[Posted 7:00 AM ET]
Iraq…Iran
Sunday’s vote in Iraq is but one step, though the most important
one. I remain in the camp that believes any semblance of
democracy in the country can have a transforming effect on the
entire region, especially in combination with recent positive
developments in the Israeli – Palestinian conflict.
Of course some of tomorrow’s headlines from Iraq will be brutal
but we will also see tremendous acts of personal courage; the
best of the human spirit. For now, though, I have to note an
opinion piece from the Wall Street Journal’s contributing editor
Mark Helprin who is not as optimistic as perhaps yours truly is.
“To succeed (in a theatre such as Iraq), a paradigm of ‘invade,
reconstruct, and transform’ requires the decisive defeat,
disarmament, and political isolation of the enemy; the
demoralization of his population and destruction of its political
beliefs; and the presence, at the end of hostilities, of
overwhelming force. With U.S. military capacity virtually
unchanged since the Clinton years, and a potentially heavy draw
upon American forces in other crises, the paradigm is untenable.
Though against all odds it may succeed temporarily in Iraq, it is
premised upon succeeding in far too many other places of fierce
and longstanding antipathy to what we represent.”
It will be interesting to see the reaction of Iraq’s neighbors
following Sunday’s vote. Expatriates have already been casting
their ballots around the world, making for an interesting scene in
Jordan, for example. And all eyes will be on Iran…both in the
support it receives in Iraq through its proxy candidates as well as
the statements from the mullahs in Tehran.
But in following up on both President Bush’s inaugural address
and the story that the U.S. is aggressively seeking out Iran’s
nuclear weapons sites for possible future offensive action; aside
from knowing an invasion of Iran is out of the question due to
the obvious fact the U.S. military is stretched too thin, a Times of
London poll found the British people 4 to 1 in opposition to such
a move, in case you’re wondering about potential support among
our allies. [I’m surprised the ratio isn’t wider, frankly.] At the
same time Washington is upset with the EU-3 (Britain, Germany,
and France) for its stance in the negotiations over Iran’s nuclear
program. Their plan is more like straight arms control rather
than seeking an end to the program itself, in the eyes of the Bush
administration, and many feel it’s time for a bigger stick, thus
some of the rhetoric of recent weeks.
If we thought Iraq was difficult, Iran is far more so. Keith
Payne, a former deputy assistant secretary of defense, wrote the
following in the latest issue of Defense News.
“There are serious potential costs associated with Iran acquiring
nuclear weapons, and with all realistic options to move Iran away
from the nuclear path. U.N. appeals to international norms and
carrots won’t work because the potential value of possessing a
nuclear threat almost certainly is seen as greater than any
proffered benefits.
“Coercive U.S. threats to induce Iranian concessions would
likely reinforce the Iranian leadership’s desire for a nuclear
deterrent.
“The actual use of force, such as air strikes against Iran’s nuclear
facilities, likely would solidify nationalist sentiment behind the
current odious leadership and not eliminate a program that would
re-emerge with even greater zeal.
“President Bush faces what the late, great, deterrence theorist,
Herman Kahn, said often is the case when leaders confront a
crisis: They must choose among several miserable alternatives;
the goal becomes finding the least miserable.”
But first the vote in Iraq.
Wall Street
What happens the next few days is vitally important to the
picture on the Street when we consider Iraq as well as the
Federal Reserve’s Open Market Committee meeting. Throw in
the State of the Union Address and perhaps the level of activity
will ratchet up a notch or two.
In looking back at the past week, however, we see the earnings
news was solid, the figure on durable goods was strong, and the
Procter & Gamble / Gillette merger was yet another sign that
M&A business is rolling right along.
But the flip side was the first estimate of 4th quarter GDP, up
3.1% and below expectations, continued money flows out of
domestic equity funds rather than the traditional January inflows,
and further signs that housing is slowing. Regarding this last
item I would argue that for the past few years it’s been three
steps forward for every one back. Now it’s at best two forward,
two back.
On the dollar front, while in my forecast for 2005 I said there
would be no currency crisis this year, I can’t help but note the
results of a survey of central bankers for the Financial Times
wherein 70% said they were shifting an increasing portion of
their reserves from the dollar into the euro.
Of course if there was to be a currency debacle it would be due
in no small part to the deficit picture in the U.S. The Bush
administration is now forecasting a budget shortfall for fiscal
2005 (ending 9/30) of $427 billion, including new funding for
Iraq and Afghanistan. This is higher than 2004’s record $412
billion and while many argue the actual number is still less than
4% of GDP and not a problem, nonetheless it just keeps adding
up. And the longer-term picture is bleak, though we’ll let
President Bush try to convince us otherwise in his address to
Congress this week. Items such as a fix for the alternative
minimum tax ($50 billion a year for ten years), let alone an
overhaul of Social Security and making the tax cuts permanent
could add anywhere from $100-$200 billion annually, for
starters.
