By Stephen Foley in New York
Published: 27 April 2007
Hang out the bunting, prepare the sandwiches and the fizzy pop, get ready for a street party. A Wall Street party. The US stock market is very, very close to reaching an all-time high, and it could break the record at any moment.
Publish
But hang on, regular readers will be saying, didn't the Dow Jones Industrial Average power into virgin territory last autumn? Indeed, didn't it just shoot through the 13,000 barrier for the first time on Wednesday?
Yes and yes. The Dow is the most visible measure of the US stock market and has served well as a yardstick for 111 years, but it measures just 30 stocks. The much wider S&P 500 has claim to be the best measure of US equities, and it remains a tad over 2 per cent below its dotcom-era peak. It is this index that Wall Streeters measure their performance against, and it is a record on this index that will trigger the big party.
Either way, though, we are definitely into party season. The stock market is surging, whichever way you measure it. Company profits are growing faster than anyone dared hope. Their profit margins are at 50-year highs. The US economy continues to grow, too, albeit at a slower pace this past year, confounding the sceptics. Corporate executives are confident enough in the outlook to embark on brave merger-and-acquisition deals that boost the share prices of companies likely to be taken over. Lenders are confident, too, and are advancing plenty of money to companies to finance such deals and to hedge-fund investors to play the stock market. Wall Street banks are raking in more money than they ever have before.
And the best thing about this party is that there are so many party-poopers about.
David Tice, investment adviser to Prudent Bear mutual funds, is one. Share prices and other assets have been driven high because of "global liquidity and massive credit that comes from ignoring risks. Credit lending is going to be more restrained in the future. This market is going to go down".
Richard Bernstein, chief investment strategist at Merrill Lynch, often sounds like another. "Valuations are fair, but nothing more. Investors who claim that stocks are immensely undervalued probably are not aware that S&P 500 earnings are the most cyclical in history. Low price/earnings ratios might simply reflect peak earnings rather than value. This was certainly true for the housing stocks during the past year or so."
There are so many warning voices, and they have a coherent case. They argue that the US consumer economy is teetering. House prices in many parts of the country have taken a dive and sales of existing homes fell at their sharpest rate in 18 years last month. Mortgage arrears and now repossessions have been rising steadily, and in the riskiest parts of the mortgage market - the so-called sub-prime market - defaults by the poorest homeowners are running so high that several lenders have gone bust.
Investment strategists at Citigroup, the US investment bank, have an intriguing tool for judging these things, an amalgamation of different measures of investor sentiment which it calls its "panic/euphoria model". It says the tool is very useful in predicting the future direction of the market and guiding what an investor should do: buy when it shows people are panicking about the economic and investment outlook, sell when there is euphoria. It has only recently crept back into neutral territory, after being in "panic" for most of the past six years.
Tobias Levkovich, the bullish chief investment strategist at Citigroup, came back from a tour of European investors this month, with a new list of their worries. "The primary investment concern relating to equities remains the direction of earnings, given that US corporate margins sit at 50-year highs. Investors often cite worries about geopolitics, oil prices, sub-prime credit contagion, housing, twin deficits, negative savings rates, protectionism, terrorism, inflation, jobs and the weak dollar as reasons for holding back from buying stocks, but these catalysts are not the issue by themselves - the issue at hand is that they all have earnings ramifications."
At the start of last month, it was the fear of "contagion" from the sub-prime market meltdown, the fear that major financial institutions would suffer destabilising losses from their dealing with sub-prime lenders, which contributed to the stock market's wobble.
Since then, though, giant banks have promised that their exposure is limited, that their own levels of bad loans are not growing as fast as investors had feared. As in the financial sector, so it is across the rest of corporate America. Most of the country's biggest companies have now reported their profits for the first three months of the year, and they have averaged growth of 11 per cent, exactly the same as in the fourth quarter of 2006. Analysts had predicted a growth rate of barely half that.
In short, the stock market's revival from its wobble in March, the Dow's 126-day progress from 12,000 to 13,000, and its 80 per cent surge since the bear market nadir in 2002 - all has been largely justified by improvements in corporate earnings.
The average S&P 500 stock is valued at a little below 16 times its reported earnings of last year, and at a little over 16 times the consensus estimate of the coming year's earnings. This does not take the market into territory that would be called irrational exuberance.
And the confidence that those estimates of future earnings are sound, if not even conservative, are based on a view of the Federal Reserve's ability to keep the economy on an even keel. A Treasury bond auction yesterday was priced with a yield lower than expected, another example of the market's belief in interest rate cuts soon to prop up a slightly weaker economy.
Even admitting clouds over the US economy, bulls argue that the addition of China, India and other emerging markets to the super-league of economic nations means that global growth can continue without it. More than half of the earnings of the Dow's 30 industrial giants come from overseas, so they are fatter in dollar terms and they are able to offset any US slowdown.
Richard Jeffrey, chief economist at Ingenious Securities in London, said: "Stock markets around the world are telling us two things. First, they are telling us that there is a high degree of confidence that the world's central banks will be able to successfully manage their way through the various issues they face without causing undue turbulence, without inflation becoming a problem or the US economy going into a recession. Second, there is also a recognition that the global economy is no longer so dependent on the US. The American economy is no longer the sole locus of growth, so the impact of a slowdown in the US is not as large as it once was."
There are other factors to be pulled into the mix to explain the outsize performance of the US stock market. The phenomenon of "de-equitisation" is one, which is adding a little scarcity value to equities. Massive share buy-back programmes by cash-rich companies are boosting earnings per share and returns on equity, and as a result reducing their number of shares in issue. And all the while, private equity funds are snapping up bigger and bigger chunks of corporate America. The past year has seen the 17-year-old record for the biggest ever private equity buy-out finally surpassed not once but several times.
Lest we contribute any temptation to euphoria, the final word should go to Merrill Lynch's Mr Bernstein, who adds a bum note related to the weakening US currency. "The dollar is falling, and much of the stock market's rally is simply 'money illusion' - that is, it takes more less-valuable dollars to buy the same asset. In euros, the Dow has been flat for six months. In a global sense, the US stock market's rally is not a growth story."
