[Posted 7:00 AM ET]
Starting Over
President George W. Bush is shuffling the deck chairs on the
Titanic, some would say, when it comes to Iraq. I prefer to give
him one more chance as he prepares to present to the American
people his plan, the “New Way Forward,” that to me is more like
“Starting Over.”
Among the personnel moves is Navy Adm. William Fallon
replacing Gen. John Abizaid as head of U.S. forces in both Iraq
and Afghanistan, while Gen. George Casey, who oversaw Iraq
specifically, is being replaced by Gen. David Petraeus, the latter
having served twice before there with some success.
At the same time Bush is moving Director of National
Intelligence John Negroponte back to Iraq to be Secretary of
State Condoleezza Rice’s chief deputy in theater (former NSA
chief Mike McConnell replaces Negroponte), while Zalmay
Khalilzad, currently U.S. ambassador to Iraq, is slated to be the
next American ambassador to the United Nations.
But as for the president’s plans to move ahead with a surge in
troops for Baghdad and Anbar province, anywhere from 10,000
to 30,000, the White House will meet stiff resistance from not
only Democrats but many Republicans as well.
You’ve known where I’ve stood for some time now, like 3 ½
years, and that is for more boots on the ground. So I’ve long
backed Sen. John McCain in this debate.
But if there is no real change in plans outside of just throwing
some extra troops into the fray, then we should bring them all
home. My point has been the past few months, in particular, if
America can’t look itself in the mirror and say it’s tried its best,
which we haven’t done to date, then end this fiasco and repair to
the defenses back home.
In the meantime, I do have to note that I wrote last week’s piece
just hours after Saddam Hussein’s execution and I normally like
to wait 24 hours before commenting, as most of you are aware by
now. This would have been a big deal three years ago. Today,
after the direction the war has taken, it’s largely irrelevant.
That is it was irrelevant until we saw how the Iraqi government
handled the whole event, disastrously, and suddenly Hussein is a
martyr. [Which is why I prefer to wait 24 hours, after all.]
Charles Krauthammer / Washington Post
“Of the 6 billion people on this Earth, not one killed more people
than Saddam Hussein. And not just killed but tortured and
mutilated – doing so often with his own hands and for pleasure.
It is quite a distinction to be the preeminent monster on the
planet. If the death penalty was ever deserved, no one was more
richly deserving than Saddam Hussein.
“For the Iraqi government to have botched both his trial and
execution, therefore, and turned monster into victim, is not just a
tragedy but a crime – against the new Iraq that Americans are
dying for and against justice itself….
“Consider the timing. It was carried out on a religious holiday.
We would not ordinarily care about this, except for the fact that it
was in contravention of Iraqi law. It was done on the first day of
Eid al-Adha as celebrated by Sunnis. The Shiite Eid began the
next day, which tells you in whose name the execution was
performed.
“It was also carried out extra-constitutionally. The constitution
requires a death sentence to have the signature of the president
and two vice presidents, each representing one of the three major
ethnic groups in the country….That provision is meant to prevent
sectarian killings. The president did not sign. Nouri al-Maliki
contrived some work-around.
“True, Hussein’s hanging was just and, in principle,
nonsectarian. But the next hanging might not be. Breaking
precedent completely undermines the death penalty provision,
opening the way to future revenge and otherwise lawless
hangings.
“Moreover, Maliki’s rush to execute short-circuited the judicial
process….The trial for his genocidal campaign against the Kurds
was just beginning.
“That larger canvas will never be painted. The starting point
became the endpoint….
“Worse was the content of the taunts: ‘Moqtada, Moqtada,’ the
name of the radical and murderous Shiite extremist whose goons
were obviously in the chamber. The world saw Hussein falling
through the trapdoor, executed not in the name of a new and
democratic Iraq but in the name of Moqtada al-Sadr, whose death
squads have learned much from Hussein.
“The whole sorry affair illustrates not just incompetence but also
the ingrained intolerance and sectarianism of the Maliki
government. It stands for Shiite unity and Shiite dominance
above all else.
“We should not be surging American troops in defense of such a
government….Maliki should be made to know that if he insists
on having this sectarian war, he can well have it without us.”
Personally, I would just replace him as the first step in “Starting
Over.”
Iran
The other day I received in the mail a newsletter from Friends of
Gettysburg, another Civil War preservation group I have donated
a little money to from time to time. I was struck by this quote
within from Abraham Lincoln.
“I am rather inclined to silence, and whether that be wise or not,
it is at least more unusual nowadays to find a man who can hold
his tongue than to find one who cannot.”
I read this after seeing yet another report on the latest statements
from Iranian President Mahmoud Ahmadinejad and all I could
think of was “can’t you ever just shut up!”
The unfortunate part is that we can’t ignore the guy, and his
thoughts are important to understand, especially today if you live
in Israel or are an American or Brit serving the cause in Iraq.
Of course much of the rest of the world needs to be concerned,
too, like in Western Europe, when you hear Ahmadinejad say
“(Iran is determined to) achieve peaks of success and defend its
interests powerfully” in reference to his country’s nuclear
program. “(The U.S. and Britain) should know that our nation is
not afraid of them. They can neither make Iranians give up
through threat, bullying, pressure and issuing of worthless
resolutions, nor threatening them with sanctions.”
Ahmadinejad’s chief rival internally, cleric Hashemi Rafsanjani,
added that the recent UN Security Council resolution is
“dangerous…It will not bring about the desired outcome. No
resolution can make us give up our atomic work.” Rafsanjani
also warned of consequences if Iran was treated unfairly. “They
(Westerners) are creating problems for themselves and the
region…the consequences of this fire will burn many others,” he
told worshippers who chanted “Death to America.” [Sources:
Reuters, Bloomberg News]
Rafsanjani’s comments are important for the following reason.
