[Posted 7:00 AM ET]
“The best hope for peace in our world is the expansion of
freedom in all the world.”
–President George W. Bush, Jan. 20, 2005
President Bush said beforehand he wanted his Inaugural Address
to be historic and it was; a sweeping statement of purpose that
one can’t help but agree with in principle. Those of us who
continue to support the war in Iraq, for example, do so with the
hope that establishing a beachhead for democracy there, however
fragile, can positively impact the entire region and thus hasten
the day when we can declare the war on terror all but won.
But I take issue when a conservative like Bill O’Reilly says after
Thursday’s address “the press will have a field day with it”
because the fact is it’s not just the liberal media that can question
Bush’s titanic vision. It’s also neo-cons like yours truly who
only need remember that while we can agree with the president’s
goals, in the past the execution has often been lacking.
I’ve told this story before but I couldn’t help but think of it again
the past two days. Back in 1973 I had the opportunity to travel to
Eastern Europe with my parents and I met my cousin in
Budapest. At one point he explained he couldn’t understand how
Americans could be giving President Nixon such a hard time
(Watergate was heating up then) when at least we were free. The
trip helped shape my politics and world view forever and with
Bush’s speech I was reminded of two things; freedom is precious
and one also shouldn’t be surprised at the speed of change,
witness the aftermath of the fall of the Berlin Wall.
President Bush believes this as well, but actions and words have
consequences and we’d like to think our presidents are grounded
in reality.
So when Bush talks of a revolution in democracy, look at our
treatment of Taiwan. Bush correctly gets criticized for coddling
dictators, like Egypt’s Mubarak, but no one mentions in the same
breath that the administration also abandons our friends in
Taipei; practically inviting the Chinese to take it over with nary a
whimper of disapproval. This is but one example of what
sickens me about the hypocrisy of the Bush doctrine.
Yes, the president’s speech was a clarion call for freedom and
democracy in as much as it was designed not just for us in terms
of support for the travails that lie ahead, but for those freedom
fighters in places such as Iran; an attempt to rally them, to foster
revolution from within. But at the end of the day one thing is for
certain; if we don’t win in Iraq the Inaugural Address will be
confined to the dustbin of history.
And victory in Iraq won’t be attained without the support of the
American people. The polls in this regard aren’t encouraging
with a consistent majority, 52% in two major surveys, labeling
Iraq a “mistake” and “not worth the costs,” but at the same time a
similar majority doesn’t want the U.S. to just cut and run.
Either way, the people deserve the truth. I have no problem with
the stern words from the other side of the aisle during
Condoleezza Rice’s confirmation hearing this week. Rice flat
out lied when she said 120,000 Iraqi troops are trained and ready
when it’s clearly under 10,000.
But come hell or high water an election to choose a 275-seat
national assembly is taking place on Jan. 30. It’s going to be far
from perfect; we all just hope it’s viewed in most corners as
legitimate. Then we could call it a significant step and a warning
to the evil ones in Iran, Syria and elsewhere.
And a last word on Iran. The New Yorker’s Seymour Hersh, a
helluva self-promoter, got a ton of press for his piece on U.S.
clandestine operations in Iran as we try to determine the nature of
its secret nuclear and chemical weapons programs; the purpose
being to eventually “destroy as much of (their) military
infrastructure as possible” while hastening the collapse of the
regime. Talk about a non-story. Of course we’re doing this,
though one must also question the level of success; see also our
intelligence effort in Iraq, pre-spring 2003. It’s nonetheless a
necessary mission; I just hope the administration focuses on the
one at hand in Iraq first.
Wall Street
The earnings period is not providing as much positive
ammunition as hoped for and the equity markets continue to
struggle as a result. The key is some corporations appear to be
ratcheting down expectations for the year which only leads me to
conclude that the deceleration in profits growth could be more
severe than anticipated, particularly in the second half. And
while an IBM can beat on the bottom line, earnings, the top
line, revenues, is less than exciting. No doubt others, such as
General Electric, were positive, particularly on the global
environment, but I look at the weight of the evidence and see a
different picture; a slowdown in most regions around the world
that goes back to last fall.
On the inflation front the Federal Reserve, which next meets Feb.
