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09/09/2011

9/11: A Look Back

On the ten-year anniversary of the 9/11 attacks, I take a look back at some of the items I was covering in the weeks leading up to 9/11, as well as my first thoughts afterwards; all courtesy of the “Week in Review” archives.

The focus is on the more market-oriented commentary and outside of a few grammatical changes, all of the text is as I wrote it then, warts and all, including warnings on real estate that were too soon, in the short run, but spot on longer term.

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“Week in Review” 9/1/01

Market History

September 1 marks the one-year anniversary of the real market top. From this day in 2000, it was truly downhill. The numbers tell the story.

12/31/99

Dow Jones 11497 [DJ hits 11722 on 1/14/00]
Nasdaq 4069

The indexes then diverge significantly.

3/10/00

Dow Jones 9928 [-15% from the 1/14 high]
Nasdaq 5048 [All-time high]

Then the process reverses. Over the next five weeks the Nasdaq swooned, culminating in a 25% decline for the week of April 10. But the Dow rallied.

4/14/00

Dow Jones 10305
Nasdaq 3320 [-34% from the 3/10/ high]

I hate to admit it, but it was at this point that I made a mistake. I thought the drubbing in tech would equate to reduced consumer spending (the wealth effect). I have learned one of those lessons that make this game of life (as well as the stock market) so challenging. I would now say that barring an external shock (which is why we still focus on wild cards around here) it takes a year for the majority of investors to materially change their consumption habits after a large market move. And it was so ingrained in our psyche to buy the dips last year, that folks adopted the Alfred E. Neuman stance, “What? Me Worry?”

And for a while they were right. Capped off by a 5-week winning streak for both the Dow and Nasdaq, the averages settled as follows one year ago.

9/1/00

Dow Jones 11238
Nasdaq 4234

So in the case of Nasdaq we had our first Crash in the spring and we were about to have our second. Both the Dow and Nasdaq embarked on a 6-week losing streak from this point forward.

10/13/00

Dow Jones 10193
Nasdaq 3316

While the Dow then managed to rally back into the close of the year, Nasdaq kept sliding.

12/31/00

Dow Jones 10788
Nasdaq 2471 [ -42% from 9/1/00]

And now, to complete the year.

9/1/01

Dow Jones 9949 [-11.5% for the period 9/1/00-9/1/01]
Nasdaq 1805 [-57.4%]

September 1, 2000 was also a key date for some big-name stocks. The following either hit highs that week or slightly thereafter.

Intel - $76 (8/28/00)…today, $28
Corning - $113 (8/30/00)…$12
Oracle - $46 (9/1/00)…$12
Sun Micro - $65 (9/1/00)…$11
Nortel - $84 (9/1/00)…$6
EMC - $105 (9/25/00)…$15
Juniper Networks - $245 (10/16/00)…$14
Ciena - $151 (10/20/00)…$17

One year later, if you bought these issues near the respective highs, the realization may be sinking in that you won’t see the purchase price for a long, long time. And that may be impacting your spending patterns.

Now what? First off, so much for relaxing the last week of summer. I was hoping to “mail this in,” as they say. Instead, the Street was in a surly mood and if you had to pick just one culprit it was Sun Microsystems, which issued another gloomy reading of today’s economic environment for technology, particularly as it pertained to the weakening overseas picture. We’re all desperate for that little ray of sunshine that will foretell a brightening profits outlook. But with the ongoing overcapacity situation in techland, lack of pricing power across all sectors, burgeoning layoffs, rising bankruptcies, and falling portfolio values, it’s no wonder that consumer confidence appears to finally be sliding for real.

In about 10 days we will be entering the formal earnings warning season for the 3rd quarter. The profits picture looks just as bleak this go around as it did last reporting period.

There were a few positive sparks in some of the manufacturing reports, but every week there is always something to hang your hat on. The vast majority of the data, however, is negative and what’s most important is investor psychology and consumer sentiment, or, more specifically, real estate and consumer spending.

I need to repeat something I wrote 7/7/01, as part of my “Black Diamond” commentary.

“On numerous occasions I have argued that we would avoid recession, only as classically defined…but that if housing ever truly cracked, we’re talking Depression…yet all of us have marveled at the strength of both housing and the consumer during this increasingly wicked downturn. But whether it’s housing or consumer spending that goes first, it really doesn’t matter, for if one cracks the other will surely follow.”

This week we had the first revision of second quarter GDP. Many of us were worried the original 0.7% number would be restated to below zero. Alas, it remained positive, 0.2%. [Though there is one last revision late September, so it can still go negative.] Psychologically, a minus sign would have made for even more depressing headlines, on top of stories about the Dow collapsing below 10000.

I found it necessary to rewind the above tape, if you will, because suddenly every one and their brother is talking about the real estate bubble; except, it seems, the writer of a front page story in this week’s Wall Street Journal who held the opinion that current real estate values in many parts of this country were not a concern.

With all due respect (long-time readers know what this is code for), there comes a point with every product or investment where you just have to stop and go, “Is a 2-BR condo in Manhattan worth $2-$3 million?” Of course not. “Did Juniper Networks at $245 and a P/E of a grillion make sense?” Of course not. To say otherwise is simply adopting the role of the village idiot.

But the real estate issue isn’t just about value. If you can afford the $18 million New Jersey estate I wrote of last week, you have no reason to worry (or care). No, it’s the debt associated with the vast majority of the real estate holdings many Americans have acquired over the past 5 years in particular that is troublesome. If the current economic slump were to continue much longer, layoffs will gain momentum, the consumer will keep pulling in his or her horns, and we will also finally see a conclusion to the greater fool theory when it comes to housing. And IF it were to roll over, with some homeowners – already loaded with consumer debt – suddenly facing negative equity on their prized asset, well then it wouldn’t be inconceivable to envision a day where we are all discussing something far worse than a recession in manufacturing.

