[Posted 7:00 AM ET]
Wall Street….gurgle, gurgle…glub glub…………….Help!
At least I wrote the following just last week.
“But while the global bull run in equities continues, you have to
wonder about excessive speculation in all assets. When does it
end, and how? Here in the U.S., for example, margin debt
reached an all-time high…the highest since March 2000. There
certainly is a herd mentality at play, as well, exacerbated by
hedge funds. When does that end? What changes perception?”
Whether or not this past week represented a real sea change
remains to be seen, but certainly sentiment is suddenly on the
gloomy side.
So let’s look at our three-legged stool for clues as to where we’re
headed; housing, the consumer, and capital spending.
The housing sector is nowhere near a bottom, a fact reinforced
by sliding equity markets that further impact confidence. As the
subprime market (those who had no right buying in the first
place) craters, lending standards are tightening quickly. The
Federal Reserve warned banks on Friday to be more transparent
when it came to disclosing risks and earlier mortgage giant
Freddie Mac said it would no longer buy the riskiest types of
subprime paper, with CEO Richard Syron adding:
“The steps we are taking today will provide more protection to
consumers and enhance the level of underwriting standards in the
market” and, as of September, Freddie would stop buying “no
income, no assets” mortgages in which borrowers are not asked
to provide financial information; “stated income, stated assets”
products, for which borrowers’ incomes are not easily verifiable;
and certain kinds of mortgages offered with teaser rates.”
“It’s a tough situation,” said Syron. “There’s a very delicate and
difficult balance between getting as many people into houses as
you can, and at the same time not putting them into houses they
can’t keep unless home prices are appreciating or interest rates
are very low.” [Financial Times, USA Today]
Countrywide Financial, the largest U.S. home mortgage lender,
said late payments on its loans were rising rapidly, to 2.9% of
prime home-equity loans, up from 1.6% a year earlier; while
19% of its subprime mortgage loans were now late, up from
15.2% at the end of 2005. Not a disaster for Countrywide, yet,
but you can’t ignore trends that are only going to worsen.
And then you throw in the derivatives angle. Years ago, Lewis
Ranieri basically created the mortgage market. [He is best
known to others for his central role in the 1989 book “Liar’s
Poker.”] Ranieri was the man who came up with the idea of
pooling mortgages, then slicing and dicing them to be resold as
bonds to pension funds and institutional investors. It was the
start of the derivatives market, in many respects.
So last weekend Ranieri told the Wall Street Journal’s James
Hagerty that the business has changed so much that if the
housing market goes down much further, no one will know
where all the bodies are buried, which has been my point on
derivatives for years, frankly. Ranieri said “I don’t know how to
understand the ripple effects through the system today.” If Lew
Ranieri doesn’t, do you think some fresh-faced trader does? I
think not; let alone the fact there are two sides to every trade.
Actually, in the derivatives market that’s part of the problem.
Often there isn’t another side; it just floats out there in the Kuiper
belt.
As talk increased this week of problems in housing and
derivatives thereof, I couldn’t help but think of how we are also
seeing a worsening of the haves vs. the have nots. Many of the
have nots are seeing their dreams go up in flames, while the
haves, battered, are nonetheless still in fine mettle, overall. If a
rising tide lifts all boats, some higher than others, a receding one
carries out the dead, while leaving the rich still sipping pina
coladas from their decks on shore.
But if you are in the misery loves company camp, take heart in a
report by the Journal’s Robert Frank, who points out that the
richest 1% control 51% of the country’s individually held stocks
(as of 2004, the latest period measured). No doubt the mega-
millionaires got spanked around a bit this week, unless their net
worth was all tied up in Treasuries, which, come to think of it, is
often the case with these folks.
[The point of Frank’s article, though, was that today the rich
have doubled their exposure to risk in investing in more hedge
funds or private equity pools. So maybe they lost 5% or so this
week. But that’s 5% of a substantial pool with zero impact on
their standard of living, I’d argue, while the typical subprime
candidate is having many a sleepless night.]
Back to our three-legged stool, yes, some of us have been wrong
for years in talking about the death of the American consumer.
But we may finally have our day, unfortunately. And as for
business spending, I have been doubting this part of the economy
for quite a while and I’ve also warned that, heaven forbid, should
we suffer another significant terrorist attack, this is the first of
the three legs to be sliced off.
So bottom line, if you were sitting on the stool, with one leg,
housing, sheered off and the other two wobbly, you have a sore
tailbone as a result.
But if you needed to be cheered up this week, take heart from
Fed Chairman Ben Bernanke who said the markets were working
well and the economy was just Jim Dandy.
He certainly wasn’t looking at the revision on fourth quarter
GDP, up only 2.2% from the first estimate of 3.5%. This is the
progression in growth for the four quarters of 2006; 5.6% (Q1),
2.6%, 2.0%, 2.2%. If we have now settled into a 2%-3% pace,
then, yes, that’s happyland. Slow growth, low inflation, low
interest rates. Even with decelerating earnings, any damage
would be limited.
But 2%-3% is not what we’ll see. Try 1%-2%, possibly worse.
It will sure begin to feel like a recession.
Of course about now you may be thinking to yourself, when is
the editor going to get around to telling us why stocks fell, with
the major indexes off 4%-6%? There is no clear-cut answer to
this one, though I’ll go with we simply became far too
complacent, not even having as much as a 2% down day since
May 2003, and then on Tuesday, China’s Shanghai market
dropped 9%, Europe choked, and the U.S. gagged.
There are other reasons, like this yen carry trade deal that is most
important to hedge funds, and no doubt this particular game
played a role, but the bottom line is we forgot that investing can
be risky and that our world is increasingly interdependent, with
cash whipping around from Tokyo to Shanghai to Bombay to
Paris to London to New York and Chicago, faster than you can
say Anna Nicole Smith. That’s just the way it’s going to be for
the foreseeable future and the riskiest places, read emerging
markets, probably aren’t where you want to throw most of your
investment dollars until the next up cycle starts.
