[Posted 7:00 AM ET]
The Middle East
I’ll attempt to be brief as I’m holding back some for next week
and my look ahead to 2007. But I still have to address the facts
as they are and so, as our troops around the world try to celebrate
Christmas while maintaining focus on their dangerous jobs,
President Bush is pondering just what his new way forward will
be in Iraq.
This week he admitted “we’re not winning,” but then added
“we’re not losing” either. As he listens to advice from generals,
both active and retired, politicians of all stripes, diplomats, and
his own advisors, Bush is being pulled in many directions but
appears to be leaning towards a surge of troops. Those who
differ, such as General John Abizaid, commander of U.S. forces
in the Middle East, are being asked to step aside; Abizaid himself
appearing to take retirement a little sooner than originally
expected next March.
Here’s my own opinion, recognizing only 15% or so of you may
agree with the thinking.
The United States must pull out all the stops one last time to try
and rectify mistakes already made. First and foremost we owe it
to the troops and their families.
Do as Senator John McCain has advocated and send in a
minimum of 20,000-30,000, recognizing not only our other
obligations and already stretched military, but that this will cause
further hardships on the home front. [Congress’s first act when
they return should be to reinforce provisions ensuring that Army
Reservist and National Guard troops have their jobs protected as
much as reasonably possible, recognizing that small business
owners have their own issues and may need help. The soldiers
and their families are stressed to the max as it is and shouldn’t
have to worry about this, too.]
Retake Baghdad, one neighborhood at a time, and go after the
militias. Remove Prime Minister Maliki. Replace him with Iyad
Allawi, a strong man. Don’t exit an area, however, until Iraqi
Army units can fill the breach.
At the same time, as Senators Clinton and Ensign recommended
in a Wall Street Journal op-ed, create a national oil trust so that
every Iraqi is distributed a share of their country’s only real
asset. Give them a stake in this fight, while possibly encouraging
some in the professional class who have fled the carnage to
return if they can see progress on the ground.
Secure the judiciary and the prisons. It’s been absurd that very
few of those arrested actually serve time. As some have
suggested, this is where strong man rule comes in as well as the
Rudy Giuliani cockroach theory. Go after petty criminals and
give the people a sense of right and wrong again. They’ve lost it.
Just these few steps will take an enormous amount of time,
money and sacrifice, but only until the rule of law is returned to
Baghdad can the U.S., its few remaining allies and the Iraqi
government consider going forward. At least it’s a defined
mission that President Bush can attempt to rally the people
behind.
During his swearing in ceremony, Secretary of Defense Robert
Gates reiterated one idea most of us, regardless of where we
stand on the troop issue, can agree on.
“All of us want to find a way to bring America’s sons and
daughters home again. But as the president has made clear we
simply cannot afford to fail in the Middle East. Failure in Iraq
would be a calamity that would haunt our nation, impair our
credibility and endanger Americans for decades to come.”
What has occurred thus far is tragic on so many different levels.
We are truly losing. The president’s own credibility is shot and
he himself is a wasting asset as he heads into his final two years
in office. I, for one, would be happier seeing less of him. Make
Gates the new public face of our final effort in Iraq. At least the
people will know they are getting the truth; something Gates is
already proving. The two leading Republican candidates for
president, John McCain and Rudy Giuliani, both agree we must
do all we can to win the war so let them help cement the
message. For the good of the country, our political leaders who
still understand the cost of defeat need to speak with one voice.
Lastly, fire Karl Rove, Mr. President, and for 2007 act as the
leader of all the American people and not just the party base,
whatever that is these days. I’m sure as heck not part of it.
So this is just one man’s opinion. We already know Colin
Powell is against this track, along with all manner of other
military leaders, politicians and the vast majority of the people. I
just can’t see giving up without being able to look ourselves in
the mirror and say we have done everything we could to win the
war. There is no way we can do so today.
Iran
Far too much is being made of the mild defeat President
Ahmadinejad suffered at the polls in municipal elections and the
vote to seat a new 86-member Assembly of Experts.
Ahmadinejad has been the public face of Iran since his own
election victory in the summer of 2005, but ultimate power
resides in the Assembly, which selects the country’s supreme
leader, currently Ayatollah Khamenei. Some editorials I’ve read
act as though Ahmadinejad’s influence has been greatly
diminished so here are the facts.
The man who lost to Ahmadinejad in the presidential vote in ’05,
former president Ali Hashemi Rafsanjani, is very much a
conservative hardliner in his own right. First and foremost, he
seeks the bomb just as much as Ahmadinejad has. Rafsanjani is
now in the Assembly of Experts and will wield even more
influence than before due to the fact the economy is suffering
under Ahmadinejad, despite the oil wealth, and Rafsanjani is one
who recognizes Iran needs to have respectable relations with the
rest of the world for Iran to thrive. I have said in the past that
despite the fact he is a virulent hardliner, and hater of Israel,
Rafsanjani is someone the United States could at least open a
dialogue with, but with eyes wide open.
As for the reform movement, yes, the students are growing
increasingly restive as they see their own hopes for a better
future dashed with the stagnant economy, but their actual clout is
limited. There will be no people power revolution, a la Ukraine,
Georgia or the Philippines. The Republican Guard would crush
it with tremendous loss of life.
And when it comes to the Republican Guard, I didn’t see one
opinion piece this week mention perhaps the most important
detail. Ahmadinejad still has their backing. Remember, it was
they who were the difference in his election victory last year.
This is what I will focus on in my own work. Should
Ahmadinejad lose their support, he’s finished. But that would
mean they’d have swung to Rafsanjani…six of one, half dozen of
another.
The real bottom line is this. Iran, under Ahmadinejad,
Rafsanjani, Khamenei or his successor will continue with the
nuclear weapons program. It’s a matter of national pride and
security in a world where Iran’s neighbors are rather hostile to its
interests, particularly Afghanistan and a nuclear Pakistan. [Who
knows how Iraq will pan out.]
