Friday, August 29, 2008

What We Can Learn About Russia -Sam Greene

In the 20 or so days since Russia went to war with Georgia, we have heard much about how the world has changed. We are told the Kremlin is newly strong and assertive and a new strategic confrontation--if not a new Cold War--is emerging between Moscow and Washington.

But the novelty of these and other observations is questionable. Russia's military might, backed up by a mammoth if decrepit army and nuclear arsenal, has never seriously been in doubt. And its economic clout has been unmistakable for several years. Meanwhile, the threat of confrontation has been high since long before Vladimir Putin delivered his tirade against American hegemony in Munich in February 2007. Remember Russia's support for socialist party leader Slobodan Milosevic during the 1999 Kosovo campaign, before anyone in the West had even heard of Putin?

There are, however, at least three lessons we can take from the current crisis in Georgia, in which Russia's troops, tanks and aviation--alleging genocide that appears to have been about as real as Iraqi weapons of mass destruction--pounded its troublesome neighbor to the south, occupied strategic cities and pulled out very, very slowly, leaving the Georgian military in tatters.

For one, we have learned how little has changed in Russia with the arrival of the country's new president, Dmitry Medvedev. Former president Vladimir Putin remains in charge, now as prime minister. But the finer touch that many in the West had expected from Medvedev has not come to light. As much abroad as at home, the Kremlin continues to favor a ham fist in an iron glove, backed up by implausible propaganda and no sign of domestic or international accountability.

Second, we learned the weakness of Russia's non-military foreign policy tools. The power of Russia's big stick is evident, but Moscow has forgotten the art of speaking softly. In this, of course, they resemble their Western--particularly their American--counterparts, who have preferred military force to robust diplomacy in recent years. But while new leadership in Washington may rely on decades of good relations with allies to rebuild burnt bridges, Moscow's legacy is far less favorable.

For those worrying about the danger posed by a belligerent Kremlin, however, Moscow's relative weakness should not be seen as good news. Russia is eyeing a number of perceived threats to its national interests, including further NATO and E.U. expansion, the installation of American anti-missile systems in central Europe and intense competition with China and the U.S. for influence in central Asia. Moscow's inability to achieve its goals through the force of persuasion may increase the temptation to use the force of arms.

Finally, we have learned the breadth and depth of the ideological chasm separating Russia from the West. It is not so much a values gap, as Western governments are more than capable of cynical and hypocritical behavior. But Moscow's lack of concern for how its actions are perceived reveals more than overconfidence. The Kremlin has a fundamentally different understanding of how the world works, one that's grounded in an extreme realpolitik that views international relations as a zero-sum game. In this view, trust is a worthless commodity, compromise can bring no added value and a premium is placed on tactical victories.

The new chill is thus distinct from the old Cold War, for Moscow no longer seeks to impose its system of government on the world. Instead, it believes that what is good for Europe and America is inherently and inevitably bad for Russia; it feels compelled to resist and obstruct at every opportunity.

As tempting as it might be to show Moscow the West's strength and solidarity, jumping headlong into confrontation would be a bad idea. While the West must defend its values and interests, it will be up to American and European leaders to show we can gain more from partnership than from a renewed standoff. As the world struggles to deal with climate change, terrorism, poverty and migration, a new arms race and competition for spheres of influence would be highly counterproductive.

What the West perceives as Moscow's hubris is in fact a deep-seated belief that Western governments see the world the same way and act accordingly. Russia's humiliation in the '90s is taken as proof of this assumption; Bush's misadventures in Iraq provide further evidence. Only principled and level-headed intolerance of such behavior by Western countries, especially from within the governments' own ranks, will convince Russia otherwise.

Sam Greene is a political analyst at the Moscow Center of the Carnegie Endowment for International Peace

Worldwide Financial News

U.S. Stocks Drop as Consumer Spending Slumps, Dell Earnings Miss Estimates U.S. stocks fell, paring the biggest monthly gain since April, as consumer spending slumped and lower- than-estimated earnings from Dell Inc. dragged down technology companies.

