Week in Review

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Week in Review

01/21/2012

For the week 1/16-1/20

Europe, Washington and Wall Street

European bond markets once again took solace in some successful auctions in the likes of Spain and France, after positive receptions in Spain and Italy the previous week. But let’s not get too carried away. We still have close to 2 trillion euro in debt to rollover in Europe between the sovereigns and the banks this year so that means you’ll have good weeks and bad ones. So far this year Europe, and the U.S., has breathed easier.

But it was a week that saw both the World Bank and International Monetary Fund lower global and country growth forecasts for 2012 considerably. To wit:

The World Bank cut its global GDP forecast to 2.5% from 3.6% as predicted last June. The IMF cut its forecast from 4% to 3.3%. 

The World Bank said the eurozone would contract 0.3% in 2012; the IMF said GDP would fall 0.5%.

Further, the IMF said Italy would contract 2.2% and Spain 1.7% for the year; far worse than their own governments are projecting today.

So the outlook for Europe is not good. The WB warned further, “even achieving these much weaker outcomes is very uncertain.”

“The downturn in Europe and weaker growth in developing countries raises the risk that the two developments reinforce one another, resulting in an even weaker outcome.”

Although contained for the moment, there is a risk of a “much broader freezing up of capital markets and a global crisis similar in magnitude to Lehman.”

In the event of such a crisis “activity is unlikely to bounce back as quickly as in 2008/09, in part because high-income countries will not have the fiscal resources to launch as strong a countercyclical policy response or to offer the same level of support to troubled financial institutions.” [Sydney Morning Herald]

Simply put, Europe’s problems are not solved by any stretch. We’ll find out in the next few days if Greece reaches agreement on a debt restructuring with its private bondholders, who have to accept significant haircuts in a voluntary debt swap, but, if successful, this would be on about 100 billion euro in debt, leaving Greece with almost 250 billion remaining. Considering the economy isn’t likely to grow at anywhere near the rate necessary to keep this new level stable, even with the bailout relief the government would gain from the private holder restructuring, you would never solve the problem. [Ditto Portugal, but that’s for another day.]

It was last Dec. 21 that the European Central Bank injected $630 billion in the form of 1% three-year loans that the banks grabbed off the table like wolverines, racing back to their den to hide it, or they put it right back into the European Central Bank for safe-keeping. Systemic risk was said to be off the table as a result of the ECB’s move, and it would appear this is the case in the very short run. [I just glanced at a Saturday New York Times piece that is bullish on the ECB and the banks. I’ll address this next time.]

You also have German Chancellor Angela Merkel and French President Nicolas Sarkozy’s new EU fiscal treaty that is to be discussed this coming week in a meeting of EU finance ministers ahead of another summit on Saturday. This, too, was unveiled without details last December in an attempt to save the euro and now as details do emerge, there indeed will be tough rules for the euro-17 nations in terms of complying with budget deficit targets, with a European Court of Justice being given the power to fine countries whose balanced-budget laws don’t meet new standards. All 17 nations employing the euro currency have to sign off on the treaty, though Ireland hasn’t decided if it needs to hold a referendum first. 

So assume the treaty is implemented. What does that mean? Lots of austerity; and you’ve seen the above estimates on growth for the eurozone. Plus the main problem is unresolved…the sovereign debt levels! It’s about solvency and the recession will do a number on revenues. Plus you still don’t have a bailout fund of any size in place that could handle the likes of Spain and Italy who are far, far from out of the woods. The European Stability Mechanism that is designed to augment the existing European Financial Stability Fund is pathetic, while the IMF asked its members for an extra $500 billion, which requires $600 billion in contributions (the U.S. has already said ‘don’t look to us on this one’), so we’ll see what the reaction is in the various parliaments who have to deal with an increasingly surly public.

At least the S&P downgrades of the nine European countries after the close last Friday, as well as a subsequent downgrade of the EFSF, didn’t hurt the markets nor lead to spikes in interest rates.

“Too many countries are too optimistic about recovery when all the evidence is now pointing towards a eurozone-wide recession. Contracting output will only exacerbate the revenue shortfalls which have already placed countries on unsustainable fiscal paths.

“Inaction is, perhaps, inevitable for politicians faced with a difficult tradeoff between political expediency and fiscal reality. France, for example, needs to deliver austerity to bring its primary deficit back under control – and also to persuade its eurozone colleagues that Paris is serious about fiscal discipline – yet Sarkozy hopes also to win the presidential election this spring.

“As for omission, the idea of a fiscal pact is all very well but it doesn’t deal with the shortfall of income which led to today’s crisis. Until the 2008 economic collapse, many countries in Europe had good fiscal records. They would surely have met many of the conditions associated with the proposed fiscal union.

“Fiscal conservatives in the eurozone have, up until now, argued that austerity will bring its own rewards: tighter fiscal policy will lead to lower deficits and lower deficits, in turn, will lead to lower interest rates and, hence, faster economic growth. Throw into the mix the gains to competitiveness of lower labor costs associated with austerity and it suddenly looks like austerity really can pay off.

“Within the eurozone, however, the argument hasn’t worked….

“In the months ahead, the eurozone’s difficulties are likely to mount. As the contagion spreads, and as investors lose confidence in the ability of countries to deliver lasting fiscal austerity, countries which, to date, have benefited from immunity will also begin to suffer.

“Next in the firing line may be Germany, not so much because its bond yields are about to spike higher but, instead, because its exporters are hugely exposed to trade with the rest of the eurozone and its financial institutions are groaning under the weight of the region’s financial disorder….

“Germany may end up more like the others, unable to avoid a descent into recession.”

But as Stephen King concluded, this could in turn lead to the European Central Bank biting the bullet and beginning a program of quantitative easing, “using newly-created money to buy government bonds. It won’t solve the crisis – that requires a leap of political imagination – but it would at least make the crisis easier to solve.”

Lastly, watch Romania and the massive protests there over a corrupt government and austerity cuts. It’s also about the gap between rich and poor, that inequality topic that is coming to a head, globally, this year. Hungary remains a potentially explosive issue as well, though here the people are marching against the increasingly authoritarian government of Prime Minister Viktor Orban.

Washington and Wall Street

I get a kick out of those who say the economic data out of the U.S. is much better. Yeah, it’s generally been pretty good, but much better? To bring everyone back down to reality, the future is probably more as the World Bank and IMF project it to be; growth of 2.2% from the former for 2012 (down from its earlier 2.9% estimate) and 1.8% for the U.S. from the latter. Barring Armageddon in Europe, I do grant you that 2% growth with low inflation can be a perfect environment for stocks, normally, but these are not normal times. The world has zero percent interest rates, for crying out loud, for starters, and the developed world in particular needs to continue to delever, both governments and households. Only in the U.S. the households have been doing their part (thought credit is expanding again) while our government stares at the debt clock like Homer Simpson when he’s stumped.

By the way, I’m as comfortable as ever on my crash scenario for some point in the year when the debt discussion forces the market to examine, far earlier than expected, the fact that we are indeed Italy. Recall, we corrected 20% in short order last year over concerns with Europe as well as our debt-ceiling discussion. I think we crash 30% over a short period of time this year on a wicked change in sentiment. This doesn’t require, by the way, that interest rates shoot up through the roof, but enough of a move, coupled with the ever-present hot spots (Iran being most obvious, but not the only one), will lead to the debacle that will have us cowering under the covers.

