[Posted 7:00 AM ET]
Wall Street
I have ridiculed the Federal Reserve over the past few months for
its seemingly crazy forecasts on growth for the U.S. economy.
You’ll recall that just a few weeks ago Chairman Alan
Greenspan was talking of a 4.5-4.75% clip for 2004 and then we
got the 3.0% number for the second quarter. Other surveys that I
wrote of on 7/10 had 4.6% and 4.7%. Now a group of 55
economists for the Wall Street Journal has just lowered their
third quarter estimate from 4.4% to 3.8%, a huge drop as these
things go.
Meanwhile, even as Dell Computer issued another solid earnings
report and forecast, far more are less than sanguine. Cisco’s
John Chambers offered that “CEOs are a little more cautious in
their outlook” (a major downer from this spinmeister), while
Hewlett-Packard, National Semiconductor, Corning and even
luxury goods maker Tiffany were all lowering their forecasts.
But while the Federal Reserve raised the key funds rate 25 basis
points (1/4%), as expected, the accompanying statement said the
economy would reaccelerate, blaming soaring energy costs for
the recent soft patch. I don’t know what the Fed is smoking but
you could fool me. The consumer appears increasingly tapped
out and there are signs that real estate, the major source for
consumer spending, has peaked.
Worldwide, the picture is also turning cloudy. June factory
production around the globe actually fell and Japan appears to
have suddenly hit a wall as second quarter GDP here missed
estimates by a mile.
And then you have China. Industrial production was up 15.5%
for the most recent recording period. Spectacular, right? Yes,
but also the slowest in a year. The government is trying to
engineer a soft landing by restricting lending, but it’s the top-
down central government vs. bottom-up local officials, the
latter desiring each town and city to be a model for the world,
complete with a world class airport, hotels, office complexes…
you get the picture. Hard as it tries, China’s finance ministry
won’t be able to prevent the bubble from popping in 2005.
It really is all about the U.S. and China these days, when you boil
it down, that and energy. Crude oil continued to surge, now over
a once unfathomable $46. Worldwide demand, particularly from
the two behemoths, is basically outpacing supply. The Energy
Department now estimates global demand at 82.2 million barrels
per day and this is forecast to rise another 1.5% in 2005. Of
course all such agencies have been way off in these estimates
over the past year and have been forced to continually raise
them.
OPEC, for one, has seen its production peak at around 29 mmbd
and while the Saudis proclaimed this week that they can pump
more, no one believes them. Plus, you have Sunday’s key
referendum on President Chavez in Venezuela, the ongoing
Yukos matter in Russia (though this is settling down a bit) and
the constant terror threats on Iraq’s pipelines.
And now…get ready for winter. The government is already
forecasting a 10-20% rise in heating oil prices. Is there a
solution? Not short term, including messing around with the
Strategic Petroleum Reserve. The U.S. is now importing 60% of
its oil needs, we have no energy policy and even if we did, oil is
still going to dominate the economy for the next 20 years.
But in talking of economic activity, I am not forecasting a
recession, yet, just understand 2.5-3% growth is a far cry from
the experts’ original estimates. It’s why stocks have struggled
so and as I spelled out in January, deceleration would lead to
less than expected profits and major disappointment. Now,
though, in the case of Nasdaq we have already hit my yearend
target of 1760, with the index finishing the week at 1757. The
Dow Jones and S&P 500 still have a ways to go to reach my
goals here of 9500 and 975.
What it does mean is that I think the major damage has been
done, barring a large terror incident, though I don’t see a
compelling reason to be an aggressive buyer either. Until we get
through the election period and the security threat (the most
immediate one, that is), I’ll sit on my cash and hope for a better
environment later on.
Street Bytes
–The major averages finished mixed after hitting new lows for
the year. The Dow Jones only added 10 points to close at 9825,
while the S&P tacked on just one to 1064. Nasdaq lost another
percent to the aforementioned 1757 mark and is now down
12.3% for the year. Below are the closing highs and lows for
2004 thus far.
