[Posted 7:00 AM ET]
Wall Street…and the growing contagion
It’s flat out comical, and an outright embarrassment, how badly
Federal Reserve Chairman Ben Bernanke and Treasury Secretary
Hank Paulson missed the impact of the housing debacle. Now,
though, they are backpedaling faster than a Tour de France
champ whose sample came back positive. The two spoke this
week.
Bernanke: “The further contraction in housing is likely to be a
significant drag on growth in the current quarter and through
early next year. However, it remains too early to assess the
extent to which household and business spending will be affected
by the weakness in housing and the tightening in credit
conditions.”
No it isn’t.
Paulson: “(Housing) is the most significant current risk to our
economy….The longer housing prices remain stagnant or fall,
the greater the penalty to our future economic growth.”
Bernanke [on the situation in the credit markets]: “(While
improvement) increases the likelihood of achieving moderate
growth with price stability, the ultimate implications of financial
developments for the cost and availability of credit, and thus for
the broader economy, remain uncertain.”
No they aren’t. To the contrary, it’s all very certain, as in I’m
certain we still have major problems ahead.
Look what we learned this week, sports fans. September housing
starts in the U.S. were down 10% and building permits are at
their lowest level since 1993. The six-county Southern
California region saw actual sales collapse 48% in Sept., to their
lowest level since 1988 (the first time such data was kept).
Homebuilder D.R. Horton said its cancellation rate was 48% and
it saw a drop in sales in the third quarter of 39%.
And many of you, such as Josh P. and Chris C., have correctly
remarked that the discounts now being placed by the
homebuilders on their properties are absolutely killing existing
homeowners and so what you have is a snowballing effect in the
sector. Business Week also had a good piece on this last week.
For starters, existing homeowners can’t refinance for a variety of
reasons in the above example, and there are few home-equity
loans being issued, this having been a leading driver of economic
activity, when the applicant has negative equity.
But remember what I’ve been pounding home for years, as if
you’d forget; it’s global! It’s been a global housing bubble!!!
When the history books are written this fact will be recognized,
even if it’s taking time to do so today.
I’ve also said you can break it down further to one word,
“affordability.” So here was a headline in the Sydney Morning
Herald this week:
“Housing affordability plumbs fresh lows”
In Australia, it takes a record 32% of income to purchase a home
there these days. [It’s higher in the U.S.]
Last week I wrote of the bubble in China property markets. Then
last Thursday, Ariana Eunjung Cha had a story in the
Washington Post titled:
“China’s Bid to Tame Economy Begins a Real Estate Bust”
Ms. Cha writes of Shenzhen, a city of 14 million, where there are
now “vast swaths of empty apartments that just a few months ago
were selling at record prices.”
“How China deals with its booming property market is especially
critical.
“A collapse in housing prices could have a harsh effect on the
economy, given that 80 percent of urban homes are owned by
private citizens. The value of housing loans awarded in China
stands at nearly $450 billion so far this year.
“Yi Xianrong, a finance and banking researcher at the Chinese
Academy of Social Sciences, a government-affiliated research
institute, worries that China’s subprime mortgage problem is
worse than that in the United States because banking laws are
still being written and a credit rating system doesn’t exist.
“ ‘Both good and bad consumers can get into the real estate
market. Many buyers are investors, using forged documents to
get money from banks to speculate on the domestic real estate
market,’ Yi said.”
Sound familiar? It should. Prices in Shenzhen, by the way, rose
17.6 percent in August from a year earlier. That’s it, I’ll bet.
The top is in….and we’re going to see a landslide the likes of
which are feared at the Three Gorges Dam these days. Do you
think it will reverberate here? Of course it will.
On a related issue, Chairman Bernanke, in addressing future Fed
moves on interest rates, said “The truth is that (the Fed) can
hardly insulate investors from risk, even if it wished to do so.
Developments over the past few months reinforce this point.
Those who made bad investment decisions lost money.”
In other words, no bailouts…..unless you are a big Wall Street
bank and you have a friend in the Treasury Department.
And so it was that this week we learned of a little meeting that
Hank Paulson had with Citigroup, JP Morgan Chase, and Bank
of America, wherein the three will create a rescue fund, with
Treasury’s blessing, to revive the asset-backed commercial paper
market. The fund, $80 billion or thereabouts, is to buy assets
from off-balance-sheet structured investment vehicles called
SIVs, which heretofore bought corporate bonds and mortgage
paper. This is supposed to prevent round two of the credit
debacle.
It’s a bailout, or as noted economist Allan Meltzer of Carnegie
Mellon University put it, “I’ve been surprised by the extent to
which the administration has been willing to be involved in the
markets. Nobody in government is ever as pure as their
statements may lead you to believe,” he told Bloomberg News.
Ain’t that the truth. Former Fed Chairman Alan Greenspan
added in an interview published Friday, the ‘superfund’ could
have “dire repercussions.”
Editorial / Wall Street Journal
“At the time of this writing [Oct. 16], the conduit-to-be raises
more questions than it answers. Banks such as Citibank – which
is heavily involved – have substantial off-balance-sheet exposure
to the asset-backed commercial paper market. And the SEC
regulators are breathing down their necks to write down the
assets in their structured investment vehicles. It may be true that,
in some cases, good assets are being marked down because
investors can’t distinguish the good debt from the bad.
