Week in Review

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Week in Review

10/08/2011

For the week 10/3-10/7

Europe, Washington and Wall Street

I was in Ireland for much of the past week, my 19th or so trip there since 1989, and I spent my time, as I do almost every trip to the Emerald Isle these days, in Lahinch, a little place along the western coast in County Clare. It’s always fun to golf a few rounds at the world famous course of the same name (especially if it doesn’t rain…and the weather cooperated), catch up with old friends and make new ones in the clubhouse and in the many pubs in town.

I’ve just about seen it all in Ireland over the years, especially when it comes to the economic rollercoaster the Celtic Tiger has been on over this time, from the depths of despair in the late ‘80s to early ‘90s, and then the surge, precipitated by a slashing of the corporate tax rate, incidentally, that spurred investment by the likes of Dell and Intel. But, as I’ve well-documented in these pages with every trip, having seen the bubble develop, fueled by no money down mortgages, far worse than even in the United States, and humongous levels of debt, I began writing years before the crash that Ireland was headed for a big fall and sure enough it came.

Today, Ireland is a mess, one of the three euro nations to require a bailout along with Greece and Portugal. The government insists it’s on the right path, and the International Monetary Fund says it is encouraged, but Ireland’s requirements to continue to shore up its banking system are massive and officials have long lined up to be the first to tap the hoped for European Financial Stability Fund (EFSF) should Slovakia and Malta’s parliaments become the last of the 17 euro currency nations to approve the 440 billion vehicle next week. [If either parliament turns the EFSF down, well then we have quite a story for next time.]

Ireland wants to be the first to exit the bailout and fund its needs in the private market but this would require that its interest rate be cut by the European Union / European Central Bank in the interim.

That’s the optimistic side. The reality is that the crash in the housing market continues. Across the road from Lahinch Golf Club, there are about ten homes everyone who’s played the course is most familiar with; modest houses that at the height of the bubble went for $800,000 to $1 million. Today, various sources told me you’d be lucky to get $400,000. For the past few years I’ve been telling you similar stories around the country, from Dublin to some of Ireland’s newer golf resorts, where home buyers have been absolutely slaughtered.

But it’s not just homeowners. Commercial owners have been hit equally hard as virtually everyone levered up, big time. The debt loads of some I know well are crushing.

There are few things in the world worse than having a ton of debt. I was there myself in the late ‘80s, until an old employer saved me and launched my second Wall Street career. Since I got out of debt, aside from a home mortgage (which I no longer have) and a car payment, I’ve had zero debt for about 20 years. I was tempted from time to time to get a big loan to juice StocksandNews (or in the early days a venture capital investment), but instead whatever I’ve done has been paid out of cash on hand. Undoubtedly it’s hurt the potential of the site, but I’ve slept better and at the end of the day that’s mattered more to me.

I bring up this personal anecdote because I’ve seen the Irish just pile debt on with not a care in the world and like some other places in the world, including the U.S., many of the personal stories are later tragic.

Ten minutes up the coast from Lahinch are the spectacular Cliffs of Moher, which rise to a peak of about 700 feet. On just about every trip to town I’ve found time to spend at least a few moments at a place that is now under consideration for the “New 7 Wonders of Nature” contest being conducted worldwide through Nov. 11. There’s a ledge anyone who has been there is familiar with and in the old days, fools (almost always teenagers), would hang off it, seemingly  oblivious to the dangers. Today, though, they’ve tightened restrictions on where you’re allowed to walk but on Tuesday, there I was, staring across the chasm at the ledge with a couple just walking within inches of it, taking pictures, and my fellow spectators and I kept telling each other, “One gust and they go over.”

Throughout its history, though, the Cliffs of Moher has held a dark secret among the locals. It’s the scene of many a suicide, a rather spectacular way to go if you get that desperate. So I went back into Lahinch after my walk at the Cliffs, hit the Cornerstone Pub and Restaurant (a terrific spot) and mention to my new best friend who works there about the couple on the ledge and how I was well aware of the secret of the Cliffs. So she proceeded to tell me that three weeks ago, a friend of hers was in his boat in the area when he found a body. He notified police who then told him it was the fifth victim that week! All suicides. The economic pain is that great. Needless to say it’s hushed up as much as possible because this isn’t exactly the way you want to promote yourself in the “New 7 Wonders of Nature” contest!

It’s so sad, but Ireland has a long ways to go, as does much of Europe, the U.S. and elsewhere before the all-clear can be given.

And so this coming week is another crucial one. Not only is it hoped the EFSF gains final approval, but on Sunday, French President Nicolas Sarkozy and German Chancellor Angela Merkel meet to decide what to do about Greece and the other struggling sovereigns, as well as Europe’s sick banks. The two are also to set an agenda for the European Union summit on Oct. 17-18, but in between, euro zone ministers are to decide whether Greece has done enough to warrant receiving the next 8 billion euro from its first bailout package.

Early in the week, Merkel told reporters that “Time is running out” to establish if recapitalization for the banks is necessary, but that banks first needed to seek capital on their own and from national governments.

“If a country cannot do it using its own resources and the stability of the euro as a whole is put at risk because the country has difficulties, then there’s the possibility of using the EFSF.” But only then.

Sarkozy, though, wants to be able to access the EFSF immediately to recapitalize the banks. French banks, particularly the top three (BNP Paribas, Societe Generale and Credit Agricole) have a collective sum of $672 billion in debt to the PIIGS (Portugal, Ireland, Italy, Greece and Spain). Sarkozy’s main concern is losing France’s AAA credit rating, especially with an election coming up, but Merkel insists the EFSF is to be used only as a last resort. The thing is the banks themselves don’t want to create a panic, or even a “run,” so they keep saying “No problemo” when everyone and their mother knows they need at least 200 billion euro injected into them, as the IMF estimates. Plus, you already had one Belgium bank, with a heavy presence in France, Dexia, suddenly requiring guarantees from the two governments to protect depositors and then split the bank into good and bad assets, this because Dexia is loaded with Greek debt and can’t afford the writedowns required in Greek Bailout I (which will probably be increased).

