Week in Review

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Week in Review

01/29/2011

For the week 1/24-1/28

Wall Street and the Crisis in the Arab World

Funny how every now and then geopolitics injects itself into the equation when attempting to determine the direction of the financial markets, isn’t it?   As stocks swooned Friday afternoon over the scenes from Egypt, I couldn’t help but smile a little, as unseemly as that might sound. It’s just that it always cracks me up when one analyst after another parades before the cameras during normal times and never mentions the ability of geopolitics to change sentiment in a flash. No, I didn’t foresee the tumult thus far in Tunisia and Egypt, but I’ve certainly warned you on others in the region, particularly Lebanon, where we’ve now officially had a change in government that is most worrisome.

One thing about Egypt that is ironic is that it was just last Sunday that the government announced it had “conclusive proof” that an al-Qaeda-linked Palestinian militant group orchestrated the New Year’s Day bombing outside the Coptic Christian church that killed 25 and which helped fuel tensions between Muslims and Copts.

But then two days later events of a different kind began to explode in Egypt as the largely disaffected youth picked up the torch from their equally disaffected brethren in Tunisia and demanded that another long-running show take its act to another venue, like perhaps exile in Saudi Arabia. It was time, say Egyptians, for 82-year-old President Hosni Mubarak to give it up, a la Tunisia’s Ben Ali.

Late Friday, Mubarak addressed his seething nation, saying he would shuffle some deck chairs but that he himself was not leaving. As I go to post, Mubarak seems intent on not even making a concession not to run in September’s presidential election, which is a minimal requirement if he isn’t to be hung by the mob, or gunned down by his own guards, which was the fate of his predecessor Anwar Sadat, assassinated by men in army uniforms later linked to the Muslim Brotherhood, which Mubarak has spent his 30 years muzzling.

And so with this little history lesson you’re reminded of the Brotherhood, and other Muslim extremists that lie below the surface across most of the Arab World and the Middle East. It’s why the developments in Tunisia and Egypt are so scary. For all their deep faults, the two countries have been bulwarks against Islamists and now there isn’t anyone who can tell you definitively whether the events across North Africa will augur in a new era of terror and suppression of a different kind, with the main exports becoming car bombs and suicide attacks on theaters and restaurants in Europe and the United States.

We just don’t know what the end game is for Tunisia, Egypt, Yemen, Algeria, Jordan, Lebanon, Iraq, Syria and Iran. Could it be the spread of an explosion of true democratic reform? If you want to live in Happy Land the rest of your life I guess you can dream about such a denouement. 

But here is what is getting lost in the early analysis of what could easily just be the top of the first inning, runners on first and second, no outs, but with the pitcher having opened up by hitting his first two batters and the count now at 3-0 on the third batsman, the manager and pitching coach shuffling uneasily as the bullpen begins to stir.

Even if there are some positive outcomes in the likes of Tunisia and Egypt, the transitions are going to be long and drawn out, with internal security focused on maintaining order and securing a new government. And that means one thing. The extremists will have safe haven, at a minimum, knowing that the security forces are focused elsewhere.   It will be like when Egypt opens up the gate to Gaza and the refugees come flooding out for a breath of fresh air, while missiles slip in. Instead of having to dodge drones in Pakistan, Afghanistan, Somalia and Yemen, al-Qaeda-like groups will proliferate throughout the entire region. The West will be helpless, not having a strong relationship with the new leaders, whoever they might be. It will be a multi-year window where the Evil Doers can plot and export terror with little concern that they will be bothered inside their new homes.

So we don’t know how things are going to shake out. Maybe the pitcher gets out of the first inning jam, only to get knocked out in the second. We do know the fuse has been lit and the opposition smells blood.

As to country specifics, if you can tell me what Tunisia is going to look like in just a month, let alone a year, you’re a better man than me. Ditto Egypt.

But as I mentioned last time one country that didn’t get too much press this week that I’m focused on is Jordan. It was May 2008 when I spent a week touring there and I told you of how I was spooked by some of the Palestinian encampments and how it wasn’t exactly the most friendly place yours truly has ever been in. The Palestinians have always been a huge potential flashpoint for King Abdullah II and he must be scared to death right now as protests started up on Friday.

Syria is worth watching if for no other reason than President Bashar Assad has always walked a tightrope, just as his father before him, though any change here could be a positive change of pace.

And of course I worry about Lebanon, which now has a prime minister-designate, Najib Mikati, a billionaire with close ties to Syria and the choice of Hizbullah to replace Saad Hariri.

Mikati wasn’t Hizbullah chief Hassan Nasrallah’s first choice but he will do as Hizbullah has orchestrated a coup in first toppling the Hariri government and then replacing him with a leader of their liking.

So while Mikati is saying all the right things initially in claiming to be his own man and a friend to the West, including Washington, he is immediately faced with a huge challenge. Does he have Lebanon cut ties with the U.N.-backed Special Tribunal for Lebanon (STL) that has apparently implicated Hizbullah, Iran’s Ayatollah Khamenei, and possibly Syria, or does he courageously continue to fund it in the face of immense pressure from Hizbullah? Mikati said he will proceed with the STL. I say he is met by some goons one night soon who threaten to disembowel him on the spot unless he swears off it.

As for the former leader, now technically caretaker prime minister Saad Hariri, for now he is saying he will lead the opposition and that he wants no part of a Hizbullah-led government. My friend Michael Young in Beirut says Hariri must remain in the new power-sharing apparatus if he is to stay viable. One thing is for certain, Hizbullah isn’t about to be disarmed and they are calling the shots. The flip side, however, is they now ‘own’ it. They can be held responsible.

But you want a nightmare scenario, as if all the proceeding isn’t bad enough? Islamists eventually take over in Egypt, break the peace treaty with Israel, precipitate a war and Hizbullah then launches an attack across the other border in conjunction with Hamas. You can be sure Israel’s leaders are ‘gaming’ this out as I write…at least they better be.

“Power across the Arab world is shifting, as sclerotic pro-Western dictators yield to Islamists opponents of pluralism. Why? Historically, the only opposition Arab rulers tolerated was the mosque. More recently, the most powerful organizing force in the region is al-Jazeera, the Qatari-owned cable channel that espouses fierce anti-Western Islamist rhetoric.

