Week in Review

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Week in Review

08/27/2011

For the week 8/22-8/26

Washington, Europe and Wall Street

As my state of New Jersey prepares for Hurricane Irene to deliver the great flood, seeing as how the ground in these parts is already saturated from about ten inches of rain the previous week, and power failures, one can only hope that the storm’s wrath doesn’t deliver a depressing knockout punch when it comes to consumer and business confidence because it’s confidence that is so lacking in supply these days, around much of the world.

About the only guy who seems confident is Warren Buffett, who was playing with his rubber ducky in his bathtub Wednesday morning when he came up with the idea of making an offer to Bank of America CEO Brian Moynihan, a deal Moynihan could have refused, but the out of his league Moynihan was so star struck to be talking to Buffett for the first time, you just know he called his co-workers into the office, covered the phone, and said giddily, “I’m talking to Warren Buffett!” “What’s he want?” “I don’t know…but how great is this?!”

Well, just days after Moynihan told investors BofA didn’t need any more capital, even though everyone knows they do, he gladly took $5 billion from Buffett but is on the hook to the Berkshire Hathaway chairman for a 6% annual dividend, plus a big gob of warrants already priced below the week’s closing share price. Buffett then covered the mouthpiece of his phone, called in his associates, and told them, “I can’t believe this schmuck is taking the deal!!”

Then again, the move was such a shock, and done so quickly, that when one analyst went on CNBC and said, ‘Well, of course Mr. Buffett’s people have been looking at BofA’s books and know the risks,’ I’m thinking, ‘No they didn’t.’

And what did we learn late Friday? Bank of America is indeed frantically trying to raise more capital. It’s a mess. America is a mess. The world is a mess. And while it appears Mr. Buffett is getting a great deal, and maybe he is, this is the same guy who just the other day said the United States is a “quadruple-A” nation. 

Two Nobel Prize-winning economists from opposite ends of the political spectrum, Michael Spence and Joseph Stiglitz, both said this week that the risks of the global economy slipping back into recession are high. Spence told Bloomberg while in Hong Kong:

“I’m quite worried. A combined downward dip in Europe and America, which is a good chunk of the industrialized economies, I’m quite sure will take down growth in China, particularly, and that will then immediately spread to the rest of the emerging economies.”

Joseph Stiglitz, speaking from Germany, said of the U.S. economy:

“The unemployment situation is very severe and very probably going to get worse . There’s a very high probability we’ll go into double dip.”

Stiglitz, the liberal, said calls by policy makers to engage in deficit-cutting austerity measures were heading in “exactly the wrong direction….Austerity is going to get us predictably into trouble.” Spence says we must get hold of the soaring deficits to begin to re-instill confidence. 

On Friday morning, the first revision of second quarter GDP in the U.S. showed the economy was growing at an annual rate of 1.0%, vs. the previous flash figure of 1.3%; this after the first quarter revision of 0.4% set the whole current phase of the financial crisis in motion. The economy is dead in the water.

But just 90 minutes later, there was Federal Reserve Chairman Ben Bernanke, in his much-awaited Jackson Hole speech, saying that while a dead housing market and financial market volatility still pose challenges, his view of the long-term outlook is “more optimistic.”     

“Although important problems certainly exist, the growth fundamentals of the United States do not appear to have been permanently altered by the shocks of the past four years. It may take some time, but we can reasonably expect to see a return to growth rates and employment levels consistent with those underlying fundamentals.”

There was one decent piece of economic news this week in July’s reading on durable goods (big-ticket items), up a better than expected 4.0%, but this is a notoriously volatile figure and you’d want to see at least one more similar reading to make much of it. On the flip side, July new home sales were putrid, like you could count them on two hands. 

Meanwhile, before we get to Europe, the news out of Washington was light with the president and family up on Martha’s Vineyard, and Congress on break (no cheap jokes on either in this regard), but the Congressional Budget Office did have some awful news, not unexpected, mind you, that the unemployment rate would be no better than 8.5% by December 2012, and that the deficit for fiscal 2011 (thru 9/30) will still be $1.3 trillion, which is down from the January forecast of $1.48 trillion because tax receipts have been better than forecast; though a look at the recent turmoil in the financial markets and increased layoff news should lead one to believe the surprises on the receipts front will be to the downside the coming year. The CBO is calling for a deficit of $973 billion in fiscal 2012, which I would guess goes up unless the economy does much better than the CBO projects. For example, the CBO’s GDP forecast for 2011 is 2.3% (which means the second half has to be much better than we’ve seen), while they are calling for 2.7% growth in 2012, both numbers far better than current consensus. Boy, I hope they’re right. Really. I’m not short the market. I want everyone to do well. But I don’t see it.

Especially given what’s happening in Europe. This was the last week for the continent’s traditional August holiday, but from a financial standpoint what an August it’s been, with the German stock market crashing 20% this month alone.

And this weekend Greece is back in the forefront of discussion as 2-year note yields on Greece scrip soared to 47%! That is not a misprint. Greek banks are having major short-term funding issues, borrowing from their government to meet daily cash needs, while the government sells some antiquities, I’m guessing, there now being little else of value here. 

