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10/15/2005
For the week 10/10-10/14
[Posted 7:00 AM ET Charlottetown, Prince Edward Island]
I’m up on PEI, Canada (north of Nova Scotia) for a road race on
Sunday and with Thursday being an all-day travel adventure,
starting with aircraft problems, and with a faulty Internet
connection in my hotel, this week’s review will be brief.
I imagine I wasn’t the only one thinking of rubble the past few
days. For starters, NBC News had a story about the challenge of
removing the debris left over from Katrina and Rita. It will take
about 4.5 million dump truck loads, over two years, and
encompass some 200 football fields worth of stuff piled 50 feet
high; of course the largest such cleanup in American history.
Then you look at the earthquake zone in Pakistan and India. The
rubble there is staggering and the human toll sickening. Where
is all that debris going? Where did all the rubble left over from
the tsunami go? To a large extent the world is nothing but a
giant pile of trash and the only ones having fun amidst it are the
rats.
But this weekend there is a chance, however fleeting, that
another big pile of rubble, Iraq, can begin to truly rebuild with
passage of its constitution. With the threat of it being voted
down by the Sunnis, accommodation was reached between the
ruling Kurdish-Shia alliance and moderate Sunnis whereby the
Sunnis received a guarantee that substantial changes could be
made after a new National Assembly is elected in December; at
which point the Sunnis may have up to 20% representation in the
legislature. A second constitutional referendum would then be
held within four months of the seating of the new Assembly.
So while many Sunnis will yet vote it down today, it seems
unlikely they will be able to garner the 2/3s in 3 of 18 provinces
necessary for defeat. This late agreement is another example of a
growing split between the more moderate Sunnis and the
jihadists.
[In case the constitution is voted down, however, parliament is
then dissolved and another election held to replace it.]
But back to rubble and the reconstruction effort in Iraq, Rick
Jervis of USA Today broke it down.
--25 cents of every project dollar is going for security.
--Of 81 water sewage treatment plants originally called for, only
13 will be built. [Excluding Baghdad, only 8% of Iraq is
connected to a sewage network.]
--The power grid is still in pitiful shape and capable of supplying
only 10-14 hours of electricity per day. [Sabotage such as
Friday’s doesn’t help.]
--Oil production is at 1.9 million barrels per day, down from 2.6
mmbd before the invasion, which itself was down from a peak of
3.5 mmbd over a decade ago. [Revenues, though, are up
substantially due to the soaring price of crude.]
The post-war phase in Iraq has been a disaster, no matter how the
Bush administration and its lackeys attempt to spin it. But Iraqis
themselves have another chance to take a positive step in the
development of a stable government. Optimism has been in
short supply here but amidst the suicide bombers and an
insurgency that has claimed over 500 lives in just the past 20
days, there is at least a ray of hope.
Wall Street
The losses continue to pile up, though a late rally on Friday
helped pare the Dow’s decline to just a few points on the week.
On the fixed income side, the 10-year Treasury hit the key 4.50%
level before finishing at 4.49%, with conventional mortgage rates
now over the psychologically important 6% mark.
Stocks are being hit by a myriad of issues, chief of which these
days is the increasing fear the Federal Reserve will hike the
funds rate substantially above 4% (it’s currently at 3.75%)
because of concerns inflation is about to take off. Friday’s 1.2%
rise in the consumer price index for September, the largest
increase in 25 years, certainly didn’t help, but once again the
core rate, ex-food and energy, was up only 0.1%.
Investors are also concerned about a looming slowdown in
consumer spending (though September’s retail sales report was
up a solid 1.1%, ex-autos), triggered in no small part by the
stagnating real estate market and the effect of still high energy
prices on earnings.
But then you had some major company specific items, including
the Delphi bankruptcy filing and its possible impact on General
Motors, whose own shares hit a 13-year low this week, while
Delphi’s approached zero. It doesn’t bode well for Joe Six-pack
that Delphi’s management is insisting on a 50%+ reduction in
wages for those workers who make it through the reorganization
process.
And then you had the collapse of futures broker Refco, creating
another big pile of rubble. [More on this in a bit.]
