Week in Review 
For the week 12/1/2008 - 12/5/2008
Brian Trumbore
President/Editor, StocksandNews.com

The Recession Deepens 

This week the National Bureau of Economic Research declared that the recession in the United States began last December. Watching CNBC, I got a kick out of those who came on the air and pooh-poohed the pronouncement, saying things like “We already know we are in recession and how does this help us today?” 

Well, two things. First, few really knew when it started, and second, it’s called history. Someone has to establish the dates for the historical record and that’s the NBER’s job. One then hopes that a generation or two later, we’ve learned a lesson or two the next time we have a crisis, though let’s hope it’s at least three or four generations before the world faces another one like we have today. 

But I can’t help but add that on 10/25/08 in this space I wrote the following: 

“The NBER, the folks who will one of these days decide when the recession started, will say it commenced early this year, if not last December.” 

Not too shabby, if I may say so myself.  I continued: 

“The 2.8% GDP figure for the second quarter was meaningless when looking at the bigger picture; the crash in housing and negative job growth. I have said, though, that the recession, when measured by actual numbers, would seem mild but would last a while. Now, I don’t have a clue where the numbers will come in. 

“I believe those saying unemployment will only hit 7%-8% are full of it. We will see 9%+ at some point. [Much higher than this and you’re talking depression when combined with the massive deleveraging taking place around the world.] 

“I have been correct in not worrying about inflation one iota. Obviously, we’re now in the midst of significant asset deflation across the board. Those saying, yeah, but look at all the money being thrown at the problem, so inflation will one day reemerge, are correct but we will have plenty of time to prepare for this and I think all of you agree that when it comes to your home and investments, you’d love inflation today!” 

So I stand by everything I wrote five weeks ago, as well as just about everything I’ve written since I called the ’08 recession the end of 2006, but when I say above that “I don’t have a clue where the numbers will come in (on growth),” what is clear now is that the 4th quarter GDP figure will be incredibly ugly and a ‘hide the kids’ moment when it’s released in January. 

But where does one start when talking about this past week’s carnage? Might as well begin with Friday’s employment figure for November, down 533,000 jobs (with October revised downward from a loss of 240,000 to minus 320,000), and with the unemployment rate hitting 6.7%. It’s safe to say this latter figure is off by at least 0.5% and will keep climbing for the foreseeable future. 

After all, we had the likes of DuPont announce it was slashing 2,500 workers with the steep drop in construction, car sales, and consumer spending. [DuPont also said it now expected a 20 to 30 cent 4th quarter loss when it had initially forecast a profit of 20 to 25 cents.] AT&T said it was laying off 12,000 and reducing capital spending, on top of 4,600 previously announced pink slips. U.S. Steel said it was reducing its work force by 3,500. 

In the entertainment and media industries, Viacom is firing 850, CBS Radio 750, NBC Universal 500, and Gannett 2,000. 

Bank of America’s merger with Merrill Lynch (approved by shareholders on Friday) is rumored to involve 20,000 layoffs, while Credit Suisse announced it was cutting back by 5,300. 

Then there’s the auto sector. Regardless of whether you are talking the Detroit 3 or including the foreign car companies, the figures for November got even worse, the 13th straight month of falling sales from year ago levels. GM’s were down 41%, Ford’s 31%, Chrysler’s 47%, Toyota’s 34%, and Honda’s 32%.  Auto sales in America are now running at an annualized rate of 10.2 million vehicles, this as the Detroit 3 went to Congress again with hat in hand, and with the urgency for a bailout greater than ever. GM, for starters, is toast by yearend without an immediate cash infusion. 

I’ve said enough about the autos and the bailout issue over the past month. Let’s face it, GM, Ford and Chrysler certainly are in their rights to point to the likes of Citigroup and the $300+ billion they have received in cash and guarantees and say, why not $34 billion for us, collectively? 

The problem is we are out of time. I’d force GM and Chrysler to merge, loan them the money to get it done, and then support Ford, who claims they really don’t need much to get through this depression patch in the sector. But then you still have to rework all the debt with the creditors, rework retiree benefits, reduce wages across the board, and so on. What we end up with at this point is thus anyone’s guess, though as of this writing it appears Congress is working on a stop-gap measure to tide the automakers over until a new administration can look at the problem.   It’s already an overused term, but it’s true. Congress, like the rest of us, has bailout fatigue and it’s the Detroit 3 who are paying the price. I suspect history might show that if the three CEOs had been more prepared, and less arrogant, two weeks earlier, they may have already had some sort of package. This will be a classic case study in MBA school down the road. 

But back to the recession, with each week we find out just how global it is and how interconnected we all are. 

This was a time when everyone slashed interest rates, with the U.S. Federal Reserve set to do the same at its Dec. 15-16 meeting. 

The European Central Bank cut its key lending rate from 3.25% to 2.50%. The Bank of England cut from 3.00% to 2.00%, the lowest figure here since 1939. Both talked of a sharp decline in the inflation forecast. 

New Zealand reduced from 6.50% to 5.00% amidst its worst recession in 18 years. The Aussies cut a full percent to 4.25% as it’s now on the verge of negative growth. Sweden cut from 3.75% to 2.00% due to the “unexpectedly rapid and clear deterioration in economic activity since October.” 

China, which had slashed rates a week earlier, talked of plunging property prices and rapidly contracting construction spending. The Bank of Japan said overall conditions, like elsewhere, were “deteriorating fast.” The UK’s purchasing managers index tumbled to 34.4 in November (50.0 being the expansion/contraction line), for the EU-15 it was a record low 35.6, Russia’s was at 39.8, China’s a shocking 38.8. Here in the U.S., the corresponding figure was 36.2, the worst since 1982, and the ISM non-manufacturing (service economy) index came in at a numbing 37.3. 

