Week in Review

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Week in Review

01/07/2012

For the week 1/2-1/6

Europe, Washington and Wall Street

I said my piece last week in terms of looking at 2012 and my opinion on Europe hasn’t wavered since the crisis hit in spring 2010 so this week just the facts.

An index of eurozone manufacturing activity for December came in at 46.9, a slight improvement over November’s 46.4 but still solidly in contraction territory. It was 42 in Greece, 43.7 in Spain and 44.3 in Italy, to give you a better sense of how it truly is a north-south, twin-speed Europe. Readings for France and Germany were both above 48 (again, still in contraction mode), while Germany’s unemployment rate fell to 6.8%, this as the overall rate for the 17-nations employing the euro remained at 10.3%.

But retail sales in Germany for November were down a second straight month, factory orders plunged, and the Bundesbank lowered its 2012 growth outlook for the nation to just 0.6% from 1.8%. Some engine of growth, eh? In France consumer spending fell in November as it faces a seemingly imminent credit downgrade.

In Italy, the issue of inequality (further discussed below) has become a big one as the people wonder how it is they are now supposed to swallow austerity cuts when their politicians make 16-18,000 euro a month, the highest in Europe (French MPs are next at 14,000). Unelected Italian Prime Minister Mario Monti wants to slash pay and perks to the average in Europe but the politicians are balking.

In Spain, where unemployment is 23% and the budget deficit is far worse than new Prime Minister Mariano Rajoy expected to find when he took office, the plan is to raise taxes and cut spending; hardly a formula for reducing the unemployment rate.

So it was no wonder that the eurozone’s New Year’s addresses by its leaders were none too cheery. German Chancellor Angela Merkel said 2012 “will no doubt be more difficult than 2011,” adding, “The road to overcome it [debt crisis] remains long and not without setbacks, but at the end of this path Europe will re-emerge stronger from the crisis than it was when it entered it.” One hopes.

In France, where auto sales plunged 18% in December from a year earlier (they were off 18% as well in Spain), President Nicolas Sarkozy talked of structural changes that were needed to return to growth.

“I know that the lives of many of you, already tested by two difficult years, have been put to the test once more. You are ending the year more worried about yourselves and your children.”

The president of Italy, Giorgio Napolitano, said: “Sacrifices are necessary to ensure the future of young people, it’s our objective and a commitment we cannot avoid…No one, no social group, can today avoid the commitment to contribute to the clean-up of public finances in order to prevent the financial collapse of Italy.”

And in Greece, the other technocrat leader, Prime Minister Lucas Papademos, is in distress. Greece has a ways to go to ensure it continues to receive bailout funds with $18.8 billion in debt coming due in March.

“We have to continue our efforts with determination, so that the sacrifices we have made up to now won’t be in vain,” he told his countrymen.

Next week is another critical one. Merkel and Sarkozy are to meet to discuss a series of amendments to the intergovernmental pact agreed to by all 27 EU members except for the U.K. at the Brussels summit last month, while both Italy and Spain have crucial bond auctions, the first of many this year. The yield on Spain’s 10-year soared to above 5.70% on Friday, while the yield on Italy’s 10-year is back over the unsustainable 7.00% level.

And then you have the basket case that is Hungary with their authoritarian leader. Parliament screwed with the central bank and now desperately needed EU and IMF aid is in jeopardy. [More on the Hungarians below.]

The euro as a trading currency had its inception in 1999, but the actual metal and paper was introduced on Jan. 1, 2002, ten years ago. There were no celebrations, no formal commemoration of the anniversary this week and for good reason.

But in Washington, the White House celebrated another respectable employment number, this one for December, as the economy added 200,000 jobs for the month, 212,000 in the private sector, with the unemployment rate falling to 8.5%.  Even the wage component rose 0.2% in December.

A further drop of just another 0.3% to 0.5% by Election Day probably clinches it for President Obama, setting aside the global hot spots for a week that I virtually guarantee will envelop his presidency as the year goes on. No one expected the unemployment rate to go from 9.0 to 8.5 in just two months. There are many forecasts out there calling for 8.6% by yearend. The frustrating thing for Republicans running for president is that Obama has had literally nothing to do with the still very slow recovery but it’s hard to dispute the numeric progress.

The other economic news on the week I’d suggest was mixed. The December reading on manufacturing, the ISM, was a little better than expected, 53.9, which as you can see from above is much better than Europe’s readings, but the ISM service sector figure for the month was weaker than projected, 52.6, and while November factory orders rose 1.8%, a key component measuring cap-ex spending was weak.

And the news on the retail front was far from great. December same-store sales at the big box retailers was up 3.4%, less than 2010’s 4.3% rise, with the likes of Target, J.C. Penney, and Kohl’s all reducing their profit forecasts. As expected, the Christmas season may have been solid, but it was due largely to discounting and the margins collapsed.

I would expect the American consumer to now take a little break, pay some bills. Despite the tick up in the wage component of the employment report, as you are all too aware, wages have stagnated for years now while key costs continue to rise (look for the tuition issue to become an increasingly divisive one in 2012).

And of course Congress and the White House will do nothing about the deficit all year, both sides thinking they can wait until 2013 to tackle it, but at some point the markets will punish them…and us.

[I know many of you read Paul Krugman’s piece this week that deficits don’t matter. I’ll have my say on the topic next time.]

You will hear that the states are doing a little better in terms of revenues as the economy improves, but local governments will continue to struggle mightily owing to ever declining property tax receipts as there is a significant lag effect in the assessment process in catching up with falling home values. And then the states get whacked in 2014 with the Medicaid portion of Obamacare.

Nope, we are far from out of the woods, we’re just lucky that the U.S. economy can indeed be resilient.

But to those on the Street this week who were saying the U.S. is decoupling from Europe, two things: first, we did indeed do some of that already last year. Our stock market was flat, while virtually the entire rest of the world was down. But, second, Europe still matters, in a huge way. I love how some strategists say, well, the average company in the S&P 500 only has 10% of their sales with Europe, so what’s the big deal? Well, that also means some have 20% or more of an exposure to Europe, for one, but you’d have to be hopelessly naïve to believe Europe’s banking and sovereign debt crisis doesn’t have tentacles…long slimy ones. Chop one off and it grows back, too.

