[Posted 2:00AM ET…Beirut]
So why is your editor in Beirut? Nothing more than curiosity, I
guess you could say. Following the assassination of former
Prime Minister Rafik Hariri on February 14, I watched as you
did the massive demonstrations by both the pro-democracy
forces as well as Hizbollah and thought, hey, this looks exciting,
might as well check it out, so I began to plan the trip in March.
Of course some of my loved ones were none too pleased,
especially those I told just days before I left, but here I am.
Because I was worried about a tight connection in Paris I left a
day early and wasted a lot of time in the vicinity of Charles de
Gaulle Airport on Wednesday, where I was without an Internet
connection, and I didn’t arrive in Lebanon until Thursday
afternoon so I don’t have a lot of comments to make at this time.
But after I post this piece I have three full days to explore Beirut,
at least as much as I’m comfortable with.
For starters, though, every single person I told of this trip thought
I was crazy and obviously that attitude is a result of past history,
specifically the 1976-90 civil war here that often found its way
onto our television screens. Anywhere from 50-100,000 died,
plus a score of Americans in a series of bombings we are all too
familiar with. The war left its marks to this day, like in the
building across the street from my hotel room. I’m on the 19th
floor, staring at a 25-story apartment tower that is gutted and
pockmarked from artillery shells. No neighborhood was spared
damage and by the end of the war the city once known as “The
Paris of the Middle East” was a shambles. Hundreds of
thousands of Lebanese had also fled their homeland.
But it was businessman turned politician Rafik Hariri who led
the city back from the brink and there is development taking
place on a wide scale. It’s now hoped his legacy won’t be lost in
the intense political battles to come.
In the aftermath of Hariri’s assassination, the world community
united, particularly the United States, France (with its
longstanding colonial interests) and the United Nations, forcing
Syria out after 29 years. The last of 14,000 troops departed on
Tuesday and now the UN is filing a report on both the
assassination and any residual Syrian presence, i.e., its
intelligence agents who terrorized large segments of the
population. Undoubtedly, many remain, either in the Hizbollah-
controlled south, along the Israeli border, or in safe houses in
Beirut.
But the democracy forces have already won some rounds and a
new interim government has been formed with Prime Minister
Mikati vowing to hold parliamentary elections by end of May.
Here’s where it gets very complicated. There are four main
political powers in Lebanon, which is roughly 70% Muslim and
30% Christian; the Sunnis, Shias, Druze (Muslim) and the
Maronite Christians. Each has its own tribes, neighborhoods and
towns. It would appear that as of this writing the election rules
will not be changed from 2000 and the status quo could prevail; a
Parliament divided more along religious than secular lines.
And then there is Hizbollah. Under the 1989 Taif Accord that
led to the end of the civil war, Hizbollah was to be disarmed
along with all other militias. Instead, today it has an army of
25,000 strong, is a growing political force in its own right, and
receives massive aid from both Iran and Syria. For its part Syria,
according to Israel, is shipping missiles to Hizbollah to threaten
them. Iran has long been doing the same thing.
I’ll have far more on this next week after I learn more firsthand
but for now the questions for Lebanon’s new and future leaders,
including Hariri’s son who is picking up his father’s mantle,
include:
What does the new government do with Hizbollah? Not to
disarm it undermines the government’s credibility as you’d have
the Lebanese army and then Hizbollah. Who has the real
authority then? But if the government attempts to disarm
Hizbollah, it risks almost certain confrontation and a renewal of
the civil war.
Ironically, Syria’s presence in Lebanon over the years probably
helped some, in a perverted way, by damping down local
tensions that could now re-emerge. At this point it could still go
either way, but what transpires here will have a huge impact on
attempts to spread democracy across the entire region.
Wall Street
You’ll have to forgive me since because of my travels I didn’t
focus as much on the Street as much as I normally do; not that it
would have mattered because investors are more befuddled than
ever these days. The figure on gross domestic product for the
first quarter, for example, came in weaker than expected, up just
3.1%. But new and existing home sales surged. The latest on
personal income and consumption was solid, but contained
within the GDP report was a worrisome number on business
spending, up far less than the recent pace.
