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For the week 3/28-4/1
Before I get to Libya and the issues facing North Africa and the Middle East, a few words on Japan, Europe, inflation and the U.S. economy.
Those who are bullish on Japan are nuts. Those who are bullish on Europe, ex-Germany (perhaps) are also nuts. Those who believe there are inflation issues around the world due to rising food prices may not be nuts but are totally missing the impact of speculation, which is huge. Those who are bullish on the United States are walking a tightrope.
First, Japan. This country will see another severe earthquake this year. There is something seriously wrong when since the March 11 record 9.0 disaster, there have been 1/3rd the world’s normal level of 5.0 earthquakes for an entire year off or near the east coast of Japan in just two weeks. [U.S. Geological Survey data / Bloomberg Businessweek] Read that again. Obviously, another 7.5 or greater in a different part of the country has the potential to bring this nation to its knees, as if it isn’t already.
I have been writing of the power grid. In case you doubted my thoughts of last time, there were a slew of pieces this past week addressing this incredibly screwed up issue where the inept, corrupt Japanese government allowed a system where the grids use different frequencies, “so sharing is inefficient.” [New York Times]
This is critical because Japan is faced with rolling blackouts as a result of the damage caused by the March 11 quake and the power companies can’t cope with the demand…and it’s only going to get worse this summer when residents and businesses crank up the air conditioning. How the hell do you run a business in that manner? If you’re a chip plant that requires 24-hour predictable power, you can’t! Heck, even breweries need constant power.
As for the critical auto industry, the car companies in Japan are looking at the feasibility of coordinating their schedules so that, say, Toyota is on for two weeks straight at full power, with Honda off, then Honda gets two weeks while Toyota is off, etc., rather than being subjected to intermittent daily stoppages.
But in terms of the car suppliers and parts, one AP story said the latter are “dwindling fast,” and of course that is an increasingly global issue. The impact will be substantial across Asia, the U.S. and Europe. In March, Japan’s PMI (purchasing managers index) plummeted to 46.4 from 52.9 (50 being the dividing line between growth and contraction) because of the earthquake and tsunami disruptions and it won’t get better for a long spell because Japan is headed into another recession, only this one will not be short as most everyone is predicting.
And notice I haven’t even mentioned Fukushima and the nuclear issue. The problem is going to be with us for months in terms of the critical nature of it, and there are some who say it could be years before it is truly stabilized. One thing we do know, the cleanup will take a generation and there’s no telling how much land will be abandoned, left to the crabs that 20 years from now could resemble god knows what (like a cheap Japanese sci-fi film of yore, the plot lines of which are now all too familiar).
Here’s the thing about Fukushima. It’s the uncertainty. It’s easy for most of us to sit in the comfort of our homes in the United States or Europe and say there’s nothing to worry about. And it’s true that the level of radiation Tokyo is receiving these days is actually less than that which occurs naturally on a normal day in Hong Kong.
But no way can you just pooh-pooh the threat outside of the immediate evacuation zone because no one can tell you definitively where this disaster is headed.
Here’s what we do know. Vast stretches of farmland in the impacted area are off-limits for the rest of our lives and these farmers must be compensated by a basically bankrupt Tokyo Electric. Giant shipping lines are beginning to steer clear of Tokyo Bay, as reported by the New York Times last weekend. Maersk, for one, said it is monitoring radiation in Tokyo hourly to gauge the risk to its cargo and crews. And, as discussed further below, you have all kinds of knock-on effects as a result of Japan’s myriad issues, such as with tourism.
I wish I didn’t have to write the above, but I’m really tired of all the trite drivel that comes across the airwaves.
Ditto, Europe. I have been consistent since this euro-17 debt crisis broke almost a year ago. It won’t be over for a long, long time but the only way for anyone, who is intellectually honest, to give an all-clear is if you tell me the region is going to grow at a robust 3-4% for the next few years. But outside of Germany, and no more than 2 or 3 others, the Euro economy is in a funk and it’s all about the massive austerity programs that are now beginning to bite.
Look at Britain last weekend and the protests that saw 250,000 (or more) turn out against the Cameron government’s moves that will result in 400,000 public sector job losses over the next five years. Disgustingly, anarchists took over what had been a peaceful demonstration and turned it into a violent one. A few more displays like this and good-bye London tourism, just in time for the 2012 Olympics. I’ve been warning watch April 27, two days before the Royal Wedding. Certainly London authorities are worried sick about the prospects…and they should be, because the security effort in London has proven over the past few years to be beyond pathetic. There is zero intelligence, for example.
So I expect Europe to be roiling this spring, and anyone who thinks this will lead to improving consumer sentiment, even in Germany, needs a shot of truth serum.
Yes, I’m upset. Look at my beloved Ireland. I saw this coming, year after year with my visits, 18 or so since 1989. It’s been a slow-motion train wreck as the Irish people, and their banking enablers, just didn’t have a clue that there are risks to taking on massive amounts of debt and buying homes with no money down amid dreams of an investment that has to rise 10% a year.
This week the new Irish government completed another round of stress tests on the country’s financial institutions and Ireland’s total cost to clean up its banking catastrophe is up to $142 billion! The Irish economy itself is only $240 billion! [George Will, my hero, says you should never use exclamation points and every time I use one I think of him.]
Of course Ireland should be forcing the banks’ senior bondholders, heretofore protected by a 2008 guarantee when the crisis was beginning to explode, to take a significant haircut.
But the likes of Germany and France, who control the European Central Bank, refuse to allow that. I’ve discussed this ad nauseum before but it bears repeating. If you force the bondholders to accept, say, 70 cents on the dollar as part of any restructuring, then the big banks in Germany, France and elsewhere would have to write down their exposures and it’s then we’d see what’s behind the wizard’s curtain…i.e., banks with no actual capital! Obviously, this would then cascade into a crisis of historic proportions as in one 24-hour period, the entire European continent would be running to their financial institution in a frantic effort to withdraw savings. It would dwarf 2008 by comparison.
