[Posted 7:00 AM ET]
British Prime Minister Tony Blair, speaking before a joint
session of Congress on the war in Iraq and its aftermath, as well
as the global threat posed by terrorism.
“Can we be sure that terrorism and weapons of mass destruction
will join together? Let us say one thing. If we are wrong, we
will have destroyed a threat that at its least is responsible for
inhuman carnage and suffering. That is something I am
confident history will forgive.
“But if our critics are wrong, if we are right, as I believe with
every fiber of instinct and conviction I have that we are, and we
do not act, then we will have hesitated in the face of this menace
when we should have given leadership. That is something
history will not forgive.”
The Prime Minister and President Bush sought to regain the high
ground after being buffeted by criticism over the run-up to the
war, as well as the reconstruction effort and the failure to deliver
any weapons of mass destruction or Saddam’s head. This is a
crucial 4-8 weeks coming up and Blair’s speech helped to
redirect attention to what is truly important.
The sad part is both Blair’s soaring performance and the joint
press conference the two leaders gave afterwards were probably
viewed by 2% of Americans, if that, and I’m continually
frustrated that, for his part, President Bush has yet to address the
people in any forum in prime time since his now discredited
carrier photo op. The increasing discontent among the soldiers in
Iraq is disturbing and but one example of the President’s total
lack of leadership the past few months.
While readers of this space have known all along that the U.S.
would be involved in Iraq for years (and possibly decades), Bush
left the impression with the military and their families that they
would be coming home soon. And as we inevitably take more
casualties, of course the public outcry will continue to grow.
No rational reader of the situation, though, can honestly say the
region is not better off following U.S. and British action to
remove Saddam’s regime, whether you are talking about
potential change (revolution) in Iran, peace efforts in Israel, or a
Syrian regime that dreams of tomahawks flashing through the
night sky. The danger, though, is that growing protest results in
increasing political pressure, especially as the presidential
campaign heats up and Bush’s poll numbers drop, so it becomes
easier for the administration to change direction and not see the
mission through to completion as history demands.
One survey result that I found particularly disturbing revealed
that only 57% of Americans view the war as worth the sacrifice.
[ABC / Washington Post] That’s astounding, coming so soon
after Saddam’s demise. The American people, an often fickle
sort, are rapidly losing sight of the Big Picture.
We were told by President Bush and others in the days
immediately following 9/11 that this new war on terrorism would
be fought over decades. This is the truth, yet less than two years
into it roughly half of all Americans seem to be waffling,
preparing to give up the leadership role the world so desperately
needs in order to prevent a return to the Dark Ages and a planet
devoid of hope.
Mr. President, remind Americans, including those in uniform, of
their duty, hard as it may be, and of the sacrifices required for the
good of humankind. If you fail to do so, soon, the election of
2004 will be the least of your worries.
Wall Street
“Beware going forward, landslide ahead.”
–PIMCO bond king Bill Gross on CNBC
Forget Federal Reserve Chairman Alan Greenspan and his
congressional testimony on the state of the economy. Gross’s
pronouncement, along with his forecast of a total return on bonds
of 1-2%, “close to zero,” for years to come should serve as a
thunderbolt to all investors, particularly those currently holding
bond funds. And as the yield on the 10-year Treasury briefly
soared above 4% (before closing the week at 3.99%), almost a
full percentage point higher than the record low of 3.09%
established just a few weeks ago, net asset values got slammed.
True, Alan Greenspan did have something to do with the
bloodbath as well when he offered up optimistic comments on
future growth in the U.S., along with his statement that the Fed
would keep the target funds rate (currently 1%) low “as long as it
takes” to ensure that we have more than a one-time spurt in
economic activity. Of course the bond market, in trading the
long end of the yield curve, acts on perception and at least for
this week, talk of a surging economy fueled inflation
expectations, even as the chairman was saying we could have
growth without it.
But Greenspan is basing his forecast on “resurgent equity
markets, tax cuts, and federal spending,” along with a further
pickup in consumer spending. I would argue that all 4 factors are
in serious doubt.
