Week in Review

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Week in Review

05/14/2011

For the week 5/9-5/13

Wall Street and Europe

It was another week about commodities and Europe, with the latter’s troubles impacting the euro-dollar relationship and thus the price of the former. After commodities’ swoon the prior week from a CRB Index of 370 to 337, metals, oil and such attempted to rally as the dollar weakened early on, only to fall back again by week’s end. The performance of silver was once again telling as it rallied from $35 to $39+ by Wednesday morning, only to tumble all the way back and hit $32.30 on Thursday before basically finishing the week unchanged at $35. For its part the CRB also finished the week basically unchanged at 338, while gold and oil added $2. In other words, hardly the kind of snapback rally expected after the carnage of May 2-6.

For a second straight week the dollar was the currency of choice (boy, my timing on my Paris adventure could not have been worse as the worst levels for the greenback were hit while I was there) and the European debt crisis once again took center stage.

One year after a $157 billion rescue package from the European Union and International Monetary Fund, Greece is on death’s door. Whether you are talking “restructuring” or “default,” both could be catastrophic for the banking system on the continent with knock-on effects elsewhere, including in the U.S.

The Greek government has little credibility remaining and the interest rate the market is charging on two-year notes says it all, 26.7% at one point this week; 15.7% on 10-year paper, or just a little above the benchmark German 10-year bund yield of 3.10%, sneered your editor.

While Greece’s GDP rose 0.8% in the first quarter, for the year it is still expected to fall about 3% and the prime immediate issue is it must roll over some $20 billion in sovereign debt in March of next year as the original EU bailout projected that the Greek government would be able to do so at an interest rate of 5.6%, or 10% less than today. Ain’t gonna happen, sports fans. Greece requires more and more euro from the other 16 members, plus non-euro Britain, and the latter already said there is no way they’d lend the Greeks more, while German Chancellor Angela Merkel said extra help would be available for Greece if it established that it was taking the tough measures needed to curb a debt burden now estimated at over 157% of GDP for 2011, on its way to 166% in 2012. Merkel added, “We can offer solidarity only if Greece’s stability and eagerness to reform is proven.” Well look what’s happened the first year of the bailout. The government may be earnest in its efforts, but the people don’t feeling like playing along, particularly when it comes to paying taxes. This past week also saw the ninth work stoppage since last May.

Then there’s Portugal. Its $110 billion bailout package is to be approved at a critical EU finance ministers meeting this coming Monday and Tuesday. Portugal’s political parties have approved it but the proposal needs the OK of all 17 euro members and you have the issue of Finland.

Now it’s said the True Finns, the nationalist, anti-bailout party dropped out of negotiations to be in the new government, and that this was good, but the True Finns weren’t supposed to be part of any parliamentary vote on giving aid to Portugal in the first place after an agreement was struck on this last week.

Instead, from my reading of the situation as I go to post (and this could be very ‘dated’ by the time you peruse it), the Social Democratic party renewed its demand that private investors must share the burden of EU bailouts along with taxpayers. The Social Democrats, it’s my understanding, are demanding changes to the Portuguese deal to placate furious Finnish voters who are tired of bailing out their drunken sailor cousins down south.

Portugal, by the way, saw its economy sink 0.7% in the first quarter, worse than expected, as its debt is now forecast to be 101% of GDP this year and 107% next, up from earlier projections by the EU of 89% and 92%, respectively. [Ireland is in a similar boat…a gloomier than initially forecast outlook on this front.]

But here’s the bottom line. European officials are running around saying the sky is not falling even though it is, and what further compounds matters is that you do indeed have economies such as those of Germany, France and Austria that are doing fine, so most folks look at the eurozone first quarter growth figure of 0.8% over the fourth quarter and think things can’t possibly be that bad but for the euro, they are.

The exposures to Greek, Portuguese and Irish sovereign debt are enormous. For example, about $240 billion in Greek government debt is held by Euro banks, including $160 billion between Germany and France alone. Britain and Germany hold a combined $450 billion in Irish government paper.

So EU officials don’t like to use the terms restructuring or default, which are really one and the same, because the ripple effect would indeed be catastrophic for Europe’s banking system when you’re writing down massive amounts and then find yourself in violation of capital requirements with no one wanting to lend you any more funds.

Oh, there’s a solution, just throw more money at it, like the Ponzi scheme effect I quoted an expert on last time (the former Argentine Central Bank governor who would know a thing or two about such matters), but that’s when politics gets in the way…as in how often can certain politicians, be they in Germany, Finland, Austria or Britain, continue to ask their taxpayers to willingly shell out some of their hard earned wages for….Greece?! [Cue Dick Vitale]

Europe is a freakin’ mess and the risk of a major domino effect is very real.

But does it happen this week? Two months from now? 2012? Who knows, but the authentic day of reckoning is nigh and just extending the maturities, as some are putting forward, doesn’t cut it. And for those who say, well, Greece and Portugal could just leave the EU and start over, it’s not that simple…though it could easily come to that.

I mean, imagine. The Portuguese government is now going to freeze public workers’ salaries and pensions through 2013 and cut pensions of more than 1,500 euros a month as part of their austerity plan. The people aren’t going to be happy, even if this is what they deserve. [Again, see Greece.]

What it is, friends, as I’ve been describing for a long time now, is a situation that is also ripe for anarchists, who were in the streets of Athens again this week. Throw in my immigration powder keg and you have a recipe for real trouble, none of which will be conducive to a happy consumer if they are forced to dodge Molotov cocktails in the streets of their major cities.

[Headline I just saw: “Greece: Nationalist Mobs Attack Immigrants in Athens”]

Yes, I’ve been painting a bleak picture. But I was doing so when it came to Ireland during the bubble and look how that turned out. Bad for them, with the first official reading on property prices being released on Friday that shows Dublin values cratered 47% in four years. Pretty good in terms of my own credibility.

Two final thoughts. When it comes to our own debt and an issue I’m convinced comes to a head in 2012 in terms of market reaction because Congress and the American people won’t make the hard decisions needed to address our looming Greek-like mess, party leaders met with the president and point man Vice President Biden this week with both sides agreeing that Social Security is off the table, which is beyond absurd because this is the one entitlement that could be fixed over a beer at your favorite tavern. Raise the retirement age further, gradually. Period. I’d go for means testing as well on mega-millionaires but it’s not necessary. The system only needs to be tweaked and it should take one Oval Office address with a few simple charts to convince the people, but, again, Congress and the White House can’t even do this. This week we learned that the Social Security trust fund will be exhausted by 2036 rather than 2037 as projected last year.