1 and 2, appears intent on continuing to raise the federal funds
rate for the foreseeable future despite claims this week from
various Fed governors that inflation is under control. The Fed’s
survey of regional activity (the Beige Book) also reiterated that
inflation pressures are in check. Others point to the fact the
consumer price index rose 3.3% for all of 2004 (2.2% ex-food
and energy), the fastest such pace since 2000, and say inflation is
an issue. Bond king Bill Gross of PIMCO says that given a
choice between ‘reflation’ and ‘deflation’ he comes down in the
reflation camp.
Admittedly, this inflation argument is a tough one. I like to have
fun with my “inflation update” and we all know that costs
associated with some very important categories, such as health
care, college tuition and property taxes, are rising as fast as ever
and far higher than the official inflation rate, but I also have to
deal with hard numbers, as crooked as they may be, that our
government provides, along with another reality. The American
consumer is not going to accept higher prices on goods they can
control. Sony’s CFO, for example, said that “prices are falling at
a speed that could not have been imagined in the past.” Throw in
my projected slowdown and I stick with the prediction that by
December the talk is of global deflation, not the reverse.
The price of energy, of course, will have a say in the above
debate as well. Crude fell early in the week before a sharp
reversal on Thursday and Friday led to another gain to the $48.53
level. Once again, though, the market is way too riveted on
weekly inventory numbers as the hedge funds and oil traders
whip the commodity around at light speed.
But longer term, CSFB issued a report on the integrateds
(Exxon Mobil, Chevron) that are currently spending just 12% of
their capital expenditures on finding new fields vs. 30% in 1990.
Instead, Big Oil is focusing on acquisitions and improving
production from existing sources. Which means one thing,
sports fans; we are finding less than global demand currently
dictates. This also means OPEC gains more, not less, leverage as
time goes on. That said I remain slightly bearish on oil prices in
’05 due to my slowdown scenario.
Street Bytes
–Incredibly, both the Dow Jones and Nasdaq have started the
year with 3-week losing streaks for the first time since 1982.
The Dow and S&P 500 are now off 3.6% for the year, to 10392
and 1167, respectively, while Nasdaq is down 6.5% at 2034.
And check this out. Back on November 5, the Dow was at
10387, S&P 1166 and Nasdaq 2038. In other words, for eleven
weeks we have gone nowhere; wiping out much of the year end
rally that commenced about ten days before the election.
One stock of note was eBay. Every issue in the history of the
market has missed expectations at one time or another and with
normally devastating consequences for shareholders. Well after
a spectacular run, eBay finally had its comeuppance, missing
earnings estimates by a penny but more importantly lowering the
overall forecast for 2005. The stock plummeted 20% on
Thursday, this as the company announced a 2-for-1 split.
Clearly, some investors didn’t understand the meaning of this
because they took it upon themselves to split the shares without
official authorization. Always let professionals do it, I say; never
try this at home.
–U.S. Treasury Yields
6-mo. 2.65% 2-yr. 3.14% 10-yr. 4.14% 30-yr. 4.64%
Bonds rallied in the face of continuing punk news in the equity
markets, uncertainty over the future of General Motors’ credit
rating, no small matter when you’re talking almost $300 billion
in debt, and a falling consumer confidence reading.
One good piece of news was contained in the data on capital
inflows from foreign investors who in November stepped up to
the plate to purchase $81 billion in U.S. financial assets, a major
improvement from October’s level. So fears of a dollar crisis
were allayed at least for another month or two.
–Housing starts in December were strong after a tepid November
so there was renewed talk of a bubble, though it’s still all about
historically low mortgage rates (and demographics). Until rates
rise significantly I can’t call for a crash in prices but I maintain
they will level off enough to adversely impact the “wealth
effect.”
I was talking to a friend the other day with connections down in
Florida and the market there, post-hurricanes, is booming,
particularly in some areas most affected. [I’d love to hear from
others in this regard.] Elsewhere, I saw recently where prices in
Montgomery County, MD, were up 70% in 3 years despite
rapidly rising property taxes, a combination which leads to a
discussion of ‘affordability.’
