Week in Review

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Week in Review

07/03/2010

For the week 6/28-7/2

Wall Street…the first half of 2010

Suffice it to say, the first half was a lousy one. The major equity averages are down for the year, what was once thought to be a solid global recovery is looking more like quicksand, we have an historic oil spill that continues to poison the Gulf of Mexico, and twin deficits…both in debt and political leadership around the world. 

So what did I say on 1/2/10 in forecasting the year? In part:

“I fall firmly in the camp that the deleveraging process for the consumer is far from over and that spending won’t return until the job picture improves, which I just don’t see happening in any big way. I also don’t see housing coming back significantly in terms of median home prices, owing to the still serious foreclosure issue….

“It’s a year that’s also going to be dominated to a great extent by further issues on the state and local government front, as in revenues won’t nearly meet expenses, which will lead to even further layoffs…

“It’s about deficits and this is an issue worldwide. 2010 is about still stagnant, if not falling, wages. This year will also see an ever increasing anger with government and the health-care debate, and this will best be manifested in what is going to be an unruly mid-term election.

“2009 was about survival…2010 is going to be about shattered expectations and dreadful pictures on television that will depress the hell out of us. It’s going to be about Iran, for sure, but also a heavy dose of Pakistan as it hurtles towards collapse, with unfathomable consequences. It’s going to be about terror attacks around the globe, including a major incident in Latin America.”

On this last bit, the geopolitical angle, we’ll see how the second half of the year pans out. Otherwise, I’m not changing a thing in terms of my outlook, including my equity prediction for 2010:

“Stocks will finish the year in negative territory…with the S&P 500 and Dow Jones down 12%, Nasdaq off 6%.”

So far so good here, though I won’t toast myself with premium until closer to year end in this regard.

“Inflation. More time has been wasted on this single topic over the past years than just about anything else. Ditto the plight of the dollar. Yours truly has not fallen into these traps of punditry for two simple reasons. Regarding the former, talk to me when the job picture is greatly improved, period. Not before. Regarding the greenback, yes, I’m well aware of our extreme budget issues and the risk China will stop buying our Treasuries. But I’m also well aware, while others miss, that just about everyone else in the world has the same deficit issues we do and, ergo, the dollar is still as good, if not better, than most alternatives. Let alone the fact that when the geopolitical picture really heats up, money will come flooding into our currency. Those screaming about these two topics will, it’s true, one day be right. But we’re nowhere close to that time.”

What we learned this spring was that the geopolitical picture was turned on its head by the euro crisis, which I nailed definitively on Feb. 20, but won’t bore you with my defining moment on the topic of debt today.

In the here and now, though, all the talk concerns a ‘double-dip’ recession. One problem. There is no clear definition of just what this is, though I would subscribe to one that says we go from recession to growth, then back to recession in terms of recording two actual quarters of negative GDP again.  Is that where we’re headed? I don’t know if this is how the numbers will play out, but it’s largely irrelevant.

The point is I thought the second half would be worse than the first (that certainly seems to be in the cards), and it’s already feeling like a double-dip in terms of market and consumer sentiment, whether the just completed quarter or the next two are actually negative or not.

It remains as it always has been…about housing and jobs; the health of both having everything to do with consumer and business confidence, and thus consumption and capital spending. All of these then feed into the markets, for good or bad, and what is normally a positive feedback loop (more good years than bad) has been a negative one since April’s highs.

Let’s look at housing. The news just continues to get worse. This week saw a record drop in pending home sales, the folks who put together the S&P/Case-Shiller home price index continue to maintain progress will be “measured in years,” there has been no inventory improvement or lessening in foreclosure pressures (on the latter, the banks continue to step up property seizures), and builders are cutting prices.

When looking at the median existing home price, though, which is the only fair way to judge where we stand nationwide, I said back in the fall of 2008 that we would bottom in the April-May 2009 timeframe and then sit there for an extended period of time, a forecast I nailed, with April ’09 seeing a median existing home price bottom of $166,500. After a rapid rise in succeeding months, we then hit $164,600 in February 2010 and May’s price came in at $179,600. So to those who say we’re going to see another leg down, yes, we will, but I’d argue essentially back to the April ’09 low and perhaps a few percentage points below that. Bottom line, we bottomed spring 2009 and have essentially gone nowhere since relative to the 40% or so decline off the peak in many U.S. markets.

So housing remains in a putrid state, as does the job outlook. On Friday we learned the private sector added all of 83,000 jobs for the month of June though the unemployment rate fell to 9.5% (we all know it’s more like 16.5-17.0% in the real world and many have simply stopped looking) and the Obama administration is praying that somehow it can get down to below 9.0% before the mid-term election. But I told you about two months ago what others continue to miss. The last employment report before Nov. 2 is Oct. 1, September’s jobs figure. Just three more months of data for this highly charged number employed on the campaign trail. Economist Mark Zandi reiterated yesterday that despite the decline to 9.5%, based on anomalies in the data, we are still headed back above 10.0% before any move below 9.0%. Regardless, with all the renewed uncertainty around the world there is zero reason for Corporate America to go on a hiring binge.

Economist Paul Krugman has a highly visible perch at the New York Times, along with a Nobel Prize, so you can’t just ignore him (if like me you read all sides of all issues) when he opines as he did this week:

“We are now, I fear, in the early stages of a third depression. It will probably look more like the Long Depression (of the 1870s) than the much more severe Great Depression. But the cost – to the world economy and, above all, to the millions of lives blighted by the absence of jobs – will nonetheless be immense.

“And this third depression will be primarily a failure of policy. Around the world – most recently at last weekend’s deeply discouraging G-20 meeting – governments are obsessing about inflation when the real threat is deflation, preaching the need for belt-tightening when the real problem is inadequate spending….

