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04/14/2012

For the week 4/9-4/13

[Posted 6:00 AM ET]

Europe, Washington and Wall Street

Robert J. Samuelson / Washington Post

“The European ‘crisis’ is back. Actually, it never went away – and won’t for many years. The problems are so deep and pervasive that there is no easy or obvious solution. Government debt and deficits in many countries are not sustainable, but the usual remedies of cutting spending and raising taxes – a.k.a. ‘austerity’ – may make matters worse by deepening already severe recessions. Europe is caught in a trap that promises more political and social unrest.

“The wonder is that, for a few months, there was a sense of complacency. Interest rates on vulnerable debtor countries Spain and Italy declined. Fears about European banks eased. Some commentators said ‘the worst is over.’

“Well, probably not. Interest rates are headed up again, while European stocks have taken a pounding….

“Each crisis aggravates the others. Because banks hold huge portfolios of government bonds, fears about the bonds’ values weaken the banks and threaten their failure. Weak banks in turn don’t provide ample business and consumer loans to increase economic growth. And feeble or nonexistent growth shrinks tax revenues and makes it harder for governments to service their debts.

“Just how Europe escapes this trap is unclear.” 

This week, the interest rate on Spain’s 10-year bond hit 6.00% as the government of Prime Minister Mariano Rajoy announced further austerity measures, as well as a crackdown on tax evaders. Rajoy each day attempted to reassure his countrymen that a European bailout was not required. At the same time it was reported industrial production in Spain for February was down 5.1% after a 4.3% decline in January. GDP is estimated to fall 1.5% or more in 2012.

In Italy, which saw its 10-year bond trade back up to nearly 5.70%, the main labor unions took to the streets to protest Prime Minister Mario Monti’s pension-system overhaul.

In both Spain and Italy, the 3rd- and 4th-largest economies in the eurozone, Rajoy and Monti have talked about reforms, particularly on the labor front, but in some cases the reform really brings few benefits, and, it’s still all about implementation, which remains the case in Greece.  Industrial production there for February, by the way, was down 8.3%. The European Commission projects the Greek economy will tank another 5% this year.

PIMCO’s Mohamed El-Erian said that “The problems in Europe are getting bigger. Europe has a debt issue and Europe has a growth issue, and until Europe deals with both, we are going to have these recurring periods of nervousness in the market.”

European Central Bank Executive Board member Benoit Coeure floated the idea of the ECB buying government bonds again, specifically Spain’s, to lower borrowing costs through an existing program that hasn’t been used in a while. But this loads up the ECB’s balance sheet with more suspect debt than it already has.

As El-Erian says: “People are realizing that the tranquility that we have is bought rather than earned. It depends on the ECB putting in liquidity in order to calm markets. At the first indication that the ECB may not be committed to this, people get really nervous.”

Editorial / Washington Post

“The continent is still plagued by a profound imbalance between the rich north and the indebted south. The latter could grow, and pay off debt more easily, if countries there could devalue their national currencies, but that’s not an option as long as they use the euro. The south could also grow more quickly if Germany would switch from an export-led growth model to growth driven by consumption. Germany has made some progress in that direction but probably not enough to boost imports from Spain, Italy and the rest significantly in the short term.”

And consider this. In December and February, the ECB floated its two LTROs, 1 trillion euro, $1.3 trillion in three-year loans that led to a big rally in the debt markets. Investment in government debt by Spanish banks climbed to a record 246 billion in February, an increase of 20% from December, ECB figures show.

Jacques Cailloux, chief European economist at Royal Bank of Scotland (RBS) in London best summed it up for Bloomberg:

“Something is wrong when you load up on assets that were considered risky in November and deemed un-risky in January. Now we’re seeing the worst you could have hoped for. As soon as the situation of the sovereign worsens, banks will come under additional market pressure. That’s extremely negative.”

Washington

The presidential campaign kicked off in full force now that we know it is Mitt Romney challenging President Barack Obama. For his part, Obama went after the rich in a speech in Boca Raton, Fla.

“Let me ask you, what’s the better way to make our economy stronger? Do we give…tax breaks to every millionaire and billionaire in the country? Or should we make investments in education and research and health care and our veterans?”

Obama added, “(What) drags our entire economy down” is when “the gap between those at the very, very top and everybody else keeps growing wider and wider and wider and wider.”

Obama then whipped out his Buffett Rule, citing the anecdote about billionaire investor Warren Buffett and his secretary in his speech, saying “now that’s wrong – that’s not fair…We’ve got to choose which direction we want this country to go. Do we want to keep giving those tax breaks to folks like me who don’t need them? Or do we want to keep investing in those things that keep our economy growing and keep us secured? That’s the choice.”

Editorial / Wall Street Journal

“Forget Warren Buffett, or whatever other political prop the White House wants to use for its tax agenda. This week the Administration officially endorsed what in essence is the Obama Rule: Taxes must be high simply to spread the wealth, never mind the impact on the economy or government revenue. It’s all about ‘fairness,’ baby….

“The policy goal is to impose an effective minimum tax of 30% on the income of anyone who makes more than $1 million a year. When President Obama first proposed this new minimum tax he declared that the rule ‘could raise enough money’ so that we ‘stabilize our debt and deficits for the next decade.’

“Then he added: ‘This is not politics; this is math.’ Well, remedial math maybe.

“The Obama Treasury’s own numbers confirm that the tax would raise at most $5 billion a year – or less than 0.5% of the $1.2 trillion fiscal 2012 budget deficit and over the next decade a mere 0.1% of the $45.43 trillion the federal government will spend. When asked about those revenue projections, White House aide Jason Furman backpedaled from Mr. Obama’s rationale by explaining that the tax was never intended ‘to bring the deficit down and the debt under control.’

“Okay. So what is the point?

“The goal, Mr. Furman explained, is to establish ‘a basic issue of tax fairness.’ Millionaires should pay an effective tax rate no lower than a middle-class secretary or a plumber. But wait: IRS data show that middle-class workers on average pay just under 15% of their income in federal taxes, while the richest 0.1% pay almost twice as high a rate on average, or 26%....

“An even greater absurdity is the White House claim that this is a first step to tax reform because it will ensure that the ‘rich don’t take advantage of tax breaks or structure their affairs to pay less taxes.’ Huh?

“A basic principle of any tax reform worth the name is to broaden the tax base in order to lower rates for everyone, not to raise them. The point is to make the tax code more efficient by reducing the incentive for avoidance – legal or illegal.

“The Buffett tax would only make loopholes more valuable. The White House has already carved out one exception to its own Buffett rule: charitable donations. So a billionaire could avoid the 30% effective tax rate by giving away millions of dollars – say, the way Mitt Romney generously does….