Back to Wall Street in a bit, but let’s take a break and focus on
the international news front, seeing as that can impact financial
markets as well.
—
Iran / Iraq
If you want to be an optimist, it was one of the better weeks for
the effort in Iraq, looking at the big picture. The three main
factions finally got together on an oil revenue-sharing
agreement, one that even satisfied the independence minded
Kurds, and since oil accounts for 90% of Iraq’s government
revenues this is rather encouraging.
And Americans, despite all the talk in Congress, continue to
oppose cutting off funding. We don’t agree with the president’s
handling of the war, but we aren’t ready to throw in the towel. I,
like the majority, want to give Iraq one last chance. What is
frustrating, though, is how long it is taking to get the troop
‘surge’ in place, but that’s a different topic.
I am also pleased to see the White House finally accept the idea
of talking to one’s enemies. This isn’t about Neville
Chamberlain-style appeasement; it’s about laying the cards on
the table so that the world sees, once and for all, where the
parties stand. Unfortunately, I just believe some of the effort will
be too late, particularly when it comes to Iran’s nuclear weapons
program that isn’t even on the table as yet in terms of the
“diplomatic initiative,” as it’s being called by Secretary of State
Condoleezza Rice.
The U.S. will be participating in Iraqi Prime Minister Nouri al-
Maliki’s Baghdad conference, commencing next week, along
with the other members of the UN Security Council, the Arab
League, and Iraq’s neighbors Syria and Iran. Secretary Rice said
there will be no one-on-one negotiations with either Iran or Syria
and the White House is insisting this isn’t a change in policy (or
an adoption of the Iraq Study Group’s ideas), but of course it is.
Rice just a few days earlier said she wouldn’t give in to
extortion, which is what she says about any discussions with the
two, which itself is absurd unless we have totally lost our self-
esteem.
Editorial / Daily Star, March 1, 2007
“In the past, U.S. President George W. Bush has frequently tried
to convince the world of his baseless idea that things are getting
better in Iraq. But rarely has the news from the war-torn country
ever substantiated his claims. On the contrary, the daily reports
of bombings, sectarian killings and seemingly endless bloodshed
have painted a bleak picture of a country that has no hope of ever
becoming a stable and prosperous democracy. However, one
recent development gives cause for optimism: The Iraqis are
taking more initiative to secure their own country….
“(Iraq says) they will use (the Baghdad meeting) to ask all of
their neighbors – not just Iran and Syria, but also Saudi Arabia,
Jordan, Turkey and Kuwait – to make contributions toward
improving Iraq’s security. The meeting could also go a long way
toward defusing regional tensions, since it will provide a forum
for the United States to meet face-to-face with its arch-foes, Iran
and Syria, with whom the Bush administration has refused to
communicate, despite the recommendations of a key bipartisan
panel on Iraq.
“The most significant thing about the conference, however, is not
who will or will not attend; rather, it is the fact that it has been
organized by the Iraqis themselves and marks the first time that
they are taking the lead in securing Iraq. This development
bodes well because the Americans, who have been in the driver’s
seat until now, have been steering the Iraqis off a cliff. U.S.
officials with little or no knowledge about the country they are
trying to shape have been running Iraq with all the detached
arrogance of a colonial power. They created a coalition around
themselves instead of the Iraqis. They tried to impose their view
of a democratic Iraq, but this was little more than a fantasy
conceived in the corridors of power in Washington. They craft
security plans from the comfort and isolation of their cocoon-like
fortress in the Green Zone, but these strategies have little impact
in terms of quieting violence in the war-ravaged country….
“What is worse is that the Americans have refused to accept
responsibility for their own failed policies. Instead, they have
blamed Iran and Syria for the escalating violence…even though a
significant number of insurgents and militants have poured into
the country from across the borders of other states that are allied
with the U.S.
“The Iraqi-led conference may be the first sign that the Iraqis are
rising up from under the mountain of American mistakes and
setting their own security agenda. Because the conference is
being organized by the Iraqis, and not the Americans, it would be
inappropriate for Bush to claim it on his (highly questionable)
scorecard of benchmarks achieved. But it could prove to be
more of a real turning point than any of the occasions on which
he has declared ‘mission accomplished.’”
But in the case of Iran, so much time has been wasted when we
could have been engaging the regime. Today, President
Mahmoud Ahmadinejad remains in control, even if tenuously,
and while the level of his rhetoric has been toned down some, he
still says of the nuclear program that “The train of the Iranian
nation is without brakes and a rear gear…We dismantled the rear
gear and brakes of the train and threw them away sometime
ago.”
Following are some opinions I take issue with.
Arab affairs expert Fouad Ajami / U.S. News & World Report
“The true believers (in Iran) will proclaim that revolutionary
purity trumps all, but worldly needs and affairs ultimately
prevail. A society that spends $20 billion a year to subsidize the
price of energy, electricity, and gasoline will in the end have to
contend with the wrath and disappointment of its people. There
is swagger in Iran, and there is menace, for its rulers are without
scruples. Terrorism, for them, is always an option. But theirs is
a vulnerable and brittle society. There is no need to ‘engage’
them and bail them out as they stumble. The regime should be
harassed, contained, and held to account. We may not have to
wait two centuries to pronounce on the fate of this revolution.
[Ed. a reference to Ajami’s earlier quoting of the late Chinese
leader Zhou Enlai, who when asked for an evaluation of the
French Revolution of 1789 said “It’s too soon to tell.”] The
swagger abroad and the rot at home: It is a trajectory we are all
too familiar with by now.”