As for the nuclear issue, the UN Security Council is slated to
vote on a resolution Saturday imposing vastly watered down
sanctions on Tehran’s suspected weapons program, assuming
Russia gives in on some financial restrictions. We’ll see.
But earlier this week Ahmadinejad said “Our nation conquered
the peak” of nuclear technology. “Since our nuclear activities
have been in the international framework and regulations, we
will continue them even if sanctions are imposed.”
On Monday a government spokesman said Iran will celebrate a
nuclear victory during the Ten-Day Dawn ceremonies marking
the anniversary of the victory of the 1979 Islamic Revolution
(Feb. 11-20). In the past few months we’ve heard Iran will be
making some kind of announcement in March. Regardless, it’s
probable that what emerges will be rather unsettling.
British Prime Minister Tony Blair, in the Middle East this week,
told an audience in Dubai, “We must recognize the strategic
challenge the government of Iran poses; not its people, possibly
not all of its ruling elements, but those presently in charge of its
policy…. (Iran wants) to pin us back in Lebanon, in Iraq and in
Palestine.”
With regards to Iraq Blair said, “We should stop buying into this
wretched culture of blaming ourselves” as he called on moderate
leaders in the Middle East to join a “monumental struggle”
between democracy and extremism. But Blair, like Bush, is
increasingly irrelevant.
As for Israel and Palestine, Blair, Israeli Prime Minister Ehud
Olmert and President Bush are all supporting the efforts of
President Mahmoud Abbas, who once again called for early
elections as a way to break the standoff between Abbas’s Fatah
faction and Hamas. But Hamas vowed to boycott any new vote.
Unless Abbas prevails, however, Western aid will not flow in if
there is the chance it can be diverted to Hamas, which still
refuses to recognize Israel’s right to exist.
Separately, Israel’s Defense Forces warn that Hizbullah in
Lebanon is back near full strength thanks to Syria’s arms
shipments. For its part the Arab League backed Syrian lackey
President Emile Lahoud and his right to serve out his term
despite calls for him to go. This is a big disappointment, though
not surprising, and the stalemate in Beirut continues.
—
Wall Street
The economy is weaker today than it was yesterday. In fact it
has been since the start of the year. Following the 5.6% reading
on GDP in the first quarter, growth came in at 2.6% in the second
and 2.0% for the third (the final revision for the third quarter
having come in this week). Few expect GDP in the fourth to
exceed 2.0%.
This week the volatile housing starts number was up 6.7% for
November, not unexpected, thanks in large part to good weather
and builders rushing to complete projects already started. But a
better indicator, building permits (future activity), was down
3.0%. Homebuilder Hovnanian announced its cancellation rate
was up to 35%.
Of course some choose to believe the market has bottomed. In
much of California, for example, prices appear to have leveled
off for now, but Josh P. reports in from San Diego County that
prices there fell 7% year over year in November. Not disastrous,
by any stretch, but it’s hard to build a case it’s clear sailing from
here on.
Of more import is the still developing story on subprime
mortgages (paper held by those who had no business buying in
the first place), which now make up more than a quarter of the
entire market. A research report by the Center for Responsible
Lending concludes one in five subprime mortgages made in the
last two years are likely to go into foreclosure.
On the earnings front, correct me if I’m wrong but the news this
holiday season hasn’t been too spectacular with warnings from
important retailers such as Circuit City and Best Buy, as well as
so-so reports from the likes of Oracle and Qualcomm, along with
a mediocre one from another important barometer of economic
activity, Federal Express. Throw in the weather-related disaster
in the Denver area that impacted tens of thousands of holiday
travelers around the country, and the last thing on some minds is
shopping. They’d settle for a warm cup of hot chocolate and the
comfort of friends and family at this point. It’s stress city for
quite a few Americans right now, including the families of our
servicemen and women.
But as I’m saving more in-depth commentary for my 2007
Outlook next week, following are some thoughts from two
respected voices.
Economist Robert Samuelson / Washington Post
“With unemployment at 4.5%, the U.S. economy is hardly ailing.
But three threats cloud the outlook.
“First, the real estate bust. Speculation helped fuel the boom –
and now it’s payback time. In the past year, housing starts have
dropped 27% and sales of new homes 25%. With buyers waiting
to see how low prices go, inventories of unsold new homes have
risen 14%. Some economists see recession. Falling home prices
could weaken consumer confidence and spending. By year-end
2007, unemployment will hit 6.3%, predicts Dean Baker of the
Center for Economic and Policy Research.
“Second, turmoil in the auto industry. Unpopular models, steep
gas prices and high labor costs have forced huge cutbacks at
Ford, General Motors and Chrysler. Pressures could intensify.
Total U.S. vehicle sales will decrease to 16.1 million units in
2007 – the lowest since 1998 – forecasts Moody’s
Economy.com. That would be down from 16.5 million in 2006
and almost 17 million in 2005. Since June, manufacturing jobs
have dropped by 95,000; about 90% of the loss relates to autos
and home building (lumber, furniture).
“Finally, and most importantly, skewed trade. America has
gorged on imports while other countries have become overly
dependent on exports. In 2006 the United States will run a
current account deficit of $878 billion, estimates the
Organization for Economic Cooperation and Development
(OECD). Meanwhile, China, Japan and Germany will record
surpluses of $211 billion, $165 billion and $117 billion,
respectively. [The ‘current account’ is an expanded trade
balance.] These huge imbalances could destabilize the world
economy through a currency crisis or trade slump.”
Mortimer Zuckerman, Editor-in-Chief, U.S. News & World
Report, on the ever-widening gap between the haves and have
nots.
“Our nation’s core bargain with the middle class is
disintegrating. We are into the fifth year of a relatively robust
expansion, but millions are worse off. Exposed to greater risks
in job security, they feel abandoned, left to fund their own health
and retirement programs out of static or falling real incomes.