Dow Jones…10757 / 9814…currently 9825
S&P 500……1157 / 1063…1064
Nasdaq………2153 / 1752…1757
Russell 2000…606 / 517…517 [15% off the high]
–U.S. Treasury Yields
6-mo. 1.71% 2-yr. 2.45% 10-yr. 4.22% 30-yr. 5.02%
Rates were largely unchanged following the anticipated move by
the Fed and a tame number on producer prices. I believe that
economic fundamentals will force Greenspan to take a breather
when the board next meets on September 21. But PIMCO’s
Bill Gross feels the Fed won’t stop at 1.75% (currently we
reside at 1.50%) and he’s turned very bearish on the 10-year. I
see deflation as the looming threat in ‘05, Gross could go either
way.
And not for nothing but the U.S. just hit another record on the
trade deficit front and the dollar tanked on Friday. I’ll have more
on this next week, but for now look for the Q2 GDP figure to be
revised downward.
–Argentina: The government announced it will meet its debt
service payments to the IMF, but it is still trying to restructure
some $100 billion in other debt without IMF backing. The latest
proposal is to offer creditors 25 cents on the dollar (it had been
far less than this) and bondholders continue to balk. Simply put,
Argentina is going nowhere unless it settles and moves on.
Otherwise, it will never attract new, desperately needed
investment.
–When I mentioned Germany’s high unemployment rate last
time, I should have noted it’s 18.5% in the former East Germany.
–Japan’s Mitsubishi Tokyo-Financial Group is merging with
UFJ Holdings. If completed it would result in the world’s largest
bank. Separately, an accident involving superheated steam at a
nuclear power plant killed four. This is a huge story here
because the nation’s nuclear industry has had a series of
accidents, shutdowns and scandals that threaten future plans.
Three reactors are under construction with another 14 on the
drawing board and you know how dependent Japan is on outside
sources of energy.
–Both Republicans and Democrats treat Halliburton as a
political football but the simple fact is there are major questions
regarding this company’s operations, and if you’re a Republican
you can’t simply deny it. The Pentagon, after all, is trying to
account for $1.8 billion a Halliburton subsidiary billed it out of a
total of $4.2 billion thus far for the Iraqi operation. The issue is a
huge winner for the Kerry campaign.
–Crime Blotter: A former Morgan Stanley broker, Carlos Soto,
was permanently barred from the securities industry after
admitting he stole up to $56 million from clients, some of which
he has returned, in an investment scheme based out of Puerto
Rico. Trial to follow.
Two former BNP Paribas executives pled guilty to stealing $12
million from their employer in a series of moves involving junk
bonds and distressed real estate. They face significant jail time,
though the funds have been returned.
And an executive of Lipper Holdings (not related to Lipper
Analytical) pled guilty to charges of overstating the value in
various hedge funds by $100s of millions. The dirtball faces up
to 10 years.
–Speaking of hedge funds, the 8th-largest in terms of assets as of
12/31/03, Andor Capital Management, has lost half of its
holdings, both from depreciation and investor withdrawals. The
tech offering in particular has been slaughtered by some terrible
bets on the sector…bearish in ’03 when Nasdaq finished up 50%
and bullish in ’04 as Nasdaq has gone into reverse.
–Toys ‘R’ Us may sell its 1,200-store retail chain, the victim of
price wars from the likes of Wal-Mart and Target. WMT now
has 23% market share, vs. TOY’s 15%, and a much lower cost
structure. The big question is; who would want to buy the
stores? Not all of them make sense from a pure real estate
standpoint.
–I have a piece on the great oil well firefighter, Red Adair, up on
my “Wall Street History” link, Adair having recently passed
away.
–Donald Trump announced that his Trump Hotels and Casinos is
attempting to restructure under Chapter 11. Of course he spun it
like it was no big deal…and it is. But then we also learned the
Donald is getting into the high-end clothing business, an idea
pitched to him by Sheldon Brody who said “I think the Donald
Trump brand will relate to the up-and-coming business people
between 19 and 35.” Huh? 19? I was tapping a keg at 19. Just
who the heck is he talking about?
–The average 401(k) balance was $76,800 as of 12/03 according
to a report by the Investment Company Institute. The average
account is 45% in equities.
–Lucent’s share price has been tumbling anew over concerns the
capital spending recovery is nowhere near as robust as forecast.