“As Hizbullah takes over in Lebanon, Hamas grows stronger not only in Gaza but also in the West Bank – and similar Islamist groups are gaining power in Algeria, Somalia and Iraq. Can the two biggest prizes, Egypt and Saudi Arabia, be far behind?”

“Many Islamists think God and the Koran should take precedence over parliaments, parties, pluralism and popular debate. At the extreme end of the Islamist spectrum are hard men whose rule would be a lot harsher than that of Mr. Ben Ali and his ilk. But in few Arab countries is an extreme version of Islam either preponderant or popular. The Muslim Brotherhood, the true opposition in Egypt, embraces a range of attitudes. The more tolerant and sensible in its number are probably the most popular. Seeing that undemocratic secular regimes have failed to give them satisfaction, Arabs should be allowed to vote for Islamists if that is their wish. It is a risk – for themselves and for the rest of the world. However, as the past few weeks have shown, winking at secular despots, as they tighten the screws on their disgruntled people, may in the long run be riskier.

“Tunisia’s upheaval has only just begun. No one knows where it will lead. It has already opened an Arab Pandora’s box. Frightening things may yet leap out. But it nonetheless deserves an enthusiastic welcome.”

Anwar Ibrahim, former deputy prime minister of Malaysia / Wall Street Journal

“Autocratic rulers accustomed to permanent sovereignty might consider changing their mindset. The Tunisian uprising was driven by a desire for freedom and justice, not by any particular ideology. The bogeyman of Islamism, the oft-cited scapegoat of Middle Eastern dictators to justify their tyranny, must therefore be reconsidered or junked altogether. The U.S., too, should learn a lesson about the myth that secular tyrants and dictators are its best against Islamists. Revolutions, be they secular or religious, are born of a universal desire for autonomy. The common thread that binds the Iranian revolution and the Tunisian upheaval is the rising discontent of the people after years of suffering under oppressive rule.

“Could Tunisia’s revolution turn this winter of Arab discontent into a spring for Middle Eastern freedom? As Tunisia moves into the league of Middle Eastern democracies along with countries such as Turkey, for much of the rest of the Muslim world democracy remains elusive. Opposition groups in countries like Egypt have found a beacon of hope in Tunisians’ struggle. Demonstrations in Cairo and throughout the region lay waste to the mistaken notion that Arabs and Muslims are politically passive and prone to authoritarianism. But will they be given a fair chance? The Palestinians chose their own leaders through the ballot box, but the West changed the rules of engagement midway through the game.

“The fundamental lesson is clear: The U.S. must stop supporting tyrants and autocrats whether in the Middle East, Pakistan or Southeast Asia. Let this be a new dawn for democracy in the Arab and Muslim world.”

Turning to the United States and President Obama’s State of the Union address, I said weeks ago that once he had made the move to the center on the tax cut extension/stimulus measures, I assumed he would use this annual platform before Congress and the American people to spell out the importance of reducing the deficit. Instead, forget the polls in the immediate aftermath that showed the president received high marks. I bet by Monday if you polled them all again the results would be very different. The speech was an unmitigated disaster because he did not in any serious way address the paramount issue of our times, domestically. And whereas last week I said the latest round of polls that gave him a bounce for his moves in December gave him a big leg up for 2012, Obama’s demonstrated failure of leadership on Tuesday meant one thing for Republicans. Game on. Plus, as pointed out above there is little going on overseas now that will find its way into 2012 campaign ads, I imagine.

“The November election sent a clear message to Washington: less government, less debt, less spending. President Obama certainly heard it, but judging from his State of the Union address, he doesn’t believe a word of it. The people say they want cuts? Sure they do – in the abstract. But any party that actually dares carry them out will be punished severely. On that, Obama stakes his reelection.

“No other conclusion can be drawn from a speech that didn’t even address the debt issue until 35 minutes in. And then what did he offer? A freeze on domestic discretionary spending that he himself admitted would affect a mere one-eighth of the budget….

“He’s been chastened enough by the election of 2010 to make gestures toward the center. But the State of the Union address revealed a man ideologically unbowed and undeterred. He served up an insignificant spending cut, yet another (if more modest) stimulus, and a promise to fight any Republican attempt to significantly shrink the size of government.

“Indeed, he went beyond this. He tried to cast this more-of-the-same into a call to national greatness, citing two Michigan brothers who produce solar shingles as a stirring example of rising to the Sputnik moment.

“ ‘We do big things,’ Obama declared at the end of an address that was, on the contrary, the finest example of small-ball Clintonian minimalism since the days of school uniforms and midnight basketball.

“From the moon landing to solar shingles. Is there a better example of American decline?”

“It is a strange and confounding thing about this White House that the moment you finally think they have their act together – the moment they get in the groove and start to demonstrate that they do have some understanding of our country – they take the very next opportunity to prove anew that they do not have their act together, and are not in the groove. It’s almost magical.

“The State of the Union speech was not centrist, as it should have been, but merely mushy, and barely relevant. It wasted a perfectly good analogy – America is in a Sputnik moment – by following it with narrow, redundant and essentially meaningless initiatives. Rhetorically the speech lay there like a lox, as if the document itself knew it was dishonest, felt embarrassed, and wanted to curl up quietly in a corner of the podium and hide. But the president insisted on reading it….

“The president will get a bump from the speech. Presidents always do…But it will be evanescent. A real moment was missed….

“An inability to focus on what is important now. The speech was more than half over before the president got around to the spending crisis. He signaled no interest in making cuts, which suggested that he continues not to comprehend America’s central anxiety about government spending: that it will crush our children, constrict the economy in which they operate, make America poorer, lower its standing in the world, and do in the American dream….

“An attitude that was small bore and off point. America is in a Sputnik moment, the world seems to be jumping ahead of us, our challenge is to make up the distance and emerge victorious. So we’ll change our tax code to make citizens feel less burdened and beset, we’ll rethink what government can and should give, can and should take, we’ll get our fiscal life in order, we’ll save our country. Right?

“Nah. We’ll focus on ‘greater Internet access,’ ‘renewable energy,’ ‘one million electric vehicles on the road by 2015,’ ‘wind and solar,’ ‘information technology.’ ‘Within 25 years, our goal is to give 80% of Americans access to high-speed rail.’ None of this is terrible, but none of it is an answer. The administration continues to struggle with the concept of priorities. They cannot see where the immediate emergency is….