“After all, unemployment – especially long-term unemployment – remains at levels that would have been considered catastrophic not long ago, and shows no signs of coming down rapidly.”

It’s this long-term nature of the current jobs picture that is so depressing and as a Pew Research Center survey showed it is killing sentiment. Among adults 62 and older who are still working, 35% say they have postponed retirement. Six in 10 working adults between ages 50 and 61 say they may be forced to do the same. Four in 10 say they have tapped savings and retirement accounts to make ends meet. A quarter say they have borrowed money from someone. [Michael Fletcher / Washington Post]

When looking at the global outlook, PIMCO’s Bill Gross wrote this week:

“(While) technological innovation – much like Moore’s law – seems to have endless promise, population growth in numerous parts of the developed world is approaching a dead end. Not only will it become more difficult to transfer high existing debt burdens onto the smaller shoulders of future generations, but the overlevered, aging ‘global boomers’ themselves will demand a disproportionate piece of stunted future goods and services – without, it seems, the ability to pay for it. Creditors, sensing the predicament, hold back as they recently have in Greece and other southern European peripherals, or in the U.S. itself, as lenders demand larger down payments on new home mortgages, and other debt extensions….

“We overdid a good thing and now the financial reaper is at the door, scythe and financial bill in one hand, with the other knocking on door after door of previously unsuspecting households and sovereigns to initiate a ‘standard of living’ death sentence….

“(The) developing nations are not growing fast enough, at least internally, to return global growth to its old standards….And so they produce for export, not internal consumption, and in the process leave a gaping hole in what is known as global aggregate demand. Developed nation consumers are maxed out because of too much debt, and developing nations don’t trust themselves to stretch their necks for the delicious leaves of domestic consumption just above.

“It is this lack of global aggregate demand – resulting from too much debt in parts of the global economy and not enough in others – that is the essence of the problem.”

Staying on the global theme, the U.K.’s austerity program is expected to cost 1.3 million public and private sector jobs over the next five years, though the Cameron government says through the spending discipline confidence will return and thus 2.5 million new jobs will be created by 2015. I’ll light a candle for these projections.

Spain’s AAA credit rating was put under review by Moody’s, which was a source of some of the market’s angst this week, but on the other hand, the European Central Bank had to lend far less than anticipated to financial institutions rolling over paper from the crisis of a year ago, so perhaps the stresses on European banks aren’t quite as severe as once thought (which was one of the reasons for that currency’s rebound in recent days).

But then you had massive strikes in Greece and Spain as the people erupted anew over the austerity measures being taken. And German Chancellor Angela Merkel is on increasingly shaky political ground following the narrow victory of her hand-picked choice to be president. In Germany, the people are still up in arms over their being a huge percentage of the EU rescue facility. The last thing Europe needs is instability in this critical nation.

Turning to Asia, it’s still all about China, 24/7, and will be, globally, the balance of 2010, at least. The purchasing managers’ index on manufacturing fell to 52.1 for June, still above the 50 dividing line between growth and contraction but less than expected and far below its peak levels. [The exact same could be said of the PMI in Japan, South Korea, and Taiwan, which were all between 53.3 and 53.9, but well off the highs of earlier in the year.]

So is China’s government successfully engineering a soft landing or is it in the process of crashing from the 11.9% growth it exhibited in the first quarter? I maintain it’s the former, as does noted economist Stephen Roach, who says China’s growth rate will slow to 8-9% later in the year, “worst case.” But the head of China’s National Bureau of Statistics called the PMI “grim.” I just believe that the Chinese government is doing exactly what it said it would. Premier Wen Jaibao also made another call for higher wages to head off unrest, and this is happening at light speed. 10 provinces this week announced wage hikes. It’s all part of the effort to rebalance China’s economy away from a focus on exports and towards a more sustainable balance between exports and domestic consumption.

But General Electric CEO Jeffrey Immelt had some scathing things to say about China this week. As reported in the Financial Times:

“(Immelt) warned that the world’s largest manufacturing company was contemplating better prospects elsewhere in resource-rich countries and that those nations did not want to be ‘colonized’ by Chinese investors.

“ ‘I really worry about China,’ Mr. Immelt told an audience of dozens of top Italian executives, referring to the Chinese government which he accused of becoming increasingly protectionist. ‘I am not sure that in the end they want any of us to win, or any of us to be successful.’”

Then Immelt took off on President Obama, “lamenting what he called a ‘terrible’ national mood and expressing concern that over-regulation in response to the global financial crisis would damp a ‘tepid’ U.S. economic recovery….

“ ‘People are in a really bad mood [in the U.S]. We [the U.S.] are a pathetic exporter…we have to become an industrial powerhouse again but you don’t do this when government and entrepreneurs are not in synch.’”

So what of Obama? The Wall Street Journal editorialized on Friday of “the tax trap that he’s been laying for Republicans.”

“Mr. Obama’s plan has been to increase spending to new, and what he hopes will be permanent, heights. Then as the public and financial markets begin to fret about deficits and debt, he’ll claim that the debt is ‘unsustainable’ and that the only ‘responsible’ policy is to raise taxes.” Ergo, VAT land.

“Businessmen are increasingly worried. The Business Roundtable, a group of establishment top executives who have avoided confrontation so as to maintain access to the White House, are suddenly willing to criticize a sitting president.

“The head of the group, Ivan Seidenberg, whose day job is running Verizon Communications, claimed Obama is creating ‘an increasingly hostile environment for investment and job creation.’ The Economist magazine, a self-styled Obama supporter, put it more graphically: Obama has ‘all too often given the impression that capitalism is something unpleasant he found on the sole of his sneaker.’

