[Posted 7:00 AM ET]
Iraq
Let’s start with the good news, and it was significant. The Paris
Club of 19 creditor governments forgave 80% of Iraq’s debt ($33
billion), thus making Iraq eligible for IMF and World Bank aid, a
huge step forward. The agreement was also significant for the
reason that it took cooperation between the U.S., Russia,
Germany and France to pull it off. And the international
community is beginning to say all the right things when it comes
to the election schedule. Even the Arab League is now on board,
except it is looking for U.S. troops to exit Iraq by 2006.
But meeting the election deadline of January 30 is going to be a
monumental task. For starters, despite coalition successes in
rounding up or killing insurgents as well as finding their
humongous weapons caches, clearly more troops are needed, up
to 50,000 according to Senator John McCain and military leaders
such as retired General Barry McCaffrey. Appearing on the
“Today Show” Friday, McCaffrey said the Army and Marines
are “pressed to the breaking point.” Anyone following the
situation, and knowing the numbers, has to believe this is true yet
for well over a year the White House has done little.
Further compounding the situation as we countdown to the
election is the fact many key Sunni and, surprisingly, Kurd
factions are threatening a boycott, while even some influential
Shiites are making waves about pushing back the date by up to
six months because of the security concerns. For his part,
Interim Prime Minister Allawi is doing the best he can and the
Bush administration remains an admirer, but it is also losing
confidence Allawi will remain a player in a post-January 30
world. Lastly, you have the fact Iranian hit squads are now
targeting both religious and political figures, on top of all the
other terrorist outfits doing the same. Which brings us to.….
Iran
What you have seen through the whole negotiating process, as it
relates to Iran’s suspected nuclear weapons program, is the price
the Bush administration pays for its lack of credibility when it
comes to making pronouncements about the threats posed by
rogue regimes. Because of problems at the CIA and Defense
Department, for example, we are “making policy on intelligence
that is not solid,” as journalist Bob Woodward put it on “This
Week.”
Iran had reached an agreement with Britain, France and Germany
to suspend its uranium enrichment program as of this past
Monday and immediately Tehran sought to rewrite the rules of
the game. The European Union refused to allow Iran to use
some small centrifuges that could be employed to enrich uranium
but the agreement did permit Iran to produce plutonium as well
as use of a heavy water reactor that is also handy in the weapons
process. The U.S. was livid when it learned of these exclusions.
Meanwhile, the International Atomic Energy Agency insists all
weapons activity has ceased as it applied its seals to equipment it
knows of, but as Senator McCain surmised, it’s still probably a
“matter of months, not years” before Iran has the bomb.
Ukraine
What a scene this week in the capital, Kiev, as hundreds of
thousands of supporters of Viktor Yuschenko have turned out to
protest his defeat in a rigged vote for president; Prime Minister
Viktor Yanukovych emerging victorious according to the
election commission by a 49.4 to 46.7 percent margin.
Independent polling, however, showed Yuschenko winning
easily.
Senator Richard Lugar, in Ukraine to monitor last Sunday’s vote,
said “It is now apparent that a concerted and forceful program of
election-day fraud…was enacted with either the leadership or
cooperation of governmental authorities.” Secretary of State
Colin Powell called the results illegitimate, while all manner of
European Union officials concurred.
But Russian President Vladimir Putin, in seeking to recreate the
old Soviet Empire, accepted the result immediately, as did his
toady, Belarus President Lukashenko. Putin, in response to E.U.
and U.S. claims of fraud, said Ukraine is “a state of law. It does
not need to be lectured.”
By midweek Yuschenko had sworn himself in, telling parliament
the country was “on the brink of civil conflict,” and then the
nation’s Supreme Court voided the official vote tally until it rules
on Monday, a huge victory for Yuschenko. The two candidates
themselves met briefly and parliament is debating the issue as I
go to post this morning. Meanwhile, it’s been stirring watching
police, soldiers and media openly support Yuschenko in
courageous acts of defiance. But at the same time violence is
still a distinct possibility.
As for the relationship between Putin and the West, an editorial
in the Washington Post had it right. It’s time for President Bush
to “publicly challenge (Putin) on his neo-imperialism.”
Finally, should the forces of good prevail in Ukraine it would
deal a devastating blow to Putin’s dreams. I have long noted the
next target after Ukraine was to be Georgia, where this week
President Saakashvili said he was not hopeful relations with
Russia will improve amidst rumors Russian agents are targeting
Georgia’s electricity grid.