On the energy front, the volatility continues as at one point crude
oil was back over $64 before finishing the week at $62.63, still
up on the week; though there were continuing signs of slowing
demand, coupled with some recovery in refinery capacity, post-
Katrina and Rita.
However, we have now entered the season where it’s all about
the weather. I found it interesting that forecasters in the U.K. are
calling for the coldest winter there since the 1940s. Hitler,
musing from hell, no doubt recalls that stretch, seeing as he was
defeated, a la Napoleon, by the brutal Russian winter back then.
[And the heroics of the Russian people.] Recall, also, the
unusually brutal weather during the Battle of the Bulge.
But I’m digressing. The point is I mentioned a few weeks ago
that it’s rare to have both Europe and the U.S. with the same
weather pattern. It’s just not the way it usually works. So while
European forecasters are increasingly gloomy on the potential for
bone-chilling cold and increased usage of heating oil and natural
gas, weathermen in the States seem fairly sanguine on the
temperature outlook, save, perhaps, the northeast.
So do we catch a break, while our brethren across the pond dress
in five or six layers? Well I for one sure as heck hope we do.
And get this. The real cause for concern in Britain is the fact it
currently has about an 11-day supply of natural gas vs. 55, on
average, for the other European nations. In other words, should
the cold weather materialize, businesses and schools could be
shut down as a result of fuel shortages and the economy could
crater.
Lastly, the Asian markets have been performing remarkably well
this year and there is a ton of talk that Japan, for one, is finally
back on track and that it’s not too late to hop on board the bullet
train to financial freedom.
Yes, I believe in the Japanese story, but no, I can’t possibly
invest in the region with bird flu hanging over their heads, and
maybe eventually ours. It is the height of irresponsibility
(remember Ed Keon’s call in July to go 100% in equities?) for an
advisor not to at least mention avian flu as a risk factor a most
serious one. Should there be proof the virus is in fact mutating,
economic activity will screech to a halt and the Asian markets,
already infused with a gambling mentality, will crash. This is
not just Chicken Little (oops, bad analogy) stuff here. I love
Asia, I plan on returning next spring, but it’s buyer beware in the
markets these days.
Street Bytes
--As noted above, the Dow Jones fell just a few points, five, to
finish at 10287. But the S&P 500 lost a more substantial 0.8%
and Nasdaq lost 1.2% to 2064.
There were all kinds of earnings reports, from Apple’s
disappointment on the sales side of its iPod (though it recovered
by week’s end), to better than expected results from the likes of
Genentech and Advanced Micro (with AMD nonetheless falling
steeply in response). G.E. reported in line and reaffirmed its
outlook for the full year of $1.82, but it’s still not exactly cheap.
But what truly irks some of us is the knowledge that Corporate
America continues to play games on the earnings front. Jack
Bogle calls it “financial engineering” and both he and Merrill
Lynch’s Richard Bernstein are perhaps the leading proponents of
this theory. I mean to tell you, sports fans, some of these
companies are simply not doing as well as they lead us to
believe. And some are also calling for another year of double-
digit earnings gains in 2006. To paraphrase an old Spinners tune,
“Games CFO’s play right, wrong, you just can’t stop ‘em ”
--U.S. Treasury Yields
6-mo. 4.10% 2-yr. 4.25% 10-yr. 4.49% 30-yr. 4.70%
Rates soared across the board, 8 to 13 basis points, on the
inflation data. Interest rates around the world are stirring, too,
and that has major implications for the U.S. Major negative
implications, that is. It’s going to be tougher and tougher to
finance the old deficit, that’s for sure. More competition on this
front is not a good thing.
[There was some good news on the federal deficit front,
however, as the figure for fiscal 2005 came in at $319 billion,
down from the prior year’s record $413 billion thanks to soaring
revenue. Unfortunately, hurricane costs will hit us this fiscal
year.]
--Refco is one of the largest futures trading firms in the world
with some $5 billion in customer assets, both individual and
institutional, as well as countless other operations. But this
week, after a series of lightning announcements and government
/ regulatory actions, the future of the firm is in serious doubt as it
came to light CEO Philip Bennett had been hiding $430 million
in losses as far back as 1998. Bennett employed a hedge fund,
Liberty Corner, to help cook the books and the loss in customer
confidence caused an old-fashioned run on the bank before
officials put restrictions on client withdrawals.