“But get this: The announced vehicle, dubbed the Master-
Liquidity Enhancement Conduit, will only buy highly-rated
paper, to ensure investor confidence. The trouble with this
theory is that investor confidence has been shaken because
people no longer feel they can trust the ratings. This in turn has
resulted from the fact that much of the now-dubious debt was
rated not on the value of the collateral, but on the strength of the
bank (such as Citibank) that issued it.”
As more than one observer has remarked the past few days, this
is shades of Enron and at the end of the day, it’s more or less
about “fair value” accounting of assets and securities, both on the
books and off. Fat chance you the investor will receive the truth.
Transparency? Pshaw.
Meanwhile, Wall Street took it on the chin this week thanks in no
small part to the likes of diversified manufacturers such as Eaton
and United Technologies issuing dour outlooks for coming
quarters, while on Friday, Caterpillar said many of the key U.S.
industries it serves are already “in recession,” including declining
sales for both residential and commercial real estate. Recall, it
was the previous week that another bellwether, Ryder Systems,
the truck-leasing company, said “Economic conditions have
softened considerably in more industries beyond those related to
housing and construction.” I’m no Bernanke or Hank Paulson,
but it seems to me this spells trouble. My long-time forecast of
recession in 2008 appears to be a lock.
Street Bytes
–Stocks snapped a five-week winning streak as some rationality
finally seeped in (or so some of us believe). Aside from
concerns over the SIV-bailout, you had humongous writedowns
from the likes of Citigroup, Bank of America and Wachovia,
along with further dire pronouncements, such as in Washington
Mutual’s that the housing market is far worse than it initially
thought. Even the likes of 3M and Schlumberger were smacked
around at week’s end on the heels of less than stellar earnings
and/or forecasts.
For the week the Dow Jones plunged 4.1%, including a 366-
point drubbing on Friday, to close at 13522, its worst week since
late July. The S&P 500 lost 3.9% to 1500 and Nasdaq dropped
2.9% to 2725, even as some tech issues reported strong earnings.
But while oil hitting $90 this week (before closing at $88.60)
finally had an impact, I’ll continue to largely pooh-pooh this
latest move in terms of ink in this space until I see gasoline
futures trade above $2.30, which would then translate to $3.00
per gallon at the pump. [Today, the nationwide average is closer
to $2.75.] Otherwise, I’m sorry if I can’t get too worked up
about it. But when we do get back to $3.00 plus gas, especially
if it’s during the Christmas shopping season, it obviously won’t
be good for retail sales and the impact will be greater than the
last time we were at that level because overall economic
conditions will have been softening more so than before.
–U.S. Treasury Yields
6-mo. 4.07% 2-yr. 3.81% 10-yr. 4.39% 30-yr. 4.69%
The Fed meets Oct. 31 and it’s clear after this week they will
lower the funds rate at least another 25 basis points. Treasury
yields plunged across the board on economic fears and a flight to
safety out of stocks. Additionally, the Sept. consumer price
index was tame…if you strip out everything we use.
Separately, in August, there were net capital outflows of U.S.
market assets – including bonds, notes and equities – of $69
billion, vs. an inflow of $19.5 billion during July. The August
outflow exceeded the previous record decline of $21 billion in
March 1990 and is a result of the credit squeeze, as well as still
growing concerns over the plight of the U.S. dollar which hit
further lows. I think if Hank Paulson stood before an audience
next week and said, “The official policy of this administration is
that a strong currency is in our nation’s best interests,” he’d be
laid out faster than you can say structured investment vehicle.
–Much was made Friday of the CNBC interview with hedge
fund legend Julian Robertson and his view we were facing a
“doozy of a recession.” But I chose to focus instead on strategist
Elaine Garzarelli’s comments on the same network Friday
morning, wherein Ms. Garzarelli, fresh off a trip to Europe, said
every country there is slowing down. She was bullish on
equities, though, owing to her long held belief that an
accommodative Fed is good for stocks. But I hear ‘slowing’ and
think earnings are about to plummet vs. expectations; not good
for equities.
–Excellent piece in the New York Times by Alexei Barrionuevo
on the coming energy crisis in South America, particularly for
Brazil, Argentina and Chile, all of which are heavily dependent
on natural gas and are now struggling to meet demand as their
economies grow. The governments have failed to keep up with
investment, while for its part Argentina has been regularly
cutting the supply it sends to Chile in order to take care of itself.
–With the boom in the China stock market, this week PetroChina
saw its market cap rise to about $450 billion at one point, or
second-largest in the world to Exxon Mobil’s $520 billion. It
was pointed out to me by former full-service broker turned
investment partner, David P., that another company, China
Mobile, saw its market cap reach $400 billion this week. Bubble
bubble.
–Pfizer, in deciding to pull its experimental insulin inhaler, took
a $3 billion hit on the project, making it one of the costliest
cancellations in history.
–Some of the issues faced by the likes of Medtronic in its heart
device products are truly scary. The latest issue involves their
defibrillator and an electrical “lead,” or a wire that connects the
heart to the device. The lead can fracture, leading the device to
misread heart-rhythm data. This in turn can cause the
defibrillator “to either deliver an unnecessary electrical jolt or
fail to provide a life-saving one to a patient in need.” [Barnaby
Feder / New York Times] The product in question is the Sprint
Fidelis.
–Google beat earnings expectations on revenue of $4.23 billion
for the third quarter, but also added 2,130 employees during the
period and now has over 15,900. In the search game, however,
Google’s share in the United States is up to 67%, with Yahoo
trailing at 19% and MSN just 9%. Yet the question remains, will
someone new come along in this category, just as they once did?