I’ve said all along he is one the United States can talk to, as
opposed to Ahmadinejad, but I’ve also said no one should doubt
that Rafsanjani is on the same page as the Iranian president when
it comes to developing a nuke.
Separately, Anatole Kaletsky of the London Times had the
following thoughts on confronting Iran and Shia Islam. I have
not seen this version of potential events elsewhere.
“What now seems to be in preparation at the White House, with
the usual unquestioning support from Downing Street, is a
Middle Eastern equivalent of the Second World War. The
trigger for this all-embracing war would be the formation of a
previously unthinkable alliance between America, Israel, Saudi
Arabia and Britain, to confront Iran and the rise of the power of
Shia Islam.
“The logical outcome of this ‘pinning back’ process would be an
air strike by Israel against Iran’s nuclear facilities, combined
with a renewed Israeli military campaign against Hizbullah in
Lebanon, aggressive action by American and British soldiers to
crush Iraq’s Shia militias, while Saudi-backed Sunni terrorists
undermined the increasingly precarious pro-Iranian Government
in Baghdad.”
Kaletsky then goes on to mention two events I passed along a
few weeks back, the abrupt announcement by Tony Blair to
absolve members of the Saudi Royal Family of complicity in a
bribery investigation, and the other a speech in Dubai where
Blair called for an “arc of moderation” to “pin back” Iran’s
advances in the Middle East. Kaletsky concludes:
“Thus, if there is one country in the world more worried than
Israel about an Iranian A-bomb, it is Saudi Arabia. And if there
are two countries in the world with real influence on the Bush
White House, they are Saudi Arabia and Israel. Now both these
countries are telling President Bush that he must pull the plug on
Iraq’s Shia Government, tear up the Baker report, whose most
important advice was to open diplomatic channels to Tehran, and
prepare to attack Iran, either directly or using the Israelis as a
proxy. This is the basis of the unholy alliance between Israel,
Saudi Arabia and America, with Mr. Blair contributing a few
choice soundbites.
“The anti-Iranian ‘arc of moderation’ may seem like another
meaningless Blairism, not nearly as threatening as Mr. Bush’s
‘axis of evil.’ But this soundbite could unleash a disaster on the
Middle East, beside which the war in Iraq would be a mere
sideshow.”
Again, I just pass the above on. I would suggest, however, that
Israel is in no position to fight any kind of war right now,
especially after the Israeli chief of staff, Lt. Gen. Dan Halutz,
conceded this week that his military had made serious mistakes
in its war with Hizbullah, though at the same time he refused to
resign.
In breaking down the battle and admitting where errors were
made, Halutz, as reported by The New York Times’ Steven
Erlanger, suggested that discipline had broken down.
“ ‘There were cases in which officers did not carry out their
assignments, and cases in which officers objected on moral
grounds to their orders,’ Halutz said, an apparent reference to
resistance against attacking southern Lebanese towns and
villages.” [Erlanger]
Also this week, Israeli Prime Minister Ehud Olmert met with
Egyptian President Hosni Mubarak at the same time an Israeli
military operation moved into the West Bank city of Ramallah,
killing four Palestinians. Seeing as the Olmert-Mubarak summit
was to promote the peace process, this was one of the stupider
moves by Israel, the timing of it that is, and it begs the question,
just who the heck is in control?
So it would appear to the cynical eye of your editor that the last
thing Israel is in a position to do is attack Iran’s nuclear facilities
and expect to be able to absorb the blowback.
This week marked a year since former Prime Minister Ariel
Sharon suffered his stroke. Never has he been missed more than
today.
One last note. The Jerusalem Post reported Turkish Prime
Minister Erdogan is willing to mediate the issue of Shebaa Farms
on the disputed border between Israel and Lebanon, with
Erdogan supporting the transfer of the territory to UN forces, but
only if Israel concurs. This was the key all along, as I pointed
out well before this past summer’s war; not that the Bush
administration ever realized it.
—
Wall Street…What’s Goin’ On?
An AP-AOL poll found that 58% of Americans described 2006
as a bad year for the country, but at the same time 76% said it
was good for them and their families. As for 2007, 72% feel
good about what the year will bring for the U.S. and 89% are
optimistic about their own fortunes. I sure hope this majority is
right.
Before I get to the main topic of discussion this week, I need to
clean up some loose ends from my ’07 forecast as issued last
time. In calling for 1.5% growth for the year it will begin to feel
like a recession even though government reports could show
positive growth. A Wall Street Journal survey of 60 economists
came out this week and their consensus was for 2.3% growth in
the first half and 2.8% growth in the second, mirroring the
previous review’s BusinessWeek forecast. No way either is
right.
But when it comes to stocks, as you’ve seen over the years the
market often defies logic, both up and down. Earnings are
expected to grow at high single digit rates in ’07, the first time
below double digits since 2002. If economic growth is slower
than consensus, we will finally see earnings disappoint. That
would normally be negative, and at times the market will treat it
as such, but I just see the end result for stocks being pretty flat.
For one thing, even bears have to concede valuations aren’t
outrageous; certainly nowhere near 1999/2000 levels that defied
explanation.
What we will see, however, is rising default levels for
individuals; a harbinger of things to come in 2008. A reason
why I’m not calling for outright disaster just yet is because, yes,
there is a tremendous amount of cash sloshing around, as we’ll
expound on further in a moment, and spending at the top levels
of our society will more than make up for shortfalls at the
middle- and lower-income levels. For a while longer, that is.
All of the above is contingent on zero large-scale terror attacks,
no attack on Iran, Iran not testing an authentic nuclear weapon,
and relatively stable oil prices outside of a hurricane induced
spike.