Housing prices in the UK tumbled 16% in November, the worst monthly decline in 25 years and are now at July 2005 levels. Separately, I wrote years ago about how credit card debt in both the UK and South Korea was far greater than in the U.S. (few believed me) and this very topic is now front and center in these two nations today. 

Aussie car sales were down 22%, Brazil’s 25%, the UK’s 37%. 

Global chip sales were down 2.4% in October, and obviously deteriorating further since. 

German retail sales fell 1.5% in October. It was just one year ago I was in Germany and was frankly shocked how good the mood was among consumers there. No longer. 

As for retail sales in the United States, once again we had the usual b.s. about Black Friday. It’s all in my archives, but I imagine you’d be hard-pressed to find many negative reports on activity that day over the years. Folks like ShopperTrak and the National Retail Federation, I’m convinced, are loose with the facts. This year, the former said sales were up 3%, while the latter said they were up over 7%. 

Here was the real bottom line, looking at the entire month of November and coming from the individual retailers themselves. It sucked, save Wal-Mart, whose same-store sales figures were up a solid 3.4%. Otherwise you had the likes of Target down 10%, Costco off 5%, J.C. Penney off 12%, Macy’s off 13%, Kohl’s off 17%, Abercrombie down 28%. 

Not to be outdone, the first reading for Cyber Monday was that sales were up 15%, but a more realistic look at the entire month from comScore said they increased only 2-4%. Considering it wasn’t too long ago that online sales were increasing 20% a year, this is putrid. 

So that’s the background, but where to go from here? Years ago I correctly identified it was about housing, like 3 years before the Fed got it, and of course it remains that way, though I said then that as it hit Americans that their number one asset was declining in value, they’d finally pull in their horns on the spending front. This process took longer than I thought at the time, but obviously has now with a vengeance. And needless to say, the legs on my three-legged stool, housing, the consumer and capital spending, have been sawed off.  

If there is any good news, it’s on the interest rate front. On one hand there is panic buying of Treasuries, as I’ll spell out below, while only now are mortgage rates belatedly beginning to move in tandem, though we still have a ways to go to hit more historical norms in the spread between the two. All manner of folks, including Ben Bernanke, now realize that a target rate of 4.50% is necessary for housing to begin to find a bottom. 

Two problems here, however. One, you need a job if you’re looking to buy, and two, if you want to refinance you need both solid income and positive equity. Also, in the first instance, you better be prepared to pony up 20% these days. 

Both of the above assume the banks will lend. Alan Blinder, a former Fed vice chairman, is right when he says the government botched the whole rescue plan from the start in not just formally nationalizing Fannie and Freddie instead of the belated effort to pump $600 billion in them as a way of lowering mortgage rates. It worked, at least for a week, but it wasn’t necessary. Instead, Treasury should have explicitly guaranteed Fannie and Freddie debt from the beginning and then wouldn’t have needed the extra $600 billion. As noted in Barron’s, Blinder calls Treasury Secretary Hank Paulson’s actions “boneheaded.” 

Speaking of Paulson, he was in China this week, begging them to cooperate on the currency front (they aren’t). So the Chinese took the opportunity to tell him that the United States needed to get its own house in order, first, and to “guarantee the safety of China’s assets and investments in the U.S.” 

[Chinese President Hu Jintao, though, also warned his people that China was losing its competitive edge and that “Whether the pressures can be turned into a driving force and the challenges turned into opportunities…is a test of our ability to control a complex situation, and also a test of our party’s governing ability,” a stark admission of both the government’s and China’s vulnerabilities.] 

On to the banks. Superstar Oppenheimer analyst Meredith Whitney, in an op-ed for the Financial Times. 

“I am more bearish today than I have been in the past 18 months. In so far as the market has impacted on the economy, capital destruction has been so intense that multi-trillions in capital raised by institutions through both private and public capital has gone to plug holes and not stabilize the effects of shrinking liquidity to corporations and consumers. More than $3 trillion of available credit has been expunged from the markets and therefore corporate and consumer borrowers so far this year. 

“I estimate that the mortgage market will shrink for the first time in U.S. history and that the credit card market will be 18 months behind it. While just over 70% of U.S. households have access to credit cards, 90% of these people use credit cards as a cash-flow management vehicle, or revolve payments at least once a year. While the credit card market is small relative to the mortgage market, it has grown to play a key role in consumer liquidity. Declining liquidity here will have disastrous effects on consumer spending and the economy.” 

The above shouldn’t exactly be a shock to anyone, seeing as credit card and home equity loans were always the next shoes to drop, but it is unsettling to some how rapidly credit lines are being pulled in by the banks as the financial institutions become scared to death about the liability on this end. 

Finally, our troubles started with housing and all the attendant securities then attached thereon, and on Friday we learned that one in 10 American homeowners were either in foreclosure or delinquent on their mortgage. The worsening jobs picture gives you a strong indication where we are headed from here, even if the government quickly establishes a 4.50% mortgage rate. 

Street Bytes 

--Aside from all the above, we had a number of key players warn on earnings, such as Staples and Merck, while luxury homebuilder Toll Brothers is forecasting lower revenues in 2009 than ’08. On the positive side, Hartford Financial told the investor community to chill out and that it was weathering the financial crisis, so this helped rally the insurance sector big time on Friday, while earlier, GE got down on its knees and begged everyone to believe its dividend was secure and its shares rose. 

But another story was the ongoing carnage in the hedge fund industry as major players such as D.E. Shaw, Fortress and Tudor Investment (along with countless others), closed the gate on redemptions because they were forcing the funds to sell investments at distressed prices, thus exacerbating the performance issue, which in turn would lead to further redemption requests. That said, there are existing requests that have yet to be honored that will beget more forced selling, which has been roiling both the equity and credit markets. This tale will continue to play out over the coming weeks. 

