Week in Review 
For the week 2/4/2008 - 2/8/2008
Brian Trumbore
President/Editor, StocksandNews.com

Gloom and Despair

So seven of us from high school spent some time in Vegas this week celebrating our collective 50th birthdays. It appears most of us will survive to actually see them (mine is yet to come) after having a little fun here. OK, a lot of fun, but if you're looking for specifics, not gonna go there?wouldn't be prudent.

As you all know by now, not only is Las Vegas known for hot action requiring an ample supply of cash, it's also ground zero for the real estate bubble. So on Thursday afternoon, after the last of my friends had departed for points east and west, I hopped in a cab, armed with an address outside the Strip to get a better handle on the housing crisis here. Ironically, my driver had his own place where we were headed so he provided some good color.

For starters, though, I haven't been to Vegas in about 11 years and flying in I was amazed how far the sprawl stretches compared to back then. But as new casinos and resorts were built, that helped fuel a demand for housing that then got way out of control. Prices peaked by most measures in 2006 and in the case of the median home price have declined 21% since then (17% since August) and also 21% for condos from their peak in January '07. The pace of the decline is staggering and with all manner of folks now facing negative equity and an inability to refinance as their mortgages reset, it spells trouble.

Nevada is No. 1 for foreclosures these days, with 7 of the worst 100 zip codes in the nation for December represented in the Las Vegas Valley alone. So driving along to Huntington- Manchester, about 20 minutes from the Strip, you just see one development after another with For Sale signs and new strip malls where you can't foresee a day when they are filled with actual tenants. My cabbie (who thought I was an interested buyer and didn't know my true intentions as a humble reporter) kept pointing out with pride all the new buildings that were going up, or were planned, while I kept thinking 'This is an unmitigated disaster.' I can guarantee that if I went back in two years, the same strip malls won't be filled with tenants and more condo and housing projects will be in bankruptcy.

The local paper this week was filled with such stories, including a number of luxury condo projects where the developers have stopped construction and buyers can't get hold of their deposits. There was one auction listed where bidding on about 80 units was starting at $79,000 for units previously listed at $233,000. No doubt, if you had been fortunate to wait there are good buys out there, but you have to understand two things: your surrounding area may be blighted and don't expect the value to suddenly shoot up. A leading Houston-based study this week said prices in Las Vegas won't bottom until early 2009, but it didn't state that from there we just sit, no V-shaped bottom in other words.

The bulls say, however, that with some huge new projects slated to open in the next year, particularly on the Strip, that means more jobs and increased demand for housing, so the bloated inventory of homes will be worked down over time. That indeed would be the case, but you're also hearing of all manner of projects facing increasing difficulties, such as the $3 billion Cosmopolitan Resort Casino that I've written of before where the developer recently defaulted on a $760 million pre-development loan. One telltale sign, my friends and I all week identified one crane that appeared to be in operation. The rest, sitting atop massive shells, were silent.

Las Vegas says it's in the midst of a $35 billion spending binge to build 40,000 additional hotel rooms by 2012 (including a new Trump condo-hotel of 1,282 units opening next month), but I'll believe it when I see it, and it also needs to be pointed out that this town is expensive; very expensive. As the consumer continues to slow their pace of spending, trips to Vegas, particularly of the luxury variety, will become less and less frequent.

As for Huntington-Manchester, a K.B. Home development of about 1,400 single-family homes featured in BusinessWeek recently, it was very pleasant, with a seemingly normal number of For Sale signs that I could see. But as my driver said, he bought in 2004 and is underwater big time already, with his five- year ARM looking to reset in 2009. He seemed like he had a good head on his shoulders but I couldn't help but plead with him, "Start talking to your banker now. Get this worked out soon. Trust me." He nodded his head but I'm not sure he was really listening.