In the here and now, the ISM index on the service sector for
December showed some softening vs. November, while the ISM
manufacturing barometer, echoing the previous week’s Chicago
Purchasing Managers index, came in better than expected.
Then the December employment figure was released on Friday
and the economy created 167,000 jobs for the month, far greater
than anticipated. Stocks sold off, though, because the solid
performance indicates the Federal Reserve will not be lowering
interest rates any time soon and much of the stock market rally in
recent weeks has been based on the assumption it would begin
doing just that early in 2007.
Couple the jobs data with the earlier release of the Fed’s minutes
from its December meeting, where the Fed reiterated its concerns
on inflation, and one can only conclude the Fed isn’t going to be
cutting rates for at least the first two meetings of the year.
Which will be a mistake, because while I talk of basically
muddling through, above, that’s not a good environment for the
majority of Americans; the non-Wall Street/Corporate CEO
money machines, that is.
And if you thought I was too bearish last week in my housing
comments for this coming year, I can thank home-builder Lennar
for making me look good for one week at least.
The Miami developer announced it expects to report a fourth-
quarter loss of around $500 million in the face of land-related
write-downs. CEO Stuart Miller said “Market conditions
continued to weaken throughout the fourth quarter, and we have
not yet seen tangible evidence of a market recovery.”
At the same time Lennar said it would sell a 62% stake it had in a
15,000 acre track in California, not exactly a ringing
endorsement of prospects for a rebound anytime soon there. And
Lennar admitted it is doing everything possible on the incentive
side to move existing inventory, something to remember next
time you see relatively sanguine new home sales data.
I was in Miami myself a few days this week for the Orange Bowl
and not having been to the area in years I was floored by some of
the high-rise condo developments. Now, granted, I was there
over the holiday weekend but on Tuesday, when I expected to
see workers back slaving away on the monstrosities lining the
beaches and waterways, I saw virtually zero activity.
Coincidentally, I saw a Reuters piece by Jim Loney noting that
developers are now pulling the plug on some of the biggest
projects (a la Lennar’s warning). In fact, Miami officials talk of
15 condo projects, representing 1,900 units, that have been
officially pulled, but analysts agree the eventual number will be
much higher, taking into consideration the rest of the overbuilt
market over the entire state. In other words, there are going to be
more than a few eyesores to stare at in the coming years,
buildings half complete or giant pits, waiting to swallow up
unsuspecting tourists.
There were also a number of tidbits this week regarding the New
York City real estate market that foreshadow further softening
rather than a bottom having been hit.
For example, construction permits declined for the first time
since 1998, demand for office space appears to be hitting a wall
(ignore some of the positive spin you may have seen), and the
average sales price for a NYC apartment is now off 4% from a
year ago; this last fact obviously doesn’t represent a crash, but a
pigeon in the mine nonetheless. [The Big Apple being an urban
area and not exactly a haven for canaries….then again it’s been
warm enough for the songbirds, but I digress.]
Of course New York’s housing market will also be the recipient
of much of Wall Street’s largesse, so numbers over the coming
months could be a bit out of whack, especially at the very high
end, though the primary trend now appears to be in place.
But I want to spend some time musing about the Fall of the
Roman Empire, 2007 style.
The Journal’s Alan Murray summed it up terrifically the other
day in talking about all the cash, or to paraphrase Scarface, what
to make of it. [The preceding was heavily censored.]
“There is a steady stream of resources to the most perilous of
emerging markets, the most hopeless of troubled companies and
the most overextended of home buyers. That’s great fun while it
lasts. But does anyone seriously think it will last forever?
“Let’s start with private equity. Private-equity fund raising set a
record last year, as did private-equity deal making. This year
will be even bigger. Look for a precedent-breaking $50 billion
deal to be announced before the big ball falls in Times Square
again.
“The private-equity geniuses would have you believe this is
because they’ve discovered a superior form of running
companies. Perhaps some of them have. But mostly, what
they’ve discovered is an amazing gusher of money….
“(In general), the swollen river of liquidity is also behind happy
predictions that housing will recover later this year. Despite
rising default rates, mortgages remain cheap and easy.
“Lenders are still willing to let borrowers bury themselves in
debt to buy a new home. The money gusher also helps explain
why the federal government in Washington can keep spending
away, without regard for projections of an exploding federal
deficit. And why the dollar remains relatively strong, despite
swelling trade deficits. Or why the Dow Jones Industrial
Average has managed to go for more than 912 trading days (now
913) without a 2% daily decline – the longest such stretch in its
history.
“Perhaps this flood of money will continue through the new year.
Fed Chairman Ben Bernanke has argued money flows are the
result of a ‘global savings glut.’ Newly enriched investors in the
developing world need to put their money somewhere, and
apparently, even the most risky assets will do.
“But as long as the good times are rolling, don’t expect Mr.
Bernanke to cut interest rates. That’s a tool he’ll only use when
the economy takes a serious turn for the worse. Those who
predict otherwise haven’t been listening to what he’s been
saying.
“And don’t be fooled into thinking that more drinking will ease
the inevitable hangover. At some point, something – a string of
big defaults, a sharp decline in the dollar, or, God forbid, a major
terror attack – will cause the intoxicating stuff to stop flowing.
“The world is still a risky place, and liquidity, at the end of the
day, is just another name for confidence. Eventually, this
confidence game will end.”
But as Mr. Murray himself knows all too well, and as he’s
written previously, there is even more at work today.
Like Home Depot’s Bob Nardelli being dismissed for lack of
performance, but still walking away with $210 million in parting
gifts as determined by his contract; this on top of at least $64
million he previously was paid during his six years at the top. So
this vaults Nardelli into “the pantheon of pay-for-failure,” as The
New York Times’ Eric Dash phrased it, joining Pfizer’s Hank
McKinnell and his own $200 million exit package.