But the immediate issue for the weekend and next week is that Greece Bailout II is in serious jeopardy because the Fins, Austrians and others are now demanding collateral for any money lent the Greeks. This totally flies in the face of the intent of the bailout, but is also predictable in that it was going to be impossible to keep all euro-17 nations together on the second giveaway. The politicians are simply under too much pressure from a people, be they Fins or Austrians or Germans, who have had it with bailing out the irresponsible black sheep in the family.

I have told you the real key is the European Financial Stability Fund, now slated at 440 billion euro, which could backstop Greece, Ireland and Portugal, maybe, but which needs to be expanded to a second fund of 500 billion euro to backstop Italy and Spain in order to engender confidence that the EU and European Central Bank finally have control of the crisis.

One problem. It’s my understanding the initial 440 billion euro isn’t technically funded yet, let alone no one is confident today that the needed second 500 billion will ever pass muster with 17 parliaments…and time is wasting!

Greece, for example, has huge funding needs coming up in September and now there is all this turmoil over short-term collateral from the likes of Finland.

Which brings us to Germany, 30% of the euro-17 economy and the one nation that must lead the rest out of crisis. But German Chancellor Angela Merkel is not up to the job, and is facing an increasing revolt within her own party, including from former chancellor, and mentor, Helmut Kohl.

Kohl said this week that nobody seemed to know in what direction Germany was headed anymore. Kohl said the EU must stand by Greece no matter what and castigated Merkel for constantly changing her position. “The enormous changes in the world can be no excuse for having no view or idea where you belong and where you are going.” 

Then one of Merkel’s own ministers said that Germany should ask Greece, and others requiring bailouts, for collateral, too…just like the Fins are demanding. Well that was hardly helpful. Moody’s ratings agency said demanding collateral only drives Greece into default, which some agree is what should happen, but it must be on the EU’s terms, and orderly, should it come to this.

So amid all the above, Europe’s economy has stalled out. The Euro manufacturing index, PMI, for August fell below the 50 dividing line between expansion and contraction, 49.7, for the first time since Sept. 2009, as, worrisomely, new export orders dropped. The services PMI for August fell to 51.5.   

France, looking to keep its AAA-rating, enacted a $16 billion austerity program that called for scrapping some tax exemptions, levying new sin taxes, and applying a 3% surcharge on incomes above $700,000, which, imaginatively, will then be scrapped when the budget deficit gets back down to 3% of GDP from the current 6%.   At least French President Sarkozy took some bold steps, but not too bold, such as further job cuts, because he faces a bitter re-election contest in just eight months.

As for Europe’s banks, none of them trust each other and the critical funding mechanism between rivals continues to threaten to totally break down at a moment’s notice, which would literally lead to a catastrophic run on the bank.

At least Wall Street rallied after the dreadful action of the preceding four weeks, and the solid gains were based on just two bits of news that were way over-interpreted; the durable goods figure and then Chairman Bernanke’s misguided optimism at Jackson Hole. Oh well, I will concede this much. If you believe the economy will somehow muddle through at 1-2 percent growth for the next 18 months or so, stocks are not overvalued. If you believe we are going to double-dip, as classically defined, two negative quarters of growth in a row, then there is further downside.

For now, however, there is nothing to turn around the crisis in confidence and events like Irene only provide more fuel for the negative feedback loop that continues to infect much of the globe.                     

Street Bytes

--The Dow Jones rose 4.3% to 11284, while the S&P 500 gained 4.7% and Nasdaq soared 5.9%.

--U.S. Treasury Yields

6-mo. 0.02% 2-yr. 0.19% 10-yr. 2.19% 30-yr. 3.53%

Yields on the longer end of the curve rose a bit as money flowed back into equities, despite a poor jobless claims number and the GDP revision.

--Walt Mossberg / Wall Street Journal…on the resignation of Apple’s Steve Jobs.

“Mr. Jobs is a historic business figure whose impact was felt far beyond the company’s Cupertino, California headquarters, and who was widely emulated at other companies. And now, for the first time since 1997, he won’t be CEO….

“CEOs resign every day, so why is this one so meaningful?

“Most people are lucky if they can change the world in one important way, but Mr. Jobs, in multiple stages of his business career, changed global technology and media in multiple ways on multiple occasions. And that changed the way people live.

“He did it because he was willing to take big risks on new ideas, and not be satisfied with small innovations fed by market research. He insisted on high quality and had the guts to leave out features others found essential and to kill technologies, like the floppy drive and the removable battery. And he has been a brilliant marketer, personally passionate about his products….

“(Today, Apple is) the most financially valuable and influential technology company in the world, whose every product is eagerly anticipated, snapped up quickly by consumers, and aped by competitors, even though they are often priced higher than rival devices.

“While CEO of the revived Apple [post-1997], he introduced the dominant digital music player, the iPod, and created the most successful digital media service, iTunes.  He introduced the first super-smartphone, the iPhone, and the only truly successful tablet computer, the iPad, which is in the process of replacing the laptop, at least in part. He built the world’s largest app store. One almost forgets that he built a phenomenally successful chain of retail stores, too.

“Jobs has dramatically changed the mobile phone industry, the music industry, the film and TV industries, the publishing industry and others.”

As Ronald Reagan would have said, “Not bad…not bad at all.”

