Week in Review

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Week in Review

02/12/2011

For the week 2/7-2/11

Wall Street and the Crisis in Egypt

There’s a good reason why I don’t Tweet and refuse to do a daily commentary. It’s all about my mantra “wait 24 hours.” No clearer example of this have we had in recent memory than the events in Egypt that led to the ouster of President Hosni Mubarak. I comment further on this specific titanic event down below, but in light of the fact it was a week with little economic news, worldwide, it gives me a chance to catch up and do my best to summarize as succinctly as possible all I’ve been saying these past six-seven weeks in particular, beginning with my outlook for 2011 back on Jan. 1. 

We’ve learned once again geopolitics matter. But it’s extremely important to treat each issue individually and not lump them all together. Outside of the initial market scare on Friday, Jan. 28, when stocks swooned over the uncertainty concerning Egypt, the markets handled the crisis well, which was for two reasons. First, the violence and images on television were limited (with 99% of the 300+ deaths appearing off screen) and, second, Egypt has little oil.

But when I talk of geopolitical risks, put what happened in Egypt instead in Saudi Arabia, or Iran, and until a resolution was reached the markets would have been totally convulsed.

If I have to pick just two ‘hot spots’ now, though, I’d say Lebanon (controlled largely by Iran at this point) and Pakistan. There has been little news in the past few weeks since Hizbullah orchestrated their own coup in Lebanon but this is but a small respite before the situation heats up anew, while Pakistan remains an incredibly volatile hell-hole with a ton of moving parts.

But geopolitical risk is also about terrorism. I warn of the kinds of events that can shatter confidence in a nanosecond, and thus impact spending and the financial markets. A Chechen attack in Russia is of virtually zero concern to yours truly. A similar suicide attack at Charles De Gaulle, Heathrow, or Newark Liberty is an entirely different matter that would impact global commerce, at least in the short term. We learned this week, for example, that Al-Qaeda in Yemen, the group headed by the evil cleric al-Awlaki (or Awlaqi), is really the primary threat to America these days; not the Al-Qaeda of Osama bin Laden and Ayman Zawahiri. Our national security apparatus told us the threat from Awlaki is very real.

Geopolitical risk of a terrorist nature, though, is different from a state level. The state level normally gives you some time to react, the terrorist obviously doesn’t.

On the global economic front, you have an emerging Asia, ex-Japan, that despite some serious inflation headlines continues to rock. Indonesia’s fourth quarter GDP, for example, was up 6.9%, the best there in six years. China and India, while showing signs of slowing and facing serious inflation on the food front, nonetheless are still projected to both grow 8%-9% in 2011. India’s industrial production for December came in up 1.6%, not as fast as recent history, but then you see that January car sales there spiked 26%. China increased interest rates a third time in four months, but property prices continue to rise (not good), while retail sales during the two-week Lunar New Year holiday rose 19% (spectacular…and a super sign when looking at a hoped for trend where the consumer in China starts to spend so that the economy isn’t solely focused on exports). But next week we get inflation data from China and it’s not supposed to be good, which will mean further rate hikes down the road with the risk that at some point the economy could roll over. [I’m not forecasting this…but I’ve been increasingly concerned for months now.]

In Europe, the patient, ex-Germany, remains in serious condition and in the case of about half the Euro-17 nations, far from ‘stable.’ I got a kick out of an IMF official on Friday saying Greece had been officially “rescued,” though at the same time recommended another $20.3 billion for it out of the bailout fund. Another basket case, Ireland, has their snap election in just two weeks, Feb. 25. The two parties that will split the vote, Fine Gael and Labour, both will demand the EU/IMF bailout be restructured. The odds of this happening beyond a minimal interest rate reduction are nil. The six Irish banks also need an immediate substantial cash infusion.

But the big news in Euroland this week was the sudden resignation of Bundesbank President Axel Weber, a hardline inflation fighter who German Chancellor Angela Merkel was assuring would take over for departing European Central Bank President Jean-Claude Trichet. Merkel’s party is under the gun in upcoming state elections and she was counting on Weber to be her ally in the ECB in terms of pushing through her agenda of tough love for nations such as Ireland and Greece. Merkel knows the German people will not stomach the idea of more of their tax money going to bailout sick cousins. Now Trichet’s replacement won’t be a German, and this is a big blow for the chancellor. The European Union is having critical meetings on March 11 and March 24-25, at which point it is expected the EU will wrap up a final agreement on a bailout mechanism going forward, and a possible increase in the existing bailout pool, but, again, Germans don’t want to contribute any more of their own cash to help others.

Bottom line, Europe still matters, even in the U.S., and what Europe needs more than anything else is growth, and with sick balance sheets and austerity programs just beginning to hit, growth is not what most European nations will see.

What of the economy in the United States? No doubt the $858 billion tax cut extension /stimulus program of last December will help, and the Federal Reserve’s quantitative easing II will continue to juice the stock market, per the Fed’s plan, until it ends this coming June. Then we’ll all look around and ask, now what? 

The U.S. continues to face major headwinds. Housing, for  starters. Zillow.com this week announced that in the fourth quarter, a full 27% of single-family homes in America were underwater. Las Vegas leads the way with a staggering 81%, followed by Phoenix at 70%. Disturbingly, Atlanta’s rate surged from 36% to 54%. This while the interest rate on a 30-year fixed mortgage hit the 5% level, up from November’s record low of 4.17%. 5% is not enough to keep a qualified home buyer from purchasing, but if we march up to, say, 6%, for most folks that’s probably a deal-breaker.

