[Posted 7:00 AM ET]
Wall Street
Well that was a fun week, wasn’t it? But what has really
changed after the tumultuous behavior of the financial markets?
I’d argue not much when focusing on the Big Picture, which is
what I try and do around here. Absolutely nothing happened that
would cause me to change my forecast….nothing. The global
slowdown story, particularly in the United States, is still very
much intact and equities worldwide will struggle. But because of
the volatility all this month, I’m forced to repeat one little
passage from last week’s review.
“I have (said) stocks would decline 3% to 5%. As you know we
are already well below those figures, so with this kind of start to
2008, you might be wondering if I’m worried on being grossly
off my forecast. Nope. Stocks do not move in lockstep with the
economy.”
And while I have never been one to overanalyze a single week,
I could only sit back and grin at the pabulum heard on the
airwaves.
I’m also not going to attempt to analyze whether the Federal
Reserve acted to lower the short-term funds rate 75 basis points
(0.75%) based on a global mini-crash in equities sparked by a
rogue trader in France. We don’t have the facts yet.
And I’m not going to spend much time on the House economic
stimulus package, because it is just that, the House’s, not the
Senate’s, let alone a compromise between the two. For now I’ll
just say this. My conservative friends who still refuse to believe
that the middle class, let alone the lower one, is truly getting
slammed in this current economic environment need to wake up
and smell the coffee. Thus I’m not against providing some short-
term relief for these folks, such as increased food stamp aid or
extending unemployment benefits (neither of which is part of the
House package). But there are consequences for even minimal
action and I address those in a discussion on the federal budget
deficit down below in ‘Street Bytes.’
On the issue of providing relief to homeowners, thus far I don’t
like what I see because I have trouble picturing how it really
helps those in need; items such as raising the limit on loans for
Fannie and Freddie.
There was a telling study released this week concerning Long
Island residents. As reported by Reid J. Epstein of Newsday,
“Nearly three in four people here said they could not afford to
purchase their own home at today’s prices. About 78 percent
said they would leave Long Island rather than purchase another
house here. Just eight years ago, 62 percent of Long Island
homes were worth less than $250,000. By 2006 that figure
dropped to 4 percent, according to the index.”
Affordability. I’ve said that was the key for years now, not just
here but globally. What I see in raising loan limits with Fannie
and Freddie is more individuals once again buying into homes
they really can’t afford and over time the cycle starts anew. Or
as Dom Cecere, chief financial officer at L.A.-based KB Home
said, raising the conforming-loan limit is “going to spur people to
move up to a more expensive house, and that’s going to get the
new and used markets moving again.” I rest my case. That’s not
exactly what we need at this time, Mr. Cecere.
President Bush on Tuesday announced the formation of a council
to address financial literacy, which was laughable because it
came from his mouth, but there is no doubt our nation could use
some lessons on top of the hard ones already learned, and I’d
suggest the president and Congress attend, too.
But as the equity markets were swooning early this week,
primarily based on fears a U.S. recession would indeed impact
the rest of the world (duh), Fed Chairman Ben Bernanke sprang
into action as his band of merry bank governors slashed the key
lending rate, citing “appreciable downside risks to growth
remain.” The problem was the timing. The move should have
taken place ten days earlier when Bernanke first spoke of taking
“substantive” action. It’s kind of like fans watching a starting
pitcher tire in the late innings of a baseball game and screaming
at the television set, hoping the manager hears them, “Take the
guy out!” and then having the manager sit on his hands while the
starter proceeds to blow a 5-2 lead. But enough from me. What
were others saying this week?
PIMCO’s Bill Gross: “It’s a sad testament to think the Fed has
to cut interest rates eight days in front of a meeting to salvage the
equity markets. The U.S. economy is in a rather sad state of
affairs in that it depends on housing and stock prices to keep it
going.”
Morgan Stanley economist Stephen Roach, now in charge of
Asian operations. “(The Fed is saying) we are there to clean up
after bubbles first rather than to prevent the danger. It’s a
dangerous, reckless and irresponsible way to run the world’s
largest economy,” adding:
“Will (the Fed’s move) work?….The answer lies in the unique
character of this recession. There are two triggers – a bursting of
the U.S. housing bubble and a bursting of the credit bubble. I do
not believe that aggressive Fed rate cuts will resolve the extreme
imbalance between supply and demand in the U.S. property
market that will be pushing housing prices lower for some time.
Nor do I believe that recent Fed actions will restore the
functioning of credit markets to their pre-crisis state. As a result,
pressure are likely to remain intense on housing – and credit-
dependent U.S. consumers – a sector that accounts for a record
72% of U.S. real GDP.
“In essence, the Fed is ‘pushing on a string’ here – unable to stop
the recessionary dynamic now unfolding. But there will be
consequences in the next recovery. Unfortunately, the U.S.
central bank can’t seem to break out of the market-friendly trap it
fell into nearly a decade ago. Panicking over the possibility that
yet another bubble is bursting, the Fed is once again injecting
liquidity into an asset-dependent U.S. economy. That won’t
arrest the recessionary dynamic now unfolding but it could well
set the stage for the next asset bubble in America’s bubble-prone
economy. Have we learned anything from the mess of the past
seven years?” [Bloomberg, Financial Times]
Billionaire George Soros: “The current financial crisis was
precipitated by a bubble in the U.S. housing market. In some
ways it resembles other crises that have occurred since the end of
the Second World War at intervals ranging from four to 10 years.
