Week in Review

10/24/2009

For the week 10/19-10/23

Each Sunday when I pull out the television guide for the week, there’s only one program I look for, PBS’ Frontline to see what the topic is. When it comes to covering financial issues, as well as geopolitics, no one does it better. I noted that the week’s episode was titled “The Warning” though didn’t explore further to find out exactly what this was about; only ripped out the schedule and put it on the desk at home as a reminder. 

So I’m watching the Angels-Yankees game on Tuesday when 9:00 p.m. rolls around and I flip on Frontline and was mesmerized the next hour (I thus missed the horrible umpiring calls in innings 3 and 4 as it turned out, but saw them later). 

It’s the story of Brooksley Born, chairman of the CFTC (Commodity Futures Trading Commission) from 1996-99. A brilliant lawyer, Ms. Born was playing in a man’s game and she paid for this. 

I was aware of the issues with the CFTC from this era but had forgotten many of the details. Basically, Ms. Born and her staff became increasingly concerned over the unregulated derivatives market and the threat it posed to our system. Born sought to regulate it and drafted language to effort this. That’s when she hit a multi-dimensional roadblock, led by the troika of Federal Reserve Chairman Alan Greenspan, Treasury Secretary Robert Rubin and Rubin’s deputy, Lawrence Summers. 

These three (who all refused to talk to Frontline, while everyone else involved in the issue did, including Ms. Born) felt that the free market would take care of any problems, with Greenspan in particular believing fraud, for one, need not be regulated or policed because the market would sort it all out. 

It was the Go-Go 90s of the Clinton administration, the heyday of financial deregulation (a fact many conveniently forget these days), especially in the last two years of Clinton’s presidency. Yet Born knew of the dangers with derivatives and so she sought transparency in a market where virtually none existed. [I wrote of derivatives being “weapons of mass destruction” before Warren Buffett did, by the way.] 

But when Brooksley Born drafted her regulations and submitted them to Treasury and the Federal Reserve, Greenspan, Rubin and Summers, and later Congress, had a fit. Summers, who played the role of henchman, was sent over to rough up Born, while Frontline has terrific footage of the congressional hearings and the likes of Senator Phil Gramm grilling her for daring to question the free market.  

Then, in the summer of 1998, Long-Term Capital Management implodes. LTCM was, of course, unregulated. Born had been fighting to regulate these very kinds of operations. LTCM almost took the system down. You’d think Born’s point had been made. Instead, the Gang of Three and Congress only hardened their resistance. Brooksley Born resigned in 1999. Ten years later we’re suffering the consequences and will be for years to come. Many will never recover because of the arrogance of some of our leaders. 

To say the Frontline program was timely is an understatement, though I wonder how many in Congress, for one, saw it. Then again, many in that institution would have sat in front of the tube for an hour with Homer Simpson-like eyes glazing over, but I digress. 

So we fast-forward to today and have the same contentious issues, such as in how to regulate the financial markets and risk, plus an offshoot of this, executive compensation. 

Let me say upfront that I want the securities markets regulated to the hilt and I won’t even add the wimpy caveat “within reason.” We have been a nation of idiots, on so many levels, and it’s time for it to stop. This doesn’t mean I’m against free markets, I’m for fair markets, and I’m for markets where no one individual, or a mere handful, can game and/or take down the system. You can’t stop all bad behavior, but America’s capital markets can do better than being but another casino in Vegas or Macau. 

On executive pay, to those who are crying in their Dom Perignon, spare me. I heartily concur with what “pay czar” Kenneth Feinberg did to the top 175 executives at the seven companies receiving federal aid in slashing their compensation (though a careful reading reveals some are nonetheless making out like bandits), including from the likes of AIG, Citigroup, Bank of America, and General Motors. As the Wall Street Journal editorialized on Friday, these companies and executives “owe their survival to political intervention, and the price of such taxpayer help is inevitably some populist retribution.”

But then the Journal expresses the common sentiment of the week that “the danger is that these pay limits will drive the most talented people at these firms to other companies without such onerous pay limits.” 

Oh, puh-leeze. When are we going to wake up and understand that you can count on two hands the irreplaceable people on Wall Street. Plus the good ones (say the rainmakers) had been jumping around long before the current crisis anyway. It’s the nature of the business, like free agency in baseball.

And as to fears the Federal Reserve is now going to heavily interject itself into the pay game, which it said it would now do in terms of issuing guidelines, don’t worry. If this means some executives will receive more of their compensation in stock, as will definitely be the case from here on, good. But no one has to worry that suddenly executive pay for the CEO of non-TARP firms is going from $15 million to $400,000. I hear the cries of socialism, and the likes of Chuck Schumer need to vent from time to time to secure their base, but this is one issue I will not lose a wink of sleep over. 

What should keep us all awake, though, is the issue of “too big to fail.” The likes of former Fed chairman and now Obama adviser (unfortunately, little used adviser) Paul Volcker and Bank of England Governor Mervyn King are calling for a split up of the larger banks, especially in terms of breaking out risky trading activities from the part that is accepting guaranteed deposits, or more simply put a division between investment and commercial banking. 

As Mr. King said, “Why were banks willing to take risks that proved so damaging both to themselves and the rest of the economy? One of the key reasons…is that the incentives to manage risk and to increase leverage were distorted by the implicit support or guarantee provided by government to creditors of banks that were seen as ‘too important to fail.’ 

“Such banks could raise funding more cheaply and expand faster than other institutions. They had less incentive than others to guard against tail risk. Banks and their creditors knew that if they were sufficiently important to the economy or the rest of the financial system, and things went wrong, the government would always stand behind them. And they were right.” [Wall Street Journal] 

As Volcker has been saying, with few in the White House seeming to listen, break up the banks and let the risky side fail when it screws up. 

