[Posted 7:00 AM ET]
Iraq / Credibility
When leading Republicans such as Robert Novak, William
Bennett and George Will talk of President Bush and his “serious
problem” in terms of credibility and the justification for war with
Iraq, you have to take notice. This is also about more than
sentiment across America, it speaks to our standing in the world
over the next few decades. Both Bush and British Prime
Minister Tony Blair have now been dragged kicking and
screaming into holding impartial investigations into prewar
intelligence and this week CIA Director George Tenet felt
compelled to issue a public defense of his agency. I watched
Tenet’s speech and was more than a bit troubled by it.
While admitting the CIA isn’t perfect, the director simply
glossed over failures and attempted to focus on recent successes,
whether warranted or not. Tenet also addressed the whole issue
of humint, human intelligence, a subject I broached last week.
“When you hear pundits say we don’t have enough human
intelligence, they don’t know what they’re talking about,” he
said.
I beg to differ. Those of us questioning the recent record of the
CIA don’t deny for a minute there have been tremendous
individual successes and no one is saying the CIA isn’t filled
with dedicated servants doing the best they can, often in spite of
hurtful congressional mandates and extreme danger.
But the fact is we don’t know what’s going on in North Korea,
we didn’t know how far advanced Iran’s nuclear program was
(despite Tenet’s claims to the contrary), and we didn’t know the
extent of Pakistan’s nuclear technology transfer, let alone what
was an unmitigated failure in Iraq, including the inability to
gauge just how decrepit the infrastructure had become, thereby
impacting our postwar planning, an incredibly costly error.
So will we ever have perfect intelligence? Probably not, and
that’s a reality we all must live with. But Tenet’s defense was
weak and not in keeping with his sole duty…that being to serve
the president. Instead he sought to distance himself some from
the White House by saying the CIA never described Iraq as “an
imminent threat,” a jab at Bush’s use of “grave and gathering
danger.” Not exactly falling on one’s sword, I think you’d agree.
What really ticked me off, though, was the gross underreporting
of David Kay’s reply to Tenet’s speech, which is typical of the
media. Forget developing context, just move on to the next
topic. Kay properly took issue with the director and said it’s just
like the CIA to pull out a few intelligence successes while
papering over the failures.
Meanwhile, in Iraq itself, the White House can’t wait to hand
over the problem of picking a permanent government to the
U.N., more than a bit ironic, so its hands will be as clean as
possible come November. Oh, were it that easy, my friends. It
certainly appears the June 30 deadline for appointing or electing
a national assembly, for starters, will have to be extended and the
U.S. will now accept the U.N.’s assessment and recommendation.
Tragically, when it comes to the Kurds and the protection of their
own interests, last weekend’s double suicide bomb attack, while
sparing the leaders of the two main parties otherwise decapitated
the hierarchy as many politicians were among the more than 100
killed. It will take years to build this back up. The terrorists
accomplished their objective.
Wall Street
The news was so-so this week and the markets acted accordingly,
finishing mixed. The report on January employment showed a
gain of just 112,000 jobs, once again well under estimates, but
the unemployment rate fell to 5.6%, the lowest since October
2001. [As Church Lady would say in an election year, “How
conveeenient!”] Ordinarily, in an expansion with GDP figures
ranging between 4 and 8 percent, the corresponding job gains
should be in the 300,000 area.
But there was some stronger data, such as in the readings on
retail sales for January, generally up 5-6 percent (Wal-Mart came
in at 5.7%), better than expected, while a leading survey of
manufacturing activity continues to rise. Then you have
semiconductor sales, up 18% in 2003 and projected to increase a
like amount in ’04.
On the other hand, you had the testimony of Cisco CEO John
Chambers, who in releasing his company’s generally positive
earnings report added the caveat that corporate executives are
“more cautious” about technology purchases, not what you
would expect given the extent of the economic recovery.
Coupled with other not so rosy tech-related outlooks, like with
fiber-optics equipment maker Ciena, it was a cold bucket of
water to the face of tech investors, though Nasdaq almost
bounced all the way back from its lows, finishing off just two
points (to 2064) but down a 3rd straight week nonetheless.