“What words could best describe the most baleful influence on the global economy in the year 2011? How about ‘governmental dysfunction?’

“The European banking crisis that has threatened global finance is about nothing more or less than the failure of Greece, Italy, Portugal, et al., to control their budgets, raising doubts about the value of their bonds. Rather than trim their bloated public sectors, they have preferred to beg for bailouts.

“The U.S. government has run deficits exceeding a trillion dollars for the last three fiscal years, forcing it to borrow heavily from the Federal Reserve, China and Japan. Despite warning signals from credit-rating agencies, Washington is doing no better than the Europeans in bringing spending under control….

“The fiscal-year 2012 appropriation bills offer no hope of reform. According to a Heritage Foundation analysis, the drafts now moving through Congress spend more than the House Budget Resolution last spring – a resolution that called for only a $30 billion reduction from FY 2011 discretionary spending of $1.0498 trillion. Obsolete or ineffective departments like Agriculture, Commerce, Labor and Education will still receive their accustomed share of taxpayer billions….

“There’s also Obamacare, yet another massive bill that turns over the vital details to the federal bureaucracy. Businesses, doctors and hospital administrators can only await with fear what confusions and delusions the bureaucrats produce out of their efforts to mastermind the many millions of decisions that must be made daily in a vital and complex industry.

“Judging from opinion polls showing increasing public contempt for what goes on in Washington, voters are frustrated by their seeming inability to get the attention of the beast. The ups and downs in the polls of the Republican presidential candidates reflect an anxiety over whether any of them are up to the job.

“Of course, there is a president now, Barack Obama. But he resigned from active duty last summer, preferring to spend most of his time giving speeches in his campaign for reelection. Like the Republicans, he too is running against the government. That’s a curious position to take, given that what he is running against is very much his creation.”

“Remember America’s triple-A credit rating? The benchmark that was eroded during the debt-ceiling standoff last year? The highest-quality measure of creditworthiness matters greatly in this country and beyond. Yet it is still disturbingly unclear who is responsible for safeguarding what remains of this important national attribute.

“A triple-A credit rating is what economists call a public good.   By reducing borrowing costs and increasing the availability of financing, it is ‘consumed’ and is of benefit to many. But this public good is also difficult to value holistically or to sustain properly.

“America’s triple-A rating is vulnerable. Two of the three major rating agencies, Moody’s and Fitch, have given it a ‘negative outlook,’ signaling the real possibility of a downgrade in the next two to three years. Standard & Poor’s downgraded the U.S. credit rating late last summer in the context of the debt-ceiling debacle and, adding insult to injury, placed the nation’s lower, AA-plus, rating on review for possible downgrade….

“Further damage to America’s credit would weaken the global economy. It would push even more countries and companies to shift from ‘pooled insurance’ to less efficient self-insurance. It would accelerate the disorderly transition to a global system with multiple, ill-defined, partial and incomplete reserve currencies. And it would further undermine the legitimacy of multilateral institutions….

“Few could say with certainty which, if any, public officials or agencies wake up every day worrying about America’s credit rating. This persistent vacuum is noteworthy at the national and multilateral levels. That must be addressed.

“The good news is that the necessary actions are totally in line with the other major interests of the U.S. and global economies. Essentially, they involve reducing the medium-term burden of indebtedness while enhancing the economy’s ability to grow and prosper. America needs to work seriously at both.

“Maintaining the U.S. credit rating should figure prominently among the new-year goals and resolutions of Congress, the administration and Washington’s bureaucracy. By addressing these issues, more will be accomplished than merely safeguarding a rating. The aspirations of millions frustrated by unemployment and underemployment, an increasing number of those in poverty, and the well-being of the global economy will all be better served, as they urgently should.”

“The emerging fight over the future of the welfare state, a paradigm without serious political challenge in eight decades, is accentuating the center’s decline. The welfare state has run up against a brick wall of economic reality and fiscal book-keeping. Congress, having enacted increases in entitlements without visible means of funding them, is on the brink of stalemate. As studies by the International Monetary Fund have demonstrated, trying to solve significant budget deficits predominantly by raising taxes has tended to foster decline. Contractions have also occurred where spending was cut as well, but to a far smaller extent….

“Cutting back on benefits that are ‘entitled’ is going to be a far harder political task than curbing federal discretionary spending. We have created a level of entitlements that will require a greater share of real resources to fulfill than the economy seems likely to be able to supply. Not only is the labor force starting to lose its most productive workers (the baby boomer generation) to retirement, but the generation scheduled to replace it will be the same individuals who in 1995, shocked us by scoring so poorly on math and science in international competitions. America’s students had slipped badly after a long tenure at the top of the global educational ladder…. Fortunately the statistical weight of the erosion in overall productivity growth is still quite small, but it will mount if our education system does not improve and we don’t increase immigration quotas of skilled workers.

“With rising concerns about income inequalities, it is a disgrace that these quotas are protecting upper income groups from competition. Such a slowdown in productivity growth will create, with slowed population growth, what Professor Gordon of Northwestern University says is ‘the slowest 20-year rise in real per capita GDP in American history.’

“I do not pretend to be able to forecast how this will turn out, but we face a true revolution, not so much in the streets but in the fundamental choices we will have to make to secure our fiscal future. Arithmetic demands it.”

“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.

“There is nothing new in the fact that a few people have too much and too many have too little. In some places (the Soviet Union and most countries with authoritarian regimes) inequality was once largely hidden from the population, in others (Latin America) it was known but tolerated and in some (the U.S.) it was celebrated. In 2011, the economic crisis made the world more aware of its extent and scope. In 2012, peaceful coexistence with inequality will end and demands and promises to fight it will become fiercer and more widespread than they have been since the end of the cold war.