“However, there is a profound difference: the current crisis
marks the end of an era of credit expansion based on the dollar as
the international reserve currency. The periodic crises were part
of a larger boom-bust process. The current crisis is the
culmination of a super-boom that has lasted for more than 60
years.”
I’m not a fan of Soros but you still have to respect his opinion
and in his op-ed for the Financial Times he added:
“Although a recession in the developed world is now more or
less inevitable, China, India and some of the oil-producing
countries are in a very strong countertrend. So, the current
financial crisis is less likely to cause a global recession than a
radical realignment of the global economy, with a relative
decline of the U.S. and the rise of China and other countries in
the developing world.
“The danger is that the resulting political tensions, including U.S.
protectionism, may disrupt the global economy and plunge the
world into recession or worse.”
Bingo.
Roger Lowenstein of the New York Times had a profile of
Bernanke in the Sunday Magazine and in it former Fed chairman
Paul Volcker comments: “Too many bubbles have been going on
for too long. The Fed is not really in control of the situation.”
But I’ve said that while the Fed is irrelevant in terms of
preventing a real estate driven recession, I’ve also hastened to
add the Fed can help prevent a recession from becoming a
Depression. That’s what I believe they’ve done with this week’s
action and a further anticipated cut in rates this coming week at
their formal meeting. For those homeowners with ARMs pegged
to the one-year Treasury or LIBOR, they have indeed caught a
break, let alone those who are qualified to refinance to a more
stable long-term rate, though regarding the latter the window
could be fleeting.
Again, however, it’s recession time, and not an ordinary one
because of massive consumer debt loads, whether you are talking
credit cards, auto or home equity loans. Regarding the latter, the
exposure is an estimated $850 billion and the banks on the other
side don’t have the collateral, i.e., look for them to take higher
and higher charges against these loans, as well as on their now
declining commercial real estate investments.
And then there is the topic of counterparty risk. Richard
Bookstaber, former risk manager at Morgan Stanley and
Salomon Brothers, commented in a story for the Financial Times.
“Can we lay out the intricate web of counterparty risk for swaps
and derivatives – who owes what to whom? At this point we
cannot. And so we cannot map out how a failure in one segment
of the financial market might propagate out to affect other
segments.” [The International Swaps and Derivatives
Association says such fears are unfounded. I’ll go with
Bookstaber.]
Well, this all is going to take at least another 18-24 months to
play out. We’ll be experts on the mysteries of the deep before
it’s over.
Street Bytes
Following are the declines for the major market averages from
their record or multi-year highs to the intraday lows on
Wednesday.
Dow Jones -17.8% [11644…from 14164]
S&P 500 -18.8% [1270…from 1565]
Nasdaq -23.0% [2202…from 2859]
Russell 2000 -23.5% [654…from 855]
And to give you a sense of the extreme volatility, following are
some ranges in trading on Wednesday alone for a few once high-
flying stocks and indexes, along with their respective recent high.
Apple…($126-$139, Wed.) $202
Google…(519-548) 747
Research In Motion…(80-88) 137
Suntech…(46-49) 90
OSX (oil service index)…(235-255) 316
XOI (major integrated oils)…(1211-1291) 1581
Overall, the broad averages finished mixed, a minor victory after
a sickening prior four weeks, with the Dow Jones and S&P 500
registering slight gains and the Nasdaq continuing its losing
streak, now five. Overshadowed to a great extent were a slew of
earnings reports, some good, some bad. On the plus side,
Microsoft spoke positively of the future after exceeding
expectations in the fourth quarter (yet after a solid rally its shares
sold off). Honeywell, Texas Instruments, and Nokia were all
positive as well. The negative stories involved significant further
writedowns and earnings that missed expectations out of Bank of
America and Wachovia, but after initially falling they rallied
with the rest of the financial sector off the lows.
Apple, eBay and Motorola all disappointed in a big way; in
Apple’s case its tepid outlook was particularly surprising and the
stock was taken out back and shot.
–U.S. Treasury Yields
6-mo. 2.36% 2-yr. 2.19% 10-yr. 3.56% 30-yr. 4.27%
Bonds rallied strongly, as you’d expect, on the heels of the Fed’s
decision to slash the funds rate, while anticipating a further ½-
point cut come Wednesday.
Richard Koo, in an op-ed for the Financial Times.
“The echoes are eerie. Ben Bernanke’s gradual change of tone
during the past year and this week’s massive cut in interest rates
seems to parallel that of Japanese officials back in 1992. At that
time, an initial period of denial was replaced by the shocking
realization that the damage caused by the bursting of the bubble
could take years to repair….
“In Japan during the 1990s, it was corporations that rushed to
pay down debt after the commercial real estate they had bought
with borrowed funds lost 85% of its value. Their need to
eliminate the debt overhang meant there was nobody left to
borrow from the banks, even though interest rates were
effectively zero, creating a significant shortfall in demand.”
–The losses on Monday and Tuesday in some of the foreign
markets were historic, such as Hong Kong’s 9% drubbing on
Tuesday and Sydney’s 7%. Regarding the latter, Sydney went
through its worst losing streak, 12 sessions, in 26 years. Even
the Frankfurt DAX index dropped 7%, with London (5.5%),
India (7%) and Brazil (6.5%) following suit. But then the
reversals on Thursday were equally startling.
–The CEO of Pepsico said that food inflation will continue to be
an issue for years to come, thanks to rising demand. Keith
Bradsher of the New York Times had an extensive piece on the
topic, singling out soaring prices for cooking oil, palm oil, and
soybeans, a real issue for the developing world as these are
staples. Last week I wrote of growing unrest in Indonesia due to
price pressures with the beans.
