Week in Review 
For the week 1/19/2009 - 1/23/2009
Brian Trumbore
President/Editor, StocksandNews.com

A New Administration?the Same Global Recession
 
I was struck by the sight of Vice President Dick Cheney in watching the stirring inauguration of our 44th president. Sitting all bundled up in his wheelchair following a back injury suffered while moving boxes the day before, Cheney was hunched over, peering over the rim of his glasses. Why yes, I thought, it’s Old Man Potter from “It’s A Wonderful Life.” How utterly appropriate, and perhaps the perfect metaphor for the times we face. Many of us are at the depths of despair, some high-profile types have even taken it to the extreme, but where we diverge from the film, at least thus far, is we’re not sure if our drama will have the same happy ending; a community rallying behind its best, the upright citizen who just needs some help to see him through. 

Many of the George Baileys, such as small business owners, need a loan, but in our case the banks have largely stopped lending, around the world, and you might say who can blame them? There is a total lack of confidence and trust, which would be bad enough by itself but is compounded by this incredible wealth destruction, starting with real estate and then the equity markets, along with a sense of fear over one’s job security. It’s all so overwhelming. It’s also a job for a million guardian angels; nay, ten million. It’s a job perhaps beyond the capacity of Barack Obama to effect change, but think of your best sports comebacks. We need a spark that at the time may seem meaningless. It’s that two-out, two-strike single in the bottom of the ninth with the bases empty and your team down two; it’s that first touchdown pass that cuts the deficit to a still seemingly insurmountable 21 points; it’s the pass that propels your car into 10th place, with only ten laps to go, but at least the leader is now in sight. Something to get things started. Provide hope. 

We don’t know what the initial piece of evidence will be that we’ll look back on and say was the critical first step to get us out of this mess, but it will come. Some say it will be an uptick in residential real estate, others positive news on the jobs front. I’ll be focused on anything, globally. 

I want to reiterate that while I have to report all the bad news, and while I was as early as any in calling for this debacle, recognizing no one had figured out the credit crisis aspect ahead of time, for some reason I am now strangely optimistic. Maybe I’m just tired of being a doom and gloomer. Maybe I’m thinking my guardian angel Clarence is about to bump into me on the street. Something good will happen long before the year ends when it comes to the financial crisis. 

Of course we can’t lose all sense of reality, and I’m the last one to do so. We’re another week closer to Iran getting the bomb, for example. But let’s just see if Barack Obama or some other leader out there can light the fire. In the meantime I have some depressing reporting to do. 

---

Ian Bremmer and Nouriel Roubini / Wall Street Journal 

“Some optimistic experts are now saying that though this will be a turbulent year for global markets, the worst of the financial crisis is now behind us. Would it were so.  We believe that 2009 will be tougher than many anticipate.
 
“We enter the new year grappling with the most serious global economic and financial crisis since the Great Depression. The U.S. economy is, at best, halfway through a recession that began in December 2007 and will prove the longest and most severe of the postwar period. Credit losses of close to $3 trillion are leaving the U.S. banking and financial system insolvent. And the credit crunch will persist as households, financial firms and corporations with high debt ratios and solvency problems undergo a sharp deleveraging process. 

“Worse, all of the world’s advanced economies are in recession. Many emerging markets, including China, face the threat of a hard landing. Some fear that these conditions will produce a dangerous spike in inflation, but the greater risk is for a kind of global ‘stag-deflation’: a toxic combination of economic stagnation, recession and falling prices. We’re likely to see vulnerable European markets (Hungary, Romania and Bulgaria), key Latin American markets (Argentina, Venezuela, Ecuador and Mexico), Asian countries (Pakistan, Indonesia and South Korea), and countries like Russia, Ukraine and the Baltic states facing severe financial pressure.” 

Martin Wolf / Financial Times 

“What then is the global failure? It is the malign interaction between some countries’ propensity towards chronic excess supply and other countries’ opposite propensity towards excess demand. But the biggest point about the world economy today is that the credit-fuelled household borrowing that supported the excess demand in deficit countries has come to a sudden stop. Unless this is reversed, excess supply of surplus countries must also collapse. This statement follows as a matter of logic: at world level, supply must equal demand. The question is only how the adjustment occurs. 

“Michael Pettis of Peking University…sees the world as divided into two economic camps: in one are countries with elastic systems of consumer finance and high consumption; in the other are countries with high savings and investment. The U.S. is the most important example of the former. China is the most significant example of the latter. Spain, the UK and Australia were mini versions of the U.S.; Germany and Japan are mature versions of contemporary China…. 

“(Whoever) was most responsible, one point is certain: huge asset price bubbles made possible the excess supply of some countries, particularly China. Since the Asian financial crisis of 1997-98, the developed world – and the U.S. in particular – have experienced, successively, the largest stock market bubble and the biggest credit-fuelled housing bubble in their histories. This era is over. We will struggle with its aftermath for years. 

“So what happens now? The implosion of demand from the private sectors of financially enfeebled deficit countries can end in one of two ways, via offsetting increases in demand or via brutal contractions in supply…. 

“Let us be clear about what is at stake. It is essential to clean up the huge current mess. But it is also evident that an open world economy will be unsustainable if it remains dependent on bubbles. Collapse of globalization is now no small risk. Mr. Obama is present at the re-creation of the global economic system. It is a challenge he has to take up.” 
Morgan Stanley Asia’s Stephen Roach 

“We’re in a post-bubble global recession, and post-bubble recessions are lethal for growth. It will be a long time before the world experiences anything more than anemic recovery.” 

As Peter Gosselin of the Los Angeles Times reports, Roach notes that while “U.S. consumers constitute only about 4.5% of the global population, they bought more than $10 trillion worth of goods and services last year. By contrast, he said, Chinese and Indian consumers, who together account for 40% of global population, bought only $3 trillion worth.” 
Thomas Friedman / New York Times [citing economist David Smick] 

“ ‘Right now,’ said Smick, ‘the bankers are sitting on mountains of cash, including our bailout money, because they know their true balance sheets are a disaster – far worse than publicly stated.’ The situation will likely worsen as delinquent consumer and auto loans are piled atop bad mortgages. ‘Obama needs to inject some truth serum into the banking discussion. No one trusts the banks, and even the bankers don’t trust each other.’ Bringing clarity to bank balance sheets, said Smick, ‘is the first step to fixing America’s bank lending problem.’” 