You also have the ongoing issue of state and local governments continuing to slash their budgets. As economist Mark Zandi noted the other day on CNBC, “There’s no more serious drag on economic growth than the severe budget cutbacks at the state and local level.” And the federal government’s own cuts are to follow.

And then there’s the inflation issue. I’ve been as clear as possible on this one. Inflation is a serious concern in the developing world and obviously we saw some examples of this in the unrest in Tunisia and Egypt, which was precipitated to some extent (though far from all) by soaring food prices.

But this is not the situation in the U.S. and much of the developed world. However, inflation is beginning to bite when it comes to profit margins, and if gasoline prices surged to $4.00, then good-bye thoughts of 3.5%-4.0% GDP growth for all of 2011 in America.

Here’s where I respectfully differ with those in the inflation camp. This is a spike we are witnessing, partially fed by poor fundamentals, i.e., the droughts we are now all aware of, including China’s, as well as speculation.  

The news out of the USDA that projects U.S. corn supplies to come in near a record low set 15 years ago, 1996, was not a surprise. I’m now on record, though, as saying by May we will begin to hear better news on the harvest front, including, importantly, from Australia, where for all the damage the recent rains have done it has also done wonders on reservoirs that are suddenly near full capacity after being at 20% or less the previous few years. I also stated for the record that the diversified CRB Index of 19 commodities will finish the year lower than 333.90, a figure I picked a few weeks ago. [It ended 2010 at 332.80 and closed this week at 337.78.]

For now, though, no doubt the inflation spike in food prices will help slow global growth. Then prices will decline. I keep thinking back to 2008. On 7/2/08, as oil peaked at $147, the CRB hit its high of 473.51. Granted, the financial crisis followed that fall but the fact is we finished the year at 229.54. Draw your own conclusions…I’ve drawn mine.

But one last word on this topic. Fed Chairman Bernanke, in testimony to Congress this week, said Treasury bond rates have increased despite his buying of government bonds because of the outlook for an improving economy, not because of the feeling in the bond pits that the Fed is behind the curve when it comes to fighting inflation. I believe rates have been heading higher for three reasons; the perception the Fed is behind the curve, the improving economy, and fears of a debt shock that will hit us in 2012, sooner than many believe, in the form of a major credit downgrade. But for now I do not believe interest rates will go that much higher than existing levels because after we run through this current inflation scare, prices will come down and the chief component of a product, labor, or wages, just isn’t going to rise in any substantial fashion.

Yup, I’m glad I wasn’t writing this column Thursday night. The following was posted on the Financial Times’ website a few hours before Hosni Mubarak stepped down. [I’ll protect the author’s name…been there, done that.]

“Egypt’s President Hosni Mubarak didn’t blink. In the face of protests that extended all over the country, he did not relinquish power. His stubborn refusal to move now sets the stage for a confrontation between Egypt’s security forces and the protesters. The winner remains deeply uncertain. What is clear, however, is that Mr. Mubarak and, in particular, the army, are not going to give up easily.”

Oops. Sure, all of us were surprised when Hosni failed to step down on Thursday, and we all awaited a day of bloodshed on Friday. Thankfully, Mr. Mubarak finally accepted his walking papers while the man the United States wanted all along to assume control on a temporary basis, Omar Suleiman, is leading the transition. Transition to what is the big question now. One cannot lose sight of the fact that Egypt remains a basket case on Feb. 12, just as it was 18 days earlier.

I have been careful to say little about the Obama administration’s response the first 17 days, but let’s face it, it was all over the place, especially when looking at the actions of Secretary of State Hillary Clinton. Obviously the intelligence apparatus down in Langley leaves something to be desired as well. CIA Director Leon Panetta could have answered the congressional inquiry in so many other ways instead of then looking like a stooge.

As for the United States and its allies, Saudi Arabia, Jordan and Israel are none too pleased at the pressure Washington placed on Egypt’s leadership to have Mubarak sent into exile. There’s a power vacuum now in the Muslim world’s most populous country at a time when the likes of Iran could stir up further unrest through its proxies.

So we just sit back and watch. Suleiman and his cronies (who might be plotting now against Suleiman) need to establish order quickly and get the economy moving again, thus creating an atmosphere where tourists feel safe to return. [Not me, Jack.] As for elections, the Muslim Brotherhood is the only organized party and outside of carpetbagger Mohamed ElBaradei, there are a mere handful, if that, of obvious political leaders among the citizen class.

What the Obama administration must insist on, though, for starters is that Egypt keep its treaty obligations.

For now, remember some of what is getting lost in the euphoria. Hundreds of hardcore militants escaped from prison in those first days. Tens of thousands of weapons were looted from armories (particularly outside Cairo). One can hope for the best, but also prepare for the worst.

“We are, unwillingly again, parties to a long twilight struggle, this time with Islamism – most notably Iran, its proxies and its potential allies, Sunni and Shiite. We should be clear-eyed about our preferred outcome – real democracies governed by committed democrats – and develop policies to see this through.

“A freedom doctrine is a freedom agenda given direction by guiding principles. Truman did it. So can we.”

“It is a sign of national maturity – the product of hard learning, from Korea and Vietnam to Iraq and Afghanistan – that fewer American complainers are today faulting the Obama administration for not anticipating and shaping events in Egypt. Israel, which lives next door to Egypt and has an excellent intelligence service, did not see this coming. So, a modest proposal:

“Those Americans who know which Republican will win next year’s Iowa caucuses can complain about those who did not know that when a Tunisian street vendor set himself on fire, he would set a region afire. From all other Americans, forbearance would be seemly….

