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Semiconductor Stocks Recently Lead, Cyclical Info or Light-Trading Noise?

August 30 (Econotech) - This article gives a brief update on equity markets, which have light pre-holiday trading, followed by a round-up of recent news in real estate, the economic outlook, emerging markets, globalization and geopolitics.

U.S. semiconductor stock index/etf have been in a long and steep downtrend relative to the rest of the world's equity markets since January 2004. E.g. the relative strength of SMH, semiconductor etf, vs MSCI World (ex US) index has declined about -50% over that period, with only very short relative strength counter-trend rallies, such as May, July and Nov 2005.

But since my last article (see Aug 14, "After the Fed's Pause," link), the lagging U.S. semiconductor stocks are up about 10%, helping to lead the equity market upward, including yesterday, when SMH easily cleared its post mid-July rally highs, closing up 2%. Part of this recent strength may just be due to the fact that semiconductors had been among the hardest hit stocks in the sharp decline from the May 10 global equity markets peak, continuing down another month past the June 13 global equity market lows.

In addition to the recent signs of a little strength in semiconductors and the tech-laden Nasdaq 100, a couple of other very short-term movements in the global equity markets the past two weeks have been relative weakness in the MSCI emerging markets and the oil services stock indexes/etf's, which had been major leaders during the four-year bull market. Unlike the semiconductor stocks, they have been unable to top their highs from last week's rally on the weaker-than-expected U.S. price inflation data.

It is still too early to tell whether this represents a significant change from the major trends of the nearly four-year old bull market of relative strength in emerging and international markets, energy, small cap and non-tech.

I am a little skeptical of a rally in the lagging U.S. semiconductor and technology sector on very light pre-holiday trading volume that is just now breaking through key regression trendlines over varying longer-term timeframes on the charts. Perhaps we'll know better when trading volume picks up after Labor Day, since, as is well known, September is on average the worst month of the year for the U.S. stock market.

One Palo Alto-based portfolio manager, when questioned on Bloomberg tv the other day as to why he favored tech stocks going forward in the second half of this year, opined that they were high beta and thus would outperform, since in his opinion the markets seemed to be looking for higher risk, a usual rationale (which downplays the desirability of risk-adjusted excess return, alpha) during the standard fourth-quarter silly season in tech stocks that often begins in early October.

Prior to this business cycle, semiconductor and electronics technology stocks were often viewed as a leading indicator of global economic cyclical strength, especially in East Asian export-oriented economies.

E.g., "Taiwan's stock index had its biggest gain in six weeks, as the Federal Reserve suggested it may hold off further U.S. interest-rate increases and oil closed below $70 a barrel for the first time in two months. Exporters such as Taiwan Semiconductor Manufacturing Co. and Hon Hai Precision Industry Co. paced the advance." (Bloomberg, Aug 30)

Equity Market Continues to Like Fed Pause Bet

As I noted in my June 2 article ("Did May's Sharp Global Sell-off Signal..." link) and several follow-up articles since, the four-year cyclical bull market seems bruised but still intact following the sharp May 10 - June 13 decline.

Since their June 13 lows, equity markets have rallied sharply on each of the four occasions that the odds increased of a Fed pause or stop of its tightening cycle that I listed in my August 14 article, starting with the June 29 FOMC meeting, when 10-year Treasury yields peaked. Since then, these yields rapidly have declined about 40 bps.

A fifth equity rally opportunity came with the release of U.S. inflation data as my Aug 14 article was posted. This pushed key global equity indexes past the key levels noted in that article, taking out their previous June-July highs, putting in a "higher high" to go with their previous "higher lows" and confirming the global equity rally from June 13.

At this point, a Fed pause at its September and October FOMC meetings is strongly priced into the futures markets, at over 80% probability. The chance of one last rate hike before year-end has been around 40%.

In other words, the good news on a pause has been discounted in the equity and bond markets rally since June 13, with a halving of U.S. equity market volatility (VIX) since that time.

For equity markets to go forward from here, not only must the Fed pause scenario survive any future inflation fears, but so must the goldilocks soft landing scenario that forecasts continuation of good earnings growth, in the face of continuing concerns over a real-estate, consumer-led economic slowdown, exacerbated by the lagged effects of rising rates and high energy prices. (Bond market bulls are betting on a sharper slowdown.)