Ah yes, the banks. Look what’s happening in the UK. There are some, such as noted investor Jim Rogers, who say Britain is basically bankrupt as it’s forced to ply its banks with $billions and $billions to keep its financial system afloat. Royal Bank of Scotland, which is now 70% owned by the government, is about to report a stupendous $39 billion loss for 2008. Lloyds Banking Group, 43% owned by the government, could join RBS in being fully nationalized before long. Some estimate this would saddle the government of Gordon Brown with $4 trillion in new liabilities, “an amount far exceeding the country’s annual economic output.” [Wall Street Journal] 

Prime Minister Brown is particularly upset with RBS for taking “irresponsible risks.” “Almost all their losses are in subprime mortgages in America and related to the acquisition of ABN Amro,” he shouted the other day. The British currency is in freefall and hit levels vs. the U.S. dollar not seen since 1985. And like in the U.S., Britain’s banks, despite all the capital coming their way, aren’t lending. 

The UK, by the way, officially entered recession with word it had its second straight quarter of negative GDP in Q4, down 1.5%. A full decline of 2.8% is projected here for 2009, as unemployment, now up to 6.1%, rockets above 8% by year end. 

Elsewhere around the world, Singapore is tapping its reserves for the first time ever to pay for a stimulus program; this after reporting GDP fell 16.8% from Q3 to Q4, staggering, and greater than an earlier estimate (reported in these pages) of 12.5%. 

Japan saw its exports in December plunge 35%. 

And China reported GDP for the fourth quarter was 6.8%, or below the magic 8% level that is deemed the mark above which the economy can provide jobs for any who want one, including those displaced from rural areas. China is calculating its GDP year over year, but if you took quarter-to-quarter, as Singapore did, it’s more like a contraction of 0.1%, according to economists at Citigroup.  

Yup, I’m looking for that ray of sunshine and none are to be found. But just 20 days to pitchers and catchers!  

In the United States, jobless claims for the week hit 589,000, just dreadful, while housing starts for December were far below expectations at 550,000, making it the worst year on record for homebuilding, dating back to 1959 when they first started keeping track of such things. 

So you might say the stage is set, globally, for massive unrest and it’s started in Iceland, the Baltics, and China. 

Economist Robert Wade, “addressing a protest meeting in Reykjavik’s cinema – recently warned that the world was approaching a new tipping point. Starting from March-May 2009, we can expect large-scale civil unrest, he said. ‘It will be caused by the rise of general awareness throughout Europe, America and Asia that hundreds of millions of people in rich and poor countries are experiencing rapidly falling consumption standards; that the crisis is getting worse not better; and that it has escaped the control of public authorities, national and international.’” [Roger Boyes / London Times] 

In Iceland, this little place about the size of Kentucky that is Ground Zero for the financial debacle, protests continue to grow as, unbelievably, the parliament took a lengthy Christmas holiday and returned to eggs and cans being thrown at members’ cars. Said a political scientist at the University of Iceland, “People feel that it is incredible that after such a policy disaster that we faced last year, there has been no resignation, no minister, no one has resigned or responded, or taken responsibility for what happened.” 

Yes, it’s not just in the U.S. where that last sentiment has been expressed. 

Look at the arrogance and hubris of one John Thain, CEO of Merrill Lynch, who was just shown the door at Bank of America, about four months after he got it to swallow his brokerage giant and all the toxic waste sitting on its books that has since been lodged in the throat of BofA CEO Ken Lewis. If you see Lewis in a restaurant and he’s turning blue, apply the Heimlich. Just understand it’s not a piece of meat he’s choking on. 

Thain, another of those Goldman Sachs Wonder Boys that the world could easily do without, received a $15 million signing bonus when he took the helms at Merrill a little over a year ago. Then, after accepting TARP funds following the BofA merger, he allegedly handed out $3 to $4 billion in bonuses to Merrill employees before the formal completion of the merger. Then he asked the board for a $10 million bonus for himself at a time when other Wall Street executives, such as Morgan Stanley’s John Mack and JPMorgan’s Jamie Dimon were turning them down. Then Thain clearly lied to Ken Lewis in discussing the breadth of Merrill’s losses for the quarter. Suddenly Lewis figured it out (we’re still in December, and before the shareholder vote approving the merger was complete), told the government, the government said, ‘If you think you’re backing out of this one, you can forget it,’ and Lewis went home to hide under the covers like Ebenezer Scrooge before he was visited by the spirits.  

Only one problem. Lewis knew the losses would eventually come out, Merrill reported over $15 billion of them, on top of BofA’s own record losses of nearly $3 billion, and the stock tanked, leaving many BofA shareholders wondering if they had been leveled with before they voted ‘yes’ on the merger in the first place. 

So now we advance to this past week and Thain being fired. It didn’t help that Charlie Gasparino of CNBC broke the story that Mr. Thain had spent over $1.2 million of shareholder/taxpayer money to redecorate his office suite, yet another item for which he will forever be known as a classic example of how some in this Gilded Age II just didn’t have a clue. It’s utterly disgraceful. 

But we’re not finished with the major events of the week. The world’s biggest institutional money manager, State Street, in issuing an earnings report that was far from great, but would have otherwise been tolerated, shocked the world when it said it had unrealized losses of nearly $10 billion sitting on its books, including potential hits to its commercial paper holdings. State Street had talked in quarters past about paper losses but it was the huge increases in liabilities that floored everyone and the stock was taken out back and shot. Just to give you a further sense of the carnage in the financial markets, State Street said its assets under management had declined from $1.98 trillion to $1.44 trillion over the past year, or 27%. Assets for which it is custodian fell an additional 21%.  

So once again investors were left shaking their heads. If you can’t trust staid State Street, never exactly known as Mr. Excitement, who could you trust? The answer of course is no one. State Street proved to be just as much of a black box as the next guy in the sector. 

What a mess. China’s awful performance impacted the likes of Australian mining giant BHP Billiton, which is laying off as many as 6,000 due to the fact there is far less demand for its coal and iron ore than the boom times. 

