Week in Review

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Week in Review

04/23/2011

For the week 4/18-4/22

Wall Street and Washington

Stocks finished up this holiday-shortened week with the Dow Jones now at its highest mark since June 2008. As opposed to the prior week when the first quarter’s initial earnings reports were lackluster, this week saw virtually all of the big names exceed expectations.

But earlier, on Monday, stocks swooned on word that ratings agency Standard & Poor’s lowered its long-term U.S. outlook for the first time as it slapped a “negative” label on Uncle Sam. The action was warranted, and not a surprise, it’s just that no one foretold the timing. Upon word from S&P on Monday morning, stocks fell 2% across the board before cutting their losses to about 1% by day’s end and the rest of the week was of a far more positive nature as earnings took over.

Nonetheless, while some by week’s end were pooh-poohing the move by an agency that played a large role in the subprime mortgage crisis, it was indeed important. After all, S&P stated in its release that there was a 1 in 3 chance the United States would lose its coveted AAA-rating within two years if lawmakers didn’t get serious about cutting the deficits in a credible fashion. This is good. It certainly should focus Congress on the task at hand.

Now ask me if such a credible plan will actually be enacted, and by end of this year because by January 2012 it will be too late…the political atmosphere poisoned by the looming elections.

But this week’s announcement by S&P gives me an excuse to review the two components of the $14.3 trillion in debt that you hear so much about. Around May 16, the exact $14.294 trillion debt ceiling will be hit and the debate is going to be intense these next few weeks post-Easter recess. Time is running out, though technically there are moves Treasury can take to extend the final date to July 8, or so we’re told. The public is opposed to raising the debt ceiling but all manner of folks, including Wall Street and the Treasury Dept., are warning that to fail to raise it would bring crisis in the financial markets.

The thing is many Republicans are saying they will not vote to increase the debt ceiling without an accompanying long-term deficit reduction plan but there is no way there’s enough time to hammer out a comprehensive package. At best, Republicans could hope to get more spending cuts a la the just-brokered deal on the remaining six months of the fiscal 2011 federal budget, a sham deal as we’ve since learned.

OK…so you have the debt ceiling issue to hike the current $14.3 trillion cap.

Now the $14.3 trillion is comprised of public debt and intergovernmental debt. $9.7 trillion is the public debt…the amount the U.S. government owes its creditors This is about 63% of the gross domestic product, or a lower ratio than Germany’s, let alone Japan’s. However, it’s this 63% that is racing towards 90% and higher, 90 being an important benchmark to some economists…as in history shows when debt reaches this level, economic growth of any significant kind is very hard to come by, i.e., Japan’s experience of the last 20 years.

The other $4.6 trillion of the $14.3 trillion is ‘intergovernmental debt,’ or primarily that owed to the Social Security and Medicare trust funds. It’s money that’s been promised but, as opposed to the public debt, Congress could always change the rules and terms in the case of these two entitlements.

You can’t change the terms on the public debt, though, or you’re in default.

Now some say the warning by S&P and the threat to lower the nation’s AAA-rating is ludicrous because the Fed can simply print more money to cover the debt, though this doesn’t come without a price…think Weimar Germany and inflation.

Nonetheless, Treasury Secretary Timothy Geithner, when asked by a Fox Business reporter Peter Barnes “Is there a risk that the United States could lose its AAA credit rating? Yes or no?” Geithner responded: “No risk of that.”

Geithner: “No risk.”

“It’s enough to make you wonder: How could Geithner know this to be true? The short answer is he couldn’t.

“All you have to do is read the research report Standard & Poor’s published on April 18…and you will see it estimated the risk of a downgrade quite succinctly. ‘We believe there is at least a one-in-three likelihood that we could lower our long-term rating on the U.S. within two years,’ said S&P….

“There you have it: Geithner says the chance of a downgrade is zero. S&P says the odds it will cut its rating might be greater than one out of three. So who are you going to believe? Geithner? Or the people at S&P who actually will be deciding what S&P will do about S&P’s own rating of U.S. sovereign debt?

“It would be one thing to express the view that a downgrade would be unwarranted, or that the chance of it happening is remote. Either of these positions would be defensible. Geithner went beyond that and staked out an absolutist stance that reeks of raw arrogance: There is no risk a rating cut will occur. He left no room for a trace of a possibility, ever.

“The mystery is why Geithner would say such a thing. What’s he going to do if S&P or some other rating company winds up disagreeing with him? Send Barney Frank to beat them up? The problem for leaders who make indefensible claims like this one is that, after a while, nobody knows whether to believe anything they say. Just remember all those government officials in Greece, Ireland and Portugal who kept saying their countries didn’t need bailouts, long after it became clear they did.”

Stanford economics Professor John B. Taylor, op-ed, Wall Street Journal

“Americans are clamoring for a fact-based debate about the budget, but the numbers they’re hearing from Washington are terribly confusing. Here’s an example: Speaking at a Facebook town hall meeting here on Wednesday, President Obama sometimes talked about saving $4 trillion, at other times $2 trillion, and he varied whether it was over 10 years or 12 years, never mentioning any one year.”

Taylor says one key is just to look at the history of government spending.

“In 2000 spending was 18.2% of GDP. In 2007 it was 19.6%. But in the three years since 2009 it’s jumped to an average of 24.4%.

“Second, and perhaps even more striking, (is) that Mr. Obama, in his budget submitted in February, proposed to make that spending binge permanent. Spending would still be more than 24% of GDP at the end of the budget window in 2021….

“Third, the House budget plan proposed by Rep. Paul Ryan (R., Wis.) simply removes that spending binge – it gradually returns spending as a share of GDP back to a level seen only three years ago.