But of course the bigger issue is Medicare, with the trustees announcing Friday that it will run out of money by 2024, not the previous projection of 2029. This is a Code Red for that one, yet now that Republican Congressman Paul Ryan laid out his plan for cuts to the program, Republicans are running scared because they are going back to their districts and all the Know-Nothings are screaming… “Don’t cut my Medicare!” It’s at times like these when I really feel down on America. We’re supposed to be special, but instead we act like a bunch of damn Greeks.

So, no…Congress will not make the tough choices. Oh, as I noted the other week the debt ceiling will get extended and both sides will talk a good game about the spending cuts that accompanied the hike in the $14.3 trillion limit, and I imagine the markets might react pretty well and the dollar will rally (which will be another blow for commodities).

But upon inspection saner heads will offer, “This package is like a Peggy Lee fastball. Is that all there is?” The hard choices will be put off until 2013 and beyond, but I’m telling you we’ll face real turmoil in the stock and bond markets before then.

One little side note. Ironically, the worst thing that can happen is for government revenues to continue to improve as they have been owing to the recovery. This only makes it easier for our esteemed representatives in Washington to put off the hard choices that will very much remain.

Lastly, China reported April consumer prices rose 5.3% vs. 5.4% in March but a little hotter than expected. However, most are in agreement that the situation on this front will improve (though it’s too early to tell about the crop outlook here, as it is across much of the globe).

China also reported exports surged a better than expected 30% in April, which didn’t exactly please the likes of the U.S., but industrial production, up 13%, and retail sales, up 17%, were actually a little lighter than forecast so everyone is talking of a slowdown here but it all seems pretty good to me.

Street Bytes

--Stocks were mixed with the Dow Jones falling 0.3% to 12595 and the S&P 500 declining 0.2%, but Nasdaq tacked on a measly point to 2828. The figures mask the intra-day volatility on the week owing to the Greek crisis and its impact on the dollar-euro relationship and thus commodities.

Two polls of note: An NBC/Wall Street Journal survey had only 37% approving of President Obama’s handling of the economy, while an AP-GfK survey had 4 in 10 believing the economy will get better (31% in the WSJ poll).

--U.S. Treasury Yields

6-mo. 0.07% 2-yr. 0.54% 10-yr. 3.17% 30-yr. 4.31%

Treasuries were basically unchanged as the inflation data for April came in as expected. The producer price index was a little hot, up 0.8%, but ex-food and energy was up 0.3%. Year-over-year, the PPI is up 6.8% and 2.1% on the core. Yes, 6.8% is high but I’m in the ‘inflation is transitory’ camp. Consumer prices rose 0.4% for the month, 0.2% on core, with the year ago comparisons showing the CPI up 3.2%, but only 1.3% ex-the stuff we use, or have decided to cut back on.

--A report from Zillow.com on the housing market garnered a lot of press though it just reconfirmed other past data; as in 28% of homes are underwater (70% in Phoenix, higher in Vegas), and home values continue to drop, down 3% in the first quarter over the fourth. Zillow says prices have fallen 57 straight months and projects they’ll fall another 7-9% before bottoming in 2012.

--Raj Rajaratnam, the hedge fund king, was found guilty on all 14 counts of insider trading (securities fraud and conspiracy) in what by many respects was the largest such case ever prosecuted and a huge victory for the U.S. government. The 53-year-old faces a probable sentence of 15-19 years when he is sentenced this summer, though his attorney, a-hole John Dowd, said he’d appeal before flipping off CNBC’s cameras and uttering an expletive, befitting a classless jerk.

The government’s successful use of wiretaps (45 secretly recorded phone conversations) will give others in the industry pause and this is good. As part of the Rajaratnam case, the feds have charged more than two dozen Wall Streeters and financial professionals, many of whom have already pleaded guilty.

So we toast Preet Bharara, the United States attorney for the Southern District of New York. As noted by the New York Times, in the 21 months Bharara has been in his position, his staff has prosecuted “some of the nation’s – and the world’s – most prominent defendants. Among them: Faisal Shahzad in the Times Square bomb plot; agents in a Russian spy ring; Ahmed Khalfan Ghailani, the first Guantanamo Bay detainee to be tried in the civilian system; Viktor Bout, a Russian accused of being an arms trafficker; a Somali man charged with piracy; and four men charged in a plot to bomb synagogues in the Bronx.”

They haven’t all gone according to plan, such as in the Ghailani case where a jury convicted him of a single count of conspiracy to destroy government buildings and property, but the guy still received a life sentence.

Overall, when it comes to insider trading cases, including the Rajaratnam one, Bharara’s office has charge 47 individuals, 36 of whom have pleaded guilty or been convicted. For his part, Bharara recently said, “I wish I could say we were just about finished (on this front), but sadly we are not.”

--71% in Greece oppose the government’s handling of the economic crisis vs. 66% in February, i.e., there will be far more protests there.

--Cisco Systems Inc. disappointed again as doubts continue to grow over the leadership of CEO John Chambers. Rather than the 12% to 15% growth Chambers always spoke of, now he’s saying fiscal fourth-quarter revenue would be flat to just 2% higher than a year earlier, which is below expectations. So despite beating on earnings for the third quarter, Cisco shares fell sharply on the outlook. Chambers also spoke of sizable job cuts as part of a plan to reduce $1 billion in costs. The company has been dead money for years now.

--Talk about stepping in it, Facebook hired leading PR firm Burson-Marsteller to orchestrate a dirty tricks campaign against Google, with Burson placing negative stories about Google in newspapers, magazines and online. Initially, rumors had it that Apple or Microsoft was at fault but when Facebook was confronted by The Daily Beast blog with evidence, it fessed up. Google isn’t likely to pursue legal retaliation but will instead launch a number of social networking products over the coming months.

--Microsoft took a big gamble when it acquired online telephone service Skype for $8.5 billion, or about three times what it could have had the company for just a few years ago. And it’s not as if others were clamoring to acquire Skype today. So many are questioning the whole thought process here.

