[Posted 7:00 AM ET]
Wall Street
It was another mostly positive week for equities on the heels of
more good news on the economy. The Federal Reserve’s
regional survey of economic activity confirmed the better tone,
as did figures on industrial production, housing starts and
renewed consumer confidence. The consensus for growth in the
third quarter, to be reported in about two weeks, is up to 6% and
as I’ve noted on more than one occasion Democratic candidates
for the White House will look kind of foolish blasting the Bush
administration in this area, especially if the employment picture
brightens, as it is showing tentative signs of doing.
But beneath the surface you still have some troubling issues,
perhaps best exemplified by the likes of IBM and Caterpillar
which both failed to exceed the Street’s expectations in their
quarterly earnings reports, while issuing rather tepid outlooks for
the fourth quarter and beyond.
One item that keeps coming up is pricing power, or lack thereof.
Competition, across the globe, is fierce and it’s this lack of
pricing power that leads folks like the governors at the Fed to
continue to believe inflation is not a problem.
Of course I have argued that inflation is indeed a pending threat
as the world reflates, but until it is manifested in more
conventional measures such as the consumer and producer price
indexes, one can’t get too excited about corporate profits in most
market sectors where cost-cutting measures have just about run
their course. In other words, without some inflation the profit
forecasts for 2004 certainly seem a bit frothy, particularly when
measured against already sky high market valuations, as in the
technology group.
Speaking of tech, it’s 1999-2000 all over again for yours truly. I
was a big investor in the sector through 1998 then sold out, only
to miss the final spectacular leg up. But I also missed the crash,
fortuitously, though I’ve now been sitting out the revival in
Nasdaq. Trust me, I’m not losing sleep over this…I’ll just try and
make it up elsewhere.
Aside from valuation there are other reasons to be cautious.
President Bush is going to be running around Asia the next few
days attempting to gain concessions on the currency front and
most market participants are simply unnerved by this blatant
attempt to manipulate the markets. It also doesn’t help when the
administration says “we’re for a strong dollar” and it’s lying. If
the dollar’s value drops against Asia’s currencies that’s good for
U.S. exports but bad for nascent recoveries across the Pacific, so
why should Asia’s monetary authorities cooperate? Plus they
have some rather poor memories of currency machinations gone
bad just 5-6 years ago.
Another troubling development that’s beginning to spill over is
best exemplified by the downgrade to junk status of the
municipal debt for the city of Pittsburgh, PA. Pittsburgh, like
many other municipalities and states, has been issuing debt to
shore up underfunded pensions, but if the revenues don’t come in
to service the debt you have a problem, let alone if the return on
investment for the pension assets themselves is below required
levels.
Lastly, I got a kick out of a comment from a leading market
strategist on CNBC Friday. When asked how the stock market
would respond to another terror attack in this country he
basically said, ‘Of course that’s a risk, but you can’t let it
influence your long-term investment strategy.’
Wrong. Always, always think about the worst case and from
time to time ask yourself, “If a (fill in the blank) goes off in New
York or Los Angeles, for example, and the global economy tanks
anew, and with it stocks, can my family survive the shock to our
finances?” Only you know the answer to this. The important
thing is to be honest with yourself.
Me? I see some very disturbing recent patterns, not just with the
usual from North Korea, but in pronouncements from
intelligence heads in Britain warning of “sleeper” cells there,
waiting for the right moment to strike. The same can be said of
the U.S., obviously, along with much of Europe and Asia. 9/11
showed just how tied together the global economy is and one big
blast or bio-terror incident will send the markets careening
downward. And what makes today’s environment even more
shaky is the incredible amount of debt Americans and many
others around the world (including speculators in China) are
taking on. There is zero margin for error.
Iraq
Secretary of State Colin Powell earned his salary this week in
negotiating a 15-0 vote of approval at the U.N. Security Council
for a new resolution on Iraq, with even Syria going along, joining
other potential ‘no’ or ‘abstention’ votes from the likes of China,
Pakistan, France, Germany and Russia. The resolution leaves the
U.S. and Britain largely in charge of shaping a new government
and a December 15 timetable for drafting a new constitution and
setting up elections is now in place.
