Week in Review 
For the week 10/6/2008 - 10/10/2008
Brian Trumbore
President/Editor, StocksandNews.com

Crash on Wall Street 

I liked this comment following Thursday’s crashette from an old friend and former Wall Streeter, Pete M. 

“It looks more and more like what the terrorists couldn’t do we did to ourselves. Thanks a lot to the borrowers who bought way more than they could afford and their enablers; the mortgage brokers, banks, and Wall Street ‘professionals’ who provided ‘innovative’ financing. And let’s not forget the [idiots] in Washington, the Greenspan Fed….” 

Or as Pete, a diehard Boston fan, concluded, “Somehow the Red Sox in the playoffs doesn’t seem so important these days.” 

I watched the Wake Forest-Clemson football game Thursday night and the announcers must have brought up the financial crisis at least six times during the broadcast. There is no escaping it. I also couldn’t help but look at the crowd, particularly the students, and wonder what was going through their heads. Which ones suddenly have fears they may not be back next spring? Which ones’ parents are suddenly in dire straits, and/or can the student obtain a needed loan? In a normal economic slowdown or market swoon, relatively few are truly devastated and it’s more of a basic set back, but today, hundreds of millions or more, around the world, have been decimated. 

Americans are fearful and depressed, as a CNN/Opinion Research poll taken last weekend found that 60% felt a depression was at least ‘somewhat likely.’ That was before the carnage of this week. 

A USA Today/Gallup poll, completed Sept. 23 but just released the other day, revealed 40% felt afraid and 53% were angry. I imagine those figures are now 80% and 85%, respectively. I’m certainly afraid and angry, myself, though also frustrated. 

As we’re all too well aware, there has been no place to hide in the investment world, unless you were short, except in cash or Treasuries. Gold? Don’t get sucked up in this one.  

The following is typical of the damage thus far in 2008, as represented by year-to-date returns for stock funds as of Thursday, courtesy of Lipper Inc. 

Large-Cap Growth -38.8 percent
Large-Cap Value -38.1
Mid-Cap Growth -41.7
Mid-Cap Value -38.0
Small-Cap Growth -40.5
Small-Cap Value -32.2
Vanguard 500 -37.0 

The uniformity of performance, with one mild exception, is stunning. Good funds with great managers are suffering with the rest. 

Ken Heebner’s CGM Focus -41.9
Marty Whitman’s Third Avenue Value -46.0 

[And while I’m not putting Fidelity Magellan in the category of the above two, everyone knows of it and many of you have it somewhere in your portfolio. Through Thursday, it was down 47.3 percent.] 

Even Lipper’s Intermediate Investment Grade bond index, a standard benchmark for a quality fixed income fund, was off 6.1% thru Thursday.  

During the discussion on the bailout, after the House first rejected it and the Dow Jones dropped a record 777 points, it was popular to talk of the $1.2 trillion hit investors took that day. Now try $8.5 trillion the past year. And then consider that when one thinks about basic pension plans, the average state fund has an allocation of 60% equities, 30% bonds, 5% real estate and 5% other, so they are hardly doing well either. [Wait till the damage in some of these is reported…in many cases it will be scandalous.] 

But what now? Take the $700 billion rescue/bailout plan. It still boils down to whether or not the financial institutions that benefit and reliquefy actually then take the next step and start lending again. Nor will my favored option, injecting capital directly into the banks, which Treasury Secretary Paulson meagerly offered up on Friday night, guarantee the same. 

And it doesn’t help when Federal Reserve Chairman Ben Bernanke, even if being honest, tells us “The combination of the incoming data and recent financial developments suggests that the outlook for economic growth has worsened and that the downside risks to growth have increased.” Or as the International Monetary Fund put it, “The world economy is now entering a major downturn in the face of the most dangerous shock in mature financial markets since the 1930s.” 
For all those talking that we have to be near a bottom, the fundamentals keep slapping us in the face. Just this week we had word from five major, meaningful corporations spanning the gamut of economic activity. IBM beat on earnings but fell far short on revenue estimates as it released its earnings early. General Electric matched already lowered expectations, but had little good to say except, importantly, it saw a lessening of pressures in the commercial paper market (at least for the day). Alcoa fell far short on a number of levels, software giant SAP spoke of a sudden drop in activity end of the quarter, owing to a blanket “budget freeze” among corporations worldwide, and Bank of America, recently heralded as a hero, released its earnings early and missed by a mile, after which it was forced to accept $22 a share for a $10 billion capital raise, $10 below where the stock sat the day before.  

In my three-legged stool example, the consumer, housing and capital spending, both cap-ex and the consumer are now finally rolling over. And in another classic cascading effect, local and state municipalities are not just scrambling but rather panicking to figure out how to match sliding revenues with what were in most cases ever-rising expenditures. The potential for unemployment to soar, well above 10%, is there. 

Globally, now you have an idea why I featured Iceland in the front of my commentary last time. I have a list on the site of the countries I’ve visited the last almost ten years, which means I don’t include a week I spent in Iceland back in 1982. My first night in Reykjavik I met a guy from North Carolina who was a contractor at the NATO base in Keflavik (where the U.S. was stationing its AWACS planes in those days) for Westinghouse and he took me out on the town. Iceland didn’t have beer then (due largely to a very unflattering “60 Minutes” piece I’ll never forget on its drinking habits) and so I ordered a vodka tonic. After just two I was feeling it.  “What do they put in the drinks?” I asked my guide. “I was waiting to see if you’d say anything,” he said. “When you order a drink here, they automatically give you two shots.” 

