[Posted 7:00 AM ET]
The War on Terror
Last week I wrote of the momentum being generated in the
Middle East on the democracy front, but this past week was
another reminder of just how long the United States will need to
remain involved in the region. Nonetheless, as Democratic
Senator Joseph Lieberman told the New York Times’ Todd
Purdum following a policy speech by President Bush:
“Look, this moment in the Middle East has the feel of Central
and Eastern Europe around the collapse of the Berlin Wall. It’s a
very different historical and political context, and we all
understand that democracy in the Middle East is in its infancy.
But something is happening.”
Lieberman went on to add that the toppling of Saddam and the
continued American presence in Iraq showed “the proven
willingness of the United States to put its power behind its
principles.”
For his part, President Bush spoke of our nation’s “generational
commitment” to nurture freedom in the entire region, while also
defeating “determined enemies who show no mercy for the
innocent and no respect for the rules of warfare.”
But while I continue to urge the president to keep pressing the
advantage, I also hope he’s careful to steer clear of triumphalism
and arrogance.
Certainly the pro-democracy forces in Lebanon were forced to
take a back seat to Hizbollah this week as the terrorist / political
organization manufactured a crowd of some 500,000 in Beirut.
Leader Hassan Nasrallah reminded his followers that it was
Hizbollah that bombed the U.S. barracks in 1983 and “if the U.S.
comes again, they will be defeated.” Nasrallah and his 25,000-
man militia are a force to be reckoned with.
But Hizbollah also has a strong political component and the U.S.
has swung to France’s position that it is best to steer Hizbollah
into the political mainstream. Lebanon has parliamentary
elections in May and the feeling in Washington and Paris is that
it’s better not to antagonize Hizbollah beforehand.
As for Syrian President Bashar Assad, last weekend he promised
a gradual withdrawal of the 15,000 troops in Lebanon and then
proceeded to shift some around during the week, in a stalling
tactic it seemed, but by Friday the first convoy was crossing back
into Syria. Both Presidents Bush and Chirac, as well as the Arab
League, have kept the heat on and over this weekend a UN envoy
will tell Assad that if Syria doesn’t comply with UN Security
Council Resolution 1559 and fully withdraw from Lebanon,
Syria faces severe sanctions.
But Assad, through his proxy in Lebanon, President Lahoud, did
reinstall the prime minister there who had dissolved the
government just a week earlier; a further example of the tough
work ahead for the pro-democracy forces.
Washington Post columnist Jim Hoagland had the following
take.
“France and the United States have found common cause to press
…Assad to withdraw troops that were first sent to Beirut in 1976
with the approval of both powers. ‘Paris wants to stabilize
Lebanon, and Washington wants to destabilize Syria,’ a diplomat
in Europe said to me recently. ‘There’s something for everyone.’
“The hard work lies ahead, as Assad predictably tries to buy time
with vague promises and muscle-flexing through his Hizbollah
allies….But the key judgment made by the Bush administration
in the spring of 2002 – that the political status quo could not and
should not be maintained in the Middle East – is being proved
prescient and worth pursuing through this Beirut Spring.”
As for Iran and Iraq, I am likely to have far more on these two
next week. Ayatollah Sistani is calling for parliament to convene
March 16 in Iraq for the purpose of picking a government, while
the United States has decided to work together with Europe in
negotiating with Iran and its nuclear weapons program. For its
part, Europe has agreed to take Iran up with the Security Council
should negotiations fail, while the U.S. is offering economic
incentives such as WTO membership. The Iranians are already
saying they refuse to give in to the demands…and they won’t.
Wall Street
It was an ugly week for both stocks and bonds, with the Dow
Jones and S&P 500 failing to confirm the prior week’s breakout
to multi-year highs (Nasdaq never broke out in the first place),
while the bond market had its worst stretch in months as the
yield on the 10-year Treasury finished the week at its highest
level since last July, 4.54%. I’ve been saying for months there
was little reason for a lengthy discussion on bonds until we got to
4.50% or higher, but now it begins to concern a few folks should
rates continue to march higher.
Actually, the events of this week bring the global economy one
step closer to my rollover scenario. Any further significant spike
in rates, amidst inflation fears, could tip this economy faster than
you can say “dollar-peg,” and any pickup in overall volatility,
which appears likely, also brings us closer to a financial accident
among the highly leveraged set that tries to convince us 100% of
them know what they’re doing. I’m of course referring to hedge
funds, as well as large financial institutions and their derivatives
holdings.
