Week in Review

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Week in Review

07/23/2011

For the week 7/18-7/22

Wall Street, Washington and Europe

This week officials with the European Union and International Monetary Fund, as well as some bankers and such, got together to decide the fate of Greece, Ireland and Portugal, while also stemming further contagion to the likes of Italy and Spain, and, just as importantly, save their August holidays. It would appear, especially in terms of the last point, that it was mission accomplished. What they come back to in September and beyond, though, is anyone’s guess.

For now, all we know are the broad outlines of this new plan, a continuation of the Euro Ponzi Scheme, but lest one be too cynical there are some good features and it gives three of the PIIGS a fighting chance, at least, if they stick to their own programs and, this is critical, THEIR ECONOMIES GROW!!!

Because none of the EU’s best intentions will mean squat without growth, and as I’ve been writing since the crisis hit last year, I’m not talking the piddly kind, or what PIMCO has been labeling the new normal…2% type growth. Nope, we need 4% or better in the case of the PIIGS, including Italy and Spain, and just where that is going to come from, amidst the austerity, and without the titanic Churchill-like leadership required, I’ll never know.

But back to the details of Greek Bailout II as we currently know them. The tax-dodging Greeks, who peaked about 2,000 years ago, are receiving another $157 billion, on top of a similar earlier amount, plus a supposed $70 billion in private participation from the likes of banks and insurers, who are to roll over their current bond holdings for a menu of options, kind of like Applebee’s. Two entrees plus an appetizer for $20…only in some cases they’ll also get a haircut thrown in.

In essence, Greek bonds will have their maturities extended to as much as 30 (I’ve also seen 40) years vs. the current 7.5-year benchmark. The 7.5-year will roll into a 15-year piece of scrip that will now pay an interest rate of 3.5% instead of 4.5% to 5.8%.   This is a big key to the plan. Ireland and Portugal are receiving the same terms when their paper is rolled into new instruments and these are legitimate savings. In the case of Ireland I saw anywhere from 600 million to 800 million euros, annually.

But back to the private partnership angle, what cracks me up is I wrote a few weeks ago that the banks and insurance companies had already sold a lion’s share of their sovereign debt, to the likes of hedge funds, so what is left to be rolled over? We’ll find out soon enough, won’t we?

Look, I can’t begin to really know what happened on Thursday in Brussels and I’m sure I’ll have far more for next week and succeeding weeks and months to come because this will be an evolving bailout just as it’s been since spring of 2010. What the EU and IMF have done is present Greece (and Ireland and Portugal) with a window of opportunity. These nations have to grab it.

At the same time, and very importantly, there is this arm of the EU that will get a ton of play in coming years, the European Financial Stability Facility, and the EFSF, backstopped by 440 billion euros (though far more will likely be needed) now has the power to buy bonds in the secondary market in an emergency. Say contagion has spread to Italy, the EFSF can buy their paper to stabilize matters until the panic subsides. The EFSF will also have the power to go in and support banks that may be critical to the eurozone but are having problems. Ergo, the folks at the EFSF should be very busy in the future. 

On the issue of “selective defaults” and Bailout II, thus far Fitch Ratings has weighed in and called it a ‘temporary default’ when it comes to Greece until the bailout cash is deposited and the mechanisms for meeting their new obligations are in place.   Those playing the credit-default swap market, hoping for Greece to default outright, are likely to be disappointed.

Lastly, aside from the growth issue, everything that the EU has done this week, including an outright write-off of some of Greece’s debt, still would leave the country, in a perfect world, and with solid growth, with a debt level, at best, of 120% of GDP around 2016. Of course it will be much higher than this. The issue is when will the markets see through the fog and get back to taking shots at the PIIGS? Hopefully not until September at the earliest. Everyone could use a bit of a break.

“The European summit on Thursday has resulted in a belated, but still impressive, step towards a resolution of the sovereign debt crisis. The measures were clearly more significant than the markets expected, but at the same time they have fallen short of a once-and-for-all resolution of Europe’s debt problem. Several key compromises have been made, notably between the German government and the European Central Bank, and these have removed some previously immovable obstacles to progress.

“The institutional plumbing is therefore now in place to resolve the crisis completely. But this still leaves one crucial question: how much money will be sent down the pipes? On that, the summit offered no new guidance….

“So how can problems still arise for the three most troubled economies? In the case of Greece, it could happen because the government fails to stick to the budget tightening which has been agreed. The eurozone would then either have to provide more money, or the Greek government would default on its official debt and possibly leave the euro. That clearly remains a possibility.

“For Ireland and Portugal, there is plenty of debt left in private hands, and markets have seen what happens when a sovereign nation reaches the limit of its financing ability – i.e. sovereign default. But for as long as these two countries remain inside the program, they will be able to refinance their debt as it falls due, at low interest rates from the European Financial Stability Facility. This means that the markets cannot make the solvency position of these countries any worse by raising bond yields. Like Greece, these two countries might still be ultimately insolvent, but only if the pain of their budget tightening proves too much to bear inside the euro.”

“Until the amount of ammunition is increased, the existential threats to the eurozone stemming from (the two has) not been removed. Sooner or later, the eurozone will have to increase the resources available to the EFSF very substantially, or the markets will once again call its bluff.”

“Debt solvency, growth and contagion have been, and are, at the core of the problems of Europe’s periphery. They speak to both the causes of this painful homegrown crisis, and to the manner in which it has been spreading. It is therefore highly encouraging that European leaders are finally taking more aggressive steps to address all three aspects.

