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Wait 24 Hours
Events happen so quickly these days and the first report is often
inaccurate. For example, just last week I posted my column
under the impression that the Saudis had found Paul Johnson’s
body. A few hours later this proved not to be the case, adding to
the misery for his family. Or take my comment that I just wished
the U.S. would fight back and destroy the nest of vipers that is
Fallujah. Saturday afternoon the military responded with what
proved to be the first of multiple strikes against al-Zarqawi’s
safe houses.
I use these examples as a way of bringing home the point that the
June 30 date to handover authority to the Iraqis, while important,
is but one day. The story on July 1 could be very different from
July 2, let alone August 10 or October 15. There may be a few
soaring highs, such as killing Zarqawi, but then the following
day may find Iraq’s prime minister with a bullet in his head.
Today, though, Iraq has to deal with the stark realities. The
security forces are in shambles and but a fraction of what we had
been told they’d be by now. The reconstruction effort is a mess
and it’s obvious the average Iraqi is going to have to deal with
120 degree heat and no air-conditioning for large portions of the
day. Here, the lack of security and the constant ambushes have
led to the withdrawal of key contractors from around the world.
And then you have stories that don’t receive the same headlines
as the attacks, such as the fact the Kurds are migrating back to
reclaim lands taken by Saddam, evicting Iraqi Arabs in the
process and only inflaming tensions.
So in many respects June 30 is but another day for the average
Iraqi just trying to get by while avoiding the shrapnel. President
Bush, in commenting on Paul Johnson’s beheading, echoed his
now familiar refrain, “They’re trying to intimidate the world…
America will not retreat.” But so often our actions say
otherwise. At least the past few days the U.S. has begun to fight
back and Prime Minister Iyad Allawi has vowed to pit his forces
against the insurgents, immediately.
The future of the country, and the entire region, dictates we take
the fight to the terrorists if we are to ensure that those who have
given their lives did not die in vain. But as support slips in the
U.S., let alone in the other nations standing tall with America,
President Bush has to ignore the coming election and the
numbing television pictures. We will win this war, but only if he
leads. The American soldier deserves the chance to avenge the
deaths of his brethren, and in so doing perhaps give Iraqis a
better future.
Wall Street
With the Dow Jones solidly above the 10000 level and with the
improving economy beginning to have a positive impact on some
of the president’s poll #’s, at least those relating to the topic, to
me it remains the key figure when forecasting the result in
November. A Dow above 10000 signifies growth, a not overly
aggressive Federal Reserve due to the fact inflation isn’t going
crazy, and a relatively stable geopolitical picture. A Dow below
10000, say in mid-October, means the Fed has either raised the
federal funds rate more than expected due to big inflation
numbers this summer (thus throwing both the stock and bond
markets in a tizzy), China’s outlook has grown cloudy, or
terrorism has hit closer to home, to cite but a few potentialities.
But for now, while market participants have concerns such as
those above, the solid economy and strong earnings have kept the
blue chips above the magic mark. It helps that the Federal
Reserve continues to talk of a “measured” approach in raising
interest rates, but I’ll hold off on further comments here as we all
await the language from Wednesday’s upcoming Fed policy
statement that will accompany the expected hike in rates.
In the meantime, let’s readdress the situation in the real estate
market, which I still maintain is a bubble while others such as
PIMCO’s Bill Gross call it a mini one. Actually, a report from
the New York Fed said there is no bubble in this sector, claiming
that those in the bubble camp are forgetting the impact of
historically low mortgage rates. But as we’ve seen recently
the picture won’t always be so rosy and despite more good news
on the home sales front last week (up another stupendous 15%
for new ones in May) I keep going back to the issue of
affordability.
Edmund Andrews had an excellent piece in the New York Times
addressing this and other facets, quoting in part economist Mark
Zandi who opined “Many people got into their homes by the skin
of their teeth.” To buttress this argument, check out these
figures.
In 1995, subprime mortgages (people with poor credit ratings)
accounted for $17 billion of the market. Today it’s $195 billion.
