Week in Review

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Week in Review

01/28/2012

For the week 1/23-1/27

Washington, Europe and Wall Street

Last time I wrote, “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.”

Well, the volatility didn’t occur but Chairman Ben Bernanke and his band of Fed governors did indeed tinker with the language; as in now the Fed says it will hold rates at zero until late 2014, or maybe it won’t.

You see, for the first time the Federal Reserve released the individual forecasts of all 17 Fed officials and six of them believe the Fed will begin increasing rates again before 2014, so it’s not like the Fed is really committed to hold rates down as it told you and Bernanke later conceded as much in his press conference. What the Fed is looking for, however, is to keep long-term interest rates as low as possible for as long as possible until a housing recovery takes hold; such a recovery being necessary if the U.S. economy is ever going to take off again.

You see, on Friday the flash estimate on fourth-quarter GDP came in at 2.8% growth, or the sixth straight quarter below 3%. On countless occasions I’ve pointed out how during the Reagan recovery off the 1981-82 recession, we had six straight quarters of growth above 5%. Oh, what the heck…one more time. Dedicated to the Gipper with love.

Q1…5.1%
Q2…9.3
Q3…8.1
Q4…8.5

Q1…8.0
Q2…7.1

Q3…2.5
Q4…2.3

Q1…0.4
Q2…1.3
Q3…1.8
Q4…2.8

Hey, look at that steady progress the last few quarters. Outstanding! Then again, this is all the White House probably needs to get the chief occupant re-elected…enough growth to enable the unemployment rate to tick down a little more…say from the current 8.5% to 8.2%.

After all, it’s about trends and sentiment. In the latest Wall Street Journal/NBC News poll, 30% of the people believe the country is headed in the right direction. Hardly a positive for the White House…but it’s eight points better than just a month ago. 60% believe the nation is on the wrong track, but that figure was 74% in October. President Obama’s job approval is up to 48% and for the first time in seven months, more people approve of his performance than disapprove (46%).

On the economy, 37% expect it to get better over the next year, 17% say it will get worse. Just last month, optimists outnumbered pessimists by only a 30 to 22 margin.

But back to the Federal Reserve, if the economy continues to show improvement, however haltingly, they will hike rates before 2014. That’s a guarantee, even if inflation stays tame, because that would mean housing is finally recovering. In the meantime, the Fed chairman couldn’t give a damn about those of you on fixed income who thought you were doing things the right way all your lives…saving and putting that money in a secure instrument, such as a savings account, CD, or money market fund. I keep using the example of a $100,000 nest egg that would supplement one’s Social Security check. At 2% that’s $2,000 a year, $40 a week. That’s a lot for someone in that situation. Take the wife out to a movie and McDonald’s for some simple enjoyment, for example. “It’s our date night,” you’d tell the neighbors with a smile.

But not today. Ben Bernanke said in his press conference that he understands “savers are getting a lower return.” Try zero, Ben! Bernanke explains, “Savers are dependent on a healthy economy to get good returns…low interest rates are needed to restore the economy, which in turn leads to higher returns on all assets.”

Some of us just want to scream. It can only be an academic exercise, but after we had turned the corner in 2009 following what was then the Fed’s appropriate zero interest rate policy to prevent Armageddon, the Fed should have normalized rates; 2% on the funds rate. No way the 10-year in that scenario would have then been above 4%, so historically low mortgage rates would have still been the norm for prospective homebuyers. Any hints of inflation would have been extinguished. The dollar would have been stronger and chances are the commodity bubble of 2010-2011 wouldn’t have occurred, which did a number on food and fuel prices. Yes, it’s all hypothetical, and even I won’t tell you what I received in my Economics or Finance classes back in school. One thing I can guarantee, though, shares in McDonald’s would have been even higher than they are today.

“Policy experimentation continues unabated in the U.S. with the Federal Reserve launching on Wednesday a new initiative to influence market valuations and, through this, the outlook for the country’s economy. The Fed hopes to use greater transparency to mould expectations in a manner that promotes economic growth and price stability. But this new approach could also create confusion and even greater hesitancy on the part of healthy balance sheets to engage in productive investments….

“On Wednesday, the Fed showed how it intends to use ‘communication’ as a much more active tool to inform and influence economic outcomes. But this approach goes well beyond the concept of greater transparency. By publishing members’ individual forecasts – specifically, the annual evolution of the policy rate, the timing of the first hike and a long-term natural rate – the Federal Open Market Committee wants to provide a firmer and steadier outlook to encourage investors, in both physical and financial assets, to commit to long-term decisions.

“Few expect this new initiative to have an immediate or durable impact. Beyond 2012, individual FOMC members’ forecasts are quite dispersed, including a 0.25% to 2.75% range for the target Federal Funds rate for end of 2014….

“We need to see a significant clustering of FOMC member forecasts that could credibly translate into a medium-term vision for policy rates, and greater responsiveness on the part of households, companies and investors to price movements. But even these will not prove sufficient unless the Fed’s continued activism is part of a more comprehensive policy response out of Washington. As yet, there is little to suggest that we are moving quickly enough to meet this requirement.”

“The two most powerful men in Washington have a big disagreement. No, not President Obama and Speaker John Boehner. We mean Mr. Obama and Federal Reserve Chairman Ben Bernanke, who can’t seem to agree on the health of the U.S. economy.

“On Tuesday night, the President proclaimed that the ‘state of our Union is getting stronger,’ employers are hiring faster than they can find skilled workers, and manufacturing is booming. Less than a day later, Mr. Bernanke and his Open Market Committee downgraded their already modest growth outlook and said the recovery is so vulnerable that the Fed must keep interest rates at near-zero for another three years.

“The contradiction may not be as profound as it seems. Mr. Obama is running for re-election and this time he needs to sell austerity more than hope, while the Fed is still trying to reflate the housing market that it seems to believe is the main driver of economic growth. The Fed is straining to deliver the asset-price ‘stimulus’ that Mr. Obama can’t any longer get out of Congress….

“The central bank had already promised to keep short-term rates near-zero through most of 2013, but now it feels the need to assure investors it will keep them there through the end of 2014. That would be six years in total, more than half of what may eventually become known as the Fed’s Zero Decade.

“Mull that one over: The Fed is declaring that it needs to run the same super-easy monetary policy when the economy is growing by 2% or 3% as it did amid the worst of the financial panic….The unavoidable implication is that the Fed doesn’t think the economy will grow any faster until what would be halfway through Mr. Obama’s second term….

“But intervening so directly to keep rates artificially low has made the bond market useless as a price signal or indicator of risk across the larger economy.

“The Fed is thus pushing investors of all kinds further out on the risk curve with consequences no one can foresee – least of all the Fed, as we are now learning from the just-released FOMC transcripts from 2006.

“Recall that during the last decade the Fed assured everyone there was nothing to worry about as it kept rates too low for too long, only to create a housing bubble it never did recognize. Recall, too, how its second round of bond-buying (QE2) in 2010-2011 was supposed to lift stock prices but in addition sent commodity prices soaring. Consumer confidence plunged as Americans felt the strain of higher prices for food and energy, and the economy has done notably better since QE2 ended.

“Where will the risk-taking excesses show up this time? Who knows.”

One thing we do know about the Fed’s interest rate policy. It’s holding down the level of interest expense on the budget deficits. In combination with Europe’s woes, Treasuries have been the place to be and that will continue to help Treasury as it sells an estimated $970 billion of bonds in 2012, according to Credit Suisse. As economist Ed Yardeni told Bloomberg:

“The Fed has been the great enabler of the government’s fiscal excesses. The Fed’s zero interest rate and quantitative-easing policies have squelched any protests by the bond vigilantes.”

But, the debt load continues to rise and interest expense will rise as well, to $474 billion this year, according to the Office of Management and Budget. Imagine when interest rates finally take off, not that I’m forecasting that any time soon, though the debt crisis will hit home at some point this year and I’ve told you what will happen then.

As to the U.S. economy and the latest data, December durable goods rose a better than expected 3.0%, but new home sales for the month were less than expected as was the leading economic indicators figure for December. Jobless claims for the past week also rose substantially off their multi-year lows. And you had that 2.8% GDP number that contained less than sterling personal consumption and consumer spending data, as well as a troubling increase in inventories that could augur for diminished manufacturing activity the first half of this year. At least the inflation component of the GDP report was good.

The week also saw another slew of earnings reports and while the likes of Apple and Caterpillar were excellent, many of the others were so-so at best, or, as in the case of McDonald’s, the stock may just be getting a bit pricey. Additionally, Chevron’s big miss on Friday didn’t help matters.