And due to all the rain in the area, its massive lawn is now
flooded and subject to root rot….so my drive-by inspection
revealed. Meanwhile, telecom equipment competitor Nortel
announced it will release “limited preliminary audit results” for
the first two quarters of ’04. This saga just goes on and on and
on. Someone should throw one of those roach bombs into the
executive suite and clean ‘em all out in one fell swoop.
–S&P issued a warning on Greece’s credit rating thanks to the
Olympics and cost overruns. This is unfair and just piling on.
The nation deserves a ton of credit for completing the job; even
as doubters like yours truly said there was no way they could.
–For a bunch of soon to be $billionaire geniuses, the co-founders
of Google sure were idiots to do a Playboy interview before the
company actually went public, thus potentially violating
restrictions on the “quiet period” before an offering is brought to
market. The IPO will proceed, however.
–Actress Fay Wray died at age 96. Her first film in 1923 was
“Gasoline Love,” making her the first spokesperson for the SUV
crowd. Bet you didn’t know that.
–My portfolio: True to my word I bought some shares in a
company with most of its operations related to Portugal (the
balance is in Brazil). It’s not hard to figure out which issue it is,
but with the exception of country funds, I don’t divulge
individual stock holdings. I’m still 75% cash.
Foreign Affairs / War on Terror
Defense strategist Robert Killebrew wrote that al Qaeda needs a
state to truly wreak havoc and thus “transmute terrorism into
political legitimacy” by attracting disaffected Muslims.
“Preventing al Qaeda’s successful transition to a new stage of
political power is the United States’ greatest strategic challenge
today.” [Washington Post]
Of course not only Iraq but Iran would fit the bill (let alone
Pakistan) and the mullahs would readily comply, I imagine. As
to its burgeoning nuclear weapons program, and the ultimate
nightmare, the marrying of fundamentalists and the bomb,
former CIA Director Robert Gates believes Iran “can go with a
weapon whenever they want to.” So much for the 2-3 years
timeframe being parroted in some quarters. The facilities are all
spread around, including urban areas, so it’s hard to envision
where a surgical strike by the U.S. or Israel can take care of the
problem. And as Iran’s ambassador to the UN said when asked
about possible sanctions against his country, “Our integrity is not
to be bargained or up for sale.”
As I noted a few weeks ago, also keep your eye on the Kurds. A
rebel group killed at least two in bomb attacks on Istanbul hotels
this week and recently Turkey’s Prime Minister Erdogan met
with his counterparts in Tehran. Both nations share an interest in
keeping the Kurds in check and if the U.S. can’t by ensuring
their rights in Iraq, the Kurds will be a huge problem.
And in Iraq itself, the U.S. did what some of us have been calling
for over the past few months in taking the fight to Moqtada al-
Sadr’s band of wackos, but as I write this there is another let up
in the fighting due to concerns over damage to the Imam Ali
Mosque in Najaf. [Hold me back on this last bit.]
Finally, to end on an upbeat note, we congratulate the Iraqi
national soccer team for its defeat of Portugal in the Olympics,
one of the great stories in all of sports in quite some time.
Hopefully the team’s performance can provide a lift to an
otherwise depressed populace.
Russia: A Russian defense analyst, writing in the Moscow
Times, says it’s just a matter of time before the nuclear weapons
security apparatus in his country breaks down. [If it hasn’t
already, I would add.] “If nukes get loose, Russia will be the
first to suffer. Russia urgently needs Western aid and technology
to help build a modern security and nuclear control system.” But
at this point, I’m not so sure President Putin wants our
involvement.
China: A not so funny thing happened the other day at the Asia
Cup soccer final in Beijing. Japan beat China, 3-1, thanks in
large part to a disputed 2nd goal by Japan. But what is worrisome
is the vicious reaction by many in the crowd of 60,000 who
threw bottles and burned Japanese flags. It goes back to World
War II and Japan’s occupation of China and as I’ve written
before, simmering below the surface here is growing
nationalism among its young people. China’s communist
leadership can tap into it at a moment’s notice, specifically to
attack Taiwan over the short run and, down the road, Japan, the
latter precipitated by the fight over energy we should all know is
coming.
Afghanistan: Secretary of Defense Donald Rumsfeld paid a
surprise visit to check out the situation before the October 9
presidential vote. But Rumsfeld said the U.S. was committed to
go after the poppy trade. I’ll believe it when I see it, with the #1
problem being what is our alternative solution for the farmers?
