Week in Review 
For the week 1/12/2009 - 1/16/2009
Brian Trumbore
President/Editor, StocksandNews.com

Heroes and Villains
 
Michael Daly / New York Daily News 

“Just when we really needed a miracle, we got one. 

“ ‘Miracle on the Hudson,’ Gov. Paterson rightly called it. 

“Paterson was standing with the mayor and the police commissioner and the fire commissioner and other faces that have become too familiar to us in moments of tragedy. 

“They must have all been stricken with the same dread when word came that a passenger plane had gone down in the icy Hudson River on a day of killing cold. 

“The dread was shared by all the cops and firefighters and paramedics who raced to the scene, emergency lights garish in the frigid air. 

“And the rest of us could only pray and say, please, not another horror…. 

“Only after we learned that all aboard had escaped serious injury did we feel how much we needed this bit of luck when so much seems to be going wrong. Smiles flashed beneath helmet brims and uniform cap visors. 

“The most beautiful sight in the city was of the passengers: shaken and chilled, but blessedly alive and unhurt…. 

“And, most of all, we had the pilot of US Airways Flight 1549. 

“Chesley Sullenberger had remained as calm as if he flew with angels as he made a perfect landing, the nose and wings just right. 

“He remained on board as the passengers evacuated and he slogged the length of the flooding plane twice to make sure everybody was out…. 

“The mayor’s obvious relief was joined by unadorned admiration after he spoke to the pilot at the ferry terminal where most of the passengers were taken. 

“ ‘This pilot did a wonderful job,’ the mayor said…. 

“We still have the memory of too many horrors. Our economy is still collapsing, and many of us who have jobs are afraid of losing them. But Thursday it seemed as if we had all been lucky, as if we had all been flying with angels. 

“ ‘Magnificent,’ the governor so rightly said.”
 
--- 

I was watching the ‘ditching’ unfold from the television in my office and when word came out all had survived, I couldn’t help but shed a tear or two of joy. 

Today, all of America has the same thought. Not only is Captain Chesley Sullenberger a hero, but this story couldn’t have come at a better time, even as the wonderment of it all inevitably begins to fade amidst the other issues of the day. 

Heroes and villains, I mused. We now have a stirring example of the former, while the river in which “Sully” landed Flight 1549 is surrounded on both sides by a financial sector whose leadership in many cases is worthy of pure contempt. 

As the captain glided the plane down the Hudson, and office workers pressed up against the windows facing the river, later to learn on their televisions and radios of the miraculous ending, I wonder how many had the same thought as me. Captain Sullenberger was just doing his job, albeit in spectacular fashion. 19,000 hours of flight experience and thousands of hours of training prepared him for this moment. 

Look at the rescuers those pressed against the windows were also able to observe. The ferry captains had training too, and reacted in the same fashion as the police, firemen, Coast Guard and other rescue crews that followed. Everyone not only did what was right, but to a man and woman they would all say later they were just doing their job. 

I wonder, again, how many of Wall Street’s executives in those glass towers saw the incongruity of it all? None of those folks in the water, from Captain Sullenberger to the rescuers, have the personal wealth of Croesus that they do, but they have the eternal satisfaction, in that moment, of having performed to the best of their ability, and because of it 155 lives were saved. 

As for those same Wall Street execs, how many went home Thursday night, looked themselves in the mirror, and thought, ‘Have I done my job to the best of my ability?’  

Of course the simple fact is none of them probably had that thought. They’ve been in a different world during this era, one not rooted in reality. I live amongst many of them here in New Jersey. They don’t have a clue. And yet the rest of us have now been forced to bail them out, time and time again since our financial system collapsed. That which they created is now in ruins. Yet not one of these titans of Wall Street has paid a real price or faced a court of law.  

I like to say, half-facetiously most of the time, that the world is 50% good and 50% evil. On Thursday we had an example of just how much is good in this country, in that selfless call to action as the boats streamed to Flight 1549. And now we have one Superhero… Captain Chesley Sullenberger III. A moment we can cherish in a time otherwise marked by disgust. 

--- 

On Tuesday, speaking in London, Federal Reserve Chairman Ben Bernanke warned that fiscal stimulus alone would not be enough to jumpstart the economy and overcome the crisis. Further capital injections, combined with a plan to remove troubled assets from bank balance sheets, was required. “More capital injections and guarantees may become necessary to ensure stability and the normalization of credit markets,” he said. 

Two days later, as the Senate was approving the release of the second $350 billion in TARP funds, and the Democrats were unveiling their $825 billion stimulus program, we learned that Bank of America, which on the heels of the Lehman Brothers debacle last September had acquired Merrill Lynch, was now seeking further massive aid from the government due to losses in the Merrill operation it didn’t quite anticipate. Losses in excess of $15 billion for the quarter as it turned out, while Bank of America recorded its own fourth-quarter loss of $2.39 billion.  