--Needless to say the insurance industry is on pins and needles with Hurricane Irene. Many of us face inevitable hikes in our insurance premiums if the storm doesn’t veer right after slamming North Carolina. If it does a direct hit on heavily populated Long Island, for example, who knows what the ultimate cost would be.

One issue that could create big problems is the fact at least 10 of the states in Irene’s path have insurance pools with far more potential exposure than assets. So you as an auto insurance holder could get dinged big time to pay for someone else’s hurricane claim; at least that’s the way it works in Florida. Reinsurance provides just a minimal buffer if the worst case scenarios prevail.

[Thankfully, as I go to post, Irene continues to weaken some.]

--As reported by Bradley Keoun and Phil Kuntz of Bloomberg:

“Citigroup and Bank of America Corp. were the reigning champions of finance in 2006 as home prices peaked, leading the 10 biggest U.S. banks and brokerage firms to their best year ever with $104 billion of profits.

“By 2008, the housing market’s collapse forced those companies to take more than six times as much, $669 billion, in emergency loans from the U.S. Federal Reserve. The loans dwarfed the $160 billion in public bailouts the top 10 got from the U.S. Treasury, yet until now the full amounts have remained secret.

“Fed Chairman Ben S. Bernanke’s unprecedented effort to keep the economy from plunging into depression included lending banks and other companies as much as $1.2 trillion of public money, about the same amount U.S. homeowners currently owe on 6.5 million delinquent and foreclosed mortgages. The largest borrower, Morgan Stanley, got as much as $107.3 billion, while Citigroup took $99.5 billion and Bank of America $91.4 billion, according to a Bloomberg News compilation of data obtained through Freedom of Information Act requests, months of litigation and an act of Congress.”

A report by the Federal Reserve Bank of New York in February said the central bank netted $13 billion in interest and fee income from the programs.

Republican Congressman Walter B. Jones of North Carolina perhaps sums up the attitude of many of us.

“Why in hell does the Federal Reserve seem to be able to find the way to help these entities that are gigantic? They get help when the average businessperson down in eastern North Carolina, and probably across America, they can’t even go to a bank they’ve been banking with for 15 or 20 years and get a loan.”

Of course this all screams out for a further increase in capital and liquidity requirements. Kenneth Rogoff, the ‘hottest’ economist of the moment for calling the sovereign debt crisis, said regulators are “not going to go far enough to prevent this from happening again.”

Some argue that the big banks, knowing they could access this heretofore secret Fed window, took on far more risk as a result.

--UBS, Switzerland’s biggest bank, was the latest to announce it would be cutting its workforce by some 3,500, bringing the number of job cuts by European banks in just the past month to 40,000; HSBC having stated it would be eliminating 30,000 (though adding 15,000 over time, if I remember correctly, specifically in emerging markets).

--Goldman Sachs CEO Lloyd Blankfein hired a prominent criminal defense attorney, Reid Weingarten, as investigators are likely to interview Goldman execs as part of the Justice Department’s ongoing probe into the sale of mortgage-backed securities at the height of the bubble. Off with his head!

[The New York Post’s John Crudele believes Blankfein lawyered up due to the Rajat Gupta-Raj Rajaratnam insider-trading situation, when Gupta was a member of the Goldman board.]

--The biggest wheat-producing region in Kansas, the southwest and south-central parts of the state, had the least precipitation on record the first seven months of the year, just 4.3 inches, and needs 9.4 inches to break the drought, experts say.

In Texas, the biggest winter-wheat grower next to Kansas, 99.9 percent of the state is suffering from drought, according to the Univ. of Nebraska’s U.S. Drought Monitor.

Oklahoma has had the driest 10-month period on record and July was the hottest month ever for the state. No, I have not contacted my farmer friends on the Panhandle since they said they were hanging in there about eight weeks ago. I want to help them, but they are a proud people and wouldn’t want it. So, maybe this fall I just show up at their door, as I’ve done before. Can’t turn me away then! 

--Google has agreed to pay a $500 million fine for publishing online advertisements from Canadian pharmaceutical outfits selling illegal drugs to U.S. consumers. The $500 million represents the firm’s revenues from the ads and the revenues generated from the sale of the drugs, according to the Justice Department. By paying the fine, Google avoided criminal prosecution.

--It is estimated that high-frequency traders have accounted for 75 percent of recent U.S. equity volume, according to Wedbush Securities, which monitors such things. 75!

--Defense aerospace giant Northrup Grumman is looking to eliminate 500 jobs through a voluntary buyout program. California will take the brunt of the losses. Last September Northrop eliminated 500 other positions. In January, Boeing slashed 900 from a Long Beach plant building cargo jets.

--I’ve said perhaps the best barometer on the health of the Chinese economy is the casino take in Macau and on Monday, casino shares took it on the chin over fears of weakening demand towards the end of the year. I’m now anxious for the September-October results in particular.

Meanwhile, Chinese officials have been open in saying the crisis in euroland “will lead to a decline in real demand that will have a far-reaching impact on our country’s real economy,” wrote economists at the China Development Bank.

--In Ireland, it’s now commonly accepted that home prices are down 50 to 60 percent from their peak. The Irish Independent noted this week that luxury homes on some of the better golf courses are off over 70 percent! In fact in one case, an estate called Winterwood at Adare Manor, the price has been slashed 76 percent and everyone agrees that at about $4.3 million it is still too high to sell. Many of Ireland’s now bankrupt developers built the biggest homes for themselves.