While the housing slowdown continues to draw enormous investor and media attention with each statistical release showing it getting worse, as of yet this hasn't translated into enough concern about the overall economy to stop the post-June 13 rally. And as mentioned above, long-term rates have sharply declined the past two months, and crude oil futures are at a nearly five-month low.

When recognition of a "tipping point" in consumer confidence, which was reported to have sharply declined yesterday, and spending might occur is anyone's guess. Nationwide annual housing price changes are hovering around 0%. Also being swept under the rug for the moment are a host of other concerns, including several obvious geopolitical risks in the Mideast and elsewhere, and the long-term U.S. dollar risk on twin deficits.

Below I show by a few key topics recent relevant quotes from news articles in the mainstream media (the few op eds are indicated by author's name).

Please note very well that inclusion of a quote does NOT necessarily mean that I agree with its viewpoint, particularly in the final geopolitical section, always an area of considerable controversy and emotional reactions, but rather that I think these viewpoints are simply ones that might be considered in trying to make a little sense of this rather messy, confusing world.

One news item mentioned below was the recent deal cut by 1990's TMT equity bubble mega-star investment banker Frank Quattrone. I mention this here not because of the individual's story, Quattrone was highly regarded and supported by many prominent figures throughout his trials and may "receive as much as $120 million from former employer Credit Suisse," according to news stories.

Far more significant is that an even more powerful form of private equity speculation than venture capital IPO's in the late 1990s (which strongly contributed to the subsequent $7-8 trillion collapse of the equity bubble), leveraged buyouts, is once again massively misallocating global capital. Yet very few seem to be overly concerned about the economic and moral implications of LBO's very high return on leveraged legal looting (ROLLL). As is often said, the more things change ... (Please see my Aug 14 article link for an extensive news summary on private equity.)

I start off the news summaries below with a quote from this week's "Economist" magazine that goes to the essence of the economic problem with the housing bubble. I have tried to make a similarpoint re its massive hyper-speculative misallocation of global capital flows several times on my blog. Of course, the "Economist" has been wrong on the housing bubble's impact for a long time, so I'm not sure citing it helps.

Not only is this poor economics, I also believe that the resulting endemic "free lunch" "won the lottery" mentality, especially of business (outrageously unjustified stock options) and political (corrupting lobby money) leaders, is a main underlying factor behind eroding morality in financial markets, corporate America, politics, popular culture, and also to the severe erosion in the standing of the U.S. in world public opinion.

When rampant financial speculation is the dominant feature of the economic landscape, then what does American freedom now stand for is a key question.

Admittedly I am guilty of overkill with news summaries on real estate in this and my Aug 14 article, but the sector remains critical for the prospects of the U.S. and global economy.

"Biggest Bubble in American History" Continues to Rapidly Leak

"This is the biggest bubble in American history: in real terms home prices have risen at least three times as much as in any previous housing boom ... prices could simultaneously fall in enough places to give America its first nationwide price decline since the Great Depression. ... The tech bubble left behind a modern capital stock that continues to yield productivity gains. In contrast, the investment stimulated by a property boom does little to boost long-term growth. Expensive houses merely redistribute wealth to home-owners from non-home-owners. Worse still, the boom has diverted resources away from productive sectors and caused households to save less, exacerbating America's economic imbalances. It is surely better for Americans to start saving in the old-fashioned way by spending less of their income rather than relying on rising asset prices." (Economist mag, Aug 24)

"The real-estate market during recent years had many unhealthy economic and psychological effects. Soaring prices forced many people, especially young people buying their first homes and starting families, out of many markets. It pushed too many people into dreadful mortgages. It misallocated capital to construction for which there was no fundamental demand." (WSJ, Aug 30)

"Investors are pushing prices for securities backed by mortgages and home equity loans to near record levels, in spite of data pointing to a slowdown in the US housing market. The rising prices - and falling yields - for these securities are an example of how the financial markets have been affected by the rising popularity of collateralised debt obligations (CDOs) ... a counter-intuitive rally in an asset class that has been a source of growing public concern ... CDO structurers and buyers are taking comfort from the belief that a slowdown in house price appreciation will not lead to a doomsday scenario of widespread house price declines." (FT, Aug 24)

"sales of new homes in July fell 4.3% from June to a rate of 1.07 million units, a pace that is 21.6% slower than a year ago. The inventory of unsold homes on the market rose to a supply of 6.5 months, up from 4.2 months a year earlier, while the median price fell to $230,000 in July and is essentially flat compared with a year ago. (WSJ, Aug 25)

