**Note: Due to fears that the current snowstorm in my area
would cause a loss of power, I posted the following earlier than
normal…11:00 PM, Friday, rather than the normal 7:00 AM ET,
Saturday.
Wall Street
A funny thing happened on the way to Nasdaq 2000 and Dow
10000. Not laugh out loud, ha-ha funny, mind you, but just
when the indexes threatened to break through, having hit 18-
month highs earlier in the week (along with the other major
benchmarks), stocks reversed course. The problem is that while
the U.S. economy continues to exhibit solid growth by most any
definition, some indicators simply haven’t been as good as
expected, and in a market already priced for perfection one or
two disappointments can derail the train for a spell.
First the good news. The Institute for Supply Managers
manufacturing survey hit its highest level since December 1983,
construction spending rose, auto sales exceeded estimates,
semiconductor sales soared 23% year over year, and productivity
for the third quarter was at a 20-year high.
But some uncertainty has crept into the retail sales outlook for
the holidays, again, versus expectations, while rising energy
costs have hit the airline sector and are about to do a number on
homeowners when they receive their next bill.
At least a trade war was averted when President Bush rescinded
the incredibly ill-advised steel tariffs, of which I have already
said enough and frankly noted two weeks ago that cooler heads
would prevail.
Back to the productivity data, Morgan Stanley economist
Stephen Roach offered up a different viewpoint in a New York
Times op-ed piece last weekend. The productivity miracle we
keep hearing about is all smoke and mirrors, in his mind, and it’s
“woefully underestimating the time actually spent on the job.”
One example Roach cites is the fact that the Labor Department
says the average workweek is unchanged for the financial
services sector since 1988, 35.5 hours, which is “patently
absurd.” And, overall, he also can’t get past the “profound
imbalances” in the economy, particularly the unsustainable debt
loads at all levels.
As for the issue of employment, only 57,000 new jobs were
created in November when the market expected 150,000 or
better. That was more than enough to pull equities down upon
release of the data on Friday and it may not bode well for
earnings comparisons down the road either.
But now you have all manner of bulls, and Republican
government officials, touting the ‘household’ survey of
employment instead, which showed a gain of 589,000 last month
due to a pickup in those who are self-employed or employees of
small businesses. Who the heck knows if this is a legitimate
statistic. The cynic in me says it only means a lot of folks are
home licking envelopes.
Finally, in a slightly different vein you have consumer spending
habits. Louis Uchitelle had an excellent piece in the New York
Times the other day on the breakdown of the now $11 trillion
U.S. economy.
$7.6 trillion – consumer spending
$2.1 trillion – government spending
$1.2 trillion – business / capital spending
Uchitelle argues only 3 times in the last two decades has a
decline in consumer spending been significant enough to do real
damage to the overall economy. In other words, we are a society
that, regardless of our economic lot, tends to keep on buying. It
may be on credit, but there’s a lot of stuff we just have to have.
We saw this during the most recent downturn. Capital spending,
on the other hand, is subject to more wild swings. But the
bottom line is our spending habits mute the impact of any
downturns. At least for now, mused the editor, thinking back to
the gigantic debt loads that Roach is so concerned about.
Street Bytes
–The major averages were mixed on the week, with the Dow
Jones finishing up 0.8% at 9862, while Nasdaq closed down
1.1% to 1937 after flirting with 2000. Friday’s lousy action
was the result of a disappointing mid-quarter review from Intel,
which moved up its projected revenue estimate, along with gross
margins, though not as much on the former as expected, plus the
company noted a special charge is going to have a negative
impact on earnings. Basically, it called into question Intel’s
valuation, which at the end of the day is what really matters for
the rest of us rational investors.
