Week in Review

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Week in Review

05/21/2011

For the week 5/16-5/20

[Posted 11:00 AM ET…from somewhere on the Jersey shore]

Wall Street, Washington and Europe

It’s said a grand jury can indict a ham sandwich and now a Manhattan grand jury has indicted a Frenchman, former managing director of the International Monetary Fund, Dominique Strauss-Kahn, on charges related to the sexual assault of a maid at a midtown hotel last Saturday afternoon. What a chain of events DSK’s act set in motion as the IMF desperately needs his knowledge and leadership in working out the European debt crisis. I’m not going into the case any further, except for a brief statement on the French reaction down below and to say that women who have supposedly been mistreated by Strauss-Kahn in the past are now coming out of the woodwork. This is not a good guy, but the world is full of examples of powerful men behaving badly, see also a certain ex-California governor, multiple U.S. presidents, etc.

Personally, I’m down at the Jersey shore with a bunch of high school buddies. It’s a unique group.   We all played poker growing up, had regular weekly games, and seven of the eight of us ended up on Wall Street or the financial space in one form or another. Actually, all seven of us had totally different Street careers. We like to say we could’ve formed a helluva investment boutique, though that probably would have been the end of the friendship. [The 8th has been a software executive so he certainly would have been folded into the operation as well.]

Anyway, I’ll fill in some gaps next time on the past week. For now…let’s go to Europe, Brussels and the euro debt crisis. 

Regarding Greece, this week some European Union officials began to openly talk of restructuring its debt, taking haircuts, or “reprofiling,” which would involve extending maturities. In terms of how the market would react, they are really one and the same. It would be a disaster, though everyone knows restructuring, or outright default, is a certainty. There is just no way Greece will be able to go to market in 2012 on $40 billion in government debt it would seek to roll over at interest rates the country could handle. Last year, when the EU, ECB and IMF set bailout terms for the $157 billion Greek package, it was expected that Greece would be able to do so at 5.6%. Today, depending on the maturity, you’d be talking 15% to 26%.

But the European Central Bank is adamant there will be no restructuring, or reprofiling, and that Greece must step up its efforts to get its financial house in order, including an increased privatization program that the ECB believes could uncover $50 billion in needed funds.

So that’s basically where we stand on Greece. The goal for now is to buy time and pray for growth…kick the can down the road further, perhaps to the time when the world ends, which could be any minute now, according to some, at which point this discussion would be entirely moot, right? I’d be a little upset I never got my book out, but that would kind of be irrelevant, too.

As for Portugal, assuming we still need to care about this stuff for a while, the EU approved $111 billion in funding for this basket case, with the IMF charging 3.25% interest on its portion and the EU charging 5.5%-6.0%. However, the bailout still needs to be approved by all 17 euro governments though it would seem at least as of today the Finns won’t be a problem.

It’s unclear how long this shell-game, or Ponzi scheme, can go on…though as I noted a few weeks ago it can go on forever…or until the time when one or two euro governments say no, at which point Greece, Portugal and/or Ireland will be left without a chair and totally without hope. Then the people will riot and we’ll have another war on the continent.

Far-fetched? Perhaps, but for all my talk, going back years, about the threat of rising nationalism on the European continent and how Greece bears special watching because it is part of the Balkans, after all, since my last column addressing this topic we had Anthony Faiola write in the Washington Post:

“Perhaps most alarming (referring to Greece), analysts here say, has been the resurgence of an anarchist movement, one with a long history in Europe.”

A story in the New York Times quoted Stefanos Manos, a former Greek economy minister who has advocated more aggressive spending cuts.

“This is an explosive situation, and there could well be violence. Especially as those who lost their jobs were earning 50% less than those who kept them.”

But up above I talked about growth and the euro-17 did see 3.3% of it on an annualized basis for the first quarter vs. a growth rate of just 1.1% for the fourth. The problem is the rest of the year is expected to come in at just 2%, and broken down further you still have the haves (Germany and France most prominently) vs. the have nots (you know those names) who will continue to threaten to take down the rest, with the people in the wealthy states telling their politicians that if they ever want to get reelected, they better not approve any further funding for the weak sisters.

I would just add that with regards to Ireland, the IMF is increasingly frustrated with the EU and ECB, because the IMF believes Ireland is doing the best they can in trying circumstances but that these two aren’t holding up their end of the bailout bargain by forwarding agreed upon aid. This is where Dominique Strauss-Kahn’s absence is most greatly felt.

Of course Greece could be America’s future (and we have our share of anarchists, lying mostly in the weeds, waiting for an opportunity to strike) if we don’t get our own debt crisis under control. This week the government technically hit its $14.3 trillion limit but the Treasury Dept. can play shell games until Aug. 2 or thereabouts. Until then, though, we are going to witness a distressing game of chicken between Congress and the White House over the size of spending cuts that must accompany a compromise on the debt ceiling, assuming one is reached.