“We must not get diverted by the financial sector’s opposition or by populist rage. We must focus, instead, on the core issue. Trying to make financial systems safer has made them more perilous. Today, as a result, neither market discipline nor regulation is effective. There is a danger, therefore, that this rescue will lead to still greater risk-taking and an even worse crisis at some point in the not too distant future. 

“Either we impose a credible threat of bankruptcy, or institutions we have to support are made safer, or, better, we have both of these. Open-ended insurance of weakly regulated institutions that take complex gambles is intolerable. We dare not return to business as usual. It is as simple – and brutal – as that.” 

It’s also simple – and brutal – to say that “There is as large a disjunction as I can recall in the recent return to good fortune for many in the financial sector and the fortunes of the American middle class. On Wall Street, one hears talk of a return to profitability, the end of recession and the need for ‘exit strategies.’ I can assure you that on Main Street, with still-rising unemployment, it is a very different conversation.” 

Who said that? Why if it isn’t that old SOB Lawrence Summers, still working in the shadows, though this time as President Obama’s economic adviser. But does this mean he now gets it? We’ll know by year end as administration policy (as well as Treasury's and the Fed's) on issues such as regulation and too big to fail is finalized. Regardless of the outcome, though, don’t look for Larry to apologize to Brooksley Born. I know she’s not waiting by the phone. 

Speaking of the real world, Main Street, 43 states reported job losses in September, while only seven gained jobs, according to the Labor Department, but the figures are deceiving. Ohio, for one, saw its unemployment rate drop to 10.1 percent from 10.8 percent in August and 11.2 percent in July, so there’s cause for optimism, right? Wrong. The improvement is from discouraged workers leaving the work force. 

By now you all know the figures. The official unemployment rate that I have to admit I didn’t think would hit 10.0% is now 9.8%, but the real jobless figure, when taking into account workers such as the example in Ohio, is closer to 16%-17%. For the life of me, I don’t see how some can be optimistic the Christmas shopping season is going to be a solid one. 

This was a fascinating week on Wall Street. I jotted down 19 companies whose earnings I deemed important and 18 of the 19 exceeded expectations, some by a huge margin. [The only one falling short, Boeing, has so many issues these days that it was hardly a surprise they fell short.] 

But while the likes of Apple and Amazon knocked the cover off the ball and gave solid forecasts for future growth, and Texas Instruments said it saw strong demand across all business segments, you also had just so-so at best outlooks from key players such as UPS and McDonald’s.  

And take Caterpillar. “The third quarter marked a low point for sales and revenues in what has been the toughest recession since the 1930s. [But] we are seeing encouraging signs that indicate a recovery may be underway.” Then you realize they’re really just talking China and India. 

The banks and credit card companies have a pretty uniform message, there is a better tone in the credit markets in terms of loan losses, but an “improvement in credit quality,” as American Express talked about, doesn’t mean increased consumer spending, which is what we all want to see. Warren Buffett talked of the “enormous” progress that has been made over the past year, and he’s right, but any improvement in the labor market will take time, he hastened to add, to which I’d say, again, that hardly means we have a healthy consumer in the interim, and it’s not as if those who are employed are seeing wage gains. Many are in fact having their pay cut. 

And regarding these too big to fail banks, analyst Dick Bove got some press for saying the worst was not necessarily over with Wells Fargo, which reported stellar earnings, because of future loan losses, Bove pointing to the housing sector in particular and Wells’ exposure to same, and that’s pretty much the case across the board with the big boys. Many really haven’t begun to realize some of their losses, hoping the market, or government, would bail them out before they had to recognize them. 

Bottom line, there’s still way too much uncertainty, as I slowly feel my way to a forecast for 2010 which to date I’ve refused to speculate on. 

In terms of the economic data, this week saw leading indicators for September rise again, better than expected, which is good, sports fans, while the September producer price index fell 0.6% when an unchanged reading was forecast; ergo, you can sleep well if prospects for inflation have been keeping you up at night. 

But there was mixed data on the critical housing sector as September starts were below estimates and building permits fell unexpectedly. 

Then you had existing home sales for the month and they surged far more than forecast, up 9.4% to a 5.57 million annualized rate. But the median price dropped again, to $174,900, though it’s above my April targeted low of $166,600. Everyone is attributing the sales surge to the coming expiration of the $8,000 tax credit for first-time home buyers; the cash for clunkers concept. Just as with car purchases, everyone sped up their home buying with the looming deadline (Nov. 30), including a bunch of kids as well as folks who have purchased a number of homes prior to claiming this last purchase was their first…but here I’m getting into all the issues of fraud that are being uncovered, which may in the end kill any chance of extending the credit. 

There was one piece of legitimate good news involving California. Banks appear to be scaling back repossessions. 

So now we turn to…Iran. 

The week started with a suicide attack on the Revolutionary Guard in the frontier lands between Iran and Pakistan, a Sunni stronghold. Six senior commanders were killed, along with 9 other Revolutionary Guard figures and at least 25 civilians, in the worst attack of its kind in the country since the 1980-88 Iran/Iraq war. Tehran claimed the Sunni rebel group had links to Pakistan (which Pakistan denied) and then Iran blamed the United States and Britain, with the head of the Revolutionary Guard vowing to “retaliate” against the two. 

So the tone wasn’t very favorable as a new round of talks on Iran’s nuclear program took place in Vienna, these sessions focusing on Iran’s supposed acceptance of an earlier proposal by the P5 plus One group to have Iran ship its enriched uranium to Russia and/or France for further enrichment that would make it suitable for medical use but not for weapons. 

Iran started out by being critical of France and President Sarkozy for his earlier comments blasting the regime and Tehran’s representative to the talks said his government would agree to ship the uranium to Russia only (which could then ship some to France). 

Outgoing International Atomic Energy Agency head Mohamed ElBaradei weighed in that Iran’s nuclear threat was “exaggerated” and that we wouldn’t wake up one morning to learn that Iran has the bomb, adding “An Israeli attack would turn the entire region into a fireball.” Of course ElBaradei has a history of being Mr. Appeaser. 