Skype has 145 million active users in an average month and Microsoft is looking to cross-sell its products, as well as gain a bigger foothold in the social networking space. The telephone service emerged out of eBay, which sold a majority to private equity firm Silver Lake and others in late-2009, with eBay retaining a 30% interest, so all did well by this. Silver Lake and its partners made three times their investment in just 18 months. As Ronald Reagan would have said, “Not bad, not bad at all.”

--The International Energy Agency cut its global demand outlook a bit for 2011, but continues to maintain it will grow 1.3 million barrels a day despite weaker IMF GDP projections for the likes of the U.S. and Europe.

--Interesting piece in the Wall Street Journal by Russell Gold on the Trans Alaska Pipeline. Dwindling production along the northern edge means “the pipeline carries less than one-third the volume it once did – and the crude takes five times as long to get to its destination.

“That leisurely flow means the oil is above ground longer and more exposed to Alaska’s frigid weather; the crude sometimes arrives chilled to 40 degrees [it used to arrive with a temperature around 100.] As the flow and temperatures continue to drop, experts say the risks of a clog or corrosion increase, as do the odds of ruptures and spills.”

So to keep the pipeline alive, you need more oil, but production from the North Slope fields has been declining for years.

The Trans Alaska Pipeline employs 2,000 people and even at its reduced rate, still delivers 11% of the oil produced in the U.S., almost all of which ends up on the west coast and Hawaii.

--Researchers found that shale gas drilling operations increase the risk to nearby drinking water becoming contaminated with methane, as noted in the Proceedings of the National Academy of Sciences. A team from Duke University collected samples from 68 private water wells in Pennsylvania and New York and found levels of methane that could lead to an explosion, with a leader of the study noting he had witnessed the spectacle of people setting fire to water pouring out of a tap himself.

It’s important to add, though, the risk isn’t necessarily from drinking the water, it’s the explosion risk; though at the same time there is no peer reviewed research on the effects of low-level exposure to methane.

So add this to the growing debate over the process known as fracking.

--The Financial Times reported that Chinese speculators have had a lot to do with the huge rally in silver, 175% from August to the peak near $50, and the subsequent fall to a low of $32 on Thursday. Silver turnover on the Shanghai Gold Exchange rose 2,837% from the start of this year, then, as the metal sold off last week, they exited, only to return in the last few days.

--General Motors Co. said it will be investing $2 billion in plants in eight U.S. states as part of its plan to boost market share. Overall, the automaker looks to add 4,000 jobs at 17 facilities.

The United Auto Workers union said it has 1,357 members on layoff waiting for jobs at GM and they will be recalled first before the company fills the other positions.

--China, the world’s largest auto market, produced 6.43 million vehicles during the first four months of the year, up 5% from a year earlier. Actual sales were 6.53 million, up 6%.

[On a different issue, high-speed rail, China tested its line between Beijing and Shanghai this week, with the first run of the 1,318-km link completed in less than five hours, which will almost halve travel time between the two. The rail line hit a top speed of 300km/h (186 mph). Reporters on board were impressed not only by the speed, but the absence of background noise.]

--Toyota continues to struggle. Now we’ve learned the new bigger hybrid Prius model won’t be available until next April due to production delays related to the March earthquake and tsunami. A battery shortage is the key. In Japan alone, Toyota had already received 25,000 orders for the model.

--Fannie Mae asked the federal government for an additional $8.5 billion in aid after announcing it lost $8.7 billion in the first quarter. While there have been successes in some of the bailout programs, such as TARP, this is not one of them as the total cost of rescuing Fannie is nearly $100 billion. Combined with sibling Freddie Mac, taxpayers will get hit to the tune of at least $250 billion when it’s all over; all to cover losses on bad loans made during the housing bubble.

Fannie and Freddie own or guarantee about half of all mortgages in the U.S., but these days are involved in nine of ten new originations.

Meanwhile, Fannie has been backing new mortgages as large as $729,750 in states such as California and Connecticut, but now both sides of the political aisle agree it’s time for the government to stop backstopping such high-end properties and should the limit be lowered substantially, as already seems to be the case, that spells major trouble for some affluent communities. For example, the New York Times reports that in Monterey County, Calif., the peak mortgage level would drop to $483,000. There are sheds currently going for $750,000 in places like Carmel.

The new mortgage limits will vary depending on the region, median prices, etc.

--April home sales in the six-county Southern California region were down 9.2% from a year earlier and 25.4% below the month’s average since DataQuick began tracking such information in 1988. The median home price in the region fell 1.8% from a year earlier to $280,000. Normally this is a hot time of year for home sales, so yet another indication we are still in the bottoming process.

--U.K. retail sales surged the most in five years last month as public holidays and the warmest April on record spurred spending. Sales rose 5.2% in April vs. a 3.5% annual drop in March. Yes, the Royal Wedding bank holiday helped big time, which you can be sure the Royal Family will use when it pleads for future funding.

--There are a few companies I like to see do well, like Macy’s and McDonald’s. The former, the second-biggest U.S. department-store chain, saw its shares rise as much as 9% on terrific earnings news, including the fact online revenue jumped 38%. I have to admit, I never think of going on the department store sites. What I love about Macy’s, though, is this was a chain that was dead and buried in the eyes of some (including me) but they came roaring back (unlike, say, Sears).

As for McDonald’s, revenue at restaurants open at least 13 months rose 6% in April, with overseas sales up 6.5%, offsetting 4% growth in the U.S. that was still ahead of projections. The company, aside from continually tweaking the menu, is now looking to upgrade its look and offer more of a Starbucks feel.

--As for those I don’t like, try investment bank Goldman Sachs. In a Bloomberg survey of traders, investors and analysts, 54% have an unfavorable opinion, double the negative rating for JPMorgan Chase. And now, as a result of the Senate subcommittee’s investigation into the financial crisis, and the Senate referring its findings on Goldman and others to the Justice Department, noted banking analyst Richard Bove issued a sell rating on Goldman on Thursday, saying, “It now appears that the pressure on the Justice Department to bring a criminal lawsuit against Goldman is building to a high pitch.”

But wait…there’s more! The European Union’s statistics office says Greece had 13 off-market derivatives contracts with Goldman designed to conceal the true size of the country’s debt. As reported by the Irish Independent’s Elisa Martinuzzi:

“The amount borrowed through the swaps was due to be repaid with an interest-rate swap that would have spread payments through 2019, Eurostat said in a report yesterday. In 2005, the maturity was extended to 2037. Restructuring the swaps spread the cost over a longer period, leading to an increase in liabilities and debt….