Singapore: Prime Minister Goh, in power since 1990, turned over
the reins of government to Deputy Prime Minister Lee Hsien
Loong, son of patriarch Lee Kuan Yew who was Singapore’s
first leader from 1965-90. As I heard while there last spring,
some of the natives don’t like the political cronyism here, but I
say, hey, it works. Goh did a superb job through some very
tough times and he went out with the economy growing at a
stupendous 12.5% in the second quarter. [I’m assuming this
included my intake of Tiger Beer.] Singapore does nonetheless
face the twin problems of manufacturing going to cheaper
destinations and the fact it remains smack dab in the middle of
Asia’s terror central.
Brazil: President Lula’s approval rating is rising, after a dismal
stretch, on signs his economic reforms are beginning to have a
positive impact and recently, the U.S. Army awarded Lockheed
Martin and Brazil’s Embraer a major $879 million contract for a
new spy plane, down payment on a deal that could total $8
billion over 20 years. [Jet Blue also placed a large Embraer
order for commercial craft.] Despite the call from protectionists
such as California Congressman Duncan Hunter, this is a good
thing for America. We need competition to ensure the highest
quality at the best price for U.S. taxpayers. And consider this…
Embraer will build a new factory in Jacksonville, Florida by
2007 as part of the deal.
Random Musings
–“I realize the fact of this affair and my own sexuality if kept
secret leaves me, and most importantly the governor’s office,
vulnerable to rumors, false allegations and threats of disclosure.”
Thus spoke New Jersey Governor Jim McGreevey as he shocked
the political world and announced his resignation.
“Heroic,” “Brave,” and “Courageous” were a few of the words
thrown around immediately after and for many of us it was
enough to make us sick.
No one gives a damn the governor finally came out of the closet.
What I care about is over his three years in office he abused his
power in a hail of corruption. As an editorial in the New York
Daily News put it, “He has presided over one of the dirtiest
administrations in modern times. And that’s no easy feat in New
Jersey!”
Among McGreevey’s many misdeeds, as documented in this
very space, was his spending $100,000 in state funds on a trip to
Ireland early in his term that would have gone unnoticed had the
Star-Ledger not uncovered it, at which point the governor said,
‘sorry’ and had the state Democratic party pick up part of the tab.
[“Week in Review,” 11/30/02.] Or the time McGreevey used the
State Police to collect dirt on Republicans, WIR 12/6/03. Or the
other scandals I’ve catalogued the past few months involving his
best friends and campaign contributors. And now we learn, as
long rumored, that he had his boy toy on the payroll, including,
incredibly, as our state’s homeland security advisor until he was
denied security clearance. It boggles the mind.
This governor has been engaging in one criminal act after
another and he’s now called “brave and heroic”?! No, no, no.
Jim McGreevey’s conduct is indefensible. This story will
continue to explode in the face of those who put him in office
until they wake up. McGreevey will deserve heavy jail time
when it’s all over. Now that would be justice.
–Former Secretary of Defense William Perry believes there is an
even chance of a nuclear strike in the U.S. within this decade, 6
years.
–I posted Senator John Kerry’s definitive foreign policy speech
– which was back in May, not at the convention – on my “Hott
Spotts” link and without comment. Personally, I’m going to try
and hold back on some of the vitriol as the campaign winds
down and as much as possible just present the opinions of others.
From Mort Zuckerman, editor-in-chief / U.S. News:
“The pundits are offering all kinds of reasons why John Kerry
didn’t get the expected bounce out of the Democratic convention.
Despite the fact that Kerry’s acceptance speech was delivered
with authority, conviction, and energy, there’s a simple
explanation for the nonbounce bounce: The speech was too
much like sugarless gum. The taste quickly evaporated because
there was too little substance.
“This was most glaring on Iraq. Kerry would persuade the
world, he said, to ‘share the burden, reduce the cost to American
taxpayers, reduce the risk to American soldiers’ so he could
bring home a substantial number of them. But how? Under what
conditions would he bring the troops home? The next day he
said he would look to substantially reduce our forces in Iraq by
the end of his first term. How? And doesn’t the very suggestion
undermine the perception of American resolve, encouraging the
insurgents to play the waiting game? The fact is that our troops
will be needed in Iraq for a long time. There will be no free and
painless exit.”