Yup, that’s Iceland. One shot isn’t enough. Let’s have two. Or in terms of its banks and their ill-conceived behavior, let’s leverage up like there’s no tomorrow, while offering the best yields on a savings account, in which by doing so we’ll attract $billions from all over the world and then we’ll lever that up even more. I’m assuming before this week’s collapse in this land of just 300,000 that when you ordered a vodka tonic, you received three shots, not just two. 

So Iceland’s government had to take over and nationalize its three big banks, with the fate of $billions in investor cash unknown as of this writing and tensions between the U.K. and Iceland, in particular, rising. [More on this below, as well as the Russia angle.]  

For his part, British Prime Minister Gordon Brown said the global crisis “has come from America” as he nationalized the British banking system, at least to the tune of up to a 30% interest, while Europe as a whole is ticked off at the Irish for its uncoordinated response to the crisis in its banking system in guaranteeing deposits, which caused a rush out of British, German and French banks, for example, into Irish ones. French President Sarkozy was moved to say “We want a capitalism of entrepreneurs, not of speculators.” 

Bill Gross / PIMCO 

“Now, as a recognition of a systemic period of capitalistic instability becomes apparent, the focus has legitimately shifted to a systemic solution. Much of the focus has been on U.S. policy and rightly so. It is here where the excesses of exuberance were most pronounced. But, up until the Treasury’s $850 billion rescue package, the policy responses may have been necessary and significant, but they were ad hoc and perhaps insufficient. A systemic delivering likely requires a systemic solution, which moves beyond cyclical interest rate cuts, liquidity provisions, or even the purchase of subprime mortgage-backed bonds. We believe that the Federal Reserve must now act as a clearing house, guaranteeing that institutional transactions clear (and investors receive) their Big Macs at the second window. They must also take another bold step: outright purchases of commercial paper. They should also cut interest rates to 1%, because we are experiencing asset deflation, and the threat of headline inflation is long past…. 

“Future economic textbooks will likely teach that while capitalism is the most dynamic and productive system ever conceived, it is most efficient when there is a delicate balance between private incentive and government oversight. The benevolent fist of government will now join hands with Adam Smith in a most visible manner. Because it will, expect a lengthy recession but not depression, accelerating government deficits approaching a trillion dollars as forecast several months ago, and the eventual rise of inflation and longer dated bond yields. For now however, it is best to focus on the potential unfreezing of commercial paper and a globally coordinated policy rate cut….Stay liquid, remain in high quality.”  

Paul Volcker / Wall Street Journal 

“Today, the financial crisis has reached a critical point. The sharp decline in the stock market and its volatility dramatically make the point. More important if less visible, the flow of credit through the banking system and the financial markets is seriously impaired – even in part frozen. 

“For months, the real economy, apart from housing, had not been much affected by the developing crisis. Now, a full-scale recession appears unavoidable. Important state and local governments face deficits they may be unable to finance. Recessionary forces are apparent in other countries and exchange rates are unstable…. 
“The inevitable recession can be moderated. The groundwork can be laid for reconstructing the financial system and the regulatory and supervisory arrangements from the bottom up. The extraordinary interventions by the government (and taxpayer) should be ended as soon as reasonably feasible. 

“That rebuilding will be the job of another day – of a new administration here in the U.S., of finance ministries and central banks working together. It must draw upon the strength of the now chastened private sector. It will require more understanding of the risks embedded in so-called financial engineering and of the perverse compensation incentives that have exalted risk over prudence. 

“There is, and must be, recognition of the essential role that free and competitive financial markets play in a vigorous, innovative economic system. There needs to be understanding, in that context, that financial ups and downs – and financial crises – will be inevitable, even with responsible economic policies and sensible regulation. But never again should so much economic damage be risked by a financial structure so fragile, so overextended, so opaque as that of recent years.” 

But in terms of equities and those trying to divine the future, you keep seeing people come on CNBC saying things like “I’m looking at stocks trading at X multiple and they are incredibly cheap,” or “American companies are fine.” How do we know? How do we really know where the economy is headed, and thus earnings? How can you make blanket statements about anything these days? You can’t, because as I’m fond of saying we’re in an environment where the best advice is to wait 24 hours. 

Street Bytes 

--It was the worst week in the U.S. stock market, as well as on many global bourses, ever, as the Dow Jones lost 18.2%, 1,874 points, to finish the week at 8451, its lowest finish in almost 5 ½ years. The Dow is now down 40% from its all-time high of 14164 set last Oct. 9, its biggest decline since the 1973-74 bear market. Friday also witnessed the wildest day ever, in terms of point range, a full 1,000-point swing. The past two weeks have been like a sporting event. Just when you thought you’d seen it all, the market confounded you one more time. And we’ve now had an unprecedented seven straight, 100-point declines in the Dow, a 22% loss in just the first eight days of October. Ah, but as many of you know, according to history September is the worst month for stocks, while October is not only known for its crashes, it also is a time for making market bottoms. 