Two key readings on consumer sentiment were down again, but
some important inflation indicators followed by the Federal
Reserve sent mixed signals. Add it all up and the Fed will raise
the funds rate another 25 basis points to 3.00% this coming
Tuesday, though once again all eyes will be on the
accompanying statement as to clues for how much longer the Fed
will tighten.
As for real estate, Morgan Stanley’s chief economist Stephen
Roach believes the Fed will keep raising rates until we hit 5 to
5.5% in order to control the “housing bubble.”
The economy is “balanced on the head of a pin of unsustainably
low real interest rates,” wrote Roach in a report published
recently. “The Fed needs to play the role of the tough guy that is
required of a truly independent central bank – taking the
proverbial punch bowl away when the party is in full swing.”
[Bloomberg News]
But the key 10-year Treasury on which most mortgages are
based is sitting at 4.20%, still an historic low (and just below my
own yearend forecast of 4.30%). The reason is inflation just isn’t
a concern to the bond market (at least for today) and almost all of
the data backs this up. It’s also why I believe the housing
bubble, which it clearly is, won’t pop until long rates rise a
substantial bit from here and / or the economy enters a recession,
which I see signs of by yearend. Until then, however, real estate
values will begin to stagnate which, while not a crash, will still
have an impact on the wealth effect and help reduce consumer
spending.
A third opinion is offered by economist Robert Shiller and bears
repeating. [I first brought this up a number of weeks ago.]
Shiller says all bubbles end not as a result of fundamentals but
rather psychology. At some point people decide not to pay such
a high price and it begins to spread. Heck, who am I to argue
with a Yale economist who called the 2000 bubble, I just don’t
see the bubble truly popping with mortgage rates as low as they
are. And Shiller offers that the bubble environment could last a
few years longer; it’s just impossible to call the top.
But no doubt housing is at the top of the Fed’s laundry list.
Chairman Alan Greenspan has said as much on various occasions
the past few months, though it also has this slowing economy
and potential inflation to deal with and in wanting to contain the
damage from a bursting of the real estate bubble the Fed
certainly doesn’t want to tank the economy overall, which is why
we’ll be tuning in Tuesday. After all, the market these days is
moving up and down at 100-point increments on the Dow Jones
on far less important news.
Ironically, the earnings reports for the first quarter continue to
look good for the most part, though there were some key misses
in the energy sector, namely from Exxon Mobil and
ChevronTexaco. I said long ago that the big money had been
made in this sector (for this cycle), but in all fairness I missed too
much of the final move to really claim any credit. Highs in the
key indexes were established on March 4 and both the XOI
(major integrateds) and OSX (oil service / drillers) are off about
10% from these levels even as the price of crude gyrates up and
down $5 a week.
Meanwhile, President Bush met with Saudi Crown Prince
Abdullah and got nowhere. The Saudis will ramp up production
over time, not tomorrow, and frankly, who can blame them?
Crude inventories soared anew this week and there are ample
supplies in the short run, even as demand from Asia appears to
be picking up again after a soft patch.
Finally, on the global economic front, consumer spending in
Japan fell a second straight month, not good, while Britain’s
home prices rose just 7% year-over-year in April, the lowest rate
in four years if you’re looking for clues elsewhere that we’re
getting closer to hitting a wall in this area.
And in Germany, the unemployment picture brightened slightly
as the jobless rate fell to a still astounding 11.8% from its high of
12%. Separately, the estimate for German GDP is now just 0.7%
for 2005 thanks largely to $50 oil.
Street Bytes
Owing to tumbling crude prices late Friday the equity market
was able to stage another rally and eke out gains for the Dow
Jones and S&P 500, up 0.3% and 0.4%, respectively, to 10192
and 1156. Nasdaq, though, had a losing week, 0.6% to 1921.
For its part, crude oil closed below $50 for the first time in two
months at $49.72. But let’s face it, folks, this schizophrenic
market often belies logic and it’s why you’re an idiot to make too
much of one day’s action in stocks, bonds or energy. Remember,
just wait 24 hours and it’s all likely to reverse.