And Microsoft, which hasn’t laid off anyone in its history, going back to 1975, is slashing 5,000 jobs; this after the company reported revenue increased just 2%, far below the company’s own expectations. What I found interesting was CEO Steve Ballmer’s memo to employees, wherein he stated: 

“To increase efficiency, we’re taking a series of aggressive steps. We’ll cut travel expenditures 20 percent and make significant reductions in spending on vendors and contingent staff….We’ve reduced marketing budgets.” 

None of this is a surprise, it’s happening all over, but you can see how Microsoft’s announcement is but a classic example of the knock-on effect; layoffs and expense reductions in one place rippling across the prairie to impact hotel workers in Pittsburgh or New York. 

Finally, you have Treasury Secretary-designate Timothy Geithner, he of the tax issues that he was less than forthcoming on. I have written little of this man, but he should not be taking a seat at the cabinet table. He’s tarnished.  

That said, he will be approved next week and then he has to officially deal with his statement that China manipulates its currency. Of course they do. Just don’t say it out loud, and during a global recession, Mr. Geithner! Who do you think is financing our massive debt? I know. If China sold large amounts of our paper it would only hurt itself, but China’s communists have a lot on their plate these days and I’ve always said they’ll play the nationalism card to keep the peace internally. 

By now, every 2nd-grader knows the simple lesson of the Great Depression and the evils of protectionism. I’ve written on numerous occasions that bad government can make for the difference between recession and depression and we had an example of that this week. If I were Geithner, I’d stay at home and send Paul Volcker on the China missions.

Street Bytes 

--It was another down week, the third straight sizable one for all the major averages. Earnings from some heavyweights were mixed. IBM, Apple, and Google were positive; eBay, Microsoft, and General Electric were major downers. In the case of GE, CEO Jeffrey Immelt needs to take a few chill pills next time he goes on television and in simply meeting already lowered expectations, shares in GE fell to $12 as investors have zero confidence the now 10% dividend will hold. On the merger front, Pfizer, looking ahead to the day it loses its patent on Lipitor in 2011, is going after Wyeth and its product line in an attempt to fill the coming revenue gap. Few believe this is a good move. 

For its part, IBM said that despite “an extremely difficult economic environment,” it expected increasing profitability from its software and services businesses, and that customers are continuing to sign up for outsourcing and other service contracts. CEO Samuel Palmisano said “we are confident about 2009” as IBM stuck to its forecast of increasing earnings through 2010. 

For the week, the Dow Jones fell 2.5% to close at 8077, the S&P 500 lost 2.1%, and Nasdaq declined 3.4%. The October and November lows have held for now. 

--U.S. Treasury Yields 

6-mo. 0.29% 2-yr. 0.81% 10-yr. 2.61% 30-yr. 3.31% 

The yield on the 30-year Treasury bond rose 43 basis points, its worst week since April 1987, on fears coming supply will overwhelm the market. The 10-year also rose to a six-week high in yield. 

In an interview with Bloomberg News, a key financial figure in South Korea, responsible for the National Pension Service, said it is time to sell U.S. Treasuries because of the exploding deficit and coming stimulus, which will eventually lead to inflation and thus become a negative for government securities. 

--ISI, the group headed by economist Ed Hyman, projects that the top four banks have $1.2 trillion in bad assets - $2.4 trillion for the industry as a whole – to give you a sense of what the government faces if the idea of a “bad bank” takes hold; one that buys up toxic assets to allow the banks to rid themselves of the crap, clean up their balance sheets, and get back to lending and attracting private capital. 

--Editorial / Wall Street Journal [on the Bush economy] 

“By pushing…excess credit into the economy, the Fed created a housing and mortgage mania that Wall Street was only too happy to be part of. Yes, many on the Street abandoned their normal risk standards. But they were goaded by an enormous subsidy for debt. Wall Street did get ‘drunk’ but Washington had set up the open bar. 

“For that matter, most everyone else was also drinking the free booze: from homebuyers who put nothing down for a loan, to a White House that bragged about record home ownership, to the Democrats who promoted and protected Fannie Mae and Freddie Mac. [Those two companies helped turbo-charge the mania by using a taxpayer subsidy to attract trillions of dollars of foreign capital into U.S. housing.] No one wanted the party to end, though sooner or later it had to.” 

--State sales taxes are expected to have declined 6.5% in the fourth quarter. Corporate income taxes down 22%. Not good. 

--Energy: Inventories continue to soar as the global economy cools. By one estimate, 80 million barrels of crude oil are being stored in tankers, the most in 20 years. Morgan Stanley made news when it was reported it was about to rent a 2 million-barrel carrier to store oil, in the hope of selling it at a higher price down the road, but then the next day it scrapped the deal. 

Schlumberger issued a sobering earnings report as it expects significant declines in its oilfield services activities in North America and Russia. Pricing erosion is also in play. It’s all about demand, and the sector will continue to suffer until demand recovers. Schlumberger added it was looking to cut more jobs than the 1,000 announced just last week. 

--Will Citigroup be nationalized?: 

“While Citi appeared to be stabilizing last quarter, at least on paper, the financial picture could deteriorate quickly. As of Sept. 30, Citi’s bank assets (what it owns) exceeded its liabilities (what it owes) by $63 billion, or 5.2% of assets. That’s a slim margin. A bank is insolvent when its assets don’t cover its liabilities. Even before that, a bank can fall into the government’s hands. 

“The big worry now is on the asset side of Citi’s ledger. Just a modest decline in the value of its $1.2 trillion banking portfolio would put Citi close to the edge of insolvency. And there are plenty of toxic securities lurking. Citi owns roughly $400 billion of consumer and real estate loans. With the economy continuing to sour, those areas are particularly vulnerable to further losses and writedowns. ‘The sooner these toxic assets can be identified and quarantined, the sooner the healing process starts,’ says Jonathan M. Duensing, head of corporate credit at money manager Smith Breeden Associates.” [Mara Der Hovanesian and David Henry / BusinessWeek] 

This week, Citigroup named Richard Parsons, longtime board member and former chairman of Time Warner, as its next chairman, thus eliciting a collective yawn from the Street. Like this is going to change things. He’s worthless. 

And I thought you might get a kick out of something I wrote in this space back on 3/10/01, nearly eight years ago; part of a story that often pops up on the Net. 

