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Week in Review

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01/14/2012

For the week 1/9-1/13

[Posted 6:00 AM ET]

Europe, Washington and Wall Street

Some European officials and leaders were patting themselves on the back this week, like European Central Bank President Mario Draghi, who told us all that the actions he took are loosening the credit markets and that there are “tentative signs” of stabilization in the region’s economy, though he did have to admit “substantial downside risks remain” and he’s frankly lying about the credit aspect. What we don’t have, yet, are bank runs and that is good.

German Chancellor Angela Merkel is all excited about her new fiscal union, saying after a meeting with French President Nicolas Sarkozy that the rules will be agreed to by end of January, or at the latest March, per the December Brussels agreement.

And Italy and Spain had decent debt auctions, though at the end of the week, Spain’s 10-year bond had a yield of 5.23% (up from yearend), while Italy’s was at 6.73%. Nonetheless, the yields on the shorter paper being offered were indeed better than December’s picture.

OK, that’s the sort of good news. And now the bad.

Standard & Poor’s downgraded France and Austria, taking away their AAA-ratings, leaving Germany as the euro area’s only stable AAA grade. France and Austria were cut one level to AA+, meaning all of the citizens have to change the sticker on the back bumper of their car. They no longer get a free tow, but they are admitted into AA meetings with a reserved parking spot.

Finland, the Netherlands and Luxembourg kept their AAA ratings, but were placed on negative watch, which means a hidden camera follows your every move and if you screw up, you go directly to AA and can’t use someone else’s name.

In an accompanying statement, S&P said: “In our view, the policy initiatives taken by European policy makers in recent weeks may be insufficient to fully address ongoing systemic stresses in the euro zone.”

Now to be fair, just as was the case with the U.S. last August when our sovereign debt was downgraded, market reaction on Friday was muted. But it is in no way a good thing, either, and you never know when these moves will bite you in the butt. At least the ratings agencies are giving proper notice and the market is no longer shocked by such actions.

Elsewhere, you had this headline on Friday:

“Greek debt restructuring talks collapse”… “an unexpected breakdown that makes it more likely Athens will become the first government of a developed country in more than 60 years to suffer a full-scale default on its debt.”

I get a kick out of those who have been pooh-poohing a Greek default as the focus turned to Italy. It would be a disaster, and not just for the Greek people. Greece must get their act together in a matter of weeks in order to ensure they get the first tranche of a second bailout package that was supposed to total 110 billion euro. 

Billionaire George Soros said Europe’s sovereign-debt crisis is “more serious” than the financial crisis of 2008 and that the world faces the prospect of a “vicious circle” of deflation.

Italian Prime Minister Mario Monti, who saw his country downgraded two notches, warned that Italians would turn hostile if they do not see the austerity measures they have accepted lead to progress, both economically and fiscally.

“If the Italians do not see concrete rewards for their willingness to save and reform, there will be protests in Italy against Europe and also against Germany which is seen as ringleader of EU intolerance and against the European Central Bank.”

Spain, also downgraded two notches, and despite its successful debt auction, has massive problems, not the least being its 23% unemployment rate. Now new Prime Minster Mariano Rajoy has to backstop his regions (think Catalonia, Valencia, Andalusia) that have massive debts of their own. Four of them, the aforementioned three plus Madrid, have been shut out of the debt markets yet need to repay $11.5 billion to lenders this year. Spain’s 17 regions have total debt of $175 billion.

Europe, just as in the U.S., also has a massive pension issue. According to Bloomberg, state-funded obligations in 19 of the European Union nations are over $39 trillion as of 2009, five times higher than their combined gross debt. Talk about unsustainable, particularly when any kind of return on the assets is so hard to come by in this era of zero interest rates. Europe’s pension fund managers, just like in the U.S., can only do one thing; take more risk. It’s insane.   You end up going from one bubble to the next.

All of the above problems are still front and center while Merkel and Sarkozy have done nothing about increasing the so-called firewall for the likes of Italy and Spain, whether it’s the European Financial Stability Fund or the coming European Stability Mechanism. [Plus the latest downgrades hurt the EFSF, for starters.] The only thing they seem to agree on is a financial transactions tax, but Britain is vehemently opposed to that unless the rest of the world is subject to it.

Back to Italy, consumer confidence hit a 16-year low in December as Fitch Ratings stated, “Italy is the front line of this crisis,” Fitch also raising the issue of insufficient firewalls.

Ireland is going to need another bailout unless it’s given a break on the interest rates it has to pay on its bailout of Anglo Irish Bank, currently 8%.

The ECB, in cutting its growth forecast for the eurozone to 0.3% for 2012, offered the coming recession “won’t be a deep one,” to which I have two comments. If the ECB is correct, it won’t do much good if the ensuing growth is tepid. And, the ECB and its ilk never take into consideration the reaction of the people to a recession during a time of severe austerity. It won’t be good.

Germany, despite all the glowing talk about its economy, is projected to have contracted 0.25% in the fourth quarter.  Germany also sold six-month treasury bills at a negative yield for the first time. You think this is good? Think again.

Mohamed El-Erian / Financial Times

“Another day and another previously unthinkable development becomes reality in Europe. Yet what on the surface appears to be good news for Germany – the record low yield at its latest government debt auction – is actually an indication of growing stress elsewhere in the region…

“German rejoicing for borrowing money at negative rates should thus be tempered by the reality of Europe experiencing an accelerating disengagement of the private sector from the region’s economic integration project. This undermines growth and employment, shifts more of the load to taxpayers, and places even greater demands on creditor and debtor countries alike – all serving to aggravate an already-strained process for agreeing on the appropriate policy response and related burden sharing.

“At a time of considerable domestic resistance, governments in surplus countries (essentially Germany, but also others such as Finland and the Netherlands), as well as the European Central Bank, will face even greater external pressure to substitute more of their solid balance sheets for the delevering private sector. Meanwhile, debtor countries will be expected to do even more on the austerity front, thereby aggravating internal tensions and sacrificing both actual and potential growth.

“Rather than welcome negative yields, Germany should interpret the outcome of Monday’s auction as further indication of the gravity of the situation facing the eurozone as a whole. It is another alarm bell calling for more forceful steps to improve the region’s policy mix, counter banking fragility, and strengthen the institutional underpinning of a ‘refounded’ Europe.”

Editorial / Wall Street Journal

“European financial markets have gotten very strange. Greece’s one-year government bond yield hit 376% yesterday, while Germany, Switzerland and the U.K. sold short-term debt this week at yields below 0%. That means investors are effectively paying the latter governments for the privilege of lending to them. Reuters also reported Monday that blue-chip firms like Johnson & Johnson and Pfizer are lending to struggling European banks, turning the usual creditor-debtor relationship on its head.

“At this point, flying saucers over the Eiffel Tower or the Colosseum in Rome wouldn’t surprise anyone.

“There’s a serious point here. The longer Europe’s crisis lumbers on, the more distortions it creates in credit markets across Europe, not merely in the distressed South. The big uncertainties – will the eurozone break up? will the European Central Bank step in? – are causing capital to flee troubled markets for safer shores. But in the financial world, a flight to safety is a clear warning sign for both the trouble spots and the safe havens….

“The more important implication is that investors are so risk-averse that they’d rather lose a little money keeping funds with a reasonably solvent national treasury than potentially lose much more in private markets….

“As for Europe’s banks, the fact that they are taking loans from their clients is only one sign of their plight. Before Christmas, the ECB offered banks hundreds of billions in cheap three-year loans, but evidence since then suggests that lenders are turning around and parking that cash right back at the central bank. Banks still aren’t comfortable lending to each other, and the ECB can only pick up the slack for so long.

“That means it’s still up to the politicians to heed the now almost-Biblical warning signs. (Plague of locusts, anyone?)…It is time for Europe’s leaders to act more like leaders and less like politicians moving step by step and going nowhere.”

Lastly, Mahathir Mohamad, former long-time prime minister of Malaysia, 1981-2003, and frequent target of the likes of George Soros, had some telling thoughts in a Financial Times op-ed.

“The Malays have a saying which inter alia means that when you lose your way, go back to the beginning and start again. I believe that everyone has lost their way in handling the current financial crisis. The West in particular needs to rethink some essentials.

“The world is still Eurocentric: how Europe handles the financial crisis is of universal importance. But I have serious doubts about Europeans ‘infallibility.’ I particularly dislike their double standards. Centuries of hegemony have convinced them they know best what is good for the world: their values are to be accepted as universal; Asian values are deemed irrelevant.

“This explains the simplistic solutions offered to East Asian countries when currency traders impoverished them. Malaysia was told to raise interest rates, have a surplus budget, allow distressed banks and businesses to go bankrupt, etc. This was the formula for all. Yet when America and Europe faced their financial crisis, they did everything they told Malaysia and East Asia not to do….

“For a long while Europe’s manufactured products lined the shelves of the world’s markets. They monopolized and dominated world trade and business. Their people enjoyed the highest standards of living….But after the Second World War Japan industrialized and produced cheaper yet quality goods. Then Taiwan, South Korea and China got in on the act. Rapidly the Europeans lost their markets.

“Unable to compete, the Europeans and particularly the Americans opted for the financial markets. Inventing new financial products such as short selling of shares and currencies, subprime lending, securitization, leveraged investments through hedge funds and a multitude of others, they apparently continued to grow and prosper. But the finance market spins off no real businesses, created hardly any jobs and gave rise to no trade. Getting greedy, they abused the system, manipulating the market for greater profits.

“In Hong Kong in 1997 I spoke at the meeting of the International Monetary Fund and the World Bank and I blamed the financial crisis in East Asia on currency trading. I told them currencies were not commodities and should not be traded. But the World Bank and IMF did not care. They even accorded currency traders such rights as not having to be transparent and not paying taxes….We concluded that their recommendation would bankrupt us and make us dependent on their loans.

“I was condemned for my criticism of currency trading. But the exploitation and abuses of the financial market could not last forever. In 2008 the bubble burst. Banks, insurance companies, investment funds and even countries went bankrupt. But for its position as the currency for trade settlements, the dollar would be worth almost nothing.

“Just as in the East Asian countries earlier, America and Europe became poor. The refusal to accept their impoverishment has resulted in their refusal to accept austerity measures. Their people demonstrate and go on strike against the measures. This simply aggravates matters.

“Asian countries behaved differently. When they became poor because of the devaluation of their currencies they lived within their means.”

Malaysia opted to fix its exchange rate. “We were told our economy could collapse, that no one would lend us money, and we were warned of dire consequences. But nothing like that happened. Malaysia recovered faster than the rest….

“The only way for the European economies to recover is to admit that they are now poor and live within their means. Then they must go back to doing real business, i.e., to produce goods and sell services….Many financial products should be strictly regulated if not banned.”

Mahathir wants a new global system with a trading currency based on gold, against which all others would be valued. Fluctuation would be minimal.

“Banks should be better regulated and new rules made to prevent excessive leveraging, limit loans and stop subprime lending. The financial system should be standardized and should support real business….

“There can be no return to the status quo ante. Europeans have to accept the days of Eurocentricism are practically over. Europe must look to the East as well for solutions.”

I don’t disagree with any of the above. We did this all to ourselves, and without leadership will continue to do so. 

Washington and Wall Street

This was a week in which the economic numbers and one key earnings report were not that great. December retail sales were up just 0.1% (down ex-autos), less than expected; jobless claims suddenly spiked up after weeks of good news on this front; and JPMorgan Chase’s earnings, though generally in line, were hardly the stuff of building a rally around. Trading in the investment bank division was off big.

With the start of the fourth quarter’s earnings season in earnest this coming week, it’s important to note that one estimate has S&P 500 earnings rising 7.2% over year ago levels, but then only 3.0% in the current quarter. The estimate for the fourth quarter back in October was 14.5%. So they’ve been coming down. That said, for all of 2012 earnings are expected to rise 10.7% to $106.67 for the S&P. The index closed the week at 1289. That’s a multiple of 12, or a market that’s undervalued historically if you believe the economy is going to grow at a 2.0% to 2.5% pace, and that Europe remains fairly stable and war doesn’t break out with Iran, etc.

I’ve never felt in this current cycle the market was overvalued. I just continue to believe exogenous events will change sentiment for the worse, perhaps in a big way.

And a note on housing, which along with jobs is the key to any sustained recovery. RealtyTrac reports 3.5 million homeowners are seriously delinquent on their mortgages, though bulls point to 1.9 million hit with default or foreclosure in 2011 vs. 2.9 million in 2010. But until we clear the 3.5 million or thereabouts, prices certainly aren’t going to bottom, let alone rise.

As to the federal and budget deficits, the Treasury Dept. reported that the latter came in at $86 billion for December and stands at $322 billion for the first three months of the fiscal year, commencing Oct. 1. That’s $47 billion less than last year.

But before you buy the biggest goose in the window in celebration, understand the Congressional Budget Office estimates the deficit for fiscal 2012 will still come in at $973 billion, which would place it fourth worst in history behind the $1 trillion+ of the first three years of the Obama administration. Further, if Congress extends the payroll tax holiday for the full year, as well as unemployment benefits, and doesn’t pay for it all, we’re back over $1 trillion. As for the federal deficit, the long-term picture remains dreadful.

Monday morning, USA TODAY had this lead headline:
“U.S. debt is now equal to economy”

“The soaring national debt has reached a symbolic tipping point: It’s now as big as the entire U.S. economy.

“The amount of money the federal government owes to its creditors, combined with IOUs to government retirement and other programs, now tops $15.23 trillion.

“That’s roughly equal to the value of all goods and services the U.S. economy produces in one year: $15.17 trillion as of September, the latest estimate. Private projections show the economy likely grew to about $15.3 trillion by December – a level the debt is likely to surpass this month.

“ ‘The 100% mark means that your entire debt is as big as everything you’re producing in your country,’ says Steve Bell of the Bipartisan Policy Center, which has proposed cutting nearly $6 trillion in red ink over 10 years. ‘Clearly, that can’t continue.’

“Long-term projections suggest the debt will continue to grow faster than the economy, which would have to expand by at least 6% a year to keep pace.” [Richard Wolf]

The other week, economist Paul Krugman wrote some of the following from his perch at the New York Times.

“In 2011, as in 2010, America was in a technical recovery but continued to suffer from disastrously high unemployment. And through most of 2011, as in 2010, almost all the conversation in Washington was about something else: the allegedly urgent issue of reducing the budget deficit.

“This misplaced focus said a lot about our political culture, in particular about how disconnected Congress is from the suffering of ordinary Americans. But it also revealed something else: when people in D.C. talk about deficits and debt, by and large they have no idea what they’re talking about – and the people who talk the most understand the least.”

Krugman points to how the experts have been wrong, such as in interest rates keep going down, which shouldn’t happen if we have such a debt problem. My own point has never been about the immediate level of rates, but rather that the debt level is simply unsustainable and at some point market sentiment will turn on a dime given there is no evidence, a la the above, that we are about to enter an era of 4, 5, and 6 percent growth for an extended period of time.

Experts such as economist Kenneth Rogoff have also carefully examined history and any time a nation’s debt level has reached 90% of GDP, a prolonged period of stagnation, at best, followed.

Erskine Bowles, of Simpson-Bowles debt commission fame, has said time and time again:

“I think we face the most predictable economic crisis in our history.”

Krugman’s analysis is insane…to believe debt levels don’t matter. Even he concedes he “doesn’t mean that the debt is harmless.”

“So yes, debt matters,” he writes. “But right now, other things matter more. We need more, not less, government spending to get us out of our unemployment trap. And the wrongheaded, ill-informed obsession with debt is standing in the way.”