“Headlines such as this recent one in the Los Angeles Times – ‘Six Walmart heirs are wealthier than U.S.’ entire bottom 30 percent’ – epitomize the new mood. Such scrutiny of the lives and deeds of the ‘1 percent’ will become obsessive. Alongside the new-found intolerance for inequality, we will also see the occasional attempt to explain that not all inequality is bad. Jamie Dimon, chief executive of JPMorgan Chase, said recently: ‘Acting like everyone who’s been successful is bad and that everyone who is rich is bad – I just don’t get it.’ Behind his perplexity is the assumption that great wealth often results from innovation, talent and hard work that are justly rewarded by society.

“But as we know, great wealth and inequality can also originate in corruption, discrimination, monopolies, abusive corporate behavior or Madoff-like malfeasance. Students of inequality like to equate it to cholesterol: there is bad and good inequality and the trick is to boost the good one while keeping the bad one at its lowest possible level.

“Therein lies the problem: lowering inequality without harming other goals (investment, innovation, risk-taking, hard work) is not easy. The fight for a more equal society was the goal of countless experiments that resulted in even more inequality, widespread poverty and loss of freedoms. Yet there is compelling evidence that high inequality is also bad for a nation’s health: it leads to higher political instability and more violence and it hurts competitiveness and growth.

“This year, elections will take place in the U.S., France, Russia, Taiwan, Mexico, Egypt and South Korea. China will also change leadership. Inequality will become part of electoral debates that will influence the conversation even in countries where it has long been taken for granted. Inequality will be the protagonist of 2012.”

Finally, I arrived in Manchester mid-week and on Thursday morning took a drive up to Plymouth, N.H., where I caught Newt Gingrich. Just as I was eight years ago, I’m in New Hampshire simply to get a feel, like I do at the Iowa State Fair during the election cycle. 

So I’m sitting there amongst a large crowd of 125, plus 20 or so members of the press in the senior center in Plymouth, waiting for Newt and Callista, talking to the locals sitting next to me, and it was great. The best of American democracy. Newt turned out to be good. The questions were all solid. Everyone was respectful. No a-hole protesters.  Newt started off blasting Obama for his four recess appointments of the day before. I loved it. 

Oh, this is going to be one ugly election. 1860, as I coined it months ago before everyone else latched onto the theme. But democracy can also be a beautiful thing. It was Thursday morning in Plymouth.

Street Bytes

--Stocks rose on the first trading day of the new year, Tuesday, and immediately some floor reporters started foaming at the mouth, touting their January stock market lore. [I stopped discussing that on my Wall Street History link, by the way.] But the market treaded water the rest of the week and we finished with the gains of Tuesday, essentially. Any positives were met with resistance from Europe.

But now its earnings season and the next three weeks will be interesting. Some companies will blame Europe. Others will blame Asia for any shortfalls. But will any give an ‘all clear’ signal? I seriously doubt it.

The yield on the 10-year Treasury got back above 2.00% briefly before Europe concerns ushered in a renewed flight to quality and the greenback.

Meanwhile, in a bid to be more transparent, the Federal Reserve said it will begin to publish its interest rate forecasts for years into the future. All 17 members of the rate-setting Federal Open Market Committee will give their own forecasts, as well as when they expect interest rates to rise for the first time.

The point seeming to be that if the market sees the preponderance of FOMC officials forecasting low short-term rates for longer than the market expects, that may help drive down longer-term rates and thus boost the economy.

I don’t see this being that effective, but getting individual forecasts from the members could be interesting.

--China’s manufacturing data for December provided a little shot in the arm for the markets on Tuesday as the government announced the reading was 50.3, rather than the sub-50 HSBC had forecast a week earlier. But Premier Wen Jiabao talked of a “relatively difficult” first quarter and as home prices declined a fourth straight month in December, you still have the important issue for 2012 of the bursting of the property bubble. With a growing price war, as developers frantically try to raise cash, many won’t survive, though the government is prepared for this. They will only feel compelled to step in if a large bank has problems and there is the risk of a systemic crisis.

As for the young homeowner who bought at the top, this is another growing issue. On unfinished properties, many are trying to cancel their contracts with limited success.

Separately, President Hu Jintao vowed that China will make the right structural adjustments, though he warned that imbalances in the country’s development and its lack of sustainability will remain big problems. At the same time, the government is determined to expand domestic consumption.

--South Korea’s manufacturing PMI for December was 46.4, the fifth consecutive month below 50.

--But India’s PMI for last month was a stronger than expected 54.2.

--Research firm Gartner expects worldwide tech spending to grow just 3.7% this year, down from an earlier forecast of a 4.6% gain. Supply constraints brought on by the floods in Thailand are still a major issue.

--U.S. auto sales for December were solid, with Chrysler continuing its comeback, up 37% over year ago levels. Ford Motor was up 10% and General Motors saw a 4.6% increase. For all of 2011, Chrysler registered a 26% gain, Ford 11% and GM 13%. Light vehicle sales for all of 2011 totaled 12.8 million. December’s annualized pace is 13.56 million.

Both Honda and Toyota, however, saw sales for 2011 down 7% each, though Toyota eked out a 1% gain in December, while Honda’s dropped a whopping 19% for the month.

Separately, Hyundai posted a 13% gain for December (affiliate Kia’s sales rose 43%), and 20% for the year, while Nissan’s sales for the month were up 7.7% and 14.7% for all of 2011.

--I noted a few weeks ago that nothing could stop the global economy, save for an attack on a commercial airliner, like bird flu after the H5N1 virus was found in a bird in Hong Kong. But now we have the confirmed death of a Chinese bus driver from the virus, thus taking the threat to a new level. 60% of humans the virus infects die. Thankfully thus far, none of the people officials were able to identify that came in contact with the man had signs of the illness but the next few weeks are critical because tens of millions of Chinese will be traveling in cramped buses and trains over the lunar new year holiday, last week in January. Hong Kong has raised its threat level to “serious.” So far the virus hasn’t mutated into a strain that could spread around the world and kill millions.

--PetroChina, Asia’s largest oil and gas company, now has 100% ownership of one of Alberta’s largest oil sands developments, buying up the remaining 40% from Athabasca Oil Sands Corp. If President Obama doesn’t act quickly on the Keystone XL pipeline that would bring oil from Canada to U.S. refineries on the Gulf Coast, Canada may just say the heck with you, we’re going to build a pipeline to the west coast from the oil sands and ship it all to China.