“Resentment and envy are not normal characteristics of our
society; we usually don’t care how much the other guy makes as
long as we feel we’re getting a fair shake. Today, however, the
middle class is not. Most of our economic gains have gone to
people at the very top of the income ladder. Median income for
a household of people of working age, by contrast, has fallen five
years in a row. What’s more, in a rapidly changing economy,
Americans are losing their jobs, and while they often find new
ones, the average pay is 17% below what they were earning
before….
“As former Secretary of the Treasury Larry Summers put it: ‘If
the anxious middle’s concerns about fairness are this serious
when the unemployment rate is 4.5%, there will be far greater
concerns whenever the economy turns down.’
“The economy is going great guns – thanks to globalization,
continued technology advancements, and improved productivity
– but the middle class and working families just don’t feel they
are getting ahead, despite the fact that they’re working very hard.
Indeed, many ordinary Americans say they are either falling
behind or just barely keeping up….
“Tens of millions of Americans live in fear that a major health
problem can reduce them to bankruptcy. They realize their
families are one health crisis away from family hardship, which
is a key reason for the pervasive feeling of personal and
permanent insecurity.”
Healthcare is the key, according to Zuckerman. “We must find
some way to provide universal health insurance, especially to
cover all children. This is one of the critical reasons that
Americans are nervous and no longer believe that the next
generation will be better off.”
Street Bytes
–The major averages took it on the chin this week with the Dow
Jones losing 100 points or 0.8% to finish at 12343. The S&P 500
lost 1.1% and Nasdaq dropped 2.3% to 2401, its worst week
since July. There is a lot of uncertainty as to just how well or
poorly we ended up this Christmas and with a weak number on
durable goods (big ticket items) on Friday and a poor reading on
manufacturing from the Philadelphia region earlier, at least for
one week caution worked its way back into the debate amidst all
the previous happy talk.
–U.S. Treasury Yields
6-mo. 5.07% 2-yr. 4.72% 10-yr. 4.62% 30-yr. 4.71%
Yields continued to inch up, even though there is no inflation to
speak of. A better indicator will be activity following New
Year’s when all the participants are back in force. One thing is
for sure, housing needs continued low rates to keep it above
water and the Federal Reserve knows this.
–Hot on the heels of the mini-summit held between Chinese
authorities and a U.S. delegation led by Treasury Secretary Hank
Paulson, China signed a deal (actually a memorandum of
understanding) with Westinghouse to buy four nuclear power
plants with an estimated cost of $5 billion to $8 billion, though
Westinghouse’s actual take will be closer to $3 billion to $4
billion.
Now to those who might be thinking, in light of my rather
derogatory comments of last week concerning the U.S.-China
relationship these days, ‘Ah-ha! The United States isn’t as
irrelevant as you make it out to be, Mr. Editor,’ I would just urge
you to consider that, true, we aren’t irrelevant when it comes to
technology transfers, which is exactly what this Westinghouse
deal is. What’s the real long-term benefit for the U.S.? China
will just take the technology and build its own, as it already is.
For now, however, China will use the deal to argue, ‘See, we
really are cooperating. Now let us alone.’ But as the contract is
only $1 billion a year, a cynic like me would say that hardly puts
a dent in a trade deficit with China exceeding $200 billion.
For the last word on the overall U.S.-China relationship in light
of the Paulson trip, I turn to Irwin Stelzer, writing in The Weekly
Standard.
“Paulson’s mission is impossible for two reasons. First, the
Chinese regime’s overwhelming priority is to stay in power.
That means providing jobs for the 300 million farmers expected
to move to the cities in the next 20 years, which in turn means
the government will under no circumstances allow the yuan to
rise to a level that cuts sharply into exports.
“Second, even if Paulson could persuade the Chinese to allow
their currency to appreciate to a point where made-in China
merchandise became more expensive in America, the effect on
the trade deficit would be trivial. American consumers would
simply shift to goods manufactured in other countries in which
labor costs are far lower than they are in the United States.
“Still, Paulson’s trip probably was worthwhile, although the
exaggerated importance it took on as a consequence of the Bush
administration’s decision to bloat the delegation with cabinet
members and to enhance its prestige by persuading Fed chairman
Ben Bernanke to join the junket probably created expectations
for success that were unattainable. My guess is that some bright
blade in the White House thought it would appease the
president’s congressional critics if Bush sent a large delegation to
prove he feels the pain of those who have lost jobs because of
imports.”
In the end, the Chinese government “can’t figure out how to get
from here to there – how to achieve that goal without creating
huge unemployment during the transition from an export-led to a
more balanced economy.”
–EBay suffered a blow to its China strategy as it shut down its
main Web site there and instead entered into a joint venture with
a Chinese company. EBay had already spent hundreds of
millions of dollars trying to establish its presence in China, but
the government puts all manner of pressure on foreign operators
to find a Chinese partner.
–More and more Chinese are returning to the mainland after
training abroad. A study by the International Labour
Organization offered that the number of educated managers
coming home has grown from about 6,000 in 1995 to almost
35,000 in 2005. An MBA holder, however, that can start out in
some industries with a $100,000 package in the United States
still just receives about $40,000 in China. Nonetheless, China is
witnessing a trend that has occurred in Ireland over the past 10 to
15 years as that economy became the Celtic Tiger.
–Thailand’s new military government imposed a capital controls
regime aimed at halting appreciation in the baht and curbing
speculation. The new rules meant that 30% of all currency
inflows of more than $20,000 were to be held on deposit –
interest free – by the central bank with investors not being
granted access to the money until after a year. If they wanted it
back sooner they would be refunded only 66%.
Well this was absurd and the first opportunity traders had to react
to the move was to say “SELL!” as Thai stocks plummeted 15%.
So the Thai government immediately said “never mind,” pulled
the plan and the following day stocks rallied back 11%. The
unnerving behavior of the government was shades of 1997 and
the Asian currency crisis but the market turbulence didn’t spread
to other Asian exchanges this time.