“Firstly, on solvency, the program countries (Greece, Ireland and Portugal) will now benefit from lower interest rates and a significant extension of loan maturities.

“Secondly, greater focus is being placed on promoting growth in the periphery, though this is still too restrained relative to what is required.

“Finally, contagion risk – especially for Italy, Spain and the Europe-wide financial system – is being lowered through a new, flexible and fast-disbursing credit facility available both to sovereigns and banks….

“Then there is the execution risk. Four parties will have to deliver simultaneously, and in a focused fashion, to make this package effective.

“Governments in core countries – Germany, Finland and the Netherlands in particular – must convince their skeptical citizens that this is a good use of their hard-earned tax euros.

“The ECB must also come up with a skilful way to compensate for the balance sheet hit it will have to take at some point on account of its peripheral bond purchases and repo operations.

“Private banks must waste no time in taking advantage of favorable market reactions to raise additional capital.

“Finally, the peripheral economies must deliver an internal economic adjustment that is both substantial and acceptable in socio-political terms.”

Joseph Stiglitz / Financial Times…after praising the agreement…

“With all these kudos, I have four cautionary comments. The European Union has once again reiterated its resolve to a quick return to fiscal rectitude (at least for those countries not in crisis). Europe’s recovery, however, is still frail and excessively quick cutbacks will slow growth, and even risks a double-dip recession. Lower economic growth will be bad even from a narrow view of deficits and debt. Moreover, Ireland and Spain both had budget surpluses and low debt-to-GDP ratios; that should serve as a reminder that these restrictions are neither necessary to ensure future growth and prosperity. Unfettered markets – and especially under-regulated banks – were central in causing the crisis; and too little has yet to be done.

“Secondly, revenues from Greece’s privatization may help address the country’s financial difficulties, but not if privatization is pushed too rapidly, with a rigid timescale. Fire sales worsen a country’s balance sheets – and the market responds to these rigid time frames with lower prices….

“Thirdly, the greater flexibility given the EFSF is important, but some of the proposals being bandied around need to be treated with caution. One entails moving to variable rate loans. Ask America’s homeowners about the wisdom of that!....

“Europe has, at last, been forced to do a cold calculation of the costs and benefits of taking the next steps to create a successful euro, and not doing so. Any rational calculation showed that the benefits of doing what it has done vastly outweighed the costs.”

While the focus was on Europe, Thursday, investors were still glaring at Congress and the White House as the Aug. 2nd debt-ceiling deadline got closer and closer. When the heck are these guys going to get together and actually do something? many of us mused. My man, Oklahoma Republican Senator Tom Coburn, who had returned to the Gang of Six, which put forward a $3.7 trillion plan of spending cuts and new revenues, actually said he had a plan for $9 trillion in debt reduction over the next ten years. Coburn didn’t expect Congress or the president to bite on all of it, but as he put it, “pick half!”

But as I go to post, we were supposed to have had a plan that all parties could agree on by July 22 to give everyone enough time to write it up before the deadline, but now House Speaker Boehner has walked out of the talks. Oh, sure, House Republicans voted on their own program that would raise the debt ceiling, along with spending cuts and a Balanced Budget Amendment, but they knew it wouldn’t fly in the Senate, let alone the White House. And for their part, Democrats, who control the Senate, still haven’t come up with a plan of their own as their base keeps saying, ‘You cut my entitlements and you’ll rue the day you did.’

The bottom line is House Republicans don’t want new taxes, Senate Democrats don’t want entitlements cut and it’s seemingly impossible to bring the two sides together in the Grand Bargain that President Obama and some Senate and House leaders still want.

In a Washington Post/ABC News survey the other day, 80% of Americans are “dissatisfied” or “angry” about the way the federal government is working, up 11% in one month. Among Republicans, 58% say the GOP is too resistant to a deal. 6 in 10, overall, say the deficit plan should include a combination of spending cuts and new taxes, but I guarantee many of these same folks would flip sides if their entitlements were impacted. 

Ditto the findings of an NBC News/Wall Street Journal poll, which found that 58% support a $4 trillion package including cuts to entitlements. I just don’t believe it. [36% favor a $2.5 trillion deal that holds the line on taxes.]

As to the picture on Wall Street and the overall economy, I’ll comment on corporate earnings in a bit but the bottom line is housing still sucks, witness another lousy report on existing home sales for June, which peaked at an annualized rate of 7.08 million in 2005 and were at 4.91 million in 2010 and are running at a similar rate thus far this year. 

Housing was obviously a key driver in the boom times and it’s still not contributing today, witness General Electric’s lousy news on the appliance front, which is tied to the sector; ovens and refrigerators operating best when under a roof with an electrical outlet as opposed to just sitting in a vacant lot.

It’s also apparent that the American consumer is still sick…the summer cold that won’t go away. Many of us continue to deleverage amidst the uncertainty, but there is a price to pay and it’s called 9.2% unemployment.

And while many of us like that government, from the feds on down through the state and local level have finally been facing budget realities, these are lost jobs, consumers not spending, etc.

One thing that is worrisome on this front in terms of employment is whereas a year ago you saw two communities looking to share police and fire services, now you see three looking to combine their efforts.  At least I’m noticing that increasingly in my area and I’m sure it’s not dissimilar to yours. So this retrenchment has a long ways to go. It’s necessary, but painful.