But I want to highlight a few thoughts on energy this week.
Crude oil and natural gas prices meandered, falling a bit in the
end, as inventories for crude in particular rose sharply, thanks to
soaring imports and stories on higher production from the likes
of Russia. The inventory figures, though, are always highly
volatile and week to week can easily mask the bigger picture,
which gives me an excuse to summarize the short- and long-term
outlook.
When you read tales such as those from Shell and El Paso that
they have been forced to lower their reserve estimates, or articles
written by experts questioning the level of Saudi reserves, and
you couple it with the difficulties faced in finding and
developing new sources, including environmental issues, you can
easily see that the longer-term outlook for oil and gas prices,
given a world economy that is growing at a decent pace, is at
worst at current levels and potentially far higher…though too
much higher kills any expansion.
Shorter-term, investing in energy stocks is no different than any
other sector. You can’t just ‘buy and hold,’ though you may end
up holding particular positions for a year or two. Many oil
stocks get just as overvalued as some tech issues and you can get
whacked just as hard when you miss it.
I bring this up because I’m wrestling with my latest foray in
energy, currently a little over 30% of my portfolio. I’ve been in
and out of individual issues many times over the past 5 years and
I watch energy prices and economic data just as closely as ever
to try and give myself an edge when it comes to an exit strategy
for a particular cycle.
This coming week OPEC meets to decide on production levels
and what they say will influence both commodity and share
prices, but with OPEC’s own ‘basket’ trading around $28.50, just
above the preferred $22-$28 range, it’s not likely to raise
production and could still cut a bit to forestall a predicted swoon
in prices this spring. Price also influences the big integrateds,
like ExxonMobil, when it comes to their own production budgets
and future exploration, and so the cycle goes around and around.
Street Bytes
–Aside from a miniscule decline for Nasdaq, both the Dow Jones
and S&P 500 rose 1.0% to 10593 and 1142, respectively.
–U.S. Treasury Yields
6-mo. 1.00% 2-yr. 1.75% 10-yr. 4.08% 30-yr. 4.92%
Bonds lost a bit, rates rose slightly, much of the week until
Friday’s less than spectacular jobs figure. Treasuries then rallied
on this news as it lent credence to the belief the Federal Reserve
will be able to safely hold off on any increase in the Federal
Funds rate until the second half of the year, if at all in 2004. As
long as jobs aren’t growing, the argument goes, the Fed is under
zero pressure to act. I would continue to argue, however, that the
Fed knows it has to raise rates at some stage and it doesn’t want
to do so close to the election so I’m sticking with my May
prediction, 50 basis points. Look for them to start telegraphing
this in March, he wrote wistfully.
As for the U.S. dollar, it has stabilized over the past few weeks,
though it took a hit on Friday as the jobs data didn’t exactly send
Americans out into the streets, shouting with joy.
–On the issue of trade, nothing ticks me off more than the power
of the sugar industry in this country. A handful of individuals
not only ply both political parties with gobs of campaign cash,
they prevent the completion of free trade pacts with the likes of
Australia and Central America, which then in turn maintain
tariffs on imported U.S. goods, such as Caterpillar trucks and
tractors. It would be a tremendous show of political leadership
for President Bush to tell the sugar lobby to go to hell. The
chances of this happening, however, are nil.
–A regional director in Asia for the World Health Organization
said that when it comes to bird flu, “There’s always the potential
(for it to) kill millions of people globally.” [William Pesek Jr. /
Bloomberg News] Clearly, some governments in the region
have been botching it thus far and whether it’s this year or 2-3
years down the road, most experts say it’s only a matter of time
before a true pandemic hits.
–I have been writing of the bubble in China and questioning how
anyone could place significant investment dollars here because
of the lack of transparency when it comes to the books. ‘It’s bad
enough in the U.S., what makes you think it’s better there?’ is
my line of reasoning. And so this week China Life, a recent IPO,
admitted past accounting irregularities, as uncovered by the
national auditor, though the company assured investors the issues
relate to the old, pre-IPO outfit. The stock was initially priced at
$19.00, rose to $36 like a rocket, and has now settled back to the
$27-$28 range. This is one instance, however, where I’ll give
them the benefit of the doubt and if I were to buy a China-
specific issue in the future, it would probably be this one.