[According to Goldman Sachs, European banks hold $270 billion in Greek, Irish and Portuguese bonds, with German banks holding $62 billion and French banks $26 billion. And, as noted in the New York Times, whereas Ireland’s bank assets are 2.5 times the size of its economy, Britain’s are 3.5 times the size of theirs.]
So, no, Ireland can’t write down the bank debt the government is now virtually totally on the hook for, save one institution that insists it can make it on its own, Bank of Ireland, which, if it is able to raise more capital could avoid majority ownership by Dublin.
Meanwhile, Portugal, struggling to avoid the fate of Ireland and Greece and a bailout of its own, announced it would hold new elections in May or June, conveniently in between the April 15 and June 15 dates where the government has to refinance $12.5 billion in debt. Portugal also reported its debt level as a percentage of GDP is 8.6%, far higher than its target.
Spain, on the other hand, waiting impatiently behind Portugal on the prospective bailout list, is having a huge problem merging its troubled cajas, or savings banks, which I have said all along is a bigger issue than people believe (including hedge fund behemoth David Tepper, WIR 1/22). It’s about understanding the true real estate exposures on each other’s books…and it’s still largely unknowable.
In France, President Sarkozy’s ruling party was mauled in local elections, with the Socialists polling 36% to Sarkozy’s 18% and the far-right National Front’s 11%. A Socialist takeover seems a certainty in 2012 and what will that do to France’s own debt and entitlement issues? Just push them further down the road…or throw the country into the ditch.
And speaking of elections we come to Germany. True, the unemployment rate for March fell to 7.1% and the likes of Volkswagen and Bosch (the giant auto parts supplier) are hiring lots of workers to meet soaring demand. This is good, but Germany is taking advantage of Europe’s sick children who can’t compete, especially when they are being forced by the same Germany to retrench.
Germany has huge political problems that over time threatens its own economy. Chancellor Angela Merkel’s Christian Democrats suffered another devastating defeat in a state election last weekend. The CDs may have gotten 39% of the vote, but their partner the FDP only received 5%, while the Greens (24%) and their partner the Social Democrats (23%) won largely on the issue of nuclear power, Merkel having botched it big time in light of the Fukushima disaster.
No one in Germany wants to see anymore of their tax dollars go to bailout the likes of Ireland and Greece, so Merkel is in a box. The result is weakened leadership as she flails about, trying to appease a majority on each issue.
But let’s get the heck out of Europe, shall we, and take a steamer back across the pond to America, land of opportunity.
Here’s my take on the commodity inflation issue that everyone in Corporate America is now talking about, including the likes of Wal-Mart, whose CEO this week said U.S. consumers face “serious” inflation in the months ahead for food, clothing and everything in between.
I’ve said my piece on inflation. If you’re looking at the core rate, there is little because unless you’ve been on the International Space Station for the past few years, not really concerning yourself with your pay, you’ve undoubtedly noticed your paycheck isn’t increasing. If you were forced to change jobs, maybe after a 6-9 month layoff, chances are in today’s America you had to accept a new position at less money. Friday’s jobs report for March, while positive in that it showed the economy added 216,000 jobs and the official unemployment rate dipped to 8.8%, a two-year low, also revealed wages have totally flat-lined. [Plus as we all know, the unofficial rate is over 15%.] For much of our economy these days, labor still comprises the lion’s share of the cost of a product and it’s not rising.
But I grant you food and gasoline is important and they’re taking off. My point has been, and remains, this is a final spike and will not be everlasting because sooner than later it is going to slow the economy far more than currently expected and commodities prices will decline. I’m grading myself using the CRB index, which closed the week at 360. I say it finishes lower on the year, meaning below the 12/31 close of 332.80. Oil, I grant you, is a different story and dependent on the geopolitical situation, but here, too, you can see the impact of near $4.00 a gallon gasoline (above that in California). For starters, on Monday we had a reading on February personal consumption and it was up a better than expected 0.7%. There were folks on the airwaves saying this was great. Only they forgot a big part of the increase was because we are paying more at the gas pump!
One other note on food. The world, I repeat, is not running out of it. We had a horrible stretch of weather, both floods and droughts of Biblical proportions in 2010. This week, California removed its longstanding drought emergency amid near-record (soon to be record) snowpack in the Sierras. I’ve also been telling you that Australia’s critical wheat growing region’s drought issues are now largely a thing of the past. China’s drought has been lessened significantly in recent weeks. Russia I’m not sure of but we’ll know shortly.
Yes, the U.S. Dept. of Agriculture’s crop report on Thursday spoke of a dismal inventory picture when it comes to soybeans and corn, particularly the latter where this nation has its head up its butt in terms of ethanol.
But the economy is going to slow, especially in the second half, demand will drop, the harvest picture will improve, and the speculators will get slaughtered…leaving us back in equilibrium by early next year at the latest. That’s my take. I may prove to be very wrong, on this or any of the above for that matter, but I assume you read “Week in Review” for not just a summary of the main news events that any person taking up space on this planet should know, but also for some educated opinion. Lord knows I spend enough time trying to keep up with this changing world, I’m just dragging you along for the ride. “You will learn this!” [Oops, sorry, George Will. That’s the last exclamation point…at least for this segment.]
Libya and the Middle East
On day ten of a conflict many Americans don’t understand, President Obama laid out why we initiated, along with our coalition allies, military action against Libya. Thus far, the polls are basically split between those favoring action and those opposed. I stated from the day Moammar Gaddafi fired on his own people that he should be removed, and you saw how Britain and France were raring to do something but the United States wasn’t. Today, I agree with the following.
Joseph I. Lieberman and John McCain / Wall Street Journal
“President Obama made a compelling case for our intervention in Libya on Monday evening, and U.S. actions there deserve bipartisan support in Congress. As the president rightly noted, failure to intervene militarily would have resulted in a humanitarian and strategic disaster. Because of our actions, the Gaddafi regime has been prevented from brutally crushing its opposition.
“The president was also correct in framing what is happening in Libya within the broader context of the democratic awakening that is sweeping across the broader Middle East – the most consequential geopolitical realignment since the fall of the Berlin Wall.