As for the S&P 500, it too dropped 18.2% to 899 (it’s amazing just typing these figures) and Nasdaq fell 15.3% to 1649. One of the causes of Friday’s action in particular was a flood of margin calls. You know Chesapeake Energy Corp. CEO Aubrey McClendon, the guy who has been running ads touting natural gas alongside Boone Pickens’ commercials? It turns out McClendon was forced to sell nearly his entire stake in the company to meet a margin call. Unreal. 
And in looking ahead, while we may hit a bottom this month, Monday could offer more of the same unless the news environment improves over the weekend because Treasury Secretary Paulson’s announcement on Friday evening following an initial meeting with G-7 finance ministers was disappointing. There does not appear to be any coordinated plan, outside of the extraordinary rate cut engineered earlier in the week by the U.S., European Central Bank, Bank of England, Bank of Canada, and even China. Aside from this, it remains every nation for itself, though the ministers have vowed not to effect any legislation that would harm the others, such as the protectionist measures that helped lead to the Great Depression. 

Also, in looking at initial reports from the Financial Accounting Standards Board, which was to clarify a rule on determining so-called fair value of assets such as illiquid securities, the FASB does not appear to have offered the clarity sought by many market participants, though I’ll have far more on this next time as warranted. 

Lastly, on Thursday, shares in General Motors hit their lowest level, $4.75, since 1951, while on Friday, Ford shares traded below $2; this as both fight rumors they will be forced to file for bankruptcy. GM and Ford denied this was going to be the case, but there is late word GM is now considering a merger with Chrysler. 

In another sign of the times in the auto industry, Capital One Financial Corp. announced it would no longer finance auto dealers’ inventories in New York and New Jersey. 

--U.S. Treasury Yields 

6-mo. 0.81% 2-yr. 1.64% 10-yr. 3.87% 30-yr. 4.13% 

The short end of the curve seized up again as the yield on a one-month T’bill was essentially 0.00% at times. And LIBOR, after improving some, finished the week at huge spreads to fed funds, with the latter now at 1.50% after the above-mentioned coordinated global rate cut. 

David Greenlaw, Morgan Stanley’s chief economist, notes the U.S. federal budget deficit could be close to $2 trillion next year, or 12.5% of GDP, more than twice the record 6% set in 1983. This is extraordinary. When President Bush spoke from the Rose Garden on Friday, he said America is a “prosperous nation.” Oh really? Sounds like smoke and mirrors to me. 

--Earnings for the third quarter will start flowing through in earnest this coming week and the guidance for the fourth quarter and beyond will not be good. How the heck can management offer up any clarity? 

--Trader George and I were laughing at how some commentators foamed at the mouth over the tumbling price of oil, down to $80 as there was ongoing liquidation on the part of hedge funds, and how consumers were saving all kinds of money at the pump, like maybe $1,000 or more a year if the trend holds. That’s great, but what about the $40,000 to $100,000 hits, or more, in many portfolios? I’ll have far more on energy next time. I nailed this one. 

--CNBC’s Jim Cramer created quite a stir this week. Back on 7/26 in this space I wrote, “On Thursday before the market opened, Jim Cramer said ‘we hit the bottom (in the stock market) ten days ago…forever.’ Cramer deserves credit for being spot on in his coverage of the Fed, Fannie et al, but such reckless b.s. as the preceding is what makes him look like a clown.” 

The low he was referring to in the S&P 500 was 1214, July 15. I received some criticism for my remark because by Aug. 11, the S&P had closed at 1305. 

So on Monday morning, Cramer appeared on “Today” and proceeded to say, “Whatever money you may need for the next five years, take it out of the stock market. Right now. This week.” 

Oh, sure, the market then plunged 1,870 Dow points, but this was the guy who had you in the market at 1300 on the S&P and it was 1099 before he made his call. 

So assuming you got out at his price point (which was an impossibility the way the market opened on Monday), you were then expected to be glued to the tube for the coming all-clear signal. But wait, he told you to get out with any money you needed for the next five years and it’s just a week or two later, I imagine, before we see a solid rally over that time. It’s absurd. Cramer’s playing investors hanging on his every word like chumps. Or as I maintain, he’s a reckless clown. It’s too bad he hasn’t learned to stick to straight commentary. 

--As for moi, I’m proud I’ve been advocating an 80% cash / 20% equities split for over two years now, but I only wish I had moved to 100% cash. My model allocation is simply that, a model, and it’s designed to help judge my work. I also have to admit that as of two weeks ago, I firmly believed we would finish the year down just 3 to 5 percent on the major market averages as I predicted last Dec. 31. Alas, so much for this one though at least I had the direction right. I also have to note I’m not into playing games like other strategists, such as Citi’s Tobias Levkovich, who this week threw in the towel on his 1450 or thereabouts prediction for the S&P by year’s end. Nice miss, Tobias. At this stage in the year, I live and die with my original predictions until it’s time to look ahead to 2009. Here’s a preview. That 80% cash level? It’s coming way down. 

--Since Aug. 31 of this year, we have seen five, 500-point declines in the Dow Jones; that’s five out of a total of nine in Wall Street history. 

