[Posted 7:00 AM ET]
Wall Street
For a week that had its share of good news it was also a rather
desultory one with the major averages finishing basically
unchanged after the prior week’s sizable decline. Retail sales for
December, for example, came in better than expected for a full
year increase of 8% and it turns out I was right after all on the
holiday season – having written last week “we still haven’t seen
all the numbers yet.” The National Retail Federation reported
that Christmas sales were up 5.7%, solidly above the 4-5%
estimate from back before Thanksgiving. And then you also had
a good reading on industrial production as it too beat estimates.
But the trade deficit for November was a record $60 billion as
exports slowed and the total for the full year will be in excess of
$600 billion. So much for the weak dollar helping in this regard.
On the earnings front, however, you had good news from Intel
which exceeded the Street’s projections on the bottom line and
revenue, while the company also gave an optimistic view of the
first quarter. And Apple Computer obliterated analysts’
estimates, with revenues coming in 74% higher than the year
earlier figure. But while Apple rallied, Intel barely moved; not a
good sign.
Intel’s rival, Advanced Micro, warned and the stock was taken to
the woodshed…down 25% in one day…while Matsushita said
worldwide demand for electronics would actually fall 1% for the
period 3/05-3/06. Outside of tech, General Motors issued a
decidedly downbeat forecast for 2005 and is under credit watch.
GM has serious issues facing it, including skyrocketing
healthcare costs. Plus, as an aside, there has been a big
slowdown in the rate of growth in China’s car sales (where GM
is a manufacturer), up 15% in 2004 but off of 2003’s torrid 75%
pace.
Generally speaking it also doesn’t help that stocks aren’t exactly
cheap, sports fans, especially if short rates continue to rise;
offering better competition for the investment dollar than the 1%
yield of last year at this time before the Federal Reserve
embarked on its tightening policy. And when it comes to global
hot spots, particularly Iraq, it’s as if Wall Street didn’t have a
care in the world. What, me worry?
Street Bytes
–The Dow Jones fell 0.4% to 10558, the S&P 500 lost two
points to close at 1184 and Nasdaq finished down a fraction to
2087. Friday represented the 5th anniversary of the Dow’s all-
time high, 11722.
–U.S. Treasury Yields
6-mo. 2.66% 2-yr. 3.22% 10-yr. 4.21% 30-yr. 4.73%
Yields on the short end of the curve rose slightly while declining
on the back end. Historically, the ongoing flattening in the curve
augurs a major economic slowdown. The 10-year had rallied
down to the 4.16% level earlier before rising a bit on the heels of
some hawkish Fed policy comments, including St. Louis Fed
President William Poole’s talk that the FOMC will remove the
term “measured” in describing its rate policy, foreshadowing
more rapid increases at least early on in ’05. Friday’s producer
price index, while reflecting a large decline for December, also
meant the core figure finished up 2.2% in 2004, still tame but
nonetheless the largest increase in six years.
–This was a major week for ‘DD’…dirtball disclosure.
Philip Cummings will be serving up to 14 years for one of the
worst cases of identity theft. He stole 30,000 credit histories and
then funneled the reports to thieves, with officials estimating the
final cost at somewhere between $50 and $100 million.
Separately, a 21-year-old infiltrated T-Mobile’s computer
network and had unfettered access for a year to both voice and
e-mail. While the kid wasn’t able to access credit card
information, this was as egregious as anything investigators have
seen.
Then you have former CBS MarketWatch columnist Thom
Calandra, who agreed to a fine of $540,000 in a case where he
pumped 23 thinly traded stocks to his newsletter subscribers,
then dumped them as the unwitting public was bidding them up.
Of course he failed to disclose he owned the issues he was
writing about. This kind of premeditated crime needs to carry a
far greater penalty than is currently the case. Calandra should be
doing time.
And how about Nortel? The company finally released its official
results for 2003, after earlier failed attempts, and said the former
CEO and nine former financial executives cooked the books in
order to trigger bonuses, while twelve current executives have
agreed to return a collective $8.6 million in bonuses they recently
received out of sheer embarrassment for being associated with
such a shoddy operation.
