Short on Money, McCain Campaign Dismisses Dozens

Marc Santora and David D. Kirkpatrick contributed reporting.
July 3, 2007.

The presidential campaign of Senator John McCain, the Arizona Republican who once seemed poised to be his party’s nominee in 2008, acknowledged yesterday that it was in a political and financial crisis as a drop in fund-raising forced it to dismiss dozens of workers and aides and retool its strategy on where to compete.

The campaign said the decline in contributions had left it with $2 million. It said it had raised just $11.2 million over the last three months, despite Mr. McCain’s promise to do better than his anemic $13 million showing in the first three months of the year.

Mr. McCain’s advisers blamed his close association with the recently defeated immigration bill, which was strongly opposed by conservatives already skeptical of his ideological credentials. But he has also had to contend with a host of other issues, including his support of the Iraq war, opposition from evangelical voters, the prospect of former Senator Fred D. Thompson’s entry into the race, and the sense that his continuing struggles to raise money were consuming the campaign and making fund-raising even more difficult.
Mr. McCain was visiting Iraq as his aides moved to reshuffle his campaign organization a second time. They said they would focus his efforts now on three states with early contests: Iowa, New Hampshire and South Carolina.

The problems fueled speculation that Mr. McCain would pull out of the race, a notion that his aides were quick to reject.

They also sent a jolt of uncertainty through Republican circles when many in the party are uneasy with their current candidates and are worried about their prospects against a far more determined Democratic field.

The party has failed to coalesce around a favored candidate, with conservatives skeptical of Rudolph W. Giuliani’s support of abortion rights and Mitt Romney facing scrutiny for shifting his positions on key social issues.

Mr. McCain’s campaign was in flux particularly in Iowa, where half of his 16-member staff was let go yesterday, campaign officials said. His state director left, and Jon Seaton, his national field director, headed to Iowa to take over.

Department heads spent yesterday calling in lower-level staff members to inform them of their dismissals. Mr. McCain’s advisers said they were cutting back on consultants, with those in the fund-raising area losing their guaranteed monthly retainers. The moves amounted to a sharp scaling back of what had once been a gold-plated campaign.

Top advisers to Mr. McCain, a Vietnam veteran known for his maverick streak, said the problems might force him to accept federal matching money, which could pump $6 million into his primary campaign but force him to abide by strict spending limits.

Mr. McCain’s aides expressed hope that with the immigration battle over, the campaign could recover its momentum as the focus shifted to other issues, like federal spending. And the history of American primary campaigns is replete with examples of troubled candidates rising from major setbacks.

“The decisions we made today were not easy,” said Terry Nelson, the McCain campaign manager, who said he would no longer accept a salary.

While refusing to go into detail about the depth of the cuts or say exactly how many staff members had been fired, Mr. Nelson said “every department” had been affected. Republicans close to the campaign said that at least 50 and as many as 80 people were being let go, out of a staff of around 150 people.

Campaign strategists said Mr. McCain’s ability to raise money was severely limited in recent weeks by the reaction to his support of the immigration legislation, which collapsed last Thursday in the Senate. They said Mr. McCain was now looking to raise $50 million this year — half of what he once expected — and was retooling the campaign to save as much money as possible for television advertising and travel.

“Clearly, we didn’t meet our goals for the second quarter in fund-raising, which I largely attribute to the immigration legislation that has dominated the news for the past two months, and his position is not too popular with our small donors,” said Charlie Black, a senior Washington political strategist who is a volunteer adviser to Mr. McCain. “We have got to restructure the budget and the organization.”

Mr. Black and others dismissed any suggestion that the moves were a precursor to Mr. McCain’s dropping out, particularly with the race still in its early stages and with no other candidate breaking away. John Weaver, another senior adviser to Mr. McCain, said the senator would now focus almost exclusively on the three early primary and caucus states.

After the defeat of the immigration bill, Mr. McCain told reporters he had no intention of leaving the race despite the setback on what has become a driving issue for him.

“Why would I contemplate such a thing?” he said. “I don’t know why I would even remotely consider such a thing in the month of June and July. It’s always been hard for me to raise money. None of the special interests are contributing because they don’t want me to be president.”