Nationally, homebuilder Toll Brothers, in issuing its latest earnings report this week, said it's "not seeing much light at the end of the tunnel," while D.R. Horton reported revenues declined from $2.8 billion to $1.7 billion a year ago, another telling sign of the brutal environment in the sector. And Crain's NY Business noted that even a $15 million East Hampton home is now in foreclosure. In fact 80 homes in the Hamptons are in the same boat. It's not just subprime anymore.

And, to beat a dead horse, the negative wealth effect is clearly beginning to hit. I said it would take some time, which was part of my 2008 recession forecast back in '06, but January was the worst ever for retailers for the month, with Wal-Mart eking out a 0.5% gain in same-store sales, while the likes of Target, Nordstrom's, J.C. Penney, Kohl's and Macy's all reported declines, many in the 6%-8% range.

Coincidentally, there has been a sharp slowdown in credit-card debt as consumers tighten their purse strings. And you'll find increasingly that this is global, sports fans, though each country is in different stages of retrenchment.

On housing and spending I note this item from the Sydney Morning Herald.

"Kim Quick, senior valuer at property advisers Herron Todd White, said increasing numbers of people were stuck in a housing trap where their home was no longer worth what they paid for it because it was over-valued when they bought it?.

"The spiraling home loan crisis is causing people to rely increasingly on credit cards and other forms of debt for everyday expenses, which is adding to their financial problems. Personal bankruptcy orders in (New South Wales?where Sydney is) rose by 23 percent between 2006 and 2007."

Credit-card debt totals here are staggering, up to $120,000US in some cases. You're reading that right.

Elsewhere, Cisco Systems CEO John Chambers said his company saw a dramatic slowdown in January. "We are seeing our U.S. and European customers become increasingly cautious," a rather predictable statement from a man who just about six months ago was exceedingly bullish about the best global economy he could ever remember. [Cisco is, however, still doing well but revenue is projected to increase 10% the next quarter vs. a normal goal of at least 12%-15%.]

Yes, the world slowdown is taking shape on the heels of my long-called for global real estate bubble. Many of you saw the front-page story in the Wall Street Journal this week on problems in the U.K., which should have looked familiar to readers of this space. And wouldn't you know but the number of economists falling into the recession camp back here is growing by the day.

It's also why the economy, not Iraq or immigration, is the number one concern of Americans these days and for this reason Congress has acted with lightning speed on an economic stimulus package. Many of you will receive checks of $600 ($1,200 for a couple), or $300 for some senior citizens. Others may qualify for a higher mortgage as limits with Fannie Mae and Freddie Mac have been raised, as long as you qualify.

Will you spend that check? Will you be enticed to buy a bigger home? Can you afford to? Merrill Lynch economist David Rosenberg, who has been dead right in his forecasting, says home values are going to decline another 25%. So do you just wait longer? Do you feel secure in your job? Have you saved enough in emergency funds in case the worst happens?

Americans have to think about these things everyday and many of us look to Washington for leadership, where little can be found. In Britain they yearn for another Churchill, I imagine, someone who inspires. There really aren't a lot of inspiring figures around the world these days when you think about it; not that the emergence of one can have too much of an impact when it comes to a global real estate bubble that simply needs to run its course. It's time we paid the piper, and he's growing impatient.

Street Bytes

--After a powerful rally two weeks ago, this past one saw the return of dreadful price action as the major averages all swooned about 4.5%, with the Dow Jones and S&P now off 14% and 15%, respectively, off their highs and the Nasdaq off 19% as it bounces around the 20% mark that denotes a bear market. The major culprit was the ISM's reading on the service economy, 41.9 when 53 was expected. Anything under 50 denotes contraction, or recession-level activity, though there were some who said this had to be a mistake because 'misses' like this are totally unheard of. But the ISM said the report was accurate and was not revising it upwards.

It also doesn't help the mood when the bond insurers continue to have problems, despite some of the more high-profile ones raising a bit of capital, while it appears the investigation into subprime mortgages, involving some of our biggest names such as Merrill Lynch, appears to be heating up with every authoritative body wanting a crack at it.

