Week in Review

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Week in Review

01/22/2011

For the week 1/17-1/21

Wall Street and China

I’ve always read that Chinese President Hu Jintao was a humorless, emotionless figure, and Americans got to see this firsthand this week. I wrote of the important points in the U.S.-China relationship extensively in my preamble for Hu’s visit last time so I won’t repeat the same ones today. China has been front and center the past ten years and it will remain so the next few decades so plenty of time each week to dissect the issues as they come up. For now, though, I got a kick out of those complaining that Hu was accorded too many niceties and that President Obama wasn’t tough enough on the Chinese leader.

Oh, c’mon. It’s called diplomacy. And Hu was our guest. It’s also become quite clear that on some issues, such as North Korea (spelled out below), Obama was plenty tough with Hu behind closed doors, and, in his public statements, such as during that bizarre press conference that I caught, while Obama could have been a little more forthright on the issue of human rights, I’m not going crazy as to his handling of the topic. Seeing as I’m the one who has said for years the Dalai Lama is immensely overrated and that more time has been wasted on this topic, and approached the wrong way, to the Tibetans’ supreme detriment, it would be a bit disingenuous of me to start blasting Obama for some mild public statements. It takes a while before we know what really transpired behind the scenes and I am confident that by year end, Nobel Peace Prize winner Liu Xiaobo will be released from prison, assuming the overall Chinese-U.S. relationship is stable.

And if I seem a little insensitive to the topic, it’s because I have something different that is troubling me; the growing sense that the real fear for the West when it comes to China could be the potential for a military coup. I admit I have given this idea zero thought until some extensive reading on Hu, as well as the treatment of the far more charismatic Premier Wen Jiabao, the grandfatherly figure who is the public face of China during its many natural disasters. Neither seems to be very well respected internally. Hu leaves his Communist Party leadership post next year, and I know little of his anointed successor, but the rumblings of the military, including not filling their own president in on the J-20 stealth fighter jet test while Defense Secretary Gates was meeting with Hu in Beijing, are disturbing.

For now when it comes to the U.S.-China relationship in terms of spheres of influence, the White House must do all it can to solidify our relations with Japan and South Korea, which we appear to be doing, and with these two helpfully recognizing strong relations with Washington are definitely in their best interests.

But this was also a week that along with the pageantry, China released some critical economic data and because it was so good, it unsettled the markets some.

China reported that GDP for the fourth quarter was a better-than-expected 9.8% and 10.3% for all of 2010. You don’t have to believe these figures, but they are darn close to being accurate. Retail sales for Dec. rose 19.1% over year ago levels, urban fixed investment (highways, subways, railways, airports, etc.) rose another 24.5% in the month and industrial production was up 13.5%. Pretty spectacular. 

But, worrisomely, China’s consumer price index rose 4.6% in December (though this was down from November’s 5.1%, as I said it would be), and producer/wholesale prices rose 5.9% in the month. For all of 2010, China’s CPI was up 3.3% and the PPI up 5.5%.

The Chinese government recognizes that nothing can bring about the dreaded public unrest faster than inflation and leadership says combating it is goal number one. But many now believe China is falling helplessly behind the curve and should have been hiking interest rates anew long ago to slow the economy rather than targeting bank reserve requirements.

China is afraid of killing the economy and throwing tens of millions out of work so they are trying to finesse their way to a soft landing.

In the meantime, housing prices continue higher, up 6.4% last year when they should have been flat, if not down slightly on their way to the needed 20% or so correction. But it’s not as if the government isn’t trying in this sphere as they keep hiking down payment requirements, which is what Washington failed to do during our bubble.

So, no, I’m not as sanguine on China’s economic prospects as I was last year. If they can manufacture the soft landing, I’m pretty sure that, personally, my investment in Fujian will do darn well. If they can’t get a handle on inflation before it’s too late, well then, Shanghai, we have a problem.

At least the Chinese media ate up the summit, heaping praise on President Obama, which is most rare for these state-controlled folks. The lead editorials called it a “masterstroke” in easing tensions between our two great peoples, as they put it, and the summit put the U.S. and China on an equal footing, say the opinion makers over there. I just want to know what the Chinese generals are saying to each other behind closed doors. I also wonder which Americans have been selling out their country in passing along key secrets, which is undoubtedly occurring on the defense front. It’s happened in the past, and I’ve spelled it out…it’s a company whose name is five letters and begins with an ‘L’.

In Euroland, where everything is like a picture postcard, until you look below the surface, or examine the books, the feeling that the debt crisis is manageable seemed to predominate again this week. Maybe Germany is doing well, but the news out of Britain was hardly encouraging, with the biggest drop in December retail sales (over November) ever, though they do have the excuse of awful weather, nonetheless it is what it is. And Britain’s housing market is the pits with mortgage approvals now at the lowest levels since March 2009. Plus Britain has a little inflation issue and their austerity program has yet to really kick in.

Then there’s Spain, which is begging private investors to come in and prop up their savings banks, which are loaded to the gills with bad real estate loans. I saw hedge fund giant David Tepper on CNBC Friday morning and he said these banks, cajas, had solid lending standards. I beg to differ, as I’ve spelled out for six years regarding the likes of Spain and their housing issues.

In fact this week there was this line in a Journal piece on how the government there knows the cajas need to be bolstered but the government can’t afford to dump even more of its own capital when it has a massive potential liquidity crisis of its own. 

“The government will wait to give any ultimatum to the cajas until it sees the results of detailed disclosures about the type and quality of loans that savings banks have made to the real estate sector, said people close to the matter. Those will be made public for the first time later this month and in February.”

So we’ll see. All I know is that Spain’s real estate issues are widespread, both in commercial (which Tepper admits is a problem) and residential.

When it comes to Europe, it continues to be about transparency, pure and simple, and there is little. As PIMCO’s Mohamed El-Erian noted, there’s a reason why the private sector is exiting the region.

In reading the Irish Independent this week, I saw this tidbit, as reported by Sarah Collins, concerning an exchange between European Commission chief Jose Manuel Barroso and MEP (member European Parliament) Joe Higgins of Ireland; Higgins accusing the EU of “making vassals” of Irish taxpayers through the high interest rate being charged Ireland on the EU’s bailout package.

“The problems of Ireland were created by the irresponsible financial behavior of financial institutions and a lack of supervision in the Irish market,” said Barroso, anger rising. “Europe is now part of the solution. It was not Europe that created this fiscally irresponsible situation and this financially irresponsible behavior.”