And thus you see another big problem. That’s a 200 billion euro minimum for just some of the bigger banks. Heck, Ireland says it still needs over 80 billion euro to satisfy its banking needs and the IMF says Ireland is doing all the right things! Ergo, once again it comes down to the original idea I’ve written of that the EFSF’s 440 billion euro was enough to backstop issues involving Greece, Ireland and Portugal, but you needed a second EFSF facility of at least 500 billion to backstop Italy and Spain, between banks and sovereigns. Some in Europe are still working on a plan to leverage up the first EFSF (again, assuming Slovakia and Malta approve of the 440 billion in the first place…they all have to contribute to the pool, remember) to the tune of 500 billion euro or so.   But as I noted last time, if you really want to stop the crisis, aside from economic growth you want far more money on the table than could be reasonably required in order to restore confidence in total and those figures reach up to 4 trillion. All of which, each step of the way, requires parliamentary approval among the 17 euro nations. To beat a dead horse, you’ve seen how difficult the first 440 billion has been. Politically, just continue to multiply the degree of difficulty in taking the sums higher as taxpayers are the ones getting dinged more and more for, what? Freakin’ Greece?! As Dick Vitale would say, “Are you kidding me?!” 

One last thing on the Sarkozy-Merkel meeting. Merkel’s bottom line, today, is that investors need to prepare for Greece’s default, but that there has to be a way to keep Greece in the euro fold, while Sarkozy says Greece can’t be allowed to default in the first place because the pain on France’s banks would be extraordinary, the country loses the AAA, and he’s trounced at the polls (though he’s likely to be anyway).

Late on Friday, Fitch credit rating lowered Italy’s and Spain’s sovereign credit ratings a few notches to add to the suspense. Earlier, Moody’s slashed Italy’s debt rating over questions concerning the seriousness of its plans to reduce spending.

Also this week, U.S. Treasury Secretary Timothy Geithner told a congressional committee:

“Our direct financial exposure to (Europe’s governments) and their financial institutions is quite small, but Europe is so large and so closely integrated with the U.S. and world economies that a severe crisis in Europe could cause significant damage by undermining confidence and weakening demand,” as Geithner called for a more “powerful financial backstop” for European banks and governments.

The other day the European Central Bank, under the leadership of Jean-Claude Trichet, initiated bank lending facilities it had first instituted in 2008 to help out the banks with their short-term funding difficulties that are getting more severe by the minute. But Trichet held the line on the ECB’s 1.50% benchmark interest rate even though the euro nations aren’t growing anymore. Trichet wants to be able to say his legacy is that he kept inflation low, but the same legacy may also read ‘was there at the destruction of the euro.’

Contrast this with the Bank of England’s Sir Mervyn King, who not only held the line on Britain’s key rate at 0.50% for a 32nd straight month, but said:

“This is the most serious financial crisis we have seen at least since the 1930s, if not ever, and we are having to deal with very unusual circumstances but react calmly to this and do the right thing. The right thing at present is to create some more money to inject into the economy.”

At the same time, British Prime Minister David Cameron was saying he would stay the course with his nation’s aggressive austerity program. “I know that we can turn this ship around,” in admonishing those who pointed elsewhere for the right economic model, i.e., Brazil and China. “I say: We need to become more like us. The real us. Hardworking, pioneering, independent, creative, adaptable, optimistic, can-do. That’s the spirit that has made this United Kingdom what it is: a small country that does great things.” As the New York Times described, however, his speech received a “lukewarm reception.” 

I pegged Cameron’s austerity program as being the critical test for the rest of the world when he first introduced it. It still can be. Hold the course, Prime Minister. That said Britain revised second quarter GDP down to just 0.1% from 0.2%, while the first quarter’s was revised down to 0.4%. Unemployment is 8%.

Yes, austerity is biting all over, including in the U.S. when you look at tumbling government employment at the state, local and federal level. The euro zone manufacturing index in September hit 48.8, below the 50 dividing line between growth and contraction, and down from 51.5 in August. New orders in Europe fell to their lowest level in 27 months. Greece manufacturing contracted for a 25th consecutive month and strikes once again shut down much of the country over the latest plan to “suspend” 30,000 state workers, though at least violence has been minimal thus far. The “I won’t pay” movement in Greece rules the day, as in “I won’t pay taxes,” yet another reason why I find it hard to have any respect for these people. 

“A fragmented, nation-by-nation approach to recapitalization will not work this time….France and Belgium may be able to stand behind Dexia but supporting entire banking systems is beyond the capacity of many sovereigns. The EFSF, the euro zone’s bailout fund, must carry out simultaneous injections of capital into the region’s banks as soon as it can. Central banks must get into full fire-fighting mode, too. In particular, that means offers of unlimited two-year liquidity from the ECB.

“Above all, no amount of recapitalization would be enough to protect banks from a cascade of euro zone defaults. Nothing matters more than putting a firewall around the likes of Italy and Spain. Here, the news is bleak. Jean-Claude Trichet, the outgoing president of the ECB, describes this as the worst crisis Europe has faced since the Second World War; but the institution he runs is unwilling to respond in kind. It is reluctant to keep buying government bonds itself, and is unimpressed by suggestions that it should boost the EFSF’s firepower by lending to it. Politicians are contorting themselves to try to strengthen the EFSF without relying on the ECB.

“In 2008 governments were credible backstops for their banks and the Fed, the central bank at the heart of the crisis, was willing to do everything it could to create confidence. Now the sovereigns are the problem and the ECB’s help is limited and conditional. That is the real horror film.”

Washington and Wall Street

The economic news this week was better than expected and offered hope a double-dip recession could yet be avoided, though such optimism is solely contingent on what transpires in Europe over the coming weeks.

The September ISM reading on manufacturing was 51.6, above the 50.3 estimate, and the non-manufacturing service reading was 53.0, a slight dip from the prior month’s 53.3 but not bad. August factory orders were down, 0.2%, but then the September employment report was released and the economy added 103,000 jobs, except 45,000 were returning striking Verizon workers so in the end only slightly above the net 50,000 estimate when everyone agrees you need at least 125,000 job growth each month just to keep the employment rate where it is, and September’s was unchanged at 9.1%. But coupled with upward revisions for August and July, the report wasn’t a disaster as 137,000 private sector jobs were added, though we’ve all lowered our expectations so severely, it’s like having a baseball team go 77-85 and fans still feeling like the season was at least halfway entertaining, which is how us Mets fans treated the just concluded campaign. So is the same with economic numbers these days.

