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07/17/2004
For the week 7/12-7/16
[Posted 7:00 AM ET]
Wall Street
This was a week where the inflation data for June was posted and
when you put it all together, the figures for both overall and core
producer and consumer prices, it pretty much came out as
expected. Most importantly from the standpoint of the Federal
Reserve, the core rate for the CPI (ex-food and energy) has risen
just 1.9% over the past year. So I’ll offer up the suggestion that
the Fed will raise rates just another 25 basis points in August and
then sit back until after the election. As I’ve noted before,
though, while this would maintain rates at historically low levels,
good for real estate, it nonetheless offers little in the way of relief
for savers.
The Fed won’t be hiking rates vigorously for another reason.
There is simply too much evidence the U.S. economy has hit a
speed bump. Retail sales were down for the month of June, as
was industrial production, and with the previous week’s sluggish
data on both auto and chain store sales, a bit of a trend is
developing. I would also add that Asia is clearly slowing.
China’s announced growth rate of 9.6% for the second quarter
may seem high, and it is, but there are distinct signs of a
government-inspired softening here, while in South Korea the
forecasts are being ratcheted down due to an indebted consumer
that can’t shop as it once did. Even consumer confidence in
Japan is slipping some, despite the recovery there, and though
inflation may be quiescent in America, it’s definitely picking up
in Asia, leaving some to say the continent is facing “stagflation.”
Meanwhile, on the U.S. corporate development front, earnings
reports are coming in fast and furious. Tech heavyweights IBM,
Dell and Apple Computer all had good things to say about future
demand and shareholders in these issues were rewarded some,
but tech overall slumped anew. The week started with a key
downgrade from Merrill Lynch of the semiconductor sector and
then the next day Intel scared the Street with the revelation that
not only were revenues uninspiring but inventories had soared
and gross margins had declined, a poor combination. Drug giant
Pfizer also weighed in with a warning on revenues.
Finally, as the SEC looks into regulating the hedge fund industry,
tech maven / venture capitalist Roger McNamee offered up what
some of us have long believed but needs to be repeated from
time to time. This is a “hedge fund dominated world” when it
comes to trading stocks. There is no such thing as long-term
investing these days. It’s all about the trade and beating the
casino.
Frankly, I’ve never been a trader and with the 10 positions I
currently own, still just about 20% of my overall portfolio, it’s
tough sometimes to focus on the horizon instead of the sidewalk
in front of you. Of course I’m largely in cash because I see a
future fraught with danger, and I’ll be damned if I’m going to
ignore the geopolitical issues that still take precedence over an
inflation or housing number. I just wish short-term interest rates
were higher to give us cautious types a chance to earn a few
nickels on our savings. But alas, that’s not to be the case. It
won’t be straight down for the U.S. economy, but by mid-2005
or thereabouts, the world’s chief economic engine will hit a wall.
Street Bytes
--The Dow Jones declined for a 4th straight week, though all four
losses have been under 1%. The index now sits at 10139.
Nasdaq, however, had its 2nd straight decline of 3% or more and
is at its lowest weekly close since last October at 1883. The tech
barometer is now off 6% for the year.
--U.S. Treasury Yields
6-mo. 1.65% 2-yr. 2.50% 10-yr. 4.37%* 30-yr. 5.12%
Yes, tame inflation figures lead to an accommodative Federal
Reserve and it also allows the real estate bubble to expand a little
more. California is a prime example of the froth in many parts of
the country. Year over year home prices in Los Angeles County
have now risen 32.3% as of June, while in Orange County it’s
30.4%, with a median price of $540,000. I know it’s largely
about demographics, coupled with low rates, but it’s the
affordability issue that is increasingly troubling.
*The yield on the 10-year now stands at a 3-month low.
PIMCO’s Bill Gross made a great trade. More on the future
direction of rates next week.