Higgins countered that the bailout package was “nothing more than another tool to cushion major European banks from the consequences of their reckless speculation on financial markets.

“Far from being a bailout, your IMF and EU mechanism makes vassals of Irish taxpayers to European banks and enslaves the working people of Europe to the markets, who lead you around by the nose,” Higgins added. “It is a vicious weapon dictated by markets masquerading as benign.” 

Turning to the U.S., here are the two key figures to know when contemplating the impact the severe issues facing states and local municipalities will have on overall growth in America over the coming years. The states have total budget deficits of $140 billion, and the state and local pension shortfalls are estimated to be $2.5 trillion. With Republicans now in charge of the House, regarding the state budget deficit issue the new House majority has weighed in. Absolutely no bailouts. [Fed chief Ben Bernanke had weighed in earlier this year saying, ‘Don’t look to us, either.’] The situation with the states is so bad, some Republicans are looking at introducing legislation that would allow the states to go bankrupt as a way of restructuring their pension and healthcare obligations, though the odds of this then getting through the Democratic senate are nil, let alone overriding an Obama veto.

Yes, it’s the public-private debate writ large, and as I’ve been emphasizing the past few months it’s going to be wrenching.

Just here in the New York area, Mayor Michael Bloomberg called for zero salary increases in his latest budget without commensurate benefit and pension reforms. His number one priority these days is to raise the retirement age for city workers, which for non-uniformed personnel is ridiculously low.

Upstate in Albany, new Democratic Gov. Andrew Cuomo is threatening 10,000 layoffs, which still is just 5% of the state workforce. Cuomo is determined at the same time not to raise taxes.

That’s not the case in Illinois, as you’ve heard, where income and corporate tax rates are going up 67% and 45%, respectively, in their attempt to deal with humongous debts.

So you don’t have to be a rocket scientist to get the big picture. Regardless of the method taken to address the problem – layoffs, benefit cuts, tax hikes…or some combination of the three – the issues facing the states and local government are going to be an impediment to growth.

No doubt there are some good things happening in the U.S. economy these days. Corporate profits hit a record in the third quarter and the fourth quarter earnings season is generally off to a great start. Business spending (cap-ex) is picking up virtually across the board, it would seem. Tax revenues are rising. 

And hopefully I’m very wrong on Europe and that continent grows at a 4% clip, rather than 2%. And hopefully Asia and Latin America get over their inflation issues without too much pain to their nascent middle classes. But boy is that threading the needle, worldwide, and it ignores all potentialities on the geopolitical front.

This Tuesday, though, is President Obama’s State of the Union Address and the focus will be not only on boosting the economy but shared responsibility, as his advisers are putting it, on the deficit. Republicans, meanwhile, are already fighting amongst themselves as to the amount of deficit reduction that should be in play this first year.

Street Bytes

--This proved to be one of the more interesting weeks in some time in that the Dow Jones rose an 8th consecutive week, 0.7% to 11871, but all the other major averages lost ground with small- and mid-cap stocks, as well as the Nasdaq, getting creamed. Nasdaq lost 2.4% while the Russell 2000 small-cap index plunged 4.3%.

Apple and Google reported super earnings, as spelled out further below, but by week’s end both stocks had reversed in a big way, leading the Nasdaq down, while General Electric and IBM had great weeks based on their very solid earnings reports that helped power the Dow to its gain.

Meanwhile, Citigroup, Goldman Sachs and Bank of America disappointed, while Morgan Stanley surprised to the upside in the financial sector.

There are also all sorts of indications, including net new client assets from the likes of Charles Schwab and TD Ameritrade that speak to the fact the U.S. retail investor is back, but, much of the renewed activity is from active or day traders.

--U.S. Treasury Yields

6-mo. 0.18% 20yr. 0.61% 10-yr. 3.40% 30-yr. 4.57%

[If you want a look at foreign holdings of U.S. Treasuries, check out my Wall Street History piece of 1/21. I also have a look at the global stock market rally since the March 2009 lows.]

--The definitive National Retail Federation said preliminary holiday sales, November and December, were up 5.7%, the best pace since 2004 though this figure is not inflation adjusted.

--On the housing front, housing starts were well below expectations in December and for 2010 were the second lowest on record going back to 1959. [2009 was the worst.] And then December existing home sales came in better than expected, but for the year were still at a 13-year low. The median home price, the only fair gauge in my estimation and put out by the National Association of Realtors, was $168,800 for December, which compares to my predicted April 2009 low of $166,500…ergo in essence we hit the low and sat there.

--The week started off with the news that Apple Inc., CEO Steve Jobs was taking another medical leave of absence, but the company reported fiscal first quarter net income rose to $6 billion from $3.38 billion a year earlier, far beating analyst expectations yet again. Sales increased 71% to a record $26.7 billion as the company sold 7.33 million iPad tablet computers in the first holiday season for the device, while the company also sold 16.2 million iPhones, 4.13 million Macs and 19.5 million iPods. Extraordinary. [StocksandNews is working on an iPad app in terms of easier viewing on it. And one of these days I will finally do some videos. What I wrestle with constantly is just how much I want to be ‘out there.’ Most of the time the answer is ‘not much.’] As for Jobs and his health, who the heck knows, but we are told he’ll be remain as CEO.

Separately, Apple is facing charges it is failing to address major pollution and worker health issues in China, as 36 environmental groups there list Apple last out of 29 multinational technology companies in this regard.

--Google co-founder Larry Page shocked the world by replacing CEO Eric Schmidt with himself, with Schmidt becoming executive chairman in a move most analysts believe was made to reinvigorate the search company and bring it back to its innovative roots. Page’s original partner, Sergey Brin, will remain president of technology and focus on strategic projects and new products.

The moves came as Google reported a fourth-quarter profit of $2.54 billion, on revenue of $8.44 billion, both figures substantially beating estimates, but the feeling is Google is stagnating in some respects and losing out to Facebook when it comes to eyeballs.

--IBM’s solid earnings included software revenue up 7%, hardware revenue up 21% and services up 2%. Normally all three aren’t up at the same time so this was big and led to overall revenues of $29.02 billion, up 6.6%, its highest quarterly percentage gain since 2001. 