But you did also have solid auto sales for September, up 9.9%, and major chain store sales for the month were up a solid 5.1%; again, both certainly not the kinds of data you’d receive if the economy was in recession. It’s just that for many it continues to feel like one.

Most economists now believe growth could be 2% or thereabouts for the third quarter and as I’ve written recently, stocks can rally big at times in slow growth, muddle through environments. But unemployment would still remain high and without a resolution to the European crisis, any advances would be limited.

It’s now earnings season, though, and key companies like FedEx continue to be optimistic in previewing the action. Growth won’t be strong by any stretch, but it will be growth, it said. I’m not ‘short’ the market, as I keep telling you. I want good times. I want people to start getting jobs! It will do nothing but help my few personal investments, even the ones in China (and my rare earth minerals play in Kyrgyzstan, which sprung to life on Friday).

But we still need certainty in Washington on issues like tax policy and deficit reduction, and while President Obama pushes a $447 billion jobs bill that Democratic Senator Harry Reid says should contain a 5.6% surtax on those earning more than $1 million a year that would take effect Jan. 1, 2013. The millionaires tax would thus scrap Obama’s plan to raise taxes on those earning more than $250,000 a year; a level that even Sen. Chuck Schumer (D., N.Y.) said doesn’t make sense in high-cost states such as his own.

Fed Chairman Ben Bernanke was sharply critical of lawmakers during a congressional hearing Tuesday for pushing the U.S. to the edge of default last summer, and then proceeded to paint a gloomy economic picture, describing it as “close to faltering.” Bernanke then empathized with the anti-Wall Street protesters.

“Very generally, I think people are quite unhappy with the state of the economy and what’s happening. They blame, with some justification, the problems in the financial sector for getting us into this mess and they’re dissatisfied with the policy response here in Washington.

“On some level I can’t blame them. Like everyone else, I’m dissatisfied with what the economy is doing right now.”

At least progress is finally being made on trade bills with Colombia, South Korea and Panama. But at the same time there is a looming trade war with China on the horizon, a war some would say we’re already in.

“On the one hand, making the Chinese scapegoats for most of our economic problems is delusional. Their role in the financial crisis was modest. On the other hand, China’s predatory trade practices erode America’s industrial base and stymie the economic recovery. The Chinese do not believe in free trade or fair trade. They practice fixed trade – fixed to benefit them at others’ expense. What, if anything, can we do about that?....

“Both the George W. Bush and Obama administrations have pushed China to let the (undervalued renminbi) RMB increase enough to reduce its huge export surpluses. Negotiations have failed. True, the Chinese did permit the RMB to rise beginning in July 2005 but only at a pace that, given productivity gains, didn’t much change their competitive advantage. The only way to get them to do more is to threaten an increase in U.S. tariffs of 25% or more, (says one expert). The idea is to pressure China to revalue its currency.

“What’s at stake is not just the U.S. trade balance with China but the nature of the global trading system….

“No one should relish threatening China with a 25% tariff. It would be illegal under existing WTO rules; to save the postwar trading system, we’d have to attack it. This would risk an all-out trade war just when the world economy is already tottering. There’s no guarantee that China would respond as hoped. Initially, it might retaliate. Cooperation on other issues would collapse. Prices of Chinese exports (consumer electronics, shoes) that we barely make would probably rise. Other countries might adopt protective measures.

“All this is dangerous stuff. The policy’s only recommendation is that it might be slightly better than the alternative: condoning China’s ongoing assault on our industry. In the past, it’s been clothes and furniture; in the future, it will be cars and commercial aircraft. China’s policies assail other countries, too, and its trade surpluses destabilize the global economy. There’s already a trade war between them and us; but only one side is fighting.”

As for the Occupy Wall Street movement, just what is it? I see a lot of anti-Israel signs, some condemning drone attacks, signs to ban fracking, but the genesis was really to create a forum to raise the issue of wealth inequality in America. I see no leadership, no plan, no policy proposals, now union support, and the inevitable infiltration of agitators. I know some of the people joining the crowd appear to be well-intentioned, but for now I’m unimpressed. They also sleep late, something I totally don’t respect. But I was away much of the week and reserve the right to say far more on the topic next time after observing things more fully.

Street Bytes

--After a rough Monday, stocks staged a vicious last hour rally on Tuesday that set the tone for much of the rest of the week. Of course it was all about program/high-frequency trading, which is why much of what transpires on Wall Street, day to day, is such a joke. It’s frankly a sham. Overall, the Dow Jones rose 1.7% on the week to close at 11103, while the S&P 500 rallied 2.1% and Nasdaq gained 2.6%.

--U.S. Treasury Yields

6-mo. 0.03% 2-yr. 0.29% 10-yr. 2.08% 30-yr. 3.02%

--I posted Steve Jobs’ commencement speech from Stanford on my “Wall Street History” link. 

Editorial / Financial Times

“Hailed as a technology visionary, Jobs also represented a new phenomenon in the 1970s: the businessman as a pop culture hero, as recognizable and charismatic as a film star. Almost from the founding of Apple, at the age of only 21, he was propelled into the public eye as the maverick face of a liberating new technology culture.

“Jobs was not an inventor in the classic sense and borrowed, bought or merely popularized many of the ideas most closely associated with his company’s success. But his genius at anticipating what millions of consumers would want next from their digital devices, and at shaping the conditions that would create feverish excitement for each successive Apple advance, were unparalleled.”

“Isn’t it ironic that the know-nothings of the Occupy Wall Street protests so earnestly employ Steve Jobs-invented technology to attack the capitalist system of which Jobs was so important a part – and in which he was such a firm believer?

“The genius of Jobs…consisted not just of how he reshaped technology, information-sharing and social interaction.