--Interesting note from Alan Abelson's column in Barron's. The above mentioned David Rosenberg of Merrill Lynch points out "in the 2000-2002 bear market, there were no fewer than 16 rallies of at least 5% in the S&P, each lasting on average about a month, and no fewer than 35 bounces of 5% or more in the Nasdaq (which still managed to wind up losing nearly 80% of its value)." This week saw the positive results of another bounce go out the window.

--U.S. Treasury Yields

6-mo. 2.10% 2-yr. 1.93% 10-yr. 3.64% 30-yr. 4.42%

Rates declined further on the short end out of fear, but rose on the long end out of concern inflation is becoming more and more entrenched.

--Speaking of inflation, the price of wheat hit one record after another, $10.93 a bushel and up the limit, or 16% this week alone. It's all about surging world demand, the lowest U.S. inventories in 60 years, and droughts and record rains in key producer nations Canada and Australia.

--Farmland in Iowa, Nebraska and elsewhere rose 20%-23% in 2007, thanks in no small part to the demand for grain and corn; read ethanol, too.

--A number of stories on the biofuel controversy this week as further studies are pointing out that in converting natural land for crops, even beyond the known effects of the destruction of rain forests, the whole process is actually carbon negative, not positive, in terms of global warming. The industry begs to differ.

--President Bush unveiled his latest budget, the first one to call for over $3 trillion in spending ($3.1 trillion). The deficit is projected to shoot back over $400 billion the next two years, but the president proposes $208 billion in entitlement savings over the next five years and there is no way that will fly in an election year. But I won't waste a lot of space on the topic because we are a long ways from any resolution in Congress and the hotter topics such as the alternative minimum tax and war funding.

--Since Lucent's North American headquarters is blocks from my home, I can't help but notice when the combined Alcatel- Lucent reports a further $3.8 billion loss and the suspension of its dividend as more Lucent assets are written off. What a sad, sad story for the employees and retirees here who continue to see their pension and healthcare benefits slashed. It also obviously doesn't help my local real estate market.

--The next round of consolidation in the airline industry is getting closer as Delta is expected to hook up with Northwest (3rd and 5th largest), which would then be followed by United (UAL) and Continental (2nd and 4th largest). All I care about is the treatment of my frequent flyer miles?and my luggage arriving where it should. In terms of being on time, ? of all domestic flights failed to arrive when scheduled in 2007, the 2nd-poorest performance on record.

[Separately, UAL announced it will charge $25 to check in a second bag due to the rising cost of jet fuel. More weight equals higher fuel usage.]

--Interesting tidbit in USA Today. The number of U.S. ski resorts has declined from 727 in 1985 to 485 today.

--Congratulations to my old friends at PIMCO Funds for garnering the No. 1 ranking for fixed income in the annual Barron's fund family survey. Rock and roll time for the wholesalers.

--Barron's Andrew Bary had a piece on Blackstone Group and the battle between the bulls and bears over its stock. Recall the IPO of the private-equity giant run by Stephen Schwarzman came out at $31 and is now trading around $18. So is it undervalued?

Mr. Bary writes of "the danger in Blackstone's reliance on performance fees, as well as the possibility that these fees, derived mainly from gains in the firm's private-equity and real- estate funds, could dry up if difficult conditions persist in the economy and financial markets."

But what I didn't know is that the Blackstone funds have a "claw back" feature, "requiring the company to refund investors already-booked incentive fees if subsequent investments suffer." So Blackstone could earn $200 million on one deal, but if another deal goes bad, could lose a like amount. So the $200 million would then be repaid to the clients; something important to be aware of when analyzing potential earnings for an outfit like this. And of course the private-equity world is fraught with danger these days in light of the fact over $200 billion in proposed deals still haven't been consummated, which also heavily impacts those investment banks involved in the financing that are now left holding the bag.

