Week in Review 
For the week 7/6/2009 - 7/10/2009
Brian Trumbore
President/Editor, StocksandNews.com

Wall Street

You know how everyone likes to talk about how rapidly their weather changes? I’m tellin’ ya, it changes fast here in Calgary so since the sun is shining as I glance out my hotel room, let’s start with the week’s good news, shall we? I mean after all, on Wednesday afternoon I was sitting in the stands for the rodeo at the Calgary Stampede, a big storm rushed in, and I pick up the paper the next morning to read of four funnel clouds in and around town and we didn’t even know there was a tornado warning. [Though because it’s not real warm, the intensity of any tornadoes is minimized…or so they say.]

So before it clouds up, once again we had some good news from China as exports, while down 21% year over year for June, were up 7.5% over May. Yippee! Or Yee-hah, as they say here. [They don’t call Calgary ‘Nashville North’ for nothing, by the way.] And China’s auto sales soared 48% in June, thanks in no small part to a stimulus program that actually works. Unlike our pitiful $787 billion colossus, which is so unwieldy none of the money can get out the spigot because the pipes are clogged with previous waste. As one who made some clean energy type investments partly because the Obama administration was so heavily touting the sector, I’m furious. More below.

There was some other good news, though. In India industrial production was up in May, while in the Philippines, exports were up in May over April’s pace. And in South Korea, the estimate for second quarter GDP is up 2.3%. Not bad…not bad at all. And I just saw here that housing starts in the Great White North rose 8% in June. Premium beer on me! [Beer is better in Canada, it goes without saying.]

Well that’s about it for the good news, save for FedEx announcing it was increasingly optimistic about the second half, worldwide, and wasn’t canceling any plane orders. That’s useful.

But the current tenor is perhaps best summed up in Alcoa’s earnings; it being the first Dow component to report on the recent quarter. Alcoa lost $454 million vs. a corresponding gain of $546 million last year for the same period. Ergo, a cool $1 billion swing. But the results, particularly on the revenue side, were better than expected so the stock more or less held its own, though at around $9 just a bit shy of its $35, 52-week high, as broadcaster Bob Uecker might put it.

Otherwise, the week was very light on data, with a June reading on the service sector better than expected but a reading on consumer confidence for July unexpectedly down from June’s reading, not good.

The weather had to have something to do with the loss in confidence, in all seriousness. Certainly all the rain in many parts of the country impeded chain stores sales, with the likes of Macy’s and Penney’s down 8%, Kohl’s down 5.5%, and Abercrombie & Fitch off a staggering 32%. [Wal-Mart doesn’t reveal monthly figures anymore.] So the consumer continues to hunker down and the savings rate, now at 6.9%, is projected to run even higher…to 11%, according to economist Nouriel Roubini.

Speaking of Roubini, he is in a camp including fellow economists Robert Shiller and Paul Krugman, as well as Warren Buffett, who argue another stimulus package is needed. Shiller, in particular, is concerned about Great Depression analogies.

Just as then, “The fundamental problem is fear” and “a sense of lost confidence or animal spirits that was a self-fulfilling prophecy” following the 1929 Crash, says Shiller. For his part, Roubini argues there is a coming wave of corporate defaults that will be “massive.”

And it’s not as if the only warnings are coming from the U.S. British Prime Minister Gordon Brown told his G-8 colleagues that there are “warning signs around the world” that the recovery is in peril, though Brown and French President Nicolas Sarkozy are particularly concerned about the impact of volatile oil prices, which for the time being are headed back down. And Brown’s Chancellor of the Exchequer, Alistair Darling, fired a shot across the bow of a different sort, saying pay cuts were coming for Britain’s public sector…for those of you still concerned about inflation. You can save your breath.

Overall, while the International Monetary Fund issued a report hiking its forecast for global growth in 2010 to 2.5%, it’s still about getting through 2009. I agree with the IMF chief who says, “The recovery is coming,” but as the equity markets have been telling us the past month, we’ve hit a large pothole and the service repair shops are jammed.   Notice how ‘shovel ready’ doesn’t apply here when it comes to road repair, either.