But for this week rates soared partly because the leading index of
commodities, the CRB, hit a 24-year high, plus the Federal
Reserve’s look at regional economic activity contained a slight
nod to “pricing power” in some areas and that is inflationary.
There have also been concerns the Fed will be forced to raise
interest rates more aggressively since it appears capital spending
is increasing at a solid pace. You see, you have this 3-legged
stool we’ve discussed over the years; capital / corporate
spending, the consumer, and housing. Housing and the
consumer have carried the ball while businesses retrenched, both
during and after the shallow recession. But now, as housing is
showing signs of flat-lining and the consumer is acting more
finicky, businesses are picking up the slack. This is good…no
doubt…but it’s helping to fuel the rise in yields and with rising
yields comes competition for stocks.
But back to commodities, the key for over a year now has been
surging demand from India and China (as well as the U.S.) and
in the case of China there is growing discontent among some
experts. Bruno Bolfo, the world’s largest steel trader, was
quoted in the Financial Times as saying steel prices were set to
fall as demand from China slows. In fact he is going so far as to
say that this year China will flip from a net importer to a net
exporter. [Others argue China will continue to do just fine.]
It’s China and the U.S. after all that are driving the bulk of global
economic activity the past few years and the IMF warned that
risks of a slowdown are increasing unless others begin to follow.
Don’t look to Europe for help as the Euro-12 just reported its
worst retail sales figures in 9 months.
Then there’s energy. While the IEA raised its 2005 demand
forecast yet again, to 84.3 million barrels per day, the fact is in
the U.S., which consumes 25% of the world’s output, inventories
are 8-9% higher than last year. So why do we still see $54
crude? The hedge funds have been playing a major role, but also
the supply / demand picture is a fragile one. No matter how you
slice it, there is little excess capacity so even though inventories
are more than adequate, it’s the fear of a shock, such as political
turmoil in Iran or Saudi Arabia, or maybe Venezuela, that has
helped put a floor on the price of oil, at least for today.
And speaking of Venezuela, you have the case of President Hugo
Chavez. This week he reiterated that OPEC should fix oil at
$40-$50 as “Venezuela will now help the southern Hemisphere
countries with its oil more than it has helped the U.S. America
wants to keep all the good things in the world for itself. But we
will not let them do it.” Then a few days later, Iranian President
Khatami came a calling to work on some joint energy deals as
well as exchange high tech secrets. The Bush administration has
had its head in the sand when it comes to Chavez, and we can’t
forget 15% of U.S. imports of oil come from here.
[Friday, Iran’s Khatami addressed Venezuela’s congress, after
which Chavez said “Venezuela and Iran agree in firmly rejecting
the imperialist policy of the United States” as Chavez went on to
support Iran’s nuclear quest.]
Street Bytes
–The Dow Jones fell 1.5% to 10774, having earlier risen to
within 20 points of 11000. The S&P 500 dropped 1.8% to 1200
and Nasdaq declined another 1.4% to 2041, with the tech
barometer now off 6% for the year. What was particularly
disappointing to market watchers was the poor response on
Friday to Intel’s mid-quarter update in which the company raised
its guidance on revenues and profit margin, yet the stock
declined.
–U.S. Treasury Yields
6-mo. 3.05% 2-yr. 3.71% 10-yr. 4.54% 30-yr. 4.81%
While Warren Buffett continued to trash the dollar, decrying the
“force-feeding of American wealth to the rest of the world” in
discussing the U.S. trade and current account deficits, Federal
Reserve Chairman Alan Greenspan told the Council on Foreign
Relations, “The resolution of our current account deficit and
household debt burdens does not strike me as overly worrisome,
but that is certainly not the case for our fiscal deficit.”
As I noted the past few weeks, I agree that the current account
deficit is not the key issue, rather it is the federal budget and
skyrocketing national debt that are the primary concerns. Again,
all you have to know is that in 2010 we will be paying over $300
billion alone in interest on the national debt (as a federal budget
item) and that is taking capital from more productive
investments. Why more people aren’t upset about this interest
figure I’ll never know. That’s insane.