A few more specifics in the here and now. Earnings have not been great thus far. They have been so-so. Of course there are exceptions, and as I reiterated last time it helps the market isn’t overvalued. I just see a consumer that will be less than robust early on in 2012 (the National Retail Federation is calling for an increase in retail sales of only 3.4% for all of 2012 vs. 4.7% in 2011), while housing may have bottomed but it is far from staging a strong recovery. Sales of existing homes rose a third straight month in December, so this is good, and it’s encouraging that the inventory figure dropped to 6.2 months, the best in quite a while, but there are still a ton of properties in foreclosure that need to be cleared and the median home price is 2.5% less than in December 2010. It’s a bottom. At a bottom there are real values in some areas. But you still have others where you can take your sweet time, unless you think interest rates are about to skyrocket.

At least Citigroup, Wells Fargo, Bank of America and, earlier, JPMorgan Chase, all have announced their strongest loan-growth numbers since the financial crisis, though the percentage increases are far from anything to write home about and what gains there are can in no small part be attributed to problems in Europe, where banks are burrowing ever deeper per the above. Forget trying to find a loan officer there.

Lastly, you have the issue of the Keystone XL pipeline that was to take oil from Canada’s tar sands and transport it down to the Gulf Coast, crossing six states in the process. President Obama ended up caving to his environmentalist supporters, even though the project has been under study, and re-routed where requested, for three years. Nonetheless, the president blamed “the rushed and arbitrary deadline insisted on by congressional Republicans,” as part of the payroll tax holiday and unemployment benefits compromise of last month, that “prevented a full assessment of the pipeline’s impact, especially the health and safety of the American people, as well as our environment.”

This was truly one of the stupider political moves in recent memory (Newt Gingrich called it “stunningly stupid”), though the Republican Party is itself so dysfunctional these days, with the worst lineup of presidential candidates in my lifetime, that it’s anyone’s guess whether the elephants can take advantage of Obama’s blunder.

I really hope Canadian Prime Minister Stephen Harper sticks it to us and builds a pipeline to Canada’s west coast for the purposes of exporting the tar sands oil to China. Harper is going there in February and he just might be signing a deal after getting dissed by the U.S. It’s in his best interests, after all, to diversify his customer base.

Harper’s office issued a statement following the White House’s move that read in part:

“The President explained that the decision was not a decision on the merits of the project and that it was without prejudice, meaning that TransCanada is free to re-apply. Prime Minister Harper expressed his profound disappointment with the news. He indicated to President Obama that he hoped that the project would continue given the significant contributions it would make to jobs and economic growth both in Canada and the United States of America.

“The Prime Minister reiterated to the President that Canada will continue to work to diversify its energy exports.”

“On Tuesday, President Obama’s Jobs Council reminded the nation that it is still hooked on fossil fuels, and will be for a long time. ‘Continuing to deliver inexpensive and reliable energy,’ the council reported, ‘is going to require the United States to optimize all of its natural resources and construct pathways (pipelines, transmission and distribution) to deliver electricity and fuel.’

“It added that regulatory ‘and permitting obstacles that could threaten the development of some energy projects, negatively impact jobs and weaken our energy infrastructure need to be addressed.’

“Mr. Obama’s Jobs Council could start by calling out…the Obama administration….

“There are far fairer, far more rational ways to discourage oil use in America, the first of which is establishing higher gasoline taxes. Environmentalists should fight for policies that might actually do substantial good instead of tilting against Keystone XL, and President Obama should have the courage to say so.”

“Yes, Obama’s decision means that the TransCanada company can submit a new Keystone proposal with a new route through Nebraska.

“After all, he only promised hope and change – not political courage.”

“The central conflict of the Obama Presidency has been between the jobs and growth crisis he inherited and the President’s hell-for-leather pursuit of his larger social-policy ambitions. The tragedy is that the economic recovery has been so lackluster because the second impulse keeps winning….

“The State Department, which presides over the Keystone XL review because it would cross the 49th parallel, claimed the two-month Congressional deadline was too tight ‘for the president to determine whether the Keystone XL pipeline is in the national interest.’ The White House also issued a statement denouncing Congress’ ‘rushed and arbitrary deadline,’ which merely passed with overwhelming bipartisan support.

“Keystone XL has been planned for years and only became a political issue after the well-to-do environmental lobby decided to make it a station of the green cross….

“Such green delusions are sad, and Mr. Obama’s pandering is sadder, though everything the country stands to lose is saddest. If Mitt Romney and the other GOP candidates have any political wit, they’ll vindicate the Keystone’s ‘national interest’ and make Mr. Obama explain why job creation is less important than the people who make a living working for the green anti-industrial complex.”

Street Bytes

--Stocks are off and running in 2012, the best start in 15 years. This week the Dow Jones gained 2.4% to 12720, while the S&P 500 added 2.0% and Nasdaq 2.8%. The major indices are up 4% to 7% already in the first three weeks. But when it comes to Friday’s 96-point gain in the Dow, 2/3s of it came as a result of an $8 move in IBM shares.

--U.S. Treasury Yields

6-mo. 0.06% 2-yr. 0.24% 10-yr. 2.02% 30-yr. 3.10%

Treasuries on the longer end of the curve got whacked a bit on signs of a strengthening U.S. economy and possible progress in Europe, but I’m hardly losing sleep over the move. I mean whoopty-damn-do…the 10-year is at 2.02%.

The inflation news, however, was good. Producer prices for the month of December were down 0.1%, up 0.3% on the core, ex-food and energy. For 2011, the PPI rose 4.8% (not good) but the core was up 3.0%. Consumer prices rose just 0.1% for December, unchanged ex- the stuff we use, and for 2011, the CPI was up 3.0%, 2.2% on the core.

The Fed’s Open Market Committee meets next week and there is a little buzz they may tinker with their previous statement they would keep short-term rates at zero well into 2013. A change in the language could lead to some volatility.

--China’s net holdings of U.S. Treasuries fell in November, though just $1.5 billion to $1.133 trillion, making them still the largest foreign holder ahead of Japan, whose position rose a bit to $1.039 trillion. Foreign buying among all investors was up $54 billion, compared with net buying of $15.3 billion in October.

--As for the Chinese economy, the World Bank is forecasting growth of 8.4% this year, significantly, unchanged from earlier forecasts, while the IMF slightly lowered its China outlook from 8.4% to 8.2%. I think most of us would snap up 8% in a heartbeat. It’s when you get much below this you have cause for concern.

And so it was that China reported fourth-quarter GDP rose 8.9% [9.2% for all of 2011; 10.4% in 2010], which was better than expected and alleviated a lot of concerns over a hard landing.  Nonetheless, 8.9% is the slowest pace in 10 quarters. So here’s the tale of the tape for last year.

Q1 9.7%
Q2 9.5
Q3 9.1
Q4 8.9

The consensus forecast for the first-quarter this year is in the 7.5% range, which should it come to pass would be cause for some heartburn, like with moi. HSBC issued its flash report on January manufacturing, the PMI, and they come up with 48.8. Last time they said 48.7 for December but the government’s official figure was 50.3.

[I have nothing to report on my large China holding. I’m waiting for word from Fujian before passing on any further commentary. They don’t like to act fast, nor do they like being pushed.]

Separately, foreign direct investment fell again, down 12.7% in December, while home prices declined in 52 of 70 cities last month. Housing continues to be the big question mark for this year.

--The World Bank is forecasting growth in Japan of 1.9% in 2012, down from an initial 2.6% estimate, while India was taken way down, from 8.4% to 6.9%.

--Japan may face a summer without nuclear power which would result in large-scale power cuts. 30% of Japan’s electricity supply comes from nuclear. All but five of Japan’s 54 reactors are down for scheduled maintenance and by May these five will have to go down for the same reason. The issue is about how quickly the others are brought back online.

