[Posted 7:00 AM ET…Note: I was on vacation this past week
but I did manage to stay somewhat in touch with the world.]
Hot Spots
Iraq
It’s been a dark period for the men and women of the U.S. armed
forces as 50 of their brethren have been killed in just the past two
weeks. Our military leaders on the ground may tout the fact the
actual number of suicide attacks is down, but they are
nonetheless deadlier than ever. The level of support among the
American people is directly tied to the level of casualties and
thus it is imperative the Iraqi government stick to the political
timetable in order to show some ongoing progress.
The constitution is to be written by Aug. 15, less than ten days
from now, and according to Prime Minister al-Jaafari, Grand
Ayatollah al-Sistani wants Islam to become the main source of
legislation. This presents problems for women across the land as
well as the minority Kurds. Last week I noted that if 3 of the 18
provinces vote the constitution down in a referendum (slated for
Oct.) then the document is null and void. Four of the provinces
are Sunni majority and three have a majority of Kurds. These
next two weeks are critical.
The Kurds themselves aren’t helping matters, particularly when
it comes to relations between Washington and Ankara. On
Friday, a rocket attack in southeastern Turkey killed five Turk
soldiers, the second related incident in two weeks (the previous
one, a car bomb, killed six). The U.S. has done zero to rein in
the Kurds’ militia, the PKK, and the Turks have every right to
crush them. It’s when they then cross the Iraq border that we
have an even bigger problem.
Iran
The mullahs are hell-bent on restarting the uranium enrichment
process and if they break the International Atomic Energy
Agency’s seals on the disputed equipment at Isfahan, for
example, the IAEA can then opt to make a report to the UN
Security Council, at which point Russia would probably veto any
sanctions the Council comes up with; Moscow being Iran’s
prime sponsor on the nuclear front.
The Euro-3 (Britain, France and Germany) has offered Iran a
deal whereby it could continue to develop a nuclear program for
peaceful purposes in exchange for improved relations with the
West, but Iran has thus far said no and the talks, as I write, are at
a stalemate. Iran will get the bomb, whether the mullahs are in
power or not, because it is in their best interest to have it given
the dangerous neighborhood they’re in.
But a note on an absurd front page story in the Washington Post
this week that reports U.S. intelligence now estimates Iran can’t
produce a nuclear weapon for another ten years, double the
previous five-year estimate, according to the piece. Talk about a
disinformation campaign. And the same story says Israeli
intelligence now concurs on the timetable. This supposedly is
the same Israeli intel that I quoted a few months back as saying
Iran could test a device by year end.
The world knows that Iran has been feverishly working on the
project for decades, and at tens, if not at least 100, facilities
around the country. This doesn’t mean the West, or Israel, goes
in today to effect regime change a la Iraq, but you’d have to be
an idiot not to know Iranians are rapidly progressing in their
attempt to join the nuclear weapons club. In this instance even
the IAEA admits it’s been duped time and again.
North Korea
Back to the issue of the UN Security Council, this is going to be
one busy body this fall because it’s readily apparent the six-party
talks on Pyongyang’s weapons programs are collapsing, which
then calls the whole process into question and will lead the
United States to take up the issue with the UN, at which point I
would guess the Chinese then exercise their veto on any
resolution calling for sanctions. North Korea continues to seek
security guarantees, diplomatic recognition, and the ability to
plow ahead with a nuclear program for peaceful means before it
will scrap its weapons. The U.S. won’t proceed unless the
weapons are first dismantled.
Wall Street
The equity markets’ momentum has been stopped dead in its
tracks the past two weeks and with most companies having
reported for the second quarter the focus returns to oil, now $62
and at another new high, and the Federal Reserve. I’ve always
said this highly-levered economy of ours, increasingly dependent
on the wealth effect created by the real estate bubble, could flip
on a dime and it’s clear that if I’m going to be right it will have
to do so from a higher rate of growth than I initially anticipated.
Morgan Stanley, for example, is forecasting GDP to increase by
5% in the third quarter and the consensus has moved to 4-4.5%.
But I’m not about to change my outlook; just prepare to give me
an extra 8-12 weeks, perhaps, to be proven right.