If none is forthcoming, Treasury Secretary Geithner warned:

“Default would not only increase borrowing costs for the federal government, but also for families, businesses and local governments….

“This would be an unprecedented event in American history. A default would inflict catastrophic, far-reaching damage on our nation’s economy, significantly reducing growth and increasing unemployment.”

The other side of the debate is represented by Oklahoma Republican Senator Tom Coburn, who this week quit as a member of the Gang of Six that was seeking to put together a budget compromise that would then be presented to the full Senate, House and the president. In a Washington Post op-ed, Coburn weighed in.

“Our country is facing the greatest threat to our freedom and future since 1941. Any honest view of our debt, deficits, size of government and demographic challenges shows we must make major changes if we are going to pass on the American way of life to our children. Each week seems to bring new warning signs: slower-than-expected growth, higher-than-expected unemployment numbers, admonitions to get our act together from the international financial community.

“If these facts are true – and very few policymakers deny them – why has the U.S. Senate become the least deliberative ‘greatest deliberative body’ in the world?

“The lack of leadership and initiative in the Senate is appalling. As of this week, the Senate has held just 72 roll call votes this year, about one per legislative day on mostly noncontroversial and inconsequential matters. By this time last year, we had taken more than twice that number of votes (152). By this time in 2009, we had taken 192 votes. If we continue to avoid tough choices, we will lose control of our economic destiny and go down in history as the Senate that lost America. Our epitaph will read: Never before in the field of legislating was so much ignored by so many for so long….

“We are facing what Democrat Erskine Bowles calls the most predictable economic crisis in history. There is no excuse for not having bills on the Senate floor with an open amendment process that allows the American people to fully comprehend not only the magnitude of our problems but the possible solutions. The people need to hear the Senate debate the central issues of our time….

“As the Senate majority leader, Harry Reid bears special responsibility for failing to direct attention to the central challenges…His floor strategy seems to be focused on saving Democrats more than democracy. I would relish a debate on tax earmarks, spending cuts and competing budgets (if there were competing budgets), yet the votes he seems most interested in scheduling – such as tax breaks for big oil companies – are designed for short-term political gain rather than long-term deficit reduction….

“History has not been kind to republics that pretend they can borrow and spend beyond their means indefinitely. We can cheat history, but only if we act quickly.”

Finally, due to time constraints I cannot do justice to President Obama’s address on the Middle East on Thursday, except to say for now that he said an independent Palestine should be based on 1967 borders – before the Six Day War in which Israel occupied East Jerusalem, the West Bank and Gaza – importantly, though, by adjusting for land swaps on both sides to create two secure, contiguous states. Obama added:

“At a time when the people of the Middle East and North Africa are casting off the burdens of the past, the drive for a lasting peace that ends the conflict and resolves all claims is more urgent than ever.”

He also urged the American people to understand the importance of devoting U.S. influence and money to help stabilize the region.

“There must be no doubt that the United States of America welcomes change that advances self-determination and opportunity. Yes, there will be perils that accompany this moment of promise. But after decades of accepting the world as it is in the region, we have a chance to pursue the world as it should be.”

It’s the endorsement of the 1967 borders, however, that stole center stage and for his part, Israeli Prime Minister Benjamin Netanyahu was furious. On Friday, in a tense Oval Office meeting with the president, Netanyahu warned Obama against chasing Mideast peace “based on illusions” and said Israel would never return to the ’67 borders.

“While Israel is prepared to make generous compromises for peace, it cannot go back to the 1967 lines – because these lines are indefensible.”

But the White House countered it never insisted Israel should return to a narrow definition of its territory and that Netanyahu was purposefully misinterpreting Obama’s remarks.

Street Bytes

--Stocks declined for a third consecutive week with the Dow Jones losing 0.7% to 12512, while the S&P 500 lost 0.3% and Nasdaq 0.9%.

A leading panel of economists (NABE) lowered its growth forecast for the U.S. to 2.8% in 2011 rather than the 3.3% they projected in February, noting the group is “highly concerned” about the federal deficit. Consumer spending was lowered, but business spending is now expected to be higher than first forecast. [The IMF also sees 2.8% growth for the U.S.]

As for the Federal Reserve, they have been buying 70% of available Treasury securities at auction as a result of QE2 so its end in June is obviously significant. The Fed is debating just how to end the grand experiment that has pumped up asset prices but done little to help the actual economy, see unemployment and housing.

--China cut its holdings of U.S. Treasury securities for a fifth month in a row in March, but before anyone starts going, “Ah ha!”, just understand it is still by far America’s largest foreign creditor at $1.145 trillion, or just 2.6% off the October peak of $1.175 trillion. Interest from Japan and Britain, on the other hand, rose in March by $17.6 billion and $29.7 billion, respectively.

