A Lesson from President Truman

Sandwiched between the end of WWII and the beginning of the Cold War (though some will argue the delayed second front by Roosevelt actually marked the beginning) stands one of the greatest gems in the crown of foreign policy achievements for the West: The Berlin Airlift, which ironically is far more akin to the struggle we face in the Middle East than the “Vietnam” comparisons drawn by many policy makers and journalists whom oppose this administration’s Iraq policy.

Here is a little background for those needing a little brush-up in Cold War History:

Following Germany’s defeat in WWII, it was decided the country would initially be ruled by Russia, the United States, UK and France. As Communist and Western ideologies clashed politically, it had soon escalated to a strategic blockade by Uncle Joe Stalin, totally shutting down all incoming rail and road deliveries of food, coal and basic necessities to all of Germany.

Facing the prospect of winter and dwindling supplies (it was estimated that in roughly 5 weeks or so all food and energy would be depleted) President Truman faced a difficult decision—desert or our old enemy Germany, virtually giving the Soviet’s a further gateway to the West and clearly harming America’s image abroad or call his bluff.

President Truman, the great leader he was, called Uncle Joe’s bluff—moving an armored division back in town and explored the possibility of bringing in much needed supplies via aircraft. Working closely with the British, the Western allies determined how many calories/person/day and energy would be required to meet the demand of the war torn country.

Operation Vittles started off well shy of meeting the needs of the populous, with not a lot of time to spare before supplies disappeared and winter emerged. Soon enough after a change in military leadership, three air corridors were established (2 into Berlin, 1 out) via Europe using RAF and USAF designated planes.

Soon thereafter, pilots began dropping chocolate to children via mini-parachutes. Shortly after that, many of the Germans whom had been part of the Luftwaffe (German Air Force) during WWII were recruited to work maintenance on the planes. While the Soviets tried extremely hard in the propaganda department to sway opinion toward Socialism via commercials, setting up food stands (which citizens could gain access to by trading their Western “ration cards” in for) and shutting down electricity.

Not only did the Soviet spin machine fail, but their policy did as well. Scores of German children could be spotted waving at every plane flying overhead and even playing a version of “the Berlin Airlift” with model planes. American news and music was playing in homes across the country via RIA radio. Many of the single mothers and children left behind as the casualties of war knew they had a future friend in the free west.

In response, the blockade was lifted and the country was carved into West and East Germany. Then followed the Berlin Wall and so forth…

I shouldn’t really have to go into too much detail about the lesson since its pretty self-explanatory: swap a few names, (i.e. Germany and Iraq/Luftwaffe and Ba’athists); the fundamental need to win the battle for the hearts and minds and most importantly, not deserting your allies/friends/former enemies/fellow man in their time of need—that is not the American way.

In my mind, it is not a coincidence that the busts of Winston Churchill and Harry S. Truman have occupied space in the Bush White House. Hopefully we can follow the blueprint for victory laid out in this overlooked nugget of foreign policy.

End of January Round Up

With only 2 sessions left in the month and the market precariously close to break even, “the January Effect” is all but decided. The Fed and earnings could still wreck havoc on the indices, setting us up for a down year—that is, if you believe in such a thing.

In addition, I believe the possibility is strong that many of the shorts that came in around the highs will look to square their positions out by the close of the month and we could see a modest lift the next few days.

While the S&P 500 remains 200 points from its summer double bottom, the economy remains strong despite global tumult and an extraordinarily weak housing sector. With the Fed standing pat on rates it will only continue to reinforce the strength of the economy (and job market notably) and may even lead to further flattening in the yield curve, eliminating the inversion altogether.

Keep your eyes

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SOTU Follow-Up

The State of the Union (SOTU) address was virtually a nonevent as far as things go, since most of the important details had already been leaked and most likely the broader concepts will not be embraced by the opposition.

While the President made a passionate defense of his foreign policy, especially the troop surge in Iraq, as David Frum noted in today’s Wall Street Journal, he literally went through the motions as far as any renewed domestic agenda. As far as I am concerned, hell will freeze over before democrats go along with his health care proposal, but his push to make America more energy independent by reducing consumption may gain some traction. In addition, the resumption of filling the Strategic Petroleum Reserve (SPR) has helped crude oil trace out a short term bottom—as traders realize demand will be backstopped by the US government.

The WSJ also has an excellent section on commodities, mainly energy and metals (with some agriculture—mostly corn based ethanol, which is energy). It is recommended reading for anyone involved in the market, as commodities prices affect virtually every sector and often have a dramatic effect on earnings.