“The Buffett rule is really nothing more than a sneaky way for Mr. Obama to justify doubling the capital gains and dividend tax rate to 30% from 15% today. That’s the real spread-the-wealth target. The problem is that this is a tax on capital that is needed for firms to grow and hire more workers. Mr. Obama says he wants an investment-led recovery, not one led by consumption, but how will investment be spurred by doubling the tax on it?

“The only investment and hiring the Buffett rule is likely to spur will be outside the United States – in China, Germany, India, and other competitors with much more investment-friendly tax regimes.”

Charles Krauthammer / Washington Post

“Here we go again.

“At the beginning of his presidency, Barack Obama argued that the country’s spiraling debt was largely the result of exploding health-care costs. That was true. He then said the cure for these exploding costs would he his health-care reform. That was not true.

“It was obvious at the time that it could never be true. If government gives health insurance to 33 million uninsured, that costs. Costs a lot. There is no free lunch.

“Now we know. The Congressional Budget Office’s latest estimate is that Obamacare will add $1.76 trillion in federal expenditures through 2022. And, as one of the Medicare trustees has just made clear, if you don’t double count the $575 billion set aside for the Medicare trust fund, Obamacare adds to the already crushing national debt.”

On the Buffett Rule, Krauthammer notes:

“For Obama, fairness is the supreme social value. And fairness is what he is running on – although he is not prepared to come clean on the price. Or even acknowledge that there is a price. Instead, Obama throws in a free economic lunch for all. ‘This is not just about fairness,’ he insisted on Wednesday. ‘This is also about growth.’

“Growth? The United States has the highest corporate tax rate in the industrialized world. Now, in the middle of a historically weak recovery, Obama wants to raise our capital gains tax to the fourth highest. No better way to discourage investment – and the jobs and growth that come with it. (Except, perhaps, for hyperregulation. But Obama is working on that too.)….

“The Buffett Rule redistributes deck chairs on the Titanic, ostensibly to make more available for those in steerage. Nice idea, but the iceberg cometh. The enterprise is an exercise in misdirection – a distraction not just from Obama’s dismal record on growth and unemployment but, more important, from his dereliction of duty in failing to this day to address the utterly predictable and devastating debt crisis ahead.”

On the economic front, more and more U.S. CEOs talked about the warm weather in the first quarter potentially pulling forward sales. Home Depot’s CEO put it very simply: “Someone buying a lawn mower in February or March is not buying another one in April or May.”

So we’ll see how the weather plays into future retail sales.

The Federal Reserve released its latest look at the national economy and said expansion in all 12 of its regions continued “at a modest to moderate pace from mid-February through late March.” 

But Federal Reserve Bank of New York President William C. Dudley said “it is still too soon to conclude that we are out of the woods” and the expansion “has yet to be strong enough on a sustained basis to make a big dent in the overall amount of slack in the U.S. economy.” Housing, high gas prices, and government cutbacks at all levels, still provide some significant headwinds.

Janet L. Yellen, the vice chairwoman of the Fed, said that the lackluster pace of growth may require the Fed to continue its policy of easy money, zero interest rates, into 2015, which warmed the stock market’s cockles some, though for the rest of us schmucks it’s not necessarily a great outlook she was talking about.

“In effect there has been a significant shortfall in the overall amount of monetary policy stimulus since early 2009,” while arguing the shortfall doesn’t necessarily call for a new round of stimulus but rather further justification for extending the existing efforts.

But, if the economy improves and growth starts picking up, Yellen added, it might be time to finally start taking away the punchbowl.

As for the federal budget deficit, the Treasury Department reported that the March take on taxes and other revenue, $171 billion, was the highest for the month since 2008. Individual income-tax revenue from October through March, the first half of the 2012 fiscal year, hit $484.1 billion, up from $475.6 billion in the year-earlier period. Like whoopty-damn-do. Just further proof on what a punk recovery it’s been.

And we also learned that the U.S. government spent $369 billion in March, “more than any previous month in U.S. history.” [Wall Street Journal]

The federal deficit is projected to total $1.2 trillion for the fiscal year ending Sept. 30, down from $1.3 trillion for fiscal 2010 and 2011 and $1.4 trillion for fiscal 2009.

But as I’ll be repeating virtually every week from here to the end of the year, partisanship will rule the day through November, and then we wait to see what a lame-duck Congress (and potentially a lame-duck president) do about the expiration of the Bush tax cuts, payroll tax relief, spending cuts previously agreed to that would take effect Jan. 1, and another debt ceiling debate.

And just a word on China, a big reason for Friday’s market decline. GDP came in at 8.1% for the first quarter, slightly worse than expected and the slowest pace in nearly three years.   But while this is down from 8.9% in the fourth-quarter, it is still very much a soft-, not hard-landing figure. Importantly, new loans rose strongly in March as the government urged the banks to begin lending again. Premier Wen Jiabao earlier forecast a 7.5% growth rate for all of 2012, but most analysts, including the World Bank, have growth coming in between 8.0% and 8.5%; the WB having just lowered their forecast from 8.4% to 8.2%. 8% would be fine. 7% would be worrisome.

China’s trade picture for March was also announced and imports were up only 5.3%, less than expected, while exports rose 8.9%, better than forecast. The lower figure on imports does point to slowing domestic demand.

But on the export side, you got a good picture of the global economy these days. China’s exports to Europe fell 1.8% in March, but rose 12.8% to the U.S.

Meanwhile, consumer prices rose 3.6% in March, higher than February’s 3.2% pace but still below the 4% government target. Food prices in March rose 7.5%, hotter than Beijing wants but down from last year’s double-digit norm.

Street Bytes

--Stocks had their worst week of the year even with the biggest 2-day rally of 2012, as the Dow Jones lost 1.6% to 12849, while the S&P 500 lost 2% and Nasdaq 2.3%. Earnings start flooding the system in earnest the next two weeks. Friday, JPMorgan Chase and Wells Fargo beat their respective earnings estimates but the shares in both dropped because of rising expenses and concerns over the quality of the profits.

--And a look at some 10-year return figures thru March 31, 2012.

Large-Cap Growth funds…3.71% annualized return
Small-Cap Growth…5.77%
S&P 500 Index Objective…3.58%
Intermediate Investment Grade Debt…5.31%

[Source: Lipper / Barron’s]

--U.S. Treasury Yields

6-mo. 0.12% 2-yr. 0.27% 10-yr. 1.98% 30-yr. 3.13%

The inflation data for March was released. Producer prices were unchanged, but up 0.3% ex-food and energy. For the last 12 months the two figures are 2.8%, 2.9% on the core.

