[Posted 7:00 AM ET]
Iraq
Less than five months to go before the U.S. election in
November and the Bush administration is doing all it can to run
out the clock. White House officials, and the president himself,
have consistently warned that the period leading up to the
handover of power on June 30 would be a violent one, while it’s
also clear that the administration is going to do all it can to
minimize American casualties.
There’s something perverse about saying “It’s going to be bad…
it’s going to be very bad,” but then not doing anything to prevent
it. In discussing the financial markets, I can warn “Watch out,
the economy is about to blow” and I would proceed to advise
investors to be cautious. But in Iraq we say “Violence is going
to pick up” and then we let the terrorists hang out in Fallujah
and plot further mayhem.
Ever since the U.S. pulled out of this hellhole it has become a
mini-Islamic republic and Senator John McCain is one of the
more vocal critics decrying our abandonment of the place. And
did you know that none of those responsible for the mutilation of
the four contractors back in March were ever apprehended? We
had the videos, for crying out loud.
In the June 14 edition of Barron’s, there’s an interview with
George Friedman, head of Stratfor, a leading foreign policy
research group. Friedman says the U.S. should move its troops
to the borders of Saudi Arabia, Syria and Iran to keep the heat
on these other nations, something I called for a year ago. It
just makes sense. That doesn”t mean we abdicate our other
responsibilities, however.
And in reading Defense News, as part of our overall troop
realignment, including the removal of 12,000 from South Korea
by December 2005, can you believe that the U.S. also plans to
withdraw all but a handful from the Middle East? On one hand
President Bush says “We will win if we are strong and
steadfast,” while on the other we’re getting ready to up and get
the hell out of Dodge. I keep asking myself “What am I
missing?”
Meanwhile, thanks to the fact we totally botched the immediate
post-war phase, let alone the pictures from Abu Ghraib, a poll for
the Coalition Provisional Authority says just 2% of the Iraqi
people view the U.S. as liberators. So much for winning the
hearts and minds. In America, a majority now believe the U.S. is
“getting bogged down.” Then again, the majority doesn’t yet
understand we’re outta there.
As for the past week, it was another one of assassinations, car
bombs, contractors killed and oil pipelines sabotaged. I’m trying
to find something positive but if you want to say that Moktada
al-Sadr’s endorsement of the interim government is a big
development, I’d call it a stretch. After all, the guy is a lunatic
and other clerics have been calling for former officers of the Iraqi
Army to join the insurgency, not the political process.
Finally, within the next 12 months, Bush and Prime Ministers
Tony Blair and John Howard all face the electors. The three
prime leaders in the war on terror are in deep political trouble.
Not good for the rest of us.
Wall Street
Federal Reserve Chairman Alan Greenspan appeared to be
mighty pleased with himself at his confirmation hearings for a 5th
term. The U.S. economy was “most impressive” he said, and
“inflationary pressures are not likely to be a serious concern in
the period ahead.” With that the 10-year Treasury had its biggest
one-day rally in 3 ½ years as the yield dropped from 4.87% to
4.69%.
Of course many of us looked at the actual inflation data that was
released this week and thought “What does Greenspan (and the
bond market) know that we don’t?” The consumer price index
rose 0.6% in May while producer prices climbed 0.8%, but
market players took solace in the core figures, ex-food and
energy, that showed increases of ‘only’ 0.2 and 0.3 percent,
respectively. Other Fed officials during the week, though,
appeared to take issue with Greenspan’s sanguine thoughts and
darnit, I still say there is a chance the Fed hikes the funds rate 50
basis points (1/2%) at the crucial June 30 meeting.
However…it would also be disingenuous of me not to
acknowledge I have a bit of sympathy for the Fed chairman and
his current predicament. To wit:
I have not changed my opinion one bit since my January 3
outlook for 2004. A solid 1st half on the economic front, which
we’ve had, with a deceleration in the second. I also said a few
months ago that whereas the inflation blip was real, I’m now in
the camp that believes the threat of ‘de’flation will reemerge next
year, thanks in no small part to a big slowdown (or collapse) in
China. PIMCO’s Bill Gross is also concerned the whole
environment could flip and expounded on this in an interview for
the Financial Times.