--Amid concerns over a slowdown, the Indian government announced it would launch $35 billion in infrastructure and overseas energy projects.

--Until 2008, for 70 years General Motors was the world’s largest automaker, only to lose the top spot to Toyota. But now GM is numero uno again as sales hit 9,025,942 for 2011 vs. Volkswagen’s 8.156 million and Toyota’s estimated 7.9 million; Toyota having suffered from the Japan earthquake and tsunami. The company said it is back to normal production.

[The European car market fell for a fourth consecutive year in 2011, and this year sure doesn’t look any better. In a direct reflection of the economic environment in Italy and Spain, sales in these two fell 10.9% and 18%, respectively. Germany, on the other hand, saw its sales rise 8.8% compared to 2010.]

--On Friday, the National Highway Traffic Safety Administration suddenly ruled that GM’s Chevy Volt battery-powered car does not pose a safety hazard, specifically a risk of fire; this after there had been three cases where a vehicle caught fire days or weeks after being severely damaged in crash tests.

NHTSA said, “The agency’s investigation has concluded that no discernible defect trend exists and that the vehicle modifications recently developed by General Motors reduce the potential for battery intrusion resulting from side impacts.”

In other words, ‘We’re cramming electric cars and their dangerous lithium-ion battery packs down your throat whether you want them or not.’

--Both Vietnam and Cambodia reported their first human deaths from bird flu, as new cases of the H5N1 virus were reported in Asia and the Middle East. Both victims in Vietnam and Cambodia had been in contact with poultry but there is still zero evidence the virus can be passed person to person, though that remains the nightmare scenario if it mutates.

[I saw a story in the South China Morning Post by Stephen Chen that a researcher at the Institute Pasteur of Shanghai claims to have “found an antibody that could ‘neutralize’ almost every known variation of the H5N1 virus – and probably future mutations.” A bird flu expert in Hong Kong was skeptical whether the findings would result in a commercially viable vaccine.]

--Morgan Stanley posted a fourth-quarter loss of $275 million, its first since 2009, though the loss was less than expected and the company’s stock rose on the news. Quarterly revenue of $5.7 billion was down from $7.7 billion a year ago, owing to a 68% decline in revenue in the institutional services/investment banking areas. MS also said it was capping the cash portion of bonuses at $125,000, with some having their 2011 payouts deferred until the end of 2012.

--Bank of America reported earnings of 15 cents per share but mostly as a result of downsizing as it sold off pieces of the business that didn’t fit its basic banking model. BofA’s real estate business lost $1.5 billion after a 74% decline in new home loans. It did say its credit card delinquency rate declined for an 11th consecutive quarter.

--The performance of Citigroup’s investment banking arm, as was the case with all the others, also helped lead to a disappointing quarter as revenues from trading and mergers and acquisitions dried up, this as rival Wells Fargo is now well head of Citi in terms of market value as Wells saw its fourth quarter profits rise 20%.

Citi said of its dismal performance in the banking division (including trading) that December was “remarkably weak – people just sat on their hands.” Revenues in equities and derivatives saw a 71% decline for the quarter, while fixed income revenues were down 25%. 

--As for Goldman Sachs, it reported a 58% decline in fourth-quarter earnings, though it beat analyst expectations. 

“This past year was dominated by global macroeconomic concerns which significantly affected our clients’ risk tolerance and willingness to transact,” said Lloyd Blankfein, chairman and CEO. “As economies and markets improve – and we see encouraging signs of this – Goldman Sachs is very well positioned to perform for our clients and our shareholders.” [This is the first and only commercial I’ll ever run for them.]

Separately, despite a 21% reduction in compensation and benefits for 2011, the Financial Times reported that during the past 10 years, Goldman has paid its employees $125 billion, twice what it made in net profits. The investment banks, when presented with similar data, always point to talent wars and the potentially devastating impact on company morale if pay or headcount was cut, which is kind of laughable, even if true, mused the one-time Wall Streeter who knows very few in his old profession are remotely ‘worth’ what they are paid. Had I stayed, I would have been in that group as well.

--Google shocked the world, and Wall Street, in not only announcing its costs rose again in its latest quarter, but also that revenue fell far short of expectations. Google’s operating costs rose 35% from a year ago, adding 1,114 new employees in the final three months that took the total increase in headcount to 8,100 for 2011.

But in its search advertising business, the company reported an 8% decline in the average cost per click; the amount advertisers pay for each user. The number of clicks, though, rose 34% from a year before. It’s the first figure that riled up analysts, a real sign that online advertising is losing its shine. Personally, I never thought it worked in the first place.

[Europe’s slowdown was another reason why Google’s revenue picture wasn’t as rosy as expected. The shares fell over 8%, $53.58, on the news.]

--Yahoo co-founder Jerry Yang was pushed out the door. Bye-bye.

--General Electric reported earnings essentially in line with estimates, but revenues dropped 8% from a year earlier, worse than expected. G.E. gets about 20% of its sales from Europe.

--Meanwhile, IBM, Microsoft and Intel all reported slower revenue growth for the December quarter, though the reports were far from poor. Intel was bullish on its outlook, while IBM’s software and services rose, though its hardware sales fell 8%. Microsoft’s issue was a 6% decline in the division responsible for Windows 7 as its assumed buyers are holding off for the arrival of Windows 8 in the second half of the year. Microsoft blamed Europe in part as well.

Back to Intel, it’s important to remember the company had warned in December that revenues would be reduced to $13.7 billion from its previous forecast of $14.7 billion and fourth-quarter sales then came in at $13.9 billion. Intel said current quarter revenues would be 8% lower than the last quarter but the company’s forecast met expectations.

--Kraft Foods announced it would cut 1,600 positions in North America as part of its restructuring into two businesses; snacks and groceries. No word on how many links at Oscar Meyer will be cut.

--I have to admit I had never heard of Megaupload, a file-sharing website that the FBI shut down, but the Hong Kong-based collection of sites generated more than $175 million in criminal proceeds and caused more than half a billion dollars in harm to copyrighted owners. Four, including the founder of Megaupload, were arrested in Auckland, New Zealand and charged with copyright infringement.

This comes as two proposed pieces of legislation before Congress, the Stop Online Piracy Act and Protect IP [Intellectual Property] Act were shelved. Both are highly controversial, not necessarily because they would give the Justice Department power to prevent pirate sites from getting U.S. traffic and revenues, but rather in how broad the government’s powers to shut down other sites may inevitably be. [This is a big issue for Ron Paul and his supporters, and I’m on board with them as it pertains to the chief concern. As the legislation was written, down the road someone who doesn’t like what I say about them could potentially shut StocksandNews down; at least that is the civil liberties nightmare some of us potentially face.]

--As expected, Eastman Kodak Co. filed for bankruptcy protection, hoping to slash expenses, such as pension costs, while forcing tech companies to pay to use its patents. The company hopes the process takes a year or two, but outright liquidation remains a distinct possibility. Kodak still has 17,000 employees, down from 64,000 in 2003. I don’t see how they make it, seeing as Kodak believes its only future is not just through licensing deals but also the printer division which has failed to catch on.

--Oil demand is falling for the first time since the 2008-09 global financial crisis, thanks largely to a mild winter, as well as high prices and softness in Europe. Global oil demand in 2011 was 89.5 million barrels a day, according to the International Energy Agency.

