
before, there is nothing to say that in a fit of desperation, the
communists wouldn’t take over American plants. The rest of the
world might still buy from them in that scenario, after all.
But in the meantime, remember the lessons of our own struggle
for independence. It was a violent one, as may yet turn out to be
the case in Hong Kong and the mainland. But it’s a matter of
simple human rights, simple decency. The people will prevail,
but not without our support.
Iraq
According to the latest CNN / USA Today / Gallup poll, the
percentage of Americans who believe the post-war operation in
Iraq is going well has fallen to 56% from 70% a month ago. But
69% still say it’s worth having troops there and it’s this second
figure that is key.
I have been crying for leadership the past few months and have
seen little from the White House. At least this week the
President spoke out, though why he refuses to do so in prime
time I’ll never know. That’s Karl Rove, for you, who obviously
believes the administration can’t admit a mistake: that being the
triumphalism of May and the claim then that formal hostilities
had ended.
But my wish for a reward on Saddam’s head was met, though
$25 million is a mere pittance. Heck, it’s what many of our
corporate chieftains take home in a good year, not that I’m
drawing a comparison between the two.
Africa
“If the United States can help Kosovo Albanians, Iraqis,
Bosnians, Israelis and Palestinians trying to settle their conflicts,
why can’t it help Africa?”
–Lynne Duke, former Africa reporter for the Washington Post
To a great extent this is essentially the question that has been
bugging some of us. Personally, I haven’t understood why the
U.S., or preferably Britain, hasn’t acted in Zimbabwe to remove
President Mugabe, especially when a freely elected opposition
leader stands ready to pick up the pieces. And it’s not as if
similar missions haven’t worked in the past, like in Sierra Leone.
But now as President Bush prepares to travel to Africa, he’s
under pressure in some circles to go to the aid of Liberia, where
unlike in Zimbabwe there is no clear successor to dictator
Charles Taylor. We should go nonetheless. It’s the right thing to
do and we can make a positive difference.
The problem is Secretary of Defense Donald Rumsfeld, who
came in looking to reform and streamline the military. Rumsfeld
sought to cut down on some weapons programs, to make the
military more lean and mean, and more technocentric. But
we’ve seen in this post-9/11 world that while many of his
reforms should still be implemented, when it comes to manpower
the U.S. is falling short, unless you believe in an isolationist
foreign policy. I don’t. As we’ve seen in Iraq and Afghanistan,
for example, we need far more troops in the active military, if for
no other reason than to reduce the stress on our reserves. And
should North Korea suddenly cross the line, we face a crisis of
immense proportions.
Liberia will not become a quagmire or another Somalia and it
will send a needed message to others on the continent that the
U.S. is not afraid to throw its weight around.
Unfortunately, Congo, and Rwanda before it, are two classic
instances where lack of a policy of any kind, be it U.N. or
Western sponsored, led to genocide. Let’s thus use Liberia as an
example for the future, a more hopeful one for the African
people, and maybe we can begin to turn a tide that threatens the
entire region.
As for Zimbabwe, President Mugabe’s aides came forward to
label Secretary of State Colin Powell an “Uncle Tom” and “an
ordinary liar.” To paraphrase Hillary, it takes a missile.
Wall Street
Just like that, the unemployment rate has become a huge political
issue for 2004, as Thursday’s June labor statistics revealed that
the jobless rate had shot up to 6.4%. There is no way to
sugarcoat it, the Democrats have something to run on, though
they lack a legitimate messenger. It is also finally sinking in
among the masses that the productivity miracle so often put
forward does not do wonders for the job market.
But the Street continues to believe the second half of the year
will bring far better news, that the 1.4% GDP figure we ran in Q4
2002 and Q1 2003 (the latter was revised downward, in case you
missed it) will look more like 3.5-4% in Q3 and Q4, as well as
on into next year. Should a recovery of this magnitude manifest
itself then the employment picture will begin to brighten long
before we vote our pocketbooks. I don’t see this coming to pass,
mind you, as I envision growth more in the 2% range, but I’ll be
happy to admit defeat if I’m wrong because it would probably
mean my own business, CSI MultiMedia, is participating along
with the rest.
Over the next few weeks we’ll learn a ton from the statements
accompanying Corporate America’s earnings releases. Profits
are expected to rebound at a 13 and 21 percent clip in the 3rd and
4th quarters, respectively, and should these expectations be met,
GDP forecasts may pan out.