BofA had already received $25 billion in TARP rescue funds, but now it needed $20 billion more to help it deal with the Merrill fiasco, while the government agreed to backstop $118 billion in additional assets. As Bank of America shares tumbled to their lowest levels since at least 1991, shareholders were left wondering just what had changed since the Dec. 5 vote that approved the deal between the two. Why weren’t the losses disclosed earlier? BofA CEO Kenneth Lewis claims he didn’t know until after the vote. One thing is certain. More than a few employees at both Merrill and Bank of America didn’t come close to doing their job, while the lack of transparency should in some instances later be proved to be nothing but outright fraud. 

It’s sickening that our fiscal and federal deficits are exploding in no small part because of the actions of a few, coupled, I hasten to add, with the irresponsible actions of some of us in living beyond our means. But the prime culprits in the credit crisis, from which all else flows these days, can be counted on two hands, including our president who hadn’t a clue what the housing bubble was all about. 

If Captain Sullenberger is our Super Action Hero, Oppenheimer banking analyst Meredith Whitney continues to wear the cape in her industry. Ms. Whitney said late last year that the recipients of TARP I, like BofA and Citigroup, would continue to go back to the trough for more capital and that indeed has been the case. And knowing that these firms remain black boxes when it comes to their finances, Whitney notes that it’s impossible to know what the banks will earn over the coming year because we haven’t a clue what the structure of each will end up being. Look no further than this past week, for example. One thing is for sure, she adds, with each capital infusion the common shareholders are diluted further and further. 

Speaking of Citigroup…it reported a fourth-quarter net loss of $8.29 billion, its fifth straight quarterly loss ($28 billion total), as revenue declined a further 13% from a year ago with losses ranging from credit derivatives to the value of its private equity holdings. For 2008, Citigroup slashed 52,000 jobs, with another 23,000 to go in 2009. 

But the bigger news was that Citigroup was splitting into two businesses, with the new Citicorp including the retail bank, while Citi Holdings will be comprised of the asset management and consumer finance segments, as well as a 49% stake in a new joint venture with Morgan Stanley (more on this below) along with $300 billion in mortgages and risky assets – what some have called a split between Good Bank and Bad Bank, or a reversal of the 1998 combination between Sandy Weill’s Travelers Group and John Reed’s Citicorp. Today’s CEO, Vikram Pandit, remains on the hot seat. 

One bank CEO who is attempting to keep his franchise’s head above water and his dignity intact is JPMorgan Chase’s Jamie Dimon. JPM managed to report net income of $707 million, $0.07 a share for the quarter, and for the full year, 2008, net income of $5.6 billion. But as Mr. Dimon acknowledged it’s going to be increasingly hard to generate positive results going forward. JPMorgan faces higher credit card costs associated with the deteriorating economy, for starters. “If the economic environment deteriorates further, which is a distinct possibility, it is reasonable to expect additional negative impact on our market-related businesses, continued higher loan losses and increases to our credit reserves.” Dimon added in an interview with the Financial Times: 

“The worst of the economic situation is not yet behind us. It looks as if it will continue to deteriorate for most of 2009.” 

More broadly speaking, this week Alcoa, the nation’s largest aluminum maker, said it was blindsided by the pace of the decline in the price of its product, which has fallen more than 50% the past six months. Supply vs. demand…the former builds as the latter falls. 

Wal-Mart CEO Lee Scott told a retailers’ convention that the first half of this year will be “extraordinarily challenging. Some people are giving up eating out; some people are giving up movies; some people are giving up other things like shopping. Those are fundamental changes that will continue.” 

As for the Obama stimulus package, all $825 billion of it, while there are funds for infrastructure programs and renewable energy, a third is for tax cuts over two years, with individuals receiving up to $500 and families $1,000, ostensibly through reductions in Social Security payroll withholdings. Republicans quickly noted that there was zero input from them and that it was more “borrow and spend our way back to prosperity,” in the words of House Republican leader John Boehner. Of course Republicans bitching about spending these days is more than a bit disingenuous after the past eight years. 

I just have to add that personally I favor the outline of a plan put forward by 2006 Nobel Laureate Edmund Phelps in the Jan. 19, 2009, issue of BusinessWeek. Phelps argues stimulating household consumption is not the best remedy. “Weren’t we all saying that households are overconsuming?” he asked. Instead, Phelps calls for the federal government to spend heavily on infrastructure, pass an investment tax credit, reduce the corporate income tax, and cut payroll taxes on low-wage jobs. But there’s no reason to get too upset over either position just yet. Post-inauguration, let the real debate begin. 

And so we’ve finally come to the historic moment, Tuesday, as Barack Obama takes the oath of office. I didn’t vote for him, yet I have liked just about everything I’ve seen thus far. I pray he succeeds. But commentator Ben Stein, who was a speechwriter for both Richard Nixon and Gerald Ford, compared his own experiences with what he foresees from the new administration in his New York Times opinion piece. 