--Saudi Arabia is aiming to keep oil prices at $100. As the Financial Times reports, it’s a sign the kingdom needs higher prices “to sustain a big rise in public spending." Back in November 2008, the Saudis said a “fair price” was $75-a-barrel. The IMF estimates Riyadh needs at least $80 to balance its budget, up from $50 in 2008. Ten years ago it was $20-$25.

--Back in December 2005, right after Hurricanes Katrina and Rita did a number on our energy infrastructure in the Gulf region, natural gas hit an all-time high of $15.38. This week it hit a 10-year low, closing on Friday at $2.34. Frack Frack.

--California home sales rose 4.2% in December, though the median price fell 3.1% compared with a year ago, which made for the 15th consecutive decline.

--New York City’s unemployment rate ticked up to 9.0% in December as the city lost 8,400 private sector jobs, with restaurants (2,400) and the securities industry (2,000) losing the most. Health services, on the other hand, added 2,300.

Separately, in a story by Shane Dixon Kavanaugh in Crain’s New York Business, “A third of New York City retail workers support families on less than $10 an hour and more than half rely on government programs for health care or simply live without it.” Yikes…when you realize how little the median income in the sector of $9.50 an hour gets you in this area. Additionally, while retail used to be considered an entry-level job, today more than 70% of surveyed workers had completed some college or possessed a college degree. 71% of retail workers do not receive health benefits of any kind through their work.

--Here’s another example of the erosion of the middle class. The state of Connecticut announced it was hiking tuition and fees next fall at its public universities and community colleges by 3.1% to 3.8%, which isn’t much but it is once again more than the percentage wages are rising, and of course in prior years tuition increases were way over the wage rate.

--I missed this last time. Atlantic City’s casino revenues rose in December, up 4.2%, for the first increase in 3 ½ years. For 2011, however, revenues were down 6.9% from 2010, the fifth year in a row the take has declined as competition surged.

The 2011 revenue of $3.3 billion compares to the 2006 peak of $5.2 billion, the year Pennsylvania opened the first of what would be 10 casinos across the Delaware River. 

--In the latest prosecution of insider trading cases, seven traders and analysts at various hedge funds were arrested for “forming a criminal club” that netted them profits of $62 million. Two of those charged are former employees of SAC Capital, Steve Cohen’s $13 billion hedge fund behemoth, bringing to four the number of ex-SACers who have been nailed as part of the government’s ongoing probe of such activity. [I admit to a little confusion on the various stories I’ve read, one of which said that among those arrested was a current SAC employee.]

--According to a New York Times study, 60% of those in the so-called “1 percent” succeeded on their own, without inherited wealth, and are three times more likely than the “99 percent” to work 50 hours a week or more. They account for nearly one in three dollars of all philanthropic giving. The 1 percent also pays more than 25% of all federal taxes while earning less than 20% of all pre-tax income.

--Pandora, the online radio service, now has 125 million registered users, up 50 million in the past year. Not too shabby. It has a 68% market share of Internet radio listening.

--What can you say about the Costa Concordia disaster other than it would appear the captain, Francesco Schettino, deserves life in prison, if the latest stories of incompetence and cowardice are proved in a court of law. 11 people not only died, with another 21 missing as I go to post, but he no doubt will have caused a coming decline in cruise ship bookings until the blowback from this tragedy subsides. That means lost jobs.

It is important to note, however, that it is possible the rock the ship hit was uncharted because Lloyd’s List, a leading maritime publication, said the ship had sailed close to the island, Giglio,  in August, when it came within 230 meters of the coast – “slightly closer to the shore than where it subsequently hit rocks on Friday.” [Sydney Morning Herald]

That said, Schettino then proceeded to make every mistake in the book and there are questions about his sobriety and the sharp turn that may have caused the ship to list severely.

In terms of financial losses, Carnival Corp., which owns the Italian operator, estimated that preliminary losses from having the Concordia out of commission would be between $85 million and $95 million, along with other costs. The company’s deductible on the ship was $30 million. In addition, the company faces a deductible of $10 million for third-party personal injury claims.

The three companies that insured the cruise ship face losses in excess of $500 million. It cost about $580 million to build when commissioned in 2004, according to the current euro-dollar exchange rate.

--In 2011, the U.S. consumed 3.7 billion bottles of wine, passing Italy and France in the process to become number one in the world by volume, according to a study by International Wine and Spirit Research. That would be a fun think tank to work at. [Growth in China should carry the industry the next decade or so.]

“Woman offered sexual favors for Chicken McNuggets, police say”

Shares in Mickey D’s hit another all-time this week, not that one has to do with the other.

Foreign Affairs

Iran: The mullahs have vowed to block the Strait of Hormuz, through which almost 20% of the world’s oil flows, if the United States and its allies block Iran’s oil exports. U.S. Defense Secretary Leon Panetta counters that the military is “fully prepared” to deal with any Iranian effort to close the Strait.

Top U.S. officials have been meeting with Israel to try and convince the Netanyahu government not to launch a preemptive strike on Iran’s suspected nuclear weapons facilities in the hope of setting the program back a few years, the U.S. preferring that sanctions be given longer to strangle the Iranian economy and perhaps precipitate a change in regime, or have the current leadership climb down and agree to international controls on its nuclear efforts.

The U.S. and Israel were to have conducted the largest joint air defense exercises between the two, ever, this April but they were postponed, with an Israeli spokesman saying the “timing is not right,” even as other representatives of both governments said the postponement was for technical reasons. We know who is telling the truth on this one.

Israeli Defense Minister Ehud Barak said Israel was “very far off” from finalizing any plan to employ force, while Israeli intelligence said Iran has not yet committed to actually building a bomb.

Saudi Arabia said that if Iran were to shut the strait, the kingdom would ramp up production to meet Iran’s lost supply and then some, as I’ve argued for years now, but Tehran warned the Saudis against doing so.

Those are some of the facts. Here’s what else we know. The White House’s latest effort to get its allies to refuse Iranian oil exports has been a big time failure, with the exception of the EU, sort of. Just a week ago, Japan acted as if it would stop taking in Iranian oil after long-term contracts were honored, but now Japan is backing off, not knowing how it would plug the hole in demand. South Korea said it can’t afford to risk damaging its fragile economy by not taking in Iran’s oil at this time. China, as I noted last time, said it wouldn’t comply, though it denounced Iran’s pursuit of nukes. This week India also said it would ignore the U.S. sanctions regime and only honor existing UN resolutions, so India will continue to accept Iran’s oil. And the European Union will ban the oil, but it is waiting until summer to give Greece, Portugal and Spain time to find alternative suppliers.

We also know that per my discussion of last week on Dimona, Israel’s nuclear reactor, that it is indeed being shut down soon. I told you what that means. Israel would do this to limit the damage from any fallout should Iran strike it in retaliation for a move on Iran’s facilities.

We also know that the odds of a misstep or miscalculation on the part of the Iranians increases with each day as its naval forces ply the same waters as the United States, the latter continuing to increase its presence.

At the same time, Israel’s government is being pressured by some of its coalition members to be tougher, though Netanyahu has said, “For the first time I see Iran wobble” due to the sanctions.

As for my opinion, I maintain my May timetable of a U.S. strike despite all the talk to the contrary. Again, it’s about the political calendar. I hope Iran backs down beforehand, and that there isn’t a mistake in the waters that could lead to war. 

Just understand that Israel cannot, and will not allow Iran to get the bomb. Netanyahu would never let this happen on his watch. The U.S., with its firepower, needs to be part of any operation. Imagine, for example, Iran with the bomb and what Hizbullah could do. It wouldn’t be too easy for Israel to move into Lebanon with Hizbullah acting under an Iranian nuclear umbrella.