More Foreign Affairs
Israel: Jailed Palestinian leader Marwan Barghouti has decided
not to run for president and has instead endorsed the candidate of
Fatah’s central committee, Mahmoud Abbas.
China: I’m heading to Latin America in about three weeks and
I’ll be curious to see what kind of buzz I can pick up concerning
China’s burgeoning contacts in the region, particularly on the
energy front.
But on the issue of Taiwan, I was reading a piece in Barron’s by
Jim McTague who quotes a China expert, Nicholas Lardy of the
Washington, D.C.-based Institute for International Economics.
Boy, I couldn’t disagree more with the following statements by
Mr. Lardy.
“A rational economic calculation would show the mainland
would pay a very high price for military action across the
Straits.” No it wouldn’t.
“In the event of military conflict, (the electronic components)
industry (in China) is going to shut down.” No it won’t. As I
continue to believe, within a few months, if not weeks, it would
be business as usual following a Chinese attack on Taiwan.
North Korea: The CIA contends Pyongyang is ready to test-fire a
long-range ballistic missile capable of hitting parts of the U.S.
No one should be in the least bit surprised if they do.
Netherlands: Some of the country’s leading politicians are in
hiding as a result of assassination threats issued in the wake of
the killing of Theo van Gogh. These are troubling times in
Europe.
Britain: The government released details of an al Qaeda plot
involving Canary Wharf and Heathrow Airport that was foiled
last spring, but opposition leaders cried that Prime Minister Tony
Blair was simply being a scare monger ahead of next year’s
elections. Separately, Britain is moving toward a system of
national identity cards.
Turkey: The military has made an important decision in
recognizing that terrorism, not its neighbors, poses the main
threat to the nation’s security. Turkey, which is set to take over
the NATO peacekeeping mission in Afghanistan this coming
February, can now be expected to broaden its involvement in
other NATO-led / international assignments.
Burma: Hopefully some good news as the military government
announced it would release more than 5,000 political prisoners,
including democracy advocate Aung San Suu Kyi over the
coming weeks.
Wall Street
The U.S. dollar continued to occupy center stage, setting a new
all-time low vs. the euro on Friday while continuing a seven-
week slide against most other major currencies as well. The
lower dollar is supposed to help shrink the trade and current
account deficits by making U.S. goods more attractive, for one,
but it isn’t due to the fact we are importing gobs of oil at far
higher than expected prices, while Europe’s own economy isn’t
doing well and thus Europeans aren’t buying as much of our
goods as they otherwise might. Morgan Stanley’s chief
economist Stephen Roach had his own take in an op-ed for the
New York Times on Friday.
“Consumer demand in the United States grew at an average of
3.9 percent (in real terms) from 1995 to 2003, nearly double the
2.2 percent average elsewhere in the industrial world.
“Meanwhile, Americans fail to save enough – whereas the rest of
the world saves too much. American consumers have borrowed
against the future by squandering their savings. The personal
savings rate was just 0.2 percent of disposable personal income
in September – down from 7.7 percent as recently as 1992.
Moreover, large federal deficits mean the government’s savings
rate is negative.”
Roach sees the need for a carefully managed “but significant
depreciation of the dollar over the next several years.”
“First, there would be a gradual rise in interest rates in the United
States – compensating foreign investors for financing the biggest
debtor in the world. That would suppress growth in those sectors
of the American economy that are most sensitive to interest rates,
like housing….The result: a higher domestic savings rate and a
reduced need for foreign capital…
“Second, when the dollar falls, other currencies rise….
“Third, as the currencies of Asia and Europe strengthen, their
exports will become less attractive to American consumers.
This will force Asia and Europe to work to stimulate domestic
demand to compensate – resulting in a reduction of both excess
savings and current-account surpluses….
“Fourth, a weaker dollar might defuse global trade tensions.
Dollar depreciation will support American exports, and higher
interest rates should slow domestic demand and reduce imports.
That means the United States trade deficit should narrow –
tempering protectionist risks….
“If the world can manage the dollar’s decline wisely, there is
more reason for hope than despair.”
Sure, this looks good on paper but what gets me is the fact Mr.
Roach, as I noted the other week, had been a well-known bear
yet has now turned sanguine even as the situation, in my opinion,
has become far more trying. Maybe Roach is worried about his
job, ‘bears’ not normally being welcome at the major brokerage
houses. It hurts business, you know.