Meanwhile, a high-flying Internet play, Sohu.com, has seen its
shares tumble from a high of $50 to $28 on worse than expected
results.
–Mutual Fund Scandal, Part XIX: A former executive of CIBC
was charged with 5 felonies for his role in permitting late-trading
by some hedge funds. CIBC has been nothing but bad news,
recently, as it has been named in other misdeeds as well.
Franklin Resources was sent to the penalty box for allowing a
large investor to time $45 million at will, while MFS was fined
$225 million, plus it will have to reduce management fees an
additional $125 million, for similar transgressions. Additionally,
two MFS executives are barred from holding senior positions in
the industry for three years and they were suspended for a spell.
But…investors keep tossing money into funds at a record pace
because (1) it’s still the most efficient way to invest in a
diversified portfolio, both stocks and bonds…that is until
investors get more comfortable with exchange-traded funds,
and (2) the actual cost to investors in these scandals is literally
pennies, as opposed to losing your shirt and mortgage in
something like Enron.
–Another week, another slew of stories on Halliburton and its
subsidiaries, such as Kellogg Brown & Root which overcharged
for meals in Kuwait, meaning another few thousand votes for the
Democrats come November. As for the Newsweek story on the
Justice Department probe into the company and possible
kickbacks in the quest to build a natural gas plant in Nigeria
during Cheney’s stewardship, we’ll see what develops, though
there is no indication the vice president was involved.
–Kudos to Marcia Vickers of BusinessWeek (2/9) for a superb
piece of journalism on the Stern family of Hartz Mountain fame.
Father Leonard, along with his two sons, one of whom is the key
figure in the Canary Capital Partners late-trading scandal,
represent the absolute worst of America (my conclusion, not Ms.
Vickers’). They are nothing but a bunch of crooks, going back to
Leonard’s shenanigans when the family controlled the Hartz pet
product operation. Read the story. I guarantee it will make your
blood boil.
–Last weekend the Sunday Times magazine had an extensive
piece on another lousy family, the Rigas clan of Adelphia cable
fame, though residents of Coudersport, Pennsylvania still largely
defend them because of their ‘good works.’ Idiots.
–A New York law firm’s office was raided as part of the
investigation into dairy giant Parmalat. But a cow, worried about
facing jail time, or worse, tipped off some of the firm’s
employees and they removed documents before the raid. Which,
as you all know, is obstruction of justice. Bad lawyers, baaaaad
lawyers.
–Inflation Watch: Mark R. reports that prices at his favorite
parking garage in Philadelphia were just hiked 20 percent. Mark
also has 25+ years in the brokerage industry and is warning all
who will listen about the recent spate of equity fund offerings
employing leverage. Buyer beware.
–Remember the good old days, before 9/11? I often wrote of the
noble and nutritious yak of Mongolia and how some were now
raising them in the U.S. So I’m perusing the insider buying /
selling list the other day and I see that an executive was a big
purchaser of Yak Communications, symbol YAKC. Why didn’t
you all tell me about this high-flying, Canadian discount long-
distance carrier (with offices in Florida)? Goodness, gracious.
It’s been straight up, sports fans, except for a breather on Friday.
[I’m not buying into it, but I reserve the right to have some fun
with the name down the road.]
–I said I wouldn’t comment on the Martha Stewart trial, though I
must say I initially thought the government could come up with
some better uses of its time. However, after reading the
testimony thus far, she’s guilty. Lock Martha up for 6 months,
but release her in time for some stirring Christmas decorating
tips.
