Week in Review

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Week in Review

06/11/2011

For the week 6/6-6/10

Wall Street, Washington and Europe

As stocks continued to tank, in terms of economic data it was a quiet week around the globe but, for starters, the next two weeks promise to be fun…or not. To wit, next week in the U.S. we have the inflation data, plus figures on retail sales, industrial production, housing starts, and the LEI (leading economic indicators). The following week is going to be dominated by home sales, durable goods data, and an all-important Federal Open Market Committee meeting.

Globally, you’ll see similar data, plus a critical European Union summit, June 23-24, at which time the fate of Greece is to be decided…maybe.

Meanwhile, the clock is ticking on the U.S. debt ceiling extension, this as the country’s finances deteriorate further. The new deadline for action appears to be Aug. 15, the day Treasury must make $25 billion in payments on more than $1 trillion worth of securities, but I can guarantee you that if this issue isn’t resolved by Aug. 1st, the markets will be even more unsettled than they are now. Here are some depressing figures, courtesy of Dennis Cauchon of USA TODAY.

“The federal government’s financial condition deteriorated rapidly last year, far beyond the $1.5 trillion in new debt taken on to finance the budget deficit, a USA TODAY analysis shows.

“The government added $5.3 trillion in new financial obligations in 2010, largely for retirement programs such as Medicare and Social Security. That brings to a record $61.6 trillion the total of financial promises not paid for….

“Medicare alone took on $1.8 trillion in new liabilities, more than the record deficit prompting heated debate between Congress and the White House over lifting the debt ceiling.

“Social Security added $1.4 trillion in obligations, partly reflecting longer life expectancies. Federal and military retirement programs added more to the financial hole, too.

“Corporations would be required to count these new liabilities when they are taken on – and report a big loss to shareholders. Unlike businesses, however, Congress postpones recording spending commitments until it writes a check.”

As Fed Chairman Ben Bernanke said this week in a speech, “Policy makers urgently need to put the federal governments’ finances on a sustainable trajectory,” not that we needed Gentle Ben to tell us this. It’s just that Americans are split on what to do, according to a new Washington Post-ABC News poll. 55% of Democrats and half of Republicans and independents support a debt-limit deal that includes a steep reduction in the size of government. But then 37% of Republicans, a third of independents and a fifth of Democrats say they are against raising the debt limit, under any circumstances.

Just this week, Fitch Ratings became the latest to warn that even a brief default would hurt the nation’s cherished AAA credit rating and that Fitch would downgrade affected U.S. securities to junk bond status “in the extremely unlikely event” that U.S. officials failed to make scheduled payments. [Lori Montgomery and Jon Cohen / Washington Post]

Meanwhile, this week the Fed released its latest Beige Book on regional economic activity and spoke of an economy that was expanding at a “steady pace,” though consumer spending was mixed. Chairman Bernanke spoke of a “frustratingly slow recovery” but offered the economy would pick up in the second half. Nonetheless, Bernanke said the economy still needs stimulus. Not necessarily a QE3 to follow an expiring QE2, but rather to keep accommodative monetary policies, as in interest rates near zero, as in keep screwing savers!

It’s funny how poorly economists have done in predicting economic activity. For example, the February survey of economists for the Wall Street Journal had the U.S. economy growing at a 3.5% clip in the first half and now we’ve had a 1.8% GDP print for the first quarter and anywhere from a 2%-3% projected second quarter number. Not exactly 3.5%.

A Bloomberg survey released this week takes a look at the second half and 67 economists project activity for the July thru December period at 3.2%. These same ladies and gentlemen are also calling for 2.3% growth in Q2 when they were forecasting 3.3% for the quarter just last month.

So is the economy experiencing more than a soft patch? If you listen to the experts, a 3%-3.5% growth rate is always just around the corner. But we need even more than that to finally begin to put a real dent in the unemployment rate and that’s just not in the cards anytime soon.

One thing President Obama could do right now to help stimulate activity is to pass the free trade agreements with Colombia, Panama and South Korea. These three are rightly furious that nothing is being done on this front. 

“Because government is inherently dangerous and often mischievous, the Constitution’s framers provided, and congressional rules have multiplied, mechanisms for blocking government action. These mechanisms can, however, also be used to force action. One is being so used in a dispute that has two remarkable facets.

“President Obama is sacrificing economic growth and job creation in order to placate organized labor. And as the crisis of the welfare state deepens, he is trying to enlarge the entitlement system and exacerbate the entitlement mentality.

“Forty-four Republican senators, three more than necessary to stop Senate action, have vowed to block confirmation of John Bryson, the president’s nominee to be commerce secretary, until the president submits for congressional approval the already negotiated free-trade agreements with South Korea, Panama and Colombia. The 44 are responding to this:

“On May 4, the administration announced that, at last, it was ready to proceed with congressional ratification of the agreements. On May 16, however, it announced it would not send them until Congress expands an entitlement program favored by unions.”

It’s about Trade Adjustment Assistance that since 1974 has provided all manner of help to those who can claim to have lost their jobs as a result of foreign competition. But it’s an entitlement that cost $975 million in 2010 for 234,000 workers and now the administration is looking to expand it further by including TAA in its policy of increasing spending everywhere.

“Reactionary liberalism holds that existing jobs must be protected with policies that reduce the economic dynamism that would mean a net increase in American jobs. So the dreary probability is that even if the TAA entitlement were re-enriched to stimulus levels, Democrats would again move the goal posts, concocting new objections to the trade agreements.

“Most Democrats oppose such agreements but lack the courage to express their controlling conviction, which is: Organized labor, which represents just 6.9 percent of the private-sector workforce, must be appeased, even if doing so injures other American workers or Americans who would be workers if policies such as TAA did not impede economic dynamism.”