Consumer Spending in U.S. Slowed in July as Prices Rose Most in 17 Years U.S. consumer spending grew at a slower pace in July as the impact of the tax rebates faded and a pickup in inflation eroded Americans' buying power.

GM Recalls 944,000 Cars, Trucks for Electrical Flaw in Windshield Wipers General Motors Corp., the largest U.S. automaker, recalled 944,000 sedans, sport-utility vehicles and pickup trucks worldwide because of a potential short circuit in a system that heats windshield-wiper fluid.

Commerzbank Is Near Agreement With Allianz to Buy Dresdner for $13 Billion Commerzbank AG, Germany's second- biggest bank, is close to an agreement to buy Dresdner Bank from Allianz SE for about 9 billion euros ($13.3 billion), two people with knowledge of the matter said.

Merrill's Mallach Quits After Being Demoted as Head of Fixed-Income Sales Merrill Lynch & Co.'s Doug Mallach, one of two executives heading the securities firm's U.S. bond division when the subprime mortgage crisis struck last year, is stepping down three months after being shifted to a lesser role, people familiar with the matter said.

Agency Mortgage-Securities Yield Spreads Narrow to Lowest Level in a Month Yields on agency mortgage securities fell to the lowest in a month relative to U.S. Treasuries after buyers took advantage of some of the widest spreads since 1986.

Alitalia Seeks Bankruptcy Protection, Allowing Start of Government Bailout Alitalia SpA said it was insolvent and asked for protection from creditors, a move that will kick start a government-backed plan to sell the state-controlled carrier.

General News

McCain Selects 44-Year-Old Alaska Governor Sarah Palin as His Running Mate Republican John McCain picked 44- year-old Alaska Governor Sarah Palin as his running mate, a surprise choice designed to attract women voters and blunt concerns about his age.

Obama Pledges to Restore `America's Promise,' Says McCain `Doesn't Get It' Barack Obama accepted the Democratic nomination for president, mixing a soaring pledge to preserve the ``American promise'' with a sharp attack on John McCain's judgment on the war, the economy and support of George W. Bush.

Tropical Storm Gustav Aims at Cuba, Gulf of Mexico After Drenching Jamaica Tropical Storm Gustav moved across western Jamaica with torrential rain today, picking up speed as it headed toward Cuba and the Gulf of Mexico cities that were ravaged by hurricanes Katrina and Rita in 2005.

Where Did The Dollars Go?

The glitter is gone from Fidelity Investments. That's a good thing.

The old Fidelity was one of golden boy stock pickers--Edward Johnson III (whose family controls the company), at the start of his career; later, more famously, Peter Lynch of the Magellan Fund. The new Fidelity is all about slick 401(k) administration and fast back-office computers. No one gets excited about Fidelity's fund performance anymore. Michael Maiello reports in "Ferrari or Buick?".

The truth is that Magellan, Fidelity's best-known offering and for a while the world's largest mutual fund, didn't make very many people prosperous. Lynch took it over three decades ago. Nimbly working a tiny portfolio, he produced spectacular results, which attracted billions of dollars of new money. But after Magellan got big its results sagged. Lynch left in 1990.

The usual way to measure fund performance is a woulda-coulda game: what would have happened to a sum invested years ago and left untouched. By that score Magellan looks outstanding. Over the 30 years ended July 31 it has averaged a 16.3% return, four points ahead of the market.

This performance, though, is nothing like what was experienced by the average Magellan customer. A lot more of these guys were around to experience the mediocre results of late than the spectacular results of the Lynch years. Magellan's dollar-weighted return, which weights each period's gain or loss by the dollars at stake, has averaged only 10.3% a year since 1978.

Don't blame Fidelity. Blame the customers for crowding in at the top. Or blame business journalists for making stars of stock pickers. Maybe we failed to confess, often enough, that past results are only a weak indicator of future ones.