“The Ford cabinet experience was educational. The men and women in the room, high-ranking White House officials and secretaries of cabinet departments, were pleasant and well briefed. But they struck me as similar to small-town Rotary Club members or Junior Chamber of Commerce officials – polite and cordial, but far from rocket scientists. They were just high-average to B+ status, with the exception of some supersmart types like Henry Kissinger…. 

“Going back a few more years, the John F. Kennedy and Lyndon B. Johnson teams were supposed to be ‘the best and the brightest.’ They undoubtedly contained some brilliant people – who led us into disaster in Cuba and Vietnam. Similarly, I think that Mr. Kissinger was and is an astonishing, off-the-charts genius. He accomplished basically zero in Vietnam. 

“So let me make it even clearer: The Obama people could be wonderful, smart people, an order of magnitude above what I saw at the Ford cabinet meetings. Obviously, many people believe that they are. 

“But they are just human beings, albeit in some cases human beings with glowing resumes. I do not see the supermen and superwomen. They do not have the gift of foresight. They have never been in a situation like this, at least not exactly. There is simply no good reason to believe they will get it right except by trial and error, turning the tumblers until the safe eventually opens. The problems we face now are so large that they humble the average and the above average and even the very much above average. 

“High-level bureaucrats, like high-level professors or doctors or investment bankers or baseball pitchers, are just people, whether serving with Bush 43 or Barack Obama or anyone else. I can vividly recall leaving those long-ago cabinet meetings and saying to myself as I walked across West Executive Avenue, ‘Put not your trust in princes.’ It’s a proverb for a good reason – then, now, and always.” 

Street Bytes 

--The economic news continued to be putrid, as December retail sales declined a record 2.7%, far more than expected, and December industrial production was off 2.0%, double estimates and off 7.8% for the year as well as the biggest 12-month drop since September 1975. With this as background, coupled with the ongoing carnage in the banking sector, it’s easy to see why stocks took it on the chin once again. The Dow Jones lost 3.7% to 8281, after trading briefly below 8000, while the S&P 500 lost 4.5% and Nasdaq declined 2.7%. Earnings season is in full force next week and with the few who have reported to date, not one has said anything of a real positive nature. 

--U.S. Treasury Yields 

6-mo. 0.28% 2-yr. 0.73% 10-yr. 2.32% 30-yr. 2.87% 

The inflation data was basically in line as producer prices for December declined 1.9%, ex-food and energy up 0.2%, while consumer prices for the same period fell 0.7%, unchanged on core. For all of 2008, consumer prices advanced only 0.1%, the weakest 12-month reading since December 1954, so it’s no wonder deflation talk is picking up. 

Across the pond, the European Central Bank, ever behind the curve, lowered its key rate to 2.00%. 

--On Monday, USA TODAY’s Alan Levin reported that “No passengers died in accidents in 2007 and 2008 (in a U.S. air carrier crash), a period in which commercial airliners carried 1.5 billion passengers on scheduled flights, according to a USA TODAY analysis of federal and industry data…. 

“Going without a crash fatality for a full year has been rare. Only four years since 1958 have passed without a passenger fatality, the analysis found. That makes the two-year string even more impressive, aviation safety experts say.” 

A MIT professor, Arnold Barnett, “calculates that it’s more likely for a young child to be elected president in his or her lifetime than to die on a single jet flight in the USA or in similar industrial nations in Europe, Canada or Japan,” as reported by Alan Levin. 

That was Monday. Sully kept the streak alive three days later. 

--The House that Sandy Weill built traced its history to 1812, with the founding of the City Bank of New York, and was highlighted by the 1998 $37.4 billion merger of Weill’s Travelers Group Inc. and John Reed’s Citicorp. Travelers, which owned Smith Barney, had a year earlier acquired Salomon Inc. to form Salomon Smith Barney. 

But now Morgan Stanley is acquiring a 51% interest in the Smith Barney division to form Morgan Stanley Smith Barney, a combination with $1.7 trillion in client assets and more than 20,000 brokers. Over time, Morgan Stanley will acquire the rest. 
Holman Jenkins, Jr. / Wall Street Journal 

“For 10 years this column has exhausted its metaphors on Sandy Weill’s sand castle, in one form or another suggesting what was wrong with the idea of a ‘financial supermarket’ was its misuse of the very word supermarket. The stock market has been no more enthused about Citi’s strategy for most of its existence, and yet couldn’t do more than kibitz. A company as big as Citi, and as protected by federal banking regulations and anti-takeover rules, doesn’t worry about rough treatment at the hands of raiders or activist shareholders. 

“Not that the supermarket strategy would have been bad if it properly reflected what a supermarket is…A supermarket doesn’t mistake who its customer is – the retail shopper. 