Yes, equity markets have been soaring, but valuation levels are
stretched, even if future earnings come through as expected, so
upside seems limited. Tax cuts are a help, but many of you are
probably in a situation like my own, where this week I received
my new property tax bill, up 9.5%! Any relief for yours truly is
thus going straight to town hall. And as for federal spending, try
world record deficits, a reality that also helped spook bonds this
week. In announcing projected federal budget shortfalls of $455
billion for fiscal ’03 and $475 billion for ’04, the Bush
administration handed the Democrats a major campaign issue.
Don’t get me wrong. I’ve written we should be running deficits
during tough economic times, and I’ve also said that if the U.S.
was fighting the war on terrorism to the hilt, a soaring deficit
would actually be our national sacrifice, and the budget proposed
by the administration certainly doesn’t come close to addressing
the real demands for homeland security. In other words, while
the White House hopes to eventually grow out of the deficit
through renewed economic strength and increasing tax receipts,
doing so is going to be far more difficult than officials would
have you believe, unless we pick up our troops around the world
and go home, and you know my opinion on that.
Finally, back to bonds, this week Fannie Mae admitted that it
took a huge hit on its derivatives position and when it comes to
these instruments I’ve noted in the past that “speed kills,”
meaning most financial accidents occur when markets are
moving faster than some portfolio managers can act to cover
their bets. Thus should the volatility continue, look for more and
more rumors of “systemic” risk across a broad spectrum.
There’s another Long-Term Capital Management on the horizon,
which is one reason why I’m content with my large cash position
right now.
Street Bytes
–Stocks finished mixed, with the Dow Jones picking up 0.8% to
the 9188 level, while the S&P 500 fell 5 points (993) and Nasdaq
slipped 1.5% to 1708. Not to give the earnings reports short
shrift, but they were mixed as well, and while the financials, such
as Citigroup and Merrill Lynch, far exceeded expectations, aside
from Intel’s solid numbers, tech in general failed to supply what
the market is really looking for, that being statements to the
effect that IT spending has turned the corner.
This is critical because as noted above the 2nd half earnings
estimates are on the optimistic side unless corporations open up
their wallets. Perhaps the best way to sum it up is from software
giant SAP’s earnings statement, in which the company said the
environment would be “challenging through the end of the year.”
The cross-currents I’ve discussed in the past can still turn this
market on a dime, and in either direction, and portfolio managers
have such a short-term horizon these days that I see volatility
only picking up as we move forward. Of course killing Saddam
and bin Laden would be a huge boost (until the bond market got
in the way as rates soared on expectations of rising inflation),
while in the back of your mind you still have to consider the
disastrous impact of a large-scale terrorist attack, let alone a
missile volley from North Korea. Bottom line, I’ll continue to
sleep with one eye open.
–U.S. Treasury Yields
6-mo. 0.95% 2-yr. 1.49% 10-yr. 3.99% 30-yr. 4.92%
The 10-year rose 36 basis points and mortgage rates are rapidly
rising in kind. Not good.
–The National Bureau of Economic Research, the group that
officially decides when the U.S. economy is in recession or
expansion, often long after the fact, ruled that the recession
ended in November 2001 and was of only 8 months in duration.
Since then, however, 938,000 jobs have been lost.
I have argued that we double-dipped in Q4 2002 and Q1 2003,
even though GDP growth was positive at 1.4% in each. I was
convinced the NBER would back me up on this. Alas, they
haven’t….but I’m declaring victory anyway, taking my toys, and
going home.
–Since I started StocksandNews, I have recommended but one
investment product, that being the PIMCO Total Return Bond
Fund. Anyone investing in it over this time should be one happy
camper. In the beginning of this year, I said investors could
expect a 4-5% total return for ’03 on this fund that’s managed by
Bill Gross and Gross, himself, offered up the same projection.
The year-to-date total return as measured by the A shares was
over 5% until the recent slide in the bond market and now sits at
3.5% for the year. If rates stabilize around existing levels, you
would nonetheless finish up the year in the 4-5% range.
