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07/13/2002
For the week, 7/8-7/12
[Posted 7:00 AM ET]
“Sometimes things aren’t always black and white when it comes
to accounting procedures.”
--President George W. Bush
Oh, brother, I thought, as I watched the President utter these
deadly words at his Monday press conference. The Democrats
would have a field day, and within hours, they were.
I don’t mean to start off with such a political tone this week, but I
was the first one to go ballistic over the Jim Jeffords defection
last year, a move that has proved costly to Republicans, and I
feel compelled to criticize the President’s performance this week
on the issue of corporate governance.
But with this President the real blame lies with Boy Wonder,
Karl Rove, perhaps the most overrated political operative of the
past 50 years. Oh sure, conservatives fawn all over him (though
that’s about to change), but it was largely his advice that cost
Republicans the advantage in the Senate, and thus the loss of
crucial committee chairmanships, while the omission of one
name in Bush’s Tuesday address to the Wall Street community
was flat out idiotic; that being a mention of Democratic Senator
Paul Sarbanes.
At times this Administration has exhibited the political skills of
Michael Dukakis, and the President is being ill-served by the
likes of Rove. There we had the Democrats, simultaneously
slamming the President as he gave his speech, when the
following single line would have made the Dems look as foolish
as Bud Selig.
“I look forward to working with Senator Sarbanes, whose
proposals on this front contain some excellent ideas.”
Instead, you saw the result, and don’t think for a moment that
this performance didn’t have more than a little to do with the
carnage at Wall and Broad. And while I understand why any
President wouldn’t want to publicly admit the following truth, as
it could create even more of a panic, the fact is that Corporate
America does not just have “a few bad apples.” No, it is replete
with dirtbags of all stripes, and they must pay in a way that
churns their stomachs for the rest of their lives.
Which leads us all to the following. The President has two
overriding issues that demand immediate action.
First, the American voter needs to see more than one guilty CEO
go to jail by mid-October if it is to have a positive impact at the
polls in November, that is if you are a Republican. Otherwise,
all else being equal (like a relatively flat stock market and zero
terror attacks until then), the elephants will lose the House (while
failing to regain the Senate) and all of us will then see our taxes
skyrocket shortly thereafter. I laid out the scenario two weeks
ago in this space and finally this past one others caught on.
But you may have also noticed I haven’t been tough on SEC
Commissioner Harvey Pitt, because just as in the case of FBI
Director Robert Mueller, I feel Pitt deserves more of a chance. It
also helps that I know some Wall Street history and the largely
positive impact that the first commissioner, Joe Kennedy, had.
Both Pitt and Kennedy, because of their backgrounds on the
seemingly wrong side of the fence, were initially thought to be
ill-suited for the position. Kennedy worked out just fine (as I
detailed long ago in my “Wall Street History” link, see archives),
and I’m willing to give Pitt a little longer to prove his detractors
wrong.
The problem is that we are only 3 months from mid-October, and
with the way the judicial system works, and with the high-priced
legal talent the indicted CEOs will have on their side, there might
not be enough time before we all pull the levers. What many of
us can only hope for, then, are some swift plea bargains. Perhaps
some of the crooks accept 3 years without parole, today, instead
of a chance they’ll be convicted of a 10-year offense down the
road. Coupled with disgorgement of their wealth, this would
satisfy me, for now.
The second issue is Iraq. As I spell out in more detail later, it’s
time to stop pussyfooting around. It’s time to take out Saddam,
and maybe that’s the “October Surprise.” This week’s report
from the Washington Times that the Administration concedes
there might be some 5,000 al Qaeda operatives in this country,
while not necessarily a great surprise, is nonetheless
discomforting (as Friday’s announcement of terrorists in Oregon
further proved). You’d have to be an idiot not to understand that
Saddam will be passing his weapons over the transom to those
desiring to kill us, if he hasn’t already. But, concerning Wall
Street, if you want to see a real rally, the day one of Satan’s
chief representatives is eliminated will witness the largest point
gain in history. [The fact that I might be selling into it is a
story of a different sort.]