“Yet Citi tied itself up in conflicts over whether its customer was the manufacturer of investment opportunities, such as companies floating stocks and bonds, or the consumer of them, such as retail investors and their financial advisers and fund managers. One result is that hardly a financial scandal could darken the headlines without casting a shadow over Citi. It was an accessory to Enron, a purveyor of tainted stock ‘research’ to telecom and dot-com investors, a minter of disingenuous off-balance-sheet vehicles to hold massive bets on mortgage derivatives. 

“All this badly dinged what Citi really had going for it, perhaps the world’s best global financial brand. John Reed, the CEO of predecessor Citicorp and one of the culprits (it must be admitted) in the merger to make Citigroup, was wont to say he saw ‘Citi’ becoming a universal consumer icon like ‘Sony’ or ‘Nike.’” 

Try PF Flyers. At least when you bought those sneakers when I was a kid, you got a ring whistle. 

--At one time, Nortel Networks was the largest company in Canada in terms of market cap, with a share price of $124 and 90,000 employees. This week it filed for bankruptcy in announcing it owes $4.47 billion in long-term debt, faces pension deficits of $2.8 billion and has $2.3 billion in cash to cover it. The shares hit 13 cents on the news. Nortel will now attempt to restructure, leaving the remaining 32,000 workers on edge. Most expect the company to be broken up and sold piecemeal. 

--Swedish engineering firm Alfa Laval is laying off 1,000 of a total workforce of 12,000 worldwide as demand for its products and services is falling, particularly in Eastern Europe and Asia. 

--Barclays, the fourth-largest U.K. bank, is cutting 2,100 jobs, in addition to 3,000 laid off last year after it acquired bankrupt Lehman Brothers’ trading and investment-banking operations for $1.75 billion. [Barclays was forced on Friday to refute rumors it was going to require a massive capital infusion to save itself. This could yet happen.] 

--Pfizer is laying off 2,400 sales representatives. Health insurer WellPoint said it will cut 1,500. 

--Motorola is handing out pink slips to 4,000 on top of a previously announced 3,000 just last month. Advanced Micro Devices is doing the same to 1,100, plus it is slashing salaries from the top on down. 

--The world’s largest solar module maker, Suntech Power, laid off 10% of its 8,000-strong workforce last quarter and suspended a plan to expand capacity 40% due to weak demand. 

--General Electric is laying off 1,000 at its GE Aviation division as engine orders continue to fall….and late Friday we learned that financing arm GE Capital is cutting up to 11,000. 

--Luxury retailer Saks is eliminating 1,100 jobs, merit-based wage increases for 2009, and suspending 401(k) matching contributions for at least one year. 

--ConocoPhillips is reducing its work force by 1,350, while Hertz lays off 4,000. 

--Lexmark warned its fourth quarter revenue would decline 17% due to slower demand for printers and cartridges. It expects a similar decline in the first quarter and is laying off up to 400. 

--Circuit City, failing to sell the company while in Chapter 11, is closing its 567 stores for good and laying off over 30,000. Best Buy is the obvious beneficiary. 

--Intel’s profit for the fourth quarter fell 90% as sales declined 23%, Intel having previously warned twice this would be the case. For 2009, Intel is forecasting a 25% sales decline and falling gross profit as the chip maker continues to spend on upgrading facilities. 

--Apple’s Steve Jobs finally admitted his health issues are more serious than previously announced and stepped down from the day-to-day running of the company until at least the end of June. Jobs is now contemplating a liver transplant. Tim Cook, the chief operating officer, has taken over on an interim basis. 

--A judge has allowed Bernie Madoff to remain under house arrest rather than go to jail, saying the scam artist wasn’t a flight risk or danger to the community – the two main requirements for bail decisions.  Separately, it’s possible Madoff’s fund never executed a single trade. Often the price of the securities he listed on the fraudulent statements didn’t jive with the actual closing value for a given day but no one caught it. 

--The state of Massachusetts has accused Reserve Management of fraud in its handling of the firm’s flagship money market fund during last September’s collapse in the financial markets. Reserve’s Primary Fund “broke the buck” after the Lehman Bros. bankruptcy filing because 1.2% of Primary Fund’s holdings were tied to Lehman debt. 

The potential fraud arises from the fact that thousands of investors, aware of the Lehman position (or not), tried to withdraw funds before Reserve Management announced it was taking the net asset value below $1 and then shutting off redemptions. But Reserve’s sales personnel, acting under the direction of senior management, tried to convince investors their money was safe, according to the Massachusetts Secretary of State’s office. 

--In yet another scam, New York State Attorney General Andrew Cuomo exposed a massive health insurance scandal involving UnitedHealth Group’s billing practices, allowing the insurer to underpay by up to 28% on claims for medical expenses in New York, meaning patients had to pay more than warranted. That was just for New York. I’m ticked because I now realize an issue I had with UnitedHealth two years ago was probably the result of similar treatment of my submission. You haven’t heard the end of this one. 