--GE saw earnings of $3.93 billion, up 31% from year ago levels and better than analyst estimates. Revenues were also better than expected. CEO Jeff Immelt, who was named to head an economic advisory panel for President Obama, replacing Paul Volcker in the process, said of GE’s operations, “Our performance is accelerating and I think our results show that.”

--Goldman Sachs’ earnings declined for a third straight quarter, down 52%, with full-year revenue off 13%. Shares in Goldman took a header, down $9 on the week, but Mr. and Mrs. Lloyd Blankfein got to attend the State Dinner in honor of Hu Jintao.

Goldman also has some major egg on its face concerning a private offering of as much as $1.5 billion in shares of Facebook Inc. Suddenly, Goldman announced it would sell the Facebook shares only to non-U.S. clients because it was worried the media spotlight surrounding the private offering of the past few weeks might violate U.S. securities laws. Needless to say, Goldman’s U.S. clients who had been approached on the deal and thought they were in are furious.

At issue was the fact U.S. law doesn’t allow private placements to be advertised in the manner the Facebook offering seemingly was, even if it wasn’t necessarily Goldman’s doing. The firm’s competitors, however, were ecstatic. “We would never treat you in such a shabby manner, Mr. Warbucks.”

[Facebook announced late Friday it had raised the $1.5 billion, through Goldman, with $1 billion of it from Goldman’s overseas clients and $500 million from Goldman itself and Russian investment firm Digital Sky Technologies.]

--Citigroup posted a disappointing profit of $1.31 billion as revenues from stock and bond trading fell. But, with their massive global footprint, if you believe the global economy is going to recover, Citi should participate.

--The Chinese government is moving in to grab a hold of its rare earth minerals production, materials with wide use in the tech sector and clean energy. 11 rare earth mining districts were seized and placed under the national planning authority. The positives are that this will allow the government to get a handle on all the illegal strip mining taking place, which is creating yet another environmental disaster. The negative for the world is that China will have total control over a market which it already produces 92% to 99% of, depending on the mineral.

So this all represents yet another opportunity for companies outside China, but as an investor you have to be very careful as these outfits are at various stages of development and some may not have the rosy prospects the market is according them. My own investment, as I wrote last week, is focused on old mines that are being resurrected in the former Soviet Union. So far, so good, as it gained another 30% the past few days but it’s a very volatile story and could be down a like amount this coming week.

--Queensland, Australia’s flooding is estimated to cost as much as $13 billion, up from an earlier projection of $5 billion. And this week the flooding spread in a big way to Victoria state and even Tasmania.

[And in yet another sign of climate change, whether you like it or not, central Victoria had already received the region’s highest monthly rainfall on record – in just the first half of the month.]

*But here’s a stat that opened my eyes when it comes to commodities inflation and stories of tight global supplies on the food front. The massive flooding in the country, particularly in the key Murray-Darling Basin, has led to reservoirs filling to over 80% as of Jan. 12, compared with 26% at the start of 2010, while dam levels outside the region are increasing. As one expert put it, “In terms of the longer-term benefits, we haven’t seen storages at these sort of levels for probably more than a decade. Across the basin it is security for irrigators moving into the next few seasons.” [Bloomberg]

So while the flooding will negatively impact the upcoming March to May harvest, the next cotton crop, for example, planted around October, could be a bumper one, as well as succeeding ones. The same type of analysis is going on for Australia’s future wheat output.

In California, look at the future impact of December’s massive snowfalls on its future harvests. No talk of drought here anymore.

So when you couple this kind of news with the clear speculation going on in the commodities pits, I see agricultural prices plummeting at some point in 2011. I’ll also just put down on paper that with the CRB index at 333.99 at week’s end, I’ll say it is solidly lower by Dec. 31. [Fun with commodities, another free feature of StocksandNews.]

--And while I’m on the topic of commodities, just a note on the esteemed trader of same, Dennis Gartman of ‘Gartman Letter’ fame. I watch CNBC’s “Fast Money” program after the market has closed not because I get trading ideas, but it’s an entertaining hour at the end of the day and they have some folks like Gartman that have heft.

So Gartman says a few weeks after gold hit the record high of $1431 and has begun to back off, ‘Yeah, gold could go down about $75 but no biggie. The long-term trend remains up…gold has become a reserve currency…blah blah blah.’

Then this past Thursday, with gold around $1340, or down $90 from the high, Gartman first says he has lightened up considerably and is down to about a third of his original position, and then a minute later he says he only has a small amount (implying much less than a 1/3) to hold off the gold bugs, and that gold could go to “$1270-$1290.”

I know Gartman is a trader, first and foremost, but while I couldn’t care less about gold myself, his whole presentation the past few weeks has in essence been fraudulent.   Who the hell knows what he’s really doing in his portfolios?

And this, sports fans, is why when I make a prediction, I stick to it come hell or high water and if I’m wrong I don’t suddenly go readjusting the stance in an attempt to cover my ass. I simply state, “I blew it. Time to move on.” 

--I didn’t have a chance last time to get down the basics on the share swap between BP and Rosneft, Russia’s state oil company, but Rosneft will take a stake of about 5% in BP in exchange for 9.5% in Rosneft, on top of 1.2% that BP already has. The big thing is the two have agreed to explore and develop three large blocks in the Russian Arctic. Russia’s deputy prime minister Igor Sechin (the man I’ve said to watch in the future, and not necessarily for good reasons), had much to do with the deal. BP CEO Bob Dudley met with Prime Minister Putin, as well, to get his blessing. Dudley said, “This is truly the first alliance fit for the 21st century, based on the promise of the future and not the legacies of the past.” It was Dudley who years ago was booted out of Russia.

[Some U.S. congressmen are not ecstatic over BP America’s involvement with Rosneft from a national security standpoint, while environmentalists are distressed that the Arctic is about to be developed in the manner in which it will, especially with BP’s awful safety record…and, recall, it really does suck and wasn’t just about the Gulf oil spill.]

--The International Energy Agency (IEA) now believes the world may have twice as much natural gas as previously thought, some 250 years of gas given current usage, thanks to new technology and the ability to go after “unconventional gas” from shale and coal beds. As the IEA’s Anne-Sophie Corbeau said, “A few years ago the United States was ready to import gas. In 2009 it had become the world’s biggest gas producer. This is phenomenal, unbelievable.” 

