[Posted 7:00 AM ET]
World View
Arab affairs expert Fouad Ajami, writing in U.S. News, said it
was time for Iraqis to show a little gratitude. By week’s end
many did seem satisfied with the deaths of Saddam’s sons, Uday
and Qusay, but others weren’t, and I’m not talking about the
Fedayeen, rather the average guy on the streets of Baghdad.
Frustrating, to say the least, though our forces are finally
receiving more cooperation and it’s hoped Saddam goes down
shortly.
It’s also frustrating, as I’ve noted over the past few weeks, to see
the lack of leadership coming from the White House, but in this
case it’s more than just about dissipating the good will initially
bought by the fall of Saddam, it’s about far more, like in the
cases of North Korea and Liberia. The latter should have been
handled weeks ago, with the people of Liberia desperately
appealing for U.S. aid, while in North Korea, zero has been
accomplished for over six months as we’ve allowed Kim Jong
Il’s orcs to continue with their nuclear weapons program.
What I still don’t understand is why the President’s advisors
won’t let him give a prime time speech to the American people
on foreign policy. To give Bush his due, he gave an excellent
progress report on Iraq in the Rose Garden this week, but it was
at 10:00 AM! If nothing else he owes it to the families of those
serving in far-off lands like Iraq and Afghanistan to remind them
why it’s critical for their sons and daughters to fight in these hell-
holes. More importantly, he needs to begin to steel the American
people for potentially far more costly actions, some day, maybe
in Iran, but more likely North Korea.
In some respects, even with our troops deployed around the
world, it feels a little like 1998-99, with the stock market rising
and people not focused on impending dangers.
Which leads me to the issue of the size of the military. Even as
Defense Secretary Rumsfeld proceeds with his plans to privatize
large segments of the Armed Forces, he has to know we don’t
have enough soldiers to protect our interests these days, and I
mean enough so that our brave men and women can be rotated
out on a timely basis, not just because it’s right, but because we
want them to re-up. Of course there’s an easy solution, re-
institute the draft, but this is politically not doable as the majority
of the American people wouldn’t understand.
I’ll leave you with a little anecdote from my senior year in
college, spring 1980. Republican John Anderson had just
announced he was running as a 3rd-party candidate and I helped
organize his appearance shortly thereafter at Wake Forest
University. I was an impressionable youth, and yes, I ended up
voting for him over Ronald Reagan and since have been told
Anderson was miserable while I soon adopted Reagan as my
new hero. But that one day at Wake Forest, John Anderson
strode before the assembled crowd and proceeded to spend the
whole time talking about the MX-missile, a key issue of that day.
Oh, it was boring to most in attendance, but I loved it. That’s
what a president should do, I thought. Educate the people on the
issues, not just rattle off some pleasing sound bites.
This is what President Bush needs to do, though in his case it is
to “re-educate” the people on the challenges of our time. He did
a masterful job of it following 9/11. This year in particular,
though, he’s fallen short.
Wall Street
It was a decent week in terms of news for the Street as the
weekly jobless claims figure fell below the key 400,000 level for
the first time since February, while June durable goods (big-
ticket items) was higher than expected. So while these two items
are known for their volatility, meaning you can’t make too much
out of one sampling, it did provide sustenance for the bulls who
argue the second half of the year will see growth in the 3.5-4%
range compared to the 1.5-2% numbers for the 1st half. [The first
estimate on second quarter GDP is this coming week.]
Corporate earnings releases have been solid, if you are looking at
the bottom line, but revenue growth is only around 3% and most
companies have been a bit tepid in their outlooks for Q3 and Q4.
For example, for each Texas Instruments that is seeing a pickup,
there are 2 or 3 Taiwan Semiconductors that fail to forecast any
broad-based recovery. And back to jobs, while Microsoft offered
up a bit of good cheer when it said it was going to be hiring
3,000 in the U.S. (up to 5,000 worldwide); you had Eastman
Kodak saying it would slash 6,000.
Meanwhile, Fed Governor Bernanke, the most outspoken of the
lot these days, said the Federal Reserve was prepared to take
short-term interest rates down to zero if necessary to ensure a
solid recovery and he also noted that he saw little inflation on the
horizon, Bernanke being the biggest early proponent of the
deflation theory. Well, heck, I read that and can’t help but think;
no inflation, no pricing power, no real growth in corporate
profits, little upside from here for stocks.