--The Wall Street Journal said a University of Wisconsin researcher and surgeon, Thomas Zdeblick, received $19 million in payments over five years from Medtronic, one of the country’s largest makers of spinal devices. Dr. Zdeblick told the university that he received just $20,000 or more from Medtronic each year except one when he reported $40,000, always the minimums required on the school’s financial disclosure form. Medtronic claims its consulting relationships with doctors such as Zdeblick are proper. 

--The Latvian capital of Riga was shaken by violent protests over the state of the economy and disgust with a government perceived to be corrupt. 25 were injured. The global downturn has hit Latvia hard and economists expect the country’s GDP to fall 5% in 2009. Unemployment is slated to spike and wages decline. President Valdis Zatlres is threatening to call a referendum for the purposes of dissolving Parliament. View this as a canary in the coal mine for the rest of the continent. 

--Insiders at Satyam, the Indian outsourcing company that turned out to be a massive fraud, were selling shares months before the chairman admitted he’d fabricated $1 billion in cash. 

--The International Energy Agency said global oil demand fell in 2008 by a further 300,000 barrels and may fall 500,000 b/d this year, leaving it at 85.3m b/d. Previously, the IEA had said demand would rise, supported by resilient growth in emerging markets, particularly China. But now it forecasts consumption there will essentially be flat. 

--According to RealtyTrac, more than 2.3 million American homeowners faced foreclosure proceedings last year, up 81% from 2007. In Stockton, Calif., ground zero, 9.5% of all housing units received a foreclosure notice, followed by Las Vegas and Riverside and Bakersfield, Calif. 

--Deflation Watch: Germany’s Daimler is putting a fifth of its staff on a four-day work week due to falling demand, though at least these folks still have a job, while Gannett is forcing its employees to take an unpaid week off, another way to cut compensation. 

--Investors pulled close to a net $150 billion from hedge funds in December, increasing the net outflow for 2008 to $200 billion. The industry has been basically halved the past year, to $1 trillion under management from around $2 trillion. 

--Atlantic City’s 11 casinos saw a record decline in the ‘win’ for December, and it was the second straight year revenues fell. 

--The decline in magazine advertising pages continues to accelerate, down 6.4% in the first quarter 2008, 8.2% in the second, 12.9% in the third, and 17% in Q4. The speed is staggering. 

--Good news! If you live in Dubuque, Iowa, that is. IBM is opening a new computer-services center that will employ 1,300 by the end of 2010. It will be a help desk for chief information officers and database administrators. Dubuque is just about 15 miles from the original Field of Dreams, by the way.  

--China revised its growth rate for 2007 to 13% from a previously reported 11.9%, which means it passed Germany as the world’s third-largest economy behind the U.S. and Japan. This raised China’s GDP to $3.5 trillion, ahead of Germany’s $3.3 trillion. In 2007, the United States’ GDP was $13.8 trillion, followed by $4.4 trillion for Japan. 

--In the annual survey by The Heritage Foundation and The Wall Street Journal rating economic freedom, Hong Kong is once again at the top, owing to its low taxes and looser regulations. The U.S. fell a notch because of increased government spending. 

1. Hong Kong 2. Singapore 3. Australia 4. Ireland 5. New Zealand 6. United States 7. Canada

132. China 146. Russia 168. Iran

175. Eritrea 176. Burma 177. Cuba 178. Zimbabwe 179. North Korea
 
[Iraq and Afghanistan are not ranked] 

--One economist in Ireland says that home prices could fall up to 80%, peak to trough. UCD’s Morgan Kelly said “Construction, but not demolition, of residential and commercial property will fall to zero for the foreseeable future….it will in all likelihood take us 10 years to get out of it.” Mr. Kelly has evidently been prescient with his forecasts for the once Emerald Isle, and, additionally, homeowners now face the return of a property tax that had largely been abolished since 1977, except for a time in the 80s. 

Meanwhile, the Irish government has nationalized Anglo Irish Bank after deciding a large cash injection wasn’t enough. Anglo was heavily exposed to the property and construction markets and its executives were making a slew of illegal maneuvers, causing “serious reputational damage,” as officials put it. The bank will continue to operate as normal. 

--Legendary real estate king Trammell Crow died. He was 94. “You can get rich selling real estate,” he often said, “but you can only get wealthy by owning it.” Different times. 

--Vail Resorts said bookings at its five properties as of Dec. 31 are down 15% on a room-night basis. 

--Conde Nast Portfolio asked various folks for a prediction. Veteran New York City columnist Jimmy Breslin: 

“If we have a real depression, you’ll see the streets filled with people and crime going through the roof. People took it like dogs in the Great Depression, but they’re not gonna take it this time.” 
--President Bush, stretching for accomplishments to brag about, is pointing out that the economy under his watch had 52 straight months of job growth in the middle of the decade, and that the economy expanded at a steady clip from 2003 to 2007. But much of it was driven by the housing bubble. For example, according to consultant IHS Global Insight, “the housing boom generated about 600,000 to 800,000 jobs that otherwise would not have been created – about 10 percent of total job growth in that span.” 