“No, Steve Jobs had a sixth sense that told him what consumers wanted – and needed – long before they did themselves.

“As Nick Schulz of the American Enterprise Institute observed: ‘Jobs gave people products they didn’t know they wanted – and then made those products indispensable to their lives.’

“Thus was his impact on our daily life almost incalculable; think Thomas Edison, Henry Ford and John D. Rockefeller.

“And, in that spirit, he was an eternally optimistic, job-producing capitalist.”

“Leadership doesn’t have a secret formula; all true leaders go about things in their own way. It’s this ability to think differently that sets them apart – and that enabled Steve Jobs to create perhaps the most respected brand in the world.

“What leadership boils down to is people. Whatever your style, whatever your method, you need to believe in yourself, your ideas and your staff. Nobody can be successful alone – and you cannot be a great leader without great people to lead….

“In a 1997 marketing campaign for Apple, entitled ‘Think Different,’ Jobs said: ‘Here’s to the crazy ones. The misfits. The rebels. The troublemakers. The round pegs in the square holes. The ones who see things differently.’ I am proud to say that, in the accompanying montage, he counted me as one of them. I think it’s an attitude that’s shared by all leaders who make a difference – and it’s one of the reasons why, despite our vastly different styles, Steve Jobs was always the entrepreneur who I most admired.”

As for Apple shareholders, the market value has grown from about $5 billion at the end of 2000 to $350 billion today. Through September, Apple shares have risen the equivalent of 44% a year since 2000, while the S&P 500 has declined (or essentially flat if you include dividends). As the Los Angeles Times’ Tom Petruno noted:

“After adjusting for stock splits, an investor who paid $2,200 to buy 100 shares of Apple at its IPO price of $22 in December 1980 today would have 800 shares worth a total of $302,600.”

As for the future, Apple has $76 billion in the bank and immense challenges.

“Google wants to crush the iPhone with its Android system. Netflix wants to dominate the world’s living rooms, leaving iTunes behind. Facebook wants to be the window to the Internet, controlling just about everything. And now Amazon is jumping into the tablet business.”

Is the man Jobs appointed to replace him, Tim Cook, up to the task? The world is moving so fast in these arenas, we should know the answer by next June, I’m guessing. Cook’s initial debut on the investor stage, Tuesday, the day before Jobs’ death, was totally unimpressive according to analysts.

--As noted above, U.S. auto sales in September were stronger than expected. Chrysler’s were up 27.2% year-over-year, GM’s increased 19.7% and Ford’s were up 9%. Nissan’s also increased 25.3%. Toyota, however, saw sales drop 17.5% and Honda’s were down 8% even as September represented the first post-tsunami/quake month where their plants were running at full capacity.

The industry’s seasonally adjusted, annualized selling rate rose to 13.1 million, the best since April.

--The average rate on a 30-year fixed mortgage this week fell below 4.00% for the first time ever, to 3.94%. For those with high credit scores and the ability to put 20% or more down, what an opportunity (though hope you acted quickly). Meanwhile, the Census Bureau released figures that there were just 587,000 housing starts last year, vs. a bubble high of 2.1 million in 2005, an unprecedented decline.

--Nearly one-third of the unemployed – 4.5 million people – have had no job for a year or more, a record high…the disenfranchised.

--Canada’s unemployment rate in September fell to 7.1%, or two full points below ours. In fact, Canada has had a lower unemployment rate than the U.S. since October 2008. And they have some of the best beer in the world!

“Once the Obama administration’s paragon of a clean-energy future, Solyndra has gone bankrupt, taking a $527 million Energy Department-guaranteed loan with it. President Obama, however, has no regrets. ‘Hindsight is always 20-20,’ he told George Stephanopoulos of ABC News. ‘It went through the regular review process. And people felt like this was a good bet.’ Solyndra didn’t pan out, Mr. Obama conceded, but that’s the sort of risk the United States must take to compete with countries, such as China, that subsidize solar power.

“This answer, which Mr. Obama essentially repeated at a news conference Thursday, was unsatisfactory – in tone and substance. When a profit-making venture blows half a billion taxpayer dollars, the president should be more upset about it. Much of the criticism Mr. Obama is taking over Solyndra is political. But not all of it.

“The important lesson is that the government ‘is a crappy vc’ – venture capitalist – as then-White House economic adviser Lawrence Summers put it in an internal e-mail. Government can foster clean energy by subsidizing basic research…Subsidizing selected technologies or companies, by contrast, is a game that taxpayers often lose, as the history of boondoggles from synthetic fuels to the fast breeder reactor suggests….

“The problem is that bureaucrats are more likely to bet wrong because they are generally not full-time investment experts and have no skin in the game themselves….

“The lost $527 million, as well as the private capital drawn to the firm by the federal seal of approval, is money that now cannot be used for any good objective. Instead, the country just has a bigger pile of debt to pay back, with interest.”

Separately, it has come to light that the Obama administration was ready to hand Solyndra another taxpayer loan in the amount of $469 million last summer and the idea wasn’t shelved until October 2010. 

Jonathan Silver, the head of the loan program that rewarded the funds to Solyndra, is leaving the Energy Department. Energy Secretary Steven Chu said, “Under his leadership, the loan program has demonstrated considerable success.” The Nobel Prize-winning Mr. Chu thus becomes a candidate for “Idiot of the Year,” which would be a first.

--The average diversified stock mutual fund fell 17.4% in the third quarter, according to Lipper; the worst quarter since Q3 of 2008.

--According to a report by the Boston Consulting Group, 3 million jobs will be created in the U.S. by 2020 because of rising Chinese labor costs, or “re-shoring” of manufacturing activity lost to China over the past decade. Skeptics, however, say that China will always find ways to help its domestic industries.

Premier Wen Jiabao urged stronger support for cash-strapped small businesses.

“Smaller enterprises should be a priority for bank credit support and enjoy more tax preferences from the government,” Wen said, adding that banks should set targets for loans to small companies, reduce their cost of credit and allow a higher non-performing loan ratio.

“Small businesses play an irreplaceable role in creating jobs and boosting economic growth,” he added. “It is of overall and strategic significance to support their development.”