–The nonpartisan Congressional Budget Office is projecting that
even if the U.S. dodges recession, the federal budget deficit will
rise to $219 billion for the fiscal year ending Sept. 30 from $163
billion for fiscal 2007. But that doesn’t include an expected $30
billion supplemental for Iraq and Afghanistan (on top of those
previously passed), along with the costs for the coming economic
stimulus package.
In other words, by the time President Bush leaves office the debt
could be back over $400 billion, obviously limiting his
successor’s agenda.
But here’s what ticks me off about the debate over the deficit.
The Wall Street Journal opined:
“We should remind readers that back in 2004 CBO projected a
$286 billion deficit for 2008; by that yardstick, $219 billion is an
improvement. Back then, the CBO also projected some $200
billion less in corporate and personal income taxes than we
actually saw, due mostly to better-than-expected growth after the
2003 tax cuts.”
No mention whatsoever of a topic I have broached over the past
year in this space. Earth to my conservative and liberal friends,
the significant growth in corporate taxes is largely due to the
massive sums paid out by hated Big Oil!
WIR 10/13/07
“Just a reminder. In the first six months of 2007, Exxon Mobil
and Chevron, combined, paid over $20 billion to the federal
government. It was about $22 billion in the first half of 2006. My
point being it’s not just low tax rates and the entrepreneurial
spirit of America, as Bush likes to tout. The facts speak of
another rather large contributor that is always left out of the
talking points, wouldn’t you know.”
And in all the above discussion, I haven’t noted what would
happen to the deficit if we truly have a recession. As in
economists at the likes of Goldman and Merrill Lynch see one
boosting the deficit by a further $140 billion plus. [Perhaps as
high as $350 billion, depending on the severity.]
Lastly, it is the crime of the century that Americans pay $430
billion, and rising, for interest on the national debt. $430 billion.
Why the citizens aren’t storming the Capitol, I’ll never know.
–31-year-old Societe General trader Jerome Kerviel is being
blamed for the biggest fraud in investment banking history, some
$7.2 billion. Kerviel worked on SocGen’s equity derivatives
desk, with the bank claiming to have invented the instruments.
Evidently he was betting on rising equity markets and when they
plunged he just kept betting more, covering his tracks by creating
fictitious hedging positions using the employee accounts and
passwords of others at the bank. SocGen immediately fired six
superiors of Kerviel’s.
But as of this writing, we are all still left shaking our heads as to
how exactly this scumbag was able to elude internal controls.
–Jeroen van der Veer, Royal Dutch Shell’s CEO, told employees
in an email this week, “Shell estimates that after 2015 supplies of
easy-to-access oil and gas will no longer keep up with demand.”
Mr. van der Veer is recommending more nuclear power and
unconventional fossil fuels, such as Canada’s oil sands. He also
envisages a mad dash by nations to secure resources; “With
policymakers viewing energy as ‘a zero-sum game,’ use of
domestic coal and biofuels accelerates,” as reported by the
London Times.
–Gold soared anew as the world’s second-largest producer,
South Africa, was forced to halt production due to power
shortages. Miners need power, number one, to provide
ventilation. More on this situation in the ‘Foreign Affairs’
section, along with a related topic, coal shortages.
–China’s fourth quarter GDP came in at 11.2%, slightly lower
than the 11.5% rate in the third. For all of 2007, the growth rate
was 11.4% as China accounted for 17% of total global activity,
the same as the U.S.
–Japan’s economy is clearly heading backwards as capital
spending weakens. It doesn’t help that the latest inflation
indicator was higher than expected. Stagflation.
–Republicans obviously shouldn’t feel real good about their
prospects next fall, with 8 in 10 Americans believing the
economy is in recession, according to the latest Bloomberg/L.A.
Times survey. By a 51-29 margin, the same respondents believe
Democrats can do a better job of handling the mess.
–Lennar, the second-biggest homebuilder in the U.S. by units
sold, took a $1.86 billion writedown for land, inventory and
goodwill, driven by a $740 million loss on 11,000 lots the
company sold recently to Morgan Stanley. Lennar’s land
portfolio is now valued at $4.5 billion vs. $7.8 billion at this time
last year, which is as good an indicator as any of the problems
faced by the industry in general. And there are far more land
sales to come.
–Josh P. reports that the median home price in San Diego
County is off 18% from the high of Nov. 2005. California’s
unemployment rate is also up to 6.1%.
–Newer golf communities must be really taking it on the chin.
–Spain’s real estate market is unraveling at lightspeed, though
‘experts’ are calling for prices to only decline 8% this year,
which seems absurdly low given the bubble here was worse than
in the U.S.
But Spain is also dealing with a tragic scam; that being how
communities were illegally built near the sea, with corrupt
builders in cahoots with local officials, only to have buyers
discover later that the government could move in and literally
bulldoze their home once it was found out the house was on
protected land. This is happening to thousands of Brits, for
example, who chose sunny Spain for a second home or for
retirement. The London Times reported that in Marbella, an
astounding 30,000 illegal homes were built. 40,000 real estate
agencies, half the overall total, have now gone under across the
country. Imagine being one of 84,000 Brits who purchased
homes here from 2000-2003 and are now at risk of losing
everything, with no compensation!
–Ford is looking to cut as many as 13,000 jobs, including 2,000
salaried positions, on top of 44,000 jobs shed since early 2006.