--In a major step, India will finally allow foreign nationals to invest directly in the country’s listed companies in an effort to widen the class of investors, attract more funds, and reduce volatility, according to the finance ministry. Previously, foreigners could only invest in India’s equity market through mutual funds or institutional channels.

--According to a European economist, Zsolt Darvas, Iceland’s policy of letting its banks fail when their economy collapsed worked out far better than the policies adopted in Ireland and Latvia, which suffered similar banking crises.

The three all allowed the credit boom to fuel property speculation and investment imbalances, says Darvas. Then the banks collapsed when property prices fell and all three had to turn to the IMF for help.

--Meanwhile, house prices in Ireland declined 13% to 18% in 2011, according to two surveys of the market. Daft.ie reports the average residential property is now off 52% from its 2007 peak, while it was reported 1,930 Irish companies failed last year. More than half the companies in the construction and real estate sectors are considered to be in danger of insolvency. [Irish Independent]

--An independent panel urged California lawmakers to postpone the issuance of $2.7 billion in bonds to kick start the $98.5 billion high-speed rail project in the state. The panel questioned whether the federal government would participate in future funding according to current plans. Not doing so leaves California taxpayers on the hook for billions in future costs. Lawmakers don’t have to listen to the panel, but it will be difficult to ignore their recommendation.

--Eastman Kodak is nearing a Chapter 11 filing, unless it finds a buyer for its 1,100 patents. The Wall Street Journal editorialized:

“Meanwhile, the companies now riding high on the technological waves that Kodak didn’t catch might consider that they also aren’t immune to business blunders or the impact of new technologies. Kodak so far has managed an astonishing 131-year run. Will Apple, Microsoft or Facebook be around in the 22nd century to say the same?”

[Steve Ballmer took over Microsoft 11 years ago, with the stock at $44. Today it’s around $28. How does he survive?]

--In an interview with the New York Times’ Steve Lohr, Samuel J. Palmisano, who just called it quits at IBM after nearly a decade as CEO, said his guiding framework boiled down to four questions:

“Why would someone spend their money with you – so what is unique about you?”

“Why would society allow you to operate in their defined geography – their country?”

“And why would somebody invest their money with you?”

As opposed to Steve Ballmer, shareholders benefited handsomely during Palmisano’s tenure, with the share price roughly doubling over that time.

--Federal investigators are looking into allegations that Wells Fargo and other banks are double-billing for mortgage escrow fees to the tune of $150 million or more, with the average homeowner being double charged about $2,000 if they fall behind on a payment or two, this according to Catherine Curan of the New York Post.

--An international arbitration panel ruled that Venezuela must pay Exxon Mobil more than $900 million for nationalizing Exxon’s assets in the country back in 2007, including one of the world’s largest oil reserves.

--Tolls on New Jersey’s highways jumped 50% in the new year.

--According to reinsurance giant Munich Re, the world had its costliest year ever for natural disasters with an estimated $378 billion in damages in terms of direct property losses. An average year sees losses of $75 billion. The Japan earthquake-tsunami accounted for $261 billion of the total in 2011. It was also the deadliest with 15,840 deaths. Severe storms and tornadoes accounted for $15 billion in the U.S., and Hurricane Irene was another $15 billion.

--Meanwhile, the weather has been quite good this winter across the country. The lack of snowfall is leading to major savings for state and local budgets. Ottumwa, Iowa, for example, has a snow-removal budget of $300,000 and hasn’t spent a dime. In my area in New Jersey, it’s funny how the landscapers, who double as snow-removal outfits, made a mini-fortune with Hurricane Irene and then the Halloween snow disaster and resulting tree removal, but now are struggling all over again. Not a good time to be a day laborer as well.

Here in New Hampshire, you can picture the consternation on the faces of those who make their living this time of year. The downhill ski operators are hanging in there with man-made snow, but those in the snowmobiling or cross country ski business can’t afford too many years like this one. I drove up north the other day and was shocked to not even see snow at the top of the mountains. Then again, restaurant business across the state is good when everyone can get around so easily.

--Super Bowl ad time is officially sold out, all of the 30-second spots going for a record $3.5 million, according to this year’s network, NBC. Evidently there will be more 60-second ads than before. Volkswagen, for example, is airing a 60-second spot in the third quarter that promotes the 2012 Beetle. GM has five ads. GoDaddy.com, will not only feature Danica Patrick again, but also the Pussycat Dolls! Woo-woo! [Couldn’t give you one song they’ve done, but they are not unpleasant to look at, mused the editor.]

Foreign Affairs

Iran: The mullahs ratcheted up the tensions this week. First, the government announced it had produced the first nuclear fuel rod from uranium ore deposits inside the country. Then on Monday, Iran announced it had successfully test fired a series of intermediate- and long-range ballistic and cruise missiles during its naval exercise in the Gulf as it warned again it could stop the flow of oil through the Strait of Hormuz if the West carried out threats to impose stricter sanctions. The U.S. said it will not allow any disruption of traffic in the Gulf as the Fifth Fleet stood by, while the White House initiated sanctions targeting Iran’s central bank and financial sector. At the end of the month, the European Union will decide on whether to ban Iranian oil imports, which account for about 440,000 barrels a day.

[Japan and South Korea receive 10% of their crude needs from Iran, so this becomes a tough topic for them too; the impact of sanctions on the two nations and whether they would be granted waivers to allow them to receive Iranian oil as long as they are cooperating on sanctions against Iran’s nuclear program directly. The South Korean government, for one, is looking for its refiners to voluntarily reduce crude imports from Iran during the next few months.]

Israeli Defense Minister Ehud Barak said, “I doubt Iran can afford to seriously consider closing the Strait of Hormuz, even in the scenario of tighter sanctions. Such a move would turn the entire world against it. In their distress, the Iranians are exhausting their pool of threats, in what is also an attempt to deter the world from further sanctions.”