Small business evidently creates 80% of China’s jobs and produces 60% of its industrial output, as reported by Cary Huang of the South China Morning Post.

Separately, the non-manufacturing PMI for September was a solid 59.3.

My friend Josh P. says Yum Brands Inc. (think KFC and Pizza Hut) is his favorite indicator of China growth, while I have my Macau casino barometer, and Yum reported that sales growth in China was responsible for more than 60% of the company’s operating profit in its fiscal third quarter as Yum has 3,800 restaurants there. But Yum expects food inflation to continue to rocket higher, as well as labor costs. Yum has been loath to increase prices but is now doing so gradually. [Yum added 138 restaurants in China during the quarter and is looking to add 600 units overall this year.]

As for Macau, casino revenue grew 39% in September, which was on track for 45% growth until Typhoon Nesat hit at month end; forcing officials to shut down the industry (while stranding tens of thousands of tourists). Year to date, revenues are up 45.9%. I’m curious about October and November, this past week being the “golden week” holiday, for a truer indication of the supposed “slowdown” many keep talking about. Casino shares have been taking it on the chin to the tune of about 30% recently on such fears.

Separately, a $7 billion project is about to resume on a bridge and road linking Hong Kong, Macau and the Chinese mainland that will put more than 30 million people within half an hour’s drive of a Baccarat table. It is scheduled for completion in 2016. If it is finished next February, I’d be careful driving on it. Just sayin’. 

--Ireland’s economy is expected to grow about 0.8% this year and 1.5% next year, according to one investment firm. The Central Bank pegs 2012 growth at 0.8%. Due to how hard the country fell, this is nothing. In fact most in Ireland talk of a “lost decade” due to the property crash, as I also heard in a news story on RTE1. September’s manufacturing PMI was 47.3.

--Up to 8 out of every 10 applications for a mortgage are being turned down in Ireland, a survey by the Irish Independent found. Tough to stop the ongoing crash in the housing market with these kinds of figures. Concerns over an applicant’s employment situation is the major reason why they are being turned down. It is also taking more than four months to get approval, compared to just days during the bubble. The average home price nationally is down about 50% according to various surveys I’ve seen, but I’ve given you some luxury figures far higher.

--Shares in Bank of New York Mellon Corp. suffered anew as the Justice Department and New York’s attorney general filed separate civil lawsuits alleging BNY Mellon systematically overcharged investors for currency trades in a decade-long scheme. The suits are seeking $2 billion in damages. The bank continues to deny any wrongdoing. Other states have filed suits against BNY Mellon, while California has sued State Street Corp., accusing them of improperly pricing currency trades as well.

--Inflation Alert: Floods have ravaged Asia’s rice bowl in Thailand, Vietnam, Cambodia and Laos. I forgot that Thailand is the world’s biggest rice exporter and 10% of its total paddies have been damaged. No. 2-exporter Vietnam has suffered worse as a series of typhoons have blown through.

Meanwhile, in the U.S., Texas’ extreme drought continues to force cattle ranchers to sell calves early to feedlots, which doesn’t augur well for production in 2012. The flip side is that there would be less demand for corn, the main ingredient in cattle feed. Ergo…

--The BBC is cutting 2,000 jobs out of a current workforce of 18,000. Previously, in 2005 and 2007, BBC initiated cuts consisting of nearly 6,600 employees.

--Britain’s financial services sector will lose 8,000 jobs over the next three months.

--Anonymous, a group of self-styled hacker-activists, has vowed to support Occupy Wall Street protests by taking out the New York Stock Exchange this coming week. An attack simply on the NYSE website would not impact trading.

--We note the passing of Arthur C. Nielsen Jr., who transformed the company his father founded into one of the true leaders in market research, particularly in terms of television ratings. He was 92. Under Arthur Jr., revenues rose from $4 million to more than $680 million.

Foreign Affairs

Afghanistan: The nation’s intelligence service said they thwarted an attempt on President Hamid Karzai’s life by Pakistani-based insurgents. Half a dozen arrests were made including one of Karzai’s bodyguards. The group allegedly was also planning attacks in the U.S. and Europe. In turn, Karzai has been turning up the heat on Pakistan as it was confirmed by Afghan intelligence that former president Rabbani’s assassin was a Pakistani, this while relations between Pakistan’s arch-enemy India and Afghanistan warm up, with India offering to train Afghan police, a move encouraged by the U.S. as well.

Friday also marked the 10-year anniversary of the war in Afghanistan. More than 1,700 Americans have been killed here.

Syria: The United Nations now estimates the death toll from the pro-democracy protests that commenced in mid-March exceeds 2,900, this as Syrian troops stormed villages close to the border with Turkey on Thursday in an attempt to hunt down military defectors. A group, the Free Syrian Army, comprised of defectors, has begun waging the first significant military challenge to President Bashar Assad’s regime. The issue is does this give Damascus a reason to crack down even further. Survey says? Yes.

But the big news this week was Russia and China vetoing a U.N. Security Council resolution condemning Syria for its crackdown, though only asking for the council to “consider” unspecified “measures” after a 30-day period. Frankly, everyone involved, including those drafting the weak resolution, are rather pathetic. [At least Turkey’s President Erdogan vowed to levy his own sanctions as he steps up military pressure on the border between the two countries.]

“For a brief moment, Lebanon can say that it behaved relatively courageously in comparison to Russia and China at the United Nations. On Tuesday, Moscow and Beijing vetoed a Security Council resolution on Syria, arguing that the text, in the words of the Russian envoy, ‘was based on a philosophy of confrontation.’ [Ed. Lebanon, as the Arab representative on the council, abstained.]….

“What bothered the Russians and Chinese was that the resolution threatened retaliation against Damascus if the violence in Syria continued. The draft did not mention ‘sanctions,’ to satisfy Moscow, replacing it with the more ambiguous ‘targeted measures.’ Responding to claims that the resolution would lead to military action in Syria, as it had in Libya, U.S. Ambassador Susan Rice was scathing. She called such worries a ‘cheap ruse by those who would rather sell arms to the Syrian regime than stand with the Syrian people.’….