So, is it also any wonder that President Obama’s poll numbers are falling? Vice President Biden admitted the administration “misread how bad the economy was,” while according to Rasmussen, its latest survey has 43% believing Obama is doing a poor job in handling the economy, only 34% now believe the country is headed in the right direction (after a flurry of optimism in the spring), and Obama’s overall approval rating is down to 51%. Granted, regarding this last figure the polls are all over the place, but it’s safe to say the days of mid-60s for Joe Cool are long gone, and he needs those kind of lofty numbers if he is to have any chance at selling the American people on health care and cap-and-trade climate legislation, for example. It certainly was telling that a supporter such as Colin Powell, concerned at Obama’s overreaching, said, “You can’t have so many things on the table that you can’t absorb it all…And we can’t pay for it all, (either).”

In the end, though, it’s still all about housing and jobs. Both are bottoming, if not basically there. But that doesn’t mean an authentic turnaround is thus around the corner, though that’s what I’m partially banking on. Some decent data points that revive the recent rally. Next week we’ll get some important numbers on inflation, industrial production and housing that will provide further clues just how much longer we’ll remain in this muck, as well as a flurry of earnings news. To paraphrase the late Karl Malden, when it comes to the accompanying statements on the outlook for the second half, “What will they say? What… will… they…say?”

Street Bytes

--The Dow Jones and S&P 500 fell a fourth straight week, down 1.6% and 1.9%, respectively, with the Dow closing at 8146, while the S&P is off 7.1% since its June 12 high, which in turn was about 40% above the March 9 low.

--U.S. Treasury Yields

6-mo. 0.24% 2-yr. 0.89% 10-yr. 3.29% 30-yr. 4.19%

So much for all the concern over a 4.00% yield on the 10-year. Treasuries have rallied back strongly over economic recovery fears, while on Friday, commercial lender CIT failed to win approval from the FDIC to issue government-backed debt, thus causing a further flight to safety in the U.S. government market. At least for now, mortgage rates are obviously headed back down, a good thing.

--In a survey of economists by the Wall Street Journal, 43 of 46 want Ben Bernanke to be reappointed when his term expires in January, though there is continued talk the White House is looking to replace him.

--Give ‘em credit…General Motors emerged from bankruptcy in far less time than many thought possible but GM didn’t face the creditor issues that Chrysler did. A much smaller GM also now has to deal with increased competition from over 30 automakers, worldwide, though it is making terrific inroads in China.

--The lead headline in the Calgary paper Friday morning concerned the first death here from swine flu, and what was a bit worrisome is that it was a young girl who was perfectly healthy before being overwhelmed by it. But, researchers in New Zealand, which has been hit hard by the virus, have now concluded H1N1 is 40 times less lethal than most initially thought.

At the same time, as I’ve been commenting it’s about the next wave and whether global health services can stem any panic. It seems the Obama administration is concerned the U.S. could be ill-prepared this coming fall and winter. 

One other note. There have been three cases where the strain was resistant to Tamiflu, the supposed drug of choice, so the experts have to quickly decide if Relenza is a better choice; in time to make the vaccine in massive quantities.

--There is a terrific museum connected to my hotel, the Glenbow, which in one of the exhibits tells the story of energy and the province of Alberta, specifically, where much of Canada’s oil and gas reserves lie, including the shale projects you’ve heard so much about. I forgot about the ongoing battles between the province and the central government over who should reap the rewards in the boom times, going back to the first oil price shock of 1973. No wonder Albertans have a history of being fiercely independent.

This week Exxon Mobil announced a potentially large discovery of natural gas in neighboring British Columbia, and the Horn River field is but another example of “shale gas” to go along with shale crude.

Overall this week, however, crude oil fell below the $60 level, down from $71 in just seven sessions. Valero was among those shutting refineries due to the economics, but this could perversely then lead to higher gasoline prices later on.

[Separately, OPEC forecast global demand wouldn’t recover to pre-crisis levels until 2013, but, here again, 35 projects have been postponed that one day will help lead to a supply crunch.]