But outside of the actual “severance” payment of $20 million,
which Nardelli should return, the rest was previously negotiated,
including $139 million in deferred stock and option grants that
can now be cashed out early. It’s the board’s fault, just as it
increasingly is in all manner of compensation outrages we’ve
seen the past few years.
It’s also just plain wrong. We all know that. But then I see in
the Financial Times that private-equity groups paid at least $11
billion in fees to investment banks last year, with KKR leading
the way in shelling out $838 million, followed by Blackstone,
which paid $555 million, according to data compiled by Freeman
& Co. and Thomson Financial.
For what, you may ask? Why it’s for merger and acquisition
advice, loan arrangements and stock and bond underwriting,
that’s what. JP Morgan received private equity fees of $1 billion
last year, with half coming from arranging loans for buy-out
groups. Goldman Sachs picked up $975 million, Morgan Stanley
$745 million, Deutsche Bank $730 million, Lehman Brothers
$655 million, Citigroup $651 million, Credit Suisse $591 million
and Merrill Lynch $552 million.
But aside from all this money sloshing around from KKR to
Goldman, back to KKR, over to Morgan Stanley, back to KKR,
then to Merrill Lynch, is any real value being created?
I’m just thinking out loud, sports fans. Shareholders in the
companies at play certainly don’t see much of it, unless you’re a
shareholder in one of the investment banks or a participant in
some of the private-equity pools themselves.
Of course you can say the same thing about the stock options
game, as best played over the years by the likes of Sandy Weill,
$979 million in realized and ‘in-the-money options,’
UnitedHealth Group’s William McGuire, $2.1 billion (some of
which is coming back), or Oracle’s Larry Ellison and his $1.5
billion haul in both realized and current gains. While you can
certainly argue in the case of these three that they did indeed
create value at one point, Ellison’s Oracle was dead in the water
for years until just recently from a shareholder standpoint, as was
Weill’s Citigroup, both before and after his departure. So I guess
the question is, ‘How did we let all this get so out of control?’
I was reading a Journal story by Daniel Golden on those luxury
skyboxes you see at college football stadiums and I never knew
about all the tax incentives there are to build the things, a fact
Congress is beginning to look into.
“Universities typically finance these renovations [like $175
million for 47 luxury suites at the Univ. of Texas] by issuing tax-
exempt bonds. They then make payments on the debt by leasing
the new luxury suites and other preferred seating to individuals
or corporations….
“A selling point to alumni and other supporters is that they can
deduct most of the lease fee from their taxable income. Under a
1988 federal law, taxpayers may deduct 80% of payment for the
right to purchase seating at a collegiate sports event – though not
a professional one – as a charitable contribution. Direct
payments for game tickets, food, parking and other goods aren’t
deductible as charitable contributions but may be written off as a
business expense if used to entertain clients.”
But now some schools are wondering if enough wealthy fans will
be interested, even as construction continues….but that’s their
problem.
To conclude, though, do you see what’s happening? Outrageous
CEO packages, approved by boards comprised of like-minded
individuals who then expect similar treatment at their home
company; gigantic options packages, ‘just because’; major
league tax incentives for the well-heeled to purchase sky boxes
while the little guy/fan is increasingly priced out. And I’m not
even mentioning the totally whacko salaries being paid some of
the most mediocre of athletes, particularly baseball and
basketball players, let alone their coaches; the latest example of
this last category being dirtball Nick Saban and his abandonment
of the Miami Dolphins after just two years to take a $32 million,
8-year deal to coach the Crimson Tide of Alabama. $4 million a
year to coach college football! And when he goes 7-5 in the
third year he’ll be fired, yet still keep the rest of his package.
What the heck is a university doing throwing around such money
in the first place?
If this isn’t looking like the Fall of Rome, I don’t know what
does. Back then it wasn’t just the barbarians that began to
pressure Rome’s finest, there were economic difficulties that
contributed to the breakdown of government. Then the Goths
sacked it for good in 410.
But don’t worry, friends. As I said last week, and up above,
we’ll make it through 2007. Enjoy.
Street Bytes
–Due to the New Year’s holiday and the national day of
mourning for President Ford, the markets were open only three
days this week and little of consequence can be gleaned from the
action as stocks got off to a mixed start this year; with the Dow
Jones losing 65 points to 12398 and the S&P 500 falling about 9
to 1409, while Nasdaq tacked on 19 points to 2434.
The big story was energy, as in oil collapsed almost $5 due to the
incredibly warm weather in the key heating regions, the Midwest
and Northeast. But in glancing at the longer-range forecasts it
appears colder weather will finally settle in next week for much
of the nation so crude could rebound some.
Since I mentioned last time I was waiting for a pullback in oil
shares before hopping back in, I do need to add that I did not
make a move this week, despite some big moves to the
downside. If I missed the bottom in this cycle, so be it. I’ll get
another opportunity later.
–U.S. Treasury Yields
6-mo. 5.08% 2-yr. 4.76% 10-yr. 4.65% 30-yr. 4.74%
Rates rallied strongly initially on the collapse in oil prices,
signaling a diminishing inflation threat, and reinforcement from
the Fed minutes that perhaps housing was taking a bigger bite out
of the economy than it first thought; ergo, a cut in rates was
indeed in the cards. But then the strong employment report hit,
the rate theory was thrown out the window, and yields rose anew.
Overall on the week, however, they were down from 12/31
levels.
PIMCO’s Bill Gross issued his rate forecast on the 10-year,
Thursday, and called for 4.50% by December. Why I wrote we
would close the year at that level, too, but six days earlier. [Just
tweaking my PIMCO friends, you understand.] Gross is calling
for 2% growth, 2% inflation for much of the year; an
environment conducive to the Fed lowering the funds rate four
times, so he says.