William Kristol of the Weekly Standard:
“The truth is this: John Kerry began his political career as an
antiwar activist. He remained one through his Senate career,
opposing President Reagan’s efforts in Central America and the
first Gulf War under the first President Bush. And at heart he
remains one still. Kerry claims he wants to fight the war on
terror. But in key respects he still sounds more like a protester
against, than a prosecutor of, the war.”
Retired Lt. Col. Ralph Peters / New York Post:
“Senator John Kerry promises to be worse as commander in
chief than President Bush on his most indecisive day. If Kerry’s
convention speech can be trusted…he would commit us to a
policy of never acting preemptively, of surrendering the initiative
to our enemies.
“Kerry’s nonsense about never going to war until war is forced
upon us means that we might as well hang a sign on the Statue of
Liberty: ‘Go ahead, hit me first.’”
–70% of U.S. high school students are opposed to a draft, while
by a 44-33 margin they say going to Iraq was the right decision.
[USA Today]
–I have no problem with Porter Goss as director of the CIA.
–General Tommy Franks says “Mission Accomplished” was his
idea as he attempts to take the fall for the president.
–Talk about cocky, Barack Obama was on vacation in Canada
when he learned Alan Keyes was selected to be his opponent for
the Illinois senate seat. Hey, I love Canada, but when you’re
running for political office in the U.S., don’t you think it’s good
PR to stay local? May I suggest the Black Hills of South Dakota.
[Oktoberfest in Deadwood sounds pretty good to me, actually.]
I’m not an Alan Keyes fan, by the way. Years ago I thought,
hey, this guy is different. Then I discovered he’s impossible to
listen to.
–Last Sunday, ABC News had a report from Durham, NC on the
surge in violence there involving gangs; this after my own
comments on the topic the day before. A police official said that
“not enough money was spent on prevention due to the spending
on terrorism.”
But out of nowhere, after my lecture on the Bloods street gang,
my own, placid neighborhood was the scene of an amazing sting
operation. One block from my home, State Police had been
tipped off that four Bloods from towns unfortunately too close
for comfort these days, including Newark, were about to rob a
bank right next to the place where I get my beer. 75 troopers lay
in wait as the four pulled up in two cars. Thankfully, the
authorities did a superb job and no shots were fired. All four
were carrying loaded 9mm semiautomatics with hollow bullets.
As New Jersey’s attorney general said on Thursday, “You don’t
carry hollow bullets unless you want to kill people.”
Now ask me if I sympathize with the plight of our youth in the
inner city…………time’s up.
–Scott P. wrote in reminding me that the African-American
community has a real role model in J.C. Watts. Unfortunately,
J.C. was sick of the Washington scene. But the following may
be a first for this space, quoting a letter to the editor from the
current Sports Illustrated concerning Bill Cosby. It’s from Mark
Olson of Chicopee, Massachusetts.
Cosby recently visited the Basketball Hall of Fame to open an
exhibition on the Harlem Globetrotters and went to Springfield,
MA “to honor a dozen teenage students who persevered in
getting their educations despite difficult circumstances. He had
seen a recent story about two of them in the local newspaper…
The two high school seniors were living on their own, working,
going to school and playing sports. Cosby arranged a whirlwind
college tour for these young men, flying them on his private jet.
When they selected Hampton University, Cosby promised them
that he would pay for their educations and is buying them each a
laptop computer.”
There are good people in this world who make a real difference,
as opposed to the false charlatans of the high-powered charity
circuit. Cosby scores, again.
–I’ve never understood those who oppose the death penalty. The
kids who bludgeoned the six people to death (and a dog) in
Deltona, Florida should be executed, immediately……………
……as should Terry Nichols, but he gets to live. The Oklahoma
City bombing conspirator was sentenced to multiple life
sentences. Judge Steven Taylor said, “You are a murderer and a
mass murderer. There is another word that better describes it.
You are a terrorist.”
But Nichols saw God’s mercy in his escape from execution.
“His hand has been guiding this trial from day one,” he said.
Hell is too good for this scum.