Consumer prices rose 0.3%, 0.2% ex-food and energy. And for the last 12 months the CPI is up 2.7%, 2.3% on core.

--Rep. Paul Ryan (R-Wis.):

“Treasury Secretary Tim Geithner came to the House Budget Committee about a month ago and said to us: ‘We’re not suggesting we have a solution to the long-term fiscal problem. What we do know is, we don’t like yours.’

“This is the essence of failed leadership. Rather than put out a solution to this very clear and present danger to our country’s future, the president has decided to wait for the Republicans to offer their solution and then attack it.

“If you put a budget plan in place that does deal with the drivers of our debt, that will give us an immediate boost of growth today. The bond markets and businesses are looking to see if leadership is getting this situation under control so that they can take risks, so that they know they will have a certain future to be optimistic about. Until you have a plan like this in place, you can’t reap that kind of a growth dividend.” [New York Post]

--VW’s sales in China rose 13% in the first quarter, with BMW’s up 41%. Mercedes-Benz reported a 24% sales increase on the mainland.

But, total vehicle sales in China fell 3.4% from a year earlier for the quarter (down 1.3% for passenger cars). Sales are still expected to rise this year.

--Natural gas traded below $2 for the first time since January 2002. The warm weather in the first quarter kept usage low and in turn has led to record inventories as supplies continue to rise. 

On the crude front, the International Energy Agency said tightness in the oil market is easing, but it’s still largely about Iran.

--The Justice Department announced it was suing five major publishers and Apple on e-book price-fixing charges, and simultaneously settling with three of them, which is a big boon for Amazon, which then announced it was pushing prices down on e-books to as low as $9.99 for some big titles. The publishers and booksellers argue that the ultimate effect of the suit will be to enhance Amazon’s perceived monopoly even further, with Amazon already controlling 60% of the e-book market.

The government said the five plus Apple met secretly to set prices and then sought to hide their discussions.

HarperCollins, Hachette and Simon & Schuster settled, while Penguin, Macmillan and Apple vowed to fight the charges.

--Facebook acquired photo-sharing app maker Instagram for $1 billion in cash in a move that, needless to say, had people buzzing, especially since Instagram has been around for about 18 months, and has all of 13 employees and no revenue, while founder Kevin Systrom just made an estimated $400 million. Facebook, with an estimated value of $100 billion, goes public next month. CEO Mark Zuckerberg promised Systrom that Instagram would be able to operate as an independent company. The two have known each other since 2004.

Among the many amazing parts to this story is the fact that last Friday, Instagram closed a $50 million funding round led by Sequoia Capital, which valued the company at $500 million, and then on Monday, Facebook acquired it for $1 billion.

Holman W. Jenkins, Jr. / Wall Street Journal

“Facebook obviously has learned one lesson of the Internet bubble. If you have a $100 billion market cap and no way to make money, find a way to spend it.

“We’re being mean. The $1 billion Mark Zuckerberg spent on Instagram is pocket change and the deal’s purpose wasn’t handwaving to convince investors he was finding a solution to Facebook’s profits challenge. He’s still trying to please users, God bless him, especially mobile users, who love Instagram to customize the look of photos they snap with their smartphones.

“It’s nice that Mr. Zuckerberg continues to be mostly interested in the happiness of his users, who number a gross 845 million. But how to make money should be the key focus for a company expecting to go public in May….

“Facebook is bursting at the firewalls with unmonetized information. Pathetic are the teensy, inconspicuous promotions for bridal supplies when a female user changes her relationship status to ‘engaged.’ Pitiful are the barely noticeable come-ons for Ted Nugent concert tickets that apparently materialize because a ‘friend’ insists on posting a new music video every day….

“Not exploiting user information is the worst kind of exploitation of all. Facebook would earn no profits. It would gradually fade in significance. Users would lose all the benefit of a powerful, growing Facebook. They’d also lose the untapped, incipient value of the immensely valuable personal data Facebook has been collecting.”

--In another $1 billion deal, Microsoft bought the majority of AOL’s patents for $1.06 billion, covering intellectual property rights to more than 800 innovations. AOL is retaining 300 patents which Microsoft will be granted licensing rights to.   AOL shares rose 40% on the news.

--Google reported earnings that beat expectations, though revenues were in line, but it was a move by billionaire founders Larry Page and Sergey Brin that drew the ire of shareholders. In announcing a two-for-one stock split, Page and Brin said a new class of non-voting shares would be created that ensures the two do not lose power. Coupled with chairman Eric Schmidt’s stake, the three will control about 2/3s of the voting rights.

All shareholders will receive one additional non-voting “C Class” share that will be quoted on Nasdaq. Google tanked $28 on Friday.

--Yahoo’s new CEO Scott Thompson finally unveiled his plans to restructure the company around three core groups: “consumer, regions and technology.”

The goal, according to Thompson, is to “bring some of our best product designers and engineers much, much closer to consumer needs and demands.” Prior to the move, Yahoo had announced plans to dismiss 14% of its workforce. 

--Best Buy CEO Brian Dunn’s resignation was a result of a probe into his “personal conduct,” according to the company, though no details have been released. The retailer said the issues are not linked to Best Buy’s operations or financial controls. G. Mike Mikan, a board member who was named interim CEO, told employees Dunn’s departure was “a surprise.”

--Shares in Nokia hit a 15-year low after reporting its worst quarter for sales since 2006. Finland’s flagship company is having a major issue with its Lumia 900 handset that stops it connecting to the Internet – which isn’t good, especially considering the phone was designed for the American market and launched just days ago with the slogan: “An amazingly fast way to connect.”

Nokia also admitted it lost money on every phone it sold in the first quarter and warned it did not expect an improvement in margins in the second quarter.

--Sony announced it is shedding 10,000 jobs as part of a major reorganization. The cuts will be made over the next 12 months. Earlier, Sony forecast a record annual loss of $6.4 billion for the past financial year, double a previous estimate and due largely to an additional tax expense.

Sony’s television business has lost money for the past eight years, despite selling 20 million sets per annum, so the company is looking to cut costs in the business by 60% by March 2014.

--A survey by the New York Times of CEO compensation finds that among the 100 top-paid execs, overall pay rose 2% in 2011 from 2010, with the median CEO in this group taking home $14.4 million – compared with the average annual American salary of $45,230.

Apple CEO Tim Cook was paid a salary of just $900,000 in 2011, but was granted a one-time stock award that at the end of last week (April 6) was valued at roughly $634 million.

