[Posted 7:00AM ET]
Iraq
President George W. Bush gave an impassioned speech Thursday
on the need for democracy in the Middle East, proclaiming,
among other things, that the mullahs in Tehran “must heed the
democratic demands of the Iranian people.” But while I, too,
have argued that our war in Iraq can be the touchstone for change
around the region, the administration’s actions on the ground
belie the rhetoric. How else can you explain a policy that says
on one hand the U.S. won’t cut and run, and then on the other
prepares for drastically reduced troop levels just months down
the road?
The most important opinion piece of the week was penned by
political scientist Edward Luttwak in the Washington Post. The
following should startle you.
Today we are told the U.S. has 133,000 troops in Iraq. How
many of these are actual combat forces? Try 56,000. And how
many are thus in the field at any one time, assuming 12-hour
shifts? 28,000…28,000 to cover the whole freakin’ country. [By
comparison, New York City has 39,000 police officers.]
Why so few? Because of the support tail. For example, the 101st
Airborne has 270 helicopters and 1,000 technicians to maintain
them.
It’s insane. Senator John McCain is calling for an additional
15,000, immediately, but even that’s not enough it would seem.
This isn’t the first time I’ve written this, but for crying out loud
the first thing we have to do is secure the borders and those damn
ammunition dumps! And the worst thing to do is to give some
Iraqis plucked off the streets about 6 hours training, hand them a
broomstick, and have them perform these duties instead. Aside
from the lack of preparation, with the rush on the part of the
Bush administration to ramp up the Iraqi security force quickly,
they obviously also haven’t been screened properly. What a
nightmare.
Fareed Zakaria has written the best pieces on “Iraqification,”
noting that the accelerated timing is not only “dangerous,” it also
makes the calls for a quick transition to democracy ludicrous.
First off, you need to instill the rule of law and the protection of
property rights before you can even begin to talk about the
ballot box (think Singapore and Taiwan, for example), and I
would add it doesn’t help when the new judges are being
assassinated.
You begin to see why we really do have only 3 months or so to
win the “hearts and minds” of the Iraqi people, let alone maintain
the support of the American citizenry.
According to a Washington Post / ABC News poll, 64% are
opposed to the $87 billion reconstruction package, and while
54% say the war was worth fighting (a pitifully low figure for
this point in time), 51% disapprove of Bush’s handling of it and
62% of Americans say the nation has suffered an unacceptable
level of casualties.
The Washington Post’s David Ignatius was recently over in Iraq
with Deputy Defense Secretary Paul Wolfowitz. Following are
some of his conclusions.
“America’s problems in Iraq stem in large part from wishful
thinking, and Wolfowitz and his colleagues must be careful to
avoid any more of it now as they try to craft a sustainable
strategy. What worries me most after touring Iraq with
Wolfowitz is how little the U.S. forces know about their
adversaries here. Pressed at a briefing about who is controlling
the resistance, a general answered, ‘We don’t have the
intelligence to lay this out on a chart.’ That was chilling.
“Now that the going is difficult in Iraq, the Bush administration
needs to think more with its head and less with its heart. The
idealists can win this war, but only if they act with brutally
honest pragmatism.”
Wall Street
It would appear President Bush won’t have to worry about the
economy come next November. With the solid October jobs
report and the upward revision for September, the final piece to
the puzzle appears to be in place. Of course I write this without
focusing in on the actual electoral map and the fact that key
states such as West Virginia, Pennsylvania and Ohio are still
struggling with the manufacturing sector, but overall the
president has a powerful story to tell. The tax cuts and rebate
checks, coupled with historically low interest rates, have brought
us back from an admittedly mild recession.
And very importantly, Federal Reserve chairman Alan
Greenspan’s hope that business spending would materialize
before the consumer and / or housing collapsed has come to
fruition. The replacement cycle in technology is gearing up, with
worldwide chip sales, a telling barometer, now forecast to boom
even further in 2004.