But like GM, Ford will be offering buyouts first in the hope of
replacing some of the positions with lower-wage employees.
–London’s financial center is preparing for substantial job
losses, a predicted 8,000 this year. About 25,000 jobs have been
lost on Wall Street thus far, including 1,000 just announced at
Morgan Stanley.
–A study of college endowments has found that a record 76
schools now have pools of $1 billion or more, thanks to an
average 17.2% rate of return last year over 2006. Of the 785
schools that participated in the study, total endowments are now
$411 billion.
But as I first brought up months ago, it’s the percentage of the
endowments that are actually spent each year that is so
controversial. As reported by Mary Beth Marklein in USA
Today, “Schools with $500 million or more in assets reported
spending an average 4.4%, vs. an overall average payout last
year of 4.6%.”
Sen. Charles Grassley, R-Iowa, notes that schools should be
required to spend 5% each year, just as private foundations must,
and use it “to help families and students afford college.”
“I don’t begrudge them their financial success,” he said in a
statement. “I just want to remind them that their money is tax-
exempt. They’re supposed to offer public benefit in return for
(that) exemption.”
Ohio University professor Richard Vedder (no relation to Pearl
Jam singer Eddie Vedder…at least not that I’m aware of)
weighed in with the following for an op-ed in the Washington
Post.
“An academic arms race is underway, requiring lots of spending.
And Harvard has the most guns, although by some measures
Yale and Princeton are equally wealthy. (To) increase applicants
(Princeton) has built the ultimate student-living facility,
Whitman College (after eBay chief executive Meg Whitman, the
donor), that cost $388,571 per room unit, nearly identical to what
Donald Trump spent on his luxury resort Ocean Club Panama….
Why should Whitman get a multimillion dollar tax break for
building a luxury hotel for the children of mostly wealthy
Americans?
“The Harvard and Yale moves (to provide more tuition
assistance) do nothing to deal with the root causes of rising
college costs, which include:
“The student loan explosion. When third parties are paying a lot
of the bills, universities have few incentives to conserve on
resources or to reduce their costs….
“No bottom line. Did Harvard have a good year in 2007? Who
knows? There are few measures of the value added in attending
college, making it difficult for schools to even define goals,
much less achieve them….
“Overcompensation. There is a strong correlation between
government aid to schools and faculty income levels, and staff
salaries are rising sharply for top people.”
[Whitman, incidentally, announced she is stepping down as
CEO. EBay stock has been dead money for years.]
–On a related matter, Sallie Mae, the student loan giant,
announced a $575 million loan-loss provision against expected
defaults.
–Bird flu is still simmering and the latest scare is more
worrisome than some of the others. India’s worst outbreak of
H5N1 has suddenly erupted in Calcutta, while Indonesia and
Vietnam have reported new human deaths, prompting a warning
from the United Nations. But in Calcutta we are talking a
teeming city of 14 million and an inept bureaucracy. Inspectors
may have flooded the city markets, looking for signs of bird flu,
but there is no way anyone should take comfort from this,
especially since the strain has hit chickens kept by peasants in
their yards. In many instances the chickens represent a family’s
only source of income, so they are hiding them.
–As reported by Business Week, for the first time since 1885
Britain will surpass the U.S. in terms of per capita gross domestic
product, $46,088 this year, compared with $45,598 in America.
However, much of this is due to the pound’s strength against the
dollar, so to my American readers don’t take this news and jump
off a bridge. But at the same time, be in all the earlier Monday
morning.
–Russian President Vladimir Putin went to Bulgaria, seeking
support for a multibillion-dollar pipeline aimed at further
strengthening Moscow’s hold on the energy market.
Agreements on a big project called South Stream, as well as
seven other oil and gas deals, were reached and the Moscow
Times reports the key may have been talks at a Sofia piano bar,
‘Sinatra,’ where Bulgarian President Georgi Parvanov took Putin
for a night out.
Of course Putin is a teetotaler and drank only water, leaving at
12:30 am, while “Parvanov drank wine and stayed until 2:00,”
said the bar manager. Gazprom’s Dmitry Medvedev (the next
president) and Bulgaria’s prime minister also dropped in later.
Something tells me you should assume Russia got the best of the
deals.
–I follow the weather around the world daily and it’s been
interesting to me the amazing contrasts in Europe; as in it was far
colder when I was there in November and December than it has
been in January. [While at the same time, Iran is suffering its
worst winter in memory…which when you look at a map puzzles
any junior meteorologist.]
So imagine that Continental European economies have seen their
energy prices rise 9.2% thus far in ’08 over last December’s
pace, thanks to the high price of oil and natural gas early on in
January. If they had been suffering through a normal winter,
consumers here would be crushed even further.
–Yahoo will be cutting up to 700 jobs as its reorganization
efforts continue. The company is announcing its earnings on
Jan. 29, having reported seven straight quarters of declining
profit.
–Another sign of the property bubble now unwinding. The
Journal reported that Pierre Auguste Renoir’s Paris home is on
the market for about $5.5 million. Renoir purchased it in 1870
for $450 in wine, at least that’s the guess here.
–More on the fish front. Per a story in the New York Times,
“Recent laboratory tests found so much mercury in tuna sushi
from 20 Manhattan stores and restaurants that at most of them, a
regular diet of six pieces a week would exceed the levels
considered acceptable by the Environmental Protection Agency.”