--Credit Suisse estimates that multi-employer pension plans, managed by trade unions on behalf of members working for various employers, are now just 52% funded. The most recent data by the Pension Benefit Guaranty Corporation, which insures U.S. pension programs, puts it at 48%. Both awful.

--The New York Post’s Mark DeCambre reports that Goldman Sachs Chairman and CEO Lloyd Blankfein and President Gary Cohn are not getting along as well as they have in the past, with Cohn frustrated that he hasn’t taken over the top slot yet. One Goldman insider said, “Gary thinks it’s his time [to lead].” Cohn is 51, Blankfein 57, with the latter telling other Wall Street executives he wants to remain CEO for another few years – or as long as it takes to restore the investment bank’s reputation.

So imagine the battle taking place between the two spouses.

“When is Lloyd going to give up the top spot to Gary?”

“Not any time soon, honey. My Lloyd will step down when he’s ready to. Deal with it.”

[Lloyd received a pay cut for 2011 to $12 million, which also didn’t please Lady Blankfein.]

Separately, Goldman agreed to pay $22 million to settle regulatory charges alleging Goldman analysts had weekly “huddles” from 2006 to 2011 where they discussed confidential research on stocks with the firm’s traders. The analysts then passed on the ideas to selected clients, before it was published. This is but one example of why some of us despise Goldman, not because of the New York Times op-ed by the disgruntled former employee. It was July 2010 that Goldman reached a record $550 million settlement of the SEC’s fraud charges it misled buyers of mortgage-related investments.

--This is bad. As the Wall Street Journal reports, the spread of white-nose syndrome among the bat population to Missouri and Alabama for the first time makes 19 states and four Canadian provinces, killing an estimated 5.5 million. The concern is that bats serve as nature’s pest-control and it could have a major impact on agriculture and the battle against crop-eating insects.

--The federal government reached an agreement with 41 American Indian tribes to settle charges it mishandled money and natural resources managed on their behalf. The dispute is decades old.

The Interior Department oversees 50 million acres of land for federally recognized tribes and in the process handles leases for oil and gas production and timber harvesting, among other things.

--If you ever wondered where stolen art ends up, try Serbia. A painting by Paul Cezanne, valued in excess of $100 million that had been stolen from a Swiss museum four years ago, was recovered in Belgrade. Other stolen works have been traced to an art theft ring in Serbia as well.

--Update: Matt Lauer’s new contract with NBC’s “Today” pays him $25 million a year. The network desperately needed him to stay and has granted him a four-day work week and god knows how much vacation. Evidently, he also requested a new co-anchor as rumors swirl Ann Curry will be shunted to roving international correspondent. Savannah Guthrie is a possible replacement. Or, Meredith Vieira may return.

-- “The Lion King” became Broadway’s all-time highest grossing show, replacing “The Phantom of the Opera.” Cumulative gross for ‘Lion’ is $853,846,062 as of Monday. ‘Phantom’ continues but its pace at the box office trails ‘Lion’. I did see where 40% of ‘Phantom’ tickets are sold to repeat customers, and 68% are women, according to music historian Cary Ginell. ‘Phantom’ also remains the longest-running show in Broadway history. 

--We note the passing of painter Thomas Kinkade, 54, the self-styled “Painter of Light” who made a fortune on his work, some $53 million alone between 1997-2005. Early in his career, Kinkade was selling his paintings in parking lots and once rode the rails with another artist, sketching landscapes. But he persevered. He was dismissed in some circles for “mass producing kitsch,” but I kind of liked some of it. Since his death last weekend, business has been booming.

--Finally, on the portfolio front I had some bad news on my main China holding, but I don’t want to say anything more until the company issues a statement this coming week. I promise to tell an ugly story next time concerning this one.

Foreign Affairs

North Korea: The week began with Kim Jong Un receiving the new title of First Secretary of the Workers’ Party, along with chairman of the party’s Central Military Commission and selection as a standing member of the Politburo. At the same time, North Korea was very open with the Western press the past few days, allowing them to see the launch pad for the ballistic missile/rocket that was to take the country’s first communications satellite into orbit, a rare openness. None of it, including the control center, looked the least bit impressive.

Sunday is the 100th anniversary of the birth of Kim Il Sung, founder of the nation, and the rocket launch was to take place anytime between Thursday and then in celebration, so they told us.

So on Friday, Pyongyang time, the North launched the rocket and within one to two minutes it splintered into pieces over the Yellow Sea; an incredibly embarrassing end to what was to be a glorious event for the people to celebrate and admire the regime for. Even state television was forced to admit hours later the satellite that the rocket was carrying failed to enter into orbit. “Scientists, technicians and experts are now looking into the cause of the failure.”

While the North has mastered the technology behind short-range missiles, it appears to have a long ways to go with the longer kind; meaning the United States seemingly has little to worry about on this front.

But what now? What does this say about the leadership of Kim Jong Un and his regent. Who is really in charge?

Is the North preparing a third nuclear test, as South Korea first reported this week? [The previous two tests were in 2006 and 2009.] Aside from a nuke test, which now seems a certainty in light of the missile failure, what other series of provocations does Pyongyang have in mind in an attempt to save face and show Kim is still in charge. [CNN’s Pentagon reporter Barbara Starr had a good point. I wouldn’t want to be the guy who thought it was a brilliant idea to grant the Western press such sweeping access this week.]

One thing is for sure; the February food aid deal with the United States is off, one in which the North was to stop nuclear tests, uranium enrichment and long-range missile launches in return for stale Hostess products.

As for China, they can’t be too pleased that not only did North Korea ignore their pleadings not to go ahead with the launch, but Pyongyang failed to give Beijing any advance notice.

Iran: The five permanent members of the UN Security Council – Britain, France, Russia, China and the United States – plus Germany, will be holding talks in Istanbul with Iran over their nuclear program this weekend. Expectations are low. The P5+1 is supposedly not going to make any initial demands (such demands being widely well known anyway), and instead feel out Iran on whether or not they are serious. Eventually, the U.S. and its allies would demand that Iran stop producing higher-grade enriched uranium, shut down the Fordo underground plant in Qom, and ship any existing highly-enriched uranium out of the country. This is also the least Israel expects, they being a rather interested spectator. China, meanwhile, has been urging restraint and negotiations, as well as Russia, but the patience of the U.S., France and Britain is running thin. For starters, Iran’s history would tell you that if any agreements are reached, they’ll just cheat on them. And if Iran outright rejects any demands presented this weekend or in future talks, President Obama has an election-year crisis on his hands. While he would like negotiations to go through November that just doesn’t seem conceivable.

The latest round of talks in Istanbul broke off in January 2011, when Iranian officials refused to talk about the nuclear program until sanctions were lifted.

