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07/03/2004
For the week 6/28-7/2
[Posted 7:00 AM ET]
Iraq turning it over
I’ll tell you what ticks off some of us neocons. We really do
believe that good policy can change the world, but those of our
ilk in actual authority these days abandoned the cause through
both sheer arrogance and stupidity. The war with Iraq was fully
justified, for a number of reasons, but the Bush administration
blew it on the diplomatic front, the Pentagon (read Donald
Rumsfeld), didn’t have a clue in handling the postwar phase, and
now political considerations (the election) will carry the day.
I criticized the president directly after the May 1, 2003 fiasco,
recognizing that labeling the war “mission accomplished” was
incredibly insensitive to the families of those serving in Iraq, let
alone that facts on the ground said otherwise. It was all so easy
to see, yet our leaders couldn’t. We had to have security to man
the borders and secure weapons dumps before anything like true
reconstruction could take place. We had to train an internal
security force to put an Iraqi face on things, immediately, yet we
didn’t. And when presented with opportunities such as blowing
away terrorists in Fallujah, we backed off because the
administration didn’t want ugly television pictures and risk the
further wrath of the international community.
But today we hope for the best as Prime Minister Iyad Alawi
assumes control, the U.S. having turned over power early for fear
of attack. In an op-ed for the Washington Post, Alawi spelled
out his goals. In summary:
1) establish security; promote a national reconciliation effort.
2) economy: restoration of essential services, from electricity and
transportation to oil.
3) development of strong judicial system.
4) accelerate the political process.
Alawi appears to be an honorable man and we shouldn’t care if
he adopts some strong arm tactics, but he has little time to
succeed and such success is dependent on creating a viable, loyal
Iraqi security operation backed by a committed United States.
Only then can the reconstruction effort succeed, thus winning
back some of the hearts and minds that have been lost.
Finally, there was a bit of potentially great news, the willingness
of Jordan’s King Abdullah to supply troops if the new Alawi
government requests them. This is the kind of action some of us
have long hoped for, especially in light of NATO’s own putrid
response when called upon this week.
Wall Street
It was a sloppy week for equities and a rousing one for bonds,
owing primarily to sudden hints of a slowing economy as well as
volatile energy prices. On the bigger picture issue of the
economy, you’ll excuse me if I act a bit smug. While forecasters
of all stripes like to change their tune with the shifting wind,
when at all possible I stick to my convictions. And so once again
I have to reiterate that in my forecast for 2004, issued in this
space 1/3/04, I said the first half of the year would be strong on
the economic front, the second not so as rising interest rates had
an impact on real estate with a negative effect on consumer
spending. Some of this is already self-evident, I believe.
More recently, I have also written of the coming collapse in
China in 2005 and I admitted the Federal Reserve was really
walking a tightrope. While the vast majority believes Alan
Greenspan and Co. were behind the curve in not raising interest
rates sooner, I expressed sympathy based on my opinion that
what we are witnessing is a blip in inflation, with a return in ’05
of ‘de’flation fears due to the slowdown. The Fed wouldn’t want
to hike rates sharply over the coming months only to have to put
the monetary pumps back into reverse.
That said, this week, in raising rates the expected 25 basis points
– back in January I said the first hike would be 50, and in May
though I stuck with this through thick and thin while others as
late as mid-March were saying the Fed wouldn’t raise rates at all
in 2004 – the Fed averred:
“Monetary policy remains accommodative underlying inflation
still expected to be relatively low (but) policy accommodation
can be removed at a pace that is likely to be measured.”
So, you’d think from this the Fed won’t be overly aggressive
in the coming months unless the inflation data goes berserk to the
upside, and at least for this week you’d be hard pressed to find
evidence of prices running wild. Certainly the bond market
didn’t think so.
The big retailers, such as Wal-Mart and Target, have begun
lowering sales forecasts, the U.S. automakers are stumbling, and
this week’s data on manufacturing, while still at a healthy pace,
generally wasn’t as strong as expected. Of course one month’s
data doesn’t make a trend, but the battle between the forces of
boom and bust has been joined, though I admit this is perhaps a
bit too dramatic a description.
One thing is for sure, the Fed’s accommodative policy of the past
few years has been all about propping up real estate, thus
encouraging homeowners to use their chief asset as a piggybank
for increased consumer spending. Yet many of us have rather
substantial debts, a worrisome fact if the economy rolls over.
True, this argument has been advanced many times before,
but you know what they say about broken clocks.
Greenspan’s beneficence has also been at the expense of savers.
Let’s face it, sports fans, some of us have been screwed,
especially the elderly, and unfortunately for them my own
forecast of a slowdown and later whiffs of deflation offers no
real solace.