Which leads me to the State of the Union (SOU) address. In reporting on it, one thing is easy. President Obama is always good when it comes to leaving out the details so I don’t have to get many down for the record. It’s just nice to know “America is back. Anyone who tells you our influence is in decline doesn’t know what they’re talking about.” And, “America remains the one indispensable nation in the world and I intend to keep it that way!”

The president did pull out his class-warfare rhetoric, though to be fair it wasn’t quite as partisan as it could have been. But in providing the one detail of the evening, that millionaires would have to pay an effective tax rate of 30% (the ‘Buffett rule’), he also talked of those earning $250,000 having to pony up more but here there were no details as to how he intends to fill the gap.

“The White House says that if a millionaire household’s effective tax rate falls below 30%, it would have to pay a surcharge – in essence a new Super Alternative Minimum Tax – to bring the tax liability to 30%. For those facing this new Super AMT, all deductions and exemptions would be eliminated except for charity.

“The Buffett rule is rooted in the fairy tale that taxes on the wealthy are lower than on the middle class. In fact, the Congressional Budget Office notes that the effective income tax rate of the richest 1% is about 29.5% when including all federal taxes such as the distribution of corporate taxes, or about twice the 15.1% paid by middle-class families.

“This is because wealthy tax filers make most of their income from investments. Such income is taxed once at the corporate rate of 35% and again when it is passed through to the individual as a capital gain or dividend at 15%, for a highest marginal tax rate of about 44.75%....

“One implication of the Buffett rule is that all millionaire investment income would be taxed at the shareholder level at a minimum rate of 30%, up from 15% today….

“The new 30% capital gains rate would be the developed world’s third highest behind only Denmark and Chile…This is on top of the 35% corporate rate that is already the second highest rate in the world after Japan. That giant sucking sound you hear come January 2013 would be hundreds of billions of investment dollars fleeing to China, India, Korea and other U.S. competitors.”

As Jennifer Rubin reports in the Washington Post, citing a Gallup survey:

“About half (49%) of Americans agree with President Barack Obama’s claim that the U.S. economic system is unfair, while 45% say it is fair. At the same time, 62% say the U.S. economic system is fair to them personally.”

And then there was the Republican rebuttal to Obama, offered up by Indiana Gov. Mitch Daniels.

“In three short years, an unprecedented explosion of spending, with borrowed money, has added trillions to an already unaffordable national debt. And yet, the president has put us on a course to make it radically worse in the years ahead. The federal government now spends one of every four dollars in the entire economy; it borrows one of every three dollars it spends. No nation, no entity, large or small, public or private, can thrive, or survive intact, with debts as huge as ours.

“The president’s grand experiment in trickle-down government has held back rather than sped economic recovery. He seems to sincerely believe we can build a middle class out of government jobs paid for with borrowed dollars. In fact, it works the other way, a government as big and bossy as this one is maintained on the backs of the middle class, and those who hope to join it….

“The routes back to an America of promise, and to a solvent America that can pay its bills and protect its vulnerable, start in the same place. The only way up for those suffering tonight, and the only way out of the dead end of debt into which we have driven, is a private economy that begins to grow and create jobs, real jobs, at a much faster rate than today.

“Contrary to the president’s constant disparagement of people in business, it’s one of the noblest of human pursuits. The late Steve Jobs – what a fitting name he had – created more of them than all those stimulus dollars the president borrowed and blew. Out here in Indiana, when a businessperson asks me what he can do for our state, I say, ‘First, make money. Be successful. If you make a profit, you’ll have something left to hire someone else, and some to donate to the good causes we love.’

“The extremism that stifles the development of homegrown energy, or cancels a perfectly safe pipeline that would employ tens of thousands, or jacks up consumer utility bills for no improvement in either human health or world temperature, is a pro-poverty policy. It must be replaced by a passionate pro-growth approach that breaks all ties and calls all close ones in favor of private sector jobs that restore opportunity for all and generate the public revenues to pay our bills.

“That means a dramatically simpler tax system of fewer loopholes and lower rates. A pause in the mindless piling on of expensive new regulations that devour dollars that otherwise could be used to hire somebody. It means maximizing on the new domestic energy technologies that are the best break our economy has gotten in years….

“No feature of the Obama Presidency has been sadder than its constant efforts to divide us, to curry favor with some Americans by castigating others. As in previous moments of national danger, we Americans are all in the same boat. If we drift, quarreling and paralyzed, over a Niagara of debt, we will all suffer, regardless of income, race, gender, or other category. If we fail to shift to a pro-jobs, pro-growth economic policy, there will never be enough public revenue to pay for our safety net, national security, or whatever size government we decide to have….

“In word and deed, the president and his allies tell us that we just cannot handle ourselves in this complex, perilous world without their benevolent protection. Left to ourselves, we might pick the wrong health insurance, the wrong mortgage, the wrong school for our kids; why, unless they stop us, we might pick the wrong light bulb!...

“There is nothing wrong with the state of our Union that the American people, addressed as free-born, mature citizens, cannot set right…a program of renewal that rebuilds the dream for all, and makes our ‘city on a hill’ shine once again.”

In its latest policy statement, the Federal Open Market Committee warned:

“Strains in global financial markets continue to pose significant downside risks to the economic outlook.”

This was a week that started out with positives, as a combined eurozone reading on manufacturing and the service economy for January was above the 50 line, 50.4, with Germany at 54 and France 50.9. But the figure on manufacturing alone was 48.7 for the region, so still in contraction territory. And despite the fact Italy had some successful bond auctions, with its rates coming way down on the short end, as well as seeing its 10-year trade below 6.00% for the first time since December, Italy still has 450 billion euro to go this year in terms of rolling over its debt and financing the massive deficit.

Much is being made of the success of the European Central Bank’s Longer-Term Refinancing Operation, or LTRO, that injected 489 billion euro into the banking system in December. A second LTRO is slated for February 29.

No doubt, in the short run the ECB’s ‘Fed-like’ move has stabilized the banking system in terms of what was a distinct funding crisis end of 2011, a la Lehman. The system had freezed up. Banks weren’t lending to each other.

Well they still aren’t to any large degree, but the ECB’s infusion, at a 1% lending rate for 3 years, did strongly encourage the banks to go out and use the cash to buy sovereign debt, such as that of Spain and Italy, with much higher yields. Nice spread, eh?

But not all the cash is being used in such a fashion. First off, much of it was used to just refinance the banks’ short-term obligations. Much of the rest of it is being hoarded. It’s why S&P is projecting that Europe’s default rate may soar to 8.4% or worse, from 4.8% at the end of 2011. The lending window is closed, especially for small business, highly-leveraged businesses (read risky private-equity deals from the mid-2000s), and generally anything in southern or eastern Europe. I would argue that while Spain and Italy have caught a break for the time being, and as stocks rally on the continent, the contagion is most definitely spreading. 

Just on Friday, Fitch knocked down the credit ratings of Italy and Spain again, along with those of Belgium, Slovenia and Cyprus, having previously telegraphed their actions back in December. Fitch noted:

“The divergence in monetary and credit conditions across the eurozone and near-term economic outlook highlight the greater vulnerability” these nations face in the event of financing shocks.

This past week saw the same old arguments re-emerge. The IMF wants Europe to adopt a greater firewall for the likes of Italy and Spain and German Chancellor Angela Merkel doesn’t want to contribute more resources and guarantees. British Prime Minister David Cameron concurred with the IMF’s Christine Lagarde in blasting Merkel at the World Economic Forum, stressing that while progress has been made, a much stronger firewall was needed to prevent contagion.

U.S. Treasury Secretary Timothy Geithner echoed the IMF and Cameron in his own comments at the WEF, saying, “The only way Europe’s going to be successful in holding this together, making monetary union work, is to build a stronger firewall.”

Get the picture? Europe remains a house built with sticks when it needs one built with bricks. But it seems leaders won’t reassess the size of the bailout funds already in place until they meet in March.

And there’s the issue of growth. With the austerity cuts and ongoing credit crunch, it’s hard to see where it’s going to come from. Even a shallow recession, if Europe is lucky, needs to be followed by robust growth or the crisis will be never-ending.

Finally, there’s Greece. It doesn’t go away. In fact it just gets worse. The nation is in Depression and the technocrat-led government is in full panic mode, needing to get private bondholders to agree to a restructuring of about a 1/3 of its sovereign debt or Greece won’t be eligible for more bailout funds come March and would thus default. Those, like JPMorgan’s Jamie Dimon, who say a Greek default wouldn’t be that harmful are nuts. You never hear anyone talk about the pictures we’d see on our television screens. You want to see riots? They’ll be as ugly as any you’ve seen in your lifetime, and they would spread, like to Romania, Albania and Bulgaria, for starters. It’s the Balkans, after all.

One must hope an agreement on debt restructuring is reached this week, though that would still in no way be the end of the problem for Greece and the eurozone. It would just supply more short-term relief.