“When I show people this chart [Ed. the history of government spending] they ask why Washington is even having the debate. They say: If government agencies and programs functioned with 19% to 20% of GDP in 2007, why is it so hard for them to function with that percentage in 2021, when GDP will be substantially higher and with many opportunities for reforms and increased efficiencies? And if GDP and employment grow more quickly, as they would if private investment increased as a result of lower government spending and debt, then that 19% to 20% share of GDP could provide much more in the way of public goods.”

Well, as you now know the president took the rare step of revising his original budget in response to the Ryan plan. It moves closer to Ryan’s goal, but still leaves a big part of the Obama binge in place.

“In the Great Budget Debate, Democrats and Republicans are closer than you might think. Neither is proposing a balanced budget anytime soon; both peddle soothing myths to convince supporters that they’re upholding either ‘liberal’ or ‘conservative’ values. Meanwhile, the public seems largely clueless about the enormity of the problem. The Congressional Budget Office reckons that, in 2021, even after a full economic recovery, the remaining deficit will equal almost 5% of gross domestic product. In today’s dollars, that’s $750 billion. It’s the hole that needs filling.”

[Ed. Not to insult your intelligence. Just want to stop here and be clear with the casual reader of this stuff. Above I discussed the $14.3 trillion national debt. Samuelson is discussing the federal budget deficit, which today is over 10% of GDP, hopefully heading to 5% and then below. To put this in perspective, when you hear about the euro crisis across the pond, the 17 nations holding the euro currency are supposed to have budget deficits of no more than 3%...at least that’s the target. Back to Samuelson…]

“Our budget problem is conceptually simple. Government’s spending commitments, driven by more retirees and uncontrolled health costs, vastly exceed the existing tax base. There is an argument about how fast changes should be made to protect the economic recovery. There should be no argument over the need for changes to prevent a debt crisis: Too many Treasury bonds frighten investors and drive up interest rates.

“But it also matters how we do this. By policy and procrastination, both Democrats and Republicans would largely exempt today’s elderly from changes and shift the burden to workers and the young. That’s not ‘liberal’ or ‘conservative.’ It’s expedient – and bad for America’s future. It suggests the young will pay even higher taxes and receive even fewer public services. It will make raising a family harder and possibly deter millions from doing so. It may endanger America’s security by shortsighted military cutbacks.

“We still await a serious debate about which programs to cut and which taxes to raise. Congressional Republicans advance a radical plan for shrinking government – and are not candid about it. Obama defends the status quo of ever-bigger government – and is not candid about it. Perhaps these are negotiating positions and, needing to raise the federal debt ceiling, both sides will recognize their shortcomings. It’s a hope.”

“There is an immediate test and a long-term test of whether the government is serious about getting control of its credit cards. The immediate hurdle is the national debt ceiling….

“The greater challenge will be dealing with the cost of health insurance for the elderly. There simply is no way of restoring our fiscal health without structural changes in Medicare and Medicaid, given the impending retirement of the baby boom generation and climbing medical costs. Today we pay directly for treating the elderly, including both hospital care and doctor costs. The fact is, there is no real control on costs and much is wasted in the process. This was a glaringly missed opportunity in Obamacare.

“The necessary benefit cuts and tax increases are a political minefield. Our politicians know that millions of senior citizens will vote against any change in their healthcare and retirement programs, and they represent roughly 16% of the electorate. Much will turn on the support of independents, who are focused on fiscal probity and represent some 29% of the electorate.

“But financial discipline will elude us unless we also implement enforceable legislative rules….

“Sixty-four senators recently wrote to the president urging him to develop a comprehensive plan to rein in America’s debts and to build upon the recommendations of the fiscal commission. There is support, too, from the Gang of Six, three Democrats and three Republicans, who have been working for several months to patch together a fiscally prudent program.

“But there can be no substitute for presidential leadership. The president has to be specific in his proposals and willing to confront and absorb the political costs and eschew short-term calculations of political benefit. The stakes are too high for either side to seek talking points against the other. This is not about the president or about Congress. It is about the very viability of the United States of America as we’ve known it.”

So I look at all the above and think, OK, Congress should be able to at least come to agreement on the debt ceiling, but what of the longer-term credible plan necessary to avoid the U.S. losing its AAA-rating next year, or by 2013 at the latest?

No way we are strong enough to get it done, which was my point the other week when I said the market will crash in 2012 as reality hits global financial markets in the face (aided by a little computer generated chicanery, of course).

I mean just look at the following poll data from this week. In a Washington Post/ABC News poll, 78% oppose cutting spending on Medicare as a way to chip away at the debt. On Medicaid – the government insurance program for the poor – 69% disapprove of cuts. Further, 56% are against cutting military spending, showing yours truly just how little the public understands how in so many ways we are being taken to the cleaners in defense spending. You know, just musing, but every high school student should be required to read five speeches. Washington’s Farewell Address, Lincoln’s two Inaugural Addresses, Eisenhower’s Farewell Address, and Kennedy’s Inaugural Address.

Back to the polls, though, in a New York Times/CBS News survey, only 29% believe cutting the deficit as a way to improve the economy would create more jobs, which shows an appalling lack of fundamental understanding of global capital markets. If the world sees the United States is committed to getting its fiscal house in order, capital will flood into our coffers. The world is dying to see the U.S. do the right thing. Will we? I’m not hopeful.

Just a brief note on the current economy, the figure on March housing starts was better than expected (though homebuilder confidence hit a new low), while March existing home sales were also better, though we are far from being out of the woods. You can build the case we’ve bottomed, however, give me another month or two to see what happens to median home prices, which in the case of the ‘existing’ category rose to $159,600 in March over February’s revised $156,100. 40% of home sales are still of the distressed variety and 25% of mortgages remain underwater.

The positives in the earnings news of the week were contained in reports out of the likes of IBM and Intel, both of whose revenues were up over year ago levels in a sign business spending has indeed picked up. In a normal cycle the consumer would then follow, though consumer markets remain soft, according to Intel CEO Paul Otellini.