But I said last week that after a particularly bullish commentary
I’d be back to play Joe Contrarian, so heeeeeeeere’s the editor!
For all the happy talk, and it’s well-justified, one can not also
escape the fact that for its part the Federal Reserve has succeeded
in getting many of us to take on more risk by letting short-term
interest rates float down to once unthinkable levels. This fueled
the mortgage / refinancing boom and drove U.S. investors back
into the stock market because the money market / CD
alternatives dried up. And thanks to zero percent financing, we
bought a ton of new automobiles, whether we needed them or
not.
Of course the above may be a bit of a gross generalization, but
when you added the Bush tax cuts we spent those, too.
Unfortunately, that also means we aren’t saving anything and as
official inflation begins to mount a comeback and interest rates,
as represented by the 10-year Treasury, rise above 5%, new
home construction will finally take a breather, consumers will
begin to feel a little less wealthy, and retail sales will slow. It
may not be an immediate recipe for disaster, particularly if
business owners hold up their end of the bargain, but it will
certainly give equity analysts and investors pause as the current
cycle of positive surprise goes into reverse.
But for a peek into the future, look no further than Australia and
Britain, both of which saw their central banks raise key interest
rates due to fears of housing bubbles in their own countries,
along with the fact consumers in the two are increasingly
overburdened with debt. Call it the canary in the mine.
Lastly, China and the U.S. appear to be on a collision course on
the trade front, at the same time China deals with a true bubble in
its own economy. It will get messy.
Street Bytes
–With all the positive news on the economic front, you’d think
that stocks would have responded in a more vigorous fashion.
As it was, while Nasdaq hit a 22-month high, adding another 2%
to 1970, both the Dow Jones (9809) and S&P 500 (1053) tacked
on miniscule gains. Traders are wrestling with the valuation
issue as well as questions over future Fed policy. To wit……..
–U.S. Treasury Yields
6-mo. 1.06% 2-yr. 2.01% 10-yr. 4.44% 30-yr. 5.26%
Alan Greenspan is already on record as saying the Fed would
hold the line on interest rates for a “considerable period,” but
some key barometers argue for an increase much sooner. I
recently wrote of the Baltic shipping index as being an offbeat,
yet key gauge of both economic activity and inflation and this
week the Wall Street Journal focused in on it, noting ocean
shipping rates doubled in recent weeks. Doubled! And I have
my own barometer, as reflected in the healthcare premium for
the small company I own, CSI MultiMedia. Up 23% for 2004.
Or how about the price of beef in New York City, up 47%,
thanks to both the ban on Canadian imports as well as, yes, the
Atkins diet. And don’t discount the importance of the Canadian
beef situation, because this is indicative of the kinds of price
pressures (albeit maybe at a lower level) that you’d have
throughout the system if the U.S. and its trading partners initiated
hostile actions against each other.
Finally, with short-term interest rates as low as they are, the “free
money” policy has caused many big players in the bond market
to leverage to the hilt and as both bond expert Jim Bianco and the
U.S. government itself are increasingly concerned about, the
chances of a disaster in the financial markets when interest rates
reverse is significant. [See Fannie Mae and Freddie Mac.]
–The European Union is giving up in its fight with France and
Germany and their breaking of the 3% deficit limit.
–Energy: Oil, as measured by W. Texas Intermediate, is back
over the $30 level thanks to lower than expected inventory
readings as well as concern the Yukos investigation will get even
further out of hand and impact production. Of course at the end
of the day Old Man Winter, or Lady Winter, will largely call the
tune on both the crude and natural gas fronts.
–New York Attorney General Eliot Spitzer summed up the
attitude of the mutual fund industry prior to the flood of
disclosures in two words, “grotesque arrogance.” This week,
Putnam CEO Larry Lasser stepped down under fire as his firm is
beginning to bleed assets (and will for some time to come), while
Alliance Capital is the target of an investigation into improper
trading arrangements with some hedge funds. [I’ll give you $20
million for your hedge fund product if you’ll let me trade after
4:00 PM.] And authorities are looking into allegations that fund
company executives themselves may have received shares in hot
IPOs in exchange for commission business.