You’re wrong, Professor Krugman. The markets, sooner than later, will prove this to you and your ilk. They’ve already been doing so in Europe. We need both austerity and a growth package, true tax reform, but the former must dwarf the latter to prove to investors around the globe that we are serious.  Then you will see a boom like no other in recent times as capital floods into the United States.

It’s just that there’s been zero cause for optimism on this front because Congress is so helplessly dysfunctional and corrupt. The likes of Congressman Paul Ryan and Senator Tom Coburn are few and far between.

Lastly, to further depress all of you, the World Economic Forum, ahead of its annual affair in Davos, Switzerland at the end of the month, assembled a panel of experts to discuss the biggest risks facing the globe. The chief one is “severe income inequality.” Another is “chronic government debt” (Prof. Krugman).

And the report worries about “the dark side of connectivity” with its threat of “devastating cyber-attacks.”

As reported by Tim Weber of BBC News:

“Population growth and scarce resources, especially water, are identified by the report as being among the world’s biggest problems….

“(And) the report speaks of ‘seeds of dystopia’ in a world where ‘for the first time in generations, many people no longer believe that their children will grow up to enjoy a higher standard of living than theirs,’ according to Lee Howell of the WEF.

“Nationalism, populism and protectionism could be the result, undoing what the forum describes as ‘the progress that globalization has brought.’”

But as Weber reports:

 “One of the most devastating threats…is also one of the least predictable.

“The report notes that our ‘daily lives are almost entirely dependent on connected online systems,’ which had brought the world huge economic benefits and personal freedoms….

“However, the same technologies also had a ‘dark side,’ helping to organize the riots in London and providing the ability to ‘unleash devastating cyber-attacks remotely and anonymously.’

“The complexity of a world with six billion connected devices was ‘completely mind-boggling,’ said (Steve) Wilson, (chief risk officer for general insurance at Zurich). For governments, societies and businesses, it had become both ‘difficult to understand the complexity and how to manage its risks.’

“Cyber-attacks were not a risk, but a daily occurrence, he argued, while ‘systems that we thought mitigate risk are actually concentrating risk, and these are risks that we do not fully understand yet.’”

Now who wants a beer?

Street Bytes

--Stocks were up solidly for the second week in 2012, with the Dow Jones adding 0.5% to 12422, while the S&P 500 gained 0.9% and Nasdaq tacked on 1.4%.

--U.S. Treasury Yields

6-mo. 0.05% 2-yr.   0.22% 10-yr. 1.86% 30-yr. 2.91%

It was another week that saw a flight to quality, or to the best house in a bad neighborhood, especially at week’s end with the expected European downgrades.

--Morgan Stanley economist Stephen Roach continues to believe China will fair far better than India when it comes to this dicey time and that there will be no hard landing in the former, but could be in the latter.

China reported December imports rose 11.8%, a 2-year low, while exports were up 13.4%, also a 2-year low, but clearly the import figure was partly due to lower prices, not fewer purchases. 

The December consumer price index came in at 4.1%, still high but far below July’s 6.5% peak for the cycle. Lower inflation makes it easier for monetary authorities to loosen up and spur growth.

Housing remains a big concern, with most expecting a further decline in prices for 2012 of 10-20%.

Capital outflows continued a third straight month in December.

Passenger car sales rose 5.2% in 2011, the slowest pace ever, but total sales of 14.5 million still beat the U.S. figure of 12.8 million for the year. Local brands in China made up 29% of sales. This figure should grow strongly, especially if trade tensions worsen. Currently, the U.S. and China are battling over solar cells and steel.

--In India, software services giant Infosys saw its share price tumble as it cut its revenue forecast owing to Europe’s problems.

Overall, industrial production in India rose 5.9% in November, this as the December PMI was a previously reported 54.2 (HSBC).

But inflation is still running at 9%, prohibiting aggressive loosening of monetary policy to keep the economy chugging.

--According to an anti-crime group SOS Impresa, the Mafia in Italy is the country’s biggest “bank” and squeezing the life out of thousands of small firms.

“Extortionate lending by criminal groups had become a ‘national emergency.’

“Organized crime now generated annual turnover of about $175 billion and profits of more than $125 billion,” the report added.

The criminal gangs account for 7% of national output. 200,000 businesses were tied to the crime groups. Small businesses, unable to obtain credit during the economic slowdown, have had to turn to the Mob. [Reuters]

--The Wall Street Journal reported that Bank of America Corp. has told U.S. regulators it is willing to downsize, a geographic retrenchment, if its financial problems persist. There are 7,400 U.S. banks and savings institutions, but only BofA, JPMorgan Chase and Wells Fargo have a true coast-to-coast presence.

Personally, should Bank of America be forced to exit a few regions, I’d make sure it kept the Barbecue Belt…that’s Caroline Barbecue, my friends…preferred by the editor over the Kansas City and Texas varieties. Regardless, it seems clear BofA will be exiting smaller cities that have not been as profitable as larger ones.

Others believe BofA will spin off or sell its Merrill Lynch operation.

--Regarding release of the Federal Reserve’s minutes from 2006 and how Fed governors blew it when it came to predicting the housing crisis, it’s all in this space…my columns. I’ll have to resurrect a few “Wall Street History” pieces I did on the topic. The only fair thing to say about Chairman Bernanke, after he took over for Mr. Bubble, Alan Greenspan, is that Bernanke was clueless. Thankfully he got himself together to save the banking system, but has now killed seniors with his zero interest rate policies. A pretty mixed record thus far, to say the least.

--On Wednesday, corn, soybean and wheat prices plunged after the U.S. Department of Agriculture issued a report forecasting larger inventories than analysts expected, easing concerns on food price inflation. In the case of corn, the figure was 12 percent higher than initially projected.

World food prices fell 2.4 percent in December, according to the UN’s Food and Agriculture Organization. Global wheat supplies are at levels not seen since 2000, owing to rising output in Australia and Russia. I could show you how I nailed that one way back just looking at the weather and getting notes from readers in those countries. I haven’t given a forecast for commodities this year. It’s all about debt and global hot spots for now, sports fans.

--Bucking the trend, orange juice prices hit a 34-year high this week owing to food safety concerns out of Brazil, the leading producer of the fruit. The Food and Drug Administration announced it would block imports containing a fungicide commonly used there.

U.S. consumption of O.J. has fallen by nearly a quarter in the past decade, according to the USDA. PepsiCo, which owns the Tropicana brand, and Coca-Cola, which sells Minute Maid, account for 62% of all orange juice sold at U.S. supermarkets.

--Wall Street bonuses and overall pay for 2011 will fall anywhere from 15% to 50%, while yearly raises at the lower ranks are being phased out, according to Bloomberg and the Wall Street Journal. In the case of New York City and New York State, this will have a huge impact on tax revenues and the 99%, which includes many of these same Wall Streeters, as much as the OWS crowd refuses to understand this.

--Interesting tidbit from Crain’s New York Business’ Greg David. Wall Street wasn’t always so profitable, nor its pay so large.

“Salomon Brothers CEO John Gutfreund – the Lloyd Blankfein of the 1980s – made $3.1 million in 1986, considered outrageous at the time. Goldman Sachs paid Mr. Blankfein $68.5 million in 2007, nine times what Gutfreund made after adjusting for inflation.

“The future of Wall Street and finance might be more like the 1980s rather than the ‘70s, but the adjustment will be plenty painful.”

--Apple was forced to stop retail sales of its iPhone 4S in China after its flagship store in Beijing was the scene of violence. Appleonians had been camping out in freezing temperatures, waiting for the opportunity to buy the phone, but when told by store employees there would no iPhone 4S that day, a few of the customers started throwing eggs.

It turns out demand has been so incredible, Apple’s stores in China had already sold out, plus in the case of Beijing, security was a serious concern. There are alternative ways for Chinese customers to purchase the product. The problem is really with black marketeers and scalpers.

--I missed this last time, my casino barometer in Macau. Revenues for all of 2011 rose 42% over 2010, though December’s were up 25%. I’ve said I’d become concerned when the monthly figure got below 20%. Revenue growth in 2010 over 2009 was 58%. Revenue in Macau is now five times that of Las Vegas. But, non-gaming revenues in Macau are just 5% of total revenue vs. half for Vegas, when breaking out conferences/conventions, shows and dining.

[Hong Kong Disneyland recorded its strongest results in 2011 since opening in 2005, with attendance up 13% and hotel occupancy at 92% at the theme park.]

--Hong Kong’s roadside pollution levels in 2011 were the worst ever, which is not good for attracting commerce. I’ve been there a bunch of times and it’s generally awful (as much as I still love the place). But if you’re a corporation, you have to take into consideration quality of life for your employees, let alone how many would want to relocate there if that’s the decision to be made.

--Russia saw capital outflows of $84.2 billion last year, according to the Central Bank, the second-highest figure since 1994. $37.4 billion of the total was in the fourth quarter, an example of the tremendous uncertainty surrounding the entire political situation there.

--GM sold 8% more vehicles in China last year than in 2010; 2.55 million units, or more than the above-noted overall growth in the China market.

--I forgot two other items from last time I want to get down for the archives.

Canada’s jobless rate rose to 7.5% in December.

And investors pulled $132 billion from U.S. stock mutual funds, the fifth straight year of withdrawals for the domestic variety, according to the ICI.

--According to a survey of 400 businesses in Ireland, the vast majority are set to freeze or slash pay in 2012. Irish wages have been significantly higher than the rest of the European Union for years. This is a needed step, unfortunately for those affected, in order for Ireland to restore competitiveness. It should be no surprise that a survey of consumer sentiment in Ireland registered its biggest decline in December in over a decade.

--Job cuts…Novartis AG said it will slash 1,960 jobs as it restructures its U.S. businesses due to a key patent loss and failure of a high blood pressure medicine. Of the job cuts, 1,630 will come from the sales force, so if you see some dapper folks outside Dunkin’ Donuts trying to hawk overpriced drugs that have generic alternatives, ask them for a current ID.

Vestas Wind Systems is cutting another 2,300+ jobs, or 10% of its staff as the wind turbine maker fights to compete with Chinese suppliers. The Denmark-based company said a further 1,600 jobs in the U.S. are at risk if the tax credit supporting the industry expires. Vestas slashed 3,000 jobs in October 2010, and 1,900 in April 2009.

Delhaize Group SA, the owner of Food Lion supermarkets, plans to cut 5,000 positions and 113 Food Lion stores in the U.S. People in those communities will now starve to death.

Royal Bank of Scotland PLC is shedding a further 3,500 jobs from its investment banking unit over a three-year period. Just a month or two ago, RBS said it was lopping off 2,000 from the same area. The bank is 83% owned by the U.K. government after the bailouts of the financial crisis.

Archer-Daniels-Midland Co. is cutting 1,000 jobs. Earlier, ag giant Cargill said it plans to eliminate 2,000 positions. In both cases it’s about profitability despite the boom in the sector.

MetLife, the largest U.S. life insurer, is axing 4,300 jobs as a result of shutting down its residential mortgage business.

--But…there was some good employment news in the U.S. BMW is adding 300 jobs this year to its Spartanburg, S.C. plant. This flagship operation has been in existence since 1994 and BMW says it has invested nearly $6 billion in the state thus far.

While Home Depot is hiring 70,000 seasonal workers this spring, its busiest period, up 17% from year ago levels.

--Natural gas prices continued to plummet as U.S. energy companies expand their drilling operations further, which is not beginning to make a heck of a lot of sense. At the pricing levels of today, drilling for nat gas is nowhere near as profitable as drilling for oil, though sometimes the operations can result in both products. Many companies simply don’t have ways to transport the nat gas they find. 

Then again, as a Journal article pointed out, “Some gas fields produce so much ethane, a valuable liquid used to make plastics, that companies will drill regardless of gas prices. In addition, some companies need to continue drilling so they don’t violate terms of leases on millions of acres of land – deals struck when gas prices were high.” No word on whether any of the drillers have hit China.

Of course the above is great news for U.S. consumers, with more than half heating their homes with nat gas. The government is forecasting an 18% price drop this winter.

--Venezuelan President Hugo Chavez said his government would ignore a World Bank-affiliated arbitration body’s ruling that it owed Exxon Mobil $900 million after Venezuela nationalized Exxon’s assets in 2007.

--The Securities and Exchange Commission is stepping back from its longstanding practice of allowing companies to settle fraud charges by paying a fine without admitting or denying guilt when at the same time the individual or company has been convicted of criminal violations. If the SEC is acting alone, however, the agency would continue to use the language as part of the settlement process. At least it’s a good step.

--Former General Electric chairman Jack Welch on CNBC this week:

“A great economy grows with innovation, with great people, with a president yelling, ‘We’re going to grow,’ not saying, ‘You rich bastards.’… ‘No, we’re going to grow and we’re all going to grow together. I’m not going to divide you from you, we’re all a ‘team growth,’ we’re team America.’”

--Japanese and Canadian regulators have weighed in on the Volcker Rule, which would ban U.S. investment banks such as Goldman Sachs from proprietary trading, thus exacerbating a liquidity crunch. The banks have argued that banning proprietary trading would impact their market-making functions. Japan and Canada are concerned about the impact on global government debt. Earlier, European officials voiced similar concerns on the effect of the rule on the $13 trillion eurozone debt market.

--Raymond James Financial, Inc. acquired Morgan Keegan & Company. Being familiar with both when I was on the Street, this is one deal that makes eminent sense. Nice cultural fit, as both firms’ executives put it. Raymond James will increase Morgan Keegan’s existing presence in Memphis, for one. [Unrelated to the transaction, the Memphis Grizzlies’ Rudy Gay scored a season-high 26 points in the team’s win over a pathetic Knicks squad on Wednesday night.]

--As one who flies Continental Airlines fairly frequently to Europe, I was disturbed to see that as part of its merger with United, Continental is making more unexpected stops in Canada on the leg home if it encounters strong headwinds over the Atlantic. The issue is United Continental are now employing smaller, less expensive to use jets that don’t have the fuel capacity.

Some are pooh-poohing this, pointing to only 43 flights out of nearly 1,100 that were impacted, but if you’re on one of those that has to make a pit stop, these are not simple delays.

But for Canadian airports such as Goose Bay and Gander, the fueling stops are highly profitable. Now if you tell me that I get to purchase some premium, like Moosehead, while on the ground in Canada, I won’t complain.

--Hotel room rates nationwide rose 4.3% in 2011 over 2010. They are expected to increase 3.6% this year.

--Manhattan apartment rents rose a whopping 9.5% in the fourth quarter. The median is now $3,121 a month, owing to weak home purchases and a still tight credit market.

--Attendance at the Museum of Modern Art dropped 11% last year, while admissions at the Metropolitan Museum of Art rose to a record.   In each case it was about blockbuster shows, or lack thereof in the case of MoMA. The Met’s 1978 King Tut exhibition, credited as being the first museum blockbuster, remains the most popular with 1.3 million visitors.

--The art market returned 11 percent in 2011, outpacing the stock market a second straight year, according to the Financial Times. Impressionist and modern art delivered returns of 14%, while Old Master and 19th-century art increased 4.8%. I’d still buy Russian art from the 19th-century, if I were you. That era had some spectacular landscape artists…just sayin’.

--Barclays Capital analysts have concluded there is an “unhealthy correlation” between the building of skyscrapers and subsequent financial crashes, beginning with the Empire State building, built as the Great Depression was underway, and the current world’s tallest, the Burj Khalifa, built just before Dubai cratered. Barclays warns that China and India are currently the biggest builders of skyscrapers. The report notes:

“Often the world’s tallest buildings are simply the edifice of a broader skyscraper building boom, reflecting a widespread misallocation of capital and an impending economic correction.”