“(Russia and China) saw an opportunity to abort international momentum in favor of using humanitarian arguments to intervene in the Middle East and North Africa, where the two have political and economic stakes. Moscow and Beijing know that they are fated to follow when humanitarianism beckons, wedded as they are to political realism, which enjoins pursuing one’s interests abroad without worrying about the domestic abuses of the regimes with which they are transacting….

“President Bashar Assad will appreciate what Russia and China did for him. However, it may little change things. At this stage the dynamics in Syria appear to be increasingly beyond the reach of foreign actors – which is precisely why the international community and the Arab states in particular are blameworthy for having dawdled on Syria, so eager was everyone to wish the problem away. Whatever Moscow and Beijing do, there is no repressive solution to the Syrian crisis. On the other hand, both have just ensured that Assad gets enough spare oxygen so that his security forces and armed gangs can murder more people – even as it heightens the prospect that the protesters will move toward further militarization of their revolt against Assad rule.”

Egypt: Last time I brought up the new election timetable that appeared to be in place and this week the Supreme Council of the Armed Forces, the ruling authority, said presidential elections would not be held until after the approval by referendum of a constitution to be written next year. The drafting committee will be selected by members of the upper and lower chambers in parliament elections that will start in November and end in March. No one is happy with this. The military claims it will not offer up its own presidential candidate. 

Iran: Supreme Leader Ayatollah Khamenei vowed there would be “no mercy” for those found guilty in the country’s biggest financial scandal, an alleged $2.8 billion fraud that has engulfed some of Iran’s banks and politicians, though Khamenei has been careful, it seems, to protect President Ahmadinejad, whose term ends in 2013. The scandal centers around a businessman who is accused of forging letters of credit from the second-largest bank in the country and then using the documents to access credit from seven other banks to help fund 40 companies.

And a report by Martin Fletcher for the London Times claims “The first Iranian nuclear power station is inherently unsafe and will probably cause a ‘tragic disaster for humankind,’ according to a document apparently written by an Iranian whistleblower.”

The plant is Bushehr and the document says the reactor could generate the next Chernobyl or Fukushima, owing in no small part to it being built by “second-class engineers,” while it also sits in a major earthquake zone. Plus the staff has little emergency training and zero contingency plans for accidents. The document’s authenticity cannot be confirmed, but no one would disagree with just the little I gave you. The bigger issue may be, what does this say about the new secretive plant being built?

Israel: The government has accepted the framework proposal by the quartet of Middle East peace mediators (U.S., U.N., EU and Russia) for renewing direct talks with the Palestinians, but the Palestinians insist they will not head to the peace table without a freeze on settlement construction. In a visit to Tel Aviv this week, Defense Secretary Leon Panetta and Israeli Defense Minister Ehud Barak agreed that Israel must do more to combat growing isolation in the region, including repairing relations with Egypt and Turkey.

One incident occurring this week that will not help Israel’s cause was a mosque burning by Jewish settlers in northern Israel. Prime Minister Netanyahu said, “The images are shocking and do not belong in the state of Israel.”

Libya: A concern of mine going back months now, Moammar Gaddafi’s chemical weapons stockpile, is now in the news because weapons inspectors believe a gas storage facility had been broken into before falling under rebel control just this week. It is one of Libya’s most secret sites and contains nine tons of mustard gas.

As for the ongoing conflict, loyalist forces have been stubbornly holding out in pockets across the country as NATO vows not to quit all military action until they have been subjugated.

Yemen: The U.N. Security Council is attempting to pressure President Saleh to hand over power, to no effect. And on the heels of taking out terrorist Anwar al-Awlaki, another U.S. drone killed five al-Qaeda-linked militants in southern Yemen.

Somalia: At least 70 died in a truck bombing, designed by terror group al-Shabab to further show the country is ungovernable. What is even more sickening is that the Islamists blew the truck up in front of the education ministry in the capital Mogadishu as students crowded around to learn about scholarships. It was al-Shabab’s deadliest attack.

Tunisia: Islamists appear ready to take the most votes in elections to choose an assembly to rewrite the constitution. Yippee! Go Arab Spring! The nation’s prime minister, though, says not to worry…these are friendly Islamists and that the party, Ennahda, respects women’s rights. Many are skeptical.

China: Oxfam International projects that a land grab the size of Western Europe has taken place since 2001, mostly by international investors, and specifically by China as it secures land for food production. China has been doing the same on the resource front in South America and Africa. Beijing is now looking to South America for items such as soya beans so that it could have a safe supply of livestock feed.

Russia: Prime Minister Vladimir Putin is on a charm offensive with the business community, particularly international investors, as he gears up to be president through 2024, promising a bunch of high-tech projects and more liberal rules for buying into strategic resource companies. The biggest concern for investors today is swelling military and social spending. Putin vowed fiscal discipline will remain a “cornerstone” for the government. Former finance minister Alexei Kudrin, who had just been humiliated by President Medvedev and relieved of his duties, will remain an advisor to Putin, who is his friend. Putin, you’ll recall, allowed Medvedev to embarrass Kudrin as a sop for Medvedev agreeing to step down in favor of Czar Vlad. 

Separately, Chechen leader Ramzan Kadyrov, one of the truly awful people on the planet, staged a 35th birthday bash, paid for by the Kremlin, though he claimed it was being held to mark the 193rd anniversary of the founding of Grozny, Chechnya’s capital. “I categorically forbid any events to be devoted to (my birthday) wherever they are.”

But aside from has-been film star Jean-Claude Van Damme attending, someone please explain to me why U.S. film star Hilary Swank was there?! If you know anyone in her circle, have her people call my people.

Lastly, Prime Minister Putin received some embarrassing, though hardly surprising, news this week. His spokesman, Dmitry Peskov, admitted his boss’s discovery of ancient pottery in the Black Sea this summer was staged. [“Week in Review” Aug. 13] We’re shocked!