There is still hope we can somehow pull this out, however. While I have my doubts as to its relevance these days, maybe the Fed rate cuts begin to have a more positive effect (aside from on real estate), and maybe Japan avoids its own D-Day, and maybe Europe’s economies stabilize, and maybe a real truce takes hold in the Middle East, and maybe we won’t have a flight out of U.S. dollar assets, and maybe we will get real leadership from our president.

Wow, that’s a lot of maybes. But sentiment is getting so awful that it can be construed as a sign of a bottom. So we’ll end on an upbeat note, and I now ask Jesse Jackson to help lead us all in a cheer.

“Keep hope alive! Keep hope alive!”
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“Week in Review” 9/8/01

Ah, the trials of a weekly column. How to keep it fresh and enlightening when all the editor sees is the same old doom, gloom, and despair. Forgive me for injecting a bit of religion here, but I was in New York this week and when I stopped in St. Patrick’s, I lit a candle for President Bush and prayed he would be granted some wisdom to help lead us out of this mess.

Sure, on one hand we are simply paying the price for what will go down as the biggest bubble, ever, and it’s only natural that it would take years to work off the excesses. But while I’m as guilty as the next guy in spending as much time as I do on technology and Nasdaq (because that’s where all the money flows were), we need to be reminded from time to time that tech represents less than 10% of the overall U.S. economy. There is another world out there, non-tech, that could use a little shot of confidence. President Bush should come up with a real stimulus program (not the tinker toy tax cut we’re receiving in the early years of his first plan), demand national air time, get out the Ross Perot charts (which were darn effective), and appeal directly to all of us for our support. But, alas, he’s not the greatest messenger (as Friday afternoon’s hastily called ‘state of the economy’ proved)…and then my votive candle died out.

No, I certainly didn’t see us retesting the spring lows in our equity markets, but now, forget the spring, the S&P 500 is at its lowest level since the Russian / Long-Term Capital crisis of October 1998. And it’s not just here in the U.S., all of Europe’s major markets are at lows going back to the same period, too, while Tokyo’s Nikkei index is chasing down the Dow like a kamikaze pilot at the end of the Big One. As Archie might have said, “Geezuz, Tojo, kill yourself in your own country; don’t take the rest of us with you.”

On the economic front, early in the week the equity markets got a boost when the leading gauge of manufacturing activity rose far more than expected, signaling that inventories were successfully being worked down and the pace of new orders was picking up. Good. Maybe we’re near a bottom, we all thought.

But then the reading on non-manufacturing activity (i.e., the service sector, which has a far greater real-life weighting than the manufacturing number) unexpectedly plunged. That set the tone for the rest of the week.

The Dow closed at its lowest level since the spring, 9605, while the Nasdaq lost another 6.5% to the 1687 level, just 50 points from its April low. Even a blockbuster merger between Hewlett-Packard and Compaq failed to generate excitement; in fact, both stocks tanked.

And anyone seeking a glimmer of hope on the earnings front saw that dashed, with comments from the likes of Ericsson (no recovery for the mobile phone maker in 2002), Motorola (revised revenue estimates down, again) and non-techs like Marriott (which said its own business was plummeting).

Intel, however, basically reaffirmed guidance for the current quarter, but when you’re now looking at $6.5 billion in revenue, after you did $8.7 billion for the year ago period, and your stock trades at a 50+ p/e multiple based on future earnings expectations (which may still be way too high), how much of a positive can it really be? And it wasn’t, as the stock went nowhere after the news.

But on Friday it was the employment report that really shook things up. The unemployment rate shot from 4.5% to 4.9%, the highest level in 4 years. This headline grabbing event will do a number on consumer confidence, just in time for the holiday season. [Psst…I’ve decided I’m going to take some arts and crafts classes and make my family and friends little boxes out of popsicle sticks this year. I’ll make it up to them when the economy recovers. Just don’t tell them I’m doing this.]

Lastly, there is this ever-present issue of debt. Individuals and corporations are swimming in it. Forget the figures for space junk you heard about this week, that doesn’t include all the paper that is floating around. For example, Europe’s telecoms and the $100 billion-plus they spent on wireless licenses for a new generation of product that is years away, by most sane estimates. Or bringing it closer to home, mortgage delinquencies, which are rising at an alarming rate.

It’s getting bleak. Lord knows we could all use a rally. But the media now has its hands around this story. It’s like throwing chum to the sharks. We need leadership; in Washington, Europe and Japan. Someone has to step forward. I’m waiting.

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“Week in Review” 9/15/01

On Tuesday morning I turned on the “Today Show” in my hotel room in Sturbridge, Massachusetts, to find that the lead story was the return of Michael Jordan. “This is news?” I thought. “Heck I had reported it the day before in ‘Bar Chat,’ where it belonged.”

I was heading up to Wellesley for a long-planned golf outing with my friend, Dave. As I flipped the radio dial while on the Mass Pike, I settled on a country station. Within a minute the traffic reporter said to the DJ, “Gee, I see that picture on your screen. Is that the Trade Center?” “Something has happened,” replied the DJ. “It appears a plane hit it.” My immediate thought was I knew it was a beautiful day in the New York area and that this was no accident. It was a terrorist attack.