I do believe there is a renewed sense of urgency on the deficit
front, though, and we have Federal Reserve Chairman Alan
Greenspan and his recent pronouncements to thank for that. But
any gains made on the budget, like the just passed spending bill
which sharply reduces the rate of growth for discretionary
programs, could yet be overwhelmed by the costs for the war on
terrorism and homeland security, while the current account
deficit is subject to other, often disparate market factors.
One potential positive, however, is sharply falling energy prices.
I still believe in the long-term case for oil, mind you, but over the
next 6-12 months I think we will catch a break. The inventory
picture just isn’t that bad, despite all the clamoring week to
week. It’s true that the U.S. won’t be able to rely on Europe for
any heating oil and natural gas in a pinch this winter as they are
safeguarding their own supplies, but otherwise we’re alright. It’s
the hedge funds and speculators controlling the action these days
and eventually they’ll get burned as they always do at the top
when it comes to commodities. [Unless you’re smart enough to
go ‘short’ then.]
Finally, it was a light week on the economic front with data on
home sales showing a slight decline and durable goods for
October falling as well. Otherwise it’s all about retail over the
next four weeks and I maintain it will be a strong shopping
season, above expectations, before we all collapse out of sheer
exhaustion early next year, ripping up our credit cards in disgust.
Which is part of my global recession scenario sometime in ’05,
as you know by now. I’ll give you the week off on the rest of the
tale, except for one thing. I’m amazed how the potential
negatives from some of the global hot spots I discuss in this
space on a weekly basis are now simply ignored. Not holding
elections in Iraq on time would be a huge disaster for President
Bush, for example, or North Korea test-firing a missile or actual
nuke. Or chaos in Ukraine. Or an intransigent Iran. Or a
Chinese attack on Taiwan. Or a large-scale terror attack on any
major city in the world.
Street Bytes
–The major averages resumed their winning ways with the Dow
Jones advancing 0.6% to 10522, the S&P 500 picking up 1% to
1182 and Nasdaq gaining 1.5% to 2101. Bullish reports on
Apple Computer helped tech, as did a surge in some Internet-
related issues. [No doubt the big boys on the Web should do
super this holiday season.] And energy issues hit new highs on
the back of a rebound in crude and what are perceived to be fair
valuations based on potential growth in earnings.
But remember one thing. For the S&P overall, during the past 20
years the average quarterly increase in earnings has been 7%. In
the third quarter it came in around 17%, still the lowest rate in
five. The point being we are in the midst of a decelerating
earnings trend back to the mean. Stocks may not be overvalued
compared to the Bubble, but they aren’t necessarily cheap.
–U.S. Treasury Yields
6-mo. 2.38% 2-yr. 3.02% 10-yr. 4.24% 30-yr. 4.89%
Bonds had been rallying a bit early in the week but then rose on
Friday following a story that China was selling U.S. Treasuries.
The central bank denied it, but everyone knows eventually this
will be the case.
–Yukos’ remaining senior officers have fled Russia for fear of
being arrested, or worse. The CFO said “I am not sacrificing my
life for (Russia’s) political purposes.” Shares in the energy giant
traded at $62 (U.S.) just last April and hit $4.25 on Wednesday.
What a tragedy…and what a deal for the soon-to-be world’s
largest energy company, Gazprom, a Kremlin ally. Gazprom
could be an acquirer of at least some of Yukos’ assets and as I’ve
long written, concentration of more resources in the hands of
Gazprom bodes ill for Europe in particular.
–AIG will pay fines and restitution of $126 million for creating
insurance policies that allowed companies to manipulate
earnings, while AIG Chairman Hank Greenberg is being
investigated for possible misdeeds involving an acquisition of his
in 2001, with the allegation being Greenberg attempted to
manipulate the share price to save AIG money on the deal. Just
another incredible act of hubris.
–Thanks to surging demand for copper, Chile, the world’s
largest supplier, saw its economy grow at a 6.8% clip in the third
quarter.
–Trading costs, undisclosed in a mutual fund prospectus,
average about 0.48% for an actively managed mutual fund vs.
0.064% for index funds. [Professor Edward O’Neal / Wake
Forest University]
–Shares in Apple Computer have soared over the past 11 months
from $19 to $65 on the strength of booming sales for its iPod
product. Apple is expecting to sell 10 million units this year
alone.
–CD music sales have been rebounding a bit, after a 30% decline
in the past three years, thanks to new releases from the likes of
Eminem, U2 (great) and Shania Twain (a Christmas present to
myself).