–U.S. Treasury Yields
6-mo. 1.00% 2-yr. 1.87% 10-yr. 4.22% 30-yr. 5.06%
Treasuries staged a huge rally on Friday on the heels of the
disappointing jobs report. Earlier in the week, the 10-year traded
up to 4.50% before the reversal. The Federal Reserve’s Open
Market Committee meets on Tuesday and the concern had been
that the Fed would drop a hint that it could be prepared to finally
raise interest rates come the spring, but now such a message
seems unlikely, at least until we get the blockbuster employment
data bond bears have been looking for. Of course the drop in the
10-year helps stoke the fire for real estate as it keeps homes more
than affordable…assuming you have a job and aren’t already
leveraged to the hilt.
Meanwhile, commodities continue to soar and it’s only a matter
of time before more than just the prospects for inflation begin to
wreak their own havoc on bonds. We keep inching closer to the
tipping point. Platinum, for example, hit its highest level since
1980 and gold managed to hold the $400 level, thanks in no
small part to the sick U.S. dollar, which in its own right is
officially beginning to break down. More on this next week.
–Energy: Oil prices rose further, even as OPEC ministers opted
not to reduce production as once feared, while using the excuse
of the falling U.S. dollar and the fact they need a higher price to
gain the same benefit as when the currency was stronger for
keeping prices as high as they currently are. OPEC is also
holding an “emergency” session in February, at which point
production cuts would seem to be in the offing.
But the real story on the week was the spike in natural gas to
over $6.50 (before closing at $6.25). For those of us who have a
large portion of our assets tied up in the energy sector, it was a
most welcome development for our portfolios. But for those
who have to pay higher energy bills it will be enough to drive
you to drink.
Aside from tighter supplies, the natural gas market is largely
being driven by the weather, and if you live in the mid-Atlantic
or Northeast in particular you’ve probably noticed that winter
started rather early…like while we’re still in the ‘fall.’ The
National Weather Service keeps saying it will be a mild winter,
but a look outside tells you otherwise.
–China is slowly opening its markets to foreign banks and
Citigroup gained approval for the first foreign-branded credit
card in the country. A significant positive.
–The European economy continues to show signs of rebounding,
particularly in Germany where employment and industrial
production appear to be turning around.
–Inflation Watch, part deux: Long-term care premiums are
skyrocketing 50% in some areas of the country, while Mark R.,
our unpaid official shopper, reports that the price of good wine
has risen 20-30% over the past year.
–Putnam has seen over $32 billion flow out the door since the
fund scandal hit the firm. But former chairman Larry Lasser is
all snuggled up with the $100 million plus he paid himself while
the company was committing its string of amazing breaches of
ethics.
–And in the latest installment of “Timers Gone Wild” (available
for a limited time on VHS for $9.95 through our special Net
offer… plus we’ll throw in “Lady Timers of Baja,” free!),
Invesco (AIM Funds) was hit with civil fraud charges, with the
group admitting that at one point some $900 million of $18
billion in assets was whipping around, hurting the average
shareholder. That’s an incredible percentage, sports fans, and
what I found even more remarkable was the admission in a
shareholder communiqué that fund executives had “shut down”
400 timers in the past. 400! Hell, when I was involved in this
game we had about 10.
–As for the SEC proposals for the fund industry, the headline
concerns the attempt at a 4:00 PM ET “hard close,” which in
some cases means a shareholder will have to decide first thing in
the morning whether to exchange or not. That’s simply not fair.
I keep saying the biggest issue, among many, is clients getting
screwed on breakpoints and at least the brokerage firms are
finally tackling this, with Merrill Lynch being one of those
promising to correct the situation. This is where the real losses
occurred and it was egregious behavior.
–Boeing’s chairman Phil Condit resigned amidst a slew of
allegations over the company’s corrupt business practices going
back to the case of stealing documents from Lockheed-Martin up
to the more recent controversy over the tanker deal with the Air
Force, the latter now on hold until the history of the negotiations
is ferreted out.
–Disney Vice Chairman Roy Disney resigned, blasting
Chairman Michael Eisner for his poor leadership over the past 7
years. Dumbo could be next in line to depart.
–And the chairman of the Swedish insurance giant Skandia
resigned amidst an internal investigation that revealed that top
execs looted the company like it was their personal candy store.
