[Posted 7:00 AM ET]
Wall Street
The New Year got off to a sloppy start with the major averages
finishing solidly in the red. As January goes, so goes the year,
according to market lore, and you’d be foolish not to be at least
slightly concerned if the coming weeks were downers as well.
On the economic front, Friday’s December jobs report was
respectable with 157,000 finding work, slightly lower than
projected but nonetheless solid. For all of 2004, 2.2 million new
jobs were created.
As for Christmas sales, it would appear they came in at about a
3% increase, or the same as Wal-Mart’s same-store figure for
December, though I would caution we still haven’t seen all the
numbers yet. But if it should end up being 3%, that falls short of
the original 4-5% projection before Thanksgiving as well as my
own forecast which was for higher than consensus. Oh well, this
would be in keeping with my other misses in ’04.
The Federal Reserve made news this week in releasing the
minutes from its December meeting, though the resulting sell-off
in the bond pits was overdone. A few members of the FOMC
were worried about inflation and speculation due to low interest
rates, both in the financial markets as well as real estate, and
while I may agree somewhat with the latter take, inflation just
isn’t a problem. Remember, if inflation were to become one in
the coming months and the Fed felt compelled to slam on the
brakes, this economy would reverse gears in a nanosecond…
and goodbye inflation. That’s why I’m not worried.
Globally, the employment picture in Europe remains on the grim
side with Germany’s 10.8% unemployment rate the highest in 7
years while France’s is still mired at 9.9%. Can you imagine the
political convulsions in the U.S. if our own rate (currently 5.4%)
was this high? It’s one reason why I believe Turkey is going to
have an exceedingly difficult time with its European Union
membership bid, incidentally.
Finally, on the energy front, it was another volatile week for
crude oil as it rallied back to the $45 level, with the usual
suspects such as inventories and the weather, as well as
geopolitical concerns being cited. Personally, inventories and
weather aren’t a problem at all, but we’ll let the hedge funds
have their day. Of more legitimate concern was Iran rattling the
cage at an OPEC meeting for a defense of the $40 level and
future production cuts to keep it above this mark.
Separately, Saudi Arabia announced it was forming a joint
venture with India to develop a number of Saudi fields while
CNOOC, China’s 3rd-largest oil company, was rumored to be
targeting Unocal as China continues its aggressive pursuit of
future reserves and production to satisfy its thirst. Unocal is
particularly attractive not only because it has operations in 8
countries outside the U.S. but also since it has a growing
presence in Asia.
As I keep noting, the U.S. is just sitting back while China carves
out one deal after another, all over the world including our own
backyard, Canada to Venezuela, and we don’t seem to be one bit
bothered by it. Is the Bush White House forgetting we ourselves
are importing about 60% of our petroleum needs these days? Are
we willing to see these sources go elsewhere? Hello? Is anyone
home?
Street Bytes
–The Dow Jones took it on the chin to the tune of 1.7% to start
off 2005, closing at 10603. The S&P 500 lost 2.1% to 1186
while Nasdaq had its worst week since August, off 4% to 2088.
In the case of the tech sector, it got slammed on the heels of
some downgrades for recent gainers, like Amazon and Sun
Micro, while energy stocks also got hammered across the board,
even as crude was rising. Starting next week we begin to get the
earnings picture for the 4th quarter and everyone will be focusing
on guidance for the first half of ’05.
–U.S. Treasury Yields
6-mo. 2.63% 2-yr. 3.19% 10-yr. 4.27% 30-yr. 4.84%
Rates rose on the Fed’s minutes for December and the belief it
will keep raising the funds target, at least early in the year. As
for bond strategy in 2005, PIMCO’s Bill Gross is still saying
investors should load up on TIPS (Treasury-Inflation Protected
Securities), foreign bonds (such as German bunds) and cash.
U.S. corporates are to be avoided. Gross also sees a 3-4% return
on a diversified bond portfolio for the year, one such as the
PIMCO Total Return Fund. Including fees on the ‘A’ shares,
you’re then talking more like 2-3%. I can’t argue with that call.
[Last year the PIMCO Total Return A shares returned 4.6% vs.
the Lehman Aggregate Bond Index’s 4.3%.]
As for the U.S. dollar, the performance of which I said I’m
sanguine on for this year, it had its second-largest weekly gain
ever against the euro.
–Just some tidbits on 2004, now that all the closing data is in.
In a rather strange twist, the benchmark indices for the UK,
Germany, France and Tokyo all finished up between 7.3 and 7.6
percent.