Two weeks ago the Journal had a piece on this topic, rating 325
metro areas. In 30 of these, 60% of the mortgages taken out
were interest-only because the homebuyer couldn’t afford the
purchase any other way. That’s scary.
This week I decided to look at my own situation a little more
scientifically than I have in the past and realized my place has
risen 8%+ (ann.) for 11 years. On the surface that may not seem
like a bubble scenario, but when you consider that wage increases
have been more in the 3-4% range over the same period, it goes to
the affordability issue. New homebuyers simply can not expect
this kind of appreciation to continue…and it won’t…and again
that will have a depressing effect on consumer confidence,
spending, etc.
Finally, you know what I do when I think about my own net
worth? I always knock off $100,000 from the value of my home.
For many of us over the past 10-15 years (since a rough stretch in
the late 80s / early 90s), real estate has been a superb investment.
I would just urge those of you who ‘add’ $100,000 to your
home’s value, as I’m knocking it off, to readjust your
expectations before you do something foolish and get burned.
–Related to the above, home equity loans are up 35% in just one
year to $430 billion. However, this isn’t necessarily as bad as it
sounds since many are using their lines of credit to pay off far
more expensive credit card debt. Nonetheless, 51% of the
available line has been tapped and should interest rates rise
significantly, the cost of these variable loans will also do so
commensurately.
–Delta Airlines lost a record $2.2 billion (including special
charges) in the 4th quarter and $5.2 billion for the year. Others
like Continental issued similarly depressing reports. There is
absolutely no light at the end of the runway for this sector.
–Federated Department Stores (Bloomingdale’s, Macy’s) is
acquiring May Dept. Stores (Marshall Fields, Lord & Taylor) in
a move that could be disastrous for malls. According to USA
Today (and Smith Barney), 101 malls have both a Federated and
May store and it only makes sense in these situations to cut out
one or the other.
–AT&T is going from 61,600 employees a year ago to about
42,300 in 2005 as revenues continue to plummet. However the
cost-cutting is paying off on the earnings front.
–Airbus unveiled a 505-foot-long hot dog with wings…actually,
a humongous convention center, complete with gym and health
spa that some say can also fly. In fact, by spring 2006 anywhere
from 500 to 800 passengers could be asking themselves, as the
plane taxis to take off, “Just what the heck am I doing?” I mean
why would you want to fly on this thing? Then again, Airbus
has already pre-sold 149 behemoths at $250 million each so I
guess I’m wrong.
–Remember a few months ago when I said parents should
encourage their kids to become petroleum engineers? Shell
announced it was hiring up to 1,000 as it attempts to address its
credibility issue pertaining to the company’s accounting of its oil
and gas reserves. But some say Shell will have trouble finding
that many qualified candidates and the current average age of its
engineers is 48.
–Shanghai’s mayor is trying to slow his city’s economy down in
a big way. GDP grew 13.5% last year and one worrisome issue
is the real estate bubble that is pricing all but the wealthiest out
of the market. There’s that affordability issue again.
–Beijing is on course to raise at least $1 billion in corporate
sponsorships for the 2008 Olympics. I’m assuming Amnesty
International is not one of them.
–22% of China’s agricultural, fishery and forestry imports come
from the United States, more than any other nation. In this
instance, free trade works and our farmers are reaping the
rewards.
–The number of tourists visiting China exceeded 100 million last
year, according to the government, earning it about $25.7 billion
in foreign exchange.
–Rosneft, the Russian oil company that purchased Yukos’ top
production unit as part of Russia’s renationalization program, is
evidently having trouble financing the acquisition. So China
National Petroleum Corp. may lend it $6 billion in exchange for
reserves.
–Mercedes sales in Russia were up 25.7% in 2004.
[The above China / Russia stories were gleaned from the pages
of the South China Morning Post and the Moscow Times.]
–Britain’s retailers had their worst December since 1981 as sales
fell 1%. Experts now believe the Bank of England’s next move
will be to lower interest rates after five increases from November
2003 to August 2004. Mission accomplished, one might say, as
the Bank was looking to slow the economy. The question
becomes, did the BOE go too far?