So what now? There is still much debate as to how far along Iran is in its quest for the bomb. Arms expert Joseph Cirincione says it is 7-10 years away from being able to weaponize its uranium. Others say Iran could have the bomb within a year and that it’s already been working for a long time on the weaponization front. I thought a while back that Iran would have tested one by now, so I obviously don’t agree with the likes of Cirincione, and I suspect the current Israeli leadership doesn’t either. 

By perhaps accepting the offer to have Russia and France (the two having the most expertise) enrich Iran’s uranium for peaceful use, however, Tehran is once again playing its brilliant stall game. Worst case, everyone is in agreement it only sets back Iran’s timeline a year before they would have replenished their enriched uranium stockpile.  

But Israel finally broke its silence on this particular topic as Defense Minister Ehud Barak said: 

“This agreement, if it is signed, will set Iran’s accumulation of enriched material back by about a year. However, if they don’t stop enrichment, then the only result will be that Iran has gained the legitimacy to enrich uranium on its soil for civilian purposes, in clear opposition to the interlocutors’ and our understanding that their true plan is to attain [military] nuclear capability. 

“So, I repeat, what is required is a halt to enrichment in Iran, not just an export of the enriched material to build fuel rods.” 

You also have the issue of timing. Iran is to have sent the uranium to Russia by year end. Who believes this will be the case? They’ll find a way to further delay action. 

Additionally, Israel is concerned “that the plan does not address the three fundamental issues that have been enshrined in various UN Security Council resolutions on Iran: that all Iranian enrichment activity be suspended until confidence is restored that the nuclear program is for civilian purposes only; that there be increased verification from the IAEA supervisors; and that there be transparency, meaning questions and explanations to a wide array of outstanding questions posed by the IAEA.” [Jerusalem Post] 

Editorial / Washington Post 

“Administration officials rightly describe the uranium deal as a quick and clear test of Iran’s intentions. If the export takes place by the end of this year – the time frame fixed by the United States and its allies for progress in the nuclear negotiations – the politically beleaguered regime of Ayatollah Ali Khamenei will have demonstrated, at least, that it wants to lower tensions with the West and delay a full confrontation over its nuclear program. Conversely, if it reverses its position, or seeks to drag out the talks, then the administration will have a strong case for the adoption of new sanctions – one that will put its relationship with Russia and China to the test.” 

I would add that it’s still amazing throughout all the negotiations that the West hasn’t demanded Iran stop its support of terrorism, including its heavy involvement in the violence in both Iraq and Afghanistan. 

And by agreeing to allow Iran to ship the uranium for further enrichment, the Obama administration, for one, is validating a sham government. Would the crisis be defused? Hardly, but we would have condemned Iran’s beleaguered opposition to death. 

The London Times reported on Friday that until this week’s negotiations, “Israel was ‘on a glide path’ to ordering a pre-emptive strike on Iranian nuclear facilities, one expert has said, echoing the privately-held views of some in the Obama administration,” which has been the long-held view of your editor. As I wrote in early October, though, I had to wait to see how these initial talks went, let alone Sunday’s expected opening of the Qom facility to inspectors. 

Israel can not like what it has seen thus far. I have come around to the belief that supporters of an attack should not be so concerned about Iran having 130 suspected facilities. An attack on the prime uranium enrichment plant at Natanz is all that’s required to set the program back substantially. 

Conversely, I have written extensively on the topic of blowback should Israel strike. We have no idea what it would be, though on some aspects, such as in securing the Persian Gulf for oil shipments, I’m not in the least bit concerned. Massive terror strikes in Europe, Latin America, and the U.S. are a different story, as well as attacks on our troops in the region. 

But I keep going back to one central point. Israeli leaders of all stripes have told anyone who would listen that it can not possibly accept a nuclear Iran. The coming days are critical, both in terms of Qom and inspectors being allowed in, and the reaction among Iran’s leadership to this past week’s negotiations. As I go to post, Iran is appearing to back away, making new demands of its own, but others believe Iran just wants a few more days to formally respond. Regardless, I will state my own further conclusions on this period, and Israel’s intentions, next week, including whether there is any chance Israel will attack, soon, and what that means for our financial markets. 

--Just a few earnings reports. Apple, $1.82 vs. 1.42 est.; Texas Instruments, 0.42 vs. 0.39; DuPont, 0.45 vs. 0.33; Caterpillar, 0.64 vs. 0.07; 3M, 1.37 vs. 1.17, Morgan Stanley, 0.38 vs. 0.29; Boeing, -2.20 vs. -2.10…doh! AT&T, 0.54 vs. 0.50; Amazon, 0.45 vs. 0.33; Microsoft, 0.40 vs. 0.32. But growth in the top line, revenues, in many cases was still missing. It’s been all about cost-cutting, but one day the sales will return and the only issue then will be has the market already gotten ahead of itself when that day arrives. 

For the week, stocks registered small losses, mostly as a result of Friday’s minor sell-off despite a $25 rise in Amazon’s share price (27%). The Dow Jones once again finished just below 10000…9972…off a mere 0.2%, while the S&P 500 lost 0.7% and Nasdaq 0.1% (2 points). We have another barage of earnings reports this coming week (plus the first look at third quarter GDP and further data on housing), but while 80% of the companies reporting thus far in the S&P 500 have exceeded their profit forecasts, this quarter will still represent a record 8 straight quarters of declines. 

--H1N1 continues to spread but I see zero signs that it’s impacting commerce, which was my primary fear going back to last spring, such as in a disaster scenario where the airlines shut down. Nonetheless, the Obama administration looks foolish for promising an ample supply of vaccine back in July, a full 100 million doses by October, when only 12 million has been delivered thus far. 