“The use of off-market swaps, which Greece hadn’t previously disclosed as debt, let the country increase borrowings by ($7 billion).”

--According to WPP Plc, Apple Inc. is the world’s most valuable brand, passing Google, which topped the rankings four years in a row, while IBM moved into third, ahead of McDonald’s. The report noted:

“It’s clear that every single Apple employee, from Steve Jobs and Tim Cook to the summer interns, see protecting and nurturing that brand as a top priority. Tablet computing also drove value growth not just for Apple, but also for the providers who support yet another networked device.”

--Not for nothing but California added 90,600 jobs in the first quarter, compared to 82,600 for all of 2010, with much of the increase due to hiring in the tech sector. Revenue is also $2.5 billion ahead of projections.

And this just in: Because of surging revenue, Gov. Jerry Brown is looking at postponing this year’s tax increase.

--The U.S. Postal Service reported a $2.2 billion loss during its second quarter as revenue dropped another 3.9% from the same time last year. Postal officials said the agency is still on course to lose $7 billion when its fiscal year ends in September.

Year-over-year, total mail volume dropped 3%. USPS did continue to reduce the workforce, down 6,700 from the previous year, and it plans on cutting 7,500 administrative and postmaster positions by next spring. So far, 2,000 have taken buyouts.

--According to Fidelity Investments, 401(k) plans are on a major upswing, with balances reaching a 12-year high…$74,900 on average as of the end of the first quarter, up 12% from year ago levels. In the third quarter of 2002, account balances had fallen to $41,300, due in no small part to the tech wreck.

--Manhattan rental apartment vacancy rates were below 1% for a second consecutive month. In April, the average monthly rent for a studio rose 9%, to $1,967, from a year ago. One-bedrooms increased 10% and two-bedrooms were up 11% to $2,643 and $3,711, respectively. It ain’t cheap to live in Manhattan, folks.

--Big study from Consumer Reports, which rated Jenny Craig’s prepackaged dieting plan as the No. 1 way to lose weight. Weight Watchers came in a distant third. The Slim-Fast plan ranked second. Consumer Reports cautions, however, that Jenny Craig’s food doesn’t taste that good.

Which is why it’s always important to have some Ben & Jerry’s on hand. [Or is that defeating the purpose?] 

Foreign Affairs

Pakistan: Commentator George Will on This Week. In describing Pakistan, “A house divided against itself…must become one thing eventually.” 

On Friday, the Taliban avenged the killing of Osama bin Laden by killing at least 80 paramilitary police that were heading out on leave from their academy in the northwest part of the country. A Taliban spokesman said the attack “was the first of many bombings” that would “first target Pakistan and then the U.S.” [Or they were just retaliating against the government for recent actions it has taken against the Taliban. Regardless, not good.]

Earlier, Prime Minister Gilani ordered the Army and ISI (intelligence service) to explain how it was that bin Laden was able to hide out in Abbottabad for the past five years, though Gilani denied the ISI knew or that there was Army complicity. A restive public wants answers as well. The ISI chief offered to resign.

Afghanistan: With the death of Osama bin Laden, six in 10 Americans said it is time for the U.S. to exit Afghanistan, according to a USA TODAY/Gallup Poll taken last weekend. 62% of independents feel the mission has been accomplished. Republicans are actually split, 47% calling for the troops to stay, 47% saying they should come home.

Republican Senator Richard Lugar (Ind.), in noting President Obama’s $100 billion request for Afghanistan in the 2012 budget, plus another $18 billion for training and civilian assistance, said:

“With al-Qaeda largely displaced from the country but franchised in other locations, Afghanistan does not carry a strategic value that justifies 100,000 U.S. troops and a $100 billion per year cost, especially given current fiscal restraints.”

But the above Taliban-inspired suicide bombing, as well as their comments, should remind Americans it’s not just about bin Laden and al-Qaeda. As Max Boot of the Council on Foreign Relations wrote in a Journal op-ed:

“It is immaterial whether or not the Taliban, the Haqqani network, Lashkar-e-Taiba and the others are currently targeting the American homeland. We cannot allow them to create a fundamentalist caliphate stretching from Kabul to Kashmir and beyond. Their takeover of Afghanistan – a first step toward this grandiose goal – would galvanize jihadists and could reverse the loss of momentum they have suffered because of the Arab Spring and bin Laden’s death. It would also provide greater impetus to topple nuclear-armed Pakistan next door….

“But there is no way the government of Afghanistan would allow us to keep bases there if we stopped supporting it. If an American exit were imminent, Hamid Karzai and other politicians would rush to cut a deal with the Taliban to save their own necks….

“(The) gains achieved so far are tenuous and reversible. The Taliban are back on the offensive. It is vital to stick to the strategy NATO announced last fall of not putting Afghans in the lead until 2014. Moving too quickly to turn over control to unready forces can be disastrous – as shown by last month’s breakout of more than 400 Taliban fighters from Kandahar’s main prison.

“If we give more time to Gen. David Petraeus and his successor, Gen. John Allen, they can strengthen Afghanistan enough – mainly by building up the indigenous security forces – to prevent a Taliban takeover or a ruinous civil war even after U.S. forces finally start drawing down. That, in turn, can help us to stabilize Pakistan: an outcome worth fighting for.”

Syria: The death toll, by some accounts, is now up to 1,000, with an estimated 10,000 protesters having been taken into custody in the uprising here. There are also stories that the First Lady is in hiding in London with her children, which could prove most embarrassing to the British government if this is the truth. 

One of Syria’s elite, Rami Makhlouf, is a target for anger at the nation’s privileged. As reported by Anthony Shadid of the New York Times, Makhlouf says “the ruling Assad family…has conflated its survival with the existence of the minority Alawite sect that views the protests as the seeds of civil war, rather than as legitimate demands for change.

“ ‘If there is not stability here, there’s no way there will be stability in Israel. No way, and nobody can guarantee what will happen after, God forbid, anything happens to this regime.’”

Makhlouf is saying, “Don’t put a lot of pressure on the president, don’t push Syria to do anything it is not happy to do.” In other words it’s either ‘us’ or ‘chaos.’