“Unbelievability. The president will limit the cost of government by whipping it into shape and removing redundant agencies. Really? He hasn’t shown much interest in that before. He has shown no general ideological sympathy for the idea of shrinking and streamlining government….

“As for small things and grace notes, there is often about the president an air of delivering a sincere lecture in which he informs us of things that seem new to him but are old to everyone else. He has a tendency to present banalities as if they were discoveries. ‘American innovation,’ is important. As many as ‘a quarter of our students aren’t even finishing high school.’ We’re falling behind in math and science: ‘Think about it.’

“It was a teachable moment – and Barack Obama didn’t teach.   Unless public opinion changes, we won’t end our budget deadlock. As is well-known, Americans want budget deficits curbed. In a new Kaiser Family Foundation poll, 54 percent urge Congress and the president to ‘act quickly’ and 57 percent prefer spending cuts to tax increases. But there’s little support for cuts in Social Security (64 percent opposed), Medicare (56 percent) and Medicaid (47 percent), which together approach half of federal spending. The State of the Union gave Obama the opportunity to confront the contradictions and educate Americans in the unpleasant realities of uncontrolled government. He declined….

“It’s a cliché, but true: There are no easy – or popular – solutions. Controlling the budget requires some combination of (a) reducing benefits for the elderly; (b) downsizing other programs, including defense; and (c) raising taxes. Not only did Obama avoid choices, but he failed to frame the debate in a way that clarified what the choices are. So public opinion remains muddled, and politicians – sensitive to public opinion – remain stalemated.

“Obama’s expedient evasion is the opposite of presidential leadership. It maximizes short-term approval ratings while running long-term risks. A loss of investor confidence could trigger a chaotic flight from Treasury bonds and the dollar. One economist recently wrote in the Financial Times: ‘I hope it does not ultimately require a crisis to restore fiscal [responsibility]…, but I fear it will.’ That was Peter Orszag, Obama’s first budget chief. Sobering.”

Equally sobering was the announcement the day after the State of the Union from the Congressional Budget Office that the federal deficit will come in at nearly $1.5 trillion this year, which would equal 9.8% of GDP. And the outlook for fiscal 2012 is another $1 trillion in the hole, or the fourth year in a row above that incredibly depressing figure.

Both sides in Congress know something has to be done, but it’s a giant game of chicken to see who goes first, particularly when it comes to entitlements. Just don’t look for leadership.

As for the action on Wall Street, the Dow Jones was prepared to celebrate its longest winning streak since 1995, nine consecutive weeks of gains, when the stock market took a header on Friday wiping out the gains for the major averages as oil and gold recovered their own earlier steep losses. [I got a kick out of how breathless some commentators were on Friday afternoon over the gains registered by crude and the shiny metal. Calm down, I wanted to scream. The two finished virtually unchanged on the week, yet another reason why I don’t have a ‘day in review.’]

Prior to the intrusion of geopolitics, stocks were bouncing merrily higher despite some dicey news from Britain and the ongoing inflation scare.

The U.K. is a big key the first half of the year because all eyes are on the Cameron government to see if it can limit the damage from its needed austerity program. But fourth quarter GDP came in at minus 0.5% when an increase of 0.7% was expected, a huge blow that while blamed on the dreadful December weather was really as much about plunging consumer confidence over the coming budgets cuts and tax increases, such as an increase in the VAT. Some consumer surveys have shoppers pulling in their horns big time over this last one, as well as uncertainty on both the jobs and housing front, the latter in dire straits just like the U.S. variety. There is legitimate talk of a double-dip in Britain.

And so while eurozone data on manufacturing and the service sector was strong for the month of December, if you looked below the surface, once again you saw it was Germany leading the way while many of the others continue to struggle mightily. The IMF is only projecting euro area growth of 1.7% for 2011 and, again, if you take out Germany it’s far worse. [The IMF’s revised forecast has the U.S. growing at 3%, China 9.6% and India 8.4%.]

Elsewhere in Euroland, Spain’s unemployment rate is back above 20%, 20.3% to be exact, as it struggles to come up with a plan to recapitalize its banks with money it doesn’t have (though the government claims all is well), while on Friday the retirement age was raised from 65 to 67 as part of the austerity program here. 

As for Ireland, it is an unmitigated disaster as Taoiseach Brian Cowen, by many accounts a man operating under the influence of heavy drink, was booted from his party leadership position and an election has been called for Feb. 25.

In Japan, Standard & Poor’s downgraded the country’s long-term sovereign debt owing to prospects for a deficit that is slated to reach 204% of GDP this year, or about three times the current debt level of the U.S., though some would argue that since Japan largely finances its debt internally, as opposed to the United States’ relying on foreigners for 40% of Treasury bond purchases, Japan is better off. Or to put it another way, the U.S. is likely to be downgraded at some point in 2012 as our deficit soars to a troubling 90% of GDP.

In China, a Bloomberg poll of economists has 45% believing there will be a crisis in five years owing to its speculative credit-driven bubble. I would just say that if there is going to be a crisis it comes in 2 years, not five. If China can get through 2012 largely unscathed, that will bode well for most of the rest of us as well. But that’s a big ‘IF’ these days. The government increased the down payment on second homes to 60% this week (you can’t buy a third one anymore) in yet another effort to slow the housing boom and make it more affordable at the same time. China has a housing crisis…as in it’s not necessarily overbuilding but it’s the fact the people Beijing wants to see in homes can’t afford them. The government is also instituting its first property tax, 0.4% to 1.2% of the purchase price paid annually in another attempt to slow things down.

But a big issue is that the provinces all submitted their own five-year plans (2011-2015) in conjunction with the central government’s and many of them are projecting 10%+ annual growth, while on the natural resources front, the drought in the north, including Beijing, continues to worsen. The capital, for example, has not seen any precipitation since Oct. 25.

Street Bytes

--On Wall Street the major averages fell with the Dow Jones losing 0.4% to 11823, the S&P 500 0.5%, and Nasdaq losing a fraction, 0.1%, to 2686. Some such as Caterpillar were bullish in their earnings releases, with CAT’s CFO saying, “We’re very optimistic about what’s going on in the developing parts of the world.” But some of the others, such as McDonald’s and Johnson & Johnson, were unexciting, while Ford’s fourth quarter report on Friday shocked the Street. Ford was projected to come in with earnings of 48 cents and instead did 30. In response the stock dropped 13%, $2.50. Ford blamed a loss at its European unit and new model costs, but CEO Alan Mulally conceded he needed to do a better job of communicating with analysts.