--Citigroup pulled out of its attempt to acquire Wachovia because it did not want the Charlotte-based bank’s bad assets without government help, whereas Wells Fargo was willing to take it all on. Citi will, however, pursue its $60 billion suit for damages against Wells and Wachovia for the latter’s breaching an agreement that gave it the exclusive right to negotiate. Just a big disaster for Citi all around. 

--Shares in Morgan Stanley plummeted below $8 before finishing the week at $9.65 amidst renewed short-selling (following a lifting of the ban), ongoing uncertainty over just what MS has on its books, and the status of a $9 billion investment by Mitsubishi UFJ Financial Group. Morgan’s survival will be determined by Tuesday.  

--AIG has borrowed $70.3 billion in loans from the government in just three weeks to meet massive demands from its trading partners as the company rushes to sell assets to then pay them off. What was once thought to be an $85 billion loan from the U.S. was raised to $122.8 billion this week and could go far higher. As the Journal reports, “The lion’s share of the Fed’s original loan has gone for two things: providing collateral to AIG’s trading partners on complex derivatives known as credit default swaps, and covering losses in AIG’s securities-lending program. When the threat of losses from the lending program mounted, the Fed had to step in again this week.” 

AIG’s credit default swap positions require it to post additional collateral to the owners of the swaps when the value of insured investments falls; in other words, margin calls from its counterparties. This is the classic nightmare some of us worried about, though as noted above there isn’t anyone who can say they nailed the extent of the problem that we would find ourselves in, let alone the speed. [Even the perma-bears didn’t forecast the commercial paper/credit market freeze and crisis in confidence.] 

But in congressional testimony former CEO Martin Sullivan blamed “mark-to-market” accounting, not AIG’s reckless behavior, while we also learned of a sales conference at a resort in California costing $440,000 just days after the taxpayers bailed AIG out. 

--The amount local British governments had invested in high interest rate savings accounts in Iceland is close to $2 billion, all now frozen with Iceland’s government nationalizing the banks as it tries to get a handle on the books. The split between the U.K. and Iceland over this is as severe as any in history, including the 1970s cod war. 

Iceland has about $100 billion in foreign liabilities, this for an economy that is just $14 billion. Prime Minister Geir Haarde: “There is a very real danger, fellow citizens, that the Icelandic economy, in the worst case, could be sucked with the banks into the whirlpool and the result could be national bankruptcy.” Ye olde black hole.

--From Week in Review, 9/13: “The Journal had a blurb on the recent pain in some of the Middle East markets, many of which have fallen about 30% since early in the year. No one should be surprised this is yet another bubble and not just because of oil. Take real estate. 

“For example, if you received the Sunday New York Times Magazine, Sept. 7, I hope you glanced through a large advertising supplement concerning ‘The latest boomtown for investment, lifestyle and tourism,’ Ajman. 

“Now I feel like I’ve been around and keep up on things, but I had never heard of the place. Turns out it is the smallest of the United Arab Emirates, but ‘also one of the fastest growing and most ambitious.’ 

“If you haven’t thrown it out, spend a few minutes looking at this. I’m guessing 90% of you will just shake your head, as in ‘there simply isn’t enough demand for another Dubai (which is next to Ajman) when we all know that Dubai itself will crash.’ It has to. Trust me. These guys aren’t that smart either. Or to put it another way, they’ll prove to be as stupid as our own financial leaders have been.” 

Well, since the above comments, Middle Eastern equity markets have totally cratered, including daily losses of 10% in the likes of Saudi Arabia. In fact on Monday, all 124 stocks that trade on the Saudi exchange dropped by close to the 10% max allowed under Saudi law. [Dubai on Monday was down 8% the same day.] Yesterday, the Journal ran another headline “Dubai’s Heavy Debt Load Stirs Concern.” Don’t look for any capital infusions for U.S. financial institutions from already burned sovereign wealth funds here.

--Reserve Management Co., owner of the Primary Fund which broke the buck and helped precipitate the current phase of the financial crisis, plans to liquidate 14 municipal money-market funds. But Reserve can’t say when investors will get their money back.

--The World Economic Forum’s ranking of the soundest banking systems: 

1. Canada 2. Sweden 3. Luxembourg 4. Australia 5. Denmark 

The United States? No. 40.  
--Ah, but the U.S. is still the most competitive, according to the same organization. 

1. U.S. 2. Switzerland 3. Denmark 4. Sweden 5. Singapore 

--A Wall Street Journal story said one in five middle-aged workers stopped contributing to their retirement plans in the last year, according to the AARP. But this survey was conducted last month. Imagine what it is today. 

--In a speck of good news for California and other states’ homeowners, Countrywide Financial owner Bank of America has agreed to modify as many as 400,000 mortgages nationwide and reduce payments to settle charges of lending abuse brought by the states. 

For those who feel they may qualify, understand, as reported by the Los Angeles Times, that “The program will first identify customers who have fallen behind on their mortgages by more than 60 days or are likely to do so because of loan features such as rate or payment increases. These customers will be contacted by Countrywide starting Dec. 1.” Be proactive. 

--The New York Times’ David Brooks on the financial crisis. 

“This is more than a mortgage problem. We live in a world in which trillions of dollars can move instantly, but they are in the hands of human beings who are, by nature, limited in knowledge, and subject to self-deceptions and social contagions. By one count, financial crises are twice as prevalent now as they were 100 years ago. 