The award for best performance by a developed market goes to
Austria, +57.4% (local currency); while in the emerging market
category four had returns of 100% or more…Egypt, 105%;
Romania, 100%; Ukraine, 312%; and Zimbabwe, 169%…though
you’d never catch me investing a penny in the last one.
Finally, the average U.S. stock fund returned 12% vs. 10.9% for
the S&P 500. [10.2% for the average S&P index fund.] Once
again, value outperformed growth, across all market caps, just as
it has the last five years.
–Program trading accounted for 50% of all Big Board activity in
2004. In 2003 the figure was 40%.
–Talk about turmoil in the airline industry; try sorting out what’s
happening in the bankruptcy cases of UAL and U.S. Airways.
Each day brings a new court ruling and / or labor settlement, with
the two often being in total conflict with one another. For
example, on Friday a judge granted U.S. Airways permission to
shelve three underfunded pension plans as well as previous
contracts with the mechanics and ramp workers if they don’t
agree to new givebacks. As for UAL it needs a further $725
million reduction in labor costs and asked the courts to impose
them. Instead a judge ruled against UAL’s deal with its pilots.
But the biggest news of the week in the sector concerned Delta
and its decision to drastically simplify pricing, with the result
that fares across the board were slashed 50-60%. By week’s end
AMR joined in while Continental said it would now need at least
$500 million in savings or it will be forced to scale back in a
major way. Shares in CAL were indicative of the industry
overall this past week. The stock closed ’04 at $13.54, then
collapsed to $10.30 on Thursday before closing the week just a
dime higher at $10.40.
–The confusion over who owns Yukos’ biggest production unit
is far from being cleared up. Rosneft has decided it wants to
remain independent of Gazprom, both of whom are loaded at the
executive level with Putin cronies. Rosneft, for example, is
chaired by a former KGB guy and now the company says it will
not allow itself to be taken over by Gazprom per last week’s
news. And as for the rumor that China National Petroleum
would be granted a 20% stake in whatever new outfit is formed,
it said it knew nothing about this so if you’re having trouble
sorting it all out, join the club. Bottom line, Yukos was screwed.
–Aside from India’s oil deal with the Saudis, like China it is
scrambling to assure crude from all sources, including separate
deals with Russia and Iran announced this week. And an Indian
energy company may now interject itself into the above Yukos /
Rosneft mess.
–FDA employee Dr. David Graham upped his estimate of
Americans who have died or been seriously injured using Vioxx
from 28,000 to 139,000. Shares in Merck were off slightly on
the week.
–Ten former WorldCom directors are collectively shelling out
$18 million of their own money as part of a class-action
settlement in the company’s 2002 collapse. As many have now
pointed out, this is a disturbing precedent if you’re on a corporate
board. In the past these folks escaped any financial responsibility
and relied on their directors & officers’ liability insurance. I bet
the spouses in the WorldCom case are a bit ticked off. Then
again, the men probably didn’t tell ‘em. [I checked the list; the
directors involved in the settlement were all male.]
And this just in…it turns out 10 former directors of Enron
coughed up $13 million in a similar settlement but this one has
been kept quiet since last October.
–A managing director at Marsh & McLennan pleaded guilty to a
charge of fraud in the bid-rigging investigation that has now
claimed six insurance industry executives, including two from
AIG. Robert Stearns will be cooperating with New York
Attorney General Eliot Spitzer’s office.
According to the complaint against him, Stearns instructed
insurance companies to submit bids for coverage that Marsh and
the insurers knew was “less favorable” than those of the insurer
currently covering the risk. These were the “B Quotes” or “B’s,”
as best illustrated by Stearns in an e-mail to a Marsh colleague.
“Chubb has quoted a lead renewal at $135,000. Would you
please have AIG provide a B?” All were then instructed to make
sure the B didn’t beat the incumbents’ quote. [Bloomberg News]
–And then there is the ongoing saga of Krispy Kreme, which has
been the subject of one investigation after another as the
company now says it will have to restate ’04 earnings, admitting
some of its franchisees committed “certain errors” that could also
place them in violation of debt covenants.
But the most explosive allegation is that Krispy Kreme padded
its sales by shipping out double the donuts some outlets required
…and then taking them back.
So I’m kicking myself for not figuring this out years ago, when
Krispy Kreme began selling its product in my local A&P
supermarket. The displays are huge yet I have never seen
anyone actually buy the artery cloggers. I guess I need to go
back to food detective school. “Observation 101.”
–Back to Eliot Spitzer, the AG charged the former CEO of
Federated Department Stores with perjury in the company’s
antitrust case, one that resulted from a conspiracy against my
personal favorite, Bed, Bath & Beyond. Federated and certain
suppliers such as Wedgewood didn’t want BB&B displaying the
latter’s china, thus driving down prices at Federated outlets.