--With the drop in equity markets this summer, pension funds have taken a hit after a solid recovery off the March 2009 lows. But in Ireland, a leaked confidential document presented to Finance Minister Michael Noonan reveals “about 75 to 80 percent of defined-benefit plans are now technically insolvent, with the total deficit estimated to be about $21 billion.”

--Did you see the single-seat, ultra-frugal, zero-emission electric car that Volkswagen plans to offer at some point, now in the concept stage? Very, very cool. Great idea. Perfect for short commutes…though not for the highway.

--As the Wall Street Journal points out, it hasn’t been a good year for PIMCO’s Bill Gross and his flagship Total Return Fund, the world’s biggest, as it ranks just 157 out of 179 in its Lipper category for year-to-date performance through Wednesday; owing in no small part to his bearish bet on Treasuries for much of the year. On the other hand, it’s not like it’s down for 2011, either, and holders should stay the course for the long term.

--Gold went on an incredible roller coaster this week as the price spiked to an all-time high of $1917 during the day on Tuesday before reversing and plunging $200, intraday, and then rallying back about a $100 before finishing the week at $1799. 

One potential trigger for the huge decline, aside from the recent parabolic run upwards, was the news the SPDR Gold Trust had become the largest exchange traded fund, surpassing the SPDR S&P 500 ETF, at least a short-term sign of a top and perhaps irrational exuberance. Otherwise, I’m totally agnostic on the topic.

But here’s one consequence of the historic, multi-year rally in the precious metal.

“That stunning rise in the price of gold is having a ripple effect: A rash of jewelry store robberies, street muggings and home burglaries.   Now, merchants are stepping up security and police are warning everyone against flaunting their bling…

“So far this year, gold chains have been snatched from the necks of at least 110 people during street robberies in South L.A….

“Criminals are also targeting cash-rich gold buyers, setting up appointments to sell gold but then robbing buyers at gunpoint when they arrive, police said.”

--So last Saturday I wrote that the striking Verizon workers were pretty stupid, seeing as they were lucky to have jobs in the dying land-line side of the business. Well, late Monday they got religion and agreed to go back to work while negotiations continue over health-care costs and pension contributions. 

--Shares in Heineken fell sharply this week on word from Europe’s top brewer that demand both there and in the U.S. would remain “challenging” this year. In the U.S., at least, it’s a time for ‘domestic,’ not ‘premium.’ All of you know this. 

Foreign Affairs

Libya: John Podhoretz / New York Post

“Barack Obama has had two pieces of good news – and really, just those two – to present to the American people this year. The first was the killing of Osama bin Laden. The second is the overthrow of Moammar Gaddafi in Libya.

“He can fairly and truly claim credit for both. The first came as a direct result not only of his final order but as a result of a decision to use and act on intelligence gathered in ways he once deemed unacceptable.

“The other came – though surely months later than might have been the case – as a result of his decision to commit U.S. forces to the effort against Gaddafi.

“This surely was not the record Barack Obama expected to run on when he sought reelection in 2012.”

“Gaddafi’s fall is the best development yet from the Arab Spring: Americans will not soon forget that he was responsible for the bombing of Pan Am Flight 103, which killed 270 people, including 189 Americans. The sooner he faces justice, the better.

“It’s also sure to send chills down the spine of Syria’s Assad, who’s been clinging to power for five months via a brutal crackdown on pro-democracy demonstrators.

“But it’s not at all clear what comes next for Libya. The country doesn’t have any real institutions without Gaddafi’s name plastered on them, and what little Washington knows about the rebels who form the Transitional National Council, now preparing to assume power, isn’t comforting.

“They come from a patchwork of tribes and have strong Islamist elements among them. The past six months of fighting haven’t remotely prepared them for the challenges ahead.”

Senior NATO officials expressed relief at the fall of the Gaddafi regime, though the five-month campaign encountered significant problems. At the same time, no alliance aircraft or personnel were lost, nor did it violate the UN mandate it was given. It’s just that it took far longer than defense planners had expected to topple a regime with such puny military assets.

“A dictator with American blood on his hands is about to be overthrown by a popular revolt invoking democratic principles. Not a single American has died in the effort, and the victory would not have been possible without U.S. air power, intelligence and targeting as part of NATO. A long-oppressed people now has a chance to chart a freer future, a fact that is clear from the rejoicing in Benghazi.

“Rather than wring our hands about the dangers ahead, now is the time to applaud the bravery of the Libyan people and help them build a better country. One way to start would be to respect what the rebels have accomplished and respond to their requests for assistance, rather than trying to dictate how they should act….

“The danger of tribal reprisals in Tripoli is real, and President Obama was right to urge the rebels to pursue ‘reconciliation.’ But America’s foreign policy elites have also so far misjudged the rebels, who have shown impressive persistence and coordination in maintaining a six-month military campaign. They didn’t turn on each other and they didn’t turn out to be a stalking horse for al-Qaeda, despite the claims of many on the American political right.”