[Liberty happens to be across the street from my headquarters;
the same building, incidentally, that houses another disgraced
hedge fund, Beacon Hill Asset Mgmt. Yes, my home town of
Summit, NJ, is full of dirtballs these days.]
On Wednesday, the SEC charged Bennett with securities fraud in
connection with Refco’s IPO just this past August. No one, from
the underwriters, to buyout king Thomas H. Lee, to the auditors
appear to have been aware of the hidden debts and all now will
be the subject of litigation on the part of bloodied stock and
bondholders. While trading in Refco shares was suspended
indefinitely after losing around 75% of its value, the company’s
bonds, maturing in 2012, were down to $27 from the $108 level
the previous Friday. Astounding.
Meanwhile, Bennett earned about $116 million in the IPO, while
on the other hand, Thomas H. Lee, a 40% owner of the firm, is
sitting on a week’s loss of $750 million.
The big question is will the market continue to largely shrug this
off? Stay tuned for further revelations, while I personally am
going to keep a close eye on my dentist, also in that same tainted
building.
--From economist Robert Samuelson / Newsweek:
“The fading of America’s wealth effect, should it occur, might be
equally dull and benign. But there are grimmer possibilities.
One is that many adverse forces are now converging: higher
energy prices, higher interest rates and debt payments, higher
inflation, falling wealth gains. None matters much alone, but
‘their combination is creating more consumer risk,’ writes Susan
Sterne of Economic Analysis Associates. For two decades, free-
spending American consumers have anchored the U.S. and world
economies. If they no longer play that role, it’s an open and
worrisome question of who will.”
--The total wealth of China’s 400 richest people (according to
Forbes) is $75 billion, or 7% of China’s GDP in 2004. Wong
Kwong-ya, 36, founder of China’s largest electronics retailer,
tops the list at $1.7 billion. I don’t know if he’s single, ladies,
but you may want to check it out.
--Brazil is learning about the flipside of doing business with
China as it is the latest country to be flooded with cheap textiles,
a la the U.S. and Europe before sanctions were levied.
Government officials in Brazil are also miffed that $billions in
promised Chinese investment has been slow in coming.
--Japan’s parliament approved Prime Minister Koizumi’s $3
trillion postal reform plan; one that splits up the various divisions
and privatizes them by 2017, helping to create in part the world’s
largest private bank. But notice the date, 2017. Few would
disagree this isn’t the best thing for Japan and its people, but a lot
can change between now and then.
--In 1994, there were 9.4 million vehicles on the road in China.
By 2020 the estimate is for 140 million.
--And in Russia, thanks to oil wealth the sale of cars here is
exploding. Purchases of imported vehicles rose 64% in the first
eight months of this year versus 2004. Russia is now one of the
three fastest growing car markets in Europe along with Poland
and Turkey. According to the New York Times, the 10 most
favored foreign brands consist of four Japanese models, three
Korean, one French and two American Ford and Chevrolet.
--BP is pursuing a partnership with China’s biggest producer of
oil, Sinopec. China is looking for exploration expertise, while
BP wants access to the market for its products. But China’s State
Council may not approve it, as no foreign oil group has been
granted significant access to the domestic oil industry.
[Financial Times] Well what do you know? And I caught some
flack because I was against the Unocal / CNOOC deal?
--The 10/17 issue of Business Week has a cover story on “Living
Large in Exurbia,” the definition given to once rural counties
now being developed. Fuel costs for those opting to live in these
areas while spending 1-2 hours commuting each way are soaring,
of course, and these folks are experiencing the flip side of this
lifestyle. Many were already overextended to begin with.
--I have gotten a kick out of some making the comment the last
few weeks that “at least none of the major hedge funds have
blown up.” This is the crowd that doesn’t want increased
regulation. Yeah, but a lot of small ones have, the latest being
Wind River Partners LP, where investors may have lost up to
$275 million, collectively, in another bit of financial
skullduggery.