And in 1995 there was $1 billion in no-money-down loans versus
$80 billion today. These aren’t insignificant numbers and as I’ve
always argued values don’t necessarily have to go down, they
just have to stay flat for a few years to have a major impact on
the wealth effect and thus consumer spending, because in most
parts of the country we have been conditioned to expect 6-8%
appreciation per year on our #1 asset. Any significant spike in
rates would only exacerbate the situation.
Street Bytes
–A late sell-off Friday, thanks to the ever present program
traders and rebalancing in major indices, pulled the Dow Jones
into negative territory for the week, off 0.4% to 10371, but
Nasdaq finished up, gaining 2% to 2025.
–U.S. Treasury Yields
6-mo. 1.68% 2-yr. 2.74% 10-yr. 4.65% 30-yr. 5.33%
Bill Gross now says Treasuries on the short end offer some
value, believing the recent rise in this part of the curve has
discounted much of the Fed’s intentions over the rest of the year.
Gross also claims the mini-housing bubble will temper Fed
behavior. I would argue the coming collapse in China (’05) is
more of a key when it comes to the Fed.
–Watch out for Friday’s employment report. It’s getting lost in
the shuffle.
–Energy: Prices dropped a bit on the heels of a further build in
inventories, as well as the end of a strike by oil workers in
Norway. The stocks, however, had a strong week because even
as the price of crude now sits solidly below $40, there is
increasing confidence it will remain above $30 and thus earnings
expectations may still be far too low. I don’t disagree with this,
but I maintain the big money has been made in the group, not
that another 10-15% wouldn’t be satisfying to most. China,
incidentally, reported that for the month of May its oil imports
were 3.8% less than in April, potentially an early sign that the
slowdown has begun.
–In a major decision, a federal judge ruled that a sex
discrimination suit against Wal-Mart deserved class-action
status, making it the largest civil-rights action against a U.S.
employer. Up to 1.6 million current and former female
employees could claim they are paid and promoted far less than
men doing similar work and from what I’ve seen of the case, it’s
a slam dunk for the ladies. But Wal-Mart will make sure this is
tied up for the next decade.
–SBC said it ‘may’ invest up to $6 billion in a new fiber-optic
network, depending on regulators and testing of new technology.
As products are increasingly bundled, the Baby Bells are in a
death match to compete with cable and the Internet for phone and
digital television access.
–In a similar vein, shares in AT&T continue to collapse as
severe competition cuts further into revenues, now projected to
be down another 14% in 2004 from 2003’s levels. S&P is
considering cutting the company’s long-term debt rating to junk
status.
–And staying in the sector, MCI announced another round of
layoffs, some 2,000. If you’re having trouble keeping up, that’s
in addition to 13,000 announced earlier in the year.
–A liquefied natural gas terminal was approved for an area near
Freeport, Texas. This is a major positive as far as the future of
this industry. Some communities are afraid of non-existent
dangers in this world of terrorism.
–Senator Richard Shelby, chairman of the Senate Banking
Committee, is adamant that stock options be expensed.
–Japan’s top banks were upgraded by S&P for the first time
since the early 1980s, another big positive for the economic
outlook here.
–Mexico upped its growth forecast to 4% for 2004 thanks to the
expanding U.S. economy.
–Inflation Update: USA Today is raising its price from 50 cents
to 75, undoubtedly causing chaos at airport newsstands. And
much is being made of the fact college tuition increases are
‘only’ going to be in the 6-10% range, not last year’s 14%+.
Still hefty, I think you’d agree, especially when wage gains
are nowhere near those figures.
–Web Dirtball of the Year candidate: The 24-year-old AOL
employee who ripped off 92 million screen names and sold them
to spammers.
–The mutual fund industry is crying sour grapes over the SEC’s
new ruling that fund boards need to be run by independent
chairmen. The SEC is right.
–The pending indictment of Enron’s Ken Lay will obviously
hurt President Bush a bit and the Kerry campaign should be
expected to take advantage of the Bush-Lay relationship within
24 hours when it occurs. [Not that the Bush folks don’t have
enough targets of their own.]
