[Posted from Moscow…6:00 AM ET]
You’ve probably noted I like to travel outside normal tourist
season, and so it is that I decided to visit Moscow this time of
year, just as winter takes hold in these parts. It was snowing
when I arrived on Tuesday, the city having also received 10
inches two days before, and as I write this Friday evening I have
experienced all of two hours of sunshine thus far. It’s been dark,
dreary, drab, cold, and now there’s talk of lots of rain the next
few days. Just what I wanted! This is Moscow, after all, not the
Caribbean, and I already feel as if I have a real sense of life in
these parts…it’s harsh.
As for the city itself, this isn’t your father’s Moscow, that’s for
sure. The past 3 days I have walked extensively through
different neighborhoods and I’m amazed how well-off the people
appear, especially compared to my only other visit here as a 15-
year-old way back in 1973. Also, thus far (keeping my fingers
crossed), I have not felt threatened in the least, though I do get
quite a few looks like ‘what’s that Amerikanski doing here?’
The only time I was a little uncomfortable was this afternoon,
when while walking across a bridge spanning the Moscow River I
thought, gee, with the low railing it really would be easy to
just push me over, but I quickly got over that paranoid thought.
Not that you can ever let down your guard as an outsider these
days, especially after the Chechen terrorist attack on the
theater just three weeks ago.
More on my personal experiences later. Truth be told, though, if
I had to do my life over I might have majored in Russian history.
While last week I noted that currently there is no more
fascinating country than Turkey, from a broad, historical context,
no other land rivals Russia for its culture and deep heritage.
Oh, it’s a largely dark, gloomy one, filled with contradictions,
yet it also contains some of civilization’s truly heroic moments.
You can’t begin to understand the people today, for example,
without knowing that they have dealt with invasions from the
likes of the Mongols, Napoleon, and Hitler, yet in all cases they
eventually triumphed (thanks in no small part to the elements, the
“Russian winter”).
If you understand the history, you also get a better sense why
Russians to this day are such a suspicious people. I’ve always
known this, but I’ve witnessed it firsthand in just the past few
days. I have engaged all my waiters, bus boys, bartenders, you
name it, yet while the younger folks understand English fairly
well, you can’t get them to elaborate on any issues, and as I was
sitting at dinner last night another thought suddenly hit me. No
one is asking where I am from. They know I’m American, but
they don’t inquire if I’m from New York, for example. In all of
my travels the past few years, this has never happened. Again, to
generalize, they are suspicious, but also not curious, and you can
see examples of this throughout history. In a nutshell, Russians
still feel humiliated for the way they have been treated, both by
internal and external forces. This is important, as I pointed out
years ago, when thinking of current day issues such as NATO
enlargement. I argued that the West was wrong to press
expansion until Russia was psychologically ready, and while the
club has increased its numbers thus far without incident, this is
more due to luck in having to deal with a more enlightened
leader like Russian President Vladimir Putin than anything else.
Ah yes, Putin. Back when he took over in 1999, on the heels of a
renewed war effort in Chechnya, I warned in this space that he
could be a very difficult force to reckon with. When I sensed
otherwise, however, I was quick to change my opinion and urged
the U.S. to embrace him long before other hardliners saw the
light.
So what has he done in the past 3+ years? Despite the outward
signs of wealth, at least in Moscow (and I am well aware of the
massive problems in the rural areas), not as much as some give
him credit for, as a poll I saw today helped reveal.
–Only 34% of Russians believe real power lies with Putin.
–25% with the oligarchs.
–21% with the mafia.
Yet his overall popularity remains at 67%. There you have it, the
contradictions.
The fact is Russia has changed little since the perestroika of
Mikhail Gorbachev. While there is no doubt that Putin deserves
credit for some reforms on the legal front, particularly as it
pertains to all important property rights, the key to any market
economy, it is still the oligarchs and the mob who wield the true
power. The only thing that is different from just five years ago is
that you no longer have the highly visible characters, such as the
now-exiled Boris Berezovsky. Instead, the new bosses are less
braggadocio as they have become more institutionalized, which
really means the situation is little improved.