But in the meantime, I don’t see any reason to be doing
cartwheels. The massive stimulus of low interest rates and tax
cuts may yet rule the day, and it would be helpful if early signs
of a possible recovery in Japan were for real, it’s just that the
American consumer has been carrying the load for years now
and with increasing worries over job security, at some point we
aren’t going to be so quick to whip out the plastic, and you know
what that would mean. The economists would be wrong again,
for starters.
Street Bytes
–Stocks resumed their winning ways, after a one-week respite,
with the Dow and S&P 500 finishing up about 1%, while Nasdaq
closed ahead 2.4%.
For the record, the second quarter was the best since 1998 for the
equity markets:
Dow Jones +12.4%
S&P 500 +14.9%
Nasdaq +21.0%
–U.S. Treasury Yields
6-mo. 0.93% 2-yr. 1.30% 10-yr. 3.65% 30-yr. 4.68%
[Also for your files, the 10-yr. finished the 2nd quarter at 3.52%.]
The bond market continues to be roiled by thoughts of an
explosive recovery in the economy, with the potential pickup in
inflation that this would entail. Additionally, some foreign
investors, such as in Japan, are repatriating funds out of U.S.
Treasuries. And it also doesn’t help when the undisputed king of
bonds, PIMCO’s Bill Gross, calls Treasuries and corporates a
sucker’s bet, as he, too, recommends a heavier exposure to
foreign paper at this time.
Rates haven’t climbed high enough to tip the housing market, we
have a ways to go before that is a true concern, but a move above
4% would certainly put a crimp on refinancings, a key for U.S.
consumer spending.
–The Tokyo Nikkei index hit a 10-month high on signs that
business confidence was improving, while the Japanese bond
market tumbled from a combination of factors, most having to do
with a shift in funds back into equities, including the
aforementioned repatriation.
–U.S. District Judge Milton Pollack, 96-years-old (you’re
reading that right), issued a series of powerful rulings in favor of
the brokerage industry as he dismissed class-action lawsuits that
sought damages for misleading investors during the Bubble.
Pollack labeled the plaintiffs nothing but “high-risk speculators,”
adding that the conflicts of interest between the brokerage firms
and companies they covered were “a matter of public knowledge
for years.” As you’d imagine, Wall Street breathed a huge sigh
of relief.
While I don’t necessarily disagree that the particular suits in
question were without merit due to the fact that in the case of
Merrill’s Global Technology Fund and some of the IPOs, risk
factors and conflicts were spelled out in the prospectus (no one
covers their ass better than the Street in this regard), I’m
disturbed by Pollack’s judgment that conflicts were a matter of
public knowledge.
Just a rough guess, but I’d say 10% of U.S. investors have ever
read the Wall Street Journal, Business Week, or Barron’s for that
matter, and through no fault of their own. Physically, I can tell
you tens of places I’ve been over the years where getting a
Journal, for example, was impossible.
No doubt, though, investors bear the lions share of the
responsibility for caring for their own portfolios, and for many it
was pure idiocy to put 80% of their assets in technology, to give
but one example. But there are also countless instances where
the brokerage firms and Corporate America committed acts of
pure fraud and Pollack’s rulings appear to paper this over. The
suits at issue may have been questionable, but the criminality still
needs to be addressed.
–All kinds of stories swirling around Microsoft and what the
company may or may not do with its $46 billion cash hoard. The
Financial Times reported that one option is a $10 billion special
dividend, or about $1 a share. Other options include a giant
acquisition, like acquiring the entire African continent for $22
billion and renaming it Gatesland. Well? You come up with
something better.
–U.S. auto sales were up just slightly in June, but sales of
Toyotas and Hondas advanced a solid 10.9% and 8.7%,
respectively. The slide in market share for Detroit continues.
Both G.M. and Ford are pinning their hopes on the Bush tax cut,
but this seems more like a pipedream in light of the fact that
already existing incentives no longer are luring auto buyers into
showrooms. For example, G.M. is spending an average $3,800,
while Honda is at $487.
But I just want to readdress the issue of G.M.’s massive bond
sale, which I touched on last week. As noted a majority of the
proceeds of the $13+ billion raised (plus there was another $4
billion in convertible securities) is earmarked for shoring up
depleted pension funds. The maneuver, however, is also slated
to add about $200 million to G.M.’s earnings. Mary Williams
Walsh offered a simple explanation in the New York Times.