It turns out reporter Shadid was allowed into Syria only for a few hours to conduct the interview with Makhlouf, a cousin of President Assad, and as Michael Young of the Daily Star opined afterwards, there is no split in the ruling family, and there is no serious alternative to what Assad and the elites have to offer.

“They can either stand together behind repression, or fall apart. That’s hardly to justify the regime’s butchery of hundreds of unarmed civilians. Rather, it’s to affirm that the Syrian leadership is incapable of undertaking anything different. There simply is no reform option, and there never was. Genuine reform means dislodging the bricks holding up Assad-Makhlouf authority. Bashar Assad’s open-ended presidency, the crony capitalism practiced by his cousin and other members of Syria’s elite, the abuse practiced by the all-powerful security services, even Alawite predominance, would never survive a system shaped by free elections, the rule of law, and the existence of independent media….

“The Syrian protesters are right in not pursuing their salvation in Washington, let alone Brussels, Paris, or London. This is not an American administration overly outraged by the viciousness of dictatorships. Even in Egypt, Obama only turned against Hosni Mubarak when he was left with no other choice – although doing so against an old ally while sparing Assad suggests that Obama is like the coward who will yell at his wife to avoid a brawl with the neighbor.

“What all this could also mean, however, is that the Syrian regime is wrong in pursuing its salvation in foreign capitals. Ultimately, Assad, his legitimacy in tatters, will have to win out against his own people. That will not be easy, not when the president has had to order the military occupation of several of his major cities. The regime’s behavior is a daily insult to Syrians, one they will not readily forget.”

Israel: The Jerusalem Post ran a story that intelligence agencies are concerned Hizbullah may attempt to transfer weaponry it is storing in Syria to its base in Lebanon. Prime Minister Netanyahu previously told Italian Prime Minster Berlusconi that Syria was storing Scuds for Hizbullah at its military bases, but there is also the issue of Syria’s extensive chemical weapons stockpile and whose hands they could fall into.

Separately, Israel is holding back tax revenues owed the Palestinians because of their agreement to enter into a power-sharing arrangement with Hamas, so Palestinian Prime Minister Fayyad urged his Arab brothers to pay the salaries of some 155,000 government workers (though I can’t imagine what 150,000 of them do). “We say to our Arab brothers: Save us….It is the moment of truth.”

Here are some startling figures on aid to the Palestinians.

Fayyad told Reuters that “Arab countries had paid only $52 million in Palestinian aid since the beginning of 2011 - $42.5 million from the United Arab Emirates and $10 million from Oman. This compares with $236 million from Arab countries in 2010.

“The European Union paid $210 million during the same period. The EU announced on Friday (last) it would provide an additional $122 million in aid in 2011.”

Back to Lebanon, there is still no government, but Walid Jumblatt is prepared to pull his bloc of support from the March 8 (Hizbullah-led) alliance due to the “endless polarization” since Jan. 12 when the Hariri government collapsed thanks to Jumblatt switching sides.

And with the new indictment in the Special Tribunal for Lebanon looking into the 2005 assassination of Rafik Hariri, now it would appear the additional submission will delay for months more the release of names in the probe. Frankly, this is bulls---.

Egypt: As noted before, this is the paramount issue by year end and this past week was a bad one as the extremist Salafists went after the Coptic Christians with a vengeance and at least 12 died in the fighting, which apparently started when a Christian woman converted to Islam and was reportedly kidnapped by the Copts and held in a church. At least this was the rumor that initiated the Salafist assault on the place.

“Salafis have been blamed for other recent attacks on Christians and others they don’t approve of. In one attack, a Christian man had an ear cut off for renting an apartment to a Muslim woman suspected of involvement in prostitution.”

Egypt’s justice minister said the security forces would come down with “an iron fist” to put an end to the unrest.

Speaking of Islamists, a member of the Muslim Brotherhood’s legislative council, Abdel Moneim Aboul Fotouh, said he would run for president, thus breaking with the Brotherhood’s leadership as they had promised they would focus on the parliamentary races, not the presidency and wouldn’t field a candidate for same. The Brotherhood said they might suspend Aboul Fotouh, who is viewed as a moderate but who the hell really knows on these matters. Regardless, he’s an Islamist and it’s yet another sign that they could easily dominate the new parliament and possibly the presidency.

Separately, tourism has totally collapsed in Egypt, which is killing the economy, and a New York Times headline doesn’t help when it comes to those contemplating a little vacation there this year.

“Crime Wave in Egypt Has People Afraid, Even the Police”

“Businessmen, politicians and human rights activists say they fear that the mounting disorder – from sectarian strife to soccer riots – is hampering a desperately needed economic recovery or, worse, inviting a new authoritarian crackdown.”

Heck, you saw what happened during the revolution. All the police left their posts and it was the Army that restored some semblance of order. But they aren’t the police, let alone its payback time as the public goes after those police who have remained on their job for past mistreatment.

Libya: As one who predicted way back, in the first days of the turmoil here, that Moammar Gaddafi would survive, it is now pretty clear his days are finally numbered as severe shortages of food and fuel are plaguing Tripoli owing to the impact of sanctions and NATO’s stepped up bombing campaign. At the same time, though, Gaddafi is going through with his threat to unleash a wave of migrants to Europe. As in up to 600…600…African migrants may have perished within sight of the Libyan coast when their overcrowded ship capsized. Libya has been accused by the U.N. of forcing thousands onto unsafe vessels. About 14,800 have made the grueling journey across the Mediterranean and before this latest accident another 800 are estimated to have died.

And it’s also clear that when you look for clues about what will follow Gaddafi, it’s going to be about settling old scores.

Iran: Needless to say, Tehran is focused on Damascus and the Syrian uprising as the relationship between the two is critical to Iran’s overall plans.

But lately the internal squabbling between President Ahmadinejad and Supreme Leader Ayatollah Khamenei has taken center stage. Ahmadinejad’s chief of staff, who the president is grooming to succeed him in 2013, had his office bugged by the minister of intelligence, who Ahmadinejad then fired. But Khamenei had the guy reinstated.   Ahmadinejad’s “moderate” allies are all under pressure from the hardline clerics.

On the economic front, Ahmadinejad’s program of reducing reliance on subsidies for things like gasoline and heating oil have backfired as the public is really feeling the pain, with protests against the actions becoming more widespread.

Meanwhile, Iran’s first nuclear power station at Bushehr has begun low-level operations.