Wall Street
Aside from the poor reaction to the President’s attempt to stamp
out the fire, the Street still had other worries to deal with, like
further revelations concerning accounting irregularities and
revenue enhancement with the likes of Qwest Communications,
Duke Energy, Merck and Bristol-Myers, though regarding the
latter two, I’d probably put their alleged offenses in the 1-3 years
with community service category, rather than the hoped for 20-
30 at Leavenworth for the likes of Qwest’s leadership.
The Dow Jones had its worst performance since the week
following 9/11, plummeting almost 700 points to 8684, a loss of
7.4%, while Nasdaq declined for the 15th week in 18, 5.2% to the
1373 level. The S&P 500 suffered a similar fate and these latter
two are now at 5-year lows. It’s beyond sad…the destruction
that has taken place in most portfolios.
But up until now, Americans have continued to shop at a pace
belying the hit to their wallets. However, Friday’s revelation that
consumer confidence had tumbled to an 8-month low could be
the signal that a serious turn in our spending patters is around the
corner, and that isn’t good, especially considering that
corporations had already shut down on the capital spending front.
Which leaves us with old reliable, Mr. C. Housing Market. As
long as overall employment holds up, I guess this sector can hold
its own for a little while longer, but I wouldn’t count on it.
Valuation
But, Mr. Editor, what about all the positive news on the earnings
front at week’s end from the likes of G.E., Dell and Juniper
Networks? Yeah, but did you notice how it was a return to the
good old days, of just eking out #’s (either on the earnings or
revenue front, or both) that just barely beat expectations? As
Church Lady used to say, “How con-veeee-nient.” And even if
they are taken at face value, admittedly a difficult thing to do
these days, what then of their valuations?
Strategist Jim Paulsen of Wells Capital Management has
summed up the issue best for those of us who were right in 2000,
and now still see little cause for optimism even at these levels,
beyond a much deserved rally just to make us all feel a little
better.
G.E. is a good example of what most concerns Paulsen, that
being the fact that while the company met earnings expectations,
up an impressive 14% in a moribund global economy filled with
uncertainty, revenue only increased a measly 4%. For the rest of
Corporate America, sales have generally been even more tepid.
As Paulsen notes, how can you continue to have little or no
growth on the top line and still project substantially higher
earnings per share at the bottom? After all, corporations have
already done just about as much as they can on the expense front.
Which brings me to a number I’ve mentioned the past few
weeks, $60, the projection for 2003 earnings on the S&P 500.
Slap a generous market multiple of 20 on it and you get an index
of 1200. With the S&P now down to near 900, that’s a potential
rally of 33% down the road. Right?
But, first, the $60-$62 figure currently bandied about seems
totally unrealistic to yours truly, especially taking into
consideration the inevitable readjustments to earnings we will
witness over the balance of the current quarter and beyond.
Second, even a 20 multiple is high, particularly when matched
against an historical average closer to 15. The bottom line being,
it’s still awful tough to build a case that there is any hurry in
trying to pick the bottom.
Street Bytes
--U.S. Treasury Yields
6-mo. 1.72% 2-yr. 2.52% 10-yr. 4.57% 30-yr. 5.33%
Aside from the consumer confidence number, other data such as
retail sales was adequate, but these are things of the past. It’s the
future, and the sick stock market, that led to a solid flight to
quality in Treasuries this week. As for corporates, they continue
to bleed on fears of further accounting surprises, downgrades and
worse.
--A CBS News poll on Wednesday revealed that 80% of the
public feels questionable accounting is widespread. But 59%
trust President Bush in regulating business and he still has an
overall job approval rating of 74%. Additionally, 60% said the
market would be up a year from now. If it isn’t, go directly to
Depression. Do not pass recession.
--Energy: The price of crude continues to float in the upper range
of OPEC’s $22-$28 preferred price band, closing the week at its
highest level in two months, this despite concerns over the shaky
global economic outlook. There was a large announced
drawdown in U.S. inventories this week, but these numbers are
consistently all over the board. Also, trouble in Venezuela
helped prices. More on this later.
--The London stock market traded at a 5 -year low earlier in the
week. The pain is being felt all over.
--The number of cellphone subscribers in Western Europe
actually declined in the first quarter, in case you still thought this
was a growth area. As for those still touting the next generation
of products, I counter, 50% of the calls I receive from cellphones
are inaudible. If you can’t even get this part of the equation
right, why should anyone expect the newfangled gadgets of
tomorrow to work?