--Japan’s economy fell back into recession with GDP contracting 0.9% in the first quarter over the fourth, when the economy also experienced declining activity. But a fuller picture of where Japan stands will emerge with the report for the second quarter when we see the real impact of the March 11 triple disaster.

--Iran is the holder of the rotating presidency for OPEC in 2011 and President Ahmadinejad plans on attending a meeting next month in Vienna that could prove interesting, seeing as archrival Saudi Arabia is seeking to increase production quotas to bring oil prices down some while Ahmadinejad is against such a move. It is expected that he will use the platform to spout anti-West and anti-U.S. drivel. While the president may decide not to attend in the end, his appearance is still possible seeing as how he is acting oil minister after dismissing the head of the agency the other day and Ahmadinejad has up to three months to name a new head. [At last word, though, the Iranian parliament has said Ahmadinejad cannot be the nation’s representative at the meeting.]

--The International Energy Agency urged OPEC to step up production, saying there was a “clear, urgent need for additional supplies,” adding, “The loss of Libyan crude volume now looks likely to be a protracted one.” Before the uprising, Libya was producing about 1.6 million barrels per day.

--As a follow-up to a comment I made last time on the Alaskan Oil Pipeline and the need for increased production to avoid disruptions as a result of the currently weak flow through the pipe, President Obama granted a one-year extension on leases companies hold in parts of Alaska, as well as the Gulf of Mexico, and the administration will begin conducting annual lease sales in Alaska, which should help the pipeline situation some.

--Iraq is slated to miss its oil production target of quadrupling output by 2017 due to constraints in both pipelines and export terminals. A more realistic goal is to double production to 5 million to 6 million barrels a day from the current 2.6-2.7 mmbd.

--Singapore raised its growth forecast for the year to 5% to 7% from an earlier forecast 4% to 6%, which is significant in that this is a major regional player and counters a feeling that Asia’s emerging economies could slow.

--A U.S. International Trade Commission report requested by senators surveyed U.S. businesses and estimated they lost some $48 billion in 2009 due to infringement of intellectual property rights in China. If Beijing raised its enforcement, U.S. companies could increase employment at home by 923,000 jobs, the survey said.

--Meanwhile, foreign direct investment in China rose 15% in April owing to the expansion plans of companies like Disney and Starbucks. Builders broke ground on the $4.4 billion Shanghai Disney Resort, the company’s first theme park on mainland China, while Starbucks is expanding from 35 to 70 cities there.

--And now for the domestic news, on Thursday, professional social network site LinkedIn went public at $45 a share and soared to over $105 before closing the first day at $94 ($93 by week’s end). Everyone had the same reaction…this is absurd. The valuation, however you slice it, is nuts. I just wish I had some shares myself at $45 to flip (one of the members of my group this weekend did do so). As Aaron Elstein wrote in Crain’s New York Business, the LinkedIn IPO reminded him of Aug. 9, 1995, more so than the bubbly days of 1999, as everyone was saying on Thursday.

“Jerry Garcia died that day, delivering one massive bummer to Deadheads. White House intern Monica Lewinsky would soon deliver a pizza to President Clinton. And Web browser Netscape went public at $28 a share, then soared to $75 on its first day of trading before closing at $58.25, giving the 14-month-old company a market value of about $3 billion. Thus was born a craze.”

--Existing home sales for April came in worse than expected and the median home price declined over year ago levels, though up from March’s levels. Here’s the bottom line. In late 2008, I said the housing market would bottom in April-May of 2009, and then refined that to April, after which I said “we’d then just sit there.”   The median existing home price in April ’09 was $166,500. Last month the median price was $163,700. I’d say I nailed that one.

--California’s surprise revenue windfall is now projected to be $6.6 billion, which all comes from the state’s rich as a result of capital gains tax receipts and such.   So Gov. Jerry Brown, still facing about a $10 billion budget deficit, will nonetheless restore some $3 billion in education funding. New Jersey is looking at its own “windfall” of $900 million on better than expected revenue. No word on what Gov. Christie will do here.

--Wal-Mart’s earnings for the just-completed quarter were saved by strength in its international stores.

--New York Attorney General Eric Schneiderman (who replaced now-Gov. Andrew Cuomo) has launched an investigation into the mortgage securities operations of Bank of America, Goldman Sachs and Morgan Stanley during the credit crisis. The inquiry appears to be very broad and undoubtedly will be extended to other institutions.

--Incredibly, Air France recovered the flight recorders from the A330 jet that crashed off Brazil two years ago and preliminary evidence shows no immediate safety problems with the plane. Recall that evidence at the time of the disaster indicated the jet’s speed sensors had malfunctioned. There were supercells in the flight path, though, whose possible impact is still being looked into.

