Week in Review

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Week in Review

03/05/2011

For the week 2/28-3/4

Wall Street…the Middle East…and Inflation

Just a reminder. I am not a trader and don’t have that kind of mentality when coming up with a forecast. I take things one year at a time when looking at the world and so after another tumultuous week, though one where stocks ended up just fractionally across the board, I need to repeat that you’re not going to get any Big Picture changes from yours truly. But I will summarize the talking points that lead to my overall outlook for both the political picture and the equity market in particular.

StocksandNews is half a report on what has transpired over the week and the other half identifying the hot spots that can shape investor sentiment and consumer confidence. Long ago one of my tenets was “a car bomb going off in Sri Lanka doesn’t have an impact on U.S. markets, but one going off in Tel Aviv might.”

And these last few weeks we’ve been reminded that geopolitics matter. So this week let’s start there, specifically the Middle East.

When it comes to Libya, U.S. policy is a mess. First off, I can understand why President Obama did not want to act, or even say much, until American citizens were removed, but many of them should not have been there in the first place and I would like to think because of the delay in getting them out that we didn’t miss an opportunity to eliminate Gaddafi and potentially save a lot of bloodshed, let alone maintain the flow of oil there. I’m not talking in any way about a large-scale operation, but a covert one.

I bring this up because just as I did when I went to Albania and Beirut last year, I notify the U.S. State Department of my intentions whenever I go somewhere not exactly on the approved list for American travelers. Everyone should do that.

But I’m also a big boy and I know if all hell breaks loose, while it would be nice to be plucked out like in some Hollywood adventure film, I recognize I’m largely on my own and I’m not about to bitch if my government can’t rescue me. [Again, all the more reason to at least drop them a note so they might be motivated to at least make the effort.]

The preceding aside, Defense Secretary Gates, refuting Secretary of State Hillary Clinton’s initial talk of a no-fly zone, reminded us of a few things. First, at times like this it’s important to look at a map and be reminded that Libya is over twice the size of Iraq, where the United States and its allies enforced a no-fly zone prior to the expulsion of Saddam. Libya is huge, and while you could say, hey, you only have to cover a few major areas, that’s not true. Gaddafi can fly in mercenaries and/or weapons in a number of desert air strips all over the place. Gates also warned that you can’t put together a no-fly zone without first destroying Libya’s air defenses; only then can you “fly planes around the country and not worry about our guys being shot down.” Gates, who has the support of Joint Chiefs of Staff chairman Admiral Mike Mullen, added, “there’s a lot of talk, frankly, loose talk about some of these military options,” referring not just to Clinton but also British Prime Minister David Cameron, who first came out for military action.

An editorial in the New York Post summed it up perfectly.

“President Obama yesterday (Thurs.) for the first time publicly called for Moammar Gaddafi to step aside in the midst of the increasingly bloody revolt in Libya.

“ ‘Moammar el-Gaddafi has lost the legitimacy to lead, and he must leave,’ Obama said at the White House.

“OK. Now what?

“For all the public rhetoric, Team Obama seems totally at sea regarding the current crisis.

“Case in point: Secretary of State Hillary Clinton in recent days has talked up the idea of imposing a no-fly zone….[Defense Secretary Gates demurred.]

“That caused British Prime Minister David Cameron, who’d also sounded enthusiastic about the idea, to abruptly pull back support, given what he saw as Washington’s hesitancy.

“Yesterday, however, Obama insisted that a no-fly zone ‘is one of the options that we would be looking at.’

“If the president means to confuse Gaddafi about his plans, he’s succeeding.

“Problem is, the U.S. public and America’s allies are bewildered as well.

“The administration has been lurching about since the start of the Egyptian demonstrations that toppled Hosni Mubarak.

“And the public signs have been conflicting, too.   First the administration stood behind Mubarak, then played catch-up and called for his ouster.

“Likewise with Gaddafi: For all of Obama’s insistence on being ‘very unambiguous about this,’ he and his administration have yet to show the faintest hint of a coherent strategy – to say nothing of constructive leadership.

“Nothing good can develop in such a vacuum – but plenty of mischief is possible; indeed, it’s inevitable.

“ ‘We will continue to send a clear message,’ the president said yesterday.

In Libya itself, I was struck by the oil chief who said on Monday that production had been cut by around 50%, arguing it was “safe” for foreign oil workers to return after their mass exodus. Not quite. Instead they’ve either been running into the sea like lemmings or fleeing to Tunisia, thus presenting that new government with a refugee crisis of massive proportions. 

NATO has been powerless, the European response pathetic, and UN/U.S. sanctions are equally ineffective in stopping Gaddafi from destroying his country. And at mid-week, the story crossed that the Arab League was seriously considering a peace overture from none other than Hugo Chavez.

No one knows how the chaos in the Middle East is all going to shake out. It’s anyone’s guess what the region will look like a year from now. But on 2/19, I took a stab at it and said of Libya, “the regime should succeed in beating down the protesters, but at a high cost.” 

Meanwhile, Tunisia ousted its second leader as protesters continue to press for more and more concessions, though elections are now set for July. Egypt replaced its interim prime minister with the transport minister, Essam Sharaf, who has been a supporter of the opposition. Bahrain is still tense but I maintain no way the Saudis will let it fall into Iran’s orbit.   Saudi Arabia itself will totally crush any opposition to the status quo, while in Jordan, the main opposition IAF party, the political arm of the Muslim Brotherhood, has given the government one month to implement further reforms.

As for Iran, there was talk that the two main opposition leaders, Mousavi and Karroubi, had been arrested, though it’s actually house arrest. Were either to be executed for treason, as many in the Iranian parliament want, that would be the end of the regime. The Iranian people, and the world, has its limits. Crackdowns on the citizenry, while brutal, will I imagine continue to be tolerated. But to execute a leader or two, that’s something entirely different and from everything I know Ayatollah Khamenei, who would be calling the shots, is loath to take such an extreme measure. If we were to wake one day to news of this sort, though, my guess is Khamenei’s own days would then be numbered and that he had been superseded by an even more extremist element, at which point I’d short the U.S. stock market in a heartbeat.