And related to pricing, the big talk this week concerned the plans of the nation’s top commodities regulator, Gary Gensler, to crack down on price manipulation in the energy markets. While nothing is going to take place soon, the process of holding public hearings will start shortly as Gensler’s Commodity Futures Trading Commission contemplates strict limits on the number of contracts energy traders can hold, thus limiting the power of hedge funds to influence price, for example, but determining just who is legitimately hedging and who isn’t is not an easy task and this would be left to regulators to decide, thus the pushback among some in the trading pits.

--A high profile Australian mining executive connected to giant Rio Tinto has been detained by Chinese authorities on espionage charges, along with three Chinese nationals in a case that bears watching. The Chinese better have the goods on the man or their efforts to invest in the international mining and steel business will be hurt immeasurably. Some say the move is retaliation for Rio’s rejection of a large cash infusion from Chinese government-owned resources company Chinalco, and the move against the executive also occurs against a backdrop of China asking for a large discount on the benchmark contract price for iron ore. Bottom line, global resource companies are not as apt to deal with China if this proves to be simply a tit-for-tat move.

--Billionaire T. Boone Pickens has withdrawn his plan to build the world’s largest wind farm in Texas due to costly credit and oil and natural gas prices down sharply from the levels they were at when he first introduced his plans.

Like with so many aspects of the Obama administration’s stimulus program, wind power companies are waiting to see what industries will profit from promised tax credits. [As the Journal reported, three major programs that were to be at the core of Obama’s renewable energy plans have yet to define the parameters by which investments can be made. Two of my own holdings are negatively impacted because of this.] 

For his part Pickens noted that while “The capital markets have dealt us all a setback and I’m less aggressive with the Panhandle project than I have been,” he would still take delivery on 667 GE wind turbines he ordered and use them on smaller projects.

Meanwhile, China continues to ramp up its own wind efforts and BP forecasts wind power generating capacity will more than double by 2012.

--Economist Ed Yardeni on the new demographic issue the world faces; an aging population.

“The new Malthusian nightmare is approaching. Today’s much more realistic and dismal demographic scenario is that the number of older people will grow faster than younger ones almost everywhere in the world.”

Which, in turn, puts enormous pressures on governments; already stretched to the limit in dealing with the financial crisis. And the UN estimates that birth rates have fallen below replacement levels in more than 70 countries, including most of the developed world. The International Monetary Fund adds that as a portion of GDP, developed countries on average will see their debt burden jump by 36% by 2014. [The Globe and Mail]

--A former Goldman Sachs computer programmer was charged by the FBI with stealing trade secrets from GS. The Russian-born fellow downloaded software and sent computer codes to an Internet account in Germany. There appear to be a lot of tentacles to this story, and in just glancing through a Bloomberg account, for the life of me I can’t figure out what was going on.

--15,400 claims have been filed against Bernie Madoff, far more than initially projected. I just learned the other day that a neighbor of mine was wiped out.

--The G-8 summit’s focus was to be on climate change and let’s just say it didn’t go well…at all. The G-8 agreed to cut emissions 80% by 2050, when most of us will be dead, particularly 95% of the leaders who came up with this totally meaningless target, while emerging nations said, ‘Hold on here. You think we’re signing on to that? Are you kidding me?’ and packed their bags, saying over their shoulders, ‘We’ll see you greedy bastards in Copenhagen in December.’ Ergo, look for real fireworks there. 

--El Nino is back! El Nino is back! Basically this normally means fewer Atlantic hurricanes.

--Thanks to the California budget crisis, tuition in the Cal-State system could rise another 20% on top of an earlier 10% increase.

--President Obama gave a speech to students in Moscow, pressing the issue of “free and fair” trade, while zinging Russia for its endemic corruption. By coincidence, the World Economic Forum and the Wall Street Journal issued their annual report on the world’s most open economies and while the U.S. ranked only 16th, with Singapore, Hong Kong and Switzerland occupying the top three slots, Russia was No. 109 out of 121 nations ranked. [China was No. 49.]

--President Obama said the next month his primary legislative focus is health care, so I note the comments of former Treasury Secretary Paul O’Neill in a New York Times op-ed.