“If Gaddafi is allowed to hang onto power through the use of indiscriminate violence, it will send a message to dictators throughout the region and beyond that the way to respond, when people rise up peacefully and demand their rights, is through repression and slaughter – and that the rest of the world, including the U.S., won’t stand in the way.
“What is needed now is not a backward-looking debate about what the administration could or should have done differently, but a forward-looking strategy that identifies America’s national interests in Libya and works to achieve them.”
McCain and Lieberman believe the United States should follow the lead of France and Qatar in recognizing the Transitional National Council as the legitimate government of Libya.
“If there is any hope for a decent government to emerge from the ashes of the Gaddafi dictatorship, this is it. Throwing our weight behind the transitional government is our best chance to prevent Libya’s unraveling into postwar anarchy – precisely the circumstance under which Islamist extremists are most likely to gain a foothold.
“We cannot guarantee the success of the Libyan revolution, but we have prevented what was, barely a week ago, its imminent destruction. That is why the president was right to intervene. He now deserves our support as we and our coalition partners do all that is necessary to help the Libyan people secure a future of freedom.”
McCain and Lieberman are optimistic that should Gaddafi go, the Muslim Brotherhood, which has a presence in Libya, won’t emerge to fill the power vacuum.
But for now, President Obama has taken ownership of Libya and authorized the CIA to learn as much as possible about the rebels and whether it was feasible to arm them. The CIA is also capable of trying to encourage a coup, though this would require Gaddafi’s sons to turn on their father and I can’t imagine that scenario. [Someone else plugging him I can, and as I go to post, there are stories the regime wants to hold talks.]
Obama said in his speech, “We have intervened to stop a massacre.” And that:
“Mindful of the risks and costs of military action, we are naturally reluctant to use force to solve the world’s many challenges. But when our interests and values are at stake, we have a responsibility to act….
“Some nations may be able to turn a blind eye to atrocities in other countries. The United States of America is different. And, as president, I refused to wait for the images of slaughter and mass graves before taking action.”
I don’t have any problem with the above, but by waiting instead of coming up with a resolution far sooner, we are now risking a real split among some key players, including the Italians and Germans who simply want us to seek a ceasefire and then send Gaddafi into exile, which I find it hard to believe Gaddafi will accept, nor does he in no way deserve.
There is one thing I do find particularly intriguing, however, and a huge potential positive for the United States and the White House. The president noted the $33 billion in Libyan assets being held in the U.S. that we have frozen. At first we thought we’d find about $100 million.
President Obama said this is reserved for the Libyan people when Gaddafi leaves. These funds could gain America a ton of goodwill if put to the right purposes, such as in infrastructure projects, including for the energy sector. But it would also require an ongoing U.S. presence on the ground of some kind more than a mere embassy staff. In all sincerity, I find the prospects exciting because of these funds. And you know who would be good at overseeing such efforts? Rudy Giuliani.
Prospects here are not nearly as good as Libya’s. President Assad at first talked reform, then in a speech to parliament this week blamed “conspiracies” for the anti-regime unrest. There would be no reform and he did not lift the decades-long state of emergency. “Syria is a target of a big plot from outside.”
Many of the members of Congress of both parties who have gone to Syria in recent months have said they believe he’s a reformer.
“Few things said by this administration in its two years can match this one for moral bankruptcy and strategic incomprehensibility.
“First, it’s demonstrably false. It was hoped that President Assad would be a reformer when he inherited his father’s dictatorship a decade ago. Being a London-educated eye doctor, he received the full Yuri Andropov treatment – the assumption that having been exposed to Western ways, he’d been Westernized. Wrong. Assad has run the same iron-fisted Alawite police state as did his father.
“Bashar made promises of reform during the short-lived Arab Spring of 2005. The promises were broken. During the current brutally suppressed protests, his spokeswoman made renewed promises of reform. Then Wednesday, appearing before parliament, Assad was shockingly defiant. He offered no concessions. None….
“Yet here was the secretary of state covering for the Syrian dictator against his own opposition. And it doesn’t help that Clinton tried to walk it back two days later by saying she was simply quoting others. Rubbish. Of the myriad opinions of Assad, she chose to cite precisely one: reformer. That’s an endorsement, no matter how much she later pretends otherwise….
“This delicacy toward Assad is dismayingly reminiscent of President Obama’s response to the 2009 Iranian uprising during which he was scandalously reluctant to support the demonstrators, while repeatedly reaffirming the legitimacy of the brutal theocracy suppressing them.
“Why? Because Obama wanted to remain ‘engaged’ with the mullahs – so that he could talk them out of their nuclear weapons. We know how that went.
“The same conceit animates his Syrian policy – keep good relations with the regime so that Obama can sweet-talk it out of its alliance with Iran and sponsorship of Hizbullah….
Assad cannot deliver on any true democratic reforms because that would mean the downfall of his minority Alawite sect that makes up about 6% of the population.
“Clinton and others share Assad’s anxieties, and worry that an uprising in Syria might play out in favor of Sunni Islamists. And yet for as long as the United States and other democratic countries surrender the rhetoric of freedom…they will only strengthen the credibility of the Islamists at the expense of Syrians who advocate a non-sectarian, consensual, broadly national approach to reform.
“In several of the recent Arab revolts, once a threshold of popular dissatisfaction was reached, regimes were incapable of holding back the tide. What began as the expression of specific beefs soon morphed into irrepressible demands for freedom and a change of leadership. A grand narrative took over and the public’s ambition followed. Can Bashar Assad successfully counteract the grand narrative of liberty that many Syrians have started to embrace? His address makes this far less likely.”
On the terrorism front, Yemeni-American Anwar al-Awlaki claimed this week, “The mujahedeen around the world are going through a moment of elation, and I wonder whether the West is aware of the upsurge of mujahedeen activity in Egypt, Tunisia, Libya, Yemen, Arabia, Algeria and Morocco?”
For his part, President Saleh of Yemen continued to hang on to power, vowing to make “no more concessions” while calling his country a “time bomb.”