Where does that leave Fidelity and its 24 million customers? Seeking efficiency, not performance. Fidelity's tax-exempt sweep fund for brokerage accounts pays a quarter of a point better than Schwab's. For busy traders, its $8 commission beats that of other discounters. In running low-cost index funds Fidelity can hold its own against penny-pinching Vanguard.

If you want a prosperous retirement, watch your costs. Care a lot about the dollars that get frittered away in trading fees, taxes and fund expense ratios. Don't chase the fool's gold of hot stock pickers, even ones that make the cover of a magazine

Cybercrime Gets Its Game On


NASA's revelation this week that a computer virus had infected the International Space Station brought to mind images of cybercriminals sending astronauts plummeting toward a major U.S. city. Instead, the rogue software on the station's computer turned out to be doing something stranger: looking for passwords to the multiplayer online game "World of Warcraft."

Bizarre as that phenomenon may seem in outer space, it's increasingly common here on earth. A report released Thursday by researchers at McAfee's (nyse: MFE - news - people ) Avert antivirus labs found that nearly half of all password-stealing Trojan software detected in the last year target multiplayer online games like "World of Warcraft," "Everquest" and "Lineage."

In the first half of 2008, McAfee's researchers counted about 24,600 versions of one type of malicious code aimed at stealing passwords from a variety of so-called "massive multiplayer" online games, compared with 26,000 aimed at stealing banking passwords. That's compared to 2007, when only about 11,000 species of the game-password stealing Trojans were found, compared with 21,000 bank-password stealing varieties.

The goal of such game-targeted malware, says McAfee researcher Igor Muttik, is to gain possession of virtual in-game property and currency and resell it on auction sites like Hong Kong-based IGE.com. Those virtual commodities increasingly have real value: Many individual gamers have built up accounts of in-game funds worth more than $10,000, says Muttik. In September 2007, a hotel in the virtual world "Entropia" sold for $100,000. Analysts at Pearl Research estimate the total in-game supply of cash and property in Asia alone is now worth around $4 billion.

"The gaming industry has been growing much faster than banking," says Muttik. "It's very visible that online games are the bad guys' focus."

In fact, cybercriminals have targeted gamers for years. But the growth of those in-game economies, combined with new protections on bank accounts like fraud detection and authentication systems, means games have become the path of least resistance, says Gary McGraw, a security consultant with Dulles, Va.-based Cigital, and author of Exploiting Online Games.

"It's not easy to get into an online bank. But games often aren't as well protected," says McGraw. "As in the real world, a few people try to rob banks, but knocking over a 7-11 takes a lot less gunpowder and less planning."

That doesn't mean non-gamers are safe, warns Muttik. Banking-targeted password-stealing programs still outnumber gaming-targeted Trojans, and many of the programs record all keystrokes to swipe any password the user types in.

"It's not that they've stopped targeting banking," says Muttik. "It's that they're casting a broader net than ever."

So broad, it seems, that not even outer space is safe

Obama Hails `America's Promise,' Says McCain `Doesn't Get It'

By Kristin Jensen and Julianna Goldman

Aug. 29 (Bloomberg) -- Barack Obama accepted the Democratic nomination for president, mixing a soaring pledge to preserve the ``American promise'' with a sharp attack on John McCain's judgment on the war, the economy and support of George W. Bush.

In a moment full of history, the first black nominee of a major U.S. party told the crowd of more than 75,000 that he can fix the ``broken politics'' of Washington and end the ``failed policies'' of Bush. Against the backdrop of the Rocky Mountains in Denver's Invesco Field, he forcefully answered McCain's charges that he's unprepared to handle national security.

``If John McCain wants to have a debate about who has the temperament and judgment to serve as the next commander-in- chief, that's a debate I am ready to have,'' Obama said, highlighting his own early opposition to the war in Iraq. ``John McCain stands alone in his stubborn refusal to end a misguided war.''

Obama, 47, used much of the speech to talk about what he characterized as his unlikely journey to the nomination. Speaking on the 45th anniversary of Martin Luther King Jr.'s ``I Have a Dream'' speech in Washington, Obama last night referenced that historic legacy by echoing King's words.