But back to the dollar, Buffett looked good this week as the
currency took on gas due to comments from the Far East, as well
as on the release of the second highest trade deficit in history;
$58.3 billion for the month of January. First, Japan’s Prime
Minister Koizumi was quoted as saying his nation may have to
diversify out of the dollar and, second, China strongly hinted it
may shift its dollar-peg, though on the latter I would offer that
this will have minimal impact on China trade as it would remain
the lowest cost provider in most market segments.
–According to a Federal Reserve study, U.S. household net
worth (total assets including homes, minus mortgages and credit-
card debt) rose 4.2% in the fourth quarter to a record $48.5
trillion. The increase was due to the run-up in stock prices as
well as continued appreciation in home values, though the pace
of the latter is slowing.
–In a troubling story on many levels, Boeing CEO Harry
Stonecipher was forced to resign following discovery of a
consensual relationship with a female executive. Boeing’s board
said the actions “reflected poorly on Harry’s judgment and would
impair his ability to lead the company.”
Boeing had been suffering for years with ethical improprieties
but it was recovering under Stonecipher’s leadership, then he
goes and violates the very ethics rules he put in place.
What troubles me about this case is the fact Stonecipher’s
relationship with the executive (who didn’t report directly to
him) was just 7-8 weeks old and, in addition, a third party
somehow found an illicit e-mail between the two and passed it on
to the board. How did this person receive it? What could be
their motive?
–Since the quotas on textiles and apparel ended for China last
December, exports of textiles to the U.S. were up 75% in the first
month ($1.2 billion …including 941,000 cotton knit shirts…
check your label). This is going to be a huge issue over the
coming months.
–A new bankruptcy law is about to be signed into law that will
prevent most debtors from just filing Chapter 7 and wiping out
their debts. More will now be forced into Chapter 13 and have to
pay something, as it should be. But the law isn’t likely to take
effect until the fall so there will be a last rush to file.
–Adding Plavix to the commonly used drug regimen for heart
attack patients in the first 90 minutes has been shown to have a
very positive effect.
–Biogen’s general counsel was forced to resign following
evidence he sold 90,000 shares of company stock for a $1.9
million profit the day the company learned a patient had died
from using its drug, Tysabri, though before the information was
made public. This is the definition of a corporate dirtball.
–Delta Airlines has projected a “substantial” loss for 2005 and
may have difficulties avoiding bankruptcy. Like with the entire
industry, high fuel prices are killing Delta, while for its part
Continental said it was being negatively impacted by Delta’s
recent fare cuts that Continental and the others were forced to
match. Separately, Delta announced it was joining American in
discontinuing the use of pillows. I imagine there are some
gooses that are happy with this development.
–Mark R. had a good point concerning Federal Express. He
recently attended a retirement party for one of its pilots, a fellow
who had been with FedEx for 31 years. Remember when a job
flying planes for them was looked down upon compared to
working for a leading commercial airline? Well, as Mark
points out, who has had the last laugh? Which pilot still has his
401(k) and pension intact?
–71% of 158 foreign companies operating in Russia said
corruption was the biggest obstacle to doing business in the
country. [Moscow Times]
–South Korea’s top finance minister was forced to resign over a
real estate scandal involving his wife who accumulated $mms
through speculation.
–Sony handed the reins of power to a foreigner for the first time,
American Howard Stringer.
–According to Morningstar, there were only 260 new fund
offerings in 2004 vs. 729 in 2000. [Investment News]
–I never have the time to just sit back and read a book, but I saw
a terrific review in Barron’s of “China Inc.” by Ted Fishman.
Definitely sounds worth checking out, sports fans.
–Here’s an example of the real estate bubble in much of
California. Actor Nicholas Cage purchased his Malibu home for
$3.6 million in 1997 and recently sold it for $10 million.
Granted, it overlooks the ocean but it’s just 2BR and 3BA. [Los
Angeles Times]
–Forbes reports that the number of billionaires grew to a record
691 from 587 last year. Bill Gates is still #1 at $46.5 billion.
Only 29 are under age 40, a lesson for those of you graduating
from college this spring. Be patient. The average age, by the
way, is 64…which gives us 40-somethings a ray of hope.
–Martha Stewart really is amazing. No apology, no remorse.