“Citigroup (Citibank) continues to be the prime target of money- laundering investigations. I wonder what top execs like Robert Rubin are doing with their money? The former Treasury Secretary took down a cool $19 million last year (by another measurement it was over $50 million).

“Speaking of banks, I was asked my opinion of the dismantling of Glass-Steagall (which opened the door to banks as far as the securities side of Wall Street is concerned) for an online financial site about a year ago. I commented then that with the rise of the bank supermarket, a la Citigroup, these would be viewed as ‘too big to fail,’ i.e., the government would feel compelled to step in in the event of a collapse of one of the giants in order to prevent economic calamity across the board. At the time many said, wrong, the fact that these new super banks were so big made it almost impossible for them to fail because their product lines would be so highly diversified.

“So I noted with amusement an article in my latest issue of ‘Grant’s Interest Rate Observer,’ wherein it is revealed that the money-center titans are not in as good a shape as once believed. The former chairman of Wachovia Bank said, ‘The strain on the banks' capital is greater now than it was (during the banking crisis of 1989-91) – there’s more risk that doesn’t show up on the balance sheet.’ An international financial crisis could bring this all to the forefront, which is why you have to pay attention when even a relative lightweight, like Turkey, catches cold.”  

Not too shabby, given today’s environment. 

--Saudi Prince Alwaleed, a large holder in Citigroup, saw the value of his investment company decline $8.3 billion in the fourth quarter, as leading holding Citi lost 75% of its value. 

--Ireland’s banking industry remains in deep trouble as Anglo Irish Bank Corp. was nationalized. [For about an hour after I posted the last review, I carelessly included the moniker AIB in describing Anglo Irish. They are two distinct entities and thanks to Chris K. for pointing out this mistake.]  

Ireland is up in arms over the goings on at Anglo Irish and the government’s own competence is being called into question. The bank had been extending massive loans, one of over $120 million to the chief executive, Sean FitzPatrick (sic), all undisclosed. In his case, FitzPatrick “used the secret loans to invest in Anglo shares, property funds, wealth management products, investment property, film finance and pension products.” 

Incredibly, the board knew of FitzPatrick’s shell game in moving the loans off the books. I have only read snippets of this one, but speaking of books, it appears this will one day be an outstanding one. 

As for the future of The Bank of Ireland and Allied Irish Bank, the central bank governor said they are too big to fail as recapitalization is ongoing. I’d say wait 24 hours. 

And here’s a sign of the times. Diageo, the world’s biggest drinks company, was going to build a new state-of-the-art Guinness brewery in Ireland, but the plans had been predicated on selling off existing brewing properties. Alas, as the real estate market has collapsed, the plans are now on hold. 

Lastly, the Irish Nurses Organization, which represents about 40,000 of them, said it will not participate in talks with Government “if the process involves discussions on reducing pay in any form.” No word on the position of Swedish nurses. 

--Italian car company Fiat is acquiring a 35% stake in Chrysler that will allow it to distribute its Fiat and Alfa Romeo brands in the United States through Chrysler’s dealership network. No cash is exchanging hands, though, and both automakers remain in deep, deep trouble. If they survive, Americans will love Fiat. 

--Toyota Motor has overtaken General Motors as the world’s biggest carmaker, ending GM’s 77-year unbroken period of supremacy. Toyota sold 8.97 million vehicles, worldwide, to GM’s 8.35 million. 

--I still have my reduced holding in a battery company (it’s been slammed recently, so thank god I sold half last year), and I couldn’t help but note that Chinese officials say that despite the current slump in demand for cars there, the fact is auto usage will take off anew in the next up cycle and China must move to electric cars because otherwise the pollution would destroy the place. 

--New York City is projected to lose 48,900 jobs in the securities industry by the end of 2010, or 26% of the total, which coincidentally would be the exact same percentage lost in the 1973-74 bear market. The problem is this time the damage is far broader. The New York metro area as a whole is projected to lose 181,000 jobs in all sectors, the most of any region in the U.S. 

--Congratulations to my friends at Stifel Nicolaus for being rated #1 in both Stock Picking and Earnings Estimate Accuracy out of 264 firms in StarMine’s 2008 domestic rankings. As Ronald Reagan would have said, “Not bad…not bad at all.” 

--All of you have new housing developments in your area that I imagine are only partially filled. It’s a leverage intensive business so I keep waiting for this mammoth townhouse development a few blocks from my place that I’ve been writing about for years to go into foreclosure. Only one or two $950,000 units have been sold out of about 35.  [The units have elevators and such.] The New York Times had a typical story of a private developer, Brown Family Communities of Tempe, Ariz., that had shut its doors after 33 years because the bank will no longer lend to it. “They treated me like a deadbeat who missed his car payment,” said owner Brown. “They wanted their money now.” 

As the piece by John Collins Rudolf points out, it’s the classic story of private vs. public developers. Public companies, at least for now, have had an easier time of it in meeting their obligations, simply because they’re better capitalized. According to the National Association of Home Builders, at least 20,000 builders – about a fifth of the total nationwide – have closed up shop in the last two years.” 

--New home sales in the six-county Southern California region were down 53% in December from the prior year, though sales of all homes were up 51% due to bargain hunters snapping up foreclosed and distressed properties. The median home price for the Southland fell to $278,000, down 35% in one year. As my local expert Josh P. pointed out, in San Diego County, where he resides, prices are now off 42% from the peak. [52% in Riverside and San Bernardino] 

Peter Hong of the Los Angeles Times also notes the “holding pattern” in the housing industry in terms of new construction can further impact any recovery because while you want to work through the massive inventory, “the loss of construction jobs has…been a leading cause of unemployment in the state. There were 67,700 jobs lost in residential and commercial construction statewide in November compared with the year before….Those construction job losses were 32% of the total jobs lost in that period.” So you have the spillover effect. Fewer potential home buyers. 

--Deflation Watch: Josh P. passed along the fact apartment rents across the U.S. West and South dropped for the three months ending December 31. To save money, 45 are now living in the average unit. [OK, that last bit is just a guess. We had a fire a few weeks ago blocks from my office and in a three-bedroom apartment that was impacted, something like 25 emerged onto the street as the firemen pulled up. Ye olde day laborers, you could say.] 

