[Posted 7:00 AM ET]
Iraq
The following is from a New York Times editorial on Iraqi
Prime Minister Iyad Allawi’s avowed crackdown on the
insurgents that threaten his nation’s stability.
“In the short term, Dr. Allawi’s repressive reflexes may resonate
among Iraqis who grew up under Mr. Hussein and equate
authentic Iraqi leadership with strong-arm rule. But martial law
decrees cannot resolve the ethnic and religious differences that
threaten to tear Iraq apart even before American troops depart.
That will take delicate political bargaining in an atmosphere free
of governmental intimidation. Assuming emergency powers is
no way to nurture a democratic Iraq, which has been the
administration’s main rationale for the war since its earlier
allegations about active unconventional weapons programs fell
apart.”
This has to be one of the more ridiculous statements I’ve seen
since the war began. But it’s typical of those who just don’t get
it; that you cannot have democracy without security, that there is
no reconstruction without security, and that you cannot begin to
hope to transform the politics of the entire region unless there is
security in Iraq.
But there is also no doubt that when it comes to our presidential
election and the war issue it could be as much about casualties as
anything else. It was sickening to learn that a mortar-attack this
week killed 5 American soldiers and the death toll for the
conflict now stands at over 870. What follows is a sensitive
topic that no one wants to discuss, but I have to bring up an
uncomfortable fact of our political process. 1,000 U.S. war dead
is a figure the Bush administration will try to avoid at all costs,
even at the expense of good policy, though unless peace breaks
out across Iraq in the next few months it is a number that could
be reached by November, even if the new Iraqi security forces
shoulder an increasing share of the burden.
1,000 is important because for some it will further crystallize the
tragic consequences of our action and you can count on one thing
…the U.S. media won’t let the citizenry forget it.
Your heart goes out to the families of those killed and wounded,
but I hope this depressing figure that we are fast approaching
doesn’t prevent the U.S. from fulfilling its mission. For
example, I first wrote back on April 3 in this space of our
failure to finish the job in Fallujah and today you are seeing an
extensive number of pieces on the consequences of our pulling
out of that theater. But in a renewed effort to rout the
insurgents from this hell-hole, the U.S. could bear a heavy price.
Should Allawi offer to launch a devastating joint attack, would
the U.S. then say yes? You know the marines want to go in and
finish the job, but will their military leaders pressure Washington
to do so?
No doubt, Friday’s release of the Senate report on pre-war
intelligence is also devastating to the administration, but the
U.S. must stand tall. Politics, though, can be a powerful
countervailing force.
Wall Street
I got a kick out of the conclusion of two surveys of economists
this week where the consensus for full year growth in the U.S.
economy was 4.6 and 4.7 percent. No way. While I never set a
GDP target of my own I am more convinced than ever that my
2004 call of a significant slowdown with decelerating profits for
the second half was the right one, even though technically we are
beginning to see this with the reports from June and the second
quarter overall. And while I have to admit General Electric’s
optimistic tone on the state of the world’s economy for the rest of
’04 and into 2005 can’t be ignored, I choose instead to focus on
the desultory same-store sales for June among some of the
leading retailers, like Wal-Mart and Target, while some big
business software players, such as Veritas, Peoplesoft and Siebel
Systems, warned on Q2 results due to weakness in the U.S.
market. Throw in the fact that U.S. auto sales are so punk the
industry has to toss around $5,000 rebates just to entice folks into
the showroom and 4.6% growth certainly looks a bit rosy.
And then there is China, which no doubt is still cooking but will
tumble one of these days, specifically 2005. When China goes,
Asia and the rest of the world will follow. If you’re not
convinced of the dangers, just know that credit rating agency
S&P weighed in this week, labeling China’s banking system the
most vulnerable among the developing world.
Speaking of vulnerability, in his latest missive PIMCO’s Bill
Gross reiterates that the Federal Reserve’s recent interest rate
hike is “just the beginning of a journey as to who knows where
or when. Not only our housing market, but the financed-based
profits of American corporations are at risk. This in turn speaks
to the stock market, P/E ratios, and wealth / paper-based
prosperity, that depend on the continued low cost of excessive
debt taken on in recent years.”
Gross continues, “Because of these realities based on historically
high levels of debt issued during a period of superficially low
interest rates, the global economy is, indeed in my view, more
vulnerable than it has been for the past 25-30 years. The
economic and investment consequences appear to be as follows:
real short-term rates kept too low will create asset bubbles and
accelerating inflation. Real yields raised too high will pop
existing asset bubbles and lead to economic recession.”