There is no reason why similar results wouldn’t be found
elsewhere across the country. Said one doctor, a professor of
environmental and occupational medicine, “No one should eat a
meal of tuna with mercury levels like those found in the
restaurant samples more than about once every three weeks.”
–Ah ha! So you laughed when I said I was sticking with
traditional incandescent light bulbs, didn’t you?
Jan. 24, 2008…headline in the Wall Street Journal
“The Dark Side of ‘Green Bulbs’…Disposing of Fluorescents,
Electronics Releases Toxins”
“(One) product that should be recycled is the fluorescent light
bulb….
“Yet unlike traditional incandescent bulbs, these bulbs contain
mercury, a metal hazardous to human health and the
environment. Consumers are urged not to toss them in the
trash.”
And as I noted weeks ago, the problems occur when you drop
one of them. “As long as people clean up broken bulbs right
away and don’t let kids touch them, people should be able to
prevent contamination in their home,” says Ellen Silbergeld, a
professor of environmental health sciences. [The government
suggests airing out the room for at least 15 minutes as a
precaution.] Yet Ms. Silbergeld says she is more concerned
about the environmental impact if millions of these bulbs end up
in landfills or incinerators.
“ ‘I don’t think anybody has really grappled with this,’ she says.”
I have. I’m just not buying them. This will rival asbestos as a
future money pit for lawyers 20 years from now.
Foreign Affairs
Israel / Palestinians: Power was shut off to Gaza by Israel on
Sunday, and in response Hamas accelerated what was clearly a
plan in the works in blowing up a portion of the wall between
Gaza and Egypt. At which point tens of thousands of
Palestinians crossed the border in search of food and fuel.
Of course that means hundreds of terrorists could cross into
Gaza, let alone the ones already there being able to restock in
Egypt. In other words, an incredible mess.
Just last week I noted President Bush’s almost farcical
discussions with Egyptian President Hosni Mubarak as Bush
pleaded with Mubarak to shut down the tunnels funneling arms
into Gaza, and here was a case where Mubarak and his military
just looked the other way for 48 hours before beginning to
reinforce the border. At which point Hamas punched another
hole in the wall and at last word Egyptian forces were retreating.
Iran: The UN Security Council (and Germany) have agreed on a
new round of sanctions on Iran, but as Russian Foreign Minister
Sergey Lavrov put it, the sanctions call “for vigilance” and little
else, which is why Russia and China went along. Sure, there will
be increased asset freezes and even tighter travel restrictions, but
Iran continues on with its nuclear weapons program, even as it
parades inspectors from the International Atomic Energy Agency
past cardboard centrifuges that Tehran will claim are real and not
in use. IAEA chief Mohamed ElBaradei will then nod in
agreement, “I see.”
But there is a hopeful sign in the growing conflict between
Supreme Leader Ayatollah Khamenei and President
Ahmadinejad, this time over the harsh weather and
Ahmadinejad’s refusal to supply remote villages with gas.
Khamenei overruled him, a big embarrassment to the president.
Lebanon: For a 13th time the presidential vote in parliament was
postponed until Feb. 11 as Syria and Hizbullah continue to muck
things up, while Lebanon’s weak-kneed pro-democracy forces
cave. This week Hizbullah’s Sheikh Nasrallah appeared for the
first time in public since Sept. ’06 as he rallied the troops in
south Beirut and claimed Hizbullah held the remains of Israeli
soldiers from the war. One Israeli minister replied that Nasrallah
was a “sewer rat” and that “we should take him out.” All
ministers, for that matter, uttered the same assassination call.
But Israel sent six jets over southern Lebanon, violating its
airspace (grossly illegal) and the Lebanese army fired on the jets
without damage. Then on Friday, there was another bombing in
Beirut, this one killing a key intelligence officer who had been
investigating earlier attacks on anti-Syria politicians. Four others
died in the bombing that was the most powerful since the 2005
attack on Rafik Hariri.
Iraq: The New York Times reported Gen. David Petraeus was in
line to take over NATO command, which would put him in
charge of the effort in Afghanistan, as well as dealings with
Russia, but the Pentagon said at week’s end that Petraeus was
staying put at least until the fall. Meanwhile, the No. 2 in Iraq,
Lt. Gen. Odierno, is scheduled to depart Iraq mid-February on
completion of his tour.
Afghanistan: Speaking at the Davos Economic Forum, Afghan
President Karzai blasted the efforts of British troops in Helmand
province.
“Before (the arrival of the British forces in the southern region),
we were fully in charge. They came and said, ‘Your governor is
not good.’ I said, ‘All right, do we have a replacement for this
governor; do you have enough forces?’ Both the American and
the British forces guaranteed to me they knew what they were
doing and I made the mistake of listening to them. And when
they came in, the Taliban came.”
David Satterfield, the U.S. co-coordinator on Iraq, told the
London Times:
“It is the nature of Afghanistan. Afghanistan has many deficits
not present in Iraq. Iraq is a wealthy country, it has resources –
badly used – but it is rich. Iraq for all its difficulty in unifying
politically has many quasi-democratic recognizable political
forces. Afghanistan has warlords.”
Karzai angrily rejected Satterfield’s analysis. And then on
Thursday, it was reported that nine Afghan police officers were
killed accidentally in a firefight with American forces when they
were mistaken for Taliban during an operation to root them out.
Pakistan: President Pervez Musharraf has been touring Europe,
seeking support for his government and renewed investment, but
back at home the knives are out in force. He has vowed the
parliamentary elections slated for Feb. 18 will be free and fair. If
they aren’t, he’ll be tossed out onto the street within days after.