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Tear Down the (This) Wall

Things have become so—I don’t know what—at Citi, formerly known as: Citigroup, Citigroup-Salmon Brothers, Citigroup-Salomon Smith Barney, Citigroup-Traveler’s Insurance and so forth.

Under the leadership of Mr. Prince, whom had been left pretty big shoes to fill by his predecessor, the legendary Sandy Weill; the company has simply fallen into disarray.

Earnings are unpredictable. Leadership is a combination of musical chairs and bait ‘n switch. Confidence is nonexistent, both on Wall Street and in many factions of the behemoth.

In many ways Citi is emblematic of what went wrong at the end of the 1990’s when companies were riding super high share prices and sitting on piles of cash. Shareholders (especially activists) had placed pressure on corporations to reward them for placing their money in the company’s futures (and are partly responsible for the trouble that ensued) and management reacted mainly in the form of M&A and share buybacks (as opposed to dividend initiatives). Many smaller companies (and the smartest ones may I add) actually sold assets into the market and reaped record high prices, much to the delight of their stakeholders.

The other middle and larger capitalization companies went on shopping sprees: AOL bought Time Warner, just to name one egregious example. In the financial sector, deals were actually far saner relative to fundamentals, but the excessive amount of activity went on to create the mistake that is Citi.

Now forgive me if my order is off slightly and I miss a few deals, but I am just trying to give the reader an idea of what has transpired in the financial services sector and mainly Citi in the last decade or so:

Salomon Brothers (after being bailed out by Warren Buffett and others) buys Smith Barney. During that same time period Morgan Stanley and Dean Witter merged and Chase acquired JP Morgan. Citibank bought Travelers Insurance. Goldman goes public. Merrill buys a specialist firm, Spear Leeds and Kellogg. Then Citigroup (the combined entity of Citibank and Travelers) keeps their umbrella logo and purchases Salomon Smith Barney. Citigroup also spins off Travelers and shortly thereafter sends the “group” in “Citigroup” and Umbrella logo with it.

With a diversified company of its size, there is no way that earnings should not be smooth and consistent. Look to General Electric or United Technology for guidance. If one segment is under pressure, usually another is hitting its stride—that’s the reason why you diversify.

In addition, the management at Citi has not only lost credibility with Wall St., as mentioned above—many employs fret that they may become a casualty of one of their “quick fixes” they always seem to be unveiling quarterly.

In summary, the financial business is driven by risk. Companies need to take risk in order to generate returns. In the case of Citi, the deposit/loan side of the commercial banking unit should provide sustainable, middle single digit returns in this interest rate environment. Since the market has been on a tear, with a flurry of M&A/LBO activity in the past few years, the brokerage and investment banking arms should be driving higher, double-digit returns. This is not happening. The corporate culture at the behemoth is one of failure. You can keep moving Sallie Krawcheck from post to post and you can buy another company (the mortgage lending arm of ABN Amro). You can even change your name and logo. None of this will work.

Tear down the wall. Spin off your non core assets. Bring in a CEO/Chairman of Jack Welch’s caliber—someone with experience in running a company of this size, with Wall Street credibility and the ability to deliver consistently. Then and only then will Citi (or whatever its name is by that time) flourish.

The State of the Union

“The State of the Union is strong.”

Many a President has uttered the famous line, followed by a chorus of cheers from the incumbent’s party in congress, with a smattering of boos from the other side.

President Bush should fall in lockstep when he gives his address coming up, but will probably not enjoy too much in the way of support from the newly minted republican minority—despite a strong record across the board sans four letters—Iraq.

Iraq has dominated the U.S. political landscape since before President George W. Bush was even sworn in, its only fate that the lynchpin of his administration is the seeming tailspin that the country has erupted in as sectarian violence has taken hold. Acting as Commander-in-Chief, the President has decided to expand upon the War Powers act and escalate the number of troops in problem areas, allowing for a broader strategy of “clear, hold and build” mainly across Baghdad and any area threatening to come under control (or already under control) of the militias, albeit Sunni or Shiite.

His speech will most likely underscore his latest decision in reference to the Baker Report and the smattering of violence, portrayed by the media as bordering on chaos. The President should also beat into the heads of those watching that the economy is damn near perfect. Since taking office and undertaking a round of economic incentives, largely in the form of tax cuts—the economy has been on a tear.

The President is also expected to announce a new Health Care Initiative, which should make coverage more affordable, while shifting the balance of responsibility from the Treasury’s Balance sheet. In other words, “privatization,” a term—and plan that you can count on to throw Democrats into a tizzy.