This week, Russian Foreign Minister Sergei Lavrov warned against the U.S. or Israel acting preemptively. “The consequences will be extremely grave…It will trigger a chain reaction and I don’t know where it will stop.”

Russia wants talks between the six powers and Iran to resume. I don’t believe it will get to that.

Finally, Mark Helprin wrote the following in an op-ed for the Wall Street Journal.

“To assume that Iran will not close the Strait of Hormuz is to assume that primitive religious fanatics will perform cost-benefit analyses the way they are done at Wharton. They won’t, especially if the oil that is their life’s blood is threatened. If Iran does close the strait, we will fight an air and naval war derivative of and yet peripheral to the Iranian nuclear program, a mortal threat the president of the United States has inadequately addressed.

“A mortal threat when Iran is not yet in possession of a nuclear arsenal? Yes, because immediately upon possession all remedies are severely restricted. Without doubt, Iran has long wanted nuclear weapons – to deter American intervention in its and neighboring territories; to threaten Europe and thereby cleave it from American interests in the Middle East; to respond to the former Iraqi nuclear effort; to counter the contiguous nuclear presences in Pakistan, Russia and the U.S. in the Gulf; to neutralize Israel’s nuclear deterrent so as to limit it to the attrition of conventional battle, or to destroy it with one lucky shot; to lead the Islamic world; to correct the security imbalance with Saudi Arabia, which aided by geography and American arms now outclasses it; and to threaten the U.S. directly….

“It is true that Iranian proxies would attempt to exact a price in terror worldwide, but this is not new, we would brace for the reprisals, and although they would peak, they would then subside. The cost would be far less than that of permitting the power of nuclear destruction to a vengeful, martyrdom-obsessed state in the midst of a never-subsiding fury against the West.

“Any president of the United States fit for the office should someday, soon, say to the American people that in his judgment Iran – because of its longstanding and implacable push for nuclear weapons, its express hostility to the U.S., Israel and the West, and its record of barbarity and terror – must be deprived of the capacity to wound this country and its allies such as they have never been wounded before.

“Relying solely upon his oath, holding in abeyance any consideration of politics or transient opinion, and eager to defend his decision in exquisite detail, he should order the armed forces of the United States to attack and destroy the Iranian nuclear weapons complex. When they have complied, and our pilots are in the air on their way home, they will have protected our children in their beds – and our children’s children, many years from now, in theirs. May this country always have clear enough sight and strong enough will to stand for itself in the face of mortal threat, and in time.”

Israel: Separate from all the above, the Jerusalem Post reported that the Israeli Defense Force (IDF) “has ordered the Southern Command to prepare for a possible large Gaza operation that could occur within the next few months.”

A member of the General Staff said this week, “Gaza is possibly Israel’s most volatile front today. It is a front that can explode at any given moment.”

Hamas’ weaponry has grown significantly and it’s estimated they have a fighting force of 20,000, while the IDF is concerned with the smuggling of sophisticated weaponry into Gaza – such as Russian made anti-tank missiles and shoulder-to-air missiles that were stolen from Libyan military storehouses.

On a different topic, Israel and Saudi Arabia are engaged in a cyberwar, with each attacking the websites of each other’s stock markets and other interests. Israel’s El Al was hit, for example. Both sides have left little doubt their actions are politically motivated. Israel’s deputy foreign minister, Danny Ayalon, said Israel regarded any hack attack as “comparable to terrorism,” and vowed to respond in kind.

Syria: The Arab League’s observer mission is over, at least for a few days, and a most fruitless one it has been as violence actually picked up while the monitors were there. The monitors were supposed to determine if the Bashar Assad regime had kept its pledge to end the crackdown and they quickly learned that wasn’t the case. Immediately after they left a place, the Syrian troops would move back in. Arab foreign ministers are to meet on Sunday to plot their next step. Last week on “60 Minutes” the emir of Qatar said sending Arab troops in to halt the bloodshed was a distinct possibility but this seems highly unlikely. An extension of the mission, though, is possible. What we do know is Iran’s head of the Revolutionary Guards’ Quds Force has been in Syria, no doubt coordinating military aid from Tehran.

Civil war has broken out, whether some want to use the term or not. The opposition is now in control in the town of Zabadani, near Damascus, while Assad is having problems in parts of Damascus itself. The death toll is now over 5,400 in the ten months of the uprising.

Last Sunday in Beirut, at a conference on democracy in the Arab world, UN Secretary General Ban Ki-moon said, “Today, I say again to President Assad: Stop the violence. Stop killing your people”

Ban added, on the topic of the Arab Spring in general:

“It is sometimes said that authoritarian regimes, whatever else their faults, at least kept a lid on sectarian conflict. This is a cruel canard. Yet it would be equally mistaken to assume that all of the new regimes now emerging will automatically uphold universal human rights….

“The old way, the old order, is crumbling. One-man rule and the perpetuation of family dynasties, monopolies of wealth and power, the silencing of the media, the deprivation of fundamental freedoms that are the birthright of every man, woman and child on this planet – to all of this, the people say: Enough!” [Washington Post]

Ban also addressed the topic of Hizbullah in Lebanon, saying he was “deeply concerned about the military capacity of Hizbullah and…the lack of progress in disarmament.”

To which Hizbullah leader Sheikh Nasrallah replied: “Our concern is that our people are comforted that there is a resistance in Lebanon and we will not allow a new occupation or another violation.” So, no, he will not disarm.

[Beirut was rocked this week by a building collapse that claimed 27 lives. Entire neighborhoods are probably unsafe as structures built in the 1950s in particular have flimsy foundations on what is basically sand.]

Iraq: The leader of the secular Iraqiya party, Ayad Allawi, said “Sectarianism is coming back in force in this country. Iraq is passing through the most dangerous phase in its history.” In just two instances in the past week, 53 Shiite pilgrims were killed as they headed towards a Sunni town for a religious celebration, while 21 were killed in fighting at a police compound in Ramadi.

The New York Times also reports that “Iraqi authorities have detained a few hundred foreign contractors in recent weeks, industry officials say, including many Americans who work for the United States Embassy, in one of the first major signs of the Iraqi government’s asserting its sovereignty after the American troop withdrawal last month.”

Most of the time, Iraqi officials claim the paperwork isn’t in order as their reason for detaining the workers. An adviser to Iraqi President Jalal Talabani told the Times, “The Iraqi public is not happy with security contractors. They caused a lot of pain.”

Afghanistan: Not a good 24-hour period, Thursday-Friday, as six U.S. Marines were killed in a helicopter crash, while four French soldiers were gunned down by an Afghan soldier they had been training. French President Sarkozy immediately suspended France’s participation in the critical training program for Afghan troops and there are fears France could withdraw all its troops early, which would be a huge blow to coalition efforts. Others would surely follow.

Pakistan: It was another chaotic week as Army chief Gen. Kayani and President Zardari met to clear the air and attempt to reach consensus on the current security situation in the country. Kayani is not looking to launch a coup, according to sources, but he may not mind if the Supreme Court dismisses the government.

To that end, Prime Minister Gilani appeared before the Court after being charged with contempt for not pursuing corruption allegations against Zardari, with Chief Justice Chaudhry warning: “If an institution like the Supreme Court is not respected and an attempt is made to lower its prestige in the eyes of the general public, then it would be very difficult to administer justice.”

The government believes new elections are the only way to break an impasse between the government, military and the Court, but elections are not due until next year. The Court adjourned Gilani’s hearing until Feb. 1.