–EBay’s earnings report was met with little enthusiasm as its
U.S. auction business is slowing considerably. The company
also took a $1.4 billion hit on its investment in Skype, the
Internet calling service it acquired in 2005.
–Citigroup not only wrote off $3.55 billion in mortgage-related
securities transactions, as well as leveraged loan costs, but also
set aside another $2.2 billion to cover future losses in
anticipating further troubles. CEO Chuck Prince is hanging by
his thumbs.
–Congratulations to my good friends at Bank of New York
Mellon for a fine earnings report. Yeah you…T.G. and M.S. [If
I revealed any more, they’d have to shoot me.]
–Intel’s revenues grew 15% in the third quarter, exceeding
estimates, as global PC demand remains strong. Intel’s margins
also came in at a solid 57%, while its shares are up some 40% off
its spring lows.
–Alas, success was nowhere to be found at Ericsson, the world’s
largest telecom equipment maker, as it issued a major profit
warning and the stock plunged over 20%. Ericsson blamed a
shortfall in contracts to expand and upgrade existing mobile
networks in the U.S. and Western Europe.
–In a sudden reversal, coal-fired power plant proposals are being
shelved left and right due to concerns over the environment as
well as soaring construction costs. The U.S. Department of
Energy’s latest tally of pending coal plants shows eight projects
have been canceled since May, and at least another eight have
been scrapped with dozens facing new delays. Coal produces
half the electricity consumed in the U.S., but it’s also one of the
larger sources of greenhouse gases. Plus, demand for skilled
labor has led to cost increases of 40 percent in constructing the
plants thanks to increased competition from the likes of China
and India for qualified workers. [Matthew Brown / AP]
–Berkshire Hathaway’s Warren Buffett said he was never
interested in acquiring a large stake in Bear Stearns, refuting an
earlier New York Times story. “All the news that’s fit to print
…even if it’s totally made up.”
–While the IPO market remains busy, with 11 completed since
Labor Day, analysts say the private-equity bubble has burst,
possibly for good. Among the reasons, investors “Don’t just
want companies that rely on cost-cutting for improved returns.
Investors want companies that are growing by selling new
products and services, not those that have undergone ‘financial
engineering,’” as Kathleen Smith of Renaissance Capital told
USA Today’s Matt Krantz.
–Social Security benefits will rise just 2.3% in January, an
adjustment based on consumer prices from July through
September compared with the similar period in 2006. Of course
this doesn’t take into effect higher energy and food costs and is
yet another Washington scam.
–Inflation Watch: Rising food prices are a big concern in Russia
and the finance ministry now concedes inflation there could hit
double digits this year, far in excess of the government’s 8%
target. [Phew…my visa arrived today. I’m heading to Moscow
in three weeks.]
–My portfolio: I sold my China solar play (leaving me with a
U.S.-based one in this space) after making a nice profit on it. Just
thought it got a little ahead of itself, plus I wanted to raise some
more cash. I’m solidly back to the 80% cash / 20% equities ratio
I have long said will beat the S&P. [Should the China solar play
correct significantly, though, I will probably get right back in.]
–In looking up some statistics for my “Wall Street History”
column, I came across something I have seen nowhere else. The
Dow Jones bottomed at the 776 level in Aug. 1982 before the
great bull market took off, and a little over five years ago, Oct. 9,
2002, the S&P 500 hit its key bottom, also, amazingly, 776. [If
you find this factoid anywhere else I will donate $100 to your
favorite charity.]
But I thought you’d be curious what I was doing on Black
Monday, Oct. 19, 1987. So now…the ‘professional’ life story of
Brian Trumbore…short version.
After entering the work force as a clerk/typist at an insurance
brokerage firm in New York City (very fun job, great people),
Sept. 1980, I received my first big break when George Ross hired
me to help him out in the tax shelter department at Thomson
McKinnon Securities, Nov. ’82, which is why I feel I’m a bull
market baby; the historic bull run having commenced the
preceding August. Seeing as I was friends with his son, Trader
George, and knew Boss Ross since I was about 14, he was Mr.
Ross to me.
I stayed with Mr. Ross until 2/85, got a job as a spice broker and
went to India, then, not having burned any bridges, found myself
right back at Thomson, 9/85, only this time in the real estate
department.
But in February 1987, Thomson saw I was single and had no
worldly possessions so they proceeded to move me six times in
exactly two years, all regional positions…New York to
Washington, to Philadelphia, back to New York, down to
Raleigh, back to Philadelphia, and then a final return to New
York, where I stayed until TMSI went bankrupt…….kerplunk!
But on Oct. 16, 1987, I had been told I was moving to the New
York region and my first meeting with the managers was the
following Monday, Oct. 19. So that morning I checked out of
the Philly office as the market began to collapse, stopped off at
my parent’s house in New Jersey to catch up on the action in the
early afternoon, though the radio reports were as good as
television in those days, and then it was on up to Nanuet, NY, to
meet my new region over dinner.
I mean to tell you, the last thing any of the branch managers
wanted to do was see me after a 508-point decline. I’ll never
forget one, Jerry S., who was screaming at the regional director,
“We should be back in our offices, calling the clients and holding
their hands! What are we doing here?!” as he shot a look at me.
I couldn’t help but agree.
Well, the rest is history. I survived another 12 years in the
industry, eventually ending up at Thomson Funds, the unit that
had survived the bankruptcy of TMSI and later was acquired by
PIMCO.