Finally, Morgan Stanley was fined a record $19 million by the
New York Stock Exchange for not delivering prospectuses to
clients properly.
–In a long-awaited decision, the Bush administration established
guidelines for a one-time tax break for companies now able to
repatriate their overseas profits back into the U.S. But the
windfalls, as much as $500 billion cumulatively, can not be used
for share repurchases or shareholder dividends. Instead the
profits have to be invested in activities that may create jobs back
home. But this includes using the foreign profits for corporate
acquisitions that could actually lead to job losses, not gains.
Among the hoped for beneficiaries are big pharmaceutical
companies such as Eli Lilly, Merck and Schering Plough, all of
whose shares declined a bit on the less than exciting news.
–The European Union and the U.S. are returning to the
bargaining table over the hot button issue of aircraft subsidies;
Airbus vs. Boeing.
–Hispanics in America are rapidly moving up the ladder of
success, but I saw that 56% of the 40 million in this country have
never held a bank account. Which means one thing…there’s a
tremendous opportunity here for some financial institutions.
–Delta is reducing the number of flight attendants and crew for
its domestic flights, though they’ll still be at or above federal
minimums. [In case you wondered…you can’t just have one
flight attendant on a 747.] But Delta is also cutting out meals for
the crew as another cost-saving measure. So if you smell one of
those awful airport hot dogs while onboard, you’ll know who’s
responsible.
–Actually, the big six airlines should stop masquerading as full
service ones and go the Ryanair route where they produce a huge
percentage of their overall revenue from the sale of food and
drink on board.
–Comcast is launching an aggressive plan to introduce Internet-
based phone service over the coming 1 ½ years. In five it hopes
20% of 40 million homes with access to its systems are using it.
Comcast joins Time Warner and Cox Communications in this
battle against the Bell telephone giants.
–Inflation Update: Mark R., who still hasn’t recovered from
seeing his sanitation and sewer bill rise 70%, now says
Philadelphia area water bills are rising another 14%. And this is
Schuylkill River water.
–As Bank of America strategist Tom McManus noted, try
finding a tech company that is providing guidance on the impact
of having to expense options come this June. [Others say the
provision will yet be shelved as a result of political pressure.]
–Back on Dec. 30, shares in Taser, the non-lethal / lethal stun
gun manufacturer, were trading above $33. Since then it has
been nothing but chaos as the SEC said it was investigating
Taser’s safety statements along with a controversial yearend sale
that smacked of channel-stuffing. Other reports addressed the
$91 million in insider sales for the fourth quarter that the men in
black took for themselves as the stock was soaring. Good ol’
Bernie Kerik, a director at the time, was one beneficiary with a
November sale that netted him a cool $6.8 million. Anyway,
Taser tumbled to $14 by this past Tuesday before finishing the
week at $20.
–Apple’s iPod holiday sales rose from 733,000 units in 2003 to
4.5 million in ’04. I think I’m the last person in America who
jogs without music.
–In the continuing saga of E.D. Jones and its “preferred” mutual
fund list from which it generates 95% of its sales, the brokerage
firm admitted it had received $82.4 million in payments from
these firms in the first 11 months of 2004. Revenue sharing,
such as this, is not illegal but there was zero disclosure to Jones’s
clients. And as I’ve told you before, based on my own past
experience with Jones, what’s not getting out is the fact this has
been going on for over 10 years. Most other brokerage firms,
almost all of whom also have revenue sharing arrangements, at
least have a reasonable split between dollars going into “focus
group” funds and those that aren’t . Not at Jones.
–Shanghai now has the #2 busiest port in the world in terms of
tonnage, passing Rotterdam (Singapore being #1 in the
category). When measured by containers, Shanghai is now #3
behind Hong Kong and Singapore.