I am not concerned in the least that Iran will act to close the Strait for more than a day or two before its navy and shore batteries are blown to pieces. Forget the U.S., there is a ton of other firepower in the region. Now if they were stupid enough to lay a bunch of mines, that’s a different story. Either way, the Iranians are only hurting themselves and risking a revolution that this time could succeed.

This week the oil market would have moved a lot higher if the Iranian threats were taken more seriously, with crude (as measured by West Texas Int.) nearing $105 but then backing off to finish the week at $101.50.

Separately, Joby Warrick of the Washington Post reports on a topic near and dear to my heart, going back many years:

“Iran has…dramatically expanded its diplomatic missions throughout (Latin America) and dispatched members of its elite Quds Force – the military unit U.S. officials in October linked to a foiled assassination plot in Washington – to serve in its embassies, U.S. officials and Iran experts say.”

Iranian President Ahmadinejad is making a trip to South and Central America this month to shore up relations.

But on a happy note, at week’s end U.S. naval forces rescued 13 Iranian sailors being held by pirates with no injuries in a flawless operation. I haven’t seen an official Iranian government response as yet.

Iraq: At least 78 died on Thursday in another wave of bombings targeting Shiites, the second such large-scale attack since U.S. forces left. The bombings occurred in Baghdad and outside the southern city of Nasiriyah. Many hold the government responsible. Civil war seems a certainty.

Syria: Reports are sketchy but at least 25 were said to have been killed by a suicide bomber in Damascus on Friday, the second large attack on the once peaceful capital. President Bashar al-Assad also suffered the highest-ranking defection yet as one of his generals went over to the Free Syrian Army. This could be significant. Hopefully others follow soon, or, better yet, one of them takes Assad out directly.

Activists say over 400 have been killed across the country since Arab League observers arrived on the scene. The Arab Parliament is looking to withdraw them due to the ongoing violence. It’s really not known how many of a once proposed 500 observers are actually in the country. French President Sarkozy insisted Assad “must leave power.”

“The massacres being committed by the Syrian regime rightly arouse disgust and revolt in the Arab world, in France, in Europe and everywhere in the world,” he said.

Hizbullah, however, reiterated its support for Assad.

Israel: Negotiators for Israel and the Palestinians met in Amman, Jordan for the first direct talks in 16 months and agreed to meet again this coming week. The atmosphere was characterized as “positive” as the two sides addressed security issues. There is zero cause for optimism, however.

On the more important issue of the day, aside from the ongoing threat from Hizbullah, 1,500 ultra-Orthodox men protested what they call “oppression” and “incitement” of the “secular community” against them. The Orthodox have bizarrely dressed their children in Nazi prison camp garb. One man told the Jerusalem Post:

“What’s happening is exactly like what happened in Germany. It started with incitement and continued to different types of oppression.”

Oh brother. These people are so dangerous, it just needs to be said. At least opposition leader Tzipi Livni condemned the haredi. Defense Minister Barak said the government should consider some of the Orthodox settler ‘gangs’ as terrorist organizations.

Prime Minister Netanyahu, though, doesn’t want to alienate his far-right supporters, so he’s rejecting what is indeed an appropriate label. Heck, they’ve been attacking Israel Defense Forces in the outposts, vandalizing mosques…they want both a civil war and war with the Palestinians, and as I wrote last week, this is going to end very badly.

Afghanistan: For the first time the Taliban publicly expressed interest in negotiating with Washington, this after the militants said they wouldn’t negotiate while foreign troops remained. So every now and then this topic comes up and I can only counter; peace with the Taliban? Have their attitudes towards women changed? Will little girls be allowed to go to school? These people haven’t changed in the least (and killed another eight NATO soldiers on Friday). It’s nothing more than a trap.

[Officially, U.S. deaths in Afghanistan were down from 499 in 2010 to 417 last year. NATO deaths fell from 711 to 565.]

Yemen: As expected, President Ali Abdullah Saleh isn’t stepping down after all in yet another bluff. His son has launched a crackdown against dissident elements in the security services in a further sign the family is trying to beat down the uprising, even as hundreds of thousands marched, calling for Saleh to be put on trial for the deaths of protesters. Saleh had signed a transfer of power agreement in November.

Libya: Two militia groups battled it out for two hours in central Tripoli, leaving four dead. This was predictable. I wouldn’t quite make any travel plans here yet. As a Wall Street Journal reporter described the scene, while heavy weapons are largely invisible during the day, “at night, the sprawling city becomes a hive of heavily guarded enclaves, most districts possessing their own weapons stockpiles and deploying their local guardsman to stand post at the major intersections leading to their homes.”

Tunisia: who cares
Egypt: worse
Libya: not better except for removal of Gaddafi
Yemen: worse
Bahrain: not better
Syria: far worse
Morocco: better

North/South Korea: As the world waits to see how and when the Great Successor Kim Jong Un will flex his muscles in his attempt to consolidate power, South Korean President Lee Myung-bak said in a New Year’s speech that the Korean peninsula was at a “turning point” with opportunities for positive change, but that Seoul would “react strongly” if provoked by the North. Lee said he would resume aid-for-disarmament talks if Pyongyang halted its nuclear activities.

In a series of statements, North Korea in turn warned there would be no change in inter-Korean relations as long as Lee is South Korea’s president, calling him a “rude political gangster,” and that the Seoul government was “a despicable immoral and depraved horde.”

“Glorify this year 2012 as a year of proud victory, a year when an era of prosperity is unfolding,” the North said. “The whole Party, the entire army and all the people should possess a firm conviction that they will become human bulwarks and human shields in defending Kim Jong Un unto death….The entire army should place absolute trust in and follow Kim Jong Un.”

Other statements did emphasize that the country should turn itself “into an economic giant,” which is mildly encouraging if you seek stability.

Meanwhile, a U.S. expert on North Korea believes Pyongyang’s progress towards a nuclear-capable missile is probably further along than once thought. According to Larry Niksch, who used to prepare reports on the North for Congress, they are possibly just a year or two from developing a nuclear warhead compact enough to be fitted to its medium-range Nodong missile.

China: On Friday, the government warned the U.S. not to be an aggressor in the Pacific, but, in an official editorial, said the increased U.S. presence could add to more stability and prosperity in the region.