Overall, after another death spiral on Monday, about 680 points, stocks gradually rallied back and then staged a nice move on Friday, despite all the dire economic news, to cut the week’s losses to 2.2% for the Dow Jones, 2.3% for the S&P 500 and 1.7% for Nasdaq. 

There was a bit of symmetry in the 533,000 job loss figure for November being the worst since December 1974. The actual low for the 1973-74 bear market was set on 12/6/74 at 577. 
But if you think this is some sort of good omen, let me remind you that the current recession is far different from that of 35 years ago. 

Then again, by the close on Friday, all manner of folks were out of breath, proclaiming that the lows are definitely in and that the market is anticipating far better times in 4-6 months, because, altogether now, the market is a discounting mechanism. 

I said my piece on this topic last week. I sincerely hope the bulls are right. Depending on how we finish up the next few weeks, I plan on increasing my recommended allocation for equities in 2009. 

But there’s no rush! There are so many moving parts to this global recession that yet threatens to become a full blown depression. I wrote a few weeks ago that for starters, I don’t see how any corporation can possibly forecast anything of a positive nature when it comes to the global outlook until mid-February at the earliest. Certainly no one reporting earnings, say, on Jan. 15 is going to be able to look at the fourth quarter and say with any conviction it’s up, up and away from there. 

I’m well aware of all the liquidity being pumped into the system, worldwide, and the various stimulus packages being employed from Moscow to Paris to Washington to Beijing. Eventually some of them should bite, and for selfish reasons, like my investment there, I believe it could be China that first regains traction. 

We also await the impact Barack Obama will have, and the attendant massive stimulus program he will have under his coat as he takes the oath of office. If it truly puts a sizable number of people back to work, that’s great. I’ll worry about the deficit later. 

But it’s still a guessing game at this point. No one, yet, in the world, can say with any authority just what the timeline for getting out of this mess will be, and remember, we still have a major geopolitical item to deal with in the interim…a nuclear Iran. 

--U.S. Treasury Yields

6-mo. 0.20% 2-yr. 0.92% 10-yr. 2.71% 30-yr. 3.13% 

The flight to safety in bonds has been unreal. As Merrill Lynch economist David Rosenberg noted the other day, we have entered the “bubble” phase in Treasuries. It will end, these historically low rates, in the case of the 10-year yields not seen since 1954, but just when is not known. Bubbles can last awhile, see also tech and housing. 

For the record, the 10-year at one point yielded 2.55%, while the 30-year got down to a record low of 3.06%. Now we wait to see if mortgage rates follow and/or how quickly some investors will be burned as rates rocket back up due to any optimism on the economy and signs of renewed demand. 

--Energy: On July 11 we hit an intraday high of $147 on crude oil and on Friday we were back down to $40.80, the lowest weekly finish in exactly four years. There isn’t a man alive who could have foretold this spectacular move, just as there was no one who nailed the extent of the credit crunch. I nailed the top in crude, though, on July 5 in this space. 

“I’ll lay out the facts below but I want to be clear. I am definitely in the Peak Oil camp, but that doesn’t mean I can’t also call for a big drop in the price of oil at some point the next six months, to $100 or below. There is no way you can validate $145 oil, no matter what anyone says on the supply/demand front. I know all the arguments, and I have some good friends who make their living in the energy sector and would disagree, but there is no doubt speculation has played a role in the high price just like speculators bid up the price of some tech stocks during that bubble.” 

I was thinking $80 to $100. $40? As Dick Vitale would scream, “Are you kidding me?!” 

But, alas, capital spending on the drilling front is beginning to dry up faster than you can say Plaxico Burress. For starters, you have the vaunted oil tar sands of Alberta. This region was to supply its neighbor, us, with oil the rest of our lives. One problem. Much of it is uneconomical below $80-$85, let alone $40 to $50. [Imagine the convulsions in some of the local economies supporting the industry there.] Offshore projects, such as those in the Gulf or off Brazil that have been highly touted as future sources are now being shelved and buried deep in file cabinets. 

So, yes, just as oil plunged, we are setting ourselves up for another mammoth bull run in crude, though as I’ve written, as much as I follow the sector, and as much as I’ve made in it, I have been out for years. I missed the move to $147, but get this. 

While I seldom mention individual issues, one I’ve noted that I made money on numerous times was Nabors. I am not a trader, but this is one issue I used to love playing from $28 to $36. I was long out, though, when it hit $50 this past June 30. Yesterday, it traded below $10. Every single oil stock I was in from 1999 to 2005, except perhaps one, is now below where I last owned it. Remarkable. 

Oh yeah, there will be opportunities, but not until global demand shows signs of bottoming and that is not the case today. Meanwhile, OPEC is beside itself with fear and on Dec. 17 will next meet to try and figure out how to get the price moving back in the right direction. 

On the topic of crude I also can’t help but bring up a corollary subject I was first in noting the importance of…taxes paid by Big Oil. As oil was moving from the once-scary $60 level to $80 to $100 and on up, you had the hue and cry against the likes of Exxon and Chevron. So I felt an obligation at the time to remind people that aside from the fact these companies employ hundreds of thousands in good paying jobs, they also pay more than their share of taxes. To wit on 10/13/07 in this space I wrote: 

“In the first six months of 2007, Exxon Mobil and Chevron, combined, paid over $20 billion to the federal government. It was about $22 billion for the first half of 2006. My point being it’s not just low tax rates and the entrepreneurial spirit of America, as Bush likes to tout. The facts speak of another rather large contributor that is always left out of the talking points, wouldn’t you know.” 