Mr. McCain’s allies in the Senate had hoped that approval of the immigration legislation would help him politically by showing that there was consensus on his position, tightening the borders while offering the prospect of legal residency to some illegal immigrants. But the widespread Republican abandonment of the bill only further undercut him and caused him particular trouble in Iowa, where aides said polls had found that his support had plummeted to single-digit numbers.

The scene yesterday at McCain headquarters in suburban Virginia was described as somber. People were called in and told they were being dismissed, effective immediately. They were given two weeks’ severance pay. A dozen senior campaign aides either agreed to work without salary or for less pay.

Senior McCain advisers say they realized over the past few months that they had to change the mindset that they were running what one called a “Bush-Cheney campaign,” with the plush offices, army of consultants and extended staff befitting a front-runner. Mr. McCain himself had raised questions about the size of the operation and also bristled at making fund-raising calls.

Rival campaigns said they still considered Mr. McCain a threat, but added that the decision to reduce his staff in the primary states of Iowa, New Hampshire and South Carolina could be disastrous because a strong organization was crucial.

Mr. Black, the McCain adviser, was adamant that the senator was competitive in those states and said the end of the immigration fight could ultimately help Mr. McCain by shifting attention from the issue.

“This will fade over time,” he said. “He has got as good a chance as anyone else.”

The immigration battle resonated particularly in South Carolina, where the state’s two Republican senators split on the measure. Senator Lindsey Graham, a top McCain ally, supported the bill, and Senator Jim DeMint was a leading opponent.

Katon Dawson, the chairman of the South Carolina Republican Party, said that Mr. McCain had been hurt but that the race there would be decided on more than one issue.

“I do think it has wounded him, but I don’t think it has taken him out of the game,” Mr. Dawson said. “There is time to recover from this.”

Americans on economy: This hurts

Nationwide poll locates sore spots as consumers are knocked around by inflation and gas prices. Consumers hunker down but feel optimistic about future.

NEW YORK (CNNMoney.com) -- Some economists say the United States is not in a recession, but don't tell that to the majority of American consumers.

A national CNN/Opinion Research Corp. poll released this week found that the recent economic downturn has taken its toll.

Americans are driving less and even cutting back on necessities such as food and medicine. The financial strains have led a vast majority of people to believe that the U.S. economy has entered a recession.

"This economic downturn will be relatively mild according to the numbers," said Wachovia economist Mark Vitner. "But the pain and discomfort for the consumer will be the most severe since 1991, and possibly since 1981 to 1982."

But there is some hope for the future, as a majority of those surveyed feel that the economy will rebound in 2009.

Majority think U.S. economy is in a recession. Americans think the economy is now in a recession and the number who feel that way continues to grow.

Of the more than 1,000 adult Americans conducted March 14-16 , 74% said they believe the nation is now in a recession. That figure rose from 66% in February and 61% in January.

Economists' definition of a recession is two consecutive quarters of negative GDP growth, and though growth was sluggish in the last quarter - 0.6% - the U.S. economy has not yet shown one quarter of retraction. But to the average American, times are still tough.

"What they're describing is different from a recession - they're giving a common sense definition of a recession," said Wachovia economist Mark Vitner. "They're saying that these are tough economic times, and from that perspective they're absolutely right."

Inflation is top concern. Most Americans think times are tough because they are feeling the pinch from rising prices.

The survey showed that 65% said they are "very concerned" about inflation, and 26% said they are "somewhat concerned."

Unemployment concerns also loom large, with 59% saying they are "very concerned" and 27% saying they are "somewhat concerned" about job losses.

According to the Department of Labor, the United States has already lost 85,000 jobs so far in 2008, with February's net job report showing the worst loss in nearly five years.

American's concerns framed the issue that faced the Federal Reserve, which attempted to balance the threat of recession against rising inflation in its 3/4 percentage point cut of its key interest rate Tuesday.

The central bank cuts rates in order to boost the economy and, in this round, to stave off a recession. But lower interest rates can also weaken the dollar, sending inflation higher.

Though the Fed decided to cut rates further, it noted that "uncertainty about the inflation outlook has increased," in a statement following the rate cuts Tuesday. But the central bank said it will closely monitor inflation in the future.

"The Fed is definitely concerned, because [inflation] issues impact consumers," said Wachovia economist Sam Bullard.