“One top administration official tells me he spends a lot of time trying to persuade the president that his anti-business rhetoric has serious consequences at a time when the economic recovery rests heavily on inducing businesses to invest. The government is now too much in debt to add much demand to GDP. Consumers, too, remain heavily indebted and too worried to increase spending very much.

“That leaves business, its cash pile high and rising, its entrepreneurs ever ready to innovate and invest. Unfortunately, those animal spirits have been tamed by the prospect of increased regulation, tax rises the president will levy on the rich and their legatees, and naming and shaming by the president should they do something of which he disapproves.

“You don’t have to be an insurance executive to identify with those hauled into the White House and told by the president that although he has no legal authority to do so, if they raise premiums to reflect the costs imposed by his healthcare bill, he will make them regret it.

“Believe that he would. Believe, too, that many Americans, and not only businessmen, are uncomfortable with the importation of Chicago-style, kill-or-be-killed politics into the hallowed halls of the White House. 

“None of this is to deny that the recent drop in sales of new houses to a record low, and the fact that almost two-thirds of Americans know a non-family member who has lost a job, are not conducive to euphoria. Reality bites. But so does a president seemingly eager to turn the private sector into his pet whipping boy.”

Street Bytes

--Stocks took it on the chin in the second quarter to the tune of 10% for the Dow Jones and 12% for both the S&P 500 and Nasdaq. And it was another dismal week as double-dip fears gripped investors. It didn’t help that the economic news, including the labor report, wasn’t great, particularly a May reading on factory orders, down 1.4%, and a June ISM reading that, while at 56.2, was less than expected. Plus we had a downright horrible slide in June consumer confidence, almost a ten-point drop in a month and far worse than projected. For the week the Dow Jones lost 4.5% to 9686, the lowest weekly close since last October, plus the Dow is on a seven-session losing streak, again the worst since last fall. For its part, Nasdaq tumbled 5.9% and now sits at its worst level since Oct. 30, 2009.

--U.S. Treasury Yields

6-mo. 0.21% 2-yr. 0.62% 10-yr. 2.98% 30-yr. 3.94%

The 30-year Treasury bond’s yield fell in the first half from 4.64% on Dec. 31 to 3.91% as of the close of the second quarter, while the 10-year, 3.84% on March 31, finished June at 2.96%. Staggering, and more than a bit unsettling as the bond market is forecasting further tough sledding ahead. And you know what they say; it isn’t easy sledding down an asphalt road in the summertime.

--So, who wants to discuss Financial Reform Regulation, or FinReg? I sure as hell don’t. What’s so frustrating to some of us is that the causes of the financial collapse, and thus the solution, could be put down on a sheet or two of paper, instead of the 2,000-page gobbledygook we always seem to come up with in matters such as these. All Congress had to do was raise bank capital requirements (an issue already being tackled in Basil III talks…so over time this will be addressed), eliminate credit-default swaps, and enforce existing regulations. Plus if it was going to spend so much time on a massive restructuring, you’d think Congress would have carved out a few hours to deal with Fannie Mae and Freddie Mac, but that would have been exhibiting too much responsibility.

Instead, I really don’t want to discuss FinReg in great detail because there still isn’t anyone who can tell you with any certainty just what it will all mean for the financial services industry due to the inevitable unintended consequences, which will take years to hash out.

But for now the “Dodd-Frank Act,” as it will be called, is going to overwhelm and overburden regulatory agencies with thousands of rules, each of which must first be interpreted. [I like how Alan Greenspan said this week that, in essence, the legislation was written by junior staffers. No one knows what’s in it yet.]

For their part, the SEC and Commodities Futures Trading Commission have to decide which firms are exempt from new rules on derivatives trading.  But many of the instruments will finally see the light of day and be traded on exchanges for transparency, plus you didn’t have the drastic cuts in the business first feared by the Street.

Oh, there were other good items; such as those packaging loans into securities must have some skin in the game themselves instead of foisting all the risk on us schmucks. And ratings firms can be the subject of lawsuits from private investors for negligence, which may finally put the fear of God into them, i.e., they may actually do some due diligence for a change and use common sense; such as in the Three Little Pigs, and which house was more likely to stand up to tropical storm force winds? The one made of straw, sticks or bricks?

Continuing, on the paramount issue of too big to fail, government can now take over and unwind big firms, but they still won’t be allowed to fail and while taxpayers are supposed to be protected, in practice who the heck knows? On a related issue, the Fed can force banks to bolster their capital, though we’ll see if much of this is solved in Basil III.

As for the Volcker Rule, which was to force banks to spin-off their proprietary trading desks, this, like so many other original proposals, was watered down, much to the glee of the banks.

But, overall, the regulations contained in the 2,000-pages will mean less access to credit for business because banks will be less profitable. Financial institutions will be loath to make a loan without verifying the borrower can repay it. Not that this isn’t sound policy to begin with, but banks will be far more risk averse and some otherwise creditworthy candidates will go hungry. Perhaps we miss out on the next Bill Gates or Steve Jobs as a result.

Lastly (and recognizing I’m skipping only about 1,500 other items), FinReg establishes a new consumer protection bureau, housed under the Federal Reserve, which will oversee credit cards, mortgages, and student loans, but not auto loans because these shysters worked out a deal. I mean have any of you, ever, felt like you got the truth in an auto loan?   

Don’t worry, we’ll have years and years to get into further specifics on FinReg, though the odds are good the discussion will outlive me.

For now, the Washington Post summed it up thusly in an editorial.

“For all the bashing of Wall Street – justified and not – that surrounds this bill, the fact remains that government, business and ordinary consumers all shared the Street’s cockeyed optimism about the housing market and other investments during the boom. For that reason alone, no one should entertain the idea that this bill, whatever its pluses and minuses, has banished the specter of financial crisis – because financial crisis is, ultimately, rooted in human folly.”