--Sony CEO Howard Stringer warned consumers that the company couldn’t keep everyone safe from cyber threats, even as he urged users to return to its PlayStation network following a massive security breach. Stringer told the Wall Street Journal, “It’s not a brave new world; it’s a bad new world.” Tell me about it.

--Hewlett-Packard CEO Leo Apotheker, in an email sent to executives, asked his lieutenants to cut back on their hiring plans and expenses with a vengeance, adding compensation was way too big.

Separately, H-P’s consumer PC sales plunged 23% last quarter and the company lowered its sales forecast $1 billion for the year, while Dell, which handily beat estimates on earnings this week, saw its consumer sales fall 7.5%.

Yes, PC sales are getting slammed as a result of the surge in iPad and other tablet computer sales. Jefferies & Co., for example, looks for iPad sales to go from 70 million units in 2011 to 246 million in just three years.

--Sales of gold coins in May are on track for the best month in a year. As reported by Bloomberg, “The last time sales reached that level, bullion rose 21% in the next year.” A median estimate of a Bloomberg survey of 31 analysts, traders and investors has gold advancing to a record $1,750 by Dec. 31. 

[China overtook India in the first quarter as the largest market for gold bars and coins, with Chinese demand up a whopping 55% from the previous quarter and double year ago levels, according to the World Gold Council.]

--Last week I mentioned the first official government survey of Irish home prices and how values in Dublin fell 47% in four years. To update the report, the government expects a further decline, with overall prices, nationwide, likely to have fallen 55% to 60% before stabilizing.

--Richard Marston, a professor of finance at the Wharton School, said that when PIMCO forecast a “new normal” for investment returns in the spring of 2009, “from that point through March of this year the stock market gained 94%. It was terrible timing to call for a new normal. If your clients bailed out of the market during that grim winter of 2008 and 2009 they lost out on an almost 100% rally.”

--In front of a crowd of music industry executives, billionaire tech investor Roger McNamee skewered Google in a speech, describing it as the “old guard” which has fallen behind Apple’s innovation and has “filled the Web with crap.”

“You have to support [Apple’s] platforms even if you hate Steve Jobs…Apple is about trusted brands, authority, security, copyright and the like.” McNamee alleged that Google had to remove 64 apps from its Adroid app store for stealing confidential information.

McNamee added that when it comes to Microsoft, “Consumers are abandoning Windows as fast as they can.”

It was about nine years ago that I met Roger and, looking back, should have followed his advice in a few areas (though most are irrelevant to what I’m doing today). However, I’m aggressively pursuing an Apple angle myself that is going on behind the scenes with my tech folk. Apple is a real pain in the butt to deal with, but, you can see that they do things the right way.

--A Munich Re unit held a party in Budapest to reward some of its best-performing agents and it has now come to light the 2007 event was hosted by 20 prostitutes. Women wore color-coded armbands, a German newspaper said, with red for hostesses, yellow for those available for sexual favors and white for women reserved for executives and top agents. Good lord. Munich Re assured everyone the other day that executives responsible for the party are no longer with the firm.

--Oh, those daffy Chinese. It seems farmers in eastern Jiangsu province sought to make their watermelons bigger to earn more money at market so they sprayed forchlorfenuron, a growth accelerator, during overly wet weather and put it on too late in the season, which caused the watermelons to burst. So China Central Television showed acres and acres of ruined product, describing the melons as “land mines.”

[Forchlorfenuron, by the way, is not a banned drug and is used in the U.S. on kiwi fruit and grapes. Needless to say, though, in China the government needs to supervise its farmers a little more closely.]

--Legendary Manhattan eatery Elaine’s is closing, just six months after flamboyant owner Elaine Kaufman passed away. Business fell off dramatically shortly after her death.

--Donald Trump is always talking about his “world class properties” and so to give him his due, in looking at the latest Travel & Leisure survey of its readers, the top city hotel in the U.S. and Canada is Trump International Hotel & Tower in Chicago. This place is ranked No. 4 worldwide among all city properties. [Interesting story on HBO’s “Real Sports” last week on The Donald’s struggle to build “the world’s greatest golf course” in Scotland. Worth watching.]

--My portfolio: The large China holding of mine reported earnings on Monday and they were once again very solid. The company also reiterated 2011 guidance. But due to the fact it often seems like just a handful of investors know about this outfit, let alone the hits many Chinese stocks are taking due to accounting issues, shares in the specialty chemical/biodiesel company went nowhere. Very frustrating.

Foreign Affairs

Syria: Anywhere from 750 – 1,000 have been killed in demonstrations against the Assad regime, perhaps another 10,000 arrested,  but after two months the Obama administration finally acted by levying sanctions on the Syrian president and six of his top aides. Property any of the seven have in the U.S. will be frozen and it becomes illegal for any U.S. company to deal with them. Until now the White House has seen Assad as a pragmatist and potential reformer, which looked more than a bit foolish as his crackdown intensified.