Turning to Europe and the euro debt crisis, as noted above we are two weeks away from a critical EU summit that is to decide the fate of Greece, among other issues. There have been large protests in Athens as the people cry ‘enough’ when it comes to the country’s wrenching austerity program. Unemployment rose to 16.2% in March (the latest data point) and of those under age 24 the rate is 42.5%.

Under an expanded bailout plan for Greece, as currently under discussion for the summit, Greece would be lent an additional $65 billion by European governments and the IMF. As noted in Bloomberg:

“European estimates (now) put Greece’s 2012-14 financing gap at as much as 170 billion euros…It would be filled by the loans, plus around 57 billion euros in unspent aid from last year’s bailout, roughly 30 billion euros in asset-sale proceeds and about 30 billion euros in rollovers by creditors.”

But it’s the ‘rollover’ portion that has become the prime issue. Extending maturities in this fashion, warns European Central Bank President Jean-Claude Trichet, could be tantamount for rating agencies to a default. Last year at this time, the ECB bailed out the politicians by lending Greece, and then Ireland, the lion’s share of the funds, along with the IMF. Now the ECB is saying, hey, it’s time for the supporting governments to pony up; we’ve already done our part. Meaning the politicians have to ask their taxpayers to help out Greece. At the same time, Trichet said on a different matter, the prospects for inflation, that he’s raising interest rates in July, regardless of what this will mean for the sick puppies of the EU.

As for Britain, which is already in the midst of its own austerity plan, the IMF urged the government to stick to its program despite the “significant risks” the economy could double-dip. But when it comes to austerity, as the Brits know better than anyone, it’s about leadership and bucking the people up. After all, what the Brits went through during the Battle of Britain, with people spending long stretches hunkered down in the subways, was far worse than anything they are facing today, but it takes leadership to get the people to understand this; be it in London, Lisbon, Athens, or Dublin.

But then Europe has this E. coli outbreak with at last word 33 dead and  3,000 sickened, hundreds severely so. One thing is clear, even if the source has not always been. The performance of the German government and health officials has been pathetic. In about ten days we have gone from the source being cucumbers (from Spain), to bean sprouts, back to cucumbers, and now back to bean sprouts from northern Germany. I mentioned last week that officials and farmers in Spain were furious that they were initially assigned all the blame, which led to an immediate boycott of its products, and now the European Union is putting together an aid package for farmers that have been hurt of $300 million, which by some estimates barely covers Spain’s losses for a week.

And one other note on Germany and its health care system. One victim of the E. coli, Nicoletta Pabst, woke up with severe stomach cramps and diarrhea at her Hamburg home and when other symptoms emerged, she and her husband arrived at the emergency room of the University Medical Center in Hamburg-Eppendorf.   They were shocked by the scene.

“All patients suspected of E. coli were led to a separate location for examination,” remembered Pabst. ‘When I arrived, there were at least 20 other people and more and more kept coming in, many of them by ambulance.’

The sanitary conditions in the emergency room were abhorrent.

“All of us had diarrhea and there was only one bathroom each for men and women – it was a complete mess,” she said. “If I hadn’t been sick with E. coli by then, I probably would have picked it up over there.”

After three hours Pabst was told she could go home because her blood levels didn’t indicate kidney failure. [Kirsten Grieshaber / AP]

Finally, just a word on commodities. The CRB Index finished down fractionally on the week as gold, silver and oil were among the losers but wheat and corn were in the win column, the latter two primarily because of the spring rains and flooding that severely impacted the planting season. Corn hit a record as the U.S. Department of Agriculture projected that stockpiles will continue to fall and inventories will approach 1996 levels before the 2012 harvest. In northern Europe it’s about drought. France, Europe’s breadbasket, is experiencing its worst drought in 30 years and the Danube river, one of Europe’s important waterways, has seen volume in some parts drop to 100-year lows, so that is impacting businesses in the shipping of grains and iron ore.

But I would suggest that while it’s pretty apparent how the 2011 harvest may pan out in parts of the U.S., globally it’s not too late…yet. For example, remember the drought in China? It’s over, baby. Like way over. Like try tons of people drowning in raging floodwaters in the once dry Yangtze River basin. Here I thought the China agriculture minister I quoted the other day, who said the drought would be history shortly, was spinning tall tales. Au contraire, mon frère. [I don’t know Mandarin.]

Yes, it’s a changing world, sports fans. Last week I reiterated the importance of “waiting 24 hours” before making any sweeping pronouncements. 24-48 hours after I posted my piece, a lot had already changed, from Weinergate to Yemen. 

Street Bytes

--The Dow Jones and S&P 500 fell for a sixth straight week (Nasdaq had one week in the stretch where it gained a single point) amidst continued concerns on the global economy, as well as ongoing euro fears. Since the April highs, the Dow is off 6.7% and the S&P 6.8%. Nasdaq is now down for the year, -0.3%.

--U.S. Treasury Yields

6-mo. 0.10% 2-yr. 0.40% 10-yr. 2.97% 30-yr. 4.18%

PIMCO’s Bill Gross continues to be severely underweight Treasuries in his flagship Total Return Fund, 5% vs. a benchmark 32.5%. Of course the Bond King has suffered with his bearish bet, though knowing a little about the man and his track record, it’s normally not a good thing to bet against him over the longer term. Gross himself also argues he can find better value in other government bonds such as from those in Germany, Canada and Brazil.