--Janus Capital Group reported assets under management dropped to $123 billion as of Dec. 31, from $206 billion a year earlier. And per my conversation of a few weeks ago on some fund groups needing to eliminate their government securities focused money market funds due to low yields, Janus is pulling some of its institutional offerings. [PIMCO, on the other hand, is getting into the game. Size still matters.] 

I don’t mean to pick on Janus, by the way. Any equity focused fund group has obviously been slammed. And Investment News reports that executives in this industry expect revenue (management fees) to drop by as much as 43% by the end of ’09. Job losses will be the result, about 10% on average it is assumed. 

--Intel is cutting 5,000 to 6,000 as part of a restructuring in its global operations. That includes the Limerick, Ireland facility I have written of, emblematic of troubles there. 

--Sony confirmed it will report its first annual loss in 14 years for its fiscal year ending in March, perhaps as much as $1.7 billion. 

--For all of China’s problems regarding its economy, its exports are declining at a far less rate than, say, Japan, Taiwan and Singapore. For example, down less than 10% in December vs. 27% to 45% in the others. 

--With all the talk surrounding Timothy Geithner and his tax issue, Bloomberg ran a piece concerning investors fleeced by Bernie Madoff. I haven’t had a chance to really delve into this, but as Thom Weidlich and Cynthia Cotts report: 

“Bernard Madoff’s customers may recoup more of their investment losses by using tax strategies than by suing the man accused of bilking them in a $50 billion Ponzi scheme or his bankrupt firm.” Like 40% of everything. 

“U.S. tax law allows Madoff’s customers to take income deductions for losses caused by theft if they prove their money was stolen, (said tax specialist Micah) Bloomfield. Madoff’s alleged estimate of the size of the fraud didn’t specify if it included principal or how much was lost by charities not subject to taxation.” Another expert, Martin Shulkin, said “The claim should be made for the year you discover the loss, and is subject to a reasonable expectation of recovery.” 

It’s very complicated and on the off chance a Madoff victim is reading this, make sure you’re discussing it with your accountant. 

Otherwise, at first blush it appears Madoff investors will only recover 10 cents on the dollar, at best. So far the trustee handling the liquidation of his firm has identified $830 million in liquid assets that may be subject to recovery, while investors may still be on the hook to make payments in “clawbacks” if they received alleged profit payments that the law says should be part of the pool for redistribution. 

[The New York Post reports that CNN’s Larry King was another victim of Madoff, losing over $1 million, according to a source. “The personal loss would explain why the usually garrulous King, has been so quiet about the Madoff scandal – even when it was announced that celebrities like Kevin Bacon and Kyra Sedgwick were among those who lost their life savings.” And now we learn Zsa Zsa Gabor was fleeced to the tune of $10 million.] 

--Resorts Atlantic City, New Jersey’s first casino, has defaulted on its mortgage. Column Financial, a subsidiary of Credit Suisse, has filed to foreclose on the property. 

--Warner Brothers Entertainment is laying off 10 percent of its staff, 800 positions. 

--Clear Channel Communications is eliminating 1,850 positions, 9 percent of its staff. In the third quarter, revenue from radio broadcasting fell 7 percent, but outdoor advertising was off just 1 percent. 

--Harley-Davidson is jettisoning 1,100, or 12 percent of its workforce, as global sales dropped 13%, 20% in the U.S., in the fourth quarter. 

--Apple said sales of iPhones, iPods and Mac computers rose 6% in the fourth quarter despite all the problems in the economy, and gave a relatively rosy forecast for the current quarter. 

Meanwhile, the SEC is investigating Apple’s recent disclosures about the health of Steve Jobs. 

--There were just 43 initial public offerings in 2008, down from 272 in 2007, thus making ’08 the worst year for IPOs since 1978, according to Renaissance Capital and USA TODAY. 

--Mexican billionaire Carlos Slim is taking a sizable stake in the New York Times Co., and is receiving 14% interest for his efforts…usury…plus a bunch of warrants that can be converted into common. 

--So much for that one-time darling eBay. The company reported revenues in the fourth quarter fell, its first quarterly sales decline, and it lowered expectations for revenues in the first quarter. Shares continued to tumble. 

--Merrill Lynch reportedly settled with its employees to the tune of $75 million for failing to disclose subprime-related losses that affected its savings and investment plan. This is just the tip of the iceberg. Merrill, a lead plaintiff in a similar case involving the State Teachers Retirement System of Ohio, for example, evidently agreed to a settlement of $475 million with them. [Dan Jamieson / Investment News] 

--I love this one, seeing as how I’ve written extensively on the fake fish issue. Elizabeth Weise of USA TODAY reports that “Fish is the most frequently faked food Americans buy. In the business, it’s called ‘species adulteration’ – selling a cheaper fish such as pen-raised Atlantic salmon as wild Alaska salmon. 

“When Consumer Reports tested 23 supposedly wild-caught salmon fillets bought nationwide in 2005-2006, only 10 were wild salmon. The rest were farmed. In 2004, University of North Carolina scientists found 77% of fish labeled red snapper was actually something else.” 

So the chances are you’re eating sea robin. But here’s a way to differentiate between wild and farmed salmon. 

“When you cook it, the wild salmon retains its color, and in the aquaculture salmon, the color tends to leak out,” said an official with the FDA. 

And it turns out olive oil is one of the most frequently counterfeited food products, according to the FDA. “We were coming across a lot of products labeled as extra-virgin olive oil that contained up to 90% soybean oil,” said a Connecticut official. Off-brands sold in discount stores are the prime problem. [In China, extra-virgin olive oil contains 90% motor oil….that’s a joke, Mr. Chinese Censor.] 

And did you know honey and maple syrup are also often counterfeited? It’s yet another sign of the apocalypse.  

--It appears the Ricketts family, whose patriarch Joe Ricketts founded TD Ameritrade Holding Corp., is the winning bidder for the Chicago Cubs with an offer of nearly $900 million. If approved by Major League Baseball, the deal could close in 60-90 days. 

--You know my Manchester United shirt with the AIG logo that I’ll never wear out of sheer embarrassment? ManU says it can pull its $26M sponsorship deal, which expires in a year anyway, and is seeking a new partner. Actually, maybe my shirt will be worth something in a century or two. 

[AIG, incidentally, announced the sale of its Asian life assurance unit – hoping to raise $20 billion to help repay the $60 billion in loans it has with the U.S. government. Nothing like selling at the bottom of the market, eh?] 