"Sales of previously owned homes fell in July to the lowest level in 2 1/2 years ... off 11.2% from a year ago ... inventory of unsold homes rose 3.2% to a record 3.85 million, a 7.3-month supply at the July sales rate, the highest since April 1993. The past year has seen the sharpest increase in inventories on record ... The median price of a home sold last month was $230,000. That was up just 0.9% from the same month last year and marked the smallest year-over-year increase since May 1995." (WSJ, Aug 23)

"Over the past year, the number of previously occupied homes listed for sale nationwide has risen nearly 40%. In some metropolitan areas, including Orlando and Phoenix, the supply has quadrupled." (WSJ, Aug 23)

"Purchases and prices in areas of the country that didn't fully participate in the boom are now weakening as well, raising concern the slowdown nationally will be more pronounced ... In the Midwest ... sales slumped to the lowest level in almost nine years." (Bloomberg, Aug 25)

"Housing starts fell 2.5% in July to an annual rate of nearly 1.8 million units following a 5.7% plunge in June. The pace of new-home construction is off nearly 21% from its peak in January and is 13.3% lower than a year ago. Similarly, permits for new construction ... were down 6.5% from June to an annual rate of 1.75 million, and are running almost 21% lower compared with last year ... the rising rate of cancellations, which by his latest estimate has increased to 7.4% of new sales, up from 3.5% a year ago." (WSJ, Aug 17)

"builders will be much more aggressive than individual homeowners in cutting prices ... home prices in 2007, nationwide, will be up slightly less than incomes for the first time in years. In the first quarter of 2006, Freddie Mac data showed that 88% of refinancing was equity take-out refinancing, which is about the highest it's ever been ... something we've never seen before, was the fact that in more than 50% of the equity take-out refinancings, the homeowner refinanced into a higher rate to take out equity ... Over the last six years, the boom in housing has created $5 trillion more value in homes than mortgages have gone up ... this is going to be a problem down the road but we don't think it is close to a problem yet." (Scott Simon, Pimco's website, Aug 2006)

"a typical $250,000 three-year adjustable-rate mortgage with a 2% rate-hike cap ... After the second adjustment, the monthly payment is $1,748, a $625-per-month increase ... • 32.6% of new mortgages and home-equity loans in 2005 were interest only, up from 0.6% in 2000 • 43% of first-time home buyers in 2005 put no money down • 15.2% of 2005 buyers owe at least 10% more than their home is worth • 10% of all home owners with mortgages have no equity in their homes • $2.7 trillion dollars in loans will adjust to higher rates in 2006 and 2007 ... At the end of 2003, 1% of WaMu's [Washington Mutual] option ARMS were in negative amortization (payments were not covering interest charges) ... At the end of 2005, the percentage jumped again to 47%. By value of the loans, the percentage was 55% ... WaMu's situation is the norm, not the exception." (Lon Witter, founding partner at Witter & Westlake Investments, Barron's, Aug 21)

"discounts are almost entirely missing from the statistics on new-home prices reported by the government and on existing-home prices reported by the National Association of Realtors. As a result, home prices may now be falling, despite what the official numbers show, many economists say. The use of rebates ... making the real estate market look healthier than it may truly be and by preventing a snowballing decline in home prices." (NYT, Aug 25)

"The home-builders association says interest in new home auctions is up as builders experience an increase in contract cancellations -- 30% this summer, compared with 15% last summer. Builder confidence, as measured by the trade group's monthly survey of its members, is at a 15-year low." (WSJ, Aug 25)

"The average for 30-year fixed mortgage rates for the week ended Aug. 24 was 6.48%, down from 6.52% a week earlier, Freddie Mac said in its weekly primary mortgage market survey. A year ago, the rate averaged 5.77%. The average for 15-year fixed-rate mortgages this week was 6.18%, down from 6.20% a week earlier but up from the year-earlier 5.35%." (WSJ, Aug 25)

"the number of first-time homebuyers dropped to a 25-year low last year ... [former BoE economist] Vosa says. ``The risk is at some stage, the value of the housing stock falls precipitously because there are simply no buyers left.' ... Bank of England governor Mervyn King says ... ``Clearly, in the long run, the market requires first time buyers to come in and provide base demand.'" (Bloomberg, Aug 18)

"Among the states where home prices rose more than the national average from 2000 to 2005, John Kerry won 155 electoral votes in 2004, compared with just 55 for President Bush. But among states where home prices rose less than the national average, Mr. Bush gained 231 electoral votes to just 97 for Mr. Kerry." (NYT, Aug 26)

Btw, I've noted the same thing several times on my blog, from the viewpoint of the negative effect of over-reliance on real estate speculation by the leaders and active supporters of both political parties, but especially "liberal" "blue state" Democrats.

