[Posted 7:00 AM ET]
“In these four years, Americans have seen the unfolding of large
events. We have known times of sorrow, and hours of
uncertainty, and days of victory. In all this history, even when
we have disagreed, we have seen threads of purpose that unite us.
The attack on freedom in our world has reaffirmed our
confidence in freedom’s power to change the world. We are all
part of a great venture: To extend the promise of freedom in our
country, to renew the values that sustain our liberty, and to
spread the peace that freedom brings.”
–President George W. Bush, State of the Union. Feb. 2, 2005
As a longtime supporter of action in Iraq and a neocon who
continues to believe we can truly reshape the entire region, I
have also been highly critical of how the Iraq War has been
conducted and the facts have borne me out. But in keeping with
the events of the past week I can’t help but refer to something I
wrote on 12/11/04 in this space that best sums up my mood today
as well.
“It’s not enough to say in war ‘mistakes are made.’ I’m tired of
this pitiful excuse wherein one is really saying you never learn
from history or learn to adapt quickly. But President Bush will
nonetheless be judged on the broader picture and if democracy
takes root in Iraq, even if a flawed version, the mission will be
deemed a success.
“The picture of the week may have been of Pakistan’s President
Musharraf sitting in the Oval Office….Who could have predicted
that pre-9/11? Who could have possibly predicted the rise of
Hamid Karzai? Add it all up and there is still more good than
bad from this editor’s perch. But January can yet prove to be a
real make or break month, what with the Palestinian Authority
and Iraqi elections, as well as the aftermath of the vote in
Ukraine…It’s the season for hope, however. Light a candle.”
January proved to be historic and for the right reasons, and the
candle is still lit. If you believe in prayer, there’s no reason to let
up.
You all know the basics of last Sunday’s election but as I write
this the results aren’t fully known. I’ll let Gerard Baker below
detail some of the better moments.
What does seem clear is Shia cleric Ayatollah al-Sistani’s
supporters captured a solid majority and while many are pointing
to the Iranian influence in Sistani’s base it is far too early to tell
in just what direction the new leadership will take the country.
For his part, Sistani has been a voice of reason since the fall of
Saddam.
But while it’s a week to celebrate, I also can’t help but sound a
note of caution on a topic I’ve written of countless times in this
space; that being the Kurds and their dreams of autonomy vs. the
Turks who rightfully would feel threatened by an independent
Kurdish state. The Kurds will probably cooperate, for now, in
the new legislative body and in the writing of a constitution, but
the people want their own nation…with oil rights.
As for the aforementioned Gerard Baker of the Times of London,
he had the following thoughts after the State of the Union
address in response to European critics of President Bush.
“Bush is slowly, steadily ratcheting up the rhetoric, not to
threaten all-out war, as his screaming critics claim, but to create
an international climate in which the price of supporting
repression is intolerably high.
“By calling explicitly on Saudi Arabia and Egypt to liberalize, he
made it harder than ever for the U.S. to return to an approach that
connives at those regimes’ corruption and autocracy. By
challenging Iran and Syria to stop their support for terrorism, and
in Iran’s case, its pursuit of nuclear weapons, he emphasized
again that the post-September 11 world is not a safe one for
dictators and fanatics who thrive through mass murder.
“But the entire speech, indeed the entire opening act of this
President’s second term, was ventilated by the extraordinary air
that has blown around the world from Iraq since Sunday’s
elections.
“Contrived it may have been, but there was no escaping the
emotional symbolism of the moment when Janet Norwood, the
mother of a Marine killed in the assault on Fallujah last year,
embraced Safua Taleb al-Suhali, the daughter of an Iraqi
murdered by Saddam Hussein who had just triumphantly voted
in Iraq’s elections. It was an iconic moment. The symbolism
was captured by two poignant visual effects – Mrs. Norwood
clasped her son’s dog tags; Ms. al-Suhali waved the purple finger
of magnificent defiance.
“If the world could only strip away some of its blind resentment
it might start to see without prejudice what Mr. Bush and Tony
Blair are seeking to achieve in their grand and noble venture in
the Middle East. But in the end, it will matter not how the world
reports a president’s or a prime minister’s words. It will be the
inescapable logic and reality of events that will eventually
persuade even the most cynical critic.