On the oil front, the IEA raised its projection for demand to 89.1 million barrels a day in 2011 from a revised upwards figure of 87.7 million in 2010, while OPEC raised its expected 2011 demand to 29.4 million.

--For a third year in four, the U.S. airline industry did not have a single fatality. Back in the 1990s, there were an average 86 a year. And 2010 was the first year there were no passenger fatalities in developed nations.

The last fatal crash in the U.S. was the Colgan Air incident in Buffalo that killed 49 on board and a man on the ground. Before that you have to go back to 2006 and a Comair regional jet that crashed in Lexington, also killing 49. But lest the industry, and the public, get too smug, there have been numerous very close calls so yours truly will continue his routine of a series of prayers before each takeoff.

--Congratulations to South Korea’s special forces for their dramatic rescue of 21 seamen aboard a South Korean-operated chemical carrier that were being held by Somali pirates. Eight of the abductors were killed. The terrific effort was great news for South Korean President Lee, who has been taking heat for the military’s lack of preparedness in responding to the North Korean shelling attack that claimed four lives last November.

--Boeing was forced to slash 1,100 at its U.S. plants, most of them at Long Beach, Calif., due to dwindling demand for its C-17 cargo planes.

--Hewlett-Packard shook up its board of directors after facing criticism for its handling of the Mark Hurd debacle. One of those joining the new board is Meg Whitman, hot off her pathetic run for governor of California, as well as Patricia Russo, who proved to be a major loser while piloting Lucent. But this is what these folks do, you see, not that those who are departing were any better.

--New York City’s jobless rate fell to 8.9% in December, marking the first time in 19 months it has been below 9%, but, part of the declining jobless rate was the result of 38,000 leaving the workforce. Sound familiar?

--When January’s New York employment figures are published, about 110 of 127 mobsters rounded up on Thursday will have to be figured in (the others are from New Jersey and Rhode Island). It was the largest one-day sweep of the Mafia in FBI history. Charges ranged from racketeering and extortion to murder. Regarding the latter, to say the least some of the murders were “senseless.” In one case, said U.S. Attorney General Eric Holder, two of the owners of the Shamrock Bar in the Woodhaven section of Queens were shot and killed in 1981 “over a spilled drink.”

Of course in any mob bust you learn some new names. As the New York Daily News put it, this one released a “treasure trove” of them: like “Tony Bagels,” “Jimmy Gooch,” “Vinny Carwash,” and “Johnny Pizza.”

--Evergreen Solar received a large investment from the state of Massachusetts in 2007, reportedly $60 million in state grants, tax credits and loans, in exchange for creating hundreds of jobs. But now Evergreen is axing 800 workers, shuttering its facility, and shipping operations to China. Not exactly the kind of story China supporters wanted to see hit the week of President Hu’s visit.

--And now…as Ireland Turns, starring the corpulent Taoiseach (prime minister) Brian Cowen. Somehow, Cowen retained the leadership of his staggering Fianna Fail party, but he was forced to call an early general election for March 11 when his “bungled” effort to reshuffle the cabinet failed spectacularly (he seemed to appoint old friends rather than take care of other parties, namely the Greens, in his coalition) amid renewed calls for him to resign by week’s end. I mean imagine this. One-third of his cabinet resigned in just over 24 hours after he survived a vote of confidence in his leadership. It’s just a disastrous situation, and as I mentioned weeks ago, chances are the new government elected in March will seek to change the terms of its bailout agreement with the EU and they’ll tell the Irish to stick it.

The following tidbits were gleaned from the Irish Independent and Financial Times.

Ireland is expected to return to growth sometime in 2011, but with unemployment projected to remain at 13%, the Economic and Social Research Institute projects net migration of 100,000 from 2011 to 2012, far exceeding the previous peak net outflow of 44,000 in 1989, though the 100,000 figure is off a higher population base.

Mortgage rates are set to rise next month as ‘variable’ increases kick in, which could be a killer for thousands of homeowners already struggling. One study has 85% saying they couldn’t cope with the equivalent of a $400 a month rise (though for most the increase will probably be closer to $130). Some 200,000 homeowners in Ireland have standard variable rate mortgages, on which banks can raise rates whenever they want. And if the ECB starts hiking its key lending rate next fall, as now anticipated, that would impact 400,000 more on the Emerald Isle.

Almost 50 homes and businesses had their electricity cut off every day between August 2009 and December 2010 due to nonpayment of accounts.

Passenger traffic at Dublin Airport fell 20% last year, mostly due to the recession (but also the Big Freeze and the volcano). And despite a massive advertising campaign, only ten flights a day are departing from the new terminal that cost almost $800 million! Good gawd. But, airlines such as Continental and U.S. Airways are now signing on to use it.

--Beer sales in Australia are at the lowest levels in 61 years; this as consumption of wines and spirits increased. I’m not sure the data I saw included my own consumption while there last fall.

--The U.N. World Tourism Organization reported that international tourism grew by nearly 7% in 2010 compared with ’09. Travel to the Middle East grew the most, up 14%, while the number visiting Asia grew 13%. North America saw an 8% increase and Europe just 3%. [This last one was impacted by the volcano.]

--Hong Kong Disneyland (which I was unimpressed with) saw its traffic increase 13% last year.

--Initial ratings for the new team of judges at American Idol were down 13% from the total who saw last year’s debut. One complaint was that Jennifer Lopez and Steven Tyler were too easy on the contestants.

--Regis Philbin announced he was retiring from his weekday talk show. Regis is 79, after all, though he looks like he could go on forever. Now the rush is on to try to score the hosting duties opposite Kelly Ripa. 

--Meanwhile, the Food Network is seeing its core female audience look elsewhere for their entertainment and in the fourth quarter, viewership dropped a whopping 10.3% among those age 25 to 54. [New York Post]

--Continental Airlines has announced it will begin nonstop flights between Newark Liberty and Port-Au-Prince, Haiti, on June 9. Boy, how great is it to have such a beautiful resort so accessible to those of us in the Newark area?!

--Robert Lee Hotz of the Wall Street Journal reported on the first comprehensive “genetic” study of bedbugs and the findings are distressing… “they are quickly evolving to withstand the pesticides used to combat them.”

“In New York City, bedbugs now are 250 times more resistant to the standard pesticide than bedbugs in Florida, due to changes in a gene controlling the resilience of the nerve cells targeted by the insecticide, researchers at the University of Massachusetts in Amherst recently reported.”