But you should see where I’m headed with this. Given Gross’s
outlook for bonds, don’t expect a lot from this particular
offering. And while there is no one better in the business in
managing risk than PIMCO, and downside is somewhat limited
in the Total Return Fund, just make sure you understand the
risks. Again, also make sure your broker or financial advisor
tells you what the “duration” is on a particular fund and if they
don’t know, or can’t explain the concept, fire them.
–The Mortgage Bankers Association projects home sales will
fall 3.5% in 2004, not a disaster, coming off all-time record
levels of activity, but it does tell me that at best, employment in
the housing sector will fall and, at worst, any real appreciation
will be tougher and tougher to come by. That’s just my opinion,
I could be wrong. [Obviously, if mortgage rates soar to, say, the
7% level, the problems are compounded and the negative impact
on the overall economy will be felt.]
–Brazil: President Luiz ‘Lula’ da Silva told the BBC his nation
would not be a toady of the United States in trade negotiations
and called on the rich to drop tariffs on developing nations. Lula
has a point. Europe, Japan, and the U.S. talk out of both sides of
their mouth, witness the dispute over steel tariffs that
Washington finds itself in, an issue the Wall Street Journal
editorial board regards as “the worst mistake of the Bush
presidency.”
–China: And on the topic of trade, I was for China’s admittance
to the WTO but said we would need to keep our eyes wide open,
and of course today the Chinese are trying to screw us, whether
it’s in dumping products on our markets or failing to revalue its
currency. And then this week I read a piece in the South China
Morning Post where Beijing is proposing to prohibit car dealers
that sell domestic brands from carrying imports, in an obvious
effort to protect homegrown product. So much for a lot of the
once ballyhooed joint ventures. [In 2002, imports were 7.5% of
total auto sales in China.]
–France will join Germany in exceeding the European Union’s
3% deficit target, which in and of itself isn’t awful, the U.S. now
being at 4%+, but it just shows what a sham the whole E.U.
monetary system is when it comes to coordinating fiscal policy.
–Japan: The Bank of Japan issued its first optimistic comments
on the nation’s economy in quite a while, though just as in the
U.S., equities may have gotten a bit ahead of themselves. Japan
also has its own brewing bond bubble, which some say could be
far worse than our own.
–Energy: Conservative commentator Sean Hannity was running
through a recitation of all that has gone right in Iraq and he said
“no oil wells were set afire.” Ah, Mr. Hannity, wake up and
smell the gas. You’re right, our military did a brilliant job in
securing the oil fields, but then due to lack of manpower and
security, the very same facilities were looted and sabotaged.
This is important because everyone keeps asking why the price
of oil isn’t substantially below $30 yet, as it was supposed to be
by now, and they don’t understand that production out of Iraq
won’t reach pre-war levels until yearend, if we’re lucky, due to
the awful shape of the supporting infrastructure.
–Lucent warned and pushed back its return to profitability again,
this time into 2004. This is an act that should have been
relegated to off-off Broadway long ago. The company’s
credibility is shot and for the last quarter revenues were down
another 18%. It’s a sad, sad tale and so many in my immediate
neighborhood, where LU is headquartered, have been hurt.
–Microsoft disappointed shareholders when the company failed
to announce any plans for a special dividend or a hike in the
current small one, saying that it needed to resolve some major
legal issues before it did anything extraordinary with its $49
billion in cash. I asked for a $billion and was turned down.
–Citigroup’s Sandy Weill shocked the world (at least he’d like to
think so) by announcing he was stepping down from his CEO
position; handing it over to Charles Prince, though Mr. Weill will
remain as chairman and a major factor in the future of the
world’s most profitable company. No doubt parts of his tale
represent a true American success story; it’s the other side of it
that bothers me, however, and the sycophants that are
conveniently ignoring the recent scandals are worthy of contempt
themselves.
–Energy producer Mirant filed for Chapter 11, the 10th-largest
bankruptcy in U.S. history. Equity holders are likely to be wiped
out, which will be bad news for those who were buying the stock
just hours before the announcement of its demise, thinking that
the company was going to work out a restructuring of its debt.