My friends (someone has to remember John McCain), you won’t have Exxon and Chevron to kick around any more (channeling Richard Nixon after his loss in the ’62 California gubernatorial race) in another quarter or two. Oh, they’ll still have solid earnings, but they won’t be contributing $40 billion a year between them to the federal treasury, I imagine. Then again, as I told Trader George the other day (George being intimately involved in the sector at Strategic Energy Research and Capital), when we’re talking about a $trillion+ federal deficit and $350 billion in capital and loan guarantees for Citigroup, who gives a hoot about a piddling $40 billion in lost revenue? 

Lastly, back to OPEC, President Chakib Khelil said this week “We realize that in the first quarter of next year we are probably going to have a decline in demand, and in the second quarter we are going to have a big decline.” If true, can you say $1.10-$1.20 at the pump? 

--The spreads in the junk bond market, 19%+ on Dec. 1, foretell a U.S. default rate of 21%, far greater than in 1933, according to John Lonski of Moody’s. Lonski also notes “There’s a lot of forced selling of high-yield bonds by hedge funds owing to the need to de-lever as well as by mutual funds in response to redemptions. You’re looking at a market where the sellers well outnumber the buyers and the reluctance on the part of buyers makes sense if only because a bottom for economic activity is not yet in sight.” [Bloomberg] 

--In so many ways the British government has been leading the way in terms of seeking solutions for the housing and financial crises. On Wednesday, Prime Minister Gordon Brown announced that eight major British lenders, representing 70% of all outstanding mortgages, have agreed to his plan to stave off massive foreclosures by providing for a way to keep homeowners from defaulting if they lose their jobs or suffer a sharp drop in income by deferring mortgage interest payments for up to two years. 

--Thanks to delays in appraising homes, and thus coming up with new assessed values following the popping of the housing bubble, property tax collections continue to rise as values fall, this as sales and income tax revenues tumble. As Church Lady once said, “How conveeenient.” 

--Chip maker AMD warned fourth-quarter revenue will decline a whopping 25% from the third quarter, when the company had originally forecast sales to be flat. Another astounding indication of just how quickly the global economy has fallen off a cliff. 

--The chairman of China’s sovereign wealth fund, having sustained huge losses on investments in the likes of Blackstone Group and Morgan Stanley, said Western financial institutions needn’t bother looking for further capital from him. 

“Right now we do not have the courage to invest in financial institutions because we do not know what problems they may have.” 

--No secret I haven’t been a big fan of the private-equity sector. One of the largest, Carlyle Group, announced the first layoffs (10% of staff) in its 20-year history and this is just the beginning. Some would say turnabout is fair play.

BusinessWeek, for example, had a story on the private-equity purchase by Cerberus Capital and two others of department store chain Mervyns, a 149-year-old company. 

“When those firms bought Mervyns from Target for $1.2 billion in 2004, they promised to revive the limping West Coast retailer. Then they stripped it of real estate assets, nearly doubled its rent, and saddled it with $800 million in debt while sucking out more than $400 million in cash for themselves, according to the company. The moves left Mervyns so weak it couldn’t survive.” 

18,000 are out of work – without severance. It’s a story repeated countless times elsewhere. 

--No one is escaping the carnage these days. Harvard’s $37 billion endowment fund lost 22% of its value in the past four months and, in a letter to its deans (who receive funding from the vehicle), said the loss could end up being as much as 30% by June 30. Harvard depends on the endowment for 35% of its operating budget. 

The main problem is the level of illiquid investments in the portfolio, such as in private equity, 11% of the holdings, as well as 9% in timber and agriculture, and, as reported by the New York Times, a like amount in real estate. Obviously, no sector has gone unscathed during the financial meltdown. 

What makes it worse is that, similar to the hedge fund issue noted above, the endowment has placed $1.5 billion in private equity investments on the market, just as other endowments and foundations do the same, so good luck in getting a satisfactory price. 

--Jim Bianco of Bianco Research came up with a terrific look at past government programs and the costs. For example, in today’s dollars, the Louisiana Purchase set us back $217 billion; the Marshall Plan $115 billion. Thus far, just taking the original $700 billion bailout plus the extra $800 billion announced ten days ago by the Fed, that’s $1.5 trillion…for a bunch of paper. Seems like in the first two we got something tangible out of it. Damn I miss Thomas Jefferson and George Marshall! [Talk about underrated figures in American history…start with Gen. Marshall.] 

--PIMCO’s Bill Gross: 

“My transgenerational stock market outlook is this: stocks are cheap when valued within the context of a financed-based economy once dominated by leverage, cheap financing, and even lower corporate tax rates. That world, however, is in our past not our future. More regulation, lower leverage, higher taxes, and a lack of entrepreneurial testosterone are what we must get used to – that and a government checkbook that allows for healing, but crowds the private sector into an awkward and less productive corner. Dow 5000? We don’t have to go there if current domestic and global policies are focused on asset price support and eventual recapitalization of lending institutions. But 14,000 is a stretch as well. One only has to recognize that roughly 20% of bank capital is now owned by the U.S. government and that a near proportionate share of profits will flow in that direction as well. Better to own corporate bonds than corporate stocks.” [pimco.com] 

[PIMCO received some rare bad press as it was forced to suspend dividends on some closed-end funds due to the inability to find a borrowing substitute for the once traditional auction-rate market. PIMCO’s problem, which other fund groups are facing, is related to the mandated asset-coverage ratios it is required to maintain in order to pay out dividends. Such payouts should resume relatively soon.] 

--Goldman Sachs is not only expected to lose about $2 billion or $5 a share in its quarter ending Nov. 28, owing to its book of distressed investments, but the Journal had a piece that Goldman was looking to get into the Internet banking business. Right, like I’m going to give Goldman my password. 