In Lebanon, Caretaker Prime Minister Saad Hariri (an absurd title at this point) spent his first day in the opposition (having refused to join a new coalition government) blasting Hizbullah. Hariri is showing far more spine these days than he ever has and in what was described as a “fiery” speech said of Hizbullah and its weapons:

“We will continue to reiterate these simple and clear facts calmly and with responsibility, and in a democratic way. We will repeat these facts through all available peaceful means until you confess that this problem has become a national problem…and needs a national solution…before anything else, because it is poisoning everything else and we will not allow it from now on to poison the memory of our martyrs.”

Hariri vowed Hizbullah could not poison the search for the truth into the assassination of his father in 2005.

“We want to tell you [Hizbullah] that just because you have weapons, this doesn’t mean that you are right. The weapons may give control, but they don’t give a majority. The majority is produced by the ballot boxes, without weapons. The majority expresses its views in the Parliament, without weapons.” [Daily Star]

And in Pakistan, last week I reiterated that when it comes to this hell-hole, it “could come under the spell of extremists with a few bullets placed into the skulls of just a handful of current leaders.” Then on Wednesday, assassins sent by al-Qaeda or the Taliban killed the only Christian member of Pakistan’s federal Cabinet; the second assassination in two months of a high-profile opponent of blasphemy laws that impose the death penalty for insulting Islam. Christians have been under attack here, in Iran, Iraq and Egypt, among others, and those of us of a similar faith should be sickened by it all. 

Regarding the Middle East, we’ll be looking for answers to some of the following over the coming year.

Will the new leaders be answerable to an emboldened citizenry?

Who does the United States deal with in each country? There will be many disparate parties and factions, far different from a past where it was one authoritarian figure in each. The old cooperation from the likes of Libya, Tunisia and Egypt when it came to combating terrorists is gone (yes, in a twisted way, Gaddafi, himself the ultimate terrorist, was useful in the war on al-Qaeda).

The entire regional security apparatus is at risk. How do we fill the void? [We can’t.]

“The Middle East’s march away from authoritarianism will ironically inhibit the projection of American power. Because of the complexity of hybrid regimes, American influence in each capital will be limited; Turkey is more likely to be the avatar toward which newly liberated Arabs look. America’s influence is likely to be maintained less by the emergence of democracy than by continued military assistance to many Arab states and by the divisions that will continue to plague the region, especially the threat of a nuclearized, Shiite Iran.

“Mitigating the loss of American power will be the geopolitical weakening of the Arab world itself. As Arab societies turn inward to rectify long-ignored social and economic grievances and their leaders in hybrid systems battle each other to consolidate power domestically, they will have less energy for foreign policy concerns.

“The political scientist Samuel Huntington wrote that the United States essentially inherited its political system from England and, thus, America’s periodic political upheavals had to do with taming authority rather than creating it from scratch. The Arab world now has the opposite challenge: It must create from the dust of tyrannies legitimate political orders. It is less democracy than the crisis of central authority that will dominate the next phase of Middle Eastern history.”

“(American supremacy) in the Middle East (has) sprung a leak from both ends. American mismanagement of postwar Iraq and stumbling in Afghanistan have played to Iran’s advantage. The region has also witnessed the rise of another non-Arab actor, Turkey, which has taken a firm distance from Washington. These dynamics, in turn, fed off and accelerated the relative decay of America’s prominent Arab allies such as Egypt, Saudi Arabia, and Jordan, whose brand of leadership seemed to stifle any regeneration of their states and societies, and who were seen as neutered on the Palestinian issue.

“It’s not obvious where the Arab uprising will lead. Perhaps understandably, given the speed of events, President Barack Obama and his administration are still functioning according to the old paradigm of American influence over the region. Their catchword continues to be stability, even as instability proliferates. However, now seems a necessary time for the U.S. to prepare a new approach to the region, one in which Washington accepts that the days of Pax Americana are over, but also devises a new framework to facilitate the emergence of democratic, pluralistic, secular Arab societies, even if American paramountcy suffers as a consequence.

“The tradeoff may not be as straightforward as it seems. American military strength will remain unrivaled, and the antagonism with Iran in particular will persist. Power politics will not suddenly end in the Middle East. However, democracy and pluralism, as concepts, are valuable weapons. The U.S. now has an opportunity to deploy them, and doing so means ensuring that the Arab uprisings do not engender flawed, illiberal orders far worse than what we had before.

“If not quite a pillar, there has been a fourth American preoccupation in the Arab world since the 1990s: the suppression of terrorism. Washington’s thinking on that front has been fixated on the use of military countermeasures. But only healthy societies can lastingly eliminate terrorism. And healthy societies are generally open societies that enforce the rule of law. It is America’s moment to recognize this.”

“In the absence of an American strategy, the probability of a worst-case scenario creeps up every day – a scenario of the sort that ultimately arose in revolutionary France, Russia, and China. First the revolutions in North Africa and the Middle East could turn much more violent, with a death toll running into tens or hundreds of thousands. Then they could spark a full-blown war, claiming millions of lives. Worst of all, out of that war could emerge an enemy as formidable as Napoleon’s France, Stalin’s Soviet Union, or Mao’s China.

Next up, the U.S. economy. The news has been great. Manufacturing continues to cook with readings from the Chicago Purchasing Managers Index and the Institute for Supply Management showing an economy that is cranking out goods at multi-year record levels. In fact the 71.2 reading on the Chicago PMI was its best since 1988! The ISM, 61.4, hit a level not seen since 2004. Construction spending was down for January, but then factory orders for the month were the best in 4 years. Friday’s employment report for February revealed that the economy added 192,000 jobs, as expected, and that the private sector added some 222,000, another solid figure. True, after the deep recession we’ve been through the economy should be adding even more positions during the recovery, but the figures were better than recent numbers on this front and the unemployment rate fell to 8.9%. That’s the good news.

The bad news is that the number of those actually looking for work hasn’t budged in ages, allowing the unemployment rate to drop from 9.8% to 8.9% in three months (unheard of) because the number of those counting themselves as part of the labor force hasn’t increased and has in fact shrunk some. Of course that’s just not dealing with reality and in fact the real unemployment rate remains around 16%. But things are at least looking up, no doubt.

What isn’t getting better, however, are wages. Average hourly pay for February was unchanged, and an earlier reading on January consumption revealed a consumer that was beginning to pull in their horns some compared to the previous pace, and this was before the oil price shock. 