–Oracle said 60% tendered their PeopleSoft shares but the
latter’s board continues to fight Oracle’s merger bid. One
company taking advantage of this mess is SAP, the German
business-software giant that is blowing away its competition and
now works with 49 of the 50 largest companies in the world.
–The British, other Europeans and Japanese interests are among
those buying up New York City real estate, partially due to the
weak dollar but, more importantly, right at the top of the market,
mused the editor. [Crain’s New York Business]
–Krispy Kreme announced that for the first time since it went
public same-store sales declined last quarter, a pitiful one overall
for the doughnut maker as it still faces an SEC investigation of
its accounting methods. The company says it will regain its old
momentum on the strength of new products, like a low-cal
doughnut. May I suggest they just offer poker chips, instead.
–Courtesy of the New York Times’ Gretchen Morgenson, here is
a different take on the Kmart / Sears merger. Analyst Carol
Levenson speculates “the merger was a hurried defensive move
by (Eddie) Lampert, who owns major stakes in both companies.
Why else…would a company unveil such a bombshell, unsettling
workers, customers and suppliers just before the Christmas
selling season began?” [Hadn’t thought of that angle.]
–PBS’ “Frontline” did a story on the credit card industry and it
obtained a rare interview with a consultant who has had more to
do with shaping the business than anyone else, the reclusive
Andrew Kahr. Back in the 1970s, it was Kahr who told his client
that by reducing the minimum monthly payment for a
cardholder, in this case from 5% to 2%, you increase the earnings
on the balance. Today, 35 million pay just the minimum each
month. [55 million pay it off in full.]
In the 80s, Kahr came up with another revolutionary innovation,
recommending that credit card companies employ a 0% teaser
rate for a few months as a way of hooking new customers. In
both instances the entire industry adopted his proposals. It seems
so simple in hindsight, doesn’t it? But someone always has to be
first with the idea.
–CSFB’s Frank Quattrone was permanently barred from
working in the securities industry.
–Inflation Update: Mark R. reports that the cost to dock his boat
this winter has soared 40%.
–Campbell Soup Co. is looking to reinvigorate its Pepperidge
Farm unit and has hired a new advertising agency to come up
with a campaign to juice sales at its Gold Fish snack line. So I’ll
save Campbell’s some money and give them my idea.
You have this guy on a raft out in the ocean and he’s munching
on Gold Fish. Suddenly, a shark rams it and both man and Gold
Fish go flying into the water. The shark, circling, then eyes the
alternatives before opting to go for the crackers resembling
chum.
–Follow-up: The cow that initially tested positive for mad cow
disease was, upon further inspection, shown to be clean, meaning
it could still be served in one form or another, I imagine. One
person who celebrated the good news was world famous athlete
Takeru Kobayashi who promptly scarfed down 50 burgers.
–Meanwhile, the USDA says there will not be a net surplus in
farming next year; important because in the past this has helped
offset our deficit in manufacturing.
–I stopped by Lucent’s headquarters the other day to check out
the museum they have there. I only live about a ½-mile from the
place yet haven’t done this in decades, if you can believe that.
Some day I’ll enlist Dr. Bortrum’s help in putting out a piece on
the accomplishments of its research staff, going back to the Bell
Labs days when Bortrum was a “distinguished member” of same,
as one of his plaques reads. But one thing I noticed this time is
the fact Ball Labs / Lucent have generated over 31,000 patents
since 1925, or more than one a day. By contrast, the New York
Times’ Thomas Friedman is fond of saying that the entire Middle
East had about 250 patents in one year, if I recall correctly.
[For those of you following my exclusive “Lucent Lawn
Indicator,” it was in relatively good shape as we head into winter.
More than a little slack on the leaf collection, though.]
–My portfolio: I’m still roughly 30% equities, 70% cash. I
added a little to my carbon fiber play.
Random Musings
–The Pentagon is in a position where it is going to have to cut
costs, despite the manpower shortages some of us feel exists
today, while as Defense News editorializes, officials must also
change the way they do business:
“They must invest in the technologies that best help the United
States reduce forces.
“They must open their eyes to the global marketplace, looking
not just to traditional suppliers, but also to international and
commercial systems….
“Finally, the Pentagon’s leaders must rebuild bridges with
America’s traditional friends. If the United States is going to
have fewer troops, it will have to be able to turn to willing allies
for help – even if its forces are the best equipped in the world.