Edward Luttwak / Wall Street Journal
“Viewed from the inside, Iran is hardly the formidable power
that some see on the outside. The natural outcome of increasing
popular opposition to extremist rulers, of widening ethnic
divisions and bitter Sunni resentment of Shia oppression is a
breakup. Certainly there is no reason why Iran should be the
only multinational state to resist the nationalist separatism that
destroyed the Soviet Union and Yugoslavia, divided Belgium in
all but name and decentralized Spain and even the United
Kingdom, along with other states large and small.
“Once again, there is a better alternative to détente with a
repulsive regime, and that is to be true to the Wilsonian tradition
of American foreign policy by encouraging the forces of national
liberation within Iran.”
Ajami and Luttwak are wrong in one key sense. Engaging Iran,
and end-running Ahmadinejad, has a better chance of getting the
Iranian people to give up on their existing leadership than what
we’ve seen out of the White House to date. I’m convinced the
opposition will see U.S. involvement as a sign of support.
But, again, there is one big problem. The Iranian nuclear
program is probably too far along to stop. Here it’s about
national pride at this point.
I do agree with the following.
Editorial / Daily Star, Feb. 27, 2007
“On the surface, it appears that nothing should prevent (the U.S.
and Iran) from sitting down and hammering out a deal, and U.S.
Secretary of State Condoleezza Rice should write a letter inviting
Iran to talks before the dangerous war maneuvers in the Gulf
result in an accidental war. However, as (Iran’s top nuclear
negotiator Ali) Larijani has pointed out, Iran has so far refused to
meet the U.S. demand to halt its enrichment program before talks
begin, because ‘setting preconditions means indicating the
outcome of talks in advance.’
“Several officials from the United Kingdom, France and
Germany…have pointed out that they have been unable to
negotiate a deal on Iran’s nuclear program because Tehran has
asked for certain guarantees that can only be provided by
Washington….
“The Iranians have long stated that their nuclear program is
peaceful, and the Islamic Republic’s supreme leader, Ayatollah
Ali Khamenei, has even issued a fatwa saying that the
production, stockpiling and use of nuclear weapons is forbidden
under Islam. The United States is free to suspect that something
else is afoot, but there can be no harm in discussing the issue in
the mature manner that its allies have done. On the contrary, the
potential benefits are incalculable – if only Rice would write that
letter.”
I repeat an opinion from before. We are not France. The United
States is the superpower. It’s time to act like one.
—
Wall Street, part II
Street Bytes
–So much for the solid start to 2007 as the gains have all been
washed away. By some measures it was the worst week since
January 2003 and the major indexes are at their worst levels
since last November.
What did I do with my own equity holdings? Not much. I
actually did a very small amount of buying but no selling. In all
my accounts combined I have about a dozen stocks, total, and as
a longer-term investor, nonetheless each day I think “do I still
want to own this a year from now?” With one exception the
answer this week kept coming back “yes.” [Regarding the
‘exception,’ I simply blew it and hope for a rally next week to
then unload it.]
While I’ve been recommending an 80/20 split between cash and
equities for well over a year now, my own portfolio was more
like 70/30, thanks to appreciation and a few buys in ’07. But
having been slaughtered like most everyone else this week, I’m
closer to 75/25.
–U.S. Treasury Yields
6-mo. 5.06% 2-yr. 4.54% 10-yr. 4.50% 30-yr. 4.64%
Treasuries rallied big time, as you might expect given the
carnage in the equity market, plus aside from the downward
revision to GDP, big ticket / durable goods orders in January
tumbled almost 8%. This is a most volatile number to be sure,
but the far worse than expected reading had to grab your
attention.
Other readings on manufacturing, though, were mixed. The
national Institute of Supply Management index was up to 52.3
(below 50 signaling possible recession), but the Chicago area
figure was 47.9.
And back to real estate, existing home sales were up more than
expected, but new home sales collapsed 17%. In both cases,
median home prices were off year over year by 2%-3%.
If you decide to dabble in the bond market these days, however,
do yourself a favor…buy quality. Also, buy short term. Better
yet, save yourself some aggravation and just keep your money in
a money market fund paying over 4.5%, just as we do here at
StocksandNews.
–There was much talk of the yen carry trade this week. This
impacts the hedge fund community in a big way and by
extension the equity and credit markets if these positions are
suddenly unwound.
In a nutshell, investors borrow in currencies with low interest
rates, such as Japan and its 0.5% benchmark lending rate, to
invest in those paying higher rates, such as….anywhere else in
the world! It’s interesting that as of the end of January, Barclays
Capital had estimated these speculative trades had reached their
highest level since the Russian crisis of 1998, and that was a
most sloppy time.
The risk is in the speed of any changes in the underlying
currency, in this case the yen, and this week the U.S. dollar
weakened considerably vs. it. So that’s a losing proposition,
especially considering the amount of leverage employed by most
players participating in this game. It’s too soon to know where
the bodies are, but if there were any accidents this week, and in
succeeding ones, we’ll know soon enough.
–China’s trade surplus jumped 67% in January. The biggest risk
the U.S. financial markets face, longer term, is protectionist
legislation out of Congress and this number doesn’t help.
–Oil was basically unchanged, but perhaps the big story was a
note on the weather front that La Nina is taking over for El Nino,
ergo, the risks of a volatile hurricane season in the Atlantic just
rose. It’s one reason why I’ll continue to hold onto my own two
oil plays, at least for now, unless the global economy, and thus
energy demand, goes into freefall. The problem with this logic
is, admittedly, that you have to foresee this before everyone else
does.
–Professor Jeremy Siegel and his investment partner Jeremy
Schwartz (one should change their name to Chad) noted in a
Journal op-ed that this week marked the 50th birthday for the
S&P 500. Through the end of 2006, the annualized return on the
blue-chip index has been 10.83%. The S&P comprises about
80% of the total value of all U.S. stocks.