While I agree with much of the above, I would just say to the Journal editorial board, “Wait 24 hours.” No doubt the removal of Gaddafi is terrific, but the new threats are not to be dismissed. The U.S. Defense and State Departments on Wednesday said Libyan chemical warfare materials and other armaments do not face imminent security breaches after the collapse of the Gaddafi regime, which is an absurd statement! How do they know? When asked if the facilities housing chemical agents, such as mustard gas, were secure, a Pentagon spokesman told the press, “yes.” Then he provided no details. I hardly think we have special forces on the ground there guarding same or this would have come out by now, and the same spokesman said there was no intention to dispatch U.S. military personnel to Libya. So, again, how the heck do we know everything is secure?

What we do know is that potentially “thousands” of anti-aircraft weapons have probably already been smuggled out of the country. One or two used against commercial aircraft by terrorists could tip the incredibly fragile global economy into depression.

[On Friday, the Defense Department announced it had hired a contractor for Libya who specializes in tracking down shoulder-fired missiles. Good luck.]

Remember, the same rebels who will ultimately secure the chemical stockpiles could be some of the same rebel elements that let Gaddafi’s sons get away when the West had been told they were arrested.

Amnesty International is already citing both sides in the conflict with abuse, including allegations of violence by rebels against African migrant workers accused of being mercenaries. Some appeared to have been burned to death. Saturday’s New York Times has further stories of atrocities and score-settling in Tripoli.

As for Libyan oil output, 1.6 million barrels a day before the start of the civil war, it could take years before we see such levels. The infrastructure was badly damaged in the fighting so it’s not a matter of just flipping a few switches to get the oil flowing again.

Israel / Egypt / Palestine: Tensions have been greatly ratcheted up in the region following days of conflict between Hamas and Israel, with Hamas firing rockets from Gaza, Israel retaliating, and a war of words between Israel and Egypt over the killing of some Egyptian soldiers last weekend as Israel chased Hamas terrorists across the Egyptian border in Sinai.

Amr Moussa, the former secretary-general of the Arab League and current favorite to be Egypt’s next president said, “Israel should know that the era in which our sons are killed without a harsh response on our part is over for good.”

Forget Libya, those were undoubtedly the most important words spoken all week, seeing as how Egypt’s upcoming parliamentary elections, now slated for November, coupled with the presidential race a few months after could lead to a drastic change in Egyptian foreign policy when it comes to Israel and a peace between the two since 1979. Israel is increasingly isolated, while for its part, Washington has warned Cairo that any change in the existing treaty will result in drastically reduced U.S. aid for Egypt.

In the Gaza conflict, there have been two rounds of fighting, followed by ceasefires. Including the Egyptian soldiers, roughly 40 have been killed on all three sides thus far, by my best calculation as I go to post. Israel has expressed satisfaction with its retaliatory operations in Gaza.

Syria: Despite the international condemnation he is facing, President Bashar Assad said he was “not worried” and warned against foreign military intervention. The crackdown continues as five protesters are killed here, five killed there…it just goes on and on. The protesters are nonetheless showing incredible courage.

Iran: State broadcasting said the transferring of centrifuges to Iran’s second uranium enrichment facility at Qum is underway. In June, the government announced its plans to move the manufacturing of 20 percent-enriched uranium to Qum and to boost generation by threefold that could help Tehran quickly produce weapons-grade material. Western delegations to the International Atomic Energy Agency are considering a push to have Iran referred back to the UN Security Council for possible action, though this likely wouldn’t come before November. The Security Council has already hit Iran’s nuclear program with four sanctions resolutions that Iran has ignored.

On a different matter, Iran supposedly cut funds to Hamas after the Islamist movement failed to show public support for Syria’s Assad, which has thrown Hamas into a liquidity crisis. Hamas’ two main sources of funding are Iran and Egypt’s Muslim Brotherhood.

Lastly, two American men arrested more than two years ago while hiking the Iraq-Iran border were suddenly sentenced to eight years in prison on charges of espionage after the rumor had been they’d be released. I have little sympathy for them and there is growing evidence that the calls by the U.S. State Department to release the two only hurt their cause as Iran can now use them as bargaining chips down the road if need be.

Lebanon: Hizbullah is increasingly being targeted from all sides. The West is going after patrons Syria and Iran, for different reasons, while four members of Hizbullah have been fingered by the Special Tribunal for Lebanon examining the 2005 assassination of former Lebanese Prime Minister Rafik Hariri. Additionally, there are now reports that current Prime Minister Najib Mikati (Hizbullah toady) could be the target of U.S. sanctions if the White House and State Department are able to tie him directly to the family of Syrian President Assad, Mikati having substantial business interests in Syria.

But is it enough to totally isolate Hizbullah? Does Hizbullah opt to lash out against Israel in response? Does it actually gain support within Lebanon as some view attacks on Hizbullah as being against the entire country?

Iraq: Turkey’s military said its air strikes on suspected Kurdish rebel bases in northern Iraq killed 100 and warned of further attacks if the Kurds didn’t cut the crap. Good. Not a big fan of the PKK, the Kurdish rebel group.

Japan: Prime Minister Naoto Kan announced Friday he is resigning after a pathetic 15 months in office in which he totally mishandled the nuclear crisis tied to the March 11 earthquake and tsunami. This guy was in over his head, yet another bumbling fool that this nation is good at producing…bureaucratic hacks. 