–Walter Wriston, a titan in American banking, died at the age of
85. Wriston led Citicorp for 17 years and was responsible for a
slew of innovations. [I did a recent feature on Wriston and his
role in the expansion of the credit card industry for my “Wall
Street History” link. See archives.]
–Half of IBM’s revenues now come from the service sector.
–The Wall Street Journal’s George Melloan wrote the following
in an op-ed on the Social Security / private accounts debate.
“Managing securities is no longer something just for the toffs (?);
some 27% of American households own stocks or mutual funds,
according to census data. Nearly 30% have a 401(k) plan and
23% have an IRA or Keogh plan. About 65% own interest-
bearing assets at financial institutions. Nearly 70% own their
primary residence….
“It seems safe to say that most Americans feel quite capable of
running their financial affairs.”
WRONG. Mr. Melloan needs to get out a little more. While I
suspect my particular readership feels reasonably secure in its
financial decision-making, that is definitely not the opinion in
much of the land; drawing on my past experience in giving
public seminars and later observations concerning the Bubble.
–Tyco’s Dennis Kozlowski and WorldCom’s Bernie Ebbers are
appearing in trials adjacent to one another in New York. Anyone
coming in contact with either is advised to wash their hands
immediately.
–Then there is the late CEO Charles Bell of McDonald’s. Talk
about a life well-lived. Bell, an Australian, was flipping burgers
at a McDonald’s in Sydney when he was just 15 and by 19 he
was his country’s youngest store manager. It was a meteoric rise
from there to the top as he helped engineer McDonald’s
turnaround. Bell was only 44 when he died of colorectal cancer.
–Yahoo was one company that beat earnings expectations and
still seems pretty upbeat on the future. It’s just that some of us
believe the valuation remains too high.
–Krispy Kreme’s CEO Scott Livengood was finally forced out
after running his company into the ground. Now he gets to spend
more time with his family; that is if they want him around,
especially since he won’t be bringing home free donuts.
–Lucent disappointed in its latest earnings release, particularly
on its sources of revenue, and the stock lost about 15%. CEO
Patricia Russo was wearing a sharp suit as she appeared on
“Kudlow & Cramer,” however, befitting a woman taking down
$10 million.
–The investigation into COX-2 inhibitors, arthritis painkillers,
continues with Pfizer’s Bextra the latest to come under the gun
on concerns it, too, increases the risk of heart attacks and strokes.
–Fannie Mae halved its dividend to shore up its capital. It
remains a ticking time bomb.
–Andrew Susser was a big bond analyst at Banc of America,
supposedly pulling down $4 million a year. But Andrew is no
longer working at B of A. It seems he decided to superimpose
his head on a fully clothed woman as part of a 56-page report he
issued on the hotel and casino industry. The editor of the project
was also canned.
–My portfolio: I continue to pare my holdings, selling off the
Singapore Fund for a 20%+ gain. I love the place, am still
optimistic about its prospects, and it’s a beneficiary of tsunami-
related troubles elsewhere in the region, but I just felt I got about
as much out of the investment as I expected to for now. I’ll go
through what’s left in the ol’ portfolio next week.
Foreign Affairs
Israel: Palestinian President Mahmoud Abbas said he was
“furious” at the terrorists who carried out the attack on Israelis at
the Gaza checkpoint 10 days ago and he vowed to put a plan in
place for tighter security on the border. So Friday hundreds of
Palestinian troops took their places in the disputed area and
Israeli was most pleased. Abbas is trying and Israel will be all
too happy to move forward if he can begin to control Hamas and
the other terrorists. Whether this is realistic is another matter.
China: Zhao Ziyang, the former leader of the Chinese
Communist Party in the days before the Tiananmen Square
massacre in June 1989, died at the age of 85. Zhao had been
under house arrest ever since the day in May of that year when
he tearfully warned the students massed in Beijing to go home,
knowing he had lost the struggle to put down the protests without
bloodshed.
Zhao remained a popular figure among the masses since then and
China’s current leadership was concerned the announcement of
his passing would fan the flames of democracy once again.
There was a 2-line mention in the state paper and then a foreign
ministry spokesman was shoved out to proclaim “The past 15
years have shown China’s decision was correct.” But at week’s
end the government said it would allow a funeral, though there
was no word on timing and whether any leaders would attend.