One last note on the above mentioned David P. When I started
on Wall Street, Dave was a successful salesman in the telecom
arena and a friend I had known since about sixth grade. We’d
swap stories on our jobs and I’d say, “You have to change careers
and get a job on Wall Street. You’ll be a huge success.”
So Dave left the phone biz and took a position on the Street as
a broker, with his first day literally being Black Monday. As
it turned out the timing was spectacular. Think about it. The
market never looked back and most of his clients were very
happy campers. Life is funny that way….most of the time.
Foreign Affairs
Iraq / Turkey: Turkey’s parliament gave its approval for military
action into Iraq to go after the Kurdish rebel group the PKK by a
507-19 vote, to give you a sense of the politics of the day in
Ankara, but Prime Minister Erdogan, who is not a trigger-happy
leader, said this in no means guarantees the Turks will do more
than the current shelling of known or suspected bases across the
border.
It was startling to see how quickly proponents of a House
committee resolution condemning the 1915 killings of
Armenians by Turkey as genocide backpedaled in their
support, including House Speaker Nancy Pelosi. Republican
Representative Wally Herger stated the common sense approach
favored by most of us.
“We simply cannot allow the grievances of the past, as real as
they may be, to in any way derail our efforts to prevent further
atrocities for future history books.” [New York Times]
But as I said last week, the problem is it’s too late; the damage in
U.S.-Turkey relations has been done.
Now I know there are those who are continually pointing to the
fact that if Turkey is such a good ally, why didn’t it allow a
division of troops through the northern border at the start of the
Iraq war, or, if they are such a good ally, why is the press in
Turkey so vehemently anti-American.
Maybe so. But you deal in the here and now when working the
diplomatic angle and, number one, our troops need the logistics
that Turkey has been providing for the mission in Iraq. And look
how incredibly patient Turkey has been on the whole issue of
Kurds slipping across the border to kill Turkish military
personnel and civilians.
There was an item in Bloomberg News that was troubling,
though.
“Turkish Jews’ concerns [there are about 23,000 here] for their
safety have been fanned by comments from Foreign Minister Ali
Babacan that there’s a perception in the country that Jews and
Armenians “are now hand-in-hand trying to defame Turkey.”
Turkey’s complaint: Its usual allies among pro-Israel U.S.
lobbyists didn’t work hard enough to block the [Armenian
genocide] resolution.”
As for the Kurds, there are 1.5 million across Iran, Iraq, Syria
and Turkey, and the leader of the PKK has warned of massive
attacks should Turkey go after them. The PKK says it seeks a
semi-autonomous state, a la Scotland.
Lastly, two weeks ago I wrote of Iraq that “any unbiased
observer has to agree the recent news has been better.” Not
victory, but at least the security situation has improved.
This week the Washington Post ran a front page story with the
headline “Al-Qaeda in Iraq reported crippled.”
There was also this from a Washington Post editorial.
“[The better tone] doesn’t necessarily mean the war is being
won. U.S. military commanders have said that no reduction in
violence will be sustainable unless Iraqis reach political solutions
– and there has been little progress on this front. Nevertheless,
it’s looking more and more as though those in and outside of
Congress who last month were assailing Gen. Petraeus’
credibility and insisting that there was no letup in Iraq’s
bloodshed were – to put it simply – wrong.”
Yes, we’ll take better news anywhere we can find it these
days….
Iran: …because right now we sure aren’t finding it here. In a
news conference, President Bush warned of “World War III”
should Iran acquire the bomb, going so far as to say it would be
enough cause for action if Tehran just acquired the “knowledge
necessary to make a nuclear weapon,” which was a bit absurd
because they already have this; it’s the implementation, as well
as the enriching of uranium, that thus far has prevented a ‘test’
that would rock the world.
The week also saw Russian President Vladimir Putin travel to
meet his Iranian counterpart Mahmoud Ahmadinejad, the first
visit to Iran by a Russian leader since Stalin in 1943.
Putin announced Russia would complete the controversial
nuclear plant at Bushehr, but in offering to enrich uranium for
Iran (thus overcoming international objections to the current
program), the mullahs have said no; because it would impinge on
their sovereignty.
But in a meeting of the five nations that border the energy-rich
Caspian Sea, Putin said “No Caspian nation should offer its
territory to third powers for use of force or military aggression
against any Caspian state,” a clear reference to U.S. designs on
the region, such as in Azerbaijan.
Ahmadinejad said, “The Caspian Sea is an inland sea and it only
belongs to the Caspian states, therefore only they are entitled to
have their ships and military forces here.” [AP]
Putin continues to talk of his disagreement with the U.S., Britain,
France and Germany in saying he still sees no “objective data” to
prove Western claims that Iran is trying to construct nuclear
weapons. Ergo, don’t expect any help on the sanctions front.
Finally, back to my theme of the last two weeks that President
Bush should have accepted an invitation to speak at Tehran
University, former Iranian student leader Akbar Atri concluded
the following in an op-ed for the Wall Street Journal, Monday.
[In discussing a debate in Congress over a $75 million pledge by
the administration for democracy and human-rights assistance in
Iran….]
“American lawmakers and Iranian-Americans who would
eliminate financial support for Iran’s democrats need to
understand the following: Supporting Iranian civil society and
the nonviolent struggle toward democracy and human rights is
likely the most cost-effective means to prevent a future conflict
with Iran or an armed struggle within its borders. Democracy is
difficult to achieve. But with its remarkably young, educated
population, and a long-stifled yearning for the fruits of modernity
and liberalism, Iran has many of the key ingredients for success.