But to me the one area that is just about the worst is the issue of
clients not receiving commission breakpoints. For example, let’s
say the sales charge for an equity fund’s ‘A’ shares is:
$0-$49,999…5.5%
$50-$99,999…4.5%
$100-$249,999…3.5%
You then put in an order for $100,000 and get charged 4.5% or
5.5%, rather than the proper 3.5%. This is accomplished in a
number of ways, including placing two tickets for $50,000 at
4.5% each, or, worse, 2 at $49,999 for 5.5%. [Other times the
computer just may not pick it up…but then it’s still the
responsibility of the firm to correct it.] It’s thievery.
–The investigation into specialists at the New York Stock
Exchange is intensifying and the SEC will shortly be releasing its
findings. One former kingpin, billionaire Peter Kellogg, has now
been indicted for cooking up a tax scheme. And separate
inquiries into both Dick Grasso’s compensation package as well
as possible “influence trading” on his part could further cement
his despicable legacy.
Finally, interim NYSE chairman John Reed announced that as
part of his restructuring of the Exchange the board would be
pared from 27 to 8 members, one of whom will continue to be
former Secretary of State Madeleine Albright, she of the snappy
stickpins.
–Former Motorola CEO Christopher Galvin will be receiving a
$29 million severance package for a job poorly done, while it is
estimated Putnam’s Lasser leaves with parting gifts valued at up
to $89 million. As Bob Barker would note, they both now
advance to the Final Showcase!
–Kudos to the New York Times’ Gretchen Morgenson for
another great piece of reporting with last Sunday’s expose on
Putnam and Lasser’s kingdom. It clearly had something to do
with his dismissal by the board the very next day, whether they
want to admit it or not.
–HealthSouth’s Richard Scrushy was indicted on about 842
counts of fraud. But he has a highway named after him! Bet
most of you can’t say that.
–Merrill Lynch announced it will be hiring new brokers each of
the next 3 years, a significant sign of a perceived turnaround in
the brokerage industry.
–Tyco, once known as G.E., Jr., is opting to eliminate 50 small
businesses and will lay off 7,200.
–Truth be told, many traders were watching the Manchester
United-Glasgow (Celtic) Rangers football match on Tuesday
afternoon (Eastern Time)….as was I…rather than following the
market. [Man U. kicked butt.]
–Frank Quattrone may have been watching this as well, and he
will now be retried next year, giving him a few months to wipe
that smug grin off his face.
–To give you an idea of the kind of speculation that has been
going on over in tech land, chipmaker Conexant was trading at
about $1.00 this past January and seemed on the verge of going
under (I was looking at it then and passed on making a bet).
Well, it hit $7 in September, now trades around $5.50, and
recently announced an acquisition.
–On the commodities front, an example of the boom here is
Freeport-McMoran Copper & Gold, another I passed on. Doh!
$12.50 a year ago, $41 today.
–The Bush administration is talking up a new proposal for
“lifetime savings accounts,” where withdrawals could be made
for anything from a house to paying a utility bill without penalty.
It would also raise the maximum investment for IRAs, creating a
new one in the process. I’m all for these moves, but what drives
me up the wall is that the government then does zero to promote
the accounts. We should be inundated with public service
announcements to remind investors that this valuable savings
tool is available. But as I scribble my thoughts out, that would
hurt consumer spending, right? The government wouldn’t want
that now, would they?
–Microsoft is offering bounties of up to $250,000 for
information leading to the arrest and conviction of virus writers,
such as those responsible for Blaster and SoBig. A good idea,
but we all wish Microsoft would put out a hole-free product in
the first place.
–My portfolio: I stared at it all week. Left the cash in the coffee
cans, too. 30% equities…70% $10s and new $20s.