Lastly, economists once thought the economy would grow at 3.5% for 2011. We’re about to get our first estimate of second quarter activity and the consensus seems to be around 1.5%, following 1.9% for the first quarter. Not exactly 3.5%...and you have to try real hard to build a case for roaring growth in the second half. Just ain’t gonna happen, sports fans. Now economists are saying for the 12 months, Q3 2011 thru Q2 2012, 3% is more like it. There are a lot of people who would be ecstatic with that kind of performance, though it would probably guarantee an unemployment rate still well above 8% come November 2012.

Street Bytes

--Stocks rebounded, after falling the prior week, with the Dow Jones up 1.6% to 12681, the S&P 500 up 2.2% and Nasdaq ahead 2.5%. With the potential for another week of debt talks in Washington, however, there is no telling what the market will do.

But last week it was about the EU coming up with a second bailout for Greece, et al, and some solid earnings led by the likes of IBM, Apple, and Coca-Cola. Others, including some in the banking sector (see below) were not so good. And then on Friday, Caterpillar alone was responsible for 50 Dow points to the bad when it reported a slight earnings miss. G.E. was also OK, but not great.

--U.S. Treasury Yields

6-mo. 0.08% 2-yr. 0.39% 10-yr. 2.96% 30-yr. 4.26%

--At one point this week, the Greek 2-year note was trading with a yield of 40%. After the bailout went through, the yield collapsed to a still hefty 24%. Importantly, the 10-year bonds for Italy and Spain, both having climbed over 6%, fell below that mark after Thursday’s agreement.

--The National Retail Federation is projecting back-to-school spending will decline this year, not a good thing.

--Eurozone manufacturing data was not good, down to 50.8 as measured by the PMI for June. Germany’s PMI was 52.1. France’s just 50.1.

--So you know all my writing on Spain’s banks and their lack of transparency over the past year and more?

“The real Spanish nightmare would come if heavy bank losses meet ballooning sub-national debt. Spain’s regional governments control more than a third of public spending and can issue their own bonds. But if one of those governments should fail to pay its bills, Madrid would shoulder the burden.

“In May, 13 of these 17 regions held elections, and their new leaders are now busy inspecting their predecessors’ books – and finding worrisome holes in their accounting. The new government in Castilla La Mancha, for example, last week warned that its budget deficit may be more than twice as large as previously thought.”

--Ratings agency Fitch warned of “widespread weaknesses” in Chinese corporate governance and a lack of “quality information” for shareholders. Chinese companies were at “above average” risk of being accused of fraud, sometimes wrongly, Fitch said.

“Some of the accusations will be legitimate; some will be erroneous; many will be a mixture.”

Tell me about it. No doubt, the slew of damaging news on the Chinese corporate front has hurt my own play there (actually, two…the other being much smaller). For those of you who are playing along with me on the Fujian holding, just know that in a public investor presentation this week, the company reiterated, in writing, its $17 million in cash. The CFO also continues to answer my questions promptly, though now it’s ‘quiet time’ ahead of the earnings release.

Meanwhile, the IMF praised China’s market-oriented changes in its economy but urged it to continue sweeping reforms. The fund stated in part:

“China’s capacity to both transmit and originate real shocks is rising, implying an important stake for the world in its stability…

“In so far as its export-oriented growth model is a source of stresses, economic rebalancing is crucial.”

China must let its currency rise and it has to continue its transition to a consumer-oriented economy.

The good news this week was that the leading economic indicators rose for a third straight month, even as strategists keep warning of a big slowdown (Caterpillar talked of a ‘softening’ of its business there), while tax revenues for the central government are up 30% in the first half, which is very good.

Of course on the other hand you do have legitimate concerns over the size of the underperforming loan issue, but that’s where tax receipts can be a cushion when the central government has to step in to avoid unrest, which is what would follow local financial institutions going under.

--In the News Corp. fiasco, the British parliamentary hearings proved to be a bit of a bust as Rupert Murdoch and son, James, stonewalled and denied knowledge of phone-hacking and payments to police at the News of the World. Rupert is desperately trying to keep the crisis from spreading to his U.S. holdings, including Fox News, the Wall Street Journal and New York Post.

Former NoW editor Rebekah Brooks was arrested on suspicion of knowing about the phone-hacking and payments to police, though in her appearance before the parliamentary committee, she issued a series of “carefully crafted denials” as well.

James, though, will be grilled again due to inconsistencies in his testimony as some former NoW staffers have come forward and said he wasn’t telling the truth on what he knew and when he knew it, while Rupert is going to face further heat as well because some are saying the NoW has blocked the investigation.

And the head of Scotland Yard resigned this week, which didn’t look good (especially ahead of the 2012 London Games) as the whole mess is encircling Prime Minister David Cameron, who, after all, once hired Andy Coulson as communications chief, Coulson having been another former NoW editor.

--Morgan Stanley got off the mat with better-than-expected results for the second quarter, with its highest quarterly revenue since 2007, including equity sales and trading revenue that was up by more than a third from a year ago, while beating Goldman Sachs on the fixed income and investment banking end.

--Meanwhile, Goldman’s earnings fell way short of expectations, quite a change from the old days when Goldman would blow away estimates, as trading revenues, long Goldman’s bread and butter, declined 29% from year ago levels, while overall firm revenue fell 39% from the first quarter of 2011. Goldman also announced it would cut about 1,000 jobs.