“For G.M., the $200 million has nothing to do with selling more
cars. It represents, instead, the difference between the
approximately 7.5 percent that G.M. will be paying its new
bondholders, annually, and the 9 percent that it projects its
pension investments will earn this year. Multiplying that 1.5
percentage-point spread times the $13.1 billion going into the
pension funds results in $200 million.”
The above is what some experts term “scandalous accounting.”
And, of course, if the market tanks, not only are the pension
funds further underwater, G.M. has added a ton of debt.
–Germany: Chancellor Schroeder is pressing ahead with his tax
cut plans that would reduce the top bracket from 48.5 to 42
percent. Gerhard, my man!
–Brazil: Like its neighbor Argentina, the government here is
looking to limit ‘hot’ money and is debating setting a time limit
for foreign investment before it can be repatriated. But many
investors feel this would be too strict an impediment.
–Hong Kong’s property market has been sliding anew due to the
impact of SARS. Prices are 2/3s below the peak of 1997.
–California: Tick…tick…tick. The state’s financial crisis
threatens far more than its own people. And according to the
latest Los Angeles Times poll, 51% would unseat Governor Gray
Davis in a recall, 42% reject the process. As for Arnold, that
whole idea is a joke. Don’t people remember Jesse Ventura?
–Speaking of massive debt, the Bank for International
Settlements, kind of like the world’s Federal Reserve, said there
is a distinct danger that the level of U.S. debt from all sources
will reach an unsustainable level. All the more reason why the
U.S. economy has to get cranking again to avert a crisis. A dip
down at this moment, as in that which could easily be
precipitated by a terrorist attack, and it’s depression, baby.
–Speaking of debt, part II. The Wall Street Journal reported that
the top 10 airlines now have twice the debt loads they carried
back in 1999.
–Just a warning to those of you holding closed-end bond funds,
particularly the highly leveraged variety. If interest rates rise,
especially quickly, you will get spanked, or whacked, depending
on your preference.
–UBS analyst Howard Capek was a leading cheerleader for
healthcare services giant HealthSouth, now the focus of an
extensive fraud investigation. But UBS officials uncovered a
Capek e-mail that read in part, “I would not own a share.” In this
new world, exit Capek, stage right.
–I totally agree with the new labor rule put forward by the Bush
administration that makes it tougher for classic white-collar
workers to receive overtime pay. I’m writing this on a holiday,
you expect me to be sympathetic?!
–Alec Klein is coming out with a book titled “Stealing Time” on
the merger between AOL / Time Warner. In an excerpt in the
New York Post, Klein describes the behavior of AOL executives
in the hey days of the company; coking up, taking “official”
excursions to strip clubs, hiring call girls. Lovely.
–Last week I rather facetiously wrote that an alliance between
India and China could destroy the West, economically. Of
course as a current small investor in India, I also realize there are
kernels of truth in this, and you’re beginning to see a steady
stream of stories concerning outsourcing of employees from the
U.S. to India, in particular. We all have had more than a few
situations where we are dealing with Indian call centers and this
is about to become a major campaign issue, particularly given the
dismal employment picture. But that doesn’t mean I can’t make
a buck myself on the situation. I just wish I had invested more.
–My portfolio: And while I’m touching on it above, I remain
15% equities (only 3 positions; a driller, a refiner, and India) and
85% cash. My favorite sector, the oil service / driller one best
represented by the OSX index, has been on a most frustrating
ride. I had been writing that the OSX was trading in a narrow
range for about 9 months before it finally broke out to the upside.
My own holdings performed better than the index but then they
started breaking down again and I stopped myself out of 3 of 4
plays, 2 of which are now below where I sold, 1 up. But I still
love the potential for the group and could easily be back into all
3 shortly.
–Back to India, in a further sign of the country’s potential, SAP
announced it was doubling the # of software engineers here to
2,000. It’s the same story all over: cheap, highly skilled
professionals.
–Boeing received some good news, finally, winning a $6 billion
order for 100 planes from AirTran Airways. Of course now
AirTran has to stay in business.
[By the way, I’m running a series on Pan Am for my “Wall
Street History” link. It’s light, airy reading…check it out.]