Macroeconomic Outlook Tilt toward Fed Pause Continues for Now

"Investors are betting not only that the Fed is done raising its target rate for overnight loans between banks, but that the next step will be to reduce interest rates after the central bank left its target rate at 5.25 percent on Aug. 8. The 5.185 percent yield on Eurodollar futures maturing in June 2007 shows traders expect the Fed to cut rates by about a quarter percentage point by that date. Eurodollar futures, which are tied to expectations for three-month U.S. interest rates, have historically averaged about 21 basis points higher than the overnight lending rate." (Bloomberg, Aug 28)

"The index of leading economic indicators unexpectedly dropped in July, yet another sign that economic growth will continue to slow over the next three to six months. The 0.1 percent decline followed a 0.1 percent gain in June ... The index dropped at an annual rate of 1.4 percent over the last six months, the worst performance since February 2001 ... The index isn't signaling a contraction: it would take a 3.5 percent annualized drop during a six-month period to signal a shrinking economy, according to the Conference Board." (Bloomberg, Aug 18)

"Federal Reserve officials may be prepared to live with a pickup in inflation over coming months as they consider the cost to housing and jobs of higher interest rates ... Richard Berner, chief U.S. economist at Morgan Stanley in New York [said] ``The Fed may implicitly be choosing a slightly higher inflation objective than previously thought.' ... Berner and his counterparts at Lehman Brothers Holdings Inc. and JPMorgan Chase & Co. detect a more patient stance, and say Bernanke may be wary of the costs of being more aggressive in reducing inflation." (Bloomberg, Aug 29)

"If the business investment binge is a no-show, they [some economists] say, a contraction in the economy becomes more likely. ... ``It makes little sense for businesses to accelerate their capital-spending plans at a time when final consumer demand, the largest source of demand, is decelerating,' says Jan Hatzius, chief U.S. economist with Goldman Sachs." (Bloomberg, Aug 28)

"A slump in housing, near-record oil prices and the highest Fed interest rates since 2001 have prompted some economists to speculate the world's largest economy may slip into recession next year after five years of expansion. David Rosenberg, chief North American economist at Merrill Lynch & Co., has said there is a 40 percent change of such a slump. (Bloomberg, Aug 25)

"The sacrifice ratio measures how much unemployment has to increase to bring inflation down by 1 percentage point. In the U.S., the ratio has risen to 4 percent from 2 to 3 percent during the mid-1980s, according to Fed economists." (Bloomberg, Aug 22)

"The taxable profits of corporate America will fall 8 per cent next year and remain on a downward trajectory until 2010, a new study by the Congressional Budget Office predicts. The CBO estimates that total taxable profits will inch up in 2008 but fall again in 2009 and 2010, and will not recover their current level in nominal cash terms for almost a decade." (FT, Aug 17)

""The Fed seems to be moving from a pause, which connotes further rate increases, to a full-fledged stop,' said Paul Kasriel, director of economic research at Northern Trust Securities in Chicago and a former Fed economist. ``The next move is more likely to be a cut in rates.'" (Bloomberg, Aug 30)

"As far as I know, Nouriel Roubini ... is the only well-known economist flatly predicting a housing-led recession in the coming year. Most forecasters consider his call alarmist, and many Federal Reserve officials remain optimistic ... While I don't share Mr. Roubini's certainty, I see his point: housing has been the main engine of U.S. economic growth over the past three years, and with that engine now going into reverse, it's hard to see how we can avoid a serious slowdown." (Paul Krugman, NYT, Aug 25)

"The likelihood of a recession has risen since 2005 but remains at a little less than 20 per cent. Essentially, the cautionary message from the convergence in short- and long-term bond yields is counter-balanced by less negative data elsewhere ... Were the [Fed] to ... push the Fed Funds Target Rate up by another half a percentage point, the recession probability indicator would probably rise above 50 per cent." (Simon Ward, investment strategist, New Star Asset Management, FT, Aug 17)

"Economists lowered their forecasts for Japan's 2006 economic growth after the nation's second- quarter expansion was below estimates and amid concern exports will ease as the U.S. economy cools. Japan's gross domestic product will expand 2.7 percent this year, according to the median estimates of 13 economists surveyed by Bloomberg News. That's below the 3.1 percent forecast by economists last month." (Bloomberg, Aug 24)