–As noted last week, Bill Miller, portfolio manager for Legg
Mason Value Trust, managed to beat the S&P 500 for a record
14th straight year, the best such streak since at least 1960. So this
week you had some of his competitors downplaying the
achievement, saying the S&P is not the true test. Oh, give me a
break. For equities it’s the only general barometer in my book.
It’s the “market,” for cryin’ out loud. At the end of the day every
equity investor is out to beat it. Sure, if you’re investing a
portion of your assets in a small cap fund you would measure it
against a benchmark like the Russell 2000, but overall it’s the
S&P; the point being if your manager can’t beat it on a consistent
basis, buy a S&P 500 index fund instead. Case closed…and
congratulations to Mr. Miller for a super achievement.
–Investors are certainly exhibiting complacency when it comes
to the new options accounting rules that go into effect June 15.
For many technology companies, it could result in a reduction in
reported earnings of 20% or more.
–Inflation Update: Mark R.’s quarterly sanitation and sewer bill
rose from $104 to $176…a 70% increase.
–Canada confirmed its 2nd case of mad cow disease and then
admitted this particular bovine’s sibling may have found its way
into the U.S. food chain. As of this writing, though, the U.S. is
still planning on lifting its ban on Canadian beef in March, which
coincidentally happens to be “March Madness” in the States with
the NCAA Basketball Tournament.
–Barron’s Jim McTague had a report on the underground
economy in the U.S., an estimated $970 billion or about 9% of
the real economy. This is all about nannies, construction
workers off-the-books, low-wage illegal immigrants and the like.
The largest underground economy in the developed world is
Greece at 29%, followed by Italy’s 28%. That’s a lot of missing
tax revenue.
Foreign Affairs
Iraq: There’s little more to say other than this was a horrible
week in the Iraqi theater. At least 14 U.S. soldiers lost their lives
just between Tuesday and Thursday, the Governor of Baghdad
province was assassinated, at least 90 Iraqi security forces were
killed in various attacks and the election is a mere three weeks
away. Interim Prime Minister Ayad Allawi vows it will go on
even as U.S. military experts say 4 of the 18 provinces are not
secure enough to have the people go to the polls.
So amidst the turmoil, Secretary of Defense Donald Rumsfeld
has suddenly decided to send General Gary Luck to Iraq to figure
out what needs to be done to turn around the operation. If the
situation wasn’t so tragic this would be almost laughable. Why
wasn’t this done over a year ago?
Meanwhile, intelligence (for whatever that passes for these days)
is showing that Syria is giving far more support to the insurgency
than previously thought as the administration puts renewed
pressure on Damascus to cut the crap. Put it all together and is it
any wonder support among the American people is waning
rapidly?
Israel: In this historical month of January 2005, the other big
election is Sunday, with Mahmoud Abbas expected to win the
Palestinian presidential vote handily. Abbas continued to raise
eyebrows in the final days of the campaign, labeling Israel “the
Zionist enemy,” a term even Arafat avoided publicly his last few
years, and he made numerous appearances with known terrorists.
But by Thursday Abbas was reassuring everyone he would
pursue peace, with a story in the Times of London going so far as
to say Hamas is in secret talks to end the 4-year intifada.
As for Israeli Prime Minister Sharon and his problems with Gaza
settlers who won’t relocate without a fight, he warned them
“There will be no compromise. Whoever lifts a hand against the
security forces, whoever threatens them, we will act with full
force against them.”
Russia: The Kremlin announced it would build an oil pipeline to
the Pacific and Japan rather than to northern China. It can’t do
both and this long anticipated decision makes perfect economic
sense since it opens up the entire Asia-Pacific market to Russian
oil rather than just China. Russia will still undoubtedly sign a
deal to deliver oil into China by rail. But, all of this can change
as it will be quite a while before the pipeline project begins. In
the meantime China will keep pressuring President Putin.
Speaking of Putin, this week he demoted his senior economic
advisor Andrei Illarionov for remarks criticizing the Kremlin’s
economic policies. [See last week’s WIR.]
On a totally separate note, back in the fall of 2000 during the
period of the apartment bombings in Moscow and other Russian
cities, I wrote that it was an inside job…perpetrated by Vladimir
Putin’s own security forces. A few weeks later the New York
Times’ William Safire echoed the thought. So I can’t help but
quote a piece by the Wall Street Journal’s Holman Jenkins, Jr.
from this week.