–In a total scam, Kraft announced it was cutting the fat content
and reducing portions of its products as part of its civic
responsibility to help in the fight against obesity. Bull… the
company is just scared of litigation and you can be sure they’ll
try and get away with holding prices at current levels on the
smaller portions.
–Shares in eBay soared anew, as I continue to lick my chops on
the ‘short’ side. One of these days…yes, one of these day… but
not yet. Buttressing my position was a terrific op-ed piece in the
June 29 edition of the Washington Post by Kevin Adler, who
wrote of how enthusiasm among eBay players appears to be
waning. Now I have never purchased anything on the site, but I
found Adler’s reasoning compelling. If you own a big position
in the company, it’s must reading.
–Attorneys in the Enron bankruptcy proceedings have booked
more than 1,000,000 hours…$500 million in legal fees thus
far.
–Jack Welch and his estranged wife Jane have reached a
settlement in their divorce proceedings, just days before they
were to go to trial. Drat!
International Affairs
Israel: To me the most encouraging development of the past few
weeks is the body language between Palestinian leader
Mahmoud Abbas and Israeli Prime Minister Ariel Sharon. The
two genuinely seem to like each other, which certainly doesn’t
hurt when the inevitable setbacks to the roadmap for peace occur.
Let’s face it; the last week was a positive one as Israeli forces
pulled back from Gaza and Bethlehem. And on a different note,
it was encouraging that Pakistan’s President Musharraf urged
recognition of Israel. Then again, this is the Middle East, so we
always check our enthusiasm at the door.
North Korea: According to the New York Times, the CIA is
convinced Kim Jong-Il’s orcs are developing nuclear warheads
small enough to fit on medium range missiles, thereby placing
U.S. troops in danger in both North Korea and Japan, along with
the general population bases, of course. And there is increased
talk that the North could test a nuclear weapon by yearend,
which would clearly cross the line.
India / Pakistan: 12 Indian soldiers were killed in Kashmir last
weekend, but New Delhi continued to exercise restraint, even as
it seems clear Pakistan’s Musharraf is not cracking down on
cross-border terrorism as he had promised. There was also
continued fallout from Musharraf’s visit to Camp David two
weeks ago. As the Washington Post’s Jim Hoagland noted, Bush
is walking a tightrope between India and Pakistan and it only
seems logical to choose India, as is the opinion here. But the
search for al Qaeda and Taliban in both Pakistan and
Afghanistan is trumping logic. Finally, we had further evidence
of just what a mess Pakistan is with Friday’s horrific terrorism
between Shiites and Sunnis that claimed at least 47 lives.
Russia: The largest investor in Yukos, Russia’s energy giant, was
placed under arrest on charges of embezzlement way back in
1994. The problem is that Yukos’ CEO Mikhail Khodorkovsky
has openly been supporting pro-market opposition parties and the
arrest of his ally certainly looks like another effort by President
Vladimir Putin to stifle dissent prior to the December
parliamentary elections. Russia has been taking two steps back
for every one forward, recently, and I continue to urge investors
to beware the hype when analysts talk about the huge returns in
the Russian market the past year or so.
Turkey: Just when I suspect it’s safe to ignore the place for a
while, there is a development worth passing on. The Islamist
government is at increasing odds with the military, this time
announcing that the background behind some defense contracts
would be explored. The government has the right to do this,
especially when the cost of 4 AWACs planes that Turkey
contracted for from Boeing has risen 60% in the 2 years since
negotiations started, according to Defense News.
Since the days of Ataturk, the military has played an oversized
role in politics and in 1960, ’71 and ’80 staged coups, but at the
same time it wants to see Turkey become a member of the
European Union as much as the current government supposedly
does so it can’t react to the usurpation of its power without
jeopardizing Turkey’s candidacy.
Saudi Arabia: One should take no comfort from the fact that a
top suspect in the Riyadh bombings blew himself up when
cornered. When the leaders are willing to die in such a fashion,
it speaks volumes of the struggle ahead.
Indonesia: A most pleasant surprise, as the government here has
been surprisingly tough on terrorism.
And finally……..
Italy / The E.U.: Ah yes, Americans are well aware of public
officials getting in trouble with their mouth, witness Senator
Trent Lott. But Italy’s Prime Minister Berlusconi wins the prize
for suggesting that a heckling German member of the European
Parliament would make for a good Nazi concentration camp
guard in an upcoming film on the subject. The fact that Italy had
just assumed the 6-month presidency of the parliament added to
the uproar.