As for oil and inflation, nothing can kill an economy faster, save a 9/11 style attack, than a huge spike in the price of gasoline and by the end of the weekend many of us will be paying $4.00 for a gallon of gasoline, or $50+ to fill up the tank. That’s real money. Add to this the fact that those who are finally finding work are often receiving far less than they were paid in their prior position, and probably with less benefits, and you get a sense of just how fragile this recovery remains.

But what of inflation overall? I am not changing my tune one bit. Yes, higher commodities prices, including for oil, are going to hit the developing world particularly hard (including those governments who feel compelled to heavily subsidize foodstuffs to keep the peace and thus tack on debt). It will slow growth.

And growth will be impacted in Europe, where with their heavy tax system on oil means that Europeans are paying $8.00 per gallon and up these days. Save for Germany, and one or two others, growth in the EU is anemic as it was before this new tax is added to the austerity programs being enacted.

But I believe that when it comes to other commodities what we are witnessing is a speculative bubble. I thought one of the stupider items of the week came out of the International Monetary Fund, which told us that from 2010 to 2050, food prices will essentially keep marching ever upward due to a developing world whose diet is improving as their economies improve. Yes, folks rising up from poverty and tasting the middle class for the first time want to eat better, but to then say the world will not be able to boost production enough to meet demand is of a Malthusian bent that I’ll be able to prove in just one year was a total bunch of crap. For starters, note to the IMF:

If the world is going to have such a hard time producing food, then explain to me why it is that the price of rice, a staple in the developing world, has fallen from $25 to $14 since peaking in 2008.

We have two things going on when it comes to food. Horrible luck when it comes to the weather, with historic, catastrophic floods and droughts in key growing states (Russia and Australia for starters) as well as massive speculation.

Unless we have entered a permanent period of drought and pestilence for the rest of our lives, the farmers of the world (increasingly from Africa, by the way) will have some good growing weather again. I’ve been writing of something I think is critically important on this front. Those terrible, catastrophic floods in Australia have also filled the reservoirs there for the first time in about ten years! The potential exists for boom harvests, if not by end of this year, certainly next.

As for the speculation in the commodities pits, I’m reminded of how some of us were told in 2008 that the reason oil was on its way to a record $147 was solely because of demand. Then, suddenly, from mid-July to mid-December of that year, oil collapsed from $147 to the $30s! It wasn’t all because of the financial crisis that then threw the world into a tailspin. Some speculators got their heads handed to them.

But, again, no doubt this current price spike, fueled by supply issues and/or speculation, is going to put a damper on economic growth, worldwide, and this is part of my story when it comes to equities underperforming over the full year.

Next up, Europe. I’ve said what the continent needs most is growth and outside of Germany, this is going to be awful hard to come by in 2011. There is no way many European nations, including basket cases Greece, Ireland, and Portugal, can meet their obligations and begin to put dents in their debt loads without 4% type growth and much of Europe will grow in the 1% to 2% range for 2011, if that. More likely should the oil shock continue a while, many European nations will slide back into recession, or fail to get out of it in the first place a la Ireland.  Because, you see, there is another exacerbating situation. The European Central Bank and its chief, Jean-Claude Trichet, is prepared to raise interest rates next month to combat inflation. This in turn will kill any thought of a recovery in Ireland, which desperately needs lower interest rates, not higher ones, but as the ECB raises rates, the rate on many an Irish mortgage will rise apace.

The combination of austerity programs kicking in, including reduced pension benefits and/or increases in the retirement age, higher interest rates, a food and oil price shock, and a probable massive influx of immigrants from North Africa further straining social services, is going to lead to a Europe in turmoil this spring. It’s also why the success, or failure, of British Prime Minister David Cameron’s austerity program is so vitally important. If Cameron’s Britain survives the coming pain with its head still high, that will send a super signal to the rest of Europe and across the pond to the United States. But if Britain’s economy tumbles back into full-blown recession, then all bets are off when it comes to others proceeding with needed fiscal discipline. So we all should be cheering for Cameron, and crossing our fingers.

But speaking of the U.S. and its deficit dilemma, Congress avoided a government shutdown for two weeks with yet another short-term funding deal but this can’t go on forever. Eventually it has to face up to its obligations, including a decision on raising the debt ceiling.

For all the talk of who is to blame for our current mess, though, there is only one man who stands above the rest in terms of responsibility and that is Barack Obama. He is the one who has to now lead. He is the one who has to give an address or two from the Oval Office and give Americans the facts on our looming entitlement calamity. Obama is the one who has to tell Americans it’s time to sacrifice.

But the president and his advisers are convinced they can play their game of chicken until after the 2012 election and I’m here to tell you that unless the financial markets, including those overseas, believe the United States has come to grips with its deficits, Jan. 2013 will be too late. We will meet our Waterloo at some point in 2012.

The president had his chance to begin to lay out the facts to the American people with his State of the Union address and instead he virtually cemented his legacy as one of the worst presidents in our history. Obama can still turn things around, but there is little reason to believe he will do so and, no, growth in the economy will not bail us out of a looming debt-to-GDP ratio of 100% with exploding spending to come in the mighty triad; Social Security, Medicare and Medicaid – the latter two powered by ObamaCare in the out years. Until the American people hear the truth, you will continue to get absurd poll #s like we had this week with the latest NBC News/Wall Street Journal survey wherein when asked if cuts to Medicare were necessary to “significantly reduce” the deficit, 18% said yes, while 54% said no.

Warren Buffett was on CNBC this week and said you “can’t stop this country.”

Wrong, Warren. Debt can stop this country, just like debt stopped many an individual and corporation during the financial crisis and has stopped Greece and Ireland.

As for the public vs. private debate, here again the people just don’t have a clue, which is why the polls are decidedly mixed on whether public union members, such as teachers, need to pay more for their pension and health benefits. By some new studies, state and local pension obligations are underfunded by $1.5 trillion to $1.9 trillion. Unless you tell me that we are about to embark on a 20-year bull run in stocks with consistent annual returns on equities of 15%, thus making a blended portfolio rate of 8%+ on existing pension assets achievable, then the only way to make up the difference in underfunding is further reduced services and tax hikes, neither of which, incidentally, is conducive to the kind of growth needed to fuel a 20-year boom in equities! For now, however, Republicans have their work cut out for them educating a people who refuse to face facts. Don’t look for any help from the president.