--Flashback: In going through a few notes from 2000, I present
the following tidbits.
In a report dated May 22, 2000, two months after Nasdaq
cracked, market guru (ahem) Joe Battipaglia was still calling for
a Nasdaq of 5500 by 12/31/00.
In his own 5/30/00 report, strategist Ed Kerschner declared the
following, in defending his point that valuation really didn’t
matter.
“But for how long does a 20% growth stock have to grow
earnings by 20% to ‘justify’ a 106X P/E? Not as long as you
may think.”
106?! That was the attitude back then. It’s what I railed about in
this space, total insanity.
--Shares in fiber-optic cable company Level 3 Communications
soared after Warren Buffett and some of his “valued” friends
bought into the struggling operation.
--Shares in Wyeth plunged 24% in one day as the leader in
hormone replacement treatments saw its drugs in this category
linked to an increased risk of heart disease, stroke and breast
cancer.
--In his latest missive (pimco.com), Bill Gross once again had
more than a few interesting observations, including an attack on
the hedge fund industry. But on the issue of securities selection,
he is choosing to focus more on the character of the individuals
PIMCO does business with, as well as looking at those
companies that have NOT always beaten earnings expectations
by a penny. The latter point struck home with me concerning a
particular stock in the oil service sector that I have done well
with in the past, even as it from time to time missed its numbers.
In fact, over at least the past six quarters it hasn’t come within a
penny either side. Sorry, since I’m close to buying back into this
company, I can’t give the name, but the theory is one you all may
consider as part of your stock selection process.
--On a topic related to Gross’s concerns with the hedge fund
industry and the casino nature of corporate bondland these days,
the same investment pools are largely responsible for the huge
pickup in program trading in the equity markets. I have used a
figure of 30% of daily volume in the past, but a trader connection
told me this week that the buzz is its now often closer to 50%(!),
and certainly the wild intra-day swings we have witnessed lend
credence to this.
If the truth ever comes out, don’t expect the little guy to want to
dip his toes further into the equity waters (assuming he’s still
wading) for a long while. As the great Jim Grant has long
warned, the amateurs now populating the hedge fund industry
will take us all down one of these days (yes, further than we
already are), as they rush for the exits to cover their bad
bets…which may also represent the ultimate buying
opportunity, in my way of thinking.
--Business Week listed its Global 1000, the largest companies in
the world based on market capitalization, and as of May 31, the
U.S. still held 19 of the Top 25 slots.
1. G.E. 2. Microsoft 3. Exxon Mobil 4. Wal-Mart 5. Citigroup
--Goldman Sachs became the latest to formally revise their stock
rating system to “eh,” “blows” and “yougottabekiddingme.”
--One expert on ad spending revised his 2002 projection
downward to up just 2%.
--Yahoo announced it had beaten its quarterly estimate by a
penny and a Bear Stearns analyst, with the stock trading around
$12, announced it could hit $30 over the next year. Now if
Yahoo hit its target of 20 cents for 2003, that’s a P/E of 150.
This kid (who looked 20-something) should be locked up.
Yahoo is a dead stock, period, and while we’re happy they have
survived, there is no growth story here. [But if there is, hello
StocksandNews!]
--Like I’ve said for the past few years, what’s been wrong with
cash?
--I asked my broker, D.P., what his advice was to clients these
days.
“Throw all your remaining dollars into call options.”
--That was a joke.
International Affairs
Iraq: The Bush Administration has been leaking all manner of
war plans the past few weeks and while none of it should come
as a surprise, I’m beginning to feel like it’s a giant
disinformation campaign to deflect attention from the most likely
scenario, a full-blown surprise attack. For example, you had the
nonsense of King Abdullah of Jordan supposedly granting his
approval for use of his territory as a front in the final push on
Baghdad, but only after the first of the year. [He’s either granted
it or he hasn’t. And I can’t believe he’s already worried about
Ramadan.] Most of the other plans point to January as well.