One disturbing item was the latest report on Philly-area manufacturing, which dropped big time. Manufacturing has been leading the way in the recovery and this was the first indicator to stumble some. Part of it could be Japan-related but we need more data to tell if it’s a new trend.

But one thing is clear. Thanks to the above debate on deficits and S&P’s warning, the U.S. dollar tanked anew and that benefited gold and silver in particular, with the former hitting a new nominal high above $1500, while the latter, at $46, is now close to the 1980 all-time high. If Congress ever got serious, the resulting dollar rally would kill the commodity bull run, or at least lead to a very sharp correction, but until that day, even though I’m not in either trade, I can’t help but think of the great Burl Ives and his song from “Rudolph the Red-Nosed Reindeer”.

Silver and gold, silver and gold
Ev’ryone wishes for silver and gold
How do you measure its worth?
Just by the pleasure it gives here on earth.

Yup, I have lots of friends who have been doing very well with all things silver and gold. 

Turning to Europe, where I head this week, only to get slaughtered by our damn piece of crap currency, the drumbeat on Greece having to restructure its debts is rising with even the Germans seeming to almost welcome it despite the huge losses that would entail for the German banking system.

I’m doing my best to read everything and I just have to note the numbers on bank exposures in Europe to those being bailed out, Greece, Ireland and Portugal, for now, vary widely depending on the source and the context. It’s confusing because sometimes the stories don’t make clear the distinction between bank and sovereign debt levels, but one story I saw has Germany’s banks being owed $320 billion by the bailout three when looking at sovereign, bank and corporate loans. Spain going down the bailout path would add another $240 billion. This in no way means these are the dollars that would be lost. It would be a relatively small percentage of the total as the European Central Bank and IMF would work to limit the damage in backstopping the system. At least that’s how it would look on paper.

But the reality is the likes of Germany and France have massive exposures and the losses to individual institutions would still be huge. You could yet have the kinds of bank runs I’ve written of because there is another elephant in the room. We see these exposures bandied about but what is Europe’s big problem compared to the U.S. when it comes to the banking sector? Lack of transparency…so how the hell do you really know what the true exposures are?

Here’s one thing we do know, however. Euro member Finland’s parliamentary election has gigantic potential ramifications thanks to the rise of the anti-immigrant, anti-bailout True Finns party that saw its share of the vote rise from 4% in 2007 to 19% and a third-place finish.

Negotiations will begin next week on whether to include the True Finns in a new government though there is really no way you can exclude them. Understand the import here. All 17 euro nations must approve the coming bailout plan for Portugal (assuming their caretaker government can push through a program before their June snap election…and that is far from a given), so if the True Finns say they will only join the government if the government votes ‘no,’ you have instant chaos.

Heck, it’s just a freakin’ mess all around on the continent. Some say the euro economy will do just fine, I say no way because of the coming unrest in the streets that seems to me inevitable (including over the immigration issue).

I mean look at the U.K. It’s now expected first quarter GDP will come in at only 0.5% over the fourth quarter’s pace. That’s perilously close to falling back into recession and Britain’s austerity program is just beginning to bite.

Obviously I’ll have more on this next week and it’s always possible I’m simply full of it, but I don’t think so, he typed with a wry smile.

Meanwhile, China Investment Corp., the mainland’s sovereign investment fund, issued a study on the outlook for 2012 and Chairman Lou Jiwei said: “World economies are looking grim next year, with Europe the grimmest – internal demand is weak, banks are in need of recapitalization and regional gaps are widening.

“But our negative forecast on the performance of the European economy does not mean our investment will stop. Quite the contrary, as the money we have invested in the EU in the last few years has generated quite good returns.

“We believe the infrastructure in the EU is better than the United States, and we will continue to invest.”

Lou added world economic growth was likely to slow in December and Europe was in line to take the first and the worst hit.

The U.S.? Lou said, “We don’t see any encouraging signs of change in the U.S. yet. We don’t expect them to contribute much to global growth.” [South China Morning Post]

Finally, in Japan, March exports dropped 2.2% over year ago levels as car exports plummeted 28% for the first tangible signs of the impact of the 3/11 triple disaster. Public confidence has been shattered with the failure in political leadership and in Tokyo Electric’s inability to deal with the Fukushima Daiichi nuclear disaster (which now has a formal 12-mile no-go zone).

But, owing to the Japanese character there has been no breakdown in civil society and one poll has 58% favoring a rise in taxes to pay for reconstruction, the first $50 billion for which was approved this week, with the final cost still estimated to be in the neighborhood of $300 billion.

There were conflicting stories this week that Japan’s power grid may be in a little better shape than first thought heading into the summer air conditioning season, but let’s wait a few weeks on this one.

Meanwhile, Toyota is saying they will not return to normal production levels until November or December, which virtually ensures they will lose their No. 1 in the world status to GM, which should regain the top ranking it lost in 2008. All of Toyota’s plants in Japan are now open but they are still operating at just half capacity.

Street Bytes

--Both the Dow Jones and S&P 500 advanced 1.3%, with the Dow finishing the week at 12505. Nasdaq, led by the likes of Apple’s and Intel’s earnings, rose 2.0%.

But the markets ignored a new surge in oil prices to $112 and by Monday, gasoline will be nearing $4.00 a gallon on a nationwide basis. One other negative that was ignored was a second straight week of jobless claims back over the 400,000 level. 

The bond market was quiet as participants await the first press conference by Fed Chairman Ben Bernanke next week and any clues as to what the Fed will do when QE2 ends in June. The Fed has been buying up 70% of the Treasuries, after all.  

--A sensitive U.S. Commerce Department report shows that during the 2000s, U.S. multinationals cut their U.S. work forces by 2.9 million while increasing employment overseas by 2.4 million. In all, U.S. multinationals employed 21.1 million people at home in 2009 and 10.3 million elsewhere.