–Finally, Newsweek had a piece on the great investor Sir John
Templeton, now 90, and his religious foundation. What an
inspiring figure he has been over the years…far and away the
best in his profession in my lifetime. And I can only imagine
what he must think of today’s dirtballs in the industry he helped
elevate to such prominence.
International Affairs
Russia: You can cut the tension inside the Kremlin with a sickle,
with President Vladimir Putin saying on Friday that the targeting
of Yukos chairman Mikhail Khodorkovsky is all about law and
order, as well as fighting corruption. Mildly amusing,
considering all the KGB associates of Putin’s now peopling the
inner sanctum. Others, such as new chief of staff Dmitry
Medvedev and Prime Minister Mikhail Kasyanov warn of the
long-term impact on the economy in expressing their “grave
concern” (Kasyanov).
And then there is Senator John McCain, who thundered that
Russia is sliding towards “neo-imperialism abroad and
authoritarian control at home,” adding:
“A creeping coup against the forces of democracy and market
capitalism in Russia is threatening the foundation of the U.S. –
Russia relationship and raising the spectre of a new era of cold
peace between Washington and Moscow.” [Financial Times]
But even more remarkable was McCain’s utterance concerning
the apartment bombings of 1999. Way back on 12/12/99 in this
very space (you can look it up), I said there was a chance the
FSB, Russia’s security services, were responsible for the blasts
for the purposes of rallying the people against Chechnya, for if
you follow this reasoning, the bombings, blamed on Chechen
terrorists at the time, provided a pretext for the horrific
crackdown on the breakaway republic that followed. Thus, for
McCain to now raise this issue and speak of “credible
allegations” of government complicity is absolutely explosive.
It’s also obviously a huge potential embarrassment for President
Bush, who just a few weeks ago called Putin a champion of
democracy.
As for Khodorkovsky, while sitting in jail he resigned as
chairman of Yukos not only to allow the company to move
forward without the distraction of dealing with his case, but also
to clear the decks for a possible run at the presidency against
Putin in March. However, Putin remains very popular among the
Russian people and Khodorkovsky isn’t. More likely, Mr. K.
will begin positioning himself for 2008 and the race to succeed
Putin, which promises to be a most flammable free for all.
And I was just musing…2008 could be quite a year for the world
overall, what with Hillary vs. Jeb Bush, Condi Rice or Rudy
Giuliani in the U.S., as well as a possible new constitution in
Taiwan touting independence just as China gears up for the
Olympics.
But before then, we’ll continue to watch the Kremlin and Putin.
John McCain said Russia should be disinvited from the G-8
summit to be held in the U.S. next June. As they say in the news
biz, this story has legs.
China: Last week I wrote of this nation being an ecological time
bomb and then this week we had an example of the coming
problems with the flooding in Indonesia that claimed over 200
lives. Illegal logging was blamed, and it’s overlogging in China
that should be a huge concern to the powers in Beijing. I’m
assuming they’re putting 2 and 2 together.
And then you have the findings of two British researchers who
have just burst one of China’s great myths, that being the length
of Chairman Mao’s “Long March.” In a painstaking study they
concluded it was only 3,700 miles in length, not the 6,200 (or
8,000) taught in the textbooks. Regardless, that’s still a pretty
good workout, I think you’d agree. Not a lot of obese
communists back then.
North Korea: Pyongyang’s ambassador to the UN kept calling
the Japanese, “Japs,” in English, for a speech in which he also
resurrected the themes of militarism and fascism. Which was
actually pretty stupid because if I’m a member of Tokyo’s
leadership, it just gives me another excuse to go to the people
and get approval for heightened defense spending. [Americans
should want this. It could take much of the regional security
burden off us.] Separately, the North Koreans issued threat #245
in stating they were ready to retaliate with nukes should the U.S.
attack them. Alas, America’s military is stretched to the max,
with this being your editor’s chief fear. We’ve been led to
believe we are prepared if Kim Jong il decides to cross the line.
We aren’t.
Afghanistan: A new draft constitution under the banner “The
Islamic Republic of Afghanistan” has been drawn up, though
ratification is not expected until June at the earliest.