--Bank of America continued to take it on the chin in a huge way, taking $20.7 billion in charges, including a previously announced $8.5 billion settlement with some institutional investors on mortgage-backed securities shenanigans at the time of the collapse of the housing bubble. BofA, though, would point to far lower credit-loss provisions from a year earlier. The credit-card operation, for example, earned $2.04 billion. In the end, though, total revenue at the bank declined substantially.

The Financial Times editorialized on BofA and Goldman.

“BofA’s pre-tax mortgage-related charge of $21 billion is only half the story. Beyond the continuing legal repercussions of the crisis lies the reality that the very asset prices that drove it are still falling, along with customers’ appetite for mortgages. Compared with a year ago, a decline in new loan originations caused BofA’s co-called core production volume to fall by $600 million. That might not seem like much besides a loan book of $125 billion, but remember that borrowing rates could not be more attractive. Bad mortgages, while trending lower, are also high considering where rates are today.

“If an interminable period of declining asset prices is the first Japan-like problem for U.S. banks, the second is the effect of deleveraging on economic activity. Goldman Sachs, like any business, needs enthusiastic clients to make money. That underwriting revenues fell by a tenth versus last quarter, equities trading by a third, and fixed income, currency and commodity trading by twice that, suggests an increasingly nervous client base. Likewise, reversing the downward trend in net interest income at BofA (almost a $1bn less this quarter) and other banks will only be possible if an improving economy causes interest rates to start rising again.

“U.S. banks are still making lots of money and excess capital abounds. But reflections of Japan definitely are visible at BofA and even at the mighty Goldman.”

--Apple Inc. not only blew away its earnings estimates, it demolished them; $7.79 per share vs. an estimated $5.80. Revenues came in at $28.6 billion, up 82% from year ago levels, vs. a projected $25 billion. Apple sold 20.3 million iPhones, 9.3 million iPads, and 3.95 million Macs. The iPad is now the company’s second-biggest source of revenue after the iPhone after being on the market less than two years. [In China, iPhone sales have been soaring.] The stock, which had been stuck in neutral this year, closed the week at $393, up from $364 the prior one.

Meanwhile, the health of Steve Jobs was not part of the company’s conference call. Succession, though, remains very much an issue here.

--Microsoft reported record fiscal fourth-quarter revenue, but some were discomfited by the fact the Windows operating system saw its sales decline 1% from year ago levels, its third straight quarter of decline. So while consumers are buying fewer computers that use Windows, tablet sales are obviously picking up the slack.

--IMB beat analysts’ estimates and boosted full-year profit guidance (slightly) as second-quarter revenue rose 12%. Software sales were up 17%. What a great job this company has done in restructuring their entire business from what it used to be. Investors have been duly rewarded. 

--But one company that has not done a good job of refocusing is Cisco Systems Inc., which said it will eliminate 6,500 jobs, 9% of its full-time workforce, to cut expenses by $1 billion. If you work there, at least it’s not the 10,000 rumored earlier. [Laid-off workers will receive six months’ severance, which is better than nothing.]

--Is there anyone better than McDonald’s? They have been on a roll, in tough times, and last quarter they not only beat on earnings, but U.S. sales, closely watched for trends, were up 6.9% vs. expectations of around 3%.

--AMR Corp, parent of American Airlines, is placing the largest aircraft order in history, 460 narrowbody planes to replace its aging fleet. What really made news, though, was the fact Europe’s Airbus is getting orders for 260 jets vs. Boeing’s 200. Airbus’ narrowbody offer is currently viewed as simply more fuel-efficient, among other things.

--Delta said it was losing $14 million a year on flights to 24 small airports, such as Pierre, South Dakota, so it’s shutting those operations down.

--According to the Kelley Blue Book, Hyundai surged ahead of Honda and Toyota to take the top spot in brand loyalty. Good for them.

--Bloomberg had an interesting report on India and an issue that is holding back its economic development…tax evasion (a la Greece). One expert said India loses $314 billion a year to evasion, meaning that government must borrow heavily to fund a planned $1 trillion five-year infrastructure program. Said the same expert, “Instead of 7.5% (GDP growth) now we could have grown at 12.5%.” 

Only 3% of India’s 1.2 billion in population pays tax.

--Zillow, the real estate listings website, came public on Wednesday at $20 a share and promptly went to $60 before closing the first day at $35.77.

--Yahoo disappointed once again with its second-quarter results, including a significant drop in U.S. display advertising.

--The “cost per click” for an ad placed on Facebook has increased 74% over the last year. Said an executive at TBG Digital which tracks these things, “In my experience…this is the biggest growth since Google. The main difference is that this is being fuelled by brand spend rather than [direct] response spend. That is an inflection point for the whole digital marketplace.” [Tim Bradshaw / Financial Times]

Suffice it to say, the above is important as Facebook gears up for its initial public offering, still not expected before spring 2012, but, boy, if I were them I’d accelerate the timetable.

--Back in 2005, two New Jersey siblings, Catherine and Dave Cook, started MyYearbook.com, digital versions of yearbooks. The two raised $17 million in financing in about six years, the website attracted 70 million users, and the Cook kids just sold their product to Quepasa, a publicly-traded Latino social network, for a reported $100 million, according to Business Insider and the Star-Ledger.