–I’d like to thank Dorsey, Wright & Assoc. for using an old
“Wall Street History” tidbit of mine in one of their research
reports this week. Frankly, I had forgotten about it myself but it
bears repeating.
In January 1980, as gold hit its all-time high of $850, the Dow
Jones was coincidentally also trading at 850. And at this time the
market value of all gold issues exceeded the $1.4 trillion total
market cap for all other U.S. stocks. Pretty amazing stuff…and
something to think about with gold climbing above $400 this
week as the Dow approached 10000.
–As a kid, going to FAO Schwarz was a real treat, in the days
before Toys “R” Us, let alone Wal-Mart. But the company
learned too late that its merchandise was way overpriced and
now it’s bankrupt with little chance of re-emerging from it.
–My portfolio: Thanks to the rally in my energy holdings it’s
back to premium beer for the kid this weekend. [Actually, I’m
holding my annual Christmas party for the condo complex and,
frankly, I deserve it.] I still have my 4 holdings in the oil and gas
sector (26% of my overall assets), including one refiner (a
slightly aggressive January ’05 call position) and 3 exploration
and service outfits. I also have 2% of my assets in Japan, 4% in
a carbon fiber spec play, and a new 2% trade in a U.S.
pharmaceutical company that is a classic turnaround story,
or so I hope. I’m now up to 34% equities, 66% snow-driven
cash, which I hope to find after the drifts melt away.
Iraq / War on Terror
It was a bad week for the coalition in Iraq with 8 Spanish
intelligence officers killed in an ambush, along with 2 Japanese
diplomats, 2 South Koreans and a Colombian contractor in
separate incidents. Further disasters outside this theater of battle,
though, may have been averted, particularly with the sweep of
terrorist suspects in Britain. But whether it’s Iraq, the UK,
Australia, Spain, Indonesia or the U.S., folks are going to be
increasingly on edge as the holidays approach. MI5 in Britain,
for instance, is concerned about simultaneous hits on shopping
malls; not that we haven’t heard this before but the recent
coordinated attacks in Turkey would seem to make this seem far
more plausible.
As for Iraq, the U.S. has been fighting back against the
insurgents in a concentrated fashion for the past few weeks,
capped off by the killing of 46-54 in Samarra (if we are to
believe U.S. officials…and on this one there is some doubt).
But, unfortunately, Saddam’s right-hand man, Al-Duri,
continues to elude capture and it’s Al-Duri, the U.S. is
convinced, who has been coordinating the attacks of the past few
months.
The problem with counterattacks is that while they are obviously
warranted we are losing the battle for the hearts and minds.
Local attitudes towards the U.S. are deteriorating. U.S. News
and World Report had a telling quote from an American Lt. Col.,
“I spent over $1.5 million here, rebuilding schools, setting up
city councils. They just don’t care.” Feedback like this is what
should be keeping our leaders up at night. And there is growing
talk the Iraqi Governing Council has lost all legitimacy with the
people.
Lastly, the hoped for rebound in Iraqi oil production may be a
pipe dream. As an extensive piece in the Times noted, the
northern oil fields in particular are in desperate need of
maintenance, possibly to the tune of $20 billion. It is not just the
obvious structural issues, but also the management of the fields
in terms of the amount of water that is injected – or the amount
of oil that is reinjected to maintain the proper pressure, without
which you can’t pump it.
But for now we continue to be thankful another catastrophic 9/11
type attack hasn’t occurred in the States, at least. As Tom
Friedman writes, the next time it happens here, “we’ll really see
an erosion of our civil liberties.” Albeit warranted.
More International Affairs
Russia: Sunday is the big election for parliament, the Duma, and
already there are cries that the vote has been rigged, with
opposition parties claiming that ultra-nationalists are being
promoted to power by the Kremlin and, looking ahead, the real
issue is that Russia is gearing up for a hard-liner to replace
President Vladimir Putin in 2008. I’ll have far more next week
when the results are known.