--Ahead of Wednesday’s OPEC meeting in Vienna, Saudi Arabia was quietly increasing production in an attempt to bring oil prices down. As noted last time in this space, influential Saudi leaders, such as Prince Alwaleed, want the oil price to fall to the $70-$80 range so as to keep the western world from ramping up efforts to find alternative energy sources.

But then the meeting convened and all hell broke loose. It wasn’t just Saudi Arabia vs. Iran (the Iranians among those OPEC members seeking to keep oil prices in the $100 level), but you also have a situation where Qatar and the United Arab Emirates are openly backing the rebels in the fight against Libya’s Gaddafi.

So the result was no agreement on crude production for the first time in memory, some say at least 20 years, as half the 12-member group opposed the Saudi-led effort to raise output.

Saudi Oil Minister Ali al-Maimi said, “It was one of the worst meetings we’ve ever had.”

OPEC still accounts for about 40% of the world’s oil output, but now the cartel is hopelessly split. The six that opposed an increase were Libya, Angola, Ecuador, Algeria, Iran and Venezuela.

OPEC had total output of close to 29 million barrels a day in April. Excluding Iraq, which is exempt from the quota system, the other 11 pumped 26.1 mmbd. The International Energy Agency says demand for OPEC crude will rise by 2.1 mmbd in the third quarter, leaving Saudi Arabia to make up the difference as it has the bulk of spare capacity. It seems the Saudis are now determined to pick up the slack.

--On a related matter, this week Exxon Mobil unveiled three discoveries in the Gulf of Mexico that the company called “the largest in the Gulf in the last decade.” We need oil and gas production from here more than ever and the White House is under increasing pressure to reverse course after the BP disaster led to a moratorium that stopped new projects in their tracks.

--China’s May imports rose 28% while exports fell 19%, a good trend in terms of looking for signs the government is slowly turning the economy into one that relies more on the consumer as opposed to exports.

--Japan’s first quarter GDP fell 3.5% and even though supply chain disruptions are easing, Q2 GDP is estimated to fall another 3%. Summer power cuts are going to be widespread amid ongoing nuclear safety concerns as well as nuke plant maintenance.

--Canada’s jobless rate fell to 7.4% in May from April’s 7.6%. Harper is schooling Obama.

--JPMorgan Chase CEO Jamie Dimon questioned Fed Chairman Bernanke on whether the slew of new banking regulations was hurting the economy.

“Has anyone bothered to study the cumulative effect of all these things?” Dimon asked. “And do you have a fear, like I do, that when we look back and look at them…they will be a reason that it took so long that our banks, our credit, our businesses, and most importantly, job creation started going again?”

Bernanke’s reply was pitiful: “I can’t pretend that anybody really has…We don’t really have the quantitative tools to do that.”

--Goldman Sachs said it will not back down in the face of a Senate subcommittee report and investigations, and instead will accuse the Senate panel headed by Michigan Democrat Carl Levin with overstating Goldman’s bets in the housing sector. For example, the panel claims Goldman had net short positions of nearly $14 billion in late June 2007, but Goldman says their own analysis of all the securities firm’s trades has the Senate overlooking or ignoring bullish mortgage positions.

In other words, it would be exceedingly difficult to prosecute Goldman when at trial you’d have all these disparate numbers flying around.

Then again, you have the e-mails. Plus, Manhattan District Attorney Cyrus Vance Jr., who subpoenaed Goldman, could bring charges under New York’s Martin Act, which allows prosecutors to prove securities fraud without requiring they prove intent. Experts say it is much easier to advance cases such as Goldman’s using the act because all a prosecutor has to show is a material misstatement in connection with a securities offering.

Meanwhile, Goldman’s real problems could come as a result of an investigation into whether they and other securities firms violated bribery laws in dealing with Libya’s sovereign-wealth fund. As reported by the Wall Street Journal:

“Among other things, SEC officials are interested in a $50 million fee Goldman initially agreed to pay the Libyan sovereign-wealth fund as part of a proposal by the New York company to help the fund recoup losses…The Libyan Investment Authority would have passed on the $50 million payment to an outside adviser….

“That outside adviser, Palladyne International Asset Management BV, was run at the time by the son-in-law of the head of Libya’s state-owned oil company.”

[The payment was never made because discussions were taking place when violence erupted in Libya in February.]

--Citigroup said computer hackers did a number on its network and accessed the data on about 200,000 bank card holders in North America, including customer names, account numbers and contact information, as well as email addresses.

The attack was in early May but Citi just made it public and assures us that birth dates and social security numbers, as well as card security codes were not compromised. Many are not happy that Citi just made the announcement.

So the bank joins Lockheed Martin, Sony and Google as being among the larger companies that fell victim to hack attacks.

But as Gillian Tett of the Financial Times notes, while what happened to the likes of Sony [three were arrested in Spain on Friday in this case] isn’t important in the grand scheme of the things, the recent spate of high-profile attacks is very worrisome for the reason we all think about.

“(The) danger that now worries some western government officials, and financiers too, is the vision of a malevolent government – or group of well-organized criminals – hacking into the computer systems of exchanges, banks, clearing houses or depository groups. For if that occurred on a large scale, it might not just hurt customers and banks, but wider investor confidence. A widespread computer freeze is not something most investors have ever prepared for.

“Or as James A. Lewis of the Center for Strategic and International Studies told a congressional committee in Washington a couple of weeks ago: ‘There is increasing concern about the vulnerability of the American financial system to cyberdisruption. How much of this concern is justified is difficult to say, but there are some disquieting signs. Last year’s ‘flash crash,’ where automated trading systems briefly crashed the stock market shows the potential for cyberdisruption….