Showing posts with label Wall Street. Show all posts
Showing posts with label Wall Street. Show all posts
Monday, April 30, 2007
Friday, March 2, 2007
Insider-Trading Ring Bust May Fuel Hedge-Fund Concern
(Update1)
By David Scheer
March 2 (Bloomberg) -- The U.S. government's accusations that Morgan Stanley, UBS AG and Bear Stearns Cos. employees were central figures in an insider-trading ring illustrate why regulators and lawmakers are suspicious of Wall Street's relationship with hedge funds.
Prosecutors in New York and Washington yesterday laid criminal charges against 13 people, accusing an executive at UBS and a former compliance lawyer at Morgan Stanley of tipping off traders and brokers to new analyst ratings and secret takeover talks. Bear Stearns was home to at least four professionals who traded on information leaked from inside the two firms, according to a complaint filed by the Securities and Exchange Commission.
``Incidents like this strengthen the hands of those who are urging greater scrutiny of hedge-fund activities and their sources of information,'' said David Becker, a former SEC general counsel now in private practice at Cleary Gottlieb Steen & Hamilton LLP in Washington.
Legislators such as Senator Arlen Specter, the Pennsylvania Republican, want market watchdogs to take action amid mounting evidence of rampant insider trading. At least two studies show that stocks and derivatives regularly rise ahead of takeovers, and in the past week trading of options to buy shares of TXU Corp. and Hyperion Solutions Corp. surged in advance of announcements that they agreed to be acquired.
Incentive to Trade
Hedge funds are private pools of capital that allow managers to participate substantially in gains on the money invested. That pay structure creates an incentive for employees to trade in non-public information. Hedge-fund managers also are under pressure to boost returns that since 2000 have averaged half the industry's gains in the 1990s.
The temptation to cheat extends to the securities firms, which collect $10 billion a year in fees for providing prime- brokerage services to hedge funds.
``The larger the pot of gold the more likely that you'll entice someone into stealing,'' said William Portanova, a criminal-defense attorney and former federal prosecutor based in Sacramento. ``Good people convince themselves over a cocktail that it's a victimless crime and that they're merely collecting a few crumbs from the feast that no one will ever miss.''
Earlier this year, the SEC asked at least 10 Wall Street firms to turn over stock-trading records for the last two weeks of September, seeking to determine whether they leaked details about big stock trades to favored clients.
Boesky, Levine
The government said yesterday that it broke one of the biggest insider-trading cases since the 1980s. According to the SEC, which brought a civil suit against 14 defendants, the scheme stretched over five years, included hundreds of tips and produced more than $15 million in illegal profits.
The arrests ended ``one of the most pervasive Wall Street insider trading cases since the days of Ivan Boesky and Dennis Levine,'' said Linda Thomsen, who heads the Securities and Exchange Commission's enforcement division.
At a meeting at the Oyster Bar in New York's Grand Central Station in 2001, Mitchel Guttenberg, an executive director in UBS's equity-research department, and hedge-fund trader Erik Franklin hatched one of the schemes, the SEC claims.
Guttenberg, 41, offered to settle a $25,000 debt to Franklin, 39, by slipping him analyst ratings in advance, the agency said. To avoid getting caught, the men used disposable mobile phones to send each other coded messages, according to the SEC's complaint.
Bear Stearns Officials
At the time, Franklin was working at Bear Stearns and managing money for Lyford Cay Capital out of the firm's New York offices, prosecutors said. He and his colleague, David Tavdy, 38, made more than $4 million on inside trades in brokerage accounts they controlled. Three Bear Stearns brokers also traded on Guttenberg's tips, the complaint alleges.
``The actions described in the complaint are clear violations of our policies and procedures,'' said Russell Sherman, a spokesman for Bear Stearns. ``We have and will continue to cooperate with the investigation.''
Lyford Cay's investors included ``certain senior officials'' of Bear Stearns, according to the SEC. Sherman declined to name them.
Prosecutors also accused Randi Collotta, 30, a compliance officer at Morgan Stanley, of telling her husband Christopher Collotta, 34, and Marc Jurman, 31, a broker in Florida, about deals in 2004 and 2005 including Johnson & Johnson's failed $24.2 billion bid for Guidant Corp., UnitedHealth Group Inc.'s $8.2 billion acquisition of PacifiCare Health Systems Inc. and ProLogis's $5.5 billion purchase of Catellus Development Corp.
Illegal Trading
Jurman traded on some of the information and passed it on to others, generating thousands of dollars in profits that were passed back to the Collottas and others, according to the SEC complaint. Two of the Bear Stearns brokers benefited from the leaks at New York-based Morgan Stanley, the world's second- largest securities firm.
A study by Measuredmarkets Inc. in August showed that insiders may have traded illegally in advance of 41 percent of the largest U.S. acquisitions the previous year. Two months later, Credit Derivatives Research LLC found that credit-default swaps based on the bonds of 30 takeover targets, including four of the five biggest leveraged buyouts by that point in 2006, rose before deals were announced.
More recently, trading in options to buy shares of TXU Corp. surged more than seven-fold on Feb. 23 before CNBC said the company would be acquired in the largest-ever leveraged buyout. This week, the volume of options trading to buy shares of Hyperion Solutions Corp. rose almost sixfold before Oracle Corp. yesterday said it will buy the company for $3.3 billion.
Guilty Pleas
Four of the criminal defendants have pleaded guilty. Eight, including Guttenberg, pleaded not guilty in Manhattan federal court and were released on bail of as much as $500,000. No firm was criminally charged. All the defendants declined to comment, as did attorneys for Guttenberg and the Collottas.
Lawyers for Franklin, Jurman and Tavdy didn't return calls seeking comment.
Morgan Stanley spokesman Mark Lake said his company is ``outraged that a former employee allegedly stole confidential information,'' and the firm is cooperating with investigators. UBS also is cooperating, said Rohini Pragasam, a representative in New York for the Zurich-based bank.
Bear Stearns, based in New York, is the fifth-largest U.S. securities firm by market value.
Charlotte, North Carolina-based Bank of America Corp., the second-biggest U.S. bank, also is cooperating with the government investigation after one of its brokers was accused of collecting kickbacks in exchange for shares of new stock offerings, spokeswoman Shirley Norton said.
The SEC case is SEC v. Guttenberg, U.S. District Court for the Southern District of New York (Manhattan).
To contact the reporter on this story: David Scheer in Washington dscheer@bloomberg.net .