--On the international front, China reported GDP growth of 8.9% in the third quarter with industrial production up 14% in September. Some officials, though, continue to warn of asset bubbles here, in both equities and property, and the government is going to have to remove the punchbowl in 2010, but it’s still targeting growth at a further 9% rate going forward. 

Japan’s export volumes rose 2.6% in September from August, decent news, with most of the growth coming from trade with China, but there was poor data out of the UK, with retail sales flat in September and then third quarter GDP unexpectedly falling 0.4% when a slight uptick was forecast. The news was awful for Prime Minister Gordon Brown who is struggling to hold on to his job. 

--U.S. Treasury Yields 

--The situation with hedge fund Galleon Group and founder Raj Rajaratnam took on a far darker tone this week, not just because Galleon is being forced to liquidate $3.7 billion in funds that it owns due to a sudden rush for the exits among its clients, but rather because Mr. Rajaratnam is being accused of helping fund the Tamil Tiger rebels in Sri Lanka. 

While financial writers are focusing on the insider trading angle that has killed Galleon’s reputation, I choose to recognize that the Tamil Tigers have not been your run-of-the-mill terror group. I could go back years to point out references in this space where I’ve noted that many of the tactics employed in the terror arena started with the Tamils. In fact one I recall bringing up, bicycle bombs, has since been used extensively in Iraq, Afghanistan and Pakistan. 

“Sri Lanka: Last time I observed that civil war here is important if for no other reason than the spreading of terror techniques by the leaders in the field, the Tamil Tiger rebels. By way of backing up my claim, know that this week the rebels set off a remote-controlled bomb concealed in a bicycle that was detonated as a naval foot patrol passed, killing five and strewing body parts all over the place. These guys are terrorist masterminds and passing their knowledge to other groups spells further trouble for the West. [Think dirty bomb in a bicycle.]” 

I expect the evidence to show that Mr. Rajaratnam did indeed understand where his money was going, he being a Tamil himself. 

--Shares in Apple Inc. soared as the company sold 7.4 million iPhones, 3.1 million Macs and 10.2 million iPods last quarter. The iPhone is slated to go on sale in China shortly. 

--Windows 7 came to market and the world yawned.  At least it is said to be a big improvement over Vista.  I just wish they had stayed with Windows 98.

--Yahoo reported better than expected earnings thanks to cost-cutting measures, even as revenue fell 12% in a continuing sign of weakness in the ad market, though rival Google recently touted improvement in same as its revenues rose 7%. 

--Credit Suisse has revamped its compensation system to tie bonuses to specific financial measures and allow for claw backs if the bank’s fortunes slide, which in effect aligns itself with recommendations established by the G20.   CS also reported a cool profit of $2.4 billion.

--Brazil imposed a 2% tax on foreign portfolio investments in an attempt to stem the rapid rise in its currency, the real, and in turn the equity markets reacted poorly upon the announcement. But by week’s end stocks had rallied back, and then some. Foreign direct investment was not affected by the tax. [The Brazilian airline I told you last time I had purchased more of slid on the initial news but also made up all of the loss over succeeding days and then tacked on an additional 6%.] 

--Continental Airlines lost $18 million in the quarter, which was a sizable improvement over a year ago when it lost $230 million, but revenues were down 20%, even as traffic declined just 1%. So what’s going on? Two things. Passengers have been responding to cheaper fares, thus revenue isn’t what it had been, but the bottom line is helped by greatly reduced jet fuel costs versus third quarter 2008 when oil prices were peaking at $147.  Fares, though, are headed back up.

--At last count, 105 banks had gone under this year, including six on Friday, the most in a single year since 1992 and the S&L crisis, but the fact is it’s not a story, except for the individuals who work at the institutions, because the system works. 

At the same time, though, a record 4,600 companies have filed for bankruptcy thus far in ’09, up 12% from last year, with 250 being companies that had been taken private by buyout firms, which truly sucks. 

--Home sales in the Hamptons surged 32% in the third quarter, though the median price dropped 2% to $810,000, and listings increased 11% from year ago levels. So there’s still a lot of stress in the market. 

[Separately, comedian Eddie Murphy’s seven-bedroom mansion in Englewood, N.J. initially went on the market for $30 million, but now the asking price has been slashed in half to $15 million, according to the Daily News. The lavish estate comes complete with a bowling alley, theater and recording studio, as well as a full-size racquetball court, indoor pool, elevator and a carriage house with gym. If it goes down to $299,000 I’m a buyer.] 

--Newly released court documents in the Bernie Madoff case paint a picture of a drug-filled office environment, complete with strippers. A filing notes, “Starting in 1975, Madoff began sending a longtime employee and office messenger to obtain drugs for himself and the company. Drug use in the office was described as rampant and (a source) likened the office to the ‘North Pole’ in reference to the cocaine use. Eventually, the main employee supplier was fired for his drug abuse when cocaine and other undisclosed drugs were found in his desk in 2003. Madoff worried that it might bring in drug prosecutors who could uncover the big scam.” 

And, it was alleged, there were also “wild office parties sans spouses,” with “topless entertainers wearing only G-string underwear serving as waitresses.”  Huh.

Well, I’ve got to admit I saw some of this kind of behavior myself during my time on Wall Street in the 1980s, which was a crazy era, as accurately portrayed in the movie of the same name. By the way, they were doing some location shots in Manhattan this week for the sequel. I can’t wait. 

--Exhibit No. XXIX on why some of us hate the executives running Wall Street and related financial firms. 

Jeffrey Peek, CEO, CIT, who, according to the Washington Post, received $100,000 more in corporate perks (such as for use of the corporate jet) in 2008 than a year earlier even as this small-business lender was collapsing. 