Street Bytes

--As noted above the major averages all registered fractional gains with the Dow Jones tacking on 0.3% to 12169, while the S&P and Nasdaq added a whopping 0.1% each.

--U.S. Treasury Yields

6-mo. 0.15% 2-yr. 0.68% 10-yr. 3.49% 30-yr. 4.60%

Bonds finished mixed, with earlier losses on the longer end of the curve being pared on Friday due to the ongoing turmoil in Libya and a little flight to safety. The 10-year had traded at a yield of 3.55% on the strength of the economic numbers. The Federal Reserve’s Beige Book of regional economic activity also spoke of widespread growth in manufacturing with signs higher prices will begin passing through to the retail level. The Fed is also signaling that when it ends QE2 in June, it will do so abruptly.

--In an annual revision of securities holdings by the U.S. Treasury Department, it turns out China’s Treasury position totaled $1.16 trillion at the end of December, or a 30% increase from an estimate the government made two weeks earlier. So China certainly doesn’t appear like it’s about to dump U.S. paper, though the reason for the big increase (and a commensurate decline in U.K. holdings of Treasuries from $541.3 billion to $272.1 billion) is that Chinese investors who purchase Treasuries in London are often counted as British investors. The quarterly report doesn’t track where the investors actually reside, whereas the annual report attempts to break this down. Japan is still in second place with only a slight change to the earlier figure at $882.3 billion. [U.K. is still third.]

--The U.S. dollar is getting hit primarily by high oil prices in the short-term, as higher prices lead to a transfer of funds from oil-importing countries to the sovereign wealth funds of oil-exporting ones. Longer-term, it’s about Washington’s inability to deal with the deficit issue.

--China’s PMI for February came in at 52.2, down from January’s pace. Premier Wen talked of bringing China’s growth rate down to 7% to battle inflation and soaring housing costs. China’s leadership is scared to death of food riots. [More on this next week as Wen just gave his keynote speech on the economy to the National People’s Congress.]

--Staying in the region, Taiwan’s PMI for February was 55.8, while India’s was 57.9. Japan’s came in at 52.9, which was the third consecutive increase. A number of investors have been high on Japanese stocks.

--Germany’s unemployment rate fell to 7.3% in February.

--Ireland has a new government, following its snap election, and Fine Gael leader Enda Kenny will be the new Taoiseach, or prime minister.

But Kenny was all set to ask the EU for a break on its bailout interest rate but German Chancellor Angela Merkel said, “We can’t get to a point where Ireland pays lower interest rates than Portugal.” Her uncompromising message was that Greece and Ireland had “tapped an aid program” and agreed to conditions that must now be fulfilled.

“If the Irish government now has a problem with interest rates, our job is to figure out what we can do – or whether we can do anything,” she added. [Irish Independent]

Politically back home, there is simply no way Merkel can give in any further when it comes to bailouts or her party will continue to suffer resounding defeats at the polls, a la the lambasting Merkel took in the recent Hamburg vote.

--The Obama administration finally issued the first new deep-water drilling permit for the Gulf of Mexico since the BP spill. Way too much time has been wasted in this area. I totally understand the Interior Department’s initial move, but it’s been almost a year since the disaster and we obviously need all the oil we can get. Congress is going to grill administration officials over the delays.

--Auto sales exceeded analysts’ estimates as GM’s rose 46% in February, Toyota’s 42%, Ford’s 10% and Chrysler Group’s 13%.   Nissan’s rose 32% and Honda’s U.S. sales increased 22%.  [I forgot to mention last time that I had a Chevy Malibu for my trip down the California coast and it was a great ride. Pleasantly surprised.]

--Meanwhile, Ford was most improved in Consumer Reports’ latest annual automaker rankings, commending the manufacturer for acceleration and ride, among other things. The Mustang was the No. 1 sports pick. Nissan’s Altima won in the family sedan category, while Hyundai’s Elantra took the top spot for small cars.

Overall, Honda was the top-ranked car company, followed by Subaru, Toyota, Volvo and then Ford.

--The Commodity Futures Trading Commission has had an ongoing 2 ½-year investigation into manipulation of the silver market and commissioner Bart Chilton is on record last fall as saying it is time for prosecutions. As author William D. Cohan wrote in an op-ed for the New York Times, Chilton said in an interview just last week that “one participant” in the silver market still controlled 35% of it. The legal limit is supposed to be 10%, but the commodities exchanges have granted waivers permitting ownership above the limits proposed by the C.F.T.C.

[Personally, I love that the price of silver is hitting new highs because it helps drive traffic to a story I wrote on the Hunt Brothers. Google “Hunt Brothers / silver market” and there I am, though the BuyandHold version isn’t as extensive as one under my own “Wall Street History” link. My “Ronald Reagan/Patco” tale is also at or near the top of the list for that particular topic.]

--A 20-year-old ban on Mexican trucks crossing the U.S. border is finally close to being resolved. This was a violation of the North American Free Trade Agreement and had resulted in various U.S. goods being subjected to punitive tariffs by Mexico. The introduction of Mexican trucks on our roads will be phased in and the haulers will need to comply with U.S. certification requirements, including drug tests.

Teamsters president James Hoffa said the trucking deal “caves in to business interests at the expense of the traveling public and American workers,” with the union long saying Mexican trucks and drivers are potentially unsafe.

Yeah, Mr. Hoffa. Like some of your BlackBerry wielding drivers speeding down the highway at 80 mph are any better. The U.S. Chamber of Commerce backs the administration’s move.

--Canada’s GDP rose at a solid 3.3% annual clip in the fourth quarter, a little better than expected. Aside from ever-improving exports, consumer spending rose 1.2%, the fastest in three years. For the year, Canada’s economy grew 3.1% in 2010 after a decline of 2.5% in 2009.

--The SEC is investigating Las Vegas Sands over its compliance with the Foreign Corrupt Practices Act, which prohibits bribing foreign officials. It’s a complicated deal involving the criminal Triad gangs in Macau that control much of the high-roller activity and direct traffic to favored casinos. In the case of LVS, the investigation stems from the firing of an executive who is saying he was terminated “without cause” after refusing to “use improper ‘leverage’ against senior government officials of Macau,” the gentleman alleges in a Las Vegas court filing.