--The Apple Inc. juggernaut continues as the company reported net income in the fiscal second quarter rose to $5.99 billion, or $6.40 a share from $3.33 a year earlier. Sales jumped 83% to $24.7 billion.

Johnny Jacobs, tell us how many products Apple sold in the quarter.

Try 18.7 million iPhones, editor, as well as 4.69 million iPads, 3.76 million Macs, and 9.02 million iPods.

The iPad figure was actually light owing to supply shortages.

It also needs to be noted that when it comes to mobile phones, those using the Android operating system account for 39.5% of the market to Apple’s 15.7%. 

[Last week, Apple filed an intellectual property lawsuit against Samsung. Samsung then countersued. A quick look at the facts leads me to believe Apple is in the right.]

--Nokia continues to lose market share to Apple and Google’s Android system and is actually forecasting a sales decline in the second quarter while talking of slashing costs a further $1.5 billion.

--China Mobile, the world’s largest mobile operator, passed the 600 million subscriber mark, adding another 16.8 million between January and March.

--Privacy watchdogs are up in arms over the disclosure that Apple iPhones and iPads are secretly collecting location data on users. Mobile service providers always kept this kind of stuff but it would take a court order to get it released. Google’s Android software tracks behavior but appears to warn users it’s doing so. Frankly, there is no privacy anymore. Get over it. If I had an iPhone I wouldn’t lose sleep over this. If you’re into criminal activity, then I would.

--Intel reported revenue for the first quarter that was up 25% over year earlier levels and far better than expected. The company also said revenue in the current quarter would be better than currently estimated.

But Intel is still dependent on the PC market for a lion’s share of its sales and research firm IDC said global PC shipments fell 3.2% in the first quarter while the rest of the year could be “flattish” in terms of unit growth. The problem here is that Intel says the growth in the sector will be more like “low double digits.”

--IBM reported sales climbed 7.7% to $24.6 billion, beating estimates. The world’s largest computer-services provider guided higher for the full year.

--One year after the Deepwater Horizon disaster in the Gulf of Mexico, BP filed a $40 billion lawsuit against Transocean, accusing the offshore rig company of negligence. Thus far, BP has incurred costs of about $18 billion.

[On Friday, the Coast Guard issued a report concluding that Transocean had serious flaws in its safety-management system and a poor safety culture that contributed to the blast, killing 11.]

Meanwhile, owing to the Obama administration’s 10-month freeze on deep-water drilling, offshore oil production is expected to average 1.55 million barrels a day this year, down 13% from 2010, according to the U.S. Energy Information Administration.

[As for tourism along the Gulf coast, early signs are rental bookings are returning to pre-spill levels.]

--Goldman Sachs handily beat analysts’ earnings expectations for the first quarter, but revenue fell from $12.8 billion to $11.9 billion and the shares suffered. Revenue from trading activities, the hallmark of the firm’s operations, fell 22%.

--Morgan Stanley’s net income fell 45% from a year ago but it beat analysts’ estimates. Revenue dropped from $9.07 billion to $7.64 billion, but revenue from fixed-income sales and trading was strong though still way behind that of Goldman Sachs and JPMorgan.

--In reporting its earnings, American Express said its profit increased 33% on the heels of a stronger consumer and fewer loan losses. Overdue payments, a signal of future defaults, dropped to 1.8%.

--Vegetable prices are falling substantially in China, even as consumer prices rose 5.4% in March (with food prices up 11% year-on-year). The Ministry of Commerce reported a 9.8% decrease for a basket of 18 staple vegetables for the week ending April 17 from the previous week as the weather improves.

Separately, China is forecasting continued growth in grain production, while at the same time industrialization has shrunk China’s farmland by 20.6 million acres in the past 12 years so the government is relying on improved efficiency, to say the least.

--The percentage of people who believe buying a home is a safe investment has dropped to 64% from a high of 83% when a survey for this issue first began in 2003. But according to the National Association of Realtors, falling prices have made real estate the best buy in four decades.

--New regulations have been announced by the Department of Transportation, most of which go into effect in August, that give passengers new rights on issues such as lost luggage and overbooking. Regarding the latter, the maximum compensation airlines must pay a passenger who has been forced to give up a seat goes from $800 to $1,300 (depending on how long the passenger is delayed).

--Airfares this summer are expected to climb 15% from 2010 levels. You can thank rising fuel costs and a big pickup in passenger demand.

--A $4.1 billion upgrade of Los Angeles International Airport should create 39,900 jobs in the region during the next several years.

--The New York Times has signed up 100,000 paying subscribers to its new digital content format, including on smartphones and tablet computers, in just three weeks, which has exceeded expectations. Good for them. We’ll see what the retention rate is. I’m a subscriber, though I got in through the promotion sponsored by Ford and its Lincoln brand.

--New Jerseyans have been converting to cellphone-only houses at the slowest rate in the country, which is kind of interesting. I know I’m not giving up my landline. It seems that New Jersey residents are older than those in many states. Arkansas and Mississippi are the highest users of wireless only service.

--After a decade in development, the U.S. Interior Department approved of the Cape Wind Energy Project off the Massachusetts coast…130 wind turbines. For years homeowners have bitched their ocean views would be affected by the windmill towers. Next up a probable project off New Jersey.

--CBS Corp. Chief Executive Les Moonves received compensation of $57.7 million in 2010. Salary was unchanged at $3.5 million but his bonus jumped to $27.5 million from $15 million, plus there was stock. CBS’ annual revenue rose 8% from the year before and its profit more than tripled to $724.2 million. So, yes, he did an outstanding job in turning around the network, but this is outrageous.

--Mike Hogan of Barron’s had an interesting bit from Franklin Templeton Investments on the far-reaching changes in the world’s “middle class”…those with disposable income.

“The report sees a steep decline in the number of U.S. plus European middle-class consumers to 558 million by 2025, and a veritable explosion in the Asian middle class to 3.6 billion.” Holy Toledo!