But on a different bond-related issue, here are some facts
concerning the junk market I picked up from the Journal’s
Serena Ng the other day. In the late 1980s, more than half of all
U.S. industrial corporations tracked by Standard & Poor’s were
rated junk and now the percentage is 71% according to a new
report of theirs.
It’s about remembering the bad times, and even during better
periods, for example. “Among a sample of around 120 single-B
companies that tapped the debt markets for the first time in 1996,
just 6% have paid off their debt, according to S&P. A third of
the group defaulted or went into bankruptcy proceedings.
Another third have been acquired.”
As S&P’s Nicholas Riccio noted, “Most people think they are
smart enough to get out when they should. The question is who
will be left holding the bag.”
The above is also an excuse to remind those of you who feel like
dabbling in this segment of the bond market yet don’t have a lot
of expertise, select a professional fund manager (like PIMCO).
–Both General Motors and Ford saw U.S. sales fall 13% in
December, while Toyota’s rose another 12%. Toyota’s overall
market share is up to 15.3%, thus surpassing DaimlerChrysler’s
14.9% for third place behind GM and Ford. Toyota is not only
slated to pass Ford in the U.S. sometime in ’07, it has also set a
global production target of 9.42 million vehicles for 2008, which
means it could exceed GM at that point; the latter having
produced 9.2 million globally in 2006. One key for all of the
U.S. carmakers will be this coming fall’s talks with the United
Auto Workers; ergo, management at the Big Three will be
seeking major concessions.
–Aside from the above noted fact that the Dow Jones has now
had a string of 913 days without a one-day decline of 2% or
more, the longest ever, related to this is another tidbit. The S&P
500 moved by more than 1% on average only twice a month in
2006, compared with an average of four times a month dating to
1950. It moved by more than 1% nearly 12 times a month in
2001. [Wall Street Journal]
–Boeing booked orders for a record 1,044 aircraft in 2006,
which should be more than enough to surpass Airbus for the first
time since 2000. Airbus had orders of 1,055 jetliners in ’05 but
due to various issues likely dropped to between 750 and 800,
according to the Journal.
–Copper prices had their worst week in 10 years on fears of
slower U.S. growth and growing supplies as a result of the
slowdown in housing activity.
–The options scandal at Apple Computer is not going away.
From Dawn C. Chmielewski / Los Angeles Times:
“In August 1997, Apple Computer Inc. handed four top
executives options to buy a total of nearly 1 million shares. The
next day, the value of those options jumped a staggering 48%, or
$7.7 million.
“This was no coincidence, according to a shareholder lawsuit
filed against executives and directors of the Cupertino, Calif.-
based company in federal court in Northern California. Rather,
the options were granted to coincide with good news that would
give the four executives an overnight windfall.
“The stock soared when co-founder Steve Jobs announced that
Apple’s sworn enemy, Microsoft Corp., threw the struggling
company a life raft in the form of a $150-million cash infusion.
In exchange, Apple gave Microsoft a stake in the company and
agreed to use the software giant’s Web browser on its Mac
personal computers.”
While this would become a footnote in Apple’s comeback, it’s an
example “of the fast-and-loose practices that went unchecked in
a corporate culture fashioned by Jobs to revive Apple,”
according to the suit.
An internal investigation released on Dec. 29 absolved Jobs of
any wrongdoing, but acknowledged 6,428 instances of
improperly dating option grants over a six-year period, as noted
in a filing with the SEC.
But when it comes to the backdating issue, overall, reader Scott
P. observed that as offending companies have been restating
earnings, the IRS should be stepping in with penalties and
interest due on all of the past tax filings. It’s amazing there isn’t
more of an uproar among investors, to some of us, but there
won’t be until the harshest of penalties are levied and there is
some impact on the share price. So far there has been little if any
for many of the companies involved.
–In Alan Abelson’s column in the Jan. 1 edition of Barron’s he
mentions an analyst, Alan Newman, who has an interesting take
on the ETF (exchange-traded fund) boom. As Abelson writes:
“By (Newman’s) reckoning, through mid-December, last year’s
net issuance of ETF shares weighed in at a massive $54 billion,
extending a smashing seven-year growth that has averaged an
awesome 41% annually and has lifted the total value of such
shares to close to $400 billion. It’s critical to remember,
(Newman) points out, that for an exchange-traded fund to issue
shares it must first buy the underlying assets, primarily stocks.
That demand all by itself, he reckons, was enough to keep the
market rally of the past few months alive and well.
“Not the least interesting thing about ETFs and their powerful
impact on market prices is that they don’t trade on the basis of
individual corporate prospects. Alan posits that more than half
the price of many stocks is now dependent on ‘index or sector
sponsorship, the obvious result of a market that has been
increasingly sectored to death and indexed beyond any
efficiency’ imagined by academics. For ETFs, in other words,
valuations don’t matter.”
Sandy Habermann at Miller Tabak notes that there are plans for
approximately 375 new ETFs in ’07. In other words, you’re
staring at the next bubble.
–China’s courts have been handing down rulings in favor of
copyright and patent holders, according to the Wall Street
Journal, including a judgment against Chinese Internet portal
Sohu.com to pay $139,000 in damages as a result of Sohu’s
subscription service where you could download more than 100
American movies. But while this is a decent step on the part of
the Chinese government, the fact is a tremendous amount of
piracy continues to take place.
–The Financial Times had a story that “YouTube’s failure to
complete a key piece of anti-piracy software as promised could
represent a serious obstacle to efforts by Google, its new owner,
to forge closer relations with the media and entertainment
industry.”
YouTube had promised Google it would install a “content
identification system” that tracks down copyrighted music or
video on YouTube, “making it the first line of defense against
piracy.”