So we have our 3-legged stool; housing, the consumer and
capital spending. With each passing week I’m more convinced
housing in many key markets (importantly, with large segments
of our population) has peaked. This week, developer Toll
Brothers warned of a softening Washington, D.C. market, thus
echoing a theme raised in the Washington Post a few weeks ago.
We know other markets are softening, including California as I
predict August / September figures will reflect in dramatic
fashion. I certainly know we are reaching a peak in my own area
of New Jersey.
Those who recently purchased a home with an interest-only
mortgage have to be feeling a bit queasy at the thought of much
higher payments after their initial period of good fortune passes
because short interest rates are marching higher. As for the more
standard 30-year fixed crowd, pegged to the 10-year Treasury,
new buyers here have to deal with mortgages that will be
approaching 6% shortly; still historically low, no doubt, though
psychologically it will have an impact.
But let’s look at some other economic statistics. Personal
income was up 0.5% in June, personal consumption 0.8%, and
the savings rate was 0.0%….you’re reading that right. We keep
spending what we earn, and then some. But these were all 2nd
quarter #s. This week we also heard of lackluster sales from the
nation’s retailers, though for the month of July. While
discounters such as Wal-Mart did well, mid- and high-range
operators for the most part failed to meet expectations; an
interesting development.
True, auto sales in July were spectacular: GM up 19%, Ford 29%
and Chrysler Group up 27%. But incentives for the Big Three
were about $3,800 per vehicle ($3,000 overall, including
imports), which means that profit margins couldn’t have been
that strong while a consumer used to such deals could balk when
they disappear…as they already are.
But the big killer, at least for today, was Friday’s July
employment report that reflected an increase of 207,000 jobs (all
but 4,000 in the service sector) and a worrisome inflation
component in the form of a 0.4% increase in average hourly
earnings. That spooked bonds and lent even more weight to the
language that will accompany the Federal Reserve’s next hike in
the funds rate to 3.5% this coming Tuesday.
It’s increasingly apparent the Fed is going much higher and as is
its wont, more often than not it is out hunting for bubbles to pop.
So over time it’s all about an increasingly fretful consumer,
owing to his stagnating if not declining real estate investment,
outweighing any gains on the business spending front. At least
that’s the view from here.
Finally, there is the geopolitical front. You don’t have to have
the intellect of Henry Kissinger to recognize that, for starters, the
three issues discussed up top aren’t going well. The power of
any of the three to influence the financial markets should never
be underestimated, let alone the ever present terror threat. It’s
why I scoff at the likes of Prudential Financial’s Ed Keon and his
current recommendation to put 100% in equities. Only a fool
would follow that lead.
Street Bytes
–Both Nasdaq and the S&P saw their five-week winning streaks
snapped, with the former down 0.3% to 2177 and the latter off
0.6% to 1226. The Dow registered its second straight decline,
off 0.8% to 10558. Energy issues were strong on the heels of the
death of Saudi Arabia’s King Fahd and the uncertainty this could
create in the Kingdom, but the transition to Crown Prince
Abdullah (now king) has been smooth. Otherwise, Iran’s
intransigence, political turmoil in emerging oil powers Sudan and
Mauritania, refinery issues and a heat wave helped lead to the
record close above $62.
But on Friday there was but one story, the IPO of Baidu, China’s
Google, or so they say. The offering was priced at $27 and it
closed at $122…yes, $122…for a gain of 353%. What a freakin’
joke. Just a guess, but shares in this one will collapse shortly.
Lastly, lest you get too smug about your own stock-picking
prowess, just know that the percentage of all trades on the New
York Stock Exchange that is the result of program trading has
risen to 65%. Well, you know what they say before you sit down
to gamble at a casino. Even if you think you know what you’re
doing, always have 40 times your minimum bet to withstand the
inevitable losing streaks.
–U.S. Treasury Yields
6-mo. 3.74% 2-yr. 4.10% 10-yr. 4.39% 30-yr. 4.58%
Rates rose sharply at week’s end on the hourly wage component
of the employment report. But I have not abandoned my
deflation scenario for 2006, especially since a little inflation
scare here and there only tempts the Fed to move more
aggressively, thus hastening the slide towards recession and
falling price pressures.
Separately, the Treasury Department announced that it would
resume selling the 30-year bond in the first quarter of next year.