–As if it didn’t already have enough problems, Gateway recently
had a computer glitch on its home site involving an ID # that
opened the system up to any “4-year-old” hacker to retrieve
every customer’s name, address, order history and some credit
card information. Brilliant, lads. [Lee Gomes / Wall Street
Journal]
–You just won’t find this anywhere else…I guarantee it. As I
noted in my “Wall Street History” piece of 1/16/04, if the ‘loser’
of the Super Bowl scores more than 20 points, the market will
finish up on the year, at least that’s the way it’s been on the 8
previous occasions. We’ll see what happens this time as the
Carolina Panthers scored 29.
–My portfolio: A sloppy week for the kid, though with minimal
losses. I maintain I’ll be able to treat myself to premium lager
for at least the first quarter……..without taking out a home
equity loan.
International Affairs
Pakistan: An amazing scene this week, as chief nuclear scientist
and national hero, Dr. A.Q. Khan, made an extraordinary
television appearance, apologizing for aiding Libya, North Korea
and Iran in their pursuit of nuclear weapons, while at the same
time asking for forgiveness. President Musharraf’s cabinet
recommended a pardon and it was granted.
Khan absolved Musharraf and the Army of any involvement in
his nuclear skullduggery, which of course isn’t true – the
government and military clearly having intimate knowledge of
Khan’s work and travel. But this is a new world and a ‘dirty
war’ as Secretary of Defense Rumsfeld so aptly put it in the days
following 9/11, and that means playing poker with Musharraf as
he struggles to survive and move Pakistan into the modern world,
like its neighbor India, while the extremists seek to take him out
and club the entire region back into the Stone Age.
Musharraf was heavily criticized in some circles in the U.S. this
week for backing away from punishing Khan, while the Bush
administration congratulated Pervez for his efforts to end all
nuclear proliferation activities. But this is a leap of faith and
Musharraf was adamant that he would not cooperate with the
International Atomic Energy Agency in supplying key
documents that would offer further clues to other individuals
who may be involved.
Again, this is gambling and the U.S. is betting not only that
Musharraf will survive, but that he will get the scientists and the
Army to mend their ways. Personally, I’m still wagering he
turns over bin Laden, but if we wake up one morning instead to
find him assassinated, I’m leaving the table with whatever chips I
have left. The rest of you are on your own.
Iran: And then there is this hellhole. We were supposed to have
reasonably free parliamentary elections on February 20, but
every 24 hours one can draw a different conclusion as to whether
this will be the case. Unfortunately, with little time left, it now
appears the Guardian Council, the bad guys, have won out in
barring a majority of the reformist candidates and a student
protest was also banned. The reformists sought to call off the
vote, entirely, since it would otherwise be a sham and the
Council said no to this request. It’s easy to forget that Iran has
actually had free elections for years now; it’s just that the clerics
always held the ultimate power so true reform has been stuck in
the mud. On the other hand, this could be the final impetus for
authentic change, only now it couldn’t possibly be bloodless.
–China / Hong Kong / Taiwan: Last week I wrote of the
continuing imprisonment of those voicing their opinions on the
Internet. At the same time, intellectuals are now beginning to
fight back and are calling on Beijing to define ‘freedom of
expression.’ 80 million have access to the web on the mainland
and this figure is growing exponentially. Meanwhile, the
percentage of Hong Kong residents who are satisfied with the
local government’s handling of relations with their communist
parents is plummeting, down to just 42%. [South China Morning
Post]
And on Taiwan, the country is gearing up for the referendum and
presidential election, March 20. In the south of the country,
support for President Chen Shui-bian is strong, thanks in large
part to the work of former President Lee Teng-hui who has
become a leading proponent of independence. For his part, Chen
called on China to demilitarize the Taiwan Strait in exchange for
opening a diplomatic dialogue. A good idea…but it isn’t going
to happen.
It was also reported this week that China recently sentenced 3
Tibetan monks to 12 years in prison for possessing pictures of
the Dalai Lama. It’s stories like this that should remind us all
that while we need to be engaged with Beijing, we must also
keep our eyes wide open.