Because sometimes, as in Iraq today, it isn’t how much
technology one has at his disposal, but rather how many boots
one has on the ground.”
–I can’t imagine anyone not being a fan of the Red Cross, but
the International Committee of this esteemed organization has
been comparing the killing of CARE executive Margaret Hassan
to that of insurgents. Absurd.
–There has been a large, unexpected decline in black enrollment
at many of the nation’s universities, as much as 20-30% in just
one year. One possible cause is the general shift from needs-
based to merit-based aid packages. Also, you have the issue of
last year’s Supreme Court decision outlawing the University of
Michigan’s point system that gave minority students an
advantage. [Other states, such as Texas, retain their quota
systems.]
–The New York Daily News had a cover story on the problems
at Columbia University, where “dozens of academics are said to
be promoting an I-hate-Israel agenda, embracing the ugliest of
Arab propaganda….Students face ridicule and threats for
defending the right of Israel to survive.”
–Senator John McCain basically said on “Meet the Press” that he
will be a candidate for president in 2008.
–New Jersey Senator Jon Corzine will be formally announcing
his candidacy for governor next week.
–Secretary of Defense Donald Rumsfeld denied he led the
lobbying effort against intelligence reform legislation that
collapsed last weekend in Congress. I don’t believe him.
–In case you needed further proof that we live in a truly sick
world, there is the Internet game that lets players be Lee Harvey
Oswald. As Senator Joe Lieberman said on the Imus program,
it’s part of the overall “tone of incivility” that now infects our
entire culture. And then you have the awful case of the
Wisconsin man who killed six fellow deer hunters after a dispute
over who got to occupy a tree stand.
–Frankly, I never watched Dan Rather and couldn’t give a damn
about a man who is one of the more despicable people on the
planet. What I do care about is the retirement of NBC’s Tom
Brokaw, a class act whose contributions go beyond defining the
“Greatest Generation.”
–In finalizing a $388 billion spending bill covering 13
departments, Congress was able to limit discretionary spending
to a 1% increase. Contained in the legislation were nonetheless
more than a few items of pure pork, such as the $25,000 for the
study of mariachi music in Clark County, Nevada. And one high-
profile victim of the budget squeeze was a reduction in the
amount for the “Millennium Challenge” from $2.5 billion to $1.5
billion, an item President Bush has always touted as part of his
compassionate agenda, particularly for Africa.
However, I have no problem with $350,000 for music education
programs at the Rock and Roll Hall of Fame. As my friend and
fellow music fanatic Dan L. wrote, “Rock and roll is a religion
and a unifier of all people.” [No, seriously. We both believe
this.]
–Unbelievable series of storms in Austria and Slovakia recently,
with wind gusts over 90 mph, including one clocked at 108 in
Slovakia, the highest ever recorded there. It’s hard to imagine
but half the forests in the Tatra Mountains were leveled and the
government estimates it will take 70-80 years to return to its
prior state.
–Finally, I was in New York obtaining a visa for future travel
and I had a 4-hour gap to fill before I could it pick up, so, I
headed to the Metropolitan Art Museum to check out the Gilbert
Stuart (1755-1828) exhibit. Pretty cool, if you’re into this kind
of thing. Stuart is the famous American portrait artist who is best
known for his depictions of George Washington. But I couldn’t
help but note this quote from Stuart’s eulogy, a fitting epitaph for
countless artists over the centuries.
“He left us the features of those who have achieved immortality
for themselves and made known others who would but for his art
have slept in their merited obscurity.”
—
God bless the men and women of our armed forces.
God bless America.
—
Gold closed at $451
Oil, $49.44
Returns for the week 11/22-11/26
Dow Jones +0.6% [10522]
S&P 500 +1.1% [1182]
S&P MidCap +2.1%
Russell 2000 +2.9%
Nasdaq +1.5% [2101]
Returns for the period 1/1/04-11/26/04
Dow Jones +0.7%
S&P 500 +6.4%
S&P MidCap +11.2%
Russell 2000 +13.3%
Nasdaq +4.9%
Bulls 57.1
Bears 23.5 [Source: Chartcraft / Investors Intelligence]
Have a great week. Next time I’ll be reporting to you from Palm
Springs, California. Yes, not a bad deal if I may say so myself.
I’ll be there to check out the PGA’s Q-School…one of the best,
least known sporting events around.
Brian Trumbore