Long ago I worked with a brokerage firm, Thomson McKinnon Securities, and our chairman, in his infinite wisdom, decided we needed our own building, just as Wall Street was about to crash in 1987. We called it his ‘edifice complex.’ Shortly after moving in, we went under.

Back to China, it is indeed disconcerting that it is responsible for 53% of all the tall buildings currently under construction in the world.

As for India, it currently has just two of the 276 skyscrapers over 240 meters, yet over the next five years plans to complete 14. [BBC News]

--The maker of Twinkies and other crappy products, Hostess Brands Inc., filed for bankruptcy. It’s up to the court, as the company continues to operate, to ensure that the products on the shelf are no more than 400 days old.

Uh oh…strike the above from the record. I just realized Hostess’ Drake’s unit makes my favorite, Funny Bones, which are best eaten frozen. Never mind….

--Finally, bedbug cases in New York City are down! Repeat…bedbug cases in Gotham are down! This is the best news I’ve seen in months. [I’m a Jets and Mets fan, you understand.]

Foreign Affairs

Iran: James Blitz / Financial Times: “How close is the west getting to all-out conflict with Iran? As 2012 gets underway, the question is right at the top of the international security agenda. Hardly a day goes by without some striking news from the region – be it Iran’s decision to enrich uranium at a new underground site; or the unexplained killing of another Iranian nuclear scientist; or Iran’s threat to close the Strait of Hormuz.”

The one issue fanning the flames these days is the imposition of sanctions banning oil imports from Iran (and to a lesser extent the new restrictions on Iran’s financial institutions).

The danger, especially with Iran’s Revolutionary Guard conducting naval exercises over the coming weeks in the area of the Strait of Hormuz, is an accident, a miscalculation, even by a rogue element in the Guard. They love to show off their speed boats and pretend they are about to ram a U.S. or allied naval vessel, only to turn off at the last minute. But now, with the new threat level, how can U.S. naval commanders risk that these same boats aren’t on a suicide mission?

And as I keep saying, going back months, nothing we heard this week on the nuclear weapons front should give the White House or Israel reason to believe Iran is still years away from having the bomb; therefore, my timetable of the administration taking direct action against Iran’s suspected sites remains…by May. [Or Israel will act alone beforehand.] Killing scientists, as was the case again this week for a fourth time, or sabotaging the program through computer worms such as Stuxnet, cannot do the job alone of taking down Iran’s capabilities.

But to clean up the facts of the past seven days:

U.S. Treasury Secretary Timothy Geithner went to Asia to convince China, Japan and South Korea to limit or outright ban Iranian oil imports. Only Japan agreed to pull back in terms of new purchases (though long-term contracts will be honored), while South Korea said it will, eventually, once it figures out alternative ways to replace the Iranian crude. China, though, said ‘forget about it.’

And on this front, the European Union, which was expected to ban Iranian imports, is now looking to wait up to six months before doing so owing to the importance of the supply to the likes of Spain, Italy and Greece. They, like South Korea, first need to find alternatives, let alone the fact their economies can’t afford an oil shock these days.

[Iran exports 2.3 million barrels per day, the world’s third-largest exporter. The EU receives somewhere between 400,000 and 450,000 bd. China takes in about 500,000 barrels. Japan 400,000; South Korea 300,000; India 500,000. The Saudis have vowed to make up any difference, and despite some reports you may have seen, have oil comparable to Iran’s quality level.]

Meanwhile, Iran announced it has begun enriching uranium to 20% at a second site, the underground facility known as Fordo, near the holy city of Qom, thus further outraging the likes of the United States and France, as well as even Russia to a lesser extent.

Understand that getting to 20% is the hard part. Going to the bomb-making level of 90% is then relatively easy. When you hear how the West is concerned about a “break out,” if we are so lucky to know when this is occurring, it refers to Iran’s suddenly going for 90%, meaning it would be mere months before they could have the bomb capability. [Delivery mechanisms are a separate issue.] For all we know, Iran could have broken out on a small scale already. If the West and Israel were convinced Iran was indeed doing so, a strike on the plants is a certainty, and of course this would entail blowback on Western and Israeli interests around the world. This is why stories on Hizbullah and the Revolutionary Guard’s presence in Latin America are so important because there are lots of soft targets in the region and would be easy missions to carry out quickly, one can only assume.

The International Atomic Energy Agency and Iran are to meet on Jan. 28 but details on just what inspectors would be able to see are unclear.

Indeed, the Iranian regime is under siege. A further sign of this is the imposition of a death sentence on 28-year-old Amir Hekmati, an Arizona-born Iranian-American and former U.S. Marine that Iran has accused of spying for the CIA. The U.S. government categorically denies this. He was arrested in Iran last August while visiting his grandmothers for the first time.

Iran continues to threaten to close the Strait of Hormuz, a transit point for 20% of the world’s crude. The U.S. considers this a “red line” and warns Iranian action would merit a response.

Supreme Leader Ayatollah Ali Khamenei, speaking of the pressures, said on Monday, “The Islamic establishment…knows firmly what it is doing and has chosen its path and will stay the course.”

Meanwhile, Iranian President Mahmoud Ahmadinejad was gallivanting about in Latin America, spending time with his “dear brother” Hugo Chavez in Venezuela, vowing to work with Chavez to fight imperialism and poverty. Chavez pledged to work with Ahmadinejad to stop the “imperial insanity” of the United States, which he described as a “threat for the world.” [CNN]

Syria: President Bashar Assad showed up in public for the first time in six months, telling his supporters “We are going to win.” Earlier he said in a speech to parliament that Syria would vanquish the “foreign conspirators with an iron fist.”

Assad’s pronouncements were overwhelmingly condemned in the West and in much of the Arab World. A monitor for the Arab League said Syria didn’t carry out any of its commitments previously made to the group and that he had seen “children murdered,” extensive examples of torture, and “skinned bodies.” It was utter carnage. And this week the first foreign reporter, a Frenchman, was killed. Over 400 have died since the Arab League mission of monitors went in.

Israel: Defense officials here stated the obvious, that Iran and Hizbullah were arming the Assad regime, while going back to Iran and the nuclear crisis, a London Sunday Times piece suggested that perhaps the best way to tell action against the mullahs is imminent would be if you knew Israel’s nuclear reactor at Dimona had been shut down. 

The Israelis now know that Dimona is vulnerable to Iranian intermediate- and long-range missiles, especially those fired from Lebanon or Syria. “Deactivating the reactor in the southern Negev desert would minimize the dangers of nuclear fallout in the area.”

An official told the paper that the shutdown would begin before the launch of any Israeli or U.S. assault on Iran’s facilities, but that “It takes a long time, many weeks, to cool down a nuclear reactor and lower the level of radioactivity,” as one of the founders of Israel’s nuclear program put it.

I didn’t realize that, separately, Dimona is the second oldest active reactor in the world and is deemed “dangerous” by many experts. One said it “should have been closed a long time ago.”

On a different topic, an Israeli group, Peace Now, which is opposed to settlement construction, said construction on more than 1,850 West Bank units was started in 2011, up 20% from 2010’s 1,550. Needless to say the Palestinians voiced outrage.

And in a late development, a Foreign Policy expose published at week’s end claims Mossad officers have been posing as CIA officers to recruit operatives against Iran’s nuclear program. This has infuriated the U.S. The Mossad officers are equipped with U.S. passports and dollars, and recruited “under the nose of U.S. intelligence officers,” including in London. In response, the U.S. has scaled back joint U.S.-Israeli intelligence operations. The timing is poor. [Jerusalem Post]

Pakistan: As one of my predictions for 2012, I said a coup here was a “layup.” Heck, by the time you read this something could have happened. President Zardari flew to Dubai for a check-up on his health issue, as some felt this was a sign a coup was in the works. The military does not seek a coup. They don’t want to have to deal with the domestic issues that would come with power, at least at this moment. But in many respects it is being forced on them. Prime Minister Gilani sacked the defense secretary this week for “gross misconduct and illegal action” in an attempt to reassert authority, though at the same time, Gilani has said he would step down if that would diffuse tension. However, the leading opposition figure, Nawiz Sharif, is not favored by the military either. Thus far, General Kayani, the overall military chief who was once a friend to the United States, has held off on making a move but the military did warn of “grievous consequences” for Gilani’s action to sack the defense chief.

Meanwhile, the Army has its hands full with the Taliban, with 25 members of the army or paramilitary police units being killed in separate attacks. The Taliban has killed 9,000 civilian or security personnel in Pakistan since 2009. Separately, a bomb blast at a bus terminal along the Afghan border killed 29.

Lastly, former Pakistani President Pervez Musharraf has vowed to return between Jan. 27 and 30 and run for office, even though the current government said he would be arrested in connection with the 2007 assassination of former Prime Minister Benazir Bhutto. Musharraf’s return will not be helpful.

Afghanistan: I have nothing to say on the actions of the four Marines who desecrated some Taliban bodies, other than that the four deserve to be punished according to the rules of the military.

Kuwait: In case you were wondering, the United States now has 15,000 soldiers here, including two brigade combat teams and a combat aviation brigade, according to Defense News, so there is a fairly adequate presence in the region if needed; one larger than was normal since the first Gulf War. In the event of conflict with Iran, the first mission is to protect these troops from retaliatory strikes.

China/Taiwan: By the time the vast majority of you read this, the presidential election results on Taiwan will be known (they are supposed to come out 4-5 hours after I post). Disturbingly, President Ma had only a slim lead over Tsai Ing-wen, your editor having a big financial stake in stability and further economic progress between the mainland and Taiwan and a Ma loss would be disastrous. Tsai is attempting to become the island’s first female president, but the fear is her party, the DPP, is historically independence-minded and you know what that would mean to Beijing.

To give you an idea of how things have changed, 180,000 Taiwanese businesspeople were expected to fly back home to cast their votes because the election is so close. Washington, by the way, agrees with Beijing on this one. They too want a Ma victory. Taiwanese investment in China rose to $12.2 billion in 2010.

On two other topics, similar to the story above on Hong Kong, pollution levels in Beijing are as bad as they were prior to the Olympics. The smog has been so thick many days this winter that road travel, let alone the air variety, has been severely disrupted. In an unusual move, though, the Municipal Bureau of Environmental Protection admitted that the U.S. Embassy’s pollution readings were more accurate than theirs and they have begun sharing data.

And in a story from the South China Morning Post we learn, “Almost 80 percent of women interviewed said they would not consider a man who earned less than $600 a month,” or as the reporter Stephen Chen put it, “Women marry for money and houses, while men wed for passion and looks,” according to a nationwide survey. Now discuss amongst yourselves.

North Korea: Kim Jong Un celebrated a birthday on Sunday. No doubt it isn’t really his, but it fit the calendar and ongoing plan to burnish the kid’s credentials. A documentary of the “military genius” aired the same day, one showing him driving a tank (where he looked like Michael Dukakis), sitting in the cockpit of a plane and interacting with soldiers. 

Reuters did report that Pyongyang was holding talks with Japan, though these were taking place in Beijing, this as nuclear negotiators from China and South Korea were meeting to discuss the impasse over the North’s weapons program. A separate report said the North would be willing to halt its uranium enrichment operation if the United States would increase its food assistance. We could probably just ship them excess Hostess products that have aged appropriately.

Myanmar: China can’t like what it sees going on here. The government, nominally under civilian control with the military calling the shots, released dozens of high-profile political prisoners on Friday, including a former head of intelligence, journalists and monks, as the rulers seem committed to democratic reform. The release of the detainees is an important condition set forth by the European Union and the U.S. in order for sanctions against the regime to be lifted.  Secretary of State Hillary Clinton immediately responded in kind by announcing the two nations will exchange ambassadors, though it’s a lengthy process and the U.S. is not lifting sanctions without further confidence building measures. Washington hasn’t had an ambassador in Burma since 1990. An April 1 election for 48 parliamentary seats is to take place with opposition leader Aung San Suu Kyi on the ballot. This could be one of the surprise success stories of 2012.

As for Beijing, the rulers obviously don’t want their own people getting too many ideas.

Russia: With less than two months to go before the March 4 presidential election, it still seems likely Vladimir Putin, despite all the protests, will capture more than 50% of the vote and avoid a run-off. Granted, the actual vote tally may be 35% but through the magic of the Sorcerer…

Many say this wouldn’t be too smart, such outright manipulation after last December’s fraudulent Duma vote.

Separately, the director of Russia’s space agency suggested in an interview that the disabled Russian spacecraft that is headed back to Earth this weekend (wear a helmet) failed because it was struck by some kind of anti-satellite weapon.

What was to have been a 2 ½-year mission to explore a moon of Mars failed shortly after takeoff.   Back then, as reported by the New York Times’ Andrew E. Kramer, “A retired commander of Russia’s missile warning system had speculated that strong radar signals from installations in Alaska might have damaged the spacecraft.” The space agency director, however, did appear to choose his words carefully and wasn’t blaming the United States directly while conceding the spacecraft’s equipment “may have broken down while the vehicle was stored on the ground,” waiting for the right time for the Earth and Mars to line up before proceeding with the mission.

Nigeria: There were further killings of Christians, including an attack on a bar that killed at least 8. Remind me not to travel to Nigeria for a beer.

So the Christians, tired of being killed for holding their beliefs, stormed a mosque in southern Nigeria and killed five. Since Christmas Day, at least 85 deaths have been recorded in the sectarian violence.

Meanwhile, the nation ground to a halt due to a general strike over the elimination of a fuel subsidy, which led to a doubling in fuel prices. President Goodluck Jonathan said the subsidy was economically unsustainable. Protests were suspended a few days to allow for talks with officials. The strikes could resume.

Random Musings

--Mitt Romney became the first non-incumbent Republican presidential candidate to win both Iowa and New Hampshire. The day before the New Hampshire primary, a Suffolk University tracking poll had Romney at 37%, Ron Paul 18% and Jon Huntsman 16%.

It ended up:

Romney 39
Paul 23
Huntsman 17
Santorum 9
Gingrich 9

As the candidates all moved to South Carolina for the Jan. 21 primary there, one that promises to weed out at least two of the candidates, an American Research Group poll has:

Romney 31
Gingrich 24
Santorum 24

CNN/Time/ORC

Romney 37
Santorum 19
Gingrich 18

In an early look at Florida, Jan. 31, a Quinnipiac Univ. survey has Romney at 36%, Gingrich at 24%, Santorum at 16% and Paul at 10%.

And just a reminder. Until April 1, almost all the states will award delegates proportionally, after which many will hold winner-take-all primaries.

--CNN/ORC nationwide poll of Republican voters [released Friday]

Romney 34
Gingrich 18
Paul 15
Santorum 15
Perry 9
Huntsman 4

[In December, this same survey had Romney and Gingrich tied at 28, Paul at 14 and Santorum with 4.]

--In his victory speech in New Hampshire, Mitt Romney laid out his case against President Obama….in part…

“The middle class has been crushed. Nearly 24 million of our fellow Americans are still out of work, struggling to find work, or have just stopped looking. The median income has dropped 10 percent in four years. Soldiers returning from the front lines are waiting in unemployment lines. Our debt is too high and our opportunities too few. And this president wakes up every morning, looks out across America and is proud to announce, ‘It could be worse.’ It could be worse? Is that what it means to be an American? It could be worse?

“The president has run out of ideas. Now, he’s running out of excuses.

“He doesn’t see the need for overwhelming American military superiority. I will insist on a military so powerful no one would think of challenging it. He chastises friends like Israel; I’ll stand with our friends.