Consider this, after all. The Financial Times on Friday got hold of a copy of a German government proposal that calls for Greece ceding sovereignty over tax and spending decisions to a eurozone ‘budget commissioner’ before Germany would allow Greece to secure a second 130 billion euro bailout.

“In what would amount to an extraordinary extension of European Union control over a member state,” write the FT’s Peter Speigel and Kerin Hope, “the new commissioner would have the power to veto budget decisions taken by the Greek government if they were not in line with targets set by international lenders. The new administrator, appointed by other eurozone finance ministers, would take responsibility for overseeing ‘all major blocks of expenditure’ by the Greek government….

“Athens would also be forced to adopt a law permanently committing state revenues to debt service ‘first and foremost.’”

Such a proposal has long been rumored, and Greek voters are already upset at existing EU representatives looking over their shoulders as every decision is made, but this would cross the line in their minds.

So the crisis continues, even if it’s been just simmering the past 4-6 weeks. It will boil over again.

One other item non-related to Greece and the euro. As I explain below, this coming week is a crucial one with regards to the Iranian nuclear program. This could be the lead for my next review.

Street Bytes

--The Dow Jones’ winning streak was snapped as it fell 0.5% to 12660, after approaching the May 2008 high of 12829, before the crisis, and the April 2011 high of 12811, post-crisis. The S&P 500 eked out a one-point gain, while Nasdaq, riding Apple’s success, finished up 1.1% to 2816. Trading volume this month, by the way, is off 16% from last January’s pace.

[From the Wall Street Journal’s “Heard on the Street” column… “S&P 500 companies are on track to boost earnings by 9.5% year-on-year in the fourth quarter…hardly a catastrophe. But AIG juices the numbers. The insurance giant is expected to post earnings of 62 cents a share, versus a whopping year-ago loss of $16.20. Strip that out and the S&P 500’s earnings growth rate falls to just 2.2%.” And as I pointed out the other day, the earnings outlook for 2012 is plummeting vs. last summer’s expectations for the current year.]

--U.S. Treasury Yields

6-mo. 0.08% 2-yr. 0.21% 10-yr. 1.89% 30-yr. 3.06%

The 10-year in particular rallied big time following the Fed’s announcement, as well as another bout of uncertainty over Europe’s debt crisis.

--Fiscal revenues soared 24.8% in China last year, just slightly ahead of projected gains of 8%. Spending rose 21.2%. With the added revenues, the government can do all manner of things, like cut taxes, more help for the poor, education, healthcare. 

On the GDP front, an adviser to the Central Bank is forecasting 8.5% growth in 2012.

--Brazil’s unemployment rate hit a record low of 4.7% in December, which augurs well for the 2012 economy there after stumbling in the second half. The government is predicting growth of 4.5% for this year with lower inflation.

“Germany’s economy looks like that of the U.S. a generation ago.

“In 1975, manufacturing accounted for about 20% of the United States’ economic output, or gross domestic product, about the same as in Germany today. Since then, U.S. manufacturing’s share of GDP has slid to about 12%.

“In 1975, the U.S. budget deficit was a manageable 1% of the economy, about the same as Germany’s now. Last year, the U.S. deficit was about 10%.

“American families in the 1970s and early ‘80s typically saved about 10% of their take-home pay, about the same as in Germany today. The U.S. savings rate these days is in the low single digits.”

--Retail sales in Russia rose 9.5% in December from a year earlier, better than forecast, while unemployment fell to 6.1%. Not bad…not bad at all.

--Tokyo-based tech giant NEC, in forecasting its third annual loss in four years, announced it would cut 10,000 jobs, 7,000 of which will be eliminated in Japan, with the bulk of these coming from the mobile-phone business. NEC had 154,800 employees in 2007 and after the cuts will be down to around 116,000, including earlier reductions.

--China suffered its second bird flu death in a month, the victim being in Guizhou province in the south-west; a 39-year-old man who said he had no contact with poultry.

--I can’t say I’ve ever flown Norwegian Air Shuttle but the airline is looking to become a big player in Europe’s low-cost air business and towards that end announced it was buying 222 new aircraft from Boeing and Airbus for $21.1 billion. Many feel the carrier is betting on the demise of SAS. Norwegian plans to launch long-haul operations to the U.S. in 2013.

--Dublin home prices have fallen below the 200,000 euro mark for the first time since early 2000; off another 17% in 2011, according to the Irish government. Prices are off 47% in the last five years. Prices fell in December at the fastest rate since Feb. 2010.

But…the Demographia International Housing Affordability Survey, which examines 325 cities in English-speaking countries, concludes homes in Dublin finally reached affordable levels for thousands on average salaries. [Irish Independent]

--Years ago I invested in an electric car battery company, Ener1, and thankfully got out of it after breaking even. On Thursday, the company filed for Chapter 11 bankruptcy. Ener1 was another beneficiary of the Obama administration, with the Energy Department awarding it $118 million in stimulus funds. Just one year ago, Vice President Biden visited the company’s new battery plant in Indiana. So add this one to the Solyndra ($535 million) narrative. Yes, some companies fail, or as President Obama said in his State of the Union address, “Some technologies don’t pan out…But I will not walk away from the promise of clean energy.”

House Energy and Commerce subcommittee Chairman Cliff Stearns (R-Fla.) countered:

“Sadly, the Department of Energy’s jobs record seems to grow worse by the day…and it is American taxpayers who are paying the price.”

The administration forecast that Ener1 would have a workforce of 1,400 by 2013. It recently had 350.

--As alluded to above, shares in Apple soared 6%+ as the company reported record net profits of $13.06 billion, or $13.87 per share, which exceeded projections of $10.05. Revenues came in at $46 billion, better than the $38.8 billion the Street expected. 30 million iPhones were sold, 15.43 million iPads, and 5.2 million Macs, but iPod sales, at 15.4 million, continued to fall.

--In a poll conducted by the nonpartisan Public Policy Institute of California, 68% of likely voters in the state support Governor Jerry Brown’s plan for higher taxes on individuals earning $250,000 and couples making $500,000. Support for increasing sales taxes is about the opposite as Brown tries to prevent further cuts to education and other budget areas already severely impacted by ongoing austerity. The governor’s approval rating is at 44%.

--Unemployment in California fell to 11.1% last month, with the state adding 240,000 net jobs in 2011 (another figure I saw put it at 263,000), though the jobless rate is still way above the national average of 8.5%. Nonetheless it’s headed in the right direction.

Elsewhere, Alabama showed the biggest decrease in joblessness in December, falling to 8.1% from 8.7% in November, while Nevada’s rate remained the highest at 12.6%, though it’s fallen 2.3 points. North Dakota still has the lowest at 3.3%. Florida, site of Tuesday’s primary, is at 9.9%.

--McDonald’s posted an 11% jump in fourth-quarter profits, beating analyst estimates, as revenue beat slightly as well. Global same-store sales rose 7.5%, including 7.3% in Europe and 7.1% in the U.S. In the latter this was the best performance since 2006.

Mickey D’s now garners 60% of its profits from overseas and only 10% of its new restaurant openings in 2011 were in the U.S. Just five years ago, only 40% of profits were international and the bulk of that came from Europe, as reported by the Financial Times.

[As an aside, while I love McDonald’s, I hadn’t been to a Burger King in quite a while and decided to try their new fries. Fairly tasty, I have to admit. And the Whopper was more than edible.]

--Subway (“Eat fresh!”) is opening 600 new branches in the UK and Ireland by 2015. I didn’t realize it already had over 1,400 in the UK (and 100 in Ireland).

--Morgan Stanley Chairman and CEO James Gorman addressed the compensation issue in an interview with Bloomberg television. Those who don’t grasp the reasoning behind the average cut in pay of 20% to 30% for investment bankers and traders need to adjust their attitude.

“You’re naïve, read the newspaper, No. 1,” said Gorman. “No. 2, if you put your compensation in a one-year context to define your overall level of happiness, you have a problem which is much bigger than the job. And No. 3, if you’re really unhappy, just leave. I mean, life’s too short.”

Gee, I kind of like Mr. Gorman after reading this. I’d just add a fourth point. You are all still grossly overpaid! [Gorman’s own pay was cut 25%.]

--Citigroup also cut 2011 bonuses in its investment banking division by about 30%. Bloomberg reports some businesses had them reduced by as much as 70%.

--I missed this last week. Goldman Sachs cut its charitable contributions to its donor-advised fund by more than 3/4s to $78 million after a steep drop in profits. Back in 2009, $500 million was allocated to the fund; $320 million in 2010. [Crain’s New York Business]

--JCPenney’s new CEO, Ron Johnson, the former Apple exec who arrived to great fanfare, unveiled a plan to ditch its decades-old discounting strategy for one focusing on “everyday prices” while slashing thousands of jobs, many of whom focused on daily re-tagging of merchandise for sales events. Johnson also issued an aggressive 2012 profit outlook and the stock exploded $6 on the news.