“(One) of the most pernicious problems with cyberspace, says one Pentagon official, is that the fight is so lopsided it takes huge resources to protect a bank or exchange, but just one infected computer drive to launch an attack. The tail risk of a cyber disruption to markets, in other words, cannot be ignored. Investors had better hope that the banks and exchanges are much better organized than Sony; and, perhaps, keep some hard cash in the mattress.”

*In testimony to the Senate Armed Services Committee, CIA Director Leon Panetta said a cyberattack that cripples government, utilities and computers could be the “next Pearl Harbor.”

--The percentage of their homes that Americans own is near its lowest point since World War II, according to the Federal Reserve. The average homeowner now has 38 percent equity, down from 61 percent a decade ago; this despite the fact we’re paying off our mortgages. It’s just that values are dropping at a faster rate. Not a good story in terms of the wealth effect and consumer sentiment.

On the other hand, the Fed also said this week that when you take into consideration rising stock prices, increased savings and debt reduction, the average household wealth actually rose 1.2% in the first quarter. So we’re supposed to feel happier. Go shopping! [But now the stock market has fallen back, and we feel worse again…]

--Economist Robert Shiller said a further decline in property values of 10% to 25% in the next five years “wouldn’t surprise me at all.” And real-estate data firm CoreLogic Inc. reported that 38% of borrowers with second mortgages are underwater, compared to 18% of borrowers who don’t have such home-equity loans. [Home-equity loans comprise 10% of the mortgage market.]

--On Wednesday, the U.S. Senate voted 54-45 to delay implementation of an 80% cut to the debit-card swipe fee – a move it is said will cost banks $15 billion a year, but 60 votes were needed to get the measure adopted. [Sorry to be confusing, but this was a confusing vote.] Banks claim they need the higher fee to cover fraud protection. Retailers have long said they would pass on any savings in the form of lower prices. Ha!

One of the more interesting aspects of the legislation was it pitted pro-bank Democratic Sen. Jon Tester of Wyoming against populist Democratic Sen. Richard Durbin of Illinois. Tester sought the delay to study the impact on smaller financial institutions and credit unions, which fear the costs of handling transactions will be too great and that their cards will not be accepted by retailers. Durbin painted his victory as a win for Main Street over Wall Street.

--As if President Obama didn’t already have enough problems when it comes to the economy, his top White House economist, Austan Goolsbee, announced he was stepping down to return to his teaching job at the Univ. of Chicago. This leaves Treasury Sec. Tim Geithner as the lone remaining senior member of the original economics team.

--Steve Jobs looked awful in an appearance announcing Apple’s new online service that will allow, for example, iPad users to access their digital media from anywhere…the company’s new iCloud service. The PC is no longer the digital hub.

“Keeping these devices in sync is driving us crazy,” said Jobs. “We have a great solution for this problem. We are going to demote the PC to just be a device. We are going to move the digital hub, the center of your digital life, into the cloud.”

So we’re being encouraged to move all our music and information to Apple, as opposed to the likes of Google and Amazon. But the ‘cloud,’ more than traditional methods of storing information, depends on strong security or you could be tricked into giving up your life’s files and information with one password.

--The Wall Street Journal reported that the volume of text messaging grew less than 9% in the second half of 2010 over the prior six months, “the slimmest gain since texting exploded last decade.” And Apple is now introducing an application that lets iPhone and iPad users bypass carriers and send messages over the Internet to other people with Apple devices.

Ergo, new messaging tools, including a new one from Google’s Android, present a threat “to a texting business that generated $25 billion in revenue in the U.S. and Canada last year.” The likes of AT&T and Verizon charge fees ranging from 20 cents per text to $20 a month for unlimited texting.

--Morgan Stanley employees are under the gun as compensation costs were an enormous 57% of revenues in the first quarter, vs. 44% at Goldman Sachs, a more normal payout for the Street. Even accounting for a loss in a Japanese joint venture, Morgan Stanley’s comp costs were still at 52%. So it’s time, many say, for the firm to begin laying off staff to improve margins.

MS isn’t alone, though. Cuts in equities trading and investment banking are looming elsewhere.

--New Jersey municipalities face liabilities of more than $825 million for accumulated sick and vacation days. Bloomberg News told the tale of a former finance chief in Hackensack who, knowing that Gov. Chris Christie is ending such payouts, cashed in 402 accrued days for $267,573 and retired last May with an annual pension of $39,868. Hackensack, a city of 43,000, paid $4.6 million of sick and vacation time to 36 retiring workers this budget year. Many of the towns have to borrow large sums just to issue the checks. We are idiots for allowing this practice to have existed like it has but now from New Jersey to California, the crackdown has begun. Even Gov. Jerry Brown said he will support legislation out of Sacramento that would forbid municipal employees from including unused vacation and sick time in their pension calculations, a practice that isn’t allowed in New Jersey.

--Dirtball Miami Beach businessman Nevin Shapiro was sentenced to 20 years in prison for orchestrating a massive Ponzi scheme that netted him $35 million. Here in New Jersey, Shapiro scammed $5.4 million from some of our residents, as reported by the Star-Ledger. Shapiro used the proceeds to buy a yacht, a $5 million waterfront home, and had floor seats for the Miami Heat; yet another reason why I hope the Dallas Mavericks, up 3-2 in the NBA Finals, close out LeBron and Co. [And hasn’t it been great watching James get outplayed in the fourth quarter?!]

Anyway, Shapiro’s 20-year sentence is one of the stiffest ever for a federal white-collar crime prosecuted in New Jersey.

--Comcast Corp.’s NBC Universal won the broadcast rights to the next four Olympic games, 2014-2020, though I’d suggest that the 2014 Games in Sochi, Russia, could be the last. [Half-kidding.]