Meanwhile, the preliminary reading on fourth quarter GDP came in at 3.2%, worse than the expected 3.5% but not awful. It just needs to get much better if we are to put a real dent in the unemployment rate.

--U.S. Treasury Yields

6-mo. 0.15% 2-yr. 0.54% 10-yr. 3.32% 30-yr. 4.53%

Bonds rallied at week’s end on the news out of Cairo and a flight to safety; this as the Federal Reserve once again held the line on interest rates at its latest Open Market Committee meeting. The Fed’s accompanying statement read, “Growth in household spending picked up late last year, though remains constrained by high unemployment, modest income growth, lower housing wealth and tight credit.”

On inflation, the Fed offered: “Although commodity prices have risen, longer-term inflation expectations have remained stable, and measures of underlying inflation have been trending downward.”

Yes, one of the dominant themes of the week was inflation. The likes of Procter & Gamble conceded its gross margins fell in the recent quarter due to rising prices for production materials, while McDonald’s said it may be forced to raise prices as food costs rise.

And then you have the likes of North African and Middle Eastern nations boosting their purchases of wheat because of the unrest in Tunisia and Egypt to ensure that the governments have enough to placate the people, which of course then puts pressure on wheat prices, though they fell hard at week’s end.

Which brings me to my bottom line, as spelled out a few weeks ago when it comes to inflation. I recognize there are demand elements in the story, while you can’t deny there is also a speculative one.

But this current spike is really nothing new. What it will do, however, is crimp growth, at which point prices will once again fall, aided, I’m projecting, by some better news on the harvest front by late spring. It’s the growth aspect, though, which is why I’m not bullish on equities, coupled with my normal geopolitical concerns and the resulting negative impact on sentiment.

[U.S. economists, by the way, are only projecting a CPI in the U.S. of 1.9% in 2012.]

--The S&P/Case-Shiller reading on housing for the month of November continued to show a sector that is scraping along the bottom as the 20-city index fell 1.6% for the month. Earlier, new home sales for December came in better than expected but it was hardly cause for excitement, especially when you consider that beaver-built homes are now included to juice already sick data.

--Morgan Stanley chairman John Mack, in an interview with Charlie Rose.

Rose: Were U.S. business leaders satisfied with their conversation with (Chinese President) Hu and the U.S.-China summit? Do they see change coming?

Mack: Anytime there can be a direct dialogue, CEOs find that helpful. What the Chinese want, I think, is a better understanding, having the U.S. really understand what they’re trying to do. I was there in December, and I had a discussion with one of the vice-premiers. He talked about our congressmen, our senators, coming to visit him and saying, ‘You should be doing this, you should be doing that’…He said: ‘I’ve read over 100 books about your country. I know something about your culture, but I’m not an expert. To come and preach to me what our country should do when you really don’t have an understanding, I find very resentful.’

“One of the things I’ve found as a businessperson: Our elected politicians don’t travel enough. To understand the Chinese and to get along…we need more meetings like what took place with the CEOs and Hu Jintao. And then kind of cajole and push and say why certain things should work and certain things wouldn’t work. That’s the dialogue I think they’re looking for. They really want to work together, and work with us.”

--Officials in Southeast Asia are concerned that Somali pirates will begin targeting the critical Malacca Strait, one of the world’s most important shipping lanes. But to do this they would have to get by Indian naval security so the likes of Singapore and Malaysia are asking the Indians to step it up. There have been at least 10 attacks in the past two weeks 300 miles off the Indian coast. This becomes even more of an issue if the unrest in Egypt led to the closure of the Suez Canal.

--Japan’s deflation rate is improving, just 0.4% in December, while the unemployment rate fell to 4.9% unexpectedly, so the government is actually becoming increasingly optimistic.

--South Korea should have loved President Obama’s State of the Union. He seemingly praised them as much as he did us.

--The Wall Street Journal reports that hedge-fund titan John Paulson took home net profits of more than $5 billion last year, thus exceeding his record $4 billion from 2007’s bet ‘shorting’ subprime mortgages. Others such as Appaloosa Management’s David Tepper and Bridgewater Associates’ Ray Dalio took in between $2 billion and $3 billion each. By comparison, the Journal points out that Goldman Sachs paid its 36,000 employees a total of $8.35 billion.* Much of Paulson’s take came not from his firm’s profits, but rather his own investments in his funds, having placed much of his wealth in gold-focused vehicles. So technically 2007 was better, when his subprime bet rose 590%, far better than his gold funds’ 45% gain, but size matters.

*Goldman CEO Lloyd Blankfein received a $12.6 million stock bonus for 2010, a big step up over 2009. Mrs. Blankfein confronted him upon hearing this. “Why didn’t they give you cash?!” At least her hubby’s salary was increased from $600,000 to $2 million.

--The Financial Crisis Inquiry Commission issued its 545-page report on the causes of the 2008 crisis and while there is little we didn’t already know (especially weekly readers of this space), it does confirm that 12 of the 13 largest U.S. financial institutions were under severe distress and risked failure. Fed Chairman Ben Bernanke told the commission, “As a scholar of the Great Depression, I honestly believe that September and October of 2008 was the worst financial crisis in global history, including the Great Depression.” Bernanke added the 12 under duress faced the “risk of failure within a period of a week or two.” J.P. Morgan Chase was evidently the only big player not at risk. Goldman Sachs, despite all its denials to the contrary, most definitely was. Meanwhile, the hedge fund community (such as the above John Paulson) was taking advantage of the stress in the mortgage market, particularly by shorting securities put together by the investment banks.

[I may in the next few weeks cover the minority report of the commission in my Wall Street History column.]

--Zachary Karabell commented in TIME on the advantages government has been giving the banks these days.

“While everyone else struggles, banks have been in a privileged position, benefiting from interest rates on short-term interbank loans (the mother’s milk of all banking transactions) of nearly zero and long-term rates above 3% plus fees. Because a functioning banking system is as essential to modern society as power plants and water, banks have been given every advantage by government.