Outside the U.S. much was made of China’s GDP for the fourth
quarter, 9.5%, even though this was only slightly above
projections. In fact, GDP here has averaged 9.4% annually since
1978. As Church Lady would say, “How conveeeenient.” But
some of us have gotten over the issue of crooked reporting and,
yes, the boom has been real….as will be the bust. Fixed asset
investment (or rather overinvestment) was up 26% last year and
the government is scared to death as to the repercussions.
Over in Japan, its latest readings on industrial production and
household spending were down, throwing serious doubts into its
recovery story, while Taiwan Semiconductor’s chairman said he
saw the world chip market declining 2% this year because user-
demand is too weak to soak up existing inventories. All in all, I
maintain the world slowdown is on schedule.
Of course much of what happens on the economic front the next
6-12 months will have to do with oil. Saudi Arabia is now,
significantly, backing its OPEC brethren in calling for a new $40
price floor for crude rather than the long-established $22-$28
band, plus the cartel is unlikely to increase production in the
short term due to fears of a glut in the second quarter. And when
it comes to the U.S., one can’t ignore the rumblings in
Venezuela where 15% of U.S. crude imports originate.
Street Bytes
–Stocks finally broke their losing streak, barely, as the Dow,
S&P 500 and Nasdaq all eked out fractional gains, ranging from
0.1% (Nasdaq) to 0.3% for the other two. The Procter & Gamble
/ Gillette merger continues a trend that has included the rumored
SBC / AT&T combination, Sprint / Nextel, J&J / Guidant, and
the formalization of Oracle / PeopleSoft.
–U.S. Treasury Yields
6-mo. 2.70% 2-yr. 3.24% 10-yr. 4.13% 30-yr. 4.60%
This was another dull week in the bond pits and here’s the
bottom line. We’ve been stuck in a trading range on the key
10-year from 4% to 4.30% and I’ve already stated on numerous
occasions that until we get substantially above 4.50% there is
really little to say. The short end of the curve will rise, as it did
this past week, anytime it’s confident the Federal Reserve is
about to raise rates again and the longer end is in tune to both
inflation expectations and economic activity. I see no ‘official’
inflation and I maintain the economy is slowing, or will,
worldwide. But we await the Fed’s latest pronouncement when
it wraps things up on Wednesday.
–The potential AT&T / SBC merger would obviously result in
tens of thousands of pink slips, on top of the 20,000 or so that
Ma Bell has handed out over the past year. Almost all of this
was inevitable, though.
–Microsoft’s earnings report was solid with revenues up 7%, but
the company is well known for managing expectations and the
stock hardly budged. It’s not as if Microsoft is cheap and one
issue that continues to hurt its prospects is piracy.
But from the World Economic Forum in Davos, Switzerland, Bill
Gates weighed in on the U.S. dollar.
“I’m short the dollar,” he said in an interview with Charlie Rose.
“The ol’ dollar, it’s gonna go down….It is a bit scary. We’re in
uncharted territory when the world’s reserve currency has so
much outstanding debt.” [Bloomberg News]
–Meanwhile, business software giants Oracle and SAP are going
toe to toe. Oracle’s Larry Ellison said “We would love to get in
a technology war with SAP,” while SAP’s attitude is “bring it
on” as the German outfit is taking advantage of the ongoing
confusion in personal relationships caused by the Oracle –
PeopleSoft merger. Coincidentally, SAP’s sales in the Americas
are up a whopping 27%.
–According to research firm Current Analysis, laptop sales
worldwide were up 24% in 2004, but sales of desktops were
down 7%. Prices overall for both were off about 7% from a year
earlier. [USA Today]
–The Justice Department and Homeland Security are looking
into the proposed sale of IBM’s PC business to China’s Lenovo
Group with regulators voicing concerns over security;
specifically, worries the U.S. facilities could be the hub for
industrial espionage. Heck, this is already taking place today and
I couldn’t agree more with a Journal editorial on this subject that
offered the far bigger issue is the potential lifting of the arms
embargo on China by the European Union, not the sale of a PC
business IBM was looking to dump anyway.