--My portfolio: China companies listed in the U.S. are under scathing attack these days, much of it warranted. But in my case, and my large holding there, I have seen the company in operation (the old plant) and was on site in the building of the new one. These are real assets and a real business. Whether or not it is making the money it says it is, well, I trust them.

I would also add that these new research firms, such as Muddy Waters and Citron Research, that are taking aim at China companies as they short the stock, will have their own comeuppance. 

Foreign Affairs

Syria: Who knows what is really going on in the northern town of Jisr al-Shughour, where the Syrian government claimed 120 of its troops had been killed as part of what appears to have been a mutiny by a segment of the army. Syria then regrouped and is supposedly putting down the rebellion, in vicious fashion. Thousands of Syrians, particularly women and children, have been fleeing the area and crossing into Turkey, where Prime Minister Erdogan has condemned Syria’s crackdown as “savagery,” a significant statement coming from him as he seeks re-election this weekend.

[And in another sign of the times, the existence of an influential blogger in Syria, who claimed to be a lesbian, as well as a harsh critic of President Bashar Assad, has come into question. A woman in London said her likeness is being used as the blogger’s, hijacked from the London woman’s Facebook page.]

Yemen: When I posted last week, details on the assassination attempt on President Saleh’s life were sketchy but initial reports he was wounded, though not severely, proved to be false and he was airlifted to a hospital in Saudi Arabia where the Saudis said Saleh suffered a shrapnel wound to his chest and required surgery of some kind on his neck. But they added he would recover quickly. The U.S., on the other hand, said Saleh was gravely wounded. Saleh did address his people in the hours after the attack before being ferreted out of the country.

So, if he recovers, will he be allowed back in? The United States doesn’t want him to return, but it’s unclear what the Saudis really want. They liked it when he was doing their bidding in going after terrorists, and now those same terrorists are making inroads. Al-Qaeda in the Arabian Peninsula at last word had control of one city, though government troops were trying to take it back, while tribesmen took over the second-largest city in Yemen this week.

For its part, the U.S. is continuing to strike when possible with drones. It was a few weeks ago we just missed killing Anwar al-Awlaki.

[Separately, al-Qaeda’s Zawahiri issued a video eulogizing bin Laden but didn’t announce he was in control of the organization. A senior al-Qaeda leader in Pakistan, however, Ilyas Kashmiri, was apparently killed by a drone.]

Afghanistan: The big debate comes to a head over the next week it would seem…how many troops can the United States begin to withdraw from Afghanistan given President Obama’s July deadline for starting the process. The White House believes the killing of bin Laden opens the way for substantial reductions, say, initially, 15,000 of the 30,000 sent in as part of the surge, especially in light of the war’s cost, $100 billion a year. Republican Senator John McCain says no more than 3,000 should be withdrawn the initial month, while the Pentagon is arguing against any drawdown until the summer fighting season is over.

Iraq: In the worst incident in two years on U.S. forces, five Americans were killed in a rocket attack on a base in Baghdad. Iraq’s parliament will not rule until the fall whether it will allow any of the 46,000 remaining U.S. troops to stay beyond the December deadline. Leon Panetta testified he expected Iraq to eventually ask Washington to keep U.S. troops in the country.

Libya: Initially, Defense Sec. Gates said the cost of the Libyan operation would be $750 million in fiscal 2011 (ending 9/30), but the total now appears to be headed to $1 billion and above. And in another example of the pitiful, desperate straits those fleeing Libya find themselves in, at least 200 more drowned when their boat capsized en route to Italy. It is estimated 1,500 refugees have perished in this fashion since the conflict began. Also, in the town of Misurata, which was the scene of a major Gaddafi offensive early on, at least 1,000 are still missing, taken from their homes by Gaddafi’s goons.

As for the rebels, incoming defense secretary, and current CIA leader, Panetta told the Senate he is concerned some of the opposition may be extremists and that such worries are “legitimate.”

“The House of Representatives sent the Obama administration a strong, bipartisan rebuke on Friday for failing to make the case for war in Libya or seeking congressional authorization for military action. It is critical that the administration understand the significance of this vote, abandon its plans for a nonbinding resolution in the Senate and proceed to seek the requisite debate and authorization for the use of military force, as I have advocated for nearly three months.

“The White House called the vote ‘unnecessary and unhelpful,’ but it has only itself to blame. The administration faces bipartisan opposition in Congress because it has, for more than two months, sidestepped the clear constitutional and legislative intent that a president obtain congressional authorization to go to war….

“The Founding Fathers gave Congress the power to declare war for good reason: It forces the president to present his case in detail to the American public, allows for a robust debate to examine that case and helps build broad political support to commit American blood and treasure overseas. Little of that has happened here.

“The nonbinding House resolution called on the president to issue a report to Congress answering 20 important questions about Libya. If the administration is wise enough to provide these answers promptly, that would be an example of the consultation that has so far been lacking.

“Waging war is the most serious business our nation does. Obtaining congressional approval for war is not simple.    But because getting out of wars is so difficult, the Founders did not intend that getting into them should be easy.”

Iran: The government announced it will triple its production of enriched uranium, which no one really knows where the truth lies on a proclamation of this kind. But one thing is for certain. Iran continues to thumb its nose at the U.N. Security Council and its call for Iran to cease enrichment. It’s yet another example of President Obama’s failed policy of engagement.

