Newsletter Q2 2004
April 14, 2004
Alternate Versions of Reality
President Bush, from his speech on April 13, 2004:
The success of free
government in Iraq is vital for many reasons. A free Iraq is vital because 25
million Iraqis have as much right to live in freedom as we do. A free Iraq will
stand as an example to reformers across the Middle East.
Saudi
Arabia’s Al-Watan newspaper:
A year after the fall of Baghdad the US
administration is trying to convince the world that it has liberated 25 million
Iraqis, but reality says otherwise.
George Will, syndicated columnist, from an April
7, 2004 editorial:
In the war against the militias, every door
American troops crash through, every civilian bystander shot – there will be
many – will make matters worse, for a while. Nevertheless, the first task of
the occupation remains the first task of government: to establish a monopoly on
violence.
Robin Cook, Tony Blair’s first Foreign
Secretary, who resigned prior to the invasion of Iraq, from an April 8, 2004
editorial:
It is a vicious irony that, having promised that
victory in Iraq would bring a road map to peace in the Middle East, the Bush
Administration has in practice brought to Baghdad Sharon’s military tactics
against the Palestinians with precisely the same result in consolidating local
opposition. The very codenames for the US offensives – Operation Iron Hammer or
Operation Vigilant Resolve – are eloquent of a mindset that is deluded by the
mirage of a military solution and blind to the necessity of winning hearts and
minds.
President Bush has given U.S. troops the task of controlling 25 million people
in a country the size of California with combat troops that could fit inside a
large football stadium. News reports indicate that attempts by U.S. forces to
crush resistance with overwhelming and sometimes indiscriminate force have
resulted in more Iraqis taking up arms. While Iraqi forces may lack high-tech
weapons, they are disinclined to allow a U.S. monopoly on violence as they
increase attacks on anyone who cooperates with occupation forces.
In April
2002, OPEC rejected the proposal of Iran’s supreme leader Ayatollah Ali Khamenei
to suspend exports from Islamic oil-producing countries to pro-Israel Western
states “for a symbolic period of one month.” Could an oil embargo be used as a
political statement to get the attention of the U.S.? Since the 1973 embargo,
OPEC’s share of world oil production has declined from 70% to 40%, but U.S. oil
imports have increased from 36% to 56% of U.S. oil consumption.
Market Stabilizers or Destabilizers?
The
Comptroller of the Currency recently reported fourth quarter U.S. commercial
bank derivative data. The total notional value of derivative positions expanded
during the quarter to $71.1 trillion, or 6.5 times the GDP of the country.
During the past year, JP Morgan Chase’s derivative positions have increased by
30% to $37.4 trillion. In a report issued last month, economists at Credit
Suisse First Boston argued that the enormous size of the interest rate options
market and its concentration among a small number of dealers, created conditions
to “host the next financial crisis.”
The
massive currency intervention by the Bank of Japan (BOJ) to limit appreciation
of the yen and support the U.S. dollar may be a thing of the past. Japan sold
$45.2 billion worth of yen in March alone, bringing the total for the fiscal
year ending March 31 to $316 billion. In spite of the BOJ’s active currency
intervention, the yen rose anyway as other market participants countered its
activities. According to the Financial Times, the BOJ’s trading losses are
estimated to be approximately $89 billion. Finance Minister Sadakazu Tanigaki
now says that Japan is willing to let market mechanisms determine exchange rates
but may take action to discourage currency speculators.
During
the past year, both the stock and bond market have benefited from a Federal
Reserve policy that has targeted artificially low interest rates and encouraged
higher levels of debt. Federal funds futures now indicate a 75% probability of
a quarter-point increase by August. Interest rates on bonds have already
increased but may not fully reflect the impact of future budget deficits or
reduced reliance on foreign creditors. Accordingly, most accounts now have cash
balances that are higher than in the past as I wait for some better buying
opportunities.
Additions
During
the first quarter, the American Century International Bond Fund (BEGBX) and
government bonds of Australia, Canada, New Zealand, and Norway were purchased
for accounts. Given the magnitude of the U.S. current account deficit, I expect
the dollar to decline further.
Some
closed-end municipal bonds funds were purchased for certain accounts at
discounts to net asset value of 8-10%. The funds included the Seligman Select
Municipal Fund (SEL), Van Kampen Municipal Income Trust (VMT), and Salomon
Brothers Municipal Partners (MNP).
The Van
Kampen Bond Fund (VBF) was purchased for some accounts at a discount to net
asset value of 9%. The fund is not leveraged and consists primarily of
investment-grade corporate bonds.
Deletions
JMAR
Technologies (JMAR) was sold at a profit. The price of the stock has increased
substantially since last year, although the fundamental outlook and earnings
estimates have not changed significantly.
Equity
Inns Inc. (ENN) was sold at a profit. Business conditions remain satisfactory
but upside potential is limited at the current price. I continue to own the
preferred stock for many nontaxable accounts.
Stillwater Mining Company (SWC) has been sold in accounts where capital gain
taxes are not a consideration. The price of the stock has risen considerably as
the price of palladium rose on expectations that automobile companies will
substitute palladium for higher-priced platinum. SWC has long-term contracts
with customers that set a price floor and price ceiling for both palladium and
platinum. The increase in the price of palladium has not impacted SWC’s profit
margin very much because most of their palladium was being sold at price floors
which were above market prices.
Profits
were taken on the Managed Municipal Portfolio (MMU) and John Hancock Investors
Trust (JHI). The discounts to net asset value on both closed-end funds were
less than 3% when sold. The proceeds will be used for the purchase of other
closed-end funds that are selling at a larger discount.
Some
positions in the Blackrock Income Opportunity Trust (BNA) were reduced as the
discount to net asset value reached 6%.
If you
have any questions regarding your accounts, please do not hesitate to call me.
Sincerely,
Robert
G. Kahl
CFA, CPA, MBA
Sabino
Investment Management, L.L.C.