“How hard will the sanctions imposed yesterday by President Obama on Syria’s Bashar Assad and his inner circle hit the regime’s bottom line?

“Probably not much. Unlike Libya’s Moammar Gaddafi, who had tens of billions in oil riches stashed abroad until they were seized by the U.S. and our allies, the poorer Assad regime was largely cut off from U.S. financial institutions by previous sanctions. Damascus may be more worried by yesterday’s move by the Swiss government to freeze the assets of 13 top Syrian officials.

“Then again, the benefit of sanctions is often symbolic, and in this case sanctions mean the Obama Administration may finally be getting over its fixation with the idea that Mr. Assad is a reformer, or that he can be weaned from his alliance with Iran, or that his regime is a potential partner in solving the region’s various ills.

“We stress the word ‘may’ because even now the Administration is telling reporters that the purpose of the sanctions is to put Mr. Assad on notice that he can either ‘lead this transition to democracy’ or otherwise leave office. On cue, Mr. Assad now claims that police incompetence is to blame for all the killing….

“It’s unfortunate that Mr. Obama didn’t impose these sanctions earlier, when the demonstrations had momentum and before the regime had consolidated its grip. As with sanctions on Iran and the intervention in Libya, Mr. Obama seems to come to the right conclusion only after the moment when American leadership could have done the most good.”

Israel: Last Sunday, in a well-orchestrated move by Palestinians using sites such as Facebook, and with the collusion of the Syrian government, the “Nabka,” or “catastrophe,” an anniversary marking a day of mourning for Palestinians as it was in 1948 that Israel declared its independence and began to expel 750,000, protesters clashed with Israel on four fronts – the West Bank, Gaza, Syria (the Golan Heights) and Lebanon – with hundreds breaking down barriers and moving into Israeli territory. Israel was prepared for the demonstrations, but it wasn’t prepared for the intensity of them and while the Palestinians were unarmed, at least 16 were killed by Israeli troops. Immediately a hue and cry went up in the region, “How could the Israelis kill unarmed civilians?” To which my immediate reaction was I’m amazed at Israel’s relative restraint. For sure, Israeli officials are feverishly looking for alternative, non-lethal ways, to deal with future uprisings because clearly this is going to be the new tactic.

As for Damascus, they bused the protesters to the border in an attempt to create an incident that would take the world’s eyes off its slaughter of demonstrators. For a few hours it succeeded. The Golan Heights, while under Israeli control since 1973, has been peaceful since then.

Regarding Lebanon, there is still no new government (Jan. 12 being the date of the dissolution of the old one), while it appears the seven kidnapped Estonians from the Bekaa Valley were definitely taken to Syria.

Pakistan: Parliament demanded a halt to drone strikes which have picked up since the death of Osama bin-Laden; this as the ISI chief had to admit in an 11-hour session with the body that it was embarrassing how, among other things, Pakistan didn’t detect the helicopters in the raid to kill bin-Laden, let alone that he was using Abbottabad as his base. But at the same time the U.S. raid was a “breach of the country’s sovereignty,” according to the ISI.

The Pakistani government also cried it had no idea bin-Laden was hiding where he was for over five years and by week’s end, Defense Secretary Robert Gates and Joint Chiefs of Staff chairman Michael Mullen both said they had seen zero evidence that top Pakistani officials had any knowledge.

“If I were in Pakistani shoes, I would say I’ve already paid a price,” Gates said. “I’ve been humiliated. I’ve been shown that the Americans can come in here and do this with impunity. I think we have to recognize that they see a cost in that and a price that has been paid.”

In a significant development on the U.S. home front, the imam of a Florida mosque and his two sons were arrested last weekend on charges of financing and supporting the Pakistani Taliban. The indictment detailed money transfers totaling some $50,000, but the U.S. Attorney in charge of the investigation in Florida, Wilfredo Ferrer, said, “This was just the tip of the iceberg” and the arrests (three others remain free in Pakistan), followed a three-year investigation. I have been hesitant to mention all the arrests that have come up in the U.S. for the simple reason that not all of them are the kind of cases that should keep Americans up at night. This one is different because these individuals were obviously directly involved in killing Americans through their support of a Taliban that is also seeking to undermine the Pakistani government.

Afghanistan: The White House is speeding up negotiations with Taliban representatives ahead of a July announcement on troop withdrawals in an effort to have some good news to sell their plans all the better. But on Thursday, the Taliban killed at least 35 construction workers. Eight Taliban were killed in the attack when guards returned fire. It was the deadliest single action since the Taliban killed 42 at a bank in February. Earlier in the week, four U.S. soldiers were killed in a single bomb attack.