“Sometimes moments of truly historic significance are almost
instantly recognizable for what they are. The Bolshevik
Revolution in 1917 proclaimed its universal importance right
from the start. No one needed to be told that the fall of the
Berlin Wall was going to change history. With others the
consequences creep up on us slowly, even surreptitiously. Some
wise heads see the significance; others resist it or are blind to it.
It was not immediately necessarily evident that Hitler’s ascent to
power in 1933 would lead to the unrelenting tragedy that
unfolded for Europe and the world over the next decade. We all
know better now.
“Last Sunday I think will quickly fall into the first category.
There is an unstoppable momentum for change in the Middle
East now. In just two years tyrannies have been felled in Iraq
and Afghanistan. In Palestine, the inexorable clock of human
mortality has ended another. But the crucial element was always
going to be the voluntary and courageous act of self-assertion
that democratic and free elections represent – a message heard
around the region and the world.
“The way is open now, as it has never been, for an end to the
servitude and alienation that have been the lot of the people of
the Middle East for centuries. Long after the rhetoric has been
ridiculed and scorned, the reality will stand as a magnificent
monument to the possibilities of liberty.”
Or as historian Walter Russell Mead put it in the Washington
Post, this past week “was a big climactic moment (that) will be
unfolding for many years.”
Wall Street
The Federal Reserve raised the short-term funds rate a 6th time
since last June to 2.5% and the market staged its biggest rally of
the year; in the case of the Dow Jones and S&P 500 virtually
wiping out the losses for 2005. Of course the Fed’s move was
entirely predictable but those of us with long memories of the
Street and the adage “3 steps and a stumble” can’t help but laugh.
It used to be that if the Fed raised rates three times the market
would underperform over the next 6-12 months. Alas, the Fed
commenced its latest hiking regimen at the historic low of 1% on
the federal funds rate and after six ¼-point moves it’s still like
“who cares?” much to the consternation of historians, I imagine.
At least those of us holding cash are finally beginning to receive
some recompense for our caution.
The Federal Reserve noted in its accompanying statement that
policy accommodation could continue to be removed at a
measured pace so look for more moves down the road, the next
meeting being March 22. But despite the hikes Chairman Alan
Greenspan and Co. remain sanguine on inflation.
As for the week’s economic releases, we learned that personal
income for 2004 was up 5.4% with spending rising 6.1%; for
both the best pace since 2000. Microsoft’s special dividend back
in December, however, accounted for 3.1% of the 3.7% record
increase in personal income in the 4th quarter.
Retail sales at the chain stores in January rose a solid 3%+ thanks
in part to those cashing in their Christmas gift cards.
But in keeping with my take on real estate last week, that we
were now in an environment of equal steps forward and back,
new home sales for the most recent period were up just 0.1%, far
less than expected. Barron’s Alan Abelson had the thoughts of
ISI’s Ed Hyman in his 1/31 column and Hyman believes that
since the home price-to-income ratio is 3.35, a record high, we
are definitely in bubble territory. But, he hastens to add it could
continue a while longer.
You know my stance of the past year or so. No crash in prices is
coming when the 10-year Treasury (the key mortgage
barometer), now back below 4.10%, is acting so well. That is
unless the rapidly flattening yield curve is foretelling a big time
economic slowdown.
Meanwhile, on the energy front OPEC is leaving its existing
production quotas in place, despite still high oil, and continues to
threaten to tighten in the spring for fear of a glut. The $22-$28
price band is a thing of the past and $40 is the new floor, at least
that’s the goal. As OPEC’s head said last week, “$50 oil has
done little to slow world growth.” [But another year at this level
and it will, sir. Certainly the airline industry would totally
collapse.]
Finally, it’s time for my quarterly warning. For U.S. foreign
policy and the war on terror, no one denies the initial
breakthroughs in Iraq and between Israel and the Palestinians are
of a most positive nature. But since 9/11, I have told you that,
personally, I’d have a hard time holding more than 50% equities
at any one time because of some of the ongoing risks.
Bloomberg’s Michael Lewis had a good piece the other day as he
wrote of the complacency that exists in today’s markets.
Coupled with Mark Helprin’s thoughts on homeland security that
I included last week, I would just urge those who are tempted to
throw caution to the wind when making financial decisions,
including in the area of real estate, to not get too carried away,
particularly if you have other heavy responsibilities on the home
front. There’s still a lot of evil out there, let alone the more
pedestrian risks on Wall Street.