I was soon calling my parents so they could describe what was being shown on television. Both Mom and Dad were obviously shaken. Then, “Oh no, there has been an explosion at the other tower!” I hung up with them, sick to the stomach like every American that morning, and proceeded to my friend’s office. Shortly after my arrival the first tower collapsed and I knew it was time to go home. I wasn’t angry, yet. I was scared.

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But in listening to some of the comments discussing the financial implications of the tragedy, I must say I’ve been disgusted. Idiots (who will go nameless, for now) are saying things like, “We’re all going to go out and buy a big ticket item to show the terrorists they can’t beat down our spirit,” or, “It’s a long-term buying opportunity.” This is nuts. We all want to buy American, we all want to see the economy and the markets’ rebound, but, now more than ever, as a people we need to face the truth.

This is going to be a long, drawn out war, with many tragic moments, and our emotions (and our markets) may swoon with each one. This week, for example, as 17,000 passengers were diverted to Gander, Newfoundland, I immediately thought of the December 1985 accident there, which claimed 256 of our armed forces. There will be accidents, there will be missions that may not succeed, there will be more terrorist attacks around the world; the point being that no one knows what the future holds.

As for the economy, as you listen to those who are saying the future is bright, remind yourself of the tremendous dislocations taking place, not just in the U.S. today, but around the world. The most obvious example is the aviation industry. Midway, for starters, shut down operations this week, throwing 1,700 out of work. Every nation is going to be faced with the task of bailing out their major carriers. The costs will be $tens of billions.

And you hear talk of the insurance industry and the losses they face. One analyst came out yesterday and said, however, this is a buying opportunity because once they get through this (stupidly assuming Tuesday was it!) these companies will be able to jack up their premiums. What if that were, indeed, the case? Who bears the cost? Corporate America, that’s who, which then passes it on, or, if not, sees reduced earnings.

Sure, we’re all going to go out and buy flags (and believe me, I’m excited by this new burst of patriotism), and security and defense companies should profit, but those who say the American consumer will resume his or her normal buying patterns simply don’t deserve one second of air time.

The premise of StocksandNews was to remind you that wild cards were important for one reason; they could shatter consumer confidence. And the lowering of confidence could also have a big impact on the average American’s #1 asset, real estate. Imagine what is going through the minds of people in the New York area right now. It’s not just the hig-end folks who have been impacted. Those who died were from all walks of life. And it’s not just confidence in America that has been shattered; it’s the same story in Europe (where markets collapsed for a second straight week), Canada, Mexico, and an already crumbling Japan. As Morgan Stanley economist Stephen Roach remarked “The (very) underpinnings of globalization” are at risk.

We have to deal with facts, and when it comes to Wall Street the fact is that right now preservation of capital is paramount. Don’t look to pick a bottom. Don’t try to be a hero. Don’t go out and “Buy American” if you are already loaded up to your gills in debt and run the risk of losing your job. Take care of your family first and let President Bush and our military take care of the killers.

Volatility is going to be the order of the day, but, again, ignore those who would have you believe that times of crisis are always buying opportunities. First, that isn’t the case. Second, we now face a situation unlike any other in our history. We may go months with largely positive news on the war front and then…bam!...another attack that will drop spirits to new lows. Life has changed, and not for the better.

As to the war effort, there could be some exciting positive developments. For starters, we have a tremendous opportunity to forge a new relationship with Russia. The U.S. needs its help and we have common interests in this fight. The good work that President Bush has previously done in creating a relationship with President Putin appears to be paying off.

And the U.S. has a tremendous ally in Great Britain. Anyone who didn’t cry when the “Star Spangled Banner” was played at Buckingham Palace on Thursday clearly doesn’t have a clue.

But while others like Germany and Italy will surely aid our efforts, we’re soon going to find out who our real friends are, especially in the case of nations like France, which it needs to be remembered hosted Syrian President Assad just this past June. I know the French people are behind us, let’s see if the government follows. And in the Middle East the Gulf War coalition is a thing of the past. What real support will Egypt, Jordan and Saudi Arabia give us as their own leaders fear for their heads?

Yes, in the months ahead we’re all suddenly going to become foreign policy experts. Just remember your editor was there first. My challenge now is not just to be different, but to add value to the debate.

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“Week in Review” 9/22/01

Getting Back to Normal

Well, this past Monday night was the first one where I didn’t dream of a chemical attack. Longtime readers will remember, however, that I have often dreamt of North Korean rockets slamming into Seoul, long before 9/11. But after just one peaceful night I progressed to dreaming of all things nuclear. On this I may not have been alone.

I also stopped crying this week, and I noticed a return to some semblance of normalcy in the town where I work, one that is still tallying up the dead. Life goes on and I hope I don’t offend anyone when I say I’m ready for a little football.

But patriotism and a back to work, can do, spirit are one thing. Wall Street is quite another. And looking back over the past week, no one could have offered better advice than I did in my last review.

“We have to deal with facts, and when it comes to Wall Street, the fact is that right now, preservation of capital is paramount. Don’t look to pick a bottom. Don’t try to be a hero. Don’t go out and ‘Buy American’ if you are already loaded up to your gills in debt…Take care of your family first.”

Here is just a sampling of some of the more idiotic statements made either before trading resumed on the Street, or during the week.

Senator Joe Biden [Sunday night on “Larry King,” forecasting Monday’s market action] “After an initial decline, I predict the Dow will bounce back the same day, just like Pearl Harbor.” Ah, Senator, aside from the fact that it is not your place to make market predictions, you also have your history wrong.

Jack Rivkin / Citigroup [On CNBC’s “Squawk Box,” before Monday’s open] “You’re not going to make a lot of money in your money market funds.”

Suzie Orman / self-made financial “guru” [Sunday on “Larry King”] “I’m more optimistic than I was six months ago.”