YouTube had promised to have it in place by year end and it’s
felt Google will have little patience if the delay is much longer
than another week or two. The music industry is insisting on the
technology before it solidifies any long-term relationships with
the site, which of course then impacts Google and its own
negotiations with big media.
–I didn’t know about this until reading a story in the London
Times, but California had a budget gap of about $250 million
that is now largely closed because “Taxpayer X,” who is yet to
be identified, has come clean on unpaid taxes of some $200
million. So the guessing game is on as to who it could be, with
the wealthy individual having earned $2 billion or thereabouts to
justify the payment. But of the world’s 746 billionaires in a
recent Forbes ranking, 91 live in California. The Times assumes
it’s all related to a 2004 law signed by Gov. Schwarzenegger
offering “taxpayer amnesty,” so that the ultra-rich could clean up
their act without risking fines or jail.
–Germany is experiencing a ‘brain drain’ with a record 144,800
German citizens leaving in 2005, 25% more than 2002. While
the numbers may seem small when weighed against a population
of 82 million, as DaimlerChrysler CEO Dieter Zetsche told the
weekly Der Spiegel, “We cannot simply look on as precisely
those people emigrate who are valuable, well-educated and
motivated.” But Germany has 10.2% unemployment, high taxes
and inflexible working conditions. Meanwhile, increasingly
unfriendly immigration laws are giving many a second thought
about moving to Germany, resulting in a further shortage of
highly skilled workers. And then you have a dearth of babies.
–French President Jacques Chirac, in his last few months in
office, proposed a sharp cut in the corporate income tax from
33% to 20% within five years; a shot at Socialist Party
candidate Segolene Royal who is focusing on improvements in
housing and childcare and probable tax hikes to pay for her
programs.
–In 2006, Macau casinos raked in an estimated $6.8 billion,
overtaking the Vegas Strip which came in around $6.5 billion.
2.2 billion people live within five hours’ flying time of Macau,
vs. 410 million in the same radius of Las Vegas.
–I forgot to mention last time that in my attempt to beat the
market in ’07, from a “model portfolio” standpoint, I’ll stick with
my 80% cash, 20% equities as represented by the S&P 500.
Foreign Affairs
Somalia: There is no one who can predict what will happen next
now that Ethiopia helped expel the Islamist forces in Somalia.
As of this writing, there are signs of a militant backlash against
the transitional government attempting to restore order after
forcing the Islamists to flee towards the Kenyan border. The
Islamists are also calling for a global jihad against Ethiopia,
which has a long Christian history.
Meanwhile, Kenya is rightfully afraid it will get sucked in as it
closed its northern border in what could be a futile attempt to
prevent terrorists from seeking refuge there. But Kenya faces
heat if it turns down legitimate refugees.
As for the United States, it has positioned naval forces off the
Somali coast to prevent al-Qaeda suspects from fleeing to
Yemen, among other possible destinations, while Washington is
working with the UN on a potential African stabilization force,
though currently only Uganda and Nigeria have expressed
interest in participating.
Afghanistan: Out of nowhere, Taliban leader Mullah Omar
granted an e-mail interview for the first time since going into
hiding five years ago, though this was through a Taliban
spokesman; if nothing else a reminder the U.S. hasn’t caught
either Omar or Osama bin Laden after all this time. Omar
himself said he has not seen bin Laden since the U.S. moved into
Afghanistan. He also denied the Taliban has been receiving
assistance from Pakistan, while adding if foreign troops don’t
leave Afghanistan “the war will heat up further.”
Lebanon: The political standoff continues, even though it’s not
as much in the news these days. Hizbullah’s deputy leader,
Sheikh Naim Qassem, held talks with Saudi King Abdullah in
Abdullah’s first such contact with Hizbullah; significant because
the Saudi Royal Family is Sunni and Hizbullah is Shia. The
Saudis, you’ll recall, were former Lebanese Prime Minister Rafik
Hariri’s chief backers and currently support the government of
Fouad Siniora. Abdullah invited Hizbullah leader Sheikh
Nasrallah to visit the kingdom for the hajj to Mecca but he turned
it down on security grounds. [Guess what? There weren’t any
stampedes at the hajj this year! Is that progress or what?!]
Russia / Belarus: A deal was cut between Belarus and Gazprom
to avert a cutoff of supplies of natural gas with Belarus agreeing
to a hike in the price it paid from $47 to $100 per 1,000 cubic
meters, while Gazprom gets 50% of Belarus’ pipeline,
Beltransgaz. But then Belarus turned around and said it would
charge Russia $45 per ton of oil pumped through its pipelines to
Europe. Russia transports about 20% of its oil exports through
Belarus, mainly to refiners in Poland and Germany. 20% is also
the figure on natural gas shipments for Europe transiting through
Belarus, with the other 80% going through Ukraine.
North Korea: Not that it matters, but Pyongyang’s foreign
minister died, the chap being the commies” key figure at the
worthless six-party talks on Kim Jong-il’s nuclear weapons
program. Kim calls the shots, period. At week’s end there were
also rumors of another nuke test in the near future.
Earlier, South Korea’s defense ministry issued a white paper
describing North Korea as a “serious threat” in the wake of its
earlier test; the South’s harshest description since Seoul’s policy
of engagement started in 2000.
Japan / China: “Serious” was a key word in the region this week,
China having expressed “serious concern” over reports the
United States and Japan may be planning a coordinated response
in the event China invades Taiwan (or North Korea attacks
Japan).
Spain: For no apparent reason, ETA, the Basque separatist group,
broke a truce and claimed responsibility for a bomb attack that
killed two at Madrid’s airport.
Thailand: A series of bombs in Bangkok on New Year’s Eve
killed at least three, with no one claiming responsibility here as
yet.