Ireland: So there are a record seven candidates running for president in an election to be held Oct. 27. It’s quite an assemblage, with a gay activist the early favorite, while former IRA terrorist, Martin McGuinness of Sinn Fein, is another in a group that also includes the first winner of the Eurovision Song Contest in 1970, Dana Rosemary Scallon. The latest public opinion poll shows that Sinn Fein is the second most popular party in Ireland to Fine Gael and McGuinness is also second individually in the race. Fine Gael leaders are making non-stop remarks about McGuinness’ fitness for office, saying he didn’t renounce terrorism in 1974 as he claims. If it wasn’t so serious, it would be almost comical, but imagine, there is a decent shot Ireland could have a former major terrorist as its president. Many are concerned that Sinn Fein could at any moment reactivate the IRA’s Army Council. 85% in an Irish Independent survey, for example, believe McGuinness needs to give more details on his knowledge of events surrounding the murder of Frank Hegary, an IRA victim, while 75% do not believe McGuinness ceased to be involved with the Provisional IRA.

Italy: Prime Minister Silvio Berlusconi is at it again, quipping he would name a political party after a slang term for female genitalia. Said a senator for the center-left Democratic Party, “We can no longer tolerate a prime minister who, in a grave moment of domestic and international crisis, assaults the institutions of the Italian state and who looks after only his own interests while making jokes of dubious tastes.”

France: On Sunday, the Socialist Party begins its selection process for a candidate to oppose President Sarkozy in next year’s election (the slot DSK was to have) amid further dire poll data for Sarkozy. The latest has 2/3s believing Sarkozy will lose as his approval rating hovers around 30%. As for National Front (FN) candidate Marine Le Pen, in an Ipsos poll from just a few days ago, she is getting 16% to supposed Socialist challenger Francois Hollande’s 32% and Sarkozy’s 21%. Sarkozy’s prime fear is that Le Pen knocks him out of a run-off, which is what Marine’s father, FN founder Jean-Marie, did in 2002 to Lionel Jospin in securing a place in the second round of voting. Frankly, with all the turmoil in the euro zone, I’m surprised Marine isn’t doing better and I’d place a large wager that if the election were held today, rather than next spring, she’d get at least 22%. [Just wanted to have a marker for the archives. I also fully admit that having seen her in person in Paris last April, I just find the prospects for her candidacy at this moment in time fascinating.]

Random Musings

--New Jersey Republican Gov. Chris Christie announced he would not run for president.

“My commitment to the state is what overrode everything else. New Jersey, whether you like it or not, you’re stuck with me.”

The same day, Quinnipiac released a poll of registered voters that had Christie ahead of Obama, 45% to 42%.

“It was always easy to understand the case for Chris Christie. In an age of inescapable media, politics is the art of communication. Rick Perry tripped over his tongue in one debate, and the gods of polling cast him out. Tim Pawlenty mastered the details of national policy but missed the memo that modern politics is dancing with the stars.

“What Chris Christie’s deeply disappointed promoters recognized is that the freshman governor is a great communicator, a rare gift. A short list of great political communicators would include New York Mayor Fiorello La Guardia, Bill Clinton and Chris Christie – all super salesmen of retail politics….

“It’s hard to overstate how New Jersey Chris Christie is. People compare Chris Christie to James Gandolfini’s Tony Soprano. But it’s not Tony Soprano. It’s just James Gandolfini, a Jersey guy….

“The admired Christie persona isn’t just charisma, charm and smarts, attributes that adhere to many political rookies. Unlike rookies, almost all of the devastating punchlines Mr. Christie delivers are wrapped inside a substantive, detailed argument….

“No one in politics today matches facts to plain speaking better than Chris Christie. But with this stillborn presidential draft, Mr. Christie was being asked to perform without half his skill set, his mastery of facts.

“When Mr. Christie said he wasn’t ready, he didn’t mean he wasn’t ready to be president. He meant he wasn’t ready to argue the case in front of a national jury. If Chris Christie knew as much as Paul Ryan does about entitlements, ObamaCare, the details of the U.S. budget and federal tax policy, he’d have rolled over the incumbent like a (insert your heavyweight metaphor here)….

“Feel free to believe he said ‘No’ only because of organizational challenges. I think something purely political scared him off. It might behoove the hyper-energized conservative base to look in the mirror and ask why Chris Christie is only the latest to take a pass on the gauntlet.”

“With Chris Christie ruling out a presidential run yesterday, the other important political news for the Republican Party was this: The latest Washington Post/ABC poll shows a 16-point drop in Rick Perry’s support among GOP primary voters – the same drop shown in a poll of Florida Republicans released Monday.

“In South Carolina, a state that Perry by rights should simply have in his pocket, a reliable Democratic polling firm yesterday announced the one-time gadfly Herman Cain is beating the Texas governor by 10 points (27-17).

“Political analysts should never say something like ‘Perry can’t recover from this’ – but I’m going to. Perry can’t recover from this. No one in a presidential race has ever jumped to a lead after a couple of days, only to lose more than half his support in just seven weeks.

“Yesterday, Christie said he didn’t know what accounted for the urgency among Republicans in his direction over the past month. It’s simple: Perry’s inability to rise to the occasion.”

Did Christie miss an opportunity? Perhaps. I’ve just been insisting its Andrew Cuomo vs. Christie in 2016; depending on what happens in 2012, of course. Both need to win re-election and then the table should be set.

[Meanwhile, for those who cared, and I wasn’t one of them, Sarah Palin finally announced she would not run for president. She hasn’t said anything of importance since I first learned of her.]

According to a Quinnipiac University survey, if the 2012 presidential election were held today, Mitt Romney would receive 46% to Barack Obama’s 42%. In July, Obama led Romney by six points. Obama would beat Rick Perry, though, 45-44.

Of likely Republicans, 22% favored Romney, 17% were for Herman Cain, and just 14% for Perry. In August, Cain’s support was 5%.

49% said Obama had strong leadership qualities, 49% said he did not. [L.A. Times]

But a CBS News survey had Romney and Cain tied at 17%, while Perry was down to 12%, from 23% only two weeks earlier. [Gingrich 8%, Paul 7% and Bachmann Turner Overdrive 4%] 

Separately, in a Washington Post/ABC News poll, President Obama had just a 42% approval rating, a new low for him in this survey, while 60% of independents now disapprove, a new high. In the same survey, Romney led the Republican field with 25% with Cain and Perry at 16% and Ron Paul 11%.