Today, it’s the “family,” the label for the Yeltsin holdovers,
versus Putin’s KGB cronies from his days in St. Petersburg.
But then why, you may ask, has Russia thrived recently, at least
in the economic realm? Oil, pure and simple. More specifically,
the rising price in crude over the past few years, which has fueled
wage increases and encouraged consumption. Regarding the
latter, the shopping districts in Moscow rival some of the finest
in the world. But remember something I wrote just a few weeks
ago, Russia’s fragile fiscal picture is predicated on an oil price of
$21.50 a barrel. If crude collapses, particularly in a post-Saddam
world, while this will be a huge positive for the rest of the non-
oil producing world, it will be a disaster for Russia. The only
hope is that Russia’s rapidly emerging energy powers find a way
to increase production efficiently and profitably at lower prices,
but the infrastructure is still so weak that this is years off.
And when you address the overall economic outlook, one of the
problems with an economy in the hands of a select few is it
impedes entrepreneurship. There are real barriers to entry with
the oligarchs in control. Consider this…the top 10 Russian
companies currently account for 61% of the nation’s net profits.
And then there is the matter of Chechnya. Particularly after the
theater episode, the world community can sympathize with Putin
to a certain extent when he says Russia is under the same Islamic
threat as the West. [See my 11/14 edition of “Hott Spotts” for
his vulgar, and thuggish, recent comments on the subject.] But at
the same time Russia is guilty of tremendous human rights
abuses in Chechnya and while countless Islamic rebels have died
in the conflict, because of the ill-disciplined actions of some in
the Russian military they have only sown the seeds for future
terrorists in generations to come. For some in Chechnya, this
will be like the Battle of Kosovo. Remember how 650 years
later that relatively minor episode still resonates with the people
living there?
Those are just a few thoughts for now. I’m here another three
days and will undoubtedly have more to say, not just next week,
but as long as I’m writing this column. Russia is a remarkable
place, with immense potential, but to ignore its past, or deny the
present, merely courts danger.
Wall Street
Excuse me for my brief comments this week, but my thoughts
weren’t always focused in this direction the past few days. I did
know enough that there was some key economic data released on
Thursday and Friday and the ‘bulls’ can hang their hat on the fact
that retail sales were stronger than expected, as was consumer
confidence, while ‘bears’ will point to industrial production,
which continues to be in the dumper, and to a 75% capacity
utilization rate, the latter not being a good thing when it
comes to pricing power and increased corporate profits, at
least in my simplistic way of thinking.
Meanwhile, in testimony to Congress, Fed Chairman Alan
Greenspan said that the economic recovery is on track, albeit at a
slower pace than hoped for, and that the Fed recently slashed
short-term interest rates as a way of taking out an insurance
policy. He also backed making the tax cuts permanent, but said
don’t look to them for any stimulus in the short run.
As for the market itself, the Dow concluded the week with its 6th-
straight weekly advance (the best since ’99), albeit another
meager one, just 40 points to 8579, while the S&P 500 and
Nasdaq returned to the win column, gaining about 2 and 4
percent, respectively, to the 909 and 1411 levels.
At week’s end the markets even discounted a serious warning
from the FBI concerning the threat of a “spectacular” al-Qaeda
inspired attack, along with the government’s admission that the
bin Laden audiotape is authentic. Rational behavior? Probably
not. But Wall Street’s traders are not always the smartest bunch.
Neither were the buffalo, come to think of it, who allowed the
Indians to drive them off a cliff.
And one note on the corporate profit/valuation issue,
particularly with regards to Nasdaq, which has climbed an
impressive 300 points since the October 9 closing low of 1114.
There certainly is an awful lot of optimism, especially
considering the actual news background. Applied Materials and
Cisco Systems, for example, have both announced that revenues
for the current quarter will actually decline, but investors
continue to bid the shares up. Hey, no one denies that eventually
capital spending will improve, and there are a few tentative signs
it is, but profit estimates for 2003 already factor a significant
growth rate into the equation, ergo, in the case of many big tech
names, valuation is once again a big concern. You saw some of
this reasoning in Dell’s decline at week’s end. The company was
reasonably optimistic with its forecast, but at a P/E in excess of
30 based on January ’04 earnings estimates, it was fairly valued,
and the market finally recognized this. It’s the same situation
with a lot of other companies.