--In a survey of UK and U.S. mobile phone users, 85% reported they were frustrated by the difficulty of getting a new phone up and working. 

--MillerCoors is running a one-second commercial for the Super Bowl, featuring Miller High Life’s delivery man. This is interesting. Go to 1SecondAd.com and check them out. I say this is very effective, and as a senior exec for Miller High Life notes, “(The beer) is all about high quality and great value, so it wouldn’t make sense for this brand to pay $3 million for a 30-second ad. One second should be plenty of time to remind viewers that Miller High Life is common sense in a bottle.” The company won’t say how much the ad costs. 

--For those of you who watch CNBC’s “Squawk Box,” the New York Post’s Page Six ran a funny piece. It seems anchor Becky Quick “is ruffling some feathers.” She “quietly married the show’s executive producer, Matthew Quayle, a few months ago – which has drawn grumbles from co-workers regarding the ethical ramifications. ‘She’s definitely getting preferential treatment since they got together,’ said one insider.” 

Quick was previously married, as was Quayle, before they started dating. “He is a big Christian and would always talk about the church. And then he left his wife and (two kids) for her. What a hypocrite,” offered the insider. The other anchors, Joe Kernen and Carl Quintanilla, are also married to CNBC producers. 

And that’s your Street Gossip for the week. It’s better than talking about the near global depression. 

Foreign Affairs 

Israel: Some of us are wondering, just what was the Gaza war all about? Sure, Israel stopped the rocket fire for a spell, but in not finishing the job, Hamas gained yet another PR victory in the Arab street, which happens to include the majority of the residents of Gaza, who seem impervious to destruction and poverty. Israel blew it. Hamas has already resumed smuggling activities, even though the IDF destroyed 80% of 300 tunnels between Gaza and Egypt. Hamas will rearm, siphon off some of the aid that will now flow in, build better bunkers, and allow Israel to blow it up all over again, until the time Israel’s spectacular intelligence apparatus slips up, a weapon of mass destruction is secreted into Gaza, and you know the end result. The entire region goes up in flames.  

Hostility towards Israel has only increased with this conflict. All you need to know is that Fatah (the Palestinian Authority), the preferred agent of the Palestinian people for the West, and Israel, doesn’t have a chance of replacing Hamas in Gaza, so the people remain divided between Gaza and the West Bank; two different governing authorities. It’s absurd. 

And what was the message sent to Hizbullah? They are two to three times stronger since the 2006 war, despite getting blown to bits in their own right. And now Jews around the world are on guard to see what Hizbullah does around Feb. 13, the first anniversary of the assassination of one of their top leaders, Imad Mughniyah. I say ‘Jews around the world’ because Hizbullah will retaliate at a time and place of its choosing; of this you can be certain. 

I wonder, though, if Hizbullah is stupid enough not to hold off until after the Lebanese general elections in June, when it could very well emerge with a parliamentary majority. It’s possible. You would thus think that war, which would follow an attack similar to that on the Israeli embassy in Buenos Aires in 1992, would trigger a backlash at the polls by the people.  

Israel’s own election campaign is back in full force and Likud leader Benjamin Netanyahu is once again in the lead. The vote is Feb. 10. 

As for President Obama’s selection of George Mitchell to be his new envoy to the region, many believe it will just be more of the same on the negotiation front.  

Ralph Peters / New York Post 

“Israel’s cause was just, and a response was necessary. Terror can’t be tolerated. Unfortunately, Israel’s decision to halt military operations prematurely does amount to tolerating terror. 

“The core leadership of Hamas was allowed to survive. Amid the ruins, cowardly terrorists emerged from their bunkers to declare victory simply because they’re still breathing. 

“Israel now must answer a moral question about the conflict – although not in the Hamas-hugging form the global left has posed. 

“The question isn’t whether the death and destruction was criminal – it wasn’t. Hamas, not Israel, ignited this miniature war. 

“Rather, the question is whether the amount of damage the IDF did was useful, given that Israel’s leaders were unwilling to go all the way. Had the bloodthirsty Hamas bosses been killed, every bit of collateral damage would have been justified. 

“Will murkier results justify the physical destruction and loss of civilian lives – however exaggerated by terrorist sympathizers? Or did Israel, by stopping short, hand Hamas a propaganda gift of picturesque ruins, dead kids and grinning terrorists? 

“Had Israel been willing to go all the way, every loss on either side would have been justified. But Israel’s government chickened out again…. 

“Israel’s government does have plenty of excuses for halting its offensive. It didn’t want to be on the blame-line for President Obama’s first foreign-policy crisis. A war prosecuted to the finish would have cost much higher casualties. And Israel faces elections in a few weeks. 

“But the bottom line is that, if Israel wasn’t ready to go all the way, it shouldn’t have gone in at all. For a rule-of-law democracy to embark on a war about which it isn’t completely serious is a crime. 

“Perhaps the end result of all this will be positive. International donors are lining up to offer the Palestinians billions to rebuild, but refusing (for now) to channel the money through Hamas. Perhaps aid will do what Israel left undone. 

“But I wouldn’t bet on it.” 

Lastly, Michael Slackman had a good piece in the New York Times concerning the Arab League summit in Kuwait, where the topic of Gaza dominated, even though as Slackman reported: 

“When the presidents, kings and emirs arrived…they were scheduled to discuss regional cooperation to improve education, ease trade and travel barriers, improve food security and lift their citizens out of poverty. But they were barely talking to one another because of differences over how to deal with Israel’s offensive.” 

Amr Moussa, the secretary general of the Arab League, referring to Israeli control of Gaza, said, “Yes, military occupation is a serious matter that needs to be addressed. But backwardness in our societies needs to be taken care of.” 

Slackman: “There was a suffocating sense of despair hanging over the Kuwait meeting as the Gaza crisis eclipsed every other issue.” 

“The Arab ship is sinking,” said Moussa. 

Lebanese Prime Minister Fouad Siniora said that “the Arab states would need to create 50 million jobs in the next 20 years simply to keep unemployment at current levels. He said that Arab universities were collapsing and scientific research was almost nonexistent.” 