Aside from being the prime benchmark for money managers, the
history of the S&P also speaks to the changes in America. Back
in 1957, for example, the technology, health-care and financial
sectors made up just 6% of the index vs. about 50% today.
–Because of a serious computer glitch on Tuesday thanks to a
data backlog at Dow Jones, the company faces a slew of lawsuits
because it misled investors as to the actual damage in the
markets. When the index plunged 178 points in the span of a
minute, the move implied stocks were in far worse shape than
they actually were because the share prices of the individual
issues were in fact accurate all along. Lawyers will argue,
though, that investment decisions were made based on faulty
information, including with index-linked mutual funds.
–Kohlberg Kravis Roberts and Texas Pacific Group have teamed
up to acquire TXU, one of America’s largest utilities, in what
would be the largest private equity deal on record, about $45
billion. However, the deal faces stiff regulatory approval as
TXU is the top provider of electricity to the state of Texas. KKR
and Texas Pacific sought the backing of environmental groups by
agreeing to scrap plans to construct 8 of 11 controversial coal-
fired power plants, but then that leads to the issue, where does
the needed capacity come from?
Also, as part of the attempted takeover the SEC is looking into
suspicious activity in TXU options in the days leading up to the
announcement. As Chicago trader Jon Najarian put it, the
patterns fit “a textbook example of insider trading.”
–February U.S. auto sales.
General Motors…+3.7% (a pleasant surprise)
Ford Motor…-14%
Chrysler Group…-8.3%
Toyota Motor…+12% (strong demand for the Prius hybrid)
Honda Motor…+3.2%
Separately, Toyota announced it is building a new assembly
plant in Tupelo, MS, birthplace of Elvis. Toyota said it would be
building the Highlander car-SUV crossover at the facility.
–Warren Buffett, in his annual shareholder letter, criticized
hedge funds (“Wall Street’s pied pipers of performance”) for
their exorbitant fee structure. Buffett is also looking for a new
chief investment officer, someone who can deal with the
“bizarre” things markets do these days. “Certain perils that lurk
in investment strategies cannot be spotted by use of the models
commonly employed today by financial institutions,” he wrote.
On the issue of executive pay, Buffett said the system, including
the role of consultants, is broken with an “all the other kids have
one” attitude to perks.
–Michael Dell is trying to convince everyone the company’s
restructuring efforts will bear fruit, but the fact is revenues
continue to slide; $14.4 billion for the last quarter vs. $15.2
billion a year ago. Dell also continues to deal with the SEC
investigation into its accounting practices.
–Incredibly, Nortel Networks announced it will be restating
earnings for the fourth time in four years, thus delaying its 2006
annual report, though this time it’s not about fraud, it would
appear, only a faulty abacus. [Seems that one of the thingies fell
off the wire.]
–The SEC is examining Google’s accounting methods for
determining income taxes, the first time the search giant has
attracted the attention of regulators since going public in 2004.
–The feds busted a sweeping insider-trading ring involving at
least 13 people, including employees (or former ones) at UBS
and Morgan Stanley. [MS has to be thrilled with the headlines in
Friday’s New York tabloids… “Morgan Scamley.”] An
executive at UBS and a former compliance officer at Morgan
Scamley tipped off traders and brokers to new analyst ratings and
secret takeover talks. At least four professionals at Bear Stearns
then traded on the information in conjunction with hedge funds,
which is a common occurrence. Four of the 13 accused have
already pleaded guilty. It’s important to note, though, that none
of the firms themselves were charged with wrongdoing.
–Despite all the talk on the backdating of options scandal, it
would appear a vast majority of the executives involved will
skate free. As Peter Burrows points out in the March 5 issue of
BusinessWeek:
“As legal experts take a closer look, some are questioning how
well it will play in court. Recent history illustrates why. Plenty
of business practices that were roundly condemned by
government lawyers, academics, and columnists – including
allocating hot IPO shares to favored investors and trading mutual
funds after market close – failed to produce the expected jail
sentences. And plenty of executives whom the pundits expected
to see in orange jumpsuits, such as former HealthSouth CEO
Richard Scrushy, are walking free. ‘My prediction is that a lot of
these cases are going to prove to be a lot murkier in terms of
criminality than the seemingly stark allegations as they initially
emerged,’ says Larry E. Ribstein, a law professor at the
University of Illinois. ‘There will be difficulties finding out who
did what and whether they knew it was wrong.’”
–Years ago, Citigroup agreed to pay $215 million to settle
Federal Trade Commission allegations of deceptive and abusive
lending practices at its Associates First Capital subprime lending
arm which Citi acquired in 2000. Now the SEC is looking into
the accounting practices at Associates. This was a Sandy Weill
special, one that he now admits was “one of the worst
acquisitions of my career.”
–Airbus is going to be laying off 10,000, mostly in France and
Germany, as a result of its massive restructuring. To compound
matters, UPS canceled an order to buy 10 Airbus A380
freighters, leaving Airbus with no customers for the freight
version of its superjumbo flying wiener.
–China has become a net importer of coal for the first time. Ten
years ago it became a net oil importer and it’s the increased
demand of the latter that has been a large factor in crude’s rise.
China has a lot of coal, itself, but the problem is in transporting it
from the mining sites to the heavily industrialized coastal
regions, which is why the coastal areas need to import. Coal still
fuels 70% of the country’s electrical generation.
China’s biggest problem, though, remains pollution. This
Sunday, the Hong Kong Marathon is being held and the head of
the University of Hong Kong’s department of community
medicine stated, “The bottom line is that it is not a good idea to
be running marathons in intensely polluted air. I don’t want to
be seen to be scaremongering, but for some people it could have
serious health consequences. People have asked me whether
they should run in this and I feel compelled to say if it were me I
would give it a miss,” said Dr. Anthony Hedley. [South China
Morning Post]
This kind of publicity, though, helps spur action and that has
indeed been the case the past few years. China is also obviously
focused on the Beijing Olympics and it’s doing what it can to
shape the attitudes of those who will be covering the Games.