Separately, the U.S. is pressuring Russia to remove its troops
from Georgia, which really ticked off Putin and Co. With
Friday’s terrorist attack (which killed 40) near the Chechen
border, however, the Russians will claim they need a presence in
neighboring Georgia all the more. Of course as I’ve been writing
this is part of the re-creation of the old Soviet empire. But for an
independent view, the following is from a Washington Post
editorial, December 4.
“What the Russian president has been doing, while most world
leaders have been focused elsewhere, is trying to impose
dominion over several former republics of the Soviet Union
whose independence the Kremlin has never fully accepted. Like
his campaign against oil tycoon Mikhail Khodorkovsky, this
bullying policy flows from the coterie of secret police operatives
Mr. Putin has installed around him…
“(The Bush) administration must stick to its stand. Mr. Putin
must see that his attacks on democracy in his own country and on
the independence of his neighbors will be resisted. If he pays no
price, he will surely step them up.”
Switching gears, I have to comment on an NBC News report on
Tuesday that examined the problem the U.S. has with its spy
satellites. Because of maintenance issues, the few that are
working properly are targeting countries involved in the war
on terror, while none are able to monitor Russia’s nuclear
arsenal. That’s scary enough, but what NBC didn’t tell you is
something I wrote of years ago, that being the fact Russia’s own
satellites are a lot worse off than ours and they are often flying
blind, meaning, depending on the orbit, with little or no
coverage. Why is this important? It’s how accidents happen.
As was almost the case in the early 90s when Russia at first
mistook a Norwegian launch of a weather balloon for a nuclear
attack, in today’s tense times it’s far easier to screw up. It’s also
why the world, and investors, need to pay very close attention to
who is running the show in Moscow. Russia’s military leaders,
for starters, hate the U.S. That’s a fact.
China / Taiwan: President Chen Shui-bian of Taiwan threatened
to call a referendum on independence this coming March 20, the
same date as the presidential election, using the excuse of the
500 missiles that China has on the other side of the Straits. Well,
China didn’t take too kindly to this and so a leading general said
Beijing wouldn’t be intimidated by such talk, even if many (such
as yours truly) claim China couldn’t possibly attack Taiwan
before the Olympics. Taiwan will undoubtedly be at the top of
President Bush’s list when he meets with Chinese Premier Wen
Jiabao this week. What’s worrisome to us Taiwan supporters,
though, is that Bush may use the opportunity to scold Taipei for
unnecessarily ratcheting up the tension. At which point I’d write
next week, “Hey, Mr. President, how would you like it if the
White House was targeted by 500 missiles in Philadelphia?!” Of
course I also could be getting ahead of myself.
Meanwhile, Hong Kong’s pro-democracy supporters are
beginning to gear up for another large protest, this time on New
Year’s Day, which means that thanks to the time difference I can
spend my New Year’s Eve cheering them on. This plus a Clint
Eastwood movie and I’m a happy camper.
Japan: Back to the issue of spy satellites, Japan suffered a serious
blow to its efforts to monitor North Korea when a rocket
containing 2 new ones had to be destroyed before they were
deployed. It’s a huge embarrassment, especially on the heels of
China’s successful manned mission and it represents the 3rd
major failure for Japan since 1998.
North Korea: The 6-party nuclear arms talks that had been slated
to resume December 17 have been put off until February, at least
this is the word coming out of Pyongyang, so add another
missile to the arsenal should this new timetable holds.
Israel: Secretary of State Colin Powell met with proponents of an
unofficial peace plan between Israel and the Palestinians, which
ticked off the Israeli government. But the more Israel presses on
with the settlements, the more leverage they lose. In the
meantime it is clear that Hamas has been gearing up for terrorist
actions in North America, targeting Jews in both Canada and the
U.S.
Turkey: The leadership has blasted the European Union for its
failure to share intelligence following the bombings in Istanbul,
praising Iran and Syria, instead, for their own cooperation. Syria
handed over 22 suspects. [Believe me, I note this last bit just
because it’s news…not because I’m hopeful democracy is about
to break out in Damascus.]
