Barron's Also Highlights FED's End to Transparency
UP AND DOWN WALL STREET By ALAN ABELSON http://online.barrons.com/article/ SB113175540742595410.html?mod=9_0030_b_this_weeks_magazine_columns
A Medal for Messups
SO WHAT DO THEY GIVE WINNERS?
We know what they give losers -- the Presidential Medal of Freedom.
Last Wednesday, by way of illustration, Alan Greenspan, the present and impending former chairman of the Federal Reserve, received one of these coveted metallic decorations. He thus joined two other prominent ex-civil servants, Paul Bremer and George Tenet, who were similarly honored last year.
In the four decades since its inception, the medal has undeniably been awarded to persons of true distinction and the selected this year were no exception, including the likes of the great heavyweight champ Muhammad Ali; the comedienne (we trust we won't be accused of being hopelessly sexist by not calling her a comedian, but we're meekly bowing to the official designation) Carol Burnett; the historian Robert Conquest; and the renowned golfer Jack Nicklaus.
But we fear that Mr. Bremer, Mr. Tenet and Mr. Greenspan lay claim to a different order of achievement. Mr. Tenet, late of the CIA, became famous, you may recall, for his conviction that it was a "slam dunk" that Saddam still had weapons of mass destruction, thus paving the way for the invasion of Iraq. And Mr. Bremer during his disastrous stint as proconsul, made such a botch of the occupation as to ensure that the dream of turning that woebegotten nation into a prosperous, peaceful democracy would metamorphose into a nightmare without end.
For his part, Mr. Greenspan created two of the greatest speculative bubbles in all of history, one in stocks and one in housing. Just as a measure of how remarkable an accomplishment that is, none of his dozen predecessors stretching back over nearly a century, including such formidable figures as William McChesney Martin and Paul Volcker, can legitimately be credited for creating even so much as a bubblette.
It's almost as if Mr. Bush -- who is certainly not without his playful side -- in awarding the medal to this trio was aiming for a trifecta of the messups. A kind of sly payback for the pain they've caused him, both at home and abroad. Or, it could be, a profoundly forgiving soul, he adheres to the dictum that no bad deed goes unrewarded.
We want to be fair. Mr. Greenspan's unrivaled bubble-blowing talent is by no means his only call on recognition. Equally noteworthy is his critical contribution to making this proud nation the world's leading debtor and his key role in enabling Americans to become the world's most remorseless borrowers, ravenous spenders and reluctant savers. Nor should we slight his essential participation in the magical transformation of lush budget surpluses into historic budget deficits.
The Presidential Medal of Freedom, for all its status as a vaunted symbol of appreciation for service to the citizenry, is by no means Mr. Greenspan's only tangible evidence of the esteem he so widely enjoys. Over the years, he has earned innumerable honors for his outstanding performance in behalf of the commonweal.
Thus, in our mind's eye, we can see him dusting off a place on his award-laden mantelpiece for the Medal of Freedom right next to the Enron Prize for Distinguished Public Service bestowed on him back in November 2001.
If memory serves, he accepted the prize a mere handful of days after Enron disclosed it had filed five years' worth of phony financial reports. Ah, well, for all his heralded virtues, Mr. G's timing has always left something to be desired.
AS A FOOTNOTE TO THE ABOVE, we hark back to May 24 of last year, when we penned a blurb describing some neat research done by Kenneth Thomas, who has done time in academia as a professor and is currently a lecturer in finance at the Wharton School at the U. of Penn. Through dogged persistence and crafty sleuthing, he discovered that in the three years through 2003, Mr. Greenspan had visited the White House 67% more often than he had graced it during the '96-'98 stretch of Mr. Clinton's tenancy.
As we remarked at the time, it was always possible that the markedly fewer visits might have reflected the fact that Mr. Clinton was engaged in other pursuits in the Oval Office during that particular period. But Dr. Thomas felt that Mr. Greenspan's habitual journeys to the White House was evidence of his being too tight with Mr. Bush, at the very least lending the appearance that the supposedly independent Fed was being excessively influenced by the president.
Dr. Thomas reported to us recently that Mr. Greenspan's visits to the First Residence began to drop off noticeably from 26 in the first half of last year to 20 in the second half and 19 in the first half of this year. Pure coincidence, we're sure, that the chumminess between Mr. G and Mr. B started to chill when the Fed began its serial hikes in interest rates.
Strangely, too, after Dr. Thomas went public with his findings in '04, he ran into what he calls big problems trying to extract further such info from the Fed via Freedom of Information Act requests. Even though he had been getting detailed logs of White House visitors for five years without trouble, the Fed suddenly refused to reveal the names of the visitors. Seemingly, from a policy leaning toward transparency, Greenspan & Co. quietly switched to one favoring opacity.
"I can only hope," Dr. Thomas says, "that Ben Bernanke is a little more open to disclosure" and less prone to visit the White House. We hope so, too, but feel constrained to advise him not to get his expectations up. Disclosure is decidedly not the fashion in Washington these days.