Bill O’Reilly [Commenting Thursday on the “Imus” program] “If (stocks) go down, that’s alright. I’ll take the hit because I don’t want to give in to the terrorists.”

Richard Grasso / Chairman, New York Stock Exchange [At the opening bell on Monday] “The long-term has never looked brighter.” This was one of Grasso’s tamer remarks.

As I made clear last week, what upsets me is that these comments are coming from individuals (excluding O’Reilly and Biden) who have a tremendous amount of influence with the average investor. Again, it is time for truth, just as President Bush laid out himself on Thursday.

Of course we all believe in America, and capitalism, but there is a way to address the ‘present’ with dignity, as well as caution. Nasdaq Chairman Wick Simmons is one such individual. He was a statesman this week. And I apologize that most of you won’t understand why I’m attacking Richard Grasso, since many of you don’t get to see him during the day, but he not only acts like a used-car salesman, his search for soaring rhetoric (as if he is running for political office) couldn’t be more inappropriate at this time. Isn’t it amazing that Rudy Giuliani is receiving universal praise, and there isn’t one line you can remember from all of his news conferences and interviews? The mayor is the personification of dignity, humility and strength.

These shills have performed a tremendous disservice. And for some of them like O’Reilly, it’s downright cruel to say “I’ll take the hit” when you’ve got $millions still in your bank account.

So what did I do? I followed my own advice, of course. It is a time to preserve capital.

While the market was closed I kept thinking of my junk bond position, which was substantial. I always told you that while the economy was softening, and my net asset value on the fund was slipping, on a total return basis I was still confident as I awaited an eventual economic rebound. But eking out positive growth in the economy is far different from going negative, given the handwriting that is now on the wall. The only prudent thing to do was exchange my position into the money market option, which I did at my first opportunity, Monday. I knew I would take a hit to the NAV as positions were marked down following the 4 days without trading, but I lost less than 1%. Since my move, the fund declined an additional 2.5%. Other, less conservative junk funds, lost far more. As of Monday evening I was thus 75% cash, 25% equities.

On Tuesday I sold my small California energy play, at a nice profit, but due to lack of liquidity it wasn’t easy. At the end of the day I was then 85% cash. And that’s where I sit today, though because of further depreciation in my remaining holdings it’s closer to 87%.

What I’m left with is my Nasdaq QQQ position (about 4%) and a natural gas play, 9%. This latter stock I first sold last February at $63, bought it back a few weeks ago at $26, and now it’s $20. I am sticking with the stock come hell or high water. I will unload the QQQ (purchased when Nasdaq was around 1950) by yearend to book the loss.

Some of you may have wondered why a patriotic rally didn’t unfold.  The market hates uncertainty, and we have it today in spades. Not only are we soon to be enveloped by the “fog of war,” but we also can’t effectively gauge the economic impact yet. The terrorists planned the attack long before the economy was sliding. They were originally out to kill innocent civilians. It is not an overstatement to say they also killed the global economy.

Nonetheless, there are many responsible voices out on Wall Street now proclaiming that after we have this severe decline in economic activity, the economy will roar back, largely because of all the economic stimulus that will be handed out by Congress for the rebuilding effort, as well as the massive amounts of liquidity that the Federal Reserve has injected into the system; in other words we may have a “V-shaped” recovery.

I want to believe this, but it is far too early to tell. There are so many moving parts, in both the war effort as well as the global economy that I must continue to take my own advice. I can’t pick the bottom and I’m preserving capital as best as I can. If the market rallies back at least my remaining equity positions will participate….

We all need some time to think, collect as much information as possible, and then make rational decisions. It’s been difficult to do this these past two weeks. We’re all beat, tired, wrung out. Unfortunately, the markets wait for no one; they have no timetable. Or, as Wick Simmons said, “Markets will be markets.” That’s the reality of it all.

Street Bytes

--The major market averages suffered declines not seen since 1933, in the case of the Dow Jones, off 14% and a record 1369 points (to 8235); 1987 for the S&P 500, off 12%; and spring of 2000 for Nasdaq, off 16% (1423). The big issue is how do you price individual equities in this New World? Wave after wave of earnings warnings hit the Street. And traders, the most important folks in the world, want immediate gratification on the war front.

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Following are the returns for the past two weeks. The first figure for the stock returns is for the single day of trading, 9/10, the second for last week.

Gold closed at $280 (9/14) $291 (9/21)
Oil, $29.76 (9/14) $25.97 (9/21)

Returns for the week 9/10-9/14, 9/17-9/21

Dow Jones -0.0%...-14.3%
S&P 500 +0.6%...-11.6%
S&P MidCap -0.7%...-13.5%
Russell 2000 -1.0%...-14.0%
Nasdaq +0.5%...-16.1%

Returns for the period 1/1/01-9/21/01

Dow Jones -23.7%
S&P 500 -26.9%
S&P MidCap -21.8%
Russell 2000 -21.6%
Nasdaq -42.4%

Bulls 35.7 (9/21)
Bears 37.6

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Postscript: As it turned out, while the markets began to rally back strongly, the averages later resumed their swoon and wouldn’t bottom until one year later, Oct. 2002.

9/21/01

Dow Jones… 8235
S&P 500… 965
Nasdaq …1423

10/4/02

Dow Jones…7528
S&P 500… 800…officially bottomed on 10/9 at 776
Nasdaq…1139

Of course in the fall of 2002, there was increased talk of war with Iraq. It proved to be a good time to buy, even if the war effort itself would falter badly after the initial success.

Wall Street History will return Sept. 23.