Which is exactly what we saw when locals went into an abandoned munitions factory amid the unrest, someone lit a cigarette and BOOM! The resultant fire and explosions killed at least 110. The exact toll will never be known because the bodies were burned to a crisp, with militants (read al-Qaeda and its sympathizers) not allowing fire engines and doctors in until it was too late.
Lastly, in Egypt, the Supreme military council running things here announced parliamentary elections would be held in September, not June, and that the presidential vote would probably come in November. This is a bit of good news from the standpoint it will give the yearling democratic parties a chance to organize more effectively to compete with the Muslim Brotherhood. It’s still not nearly enough time but at least it isn’t June; a timetable that guaranteed the Brotherhood would win a majority of the vote (or at least the leading percentage).
--Stocks ended up the first quarter with their best gains since 1998/99, as the Dow Jones advanced 6.4%, the S&P 500, 5.4%, and Nasdaq 4.8%. For the week all three tacked on 1.3% to 1.7%.
--U.S. Treasury Yields
6-mo. 0.14% 2-yr. 0.80% 10-yr. 3.44% 30-yr. 4.49%
The longer end of the Treasury curve was unchanged. This coming week is going to be all about Washington and the possible government shutdown. House Republican Speaker John Boehner vows to compromise, as he keeps telling the rambunctious Republican freshmen: ‘In case you haven’t noticed, the President and the Senate are still controlled by Democrats and we’re only one-third of this pie.’ So it’s probable a shutdown will be averted.
But then you have the far testier issues of both a long-term budget and the need to do something with the debt ceiling, like raise it. So sit back, or weigh in with your elected officials and watch the fireworks. It’s going to get real ugly.
--China’s PMI for March was a better than expected 53.4, a slight increase over February’s pace and a sign the economy here is still on solid footing. I know my own China holding in Fujian reported stellar earnings and this largely specialty chemical operation gave no hint of slowing down over the course of 2011. [However, the share price remains stuck in the water, leaving us holders incredulous that it trades at a multiple on 2011 guidance of less than 3. I suspect, though, that this is all about to change in just the next few weeks. A whale was spotted/heard on the conference call.]
--On the U.S. real estate front, the Case-Shiller index for January showed continued declines in housing values (reminder, while this indicator lags a bit, it is a rolling three-month barometer). We still have massive inventory in this country, though at the same time there are signs some key markets, such as in affluent Naples, Florida, have definitely bottomed and are showing signs of life. In other words, I’m not so sure we’ll technically see a ‘double-dip’ but at the same time, there is no sustained recovery, nationwide, on the horizon either.
--Sales of new vehicles in Japan plunged 37% in March compared with a year ago, with Toyota’s down 46%, Nissan’s 38% and Honda’s 28%.
[In the U.S., Ford sold 212,295 light-vehicles to GM’s 206,621, the first time Ford outsold GM in more than a year. Overall, Ford’s sales were up 16% vs. year ago levels, while GM’s increased 9.6%. Chrysler’s rose 31%, far better than expected, while Nissan’s rose 27%, Hyundai’s 32% and Honda’s 23%. But Toyota’s declined 5.7%.]
--Last year, tourism to Japan was up 27% from 2009 levels. But since the March 11 earthquake, Japan Airlines says international passenger traffic is off 25%. Airlines from all over are reducing flights to Japan. Delta, American and United Continental are reducing flights by 10% to 20%.
--Tourism to Egypt is plummeting as you might expect. The government is estimating that the unrest there in just the span of two weeks cost the country $1.7 billion with half that coming from the tourist trade. There is no way you’d get me there today after all the stories I’ve read. The main issue is there are no longer any police on the streets. They’ve just disappeared.
--The story in Ireland just gets worse and worse. On top of all the above, employees at telecom Eircom voted in favor of pay cuts of up to $280 a month even as another 1,000 jobs will be shed over the coming years. Eircom has debts of some $5 billion.
Separately, home prices fell another 10.8% in Ireland in 2010, the largest decline among nearly 50 countries studied by Knight Frank.
[But there was a smidge of good news…LinkedIn is creating 100 jobs in Dublin.]
--Russia’s economy grew 4.5% in the fourth quarter, a little less than expected.
--The issue of Warren Buffett’s heir apparent, David Sokol, and his stock trades in Lubrizol before Sokol brought a proposal to Buffett’s attention that perhaps Lubrizol would be a good fit, could not be more cut and dry. It was incredibly unethical. Period. Warren Buffett himself must be absolutely furious that Sokol has sullied Buffett’s reputation, but at the same time it’s amazing to all observers that Berkshire Hathaway doesn’t have a strict policy on what company executives can invest in with their own money. Every Wall Street firm has that in place. Heck, when I was at PIMCO all I could do was invest in our own mutual funds, without getting special permission to do otherwise and getting same wasn’t worth the hassle.
Anyway, what Sokol did was the clearest case of front-running that you can find, Lubrizol then being acquired by Berkshire at a price about $30 higher.
“Today in America there are nearly twice as many people working for the government (22.5 million) than in all of manufacturing (11.5 million). This is an almost exact reversal of the situation in 1960, when there were 15 million workers in manufacturing and 8.7 million collecting a paycheck from the government.
“It gets worse. More Americans work for the government than work in construction, farming, fishing, forestry, manufacturing, mining and utilities combined. We have moved decisively from a nation of makers to a nation of takers. Nearly half of the $2.2 trillion cost of state and local governments is the $1 trillion-a-year tab for pay and benefits of state and local employees. Is it any wonder that so many states and cities cannot pay their bills?”
--Turkey’s economy is no turkey, kids, as fourth quarter GDP rose 9.2%, up from a revised 5.2% rate in Q3. The central bank is seeking to slow growth to 4.5% by restricting bank lending. Prime Minister Erdogan is running for a third term on June 12 and the news on this front certainly doesn’t hurt.
--According to the International Energy Agency, if crude prices remain around $100 a barrel, OPEC would reap $1 trillion in revenues for the first time. President Obama gave a speech on energy this week and once again he spoke in broad generalities.