As Andrea Peyser wrote in the New York Post, “send Martha
back to prison.” But here at StocksandNews, I’ve decided that
every time I feel compelled to mention Martha, I’ll also bring up
Oprah. Last Sunday, Oprah’s ABC movie “Their Eyes Were
Watching God” was seen by 25 million, a huge audience. Good
for her. [I was watching “Deadwood.”]
–Jim Cramer’s new show on CNBC, “Mad Money,” promises to
supply me with lots of fodder as this reckless hype machine does
his thing. This past week, in a segment on hedge funds with
CNBC’s Ron Insana, Cramer shouted “read the balance sheet!”
as an explanation for how some wealthy investors can avoid
getting taken in by crooks operating in this arena. So I would
ask Mr. Cramer, what difference would that make when a fund
manufactures numbers out of thin air, as has been the case in
some recent high-profile scams?
–My portfolio: Still about 20% equities, 80% cash.
Foreign Affairs
China / Taiwan: The National People’s Congress has gathered
and on March 14 will approve the incendiary anti-secession law
that declares China “shall employ non-peaceful means and other
necessary measures to protect China’s sovereignty and territorial
integrity.”
Foreign Minister Li was sent out to elaborate.
“We will never tolerate Taiwan independence and never allow
the Taiwan independence secessionist forces to make Taiwan
secede from the motherland under any name or by any means.”
Li also addressed the following:
“Any practice of putting Taiwan directly or indirectly into the
scope of Japan-U.S. security cooperation constitutes an
encroachment on China’s sovereignty and interference into
China’s internal affairs.” [South China Morning Post]
Robert Kagan weighed in for a Washington Post op-ed.
“(China’s) deliberately vague threat would seem to suggest that
China might attack Taiwan in the event that (a) Taiwan declares
independence, (b) seems to be about to declare independence, (c)
seems to be thinking about possibly declaring independence
some time in the future or (d) is not thinking about independence
at all but merely refuses to be absorbed by China in a timely
manner.”
And what does Taiwan think about this? The Council on
Mainland Affairs called the anti-secession law “a blank check to
unleash force against Taiwan” and China may have just made a
big mistake in misinterpreting Taipei’s reaction. The
government of President Chen Shui-bian, while viewed as pro-
independence, has been conciliatory in its tone recently, but now
China is stirring up passions anew. Maybe it’s what Beijing
wants, a pretext for war. After all, the United States is in no
position to do much in the way of defending Taiwan at this stage.
But as Robert Kagan points out, China sometimes makes big
blunders and one such example is the communists’ recent
demand that Australia “review” its 50-year-old treaty with the
United States. A foreign ministry spokesman warned that
Australia “needs to be careful” lest it wind up in a confrontation
with China. The Aussies aren’t about to put up with this crap.
It wasn’t all about Taiwan this week. Tung Chee-hwa stepped
down as Hong Kong’s chief executive and what’s important here
is for the new administration of Donald Tsang, a figure generally
viewed more favorably by the people, to be able to toe the
Beijing party line of no direct elections without stirring up
protests. China’s President Hu Jintao knows he needs to keep
demonstrators off the street for one compelling reason;
democracy advocates in Hong Kong and Taiwan feed off each
other.
Lastly, we have the issue of North Korea. China is publicly
doubting U.S. intelligence on North Korea’s nuclear capability,
while the Bush administration continues to count on China
playing a positive role in six-party negotiations (along with
Russia, South Korea and Japan). But I’ve been writing Beijing
doesn’t mind seeing Washington sweat a bit. And as the Wall
Street Journal points out in a page one piece on Friday, South
Korea is doing Washington no favors, either, by sending
$billions in economic aid across the border to prop up the
government in Pyongyang; Seoul being afraid regime change in
the North will only send millions of refugees streaming across its
border.
Russia: This week it was all about events outside Russia proper.
It started with Sunday’s election in Moldova, which joined
Ukraine and Georgia in turning away from Moscow as the ruling
communist party adopted an anti-Moscow, pro-European Union
platform. The communists won, but didn’t garner a clear-cut
majority. Nonetheless, despite the party label a win for the West.
Then Russian soldiers killed Chechen rebel leader and former
president Maskhadov, and while the Kremlin celebrated the
removal of a man who had been calling for negotiations and a
ceasefire with Moscow, the death leaves the Chechen militants in
the hands of the far more dangerous Shamil Basayev, the man
responsible for the Beslan school massacre.