Iran: A confidential U.N. report obtained by Reuters appears to show that Iran and North Korea were regularly exchanging ballistic missile technology in violation of U.N. sanctions. The report also said that the transfers were taking place “through a neighboring third country,” i.e., China, but China vigorously denied this.

Separately, the U.N. International Atomic Energy Agency said its experts’ cellphones and laptops were probably hacked into by Iranian officials when the equipment was left unattended during inspection tours.

Iraq: At least 26 were killed in a series of attacks against police in the disputed northern city of Kirkuk.

France: Well I’m glad I’ve been writing about the 2012 French presidential election because the news of Dominique Strauss-Kahn’s implosion and the consequences for next spring’s vote shouldn’t be a total surprise in terms of one thing…it’s big. I told you of how he was going to run and kick his opponent’s butt in the run-off, but that the interesting aspect would be who DSK would face. I had the opportunity to hear far-right, National Front candidate Marine Le Pen in person in Paris on May Day and there was no doubt in my mind she is for real and could upset President Sarkozy in the first round of voting, whereupon DSK’s Socialist Party would romp. This would not be good for France, I’ve argued, because the Socialists certainly wouldn’t be amenable to further, needed, austerity measures. [Not that Ms. Le Pen’s stated goal of exiting the euro system is any better for the country.]

But now when you look at the Socialists’ prospects post-DSK, the two most visible candidates to replace him, party leader Martine Aubry and Francois Hollande, do not have anywhere near the wattage of Strauss-Kahn. Regardless of who emerges, both Le Pen and Sarkozy obviously pick up some points. Instead of it being 40-20-20 (20% undecided), just using my own instincts, perhaps after things settle down in a few weeks it’s more like 35-23-22.

As for Sarkozy, he is getting another of his wishes fulfilled in the unofficial (as I go to post) pregnancy of First Lady Carla. It was always felt a baby, or prospects of one, would soften his image on the campaign trail. And Carla will have that certain glow, of course…not that she needs any help. So the race is going to be fascinating to watch over the coming year.

One note on DSK and his arrest. The French were ticked off there were all kinds of pictures of him in handcuffs because it is illegal to show someone wearing them in France. France believes to show someone in cuffs negatively impacts the presumption of innocence.

Japan: Tokyo Electric Power Co., operator of the disabled Fukushima Daiichi nuclear plant, said three, not just one, of the reactors went into meltdown back in March (though the fuel rods didn’t break through the containment vessels) so the issue is can they safely shut them down without a massive release of radiation? Workers also confirmed it is reactor No. 1 that is the source of the highly radioactive water that has been leaking, which confirms the heavy damage to that containment vessel.

But what’s inexcusable is Tepco lied to the public as to the seriousness of the situation at Fukushima, including the fact, it has now become clear, that in the first day the plant was at risk of a total meltdown. No doubt, had this been known it would have added to the panic, but the information being received from foreign governments who were advising their citizens in Japan, let alone the Japanese themselves, was flawed. Should a similar such accident happen there is no way you’d believe the initial information. [On Friday, Tepco’s chief resigned as expected after reporting a $15 billion loss for the fiscal year.]

China: The government admitted for the first time that it has major problems with the Three Gorges Dam project, one that cost $40 billion and displaced 1.3 million people. An official statement read:

“There are urgent problems that need to be addressed, such as stabilizing and improving living conditions for relocated people, protecting the environment, and preventing geological disasters.”

Among the issues are frequent landslides caused by fluctuations in the water level and better job opportunities and social benefits for those forced to relocate.

And in a follow-up to my note the other day on the visit of People’s Liberation Army Chief of General Staff Chen Bingde to Washington, in a week-long visit he was mostly conciliatory, saying his country had no plans to take on the U.S. in the Pacific.

“I can tell you China does not have the capability to challenge the United States,” Chen told a joint news conference with Adm. Mike Mullen, chairman of the Joint Chiefs of Staff.

But Chen acknowledged the main source of friction remained Taiwan. When asked by an American reporter if weapons sales to the island would affect military ties between the two economic powers, Chen responded: “My answer is affirmative. It will. As to how bad the impact will be, it will depend on the nature of the weapons sold to Taiwan.”

Adm. Mullen countered there were no plans to halt the arms sales as they were mandated by U.S. law.

“As long as that law remains in effect, certainly we will follow it,” he said.

For his part, Taiwanese President Ma urged the U.S. to release F-16 fighters and submarines that were part of deals worked out in 2001, 2007 and 2009, but have been on hold over fears of upsetting China too much.

Russia: On Wednesday, President Medvedev gave his first full news conference since taking over for Vladimir Putin in 2008, which is really pretty remarkable. But after the hours-long performance, while he showed his preference for being independent, he left unanswered the paramount question…will he run against Putin next year?

On the policy front, Medvedev issued a tough statement and warning to the United States on missile defense, as well as warning other nations not to interfere in Syria.