--Next week I’ll have an extensive report from the Gulf and the BP oil spill. For now, BP is pinning its hopes on the relief wells, the first of which is said to be ahead of schedule and on target. So instead of mid-August, perhaps a week or two earlier, even as most experts say there is still a 20-30% chance this won’t work, at which point should this prove to be the case we all commit hari kari, or rather ask BP officials to do the same.

--Hurricane Alex slammed into Mexico, near the Texas border, and became the first June hurricane on the Atlantic side of the U.S. since 1995, which while you should never make too much of one storm, does lend a bit of credence to those forecasting an above average season in terms of tropical activity. It’s why I recently increased my natural gas bet; again, purely a storm trade, nothing more.

“More than 30,000 wells have been drilled in the gulf, and this is the first time anything like this has ever happened. I suspect we will see, when all the evidence and the facts are in, that the proper procedures were not followed in the attempt to shut down the well, and that’s what caused the blowout…Of the 10 worst oil spills in American history, this is the worst, but it’s also the only one that was caused by an oil well. Seven of the 10 were caused by tankers leaking oil. If we’re going to start importing a bunch more oil, we’re going to increase the chances of oil spills. And finally, this has a huge economic impact on my state – but not nothing like the economic impact on the total U.S. economy.”

--President Obama did one thing right this week. Finally, he made a pitch for Congress to sign the South Korean free trade agreement that was worked out three years ago in the Bush administration, though he wants parts of it renegotiated to please the base. It’s Democrats that have been balking, and at the same time Obama said nothing about the pending deal with Colombia, which is beyond disgraceful.

--I get a kick out of some in Congress, mostly on the Republican side of the aisle, who go nuts at the thought of cutting defense spending. As I’ve noted in this space countless times before, even the likes of Sen. John McCain and Defense Secretary Robert Gates understand the need to do so. Certainly President Dwight D. Eisenhower in his famous Farewell Address warned of the dangers of the military-industrial complex and the potential for corruption. If we want real budget savings, the first place to look should be here. It was May 8, in a speech I posted on my “Hot Spots” link, that Gates announced modernization efforts and the shift of $billions from redundant support programs to the force protection structure. Gates, citing a Defense Business Board finding that overhead consumes nearly 40% of the defense budget, has alerted everyone from the Joint Chiefs of Staff on down to take a “hard, unsparing look at how (each service and civilian branch) operate, in substance and style alike.” [Defense News]

40% of the defense budget could be overhead! Of course every single weapons program we’ve ever initiated ends up costing $billions more than first estimated. 

--June auto sales reflected concerns consumers have about the economy and jobs as June figures were less than May’s. General Motors’ sales gained 11%, when looking year over year, but failed to meet Street estimates. The same for Ford’s, up 13% but less than projected. Chrysler’s rose 35%, though this was off dreadful bankruptcy-inspired numbers a year ago, while Toyota’s rose 7%, Nissan’s 11%, and Honda’s 6%; again, all less than expected.

[GM’s sales in China, however, were up 50% in the first half of the year and overtook U.S. sales for the first time…1.21 million vehicles to 1.07 million sold. In 2009, overall, China sold 13.6 million vehicles to 10.4 million here.]

--Toyota is recalling 270,000 vehicles sold worldwide, including Lexus sedans, due to faulty engines. Their act is getting quite tiresome.

--Tesla Motors was brought to market in a $200 million public offering and the luxury electric carmaker, which has sold fewer than 1,500 vehicles, saw its shares run from the IPO price of $17 to $30 over the course of the first day and a half before closing the week at $19.20. The government earlier supplied Tesla with a $465 million loan commitment, but there are major concerns as to just how quickly electric vehicles will become commercially viable.

--Australia’s new Prime Minister Julia Gillard, under immense pressure, canceled predecessor Kevin Rudd’s proposed 40% tax on mining profits in favor of a greatly slimmed down version that Australia’s leading industry can live with. With this hot issue removed from the political agenda, Ms. Gillard could call elections at any moment to take advantage of a boost in popularity for her party. [Looks like the vote will be in October.]

--Joseph Cassano, the former AIG executive who was as responsible as anyone for the financial crisis, triggering a $180 billion government bailout, finally spoke before the Financial Crisis Inquiry Commission and said of his financial-products division, “I think there would have been few, if any, realized losses on the CDS contracts had they not been unwound in the bailout.” A bit of hubris from Joey Boy, who took $10s of millions in compensation for himself while running the portfolio of credit-default swaps and other derivatives into the ground. Cassano is truly one SOB, the likes of which stain Wall Street’s reputation forever.

--Appearing before the same FCIC panel, Goldman Sachs CFO David Viniar claimed:

“We do not divide revenues or profits between derivative and non-derivative products or track or report our financial results that way.”

FCIC Commissioner Brooksley Born countered, “I am really skeptical that you can’t measure these revenues and these profits.”

Lock Viniar up until he talks. This is outrageous. It’s like Barry Bonds’ trainer refusing to come clean on his client’s steroid use. Greg Anderson has been in and out of jail ever since for failing to cooperate.

--Reader Chris C. always writes me on the importance of summer job programs for inner-city youth, of which I totally agree, so in reading Crain’s New York Business I see that the unemployment rate for 16- to 19-year-olds in the city is 36%. One city run program has received more than 140,000 applications for 39,000 slots. So where is Obama and his stimulus crowd? Why not spend some funds here?

--Turkey’s economy expanded at an 11.7% clip in the first quarter, almost matching China’s 11.9%, though understand this nation collapsed to the tune of 14.5% in 2009.

