Week in Review 
For the week 12/10/2007 - 12/14/2007
Brian Trumbore
President/Editor, StocksandNews.com

Wall Street?and Why Our System Is a Joke, part trois

I came across this editorial in the South China Morning Post [A Hong Kong-based, not mainland, paper]. It reads in part:

"[On President Bush's and Treasury Secretary Paulson's rescue package for mortgage holders], it is ironic that the plan has been introduced by Mr. Bush, who came to office espousing the principles of free markets, free trade and small government. But his administration has repeatedly caved in to political and economic pressure to help industries such as airlines and steel. And Mr. Bush is not the first U.S. president to have done so. During Bill Clinton's administration, the U.S. Federal Reserve supported a multibillion-dollar bailout of the hedge fund Long- Term Capital Management to prevent a 'fire sale' of assets and disruption to financial markets.

"Such intervention contrasts with advice given to Asian countries during the Asian financial crisis from the International Monetary Fund and the U.S. Treasury: raise interest rates, bear the cost of massive defaults and improve transparency and regulation. For some of the countries obliged to adopt such advice, notably Indonesia, the social and political consequences were highly damaging. But as Joseph Stiglitz, former World Bank economist and Nobel laureate in economics, recently pointed out, a lack of transparency is central to the subprime crisis?.

"Supporters of Mr. Bush's rescue package argue that the adverse consequences of not bailing out U.S. subprime mortgage borrowers outweigh those of allowing a financial meltdown to take its course. That might be the case. But the international community is entitled to take the world's most sophisticated economy to task for failing to manage its financial industries, with all the implications this has for the health of the global economy.

"Experience shows that troubled borrowers have a very high rate of default, even after generous renegotiation of their mortgages. The bailout might only delay the day of reckoning for people struggling under a heavy debt burden and may lead to bigger losses. Moreover, if investors in these mortgages are forced to accept a smaller return they can be expected to demand a higher risk premium in the future, making mortgages more expensive.

Moral hazard can therefore come at a heavy cost. It does nothing for the efficient operation of free markets and the image of U.S. financial professionals proferring their services all over the world." We hold ourselves out to be the model? Of what, fraud? That's what lack of transparency really is, fraud. We have a dirty system. Not capitalism itself. Nothing wrong there. But capitalism is built on playing by some pretty simple rules. I've been asking for weeks now, just what do we stand for, both in economics and foreign policy? The United States today is a throbbing blob of hypocrisy in so many respects. That comment above on how we treated Indonesia? That should be ingrained in every American college student taking economics or political science, for starters, and every presidential candidate should be asked to comment on it. Maybe we'd finally learn something about their true character in the process.

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What we learned this week on Wall Street was that the housing crisis continues unabated? "sooprize sooprize," as Private Gomer Pyle would comment on CNBC if asked. And we had the pitiful sight of former Fed Chairman Alan Greenspan scrambling to defend himself in a Journal op-ed by now claiming it's a global real estate bubble, but he had nothing to do with it. At least he has the global bubble part right. It's only taking everyone else in the world a couple of years to begin to catch on to this rather simple theme of mine.

But for now, UBS took a $10 billion further writedown (while selling a large stake to Singapore for $9.75 billion, along with a smaller one to some $billionaire sheik sitting in a tent with his harem). As UBS management said, "Conditions in the U.S. mortgage and housing markets have continued to deteriorate? and the ultimate value of our subprime holdings?remains unknowable." [Just a few weeks ago, UBS predicted a profit for the fourth quarter. And these guys are paid $10s of millions. Then again, so were Roger Clemens and Barry Bonds.]

Washington Mutual slashed its dividend 73% and said it foresaw problems through 2008 as it closed over half its home loan centers, which will result in some 2,600 job losses. WaMu is also discontinuing all subprime operations. Wachovia and Bank of America were among others talking of further writedowns of their own, while Freddie Mac's CEO said the crisis in housing would "get tougher before it gets better." Oh, and Citigroup moved $49 billion or $58 billion (I saw two different figures) from the Netherworld onto its books to better keep track of the toxic waste that threatened all of the Caribbean.