“With some help from their American allies, Iranian democrats
are brave enough and capable enough to achieve for their country
what the likes of Mahatma Gandhi and Vaclav Havel achieved
for theirs.”
Pakistan: Last week I wrote how President Musharraf, waffling
anew, did not want former prime minister Benazir Bhutto to
return from exile. Well she did, and on her first day over 130
were killed in a suicide attack on her convoy. Bhutto was
unharmed. Al-Qaeda / Taliban types have had it out for her so
it’s assumed they were responsible, though Bhutto herself is also
blaming former army officers.
The parliamentary elections, slated for January, are still on as the
government is saying all the right things, ‘terrorism will be
stopped, we will not surrender to it, etc.’ but at the same time, I
see this attack, and others that will follow, only further
consolidating Musharraf’s power yet again as he declares a state
of emergency.
The New York Post’s Ralph Peters, not a fan of Bhutto due to
her disastrous two terms as prime minister with its “pestilential
corruption,” as he put it, added the following:
“The generally accepted line is that all civilian leaders are good,
while military coups are always bad. Like most such
generalities, it’s often wrong….
“This isn’t to say that military regimes are good news. The point
is that we need to stop being so intellectually lazy and self-
righteous. We have to try to understand the dynamics at work in
self-tormented, failing countries.
“After corruption, the greatest curse on ‘developing’ states has
been charismatic leadership in the absence of robust institutions
of government. We overlook the fact that, along with tribal and
religious loyalties, the key factor in determining elections in the
badlands beyond the West has been irresponsible flamboyance –
the snake-oil salesman in the presidential palace….
“Now Benazir Bhutto – one of the figures who did so much to
destroy the fabric of society and the economy – is back in
Pakistan. It appears that she and Musharraf have worked out a
power-sharing arrangement. We may hope for the best, but we
also need to be prepared for the worst: a new era of hyper-
corruption, as Bhutto’s grab-all gang replaces the relative moral
rigor of the military in the public sphere.
“And let’s not forget those nukes. The answer to the desperate
needs of the people of countries such as Pakistan doesn’t lie with
demagogues. And it would be better if it didn’t lie with military
regimes, either. But the old rotation between the charlatans and
the generals is likely to continue throughout our lifetimes.
“Given the inability of non-Western societies to build effective
government institutions, it may be time to rethink our faith in the
state itself as the answer to their needs.”
China: The communists held their 17th Party Congress and
President Hu Jintao gave the opening address, all 2 ½ hours of it,
wherein he touched on topics as diverse as the economy,
corruption, the environment, defense, and Taiwan, among others.
It’s been quite a period since the last gathering of party leaders
five years ago, as Hu noted.
“China is going through a wide-ranging transformation. This
brings us unprecedented opportunities as well as unprecedented
challenges. We must uphold the Party’s role as the core of
leadership in directing the overall situation and coordinating the
efforts on all quarters.”
In other words, don’t look for any Ron Paul or Mike Huckabee
type candidates anytime soon, let alone Rudy or Hillary. The
commies aren’t about to let go of power the rest of our lives, I
imagine. [At least my lifetime.]
On some of the more critical issues, Hu said “Our economic
growth is realized at an excessively high cost to resources and
the environment” and China will “ensure the quality and safety
of products.” All well and good, but just words. Hu did
acknowledge the growing chasm between rich and poor, which is
the number one threat to the government’s power (along with
pollution). More than 318 million Chinese still exist on less than
$2 a day, according to the World Bank, while at the same time
you’re hearing constant stories of the new billionaires in the
country. It’s a formula for disaster…and revolution.
Meanwhile, in Hong Kong, Chief Executive Donald Tsang
inserted foot in mouth on a radio talk show when asked about the
prospects for democracy there.
“People go to the extreme, and you have a cultural revolution, for
instance, in China. When people take everything into their own
hands, then you cannot govern the place.”
When the host of the show asked Tsang if the 1966-76 Cultural
Revolution could really be taken as an example of extreme
democracy, Tsang responded: “What is it? People taking power
into their own hands. Now, this is what it means by democracy,
if you take it to the full swing. In other democracies, even if you
have an elected person, then you overturn the policy…that’s not
necessarily conducive to efficient government.” [South China
Morning Post]
Tsang spent the following day attempting to explain himself.
And then there is the issue of Taiwan, where President Chen
Shui-bian snubbed a peace overture made by China’s Hu, with
Chen saying Taipei would never agree to a surrender treaty.
“Taiwan is our country, Taiwan is our motherland; therefore
there is no such question if Taiwan is independent or not from
the motherland,” said Chen.
But wait…there’s more! As in the Dalai Lama and his
acceptance of a Congressional Gold Medal, presented to him by
President Bush. The U.S. ambassador to China was summoned
to hear a strong protest from the foreign ministry, as in ‘stop
interfering in China’s internal affairs.’ The appearance with the
Dalai Lama represented the first time a sitting U.S. president had
appeared in public with him, which infuriates China because
Beijing accuses the Dalai Lama of being a dangerous figure
agitating for Tibetan independence. He has not been back home
since being forced to flee in 1959.
Lastly, I stumbled on the “McLaughlin Group” the other day and
Pat Buchanan had the following commentary on China.
“We have an example of something relatively new – autocratic
capitalism, which is working like a charm. China is growing this
year at 12 percent in the first six months. It’s been at 10 percent
for the last 15 years. The hope is that as it grows and prospers,
the middle class will grow, which always has produced political
reform.