“Too much debt, geopolitical risk and several bubbles have
created a very unstable environment which can turn any minute.
“More than any point in the past 20 or 30 years, there’s potential
for a reversal. We have become a levered global economy,
specifically in Japan and the U.S.
“With all this consumer debt, business debt, government debt,
smaller movements in interest rates have a magnified effect… a
small movement can tip the boat.”
Gross went on to add that the threat of instability arises from “the
advent of financial alchemy” thanks to the exploding use of
hedge funds.
On the energy front, there were both micro and macro
developments. While crude remained basically unchanged for
another week, it is now estimated that OPEC (ex-Iraq) will
produce about 27.4 million barrels per day in June, well above its
stated quota of 25.5 mmbd and all previous projections. But
Norway’s oil workers went on strike, removing some supply
from the market, while al Qaeda’s sabotage against Iraqi
facilities rendered its energy sector virtually worthless.
Additionally, further terrorism in Saudi Arabia against
Westerners, best exemplified by the beheading of Paul Johnson,
is leading to renewed calls for foreign workers to leave, thereby
potentially crippling the Saudi oil industry, though as yet few
seem to have heeded the call.
On the macro front, Deutsche Bank released a study that
concludes Big Oil has replaced only 75% of the reserves it
pumped the last few years thanks to the fact the majors have
been slow to spend gobs on risky projects; not wanting to hurt
shareholders. Obviously this can’t continue or we will truly have
the dreaded supply shock some are calling for.
And then you have one of my pet scenarios; Russia using its
energy resources as a political weapon, particularly against
Europe. The International Energy Agency warned European
leaders that Russia’s natural gas behemoth, Gazprom, could
easily wreak havoc by withholding supply, jacking up prices or
both. The IEA is recommending Europe build more nuclear
power plants. We should be doing that in the U.S. as well.
Speaking of natural gas, economist Robert Samuelson wrote the
following in a Washington Post op-ed.
“Natural gas is the heating fuel of about half of U.S. homes (51
percent in 2001). Since 1993 it has been the fuel used for almost
90 percent of new electricity generation; in effect, natural gas
powers the Internet and most PCs. It is also a major fuel for
manufacturers and for heating office buildings. In 2002 about
half of gas sales went to industrial and commercial users. The
trouble is that we’re no longer self-sufficient in natural gas – and
our import dependence will grow.”
A major solution is to relax drilling restrictions, such as on the
East and West coast and in the Gulf off Florida.
Street Bytes
–Stocks finished mixed, with the Dow up fractionally to 10416
and Nasdaq off 13 points to 1986. Trading volume has been
pitiful.
–U.S. Treasury Yields
6-mo. 1.67% 2-yr. 2.77% 10-yr. 4.71% 30-yr. 5.38%
Aside from the big inflation numbers, the bond market also
sloughed off a decent report on retail sales, as well as a big surge
in industrial production.
–The trial of Mikhail Khodorkovsky and Yukos began this
week. The former chairman and other major shareholders have
offered up various concessions in a bid to settle the $3.4 billion
tax claim against the company, but they were rejected. Then, out
of nowhere, President Vladimir Putin, who has largely avoided
commenting publicly on the Yukos case, stepped forward to say
“Russian authorities…are not interested in the bankruptcy of
such a company as Yukos. The government will do its best to
prevent (its) collapse.” Shares in Yukos soared 34% on the
news, though it’s still anyone’s guess how it will all shake out.
One thing is for certain. Foreign investors are voting with their
feet and many top Russian executives as well have been fleeing
the country. Putin is perhaps finally getting the picture.
–A new government study concludes that Social Security is in
better shape than previously thought. This has always been my
opinion and, remember, when the crossover between what is
taken in and what is paid out occurs, it merely becomes another
budget item. I have also been against the idea of private
accounts since then candidate Bush first proposed the idea; an
incredibly stupid one since, as I also continually point out, we
already have our private savings accounts…they’re called IRAs
and 401Ks, only when was the last time the government
promoted their existence?