European Union: Speaking of the E.U., Britain is siding with
Poland and Spain in the battle against France and Germany
concerning the draft constitution and voting procedures. The
draft says that future bills could become law only with the
support of half the Union’s governments and 60% of the
population, which gives too much clout to Germany due to its 80
million people. [This is also another reason why admitting
Turkey to the E.U. is so controversial, because it has a
population of about 65 million…and counting.]
You also have to look at the E.U. constitution and simply laugh
when you realize you’ll have 25 countries and 25 commissioners.
Oh yeah, that will work.
India / Pakistan: Pakistan’s President Musharraf proposed that
both sides withdraw their troops from Kashmir. India said, ‘Nice
thought, but you’re still supporting terrorists.’ Otherwise,
overflights between the two countries have been approved, a
decent confidence building measure.
Colombia: Rebels are now threatening U.S. military personnel in
the country, labeling them a legitimate target.
Lithuania: President Paksas faces impeachment amidst charges
he is tied to the Mafia and Russia’s secret police. But I’d like to
welcome my new readers here, as Lithuania has climbed into the
StocksandNews top twenty. Can’t wait to get to Vilnius.
Australia: The government announced it will participate in the
United States’ missile defense shield. Just another reason to love
our good friends…and buy Australian, mates!
Random Musings
–Wow…the developing story that you won’t be able to get a flu
vaccine after the next few days, for the rest of the flu season, is a
potentially catastrophic one. Yours truly didn’t get one, nor will
I even attempt to knowing the latest info. Alka-Sletzer Plus Cold
Medicine, that’s always been my secret at staying relatively
healthy. Take it at the first sign of the sniffles and a scratchy
throat.
[Your editor is not paid for this product endorsement, but in all
honesty I have not had a serious illness in the 20 or so years I’ve
been scarfing this down. Then again, there’s always a first time.]
–The slide in President Bush’s approval rating appears to have
stopped and it’s been ticking up again in some surveys.
Remember, it’s all about Dow 10000. If we’re there around next
June, that’s all you need to know. If we aren’t (and I don’t think
we will be), then all bets are off.
[My ‘exclusive’ 2004 market forecast is still in the making, but I
know already it’s not going to be a pretty one. I last used the
word ‘Crash’ in 2000. There’s your hint.]
But I was watching “The McLaughlin Group” last weekend and
was reminded of the split in the country. According to a Pew
Research poll, 33% of Americans call themselves Republican,
33% Democrat, 34% independent. Amazing. Commentator Pat
Buchanan says that in a Bush / Howard Dean race, it’s probably
about 40% Bush / 35% Dean, today, with a struggle for the rest.
John McLaughlin weighed in with an intriguing scenario; that if
Dean somehow stumbled, no one should be surprised to see him
run as a 3rd party candidate, and when you look at his campaign
and the anti-war stance he’s adopted, it makes perfect sense.
First, though, Dean has to lose and with poll #’s like he has in
New Hampshire, where he leads Senator John Kerry 42-12,
defeat seems unlikely at this point. Dean also leads
Congressman Richard Gephardt by 26-22 in Iowa.
Dean was on Chris Matthews’ “Hard Ball” this week and when
pressed on his Vietnam draft deferment he admitted he never
wanted to serve. I was surprised the media didn’t make more of
this…but it will as we move along.
[To me, there’s a difference between being against the war and
doing all you can to get out of serving, the latter being Dean’s
modus operandi. At least if you then plan on running for
president someday.]
–Louisiana Democratic Senator John Breaux certainly didn’t
hide his disdain for Dean in his appearance on “This Week.”
Breaux’s a good man and also clearly headed to the private
sector. He’s sick of Washington, at least that’s my take on
things.
–USA Today had a piece on the poor reception Vice President
Cheney is receiving on the campaign trail. Granted, you and I
don’t base our vote on who’s running for the second slot, but
Cheney is coming across as arrogant and out of touch. Aside
from tying up traffic, he’s missing an opportunity to court the
local press as he blows in and out, never stopping to visit
schools, factories, etc.