Brian Trumbore



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Wall Street History

09/09/2011

9/11: A Look Back

On the ten-year anniversary of the 9/11 attacks, I take a look back at some of the items I was covering in the weeks leading up to 9/11, as well as my first thoughts afterwards; all courtesy of the “Week in Review” archives.

The focus is on the more market-oriented commentary and outside of a few grammatical changes, all of the text is as I wrote it then, warts and all, including warnings on real estate that were too soon, in the short run, but spot on longer term.

---

“Week in Review” 9/1/01

Market History

September 1 marks the one-year anniversary of the real market top. From this day in 2000, it was truly downhill. The numbers tell the story.

12/31/99

Dow Jones 11497 [DJ hits 11722 on 1/14/00]
Nasdaq 4069

The indexes then diverge significantly.

3/10/00

Dow Jones 9928 [-15% from the 1/14 high]
Nasdaq 5048 [All-time high]

Then the process reverses. Over the next five weeks the Nasdaq swooned, culminating in a 25% decline for the week of April 10. But the Dow rallied.

4/14/00

Dow Jones 10305
Nasdaq 3320 [-34% from the 3/10/ high]

I hate to admit it, but it was at this point that I made a mistake. I thought the drubbing in tech would equate to reduced consumer spending (the wealth effect). I have learned one of those lessons that make this game of life (as well as the stock market) so challenging. I would now say that barring an external shock (which is why we still focus on wild cards around here) it takes a year for the majority of investors to materially change their consumption habits after a large market move. And it was so ingrained in our psyche to buy the dips last year, that folks adopted the Alfred E. Neuman stance, “What? Me Worry?”

And for a while they were right. Capped off by a 5-week winning streak for both the Dow and Nasdaq, the averages settled as follows one year ago.

9/1/00

Dow Jones 11238
Nasdaq 4234

So in the case of Nasdaq we had our first Crash in the spring and we were about to have our second. Both the Dow and Nasdaq embarked on a 6-week losing streak from this point forward.

10/13/00

Dow Jones 10193
Nasdaq 3316

While the Dow then managed to rally back into the close of the year, Nasdaq kept sliding.

12/31/00

Dow Jones 10788
Nasdaq 2471 [ -42% from 9/1/00]

And now, to complete the year.

9/1/01

Dow Jones 9949 [-11.5% for the period 9/1/00-9/1/01]
Nasdaq 1805 [-57.4%]

September 1, 2000 was also a key date for some big-name stocks. The following either hit highs that week or slightly thereafter.

Intel - $76 (8/28/00)…today, $28
Corning - $113 (8/30/00)…$12
Oracle - $46 (9/1/00)…$12
Sun Micro - $65 (9/1/00)…$11
Nortel - $84 (9/1/00)…$6
EMC - $105 (9/25/00)…$15
Juniper Networks - $245 (10/16/00)…$14
Ciena - $151 (10/20/00)…$17

One year later, if you bought these issues near the respective highs, the realization may be sinking in that you won’t see the purchase price for a long, long time. And that may be impacting your spending patterns.

Now what? First off, so much for relaxing the last week of summer. I was hoping to “mail this in,” as they say. Instead, the Street was in a surly mood and if you had to pick just one culprit it was Sun Microsystems, which issued another gloomy reading of today’s economic environment for technology, particularly as it pertained to the weakening overseas picture. We’re all desperate for that little ray of sunshine that will foretell a brightening profits outlook. But with the ongoing overcapacity situation in techland, lack of pricing power across all sectors, burgeoning layoffs, rising bankruptcies, and falling portfolio values, it’s no wonder that consumer confidence appears to finally be sliding for real.

In about 10 days we will be entering the formal earnings warning season for the 3rd quarter. The profits picture looks just as bleak this go around as it did last reporting period.

There were a few positive sparks in some of the manufacturing reports, but every week there is always something to hang your hat on. The vast majority of the data, however, is negative and what’s most important is investor psychology and consumer sentiment, or, more specifically, real estate and consumer spending.

I need to repeat something I wrote 7/7/01, as part of my “Black Diamond” commentary.

“On numerous occasions I have argued that we would avoid recession, only as classically defined…but that if housing ever truly cracked, we’re talking Depression…yet all of us have marveled at the strength of both housing and the consumer during this increasingly wicked downturn. But whether it’s housing or consumer spending that goes first, it really doesn’t matter, for if one cracks the other will surely follow.”

This week we had the first revision of second quarter GDP. Many of us were worried the original 0.7% number would be restated to below zero. Alas, it remained positive, 0.2%. [Though there is one last revision late September, so it can still go negative.] Psychologically, a minus sign would have made for even more depressing headlines, on top of stories about the Dow collapsing below 10000.

I found it necessary to rewind the above tape, if you will, because suddenly every one and their brother is talking about the real estate bubble; except, it seems, the writer of a front page story in this week’s Wall Street Journal who held the opinion that current real estate values in many parts of this country were not a concern.

With all due respect (long-time readers know what this is code for), there comes a point with every product or investment where you just have to stop and go, “Is a 2-BR condo in Manhattan worth $2-$3 million?” Of course not. “Did Juniper Networks at $245 and a P/E of a grillion make sense?” Of course not. To say otherwise is simply adopting the role of the village idiot.

But the real estate issue isn’t just about value. If you can afford the $18 million New Jersey estate I wrote of last week, you have no reason to worry (or care). No, it’s the debt associated with the vast majority of the real estate holdings many Americans have acquired over the past 5 years in particular that is troublesome. If the current economic slump were to continue much longer, layoffs will gain momentum, the consumer will keep pulling in his or her horns, and we will also finally see a conclusion to the greater fool theory when it comes to housing. And IF it were to roll over, with some homeowners – already loaded with consumer debt – suddenly facing negative equity on their prized asset, well then it wouldn’t be inconceivable to envision a day where we are all discussing something far worse than a recession in manufacturing.