On Thursday, Republican defense strategist Richard Perle
appeared on PBS’ “Wide Angle,” a program that dealt in graphic
detail with Saddam’s past gas attacks, as well as a possible al
Qaeda connection with the Iraqi security apparatus. Perle, who
is well-connected to the current Administration, perhaps summed
it up best. President Bush will not take the podium for his next
State of the Union address without having disposed of the Iraqi
regime once and for all.
Afghanistan: Right after posting last week’s column, I learned of
the assassination of one of Hamid Karzai’s vice presidents.
While it’s possible it was nothing more than a drug hit, what it
did point out is not only the fragile nature of the peace, but also
the limited role the U.S. is now playing in the process. Yes, we
still have troops aggressively pursuing al Qaeda, but in the
meantime, peacekeeping is confined to Kabul proper. The U.S.
needs to rethink the mission and, as both Senators McCain and
Kerry have said over the past few weeks, must commit to a more
robust role, longer-term, outside Kabul. This, of course, creates
problems for a Pentagon which desires to focus solely on
Saddam at this time. But we also cannot just cut and run.
Israel: The government is taking the gutty step of bringing
Palestinian Marwan Barghouti to trial for his responsibility in the
terrorist campaign. He was once thought to be Arafat’s
successor, and, in my eyes, a moderate, but then he crossed the
line.
Separately, I received a thoughtful e-mail this week from an
American living in Israel on a most sensitive topic, that being,
why does yours truly support Israel as much as I do? More
specifically, Peter S. asked, “What’s in it for the U.S.?”
Believe me, the stance I have taken, particularly over the past 18
months, has cost me some readers and yet, like everyone else
trying to analyze this situation, I may never come up with an
answer that satisfies most. As I wrote Peter, my support for
Israel is based on the simple principle that it’s the right thing to
do. How could we possibly abandon a democratic people in the
face of a region loaded with tyrants who abuse their fellow man
as policy? What would that say about all the United States stands
for if we did?
But, on the other hand, if in any eventual serious peace
negotiations (we pray) Israel doesn’t make huge concessions in
terms of dismantling most of the settlements, you won’t find me
so supportive. I can guarantee that much.
[To those of a differing viewpoint, thanks for staying with me.
It’s appreciated.]
Turkey: Despite some of the dour talk, there is light at the end of
the tunnel. As Prime Minister Ecevit’s government collapses
around him, a new, moderate party is emerging led by two of the
most respected figures in Turkish politics. [One of them is still
technically in the government, as of this writing, but that’s for
the purposes of ensuring the much needed $16 billion IMF
package.]
The stakes are huge, both internally and for the upcoming U.S.
war on Iraq. I expect the situation, however, will improve within
weeks and, in the interest of full disclosure, I may actually add to
my remaining equity position in this country shortly. [Currently,
it’s less than 2% of my overall portfolio, with the balance still
82% cash and 16% energy.] Of course, few have covered this
country like I have and for more information you may want to
glance through my “Hott Spotts” archives. Then again, it’s so
dry, you may want to take a pass.
Greece: Looking ahead to the 2004 Olympics, which will be held
in Athens, a security nightmare if ever there was one, Greek
police uncovered a huge arms cache tied to the shadowy
November 17 terrorist group, which is responsible for over 20
politically motivated killings in the last 20 years.
Venezuela: 250,000 marched in opposition to President Chavez
on Thursday. Jimmy Carter was there this week, trying to work
his magic, and, boy, what a positive impact he had. There are
many in the Bush Administration who fear a far bloodier conflict
than what we witnessed just a few months ago, one which would
obviously play havoc with a key supplier of oil to the U.S. and
elsewhere, while an already collapsing economy could be
plunged further into total darkness. Just another reason to stay
“short” Latin America. But the U.S. better start getting involved
in a big way, throughout the region, or we will see a flood of
illegal immigration unlike any seen before.
Zimbabwe: The BBC, banned from the nation for the better part
of a year now, sent a reporter undercover this week and his tale
was chilling. Civil war is imminent and President Mugabe’s
thugs have stepped up their reign of terror against both white
farmers and the opposition.
I said long ago that the British need to send a commando unit or
two down there and wipe Mugabe out. The opposition’s Morgan
Tsvangirai is a legitimate figure who can step in and gain the
respect of his people, otherwise, millions will soon starve.