“Health care reform seems to be on the way, whether we want it or not. So I have been asking questions about the various proposals. Here is a sampling.

“Which of the reform proposals will eliminate the millions of infections acquired at hospitals every year?

“Which of the proposals will eliminate the annual toll of 300 million medication errors?

“Which of the proposals will eliminate pneumonia caused by ventilators?

“Which of the proposals will eliminate falls that injure hospital patients?

“Which of the proposals will capture even a fraction of the roughly $1 trillion of annual ‘waste’ that is associated with the kinds of process failures that these questions imply?

“So far, the answer to each question is ‘none.’”

O’Neill also notes that Obama likes audacious goals. “Here is one: ask medical providers to eliminate all hospital-acquired infections within two years. This is hardly pie in the sky: doctors and administrators already know how to do it. It requires scrupulous adherence to simply but profoundly important practices like hand-washing, proper preparation of surgical sites and assiduous care and maintenance of central lines and urinary catheters.”

Just through these steps we’d save countless lives and tens of billions of dollars every year.

--The delinquency rate on commercial loans is projected to double to 7% as companies downsize and retailers go bust.

--Yet another story on the troubled MGM Mirage City Center development in Las Vegas, all $8.4 billion of it. Those who signed contracts early on for condos now want big price reductions and have hired a law firm to effort this. Others want their deposits back. The Journal reports that a total of $313 million in deposits on 1,500 units has been put down thus far, but many of the contracts were signed in 2006 or early 2007, before the market peaked, and imagine moving in and being immediately underwater…perhaps significantly so. I mean we’re talking minimum asking prices of $600,000 for the units.

--Speaking of real estate issues in the biggest bubble markets, Shu passed along a piece from Dawn Gilbertson of the Arizona Republic concerning the hotel and resort business in the Phoenix area.

“Preliminary figures show June occupancy was about 45%, nearly 10 percentage points, or 17%, below June 2008, when occupancy was already hurting. Most are calling it an industry depression, rather than recession.”

One expert says “he’d be surprised if nearly all hotels and resorts, here and across the country, weren’t in technical default on their loans.”

--New apartment leases in Manhattan were down 58% in the second quarter over year ago levels. Landlords have been forced to offer huge incentives to make up for soaring vacancy rates. [Nationwide, the rate is 7.5%, the highest in 22 years.]

--Google is taking on Windows, announcing plans to launch an operating system on personal computers to compete against Microsoft’s dominating OS. Google’s will be called Chrome and will be available mid-2010 on netbooks, sales of which are expected to hit 25 million units this year.

--Big news for Tim Hortons fans. The Canadian donut king is coming to New York City, as a franchisee is converting 13 Dunkin’ Donuts to Tim Hortons.

[To be accurate, the Dunkin’ Donuts outlets being replaced were the subject of national attention when a mouse was filmed munching on a donut in the store window and as a result of a settlement with the parent company, the franchisee had to leave the Dunkin’ system.]

--Both the crowds and vendor business at the Calgary Stampede are off about 15%, as you’d expect with the economy. It is drawing anywhere from 90,000 to 120,000 daily for the 10-day affair.

--Can Californians exchange their IOUs for Girl Scout Cookies?

--And this…from one of the Canadian papers and Agence France Presse:

“Almost three-quarters of South Korean male office workers feel uncomfortable when female colleagues show too much leg or cleavage in the workplace, a survey has found….56% of them cited micro-miniskirts as their chief complaint, while 51% objected to excessive cleavage. Low-rise trousers that reveal women’s underwear, ‘killer heels’ and flashy outfits in general were also cause for complaint.”

You know, it’s been over ten years since I was a supervisor and had to deal with these issues…or rather, I dealt with it by saying zippo. And right now I’d prefer not to comment further, citing my 5th Amendment rights under the Constitution. But did I tell you what the girls wear at the Stampede? [Lots of Daisy Dukes, guys.]

Foreign Affairs

Iran: Supreme Leader Ayatollah Khamenei warned the West against “meddling” in Iran’s affairs, saying, “The Iranian nation warns leaders of those countries trying to take advantage of the situation, beware! The Iranian nation will react.”