On the issue of jailed oil tycoon Mikhail Khodorkovsky and whether his release would pose any threat to the Russian public, Medvedev said it would pose “absolutely no danger,” but didn’t say he’d pardon him. What this statement does, however, is differentiate his position from that of Putin’s, who has called Khodorkovsky nothing but a “thief.”

Guatemala: In yet another example of how the drug wars are threatening the whole of Central America, the Zetas drug cartel appears to be responsible for the massacre of 29 people, decapitating most of them, in retaliation for an earlier killing of the brother of Guatemala’s alleged drug boss. The country suffers from weak law enforcement and rampant corruption and is a leading transshipment point for drugs.

Mexico: And as a further example of how the drug wars have impacted commerce here, only half of the U.S. firms surveyed by the U.S.-Mexico Chamber of Commerce said they would go ahead with new investment plans in Mexico, while others, such as Whirlpool, have announced they would put new factories elsewhere citing safety concerns. According to the chamber, one out of 10 companies reported kidnappings and 60% said their employees were beaten or threatened in 2010.

Ireland: This coming week, President Obama travels to Ireland for a day, but beforehand, the Emerald Isle has been the scene of a truly historic visit by Queen Elizabeth II as she became the first British monarch to visit the nation in 100 years amid super tight security…which was needed to defuse a bomb the day before she arrived in Dublin.

The Queen’s visit was highly symbolic and the 85-year-old performed brilliantly from what I was able to see and read. Oh, for sure thousands were visibly upset that this symbol of British tyranny was on Irish soil, but the visit is about moving forward while paying respects to a bloody past. At an official dinner on Wednesday night, the queen offered the following:

“To all those who have suffered as a consequence of our troubled past I extend my sincere thoughts and deep sympathy. With the benefit of historical hindsight we can all see things which we would wish had been done differently or not at all.”

The Queen won over a few skeptics when she prefaced her address with a greeting in Gaelic, a cool touch.

Random Musings

--Following is one of the reasons why I keep bringing up Dwight Eisenhower’s presidential farewell address and his warning about the military-industrial complex.

From the May 16 issue of Defense News, as reported by Marcus Weisgerber.

“Pentagon leaders love to tout the $330 billion they saved by cutting or killing weapons programs over the past two years, but that’s not the whole story.

“Nearly 40% of that sum is going straight back into U.S. military programs that replicate the canceled ones, and it’s unclear where another 10% came from at all, according to a Defense News analysis and to several analysts.

“ ‘Even if somehow it does add up to $330 billion in savings that were cut from these programs….it’s not net savings because there’s going to be replacements for a lot of these things anyway,’ said Todd Harrison, an analyst with the Center for Strategic and Budgetary Assessments, a Washington think tank.”

Sadly, it seems my favorite member of the Obama administration, Defense Secretary Robert Gates, may have played loose with the facts when he touted the initial $330 billion figure numerous times during congressional testimony.

“But asked to provide a program-by-program breakdown of the $330 billion, DoD officials declined, and provided only a simple list of names of weapons. Some programs, Defense News analysis showed, were counted as part of the savings even though they weren’t included in any five-year future years’ defense plan.

“Classified programs, as well as ‘various Army and missile defense programs,’ also contributed to the savings, according to DoD.

“ ‘Classified programs that might have been killed…they wouldn’t have been named explicitly and…they may have already been restarted and we don’t know it,’ (said Gordon Adams, who oversaw budgets during the Clinton administration).”

--Former Arkansas Gov. Mike Huckabee said he wouldn’t make a run for the White House. “All the factors say go, but my heart says no.” He’s reportedly making $500,000 a year on his Fox News contract that runs through 2012. Good move. 

And Donald Trump said, “I will not be running for president, as much as I’d like to.” Of course The Donald said that if he had run, he’d win. But, “ultimately…business is my greatest passion and I am not ready to leave the private sector.”

Drat! I was kind of looking forward to seeing him at the Iowa State Fair. So who will I see there in August? Mitt Romney? Eh. Newt Gingrich? Bleh! Rick Santorum? Yawn. Michele Bachmann? [Can’t answer this one truthfully…sorry.]

--Speaking of former Speaker Gingrich, geezuz, what an idiot. On “Meet the Press” last Sunday, Gingrich blasted Republican Congressman Paul Ryan’s plan to overhaul Medicare as being too “radical” and “right-wing social engineering.”

--Regarding Mitt Romney, on Monday he raised $10.5 million in a dialing for dollars phone bank fundraiser with his network of wealthy donors.

--I’m on record as saying New Jersey Gov. Chris Christie should resist the entreaties to run for president and just focus on his job and the latest survey of Jersey voters confirms my feelings as for the first time in over a year, more of us residents disapprove of his performance than approve, 49% to 47%.