--New Jersey’s unemployment rate ticked up to 9.5% in June vs. the national rate of 9.2%. 28 of 50 states saw their jobless rate rise for the month. Nevada still tops the list at 12.4%, California is at 11.8%, Texas 8.2%, New York 8.0%, Florida 10.6% and North Dakota just 3.2%

--As part of an effort to reduce its technology budget and modernize, the New York Times reported the federal government will close 40% of its computer centers over the next four years, some 800, which while these aren’t labor intensive would still result in thousands of job losses. It’s about embracing cloud computing for more efficiency.

--Last December, analyst Meredith Whitney appeared on “60 Minutes” and predicted 50 to 100 “sizable” municipal defaults as states slashed spending, probably “within the next 12 months.”

Well, the evidence says otherwise. From January through June, defaults totaled $746 million, not the “hundreds of billions of dollars” Whitney forecast. States and cities have indeed been slashing spending but to balance budgets, and some states have stepped forward to protect local municipalities.

--Calpers, the largest U.S. public pension fund by assets, $238 billion, announced its best investment performance in 14 years for its 2010-2011 fiscal period, up 20.7%. But underfunding remains a huge problem, and for the last decade it’s earning closer to 5.5% rather than the 7.75% assumption. [Ditto the sister Calstrs retirement fund for teachers.]

--Postmaster General Patrick Donahoe warned that within 15 years, not only will we not see Saturday delivery, but the Postal Service could be forced to reduce its schedule to just three days a week.   

--Borders has begun liquidating its 400 stores, putting 10,700 on the streets. Expect huge sales, starting this weekend. With their closing, more will continue to go online for their purchases.

--Danielle Chiesi, the 45-year-old beauty queen and disgraced trader, was sentenced to 30-months in prison for sharing illegal stock tips with her hedge fund buddies in the Raj Rajaratnam case. Before her arrest, Chiesi was caught on an FBI wiretap saying, “I’m dead if this leaks. I really am…and my career is over. I’ll be like Martha f---ing Stewart.”

-- “Harry Potter and the Deathly Hallows, Part 2,” the final movie in the series, opened with a record $168.6 million in weekend ticket sales in the U.S. and Canada. The series has generated over $6.6 billion in worldwide ticket sales for Warner Brothers as of July 15. Good Lord Voldemort. The previous 3-day record, incidentally, was $158.4 million set by “The Dark Knight” in 2009.

Personally, I’m waiting for “Horrible Bosses” and “Bad Teacher” to come out on video.

--Ed Flesh died at the age of 79. Flesh, an art director, designed the horizontal spinner for the “Wheel of Fortune.” He also helped design sets for “The $25,000 Pyramid” and “Jeopardy!”

--There’s no doubt both the American Southeast and Southwest need a hurricane to take care of the drought situation in each region. Sorry, coastal communities. And was it warm enough for you this week? On Friday, Newark hit an all-time high, for any day, of 108 with a heat index of 120. I’ve been so afraid I’d lose power I’ve been taking preventive steps while doing this column.

Foreign Affairs

Syria: The government crackdown continues, as does the opposition’s efforts, with more than 500 people rounded up in one town near the border with Lebanon, where thousands have crossed to escape the repression of President Bashar Assad. The death toll, according to some, now exceeds 1,600.

The Assad government also warned the U.S. and French ambassadors not to travel more than 15 miles outside Damascus, two weeks after the two journeyed to Hama, a city where demonstrators were expressing their opposition to Assad. U.S. Ambassador Robert Ford and French Ambassador Eric Chevallier were hailed as heroes there. Hours later, their embassies were attacked by Assad’s thugs.

On Friday, an estimated 650,000 took to the streets in Hama, and at least eight more protesters were killed by security forces across the country.

Lebanon: It remains tension city in Beirut these days. Hizbullah leader Nasrallah declared again his party will defeat the “conspiracy” of a U.N.-backed court’s indictment that implicated it in the 2005 assassination of Rafik Hariri, though Nasrallah called for national dialogue between rival factions, echoing a plea of President Michel Sleiman. Former Prime Minister Saad Hariri said he welcomed Sleiman’s call as a “positive” move. But his Future bloc’s statement said the dialogue should be “confined to the issue of Hizbullah’s weapons…with the aim of agreeing on an executive program to put the weapons and all military potentials under the authority and command of the Lebanese state.”

Israel: The Palestinian Authority reiterated it will ask the U.N. Security Council in September to recognize a Palestinian state. But Hamas said it hasn’t been consulted on the PA’s plan. PA President Abbas supposedly is going to ask Norway and Spain to recognize the state on the pre-1967 lines. The U.S. could, of course, veto the move, but the PA is convinced it already has nine of 15 Security Council votes locked up. It’s just the beginning of a process.

I continue to maintain September in New York City, during the U.N. General Assembly, could be explosive, at least rhetorically, with dueling massive demonstrations.

Afghanistan: A close adviser to President Karzai was killed during an attack in Kabul. Two men wearing suicide vests entered Gen. Zahir Wardak’s home. The Taliban claimed responsibility. Suffice it to say, the myth that Kabul was secure was long detonated months ago. If you can’t secure Kabul, what’s the use?

Meanwhile, I said after the killing of President Karzai’s brother, Wali, that it was far from certain who ordered the chief bodyguard to assassinate him and that it wasn’t necessarily the Taliban, even though they claimed responsibility. It turns out the killer, Sardar Mohammed, had worked for the CIA as an informant. There is no evidence the CIA ordered the hit but it makes this case even murkier.

Pakistan: To give you a sense of the ethnic violence in Karachi, the Human Rights Commission of Pakistan says 490 were killed in targeted ethnic or political killings in the first six months of the year, including a recent spasm that claimed 100 in just four days.

