[Posted Noon ET, Friday…back home]
Iraq
It was a particularly tough week. Back in the fall I wrote of one
‘October Surprise’ potentiality being an incident like what we
saw in Mosul with the suicide bombing that claimed the lives of
at least 13 U.S. military personnel and another 5 U.S.
contractors. I’m not so sure if a Mosul-style attack had taken
place then that President Bush would have still emerged
victorious. There were obvious political reasons for his wanting
to reduce casualties at the time.
Before this week’s tragedy, an ABC-Washington Post poll
revealed 56% believe that given the costs of the Iraq war it
wasn’t worth it, though the same survey has 58% in support of
keeping troops there until ‘civil order is restored,’ a conclusion in
conflict with the first response. Separately, a CNN / USA Today
/ Gallup poll also has a majority, 51%, disapproving of the
decision to go to war in Iraq.
The trends are not good for the White House and it doesn’t help
when President Bush defends Secretary of Defense Donald
Rumsfeld for “doing a fine job” as he did at his press conference
the other day. Or that chief of staff Andrew Card noted on
“Meet the Press” that Rumsfeld is doing a “spectacular job,”
when the facts utterly scream otherwise. In the same press
conference, after all, the president criticized the performance of
the Iraqi troops. Well someone has to be responsible, for crying
out loud, for something…anything.
As for the coming election, as the New York Times’ Thomas
Friedman keeps pointing out the White House must demand
more of its Arab “friends” such as Egypt, Jordan and the Saudis.
At the same time, I hope some of you had the chance to read the
comments of the Times’ William Safire and David Brooks this
week. As frustrated as I have been the past 1 ½ years they sum
up my own attitude. What would have happened had we not
gone in? As Safire notes, Iraq probably would have become a
haven for bin Laden, Saddam would have continued to rake in
$billions in the oil-for-food program and he would have just
bided his time while the rest of the world quickly returned to its
pre-9/11 mindset.
This war has been deeply troubling in its execution and I blame
the president on down for this. But I agree with the mission…
and that remains the last word from me.
Foreign Affairs
Ukraine: Viktor Yuschenko should romp in the new presidential
election this Sunday, but then we all wait to see how the loser
and his followers react, including Russian President Vladimir
Putin.
Israel: British Prime Minister Tony Blair met with leaders of the
PLO and the Israeli government with all parties agreeing to
attend a summit in London next month, the purpose of which is
to assist the Palestinians with reforms as well as refocusing
efforts on the roadmap.
Turkey: Prime Minister Erdogan returned from the E.U.
membership confab that endorsed his nation’s formal candidacy
pledging to create a “different” Turkey to ease European fears.
Erdogan painted a happy picture even though there are many
bridges yet to be crossed, starting with the fact official
negotiations don’t begin until October, not the April date Turkey
sought.
Foremost among the issues that must be settled is Turkey’s
acceptance of the Greek-Cypriot government on the divided
island of Cypress and in all there are 31 ‘chapters,’ such as
competitiveness and the environment, that need to be resolved,
which is why the whole process will drag out another 10 years.
But here’s where I think people are missing the point. I have
been a big time supporter of Turkey and its E.U. bid for years
now, but today, while everyone seems optimistic I am not, and
for a simple reason.
Support in Europe is tenuous, at best. Some political leaders
have stuck their necks on the line and as I see it, another high-
profile incident, such as the assassination of filmmaker Theo Van
Gogh in Amsterdam recently, and it’s over. A recession could
also have the same impact as native workers blame the Turks and
other Muslim immigrants for their problems. We may know
whether I’m right or not in as little as six months.
Saudi Arabia: The Kingdom recalled its ambassador to Libya
over the “atrocious” plot to assassinate de facto leader Crown
Prince Abdullah, a charge Libya has denied but one which the
U.S. has supplied proof of to the Saudis, with at least one Libyan
already under arrest in the U.S. for his alleged role.