–A former executive at the Hong Kong subsidiary of the Bank of
China was sentenced to death by a Chinese court for embezzling
funds worth more than one million dollars, but it will probably
be commuted to life. [Reuters] If only we had handed out a
death sentence or two of our own, some U.S. investors may have
been spared the carnage from the Bubble…
–…Such as those involved in the Beacon Hill Asset
Management fiasco. This week the SEC charged four principals
of this hedge fund with costing investors some $300 million…
$300 million…as it overstated the value of the funds. The SEC
is also requesting the wives of the four return $14 million in
gains though they are not being charged.
But what sets this one apart from all the others in the eyes of
your editor? Beacon Hill’s offices are directly across the street
from my office in Summit, N.J. As I’ve written before, this
immediate area that I was once proud to have grown up in is rife
with some of the Street’s primo dirtballs. [And drivers who tear
through pedestrian walkways without a care in the world.]
–The SEC charged Network Associates’ former CFO with
accounting fraud for overstating revenues from 1998 to 2000.
See above story on China.
–By the end of 2004, the U.S. airline industry will have lost $5
billion more than earnings generated by U.S. commercial airlines
since 1947. [Financial Times] I actually thought it was worse
than this. Meanwhile, UAL’s latest bid for another government
loan guarantee was rejected but the airline said it has alternatives.
–Reflecting the desultory volume of the past six weeks or so,
Charles Schwab & Co. reported that its average daily level of
trading in May was 15% off of April’s pace.
–Update: Herbert Axelrod, the slimeball I wrote of a few times
who sold 30 rare instruments to the New Jersey Symphony (at
probably inflated values) and then fled the country when it
became apparent he was to be indicted for tax fraud, unrelated to
the symphony deal, was arrested in Germany. We wish Mr.
Axelrod the very worst.
–Ken Langone, in defending his friend Dick Grasso in an
interview, once again trumpeted the party line of Grasso’s
supporters. He “saved the New York Stock Exchange” through
his post-9/11 efforts. Bull. Sorry to repeat myself but it was the
Verizon workers, who had to splice the shattered phone lines
back together, that were the heroes and as was proved years ago,
Grasso didn’t even attend all the meetings in those first few days
after the attacks.
–Bankruptcies in Japan are falling steeply, another positive sign
here. Auto sales in China are slowing.
–Last week I wrote of MGM Mirage’s bid for Mandalay Resorts
but I had missed before I went to post that Mandalay had turned
it down, so, for a while my comment looked kind of foolish.
Alas, Mandalay ended up accepting a sweetened offer from
MGM.
And now your quiz. One of the following is not an MGM or
Mandalay property in Las Vegas.
Luxor, Bellagio, Mirage, Treasure Island, Mandalay Bay,
Howard Johnson’s Motor Lodge, MGM Grand, Excalibur.
–California Governor Arnold Schwarzenegger appears to have
concluded a deal with the Indian “gaming” tribes for 15% of the
profits. The four bands are the Pala, Rumsey, United Auburn,
and Viejas. United Auburn sounds like an English Premier
League soccer club. Maybe their roots go back to Liverpool.
–Shares in Callaway Golf plummeted 25% Wednesday on news
of slower sales for its top line products. The company has vowed
to regain market share versus the likes of TalorMade by sharply
discounting prices. Unfortunately, nothing will help my game at
this point.
–A study by CapGemini Ernst & Young / Merrill Lynch shows
2.5 million in the U.S. and Canada have investment assets (ex-
home) of $1 million or more. 30,000 have $30 million+. I’ll try
and get these latter names so you all know who to hit up for gas
money.
–Switching gears, I drove by Lucent’s headquarters the other
day to do my semi-regular lawn checkup. Now some of you may
wonder why this has been such a big deal over the years. Well,
for starters it’s the last big open space in New Jersey…at least
sometimes it feels that way. Actually, come to think of it, we
could put a mile oval on it and run a NASCAR event.