“In his astonishingly prescient book, ‘The World Is Curved: Hidden Dangers to the Global Economy,’ David M. Smick argues that we have inherited an impressive global economic system. It, with the U.S. as the hub, has produced unprecedented levels of global prosperity. But it has now spun wildly out of control. It can’t be fixed with the shock and awe of a $700 billion rescue package, Smick says. The fundamental architecture needs to be reformed. 

“It will take, he suggests, a global leadership class that can answer essential questions: How much leverage should be allowed? Can we preserve the development model in which certain nations pile up giant reserves and park them in the U.S.? 

“Until these and other issues are addressed, the global markets will lack confidence in asset values. Bankers will cower, afraid to lend. America’s role as the global hub will be threatened. Europeans will drift toward nationalization. Neomercantilists will fill the vacuum. 

“This is the test. This is the problem that will consume the next president. Meanwhile, the two candidates for that office are talking about Bill Ayers and Charles Keating.” 

--Investor George Soros, as reported by Paul Sheehan of the Sydney Morning Herald. 

“We are, Soros warns, not just in a rapidly deflating asset bubble caused by cheap money, lax standards and excessive debt: ‘We are currently experiencing the bursting of a credit bubble that has involved the entire financial system and, at the same time, a rise and eventual fall in the prices of oil and other commodities that have some characteristics of a bubble, and the two phenomena are connected in what I call a super-bubble. The fundamental trend in the super-bubble has been the ever-increasing use of leverage – borrowing money to finance consumption and investment – and the misconception about that trend was what I call market fundamentalism, the belief that markets assure the best allocation of resources.” 

--For the archives, and the ongoing history of Fannie and Freddie. Charles Duhigg / New York Times: 

“Had Fannie been a private entity, its comeuppance might have happened a year ago. But the White House, Wall Street and Capitol Hill were more concerned about the trillions of dollars in other loans that were poisoning financial institutions and banks. 

“Lawmakers, particularly Democrats, leaned on Fannie and Freddie to buy and hold those troubled debts, hoping that removing them from the system would help the economy recover. The companies, eager to regain market share and buy what they thought were undervalued loans, rushed to comply. 

“The White House also pitched in. James B. Lockhart, the chief regulator of Fannie and Freddie, adjusted the companies’ lending standards so they could purchase as much as $40 billion in new subprime loans. Some in Congress praised the move. 

“ ‘I’m not worried about Fannie and Freddie’s health, I’m worried that they won’t do enough to help out the economy,’ the chairman of the House Financial Services Committee, Barney Frank, Democrat of Massachusetts, said at the time. ‘That’s why I’ve supported them all these years – so that they can help at a time like this.’” 

--Russia’s billionaire oligarchs lost an estimated $230 billion between May 19 and Oct. 6, based on the declines in the equity markets. So much for them propping up high-end real estate in New York and the French Riviera, let alone the art market. This is one of the few things these days that gives me pleasure. 

--Talk about market manipulation, on Wednesday, Russian authorities said the stock market would be shut until Friday, following another plunge. But on Thursday, the market unexpectedly opened up again, the fact of which was made public just 45 minutes beforehand. It did work, with the RTS gaining 7%, but imagine the anger and confusion on the part of some investors who didn’t get the news in time. 

--Incredibly, MGM Mirage received a $1.8 billion credit facility from a group of unnamed banks for its gigantic CityCenter project of hotels, condos, retail stores and restaurants in Las Vegas. MGM Mirage needs another $1.2 billion, though, to finish the project. The total price tag is $9.3 billion. Wait two years and you’ll be able to move in for $49.95. 

--EBay announced it is laying off 1,600, 10% of its work force. 

--For the record, Alan Fishman, who signed his contract with Washington Mutual just weeks before it was seized by federal regulators and sold to JPMorgan Chase, is keeping his $7.5 million signing bonus but will not take the $11.6 million severance package, though legal experts say he would have prevailed had he chosen to fight it out.  

--As a BusinessWeek story puts it, India is going to lose a ton of outsourcing business, 15% to 20% by its estimates, thanks to a shrinking info tech sector. I’d say that’s low. 

--Lost in the news by week’s end was the congressional testimony of Lehman Brothers CEO Richard Fuld. 

“Ultimately what happened to Lehman was caused by a lack of confidence. This was not a lack of confidence in just Lehman Brothers, but part of what has been called a storm of fear enveloping the entire investment-banking field and our financial institutions generally.” 

But Fuld then blamed accounting rules, a la AIG, among other items, and while he took “full responsibility,” he insisted Lehman “did not mislead investors.” Authorities will over time prove otherwise. 

--Mark DeCambre of the New York Post

“A $2.5 billion compensation package earmarked to pay out bonuses and severance to some 10,000 Lehman Brothers’ staffers may come under fire by its creditors…. 

“At issue is whether choice bonus payment deals were secured by an elite crew of Lehman executives – who would actually have earned significantly scaled-down bonuses if Lehman had managed to survive.” 

--And then there is this regarding severance packages for thousands of regular Lehman workers, from Clemente Lisi of the New York Post. 