“California welfare recipients have been able to get taxpayer cash – meant to feed and clothe needy families – from ATM machines at strip clubs across the state, including some well-known gentlemen’s cabarets in Los Angeles….

“Gov. Arnold Schwarzenegger has ordered the [Department of Social Services] to remove the clubs from the official list of businesses where welfare recipients can withdraw benefits using state-issued ATM cards.”

--In a rare admission, Apple said it was “stunned” to learn that its iPhones have been giving off false signal strength readings for years, which is why with the iPhone 4, users are seeing a sudden plunge in strength when they hold it in a certain manner. Or so they’d have us believe. Apple is looking into a software fix. Many users say the iPhone 4 is just fine.

--Sign of the times…heard on a New York Mets radio broadcast. “That’s Re/Max…your expert on foreclosures and short sales.”

--The New York Post points out that there is no state income tax in Florida, but New York state and city income taxes equate to the highest in the nation, 12.85%. Ergo, LeBron James would take a huge hit in signing with the Knicks (and to only a slightly lesser extent the New Jersey Nets). So on a five-year contract from the Knicks or Heat for the $96 million max, he’d shell out $12.34 million in New York taxes. That’s would pay for a lot of hangers-on, know what I’m sayin’?

--Continental Airlines announced it will be selling “specialty cocktails” on its flights. Partnering with Stirrings, a cocktail mixer brand, you and I will be able to order up a mojito and pomegranate martini, while Red Bull is offering its energy drink. [In all honesty, I’ve never had any of these.] All three will be offered with alcohol for $9 apiece or without for $3.

--But did you see the Food and Drug Administration’s study of airline catering facilities, like LSG Sky Chefs? As reported by Gary Stoller of USA TODAY:

“The FDA reports say many facilities store food at improper temperatures, use unclean equipment and employ workers who practice poor hygiene. At some, there were cockroaches, flies, mice and other signs of inadequate pest control.”

Yup, from now on its only beer and stale pretzels for the kid, sports fans.

--My portfolio: For those of you playing my China stock, I reaffirmed with company management that their operations were not impacted by the severe flooding in the region. I purchased a fair bit more at week’s end as the price dropped. Reminder…I can afford to sit this one out another few years. If the Chinese economy takes a header, this stock will continue to perform poorly with all the rest. But when sentiment changes, hopefully in my lifetime, there will be a time when it rocks.

Foreign Affairs

Afghanistan: The number of coalition forces killed here in June hit 102, the war’s highest monthly tally and approaching some of the worst months of the Iraq war. A record 59 Americans were killed. Nine countries lost troops, the most since hostilities began in 2001.

Before he was forced to step down, Gen. Stanley McChrystal issued a note of assessment to allies and warned of little progress the next six months. CIA Director Leon Panetta, in remarks to ABC’s “This Week,” said Afghanistan has problems in governance, corruption, and narcotics trafficking; not that any of you didn’t already know this. It’s the scope of it all that is both depressing and infuriating. Afghanistan is the perfect example of the phrase “blood and treasure.” We are losing both in great amounts.

The other day the Wall Street Journal reported that $3 billion has left the country in recent years, siphoned from Western aid projects. High officials are involved at all levels. U.S. investigations are being derailed by the Karzai government. It’s no wonder then that Karzai himself was given a deadline of five years by the G8 to sharpen security and improve the judicial system or face a backlash. President Obama said, “Putting everything we have into getting it right this year is vitally important.”

But aside from the corruption fight, the other key element in the strategy, the Afghan security forces, are demonstrating little reason to believe they will be able to secure key parts of the country by July 2011, or the time when Obama wants to begin withdrawing.

So now it’s Gen. David Petraeus’ war, he being confirmed 99-0 by the Senate. Petraeus assured the troops, and congressional supporters, that he will seek to ease the rules of engagement that Gen. McChrystal had curtailed in an effort to reduce civilian casualties.

And on the July 2011 deadline, Petraeus told senators it “is the beginning of a process, not the date when the U.S. heads for the exits.” I don’t believe Petraeus and Obama will disagree on this but by next summer the 2012 presidential election will be first and foremost on the minds of the White House.

For now it would also seem Obama and Petraeus (as well as Leon Panetta) agree that any stories of reconciliation between the Taliban and the Afghan and Pakistani governments is hogwash. The Taliban even went so far as to tell BBC News that negotiations with NATO as well are a non-starter for a pretty simple reason. The Taliban believes it is winning.

Iran / Israel: Among the many stories on this front this week was one that has Iran supplying Syria with a sophisticated radar system that not only could help Hizbullah with targeting in the next Lebanese war, but also give Iran early warning of any attack by Israel.   This becomes all the more important following CIA Director Panetta’s assertion that Iran has enough material to produce two nuclear weapons, though Panetta is not sure the Iranian government has made the decision to proceed with its program to that level. Panetta added that it would take one year to enrich the uranium to weapons grade levels, and another for a delivery system, to which I’d say Iran has been working on delivery systems for years and there’s no reason to believe it would take that long.

To me the immediate key, related to Iran’s move to give Syria a radar system, is still whether or not Moscow keeps its word to not supply Iran with the S-300 air defense system that, coupled with Syria’s new radar, would greatly impede any attempt to attack Iran’s nuclear program. We keep getting assurances from the Kremlin that they will not deliver it because the latest UN sanctions don’t allow this, but the proof is in the pudding. [This is where the Russian spy mess, detailed below, could come into play though I doubt it. Russia is more ticked off over the additional sanctions levied by the EU and U.S. that go beyond those of the UN resolution.]

This week, Joint Chiefs of Staff Chairman Admiral Mike Mullen said a nuclear-armed Iran would be “incredibly dangerous” and the international community has “no reason to trust” Tehran’s longtime insistence that its nuclear intentions are strictly civilian in nature. But, Mullen added, airstrikes on Iranian nuclear facilities would be “incredibly destabilizing” to the Gulf region and that Israel appeared to comprehend the likely consequences of an attack.