–Beer prices are soaring thanks to the ethanol craze and that has
yours truly steaming. Instead of planting key beer ingredient
barley, farmers are going for corn, soybeans and other biofuel
feedstocks. Barley and hops account for 7-8% of brewing costs.
–David Letterman, in talking about Tuesday’s mini-collapse on
Wall Street and its economic impact, noted it was so bad “Taco
Bell had to lay off 200 rats.”
–The amount of counterfeit money in circulation in the U.S. has
soared 69% in the past three years, according to data USA Today
obtained from the Secret Service.
–Online shopping, despite its 20% growth rate, is still just 3% of
total retail sales in the U.S. and that’s projected to rise to only
4% in 2010.
–Ben Stein:
“We’re in a war and we cut taxes to stimulate the economy – and
it probably did – and we are having million-dollar parties at
home while our soldiers are paid starvation wages to offer up
their lives in Iraq? We’re in a war and the government cannot
afford to pay for adequate training for our soldiers, but the
society at home is routinely having million-dollar weddings and
bar mitzvahs?
“Can anyone say ‘The Decline and Fall of the Roman Empire’?”
Actually, I did, most recently on 1/6/07.
–This is classic. I saw the following blurb in Investment News
on Tues., the day the market dived.
“Keel Capital hedge fund shutters”
“Hedge fund Keel Capital…is closing this week due to the lack
of short-selling opportunities…according to MarketWatch…..
“Managers had to choose between changing strategy and closing
up shop, and they picked the latter….
“(Co-founder Jeff Bernstein) said the fund’s approach, which
was to limit market exposure and position sizes, as well as avoid
index and exchange traded funds for hedging, was too restrictive
during a period of low stock market volatility and steady gains.
“ ‘It has become somewhat systemic: With the growth of hedge
funds, short interest is higher and that has dampened volatility
and could lead to long periods of lower volatility in the future,”
said Mr. Bernstein.”
That was Tuesday…Dow down 416. Even Mr. Bernstein’s
mother had to be telling him the obvious on Wednesday. “Nice
going. And don’t just think you can move home!”
–Lastly, in a small shopping district near my home I now have a
choice of three restaurants that have popped up in just the past
year; a Subway’s, Quiznos and Cheeseburger Cheeseburger.
Remind me not to get the 13-oz. cheeseburger, by the way.
Tasty, but a bit too much.
Anyway, I’ve been in Quiznos just twice, though the sandwiches
were good, but I pass it all the time and can’t believe the minimal
traffic inside versus the other two options.
So I read with interest a piece by Julie Creswell in last
Saturday’s New York Times on the plight of some franchisees.
One, Bhupinder Baber, committed suicide last November in his
franchise on the outskirts of Los Angeles.
In a note he left behind, Mr. Baber wrote “Someone must do
something about what Quiznos is doing to the trapped
franchisees. I deeply regret getting into Quiznos. I wish I had
never heard of them.”
Quiznos has grown to 5,000 stores from just 100 a decade ago.
But lawsuits are springing up because the company appears to be
pocketing the $25,000 licensing fees without finding store
location within an allotted one-year timeframe. Other suits
contend the licensing agreement forces them to buy everything,
including soap in the bathrooms and accounting systems, from
designated suppliers and distributors owned by Quiznos that
charge exorbitant prices, much of which then goes, of course,
into the pockets of headquarters.
Julie Creswell writes that one lawsuit “cites a memorandum
drafted by a Quiznos lawyer in 2003 that stated 40% of Quiznos
units are not breaking even” – a fact that prospective franchisees
say they were never told.
But for those thinking of buying a franchise of any kind, keep
this classic example in mind.
“In early 2004, after attending a business seminar at a Hilton
hotel conference room in New Jersey, (Elisa) Whitehall was told
she could open a restaurant in her selected area, Palm Beach,
Fla., within the year. Ms. Whitehall, who owns two Curves
fitness franchises in New Jersey that she claims are successful,
said from 2004 to 2005 she was shown three locations: an empty
lot that could not be developed because of environmental
concerns, an existing restaurant that was losing money, and a
third spot that turned out to be 35 miles away from where she
wanted to open a restaurant. None of the sites were close to what
she had agreed upon, Ms. Whitehall says.
“ ‘It’s almost three years now since I signed the franchise
agreement and even if they called and said they had a store for
me, I absolutely would not do it. Every single one around me is
closing their doors,’ Ms. Whitehall said.
“From 2003 to 2005, Quiznos collected about $7 million in fees
from the 350 franchising licenses that it sold but never found
locations for, the New Jersey lawsuit contends.”
Buyer beware.
—
Foreign Affairs
Israel / Lebanon: The good news is that the Shia / Hizbullah
efforts to topple the government are not working. The bad news
is that it is increasingly clear Hizbullah is rebuilding its defenses
in south Lebanon, including buying up land for cash to help in
establishing a de facto Hizbullah state or province. The United
States must do more here, like in insisting the tribunal on the
assassination of former prime minister Rafik Hariri go forward,
for starters, to finally bring those accountable to justice. And as
part of any Israeli-Palestinian negotiations that must include
players like Egypt, Jordan and Saudi Arabia, Hizbullah needs to
be told to back off. In turn, to prove it’s an honest broker, the
United States must tell Israel to stop expanding the settlements
and to cease with the flyovers in Lebanon that are violating its
sovereignty. Granted, at this point this requires diplomacy on the
level never before seen in the history of mankind…which is why
some of us light candles.
North Korea: Questions are suddenly arising concerning U.S.
intelligence with regards to Pyongyang’s suspected uranium
enrichment activities; the nuclear device they tested last October
being of the plutonium variety and manufactured in Yongbyon.