“In a one-page letter dated Sept. 30, Lehman told workers that it ‘unfortunately [was] no longer able to provide the salary continuation or other benefits’ because it had declared bankruptcy. 

“ ‘As a result, you will not receive a payment on October 3, 2008 or thereafter,’ the letter states.” 

We aren’t talking the high-rollers here. We’re talking people like Ann Harvey, let go in March and mentioned in the piece, who made $65,000 and was promised a paycheck every two weeks and health insurance for 13 months ending in April 2009 after being there 16 years.” 

--Johnny Mac, retired Wall Streeter and friend of StocksandNews. “My bank did well today. By that I mean I drove by it and it wasn’t padlocked.” 

--I’ve been following the Irish part of the crisis closely and it’s just one bit of awful news after another. Aer Lingus is going to lay off 1,500 and employees are sure to strike in response. [The airline is seeking to outsource much of the work.] But, 15-year employees are entitled to 2 ½ years severance! Hell, I’d snap that up and ride it out, reading books, pubbing and playing golf. 

--You know the housing stats I told you about the other day when I spent the week in Avalon, N.J.? How many of the 100+ homes on the market for $2 million+ will be sold at even half that? Or, more like it, how many will ever be sold at any price? 

--Speaking of my week at the shore, I mused in these pages on how Avalon was the perfect place for a wind farm. The other day the New Jersey Board of Public Utilities approved plans for one that would power 125,000 homes, a rather massive project for an area extending from Avalon up to Atlantic City. 

--As a result of the Great Depression, it took until 1940 for the economy to return to the level of GDP we were churning out in 1929 before the Crash. We also had 20%+ unemployment for four years. 

--Joe Bastardi, chief long-range forecaster at AccuWeather. 

“In the eastern half of the nation, people will look at the winter as bookends of cold,” Bastardi said Wednesday. December could be the most brutal month, followed by a classic January thaw. But then February roars back with more cold and snow. Ergo, while such forecasts are 50/50 at best, heating bills could soar at the worst possible time. 

--It will take at least a generation for people to look at their banks the same way they did just a year ago. 

--In reading up on China for an upcoming trip, I saw where 1,000 protested in Hong Kong over Lehman Brothers’ derivatives-related investments, pitched by local banks. It’s another sickening tale. Investors were left holding over $1.6 billion in “minibonds,” structured notes, as a result of the bankruptcy.  

--My portfolio: I’m shell-shocked as the few stocks I own are generally down far more than the overall market, though my lithium battery company is hanging in there for some reason. I haven’t sold anything in about six months, nor have I done more on the purchase side than to just round out a position. 

Foreign Affairs 

Iraq: Clashes between forces loyal to Moqtada Sadr and Iraqi troops broke out in Baghdad after the assassination of a popular Shia lawmaker. And another seven Christians were killed in separate attacks in Mosul, leaving about ten left in the country, or so it seems. 

I’ve been a supporter of the war throughout, but among the many stories that need airing from time to time when talk of success breaks out is the simple fact this is not the same country we entered when it comes to the makeup of the populace. Christians, in particular, have successfully been ethnically cleansed. That’s the only way you can put it. 

Afghanistan: A report from America’s intelligence community concludes that Afghanistan is in a “downward spiral”. A draft of the latest National Intelligence Estimate has been making the rounds in Washington, though the final version is not slated to be released until after the election. The problem is it’s not just about the Taliban, but rather a ton of problems of the Afghan government’s own making. 

While the Afghan military has made some good strides, the heroin trade, said to be up to 50% of the country’s economy, plays an immensely destabilizing role. Just this past Sunday, the New York Times reported that President Hamid Karzai’s own brother was heavily involved in heroin trafficking, thus further damaging the president’s already fragile credibility. 

Iran / Israel: Israeli Prime Minister Olmert, as lame a duck as you can get (even more so than Bush) didn’t indicate he had received any Russian pledge not to sell Iran weapons, including the S-300 air-defense system, in meetings Olmert had with President Medvedev and Foreign Minister Lavrov. Separately, the White House continues to block any Israeli strike on Iran over fears of retaliation against U.S. forces in Iraq. 

For their part Gulf officials are losing confidence in America, due not only to Russia’s invasion of Georgia, but also the ongoing wars in Iraq and Afghanistan. One leader told Defense News: 

“With the presence of a strong but unreliable ally, who needs enemies?” alluding to unfounded fears in the region that the United States will strike Iran. 

“The U.S. has not given enough assurances that an attack on Iran would not result in a massive Iranian missile attack on Arab Gulf states, and the closure of the Strait of Hormuz. We are not sure the U.S. can win this war or force Iran to surrender or succumb to its demands.” 

Enter Moscow, which has been working hard to improve its relations in the region, leaving some nations to improve ties with both Russia and Iran. Saudi Arabia, which reportedly has bought $billions worth of Russian tanks, helicopters and other arms in the past year, seems to want Russia as a friend to keep Iran in its place. 

In a related matter, Israel accused North Korea of supplying half a dozen Mideast governments with nuclear technology or conventional arms, though it didn’t identify the six by name. [Iran and Syria are obviously two of them.]  