Iraq: A shootout at a supposedly secure detention facility resulted in 17 deaths (six police, 11 detainees), including the mastermind of an attack on a Baghdad church that killed 68 last year who then launched an hour long assault when he wrestled a gun away from a guard. Incredibly, the prison allowed terrorists to congregate in one room, where of course they would spend their days plotting such moves.

As for what will happen come December and the remaining U.S. troops, Prime Minister Maliki is now leaning towards asking for some to stay beyond the deadline if most of the main political blocs go along with the decision. Maliki was vague, though, on what kind of percentage of support he is looking for, given the likes of Moqtada al-Sadr are vehemently opposed to extending the stay.

France: Carla Bruni-Sarkozy, as rumored, decided not to attend the Cannes Film Festival, citing “personal and professional” reasons, which added speculation to the talk she is pregnant. As I noted awhile back, there are some who feel husband Nicolas needs a pregnancy to juice his reelection campaign (plus Carla is said to want a baby). Ms. Bruni refuses to talk about the issue, saying, “It’s a private question. It’s your job to ask it. Mine is not to answer.”

On the issue of immigration and racism in the country, the French national soccer team was investigated as the coach and others from the federation were questioned as to whether racial quotas were introduced at training academies for young French players with dual citizenship. An audio tape had surfaced wherein the federation’s technical director and various coaches suggested an unspoken “sort of quota” (the director’s term) could be introduced to limit the number of black or Arab players allowed into the academies once they turn 13.

It was back in 1998 that France won the World Cup with a highly integrated team, players such as Zinedine Zidane, the French-born son of Algerian parents. But it’s a sign of the times, in France and elsewhere on the continent, that politics is beginning to work its way into sports. 

And so after my extensive reporting on the immigration topic recently, it should be no surprise that on Thursday, the Wall Street Journal ran the headline “Denmark Plans to Reinstate Guards at Borders.”

“The Danish government said Wednesday it would reinstate guards along borders with Sweden and Germany and conduct spot checks designed to fight crime and illegal migration. Although the move falls short of full reinstatement of border controls, it is the latest in a series of small steps reversing hassle-free travel across European Union frontiers.

“The move was made for domestic political reasons – to satisfy a party in the ruling coalition that is skeptical about immigration – but it is a sign that opinion in Europe about open borders is changing following fears about unemployment and increased migration from tumultuous North Africa.”

Back to France, as a follow-up to my writings on Marine Le Pen, the National Front candidate who is threatening to make the run-off in next spring’s presidential election, the May 7 issue of The Economist had the following:

“If Mr. Sarkozy loses in 2012, Ms. Le Pen hopes for an ‘implosion’ of his party, and a ‘recomposition’ of politics. The aim is to shed the far-right label and turn the National Front into a majority party with support across the spectrum. It would draw not only on anti-immigrant feeling but on latent French Euroskepticism and disillusion with the elite. This might be dismissed as fanciful dreaming by an untried leader. Yet polls show that she has become the most popular choice for working-class votes and is winning support among the young and middle-class, not ashamed to support her as they were her father.”

China: Editorial / Global Times [Chinese government mouthpiece]

“The demise of Osama bin Laden offers the U.S. an opportunity to declare an end to the War on Terror. In the view of many Americans, a strategic adjustment of U.S. foreign policy appears inevitable. Besides, the U.S. media is riddled with analyses of how to handle a rising China. Do the prescriptions and analyses imply that U.S. policy would aim to undo the development China has achieved in recent decades?

“For a long time, the Chinese people have been haunted by the anxiety that, one day, the U.S. will confront China. This has turned out to be unfounded – so far. In the perception of experts at home and abroad, the counter-terrorism war, mainly in the Arab world, has served to prevent the U.S. from ‘disturbing’ China during the past decade. As trouble continues to spread in the Middle East, the U.S. may remain pinned down in the region for another 10 years.

“These viewpoints, to some extent, are reasonable but exaggerate the situation. For the U.S., the concerns aroused by those authoritarian states in the Arab world are not comparable to developments rooted in the rise of China. Given that China’s GDP may exceed that of the U.S. within 10 years, this may become the primary factor to threaten the latter’s global hegemony….

“Doubtless, the U.S. is an omnipresent superpower. The rise of China is certain to cause friction with the U.S., and this demands the prevalence of a peaceful and calm mindset on both sides. Former U.S. Secretary of State Henry Kissinger once noted that if the U.S. treats China as a foe, China would be a foe. Put differently, from the Chinese perspective: If China treats the U.S. as a foe, the U.S. would be a foe.”

So much I want to say on the above, but for now I choose to ‘wait 24 hours’ and bite my tongue.

Separately, at least China and the United States have pledged to hold regular bilateral meetings between high-level military officers. But, for starters, People’s Liberation Army chief of general staff Gen. Chen Bingde is arriving in the U.S. for a weeklong trip wherein he will tell Joint Chiefs of Staff chairman Admiral Mike Mullen, Defense Secretary Robert Gates and Secretary of State Hillary Clinton that the U.S. needs to stop selling arms to Taiwan and end surveillance activities off China’s shores.

How President Obama handles this issue over the coming months will be most telling. The U.S. should honor previous agreements to sell the island F-16 fighters and submarines to modernize Taiwan’s defense forces, and we should say that if China seeks peace in the region, the first thing it could do is stop targeting Taiwan with hundreds of missiles. [Of course I’ve noted in the past that China is not about to do this until Taiwan’s presidential election early next year, one in which the mainland is expecting President Ma to win another term.]

Japan: Tokyo Electric Power Co. admitted that one of the reactors at the Fukushima Daiichi nuclear plant had experienced a substantial meltdown of its core, but that it hadn’t been a catastrophe because the vessels surrounding it didn’t break apart, though they are damaged. Had the fuel rods melted through, the release of radioactive material into the atmosphere would have been massive.

Boy, this should make everyone feel better. It certainly suggests that highly radioactive water continues to be released as the reactor in question is cooled. A big issue now with this revelation, however, was whether the reactor was damaged by the tsunami or the quake itself. If it’s the latter, then the safety of all plants would have to be reconsidered.

Earlier in the week, Chubu Electric Power Co. announced it would close a nuclear plant in central Japan, citing the risk of a disastrous quake, and then the government said it will scrap a plan calling for increasing the share of nuclear power as an energy source in Japan to 50% from the current 30%. Prime Minister Naoto Kan said Japan needed to “start from scratch” on its long-term energy policy.