“They have not, however, responded in kind. They have not aggressively lent money. Instead, they have hoarded capital. They have done so to pay for legal fees and for defaults on more mortgages and credit cards. [Ed. See Bank of America.] Though loans have increased in recent months, it’s after an unprecedented period of contraction. Credit remains tight.”

--GM sales in China rose 29% in 2010 to 2.4 million, while U.S. sales rose 6% to 2.2 million. Ergo, GM sold more cars and trucks in China than the U.S., marking the first time a foreign market outpaced the domestic one in its 102-year history.

--For the month of December, the unemployment rate rose in 20 states and fell in 15. Nevada still has the nation’s highest rate at 14.5%. California is next at 12.5%, followed by Florida at 12%. North Dakota has the lowest unemployment rate at 3.8%, followed by Nebraska and South Dakota, 4.4% and 4.6%, respectively.

--I was going to try to explain what is happening with Stanley Ho’s casino empire in Macau but I’ve given up. At first, the 89-year-old tycoon said family members were pilfering all the assets, going back to the times from the 1960s to 2002 when Ho built his casino monopoly before the territory’s government opened up the business to other companies, including big Vegas players.

Then Ho appeared on television, backtracking from his claims his relatives had “robbed” him of $billions in what was described as a truly embarrassing performance as he “read from a giant cue card.”  But at week’s end he had filed another suit to retain control of his empire, which includes 17 casinos and hotels, as well as other commercial interests.

--The New York Times’ Gretchen Morgenson reported that “Since the government took over Fannie Mae and Freddie Mac, taxpayers have spent more than $160 million defending the mortgage finance companies and their former top executives in civil lawsuits accusing them of fraud….The legal payments show no sign of abating.”

$24.2 million has gone to law firms defending three former Fannie executives, including Franklin D. Raines. [Fannie and Freddie are actually picking up further legal expenses beyond this.]

--Toyota, in yet another setback, recalled at least 1.7 million vehicles worldwide over concerns about cracks in fuel pipes which could cause leakages if untreated. No accidents have been reported. 

--Inflation Alert: The Financial Times surveyed 16 experts on the steel industry and they forecast average price jumps of 32% this year, which would be an increase that has happened only once before in 70 years. One CEO is forecasting a rise of 66%.

--The Obama administration is touting its efforts in combating healthcare fraud, collecting $2.5 billion in judgments for the year ending in September, a record. It gained a further $1.5 billion in administrative findings. Whistle-blowers received about $300 million in 2010 – from 15% to 25% of the amount recovered, per new legislation that hiked the awards. The Los Angeles Times reported that one specialty pharmacy in Florida, Ven-A-Care, recorded $168.7 million in revenues last December…on whistle-blowing! It files suits alleging fraudulent conduct. As Andrew Zajac explains:

“The company conducts research, comparing the prices it paid for drugs with the prices reported by drug makers to the government for reimbursement. Ven-A-Care files suit, on behalf of the government, when it spots large discrepancies between the two sets of prices.”

“A 2005 California suit alleged that a 1-gram vial of the antibiotic vancomycin was sold to providers for $6.29, but billed to Medi-Cal for $58.37, while 50-milligram tablets of the blood pressure medication atenolol were billed to pharmacies at $3.04 and to Medi-Cal at $70.30.”

--Amazon forecast revenues in the current quarter of $9.1 billion when the Street was expecting $9.36 billion, while at the same time the company is building at least seven new fulfillment centers to handle its growing product range. As I noted at yearend, the shares are ridiculously overvalued, and remain so even after a $13 hit on Friday to $171.

--Google said it is hiring 6,000 new workers in 2011, which would bring the company’s total payroll to 30,000 by 2012; this as Facebook surpassed Google as the most visited website in the U.S. last year.

--Apple says that its app store hit the 10 billion download mark. The store now has more than 350,000 different programs for the iPhone, iPod Touch and iPad. The individual who downloaded the 10 billionth will receive a $10,000 gift card to its iTunes store.

--Lowe’s, the nation’s second-largest home-improvement retailer, said it would lay off 1,700 middle managers in stores as it seeks to attain profit growth levels on par with rival Home Depot. But Lowe’s will be adding 8,000 to 10,000 “weekend sales positions” for the chain’s busiest time of the week. For those struggling to make ends meet the perfect job, to go on top of your hoped-for Monday thru Friday position. You can then rest on the 8th day (“Funday”), which I’m still working on for all of us. You’ll be the first to learn when He grants me an audience.

--Officially, house prices in Ireland are back to levels last seen in 2002 after a 38% decline from the peak.

--Speaking of housing markets, in a survey of 325 markets in terms of affordability, Hong Kong ranks last with a ratio of house prices to median annual household income of 11.4 [For example: The Three Little Pigs’ house of bricks cost $114,000 but their median income is $10,000.] Sydney is next to last [median house price at $634,300 and median income of $66,200, or a ratio of 9.6]. But No. 1 in affordability is Saginaw, Michigan, with a ratio of just 1.6. [Or, the first little pig’s home of straw, $11,600, on the same income of $10,000.]

--The cost of reconstruction following the Queensland, Australia floods is now estimated at $20 billion. Consider the scope of it all, like this from Bloomberg and the South China Morning Post.

“To build an average Australian house, you need 6,200 bricks, 2,950 roof tiles, 785 floor tiles and 15 cans of paint – multiply that 28,000 times and you get a picture of the task to rebuild Brisbane after Australia’s worst flood.

“It gets worse: the state of Queensland will need to rebuild enough road to circle the globe twice, thousands of kilometers of rail line, almost 100 schools, an unknown number of bridges, several regional airports, power lines, drains and water treatment plants.”

Well, you’d think the rebuilding will provide a boost to the economy. The Reserve Bank of Australia forecast in November that the economy would grow 3.75% in 2011, but that estimate could rise a fair amount, everything else being equal…which I don’t think will be the case.

[As if Queensland hasn’t had enough issues, it is now being targeted by not one, but two cyclones.]

--Bernie Madoff continues to have an impact while in prison. On Friday, New York Mets owners Fred and Jeff Wilpon announced they were being forced to sell 25% of the team to meet potential future obligations in the Madoff affair. But in their case the trustee liquidating Madoff’s estate, Irving Picard, said the Wilpons made a profit of nearly $50 million and net winners are subject to clawbacks, which could end up being far greater than this first figure, like $200 million to $300 million.