--Speaking of Macau, casino revenue there soared 48% in February as tourists from the mainland rushed in owing to China’s surging economy.

--3M CEO George Buckley blistered President Obama, telling the Financial Times that his “anti-business” policies will force manufacturers to shift production out of the U.S. to Canada or Mexico. “We know what his instincts are – they are Robin hood-esque,” said Buckley, adding, “There is a sense among companies that this is a difficult place to do business. It is about regulation, taxation, seemingly anti-business policies in Washington, and attitudes towards science. Politicians forget that business has choice. We’re not indentured servants and we will do business where it’s good and friendly.”

Buckley also said U.S. immigration policy is forcing companies to move research and development oversea. “About 68% of our science PhD candidates are from outside the U.S. Many want to stay here afterwards but we’re not allowed as many visas as we would like.”

--A USA TODAY study of 2011 proxy filings reveals that directors at the 200 biggest publicly traded companies received a median compensation of $228,000 in 2009. Apple directors averaged more than $984,000 in 2010. Occidental Petroleum directors averaged nearly $420,000.

--Speaking of Apple, it launched its iPad 2 on Wednesday, with Steve Jobs appearing before his legions, looking gaunt but sounding good as he wrestles with his serious health issues. As for the product itself, the adult entertainment industry is all fired up because the new iPad will feature Apple’s signature video chat application FaceTime, which the Daily News notes has been adapted for X-rated use by a company called iP4Play. Apple does not approve the sale of adult apps in the iTunes store, but iP4Play is a “Web service,” not an app.

[By the way, the iPad 2 will be priced at the same $499. The company also announced it has sold over 100 million iPhones to date.]

--My brother and I agree that Rolling Stone’s Matt Taibbi deserves a Pulitzer for his work on Goldman Sachs, the great vampire squid. We had another example of Goldman’s ways in the arrest this week of a former director, Rajat Gupta, who was charged with insider-trading in the Galleon Group / Raj Rajaratnam case while he was still on Goldman’s board. Gupta repeatedly used his clout and connections to help Rajaratnam earn money for his hedge funds, of which Gupta was an investor.

Coincidentally, the same day the arrest was made Goldman announced it lost money on trading during 2010 just 25 days, up from a record-low 19 in 2009. I loved how CNBC’s Rick Santelli said his boys in the Chicago pits found it rather curious that the likes of a Gupta are dolling out inside information and, wouldn’t you know, Goldman is highly successful for their own accounts.

Meanwhile, CEO Lloyd Blankfein is being compelled to testify in the Rajaratnam case as a witness for the government.

--Mazda announced a recall of 65,000 cars in North and Central America because of concerns over “yellow sac spiders” building webs in the fuel system. This is one of the more bizarre car stories, ever. Dealers had found 20 cases where the yellow sac spider, specifically, built the webs that could increase pressure in the fuel tank, leading to leaks and the risk of fire. Dealers will install a spring in the line to keep out the spiders.

A Mazda spokesman said it was not clear why the yellow sac spider liked to build nests in the Mazda6.

“Perhaps yellow sac spiders like to go zoom-zoom?” said Jeremy Barnes.

That’s not funny. We’ve all been given yet another reason to sleep with one eye open because clearly spiders can read.

--New Jersey Gov. Chris Christie vetoed a bill that would have made us the first in the nation to legalize Internet gambling. Instead, to avoid legal wrangling the governor wants a referendum before the voters in November that would specify exactly who (read Atlantic City casinos) can run it. 

The online industry said Internet gambling in New Jersey could create between $210 million and $250 million in new revenues for A.C. casinos and at least 1,500 jobs, as well as $50 million in New Jersey tax revenue.

Here’s my issue. I couldn’t care less about online gambling unless it includes sports betting!

--Ronald McDonald is being phased out as the company appeals to a more sophisticated audience, according to marketing experts. “He kind of represents the old McDonald’s, with the high-fat content foods that are kind of falling out of favor.” The guy’s a creep, baiting children with toys, who then throw them at their mothers. [This last bit is simply an observation of your editor’s from his lunchtime experiences.]

--My portfolio: I jettisoned my UNG natural gas play at a small loss (though I had previously lost a large percentage of my ‘call’ trade last year). The UNG stake wasn’t big enough to make a difference in my portfolio even if it worked out and at the same time I didn’t want to add to it. I also sold my remaining position in the uranium stock I had great success with. In fact I’m down to just three major holdings; a Chinese food company, a Canadian/Russian rare earths play, and the China biodiesel position. [I have some flotsam in my IRA not worth bringing up because I won’t lose any sleep if they all go to zero.]

Foreign Affairs

Iraq: The week started with an attack on one of Iraq’s largest oil refineries that shut it down, clearly the work of Iran and its proxies. And then the power-sharing agreement suffered a big blow when former Prime Minister Ayad Allawi (the only leader I respect in the entire country) rejected a job to be head of a new strategic policy council. Some say this is but a negotiating ploy, though Allawi said Prime Minister Nouri al-Maliki has failed to live up to his promises to share power. It was Allawi’s Iraqiya coalition that narrowly won the popular vote, but then Maliki, thanks in no small part to Moqtada Sadr, put together a majority coalition in parliament to maintain power. Curiously, Allawi met with Sadr in Najaf this week. Allawi said, “We are not looking for jobs, but looking for the people to benefit and for there to be stability and progress in Iraq.”

Meanwhile, Maliki still hasn’t appointed a minister of defense or interior, which is pathetic.

Afghanistan: Not a good week, even if it didn’t garner much press due to the ongoing crisis in the Middle East. There was another bombing at a dog fight, killing eight people and from the look of a gruesome photo, a number of canines. This was on the outskirts of Kandahar, which NATO was to have largely pacified by now. It was back in 2008 that at least 65 were killed by a suicide bomber at another barbaric dog fight in Kandahar. And also last week, a suicide bomber blew himself up at a “buzkashi” match, killing at least three. What is buzkashi? It’s that lovely sport played with the body of a headless goat which is filled with sand. 

But then NATO commander Gen. David Petraeus was forced to apologize for a horrible incident where nine boys, aged 12 and under, were hit by an airstrike while gathering firewood as a result of what Petraeus described as a miscommunication error over the location of militants. We (NATO) have to do better if we are to ever win over the hearts and minds.