Meanwhile, former cricket star Imran Khan continues to make waves, as the rising political star supports a court-sanctioned military removal of the government. Khan has drawn crowds nearing 100,000 the past few months.

Yemen: Al-Qaeda militants have seized full control of a town in the south, freeing 150 prisoners after overrunning an army position, killing two while the others fled, as reported by the AP. It’s not the first such town to fall to Al-Qaeda. And what’s the first thing that happens when they take over? The schools are closed.

Egypt: Military ruler Field Marshal Hussein Tantawi said his country is facing unprecedented “grave dangers,” this as the nation prepares for a new wave of protests planned for next week. The activists will be calling for the military to step down as they mark the first anniversary of the start of the uprising. The military has said it intends to hand power over to an elected president by the end of June, but no way the election takes place by then.

Speaking of which, Mohamed ElBaradei, the Nobel-Prize winning former head of the International Atomic Energy Agency, said he was dropping his presidential bid in protest over the military’s continued rule.

“The former regime did not fall,” ElBaradei said in a statement. “My conscience does not permit me to run for the presidency or any other official position unless it is within a real democratic system.”

ElBaradei didn’t stand a chance of winning, but his endorsement could be important. In lower house of parliament voting, Islamists took roughly 70% of the vote, with similar results expected in the upper chamber.

Turkey: Tens of thousands protested in central Istanbul on Thursday, calling for more democracy and human rights. The government has vowed to enact judicial reforms. The protest came on the anniversary of the killing of a Turkish-Armenian journalist and writer, Hrant Dink. On Tuesday, a court convicted just one of 19 alleged co-conspirators. Dink had written of the massacre of ethnic Armenians in 1915, thus drawing the ire of ultranationalists.

China: Saturday’s reelection of Taiwan President Ma was accompanied by a big sigh of relief in both Washington and Beijing, the latter not wanting to ready its 1,500 missiles targeting the island just yet. Ma captured 51.6% of the vote, six points ahead of his main challenger, Dr. Tsai, the chairwoman of the pro-independence Democratic Progressive Party (DPP). Tsai then quit as party boss. Ma won 58.4% of the vote in 2008.

“In the next four years, cross-strait relations will be more peaceful, with greater mutual trust and the chance of conflict will be less,” he said in his victory speech.

A spokesman for Beijing’s Taiwan Affairs Office said, “We sincerely hope that the Taiwan society could be stable and people live a happy life. We are willing to join hands with Taiwan’s [people from] all walks of life on the basis of continuing to oppose Taiwan independence and sticking to the ‘1992 consensus,’ to break new ground for the peaceful development of cross-strait relations.” [The 1992 consensus, an unofficial agreement that there is only one China, but with a different interpretation as to who is the legitimate sovereign representative, is not recognized by the DPP.]

President Ma may have improved relations with the mainland, but he faces big issues at home, namely stagnating wages, inequality, rising unemployment and home prices and rents that are out of reach of many in the cities.

--Chinese Premier Wen Jiabao called again for political reform, saying the people’s demands for same and the protection of their interests should be respected.

“I always emphasize that reform, not only economic reform but also political reform, should be carried out.

“It is of paramount importance for the government to maintain close ties with the people, listen to the public’s opinions and their voices and improve the government’s work, so as to better develop the economy, improve people’s livelihood and bring good to them.”

Along these lines, there have been significant protests lately, such as one involving thousands of Chinese workers at a Sanyo Electric Co. plant in Shenzhen, the workers protesting over compensation and job security. Sanyo and Panasonic are consolidating operations there and the workers are worried they’ll receive no compensation if let go.

--Premier Wen was a busy beaver, traveling to the Middle East to sign new energy deals, such as one with Saudi Arabia, as China needs to diversify sources, seeing as it gets 11% of its oil these days from Iran.

--For the first time, Beijing said the number of people living in cities outnumbered those living in the countryside, as more and more look for better economic opportunities in urban areas.

--Defense News confirmed that China test-launched six submarine-launched ballistic missiles sometime in December. As noted by Wendell Minnick:

“Such a capability could eventually allow China to launch a surprise attack on U.S. cities with nuclear-tipped ballistic missiles.”

Well, that’s yet another reason to sleep with one eye open.

North Korea: Kim Jong Un’s older brother, Kim Jong Nam, told a journalist with Tokyo Shimbun that the new regime is “a joke,” and that the “regime will not last long.”

“Without reforms, North Korea will collapse, and [even if] such changes take place, the regime will collapse. I think we will see valuable time lost as the regime sits idle fretting over whether it should pursue reforms or stick to the present political structure.”

Meanwhile, Kim Jong Un’s main adviser, a Politburo member and family confidante, Yang Hyong Sop, told the Associated Press that Kim Jong Un is ready to lead, saying he spent years working closely with his father and helped him shape economic and military policy. Really. [The AP is the first Western news agency to open a bureau in Pyongyang.]

And correction…it turns out Kim Jong Un’s birthday is going to be February 16, the “Day of the Shining Star.” I’m assuming Earth, Wind & Fire was invited to play, though hopefully they turned down the invitation. 

Russia: Surprisingly, at least to yours truly, Vladimir Putin’s approval rating has improved the past few weeks despite the protests against his rule. One survey now has 45% ready to vote for Putin on March 4, up from 42%. Veteran Communist leader Gennady Zyuganov is at 10%. [Another survey I saw has Putin at 42%, with Zyuganov and nationalist Vladimir Zhirinovsky tied with 9%.] Putin needs 50% to avoid a run-off.

The current president, Dmitry Medvedev, made a concession to the opposition by pledging to restore direct elections for regional governors, such elections having been abolished by Putin in 2004. But lest you think this is a significant move, the Kremlin will have a major say in who the candidates are through a “presidential filter.”

Putin himself launched an attack on the West, writing in Izvestia of his candidacy:

“In several regions of the planet destructive forces are becoming more active and aggressive, ultimately threatening the security of all nations in the world. Those states that are trying to ‘export democracy’ through the use of military methods objectively become their allies at times.

“Even the best of intentions do not justify the violation of international law and the sovereignty of states.”

On a different topic, Deputy Prime Minister Dmitry Kozak acknowledged that preparations for the 2014 Sochi Olympic Games are not where they should be. Out of 400 venues, 70 are well behind schedule. You couldn’t pay me to go to these Olympics. It could be terror central.

Finally, as the Fobos-Grunt Mars space probe crashed into the Pacific Ocean the other day, only about 10,000 miles from where the Kremlin initially said it would, the investigation into why the probe went haywire shortly after takeoff continues and the government said it will conduct tests to see whether U.S. radar played a role in the spacecraft’s failure, as I noted last week. Deputy Prime Minister Dmitry Rogozin, who hates the U.S., said, “This theory has a right to be presented.”

It is indeed very possible U.S. radars located in Alaska, which are as powerful as any in the world, and for good reason, could have affected the probe. But even Rogozin conceded the failure could also be a result of defective equipment. Regardless, it is going to be interesting to see how this plays out.

France: Losing its AAA-credit rating may not have impacted France’s bond market yet, but it hurt President Sarkozy’s reputation, having pinned so much of it on his country’s financial standing, and now, ahead of the April 22 presidential vote, he is trying to persuade French workers to take pay cuts in exchange for job security. The size of the state is choking growth in France; a full 56% of the economy vs. 46% in both Germany and Italy. There are 18% more state workers than in 2002, and the unemployment rate is up to 9.9%.

As for the election, an Ifop survey has Socialist Francois Hollande at 27%, with Sarkozy at 23.5% and National Front candidate Marine Le Pen at 21.5%. I’ve predicted Marine will prevent Sarkozy from gaining the run-off, which French voters say he’d lose anyway by a wide margin to Hollande. Marine’s father, Jean-Marie, moved onto the second round in 2002.