Last Updated: March 2, 2007 03:55 ESTThursday, March 1, 2007
Wall Street resumes its plunge
Market Plummets 200 Points In First Minutes
I laughed at all the bounce back hype yesterday. The DOW up 50 points after the previous day's 400 point drop is more like a plop than a bounce.
The trading day isn't over in New York.
Meanwhile have a look at:
Maybe Russell is right: May be good reason to be uneasy about stocks prices
Brimelow, CBS Marketwatch
Editorial: After the Sell-Off
I laughed at all the bounce back hype yesterday. The DOW up 50 points after the previous day's 400 point drop is more like a plop than a bounce.
The trading day isn't over in New York.
Meanwhile have a look at:
Maybe Russell is right: May be good reason to be uneasy about stocks prices
Brimelow, CBS Marketwatch
Editorial: After the Sell-Off
Monday, January 22, 2007
Gambling Subpoenas on Wall St.
The Justice Department has issued subpoenas to at least four Wall Street investment banks as part of a widening investigation into the multibillion-dollar online gambling industry, according to people briefed on the investigation.
The subpoenas were issued to firms that had underwritten the initial public offerings of some of the most popular online gambling sites that operate abroad. The banks involved in the inquiry include HSBC, Credit Suisse, Deutsche Bank and Dresdner Kleinwort, these people said.
While online gaming sites like PartyGaming and 888 Holdings operate from Gibraltar and their initial public offerings were held on the London Stock Exchange, companies that do business with them and have large bases in United States have come under scrutiny by regulators in Washington.
By ANDREW ROSS SORKIN and STEPHANIE SAUL
Wednesday, December 13, 2006
Whither Israel?
by Gabriel Ash
To understand where this current crisis might lead Israel, a little historical context is needed. From the twenties on, Zionism was a project of colonial development. As economists Nitzan and Bichler brilliantly showed, the so-called Labor party was Capital’s best friend, providing cheap labor and a captive market to attract overseas investors. The establishment of the state in 1948 led to the strengthening of ties. Israel was ruled by a tightly knit junta of generals, industrialists and bankers who quickly transformed the country into a very profitable operation. The “seed” money obtained from selling indulgences to a penitent Germany (and later to guilt-ridden wealthy Jews) was invested in military buildup. Soon, Israel began exporting its principal product—regional instability—to the colonial powers, first to Britain and France, and then to its largest and most loyal customer, the US.
By the 1980s, the economy built purely on international transfers and militarism was showing its age. The 1973 war debacle destroyed the political monopoly of the Labor Party, leading to the rise of Likud and the first appearance of the Israel’s Jewish underclass, the Mizrahi, or Arab Jews, on the political stage. A decade later, the unpopular first Lebanon war broke the bond between the leadership and the middle classes. Then, the first Intifada came soon afterward, transforming the occupation of the West Bank and Gaza from a cheap labor gold mine to a barely affordable burden. Between these three wars Israel also experienced a debilitating period of stagflation (inflation coupled with low growth and high unemployement) that culminated with an almost total banking meltdown.
Capitalist interests
Inspired by US capitalism, the Israeli ruling class responded to the long crisis with a religious adoption of neo-liberalism. The state was privatized and social services and wages were slashed wherever possible. The shekel (Israeli currency) was unmoored. The junta sliced up the different public enterprises and floated them on the financial market, which were duly liberalized. Israel became an open neo-liberal haven, albeit dominated by a tiny number of leading families.
As the roaring 1990s came by, Israel fed Wall Street a long stream of technological start-ups built at taxpayers’ expenses. US capital and Israeli capital intermingled, becoming a seamless web of personal and financial connections straddling the globe. Take for example Haim Saban, former Israeli music producer and now West Coast tycoon. He is the owner, among other things, of Israeli telecom, the Japanese Power Rangers trademark, and a German satellite broadcaster. He is also a personal friend of all former Israeli prime ministers and the largest donor to the Democratic Party, as well as the paymaster of former US ambassador to Israel Martyn Indyk’s salary at the Saban Center for Middle East Policy in Washington. Saban epitomizes the new Israeli ruling class. The prostitute who used to live next door to Saban in Tel Aviv (according to his own “rags to riches” account) is equally symbolic—Israel is today the second most economically unequal society in the industrialized world. Less than two-dozen families own more than half of the value of Israel’s stock market.
But unlike in the US, where war is always far way, the relation between financialization and militarism in Israel is complicated. The two ideologies complement each other culturally, both promoting a similar macho coarseness, lack of empathy and instrumentalization of the human world that are hollowing out Israel’s society as surely as a worm makes its way through an apple. Both, of course feed each other through military contracts, war exports, and other forms of corporate welfare. But the neo-liberal insistence of measuring all in dollars poses a growing challenge to a military culture that depends on undeclared waste and relatively high wages.
The internationalization and diversification of capitalist interests created a powerful demand not as much for peace as for the absence of war. There was also demand for shrinking government services, lower taxes, and the conservative and rationalized management of state finances. The pressure to cut costs and to boost growth collides with the unquantifiable goals of completing the cleansing of Palestinians. The clash has been feeding into a growing institutional culture of corruption.
A contradiction also exists between the dependence of military Zionism on a semblance of Jewish social solidarity that neo-liberalism scorns. Israel’s public broadcasting service used to erase the color from foreign films in solidarity with those who did not yet own a color TV set. Class power existed, but it was artfully camouflaged as long as elites raked their dividends through the state. The overtly selfish consumer culture imported from the US, together with privatization, eroded the military’s ability to demand the time and loyalty of thousands of reservists—whether for the exceptional war or for the daily maintenance of the occupation. The scions of the cosmopolitan middle classes dream of a career in investment banking rather than in the military. The destruction of the social safety net threatens the nationalist cohesion which binds the Mizrahi poor to the state and reconciles them to their abject class position.
Regional destabilizer
Israel cannot become Palo Alto. Not only is the military Israel’s largest exporter and largest employer, but Israel’s role as regional destabilizer remains essential as ever to its relation with the US. The military, which sees itself as the keeper of the Zionist flame, is still the incubator for most leadership positions and a formidable institution whose power within Israeli society is unrivaled. The military consumes around 8-9% of Israel’s GDP, totaling close to $10 billion, including over $2 billion in US direct military aid. The ruling class thus cannot do without militarism, which is both the foundation of its rule and the umbilical cord that ties it to the US. But the military, and especially its use in full-scale war, is a growing financial drain that can no longer be hidden in a globalized economy, as well as a potential threat to Israel’s rich upper crust’s trans-continental financial interests.