Of course Taiwan and Japan used Zhao’s death to call for more
political freedom on the mainland.
[I have a good piece on Tiananmen and Zhao up on “Hott
Spotts,” 1/20 edition.]
Speaking of Japan, it announced it was ready to test for natural
gas in a disputed region of the East China Sea, north of Taiwan,
that both Beijing and Tokyo claim control of. You’ll recall last
fall that a Chinese submarine was chased out by Japan’s navy
during a mission to map China’s own claims. Someday in the
next few years there will be a far more serious incident between
these two involving the fields.
And it wasn’t a good week for Taiwan as Grenada abandoned it
in favor of China, another in a line of Caribbean nations that
have renounced their ties to Taipei under pressure from the
commies. The U.S. isn’t any better.
Russia: President Vladimir Putin faced his toughest test yet on
the domestic policy front as protests spread nationwide over the
Kremlin’s new program to slash some pension benefits; among
which were free transport and subsidized medicines and utilities.
Putin sought to replace them with meager cash payments that in
many cases were less than the cost of bus fare. As 10,000
marched in his hometown of St. Petersburg, Putin blamed
officials over the handling of the crisis and vowed to increase the
payments. An interesting moment…and a chink in the armor.
Meanwhile, Mikhail Khodorkovsky now faces new charges of
money laundering, so maybe he won’t get out of jail by year end
after all; Putin’s goal being to keep Khodorkovsky from
becoming a political force for as long as possible.
And I just have to add the following from an op-ed in the
Moscow Times by talk show host Yulia Latynina.
“This history of Russia is the history of a state that betrays the
very people who defend it. It is a history of false heroes created
by decree and real heroes consigned to oblivion.
“Some Israeli soldiers told me recently that they had fought for
three days to recover the corpses of two comrades, losing 12
more men in the process. Because they do not leave their own to
the mercy of the enemy, even in death.
“Some Russian soldiers told me about how a wounded Russian
officer was put on an overloaded chopper, but was thrown
overboard when he died to lighten the load and make flying
easier. No one would admit to this, of course, and the officer
was officially listed as ‘missing in action.’ Because of this, the
military refused to pay his widow the pension to which she was
entitled.
“Wars are not lost on the field of battle. Wars are lost when the
leadership regards its soldiers as cannon fodder. And when we
honor riffraff instead of real heroes.”
Ukraine: Viktor Yushchenko is being inaugurated on Sunday, the
culmination of a tumultuous period for his nation. Yushchenko
plans on visiting Moscow, Monday, in an attempt to begin
repairing relations between himself and Putin.
Random Musings
–Differing opinions on the Bush agenda.
From the Washington Post’s David Ignatius:
“Here’s the nub of my worry, as Bush & Co. begin their second
term: If they confuse rigidity with resolve, and refuse to learn
from their mistakes because they fear it would be a sign of
weakness, they are going to get the country into real trouble.
Because they have mostly been promoted from within, the
members of the second-term team are especially in need of
reality checks from outside – even rude or awkward ones. If they
take offense at such challenges and treat public scrutiny as a
personal affront, they won’t be successful. It’s as simple as that.
Peggy Noonan, Wall Street Journal:
“The president’s speech seemed rather heavenish. It was a God-
drenched speech. This president, who has been accused of
giving too much attention to religious imagery and religious
thought, has not let the criticism enter him. God was invoked
relentlessly….
“One wonders if (the White House) shouldn’t ease up, calm
down, breathe deep, get more securely grounded. The most
moving speeches summon us to the cause of what is actually
possible. Perfection in the life of man on earth is not.”
From a lead editorial in the Times of London:
“This will not be a revolutionary movement. Nor will the
differences between some European governments and the Oval
Office disappear. The U.S. will continue to regard the threat
posed by radical Islamists, the dangers of the proliferation of
weapons of mass destruction and the behavior of rogue states
such as North Korea with more urgency than France and
Germany. These countries should ask themselves whether their
assessment of these perils is so much more modest because of
evidence, or the inconvenience that acknowledging their
intensity would entail. They might also ponder what it is about
the promotion of freedom that they regard as so alien and
objectionable.”