If the Brits don’t do it, the U.S. should. Someday I’ll explain
how Bill Clinton’s lack of leadership in East Timor was a
gigantic mistake that may have led to much of what we are now
facing. But it’s a tale for a different day. Suffice it to say, these
tinhorn dictators that pop up from time to time, to the detriment
of the lives of millions, need to be taught the difference between
right and wrong.
Northern Ireland: PBS is running another great series titled
“Endgame,” part II of which is on Sunday, detailing the whole
peace process since 1970. In this new post-9/11 era, though, I
haven’t spent as much time on issues like this because, quite
simply, the importance pales in comparison to other matters. But
the findings of a recent extensive poll in the North are quite
telling.
54% of Catholics are happy with the peace process, only 26% of
the Protestants. And a hardcore 25-30%, overall, said they
would prefer to live with their own. Lastly, the question was
asked, “Would religion always divide society there?” 89% of
Protestants and 81% of Catholics said, yes, it would. [Source:
AP]
Random Musings
--Creep Watch: An exclusive of StocksandNews.
Republican Congressman Billy Tauzin, the epitome of sleaze,
and one of those primarily responsible for the defeat of 1994
legislation which would have tightened up accounting standards.
Now Tauzin relies on the fact that, perhaps, 302 Americans
remember this (aside from all of you, of course) as he champions
stiff action against the likes of Enron and WorldCom. Of course
he is joined in this effort by…
Democratic Senators Chris Dodd and Joe Lieberman, both of
whom sought to protect the accounting interests in their home
state of Connecticut, while now expressing “outrage.”
International Paper CEO John Dillon, head of the Business
Roundtable, which represents the leaders of Corporate America.
Dillon was all over the airwaves last weekend and came across,
how can I put this gently, as an idiot. I was startled by his
seeming incompetence, but, I guess that’s why he’s pushing
paper. To his colleagues on the roundtable, this is the best you
can do? [Idiots can cross over into the creep category at will,
according to the rules of Creep Watch.]
Oracle Chairman Larry Ellison. Hey, I’ve called him one for
years, thus he has to be included in the inaugural edition of Creep
Watch just for being Larry.
James Carville and Mary Matalin. My good friend Mark R.
warned me long ago, when the two were merely courting, that
this was trouble. Now this couple is wreaking havoc on the
American political system. She is Vice President Cheney’s top
aide, while he leads the charge to bring down the President. It all
finally crossed the line this week when Carville (despite his
denials) was clearly behind the new ads slamming the Bush /
Cheney connection to Big Business.
Not to get off on a rant here, lest I be misunderstood, but the
President and Vice President do deserve their share of heat,
particularly in today’s environment. But Cheney should also
show Matalin the door, tomorrow.
[Back to the aforementioned Mark R., I give him credit for the
above, but he was also one trying to convince me what a model
citizen Allen Iverson was. Mark, you owe me dinner.]
New Jersey Democratic Senator Jon Corzine: In the height of
hypocrisy, Corzine, the former Wall Street tycoon from Goldman
Sachs who bought his senate seat, is now front and center on the
evils of Corporate America. I just want one reporter to conclude
an interview with this plutocrat, “Err, Senator, how does it feel to
have bribed your way into office?”
And then there is Corzine’s successor at Goldman, Henry
Paulson. Sir Henry, recognizing an opportunity if he jumped out
front of his fellow Wall Street chieftains, shrewdly stepped
forward to proclaim that there was much Wall Street could do to
clean up its act, and, in the past, mistakes might have been made.
“What a fine, honest leader,” the press concluded. What a creep,
thought I. Goldman is just as responsible as any of the other
firms for what will eventually be proved in some cases to be
outright criminal behavior. But Henry is slick. Follow the
money.
--I was disgusted that the police incident in Inglewood,
California, as well as the Oklahoma City case, led off many
national newscasts this week. I imagine that 90% of you feel the
same way. These are not national stories! And by week’s end
there are serious doubts as to whether or not we are even dealing
with a rogue cop in the Inglewood case. I also have nothing but
contempt for those traveling around with video cameras (who
aren’t formally part of the press) looking for a story. These
characters are scum.
--Beware…bad government can result in Depression. See also
Smoot-Hawley and the 1930s. We face a similar risk if Congress
goes too far in the corporate witch-hunt (admittedly a very fine
line) and if Democrats control tax policy the next few years.