The limited damage to the region and other emerging markets
around the world was yet another example of the placid
environment for emerging market assets these days. No reason
to worry, say investors, as the risk premium for the entire sector
continues to narrow.
Then again, on Friday Ecuador’s bonds suffered their biggest
decline, ever, after the incoming finance minister strongly hinted
his government may default on its debt as the first step in
restructuring its books. Argentina did the same thing five years
ago and cost investors dearly. [I just checked my cookie jar to
make sure I don’t have any Ecuadorean bonds myself. You
might want to do the same.]
–Toyota is set to become the world’s no. 1 auto maker in 2007
as it set a production target of 9.42 million vehicles while
General Motors, which hasn’t released an estimate as yet, will
probably fall short of Toyota’s projection. Meanwhile, Toyota is
set to replace Ford as no. 2 in the U.S.
–Royal Dutch Shell agreed to hand over 50%, plus one share, of
the vast Sakhalin oil and gas project to Gazprom for $7.45 billion
in cash. But while the deal values the project at about $15
billion, as I wrote last week some estimates have it running as
high as $25 billion. Shell called the transaction “acceptable.” Of
course Shell can’t do anything more than suck it up, even as it
also means it will have to slash future oil and gas production
estimates.
[Separately, Japan’s Mitsui and Mitsubishi, minority owners of
Sakhalin-2, are seeking cash for their stakes plus an assurance
Gazprom will continue to deliver a steady supply of gas to
Japanese utilities.]
–But the Kremlin is far from finished with its strong-arm tactics.
Russia’s energy ministry is reviewing French Total’s production
sharing agreement with the clear goal of taking control down the
road.
–Statoil ASA, Norway’s state-controlled oil company, agreed to
take over Norsk Hydro’s energy business for $28 billion,
creating the fourth-largest oil and gas producer in Western
Europe. Norway, as I often forget, is the world’s third-biggest
exporter of crude. One of the keys is that Statoil and Hydro will
now be collectively searching for new oil and gas deposits to
make up for declining North Sea production, a topic I’ve been
emphasizing whenever someone attempts to refute ‘peak oil’
theorists.
–Iran admitted it is having trouble financing oil projects as a
result of foreign banks pulling back in light of the dispute over
Tehran’s nuclear program. So even though there is no formal
sanctions regime, as yet, against investment here, the risk of
doing business in Iran is considerable and the government is
feeling it.
–The sudden death of Turkmenistan’s leader, Saparmurat
Niyazov, has raised concerns over the stability of the country’s
considerable natural gas holdings, let alone the overall stability
of the government. Niyazov ruled with an iron fist for more than
20 years. Since Turkmenistan has the world’s fifth-largest
natural gas reserves, and with much of this going to Europe,
particularly Ukraine, the transition of power bears watching.
–According to a new study by three academics, including from
Harvard and Cornell, more than 1,000 directors of U.S.
companies have benefited from backdating of stock options.
“Rather than being merely uninformed and/or passive bystanders
vis-à-vis the backdating of grants to executives, a large number
of outside directors have themselves benefited from grant
manipulation practices,” the study concludes. [Financial Times]
–One of those who benefited from backdating, former KB Home
CEO Bruce Karatz, earned $232 million in compensation over
the last three years, far more than his competitors even though
KB Home is the 5th-largest U.S. home builder.
A story by Kathy Kristof and Annette Haddad of the Los
Angeles Times points out that KB Home’s compensation
committee was itself comprised of nothing but friendly faces,
including the head of it, Occidental Petroleum Chairman and
CEO Ray Irani who earned $49 million in cash and stock, as well
as options with a potential value of $97 million in 2005. Two
others on the committee were Leslie Moonves of CBS, who
earned $23 million in 2005, and J. Terrence Lanni, CEO of
MGM Mirage, who earned almost $10 million with another $35
million option reward.
You just see this all over; incestuous boards scratching each
other’s back, knowing that one day these same folks could be
deciding on their own compensation package.
As for Karatz, he defended his pay, saying it was tied to
performance. But as one union official said, this was for 2003-
2005. “A trained monkey could have run a publicly traded home
builder over the past three years and done pretty well.”
–In its own attempt to avoid scandal and accounting issues, IBM
announced it will no longer reward board members with options
and will instead pay an annual $200,000 retainer, which they can
take either in IBM shares or partly in cash.
–Former Pfizer CEO Hank McKinnell walks away with more
than $200 million in compensation when he retires as chairman,
it was revealed on Friday, even as Pfizer shares fell 40% under
his watch. The parting gifts include $82 million in pension
benefits, $78 million in deferred compensation and $39 million
in potential severance payments. See Mort Zuckerman’s piece
above.
–Goldman Sachs CEO Lloyd Blankfein surpassed Morgan
Stanley’s John Mack and his post-Roman Empire record $41
million bonus by receiving $53.4 million himself. And
according to various reports, some head traders at Goldman will
be receiving bonus checks in excess of $100 million. Goldman’s
co-presidents, Gary Cohn and Jon Winkelried are each receiving
over $25 million. But you can be sure someone in their families
will still find something to bitch about. “Ga-reeeee….why do
the Winkelreids have six Mercedes and we only have five?”
–The NASD accused Morgan Stanley of failing to produce e-
mail messages to customers looking for damages in arbitration
cases as Morgan Stanley made false claims that millions of the e-
mails in question were destroyed in the attack on the World
Trade Center. This has been a point of contention for years and
regulators have now revealed Morgan Stanley did have backup
tapes, though the firm still regularly destroyed messages by
overwriting them and allowing employees to delete messages;
just another dirtball move by this ethically-challenged industry.
[Separately, Morgan Stanley announced it plans to spin off its
Discover credit card business.]
–The New York Times reported that Eli Lilly “engaged in a
decade-long effort to play down the health risks of Zyprexia, its
best-selling medication for schizophrenia.” Lilly executives
withheld information from doctors about Zyprexia’s links to risk
factors for diabetes. The drug maker’s sales representatives were
told to downplay the potential cause and effect in conversations
with physicians as Lilly officials worried about the impact on
sales.