China: Chinese Premier Wen Jiabao pledged to go after official corruption and abuse of power as a way to narrow the growing wealth gap as the communist government also sought to nip any Mid-East inspired protests in the bud. Foreign journalists have been forcibly removed from locations where protests were supposed to take place and when demonstrators do attempt to gather, the leaders are being rounded up. This is not good, especially for one investing in China. It was back in 2008, in the run-up to the Beijing Olympics, that foreign journalists were allowed to pretty much go anywhere they wanted, though they were still blocked from covering potential protests. Bloomberg News said one of its journalists was assaulted by five plainclothes security officers and had a video camera confiscated. Other agencies such as the BBC have reported similar treatment. A foreign ministry spokesman said, “The police provided reasonable guidance, and the journalists should understand and cooperate.   If both sides take this attitude, we can minimize the occurrence of such incidents.” U.S. ambassador to Beijing, Jon Huntsman, voiced “deep concerns” over the crackdown.

Separately, a widening probe into corruption at the Railways Ministry is raising questions about the scale and pace of the multi-billion drive for high-speed rail in the country. At the National People’s Congress, which just started, it will be interesting to see if the program is reduced, this as President Obama touts China’s success in this realm.

Critics say ticket prices are too high and the services are often nowhere near what they are touted to be. And you have instances where let’s say you had a train going from Philadelphia to New York…the line stops in Newark…so then what?

On another matter, despite President Hu Jintao’s recent summit with President Obama, where better communication between the two militaries was discussed, the commander of the U.S. Seventh Fleet warned this week of the potential for a crisis between the two sides due to a total lack of communication. Attempts by U.S. vessels to communicate with Chinese ships are going mostly unanswered. [This week China also announced it was boosting defense spending by 12.7% this year, though almost everyone agrees it is far more than this.]

And on the Taiwan front, in a further positive sign on the improving economic ties between the two, Taiwan will for the first time allow Chinese investors to take stakes in its technology companies, a big step. Taiwan is allowing investments of up to 10% in existing companies and up to 50% in any start-up joint ventures. For Taiwan, it allows companies to forge strategic alliances with customers in their biggest export market. Taiwan also makes 9 out of every 10 notebook computers in the world.

North Korea: Pyongyang threatened to take military action against the South if Seoul continued to drop leaflets encouraging revolt, so said the Korean Central News Agency. South Korea has been dropping balloons containing leaflets and video clips saved on flash-memory devices and DVDs, as well as U.S. dollar bills. The leaflets and DVDs contain information on the Middle East revolts with the intent of provoking a similar movement against Kim Jong-il and his pudgy boy.

At the same time, South Korean President Lee called for bilateral talks between the two.

“The Korean nation cannot afford to lag behind the currents of the times, repeating the dark history of yesteryear,” he said in a state broadcast. “Now is the opportune time to open a new kind of future on the Korean Peninsula.” 

Lee’s speech followed the opening of the annual joint U.S.-South Korean military maneuvers involving more than 200,000 personnel, which the North says is a prelude to invasion.

Russia: In the latest opinion poll on consumer prices, 50% said they were dissatisfied and were ready to participate in protests. Back in December, the figure was only 16%. It is the rising cost of utilities, not food, though, that is being felt the most. [Moscow Times]

But on the foreign policy front, Russia plans to install antiship and antiaircraft missiles on the disputed Kuril Islands, claimed by both Moscow and Tokyo. The dispute goes back to the final days of World War II, when Soviet troops occupied the islands, and it was last November that President Medvedev became the first Russian or Soviet leader to visit the Kurils, enraging the Japanese. To add insult to injury, there was a report that deported Russian spy Anna Chapman would plant a flag on one of the islands later this month.

This was also a week in which former Soviet leader Mikhail Gorbachev celebrated his 80th birthday and among other things warned of a terrorist attack against a nuclear energy facility, a la the 1986 Chernobyl disaster.

“The true scope of the tragedy still remains beyond comprehension and is a shocking reminder of the reality of the nuclear threat.

“I remain concerned over the dangers of terrorist attacks on power reactors and terrorist groups’ acquisition of fissile material….we must very carefully consider the vulnerability of reactor fuel, spent fuel pools, dry storage casks, and related fissile materials and facilities to sabotage, attack, and theft.” [Global Security Newswire]

Gorby also continued his attack on leaders Medvedev and Vladimir Putin, advising Putin not to return to the presidency next year.

“[Putin] has already served two terms, and one more as prime minister. I would not run for president if I were in his place…both of them must understand their time is limited.”

Gorby added, “There’s much talk about modernization, for one thing, but very little to show for it.”

The Russian people remain mixed on Gorbachev’s own legacy.

On the military front, Reuben F. Johnson wrote in The Weekly Standard of a recently published WikiLeaks cable which revealed that “NATO officers who observed the two major 2009 Russian military exercises came back less than impressed According to the cable (and as many former Russian military personnel and other specialists have attested), the exercises ‘demonstrated that Russia has limited capability for joint operations with air forces, continues to rely on aging and obsolete equipment, lacks all-weather capability and strategic transportation means.…has an officer corps lacking flexibility, and has a manpower shortage.’

“The alarming corollary to the erosion of Russia’s conventional military capability was also quite clear: an increasing willingness to use short-range, tactical nuclear weapons [emphasis mine] regardless of how small the conflict in question might be. The point at which the Russian military hits the ‘nuclear tripwire’ in battle would be the moment when its creaking supply lines and logistics system can no longer support sustained combat operations. If present trends continue, you might be able to measure that period with an egg timer.”

“Raising the specter of a new wave of violence, ordinary people weary of bloodshed in the North Caucasus have threatened to take up arms themselves to kill militants and their families.

“The grass-roots vigilantes have formed a group called the Black Hawks that opposes Wahhabism, a radical form of Islam favored by militants….the group is vowing to restore calm in the mountainous republic beset by a series of recent attacks, including the murder of three Moscow tourists at a ski resort.

“ ‘If they continue, we will kill their children,’ a masked man who identified himself as a Black Hawks member said in an interview with Ren-TV.”

Many of the Black Hawks are relatives of slain policemen. The situation here will just get worse and worse and could bleed over into Georgia all over again, let alone further harm efforts to promote the Sochi Winter Games.