The second Lebanon war follows the pattern of the second Intifada as being driven primarily by concerns over the military itself. The military began planning the second Intifada as soon as the Oslo agreements were signed. When the occasion presented itself—Sharon’s visit to Haram al Sharif—the army seized it, responding to unarmed Palestinian demonstrations with the shooting of over a million bullets, precipitating the transition of Palestinian resistance from street protests to suicide bombs. The generals’ dislike of Oslo was rooted in the correct understanding that Oslo represented an attempt to outsource the military. Rabin and Peres believed that maintaining the direct occupation was becoming too expensive, and sought to “cut the middleman” by paying Palestinians to repress themselves. But the middleman, in this case the Israeli army, fought back—and won.
With the winding down of the second Intifada, the Israeli elites accepted the demise of Oslo and the imperative of continuing the colonizing project through the Israeli military. Therefore, the end of the uprising led to a lowering of the tensions surrounding the role of the army in relation to Palestinians. The birth of the centrist Kadima, free of any ideological commitment separating “left” from right within the traditional terms of Zionist politics, represents this moment of elite unity. Kadima is the party of the star politicians and is mostly beholden to the two dozen leading capitalist families in Israel, who have all generously funded its electoral victory.
But the collapse of Sharon, the last of Israel’s first generation military heroes, and the rise of the civilian Olmert was also a sign of the times, and not totally auspicious for the military. The internal power struggle did not die with Oslo. After the Iraq war, with the fall of Saddam and the presence of the US marines in Iraq, Israel’s need for such an expensive military became less evident than ever. Whose armies was Israel preparing to fight in a traditional battlefield? Even the Bush administration has been pushing for slimming down Israel’s defense budget.
In the last elections, a new threat materialized from the “left.” Peretz, a Mizrahi with trade unionist credentials, took over the leadership of the labor party on a (quite weak) commitment to reverse some of the excesses of neo-liberal policies. The protest vote of the disaffected middle class was captured by a new, and quite bizarre, party—the pensioners’ party, led by a former Mossad agent who made a fortune in Cuba. Peretz was appointed Defense Minister thanks mainly to his lack of military background and to his so-called “social” agenda. The first “qualification” ensured he could not outshine Olmert. The second would defend neo-liberalism from the brewing popular discontent.
Shock and fizzle
As defense minister, Peretz would have to fight for the military’s bacon, and thus be forced to sacrifice his voters or risk alienating the people who could make him fail in his job—the generals. But his appointment left the army under two inexperienced and weak politicians. When Hezbollah supplied the pretext, the military submitted its readymade plans, which were more marketing plans than war plans—a demonstration of the army’s awesome powers and political usefulness—shock and dazzle. If the war in Iraq was supposed to be a cakewalk, the war in Lebanon was supposed to be a power-point presentation, reminding the Israeli public, Olmert and the capitalists behind him, and finally the US paymasters, what the army can do for them. Except that it turned out as shock and fizzle.
The war exposed the command of the Israeli military as incompetent, and the troops as untrained, undisciplined, badly supplied and not always willing to fight. The Israeli Air Force (IAF), on the other hand, proved its ability to cause massive civilian destruction. Since this is, despite constant denials, the normal mode of Western colonial warfare, the IAF’s display of lethality was in fact a partial success, undermined only by the unrealistic expectations that the military commander Halutz and Olmert created. However, there is nothing that the IAF can do that US and NATO jets cannot do, and probably better. Thus, the surprising failure of the ground forces should resonate a lot more with US strategists than the IAF’s performance.
The defeat was a particular blow to the neo-con/Pentagon faction, giving a boost to Rice, who even dared float a balloon criticizing the “daily humiliation” of the Israeli occupation. To be sure, the US is not going to end its support for Israel soon, but pressure is mounting in Washington for a public relations boost through exacting some unpleasant concession from Israel.
The army has therefore handed itself a defeat, severely weakening its prestige and therefore its bargaining power within the Israeli and US power game. On the other hand, precisely by weakening Israel and rekindling Arab dreams of military victory, the military can point to a new urgency for increasing, and certainly for maintaining, the military budget. The budget cuts that were scheduled for 2007-08 have been already rescinded, and negotiations are apace over budget increases the army is demanding for the long term. There is new interest in reviving various high tech anti-missile programs that were shelved in the last few years, probably for lack of funds rather for their inherent inability to deliver.
Apartheid system
True to form, the military leadership has engaged in a significant operation in Gaza, arguing that Hamas is arming itself with the intention of emulating Hezbollah. Meanwhile, the political echelon is paralyzed by the fallout of the Lebanon defeat, and looks content in waiting for Fatah to finally deliver the Palestinian civil war Israel has been dreaming of for the last twenty years. The “convergence plan,” Olmert’s proposal to formalize a unilateral apartheid system in the West Bank and Gaza, is clinically dead.
The most interesting news, however, comes from Steph Wertheimer, who unofficially suggested launching an expensive reconstruction project in Gaza’s refugee camps. While the half-baked political balloon floated by Israel’s richest oligarch is not important in itself, the intervention may suggest a revival of the internal conflict within Israeli elites over the role of the military. That is bad news for the army and may be one more incentive for precipitating the next war.
The Lebanon War also laid bare the government’s abdication of responsibility for civilian defense and the dismal conditions of poor Israeli border communities. There was no plan for even supplying water to northern residents caught in stinking and badly maintained underground shelters. The affluent residents escaped to Tel-Aviv and the care for the mostly Mizrahi population was left to charity and individual initiative. The exposure of the government’s callousness is feeding the anger against the neo-liberal policies of the last decades. But it is the nationalist right, not the left, who is best able to capitalize on this anger, recasting social solidarity as essential ingredient of national security.
Additionally, the war exacerbated tensions between the Jewish majority and the sizeable minority of 1948 Palestinians. The latter suffered a significant death toll from Hezbollah rockets, due to lack of shelters in Arab communities and the military penchant for placing military installations in their proximity. Many of the community leaders criticized the war from its inception (practically alone in Israel), blamed the casualties on Israel and sympathized with Lebanon and even with Hezbollah. That has incensed most Israeli Jews, who resent the refusal of many 1948 Palestinians to reconcile themselves to their second-class status.