But the opposition has not been extinguished and the three leaders of the movement, Mousavi, Karroubi, and former president Khatami, are still speaking out, though not in public, while continuing to release evidence of “irregularities” in the vote, including the payment of cash bonuses by Ahmadinejad’s team to get out the vote, as well as the printing of millions of extra ballots.

Mousavi, however, has been accused of treason by a top aide to Khamenei, while for his part another key figure, Rafsanjani, continues to walk a tightrope. While he is not calling for the direct ouster of Ayatollah Khamenei, with Rafsanjani having the power to do so with majority backing of the Assembly of Experts, he has met with some families of those detained, saying he was “not satisfied…with the current situation.”

Meanwhile, Iran is making a big mistake in holding a French academic on spy charges, as well as a British embassy employee. The moves only encourage stiffer action on the sanctions front by both Paris and London.

Israel: The London Times ran a report that the head of Mossad said Saudi Arabia has already approved the use of their airspace in any attack on Iran, though both Riyadh and Jerusalem denied this is the case. [Of course it is…the Saudis want Iran’s nuclear program smashed almost as much as Israel does.]

U.S. Joint Chiefs of Staff chairman, Adm. Mike Mullen, however, continues to worry that any Israeli strike would be highly destabilizing, while last Sunday on “This Week,” Vice President Biden basically gave Israel the green light, saying the U.S. “cannot dictate to another sovereign nation what they can and cannot do.”

But the Jerusalem Post reports that both Israeli and U.S. officials don’t seem that concerned that Iran will have the bomb within a year, even though they increasingly have the capability to build one. Some argue Iran is content on developing the expertise further, first, so that should they decide to build a full arsenal of nukes they could move quickly to do so.

Separately, there appears to be a compromise in the works on the settlements issue.

Iraq: Violence ramped up following U.S. withdrawal from the major cities, June 30, but perhaps the more worrisome development is the renewed independence of the Kurdish government, which not only is working on a new constitution, but has also laid claim to all oil and gas holdings, counter to what both the U.S. and the central government in Baghdad desire.

Afghanistan: Violence has picked up here as well, only in part due to the major offensive by the United States and its Afghan allies in Helmand Province. Being in Canada this week, I can’t help but note that four Canadian soldiers died in four days and the total sacrifice they have made in Afghanistan is now at least 124, while the British lost a sickening eight in 24 hours, 15 in ten days, and now have a toll of at least 184, greater than their losses in Iraq.

Americans need to be constantly kept aware of the significant sacrifices to the cause on the part of our allies. At the Calgary Stampede on Thursday night, during the playing of their national anthem (love that song), a military helicopter flew over the stadium with the Canadian flag and it was quite moving as they honored a submariner from the area.

Pakistan: Drone attacks continue to take out scores of Taliban and al Qaeda.    I just have to believe we are tightening the noose around bin Laden and Zawahiri.

[Speaking of al Qaeda, a Libyan group that had claimed it was an ally of bin Laden’s has left the fold, arguing against al Qaeda’s indiscriminate bombings, but the New York Times reports other terrorist groups allied with al Qaeda are beginning to wreak havoc in North Africa.]

Russia: President Obama met with both President Medvedev and Prime Minister Putin, receiving quite a lecture on the Cold War from the latter, it would seem, following Obama’s comments before the trip that Putin had “one foot” in the past and “the old ways of doing business.” Low expectations were set for the summit and low expectations were indeed met as the two sides agreed to an outline for a new arms reduction treaty while Russia agreed to allow the U.S. to use its airspace to fly troops and weapons across its territory to Afghanistan; though anyone with half a brain can look at a map and see this seldom comes into play. Like as former NBA star Derrick Coleman would have said, “Whoopty-damn-do.”

Elsewhere, on issues like Iran and missile defense, the two sides got nowhere. Iran is our problem, not theirs, both Medvedev and Putin seemingly said. And, President Obama, don’t press the issue of Ukraine and Georgia joining NATO anytime soon.