--There were a number of stories on Citigroup’s Robert Rubin this week as both he and ‘his people’ granted interviews in a desperate attempt to keep his legacy intact. It isn’t working. From a Newsweek column by Evan Thomas and Michael Hirsh: 

“ ‘Everyone agrees we have to save Citi, so we’re throwing hundreds of billions at it because it was so poorly managed, and yet there’s Robert Rubin sitting right there in the middle of it and he’s been looked to as a wise man,’ says Dean Baker, cofounder of the Center for Economic and Policy Research, a left-leaning think tank in Washington. ‘It’s outrageous. We’re turning to the same people who made this mess in the first place.’ 

“Rubin has said very little to rebut such harsh criticism, but last week he spoke to Newsweek and…offered a sort of anti-smoking-gun defense. Many financial institutions have been brought low by the use of complex financial instruments called derivatives. At Citigroup, the lethal derivative was called a ‘CDO liquidity put’ – a kind of option that would allow the buyers of collateralized debt obligations to sell them back to Citibank at cost. The chance that these options would be exercised en masse was seen as extremely remote, but in the general financial collapse, that’s just what happened – costing Citigroup about $25 billion. Rubin says he never recommended that Citigroup use these instruments. In fact, he says, he did not even know what a CDO liquidity put was when he first heard the term….A lengthy investigative piece in The New York Times on Nov. 23 asserted that Rubin urged the bank to get into more high-risk markets, like real estate debt. Not true, says Rubin…. 

“Rubin…may not have been the architect of the financial world that has been imploding for the last year or so. But he was, as the great Cold War Secretary of State Dean Acheson once wrote of his own role, ‘present at the creation.’ At Treasury, Rubin was a proponent of loosening the Depression-era laws barring banks from becoming investors, and he opposed attempts to regulate those newfangled (and hard-to-understand) financial instruments called derivatives. At Citigroup, he was paid many millions [$115mm over ten years] and his job description included strategic advice. Shouldn’t he have done a better job warning that there was trouble ahead?” 

William Smith, a money manager and frequent critic: 

“Even though he has no ‘operating’ responsibilities, he still has a fiduciary responsibility as a board member. He has overseen the entire meltdown, yet been compensated as an operating employee while bragging about having no operating responsibility. (Rubin can’t) have it both ways.” 

Editorial / Wall Street Journal 

“As a great man of finance, Mr. Rubin would be paid CEO money – but without having to run a business or be accountable for the results. For years, journalists tried to figure out exactly what Mr. Rubin’s job was at Citigroup, and perhaps even his fellow Citi directors weren’t entirely sure.” 

Then, when there was a feud between Sandy Weill and John Reed over control, the board asked Rubin if he wanted to become CEO. The Journal: 

“He immediately rejected the idea. No surprise there. If you can have the paycheck and the authority without the responsibility, could there be a better gig? 

“The virtue of this arrangement for Mr. Rubin has become manifest during the current panic. While Mr. Rubin has acknowledged that he promoted the disastrous idea of exposing the bank to greater risk to boost profitability, his ‘no line responsibilities’ job description now allows him to blame the line managers for the consequences of his ideas.” 

--Owing to the fact the first half of 2007 was so lucrative on Wall Street, many companies prepaid millions of dollars more in taxes in estimating their future liabilities. Then revenues collapsed, and now New York City is faced with refunding more than $800 million in overpayments, this as Gotham faces a $4 billion budget shortfall over the next two years. 

--Google is dramatically paring back as revenue growth has slowed. Despite all their pet initiatives, the fact is online ads still account for 97% of revenue and this is a shaky source at best these days. CEO Eric Schmidt told the Journal that the company will curtail the “dark matter,” projects that “haven’t really caught on and aren’t that exciting.” The perks are being stripped away as well. What was a $740 stock in November 2007 is now $283. 

--Merrill Lynch is reducing year-end bonuses by half, which is actually less than one compensation consultant’s 70 percent estimate for all Wall Street firms. 

--One investment firm in Ireland now predicts the recession there will continue on into 2010 and that the unemployment rate will hit 12%. GDP is expected to shrink 4% in 2009. Fears are also growing over the safety of retirement pension funds on the Emerald Isle. 

--Boeing is being forced to further delay the first deliveries of the 787 Dreamliner by another six months owing primarily to the machinist strike. The jet’s introduction, first slated for 1960, is now looking like summer 2010. 

--Sign of the times, part XIX. The Port Authority of New York and New Jersey received no bids for a hoped for $300 million offering of three-year notes. Operations, though, will not be impacted…for now. 

--Good news! Really! The European ski season is off to a terrific start. Snow is falling, and November was the best month for the white stuff (snow, not cocaine…you need to specify when you’re talking European resorts) in at least a decade.  Thus far officials say the economy isn’t impacting reservations. 

--Can someone tell me how after all these years Bose thinks it can still charge a gazillion for its radios? Their pricing hasn’t changed…ever.  [Truth be told, I own a few from back in the day when I was making real money…time to polish ‘em up and set up a table outside the office. “But Mister, they look used!” “Hey, it’s a Bose…they appreciate in value, kid. Didn’t your mother tell you that?”] 

--Icelanders are not having a good time of it as the economy and currency crater. Thousands have been protesting, with hundreds at one point storming the central bank to demand the ouster of bankers they blame for Iceland’s incredible meltdown. Unemployment, once less than 2%, is soaring. It’s expected the economy will collapse 10% next year. 

And now, half of those between the age of 18 and 24 are considering leaving the country. Norway is the new home of choice, reversing a trend of some 1,200 years ago when Viking chief Ingolfur Arnarson left Norway to found Reykjavik, as noted by Meera Bhatia and Helga Kristin Einarsdottir of Bloomberg. [I couldn’t begin to pretend to know this factoid myself.] 

--On Wall Street, alcohol sales at the name establishments, such as Delmonico’s, are up 10-15%. 