--My old friends at PIMCO suffered a real loss this week with
the announcement that emerging markets bond guru Mohamed
El-Erian was moving to Harvard to replace Jack Meyer at the
$26 billion endowment fund. [Meyer, highly successful in more
ways than one, is starting his own money management firm.] At
least this shows investors and financial advisors that PIMCO is
far more than Bill Gross. As he’s undoubtedly saying at a time
like this, “we have a deep bench.” But in the fund game, a high-
profile departure like this gives brokers, in particular, an excuse
to look elsewhere.
--Disney and Apple announced a joint venture to sell episodes of
ABC’s “Lost” and “Desperate Housewives” that could then be
displayed on a new iPod with a 2 -inch screen. Well, I guess a
-inch of Eva Longoria and Terri Hatcher is better than nothing.
--Beer sales are down to just 58.1% of the alcohol market in the
U.S., with spirits at 28.5% and wine 13.4% of all servings.
[Adams Beverage Group / Washington Post]
--Here in Canada, two Canadian mining giants, Inco and
Falconbridge (cool name) are merging for $11 billion. The
combined entity will be the largest producer of nickel. I’m not
sure who is responsible for maintaining the CoinStar machines.
--I like this comment from Scott P.
“I’m glad to see those automobile ads for ‘employee pricing’
end. Local dealers (in Florida) advertised that we could be
treated like employees. Well, I’ve been an employee and rarely
recall it being a pleasant experience which is why I started a
company of my own and why I drive a Nissan!”
--So you think you’re seeing a lot of commercials on programs
like “Desperate Housewives”? Truth is you are. Back in the
1980s, commercials made up about 12 minutes of a 60-minute
series. Today’s Housewives is only 40 minutes and 30 seconds
of action, taking out the “previously on...” recap, opening credits
and a teaser for next week’s episode. [USA Today]
Foreign Affairs
Pakistan: Some are saying the horrific earthquake could help
bring India and Pakistan closer together in a spirit of cooperation
in dealing with the tragedy, particularly over the issue of
Kashmir where the worst damage occurred.
But I view it differently. If the relief effort goes poorly, the
extremists could use it as an excuse to go after President
Musharraf while gaining more public support for such a move.
Iran: With the financial market here collapsing following the
International Atomic Energy Agency’s recommendation that Iran
be referred to the UN Security Council unless it immediately
ceases with its uranium enrichment program, some leaders are
beginning to question the Mullahs hard line. Rafsanjani, the
former president who I wanted to win the recent election, has
denounced the confrontational style. So it might not be just a
coincidence that this week Iran announced it was willing to
reopen talks with the Euro-3 Britain, France and Germany.
The Bush administration should interject itself into any new
discussions. It can’t hurt.
Syria: The investigation into the assassination of Lebanon’s
Rafik Hariri is heating up with Detlev Mehlis’s final report now
slated to be released as early as Oct. 21. It promises to be
explosive, and it’s already had an impact with the “suicide” of
Syria’s interior minister, a former strongman in Lebanon.
Supposedly, he shot himself in the mouth, but the odds are he
was murdered. Eliminating a key witness certainly makes sense
if you’re Bashar Assad, facing a crisis of leadership.
Middle East: A Dubai-based survey of 17 Arab nations found
the following.
71% of Arabs believe that political leaders in the Arab world are
“mostly corrupt politicians who destabilize the region.”
53% are unhappy with the levels of freedom available in their
country.
83% believe a state could be both Islamic and democratic.
[Jerusalem Post]
Afghanistan: The Taliban killed at least 24 Afghan policemen in
two attacks.
Russia: President Putin faced another crisis in the Caucusus as
terrorists launched an audacious raid on Nalchik, a city of over
200,000. At last count over 100 were killed, including 24
Russian soldiers and police.
Germany: Angela Merkel won the power struggle but lost the
war. Merkel will become Germany’s first female chancellor but
her conservative coalition was forced to give Gerhard
Schroeder’s SPD the three key cabinet slots; foreign ministry,
finance and labor. This government is going nowhere.
China: President Hu Jintao pledged deeper ties with North
Korea on the 60th anniversary of the founding of the Workers
Party of Korea. Oh yeah, that’s been a great 60 years, hasn’t it?