And on a different front, Americans can be thankful we haven’t
suffered another terrorist attack for many reasons; but to talk of
the consequences in financial terms, if we had been hit while the
chairman of the Federal Reserve was encouraging one and all to
take risks of every kind, the damage done to our balance sheets
would have been catastrophic.
But since we’ve survived the post-9/11 period thus far, and in
many cases prospered through both rising home values and our
equity holdings, it might be a good time to thank your God of
choice, sit down with your financial advisor, and take stock of
your current situation, i.e., remove a few chips off the table
because you’ve probably been there a long time and you’re
tired; tired gamblers seldom being successful ones.
Street Bytes
--Stocks fell on the economic data that may have foretold
tougher sledding for future earnings growth, at least up to the
level of existing expectations. Two early examples were
Cardinal Health and Washington Mutual, both getting shelled
after warning for the recently completed quarter. The major
indices, Dow Jones, Nasdaq and S&P 500, all declined about
1%.
--U.S. Treasury Yields
6-mo. 1.60% 2-yr. 2.52% 10-yr. 4.46% 30-yr. 5.21%
PIMCO’s Bill Gross made a pretty penny this week, aggressively
buying Treasuries before the big rally on the weaker than
expected manufacturing and retail sales data. I would argue that
if the 10-year, for example, were to stay in the 4.40% range, not
only is inflation not a problem, but on the other hand the
economy’s coming slowdown could be more rapid than I myself
first thought. Then again, Greenspan’s real estate bubble has a
chance to grow even larger!
--Energy: Based on last week’s closing level of $37.55, this
Friday’s price of $38.39 isn’t that big a deal. But it’s what
happened in between that is, with oil initially sliding $2, only to
rally back $3. The ever changing inventory picture was a major
cause for the rebound as there were significant drawdowns
across the board. In addition, Saudi Arabia pronounced that the
current price was just fine and that further production increases
weren’t necessary. “Whaddya mean?” said the groveling
Western world. But in the long run we all know it’s about
economic growth and supply / demand.
--Inflation in China is now running at 5%, at least year over
year in June, and China may be forced to ration power at luxury
hotels in Beijing due to the shortfalls in supply when it comes to
electricity generation. There are similar problems across the
country.
--Meanwhile, growth in India was at an 8.2% clip for the first
quarter, though this is down from a 10.5% rate the previous one.
And in Japan, the business confidence index registered its
biggest gain since 1991.
--Brazil’s inflation rate is expected to rise to 6.4% this year,
though growth may be in the 3.5-4% range, the latter up from
’03’s flat pace. Exports to China are the primary reason for the
improving GDP picture. Of course this would reverse if I’m
right on my China forecast.
--Recently, Russian President Vladimir Putin said it was not his
government’s goal to bankrupt energy giant Yukos. This week’s
actions say otherwise, as a Russian court refused to unblock the
company’s assets while a separate authority tacked on an
additional tax bill of $3.3 billion for 2001 on top of the $3.4
billion assessed for 2000. Within days this troubling fiasco could
be over with Yukos’ assets disposed of. There is no way foreign
investors can view this as an isolated incident, as much as Putin
would like everyone to believe it is.
--The European Union turned down China’s bid for market
economy status due to its poor corporate governance and
excessive state interference; important because without this label
the West can continue to impose anti-dumping penalties.
--A federal board has turned down another attempt by UAL to
secure a loan.
--Singapore Air commenced non-stop service between Newark
and Singapore; at 18 hours the longest flight in existence.
Ah, but we’re talking 18 hours with the Singapore Air girls.
--8 brokerage firms were fined for overcharging investors in
municipal bonds. Buying individual bonds is one of the biggest
scams going, particularly in illiquid markets.
--As part of a large corruption sweep involving key government
officials in Philadelphia (but not Philly Mayor John Street), two
top executives of Commerce Bank were charged with influence
peddling and offering bribes for future banking business.
--Bank One’s mutual fund arm agreed to pay $90 million in
various fines, restitution and fee reductions for its role in the
Canary Capital Partners market timing fiasco. The former
president of the fund operation was also barred from the industry
for two years.
--Gretchen Morgenson of the New York Times reported that
industry giant Capital Research (American Funds) is being
investigated for directing commissions based on sales, a major
conflict of interest, though many others have been guilty of this.