Oh, it’s going to be an incredibly dreadful year at Citi Field…I’m projecting a 43-119 season. By September there will be 4,000 in the stands at most games.

--Two Bell Labs inventors won the prestigious Japan Prize, one of the world’s top science and technology awards (they’ll split $600,000) for an invention from 40 years ago, the UNIX computer operating system, which became a building block for everything that followed, including the Internet. Dennis Ritchie lives nearby, now retired, while Ken Thompson left the Labs and now works as a “distinguished engineer” at Google. Very cool to think this is yet another coup for a historic facility, now, as I noted the other day, Alcatel-Lucent Bell Labs.

But…you know how when reviewing my old Lucent lawn indicator that I told of work being done on the lawn despite the snow? I just found out why this was the case. It seems they are conducting tests on the groundwater to see if homes in the area, down the hill from Lucent, were contaminated with the chemical Trichloroethylene or TCE, a known carcinogen. Why I lived in the potentially impacted area for 16 years, but because I left exactly a year ago I wasn’t aware of the tests. Thankfully, preliminary results show no contamination. That creek I used to speak of behind my former abode was the runoff from Lucent up top, about three blocks away.  

--We note the passing of former Merrill Lynch CEO William A. Schreyer, who ran the investment bank from 1985 to 1993, back when it stuck to its roots.

--By 2013, 11% of New York City’s budget, $8.4 billion, will be pension costs.

--In a State of the Media 2011 report, 151 newspapers folded in 2010 vs. 300 in 2009. Of those biting the dust, 109 were weeklies.

Foreign Affairs

Iran: Talks on Tehran’s nuclear program in Istanbul went nowhere and despite the increased sanctions being levied on it, which are having an impact on the economic front, Iran’s mullahs are showing zero signs of capitulating. In Istanbul, Iran refused to consider freezing uranium enrichment unless sanctions are lifted and the P5+1 accept its enrichment program as is, first.

But the United States is taking heart in the latest Israeli estimate that Iran is incapable of enriching enough uranium to bomb grade strength until 2014, owing to sanctions and the Stuxnet computer worm, though the U.S. wants to make sure the likes of China, South Korea and Japan comply with the U.N. restrictions that have been adopted by the European Union, Canada and Australia.

Israel: Palestinian leaders were furious with Arab news channel Al-Jazeera for leaking documents that show the Palestinian Authority was willing to give up large tracts of East Jerusalem, which is to be their future capital, to Israeli settlements.

The concessions were evidently made as part of negotiations in 2008, but the discussions were kept secret over fears they would derail the peace process. Al-Jazeera is calling the 1,600 documents the Palestine Papers, and has been posting them WikiLeaks style over several days. The Palestinian Authority is vehemently denying the authenticity, calling the documents “lies and distortions,” while their chief negotiator, Saeb Erekat, pitifully said the positions were being “misrepresented” and took “statements and facts out of context.”

Al-Jazeera said, “Over the last several months, (we have) been given unhindered access to the largest-ever leak of confidential documents related to the Israeli-Palestinian conflict.”

Many Palestinians feel betrayed by their negotiators and Hamas was quick to take advantage of the situation, condemning the West Bank administration of Mahmoud Abbas.

“Any credibility the Middle East peace process retained has been dealt a crippling blow. Leaked Palestinian documents detailing a decade of negotiations with Israel show that the Palestinian Authority was prepared to let Israel keep all but one of the settlements built illegally in East Jerusalem since 1967. Israel rejected the offer as insufficient. It was, of course, already presumed that Palestinian officials were making ever greater concessions in a bid to keep the peace process alive. But the details that have been laid bare so starkly cast all parties in a bad light.

“For the mainstream nationalist Fatah party, which had staked its reputation on a negotiated settlement, the leak is lethal. The deals Fatah offered in private diverge so sharply from its official position, and from Arab public opinion, as to leave the party politically bankrupt. Most dispiriting, however, is that the affair shows that even the Palestinians’ highest offer was not enough to meet the Israelis’ minimum demands. That can only strengthen those, such as Hamas, who in the past have justified acts of terror on the grounds that a negotiated peace is not achievable.”

Iraq: While President Obama touts success in Iraq, just as his predecessor did, all I see is the formation of a new government and then at least 8 separate bomb attacks in the past two weeks that have claimed the lives of over 175 because the government doesn’t even have a security apparatus in place. 

Pakistan: The Islamists may only garner 5% in national elections, but they control the street and the majority of Pakistanis, the ‘good,’ live in fear. But on Thursday in Lahore, a U.S. consular official shot dead two armed men after they attempted to rob him, it would seem, triggering a mass protest. Further compounding matters, when the U.S. Consulate came to the rescue of the official, they struck and killed a pedestrian. The American is being charged with murder as further details are yet to emerge. Were the would-be robbers actually terrorists, for instance, or just innocents? Anti-Americanism was widespread before this incident. Imagine the level it is now. Forget Egypt. Pakistan remains the worst threat to stability in the entire region, if not the world.

Afghanistan: President Karzai finally acquiesced and swore in a new parliament, five months after the September elections, but because he doesn’t like the composition of it, he proceeded to walk out of the first session. I can just see his cape swirling as he turned to leave in a huff.

Separately, a rare car bomb killed 8 at a Kabul market on Friday, while this morning, a deputy governor of Kandahar was killed in a suicide attack.

Russia: In what was another terrorist attack by Chechen-Islamist separatists, a suicide bomber killed 35 at Russia’s busiest airport, Moscow’s Domodedovo, leaving another 180 people injured as the bomber walked into the international arrivals area, which is unsecured at most airports around the world and was the case at Domodedovo. Just last March, Chechen insurgents claimed responsibility for double suicide bombings in Moscow that killed 40, and countless other attacks including the Beslan school tragedy from 2004.

Of course these security breaches once again shine a lot on the International Olympic Committee’s decision to award the 2014 Winter Olympics to Sochi and FIFA’s corrupt move to hand Russia the 2018 World Cup. Would you attend either? You’d have to have a screw or two loose to even contemplate doing so.

But there are no solutions to the terror threat. Chechnya is not about to be granted its independence, and if you beef up security one place, the Chechens, a la Beslan, have proved they will just pick a softer target.