And a word on the sanctions. While no doubt the UN versions were weak, the new EU and U.S. ones do have some teeth and the other day French oil giant Total announced it would halt gasoline sales to Tehran, while the Spanish firm Repsol indicated it would not participate in a contract to develop a major Iranian gas field.

On the issue of Israel and Turkey, ‘not so’ secret talks were held in Brussels between Turkey’s foreign minister and Israel’s trade minister, which ordinarily would be a good sign given tensions between these two, but then it turns out the trade minister, a moderate, didn’t tell Israel’s far-right foreign minister Lieberman about the discussions beforehand, which as you can imagine ticked off the hot head royally.

Lastly, the London Times had an interview with the owners of Lebanon’s Massaya winery in the Bekaa Valley. Back in April, I went to a rival vintner a few miles away. What struck me was the musings of Ramzi Ghosn, one of Massaya’s owners. “I think there will be another war,” although he believes it will come next summer rather than this year. I returned to Lebanon when I did because I feel there will be war before year end, which may or may not be tied to an Israeli attack on Iran’s nuke facilities. 

Iraq: There was a story cleric Moqtada Sadr’s Mahdi Army is beginning to make a comeback as it vows to protect its communities at a time when there is still stalemate over a new government. One former militiaman now working with Sadr’s political operation told the Los Angeles Times, “The security forces are loyal only to the parties, and not to the people,” adding that the continued U.S. presence is that of an occupation force. Familiar rhetoric that warrants concern. U.S. Ambassador Christopher Hill said American forces were closely monitoring reports of the resurrection of Sadr’s old force but were not convinced it was an imminent threat to Iraqis or U.S. forces.

China/ Taiwan: Beijing and Taipei signed their historic trade agreement on Tuesday, the most significant pact since 1949. Taiwanese banking, insurance and financial companies will have new access to the mainland while tariffs are being reduced on 539 Taiwanese export items (15% of the Taiwanese goods shipped to the mainland). 267 Chinese mainland products will receive the same treatment (10.5% of their exports to Taiwan).

Taiwan’s leader President Ma said the Economic Cooperation Framework Agreement was “a vitamin, not a panacea to cure all ills,” but the signing of the treaty “shows that peace and prosperity between the two sides are not like roses in the sky. We are able to touch them with our hands.”

Ma is counting on the pact creating 260,000 jobs on the island while boosting GDP and protests against the agreement have been relatively mild in a place known for massive demonstrations. Amidst tough economic times, the people seem to want to give the agreement a shot. China feels it will move the two closer to political integration, though of course it won’t say this publicly.

In the end, however, it’s all about the 2012 presidential election. If the opposition DPP defeats Ma, the DPP favoring independence, any of the above progress could go out the door in a nanosecond.

North Korea: Pyongyang accused South Korea and the United States of bringing heavy weapons to the border at Panmunjom, demanding their removal. Meanwhile, Kim Jong-il will be formally elevating his son Kim Jong-un at a September convention. Intelligence research reveals the boy exhibits violent and sadistic tendencies. Super.

Russia: There was a large pickup in U.S. prisoner requests this week, as made through their attorneys. The typical one went, “Can I be transferred to the prison that Anna Chapman is going to be placed in?”

At least I’m imagining this is the scuttlebutt among the incarcerated as Ms. Chapman, who is rather attractive, became the face (and body) of a Russian spy ring that was exposed this week. As many have observed, however, this ring, with direct links to the KGB’s successor organization (Ms. Chapman’s father was a former KGB operative) was rather ridiculous in that the information they were attempting to glean could just as easily be picked up on the Internet.

The case, though, was not exactly welcomed in the White House, seeing as how President Obama had just courted Russian President Medvedev a few days earlier. Surprisingly, the Kremlin did admit that some of those arrested were Russian.

The suspects had been collecting information for the Foreign Intelligence Service for at least seven years. An 11th suspect, the money man, was arrested on Cyprus and granted bail, whereupon he fled, which became the reason why the other 10 in the U.S. won’t be granted bail.

Vladimir Putin was hosting former President Bill Clinton in Moscow as the news broke.

“Back at your home,” said Putin, “the police went out of control and are throwing people in jail. But that’s the kind of job they have. I hope that all the positive gains that have been achieved in our relationship will not be damaged by the recent event.”

So what were the agents supposed to be collecting information on? According to the Justice Department, U.S. policy on Internet use by terrorists, U.S. policies in Central Asia, problems with U.S. military policy, Western assessments of Russian foreign policy, the U.S. position on new START treaty, U.S. position on Afghanistan, U.S. position on Iran’s nuclear program… again, all topics covered in any major newspaper or site like the one you’re reading now.

Had they been sent to crack LeBron James’ inner circle for the purposes of finding out his hot buttons in terms of where he wants to play, that’s a different story. I just wish Ms. Chapman had contacted me.

“What do I need to do to, err, please you and gain your knowledge?”

Venezuela: In President Hugo Chavez’s latest attempt to curry the favor of the forces of evil, he hosted Syrian President Bashar Assad on Assad’s first visit to Latin America.

“Arab civilization and our civilization, the Latin American one, are being summoned in this new century to play the fundamental role of liberating the world, saving the world from the imperialism and capitalist hegemony that threaten the human species. Syria and Venezuela are at the vanguard of this struggle.”

Oh, shut up, Hugo. You guys are all nothing but losers who have dragged your people down in one of the crimes of the century.