“Gas is well over $4 a gallon in most places in California – and soaring elsewhere as well. But are high energy prices good or bad?
“That should be a stupid question. Yet the Obama administration has stopped domestic offshore-oil exploration in many U.S. waters, curbed oil leases in the West and keeps oil-rich areas of Alaska exempt from drilling.
“Last week, President Obama went to Brazil and declared of that country’s offshore finds: ‘With the new oil finds off Brazil, President [Dilma] Rousseff has said that Brazil wants to be a major supplier of new stable sources of energy, and I’ve told her that the United States wants to be a major customer, which would be a win-win for both our countries.’
“Consider the logic of Obama’s Orwellian declaration: America in the last two years has restricted oil exploration of the sort Brazil is now rushing to embrace. We’ve run up more than $4 trillion in consecutive budget deficits during the Obama administration and are near federal insolvency. Therefore, America should be happy to borrow more money to purchase the sort of ‘new stable sources of energy’ from Brazil’s offshore wells that we most certainly won’t develop off our own coasts.”
--According to the Pew Environmental Group, China invested $54.4 billion in clean energy technology in 2010, while U.S. investment came to $34 billion, third behind Germany’s $41.2 billion.
--Shares in Apple stumbled on fears production of iPhones and iPads could be materially affected by production issues in Japan.
--Nothing bores me more than merger talk between the exchanges and at the end of the day when I’m writing my history of these times (probably on my death bed…. ‘Oh s---! I forgot to write the book!’), the potential merger of Nasdaq/Intercontinental Exchange and the New York Stock Exchange will get nary a mention.
Now to be fair, the joint bid is trying to best the original offer by Deutsche Boerse, owner of the Frankfurt stock exchange, but that’s it for now.
--I have warned to be careful in investing in defense stocks as some Middle East countries are forced to pay more to keep the people happy and such funds could come out of defense budgets. This week in Defense News, I read of another example…Israel…which two years running had export sales of $7 billion+ on the defense side but “government officials say tougher times lie ahead,” including among other issues drastically reduced defense budgets in western Europe. [Growing diplomatic isolation is also hurting Israel.]
--The World Trade Organization has ruled that Boeing received at least $5.3 billion in illegal U.S. subsidies which gave it an unfair advantage over Airbus. The aid was in the form of federal research grants and state support. Airbus parent EADS (European Aeronautic, Defence & Space Co.) had gone to the WTO, claiming the subsidies cost it $45 billion in lost sales from 2002 to 2006. Of course EADS receives tons of illegal subsidies of its own.
--EBay acquired e-commerce service company GSI Commerce Inc. for $2.4 billion in a bid to go after Amazon’s business. I have to admit I never heard of GSI, which doesn’t make me a bad person, but they are in the business of assisting more than 180 top brands and retailers with their websites, including Mattel and Major League Baseball. So eBay gets a shipping and fulfillment business that competes with Amazon’s own fulfillment offering for merchants. GSI has the warehouses for its clients, you put in an order through Mattel, and it’s GSI that fills the order.
--A chemist at the Food and Drug Administration was charged with insider trading, allegedly making more than $3.6 million trading drug stocks ahead of the release of drug-approvals. Cheng Yi Liang, 57, traded in advance of at least 27 different FDA announcements, as reported by the Wall Street Journal. Liang’s son was also charged. The pair traded both ways…before positive and negative announcements.
--This is classic and an example of why some of us have real problems with Wall Street.
“Crippled by debt piled upon it by its Wall Street owners, storied Oregon fruit company Harry & David has filed for bankruptcy protection….
“(Some) analysts said the mountain of debt put onto the century-old company as part of its 2004 buyout by New York private equity firm Wasserstein & Co. proved the difference, giving Harry & David no room to maneuver during tough times.”
In ’04, Wasserstein purchased the company for $253.9 million and financed the deal by issuing $250 million in bonds, which it used to pay itself back all of the cash it had put in to buy the company. As Charles Jaeger, a professor at Southern Oregon University business school put it:
“All of the Wasserstein original investors got their money out of it and left Medford [where Harry & David is based] with a shell of a company with gigantic debt. They handled it in their typical greedy Wall Street way.”
“The interest payments on the debt have been staggering. In the first half of its current fiscal year, Harry & David posted $6.2 million in operating profits, but its debt service totaled $10.9 million.”
Medford, Oregon is a city of 77,000 and Harry & David had been a major contributor to local charities and was the biggest private employer. Wasserstein came in and torched the place, firing the local management team and reducing the workforce by a third. And to top it off, the two main men brought in by Wasserstein didn’t even relocate to Medford, remaining in Atlanta and Beverly Hills instead. CEO Steve Heyer, who “had previously been pushed out as CEO of Starwood Hotels after facing allegations that he had sent inappropriate sexual emails,” was given a $9.4 million pay package, nearly seven times what the previous CEO had earned.
--In catching up on the latest from Atlantic City, I see that Pennsylvania is now poised to surpass A.C. as the nation’s second-largest gambling market sometime in 2012. In 2010, Pennsylvania’s 10 casinos took in about $2.5 billion in revenue, while Atlantic City’s 11 facilities took in $3.6 billion, but the two are headed in opposite directions.
--Dr. Bortrum and I have our own bone to pick…this one with the likes of Campbell’s that advertise low sodium soups that are all of “25% less,” and hardly low. Four New Jersey women are now suing Campbell’s for this kind of misleading labeling. For example, the suit claims that Campbell’s 25% Less Sodium Tomato Soup has the same level – 480 milligrams – as its regular tomato soup.
So Campbell’s tried to have the case thrown out, but U.S. District Judge Jerome Simandle in Camden wrote in a decision last week that “it was reasonable for plaintiffs to expect that the soups they were receiving had 25%-30% less sodium than the regular tomato soup, when the soups in fact had approximately the same amount of sodium.” [P.J. Huffstutter / Los Angeles Times]
--Harry Coover, the inventor of Super Glue, died. He was 94 and by his life’s end held some 460 patents, spending most of his time at Eastman Kodak Company. But while he did well in his career, he did not get rich on Super Glue because it didn’t become a commercial success until the patents had expired. As with all such inventions, it came about by mistake when Coover was experimenting with acrylates for use in clear-plastic gun-sights during World War II. The compound Coover and a partner were testing worked in a way not intended when two lenses couldn’t be separated.