Economist Mark Zandi comments, “It’s sad to say, but we really went nowhere for almost ten years, after you extract the boost provided by the housing and mortgage boom. It’s almost a lost economic decade.” [Neil Irwin and Dan Eggen / Washington Post] 

Another way of looking at the Bush years…during his time in office, a net total of 3 million jobs were created. In the two terms of Bill Clinton, roughly 21 million were generated. [Jim Drinkard / AP] 

President Bush has been running around saying the problems in the economy “started before my presidency.” Vice President Cheney chimed in in an interview with Jim Lehrer, “You can’t blame the financial crisis on George Bush.” Whatever. 

--China now has 298 million internet users, a 42% increase in one year. China also now has 633 million mobile phone users. 

--DVD sales of new titles are down as much as 30%, which will translate into big pay cuts for Hollywood’s leading actors. Time to make more dog flicks, I say; dogs just require a warm cushion to retire to and three squares. 

--The U.K. has become the world’s biggest importer of wine, 1.6 billion bottles in 2007, with Aussie wine the most popular. But British adults are likely to go through 28.3 liters a year on average, well short of the world’s most prolific wine drinkers – the French – who “sink” 58.8 liters. [BBC News] 

--But wait…there’s more! SABMiller, brewers of Grolsch, Miller Genuine Draft and Peroni, said its beer shipments unexpectedly fell in the third quarter as consumer demand dropped. This flies in the face of past experiences where beer sales held up during tough economic times.  

--Bloomberg’s Naomi Kresge: “Consuming the caffeine in seven cups of instant coffee a day leaves you more likely to see, hear and smell things that aren’t there, U.K. researchers said.” 

I know that when I drink a lot of coffee, I tend to hallucinate that I’m able to access the TARP for $20-$30 million. Over and over again. And no one asks any questions. 

--My first trip to Turkey, the currency was such that a dollar or two was the equivalent of one million Turkish lira so when I asked a cabbie about it, he said “In Turkey, everyone’s a millionaire.” Well these days, in Zimbabwe, everyone is a trillionaire. Friday, the government introduced a $100 trillion note, currently worth about $30. The latest estimate on the inflation rate here is 231 million percent. Just on Tuesday, the government was unveiling the first 50 billion note. 

Foreign Affairs 

Israel: We are less than a month from the election to select a new prime minister, but as Likud Party leader Benjamin Netanyahu said, the campaign has been suspended as the conflict in Gaza with Hamas is “the most just war in Israeli history.” 

Amidst talks of a ceasefire (possibly this weekend), with efforts being led by Egypt and supported by the European Union and the United States, as well as other Arab states, Israel continues to pound away, taking out Hamas’ No. 2 man and security chief in the Strip in an airstrike. But Israel also accidentally hit the U.N. compound in Gaza, destroying tons of humanitarian relief and thus infuriating U.N. officials. The death toll is now over 1,000. 

91% of Israelis support the war, while Arab radicals are upset with the moderate tone shown by Arab leaders, who clearly prefer the Palestinian Authority as the true representative of the Palestinian people. One of the problems, though, is that while Hamas has been dealt a severe blow to its political and military leadership, the people still support it; the P.A. being seen as riddled with corruption and not having the average Palestinian’s fate at the top of their agenda. Further, Palestinian leader Mahmoud Abbas technically lost his title as president a week ago when his term ended. Abbas has said he’d call for new elections, but what if Hamas won them like it did in 2006?  

As for Israeli Prime Minister Olmert, he made a real fool of himself this week in flat out lying about Washington’s abstention in a U.N. Security Council vote. Olmert said he called President Bush on Thursday, Jan. 8, before the vote on a resolution calling for an immediate ceasefire. 

“I said, ‘Get me President Bush on the phone,’ Olmert told a crowd. ‘They said he was in the middle of giving a speech in Philadelphia. I said I didn’t care; ‘I need to talk to him now.’ He got off the podium and talked to me.’” 

Olmert then claimed that as a result, Secretary of State Condoleezza Rice was ordered to abstain by Bush. But the White House is in agreement this was “wholly inaccurate… completely not true,” as spokesman Sean McCormack put it. 

Now we wait to see what Barack Obama will do, Obama saying he’s prepared to tackle the Palestinian issue on day one. 

Iran: In her confirmation hearings, incoming Secretary of State Hillary Clinton said the new administration would engage both Iran and Syria, this as the Gaza war thus far has helped Iranian President Ahmadinejad as he prepares for the June election there. 

But a survey for the BBC in Iran says that the number one concern of Iranians these days is the economy (over relations with the West), not good for Ahmadinejad’s reelection chances, though at the same time 94% support the nuclear program. 