“President Obama wants to put free enterprise on trial. In the last few days, we have seen some desperate Republicans join forces with him. This is such a mistake for our party and for our nation. This country already has a leader who divides us with the bitter politics of envy. We must offer an alternative vision. I stand ready to lead us down a different path, where we are lifted up by our desire to succeed, not dragged down by a resentment of success. In these difficult times, we cannot abandon the core values that define us as unique – We are One Nation, Under God. Make no mistake, in this campaign, I will offer the American ideals of economic freedom a clear and unapologetic defense.” [Jennifer Rubin / Washington Post]

I watched the speech. It was powerful. He just needs to keep repeating it.

--But I’m not a Mitt Romney fan. I’m like so many Republicans, disgusted with our choices. And between both the Republicans and the Democrats, I keep thinking, ‘330 million people in this country and the last 20 years this great nation has produced Bill Clinton, George W. Bush and Barack Obama.’ What are we thinking, people?

Then again, Rome had a lot of lousy rulers before it finally collapsed.

Oops. Bad analogy.

--One topic ticks me off is the whole Romney / private-equity situation. For starters, there is a distinct difference between venture capitalists and private-equity, but the commentators and politicians are blurring the two.

It’s true…some firms do a little of both, but for the most part, private-equity players buy up troubled companies, remove them from the public market, restructure ‘em, which almost always involves layoffs, and then hope to bring them back out in an IPO as a successful company and make a fortune. Nothing wrong with that. Many of these companies were dying and on a respirator to begin with. Some still do die after private-equity funds have been expended. (Stuff) happens. Heck, I often forget that I myself once bought a dying operation, in the early years of StocksandNews. I injected my own capital into it, thought by sheer force of personality and incentives that I could turn things around (plus there were cost savings for my own business involved), but it still died. I made two mistakes. I never should have acquired it and I did a lousy job once I took over. Luckily most of the 13 employees found other work quickly.

Where private-equity has gotten a bad name, though, is when they gobble up a company and then pile massive amounts of debt on it, which almost always leads to a final collapse, only the p-e partners have paid themselves large dividends and profits while the workers get screwed.

[Venture capitalists, on the other hand, as classically defined, are investing in new businesses before they go public, like those who’ve been investing in Facebook. For every two or three where the VC guys are taking a flyer and it doesn’t pan out, you hope you get one that succeeds more than enough to make up for the failures. VCs, for their stake in the business, get board seats and a say in the direction of the start-up.]

Walter Hamilton of the Los Angeles Times cites a study of 3,200 private-equity deals over a 25-year period that showed it was neither a big job creator nor a big job destroyer.

But when one looks at the history of Bain Capital, where Mitt hung out all those years, it has had a solid reputation. Sure, lots of losers. Lots of lost jobs. But also some big successes whose names you all know by now; like Staples, Sports Authority and Domino’s Pizza, though for Romney to then say he has helped create 100,000 jobs is more than a bit disingenuous.

Editorial / Wall Street Journal

“Mr. Romney needs to rise above the personal and base his claim to office on a defense of the system of free enterprise that has enriched America over the decades and is now under assault. Mr. Obama will attack Mr. Romney as Gordon Gekko because the President can’t win by touting his own economic record. Mr. Romney’s GOP opponents (with the admirable exception of Rick Santorum*) are embarrassing themselves by taking the Obama line, but Mr. Romney should view this as an opportunity to stake his campaign on something larger and far more important that his own business expertise.”

*Once again the Journal ignores Ron Paul, who also hasn’t criticized Romney on the issue.

Robert Samuelson / Washington Post

“For Mitt Romney, it’s the best of times and the worst of times. While his New Hampshire win brings him closer to the Republican nomination, his campaign narrative against President Obama may be unraveling. The plot is simple: With a comatose economy and stubbornly high unemployment, Romney’s private-sector experience makes him a better job creator than Obama. There are problems. Not only does the economy seem to be strengthening, but Romney’s business background is being turned against him. By Republicans, no less.

“We understand the achievements of Bill Gates and Steve Jobs. They created enterprises that employ thousands and sell to millions. But private-equity, Romney’s specialty? That’s more complex and confusing. Texas Gov. Rick Perry calls Romney a ‘vulture capitalist.’ Former Utah governor Jon Huntsman says Romney ‘enjoys firing people.’ Is Romney’s business experience a virtue or a vice?...

“It’s not just that a president’s job extends beyond bolstering business. Romney belongs to the class of the super-rich, and private-equity – whatever its value – benefits from unjustifiably low taxes. Romney can easily be typecast as a coldblooded, numbers-crunching ‘Wall Street type’ disconnected from most Americans’ hopes and frustrations.

“That his Republican rivals, of all people, have brought this charge is actually an unintended gift. If Romney becomes the nominee, Democrats will escalate the assault. Romney now has the chance to defuse these attacks – or show that he can’t. Defending his economic views in today’s anti-Wall Street climate will test his political skills as little else.”

--Personally, last Saturday I went to Windham High School while in New Hampshire to see Sen. Rand Paul, who some say went around the state cleaning up after his father, which isn’t exactly fair but I’ll say this…I like Rand Paul. 

Yes, until I saw him in an interview with Wolf Blitzer the other day, referenced last week in this space, I have harshly criticized the senator, particularly when he was running for the senate in 2010. I said he wasn’t ready for prime time. He wasn’t. But he won.

Well, let’s just say he’s a quick study. He will run for president in 2016, depending on the 2012 results, of course. He is also a much better presenter of his father’s ideas.

It hit me the other day that Ron and Rand Paul are in some respects similar to Jean-Marie and Marine Le Pen in France. The son and daughter are finding ways to moderate their fathers’ harsher tone and it will translate to a broader audience.

Charles Krauthammer / Washington Post

“There are two stories coming out of New Hampshire. The big story is Mitt Romney. The bigger one is Ron Paul.

“Romney won a major victory with nearly 40 percent of the vote, 16 points ahead of No. 2….

“But the bigger winner was Ron Paul. He got 21 percent in Iowa, 23 in New Hampshire, the only candidate other than Romney to do well with two very different electorates, one more evangelical and socially conservative, the other more moderate and fiscally conservative.

“Paul commands a strong, energetic, highly committed following. And he is unlike any of the other candidates. They’re out to win. He admits he doesn’t see himself in the Oval Office. They’re one-time, self-contained enterprises aiming for the White House. Paul is out there to build a movement that will long outlive this campaign.

“Paul is less a candidate than a ‘cause,’ to cite his election-night New Hampshire speech. Which is why that speech was the only one by a losing candidate that was sincerely, almost giddily joyous. The other candidates had to pretend they were happy with their results.

“Paul was genuinely delighted with his, because, after a quarter-century in the wilderness, he’s within reach of putting his cherished cause on the map. Libertarianism will have gone from the fringes – those hopeless, pathetic third-party runs – to a position of prominence in a major party….

“His goal is to make himself leader of the opposition – within the Republican Party….

“Paul won’t quit before the Republican convention in Tampa…His goal is to have the second-most delegates, a position of leverage from which to influence the platform and demand a prime-time speaking slot – before deigning to support the nominee at the end….

“The Democratic convention will be a tightly scripted TV extravaganza extolling the Prince and his wise and kindly rule. The Republican convention could conceivably feature a major address by Paul calling for the abolition of the Fed, FEMA and the CIA; American withdrawal from everywhere; acquiescence to the Iranian bomb – and perhaps even Paul’s opposition to a border fence lest it be used to keep Americans in. Not exactly the steady, measured, reassuring message a Republican convention might wish to convey. For libertarianism, however, it would be a historic moment: mainstream recognition at last.

“Put aside your own view of libertarianism or of Paul himself. I see libertarianism as an important critique of the Leviathan state, not a governing philosophy. As for Paul himself, I find him a principled, somewhat wacky, highly engaging eccentric. But regardless of my feelings or yours, the plain fact is that Paul is nurturing his movement toward visibility and legitimacy.

“Paul is 76. He knows he’ll never enter the promised land. But he’s clearing the path for son Rand, his better placed (Senate vs. House), more moderate, more articulate successor.

“And it matters not whether you find amusement in libertarians practicing dynastic succession. What Paul has already wrought is a signal achievement, the biggest story yet of this presidential campaign.”

--Meanwhile, in full campaign mode in Chicago the other night, President Obama declared:

“I promise you…change will come.”

Then on Friday, he called on Congress to give him authority to consolidate six agencies dealing with trade and commerce. The Commerce Department would be eliminated and the Small Business Administration would be given a cabinet-level slot, which is an absurd idea. [There are too many cabinet members as it is.]

Suddenly the campaign has a new mantra… “Rethink, Reform, Remake our Government.”

The move will supposedly save $3 billion over ten years and the jobs lost will be through attrition. As you know, we need a deficit reduction package of $4 trillion or so to be taken seriously by investors around the world.

Whatever. The president comes out with his plan to reshape government just as Republican presidential candidates are talking about shrinking the size and cost of government as well, though on a far grander scale. It’s all kind of funny. Once again Obama has laid a little trap.

Michael A. Walsh / New York Post

“(With the focus on Iowa and New Hampshire), the real action has been going on under the media radar in Washington, where:

“A rogue Senate, under the feckless majority leader, Harry Reid, has not passed a budget resolution since April 29, 2009 – nearly a thousand days. Since then, the government has been funded under a series of continuing resolutions and other gimmicks. The Senate adamantly blocked consideration of Paul Ryan’s ‘Path to Prosperity’ budget, which passed the Republican-controlled House back in April 2011.

“Dereliction of duty or all part of the plan? Obama’s strategy this year – in addition to demonizing whichever Republican gets the nod to challenge him – will be to run against a ‘do-nothing’ Congress, a la Harry Truman in 1948. But in this case the ‘nothing’ is being ‘done’ by the Democrats, who have gone to the mattresses in their battle to preserve the entitlement state.

“As a result, the nation closed out 2011 with the total debt at an astounding $15.22 trillion, or more than 100% of GDP. We’re less than $14 billion (chump change these days) from having to raise the debt ceiling yet again – a farce that apparently will continue until a responsible Congress, not to mention a new president, takes office next January. And maybe not even then, given the corrupt state of a permanent governing class that bipartisanly enriches itself via ‘public service’ by trading on insider information.”

--In a move that was buried in the other news of the week, William Daley stepped down as White House chief of staff, to be replaced by budget director Jack Lew. Daley supposedly is staying on through the reelection campaign as an advisor. His one year in the position, since the 2010 mid-term elections, after which he replaced Rahm Emanuel, was largely a waste.

--Last week I quoted Moises Naim in the Financial Times who stated “Inequality will be the central theme of 2012. It has always existed and is not going away, but this year it will top the global agenda of voters, protesters and politicians running for office in the many important elections scheduled.”

This week, Annie Gowen of the Washington Post discussed the results of a Pew Research Center survey in America that found “About 2/3s of the public now believes there are strong conflicts between the rich and poor in America, making class a likelier source of tension than traditional flash points of race or nationality.”

The percentage has been rising rapidly, owing to the Occupy Wall Street movement. But the way OWS has conducted itself, it isn’t deserving of the credit.

--First Lady Michelle Obama gave an interview to CBS News’ Gayle King and dismissed the notion that she was “some angry black woman” after a new book , “The Obamas,” described some of the tension with the president’s aides.

--Defense Secretary Leon Panetta formally announced the U.S. is reducing its force in Europe. Currently it maintains 80,000 from all of the services and the elimination of two Army brigades and their noncombat support units will cut this by about 10,000 to 15,000. European officials are concerned. They can get over it.

Actually, as Panetta said, the presence won’t change much at all because of his idea of rotating combat brigades through the area on training missions, which would augment the permanent presence.

We should cut to 40,000, all services. Europe is spoiled beyond belief at this point. Of course they’ve also gotten a break on the budget front, but despite the tough economic times, they are going to have to increase their own defense spending eventually.

--According to data compiled by the National Weather Service, lightning killed fewer Americans in 2011 than any year on record, even as tornadoes killed more than 500. Only 26 died as a result of a lightning strike. The average is 55 a year.

In the 1940s, even as the USA’s population was less than half what it is today, lightning killed more than 300 Americans each year, on average. In 1942 alone, 432 died, which is kind of remarkable when you think about it. The difference is all about public education. [Doyle Rice / USA TODAY]

--And for the first time in 45 years, homicide is not among the 15 leading causes of death in the United States. According to data compiled by the Centers for Disease Control and Prevention, which looks at death certificates provided by the states, of the 2.4 million total deaths reported in 2010, there were 16,065 homicides, down from 16,799 a year earlier.

Heart disease and cancer, the most common causes of death, accounted for 47% of all deaths last year.

Between 1990 and 2010, homicides in New York dropped 76%; they were down 70% in Los Angeles and 49% in Chicago.

Causes of Death in America

1. Heart disease
2. Cancer
3. Chronic lower respiratory diseases
4. Stroke
5. Accidents
6. Alzheimer’s
7. Diabetes
8. Kidney disease
9. Influenza/pneumonia
10. Suicide
16. Homicide

[Kevin Johnson / USA TODAY]

--Good news…India has gone a full year without recording a single new case of polio, a huge achievement, but the pressure needs to be kept on parents to keep immunizing their children. 26 million babies are born each year in the country and it won’t be truly polio-free until at least three years have passed without a new case. Polio is still endemic in neighboring Pakistan and Afghanistan.

This gives me an excuse to recognize Jonas Salk again. Did you ever think about a top ten list of people in the history of the world who made a positive difference? Salk has to be on it.

--Sign of the Apocalypse…from the New York Daily News:

“A study of bushmeat smuggled into the city shows it could spread disease or even spark pandemics, researchers said Tuesday.

“Dr. Denise McAloose, chief pathologist for the New York-based Wildlife Conservation Society, said no one had tested illegal bushmeat for pathogens before the study.

“Animal parts seized by custom agents at Kennedy Airport were routinely destroyed until the WCS partnered with the Centers for Disease Control and Prevention in 2008 for the research….

“Scientists found simian foamy viruses and two types of herpesviruses in the animal parts tested.

“While the herpesviruses detected are not considered dangerous to people, related viruses cause disease in humans.

“Researchers say the results show potential danger.

“ ‘Diseases such as HIV, Ebola, swine flu, avian flu and monkey pox all originated in wildlife,’ McAloose said.   ‘We don’t know where the next disease like that might occur.’

“Some animal skulls, hands, arms and torsos were still fresh in coolers when confiscated.”

So what’s getting through? I just hope I don’t die of monkey pox myself. That would kind of suck.

--Speaking of which, the Bulletin of the Atomic Scientists, the group responsible for the Doomsday Clock, moved it to 11:55 p.m. Two years ago, the clock was moved back to 11:54 p.m., after the organization became convinced climate change talks were making progress.

But now the group comprised of Nobel laureates, scientists and others, feels efforts to increase energy production in the 21st century to deal with rising population needs are falling short.

Personally, I normally go to bed well before 11:55 p.m. so I hope to be sound asleep when the world goes poof! I’m assuming that’s 11:55 p.m. ET, so if you’re in the Central, Mountain or Pacific time zones you really need to plan accordingly. Then again, we all shouldn’t have to worry until they move it to, like, 11:58.

---

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

God bless America.
---

Gold closed at $1630
Oil, $98.70

Returns for the week 1/9-1/13

Dow Jones +0.5% [12422]
S&P 500 +0.9% [1289]
S&P MidCap +1.7%
Russell 2000 +1.9%
Nasdaq +1.4% [2710]

Returns for the period 1/1/12-1/13/12

Dow Jones +1.7%
S&P 500 +2.5%
S&P MidCap +3.1%
Russell 2000 +3.1%
Nasdaq +4.0%

Bulls 51.1
Bears 29.8 [Source: Chartcraft / Investors Intelligence]

Have a great week. I appreciate your support.