–Bristol-Myers Squibb reached an agreement to pay $499
million to settle a long-running federal investigation into its sales
and marketing practices from the late 1990s through 2005.
According to Barnaby Feder of the New York Times, “Federal
prosecutors have delved into practices like failing to tell the
government about price discounts offered to (major) customers.
As a result, Medicare and other government health plans that are
entitled to the lowest available price have frequently been
overcharged.” Despite the fact the amount wipes out Bristol-
Myers’ fourth quarter profit, shares rose slightly on the feeling
the drug maker had finally put this behind it.
–As hoped for, the Office of Federal Housing Enterprise
Oversight filed 101 charges against former Fannie Mae CEO
Franklin Raines, former CFO Timothy Howard and a third
executive, seeking fines and the return of bonuses and stock
grants in an amount of around $200 million, including $85
million awarded to Raines alone; all tied to Fannie’s $mega-
billion accounting scandal.
The discovery of the fraud in 2004 led to Fannie paying a $400
million penalty and the eventual restatement of some $6.3 billion
in previously reported profits.
James Lockhart III, a potential StocksandNews “Person of the
Year,” said Raines et al “improperly manipulated earnings to
maximize their bonuses, while knowingly neglecting accounting
systems and internal controls, misapplying over twenty
accounting principles and misleading the regulator and the
public.” The three “did very serious harm to this company.”
Franklin Raines is one of the truly despicable people on the
planet. He was a leader of the Business Roundtable, a lobbying
group for major corporate chieftains, and yet, incredibly, was one
of those assigned to restore accountability following scandals at
the likes of WorldCom, Enron and Tyco.
As David Hilzenrath reported in the Washington Post, Raines
wrote in Fannie Mae’s 2002 annual report:
“As a CEO, one of the most offensive things about the corporate
scandals that emerged recently was to hear CEOs claim that they
did not know, they could not know, and they could not be
expected to know about the activities that brought down their
companies.”
Fannie’s problems were so deep it cost over $1.4 billion to redo
the books and the mortgage giant still can’t issue current
financial statements.
–Aside from the Statoil/Norsk Hydro deal, there were a number
of other acquisitions on Monday, some $90 billion worth in total
including Express Scripts’ $26 billion hostile bid for rival
Caremark. Globally, it has been the busiest year on record for
the M&A crowd and when it comes to private-equity, 8 of the ten
largest of all time have occurred in 2006, including Apollo
Management and Texas Pacific Group’s bid for Harrah’s
Entertainment.
But while the value of private-equity backed buyouts has
doubled this year to well over $600 billion, there is suddenly
some question about the investors in these private pools; as in
they are being stretched too thin. Or, as a Reuters story I saw put
it, “What is worrying institutional investors is that funds are
coming back to them too quickly for money, without a track
record from their prior fund.”
For example, Bain Capital raised $10 billion last year and will
probably be returning to the fund-raising trail next year. The
Carlyle Group and Warburg Pincus are also expected to raise $10
billion each, another short turnaround time.
Then there’s Blackstone, which closed a $15.6 billion fund
earlier in the year and is seeking to up this to $20 billion, but
supposedly a few investors are balking. In other words, as one
advisory firm put it, investors are being asked to “double down.”
In the old days, the buyout firms would take four to five years to
spend their funds, with investors receiving returns gained from
the sale of their assets over that time. Money was thus coming in
and going out, but now the money is just going out.
–The London Times had a piece on Mark Zuckerberg, the 22-
year-old Harvard dropout responsible for social networking
website Facebook. Evidently Yahoo offered Zuckerberg $1
billion and when he said it wasn’t enough, Yahoo upped its bid
to $1.6 billion. Zuckerberg turned this down as well, despite the
fact his stake is thought to be 30%, or $500 million at the highest
offer. That’s nuts.
–The average baseball salary rose 9% in 2006 to $2,699,000; the
highest since a 12.8% increase in 2001. I’m still working on my
knuckleball but am having trouble getting the proper movement,
let alone finding someone to catch it for me since all the
neighborhood kids do is sit around and play video games.
–Global warming is causing major economic headaches for
Europe and its ski resorts. Temperatures in the Alps have been
rising so fast that whereas in 1980, 75% of Alpine glaciers were
advancing; today, 90% are retreating. Low-altitude resorts such
as Kitzbuhel are feeling the biggest impact, while in Austria 83%
of ski resorts are “snow-reliable,” meaning they have enough
snow for 100 days a season. If temperatures were to rise two
degrees Celsius only half would.
–My portfolio: I sold the rest of my carbon fiber stock Monday
morning. The investment worked out well for me but it was such
a struggle the last few months I almost feel like I lost money.
This year it went from $9 to $39 to $17 to $26 and now sits
around $20. I can’t take chances with the world’s worst
management no matter how good the idea is. Having said that, if
they can settle their lawsuit to my satisfaction and institute some
other changes, I’m right back in there.
–Finally, I forgot to mention last time that I got a kick out of
how many of you wrote to tell me you were trying out
conservationsalmon.com. I hope your orders went through
alright and that you were satisfied with the quality of the product.
I have to admit I overcooked my first meal of wild salmon, but I
was used to the farm-raised garbage, I guess. Since I wised up
I’ve found it to be quite tasty, as is the haddock I ordered.
Ironically, Thursday’s Wall Street Journal had a story on buying
wild salmon online but conservationsalmon wasn’t part of it.
They should have been. Let me know if you try it out.
Foreign Affairs
North Korea: Early in the week, we were told by Assistant
Secretary of State Christopher Hill that North Korean negotiators
at the resumption of six-party talks had turned more “pragmatic.”
Hill said details were being discussed on implementing a 2005
draft agreement on ending Pyongyang’s nuclear program.