--Paul Tharp / New York Post 

“Treasury Secretary Hank Paulson admitted in a televised speech late yesterday that he knew all along that things were very bad but he was still trying to improve the economy – drawing boos from trading desks. 

“ ‘Shut up!’ shouted one trader above a din of groans and hoots on the Park Ave. South trading floor of Euro-Pacific Capital. ‘God, I hate hearing his voice – he’s clueless!’ another yelled.” 

--In another sign of the times, Honda announced it is quitting Formula One in looking to sell the team due to the financial crisis. Good luck finding a buyer. 

--No. 1 chicken producer Pilgrim’s Pride filed for Chapter 11. It will continue to operate as it looks to shed assets and reduce debt, but you’ve gotta feel for the stressed out birds; bankruptcy just adding to the anxiety level and the timing of their eventual appointment with the grim reaper. 

Foreign Affairs 

India / Pakistan: As I wrote the column last week, it was too soon for sweeping pronouncements on the Mumbai attacks but we do have some clarity at this point. U.S. Director of National Intelligence Michael McConnell fingered the Pakistani/Kashmir-based terrorist group Lashkar-e-Taiba, the same group responsible for countless attacks including a 2006 train massacre and an attack in 2001 on the Indian parliament. Lashkar-e-Taiba was initially formed by Pakistan’s intelligence agency, ISI, to combat Indian rule over 2/3s of Kashmir. 

As Indian citizens call for the removal of their government over the lax security in Mumbai, while also seeking revenge against Pakistan, the Washington Post editorialized, “It is getting harder and harder for [the Bush administration] to counsel patience.” 

India’s ruling Congress party had been campaigning ahead of next year’s parliamentary elections (which must be held by May) on a single issue, the economy, but now it’s terrorism. It’s depressing for India’s citizenry to see how poorly the security forces acted against a mere 10 combatants, and the government has to take the blame (as it is beginning to) on a number of levels, including largely ignoring warnings of a waterborne attack from both the United States and some in India’s own intelligence apparatus. 

In Pakistan, President Zardari has been saying all the right things about combating terrorism, and there is zero hard evidence his government had a direct hand in the attacks, but talk is cheap. He must shut down Lashkar-e-Taiba. 

Ralph Peters / New York Post 

“What were the terrorists’ immediate goals? First, it bears repeating: These attacks were not about us or our government’s actions…. 

“The terrorists had several goals: First, they just wanted to hurt India. Second, they wanted to embarrass the Indian government. Third, they wanted to damage India’s strengthening economy. 

“The attacks on the hotels weren’t just to scare away tourists. The underlying purpose was to frighten off foreign businessmen and investors – to make India seem unstable and incapable of protecting itself. 

“One of the grievances shared by Islamist extremists throughout the region and Pakistanis in general is jealousy of India’s remarkable progress from economic basket case to a sparkling center of yuppie consumerism. 

“While India remains a bitterly poor home for most of its citizens, a fifth of them have been soaring upward, while more than half have seen their lot improve. Meanwhile, Pakistan tumbles ever farther behind, unproductive, paralyzed by corruption, torn by violence – and paying a grim price for restricting schoolchildren’s English-language instruction for two generations, cutting off the populace from the benefits of globalization. 

“Indeed, jealousy is the great unacknowledged strategic factor of our time.” 

On the logistics of the Mumbai attacks, David Ignatius / Washington Post: 

“The attacks were a ghastly reminder of the threat still posed by al-Qaeda and related terrorist groups. The militants have the training, the logistical support and, most of all, the determination to pull off spectacular attacks. They read their enemies’ tactical vulnerabilities well – understanding in this case that urban police forces have trouble combating moving bands of shooters. And they appeared to have had a cleverly divisive strategic goal – of reanimating tension between India and Pakistan just as the two were beginning to make common cause against terrorism.” 

Thomas Friedman / New York Times 

“On Feb. 6, 2006, three Pakistanis died in Peshawar and Lahore during violent street protests against Danish cartoons that had satirized the Prophet Muhammad. More such mass protests followed weeks later. When Pakistanis and other Muslims are willing to take to the streets, even suffer death, to protest an insulting cartoon published in Denmark, is it fair to ask: Who in the Muslim world, who in Pakistan, is ready to take to the streets to protest the mass murders of real people, not cartoon characters, right next door in Mumbai? 

“After all, if 10 young Indians from a splinter wing of the Hindu nationalist Bharatiya Janata Party traveled by boat to Pakistan, shot up two hotels in Karachi and the central train station, killed at least 173 people, and then, for good measure, murdered the imam and his wife at a Saudi-financed mosque while they were cradling their 2-year-old son – purely because they were Sunni Muslims – where would we be today? The entire Muslim world would be aflame and in the streets…. 

“ ‘I often make the comparison to Catholics during the pedophile priest scandal,’ a Muslim woman friend wrote me. ‘Those Catholics that left the church or spoke out against the church were not trying to prove to anyone that they are anti-pedophile. Nor were they apologizing for Catholics, or trying to make the point that this is not Catholicism to the non-Catholic world. They spoke out because they wanted to influence the church. They wanted to fix a terrible problem’ in their own religious community. 

“We know from the Danish cartoons affair that Pakistanis and other Muslims know how to mobilize quickly to express their heartfelt feelings, not just as individuals, but as a powerful collective. That is what is needed here. 

“Because, I repeat, this kind of murderous violence only stops when the village – all the good people in Pakistan, including the community of elders and spiritual leaders who want a decent future for their country – declares, as a collective, that those who carry out such murders are shameful unbelievers who will not dance with virgins in heaven but burn in hell. And they do it with the same vehemence with which they denounce Danish cartoons.” 