Speaking of CIT, investor Carl Icahn offered a $6 billion lifeline that he said would save the company $150 million in fees, Icahn being an existing CIT bondholder. A friend at CIT sent me a copy of Icahn’s letter, addressed to the Board of Directors, which started in part: 

“I am reaching out to you to address what I view as the latest example of incompetent and unconscionable behavior on the part of the Board of Directors of CIT. Specifically, I am referring to approximately $6.0 billion in a secured term loan currently being offered by the company. The economics offered to prospective lenders are well in excess of what the current syndicated loan market should dictate, given the loan’s collateral coverage…. 

“The Board of CIT, after years of mismanaging our assets, has over the past year pleaded with the government to bail them out. The government, after studying the problems at our company, flatly turned down the bail-out. So now the Board, in their wisdom, has determined to ask the unsecured creditors of CIT to bail them out by voting to approve the pre-packaged bankruptcy plan. The plan would, of course, give the Board releases against certain claims that shareholders and bondholders would have against them, and I believe there are many. Even worse, the plan would leave a majority of the existing Board, or their chosen successors, in control of our company for years to come. The company argues that they must stay in control because a change of control at the company might cause the Federal government to close down our very small bank…..” 

--The port of Los Angeles’ best month ever for imports was September 2006. Last month container shipments were off 27% from the pace of three years earlier. At Long Beach, shipments were off 32% from their own Sept. ’06 record mark. 

--On the compensation front, I thought Barron’s Michael Santoli had a good point. Part of the issue is with the phrase itself, “bonus.” If it were called “profit-sharing,” “the pay debate might become more rational.”  

--Copenhagen, December…be there! The great climate change debate, as the developing world, read India and China, takes on the developed world. Who will give in on emissions cuts? Both sides need to compromise…or simply set targets for a less ambitious deal, like halving emissions by 2050 when many of us will be dead. [Just being selfish here, folks.] 

Then again, one official told the Financial Times, “Discussions on 2050 have been eating up time that could be more usefully spent determining what we do before we’re all dead.” 

Don’t get me wrong, there’s a lot I want to do before I check out in 2038 (going off actuarial tables, you understand), and most developed countries have agreed to targets for cutting emissions by 2020, but developing countries want tougher targets for us rich folk, while the rich want the poor to have legally binding commitments. 

I just think that China, in particular, now sees the handwriting on the wall and they will be way ahead of the game. The government recognizes that if it wants to keep its corrupt system it needs to keep the people happy and if the current trends on the pollution front continue, unrest will become the order of the day. Ergo, China will lead the way on climate change. 

But what’s this? A new Pew Research Center survey shows just 57% of Americans believe there is solid evidence the world is getting warmer, down 20% in just three years. Research director Andrew Kohut summed up the change in sentiment. 

“The priority that people give to pollution and environmental concerns and a whole host of other issues is down because of the economy and because of the focus on other things. When the focus is on other things, people forget and see these issues as less grave.” 

But Jane Lubchenco, head of the National Oceanic and Atmospheric Administration, noted: 

“The science is pretty clear that the climate challenge before us is very real. We’re already seeing impacts of climate change in our own backyards.” 

Of course yours truly has always said the debate is being framed the wrong way. It’s about global pollution, period. It’s global pollution that is killing people, today, particularly in the developing world.  

It’s always been about clean air and clean water, more so than climate change. It just so happens that if you take care of the first one, it has added benefits. And that’s a memo. 

--Wow. Kia Motors, South Korea’s 2nd-largest automaker, reported record profits as quarterly sales rose 32%. Good for them. Kia is about to start rolling out cars produced in the United States. 

--If gold is such an inflation hedge, then why is it that today’s $1,050 is still less than half what should be an inflation adjusted $2,287 off of the 1980 record of $873? Now if you want to talk about it being a hedge in uncertain times, be it financial, geopolitical or both, or a new reserve currency, that’s a different story, but don’t call gold an inflation hedge. 

--In another sign of the times, at the upscale Short Hills Mall, about ten minutes from here, I noticed in the crime blotter that there were seven arrests for shoplifting in one 3-day period. 

--I congratulated a friend of mine who is a managing director at Morgan Stanley when the investment bank reported revenues far better than expected and he correctly pointed out that they were doing better than the major league’s umpires these days.  

--MySpace has conceded it can no longer attempt to compete with Facebook on the social networking front, but instead is aiming to become an online hub for music and entertainment. “Facebook is not our competition,” said the new CEO, Owen Van Natta. MySpace, for example, has struck a deal with Apple’s iTunes stores to allow its users to buy tracks without leaving the MySpace site. 

--I’m giving the health-care topic a rest this week as polls show the public option gaining support, now 57% according to the latest Washington Post/ABC News survey. 

[Separately, in the above survey, 50% approve of Obama’s efforts on the economy, while 48% disapprove. I’m not buying these figures.] 

--Chinese e-commerce giant Alibaba.com reported it has seen a significant increase in global trade activity in toys, led by U.S. buyers, which certainly appears to be a sign that Christmas may not be quite so bleak for some little tykes. No word on whether anyone has done a spot check on Santa’s workshop, and we’ll learn soon enough in January and February whether The Island of Misfit Toys is accepting more applicants for its assisted-living facilities. 

--Rick Jervis of USA TODAY reported on the depression in the alligator trade these days. Thanks to a severe drop in global demand for designer gator-skin handbags and such, the number of wild alligator skins sold to market declined from 35,000 last year to around 7,500 this season among Louisiana gator farmers, who are responsible for 80% of the market. 

And if you’re thinking, well, I could be a gator farmer ahead of the next upturn in the market, understand “it costs $100 per gator to raise the animal until it reaches the 3 ½-foot size for harvest.” 

--Speaking of beer, Foster’s reported quarterly results in line with expectations as beer sales remained strong in Australia, but “The rising Aussie dollar, up over the 90 US cent level against the weakening US greenback…presents challenges in terms of earnings and competitiveness in export markets.” And there’s your example of the other side of the dollar trade. 