--Ms. Morgenson also reported on the wheeling-dealing that took
place prior to the J.P. Morgan Chase / Bank One merger. Bank
One’s Jamie Dimon was supposedly willing to accept a deal at
zero premium to existing share price if he could assume control
of the combined operation from day one, but JPM’s William
Harrison nixed the idea and offered an equivalent of $7 billion in
market premium to be able to stay on for two more years before
turning the reins over to Dimon. So Morgenson’s article
appears to have instigated a class action suit on behalf of JPM
shareholders, who now contend Harrison paid $7 billion too
much.
--Shares of Research In Motion, makers of the BlackBerry
wireless devices, soared as revenue for the quarter ending 5/29
zoomed from $104 million a year ago to $269 million. RIMM
now claims 1.34 million BlackBerry subscribers. I’m inching
closer to finally getting one myself. Give me another year,
though.
--Toyota’s Lexus was ranked first by J.D. Power Associates for
dependability. Ford’s Land Rover worst.
--Dick Grasso’s total compensation is now thought to be $240
million, not the more commonly quoted figure of $190 million,
including all amounts he feels he’s still owed.
--Kmart is selling 54 stores to Sears. I just hope the latter
remembers to take the name off.
--Is mad cow making a comeback? Two bovine were initially
suspected of the brain wasting disease, though the first tested
returned a ‘false positive’ while tests on the second were also
negative. Regardless, it is strongly suggested that all cows that
appear to be wobbly on their hooves turn themselves in, or suffer
the consequences. Repeat all mad cows are to turn themselves
in, immediately.
--My portfolio: No changes. Still roughly 80% cash, 20%
equities.
Foreign Affairs
Afghanistan: I noted a few weeks ago that there was no way the
elections here would come off in September, despite President
Hamid Karzai’s assurances to the contrary. I virtually guarantee
I will be right, as this past week saw two gruesome examples of
just how tough it’s going to be to secure the country well enough
to hold a vote. First, two women working on election
registration were killed by the Taliban, then the terrorists killed
16 men on a bus after they were found to be carrying voter
registration cards.
China / Hong Kong: It appears that pro-democracy advocates
turned out in impressive numbers on Thursday, the 7th
anniversary of Hong Kong’s turnover to China. Most crowd
estimates ranged from 200,000 to 500,000, so we’ll call it
350,000, nonetheless a super impressive display of support given
there wasn’t an overriding issue like last year’s debate over
security legislation. Also, picture temperatures in the 90s,
oppressive humidity and severe pollution as further reasons to
respect those who turned out to march for more democracy. The
next key date is September 12, when the public selects 30 of the
60 members of the territory’s legislature.
[As I go to post, I see that Beijing reiterated that there will be no
direct elections in 2007/08. “It is unwise to try to achieve what
is unachievable,” said the deputy director of China’s Liaison
Office in Hong Kong. But now Hong Kong has become a center
of People Power. Watch the commies deal with this.]
North Korea: The 3rd round of six-party talks ended like the
other two, with little progress. However, Secretary of State
Colin Powell met with his counterpart from Pyongyang and the
tone was fairly positive, significant because the foreign minister
obviously represents the views of Kim Jong il.
Iran: The mullahs said they won’t enrich uranium for their
nuclear program after threatening to do so the prior week, which
means they’re lying once again because it’s what Iranian mullahs
do. And in New York City, two Iranian guards assigned to the
U.N. mission were expelled for taking pictures of New York
landmarks, as well as the subway system more than a bit
unsettling but certainly no surprise.
Serbia: Just last week I commented that it was pitiful the Bosnian
Serbs hadn’t arrested war criminals such as Radovan Karadzic.
Well, this Wednesday chief envoy Paddy Ashdown fired 60
Bosnian officials, as is in his power, for their failure to capture
Karadzic, while also blasting the corruption of those who have
been protecting the criminals. Karadzic should be in custody
shortly with some of the roadblocks having now been removed
thanks to Ashdown’s courageous move. Separately, after three
votes where turnout below 50% invalidated the result, Serbia
elected a new president on the 4th try, Boris Radic, a pro-West
politician.
Canada: Prime Minister Paul Martin and his Liberal Party barely
survived in last Monday’s elections, capturing 135 of 308 seats
in parliament, while the conservatives won 99, the separatist
Bloc Quebecois 54, and the NDP 19. [There is one independent,
Chuck Cadman of British Columbia just to show my Canadian
friends I’m doing my best to keep up.] 155 are needed for a
majority, so it was expected Martin would rope in the NDP and
then Cadman, but instead Martin may try to cobble together
different voting majorities for each issue. Sounds good in
theory, but a recipe for chaos in practice I imagine.