Bottom line, simple spraying of some pesticides may not be enough now or in the future. It would appear we are doomed. Cockroaches and bedbugs will rule the world, then the two of them will fight it out for global supremacy.

Foreign Affairs

Lebanon: There is no truer example of my adage ‘wait 24 hours’ than Lebanon, and it’s not even close. It is virtually impossible to comment daily on the world’s most complicated country without looking like a fool a day later. So as I go to post, here’s what we learned this past week.

The prosecutor for the Special Tribunal for Lebanon (STL) looking into the 2005 assassination of former prime minister Rafik Hariri handed down his sealed indictments to the special judge, who will now examine the charges over what is expected to be the next six to ten weeks, whereupon he’ll make a judgment as to whether or not there is enough evidence to proceed to trial. At that point the court would attempt to arrest those charged, or try the individuals in absentia.

A number of reports allege that the indictments point the finger at Iran’s Ayatollah Khamenei as ordering the assassination, with Iran’s Quds force working alongside Hizbullah to carry it out. Specifically, Hizbullah leader Imad Mughniyeh is said to have put together the team. Mughniyeh himself was killed in 2008 in a Damascus car bomb with Israel thought to have carried that out. The reason why Khamenei had it out for Hariri is because he was viewed as an agent of Sunni Saudi Arabia (he was), and that wouldn’t be good for Iran and its proxy, Shia Hizbullah.

The rumors that Hizbullah, until ten days ago part of the Lebanese government, would be named have been around since last summer, and, while the indictments are still sealed, the handing down of them gave Hizbullah cause to take to the streets of Beirut on Tuesday in a show of force and a possible dry run for a coup. While the members of the terror group were unarmed, the effect was chilling. Picture one of those Westerns where the black hat rides into town and mothers rush their children inside. That’s exactly what happened in parts of Beirut last week.

But since Hizbullah pulled its 10 cabinet members out the other day, there has been no government in Lebanon and it was here the 24-hour rule really came into play. Recall the government collapsed because Saudi-Syrian peace talks fell apart just when there was rumored success, and this week there was talk of a breakthrough in talks brokered by Qatar and Turkey, but they fell through 24 hours later, whereupon “caretaker” Prime Minister Saad Hariri said he would seek a new term as prime minister at next week’s parliamentary consultations (if they are held…these things are constantly postponed in this historically dysfunctional place), even though Hizbullah said there is no way they would accept Hariri again.

Hariri addressed the people for the second time in less than a week, and the man who I’ve claimed in the past was hopelessly inept has shown surprising guts under immense pressure.

“They [Hizbullah and its allies] came back at dawn [Thursday] to the Qatari and Turkish mediators with one demand: Saad Hariri’s return to the premiership is unacceptable…

“They have put aside all provisions of the solution and did not make any observations or comment. They only demanded that Saad Hariri be ousted from the premiership.”

Hariri then said he was putting his name in nomination for the post, drawing cheers and a standing ovation among the members of his caretaker cabinet. He also proclaimed:

“The game of streets and the threat to use streets [Ed. to take the crisis to them] is a game that has nothing to do with our national upbringing. We will not resort to the streets because from the beginning we have chosen state institutions. Any drop of Lebanese blood is more precious to me than all positions in power.”

But then on Friday, one of the world’s most fascinating politicians of the last century, Progressive Socialist Party leader Walid Jumblatt, who is playing the role of kingmaker between the March 8 (Hizbullah and its allies) and March 14 (Hariri coalition) factions, threw his Druse support to Hizbullah, though it’s not known how many MPs and cabinet members are with him. It seems Jumblatt is afraid giving Hariri the leadership slot would lead to “catastrophic consequences” for the security of the Druse party, the Druse who live in Hizbullah-controlled areas, and himself. Jumblatt is the ultimate survivor, and chameleon. This is not good for those who seek peace.

The next step is Lebanese President Michel Suleiman’s as it is he who is supposed to launch the new round of talks, and the longer this all drags out, the more the needs of the people go unaddressed, and the greater the risk of demonstrations against the leadership that Hizbullah can exploit. One mistake and Beirut goes up in flames.

[Meanwhile, Lebanese bankers say the conversion of accounts from Lebanese pounds to dollars is increasing after the latest failed attempt at a solution for a new government.]

Israel: Needless to say, the government of Israeli Prime Minister Benjamin Netanyahu is watching events north of the border closely, and this week Defense Minister Ehud Barak pulled out of his Labor Party to form a new parliamentary faction that will remain inside the government. Barak, a former prime minister himself, is the ultimate pragmatist, and centrist, and he felt Labor had become too dovish in pushing Israel to get peace talks back on track. This does not impact Netanyahu’s overall standing as he still has 66 seats in the 120-seat Knesset. 

Iran: Talks on the nuclear front restarted in Istanbul though they are going nowhere as of this post. Despite all the glowing articles on how the Stuxnet computer worm has disabled a few thousand centrifuges from enriching uranium, enrichment nonetheless continues. How far the program has been set back is total conjecture but one thing does seem clear…Stuxnet was as sophisticated as any cyber weapon ever unleashed, though this should hardly make any of us feel real good, outside of the delay to Iran’s weapons program, because it is an example of the power of such viruses to inflict heavy damage on the U.S. and West as well. [See our electric grid.]

Separately, President Ahmadinejad proceeded with the removal of subsidies for items such as gasoline, flour and electricity and reaction among the people thus far has been surprisingly good. They seem to recognize that their profligate ways on the fuel and power front in particular were absurd and Iran wants to be able to export more of its oil for currency, while the subsidies were cutting into the supplies available for export because when gas cost just $0.35 a gallon under the subsidies, everyone wasted it.

Ahmadinejad is proving to be quite resilient, in spite of the sanctions that have taken a toll, and opposition has been squelched. It also needs to be said that the Christian community in Iran is being cleansed.

Iraq: Back on Dec. 21, Prime Minister Nouri al-Maliki named his cabinet and everyone (except yours truly) proclaimed peace in our time. But Maliki still hasn’t filled the interior, defense, or national security posts, meaning he is temporarily in charge of the entire Iraqi security apparatus and this week it showed as insurgents killed at least 120 in three separate large-scale attacks on pilgrims and Iraqi police recruits, at least two involving multiple suicide bombers. In addition, five U.S. soldiers have been killed in action thus far in January, including two who were gunned down when an Iraqi trainee, whose gun was not supposed to have live ammunition, turned on them.