But in approving the act, France, Germany and Russia also said
they were still not willing to commit troops or make significant
financial contributions to the cause of Iraq’s reconstruction. A
donor conference in Madrid this coming week is unlikely to bear
much fruit, in other words, and on this issue it certainly didn’t
help matters that the U.S. Senate voted to treat half the Bush
administration’s requested reconstruction aid as a loan, rather
than a grant. As Senator John McCain pleaded, why would other
nations agree to help us out financially if we are saying that we
insist the Iraqis pay us back? And how then can we ask the other
nations for forgiveness of Iraqi debt owed them when the U.S., in
essence, won’t do the same?
Nonetheless, there is still a chance the House and Senate will
work out a proposal more satisfactory to the administration in
conference.
Separately, on the security front, the Washington Post had a good
piece concerning the difficulties facing the Iraqi governing
council. It’s important for the members to be able to mingle with
the people, including the influential clerics, but it is also too
dangerous, witness the assassination of one of the 3 female
members a few weeks ago.
Street Bytes
–The markets finished mixed following a down day on Friday.
Both the Dow Jones and S&P 500 registered fractional gains
while Nasdaq finished off just 3 points on the week. The
Russell 2000 small cap index hit a 3-year high. Intel’s
announcement that it beat by 2 cents was a big positive for
technology at mid-week, but the less than exciting news from the
likes of eBay and IBM hurt later on. It’s also important to
remember that while volume has been lackluster, at best, 40% of
it is still the result of program trading. In other words, the casino
remains open.
–U.S. Treasury Yields
6-mo. 1.01% 2-yr. 1.86% 10-yr. 4.39% 30-yr. 5.25%
Mortgage rates are back over 6% and bonds suffered some this
week due to the continuing pickup in economic activity. At one
point the 10-year hit 4.45% before rallying a little on Friday.
–Energy: This week represents the 30th anniversary of the
creation of OPEC so celebrate by buying a Hummer! After all,
in 30 years America has learned nothing and now imports 60%
of its oil.
Meanwhile, non-OPEC Russia told the cartel that current oil
prices are way too high and the price band should be moved
down to $22-$25 from $22-$28 a barrel (the actual ‘basket’
OPEC monitors is around $29.50), because $30 oil threatens the
global recovery. Responsible talk from the Russians, for now,
but when the price collapses down the road they’ll be crying for
everyone to cut production to jack it back up.
As for the rumored transaction wherein ExxonMobil would
purchase a 40% stake in Yukos, ChevronTexaco is also
reportedly looking at a stake. But both should be wary. BP, for
example, is having problems with its own $8 billion joint venture
here. In other words, with still shaky corporate governance and
political issues, buyers beware.
Then there is Japan, which has proposed a $7 billion deal of its
own to secure a Russian oil pipeline to Japan instead of the
competing proposal from China that would see a pipeline routed
there. It’s simply not possible to do both at the same time so
look for this issue to become a real political hot potato.
–Asia has recovered remarkably well from last winter’s SARS
scare, while everyone crosses their fingers that the disease stays
dormant this year. As for China, demand for steel is slated to be
up 22% in 2003. No wonder the projected growth rate in the
economy here is more like 10% than the 8% the government has
been touting. Just throw this into your China bubble equation.
–German officials have lowered their 2004 growth estimate from
2% to 1.5-1.75%, though this would still be a significant
improvement from 2003’s flat line number.
–Fidelity Investments became the latest to call for drastic
changes at the New York Stock Exchange, specifically
recommending that computers take over for the specialist system
currently in place. A few days later the NYSE’s enforcement
arm announced that 5 specialist firms would be fined a collective
$150 million for pocketing illegal spreads in trades where they
shouldn’t have, which begs the question, what took the NYSE so
long? Of course you now understand why, after learning of Dick
Grasso and Co.’s compensation and all the cronyism at the Big
Board, it’s impossible to defend the actions here over the past 5
years. And my suggestion of last week that the NYSE be turned
into a museum of financial history, complete with theme bars and
a crack den is the best you’re likely to hear.