--Speaking of proposed deals, Yahoo is still mulling over the $31 Microsoft bid, with major Yahoo investors looking for more. The concern is that institutions (such as mutual funds) may own both and if the value of their Microsoft holding goes down (as it has since the announcement), can they then offset it with the gain in Yahoo. On the other hand, Yahoo may explore opportunities with Google.

--This is scary. Investigators probing the crash landing of the British Airways Boeing 777 aircraft at Heathrow the other week are looking into the idea that there was fuel-system contamination, perhaps from small particles of ice. As reported by Andy Pasztor and Susan Carey of the Wall Street Journal:

"Such a finding could call into question longstanding aviation- industry assumptions and safeguards regarding jetliner fuel systems and internal icing hazards on some long-distance flights, particularly in extreme cold conditions."

Investigators increasingly suspect some kind of blockage interrupted the fuel flow, causing the simultaneous shutdown of both engines. But tests showed the jet fuel used on this and other flights that day met specifications.

--If you are technically/mechanically inclined, you may want to consider the wind farm industry. With all the turbines going up (3,200 installed last year alone in this country), someone has to maintain them and the companies are having trouble finding qualified workers. You need a knowledge of hydraulics, computers, even meteorology and the willingness to climb 200 feet in the air in all kinds of weather. Wind energy graduates from training school generally earn $20 to $25 an hour, with supervisors earning far more.

--Advertisers for the Super Bowl should be happy as a record audience watched the game, 97.4 million, with over 100 million viewing it late in the contest. Nice play by Eli and David Tyree, eh?

--Lastly, what an interesting story concerning the promotion of Pfizer's anti-cholesterol drug Lipitor and spokesman Dr. Robert Jarvik, inventor of the artificial heart. Congress and the FDA are now involved because it seems there are serious concerns about Dr. Jarvik's qualifications to pose as an expert. For starters, while he holds a medical degree he is not a cardiologist or licensed to practice medicine, rather important items since Lipitor is the world's single best-selling drug. And here's the payoff?Pfizer's ad agency used stunt doubles in those spots where Jarvik is rowing.

Foreign Affairs

Iraq: Grand Ayatollah Ali al-Sistani hasn't been seen in public since 2004 and as he remains the most influential Shiite cleric, there are questions who will replace him as his health is clearly deteriorating (Sistani is said to be 79 or 80). Moqtada al-Sadr is one obvious possibility.

This week Republican presidential frontrunner John McCain reiterated we will have troops in Iraq just like we do today in Kuwait, South Korea and Bosnia. Of course Hillary Clinton and Barack Obama say otherwise were they to be in the White House.

Afghanistan: Secretary of Defense Robert Gates said of NATO, "I worry a great deal about the alliance evolving into a two-tiered alliance, in which you have some allies willing to fight and die to protect people's security and others who are not." Currently, while 26 nations have some form of presence in the country, only the Americans, British, Aussies, Canadians, Dutch and Danes are really putting their troops in harm's way. The Germans are the biggest disappointment in not wanting to step up and share the load. May I remind my friends there that Frankfurt and Berlin are as big a target as New York, London or Madrid.

Pakistan: Scotland Yard has concluded that Benazir Bhutto was indeed killed by the suicide bomb blast and not an assassin's bullet, just as the government initially maintained. But in the run-up to the February 18 parliamentary election, it is expected that Bhutto's party will win, profiting from a sympathy vote, while another party led by former prime minister Nawaz Sharif should do well too. The party of President Musharraf, however, is increasingly split as many leaders opt to defect.

In the battle against the Taliban, a truce was declared between the Army and insurgents in the lawless tribal area, running directly counter to what the Bush administration demands, an ongoing crackdown.

Iran: Parliamentary elections remain on for March 14, while Iran launched a rocket this week designed for its first locally-made satellite. It could just as easily be used to carry a nuclear warhead.