Street Bytes
–U.S. Treasury Yields
6-mo. 1.26% 2-yr. 1.88% 10-yr. 4.04% 30-yr. 4.91%
Rates backed up again, largely on the heels of a far higher
reading for producer prices than was anticipated, up 1.1% for the
month of October. But there was a lot of smoke in the reading.
Of greater concern for the bond market should be whether the
recovery ever truly takes hold. We do have this little item called
Iraq out there, though, let alone the terrorism threat, which
should have some impact on this front, particularly as it relates to
consumer confidence.
–Good piece by David Ignatius in Friday’s Washington Post
concerning the bubble in credit derivatives, a topic near and dear
to my heart. It’s out there, but like the long discussed housing
bubble, the only question remains when it will break. You can’t
pin a whole investment philosophy on either one, or, to add
another, a possible collapse in the U.S. dollar because foreigners
eventually throw in the towel, but I will continue to mention
them all from time to time since they are clear risk factors, the
knowledge of which should prevent one from heavily
overweighting equities.
–In a similar vein you have the issue of the rapidly growing
federal deficit in the U.S. True, as a percentage of overall GDP,
it is not a major concern, as yet, but trends don’t auger well and
if Americans are looking for where they will be asked to sacrifice
in the war on terror, and if they aren’t serving in the military, it’s
here…rapidly expanding federal expenses that will eventually
impact interest rates and increase borrowing costs. Another
negative for equities.
–Japan: The market here remains in turmoil, this week owing in
part to rumors some of the larger banks may be nationalized due
to the crushing debt issue, though the government at week’s end
denied the reports.
–Argentina: The nation defaulted on some World Bank debt, not
exactly a great way to engender confidence and make foreigners
want to invest in the country. At least that’s what they teach at
the nursery school Jack Grubman’s twins attended.
–Speaking of Grubman, the former Salomon Smith Barney
analyst who is at the center of Eliot Spitzer’s Citigroup inquiry,
both he and Citigroup chairman Sandy Weill issued various
statements this week; Grubman saying he sought Weill’s help in
getting his children into an elite nursery school (where Stephen
Hawking is required reading), while at the same time flipping on
his earlier stated position that Weill had unduly influenced his
1999 decision to upgrade AT&T. For his part, Weill fully
admitted some responsibility for the first time, saying he merely
asked Grubman to take a “fresh look” at Ma Bell. Weill also
said he helped out in the nursery school application (an
institution where children are taught how to vault the “Chinese
Wall” between research and investment banking).
[It does appear the Spitzer probe on conflicts-of-interest is
nearing an end.]
–Personally, I have but one memory of my own nursery school
experience, that being nap time. Looking back, though, I learned
my lessons better than I initially thought because I am now
capable of taking a 15-minute snooze virtually anywhere,
anytime.
–Back to Eliot Spitzer, this week he attended an awards
presentation put on by Institutional Investor magazine, which
sponsors the highly sought II honors for research analysts.
Spitzer took the opportunity to blast the publication for not
focusing more on actual success or failure in stock selection
when it comes up with its rankings. The analysts in attendance,
of course, were pissed. But I, reading of the speech while here in
Moscow, was delighted.
–William Webster, the little guy who once had his own sitcom,
resigned from his position as the SEC’s chief accountant for the
new Audit Oversight Board, another embarrassment for the
commission that is supposed to be leading the charge to restore
investor confidence in our financial markets. Or was this a
different “Webster” I’m thinking of?
–UBS, the parent of PaineWebber, said it was eliminating the
PaineWebber name. This could go nuclear.
–Michael Capellas, #2 at Hewlett-Packard, left to take the new
CEO position at a restructured WorldCom. If he’s smart, he’ll
bring along the profitable printer cartridge business.
–For those of you following Russian oil stocks, the big news
over here this week was that Yukos is now outproducing LUKoil
(sic). But what you also notice is the constant activity on the
alliance front, with Yukos looking to possibly align itself with
Italy’s ENI, while LUKoil announced a new partnership with
Norway’s Statoil.