--According to an analysis by USA TODAY, federal tax prosecutions hit a 10-year high in 2010, owing in no small part to an ongoing crackdown on offshore tax evasion by wealthy Americans.

--NASA handed out $269.3 million in grants to four companies looking to develop the next generation of rockets and spacecraft for manned spaceflight with the retirement of the shuttle program. The four are:

Space Exploration Technologies Corp., or SpaceX; Boeing; Blue Origin (closely held venture owned by Amazon.com’s Jeff Bezos); and Sierra Nevada Corp.

Until these guys get their act together, the U.S. is reliant on the Russians to get our astronauts to the International Space Station, which is more than a bit embarrassing.

--It’s not just gold and silver that are soaring, other commodities are soaring as well. According to the U.N., the price of dry fresh opium in Afghanistan increased over 250% in February vs. year ago levels!

--Yippee! Subway is not only my favorite sandwich outlet, but this week they announced they will be reducing the salt content of their product by 15% to 28% depending on the sandwich. Subway is the first national fast-food chain to publicly announce such a large reduction. Later this year, the Food and Drug Administration is expected to announce a major push on this front. Good!

Foreign Affairs

Libya: The scenes and tales from Misrata are awful as various nations are feverishly trying to ferry migrants out of there and on to Benghazi, while a lone hospital attempts to treat the growing number of casualties without the proper equipment. The Libyan government, though, is withdrawing its forces from the hellhole so we’ll see who fills the void.

 A Washington Post/ABC News poll shows 49% of Americans disapprove of President Obama’s handling of the war, up from 34% in mid-March, so you know the White House is concerned about this aspect as 2012 approaches.

“The tragic incongruity of the Libya war continues with no end in sight. NATO forces continue to pursue a half-hearted bombing campaign to stop Moammar Gaddafi’s forces in the name of preventing civilian deaths. Yet Gaddafi’s forces continue to attack rebels in civilian areas, a reality horribly dramatized by Wednesday’s deaths of photographers Tim Hetherington [Ed. co-director of the documentary “Restrepo” about U.S. soldiers on an outpost in Afghanistan] and Chris Hondros in the besieged city of Misrata.

“Here’s other news from the front: Rebels fight with aging rifles and other weapons that often don’t work or lack ammunition or spare parts. Their leading generals can’t decide who is subordinate to whom. The U.S. has handed off responsibility to NATO for maintaining the no-fly zone and enforcing U.N. resolutions, but the alliance has proved to be a coalition of the ambivalent and the unwilling. Only six of its members – including Britain, France and Canada but not the U.S. – are carrying out air strikes. Those strikes are increasingly ineffective as Gaddafi’s forces adapt by taking cover behind civilians….

“Meantime, it’s worth taking stock of the costs of faint American leadership. A dictator who is despised by most of his people and who might have been deposed in the early days of a rebellion with minimal outside aid remains in power and defiant. Civilians are being starved and butchered thanks to U.N. resolutions that are supposed to protect them but limit the means by which that protection may come. The administration continues to be involved in an ever-longer war because it tried to get out of it too soon. And an effort to showcase NATO’s capabilities has only demonstrated how little the alliance can do without the U.S.”

But now Britain, France and Italy have sent military advisers and the U.S. is going to use armed drones, it’s just that most don’t see how you accomplish the goal of removing Gaddafi at this point without ground troops, let alone keeping the peace after he’s gone.

Vice President Joe Biden argues that NATO can fulfill the mission and doesn’t need the U.S.

“The question is: where should our resources be? Should we be spending more time knowing everything there is to know about the make-up of the opposition in Libya, or should we be having all the intelligence that is available to know and reasonably could be known in what’s going on in Egypt and the Muslim Brotherhood? It’s not even close.”

But there was Senator John McCain, suddenly popping up in Benghazi on Friday, calling the rebels “my heroes” and urging Obama to go after Gaddafi directly.

Syria: The government finally lifted 48 years of emergency rule in a concession to protesters demanding greater political freedom, but the demonstrations continued after the announcement and appeared to be spreading rapidly on Friday. It is estimated 200 have been killed, not including the toll from Friday’s action that is deemed to be significant (up to 81 dead as I write) as once again government forces fired on unarmed protesters. The United States adds that the lifting of the emergency decree may have been replaced with the requirement that protesters receive permission from the Interior Ministry before holding any demonstrations, which would make things as restrictive as before. The situation in Syria can best be described as fluid, and administration inaction appalling.

Egypt: A government investigation into the three-week revolution that overthrew President Hosni Mubarak says that at least 846 people were killed, far more than initially estimated. The lead judge on the probe said that Mubarak was at least indirectly responsible for the deaths. Former Interior Minister Habib Adly, facing trial on corruption charges, was the one who ordered the shooting according to the new government.

“The most dangerous developments are happening in Egypt, which was a bulwark for 30 years against Iranian expansion and Arab Islamic fundamentalists. But the risky departure of Hosni Mubarak, under American pressure, threw the door wide open to both and the results already are disturbing.

“Many people saw this coming – but apparently, they did not include a single soul in the White House.

“Even though leaders of the Muslim Brotherhood were talking about getting Egyptians ready for ‘war with Israel’ in January and sabotaging a natural-gas pipeline between the countries, President Obama still decided that Mubarak had to go even before a succession was clear. Saudi Arabia, among others, saw the push against Mubarak as a betrayal of an American ally and an invitation for Islamists to make a move.”

Now it is said Egypt and Iran are on the verge of establishing diplomatic relations, while the issue of the above-mentioned pipeline is about to explode as Mubarak is questioned as to why he cut a seemingly good deal for Israel…more fodder for the extremists in Egypt.