Russia: Along the lines of the above, President Medvedev blasted the United States on Wednesday, telling European leaders in Evian, France that “A desire by the United States to consolidate its global domination led to it missing an historical chance” after the Sept. 11, 2001 attacks “to build a truly democratic world order.” Medvedev is proposing a new trans-Atlantic organization in which the U.S. would no longer be dominant; this after invading Georgia and seeing its stock market plunge 70% in months. Talk about chutzpah. Joseph Collins, a professor at the National War College, told USA Today’s Andrea Stone, Russia “has a little Rodney Dangerfield in it” these days. “They’re starved for respect.” 

Notice how a desperate Moscow pulled out of some contentious border zones in Georgia this week as part of its attempt to change the conversation. 

Edward Lucas / Financial Times 

“Relations between the West and Russia have entered a period of extraordinary mistrust and mutual disdain. Indeed, after the conflict in Georgia, the description ‘cold war’ risks looking like an understatement. Russia has shown that it is prepared to use military force against another country; the West has shown that it will not fight and will merely respond with a token protest. Some in the European Union, such as Nicolas Sarkozy, president of France, may see the Kremlin-dictated truce that stopped the fighting (though not the ethnic cleansing, which continues apace) as a triumph. From Russia’s point of view, the lesson of Georgian adventure is simple: we got away with it. 

“News last week that a Russian nuclear bomber simulated an attack on a city in northern England, combined with the biggest military maneuvers since the collapse of the Warsaw Pact and the dispatch of a Russian naval squadron to the Caribbean, raise two pressing questions: what is Russia up to and what should we do in response?” 

Lucas talks of Russia’s aim being the recreation of a ‘lite’ version of the Soviet empire, based not on military might but on economic dominance and pipeline monopolies; and that it wants the ‘Finlandization’ of Western Europe. That involves the use of money, above and below board, to cultivate friendly lobbies. One example is this week’s dramatic $5.5 billion Kremlin bailout of Iceland. Another is the former German chancellor Gerhard Schroeder chairing a Russian-German gas pipeline consortium.

To combat this, Lucas proposes the West keep the lines of communication open to “help slow (Russia’s) paranoia and adventurism.” We need to rethink our energy policy. “If the European Commission can bring Microsoft to heel over its outrageous behavior with Windows software, it can do the same with Gazprom: not just as a tool of Kremlin foreign policy, but also as a flagrant price-fixer and competition inhibitor (for example in its refusal to allow third-party access to its pipelines).” Also, it’s time to stop the flow of dirty money (not just from Russia) into our banks and markets. Lucas concludes we are running out of time. 

By the way, Russian media is not covering the financial meltdown there. As stocks were plunging 19% (yes, 19%) on Monday, the three main television channels showed billionaire Mikhail Fridman telling President Medvedev that the global financial meltdown offered new opportunities for Russian companies abroad. 

“I am convinced that the Russian financial system is protected from such a fundamental shock to a greater degree than many other countries,” Fridman told Medvedev. As Anna Smolchenko writes in the Moscow Times, “When faced with unpleasant news, the government has often resorted to a strategy that can be summed up as: ‘If we don’t report it, it didn’t happen.’” 

Such were the delays in news about the Beslan attack in 2004, the Kursk submarine sinking in 2000, and Brezhnev’s death in 1982. 

Murray Feshbach / Washington Post

[The ‘bear’ might be back, in some respects, but….] 

“Something even larger is blocking Russia’s march. Recent decades, most notably since the breakup of the Soviet Union in 1991, have seen an appalling deterioration in the health of the Russian population, anchoring Russia not in the forefront of developed countries but among the most backward of nations…. 

“According to U.N. figures, the average life expectancy for a Russia man is 59 years – putting the country at about 166th place in the world longevity sweepstakes, one notch above Gambia.” 

You know the culprits; HIV/AIDS, tuberculosis, alcoholism, cancer, heart disease, smoking, traffic accidents…but the policies to combat the health crisis in particular “seem unlikely to change as the bear lumbers along, driven by disastrously misplaced priorities and the blindingly unrealistic expectations of a resentment-driven political leadership. Moscow remains bent on ignoring the devastating truth.” 

But suddenly, Russia became very popular, at least in Iceland, as the Reykjavik government pleaded with Moscow for the $5 billion loan. Russia jumped at the opportunity. After all, Iceland’s fellow NATO allies didn’t step forward. Former U.S. Treasury Secretary Larry Summers observed, “I have to say that the news on today’s Bloomberg that Iceland was negotiating a stabilization loan with Russia did not fill me with a sense of comfort about the political implications and the ways in which the world is moving.” [You can be sure the Kremlin is scouting out sites for a new naval base there, eh? Now that’s a way to stick it to NATO.] 

Lastly, you know how I’ve taken liberties by writing of “drunken Russian soldiers”? Here is a Reuters headline from Wed., Oct. 8: 

“ ‘Drunk’ Russia Soldiers Return For Georgia Pullback” 

“Two Russian soldiers almost missed their unit’s withdrawal from Georgia on Wednesday after spending the night sobering up in a police cell, Georgian police said. 

“The uniformed soldiers were handed over by Georgian police to the Russian military at the Karaleti checkpoint, just hours before Russian troops were expected to pull back from positions inside core Georgia.” 

Driving around drunk when pulled over late on Tuesday, the two asked arresting officers, “Where are we?” 