It had stopped offering it back in October 2001. Having a 30-
year option only makes sense, both from the standpoint of
financing the national debt but also in terms of offering more
options for those with longer-term obligations, such as insurance
companies and pension funds.
Lastly, the Bank of England actually lowered its benchmark rate
as Britain faces a slowing economy.
–CNOOC formally abandoned its bid for Unocal, leaving the
latter in the arms of Chevron. But I still see it as a big victory for
the Chinese government on the propaganda front unless
addressed directly by President Bush when he meets with
Chinese leader Hu Jintao in September.
–Exxon Mobil CEO Lee Raymond is stepping down at year end
after 12 years at the helm. He’s to be replaced by current
president Rex (Roto)Tillerson.
–Total, Europe’s largest energy refiner, said production fell 4%
in the second quarter due to strikes and maintenance issues.
–And speaking of production, energy expert Daniel Yergin had
some of the following thoughts in a Washington Post op-ed.
Yergin has been arguing recently that the current $60 level for oil
isn’t warranted by the fundamentals.
“There will be a large, unprecedented buildup of oil supply in the
next few years. Between 2004 and 2010, capacity to produce oil
(not actual production) could grow by 16 million barrels a day –
from 85 million barrels per day to 101 million…a 20 percent
increase. Such growth over the next few years would relieve the
current pressure on supply and demand….
“A common pattern in the shortage periods is to underestimate
the impact of technology…Over the next few years, new
facilities will be transforming what are inaccessible natural gas
reserves in different parts of the world into a quality, diesel-like
fuel.
“(But) the growing supply of energy should not lead us to
underestimate the longer-term challenge of providing energy for
a growing world economy. At this point, even with greater
efficiency, it looks as though the world could be using 50 percent
more oil 25 years from now. That is a very big challenge. But at
least for the next few years, the growing production capacity will
take the air out of the fear of imminent shortage. And that in turn
will provide us the breathing space to address the investment
needs and the full panoply of technologies and approaches –
from development to conservation – that will be required to fuel
a growing world economy, ensure energy security and meet the
needs of what is becoming the global middle class.”
I agree with this take.
–Dan L. passed along the story that on page 1,391 of the 1,724-
page energy bill, a provision to offer tax credits for those
acquiring hybrid autos also limits the number of cleaner, more
efficient cars that can be sold under the hybrid category. Absurd.
–Richard Ness, president of the Indonesian subsidiary of
Newmont Mining Corp., is on trial for polluting a bay as the
company’s lead executive. The government alleges Newmont
dumped millions of tons of mercury and arsenic-laced pollutants
into the bay on Sulawesi island, sickening villagers. Not only
does Ness deny this but the World Health Organization and an
initial Environment Ministry report found the water not to be
polluted, while another government study from just last May
found traces of heavy metals in villagers living close to
Newmont’s facilities to be within normal levels. It’s a case
being watched closely by foreign investors wary of Indonesia’s
corrupt system. Sounds like nothing more than extortion.
–The Justice Department is looking into allegations that
DaimlerChrysler’s Mercedes unit paid bribes in at least a dozen
countries, primarily in Latin America and Africa, though the
purpose of the supposed payments hasn’t been disclosed,
according to a report in the Wall Street Journal.
–E. Kirk Shelton, the former vice chairman of Cendant Corp.,
was sentenced to 10 years in prison for his role in the $19 billion
fraud that occurred between 1983-1997 prior to Cendant’s
acquisition of Shelton’s CUC International in 1998, after which
the scheme was revealed.
–The Journal is reporting that the SEC may be close to indicting
former Fidelity Investments stock-trading head Scott DeSano as
part of the investigation into gift-giving by brokerage firms
looking to do business with Fidelity, as covered previously in
this space.
–Martha Stewart, the poster girl for sheer arrogance, failed to
live up to the terms of her house arrest by attending yoga classes,
among other transgressions, so the government extended it
another three weeks. Martha otherwise would have been
released on August 10. It’s a good thing.
–CIBC is ponying up a cool $2.4 billion for its role in inflating
Enron’s revenues as well as hiding the company’s debt.
–Adidas purchased Reebok for $3.8 billion, a 34% premium for
Reebok shareholders from the price the stock was fetching the
day before the announcement, as Adidas takes a run at #1 sports
apparel king Nike.