China: As a lead editorial in the Washington Post pointed out,
and as I have for years now, the White House is not challenging
President Hu’s dangerous foreign policy, including our seeming
inability to stick up for ‘democratic’ Taiwan, while Europe has
been giving into China on every issue that comes down the pike
including, over time, lifting of the arms embargo. But at least
Japan showed some guts in granting former Taiwanese President
Lee Teng-hui a visa to visit, totally ticking off Beijing in the
process.
Northern Ireland: In an incredibly well-orchestrated heist, a gang
of possibly 12 took the families of two Northern Bank (of
Belfast) executives hostage, held them in separate locations, and
then forced the execs to open the vaults to the main branch,
pocketing $39-$43 million by most estimates. Authorities say
that the planning for such a daring operation could only be
carried out by someone like the IRA, though Protestant para-
military groups could also have perpetrated the crime. If it does
prove to be the work of the IRA, however, it will spill over to the
entire peace process in the North. In other words, it would be
over, period.
Wall Street
Take a look at the year-to-date returns down below. It hasn’t
been a bad one at all, that’s for sure, and I’ll admit my many
mistakes on the forecasting end next week as I also attempt to get
back on track with the analysis in 2005; though you should have
a good idea where I’m headed because if nothing else I’m
consistent.
So for this week, especially in light of the fact I was in the air
much of the time on my way back from Chile and Paraguay, and
I have my own pressing deadline, Christmas Eve, the
commentary will be brief.
It’s always tough to draw too many conclusions from holiday-
shortened weeks, such as this two-week period we’re in the midst
of, but suffice it to say year end is normally a time of froth and
merriment for equities. But on the economic front there were
tidings of mixed joy the past few days. The leading economic
indicators rose for the first time in six months and an index of
consumer confidence showed a solid gain in December, while
personal income and spending were also up respectable amounts.
But on the negative side was the largest drop in new home sales
in 10 years. Since I rail against those who make too much out of
one number in any category I certainly won’t myself in this
instance, but it has to make you sit up and take notice, especially
if you’re in the bubble-busting camp as I am.
Meanwhile, on the broader issue of our national debt, the total
gross government figure hit $7.4 trillion through September, the
end of the fiscal year, or nearly 70% of GDP, though if you
include all the unfunded liabilities, such as for Social Security
and Medicare, the debt is more like $46 trillion. [Source:
General Accounting Office / Wall Street Journal] Separately, the
White House lowered its expectations for jobs gains in 2005 to
175,000 per month. [You need at least 150,000 just to make up
for the rise in population, incidentally.]
Then there is energy. The markets here are nothing but a casino
as the daily swings are totally absurd. Every inventory number is
given far too much weight in the grand scheme of things and the
speculators (read hedge funds) control the action, just as they do
in the broader equity market for the most part.
Think about this. In one day the price of natural gas rose 6.5%
and then fell 6.7% the next. Now did anything drastic happen in
between to affect the true fundamentals? Of course not. We had
a little cold front one day and then a forecast of warmer
temperatures the next. Hey, it’s called winter, folks…relax.
That said there are significant fundamental reasons why crude
oil, for example, remains stubbornly high. China, for starters,
continues to import gobs of it, up 45% year-over-year in
November alone, and the controversy over Yukos’ largest
production outfit (more below) has hurt. But then the crude
inventory #s showed a build in supplies so the price of black gold
ended up down over $2 on the week.
One big picture item worth considering was spelled out in a New
York Times piece; that being China’s increasing interest in
Canada’s energy resources. The United States has long taken its
neighbor for granted in this regard and we could pay a heavy
price if we just assume Canada will always be there for us. Then
again, we could always launch plan B…an invasion. [Just
kidding, my Canadian friends!]
Street Bytes
–Regarding the above, it’s also not merely a coincidence that the
Dow Jones bottomed on Oct. 22 at 9757 as oil was closing the
same day at its all-time high of $55.17, and now the Dow has
reversed course over 1000 points to 10827 while oil has fallen
$11 to $44.18. The Dow has advanced 7 of the 9 weeks since
then, including this past week’s gain of 1.7%.