And then you had Georgia’s parliament, which voted 159-0 to
have Russia withdraw from two Soviet-era military bases by next
January. The move puts pressure on Georgia’s executive branch
to follow through. I wrote at year end that Georgia would be a
flashpoint in 2005 and I see nothing to dissuade me from this
view.
Finally, the Financial Times had a disturbing story that just came
to light. Back in January, Russia threatened to withdraw from
the Intermediate-Range Nuclear Forces treaty it has with the U.S.
but cooler heads prevailed in the Kremlin. What the story
proves, however, is the ongoing struggle between the hardliners
and the more moderate elements as they play for Vladimir
Putin’s ear.
Israel: Palestinian leader Mahmoud Abbas and Israeli Prime
Minister Ariel Sharon are slowly inching back to cordial
relations following the Tel Aviv bombing, but there remains
much work to do before anyone can say the ceasefire, on a broad
scale, is holding. Israel has promised to begin turning security
over to the Palestinians in some West Bank cities but Palestinian
minister, and former security official, Mohammad Dahlin, is
crying for help.
Dahlin, who seeks Abbas’s job down the road and is respected
by the Israeli government, points out that the Palestinian forces
are not only in a shambles, but they are lacking in the very
basics; cars, fuel for cars, food, etc. And without a viable
security force, it’s little wonder that Abbas has yet to rein in the
terrorist groups to anyone’s satisfaction. It all can unravel in an
instant.
Afghanistan: Poppy production in 2004 was triple the level of the
prior year and is now 17 times greater than the 2nd-leading
producer, Myanmar (Burma). A U.S. government report cites
the narcotics situation in Afghanistan as “representing an
enormous threat to world security.”
Netherlands: France is voting in a referendum on the new
European Union constitution on May 29 and the latest polling
data has the French approving it. But on June 1, the Netherlands
weighs in and the latest survey here has voters turning it down
42-28 (with the rest still undecided). And it’s not just about
immigration and the impact of 70 million Turks should they join
the E.U. in ten years or so. It’s also about the fact the Dutch
spend more per capita on the Union than any other country, and,
while the government here adheres to the strict budget deficit
requirements, as the E.U. mandates, all it sees are France and
Germany breaking the targets at will.
But here’s the catch. No one knows what happens to the
constitution effort if a country votes it down. As the Times of
London points out, if France votes ‘no’, the constitution would
likely be shelved, but if the smaller Netherlands says no,
authorities will probably just try to amend it.
Northern Ireland: Can the IRA screw it up any more than they
already have the past few months? The answer is yes. Robert
McCartney, a Catholic and sometime IRA sympathizer, was
killed a few weeks ago in a vicious attack outside a pub. At least
two IRA members were implicated directly. The IRA’s political
arm, Sinn Fein, then suspended a number who were either there
or refused to give up information while the IRA itself said it
would punish those responsible. This wouldn’t have risen to the
heights it has, however, were it not for McCartney’s sisters who
refused to let the case die.
So what does the IRA decide to do next? It offers to shoot four
suspects. Britain’s Tony Blair, Ireland’s Bertie Ahearn and the
Bush administration were all sickened by this latest twist and, for
its part, the White House is not inviting Sinn Fein to Washington
for St. Patrick’s Day, a recent tradition. The top U.S. envoy for
the North said the IRA should “go out of business.” My own
sentiments, exactly.
Random Musings
–Never was there a clearer example of my adage “wait 24 hours”
than in the case of Chicago’s Judge Lefkow and the murder of
her husband and mother two weeks ago. White supremacists
were immediately fingered and it turned out to be someone
entirely different. But these days there is a rush to judgment in
all manner of situations and it’s getting worse and worse.
–Related to the above, of course, is the situation with the Italian
journalist who was shot by friendly fire on the road to Baghdad
Airport. I saw a terrific program on PBS’ “Frontline” a few
weeks ago that focused on an American unit charged with
security in the area, including the airport road. I can easily see
what happened, especially assuming the Italians didn’t notify the
Americans of their plans, as appears to be the case. [The
checkpoint itself was set up for U.S. Ambassador John
Negroponte’s convoy.] Now we see the journalist is conflicted
in her testimony, let alone the fact she works for an anti-
American, communist publication, Il Manifesto.