--Netflix reported better than expected fourth quarter results and shares soared 22% on Thursday, closing at $116; this after the company rocked the market last fall after losing 800,000 subscribers in the third quarter following a controversial price hike and aborted attempt to separate the DVD business. The 52-week range on the stock is $74 to $304. Just a slight bit of volatility.

--Imagine the battle going on behind the scenes between the New York Stock Exchange and Nasdaq to see who gets the coming Facebook listing.   The social-networking giant will be raising a reported $10 billion in stock sometime this spring, with a filing for the IPO this coming week, according to reports. The company will likely be valued at between $75 billion and $100 billion.

--Yahoo Inc. saw its fourth-quarter profit fall 5% and revenue decline 13% from a year earlier, though these lousy results were in line with expectations. Online display-ad sales fell 4%. Yahoo continues to lose market share to both Google and Bing (though Yahoo has a partnership with the latter). The revenue miss was the 13th consecutive quarter it has done so. I think I’d guide the Street to $30 or $40 next time just to be on the safe side.

--The market was underwhelmed by the announcement Thorsten Heins was taking over the reins at BlackBerry maker Research in Motion, replacing the former co-chief executives, Tweedledee and Tweedledum. What upset the market was that Heins, formerly co-chief operating officer of RIM, said he would consult with his predecessors and that the existing strategy was sound.

“Last week, the ratio of the price of oil to that of natural gas broke through 40 times for the first time ever. To put that in context, in pure energy-equivalency terms, oil should cost somewhere between six and 10 times the price of gas. Right now, Americans are paying an extraordinary premium for the convenience of liquid fuels over natural gas.”

The infrastructure challenge, however, will prevent the nation from benefiting en masse for years to come but the right steps are finally being taken, even as nat gas producers deal with the poor economics that low prices bring. The second-largest producer, Chesapeake Energy, announced it would slash gas drilling by nearly half. Nat gas prices jumped 8% on the news, even more for the week.

--Meanwhile, Apache Corp. acquired Cordillera Energy Partners III for $2.85 billion in a deal that gives Apache 254,000 acres of rich oil and natural gas straddling the Texas-Oklahoma border. New drilling techniques made this one possible.

--Follow-up on the alternative to the Keystone XL pipeline debate. Some of us would love Canadian Prime Stephen Harper to stick it to the Obama White House and build a pipeline to Canada’s west coast instead for the purpose of shipping oil to China. I should have added last week that this potentiality faces all kinds of problems of its own, including protests from Indian tribes whose lands the pipeline would cross, though British Columbians back the idea, 48% to 32%.

--I loved how the president during the State of the Union “took credit for the shale gas revolution he had nothing to do with,” as the Journal put it.

--And you had Obama’s line, “No bailout, no handouts and no cop-outs” just minutes after hailing the auto industry bailout (which, as the New York Post reminds us, began under the Bush administration).

--Speaking of autos, Ford Motor Company reported its third consecutive full-year profit, the largest in 13 years. 41,600 hourly workers in the United States will thus receive profit-sharing bonuses of $6,200, up from $5,000 in 2010.

--According to Helen Kennedy of the New York Daily News:

“Survivors of the Costa Concordia wreck are being offered 30% off future cruises with the company,” along with a refund. To say the least, this is not being received very well by passengers. A class-action suit was filed in Miami, where parent Carnival Cruise Lines is based, seeking $160,000 a passenger – “or almost $513 million if all 3,206 passengers were to be paid.”

--According to a study by the Airlines Reporting Corp., “Passengers can get the lowest airfares if they buy six weeks before their flight.” Ticket prices “soar dramatically about a week before the day of travel,” as reported by Hugo Martin of the Los Angeles Times.

--Despite the drought in the American southwest, the U.S. Department of Agriculture announced that the amount of winter wheat that was planted is up 3% from 2010. The International Grains Council boosted its estimate of the 2012 world wheat crop to a record 690 million metric tons.

--A few years ago I was on the spectacular Ngong Ping 360 cable car outside Hong Kong that takes you to a touristy village in neighboring Lantau (check it on the Web). At first it scares the hell out of you, but then you think nothing could possibly happen. Well, for those of you who have taken it yourself, the other day passengers were stranded for two hours, with no communication and in very cold weather (around 40 degrees). This isn’t a simple ski lift. I can imagine the horror, especially as you can have a car to yourself, as I did. I bring it up because this should have a negative impact on Lantau tourism, a major growth prospect for the Hong Kong region. 

--So the late Liz Taylor had an awesome art collection and Christie’s just sold one work, a Frans Hals painting (he’s one of my favorites) for $2.1 million when it was only expected to sell for $700,000 to $1 million. 

--New York Yankees star Alex Rodriguez has proven to be quite the real estate investor. Eight months ago he acquired a 3,600-foot Upper West Side condo for $5.5 million. Last week it sold for a reported $8 million (or slightly lower). A-Rod previously lived in a building at 15 Central Park West, which is the site of the most successful condo in the world, the penthouse that recently sold to a Russian heiress for $88 million, an apartment Citibank’s Sandy Weill had purchased in 2007 for $43 million. [New York Daily News]

--Starbucks beat expectations slightly for the fourth quarter, but also reported growth in Europe was just 2% vs. 9% in North America (mostly the U.S.), and its full-year guidance was so-so.

However, in four to six locations in Southern California, as well as select stores in Atlanta and Chicago, Starbucks will begin offering beer and wine. In hometown Seattle, it has been testing its alcohol menu since 2010, offering beers for $5 and wines by the glass for $7 to $9. Beer options include Rogue Dead Guy Ale.

But, there are skeptics. A police officer in Valencia, Calif., told the Los Angeles Times, “If I wanted a beer, I’d go to a bar. I bring my grandkids in here. I don’t want to have to deal with a drunk if I’m having coffee.”

Foreign Affairs

Iran: President Mahmoud Ahmadinejad, who has been largely silent lately when it comes to the latest nuclear standoff with the West, owing in part to his travels to Latin America, said on Thursday that he was ready to restart talks with the Group of Five plus one (the five permanent members of the U.N. Security Council plus Germany), but this is all part of Iran’s four corners offense, or stall game. Iran will never give up uranium enrichment so any talks, like the first two rounds, would go nowhere. Given Iran’s increasingly desperate situation with its economy in collapse, however, Iran needs to lower the heat if at all possible. On Sunday, the International Atomic Energy Agency is to launch a mission to Tehran and the key here will be just how much the Iranians want to reveal and whether the IAEA will be able to announce conclusively that Iran is determined to build the bomb. Iran will speak volumes by its actions, or inaction. Will it grant the IAEA access to suspected sites, for example?

On the issue of the increased sanctions being levied by the United States and the European Union, they are indeed having a serious impact. There is a currency crisis in Iran with the citizenry rightfully concerned its wages and savings are becoming worthless, the rial having declined at least 50% in just a few weeks vs. the dollar. Many Iranians are converting what funds they have into gold, or even crossing the border into Iraq to obtain dollars. The U.S. and the EU want to bring Iran’s economy to its knees in the hopes of toppling the regime, while Iran is threatening to preempt the EU’s oil embargo (the EU imports 450,000 barrels of Iranian oil a day, or 20% of Iran’s total exports), slated for six months from now, by refusing to sell to the likes of Greece, Spain, Italy and Portugal any Iranian oil before these countries can find alternatives, the purpose of the six-month EU delay. Iran has also said it still intends to retaliate for the recent assassination of one of its nuclear scientists. And they continue to threaten to close the Strait of Hormuz, through which 20% of the world’s oil flows every day; this as the United States, France and Britain moved six warships thru the Strait in a rather impressive show of force. One U.S. aircraft carrier has more striking power than the entire Iranian air force.

So I just listed a mouthful. But there’s more. Washington extended sanctions to Iran’s 3rd-largest bank, while the EU froze assets of Iran’s Central Bank. Russia, on the other hand, is against sanctions and wants talks, while China, which currently receives 557,000 barrels of oil a day from Iran, is also against sanctions but, significantly, is urging Iran not to build nukes.

It all boils down to this. Is Iran close to a “break out,” where it becomes clear they are enriching uranium from the current 20% to the 90% needed for weapons grade material, a process that could take only weeks; would Iran take this risk today and hope over time the sanctions’ impact on the economy is lessened; will Israel, and/or the United States, run out of patience and decide to act because of intelligence they are receiving that Iran is too close for comfort; and does the U.S. election cycle impact President Obama’s decision-making?