–Jean-Marie Messier, former chairman of Vivendi Universal and
no relation to hockey great Mark Messier, was held by French
police this week as part of a widening fraud investigation into
Messier’s possible manipulation of Vivendi’s share price while
he was in control.
–Tiffany sued eBay for allowing counterfeit Tiffany items to be
sold on the site. Tiffany claims up to 73% are knockoffs.
–Tourism to the new gambling mecca of Macau is exploding, up
50% in just the 1st five months of 2004, including your editor’s
visit. And thanks to “Lord of the Rings,” tourism in New
Zealand now represents the largest sector of the economy here,
far exceeding the former #1…the dairy industry.
–The trial of former Yukos chairman Mikhail Khodorkovsky
and his associate has been adjourned until July 12 amidst rumors
of a possible settlement on the Russian government’s claim that
Yukos owes $3.4 billion in back taxes. What is truly
embarrassing is to see the defendants in a metal cage in the
courtroom…for those who might harbor illusions the Putin
regime isn’t increasingly totalitarian.
–Mike Clowe had a piece in Crain’s New York Business on
ethics, or lack thereof. According to surveys, 70% of both high
school and college students admit to cheating so Clowe
correctly opines that this is another future generation of business
leaders that may be involved in a huge amount of unethical
behavior.
–My Portfolio: No changes, still about 80% cash. [Week to
week, the equity portion is 18-22% depending on price
movements.] But I haven’t reviewed the actual stock holdings in
some time, let alone for my new readers, so here’s the deal.
[Except in the case of country funds, it has always been my
policy not to list individual stocks that I own.]
After reducing my equity exposure from about 50% to the
current 20% level last April, I do still hold two energy issues
(though this is only 6% of my overall portfolio), a
pharmaceutical comeback play, the Singapore closed-end fund
(at a steep discount to NAV), an Aussie natural resources giant,
and five highly speculative issues, including an Internet
telephony play. These last five took a big hit with the fall in
small caps about two months ago but they’ve rallied back.
Anyway, all the issues I sold in the spring are still below the
prices at which I jettisoned them except for one, my oil refiner
that was also far and away my biggest holding. I had purchased
long-term call options on this particular company at $10 and sold
them at $30, one of my better investments, but since then the
calls have risen to $43. Even though the expiration wasn’t until
January, I just couldn’t take the chance that it would erode and
I’d do the same thing all over again. In fact, if this particular
stock goes much higher, I could be tempted to buy ‘puts’ on it,
especially if I become more convinced the global economy is
headed for a downturn in 2005.
Foreign Affairs
North Korea: For the first time, the Bush administration put a
serious proposal on the table at the six-party talks with South
Korea, China, Japan and Russia. Under pressure from those four
to advance the ball, the White House offered to resume delivery
of heavy fuel oil (most of it from the other four nations) in
exchange for Pyongyang’s dismantling of its nuclear weapons
programs, with Kim Jong il having three months to comply. But
as of this writing the North turned it down and their
representative noted that some in his government want to test one
of the nukes, though officials have threatened to do so many
times before. Right now, there is simply no reason for Kim to
negotiate ahead of the U.S. election.
Iran: International Atomic Energy Agency chief Mohamed
ElBaradei described the situation in Iran and elsewhere as a “race
against time” to prevent nuclear weapons from falling into the
wrong hands, but by week’s end, following an earlier harsh
censure levied against Tehran for covering up details of its nuke
program, the Iranian government basically said ‘stick it’ in
stating it will resume its weapons efforts, including taking steps
important to the uranium enrichment process. So in the case of
both Iran and North Korea, two members of the ‘axis of evil,’
nothing positive has transpired since President Bush first singled
them out 2 ½ years ago.
[As for the seizing of the eight members of the British navy after
they strayed into Iranian waters, thankfully it proved to be a non-
event as they were released unharmed, but even here the mullahs
showed their true colors by blindfolding them for public
consumption.]
Saudi Arabia: Call this the ‘show me country.’ Show the West
you are serious about fighting terrorism, ye Saudi princes. Of
course like everything else we will only know over the passage
of time, but the Paul Johnson incident was disturbing in more
ways than the obvious. By week’s end Crown Prince Abdullah
was offering limited amnesty for those al Qaeda types who
would turn themselves in. Who knows if this is smart policy, or
if the kingdom is really serious?