–Energy: Crude oil continued to hit levels not seen since March
as Iraq’s acceptance of the UN resolution led some to foolishly
believe that peace was breaking out. But while U.S. West Texas
Intermediate is trading around $25 a barrel, overall, when you
factor in other grades from around the world you now see that
the average “basket” is in the $22-$23 range, or suddenly at the
low end of OPEC’s stated $22-$28 preferred band. For their
part, cartel members continue to produce far more than their
quotas, thereby weighing on the supply side of the equation.
Separately, with China in the news this week due to its change in
leadership, it is interesting to note that it receives 60% of its oil
from the Persian Gulf, so expect to see more and more alliances
between the Commies and the Gulf states…that is until China’s
military gets up to speed and it starts creating mischief in its own
region as it seeks more localized sources of crude. Just my
opinion, I could be wrong.
International Affairs
Iraq: Friends, we have now reached the point where there truly
is little to say. With Iraq’s announced willingness to “comply”
on the inspections front, we all just sit back and see what
happens next, while knowing at the same time that the U.S. and
British militaries already have in place much of what is needed to
wage war. All of the recent stories on the actual conduct of it,
though, aren’t worth wasting your time or mine. Some of this
week’s op-ed pieces, for example, were truly pitiful in their
questioning of U.S. military intentions before even the first shot
is fired. No, all we need to know for now is that December 8 is
the first critical deadline for Iraq to supply a full and detailed list
of its weapons sites. All else flows from this.
Iran: Now here is something to write about and it’s a potentially
very exciting development for freedom-loving peoples
everywhere. Student protests are growing, not just in Tehran, but
around the country as a result of the death sentence handed down
to an academic who questioned the clerics role in governing the
country (though few expect it to be carried out). Finally, we
could be witnessing the beginning of the penultimate challenge
to the conservative hardliners, headed by Ayatollah Khamenei.
The reformers, led by President Khatami, need to press their
case, but the problem has been that in the past Khatami has been
too weak of character to take on the clerics, who for their part
constantly threaten use of the military to put down any serious
threat to their rule. But if Khatami finally shows some spine,
change could come about in Iran at lightspeed. Keep the faith. It
would be a gigantic positive, surpassing the impact of Saddam’s
demise, especially as it pertains to the rest of the Islamic world.
The Bush Administration needs to speak out more forcefully to
encourage the students and Khatami, but it also must stay
committed to the cause, and this is where past administrations
have been seriously lacking.
Israel: New foreign minister/candidate Benjamin Netanyahu
announced that if elected to run Israel’s new government come
January, he will oust Yassir Arafat. Bolstering his case was
Friday’s terrorist attack on Israelis, which left at least 12 dead at
last report, an act for which Islamic Jihad claimed responsibility.
Jordan: King Abdullah was forced to use the military for the
first time in his reign in order to quell a major disturbance caused
by fundamentalists in one city.
China: The ascension to power of Hu Jintao as the new #1 is
officially complete. At the Party Congress, officials also
admitted they need to address the issue of massive corruption,
while outside analysts are now zeroing in on China’s huge bad
debt problem, which heretofore has taken a back seat to Japan’s.
Now some say that up to 50% of China’s loans outstanding are
of the nonperforming variety.
North Korea: The Bush Administration achieved another
diplomatic victory in gaining a unified approach to handling Kim
Jong-il and Company, as it halted fuel oil shipments. Even South
Korea and Japan agreed to this needed, though confrontational,
approach.
Pakistan: U.S. officials now believe Pakistan has been aiding
North Korea’s nuclear weapons program as recently as just a few
months ago. Not a good thing.
Britain: The television here in Moscow has lots of British
stations, which show the country is in turmoil over the
firefighters strike, firemen in the UK being unionized, nationally.
Soldiers have replaced the strikers and the government is under
increasing pressure to resolve the crisis. Separately, Prime
Minister Blair and his cabinet have been increasingly candid
about the terrorist threat facing Britain, including the potential
for truck bombs on ferries. All of Europe, for that matter, is
finally waking up to the threat across the continent.