–U.S. Treasury Yields
6-mo. 2.52% 2-yr. 3.00% 10-yr. 4.22% 30-yr. 4.84%
Another week of virtually zero movement in yields. No one
seems worried about the Fed’s recent tightening. Heck, I’m
really not myself as I’ll spell out next week.
–Russia and Yukos: This past Sunday the Russian government
held its long-awaited auction for the top asset of Yukos, one
responsible for about 1% of the world’s total production of oil,
for the purpose of taking back a portion of the $27 billion in back
taxes the Kremlin claims it is owed. As expected the auction
itself was a sham, but few realized it would also be a farce as a
heretofore unknown entity Baikal (named after the lake), won the
bid, unchallenged, and then it itself was acquired by a Russian
state-owned energy company, Rosneft. As Russian President
Vladimir Putin put it himself in a news conference on Thursday,
he is renationalizing the oil industry.
Putin will attempt to use his new weapon as a political tool on
par with OPEC in the future and we shouldn’t be surprised how
quickly he does so. It’s why I keep warning that natural gas
giant Gazprom (which will now finalize its own acquisition of
Rosneft) needs to be watched carefully because Europe is way
too dependent on Gazprom’s supply. All Putin has to do is shut
off the valves and, presto, an instant crisis.
In the meantime Putin needs high energy prices to help him
obtain the resources to rebuild his conventional army and to pay
for infrastructure projects as well as provide his people with a
minimal safety net. He has to know diversifying Russia’s
economy away from oil thus far has been a total failure.
But on the Yukos auction there was an interesting sidebar.
You’ll recall I blasted the six financial institutions, led by
Deutsche Bank, that were set to finance Gazprom’s bid. They
backed out when a Houston judge issued an order in support of
Yukos; but they’ll all be back and I’ll shine a light on them as
much as possible.
–Pfizer suspended advertising of its anti-pain medication
Celebrex but left it on the market, as opposed to Merck and its
decision to pull Vioxx. Then on Thursday the FDA issued an
advisory on all medications of this kind, both over the counter
and by prescription, to not exceed recommended dosages, yet
this still leaves open the question of whether or not there is truly
a significant danger in taking these drugs. In other words, few
questions, if any, have been answered and the FDA really just
further muddied the waters.
–Fannie Mae’s board finally saw the light and forced CEO
Franklin Raines and CFO Timothy Howard to resign. According
to bond expert Jim Bianco, though, this instance of financial
chicanery is far from over with Bianco comparing Fannie Mae’s
problems, potentially, to Enron. Thus far the market remains
unconcerned, but Bianco knows it’s all about the derivatives
positions and cooking the books. I certainly can’t disagree with
his thoughts.
–Speaking of Enron, the advisors to its bankruptcy are asking for
a record $780 million in fees, including $164 million for a single
law firm. I can’t help but note the GDP of Paraguay is about $6
billion.
–New York State Attorney General Eliot Spitzer accused former
NYSE chairman Dick Grasso and former Big Board director Ken
Langone of “grotesque behavior” and “grotesque comments” as
the battle between Grasso and Spitzer escalated anew. Spitzer
wants to negotiate with Grasso on the issue of his grotesque pay
package and the Grasso / Langone camp refuses to. Here’s
hoping Spitzer rolls the two of ‘em until they’re flatter than a
pancake.
–The Wall Street Journal reported on the dilemma facing the
White House in the case of SEC Chairman William Donaldson.
Donaldson, a Bush friend, wants to stay but big business is fed
up with the SEC’s new restrictions as best exhibited by
Sarbanes-Oxley. Tough. What would you have the SEC do?
Go back to the old days when us schmucks got slaughtered? Of
course Sarbanes goes too far in some respects, but
modifications will be worked out over time. Meanwhile,
corporations should consider it penance.
–According to Thomson Financial, companies raised $41
billion in initial public offerings this year versus just $16 billion
in 2003. On this topic I need to add that last time I wrote of the
Las Vegas Sands offering as being the hottest deal of the year
and to those who may have raised an eyebrow thinking “why not
Google?” let me just add that LVS’s original pricing band was
hiked, big time, and the new stock kept going up the first few
days, while you’ll recall in Google’s offering that bankers were
ratcheting down the initial price substantially due to perceived
soft demand, thus my reasoning for picking LVS over Google as
the hottest deal of the year.