–The FCC ruled that the large telephone companies no longer
have to lease their high-speed Internet lines to competitors,
granting the Big Telcos the same treatment won by cable
companies in a recent Supreme Court decision. For starters, it
will help drive out many smaller ISPs.
–The economics of Sirius Satellite Radio’s 5-year, $500 million
contract with shock jock Howard Stern are being called into
question once again after Stern announced he will be airing his
raunchier segments, uncensored, on pay-per-view TV. Sirius has
previously said it needs to convert at least one million of Stern’s
listeners for the venture to turn a profit but many may now opt
for the TV version instead.
–Tyco warned that its results could fall short of expectations
through the third quarter of 2006 as the turnaround is taking
longer than anticipated. For the second quarter of this year, the
conglomerate once known as G.E. Jr. saw revenues increase just
3.3%.
–As part of General Motors’ stellar numbers for July, we learned
SUV sales reached an all-time high for the automaker; more bad
news for those of us driving Hondas, trying to look over, under
or around the behemoths.
–3,000 floor traders at the New York Stock Exchange could be
out of a job within 6-12 months as a result of the Big Board’s
merger with electronic trading outlet Archipelago. Today, the
top 500 issues account for 80% of all trades and don’t require
human intervention. There are 2,300 other listed securities that
specialists would argue do, but the handwriting for these, too, is
on the wall. [Crain’s New York Business]
–Last week I mentioned FPA Capital Fund’s Robert Rodriguez
had a 35% cash position in his flagship offering. I double-
checked and as of June 30, the fund’s web site says it was 33%.
Just as importantly, I was wondering how his performance could
still be so strong in 2005 and saw he has 21% in energy and 20%
in retail, two of the best performing sectors of the year.
–According to a Fidelity Investments study, the average 401(k)
balance was up 10% in 2004 to $61,000…the best level in five
years but still below the 1999 peak.
–My portfolio: I remain about 85% cash, 15% equities, though
the bulk of the equity portion is in my volatile carbon fiber play
and I maintain some high tech garbage, of which I’ve jettisoned
a portion recently. The last energy position I dumped is up about
10% from where I sold it. Doh!
–Next week the impact of rising property taxes…if you keep it
where it is.
Foreign Affairs
Britain: Prime Minister Tony Blair announced a crackdown on
hate speech while outlining new rules for deporting those
espousing terror. Parliament and civil libertarians will have
other ideas…until they all get whacked again and the country
finally comes together on the issue.
Israel: An Israeli army deserter boarded a bus and gunned down
four Israeli Arabs, while wounding at least 12 others before
running out of bullets; after which he was beaten to death by a
mob. Evidently, the soldier deserted after being told he would be
part of the force overseeing the disengagement from Gaza. It’s a
harbinger of the nightmare scenario that Israeli officials fear,
potential civil war. Prime Minister Ariel Sharon said afterwards,
“Terror between civilians is the most dangerous thing for the
future of Israel and its democratic stability.”
Turkey: Aside from the aforementioned attack by the Kurd’s
PKK on Turkey’s military, France is now trying to delay the start
of Turkey’s European Union membership talks slated for
October 3. Back in December, the EU told Turkey that one of
the preconditions for acceptance into the club was to extend its
customs agreement to Cyprus, which Ankara just did, but the
Turks failed to formally recognize the Cypriot government
because of the historic differences between the two. Turkey’s
Prime Minister Erdogan argued that he had been assured by
French President Jacques Chirac that France would not stand in
the way if formal recognition wasn’t granted. Given today’s
post-7/7 climate, this is only going to get uglier.
Russia: In his first statement since receiving a 9-year prison
sentence, former Yukos chairman Mikhail Khodorkovsky called
on President Vladimir Putin to step down in 2008, as currently
mandated by the constitution, in order to prevent the nation’s
collapse. But Khodorkovsky also said that with the failure of
social reforms together with a growing sense of social injustice
in Russia, a turn to the “Left,” either democratically or through
revolution, is inevitable. Separately, the Kremlin barred ABC
News from broadcasting in Russia after it aired an interview with
Chechen leader Shamil Basayev, the terrorist responsible for
Beslan and other atrocities.
Uzbekistan: The U.S. was told to leave a vital airbase used for
operations in Afghanistan in six months following increased
tensions resulting from a May crackdown that left up to 700
dead.