Globally, Spain's real estate crisis is threatening to take down the rest of Europe. Did you know the inventory level of new homes here is greater than that of the U.S.? We're talking Spain! And consider this. While U.S. home prices rose 50% in real terms for the eight years ending late 2005, in Britain they were up 125% and 120% in Spain. [Anatole Kaletsky/London Times; Financial Times] Remember all the times I'd write of my chats in the pubs, like in Ireland or other parts of Europe, where people would tell me they have a second home in Spain? Remember how I said that spelled trouble? It's trouble in spades today. Developers are going under left and right, leaving the banks holding the bag. And if you think we have a debt crisis in America, trust me, it's far worse in much of Europe. Folks in Britain, Ireland, France, Spain?they're stretched to the max. But then you should know all this by now.

And notice how I haven't even mentioned the Fed's move to lower interest rates another ?-point this week, which disappointed Wall Street to no end, it wanting a ?. Why? You know why. I've said for months the Fed is totally irrelevant at this point. The market will eventually prove this to be so.

For the archives, I do have to note the Fed's accompanying statement read: "economic growth is slowing, reflecting the intensification of the housing correction and some softening in business and consumer spending."

And while the Fed was slashing rates, inflation exploded back on the scene with the producer (wholesale) price index soaring a Zimbabwean-like 3.2% in November, the largest monthly gain since 1973?a year in which about the only thing good you can say is that the Mets came from out of nowhere to make the World Series, only to crash and burn themselves in the end.

Granted on the inflation front, ex-food and energy the PPI was up a more modest, though still high, 0.4%, but the consumer price index rose 0.8% (0.3% ex-the stuff we use), also above expectations. So weren't you taught in kindergarten that the Fed's main mandate was to fight inflation? Ah, the hypocrisy.

Street Bytes

--Stocks took it on the chin as the major averages all tumbled at least 2%, with the Dow Jones off 2.1% to 13339. Inflation and further credit market jitters were to blame. Being away, I'll catch up on a few market issues next time.

--U.S. Treasury Yields

6-mo. 3.26% 2-yr. 3.30% 10-yr. 4.23% 30-yr. 4.66%

Yields rose on fears the inflation news will stall further rate cuts.

--A survey of 52 economists for the Journal notes, collectively, there is a 38% chance of recession, though the average forecast has GDP coming in at 0.9% in the fourth quarter and 1.5% in the first. A separate survey for Bloomberg revealed lower figures. PIMCO's Bill Gross said the economy is moving towards zero, but he's not placing himself in the recession camp as yet. For the record I've said since the end of 2006 that recession would hit in '08. This doesn't necessarily mean the stock market collapses, though. I'm wrestling with this and have two weeks before giving you my '08 forecast. I will just say for now that if much of the rest of the world rolls over as I expect, we certainly aren't going to see an up year for stocks.

--From Barron's Thomas G. Donlan:

"The business of Wall Street is to introduce people who should not borrow to people who should not lend, collecting fees from both parties. It's a good business as long as everyone keeps a straight face."

--According to a Federal Reserve study, the amount of equity that homeowners hold in their homes (market value minus mortgage debt) slipped to 50.4% in the third quarter. When it drops below 50% the next quarter or two, it will be the first time since the Fed started recording the data in 1945. Offsetting this dire news, though, was the fact overall net wealth rose thanks to the stock market. That now could reverse.

--China told Treasury Secretary Hank Paulson to basically take a hike during talks this week. Mr. Paulson, whose legacy is unraveling faster than the Mets' did this past September, once again looks like a stooge.

--According to a report in the New York Times, domestic consumption among the five biggest oil exporters - Russia, Saudi Arabia, Norway, Iran and UAE - was up 6% in 2006 over 2005. Ergo, don't rely on them to fill any increase in demand elsewhere should it develop.

--Goldman Sachs reportedly made $4 billion in profits betting against the subprime sector; part of what will end up being its best year ever. At least this will keep a few yacht-building companies in business.

--Novartis is eliminating 2,500 positions as Big Pharm continues to suffer with competition from the generics and fewer big drug introductions.

--Student loan king Sallie Mae spurned a private-equity buyout at $60 a share because Sallie's chairman is an arrogant fool. Then, when the credit crisis hit, Sallie was still offered $50. But the man turned that down. Now the shares are below $27, as defaults pile up in its portfolio, and shareholders are left asking, "What the heck are you thinking?" [Late Friday there was a management shakeup here?though the decision-maker was given more authority it seems.]

--You know how some of us think the share buyback game is nothing but a scam? Way back, like in the 1980s, a company would announce a buyback and the shares would soar; the feeling being you're reducing the amount of stock in circulation and thus earnings per share would rise. Over time, though, folks caught on, especially to the game of making an announcement and then never following through on the share repurchases. Some might call that fraud.