–Business Week’s cover story was on India’s surging prospects
and contained within a piece on the importance of a new road
connecting Bombay to the just established city of Pune, which is
confirmation of my adage that when it comes to the developing
world the first two things you focus on are good roads and clean
water. Period. All future progress flows from this. Too often
we pussyfoot around with other objectives (like the Clinton
administration’s drive to get Africa wired for the Net) when the
best solution is an elementary one.
–Scotland’s fertility rate is plummeting, which means one thing:
tee times may be easier to come by in 20 years.
–So a lot of folks in New Jersey are awful pissed off at cable
giant Comcast because it has moved major networks like CNN
and Fox News to channels 76 and 95, respectively, in some
areas. Heck, lots of people have older televisions that don’t go
that high. It’s not fair, I tell you. Actually, I just bought 3 new
ones.
–The 4 warmest years in recorded world history have all
occurred since 1998 and a UN climate study has grave warnings
for the European ski industry due to the fact snow has become so
unpredictable in these parts. Then again, these days it’s better in
New Jersey.
–The Supreme Court ruled police need only wait 15-20 seconds
before breaking down a door while conducting a drug bust.
“One Mississippi…two Mississippi…”
–The Star-Ledger in New Jersey broke the story that Democratic
Governor Jim McGreevey used the State Police to dig up dirt on
Republican officials, a rather egregious abuse of power I think
you’d agree. And there was a terrific piece in the Los Angeles
Times (reported by Josh Getlin) on the scandal behind the re-
development efforts for the Erie Canal, the 363-mile-long
historic waterway between Albany, NY and Buffalo. One
developer was granted rights on gobs of land for just $30,000
while 32 others were entirely shut out of the process. The whole
world is dirty, but then long-time readers already knew this.
–U.S. News had a cover story on charities for its 12/8 edition
titled “Who’s Minding the Till?” It discussed how the non-profit
world is shaken by corruption and at first I thought, ‘Boy, these
guys are sure ripping me off.’ But then I realized they still
missed the big point. Executives hide behind charities for self-
gratification and promotion for the purposes of hoodwinking the
public into believing they are really fine, upstanding individuals,
when all they really are is dirtballs.
–Former astronaut Buzz Aldrin, writing in a New York Times
op-ed piece, urged President Bush to not just go for a new moon
mission, but rather build a platform in the low gravity space
between Earth and the moon. This is the best way, he argues, to
work towards a relatively inexpensive system for exploration
elsewhere, including Mars. Aldrin also believes that from a
geopolitical standpoint the United States should form an alliance
with China in this regard now that we know it has the technology
to get the job done. An intriguing idea…though I’d wait a few
years to see what direction President Hu takes on issues like
Taiwan and human rights in general.
–Finally, friends, this year I broke down. My Christmas party is
earlier than normal and that meant that if I got a fresh tree this
past week it would dry up before January. So I went to Home
Depot and purchased my first artificial tree! And I mean to tell
you, I will never buy a fresh one again. Yup, it’s a 6.5 foot
Chinese (Hong Kong) model (#MYA-T-1044/450CL), complete
with lights and all in just three pieces. And everything works.
Granted, it doesn’t smell like Christmas, so I sprayed some Jack
Daniels on it………………………..just kidding!
—
God bless the men and women of our armed forces.
God bless America.
—
Gold closed at $407
Oil, $30.73
Returns for the week 12/1-12/5
Dow Jones +0.8% [9862]
S&P 500 +0.3% [1061]
S&P MidCap -0.8%
Russell 2000 -1.4%
Nasdaq -1.1% [1937]
Returns for the period 1/1/03-12/5/03
Dow Jones +18.2%
S&P 500 +20.7%
S&P MidCap +30.8%
Russell 2000 +40.7%
Nasdaq +45.1%
Bulls 56.8
Bears 21.6 [Source: Chartcraft]
Have a great week. Keep on shopping.
Brian Trumbore