–I haven’t said much about New York Attorney General Eliot
Spitzer going after Warren Buffett’s Berkshire Hathaway, with
Spitzer joining an SEC investigation looking into whether losses
at some of Berkshire’s subsidiaries were covered up through
quack insurance products. Well, it is a big deal but it could be
quite a while before we learn anything conclusive, particularly
about the GEICO and General Reinsurance units.
–Canada reported yet another case of mad cow, its 3rd. Geezuz,
has anyone asked the cows what’s upsetting them so? The
weather? Water supply? ………..turns out it was the feed. Hey,
I’m not real happy when I get a bunch of ruminants and prions in
my cereal, either.
–Jack Meyer, head of Harvard University’s investment portfolio,
is stepping down to start his own hedge fund, taking other
managers with him. Meyer was at the helm during a time when
Harvard’s endowment grew to about $22.5 billion from the $4
billion level over the last 15 years. He was also rather highly
compensated considering Harvard will never compete for the
NCAA Division I football or basketball titles. That’s what it’s
all about, isn’t it? Or am I missing something?
–According to the Wall Street Journal, Viagra’s share of the
impotency drug market is down to 65% with Cialis at 21%,
Levitra 13% and Oysteris the remaining 1%. This market,
overall, is not growing as fast as the drug industry expected.
Guess everyone is fiddling with their iPod instead.
–My portfolio: I’ve been doing some major pruning the past few
weeks and booted out four issues while cutting back on others. I
sold out of my Internet telephony play and took a 50% loss
(ouch), but could easily go back in later if I see improvement in
the financials; I sold the Aussie natural resources stock at a 30%
gain because I’m down on China, a big part of the story in this
instance; I sold out of one of the software stocks I purchased last
spring for a minimal gain; I sold my big pharm selection that I
held for over a year in one form or another (the common or long-
term call options) for a small gain because it just wasn’t turning
around as fast as I expected, though it was not involved in any of
the high-profile cases of the past few months; I reduced my
carbon fiber play by half, taking a 60% profit on the common
while retaining the calls; and I sliced one of my other software
plays in half, taking a sizable loss on this one. I also added to a
spec play in the chip sector. Bottom line, I’m suddenly only
about 20% equities, the balance cash; though I may redeploy
some of the latter shortly.
Foreign Affairs
Iraq: Two weeks to go, then it’s Election Day. Will it be one
small step forward, or a giant leap backwards? Will a majority
of Americans give their stamp of approval on President Bush’s
policy, or will a new chant go up across our land, following his
inauguration for a second term; that being “Four long years…
four long years.”
I was pounding the table to take out Saddam years before we
went in. I still maintain it was the right decision. But I also
recognized the postwar strategy was deeply flawed just as the
president was declaring “Mission Accomplished.”
Following are excerpts from a piece by the noted military
historian (and conservative) Frederick W. Kagan that appears in
the January 17 issue of The Weekly Standard. Mr. Kagan echoes
my sentiments as expressed in this space the past 1 ½ years.
On the issue of troop levels:
“With more troops in Iraq during and immediately after the war,
we would have been able to do the following things that we did
not do:
“Capture or kill thousands of Iraqi soldiers who were at that time
still concentrated in combat units and had not yet melted back
into the countryside with their weapons and their skills.
“Guard the scores of enormous ammunition dumps from which
the insurgents have drawn the vast majority of their weapons,
ammunition, and explosives.
“Secure critical oil and electrical infrastructure that the
insurgents subsequently attacked, setting back the economic and
political recovery of Iraq.
“Prevent the development of insurgent safe havens in Najaf and
Fallujah, or at least disrupt them at a much earlier stage of
formation.
“Work to interdict the infiltration of foreign fighters across Iraq’s
borders.”
As for Secretary of Defense Donald Rumsfeld, Kagan concludes:
“Rumsfeld’s attitude has already led to a series of mistakes that
have made a difficult situation more difficult. It has put the
administration on the defensive about its conduct of a policy that
is vital to America’s national interest. It has distracted attention
from the problem of winning the current war – our most
important priority today bar none. These problems don’t result
from the liberal media or the antiwar crowd making a ruckus
about nothing. They result from Rumsfeld’s stubborn adherence
to a wrongheaded policy. Surely, with the election safely over,
there is no longer any need to protect the architect of these
mistakes.”