So Barron's had a piece by J.R. Brandstrader that referred to a study by S&P showing how few companies initiating such plans actually outperformed the S&P 500.

"The most startling finding, however, is that while the buybacks [of companies in the S&P 500] removed nearly 20 billion shares from the market, the total number of outstanding shares among the repurchasers fell by only 4.4 billion. Where did the extra 15.6 billion shares come from?

"The researchers suspect the major culprit was heavy issuance of stock-option grants to executives and other employees (and the subsequent exercise of those options)."

I long stopped giving a damn when a company announced a buyback. I'm assuming any others on the fence have now been convinced to do the same.

--Merrill Lynch was planning on relocating its headquarters from next to the World Trade Center [World Financial Center] to a new midtown location in 2013. But with downtown/NYSE boss John Thain taking over at Merrill, he's rethinking the proposition and may decide to keep Merrill right where it is, or one of the new buildings at the Freedom Towers project. I bring this up because with all of Merrill's other problems, Thain could save some money by staying put. How much? Try $1 billion. [But isn't it amazing how such large figures don't faze us anymore?]

--Citigroup finally has a new CEO, Vikram Pandit, a former Citi investment banker and about the 18th choice on the list to succeed Chuck Prince. The search was going so poorly, even NBA coaching vagabond Larry Brown turned it down. And actor Michael Caine, who has a reputation for taking any project for the money (see "Blame It On Rio"), did so as well.

--Lufthansa acquired a 19% interest in JetBlue, adding an avant garde flavor.

--Someone is reading StocksandNews, I now have proof . None other than Harvard and Yale announced this week that they are taking some of the $gazillions in their endowments and expanding their financial aid programs, especially to middle class families; exactly what I've been calling for in this space. Actually, Harvard thinks we should be impressed they're adding an extra $22 million a year. As Derrick Coleman, former NBA star, used to say, "Whoopty-damn-do." But it's a step in the right direction.

--Dirtball Conrad Black, former CEO of publishing giant Hollinger International, was sentenced to 6 ? years for stealing $6 million. Using that scale, you could build a case that some on Wall Street should be serving 30-40, at least.

--I never do these things, but because I like weather.com so much I participated in one of their surveys. One question was, "Have you ever clicked on an ad?" Nope. Why would I? And doesn't everyone feel this way? I keep saying the Web's advertising model is worthless and incredibly overrated and one day I'll be proven right. It's just like the fact that as much as even I like to shop online, such revenues are still only about 3% of the total, and I just saw where sales growth online this holiday season is under 20%; not good.

--I also see where Russians are now favoring euros over dollars when exchanging or withdrawing foreign currency from bank accounts. I've been feeling the same way these days. Plus the 2 euro coin, about $3 given today's exchange rate, is a terrific denomination. Perfect for bar tips, for example.

Foreign Affairs

Iran: Less than 24 hours after I wrote that President Bush was made to look like a "fool" in the aftermath of the latest National Intelligence Estimate on Iran's nuclear weapons program, and that the world was actually more dangerous, Secretary of Defense Robert Gates, addressing a conference on Strategic Studies in Bahrain said:

"Everywhere you turn, it is the policy of Iran to foment instability and chaos, no matter the strategic value or cost in the blood of innocents - Christians, Jews, and Muslims alike?.

"There can be little doubt that their destabilizing foreign policies are a threat to the interests of the United States, to the interests of every country in the Middle East, and to the interests of all countries within the range of the ballistic missiles Iran is developing."

Later in a tense press conference, Gates said it would be a "grave misconception" to suggest the U.S. has been weakened by the war in Iraq.

"Imperial Germany, Imperial Japan, Nazi Germany, Fascist Italy, the Soviet Union - all made this fundamental miscalculation. All paid the price. All are on the ash heap of history. As I have said before, restraint should never be confused with weakness."

Editorial / Wall Street Journal

"President Bush has been scrambling to rescue his Iran policy after this week's intelligence switcheroo, but the fact that the White House has had to spin so furiously is a sign of how badly it has bungled this episode. In sum, Mr. Bush and his staff have allowed the intelligence bureaucracy to frame a new judgment in a way that has undermined four years of U.S. effort to stop Iran's nuclear ambitions?.