Personally, I like the prime minister because of his staunch
support in the war on terror, but this obviously crossed the line.
The German MEP, though, deserves to be thrown out for his
incredibly disrespectful behavior that precipitated the mess.
Random Musings
–I never thought I’d find myself addressing the issue of same-
sex marriage, particularly since I’ve tried to steer clear of certain
social issues, but I can’t help but weigh in as the debate heats up.
While President Bush urged patience before Congress puts
forward a constitutional amendment defining marriage as
between man and woman, the battle lines are being drawn.
Let me reiterate I agree with the Supreme Court’s ruling on the
Texas sodomy statute, but I didn’t feel the Court should have
taken this up in the first place. It’s a matter for the state
legislatures. Having said this, I also mentioned last week that the
decision would radicalize Gay Activists, and you’re beginning to
see this.
Henry Brinton, a leading Virginia pastor, wrote in the
Washington Post last Sunday that he is concerned over the
growing tension between what he labels diversity and purity
when it comes to sexual orientation, while conservative William
Safire, in a Times op-ed, weighed in:
“Rather than wring our hands and cry ‘abomination!’, believers
in family values should take up the challenge and repair our own
house.
“Why do too many Americans derogate as losers those parents
who put family ahead of career, or smack their lips reading about
celebrities who switch spouses for fun? Why do we turn to the
government for succor, to movie porn and violence for sex and
thrills, to the Internet for companionship, to the restaurant for
Thanksgiving dinner – when those functions are the ties that bind
families?”
I don’t agree with Safire’s later conclusion, which I have
purposefully omitted, but I’m just sad the discussion got this far.
For instance, it is an indictment of our whole society that the
word “bestiality” is suddenly commonplace, especially
considering that children hear it.
“Mom, what’s bestiality?”
“Well, Bobby, it’s when a man has sexual relations with an
animal, like a goat.”
“A goat?…………….Mom?”
“What Bobby?”
“I’m going to the field to play some baseball.”
–Pol Pot’s 1st wife died. She was witness to the genocide that
took 1.7 million Cambodians between 1975-79. She should have
been hung.
–Congratulations to Vancouver for winning its bid for the 2010
Winter Olympics. There are those who say this precludes New
York from gaining the 2012 Summer Games. Gosh, I sure hope
so. I don’t want to deal with the mess. Then again, I might be
settled into Deadwood, South Dakota by then; quaffing beers,
playing blackjack.
–With this week’s hoopla over football (soccer) star David
Beckham, I feel obligated to mention his name………..and so I
have.
–Wow, rough week for the Kennedy clan, wasn’t it? First we
have this new book coming out on how JFK Jr.’s wife, Carolyn
Bessette, was a cokehead, and then the next day Andrew Cuomo
and Kerry Kennedy Cuomo decide to air their dirty laundry in
public. I mean it just doesn’t get any worse than this, especially
since the allegations are by all accounts true. And knowing what
we now know about Bessette, who was a drug-addled witch, my
friend Jimbo has a new theory. Not only was Bessette two hours
late for the ill-fated flight because she was getting a manicure,
pissing JFK Jr. off to no end as he sat at the airport, but Jimbo
believes the two got into a physical fight on the small plane,
thereby dooming it. Hey, it’s as good as any other theory put
forward.
–We note the passing of the great Barry White. Many of us have
special memories of times spent with his music on in the
background.
–Back on June 30, 1941, Franklin D. Roosevelt dedicated his
presidential library, saying in part:
“It must believe in the past. It must believe in the future. It
must, above all, believe in the capacity of its people so to learn
from the past that they can gain in judgment for the creation of
the future.”
—
God bless the men and women of our armed forces.
God bless America.
—
Gold closed at $351
Oil, $30.42
Returns for the week 6/30-7/5
Dow Jones +0.9% [9070]
S&P 500 +1.0% [985]
S&P MidCap +1.1%
Russell 2000 +1.7%
Nasdaq +2.4% [1663]
Returns for the period 1/1/03-7/5/03
Dow Jones +8.7%
S&P 500 +12.0%
S&P MidCap +13.4%
Russell 2000 +19.1%
Nasdaq +24.6%
Bulls 53.1%…decent drop
Bears 20.9% [Source: Investors Intelligence / Chartcraft]
Have a great week. I appreciate your support.
Brian Trumbore