Of course regarding this last point, the November election is critical to any decision Obama makes. You have seen in the past few weeks all manner of reports that Washington is urging Israel to let sanctions play out in the hopes of toppling the regime without the U.S. having to act in tandem with the Israelis.  

But how much longer can Israel stand pat? Israel’s envoy to the United Nations on Tuesday called for further international action.

“Never has it been so clear Iran is seeking to build a nuclear weapon,” Ambassador Ron Prosor said. “Now is the time to act. Tomorrow is too late. The stakes are too high. The price of inaction is too great.”

“(Israeli Prime Minister Benjamin) Netanyahu’s government may calculate that if Israel is going to attempt a strike, doing so during the presidential campaign, when it would have the sympathy of many American voters, is the only way to avoid a major backlash from Mr. Obama, with whom Mr. Netanyahu has a tense relationship. Elliot Abrams, President George W. Bush’s hawkish Middle East adviser, wrote recently that if Israel attacked, “Mr. Obama would be forced to back it and help Israel cope with the consequences. It might even help the president get re-elected if he ends up using force to keep the Strait of Hormuz open and Israel safe.”

And in the Sunday Times Magazine, Ronen Bergman, an Israeli analyst and author of “The Secret War With Iran,” has an extensive piece titled “Will Israel Attack Iran?”

“Netanyahu and (Defense Minister Ehud) Barak have both repeatedly stressed that a decision has not yet been made and that a deadline for making one has not been set. As we spoke, however, Barak laid out three categories of questions, which he characterized as ‘Israel’s ability to act,’ ‘international legitimacy’ and ‘necessity,’ all of which require affirmative responses before a decision is made to attack:

“1. Does Israel have the ability to cause severe damage to Iran’s nuclear sites and bring about a major delay in the Iranian nuclear project? And can the military and the Israeli people withstand the inevitable counterattack?

“2. Does Israel have overt or tacit support, particularly from America, for carrying out an attack?

“3. Have all other possibilities for the containment of Iran’s nuclear threat been exhausted, bringing Israel to the point of last resort? If so, is this the last opportunity for an attack?

“For the first time since the Iranian nuclear threat emerged in the mid-1990s, at least some of Israel’s most powerful leaders believe that the response to all of these questions is yes.

“At various points in our conversation, Barak underscored that if Israel or the rest of the world waits too long, the moment will arrive – sometime in the coming year, he says – beyond which it will no longer be possible to act. ‘It will not be possible to use any surgical means to bring about a significant delay,’ he said. ‘Not for us, not for Europe and not for the United States. After that, the question will remain very important, but it will become purely theoretical and pass out of our hands – the statesmen and decision-makers – and into yours – the journalists and historians.’…

“For their part, the Israelis suspect that the Obama administration has abandoned any aggressive strategy that would ensure the prevention of a nuclear Iran and is merely playing a game of words to appease them. The Israelis find evidence of this in the shift in language used by the administration, from ‘threshold prevention’ – meaning American resolve to stop Iran from having a nuclear-energy program that could allow for the ability to create weapons – to ‘weapons prevention,’ which means the conditions can exist, but there is an American commitment to stop Iran from assembling an actual bomb….

“Matthew Kroenig (of the Council on Foreign Relations and special adviser to the Pentagon, worked on) defense policy and strategy on Iran. When I spoke with Kroenig last week, he said: ‘My understanding is that the United States has asked Israel not to attack Iran and to provide Washington with notice if it intends to strike. Israel responded negatively to both requests. It refused to guarantee that it will not attack or to provide prior notice if it does.’ Kroenig went on, ‘My hunch is that Israel would choose to give warning of an hour or two, just enough to maintain good relations between the countries but not quite enough to allow Washington to prevent the attack.’ Kroenig said Israel was correct in its timeline of Iran’s nuclear development and that the next year will be critical. ‘The future can evolve in three ways,’ he said. ‘Iran and the international community could agree to a negotiated settlement; Israel and the United States could acquiesce to a nuclear-armed Iran; or Israel or the United States could attack. Nobody wants to go in the direction of a military strike,’ he added, ‘but unfortunately this is the most likely scenario. The more interesting question is not whether it happens but how. The Untied States should treat this option more seriously and begin gathering international support and building the case for the use of force under international law.’”

I may refer back to other aspects of the Ronen Bergman article in future weeks, but for now, Mr. Bergman concludes:

“After speaking with many senior Israeli leaders and chiefs of the military and the intelligence, I have come to believe that Israel will indeed strike Iran in 2012. Perhaps in the small and ever-diminishing window that is left, the United States will choose to intervene after all, but here, from the Israeli perspective, there is not much hope for that. Instead there is that peculiar Israeli mixture of fear – rooted in the sense that Israel is dependent on the tacit support of other nations to survive – and tenacity, the fierce conviction, right or wrong, that only the Israelis can ultimately defend themselves.”

Since last fall, you’ve known where I stood. The U.S. will be part of an attack this spring. It’s as much about the political timetable as anything else. 

For now, we’ll learn a lot more with the IAEA delegation next week in Tehran.

Syria: The uprising has reached Damascus’ suburbs as the Syrian government dismissed out of hand a demand by the Arab League for President Bashar Assad to step down in favor of a unity government. Foreign Minister Walid al-Mouallem said Syria was “like a mountain that never shakes in the wind.” But the Free Syrian Army is making advances, if haltingly. The death toll is increasing by 30 to 50 every day; a reported 74+ for Thurs. and Friday.

This week the head of the Syrian Arab Red Crescent was gunned down as he was on his way to Damascus, riding in a vehicle clearly marked with the Red Crescent symbol, according to reports. State-run media blamed “terrorists.” Many of the Gulf states, led by Saudi Arabia, have pulled out of the Arab League’s observer mission, asking the U.N. Security Council to intervene. Actually, it’s hard to tell if anyone is really participating in the mission these days.

As for the Security Council, a Western-Arab draft resolution endorses the Arab League’s call for Assad to relinquish power, but if it comes up for a vote this coming week, it would seem Russia will veto it. Russia, after all, just signed a contract to sell 36 combat jets to Syria, in open defiance of international condemnation of Assad’s crackdown. Russian Foreign Minister Sergei Lavrov said no explanation was necessary and that Russia was acting in full respect of international law and wouldn’t be guided by unilateral sanctions others impose. Yet another example of Obama’s ‘reset’ with Russia that he conveniently left out of the State of the Union when going through his foreign policy successes, which can be counted on one hand. To wit:

Egypt: Final results show that Islamists have captured close to 75% of the seats in the new parliament, though some say the Muslim Brotherhood (47% in the lower house) won’t align itself with the ultraconservative Al-Nour (Salafist) party (25%). A Brotherhood leader told an Arab daily in London that his group will not have dialogue with Israel. Another representative said, “We do not recognize Israel at all. It’s an occupying criminal enemy.”

So to those who say the Brotherhood is moderate, you’re nuts. Others say the Brotherhood will divvy up governmental responsibilities with the ruling military council, with the army getting the foreign policy portfolio. The council still maintains a presidential election will be held in June (I continue to be skeptical on this unless the co-governance arrangement has already been worked out in secret).

One thing is clear. The ruling council is peopled with flat-out idiots. Six Americans working for U.S.-based democracy organizations have been prohibited from leaving the country, including a son of U.S. Transportation Secretary Ray LaHood. A State Department spokesman said, “We are urging the government of Egypt to lift these restrictions immediately and allow these folks to come home as soon as possible.”

I mean we give the Egyptians $1.3 billion in annual aid their military badly needs and of course that was already being reviewed. I’m biting my tongue on this one. Time to invoke my “24-hour rule” to see what transpires the next few days. 

Libya: The National Transitional Council now operates in name only. Amnesty International was among the groups this week that said detainees, such as Gaddafi’s loyalists, are being tortured and killed in prison. “Limbs are being crushed and victims scorched with cattle prods.”

As reported by the London Times, “In Misrata, a commercial hub that withstood months of devastating siege by Colonel Gaddafi’s forces, the systematic torture has become so bad that (Medicins Sans Frontieres) said it would no longer treat detainees, arguing that they were only patching up abused inmates so that they could be tortured again.”

More than 8,000 pro-Gaddafi supporters are being held by militia groups, according to the U.N.

This week, protesters stormed the Benghazi headquarters of the NTC, and this was the birthplace of the revolt. The people demand the ouster of what they claim are Gaddafi-era officials. The NTC, you’ll recall, is internationally recognized.

Separately, Gaddafi loyalists seized control of Bani Walid. Bani Walid was the home of Gaddafi’s son, Seif, who was captured in November but is still being held by militia forces, even though the NTC is demanding Seif be turned over to them. So it’s civil war all over again, and as much a hellhole as you’ll find in the world these days.