Cash strapped, and driving less. Escalating prices - specifically rising gas prices - have taken their toll on Americans, causing them to drive less.

Seventy-two percent of respondents said recent price increases in gasoline have caused financial hardship for them or their households.

"For some time we've been trying to determine the breaking point for when gas prices take their toll on the consumer," said John Kilduff, an energy analyst at the trading firm MF Global. "It appears we've found that point."

Rising fuel prices have caused most Americans to cut back on their driving. Of the over 1,000 American adults surveyed in the poll conducted March 14-16, 64% said they have made some changes to their driving behavior as a result of higher gas prices, with 19% saying they have cut back on driving enough to have a major effect on their daily lives. And 5% say they have stopped driving altogether.

Financial pain hits close to home. The slumping economy is not only hurting Americans at the pump, but it's causing pain where it hurts the most: daily necessities like food and drugs.

Thirty percent of respondents are trimming their spending on food and medicine and that 57% are worried they will have to cut back soon. Nearly half said they have cut back on how much heating or electricity they use in their homes, and 53% are concerned that they will have to trim spending on heating in the future.

"Consumers are definitely feeling a pinch on rising prices of staple products like food," said Wachovia economist Adam York. "There are some consumers that are having some real trouble in this environment."

Typically in an economic downturn, consumers have shifted their spending from discretionary items like electronics and leisure activities in order to continue paying for food and drugs. But continually escalating prices may have left consumers with little left to cut.

A recent Commerce Department report shows that consumers' food and beverage spending dropped 0.2% in February from the previous month and grocery store sales fell 0.3%.

"Instead of buying steak, they're buying chicken," said York. "People are buying generics and reducing spending by shifting to cheaper alternatives."

Confident in 2009 turnaround. Though times are tough now, Americans believe the economy will bounce back by next year.

The poll showed 60% of respondents think economic conditions in the United States will be "good" next year, as opposed to the 75% who think the economic situation is "poor" now.

"Most people realize that the economy has cycles of ups and downs," said Bullard. "Fortunately, the last two recessions were some of the shortest on record, so in 2009 we should be pulling up out of this."

Americans agree with the economists. Eighty-three percent said they are "confident" that they will be able to maintain their standards of living next year, and 85% are "confident" they will keep their jobs over the next six months.

Consumers also showed faith that they would be able to pay off their future debts, with 90% of respondents demonstrating confidence they would be able to meet their monthly mortgage payments for the duration of the mortgage. Nearly as many Americans - 83% - said they could pay off college loans, car payments, and credit cards in the future. The average amount of credit card debt of those polled was $4,000.

"The Fed's rate cuts will start to take their toll later this year, and the economy should bounce back by the end of 2008," Bullard said.

College saving: Do it now

Whether the stock market is up or down, start saving for your children's education before it's too late.

NEW YORK (CNN) -- As the stock market was tumbling early this year, 40-year-old Eric Horowitz decided he could handle only so much pain. His daughter Elizabeth attends private high school, and a year from September she'll be a freshman in college. So Horowitz chopped his exposure to stocks to about 60% of his portfolio down from 85%.

"I think the stock market is always risky," says Horowitz, a single, divorced father in Manhattan, and a self-employed "executive coach." "You always bet on yourself first. First put your money into yourself, into your children."

Parents are spending record amounts for their children's education. The average cost for tuition, fees, room and board at a four-year private college is $32,307 this year, as calculated by the College Board. That's up 6% from the prior academic year.

"How am I going to make it?" asks Horowitz, who says he is already paying $30,000-a-year for Elizabeth's private school education. "How am I going to get all four years through - and hopefully she won't go to graduate school."

A common dilemma
Horowitz is not alone in fearing that the stock market could be too volatile to provide the income he needs to pay for Elizabeth's education.

Mutual fund giant T. Rowe Price says parents have been pulling back on investing in 529 college savings plans, which accumulate tax-free as long as the account is spent on a child's college education. New accounts this year are down about 20%, according to T. Rowe Price, while existing customers are contributing 10% less to 529s.

"It certainly appears as though it is the economy that's impacting consumers," says T. Rowe Price's Tom Kazmierczak. "It's very easy for parents to think to themselves that they can cut college savings when they have to choose between saving for college and paying for a mortgage," he says. "It really can be the wrong thing to do particularly if you've got younger children at home."