–Another big bankruptcy was filed by Loral Space &
Communications, whose chairman you’ll recall had to settle with
the federal government over charges Loral had passed missile
secrets to the Chinese.
–The Pension Benefit Guaranty Corp. estimates that pensions are
underfunded by some $300 billion. The figure was only $23
billion in 1999. Unfortunately, according to Robert Samuelson,
UAL could be next in line to see its own plan taken over by the
PBGC, at which point retirees face drastically reduced benefits.
I’ve written of this topic often in the past and there are far too
many large corporations whose current and former employees
won’t see anywhere near the benefit level they once took for
granted; a real tragedy with societal and severe economic
consequences.
–The Bank of Canada cut its key interest rate 0.25% on
weakening exports.
–PeopleSoft completed its acquisition of J.D. Edwards, meaning
that Oracle’s hostile bid for the now combined company seems
highly improbable.
–Not a good week for Boeing, as the government launched an
official investigation into allegations the company stole
documents from Lockheed Martin during a rocket competition,
while Continental Airlines became the latest to defer an order it
had for 36 737s until 2008. The slump in orders was a major
reason why Boeing then announced an additional 5,000 layoffs
will be necessary.
–Ford is laying off 2,000. Separately, the average fuel economy
for its SUVs is actually worse for the 2003 model year than
2002.
–New York and Massachusetts regulators, led by Gotham
Attorney General Eliot Spitzer, launched an investigation into
Morgan Stanley and its in-house mutual funds, alleging that the
firm improperly pressured its brokers to sell proprietary product
over outside funds (like American and PIMCO, for example).
Clients aren’t apprised of the conflict of interest in this policy.
Back on May 8, Morgan Stanley officials denied that incentives
were offered, but according to regulators, a Morgan Stanley
broker passed something over the transom and executives had to
fess up.
Well, it just so happens, sports fans, that your editor has intimate
knowledge of the practice in question based on my days as
national sales manager at PIMCO. Morgan Stanley (the Dean
Witter side back in those days) definitely made it difficult for
outside fund companies to gain shelf space and while other big
brokerage houses preferred that their sales forces push in-house
funds in order to garner larger fees, no one put up the roadblocks
that Morgan Stanley did. To be fair, however, I have been
largely out of touch for 4+ years now, so I can’t unequivocally
say that things are the same today as they were in my day. I also
have to add that the individuals I dealt with were good people
who were hamstrung by the a-holes in the corner offices.
Anyway, this whole investigation has caused a rift between
Spitzer and Co. and the SEC, the latter being the organization
that is supposed to be in charge of enforcement. Spitzer claims,
correctly, that the SEC (and NASD) were asleep at the switch the
last five years and if he didn’t take action, no one would.
–My portfolio: I remain 15% equities, 85% cash.
International Affairs
China / Hong Kong / Taiwan: Hong Kong’s Chief Executive
Tung Chee-hwa is under increasing fire from democracy
advocates, though he pledged to reform his ways and become
more accountable to the people, this after seeing two of his most
controversial council members resign, including Security
Secretary Regina Ip. Tung was called to Beijing for more talks
with the leadership there on how to address the growing crisis.
By 2007, Hong Kong’s Legislative Council is to have adopted
constitutional changes which would lead to a democratically
elected leader. For your information, today the public only votes
on 24 of the 60 council seats, which is why Beijing can handpick
who has the real power in the region. Of course all 60 should be
voted on by the people, but you can see the obvious problem for
the Communists. If they give Hong Kong too much freedom, the
people on the mainland will demand similar reforms.
And on Taiwan, one political leader said of the turmoil in Hong
Kong, “The lies of China have been exposed.” Officials in
Taipei are concerned that if Hong Kong’s controversial Article
23 anti-subversion bill is approved in its current form, then
Taiwanese living there could be at risk. Politicians are also
beginning to more closely examine business ties between Taiwan
and the mainland. I’ve long said the island’s business leaders do
not always act in the best interests of the people, but then that’s
the case everywhere in the world, isn’t it?