Russia: Guess who made a terrific investment? Why none other than Prime Minister Vladimir Putin. Back in November 2005, while president, Putin suggested that the Central Bank increase the share of gold in its reserves as gold was hitting an 18-year peak of $493 an ounce. “In gold,” Putin said at the time, “the Russian population could find an investment alternative to the dollar and euro.”

So shortly thereafter, the Central Bank began loading up and by this month the amount of gold in its reserves grew from about 2.5% to 8%. 

As for the growing rift between Putin and President Medvedev, we could learn more about next year’s presidential election on Wednesday at a rare news conference called by Medvedev. This week Putin created a new coalition of supporters under his personal banner as a way of gearing up for 2012, and Medvedev must counter this to stay relevant. For Putin it was a way to split from his United Russia creation that is seeing falling support, so the prime minister created the “All-Russia People’s Front”.

Spain: As if the situation here isn’t bad enough economically, the country received a shock in the form of two earthquakes close to the town of Lorca that killed 8 and caused major damage. Spain receives hundreds of earthquakes a year but few that the people even feel and this was the worst since the 1950s.

Mexico: President Felipe Calderon is touting 2011 as the year of tourism, even as the U.S. State Department expands its travel warnings after yet another spate of violence, including a gun battle on an island sitting in a lake bordering Texas that claimed 13 lives. And another eight were discovered near the border without their heads, which is really kind of a lousy way to go, so with all due respect to Mr. Calderon, I’ll pass. 

By the way, the occupancy rate at Acapulco’s major resorts is down to 38%, Cancun’s to 57%. I feel very sorry for the locals, I must say, but 111 Americans were killed south of the border last year, compared to 35 in 2007. Did you have any idea the toll was that high? [Tiffany Hsu / Los Angeles Times]

Random Musings

--In the above-mentioned NBC/Wall Street Journal survey, President Obama’s approval rating, post-bin Laden, ticked up just three points to 52% from 49%. But 51% gave him high marks for being a good commander in chief, up from 41% in December. 

56% approved of Obama’s handling of Afghanistan, the highest of his presidency, with 72% saying he should keep the troops there.

In the AP-GfK poll, Obama received a 60% approval rating, the previous high being 64% in May ’09. 45% believe the country is headed in the right direction, up 10 points from five weeks ago.

--Sign of the Apocalypse: A mailer from AARP… “Tell Congress to stop painful cuts to Medicare and Social Security.”

They should add… “And tell your grandchildren to start hoarding nuts.”

--In a Bloomberg Global Poll of investors, outside the U.S., President Obama is rated stronger than President George W. Bush on terrorism, 48% to 16%. But by 54% to 26%, investors in the U.S. give Bush the edge. 

--President Obama gave a speech on immigration in El Paso, sarcastically blasting Republicans on border enforcement. “Maybe they’ll need a moat. Maybe they want alligators in the moat.” Then, as the Washington Post’s Charles Krauthammer observed, Obama issued his now classic line:

“I’m going to do my part to lead a constructive and civil debate on these issues.”

“Nice touch. Looks like the Tucson truce – no demonization, no cross-hairs metaphors – is officially over. After all, the Republicans want to kill off the elderly, throw the disabled in the snow and watch alligators lunch on illegal immigrants.

“The El Paso speech is notable not for breaking any new ground on immigration but for perfectly illustrating Obama’s political style: the professorial, almost therapeutic, invitation to civil discourse, wrapped around the basest of rhetorical devices – charges of malice compounded with accusations of bad faith. ‘They’ll never be satisfied,’ said Obama about border control. ‘And I understand that. That’s politics.’

“How understanding. The other side plays ‘politics,’ Obama acts in the public interest. Their eyes are on poll numbers, political power, the next election; Obama’s rest fixedly on the little children.

--The Senate Ethics Committee recommended that federal prosecutors relaunch an investigation of former Nevada Republican Senator John Ensign, saying a panel had amassed evidence Ensign broke the law, including making “false or misleading” statements to the Federal Election Commission and obstructing the ethics panel’s probe into his affair with Cynthia Hampton, a former campaign aide, by deleting key documents. For starters, it appears Ensign accepted illegal campaign contributions far over allowed limits.

--FBI Director Robert Mueller’s 10-year term as director ends Sept. 4 and now President Obama wants to extend it two years, even though this changes the congressional statute on the position. Congress would thus have to pass legislation to allow the move. Obama says he’s looking for continuity, especially with the anniversary of 9/11 coming up. Mueller could easily stay on a few weeks longer, no doubt, but I think it’s wrong to keep him beyond that. For starters, he’s just not that good.

--Republican presumptive presidential candidate Mitt Romney tackled a skeleton in his closet, the health care overhaul he enacted as governor of Massachusetts that looks an awful lot like Obamacare. Romney has been running around the country saying Obamacare should be repealed and needless to say he has a huge credibility issue and appears to be planning on circumventing his past by spouting:

“Our plan was a state solution to a state problem and his was a power grab by the federal government.”

Romney also now says, “I did what I thought would be right for the people of my state.”

--Mideast envoy George Mitchell is resigning after more than two years. Here’s to a job poorly done. 

--A German court sentenced Nazi death camp guard John Demjanjuk to five years in prison after he was found guilty of taking part in the murder of 28,000 people while working at Sobidor. Demanjuk is 91 and has been placed in a nursing home. Undoubtedly this is the last of the major Nazi war crimes trials. It seems like his case has been going on forever, including court proceedings involving his time at the Treblinka camp as “Ivan the Terrible.” But an Israeli court overturned a Treblinka related conviction and death sentence in 1993, though it appeared he had been a guard at Sobidor, also in Poland. 

[I’ve been to the site of the Treblinka camp, 1999, and it was more than a bit unsettling driving past the locals, who weren’t pleased I was in the neighborhood.]

--I forgot to add some thoughts on my trip to Paris last time. None of the French are overweight. At least I didn’t see any. [Frankly, the women also never looked more beautiful. Just sayin’.] One thing I noticed more than in all my previous trips here is the hordes that seemed to be jogging. That’s great. The flipside is I was surprised at how many still smoke, which is not great.