Separately, all the recent talk that the U.S. is concerned over the safety of Pakistan’s nuclear weapons (despite public pronouncements to the contrary by the State Department) could have unintended consequences, such as the government may opt to at least temporarily disperse the weapons rather than have them fall into the hands of the West, who many inside the country believe is about to try and seize them before the nukes fall into the hands of terrorists, including through a coup.

But then this could make it far easier for terrorists to then seize an individual weapon or two. And as one U.S. nuclear weapons expert put it, we really don’t know a lot about India’s security regarding their own nuclear arms, their transparency being sorely lacking.

Iran: This week the government announced it is installing centrifuges with “better quality and speed” at its nuclear plants. France and the U.K. said this proved Iran’s program has “no credible civilian application,” as noted by the French Foreign Ministry, adding, “Iran has just given into another provocation by announcing the imminent installation” of the devices.

There is little doubt Iran is moving forward with a new, more clandestine facility in the mountains near the holy city of Qum.

Libya: It’s really pathetic. After more than four months, NATO hasn’t been able to remove Moammar Gaddafi and now the U.S., U.K., Italy and France have stated that Gaddafi can stay in Libya as long as he steps aside from politics. No standing on war crimes trial, to say the least. Gaddafi himself declared in a speech this week, “They said Gaddafi will go to Honolulu. This is funny: To leave the graves of my forefathers and my people? Are you serious?”

As for the rebels, they are receiving little support but fighting gamely.

Bahrain: The Times of London reports the U.S. Navy is looking to move the Fifth Fleet away from Bahrain “amid fears over violence and continued instability in the Gulf kingdom.” The U.S. doesn’t want to be seen lending tacit support to a government that has suppressed the opposition. The UAE and Qatar are leading candidates for the relocation but as neither has the capacity as yet to handle the fleet (40 vessels and 30,000 personnel), a potential move is years off.

China: The diplomatic fallout over President Obama’s very low-key meeting in the White House with the Dalai Lama appears to have been minimal. I am on record as stating the Dalai Lama is one of the more “overrated” figures in history for one reason. What good has he done his people the last 50 years? They would have been far better off negotiating with the Chinese government, particularly in the last two decades.

So Beijing issued the usual statements, but for now there has been little follow-through.

“Generally, the Chinese believe that the U.S. government meets with the Dalai Lama either to appease its domestic hardliners or to vent its dissatisfaction with China in other fields,” wrote the Global Times, a government mouthpiece. The Lama is “a drop of spittle on China from the West.”

The People’s Daily warned the meeting “will undoubtedly negatively affect the development process of Sino-U.S. relations.” [South China Morning Post]

China’s Foreign Ministry spokesman said the United States should “stop interfering in China’s internal affairs and cease to connive and support anti-China separatist forces that seek ‘Tibet independence.’”

On a far more immediate topic, tensions in the South China Sea, Democratic Sen. John Kerry and Republican John McCain issued a statement:

“We are concerned that a series of naval incidents in recent months has raised tensions in the region. If appropriate steps are not taken to calm the situation, future incidents could escalate, jeopardizing the vital national interests of the United States.”

Vietnam and the Philippines have accused China of harassing fishermen and generally becoming more aggressive.

But by week’s end, the countries claiming interests (including the above plus Brunei, Malaysia and Taiwan) agreed to a set of guidelines for talks at an Asean summit in Bali, which U.S. Sec. of State Hillary Clinton welcomed.

Lastly, investigators looking into the hacking of the International Monetary Fund’s computers have concluded the attacks were carried out by Chinese spies, as reported by Bloomberg. What’s potentially embarrassing for new IMF chief, Christine Lagarde, is that she gave in to China’s complaints it deserved more influence and appointed a Chinese economist as deputy managing director.

Norway: I was prepared not to comment on Friday’s twin terror attacks, invoking my customary ‘wait 24 hours’ rule until we knew more, but after about 10 hours, Norwegian officials were confident in saying it all was the act of a 32-year-old ethnic Norwegian. An unfathomable 91 were killed, at last report, in a car bomb and then the suspect’s attack on a summer camp.

“It seems it’s not Islamic-terror related,” an official said. “This seems like a madman’s work.” The official went on to say the attack “is probably more Norway’s Oklahoma City than it is Norway’s World Trade Center.”

Russia: A complicated survey here, combining a poll of the people as well as the prognostication of 13 political analysts, says that if the State Duma elections were held today (instead of next December as planned), United Russia would receive 58% of the vote, down from 63% last November. The Communist Party has increased its support to 15%. The newly revamped Right Cause party of billionaire and Nets owner Mikhail Prokhorov would receive just 4%. Prokhorov may have a far tougher time increasing his support than he thinks. I didn’t realize he really ticked off the unions by proposing a 60-hour work week last year. No sympathy for the unions from me in this regard.

But back to United Russia, Vladimir Putin’s party, an online campaign was launched urging young women to support Putin by taking off their clothes. Good grief.

France: Speaking of women, Dominique Strauss-Kahn has admitted to having sex with three women in the course of a few hours before his tryst/rape of the hotel chambermaid in May. When it comes to his waning presidential ambitions, this should officially close the door, though should DSK be allowed to return to France shortly, he will still want to influence the campaign.