–New York Attorney General Eliot Spitzer: “We have put to rest
the mutual fund industry’s claim that they are pure as the driven
snow. The arrogance of the industry has to change.” [Wall Street
Journal] And thanks to Spitzer’s ongoing investigation into
illegal and unethical market timing in funds, the industry’s smirk
has been wiped off as a senior executive of Fred Alger
Management pled guilty to wrongdoing, two execs at Bank
One’s fund unit were dismissed, and the inquiry into Morgan
Stanley’s behavior heats up as the brokerage firm faces renewed
allegations of failing to disclose sales incentives to its customers.
–Leo Wells, founder of Wells Real Estate Funds, was suspended
for one year from his broker / dealer arm by the NASD for
providing lavish perks to brokers selling his product. In other
words, the deal on sales conferences (going back to my last days
in the fund industry) was there had to be an ‘educational’ angle.
Wells, whom I was very familiar with, got in trouble for
spending over $200 per person, per day, on food alone at his
extravaganzas, while the education part was largely missing.
But did I ever tell you that I was once scolded at an investment
shindig by Levi Stubbs of the Four Tops for dancing in front of
him while he was performing? Ah yes, a special moment.
[Actually, someone has pictures. Uh oh!]
–Speaking of the old days, spaceman / institutional money
manager Dennis Tito of Wilshire Associates is officially being
investigated by the SEC for his role in the mutual fund timing
scandal. Good.
–Daniel Gordon, former Merrill Lynch energy trader, was
formally charged with money-laundering in embezzling $43
million in 2000.
–But Merrill itself reported its second-best quarter ever in
earning a cool $1.04 billion. So who cares about a piddly $43
million?
–Former Rite Aid vice chairman Franklin Brown was convicted
for his role in one of the biggest corporate frauds of the era, a
conspiracy that led to the restatement of $1.6 billion in profits
back in July 2000.
–Senior drivers at UPS earn up to 9 weeks paid vacation.
Hmmmmm…………….
–Harley-Davidson reported flat revenues in the 3rd quarter. The
centennial celebration is over.
–General Motors isn’t making squat selling cars and, like Ford,
only earns money through its financing arm. So…we’re talking
major, major problems the next downturn in the economy.
–Michael Dell’s image is tarnished a bit for putting pressure on
CSFB’s Frank Quattrone to give the former a large allotment in
shares of an IPO, Corvis Inc., in exchange for ‘potential’ future
investment banking business.
–For the 10th-straight quarter, year-over-year sales fell at Sun
Microsystems. Ah, guys? I’m no Albert Einstein, but something
tells me your business model sucks.
–HSBC announced it was laying off 4,000 in the UK while
shifting the work to India, Malaysia, and China…in case you
needed further evidence of the seismic shifts taking place in the
global economy.
–Shares in eBay took a header as, first, Smith Barney issued a
‘sell’ recommendation and, second, the company later reported
earnings and revenues for the quarter that failed to beat
expectations. To compound matters, the company said it would
earn $0.98 in 2004 when the consensus was more like $1.05.
Has the worm turned?
–My portfolio: I’m now the proud holder of a minimal stake in a
Polish energy exploration company, but overall my equity
exposure remains around 25%.
International Affairs
China: Yang Liwei became the country’s first man in space, as
the Communist rulers opted not to broadcast the launch live
because they were afraid of the repercussions should something
go wrong; which tells you an awful lot about the place, in case
you were stranded on a desert isle for the past 50 years.
Liwei hung out up in space for 21 hours before landing safely
and when he emerged from the capsule the first question asked
was “Did you see the Great Wall?” a long-held myth. “Err, no,”
he replied. [London Times]
The space flight was, however, a huge success for China as it
showed off its technical prowess, acquired at America’s best
universities or stolen outright. And you don’t have to be a rocket
scientist to recognize that China is using this newfound
knowledge on the military front. In other words, Yang Liwei
should have pronounced upon opening the hatch, “That’s one
small flight for China, one giant leap in the global arms race.”