But talks ended Friday without any kind of agreement on
disarmament, nor on when discussions would resume. Evidently,
Mr. Hill was feeding us all a line of garbage because the North’s
negotiators never did talk about their weapons program in five
days. It was all about the U.S. removing financial restrictions.
It’s now been three years that talks have been sporadically taking
place with zero movement. Time for Plan B….I’m assuming the
Bush administration has one. At least that’s what we pay them
for.
Russia: On Wednesday evening, President Vladimir Putin feted
the KGB on its anniversary, Dec. 20, 1917, in a very public
display of affection, broadcast over state television.
“Your profession is directly connected with protecting the
national interests and the sovereignty of the Russian State. And
those who are ready to execute the most difficult and dangerous
tasks at the first order work in the security services.
“The struggle against the activities of foreign intelligence
services remains as topical as before. Today these organizations
are increasingly interested in secret economic information.”
Au contraire, mon frere. What economic information does
Russia have of value? We know you’re taking over all the
energy resources and that this represents the vast majority of
economic activity. Ergo, I know everything about the health of
your economy by simply following the oil price, comrade Putin.
As for the rest of the Russian economy, we know you’re just
ripping everyone else off in terms of stealing intellectual
property.
Earlier in the week, hundreds of opposition activists, part of a
group called Other Russia that is led by Garry Kasparov, were
detained ahead of a rare anti-government rally in Moscow. 2,000
others were allowed to protest what they called Russia’s retreat
from democracy.
Kasparov told the London Times, “I don’t think we are seeing a
super-confident Kremlin. It is not one Kremlin any more, the
ruling elite is split into many different voices. If the temperature
is rising, we will see the collapse of the Kremlin power structure.
Putin has to make his move and name a successor, but this is a
man who has never made a painful choice in his life.”
Kasparov’s goal, heading into the March 2008 vote, is to build
some momentum in the opposition movement by next summer,
at which point “there will be more and more losers in the
Kremlin battle who are looking for other options.”
On the issue of energy and Belarus, last weekend’s discussions
between Putin and President Lukashenko went as well as could
be expected, with an agreement on oil export duties and a
gradual rise in the price paid Gazprom for natural gas, though it
was unclear what happened in terms of control over Beltransgaz,
Belarus’ gas-pipeline operator.
Lastly, Russia announced it would modernize its Topol-M
missiles and substitute multiple warheads for the current single
one; the better to “penetrate any prospective missile defense,”
said Putin. Only high oil prices enable Russia to do this.
Pakistan: The following is from a lead editorial in the
Washington Post.
“Three months ago the Pakistani government struck a deal with
pro-Taliban leaders in the district of North Waziristan, bordering
Afghanistan: It agreed to abandon military operations, withdraw
the army and release prisoners in exchange for promises that the
militants would cease cross-border attacks and disarm the foreign
terrorists in their midst. That the extremists would not respect
the accord, and that attacks on U.S. forces in Afghanistan would
increase rather than decline, obviously seemed likely at the time.
Yet President Bush, ever indulgent of Pakistan’s autocratic ruler,
Gen. Pervez Musharraf, accepted his promises. ‘When the
president looks me in the eye and says the tribal deal is intended
to reject the Talibanization of the people, and that there won’t be
a Taliban and won’t be al-Qaeda, I believe him,’ Mr. Bush
declared when he met Gen. Musharraf at the White House on
Sept. 22.
“As senior administration officials now acknowledge, Gen.
Musharraf’s assurances were empty – as they have been many
times before. According to multiple independent reports,
Waziristan has been thoroughly Talibanized, and the
fundamentalists are spreading their influence through adjacent
border districts. Cross-border attacks and the deaths of
American soldiers that they cause are up significantly. Al-Qaeda
is reliably reported to be operating training camps in North
Waziristan with the help of scores of foreign militants who are
schooling recruits in suicide bombings and the use of improvised
explosive devices. According to a stunning report in the current
edition of Newsweek, they are also preparing Western citizens
who could carry out major terrorist attacks in Britain or the
United States….
“In fact the situation in Pakistan’s border areas is starting to look
a lot like eastern Afghanistan before Sept. 11, 2001. President
Bush and (Director of National Intelligence John) Negroponte
ought to be asking themselves if they are repeating history by
tolerating the situation. They need not do so: The United States
has provided Gen. Musharraf strategic cover and billions of
dollars in military and economic aid since 2001. In return it
should have the right to demand that he abandon his separate
peace. Action must be taken against Taliban and al-Qaeda forces
in Pakistan before spring, when another major offensive against
U.S. and NATO forces can be expected unless the enemy bases
and supply lines are disrupted.”
India / Japan: Related to President Bush’s signing of the new
U.S.-Indian civilian nuclear cooperation agreement, Japanese
Prime Minister Shinzo Abe said “It is of crucial importance to
Japan’s national interest that we further strengthen our ties with
India,” which Abe calls “the most important bilateral relationship
in the world.” As Daniel Twining writes in The Weekly
Standard, “Abe has enthusiastically backed the concept of a
quadrilateral security partnership among Japan, India, Australia,
and the United States.” Throw in Great Britain and one has my
long-sought supra-alliance, which I first raised immediately after
9/11.
But long term, Prime Minister Abe and those who follow him in
office have a huge domestic issue, demographics. A new
government survey says the population of Japan will sink from
its current 127 million to below 90 million by 2055. At that
point the percentage over 65 would be 40%…an entitlement time
bomb, let alone an economy in perennial depression.
Saudi Arabia: Adel al-Jubeir has been selected to be the new
ambassador to the United States, replacing Prince Turki al-
Faisal. Boy, I just don’t like this guy. If you’re scratching your
head trying to remember him, you’ll recognize Jubeir’s face from
his many television appearances following 9/11. [Or maybe I
was upset he once dated NBC’s Campbell Brown. “You’re too
good for him, Campbell,” I mused upon learning this.]
But following up on our discussion last week concerning Turki’s
departure, Simon Henderson had an interesting take on what it all
means in a Journal op-ed.