Last Sunday, in an interview on CNN, Israeli Defense Minister Ehud Barak said:

“It’s clear that the depth of the sanctions is different from what we had in the past and it has its impact. Both the closing of the SWIFT [electronic transfer] clearing system as well as the sanctions on the oil exports and, of course, the coming negotiations. It probably will encourage them to move. But to tell you the truth, we hope for the best. But I don’t believe that this amount of sanctions and pressure will bring the Iranian leadership to the conclusion that they have to stop their nuclear military program.”

Barak made clear that any negotiations would be a failure if they did not end in Iran not only stopping enrichment to 20%, but agreeing to remove all uranium already enriched to that level to a “trusted” neighboring country.

Lastly, remember how years ago, going back to the George W. Bush administration, I said the United States should be negotiating with former president Ayatollah Rafsanjani? The still influential cleric reportedly has been criticizing President Ahmadinejad for his extremist anti-American rhetoric, though a hardline news agency “categorically denied” Rafsanjani had called on Iranian leaders to resume talks with the U.S. I’m sure he has. 

Stephen Hayes / Wall Street Journal

“Anything that retards Iran’s nuclear progress is helpful. But even if the talks ‘solved’ the nuclear issue – virtually inconceivable, given the measures the Iranians have taken to preserve their program – a bigger problem would remain: the Iranian regime itself. Whatever progress is made in the context of overlapping short-term interests, it will do little to change the long-term strategic problems presented by a hostile Iran. And Iran is hostile.

“It is one of the most underreported stories of the past decade: As we went to war in Afghanistan and Iraq, Iran went to war with us. Tehran has provided weapons to insurgents directly responsible for killing hundreds of American troops in those two countries. It has funded, trained and equipped jihadists – Sunnis and Shiites alike – targeting American forces and interests in the Middle East and beyond. And all along the way it has provided safe haven and support to al Qaeda leaders and those closest to them….

“This weekend’s talks in Istanbul will ignore all of this. Instead, they will, as White House spokesman Jay Carney said, focus on ‘the international community’s concerns with Iranian behavior regarding their nuclear program.’

“Fair enough: The international community isn’t interested in holding Iran accountable for these acts of war, and in preparing for high-level talks it’s easy to separate one problem from another. But the real world doesn’t work that way.”

Syria: Syrian forces clashed with rebels near the Turkish border on Friday in a violation of the cease-fire that went into effect on Thursday. Of course the original cease-fire was to be Tuesday and that didn’t hold. Across the country, at least 160 were killed on Monday. Additionally, this week, a Lebanese cameraman was killed inside the Lebanese border as he was covering the Syrian army across the way. He waved and was met with a hail of bullets. Human Rights Watch and Amnesty International documented hundreds of executions. The death toll stands at 10,000+ and a reported 200,000 have been imprisoned.

Lebanon: Lebanese Forces leader Samir Geagea blamed the March 8 coalition for the attempt on his life the prior week; March 8 having among its members Hizbullah and its allies of Syria, as he put it.

Egypt: A super confusing week as a court in Egypt suspended the 100-member national assembly charged with drafting a new constitution. Several lawsuits had demanded the panel be blocked because it did not reflect the diversity of Egyptian society. Liberals and secularists said Islamists dominated the group.

Meanwhile, hard-core Islamist Hazem Abu Ismail was to be ruled ineligible for the presidential ballot because his late mother was a U.S. citizen, but a court ruled in Ismail’s favor…for now…even though the evidence is clear he should not be eligible. 

And Muslim Brotherhood lead candidate, Khairat el-Shater, may have his own eligibility issues concerning his past imprisonment and whether he was officially pardoned by the ruling military council. Shater said the Brotherhood reneged on its promise not to field a presidential candidate only to stop the “tyranny” of the past.

As for the decision by former Mubarak-era spy chief Omar Suleiman to run for president , Shater said, “We are talking about a nation that was subjected to destruction and plundering under Hosni Mubarak’s leadership, who based his system on tyranny and corruption, which led to backwardness, and Omar Suleiman was one of his main assistants. His nomination is an insult to all the Egyptian people and an attempt to reproduce the old regime in a modified way.”

Shater also said the United States should support the democratic transition in Egypt, while adding, “There is a state of lack of trust between the different fronts. That is a result of the U.S. administration largely supporting the tyranny of the Mubarak regime for a long time. Egypt’s relations with the U.S. must be strong and strategic based on economic cooperation and all other forms of cooperation.”

But it was also revealed this week that Shater gave an address last April 21, 2011, which was just transcribed into English, and in it he says:

“Everywhere, the Brothers are working to restore Islam in its all-encompassing conception to the lives of people. Thus the mission is clear: restoring Islam in its all-encompassing conception, subjugating people to God, instituting the religion of God, the Islamicization of life, empowering of God’s religion, establishing the renaissance of the ummah [worldwide Muslim nation] on the basis of Islam…Every aspect of life is to be Islamicized.” [Jerusalem Post]

For its part, the ruling military council said it would stay neutral and not field a candidate, though most feel Suleiman is favored by the army. The council has been careful not to put Suleiman on trial for the abuses of the old regime.

Pakistan: Parliament on Thursday unanimously approved new guidelines on relations with the United States which include a ban on transporting weapons through the country to Afghanistan. The national security committee also called for an end to drone attacks in Pakistani territory and an unconditional apology for U.S. air strikes in November that killed 24 Pakistani soldiers. Parliament is demanding those responsible for the air strikes be brought to justice.

While it wasn’t revealed if NATO convoys would be allowed, denying use for weapons shipments is a demand several political parties had including opposition Islamists. Prime Minster Gilani told parliament his government would implement the recommendations in “letter and spirit.”

A U.S. State Department spokesperson said, “We respect the seriousness with which parliament’s review of U.S.-Pakistan relations has been conducted. We look forward to discussing these policy recommendations with Pakistan.”

The ongoing closure of the supply routes through Pakistan greatly impedes the U.S. military’s withdrawal from Afghanistan. Prior to the shutdown, one-third of American war supplies moved through there. Since then, coalition forces have relied on a system of supply lines in countries such as Russia, Kyrgyzstan and Uzbekistan.

On a different matter, Pakistani President Zardari went to India for the first visit there by a Pakistani head of state in seven years. Zardari had lunch with Indian Prime Minster Singh, though little of substance came of it.

And up to 135 people, 124 soldiers and 11 citizens, died in the avalanche that crushed a Pakistani military camp in mountainous Kashmir on Saturday.