--As for Herman Cain’s strategy, it will be interesting to see how his new book does, “This is Herman Cain! My Journey to the White House.” He might suffer a bit from Steve Jobs overload and Jobs’ authorized biography now being rushed out that even I will read (your editor not having time for a book anymore).

Cain is now the favorite among tea-party activists, but his campaign remains highly disorganized with key staffers having left months ago. Personally, I think his 9/9/9 plan…9% income tax, 9% tax on corporate profits and a 9% sales tax, is pretty darn good, though I admit to not looking at how the numbers could play out.

Cain says he needs to finish in the top three in Iowa and New Hampshire and then win in South Carolina and Florida.

--Rick Perry was faced with an unexpected issue, at least I’m assuming it was to him, that being his hosting of lawmakers, friends and supporters at a hunting camp known by the name painted across a large, flat rock standing at the entrance… “Niggerhead.”

It’s unclear just when the name was painted over, the camp having been leased by Perry’s father going back to the early 1980s. Gov. Perry was party to the lease from 1997 to 2007. Herman Cain blasted Perry, but Cain doesn’t know the details on how long the wording was allowed to stay.

--Republican presidential candidate Ron Paul blasted President Obama for his “assassination” of terrorist Anwar al-Awlaki.

“I don’t think it’s a good way to deal with our problems. If the American people accept this blindly and casually that we now have an accepted practice of the President assassinating people who he thinks are bad guys, I think it’s sad.”

I don’t agree with Mr. Paul, but glad he’s in the race. He also raised a strong $8 million in the third quarter, all from small donors, while Rick Perry raised $17 million from one-fifth the donors Paul had.

--Then there’s the actual primary/caucus schedule now that Florida Republicans screwed things up by moving their primary up to Jan. 31. I mean a Wall Street Journal editorial on Wednesday, addressing the Republican field, post-Christie’s decision, had the following stupid conclusion:

“The campaign is only now beginning in earnest, so all of these candidates will have time to showcase their political skills and ideas. We’re hoping for a long audition.”

Earth to the Journal editorial board. What time?! What long audition?! Iowa is now forced to hold their caucuses Jan. 3 (just announced), instead of the original date of Feb. 6. New Hampshire hasn’t set a date that I’ve seen but will probably be Jan. 10, while Nevada is moving its caucuses to Jan. 14 instead of Feb. 18, and South Carolina is holding its primary on Jan. 21 rather than Feb. 28. 

I want a long audition. I want to see if guys like Herman Cain can perform over the long haul. But this race could essentially be over by the end of February.

“Organized labor joined the Wall Street Occupiers yesterday, milling about Downtown, snarling rush-hour traffic and fundamentally working against the unionists’ long-term best interests.

“It was no doubt a pleasant way to spend a glorious autumn afternoon. But even as the demonstrators were targeting Wall Street and other financial firms for their ‘corporate greed,’ City Hall was getting set to trim its budget sails – chopping some $500 million through this year and $2 billion more in Fiscal 2013.

“In large part, because – as Budget Director Mark Page put it – ‘the outlook for the economy, as evidenced by the chaotic stock market and other indicators, has become increasingly uncertain.’

“Seems Wall Street and other local financial firms – that is, the part of the economy smack in the protesters’ crosshairs – aren’t strong enough to pump out sufficient tax revenues to keep the city afloat.

“Thus, Mayor Bloomberg has ordered immediate cuts at every city agency – and this time that will include even the NYPD.

“The entire municipal workforce (the folks represented by the very unions that put on such a show yesterday) might want to prepare for…layoffs.

“These firms, after all, are footing the bill for public-sector salaries and helping keep folks employed….

“Ah, say the unionists: There’s always the ‘millionaires’ tax’ to make up the difference – never mind that raising taxes on anyone is always a bad idea…..

“We don’t expect the thoroughly unserious Occupiers to understand any of this.

“Don’t blame Wall Street, don’t blame the big banks, if you don’t have a job and you’re not rich, blame yourself. It is not someone’s fault if they succeeded, it is someone’s fault if they failed.”

--Three women will share the Nobel Peace Prize for their work on women’s rights; Liberian President Ellen Johnson Sirleaf, Liberian peace activist Leymah Gbowee and Tawakkul Karman of Yemen. I’d say Ms. Karman in particular has her work cut out for her.

--A draft recommendation by the United States Preventive Services Task Force is advising that healthy men no longer need to take a P.S.A. blood test to screen for prostate cancer because the test often leads to more tests and treatments that needlessly cause pain, impotence and incontinence in many. The recommendation is based on the results of five clinical trials. This is big. Advocates of the test, including Michael Milken and former Mayor Rudy Giuliani, believe a P.S.A. test saved their lives, while more than a few believe such a decision is akin to rationing, though the panel is not supposed to consider costs in its recommendations.

--I didn’t follow the Amanda Knox case at all, save for when it was being covered on “Today” or nightly newscasts. But I do have to say that as the case reached a dramatic end after four years, it was indeed a worldwide story, at least dominating the headlines in all the Irish and British newspapers I saw while in Ireland. Otherwise, it’s not fair of me to comment, except to note that one editorial I read in a British paper called Knox the “greatest actress of her era.”

--Exciting baseball on Friday night. Hope a lot of you caught it. And does anyone care about the NBA lockout? .....I didn’t think so.

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

God bless America.

---

Gold closed at $1635
Oil, $82.98

Returns for the week 10/3-10/7

Dow Jones +1.7% [11103]
S&P 500 +2.1% [1155]
S&P MidCap +2.3%
Russell 2000 +1.9%
Nasdaq +2.6% [2479]

Returns for the period 1/1/11-10/7/11

Dow Jones -4.1%
S&P 500 -8.1%
S&P MidCap -11.9%
Russell 2000 -16.3%
Nasdaq -6.5%

Bulls 34.4
Bears 45.2 [Source: Chartcraft / Investors Intelligence…highest number of bears since March ’09, the bottom, when the reading was 47.2]

Have a great week. I appreciate your support.

Brian Trumbore

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