On Monday the ruling Democratic Party of Japan will pick a new leader and former Foreign Minister Maehara, a China hawk, is viewed as the front-runner to be the sixth prime minister in five years. Naoto Kan’s approval rating, by the way, had plunged to below 20% as recovery efforts from the triple disaster have lagged. Earlier in the week, Moody’s Investors Services cut its rating on Japan’s government debt a notch, Japan having first lost its AAA-status in 1998.

China: In a new report immediately criticized by the People’s Liberation Army, the Pentagon said China continued to target Taiwan with 1,000 to 1,200 ballistic missiles, and that the PLA continues to upgrade the arsenal. The report stated in part:

“The PLA seeks the capability to deter Taiwan independence and influence Taiwan to settle the dispute on Beijing’s terms. In pursuit of this objective, Beijing is developing capabilities intended to deter, delay, or deny possible U.S. support for the island in the event of conflict. The balance of cross-Strait military forces and capabilities continues to shift in the mainland’s favor.”

The official Xinhua News Agency fired back: “For many in China, it is weird that the Pentagon, whose expenditures reached nearly $700 billion and accounted for over an appalling 40 percent of the world’s total in 2010, routinely points its finger at China. The 94-page report, as usual, interferes with the internal issue of China by making willful comments on the situation across Taiwan Straits.”

Meanwhile, the White House is going to cave to China and not deliver 66 new F-16 fighter jets to Taiwan. This whole deal goes back to the Bush administration, though there is talk in the U.S. Senate of trying to circumvent the president on this.

A respected magazine here reported that workers found a crack in an axle on a high-speed rail train made by China’s CNR Corporation, a claim the state-owned company denied; this after the same company withdrew 54 trains from the Beijing to Shanghai link, with the magazine speculating that cracked axles were the “real reason” behind the recall. Obviously, a cracked axle could lead to a break that causes a derailment.

Speaking of the high-speed train project, however, despite the crash near Wenzhou, and resulting mandated lower speeds, passenger traffic has been heavy and there is a good shot the government will meet its initial goal of about 70 million passengers a year.

And the state-run Global Times reported that more than 40,000 reservoirs around the country have been in use longer than their design life and are poorly maintained. As a result, more than 25 percent of China’s cities and vast rural areas are at threat from potentially devastating floods if dams break. The government is speeding up efforts to make repairs. Problems at the controversial Three Gorges Dam project lead the list. The main threat to reservoirs would be from an earthquake or a large typhoon.

North Korea: The U.S. and South Korea are highly skeptical about the offer made by North Korean leader Kim Jong Il to freeze nuclear weapons development after international talks on his nation’s atomic activities have been restarted. Kim made the offer after a rare summit with Russian President Medvedev. Kim is really just desperate for more aid for his starving country. The U.S. and the South insist Kim commence denuclearization before the six-party talks resume.

Russia: The aforementioned Medvedev’s approval rating fell to 63 percent, the lowest since he took office, according to the definitive Levada Center survey. Prime Minister Putin’s remained at 68 percent. While these seem high by western standards, at the same time only 36 percent of Russians believe the country is headed in the right direction.

But Russia, and the U.S., faced a bit of a disaster this week as an unmanned Progress supply ship bound for the International Space Station failed to reach its planned orbit Wednesday, with pieces then falling on Siberia in a “thunderous explosion,” according to the AP. There were no immediate reports of any casualties on the ground.

This was the 44th mission for Progress and the first to have a problem, but it points out just how dependent the world now is on the Russian space agency. With the end of the space shuttle program, the U.S. is relying on the Russians to deliver our payloads and that of the ISS until we get our act together. The next flight with a replacement astronaut crew was scheduled for Sept. 22 but has now been suspended pending an investigation. The ISS does have ample supplies, we are told, with the last shuttle mission delivering sufficient food stores to maintain a crew for a year. Japan and Europe are also planning their own freighter missions early next year.

Back to politics, Valentina Matviyenko, the Governor of St. Petersburg (appointed awhile back by Vladimir Putin) is now the third most powerful politician in Russia, and most powerful woman, after winning a fraudulent election that puts her on a path to become the new Speaker of the Federation Council. Matviyenko won “95 percent” of the vote as authorities brought out clowns to entertain voters and give out ice cream, while inside the polling stations free medical exams were given, including checkups for pet dogs. You see, there was no real opposition as they weren’t given any notice of the vote! Matviyenko didn’t even announce her candidacy in time, and then apologized, saying she was on vacation.

Boris Nemtsov, the most prominent opposition leader these days, called the election “a 100 percent fraud.” He was later arrested.

But wait…there’s more! Yevgeny Dushko, the mayor of a popular tourist destination for Russians (Sergiyev Posad…just north of Moscow), was killed gangland style in a murder reminiscent of the 1990s. He had enemies in the construction trade, it appeared.

Finally, in a survey of 13 European countries by the Hamburg-based Foundation for Future Studies, Russia was ranked worst among those asked the question if they were happy with their lives, with only 37 percent answering affirmatively. Compare this to Denmark, where 96 percent said they are happy. 