Earlier, President Hu Jintao wrote in a Communist Party magazine that “International forces are trying to Westernize and divide us by using ideology and culture. We need to realize this and be alert to this danger.”

So the government continues its crackdown on the Internet, especially social-media sites that are hard to control.

Russia: Prime Minister Putin sent New Year’s greetings to his countrymen, though with a bit of sarcasm, wishing prosperity “to all our citizens regardless of their political persuasion, including those who sympathize with leftist forces and those situated on the right, below, above, however you like.” I read that in Russian “the sexual innuendo was clear.” Putin is known for this kind of language when dismissing his critics. 

Police arrested 60 protesters last weekend in Moscow, a group chanting against 12 years of Putin’s rule. Another mass demonstration is set for Feb. 4. The presidential election is on March 4.

Hungary: As alluded to above, this place is a mess. Dissidents accuse Viktor Orban of “destroying the democratic rule of law,” in a statement entitled “The decline of democracy – the rise of dictatorship,” accusing Orban further of “removing checks and balances and pursuing a systematic policy of closing autonomous institutions.”

Among the new laws Orban’s Fidesz party pushed through in the last weeks of the year is a bill allowing the government to appoint members of the central bank’s rate-setting council.

“(Fidesz) has left Hungary’s Opposition, its neighbors and new partners in the European Union aghast.

“The new constitution…is an extraordinary affront to basic liberties. It vastly increases the power of the ruling party, reimposes state control on the central banks, limits the independence of the courts, politicizes the judiciary, holds the Opposition criminally responsible for the former Communist Party’s misdeeds, gives a three-man government cabal the power to veto any budget, subverts the sovereignty of its neighbors by allowing their Hungarian minorities to vote in Hungarian elections and, most disgracefully, attempts to reimpose state regulation of religion by reducing the number of acknowledged faiths and sects from 300 to 14 while denying any official place in society for Muslim, Buddhist or Hindu congregations unless they have operated in Hungary for at least 20 years….

“Even more ominously, the interference in the judicial system…returns Hungary to the monopoly of power by the ruling party under which it suffered for more than 40 years.

“All this is incompatible with EU membership. This must be made bluntly plain to the new autocrats in Budapest. Hungary is demanding 20 billion euro in emergency EU help for its struggling economy. Not a cent should be paid while this disgraceful constitution remains in force.”

Protests are spreading; tens of thousands in Budapest the other day.

France: It’s become tougher to become a French citizen as you have to take a harder language test and swear allegiance to “French values.” Talk about pandering to the far right ahead of the April presidential election (to the possible detriment of Marine Le Pen, the National Front candidate…though I stand by my prediction she makes the run-off). On the language side, you have to prove you can speak French as well as an average French 15-year-old. Drat! I guess I have to remain a tourist.

Britain: An authoritative study reveals that 53% of the workforce in Britain suffered a salary freeze or cut in 2011, with only one in 10 matching inflation. The pay squeeze has caught up with public sector workers. 

Which leads me to the issue of Prime Minister David Cameron. In 2010, I named him my “Person of the year,” as “Cameron showed both political courage and savvy.” I noted that all eyes would be on Britain the first 4-5 months of 2011 “because the prime minister’s austerity program, that he ran on, and which makes him so unusual, begins to hit in earnest. We’ve seen some minor protests thus far but will they gather speed or will the British people provide an example for the rest of us a la during World War II and the blitz? Some say the austerity plan is too severe, but others in Europe, by necessity, are following suit….The grand experiment is on. We all should want Cameron to succeed.”

“If Cameron’s Britain survives the coming pain with its head still high, that will send a super signal to the rest of Europe and across the pond to the United States. But if Britain’s economy tumbles back into full-blown recession, then all bets are off when it comes to others proceeding with needed fiscal discipline.”

That was a year ago. I would argue he didn’t succeed, but he also didn’t fail. Government revenues, for example, are increasing, but Britain is no doubt entering recession with the rest of the continent.

And then last month, Cameron declared his independence from the EU, refusing to be part of a new treaty being worked on for the proposed European fiscal union.

Andrew Roberts, a historian and friend of Cameron’s, recently opined in the Wall Street Journal.

“The mistake that the liberal media constantly make, especially for some reason in America, is assuming that when Britons are isolated in Europe, they are also uncomfortable. Yet since the 16th century it has almost always been precisely when she was most isolated that she was later proved most right. And whereas President Sarcastic – does he have any other form of address when talking to opponents? – is currently the least popular president of France in the history of the Fifth Republic, Mr. Cameron saw his Conservative Party overtake Labour in approval ratings after he exercised the veto.

“British Foreign Secretary William Hague has written a superb biography of William Pitt the Younger, whose most famous and effective speech comprised one sentence during the Napoleonic Wars: ‘England has saved herself by her example and will, I trust, save Europe by her example.’ King George VI actually rejoiced after the fall of France, writing in his diary 1940: ‘Personally, I feel happier that we have no allies to be polite to and pamper.’ That is the true voice of Britons, and one that David Cameron has articulated superbly.”

“ ‘A good decision is based on knowledge and not on numbers,’ remarked Plato, the critic of Athenian democracy.

“In the coming years, we shall see whether democratic governments in the West can make good choices, faced with falling living standards, reduced expectations and increased inequality.

“The answer is far from clear, because democracy in its modern form is quite new. Britain gave the vote to all adult men and women on equal terms only in 1928. In 1941 there were 11 democracies in the world.

“So the form of government enjoyed now by more than a hundred countries has shallow roots. Its broad global extension is a post-second world war phenomenon. During that brief period, democracy has been inextricably linked with steadily growing national wealth for most countries. Democratic politicians have little experience of managing decline.

“Instances where they have had to do so offer little encouragement. Argentina, Venezuela and Russia were once on the global list of democracies, but after their economic shocks, I would hesitate to include them today. Greece and Italy, racked by national debt, have been handed over to the rule of unelected officials.