There is still hope we can somehow pull this out, however. While I have my doubts as to its relevance these days, maybe the Fed rate cuts begin to have a more positive effect (aside from on real estate), and maybe Japan avoids its own D-Day, and maybe Europe’s economies stabilize, and maybe a real truce takes hold in the Middle East, and maybe we won’t have a flight out of U.S. dollar assets, and maybe we will get real leadership from our president.

Wow, that’s a lot of maybes. But sentiment is getting so awful that it can be construed as a sign of a bottom. So we’ll end on an upbeat note, and I now ask Jesse Jackson to help lead us all in a cheer.

“Keep hope alive! Keep hope alive!”
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“Week in Review” 9/8/01

Ah, the trials of a weekly column. How to keep it fresh and enlightening when all the editor sees is the same old doom, gloom, and despair. Forgive me for injecting a bit of religion here, but I was in New York this week and when I stopped in St. Patrick’s, I lit a candle for President Bush and prayed he would be granted some wisdom to help lead us out of this mess.

Sure, on one hand we are simply paying the price for what will go down as the biggest bubble, ever, and it’s only natural that it would take years to work off the excesses. But while I’m as guilty as the next guy in spending as much time as I do on technology and Nasdaq (because that’s where all the money flows were), we need to be reminded from time to time that tech represents less than 10% of the overall U.S. economy. There is another world out there, non-tech, that could use a little shot of confidence. President Bush should come up with a real stimulus program (not the tinker toy tax cut we’re receiving in the early years of his first plan), demand national air time, get out the Ross Perot charts (which were darn effective), and appeal directly to all of us for our support. But, alas, he’s not the greatest messenger (as Friday afternoon’s hastily called ‘state of the economy’ proved)…and then my votive candle died out.

No, I certainly didn’t see us retesting the spring lows in our equity markets, but now, forget the spring, the S&P 500 is at its lowest level since the Russian / Long-Term Capital crisis of October 1998. And it’s not just here in the U.S., all of Europe’s major markets are at lows going back to the same period, too, while Tokyo’s Nikkei index is chasing down the Dow like a kamikaze pilot at the end of the Big One. As Archie might have said, “Geezuz, Tojo, kill yourself in your own country; don’t take the rest of us with you.”

On the economic front, early in the week the equity markets got a boost when the leading gauge of manufacturing activity rose far more than expected, signaling that inventories were successfully being worked down and the pace of new orders was picking up. Good. Maybe we’re near a bottom, we all thought.

But then the reading on non-manufacturing activity (i.e., the service sector, which has a far greater real-life weighting than the manufacturing number) unexpectedly plunged. That set the tone for the rest of the week.

The Dow closed at its lowest level since the spring, 9605, while the Nasdaq lost another 6.5% to the 1687 level, just 50 points from its April low. Even a blockbuster merger between Hewlett-Packard and Compaq failed to generate excitement; in fact, both stocks tanked.

And anyone seeking a glimmer of hope on the earnings front saw that dashed, with comments from the likes of Ericsson (no recovery for the mobile phone maker in 2002), Motorola (revised revenue estimates down, again) and non-techs like Marriott (which said its own business was plummeting).

Intel, however, basically reaffirmed guidance for the current quarter, but when you’re now looking at $6.5 billion in revenue, after you did $8.7 billion for the year ago period, and your stock trades at a 50+ p/e multiple based on future earnings expectations (which may still be way too high), how much of a positive can it really be? And it wasn’t, as the stock went nowhere after the news.

But on Friday it was the employment report that really shook things up. The unemployment rate shot from 4.5% to 4.9%, the highest level in 4 years. This headline grabbing event will do a number on consumer confidence, just in time for the holiday season. [Psst…I’ve decided I’m going to take some arts and crafts classes and make my family and friends little boxes out of popsicle sticks this year. I’ll make it up to them when the economy recovers. Just don’t tell them I’m doing this.]

Lastly, there is this ever-present issue of debt. Individuals and corporations are swimming in it. Forget the figures for space junk you heard about this week, that doesn’t include all the paper that is floating around. For example, Europe’s telecoms and the $100 billion-plus they spent on wireless licenses for a new generation of product that is years away, by most sane estimates. Or bringing it closer to home, mortgage delinquencies, which are rising at an alarming rate.

It’s getting bleak. Lord knows we could all use a rally. But the media now has its hands around this story. It’s like throwing chum to the sharks. We need leadership; in Washington, Europe and Japan. Someone has to step forward. I’m waiting.

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“Week in Review” 9/15/01

On Tuesday morning I turned on the “Today Show” in my hotel room in Sturbridge, Massachusetts, to find that the lead story was the return of Michael Jordan. “This is news?” I thought. “Heck I had reported it the day before in ‘Bar Chat,’ where it belonged.”

I was heading up to Wellesley for a long-planned golf outing with my friend, Dave. As I flipped the radio dial while on the Mass Pike, I settled on a country station. Within a minute the traffic reporter said to the DJ, “Gee, I see that picture on your screen. Is that the Trade Center?” “Something has happened,” replied the DJ. “It appears a plane hit it.” My immediate thought was I knew it was a beautiful day in the New York area and that this was no accident. It was a terrorist attack.