Already, the mood of the Jewish electorate shifted decidedly to the extreme right, with Netanyahu’s Likud and Lieberman’s “Israel Beiteinu” the major winners. If the financial elites shift, as could very well happen, to a more dovish position that would also be bolstered by a more realist US, the center will not hold. But that is far from given. An alternative compromise that would soften the internal rivalry could involve, for example, a privatization of the non-combat functions of the army.
The internal polarization, both within the Israeli elite and between the elites and the larger society, may end the honeymoon of Zionist unity created by the second Intifada. Its fate, however, depends as much on the future of the larger circles of conflicts that have all been intensified by the Lebanon War: in the Occupied Territories; in Lebanon between nationalists and capitalists; in the Middle East between the Saudi-Egypt-Jordan Axis and the Syria-Iran-Hezbollah alliance; and globally, between the US and Iran, Russia and China. The second Lebanon War cut across and hardened these layered conflicts. While nobody can predict the exact future interaction between all these tensions, the likelihood that they will all pan out in Israel’s favor seems low.
- Israel is in crisis. The recent Lebanon War has heightened all its internal and external contradictions. Gabriel Ash looks at the economic and political foundations of this deeply militaristic and ideological state. The recent military defeat, brewing class divisions and political polarization from within, have made Israel more unstable than ever.
To understand where this current crisis might lead Israel, a little historical context is needed. From the twenties on, Zionism was a project of colonial development. As economists Nitzan and Bichler brilliantly showed, the so-called Labor party was Capital’s best friend, providing cheap labor and a captive market to attract overseas investors. The establishment of the state in 1948 led to the strengthening of ties. Israel was ruled by a tightly knit junta of generals, industrialists and bankers who quickly transformed the country into a very profitable operation. The “seed” money obtained from selling indulgences to a penitent Germany (and later to guilt-ridden wealthy Jews) was invested in military buildup. Soon, Israel began exporting its principal product—regional instability—to the colonial powers, first to Britain and France, and then to its largest and most loyal customer, the US.
By the 1980s, the economy built purely on international transfers and militarism was showing its age. The 1973 war debacle destroyed the political monopoly of the Labor Party, leading to the rise of Likud and the first appearance of the Israel’s Jewish underclass, the Mizrahi, or Arab Jews, on the political stage. A decade later, the unpopular first Lebanon war broke the bond between the leadership and the middle classes. Then, the first Intifada came soon afterward, transforming the occupation of the West Bank and Gaza from a cheap labor gold mine to a barely affordable burden. Between these three wars Israel also experienced a debilitating period of stagflation (inflation coupled with low growth and high unemployement) that culminated with an almost total banking meltdown.
Capitalist interests
Inspired by US capitalism, the Israeli ruling class responded to the long crisis with a religious adoption of neo-liberalism. The state was privatized and social services and wages were slashed wherever possible. The shekel (Israeli currency) was unmoored. The junta sliced up the different public enterprises and floated them on the financial market, which were duly liberalized. Israel became an open neo-liberal haven, albeit dominated by a tiny number of leading families.
As the roaring 1990s came by, Israel fed Wall Street a long stream of technological start-ups built at taxpayers’ expenses. US capital and Israeli capital intermingled, becoming a seamless web of personal and financial connections straddling the globe. Take for example Haim Saban, former Israeli music producer and now West Coast tycoon. He is the owner, among other things, of Israeli telecom, the Japanese Power Rangers trademark, and a German satellite broadcaster. He is also a personal friend of all former Israeli prime ministers and the largest donor to the Democratic Party, as well as the paymaster of former US ambassador to Israel Martyn Indyk’s salary at the Saban Center for Middle East Policy in Washington. Saban epitomizes the new Israeli ruling class. The prostitute who used to live next door to Saban in Tel Aviv (according to his own “rags to riches” account) is equally symbolic—Israel is today the second most economically unequal society in the industrialized world. Less than two-dozen families own more than half of the value of Israel’s stock market.
But unlike in the US, where war is always far way, the relation between financialization and militarism in Israel is complicated. The two ideologies complement each other culturally, both promoting a similar macho coarseness, lack of empathy and instrumentalization of the human world that are hollowing out Israel’s society as surely as a worm makes its way through an apple. Both, of course feed each other through military contracts, war exports, and other forms of corporate welfare. But the neo-liberal insistence of measuring all in dollars poses a growing challenge to a military culture that depends on undeclared waste and relatively high wages.
The internationalization and diversification of capitalist interests created a powerful demand not as much for peace as for the absence of war. There was also demand for shrinking government services, lower taxes, and the conservative and rationalized management of state finances. The pressure to cut costs and to boost growth collides with the unquantifiable goals of completing the cleansing of Palestinians. The clash has been feeding into a growing institutional culture of corruption.
A contradiction also exists between the dependence of military Zionism on a semblance of Jewish social solidarity that neo-liberalism scorns. Israel’s public broadcasting service used to erase the color from foreign films in solidarity with those who did not yet own a color TV set. Class power existed, but it was artfully camouflaged as long as elites raked their dividends through the state. The overtly selfish consumer culture imported from the US, together with privatization, eroded the military’s ability to demand the time and loyalty of thousands of reservists—whether for the exceptional war or for the daily maintenance of the occupation. The scions of the cosmopolitan middle classes dream of a career in investment banking rather than in the military. The destruction of the social safety net threatens the nationalist cohesion which binds the Mizrahi poor to the state and reconciles them to their abject class position.
Regional destabilizer
Israel cannot become Palo Alto. Not only is the military Israel’s largest exporter and largest employer, but Israel’s role as regional destabilizer remains essential as ever to its relation with the US. The military, which sees itself as the keeper of the Zionist flame, is still the incubator for most leadership positions and a formidable institution whose power within Israeli society is unrivaled. The military consumes around 8-9% of Israel’s GDP, totaling close to $10 billion, including over $2 billion in US direct military aid. The ruling class thus cannot do without militarism, which is both the foundation of its rule and the umbilical cord that ties it to the US. But the military, and especially its use in full-scale war, is a growing financial drain that can no longer be hidden in a globalized economy, as well as a potential threat to Israel’s rich upper crust’s trans-continental financial interests.