China / Hong Kong: Here’s a twist. The U.S. would like to
release 22 Chinese-Muslim prisoners currently being held at
Guantanamo Bay, but Amnesty International is saying they face
execution if returned to China. The U.S. can’t find other nations
to take them. And all eyes will be on Hong Kong July 1 to see
what kind of turnout pro-democracy forces produce for their now
annual demonstration against the central authority. Last year it
was 500,000…this time the early estimate is for 300,000. I have
to admit if the projection comes about it would be a surprise to
me after my visit here two months ago. Of course I wish these
good folks the best as they battle the communists who seek to
take away their freedoms.
South Korea: President Roh deserves a ton of credit for standing
up to the opposition in declaring that his nation will still send an
additional 3,000 troops to Iraq, even as he fights Washington on
the issue of North Korea. The beheading of Kim Sun-il was a
watershed event and Roh is exhibiting true courage.
Russia: The republic of Ingushetia, bordering Chechnya, was
rocked by a massive series of attacks perpetrated by 300-500
Chechen terrorists that left over 90 dead, making a mockery of
President Putin’s claim that the war in Chechnya was essentially
over.
Israel: The Palestinian Authority is upset over the proposed role
for Egypt in securing Gaza’s borders in the event of a complete
Israeli pullout from the territory, because Egypt is first
demanding that Yassir Arafat reform his security forces and
renounce terrorism. For his part Israeli Prime Minister Sharon
refuses to negotiate with the Palestinians while Labor Party
leader Shimon Peres has said he will only back Sharon if the
prime minister does negotiate.
Meanwhile, clearly Israel’s hard line policy of the past few years
is working when you look at the 75% decline in attempted
suicide attacks thus far in 2004 vs. 2003. Aside from the
targeted assassinations and the security fence, some 6,600
Palestinians have been imprisoned. I can only assume they
deserve to have been.
India / Pakistan: These two have taken a significant step towards
reducing the risks of a nuclear war by establishing a hotline.
Separately, the U.S. will give India more military support,
including the transfer of high-tech know-how, but only if New
Delhi supports the Bush administration’s missile defense system.
Turkey: Little is slated to be accomplished at the NATO summit
this week in Istanbul, but the bombings in both Ankara and
Istanbul have everyone on edge. The one in Ankara was a bit
surprising to me because it was staged at the same Hilton Hotel I
stayed at in May 2002. It’s next to the Iranian embassy and I
commented in this space (WIR 6/1/02), “I…realized my Hilton
probably wouldn’t be bombed. Too close.” Well, I was wrong.
Canada: Big election on Monday as Prime Minister Paul Martin
and his Liberal Party stagger to the finish line, still suffering the
effects of a campaign funding scandal that had its roots under the
leadership of former Prime Minister Chretien (as well as then
finance minister Martin). According to the latest poll the
Liberals and Conservatives (led by Stephen Harper) are in a dead
heat. But the real kingmaker could be Bloc Quebecois, at 11%
nationally and 50% in Quebec. Incidentally, the #1 issue in the
country is healthcare.
But for a native view, here are the thoughts of my friend Harry
K., up Toronto way. Harper is deemed “scary” and too friendly
with the Bush administration.
“Apparently wishing for cordial relations with our best friend
and biggest trading partner is somehow indicative of a ‘secret
agenda.’ Oddly enough, his platform is no more ultra-
conservative than that of the U.S. democrats. In fact it’s an old
saying up here that all the Canadian political parties are well to
the left of the democrats, even the so-called ‘right wing.’ The
whole thing is reminiscent of France, where Chirac once
characterized an election as a choice between the ‘crooks and the
fascists.’ Here it’s a choice between the crooks, the socialist
wing-nuts, and a moderate, middle-of-the-road party with slight
Libertarian leanings that has been demonized as being right-wing
warmongering right-to-life Christian fundamentalist wackos.”
Good luck, friends.