As for Iranian President Ahmadinejad, he admitted he’s had a rift with the most senior figures of the Islamic regime. At a news conference in Tehran, the president said: “It is very clear now that we are 180 degrees away from them [Ed. Supreme Leader Khamenei and his ilk] – we are actually on opposite sides.” Ahmadinejad blamed conservatives who have accused his government of “revolutionary deviancy.” [Sydney Morning Herald]

Israel: Last Sunday, Palestinians, egged on by Syria’s Assad to create a diversion from his own serious issues, protested in the Golan Heights for a second time and a reported 24 were killed by Israeli security forces (who dispute the total Syria gave). I heavily sympathize with Israel in this matter. What are they to do? Just let hundreds come streaming across the border? What if a number of them are suicide bombers?

Egypt: A Gallup poll should provide a bit of relief as 69% of Egyptians want religious leaders to have an “advisory role” in new legislation, but do not want a government based in religion. Only 15% say they support the Muslim Brotherhood. 

This flies in the face of previous judgments (including my own) that the Brotherhood will emerge from September’s parliamentary elections with easily the main voting bloc (though not necessarily a pure majority). I stand by my thinking.

More importantly, today, the Egyptian economy is in tatters and as Niall Ferguson writes in Newsweek:

“The big story…is capital flight. Egyptian businessmen complain of soaring crime in the cities, the difficulty of carrying out normal transactions, and, above all, nerve-racking political uncertainty. Rich Arabs do not trust this revolution. Since January they have been rushing to get their cash into safe havens, some arriving in London or Zurich with suitcases full of it. According to Reuters, the country’s foreign-exchange reserves fell by as much as a third in the first three months of the year. Al-Hayat newspaper estimates that $30 billion has left Egypt since the onset of the Arab Spring….

“None of this should surprise us. Such is the life cycle of revolutions. What begins with euphoric crowds soon slides into a second phase of economic paralysis. The same happened in France after the initial ‘bliss’ of 1789 and in Russia after 1917. In each case, exuberance at the overthrow of the old regime was swiftly succeeded by exasperation at the decline in living standards. And that was what gave the political extremists their opportunity to peddle their radical ideology of war against internal and external foes. Yesterday, the Jacobins and Bolsheviks. Tomorrow, I fear, the Muslim Brotherhood and al-Qaeda.”

Lastly, I agree with the Washington Post editorial board when it says now is not the time to try former President Hosni Mubarak and family; not before the elections.

“Egypt cannot bury a half century of authoritarianism; there must be a reckoning. But the right authority to oversee it is not a temporary military authority attempting to keep crowds out of the streets, but a democratically elected government. Investigations and trials must be conducted by prosecutors and judges who are neutral, professional and untainted by the previous regime. One leading Egyptian human rights activist, Hossam Bahgat, has suggested that Egypt follow the example of other countries emerging from dictatorship and establish a formal process of investigation and exposure of past crimes – a process that could include reparations for victims and prosecution of the most significant cases. Such an initiative could help to bolster a new democratic order in Egypt, but the rush to judgment now underway could seriously undermine it.”

Pakistan: Interior Minister Rehman Malik insisted his country’s nuclear arsenal was “200% safe” against an attack. I’d settle for 100%, but that’s just me. “The assets are well-protected and tightly monitored,” Malik asserted. “The (International Atomic Energy Agency) agrees with us. We should be wary of the disinformation being spread against our nuclear program, including the suggestion that the U.S. may move to denuclearize Pakistan.”

For its part, India said it would conduct a test of a nuclear-capable ballistic missile with a range of 3,100 miles in December. The missile is actually designed to counter the China threat as India already has the capability to hit all of Pakistan.

A top Indian defense official, however, said that when it comes to Pakistan, “If a provocation is to happen again [Ed. see Mumbai], it would be hard to justify to our people self-restraint.” [Global Security Newswire]

China: Tensions in the South China Sea are growing worse as Beijing accused Vietnam of “gravely violating” its sovereignty and endangering its sailors in an escalating row over territorial claims in the resource-rich region, while in an Asian security conference speech in Singapore, Defense Secretary Gates vowed the U.S. military would maintain a “robust” presence across Asia as he attempted to reassure the region the U.S. would protect them against a surging China. Regarding the tensions in the South China Sea specifically, Gates said:

“I fear that without rules of the road, without agreed approaches to deal with these problems, that there will be clashes.  I think that serves nobody’s interests.”

Peru: In a shocking election result, a leftwing candidate, Ollanta Humala, won the country’s presidential vote over conservative Keiko Fujimori. On Monday, financial markets reacted and stocks fell a record 12.4%. They then recovered much of the losses the balance of the week.

Mexico: According to U.S. government figures, 70% of over 29,000 firearms recovered by Mexican authorities have U.S. origins. Gun-rights groups here have contended this isn’t the case; that most of the weapons come from Russia, China and elsewhere. I say the point would be moot if Americans would just get off drugs.

Random Musings

--I posted Defense Secretary Robert Gates’ recent commencement speech at Notre Dame on my “Hot Spots” link and describe it as his final, major policy speech as he leaves the Pentagon. Others, though, say a speech he gave on Friday in Brussels is his valedictory address, but the two are different.

You can read the Notre Dame speech and get the gist of that one on your own, but in Brussels, Gates slammed the NATO military alliance, saying after six decades it faced a “dim, if not dismal” future. NATO’s penny-pinching and lack of political will could lead to the end of U.S. support.

“Future U.S. political leaders – those for whom the Cold War was not the formative experience that it was for me – may not consider the return on America’s investment in NATO worth the cost.”

Gates has been particularly upset over the large restrictions some European governments place on their military participation in Afghanistan. Instead, these same governments just assume the U.S. will always do their heavy lifting.

Without naming names, Gates blasted allies who are “willing and eager for American taxpayers to assume the growing security burden left by reductions in European defense budgets.”

It’s now up to Europe to “halt and reverse these trends and instead produce a very different future” for the alliance.