Brian Trumbore



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-01/14/2012-      
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Week in Review

01/14/2012

For the week 1/9-1/13

[Posted 6:00 AM ET]

Europe, Washington and Wall Street

Some European officials and leaders were patting themselves on the back this week, like European Central Bank President Mario Draghi, who told us all that the actions he took are loosening the credit markets and that there are “tentative signs” of stabilization in the region’s economy, though he did have to admit “substantial downside risks remain” and he’s frankly lying about the credit aspect. What we don’t have, yet, are bank runs and that is good.

German Chancellor Angela Merkel is all excited about her new fiscal union, saying after a meeting with French President Nicolas Sarkozy that the rules will be agreed to by end of January, or at the latest March, per the December Brussels agreement.

And Italy and Spain had decent debt auctions, though at the end of the week, Spain’s 10-year bond had a yield of 5.23% (up from yearend), while Italy’s was at 6.73%. Nonetheless, the yields on the shorter paper being offered were indeed better than December’s picture.

OK, that’s the sort of good news. And now the bad.

Standard & Poor’s downgraded France and Austria, taking away their AAA-ratings, leaving Germany as the euro area’s only stable AAA grade. France and Austria were cut one level to AA+, meaning all of the citizens have to change the sticker on the back bumper of their car. They no longer get a free tow, but they are admitted into AA meetings with a reserved parking spot.

Finland, the Netherlands and Luxembourg kept their AAA ratings, but were placed on negative watch, which means a hidden camera follows your every move and if you screw up, you go directly to AA and can’t use someone else’s name.

In an accompanying statement, S&P said: “In our view, the policy initiatives taken by European policy makers in recent weeks may be insufficient to fully address ongoing systemic stresses in the euro zone.”

Now to be fair, just as was the case with the U.S. last August when our sovereign debt was downgraded, market reaction on Friday was muted. But it is in no way a good thing, either, and you never know when these moves will bite you in the butt. At least the ratings agencies are giving proper notice and the market is no longer shocked by such actions.

Elsewhere, you had this headline on Friday:

“Greek debt restructuring talks collapse”… “an unexpected breakdown that makes it more likely Athens will become the first government of a developed country in more than 60 years to suffer a full-scale default on its debt.”

I get a kick out of those who have been pooh-poohing a Greek default as the focus turned to Italy. It would be a disaster, and not just for the Greek people. Greece must get their act together in a matter of weeks in order to ensure they get the first tranche of a second bailout package that was supposed to total 110 billion euro. 

Billionaire George Soros said Europe’s sovereign-debt crisis is “more serious” than the financial crisis of 2008 and that the world faces the prospect of a “vicious circle” of deflation.

Italian Prime Minister Mario Monti, who saw his country downgraded two notches, warned that Italians would turn hostile if they do not see the austerity measures they have accepted lead to progress, both economically and fiscally.

“If the Italians do not see concrete rewards for their willingness to save and reform, there will be protests in Italy against Europe and also against Germany which is seen as ringleader of EU intolerance and against the European Central Bank.”

Spain, also downgraded two notches, and despite its successful debt auction, has massive problems, not the least being its 23% unemployment rate. Now new Prime Minster Mariano Rajoy has to backstop his regions (think Catalonia, Valencia, Andalusia) that have massive debts of their own. Four of them, the aforementioned three plus Madrid, have been shut out of the debt markets yet need to repay $11.5 billion to lenders this year. Spain’s 17 regions have total debt of $175 billion.

Europe, just as in the U.S., also has a massive pension issue. According to Bloomberg, state-funded obligations in 19 of the European Union nations are over $39 trillion as of 2009, five times higher than their combined gross debt. Talk about unsustainable, particularly when any kind of return on the assets is so hard to come by in this era of zero interest rates. Europe’s pension fund managers, just like in the U.S., can only do one thing; take more risk. It’s insane.   You end up going from one bubble to the next.

All of the above problems are still front and center while Merkel and Sarkozy have done nothing about increasing the so-called firewall for the likes of Italy and Spain, whether it’s the European Financial Stability Fund or the coming European Stability Mechanism. [Plus the latest downgrades hurt the EFSF, for starters.] The only thing they seem to agree on is a financial transactions tax, but Britain is vehemently opposed to that unless the rest of the world is subject to it.

Back to Italy, consumer confidence hit a 16-year low in December as Fitch Ratings stated, “Italy is the front line of this crisis,” Fitch also raising the issue of insufficient firewalls.

Ireland is going to need another bailout unless it’s given a break on the interest rates it has to pay on its bailout of Anglo Irish Bank, currently 8%.

The ECB, in cutting its growth forecast for the eurozone to 0.3% for 2012, offered the coming recession “won’t be a deep one,” to which I have two comments. If the ECB is correct, it won’t do much good if the ensuing growth is tepid. And, the ECB and its ilk never take into consideration the reaction of the people to a recession during a time of severe austerity. It won’t be good.

Germany, despite all the glowing talk about its economy, is projected to have contracted 0.25% in the fourth quarter.  Germany also sold six-month treasury bills at a negative yield for the first time. You think this is good? Think again.

Mohamed El-Erian / Financial Times

“Another day and another previously unthinkable development becomes reality in Europe. Yet what on the surface appears to be good news for Germany – the record low yield at its latest government debt auction – is actually an indication of growing stress elsewhere in the region…

“German rejoicing for borrowing money at negative rates should thus be tempered by the reality of Europe experiencing an accelerating disengagement of the private sector from the region’s economic integration project. This undermines growth and employment, shifts more of the load to taxpayers, and places even greater demands on creditor and debtor countries alike – all serving to aggravate an already-strained process for agreeing on the appropriate policy response and related burden sharing.

“At a time of considerable domestic resistance, governments in surplus countries (essentially Germany, but also others such as Finland and the Netherlands), as well as the European Central Bank, will face even greater external pressure to substitute more of their solid balance sheets for the delevering private sector. Meanwhile, debtor countries will be expected to do even more on the austerity front, thereby aggravating internal tensions and sacrificing both actual and potential growth.

“Rather than welcome negative yields, Germany should interpret the outcome of Monday’s auction as further indication of the gravity of the situation facing the eurozone as a whole. It is another alarm bell calling for more forceful steps to improve the region’s policy mix, counter banking fragility, and strengthen the institutional underpinning of a ‘refounded’ Europe.”

Editorial / Wall Street Journal

“European financial markets have gotten very strange. Greece’s one-year government bond yield hit 376% yesterday, while Germany, Switzerland and the U.K. sold short-term debt this week at yields below 0%. That means investors are effectively paying the latter governments for the privilege of lending to them. Reuters also reported Monday that blue-chip firms like Johnson & Johnson and Pfizer are lending to struggling European banks, turning the usual creditor-debtor relationship on its head.

“At this point, flying saucers over the Eiffel Tower or the Colosseum in Rome wouldn’t surprise anyone.

“There’s a serious point here. The longer Europe’s crisis lumbers on, the more distortions it creates in credit markets across Europe, not merely in the distressed South. The big uncertainties – will the eurozone break up? will the European Central Bank step in? – are causing capital to flee troubled markets for safer shores. But in the financial world, a flight to safety is a clear warning sign for both the trouble spots and the safe havens….

“The more important implication is that investors are so risk-averse that they’d rather lose a little money keeping funds with a reasonably solvent national treasury than potentially lose much more in private markets….

“As for Europe’s banks, the fact that they are taking loans from their clients is only one sign of their plight. Before Christmas, the ECB offered banks hundreds of billions in cheap three-year loans, but evidence since then suggests that lenders are turning around and parking that cash right back at the central bank. Banks still aren’t comfortable lending to each other, and the ECB can only pick up the slack for so long.

“That means it’s still up to the politicians to heed the now almost-Biblical warning signs. (Plague of locusts, anyone?)…It is time for Europe’s leaders to act more like leaders and less like politicians moving step by step and going nowhere.”

Lastly, Mahathir Mohamad, former long-time prime minister of Malaysia, 1981-2003, and frequent target of the likes of George Soros, had some telling thoughts in a Financial Times op-ed.

“The Malays have a saying which inter alia means that when you lose your way, go back to the beginning and start again. I believe that everyone has lost their way in handling the current financial crisis. The West in particular needs to rethink some essentials.

“The world is still Eurocentric: how Europe handles the financial crisis is of universal importance. But I have serious doubts about Europeans ‘infallibility.’ I particularly dislike their double standards. Centuries of hegemony have convinced them they know best what is good for the world: their values are to be accepted as universal; Asian values are deemed irrelevant.

“This explains the simplistic solutions offered to East Asian countries when currency traders impoverished them. Malaysia was told to raise interest rates, have a surplus budget, allow distressed banks and businesses to go bankrupt, etc. This was the formula for all. Yet when America and Europe faced their financial crisis, they did everything they told Malaysia and East Asia not to do….

“For a long while Europe’s manufactured products lined the shelves of the world’s markets. They monopolized and dominated world trade and business. Their people enjoyed the highest standards of living….But after the Second World War Japan industrialized and produced cheaper yet quality goods. Then Taiwan, South Korea and China got in on the act. Rapidly the Europeans lost their markets.

“Unable to compete, the Europeans and particularly the Americans opted for the financial markets. Inventing new financial products such as short selling of shares and currencies, subprime lending, securitization, leveraged investments through hedge funds and a multitude of others, they apparently continued to grow and prosper. But the finance market spins off no real businesses, created hardly any jobs and gave rise to no trade. Getting greedy, they abused the system, manipulating the market for greater profits.

“In Hong Kong in 1997 I spoke at the meeting of the International Monetary Fund and the World Bank and I blamed the financial crisis in East Asia on currency trading. I told them currencies were not commodities and should not be traded. But the World Bank and IMF did not care. They even accorded currency traders such rights as not having to be transparent and not paying taxes….We concluded that their recommendation would bankrupt us and make us dependent on their loans.

“I was condemned for my criticism of currency trading. But the exploitation and abuses of the financial market could not last forever. In 2008 the bubble burst. Banks, insurance companies, investment funds and even countries went bankrupt. But for its position as the currency for trade settlements, the dollar would be worth almost nothing.

“Just as in the East Asian countries earlier, America and Europe became poor. The refusal to accept their impoverishment has resulted in their refusal to accept austerity measures. Their people demonstrate and go on strike against the measures. This simply aggravates matters.

“Asian countries behaved differently. When they became poor because of the devaluation of their currencies they lived within their means.”

Malaysia opted to fix its exchange rate. “We were told our economy could collapse, that no one would lend us money, and we were warned of dire consequences. But nothing like that happened. Malaysia recovered faster than the rest….

“The only way for the European economies to recover is to admit that they are now poor and live within their means. Then they must go back to doing real business, i.e., to produce goods and sell services….Many financial products should be strictly regulated if not banned.”

Mahathir wants a new global system with a trading currency based on gold, against which all others would be valued. Fluctuation would be minimal.

“Banks should be better regulated and new rules made to prevent excessive leveraging, limit loans and stop subprime lending. The financial system should be standardized and should support real business….

“There can be no return to the status quo ante. Europeans have to accept the days of Eurocentricism are practically over. Europe must look to the East as well for solutions.”

I don’t disagree with any of the above. We did this all to ourselves, and without leadership will continue to do so. 

Washington and Wall Street

This was a week in which the economic numbers and one key earnings report were not that great. December retail sales were up just 0.1% (down ex-autos), less than expected; jobless claims suddenly spiked up after weeks of good news on this front; and JPMorgan Chase’s earnings, though generally in line, were hardly the stuff of building a rally around. Trading in the investment bank division was off big.

With the start of the fourth quarter’s earnings season in earnest this coming week, it’s important to note that one estimate has S&P 500 earnings rising 7.2% over year ago levels, but then only 3.0% in the current quarter. The estimate for the fourth quarter back in October was 14.5%. So they’ve been coming down. That said, for all of 2012 earnings are expected to rise 10.7% to $106.67 for the S&P. The index closed the week at 1289. That’s a multiple of 12, or a market that’s undervalued historically if you believe the economy is going to grow at a 2.0% to 2.5% pace, and that Europe remains fairly stable and war doesn’t break out with Iran, etc.

I’ve never felt in this current cycle the market was overvalued. I just continue to believe exogenous events will change sentiment for the worse, perhaps in a big way.

And a note on housing, which along with jobs is the key to any sustained recovery. RealtyTrac reports 3.5 million homeowners are seriously delinquent on their mortgages, though bulls point to 1.9 million hit with default or foreclosure in 2011 vs. 2.9 million in 2010. But until we clear the 3.5 million or thereabouts, prices certainly aren’t going to bottom, let alone rise.

As to the federal and budget deficits, the Treasury Dept. reported that the latter came in at $86 billion for December and stands at $322 billion for the first three months of the fiscal year, commencing Oct. 1. That’s $47 billion less than last year.

But before you buy the biggest goose in the window in celebration, understand the Congressional Budget Office estimates the deficit for fiscal 2012 will still come in at $973 billion, which would place it fourth worst in history behind the $1 trillion+ of the first three years of the Obama administration. Further, if Congress extends the payroll tax holiday for the full year, as well as unemployment benefits, and doesn’t pay for it all, we’re back over $1 trillion. As for the federal deficit, the long-term picture remains dreadful.

Monday morning, USA TODAY had this lead headline:
“U.S. debt is now equal to economy”

“The soaring national debt has reached a symbolic tipping point: It’s now as big as the entire U.S. economy.

“The amount of money the federal government owes to its creditors, combined with IOUs to government retirement and other programs, now tops $15.23 trillion.

“That’s roughly equal to the value of all goods and services the U.S. economy produces in one year: $15.17 trillion as of September, the latest estimate. Private projections show the economy likely grew to about $15.3 trillion by December – a level the debt is likely to surpass this month.

“ ‘The 100% mark means that your entire debt is as big as everything you’re producing in your country,’ says Steve Bell of the Bipartisan Policy Center, which has proposed cutting nearly $6 trillion in red ink over 10 years. ‘Clearly, that can’t continue.’

“Long-term projections suggest the debt will continue to grow faster than the economy, which would have to expand by at least 6% a year to keep pace.” [Richard Wolf]

The other week, economist Paul Krugman wrote some of the following from his perch at the New York Times.

“In 2011, as in 2010, America was in a technical recovery but continued to suffer from disastrously high unemployment. And through most of 2011, as in 2010, almost all the conversation in Washington was about something else: the allegedly urgent issue of reducing the budget deficit.

“This misplaced focus said a lot about our political culture, in particular about how disconnected Congress is from the suffering of ordinary Americans. But it also revealed something else: when people in D.C. talk about deficits and debt, by and large they have no idea what they’re talking about – and the people who talk the most understand the least.”

Krugman points to how the experts have been wrong, such as in interest rates keep going down, which shouldn’t happen if we have such a debt problem. My own point has never been about the immediate level of rates, but rather that the debt level is simply unsustainable and at some point market sentiment will turn on a dime given there is no evidence, a la the above, that we are about to enter an era of 4, 5, and 6 percent growth for an extended period of time.

Experts such as economist Kenneth Rogoff have also carefully examined history and any time a nation’s debt level has reached 90% of GDP, a prolonged period of stagnation, at best, followed.

Erskine Bowles, of Simpson-Bowles debt commission fame, has said time and time again:

“I think we face the most predictable economic crisis in our history.”

Krugman’s analysis is insane…to believe debt levels don’t matter. Even he concedes he “doesn’t mean that the debt is harmless.”

“So yes, debt matters,” he writes. “But right now, other things matter more. We need more, not less, government spending to get us out of our unemployment trap. And the wrongheaded, ill-informed obsession with debt is standing in the way.”