Be on the lookout for other topics to be addressed and subsequently dismissed by the media and war critics as “distractions,” despite how valid or practical they may be. Also be on the lookout for a market pause leading up to the big speech (and democrat response) as policy shifts may affect stocks. In this particular case, from the leaks to date it appears the sectors with the potential to be materially impacted are: HMO’s, big pharmaceutical and Defense/Homeland Security.




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Papers Please!

Throughout history these two words have been used to identify people.

Sometimes governments or certain unstable countries have used these papers to distinguish on a sectarian basis (Germany, Iraq, etc.) and utilized the documents in order to create terror.

More likely, these papers have been used to facilitate travel, get government benefits or distinguish adults from kids (alcohol consumption, voting, military enlistment, etc.) and other useful purposes.

Unfortunately, in the advent of ID scams, computer hackers and Identity theft rings, it has become commonplace for said documents to become easily forged or duplicated—resulted in lack of faith by governments, employers and the general public.

This crisis has paved the way for the creation of biometric-enabled identification.

Biometrics is simply the measurement of physical characteristics, such as fingerprints, DNA, or retinal patterns, for use in verifying the identity of individuals.

For example, two people cannot have the same fingerprints—even so far as forensic science has been able to determine, not even identical twins have exactly matched fingerprints. They may appear identical to the naked eye but they are distinguishable using this technology; helping make the analysis of fingerprints still one of the main means in which to identify people. In addition, DNA can take it a step further, allowing the identification of the individual(s) in question far more accurate.

If for example, when fingerprints are etched on to the ID card, they can help determine, verify and accept the cardholder’s credentials as they appear.

Companies that specialize in ID cards have tremendous value in this relatively unsafe world. In the age of globalization, Nations and their governments have an absolute necessity to know who their citizens are and also the whereabouts, employment status and general idea of who the foreigners are that are within their borders.

The main obstacle in the implementation of Biometrics on a national level is privacy. Groups like the ACLU cite the 4th Amendment and the right of citizens to freedom from “unreasonable” search and seizure. I believe this is a red herring issue at the very least. The balance of one subjecting their fingerprint or DNA to a database weighed against the need for national security is a “no-brainer” in my opinion. The choice, however, is up to you.

Terror and the Financial Markets

Capitalistic financial markets have always been dependent on the double edged sword of greed and fear. I don't see this basic concept changing much.

Throughout history there have been occasions where the fear side of the sword has gone to a full blown state of panic (1929, 1987 Crash, 1998 Asian crisis, Sep 11 2001 Attacks to name a few) and created an imbalance which has deterred some investors from investing for the long term.

In this article I want to focus on the threat of terrorism to the markets and how to use the fear to investors' advantage.

It certainly looks like the early part of the 21st century will be will spent on the “war on terror.” Certain criminals have decided to hijack a peaceful religion and use it to propel their own twisted radical views on our civilization.

This war on terror has created a huge opportunity for "anti-terror" companies and their products that protect us all. This newer breed of industry has been dubbed the "homeland security" sector.

Government spending for protecting their population is a self serving proposal for most politicians. I have yet to hear a politician who would be opposed to protecting his or her homeland and, whenever there is an attack in a different jurisdiction (Madrid, London etc) it has created a frenzy of press globally, reminding us that it could happen in our own backyard, thereby creating more demand for their products.

A stock price is simply a reflection of the demand and supply of a stock, which represents a particular company. As revenues and profits grow from greater demand, in theory, stock prices should appreciate in turn.

As more money has rushed into this industry and new products have been developed, more earnings are possible over time and hence the potential of higher stock prices.

Also the bigger defense conglomerates seeing these smaller companies getting the first player advantage (and government orders) are on the prowl for acquiring such companies.

There has already been a flurry of mergers and acquisitions in this industry—which I consider still in its infancy. I suspect we will see more over the next 12-18 months.

And if there is another Sep 11th like terrorists attack again, these stock should do well while the general markets falls apart. If there is no further attack on the homeland, just alleviating the potential for such an attack by buying more of this sector’s products will create the potential for more earnings, aiding their share prices as well.

These stocks show how astute investors can use the greed-fear sword to their advantage and make it a win-win situation.

In future articles, I intend to dwell further on some of the products out there that could and should be further deployed to protect us better; allowing us to continue living and invest for the next century and beyond.

Best wishes for a safe holiday and a prosperous 2007.