Afghanistan: 7 NATO soldiers were killed last Saturday in two separate attacks. In one, a suicide bomber using an Afghan uniform killed five NATO troops plus four Afghan Army soldiers. It’s a style of attack increasingly favored by the Taliban. The day before, a suicide bomber wearing a police uniform killed the police chief of Kandahar Province, Gen. Khan Mohammad, who was said to be a beloved figure there. No doubt the infiltration of the military and police keeps American officers up at night. Lt. Gen. William B. Caldwell IV, who leads the United States and NATO training mission in Afghanistan, said they have begun training counterintelligence agents to help find Taliban and insurgent infiltrators in the ranks.

128 coalition troops have died in Afghanistan thus far in 2011.

Iraq: Moqtada al-Sadr and his Sadrists have made all manner of threats against U.S. diplomats who will be left behind when U.S. troops leave; diplomats who will then be relying on Iraqi security forces and private contractors for their safety. But the overall diplomatic presence come next year will be massive…16,000 employees at the new embassy in the Green Zone. Discussions on keeping 10,000 U.S. troops beyond the December deadline have bogged down over ongoing political concerns that a continued American presence will lead to more sectarian violence and Egypt-like protests. The thing is Iraq can’t just decide in October that it wants the U.S. to stay. They need to act now.

But you want some good news? As reported by USA TODAY’s Jim Michaels, Iraq has doubled its electricity capacity over prewar levels, a dramatic improvement, though demand is skyrocketing so supply still falls way short of what’s needed.

On the oil production front, 2.7 million barrels a day is the norm these days, up 26% over prewar levels as the Iraqi government works with 14 foreign oil companies to increase production further.

Israel: Security sources here have warned that Hizbullah is preparing an imminent attack on Israeli interests abroad within days. A Hizbullah operative responsible for bombings in Buenos Aires in 1992 and 1994 has been targeted. The terrorists are still looking to avenge the assassination of their field commander, Imad Mughniyeh, in Damascus in 2008. The targeted operative, Talal Hamia, replaced Mughniyeh and answers directly to Hizbullah chief Hassan Nasrallah.

[So years ago I opted to spell Hizbullah as I do, even though the mainstream press mostly spells it “Hezbollah,” because the Jerusalem Post and Lebanon’s Daily Star spelled it Hizbullah and I figured if any two newspapers knew the correct spelling it would be them. But now both of these papers have switched to Hezbollah. So this sucks in terms of the archives but I’m sticking with Hizbullah for now.]

Lebanon: The fate of the seven Estonian tourists who were kidnapped about a month ago is still not known even though a video emerged of them, apparently unharmed but the date isn’t clear. Also unknown is the group claiming responsibility, a new one called ‘Movement for Renewal and Reform’ when translated. Some seem to believe they were taken to Syria. It’s also possible the group thought they were kidnapping Europeans that they would then exchange for terror suspects in, say, French or German prisons, and accidentally took the Estonians, only now they are trying to figure out how to leverage them. [Totally my guess.]

Pakistan: In very harsh words, Chairman of the Joint Chiefs of Staff Adm. Mike Mullen accused Pakistan’s spy agency, the ISI, of having a “longstanding relationship” with a militant group run by Afghan insurgent Haqqani. Mullen made the comments upon arrival in Islamabad for meetings with government officials.

“Haqqani is supporting, funding, training fighters that are killing Americans and killing coalition partners. And I have a sacred obligation to do all I can to make sure that doesn’t happen.”

A government official denied the ISI is helping Haqqani, but the U.S. believes the terrorist is based in Pakistan. On Friday the U.S. launched a drone strike that killed 25 in North Waziristan, exactly what Pakistan has warned the U.S. to stop.

And this was disturbing. Back in 2002, a woman, Mukhataran Mai, hit the headlines after speaking out about being gang raped. She became an icon for women’s rights in Pakistan.

But now five of six men charged have been acquitted by the Supreme Court, this after a lower court commuted the death penalty of the sixth man to life imprisonment (which in Pakistan means he could already be back out on the streets).

The head of U.S.-based Human Rights Watch said the verdict sent a “very bad signal” across Pakistani society. “It suggests women can be abused and even raped with impunity and those perpetrating such crimes can walk.” [BBC News]

Mukhataran Mai became a hero because she chose to speak out, as opposed to many Pakistani women who when raped commit suicide.

China: The government has to be super nervous as a result of a growing trucker dispute in Shanghai over rising costs, including fuel prices. This bears watching over the coming days.

North Korea: The head of South Korea’s National Intelligence Service told lawmakers that “another atomic test is always possible as (North Korea) has various nuclear test sites and construction of (new) sites is under way. I believe North Korea will use military action such as nuclear and missile (tests) to turn the tables if its current tack of dialogue fails.”

Nigeria: I apologize. I did not think incumbent President Goodluck Jonathan would be able to avoid another round of balloting which is why I failed to identify that the election process for president ended last weekend, not this one. [Not that I’m lashing myself like an Islamist during one of their ‘celebrations.’ There is a round of voting this weekend for state governors.]

In Nigeria the Islamists are mostly in the north and the Christians in the south and following the vote there were riots in the north over Jonathan’s election (in which he won 59%).

Jonathan is the Christian who was appointed president last year upon the death of incumbent Yar-Adua. By all accounts the vote was free and fair.

Nigeria, with 150 million people, is Africa’s most populous. It’s also a critical oil producer so a reasonable semblance of peace is necessary.

Separately, on Africa in general, the Sunday London Times had an investigative story on where some $2 billion+ in British aid for a European Union fund flows. Some of it has gone to fund a huge medical store that has been largely empty, “an immigration and job center that has arranged six jobs in three years and a Belgian group that teaches Africans how to dance.” Now discuss amongst yourselves.

Malawi is getting about $800 million over five years, even though the government has restricted media freedom and punishes homosexuality by up to 14 years of hard labor. [Malawi also criminalizes flatulence in public places.]