Having said that, the Italian agent who died acted heroically and
for this he paid with his life. It was all a tragic accident, but as I
reminded you last week in discussing how China is using Abu
Ghraib for propaganda purposes, the U.S. has to be almost
perfect in its actions these days. No one can be.
–I think the selection of John Bolton to be the next U.S.
ambassador to the U.N. was brilliant.
–In the latest poll of New York voters, Attorney General Eliot
Spitzer would trounce Governor George Pataki 53-30 should the
latter opt to run for reelection.
–Well, I was thinking that I may have to apologize to the
dolphins that beached themselves on the Florida Keys about ten
days ago; having learned after I posted my last column that U.S.
Navy sonar might have been responsible rather than the
dolphins’ failure to read the tide tables.
But then I was watching “Today” on Monday morning and there
was NBC reporter Kerry Sanders in a pool with some of the
dolphins that were being nursed back to health.
“Kerry, these are wild animals, are you scared?” he was asked.
Sanders, appearing a bit intimidated, said “I have to be careful
because if I put my hand in the water they think it’s a squid.”
–I’m assuming many of you were reminded of “The Wizard of
Oz” in watching Dan Rather’s last broadcast. Specifically, Bert
Lahr as the cowardly lion. Rather’s last message to us all was
“courage.” From the lion:
“What makes a King out of a slave? Courage.
What makes the flag on the mast to wave? Courage…
What makes the dawn come up like thunder? Courage.”
G’night, Dan.
–I was down in Florida for a few days this week, visiting my
parents on beautiful, but incredibly overdeveloped Marco Island.
If you ever plan a trip down this way in February or March as I
have the last few years, please contact me first. I have a habit of
bringing out the worst in the weather.
–Finally, as a Wake Forest alum who is fired up about the
NCAA Basketball Tournament (despite Friday’s awful loss in
the ACC Tourney), I have to note a speech our retiring President
Thomas K. Hearn, Jr. made back in 2002 that I came across in
the Wake Forest magazine. The topic of the discussion was
“Schools and American Cultural Conflict.”
“My greatest concern for the best of this generation, the best of
your graduates and mine, is that these students are so
sophisticated, accomplished, worldly, traveled – perhaps I should
say ‘programmed’ – that they have education mastered. They
have school figured out. They know where they are going and
what it takes to get there. School is a game, and they are the
winners. Their parents’ dreams are coming true.
“What is missing in this outlook is any sense of discovery,
adventure, wonder, possibility, or any thought that they might
find around some corner of their minds an unknown passion
leading in some new direction. Aristotle said that all knowing
begins in wonder, and these most successful of our students lack
wonder. They are on the fast track – destinations chosen.
“Each year at our convocation for entering students, I recite Shel
Silverstein’s marvelous little homily, ‘Magic Carpet.’ I hope you
know it. I trust you will join me in spreading its enduring lesson.
You have a magic carpet
That will whiz you through the air,
To Spain or Maine or Africa
If you just tell it where.
So will you let it take you
Where you’ve never been before,
Or will you buy some drapes to match
And use it
On your
Floor?
“Too many of our best and brightest students are buying drapes.
They have fixed their destination. No matter how much they
accomplish or how much they achieve, they may miss the joy
and wonder of education and discovery. That experience is ‘the
ride of their lives.’
“We must see that the joy and discovery of some domain yet to
be explored continues to surprise and delight young minds, for
upon such uncharted explorations our future, their future –
indeed the future of the world – depends.”
—
God bless the men and women of our armed forces.
God bless America.
—
Gold closed at $445
Oil, $54.43
Returns for the week of 3/7-3/11
Dow Jones -1.5% [10774]
S&P 500 -1.8% [1200]
S&P MidCap -1.6%
Russell 2000 -2.8%
Nasdaq -1.4% [2041]
Returns for the period 1/1/05-3/11/05
Dow Jones -0.1%
S&P 500 -1.0%
S&P MidCap +0.8%
Russell 2000 -3.8%
Nasdaq -6.2%
Bulls 55.7
Bears 21.6 [Source: Chartcraft / Investors Intelligence]
Have a great week. I appreciate your support.
Brian Trumbore