But on the Monday I was there, I watched French television do a special on the death of bin Laden, “Mort de Ben Laden,” and there were reporters stationed in Marrakesh (because of the recent bombing there), Casablanca, Washington, Islamabad, and Kabul. Granted, the distances between Paris and these cities vs. a New York-based network are far shorter but it was nonetheless impressive coverage. 

--There was a very disturbing report I didn’t get to comment on the other day; that being a look at studies from around the world on prostate exams. As reported by Jason Gale of Bloomberg:

“Among the millions of men tested for prostate cancer around the world each year, doctors are detecting an alarming trend: An increasing number of patients are getting sick from potentially lethal, drug-resistant infections.

“Studies emerging during the past year have uncovered that a small, yet growing percentage of those undergoing routine needle biopsy tests are becoming critically ill and dying from bacterial infections. Infectious complications including sepsis from prostate biopsies have more than doubled in less than a decade, studies from three countries show. Nine out of 10,000 men whose tests were negative died within a month, researchers in Toronto reported in the Journal of Urology in March last year.”

But now new reports appear to show a rate higher than this. The Toronto study showed that the chance of being hospitalized within a month of the procedure had increased fourfold in less than a decade, and this particular look at some 75,000 electronic records was just for the period 1996-2005.

The source of the sepsis is from the prevalence of antibiotic-resistant strains, owing to our overuse of antibiotics. As Gilbert J. Wise, 78, clinical professor of urology at New York’s Weill Cornell Medical Center told Bloomberg:

“There’s not just smoke, there is a fire. No question. I’m personally aware of two deaths – they’re not mine, thank God – in patients following biopsy. So it can happen. It’s a shame. You do something, there is no cancer, and they die of the procedure.”

“Men most susceptible to harboring resistant bacteria include those who have taken antibiotics in the year before the procedure; who have recently visited countries where resistance is common in the community; and those who work in a hospital or live with someone who does,” said David Bell, a urologist in Halifax, Nova Scotia. “This is a huge issue. This is actually catastrophic.”

--I haven’t reported on this story before, but as a subscriber to Army Times I have seen a ton of articles on men faking war service, claiming unearned medals and such. One who got pretty high in the chain of command was recently let go for wearing medals he hadn’t earned. But now, with the killing of bin Laden by Navy SEALs, imagine how many are going to be tempted to claim they too were SEALs. One U.S. pastor was already exposed as a fraud and it turns out parts of his story were similar to a Steven Seagal movie, Under Siege. One SEAL, Don Shipley, told ABC News that he spent much of his time looking for and challenging SEAL-wannabes, and since the bin Laden operation, the number claiming to be SEALs has “skyrocketed.”

“I can’t even keep up with the amount of fraudulent claims and phony SEALs. Guys who haven’t ever considered doing this are coming out of the woodwork, and we’re nailing them as fast as we can.”

Another retired SEAL, Larry Bailey, told the Associated Press that he and his friends have exposed “35,000 phonies through the years.”

“There were about 500 SEALs that operated in Vietnam, and I’ve met all 20,000 of them,” joked another, Steve Waterman.

Currently there are about 2,500 SEALs on active duty.

--A military study finds that troop morale in Afghanistan continues to deteriorate. As reported by Gregg Zoroya of USA TODAY:

“The report says the decline in individual morale is significant: 46.5% of troops said they had medium, high or very high morale, compared with 65.7% who said that in 2005.”

Gen. Peter Chiarelli, Army vice chief of staff, who has focused on combat stress, says:

“We’re an Army that’s in uncharted territory here. We have never fought for this long with an all-volunteer force that’s 1% of the population.”

--Finally, one my favorite figures, George Will, turned 70 the other day and talked about the milestone in his Washington Post column.

“To be 70 is to have escaped the disagreeable fate of dying young….

“To be 70 is to have seen the nation put away the almost casual cruelty of racial segregation…

“To be 70 is to have been born shortly before Pearl Harbor, to have lived through the war that was already then raging, and the Cold War, and to have arrived at the sunny uplands of today. Yes, of course, man is still, and ever will be, born into trouble, as the sparks fly upward. But never before in the human story has the risk of death by violence been smaller for such a large portion of humanity….

“To be 70 is to understand that time cannot wither, nor custom stale the infinite pleasure of simply trying to do things well, or witnessing others do them. Casey Stengel returned from exile to manage the 1962 New York Mets, an expansion team that, en route to losing 120 games, caused him to look down the dugout and ask in wonderment, ‘Can’t anybody here play this game?’ Few can, which is why the especially talented few – athletes, writers, musicians, thinkers – delight the many….

“Finally, to be 70 is to have lived 30% of the life of this nation, which is almost enough time to begin to fully appreciate the inestimable privilege of being a legatee of those who first unfurled the republic’s sails and steered it toward the present. That is why – with homage to F. Scott Fitzgerald – as we beat on, boats against the current, we should be borne back ceaselessly into the American past: It is impossible for the young to know, but never too late to learn, that America truly is something – perhaps the only thing – commensurate with our capacity for wonder.”

This summer, be sure to take your children to at least one good history museum or battlefield. There’s one undoubtedly in your backyard.   In my area, for example, we have Jockey Hollow, the national park where George Washington spent the brutal winter of 1779-80. I kick myself all the time for not visiting New Jersey’s many historic Revolutionary War battlefields. Or go to Arlington National Cemetery and not only pay your respects to the recent war dead, but also show your kids the burial site of Audie Murphy, one of this nation’s biggest heroes. His is a great tale for them to learn.

Speaking of history, it was sad this week seeing the massive flooding in places such as Vicksburg. May residents of this historic city and all the others in the Mississippi River’s destructive path recover quickly.

Returns for the week 5/9-5/13

Dow Jones -0.3% [12595]
S&P 500 -0.2% [1337]
S&P MidCap +0.5%
Russell 2000 +0.3%
Nasdaq +0.0 [2828]

Returns for the period 1/1/11-5/13/11

Dow Jones +8.8%
S&P 500 +6.4%
S&P MidCap +9.5%
Russell 2000 +6.6%
Nasdaq +6.6%

Bulls 51.1
Bears 18.5 [Source: Chartcraft / Investors Intelligence]

Have a great week. I appreciate your support.

*Not sure what I’m doing yet regarding the timing of next week’s edition. It’s going to be an abbreviated one…probably not posting until Sunday p.m. but I’ll have something up top when I decide. I have a mini-high school reunion with the guys…golf, poker and beer and every derivation thereof.

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