Street Bytes
–Stocks were broadly higher across the board with the Dow,
S&P 500 and Nasdaq all up between 2.5% and 2.8%. A weaker
than expected employment report for January, with 146,000 jobs
created when 200,000 was the projection, led to the belief that
there was light at the end of the tunnel in terms of further
rate hikes. The resulting bond rally helped propel equities.
Increased mergers and acquisition talk was another plus with
formal announcement of the SBC / AT&T combination that
signals the end of Ma Bell’s 130-year history, as well as the
possible Qwest / MCI alliance. And a blowout earnings report
from Google gave the Nasdaq a boost. Amazon’s less than
stellar quarter was a downer, though, and its shares tanked $7 on
the news.
–U.S. Treasury Yields
6-mo. 2.74% 2-yr. 3.28% 10-yr. 4.08% 30-yr. 4.48%
Aside from the jobs number, Alan Greenspan issued positive
remarks on the current account deficit which in turn helped the
dollar. Greenspan also suggested that Asian demand for U.S.
Treasuries will remain strong. As for inflation (the official,
government variety), it just isn’t an issue, both in the minds of
the Fed as well as yours truly.
–Royal Dutch / Shell lowered its estimate of reserves a 5th time
for 2003 (the latest data point) to 33% of 2002’s level. Since
reserves are a major component in evaluating an oil stock, this is
obviously a huge issue, let alone for the message it sends about
the overall supply / demand conundrum in this arena. Shell
maintains it will grow its future reserve base not only through
new exploration and development but also acquisitions.
–Exxon Mobil reported record profits of $25.3 billion in 2004,
including $8.4 billion in the fourth quarter. Another way of
looking at it is Exxon is larger than Syria’s entire economy.
Then again, Saudi Aramco is about six times greater than the two
of them combined.
–Iran is helping Venezuela figure out how best to aid China over
the U.S. in the area of oil exports. President Chavez is having
too much fun these days and the White House is letting it get out
of control.
–Along the same lines Irwin Stelzer wrote the following in the
Weekly Standard.
“China is not confining the extension of its influence to the
Middle East. The Western Hemisphere is also in its sights.
Canadian Prime Minister Paul Martin just visited Beijing and
came away with a broad-ranging deal to cooperate in a wide
variety of energy projects, including plans for a pipeline and
ports that would allow as much as one million barrels per day of
oil from Alberta’s tar sands to move to Canada’s west coast for
export to China. That’s one-third of the oil that America has
been hoping might in the future be available to it from Canada’s
tar sands.”
My friend Harry Koza, who hails from north of the border and
writes for GlobeInvestor.com, adds that for investors looking to
play China’s incredible growth, the best way is through Canada.
In his own inimitable way:
“China is over here in Canada looking for rocks and trees and
metal and coal and oil (and what else you hosers got that we can
look at, eh?), and just generally going around kicking the tires
and taking the place for a test drive. They’ve got plenty of cash
for shopping.”
–One positive development for the U.S. on the oil front
ironically comes from Libya where U.S. companies have won the
lions’ share of new exploration licenses…the first such
opportunity since 1986.
–But back to China, many foreign companies operating power
plants are leaving the country because they can’t make any
money amidst surging coal prices and government limits on the
prices that can be charged.
–Germany’s unemployment rate hit a new post-World War II
high of 12.1%.
–Merrill Lynch’s chief strategist Richard Bernstein on the
impact of rising interest rates on U.S. consumption.
“The combined threat of tightening of monetary policy and a
weaker dollar pretty much ensure that the headwinds the U.S.
consumer has been able to navigate will continue to increase in
intensity and may soon reach gale force.” [Financial Times]
–It is estimated that Gillette CEO James Kilts stands to benefit
from the merger with Procter & Gamble to the tune of $185
million. Of course this is outrageous.
–Kilts’s potential windfall, though, squares nicely with that of
former NYSE Chairman Richard Grasso. The newly released
Webb report addresses the issue of his receiving excess
compensation of at least $150 million, including the infamous
$139 million lump sum he pocketed in 2003, the result of pulling
out of his retirement plan a wee bit early.