Britain: According to two polls, voters here would reject the new
European Constitution 49 to 23 percent and 57 to 28. The
people don’t like the idea of ceding sovereignty on issues like
taxes. A referendum will probably take place in 2006. [Other
referendums are already slated for Denmark and Ireland, for
starters, meaning ratification of the document is far from certain.]
The new European court would interpret supremacy of the
constitution over Britain’s laws so you can see why one
opponent of Prime Minister Blair would call Blair’s support
“appeasement.”
Zimbabwe: A document titled “Solution to the White Problem”
was uncovered. President Mugabe’s thugs had developed a plan
whereby they would stage bomb attacks, blame the opposition
MDC, declare a state of emergency, and then give whites 48
hours to leave. One must assume this sinister plot has now been
shelved.
Philippines: After an interminable vote count, President Gloria
Arroyo’s reelection was finally certified.
Singapore: I just want to thank those of you who have been
forwarding reports on the Strait of Malacca since my trip to the
region in May. No doubt securing this narrow strip and the oil
that flows through it is as important as any other mission the U.S.
and its allies have. I also happened to see a story on how
insurance costs among the contractors in Iraq are skyrocketing,
tripling in some instances, and I reiterate that if one tanker is
attacked in the Strait of Malacca, or any other chokepoint for that
matter, rates will more than triple and some shippers could opt to
sit it out for a while, thereby exacerbating any fuel shortages. In
the case of Singapore, it’s doing all it can to protect the tankers
but Malaysia and Indonesia’s cooperation is limited.
Random Musings
–HBO’s “Real Sports” had a terrific piece on Iraq’s soccer team
which somehow managed to qualify for the Olympics. All of us
should be pulling for them in a huge way. But what’s so
frustrating is that the Coalition Provisional Authority has only
granted the squad minimal support and you could see how
distraught the team members are, many of whom were victims of
Uday’s torture when they, heaven forbid, lost a match. The Iraqi
national team is the only thing this nation can unite around and
we shortchange them, a colossal mistake.
–In a Washington Post – ABC News survey, 47% say the war in
Iraq was worth fighting, 52% no. [A USA Today / CNN / Gallup
poll has 54% saying the war was a mistake.] 70% believe there
has been an “unacceptable” level of casualties, however a
growing number see progress in forming a democratic
government. Overall, the president’s job approval is 47% and in
a race including Ralph Nader, John Kerry leads 48-44-6.
But the above referenced USA Today poll has Bush ahead 48-
47-3, though in 17 key battleground states, Kerry has a
substantial lead.
–Vaclav Havel wrote op-ed pieces in the past few days on the
deteriorating situations in both Sudan and Zimbabwe and once
again I have an excuse to tout Havel for U.N. Secretary General.
–NATO’s failure in bringing in Bosnian Serb leader Karadzic as
well as General Ratko Mladic is astounding. The Bosnian Serbs
are supposed to arrest them, but since they’re unwilling to do so,
NATO must step in.
–The Wall Street Journal reported on growing concerns over
herb-drug interaction. For example, studies show using a
compound such as St. John’s wort may compromise the
effectiveness of other drugs one may be taking. Even fortified
foods could be a problem. As always, read the warning labels
and consult your doctor.
–British researchers now assert that smoking knocks 10 years off
one’s life, but if you quit by age 30 you cut your risks of an early
death by almost 100%. If you quit by age 50 you can still reduce
the risks by half.
–The Supreme Court ruled that patients cannot sue their HMO in
state court for negligence or malpractice on ordinary benefits
decisions, such as refusing to pay for treatment doctors
recommended. The HMOs claim the added costs would be
prohibitive and millions more would be thrown off the rolls as
employers either dropped plans or passed the increase on to
employees.
–Last week I wrote of the surge in kidnappings in Mexico. It
turns out Argentina has a similar problem with the figure
growing from 46 in 2001 to 306 in 2003, partly due to the
economy’s collapse in ’02.