[pimco.com]
I say we’ll come close to the second conclusion, but the Fed will
not be raising rates that high, once again to the detriment of
savers. Forces largely out of our control, a la China and possible
terror strikes close to home, will carry the day. In other words,
I’m content to stick with my own large position in cash.
Street Bytes
–Another sloppy week for stocks, as the Dow Jones lost 69
points to close at 10213, off 0.7%, while Nasdaq took it on the
chin to the tune of 3% and now sits back below 2000 at 1946.
The persistent earnings warnings didn’t help the tech sector in
particular.
–U.S. Treasury Yields
6-mo. 1.61% 2-yr. 2.51% 10-yr. 4.46% 30-yr. 5.21%
After the prior week’s big rally, the bond market finished
unchanged. The Fed doesn’t meet again for another four weeks
and in the meantime the inflation figures next week will be
critical. In the meantime, enjoy the latest decline in mortgage
rates. Buy a third house, if you can…but flip it quickly.
–Energy: Oil soared back above $40 (though closed a few
pennies below) thanks to further terrorism on the pipelines in
Iraq, the Yukos debacle, and Nigerian labor issues, as the market
ignored continued builds in inventory levels. But I’ll throw out
an item to keep a close eye on, that being recent tension (albeit of
the low-grade variety thus far) between Japan and China over
Japan’s search for natural gas off Okinawa. China questions
whether Japan is exploring in Chinese waters, the official border
in these parts being very murky. It’s a harbinger of things to
come. And lastly, yes, the stubbornly high oil prices we’ve seen
this year clearly had an impact on consumer spending, probably
more of one than even I anticipated because sticker shock at the
pump here in New Jersey was late in coming compared to most
of the rest of the nation.
–Related to the above, a report by Cambridge Energy Research
Associates predicts that North America will experience crippling
natural gas prices unless immediate action is taken to address the
supply / demand equation. Many industrial companies in
America, for example, are being forced out of the country, with
more to follow if nat gas (currently $6.15) settles in the $6.50-$8
range. One solution is liquefied natural gas (LNG) but the U.S.
must get cracking on approving the construction of LNG
terminals, with only one currently under contract. [Financial
Times]
–As of this writing, Russian energy giant Yukos’ assets are still
frozen though the government has not raided them for the $billions
in back taxes officials claim Yukos owes. Last weekend, police
stormed the offices of the company and Yukos was notified by a
group of creditors that it was in default on $1 billion in debt.
Then at mid-week there were rumors former CEO Mikhail
Khodorkovsky was willing to sell his 44% stake in the company
he founded in order to save it, but this could easily have been a
ruse put out by the Kremlin to make it appear they sought a
compromise. Bottom line, President Vladimir Putin wants to kill
off Khodorkovsky’s political ambitions once and for all.
–In the small town where my office is, there are 23 homes on the
market at $3.5 million and up. Bubble bubble.
–The Organization for Economic Cooperation and Development
(OECD) has concluded that in the United States, higher wealth is
due not to higher productivity but instead to working more hours
per capita. Specifically, for the period 1970-2002, hours worked
rose 20%. Conversely, the same figure fell 17% in Japan and
24% in France over that time frame.
–Microsoft CEO Steve Ballmer issued one of his regular e-mails
to the troops, a call to arms, and announced the company needs
to cut costs $1 billion, while expressing concern over the
stagnant share price. Ballmer said this was “no time for wasted
motion,” referring, I’m assuming, to surfing for porn. Ballmer
also cited rising healthcare costs, up 54% per employee for the
four years ending 7/05.
–Inflation Update: Mark R. alleges that the cost of a bushel of
blue crabs from the Chesapeake Bay has skyrocketed from $50
to $175 over the past year or so.
–Former Enron CEO Ken Lay was finally indicted, though I
admit this may not be a slam dunk case; certainly not as much as
Skilling’s should be, though even here Skilling doesn’t have an
e-mail trail. But I have to tell you, the media saturation on some
stories, such as this one, is so great I have zero to add.
–As opposed to the Dick Grasso saga, big in New York, but not
as much so nationwide. This week a Bloomberg News piece
rehashed some of the evidence in the case against the former Big
Board chairman, but it bears repeating, particularly details on his
charity giving …my pet peeve if you’re new to the site. Some
New York Stock Exchange members are ticked, according to
Philip Boroff’s article, as it becomes clearer that Grasso was
doling out $s from NYSE funds to his favorite charities without
Exchange members’ knowledge. For example, he gave $125,000
to the National Italian American Foundation, of which he’s vice-
chairman. And he gave to charities where compensation
committee chairman, and co-defendant, Ken Langone was on the
board. Ah yes, it’s easy to be a do-gooder with other people’s
money.