--Lucent lawn update: So now that I don’t live a few blocks from the Murray Hill, N.J. headquarters of Alcatel-Lucent, I haven’t been tracking the lawn like I used to. But last Saturday was electronics recycling day, sponsored by Lucent and always an exciting time at StocksandNews as I go through desktops and laptops at a pretty rapid clip. And guess what I saw going on? They are building a massive solar-energy project on half the lawn. It looks like crap but I’m going to do more scouting around to see who all is involved on the company front.
Speaking of crap, I have no idea what the infamous Lucent Geese will be doing now with this particular parcel gone from their inventory. I loved a headline in the New York Post the other day, regarding a protest by geese lovers over renewal of a New York City contract with the U.S. Dept. of Agriculture that gassed about 2,000 last year to improve air safety around the area’s three major airports.
--Jimbo is wondering how Amtrak can’t make money when they charge $6 for a beer on the Acela from New York to Boston. Good point.
--As if New York Mets ownership doesn’t have enough problems with the Madoff mess, the Journal reports its real estate holdings are tanking, with Sterling Equities controlling more than 6.8 million square feet of commercial space and more than 15,000 residential units through its funds and private holdings.
Speaking of baseball…I’m picking the White Sox to go all the way, mostly because they now have one of my two favorite players, Adam Dunn (Ichiro is the other).
As for my real team, the Mets, they lost on Opening Day and seem destined to finish 16-145 (with one rainout not made up due to lack of interest).
--Tiger Woods put his 155-foot mega yacht “Privacy” up for sale for $25 million. Not interested.
--Movie ticket receipts in the U.S. and Canada have plunged 20% so far in 2010 and as the Los Angeles Times reports, all are in agreement as to what the problem is: lousy flicks. Last year at this time you had “Avatar” and “Alice in Wonderland.” Personally, I’m still behind on my movie viewing and have yet to unseal my copy of Ernie Borgnine’s “Ice Station Zebra.” But I vow to watch it in the second quarter!
Foreign Affairs, part II
Israel: U.N. Secretary General Ban Ki-moon called on Israel to halt further construction of settlements in the West Bank:
“The occupation that started in 1967 is morally and politically unsustainable, and must end. The Palestinians have a legitimate right to the establishment of an independent and viable state of their own.”
Ban made his comments at a conference in Uruguay, at a time when Israeli military officials were supplying a map to the Washington Post that supposedly identifies more than 550 Hizbullah underground bunkers and 450 other varied sites, including for surveillance. By showing the map, Israel wants to preempt criticism should war break out again by showing how Hizbullah is turning villages “into fighting zones,” as one senior Israeli commander told the Post.
Afghanistan: In a series of attacks by the Taliban, a suicide bomber killed 20 and wounded 50 others in the province of Paktika, while insurgents kidnapped 40 men in an ambush in Kunar. We then learned on Friday that six U.S. soldiers had been killed in a single operation over two days in eastern Afghanistan, a remote part of Kunar close to the Pakistani border. And also on Friday, at least seven U.N. workers were among 14 killed as protesters stormed a U.N. compound, the result of a protest over the burning of the Koran in the U.S. a few weeks ago. Five more died in a similar protest on Saturday.
Iraq: In a particularly horrible attack, at least 56 were killed when al-Qaeda-linked gunmen took hostages at a provincial headquarters in Saddam’s hometown of Tikrit, which led to a battle with security forces who stormed the place, hoping to end the siege. The gunmen were wearing security force uniforms.
China: A poll conducted by BBC World Service across 27 countries found that 50% expressed a positive view of China’s economic power, 33% a negative one, the latter an increase from the last such survey in 2005. A majority in the U.S., France, Canada, Germany and Italy now view China’s economic power negatively.
On the security front, China’s National Defense white paper was issued and it gives a downbeat assessment of the state of the region.
“Profound changes are taking shape in the Asia-Pacific strategic landscape. Relevant major powers are increasing their strategic investment….
The white paper adds: “The United States continues to sell weapons to Taiwan, severely impeding Sino-U.S. relations,” though the same document also says: “The two sides of the Taiwan Strait can establish contacts and exchanges on military issues at an appropriate time, and explore establishing a military security mechanism of mutual trust.” No doubt this last passage reflects warming ties between Taiwan and the mainland.
Overall, China maintains it has a strategy of “attacking only after being attacked.” [BBC]
“In the background of the ongoing Middle Eastern drama looms the shadow of a rising China. China is not a ‘responsible stakeholder’ in the international system, as we proclaim it should be; it is a free rider. We are at war in Afghanistan to make it a safe place for China to extract minerals and metals. We have liberated Iraq so that Chinese firms can extract its oil. Now we are at war with Libya, which further diverts us from concentrating on the western Pacific – the center of the world’s economic and naval activity – which the Chinese military seeks eventually to dominate.
“Every time we intervene somewhere, it quickens the pace at which China, whose leaders relish obscurity in international affairs, closes the gap with us. China will have economic and political problems of its own ahead, no doubt, and these will interrupt its rise. But China is spending much less to acquire an overseas maritime empire than we are spending, with all our interventions, merely to maintain ours.
“The arch-realist approach would be to forswear a moral narrative altogether and to concentrate instead on our narrow interests in the Middle East. The problem is that if we don’t provide a narrative, others will, notably al Qaeda, whose fortunes will rise as the region’s dictators, with their useful security services, struggle to survive. But we should craft our narrative with care. It should focus on the need for political and social reform, not on regime change.
“Order is preferable to disorder. Just consider what happened to Iraq after we toppled Saddam Hussein. The U.S. should not want Iraq’s immediate past to be a foretaste of the region’s future.”