Then you have housing, the lynchpin of the economy for the past
few years. Mortgage rates are rising quickly on the heels of the
sloppy bond market, which saw a further increase in the 10-year
Treasury to as high as 4.21% this week before closing at 4.18%,
up from last week’s close of 3.99%. It’s still not quite time to
cry “Fire!” but there is little doubt housing is in the process of
peaking, let alone the fact that refinancing activity is definitely
going to be drying up if the 10-year remains solidly above 4%.
With housing softening, it’s up to the corporate sector and capital
spending to pick up the slack and it’s too early to tell if the latter
is happening just yet.
Finally, I am continually irked by those investment advisors /
money managers who say “nobody’s getting anything in a money
fund,” implying that you’re an idiot to hold cash. True, there’s
no yield but you still have your freakin’ capital. If you’re unsure
about what to do these days with your investment dollars, sit on
the sidelines. As discussed last week, the bond market is fraught
with danger and you can’t convince me stocks in general aren’t
overvalued.
Street Bytes
–Once again, the equity market rallied in a huge way at the close
on Friday. As noted Wall Street maven Church Lady once said,
“How conveeeenient.” But, truth be told, in the post-9/11 era it
used to be that you didn’t want to be ‘long’ going into a weekend
in case of a terrorist attack. These days, however, traders feel the
risk is in being ‘short’ if Saddam or bin Laden are captured or
killed.
Of course there were some actual fundamental reasons for the
rally as spelled out above, and Friday the cyclicals took off, led
by Cummins Engine.
For the week the Dow Jones gained 1% to finish at 9284. 9300,
or thereabouts, is viewed as a key resistance level, so we’ll see if
it can bust through with any strength. Nasdaq closed at 1730, up
1.3%.
But to best gauge the action in the market the past 8 weeks, take
a look at the Friday close for the S&P 500.
6/6…..987
6/13…988
6/20…995
6/27…976
7/4…..985
7/11…998
7/18…993
7/25…998
–U.S. Treasury Yields
6-mo. 0.97% 2-yr. 1.51% 10-yr. 4.18% 30-yr. 5.12%
–Terry Keenan in the New York Post quoted the legendary John
Templeton as saying the U.S. was in the midst of a severe
housing bubble, with his added concern being that the average
consumer / homeowner is also extremely leveraged. I would
chip in that real estate bubbles are also prevalent in the U.K. and
China.
–The issue of trade, along with the exporting of jobs overseas, is
about to explode in a big way and will be a major one in the 2004
presidential campaign. Whether it’s IBM’s self-acknowledged
effort to accelerate the move of a large segment of its white-
collar force to India and elsewhere, or the U.S. textile industry’s
complaints of dumping by Chinese producers, if you put your ear
to the ground you can hear thundering hooves foretelling an
imminent clash.
And when it comes to China and its currency, the yuan, the
European Union has joined the U.S. in complaining that China
needs to revalue it. The weak yuan has enabled China to export
its goods at significantly lower prices than the competition, but
of course this has helped to keep the rate of inflation down in the
U.S. and Europe, a good thing.
For its part China is loath to strengthen its currency, pegged to
the U.S. $ for 8 years now, because it would lead to further
dislocations in its domestic economy. The last thing Beijing
wants as it continues the journey from an agrarian / state-run
economy to a market-driven one is political unrest.
Finally, it needs to be pointed out that 75% of the rise in global
exports in China is attributable to foreign companies’ operations
there. [Bloomberg News] And as I’ve noted often in the past,
it’s tough for the Bush administration to cry foul after its passage
of its own massive farm bill along with the tariffs being levied on
imported steel coming into this country.
–Boeing was penalized by the U.S. Air Force to the tune of $1
billion as a result of the investigation into the company’s stealing
secrets from Lockheed Martin. The 5-year program of industrial
espionage conducted by Boeing resulted in it unfairly winning 19
of 28 contracts for new launch vehicles worth some $1.9 billion.
[Defense News] The Air Force penalty is shifting $1 billion
back to Lockheed Martin.
The government has been wrestling with this serious issue for
some time. There had been talk of booting Boeing, permanently,
from the defense business but that would have left only one
airframe manufacturer, Lockheed, and having no competition
isn’t a healthy thing.
But some folks commenting on the penalty are expressing shock
over the high-level stealing of secrets. Hopefully, you all aren’t
among them as I’ve harped on this for years now, particularly in
the case of Loral and Hughes, which clearly gave the Chinese
key technical information for their missile program, some of
which could easily have been passed on to North Korea.