I would have added, don’t look to the president for leadership in
this regard.
Meanwhile, Interim President Ayad Allawi conceded that
“pockets” of Iraq are too dangerous to hold elections, while the
biggest supporters of the process, the 60%-majority Shiites,
were dealt one blow after another, including the assassination of
a number of Ayatollah al-Sistani’s aides.
In Washington there is increasing talk of an exit strategy and
retired General Barry McCaffrey said the “equipment base of this
army is falling apart,” adding the Reserves “are a broken force.”
And while more coalition partners pull their troops, the United
States now finds its relations with Turkey frayed because of the
ongoing violence perpetrated by the rebel Kurds, the PKK,
operating from bases on the border. 70 Turkish security forces
were killed in 2004 and Washington is in a box. Turkey
rightfully fears an independent Kurdish state in Iraq that
could help refuel the independence movement within Turkey’s
own Kurdish community, while the U.S. is just trying to get
through the election before coming down on Kurdish terrorists.
But much of the above could be water under the bridge if only a
successful vote can be staged on Jan. 30; one that has a modicum
of legitimacy. As for me, I refuse to be a naïve sycophant of the
administration, but I will always pray for the best.
Israel: Palestinian President-elect Mahmoud Abbas captured
62% of the vote in last weekend’s historic election with about
65% turning out to cast their ballots. There were no major
incidents and after the result was confirmed Abbas said “We are
ready for peace, peace based on justice.” Israeli Prime Minister
Sharon, who was able to form a new government, yet again, that
approves of his disengagement plans, called Abbas to
congratulate him; the highest such level of contact in 4 years.
President Bush invited Abbas to the White House.
But it’s all about actions, not words, and as well-meaning as
Abbas may be, by week’s end it was clear he wouldn’t be able to
rein in the terrorists without a great struggle, one that could cost
him his life, to put it bluntly, just as Sharon himself is threatened
from within.
And so it was that on Thursday terrorists struck the key border
crossing into Gaza, killing six Israelis in an attack employing
tremendous firepower. So this is Abbas’s first test as on Friday
Sharon ordered all government officials to cut ties with the
Palestinian Authority until it takes the necessary steps to curb
terrorism. One thing is certain; the terrorists will do anything
to harm their own people. Picture that the closing of the Gaza
border plunges the economy here once again into the depths of
despair.
[One other note. Israel is increasingly concerned Syria could be
in the process of acquiring sophisticated Russian missiles.
Moscow says not to worry, but we’ll shortly know Putin’s true
intentions when Syria’s President Assad travels to Moscow for a
sit-down with the Russian leader.]
Russia: Georgia’s breakaway republic of Abkhazia is holding
what Tblisi labeled a sham presidential election while Georgia’s
foreign minister calls Russia’s behavior and interference in this
vote “outrageous.” [Sound familiar?]
Meanwhile, German Gref, Russia’s minister for economic
development, called on the Kremlin to privatize Rosneft and the
recently acquired Yukos production unit. There is a growing rift
between Putin’s KGB cronies and the more moderate elements.
Morgan Stanley strategist Byron Wein, who issues an annual list
of contrarian predictions each year, most of which are horribly
off the mark, said in 2005 he thought one shocker would be the
ouster of Putin. I believe the opposite; Putin will continue to
consolidate his power even further, but I nonetheless can’t help
but think of Wein’s idea as I follow the news from here.
And on a different note, I’ve been writing a lot about natural gas
behemoth Gazprom, and its potential to negatively influence
events in Europe, long before the mainstream press began to pick
up on this. When did I first mention the threat? June 2, 2001, to
be exact. I said then Gazprom could be “wielded as a club” by
Putin, though I was also more sanguine on him overall in those
days…as were we all.