South Korea: President Roh is calling for a referendum on his
leadership December 15 in an attempt to distance himself from a
huge political funding scandal involving a key aide. It could
always backfire, however.
[As I go to post, the government here has announced it will
supply troops to the cause in Iraq.]
Israel: Interim Palestinian Prime Minister Qureia continued to
squabble with Yassir Arafat and said he’d only stay in office
another few weeks as Arafat flexed his muscles in choosing
cabinet ministers not satisfactory to Qureia. In other words, at
least Qureia had the guts to stand up to Arafat but, again, when
will the rest of the Palestinian people do the same?! Rise up,
before Arafat takes you all with him.
It doesn’t help when 3 U.S. diplomats (contractors, incidentally)
were blown up in Gaza by a shadowy, new terrorist group. Not
exactly a good way to win Western support.
As for Israel itself, the Financial Times had an extensive piece on
its growing nuclear capability, which now includes possible
deployment of submarine-based cruise missiles that can carry
nuclear warheads. The disclosure hurts U.S. efforts in the U.N.
to gain international support for clamping down on Iran’s own
burgeoning program.
Saudi Arabia: The Kingdom announced it would hold the first
elections ever to create local councils, though only half the
members would actually be elected in 14 chosen municipalities.
But before anyone gets too excited about this initial step towards
some form of democracy, understand Saudi Arabia has made
these announcements before and then failed to follow through.
In this instance, no actual timetable was established.
Malaysia: In the past I have expressed my admiration for Prime
Minister Mahathir for standing up to the likes of George Soros.
But the other day Mahathir addressed an Islamic conference and
proclaimed that “Jews rule this world by proxy.” His latter
comments blasting radical Islamists don’t begin to make up for
the earlier remark. Mahathir is only in office a few more weeks.
Bolivia: The poor here, rioting against the free-market policies of
President Sanchez de Lozada, forced him to resign Friday after at
least 70 had been killed in demonstrations. The president had
been forced to back down on his proposal to export natural gas to
the United States as the peasantry said the benefits wouldn’t flow
to them. Granted, the unrest has little impact on global markets
but it does represent a warning sign to those thinking of investing
in the region, especially when you already have a dictator in
Venezuela and the ongoing battle between the government and
the narco-terrorists in Colombia, let alone problems in Peru.
Incidentally, President Bush came into office insisting that Latin
America would be a priority in his administration, yet he has
spent a total of 5 days in the region thus far.
Random Musings
–Bush received some good news from the latest USA Today /
CNN / Gallup poll that showed his overall approval rating
edging back up to 56%, though a Newsweek survey offered up
some not so good news. 54% were dissatisfied with the overall
state of affairs in the U.S., while 56% don’t approve of Bush’s
handling of the economy.
On the subject of Iraq, Bush said he was “mindful of the filter”
when it comes to reporting the full story and that from here on he
would “speak directly to the people” in order to get the truth out.
This was in response to Republican Senator Richard Lugar’s
proclamation on “Meet the Press” that the President needed to
“take charge.”
But with all due respect, Mr. President, don’t simply blame the
press for its overall failure to report both the ‘good’ and the
‘bad.’ Between May 1 and September 1 you said absolutely
nothing in prime time and you missed countless opportunities to
set the record straight. Talk to Karl Rove about this.
–Bush hooked up with governor-elect Schwarzenegger on
Thursday. As I noted last week, if the overall economy improves
Arnold and the President will both benefit.
–NBC had a report on the probable role of some U.S. companies
in selling weapons to Saddam right before the war. Any CEO
who knowingly allowed this should be put to death.
–It was disappointing seeing the story of the fake letters from
servicemen to local newspapers describing how great things are
in Iraq. Just not necessary.
–John Leo in U.S. News wrote a terrific piece on how
Americans are way too quick sometimes to grant 2nd and 3rd
chances for past transgressions. For example, folks like singer R.