The second Lebanon war follows the pattern of the second Intifada as being driven primarily by concerns over the military itself. The military began planning the second Intifada as soon as the Oslo agreements were signed. When the occasion presented itself—Sharon’s visit to Haram al Sharif—the army seized it, responding to unarmed Palestinian demonstrations with the shooting of over a million bullets, precipitating the transition of Palestinian resistance from street protests to suicide bombs. The generals’ dislike of Oslo was rooted in the correct understanding that Oslo represented an attempt to outsource the military. Rabin and Peres believed that maintaining the direct occupation was becoming too expensive, and sought to “cut the middleman” by paying Palestinians to repress themselves. But the middleman, in this case the Israeli army, fought back—and won.
With the winding down of the second Intifada, the Israeli elites accepted the demise of Oslo and the imperative of continuing the colonizing project through the Israeli military. Therefore, the end of the uprising led to a lowering of the tensions surrounding the role of the army in relation to Palestinians. The birth of the centrist Kadima, free of any ideological commitment separating “left” from right within the traditional terms of Zionist politics, represents this moment of elite unity. Kadima is the party of the star politicians and is mostly beholden to the two dozen leading capitalist families in Israel, who have all generously funded its electoral victory.
But the collapse of Sharon, the last of Israel’s first generation military heroes, and the rise of the civilian Olmert was also a sign of the times, and not totally auspicious for the military. The internal power struggle did not die with Oslo. After the Iraq war, with the fall of Saddam and the presence of the US marines in Iraq, Israel’s need for such an expensive military became less evident than ever. Whose armies was Israel preparing to fight in a traditional battlefield? Even the Bush administration has been pushing for slimming down Israel’s defense budget.
In the last elections, a new threat materialized from the “left.” Peretz, a Mizrahi with trade unionist credentials, took over the leadership of the labor party on a (quite weak) commitment to reverse some of the excesses of neo-liberal policies. The protest vote of the disaffected middle class was captured by a new, and quite bizarre, party—the pensioners’ party, led by a former Mossad agent who made a fortune in Cuba. Peretz was appointed Defense Minister thanks mainly to his lack of military background and to his so-called “social” agenda. The first “qualification” ensured he could not outshine Olmert. The second would defend neo-liberalism from the brewing popular discontent.
Shock and fizzle
As defense minister, Peretz would have to fight for the military’s bacon, and thus be forced to sacrifice his voters or risk alienating the people who could make him fail in his job—the generals. But his appointment left the army under two inexperienced and weak politicians. When Hezbollah supplied the pretext, the military submitted its readymade plans, which were more marketing plans than war plans—a demonstration of the army’s awesome powers and political usefulness—shock and dazzle. If the war in Iraq was supposed to be a cakewalk, the war in Lebanon was supposed to be a power-point presentation, reminding the Israeli public, Olmert and the capitalists behind him, and finally the US paymasters, what the army can do for them. Except that it turned out as shock and fizzle.
The war exposed the command of the Israeli military as incompetent, and the troops as untrained, undisciplined, badly supplied and not always willing to fight. The Israeli Air Force (IAF), on the other hand, proved its ability to cause massive civilian destruction. Since this is, despite constant denials, the normal mode of Western colonial warfare, the IAF’s display of lethality was in fact a partial success, undermined only by the unrealistic expectations that the military commander Halutz and Olmert created. However, there is nothing that the IAF can do that US and NATO jets cannot do, and probably better. Thus, the surprising failure of the ground forces should resonate a lot more with US strategists than the IAF’s performance.
The defeat was a particular blow to the neo-con/Pentagon faction, giving a boost to Rice, who even dared float a balloon criticizing the “daily humiliation” of the Israeli occupation. To be sure, the US is not going to end its support for Israel soon, but pressure is mounting in Washington for a public relations boost through exacting some unpleasant concession from Israel.
The army has therefore handed itself a defeat, severely weakening its prestige and therefore its bargaining power within the Israeli and US power game. On the other hand, precisely by weakening Israel and rekindling Arab dreams of military victory, the military can point to a new urgency for increasing, and certainly for maintaining, the military budget. The budget cuts that were scheduled for 2007-08 have been already rescinded, and negotiations are apace over budget increases the army is demanding for the long term. There is new interest in reviving various high tech anti-missile programs that were shelved in the last few years, probably for lack of funds rather for their inherent inability to deliver.
Apartheid system
True to form, the military leadership has engaged in a significant operation in Gaza, arguing that Hamas is arming itself with the intention of emulating Hezbollah. Meanwhile, the political echelon is paralyzed by the fallout of the Lebanon defeat, and looks content in waiting for Fatah to finally deliver the Palestinian civil war Israel has been dreaming of for the last twenty years. The “convergence plan,” Olmert’s proposal to formalize a unilateral apartheid system in the West Bank and Gaza, is clinically dead.
The most interesting news, however, comes from Steph Wertheimer, who unofficially suggested launching an expensive reconstruction project in Gaza’s refugee camps. While the half-baked political balloon floated by Israel’s richest oligarch is not important in itself, the intervention may suggest a revival of the internal conflict within Israeli elites over the role of the military. That is bad news for the army and may be one more incentive for precipitating the next war.
The Lebanon War also laid bare the government’s abdication of responsibility for civilian defense and the dismal conditions of poor Israeli border communities. There was no plan for even supplying water to northern residents caught in stinking and badly maintained underground shelters. The affluent residents escaped to Tel-Aviv and the care for the mostly Mizrahi population was left to charity and individual initiative. The exposure of the government’s callousness is feeding the anger against the neo-liberal policies of the last decades. But it is the nationalist right, not the left, who is best able to capitalize on this anger, recasting social solidarity as essential ingredient of national security.
Additionally, the war exacerbated tensions between the Jewish majority and the sizeable minority of 1948 Palestinians. The latter suffered a significant death toll from Hezbollah rockets, due to lack of shelters in Arab communities and the military penchant for placing military installations in their proximity. Many of the community leaders criticized the war from its inception (practically alone in Israel), blamed the casualties on Israel and sympathized with Lebanon and even with Hezbollah. That has incensed most Israeli Jews, who resent the refusal of many 1948 Palestinians to reconcile themselves to their second-class status.