Slackman writes that Arab leaders recognize they are falling further and further behind, but the Palestinian issue consumes their meetings. For example, in an international survey of eighth-graders examining trends in math and science, eighth-graders from Saudi Arabia placed 46th out of 48. Among fourth-graders, the bottom four nations out of 36 were Tunisia, Kuwait, Qatar and Yemen. In science, Qatar’s eighth-graders were next to last, below Botswana. . 

No wonder Hamas survives.  

Iran: President Ahmadinejad canceled activities for four days because of a cold, the fifth time since April that he has canceled his official agenda for health reasons. Last October, the official IRNA news agency reported Ahmadinejad was suffering from exhaustion. The presidential election is slated for June so this bears watching. “Reformist” former president Mohammad Khatami is to make his final decision on whether to run shortly. Ahmadinejad still has the support of the conservatives, especially Ayatollah Khamenei. 

[I was reading the Iranian news service online and saw a ‘special report’ blasting Egyptian leaders for supporting Israel during the Gaza war. For his sake, I hope President Mubarak is constantly checking his security detail for moles.] 

Iraq: The provincial elections are next Saturday, Jan. 31, a huge milestone. The Washington Post’s David Ignatius interviewed the retiring U.S. Ambassador Ryan Crocker, who deserves a ton of credit for the successes here. 

“The key to success in Iraq, insists Crocker, was the psychological impact of Bush’s decision to add troops. ‘In the teeth of ferociously negative popular opinion, in the face of a lot of well-reasoned advice to the contrary, he said he was going forward, not backward.’ 

“Bush’s decision rocked America’s adversaries, says Crocker: ‘The lesson they had learned from Lebanon was, ‘Stick it to the Americans, make them feel the pain, and they won’t have the stomach to stick it out.’ That assumption was challenged by the surge.’ 

“Soon, Iraq will be Barack Obama’s problem. And I ask Crocker what mistakes the new administration could make. He answers that he thinks it will avoid these errors, but he lists them anyway: ‘Concluding that this was the Bush administration’s war, that it’s stable enough now, that we don’t want to inherit it, so we’re going to back away.’ 

“Most of all, says Crocker, policymakers need to understand that this is a long game. A lasting change in Iraq isn’t an on-off switch: ‘Not this year, not in five years, maybe not in 10 years.’ 

“The overarching lesson, he says, not just of Iraq but of his entire career, is that events have consequences that cannot be predicted, or escaped: ‘When we are part of a sweeping and traumatic set of events, we’ve got to understand that currents are set in motion that will play themselves out for many years, in ways that we can’t always understand.’” 

[For the record, in a Washington Post/ABC News survey, 61% of Americans said the Iraq war was not worth fighting.] 

Afghanistan: During the campaign, Barack Obama said he was committed to sending more troops here, but whether he can get European Union members of NATO to do the same is doubtful. While Obama’s popularity in Germany, Britain, France and Italy is high, 53 to 60 percent of the people here do not want their countries to send more troops to Afghanistan, according to a Financial Times survey. Only in Spain does a small majority favor contributing additional forces. Voters in all five believe the international financial crisis must be at the top of the list of issues to which President Obama should give priority. 

Separately, 45 percent of U.S. respondents said Obama should continue to place the war against international terrorism at the top of his list, while only 13 percent in Germany favor this. 

And there are reports Osama bin Laden’s son, Saad, is hanging out in Pakistan. Of all bin Laden’s children, Saad is said to be the one most involved in the terror game. Wouldn’t it be nice if he was a victim of Friday’s two drone attacks in Waziristan that supposedly took out at least five al Qaeda operatives? [The first strikes of the Obama administration.] 

Russia: The gas dispute between Ukraine and Russia was resolved and a 10-year supply deal signed on Monday, leading to the resumption of supplies to Europe. The exact price was not disclosed, but Ukraine will be paying more than the old $179 per 1,000 cubic meters for 2009, and a much higher price in years after. The actual impact of the suspension of gas to Europe may have been overstated except in a select few countries, like Bulgaria, as most nations weathered it just fine having built up ample reserves. 

The bigger issue for now, aside from Russia’s reliability as an energy partner, is the ongoing political crisis in Ukraine. Russian President Putin dealt with Prime Minister Tymoshenko and she evidently acquiesced to some conditions that President Yushchenko did not agree with. For now the fragile coalition remains in place as the Kremlin licks its chops. 

Meanwhile, in yet another assassination of an opposition figure, human rights lawyer Stanislav Markelov was gunned down on a main street in Moscow, just a half mile from the Kremlin, after a press conference Markelov gave to discuss the case of a Chechen woman murdered by a Russian army officer. As Markelov was shot in the head with a pistol fitted with a silencer, a journalist with him, Anastasia Baburova, was also shot and killed. Last week, you’ll recall a Chechen opposition figure was gunned down in Vienna. 

Editorial / Washington Post 

“The larger story here is of serial murders of Mr. Putin’s opponents, at home and abroad. Ms. Baburova, 25, is at least the 15th journalist to be slain since Mr. Putin took power. No one has been held accountable in any of the cases – including that of Anna Politkovskaya, a former client of Mr. Markelov who was also murdered execution-style in broad daylight, on Mr. Putin’s birthday in 2006. In London, dissident former KGB agent Alexander Litvinenko was poisoned; so was Ukrainian President Viktor Yushchenko, who survived. Karina Moskalenko, another opposition lawyer who has represented Ms. Politkovskaya’s family, fell ill from mercury poisoning in Strasbourg, France, in October, just before a hearing in the case…. 

“It is possible that Mr. Putin and his security services had nothing to do with any of these murders. But it is a fact that the Russian leader has not pressed for justice; on the contrary, he has protected the suspects identified by Scotland Yard in the Litvinenko case. What is indisputable is that Russians live in a political climate in which those who criticize Mr. Putin or the human rights violations of his government can be murdered with impunity. Although some of the killings have occurred in their cities, Western governments have made no attempt to hold Mr. Putin or the Russian government accountable. Their silence helps keep brazen murder a part of Russia’s politics.” 

The vast majority of Russians themselves, however, continue to give Putin high marks. In an independent survey, 83% approve of him, and 75% approve of the job President Medvedev is doing. But at the same time, only 43% now believe the country is headed in the right direction, a big come down. 