“An additional dimension derives from the 2003 invasion of Iraq:
A huge Shia-dominated neighbor has emerged on (Saudi
Arabia’s) northern border. Saudis see Shias as threatening their
security and leadership of Islam, and perceive them to be Iranian
surrogates. In response, Saudi Arabia has been reaching out to
Sunni states like Egypt and Jordan. Dramatically, even contacts
with Israel have not been ruled out. One report suggests that it
was not Saudi national security advisor Prince Bandar who had a
clandestine autumn meeting in Amman with Israeli Prime
Minister Ehud Olmert, but Prince Turki. The logic: As
intelligence chief, he had established a back-channel relationship
with the Mossad.
“Despite the continuing high oil prices, for once U.S. difficulties
with Saudi Arabia do not appear to be dominated by immediate
energy concerns. The main challenge appears to be to steer
Riyadh between a near holy confrontation with Shia Iran and an
equally destabilizing alliance with radical Sunnis….
“One early danger is that the kingdom is close to acquiring
nuclear weapons rather than continuing to rely on the
longstanding security guarantees and understanding of
successive administrations in Washington. Last month a Saudi
official privately warned the kingdom would not tolerate a
nuclear-armed Iran. Pakistan (for bombs) and perhaps North
Korea (for rockets) are potential allies. There are already
credible reports of facilities in the desert that the Saudis claim are
oil-related, although there are no pipelines in sight. Also, North
Korean personnel have been spotted at military facilities.
“Iraq, Iran, nuclear weapons, oil. Washington desperately needs
a new, reliable Saudi interlocutor.”
Britain: A Somali national and suspected terrorist, Mustaf Jama,
wanted in the murder of a policewoman, escaped from the U.K.
by disguising himself as a veiled Muslim woman. The story has
just come to light Jama eluded security at Heathrow airport last
year between Christmas and New Year’s, even though he was
Britain’s most wanted man and his picture was plastered all over.
But he was allowed to board a flight because immigration
officers didn’t do a visual check. As you know British security is
generally acknowledged to be as good as any in the world.
Random Musings
–Anne Applebaum / Washington Post
“On the day James Baker’s Iraq report was published, I gritted
my teeth and waited for the well-earned, long-awaited, Franco-
German ‘Old Europe’ gloat to begin. I didn’t wait long.
‘America Faces Up to the Iraq Disaster’ read a headline in Der
Spiegel. In the patronizing tones of a senior doctor, Le Monde
diagnosed the ‘political feverishness’ gripping Washington in
Baker’s wake. Suddeutsche Zeitung said the report ‘stripped
Bush of his authority,’ although Le Figaro opined that nothing
Baker proposed could improve the ‘catastrophic state’ of Iraq
anyway.
“And then, for two weeks…silence. If there are politicians,
academics or journalists anywhere in Germany and France who
have better ideas about how to improve the catastrophic state of
Iraq, they aren’t speaking very loudly. There is no question that
America’s credibility has been undermined by the Iraq war, in
‘Old Europe’ as everywhere else. There is no question that
America’s reputation for competence has been destroyed. But
that doesn’t mean there are dozens of eager candidates, or even
one eager candidate, clamoring to replace us.”
–Peggy Noonan on Barack Obama, in an op-ed for the Wall
Street Journal.
“He doesn’t have an issue, he has a thousand issues, which is the
same as having none, in the sense that a speech about everything
is a speech about nothing. And on those issues he seems not so
much to be guided by philosophy as by impulses, sentiments.
From ‘The Audacity of Hope,’ his latest book: ‘[O]ur democracy
might work a bit better if we recognized that all of us possess
values that are worthy of respect.’ ‘I value good manners.’
When not attempting to elevate the bromidic to the profound, he
lapses into the language of political consultants – ‘our message,’
‘wedge issues,’ ‘moral language.’ Ronald Reagan had ‘a durable
narrative.’ Parts of the book, the best parts, are warm, anecdotal,
human. But much of it pretends to a seriousness that is not borne
out. When speaking of the political past he presents false
balance and faux fairness. [Reagan, again, despite his ‘John
Wayne, Father Knows Best pose, his policy by anecdote and his
gratuitous assaults on the poor’ had an ‘appeal’ Sen. Obama
‘understood.’ Ronnie would be so pleased.]….
“But again, what does he believe? From reading his book, I
would say he believes in his destiny. He believes in his
charisma. He has the confidence of the anointed. He has faith in
the magic of the man who meets his moment.
“He also believes in the power of good nature, the need for
compromise, and the possibility of comprehensive, multitiered,
sensible solutions achieved through good-faith negotiations.
“But mostly it seems to be about him, his sense of destiny, and
his appreciation of his own particular gifts. Which leaves me
thinking ‘Oh dear, we have been here before.’ It’s not as if we
haven’t already had a few of the destiny boys. It’s not as if we
don’t have a few more in the wings.”
–An analysis by Lawrence Livermore National Laboratory and
Rensselaer Polytechnic Institute, obtained by the New York
Times, is more than a bit troubling. A relatively small amount of
explosives could cause significant flooding of the PATH rail
system within hours (just six minutes for one of the four tubes),
meaning the structures are far more fragile than had been
previously thought.
Worst case, a bomb carried aboard a train could punch a 50-
square-foot hole in one side of a tube, possibly breaching both
sides of the tunnel. “Under that situation, 1.2 million gallons of
water a minute could pour into the tunnel, flooding parts of the
system.” During rush hour, up to 900 people would be on one
crowded train. [William Rashbaum and William Neuman / New
York Times]
–A new study published in the Lancet medical journal estimates
62 million would die from an influenza pandemic such as that
which occurred in 1918 and 1919, with 96% of the deaths
occurring in developing countries. If the figure was right it
would double global mortality since 59 million people now die
each year.