You’re wrong, Professor Krugman. The markets, sooner than later, will prove this to you and your ilk. They’ve already been doing so in Europe. We need both austerity and a growth package, true tax reform, but the former must dwarf the latter to prove to investors around the globe that we are serious.  Then you will see a boom like no other in recent times as capital floods into the United States.

It’s just that there’s been zero cause for optimism on this front because Congress is so helplessly dysfunctional and corrupt. The likes of Congressman Paul Ryan and Senator Tom Coburn are few and far between.

Lastly, to further depress all of you, the World Economic Forum, ahead of its annual affair in Davos, Switzerland at the end of the month, assembled a panel of experts to discuss the biggest risks facing the globe. The chief one is “severe income inequality.” Another is “chronic government debt” (Prof. Krugman).

And the report worries about “the dark side of connectivity” with its threat of “devastating cyber-attacks.”

As reported by Tim Weber of BBC News:

“Population growth and scarce resources, especially water, are identified by the report as being among the world’s biggest problems….

“(And) the report speaks of ‘seeds of dystopia’ in a world where ‘for the first time in generations, many people no longer believe that their children will grow up to enjoy a higher standard of living than theirs,’ according to Lee Howell of the WEF.

“Nationalism, populism and protectionism could be the result, undoing what the forum describes as ‘the progress that globalization has brought.’”

But as Weber reports:

 “One of the most devastating threats…is also one of the least predictable.

“The report notes that our ‘daily lives are almost entirely dependent on connected online systems,’ which had brought the world huge economic benefits and personal freedoms….

“However, the same technologies also had a ‘dark side,’ helping to organize the riots in London and providing the ability to ‘unleash devastating cyber-attacks remotely and anonymously.’

“The complexity of a world with six billion connected devices was ‘completely mind-boggling,’ said (Steve) Wilson, (chief risk officer for general insurance at Zurich). For governments, societies and businesses, it had become both ‘difficult to understand the complexity and how to manage its risks.’

“Cyber-attacks were not a risk, but a daily occurrence, he argued, while ‘systems that we thought mitigate risk are actually concentrating risk, and these are risks that we do not fully understand yet.’”

Now who wants a beer?

Street Bytes

--Stocks were up solidly for the second week in 2012, with the Dow Jones adding 0.5% to 12422, while the S&P 500 gained 0.9% and Nasdaq tacked on 1.4%.

--U.S. Treasury Yields

6-mo. 0.05% 2-yr.   0.22% 10-yr. 1.86% 30-yr. 2.91%

It was another week that saw a flight to quality, or to the best house in a bad neighborhood, especially at week’s end with the expected European downgrades.

--Morgan Stanley economist Stephen Roach continues to believe China will fair far better than India when it comes to this dicey time and that there will be no hard landing in the former, but could be in the latter.

China reported December imports rose 11.8%, a 2-year low, while exports were up 13.4%, also a 2-year low, but clearly the import figure was partly due to lower prices, not fewer purchases. 

The December consumer price index came in at 4.1%, still high but far below July’s 6.5% peak for the cycle. Lower inflation makes it easier for monetary authorities to loosen up and spur growth.

Housing remains a big concern, with most expecting a further decline in prices for 2012 of 10-20%.

Capital outflows continued a third straight month in December.

Passenger car sales rose 5.2% in 2011, the slowest pace ever, but total sales of 14.5 million still beat the U.S. figure of 12.8 million for the year. Local brands in China made up 29% of sales. This figure should grow strongly, especially if trade tensions worsen. Currently, the U.S. and China are battling over solar cells and steel.

--In India, software services giant Infosys saw its share price tumble as it cut its revenue forecast owing to Europe’s problems.

Overall, industrial production in India rose 5.9% in November, this as the December PMI was a previously reported 54.2 (HSBC).

But inflation is still running at 9%, prohibiting aggressive loosening of monetary policy to keep the economy chugging.

--According to an anti-crime group SOS Impresa, the Mafia in Italy is the country’s biggest “bank” and squeezing the life out of thousands of small firms.

“Extortionate lending by criminal groups had become a ‘national emergency.’

“Organized crime now generated annual turnover of about $175 billion and profits of more than $125 billion,” the report added.

The criminal gangs account for 7% of national output. 200,000 businesses were tied to the crime groups. Small businesses, unable to obtain credit during the economic slowdown, have had to turn to the Mob. [Reuters]

--The Wall Street Journal reported that Bank of America Corp. has told U.S. regulators it is willing to downsize, a geographic retrenchment, if its financial problems persist. There are 7,400 U.S. banks and savings institutions, but only BofA, JPMorgan Chase and Wells Fargo have a true coast-to-coast presence.

Personally, should Bank of America be forced to exit a few regions, I’d make sure it kept the Barbecue Belt…that’s Caroline Barbecue, my friends…preferred by the editor over the Kansas City and Texas varieties. Regardless, it seems clear BofA will be exiting smaller cities that have not been as profitable as larger ones.

Others believe BofA will spin off or sell its Merrill Lynch operation.

--Regarding release of the Federal Reserve’s minutes from 2006 and how Fed governors blew it when it came to predicting the housing crisis, it’s all in this space…my columns. I’ll have to resurrect a few “Wall Street History” pieces I did on the topic. The only fair thing to say about Chairman Bernanke, after he took over for Mr. Bubble, Alan Greenspan, is that Bernanke was clueless. Thankfully he got himself together to save the banking system, but has now killed seniors with his zero interest rate policies. A pretty mixed record thus far, to say the least.

--On Wednesday, corn, soybean and wheat prices plunged after the U.S. Department of Agriculture issued a report forecasting larger inventories than analysts expected, easing concerns on food price inflation. In the case of corn, the figure was 12 percent higher than initially projected.

World food prices fell 2.4 percent in December, according to the UN’s Food and Agriculture Organization. Global wheat supplies are at levels not seen since 2000, owing to rising output in Australia and Russia. I could show you how I nailed that one way back just looking at the weather and getting notes from readers in those countries. I haven’t given a forecast for commodities this year. It’s all about debt and global hot spots for now, sports fans.

--Bucking the trend, orange juice prices hit a 34-year high this week owing to food safety concerns out of Brazil, the leading producer of the fruit. The Food and Drug Administration announced it would block imports containing a fungicide commonly used there.

U.S. consumption of O.J. has fallen by nearly a quarter in the past decade, according to the USDA. PepsiCo, which owns the Tropicana brand, and Coca-Cola, which sells Minute Maid, account for 62% of all orange juice sold at U.S. supermarkets.

--Wall Street bonuses and overall pay for 2011 will fall anywhere from 15% to 50%, while yearly raises at the lower ranks are being phased out, according to Bloomberg and the Wall Street Journal. In the case of New York City and New York State, this will have a huge impact on tax revenues and the 99%, which includes many of these same Wall Streeters, as much as the OWS crowd refuses to understand this.

--Interesting tidbit from Crain’s New York Business’ Greg David. Wall Street wasn’t always so profitable, nor its pay so large.

“Salomon Brothers CEO John Gutfreund – the Lloyd Blankfein of the 1980s – made $3.1 million in 1986, considered outrageous at the time. Goldman Sachs paid Mr. Blankfein $68.5 million in 2007, nine times what Gutfreund made after adjusting for inflation.

“The future of Wall Street and finance might be more like the 1980s rather than the ‘70s, but the adjustment will be plenty painful.”

--Apple was forced to stop retail sales of its iPhone 4S in China after its flagship store in Beijing was the scene of violence. Appleonians had been camping out in freezing temperatures, waiting for the opportunity to buy the phone, but when told by store employees there would no iPhone 4S that day, a few of the customers started throwing eggs.

It turns out demand has been so incredible, Apple’s stores in China had already sold out, plus in the case of Beijing, security was a serious concern. There are alternative ways for Chinese customers to purchase the product. The problem is really with black marketeers and scalpers.

--I missed this last time, my casino barometer in Macau. Revenues for all of 2011 rose 42% over 2010, though December’s were up 25%. I’ve said I’d become concerned when the monthly figure got below 20%. Revenue growth in 2010 over 2009 was 58%. Revenue in Macau is now five times that of Las Vegas. But, non-gaming revenues in Macau are just 5% of total revenue vs. half for Vegas, when breaking out conferences/conventions, shows and dining.

[Hong Kong Disneyland recorded its strongest results in 2011 since opening in 2005, with attendance up 13% and hotel occupancy at 92% at the theme park.]

--Hong Kong’s roadside pollution levels in 2011 were the worst ever, which is not good for attracting commerce. I’ve been there a bunch of times and it’s generally awful (as much as I still love the place). But if you’re a corporation, you have to take into consideration quality of life for your employees, let alone how many would want to relocate there if that’s the decision to be made.

--Russia saw capital outflows of $84.2 billion last year, according to the Central Bank, the second-highest figure since 1994. $37.4 billion of the total was in the fourth quarter, an example of the tremendous uncertainty surrounding the entire political situation there.

--GM sold 8% more vehicles in China last year than in 2010; 2.55 million units, or more than the above-noted overall growth in the China market.

--I forgot two other items from last time I want to get down for the archives.

Canada’s jobless rate rose to 7.5% in December.

And investors pulled $132 billion from U.S. stock mutual funds, the fifth straight year of withdrawals for the domestic variety, according to the ICI.

--According to a survey of 400 businesses in Ireland, the vast majority are set to freeze or slash pay in 2012. Irish wages have been significantly higher than the rest of the European Union for years. This is a needed step, unfortunately for those affected, in order for Ireland to restore competitiveness. It should be no surprise that a survey of consumer sentiment in Ireland registered its biggest decline in December in over a decade.

--Job cuts…Novartis AG said it will slash 1,960 jobs as it restructures its U.S. businesses due to a key patent loss and failure of a high blood pressure medicine. Of the job cuts, 1,630 will come from the sales force, so if you see some dapper folks outside Dunkin’ Donuts trying to hawk overpriced drugs that have generic alternatives, ask them for a current ID.

Vestas Wind Systems is cutting another 2,300+ jobs, or 10% of its staff as the wind turbine maker fights to compete with Chinese suppliers. The Denmark-based company said a further 1,600 jobs in the U.S. are at risk if the tax credit supporting the industry expires. Vestas slashed 3,000 jobs in October 2010, and 1,900 in April 2009.

Delhaize Group SA, the owner of Food Lion supermarkets, plans to cut 5,000 positions and 113 Food Lion stores in the U.S. People in those communities will now starve to death.

Royal Bank of Scotland PLC is shedding a further 3,500 jobs from its investment banking unit over a three-year period. Just a month or two ago, RBS said it was lopping off 2,000 from the same area. The bank is 83% owned by the U.K. government after the bailouts of the financial crisis.

Archer-Daniels-Midland Co. is cutting 1,000 jobs. Earlier, ag giant Cargill said it plans to eliminate 2,000 positions. In both cases it’s about profitability despite the boom in the sector.

MetLife, the largest U.S. life insurer, is axing 4,300 jobs as a result of shutting down its residential mortgage business.

--But…there was some good employment news in the U.S. BMW is adding 300 jobs this year to its Spartanburg, S.C. plant. This flagship operation has been in existence since 1994 and BMW says it has invested nearly $6 billion in the state thus far.

While Home Depot is hiring 70,000 seasonal workers this spring, its busiest period, up 17% from year ago levels.

--Natural gas prices continued to plummet as U.S. energy companies expand their drilling operations further, which is not beginning to make a heck of a lot of sense. At the pricing levels of today, drilling for nat gas is nowhere near as profitable as drilling for oil, though sometimes the operations can result in both products. Many companies simply don’t have ways to transport the nat gas they find. 

Then again, as a Journal article pointed out, “Some gas fields produce so much ethane, a valuable liquid used to make plastics, that companies will drill regardless of gas prices. In addition, some companies need to continue drilling so they don’t violate terms of leases on millions of acres of land – deals struck when gas prices were high.” No word on whether any of the drillers have hit China.

Of course the above is great news for U.S. consumers, with more than half heating their homes with nat gas. The government is forecasting an 18% price drop this winter.

--Venezuelan President Hugo Chavez said his government would ignore a World Bank-affiliated arbitration body’s ruling that it owed Exxon Mobil $900 million after Venezuela nationalized Exxon’s assets in 2007.

--The Securities and Exchange Commission is stepping back from its longstanding practice of allowing companies to settle fraud charges by paying a fine without admitting or denying guilt when at the same time the individual or company has been convicted of criminal violations. If the SEC is acting alone, however, the agency would continue to use the language as part of the settlement process. At least it’s a good step.

--Former General Electric chairman Jack Welch on CNBC this week:

“A great economy grows with innovation, with great people, with a president yelling, ‘We’re going to grow,’ not saying, ‘You rich bastards.’… ‘No, we’re going to grow and we’re all going to grow together. I’m not going to divide you from you, we’re all a ‘team growth,’ we’re team America.’”

--Japanese and Canadian regulators have weighed in on the Volcker Rule, which would ban U.S. investment banks such as Goldman Sachs from proprietary trading, thus exacerbating a liquidity crunch. The banks have argued that banning proprietary trading would impact their market-making functions. Japan and Canada are concerned about the impact on global government debt. Earlier, European officials voiced similar concerns on the effect of the rule on the $13 trillion eurozone debt market.

--Raymond James Financial, Inc. acquired Morgan Keegan & Company. Being familiar with both when I was on the Street, this is one deal that makes eminent sense. Nice cultural fit, as both firms’ executives put it. Raymond James will increase Morgan Keegan’s existing presence in Memphis, for one. [Unrelated to the transaction, the Memphis Grizzlies’ Rudy Gay scored a season-high 26 points in the team’s win over a pathetic Knicks squad on Wednesday night.]

--As one who flies Continental Airlines fairly frequently to Europe, I was disturbed to see that as part of its merger with United, Continental is making more unexpected stops in Canada on the leg home if it encounters strong headwinds over the Atlantic. The issue is United Continental are now employing smaller, less expensive to use jets that don’t have the fuel capacity.

Some are pooh-poohing this, pointing to only 43 flights out of nearly 1,100 that were impacted, but if you’re on one of those that has to make a pit stop, these are not simple delays.

But for Canadian airports such as Goose Bay and Gander, the fueling stops are highly profitable. Now if you tell me that I get to purchase some premium, like Moosehead, while on the ground in Canada, I won’t complain.

--Hotel room rates nationwide rose 4.3% in 2011 over 2010. They are expected to increase 3.6% this year.

--Manhattan apartment rents rose a whopping 9.5% in the fourth quarter. The median is now $3,121 a month, owing to weak home purchases and a still tight credit market.

--Attendance at the Museum of Modern Art dropped 11% last year, while admissions at the Metropolitan Museum of Art rose to a record.   In each case it was about blockbuster shows, or lack thereof in the case of MoMA. The Met’s 1978 King Tut exhibition, credited as being the first museum blockbuster, remains the most popular with 1.3 million visitors.

--The art market returned 11 percent in 2011, outpacing the stock market a second straight year, according to the Financial Times. Impressionist and modern art delivered returns of 14%, while Old Master and 19th-century art increased 4.8%. I’d still buy Russian art from the 19th-century, if I were you. That era had some spectacular landscape artists…just sayin’.

--Barclays Capital analysts have concluded there is an “unhealthy correlation” between the building of skyscrapers and subsequent financial crashes, beginning with the Empire State building, built as the Great Depression was underway, and the current world’s tallest, the Burj Khalifa, built just before Dubai cratered. Barclays warns that China and India are currently the biggest builders of skyscrapers. The report notes:

“Often the world’s tallest buildings are simply the edifice of a broader skyscraper building boom, reflecting a widespread misallocation of capital and an impending economic correction.”