Gazprom also looms behind the recent actions of German
Chancellor Gerhard Schroeder. From a piece in the Financial
Times:
“Schroeder never speaks out on Putin’s human rights abuses in
Chechnya or his interference in Ukraine’s affairs,” says Friedbert
Pfluger, member of parliament for the opposition Christian
Democrats. “And there is a suspicion that this has to do with oil
and gas.”
It does. And this one.
“North Sea oil is running out, France has shut its coalmines, and
Europe will soon be completely dependent on the rest of the
world and Russian gas in particular,” says one senior French
government official. “We must be extremely vigilant on this
issue.”
Yup, you sure do.
Finally, former Yukos chairman Mikhail Khodorkovsky spoke
from his prison cell in letter form, portions of which appear
below.
“I have great pity for those authorities who sincerely believe that
they are doing a good thing for the country, for the people (ed. by
going after Yukos and tossing Khodorkovsky in prison). The
road to hell is paved with good intentions. Further down this
road they will realize that repressive methods and the forced
redistribution of wealth are not compatible with modern
economic development. And they will not be able to limit this
assault to Khodorkovsky, Yukos or the oligarchs – their victims
will be many, including those who created this machinery.
“My persecutors know that there’s not a shred of evidence of any
guilt on my part. But that’s irrelevant, since they could always
accuse me of something else – burning down the Moscow
Manege, or economic counterrevolution. I’ve been told that they
want to put me away for a long time – five years or more –
because they fear that I will seek revenge.
“These simple people judge others by themselves. Relax: I have
no intention of becoming a Count of Monte Cristo. To breathe
the spring air, to play with children studying at an ordinary
Moscow school, to read good books – all this is so much more
important, more right and more pleasant than multiplying wealth
and settling scores.” [Khodorkovsky has now been in prison 15
months with most believing he will be released by yearend.]
North Korea: Pyongyang told a U.S. congressional delegation it
was ready to resume talks on the nuclear weapons front. What
appears to be different this time is the government’s much softer
tone on U.S. – North Korea relations.
China: In a mildly positive development, China and Taiwan hope
to launch direct commercial flights between the two for the first
time since 1949. [What’s ridiculous is today you still have to fly
to either Macau or Hong Kong, first, when it’s all of an hour
across the Strait.]
Egypt: There is growing talk in different quarters of Egypt’s
quest for nuclear weapons. I would guess it is not close to a true
capability but there is also little doubt it has sought China’s help.
Northern Ireland: Irish Prime Minister Bertie Ahearn directly
blamed Sinn Fein, the IRA’s political wing, for the Belfast bank
heist I’ve been discussing in this space; a bold move by Ahearn
even as he admits renewal of the power-sharing arrangement in
the North is but a pipedream.
India: Newsweek’s Fareed Zakaria had an interesting point about
the government’s reaction to the tsunami. India has sought little
outside help and appears to be handling the relief effort well.
Zakaria thus concludes, India’s “confidence yields huge
dividends and is self-fulfilling. Success produces confidence,
which then produces more success.”
And just a note on Indonesia and the tsunami aftermath. The
government received hell in some countries, like the U.S., for
announcing it wanted all foreign troops out by March. But in
another example of the Trumbore 24-hour rule, the next day the
foreign minister was falling all over himself to explain that this
was not what the government really meant and that foreign aid
was welcomed. We have now entered the “just sit back and see
what happens” stage. Enough money has already been raised for
at least the coming year, but now it’s up to the impacted nations
to let the world know where it’s best applied, and accept outside
help when necessary for the recovery of its own people.
Random Musings
–A while back I was harsh in my appraisal of CBS News anchor
Dan Rather. Now that the report on the network’s internal
investigation into the Bush National Guard flap has been released
I feel justified in the line I took. I also couldn’t agree more with
Patrick Buchanan’s assessment that the whole episode was a
“criminal conspiracy designed to bring down a president of the
United States.”
The report found no “political bias” at CBS, but of course a large
majority of the American population knows this conclusion is a
farce. I watched Monday’s CBS News, Dan Rather himself
having wussed out of appearing, and I felt sorry for Bob
Schieffer, a good man who was forced to fill in and announce the
findings. One thing is certain; eventually the facts will come out
even as the network continues to cover them up.