The recently signed six-party agreement pertains specifically to
this facility and calls for the dismantlement of any weapons
capabilities there.
But since 2002, the U.S. has accused North Korea of operating a
clandestine uranium enrichment program, something Kim Jong-il
and his folks have consistently denied. Now the New York
Times says the CIA and others may have goofed yet again.
Here’s the bottom line, as I’ve noted for years; we just don’t
have a clue here, just as we don’t when it comes to Iran and its
weapons program. However, this in no way should impact North
Korea’s agreement to suspend enrichment at Yongbyon within
60 days from Feb. 13.
All manner of exchanges have taken place the past week, or are
about to, between the parties involved.
North Korea’s No. 2 told a high-level South Korean delegation
that “The denuclearization of the Korean Peninsula is the dying
wish” of the country’s late founder Kim Il Sung. The North
“will make efforts to realize it,” said Kim Yong Nam.
Good. Do it. No. 2 also called on the two Koreas to speed up
reunification and inter-Korean collaboration. That’s not so good,
as even Seoul understands. Maybe down the road, but first
things first. Shut Yongbyon down, as mandated, and maybe we
can talk later.
It’s tempting to rush to praise the six-party agreement, but it’s
yet another case of ‘wait 24 hours.’ Hope for the best, but keep
your eyes wide open. It’s not just about Yongbyon, it’s about
everything the North has been doing for decades. If it wants to
normalize relations with the United States, gain security
guarantees, and a million tons of fuel oil, it has to come clean.
Meanwhile, words are being exchanged between other parties in
the region. South Korean President Roh Moo-hyun said Japan
must atone for the atrocities committed during World War II, an
issue that isn’t about to die.
“(Japan) may try to cover the sky with its hand, but we were able
to confirm once again that the international community does not
forgive the atrocities committed by imperial Japan,” said Roh in
a speech marking the 1919 uprising in Korea against Japanese
colonial rule. “We hope that Japan will not try to glorify or
justify a mistaken past, but instead show sincerity by following
its conscience and the international community’s generally
accepted precedent.”
But some Japanese lawmakers said a 1993 apology
acknowledging a wartime brothel program, where South Korean
women were forced into sexual servitude, “damaged Japan’s
image and invited misunderstanding of the facts.”
Prime Minister Shinzo Abe then denied Japan’s military had
forced the women into sexual slavery. “There is no evidence to
prove there was coercion, nothing to support it,” he said in a
statement. The U.S. House of Representatives has been
deliberating a resolution that would call on Tokyo to apologize
for the military’s role in the alleged practice. For his part, Abe,
whose poll numbers are sliding precipitously, is pandering to the
conservative base in Japan. This is no small issue in a region
where people have long memories.
Then there’s China, which called on Tokyo to be more open
about its defense spending and the status of Taiwan in Japan’s
plans, this after Japan demanded more information on China’s
arms buildup.
“It is very strange that Japan, with only one-twenty-fifth of
China’s land and one-tenth of China’s population, possesses such
a huge military expenditure…Meanwhile, it claims China is a
threat,” said a foreign ministry spokesman. “Can they explain
their military development and action including putting Taiwan
into their law on contingencies in surrounding areas and the so-
called Taiwan Act?”
Well this is a total crock. China reports that it spends $35 billion
on defense, vs. Japan’s $42 billion, but the actual figure for
China is far higher; they just don’t have the transparency that
Japan, let alone the United States, has.
Pakistan: According to various reports, the former Taliban
defense minister, Mullah Obeidullah, among the top four in the
entire Taliban leadership, was arrested in Quetta, Monday; the
day Vice President Cheney was in the country pressuring
Pakistani President Pervez Musharraf to do more to crack down
on the Taliban. If true, Obeidullah is the most senior officer to
be arrested since the U.S. moved into Afghanistan in 2001.
But if the Taliban’s hierarchy is hiding out in Quetta, as
suspected, why can’t they pick up more?
Russia: Foreign Minister Sergei Lavrov responded to the reaction
to President Vladimir Putin’s recent speech in Munich in an op-
ed for the Washington Post. In part:
“Defense Secretary Robert Gates got it right when he responded
by asserting that ‘one Cold War was quite enough.’ Indeed it
was, so let’s not declare – or look for a pretext to declare – a new
one. At a time when Russia is ready and eager to play a positive
role in world affairs and integrate into the global economy, it
does far more harm than good to treat Russia as a hostile nation
whenever Moscow and Washington disagree….
“Our American colleagues tell us that the United States needs
Russia and other key countries to help resolve numerous regional
conflicts. Against this background, America’s unilateral actions
look puzzling. It’s also ironic that Putin’s speech was deemed
threatening. Russian citizens ask themselves: Who threatens
whom? With the Warsaw Pact dissolved for more than 15 years,
why does NATO still spread toward Russian borders? What
should Russia believe when the United States seeks to place anti-
missile systems in Eastern Europe? And instead of joining
efforts to counter global threats, should our two countries really
be engaged in searching for deficiencies in each other’s domestic
life? ….
“In any relationship, disagreements arise. But observers make a
grave error when they mistake the honest and open airing of
concerns as some sort of cassus belli. President Bush rightly
emphasized the other day that, while differences exist between
our two countries, ‘there’s also a relationship in which we can
find common ground to solve problems.’ Russia is ready to
work with the United States on an equal and mutually respectful
basis.
“Another Cold War? Certainly not. A democratic world in
which a strong Russia coexists with a strong United States, as
well as a strong Europe, China, India, Brazil and others? That is
Vladimir Putin’s vision – and it is well worth considering.”
My opinion on the above by Foreign Minister Lavrov? Total
garbage. But there is little doubt the level of rhetoric between
the two countries continues to be ratcheted up. U.S. National
Intelligence Director Michael McConnell told the Senate Armed
Services Committee the other day:
“The march for democracy has taken a step back (in Russia).