This week Putin ordered that a new budget be drawn up to reflect $41 oil, not the existing budget built on a $95 price. 40% of budget tax revenues in Russia come from the energy industry. One expert believes that Putin maintains such high approval because only 10% to 15% of the people have thus far seen their lives get markedly worse, though this number is about to explode, I’m guessing. 

Lastly, Russia proudly announced it had sent four nuclear-capable strategic bombers on patrol missions over the Arctic and Atlantic oceans, Wednesday, but I love the story in the Global Security Newswire that “NATO F-16 fighter jets flew alongside the Tu-160 bombers for parts of their 12-hour mission while U.S. F-15 Eagle fighter jets followed the Tu-95 aircraft during their 10-hour run.” 

Turkey: Prime Minister Erdogan made his first visit to European Union headquarters in Brussels since December 2004 as he tried to resurrect his country’s bid for EU membership. The key remains the ongoing peace talks between Greek and Turkish Cypriots on Cyprus. 

However, as I noted last week, this is the same Erdogan, the Islamist, who has blasted Israel more than just about any leader in the world for its actions in Gaza, and before the ceasefire went into effect said Israel should be barred from the United Nations for not implementing a resolution of the UN Security Council. 

North Korea: Kim Jong-il held his first official meeting with a Chinese official since his stroke, while his country screams to the Obama administration, “Hey, look at us!” as the North threatened to “wipe out” South Korea amidst claims by an American journalist that they have weaponized plutonium into warheads. Departing National Security Advisor Stephen Hadley said the U.S. is convinced North Korea also has a second uranium-based program that has been a sticking point in Six Party talks. 

While Kim and his Orcs make outrageous claims all the time, what was disturbing about last weekend’s threat to go to war with the South was that the statement was delivered by a uniformed spokesman for the military’s Joint Chiefs of Staff. The spokesman warned of a clash along a disputed western sea border between the two countries. 

Pyongyang is convinced such belligerent talk will yield further concessions from Washington, but they are likely to be disappointed as President Obama has already said he would largely follow the path the Bush administration was pursuing. 

China: State television and domestic websites censored President Obama’s inauguration speech, specifically his references to communism and dissent, saying it was an editorial right. 

Obama: “Recall that earlier generations faced down communism and fascism not just with missiles and tanks, but with sturdy alliances and enduring convictions…(and)…To those who cling to power through corruption and deceit and the silencing of dissent, know that you are on the wrong side of history, but that we will extend a hand if you are willing to unclench your fist.” 

The Chinese government handed down two death sentences in the tainted milk cases, while a number of other dairy executives were given long jail terms. A third man received the death penalty but could be spared execution. 

Thailand: The South China Morning Post (Hong Kong) uncovered a highly disturbing story. “Hundreds of Myanmese and Bangladeshi refugees are dead after being towed out to sea by the Thai military and deliberately cast adrift in unpowered boats last month. A total of 538 people are missing or dead.” Indian security officials, who interviewed survivors, heard an account of how 300 people “jumped off a barge that had drifted for days. Survivors described swimming through a sea of bodies as they tried to reach a nearby island. Only 11 swimmers survived.” The Thai government told the newspaper that an investigation was under way. 

Congo: The leader of the strongest rebel group, Gen. Laurent Nkunda, was detained in Rwanda. He had been an ally of the government there but it recently turned to help Congo destroy the Hutus. Nkunda, a Tutsi, like Rwanda’s leaders, did not back the alliance. It is expected that many of Nkunda’s forces will join the Congolese army. An estimated 5 million have died in 15 years of conflict…following the Rwandan genocide of 1994, which had resulted in the slaughter of some 800,000. 

Australia: A sermon given by a Melbourne Islamic figure in 2003, but posted on the Internet only late last year, has now earned the wrath of Prime Minister Kevin Rudd. 

Samir Abu Hamza, who runs the Islamic Information and Services Network of Australasia, made some of the following remarks in a lecture titled “The Keys To A Successful Marriage,” whether it was possible for a man to demand sex from his wife. 

“First of all advise them, that when you are with them in the bed you move away from them in the same bed. And…you beat them…but this is the last resort, after you have advised them for a long, long time, then you smack them, you beat them.” 

The balance of the sermon is far worse than this little snippet, but Rudd said, “These remarks have no place in modern Australia at all. I would call upon this Islamic cleric to publicly apologize and repudiate his remarks. Under no circumstances is sexual violence permissible or acceptable in Australia.” We applaud Mr. Rudd for speaking out. 

Zimbabwe: Renewed talks between President Robert Mugabe and opposition leader Morgan Tsvangirai went nowhere, with Tsvangirai saying, after a 12-hour session that must have been pure torture for him, it was “probably the darkest day of our lives” for his party. 
 
Mexico: The Congress here is looking at reinstating the death penalty. It had been abolished in 2005, but now 70% of the people are in favor of it. Mexico has not carried out an execution since 1961, but the drug violence has changed attitudes. Chances of it being approved, and the constitution changed, however, look remote. 

---

Pray for the men and women of our armed forces.

God bless America.

--- 

Gold closed at $898…up $55 on the week
Oil, $46.47…up $10…but don’t get too excited just yet
 
Returns for the week 1/19-1/23 

Dow Jones -2.5% [8077]
S&P 500 -2.1% [831]
S&P MidCap -3.0%
Russell 2000 -4.7%
Nasdaq -3.4% 

Returns for the period 1/1/09-1/23/09 

Dow Jones -8.0%
S&P 500 -7.9%
S&P MidCap -6.9%
Russell 2000 -11.0%
Nasdaq -6.3%

Bulls   38.7
Bears 37.6 [Source: Chartcraft / Investors Intelligence] 

Have a great week. I appreciate your support. 

BUYandHOLD does not offer or provide any investment advice or opinion regarding the nature, potential, value, suitability or profitability of any particular security, portfolio of securities, transaction or investment strategy. Any investment decisions you make will be based solely on your evaluation of your financial circumstances, investment objectives, risk tolerance, and liquidity needs. The securities mentioned above are being used for illustrative purposes only and should not be regarded as an offer to sell or as a solicitation of an offer to buy. The securities markets are subject to the risks of fluctuating prices and the uncertainty of rates of return and yields inherent in investing. Past performance is no guarantee of future results. The opinions expressed above are not necessarily those of BUYandHOLD, Freedom Investments, its officers, directors or any of its affiliates.