Finally, in a possible positive development, China appears to be
injecting itself more forcefully into the crisis over North Korea,
which remains hot spot #1 as the world attempts to figure out
what the truth is with regards to Kim Jong-Il’s nuclear weapons
program. [As an aside, you’re beginning to hear increased talk
of how the U.S. military is stretched to the max, with the possible
call-up of thousands of National Guard troops to rotate into Iraq.
Yet few mention that this whole issue is of utmost concern
because of the dangers posed by the irrational commies in
Pyongyang.]
Britain: It’s incredible to think that Tony Blair may not survive
the latest crisis over his leadership, as the apparent suicide of
weapons expert David Kelly is of momentous importance. Blair
has been at war with the BBC over intelligence used to build the
case for war and Kelly was allegedly the BBC’s source in its
claim that Blair spokesman Alastair Campbell had “sexed up” a
crucial dossier on Iraq.
Israel: Prime Minister Sharon began the week criticizing the
European Union for appeasing Yassir Arafat, even as Arafat and
Palestinian Prime Minister Abbas reached a power-sharing
agreement that unfortunately leaves Arafat with still far too much
control. Meanwhile, a highly controversial survey of Palestinian
refugees throughout the region revealed that only 10% would
exercise a “right of return” to Israel as part of any final peace
settlement, far fewer than was anticipated. Lastly, in another
example of my maxim “wait 24 hours,” Israel arrested a
suspected IRA bombmaker who was allegedly tied to Palestinian
militants, only to discover the next day that he was merely a
journalist.
Iran: In a rather startling admission of his own incompetence and
lack of leadership, President Khatami offered to resign if that
was what the people wanted. Since his election in 1997,
Khatami has seen all of his reform efforts blocked by hardliners
in the judiciary. At the same time Iran is threatening to withdraw
from the Nuclear Non-Proliferation Treaty. And then there is the
case of the female Canadian photojournalist who was beaten to
death after being detained for doing nothing more than taking
pictures of protesters outside a notorious prison. This story
should have some legs.
Russia: More intimidation for energy giant Yukos as police
raided its offices without a search warrant. But as I write this the
prosecutor-general’s office said it was investigating a slew of
criminal cases tied to the company, including 5 murders. Yukos
founder Mikhail Khodorkovsky has been financing two political
parties opposed to President Vladimir Putin and it’s clear that
Putin’s ex-KGB cronies are carrying out the crackdown against
what is perceived to be the last vestiges of the Yeltsin oligarch
era. Others say the former agents merely want their share of the
pie, extorted or otherwise. The possible murder charges,
however, take this whole fiasco to a different level.
Saudi Arabia: Are attitudes in the House of Saud finally
changing for the better? Clearly, leaders recognize the regime is
under attack and according to Richard Beeston of the London
Times, steps are being taken to clean up the schools and suspend
militant clerics. Separately, the Kingdom is opening up its oil
fields to foreign capital for the first time since the mid-1970s, a
significant move.
Burma: As a Washington Post editorial put it, where’s the
outrage? Nothing has been heard from Nobel Peace Prize winner
Aung San Suu Kyi for over 6 weeks now, ever since her
supporters were beaten and she was thrown in jail. The U.S.
threatened stiffened sanctions against the drug-addled military
leadership yet little has been done.
Indonesia: Authorities scored another success on the terror front
in finding a huge weapons cache while arresting 9 men linked to
Jemaah Islamiyah. The group was targeting churches and
shopping malls.
Random Musings
–British Prime Minister Tony Blair on America’s role in today’s
world.
“I know it’s hard on America. And in some small corner of this
vast country, in Nevada or Idaho, these places I’ve never been
but always wanted to go, there’s a guy getting on with his life,
perfectly happily, minding his own business, saying to you the
political leaders of this nation: Why me? Why us? Why
America?
“And the only answer is: because destiny put you in this place in
history, in this moment in time and the task is yours to do.”