I’m reminded of my first trip to Moscow in November 2002 (first since my youth) when I told you then of my walking across from my hotel to catch an opera at the Bolshoi. This was just weeks after terrorists stormed a Moscow theater and took hundreds hostage, but when Russian special forces moved in to retake the theater, they accidentally gassed to death over 120 hostages in killing the 30+ terrorists.

So some of you will recall my incredulousness in how I was able to walk into the Bolshoi, heavy winter coat on, with zero security. No one was checked…just weeks after such an incident. Amazing. But that’s Russia.   

Meanwhile, the upper house of parliament ratified new START (Strategic Arms Reductions Treaty), thus concluding the ratification process on both sides.

And on a different matter, the country’s ambassador to NATO, Dmitry Rogozin, wants the Stuxnet computer virus investigated because the malware could have caused radioactive material to escape into the air from Iran’s Bushehr nuclear power plant on a scale similar to the explosion at Chernobyl in the former Soviet Union. “The virus is very toxic, very dangerous, and could have had serious implications.” Interesting angle.

South/North Korea: Seoul has proposed talks with Pyongyang for Feb. 11, the first official contact since the North’s shelling of a South Korean island last November. The North, clearly under pressure from Beijing, has made waves about easing hostilities on the peninsula after weeks of threatening war. The preliminary talks are designed to set the stage for the first meeting between defense ministers since November 2007. China has said that once the two sides meet, then it would be appropriate to press for a renewal of the six-party talks.

China/Taiwan: A top Taiwanese official renewed calls for Washington to sell his government F-16 fighters, especially in light of China’s seeming development of a stealth jet, the J-20. If the J-20 is everything it appears to be (or close to being), there is a serious imbalance between the two sides. But of course Beijing opposes any arms sales to Taiwan.

As an aside, in reading a New York Times profile of the man slated to replace Hu Jintao, Xi Jinping, I learned he was at one point governor of Fujian province and mayor of Fuzhou, both of which are near and dear to my heart because of my large investment there. Xi apparently has far more experience on the military front than Hu ever did. I mention this for two reasons. I’m trying to get a handle on the coming transition, related to my comments of last week which I will not repeat, but, to be even more cryptic, some of what I’ve observed in my trips there is now coming into focus. 

Italy: Prime Minister Silvio Berlusconi’s lawyers said his wild “bunga bunga” orgies were but gentle soirees, with modestly dressed young women, not of the topless variety claimed by attendees and prosecutors who have the power of wiretap evidence. Italy’s top porn star (I wouldn’t know this…it’s just what I read) Rocco Siffredi, said “The truth is, Italians are proud of someone like Mr. Berlusconi who is 74, loves sex and has a good sex life, and I don’t just mean working-class Italians.” [Irish Independent]

Well, then this might explain the results of two surveys taken Jan. 17 and Jan. 19, which show Berlusconi’s approval rating at 52.3%. [Sunday London Times] And the ratings come despite comments from Maria Ester Garcia Polanco (no relation to Phillies infielder Placido), an aspiring showgirl from the Dominican Republic (then again, Placido Polanco is from the D.R. too…hmmm) who said she had sex with Berlusconi, not for money, but rather out of gratitude because the prime minister had paid for medical treatment for her five-year-old daughter and helped her find television work.

And that’s this week edition of “As Italy Turns…starring Silvio Berlusconi and Maria Ester Garcia Polanco.” Next week… “The Phillies’ overthrow the Berlusconi government.”

Random Musings

--Mitt Romney won one of the first beauty contests of the 2012 presidential primary campaign, a straw poll in New Hampshire, taking a third of the vote while Sarah Palin was a distant fourth. Romney finished second in the 2008 primary there. In the straw vote, Ron Paul was second but only with 11%.

Meanwhile, in both an ABC News/Washington Post and Public Policy Polling survey, former Arkansas Gov. Mike Huckabee came out on top, with Palin and Romney taking second and third. 

But in watching one of the Sunday talk shows last weekend, I saw Senators Joe Lieberman and Kent Conrad discussing their decisions not to run in 2012, and I thought in the perfect world, those two would make for a classy independent third party bid (but with Conrad in the top spot, and the ‘old sage,’ Lieberman, as the veep pick for a variety of reasons). I’m not saying I’d vote for them, but you know my soft spot for third party candidacies and I just wish we had a choice like this.

--New Jersey Gov. Chris Christie took aim at the commissioners running the state’s largest sewage treatment plant and fired six of the seven for using the state authority as a “personal spoils system,” in Christie’s words. 

It’s really such a sign of the times. As the Star-Ledger reported, the commissioners of the Passaic Valley Sewerage plant “hired brothers, wives, children and in-laws; cut sweetheart deals for insiders; gave out lucrative, no-bid consulting contracts, and ran up lavish travel expenditures.” [I’m guessing the ‘consultant’ would come in and go, “Looks like you have a lot of [excrement] in there.” “Why, yes, it would appear we do. Thanks for pointing that out. Here’s your $5,000 fee.”]

Ah, but there is a new sheriff in town and after the Ledger exposed the patronage and nepotism, Christie wasted no time in acting.

--New York Gov. Andrew Cuomo has an early approval rating of 71% among voters across the state, while the State Senate and Assembly have ratings in the teens. But the governor in New York is largely helpless and has limited real power compared to the position in New Jersey. If, however, Cuomo can affect the kind of change he’s after on the fiscal side, to me he is an instant favorite for 2016, or perhaps Hillary’s running mate (yes, I know they’d both technically be from New York but she’s obviously a national figure at this point).

So the official call for 2016 is Christie vs. Cuomo. You heard it here first. Time to move on to 2020.

--I was going to comment on Sarah Palin’s latest essay and video on her Facebook page but then thought, why bother? She’s like a wounded grizzly. Can’t decide whether to go away and lick her wounds, or lash out and eventually face the consequences. Either way, the grizzly ends up being a loser. It’s 11:58:30 p.m. 90 seconds of fame left before it’s poof!

--Of course Rahm Emanuel should be allowed to run for mayor of Chicago as the Illinois State Supreme Court ruled after an appeals court said he wasn’t eligible because he didn’t live in Chicago for a year before the Feb. 22 vote. The guy was working in Washington for the past two years but had a home in Chicago, too, let alone he served six years in Congress; a district that included part of Chicago. As the Wall Street Journal pointed out, Emanuel’s absence “was done in the course of service to the country.” [Whether or not you objected to the quality of the service is a different matter.]