Russia: Prime Minister Vladimir Putin said in an annual address to parliament that a key lesson of the global financial crisis is that vulnerability to economic shocks could undermine national sovereignty, adding Russia must be “independent and strong” to resist outside pressure.

But more closely followed were his comments that he intended to boost military spending, as well as funding for agriculture and infrastructure over the next 10 years in a further sign he plans on staying in power long after the 2012 presidential election. As reported by the Moscow Times, Putin only mentioned President Medvedev twice during a four-hour speech and Q&A session – “and only then in passing.” Putin also said the word “corruption” just once, fighting corruption being the centerpiece of Medvedev’s agenda, which was also curious.

As for the four hours in length, which observers said was the longest presentation to the Duma in at least 20 years, nationalist party leader Vladimir Zhirinovsky “accused Putin of not thinking about the lawmakers, who had no chance to take a snack or smoke break while listening to the long report.” “You’ll spoil everyone’s digestion system,” said the rather colorful Zhirinovsky.

But back to Medvedev and Putin, it increasingly looks like the two could be running against each other in the March 2012 poll.

Serbia: This is a sleeper hot spot (the entire region always is). Tens of thousands of anti-government protesters in Belgrade on Sunday called for early elections amid growing anger over corruption and the state of the economy.   An opposition leader vowed to go on a hunger strike until an election was called. President Boris Tadic dismissed the opposition’s ultimatums.

Regarding my comment on Greece last week that ‘it matters’ in no small part because it’s in the Balkans, Bloomberg ran a story on Thursday that started out, “The Balkans remains at risk from Greece’s sovereign debt crisis as the region’s recovery is weaker than elsewhere in eastern Europe.”

Bosnia & Herzegovina, the scene of the worst fighting during the Balkan wars, is suffering the worst. They still don’t have a central government since an October election. Of course the worse the economy gets, the greater the chance for unrest and here it can escalate in a flash.

Britain: Finally, let’s hope the Royal Wedding goes off without a hitch. The Real IRA is under intense surveillance, according to British authorities

Disturbingly, protestant terrorists appear to be targeting Roman Catholic bishops in Scotland, though the tensions here begin with two famous football teams, Celtic (and its largely Catholic following) and the Rangers (largely Protestant). The two held a game on March 2 and there were all kinds of altercations on the field. So this week, three men associated with Celtic received mail bombs that failed to go off.

Random Musings

--In a Marist College poll for McClatchy Newspapers, 44% said they definitely plan to vote against Barack Obama in 2012, 37% said they will vote for him and 18% were unsure. Incredibly (to me), in a matchup against Mitt Romney, Obama wins only 46-45, according to the same poll. In January, Obama had a 13-point lead.

In a Washington Post/ABC News survey, Obama’s job approval dropped to 47% (46% in the New York Times/CBS News poll), while 50% disapproved. Importantly, among independents, 55% disapprove of the job he’s doing. In a Gallup survey, Obama’s approval rating among independents stood at 35%.

57% disapprove of the job the president is doing in dealing with the economy.

And in the same Washington Post/ABC News poll, only 43% approve of House Speaker John Boehner’s performance. But if he thinks that is bad, only 33% approve of the job Senate Majority Leader Harry Reid is doing.

--Obama raised $2 million at an event a week ago in Chicago, and nearly $10 million from events in San Francisco, Los Angeles and New York. As the Wall Street Journal noted, contrast this with Republican Tim Pawlenty, who raised $160,000 in the first quarter.

--Charles Krauthammer / Washington Post…on Donald Trump and his odds of winning the Republican nomination.:

“He’s not a candidate, he’s a spectacle. He’s also not a conservative. With a wink and smile, Muhammad Ali showed that self-promoting obnoxiousness could be charming. Trump shows that it can be merely vulgar. A provocateur and a clown, the Republicans’ Al Sharpton. The Lions have a better chance of winning the Super Bowl.”

Yet in two recent polls of likely Republican primary voters nationwide, Trump is in the lead, owing to the weak field as well as the birther issue. One poll found that the most ardent of them are nearly three times more likely to be in favor of Trump than any other candidate. A Fox News survey found that four in 10 American voters think there is “cause to wonder” whether the president was born in the U.S. while 24% believe outright that he was not.

“Very few people have the luxury of being freely obnoxious. Most people have to watch what they say for fear of offending their bosses and colleagues. Others resist saying anything that might make them unpopular.

“But, in every society, there are a few rare souls who rise above subservience, insecurity and concern. Each morning they take their own abrasive urges out for parade. They are so impressed by their achievements, so often reminded of their own obvious rightness, that every stray thought and synaptic ripple comes bursting out of their mouth fortified by impregnable certitude. When they have achieved this status they have entered the realm of Upper Blowhardia….

“(There) has always been a fan base for the abrasive rich man. There has always been a market for books by people like George Steinbrenner, Ross Perot, Bill O’Reilly, Rush Limbaugh, Bobby Knight, Howard Stern and George Soros. There has always been a large clump of voters who believe that America could reverse its decline if only a straight-talking, obnoxious blowhard would take control.

“And today, apparently, Donald Trump is that man….Many people regard Trump as a joke and his popularity a disgrace. But he is actually riding a deep public fantasy: The hunger for the ultimate blowhard who can lead us through dark times.

“He is riding something else: The strongest and most subversive ideology in America today. Donald Trump is the living, walking personification of the Gospel of Success….

“(His) boyish enthusiasm for glory has propelled him to enormous accomplishment. He has literally changed the landscape of New York City, Chicago, Las Vegas and many places in between. He has survived a ruinous crash and come back stronger than ever….

“A child of wealth, he is more at home with the immigrants and the lower-middle-class strivers, who share his straightforward belief in the Gospel of Success, than he is among members of the haute bourgeoisie, who are above it. Like many swashbuckler capitalists, he is essentially anti-elitist….