Afghanistan: President Hamid Karzai said he is thinking of stepping down in 2013 – a year early – due to NATO’s withdrawal in 2014; Karzai knowing that it will be difficult to hold a presidential election without NATO’s presence. His second five-year term is due to expire in 2014 and the constitution forbids him from running a third time. Karzai did say a final decision on the poll will not be made for some time.

An ABC News/Washington Post poll found that 48% of Americans support President Obama’s handling of the war, 43% disapprove. But only 30% now say it has been worth fighting.

China: The Communist Party formally removed Bo Xilai and his wife was arrested on suspicion of murdering British businessman Neil Heywood. In a one-line statement, Chinese state media announced Bo had been suspended from his position on the 25-member Politburo because of “suspected serious violations of discipline.”

Bo’s wife, prominent attorney Gu Kailai, and an orderly who worked at the couple’s residence, were “transferred to judicial authorities.”

Heywood was found dead in a hotel room in Chongqing last November 15 and at the time police informed British consular officials that he had died from “excessive alcohol consumption” and his body was quickly cremated. Heywood had been a close associate of the Bo family.

But a police investigation now concludes Gu and Heywood fell out over a “conflict over economic interests.”

Meanwhile, in terms of the transfer of power at year end, speculation now has it that President Hu Jintao and Premier Wen Jiabao, both of whom held Bo’s Maoist campaigns in Chongqing in contempt, have gained an upper hand in promoting their own supporters.

Others say there are growing calls to cut the key standing committee (of which Bo might have been a member before the purge) from nine to seven to facilitate better and quicker decisions.

The Communist Party’s official People’s Daily urged members to support the decision to remove Bo from his senior party post. According to the front page editorial, the investigation into Bo and his wife’s arrest shows the Party’s “firm determination of maintaining its own purity. Bo has seriously violated Party discipline, causing damage to the cause and the image of the Party and state.”

An editorial in the South China Morning Post (Hong Kong) concludes “Bo seems certain to go to jail.”

“That would be an ignominious end to the career of a populist of nationwide renown. But he was also a man of contradictions. His leadership of Dalian and Chongqing and his crackdown on crime and corruption made him popular with the masses. But a campaign to revive values of the Maoist era stirred painful memories of the Cultural Revolution and rankled fellow leaders of modern China….

“Mao Zedong famously said that upheaval or crisis strikes China once every seven or eight years. This one may be late or early, but if the past is any guide it will pass without serious harm to the solidarity of the leadership or the political legitimacy of the party. Rather, it will spur the leadership to unite and put aside personal differences – not only in their own interests, but because Communist Party rule is at stake. In the wake of the crisis, the emphasis is bound to be on economic and political stability. But that should not be allowed to delay reforms aimed at putting China’s meteoric growth on a sustainable path, safeguarding its achievements and spreading the benefits equitably among its people.”

France: The first round of the presidential vote is a week from Sunday, April 22, and polls still show that Socialist Party candidate Francois Hollande will defeat President Nicolas Sarkozy handily in a runoff, which will be May 6. Hollande is being hurt, however, by far-left candidate Jean-Luc Melenchon, who is attracting some of the biggest crowds so far at rallies blanketed in red communist flags. Hollande vows to focus on education, job support for French youths facing high unemployment rates, equal pay for women, respect for culture and ethnic diversity.

Melenchon, by the way, is beginning to poll ahead of far-right National Front candidate Marine Le Pen. And if you thought Hollande’s 75% top tax rate proposal on millionaires was outrageous, Melenchon is proposing to confiscate all income above $470,000 a year.

Editorial / London Times

“There is something even more disquieting than the possibility that the candidates to be France’s next president are driven by the cynicism of the hustings to make promises to tax the rich, to expand the reach of the State, to safeguard social services and to tighten the free movement of people across EU borders – all at a time when France’s public finances are as precariously balanced as a drunk on a tightrope. What is more disquieting is the possibility that the candidates may genuinely believe they can deliver what they are promising….

“France is in the grip of an election campaign stained by a hostility to the very wealth and industry that has made it the world’s fifth richest country and the second most powerful member of the eurozone, and also by a willful refusal to address its parlous financial book-keeping….

“Mr. Sarkozy, the presidential candidate of 2012, is hard to recognize as the same Mr. Sarkozy who once moaned that France was a country that had ‘never stopped discouraging initiative and punishing success.’ Today, he zealously joins his political rivals in bad-mouthing bankers. Having already increased income and corporate tax, he now aims to squeeze more tax even from those expatriate French who have fled France to escape taxes – a policy that would be comically tricky to pursue.

“Mr. Hollande, meanwhile, is recklessly promising to spend money that France has not yet even borrowed, partially balancing the books by introducing a top rate of income tax of 75%....

“Worryingly, none of these various pledges on the stump is being unduly burdened by the reality of France’s economic plight. No candidate acknowledges that public spending accounts for 56% of GDP, more than in any other eurozone country; or that unemployment is at its highest for a quarter of a century; or that public debt is 90% of GDP; or that social costs for employers are uncompetitively high compared with those of France’s neighbors; or that exports are sluggish. You need not be a diehard doom-monger to worry that the eurozone’s next crisis might be made not in Athens or Rome or Madrid, but in Paris….

“Voters are reluctant to recognize that unless the State starts to live within its means, France is hurtling towards a financial reckoning. So far neither Mr. Sarkozy nor Mr. Hollande has had the courage to serve voters this awkward truth. This threatens to make the inevitable austerity of life after May 6 all the harder to stomach.”

Nigeria: 50 were killed in an Easter Sunday suicide car bombing near a church in the city of Kaduna. Islamist militant group Boko Haram was suspected.

Zimbabwe: A story was circulating in various places that President Robert Mugabe was near death in a Singapore hospital; the 88-year-old dictator suffering from prostate cancer. While this is great news, there is supposedly a secret “gentleman’s agreement” to hand over power in Zimbabwe to his feared defense minister, Emmerson Mnangagwa, a former spy chief nicknamed “The Crocodile” and known for his ruthless style. [Sydney Morning Herald/The Daily Telegraph]

Random Musings

--Rick Santorum bowed out of the Republican presidential nomination race, leaving Mitt Romney to finally focus on President Obama in what I first wrote last fall will be the ugliest race since 1860. Santorum was behind in the polls in his native Pennsylvania, which holds its primary on April 24, the delegate math wasn’t in his favor, and he is in debt.

Needless to say there remains bad blood between the Romney and Santorum camps and to his credit, Santorum did win 11 states, but that took a toll on Romney, as some of the below polling shows. Romney also had to spend millions beating back Santorum, campaign dollars he had hoped to use in the general election campaign against the president. At the end of February, Romney’s campaign coffers had about $7.2 million to President Obama’s $84 million, though both war chests will now grow, including the ability to tap party resources.