–Ah yes, it’s great to be a resident of New Jersey and pay sky
high taxes of all kinds. This week the legislature handed
Governor Jim McGreevey the victory he sought, a new
“millionaires” tax on income above $500,000; which isn’t really
a million but that’s the way we calculate such things in the
Garden State. McGreevey claims the revenue will go towards
offering greater property tax relief, like $250-$400 for us
schleps. What will I do with my newfound largesse? Perhaps
some premium beer is in order. Stay tuned.
–One of the more arrogant people on the planet, Connecticut
Governor John Rowland, was forced to resign after accepting
free renovations and other gifts from state contractors in
exchange for government business, and then lying about it.
Rowland would have been impeached had he chosen to fight the
charges.
–In another week bereft of truly good news, Burt Rutan’s
SpaceShipOne provided it as pilot Mike Melvill became the first
citizen to take a private manned spacecraft to the edge of space,
62 miles up. The privatization of space is now in full swing and
this can only be viewed as a good thing.
–Note to my British readers: Boy, David Beckham sucks.
[In case you haven’t been following the Euro 2004 soccer
championship, Beckham missed two critical penalty kicks,
including one in a quarterfinal loss to Portugal. As Trader
George said, his 11-year-old daughter Nicki could have done a
better job.]
–School officials are increasingly concerned about bullies using
camera phones to embarrass students. Kids have always been
cruel and now they have a new weapon.
–Which brings me to this week’s sign the apocalypse is near.
From the New York Daily News:
“The tony suburb of Scarsdale is being rocked by a sleazy
amateur video of two 14-year-old girls being hounded by their
high school pals to have sex with each other.”
The girls were drunk and the case is being investigated by the
District Attorney’s office. This stuff is sick, but par for the
course in this whole area, one I trashed last week in this space.
Of course we also see examples of similar behavior nationwide.
And once again, what the hell were the parents doing?
–Oh well…might as well finish up with the latest quotations
from Bill Clinton, he being responsible in no small part for the
moral decay.
“Becoming a good person is a lifelong effort.” [No it’s not.]
“I was incapable of inhaling.” [If this were true, you’d be dead;
the ability to inhale being rather important in the breathing
process.]
“I have said more about my personal life than probably any
public figure should.” [Not that there wasn’t any cause to, Mr.
President.]
Watching him this past week has been pretty funny for some of
us. OK, more like a nightmare. But I liked the following bit
from an editorial in the Washington Post, not exactly a bastion of
conservatism.
“So even as Mr. Clinton’s book overflows with apology for his
relationship with Monica Lewinsky, the former president still
seems indignant that anyone would have investigated his public
misconduct – that is, his lies under oath, including to a grand
jury, and other affronts to the justice system. In fact, you
wouldn’t know from reading Mr. Clinton’s book that he had lied
under oath, much less that he had at least tacitly encouraged
others to as well.”
And then we have this bit from Clinton’s memoirs, referring to
Martin Luther King Jr.’s 1963 “I Have a Dream” speech, which
Clinton watched on television.
“I started crying during the speech and wept for a good while
after Dr. King finished. He had said everything I believed, far
better than I ever could. More than anything I ever experienced,
except perhaps the power of my grandfather’s example, that
speech steeled my determination to do whatever I could for the
rest of my life to make Martin Luther King’s dream come true.”
Ah, in case you didn’t know it, Bill had turned 17 four days
earlier.
—
God bless the men and women of our armed forces.
God bless America.
—
Gold closed at $403…the first close over $400 in 10 weeks.
Oil, $37.55
Returns for the week 6/21-6/25
Dow Jones -0.4% [10371]
S&P 500 -0.1% [1134]
S&P MidCap +1.5%
Russell 2000 +3.0%
Nasdaq +2.0% [2025]
Returns for the period 1/1/04-6/25/04
Dow Jones -0.8%
S&P 500 +2.0%
S&P MidCap +4.8%
Russell 2000 +5.5%
Nasdaq +1.1%
Bulls 54.6
Bears 18.6 [Source: Investors Intelligence / Chartcraft]
**I am moving StocksandNews to a new server this week and
there is a chance the site will be down for a spell during this
migration, if so, between Wednesday and Friday. Don’t worry.
I’ll be back for next week’s review.**
Brian Trumbore