Financial advisor Thomas Henske of Lenox Advisors recommends that clients who can afford it tuck away $10,000-$12,000 annually in an investment account for each child beginning at birth. If the investments can achieve an 8% return, the child's college expenses should be fully funded at about $90,000 a year, he estimates.

"What's going to make the difference is putting that money away on a regular basis, investing it the right way with a long term approach," says Henske.

It's never too early
Robin Kahn, an attorney who is mother of two students at Millburn High School in New Jersey, says she and her husband Scott ignored a close friend who had advised them to begin saving for college when their children were born.

"It wasn't until the mid-90's when we started," says Kahn. "That was definitely a mistake. We should have listened."

Both children, Max, a senior, and Gabrielle, a freshman, now have investment accounts for college. But their parents expect to dip into their own savings for college.

"It's definitely not enough. We don't have enough for four-years for each of them," Kahn says. "We'll have to see what scholarships or grants or loans are available to us."

Horowitz also says he hasn't saved nearly enough to pay for Elizabeth's college. His plan is to set aside as much of his annual earnings as possible to pay for tuition, and take out loans for the remainder.

How Sulzberger beat the hedge funds at their own game

The New York Times chairman may have neutralized his hedge fund critics by giving them board seats.
NEW YORK (Fortune) -- It seemed too easy. Two months ago, a pair of little-known hedge funds informed the New York Times that they were mounting a campaign to elect four directors to the company's board. Monday, the nation's most powerful newspaper publisher capitulated and agreed to support two of the insurgent nominees at its annual meeting next month.

How could the Times be so easily bought to its knees? The dissidents - Harbinger Capital Partners and Firebrand Partners - amassed a nearly 20% stake in the Times (NYT). The company's controlling shareholders, the Sulzberger/Ochs clan, couldn't brush off them off as they did a Morgan Stanley (MS, Fortune 500) fund manager who tried to shake things up at the company last year.

The hedge funds have declared victory. But perhaps they are being a little hasty. The truth is, Arthur Sulzberger Jr., the company's chairman, may have been the true winner for avoiding a bitter proxy war that might have raised questions about his leadership and damaged the Times.

The New York Times, after all, is no ordinary public company. Presidents quake before Times' op-ed columnists like Maureen Dowd. Wall Street isn't as easily cowed - not when the company's stock has fallen nearly 60% in the last five years. But even deep-pocketed hedge fund managers can't play too roughly with the Paper of Record.

Harbinger and Firebrand grasped this far better than Morgan Stanley. Hassan Elmasry, one of the investment bank's fund managers, tried to force the Sulzberger/Ochs family to do away with the company's sacrosanct two-tiered stock structure. It's easy to see why. The clan owns shares that have super-voting rights, making the Times impervious to hostile takeovers.

If the family lost that veto power, a Rupert Murdoch could swoop in and add the Times to his empire. That would have been great for Elmasry's fund. But it would have threatened the quality of the company's flagship paper.

Elmasry ended up looking like a stereotypical Wall Street barbarian interested in nothing but a quick buck. The Sulzbergers came across as principled guardians of journalistic independence by standing up to him.

The new dissidents didn't make the same mistake. They bought up shares like typical green-mailers. But publicly, Harbinger and Firebrand offered the Times nothing but olive branches. "I want to assure you that we are not pursing a change in the dual class shareholder structure," Firebrand Partners founder Scott Galloway wrote Times chairman Arthur Sulzberger Jr., on Jan. 27.

Sulzberger, however, demonstrated that he had also learned something from his tussle with Morgan Stanley. He beat back Elmasry, but looked as if he was turning a deaf ear to the fund manager's legitimate complaints about the company's poor financial performance. That didn't sit well with the investors. At last year's annual meeting, half of the non-family shareholders withheld their votes in protest.

Now Sulzberger is wisely casting himself as a conciliator. Instead of ignoring the hedge funds, he agreed to enlarge the company's 13-member board to make room for two of the candidates proposed by the hedge funds: Scott Galloway and James Kohlberg, co-founder of private equity firm Kohlberg & Company.

In doing so, the Times chairman may have may have effectively neutralized the dissidents - at least, for a while. The hedge funds can't complain that he is ignoring them, but they don't have enough votes to sway the board either.