Obama seemed to be saying in turn that if Russia would help in preventing Iran from gaining nuclear weapons, then the rationale behind a missile defense shield is basically nil.

But on the issue of reducing the number of nuclear warheads to around 1,500 from the maximum allowable today of 2,200, the Wall Street Journal editorialized thusly.

“Mr. Obama’s negotiators would be wise to be wary. The odds that America will take part in a nuclear war are low. But the long-range bombers, submarines and missiles under discussion are an important part of the far superior American conventional arsenal. No wonder the Russians are so eager to have America reduce those numbers.

“China, too, must be rooting for a lower floor. As delivery vehicle and warhead numbers go down, the U.S. will at some point approach strategic parity with rising powers such as China, which have a small nuclear arsenal and weaker army. A reduced U.S. posture may also give our allies – Japan and South Korea in Asia, or Turkey in NATO – cause to doubt America’s commitment to a large and credible enough nuclear arsenal able to protect them. They will then seek to develop their own atomic bombs, however quietly.”

Previously, I’ve said the modernization of our nuclear weapons force would be a big debate topic this year and the reductions being discussed between the U.S. and Russia make it even more so. It’s up to the Senate to slow the disarmament process down instead of feeling compelled to meet artificial deadlines as the Obama administration seems hellbent on doing. 

China: I made a prediction for 2009 that the Chinese government would do a good job this year in stemming any domestic violence resulting from a rough economy. I do not put the violent clashes between the Uighurs and the majority Han in that category, though some say the violence stems from economic dislocations involving the Turkic minority Uighurs.

Beijing has accused the Muslim Uighurs of seeking independence in the northwest part of the country and that an exiled leader of the group is responsible for the chaos that claimed at least 156 lives this week.

But it’s also clear that what started out as a peaceful protest on the part of about 3,000 Uighurs turned nasty when police overreacted. Bottom line, it was the worst domestic violence since Tiananmen Square in 1989 and it forced President Hu Jintao to cut short his G-8 summit trip.

I suspect the government will be able to reestablish order in the region but it’s a situation that bears watching and as Beijing had a policy of trying to integrate Uighurs into Eastern society, I have to admit I’m now curious as to the ethnic makeup of the workers at the biodiesel company I’ve invested in over in Fujian. The Han make up a full 92% of China’s population, but are a slight minority (I think) in disputed Xinjiang province.

North Korea: Kim Jong-il appeared on television and looked like a cadaver, which means the already unsettling transition to his 26-year-old son could become more so. After the testing of seven ballistic missiles last weekend, South Korean experts believe the North has 900 such medium-range weapons.   While no one believes the North has the expertise to put a nuclear warhead on a missile as yet, certainly they could launch chemical or biological weapons against the South, or Japan.

Honduras: Former Nobel Peace Prize winner and current Costa Rican President Oscar Arias was tabbed to play mediator over the Honduran crisis, but as of this writing, ousted President Zelaya and coup leader Micheletti have yet to meet face to face; this after Zelaya’s plane was blocked from returning to Honduras, while the Supreme Court there continues to reject an Organization of American States demand that it reinstate the president. It seems clear to me the coup leaders acted appropriately.

South Africa: Thousands of construction workers went on strike for higher wages and benefits, thus imperiling completion of five new stadiums and the renovation of five others in preparation for the holding of the World Cup next year. No doubt the government will force some kind of settlement between the unions and the companies in charge of the projects because there is simply too much to lose.

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Pray for the men and women of our armed forces, and all the fallen.

God bless America.

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Gold closed at $912
Oil, $59.85

Returns for the week 7/6-7/10

Dow Jones -1.6% [8146]
S&P 500 -1.9% [879]
S&P MidCap -3.2%
Russell 2000 -3.3%
Nasdaq -2.3% [1756]

Returns for the period 1/1/09-7/10/09

Dow Jones -7.2%
S&P 500 -2.7%
S&P MidCap +1.6%
Russell 2000 -3.7%
Nasdaq +11.4%

Bulls 42.7
Bears 30.3 [Source: Chartcraft / Investors Intelligence]

Have a great week. I appreciate your support.

Brian Trumbore

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.

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