Russia: BBC Radio reporter Lucy Ash had a story on Moscow’s
property scams that go far beyond most normal illegal activity in
this realm. The unwitting sign over their apartments to criminals
- not knowing they’re granting the thugs power of attorney - , the
dirtballs then flip the apartments in Moscow’s soaring real estate
market and the previous owners are often kidnapped to keep
them from complaining to authorities. Many are never seen or
heard from again. Investigators looking into the scheme believe
one gang in particular is responsible for up to 100 murders.
President Putin, meanwhile, talks of the rule of law. Of course
he means “his” law, not what you or I would normally consider it
to be.
Sudan: Secretary of State Colin Powell and U.N. Secretary
General Kofi Annan traveled to Sudan to pressure the ruling
terrorists to allow emergency relief aid to flow to the desperate
refugees of Darfur province. The government will do little and
the humanitarian crisis deepens.
For its part, the U.S., as is almost always the case, is leading the
relief charge, having pledged $62 million in aid, but as the
Washington Post points out, Germany, France and Japan have
each promised less than $4 million.
“The tightfistedness of these allies is outrageous, as is the
reluctance of France and other members of the U.N. Security
council to support a tough resolution on Darfur. To excuse their
failure to contribute to Iraq’s reconstruction, these nations
complain that the Bush administration’s Iraq policy was
insufficiently deferential to the United Nations. But none other
than the U.N. secretary general has just visited Darfur to
demonstrate the urgency of humanitarian action. What excuse
can there be now?”
Pakistan: Under pressure from President / General Musharraf and
the military, the prime minister resigned, not a particularly good
sign for proponents of a more democratic process. Meanwhile,
high-level talks with India were successful in establishing more
confidence building measures between the two, though the
paramount issue of Kashmir is far from resolution.
Saudi Arabia: The kingdom basically declared victory against al
Qaeda. Unbelievable. And Paul Johnson’s body is yet to be
found.
Turkey: President Bush, as part of his participation in the NATO
summit that was held in Istanbul, blasted some in attendance for
not supporting Turkey’s bid for European Union membership,
proclaiming it would provide a “crucial advance in relations
between the Muslim world and the west.” But France and
Germany, in particular, argue otherwise as they deal with an
explosion in their respective Muslim populations. Separately,
the U.S. wants to deploy 72 F-16s, currently in Germany, to
Turkey’s Incirlik air base, giving the U.S. more firepower closer
to Syria, Iran and Iraq, but first the Turkish parliament must
approve the move in the face of strong public opposition. How
the leadership in Ankara takes care of this will be telling.
Singapore: For another view of the war on terror, I’d encourage
you to read a recent speech given by Singapore’s Prime Minister
Goh which you can find on my “Hott Spotts” link. On Tuesday
I will be posting President Bush’s comments from Istanbul.
Random Musings
--Britain lost its 60th soldier in the Iraq war this week. We note
this nation’s contribution and pray for the families.
--John Kerry’s campaign received a holiday gift in the form of
Friday’s less than rousing jobs report. The latest polls, taken
before the release of the data, had been reflecting an uptick for
President Bush as far as his handling of the economy, while
maintaining his edge on the question of who is better suited to
wage the war on terror. Overall, though, Bush’s approval rating
remains mired below 50%.
And the polls continue to show the election to be a dead heat, but
contained within the national surveys is both good and bad news
for each. In what one poll viewed to be the key battleground
states, Kerry has a decided edge in most, while in deadlocked
Florida, Ralph Nader is automatically on the ballot through his
Reform Party endorsement, a decided disadvantage for Kerry.
Nader, however, failed to garner the Green Party endorsement
and with it a line in 22 states, as the Greenies chose David
“Corn on the” Cobb instead. Nader is thus going to have an
exceedingly difficult time in gaining access to half the states, let
alone 40 or more, and for the life of me I fail to see what he
thinks he gains by continuing on. Of course as a Republican I
welcome his participation (heh heh), but as an objective observer
I believe the old fool should pack it in.
--The Defense budget for fiscal 2005 is pegged at $417 billion,
but if the House gets its wish for 20,000 more troops that means
it would be at the expense of needed equipment, unless you want
to further increase the budget, but that’s politically unpalatable
for the White House right now so they argue against the force
increase, thus making a political decision at the expense of good
policy and national security. Get it?
--Senator John McCain has been granted a prime-time slot at the
Republican Convention. Maybe he’ll set us straight on the
above.
--With the U.S. military clearly overstretched and incapable of
waging war on another front if it suddenly developed, former
Nixon aide Noel Koch weighed in on one solution.
“The resurrection of the draft, so vitally necessary to restore the
depth of ready manpower we need in our force structure, is self-
justifying despite the arguments of a succession of defense
secretaries who feel obliged to defend our ‘voluntary military’
with technical arguments that mask political squeamishness.