--My portfolio: I never mention individual names, but out of principle I have to note that I bought a little Hudson City Bancorp this week after meeting CEO Ron Hermance in Ireland. Despite it being a local New Jersey institution, I never paid it much attention even as it’s been a favorite of CNBC’s Jim Cramer, but I finally got around to looking at the stock and after another solid earnings report, bought some. It’s also a good way for me to stay in touch with the local real estate market. I want to emphasize this will be a long term play and I will not be mentioning it further barring an earth-shattering corporate development. 

Meanwhile, my China specialty chemical/biodiesel company made its expected announcement…the new plant is finally finished and production will start fairly soon after required testing and certification. It was no surprise whatsoever, though, that the stock then sold off…classic action…and now the company has entered the show me phase. Show me some real sales and profit growth. For those of you playing along with me, I am not expecting real good news until the end of the first quarter 2010, probably reported in mid-May, though the company should be providing some guidance in its next earnings call. 

Afghanistan: Thanks in no small part to Sen. John Kerry’s diplomatic efforts (gotta give credit where it’s due), President Hamid Karzai was presented with the facts, as best as the UN could develop them; that being at least ¼ of the ballots in the presidential election were fraudulent so Karzai finally relented and agreed to a runoff on Nov. 7. 

The problem now, though, is the same one faced before…how do you secure the vote when the Taliban control many parts of the country? Plus, now you have the issue of the fast-approaching winter. 

Bottom line: How does the runoff provide any more of a legitimate government than the first vote? Realistically it can’t, and a government perceived by the Afghan people to be illegitimate presents further problems for the U.S. and NATO. 

So there’s only one real solution, a power-sharing arrangement between Karzai and rival Abdullah Abdullah. 

On the security front, President Obama appears to be weeks away from making a decision on Gen. Stanley McChrystal’s request for an additional 40,000 troops. Former Vice President Cheney blasted the president for “dithering.”  

Some say Obama is right to take his time, but it’s not as if he hasn’t already thought through the issue. He said back in March that Afghanistan was a just war. But now his supporters offer the excuse that he has to wait to see what happens with the disputed election, while I don’t see what that really has to do with the issue at hand; securing the population bases, as recommended by McChrystal, so that whoever is running the show from Kabul can govern more effectively. 

Obama’s dithering clearly has not provided comfort to some of our allies, including the Dutch and the Danes who, collectively, have 2,850 troops in the theater. Both said this week they wouldn’t supply any more and could withdraw what they have at some point next year. [Both have made a real contribution, compared to some of the other nations still here.] 

Democratic Congressman Ike Skelton (Mo.) and Sen. Joe Lieberman (I-Conn.), in an op-ed for the Washington Post. 

“There should be no confusion about what is at stake in this fight. The last time they were in power, the Taliban not only brutally suppressed the human rights of their own people, they also welcomed Osama bin Laden and the al-Qaeda network into Afghanistan, refusing to give them up even after Sept. 11, 2001. Allowing the Taliban to return to power would represent a major victory for extremist forces throughout the world, tilt the balance of power in South Asia in their favor and further endanger America’s homeland security from terrorists trained there. 

“The president was right to call the war in Afghanistan ‘a war of necessity.’ Now it is time to treat it as such and commit the decisive force that will allow Gen. McChrystal to break the Taliban’s momentum as quickly as possible.” 

Pakistan: Taliban attacks continued and the government was forced to close all universities for five days after suicide bombers struck a school in the heart of Islamabad. But attitudes are finally changing here. In late 2007, only 37% of the people saw the Taliban as a threat to the nation. Today it’s 81%. 

Israel: Even Secretary of State Hillary Clinton had to tell President Obama that it would be premature to restart peace talks between Israel and the Palestinians. 

And then you have the ongoing issue of the Goldstone Report, named for a former South African judge who chaired a commission that investigated Israel’s campaign in Gaza last year. Judge Goldstone himself said that the final draft submitted to the UN for a symbolic vote, one that Britain took heat on in particular for failing to even abstain, was too one-sided and did not criticize Hamas even though Goldstone had concluded they deserved their share of the blame for the conduct of operations as well as Israel. Coupled with growing U.S. and Israeli concerns over Turkey’s shift east, including in improved relations with Syria, and it’s easy to see why Israel feels on the defensive more so than normal. 

Lebanon: Once again zero progress was made in the latest attempt to form a cabinet, following elections that took place June 7! What a mess, which to say the least has the potential to be destabilizing. A key leader, Michel Aoun, demanded that his Free Patriotic Movement party be granted six portfolios on top of maintaining the five ministries – including that overseeing the key telecom industry – already being handled by his bloc in the current caretaker cabinet. 

And on the issue of Israel, the following is from an editorial in Lebanon’s Daily Star. 

“It is a sad fact that the Israeli government’s hypocrisy regarding UN Resolution 1701 [which ended hostilities in 2006] no longer elicits any notion of surprise among the Lebanese. It has become an all too familiar occurrence whereby Israel chastises UNIFIL [United Nations Interim Force in Lebanon] for ignoring Hizbullah’s violations of 1701 while it continues to violate Lebanese sovereignty on a daily basis by land, air and sea. 

“Reports on Sunday that the Lebanese Armed Forces responded to an Israeli reconnaissance flight with anti-aircraft fire should serve as a reminder of the threat these incursions pose…. 

“The motivations for the flights are relatively transparent. By continually breaching Lebanese sovereignty, Israel perpetuates an atmosphere of instability in the country. The flights not only undermine the ability of the Lebanese government to address its domestic duties, but seriously hinder badly needed investment and development projects. 

“Moreover, the flights act as a continued source of provocation. The pursuit of these tactics by a country which in the past has repeatedly relied on feeble pretexts to justify invasion, does much to distill mistrust among the Lebanese, and increases the risk of confrontation….a reaction is inevitable…. 