“We still do not know how the process begun by America’s intervention in Iraq will end – or, for that matter, how to mark the ‘end’ of a great historical convulsion. In Egypt, Egyptians will tell us how it ends.”

Street Bytes

--Stocks powered forward yet again with the Dow Jones up 1.5% to 12273, the S&P 500 up 1.4% and Nasdaq advancing 1.4%. The reasons for the rally were, well, gee, I really don’t know. There was no economic news to speak of, and the few earnings reports that were released were far from energizing (or downright awful). But maybe it’s the fact $12 billion has been invested in domestic stock funds the past four weeks (while investors have yanked $22.5 billion out of bond funds in the past 12 weeks), according to USA TODAY and the ICI.

Or maybe it was the Super Bowl result. You see, according to my proprietary indicator (see my current “Wall Street History” piece), in each of the prior 11 years in which the loser scored more than 20 points, the market finished up. So much for my forecast of stocks finishing down 5% to 7% in 2011. Final score, 31-25. 

--U.S. Treasury Yields

6-mo. 0.15%   2-yr. 0.83% 10-yr. 3.63% 30-yr. 4.69%

--For the archives, thru Wed., corn futures were up 97% since June, wheat up 107% and soybeans up 56%.

--Cisco Systems Inc. for the third straight quarter spooked investors as CEO John Chambers continued to warn of dwindling public spending and weaker margins during what he’s labeling the network equipment maker’s transition phase. Shares in Cisco cratered on Thursday from $22 to $19 (and finished the week at $18.70).

“The challenges at state, local, and eventually federal level in our opinion will worsen over the next several quarters,” said Chambers. The chorus is growing for Chambers to leave. I’ve always appreciated his forthrightness, but then I’ve never been a Cisco shareholder and this stock is solidly in Microsoft/Intel/Dead Money Land.

--For the first four months of fiscal 2011 (beginning last Oct. 1), the U.S. budget deficit totaled $418.8 billion, with the Congressional Budget Office still projecting a record deficit of $1.5 trillion for the year as coming spending far exceeds revenues. On Monday the White House unveils its 2012 budget. 

--This is kind of pathetic. Under the proposed merger of Deutsche Borse and NYSE Euronext, the German exchange’s shareholders would hold up to 60 percent of a Netherlands holding company, with the New York exchange a subsidiary. While some such as New York Mayor Michael Bloomberg favor the move, touting the access opportunities for the NYSE in Europe, and vice versa, it’s a fact the iconic NYSE will be under the control of a foreigner.

“Robert Benmosche, CEO of AIG, made several comments last week that were so stunningly ignorant that it’s hard to believe he actually said them.

“ ‘All of the states where we’re a leader, where we’re the No. 1 insurer, are red states. All of the states where we’re at the bottom are blue states,’ Benmosche said last week at a conference in Washington. ‘Part of what we found out is that our model is about culture, and it’s about the attitude in the public. And what we find is where there’s more of a tendency for people to be more liberal, more that the government is responsible for what happens to me.’

“It’s even harder to believe that someone with such views is not only the top officer at one of America’s largest financial institutions, but one of the many that only exists at all because the government bailed it out with billions and billions of taxpayer dollars – something Benmosche and too many of his fellow CEOs in finance pretend never happened….

“Benmosche’s words speak volumes about renewed financial industry hubris, a denial of reality and a feeling of invulnerability among executives whose poor judgment can destroy the destiny of so many people….

“To be sure, a special place in the pantheon of bailout legend will always be reserved for AIG, which received about $180 billion in assistance. Benmosche joined the firm only in 2009, but his behavior and remarks are reminiscent of what led us into great difficulty.

“Benmosche…insults the taxpayers who saved AIG while holding their noses.”

“2011 in China began with a severe dry spell. However, the nation needs to fight not only against a year but a century of drought ahead.

“This is now the third severely dry season in three years. Persistent drought now appears to be a common natural scenario.  China’s water usage per capita is merely 28 percent of the world’s average level, whereas the nation is setting an ambitious goal to exceed the global average living standard during this century.

“It can be predicted that China will have to contend with a developing yet thirsty civilization.

“We cannot expect more precipitations to ease this reality. More and more Chinese citizens now want a modern life – equipped with modern bathrooms, washing machines or using the car wash. All these call for more water….

“China has to launch a large-scale water-saving movement. People should be well aware of water conservation and recycling practices. The entire nation should become a huge reservoir, for example, maximizing the usage of rainfall run-offs.”

--Back in September 2008, a net 9 percent of Irishmen (those who think they will be better off minus those who think they will be worse off) expected to be better off the following year. Today, a record 68 percent say they are worse off and only 12 percent believe things will improve over the next 12 months.

--The price difference between West Texas Intermediate oil and Brent crude reached a new record of more than $16 this week. Until the past 12 months, the divergence was typically about $1. The biggest factor for the spread are the massive inventories in Cushing, Oklahoma, where WTI is delivered into America’s pipeline system, which has depressed the value relative to other global benchmarks.

--The FBI is investigating a series of cyber-espionage attacks on at least five major oil, gas and petrochemical companies by hackers based in China, as first reported by the Financial Times. It appears the hackers were looking for “plans for bidding on drilling rights in specific fields, and production information.” This may seem innocuous but it’s highly valuable to competitors.

--WikiLeaks cables reveal U.S. concern that Saudi Arabia is overstating its oil reserves and may not be able to lay on new production to bring down crude prices if necessary, but this is old news, with the cables dating from 2007 to 2009. The Saudis currently produce about 8.5 million barrels a day and the immediate issue seems to be whether they have reached their target capacity of 12.5 million. My issue of the past few years has been that the Saudis have the ability to flood the system say during an Iran-related price spike (or as we’ve learned, Egypt-led price increases if unrest spreads further in the region). To me that theory still remains in place.