"Federal Reserve Bank of Dallas President Richard Fisher said Wednesday inflation has been running higher than he'd like to see, and said the central bank must make sure price pressure remained contained ... "the slowing of housing and consumption frees up resources for investment and a more balanced economy," he said." (WSJ, Aug 30)

"The US Federal Reserve is wrong to focus on core measures of inflation that exclude energy prices, Charles Bean, chief economist at the Bank of England, has suggested. It should focus instead on headline inflation, which is much higher, he argued. Including energy and food costs, US consumer price inflation is running at an annual rate of 4.1 per cent, against 2.7 per cent for core inflation." (FT, 8/27)

"the rate of change in sales by new-car dealers, comparing the most recent 12 months with the 12 months before that; it is adjusted for inflation ... if the figure is down 2 percent or more, a recession is either under way or set to begin within a few months. The figure fell to a negative 2.4 percent when June sales figures were released ... In July, sales at gasoline stations accounted for 10 percent of all retail sales, the highest figure in decades." (NYT, Aug 19)

"``frankly, nobody knows with precision how the dynamics of the global economy affect these lags or the practicability of our policies,' [Dallas Fed Pres] Fisher said. Economists and analysts who say the Fed has stopped raising interest rates or will keep boosting them in coming months are ``only guessing.'" (Bloomberg, Aug 16)

Emerging Markets

"China's government has been throwing up some new hurdles for foreign investors in recent months, including increased scrutiny of foreign-backed mergers ... government's growing preoccupation with helping China's expanding universe of domestic companies and pressing social issues such as poverty and wealth disparities. Top leaders insist that fast-growing China, the developing world's biggest recipient of foreign investment for many years running, isn't closing off its economy ... [China] lets foreign businesses compete in its domestic markets to an extent that few if any developing countries have matched ... China has systematically stripped away many of the previous barriers to entry for foreign companies. Roughly 280,000 companies backed by foreign investors operate in China ... [government] giving prominent media exposure to those who support increased economic openness." (WSJ, Aug 30)

"China's top planning agency said an oversupply of steel in the country, the world's biggest producer of the metal, may depress prices and hurt steelmakers' profits, and warned that the industry ``can't blindly pursue growth.' ... statement was issued as Baoshan Iron & Steel Co., China's biggest steelmaker, posted a 27 percent decline in second-quarter profit yesterday." (Bloomberg, Aug 30)

"Of the 30 BRIC [Brazil, Russia, China, India] -related equity funds tracked by Bloomberg data, 75 percent were started in the past year. Assets in 12 of the biggest have more than doubled to $10 billion in 2006 ... [MSCI] BRIC Index has gained 25 percent this year. That compares with an 8.9 percent advance in the broader MSCI Emerging Markets Index ... All four markets have gained more than the MSCI index since their troughs in mid-June, with the dollar-denominated Russia Trading System Index jumping 33 percent." (Bloomberg, Aug 17)

"OAO Gazprom's weighting in the [MSCI] Emerging Markets Index will almost double in September, when the world's biggest natural-gas producer becomes the largest component of the benchmark ... [Its] shares have jumped 56 percent this year ... Since 2004, Gazprom's market value has surged fivefold to $277 billion ... bigger than every other publicly traded company in the world except Exxon Mobil Corp. and General Electric Co ... The higher weighting will raise Russia's representation in MSCI's index to 11.1 percent, making it the third-largest emerging market worldwide ... will trail only South Korea and Taiwan." (Bloomberg, Aug 18)

"China's statistics bureau has set up a special department to investigate cases of data being falsified by government officials. ``Some leaders, seeking to advance their careers, interfere in the statistics, and encourage statistics bureau officials to inflate data,' the Beijing-based National Bureau of Statistics said in a statement on its Web site yesterday." (Bloomberg, Aug 18)

"[China] public companies are required to meet international accounting standards by next year, spurring demand for accountants. The country has 69,000 licensed accountants and needs more than 300,000, says Chen Yugui, secretary-general of the Chinese Institute of Certified Public Accountants." (Bloomberg, Aug 15)

"Vietnam's $3 billion garment industry, which supplies Nike Inc. and Limited Brands Inc., may see a surge in bankruptcies because of rising labor costs and competition from China, the nation's biggest clothing maker said ... The industry is Vietnam's second-biggest foreign-exchange earner after crude oil, and its decline may curb growth in an economy the government projects will expand 8 percent annually in the next decade ... Vietnam's 1 million apparel-factory workers make about $100 a month, almost twice the $55 minimum wage." (Bloomberg, Aug 30)

Globalization - The Good, ...