Thank you, Mr. Blair, for backing up a statement I made last
week, “The United States must act as the world’s policeman…”
–I have been wrestling with my judgment of Deputy Defense
Secretary Paul Wolfowitz, creator of the strategy of preemption,
and I have continued to give him a pass on Iraq even as I slam
his boss, Donald Rumsfeld. So I have to admit this passage from
an op-ed by military strategist Ralph Peters caught my eye.
“Unlike some of the men he mistakenly appointed, President
Bush supports and values our troops. Now he needs to
demonstrate that support by cleaning house (at Defense).
Rumsfeld needs to go, and all his key subordinates need to go
with him – with the single exception of Paul Wolfowitz, who
may be the only strategic visionary in Washington.”
–This wedding I attended last weekend was a rather large affair
(close to 300) and one of my relatives and I were discussing the
costs. It’s tough for so many families to start out in the hole like
that, and/or it’s a huge burden on the parents. Last Sunday the
New York Times quantified the dilemma, as the average cost of
a wedding has now risen to $22,000. Yikes! [Your editor has
never been married, reads this and thinks, why that’s 13,750
shares of Lucent at $1.60.]
–Last week I wrote of how the Louisiana coastline is literally
sinking at an alarming rate and then on Sunday the Washington
Post had a cover story on the same issue. 2,000 square miles
have vanished in the last 65 years or so, equivalent to the size of
Delaware, Baltimore and Washington, D.C. combined. Or to put
it another way, a football field every half-hour. Of great import
is the fact that much of the industrial economy is on the coast.
My friend Jimbo did have a good suggestion, hire the Dutch.
–And regarding the above, thankfully for Louisiana Hurricane
Claudette didn’t slam into it, though this is of little consolation to
the residents of the Texas Gulf coast. With all of our technology,
the experts still missed just how strong Claudette would get.
There is no doubt that extremes have almost become the norm
these days when one observes the weather around the world;
including record rainfall on America’s East Coast, violent storms
in France or 200-year record high temperatures in Switzerland. I
mean for crying out loud it was 99 F. in Geneva on Wednesday.
–I have read Bill Keller’s columns in the New York Times over
the years and almost always found him to be balanced. Keller is
a worthy selection as the Times’ new executive editor.
–Quite a performance by Kobe Bryant last night. I’m just
disappointed I was one of many who held him up as a role
model.
–So I’m watching Congresswoman Maxine Waters and
Communist Congressman Bernie Sanders lambaste Alan
Greenspan in a totally disrespectful manner the other day and
I’m thinking these two would be perfect for the European
Parliament.
–I’ve told you in the past of how I often dream of North Korean
missile strikes. Well, this week I had my first nightmare about
bears here in New Jersey. They’ve been spotted around the
block from my place, so I’m now extra careful in answering the
doorbell. Of course I always have been leery of irate readers and
I’ve taken appropriate precautions.
–Mars is on its closest path to Earth in 50,000 years. Goodness,
gracious. In fact on August 27 it will be a mere 35 million miles
from us, when it normally is 60 million away. Unfortunately,
astronomers say the view may be obscured due to dust storms,
which means the buffalo are stampeding. [You knew there were
buffalo on Mars, didn’t you?]
–Research has shown that kids at the end of a day care day have
a higher stress level than those who are at home. The solution
is easy. Cut out the day trading.
—
God bless the men and women of our armed forces.
God bless America.
—
Gold closed at $347
Oil, $31.96
Returns for the week, 7/14-7/18
Dow Jones +0.8% [9188]
S&P 500 -0.5% [993]
S&P MidCap -0.6%
Russell 2000 -1.9%
Nasdaq -1.5% [1708]
Returns for the period 1/1/03-7/18/03
Dow Jones +10.2%
S&P 500 +12.9%
S&P MidCap +14.9%
Russell 2000 +21.3%
Nasdaq +27.9%
Bulls 57.4
Bears 17.0 [Source: Investors Intelligence / Chartcraft]
Note: I will be posting Tony Blair’s speech to Congress on my
“Hott Spotts” link for Tuesday. It’s a must read.
Have a great week. I appreciate your support.
Brian Trumbore