``America, we cannot turn back,'' Obama said. ``We cannot walk alone. At this moment, in this election, we must pledge once more to march into the future.''

2004 Speech

Democrats had high expectations for the speech; it was Obama's keynote address to the Democratic National Convention in 2004 that propelled him to prominence. In that speech, Obama brought the crowd to its feet declaring, ``There's not a black America and white America and Latino America and Asian America; There's the United States of America.''

Last night, the Illinois senator combined lofty rhetoric with specific pledges, promising to cut taxes for working families and small businesses and end U.S. dependence on Middle Eastern oil in 10 years. He also took on his opponent with a passion that has sometimes been missing from stump speeches designed to hit largely positive notes.

``John McCain doesn't get it,'' Obama said. McCain subscribes to an ``old, discredited Republican philosophy'' that rewards the rich and leaves others worse off, he said. ``It's time for them to own their failure,'' Obama said. ``It's time for us to change America.''

90 Percent

Obama said McCain, an Arizona senator, voted for the president's positions 90 percent of the time.

``What does it say about your judgment when you think George Bush was right more than 90 percent of the time?'' Obama said. ``I don't know about you, but I'm not ready to take a 10 percent chance on change.''

McCain, who turns 72 today, is set to accept his party's nomination at the Republican National Convention next week in St. Paul, Minnesota. His campaign took some of the attention away from the Democratic convention when officials confirmed that McCain will announce his running mate sometime today.

McCain himself offered a temporary suspension to the campaign hostilities in a new television advertisement released just before Obama spoke.

``Too often the achievements of our opponents go unnoticed,'' McCain said in the ad. ``So I wanted to stop and say, congratulations. How perfect that your nomination would come on this historic day. Tomorrow, we'll be back at it. But tonight, senator, job well done.''

`Not Ready'

As Obama was concluding his speech, however, McCain campaign spokesman Tucker Bounds issued a statement. ``Tonight, Americans witnessed a misleading speech that was so fundamentally at odds with the meager record of Barack Obama,'' Bounds said. ``The fact remains: Barack Obama is still not ready to be president.''

Obama's speech addressed critics by offering specifics, a window into his personal life and tough challenges to McCain, said Rogan Kersh, a public service professor at New York University. Kersh said he counted 28 policy prescriptions.

``It's not yet clear whether he passes the `presidential' sniff test for undecided voters, but he took a long stride in that direction,'' Kersh said.

Obama formally became his party's standard bearer on Aug. 27. His former rival, Hillary Clinton, moved to nominate him by acclamation after her name was placed in nomination along with his for the party roll call.

Obama paid homage to Clinton early in his speech, saying she served as ``an inspiration to my daughters and yours.''

Stadium

Supporters began streaming into the stadium seven hours before Obama began his speech. His campaign turned it into a high-tech organizing seminar, asking supporters to text-message the Democratic National Committee. It was part concert, with Sheryl Crow and Stevie Wonder among others performing, and it was part Fourth of July celebration, with fireworks exploding over the stadium after Obama spoke.

During a brief appearance the previous day at the Pepsi Center arena, where the bulk of the convention took place, Obama said he decided to move the event to Invesco Field to include more people because ``change starts from the bottom up.''

The risk was that McCain's campaign might use images of the huge venue to press its description of Obama as more a ``celebrity'' than a leader.

`Enough!'

Obama addressed that line of attack by recounting the struggles faced by his grandmother, who helped raise him, and the laid-off workers he assisted on Chicago's South Side.

``I don't know what kind of lives John McCain thinks that celebrities lead, but this has been mine,'' he said.

Throughout the speech, Obama linked McCain to Bush and Republican policies that he said were responsible for the declining fortunes of American workers.

``Tonight, I say to the people of America, to Democrats and Republicans and independents all across this great land, enough!'' Obama thundered. ``This moment -- this election -- is our chance to keep, in the 21st century, the American promise alive. We are here because we love this country too much to let the next four years look just like the last eight.''