"the main story of consistently high underlying real growth explains, more than anything, why globalisation has helped central banks so much. Central bankers deserve credit for taking advantage of these good times to establish and enhance their credibility ... what might happen if globalisation hits a really large bump in the road. Then, at least in a few big countries, inflation will end up being far higher than policymakers or market participants now seem to think possible. Market convictions that inflation is forever dead will be shattered." (Kenneth Rogoff, Harvard economics professor, former IMF chief economist, FT, Aug 29)

"[the near East] needs modern industry, jobs and better education geared to competing in the global market ... I set up five industrial parks in Israel to provide employment and last year, established my first venture in Turkey... provide opportunities for people from diverse backgrounds ... special kind of regional economic development that promotes industrial production for export industries ... each of the parks works with an educational institution ... starting 100 industrial parks is equal to buying fewer than 50 fighter aircraft ... need contributing companies to establish branches in the new parks ... need the support and commitment of national governments to set up the incentives." (Stef Wertheimer, Israel-based industrialist, founder of Iscar, manufacturer of metalworking tools in which Warren Buffet bought 80% stake in July, FT, Aug 24)

"There has never been a more critical time to ensure that mining contributes to long-lasting development. Soaring metals and minerals prices are bringing billions of dollars in tax revenues to mineral-endowed countries throughout the developing world, enhancing prospects for economic growth. It is essential that these windfall funds are used effectively for community development ... popular pressure is mounting in poor mineral states that have yet to demonstrate to their citizens that foreign direct investment can generate economic and social benefits ... Enhancing the impact of mining on development requires joint action and new forms of partnership between governments, companies, civil society and international development agencies." (Wayne Murdy, chairman of International Council on Mining and Metals, chairman, CEO of Newmont Mining, FT, Aug 24)

"In a new book, 'The Central Liberal Truth,' Harrison takes up the question that is at the center of politics today: Can we self-consciously change cultures so they encourage development and modernization? ... this is incidentally a book about the war on terror, and whether it is possible to change culture in the Middle East and the ghettos of Muslim Europe ... Harrison and a team of global academics ... concluded that cultural change can't be imposed from the outside, except in rare circumstances. It has to be led by people who recognize and accept responsibility for their own culture's problems and selectively reinterpret their own traditions to encourage modernization." (David Brooks, NYT, Aug 13)

Globalization - The Bad, and the Ugly

""It became evident in 2000 that oil consumption would increase and the major publicly held oil companies should have doubled their spending for increased production, says [Wall Street oil guru] Maxwell, who began working in the oil industry in 1957. They didn't. ``You can lay this at their doorstep,' he says. Exxon Mobil Corp. has spent tens of billions of dollars buying back its shares, Maxwell says, money that would have reaped additional profit if it had been spent on production capacity. National oil companies, which control the lion's share of world production, didn't expand capacity either, Maxwell says, because they didn't get enough money from their governments and because they turned away private investment by tough bargaining." (Bloomberg, Aug 16)

"The number of suicides among India's 235 million farmers is rising as seed and pesticide costs increase and the rural economy provides few other job opportunities. More than 18,000 farmers may kill themselves this year, the most ever recorded by the government ... The deaths show the plight of India's farmers, whose destitution is overshadowed by the country's booming software and pharmaceutical industries. About 27 percent of India's rural population, or almost 200 million people, live below the poverty line." (Bloomberg, Aug 30)

"The median hourly wage for American workers has declined 2 percent since 2003, after factoring in inflation ... As a result, wages and salaries now make up the lowest share of the nation's gross domestic product since the government began recording the data in 1947, while corporate profits have climbed to their highest share since the 1960's ... For most of the last century, wages and productivity ... have risen together, increasing rapidly through the 1950's and 60's and far more slowly in the 1970's and 80's. But in recent years, the productivity gains have continued while the pay increases have not kept up. Worker productivity rose 16.6 percent from 2000 to 2005, while total compensation for the median worker rose 7.2 percent." (NYT, Aug 28)

"Japan's wages unexpectedly slipped for the first time in six months, as record corporate profits and increased demand for workers failed to translate into higher pay. Wages, including overtime and bonuses, fell 0.1 percent ... in July from a year earlier ..." (Bloomberg, Aug 30)