Obama told donors this week, “This election will probably have the biggest contrast that we’ve seen maybe since the Johnson-Goldwater election, maybe before that.”

Romney replied on Tuesday, “This game, this populism of trying to go and divide America, is not only wrong, it’s dangerous.”

John Podhoretz / New York Post

“Mitt Romney’s nomination was certain as long ago as December because he was, when it came right down to it, the only serious candidate in the race – the only candidate who combined intense preparation on issues, an overarching and coherent theme and the necessary fund-raising prowess to prevail in a contest dominated by cringe-inducing silliness.

“Yes, Santorum tied Romney in Iowa and Newt Gingrich blew Romney away in South Carolina – but even then, even serious political types who didn’t want to see Romney as the nominee couldn’t quite envision a way for either of the others to actually win….

“For most of the past year, the political coverage of Romney on both right and left has centered on his weaknesses – how he’s failed to stir Republican passions, how he’s been inconstant in his positions over time, how he put his dog on the roof of his car in 1983, how his profession of a minority faith is problematic.

“But today, perhaps, it’s worth taking a moment to look at Romney’s demonstrable strengths.

“He spent three years patiently building an organization, state by state – which proved exceptionally important with the primary rule changes initiated by the GOP in 2010.

“He became extraordinarily fluent…on the issues. This was notable because, in his 2008 run, he’d been quite ham-fisted and inarticulate on matters that hadn’t been in his wheelhouse as Massachusetts governor.

“In part as a result of his command of material and his understanding of the importance of tone, he was without question the most impressive and strategic performer over the course of the 20 GOP debates….

“And Romney showed a talent for aggressive confrontation without appearing obnoxious. He took Rick Perry out practically single-handedly in their first face-to-face encounter and took Newt Gingrich down in two successive knockouts between South Carolina and Florida.

“Finally, he showed that he could dish it out when he inundated his rivals with well-conceived negative ads that left them sputtering impotently – a mark of the toughness he is going to need to face President Obama in the fall.

“Perhaps even more important, he showed that he could take it – that he could withstand Newtmania and the Santorum Surge without melting down, panicking, losing faith or changing his strategy to satisfy the demands of pundits who didn’t necessarily wish him well.

“That ability to stand his ground and maintain his sangfroid will also stand him in good stead against his formidable Democratic rival.

“Time to get on with it, then.”

--In a Washington Post/ABC News poll, President Obama has double-digit leads over Romney on who would do a better job of protecting the middle class, addressing women’s issues, handling international affairs and dealing with health care. Obama has a better than 2-to-1 advantage as the more likable of the two (64-26). And Romney faces a huge deficit among female voters.

Obama’s overall approval rating remains at 50%, but nearly half of all Americans say his handling of the economy is a major reason to oppose his reelection. 

Romney’s only big advantage is on the issue of who would do a better job dealing with the federal budget deficit (51-38).

In a Romney-Obama matchup, with the poll being held prior to Santorum’s exit, the president holds a 51-44 lead.

Romney trails by 19 among women (Obama won the demographic by 13 points in 2008). The president, on the other hand, loses white men with college degrees by a 57-39 margin.

76% of Americans say the economy is still in recession, even though by definition the recession ended three years ago.

--A story on ten swing states for 2012 in the Wall Street Journal, in conjunction with the Cook Political Report, shows that Obama leads Romney in all ten, though he also won them in 2008…Colorado, Florida, Iowa, Nevada, New Hampshire, North Carolina, Ohio, Pennsylvania, Virginia and Wisconsin.

--Dick Morris & Eileen McGann / New York Post

“The shape of President Obama’s reelection strategy is coming clear. The key elements:

“ 1) Don’t run on your record; run as if there were no incumbent.

“ 2) Stress class warfare; exploit fear of Republican spending cuts. Harp on the negatives.

“ 3) Hide the negatives about your record in a miasma of general pessimism. (Medicare was broken before we got here; headwinds slowed the economy.)….

“Obama’s appeals to fear, envy and class antagonisms haven’t been working lately. But even if they start to, he’s sacrificing the themes of optimism and hope.

“A dour, bitter Obama, lashing out at the rich and peddling fear of the Republicans, can’t compete with a sunny, smiling Mitt Romney. He’s largely stuck talking about who Romney is – an unbecoming attack line that doesn’t inspire faith in a national leader.

“Were we France or Italy, perhaps this rhetoric would fall on receptive ears conditioned by years of discord. Here in America? Not yet.”

--Democrats from President Obama on down were left scrambling after party strategist Hilary Rosen, a CNN contributor, said of Mitt Romney’s wife, Ann, “His wife has actually never worked a day in her life. She’s never really dealt with the kinds of economic issues that a majority of women in this country are facing.”

Doh!

“It was the wrong thing to say,” President Obama declared. “There’s no tougher job than being a mom…That’s work, so, anybody who would argue otherwise probably needs to rethink their statement.” Michelle Obama tweeted her own support for women and mothers.

Ann Romney tweeted for the first time: “I made a choice to stay home and raise five boys. Believe me, it was hard work.”

She later said on Fox News:

“Other women make other choices, to have a career and raise family, which I think Hilary Rosen has actually done herself. I respect that, that’s wonderful. But, you know, there are other people that have a choice. We have to respect women and all those choices that they make. And, by the way, let me give a shout out to all the dads that are at home raising kids.”

Rosen’s communications and public relations firm, SKD Knickerbocker, where she is a managing director, has been paid $120,000 by the Democratic National Committee in this election cycle. She later rethought her stance:

“I apologize to Ann Romney and anyone else who was offended. Let’s declare peace in this phony war and go back to focus on the substance.”

--At a conference in Manhattan, New Jersey Gov. Chris Christie said America has become a couch-potato nation, citing a “paternalistic entitlement society.”

“I’ve never seen a less optimistic time in my lifetime in this country.” Christie added, the government is now telling people, “‘Stop dreaming, stop striving, we’ll take care of you.’ 

“That will not just bankrupt us financially, it will bankrupt us morally, because when the American people no longer believe that this is a place where only their willingness to work hard and to act with honor and integrity and ingenuity determines their success in life, then we’ll have a bunch of people sitting on a couch, waiting for their next government check….

“I think politicians get themselves into the biggest trouble when they care more about being loved than being respected. That’s why we run up these deficits we run up. That’s why we can’t say no to anything, because we care too much about being loved.”

--9/11 mastermind, Khalid Sheik Mohammed, and four of his henchmen will be arraigned on May 5 at a Guantanamo Bay military tribunal. They face the death penalty. Of course some wonder why this wasn’t done sooner.