"What's amazing in this case is how the White House has allowed intelligence analysts to drive policy. The very first sentence of this week's NIE is written in a way that damages U.S. diplomacy: 'We judge with high confidence that in fall 2003, Tehran halted its nuclear weapons program.' Only in a footnote below does the NIE say that this definition of 'nuclear weapons program' does 'not mean Iran's declared civil work related to uranium conversion and enrichment.'?.

"The result is that we now have NIE judgments substituting for policy in a dangerous way. For one thing, these judgments are never certain, and policy in a dangerous world has to account for those uncertainties. We know from our own sources that not everyone in American intelligence agrees with this NIE 'consensus,' and the Israelis have already made clear they don't either. The Jerusalem Post reported this week that Israeli defense officials are exercised enough that they will present their Iran evidence to Admiral Michael Mullen, the Chairman of the U.S. Joint Chiefs of Staff, when he visits that country tomorrow?.

"(The) NIE heard 'round the world is already harming U.S. policy. The Chinese are backing away from whatever support they might have provided for tougher sanctions against Iran, while Russia has used the NIE as another reason to oppose them. Most delighted are the Iranians, who called the NIE a 'victory' and reasserted their intention to proceed full-speed ahead with uranium enrichment. Behind the scenes, we can expect Egypt, Saudi Arabia and Turkey to expand their nuclear efforts as they conclude that the U.S. will now be unable to stop Iran from getting the bomb?.

"(The) ultimate responsibility for this fiasco lies with Mr. Bush. Too often he has appointed, or tolerated, officials who oppose his agenda, and failed to discipline them even when they have worked against his policies. Instead of being candid this week about the problems with the NIE, Mr. Bush and his National Security Adviser, Stephen Hadley, tried to spin it as a victory for their policy. They simply weren't believable.

"It's a sign of the Bush Administration's flagging authority that even many of its natural allies wondered this week if the NIE was really an attempt to back down from its own Iran policy. We only wish it were that competent."

And you thought I was tough on the man.

But as I also noted last week amidst the uproar over the NIE, it really didn't matter what we or our allies thought on this issue because it is more than ever all about Israel. So on Wednesday, French President Nicolas Sarkozy said in an interview that there was a danger of war erupting over Iran's nuclear program if "the Israelis consider their security is truly threatened." Sarkozy added France was more worried about tensions between Iran and Israel than between Iran and the United States. Touche.

As for Israel itself, Prime Minister Ehud Olmert said it would work with the International Atomic Energy Agency to expose Iran's plans to develop nukes, while an Iranian opposition group, that has been reliable in the past, said Iran did indeed shut down a weapons program in 2003, only to relocate and restart the operation at another facility in 2004.

A new round of sanctions, meanwhile, is off the table until after the first of the New Year, if ever. Yes, the situation has grown far more dangerous, and we have a president who is flopping like a flounder that has just been landed.

Russia: President Putin selected 42-year-old deputy prime minister Dimitri Medvedev to be his handpicked successor in the March 2 presidential vote. Medvedev, also the chairman of Gazprom and an economist with no ties to the security apparatus, then turned around and said Putin should become prime minister after he leaves office.

The selection of Medvedev over 66-year-old Viktor Zubkov probably means Putin won't attempt to come back as president, immediately, but instead will use the prime minister's office to consolidate power currently granted under the constitution to the president. In most parliamentary forms of government, anyway, it's the prime minister, not the president, with the power.

As in here's a question no one is asking. Who attends the summits, post-March 2? Does Vlad the Great even let Medvedev be the key figure at a single one? I'd be surprised if he did.

Meanwhile, in the latest independent poll, Medvedev would roll to victory over his two closest rivals, Zubkov and Sergei Ivanov, but these two might not even run, leaving only Communist leader Gennadi Zyuganov to contend. In other words, Medvedev would win with over 65%. Putin's own popularity rating has hit a staggering 87%.

Lastly, in an op-ed for the Washington Post, former Putin economic adviser Andrei Illarionov blasts Secretary of State Condoleezza Rice for immediately stepping forward to praise Medvedev, before the man even starts campaigning! As Illarionov so correctly puts it, if the U.S. wants more democracy in Russia, why in essence interfere by acting as if Medvedev is our preferred candidate?especially when this is hardly a democratic process in the first place. It's unbelievable how incredibly inept the Bush administration's foreign policy is. Note to Condi?just shut up! Better yet, stay home and stop using all that jet fuel. The contrails are raising the temperature another degree.