Anyway, Lucent had just cut the grass before my drive by
inspection but the edging was spotty and I give the overall
appearance a C+. In other words, the lawn is still not flashing a
‘buy’ signal, though I grant you this has little to do with the
company’s true fundamentals.
–The Wall Street Journal reported that cookie sales were off 5%
in 2003, continuing a trend of the past 3 years. I’m eating far
fewer cookies than before, too, but I’ll tell you what I have
discovered as a substitute…Oscar Mayer Fully Cooked / Ready
to Serve Bacon. I mean to tell ya, I’m eating a ton of the stuff.
–My portfolio: Still roughly 80% cash, though with the rebound
in energy stocks this week it was one time where I wished I still
had my old holdings in the sector. Until I see the Oil Service
Index, OSX, break through 110, however, I won’t be sold these
issues have much further to run. Many of them also aren’t
cheap, even if earnings expectations are ratcheted up.
Foreign Affairs
Saudi Arabia: I commented extensively on this nation last week
(see archives link below) and I have little to add even after the
events of the past few days. It’s telling that you can’t trust the
Saudis with the truth even when they say they killed a top
terrorist. Al Qaeda has infiltrated all levels of government and
the security apparatus. Periods of relative calm will undoubtedly
be followed by more horrific acts of violence. In other words,
maintain perspective and don’t jump to conclusions, though for
the ruling family it’s put up or shut up time.
China / Taiwan / Hong Kong: Commenting on a U.S. Pentagon
report that suggested Taiwan could target the Three Gorges Dam
project in a possible preemptive strike to scare off a Chinese
attack on Taiwan, Chinese Lt. Gen. Liu Yuan, the son of former
President Liu Shaoqi, replied.
“Since Taipei cannot match Beijing’s ability to field offensive
systems, proponents of strikes against the mainland apparently
hope that merely presenting credible threats to China’s urban
population or high-value targets, such as the Three Gorges Dam,
will deter Chinese military coercion.
“Some people who say they support democracy, wave the flag of
human rights and shout about fighting terrorism are actually a
bunch of provocateurs, inciting nationalism and purposely and
shamelessly provoking revenge without regard to consequences.
“It is very clear they are whores, masquerading as gentlemen,
and are willing to go farther than Bin Laden.” [BBC News]
As for Hong Kong, less than two weeks remain before the July 1
showdown between pro-democracy advocates and the central
authority. Both sides, though, have issued less provocative
statements recently.
South / North Korea: From former Czech president Vaclav
Havel in a Washington Post op-ed.
“Now is the time for the democratic countries of the world – the
European Union, the United States, Japan, South Korea – to take
a common position. They must make it clear that they will not
offer concessions to a totalitarian dictator. They must state that
respect for basic human rights is an integral part of any future
discussions with Pyongyang. Decisiveness, perseverance and
negotiations from a position of strength are the only things that
Kim Jong il and those like him understand.”
Separately, North and South will no longer scream at each other
across the DMZ as the loudspeakers have gone silent. In the
battle of pop vs. martial music, I guess you have to call it a draw.
Meanwhile, six-party talks are slated to resume this week.
Iran: The U.N. finally censored Iran for its lack of cooperation in
revealing details on its nuclear program. But the harshly worded
resolution, put forward by Britain, France and Germany, failed to
levy economic sanctions. So the mullahs are probably partying
this weekend as they are one step closer to having the bomb.
Afghanistan: Despite President Hamid Karzai saying elections
will be held in September, I say this is highly unlikely. And as
my friend Dave and I agreed, time to ditch the outerwear, Mr.
Karzai.
Israel: As expected, Prime Minister Sharon received word he will
not have to face bribery charges, while on the security fence
issue (which I support), the Bush administration protested the
plans to build it 10 miles inside the West Bank, but in this
election year Israel can just ignore Washington and do what it
pleases.
Mexico: Depending on whom you believe, the country saw
1,250-2,500 kidnappings last year and now the lead official in
charge of a key investigation into some of the more high-profile
cases has been assassinated.
Colombia: In one of the biggest attacks in years, 34 farmers
were brutally killed by rebels.