Obama tied that promise to his own family, saying his parents, a Kenyan man and a white woman from Kansas, ``shared a belief that in America, their son could achieve whatever he put his mind to.'' He said he became the Democratic nominee because Americans are looking for a different kind of politics.

``I stand before you tonight because all across America something is stirring,'' Obama said. ``You have shown what history teaches us -- that at defining moments like this one, the change we need doesn't come from Washington. Change comes to Washington.''

India's Economic Run

HONG KONG - With Western consumers tightening their belts, companies still in budget-cutting mode and inflation raging, the Indian economy was bound to slow from its spectacular pace of recent times.

New Delhi's Central Statistical Office revealed Friday that India's economic growth slowed to 7.9% annually in the April-June quarter, down from 9.2% in the second quarter last year and easing off from the previous quarter's 8.8%. This is the first time India has recorded GDP growth lower than 8% in nine quarters, since December 2004.

A downturn in the manufacturing sector braked the Indian economy. According to the government figures published Friday, manufacturing growth was hit the hardest, dropping to 5.6%, from 10.9% last year.

Besides manufacturers, Indian information technology companies, whose success in recent years has been grounded on India's large population of low-wage but well-educated, English-speaking technicians, are also under threat as international banks, brokerages and other firms all started to cut their IT budgets amid the global credit crunch. (See “Slowdown Affects Indian’s IT Sector.”)

The decline of Indian economic growth is also a natural outcome of the Indian government’s monetary tightening measures to curb inflation. "These are numbers that shouldn't surprise," said Saumitra Chaudhury, a member of the Prime Minister's Economic Advisory Council and chief economist at the credit rating agency ICRA, a Moody's affiliate.

After a few months of tightening, India’s inflation, which hit a 13-year high in June, appears to have stabilized. On Thursday, the government reported that the wholesale price index, the nation's benchmark inflation indicator, fell to 12.4% for the week ending Aug. 16, from 12.6% the previous week.

Chaudhury expected the central bank to maintain interest rates when it next meets in October.

Two days before the GDP announcement, Moody's projected that India's economic growth would decelerate to 7.9% in the current fiscal year, from 9% in 2007-08 amid slowing credit growth and higher interest rates.

-- The Associated Press contributed to this article.

U.S. Stocks Retreat on Income, Spending Data, Dell's Earnings

By Lynn Thomasson

Aug. 29 (Bloomberg) -- U.S. stocks fell, paring the biggest monthly gain since April, as consumer spending slumped and lower- than-estimated earnings from Dell Inc. dragged down technology companies.

Starbucks Corp. and Amazon.com Inc. each lost more than 2 percent in Nasdaq Stock Market trading after the government said growth in spending slowed to 0.2 percent in July as incomes declined 0.7 percent. Dell, the second-biggest personal-computer maker, had the biggest drop since November. Constellation Energy Group Inc., the largest U.S. power marketer, drove all 31 utility companies in the Standard & Poor's 500 Index lower after Jefferies Group Inc. downgraded the stock.

The Standard & Poor's 500 Index slipped 11.85 points, or 0.9 percent, to 1,288.83 at 1:47 p.m. in New York, ending a three-day advance. The Dow Jones Industrial Average lost 122.05, or 1 percent, to 11,593.13. The Nasdaq Composite Index retreated 37.66 to 2,364.29. Two stocks fell for each that rose on the New York Stock Exchange.

``The environment remains challenged for the equity market,'' Mike Ryan, head of wealth management research for the Americas at UBS Financial Services Inc., told Bloomberg Television. ``As we're faced with the impact of higher energy costs and the lack of availability of credit, that's going to put more pressure on the consumer sector.''

Technology and retailer shares led stocks lower as the Commerce Department report also said prices excluding food and energy, the Federal Reserve's preferred gauge, climbed 2.4 percent on a yearly basis. The data overshadowed a better-than- forecast reading of 63 in the Reuters/University of Michigan consumer sentiment index and damped optimism spurred by better- than-estimated growth in gross domestic product yesterday and an unexpected increase in orders for durable goods on Wednesday.