North Korea: Supposedly, a new round of talks will begin in
Beijing, February 25, though Pyongyang initially made the
announcement without the other 5 nations knowing anything
about it. Meanwhile, Mohamed ElBaradei, head of the IAEA,
continues to warn of the danger posed by Kim Jong-il, asserting
“they probably have enough plutonium to make a few bombs.” I
only mention this because it appears that ElBaradei was right on
Iraq, stating before the war there was no evidence Saddam had
massive stockpiles of WMD. He was ridiculed then, but his
consistent warnings on North Korea now need to be taken very
seriously.
Israel: Prime Minister Sharon is prepared to take some bold
steps that are getting lost in the other news of the day by exiting
Gaza as part of a possible exchange of Arab Israeli towns for
sections of the West Bank. In other words, he would redraw the
borders; 7,500 settlers in 17 settlements in Gaza would be forced
out and the plan has the backing of long-time Labour / opposition
leader Shimon Peres. Sharon may now call for a referendum in
his attempt to address the realities of today. So far, Palestinian
Prime Minister Qureia is saying the right things in response.
But there is far more to Sharon’s plan than meets the eye and
first he must deal with the bribery investigation that could
ultimately force him out of office.
Russia: Parliament is putting forward legislation that would in
effect keep President Putin in power through 2018 by approving
a new presidential term of 7 years, two elections. Putin has said
in the past he doesn’t favor such a move, but I imagine there will
be some who use Friday’s horrific suicide attack on a Moscow
subway train as an excuse to approve the bill; the argument being
Russia needs a strong leader now more than ever. The election
here is March 14 and there are obvious concerns over further
attacks by Chechen terrorists.
Saudi Arabia: The top cleric, Sheik Abdul Aziz al-Sheikh,
denounced terrorism before 2 million pilgrims in Mecca.
“Is it holy war to shed Muslim blood? Is it holy war to shed the
blood of non-Muslims given sanctuary in Muslim lands? Is it
holy war to destroy the possessions of Muslims?”
While the Sheikh is a Wahhabist, at least his words over the past
few years are on the moderate side and it’s a small step towards a
true dialogue. [I have an extensive piece on him on my “Hott
Spotts” link.]
Of course the day after the Sheikh spoke, about 250 were
trampled to death in the ‘Stoning of the Devil’ ritual because the
Saudi police still haven’t figured out how to control this mass of
humanity each year.
France: The National Assembly may vote on February 10 to
formally ban headscarves in public schools as the issue continues
to boil. Both President Chirac and Prime Minister Raffarin
approve the ban as a way to maintain the country’s secular
purity. Good luck. You’ll need it, mon freres.
Britain: An Independent newspaper poll this weekend shows that
54% believe Blair lied over the threat posed by Saddam and 51%
want him to resign.
Random Musings
–So this week President Bush unveiled his $2.4 trillion budget,
reflecting a deficit of $521 billion, up over $40 billion from just a
week earlier and the Congressional Budget Office’s own
forecast. Bush then stepped forward and called for “spending
limits,” blaming Congress and the war on terror for any
shortfalls, a total farce.
I have nowhere else to go when it comes to this coming election
and my own vote (don’t worry, my conservative friends), but
Bush is losing his base at warp speed. The deficit has expanded
not just because of costs for the war and homeland security, but
because of an ill-conceived farm bill, massive pork (such as in
the coming highway extravaganza), and the Medicare legislation.
One expert noted the other day that the $6.8 trillion total national
debt is really more like $30 trillion when you add in all the
unfounded mandates, in case you like scrawling zeroes on your
beer coaster. And of course the current deficit projection of $520
billion doesn’t include future costs in Afghanistan and Iraq, nor a
final solution to the alternative minimum tax debacle (there’s just
a one-year patch in the Bush plan), for starters.
This Sunday, however, the president can begin to make a
comeback of sorts with his appearance on “Meet the Press.” It’s
only a bit of a gamble because it’s being taped in the Oval
Office, on Bush’s turf, and you wouldn’t expect Russert to be as
tough as he would be with, say, John Kerry in the studio.
Regardless, it’s must see T.V.
–Some of us Republicans truly wish Dick Cheney would step
down, for Rudy Giuliani, perhaps. The vice president is
exceeding his baggage limit.