Britain: Michael Howard was selected as the new leader of the
chief opposition, the Conservatives. But no one here cares
because it’s all about Prince Charles. What did he do and when
did he do it? We learn shortly, though the rumors are brutal in
every respect. I, for one, really do hope they aren’t true. I love
the monarchy, but then my tax money isn’t paying for it.
Random Musings
–Ralph Peters (New York Post) wrote of the virulent anti-
Semitism that in his mind has existed in Germany ever since the
days of Hitler, pointing to the example of the head of Germany’s
Special Forces Command who was sacked this week after
expressing his “Jew-hating sentiments.” Just last week I wrote of
the growing anti-Semitism across much of Europe, particularly in
Russia, though with respect to the German people, I have to add
that in all my travels around the world, the past five years in
particular, I have found them to be among the friendliest.
–In a separate piece, Peters commented on the Islamic world.
“The cultures of the Middle East are so crippled that they can’t
even limp along without the psychological crutch of blaming all
their ills on foreign devils. No amount of well-intentioned
information disseminated by the United States will persuade the
Arab masses that we’re innocent of the cruelties their own
leaders and social systems have inflicted upon them. Men and
women everywhere believe their own kind first.
“The ‘only’ hope we have of eventually convincing the
populations of the Middle East that our intentions are sound and
that our interests lie in their success, not in their continued
failure, is to take a long-term view and demonstrate our purpose
on the ground…
“Leave the bilious rhetoric to the demagogues. Work to bring
positive change. Let our deeds proclaim themselves. Prove our
accusers wrong. Prove that our values breed success.
“It’s an approach that requires enormous patience and fortitude.
But it’s the only approach that has a chance to succeed. It’s easy
to dismiss a government pronouncement. It’s harder to deny
practical results.”
–From Robert Samuelson / Washington Post:
“We Americans are constantly grasping for symbols of
superiority – something to show everyone that we’ve done better
than those around us. In an ever-richer society, the pursuit of
these badges of success has become progressively harder because
yesterday’s accepted markers of distinction have become today’s
mass merchandise.”
For example: In 1980 only 4.5% of Americans bought “luxury”
cars. So far in 2003 the category accounts for 10.5% of sales.
Or in building homes 3 Xs larger than years ago.
Me? I keep buying Honda Accords (made in the U.S.!), though
I’m springing for a window-washer for my place.
–The New York Times’ Tom Friedman wrote of the need for a
renewed Atlantic alliance, particularly between the U.S., France
and Germany, in order to ease existing tensions. I would turn
this around and reiterate my idea of a new alliance…the U.S.,
Britain, India, Australia and Japan. Granted, it would require a
bit of diplomacy and vision.
–Winston Churchill: “An appeaser is one who feeds a crocodile,
hoping it will eat him last.”
–Well, Howard Dean got in trouble for saying he was the
“candidate for guys with confederate flags in their pickup
trucks,” and his opponents ganged up on him at the “Rock the
Vote” debate on Tuesday, parts of which were simply painful to
watch, like when the girl asked “Macs or PCs?” Oh, brother. I
bet her parents were proud. But I also couldn’t help but notice
John Kerry and think of Donna Brazile’s comment that the
Senator simply looks uncomfortable in his own skin.
–Florida Senator Bob Graham is not going to run for re-election
in 2004. 19 Democratic seats are up for grabs, 15 Republican
ones.
–The New York Daily News reports that New York Governor
George Pataki is urging Rudy Giuliani to run for governor in
2006, with Pataki opting out of a shot at a 4th term. Can you
imagine a Giuliani – Spitzer contest? Vicious. [Being governor
wouldn’t hurt Rudy if he wanted to run for president in ’08.]
–George Will points out that if Republicans retain the
governorship of Louisiana in the 11/15 election, they would then
hold the statehouse in 29 states with 60.6% of the country’s
population.