Perhaps Harbinger and Firebrand might have done better if they had a chance to fight it out with the Times over board seats. That way, they might have rattled the company's controlling shareholders and forced them to sell some non-core assets like the company's stake in the Boston Red Sox to boost shareholder value. Now the hedge funds have to play nice - even with nearly 20% of the company's shares.

Oh, and about those shares. In the end, Harbinger and Firebrand want a sizable return on their investment. They are likely to discover there are no miracle cures for newspaper publishers. Isn't that what Times CEO Janet Robinson has been saying for a while? Well, nobody can say that Harbinger and Firebrand haven't been warned.

Stocks surge in early going

Wall Street aims higher as investors welcome Lehman and Goldman earnings, and gear up for the Fed.

NEW YORK (CNNMoney.com) -- Stocks rose at the open Tuesday as investors welcomed better-than-expected earnings from Goldman Sachs and Lehman Brothers and geared up for an expected interest rate cut from the Federal Reserve later in the day.

The Dow Jones industrial average added over 200 points or 1.7% at the open. The Nasdaq composite index gained 1.9%. The Standard & Poor's 500 index rose 2.2%.

Stocks were mostly lower Monday after Bear Stearns (BSC, Fortune 500)' fire sale to JP Morgan chase (JPM, Fortune 500). However, falling commodity prices and anticipation about the Fed helped stocks close off the lows.

In the news Tuesday:

Lehman Brothers. Shares of the brokerage surged 20% after it reported weaker quarterly sales and earnings that beat estimates, despite taking $1.8 billion in writedowns for bad mortgage bets. Lehman also sought to reassure investors that it was not in danger of seeing a fate similar to that of Bear Stearns, saying that it has maintained a strong liquidity position. Stock (LEH, Fortune 500)

Goldman Sachs. The Wall Street firm managed to report another quarter of better-than-expected sales and earnings, despite the ongoing market turmoil, although results were sharply lower versus a year ago. Shares gained 9% at the open. Stock (GS, Fortune 500)

Federal Reserve. Central bankers meeting Tuesday are expected to cut the fed funds rate, a key overnight bank lending rate, by as much as a full percentage point, with an announcement expected at 2:15 p.m. ET. The Fed has already cut the fed funds rate by 225 basis points since September as a means of shoring up the struggling economy and unfreezing the blocked up credit markets. There are 100 basis points in one percentage point.

Housing. New home construction fell in February to just over a million properties, beating forecasts for a bigger drop. Building permits, a measure of builder confidence, tumbled more than expected.

Inflation. The Producer Price Index (PPI), which measures inflation at the wholesale level, rose as expected in February. But core PPI, which excludes volatile food and energy prices, rose more than expected.

Gold glitters again - sets new record

Investors flock to the commodity amid sinking dollar and worries about rising inflation.

NEW YORK (CNNMoney.com) -- Gold futures soared to a fresh all-time trading high above $1,000 an ounce Friday as the dollar sunk to new lows.

COMEX gold for April delivery touched $1,007.30 an ounce in morning trading before slipping back a bit.

After weeks spent hovering below the key psychological mark, gold finally hit $1,000 an ounce for the first time Thursday.

Behind gold's surge has been a drop in the dollar, which dropped below 100 yen for the first time since 1995 Thursday. It also has hit a string of record lows against the euro.

The greenback has fallen to record lows amid fears of a protracted slowdown in the U.S. and concerns about rising inflation.

A key inflation reading released by the Labor Department Friday showed consumer prices were flat last month, but there are signs that price pressures are building.

Commodity prices have soared recently. Oil prices have set 12 record highs in the past 13 trading sessions. The front-month crude contract is now trading just below $111 a barrel. Gasoline has set record highs for four straight days, as U.S. drivers now need to shell out an average of $3.28 a gallon.

Targeting the right fund mix

It’s easy to select a good asset allocation for your nest egg on your own, but if you don’t have the discipline to stay balanced, a target-date retirement fund could be your best option, says Money Magazine’s Walter Updegrave.