And in a different vein, Jeffrey E. Garten, dean of the Yale
School of Management, had a terrific piece in the January 31,
2005, issue of Business Week. In part:
“I fear that the U.S. hasn’t come to grips with the implications of
corporations doing so much R&D in China. U.S. companies are
understandably seeking the best talent and lowest cost of
operations anywhere. But in the process they are sharing
America’s intellectual treasures with a foreign rival in
unprecedented ways. They are training foreign scientists and
engineers and giving them and the omnipresent Chinese
government access to their proprietary research programs….
“In the 1960s, Americans were galvanized by Sputnik, and in the
1980s they were spurred on by Japan Inc. As the challenge of
remaining technologically superior becomes more complex, the
U.S. needs another shot of adrenaline. The perceived threat of
China could supply it, but I worry that it won’t be strong enough
or soon enough.”
–Morgan Stanley and Goldman Sachs were each fined $40
million by the SEC for their respective roles in the “laddering”
IPO scandal of 1999 and 2000 whereby the brokerage firms
coerced their customers to buy shares in the IPO aftermarket as a
condition of getting a piece of the offerings.
–China Aviation Oil, the state-run jet fuel company that
collapsed in a hail of derivatives last fall, is offering debt holders
40 cents on the dollar as part of a restructuring proposal. This is
a warning to those dabbling in junk bonds, by my way of
thinking, even though CAO wasn’t rated such at the time.
Accidents happen. An individual investing in the ever more
risky junk sector, however, should be doing so through a fund
where one mishap has a relatively minimal impact on the overall
portfolio.
–Medicare premiums are slated to rise 17.5% in 2005 but the
flipside is a couple 40 years old beginning to collect Medicare in
2030 will receive an average of $665,000 in lifetime benefits
after they retire.
–Speaking of inflation, the kind that is minimized in official
government tallies, iron ore producers are looking for a price
hike of 30-50% this year.
–The SEC upgraded its investigation into Merck and the
marketing of Vioxx and, separately, a U.S. appeals court said
Merck would lose its patent protection on the blockbuster
osteoporosis drug Fosamax some ten years earlier than originally
thought. Merck’s shares were off 10% on Friday.
–Riggs Bank of Washington, D.C. pleaded guilty to its role in
aiding the money laundering efforts of former Chilean leader
Augusto Pinochet along with some characters from Equatorial
Guinea. But in ponying up $41 million in fines, Riggs’ deal
with PNC is now in some jeopardy as acquirer PNC demands
better terms on the merger thanks to Riggs’ bad behavior.
–Some large sellers in eBay are up in arms over fee hikes and
many will begin to realistically explore other options; something
eBay will obviously need to watch closely. After cratering last
week on the earnings disappointment, shares slid another few
bucks this past one.
–Shares in Internet travel site Travelzoo collapsed 25% in one
day after the company not only missed its earnings number but
also announced it was the subject of a SEC insider trading probe.
After hitting $110 one month ago (12/28), the stock closed the
week at $55.
–Now I thought I knew a little about aquaculture, fish farming,
but I learned the following in a piece by Juliet Eilperin in the
Washington Post.
“Aquaculture is the fastest-growing sector of U.S. agriculture,
with $1 billion in annual sales…(and) by 2025 (forecasters say),
half the fish consumed worldwide will be farm-raised instead of
wild-caught….With $11 billion in imports in 2003, fish is second
only to oil among imported natural resources.”
And this…“China leads the world, with as much as 70 percent
of the world’s aquaculture production; by comparison, the 4,000
U.S. fish farms produce 1 to 2 percent of the global total.”
That’s it…….I’m going out to buy a fish tank. Can’t decide
what to raise, however.
–My portfolio: It’s a mess, even if it is roughly 80% cash. I’m
down to a solid energy issue, 6%, my remaining carbon fiber
play, 4%, and four pieces of high-tech toxic waste accounting for
the other ten. Despite having just 20% in stocks the beta
(volatility) of the holdings makes it feel like far more.
*For those of you new to the site, I refuse to play the Thom
Calandra game, he being the disgraced editor at CBS
MarketWatch who touted individual stocks in his newsletter
without telling his readers, a) he owned them and, b) he was
dumping them as the readers bought ‘em. The only issues I will
identify as current holdings are country funds, as was a recent
case with the Singapore Fund.
Foreign Affairs
Israel: Prime Minister Sharon declared he was “very satisfied”
with the initial moves taken by new Palestinian leader Mahmoud
Abbas and Sharon added he wants to resume direct negotiations
soon. Israel has stopped targeting Palestinian terror suspects for
death, Abbas has strengthened security, and the militant groups
say they are ready to suspend attacks if Israel reciprocates in
kind. For its part, though, Hamas cleaned up in the first local
elections in Gaza, winning a projected 77 of 118 seats.