So once again Grasso’s defenders are out in force. If you are
new to the site, understand I was ahead of the curve on this one,
blasting Grasso for his hubris in the days after 9/11 (his role in
the Street’s recovery having been grossly exaggerated) and for
the fact that what gets lost in all the discourse over his pay
package is the fact the self-regulatory New York Stock Exchange
simply looked the other way as Wall Street’s research scandal
unfolded. Grasso ran a crooked operation, pure and simple.
But I do agree New York Attorney General Eliot Spitzer has a
tough task here in attempting to take back $tens of millions
because the pay package was approved by a compliant, and
complicit, board; a majority of whom were Street titans in their
own right.
Finally, it was interesting to learn Grasso’s two personal drivers
were paid $130,000 a piece and his secretary earned a cool
$240,000 (including bonus). Is this a great country or what?!
–As part of the 2003 settlement in the Wall Street research
scandal, $430 million was set aside for investors who feel
aggrieved. 50 or so stocks qualify, including WorldCom and
Global Crossing. If you think you’re entitled to some
compensation, check out…globalresearchanalystsettlement.com.
–A Harvard study reveals that out-of-pocket medical expenses
are responsible for half of all U.S. bankruptcy filings, even
though most had some form of medical insurance.
–Jean-Claude Trichet, president of the European Central Bank,
is calling for an intense investigation into Citigroup’s eurozone
bond trades from last August. Good. Citigroup attempted to
‘game’ the system and a criminal investigation has also begun in
Germany. The bank apologized but denies it violated “any
applicable rules or regulations.”
–The world’s largest insurance broker, Marsh & McLennan,
agreed to pay a whopping $850 million in fines for its role in the
bid rigging scandal without admitting or denying guilt, the
squirrelly phrase that finds its way into so many of these types of
cases because without it prosecutors feel they can’t win as many
judgments.
–American Express is spinning off its financial advisor unit to
refocus on credit cards and travel services. In much the same
way, Citigroup is selling its Travelers insurance and annuity unit
to MetLife, making MetLife the largest individual life outfit in
North America.
–In a further sign sales of impotence drugs have gone limp
Viagra’s were off 11% in 2004 vs. 2003.
–U.S. ad spending is slated to rise a solid 5% in 2005.
–General Electric is the latest to feel the heat of the U.S.
government, even if indirectly, and has opted to wind down its
operations in Iran.
–Global airline traffic rose 15% in 2004 over 2003, up 20.5% in
Asia.
–With the run-up in Google shares to $204 (the intraday high
was $216), the company now has a market cap handily exceeding
eBay’s …$56 billion vs. $50 billion. Google’s revenues doubled
from a year earlier as paid-search advertising explodes. This is
one instance where there is pricing power; limited capacity /
strong demand. As for eBay, it’s officially a dead stock; $118 on
12/31, $75 today and gasping for air.
–Amazon is being hurt by rising operating costs in the
company’s attempt to maintain market share in the face of
increased competition.
–Pfizer denied claims it hid results of a 1999 clinical trial for
Celebrex that showed a far greater risk of heart problems than
with those taking a placebo.
–Bill Gates spoke out on the tougher U.S. visa restrictions
implemented since 9/11. “There has been a 35% drop in Asians
coming to our computer science departments. It really is a very
bad thing for a very key area.” Agreed.
–In 1986, then model Russell Christoff posed for a photographer
from Nestle’s and had frankly forgotten about the shoot until a
stranger pointed out to him he was the man pictured on the
Taster’s Choice coffee label. A Los Angeles Superior Court
awarded him $15.6 million for using his likeness without
permission; $330,000 plus 5% of the profits from the time it was
in use.
–McDonald’s is opening up 105 new restaurants in Russia, on
top of 127 currently operating there.
–Some statistics on the global counterfeiting industry, courtesy
of Business Week.
The World Customs Organization estimates counterfeiting
accounts for 5% to 7% of global merchandise trade. Seizures of
fakes by U.S. customs jumped 46% last year. Unilever Group
says knockoffs of its shampoos, soaps, and teas are growing 30%
annually.
China accounts for 2/3s of fake goods.
–My portfolio: Just a correction on my breakdown from last
week. I inadvertently omitted that I still have my minimal (less
than 1% of assets) position in Portugal, one I purchased last
August as kind of a test case when I saw that the Portuguese
were the hardest workers in Europe. You know what? It’s up
25%. Wish I had bought a lot more. Overall, I’m still roughly
20% equities, 80% cash.