Already, the mood of the Jewish electorate shifted decidedly to the extreme right, with Netanyahu’s Likud and Lieberman’s “Israel Beiteinu” the major winners. If the financial elites shift, as could very well happen, to a more dovish position that would also be bolstered by a more realist US, the center will not hold. But that is far from given. An alternative compromise that would soften the internal rivalry could involve, for example, a privatization of the non-combat functions of the army.
The internal polarization, both within the Israeli elite and between the elites and the larger society, may end the honeymoon of Zionist unity created by the second Intifada. Its fate, however, depends as much on the future of the larger circles of conflicts that have all been intensified by the Lebanon War: in the Occupied Territories; in Lebanon between nationalists and capitalists; in the Middle East between the Saudi-Egypt-Jordan Axis and the Syria-Iran-Hezbollah alliance; and globally, between the US and Iran, Russia and China. The second Lebanon War cut across and hardened these layered conflicts. While nobody can predict the exact future interaction between all these tensions, the likelihood that they will all pan out in Israel’s favor seems low.
ABOUT THE AUTHOR
Gabriel Ash is an activist and writer who writes because the pen is sometimes mightier than the sword and sometimes not. He welcomes comments at: g.a.evildoer (at) gmail.com
from Left Turn Magazine #23
from Left Turn Magazine #23
Tuesday, November 28, 2006
Wall Street has worst day in 4 months
By TIM PARADIS, AP Business Writer
Mon Nov 27, 6:33 PM ET
Wall Street had its worst day in more than four months Monday as the dollar weakened and concerns about the strength of the retail industry arose following a rare sales decline at Wal-Mart Stores Inc. The Dow Jones industrials fell 158 points.
Investors were uneasy after the dollar fell for the fifth straight day and after Wal-Mart, the world's largest retailer, reported a 0.1 percent drop in same-store sales, those from stores open at least a year. Same-store sales are the industry standard for assessing a retailer's strength, and while overall retail sales appeared strong last weekend, Wal-Mart's first deficit in a decade raised concerns about the strength of consumer spending during the holiday season.
"There is now significant concern that the holiday retail season is going to underperform," said Gregory Miller, chief economist at SunTrust Banks. "Traffic doesn't necessarily translate into profits," he said, referring to reports of crowded stores over the weekend.
As the dollar's slide continued, it hit a 20-month low against the euro though it did for a time move higher against the Japanese yen. The dollar's fall raised concerns that foreign investors were sensing weakness in the U.S. economy and would pull some of their investments from U.S. markets.
Beyond the weak dollar and news from Wal-Mart, some retrenchment was to be expected as investors seek to preserve their profits after stocks have soared the past two months.
The Dow fell 158.46, or 1.29 percent, to 12,121.71, as 27 of the index's 30 stocks fell. It was the Dow's biggest slide since a string of triple-digit declines in mid-July that followed disappointing profit reports and a spike in oil prices amid tensions with Iran and North Korea.
Broader stock indicators also dropped sharply Monday. The Standard & Poor's 500 index fell 19.05, or 1.36 percent, to 1,381.90, and the Nasdaq composite index slid 54.34, or 2.21 percent, to 2,405.92.
Bonds rose, with the yield on the benchmark 10-year Treasury note falling to 4.53 percent, from 4.55 percent late Friday. Gold prices rose.
Light, sweet crude settled up $1.08 at $60.32 a barrel on the New York Mercantile Exchange. Crude prices gained ground after an attack on an oil facility in Iraq and comments by Saudi Arabia's oil minister that OPEC could consider further production cuts next month.
Wall Street appeared little moved by a report from the Federal Reserve Bank of Dallas that showed an index of manufacturing activity in Texas was essentially unchanged in November.
Investors examining retail reports tried to determine whether an increase in traffic at stores would translate to higher profits for retailers. Consumer spending accounts for two-third of all economic activity, and Wall Street is concerned that weak spending would prevent the slowing economy from achieving a soft landing.
ShopperTrak RTC, which compiles sales data, estimates sales rose 6 percent on Black Friday from a year earlier.
Regardless of the pace of retail sales, however, stocks have posted strong gains in October and November, making Monday's retreat unsurprising.
"A little bit of profit-taking is healthy at this point, said Jim Russell, director of core equity strategy for Fifth-Third Asset Management. "The market went up a little bit too far, too fast. Folks have made big money just in the past two or three months and are perhaps looking to lock in gains before the end of the year."
He contends that while the weak dollar and the Wal-Mart news caught Wall Street by surprise, investors shouldn't have fundamental concerns about the health of the market.
"Certainly a little bit of cold water has been thrown on the market with the results from Wal-Mart over the weekend," he said.
Miller remains concerned that the overall economy might be weaker than some investors had believed when they sent stocks higher in recent months. The Dow has closed at record levels 18 times since the beginning of October.
He also questioned whether retailers have run the risk of hurting profit margins by offering steep discounts to lure shoppers during an increasingly competitive Black Friday.
"The American consumer now expects that the holiday season isn't just a time to spend a lot of money but a time to get some bargains."
Wal-Mart fell $1.29, or 2.7 percent, to $46.61 following its report, while some retailers moved higher following reports of strong traffic in stores over the weekend. Lowe's Cos. rose 40 cents to $1.33.
J. Crew Group Inc. fell $3.07, or 7.1 percent, to $40.21 after a CIBC analyst lowered her rating on the clothing retailer based on valuation; the stock rose 27 percent last week following a strong profit report.
In other corporate news, Ford Motor Co. fell 36 cents, or 4.2 percent, to $8.16 after announcing it plans to obtain about $18 billion in financing to shore up its balance sheet and fund its restructuring.
Swift Transportation Co. rose 75 cents, or 2.7 percent, to $28.36 after the trucking company rejected an offer from its largest shareholder to acquire the company for $29 per share, or about $2.2 billion.
Several hotel companies lost ground after an AG Edwards & Sons Inc. analyst lowered his rating on the stocks to "Hold" from "Buy." Hilton Hotels Corp. fell $1.70, or 5 percent, to $32.10, while Marriott International Inc. fell $1.54, or 3.3 percent, to $44.91. Starwood Hotels & Resorts Worldwide Inc. was down $1.92, or 2.9 percent, to $63.46.