–Junk bond issuance hit a record this year, $140 billion, besting
1998’s mark.
–But in the area of mergers and acquisitions, a story in
Bloomberg News cautioned that the M&A rankings for the
investment banks are a farce. Often they claim participation in
deals they never really worked on, such as in calling a corporate
restructuring a merger.
–A European Union court slapped Microsoft around yet again in
ruling the company can only sell new versions of Windows that
do not contain Microsoft’s music and video players because to
do otherwise stifles competition. This is a big deal but shares in
Microsoft hardly budged on the news, a reaction perhaps a bit
too optimistic in thinking this latest dispute will be resolved
satisfactorily.
–The FAA will be hiring 12,500 new air traffic controllers over
the next decade to offset a coming wave of retirements going
back to the 1981 Patco strike and President Ronald Reagan’s
replacement of striking workers at that time. These folks are the
ones now entering retirement age.
–Brokerage firm E.D. Jones was hit with a collective fine of $75
million by the regulators – the SEC, NASD and NYSE – to settle
charges it steered clients to focus group mutual funds without
disclosing Jones and its financial consultants were earning extra
compensation. As is true in most of these cases, Jones neither
admitted or denied the charges.
I’ve written before of E.D. Jones when this issue was first being
investigated because it is a subject of which I am most familiar,
in fact unlike anyone writing on the financial scene today. As
national sales manager at PIMCO, up until February 1999 when I
started StocksandNews, my job was to help earn shelf space for
our funds with the likes of Jones and no one was more difficult to
deal with (I’m being kind). The allegations in the current case
say 98% of sales were directed into just 7 preferred fund groups
since January 2000, PIMCO still not being one of them, yet I
can tell you unequivocally it was that way long before then.
In fact, if the state of California should desire my expertise in its
new suit against Jones I’d be more than happy to help.
Look, almost every brokerage operation had a certain focus list
and they were useful for branch managers in particular in
controlling the traffic going through their offices, while the fund
companies in turn were expected to pay up in one fashion or
another. I’ve said on many an occasion this was one reason I
soured on the industry and just up and left it. But for the most
part the big boys, like Merrill, Smith Barney and UBS (the
successor to PaineWebber), still had an open door for others
which was the only fair thing to do for both its brokers and
clients. Assuming the broker was ethical, the client then had a
choice…though disclosure on the compensation side was a
different matter as further investigations have revealed. But not
at E.D. Jones, whose customers have been ill-served all along.
–Toy retailers are complaining there wasn’t one ‘must have’
item this year, to which I’d say the heck there isn’t! It’s obvious
that poker chips can’t be kept on store shelves, they’re that hot;
just remember to keep them out of the mouths of the little ones,
parents.
–The Kia Spectra failed a frontal crash test, the first to warrant
the lowest grade since the 2001 Chevy Cavalier.
–Martha Stewart wrote from her confinement that the food is
lousy; another reason to obey the law, one could surmise.
–In reaching a settlement with management, United Airlines’
pilots now find themselves pitted against the flight attendants
who feel as if they have been sold down the river due to the
new pension arrangements that all employees face. In other
words, if you’re on a United flight and hear a commotion, it
might not be terror-related.
–US Airways’ ground employees were given a choice; either
lose your job or take a 13% pay cut. They opted for the latter.
Merry Christmas.
–An AP survey revealed that ½ of all Americans worry about
their overall debt level.
–I was at Nordstrom’s this morning to pick up some gift
certificates and when I asked the employee helping me how the
season had been, she said “awful.” But then she added, “My
manager did say that sales at Nordstrom.com were up 50%.” So
don’t jump to any conclusions on overall holiday sales just yet.
But if you think 2005 is going to be a good one for retailers,
you’re sadly mistaken.