Kelly, who was convicted on charges of child pornography and
having sex with an underage girl, or the return of Admiral John
Poindexter and the rehabilitation of Dick Morris. Leo compares
such cases to Baseball’s Hall of Fame, which has kept Pete Rose
and Shoeless Joe Jackson out (though you’ll get big arguments
here).
Of course Leo’s best poster boy, and mine, is Al Sharpton. “The
rapid refurbishing of appalling people is a constant threat in a
culture with no higher standard than nonjudgmentalism.”
–Boy, that convicted murderer Hugo Selenski is a real bright
guy. He manages to escape prison by rappelling out a window,
then decides to go home. It did save police a lot of time and
money, however.
–The National Academy of Sciences is recommending the
resumption of experiments involving cloud seeding. Some 24
other countries already do (like China). What this means is that
baseball owners may one day seed the clouds over their stadium
to force a rainout if their team is scheduled to face a pitcher it
doesn’t want to. George Steinbrenner would have no problem
doing this, as you can imagine.
–Speaking of baseball, I was in upstate New York this week and
went to Cooperstown (along with Saratoga Springs) for a little
Hall of Fame action. [The museum is undergoing an extensive
renovation, in case you’re thinking of going soon, by the way.
Wait until 2005 if this will be your only trip there.]
But as I write this I see that Boston manager Grady Little is still
alive, though for how much longer no one can say. Personally,
as a Mets fan I had no real rooting interest in the Boston – New
York series, other than that I detest the Yankees, but let me pile
on and say Little’s decision to keep Pedro Martinez in the game
ranks right up there in U.S. history with Pickett’s Charge.
–As for the Cubs and fan Steve Bartman, geezuz folks, shortstop
Alex Gonzalez is the real goat for muffing that double play ball,
not this poor soul. And as Phil N. wrote me, how about Illinois
Governor Rod Blagojevich, who sneered after Bartman
interfered in Moises Alou’s attempt to catch a foul fly, “I hope he
made it home.” Then, in an attempt to try and make amends, the
governor later added, “Nobody can justify any kind of threat to
someone who does something stupid like reach for that ball.”
And so, Governor, for your own actions we hereby name you
“StocksandNews Jerk of the Week.” The plaque is in the mail.
–I had a chat with a National Park Ranger at the Saratoga
monument commemorating the surrender of the British there on
October 17, 1777. I always love talking to these folks, who are
vastly underpaid and under-appreciated, and we had a good
conversation on the growing issue of independent contractors
doing the work of the rangers, a problem that exists in the
military, as I’ve noted ad nauseum. The experience for the
tourist is sadly being greatly diminished.
–Pope John Paul II celebrated his 25th year at the head of the
Roman Catholic Church this week. While there is no doubt that
some wish he had resigned a few years ago when his health
began to fail him (and I count myself in this group), this in no
way diminishes his monumental accomplishments in ending the
Cold War. Columnist David Brooks wrote in the New York
Times, “When history looks back on our era, Pope John Paul II
will be recognized as the giant of the age, as the one individual
who did the most to place democracy and freedom at the service
of the highest human goals.”
In his homily the other day, the Pope reiterated his theme of the
divide between the rich and poor, between the haves and have
nots. “Carry the weak on your shoulders,” he prayed. Amen.
—
God bless the men and women of our armed forces.
God bless America.
—
Gold closed at $372
Oil, $30.68
Returns for the week 10/13-10/17
Dow Jones +0.5% [9721]
S&P 500 +0.1% [1039]
S&P MidCap -0.2%
Russell 2000 +0.3%
Nasdaq -0.2% [1912]
Returns for the period 1/1/03-10/17/03
Dow Jones +16.6%
S&P 500 +18.1%
S&P MidCap +24.7%
Russell 2000 +35.8%
Nasdaq +43.2%
Bulls 57.4%
Bears 19.8% [Source: Chartcraft]
Note: Next time you head up to Cooperstown, I heartily
recommend the Landmark Inn. Great spot. Awesome breakfast.
Have a great week. I appreciate your support.
Brian Trumbore