But Gates did have praise for Norway and Denmark for providing a disproportionate share of the combat power in the Libya operation, given the size of their militaries. Belgium and Canada have also made “major contributions” in this theater.

Yet another reason for Americans to buy some premium Canadian lager to say thanks.

“U.S. government computer networks are attacked about 1.8 billion times per month, according to a recent Center for New American Security report, and…the weeks since U.S. forces killed Osama bin Laden have seen an uptick.”

Cybersecurity analyst Charles Dodd told Defense News’ Marcus Weisgerber that “the defense industry has been ‘completely arrogant’ about the capabilities it possesses and is not fully prepared to combat a state-sponsored entity.

“ ‘This is not the stage for arrogance,’ he said. ‘You’ve brought a stick to a gunfight, and you’re arrogant about your capabilities?’”

--So much for the bin Laden bounce. President Barack Obama saw his approval ratings fall across the board in the latest Washington Post / ABC News poll. 59% gave the president negative marks for his handling of the economy, up from 55% a month earlier, while his overall approval rating, which hit 52% after the al-Qaeda leader was killed on May 2, has fallen back to its previous level of 47%. 89% say the economy is in bad shape and 66% believe the U.S. is on the wrong track, meaning the other 34% are pretty much idiots.

That’s not a political statement. It’s just a statement of fact. Anyone who doesn’t believe our debt levels are dangerous is nuts.

But the shocker, at least for me, was the pairing of Obama against Mitt Romney, and here the two were tied in the Post-ABC survey at 47%, with Romney ahead 49-46 among registered voters.

--Well isn’t this special…Anthony Weiner’s wife is expecting a baby. And Weiner refuses to resign, even as he admitted to lying to both the public and his wife, Huma Abedin, who works at the State Dept. with Hillary Clinton. A close friend told the New York Post that “She loves her husband very much. She is committed to her husband and her marriage.”

Good lord. I can understand why she would be scared to raise a child herself (not that I in the least know anything about this topic), but him? Tony Weiner? One of the true jerks on the planet…BEFORE Weinergate.

As for the congressman not resigning, Michael Goodwin / New York Post:

“Imagine you go to a restaurant and Anthony Weiner is your waiter. Do you have the stomach for dinner?

“Imagine you call an electrician and Weiner shows up at your home. Do you let him in?

“Of course you don’t trust him with your food or let him in your home, and you sure as hell don’t let him anywhere near your child. So unless we have a lower standard for government service than for those jobs, Weiner is not qualified to stay another minute in Congress.

“Yet his blubbering confession and continuing revelations aside, Weinergate is now about his fitness to continue in office. It’s a no-brainer that he fails the test – and he must go in short order.

“But his refusal to resign already illustrates the depths of his depravity. While his low-rent behavior reflects the character flaws that drove his perverted exhibitionism, his refusal to quit reflects the tight grip of corruption on government….

“(Weiner), his chutzpah intact, demands that his punishment be limited to public shame. He boasts he’s taking ‘responsibility’ as though that’s a heroic act and he has another choice. He is so self-obsessed that he thinks he has suffered enough by admitting some of his lies.

“Like fellow New York Dems Charlie Rangel and Eliot Spitzer, Weiner is so corrupted by power and privilege that he has lost all perspective. The only reality in their world is the one you can get away with….As he instructed a porn pal in how to lie, the aim is to keep repeating your talking points until the press gets bored or distracted.

“This is the mindset of too many modern politicians, who see government as nothing more than one long battle against the other team. Weiner excelled at it and became a cable-TV star because he has no shame and more than one screw loose….

“Whatever happens between Weiner and his wife is their business. His public career is ours, and it’s time for a divorce.”

“Congratulations, Anthony Weiner. You are now officially the Twit of the Millennium.

“It was once said of Weiner’s mentor that the most dangerous place in Washington was between Chuck Schumer and a camera. Yesterday, it turned out the most dangerous place for Tony Weiner in Washington was in front of a camera….

“People tell me Weiner is a smart guy. But unless he unconsciously sought to get caught, which I doubt, what he has done over the past week should forever retire the notion that he is anything but a colossal boob of the highest order.

“Let’s be honest. Many elected officials the world over are colossal boobs. But here’s the thing: Most colossal boobs in politics tend to comport themselves with a certain surprising modesty.

“There’s a reason you probably hadn’t heard of Reps. Chris Lee and Mark Foley or Sens. Larry Craig and David Vitter before their careers were derailed by sex-related scandals that suggested a comparable degree of idiocy. You hadn’t, because they kept a low profile.

“Not Weiner. He is as allergic to a low profile as he is, evidently, to boxer shorts.”

Democrats, who desperately want Weiner to disappear, have called for an ethics probe.

But…in his own district, a Marist poll of 512 voters found 56% saying they want Weiner to stay on the job. Even 47% of Republicans said he should not resign.

--Republican presidential candidate Mitt Romney said he will not participate in Iowa’s straw poll, Aug. 13, which he won four years ago, rather than risk a loss that could deflate his image. Romney instead will focus on New Hampshire, though he will still participate in an Aug. 11 debate in Iowa.

--And then there is the story of Republican candidate and former House Speaker Newt Gingrich. On Thursday, in a stunning move, his top aides resigned en masse, leaving Gingrich to wonder what happened?

Gingrich issued a statement: “I am committed to running the substantive, solutions-oriented campaign I set out to run earlier this spring. The campaign begins anew Sunday in Los Angeles.”

Basically, his aides vehemently disagreed on the direction the campaign should take, plus it seems they were correctly incredulous that after Gingrich had his flap with Congressman Paul Ryan over Ryan’s Medicare plan, Newt and his wife embarked on a two-week Greek Isles cruise while his rivals continued with their heavy campaign schedules.