Israel: A suicide bomber got through to kill one Israeli woman in Dimona, the first such attack of the year after just one in 2007. There were 53 suicide attacks in 2002. What was truly terrifying, though, were the pictures of the discovery of a second bomber, who was wounded and trying to detonate his bomb belt before a doctor treating him understood what the situation was. Troops killed the terrorist before he could succeed.

Lebanon: Watch this coming Feb. 14, the third anniversary of the assassination of Rafik Hariri. His son, parliamentary leader Saad, is calling for a mass protest against Syria and Iran for continuing to meddle in the nation's affairs. I'm uneasy about the consequences of this.

Russia: Vladimir Putin accused the West of unleashing a new arms race on Russia's borders and said "we are forced to retaliate."

China: The nation is slowing returning to some semblance of normality following the awful series of winter storms. The city of Chenzhou, some four million, went 12 days without power, at least, as gas stations closed and banks ran out of money. I was also reading a story about some of the horrific train journeys for the migrants who couldn't move for days. When the tracks were finally cleared, in some cases you had 60 people crammed into a compartment designed for 20 and the toilets didn't work. If that isn't the ultimate nightmare, I don't know what is. As for the economic cost, it is incalculable and you're unlikely to get the truth out of the government anyway.

Meanwhile, regarding Taiwan, the government there has announced it will proceed with two referendums on March 22 on joining the United Nations, the same date as the presidential election. Taiwan hasn't been a member of the UN since 1971, when it lost its seat to China. One referendum will ask whether voters "agree that the government should seek to join the UN in the name of Taiwan to express Taiwanese people's will and enhance Taiwan's international status." The opposition KMT, favored in the presidential vote and wishing closer ties with China, will propose whether the island should seek to "return to the UN with a pragmatic and flexible approach."

The U.S. strongly opposes both parties' proposals, calling it a "provocative policy." Of course you know where China stands. And, separately, Taiwanese President Chen Shui-bian inaugurated a runway on one of the disputed Spratly Islands, insisting the archipelago belonged to Taiwan rather than China and other Asian nations seeking them, including Vietnam and the Philippines.

Mexico: Give President Felipe Calderon credit for what seems an almost impossible task, cracking down on police corruption. Army troops have confiscated weapons from 300 police along the Texas border who were under investigation and hundreds of drug suspects have been arrested. But one of the big problems is police pay. In Mexico City, a beat officer earns $700 a month, while a government clerk makes $900.

Australia: The government released gruesome pictures of Japanese hunters harpooning whales and dragging their bleeding carcasses onto a ship near Antarctica, calling it evidence of the "indiscriminate" slaughter of the animals. One photo showed a mother and its calf being killed, but Japan denied these were from the hunt and accused Australian officials of spreading propaganda that could damage ties between the two. Australia's Environment Minister Peter Garrett countered: "To claim that this is in any way scientific is to continue the charade that has surrounded this issue from day one."

Kenya: In another depressing sign of a country sliding into the abyss, the Peace Corps announced it is pulling its remaining volunteers. At least 1,000 Kenyans have died in the violence thus far with another 300,000 forced to flee the ethnic cleansing taking place in some cities and villages.

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Pray for the men and women of our armed forces.

God bless America.

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Gold closed at $925
Oil, $91.73?Friday surge over production concerns in Nigeria.

Returns for the week 2/4-2/8

Dow Jones -4.4% [12182]
S&P 500 -4.6% [1331]
S&P MidCap -3.6%
Russell 2000 -4.3%
Nasdaq -4.5% [2304]

Returns for the period 1/1/08-2/8/08

Dow Jones -8.2%
S&P 500 -9.3%
S&P MidCap -7.5%
Russell 2000 -8.8%
Nasdaq -13.1%

Bulls 41.6
Bears 32.6 [Source: Chartcraft / Investors Intelligence]

Have a great week. I appreciate your support.

Brian Trumbore

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