Ukraine: President Viktor Yushchenko finally dissolved parliament and called for an early election on Dec. 7. The coalition Yushchenko had with Prime Minister Timoshenko broke up on Sept. 3 and Ukraine has been in limbo since. Timoshenko and her allies garner 24% in the polls while opposition leader Viktor Yanukovych has 23%. Yushchenko? 3.8%. Which means that Yushchenko could easily face an even more rebellious parliament, while waiting in the weeds is Russia, looking to take advantage of the coming chaos. 

[The next presidential vote isn’t slated until 2010, but Timoshenko is vowing to move the date up. None of this is pleasing to Washington.] 

Pakistan: President Zardari, eager for good relations with India because he is scared of it, got himself in more hot water by calling Islamic militants fighting Indian rule in Kashmir, “terrorists.” Most Pakistanis call them “freedom fighters,” so in some militant circles, Zardari is today a traitor. Meanwhile, the U.S. continued to strike suspected Taliban hideouts in the tribal regions, against Zardari’s wishes. Do you think he’s in a bit of a box these days, all of about four weeks into his presidency? 

North Korea: Whoever is in control these days (and we really have no clue…even as “Dear Leader” made a second appearance, as shown on state television Saturday) is reversing the disablement at Yongbyon and has been firing short-range bottle rockets into the Yellow Sea; this as South Korea’s top military official said the North is trying to develop a small nuclear warhead to fit on a missile, though it wasn’t clear if they’ve been successful. 
But then there were all kinds of reports Washington was about to take Pyongyang off the terrorism blacklist, this as ABC News said North Korea was preparing another nuclear test. The White House is a confused bunch these days. Nice legacy. 

China / Taiwan: The head of Taipei’s National Security Bureau accused China of developing the deadly SARS virus as a biological weapon, not exactly the kind of talk you like to see between two sides that are now trying to improve relations. 

And in following up on my comments from last week, that the Bush administration was holding off on an $11 billion arms sale to Taiwan, the White House reversed course and notified Congress it was approving $6.5 billion. In protest, China told the U.S. it would not proceed with several senior-level visits and other plans for military cooperation. 

[Taipei is nonetheless soon to receive two giant pandas from the mainland as a gift, assuming the previously announced offer goes through. In exchange, Taiwan is sending China “a rare goat and deer.” I’m thinking Taiwan is getting the better of the deal.] 

South Africa: Well, I’ve been warning of coming chaos here and on Monday, the New York Times’ Barry Bearak wrote a piece titled “Post-Apartheid South Africa Enters Anxious Era.” 

Last week I wrote of the demographics here and white flight. Barry Bearak adds: 

“Since 1996, the black population has risen to a projected 38.5 million from 31.8 million, according to government statistics. The white population has dropped to a projected 4.5 million from 4.8 million.” 

But this week the plot thickened as the ruling African National Congress party threatened to split into two factions; those allied with ousted former president Thabo Mbeki, and the new rulers led by the nut-case Jacob Zuma, who will become president in elections next spring. [There is a caretaker president, an ally of Zuma, today.] Zuma still faces corruption allegations resulting from a multibillion-rand arms scandal in 1999-2000. He was acquitted of rape in 2006, but was forced to admit that he had had unprotected sex with an HIV-positive woman half his age. 

Zimbabwe: And then there is this hellhole. President Robert Mugabe’s henchmen are determined to drive out the last white farmers (see a pattern coupled with the story above?) Recall in 2000, Mugabe commenced his campaign of “land reform,” expropriating white farms, 4,100 of 4,500. Now the remaining 400 are being targeted and the white owners are subjected to violent attempts to drive them off. 

In case you forgot, half of Zimbabwe’s population faces starvation. 

Somalia: An international taskforce is being assembled to put an end to the piracy threat off the Somali coast. It’s time to unleash our frustrations of the past two months, thanks to the financial crisis, and take it out on these bastards. 

Mexico: In one week, 57 were killed in Tijuana as a result of the drug war. 57. 

Austria: Far right leader Jorg Haider, who burst on the scene in 2000, died in a car accident today. 

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Pray for the men and women of our armed forces.

God bless America.

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Gold closed at $851
Oil, $80.18

Returns for the week 10/6-10/10…staggering 
Dow Jones -18.2% [8451]
S&P 500 -18.2% [899]
S&P MidCap -16.9%
Russell 2000 -15.7%
Nasdaq -15.3% [1649] 
Returns for the period 1/1/08-10/10/08

Dow Jones -36.3%
S&P 500 -38.8%
S&P MidCap -35.9%
Russell 2000 -31.8%
Nasdaq -37.8%

Bulls 25.3
Bears 53.0 [Source: Chartcraft / Investors Intelligence…this is the largest spread since Sept. 1990. Ironically, my own bull/bear readings go back to March 1990, so I can confirm this. Back on 9/21/90, the spread was 27.9/55.7 and the Dow Jones was within three weeks of bottoming at 2398 in the buildup to the Gulf War, Saddam Hussein having invaded Kuwait on 8/2/90. Conversely, the bull reading reached its recent peak at 62.0 the week ending 10/19/07, ten days after the Dow hit its all-time high of 14164.] 

Let’s all hope for a better week. I appreciate your support.

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