“But the nation also needs a draft because it is one proven
mechanism to bring unity to our rapidly separating parts. It
needs a draft to provide that common civic grammar that
encompasses those who have served and their families and
friends. It needs a draft to honor, and to even out, the sacrifices
we call upon our young to make for our nation.
“Finally, America needs this fund of experience to expand the
pool of people likely to find their way into the corridors of power
and, when they get there, to bring with them a bone-deep
appreciation of the true costs of conflict. Thus might we reduce
the risks of counsel from those who have never had to learn the
difference between a war and a cakewalk.” [Washington Post]
--Commentator Ralph Peters, on a facet of the war in Iraq that
the Bush administration blew.
“Don’t treat an occupation as a bonanza for American
contractors – hire locals. Hurling sweetheart deals at
unscrupulous American corporations for the reconstruction of
Iraq ripped off the American taxpayer, raised impossible
expectations among Iraqis and let our soldiers down.”
[New York Post]
--The White House had to have noticed the surly reception given
Vice President Cheney at a Yankees game this week. When his
image was shown on the scoreboard, boos rained down. What an
idiotic move to send him there in the first place, which shows
how out of touch some Bush / Cheney staffers truly are.
[Speaking of the Yankees, shortstop Derek Jeter made one of the
truly great plays in the history of the game this week.]
--Will Jacques Chirac be a character witness for Saddam, or will
Saddam finger Chirac in the oil for food scandal? And while you
may be surprised I made no mention of Saddam in my initial
remarks above, it’s because his story isn’t that important yet.
However, the White House should do all it can to keep Saddam
from going to trial until well into 2005. I can’t believe those
who say it’s a positive for Bush to have Saddam in the public
eye. Are you kidding? He proved by his appearance on
Thursday he is still capable of great mischief.
--I was a Paul Bremer fan at first, but I suspect history will not
treat him well. I’m not sure disbanding the Iraqi army as he did
was as bad as (1) not conveying the truth on the ground to the
White House and the Pentagon and thus (2) not calling for more
troops for security. (3) It was pitiful he didn’t recognize that the
Iraqis needed a jobs program immediately after the takeover.
--Both the U.S. and European defense industries are increasingly
concerned over the lack of home grown engineers. So to the
parents out there, steer your kids into this field.
--250,000 protested in Mexico City over the never-ending crime
wave and rampant corruption. While in New York, the city is
headed for its lowest murder tally since 1963 and at just 25% the
record high level of 1990.
--The Supreme Court ruled that a law protecting children from
pornography on the Net is unconstitutional. Protecting free
speech, they say, is paramount. Bull. The bench is wimping out.
--Here’s one who hasn’t been wimping out recently, Bill Cosby.
This week, in an appearance at Jesse Jackson’s Operation Push,
Cosby addressed the topic of today’s black youth and their
parents who refuse to take control and set a good example.
“Let me tell you something, your dirty laundry gets out of school
at 2:30 every day, it’s cursing and calling each other nigger as
they’re walking up and down the street. They think they’re hip.
They can’t read; they can’t write. They’re laughing and
giggling, and they’re going nowhere.”
--According to Crain’s New York Business, the IRS is increasing
its workforce in the New York area by some 25% by year end in
an effort to go after corporate tax dodgers.
--The Cassini space probe reached Saturn after a 7-year journey,
prompting Saturnians – that’s what they’re called in case you
didn’t know – to proclaim “We are not alone.”
---
God bless the men and women of our armed forces. You’re in
our thoughts and prayers.
Happy Birthday, America!
---
Gold closed at $398
Oil, $38.39
Returns for the week 6/28-7/2
Dow Jones -0.9% [10282]
S&P 500 -0.8% [1125]
S&P MidCap -0.8%
Russell 2000 -0.9%
Nasdaq -0.9% [2006]
Returns for the period 1/1/04-7/2/04
Dow Jones -1.6%
S&P 500 +1.2%
S&P MidCap +4.0%
Russell 2000 +4.6%
Nasdaq +0.2%
Bulls 56.1
Bears 17.4 [Source: Chartcraft / Investors Intelligence]
Note: Our transition to a new server appears to have gone
smoothly. My thanks to the staff at both CSI MultiMedia and
Web Epoch for their hard work on this project.
After 5 great years with CSI, I was forced to cut the tie. It
was a painful decision, as the folks there are first class in every
respect.
But it’s a new day for StocksandNews, even if you, the reader,
are not likely to recognize the difference.
Have a great week. I appreciate your support, including from
what is an increasingly international audience, now
compromising a full 40% of the total.
Brian Trumbore
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