–U.S. Treasury Yields
6-mo. 3.18% 2-yr. 3.65% 10-yr. 4.20% 30-yr. 4.51%
The yield on the 10-year hit 4.15% before fading at week’s end,
partially because of the rush into stocks late Friday. The focus
recently has been on the spread between the 2-year and the 10-
year, now at its narrowest in over four years, which would
normally signify economic weakness, if not a pending recession.
–Boeing had a solid week on the heels of two big orders from
Air Canada (32 planes) and Air India (up to 50), both wins over
rival Airbus. Speaking of Airbus, this week it tested its A380
behemoth that can carry up to 1,000 passengers but one big issue
remains; that being the huge amounts of money airports would
need to spend on lengthening landing strips, upgrading gates and
arrivals procedures just to accept the aircraft. Atlanta, for
example, is one that has already said it won’t take it.
–The Rigas family of Adelphia cable fame is being forced to
forfeit some $1.5 billion in assets to settle federal fraud charges,
with about $700 million going towards a restitution fund for
investors…still just a fraction of the $5 billion lost. Because of
the agreement with the family, however, the company itself will not
be prosecuted for the “executives’ crimes.” The Rigas clan
will receive stiff prison sentences.
–AIG is delaying yet again release of its 10-K annual report for
2004 as auditors refuse to sign off on it. After earlier admitting it
would need to restate the company’s net worth reflecting a loss
of $1.77 billion, an internal review is close to revealing another
$1 billion plus in accounting errors.
–I pointed out the other week that many seem to be missing a big
point with regards to the specialists scandal on the floor of the
New York Stock Exchange; namely that this occurred under
former Chairman Dick Grasso’s watch, 1999-2003. So as the
New York Post’s John Crudele observed this week, what the
heck did Grasso know and when did he know it? And as the
Post’s Terry Keenan weighed in, remember the claim on the part
of the NYSE compensation committee that Grasso’s $20 million
a year pay package was commensurate with the pay of other top
executives managing similar operations? Well, as the deal with
Archipelago infers, the NYSE really isn’t worth that much after
all, like 20-40 times less than some of the corporations Grasso
was supposedly being measured against; let alone New York
Attorney General Eliot Spitzer’s key claim that Grasso’s pay
violated the state’s regulations on compensation for not for profit
organizations.
Meanwhile, former NYSE director and FOD (Friend of Dick)
Ken Langone is working on a competing bid for the Exchange,
with Langone being particularly upset that Goldman Sachs was
on both sides of the merger deal with Archipelago. [NYSE
President John Thain is a former Goldman executive.]
–President Bush has been suddenly pounding away on his
energy plan now that his poll numbers are beginning to reflect
Americans’ concern over $2+ gasoline at the pump. The
president does bring up the good point that with regards to
nuclear power, since the last plant was built in the U.S., for
example, France has built 58 and now meets 78% of its
electricity needs in this manner. Americans have been let down
for decades by leaders of all stripes on this front.
[I liked another of Bush’s ideas, that being that new oil refineries
could be built on the sites of closed military bases, but, again,
where has the president been all these years?]
–Speaking of refiners, Valero, the 3rd-largest in the U.S., is
buying privately held Premcor thus making the combined entity
North America’s largest.
–According to an ABC News – Washington Post poll, 51% now
oppose the idea of private accounts, but at least the debate is now
moving forward as the president’s latest proposal calls for benefit
cuts. Republican leaders in the House vow to shape a plan of
their own by June, thus forcing the Democrats’ hands.
–New e-mails have emerged showing that all the way back to
2000 Merck attempted to block a scientist’s report on Vioxx that
proved an increased risk of heart disease, even as the company
has maintained it had no prior evidence of such a report until the
fall of 2004.
–Amazon.com’s income fell in the quarter to 18 cents a share
from 26 cents a year earlier. Amazon is spending boatloads on
its free shipping program in an attempt to beat back competitors
and it’s killing the bottom line.