Random Musings
–President George W. Bush was selected for a second time as
Time magazine’s “Person of the Year,” with Managing Editor
Jim Kelly explaining Bush was honored for “reshaping the rules
of politics to fit his 10-gallon hat leadership style.” Kelly also
observed that the president is “much more resolute than 2000.”
I’ll have my own thoughts on who gets the StocksandNews nod
next week, as well as the “Dirtball of the Year” selection.
–Having just traveled to South America let me reiterate
something I noted before I went down there. President Bush
would be foolish not to let Commerce secretary-designate Carlos
Gutierrez loose in the region. Gutierrez could work wonders on
relations with our key neighbors. It’s a no brainer, yet I have
seen zero commentary to this effect. And so for the first time in
my life I will be writing the president on this matter…despite
knowing it will never see the light of day outside the facility
screening letters for anthrax.
–At the start of the week Rudy Giuliani was distancing himself
more and more from long-time associate Bernie Kerik and then
on Wednesday Kerik resigned from Giuliani Partners in disgrace,
though Mr. Kerik wouldn’t describe it that way. Of course he
said he’s innocent of all the recent accusations, including alleged
mob ties.
–Former Connecticut Gov. John Rowland pleaded guilty to one
count of tax fraud and will probably be sentenced to anywhere
from 15 to 21 months in prison, according to federal guidelines.
Rowland had resigned earlier this year after facing possible
impeachment. His own fall from grace rivals any in recent years.
–85% of America’s schoolchildren don’t walk to school; though
it needs to be noted only 20% live within a mile of one. [USA
Today] So instead of walking through blinding snowstorms with
no shoes, as our forefathers did (and heck, yours truly, though I
did have Keds), today our kids are coddled by mom and dad (or
the bus driver). No wonder we’re fat.
–The Washington Post had a story on travelers and the act of
prayer that I got a kick out of. Personally, I’ll admit to saying
mine while standing in the line to board the plane.
–Chile: I returned to Santiago on Sunday and spent another two
full days in this absolutely delightful city. I could easily live
here; it’s clean, modern (great architecture in its soaring
skyscrapers), super climate, both beaches and the spectacular
Andes an hour away, awesome dining / café scene…what more
do you need? This is a city of 6 million but you’d never know it,
and while I can’t say my interaction with the people was as
extensive as it’s been in some other spots I’ve visited, those I did
meet could not have been nicer. My only regret is not allowing
for a few extra days to explore the vineyards and beaches. At
least I flew over the Andes.
–And then there is Paraguay, a nation of 6 million the size of
California but with a GDP in the aforementioned $6 billion
range. As you could see from my first comments last weekend,
this place is rough and in traveling into the city of Asuncion (the
capital of about 550,000) I immediately thought of the comments
of a native girl I met at the consulate in New York as I applied
for my visa. She needed to go back to see her parents but
otherwise would never return.
I’ve told you of the war Paraguay fought with Brazil, Argentina
and Uruguay back in the 1860s that took the lives of 90% of the
adult male population then and how the country has simply never
recovered. In the past 100 years there have been 45 coups or
attempted ones and whereas Chilean dictator Augusto Pinochet
arguably laid the foundation in some respects for today’s
prosperity there, Paraguay’s answer was dictator Alfredo
Stroessner who ruled from 1954-89 while seeking to isolate his
nation from the rest of the world. He was, unfortunately,
successful, and Paraguayans are still paying that price as well.
Just in the past few years a vice president was assassinated
(1999), the president and military leader were implicated, the
president then resigned, the general led a failed 2000 coup
attempt and was exiled, the successor to the presidency was
accused of corruption and the legislature filed impeachment
proceedings that he survived, only to be forced to resign over
similar charges, exiled General Oviedo returned and was
eventually arrested and imprisoned for a separate 1996 coup-
plotting…you get the picture.
The new president is evidently trying to do the right thing but the
latest issue is soaring violent crime, with the children of the few
successful businessmen in the country becoming hostage targets.
Some have been killed over the past year.