Question: I’ve got my 401(k) invested in a target-date retirement fund. I’m wondering, though, whether I would be better off investing it in large-cap, mid-cap, small-cap and blended funds, putting 25% into each option. What do you think? –J. Duffaut

Answer: You’ve no doubt heard the expression, “First, do no harm.” (You scholarly types may be more familiar with the Latin version, “Primum non nocere.”)

It’s a bedrock principle that all good physicians adhere to. The idea is that a doctor shouldn’t dole out medicine or prescribe a treatment that has an uncertain benefit for the patient but may have a good chance of causing harm.

In other words, a doctor must consider the downside before intervening.

Well, I think that individual investors - and particularly people who are building a nest egg for retirement in a 401(k) or similar account - ought to take this principle to heart as well.

Take the case of 401(k)s and target-date retirement funds. The number of 401(k) plans offering target funds has mushroomed over the past few years and more and more participants are plowing their contributions into this option. I think the growing popularity of target funds is good for two reasons:

1. They make retirement investing easy. Just choose a target fund with a date that roughly matches the year you plan to retire, and you get a ready-made diversified portfolio of stocks and bonds that’s appropriate for someone your age. What’s more, the fund automatically shifts its mix more toward bonds as you age, so that you take less investing risk as you grow older.

2. They can save us from our own worst impulses. Here I’m talking about our tendency to chase hot funds and sectors, buy into inflated asset classes and pour too much money into company stock and other investments that may be risky but we don’t necessarily see as risky. In short, target funds make it harder for us to sabotage our own retirement planning efforts.

Are target funds perfect? Of course not. But if your 401(k) offers this option, then it seems to me that before you reject it in favor of other funds, you ought to ask yourself: Can I do better on my own?

The answer may very well be yes. You don’t have to be an investing savant to put together a decent portfolio of stock and bond funds. But you do have to take responsibility for creating and maintaining a workable investment strategy - that is, deciding on a reasonable mix of stocks and bonds, choosing appropriate funds, monitoring their performance and then rebalancing your portfolio once a year.

If you don’t know enough about investing to do this or you’re not willing to put in the fairly minimal time and effort needed to do it (or you know deep inside that you’ll probably give in to the urge to tinker often enough that you may undermine your efforts), then it seems to me that taking an active approach has the potential to do more harm than good. In which case, I’d say you’re better off with a target fund.

Now, I don’t know you well enough to judge how capable or responsible an investor you are. But based on your question, my guess is that you’re probably a good candidate for a target fund.

Why? Well, you talk about putting equal amounts of money in large-, mid- and small-cap funds. That means you’ve got twice as much money in mid-size and small stocks combined as you do in the big boys. (Let’s leave the “blended” funds aside since I’m not sure what kind of funds you mean.)

But if you take a look at the percentage of total market value that large-, mid- and small-cap stocks actually account for in the stock market, you find that large stocks represent almost 75% of market value and mid- and small-caps combine for the other 25%. (You can see this for yourself by plugging the stock market ticker for Vanguard’s Total Stock Market Index fund—VTSMX—into the Instant X-Ray tool.)

This means that investors as a whole have allocated about three times as much of their capital to large stocks than medium and small ones. You, on the other hand, are proposing to do pretty much the opposite by putting twice as much in the mid-size and small stocks.

If you’re doing this because you believe you have insights that investors overall lack - in effect, you think they’ve made the wrong decision - then fine, maybe it makes sense to go so far against the grain. But if you don’t have insights or information the rest of the investing world doesn’t have, then I don’t see how you can justify divvying up your money as you’ve suggested.

Either way, I can tell you that by piling so much into mid- and small-size stocks (and putting nothing in bonds, unless they’re in your “blended” category), you are creating a very volatile portfolio that, if nothing else, is virtually guaranteed to give you a white-knuckle ride.

So I guess I would answer your question with one of my own - namely, how did you come up with that 25%-in-each-group strategy? And unless you have a very cogent reason for it, I’d say you’re better off sticking with your target-date fund.

That’s not to say, however, that at some point in the future you can’t switch out of your target-date fund and into a portfolio of individual funds you’ve created. But for that to make sense, I think at the very least you would want to have read a few of our Money 101 lessons, starting with the basics of investing, then moving on to stocks, bonds, mutual funds, asset allocation and, of course, retirement planning.

Until you do that, however, I say your first obligation is to do no harm, which means staying put in that target-date fund.