–In the trial of top executives at cable giant Adelphia
Communications, founder John Rigas and his son were convicted
of conspiracy, bank fraud and securities fraud. All they did was
hide $2.3 billion, with a ‘b’, in debt while looting the coffers for
all kinds of goodies, including in the case of now 79-year-old
John Rigas, $40,000 for a masseuse. I’m assuming, however,
both will have free cable in prison.
–Knight Trading will cough up $79 million in fines and
restitution for the despicable tactic of front-running, placing its
orders ahead of the clients’.
–I always glance at the insider buying / selling tables, hoping I
don’t see an executive from a company whose shares I
personally own selling out, and the other day I couldn’t help but
see Oracle’s Larry Ellison all over the list, selling 1 million
shares here, 1 million there, another million, and another…and
another. Roughly $11.7 million worth per shot. Hey, that’s
America, I guess, but it doesn’t mean the rest of us schleps can’t
daydream now and then…. “Oh, if only I had one of those lots.”
–Yahoo shares fell sharply after the company only met
expectations for the quarter rather than exceeding them, and then
when it guided for the rest of the year it was like “big deal” to the
Street. However, while the shares remain exceedingly
overvalued, one thing I’ve learned when it comes to the holy
trinity of eBay, Amazon and Yahoo, it takes a strong constitution
to short ‘em.
–Global semiconductor sales were up 37% in May, year over
year; up 2.1% over April. But this is history, sports fans; the
market cares about the future.
–Morgan Stanley goes to trial over an EEOC accusation of
sexual discrimination as a group of female professionals claim
they were stiffed when it came to bonuses and promotions.
–Great piece in the Los Angeles Times (I apologize I forgot the
reporter’s name) on the plight of farmer Guillermo Gonzalez,
who markets foie gras at his central California farm, one of only
3 in America to do so. The problem is the animal rights activists
are upset over his force-feeding of ducks and geese in order to
fatten the suckers up so us gourmands can salivate over their
liver. Anyway, the California legislature may ban force-feeding,
but at least one statesman is fighting to grant Gonzalez a lengthy
grace period so he can segue into a different line of farming.
But I say…if you ban force-feeding of ducks and geese, then
what about the heroic Takeru Kobayashi, the now 4-time
Nathan’s Coney Island Hot Dog champ who ingested 53 ½
wieners in 12 minutes this past Fourth of July? [Kudos to ESPN,
by the way, for its great coverage of this vitally important
spectacle.]
Foreign Affairs
China / Taiwan: The rhetoric heated up between Washington and
Beijing as National Security Advisor Condoleezza Rice paid a
visit this week and was upbraided by China’s leadership for U.S.
arms assistance to Taiwan, including anti-missile defense
systems. Former president Jiang Zemin, still in control of the
military and in a real power struggle with his successor, Hu
Jintao, warned that China would respond if the U.S. came to
Taiwan’s aid in the event the island declared independence (a
policy the Bush administration does not support).
“The U.S. recent series of actions, especially plans to sell arms to
Taiwan, has made Chinese people feel seriously concerned and
dissatisfied,” Jiang was quoted as saying.
“The Chinese people long for peace and do not want to go to
war. We will insist on the principles of peaceful unification and
‘one country, two systems,’ but there is no way that we will
tolerate independence for Taiwan.” [South China Morning Post]
For her part, Dr. Rice reiterated that under the Taiwan Relations
Act, Washington is obligated to defend Taiwan if attacked.
Meanwhile, a doctor who exposed the Chinese government’s
initial SARS cover-up is in custody, undergoing “study sessions”
(brain-washing).
As for Taiwan itself, the island had to deal with a devastating
tropical storm, Mindulle, that claimed countless victims and
caused $millions in damage. But going back to the recent
presidential election and the assassination attempt on President
Chen Shui-bian and his vice president, reports are that the
security services may have ignored prior warnings of the attempt
and that the shooter, still at large, was trying to elicit sympathy
for Chen at the polls.
But back to the mainland, Ted Fishman wrote an extensive piece
for the Sunday Times magazine, mostly dealing with the
economy, though at one point he writes that “Uppity
Taiwan…may push China to war.” Excuse me, Mr. Fishman,
but which is the democracy that also has 500 missiles pointed at
it?