–So I’m watching Maria Bartiromo’s interview of Citigroup’s
Sandy Weill on CNBC the other day and Weill is saying things
like, clearly, he now understands how Wall Street’s problems
were an “industry issue” and the question was, how can it create
a better model by learning from these problems? It was a most
disingenuous performance, to say the least. ‘Gee, I had no idea
that what we were doing was wrong.’ Barf. And this very man,
known for attention to the minutest detail, will always claim he
had no idea how Jack Grubman was operating. No doubt Sandy
Weill will be long-remembered in the history of Wall Street, and
investors have been rewarded with his efforts. But I will always
regard him with disdain.
–Brazil’s unemployment rate hit 13% and the government
slashed interest rates, not only to further stimulate the economy
but also because inflation is coming down. I only mention these
facts because what happens here is obviously vital to the health
of the entire region, let alone I want to let my readers down there
know I care about you!
–Germany had some good news as sales tax receipts rose in
June, while the French legislature approved sweeping pension
reforms, a most positive step towards addressing a critical issue.
Hey, these two nations have been stepping up recently…but I’m
still years away from returning to Paris.
–Energy: It’s a simple story, actually. If you believe the
economy is going to strengthen as currently projected, with Asia
and Europe coming along for the ride, then energy stocks are a
‘buy’ as demand increases. But the sector, overall, has lagged
recently as money flowed into the more speculative areas.
Personally, I’m still not convinced the economy is off to the
races, not least because I’m concerned about the aforementioned
hot spots, though at least valuations for this group are far more
reasonable than most others.
As for the price of natural gas, it has fallen due to the fact that
the Northeast and Mid-Atlantic states have had a very cool
summer thus far. [Apologies to my friends in the West who are
burning up.]
–Perhaps the best example of the kind of equity environment we
are in this year comes from Value Line, which for decades has
rated stocks for “timeliness,” 1 to 5, ‘1’ being best. For the first
six months of 2003, however, Group 5 issues, the worst, were up
43% vs. 14% for Group 1.
–An internal investigation has revealed that Freddie Mac’s
former CEO was in the forefront of the company’s efforts to
manipulate earnings, but current members of the new
management team are far from clean on the issue as well.
–The House rolled back the FCC’s controversial ruling on
television ownership that was going to allow a company to
control up to 45% of the nation’s media outlets. Now the limit
goes back to the former 35% rule. President Bush vowed he
would veto the act, but since he hasn’t vetoed one piece of
legislation to date, this seems unlikely. Politically, it would just
seem foolish to wield the pen on this issue while not using it on
more voter-friendly legislation. But then I’m not Karl Rove, boy
genius.
–AOL Time Warner reported that revenues were up 6% thanks
largely to its cable operations, but AOL itself continued to lose
subscribers. Then at week’s end the Wall Street Journal reported
AOL has been manipulating / hyping its subscriber figures for
years. Dirtballs.
–Wall Street expects its 3rd best profit year ever, despite all of its
problems. If this upsets you, just remember these folks buy
expensive cars and boats, so at least some jobs in other industries
are being preserved.
–La-Z-Boy issued an earnings warning due to sluggish demand.
We always mention anything this company says, just because.
–Lehman Brothers finally acquired money manager Neuberger
Berman.
–Ameritrade said its customer activity was up 33%, while
Schwab reported a 9% increase year-over-year, but the latter is
losing accounts.
–Sun Microsystem’s revenues tumbled again. No pricing power.
–Amazon issued a strong earnings report on the heels of
booming international sales (in relative terms) and Harry Potter.
The stock shot up $5, which means it’s more over-valued than
ever, if you could even figure out the true earnings picture, since
Amazon continues to jerk us all around in this regard.
–In a similar vein, eBay’s numbers were solid, though it’s clear
the super growth story is beginning to wane somewhat, in my
humble opinion. EBay raised its earnings estimate for the full
year to $1.31, meaning that at $110, the price / earnings multiple
is 84. Be my guest.
–AT&T saw earnings rise substantially higher than expected, but
revenues were down another 8%. The company did increase its
dividend, however, and this is one case where the new yield of
4.5%+ is somewhat enticing. Overall, though, I stand by my
position that dividends in most other cases are vastly overrated.
–Microsoft, in announcing it would hire up to 5,000 worldwide,
said it was hiking its budget for R&D substantially. Hopefully,
just one of these new employees will be able to figure out how to
create software that’s not full of security holes.
–My portfolio: I remain 15% equities, 85% cash. I do have to
brag that my minimal position in India is up 30% now, though
my two remaining energy plays are struggling. So it’s light beer
for the kid, as I can’t afford premium. Then again, I may quaff
an Indian lager.