Foreign Affairs
Israel: Palestinian President Mahmoud Abbas and Israeli Prime
Minister Ariel Sharon are meeting in Egypt on Tuesday, with
Egypt’s Hosni Mubarak and Jordan’s King Abdullah as
participants. Agreement on a ceasefire would appear to be
likely, despite some scattered violence over the past week. The
West Bank, and ongoing expansion in some Jewish settlements,
remains the first real sticking point.
When it comes to European attitudes towards Israel, Robin
Shepherd of the Washington Post shed some light on the
worsening trends. For example, 68% in Germany believe Israel
is waging a “war of extermination against the Palestinian
people.” 74% in the Netherlands think Israel is the greatest
threat to world peace, ahead of Iran and North Korea. And 60%
of Britons under age 35 never heard of Auschwitz. Disturbing.
Russia: An already unpopular Duma (parliament) now has a 3%
approval rating among the Russian people as a result of the
benefits flap, while President Putin’s own approval figure has
dropped from 65% to 43% over the past year. Aside from the
protests triggered by the reform program that replaced many
popular benefits such as free transportation for the elderly with
meager cash subsidies, inflation has also become a huge issue
with the official rate pegged at 11.7% for 2004. Many believe it
is far higher, however, as items like groceries are now up 20-
30% from last year’s levels. Inflation is a particularly sensitive
issue here because three times since 1991 a crisis on this front
has wiped out savings.
Northern Ireland: I told you weeks ago the political process here
was officially dead, but this week the situation got far bleaker as
the IRA announced it was withdrawing its offer to decommission
its arms. Irish Prime Minister Bertie Ahearn renewed his claim
that the IRA was responsible for the spectacular bank heist in
Belfast last December, as well as other robberies. Sinn Fein
leader Gerry Adams spoke of a “deepening crisis.” There is a
real danger the cease-fire will be broken, with the IRA still
capable of incredible destruction that could shake Britain to its
core.
Georgia: The prime minister, President Saakashvili’s right-hand
man and confidant, died in an accident involving carbon
monoxide poisoning, a big blow to the fledgling government that
has been such a staunch supporter of the U.S. thus far. [There is
no indication the Kremlin is involved in this one despite rumors
to that effect.]
Ukraine: In case you needed further proof that a democratic
Ukraine is in the West’s best interests, U.S. intelligence is now
convinced Ukraine sold advanced long-range missiles, six each,
to both Iran and China.
North Korea: A South Korean defense policy paper said the U.S.
would dispatch 690,000 troops and 2,000 warplanes if war
breaks out on the Korean Peninsula. Where the heck we’d find
them is anyone’s guess. Separately, the U.S. is now convinced
the North sold processed uranium to Libya, since turned over as
part of Washington’s agreement with Tripoli. But the issue then
is who else has received it?
Zimbabwe: President Robert Mugabe has called for a general
election on March 31, but opposition leader Morgan Tsvangirai
hasn’t as yet stated whether he will run, knowing it would be
another sham vote.
Random Musings
–When then presidential candidate George W. Bush first
proposed private accounts as part of a solution to a perceived
crisis with Social Security, I blasted it as “incredibly stupid.”
And as you’ve undoubtedly noticed over the years I haven’t
changed my position one bit. While I give Bush credit for his
own conviction, and importantly for advancing the debate on this
issue, the plain fact is Social Security is not in crisis…especially
when compared to Medicare, which is.
No doubt, Social Security does need to be tweaked a bit, but to
state it will be “exhausted and bankrupt” by 2042 is dishonest
and needlessly scaring Americans. For starters, the stated future
growth rate for the economy, a critical part of the calculations, is
way too low – a growing economy being good as it translates
into more workers paying into the system for the benefits of
retirees then pulling funds out – and it is quite possible that the
nation’s birth rate along with higher rates of immigration than
currently projected could also be a huge positive.
But to ensure its viability should today’s projections become
fact, and so that everyone shares in the pain, without increasing
payroll taxes or even extending the retirement age for full
benefits, consider my solution; my long-discussed “freeze.”
Take an average monthly benefit of $1,400. Now for arguments
sake, grow this by a conservative cost-of-living adjustment of
3%.