Europe: Last weekend, the governing parties of Britain, France,
Germany and Italy suffered crushing defeats in elections for the
732-seat European parliament. In the case of France, President
Chirac’s party saw its worst showing in 27 years while
Germany’s Chancellor Schroeder had its worst in 60 years.
Britain’s Tony Blair also was handed a resounding defeat in local
elections there. But while turnout for the parliamentary vote
averaged just 45%, distressingly, turnout was only 26% among
the 10 new members of the European Union.
And in Brussels this week, the big battle over who will replace
European Commission President Romano Prodi has evolved into
a food fight between Tony Blair on one side and the firm of
Chirac & Schroeder on the other, though the participants did
reach an agreement on a new constitution.
But longer term, an issue is simmering below the surface that
threatens to result in more bad blood between the U.S. and
Europe, that being protectionism. Key Republicans, such as
Congressman Duncan Hunter, are trying to block the Europeans
from competing for weapons and other defense contracts.
Britain is stuck in the middle as it has the most liberal
procurement policy. All governments need to reduce costs while
acquiring the best product and open competition is the only way
to assure this. The Bush administration can not let special
interest congressmen and senators run foreign policy.
And then you have the case of Hunter and Congressman Henry
Hyde, who have suggested that Britain and Australia are soft on
terror and thus shouldn’t receive high tech assistance from the
U.S. Someone muzzle these guys before we lose our last
remaining friends.
Random Musings
–I agree with Senator John McCain that President Bush needs to
call on Americans to sacrifice, though McCain is for holding off
on tax cuts. I’m not, except for the dividend tax break that is the
biggest sop to the rich ever to come down the pike.
But in addressing the issue of the overstretched military, McCain
remains against the draft as a solution. So here’s my suggestion.
Keep the military and reserves as is, a volunteer force, and add to
them, but institute a draft for the National Guard which as John
Kerry correctly says should focus solely on homeland security.
–According to a survey for Business Week, 56% of senior
executives believe the situation in Iraq will have a greater impact
on the election than the economy.
–I do not focus much attention on the likes of Nicholas Berg and
Paul Johnson for the following reasons. At this point you don’t
need me to tell you what we’re up against, focusing on one
individual at the expense of others is wrong and, personally, if I
was kidnapped while traveling about as I do I wouldn’t want my
government negotiating with terrorists for my release.
–Secretary of Defense Rumsfeld admitted that a top terror
suspect was hidden from the International Red Cross, on his
order, during one of the organization’s prison inspections in
Iraq. Maj. Gen. Antonio Taguba had earlier said this was a
violation of international law. But what is even more astounding
is the fact this key prisoner was supposedly interrogated just
once in seven months. The military and CIA lost track of him.
–Journalist Al Hunt echoed a comment many made the past few
weeks, that being he never met a man more comfortable in his
own skin than Ronald Reagan. The flip side, as even the
Democrat’s Donna Brazile admitted long ago, is John Kerry.
–The 9/11 Fund has completed its mission. The average
victim’s family received compensation of $2.1 million.
–One consequence of the war in Sudan is the imminent
extinction of the northern white rhino. Only 25 are left and
they’ll be poached shortly. Here’s hoping they at least go down
charging.
—
God bless the men and women of our armed forces.
God bless America.
—
Gold closed at $395
Oil, $39.00
Returns for the week 6/14-6/18
Dow Jones +0.1% [10416]
S&P 500 -0.1% [1135]
S&P MidCap -0.1%
Russell 2000 +0.3%
Nasdaq -0.7% [1986]
Returns for the period 1/1/04-6/18/04
Dow Jones -0.4%
S&P 500 +2.1%
S&P MidCap +3.3%
Russell 2000 +2.5%
Nasdaq -0.8%
Bulls 55.7
Bears 17.5 [Source: Investors Intelligence / Chartcraft…yes,
huge swing from just 3 weeks earlier, 42.4 / 27.3. If you’re new
to the site, this is a contrarian indicator.]
Have a great week. Happy Father’s Day!
Brian Trumbore