Turkey: The new government is falling into place and we’ll get a
good idea of how the Islamist AKP plans on conducting foreign
policy this week, as the UN has requested that both Greece and
Turkey respond to a proposal on the table over the vital issue of
Cyprus. For its part, should Turkey comply, it will be tougher
for the European Union to then deny the Ankara government’s
formal candidacy into the club.
Canada: I saw where the government is scaling back on its
military, at a most inopportune time. The cost of its mission in
Afghanistan broke the budget and further commitments from the
Chretien government don’t appear to be forthcoming.
Belarus/Ukraine: Both nations leaders want to crash a NATO
summit slated for this coming week in Prague, but no one wants
them there. Ukraine has been linked to selling radar systems to
Iraq, while Belarus’s Lukashenko is a schizoid dictator who
really needs to be taken out, if you catch my drift.
Random Musings
–I’ve said it before, but after my opening on Russia and the
blurb on China, it bears repeating. Sadly, corruption is what
makes the world go ‘round, whether it’s in these two countries,
Japan, Africa, Latin America or, yes, the U.S. In the latter case,
a quick examination of our political process and the power of
money, let alone the recent examples on Wall Street are all you
need to know to be convinced of this fact.
–A Newsweek survey from Election Day had some interesting
revelations, which can be summed up in the following…
Americans don’t know what they want. While the country is
basically divided on whether full Republican control is good or
bad, by 51-40 percent the voters say more will get done with
Republicans in control.
But then 63% are concerned that tax cuts will help balloon the
deficit, yet 80% say prescription drugs are a top priority (a big
budget buster). On the other hand, at least 65% conclude that
overhauling the tax system should be a real priority, which gives
some of us encouragement that maybe, just maybe, real change
can take place, but, realistically, this is for the first year of a 2nd
Bush term and it appears the White House is gearing up for it.
–We wish Nancy Pelosi well in her new position as House
Minority Leader (no we don’t, but my ‘delete’ key is stuck).
One thing Democrats will harp on the next two years is fiscal
mismanagement, but since many of the budget items are war
related, they’ll be walking a fine line in this regard.
–It’s almost embarrassing how much the Wall Street Journal
loathes Colin Powell. This past Monday, for example, the
Journal’s editorial board praised the UN resolution on Iraq but
couldn’t get itself to even mention Powell’s positive role. Suck
it up, guys. As I’ve said from Day One of the Bush
Administration, you can’t have all hawks in your cabinet, much
as I generally agree with the likes of Cheney, Rumsfeld, and
Wolfowitz. Sometimes a good diplomat can pay dividends, as
Powell did in this instance. But the general also recognizes that
it is now time to let the hardliners control events from here.
–One advantage of being in Russia this week is that I’m not
forced to hear Al Gore whine about the 2000 election.
–So on Monday I’m sitting at JFK airport and some guy is
giving a baggage handler an autograph. He then turns my way
and it was MacCauley Culkin. I just smiled at him as he walked
away and then I went up to a group of security guards and just
said, “That was funny.” “Yup,” they replied in unison. “Can’t
leave that little kid home alone.”
–Since I’ve been slamming philanthropists with regularity this
year, it’s only right to praise those who truly make a difference,
as Bill Gates came through, again, with his $100 million
donation to fight AIDS in India.
–It’s been a while since I had reason to mention the noble yak of
Mongolian fame, but I saw where a Ukrainian “Yak-40” aircraft
narrowly missed colliding with a Polish passenger jet in mid-air.
I thought it was always pretty clear that yaks were never intended
to be in the air transport business.
Moscow Musings
–As soon as I checked in here on Tuesday, I went to the
concierge desk to set up some activities, specifically a classical
music concert and at least one event at the Bolshoi. So my new
best friend Andrey (sic) hooked me up with the Moscow
Philharmonic on Wednesday, while on both Saturday and
Sunday I’m going to events at one of the world’s great theaters.
Andrey told me the Houston Ballet was there on Thursday and
Friday, but we both agreed you don’t come all the way to
Moscow to see a group from Houston. Bad move, as it turns out.