Israel: International Atomic Energy Agency chief Mohamed
ElBaradei held talks on nuclear weapons with senior Israeli
officials, including Prime Minister Sharon, and declared himself
satisfied that progress can be made in establishing a nuke-free
zone in the Middle East at some point. Israel, of course,
nonetheless refuses to change its official policy of “ambiguity”
regarding its own program that experts peg at anywhere from
100-200 warheads. Meanwhile, there are growing concerns
right-wing extremists in Israel could take out Sharon or others in
his cabinet due to the government’s planned withdrawal from
Gaza and the dismantling of Israeli settlements there. Yitzhak
Rabin was assassinated by an extremist in 1995 for similar
actions.
As for the ruling by the International Court of Justice in The
Hague that Israel’s security fence is illegal and should be
removed, we’ll see what the reaction is in the world community,
and the UN specifically, over the coming weeks. Personally,
I’ve always supported the barrier, but I’ve had problems with its
actual path at times.
Russia: PBS’ “Wide Angle” (the summer edition of “Frontline”)
had a terrific, and disturbing, piece on the hazards of being a
journalist in Russia, where over 100 have been murdered since
1986. Then late Friday, Forbes magazine editor Paul Klebnikov
was murdered in Moscow. Klebnikov oversaw the recent
publication of a list of Russia’s wealthiest people for Forbes’
Russian edition.
The ‘Wide Angle’ story also gave vivid examples of the pitiful
court system here and a recent commentary from the Moscow
Times addressed that issue, though in this case it was in
reference to the current upheaval in Russia’s banking sector.
“In a country where there is no functioning law enforcement
system there can be no proper banking system.”
Regarding the banks, the Kremlin denied there is a crisis, even
though a top 25 institution, Guta, suspended operations after a
run on it. In response, the 4th-largest imposed a penalty on
withdrawals. No word on the fate of those reporters attempting to
do objective analysis.
Afghanistan: Writing of NATO’s abysmal failure here, the
Washington Post’s Jackson Diehl noted that with just 8,400
troops in Afghanistan, the force is 1/5th the size committed to
Kosovo in 1999. As an aside, Diehl adds that of the 270,000
soldiers in Germany’s army, commanders tell him only 10,000
can be deployed at any one time.
North Korea: And now for something completely different, Leo
Lewis of the London Times interviewed Kim Jong il’s long-time
sushi chef and this fellow spoke of Kim’s love of fugu, the
Japanese delicacy that if not prepared properly can be fatal. But
while expressing his admiration and respect for the dictator, the
chef also cited examples of Kim’s extreme temper, not exactly
reassuring to the rest of us. Someone needs to slip him some bad
fugu, quick.
Japan: Major parliamentary elections here this week as Prime
Minister Koizumi’s approval rating is only 35% despite the
recovering economy. His term ends in 2006 but a disastrous
showing by his party could lead to an earlier exit.
Britain: According to the Financial Times, a government report
to be released on July 14 concludes that “Britain’s spies were
correct to say that Saddam Hussein’s regime sought to buy
uranium from Niger,” one of the prime reasons given by both the
U.S. and U.K. for going to war with Iraq, though the same report
will say the claim that Saddam could deploy chemical weapons
in 45 minutes was not supported by the available intelligence.
Meanwhile, Prime Minister Tony Blair appeared before a House
of Commons Committee and was asked if he would apologize
for going to war for the wrong reasons, to which Blair replied: “It
has gotten rid of Saddam Hussein and he was a tyrant. I do not
believe there was not a threat in relation to weapons of mass
destruction,” adding, “I have to accept the fact that we have not
found them (WMD), but we have found very clear evidence of
intent and desire. Whether they were hidden, removed or
destroyed, he was in clear breach of UN resolutions.” [BBC
News]
Venezuela: According to the latest polls, it appears as if
President Chavez will beat back a recall vote set for August 15.
The bar for ouster has been set too high for the opposition as they
don’t just need a majority, but at least 3.8 million votes total.
Mexico: President Vicente Fox’s chief of staff resigned,
supposedly over the role Fox’s wife is playing in the decision-
making process. Fox, whose term expires in 2006, denies his
wife is angling to succeed him as widely rumored. Separately,
U.S. officials were furious over an incident at a marine’s funeral
in Mexico. The soldier was killed in Iraq and was being buried
in Mexico when Mexican soldiers interrupted the service because
a Marine Guard in attendance was carrying ceremonial rifles,
foreign soldiers not being allowed to bear arms in the country.
The action on the part of the Mexicans was totally uncalled for.
Cuba: Americans with families in Cuba can no longer visit once
a year. Now they have to wait three under a new Bush
administration policy. Talk about idiotic. The whole sanctions
regime has been a failure.