Mexico: A leading gubernatorial candidate was killed, the highest-level assassination of a political figure since President Calderon announced his war on drug cartels in 2006. Rodolfo Torre was the odds-on favorite for governor of Tamaulipas. Torre was killed along with three others when his campaign convoy was ambushed by gunmen. The election is July 4 and the vote is proceeding. Separately, in a massive gun battle between drug and migrant trafficking gangs 12 miles from the Arizona border, 21 were killed.

Random Musings

Last week I wrote of how I was troubled that in the course of the firing of Gen. Stanley McChrystal we saw evidence of insubordination among his entire staff. Saturday, I saw a friend of mine who is a West Point grad and he, too, was troubled by this. He added that of course McChrystal should have been released of his duties. In Army Times, there was a slew of letters from enlisted men and women on both sides of the issue. This is one topic that isn’t going away.

“With the shock still fresh over the sacking of Gen. Stanley McChrystal, it fell to Adm. Mike Mullen, the chairman of the Joint Chiefs, to put the case in perspective: ‘We are and must remain a neutral instrument of the state, accountable to and respectful of those leaders, no matter which party holds sway or which person holds a given office.’….

“Sadly, the admiral’s comment was necessary because of the dangerous divisions the incident exposed.

“While McChrystal is a genuine patriot and warrior, too many Americans were ready to excuse the disparaging comments by him and his staff on the grounds that Obama deserves the mocking rebuke. Those defenses left me with the unhappy conclusion that the disunited of America is surging ahead at a heart-stopping pace.

“If not in a case like this, there is no place left where a single standard of conduct still applies.”

“I think you may have it backwards,” reader Nancy King wrote. “McChrystal deserves to become president so he can actually fight to win, and Obama deserves to be fired.”

Another reader, unsigned, told Goodwin: “General McChrystal only said what millions of people are coming to realize, this administration is in over its head.”

“On one hand, the tirades reflect that a majority of Americans are growing sour on Obama. Count me among them.

“On the other hand, some of the defense of McChrystal threatens to elevate political differences above the rule of law and the Constitution. Count me out on that.”

Some of the opinion out there today would have you believe that military leaders can ignore elected officials. That’s absurd. Use your heads, people. Better yet, don’t take it from me. Listen to Adm. Mullen and Defense Secretary Gates.

Of equal importance these days, as Greg Jaffe of the Washington Post reported, is the issue of why the U.S. military, with few exceptions such as Gen. Petraeus and Gen. Odierno, keeps producing mediocre leaders. A dozen commanders have been through top jobs in Iraq and Afghanistan. Some of them, such as Gen. Tommy Franks and Lt. Gen. Ricardo Sanchez, were unable to adapt to the type of war being waged in Iraq. Franks wrote in his 2004 autobiography, “Our steady progress in Afghanistan is one factor that gives me confidence that Iraq will be able to provide for its own security in the years ahead.” Just slightly off the mark.

And Greg Jaffe brought up a point I’ve been making in recent weeks.

“There is also widespread skepticism that the military’s slow-moving bureaucracy can come up with a system for routinely producing innovative officers with the political, bureaucratic and battlefield skills needed to lead at the highest levels.”

McChrystal, incidentally, decided to retire. He was just made a four-star general last year and you need to be one for three years to remain as one in retirement, which impacts your pension, so it’s expected that Obama or Gates will take the necessary steps to ensure the general gets the full pension, as he should. Generals retire at 75% of their final salary…$193,584 for a four-star, $171,808 for a three-star.

Staying on topic…Andrew J. Bacevich / Washington Post [Bacevich being a retired officer and West Point grad who lost a son in Iraq]

“The day the McChrystal story broke, an active-duty soldier who has served multiple combat tours offered me his perspective on the unfolding spectacle. The dismissive attitude expressed by Team America, he wrote, ‘has really become a pandemic in the Army.’ Among his peers, a belief that ‘it is OK to condescend to civilian leaders’ has become common, ranking officers permitting or even endorsing ‘a culture of contempt’ for those not in uniform. Once the previously forbidden becomes acceptable, it soon becomes the norm.

“ ‘Pretty soon you have an entire organization believing that their leader is the ‘Savior’ and that everyone else is stupid and incompetent, or not committed to victory.’ In this soldier’s view, things are likely to get worse before they get better. ‘Senior officers who condone this kind of behavior and allow this to continue and fester,’ he concluded, ‘create generation after generation of officers like themselves – but they’re generally so arrogant that they think everyone needs to be just like them anyway.’….

“The responsibility facing the American people is clear. They need to reclaim ownership of their army. They need to give their soldiers respite, by insisting that Washington abandon its de facto policy of perpetual war. Or, alternatively, the United States should become a nation truly ‘at’ war, with all that implies in terms of civic obligation, fiscal policies and domestic priorities. Should the people choose neither course – and thereby subject their troops to continuing abuse – the damage to the army and to American democracy will be severe.”

--The other week I noted that no living soldier has received the Medal of Honor since Vietnam, but now the Pentagon has recommended that the White House consider awarding one for a living soldier’s actions in Afghanistan, fall 2007. The review is so secret that the soldier’s family does not know it has reached the White House. This is a layup for both the Pentagon and Obama as both stand to benefit.

--For President Obama and congressional Democrats, it’s a race against the clock when it comes to jobs, the Gulf oil spill, and now Afghanistan. It’s all about preventing more bad news before November’s election. That’s going to be impossible to do.

--Democratic Senator Robert Byrd of West Virginia died. He was 92. Let’s just say it is truly pathetic that our system allows a man like this to be in the Senate for 51 years, 57 in Congress overall.

--In another 5 to 4 decision, the Supreme Court reaffirmed the Second Amendment right to bear arms in the case McDonald vs. Chicago, though it does not strike down any gun-control laws. Justice Samuel Alito Jr. wrote: “It is clear that the Framers…counted the right to keep and bear arms among those fundamental rights necessary to our system of ordered liberty.” 