But as if all the above isn’t enough, now the mother of the French writer, Tristane Banon, who has filed attempted rape charges against DSK for an alleged 2003 attack, said she too had “consensual but brutal” sex with him, somewhere around 2000.

Venezuela: President Hugo Chavez is back in Cuba, undergoing cancer treatment. This time he delegated “budgetary” powers to his vice president and finance ministers.

And if you thought about taking a holiday on the Venezuelan resort island of Margarita, think again. A British tourist was shot dead last week when he and his brother fought back against a gang that tricked their way into the hotel in a failed robbery attempt. The 28-year-old firefighter was the third tourist to be killed in Margarita this year.

Mexico: So there is this jail in Nuevo Laredo town, just across the border from Laredo, Texas, and last December more than 140 prisoners escaped. Then the other day, seven were killed but 59 more escaped from the same prison after a riot. Five guards were missing, believed to have aided the inmates.

Random Musings

“American conservatism now has a rich network of Washington interest groups adept at arousing elderly donors and attracting rich lobbying contracts. For example, Grover Norquist of Americans for Tax Reform has been instrumental in every recent GOP setback. He was a Newt Gingrich strategist in the 1990s, a major Jack Abramoff companion in the 2000s and he enforced the no-compromise orthodoxy that binds the party today.

“Norquist is the Zelig of Republican catastrophe. His method is always the same. He enforces right ultimatums that make governance, or even thinking, impossible.”

--Grover Norquist, in his own op-ed in the New York Times. In part:

“My position, and the implications of the [Taxpayer Protection Pledge] regarding [“temporary” tax cuts such as the 2001 and 2003 cuts or the A.M.T. ‘patches,’ which are due to expire Dec. 31, 2012], is clear. If there were no vote in Congress and taxes rose automatically, then no politicians would have voted for higher taxes and no elected official would have broken his or her pledge.

“But that is different from supporting a plan by some Democrats that would end some or all of these lower tax rates, higher per-child tax credits and the A.M.T. patches – policies that, by the way, Congress has extended repeatedly with bipartisan support. It is difficult to see how such a package would fail to violate the Taxpayer Protection Pledge. Contrary to the hopes of some that I am somehow softening the pledge, it is stronger and more important than ever: it has made it easier for members of Congress to credibly commit to voters that they will refuse to increase taxes and instead focus on reducing the cost of government.

“But ultimately, the pledge is only one expression of the Republicans’ commitment to shrinking the size of the federal government. The Republican leaders – Mr. Boehner, Representative Eric Cantor, Senator Mitch McConnell and Senator Jon Kyl – have repeatedly and clearly stated that they will not allow a net tax hike to be imposed on the American people as part of a debt ceiling deal – especially when the goal of that deal is to reduce the runaway spending now damaging America’s economic future and killing the jobs we need.”

--Michele Bachmann said of reports she suffers from severe migraines and that they would impact her ability to serve as president, “Let me be abundantly clear – my ability to function effectively has never been impeded by migraines and will not affect my ability to serve as commander in chief.”

She certainly didn’t deny she suffers from the condition, though, saying her symptoms were controlled with medication. Former aides described incidences where Bachmann was hospitalized at least three times, and the migraines apparently hit her about once a week.

But when you run for president and begin to garner the attention Ms. Bachmann has, all manner of other stuff pops up, like a supposed audio recording of a 2006 prayer she gave at the ministry of a controversial preacher, Bradlee Dean, wherein Bachmann intones:

“The day is at hand, Lord, when your return will come nigh. Nothing is more important than bringing sheep into the fold, than bringing life into the new kingdom.”

But Bachmann keeps rising in the polls. According to a Wall Street Journal/NBC News survey, among Republican primary voters, Mitt Romney gets 30% but Bachmann is next at 16%, with undeclared Texas Gov. Rick Perry at 11%. Tim Pawlenty has all of 2%.

In a Public Policy Polling survey of primary voters, however, Bachmann bested Romney, 21-20, with Perry in third at 12%. Herman Cain actually got 11% in this one.

When the poll included Palin, Romney got 20%, Bachmann 16% and Palin 12%.

--In a USA TODAY/Gallup Poll, the GOP’s approval rating is just 28%, while Obama’s is at 45%.   Obama is at 46% in the above Public Policy Polling survey. ABC/Washington Post has him at 47%.

--New Jersey Republicans can take some comfort in knowing that Democratic Sen. Robert Menendez is not polling well, with only a 37% job approval rating as he gears up for re-election next year. But he still handily beats any Republican potential candidates that are brought up in what looks like an incredibly weak field of pachyderms. One potential Republican is none other than New York Jets owner Woody Johnson.

“Many Americans are suffering under the ailing economy – but not those lucky enough to be on President Obama’s executive staff.

“Turns out the 454 people were paid a total of $37,121,463 this year.

“Yes, that’s 15 fewer staffers and $1.7 million less than taxpayers shelled out for the president’s workforce last year.

“But it’s seven bodies more than the White House employed during the last year of George W. Bush’s term – and at a cost of nearly $4 million, or 13%, more.

“No wonder the Obama folks tried to bury the news late on a Friday this month: Nearly one in three White House staffers is earning a six-figure salary.

“Some 21 – mostly old Chicago cronies – are pulling down the top capped salary of $172,200. (Last fall, it was disclosed that 41 owed $831,000 in back taxes.)

“Yet that’s just a taste of some bad – but revealing – numbers streaming out recently about the White House’s performance.