Year 1…$1,400
Year 2…$1,442
Year 3…$1,485
But say you freeze year 2 and keep it at $1,400 before resuming
the 3% escalator. Given 45 million beneficiaries (a figure used
Wednesday night by the president), that is a savings of $22.7
billion. [45 million Xs $42 Xs 12 months]
Through the power of compounding, that savings grows each
year thereafter. Voila! Future projected payouts would plummet
compared to today’s estimates.
[Just changing the indexing from wage inflation to the consumer
price index would be a further, common sense move that would
save additional $10s of billions, and then some.]
Now of course folks would shout this proposal is a benefit “cut,”
an old game in Washington. It is…but nowhere near as painful
as the other discussed remedies. More importantly, it’s a perfect
compromise solution that doesn’t add to the tax burden for those
now better off while ensuring young and old alike will still
receive a respectable pension in their golden years should all
other safety nets come up short.
As for the private accounts, you know my bottom line on this
one. We already have them. It’s called an IRA (and variations
thereon). You can invest your own money any way you darn
well please but as I also always say, when was the last time you
saw a government public service announcement remind the
citizens to take advantage of this terrific savings vehicle?
And not for nothing but New York Mayor Michael Bloomberg, a
rather successful entrepreneur, slammed private accounts the
other day.
–Once again President Bush had an opportunity to say the
United States would stand by democratic Taiwan and didn’t.
–Hopefully the administration scores a big victory shortly in the
realm of tort reform. Prospects have become much better in just
the past week.
–Here in New Jersey, Acting Governor Richard Codey opted out
of this year’s gubernatorial race due to the fact he would have
been going up against Senator Jon Corzine, the mega-millionaire
who spent $63 million on his first political foray. Even the New
York Times said it was a joke the way Corzine presents himself
as an “outsider” while lining the county bosses’ pockets.
–Bird flu claimed its 13th victim in Vietnam in just the past
month and the government is asking for international help in
combating the problem before it gets any worse. It’s beginning
to get a little scary. Any expert would tell you this could be the
next global pandemic.
–Recently, New York City lost two firemen in a blaze, with one
or two others still in critical condition, when they were forced to
jump out of a building from the fifth floor. A controversy
erupted because the men did not have safety ropes that the
previous fire commissioner took away in a budget cutting move.
That was Thomas Van Essen…one of the “heroes” of 9/11. It
really ticks me off to think of this because Van Essen was also a
failure before 9/11 over his inability to get his men workable
radios.
But like Bernie Kerik, Van Essen capitalized on his newfound
fame among those who didn’t know all the facts. [I will always
remain a fan of Rudy Giuliani and his own handling of the
tragedy, however.]
So this week Van Essen had a pitiful excuse for his decision to
pull the ropes and in part blamed commanders on the scene of the
fatal blaze for the casualties. It wasn’t their fault.
–An East Hampton, Long Island, school board was close to
adopting a policy where breathalyzers could be employed at the
start of the school day at the local high school but opted not to
for the time being. You’re reading that right…before the school
day. There is that great a problem in this town and others in the
area evidently. This is sick.
–On a lighter note, the journal “Nature” has a study that tells us
what some of us always knew. Some birds are highly intelligent.
[Ever watch a crow? The ones in Ireland are amazing.] In fact,
researchers believe some birds are as intelligent as chimps.
–And your official Super Bowl prediction…
Patriots 27…Eagles 10
—
God bless the men and women of our armed forces.
God bless America.
—
Gold closed at $416 [Lowest weekly close since September.]
Oil, $46.48
Returns for the week 1/31-2/4
Dow Jones +2.8% [10716]
S&P 500 +2.7% [1203]
S&P MidCap +3.9%
Russell 2000 +4.0%
Nasdaq +2.5% [2086]
Returns for the period 1/1/05-2/4/05
Dow Jones -0.6%
S&P 500 -0.7%
S&P MidCap -0.2%
Russell 2000 -2.2%
Nasdaq -4.1%
Returns for January
Dow Jones -2.7%
S&P 500 -2.5%
Nasdaq -5.2%
Bulls 54.5
Bears 25.3 [Source: Chartcraft / Investors Intelligence]
Have a great week. I appreciate your support.
Happy Birthday to my brother…a good man.
Brian Trumbore