“Plato’s chief fear was that ‘dictatorship naturally arises out of democracy’ and ‘the most extreme liberty’ was liable to provide the ‘most aggravated form of tyranny.’ History bears out that the most brutal dictatorships…were carried out in the name of the people. But the most obvious failing of democracies today is that competition between politicians seeking election causes them to promise too much….

“Cameron cannot be expecting to win the next election as a popularity contest. He will succeed not because people like him, but if he convinces them that our dire situation demands tough measures, and leadership that he rather than (opposition leader) Miliband can supply. That is the Margaret Thatcher approach. However, it is not consoling that around Europe even bold incumbents are being swept away.

“Nor is it heartening that a country such as Greece, which has descended into the economic and social abyss, and changed its government, remains in political paralysis, unable to adopt measures deemed necessary by its prime minister.

“In Britain, the government may have abandoned promising too much. But so far, Britons have been required to make fewer sacrifices than the Greeks, Irish or Spanish. It is not clear how we will react if obliged to cut much more deeply. Nor is it apparent that the government envisages making the radical changes in welfare and education that our lack of competitiveness demands. Cameron might say that presiding over a coalition makes such a revolution impossible, but in truth the scale of change remains unthinkable in a democratic system.”

Mexico: The U.S. has lost about 6,300 men and women in Iraq and Afghanistan combined. 12,000 were killed in Mexico’s drug war last year alone. More than 50,000 since President Calderon’s crackdown began in 2006.

Random Musings

--Days before the Iowa caucuses, the Des Moines Register released its final poll.

Mitt Romney 24 percent
Ron Paul 22
Rick Santorum 15
Newt Gingrich 12
Rick Perry 11
Michele Bachmann 7

Romney 30,015…24.6
Santorum 30,007…24.5
Paul 26,219…21.4
Gingrich 16,251…13.3
Perry 12,604…10.3
Bachmann 6,073…5

Just a few weeks ago, Santorum registered 5 percent, or less, in most of the surveys. You can see the Des Moines Register and others pretty much nailed the final tally except for the former Pennsylvania senator’s vote and his remarkable surge.

As for Perry and Bachmann, the former has opted to focus solely on South Carolina in an attempt to restart his campaign, while Bachmann dropped out. Not that it was particularly bold, but I did say last week, “I’ll be shocked if (Bachmann) gets 7 percent and moves on to New Hampshire.”

Speaking of which, Suffolk University has a respected tracking poll and it shows:

Romney 41
Paul 18
Santorum 8
Huntsman 7
Gingrich 7

But a different survey has the Top three now at 40, 17, 11…again, with Santorum surging a bit while the others tread water. I was listening to the guy from Suffolk and he thought Santorum would peak at 11-12 percent. Romney is gaining the most from women, incidentally, and this is where Ann Romney has been a plus (I’m not a fan).

The same professor (sorry, forget his name), who made his name nailing the 2008 Iowa caucus and New Hampshire primaries, said that in ’08, Mike Huckabee won with 35 percent to Romney’s 25 in Iowa, but then Huckabee only did 11 percent in New Hampshire, this gentleman drawing the same parallels with Santorum.

--After New Hampshire on Tuesday comes South Carolina, Jan. 21, and on Friday, CNN/ORC released a poll from that state.

Romney 37 percent…surprising strength
Santorum 19
Gingrich 18
Paul 12

--Ah yes, it’s going to be quite an election year. When I saw Newt Gingrich on Thursday, he said he wanted to open with a statement on President Obama’s recess appointments for both the Consumer Financial Protection Board and the pro-union activist National Labor Relations Board. Gingrich said Obama’s moves were unconstitutional because the appointments were made even though the Senate isn’t actually in recess. Yes, the president has the power to make such appointments, including the three new members of the NLRB, but as the New York Post editorialized:

“Obama is the first president to declare that he, and he alone, can decide whether the Senate – which must confirm his picks – is actually meeting.

“In order to block recess appointments, the Senate intentionally has been holding pro forma sessions every few days, each of which lasts only a few seconds.

“Senate Majority Leader Harry Reid – with then-Sen. Obama’s support – did the same thing in 2007 to block any recess appointments by President George W. Bush.

“But now Obama, with Reid’s concurrence, contends that such sessions are actually ‘gimmicks’ – and that the Senate is in recess.

“So much for the separation of powers and the carefully calibrated system of checks and balances that are hallmarks of the U.S. constitutional system.

“Obama, of course, plans to run for reelection against Congress, painting it as Wall Street’s puppet.

“But what he did yesterday was no shot across the bow; it was, rather, a direct hit – with the Constitution taking the brunt of the blow.”

“Could 2012 turn conventional wisdom on its head? Here’s the conventional wisdom: President Obama’s reelection is vulnerable to the weak economy and high joblessness. Here’s what might happen: The economy gradually improves, and although unemployment stays high (exceeding 8 percent), what counts politically is the palpable sense that things are moving in the right direction. This allows Obama to argue, as he already does, that his policies are slowly repairing the economic calamity he inherited from Republicans.

“To which they respond: Obama’s anti-business rhetoric and policies have impeded recovery; the Affordable Care Act (“Obamacare”) and new regulations create uncertainties that deter hiring; and Obama hasn’t dealt with the explosion of federal debt.

“Just which narrative triumphs may well determine the election. If Obama convinces Americans that he’s set a course for a stronger recovery, then he wins. If the Republicans successfully cast his policies as producing prolonged stagnation, they win. Though the debate matters, the economy’s actual performance – for better or worse – will decide how many Americans feel. And this will depend on forces and events over which the candidates have little or no control.”

“This year, Romney is trying to establish some emotional bond with the working class by waging a hyperpatriotic campaign: I may be the son of a millionaire with a religion that makes you uncomfortable, but I love this country just like you. The strategy appears to be only a partial success.

“Santorum is the grandson of a coal miner and the son of an Italian immigrant. For years, he represented the steel towns of western Pennsylvania. He has spent the last year scorned by the news media – working relentlessly, riding around in a pickup truck to more than 370 towns. He tells that story of hard work and elite disrespect with great fervor at his meetings.