Longer-term, though, I have always been a Peak Oil adherent. The reserves may be underground, but it’s getting to them in an economically feasible way that is the true issue worldwide.

--A NASA report on Toyota Motor Corp.’s sudden acceleration issues found that it was caused by mechanical rather than faulty electronic systems, with the study concluding the only defects that could cause sudden acceleration involved floor mats that could jam the gas pedal and accelerator pedals that could become stuck, as reported by the Los Angeles Times. The NASA study examined 58 cases of sudden acceleration in Toyota and Lexus vehicles and found that two-thirds appeared to involve a driver accidentally hitting the wrong pedal. NASA looked at 280,000 lines of software code, looking for glitches that could have triggered the engine to unexpectedly go to full power. None was found.

But while Toyota is absolved, its reputation has been heavily damaged. Or as former Labor Secretary Raymond Donovan famously said when falsely accused of a crime, ‘Where do I go to get my reputation back?!’ [His exact words in court were “Give me back my reputation!”]

However, Toyota and other vehicles do have acceleration issues, such as with sticky pedals, and so the NHTSA will recommend new brake override systems.

--Nissan has had major delays in producing its new Leaf model. 20,000 have signed up for the electric car in the U.S. but Nissan delivered a mere 19 in December and 87 in January. The automaker says production is on schedule but it is facing bottlenecks in its quality assurance process as well as distribution delays. So I’m assuming the 20,000 buyers are just walking around aimlessly. ‘I have no car…where is my car…’

--Nokia may be the world’s biggest maker of mobile phones, but it is losing out to Google’s Android and Apple’s iOS platform rapidly. So Nokia announced it would partner with Microsoft and its Windows software in a strategic joint venture. 

Back when Apple first shipped its iPhone in June 2007, Nokia controlled 50.8% of the smartphone market. Now its share is down to 27.1%, according to Gartner Inc.

--It was comical on Thursday, as CNBC and others had reporters stationed at Verizon stores, waiting for a crush of customers who would be buying iPhones with Verizon service for the first time. But the lines failed to materialize. Verizon insisted it was because of a successful pre-order campaign. More likely, it is customers waiting for the next generation of iPhone slated for June. But analysts still expect Verizon to sell 2 million or more devices this quarter as it draws subscribers from AT&T.

I know that I was thinking of getting an iPad the other day, but when I saw that the next version would be available in a month or two I held off. [I don’t really need an iPad, but I figured if I’m paying my tech guys to develop an iPad app for the site, I better understand the product, know what I’m sayin’?]

--The Wall Street Journal had a story on the valuation of Twitter, which some peg at $8 billion to $10 billion, and whether that is way too high, though it’s befitting the industry these days. Facebook, for example, was valued at $10 billion in 2009 and now is placed at $50 billion.

Online-coupon provider Groupon Inc. turned down a $6 billion offer from Google and is looking to go public this year. And this week, AOL paid $315 million to buy the Huffington Post.

Regarding Groupon, I signed up just to keep abreast of how the business runs and I’m highly skeptical. But, to be fair, I have clicked on an online ad (not apples to apples but close) no more than twice in over ten years…I guarantee that. So I’m probably not a fair judge. [I also have never purchased a video game and have played one at a friend’s house maybe twice, which I realize puts me in the Stone Age, though there have been times the past 10-12 years when the Stone Age doesn’t look that bad in hindsight. They say free-range Mastodons were quite tasty.]

--The insider trading scandal claimed another few victims this week and is edging ever closer to what appears to be the chief target all along…$12 billion hedge fund SAC Capital Advisors, run by Steve Cohen. Many of the trades coming into question were mirrored by SAC as some of those arrested either once worked there or were known conduits. The wiretaps the feds have collected are quite damning, including one where a trader who was arrested tells of throwing his mangled computer drives “in the back of like random garbage trucks” in New York at 2 a.m.

--Ryanair, Europe’s low-cost air carrier, is holding talks with Chinese and Russian airplane manufacturers, which would really shake up the industry.

--For all of China’s advances, it’s still China. The other day a blaze that was started by Lunar New Year fireworks destroyed a five-star hotel in Shenyang. The building was 600 feet tall but the fire equipment could only reach 150 feet. It was two years ago that illegal fireworks destroyed a hotel under construction next to China Central Television in Beijing. And the inability to reach higher floors resulted in 58 deaths last November when an apartment building went up in flames in Shanghai. Also, substandard insulating materials were found to have been used in both the Beijing and Shanghai buildings which fed the fires.

--Pirates seized control of an Italian oil tanker in the Indian Ocean some 800 miles from Somalia. Then the next day they took a Greek oil supertanker off the coast of Oman. So it was a good week to be a pirate….Aarghhh! Of course we also hope the good times are fleeting for them and that they are blown to smithereens, becoming chum for the sharks.

--Walt Disney Co. saw its fiscal first-quarter profit rise 54 percent to $1.3 billion, owing to gains at the company’s theme parks and advertising growth at the likes of ESPN.

--Anglo-Australian mining giant Rio Tinto recorded net profits in 2010 of $14.3 billion, which is rather impressive. In response the company announced a $5 billion share buyback. [I can’t stand buybacks. More often than not the company doesn’t come close to doing what it says it will, or at least in the timeframe promised.]

--Guess how expensive parking is at Sydney Airport? More than $52 for just four hours! Good lord. At New York’s three major airports it would be about $15. Sydney’s rate is the most expensive in the world.