“(And) I do insist that Trump is no joke. He emerges from deep currents in our culture, and he is tapping into powerful sections of the national fantasy life. I would never vote for him, but I would never want to live in a country without people like him.”

I was in the barber shop this week and I view my guy Mike as the epitome of the Average Joe on the streets of America in terms of his political viewpoints. This week’s conversation centered around Obama and Trump. Mike was adamant in his support of the latter, and his ongoing disdain of the former. “Trump would kick ass and get things done.”

Will I be seeing Trump when I go to the Iowa State Fair in August? That would be a sight.

“You know what I love about this fair,” I can picture Trump saying. “It’s world class! And these are the best of America! These farmers know what it is to live the American dream. If you work hard, you can achieve anything! Am I right?!”

“Aarrgghh!” the crowd would roar back. Trump is causing a buzz across the state. The Iowa Republican Party’s spring fundraiser is June 10 and Trump is scheduled to be there. This could be when he announces.

--Republican Sen. John Ensign of Nevada is resigning effective May 3, saying an ongoing Senate Ethics Committee probe into an extramarital affair with a former staffer would result in further “wear and tear” on himself and his family. It was June 2009 that Ensign announced the dalliance with Cynthia Hampton, and that he had helped her husband, Doug Hampton, obtain lobbying work with two Nevada companies. There is something more to this case that Ensign doesn’t want to come out, as the Senate vows to continue its investigation despite his resignation.

Nevada has a Republican governor who will be appointing someone to serve out Ensign’s remaining term, which expires end of 2012.

“Our long wars have cost much in blood and treasure, and our military is overstretched. We’re asking soldiers to be social workers, as Bing West notes in his book on Afghanistan, ‘The Wrong War.’

“I saw it last month, when we met with a tough American general. How is the war going? We asked. ‘Great,’ he said. ‘We just opened a new hospital!’ This was perhaps different from what George Patton would have said. He was allowed to be a warrior in a warrior army. His answer would have been more like, ‘Great, we’re putting more of them in the hospital!’

“But there are other reasons for a new skepticism about America’s just role and responsibilities in the world in 2011. One has to do with the burly, muscular, traditional but at this point not fully thought-through American assumption that our culture not only is superior to most, but is certainly better in all ways than the cultures of those we seek to conquer. We have always felt pride in our nation’s ways, and pride isn’t all bad. But conceit is, and it’s possible we’ve grown as conceited as we’ve become culturally careless.

“We are modern, they are not. We allow women freedom, they do not. We have the rule of law, they do not. We are technologically sophisticated, they are the Flintstones. We have religious tolerance. All these are sources of legitimate satisfaction and pride, especially the last. Our religious pluralism is, still, amazing….

“We have much to be proud of. And we know it. But take a look around us. Don’t we have some reasons for pause, for self-questioning? Don’t we have a lot of cultural repair that needs doing?

“Imagine for a moment that you are a foreign visitor to America….

“You get to town, settle into a modest room at the Hilton on Sixth Avenue. You’re jet-lagged. You put on the TV, not only because you’re tired but because some part of you knows TV is where America happens, where America is, and you want to see it. Headline news first. The world didn’t blow up today. Then:

“Click. A person named Snooki totters down a boardwalk. She lives with young people who grunt and dance. They seem loud, profane, without values, without modesty, without kindness or sympathy. They seem proud to see each other as sexual objects.

“Click. ‘Real Housewives.’ Adult women are pulling each other’s hair…They insult each other.

“Click. Local news has a riot in a McDonald’s. People kick and punch each other. Click. A cable news story on a child left alone for a week. Click. A 5-year-old brings a gun to school, injures three. Click. A show called ‘Skins’ – is this child pornography? Click. A Viagra commercial. Click. A man tried to blow up a mall. Click. Another Viagra commercial. Click. This appears to be set in ancient Sparta. It appears to involve an orgy….

“My small point: Remember during the riots of the 1960s when they said ‘the whole world is watching?’ Well, now the whole world really is. Everyone is traveling everywhere. We’re all on the move. Cultures can’t keep their secrets.

“The whole world is in the Hilton, channel-surfing. The whole world is on the train, in the airport, judging what it sees, and likely, in some serious ways, finding us wanting.

“And, being human, they may be judging us with a small, extra edge of harshness for judging them and looking down on them.

“We have work to do at home, on our culture and in our country.”

--Big controversy over where the retiring space shuttles will be based. Texas thought it should get one but the shuttle Enterprise, for example, is going to be based at the Intrepid Sea-Air-Space Museum in New York City. Utah Republican Congressman Jason Chaffetz pushed a bill that would reshuffle where the four retired shuttles will go.

“I am seeking to restore common sense and fairness to the Space Shuttle retirement home debate. Instead of relying on political guidance systems, these decisions must be steered by history and logic.”

To which New York Democratic Senator Charles Schumer replied, “When people from Paris, Beijing, Tokyo and Amsterdam start saying they want to go to Houston, maybe then they’ll get a shuttle.”

Pretty good, you’ve got to admit. The other three shuttles are going to the Smithsonian, Cape Canaveral, and the California Science Center in Los Angeles.

--Our thoughts and prayers go out to our friends in North Carolina and other states who suffered through the worst tornado outbreak in our history last weekend. The month of April is also the worst on record for twisters.

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

Gold closed at $1503
Oil, $112.29

Returns for the week 4/18-4/22

Dow Jones +1.3% [12505]
S&P 500 +1.3% [1337]
S&P MidCap +1.3%
Russell 2000 +1.3%
Nasdaq +2.0% [2820]

Returns for the period 1/1/11-4/22/11

Dow Jones +8.0%
S&P 500 +6.3%
S&P MidCap +9.7%
Russell 2000 +7.9%
Nasdaq +6.3%

Bulls 54.2
Bears 19.2 [Source: Chartcraft / Investors Intelligence]

Have a great week. Next time from Paris.

Brian Trumbore

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