“(Putin’s) popular election in 2000 was cemented by a string of
five apartment bombings….killing 243 people, which he blamed
on Chechen terrorists. One bomb didn’t go off, however, thanks
to alert residents in the City of Ryazan who noticed suspicious
individuals unloading bags of ‘sugar’ into the basement of a
large apartment block. The suspects turned out to be Russian
federal security agents. The sugar tested positive as the
explosive RDX.
“Moscow quickly produced a tale about how a ‘fake’ bomb was
being planted as a training exercise. But the building attacks
came to a sudden end after the Ryazan incident, raising the
suspicion that the bombing campaign had been a deliberate
provocation engineered to serve Mr. Putin’s interests. Sergei
Yushenkov, a parliamentary deputy who insisted on leading an
investigation, was shot and killed. Yurii Shchekochikhin, a
fellow legislator and deputy editor of Novaya Gazeta, died
mysteriously of an ‘acute allergic reaction.’ Other participants in
the investigating panel’s work have been ousted from elective
office or arrested on imaginative criminal charges.
“Let it be added that a perception that homicide is routine in
Russia to settle all kinds of business, political and personal
disputes – such as the barely noticed killing of Forbes Magazine
editor Paul Klebnikov in July – has made it easier for Western
leaders to overlook the possibility that murder has become a
workaday tool of the Putin regime….
“Add the fact that Mr. Putin, unlike Saddam, already has nuclear
weapons, and even boasts of a new warhead allegedly capable of
eluding forthcoming missile defenses. Now you know why,
Yukos notwithstanding, Western governments will hold their
breath and continue to follow Mr. Putin down his chosen path,
trying not to think too hard about where it might be leading.”
Ukraine: Prime Minister Yanukovych stepped down though he
vowed to continue his court battle against President-elect
Yukaschenko. And in a dig at Moscow, Georgian President
Mikhail Saakashvili appeared with Yukaschenko in Kiev,
Saakashvili having engineered Georgia’s Rose Revolution
recently. Remember my prediction from last week; Putin has
Georgia in his sights.
Iran: The mullahs said they would allow the International Atomic
Energy Agency to inspect a secret military base long-suspected
of being a site for nuclear weapons research. This isn’t
necessarily a positive. Former assistant secretary of defense
Ashton Carter commented “The Iranians are playing a shrewd
game of giving international opinion just enough to keep the
wolves at bay.” Said another strategist, the Iranians are great at
playing the cat-and-mouse game and “moving soil.” [New York
Times]
Kuwait: A group of Kuwaiti soldiers was accused of being
involved in a plot to harm “friendlies,” read U.S. soldiers, in the
emirate. Unsettling, but hardly surprising.
Latin America: It was a turbulent week, topped by an attempt by
some 150 Peruvian reservists to force President Alejandro
Toledo to leave office. They killed four policemen at one
outpost before giving up. Toledo, who has an 11% approval
rating, declared a 30-day state of emergency.
In Colombia, a top FARC leader was extradited to the U.S. to
face murder and drug charges, a bold move by the Colombian
government, but at a New Year’s party rebels killed 17 peasants
for cooperating with government forces.
And in Chile, another court ruled that former president General
Augusto Pinochet must stand trial on murder and kidnapping
charges. So get started, already!
Northern Ireland: Remember that huge bank heist in Belfast
back on December 20? As suspected, officials now believe it
was an IRA job. The peace process is dead.
Zimbabwe: Johnny Mac passed along a great piece from the
pages of Der Spiegel on how white farmers, brutally kicked out
of Zimbabwe, are being welcomed with open arms across the
border in Zambia where they are now thriving. Others, such as
Nigeria, Mozambique and Malawi, are also encouraging the
whites to set up shop in their countries. I saw a separate piece
the other day that said since Zimbabwe’s President Robert
Mugabe launched his racist campaign to boot the whites out,
farm output is about 1/6th former levels.
Random Musings
–Tsunami: I imagine some of you have faced the following in
recent days. I belong to a local community service organization
and during our meeting on Wednesday a veteran of the club
suddenly said we should spend about 2/3s of our yearly budget
for charitable donations on the tsunami relief effort. The rest of
us were floored by the dollar figure he was suggesting, at which
point I told him to relax as we wait to see how things develop
over the coming months.
Don’t get me wrong. I donated immediately to the Red Cross,
but it wasn’t all I plan on giving as the months and years go by; I
just want to learn more of the facts before doing so.