“The international community calls Israel’s violations ‘unhelpful’ and Hizbullah’s ‘dangerous.’ The message is clear: Israel’s national security trumps that of Lebanon’s. 

“If real progress is to be made in this dispute, and the many other disputes that trouble the region, it is time Western powers viewed Israel’s actions through the same lens as they do its enemy’s.” 

[I agree with much of the above…but Lebanon does itself no favors when it shows itself incapable of producing a government five months after an election.] 

Iraq: General Ray Odierno warned of instability ahead of the January 16 parliamentary elections, a bloody campaign. 

“It’s clear that al-Qaeda and other groups do not want the elections to occur. What I think they will try to do is discourage people from voting by undermining the authority of the Government of Iraq with attacks, so that people lose faith in the democratic process.” 

The Iraqi parliament still hasn’t passed a new election law due to arguments over whether ballots should list the names of candidates or just the party. Any postponement in the vote would impact President Obama’s pledge to end combat operations by Aug. 31 next year, let alone the withdrawal of all U.S. forces by the end of 2011. 

Japan: Following its historic election victory in August, the fears have been that the Democratic Party of Japan would redefine the country’s relations with the United States and that is exactly what the government is attempting to do. Secretary of Defense Robert Gates, for one, is furious that the DPJ has announced Japan would withdraw from an 8-year-old mission in the Indian Ocean to refuel warships supporting the war in Afghanistan, but, more importantly, that it wants to reopen negotiations over a $26 billion military package revolving around the relocation of a U.S. Marine Corps helicopter base and 8,000 Marines from Japan to Guam. It took ten years to come up with the deal in 2006 and now the DPJ wants to change it. 

Prime Minster Hatoyama, responding to Gates’ criticism, said that just because the secretary was in Japan, “doesn’t mean we have to decide everything.” On the campaign trail, Hatoyama said he would reexamine what he called “secret” agreements between the U.S. and the ruling LDP, including on the issue of storage or transshipment of nuclear weapons. Hatoyama has also been pushing for a new alliance in East Asia with China at the core, a la the European Union. 

So the DPJ is seeking change in its foreign policy but no one is quite clear just where they are headed. Some in Japan are also saying Gates shouldn’t be so public in his comments. 

North Korea: A South Korean lawmaker claims the North still runs six prison camps holding 154,000 political prisoners. This is actually a reduction from ten camps and 200,000 prisoners in the 1990s. They are forced to work 10 hours a day and are given 7 oz. of food, plus are denied medical care. 

China: A congressional advisory panel concludes China continues to rush ahead in building a cyber warfare capability as it collects U.S. intelligence through a long-term computer attack campaign, a top priority of the military. 

On the issue of Taiwan, a senior U.S. diplomat, William Stanton, reassured Taipei that the Obama administration’s policies toward the island remain unchanged, though he refused to comment on whether the U.S. will accede to Taiwan’s request for 66 F-16 fighter jets. 

Poland: Speaking of reassurances, Vice President Joe Biden was in Warsaw to tell the people, “Our commitment to Poland is unwavering” after the White House scrapped the Bush plans on missile defense. Instead, Poland could play host to short- and medium-range missile interceptors as part of the administration’s revamped system that Biden claims would be more effective and cover a much greater part of European territory. 

Related to the above, Russia is upset the U.S. is talking to Ukraine about hosting part of the new and improved missile defense plan. 

Somalia: The number of pirate attacks this year has already surpassed the figure for all of 2008. I thought they’d decline significantly with the concerted international effort to combat them. 

Zimbabwe: After a period of relative peace and cooperation in the power-sharing arrangement here, Prime Minister Morgan Tsvangirai announced that his party would boycott cabinet meetings and withdraw from dealing with President Robert Mugabe. “It is our right to disengage from a dishonest and unreliable partner,” said Tsvangirai, who should have received the Nobel Peace Prize. The prime minister has patiently bided his time while waiting for Mugabe to give him promised authorities when he joined the unity government, but Tsvangirai has had it. The final straw was the jailing of his party’s treasurer. 

Mexico: Success in the drug war as U.S. law enforcement rounded up 300 people in 19 states in the largest strike ever against a major Mexican drug cartel, La Familia Michoacana, which specialized in shipping large amounts of methamphetamine and cocaine to U.S. cities from Mexico [with hubs in Los Angeles, Atlanta, Dallas and Seattle.]   Attorney General Eric Holder said “It is the newest and it is the most violent of the five Mexican drug cartels. The sheer level and depravity of violence that this cartel has exhibited thus far exceeds what we unfortunately have become accustomed to from the other cartels.” The roundup was the culmination of a 44-month investigation. 

Brazil: In a rather embarrassing spate of violence here, at least 21 were killed and a helicopter downed in clashes between drug gangs and police in Rio de Janeiro.  Authorities say, however, not to worry. The security situation will be no problemo by the time 2016 and the Olympics roll around. 

--In an ABC News/Washington Post poll, President Obama’s approval rating was 57%, but a Gallup survey has him down to 53% from 62% in the second quarter and 78% on Inauguration Day. By comparison, at this stage in his first term, John F. Kennedy was at 77%. Gallup notes that Obama’s decline is the worst in the 50 years it has been keeping records. 

--David Gergen / U.S. News & World Report, on the national deficit – of leadership. 

“Perhaps the biggest puzzle involves America’s new president. Barack Obama fired the imagination of the country in the campaign a year ago, and his Inauguration Day was magical. Millions of citizens revere him still, thankful that he – not his predecessor – is in the White House and convinced that he remains our greatest hope. 

“Yet the glow of Inauguration Day has clearly faded. Less than a year into office, the country is as sharply divided as under George W. Bush. Obama’s critics argue that he is rushing too fast with too much government and too much debt; his supporters vigorously defend him in public, but in private some worry that he has not yet made the transformation from campaigner to chief executive. Controversy rages on many fronts. 