“His worldview is not individualistic. His book, ‘It Takes a Family,’ was infused with the conservative wing of Catholic social teaching. It was a broadside against Barry Goldwater-style conservatism in favor of one that emphasized family and social solidarity. While in Congress, he was a leader in nearly every serious piece of antipoverty legislation. On the stump, he cries, ‘The left has a religion, too. It’s just not based on the Bible. It’s based on the religion of self.’….

“He is not a representative of the corporate or financial wing of the party…His economic arguments are couched as values arguments: If you want to enhance long-term competitiveness, you need to strengthen families. If companies want productive workers, they need to be embedded in wholesome communities….

“If you took a working-class candidate from the right, like Santorum, and a working-class candidate from the left, like Senator Sherrod Brown of Ohio, and you found a few islands of common ground, you could win this election by a landslide. The country doesn’t want an election that is Harvard Law versus Harvard Law.”

--You know who I was impressed with the other day in an interview with Wolf Blitzer? Sen. Rand Paul. Not that I agreed with him, as he backed his father’s policies, but I was blown away by his superior knowledge of foreign affairs compared to just about all the Republican candidates in the field. Since father and son, though, don’t believe in a mainstream foreign policy, I was struck by how maybe it is Rand, not the father, who is the viable third party candidate someday.  Rand could easily change his party affiliation to ‘independent’ and just caucus with the Republicans for now.

--I was talking to a local Republican county chairman up in Plymouth and was startled by how extensive voter fraud is in New Hampshire, according to him. The state has same-day registration and all you need to do is show ID. The problem is this includes student IDs, so he said the kids run around voting multiple times, and up here that means they are voting predominantly Democrat.

So my new friend said that challengers actually do their job in New Hampshire and one guy asked a kid for different ID and the kid produced an envelope with his address on it. Then the kid realized what he had done, panicked, and ran off. What was on the envelope? It was his absentee ballot application for Massachusetts!

--President Obama unveiled his plans for a slimmed-down military. Last year the administration and Congress agreed on $450 billion in cuts over the next decade, on top of earlier cuts to weapons programs, and the potential for another $500 billion in cuts next January as a result of “sequestration,” unless Congress acts on finding other ways to reduce spending $1.2 trillion, again per previous agreement as part of the summer’s debt-ceiling debate.

I’ve made it clear where I stood. There are lots of areas to cut defense spending, particularly on the procurement front. But as the Wall Street Journal editorializes, what makes this round of cuts different is the growing entitlement state.

“The administration is making a political choice and sparing Social Security, Medicare and Medicaid, which are set to hit nearly 11% of GDP by 2020. And that’s before $2.6 trillion for Obamacare, which will surely cost more….

“Part of the problem is that military personnel costs are exploding on pace to exceed the entire defense budget by 2030, according to Andrew Krepinevich of the Center for Strategic and Budgetary Assessments. It’s hard to make the political and moral case to reduce benefits for veterans and soldiers, but here’s where (Defense Secretary) Panetta could show mettle on Capitol Hill, especially by reforming military health care. The bulk of any defense budget is better spent on equipment, training and research….

“The real message to the world is that the Administration wants to scale back U.S. leadership. This was part of the rationale behind the White House’s reluctance to take the initiative in the Middle East last year, as well as the attempts to mollify Iran’s mullahs and Russia’s Vladimir Putin….

“President Obama ended his remarks yesterday by quoting Dwight Eisenhower on ‘the need to maintain balance among national programs.’ The line comes from his 1961 Farewell Address, better known as the ‘military-industrial complex’ speech. Mr. Obama’s new defense posture brings to mind another Eisenhower line offered two years earlier: ‘Weakness in arms often invites aggression.’”

--Back to the issue of military personnel costs, the Pentagon currently spends $181 billion, a third of its budget, on this item: $107 billion for salaries and allowances, $50 billion for health care and $24 billion in retirement pay.

--The park ranger killed in Mount Ranier National Park in Washington was from Westfield, New Jersey, two towns over from me. As I’ve noted many times before, there are no finer people in America than those serving in our national park service. 

--The debris from the Japanese tsunami, which is measured in the millions of tons and includes chunks of whole towns, is expected to hit California in 2014. Researchers say this could include shoe-encased feet. Said one to future beachcombers, “Be respectful.”

--I didn’t realize Chelsea Clinton was just on a 90-day contract with NBC. Evidently, she is going to provide the network with two more scintillating stories and then it’s sayonara. Sources told the New York Post’s Page Six that Chelsea was “set up for a fall” after NBC trumpeted her deal to become a full-time correspondent. I mean we were told by Brian Williams et al that Chelsea was going to be the new force behind their “Making a Difference” series, but no one mentioned the short contract at the time.

After her debut, the Washington Post’s Hank Stuever opined:

“Either we’re spoiled by TV’s unlimited population of giant personalities or this woman is one of the most boring people of her era.”

--I see a New York Times reporter is releasing a book titled “The Obamas” that doesn’t paint Michelle in a pretty light. This could be fun, though I’m not about to rush out and buy it.

--Sign of the Apocalypse: I was having lunch at McDonald’s the other day here in Manchester and this guy was looking for a booster seat for his kid. What I learned in the ensuing conversation with the manager is that someone came in and just walked off with the chair they had.

--Actually, there were a number of articles from around the world this week on the real apocalypse, according to the Mayan calendar, December 21, 2012, this being the end of a 5,126-year cycle, bringing the return of Bolon Yokte, a god associated with war and creation.

I haven’t begun to make special preparations, but I’m thinking it could impact the holiday shopping season some. You know, malls will be more crowded, so get your Christmas shopping done early, which actually I’ve largely done already so, hey, I am prepared. Bring on Bolon Yokte. Hope he likes beer.

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

Gold closed at $1616
Oil, $101.56

Returns for the week 1/2-1/6

Dow Jones +1.2%
S&P 500  +1.6%
S&P MidCap +1.4%
Russell 2000 +1.2%
Nasdaq +2.6%

Bulls 49.5
Bears 30.5 [Source: Chartcraft / Investors Intelligence]

My tech people and I forgot to fill out the appropriate forms with Apple so the StocksandNews iPad app is still free! Hurry before we get our act together.

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