Cyclicals Slump

The Morgan Stanley Cyclical Index, a gauge of companies that rely the most on economic expansion to boost profits, lost 1 percent today as 21 of its 30 stocks fell. The gauge jumped 2.5 percent yesterday for its steepest advance in three weeks.

The S&P 500 has gained 1.6 percent in August, snapping a two-month retreat that sent the measure to an almost three-year low on July 15. The rally was fueled by the 22 percent drop in oil from a record, a jump in the dollar and growing speculation that the worst of banks' mortgage losses are over.

Starbucks, the biggest coffee-shop chain, slid 2.6 percent to $15.57, while Amazon, the largest Internet retailer, fell 2.4 percent to $81.46.

Dell sank 13 percent to $22.02. The company said ``continued conservatism'' from some U.S. customers is spreading to western Europe and some Asian countries. Sales growth in those areas slowed last quarter and profit missed analysts' projections after Dell reduced prices.

`A Hard Time'

Hewlett-Packard Co., the biggest PC maker, lost 0.3 percent to $47.17. Microsoft Corp. retreated 1.7 percent to $27.47, while Intel Corp., the largest chipmaker, slumped 2.5 percent to $23.01. Technology companies collectively fell 2 percent, the most in a month, for the steepest decline among 10 S&P 500 industries.

``Anything that's related to the consumer is going to have a hard time and is more than likely going to miss expectations,'' said Tom Wirth, senior investment officer at Chemung Canal Trust Co. in Elmira, New York, which manages $1.8 billion. Weakness in technology stocks ``has to do with the consumer having to rein in their spending.''

Marvell Technology Group fell 4.6 percent to $14.08 after the maker of chips for Apple Inc.'s iPhone predicted sales in the current quarter of $860 million to $880 million, missing the $889.2 million estimated by analysts in a Bloomberg survey.

Utilities Drop

All 31 stocks in the S&P 500 Utilities Index dropped, sending the industry group down 1.5 percent for its steepest loss in almost three weeks.

Constellation Energy Group Inc. fell 2.5 percent to $66.81. The biggest U.S. power marketer was cut to ``underperform'' from ``hold'' by Jefferies analysts.

International Paper Co. sank 3.9 percent to $27.19, the biggest drop in three months, after Deutsche Bank AG cut the world's largest maker of office paper to ``hold'' from ``buy.''

Fannie Mae fell for the first time this week, losing 9.4 percent to $7.20. Freddie Mac dropped 9.1 percent to $4.80. Bank of China Ltd., the nation's third-largest bank, pared holdings of corporate debt from the two largest U.S. mortgage-finance companies in the past two months amid concern on the potential need for a U.S. government bailout. Separately, the Washington Post reported that Freddie Mac's capital cushion may not be enough to cover losses.

Financials Retreat

SLM Corp. retreated 1.2 percent to $16.76. The biggest U.S. college lender cut the amount it can borrow for education loans through two banking agreements by $6.3 billion, or 20 percent, prompting Moody's Investors Service to consider downgrading SLM debt.

PetSmart Inc. increased 12 percent to $27.24. The largest U.S. pet-store chain said second-quarter profit fell less than analysts estimated, helped by increased boarding and grooming sales for dogs and cats.

The S&P 500 and the Dow average have both fallen less than 1 percent this week. The Nasdaq Composite Index has slipped almost 2 percent for the worst week since the beginning of July.

The S&P 500 is poised to complete only its third monthly advance since reaching a record in October. It is still down 11 percent this year.

The S&P 500's August gain has been led by so-called consumer discretionary companies, which include retailers and hotel and restaurant chains. The S&P 500 Consumer Discretionary Index rallied 8.1 percent this month for the best gain among 10 industries through yesterday

An index of technology shares in the S&P 500 had the second- best return in August with a 4.6 percent rally through yesterday, led by a 48 percent jump in Advanced Micro Devices Inc.

U.S. markets will be closed on Sept. 1 for the Labor Day holiday.

To contact the reporters on this story: Lynn Thomasson in New York at lthomasson@bloomberg.net.