--President Obama appeared before the U.S. Chamber of Commerce in an attempt to mend fences and he did offer some conciliatory words, particularly on corporate tax rates. But he added, when alluding to huge corporate cash reserves, “Ask yourselves what you can do for America. Ask yourselves what you can do to hire American workers, to support the American economy, and to invest in this nation.” One executive in attendance responded, “I think it’s a little outside the bounds to suggest that if we hire people we don’t need, there will be even more demand.”

One big bone of contention is on the issue of free trade. The president likes to tout his initiative with South Korea, and this is good, but he’s ignoring trade agreements with Colombia and Panama that need the same level of attention for passage that South Korea has received.

--The resignation of Wells Fargo CFO Howard Atkins was bizarre. He’s taking an unpaid leave of absence until his retirement is effective Aug. 6, with Wells officials saying his departure “is unrelated to the company’s financial condition or financial reporting.”   Atkins will still receive about $22 million in parting gifts.

--Many in Australia are fuming over their insurance companies which are dithering over paying up for the flood damage suffered in cities like Brisbane. Some are refusing to, depending on the insurance companies’ definition of “flash-flooding” and a slow-rising “riverine” flood. It’s a major issue Down Under.

--Game maker Activision Blizzard Inc. said it is halting development of the “Guitar Hero” games because newer versions weren’t selling nearly as well as past ones just a few years ago. Kind of like the Hula Hoop.

--You know who you have to feel sorry for? Seamstresses, set designers and musicians down in Rio de Janeiro who saw their work on this year’s carnival go up in flames when fire destroyed a warehouse housing costumes and floats. Seriously, it’s not as if some of these folks have a lot else going on in their lives. Said one seamstress, “Do you know what it feels like to work all day, into the night, to make this happen, and then this? It’s over. There’s nothing. This carnival is over for us.”

Of course the show will go on…I mean it’s not like a lot of the female dancers wore much to begin with.

Foreign Affairs

Iran: Monday was to be a day of protest in Tehran, as opposition leaders Mehdi Karroubi and Hossein Mousavi called for a rally to support the popular uprisings in Egypt and Tunisia. But Karroubi was placed under house arrest at week’s end and authorities have refused permission. No mass opposition rallies have been held since the disputed presidential elections of 2009.

Pakistan: A suicide bomber linked to the Taliban took out at least 27 Pakistani troops at a training camp. The Taliban said, though, that a Pakistani soldier had approached them and asked for the mission, which wouldn’t be the first time this happened.

Separately, investigators in Lahore have charged American Raymond Allen Davis was not acting in self-defense when he shot and killed two there on Jan. 27. The U.S. says Davis acted when they tried to rob him. But for Davis now to be charged is deeply troubling in terms of fanning anti-Americanism. Plus police allege Davis shot and killed one of the two as he tried to flee, hitting him in the back. The U.S. says at worst Davis has diplomatic immunity. Talk about a mess, plus you have the situation that the U.S. Embassy car that went to rescue Davis struck and killed a bystander. Nothing from authorities on that one yet.

At least there was some better news in the form of renewal of peace talks between India and Pakistan, which were broken off after the 2008 Mumbai terrorist attacks.

Lebanon: It’s wait and see time as Prime Minister-designate Najib Mikati continues to attempt to put together a 24-member Cabinet representative of all sides, though Saad Hariri’s March 14 coalition refuses to take part. Assuming Mikati does form a government, it’s then all about the Special Tribunal for Lebanon and whether he will support the U.N.-backed investigation into the 2005 assassination of Saad’s father, Rafik.

Meanwhile, Israel is ratcheting up the pressure when it comes to Hizbullah’s growing arsenal, with deputy prime minister Silvan Shalom telling a conference of ministers and Israeli military officials that “Hizbullah is not only a terrorist organization; they are going to take control of the whole country” and that they must be forced to comply with U.N. resolutions calling for the group’s disarmament. Shalom continued:

“If Hizbullah is controlling the new prime minister, it means Iran is taking control.”

The Palestinian government set July 9 as the date for elections in the West Bank and Gaza. No vote has been held in the former since 2006, when President Mahmoud Abbas unilaterally extended his term. But Hamas doesn’t want to hold a vote, so the PA said if they won’t allow one in Gaza, the vote will go on as planned in the West Bank. Hamas refuses to participate until the two governments are reconciled.

And then you have this very confusing situation where Abbas and his two sons took out Jordanian citizenship, with other PA leaders registering as full Jordanian citizens as well. What’s confusing is that the PA leaders have been urging Jordanian authorities to stop giving Palestinians citizenship in order to “consolidate their Palestinian identity,” the same argument Jordanians used in stripping Palestinians of their citizenship.

I’ve always said that when it came to Jordan, King Abdullah II’s chief headache is the Palestinians in his country.

An editorial in Al-Quds Al-Arabi criticized the Palestinian leaders.

“This is shameful for them because they and their families should be proud of their Palestinian citizenship. If they don’t believe in their own citizenship and are not proud of it, this means that they are not loyal to the Palestinian Authority and don’t deserve to speak on its behalf.” [Jerusalem Post]

Jordan: Meanwhile, the Muslim Brotherhood here has said it is willing to wait a year to see how King Abdullah’s new changes in government work out. If the Brotherhood keeps their word, this is good, but events elsewhere will shape the direction of Jordan.

Iraq: Prime Minister Nouri al-Maliki, in an attempt to beat back growing discontent, said he would not seek reelection when his second term ends in 2014. Maliki also said he would cut his pay in half. The Iraqi Constitution limits the term of the president but doesn’t say anything about the prime minister’s post so Maliki said he would seek a constitutional amendment to impose the same two-term limit on his slot.