Russia: I have long felt there is a third force in Russia aside from those favoring Vladimir Putin and those supporting Dmitry Medvedev, and that individual is Deputy Prime Minister Igor Sechin, a billionaire who is chairman of Rosneft, the largest Russian oil company.
But now Medvedev is looking to dismiss Sechin and other government officials from their posts at state enterprises, and in ousting Sechin, Medvedev is picking a fight with Putin as Sechin is a close friend.
Italy: Prime Minister Silvio Berlusconi has four separate cases against him working their way through the courts, including for tax fraud involving his media conglomerate, while on the sex front and his underage-prostitution trial, we learned George Clooney may be called to testify as a witness due to the fact he was a guest at one of the dinners in question.
But in a far more important situation, Berlusconi traveled to the island of Lampedusa, where thousands of migrants from Libya and Tunisia have been landing, now up to 20,000 since the upheavals began in the region. Camps are being established on the mainland to process them as the poor people of Lampedusa, a village of 7,000, are being overwhelmed. Sanitary conditions on the island, for example, are being described as “desperate.”
Ivory Coast: The International Red Cross reported that at least 800 were killed in inter-communal violence in the ongoing dispute following last November’s election.
Nigeria: Violence is feared here over the next three weeks as the country undergoes a series of elections, including for president.
--A new Quinnipiac poll of registered voters nationwide reveals that just 41% think President Obama deserves to be reelected in 2012. His overall approval rating has dropped to a record low of 42% in this particular survey. Democrats approve of the job Obama is doing by an 80-13 margin, but Republicans are 81-9 the other way.
--Geraldine Ferraro, the first woman vice-presidential candidate on a major party ticket, died. She was 75. It was in 1984 that Democratic presidential candidate Walter Mondale chose the 3-term congresswoman from Queens.
“My name is Geraldine Ferraro. I stand before you to proclaim tonight: America is the land where dreams can come true for all of us.”
“(There) is a thin line between ticket-balancing and pandering, and the Ferraro nomination clearly crossed it – as the candidate herself ultimately confessed.
“ ‘I am the first to admit that were I not a woman, I would not have been the vice-presidential nominee,’ she wrote in her memoir…
“Moreover, Mondale ended up choosing Ferraro only after a high-pressure campaign from feminist leaders, who threatened a convention-floor fight if a woman was not named to the ticket….
“Still, there’s no denying that her nomination permanently shattered the political glass ceiling – to America’s lasting benefit.”
Ferraro, however, later told interviewers, such as presidential historian Arthur M. Schlesinger Jr., that she would not have accepted the nomination had she known how it would focus criticism on her family.
“You don’t deliberately submit people you love to something like that,” she said. “I don’t think I’d run again for vice-president,” then paused, laughed and said, “Next time I’d run for president.”
“With Ms. Ferraro on the ticket, Democrats hoped to exploit a so-called gender gap between the parties. A Newsweek poll taken after she was nominated showed men favoring Reagan-Bush 58% to 36% but women supporting Mondale-Ferraro 49% to 41%....
“(But) to the Democrats’ chagrin, Reagan captured even the women’s vote, drawing some 55%; women, it appeared, had opposed, almost as much as men, the tax increase that Mr. Mondale had said in his acceptance speech would be inevitable, an attempt at straight talking that cost him dearly at the polls.
“Most election analysts believed that from the start the Democratic ticket had little chance against a popular incumbent who was basking in an economic recovery and proclaiming that it was ‘morning again in America.’”
Separately, “Ms. Ferraro’s words raised hackles as well. She was criticized for suggesting that Reagan was not a ‘good Christian’ because, she said, his policies hurt the disadvantaged.
“Her inability to escape questions about her finances was partly brought on by her husband’s initial refusal to release his tax returns. She riled Italian-Americans when she explained, ‘If you’re married to an Italian man, you know what it’s like.’
“When her financial situation was finally disclosed, it turned out that the candidate with the rags-to-riches story had a net worth exceeding that of Mr. Bush, a boat, a full-time uniformed maid and vacation homes on Fire Island in New York and in the Virgin Islands.
“Mr. Bush’s wife, Barbara, complained that Ms. Ferraro was masquerading as a working-class wife and mother, calling her a ‘four-million-dollar – I can’t say it, but it rhymes with rich.’….
“Evidence also emerged that organized-crime figures had contributed to her campaigns. When a House ethics panel investigated her financial disclosures, it came out that one of Mr. Zaccaro’s companies had rented two floors of a building to a pornography distributor.”
Well, that didn’t exactly help the campaign. “Mr. Mondale later said he thought they cost the campaign 15 percentage points in the polls.”
--The first straw poll in Iowa is just five months away, but Iowa voters seem bent on making social issues number one, not jobs, healthcare, or the budget deficit. So that means the likes of my current favorite, Mitch Daniels, don’t stand a chance as he’s advocated a truce on social issues.
--New York City Democratic Congressman Anthony Weiner would like to be mayor, but the New York Post reported on a story that to me disqualifies the guy right off the bat. He owes over $2,000 in parking violations in Washington, D.C. And according to a report from the Capitol Hill paper Roll Call, Weiner just paid up a few days ago. In fact Weiner was Washington’s number one scofflaw.
--The first thing you want to do when you go to the hospital is get the heck out. But sometimes even then it’s too late. Like the story out of Montgomery, Ala., where nine patients died after being treated with contaminated intravenous feeding bags. All the patients were, however, critically ill before receiving the IVs and officials haven’t definitively tied the deaths to the bags and an outbreak of Serratia marcescens bacteria. A Birmingham-based pharmacy, Meds IV, made them. Remind me not to get critically ill down there.
--Good news…the Transportation Department estimated that 33,788 were killed on U.S. roads in 2010, the fewest number since 1949, which is when the government started tracking such data. Needless to say, since Ralph Nader first went after the Corvair in the 1960s, auto safety has improved at least 100-fold in many respects, especially with the advent of airbags and far higher use of seat belts.