North Korea: Pyongyang is complaining the White House hasn’t
removed the commies from the state sponsors of terrorism list,
while the Bush administration says that it is waiting for a
complete declaration of all its nuclear activities.
Separately, an administration envoy to North Korea, Jay
Lefkowitz, gave a speech this week questioning the failure to
rein in the North’s weapons program. The Wall Street Journal
editorialized:
“Kim Jong il has now had nearly a year and two deadlines to
fulfill his nuclear promises and shows no intention of doing so.
Chances are he now figures he can wait out this Administration
and hope for better terms from President Clinton.
“On present course, (Secretary of State) Rice is setting President
Bush up to spend his final year begging Kim to cooperate by
offering an ever growing and more embarrassing list of carrots.
Mr. Bush would do better to listen to Mr. Lefkowitz, while
ordering Ms. Rice to introduce him to the Chinese and
Russians.”
[Rice had said the two countries didn’t know or care who
Lefkowitz was. What a miserable failure she has been. As
Donald Trump first said, Rice just flies around and looks good.]
Russia: Foreign Minister Lavrov gave his annual news
conference and lashed out at the European Union, saying “a
reorganization of the entire European architecture” was one of
the country’s key foreign policy objectives for 2008, accusing
the EU of promoting the illegitimate interests of individual
nations under the guise of solidarity.
As reported in the Moscow Times, Lavrov cited the recent row
between Britain and Russia as an example, “warning London not
to turn the dispute into an issue for the whole union.”
But of most immediate import was Lavrov’s warning on Kosovo
that the Kremlin would not look kindly on recognition of a
unilateral declaration of independence, calling such an act an
illegal move that would set a dangerous global precedent. So
you can see where this is all headed. Kosovo could be declaring
its independence shortly, just as Serbia itself is wrapping up a
contentious presidential election between two candidates with
totally opposing views towards relations with the West.
Meanwhile, Russia’s own presidential election is rapidly
approaching, March 2, at which point Dmitry Medvedev will
receive his 80% plus of the vote. Former Prime Minister Mikhail
Kasyanov, who was a candidate, is now under criminal
investigation as prosecutors trump up charges in an effort
designed to force him out. The prosecutor general is claiming
Kasyanov submitted thousands of fake signatures to get on the
ballot. Kasyanov said it was all politics, as his campaign said
people who signed his petitions were being threatened with home
searches, arrest and dismissal from their jobs.
Another candidate, Communist Party leader Gennady Zyuganov,
has denied he is withdrawing. The Kremlin shouldn’t want this
because then the election will appear even more one-sided, thus
creating a further image problem abroad; not that greedy global
business leaders seeking the Kremlin’s blessing give a damn
about this prospect.
But I just have to throw in a note on Poland, concerning the
proposed missile defense program that the U.S. wants to install
near the Russian border. I was reading an AP story by Ryan
Lucas on how residents of one Polish village where a base could
be built were concerned they’d then become a target, and a
restaurant owner made the following point.
“We have not received any benefits from our cooperation with
the Americans so far – not one thing. Not in Iraq, not in
Afghanistan, not in Poland – nothing. We don’t even have visas.
I’ll tell my grandchildren that maybe in 20 years they’ll have a
shot at visa-free travel to the U.S.”
The man is 100% right. We’ve treated the Poles like crap in the
guise of security post-9/11, and it’s time the White House is
called on it.
Finally, Russian Gen. Yuri Baluyevsky made a rather belligerent
statement this week, concerning his country’s nuclear force.
“We have no plans to attack anyone, but we consider it necessary
for all our partners in the world community to clearly understand
…that to defend the sovereignty and territorial integrity of Russia
and its allies, military forces will be used, including preventively,
including with the use of nuclear weapons.”
Lovely.
China / Taiwan: Taiwan presidential candidate Ma Ying-jeou
said if elected this spring, his Kuomintang (KMT) party would
seek a “peace agreement” with China, along with cross-strait
military confidence-building measures. Seeing as Ma is heavily
favored to win at this point, his three-pint program is worth
noting.
“First is the normalization of our economic relations. Meaning:
to have a comprehensive economic cooperation agreement
signed, which will cover a wide variety of economic issues.
“The second one is about the peace agreement, which will
terminate the state of hostilities across the Taiwan Strait, which
could last for 30 or 50 years, and which will include, critically,
the confidence-building measures, particularly in the military
field.
“And the last one…is about Taiwan’s international space.
Looking from broader terms, there is no reason for mainland
China to further squeeze or suffocate Taiwan in the international
community. We are not threatening them in terms of legitimacy
or competing over the ruler of China….I think that we should
really sit down and think about what should be the future mode
of cross-Strait relations on the diplomatic front.”
China won’t be happy until Taiwan is fully in the fold…that’s
the real bottom line. And remember, when the Chinese people
rise up over food and energy shortages, for example, and demand
more democracy, Beijing will play the nationalism card to
reunite the people, with Taiwan the victim.
Along these lines, President Hu Jintao urged the Communist
Party’s public relations staff to fire up the propaganda machine
prior to the Olympics as a way of showcasing all that is good in
the land, human rights be damned. Hu instead wants all to know
of “the rejuvenation of the nation, the happiness of the people
and the harmony of the society,” as reported by the South China
Morning Post.