Long ago I worked with a brokerage firm, Thomson McKinnon Securities, and our chairman, in his infinite wisdom, decided we needed our own building, just as Wall Street was about to crash in 1987. We called it his ‘edifice complex.’ Shortly after moving in, we went under.

Back to China, it is indeed disconcerting that it is responsible for 53% of all the tall buildings currently under construction in the world.

As for India, it currently has just two of the 276 skyscrapers over 240 meters, yet over the next five years plans to complete 14. [BBC News]

--The maker of Twinkies and other crappy products, Hostess Brands Inc., filed for bankruptcy. It’s up to the court, as the company continues to operate, to ensure that the products on the shelf are no more than 400 days old.

Uh oh…strike the above from the record. I just realized Hostess’ Drake’s unit makes my favorite, Funny Bones, which are best eaten frozen. Never mind….

--Finally, bedbug cases in New York City are down! Repeat…bedbug cases in Gotham are down! This is the best news I’ve seen in months. [I’m a Jets and Mets fan, you understand.]

Foreign Affairs

Iran: James Blitz / Financial Times: “How close is the west getting to all-out conflict with Iran? As 2012 gets underway, the question is right at the top of the international security agenda. Hardly a day goes by without some striking news from the region – be it Iran’s decision to enrich uranium at a new underground site; or the unexplained killing of another Iranian nuclear scientist; or Iran’s threat to close the Strait of Hormuz.”

The one issue fanning the flames these days is the imposition of sanctions banning oil imports from Iran (and to a lesser extent the new restrictions on Iran’s financial institutions).

The danger, especially with Iran’s Revolutionary Guard conducting naval exercises over the coming weeks in the area of the Strait of Hormuz, is an accident, a miscalculation, even by a rogue element in the Guard. They love to show off their speed boats and pretend they are about to ram a U.S. or allied naval vessel, only to turn off at the last minute. But now, with the new threat level, how can U.S. naval commanders risk that these same boats aren’t on a suicide mission?

And as I keep saying, going back months, nothing we heard this week on the nuclear weapons front should give the White House or Israel reason to believe Iran is still years away from having the bomb; therefore, my timetable of the administration taking direct action against Iran’s suspected sites remains…by May. [Or Israel will act alone beforehand.] Killing scientists, as was the case again this week for a fourth time, or sabotaging the program through computer worms such as Stuxnet, cannot do the job alone of taking down Iran’s capabilities.

But to clean up the facts of the past seven days:

U.S. Treasury Secretary Timothy Geithner went to Asia to convince China, Japan and South Korea to limit or outright ban Iranian oil imports. Only Japan agreed to pull back in terms of new purchases (though long-term contracts will be honored), while South Korea said it will, eventually, once it figures out alternative ways to replace the Iranian crude. China, though, said ‘forget about it.’

And on this front, the European Union, which was expected to ban Iranian imports, is now looking to wait up to six months before doing so owing to the importance of the supply to the likes of Spain, Italy and Greece. They, like South Korea, first need to find alternatives, let alone the fact their economies can’t afford an oil shock these days.

[Iran exports 2.3 million barrels per day, the world’s third-largest exporter. The EU receives somewhere between 400,000 and 450,000 bd. China takes in about 500,000 barrels. Japan 400,000; South Korea 300,000; India 500,000. The Saudis have vowed to make up any difference, and despite some reports you may have seen, have oil comparable to Iran’s quality level.]

Meanwhile, Iran announced it has begun enriching uranium to 20% at a second site, the underground facility known as Fordo, near the holy city of Qom, thus further outraging the likes of the United States and France, as well as even Russia to a lesser extent.

Understand that getting to 20% is the hard part. Going to the bomb-making level of 90% is then relatively easy. When you hear how the West is concerned about a “break out,” if we are so lucky to know when this is occurring, it refers to Iran’s suddenly going for 90%, meaning it would be mere months before they could have the bomb capability. [Delivery mechanisms are a separate issue.] For all we know, Iran could have broken out on a small scale already. If the West and Israel were convinced Iran was indeed doing so, a strike on the plants is a certainty, and of course this would entail blowback on Western and Israeli interests around the world. This is why stories on Hizbullah and the Revolutionary Guard’s presence in Latin America are so important because there are lots of soft targets in the region and would be easy missions to carry out quickly, one can only assume.

The International Atomic Energy Agency and Iran are to meet on Jan. 28 but details on just what inspectors would be able to see are unclear.

Indeed, the Iranian regime is under siege. A further sign of this is the imposition of a death sentence on 28-year-old Amir Hekmati, an Arizona-born Iranian-American and former U.S. Marine that Iran has accused of spying for the CIA. The U.S. government categorically denies this. He was arrested in Iran last August while visiting his grandmothers for the first time.

Iran continues to threaten to close the Strait of Hormuz, a transit point for 20% of the world’s crude. The U.S. considers this a “red line” and warns Iranian action would merit a response.

Supreme Leader Ayatollah Ali Khamenei, speaking of the pressures, said on Monday, “The Islamic establishment…knows firmly what it is doing and has chosen its path and will stay the course.”

Meanwhile, Iranian President Mahmoud Ahmadinejad was gallivanting about in Latin America, spending time with his “dear brother” Hugo Chavez in Venezuela, vowing to work with Chavez to fight imperialism and poverty. Chavez pledged to work with Ahmadinejad to stop the “imperial insanity” of the United States, which he described as a “threat for the world.” [CNN]

Syria: President Bashar Assad showed up in public for the first time in six months, telling his supporters “We are going to win.” Earlier he said in a speech to parliament that Syria would vanquish the “foreign conspirators with an iron fist.”

Assad’s pronouncements were overwhelmingly condemned in the West and in much of the Arab World. A monitor for the Arab League said Syria didn’t carry out any of its commitments previously made to the group and that he had seen “children murdered,” extensive examples of torture, and “skinned bodies.” It was utter carnage. And this week the first foreign reporter, a Frenchman, was killed. Over 400 have died since the Arab League mission of monitors went in.

Israel: Defense officials here stated the obvious, that Iran and Hizbullah were arming the Assad regime, while going back to Iran and the nuclear crisis, a London Sunday Times piece suggested that perhaps the best way to tell action against the mullahs is imminent would be if you knew Israel’s nuclear reactor at Dimona had been shut down. 

The Israelis now know that Dimona is vulnerable to Iranian intermediate- and long-range missiles, especially those fired from Lebanon or Syria. “Deactivating the reactor in the southern Negev desert would minimize the dangers of nuclear fallout in the area.”

An official told the paper that the shutdown would begin before the launch of any Israeli or U.S. assault on Iran’s facilities, but that “It takes a long time, many weeks, to cool down a nuclear reactor and lower the level of radioactivity,” as one of the founders of Israel’s nuclear program put it.

I didn’t realize that, separately, Dimona is the second oldest active reactor in the world and is deemed “dangerous” by many experts. One said it “should have been closed a long time ago.”

On a different topic, an Israeli group, Peace Now, which is opposed to settlement construction, said construction on more than 1,850 West Bank units was started in 2011, up 20% from 2010’s 1,550. Needless to say the Palestinians voiced outrage.

And in a late development, a Foreign Policy expose published at week’s end claims Mossad officers have been posing as CIA officers to recruit operatives against Iran’s nuclear program. This has infuriated the U.S. The Mossad officers are equipped with U.S. passports and dollars, and recruited “under the nose of U.S. intelligence officers,” including in London. In response, the U.S. has scaled back joint U.S.-Israeli intelligence operations. The timing is poor. [Jerusalem Post]

Pakistan: As one of my predictions for 2012, I said a coup here was a “layup.” Heck, by the time you read this something could have happened. President Zardari flew to Dubai for a check-up on his health issue, as some felt this was a sign a coup was in the works. The military does not seek a coup. They don’t want to have to deal with the domestic issues that would come with power, at least at this moment. But in many respects it is being forced on them. Prime Minister Gilani sacked the defense secretary this week for “gross misconduct and illegal action” in an attempt to reassert authority, though at the same time, Gilani has said he would step down if that would diffuse tension. However, the leading opposition figure, Nawiz Sharif, is not favored by the military either. Thus far, General Kayani, the overall military chief who was once a friend to the United States, has held off on making a move but the military did warn of “grievous consequences” for Gilani’s action to sack the defense chief.

Meanwhile, the Army has its hands full with the Taliban, with 25 members of the army or paramilitary police units being killed in separate attacks. The Taliban has killed 9,000 civilian or security personnel in Pakistan since 2009. Separately, a bomb blast at a bus terminal along the Afghan border killed 29.

Lastly, former Pakistani President Pervez Musharraf has vowed to return between Jan. 27 and 30 and run for office, even though the current government said he would be arrested in connection with the 2007 assassination of former Prime Minister Benazir Bhutto. Musharraf’s return will not be helpful.

Afghanistan: I have nothing to say on the actions of the four Marines who desecrated some Taliban bodies, other than that the four deserve to be punished according to the rules of the military.

Kuwait: In case you were wondering, the United States now has 15,000 soldiers here, including two brigade combat teams and a combat aviation brigade, according to Defense News, so there is a fairly adequate presence in the region if needed; one larger than was normal since the first Gulf War. In the event of conflict with Iran, the first mission is to protect these troops from retaliatory strikes.

China/Taiwan: By the time the vast majority of you read this, the presidential election results on Taiwan will be known (they are supposed to come out 4-5 hours after I post). Disturbingly, President Ma had only a slim lead over Tsai Ing-wen, your editor having a big financial stake in stability and further economic progress between the mainland and Taiwan and a Ma loss would be disastrous. Tsai is attempting to become the island’s first female president, but the fear is her party, the DPP, is historically independence-minded and you know what that would mean to Beijing.

To give you an idea of how things have changed, 180,000 Taiwanese businesspeople were expected to fly back home to cast their votes because the election is so close. Washington, by the way, agrees with Beijing on this one. They too want a Ma victory. Taiwanese investment in China rose to $12.2 billion in 2010.

On two other topics, similar to the story above on Hong Kong, pollution levels in Beijing are as bad as they were prior to the Olympics. The smog has been so thick many days this winter that road travel, let alone the air variety, has been severely disrupted. In an unusual move, though, the Municipal Bureau of Environmental Protection admitted that the U.S. Embassy’s pollution readings were more accurate than theirs and they have begun sharing data.

And in a story from the South China Morning Post we learn, “Almost 80 percent of women interviewed said they would not consider a man who earned less than $600 a month,” or as the reporter Stephen Chen put it, “Women marry for money and houses, while men wed for passion and looks,” according to a nationwide survey. Now discuss amongst yourselves.

North Korea: Kim Jong Un celebrated a birthday on Sunday. No doubt it isn’t really his, but it fit the calendar and ongoing plan to burnish the kid’s credentials. A documentary of the “military genius” aired the same day, one showing him driving a tank (where he looked like Michael Dukakis), sitting in the cockpit of a plane and interacting with soldiers. 

Reuters did report that Pyongyang was holding talks with Japan, though these were taking place in Beijing, this as nuclear negotiators from China and South Korea were meeting to discuss the impasse over the North’s weapons program. A separate report said the North would be willing to halt its uranium enrichment operation if the United States would increase its food assistance. We could probably just ship them excess Hostess products that have aged appropriately.

Myanmar: China can’t like what it sees going on here. The government, nominally under civilian control with the military calling the shots, released dozens of high-profile political prisoners on Friday, including a former head of intelligence, journalists and monks, as the rulers seem committed to democratic reform. The release of the detainees is an important condition set forth by the European Union and the U.S. in order for sanctions against the regime to be lifted.  Secretary of State Hillary Clinton immediately responded in kind by announcing the two nations will exchange ambassadors, though it’s a lengthy process and the U.S. is not lifting sanctions without further confidence building measures. Washington hasn’t had an ambassador in Burma since 1990. An April 1 election for 48 parliamentary seats is to take place with opposition leader Aung San Suu Kyi on the ballot. This could be one of the surprise success stories of 2012.

As for Beijing, the rulers obviously don’t want their own people getting too many ideas.

Russia: With less than two months to go before the March 4 presidential election, it still seems likely Vladimir Putin, despite all the protests, will capture more than 50% of the vote and avoid a run-off. Granted, the actual vote tally may be 35% but through the magic of the Sorcerer…

Many say this wouldn’t be too smart, such outright manipulation after last December’s fraudulent Duma vote.

Separately, the director of Russia’s space agency suggested in an interview that the disabled Russian spacecraft that is headed back to Earth this weekend (wear a helmet) failed because it was struck by some kind of anti-satellite weapon.

What was to have been a 2 ½-year mission to explore a moon of Mars failed shortly after takeoff.   Back then, as reported by the New York Times’ Andrew E. Kramer, “A retired commander of Russia’s missile warning system had speculated that strong radar signals from installations in Alaska might have damaged the spacecraft.” The space agency director, however, did appear to choose his words carefully and wasn’t blaming the United States directly while conceding the spacecraft’s equipment “may have broken down while the vehicle was stored on the ground,” waiting for the right time for the Earth and Mars to line up before proceeding with the mission.

Nigeria: There were further killings of Christians, including an attack on a bar that killed at least 8. Remind me not to travel to Nigeria for a beer.

So the Christians, tired of being killed for holding their beliefs, stormed a mosque in southern Nigeria and killed five. Since Christmas Day, at least 85 deaths have been recorded in the sectarian violence.

Meanwhile, the nation ground to a halt due to a general strike over the elimination of a fuel subsidy, which led to a doubling in fuel prices. President Goodluck Jonathan said the subsidy was economically unsustainable. Protests were suspended a few days to allow for talks with officials. The strikes could resume.

Random Musings

--Mitt Romney became the first non-incumbent Republican presidential candidate to win both Iowa and New Hampshire. The day before the New Hampshire primary, a Suffolk University tracking poll had Romney at 37%, Ron Paul 18% and Jon Huntsman 16%.

It ended up:

Romney 39
Paul 23
Huntsman 17
Santorum 9
Gingrich 9

As the candidates all moved to South Carolina for the Jan. 21 primary there, one that promises to weed out at least two of the candidates, an American Research Group poll has:

Romney 31
Gingrich 24
Santorum 24

CNN/Time/ORC

Romney 37
Santorum 19
Gingrich 18

In an early look at Florida, Jan. 31, a Quinnipiac Univ. survey has Romney at 36%, Gingrich at 24%, Santorum at 16% and Paul at 10%.

And just a reminder. Until April 1, almost all the states will award delegates proportionally, after which many will hold winner-take-all primaries.

--CNN/ORC nationwide poll of Republican voters [released Friday]

Romney 34
Gingrich 18
Paul 15
Santorum 15
Perry 9
Huntsman 4

[In December, this same survey had Romney and Gingrich tied at 28, Paul at 14 and Santorum with 4.]

--In his victory speech in New Hampshire, Mitt Romney laid out his case against President Obama….in part…

“The middle class has been crushed. Nearly 24 million of our fellow Americans are still out of work, struggling to find work, or have just stopped looking. The median income has dropped 10 percent in four years. Soldiers returning from the front lines are waiting in unemployment lines. Our debt is too high and our opportunities too few. And this president wakes up every morning, looks out across America and is proud to announce, ‘It could be worse.’ It could be worse? Is that what it means to be an American? It could be worse?

“The president has run out of ideas. Now, he’s running out of excuses.

“He doesn’t see the need for overwhelming American military superiority. I will insist on a military so powerful no one would think of challenging it. He chastises friends like Israel; I’ll stand with our friends.