–If I read the Bush budget submission properly, funds for the
EPA are being cut 9.5%, thus handing the Democrats a campaign
issue on a silver platter, even if it’s the fiscally responsible thing
to do.
–Of the $1.3 trillion that Americans laid out for healthcare in
2003, 31% was devoted to administrative paperwork. [Business
Week / Harvard Medical School]
–Massachusetts’ high court approved gay marriages. Now
discuss amongst yourselves. I’m not running for political office
and thus beg out myself.
–The Times’ Thomas Friedman has come up with a term
Democrats can have a field day with… “budgets of mass
destruction.”
–I ordinarily don’t comment on stories such as the tragedy of
Carlie Brucia in Florida. It’s just so sad that in this case
everyone’s last picture is that haunting video.
–According to David Rothkopf of the Carnegie Endowment,
“There are more people under 24 now in the developing world
than the entire population of the planet just 50 years ago.”
[Washington Post] Since they’re also concentrated in the cities
this means that there will be even further demand for already
scarce jobs, thus forcing increasing levels of migration to
developed nations, setting off more alarms. The inevitable
conclusion to this scenario would be protectionism, let alone
massive unrest.
–In a study for the Centers for Disease Control, we now know
that caloric intake by women was up 22% for the period 1971 to
2000, while for men it increased 7%.
–Finally, I can’t help but say a word or two about Janet Jackson
and her right breast. Rather, more to the point, I think, is a
discussion of what this past week really represents, the 40th
anniversary of the Beatles arriving in America and their impact
on our music and culture.
While I was about to turn six at the time, I distinctly remember
this event. I instantly became a rock music fan, thanks to a G.E.
transistor radio that my Aunt Rose bought me which was then
permanently attached to my ear, tuned to WABC in New York.
I also recall how many parents were horrified in those days and
as DJ Cousin Brucie, who was one of the first to interview the
Beatles, said, the press was none too accepting initially either.
Just who were these strange guys? Brucie also relates how
nervous the Beatles themselves were, faced with the mobs of
hysterical fans, but they handled it all with grace and wit, and
they were a welcome diversion from the funk the nation found
itself in following the Kennedy assassination.
My brother and I will never forget the moments at home, a few
years after the Beatles arrived, when Mom would have her easy
listening station on and a nice tune would pop up. “I like that
song,” she’d say. “That’s the Beatles,” we’d say in tandem. The
next day, “I like that song.” “That’s the Beatles, Mom.”
And so it will be for the next hundred plus years, I imagine. It
wasn’t just all slick marketing, these guys were geniuses.
In the end it’s about the music and Janet and her ilk can’t hold a
candle to the Beatles, or the Stones, or the Dave Clark Five, or
the Four Seasons, or the Beach Boys, for starters. No one will
remember any of today’s rap-oriented, in your face, crap. But
then every generation defends ‘their’ music in a similar fashion
to mine.
These days, though, it’s also about having commercials for
erectile dysfunction, or the popularity of video games like
“Grand Theft Auto.” Oh well, while I lecture I recognize there
are just as many folks out there saying “Get over it” and “Who
gives a damn”?
—
God bless the men and women of our armed forces.
God bless America.
Happy Birthday, President Reagan.
—
Gold closed at $403
Oil, $32.48
Returns for the week 2/2-2/6
Dow Jones +1.0% [10593]
S&P 500 +1.0% [1142]
S&P MidCap +1.1%
Russell 2000 +0.6%
Nasdaq -0.1% [2064]
Returns for the period 1/1/04-2/6/04
Dow Jones +1.3%
S&P 500 +2.8%
S&P MidCap +3.2%
Russell 2000 +4.9%
Nasdaq +3.0%
Bulls 57.0
Bears 19.0 [Source: Chartcraft / Investors Intelligence]
Notes:
Check out my “Wall Street History” piece on Ray Dirks and the
Equity Funding scandal. Lots of lessons not learned from back
in 1973.
Next time from Daytona Beach, Florida. Vroooooooommmm!
Have a great week. I appreciate your support.
Brian Trumbore