--It’s interesting watching neighboring governors, Democrat Andrew Cuomo and Republican Chris Christie, tackle similar issues such as the state pension systems they’ve inherited. For both it appears to have been a good week. From Bloomberg News:

“Gov. Andrew Cuomo, fulfilling a pledge he made on the campaign trail last year, proposed changes to New York State’s pension system that he said would save taxpayers $93 billion over 30 years.

“The new pension system, called Tier VI, would increase the retirement age for new employees to 65 from 62 and boost employee contributions, Mr. Cuomo said Wednesday in a statement. It would also end so-called pension padding, in which employees artificially inflate their salaries with overtime pay in the final years of employment to receive bigger retirement checks….

“Mr. Christie, a Republican, has been urging the Democratic-led Legislature since September to pass measures designed to reduce a $53.9 billion deficit in New Jersey’s pension system. His agreement with Mr. Sweeney is projected to save state and local governments $122 billion over the next 30 years in pension costs alone.”

--New Jersey has the highest high school graduation rate in the country, 87%. Why even I got a high school diploma from the Garden State. Still not quite sure how I got a college one, though. Anyway, the national graduation average is 71.7%.

--Back to Cuomo, even the conservative New York Post editorial page praised him on a different topic. He came through on another campaign promise, and a huge one in New York, that being a new ethics reform bill.

“Congratulations to Silver, Skelos and especially Cuomo for getting it done.

“And to all those many Albany miscreants now on parole, in prison or on their way there: Hey, you take a bow, too!

--And back to Christie and his state helicopter gaffe of the prior week, the governor, in typical fashion, lashed out at Democratic Assemblywoman Valerie Vainieri Huttle after she pointed out Christie left his son’s baseball game in the fifth inning to meet with Iowa businessmen trying to get him to run for President.

“She should really be embarrassed at what a jerk she is.”

--For the archives, Sarah Palin, with nearly 2/3s* of Americans saying they “definitely would not” vote for her for president (an astoundingly large ‘negative’) in the aforementioned Post-ABC poll, said the following when in Boston. Unprompted. 

“We saw where Paul Revere hung out as a teenager, which was something new to learn. He who warned, uh, the British that they weren’t going to be taking away our arms, uh, by ringing those bells and making sure as he’s riding his horse through town to send those warning shots and bells that we were going to be secure and we were going to be free and we were going to be armed.”

Three days later on “Fox News Sunday,” she told an incredulous Chris Wallace when he queried her on her take on American History for $200:

“You know what? I didn’t mess up about Paul Revere. Here is what Paul Revere did. He warned the Americans that the British were coming, the British were coming, and they were going to try to take our arms and we got to make sure that we were protecting ourselves and shoring up all of our ammunitions and our firearms so that they couldn’t take it. But remember that the British had already been there, many soldiers for seven years in that area. And part of Paul Revere’s ride – and it wasn’t just one ride – he was a courier, he was a messenger. Part of his ride was to warn the British that were already there. That, hey, you’re not going to succeed. You’re not going to take American arms. You are not going to beat our well-armed persons, individual private militia that we have. He did warn the British. And in a shout-out, gotcha type of question that was asked of me, I answered candidly. And I know my American history.”

The actual “gotcha question” was: “What have you seen so far today, and what are you going to take away from your visit?”

As Glenn Kessler of the Washington Post notes, however, Ms. Palin actually had a few parts of her tale right, but that’s only if you believe she read Paul Revere’s own obscure account of the incident, written in 1798, which I be a tellin’ ya, there’s no way she knew of this one.

Meanwhile, too bad George Washington isn’t around (for more reasons than one) to set Sarah straight on just how ill-prepared we were for a war with the British. George himself got his butt kicked early on. But he stepped up when it came to crunch time, unlike LeBron.

*A CBS poll found the same 2/3s of all voters, and 54% of Republicans, don’t want Palin to run, period.

--Rick Santorum entered the Republican presidential race…yawn.

--I’m one of those hoarding incandescent light bulbs as we approach the Jan. 1, 2012 ban on same. I figure I live another 25 years and since I go through about 10 a year I need to collect 250. I do have ample storage space.

Actually, while many are buying gold and silver these days, I’m guessing incandescent bulbs will become the real currency. “I’ll give you two 60-watt incandescent bulbs for that Hyundai.” “Throw in a 75-watt and you’re driving home a new car tonight!”

--So in the June 13-20 issue of Newsweek there is an extensive story titled:

“Hotel Confidential: It’s the dirty secret about business travel. Many married men expect sex along with their room service, according to a Newsweek poll. But will the Strauss-Kahn scandal change the rules of the game?”

“3 percent of the men in Newsweek’s poll said they’d made a pass at a hotel worker (more than half were rebuffed), and 2 percent had sex with them.”

In other words, while I still find it absolutely unbelievable that even 2 percent have sex with the housekeeper, Newsweek should be fined for running the headline the way they did. 2 percent is hardly “many.”

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

Gold closed at $1529
Oil, $99.29

Returns for the week 6/6-6/10

Dow Jones -1.6% [11951]
S&P 500 -2.2% [1270]
S&P MidCap -3.0%
Russell 2000 -3.5%
Nasdaq -3.3%  [2643]

Returns for the period 1/1/11-6/10/11

Dow Jones +3.2%
S&P 500 +1.1%
S&P MidCap +2.7%
Russell 2000 -0.5%
Nasdaq -0.3%

Bulls 40.9
Bears 22.6 [Source: Chartcraft / Investors Intelligence]

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