–Just a little prediction for the archives. If the Dow Jones is at
10000 by October 1, 2004, President Bush will win the election
handily. A market at that level will mean many things, most
noticeably that the U.S. continues to win the war on terror, with
no further attacks on American soil, the situation in North Korea
has stabilized, and the economy is doing just fine, even with a
slide in real estate due to much higher interest rates by then.
–Big week coming up: key readings on consumer confidence,
manufacturing and employment, for starters. Will the editor
begin to throw in the towel on his 2nd half growth forecast of
2%? Will he be able to buy premium? These and other issues, if
you keep it where it is.
International Affairs
North Korea: There is some hope that a new round of talks
between North Korea, the U.S. and China will commence within
two months, but as I noted above, the clock is ticking. This week
brought news of a probable 2nd secret plant for producing
weapons-grade plutonium and it is not a stretch to say that the
North could easily have 6-8 nukes by year end unless they are
stopped immediately. Former defense secretary William Perry
said that a confrontation appears inevitable, one with “casualties
that would shock the world.” [Washington Post]
Israel: Well, we’ve reached our first impasse in implementing the
road map for peace, as Israel continues to build its settlements, a
slap in the face to the Bush administration, while Palestinian
Prime Minister Mahmoud Abbas complains that Israeli Prime
Minister Sharon isn’t releasing thousands of prisoners. For their
part, Palestinian militants beat up a moderate West Bank mayor
in an obvious reminder to Abbas that the terrorists can torch any
peace initiative at a moment’s notice.
Iran / Canada: It’s receiving zero press in America, but there is
quite a diplomatic tussle going on between these two. First you
had the Iranian government admit that the Canadian journalist
killed in its possession was beaten to death; then Tehran got
ticked at Ottawa over the death at the hands of police of an
Iranian citizen in Vancouver. The Canadian was buried in Iran
(she had dual citizenship), against the wishes of her relatives in
Canada, and Ottawa recalled its ambassador. At least I think I
have all this straight. But it must be comforting for the
Canadians to know that the United States would come to its aid
should this confrontation escalate further. I’m assuming they
appreciate that.
China / Hong Kong: Beijing reiterated its support for Hong
Kong chief executive Tung Chee-hwa, strongly hinting of a
potential crackdown on further protests in Hong Kong in the
name of “social stability.” While the controversial Article 23
anti-subversion bill has been postponed, a revised act is likely to
be introduced in September, so stay tuned. Meanwhile, British
Prime Minister Blair was touring the region and while in China
he expressed his support for the people of Hong Kong, but then
while in the latter he dissed the legislators, including the leading
activist Martin Lee.
Britain: Of course Blair has his own problems. Your heart has
to go out to weapons inspector David Kelly and his family, as the
BBC admitted, following Kelly’s suicide, that yes, he was the
source for the story that said the key dossier exhibited in the run-
up to the Iraq war was “sexed up.” But did the BBC
misrepresent Kelly’s opinions? As for Blair, he denies
approving the leak of Kelly’s name to the press which caused the
issue to explode. Clearly, someone in the Ministry of Defense is
at fault, even as the BBC’s vaunted reputation has been
tarnished. According to a poll in the Guardian, only 39% “trust”
Blair, down from 51% a month ago. This is far from over.
Russia: The investigation into wrong-doing at energy giant
Yukos continues to deepen with chairman Mikhail
Khodorkovsky proclaiming that Russia is sliding back into
totalitarianism, while Prime Minister Kasyanov admitted the
recent actions taken by the security service against Yukos have
begun to hurt the overall economy. Foreign capital has been
flowing out for the first time in years on the uncertainty.
Saudi Arabia: There is no doubt that some members of the House
of Saud were involved in the financing of the 9/11 hijackers.
The question for me is not only how high up it goes but, more
specifically, U.S. Ambassador Prince Bandar’s own personal
involvement, if any. We may never know for sure, but if it is
proved he had some culpability, this would be devastating to the
Bush administration due to the intricate ties some have to the
Saudis, including Bush #41’s own dealings. Separately, the
Saudis announced they had arrested 16 suspected al Qaeda
terrorists, but as is the case with Iran’s announcement that they
were holding some al Qaeda leaders, the proof is in the pudding.
Bring us their heads.
Japan: Prime Minister Koizumi faced steep opposition to sending
troops to Iraq, with 55% of the people being against such a
move, according to one survey I saw. On Friday, though, the
Parliament approved a force of 1,000. Koizumi has been
courageous as he attempts to show solidarity with George Bush
and Tony Blair, but there is an election by year end and if one
Japanese soldier dies beforehand, many in this nation will go
ballistic. So, one possible solution is to attempt to delay
deployment until 2004 and the Parliamentary action sets no
timetable.