--The BBC reported on a Tanzanian ‘miracle’ pastor, “Babu” Mwasapile, who supposedly has a miracle cure for what ails you, a concoction made from herbs and water, which he sells for five cents.
The problem is the queues to see him have stretched up to 16 miles and over 50 have died in line, waiting along the road without shelter, clean water or toilets.
“Some people have even been taken out of hospital by their relatives who believe they are more likely to be cured by Mr. Mwasapile.
“Some of these have died before seeing him, while others are reported to have died after taking his concoction.”
--Three cheers for Billy Joel. Joel had signed on with HarperCollins to write his memoirs and it was slated for release in June, but he suddenly canceled plans for it.
“It took working on writing a book to make me realize that I’m not all that interested in talking about my past, and that the best expression of my life and its ups and downs has been and remains my music.”
--Andrew Ferguson, who writes for The Weekly Standard, has written a “laugh-until-your-ribs-squeak book” on the college application process, “Crazy U: One Dad’s Crash Course in Getting His Kid into College,” as noted by George Will in his Washington Post column.
“Ferguson becomes one of the Kitchen People – parents who at parties cluster in kitchens where ‘in the reflected shimmer from the brushed-steel doors of the Sub-Zero, the subtle dance would begin.’ Squirming against the Viking oven, a mother is bursting – or wanting to burst – with pride over her child’s SAT scores.”
“Her eyes plead, Ask me what they were, just please please ask…
“ ‘Of course, she tests well in general. But scores like these…’ Her pride bladder was terribly distended now, swelling in all directions, this painful unsatisfied need driving her nearly to the slate flooring.
“ ‘I mean when the e-mail with the scores arrives, I just had to peek! And then when I did, I’m thinking, My God – this is my kid?’
“At last she’d catch a sympathetic eye, and another parent would say, ‘They must have been really – ‘
“It is, (Ferguson) says, nice to know there is $143 billion for student aid – but worrisome that $143 billion is needed. His history of the SAT confirms the assessment that it is ‘impossible to find a measure of academic achievement that is unrelated to family income.’ It has been well-observed that America’s least diverse classes are SAT prep classes.
“Still, the college admission process occasions too much angst. America is thickly planted with 1,400 four-year institutions. Motivated, selective students can get a good education at any of them – unmotivated, undiscerning students at none. Most students love the schools they attend.
“Last year, Wake Forest, a wonderful university with a stimulating application form, asked applicants what they would title their autobiographies. One, obviously a golfer, answered: ‘Mulligan.’ Wouldn’t we all?”
[I would like to thank Mr. Will for calling my alma mater a “wonderful university.” It is. But as some of my former classmates and I always say, we’d never get in there today. And for crying out loud, I can’t go through another basketball season like we had this past year. The worst in ACC history!]
--Finally, on a serious note, I had never really read the story of Mohammed Bouazizi, the Tunisian vendor who set himself on fire and in turn sparked the Arab revolution. Marc Fisher wrote of Bouazizi in the Washington Post. An excerpt:
“For years, Bouazizi had told his mother stories of corruption at the fruit market, where vendors gathered under a cluster of ficus trees on the main street of this scruffy town, not far from Tunisia’s Mediterranean beaches. Arrogant police officers treated the market as their personal picnic grounds, taking bagfuls of fruit without so much as a nod toward payment. The cops took visible pleasure in subjecting the vendors to one indignity after another – fining them, confiscating their scales, even ordering them to carry their stolen fruit to the cops’ cars.
“Before dawn on Friday, Dec. 17, as Bouazizi pulled his cart along the narrow, rutted stone road toward the market, two police officers blocked his path and tried to take his fruit. Bouazizi’s uncle rushed to help his 26-year-old nephew, persuading the officers to let the rugged-looking young man complete his one-mile trek.
“The uncle visited the chief of police and asked him for help. The chief called in a policewoman who had stopped Bouazizi, Fedya Hamdi, and told her to let the boy work.
“Hamdi, outraged by the appeal to her boss, returned to the market. She took a basket of Bouazizi’s apples and put it in her car. Then she started loading a second basket. This time, according to Alladin Badri, who worked the next cart over, Bouazizi tried to block the officer.
“ ‘She pushed Mohammed and hit him with her baton,’ Badri said.
“Hamdi reached for Bouazizi’s scale, and again he tried to stop her.
“Hamdi and two other officers pushed Bouazizi to the ground and grabbed the scale. Then she slapped Bouazizi in the face in front of about 50 witnesses.
“ ‘Why are you doing this to me?’ he cried, according to vendors and customers who were there. ‘I’m a simple person, and I just want to work.’….
“After the slap, Bouazizi went to city hall and demanded to see an official. No, a clerk replied. Go home. Forget about it.
“Bouaziz returned to the market and told his fellow vendors he would let the world know how unfairly they were being treated, how corrupt the system was.
“ ‘We thought he was just talking,’ said Hassan Tili, another vendor.
“A short while later, the vendors heard shouts from a couple of blocks away. Without another word to anyone, Bouazizi had positioned himself in front of the municipal building, poured paint thinner over his body and lit himself aflame.”
It took over an hour for an ambulance to arrive. The dictator Ben Ali visited Bouazizi in the hospital, along with a camera crew. Ben Ali made a show of pretending to give Mohammed’s mother a check, but then after the film was shot they took the check back. Mohammed Bouazizi died shortly thereafter. The protests started in earnest and soon Ben Ali was sent into exile. The revolution was under way.
Pray for the men and women of our armed forces, and all the fallen.
Gold closed at $1428 [hit new high of $1447]
Oil, $107.94…2-year high
Returns for the week 3/28-4/1
Dow Jones +1.3% 
S&P 500 +1.4% 
S&P MidCap +2.7%
Russell 2000 +2.8%
Nasdaq +1.7% 
Returns for the period 1/1/11-4/1/11
Dow Jones +6.9%
S&P 500 +5.9%
S&P MidCap +9.8%
Russell 2000 +8.0%
Bears 23.1 [Source: Chartcraft / Investors Intelligence]
*Dr. Bortrum has a new column. Another step back in time.