I was soon calling my parents so they could describe what was being shown on television. Both Mom and Dad were obviously shaken. Then, “Oh no, there has been an explosion at the other tower!” I hung up with them, sick to the stomach like every American that morning, and proceeded to my friend’s office. Shortly after my arrival the first tower collapsed and I knew it was time to go home. I wasn’t angry, yet. I was scared.

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But in listening to some of the comments discussing the financial implications of the tragedy, I must say I’ve been disgusted. Idiots (who will go nameless, for now) are saying things like, “We’re all going to go out and buy a big ticket item to show the terrorists they can’t beat down our spirit,” or, “It’s a long-term buying opportunity.” This is nuts. We all want to buy American, we all want to see the economy and the markets’ rebound, but, now more than ever, as a people we need to face the truth.

This is going to be a long, drawn out war, with many tragic moments, and our emotions (and our markets) may swoon with each one. This week, for example, as 17,000 passengers were diverted to Gander, Newfoundland, I immediately thought of the December 1985 accident there, which claimed 256 of our armed forces. There will be accidents, there will be missions that may not succeed, there will be more terrorist attacks around the world; the point being that no one knows what the future holds.

As for the economy, as you listen to those who are saying the future is bright, remind yourself of the tremendous dislocations taking place, not just in the U.S. today, but around the world. The most obvious example is the aviation industry. Midway, for starters, shut down operations this week, throwing 1,700 out of work. Every nation is going to be faced with the task of bailing out their major carriers. The costs will be $tens of billions.

And you hear talk of the insurance industry and the losses they face. One analyst came out yesterday and said, however, this is a buying opportunity because once they get through this (stupidly assuming Tuesday was it!) these companies will be able to jack up their premiums. What if that were, indeed, the case? Who bears the cost? Corporate America, that’s who, which then passes it on, or, if not, sees reduced earnings.

Sure, we’re all going to go out and buy flags (and believe me, I’m excited by this new burst of patriotism), and security and defense companies should profit, but those who say the American consumer will resume his or her normal buying patterns simply don’t deserve one second of air time.

The premise of StocksandNews was to remind you that wild cards were important for one reason; they could shatter consumer confidence. And the lowering of confidence could also have a big impact on the average American’s #1 asset, real estate. Imagine what is going through the minds of people in the New York area right now. It’s not just the hig-end folks who have been impacted. Those who died were from all walks of life. And it’s not just confidence in America that has been shattered; it’s the same story in Europe (where markets collapsed for a second straight week), Canada, Mexico, and an already crumbling Japan. As Morgan Stanley economist Stephen Roach remarked “The (very) underpinnings of globalization” are at risk.

We have to deal with facts, and when it comes to Wall Street the fact is that right now preservation of capital is paramount. Don’t look to pick a bottom. Don’t try to be a hero. Don’t go out and “Buy American” if you are already loaded up to your gills in debt and run the risk of losing your job. Take care of your family first and let President Bush and our military take care of the killers.

Volatility is going to be the order of the day, but, again, ignore those who would have you believe that times of crisis are always buying opportunities. First, that isn’t the case. Second, we now face a situation unlike any other in our history. We may go months with largely positive news on the war front and then…bam!...another attack that will drop spirits to new lows. Life has changed, and not for the better.

As to the war effort, there could be some exciting positive developments. For starters, we have a tremendous opportunity to forge a new relationship with Russia. The U.S. needs its help and we have common interests in this fight. The good work that President Bush has previously done in creating a relationship with President Putin appears to be paying off.

And the U.S. has a tremendous ally in Great Britain. Anyone who didn’t cry when the “Star Spangled Banner” was played at Buckingham Palace on Thursday clearly doesn’t have a clue.

But while others like Germany and Italy will surely aid our efforts, we’re soon going to find out who our real friends are, especially in the case of nations like France, which it needs to be remembered hosted Syrian President Assad just this past June. I know the French people are behind us, let’s see if the government follows. And in the Middle East the Gulf War coalition is a thing of the past. What real support will Egypt, Jordan and Saudi Arabia give us as their own leaders fear for their heads?

Yes, in the months ahead we’re all suddenly going to become foreign policy experts. Just remember your editor was there first. My challenge now is not just to be different, but to add value to the debate.

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“Week in Review” 9/22/01

Getting Back to Normal

Well, this past Monday night was the first one where I didn’t dream of a chemical attack. Longtime readers will remember, however, that I have often dreamt of North Korean rockets slamming into Seoul, long before 9/11. But after just one peaceful night I progressed to dreaming of all things nuclear. On this I may not have been alone.

I also stopped crying this week, and I noticed a return to some semblance of normalcy in the town where I work, one that is still tallying up the dead. Life goes on and I hope I don’t offend anyone when I say I’m ready for a little football.

But patriotism and a back to work, can do, spirit are one thing. Wall Street is quite another. And looking back over the past week, no one could have offered better advice than I did in my last review.

“We have to deal with facts, and when it comes to Wall Street, the fact is that right now, preservation of capital is paramount. Don’t look to pick a bottom. Don’t try to be a hero. Don’t go out and ‘Buy American’ if you are already loaded up to your gills in debt…Take care of your family first.”

Here is just a sampling of some of the more idiotic statements made either before trading resumed on the Street, or during the week.

Senator Joe Biden [Sunday night on “Larry King,” forecasting Monday’s market action] “After an initial decline, I predict the Dow will bounce back the same day, just like Pearl Harbor.” Ah, Senator, aside from the fact that it is not your place to make market predictions, you also have your history wrong.

Jack Rivkin / Citigroup [On CNBC’s “Squawk Box,” before Monday’s open] “You’re not going to make a lot of money in your money market funds.”

Suzie Orman / self-made financial “guru” [Sunday on “Larry King”] “I’m more optimistic than I was six months ago.”