--Energy: As previously agreed upon, OPEC will raise
production 500,000 barrels per day as of August 1st, in a small
attempt to rein in prices a bit. In looking at 2005, though, the
International Energy Agency sees growth in demand of 2.2% for
crude (8% in China) on top of a 3.2% increase in 2004. But
there just isn’t a lot of spare capacity so the following will
inevitably occur. Stubbornly high prices will continue to do a
number on the consumer and some businesses (like chemicals
and airlines), the economy will slow, demand for oil will slacken,
and prices will finally fall thereby helping to set the stage for
the next leg up in worldwide growth. At least that would be a
textbook projection.
[Energy stocks, particularly the oil service sector, had another
great week and the OSX index I follow finally broke through the
110 level. Alas, months ago I reduced my own position in oil
issues to just 6 percent from 35. I still maintain, however, the
big money has already been made and I’m not going to chase
them now.]
--Russian energy giant Yukos, responsible for a full third of the
country’s oil output, has begun to pay back a portion of the $3.4
billion the government says it owes on taxes for 2000. The
company has agreed to pay up to $8 billion if it’s given 3 years
to do so. Former chairman Mikhail Khodorkovsky officially
pled not guilty to fraud and tax evasion charges as he continues
to sit in a metal cage on days he’s in court. Humiliating for him
and embarrassing for Russia, though the Kremlin doesn’t seem to
care.
--Boy, if you have some dirty cash sitting in your wallet and
would like to clean it, take the greenbacks over to Riggs National
Bank of Washington, D.C. A Senate report came down hard on
this money-launderer that participated in a massive bribery
scheme with the West African nation of Equatorial Guinea
involving the president of the place and oil windfalls. In
addition, Riggs was found to have laundered former Chilean
dictator Pinochet’s fortune. The key investigation into Riggs,
however, remains the previously announced one examining the
bank’s relationship with Saudi Arabia and its embassy in D.C.
But on Friday, PNC Financial announced it was acquiring Riggs,
so this tarnished name will be no more. What a tawdry ending to
a once proud institution.
--Tyco attorney Mark Belnick was acquitted in his grand larceny
and securities fraud trial, thus severely jeopardizing the retrials
of Dennis Kozlowski and former CFO Mark Swartz. Score one
for the dirtballs.
--Congress approved the U.S. – Australia Free Trade Agreement,
a good thing.
--Business Week had a story on Enron’s Ken Lay and how a
Houston jury could easily opt to acquit - despite his defense
team’s assertion it will be tough to get an unbiased jury –
because of Kenny’s extensive charity work in Houston and
throughout the state. Typical. More on this topic in “random
musings.”
--The SEC’s examination of the mutual fund industry and pay-to-
play for shelf space in the 401(k) business is a serious one. Plan
participants have no idea how fees are jacked up as a result. The
SEC is also one step closer to cracking down on hedge funds as
the commission voted 3-2 to force many of these folks to register
as investment advisors, thus subjecting them to closer scrutiny,
as well as mandating a new position of compliance officer for
each. Now there is a public comment phase before any rulings
can be enacted. It’s far from perfect, but it’s a start.
--For the five years ending 6/30/04, when looking at investment
styles and market cap - large, mid, small / core, growth, value –
small cap value has been the best sector with an annualized
return of 12.9% vs. minus 2.2% for the S&P 500. Large cap
growth is at -5.4% annualized, large cap value +0.5%. [Lipper]
--UAL will not be making $72.4 million in payments to
employee pension funds, another distressing sign for those
relying on company plans for their retirement needs. It’s just a
huge American tragedy as one company after another slashes or
dissolves benefit programs.
--Insurance companies continue to drop out of the long-term-care
insurance business, Aegon being the most recent to do so. It’s a
serious problem unless others step in.
--Morgan Stanley settled its EEOC sex discrimination suit before
it went to trial for $54 million, $12 million of which is going to
plaintiff Allison Schieffelin. Ms. Schieffelin said she was
pleased. I would be too.
--President Jacques Chirac of France.
“The first principle is that the work time is and will stay 35
hours. The second principle is that more flexibility is needed for
workers, notably those who want to work more in order to earn
more, and more freedom is needed for companies.” [International
Herald Tribune]
Why France is still even having this debate I’ll never know. The
35-hour rule was put into effect as a way of reducing
unemployment. It’s been a disaster.