Random Musings
–Some Islamic leaders have begun to speak out against
terrorism, far more than are actually being given credit for in our
media. One such man is Mohammed Sayyed Tantawi, the
leading Sunni leader in Egypt. In a sermon the other day
Tantawi said:
“The aggressors who blow up themselves, their cars and bombs
against innocent men, women and children will not be given any
mercy by God….They will be cursed by God and his angels.”
But Lebanon’s most senior Shia cleric, Grand Ayatollah
Mohammed Hussein Fadlallah, said in his own sermon that the
“evil phenomenon” of terrorism “stems from the policy of
arrogance (by the United States and Israel).”
[Lee Keath / AP]
At least an authentic debate is now taking place. It will roil the
waters further, but it’s a necessary part of the process if we are to
ever achieve any kind of real success in the war on terror.
–Following my story on bird flu last Saturday, the Washington
Post had a front page piece on Sunday that highlighted how the
world medical community is frantically scrambling to produce
vaccines. Then this week it was reported that Russia has
confirmed cases in Siberia and two other regions and it may have
spread into Kazakhstan. Meanwhile, the World Health
Organization is demanding that China conduct more tests on the
pig-borne disease there (see last week’s WIR) that has now killed
at least 38. As yet there has been no person-to-person
transmission in this instance but this virus is so virulent it killed
one farmer in two hours. [South China Morning Post]
–E. Wayne Merry, a former U.S. State Department and Pentagon
official had the following thoughts in the current issue of
Defense News. Merry argues we need to refocus on U.S. ground
forces.
“Today’s reality is what Gen. Eric Shinseki, former Army chief
of staff, warned about: an Army with many more obligations
than battalions. Each day’s news proves there is no substitute for
ample infantry when facing a determined and resourceful
enemy….
“Sadly, the news also shows the continuing erosion of our
ground forces. The hemorrhage of talented noncommissioned
officers – the backbone of any great army – and of junior officers
is far more ominous than recruiting shortfalls….
“It has been said the United States went into Korea with a pretty
poor army but emerged with a very good one, while it went into
Vietnam with an excellent army but came out with a terrible one.
“We sent to Iraq a superb force, and in terms of operational art,
perhaps the finest this country has ever fielded. Armies,
however, are intrinsically fragile institutions because they
depend so much on the human factor. What shattered our troops
in Vietnam was the combination of mission futility and knowing
the home front did not care.
“Today, our soldiers have the support even of Americans who
oppose the war they are fighting. The futility of nation-building
with the bayonet where we are not welcome is another matter.
“After the damage inflicted by the Iraq insurgency, it will take
time and resources to rebuild our combat battalions. For
America, these forces are a vital national asset and far more
important than the future of Iraq. We are going to need our
ground pounders again, and perhaps soon.
“As a Marine officer in the First World War said about the bulky
Colt .45 pistol on his hip, ‘I don’t want it very often, but when I
do, I want it damn bad.’”
–New Jersey Democratic Senator Jon Corzine is running for
governor but, thanks to the work of the New York Times and the
Star-Ledger, Corzine has just handed opponent Doug Forrester
one heck of an issue. For it seems that the senator loaned his
then girlfriend Carla Katz a cool $470,000 to allow Ms. Katz to
purchase her home from her ex-husband back in 2002. Corzine
then forgave the loan in 2004, in addition to previously paying a
large gift tax, but the couple later split, amicably.
The problem is Carla Katz is president of a 9,000 strong state
employee union and, obviously, should Corzine become
governor he would be involved in union discussions in one form
or another, i.e., a massive conflict of interest. The deal may not
be illegal but this is not just a situation where Corzine takes care
of a “friend” as he claims. To be continued….wrote the editor
with glee.
–President Bush named John Bolton to be UN ambassador,
thereby bypassing the Senate in a recess appointment that lasts
until January 2007.
–Baltimore Orioles star Rafael Palmeiro, one of the great
sleazeballs in the history of the game, tested positive for steroids,
though the announcement of the results of his May drug test were
kept secret until this week while Raffy appealed. He is thus
suspended for ten games under baseball’s new rules. This is the
same Palmeiro who pointed his finger at Congress last spring and
claimed he had never used the stuff. He’s simply a fraud, a
cheat, a liar, a phony and a dirtball. It’s the hope here that
Congress decides to nail the slimeball for perjury.