Bill O’Reilly [Commenting Thursday on the “Imus” program] “If (stocks) go down, that’s alright. I’ll take the hit because I don’t want to give in to the terrorists.”

Richard Grasso / Chairman, New York Stock Exchange [At the opening bell on Monday] “The long-term has never looked brighter.” This was one of Grasso’s tamer remarks.

As I made clear last week, what upsets me is that these comments are coming from individuals (excluding O’Reilly and Biden) who have a tremendous amount of influence with the average investor. Again, it is time for truth, just as President Bush laid out himself on Thursday.

Of course we all believe in America, and capitalism, but there is a way to address the ‘present’ with dignity, as well as caution. Nasdaq Chairman Wick Simmons is one such individual. He was a statesman this week. And I apologize that most of you won’t understand why I’m attacking Richard Grasso, since many of you don’t get to see him during the day, but he not only acts like a used-car salesman, his search for soaring rhetoric (as if he is running for political office) couldn’t be more inappropriate at this time. Isn’t it amazing that Rudy Giuliani is receiving universal praise, and there isn’t one line you can remember from all of his news conferences and interviews? The mayor is the personification of dignity, humility and strength.

These shills have performed a tremendous disservice. And for some of them like O’Reilly, it’s downright cruel to say “I’ll take the hit” when you’ve got $millions still in your bank account.

So what did I do? I followed my own advice, of course. It is a time to preserve capital.

While the market was closed I kept thinking of my junk bond position, which was substantial. I always told you that while the economy was softening, and my net asset value on the fund was slipping, on a total return basis I was still confident as I awaited an eventual economic rebound. But eking out positive growth in the economy is far different from going negative, given the handwriting that is now on the wall. The only prudent thing to do was exchange my position into the money market option, which I did at my first opportunity, Monday. I knew I would take a hit to the NAV as positions were marked down following the 4 days without trading, but I lost less than 1%. Since my move, the fund declined an additional 2.5%. Other, less conservative junk funds, lost far more. As of Monday evening I was thus 75% cash, 25% equities.

On Tuesday I sold my small California energy play, at a nice profit, but due to lack of liquidity it wasn’t easy. At the end of the day I was then 85% cash. And that’s where I sit today, though because of further depreciation in my remaining holdings it’s closer to 87%.

What I’m left with is my Nasdaq QQQ position (about 4%) and a natural gas play, 9%. This latter stock I first sold last February at $63, bought it back a few weeks ago at $26, and now it’s $20. I am sticking with the stock come hell or high water. I will unload the QQQ (purchased when Nasdaq was around 1950) by yearend to book the loss.

Some of you may have wondered why a patriotic rally didn’t unfold.  The market hates uncertainty, and we have it today in spades. Not only are we soon to be enveloped by the “fog of war,” but we also can’t effectively gauge the economic impact yet. The terrorists planned the attack long before the economy was sliding. They were originally out to kill innocent civilians. It is not an overstatement to say they also killed the global economy.

Nonetheless, there are many responsible voices out on Wall Street now proclaiming that after we have this severe decline in economic activity, the economy will roar back, largely because of all the economic stimulus that will be handed out by Congress for the rebuilding effort, as well as the massive amounts of liquidity that the Federal Reserve has injected into the system; in other words we may have a “V-shaped” recovery.

I want to believe this, but it is far too early to tell. There are so many moving parts, in both the war effort as well as the global economy that I must continue to take my own advice. I can’t pick the bottom and I’m preserving capital as best as I can. If the market rallies back at least my remaining equity positions will participate….

We all need some time to think, collect as much information as possible, and then make rational decisions. It’s been difficult to do this these past two weeks. We’re all beat, tired, wrung out. Unfortunately, the markets wait for no one; they have no timetable. Or, as Wick Simmons said, “Markets will be markets.” That’s the reality of it all.

Street Bytes

--The major market averages suffered declines not seen since 1933, in the case of the Dow Jones, off 14% and a record 1369 points (to 8235); 1987 for the S&P 500, off 12%; and spring of 2000 for Nasdaq, off 16% (1423). The big issue is how do you price individual equities in this New World? Wave after wave of earnings warnings hit the Street. And traders, the most important folks in the world, want immediate gratification on the war front.

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Following are the returns for the past two weeks. The first figure for the stock returns is for the single day of trading, 9/10, the second for last week.

Gold closed at $280 (9/14) $291 (9/21)
Oil, $29.76 (9/14) $25.97 (9/21)

Returns for the week 9/10-9/14, 9/17-9/21

Dow Jones -0.0%...-14.3%
S&P 500 +0.6%...-11.6%
S&P MidCap -0.7%...-13.5%
Russell 2000 -1.0%...-14.0%
Nasdaq +0.5%...-16.1%

Returns for the period 1/1/01-9/21/01

Dow Jones -23.7%
S&P 500 -26.9%
S&P MidCap -21.8%
Russell 2000 -21.6%
Nasdaq -42.4%

Bulls 35.7 (9/21)
Bears 37.6

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Postscript: As it turned out, while the markets began to rally back strongly, the averages later resumed their swoon and wouldn’t bottom until one year later, Oct. 2002.

9/21/01

Dow Jones… 8235
S&P 500… 965
Nasdaq …1423

10/4/02

Dow Jones…7528
S&P 500… 800…officially bottomed on 10/9 at 776
Nasdaq…1139

Of course in the fall of 2002, there was increased talk of war with Iraq. It proved to be a good time to buy, even if the war effort itself would falter badly after the initial success.

Wall Street History will return Sept. 23.

Brian Trumbore