But back to shortages, China today faces a real energy crisis
thanks to severe shortages of coal, with the government now
demanding that no coal be shipped for export in order to address
domestic demand. It’s all about ill-advised price controls not
being consistently applied. Beijing fixed power tariffs, but coal
prices were allowed to float. Thus the utilities, whose electricity
prices were capped, couldn’t afford the soaring price of coal to
power their plants so they shut some operations down or they
would have gone bankrupt. You’ll recall you had the exact same
issue last fall when the government tinkered with diesel fuel
price controls amidst soaring prices for crude. The refineries
suspended operations because the cost of the raw material was
above what they were allowed to charge for it. All this is
happening at the start of the new year holiday season when
virtually the whole nation hits the road.
To further compound matters, China is also dealing with record
snows, which has interrupted the delivery of not just coal, but
could also hamper the delivery of food stocks in some regions.
In other words, President Hu may have to play the nationalism
card earlier than I thought.
Africa: A study has concluded some 45,000 people die each
month in Congo, or an estimated 5.4 million between 1998 and
2007, with most not dying from the actual fighting in the civil
war but rather from rampant disease and food shortages created
by it. In a mildly positive development, though, Congo’s
government announced it had reached agreement with a renegade
general whose insurgency had led to the displacement of
400,000.
But elsewhere in Africa, specifically the southern part, Zambia,
Zimbabwe and South Africa are beset by severe power shortages.
In Zambia and Zimbabwe, nationwide blackouts were the norm
this past week. It was so bad in the latter that state radio, running
on generators, made the announcement yet no one seems to
understand exactly the causes, which in the case of South Africa
led to a shutdown of the above-mentioned gold mines.
And in Kenya, the violence continued despite a meeting between
the two main political leaders. It’s always great for tourism
when you see headlines such as “Kenyans Hacked to Death With
Machetes.”
“One man staggered past with blood streaming from the stump of
his arm……..” [AP]
Italy: Prime Minister Romano Prodi lost a confidence vote,
ending his government after less than two years in power, so
Italy may now turn back to former Prime Minister Silvio
Berlusconi to form government number 62 since World War II.
Berlusconi’s alliance leads opinion polls by a significant margin
at the moment, as his supporters in parliament popped
champagne corks on the Senate floor, creating a sticky mess.
[Well it was, you know.]
Random Musings
–Some polling data:
An NBC/Wall Street Journal national survey has John McCain
leading the Republican pack with 29 percent to Mike Huckabee’s
23, Mitt Romney’s 20 and Rudy Giuliani’s 15. Hillary leads
Barack Obama 47-32 as her negatives come down, now 41
percent. But while the Democrats slaughter Republicans these
days when voters are asked who can do a better job of handling
the economy, or in who is preferred for individual congressional
seats, McCain in a potential head-to-head contest versus Hillary
defeats her 46-44, while it’s a draw between McCain and Obama
at 42.
But in the here and now, for the Democrats it’s about South
Carolina, Saturday, and Florida for the Republicans on Jan. 29.
Obama is slated to handily defeat Hillary today, while it’s
anyone’s guess which elephant will emerge out of Florida. Mitt
Romney is ahead in a battle that represents Giuliani’s last stand,
with McCain also needing to win.
Meanwhile, Fred Thompson and Dennis Kucinich both said
‘This is stupid. I’m outta here.’
[And for the archives, I have to note that McCain won South
Carolina last weekend, 33-30 over Huckabee, while Hillary took
Nevada’s popular vote, 51-45, but Obama emerged with one
more delegate than her.]
–I’m tired of Mayor Bloomberg’s shadow third party bid and his
statement “I’m not a candidate,” even as he meets with the likes
of Ross Perot’s expert on ballot-access the other day in Texas.
Mr. Mayor, just say “I haven’t decided” and leave it at that.
–William Kristol had a great analysis of John McCain’s
comeback and recent success in his op-ed for the New York
Times. “(What’s) so distinctive about McCain as a
contemporary figure: He’s not thoroughly modern.
“In this he differs from his competitors. Mitt Romney is the very
model of a modern venture capitalist. Mike Huckabee is the very
model of a modern evangelical. Rudy Giuliani is the very model
of a modern can-do executive. They are impressive modern men
all. But John McCain is a not-so-modern type. One might call
him a neo-Victorian – rigid, self-righteous and moralizing, but
(or rather and) manly, courageous and principled.
“Maybe a dose of this type of neo-Victorianism is what the 21st
century needs. A fair number of Republican and independent
voters seem to think so, if one can infer as much from their
support of McCain at the polls. But, amazingly, a neo-Victorian
straightforwardness might also turn out to be strategically smart.
“McCain has been the only Republican candidate who hasn’t
tried to out-think the process. Perhaps out of sheer necessity,
after his campaign imploded last summer, he simply picked
himself up and made his case to the voters in the various states.
“Meanwhile, the other G.O.P. candidates are creatures of our
modern age of analysis and meta-analysis, and their campaigns
have sometimes been too clever by half. Rudy Giuliani believed
it would look bad to contest states he might not win. He
therefore pulled back from Iowa, New Hampshire, Michigan and
South Carolina – and in the process surrendered his lead in
Florida and nationally.
“Conservatives were excited about Fred Thompson last spring.
But Thompson apparently decided it would be too simple to
strike while the iron was hot. He never recovered. And Mike
Huckabee, after an extraordinary run in the fall, brought on
experienced campaign pros, changed his position on
immigration, raised the issue of the Confederate flag – and lost
South Carolina.