And now there are more arrangements to control the process and
the populace and the parties and so on, to the point of picking the
next leader of Russia. As Russia moves toward a presidential
election in March 2008, succession maneuvering has intensified
and increasingly dominates Russian domestic and foreign
policy,” adding that Putin is now surrounded by “extremely
conservative” advisers.
As a Russia expert, Ivan Safranchuk, told The Moscow Times,
escalating criticism between Washington and Moscow reflected
the lack of a “safety margin” in U.S.-Russian relations. “Each
side says that a new Cold War would be a bad thing, and then
tells the other: ‘But you’re the bad guys.’”
Spain: Imagine you are the family of one of 800 victims of ETA
(the Basque separatists) terror attacks. Then imagine one of the
top killers in the group is suddenly released after going on a
hunger strike for 114 days. Imagine the ensuing uproar. That’s
just what happened this week as the government opted to release
Inaki de Juana on “humanitarian grounds.”
To be fair, however, Spain’s leaders were in a box as they feared
de Juana’s death would trigger a new cycle of violence. Only
time will tell if his release does.
Turkey: A potential oil and gas bonanza has been found off the
divided island of Cyprus and Turkey is challenging agreements
that Cyprus has already signed with Lebanon and Egypt to
facilitate exploration. Turkey says it has rights in the area too.
This is worth watching.
Italy: He’s baaaaaaack! Prime Minister Romano Prodi, that is.
Actually, it’s hard for someone sitting in New Jersey to tell if
Prodi was ever technically out of office following his resignation
as a result of a key legislative defeat. It would seem the
unwieldy nine-party coalition agreed to back Prodi again, barely,
because the alternative was the return of Silvio Berlusconi; he of
the wandering eyes.
Guatemala: President Bush is slated to visit here shortly and
let’s hope a current crisis is cleaned up by then. About ten days
ago, three visiting Salvadorean lawmakers were killed by four
police officers. The officers were then arrested.
Then, a number of suspected gang members were allowed past
extensive security at the prison where the police were being held
and the four officers were gunned down. The head of the prison
and 21 employees have been arrested.
The four policemen were part of the country’s organized crime
unit, including the head of it. Some say the four were killed to
stop them from telling who ordered the deaths of the three
Salvadoreans.
So who wants to go to Guatemala? Frankly, if I were President
Bush, I’d reschedule.
Random Musings
–Sadly, the problems at Building 18 at Walter Reed Army
Medical Center further make my point about the state of our
military. The grunts are the best this nation has to offer and we
must always do what’s necessary, even if it means raising taxes,
to not only protect them in the field, but care for them when they
come home.
But the generals are proving time and time again to be a most
overrated lot. I’m proud of my comments in the immediate
aftermath of the fall of Saddam, before even John McCain began
to lash out, on how the generals had failed President Bush.
Now we have the debacle at Walter Reed and another example of
a bunch of bureaucrats acting no different than the worst of
Corporate America. At least Sec. of Defense Robert Gates is
taking charge and dismissing those most involved, saying in part,
“some in the Army have not adequately appreciated the
seriousness” of the issue.
But there are some generals who are now standing tall, and one
would appear to be Gen. Peter Pace, chairman of the Joint Chiefs
of Staff. I had serious doubts about this man, but now Pace is
taking charge in addressing the fact that the U.S. military won’t
be able to quickly respond to another crisis due to the decline in
overall military readiness. In a classified report, Pace evidently
concedes it “may take several years to reduce risk to acceptable
levels.” Secretary of Defense Gates backs Pace’s conclusion. At
least some in the Pentagon no longer cower in fear, living in
Donald Rumsfeld’s State of Denial.
Separately, the London Times reports that Gates has warned the
president against striking Iran and that there are senior
commanders willing to resign if the White House orders a strike.
On the one hand you could say this is almost treasonous, but on
the other it’s clear feelings are finally getting through, which
would have been useful earlier with regards to Iraq.
President Bush has proven he is not a student of the world and
various realities. Post-Rumsfeld, he’s finally hearing the truth.
–Two weeks ago I questioned why we were seemingly expected
to accept Barack Obama as our “savior,” pointing to the way he
was portraying himself. Then this past week I read a piece in the
Feb. 22 issue of Rolling Stone by Ben Wallace-Wells on Obama,
a very balanced one, and I see where a Chicago Tribune reporter
is following him on the campaign trail as part of this fellow’s
effort to produce a book titled “The Savior,” so I’m far from the
only one with this image of the man from Illinois. I’m going to
be as fair as possible in my own coverage and musings going
forward, but as reader Scott P. writes, for now I fall on the side
of those who feel “the presidency of the United States is not an
entry level position.”
What’s interesting are the early polls, such as one from the
Washington Post and ABC News that shows Hillary with 36%,
Obama 24%, Al Gore 14% and John Edwards 12%. If you take
out Gore, Hillary leads Obama 43-27. But among potential black
primary voters, back in December and January, Hillary led
Obama in this bloc by 60-20. Today it’s down to a 44-33
margin.
I love those who say “polls this early don’t matter.” Wrong.
They’re critical in shaping opinion. But no doubt, as my friend
David P. and I were discussing the other day, Bill Clinton and
John Kerry didn’t exactly get off to roaring starts, to cite but two
more recent examples. I just see a different dynamic behind
the 2008 race; as in forget Iowa….this could be over come
November for all intents and purposes. The massive field on
both sides is going to be winnowed down quickly, well before
the first primary.
And having observed Al Gore during the Oscars, I’ll be shocked
if he doesn’t run. For starters, it’s not as if he owes Hillary or
Obama anything and needs to step aside for them. So for the
archives, I’ll throw out that Gore announces (no need for him to
rush it) and we end up with a Gore-Obama ticket, which could be
rather formidable.