On the security side, with the United States slated to pull all remaining forces by year end, it was believed the Iraqi government may ask the U.S. to stick around a bit longer but recent opinion polls show 80 percent of Iraqis do not favor an extension of U.S. troops.

Army Gen. Lloyd Austin, the top U.S. commander in Iraq, had this comment:

“Iraq will not be able to defend its air sovereignty for some time. They will also require continued development on capabilities such as logistics and sustainment and intelligence.”

While Iraqi forces can provide for their own “internal security,” they are unable to beat back outside threats, i.e., from Iran. And that’s going to be a big issue.

North / South Korea: In yet another classic case of “wait 24 hours,” the first talks between these two sides in four months collapsed just as soon as they began without an agreement on holding higher-level discussions. 

“We no longer feel the need to deal with the traitor group, which has no interest in improving relations,” North Korea’s delegation stated afterwards. “It is our tradition to respond to dialogue with dialogue and confrontation with confrontation.”

It was pretty simple. The South was looking for an apology for the sinking of the South Korean warship last March and the North Korean generals didn’t supply one.

China: In what is being viewed as the worst espionage case in 50 years, a Taiwanese general, Lo Hsien-che, head of the army’s telecommunications and electronic information department when he was arrested a few weeks ago (which just became public the other day), had been collecting state secrets for China since 2003 and received up to $200,000 for his services.

It seems he was lured into a classic honey trap. The China Times said, “Lured by sex and money offered by the spy, Lo was recruited by China to supply top secret information.”

The woman was described by the paper as “tall, beautiful and chic” and held an Australian passport. She pretended to be working in the export and import trade business when she met Lo. All this time, Lo passed repeated loyalty checks and was promoted to major general in 2008.

So let that be a lesson to you guys out there! Be very wary of beautiful women purporting to be in the import/export trade. [“You are so beautiful.” “Thank you. I work in the import/export trade.” “I don’t care. What do you want from me?” Sorry…just working on my screenplay.]

Taiwanese officials said that despite warming ties between Taipei and Beijing, the Chinese have been stepping up their intelligence gathering.

Russia: Chechen warlord Doku Umarov claimed responsibility for the deadly suicide attack on Moscow’s Domodedovo airport on Jan. 24. He vowed similar attacks in a video posted online. What I find a bit disturbing is his condemnation of “Zionist and Christian regimes led by Israel and America.” I don’t recall the Chechen terrorists dragging the U.S. into their war against Russia before. So I’ll cross off Chechnya and Dagestan from my bucket list, I guess.

Indonesia: This was disturbing. A Muslim mob burned churches and clashed with police after demanding the death penalty for a Christian man convicted of blaspheming against Islam, in the latest outbreak of religious violence in the world’s most populous Muslim-majority country.

Britain: Prime Minister David Cameron heavily criticized his country’s past policy of “state multiculturalism” in his first speech on the internal Islamic threat; signaling a tougher stance on groups promoting Islamist extremism. Cameron was particularly critical of Muslim groups that receive public funds but do zero to prevent messages of hate from being spread.

“Frankly, we need a lot less of the passive tolerance of recent years and much more active, muscular liberalism,” Cameron said.

“Let’s properly judge these organizations: Do they believe in universal human rights – including for women and people of other faiths? Do they believe in equality of all before the law? Do they believe in democracy and the right of people to elect their own government? Do they encourage integration or separatism?

“These are the sorts of questions we need to ask. Fail these tests and the presumption should be not to engage with organizations.”

Cameron also called for an end to the double standard that exists in his country where views such as those held by the Muslim extremists would never be tolerated if they involved radical groups among whites. That took guts. Good for you, Mr. Prime Minister.

Needless to say, many Muslim groups in Britain were not too pleased by Cameron’s speech. Said one representative of the Muslim Council of Britain:

“Again it just seems the Muslim community is very much in the spotlight, being treated as part of the problem as opposed to part of the solution.”

Italy: Somehow Prime Minister Silvio Berlusconi has been able to survive the sex scandal and remain in power, largely because the polls showed a majority of the people in favor of him staying on. But now a new poll indicates 61 percent want Berlusconi to step down as he could be headed to trial as early as April. A big issue is who has jurisdiction, in terms of being pro- or anti-Berlusconi.

Random Musings

--Arizona Senator Jon Kyl, the No. 2 Republican in the Senate, announced he would not run for reelection in 2012, thus becoming the fifth senator to announce his retirement this year. Earlier this week, Virginia Democrat Jim Webb said he was only going to serve one term. I’m hoping Arizona Republican Congressman Jeff Flake runs for Kyl’s seat. Democrats in the state are looking to former governor Janet Napolitano, now head of Homeland Security. In Virginia, former senator George Allen, Republican, is going to make another go of it.

[The other three senators to drop out for 2012 are Kent Conrad (D-ND), Kay Bailey Hutchinson (R-TX) and Joe Lieberman (I-CT).]

--The Republican race for president is finally beginning to warm up, though the first candidate hasn’t as yet formally announced. Donald Trump stirred things up at the Conservative Political Action Conference in Washington on Thursday. First he said to an audience of Ron Paul supporters that “Paul cannot get elected [true]” which brought a chorus of boos, but Trump didn’t back down and said in typical Donald fashion.

“If I decided to run, I will not be raising taxes, we’ll be taking [back] hundreds of billions of dollars from other countries that are screwing us, we’ll be creating vast numbers of productive jobs, and we’ll rebuild our country so that we can be proud. Our country will be great again.”