--Citigroup booked a $5 billion charge to deal with its legal
issues, such as with WorldCom, Enron and IPO-related inquiries,
thus wiping away the last of Sandy Weill’s legacy. But he gives
so much to charity!
--Inflation Update: [Even though I believe deflation is the bigger
issue next year.] Mark R. reports that doughnuts at WaWa are
now 69 cents apiece when they used to be 2 for 79. Ever wonder
what your editor has each morning to start the day? A large
black coffee and two glazed doughnuts. Next week I come clean
on lunch.
--Lucent received a new $5 billion contract from Verizon
Wireless, including $500 million previously announced, yet the
shares actually closed down on the week. Time for another lawn
check.
--Shares in Red Hat, provider of Linux business software, fell
23% after the company announced it was restating earnings for
the past three years.
--Charles Schwab and Co. really is having trouble figuring out
what it wants to be. Just last November it acquired research firm
Soundview Technology Group and now it wants to jettison this
outfit and others in capital markets.
--Nokia reported declining profits and revenues as it continues to
lose market share.
--Harrah’s is buying Caesar’s. No word on what happens to
Wayne Newton amidst the recent industry shakeup.
--Ah ha! Way back on February 7 in this space I said Martha
Stewart would receive 6 months in prison. She got 5 plus
probation. Not a bad forecast, if I may say so myself. This
seems fair. But as a condition of her additional term of 5 months
home confinement, she must spend one full day a week in the
house. Ergo, look for the flowers to be over-watered, seeing as
she’ll have little else to do on those days.
[You know, I watched Martha’s interview with Barbara Walters
last night and Ms. Stewart still doesn’t get it. I know many of
you are fans of hers and I’ve tempered my opinions in this space
because of that, but for crying out loud, you can’t lie the way she
did.]
--Slim-Fast dropped spokesperson Whoopi Goldberg after her
anti-Bush tirade the other night at a Democratic fundraiser.
Here’s my take on her. She’s never been funny and she needs to
wash her hair. No telling what varmints are in that tangled, nasty
mess.
Foreign Affairs
Iraq: Don’t read too much into my slotting of this topic down
below the fold, so to speak. We’ve entered a stretch where there
may be little real news, which is both good and bad.
The Bush administration is catching a bit of a break as the media
isn’t covering the car bombs as intensely as it has in the past. It’s
also summer and media assets are being redeployed. Let’s face
it, I imagine more than a few reporters need to come home to
cover the presidential campaign.
But this means the good news gets underreported. What is clear
these days is that Iraq’s Prime Minister Iyad Allawi is a vigorous
leader. While we need far more time to see how some of his
initiatives pan out, such as the granting of amnesty to insurgents,
the man is using both the carrot and the stick. For example, he
negotiated a deal with the Fallujah Brigade to join the formal
Iraqi Army and Moqtada al-Sadr is supposedly converting his
militia into a political force, but before we go crazy on the latter
just know that al-Sadr still makes comments such as “resistance
is the means to end occupation.” Allawi also deserves credit for
the first police sweep in Baghdad targeting common criminals.
In a nutshell, he appears to be a man worthy of major support.
Let him play hardball when necessary.
But there is a potential flashpoint that is being underreported and
that is in northern Iraq on the border with Turkey. There are
good Kurds, and there are bad ones. The bad ones are nothing
but terrorists and since June 1 have killed at least 20 Turkish
security forces in Turkey, this after the Kurds ended a multi-
year ceasefire. Turkey is seeking Washington’s help to go after
the terrorists before the conflict escalates. The White House
doesn’t want to upset the Kurds. But while there is no doubt the
Turks abandoned the U.S. at a critical juncture before the start of
the war, we have to look ahead and if the Turks feel threatened
with home grown terrorism, the U.S. has a big problem. For
starters, the Pentagon is seeking to reestablish a major presence
at Incirlik air base, a strategic imperative to keep the heat on
Syria and Iran, but this could now be in jeopardy.