Oh, and officials at Cairo’s international airport found a bomb planted in a Libyan Airlines plane that arrived from Tripoli. Explosives experts defused it after a steward found the bomb in a bathroom cabinet.

You only need the cooperation of 2 or 3 others in this part of the world to take down a commercial airliner or two. One thing never far from my mind is just where are the hundreds and hundreds of shoulder-fired missiles that disappeared into thin air following Gaddafi’s fall?

Iraq: Many Iraqis are not happy with the U.S. military judge’s decision to accept Marine Staff Sgt. Frank Wuterich’s guilty plea of negligent dereliction of duty in the killing of 24 unarmed Iraqi civilians in Haditha back in 2005. Charges were previously dropped against six others; a seventh Marine was acquitted amid the “fog of war.” Official reaction in Iraq, however, has been muted.

Meanwhile, Iraqi security forces raided the homes of two prominent Sunni politicians in another sign that Shiite Prime Minister Maliki is targeting Sunnis.

Afghanistan: IED (improvised explosive device) attacks rose to a record 16,554 in 2011 from 15,225 the year before. In 2009, there were 9,304. The number of Afghan civilians killed rose by 10% last year. Mullah Omar supposedly ordered his Taliban forces to stop targeting civilians, which, if true, is then worrisome in that he is being ignored by an even more vicious element (if that’s possible). But fret not. President Obama would have you believe Afghanistan is in his ‘success’ column. [See France below.]

Pakistan: No coup yet, maybe next week. But don’t worry, Stage One will be bloodless.

“Who’s there?”
“Gen. Kayani. Time for you and Prime Minister Gilani to go, President Zardari.”
“OK…Saudi Arabia?”
“Yes…you’ll be happy there.”
“No problemo.”

Ah, but then a little while later comes Stage Two….Gen. Kayani’s office.

Yemen: President Ali Abdullah Saleh is due in the U.S. for medical treatment this weekend, as far as I can ascertain after Saleh left Yemen during the week. The State Department approved Saleh’s request. This has the makings of a “24” episode. You know, an “insider” that is part of Saleh’s security detail at the hospital; a fellow aligned with al-Qaeda, which has been making inroads in Yemen’s south. At least the White House can now convince Saleh to give up power for good (he handed it over before leaving, but you never about this guy), while the State Department desperately tries to find another home for him.

Russia: According to the latest poll, Prime Minister Vladimir Putin gets 49% of the vote for the March 4 presidential election. He needs 50 to avoid a run-off. Another survey has him at 44%. The opposition is staging a big rally in Moscow on Feb. 4, but a pro-Kremlin counter-rally has been scheduled for the same time.   Probable temperatures below zero, however, may limit the crowds in both.

Liberal leader Grigory Yavlinsky is supposedly going to be kept off the March 4 presidential ballot because many of the signatures his people submitted were ruled inadmissible by the Central Elections Commission. How conveeenient. Yavlinsky posed no threat whatsoever to Putin, but it’s seen as revenge for the role his Yabloko party played in exposing December’s fraudulent Duma vote. The Election Commission did say, however, that billionaire Mikhail Prokhorov was on his way to qualifying for the election. Many view him as Putin’s puppet.

Putin himself lashed out against what he called nationalists who threaten the nation’s collapse.

“Nationalism, religious intolerance are becoming a base for radical groups and movements,” he wrote in a newspaper article, though a recent poll found that 43% of Russians support the notion of “Russia for Russians” and that a xenophobic sentiment is on the rise. Opposition forces from both the right and left have blamed uncontrolled immigration, especially from the Northern Caucasus and Central Asia. Sound familiar? Putin counters that migrants wanting to work in the country should pass exams on Russian language and culture.

Yulia Latynina, a political talk show host in Moscow, had an opinion piece in the Moscow Times and I learned this:

“Under Putin’s decade-long rule, Russia earned 1.6 trillion petrodollars and yet failed to build a single modern highway while reportedly having 26 personal palaces built for Putin’s use. Meanwhile, Putin refuses to debate other presidential candidates and believes that anyone who opposes him is a condom, a monkey and a Georgian.” [Putin’s recent description of some of the protesters, including what their ribbons look like. He’s a daffy guy, that Vlad the Great.]

An anonymous source told Interfax that “Russia intends to field short-range missiles in territory that borders multiple NATO states in the latter half of 2012.”

The U.S. Defense Department rejected claims that radar waves caused the malfunctioning of a Russian Mars probe that never made it into orbit and crashed back to Earth. Pentagon spokesman George Little dismissed Deputy Prime Minister Rogozin’s claim that there was evidence to this effect, saying, “I’ve heard of full-mooner theories and this is one of them.”

And for those of you wondering if you can risk flying on a Russian commercial airliner, the answer is an emphatic Nyet. From the Moscow Times:

“A Moscow-bound Boeing 737 operated by the Donavia airline was forced to execute a terrifying emergency landing in Rostov-on-Don on Monday after the cabin lost pressure, causing some passengers to pass out and others to get bloody noses, Interfax reported.”

20 minutes into the flight there was a technical problem in the cabin so the crew did an about face and headed back. One passenger wrote on his Facebook page.

“On the falling airplane everyone was screaming, the oxygen masks fell but weren’t working, blood was flowing from many people’s ears and noses, some have already lost consciousness.”

China: Mike McConnell, Michael Chertoff and William Lynn / Wall Street Journal

“Only three months ago, we would have violated U.S. secrecy laws by sharing what we write here – even though, as a former director of national intelligence, secretary of homeland security, and deputy secretary of defense, we have long known it to be true. The Chinese government has a national policy of economic espionage in cyberspace. In fact, the Chinese are the world’s most active and persistent practitioners of cyber espionage today.

“Evidence of China’s economically devastating theft of proprietary technologies and other intellectual property from U.S. companies is growing. Only in October 2011 were details declassified in a report to Congress by the Office of the National Counterintelligence Executive. Each of us has been speaking publicly for years about the ability of cyber terrorists to cripple our critical infrastructure, including financial networks and the power grid. Now this report finally reveals what we couldn’t say before: The threat of economic cyber espionage looms even more ominously.

“The report is a summation of the catastrophic impact cyber espionage could have on the U.S. economy and global competitiveness over the next decade. Evidence indicates that China intends to help build its economy by intellectual-property theft rather than by innovation and investment in research and development (two strong suits of the U.S. economy)….

“In this election year, our economy will take center stage, as will China and its role in issues such as monetary policy. If we are to protect ourselves against irreversible long-term damage, the economic issues behind cyber espionage must share some of that spotlight.”

The above could easily be a topic of discussion when Vice President Xi Jinping visits the White House on Feb. 14, Xi the president-to-be in 2013. He will meet with President Obama, and also visit California and Iowa.

Xi may have a few questions for Obama concerning security in the Pacific as the administration is negotiating with the Philippines over a renewed presence there to go along with our forces in Japan, South Korea and on Guam.

Nigeria: Further attacks by Islamist terror group Boko Haram killed at least 160 last weekend as the scale of their bombings continues to grow with sophistication. They were always viewed as an al-Qaeda offshoot. Just call them al-Qaeda at this point. The helpless Nigerian government asks one simple question of the group. ‘What the heck do you want?’ [The imposition of Sharia rule, of course.] Imagine, a day after this latest wave, Nigerian police discovered another 10 bomb-laden cars and hundreds of other unexploded devices in the northern city of Kano.

France: This is truly a fascinating time here as the people gear up for the April 22 presidential election. Socialist Party candidate Francois Hollande continues to lead by sizable margins in the polls, but this is a guy who promises if elected to reverse President Sarkozy’s policies by raising taxes on corporations, banks and the wealthy and bringing the retirement age back down from 62 to 60. He’s also promising to create 150,000 subsidized jobs in some of the distressed urban areas. Among his package of 60 measures released this week, Hollande would raise the income tax on those earning about $200,000 a year to 45% from 40%, while maintaining Sarkozy’s plan for a financial-transaction tax.

For his part, Sarkozy is slated to do a “60 Minutes” style interview, Sunday night. He has yet to formally announce his candidacy and is being criticized within his own party for his increasingly somber and dour tone; what some say is a suicidal approach to the election, assuming he does run as everyone expects him to.

France also has problems with Turkey after the French parliament voted to approve a bill making it illegal to deny the genocide that took place with the mass killing of Armenians by Ottoman Turks, with Ankara saying they will take some steps against the French in retaliation. The Holocaust is the only other mass killing recognized as genocide in France and to deny either one would be punishable by up to a year in prison.

On the issue of French troops in Afghanistan following the death of four French soldiers and the wounding of 15 at the hands of an Afghan that was being trained by the French, Sarkozy just announced he has opted to withdraw all French forces one year early, by the end of 2013 instead of end of 2014. 1,000 of 4,000 will leave this year. Far more on this next time.