And if you ever wanted an example of the inside corruption in
Washington, you need look no further than former Attorney
General Dick Thornburgh who helped lead the investigation.
Never let the truth stand in the way of a 7-figure payday as a
lobbyist or in private industry.
–With our broken down National Guard, many states have no
way to deal with a large natural disaster, let alone a terror-
induced one.
–Army Spc. Charles Graner Jr., ringleader at Abu Ghraib, was
found guilty.
–You’ll be happy to know I’m taking the week off from the
Social Security debate. The bigger problem, everyone should
know, is Medicare and the president is showing no sign of
tackling this baby.
–Michael Chertoff was a good selection to be the new head of
Homeland Security.
–Governor Arnold Schwarzenegger was touring the scene in La
Conchita following the deadly mudslide there and this local
resident started blasting him for not shoring up the mountain as
the state supposedly promised following a similar occurrence 10
years ago. Shoring up the mountain?! Hey, the loss of life in
California is tragic, but at the same time I have little sympathy
for folks, anywhere, who build homes in known danger zones.
–The Supreme Court, in another 5-4 ruling, has given federal
judges broader discretion in sentencing. Congress will now
attempt to redress this mistake, correctly fearing that some
judges will be too lenient if given the opportunity.
–New Jersey has a rapidly developing gubernatorial race this
year. Interim Governor Dick Codey, who took over from Jim
McGreevey, the self-proclaimed “Gay American,” gave his state-
of-the-state address and focused almost solely on stem cell
research and mental health (his own wife being a bit unstable).
Republicans rightfully shot back ‘These are the priorities most
New Jerseyans care about?’ Of course not. Codey is
contemplating a run against Senator Jon Corzine for the
Democratic nomination. The bet here is if he decides to run,
Corzine will clean his clock.
–Prince Harry. What more can you say? Kind of reminds me of
that song from “Sound of Music.”
‘How do you solve a pro-blem like Prince Har-ry?’
–I kid you not. The Arkansas Department of Tourism is
advertising in the New York television market. This is right up
there with the Pentagon of yore and $10,000 toilet seats.
–Foreign tourism in New York City hit an all-time high last
year, with Japan now 3rd behind the U.K. and Canada. 20% of
Japan’s gain, though, is directly attributable to the influence of
the Yankees’ Hideki Matsui, according to Crain’s New York
Business, owing to the fact Matsui is a national hero and his
games draw a huge television audience there.
–The local NBC News affiliate reported on the ever increasing
harassment of kids on the Net by their fellow students, an awful
form of bullying, but this time much of it is of the “revenge of
the nerds” variety.
–Speaking of kids, Jeff B. responded to my bit from last week on
parents and the ill-advised use of nicknames for their children,
noting that one couple he is friends with called their daughter
“Fish” and today, at age 12, she’s a mess. Stamp out child
nicknames, I say…a new cause at StocksandNews.
–The first pictures from the European space probe Huygens’
exploration of Saturn’s moon Titan emerged Friday.
“I’m shocked. It’s remarkable,” said Carolyn Porco, of the
Cassini Imaging Center. “There are river channels. There are
channels cut by something…a fluid of some sort is my best
guess.”
That or a Honda rototiller.
—
God bless the men and women of our armed forces.
God bless America.
—
Gold closed at $423
Oil, $48.38
Returns for the week 1/10-1/14
Dow Jones -0.4% [10558]
S&P 500 -0.1% [1184]
S&P Midcap +0.9%
Russell 2000 +0.7%
Nasdaq -0.03% [2087]
Returns for the period 1/1/05-1/14/05
Dow Jones -2.1%
S&P 500 -2.3%
S&P Midcap -3.5%
Russell 2000 -5.2%
Nasdaq -4.0%
Bulls 59.4
Bears 22.9 [Source: Chartcraft / Investors Intelligence]
Have a great week. I appreciate your support.
Brian Trumbore