On the Republican side, Rudy Giuliani has a huge 44-21 lead
over John McCain in the same Washington Post/ABC survey.
[Newt Gingrich is at 15% and Mitt Romney a pitiful 4%.] One
of the issues hurting McCain is his age…currently 70…
according to those polled. I’m shocked how well Rudy is doing
this early.
As for Congress, by a 54-41 margin we disapprove of the job
they are doing, i.e., the Democrats’ honeymoon is already over.
Lastly, I can’t help but note a story I saw in the New York Post
concerning Newt Gingrich’s latest thoughts on Hillary, calling
her “a nasty woman” who runs an “endlessly ruthless” campaign,
while he continues to believe the senator will be the nominee.
“Nobody will out-mud the Clintons,” he told the Post editorial
board.
Here’s where I disagree. While Hillary may yet win the
nomination if Gore doesn’t run, I think it is a huge mistake to
have men like snake Howard Wolfson out front as spokespeople.
If this guy isn’t a turn-off, I don’t know who is. A majority of
the electorate (if you take out Ross Perot’s votes) put up with this
kind of attack dog in 1992 and 96, they won’t do so again.
Recommendation: Can Wolfson. [I felt obligated to give the
Clinton campaign some actionable advice…another free feature
of StocksandNews.]
–This is a little disconcerting. Results of a study published in
the Journal of the American Medical Association suggest three
supplements – vitamins A and E and beta carotene – appear to
increase the death rate of those taking them. Vitamin C is
basically OK. The bottom line is to get all of these as part of
your diet, not through pills.
–Add this to my drug discussion of the past few weeks. I was
startled to see a story in the Los Angeles Times by Charles
Proctor on methadone usage and the number of fatalities
resulting from it. Methadone-related deaths climbed to more
than 3,800 in 2004 from about 780 in 1999. “Among all
narcotic-related deaths in 2004, only cocaine killed more people
in the United States than methadone.” The problem is doctors
are increasingly prescribing it as a pain medication and it’s being
used by drug users as a cheap way to get high. Anna Nicole
Smith’s son died from taking a lethal mixture of methadone and
two antidepressants, Zoloft and Lexapro.
Cost is a big issue in the increased use of methadone. A
pharmacy can buy a month’s supply for one patient for as little as
$8 vs. $170 for a similar amount of OxyContin.
–I love the Smithsonian Institution, subscribe to its magazine,
and this fall gave a small extra donation when solicited. Remind
me never to do so again after reading a Washington Post story on
Secretary Lawrence Small. A government investigation looking
into Small’s expenses found nearly $90,000 in unauthorized ones
from 2000 to 2005, including charges for chartered jets, his
wife’s trip to Cambodia and expensive gifts. The Smithsonian
receives 70% of its funding from the federal government, over
$700 million in 2006.
For starters, Small has a salary of $617,000 and then he has this
crazy home allowance so he can use the residence for “official
Smithsonian hospitality.” I wouldn’t have a problem with this
except that in Small’s case, he is reimbursed up to an additional
$150,000 a year for this one category.
But back to the chartered jet, in one instance he was reimbursed
$14,500 for a round-trip to San Antonio when plenty of
commercial alternatives were available.
It’s all just part of this institutional arrogance, in government as
well as Corporate America, that makes so many of us sick.
–Joe Horn is a four-time Pro Bowl wide receiver for the New
Orleans Saints who in the aftermath of Katrina has been the chief
spokesman for the team, especially during their exile following
the hurricane as the Super Dome was being repaired. No one is
more loved in the community as Horn defended more than
anyone, including Saints ownership, the return to New Orleans.
Nor does anyone doubt that the Saints’ success this past year not
only provided the city a badly needed shot of confidence, Joe
Horn played a large role in the good feeling.
Now I have to admit I don’t like Joe Horn, viewing him from the
outside, because of some of his on-field antics, but I’ve read
enough to know he’s a good guy deep-down and the fans’ love
for him speaks for itself.
So the other day the Saints released Horn, citing a salary dispute.
Horn, whose production has been declining as he ages is
nonetheless of value and he told a newspaper “I wanted to retire
as a Saint. I’ve been through hell and back for that city and that
organization. If I wanted out of New Orleans that bad, I would
have just kept my mouth shut and let them move the team to San
Antonio.” [ESPN.com / The Fayetteville (N.C.) Observer]
I read something like this and to me it’s a further example of how
dysfunctional New Orleans has become, from one end to the
other. I frankly don’t see how it will ever come back.
–Lastly, back in the spring of 2003, I saw the devastation that a
tornado wreaked on Pierce City, Missouri, and said I needed to
do something to help. As I wrote in this space, 6/28/03, it was an
eye opener when I got down there but it also was too
uncomfortable to speak directly to those I observed. So I ended
up contacting the fire department later and contributed towards a
new engine. I only bring this up because with the tragedies in
Enterprise, AL, and Americus, GA, this week, they will need that
kind of help. Americus lost all their rescue equipment in the
tornado. Just a thought. Wait a few weeks then call.
—
Pray for the men and women of our armed forces, and the
tornado victims.
God bless America.
—
Gold closed at $641…down over $40. So much for it being a
safe haven.
Oil, $61.57
Returns for the week 2/26-3/2
Dow Jones -4.2% [12114]
S&P 500 -4.4% [1387]
S&P MidCap -5.1%
Russell 2000 -6.2%
Nasdaq -5.9% [2368]
Returns for the period 1/1/07-3/2/07
Dow Jones -2.8%
S&P 500 -2.2%
S&P MidCap +2.4%
Russell 2000 -1.6%
Nasdaq -2.0%
Bulls 50.5
Bears 24.2 [Source: Chartcraft / Investors Intelligence]
Have a great week. I appreciate your support.
Brian Trumbore