The decision extended a 2008 ruling that “the Second Amendment protects a personal right to keep and bear arms for lawful purposes, most notably for self-defense within the home.”

--Space Shuttle Discovery Commander Alan Poindexter told London’s Telegraph that there is no sex in space. “Personal relationships are not an issue.”

--Speaking of sex, Portland, Oregon police explained that the reason they reopened a sexual assault investigation into former Vice President Al Gore was because detectives looking into the matter last year failed to notify high-ranking officials of their decision to drop the case. Detectives had previously investigated the claims of the massage therapist that Gore groped her, among other things, but decided the case was weak and the accuser erratic. But then she told her story to the National Enquirer.

A Gore spokeswoman said, “Further investigation into this matter will only benefit Mr. Gore,” aka “Mr. Stone,” the name employed by Gore when he checks into hotels.

“No M’am. I’m Mr. Stone. Al Stone.”

As reported by Terrence Petty of the AP, Molly Hagerty claims that as she entered Gore’s suite while he was in town giving a speech on global warming, “he dimmed the lights and asked her to massage the inside muscles of his thigh – a request she viewed as inappropriate. She refused and he….” Well, you know the rest of her story, including Hagerty’s calling Gore “a crazed sex poodle.”

--After 25 years at CNN, Larry King announced he is hanging it up. King, 107, said he felt no pressure to leave even though on most recent nights he had just 245 comatose viewers.   But no doubt Larry King had a remarkable career and it wasn’t too long ago he was the leader in “gets.”

--The following may save one of you some day. From Megan Holland / Anchorage Daily News:

“A Haines commercial fisherman has become the second Alaskan in less than a week to die from a suspected case of paralytic shellfish poisoning, said the state Department of Health and Social Services. He is the fifth Alaskan to fall ill to the poison from seafood this month.”

The victim ate Dungeness crab at a large family gathering. State epidemiologist Dr. Joe McLaughlin “urged Alaskans to stay away from all personally harvested shellfish. ‘You are basically playing Russian roulette if you personally harvest shellfish in Alaska waters,’ he said.

“He also said to stay away from crab guts. While crab meat does not contain poison, the guts, or viscera, of crab can because crab eat shellfish, health officials said.

“The toxin involved in paralytic shellfish poisoning is 1,000 times more lethal than cyanide, McLaughlin said.

“Commercially sold shellfish are regularly tested for the toxin and are considered safe.”

The victim’s wife said “her husband immediately felt tingling of his lips after he ate the crab but didn’t think anything of it – and didn’t tell anyone about it.”

What’s interesting is that locals know all about the threat, but thought it only pertained to mussels and clams, not crabs.

Symptoms normally begin an hour after consumption, McLaughlin said.

“Those who suspect they have paralytic shellfish poisoning should induce vomiting immediately to get the poison out of the stomach and go to the emergency room.”

--Wildlife officials are digging up 70,000 turtle eggs from beaches on the Gulf of Mexico and moving them hundreds of miles to the Atlantic coast in an attempt to save a generation from being wiped out by the oil spill.

The life of the turtle is really remarkable. After rushing to the sea upon hatching, they swim out to deep-sea areas for their “lost year,” during which they ride the current clinging to seaweed.

Chuck Underwood of the U.S. Fish and Wildlife Service said: “This is an extraordinary effort with a chance of failure but we know for certain that if we don’t act, those 50,000 to 70,000 hatchlings are going to end up in that oil.”

The effort is focused on loggerhead turtles, which are on the verge of being placed on the “endangered” list.

It’s feared that many sea turtles have been killed during controlled burns of the oil on the surface. One wildlife officials said, “BP is burning turtles alive and it is cruel, heartless and a crime we can’t and won’t allow to continue.” But conservation efforts have saved 79 of 81 oil-covered turtles.

Of course relocation may not work, habitats being different.

“It is believed that when turtles emerge from their eggs and head for the surf, they ‘imprint’ on the beach where they hatch, meaning they are programmed to recognize and return to it in later life. Biologists believe it is possible that the imprinting process may occur even before they hatch, giving the babies a loyalty to that location either through its smell or magnetic position.

“In moving the eggs from Florida’s Gulf coast to its east coast, they therefore cannot be sure which direction the hatchlings will head – eastwards into the sea, or westwards up the beach.”

This is fascinating. No wonder some choose to become biologists. Better than being an investment banker, that’s for sure.

Loggerheads can live to over 50 years of age, by the way, and females sometimes swim thousands of miles to the beaches where they were born to lay their eggs.

--And here’s another reason why humans don’t deserve the top slot on the All-Species List.

“Two Census Bureau managers from a Brooklyn field office were fired after their bosses found they faked household surveys to meet deadlines….

“Instead of pounding the pavement and knocking on doors, the corner-cutting people-counters mined the phone book and Internet to make up answers to questionnaires, regional director Tony Farthing said.” [I’m assuming Mr. Farthing is British.]

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

God bless America.

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Gold closed at $1207…a little dip this week
Oil, $72.14

Returns for the week 6/28-7/2

Dow Jones -4.5% [9686]
S&P 500 -5.0% [1022]
S&P MidCap -5.8%
Russell 2000 -7.1%
Nasdaq -5.9% [2091]

Returns for the period 1/1/10-7/2/10

Dow Jones -7.1%
S&P 500 -8.3%
S&P MidCap -3.4%
Russell 2000 -4.2%
Nasdaq -7.8%

Bulls 41.1 [unch]
Bears 33.3 [Source: Chartcraft / Investors Intelligence]

Have a great week. Next time from Orange Beach, Alabama.

Brian Trumbore

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