“As The Weekly Standard noted, a recent Council of Economic Advisers report claims that the $666 billion stimulus ‘raised employment relative to what it otherwise would have been by between 2.4 [million] and 3.6 million jobs.’

“That means the stimulus package cost taxpayers more than $183,000 per job – and possibly as much as $278,000 per.”

--16 suspected hackers with the group Anonymous were arrested by the FBI on Tuesday, 14 of whom were charged in connection with an attack on the Web site of PayPal last December. PayPal had stopped accepting payments for accounts set up for donating funds to WikiLeaks and Anonymous had called on supporters to attack the sites of companies that followed PayPal’s lead.

--The Tsunami that struck Japan is now estimated to have risen to a maximum height of 132.5 feet based on data collected from 5,400 locations the length of the east coast, the largest to ever hit Japan. The December 2004 tsunami that hit Indonesia was 108 feet.

“Action is needed now to prevent nightmarish ‘Planet of the Apes’ science ever turning from fiction to fact, according to a group of eminent experts….

“An example given is the creation of primates with distinctly human characteristics, such as speech.

“Exactly the same scenario is portrayed in the new movie ‘Rise of the Planet of the Apes,’ in which scientists searching for an Alzheimer’s cure create a new breed of ape with human-like intelligence.”

I’m never going outside again….except to golf and drink beer at a sidewalk café. Just sayin’.

--Gotta give Wendi Murdoch credit for her quick jab to the face of the man who attempted to hit her husband, Rupert, with a cream pie. As fleeting as the moment was, it was more entertaining than a heavyweight championship fight I saw on HBO the other week.

--Depressing story in the Wall Street Journal on a new scourge crossing the country, the urban invasion of the tiger mosquito, which prefers cities to marshy areas and is “more vicious, harder to kill and, unlike most native mosquitoes, bites during the daytime.”

The tiger mosquito is thought to have come to the U.S., Texas specifically, in 1985, perhaps from Japan on a ship loaded with used truck tires. Since then the mosquito went from Texas to Florida, and then up the East Coast on I-95, threatening drivers who wouldn’t give it a free ride.

But wait…there’s more. A MCT News Service story addressed one of the major ills left behind by the Mississippi River flooding…mosquitoes. Talk about a world class breeding ground…standing pools of water all around. The director of emergency management for Atchison County, Mo., said, “You walk outside and within seconds you can see them on your arms. You can see them swarming the dogs like flies.”

Some towns are trying to combat the problem daily, but you can imagine the work that needs to be done. You also have the threat of disease.

--So I’m reading a book review in the Wall Street Journal, another tome on D-Day and the Battle for Normandy, and every now and then it’s important to be reminded of the numbers. The reviewer of the book, “Normandy Crucible,” was none too complimentary, but Alexander Rose wanted to make the point that while the author, John Prados, claimed the Normandy campaign was decisive, “nonetheless (it) was by no means an Allied walkover.

“German casualties may have been 450,000, with more than half dead or wounded, but the Allies suffered 210,000 casualties (37,000 dead) and an additional 17,000 aircrew killed. Equipment losses actually exceeded those of the Germans in key areas: 4,100 aircraft and 4,000 tanks. The difference was that the Allies could afford such losses and the Germans could not.”

The Reich also didn’t give up for another 11 months. “In 1944, a very hard year, Germany actually produced more aluminum, synthetic rubber and coal than in 1941 and just slightly less synthetic oil and steel. Weaponry, too. In 1941, Germany manufactured 3,790 tanks, 11,776 aircraft and 11,200 heavy guns. In 1944: 19,002 tanks, 39,807 aircraft and 70,700 heavy guns. Not bad for a power ‘decisively’ beaten in Normandy.”

And then there was the war on Germany’s Eastern Front. In three months, beginning late June 1944 and until the Russians began to close on Berlin in September, two million Germans were killed, wounded, captured or missing. The Soviet toll would be 250,000 killed and 810,000 wounded. Of course it was the Soviets who prevented Hitler from moving one million troops, thousands of tanks and hundreds of bombers to the Western Front.

So that’s a little history lesson for you today. The Battle for Berlin itself was another titanic struggle, costing hundreds of thousands of lives that I’m embarrassed I know little of, so after posting this column I’m giving myself a homework assignment to relearn a few facts on that final campaign.

--And the last link to the official Austro-Hungarian empire, Otto Habsburg-Lothringen, who died at age 98, was buried in Vienna last weekend as thousands lined the streets. Actually, to be accurate, his body was buried in Vienna. But, in keeping with strict royal and imperial Catholic tradition, his heart was buried separately at a monastery near Budapest.

Which is why I think I’ll just get cremated, if you don’t mind, not that I ever had any connections to the Habsburgs, who were lacking on many fronts but I’ll be damned if they weren’t terrific art collectors! And for this we thank them.

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

Gold closed at $1601…silver back over $40.00
Oil, $99.87

Returns for the week 7/18-7/22

Dow Jones +1.6% [12681]
S&P 500 +2.2% [1345]
S&P MidCap +1.6%
Russell 2000 +1.6%
Nasdaq +2.5% [2858]

Returns for the period 1/1/11-7/22/11

Dow Jones +9.5%
S&P 500 +6.9%
S&P MidCap +9.3%
Russell 2000 +7.4%
Nasdaq +7.8%

Bulls 46.2
Bears 21.5 [Source: Chartcraft / Investors Intelligence]

Have a great week. I appreciate your support.

Brian Trumbore

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