France: Dominique Strauss-Kahn became a free man after New York prosecutors dropped the attempted rape case against him, but his thoughts of running for the presidency of France were long dashed. His Socialist Party allies cheered the dismissal of the case but no way could he run even if he wanted to because of all the dirt that came out on his past following his arrest; and it’s not like he denied having sex with the maid.   

Nigeria: The Islamist group Boko Haram is undoubtedly responsible for the bombing of a UN building in the capital of Abuja on Friday, killing 18 at last count. The building housed Unicef and was attacked when a car drove into the lobby, detonating the bomb. The place was apparently well fortified but the car drove in through the exit. This is the first time Boko Haram has gone after a foreign target and is a highly worrisome development.

Mexico: I’ve written how awful it was for the business community, and the people, that the drug war had spilled into Monterrey, a key industrial city, but the situation in terms of the future worsened considerably on Thursday with the murder of at least 53 in a casino there as gunmen spread gasoline and ignited a fire that trapped gamblers and employees. President Calderon called the attack barbaric, which was probably the result of an extortion plot by one of the gangs. It was just last month that gunmen killed 20 in a bar in once-peaceful Monterrey.

Canada: Opposition leader Jack Layton died of cancer less than four months after the general election that propelled his party into prominence. He was just 61. Prime Minister Stephen Harper’s hand is strengthened further with Layton’s passing.

Random Musings

“The rising impatience with the leadership of President Obama was epitomized on Aug. 8 in the middle of one of the now-habitual Wall Street roller coasters. His speech on the economy was 53 minutes late. What showed on TV screens was an empty White House podium, an image suggestive of the absence of leadership. When the president did speak, the best he could come up with was ‘We’ve always been and always will be a triple-A country.’ The market’s response was a Bronx cheer, a drop of another 300 points.

“Mr. Obama seems unable to get a firm grip on the toughest issue facing his presidency and the country – the economy. He now asserts he is going to ‘pivot’ to jobs. Now we pivot to jobs? When there are already 25 million Americans who are either unemployed or cannot find full-time work? Does this president not appreciate what is going on?

“Fewer Americans are working full-time today than when Mr. Obama took office. We have lost over 900,000 full-time jobs in the last four months alone, and long-term unemployment is at a post-World War II high. The public’s faith in his ability to deal with the economy has plunged. As Doyle McManus of the L.A. Times put it, ‘Can this president persuade voters to let him keep his job when so many have lost theirs?’….

“Since the president is the one who represents all of America and all Americans, the buck stops with him rather than with the Congress. It is the president’s job to offer a coherent program for the twin threats of a static economy and an unsustainable explosion of our debts and deficits. But the only core issue on which he took a clear position in the recent debt-ceiling negotiations was that it would have to include new taxes on the wealthy – and he didn’t even hold to that.

“He made the politically tested and calculated statement that if you raise taxes on billionaires and millionaires you could solve the problem. This is not so. Even for those who support higher taxes on the wealthy, as I do, we must remember that we have an income tax system in which fully half the ‘taxpayers’ pay no tax at all, and in which the variety of loopholes cries out for a real reform of the tax code. Even if the government instituted a 100% tax on both corporate profits and personal incomes above $250,000 per year, it would yield enough revenue to run the government for only six months. Why? Because under Mr. Obama’s presidency, government spending has swelled to 24% of GDP from 18%....

“Many voters who supported him are no longer elated by the historic novelty of his candidacy and presidency. They hoped for a president who would be effective. Remember ‘Yes We Can’? Now many of his sharpest critics are his former supporters. Witness Bill Broyles, a one-time admirer who recently wrote in Newsweek that ‘Americans aren’t inspired by well-meaning weakness.’ The president who first inspired with great speeches on red and blue America now seems to lack the ability to communicate any sense of resolve for a program, or any realization of the urgency of what might befall us. The teleprompter he almost always uses symbolizes and compounds his emotional distance from his audience….

“Will voters be willing to give him another four years? Like many Americans who supported him, I long for a triple-A president to run a triple-A country.”

“Cruising white Midwestern hamlets in his black bus, Obama tried to justify not calling lawmakers back to D.C. by saying they’d just continue to bicker. But what does he think they’ll do in September? The truth is, he doesn’t want them back in the capital any more than they want to be back. It would have screwed up his vacation and upset Michelle, who already feels trapped in the Washington bubble.

“If Clinton wanted to be president 25 hours a day and W. wanted to be president four hours a day, Obama wants to be president for about 14 hours a day. And that’s fine, as long as you don’t look like you’re phoning it in when the country is dialing 911.”

“How could (Obama) not be depressed? He has made big mistakes since the beginning of his presidency and has been pounded since the beginning. He’s got to be full of doubts at this point about what to do. His baseline political assumptions have proved incorrect, his calculations have turned out to be erroneous, his big decisions have turned to dust. He thought they’d love him for health care, that it was a down payment on greatness. But the left sees it as a sellout, the center as a vaguely threatening mess, the right as a rallying cry. He thought the stimulus would turn the economy around. It didn’t. He thought there would be a natural bounce-back a year ago, with ‘Recovery Summer.’ There wasn’t. He thought a toe-to-toe, eyeball-to-eyeball struggle over the debt ceiling would enhance his reputation. The public would see through to the dark heart of Republican hackery and come to recognize the higher wisdom of his approach. That didn’t happen either.