Iraq: U.S combat deaths were the lowest of the war in November, 11, and now it’s all about the Status of Forces Agreement recently approved by the Iraqi parliament. Grand Ayatollah Ali al-Sistani, a force of moderation throughout the war, is worried the security pact gives too much power to the Americans and there is still one more hurdle to clear, a July 30 national referendum; a condition put in place in order to gain parliament’s acceptance. In addition there are key provincial elections in January.  But there is no doubt Iraq’s progress has been startling. 

Charles Krauthammer / Washington Post 

“The barbarism in Mumbai and the economic crisis at home have largely overshadowed an otherwise singular event: the ratification of military and strategic cooperation agreements between Iraq and the United States. 

“They must not pass unnoted. They were certainly noted by Iran, which fought fiercely to undermine the agreements. Tehran understood how a formal U.S.-Iraqi alliance endorsed by a broad Iraqi consensus expressed in a freely elected parliament changes the strategic balance in the region. 

“For the United States, this represents the single most important geopolitical advance in the region since Henry Kissinger turned Egypt from a Soviet client into an American ally. If we don’t blow it with too hasty a withdrawal from Iraq, we will have turned a chronically destabilizing enemy state at the epicenter of the Arab Middle East into an ally.” 

But, as Gen. David Petraeus keeps repeating, successes are fragile in this part of the world. 

Charles Krauthammer: 

“The more long-term danger is that Iraq’s reborn central government becomes too strong and, by military or parliamentary coup, the current democratic arrangements are dismantled by a renewed dictatorship that abrogates the alliance with the United States…. 

“But if our drawdown is conducted with the same acumen as was the surge…a self-sustaining, democratic and pro-American Iraq is within our reach. It would have two hugely important effects in the region. 

“First, it would constitute a major defeat for Tehran…. 

“Second is the regional effect of the new political entity on display in Baghdad – a flawed yet functioning democratic polity with unprecedented free speech, free elections and freely competing parliamentary factions. For this to happen in the most important Arab country besides Egypt can, over time…alter the evolution of Arab society. It constitutes our best hope for the kind of fundamental political-cultural change in the Arab sphere that alone will bring about the defeat of Islamic extremism.” 

Iran / Israel: The Israeli military has updated a plan to unilaterally attack Iran’s atomic sites, though it’s still hoping the United States will offer its logistical support. One critical issue is the ban on crossing U.S.-occupied Iraq.  

But one Israeli official said, incredibly, “There is still time and there is no need to rush into an operation right now. The regime (in Tehran) is already falling apart and will likely no longer be in power 10 years from now.” 

Huh? Iran basically has enough enriched uranium for a crude weapon today and production has clearly been ramped up. 

Here’s the real issue. Barack Obama takes over in January and a new Israeli government, probably headed by Benjamin Netanyahu, comes into power in February. I thought Israel would strike this year, especially when taking into account it is losing its biggest supporter in a few weeks, George W. Bush, but I can’t imagine my projected timetable will be off by much, unless Obama rushes to negotiate as a way of saying to Israel, please, give me a shot first before you act. Otherwise, no doubt Israel will be presenting the U.S. with irrefutable evidence that something must be done. 

David Ignatius / Washington Post 

“Now let’s consider the enriched uranium itself. When Bush took office, Iran had none. By this month, the IAEA reported, the Iranians had 1,390 pounds of low-enriched uranium. That’s enough to make one nuclear weapon, after this feedstock has been enriched further with additional passes through the centrifuges. 

“What about the missile systems that could deliver a nuclear weapon? Iran has continued over the past eight years to expand its arsenal of ballistic missiles. The Shahab-3 has a range of about 1,300 miles, which could allow it to target Israel and countries in Eastern Europe. Iran is also developing a longer-range, Shahab-6 intercontinental ballistic missile with a range of 6,200 miles that could, in theory, reach parts of the United States. 

“A disturbing test of Iran’s missile technology and the robustness of its command-and-control systems came in the war in Lebanon in the summer of 2006. Tehran’s proxy army, Hizbullah, was able to keep firing its Iranian-supplied missiles at Israeli population centers despite several weeks of aggressive Israeli attacks…. 

“Bush also missed the chance to engage Iran in a constructive dialogue about the future of Iraq. Iran’s supreme leader, Ayatollah Khamenei, agreed to send his top negotiator, Ali Larijani, to Baghdad for talks with the United States in March 2006. That upset Iranian hard-liners, but they needn’t have worried. The administration backed out. 

“It’s easy to criticize the Bush record on Iran. But anyone who thinks it will be easy for Obama to make a breakthrough hasn’t been paying attention. Iran moves closer every day to becoming a nuclear-weapons power. It views America as an aggressive adversary that wants regime change, no matter what Washington says. Dialogue is worth a try, but Obama and his advisers should start thinking about what they will do if negotiations fail.” 

Thailand: There is a Thai restaurant below my office, so this “Thai Thursday,” when I went to order my lunch, I couldn’t help but tell the staff, “Boy, your country is a mess.” The protesters won and Prime Minster Somchai was ousted as the Constitutional Court found Somchai’s party guilty of fraud in the December 2007 election. Now, parliament has to pick a new prime minister in 30 days, perhaps this Monday, it would appear. The protesters had shut down Bangkok’s two main airports, stranding 300,000 travelers, but things have returned to normal on this front. 

Otherwise, it’s chaos. Understand that in Thailand the 81-year-old king is revered for his judgment and the people had been waiting for his traditional birthday address on Thursday. Alas, he didn’t appear, with the Crown Princess saying he had a throat infection. So the nation is bummed all over again, with some experts saying the king simply didn’t want to be seen taking sides. 

Meanwhile, while the court disbanded the ruling party, it is reconstituting itself under a new name and could yet reemerge with a new leader, thus setting the stage for renewed violence. 

Russia: Prime Minister Vladimir Putin continued his tradition of a live televised question-and-answer program and handled 72 questions in what was nearly a three-hour session. Most of them were on the economy. 