–I told you last February I met George McGovern while he was
walking his dog down on Marco Island. [Hope his home is OK,
after Charley.] McGovern is a pleasant chap. But he is 82, after
all, and it’s beginning to tick me off that he is now running
around blaming Richard Nixon for Vietnam while he humps his
book. Am I forgetting my history or what? Wasn’t Vietnam
initially JFK and LBJ’s war? George?
–I’m going to hold off on extensive remarks concerning Laura
Bush’s comments on stem cell research the other day. Politics is
standing in the way of progress, though both sides have a point.
What bothers me is the fact both Nancy and Ron Reagan never
said stem cells were a cure for Alzheimer’s, as Mrs. Bush
insinuated. But where most scientists believe stem cells can
have the quickest impact is in finding cures for forms of diabetes
and Parkinson’s. There is hope, nevertheless, that Alzheimer’s
could be a beneficiary, too.
In the meantime, I saw where the Alzheimer’s Association is not
receiving the funding it hoped to with Nancy Reagan’s plea
following the president’s illness. I’ve never done this before, but
if you want to contribute, the correct web site is alz.org. The
national organization is out of Chicago.
–Other events this week overwhelmed any extensive comments
I was going to make concerning Bruce Springsteen. My point
last time was simply that he was making a mistake by crossing
the line between having an opinion and using his public platform
to shove it down everyone’s throat.
But Scott P. wrote of his frustration how “it’s getting near
impossible to go to a movie or a concert these days without
some entertainer spoiling it with their wrong-headed politics.”
Jimbo added, “As artists, I love each of (those participating with
Bruce in his upcoming concert series). I have paid money to see
all of them. I never did so to ask them about their politics
and I never would have stopped finding them appealing if I had
learned of their positions based on their casual comments.”
What ticks Jimbo and many of us off is that none of these guys,
with few exceptions, can explore the issues in any depth.
Springsteen, for example, writes with some passion in his New
York Times op-ed piece (reprinted on his web site) but says
nothing about how we are to defeat the terrorists.
But no doubt, Springsteen is a most charitable fellow and we’ll
continue to listen to his music and some will go to his shows. An
old neighbor of mine, Steve G., asked me to lay off the Boss.
[Steve had the sweetest jumpshot on the block, incidentally.] I
will…….unless he gives me another reason to do otherwise.
[That’s coming with the October concerts.]
–According to the American Society of Appraisers, if you install
a pool it increases your home resale value by 35-50% of the
pool’s cost. On the other hand, a new kitchen, complete with a
deluxe George Foreman Grill (my personal touch), recoups 65-
85%.
–Boy, I knew Las Vegas Mayor Oscar Goodman was a first
class a-hole, but did you see this jerk after word leaked out he
had probably suppressed warnings years ago of Vegas being a
prime terrorist target? He did an interview with CNBC’s Maria
Bartiromo that was unbelievable. [Maria handled herself
beautifully…I wouldn’t have.] Anyway, Johnny Mac said
“Mayor Goodman is right up there with the mayor of Amity in
‘Jaws.’” Brilliant.
–I was reading “Peanuts” the other day and got to thinking.
Let’s assume Linus and Charlie Brown are now in their 40s.
What would they be? Both are obviously good, honest
folks, representing the best of America. I see Linus as an
historian, kind of like Doris Kearns Goodwin. Charlie Brown,
on the other hand, is probably a local city official, catching
nothing but grief.
—
God bless the men and women of our armed forces.
God bless America.
—
Gold closed at $401
Oil, $46.03! [There are other closing prices out there. I’ll clear it
up next time.]
Returns for the week 8/9-8/13
Dow Jones +0.1% [9825]
S&P 500 +0.1% [1064]
S&P MidCap -0.4%
Russell 2000 -0.4%
Nasdaq -1.1% [1757]
Returns for the period 1/1/04-8/13/04
Dow Jones -6.0%
S&P 500 -4.2%
S&P MidCap -4.6%
Russell 2000 -7.1%
Nasdaq -12.3%
Bulls 48.4
Bears 24.2 [Source: Investors Intelligence / Chartcraft]
Have a great week. To my friends in Florida, I pray you all
made out as best as can be expected.
Brian Trumbore