Consider, for example, this whole issue of government pledges,
now in the $billions. Just one year ago $1 billion was pledged to
the relief effort in Bam, Iran, following the devastating
earthquake there and yet I learned the other day that only $17
million…$17 million…has been delivered. [William Pesek Jr. /
Bloomberg News] As much as I have a problem with UN
Secretary General Kofi Annan, he is right in demanding $900
million in immediate aid for the tsunami victims. You have
countries and individuals falling all over themselves to garner
favorable publicity with excessive pledges, including dueling
politicos Tony Blair and Gordon Brown in Britain, yet talk is
cheap. Fork it over.
We also know this is a 5-10 year project and undoubtedly our
attention spans will last a fraction of that. Heck, on Friday the
“Today Show” led with the story of Andrea Yates’s conviction
being overturned. Who gives a damn? Well, obviously a
significant majority of Americans do or the producer of “Today,”
experienced in making such decisions, wouldn’t have placed the
story first.
Finally, last week I was critical of President Bush’s early
insensitivity to the death and destruction from South Asia. Since
then, however, he’s done everything right, from dispatching
Secretary of State Colin Powell to bringing Bush 41 and Bill
Clinton together to add their weight to the effort.
[Speaking of Clinton, wife Hillary is receiving some bad
publicity this weekend as her former campaign finance chief has
been indicted. There are troubling potential ties to Denise and
Marc Rich.]
–In a Washington Post / ABC News survey at year end, 54% of
Americans describe themselves as more hopeful about how the
world will fare over the next year, down from 69% one year ago
…a time influenced then by the capture of Saddam. Only 46%
are hopeful about the situation in Iraq vs. 58% from a year
earlier. 75%, though, are hopeful about the state of their own
finances, a gain, even as they are not as sanguine on the
economy. That’s the wealth effect at work…rising home values
and stocks.
–I said my piece on torture and U.S. government policy last
week and I won’t repeat it, but I’m torn on the nomination of
Alberto Gonzales to be attorney general. As it is, the president’s
approval rating is a meager 49% heading into his second term
(awful, historically) and while Gonzales will be approved, it just
seems Bush could have avoided a lot of the negative headlines.
Separately, I’m sick of the president’s talk of tort reform. Just do
it! He’s had a majority in Congress and it’s time to quit screwing
around after all these years.
–In describing a low-level State Dept. official who was quoted in
a major newspaper, Colin Powell used the term “rolodex ranger.”
Boy, this spread like wildfire…Powell’s everlasting contribution
to our lexicon. It’s a beauty.
–And it’s official. New York City recorded just 570 murders in
2004, the lowest level since the mid-60s. The high was 2,245 in
1990, when David Dinkins was mayor. Come to think of it he
was a lot like Kofi Annan; both being totally incompetent.
–Environmentalists have a problem, particularly in the Diablo
Mountains of California. The wind turbines there are killing far
more birds of prey, 4,700 annually, than anyone is comfortable
with, thus putting the greenies in a bind. They clamor for clean,
alternative energy sources, but these particular turbines are in the
middle of a key migratory route, with the result that some species
may soon make the endangered list if the kill rate isn’t reduced.
[USA Today]
–Meanwhile, CNN is killing “Crossfire”…no big deal…but
what ticks me off is they are also going to drop “Capital Gang.”
Hey, I plan my Saturday nights around that one.
–The local NBC News affiliate had a child psychologist on the
other day and this fellow had an interesting point. Parents spend
so much time picking a child’s name and then they never use it,
instead reverting to nicknames…like Cookie, Booby, and Pickles
…that in turn have a damaging effect on the kid’s self-esteem.
So parents, cut it out!
[OK, I got Pickles from “Opus.” But anyone using it on their
child should be imprisoned.]
—
God bless the men and women of our armed forces.
God bless America.
Remember those in South Asia.
—
Gold closed at $419
Oil, $45.43
Returns for the week 1/3-1/7
Dow Jones -1.7% [10603]
S&P 500 -2.1% [1186]
S&P MidCap -4.3%
Russell 2000 -5.9%…yikes!
Nasdaq -4.0% [2088]
Returns for the period 1/1/05-1/7/05
[Same as above]
Bulls 62.9
Bears 20.6 [Source: Chartcraft / Investors Intelligence]
*Check out “Wall Street History” for more market stats on the
just completed year as well as the past ten.
Have a great week.
Brian Trumbore
—
Tsunami Relief Aid
American Red Cross
International Response Fund
P.O. Box 37243
Washington, D.C. 20013
800-HELP NOW
www.redcross.org
*Mark R. reminds me that some of you should be checking with
your employer before making a contribution to any of the major
charities as the company may match it.
**The Red Cross received an A+ ranking in a recent survey in
terms of the amount of money raised that goes to actual relief
efforts, about 92%.