“But the problem is in China they have never known freedom.
And there’s another course they can go…and that is through
ethnic chauvinism and economic nationalism and foreign policy
nationalism of a nation that sees itself as having been humiliated.
“And the example of that kind of regime, frankly, is Germany in
the 1930s. That is the fear it will go that way. The hope is that
the middle class will grow and effect political reforms and make
it much more like a western country. But we’ve got a long way
to go for that.”
Russia: What a stretch we’ve just gone through between the
meetings Sec. of State Condoleezza Rice and Defense Secretary
Robert Gates had with Russian President Putin, Putin’s visit to
Iran, and then Putin’s annual call-in show.
Rice and Gates were treated rudely, to say the least, as Putin
upbraided them for the U.S. anti-missile proposal, warning again
that on this issue Russia could withdraw from the Intermediate-
Range Nuclear Forces Treaty if the United States proceeded with
its plans, which the Kremlin feels contain “a strong anti-Russian
component.” [10 missile interceptors in Poland and a tracking
radar in Czech Republic is hardly a threat to Russia.]
Then Rice met with human rights activists and said, “I think
there is too much concentration of power in the Kremlin. I have
told the Russians that. Everybody has doubts about the full
independence of the judiciary. There are also questions about the
independence of the electronic media.”
Then you have the issue of succession. One analyst, Gordon
Hahn, wrote in an op-ed for the Moscow Times that he feels not
only is current Prime Minister Viktor Zubkov going to be
president, as hand-picked by Putin, but that Zubkov will only
serve one year, after which then Prime Minister Putin will
replace him in the presidency, citing “health reasons.”
Meanwhile, Zubkov took advantage of a very important football
(soccer) game this week as Russia came from behind to defeat
England 2-1 and virtually clinch a spot in the next round of the
European Championship, a huge deal.
The game was in Moscow (there was some violence before the
contest between Russian hooligans and English fans), but
Zubkov, in attendance, told the players beforehand:
“We won the Great Patriotic War and were first to fly into space
and, therefore, you must win today, too. You must do everything
you can,” he said, cutting the air with his right hand, as reported
by the Moscow Times, which added, “The meeting was highly
reminiscent of Soviet times, when Communist bosses met
athletes ahead of important games.”
Back to Putin, in his annual three-hour session with the public
via television (live questions and e-mails, all screened in
advance), Vlad talked about developing a new nuclear missile,
reiterated he was prepared to retaliate if the U.S. went through
with its missile defense plans, but said little concerning who he
will select to succeed him in March….except he did compare
himself to Franklin Delano Roosevelt.
“Roosevelt laid out his plan for the country’s development for
decades in advance,” prompting criticism from the U.S. elite,
Putin said. Rather curious of him to speak of our only four-term
president, isn’t it?
North Korea: A South Korean think tank said that due to the
floods here, “The North’s food inventory has almost hit the
bottom, so unless there’s an extraordinary measure to stabilize
supply, there may be a situation next year similar to the late
1990s,” a time when it is estimated 10 percent of the North’s 22
million perished due to drought and mismanagement in the farm
sector. All the more reason to cooperate on the nuclear front,
you’d think.
Israel: Syria has begun dismantling the remainder of the target
hit in the mysterious Sept. 6 attack that, according to various
reports, was indeed on some kind of nuclear reactor in its
infancy. The debate now is over whether it was necessary to take
it out if, as some claim, Syria would have been years from
producing spent nuclear fuel that eventually could be reprocessed
into bomb-grade plutonium. But regardless, Syria did not come
clean with the International Atomic Energy Agency, as
mandated.
Separately, Prime Minister Ehud Olmert went to Moscow for a
quick meeting with Putin. The following is from an editorial in
Lebanon’s Daily Star.
“Israel offered a free lesson to its Arab and Islamic neighbors on
Thursday, launching a diplomatic offensive designed to gain
Russian and Chinese acquiescence in new UN sanctions against
Iran over that country’s nuclear program. Immediately following
Russian President Vladimir Putin’s visit to Tehran for a summit
of Caspian Sea littoral states, Israeli Prime Minister Ehud Olmert
headed for Moscow, and Foreign Minister Tzipi Livni reportedly
will travel to Beijing on Saturday. The gambits stand in stark
contrast with the habitual inactivity of Arab regimes, and the
effect of these very different levels of performance could not be
more obvious: It is true that Israel derives tremendous benefit
from the slavish backing it receives from the United States, but it
supplements this by missing no opportunity to state its case to
other nations around the world as well.
“All of this goes a long way toward explaining how it is that a
country with less than 7 million people has managed consistently
to outmaneuver 300 million Arabs and more than a billion
Muslims.”
France: President Nicolas Sarkozy is not only dealing with major
labor unrest as he attempts to push through his economic reform
agenda, but the people learned he had divorced his wife of 11
years, just six months after he took office, with all legalities
having been taken care of in the past few weeks. Heck, the
woman didn’t even vote for him in the second round of elections,
let alone constantly embarrass him by not showing up as his
partner on countless occasions, including during his visit to meet
Bush 41 and 43 in Kennebunkport.
Australia: Prime Minister John Howard finally called an election
for Nov. 24, at which point he will likely lose his bid for a fifth
term.