Trump said he’ll announce by June if he intends to run. Here’s hoping he does. It would be fun, though it’s well known Trump hates shaking hands because he doesn’t want to pick up germs.

--New Jersey Republican Gov. Chris Christie has seen his approval tick back up, to 52% vs. 40% who disapprove, which is very strong in this heavily Democratic state. Said the Quinnipiac University poll director, “(Christie) is a real New Jersey guy and he stirs a lot of real New Jersey emotions.”

--Boy, this is scary…from a Newsweek profile of Republican Sen. Scott Brown, with Brown addressing Rotarians in Pittsfield, Mass.

“When he opens the floor to questions, a senior citizen in a blue sweater raises his hand. ‘Could you explain this quantitative easing that [Fed chairman] Ben Bernanke is doing?’ he asks. ‘I still don’t understand it.’ Brown blinks. ‘What’s that?’ he mutters. A few audience members repeat the phrase: ‘quantitative easing.’ They seem to know all about the Fed’s recent decision to boost the economy by purchasing $600 billion in Treasury bonds – perhaps because Sarah Palin spent much of the autumn criticizing the maneuver. Their senator, however, is lost. ‘I’ve never heard [Bernanke] say that,’ Brown finally admits.”

I find this absolutely unbelievable, and yet another Sign of the Apocalypse.

--Speaking of Ms. Palin, who is down to her final 55 seconds on my clock, she really needs to be sat down and told she’s no Ronald Reagan, despite her constant efforts to claim his mantel. And I have to repeat one of my main issues with this woman. She resigned with 1 ½ years left in her term as governor, but somehow we’re supposed to admire this action? And in criticizing President Obama’s handling of the Egypt crisis, Ms. Palin declared: “Now, more than ever, we need strength and sound mind there in the White House.” Make that 50 seconds.

I can’t wait to spend a week in Iowa this coming August, much of it at the Iowa State Fair. Four years ago I interviewed a lot of farmers there, asking about the economy. This time I’ll ask two simple questions. “Do you like Sarah Palin? Why?”

--Republican Congressman Christopher Lee (N.Y.) resigned abruptly after a report that he responded to a Craigslist online posting, “women seeking men,” by describing himself as a divorced lobbyist and a “fit fun classy guy.” Lee included a shirtless photo of himself. He’s married with a young child. And he’s 46, not 39 as claimed. So the woman he was chatting with Googled his name (he kept that real) and, presto! She sent the evidence of who she was dealing with to Gawker Media. Rep. Lee didn’t even put up a defense. A-B-C ya later! 

Also within the past year another upstate New York congressman, Democrat Eric Massa, was forced to resign after coming under investigation for creepy conduct with his staff.

--Robert Samuelson / Washington Post on Ronald Reagan

“We are deluged with Ronald Reagan celebrations and retrospectives, but most are misleading. They omit Reagan’s singular domestic achievement and the wellspring of his popularity: the defeat of double-digit inflation. In 1979 and 1980, inflation averaged 13 percent; by 1984, it was 4 percent – and falling. Without subdued inflation, the economy would have remained a mess and Reagan might have lost his 1984 reelection bid. He certainly wouldn’t have won his 58.5 percent to 40.4 percent landslide.

“You will not find this in most of today’s Reagan’s appraisals, which tell us more about the appraisers than about Reagan….

“ ‘By the summer of 1979, no other issue could rival inflation as a pressure on the American mind, its mood and family planning for the future,’ wrote the preeminent political reporter Theodore H. White. The reason: Inflation affected everyone; it was a unique threat.

“One reason Reagan receives so little credit for its collapse is that Paul Volcker’s Federal Reserve did the hard labor. Through sky-high interest rates, Volcker engineered a savage recession. Housing and auto sales collapsed. Unemployment rose to 10.8 percent. Reagan’s role was to provide the political support that allowed Volcker to maintain the squeeze long enough to purge inflationary psychology. Companies and workers had to learn that outsize price and wage increases would result in bankruptcy and unemployment. If the Fed had relaxed prematurely, inflation would almost certainly have revived and exceeded its previous peaks.

“No other possible president at the time, Democrat or Republican, would have so steadfastly supported Volcker.  Reagan faced enormous pressure from both Republicans and Democrats to push the Fed to relent. He was vilified in the press; his approval rating fell to 35 percent. Reagan and Volcker, though lacking a close personal relationship, did share a common conviction: America could not thrive with high inflation. ‘Unlike some of his predecessors,’ Volcker later remarked, ‘he had a strong visceral aversion to inflation.’

“Without Reagan, Volcker would have failed….Reagan earned his success the hard way – by backing policies that, though initially unpopular, served the nation’s long-term interests. That’s called leadership, a quality Obama has yet to demonstrate.”

“Entire books have been written on Reagan’s ability to communicate, but his reputation as The Great Communicator boils down to three basic traits: he was simple; he was clear; he was sincere.

“Let’s not confuse ‘simple’ with ‘simplistic.’ Reagan was by no means simplistic. To the contrary, he communicated wide-reaching ideology and complex policies in terms people could understand. For instance, Reagan summed up his approach to the Cold War as, ‘we win, they lose.’ His detractors called it naïve, but that simple phrase communicated volumes about Reagan’s philosophy and strategy when it came to facing down the Soviet Union.

“And Reagan’s message wasn’t meant only for American audiences but for international audiences as well. When Reagan called the Soviet Union the ‘evil empire,’ the political establishment in Washington howled – but those trapped behind the Iron Curtain cheered. Reagan’s message was for all who hunger for freedom, and as leader of the free world, Reagan understood that he spoke for them.