And then there is the pitiful display of cowardice by Philippine
President Gloria Arroyo for giving into the terrorists holding a
Philippine worker. Heretofore she’s been a stalwart in the war.
Now she is deserving of the scorn being heaped on her and it’s
another example of why some nations stay stuck in 3rd gear while
others, such as South Korea and Singapore, crank it up to 1st.
Israel: At week’s end Prime Minister Ariel Sharon was still
fiddling with a new coalition, at one point inviting Shimon
Peres’s Labor Party but then backing off. Sharon needs to come
up with a combination that advances his Gaza withdrawal plan
without inflaming tensions with the settlers, though this last part
seems virtually impossible.
Separately, a government report expresses deep concern with the
period of time immediately following Yassir Arafat’s death,
projecting that the Palestinian Authority would collapse amidst
turmoil throughout the region owing to Arafat’s still sky-high
popularity among certain segments. Particularly volatile is the
issue of where he is to be buried, with Arafat himself desiring
Jerusalem. Personally, I say go for a Viking funeral place his
body on some logs, set them aflame, and push him out to sea.
Then again, this gives Vikings a bad name.
China: The Chinese embassy in Washington issued an unusual
public statement the other day. “We are gravely concerned over
the recent U.S. moves on the Taiwan question,” urging the U.S.
to stop selling arms to Taipei. This as the U.S. holds massive
naval exercises over the coming weeks in the Taiwan Strait as a
none too subtle sign of support for the island. China instead sees
it as a threat, but all the while it is tailoring its military to be able
to counteract a large U.S. presence in the event of war with
Taiwan, including the development of missiles designed to take
out an aircraft carrier.
On the economic front, as Jason Shaplen and James Laney
pointed out in a New York Times op-ed piece, China’s
emergence as a power broker through trade is increasing its
influence throughout the Asian continent at the expense of a U.S.
that seems largely unfocused. Japan now imports more from
China than the U.S., for example, and China is the largest trading
partner of South Korea. The Bush administration ignores this
trend at its own peril.
Lastly, China is upset at Singapore because that nation’s deputy
prime minister, soon to be premier, paid a visit to Taiwan.
Another reason to love Singapore.
Russia: Just last March, President Putin won reelection with 71%
of the vote, but today his approval rating now resides below
50%. [Public Opinion Foundation / Moscow Times] The poor
are being hit hard by some of the Kremlin’s social reforms, a
prime cause of the slide in the figures.
On the issue of the murder of Forbes journalist Paul Klebnikov a
week ago in Moscow, here are two opinions.
From Serge Schmemann / International Herald Tribune
“Seven hours before he was shot, he was interviewed by an
Izvestia reporter. The oligarchs now fear the president, whom
they used to control, the interviewer said. ‘It’s good that they
fear him,’ Klebnikov said. ‘One can only welcome the principle
of restoring state authority over society and the biggest players in
this society. But now the state is going straight to another
extreme – interfering in everything at a whim. It’s possible that
we’ll be saying that the real threat to the country is not the
oligarchic system, but the excessive authorities of bureaucrats,
who use the law at their whim.’”
David Satter of the Hoover Institute / Wall Street Journal
“Until now, the Putin regime’s complacency toward organized
crime and the slow strangulation of political pluralism that it
facilitates have evoked little reaction from the U.S. The murder
of Mr. Klebnikov needs to change that policy. American
reporters have enjoyed a seeming immunity from the attacks that
have made Russia one of the deadliest countries for journalists.
If the U.S. does not react forcefully, however, even that limited
immunity will be gone. At the same time, the Russians will do
nothing to find Paul Klebnikov’s murderers and a system will be
confirmed in Russia that weds the country’s future to dictatorship
and organized crime.”
Not one of the murders of journalists in Russia during Putin’s
presidency, at least 14, has been solved. For starters, Russia
should be denied access to the G-8 meetings until Putin shows
he’s serious about the establishment of the rule of law.