The Russell 2000 index of smaller companies was down 20.18, or 2.55 percent, to 772.10.
Declining issues outnumbered advancers by about 4 to 1 on the New York Stock Exchange, where consolidated volume came to 2.72 billion shares.
Overseas, Japan's Nikkei stock average closed up 0.96 percent. Britain's FTSE 100 closed down 1.18 percent, Germany's DAX index fell 1.77 percent, and France's CAC-40 was down 1.50 percent.
___
On the Net:
New York Stock Exchange: http://www.nyse.com
Nasdaq Stock Market: http://www.nasdaq.com
http://news.yahoo.com/s/ap/20061127/ap_on_bi_st_ma_re/wall_street
Mon Nov 27, 6:33 PM ET
Wall Street had its worst day in more than four months Monday as the dollar weakened and concerns about the strength of the retail industry arose following a rare sales decline at Wal-Mart Stores Inc. The Dow Jones industrials fell 158 points.
Investors were uneasy after the dollar fell for the fifth straight day and after Wal-Mart, the world's largest retailer, reported a 0.1 percent drop in same-store sales, those from stores open at least a year. Same-store sales are the industry standard for assessing a retailer's strength, and while overall retail sales appeared strong last weekend, Wal-Mart's first deficit in a decade raised concerns about the strength of consumer spending during the holiday season.
"There is now significant concern that the holiday retail season is going to underperform," said Gregory Miller, chief economist at SunTrust Banks. "Traffic doesn't necessarily translate into profits," he said, referring to reports of crowded stores over the weekend.
As the dollar's slide continued, it hit a 20-month low against the euro though it did for a time move higher against the Japanese yen. The dollar's fall raised concerns that foreign investors were sensing weakness in the U.S. economy and would pull some of their investments from U.S. markets.
Beyond the weak dollar and news from Wal-Mart, some retrenchment was to be expected as investors seek to preserve their profits after stocks have soared the past two months.
The Dow fell 158.46, or 1.29 percent, to 12,121.71, as 27 of the index's 30 stocks fell. It was the Dow's biggest slide since a string of triple-digit declines in mid-July that followed disappointing profit reports and a spike in oil prices amid tensions with Iran and North Korea.
Broader stock indicators also dropped sharply Monday. The Standard & Poor's 500 index fell 19.05, or 1.36 percent, to 1,381.90, and the Nasdaq composite index slid 54.34, or 2.21 percent, to 2,405.92.
Bonds rose, with the yield on the benchmark 10-year Treasury note falling to 4.53 percent, from 4.55 percent late Friday. Gold prices rose.
Light, sweet crude settled up $1.08 at $60.32 a barrel on the New York Mercantile Exchange. Crude prices gained ground after an attack on an oil facility in Iraq and comments by Saudi Arabia's oil minister that OPEC could consider further production cuts next month.
Wall Street appeared little moved by a report from the Federal Reserve Bank of Dallas that showed an index of manufacturing activity in Texas was essentially unchanged in November.
Investors examining retail reports tried to determine whether an increase in traffic at stores would translate to higher profits for retailers. Consumer spending accounts for two-third of all economic activity, and Wall Street is concerned that weak spending would prevent the slowing economy from achieving a soft landing.
ShopperTrak RTC, which compiles sales data, estimates sales rose 6 percent on Black Friday from a year earlier.
Regardless of the pace of retail sales, however, stocks have posted strong gains in October and November, making Monday's retreat unsurprising.
"A little bit of profit-taking is healthy at this point, said Jim Russell, director of core equity strategy for Fifth-Third Asset Management. "The market went up a little bit too far, too fast. Folks have made big money just in the past two or three months and are perhaps looking to lock in gains before the end of the year."
He contends that while the weak dollar and the Wal-Mart news caught Wall Street by surprise, investors shouldn't have fundamental concerns about the health of the market.
"Certainly a little bit of cold water has been thrown on the market with the results from Wal-Mart over the weekend," he said.
Miller remains concerned that the overall economy might be weaker than some investors had believed when they sent stocks higher in recent months. The Dow has closed at record levels 18 times since the beginning of October.
He also questioned whether retailers have run the risk of hurting profit margins by offering steep discounts to lure shoppers during an increasingly competitive Black Friday.
"The American consumer now expects that the holiday season isn't just a time to spend a lot of money but a time to get some bargains."
Wal-Mart fell $1.29, or 2.7 percent, to $46.61 following its report, while some retailers moved higher following reports of strong traffic in stores over the weekend. Lowe's Cos. rose 40 cents to $1.33.
J. Crew Group Inc. fell $3.07, or 7.1 percent, to $40.21 after a CIBC analyst lowered her rating on the clothing retailer based on valuation; the stock rose 27 percent last week following a strong profit report.
In other corporate news, Ford Motor Co. fell 36 cents, or 4.2 percent, to $8.16 after announcing it plans to obtain about $18 billion in financing to shore up its balance sheet and fund its restructuring.
Swift Transportation Co. rose 75 cents, or 2.7 percent, to $28.36 after the trucking company rejected an offer from its largest shareholder to acquire the company for $29 per share, or about $2.2 billion.
Several hotel companies lost ground after an AG Edwards & Sons Inc. analyst lowered his rating on the stocks to "Hold" from "Buy." Hilton Hotels Corp. fell $1.70, or 5 percent, to $32.10, while Marriott International Inc. fell $1.54, or 3.3 percent, to $44.91. Starwood Hotels & Resorts Worldwide Inc. was down $1.92, or 2.9 percent, to $63.46.
The Russell 2000 index of smaller companies was down 20.18, or 2.55 percent, to 772.10.
Declining issues outnumbered advancers by about 4 to 1 on the New York Stock Exchange, where consolidated volume came to 2.72 billion shares.
Overseas, Japan's Nikkei stock average closed up 0.96 percent. Britain's FTSE 100 closed down 1.18 percent, Germany's DAX index fell 1.77 percent, and France's CAC-40 was down 1.50 percent.
___
On the Net:
New York Stock Exchange: http://www.nyse.com
Nasdaq Stock Market: http://www.nasdaq.com
http://news.yahoo.com/s/ap/20061127/ap_on_bi_st_ma_re/wall_street
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