Cuba: He’s alive! Fidel Castro made his first live appearance on
the Cuban airwaves since falling ill 14 months ago. By all
reports he seemed in good spirits, and, of course, Venezuelan
President Hugo Chavez was at his side, with a video of the two
showing them singing revolutionary songs. Very sweet.
Random Musings
Lots of ‘deep thoughts’ this week. Probably because there are
some big issues out there, including of the societal and cultural
variety.
–My favorite economist, Robert Samuelson, commenting on the
likes of Bill Belichick, Marion Jones and trial lawyer William
Lerach, who for various reasons all felt compelled to cheat the
system, even though they were already immensely successful.
“Almost all of us want to be champions; almost none of us can
be. We sympathize or identify with upstanding losers, who,
despite strenuous efforts and personal integrity, fall short. We
cheer winners whose talent and hard work merit success. We’d
like to be in their spot. But we dislike a conniving victor who,
even if talented, seems a creep or fraud.
“By and large, most Americans reconcile ambition’s high
demands with real-world limits. The essayist Daniel Akst,
writing in the Wilson Quarterly, sensibly warns:
“ ‘Life is not as competitive as the media might have us believe.
Most Americans have more leisure than they did a generation
ago, even as the highest-paid earners work like maniacs. And
competition of all kinds is worst in places such as New York and
Los Angeles, where real-estate hysteria and preschool panic
afflict even the rich and powerful. The media come to us from
these places…[and their reports] should be discounted by at least
50 percent.’
“Fair enough. But for a subset of Americans, ambition becomes
unmoored from anchors of good judgment, widely accepted
social norms or ethical values. It becomes fanatical, a force that
sometimes produces astonishing accomplishments and
sometimes tragedy, misery and glaring lapses in behavior – and
occasionally all of them together. The stories of Belichick, Jones
and Lerach attest to that.
“As ambition inflates, so does self-absorption. Everything else
in life deflates. The single-mindedness can smother self-restraint
and common sense. It’s a big downside.”
–Lynne Munson had a piece in USA Today on the unwillingness
of colleges to spend some of their endowments on something as
basic as tuition. Recently the Senate Finance Committee began
discussing “a long-overlooked remedy for making college more
affordable” by tapping into these funds.
In 2006, endowments increased 17.7% on average, but as
Munson notes, “despite double-digit gains stretching back at
least a decade, annual spending is at a nearly all-time low of
4.2% – down from 6.5% in 1982.”
“What’s more, schools are not spending much of it on helping
students attend college. For example, the University of
Michigan, which recently raised undergraduate tuition 7.4%,
announced in July that it plans to spend just $61.9 million on
undergraduate financial aid in 2008. Even based on conservative
estimates, that will mean this multi-campus public university
serving more than 40,000 students will be spending less than 1%
of its endowment on undergraduate financial aid.
“Michigan and the other large schools have company. Tuition at
Grinnell College, population 1,500 students, went up more than
12.6% last year, though this Iowa college has more than $1
million in the bank per undergraduate.
“Any reasonable amount of endowment spending would mean
real savings for students and families. The Congressional
Research Service found that a mere 0.7% payout could halt
tuition increases at the 20 schools with the largest endowments.”
–The Atlantic magazine, in celebrating its 150th anniversary,
solicited contributions on defining “the American idea.”
Columnist George Will weighed in.
“The Danger”
“It is a good and very American idea to avoid the definite article
in locutions like ‘the American idea.’ ‘The’? There are many
American ideas pertaining to liberty under a constitutional
government of limited, delegated, and enumerated powers. The
best of these ideas can be found in the Federalist Papers, which
are agreeably untainted by monomania.
“It has been often said that any idea is dangerous if it is a
person’s only idea. Talk about ‘the’ American idea is dangerous
because it often is a precursor to, and an excuse for, the
missionary impulse that sleeps lightly, when it sleeps at all, in
many Americans. After all, if the essence of America can be
distilled to a single idea, it must be supremely important, and
there might be a moral imperative to export it.
“In 1990, with the collapse of the Berlin Wall still reverberating
around the world, Jeanne Kirkpatrick wisely warned Americans:
‘There is no mystical American ‘mission,’ or purpose to be
‘found’ independently of the U.S. Constitution.’ With the Cold
War over, and the moral and military mobilization it demanded
no longer necessary, Kirkpatrick wrote: ‘The time when America
should bear such unusual burdens is past. With a return to
‘normal’ times, we can again become a normal nation.’….
“Belief in American exceptionalism is compatible with the idea
of American normality: Our nation is exceptionally well-founded
and exceptionally faithful to an exceptionally nuanced system of
prudential political axioms. But one of those axioms – it is the
crux of the Madisonian persuasion – is that no polity is exempt
from the passions and failings that make governance
problematic, always and everywhere.”
–Peggy Noonan, in her op-ed for the Wall Street Journal, on the
seeming inability of former administration officials to exit
gracefully.
“They serve and rarely leave. So often people work in
government and make it more of a swamp; then they leave and
become mosquitoes living off the pond scum, buzzing off the
surface, eating well, issuing their little stings. [Ms. Noonan was
referring to the most recent example, former White House
counselor Dan Bartlett.]
“I am harsh. But it’s something I often wonder: Why don’t
people in Washington go home anymore? I’m reading Michael
Korda’s serene and gracious tribute to Dwight Eisenhower, ‘Ike:
An American Hero,’ and stopped dead at this part. The day his
White House successor, JFK, was inaugurated, ‘in the middle of
a heavy snowstorm, [Ike] and Mamie left quietly and
unobtrusively…grateful that they were no longer the focus of
attention, and drove the eighty miles to Gettysburg.’ Oh for
those days. And that sort.”