Afghanistan: This country’s parliamentary elections took place in September but parliament has yet to be seated amid disputes on the vote. This time, though, it was President Karzai who ordered a further delay, precipitating a constitutional crisis and further ticking off his NATO backers. Karzai’s special court looking into election disputes, selected by Karzai himself, says fraud and insecurity left large parts of the Pashtun south, where Karzai maintains his political base, excluded from the vote. The actual election commission, though, already had its final say and certified the results as legitimate, which they largely were. Without a parliament, however, Karzai is ruling by decree. A huge concern is that Karzai will annul the election, which would throw the country into total chaos, far more so than witnessed today.

In the meantime, Iran’s month-long fuel blockage of Afghanistan continues, with some 2,500 vehicles backed up on the border, with most seeing Iran’s move as a way of getting back at the U.S. Afghanistan is totally dependent on the outside for its fuel and at least one-third passes through Iran.

Tunisia: What we saw here was a textbook revolution, helped along by modern means of communication. 78 died, according to most sources, which is a low number given the ongoing changes in leadership taking place after 23 years of President Ben Ali’s dictatorship. A few days before Ben Ali fled to Saudi Arabia, Secretary of State Hillary Clinton told a gathering in Qatar that the region had to do something about its “corrupt institutions” and stagnant political order. In Tunisia, at least for today, the new coalition government is saying it is recognizing all banned political groups, including Islamists, and is granting an amnesty to all political prisoners. The last vestiges of the old order are being dismantled. Now the new leaders have to keep their promise to hold free and fair elections within six months. But there remains unrest and a state of emergency is in place. [It’s not looking good Saturday morning.]

So the larger question is, does the Tunisian revolution spread to the likes of Egypt, Jordan and Morocco. It’s not likely, but the existing leadership is going to have to make some quick compromises to keep the peace. To me Jordan is of particular concern given it’s where terrorists such as Zarqawi hailed from. [I am not a believer that change in this region is necessarily to our benefit as yet. As opposed to the following view.]

“As revealed in Tunisia, the new ‘Arab Street’ consists mainly of urban, educated, middle-class elements and industrial workers.

“It is positive in tone and spirit. Far from being xenophobic, it demands a place in the modern world. Its use of the latest communication systems, from Twitter to satellite TV, was nothing short of remarkable.

“This new ‘street’ is not an assembly of arsonists and looters, although Ben Ali’s henchmen tried to tarnish its image by acts of vandalism and pillage.

“It has cast aside tired ideologies such as Pan-Arabism, Islamism and Baathism. Instead, it is calling for democracy, human rights and economic development.

“The old ‘Arab street’ carried clubs, daggers and chains. The new ‘street’ is armed with satellite phones, video cameras and iPads.

“It is too early to tell whether other Arab countries can reproduce the Tunisian experience. But there is no reason why they shouldn’t.

“With few exceptions, all Arab countries live under despotic or autocratic regimes, with the same type of corrupt and capricious ruling elites as in Tunisia under Ben Ali. Yet they all also have educated urban middle classes and industrial workers, in touch with the outside world.

“From Morocco to Egypt to Jordan to Oman, the appearance of the new ‘Arab street’ is a reminder that the deep freeze in which Arab systems languish cannot last forever.”

South/North Korea: It would seem U.S. pressure on China has borne fruit in this situation as, according to the New York Times, President Obama warned China that if Beijing didn’t put more pressure on North Korea to mend its ways, the United States would be forced to redeploy forces in Asia to protect its interests and that of its allies. The reaction in Pyongyang has been to call for direct talks with Seoul in an effort to find “ways to defuse military tensions.” Supposedly, the North is willing to discuss the shelling of the South in November, as well as the March sinking of the South Korean warship. The U.S. is then sending a representative to visit South Korea, Japan and China later this month.

Meanwhile, there is a report out of Pyongyang that more than 200 senior officials have been killed or imprisoned by the state security bureau as part of the succession of Kim Jong-un as absolute dictator. Supposedly, the chubby kid called for “gunshots across the country” upon learning of complaints about his ascension.

China, part II: President Hu sought to assure congressional and business leaders that his country is not a military threat to America or anyone else. But Hu said that when it comes to Tibet and Taiwan, lay off.

This week Taiwan said the two sides will further their efforts on the economic cooperation front with a deal to provide legal protection for Taiwanese investments on the mainland sometime in the next few months, which is a significant positive.

But then Taipei felt compelled to respond to China’s unveiling of its stealth fighter by testing 19 surface-to-air and air-to-air missiles, the first such tests since 2002. President Ma was in attendance and not happy that five out of the 19 failed to hit their targets. The launch of the stealth fighter was a major blow to Taiwan’s military and a “slap in the face” for their intelligence agencies.

Taiwan remains the key to Sino-U.S. ties and we’ll see what the Obama administration does on the arms front over the coming weeks after Hu’s visit. China maintains, and always has, that Taiwan is about China’s core interest of sovereignty and territorial integrity.

Russia: The London Telegraph reported that Russia could complete work on a new ICBM by 2017. The new ballistic missile would succeed the SS-18 and is designed to defeat the U.S. antimissile defense system. The SS-18 is capable of delivering 10 nuclear warheads. A single one of the weapons can unleash 500 times as much force as the 1945 atomic strikes on Japan, the head of the Russian strategic missile forces said recently. 500 times! Russia currently is said to have 59 to 88 SS-18 launch sites and it takes a direct hit to destroy them.

Italy: Prosecutors allege that Prime Minister Silvio Berlusconi had sex with a “significant number” of young prostitutes, a case that started with an investigation into the prime minister and whether he paid for sex with a now notorious 17-year-old nightclub dancer, Karima El Mahroug, a.k.a. Ruby Rubacuori – Ruby Heartstealer, who gave her age as 24. Berlusconi continues to deny all the charges but it seems impossible he can complete his term that is due to expire in 2013; especially after the release of a 389-page dossier presented to Italy’s parliament that contains intercepted telephone conversations concerning his so-called “bunga bunga” parties, where women galore were running around topless and stripped for the prime minister and his friends. One participant described the palace in Milan that was used for such occasions as “a whorehouse.”