Indonesia: It appears there will be a run-off for the presidency
between a former army officer, Susilo Bambang Yudhoyono
(who thankfully goes by the moniker SBY) and President
Megawati. SBY is favored by the business community and his
election could be a first step in stemming the years-long flight of
foreign capital out of the country.
Random Musings
–I imagine I’m but one of a handful of conservatives who
trekked up to New Hampshire this past winter just to observe the
Democratic presidential candidates. I had the opportunity to see
both John Kerry and John Edwards give their first post-Iowa
speeches and I remarked of Edwards at the time that he was
“very impressive” but also “slick.” [WIR 1/24/04] Since then I
have seen nothing to make me want to alter my opinion. He does
have a way of connecting with a crowd, no doubt, but the man
troubles me.
On the issue of experience, though, it’s pretty tough for me to
slam Edwards’s lack of it when it was I who blasted then
candidate George W. Bush in the fall of 1999 for his not
knowing the names of some major foreign leaders, and I can’t
help but agree with the Wall Street Journal’s Al Hunt that when
matching Edwards with Dick Cheney, one must weigh both
experience and judgment. Otherwise, I see no reason to harp on
Kerry’s veep selection. As Kenneth T. Walsh wrote in U.S.
News, this election is really a referendum on George Bush more
than anything else.
–The costs for the wars in both Iraq and Afghanistan will exceed
the administration’s estimates by $tens of billions, if not
hundreds, but the White House will do all it can to keep this from
the public until after November 2. I wrote a few weeks ago of
how the Pentagon budget needs to be increased further for the
simple fact that you can’t call for adding troops on one hand and
cut back on equipment with the other in a time of war. One
other soaring cost that is coming to light is the fact that 1 in 5
returning from Iraq is suffering from posttraumatic stress
syndrome so benefits costs will end up being far higher than
expected here as well.
–General Richard Codey told Congress this week that
“absolutely” the U.S. military is stretched thin. Codey deserves
another star just for his candor, often lacking in the halls of the
Pentagon.
–The head of the UN AIDS program is warning of an expanding
epidemic in Asia, though the good news is it’s finally stabilizing
in Africa.
–A National Endowment for the Arts study on reading reveals
that the pace at which the nation is losing readers, especially the
young, is quickening. But is this important? Some say it isn’t in
an age where there are so many other forms of information. I
would counter that half this other stuff is porn-related.
–Britain’s House of Lords beat back a bid to ban the smacking
of children, though it did approve legislation that legalizes “mild
smacking.” Lots of wiggle room for the parents, in other words.
Take note, kids.
–People…can’t we all just get along? At last word the Olympic
torch was to have gone through Greek and Turkish Cyprus, but
one problem; only Turkey recognizes Turkish Cyprus so the IOC
won’t take the candle to the Turks’ home.
–New Jersey Governor Jim McGreevey is enmeshed in a
corruption scandal in which a leading fundraiser was indicted for
attempting to extract a large campaign donation in exchange for
help with a land sale. It’s ugly and going to get worse. Some of
us are giddy as a schoolboy.
–Only half of America’s doctors and surgeons wash their hands
like they should between seeing patients, let alone between
surgeries. Bring your own wipes to give to your doctor before
you let him or her touch you.
–The Dutch painter Jan Vermeer, who toiled away in the 17th
century, had one of his rare works sold at auction by Sotheby’s
for $30 million this week. That’s $30 million for a little 10- by
8-inch canvas. Unfortunately, it’s a bit late for Vermeer to enjoy
the fruits of his labor.
—
Hang in there, men and women of the U.S. armed forces. You’re
in our thoughts and prayers.
God bless America.
—
Gold closed at $407…highest in 3 months.
Oil, $39.96
Returns for the week 7/5-7/9
Dow Jones -0.7% [10213]
S&P 500 -1.1% [1112]
S&P MidCap -1.8%
Russell 2000 -3.6%
Nasdaq -3.0% [1946]
Returns for the period 1/1/04-7/9/04
Dow Jones -2.3%
S&P 500 +0.1%
S&P MidCap +2.1%
Russell 2000 +1.2%
Nasdaq -2.9%
Bulls 56.3
Bears 17.7 [Source: Chartcraft / Investors Intelligence]
Note: While the migration to the new server was fairly smooth, I
discovered we did have some problems in receiving e-mails. In
other words, if I didn’t respond to an inquiry within 24 hours,
unfortunately I never got your note. It looks like we’re back to
normal now, however.
Have a great week. I appreciate your support.
Brian Trumbore