--I’ve written in the past about drug use in the U.S. military and an internal Army investigation report released Tuesday “revealed that 25% to 35% of about 10,000 soldiers assigned to special units for the wounded, ill or injured are addicted to or dependent on drugs,” as noted in a story by Gregg Zoroya of USA TODAY. Lt. Gen. David Fridovich, deputy commander of the nation’s nearly 60,000 special operations forces (including Green Berets and Army Rangers) recently admitted to his own addiction. Fridovich has stepped forward to talk about his dependency on pain killers as part of a commitment to push the Army into better addressing the drug issue and pain management for PTSD and other problems. From 2005 to 2009, the number of troops diagnosed each year with substance abuse disorders was nearly 40,000, the Pentagon says.

--For all of Ireland’s beauty, the dirty little secret is that it is, well, dirty…and highly polluted. It’s lacking in efficient and environmentally safe waste disposal areas, or dumps, for one thing, and as if the country doesn’t already have enough problems, now it has a 50-acre dump in Co. Kildare that is ablaze and can’t be extinguished easily, putting the health of 30,000 nearby residents at risk. It could be months before it’s out and, typical of the Irish:

“Effectively, the fire is burning in the core of a mountain of waste, and because no records were kept of what was allowed on to the landfill site by its former owners, it is impossible to speculate on what is actually causing the fire.” [Irish Independent]

Ireland’s EPA said 1.75 million tons of waste had been illegally deposited at the site before it was licensed in 2003 as a dump, and now a report commissioned by the EPA warns there could be a catastrophic explosion from gases.

--New York Mayor Michael Bloomberg recovered some of his dignity as Gotham handled this week’s 19-inch snowstorm well, even though it fell far quicker than the Christmas Blizzard.

Yes, it’s been a brutal winter for those of us in the northeast, particularly close to the coast. It’s not as much the record snow (using Central Park as the barometer, we came within one inch on Wednesday of our fourth 20” snowstorm in six years, after just three others the previous 100+), it’s the fact we’ve had like three days over the last 60 where the temperature was above normal. It sucks. I just want to go for a jog in the park, as in most winters there are about 15-20 days where the non-fanatic (moi) can do so. But I’m not about to do what some idiots in my area do…jog in the street where there are 1 ½ lanes worth of space vs. a normal 2 lanes plus shoulders. That’s a death sentence. And that’s a memo.

--Wednesday night I watched San Diego State take on Brigham Young in men’s basketball in Provo, Utah, and BYU came out victorious over my pick to win it all this year, SDSU. I always admired BYU and the school’s mission and then I saw in U.S. News & World Report that for a second straight year, it was the most popular national university in America among applicants, according to an analysis of yield (the percentage of students accepted to a school who opt to attend). In U.S. News’ 2011 rankings of national universities, it was only rated 75th, but of 7,049 students accepted, 5,421 enrolled (76.9%), edging out Harvard, #1-ranked and with 2,175 students accepted and 1,663 enrolled (76.5%). It seems those who want to be part of the BYU experience don’t bother enrolling anywhere else.

--I noticed an op-ed by Christopher Williams in one of China’s state papers the other day commenting on the state of fitness in China and the death of an American no one in China knew anything about, Jack LaLanne.

“In China, there is a long and proud history of refined physical knowledge and practice. The Taoist traditions of balancing yin and yang, the martial disciplines of tai chi, and even feng shui’s principles of harmony with the environment all suggest a rich heritage of appreciating one’s physical and spiritual well-being.

“But as China becomes richer, and as it adopts more Western attitudes and customs, some of that may be changing.

“For example, how many young people now wake up every morning and do their tai chi in the park? It seems to only be a habit of the old. [Ed. That’s been my personal observation as well when over there.] As young people get more money they buy cars and scooters, so they’re not riding their bicycles.

“Some people do go to the gym, but many busy working couples don’t have time to work out, and they’re so stressed out that they grab junk food and just stare at the TV when they come home. Children in China are getting fatter and lazier, just like too many American kids….

“Around Spring Festival, the Chinese New Year, it’s common to wish people good luck, good fortune and good health.

“But Jack told us, a long time ago, that good health is the most important.”

--New York lawmakers are calling for a crackdown on a Westchester company selling 9/11 commemorative coins supposedly made of silver from Ground Zero. I mean talk about egregious. As the New York Post reported, “National Collector’s Mint” is advertising the coins as “the officially authorized 10th-anniversary September 11th commemorative.” The coins sell for $29.95. But the coins aren’t sanctioned by any government agency and have nothing to do with the 9/11 memorial that is being built on the World Trade Center site. The company’s president said the company has donated more than $2 million to various Sept. 11 charities.

I mean you read something like this and it makes your blood boil. Just lock these guys up, and for a long time. [No, I don’t believe they’ve given $2 million to charity.]

I bring this up because, like many of you, a few times a year I drop a $100 check in the mail to the Salvation Army because they consistently rank high in terms of doing what they say they are going to do. [As opposed to the various Haiti charities that you wouldn’t catch me giving a cent to.]

So the other week I send the Salvation Army another $100 and a few days later I received a personal thank you card, handwritten, and not a robo version.

We’re so grateful for your generous gift during these difficult times….etc.

I mean how great is that? That’s old school, like when President George H.W. Bush would write personal thank you notes while in the Oval Office, a practice I then adopted when I worked at PIMCO to I’d like to think positive effect. [If I were in sales today, in this age of tweets and twits, I bet it would be even more effective, guys and girls. Try it. I guarantee it sets you apart.]

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

We remember the victims of the Challenger disaster, 25 years ago today.

Gold closed at $1337
Oil, $89.34

Returns for the week 1/24-1/28

Dow Jones -0.4% [11823]
S&P 500 -0.5% [1276]
S&P MidCap +0.4%
Russell 2000 +0.3%
Nasdaq -0.1% [2686]

Returns for the period 1/1/11-1/28/11

Dow Jones +2.1%
S&P 500 +1.5%
S&P MidCap +1.1%
Russell 2000 -1.0%
Nasdaq +1.3%

Bulls 55.1
Bears 19.1 [Source: Chartcraft / Investors Intelligence]

Due to weather and other issues, my brother and I didn’t have a chance to celebrate our parents’ 60th wedding anniversary with them this week as planned, but we will down the road. Pretty awesome achievement, eh?   

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