“This is not the first season that Americans have felt disgruntled with their leaders. Months before the economy cracked and Obama rose to prominence, some three quarters of Americans said we faced a leadership crisis. Indeed, confidence in government plummeted back in the ‘60s and ‘70s and has never really recovered. It was nearly four decades ago that John Gardner first observed that at the founding, with a population of 3 million, the republic spawned a dozen world-class leaders – Washington, Jefferson, Franklin, Adams, Madison, and Hamilton among them – but today, with a population nearly 100 times that, we struggle to produce even one or two.” 

--A report from the Commission on the Prevention of Weapons of Mass Destruction, chaired by former senator Bob Graham, said the government’s efforts on the bio terror front “have not kept pace with the increasing capabilities and agility of those who would do harm to the United States. The consequences of ignoring these warnings could be dire.” 

Among the potential scenarios, a crop-duster releasing anthrax spores could “kill more Americans than died in World War II” and the economic impact could exceed $1.8 trillion in cleanup and other costs. 

--Most of the polls in the New Jersey race for governor have Democrat Jon Corzine and Republican Chris Christie even, with independent Chris Daggett coming in around 14%. Once again, Corzine’s own donations from his prodigious personal wealth are coming under fire, such as his giving Rev. Reginald Jackson and his various charities another $87,000 in 2008. Jackson has a lot of influence with New Jersey’s blacks and wouldn’t you know, he just endorsed Corzine again. 

As for Daggett, on Friday the Wall Street Journal’s Gerald Seib highlighted him in his Capital Journal column and then last evening NBC Nightly News did as well. Seib notes that when it comes to independents, a Washington Post/ABC News survey “finds a stunning 42% of those surveyed identifying themselves as political independents, well more than those who call themselves either Democrats (33%) or Republicans (20%).” The independent share has risen 8% since August. So with little else to follow, nationally, the Garden State is going to receive quite a bit of attention. 

--As an editorial in the New York Post points out, “The most critical question facing Mike Bloomberg when he took office nearly eight years ago was: Could he keep New York City safe? Could he maintain the astonishing drop in crime rates achieved under his predecessor, Rudy Giuliani?” 

The answer is yes. Crime is down an additional 30 percent in Bloomberg’s two terms, with murders down 19 percent. 

--Pope Benedict XVI is amending Vatican laws to make it easier for Anglicans to become Roman Catholics, and boy is this upsetting some in the Anglican hierarchy. But it’s in keeping with his outreach to rival churches, including the Muslim faith. 

There are few details on the new Apostolic Constitution that would amend church laws to bring in Anglicans but the intriguing issue involves married Anglican priests, who the church is saying wouldn’t be able to become a Catholic bishop, but there are those (perhaps grossly misguided) who say the Pope is opening the door a crack on the topic of celibacy. 

--An internal review has revealed that security at Mount Rushmore is far too lax. Last July 8, activists with Greenpeace were able to hang a protest banner on the monument by breaching security and using anchors used by the National Park Service for periodic cleaning, as reported by USA TODAY. 

--Owing to advances in body parts, scientists at Leeds University believe that soon you’ll be able to achieve “50 active years after 50,” thanks to new hips, knees and heart valves, for starters. And then you’ll have transplantable tissues, and eventually organs, that the body can make its own, eliminating the threat of rejection. [BBC News] 

--No doubt, the Northwest Airlines flight that overshot the runway by, oh, only 150 miles before the pilots recognized their mistake is quite a tale. The pilots claim they became distracted during a “heated discussion about airline policy.” It certainly seems more likely they both fell asleep. [The first officer, though, denies this was the case.]

--George W. Bush and wife Laura are hitting the motivational speaker circuit, signing on with the “Get Motivated” seminar program that has been known to pay a cool $100,000 per outing.   43’s first appearance is to be Monday in Fort Worth, where he’ll be on the docket with Rudy Giuliani and Colin Powell, along with NFL analyst Terry Bradshaw. 

--OK, back to the climate change debate. I’m reading the November issue of Smithsonian and I see this. 

“In the early 1900s, UC Berkeley’s Joseph Grinnell surveyed bird territories in California’s Sierra Nevada. Biologists have now found that out of 53 bird species, 48 have moved. Why? Climate change, they say. Many of the birds’ new ranges are farther north or higher in altitude, with temperatures or rainfall akin to where they lived before.” 

--I started subscribing to Army Times and noticed this tidbit. 

“Army equipment officials awarded a contract Oct. 9 for 58,000 armor plate carriers in an effort to lighten heavy loads soldiers carry in Afghanistan. 

“KDH Defense Systems Inc. beat out Eagle Industries, MSA Paraclete and Tactical Assault Gear… 

“KDH is located in Johnston, Pa., which is in the state’s 12th congressional district and home to Rep. John Murtha, D-Pa., chairman of the House Appropriations defense subcommittee.” 

Why of course, Big John…King of Corruption…not that KDH doesn’t make a good product. 

Actually, “the KDH plate carrier weights 6.47 pounds, according to PEO Soldier data. It’s about 1.5 pounds heavier than the Eagle Industries Modular Body Armor Vest.” 

--The Army is sadly on track to surpass last year’s record of 140 active-duty soldier suicides. 

--The news on some of the following bases is often not good; posts with the highest number of soldier deaths during combat operations in Iraq and Afghanistan since October 2001. [Thru Oct. 8, 2009] 

1. Fort Hood, Texas…519
2. Fort Bragg, N.C. …303
3. Fort Campbell, Ky. …268
4. Fort Lewis, Wash. …220
5. Fort Carson, Colo. …218
6. Fort Drum, NY …204
7. Fort Stewart, Ga. …198 

Pray for the men and women of our armed forces, and all the fallen. 

Gold closed at $1054
Oil, $79.70 

Returns for the week 10/19-10/23 

Returns for the period 1/1/09-10/23/09