"Since the 1920's there have been four eras of American inequality: • The Great Compression, 1929-1947: The birth of middle-class America. The real wages of production workers in manufacturing rose 67 percent, while the real income of the richest 1 percent of Americans actually fell 17 percent. • The Postwar Boom, 1947-1973: An era of widely shared growth. Real wages rose 81 percent, and the income of the richest 1 percent rose 38 percent. • Stagflation, 1973-1980: Everyone lost ground. Real wages fell 3 percent, and the income of the richest 1 percent fell 4 percent.• The New Gilded Age, 1980-?: Big gains at the very top, stagnation below. Between 1980 and 2004, real wages in manufacturing fell 1 percent, while the real income of the richest 1 percent ... rose 135 percent ... except during stagflation ... what happened in each era was what the dominant political tendency of that era wanted to happen." (Paul Krugman, NYT, Aug 18)

"Federal Reserve Chairman Ben S. Bernanke told Congress in July that he is disturbed by the growing chasm between the rich and the poor ... The dream of greater prosperity has bypassed his hometown of Dillon, South Carolina, which is honoring its native son with Ben Bernanke Day on Sept. 1 ... The town of 7,000 people hasn't recovered from textile layoffs in the 1990s prompted by competition from lower-cost Asian imports, nor from the decline of its tobacco crop ... Dillon County's unemployment rate was 9.7 percent, more than twice the national average ... Average income of $20,342 a year came to 62 percent of the U.S. average in 2004." (Bloomberg, Aug 30)

"Banker Frank Quattrone's deal with U.S. prosecutors that allows him to avoid a third trial on obstruction-of-justice charges, clears the way for him to receive as much as $120 million from former employer Credit Suisse, people familiar with the matter said on Wednesday. The settlement approved by a federal judge on Tuesday would allow Quattrone, 50, to avoid any penalty without admitting any wrongdoing. If he obeys the law for the next year, prosecutors will dismiss charges that were filed against him in 2003." (Reuters, Aug 23)

"Justice Department's failed attempt to convict Frank Quattrone, the former Credit Suisse Group banker, highlights how Wall Street executives have largely escaped a government crackdown on corporate crime ... During the six years that Quattrone faced accusations of wrongdoing, prosecutors secured about 1,000 corporate-fraud convictions ... Prosecutors have largely concluded bankers didn't commit financial crimes and misconduct by them is better handled by civil regulators, lawyers said." (Bloomberg, Aug 23)

"At Dana, the U.S. auto parts company that is in bankruptcy and facing lawsuits claiming that it manipulated its books to hide rising costs, there is talk of saving money by reducing or eliminating retirees' health benefits. But at the same time the bosses, including the chief executive, Michael Burns, want guaranteed multimillion- dollar payouts. ... John Dempsey, a principal at Mercer Consulting, which helped draw up the pay package ... [said] something needed to be done to offset the fact that Burns's stock and options were now close to worthless." (IHT, Aug 17)

"the successes enjoyed by private-equity firms over the past few years have enabled public pension funds with exposure to the sector to achieve returns far superior to those on equity and bond markets ... the record levels of buy-out activity and the unprecedented involvement of public pension funds raise the risk that a lean period in private equity would hit public funds just at a time when many of them are struggling to meet mounting pension obligations." (FT, Aug 26)

"Deals involving consortiums of buy-out funds total about $265bn so far this year and account for more than 70 per cent of the value of all private equity take-overs, compared with less than half that for the whole of 2005. ... Industry observers say club deals have proliferated recently because attractive takeover targets are scarce and buy-out funds are under pressure to invest the $14bn-plus raised this year. Private equity firms like club deals because they can buy companies too big to be taken over by a single fund." (FT, Aug 28)

"Private equity groups are stepping up their efforts to lure senior executives away from public companies and making it more difficult for listed groups to attract and retain top talent ... the offer of large financial rewards by cash-rich buy-out groups and the prospect of being shielded from the short-term pressures of capital markets are prompting more top managers to move to private equity ... Private equity's interest comes when many executives are complaining about the burdens of US legislation introduced after the Enron and WorldCom scandals." (FT, Aug 29)