Afghanistan: The presidential election has been postponed until
October 9, with the full vote on a new legislature now moved
back to next spring. The nation simply isn’t secure enough for
millions to go to the ballot box without fear of reprisal.
Japan: Prime Minister Koizumi’s LDP kept its majority in a
parliamentary vote, meaning economic reforms should continue.
There had been concern Koizumi would lose substantial ground.
France: In another example of my dictum “wait 24 hours,” a 23-
year-old French woman claimed she was assaulted on a train by a
gang that thought she was Jewish. [She isn’t.] The baby stroller
was knocked over, with her baby slightly injured, her clothes
torn and a swastika drawn on her body. President Jacques Chirac
was quick to condemn the attack and the nation was aghast. One
problem. About 24 hours later the woman confessed to making
it all up.
Britain: The commission looking into prewar intelligence
reached a conclusion similar to that of the U.S. Senate
Intelligence Committee; that being the information on weapons
of mass destruction was faulty, but the British report cleared
Prime Minister Tony Blair of deliberately distorting it. In
London for a book signing, former President Bill Clinton
vigorously defended his good friend, an unintended defense of
President Bush as well even if Clinton tried to criticize him.
Saudi Arabia: The Washington Post reports that terrorists
returning from Iraq are intensively plotting against the kingdom.
Others are streaming into the country from camps in Sudan.
Separately, I noted weeks ago that it was incredible and deeply
disturbing that Paul Johnson’s body had yet to be produced. It
still hasn’t. Bill O’Reilly seems to be the only one who picked
up on this the past week.
Turkey: Commentator George Will wrote that the American
people should ask John Kerry what he would do about Turkey
and NATO? In other words, with the European Union to decide
this fall on Turkey’s candidacy for E.U. membership, as a key
NATO ally would Kerry offend Europe the way George Bush
recently did at the NATO conference in Istanbul and voice his
support for Turkey?
Mexico: From Chris Ayres of the London Times.
“Mexico’s ambitious First Lady, Marta Sahagun, has sought to
end months of political debate by saying she would not run for
the presidency in 2006.
“Heavily made-up and wearing a red sleeveless top, the wife of
Vicente Fox, the President of Mexico and the first opposition
leader to rise to power peacefully, sought to quash speculation in
a terse four-minute statement after which, visibly irritated, she
took no questions.”
Senora Sahagun was formerly Fox’s press secretary before they
got hitched. She sounds like a real piece of work.
Random Musings
--Back on March 20 and 27, I commented in this space on the
threat of terrorism this November, citing a solid column by Jim
Hoagland of the Washington Post. Hoagland’s idea that
President Bush and Senator Kerry should get together and issue a
joint statement that the election would go on as scheduled was
ridiculed at the time, but now the topic has reemerged. I would
take it one step further at this point and add that the time for the
candidates to say something is at the start of the first presidential
debate, just a simple re-affirmation and commitment from both
that the Constitution should be followed; the election must take
place in a single day.
--One major finding in the Senate Intelligence Committee’s
report is that former ambassador Joseph Wilson (who clearly
spends too much time in front of the mirror every day) has been
lying about his trip to Niger and what he learned about uranium
sales to Iraq. The committee believes his original work bolstered
the case, rather than debunking it. Furthermore, his wife, the
outted CIA agent, recommended him for the mission, a fact she
has denied.
--The latest New York Times / CBS News poll shows that 62%
of Americans don’t believe the war in Iraq was worth the loss of
American lives and other costs.
--Among likely voters, President Bush leads John Kerry 54-39 in
North Carolina.
--Commentator John McLaughlin has the plausible prediction
that Ralph Nader will drop out of the race following the
Democratic Convention, with Nader then saying he
accomplished what he set out to, having earlier expressed his
support for John Edwards prior to the senator’s selection as
Kerry’s running mate.
--Barron’s Jim McTague had the intriguing point that enough
conservatives are upset with President Bush on issues such as the
budget deficit and the war that they may consider voting for
Libertarian candidate Michael Badnarik. Such a protest vote
could pose problems for Bush in some states similar to the Nader
effect on Kerry.