THE STOCK MARKET YAWNED rather loudly at the election results, widely seen by political "experts" (an expert, as someone once shrewdly observed, is anyone 50 miles away from home) as an ill omen for Republicans in next year's congressional contests. Our own strong hunch is that the stock market's reaction was dead on.
For one thing, those very same experts pretty much were all predicting the New Jersey gubernatorial race was too close to call; in the event, it wasn't even close enough to be interesting. But, especially in politics, a year can be an eternity (as witness what has happened to Mr. Bush's poll numbers in the past 12 months). And while the market is a bosom buddy of speculation and no stranger to wild speculation, it doesn't cotton all that much to political speculation, which is all mouth and no money.
But, in contrast to its jittery and pale performance during most of October, the market these past couple of weeks has been able to shrug off, or, at the very least, take in stride, virtually any kind of bad news. Which, no surprise, has been just the fodder the bulls have been praying for and with evident reason: Nothing is quite as inspiriting for investors as the sight of stocks rising, whatever the ostensible impetus.
There is, we're happy to report, no shortage of explanations for the market's turn for the better. The reigning favorite is that 'tis the season. November and December, so this learned calendrical argument runs, usually are strong months for share prices; we're now firmly ensconced in November; ergo, share prices are going up. This explication has the great advantage of going beyond simplicity to simple-mindedness, which invariably has great appeal on Wall Street.
And such a warm and fuzzy sensation as conveyed by the phrase " 'tis the season," we must confess, is a real comfort in a year not conspicuously overburdened by such heartening qualities. A less sentimental analysis can be found in Fred Hickey's latest edition of the High-Tech Strategist. He notes that hedge funds this year haven't been setting the world on fire. But, he points out, there are huge monetary incentives, like 20% or more of the profits, for managers of those funds to achieve gains above their hurdle rates. And Fred suspects that their exertions to goose their portfolios as the year winds down will provide no little spur to the market as a whole.
We might add that mutual funds are also not loath to similarly embellish their performances at year end, and especially in a nondescript market year like this one. There were some peculiar runs in various stocks owned by those mastodon investors as the third quarter drew to a close, and we expect a lot more of them before 2005 calls it quits. Whether aggressive stewardship of other people's money or good old hanky-panky, it's fuel for a rising market.
As we're witnessing even as we scribble, it doesn't take very much to turn investor sentiment around. And all the soundings we attend to on that score, whether they measure the feelings of individuals, institutions or professional kibitzers, have shifted from down in the dumps to cautiously bullish to not-so-cautiously bullish. Just about everybody suddenly is salivating over the signs of a big year-end rally.
Nor, in light of all this, would a further push upward by the market knock our socks off. But the near unanimity that such a rally is a done deal makes us feel a bit antsy. And we don't like to even think about what might happen, if, by some remote possibility, it turns out the crowd has gotten it wrong and the rally fizzles out before the year does.
AMONG THE NEGATIVES the market ran into last week were some crummy quarterly earnings reports, notably by Cisco Systems (ticker: CSCO) and Dell (DELL). Cisco, of course, has been a chronic disappointer for quite a spell, so one more unexciting quarter doesn't come under the heading of a surprise. But while Dell carefully prepared investors for a blah showing with pre-emptive warnings, the actual results in some important ways were worse than expected.
So spake the incomparable Fred Hickey when we chatted with him on Friday (the company released its earnings on Thursday, which occasioned our call). While in its official exegesis of October-quarter results Dell cited softness in the U.S. and U.K. consumer markets as the prime culprits responsible for its lackluster showing, Fred says the striking thing was how relatively poorly it did just about everywhere. And everywhere in this case includes the booming Asia-Pacific market, which takes in China and Japan. The only real strength for the company, he notes, came courtesy of U.S. business demand.
Fred was particularly disturbed by what he espies as the deterioration of Dell's balance sheet, something, he sighs, the analysts who follow the company seem to pay scant attention to. In particular, he cites the rise in inventories, receivables and payables, along with ballooning "other assets," a vague and catchall category.
He further questions Dell's heavy repurchases of its own stock, which for all they may support per-share earnings, eat away at stockholders' equity. In that regard, he sighs, book value has shrunk steadily to its present reduced status of less than $2 a share (his more precise calculation puts it at $1.98). Which means, among other things, that Dell's stock is selling at around 15 times book, a rich price, indeed, for a company whose growth is perceptibly slowing.
What's more, Fred observes, Dell's middling performance is taking place against a backdrop of pretty vigorous PC demand: Worldwide unit sales are up something like 17% this year. If Dell finds the going tough now, he can't help but grimace at its prospects if, as he anticipates, consumers, under pressure from high fuel prices and a less accommodating housing market, cut back their frenetic consuming of all kinds of stuff, including computers.
He doesn't think, to state the obvious, that Dell has seen the last of its woes or that its stock, even after suffering a spate of selling, bears much resemblance to a bargain.
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