–Shares in Microsoft rallied a bit (but let’s not get carried away,
headline writers) on the heels of a solid revenue forecast for its
fiscal 2006 year starting on July 1. As I noted last week, though,
with all of the tech bellwethers, let’s clear the 2004 highs before
getting too optimistic. Most of the leaders still have dead charts.
–As conjectured in this space recently, Eliot Spitzer formally
sued Internet marketer Intermix Media for spreading spyware
and adware on our personal computers. Good stuff, Mr. Spitzer.
Nail these guys and shine the light on other purveyors of
programs that corrupt our machines and invade our privacy.
–Martha Stewart has probably been violating terms of her house
arrest as she’s been seen around town, doing her thing, including
attending cocktail parties. Initially, Stewart was only to be
allowed out for religious services, food shopping, medical or
dental appointments and work. It’s the latter that she’s abusing.
Meanwhile, her company reported a greater than expected loss in
the first quarter as revenues fell 13%.
–Oprah update: Now this is one of the great American success
stories of all time. According to Crain’s New York Business,
Oprah, in her 20th year, has never been stronger. For example,
her television audience is bucking all trends and bigger than it
was 11 years ago; 8.3 million daily (Nielsen Media Research)
with $208 million in advertising revenues. “O” magazine is in
its 5th year and already generating revenues of $207 million.
These are just two parts of her empire built on a relationship of
trust that cuts across all races and income levels.
–You’ll recall I live a few blocks from Lucent’s headquarters
and the other day I took a friend on an extensive investigation of
the lawn there; the lawn indicator having been a clear signal
years ago that the company was facing big problems. What we
saw was shocking…dandelions all over the place, though at least
the grass had been cut. Across the street, though, where BOC
Gases has a large presence, there wasn’t one weed. Now I
mentioned BOC a long time ago and should have bought the
stock because it’s been a solid performer, as opposed to Lucent
which remains on the sick list.
–My portfolio: Sold a portion of my carbon fiber play this week
but retain a fair amount. In the interests of as full disclosure as I
feel comfortable providing, I sold some June ‘calls’ that I just
didn’t want to run down much further and I kept the common. I
will be buying back ‘calls’ later. So, I’m now around 87% cash,
13% equities.
Foreign Affairs
China: Japanese Prime Minister Koizumi and Chinese President
Hu Jintao met to discuss their differences and Hu said Japan
needed to reflect on the past and warned it not to support Taiwan.
But, recognizing the anti-Japanese protests of the prior few
weeks had been allowed to go too far, the government shut down
anti-Japan web sites.
Regarding Taiwan, for almost six decades there have been zero
high-level talks between Taiwan and China; that is until this
week when Lien Chan of the opposition Kuomintang
(Nationalist) party went to Beijing in an act of reconciliation.
President Hu met with Lien and both agreed to pursue a
constructive dialogue.
At first the visit by Lien was scorned upon by Taiwan’s President
Chen Shui-bian but he grudgingly accepted it, while Chen’s pro-
independence forces protested widely against Lien’s diplomatic
foray. Personally, if nothing else Lien’s trip will get Beijing
more on the record so Taiwan’s voters can decide for themselves
what path they want their leaders to pursue…independence or
Beijing’s long sought “one China, two systems.” If there are any
doubts among the Taiwanese as to how the latter would work out
they need only look at Hong Kong, where it’s failing miserably.
Iraq: Prime Minister Ibrahim al-Jaafari finally formed a
government, three months after elections. Including himself,
there are to be 36 cabinet posts (as best as I can ascertain…I’ve
seen so many different numbers bandied about) and it appears
there are 17 Shiites, 8 Kurds, 6 Sunnis, a Christian and four
deputies still to be decided. Acting prime minister Iyad Allawi’s
party was shunned and he vowed to operate from the side of the
opposition as a member of the national assembly, while the
Sunnis are upset at their under-representation, though you’ll
recall they didn’t participate in the election so you might be like
me and think, too bad. [It’s obviously a little more serious than
this.]