“Meanwhile, trying to be clever, Mitt Romney left South
Carolina and headed to Nevada, thinking he could get more
attention for his expected victory in the caucus there. If he had
stayed and campaigned in South Carolina, he still would have
won Nevada. And he might have cost McCain enough votes that
McCain would have lost South Carolina to Huckabee, a much
better outcome for the Romney campaign.”
–In the aforementioned NBC/WSJ survey, only 19 percent say
the country is headed in the right direction.
–Talk about a major speech that is flying under the radar,
President Bush gives his final State of the Union address on
Monday. He will focus on the economy, promote his Mid-East
peace initiative, praise Gen. Petraeus, ignore the growing threats
from Russia and China, and attempt to pull the wool over our
eyes re North Korea. When it comes to Social Security and other
entitlement programs, he should be totally embarrassed that he
wasted two terms, failing to tackle these vital issues, and so will
probably say little about them as well. As for Laura, I’m
guessing she wears red.
–The residents of Detroit often get what they deserve. Mayor
Kwame Kilpatrick, who always struck me as a pimp, denied
having an affair with a top aide when pressed last year in a
proceeding originating with a lawsuit filed by two police
officers, who claimed they were fired for investigating
allegations from two former bodyguards that the mayor used his
security unit to cover up extramarital affairs. Back then Chief of
Staff Christine Beatty said she was not romantically involved
with the mayor, yet the lawsuit resulted in a jury awarding the
two officers $6.5 million, after which Kilpatrick said “I’m
absolutely blown away at this decision.”
But now Kwame is telling a different story, thanks to the Detroit
Free Press obtaining some 14,000 often steamy text messages
between Beatty and himself. On Oct. 16, 2002, Kilpatrick wrote
Beatty: “I’ve been dreaming all day about having you all to
myself…yada yada yada.” [This is a PG-13 column. Sorry, I
can’t go on.]
Prosecutors could seek perjury charges against the mayor. He’s
married with three children. Beatty was also married at the time.
[Corey Williams / AP]
–Good news. The American Heart Association reported heart
disease death rates dropped 26% between 1999 and 2005,
surpassing the AHA’s target. Coupled with a similar drop in
stroke deaths, roughly 160,000 lives were saved by 2005. Eating
better and smoking less are certainly two factors. But at the
same time the AHA continues to warn on the twin epidemics of
obesity and diabetes in young people.
–Normally the U.S. armed forces seek to fill 90 percent of their
recruiting classes with traditional high school graduates. But
Department of Defense figures analyzed by an outside group
found that only 71 percent of the Army’s recruits in 2007 were
high school grads – the lowest proportion in 25 years. This is not
good.
–So I read a headline on BBC News, “Brazil Amazon
deforestation soars,” and I’m thinking, ‘I thought I saw recently
where tremendous improvement had been made,’ didn’t you?
Alas, the Brazilian government did indeed say last year that real
progress had been made but now they’ve had to admit an
amazing 1,250 square miles was cleared the last five months of
2007, including 366 square miles in December. It’s about the
commodities boom, such as in the demand for biofuels.
–Startling article by Marc Champion in the Wall Street Journal
on various uses of water; such as in it takes 79 gallons of it to
wash a car, or 466-2,300 gallons to generate a pound of wheat.
How much water does it take to make an acre of artificial snow?
Try 491,670-979,175 gallons.
–In a study of Russian women marrying foreign nationals in
Moscow, German men topped the list with 147 marriages in
2006 to 140 with men from Turkey, followed by the U.S. [USA!
USA!….sorry, got a little pre-Olympics fever] (119), Britain (95),
Israel (86), and France (60).
–Back last August, I explained why I didn’t comment on the
report that had astronauts getting drunk before space launches
because to me it was a case of ‘waiting 24 hours.’ [WIR 8/4/07,
8/11/07] Too bad the rest of the world doesn’t follow this
always sound advice that I picked up from a former boss of mine.
I bring it up again now because NASA just completed its own
internal investigation in which 89% of NASA’s 98 astronauts
participated, as well as all 31 of its flight surgeons, answering
questions in an anonymous survey, and “the only alcohol-related
incident mentioned by those surveyed was a bad reaction by one
astronaut to mixing alcohol and prescription drugs several days
before liftoff,” said astronaut Ellen Ochoa, deputy director of
NASA’s Johnson Space Center. [Traci Watson / USA Today]
But we live in a world where people find it necessary to rip
others, instantly, without knowing any facts or without doing any
homework themselves.
—
Pray for the men and women of our armed forces.
God bless America.
—
Gold closed at $910
Oil, $90.71…earlier in the week was down to $86
Returns for the week 1/21-1/25
Dow Jones +0.9% [12207]
S&P 500 +0.4% [1330]
S&P MidCap +2.1%
Russell 2000 +2.3%
Nasdaq -0.6% [2326]
Returns for the period 1/1/08-1/25/08
Dow Jones -8.0%
S&P 500 -9.4%
S&P MidCap -10.1%
Russell 2000 -10.1%
Nasdaq -12.3%
Bulls 41.6*
Bears 31.5 [Source: Chartcraft / Investors Intelligence]
*Remember, this is a contrarian tool and thus it’s interesting to
note that back on 10/9, the bulls hit 60.2, with the bears at 21.5.
That very day the S&P hit its all-time high, 1565. The following
week, 10/16, the bulls peaked at 62.0 and the bear reading was
19.6. The indicator has been working pretty well the past two
years after a long drought where it was frankly useless. We’ll
see what the bull reading is this coming week as potential
evidence of at least a short-term bottom..
Have a great week. I appreciate your support.
Brian Trumbore