Random Musings
–I congratulate Representative Nancy Pelosi on becoming the
first woman to occupy the House Speaker’s chair. And with the
Democrats now taking control of Congress, they, at least in the
House, will be focusing their initial efforts on hiking the
minimum wage and ethics reform, as well as increasing
disclosure on those attempting to sneak through “earmarks,” or
pork. A major first step was Friday’s bill requiring sponsors
of earmarks to identify themselves.
But I had to laugh when reading President Bush’s Wall Street
Journal op-ed in which he said his policies will balance the
federal budget by 2012, not that this isn’t a noble goal. Of
course the president harps on making his tax cuts permanent,
something I agree with, but, just as in the case of Ronald Reagan
and his big failing on the domestic side, it’s funny to see Bush
now suddenly advocate spending restraint when it is he who has
never vetoed a spending bill. And who was Bush’s ghostwriter
for this passage?
“One important message I took away from the election is that
people want to end the secretive process by which Washington
insiders are able to slip into legislation billions of dollars of pork-
barrel projects that have never been reviewed or voted on by
Congress.”
You needed an election, Mr. President, to learn this? You
needed an election to figure out your Iraq policy was a failure?
Just what do you do all day?
But I do believe the president has finally received the message on
a number of issues, with the obvious question then being does he
have any credibility left whatsoever as well as the will to not
only sit down and compromise from time to time but also to
wield the veto pen. I suspect we’ll see a rash of vetoes these
final two years and I’m likely to be supportive in most instances.
–Rudy Giuliani’s fledgling presidential bid suffered a blow
when somehow a 140-page internal strategy guide for the
campaign was obtained by the New York Daily News from a
source sympathetic to a rival campaign. Giuliani staffers
immediately called it a “dirty trick” where it seems like nothing
more than sheer negligence as the booklet was carelessly left
behind somewhere along the way. Here is the official
explanation from team Giuliani.
“During one leg of his campaign travel, all luggage was removed
from a private plane and later put back on. However, one
staffer’s bag was not returned. After repeated requests over the
course of a few days, the bag was finally returned with the
document inside. Because our staffer had custody of this
document at all times except for this one occasion, it is clear that
the document was removed from the luggage and photocopied.”
If you believe this scenario, you can only conclude this has to be
the world’s dumbest staffer. What the heck would he/she be
doing just casually throwing the strategy guide in checked
luggage anyway? So we hereby nominate the unknown Giuliani
aide for “Idiot of the Year.”
–I’ve been writing a lot about the disturbing trends in violent
crime in America the past few years and while some cities, such
as Los Angeles and Washington, D.C., have met with success in
reducing the murder rate, most haven’t, albeit we are coming off
historic lows in many instances.
Nonetheless, it’s worth noting some findings from Newark, N.J.,
where at least 106 murders took place in 2006, the most since
1990’s 114. Overall, the number of violent crimes in Newark
actually plummeted from 10,912 in 1990 to 2,956 in 2005 (the
latest available data point), but it’s the gun violence that is
soaring.
90% of the murders here were committed with a gun this past
year vs. 48% in 1990. As a crime expert, George Kelling, told
the Star-Ledger, “It’s not the old days of robberies gone bad. It’s
a culture of gun violence that is limited to a small population of
people. Shooters and victims are very much the same. It’s bad
guys killing bad guys. And it’s much more senseless.”
You read something like this and on one hand you can hide
behind the statement “bad guys killing bad guys” and not care;
until that time someone is innocently caught in the crossfire or
the violence moves into your neighborhood.
Newark’s police director, Garry McCarthy, offers that “I think
we have less of a gang problem and more of a narcotics problem
than people seem to realize.” McCarthy estimates 80% of all
shootings are drug-related.
Whatever the reason, it’s sick. And then these days you have the
added cases of sports celebs like the Denver Broncos’ Darrent
Williams, who was gunned down in a drive-by shooting outside a
Denver nightclub last weekend. What is emerging is that
Williams’ entourage had a disagreement with the killer’s posse
inside the club and it seems clear the latter then took matters into
their own hands outside. This is the third high-profile incident of
the kind in Denver in a little over a year.
Of course there is a reason for the “senseless” killings in a
segment of our society. The rap culture. But try finding anyone
outside of Bill Cosby among black leaders who seek air time to
really address it.
–Then there’s Oprah Winfrey. She took some heat for the
following comments, made in conjunction with the founding of
her Academy for Girls in South Africa.
“When I first started making a lot of money, I really became
frustrated with the fact that all I did was write check after check
to this or that charity without really feeling like it was a part of
me. At a certain point, you want to feel that connection.”
Winfrey then noted she was frustrated by her visits to America’s
inner-city schools, in explaining why she just shelled out $tens of
millions for something in South Africa and not here.
“The sense that you need to learn just isn’t there…(In America)
if you ask the kids what they want or need, they will say an iPod
or some sneakers. In South Africa, they don’t ask for money or
toys. They ask for uniforms so they can go to school.”
[Newsweek]
Bang on, and good for you, Oprah.
–Last Saturday evening I watched the state funeral in
Washington for Gerald R. Ford and I have to admit until I read
Dana Milbank’s column afterwards in The Washington Post, I
hadn’t observed just how few congressmen were there. Certainly
President Bush’s absence was notable, but he was in Crawford
clearing brush.
Now to be fair the timing could not have been worse, we all
know that, and official Washington was scattered across the
globe. But according to Milbank, there were only eight
congressmen in attendance on Saturday and about ten senators.
Republican Congressman James Sensenbrenner (Wis.) was one
who showed up and told Milbank, “Everybody’s got to deal with
their own schedule. (But funerals) are important. When you’re
in an official position, it’s one of the things that’s the right thing
to do.”