–New Census data estimates Arizona, Florida, Georgia, Nevada,
Texas and Utah are set to gain seats in Congress after the 2010
Census, with all six currently tilting Republican (President Bush
won them all in 2004). New Jersey is concerned we’ll lose one.
Take it!
–To wit, here in New Jersey, we pride ourselves in having the
most corrupt politicians in the country, as exemplified by the
latest prison sentence, 39 months for former state senate leader
John Lynch on corruption charges. But it seems New York is
giving the Garden State a run for its money. This week State
Comptroller Alan Hevisi resigned and pleaded guilty to one
count of corruption rather than face indictment for using state
workers as chauffeurs and personal aides for his wife, while New
York Senate majority leader Joseph Bruno is the subject of an
FBI investigation into his business interests. Last week it was
that dirtball legislator Efraim Gonzalez who pilfered over
$400,000 from a slush fund.
–For a second straight year violent crime is up in the United
States, according to the FBI, and nearly 4% for the first six
months of this year over 2005’s pace. Among cities with at least
500,000 residents, Houston has seen a 28% increase attributable
largely to an influx of Hurricane Katrina refugees.
–Very much related to the above, Newark is on the verge of
surpassing its all-time murder record, 102, set back in 1995.
New Mayor Cory Booker has staked his whole tenure on getting
this down. If he can, he’s a national force in the Democratic
Party. If he can’t, he’s toast.
–Thanks to the IRS taking a closer look, “swag bags” of lavish
goodies will not be handed out to presenters, nominees and
selected celebrity audience members at the upcoming Oscars and
Golden Globes. At the 2006 Academy Awards, the bag was
thought to be worth about $100,000, including such perks as a
home-cooked meal for ten by Wolfgang Puck and $7,000 of
Victoria’s Secret underwear. The IRS has now declared the gifts
are taxable and it reached an agreement with the Academy of
Motion Picture Arts and Sciences to send out tax forms for this
past spring’s gift bag recipients. As IRS Commissioner Mark
Everson put it, “There’s no red-carpet loophole for the stars.”
–According to the New York Post, the son of legendary late
Giants owner Wellington Mara “tackled and choked a fellow
broker on the floor of the New York Stock Exchange after the
man mocked the team.” The victim, a 57-year-old Eagles fan,
was kidding Stephen Mara about the Giants’ loss to Philadelphia
last Sunday. As Phil W. wrote me, if the Giants displayed the
kind of intensity the fans have, they wouldn’t be struggling to
make the playoffs.
–I must say I smile every time President Bush mentions “No
Child Left Behind” since our leader can’t even speak proper
English himself.
–During his press conference the other day, President Bush said
“I don’t like earmarks. It’s not good for the system.” So why
the heck didn’t he veto the bills and force Congress to take the
earmarks out before resubmitting the essential legislation? [The
president not having the line-item veto.] His approval ratings
would have risen 5% in an instant.
–It will be a crime if district attorney Michael Nifong doesn’t
himself go to jail over his handling of the Duke lacrosse rape
case.
–While the Pennsylvania Gaming Control Board awarded five
licenses for casinos (slots only) in Philadelphia, Pittsburgh, the
Pocono Mountains and Bethlehem, it turned down a proposal for
a large slot complex a mile from a portion of the Gettysburg
National Military Park. Us Civil War preservationists have
achieved a great victory.
–Finally, Time magazine selected “You” as the “Person of the
Year” for the role each and every one of us plays in the
information highway. This has to be dumbest idea of the century
thus far. NBC’s Brian Williams, in an essay in the same Time
issue, commented on the selection.
“Once inside (the Web), the doors swing open to a treasure trove
of video: adults juggling kittens, ill-fated dance moves at
wedding receptions, political rants delivered to camera with
venom and volume. All of it exists to fill a perceived need….
“The larger dynamic at work is the celebration of self. The
implied message is that if it has to do with you, or your life, it’s
important enough to tell someone. Publish it, record it…but for
goodness’ sake, share it; get it out there so that others can enjoy
it. Or not. The assumption is that an audience of strangers will
be somehow interested, or at the very worst not offended.
Intimacies that were once whispered into the phone are now
announced unabashedly into cell phones as loud running
conversations in public places. Diaries once sealed under lock
and key are now called blogs and posted daily for all those who
care to make the emotional investment. We’ve raised a
generation of Americans on a mantra of love and the importance
of self as taught by brightly colored authority figures with names
like Barney and Elmo. On the theory that celebrating only the
winners means excluding those who place, show or simply show
up, parents-turned-coaches started awarding trophies, entire
bedrooms full, to all those who compete. Today everyone gets
celebrated, in part to put an end to the common cruelties of life
that so many of us grew up with….
“The problem is that there’s a lot of information out there that
citizens in an informed democracy need to know in our
complicated world with U.S. troops on the ground along two
major fronts. Millions of Americans have come to regard the act
of reading a daily newspaper, on paper, as something akin to
being dragged by their parents to Colonial Williamsburg….
“The whole notion of ‘media’ is now much more democratic, but
what will the effect be on democracy?
“The danger just might be that we miss the next great book or the
next great idea, or that we fail to meet the next great challenge…
because we are too busy celebrating ourselves and listening to
the same tune we already know by heart.”
—
Pray for the men and women of our armed forces.
God bless America.
—
Gold closed at $623
Oil, $62.47
Returns for the week 12/18-12/22
Dow Jones -0.8% [12343]
S&P 500 -1.1% [1410]
S&P MidCap -1.7%
Russell 2000 -1.5%
Nasdaq -2.3% [2403]
Returns for the period 1/1/06-12/22/06
Dow Jones +15.2%
S&P 500 +13.0%
S&P MidCap +8.7%
Russell 2000 +16.0%
Nasdaq +8.9%
Bulls 58.8
Bears 20.6 [Source: Chartcraft / Investors Intelligence]
Next week…the 2007 Outlook and the StocksandNews “Person
of the Year.”
Merry Christmas! God bless us, everyone.
Brian Trumbore