Ike is a favorite at StocksandNews as well, and more than a few
scholars are coming around to the opinion he’s top ten.
–My friend Phil W. in North Carolina passed along a story from
the Winston-Salem Journal concerning the drought in the
southeast. North Carolina Gov. Mike Easley told a gathering of
mayors and municipal leaders:
“If we do not get significant rain, some areas face the once-
unthinkable possibility of water rationing and potentially running
out of water entirely. A bit of mud on the car or patches of
brown on the lawn must be a badge of honor. It means you are
doing the right thing for your community and our state.”
–It was a terrific hour of television last Sunday as Tim Russert
interviewed Bill Cosby and Dr. Alvin Poussaint, the two having
co-authored a book titled “Come On, People: On the Path from
Victims to Victors.”
Russert quoted from the first chapter, “What’s Going On With
Black Men?”
“For the last generation or two, as our communities dissolved
and our parenting skills broke down, no one has suffered more
than our young black men. There is one statistic that captures the
bleakness. In 1950, five out of every six black children were
born into two-parent homes. Today, that number is less than two
out of six. In poor communities, that number is lower still.
There are whole blocks with scarcely a married couple, whole
blocks without responsible males to watch out for wayward boys,
whole neighborhoods in which little girls and boys come of age
without seeing up close a committed partnership and perhaps
never having attended a wedding.”
Bill Cosby on why this is so important: Because children need
the guidance. Because the other parent needs help as well.
Because if a home is set with one parent [or an aunt, or
caregiver] we’re in big trouble. But these families that we speak
of also include homeless children.
Dr. Poussaint: One-third of homeless people are black, black
men. [And today] the figure cited is 70 percent of black babies
are born to single mothers in the United States each year, and a
lot of them are living in poverty because of that. And the boys
and the girls don’t have fathers, and every study indicates that
the involvement of fathers with their family, and particularly
with their children, is very important to their good and healthy
development. But that’s not happening. And many of these
fathers don’t even know what to do as a father because many of
them grew up in homes that were fatherless.
Bill Cosby [on what the children must think]: “Somewhere in
my life a person called my father has not shown up, and I feel
very sad about this because I don’t know if I’m ugly, I don’t
know what the reason is.” And so there’s a great deal that a
person has to put up with.
Dr. Poussaint: I think a lot of these males kind of have a father
hunger and actually grieve that they don’t have a father. And I
think later a lot of that turns into anger. “Why aren’t you with
me? Why don’t you care about me?” And this affects their own
feelings of self, self-worth, feelings of abandonment.
Tim Russert: What happened with the black community since
1950?
Dr. Poussaint: Well, I think all kinds of things. Some of it has to
do with the fact that things changed for women with the
women’s liberation movement. In the past, there was a stigma if
you had a child out of wedlock. That’s not true anymore, for
white women or black women. So a lot of black women do not
feel compelled to get married. And then the other issue is the
availability of black men and whether they’re eligible to be
married. You have so many black men incarcerated, so many
black men unemployed, underemployed. In colleges now, black
women outnumber black men two to one.
[I’m going to have more on the interview next week, including
on the issue of drugs and prison sentencing.]
–The staph infection MRSA is now killing more across the
United States each year than AIDs.
–According to the Marist poll in New Hampshire, Hillary leads
Obama 40-20 (Edwards is at 12 percent), while Mitt Romney
leads Giuliani 25-21, with McCain a solid 18 percent.
A Quinnipiac survey in New Jersey was revealing. Hillary leads
Obama 46-20, while Rudy is slaughtering the competition, 48 to
McCain and Thompson’s 12. So, in my home state, if Hillary
and Rudy were matched up today, the result? 44-44.
–And now……….your 2008 UN Security Council! Aarrghhhh!!
Leading off, and with the veto, give it up for Britain, China,
France, Russia and the United States!
Next, and with another year to go in their terms, we have
Belgium, Indonesia, Italy, Panama and South Africa!
And let’s have a big round of applause for our new members
whose 2-year term begins in January…Libya, Vietnam, Costa
Rica, Croatia, and Burkina Faso!
My, how times have changed. The White House was actually a
big supporter of Libya’s candidacy. But when I saw Burkina
Faso, I have to admit I had to look carefully at the big world map
that I face here in the office. Six African nations share a border
with it…Mali, Niger, Benin, Togo, Ghana and Cote D’Ivoire.
And that, friends, is your geography lesson for today.
—
Pray for the men and women of our armed forces.
God bless America.
—
Gold closed at $768
Oil, $88.61
Returns for the week 10/15-10/19
Dow Jones -4.1% [13522]
S&P 500 -3.9% [1500]
S&P MidCap -3.7%
Russell 2000 -5.0%…yikes!
Nasdaq -2.9% [2725]
Returns for the period 1/1/07-10/19/07
Dow Jones +8.5%
S&P 500 +5.8%
S&P MidCap +9.3%
Russell 2000 +1.4%
Nasdaq +12.8%
Bulls 62.0
Bears 19.6 [Source: Chartcraft / Investors Intelligence…just
two months ago, 8/21/07, the ratio was 40.6 / 37.4. The bull
reading of 62.0 is the highest since 12/31/04. Normally, a bull /
bear spread of 35-40 is of concern. And, obviously, at least for
this week the theory worked.]
Have a great week. I appreciate your support.
Brian Trumbore