Iran: In addition to the comments at the front of this column, the
head of Mossad in Israel said Iran’s nuclear weapons program
would reach a “point of no return” by year end. [I still maintain
we could see a test by Iran before then.] And in the realm of
energy politics, British Petroleum announced it would not do
business in Iran due to the company’s heavy exposure in the
United States. BP fears it would suffer greatly in violating U.S.
sanctions against Iran. For its part Iran said BP can forget doing
any future business in the country even if the U.S. was to lift
sanctions.
Russia: Syrian President Assad visited Moscow and in public
comments urged Russia to more aggressively balance U.S.
power, particularly in the Middle East. The Kremlin forgave
some debt but the biggest question, as mentioned the other week
in this space, involved the potential sale by Moscow of advanced
weaponry to Damascus. While by nature any such deal would be
secret, especially to a state sponsor of terrorism like Syria,
Russian President Vladimir Putin addressed the issue with a
reporter from the Jerusalem Post. Putin strongly hinted the sale
of advanced shoulder-fired missiles is in the works, labeling the
weapons purely “defensive” in nature. Israel fears they’ll fall into
the hands of terrorists and be used to shoot down commercial
aircraft. As for the issue of Iraq, Russian Foreign Minister
Sergei Lavrov vigorously defended Syria against U.S. claims it
was allowing the free flow of terrorists across its border.
Meanwhile, Putin continues to face problems on the home front
relating to some of his economic policies. The military is the
latest to cry foul with the elimination of some subsidies and
freebies and Putin was forced to announce an increase in their
pay of 20% to help make up for the loss of benefits like free
public transportation. Today, a lieutenant not seeing combat
duty takes home all of $160 a month. [Moscow Times]
Ukraine: President Yushchenko traveled to Moscow the day after
his inauguration to begin to patch things up with Putin and after
three hours of discussion both emerged with stern looks on their
faces. It couldn’t have helped that Yushchenko that very day
selected firebrand nationalist Yulia Tymoshenko to be his prime
minister, she being a woman greatly disliked by the Kremlin.
China: A funeral service was held today for former Communist
Party leader Zhao Ziyang and his body was cremated. Then, in
the official obituary, the government issued its first formal
statement, saying during the summer of 1989 “Comrade Zhao
Ziyang made serious mistakes.” His mistake, of course, was to
care about human life. There have been reports numerous
mourners were detained and beaten over the past week.
Mexico: President Vicente Fox has a real mess on his hands as
the drug violence spirals out of control, with operations often
being directed right from the maximum security prisons where the
kingpins are being held.
Random Musings
–Further fallout from President Bush’s second inaugural
address. This from Robert Kagan / Washington Post.
“…presidential rhetoric has consequences. Contrary to his initial
instincts, Reagan wound up pulling the rug out from under those
friendly dictators, propelled by his own publicly stated
democratic principles. Bush may be thinking about Iran and
some Arab dictatorships, not China. But the next time China
locks up a dissident, or Vladimir Putin further curtails Russian
freedoms, people will remind Bush about his promise that
‘America will not pretend that jailed dissidents prefer their
chains.’
“I believe Bush understands the implications of his universalist
rhetoric. In Ukraine, Bush chose democracy over his
relationship with Putin – a first example of a paradigm beyond
the war on terrorism. In Asia, too, we may be on the threshold of
a strategic reevaluation that places democratic allies, not China,
at the core of American strategy.”
I hope Kagan is right on this last point, but I never hear the
president raise the issue of Taiwan.
–I watched both the HBO film “Dirty Bomb” as well as a
“Frontline” piece on Europe’s battle against terrorism and you
can’t help but come away discouraged. This week both
Germany and France, for example, arrested a slew of terrorists
bent on recruiting suicide bombers for Iraq and possibly the
continent.
In this vein, the aforementioned piece by the Journal’s Mark
Helprin also focused on similar topics. To wit, speaking of the
United States:
“An impressive civil-defense effort has been made, but only
relative to the absence of anything before it. It isn’t a question of
gaps in the fence here and there, but of sections of the fence here
and there. Three and a half years after September 11, air cargo is
still not x-rayed; illegal immigration and drug smuggling prove
that the borders are porous; simulated attacks are almost always a
walk-over for the red-teams; and the nature of chemical, nuclear,
and biological terrorism remains such that merely rattling
terrorist networks is insufficient.