--Finally, as the Washington Post’s Chris Cillizza put it, Indiana Gov. Mitch Daniels (my personal fave) “has become the hottest thing in Republican political circles of late by doing one simple thing: waiting…as he has remained on the fence, almost everyone else in the race has jumped off of it – leaving a field that many GOP voters and strategists believe is wanting.”

Sure is. Gov. Christie is emblematic of the support Daniels is receiving, saying in a radio interview that “he’s certainly somebody who I have enormous respect for and would give real consideration to supporting.” Haley Barbour and Speaker John Boehner have voiced similar sentiments.

--In a USA TODAY/Gallup Poll, by more than 2-1, voters say most members of Congress don’t deserve reelection, matching an historic low.

--Not that the following should be a surprise, but Shirley S. Wang of the Wall Street Journal reported on the proliferation of breathing ills facing our troops in the Middle East.

“Data collected from more than 7,000 veterans who served between 2004 and 2010 – thought to be the largest study of its kind to date – show that some 14.5% of the 1,816 veterans in the study who had served in Iraq or Afghanistan had respiratory illnesses, including bronchitis and asthma. That compares with 1.8% of the 5,335 veterans deployed anywhere else.”

“Police in Chiapas State in southern Mexico found 513 migrants on Tuesday inside two trailer trucks bound for the United States, in what the authorities said were dangerously crowded conditions.”

“Some of the migrants had dehydration after traveling for hours clinging to cargo nets inside the containers to remain upright as the trucks bounced along from the Guatemalan border.

The migrants said they were charged about $7,000 each.

--Eric Prince, the founder and former CEO of the Blackwater security group, is alleged to be using police and military veterans from Latin America and South Africa to build a private army at a secret desert base outside Abu Dhabi. The United Arab Emirates has evidently hired Prince to help them defend a string of strategic islands in the Persian Gulf and to put down uprisings.

Prince, who moved to the region after facing numerous lawsuits in the U.S. related to Blackwater’s dealings in Iraq and Afghanistan, is being watched closely by Washington because his new army, numbering in the hundreds, could be used against pro-democracy protesters.

“Arnold Schwarzenegger is now a made member of the Kennedy Crime Family.

“How ironic – he makes his bones just as his wife, Maria Kennedy Shriver, is throwing him out of the house. Which raises a question – what kind of Kennedy woman is she, divorcing her husband just as he proves himself worthy of the Kennedy mantle, by fathering a child out of wedlock with a member of the household staff?

“Kinda reminds you of Conan the Adulterer’s famous line in ‘Kindergarten Cop’: ‘Who is your daddy und vat does he do?’

“So this Schwarzenegger spalpeen was born more than 10 years ago and Maria never had a clue? Arnold apparently took good care of his offspring, at least monetarily, but Maria didn’t catch on.

“That’s showing her (female) Kennedy roots all right. Paging Rose Kennedy. Just look the other way, like Michael Kennedy with the babysitter. Or Jack with Fiddle and Faddle and Judith Campbell Exner. Or Bobby with Marilyn Monroe.”

--I’ve long said that the best people in this country, aside from the military, are our nation’s park rangers. So I couldn’t help but note that with the closure of 70 of California’s 278 state parks, 220 positions will be eliminated. However, it turns out there are 500 vacancies so no existing workers are actually losing their jobs. It’s not a great paying position, you understand, and working conditions, and facilities, are often the pits.

--Satellite imagery shows that deforestation in the Brazilian Amazon rainforest has increased almost six-fold from 103 square km in March and April 2010 to 593 sq km (229 sq miles) in the same period of 2011. The new figures apparently took the government by surprise. Just last December, officials said the rate was at a 22-year low, but the figures obviously say otherwise.

--According to the U.S. Census, 30% of Americans have never been married – the largest percentage in the past 60 years. Why that’s remarkable…I mean, oops, that’s me! Never mind.

--Robert Zubrin, president of Pioneer Astronautics and the Mars Society, had an op-ed in the Wall Street Journal discussing how innovations on a new rocket out of private firm SpaceX could lead to a manned mission to Mars by 2016 and at half the cost to launch a Space Shuttle flight. It would be a three-stage affair, the first two to land essentials, including a booster to get the third mission’s two-man crew back home. Oh, how I wish we’d do this.

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

Gold closed at $1508
Oil, $100.10

Returns for the week 5/16-5/20

Dow Jones -0.7% [12512]
S&P 500 -0.3% [1333]
S&P MidCap -0.7%
Russell 2000 -0.8%
Nasdaq -0.9% [2803]

Returns for the period 1/1/11-5/20/11

Dow Jones +8.1%
S&P 500 +6.0%
S&P MidCap +8.8%
Russell 2000 +5.8%
Nasdaq +5.7%

Bulls 45.6
Bears 19.6 [Source: Chartcraft / Investors Intelligence]

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