Another poll, LH2, has Hollande at 30, Sarkozy at 23.5, and Le Pen at 17, though she was rising in this one.

Nigeria: Trade unions called off a debilitating nationwide strike after the government cut fuel prices by a third and promised to tackle corruption in the oil sector. President Goodluck Jonathan had removed the subsidy on the price of gasoline on Jan. 1, but was forced to give in, though the price is still substantially higher than the old one.

But Jonathan has to remove the subsidy eventually. It costs $8 billion a year, or more than the combined 2012 budgets for health, education, housing and social welfare.

And here’s a depressing item. The main suspect in a Christmas Day bomb attack on a church that killed 37 escaped within 24 hours of his arrest. Police caught the guy on Tuesday and while they were taking him to his house to conduct a search, their vehicle came under fire and in the process the suspect got away. [Boko Harem conducted more bombings on Friday, killing at least seven.]

Kosovo: 140 were arrested after police clashed with protesters who were trying to stop traffic from Serbia from entering the territory. Serbia, you’ll recall, doesn’t recognize Kosovo’s independence, which it declared in 2008.

Britain: Here’s a sleeper potential flashpoint…the Falklands. Prime Minister David Cameron has approved a contingency plan for a rapid increase in Britain’s military force there should Argentina act up as the 30th anniversary of the 1982 conflict is approaching. 255 British servicemen and 652 Argentines died in the war. What could add to the tension is the presence of Prince William, who has lobbied to take his deployment as a search and rescue co-pilot there next month and in March. I would back off a few months if I were the Brits and tell William to do it later in the year. Argentina invaded the islands in April of ’82. There is, however, no evidence Argentina is preparing a move today.

Random Musings

--Helluva day on Thursday in terms of Republican presidential politics, eh? Rick Perry, in his best speech yet, bid us adieu; Rick Santorum learned he was the actual winner in Iowa, not Mitt Romney; and Newt’s ex-wife, Marianne, gave an interview wherein she said Newt wanted an open marriage as he was having an affair with his assistant, current wife Callista. Then came Thursday’s seminal debate. More below. But first…

--A CNN/TIME/ORC poll of South Carolina Republicans prior to Saturday’s primary had the following:

Mitt Romney 33 percent
Newt Gingrich 23
Rick Santorum 16
Ron Paul 13

Two weeks earlier, the same poll had Romney ahead of Gingrich, 37-18. But the current one was taken before the week’s two debates.

--An NBC/Marist poll of South Carolina Republicans had:

Romney 34
Gingrich 24
Paul 16
Santorum 14

But…those polled before the Fox debate, Tuesday, actually had Romney ahead 37-22. Those polled by NBC/Marist after the debate had it:

Romney 31
Gingrich 26
Santorum 19

Again, all the above were before Thursday’s tussle, after which Newt surged. Was it enough? A Clemson University poll conducted on Friday had Newt ahead of Romney by six points.

Romney 43
Santorum 19
Gingrich 18

“(Thursday’s) face-off in South Carolina was the most interesting and revealing to date. What started out as a triumph for Newt Gingrich in media bashing became an effective showcase for he, Mitt Romney and Rick Santorum, who drew the first real blood from Gingrich.

“Moderator John King started off with an idiotic set-up for Gingrich, asking him directly about his ex-wife Marianne’s allegation about his demand for an open marriage. And Newt was off railing at the media, decrying the attack and getting an ovation from the crowd. The episode confirmed that: 1) King is certainly the dimmest man on cable news and 2) If the election were against the media rather than Barack Obama, Gingrich would be ideal.”

I’ve learned the past few months that Jennifer Rubin is must reading. Continuing…

“Gingrich may have met his debating equal in Rick Santorum. Certainly, Santorum’s answers lacked punchy topic sentences, but he made devastating points. He tied Gingrich to Romney on the individual mandate. He sounded like a Romney surrogate in indicting Gingrich’s conduct as speaker and Newt’s failure to execute his ideas. He chastised Gingrich for suggesting he get out of the race, saying ‘these are not cogent thoughts.’ He dinged both Romney and Gingrich on abortion…He rebuked both Gingrich and Romney on illegal immigration…And he summarized his case as effectively as he has to date: ‘I’m steady, I’m solid, I’ll make Obama the issue.’ Boom. In other words, I’m more conservative and I’m not going to give you a coronary. It might not be enough in South Carolina, but he’s got a theme for the primaries ahead.”

The big problem I’ve read about Santorum, forgetting whether you agree or disagree with his positions, is that he is immensely long-winded. I’m thinking if he was elected, 500 people would freeze to death on the National Mall listening to his Inauguration Address. Future State of the Union speeches would have to start at 6:00 p.m. Eastern time to finish before 11:00. You need to think about these things before you go to the polls.

--Republican Party of Iowa officials told the Des Moines Register that while it is not certain, it appears Rick Santorum actually won the Iowa caucuses by a 34-vote margin, not the 8-vote deficit he initially had to Mitt Romney. The problem is results from eight precincts are missing and will never be recovered and certified. GOP officials discovered inaccuracies in 131 precincts, including in one that shifted the vote by 50. So some of the Iowans counting the votes that night were rather sorely lacking in the fundamentals. 

The new numbers read 29,839 for Santorum and 29,805 for Romney.

What an embarrassment, though, that Iowa Republican officials couldn’t get their act together that evening, let alone at least a few days before New Hampshire.

And so much for the narrative that Mittens was the first non-incumbent Republican to win both Iowa and New Hampshire.

--In a new nationwide Washington Post/ABC News poll of registered Republicans and Republican-leaning independents, Romney took 36%, with Gingrich and Paul tied with 16% while Santorum had 13%. [But, again, before Thursday’s game-changing debate, or so some believe.]

--In a national Rasmussen poll of Republican voters, Mitt Romney captured 30%, but Newt Gingrich was at 27%.

--When asked, Romney said he probably had an effective income tax rate of 15%, to which Newt Gingrich replied:

“31% of my income belonged to the government.” Touting his plan for a 15% optional flat tax, he added: “My goal is not to raise Mitt Romney’s taxes; it’s to let everybody pay Mitt Romney’s rate.” Gingrich later said he would rename his proposal the Mitt Romney Flat Tax.

--ABC News reports that Romney has millions invested in the Cayman Islands, a known tax haven, but a spokesman for the campaign said, “The Romneys’ investments in funds established (there) are taxed in the very same way they would be if those funds were established in the United States. These are not tax havens and it is false to say so.”

But ABC News says documents it obtained show that Bain Capital has set up 138 secretive offshore funds in the Caymans. Campaign officials say the accounts in the Caymans are designed to help attract money from foreign investors.

--John Farmer / Star-Ledger…a good summary of Mitt Romney in terms of what Republicans are wrestling with.

“What are his core beliefs? Does he have any? Does he even know himself what they might be? It’s an issue that stirs his Republican rivals as much as it does the Obama Democrats. Indeed, it’s about the only example of bipartisan agreement we have in current U.S. politics.

“Conservative GOP critics oppose Romney because they don’t believe his post-Massachusetts conversion. Establishment Republicans who support him do so for exactly the same reason. They don’t believe him, either.

“Romney fans ask, with reason, ‘Can’t a guy change his mind out of real conviction?’ And the answer is ‘sure he can.’ Some of Romney’s switches doubtless reflect real changes of heart.