“It was for that reason that Reagan insisted, despite the objections of his own State Department, to keep a line that will echo across the ages: ‘Mr. Gorbachev, tear down this wall.’ The State Department famously removed the phrase from drafts of Reagan’s speech – repeatedly. Each time, Reagan reinserted it, because he knew it would be heard by the whole world….

“As Reagan himself used to say, he wasn’t successful because he was a great communicator. He was a strong leader because he communicated great things. That’s what separated Reagan from so many others who try to compare themselves to him. Throughout his centennial year, when we will see all manner of Reagan tributes, let’s not forget what was perhaps Reagan’s greatest quality: His faith in the American people. He was believable because he believed. That’s what made Reagan the Great Communicator.”

“Young parents in America are holy and not to be messed with.   If they say something is correct, we all acquiesce. And is there any man, woman or canine who doesn’t leap out of the way when one of those giant, all-terrain Bugaboo strollers comes barreling down the sidewalk?

“The impulse to butt out of parents’ business is natural. Our culture hardwires us to respect those who are rearing children. We gave them a job to do, so we should let them do it.

“Yet there’s one smug subgroup whose sense of entitlement endangers the rest. No, not poor Medicaid moms or Social Security grannies. The treacherous group is those parents, predominately those of some financial means, who refuse to vaccinate their children.

“Anxiety about vaccinations starts with a legitimate concern: the medicine can cause allergic reactions. General worry became specific controversy in 1998, when the Lancet, a respected medical journal, published a paper…saying that the standard vaccine for measles, mumps and rubella might cause autism.”

But as we’ve learned the study was found to be fraudulent and Lancet retracted the paper.

“The anti-vaccine crowd, short of evidence, has reverted to personal attacks (against the likes of Dr. Paul Offit, author of “Deadly Choices: How the Anti-Vaccine Movement Threatens Us All”).

“Non-vaccinators aren’t merely endangering their own children, or even other children whose parents oppose vaccination. All newborns must wait several months to be old enough for vaccinations. Vaccines are often too risky for people with compromised immune systems, regardless of age. It’s newborns and chemotherapy patients, already physically vulnerable, who pay the price for parental NIMBYism.”

--U.S. investigators are unable to tie WikiLeaks founder Julian Assange directly to Pfc. Bradley Manning in terms of his inducing the Army private to leak government documents to Assange’s website. Personally, it’s always been about Manning for me, far more than Assange.

--Russian scientists claim they know the exact day when asteroid Apophis is most likely to hit the Earth. April 13, 2036.   Professor Leonid Sokolov of the St. Petersburg State University told Ria Novosti, “Apophis will approach Earth at a distance of 37,000-38,000 kilometers on April 13, 2029,” but, “It’s likely collision with Earth may occur on April 13, 2036.”

Now this means a few things. My Mets have 25 years to get their act together and win a World Series, and my China stock holding in Fujian has 25 years to pan out.

But, as reported by Peter Farquhar in the Courier Mail (Australia), this doesn’t mean Apophis, or Asteroid 99942, is definitely going to strike us, but it was back in 2004 that Apophis was first discovered to be in the Earth’s impact zone, and at roughly 300m wide, “is estimated to be able to hit the Earth with the force equivalent to somewhere around two Krakatoas.” And, according to a paper delivered in 2007, if it strikes it would land somewhere in a streak running from the Middle East through the tip of South America to the west coast of Africa. So like I’m thinking there is no reason to cancel a tee time in the States, for example.

But this is kind of fascinating. In 2029, “when it swings close by the Earth, we’ll find out whether Apophis has nailed a gravitational keyhole that will drag it into our orbit seven years later. The gap is just 600m wide, so there’s a fair chance it won’t happen.”

Donald Yeomans, head of NASA’s Near-Earth Object Program Office, told The Christian Science Monitor, “If it goes through what we call a keyhole during that close Earth approach…then it will indeed be perturbed just right so that it will come back and smack Earth on April 13, 2036.”

Actually, that would be just a week after that year’s Final Four, which would make that event particularly exciting I imagine.

--Bristol and Chelsea are back in the news. A listing popped up on Amazon.com about a coming Bristol Palin memoir, 304 pages and priced at $25.99. The Palin camp issued a denial and the listing was pulled

But in the saga of newlyweds Chelsea Clinton and Marc Mezvinsky, it seems that after the New York Post broke the story that Mezvinsky was running off to be a ski bum in Jackson Hole, Wyoming, he abruptly hightailed it back to New York to spend a very visible weekend with his bride in a clear attempt to quash the rumors their marriage was already on the rocks. I say it’s over this coming November.

--The Romanian legislature is debating whether witches should be required to get a permit and make it possible to imprison those whose predictions prove to be false. It is already officially recognized as a profession in Romania.

Separately, Christine O’Donnell continues to deny she is a witch, not that I’m trying to tie the two stories together and allege she’s also Romanian.

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

Gold closed at $1356
Oil, $85.48

Returns for the week 2/7-2/11

Dow Jones +1.5%
S&P 500 +1.4%
S&P MidCap +2.6%
Russell 2000 +2.7%
Nasdaq +1.4%

Returns for the period 1/1/11-2/11/11

Dow Jones +6.0%
S&P 500 +5.7%
S&P MidCap +6.9%
Russell 2000 +4.9%
Nasdaq +5.9%

Bulls 53.4
Bears 23.3   [Source: Chartcraft / Investors Intelligence]

Have a great week. I appreciate your support.

Brian Trumbore

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