–Jeffrey Garten, in an op-ed for Business Week, wrote of the
growing anti-Americanism across the world and how many U.S.
corporations have turned a blind eye to it. America’s executives
must learn to tailor products to local markets and avoid
appearing insensitive.
–Here’s an interesting tidbit on planet Earth.
70% of it is covered with water
97% is salt water
2% fresh but frozen in glaciers
1% readily available as a resource
And the U.S. uses 402 billion gallons of water every day.
[Trent Loos / High Plains Journal]
–Here’s my take on the controversy surrounding “The Reagans.”
It was a smear job and CBS did the right thing. But a lot of crap
gets on the air (as this will still be) and, yes, you can’t stop all of
it, let alone should any group be able to. I haven’t watched a
single made for TV movie since Ted Turner’s last Civil War epic
(“Andersonville,” I think), nor would I ever waste my time with
something like “The Reagans” (and I’m not watching “The
Elizabeth Smart Story” or “Saving Jessica Lynch,” either). But
all CBS had to do was have the decency to wait at least a year or
two until after the president leaves us. Because they didn’t, the
network now becomes eligible for the StocksandNews “Idiot of
the Year” award.
–Following the Staten Island Ferry tragedy, lawyers have been
running after clients in the worst example of ambulance chasing
you’ll ever see. As of this week a total of $1.3 billion in suits
have been filed, including $200 million for a woman who wasn’t
even hurt but, get this, has trouble sleeping. Anyone still against
tort reform?
–I’ve always had a lot of respect for former football great Jim
Brown and his Amer-I-Can program which targets inner city
youth. [Yes, he’s also had some troubles of his own.] The other
day Brown was at the Essex County Jail here in New Jersey and
he asked for a show of hands among the prisoners as to how
many had a father who was still in their lives. Only 3 of 24 did.
–“60 Minutes” had a good piece on the piracy, or downloading,
of movies and how it has the potential to kill the industry. I’ve
given up trying to understand the mentality of those who
blatantly steal a product.
–I was reading an op-ed piece the other day on the whole issue
of superbugs and how too many healthcare workers simply don’t
wash their hands enough, which helps spread the new generation
of antibiotic resistant strains that the medical community has
such a hard time dealing with. And then you have the hepatitis
outbreak in Pittsburgh, probably due to a restaurant employee at
Chi-Chi”s failing to wash their hands. It’s time to start handing
out prison sentences for anyone not washing their hands at least
twice daily.
–Here in the New York City area there has been a lot of talk this
year about the new high school that is strictly for gays and
lesbians. Some of us got a kick out of this and I, for one, would
hope that Mets fans eventually get their own so that they don’t
have to mingle with Yankee fans.
But the other day, 5 male students from this beautiful place were
arrested for cross-dressing, posing as prostitutes, performing sex
acts on men and then identifying themselves as police officers
working undercover, after which they robbed the victims (in one
case taking $1,200).
–Hey small business owners. Don’t forget that $100,000 SUV
loophole! The sheiks will thank you.
–Made for each other…Rosie O’Donnell and Princess Di’s
former butler, Paul Burrell.
—
God bless the men and women of our armed forces. It’s been a
tough stretch for both them and their families. Pray for their safe
return as we honor all who served this Veterans’ Day.
And for those who gave their lives in defense of our freedom…
Think not only of their passing…remember the glory of their
spirit.
God bless America.
—
Gold closed at $383
Oil, $30.85
Returns for the week, 11/3-11/7
Dow Jones +0.1% [9809]
S&P 500 +0.2% [1053]
S&P MidCap +2.1%
Russell 2000 +2.8%
Nasdaq +2.0% [1970]
Returns for the period 1/1/03-11/7/03
Dow Jones +17.6%
S&P 500 +19.7%
S&P MidCap +30.3%
Russell 2000 +41.7%
Nasdaq +47.6%
Bulls 56.3
Bears 21.4 [Source: Chartcraft]
Have a great week. I appreciate your support.
Brian Trumbore