Haiti: So why the heck did “Baby Doc,” Jean Claude Duvalier, return after nearly 25 years of exile? He immediately faced a slew of charges as Haiti’s leaders reopened a 2008 case that had been put together, only the original dossier was lost in the earthquake so they are having to reconstruct everything. Duvalier isn’t technically under arrest but has agreed to remain and make himself available. He is trying to convince everyone he is there to aid reconciliation.

Duvalier ruled with an iron fist from 1971 to 1986 until he was forced out. He’d been living in France ever since. Earlier, his father, “Papa Doc,” ruled from 1957 to 1971, and the two are said to have stolen hundreds of millions of dollars. 

Albania: I just saw that massive demonstrations have broken out in the capital, Tirana, where I was last April, with at least three killed. As I wrote back then, there still hasn’t been a resolution to the 2009 election, if you can believe it, and Albania is a true flashpoint that deserves some attention.

Random Musings

--It’s pretty amazing that three polls – NBC/Wall Street Journal, AP/GfK, and CNN – all have President Obama’s approval rating rising to 53%, while the Washington Post-ABC News survey has him at 54%, and USA TODAY/Gallup at 47%, unchanged from earlier in January. So throw out these last two and call it 53%. That’s pretty strong. In fact, just four weeks ago (12/25/10), following approval of the tax-cut extension/stimulus bill and the New Start arms control treaty, as well as repeal of “Don’t Ask, Don’t Tell,” I wrote:

“What Republicans…have to concede is that Obama’s approval ratings are heading back up. Not to inauguration levels, but certainly back above 50%. At least in the short term.

“They could approach 55% plus, though, if he tackles the deficit issue in a true bipartisan fashion.”

Beginning with this coming Tuesday’s State of the Union Address, we’ll learn if the administration is now prepared to focus on this last point which, seeing as raising the debt-ceiling is a rapidly approaching flashpoint, is a must.

Some Republicans are no doubt frustrated that Obama’s popularity, to a certain extent, has returned. But they can take pride that their historic election gains in November forced the president to the center. And while I’d say that, today, Obama is a lock for 2012, the election isn’t being held today and there’s no doubt the next two years will be filled with further tests for the country and our leader. I would just add that if the unemployment rate is 8.0% or less come Nov. 6, 2012, that means the international scene is generally in decent shape and that the global economy is doing pretty well. An 8% rate is still awful, and means that the ‘real’ rate would remain closer to 14%, but it’s all about trends and perception.

Two other notes on the approval ratings. In all of the above-referenced polls, Obama scored big on his handling of the Tucson tragedy, 71% to 78% approval, while in two of the surveys, Sarah Palin recorded just 30% approval for her own handling of the shootings.

--Democrats suffered a big blow not with the announcement that Sen. Joe Lieberman is retiring in 2012, because Democrats will retain his Connecticut seat it would seem, but rather the retirement of Kent Conrad in North Dakota virtually ensures that this moderate Democrat’s seat will go Republican. Conrad’s pragmatism these past few years made him a favorite of moderate Republicans. Now hopefully North Dakota Republicans won’t screw it up by selecting someone like Christine O’Donnell or Sharon Angle to face whoever the Democrats come up with.

--Back to Obama, I was watching his speech in Tucson and couldn’t help but notice how Sen. John McCain looked, sitting in the second row, as if he was pained to be there. The relationship between the two, to say the least, has been strained and as the Washington Post’s Dan Balz put it, “Both have seemed more interested in scoring points against the other than in putting the 2008 campaign behind them.”

But then a few days later, McCain wrote an extraordinary op-ed in the Post praising Obama.

“President Obama gave a terrific speech Wednesday night. He movingly mourned and honored the victims of Saturday’s senseless atrocity outside Tucson, comforted and inspired the country, and encouraged those of us who have the privilege of serving America….

“I disagree with many of the president’s policies, but I believe he is a patriot sincerely intent on using his time in office to advance our country’s cause. I reject accusations that his policies and beliefs make him unworthy to lead America or opposed to its founding ideals. And I reject accusations that Americans who vigorously oppose his policies are less intelligent, compassionate or just than those who support them….

“We are Americans and fellow human beings, and that shared distinction is so much more important than the disputes that invigorate our noisy, rough-and-tumble political culture. That is what I heard the president say on Wednesday evening. I commend and thank him for it.”

--Poll numbers on healthcare reform have softened since the November congressional election. According to an AP-GfK survey, 40% support the law, 41% oppose; which compares to 47% in opposition, 38% supporting it 10 weeks ago. In a Washington Post-ABC survey, 45% support ObamaCare, 50% oppose it, which match exactly the figures going back to August 2009. 75% of Democrats support the law, 80% of Republicans oppose it.

But the House repealed the healthcare overhaul, 245-189, with all of the House’s 242 Republicans and three Democrats supporting starting over. Of course Democrats control the Senate and the repeal bid is going nowhere, but it’s now up to Republicans to come up with an alternative as the courts continue to weigh in on various state efforts to dismantle ObamaCare.

So let me tell you a little story concerning my own healthcare…one that in the end turns out pretty good but started off as a total nightmare.

Back in September, I wrote of how my insurance policy’s premium was going up 19%, effective on my 9/30 renewal date, and I heard from a number of you that this figure, 19%, seemed to be the magic number for those of you also facing renewal at the same time, including those with large corporations. In my case my premium went from about $785 to $935, which is a staggering sum for one who is generally healthy and doesn’t call 911 for a stubbed toe. 

I was receiving my statements from Oxford and submitting checks in the new amount, went off on my long trip to Micronesia, Guam and Australia, returned, and then a week later went to Washington State and Idaho.

It was a few days before Thanksgiving that I then called Oxford wondering why I hadn’t received a new insurance card (in years, it seemed). So I’m going through the automated process when I learned…I had no insurance! Oxford was sending me statements, I paid my new premium level, they cashed the checks, but never told me that before my renewal became effective they had cut off my insurance because my situation had changed drastically when they audited the group plan. [Some of you may recall long ago I purchased a company in Perth Amboy with about 15 employees, picked up their existing plan, and I was such a success as a leader that I folded the company about 18 months later…but kept the insurance plan for myself, plus some of the employees stayed on it for awhile thereafter.]

Anyway, picture that I went all the way to the tropics, especially the island of Yap, and was la-di-daing without insurance! I could have easily picked up a bug, had a boating accident, anything, and I was screwed and didn’t even know it.