“But many seem too conveniently timed to dovetail with his shift from pleasing moderate-to-liberal Massachusetts to placating the radical right-wing elements dominant in the GOP today….

“The real potential threat to Romney at the moment is former Pennsylvania Sen. Rick Santorum – not so much for his ideas or personality as for the contrast he offers in the area of authenticity.

“Like him or not, Santorum is as genuine as Romney is not. He is today just what he was during 16 years in Congress – the ultimate Christian soldier marching out to war against godless government….

“Santorum would present a stark choice. He’s exactly what you see and what he says he is. Romney, on the other hand, is, well…what?

--President Obama gives his third State of the Union address on Tuesday and the aforementioned Washington Post/ABC News poll found that 52% say Obama has accomplished “not much” or “little or nothing” as president, while 47% assess his record positively. They are identical to attitudes two years ago. In a hypothetical matchup vs. Mitt Romney, Romney leads 47-46. Obama’s overall job approval is 48%, with 48% disapproval. In this survey, Obama’s approval rating bottomed at 42% last fall.

But one issue clearly in Obama’s favor is that of inequality. By 55% to 38%, more Americans consider it the biggest economic issue today, more so than over-regulation of free enterprise. A majority of independents say inequality is the bigger issue.

--In a New York Times/CBS News poll, only 31% of independents express a favorable opinion of Obama. [In 2008, Obama won 52% of the independent vote vs. 44% for John McCain.] 7 in 10 Republican voters nationwide want more options. 28% of the public also says the economy is getting better, the most optimism in this survey since last February. Obama’s official approval rating is 47%. Congress’ approval rating is still near a record low at 13%. [A separate CNN/ORC poll has Congress’ approval rating at 14%, while the ABC/Washington Post survey shows Congress at 16%.]

Nationally, Republicans gave Romney 28%, Gingrich 21%, Santorum 16% and Paul 15%.

--A Gallup poll finds that 40% of Americans identify themselves as “conservative,” compared to 35% “moderate” and 21% “liberal.”

“There’s a lot to deplore about President Obama’s proposed military drawdown, but here’s a possible silver lining: It may finally force the Pentagon to stop buying weapons and equipment in the wasteful way it has since the 1960s. Changes in military acquisition could not only save hundreds of billions of dollars but could also allow our defense industry to relearn how to build the best possible weapons at the lowest possible cost….

“(Anyone) wondering why an F-18 fighter that should cost $18 million costs $90 million, or why operating a future fleet of F-35s is slated to cost more than $1 trillion, needs to realize that these problems arise out of a procurement system that dates back to the age of vacuum tubes and hi-fi sets.

“Created in the 1960s by then-Secretary of Defense Robert McNamara and his vaunted team of ‘systems analysts,’ the five-stage Planning, Programming, Budgeting and Execution System is a one-size-fits-all process for buying weapons and equipment for all the military’s services. By insisting on a rigorous review at every stage, the system was supposed to bring business-style accountability and cost control to the Pentagon.

“Instead the system has become a bureaucratic nightmare. Pentagon acquisition employs more than 30,000 people – the equivalent of two full Army divisions.”

But while Arthur Herman praises former Defense Secretary Robert Gates for circumventing the entire system to get the Mine Resistant Armored Reconnaissance vehicles (MRAPs) that the troops needed in Iraq, Herman in his lengthy piece doesn’t once mention corruption. It’s rampant.

--I liked a point Ron Paul made in Tuesday’s debate concerning military spending and his desire to slash same. Paraphrasing, “Let’s say we spend $1 billion on an embassy in Baghdad. You consider that defense spending. I consider that waste.”

--Thank God Rick Perry is out. In Tuesday’s debate, he said Turkey was “ruled by Islamic terrorists.”

That’s Turkey, as in our NATO ally. Yes, an Islamist is running the country, and as I point out above there are concerns as to the direction of democracy in the country, but there is zero proof Erdogan is a terrorist. Heck, I’m the guy calling for Turkey to invade Syria. Just give it to them, in return for better relations with Israel, which Turkey has issues with. But, alas, we won’t have Rick Perry to kick around anymore.

--New York City Mayor Michael Bloomberg and New York Governor Andrew Cuomo have both called for teacher evaluations on a grand scale. Bloomberg has proposed giving $20,000 raises to “highly effective teachers,” but they must pass a new rating system. He has vowed to ax half the teachers in the 33 lowest-performing schools…and without the union’s consent. Needless to say, the union isn’t fired up about this.

“Historically, teachers unions around the country have opposed rewarding great teaching through merit pay, but more and more teachers are asking why,” said Bloomberg.

The head of the United Federation of Teachers, Michael Mulgrew, said research shows plans such as Bloomberg’s don’t improve educational results.

Meanwhile, Gov. Cuomo vowed to set up his own teacher evaluation program if unions and local officials can’t reach a deal in 30 days. Speaking on Martin Luther King Day, Cuomo said:

“One of the greatest injustices to right is the failing of the public-education system.

“It’s about…perpetuating the education bureaucracy. It has become about the business of education more than the achievement in education.”

Both Bloomberg and Cuomo don’t want to lose federal aid and this issue will be propelled quickly to a conclusion one way or another.

Interestingly, this week former British Prime Minister Tony Blair gave an interview to the London Times in which he expressed regret for not doing enough to remove teachers who didn’t meet high standards.

--This is depressing. As reported by Michael Winter of USA TODAY, “Federal biologists announced that up to 6.7 million bats in 16 states and four Canadian provinces may have died from the white-nose fungus since it was detected six years ago, a die-off that a conservationist today called ‘a potential extinction event.’”

It’s been six years since the syndrome was discovered, and biologists report mortality rates of 90% to 100% at some sites.

--In New York, there is a rapidly growing backlash against the new Tom Hanks, Sandra Bullock film, “Extremely Loud and Incredibly Close,” which tells the tale of a fictitious little kid who searches for answers after the death of his father at the World Trade Center. A big problem is the studio is running incredibly insensitive ads, such as video displays on New York City subways that show a clip of the burning Twin Towers, which is a snippet in the film. Amazingly stupid on the part of Warner Bros. 

--I’m launching a personal crusade. From time to time I’ve told you of a professor I had at Wake Forest who once when I finished an answer to his question with “you know?” he replied, “Mr. Trumbore, no I don’t know!” I swear I’ve thrown in ‘you know’ no more than five times in my life since. You sound like a moron when you do so.

So somewhere, somehow, about 18 months ago it seems, when someone says something we agree with, but we want the person to ‘move along,’ everyone has started going “right right right” or “yeah yeah yeah.”

This drives me up the wall, watching CNBC as I do all day as one of the morning guys in particular is always going “right right right.”

It’s freakin’ rude, people! I’ve caught myself doing this once and I hope I never do it again. Treat people with respect…know what I’m sayin’?

--I continue to buy up all the incandescent light bulbs I can find, especially those on sale at my local A&P. I’ve also decided I need to redo my will. I told a friend the other day he could have them if I go first.

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

Gold closed at $1667
Oil, $98.37

Returns for the week 1/16-1/20

Dow Jones +2.4% [12720]
S&P 500 +2.0% [1315]
S&P MidCap +2.6%
Russell 2000 +2.7%
Nasdaq +2.8% [2786]

Returns for the period 1/1/12-1/20/12

Dow Jones +4.1%
S&P 500 +4.6%
S&P MidCap +5.8%
Russell 2000 +5.9%
Nasdaq +7.0%

Bulls 50.0
Bears 29.8 [Source: Chartcraft / Investors Intelligence]

Have a great week. I appreciate your support.

Brian Trumbore

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