I saw a review on Friday that read “There aren’t any things as
beautiful as the Houston Ballet.” [So take pride, Texans…even
if Enron execs supplied the funding.] But the payoff was that if I
had been there on Thursday I would have seen Vladimir Putin.
–As for my classical concert, I thought I was going to see an all
Tchaikovsky performance, but after the first note I thought,
“That ain’t no Tchaikovsky.” I didn’t have my own program so I
glanced at my neighbor’s and all I could read were nine
movements. Yup, that isn’t him. It turns out it was a modern
Russian composer, Svedin(sp?), so when I returned to the hotel,
after walking a half hour in a snowstorm, I said to Andrey, “That
wasn’t Tchaikovsky!” “I know,” he told me, “it was Svedin.”
Somehow something got lost in the translation. Another case of
my summer Russian lessons failing me.
–Speaking of the language barrier, I do know the alphabet (far
different from our own), which is critical to getting around, so
I’m doing well enough.
–What is most troubling here is the issue of security.
Amazingly, there isn’t even a metal detector at my hotel, which
is one of the top ones in Moscow and thus a target. Some of the
museums have very lax security as well.
–I am able to read 3 newspapers here, English translations of
Russian dailies, and I have to tell you, the issue of press
censorship seems to me to be vastly overrated. I feel like I am
receiving both sides of most stories, though you continue to hear
that the trend in this regard is troubling, and Putin the other day
supposedly threatened the foreign press.
–My first night I wore khakis at dinner. This is not mob attire,
as I’m well aware, but you never know when you’re going to
bump into Curtis Strange.
–Bootleg vodka is a $5 billion business in Russia.
–Hackers broke into Russia’s largest anti-virus software
company and then sent an e-mail virus to all its customers. Not a
great statement on the company’s prospects for survival.
–A sign of Russia’s burgeoning wealth (at least for now) is this
townhouse development 20 minutes from Moscow. Units are
leased, never sold, and go for $5,600-$12,000 a month!
–I paid $5 to hear the Moscow Philharmonic, but am paying $75
and $110 for my two events at the Bolshoi. But then I just found
out Andrey got me 2nd row seats for both nights! My man.
–Boy, they love their music here. Some of the piano players in
the hotel lobby are concert quality. They even have a harp player
for breakfast.
–So some of you might be thinking, “Hey, Brian, what about the
Russian girls?” Well, label me a big fan. The lovely ladies in
the business center have also been a huge help, since Net access
from my room isn’t possible.
–Having visited the Pushkin Museum (which has one of the best
collections of art in the world), I hereby present my “exclusive”
rating of the painters whose work was on display.
Underrated: Peter Brueghel, Alfred Sisley
Overrated: Rembrandt, Matisse, Gaughuin
Van Gogh: Totally deserving of the accolades.
Cezanne: To paraphrase basketball commentator Dick Vitale,
he’s a PTPer…Prime Time Painter.
Pissarro: Always a personal fave.
Courbet and Corot: Also vastly underrated.
Monet…yes…Manet…sucks.
Maurice Utrillo (1883-1955): Can’t say I was ever really aware
of this guy, but he’s real strong with the brushwork.
Frans Snyder: 17th century patron saint of butchers, but his great
paintings of them also expose the roots of Mad Cow disease.
Butchers in those days operated under very unsanitary conditions
and should have been fined heavily.
There you have it. If you personally have a Rembrandt hanging
in your living room, I’d sell it immediately. He’s peaked.
—
God bless the men and women of our armed forces.
God bless America.
—
Gold closed at $320
Oil, $25.51
Returns for the week of 11/11-11/15
Dow Jones +0.5%
S&P 500 +1.7%
S&P MidCap +2.2%
Russell 2000 +1.8%
Nasdaq +3.8%
Returns for the period, 1/1/02-11/15/02
Dow Jones -14.4%
S&P 500 -20.8%
S&P MidCap -14.8%
Russell 2000 -21.0%
Nasdaq -27.7%
Bulls 50.6%
Bears 28.1% [Source: Investors Intelligence]
Have a great week, folks. I appreciate your support.
Brian Trumbore