Hu wants to take the relationship to “a new high.” Hopefully,
the White House is filing this away for future reference.
Japan: Only 18% want the government to maintain its non-
combat force of 600 troops in Iraq beyond the Dec. 14 deadline
for withdrawal.
Random Musings
--The latest poll #s are almost startling in their consistency. Both
the NBC News / Wall Street Journal and AP-Ipsos surveys show
President Bush with just a 39% overall approval rating, while
both also say only 28% of the country believes we’re on the right
track. [59% and 66% believe we’re on the wrong track.]
Separately, only 50% of Republicans approve of the job Bush is
doing [NBC / WSJ], while only 2% of African-Americans give
Bush high marks. [NBC / WSJ] That’s two percent. So it’s no
wonder that congressional Republicans are scared to death about
the 2006 mid-term elections.
--Here’s my bottom line on Harriet Miers, having shared the
thoughts of some leading conservatives last time. It’s not a
matter of sexism or elitism. I just find it appalling that President
Bush showed zero respect for both the American people and the
Constitution in nominating someone with such limited
experience.
Here are some of the quotes from a column Ms. Miers once
wrote for The Texas Bar Journal, as dug up by the New York
Times’ David Brooks.
“More and more, the intractable problems in our society have
one answer: broad-based intolerance of unacceptable conditions
and a commitment by many to fix problems.”
“We must end collective acceptance of inappropriate conduct
and increase education in professionalism.”
“We have to understand and appreciate that achieving justice for
all is in jeopardy before a call to arms to assist in obtaining
support for the justice system will be effective. Achieving the
necessary understanding and appreciation of why the challenge is
so important, we can then turn to the task of providing the much
needed support.”
Brooks:
“I don’t know if by mere quotation I can fully convey the
relentless march of vapid abstractions that mark Miers’s prose.
Nearly every idea is vague and depersonalized .
“Throw aside ideology. Surely the threshold skill required of a
Supreme Court justice is the ability to write clearly and argue
incisively. Miers’s columns provide no evidence of that.”
--New York Mayor Michael Bloomberg has a 60-32 lead over
his opponent in his bid for a second term.
--But in New Jersey, if you believe the polls, Republican Doug
Forrester is within one point in one survey, 44-43, and down 44-
37 in another to Senator Jon Corzine in their race for governor.
It’s great to see Corzine sweat, though both are running a terrible
ad campaign, filled with lies and gross distortions that insult the
intelligence of the average voter. Then again, the people of my
state are a pretty stupid bunch. And as noted above in the Refco
tale, rather crooked.
--I was watching a BBC report from the earthquake zone and the
reporter was interviewing a poor, destitute soul with his family in
Kashmir. What struck me was this mountain man, with few teeth
and the look of a life of poverty, spoke almost perfect English.
Far better than most people from our own inner cities, I mused.
--Happy Birthday to Margaret Thatcher, 80; one of history’s true
giants.
--Finally, those of you who run distance races will appreciate
this. My buddy Pete and I have run two marathons together, but
are doing just a half marathon here in Charlottetown. The
forecast is for rain, but at least it’s not today, when the rain is to
be accompanied by 40-50 mph wind.
But why do a race all the way up here? Well, I just thought we’d
go someplace different. The people are super friendly and the
seafood is out of this world. As for carbo-loading, that’s what
beer is for, eh?
---
Pray for the men and women of our armed forces.
God bless America.
---
Gold closed at $471
Oil, $62.63 week #12 over $60
Returns for the week 10/10-10/14
Dow Jones -0.1% [10287]
S&P 500 -0.8% [1186]
S&P MidCap -1.7%
Russell 2000 -1.7%
Nasdaq -1.2% [2064]
Returns for the period 1/1/05-10/14/05
Dow Jones -4.6%
S&P 500 -2.1%
S&P MidCap +2.7%
Russell 2000 -2.8%
Nasdaq -5.1%
Bulls 45.8 this is identified as ‘normal’
Bears 29.2 normal here would be about 35
[Source: Chartcraft / Investors Intelligence]
Have a great week. I appreciate your support.
Shout out to LT!
Brian Trumbore
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