The real issue, however, is how much influence do the militant
Shiite clerics have? What kinds of deals will Jaafari cut?
Meanwhile, the insurgency goes on and violence has picked up
considerably, as well as the sophistication of the attacks. This
was a particularly horrifying week on this front. Until the
government gets a handle on security, the reconstruction effort is
non-existent and the people grow more and more restless, which
means the chances of a true civil war increase.
Israel: Russian President Vladimir Putin paid an historic visit
here, becoming the first Kremlin leader to do so. Putin is trying
to allay Israel’s fears that Russia is supplying Syria with long-
range missiles. He insists they are short-range and for anti-
aircraft use only, but Israel argues that these can be shipped to
Hizbollah, as mentioned earlier, and thus be used to target
Israel’s major cities. On the issue of Iran, Putin told Israel that
Russia’s support of Tehran’s nuclear program is for peaceful
purposes only. While Israel gave Putin the royal treatment, his
arguments were unconvincing.
Separately, Amnesty International is claiming Israeli settlers are
spreading rat poison and other toxins on Palestinian farmland,
with both Palestinian and Israeli scientists confirming this. For
his part, Israeli Prime Minister Sharon continues to demand
Palestinian President Mahmoud Abbas disarm the terrorists
before any substantive talks can take place.
Russia: In his annual state of the nation address, President Putin
laid out a pro-business agenda in an attempt to appease foreign
investors. “Tax authorities have no right to terrorize businesses,”
he said, though this won’t apply to Yukos. Former Yukos
chairman Mikhail Khodorkovsky was to be sentenced this week
but the decision was suddenly put off until after Russia’s World
War II commemoration where scores of world leaders will be
descending on Moscow. We wouldn’t want them buzzing about
Yukos and Mr. K’s sentence now, would we?
In his address, Putin also discussed recent history in rather
interesting terms.
“The collapse of the Soviet Union was the greatest geopolitical
catastrophe of the century. And for the Russian people, it
became a real drama. Tens of millions of our citizens and
compatriots found themselves outside the Russian Federation…
“Russia is a country that, at the will of its own people, chose
democracy for itself. It set out on this course itself and,
observing all generally accepted political norms, will decide for
itself how it will ensure that the principles of freedom and
democracy are implemented, taking into account its historical,
geopolitical and other characteristics…
“Russia, connected as it is with the former republics of the
USSR, connected as it is today with these independent states, by
a single historical destiny, the Russian language and a great culture,
cannot stand aside from the general aspirations for
freedom…”
Bottom line? ‘We blew it, comrades, and as long as I’m in
power (more than the constitutionally mandated two terms) no
one is going to tell us what to do. I threw in a few references to
democracy just for the West’s consumption.’
Italy: We congratulate Prime Minister Berlusconi for cobbling
together Italy’s 60th post-World War II government. Separately,
the spat between Italy and the U.S. over the death of the
intelligence officer in Iraq has once again grown more rancorous.
Britain: British Prime Minister Tony Blair faces the voters this
week and he’ll win a third term. No problemo, mused the editor.
Random Musings
–Oh, what the heck. I still support John Bolton for UN
ambassador.
–Finally, the House is going to conduct an ethics inquiry into
House Majority Leader Tom DeLay. Republicans better hope
this wraps up by the fall.
–Zimbabwe was re-elected to the UN Human Rights
Commission. Even Secretary General Kofi Annan has called for
abolishing this sham panel whose past members included Cuba,
Libya and Sudan. U.S. Representative William Brencick said the
U.S. was “perplexed and dismayed.” Zimbabwe’s ambassador to
the UN called Brencick’s remarks “hate-driven.” If it wasn’t so
sad it would be comical.
–The Saudi star of the French equivalent of “American Idol”
was detained for a spell after kissing admiring fans at a Riyadh
mall.
–According to an ABC News – Washington Post survey, 73% of
Catholics are “enthusiastic” about Pope Benedict XVI. As for
the Pope himself, he spoke out this week on Europe’s Christian
roots, a topic that needed to be addressed in light of the new
European constitution’s failure to even utter the word
Christianity. Say what you will about Europe, but those in the
Union are democracies and Christian values have played an
important role in any successes that can be claimed.