Hungary: Prime Minister Viktor Orban has acquiesced to pressure by the European Union and IMF and has committed to change laws and adjust policies the two bodies find objectionable, namely restrictions on the independence of the National Bank of Hungary. The IMF issued a review of Hungary’s economy and fiscal situation and said the government’s budget-deficit projections were “broadly appropriate.”

Australia: Prime Minister Julia Gillard had a scary moment during an Australia Day function when opposition leader Tony Abbott questioned an Aboriginal tent city, or “embassy,” as they call it, which has been in place since 1972 in a call for recognition of Aboriginal land rights.

Abbott said, “I think the Indigenous people of Australia can be very proud of the respect in which they are held with every Australian. Yes, I think a lot has changed and I think it’s probably time to move on from that.”

Uh-oh! A co-founder of the makeshift embassy said Mr. Abbott’s remarks were “madness” and “amounts to inciting racial riots.”

So the 100 to 200 protesters on the scene, listening to the comments on radio next door, rushed the restaurant where the two leaders were speaking and riot police had to be called in to whisk Gillard and Abbott away. 

Many have made fun of Gillard for her scared look as she was dragged by security into her vehicle, but that’s unfair. As for Abbott, he is already in line for “Idiot of the Year.”

Random Musings

Jan. 31 – Florida
Feb. 4 – Nevada and Maine caucuses
Feb. 7 – Colorado, Minnesota and Missouri caucuses
Feb. 28 – Arizona and Michigan
Mar. 6 – Super Tuesday! Georgia, Massachusetts, Ohio, Oklahoma, Tennessee, Vermont, Virginia; Caucuses: Alaska, Idaho, and North Dakota

--South Carolina

A week before the South Carolina primary, as I noted last time an NBC/Marist survey had Mitt Romney ahead of Newt Gingrich 34 to 24 percent, with Ron Paul at 16 and Rick Santorum at 14.

Gingrich 40
Romney 28
Santorum 17
Paul 13

A stunning turnaround for Gingrich. Exit polls showed 53% of voters made up their mind in the last few days. 70% described themselves as somewhat/very conservative and 43% of these went for Gingrich. Gingrich received 40% of the Tea Party/Evangelical vote.

--On to Florida…a few days ago in this incredibly fluid race: 

Gingrich 41
Romney 32

[2 weeks earlier, Romney was up by 22 in the same survey.]

Romney 39
Gingrich 31
Santorum 12

A Monmouth University survey in Florida end of the week:

Romney 39
Gingrich 32
Santorum 11

Romney 36
Gingrich 34
Santorum 11
Paul 9

[On Sunday, the same poll had Gingrich leading Romney 38-32, the bump from South Carolina the day before, but it was 38-29, Romney, among those surveyed on Monday and Tuesday.]

Romney 38
Gingrich 29

Gingrich holds a 29% favorable rating, 58% unfavorable statewide. Romney’s favorable came in at 44% vs. 37% unfavorable. The split among independents for Romney was 37-36, while Gingrich only received a 19% favorable rating among the same group with 70% unfavorable.

Gingrich 35
Romney 28
Santorum 16
Paul 10

Jan. 15…37-14 Romney
Jan. 22…29-28 Romney

Gingrich 37
Romney 28
Santorum 18
Paul 12

Obama over Romney, 49-43
Obama over Gingrich, 55-37

“If Romney can’t right himself and Gingrich goes on to win Florida, every major elected Republican in the country will panic. Every unlikely scenario to get another candidate in the race will be explored. Because whatever GOP primary voters in South Carolina think about his electability, Gingrich is currently radioactive among the general public.

“Who knows how it will turn out? All we know is that Newt Gingrich will keep talking.”

“Let’s just say right now what voters will be saying in November, once Barack Obama has been re-elected: Republicans deserve to lose.

“It doesn’t matter that Mr. Obama can’t get the economy out of second gear. It doesn’t matter that he cynically betrayed his core promise as a candidate to be a unifying president. It doesn’t matter that he keeps blaming Bush. It doesn’t matter that he thinks ATMs are weapons of employment destruction. It doesn’t matter that Tim Geithner remains secretary of Treasury. It doesn’t matter that the result of his ‘reset’ with Russia is Moscow selling fighter jets to Damascus. It doesn’t matter that the Obama name is synonymous with the most unpopular law in memory. It doesn’t matter that his wife thinks America doesn’t deserve him. It doesn’t matter that the Evel Knievel theory of fiscal stimulus isn’t going to make it over the Snake River Canyon of debt.

“Above all, it doesn’t matter that Americans are generally eager to send Mr. Obama packing. All they need is to be reasonably sure that the alternative won’t be another fiasco. But they can’t be reasonably sure, so it’s going to be four more years of the disappointment you already know.

“As for the current GOP field, it’s like confronting a terminal diagnosis. There may be an apparent range of treatments: conventional (Romney), experimental (Gingrich), homeopathic (Paul) or prayerful (Santorum). But none will avail you in the end. Just try to exit laughing….

“Finally, there are the men not in the field: Mitch Daniels, Paul Ryan, Chris Christie, Jeb Bush, Haley Barbour. This was the GOP A-Team, the guys who should have showed up to the first debate but didn’t because running for president is hard and the spouses were reluctant. Nothing commends them for it. If this election is as important as they all say it is, they had a duty to step up. Abraham Lincoln did not shy from the contest of 1860 because of Mary Todd. If Mr. Obama wins in November – or, rather, when he does – the failure will lie as heavily on their shoulders as it will with the nominee.”

“Gingrich is more than a performer. He is the GOP’s chief diagnostician, specializing in the vivid explanation of public challenges. Other candidates struggle to recall three points on a 3-by-5 card. Gingrich struggles to suppress the dissertation that might emerge at any moment. The ability to think in public is a rare political gift – more common in Britain than in America. Bill Clinton would shine during prime minister’s question time. So would Gingrich.

“But Gingrich regularly gets into trouble when moving from analysis to prescription. Nearly every problem that crosses the threshold of his attention becomes historically urgent, requiring a fundamental solution. This is the reason for his most revealing verbal habit. Systems are ‘fundamentally broken’ and require ‘fundamental change.’ Opposing views are ‘fundamentally a lie’ and ‘fundamentally alien to American tradition.’ Only the biggest ideas are sufficient to his self-regard….

“Currently many conservatives are exercising not just their franchise but their imaginations. They picture a debate between Mitt Romney and Barack Obama, and they yawn. They envision Gingrich going after the president, the media and the fundamental failures of liberalism – and their pulses race.

“But Republicans need to imagine just a little further – electing a president with no history of prudence.”

“Well, let’s see. I think it was last fall that I first listed my three personal favorites in the race for the Republican presidential nomination; Mitch Daniels, John Thune and Haley Barbour. Doh! I was bummed to see Gov. Daniels make it 3 for 3 on the losing end when he dropped out last weekend, saying:

“ ‘In the end, I was able to resolve every competing consideration but one, but that, the interests and wishes of my family, is the most important consideration of all. If I have disappointed you, I will always be sorry.’

“Damn right you disappointed me, Governor. You’ve left us elephants with a pathetic lineup. You should have abandoned your family for the duration of the race and let them fend for themselves.

I wish I hadn’t added that last line. As Bret Stephens alludes to above, Daniels should have told his wife to, you know…stick it. After all, she left him at first, for another man in California… and stuck him with the kids. He’d be a terrific candidate, as many of you saw on Tuesday night.

[Daniels issued a statement after he announced he wasn’t running for president last May that what I just wrote isn’t the truth. As best I know, however, it is. He’s a good guy. He’s trying to protect his wife from the press. But the country needs him. She can get over it.]

“The Cook Political Report lists 10 states, with 142 electoral votes, as toss-ups. In that group, with 73 total electoral votes, are four states…where first-term Republican governors are foundering in the polls after their excessive policies spurred the kind of grass-roots movements that can be a huge boon to a presidential campaign.”

Schlesinger’s piece is titled “The Four Governors of the GOP Apocalypse”:

Wisconsin’s Scott Walker, facing a recall; Michigan’s Rick Snyder; Ohio’s John Kasich; and Florida’s Rick Scott. All have abysmal approval ratings.

“Once upon a time, small ball was not Barack Obama’s game. Tuesday, it was the essence of his State of the Union address. The visionary of 2008 – purveyor of hope and change, healer of the earth, tamer of the rising seas – offered an hour of little things: tax-code tweaks to encourage this or that kind of behavior (manufacturing being the flavor of the day), little watchdog agencies to round up Wall Street miscreants and Chinese DVD pirates, even a presidential demand ‘that all students stay in high school until they graduate or turn 18.’ Under penalty of what? Jail? The self-proclaimed transformer of America is now playing truant officer?