Then you have the issue of a potential Israeli strike on Iran’s suspected nuclear weapons facilities. As reported by the Times’ David Sanger, it seems I wasn’t at all off base in thinking Israel would attack last year, as it appears Defense Secretary Gates told President Bush to reject Israel’s plea for help in launching a raid on the main Iranian nuclear complex; Gates believing a strike not only wouldn’t be successful, but that it would lead to a broader Middle East war. So you can see where the Obama administration is headed on this front with Gates still in place at defense (if there was ever any doubt what its stance would be). 

Russia/Ukraine: Saturday, Ukraine’s Prime Minister Tymoshenko is slated to meet with Russian Prime Minister Putin in Moscow, the same day a broader summit is to take place in an attempt to resolve the gas crisis that is now approaching two weeks. [Ukraine President Yushchenko said he would only attend if the meetings took place on neutral territory.] The International Energy Agency called the situation yet another “wake-up call” to EU countries to restructure their energy supplies. The IEA’s chief economist said “Russia has cut off its status as being a reliable energy supplier to Europe.” European Commission President Barroso called the standoff “most unacceptable and incredible.” 

Ukraine has accused Russia of blackmail (which is exactly what it is), while the Kremlin has accused Kiev of siphoning off Russian gas bound for Europe, before the supplies were shut for all. 

The real reason why Russia is gambling with its reputation is it seeks to get Europe to accept new pipelines under the Baltic and Black Seas that would bypass Ukraine, but skeptical Europeans now recognize this would make it even easier for Russia to control the level of natural gas reaching them. For his part, Russian President Medvedev wrote an op-ed piece for the Wall Street Journal, claiming Ukraine was stealing gas intended for Europe. But ignore everything you hear from Moscow. It’s about Europe circumventing Ukraine, amidst concerns that Russia is going to use the summit to divide the bloc. Now we wait to see how Europe treats Kiev, Yushchenko having long desired to see his nation become part of the European Union. 

But there were other goings on in Russia this week. Medvedev accused Putin of moving too slowly on the economy, and, somewhat surprisingly, Putin didn’t disagree. It’s the second time in recent months Medvedev tried to distance himself from Vlad the Great, furthering Kremlin intrigue. 

Meanwhile, a Chechen opposition figure killed in Vienna had detailed abuses of power by Chechen President Kadyrov, including torture, thus continuing a pattern of behavior by the Kremlin of snuffing out the opposition. And Russia is a member of the G-8. Remarkable. 

North Korea: There are conflicting reports on just what is happening here in terms of a possible successor to Kim Jong Il. A South Korean news agency said Kim named his youngest son to succeed him, but another report said his eldest son was poised to step in as figurehead. So is it Swiss-educated Kim Jong Un, who is in his mid-20s and said to be ready to grab power, or the eldest son, Kim Jong Nam, 38 and long considered the favorite? [There is a third son in between but he’s said to be a real jerk.] In prior weeks, we’ve also heard the new leader could be Kim Jong Il’s brother-in-law, Jang Song-thaek. In fact, in just the past few days I have read reports definitively saying each of the above is poised to take control, if they haven’t already behind the scenes. 

Meanwhile, the government reiterated it intends to keep its nuclear weapons for now, saying it would disarm only after the United States establishes direct diplomatic ties and can ensure there are no nuclear weapons in South Korea. Pyongyang is anxious to deal with Barack Obama. Little do they know he has other priorities. 

China: Dissident Wei Jingsheng, op-ed London Times. 

“(The) government in Beijing does not know how to save itself….(China) suffers from a huge disparity between the rich and poor: while 0.4 percent of the people hold 70 percent of the wealth of the country, a fifth of the population – more than 300 million Chinese – have daily incomes of less than one dollar. This extreme concentration of wealth is a serious problem for the Chinese Government and threatens its grip on power. 

“First, it means that there are too few consumers to sustain a domestic market. So ‘the workshop of the world’ is particularly reliant on the fortunes of the world economy. The Chinese Government announced yesterday (1/13) that exports had fallen at their fastest rate in a decade…China’s exporters are collapsing, pulling down other businesses with them. The Government claims that unemployment is running at 4 percent in urban areas; but the official figures cannot be believed. According to some serious statisticians, the unemployment rate may have already passed 20 percent. This makes the severity of the economic crisis in China much sharper than in the U.S. and Europe. 

“Second, growing unemployment and stagnant wages will stoke the rising resentment against the super-rich, threatening the position of the ruling class. The Government regards the tens of millions of peasant workers who will return to the cities after the Chinese holiday season to closed factories and no jobs as an urgent threat. Chinese peasants have a long tradition of rebellion…. 

“If the Chinese Government does not take a New Deal approach, it risks the Chinese people revolting and overthrowing those in power. Across the country there is mounting evidence of popular discontent turning to violence…. 