“Nothing worked! And nothing’s going to work. He’s the smartest guy in the room, but he’s got the reverse Midas touch. Everything he touches turns to – well, unsatisfying outcomes.”

“Great leadership isn’t shaped in the absence of opposition but in the presence of it. Great leaders draw us together by our universal humanity; they galvanize the wills of the willing; they draw clarity for the spigot of chaos.

“But that is not how this president is performing at this critical moment, and people are growing increasingly unhappy with him. A Gallup poll released on Aug. 15 found that Obama’s approval rating had fallen to the lowest level of his presidency, and Gallup polls released a few days later found that the number of people not satisfied with the direction of the country and who disapproved of the president’s performance on the economy, budget deficit, job creation, education and foreign affairs had reached the highest levels of the administration.

“The country needs the president to rise to this crisis in word, spirit and deed. We need him to reach out of his nature and into the nation’s need. We are on the precipice. There’s growing concern that we may slip into a second, more painful recession. There is little optimism that the housing crisis will loosen its grip on the economy anytime soon. The unspeakable truth is that we may well be on the leading edge of a prolonged period of national stagnation, if not decline.

“A robotic Sustainer-in-Chief with an eerie inhumanity will not satisfy. At this moment, we need less valley and more mountaintop.”

--According to the unofficial record keeper of such data, CBS News radio reporter Mark Knoeller, at about the same stage in their presidencies, Bill Clinton had taken 47 days of vacation, Barack Obama 71 (including the just concluded one), and George W. Bush 180 days; “spanning all or part of” that time regarding the last two.

--According to a Washington Post/ABC News poll, President Obama still enjoys support among African Americans with 86 percent approving of his overall job performance. But I’m kind of shocked at the extent his support among Hispanics has plummeted from a high of 85 percent in April 2009 to just 49 percent this month, according to a Gallup survey.

--A Gallup poll of Republicans and GOP-leaning independents nationally has Texas Gov. Rick Perry with a huge 29 to 17 percent lead over Mitt Romney. Ron Paul is third at 13 percent and Michele Bachmann only takes in 10 percent.

[Meanwhile, former New York Gov. George Pataki is supposed to announce he is running for the presidency today in Iowa, begging for the umpteenth time the question, ‘Why?’]

--When I was in Iowa, what I heard from my conversations in the bars (where else do you think I’d be talking to people?) was the yearning for a real third party in 2012, though I just don’t see who could possibly lead the charge and win at least 20% of the vote and maybe 2 or 3 states, let alone results that are far better.

But as Patrick H. Caddell and Douglas E. Schoen wrote in the Wall Street Journal, the two being long-time pollsters, 51% of voters in a poll taken by Schoen’s group favored having a third major political party.

--Someone explain to me why Mitt Romney thought it was a good idea to bulldoze his 3,009-square-foot home facing the Pacific Ocean in La Jolla, Calif., and replace it with an 11,062-square-foot home…now! The San Diego Union-Tribune reported that Romney has filed an application with the city for a coastal development permit.

I know, I know. Romney defenders would say he has been consolidating his real estate holdings, selling off some other properties, and he wants room for his kids and grandchildren, blah blah blah. The appearances are nonetheless awful.

--California Democratic Congresswoman Maxine Waters, at a community summit in Inglewood, Calif., said, “I’m not afraid of anybody. This is a tough game. You can’t be intimidated. You can’t be frightened. And as far as I’m concerned, the tea party can go straight to hell.”

--What Tuesday’s east coast earthquake pointed out in stunning fashion is how truly unprepared we are in the event of a terror attack when it comes to cellphone coverage. It’s pathetic that within minutes of the quake hitting, many calls couldn’t go through due to system overload.

--Ten years after 9/11, there have been 13 publicly known attempted terror attacks in New York City; 1,000 police officers are devoted to counterterrorism; 3,000 NYPD cameras are planned for lower Manhattan and midtown (more than 400 at the World Trade Center site); 238 license plate readers; 670 police officers to be permanently assigned to the 16-acre WTC site in the next few years. [Ian Thomas / Crain’s New York Business]

--Sign of the Apocalypse: It’s one thing to have Irish gangs spearheading the illegal traffic in rhino horns, as has been previously reported, but the New York Times’ Sarah Lyall adds that thieves are now taking the horns off rhinos in museums! As many as 30 thefts, solely for the horns, just snapped off, have been reported in Europe this year, including from auction houses, antique dealerships and homes as Asia’s growing demand for rhino horns, ground into medicine with dubious purposes, is met. “Man” continues to plummet on the All-Species List.

Gold closed at $1797
Oil, $85.37

Returns for the week 8/22-8/26

Dow Jones +4.3% [11284]
S&P 500 +4.7% [1176]
S&P MidCap +6.1%
Russell 2000 +6.1%
Nasdaq +5.9% [2479]

Returns for the period 1/1/11-8/26/11

Dow Jones -2.5%
S&P 500 -6.4%
S&P MidCap -7.9%
Russell 2000 -11.7%
Nasdaq -6.5%

Bulls 40.9
Bears 33.3 [Source: Chartcraft / Investors Intelligence… big pop in bears]

Have a good week. I appreciate your support.

Brian Trumbore

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