Columnist Charles Krauthammer, Washington Post, on the new
threat:
“It is no accident that Russia has begun hinting at making
common cause with China. This is potentially ominous because
of China’s rising power and its status as the leading have-not
nation on the planet, the Germany of the 21st century. In
December, during the week of the rerun Ukrainian election that
finally brought the pro-Western Viktor Yushchenko to power,
Russia made two significant moves toward China. First was the
announcement of intensified economic cooperation in developing
Russia’s vast energy resources. More ominous was the Russian
defense minister’s Dec. 27 announcement of, ”for the first time
in history,” large joint military exercises on Chinese territory.
“China in turn is developing relationships with such virulently
anti-American rogue states as Iran. Add such various self-styled,
anti-imperialist flotsam as Syria, North Korea, Cuba and Hugo
Chavez’s Venezuela, and you have the beginnings of a
significant ”anti-hegemonic” bloc – aimed at us.
“This is not a new Cold War. The United States will still remain
the vastly predominant world power. But it is a challenge that
history has waiting for us on the day the war on terrorism is won,
and perhaps even before. There is no rest for the weary.”
–President Bush, as he’ll illuminate in his State of the Union
Address in two weeks, has four major goals in his second term;
spreading democracy, tort reform, Social Security and tax
reform. But the polls show the American people, aside from
their concerns over Iraq, continue to have education and health
care at the top of their list, so whether the president can rally the
nation to his pet projects is questionable.
–I’m not so sure how far the U.S. really wants the oil-for-food
investigation to go. It’s not just embarrassing for the U.N.,
France and Russia, but it could yet prove to be for the United
States as well.
–Bird flu has killed 7 in Vietnam over the last three weeks and
one in Thailand. There still aren’t any documented cases of
human to human transmission but such a progression seems
inevitable…and then watch out.
–Local charities, worldwide, are suffering big time with the
focus on the tsunami relief effort.
–I’ve been writing a lot on the street gang issue and the Sunday
Times had a piece quoting Los Angeles Police Commissioner
William Bratton who said it’s a “national priority…taking more
lives than all the civilians lost to al Qaeda last year.” [Note to
Bill O’Reilly, who ripped off the article on Monday’s broadcast.
Don’t be afraid to give your source appropriate credit.] And
yesterday the Washington Post had a chilling story on the Central
American gangs wreaking havoc not just in urban areas like Los
Angeles and the suburbs of D.C., but also in Mexico where the
gangs converge, both going to and leaving, often forcibly, the
U.S.
The FBI has now made gangs a top priority, but there are so few
leaders, like Bill Cosby, who are willing to take a stand. And it’s
depressing, as the Times pointed out, that intimidation of
witnesses is increasingly deadly as the gangs impose their will on
the innocent. Bratton is correct; they are nothing but terrorists of
a different stripe.
–From a lead editorial in the Washington Post:
“ ‘Here is a telling statistic,’ California Gov. Arnold
Schwarzenegger said in his State of the State speech last week.
‘One hundred fifty-three of California’s congressional and
legislative seats were up in the last election and not one, I repeat,
not one, changed parties. What kind of democracy is that?’
“Good question – and pertinent not just to California but to the
depressing state of electoral democracy throughout the country.
Mr. Schwarzenegger proposed to replace the self-serving
politicians who draw – and gerrymander – their own legislative
districts with an independent panel of retired judges. To which
we say: Go, Arnold!”
–Jack Nicklaus turned 65 on Friday. Yikes.
—
God bless the men and women of our armed forces.
God bless America.
—
Gold closed at $427
Oil, $48.53
Returns for the week 1/17-1/21
Dow Jones -1.6% [10392]
S&P 500 -1.4% [1167]
S&P MidCap -1.0%
Russell 2000 -1.0%
Nasdaq -2.6% [2034]
Returns for the period 1/1/05-1/21/05
Dow Jones -3.6%
S&P 500 -3.6%
S&P MidCap -4.5%
Russell -6.2%
Nasdaq -6.5%
Bulls 55.9
Bears 24.7 [Source: Chartcraft / Investors Intelligence]
Have a great week. I appreciate your support.
Brian Trumbore