“We have every chance of making it through this difficult period with minimal losses to the economy and, most importantly, for our people,” he said. 

Then there was this summary, as reported by the Moscow Times. 

“Another telephone question invoked a recent controversial statement made by Putin and reported by the European media. During negotiations with Nicolas Sarkozy in August immediately following a short war between Georgia and Russia in South Ossetia, Putin promised to hang Georgian President Mikheil Saakashvili by the testicles. 

“An anonymous caller from Penza asked Putin whether he really promised ‘to hang Saakashvili by one thing’ and immediately hung up. 

“ ‘Why by one?’ Putin replied, smiling as the audience cheered. "Yup, Vlad the Great is a piece of work. 

Meanwhile, Putin said he was happy with his partnership with President Medvedev and is not considering running for the presidency earlier than 2012, when Medvedev’s first term expires (don’t believe it), while on the issue of U.S.-Russian relations when Barack Obama assumes office, Putin said he was encouraged by signs Washington and NATO were backing off on speedy accession for Georgia and Ukraine. 

Lebanon: Interesting goings on here as President Michel Sleiman reminded foreign countries that they were to deal with his office as he was “in charge of [Lebanon’s] relations with other states.” What brought this on was a visit to Syria by Christian leader Michel Aoun, who was received by Syrian President Assad. Earlier Sleiman had made a historic trip to Damascus and spoke of relations between the two having “been placed on the proper track.” 

Understand this is a touchy subject because many, including myself, still believe Assad is getting away with the murder of former Lebanese Prime Minister Rafik Hariri in 2005. My favorite politician in these parts, Walid Jumblatt, said reconciliation with Syria is “impossible.” Syria, he added, had “stopped assassinations [recently] only to focus on winning the Lebanese elections [2009] in order to rule us again at the political, economic and security levels without returning militarily.” As to Syria’s official denials of any role in Hariri’s death, Jumblatt said “I know the structure of the Syrian regime and I know that they have no mercy for anyone….The borders with Syria remain the source of terrorism.” 

As for Aoun, a worm if ever there was one, he was once seen as a hero of the Lebanese Civil War who was forced into exile in 1990 after being defeated in a Syrian offensive at the end of the conflict. Aoun then spent 15 years in Paris campaigning against Damascus. But he returned to Lebanon in 2005, shortly after Syria withdrew its forces following Hariri’s assassination. 

Since then, however, Aoun has aligned himself with Hizbullah and given Aoun’s still strong popularity among Christians, it’s been a boon for the terrorists and their political ambitions. Aoun didn’t win the presidency as he had sought, but now you see he has turned pro-Syrian as well. 

[For new readers of this column, I was in Beirut shortly after Hariri’s assassination and have done my fair share of work on the topic.] 

Canada: Prime Minister Stephen Harper faced a true crisis as the opposition assembled enough support to take him down, but he was able to get the country’s head of state (normally a figurehead) to approve the suspension of parliament until Jan. 26, at which point Harper hopes to have beaten back the challenge on his economic stimulus program. 

The opposition was looking to accelerate the package, while incorporating their own ideas, and things got complicated when the separatist Bloc Quebecois (a long-time pain in the butt for most English-speaking Canadians) said it would offer its help in passing the opposition plan. One thing led to another and suddenly there were cries to call a confidence vote that could have forced Harper out. As you can imagine, the turmoil has done a number on the Canadian currency. Harper had just been re-elected on Oct. 14. 

Zimbabwe: Robert Mugabe’s government finally declared a national emergency over the cholera outbreak that has claimed nearly 600 lives at last report, appealing for international help. The health minister admitted “Our central hospitals are literally not functioning. Our staff is demotivated and we need your support to ensure that they start coming to work and our health system is revived.” [Remind me not to go to Zimbabwe for my next physical, no matter what insurance plans they accept.] 

As for the scotched power-sharing agreement between Mugabe and Morgan Tsvangirai, Kenyan Prime Minister Odinga said “It’s time for African governments…to push [Mugabe] out of power.” I argued over six years ago Mugabe should have been taken out. [Or if you have a problem with that, airlifted and dropped into the shark-infested waters off South Africa.] 

Mexico: Just when you thought the drug war here couldn’t get worse, it did. Some of this week’s carnage: 

“A group of masked gunmen have killed eight people at a restaurant in the Mexican border town of Ciudad Juarez.” [On Friday night (11/28) alone, here, 25 were gunned down.] 

“At least 37 people were killed over three days in the Mexican border city of Tijuana, including four children caught in shootouts and nine men found decapitated….More than 200 people have been killed in the past month in Tijuana.” Staggering. Three police officers were among the nine decapitated. Their credentials were found stuffed in their mouths. 

“A man suspected of shooting his mother and killing three police officers called to the scene was found beheaded in southern Mexico on Tuesday.” 

And on and on… 

Nigeria: Mexico and Mumbai had no monopoly on violence this week. Following a disputed local election, clashes between Christian and Muslim mobs claimed about 400, the worst such violence since 2004. 

---

Pray for the men and women of our armed forces. 
God bless America. [warts and all.] 

--- 

Gold closed at $752

Oil, $40.81 

Returns for the week 12/1-12/5 

Dow Jones -2.2% [8635]
S&P 500 -2.3% [876]
S&P MidCap -3.2%
Russell 2000 -2.6%
Nasdaq -1.7% [1509] 

Returns for the period 1/1/08-12/5/08 

Dow Jones -34.9%
S&P 500 -40.3%
S&P MidCap -42.0%
Russell 2000 -39.8%
Nasdaq -43.1%

Bulls  23.1

Bears 49.5 [Source: Chartcraft / Investors Intelligence] 

Have a great week. I appreciate your support. 

And Happy Birthday, Mom!

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