Then you had the August fire at the shopping mall where the
exits were blocked to prevent people from leaving without
paying and over 400 died. One report of the tragedy said
firefighters were seen trying to plug holes in the hoses. Victims
were rushed to a pitiful looking hospital in police cars because
there were no ambulances.
The World Economic Forum recently ranked Paraguay 100th out
of 104 countries in terms of overall performance, ahead of only
Ethiopia, Bangladesh, Angola and Chad. This is down from #95
in 2003.
One of the lasting impressions I’ll have is of tens of police and
military personnel, all carrying assault rifles, protecting the main
police barracks, while a few blocks away only two men with
pistols seemingly guarded the presidential palace. The
incongruity of it all staggered the imagination.
And talk about contrasts, while Santiago has one major
construction project after another in the works, the only one I
saw in Asuncion involved the building of a curb, a curb, on the
main thoroughfare, while buildings and streets crumble.
Well, you know I went down to do some spadework on a book
project with golfer Carlos Franco and on that score I came up
empty, though the trip was far from a total failure in my
estimation. I did receive another message from his agent upon
my return and we are at loggerheads over money. Carlos wants
mucho dinero; I don’t even want to discuss it.
But I must leave you with the other side of Paraguay; the people
of this nation. My hotel had a lobby bar elevated a bit from the
rest of the action and I would sit there, enjoying a Baviera
ceverza, just soaking up the scene. Such as the girl who kept
coming in to rearrange the flowers. Or the workmen who
labored so earnestly over the setup for a wedding reception (boy,
that was loud…and it ‘started’ at 1:00 AM!). Everyone paid
such attention to detail.
Then there were the many cab drivers I had as I explored the city
(this was one place you wouldn’t want to view by foot); all super
friendly and as helpful as the language barrier allowed. And my
waiters and waitresses, who never seemed to be off work. The
maid. Everyone had a terrific attitude.
And I couldn’t help but think, what a good people; and yet
understand the vast majority went home at the end of the day to
what 99% of you would describe as very rough accommodations.
How did they maintain their dignity?
In recent times in the United States it was Ronald Reagan who
sought to lesson the grip government had on our lives. We
function quite well without Washington’s interference when
given the chance, but in the post-9/11 era we also now
recognize we rely on government to help keep us safe.
In Paraguay, though, you have a situation where the people are
yearning to break out, but instead they are held under by a
classically corrupt, Third World system that won’t let them move
ahead. It’s been this way in Paraguay for centuries and I suspect
if I returned in 50 years I’d see little change, though I pray I’m
wrong.
Finally, in both Chile and Paraguay I saw zero signs of anti-
Americanism. I was treated super throughout, just as I have been
in my recent trips to Asia. Part of it is my own attitude in that I
love learning about other cultures and I truly care about those
who are doing their best but find it difficult to catch a break; as
opposed to many in America who have opportunities galore at
their fingertips yet choose, instead, to blame others for their
problems.
And so while I doubt I’ll ever return to Paraguay, I come back
with some great memories. I know I touched a few lives over
there and the smiles I received in return were priceless. I’ve told
you before that of all my material possessions, the ones I cherish
most are the gifts I’ve received from some of the poorest of the
poor. In this regard Paraguayans touched me, too, and hopefully
made me a little better person for the experience.
—
God bless the men and women of our armed forces. We
particularly pray for the families of those who have given their
lives.
God bless America, land that we love.
—
Gold closed at $442
Oil, $44.18
Returns for the week 12/20-12/24
Dow Jones +1.7% [10827]
S&P 500 +1.3% [1210]
S&P MidCap +1.0%
Russell 2000 +1.1%
Nasdaq +1.2% [2160]
Returns for the period 1/1/04-12/24/04
Dow Jones +3.6%
S&P 500 +8.8%
S&P MidCap +14.3%
Russell 2000 +16.6%
Nasdaq +7.9%
Bulls 61.2
Bears 20.4 [Source: Chartcraft / Investors Intelligence]
I’ll be posting the next review by 3:00 PM ET next Friday.
Felices Navidad! Merry Christmas, my friends!
Brian Trumbore