France: President Nicolas Sarkozy further sealed his fate in the 2012 election as he was forced to fire his foreign minister, Alliot-Marie, who stupidly took a Christmas vacation in Tripoli amidst the turmoil and didn’t grasp what was transpiring there. She was also flitting about in private planes. So…France is one step closer to a socialist president, Dominique Strauss-Kahn.

New Zealand: The death toll in the devastating Christchurch earthquake is expected to settle around 250 and the government is saying it will be several weeks before many will even be allowed back into the central business district which leaders are saying needs to be entirely rebuilt, with perhaps some commercial high-rise buildings moved into the suburbs. The head of the area Chamber of Commerce told the Financial Times, “The concept of a densely populated inner-city high-rise configuration won’t be appropriate anymore,” with a “more park-like environment” for where Christchurch stands today.

Damage is still estimated at about $9 billion. But, thankfully, 60% of the immediate region’s economy is based on farming and that continues to boom.

Zimbabwe: President Robert Mugabe celebrated his 87th birthday and has vowed to take over foreign companies from countries that have imposed sanctions on Zimbabwe. In a speech he railed at President Obama, calling him “a nobody from America.” This is one instance where it’s really too bad John McCain isn’t president because the ill-tempered one upon hearing something like this would send a tomahawk missile up Mugabe’s butt.

Random Musings

“Last week, pirates attacked and executed four Americans in the Indian Ocean. We and the Europeans have endured literally thousands of attacks by the Somali pirates without taking the initiative against their vulnerable boats and bases even once. Such paralysis is but a symptom of a sickness that started some time ago.

“The 1968 film, ‘2001: A Space Odyssey,’ suggested that in another 30 years commercial flights to the moon, extraterrestrial mining, and interplanetary voyages would be routine. Soon the United States would send multiple missions to the lunar surface, across which astronauts would speed in vehicles. If someone born before Kitty Hawk’s first flight would shortly after retirement see men riding around the moon in an automobile, it was reasonable to assume that half again as much time would bring progress at a similarly dazzling rate.

“It didn’t work out that way. In his 1962 speech at Rice University, perhaps the high-water mark of both the American Century and recorded presidential eloquence, President Kennedy framed the challenge not only of going to the moon but of sustaining American exceptionalism and this country’s leading position in the world….

“Not only have we lost our enthusiasm for the exploration of space, we have retreated on the seas….

“With the loss of a large number of important bases world-wide, if and when the U.S. projects military power it must do so most of the time from its own territory or the sea….Nothing is better or safer than naval power and presence to preserve the often fragile reticence among nations, to protect American interests and those of our allies, and to prevent the wars attendant to imbalances of power and unrestrained adventurism.

“And yet the fleet has been made to wither even in time of war. We have the smallest navy in almost a century, declining in the past 50 years to 286 from 1,000 principal combatants. Apologists may cite typical postwar diminutions, but the ongoing 17% reduction from 1998 to the present applies to a navy that unlike its wartime predecessors was not previously built up….

“The overall effect of recent erosions is illustrated by the fact that 60 ships were commonly underway in America’s seaward approaches in 1998, but today – despite opportunities for the infiltration of terrorists, the potential of weapons of mass destruction, and the ability of rogue nations to sea-launch intermediate and short-range ballistic missiles – there are only 20.

“As China’s navy rises and ours declines, not that far in the future the trajectories will cross. Rather than face this, we seduce ourselves with redefinitions such as the vogue concept that we can block with relative ease the straits through which the strategic materials upon which China depends must transit. But in one blink this would…cast (us) as insurgents (and) China will be driven even faster to construct a navy that can dominate the oceans, a complete reversal of fortune….

“Despite its necessity, deficit reduction is not the only or even the most important thing. Abdicating our more than half-century stabilizing role on the oceans, neglecting the military balance, and relinquishing a position we are fully capable of holding will bring tectonic realignments among nations – and ultimately more expense, bloodletting, and heartbreak than the most furious deficit hawk is capable of imagining. A technological nation with a GDP of $14 trillion can afford to build a fleet worthy of its past and sufficient to its future. Pity it if it does not.”

--By an 8-1 vote, the Supreme Court ruled that the First Amendment protects fundamentalist church members who mount anti-gay protests outside military funerals, upholding an appeals court ruling in favor of the wacko Westboro Baptist Church of Topeka, Kan. Chief Justice Roberts said free speech rights in the First Amendment shield the funeral protesters, noting they obeyed police directions and were 1,000 feet from the church.

“Speech is powerful. It can stir people to action, move them to tears of both joy and sorrow, and – as it did here – inflict great pain. On the facts before us, we cannot react to that pain by punishing the speaker. As a nation we have chosen a different course – to protect even hurtful speech on public issues to ensure that we do not stifle public debate.”

“Even jerks are protected by the First Amendment, as the Supreme Court reaffirmed….

“(The) church members were in a public street and at a predefined distance from the funeral. Speech about public affairs is the essence of self-government, Justice Roberts noted, and thus deserves protection regardless of its underlying value.

“If nothing else, the Westboro bullies managed the rare feat of uniting the Court’s liberal and conservative wings. If the Court’s four liberals are willing to defend free speech for antiwar, antimilitary philistines, perhaps they’ll rethink their contradictory willingness to limit the political speech of businesses and other issue advocates…Just asking.”

--Peggy Noonan / Wall Street Journal…on the public vs. private debate.

“Unions have been respected in America forever, and public employee unions have reaped that respect. There are two great reasons for this. One is that unions always stood for the little guy. The other is that Americans like balance.  We have management over here and the union over here, they’ll talk and find balance, it’ll turn out fine.

“But with the public employee unions, the balance has been off for decades. And when they lost their balance they fell off their pedestal.

“When union leaders negotiate with a politician, they’re negotiating with someone they can hire and fire. Public unions have numbers and money, and politicians need both. And politicians fear strikes because the public hates them. When governors negotiate with unions, it’s not collective bargaining, it’s more like collusion. Someone said last week the taxpayers aren’t at the table. The taxpayers aren’t even in the room.

“As for unions looking out for the little guy, that’s not how it’s looking right now. Right now the little guy is the public school pupil whose daily rounds take him from a neglectful family to an indifferent teacher who can’t be removed. The little guy is the beleaguered administrator whose attempts at improvement are thwarted by unions. The little guy is the private-sector worker who doesn’t have a good health-care plan, who barely has a pension, who lacks job security, and who is paying everyone else’s bills.”