--Let me weigh in on the rumors concerning Vice President
Cheney and his removal from the ticket. I always liked Lynne
Cheney better. Dump Dick, select her. Or at least make her
Secretary of Re-education, as in teaching America’s school
children some basic history.
--Newsweek ran the following caption under a picture of
Elizabeth Edwards. “Tired of seeing arm candy, women respond
to (her) smarts and personal strength.” What an incredibly stupid
statement.
--Along the lines of my comment last week that a significant
ongoing cost of the wars in Iraq and Afghanistan is the treatment
of about 20% of our soldiers for posttraumatic stress syndrome,
NBC News reported on how many are loathe to seek help
because of the stigma attached to doing so. To our soldiers
reading this, you are heroes to us all and don’t be afraid to get
assistance.
--A real estate speculator plopped down $40,000 for the
American Media building in Florida, scene of the anthrax attack
at the home of the National Enquirer. Now the building has been
fully decontaminated and it could be worth up to $10 million.
Now that is a great bet to be admired.
--You know why I wouldn’t go into New York during the
upcoming Republican Convention? Not because of any
terrorism threats, but rather I’d be afraid of all the kooky
demonstrators that will be peopling Manhattan. Look for major
clashes with the police.
--Just last week I wrote of New Jersey Governor Jim McGreevey
being enmeshed in a corruption scandal and how it was “going to
get worse.” Well, it did. Not only did the governor’s commerce
secretary resign under a cloud, but his top fundraiser, Charles
Kushner, a huge real estate developer in these parts, was indicted
for hiring a prostitute (retail value $10,000) to blackmail a
witness in a federal fraud probe. Kushner had a videotape of the
affair sent to the target’s wife. So then we were treated to the
spectacle of Kushner’s attorney, Benjamin Brafman, telling us
schleps that his client “is one of the great philanthropists of this
century.” As Ronald Reagan would have said, “There you go
again.” Hiding behind charity. Every single one of these crooks
does and it’s a bunch of bull.
--So you’re in a restaurant and the waiter remarks the red snapper
is particularly good that day. “OK, I’ll take it” you say, only
there’s one problem. According to a government investigation,
up to 77% of fish like red snapper, swordfish, even scallops is
mislabeled and replaced by cheaper fish. Mako shark, for
example, is the substitute for swordfish, and the wings from
skate (of the stingray family) passes for scallops. Now this
sucks. [USA Today]
--President Bush signed into law an identity theft bill that
imposes mandatory two-year prison sentences, five for those
using data to commit “terrorist offenses.” For many Americans
this is as significant a piece of legislation as any Congress has
enacted in years. But the crime is so devious and cruel the
penalties should be 5 and 10.
--Best places to live, according to the UN Human Development
Report. [Based on measures such as per-capita income,
educational levels, health care and life expectancy.]
1. Norway 2. Sweden 3. Australia 4. Canada 5. Netherlands
8. U.S.
Bottom five [Iraq and Afghanistan weren’t ranked.] 173.
Burundi 174. Mali 175. Burkina Faso 176. Niger 177. Sierra
Leone
Life expectancy in parts of Africa is less than 33 years due to the
impact of AIDS.
--Count me in as a major fan of the Bush girls. Keep ‘em out
front, Mr. President.
---
God bless the men and women of our armed forces.
God bless America.
---
Gold closed at $406
Oil, $41.30
Returns for the week 7/12-7/16
Dow Jones -0.7% [10139]
S&P 500 -1.0% [1101]
S&P MidCap -0.7%
Russell 2000 -1.5%
Nasdaq -3.2% [1883]
Returns for the period 1/1/04-7/16/04
Dow Jones -3.0%
S&P 500 -1.0%
S&P MidCap +1.4%
Russell 2000 -0.3%
Nasdaq -6.0%
Bulls 54.2
Bears 18.8 [Source: Chartcraft / Investors Intelligence]
Have a great week. I appreciate your support.
Brian Trumbore
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