Bottom line, I had to scramble to get a new policy and it wasn’t that simple but I found one with AmeriHealth that allows me to use my same doctors, same deductibles, and it is $300 a month less! Plus, this week I received this:

“We are pleased to inform you that there will be no increase in rates for your plan at this time (when plans such as mine come up for renewal on March 1).” Out of nowhere, I’m one of the few success stories in this realm, though I hasten to add it has nothing to do with ObamaCare. I wa just an idiot in staying with Oxford as long as I did without checking out my options.

But back to ObamaCare, the real story, whether the public raises hell all over again, will concern the overall economy and the deficit debate. If the economy slowly improves and increased tax revenues are greater than rising entitlements, particularly healthcare, the people will largely put the issue aside. But if the deficits continue to explode because of soaring costs associated with ObamaCare, well then we could very well have a revolution. [A downgrade of U.S. sovereign debt, which could come in 2012, may hasten the furor.]

--PBS’ “Frontline” program had a distressing story on the intelligence apparatus in this country following 9/11 and the countless $billions being spent on 17 different agencies who largely don’t speak to one another, where there are all kinds of duplications, and there are serious questions whether it’s really keeping us safer. 

Think of it. The Christmas Day 2009 bomber wasn’t picked up after being ratted out by his father because a single letter of his name was misspelled. The Times Square bomber wasn’t discovered by one of these 17 agencies. Instead it was a street vendor who was the hero in that instance.

The other day in Spokane, Washington, a serious bomb was discovered in a backpack, hidden on a parade route for a local Martin Luther King Day walk for peace, by a city worker who was sitting on the bench when he noticed this bag, looked inside and found wires. It was designed to go off by remote control. [I was staying at a hotel in Spokane last November three blocks from the location of the bomb and can’t say I’m surprised, for a number of reasons which I’ll keep to myself.]

And along these lines, here’s one I didn’t get to share last time. From Global Security Newswire and a story by Robert O’Harrow in the Washington Post:

“A new National Academy of Sciences report criticizes the Homeland Security Department’s testing regimen for next-generation radiation monitors developed for use at U.S. ports.

“Advanced Spectroscopic Portal systems are intended to detect potential radiological and nuclear weapons materials being covertly smuggled into the United States through the port system. However, as the department’s Domestic Nuclear Detection Office pushed the technology toward deployment, it carried out inadequate tests of the detector’s operational capabilities, according to the NAS report. The situation made it difficult to ‘draw reliable conclusions’ on whether the expensive machinery would work as intended.”

Back in 2006, Congress approved $1.2 billion for development of the system but the U.S. Government Accountability Office not only criticized the program’s cost, it said the detection office exaggerated the detectors’ capabilities and presented inaccurate data to lawmakers.

--Two dirtballs, Daniel Spitler, and Andrew Auernheimer, were arrested on federal charges that they stole the e-mail addresses of more than 100,000 Apple iPad users. The local NBC affiliate showed one emerging from federal court in Newark and the 26-year-old Spitler was just a despicable looking figure. The other character, appearing in Fayetteville, Arkansas mocked the case against him, telling federal officials in the courtroom, “This is a great affidavit – fantastic reading.” From both their attitudes, they deserve life in prison.

--And then you have the cop killer in New Jersey, Jahmell Crockam, who executed a Lakewood police officer who pulled up along the 19-year-old to ask him a question and Crockam shot the cop in the face. Thankfully he was then captured in a massive dragnet in Camden, but when he appeared in court for the first time there was extra security because the Bloods had threatened the cops for rounding so many of them up in the process of tracking down the killer. [Plus you have the sickening case of the two Miami police officers being gunned down on Thursday.]

--Changing the subject, Rome officials are scrambling big time with the rather quick announcement that Pope John Paul II’s beatification is on May 1. They expect 2 million pilgrims for the event, which comes a week after Easter so a lot of tourists will already be there.   Plus there are no tickets. John Paul’s funeral drew 3 million.

--MSNBC’s Keith Olbermann quit suddenly…can’t say I ever watched the man, seeing as we’re kind of on different sides of the political aisle.

--A report published in Chemical Research in Toxicology (U.S.), shows that smoking damages the body in minutes rather than years, with chemicals that cause cancer forming rapidly after smoking. The study was highly limited but funded by the National Cancer Institute.

--Actor George Clooney contracted malaria on a trip to Sudan, he revealed, though he has been treated successfully. That’s scary. The news will do zero to help tourism on the continent. British singer Cheryl Cole almost died after she caught the same disease while vacationing in Tanzania last year.

--The National Enquirer is reporting that Todd Palin is involved in an extramarital affair with a massage therapist. Did you see a picture of the alleged woman in question, Shailey Tripp? I have no further comment….

Except of course there was a time when the Enquirer was ridiculed for its made up stories, but ever since it broke Monica and Bill, and the John Edwards affair, you have to take notice when they report something along these lines.

--No question, while I don’t cook for myself, save for Salmon Sunday, I do love a good meal. So I drooled over the menu at the State Dinner for Chinese President Hu Jintao.

D’Anjou Pear Salad with Farmstead Goat Cheese
 Fennel, Black Walnuts, and White Balsamic

Poached Maine Lobster
Orange Glazed Carrots [this is the only thing I could do without] and Black Trumpet Mushrooms
[Dumol Chardonnay “Russian River” 2008]

Lemon Sorbet

Dry Aged Rib Eye with Buttermilk Crisp Onions
Double Stuffed Potatoes and Creamed Spinach
[Quilceda Creek Cabernet “Columbia Valley” 2005]

Old Fashioned Apple Pie with
 Vanilla Ice Cream
[Poet’s Leap Riesling “Botrytis” 2008]

So I’ve left you with some White House wine selections, if nothing else. Now hit the wine shop!

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

And we note the miraculous recovery to date of Gabby Giffords.

Gold closed at $1341
Oil, $89.11

Returns for the week 1/17-1/21

Dow Jones +0.7% [11871]
S&P 500 -0.8% [1283]
S&P MidCap -1.8% 
Russell 2000 -4.3%
Nasdaq -2.4% [2689]

Returns for the period 1/1/11-1/21/11

Dow Jones +2.5%
S&P 500 +2.0%
S&P MidCap +0.8%
Russell 2000 -1.3%
Nasdaq +1.4%

Bulls 56.0
Bears  20.9 [Source: Chartcraft / Investors Intelligence]

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