As for my own feelings, I know I wasn’t alone in watching the
Ford ceremonies and services and thinking ‘what a great country
we have.’ But I was struck by a line in Henry Kissinger’s eulogy
on Tuesday at the National Cathedral; a simple one that none of
the excerpts highlighted afterwards.
“Jerry Ford always did his best.”
There is no way the current occupant of the White House can say
that of himself, and it’s not only frustrating, it should make every
American furious.
But as my friend Jimbo and I exchanged thoughts on the subject,
what we will prefer to remember from this past week was the
incredibly moving moment when Ford’s hearse paused at the
World War II Memorial, Saturday, with the boy scouts there and
the other well-wishers waving to Betty Ford. In so many
respects it was the passing of an era.
–Senator Barack Obama wrote an op-ed for the Post and I would
have gladly thrown in a quote or two for this column had I seen
anything even remotely worth passing on.
–President Bush’s longtime White House counsel, Harriet Miers,
resigned after six years. Oh yeah, she was good…………not.
–So much of the news these days, especially in the eastern half
of the United States, is about the warm winter thus far. New
York City, for example, has now gone longer than ever before
without the first flake of snow and today, Saturday, we will
smash the all-time high temperature for the date.
But it’s not just about global warming, which is real, it’s also
about El Nino and the jet stream. How easily we forget this area
had four straight winters with above average snowfalls before
this welcome respite. [One idiot newsperson on WCBS-AM
radio asked their weather guy, “So Craig, what’s up with the
Gulf Stream?” Oh brother, I mused.]
Meanwhile, Australian officials released data “showing that the
country appears to be experiencing the effects of global warming
more deeply than other parts of the world,” and as I glance at
Moscow’s temps daily, winter is already two months behind
schedule there.
–Sticking on the weather theme, when I was in Miami this week
there were a number of stories on National Hurricane Center
Director Max Mayfield’s retirement. For much of his 34-year
career Max was the most recognizable face in discussing pending
storms. But in departing for the consulting world, Mayfield’s
parting shot came in the form of a warning that ten times as
many fatalities as those attributed to Katrina could occur in an
inevitable strike by a huge storm along our overbuilt coasts. It’s
about lacking the political will to make the hard decisions in
terms of building codes and restrictions on coastal development.
–The Sunday Times of London surveyed Brits on a number of
topics. Here are a few.
Just 11% believe Britain has become a better place to live over
the past five years, compared with 62% who said it had gotten
worse.
“Immigration tops the list of issues that people worry about most
on a day-to-day basis (47%)….
“Rudeness and bad language are the most common irritants in
everyday life….
“ ‘People have become incredibly selfish,’ said Simon Fanshawe,
an author and broadcaster. ‘I think we’ve lost a real sense of
collectivity. There’s too little respect for public spaces.
“ ‘I was recently on a train late at night and some girls were on it
playing music really loud. But their justification for it when I
challenged them was, ‘We’re doing what we want. What’s it to
do with you?’”
The poll also talked about a dearth of suitable role models, just
like here in America, “exacerbated by the popularity of banal
reality television shows.” ‘Why the hell should a child this
Christmas holiday settle down and do his revision for his
geography GCSE if he knows that he can become a star by
saying f*** a lot on Channel 4?’ said a London talk show host.
It’s easy to get down on the future these days.
–The aforementioned Orange Bowl saw my alma mater Wake
Forest take on Louisville. I must say the whole scene was a
blast, even though we lost 24-13. As it turned out it was also the
largest gathering of Wake Forest alumni in history, over 17,000
of us. Considering the school only has 4,000 undergrad and
about 55,000 living alumni, it was a darn good showing on our
part. [Louisville turned out 40,000.]
Special thanks to our coach, Jim Grobe, without whom none of
this would have been possible. He was AP “Coach of the Year”
for a reason. [And I think his salary is still below $1 million!]
–Regarding last week’s selection of “no one” for “Person of the
Year,” which has to be a world leader under my guidelines, Mark
R. said his vote was for Canada’s prime minister, Stephen
Harper.
“He hasn’t screwed up yet. There’s something to be said there.”
“Canada makes truly fine beers….a major consideration for you,
editor.”
“We will really need their oil in the future, so sucking up now is
critical.”
“His wife is attractive.”
“He may be the last Western leader left standing by 2008.”
All good points, Mark. A most inspired choice. But I
nonetheless need to stick with my initial take.
–Back to Gerald Ford, Peggy Noonan commented in the Journal.
“(Despite his shortcomings), this must be said and should be
said. He was a good man, and that’s not nothing – it’s
something. Gerald Ford fought for his country. He didn’t
indulge his angers and appetites. He seems to have thought, in
the end, that such indulgence was for sissies – it wasn’t manly.
He was sober-minded, solid, respecting and deserving of respect.
And at that terrible time, after Watergate, he picked up the pieces
and then threw himself on the grenade.
“We were lucky to have him. We were really lucky to have him.
Rest in peace.”
–And from Senator John McCain: “You’ve got to study history.”
—
USA Today had a breakdown of the 3,000 U.S. deaths suffered
in Iraq. Among the more depressing items is the toll at our
military bases, the first three being…
Camp Pendleton, Calif. – 298 killed
Fort Hood, Texas – 292
Camp Lejeune, N.C. – 248
I can’t begin to imagine how difficult it must be for the families
here and at the other bases around our nation. You are always in
our thoughts and prayers.
God bless America.
—
Gold closed at $609
Oil, $56.31
Returns for the week 1/1-1/5…and year-to-date
Dow Jones -0.5%
S&P 500 -0.6%
S&P MidCap -0.5%
Russell 2000 -1.5%
Nasdaq +0.8%
Bulls 55.3
Bears 21.3 [Source: Chartcraft / Investors Intelligence]
Have a great week. I appreciate your support.
Brian Trumbore