“It sounded like the Clinton years with their presidentially proclaimed initiatives on midnight basketball and school uniforms. These are the marks of a shrunken presidency, thoroughly flummoxed by high unemployment, economic stagnation, crushing debt – and a glaring absence of ideas.

“Of course, this being Obama, there was a reach for grandeur. Hope and change are long gone. It’s now equality and fairness….

“Which is why Obama introduced a shiny new twist – the Buffett Rule, a minimum 30 percent rate for millionaires. Sounds novel. But it’s a tired replay of the alternative minimum tax, originally created in 1969 to bring to heel all of 155 underpaying fat cats. Following the fate of other such do-goodism, the AMT then metastasized into a $40 billion monster that today entraps millions of middle-class taxpayers….

“This is redistribution for its own sake – the cost be damned. It took Indiana Gov. Mitch Daniels about 30 seconds of his State of the Union rebuttal to demolish that idea….

“Tax reform and entitlement reform are the really big ideas. The first produces social equity plus economic efficiency; the second produces social equity plus debt reduction. And yet these are precisely what Obama has for three years steadfastly refused to address. He prefers the easy demagoguery of ‘tax the rich.’”

“(President Obama concluded the State of the Union) with a deserved salute to the extraordinary work of SEAL Team Six in killing Osama bin Laden. His description of how they did it was gripping – until he decided to claim that it had something to teach us about America:

“ ‘No one built this country on their own. This nation is great because we built it together. This nation is great because we worked as a team. This nation is great because we get each other’s backs.’

“It is a tragedy for this nation that its president believes this. America is great not because it’s a team. America is great because it is a nation whose founding documents elevated the rights of the individual.

“Aside from his poor record, this misunderstanding of the U.S. is Obama’s gravest weakness as a general-election candidate, and the Republicans running for president should take heed and go at it.”

--It is truly pathetic that the State of the Union address, Jan. 24, marked 1,000 days since Senate Democrats last approved a federal budget.

--Sen. Mark Kirk (R-IL) suffered a stroke and prospects for a full recovery are uncertain. Kirk is only 52. Democrats control the Senate 53-47, including independents Joe Lieberman and Bernie Sanders, who almost always vote with the Democrats.

--Arizona Congresswoman Gabrielle Giffords decided to resign from her seat and focus on her recovery from last year’s tragic shooting in Tucson. It was a courageous step on her part to do the right thing for her state and district and we all should hope that in 2014 or 2016, she is able to run for elected office again.

--Defense Secretary Leon Panetta announced almost 100,000 troops will be cut as part of the Pentagon’s plans for a “smaller, leaner” military. In five years, the Army will drop from a peak of 570,000 to 490,000, and the Marines will be cut from about 200,000 to 182,000. Special forces would receive a greater share of the funding, while Panetta assures us the U.S. will retain the ability to defeat “any enemy on land.”

--From Army Times: “The Army reported 278 suicides in the active force, National Guard and Reserve in 2011, a nearly 10 percent decrease from the previous year and the first time those numbers have declined in four years.

“However, within that total, the number of active-duty soldier suicides reached an all-time high of 164, five more than 2010 and two more than 2009….

“Almost 70 percent of the Army’s most seriously wounded soldiers have been diagnosed with post-traumatic stress or traumatic brain injury, (Gen. Peter) Chiarelli said.

“In total, more than 126,000 soldiers have been diagnosed with TBI since the beginning of the war – 54 percent of those diagnoses were made in the last four years.

“Since 2003, more than 70,000 soldiers have been diagnosed with post-traumatic stress.”

--Secretary of State Hillary Clinton told State Dept. employees that she will not stay on in the job if Obama wins re-election, saying that after two decades, she is ready to step off “the high wire of American politics.”

“New Jersey Democrats thought they’d painted Gov. Chris Christie into a corner by demanding that his next two state Supreme Court picks be minorities – after he refused in 2010 to reappoint the court’s lone black justice, John Wallace.

“Monday, Christie named Bruce Harris, an openly gay African-American, and Philip Kwon, a Korean immigrant, to the court….

“Along with the historic ethnic and sexual-orientation milestones is another key diversity element: ideological diversity.

“ ‘My expectation is [that] I’ve nominated two justices who understand the appropriate role of the courts in our system of government,’ said the governor.”

--Thinking of taking a cruise, even after the Costa Concordia disaster? Eve Conant in Newsweek had a piece on how unprepared the crew might be.

“Former crew of numerous other lines say workers were often too exhausted to pay attention during safety-training sessions, and many didn’t speak enough English to even understand what was being said. Reshma Harilal says that during her eight years as a stateroom attendant with Carnival Cruise Lines, parent company of the ill-fated Concordia, boat-safety drills varied in regularity, and she never once had a native English speaker conduct training. ‘We all got safety training, but even I had difficulty understanding the English of the officers who trained us, who were always Italian with strong accents.’

“Crew members also work 12-to-14-hour days, seven days a week, with minimal time off. ‘Half the ship is working in a state of fatigue,’ says James Walker, a former cruise-industry lawyer who now represents aggrieved crew. ‘All types of safety studies have shown if you’re really exhausted you can be impaired to the point of intoxication.’”

--Timothy Dolan, archbishop of New York / Wall Street Journal

“Religious freedom is the lifeblood of the American people, the cornerstone of American government. When the Founding Fathers determined that the innate rights of men and women should be enshrined in our Constitution, they so esteemed religious liberty that they made it the first freedom in the Bill of Rights.

“In particular, the Founding Fathers fiercely defended the right of conscience. George Washington himself declared: ‘the conscientious scruples of all men should be treated with great delicacy and tenderness; and it is my wish and desire, that the laws may always be extensively accommodated to them.’ James Madison, a key defender of religious freedom and author of the First Amendment, said: ‘Conscience is the most sacred of all property.’

“Scarcely two weeks ago, in its Hosanna-Tabor decision upholding the right of churches to make ministerial hiring decisions, the Supreme Court unanimously and enthusiastically reaffirmed these longstanding and foundational principles of religious freedom. The court made clear that they include the right of religious institutions to control their internal affairs.

“Yet the Obama administration has veered in the opposite direction. It has refused to exempt religious institutions that serve the common good – including Catholic schools, charities and hospitals – from its sweeping new health-care mandate that requires employers to purchase contraception, including abortion-producing drugs, and sterilization coverage for their employees….

“Coercing religious ministries and citizens to pay directly for actions that violate their teaching is an unprecedented incursion into freedom of conscience. Organizations fear that this unjust rule will force them to take one horn or the other of an unacceptable dilemma: Stop serving people of all faiths in their ministries – so that they will fall under the narrow exemption – or stop providing health-care coverage to their own employees.

“The Catholic Church defends religious liberty, including freedom of conscience, for everyone. The Amish do not carry health insurance. The government respects their principles. Christian Scientists want to heal by prayer alone, and the new health-care reform law respects that. Quakers and others object to killing even in wartime, and the government respects that principle for conscientious objectors. By its decision, the Obama administration has failed to show the same respect for the consciences of Catholics and others who object to treating pregnancy as a disease.

“This latest erosion of our first freedom should make all Americans pause. When the government tampers with a freedom so fundamental to the life of our nation, one shudders to think what lies ahead.”

Archbishop Dolan will become Cardinal Dolan in February. He is beloved in New York City and his diocese. Just the other day, I was exchanging notes with a reporter for a New York television station and Dolan came up in the course of conversation. In discussing a recent death in the reporter’s family, it was confirmed to me just what a special person the archbishop is. 

I’m not the best Catholic in the world these days, and do not agree with my church on many matters, but President Obama has met his match. On the above issue, I’d love to see Dolan take Obama down.

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

We offer a prayer of thanks for SEAL Team Six, who once again made us so proud this week, this time in Somalia.

Gold closed at $1740…highest in 8 weeks
Oil, $99.73

Returns for the week 1/23-1/27

Dow Jones -0.5%
S&P 500 +0.1%
S&P MidCap +1.2%
Russell 2000 +1.8%
Nasdaq +1.1%

Returns for the period 1/1/12-1/27/12

Dow Jones +3.6%
S&P 500 +4.7%
S&P MidCap +7.2%
Russell 2000 +7.8%
Nasdaq +8.1%

Bulls 50.0*
Bears 28.7 [Source: Chartcraft / Investors Intelligence]

*In keeping with the recent lack of volatility, the last five bull readings are 50.5, 49.5, 51.1, 50.0, 50.0…I haven’t seen this kind of narrow band in quite a while, if ever.

**Next week I’ll be coming to you from somewhere totally different…in the U.S.

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