“Military suppression cannot work. Soldiers are the relatives of the peasant workers who have lost their jobs; the families of the military officers will also suffer through the economic crisis. But if the Chinese Government does act to protect the ordinary Chinese, the ruling class of big businessmen and bureaucrats will overthrow it, and replace it with a Government that will protect its interests…. 

“The people of modern China are different from their ancestors: they no longer expect a wise emperor and fair judges to rule over them. They know that only democracy will guarantee what they want: prosperity, security and fair treatment.  The Chinese ruling class think this too – that’s why they already send their children and their money to the West.” 

Pakistan: The New York Times’ David Sanger had an extensive piece in the Sunday Magazine last week. In part: 

“After more than four years, no one in Washington has a clear sense of whether the small, covert American program to help Pakistan secure its weapons and laboratories is actually working. (Khalid) Kidawi [ed. keeper of the country’s nuclear keys] has been happy to take the cash and send in progress reports, but auditors from Washington have been rebuffed whenever they have asked to see how, exactly, the money was being spent. Kidawi, when pressed, says that the Americans shouldn’t offer lectures about nuclear security, not after the U.S. Air Force lost track of some of its own weapons in 2007 for 36 hours, flying them around unguarded to air bases and leaving them by the side of the tarmac. He makes use of another argument as well, a legacy of the Bush era that will last for many years: how can an intelligence apparatus in the United States that got Iraq’s nuclear progress so wrong in 2003 be so certain today that Pakistan’s arsenal is at risk?.... 

“Just as Kidawi fears, every few months someone in Washington – either at the Pentagon, or the Energy Department, or on the campus of the National Defense University – runs a simulation of how the United States should respond if a terrorist group infiltrates the Pakistani nuclear program or manages to take over one or two of its weapons. In these exercises, everyone plays to type: the State Department urges negotiations, while the Joint Special Forces Command loads its soldiers and nuclear teams onto airplanes. The results of these simulations are highly classified, for fear of tipping off the Pakistanis about what the United States knows and doesn’t know about the location of the country’s weapons. But most of these war games conclude in a sea of ambiguity, with the participants who are playing top officials in Islamabad and Washington unable to get a clear picture of what happened and, if something is missing, the Pakistanis unwilling to admit it. As one frequent participant in these tabletop exercises put it to me, ‘Most of them don’t end well.’” 

As Sanger concludes, in his opinion Pakistan is Barack Obama’s worst nightmare. 

Separately, the United States has issued sanctions targeting Pakistani nuclear scientist Abdul Qadeer Khan and others that have participated in the nuclear smuggling ring Khan once led. While the Khan network has supposedly been shut down, the State Department warned that countries should “remain vigilant to ensure that Khan network associates, or others seeking to pursue similar proliferation activities, will not become a future source for sensitive nuclear information or equipment.” 

Khan himself is under house arrest in Pakistan, but we all know how these things go there. “We have arrested 30 terrorists!” “Where are they, can we see them?” “Ah, err, ah, err….no, it’s very sensitive.” 

Turkey: At least 86 have been arrested in an investigation going back to January 2007 into an alleged plot to overthrow the Islamist government of Prime Minister Erdogan. Among those taken into custody are four retired generals, the highest-ranking officers arrested since Turkey’s first multiparty elections in 1950. It’s a tension convention in Turkey these days, and it goes back to the days of the founder of modern Turkey, Ataturk, and the creation of a secular government with European leanings. Today it’s the secular opposition and military versus the Islamists. 

[Erdogan issued some disturbing comments this week on the Gaza crisis, in effect appearing to support Hamas even though Turkey and Israel have had a strong relationship over the years as Erdogan has previously acted as mediator in various talks.] 

Venezuela: For all his bluster, now President Hugo Chavez is seeking Western help to develop his nation’s oil reserves, this after booting the same folks out when he nationalized the oil fields in 2007. But due to the scarcity of projects open to foreign companies these days, some, such as Chevron and Royal Dutch/Shell, are submitting bids. 

South Africa: Corruption charges against ANC leader Jacob Zuma are likely to be reinstated, though Zuma, a real wacko, is still slated to be elected president in April; all part of my scenario that plunges this country into chaos at some point this year. A trial date is unlikely before August. 

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Pray for the men and women of our armed forces.
 
God bless America….and Captain Sullenberger.
 
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Gold closed at $843
Oil, $35.94 
Returns for the week 1/12-1/16 
Dow Jones -3.7% [8281]
S&P 500 -4.5% [850]
S&P MidCap -2.6%
Russell 2000 -3.1%
Nasdaq -2.7% [1529]
 
Returns for the period 1/1/09-1/16/09
 
Dow Jones -5.6%
S&P 500 -5.9%
S&P MidCap -4.0%
Russell 2000 -6.6%
Nasdaq -3.0%

Bulls 43.0
Bears  34.4 [Source: Chartcraft / Investors Intelligence]
 
Have a great week. I appreciate your support.
 
Next time…our new president.

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