Pakistan: 70% of the people here do not want to see the Musharraf government win reelection in January, meaning there will have to be a world class vote-rigging operation to keep him in power. It also means that when Musharraf does declare himself to be the victor, the opposition of former prime ministers Bhutto and Sharif could lead to widespread violence. [His plan to lift the state of emergency on Saturday is meaningless unless he reinstates the fired Supreme Court justices.]

Separately, Musharraf rejected a U.S. call to send troops after militants in Pakistan but said he would welcome intelligence assistance, calling President Bush a "great, personal friend." To which Bush replied, "Check's in the mail, Stash." [You know, Bush has a nickname for everyone.]

Lebanon: A probable al-Qaeda-based attack killed Lebanon's No. 2 general who was slated to take over for No. 1, Michel Suleiman, should the latter finally be elected as the nation's next president in the ongoing constitutional crisis. Others blame Syria, but this wouldn't square with recent efforts to cooperate on some fronts with the U.S. Al-Qaeda, though, has every incentive to keep the crisis in Lebanon boiling with a return to all-out civil war its goal. Just my opinion. Syria, to me, has enough problems to deal with, and it wants the UN tribunal on the Hariri assassination to go away. The U.S., in return for cooperation in other areas, could largely make it disappear; which would be a tragedy in its own right but I don't trust Washington one iota when it comes to its Lebanon/Syria policy.

Algeria: With the horrific attacks in Algiers, al-Qaeda has left its mark in the region once again. Veterans of the Iraq War are returning to the Maghreb - Tunisia, Morocco, and Algeria - to set up shop. Europe is duly concerned due to its proximity to the region.

Israel: So much for Annapolis. I thought it would be a waste, but still don't fault President Bush for getting everyone together. This week talks restarted between Israel and the Palestinians, but as they came one day after a major Israeli offensive in Gaza claimed six lives, and the Palestinians retaliated by launching 17 rockets into Israel, let's just say little was accomplished.

Iraq: Violence picked up some, but of particular interest to yours truly was a story that Moqtada al-Sadr is on a crash study course to become Ayatollah. With this title, which requires intensive study in all things Islam, he would have a far greater influence on the Shiites because his pronouncements would thus carry more weight. Supposedly, he hasn't been seen since May as he's holed up with clerics in Najaf.

Kosovo: Importantly, the EU has recognized a plan by its leading powers whereby Kosovo will declare independence in February, after Serbian elections are held, in what will become a rolling recognition by all powers, led by the United States and an Islamic coalition of nations. The plan is to minimize the risks of a new Balkan war, but the key remains Serbia's ally, Russia.

I have said this is a flashpoint worth keeping your eye on as one of my predictions for 2007, not because it would be a market- moving event, but rather it would sap resources from the war in Afghanistan. That is the import I have yet to see anyone mention. This EU-sponsored move, however, appears to be a major step in the right direction. But let's wait 24 hours.

Afghanistan: And the reason why the above is so important is because this week you had Secretary of Defense Robert Gates blasting NATO for its lackluster effort in Afghanistan; as in many nations refuse to step up as they should. So, again, another conflict in Kosovo would thus give Europe a further excuse to cut back on its Afghan operations.

Britain: Prime Minister Gordon Brown could not have stepped in a bigger pile than he did this week in blowing off an historic EU treaty signing to attend to a parliament meeting he easily could have rescheduled. Talk about poor form. One might say this chap is off to a rather dismal start.

North Korea: Nuclear arms talks have suddenly bogged down, but the New York Philharmonic is going to play Pyongyang in February! Yippee! I know, I know?this is like ping-pong diplomacy, I guess, but I have a compromise. Force the Philharmonic to play some Shostakovich, which by the end will have the Commies screaming, "We give up! Here are all the details on our entire weapons program! They're yours! Now leave us alone!"

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Pray for the men and women of our armed forces.

God Bless America.

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Gold closed at $798
Oil, $91.27

Returns for the week 12/10-12/14

Dow Jones -2.1% [13339]
S&P 500 -2.4% [1467]
S&P MidCap -3.4%
Russell 2000 -4.0%
Nasdaq -2.6% [2635]

Returns for the period 1/1/07-12/14/07

Dow Jones +7.0%
S&P 500 +3.5%
S&P MidCap +6.3%
Russell 2000 -4.3%
Nasdaq +9.1%

Bulls 53.3
Bears 25.6 [Source: Chartcraft / Investors Intelligence]

Have a great week.

I appreciate your support.

Brian Trumbore

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