“President Obama wants to put free enterprise on trial. In the last few days, we have seen some desperate Republicans join forces with him. This is such a mistake for our party and for our nation. This country already has a leader who divides us with the bitter politics of envy. We must offer an alternative vision. I stand ready to lead us down a different path, where we are lifted up by our desire to succeed, not dragged down by a resentment of success. In these difficult times, we cannot abandon the core values that define us as unique – We are One Nation, Under God. Make no mistake, in this campaign, I will offer the American ideals of economic freedom a clear and unapologetic defense.” [Jennifer Rubin / Washington Post]

I watched the speech. It was powerful. He just needs to keep repeating it.

--But I’m not a Mitt Romney fan. I’m like so many Republicans, disgusted with our choices. And between both the Republicans and the Democrats, I keep thinking, ‘330 million people in this country and the last 20 years this great nation has produced Bill Clinton, George W. Bush and Barack Obama.’ What are we thinking, people?

Then again, Rome had a lot of lousy rulers before it finally collapsed.

Oops. Bad analogy.

--One topic ticks me off is the whole Romney / private-equity situation. For starters, there is a distinct difference between venture capitalists and private-equity, but the commentators and politicians are blurring the two.

It’s true…some firms do a little of both, but for the most part, private-equity players buy up troubled companies, remove them from the public market, restructure ‘em, which almost always involves layoffs, and then hope to bring them back out in an IPO as a successful company and make a fortune. Nothing wrong with that. Many of these companies were dying and on a respirator to begin with. Some still do die after private-equity funds have been expended. (Stuff) happens. Heck, I often forget that I myself once bought a dying operation, in the early years of StocksandNews. I injected my own capital into it, thought by sheer force of personality and incentives that I could turn things around (plus there were cost savings for my own business involved), but it still died. I made two mistakes. I never should have acquired it and I did a lousy job once I took over. Luckily most of the 13 employees found other work quickly.

Where private-equity has gotten a bad name, though, is when they gobble up a company and then pile massive amounts of debt on it, which almost always leads to a final collapse, only the p-e partners have paid themselves large dividends and profits while the workers get screwed.

[Venture capitalists, on the other hand, as classically defined, are investing in new businesses before they go public, like those who’ve been investing in Facebook. For every two or three where the VC guys are taking a flyer and it doesn’t pan out, you hope you get one that succeeds more than enough to make up for the failures. VCs, for their stake in the business, get board seats and a say in the direction of the start-up.]

Walter Hamilton of the Los Angeles Times cites a study of 3,200 private-equity deals over a 25-year period that showed it was neither a big job creator nor a big job destroyer.

But when one looks at the history of Bain Capital, where Mitt hung out all those years, it has had a solid reputation. Sure, lots of losers. Lots of lost jobs. But also some big successes whose names you all know by now; like Staples, Sports Authority and Domino’s Pizza, though for Romney to then say he has helped create 100,000 jobs is more than a bit disingenuous.

Editorial / Wall Street Journal

“Mr. Romney needs to rise above the personal and base his claim to office on a defense of the system of free enterprise that has enriched America over the decades and is now under assault. Mr. Obama will attack Mr. Romney as Gordon Gekko because the President can’t win by touting his own economic record. Mr. Romney’s GOP opponents (with the admirable exception of Rick Santorum*) are embarrassing themselves by taking the Obama line, but Mr. Romney should view this as an opportunity to stake his campaign on something larger and far more important that his own business expertise.”

*Once again the Journal ignores Ron Paul, who also hasn’t criticized Romney on the issue.

Robert Samuelson / Washington Post

“For Mitt Romney, it’s the best of times and the worst of times. While his New Hampshire win brings him closer to the Republican nomination, his campaign narrative against President Obama may be unraveling. The plot is simple: With a comatose economy and stubbornly high unemployment, Romney’s private-sector experience makes him a better job creator than Obama. There are problems. Not only does the economy seem to be strengthening, but Romney’s business background is being turned against him. By Republicans, no less.

“We understand the achievements of Bill Gates and Steve Jobs. They created enterprises that employ thousands and sell to millions. But private-equity, Romney’s specialty? That’s more complex and confusing. Texas Gov. Rick Perry calls Romney a ‘vulture capitalist.’ Former Utah governor Jon Huntsman says Romney ‘enjoys firing people.’ Is Romney’s business experience a virtue or a vice?...

“It’s not just that a president’s job extends beyond bolstering business. Romney belongs to the class of the super-rich, and private-equity – whatever its value – benefits from unjustifiably low taxes. Romney can easily be typecast as a coldblooded, numbers-crunching ‘Wall Street type’ disconnected from most Americans’ hopes and frustrations.

“That his Republican rivals, of all people, have brought this charge is actually an unintended gift. If Romney becomes the nominee, Democrats will escalate the assault. Romney now has the chance to defuse these attacks – or show that he can’t. Defending his economic views in today’s anti-Wall Street climate will test his political skills as little else.”

--Personally, last Saturday I went to Windham High School while in New Hampshire to see Sen. Rand Paul, who some say went around the state cleaning up after his father, which isn’t exactly fair but I’ll say this…I like Rand Paul. 

Yes, until I saw him in an interview with Wolf Blitzer the other day, referenced last week in this space, I have harshly criticized the senator, particularly when he was running for the senate in 2010. I said he wasn’t ready for prime time. He wasn’t. But he won.

Well, let’s just say he’s a quick study. He will run for president in 2016, depending on the 2012 results, of course. He is also a much better presenter of his father’s ideas.

It hit me the other day that Ron and Rand Paul are in some respects similar to Jean-Marie and Marine Le Pen in France. The son and daughter are finding ways to moderate their fathers’ harsher tone and it will translate to a broader audience.

Charles Krauthammer / Washington Post

“There are two stories coming out of New Hampshire. The big story is Mitt Romney. The bigger one is Ron Paul.

“Romney won a major victory with nearly 40 percent of the vote, 16 points ahead of No. 2….

“But the bigger winner was Ron Paul. He got 21 percent in Iowa, 23 in New Hampshire, the only candidate other than Romney to do well with two very different electorates, one more evangelical and socially conservative, the other more moderate and fiscally conservative.

“Paul commands a strong, energetic, highly committed following. And he is unlike any of the other candidates. They’re out to win. He admits he doesn’t see himself in the Oval Office. They’re one-time, self-contained enterprises aiming for the White House. Paul is out there to build a movement that will long outlive this campaign.

“Paul is less a candidate than a ‘cause,’ to cite his election-night New Hampshire speech. Which is why that speech was the only one by a losing candidate that was sincerely, almost giddily joyous. The other candidates had to pretend they were happy with their results.

“Paul was genuinely delighted with his, because, after a quarter-century in the wilderness, he’s within reach of putting his cherished cause on the map. Libertarianism will have gone from the fringes – those hopeless, pathetic third-party runs – to a position of prominence in a major party….

“His goal is to make himself leader of the opposition – within the Republican Party….

“Paul won’t quit before the Republican convention in Tampa…His goal is to have the second-most delegates, a position of leverage from which to influence the platform and demand a prime-time speaking slot – before deigning to support the nominee at the end….

“The Democratic convention will be a tightly scripted TV extravaganza extolling the Prince and his wise and kindly rule. The Republican convention could conceivably feature a major address by Paul calling for the abolition of the Fed, FEMA and the CIA; American withdrawal from everywhere; acquiescence to the Iranian bomb – and perhaps even Paul’s opposition to a border fence lest it be used to keep Americans in. Not exactly the steady, measured, reassuring message a Republican convention might wish to convey. For libertarianism, however, it would be a historic moment: mainstream recognition at last.

“Put aside your own view of libertarianism or of Paul himself. I see libertarianism as an important critique of the Leviathan state, not a governing philosophy. As for Paul himself, I find him a principled, somewhat wacky, highly engaging eccentric. But regardless of my feelings or yours, the plain fact is that Paul is nurturing his movement toward visibility and legitimacy.

“Paul is 76. He knows he’ll never enter the promised land. But he’s clearing the path for son Rand, his better placed (Senate vs. House), more moderate, more articulate successor.

“And it matters not whether you find amusement in libertarians practicing dynastic succession. What Paul has already wrought is a signal achievement, the biggest story yet of this presidential campaign.”

--Meanwhile, in full campaign mode in Chicago the other night, President Obama declared:

“I promise you…change will come.”

Then on Friday, he called on Congress to give him authority to consolidate six agencies dealing with trade and commerce. The Commerce Department would be eliminated and the Small Business Administration would be given a cabinet-level slot, which is an absurd idea. [There are too many cabinet members as it is.]

Suddenly the campaign has a new mantra… “Rethink, Reform, Remake our Government.”

The move will supposedly save $3 billion over ten years and the jobs lost will be through attrition. As you know, we need a deficit reduction package of $4 trillion or so to be taken seriously by investors around the world.

Whatever. The president comes out with his plan to reshape government just as Republican presidential candidates are talking about shrinking the size and cost of government as well, though on a far grander scale. It’s all kind of funny. Once again Obama has laid a little trap.

Michael A. Walsh / New York Post

“(With the focus on Iowa and New Hampshire), the real action has been going on under the media radar in Washington, where:

“A rogue Senate, under the feckless majority leader, Harry Reid, has not passed a budget resolution since April 29, 2009 – nearly a thousand days. Since then, the government has been funded under a series of continuing resolutions and other gimmicks. The Senate adamantly blocked consideration of Paul Ryan’s ‘Path to Prosperity’ budget, which passed the Republican-controlled House back in April 2011.

“Dereliction of duty or all part of the plan? Obama’s strategy this year – in addition to demonizing whichever Republican gets the nod to challenge him – will be to run against a ‘do-nothing’ Congress, a la Harry Truman in 1948. But in this case the ‘nothing’ is being ‘done’ by the Democrats, who have gone to the mattresses in their battle to preserve the entitlement state.

“As a result, the nation closed out 2011 with the total debt at an astounding $15.22 trillion, or more than 100% of GDP. We’re less than $14 billion (chump change these days) from having to raise the debt ceiling yet again – a farce that apparently will continue until a responsible Congress, not to mention a new president, takes office next January. And maybe not even then, given the corrupt state of a permanent governing class that bipartisanly enriches itself via ‘public service’ by trading on insider information.”

--In a move that was buried in the other news of the week, William Daley stepped down as White House chief of staff, to be replaced by budget director Jack Lew. Daley supposedly is staying on through the reelection campaign as an advisor. His one year in the position, since the 2010 mid-term elections, after which he replaced Rahm Emanuel, was largely a waste.

--Last week I quoted Moises Naim in the Financial Times who stated “Inequality will be the central theme of 2012. It has always existed and is not going away, but this year it will top the global agenda of voters, protesters and politicians running for office in the many important elections scheduled.”

This week, Annie Gowen of the Washington Post discussed the results of a Pew Research Center survey in America that found “About 2/3s of the public now believes there are strong conflicts between the rich and poor in America, making class a likelier source of tension than traditional flash points of race or nationality.”

The percentage has been rising rapidly, owing to the Occupy Wall Street movement. But the way OWS has conducted itself, it isn’t deserving of the credit.

--First Lady Michelle Obama gave an interview to CBS News’ Gayle King and dismissed the notion that she was “some angry black woman” after a new book , “The Obamas,” described some of the tension with the president’s aides.

--Defense Secretary Leon Panetta formally announced the U.S. is reducing its force in Europe. Currently it maintains 80,000 from all of the services and the elimination of two Army brigades and their noncombat support units will cut this by about 10,000 to 15,000. European officials are concerned. They can get over it.

Actually, as Panetta said, the presence won’t change much at all because of his idea of rotating combat brigades through the area on training missions, which would augment the permanent presence.

We should cut to 40,000, all services. Europe is spoiled beyond belief at this point. Of course they’ve also gotten a break on the budget front, but despite the tough economic times, they are going to have to increase their own defense spending eventually.

--According to data compiled by the National Weather Service, lightning killed fewer Americans in 2011 than any year on record, even as tornadoes killed more than 500. Only 26 died as a result of a lightning strike. The average is 55 a year.

In the 1940s, even as the USA’s population was less than half what it is today, lightning killed more than 300 Americans each year, on average. In 1942 alone, 432 died, which is kind of remarkable when you think about it. The difference is all about public education. [Doyle Rice / USA TODAY]

--And for the first time in 45 years, homicide is not among the 15 leading causes of death in the United States. According to data compiled by the Centers for Disease Control and Prevention, which looks at death certificates provided by the states, of the 2.4 million total deaths reported in 2010, there were 16,065 homicides, down from 16,799 a year earlier.

Heart disease and cancer, the most common causes of death, accounted for 47% of all deaths last year.

Between 1990 and 2010, homicides in New York dropped 76%; they were down 70% in Los Angeles and 49% in Chicago.

Causes of Death in America

1. Heart disease
2. Cancer
3. Chronic lower respiratory diseases
4. Stroke
5. Accidents
6. Alzheimer’s
7. Diabetes
8. Kidney disease
9. Influenza/pneumonia
10. Suicide
16. Homicide

[Kevin Johnson / USA TODAY]

--Good news…India has gone a full year without recording a single new case of polio, a huge achievement, but the pressure needs to be kept on parents to keep immunizing their children. 26 million babies are born each year in the country and it won’t be truly polio-free until at least three years have passed without a new case. Polio is still endemic in neighboring Pakistan and Afghanistan.

This gives me an excuse to recognize Jonas Salk again. Did you ever think about a top ten list of people in the history of the world who made a positive difference? Salk has to be on it.

--Sign of the Apocalypse…from the New York Daily News:

“A study of bushmeat smuggled into the city shows it could spread disease or even spark pandemics, researchers said Tuesday.

“Dr. Denise McAloose, chief pathologist for the New York-based Wildlife Conservation Society, said no one had tested illegal bushmeat for pathogens before the study.

“Animal parts seized by custom agents at Kennedy Airport were routinely destroyed until the WCS partnered with the Centers for Disease Control and Prevention in 2008 for the research….

“Scientists found simian foamy viruses and two types of herpesviruses in the animal parts tested.

“While the herpesviruses detected are not considered dangerous to people, related viruses cause disease in humans.

“Researchers say the results show potential danger.

“ ‘Diseases such as HIV, Ebola, swine flu, avian flu and monkey pox all originated in wildlife,’ McAloose said.   ‘We don’t know where the next disease like that might occur.’

“Some animal skulls, hands, arms and torsos were still fresh in coolers when confiscated.”

So what’s getting through? I just hope I don’t die of monkey pox myself. That would kind of suck.

--Speaking of which, the Bulletin of the Atomic Scientists, the group responsible for the Doomsday Clock, moved it to 11:55 p.m. Two years ago, the clock was moved back to 11:54 p.m., after the organization became convinced climate change talks were making progress.

But now the group comprised of Nobel laureates, scientists and others, feels efforts to increase energy production in the 21st century to deal with rising population needs are falling short.

Personally, I normally go to bed well before 11:55 p.m. so I hope to be sound asleep when the world goes poof! I’m assuming that’s 11:55 p.m. ET, so if you’re in the Central, Mountain or Pacific time zones you really need to plan accordingly. Then again, we all shouldn’t have to worry until they move it to, like, 11:58.

---

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

God bless America.
---

Gold closed at $1630
Oil, $98.70

Returns for the week 1/9-1/13

Dow Jones +0.5% [12422]
S&P 500 +0.9% [1289]
S&P MidCap +1.7%
Russell 2000 +1.9%
Nasdaq +1.4% [2710]

Returns for the period 1/1/12-1/13/12

Dow Jones +1.7%
S&P 500 +2.5%
S&P MidCap +3.1%
Russell 2000 +3.1%
Nasdaq +4.0%

Bulls 51.1
Bears 29.8 [Source: Chartcraft / Investors Intelligence]

Have a great week. I appreciate your support.

Brian Trumbore