But baseball fans are in many respects just as hypocritical as
players like Palmeiro, Jason Giambi, Gary Sheffield, and Barry
Bonds are for continuing to embrace many of them. It’s what
has us traditionalists, who grew up loving the game and its
statistical heritage, so upset.
Alas, at this point there is little we can do. As much as I’d like it,
purging the record book of some of the lifetime marks of its
players just won’t happen, so we appear to be headed towards a
conclusion reached in a Wall Street Journal editorial on Friday.
“Baseball’s fans know about the ‘dead-ball’ era prior to 1920 and
the ‘live-ball’ era that followed. Whatever the much-debated
cause, stats before and after were like night and day. So let’s
designate post-1995 the ‘live-player’ era. Professional sports are
now populated with chemicalized robots who are often fun to
watch. But they are different than what went before. We can
call this the ‘live-player’ era, let the old heroes rest in peace and
argue into the night about the new heroes like Mr. Palmeiro.”
By the way, if you have a word to describe Palmeiro that I
omitted above, please pass it along and I’ll share it with the
crowd.
–Newsweek’s cover story on the crystal meth epidemic is
depressing. Today, the rate of lab seizures and emergency room
visits continues to skyrocket. Whole communities have now
been impacted and it’s no longer just a rural issue. It’s become a
nightmare all across the country and, coupled with gang
violence, the hidden terror.
–So I was in Bermuda this past week and became a victim, in a
certain sense, of Tropical Storm Harvey because it certainly
rained more than usual and my return was delayed by five hours
due to flight issues.
I’ve been here quite frequently but not since 1983 and boy has
this place changed; perhaps best exemplified by the closing of
Trimingham’s, a department store on the main street in Hamilton
that has been an institution here for 146 years. Taking over the
space is the Bank of Bermuda.
While tourism is still a major part of the local economy,
commerce is exploding with the building of large-scale office
complexes. Yes, Bermuda is still a capital of the insurance
industry, but others such as Baccardi have built large
headquarters here as well. [I walked into the building of this last
one, hoping for free samples but, alas, ended up with just a
brochure.]
Bermuda also has to be about the most expensive place in the
world; for real estate, at least. The average cost of a home is
now in the $3-$5 million range…and I’m being conservative.
Any house with a harbor or ocean view is generally at least $7
million. I asked a taxi driver to show me billionaire Michael
Bloomberg’s $55 million palace but security wouldn’t let us
through. I did at least see the surrounding neighborhood (he’s in
the Mid-Ocean Golf Club sector for those of you familiar with
the island). Bloomberg evidently lives next to Ross Perot’s
equally impressive residence.
In talking with the locals, they do most of their purchasing
online; it’s that expensive to buy items on Bermuda itself. For
example, most obtain a refrigerator for $1,000 on the Web and
pay for it to be shipped when the same product costs $3,000 at a
local appliance store. Gas, by the way, is $6.00 a gallon and
traffic is horrendous during rush hour as car ownership rules
have been relaxed over the years.
Finally, I just want to thank my new friends Bill and Mary, Lois
and George, for a delightful evening on Monday as I hooked up
with them by chance. Mary, whose family was big in Illinois
politics, and Bill regaled us with stories of Adlai Stevenson and
Everett Dirksen, right up this political junkie’s alley, while 82-
year-old George is still quite the mountain climber.
But now it’s back to work, sort of. The PGA Golf Championship
is coming to my area and the biggest problem us locals face is
the crush of fans that is about to descend on the place that
StocksandNews calls home.
—
Pray for the men and women of our armed forces.
God bless America.
—
Gold closed at $442
Oil, $62.31
Returns for the week 8/1-8/5
Dow Jones -0.8% [10558]
S&P 500 -0.6% [1226]
S&P MidCap -1.7%
Russell 2000 -2.5%
Nasdaq -0.3% [2177]
Returns for the period 1/1/05-8/5/05
Dow Jones -2.1%
S&P 500 +1.2%
S&P MidCap +6.8%
Russell 2000 +1.7%
Nasdaq +0.1%
Bulls 57.3
Bears 22.5 [Source: Chartcraft / Investors Intelligence]
Have a great week. I appreciate your support.
Brian Trumbore