Geopolitical Risks

"Arab nations want the U.N. Security Council to help launch a new peace process to end the broader Arab-Israeli conflict, saying the "road map" unveiled in 2003 to establish a Palestinian state is dead. Arab League foreign ministers have asked to send a delegation to a ministerial meeting of the Security Council in September to initiate a new effort to bring lasting peace between the Israelis and Palestinians after nearly 60 years of conflict ... To counter Hezbollah's rising influence, diplomats said the Arab moderates sought to restart an Arab-Israeli peace process." (AP, Aug 18)

"Russia's defense minister said Friday that it was premature to consider punitive actions against Iran despite its refusal so far to suspend its efforts to enrich uranium as the United Nations Security Council has demanded ... Ivanov's remarks made it clear that Russia would not support taking the next step that the United States and Britain have called for: imposing sanctions against Iran or its leaders over its nuclear programs ... Mr. Ivanov, a close ally of Mr. Putin who also serves as deputy prime minister." (NYT, Aug 25)

"Iran, the ultimate source of terrorist money and arms, is too far away for effective Israeli retaliation. Syria, however, is a weak link in the quartet. Syria's importance as an advance base for Iran — the two countries concluded a formal alliance on June 16 — cannot be exaggerated ... State Department optimists dream that Syrian dictator Bashar Assad can be weaned from Iran through concessions from the United States and Israel, such as the return of the Golan Heights ... History suggests that only force, or the threat of force, can win substantial concessions from Syria." (Max Boot, well-known "hawk," LAT, 8/23)

"Joshua Landis, a historian of Syria ... says that from Assad's standpoint, abandoning Hizbullah means abandoning his country's claims to the Golan Heights, which were captured by Israel during the Six-Day War in 1967... Syria's overtures over the past two years to reopen negotiations over the Golan have repeatedly gone unheard. (CSM, Aug 25)

"since 1999. IDF [Israel Defense Forces] Chief of Staff Shaul Mofaz and his successor, Moshe Yaalon, both recommended peace negotiations with Syria and were prepared to make significant territorial compromises to reach a peace settlement. Prime Minister Ehud Barak and his successor, Ariel Sharon, vigorously opposed this approach." (WP, Aug 25)

"Iraq, sitting atop the biggest conventional oil reserves after Saudi Arabia and Iran, is facing what may be the direst threat yet in its eight decades as a petroleum powerhouse: a brain drain ... Of the top 100 or so managers running the Iraqi oil ministry and its branches in 2003, about two-thirds are no longer at their jobs, according to current and former Iraqi officials and outside analysts." (WSJ, Aug 22)

"In April, the [US intelligence] community produced a National Intelligence Estimate on terrorism, which, according to people who have read it, says that Hezbollah is the only major terrorist group with global reach currently not trying to kill Americans ... Despite suggestions by some politicians that Islamic radical groups are all alike, Hezbollah is not Al Qaeda." (Boston Globe, Aug 13)

"Hamas is gaining support in Gaza as its opponents say the mounting death toll [more than 200 Palestinians since June 25] diminishes support for politicians such as Palestinian President Mahmoud Abbas, considered by Israel a potential negotiating partner. ... About 70 percent of Gazans now rely on food aid, according to the United Nations. ... While support for Hamas swells, Palestinian support for Hezbollah, which is backed by Iran and Syria, is also palpable." (Bloomberg, Aug 16)

"Political Islam was widely seen as the antidote to the failures of Arab nationalism, Communism, socialism and, most recently, what is seen as the false promise of American-style democracy ... There is a wide diversity of views and agendas under the pan-Islamic-Arab umbrella. But as is often the case in politically aligned movements, those differences are easily papered over when that movement is in the opposition." (NYT, Aug 20)

"Israel's effort this time to eradicate Hizbollah was no remake of past Israeli-Arab wars. It signified several complex - and seemingly contradictory - trends in the Middle East: First is the revival of a radical Islamic front that rejects the Arab-Israeli peace process. Second is the growing divide between Shia and Sunni Muslims in the Gulf region. Finally is the changed political dynamic after the recent entry by radical Islamist movements - such as Hizbollah and Hamas - to mainstream electoral politics." (Olivier Roy, professor at Ecoles des Hautes Etudes en Sciences Sociales, author of "Globalised Islam," FT, Aug 18)

"One of the participants at the Monday [Aug 14] lunch [with Pres Bush on Iraq], Eric Davis, a Rutgers University political science professor ... Mr. Davis said he urged the creation of more jobs for younger Iraqis, and proposed a major reconstruction fund to be underwritten by Saudi Arabia and other Arab oil states seeking regional stability." (NYT, Aug 16)


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