“Although nuclear detonations in American cities are not to be
slighted, still, the greatest and most likely perils are natural
epidemics and biological warfare. A common belief among
public health experts is that a viral shift such as that which
caused the 1918-19 pandemic is almost certain. Estimates of the
number of dead run to the hundreds of millions world-wide and
scores of millions in the U.S. If nature fails to deliver an
epidemic, it is unfortunately easy for a highly trained terrorist, by
genetic manipulation, to create a super-virulent pathogen with a
nearly 100% rate of mortality. Natural or artificial epidemics are
collectively the greatest threat this country has ever faced, and
will not be exceeded for decades to come. But though the
biological sciences advance day by day and could put up a
spirited defense, they can do so only if efforts are begun now on
a scale several orders of magnitude beyond what is scheduled.
Given current plans and preparations, this will not occur, and the
greatest enemy the country has ever known will have no
opposition.”
–Vietnam identified its 10th victim of bird flu in the past month,
while investigators in Thailand now believe a girl transmitted it
to two relatives last year, the first proof of the nightmare
scenario.
–Unbelievably, this week the FBI, for the first time publicly,
disclosed al Qaeda may use scuba divers. No kidding! I was on
the QE2 two years ago and you can be sure port security
wherever we went had this in mind. Heck, it was on mine
constantly.
–A study by the Rand Organization says it would cost $billions,
potentially up to $40 billion longer-term, to shield commercial
airliners from shoulder-fired missiles and of course the airline
industry doesn’t have that kind of cash lying around these days.
But when you look at a cost-benefit analysis, to be harsh about it,
a simultaneous attack on two planes (the fear of most of us
who’ve thought of this possibility) would send the economy
spiraling into recession. Call it 2% down on GDP…or well in
excess of $200 billion in economic activity…let alone the
obvious human costs. I just think it’s an expense government
has to consider, despite the deficit. Certainly Israel and
Singapore have already made the decision that it is too important
not to retrofit their aircraft.
–I’m surprised the story that all the federally approved stem cell
lines could be contaminated didn’t receive more play.
–Bill and Melinda Gates are contributing another $750 million to
their effort to immunize the children of Africa, the second such
installment from the foundation bearing their names.
–“If I could do it all over again…” I’d go to meteorology school
and be another Dr. Paul Koscin, severe weather expert for the
Weather Channel.
–Titan, Saturn’s moon, may produce “methane rain.” Remind
me to take cover if Dr. Koscin ever mentions this in his forecast.
–Ah yes, it’s Oscar season…the time when I muse that I didn’t
see one movie all year, especially now that the “Lord of the
Rings” trilogy has run its course. But I buy all the movies
instead and stash them away, because I have this ridiculous
notion I’ll just sit back at some point in my life and watch 200
flicks over 200 days. Then again, if it starts raining methane this
may not be such a bad idea.
–I was a huge Johnny Carson fan growing up and I probably
picked up as much about the world around me through his
monologues as any other source in those days.
But this week you had another example of what a generational
thing it is when someone of Carson’s era leaves the scene.
Author David Thomson wrote the following in the New York
Times:
“There is another thing that never came back: late-night
television for grown-ups. I know, there’s Jay and Dave and
Conan, and guys on cable, too. We were supposed to get excited
a while ago that Conan O’Brien was being groomed for the big
one. But no one cares now. We are so tired at the end of the
day, or several hours before it. And only a riddle would keep us
up. Jay and Dave and the others know this, and they know that
they are merely naughty kids compelled to stay awake when the
rest of America is sleeping.”
In a segment on NBC News we were shown another side of
Johnny, his generosity in supporting his hometown of Norfolk,
Nebraska. Carson has given $millions to various causes here
over the years and he evidently lived by the rule that those who
are successful have a moral responsibility to pay back the
community where they grew up. Are you listening, multi-
millionaire athletes of today?
–Finally, this week marked the 60th anniversary of the liberation
of Auschwitz, the largest Nazi death camp. I would urge all
parents to make sure they add the Holocaust Museum in
Washington, D.C. to any travel plans to our nation’s capital. It’s
so important that our young people learn the story so they can
pass it down to future generations. But then we also never seem
to take the lessons to heart.
—
God bless the men and women of our armed forces. We pray for
the families of those who perished this week in Iraq.
God bless America.
—
Gold closed at $428
Oil, $47.18
Returns for the week 1/24-1/28
Dow Jones +0.3% [10427]
S&P 500 +0.3% [1171]
S&P MidCap +0.5%
Russell 2000 +0.3%
Nasdaq +0.1% [2035]
Returns for the period 1/1/05-1/28/05
Dow Jones -3.3%
S&P 500 -3.4%
S&P MidCap -4.0%
Russell 2000 -5.9%
Nasdaq -6.4%
Bulls 56.0
Bears 24.0 [Source: Chartcraft / Investors Intelligence]
Have a great week. I appreciate your support.
Brian Trumbore