Mexico: Uh oh. President Fox’s 2000 campaign allegedly took
in illegal contributions, including large sums from as yet
unnamed foreign sources. Could be a huge story shortly, though
in one respect it’s kind of encouraging that this sort of
investigation is even taking place, corruption being the nation’s
essence, so to speak.
Spain: Since 1965, Basque separatist rebels have killed 840 and
this week the movement’s terrorist organization, ETA, launched
a new bombing campaign across the country, though thankfully
no one was killed. Even more disturbing was the discovery this
week of materials related to the development of chemical
weapons.
Random Musings
–Years ago I covered the topic of diamonds extensively for my
“Hott Spotts” link, discussing the terrorist link. More needs to be
made of this these days with al Qaeda’s connection to the trade,
let alone the ties to dirtballs like Liberia’s Charles Taylor. As
my friend Harry K. always tells me, moissanite is the better, and
cheaper, alternative to blood diamonds.
–Looks like Kobe Bryant couldn’t give a damn about the above.
He just spent $4 million on a rock for his wife. Dumb move.
She’s going to take him to the cleaners as it is down the road, he
may need those funds.
–Gray Davis will win the California recall vote on October 7, at
least that’s the view here, though I’d love to see Jack Kemp run
as a kind of coalition candidate. Then again, Republicans should
want Davis to struggle on, taking advantage of this come
November 2004.
–The shooting at New York’s City Hall was the result of
institutional arrogance, since council members and other
politicos weren’t required to go through a metal detector. I’ve
commented before on the intellect of many of the officials here
and it continually amazes me how some of them, including one
particular borough president, are basically illiterate. It’s flat out
uncomfortable listening to these idiots.
Alas, the victim, Councilman James Davis, appeared to be a
good, noble man and special kudos to police officer Richard
Burt, whose quick actions prevented a far more tragic situation.
–Not to tick off a lot of my European readers, but this is one guy
who is glad Italy and Prime Minister Berlusconi are at the helm
of the European Union during this critical 6-month period.
President Bush was smart to bring him to the Texas ranch.
–Thank you, Aussies, for leading the peacekeeping force in the
Solomon Islands. Stepping up, again.
–His name is Sheikh Nawaf al-Zaidan and if you see him in
Buffalo, Omaha, or Dearborn, congratulate him, because this is
the man who led the U.S. military to Uday and Qusay, earning up
to $30 million for his efforts. Then again, chances are good he’ll
be going by the name of Joe Smith.
–You know what ticks me off? The damn baggage and
passenger screeners are already screaming that they want to
unionize.
–I was talking to a friend of mine from North Carolina the other
day and he was telling me about how early high schools down
there are starting these days, like in one instance August 4th!
Now I’ve always known that in certain parts of the country
school commenced around August 20, whereas in the Northeast
they generally open after Labor Day. But as Phil correctly
pointed out, aside from the fact these kids don’t have a real
summer (plus it’s not like all the schools are air-conditioned),
what about the summer tourist industry?
–To my friends in the Ponca City, Oklahoma area, I was
thinking of you with that explosion at the Conoco refinery.
Thankfully, it wasn’t as bad as it could have been. I lived just
two blocks from there for a spell in 1978…432 S. Oak, if
memory serves me right.
–Another research study reveals the benefits of eating fish at
least once a week, with this particular one saying it could help
prevent Alzheimer’s. Here at StocksandNews we have salmon
each Sunday…Salmon Sunday. So join me in starting a new
tradition. Your brain will thank you.
–I’ve basically lived in New Jersey all my life, yet tonight I’m
attending my first Springsteen concert. I told my friends I don’t
know how to act. Steve said, just stand there. I wonder if
anyone will care if I bring along Barron’s?
—
God bless the men and women of our armed forces. And a
special thanks to our Korean War Veterans.
God bless America.
—
Gold closed at $362…highest in 7 weeks.
Oil, $30.17
Returns for the week 7/21-7/25
Dow Jones +1.1% [9284]
S&P 500 +0.5% [998]
S&P MidCap -0.1%
Russell 2000 +0.9%
Nasdaq +1.3% [1730]
Returns for the period 1/1/03-7/25/03
Dow Jones +11.3%
S&P 500 +13.5%
S&P MidCap +14.8%
Russell 2000 +22.4%
Nasdaq +29.6%
Bulls 55.2
Bears 19.8 [Source: Investors Intelligence / Chartcraft]
Have a great week. I appreciate your support.
Brian Trumbore