--The U.S. Army has levied 22 new charges against Private First Class Bradley Manning, including for his aiding of the enemy, which is a capital offense though prosecutors said they would not seek the death penalty. Manning deserves it if proven guilty.

--Newt Gingrich announced he is forming an exploratory committee for seeking the Republican presidential nomination in 2012. I really don’t know why he’s wasting his time. He simply isn’t likeable. Plus, the above noted investigation into Las Vegas Sands could ruin Gingrich’s run before it even gets started as Sheldon Adelson is listed as the single largest donor to a non-profit organization headed by Gingrich, American Solutions for Winning the Future, that has received $6.5 million from Sands since the 2006 election cycle.

--Hawaii Democratic Senator Daniel Akaka announced he wouldn’t run for reelection next year. Talk about a walking case for term limits, Akaka had previously said he intended to run in 2012 even though he is already freakin’ 86! You ever see this guy at a committee hearing? 

--The New York Post reported on how 1,500 New York City teachers are paid not to teach as part of “a sweetheart deal that costs taxpayers an extra $9 million a year to pay fill-ins for instructors who are sprung – at full pay – to carry out responsibilities for the United Federation of Teachers.”

These 1,500 are paid for time away from students, at least one class period a day, “for investigation of grievances” and other union-related duties.

But get this, the Department of Education lets 40 experienced teachers “collect top pay and fringe benefits, but work just one class period a day.

“Under a contract agreement since 2003, the DOE excuses these veterans to work for the UFT” as district representatives and two as union vice presidents, with the UFT paying them another salary.

So, for example, two teachers earn the maximum teacher salary, $100,049, but also received over $50,000 from the UFT, paid for by taxpayers.

--The House and Senate have passed a new law whereby people who knowingly aim laser pointers at aircraft would be committing a federal crime subject to a jail sentence of up to five years. But I had no idea what a growing problem this is. The FAA reported that the number of cases of people pointing lasers at planes and helicopters jumped from 1,527 in 2009 to 2,836 in 2010. “In some cases pilots have had to relinquish control of an aircraft to a co-pilot because of vision loss.”

In the 15-year period before 2005, there were only 400 reported incidents. As the sponsor of the bill, Republican Dan Lungren said this is “a tragedy waiting to happen.”

--Les Krantz and Chris Smith have written a book titled “The Unofficial US Census” which is a compilation of data from public polls and agencies to paint a picture of our lives beyond the demographics. Among their items…

85% of Americans have a cellphone. Among those 18 to 29, the rate is nearly 100%.

24% believe extraterrestrials have visited Earth. [I’m not there…yet…]

The average American eats 62 lbs. of beef and 60 lbs. of chicken each year. We also drink an average 25.7 gallons of beer (or roughly 275 cans worth by my back of the beer coaster calculation…so, divide this by 365…hmmm…I just might be a little over that rate, myself).

Only 10% eat donuts for breakfast. [I eat a chocolate-frosted donut Mon.-Fri. Two glazed donuts on Sat. And then on Sun., I have cereal.]

In 1910, the average weeknight daily sleep was 10 hours!
In 2010, it was 6.7 hours. [I only get about 5.5…but I’m a micronapper, sports fans!]

Utah has the highest rate of volunteer participation, followed by Iowa and Minnesota.

43% think the Civil War happened before 1850 or after 1900.

1 in every 31 Americans is on parole. [I’ve never been on parole, but I may have been on “double-secret probation.”]

90% of readers of this column are mainlining while perusing it.

“Northwestern University’s president said Thursday that he is ‘troubled and disappointed’ that a psychology professor allowed a couple to engage in a sex act involving a motorized sex toy in front of dozens of students, and is calling for an investigation….

“A guest lecturer had been discussing bondage and sexual fetishes during (Professor John Michael) Bailey’s human sexuality class. According to published reports, a couple at the lecture decided that a video the students were watching on the female orgasm was not realistic and gave a live presentation involving the sex toy.”

President Morton Schapiro “said it did not matter that the incident occurred after class was over, that attendance was voluntarily and that the students were warned of the explicit nature of what they were about to see.”

“The guest lecturer asked the students if they were ‘ready for a live sex show,’ student Justin Smith told the Chicago Tribune.

“At that point, Faith Kroll took off her clothes and she and Jim Marcus climbed on the stage and, as about 100 students looked on, the pair demonstrated the use of a motorized device…,” and, you get the picture.

Student Smith told the Tribune, “It is probably something I will remember the rest of my life. I can’t say that about my Econ 202 class and the material that I learned there.”

Oh brother. Time to pull out my copy of Edward Gibbon’s “The Decline and Fall of the Roman Empire.”

“Here’s some news to make your skin crawl: Bedbug infestations will explode this year, particularly in the summer, experts say. Said one researcher, Jeffrey White:

“If we combine the seasonal trend, with the bugs getting more and more embedded in our community, that allows the bugs to make that resurgence all the more stronger.”

Our nation needs a surge of bedbug sniffing beagles. If you hear one barking outside your door, ask for their ID but otherwise it’s best to just let them in to do their work.

And here’s a tip I hadn’t thought of. “Check your laptop. The bedbugs are attracted to the heat and body oils on the computer.” Ditto the alarm clock, another warm spot.

Also, you may want to sleep in the bathtub. Remember, kids. Bedbugs don’t like linoleum so the bathroom is probably your only hiding place.

“Study offers warning about next potential mass extinction”

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

Gold closed at $1428 [hit closing record of $1430 earlier]
Oil, $104.42

Returns for the week 2/28-3/4

Dow Jones +0.3% [12169]
S&P 500 +0.1% [1321]
S&P MidCap +0.4%
Russell 2000 +0.4%
Nasdaq +0.1% [2784]

Returns for the period 1/1/11-3/4/11

Dow Jones +5.1%
S&P 500 +5.0%
S&P MidCap +6.8%
Russell 2000 +5.3%
Nasdaq +5.0%

Bulls 50.6
Bears  19.5 [Source: Chartcraft / Investors Intelligence]

*Dr. Bortrum has a new column.

Brian Trumbore

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