--The AIDS activists once again went way too far in abusing
Secretary Tommy Thompson at the conference in Barcelona.
They are hurting their cause and obscuring the real story, that
being that by 2010 it is now estimated the average life
expectancy in Botswana will be just 26. Oh, there is far more I
want to say on this issue, specifically regarding AIDS in the
U.S., but I undoubtedly ticked off enough people already for one
week.
--Researchers have proved they can construct a virus using data
and materials ordered directly off the Internet. It was all quite
simple. Not a good thing.
--As documented by Soldier of Fortune magazine (no, I don’t
subscribe to it) and the National Post of Canada, Canadian
snipers killed at least 20 al Qaeda, including one from an
astounding mile and a half, purportedly the longest kill ever by a
military sniper. So we salute our northern friends. But now it’s
time to start picking off all the al Qaeda lying in the weeds right
there in Montreal. Get on it, boys.
--A human skull believed to be 6-7 million years old, and thus
the oldest ever found, was discovered in Chad. Now you often
think of our forefathers as being pretty stupid, pre-wheel, that is,
but the fact is this particular individual put 10,000 chads in the
market around 5900 B.C., rode the wave to the Fall of the Roman
Empire, went to cash until the Renaissance, moved over to the
U.S. around 1920, got out in 1929, shifted to Nasdaq in 1995,
exited March 2000, and was lying underground, content with his
winnings, when he was so rudely uncovered.
--Speaking of an earlier era, a Rubens painting sold for a
phenomenal $77 million. The guy’s overrated. Van Dyck was
better.
--The Sunday Times Magazine had a fascinating, and
controversial, piece last week on the battle of the diets. It was in
the early 80s that low fat, high carb nutritional guidelines became
the rule, thus beating back those protein proponents like Dr.
Atkins, who said this new regime would lead to the very
explosion in obesity we have witnessed in this country, because
those utilizing the latest fad would find themselves always
hungry. Now, many responsible scientists have come down on
the side of Atkins and his ilk. The problem is how to tell the
public that the government has been wrong all these years. Hell,
wouldn’t be the first time. Just do it.
--Well, according to the World Wildlife Fund, your editor is not
a crackpot for advocating immediate manned missions to Mars.
The WWF says the need to colonize by 2050 is acute, as we’re
using up the earth’s resources at an incredible rate. I used to
pooh-pooh this stuff, but when you look at what’s going on in
our oceans and the dwindling fish supply, for starters, it’s more
than a bit worrisome. Plus, they say that Martian monkfish is
really quite tasty.
--We toast the fine people of Nevada who are welcoming all the
nation’s nuclear waste with open arms at that new resort site,
Yucca Mountain. What? You mean it was rammed down your
throats? Ah, sorry. Good luck.
--So I’m taking Russian lessons, another brilliant idea gone bad,
and after 60 minutes of each 2 -hour session I’m climbing the
walls. But to top it all off, it wasn’t until week #4 that we
covered the word for beer, pivo. I can count to 10, though.
Chyetirye pivos, pazhalsta. Four beers, please.
---
God bless the men and women of our armed forces.
God bless America.
Gold closed at, $315. A weak effort, in the face of the market
turmoil.
Oil, $27.46
Returns for the week, 7/8-7/12
Dow Jones -7.4%
S&P 500 -6.8%
S&P MidCap -7.1%
Russell 2000 -6.3%
Nasdaq -5.2%
Returns for the period, 1/1/02-7/12/02
Dow Jones -13.3%
S&P 500 -19.8%
S&P MidCap -12.5%
Russell 2000 -15.4%
Nasdaq -29.6%
Bulls 39.8%
Bears 36.7% [Source: Investors Intelligence. Reminder, there is
about a ten-day lag in the readings.]
Notes:
I commenced an updated history of the Bubble on my “Wall
Street History” link, which will be running for the next 5 weeks
or so. You may want to print these out, and then you won’t have
to buy any of the new books on the topic.
Also, some of you have written me with great comments, but for
technical reasons my replies are being rejected. [Particularly
those employing web-TV addresses.] I’m not ignoring you.
Have a great week. At least try to.
Brian Trumbore
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