Meanwhile, I loved this passage from a piece in Newsweek by
biographer George Weigel.
“Judging from the hysteria in some quarters after his election,
you might have thought Pope Benedict XVI was ordering boxes
of freshly polished thumbscrews to be brought to the papal
apartments from the bowels of the Congregation for the Doctrine
of the Faith (‘…formerly known as the Inquisition…’) – while
concurrently issuing orders for the rusty guillotine that served the
19th-century Papal States to be hauled out of storage and
reassembled in the Cortile San Damaso of the Apostolic Palace.
All of which, of course, fits the regnant caricature of Joseph
Ratzinger as ‘God’s Rottweiler.’ To which those who know him
can only say, ‘Rot.’”
–Ronald Reagan’s handwritten personal diaries from his
presidential years are to be published next year. I imagine this
will be one of the five or six best-selling books of all time.
–Speaking of books, remember Salman Rushdie of “Satanic
Verses” fame? He had an op-ed in the Los Angeles Times the
other day and, like everything else this guy has ever written, it
was unreadable. Why Iran ever wasted their time worrying about
him I’ll never know.
–The New York Daily News reported that girls as young as 9
have been taking steroids to help them get six-pack abs and
Madonna-like quads. 7% of middle school girls in the New York
area admit to having used them. So the obvious question is how
do they obtain them? I imagine from high school boys.
–Finally, a few initial thoughts and observations from my first
30 hours in Lebanon. I have to admit I was very apprehensive a
few days before my trip but as I looked at my fellow passengers
at the airport in Paris, it certainly was a better looking, and less
threatening, group than I’ve seen on many a U.S. flight. So this
fact put me at ease and after a thoroughly enjoyable ride on Air
France, the approach into Beirut’s airport was dramatic,
paralleling the coast…massive, modern apartment blocks, office
towers and slums, all mixed together.
Clearing customs was no problem. I was waved through, even
got a few smiles, and then I was very fortunate to have a
representative from my hotel there who arranged for a car,
something that was a welcome surprise.
The drive into town is eye-opening. It’s a modern superhighway
with more than a few billboards with Hariri’s picture on them,
lots of slums (I’ll skip these areas, I thought…plus it’s Hizbollah
territory), and then you enter the city center with some very
impressive structures. I’m staying at a modern hotel on the coast
but am not about to go waltzing all over the place with a
Hawaiian shirt, ugly shorts and a camera draped over my neck.
Nope, wouldn’t be prudent. However, after a chat with the
concierge he reassured me that I am perfectly safe walking about.
I had one dinner at a sidewalk café that is connected to the hotel
and had a delicious meal while being waited on by a delightful
staff that spoke good English. At one point about 30 policemen
in two buses pulled up and idled for a bit, but that was all the
excitement.
What was interesting, though not necessarily surprising, was the
fact all 30 or so patrons around me chain smoked. Oh well, if
you lived here the last 30 years the tensions would drive anyone
to light up. Much more next week. Wish me luck as I go
exploring and hit Martyrs’ Square, scene of the demonstrations.
Don’t worry. I’m not looking to become one myself.
—
God bless the men and women of our armed forces.
God bless America.
—
Gold closed at $435
Oil, $49.72…an incredibly volatile stretch for crude.
Returns for the week 4/25-4/29
Dow Jones +0.3% [10192]
S&P 500 +0.4% [1156]
S&P MidCap -0.3%
Russell 2000 -1.7%
Nasdaq -0.6% [1921]
Returns for the period 1/1/05-4/29/05
Dow Jones -5.5%
S&P 500 -4.5%
S&P MidCap -4.6%
Russell 2000 -11.1%
Nasdaq -11.7%
Bulls 44.0
Bears 29.7 [Source: Chartcraft / Investors Intelligence…levels
not seen since last August. More next week.]
Have a great week. I appreciate your support.
Brian Trumbore