--George Zimmerman was charged with second-degree murder in the death of Trayvon Martin. Zimmerman told police he was fighting for his life in the altercation with Martin before he fired in self-defense. If convicted of murder in the second degree, Zimmerman would face a maximum sentence of life in prison. Zimmerman pled not guilty. Trayvon’s mother, Sybrina Fulton, admitted on “Today” on Thursday that her son’s death was “an accident.”

--Newsweek conducted an exclusive poll on race relations in America. Among their findings:

Back in 2008, 52% of Americans told Pew Research Center that they expected race relations to get better as a result of Obama’s election; only 9% anticipated a decline.

But today that 43-point gap has vanished. According to the Newsweek survey, only 32% of Americans now think that race relations have improved since the president’s inauguration; 30% believe they have gotten worse.

51% of whites believe Obama’s been unhelpful in bridging the country’s racial divide. 

But…when Newsweek asked: Is racism a big problem today in America? 60% of blacks think yes. Only 19% of whites agree.

Was Trayvon Martin’s death racially motivated? 80% of blacks said yes. 31% of whites agreed.

78% of blacks believe President Obama’s comments about the shooting were appropriate. Only 28% of whites felt they were.

--Interesting story in the Wall Street Journal on the recent surge in priestly ordinations. According to the Vatican, there were 5,000 more Catholic priests world-wide in 2009 than there were in 1999.   The situation in the U.S. is still dire but improving.

--In an interview for Smithsonian magazine, “Simpsons” creator Matt Groening said Homer et al live in Springfield, Oregon, 100 miles south of Portland.

“When I grew up, I realized it was just a fictitious name,” he said. “I also figured out that Springfield was one of the most common names for a city in the U.S.

“In anticipation of the success of the show, I thought, ‘This will be cool; everyone will think it’s their Springfield.’ And they do,’” he told Smithsonian.

Ahead of the “The Simpsons Movie” in 2007, USA TODAY held a contest to pick the Simpsons’ ‘real’ hometown and the Springfield in Vermont beat the Oregon version.

But wait…there’s more! Groening said at week’s end (in TV Guide) that his comments were misinterpreted. 

“I never said Springfield was in Oregon.”

But he did. Executive producer Al Jean told TV Guide: “There is no specific state that Springfield is in, and we will never reveal that secret…except this coming Sunday at 8.”

--Mirlande Wilson, the McDonald’s worker in Maryland who insisted she hit the Mega Millions jackpot, now insists she didn’t lie when she told her lottery pool co-workers – and us – that she won.

“I don’t know who lied. I’m not the liar!” Wilson said after Maryland officials said three others from the state held the winning ticket in an equal partnership. “Let them think what they want, let them say what they want to say. I’m happy.”

Good lord…yet another Sign of the Apocalypse. [The Kansas winner chose to remain anonymous, while no one has come forward in Illinois, where winners have one year to claim a jackpot, though you have to reveal some details about yourself, but not your name.]

--Tim Tebow packed Easter Sunday services at the Celebration Church in Georgetown, Texas (near Austin). Aside from his comments on faith, he took a shot at professional athletes who insist they are not role models.

“Yes you are. You’re just not a good one.”
---

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

God bless America.
---

Gold closed at $1659
Oil, $102.85

Returns for the week 4/9-4/13

Dow Jones -1.6% [12849]
S&P 500 -2.0% [1370]
S&P MidCap -2.0%
Russell 2000 -2.7%
Nasdaq -2.3% [3011]

Returns for the period 1/1/12-4/13/12

Dow Jones +5.2%
S&P 500 +9.0%
S&P MidCap +9.7%
Russell 2000 +7.5%
Nasdaq +15.6%

Bulls 48.4
Bears 21.5 [Source: Investors Intelligence]

Have a great week. I appreciate your support.

*Don’t forget the StocksandNews iPad app [you need an iPad first, as I was reminded this week]. The perfect Administrative Professionals Day gift (April 25).

Next time from somewhere in the Blue Ridge Mountains. Assuming all goes well, I’m forcing lots of history on you as I’ll be touring some Civil War sites and an important WWII memorial.

Brian Trumbore



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-04/14/2012-      
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Week in Review

04/14/2012

For the week 4/9-4/13

[Posted 6:00 AM ET]

Europe, Washington and Wall Street

Robert J. Samuelson / Washington Post

“The European ‘crisis’ is back. Actually, it never went away – and won’t for many years. The problems are so deep and pervasive that there is no easy or obvious solution. Government debt and deficits in many countries are not sustainable, but the usual remedies of cutting spending and raising taxes – a.k.a. ‘austerity’ – may make matters worse by deepening already severe recessions. Europe is caught in a trap that promises more political and social unrest.

“The wonder is that, for a few months, there was a sense of complacency. Interest rates on vulnerable debtor countries Spain and Italy declined. Fears about European banks eased. Some commentators said ‘the worst is over.’

“Well, probably not. Interest rates are headed up again, while European stocks have taken a pounding….

“Each crisis aggravates the others. Because banks hold huge portfolios of government bonds, fears about the bonds’ values weaken the banks and threaten their failure. Weak banks in turn don’t provide ample business and consumer loans to increase economic growth. And feeble or nonexistent growth shrinks tax revenues and makes it harder for governments to service their debts.

“Just how Europe escapes this trap is unclear.” 

This week, the interest rate on Spain’s 10-year bond hit 6.00% as the government of Prime Minister Mariano Rajoy announced further austerity measures, as well as a crackdown on tax evaders. Rajoy each day attempted to reassure his countrymen that a European bailout was not required. At the same time it was reported industrial production in Spain for February was down 5.1% after a 4.3% decline in January. GDP is estimated to fall 1.5% or more in 2012.

In Italy, which saw its 10-year bond trade back up to nearly 5.70%, the main labor unions took to the streets to protest Prime Minister Mario Monti’s pension-system overhaul.

In both Spain and Italy, the 3rd- and 4th-largest economies in the eurozone, Rajoy and Monti have talked about reforms, particularly on the labor front, but in some cases the reform really brings few benefits, and, it’s still all about implementation, which remains the case in Greece.  Industrial production there for February, by the way, was down 8.3%. The European Commission projects the Greek economy will tank another 5% this year.

PIMCO’s Mohamed El-Erian said that “The problems in Europe are getting bigger. Europe has a debt issue and Europe has a growth issue, and until Europe deals with both, we are going to have these recurring periods of nervousness in the market.”

European Central Bank Executive Board member Benoit Coeure floated the idea of the ECB buying government bonds again, specifically Spain’s, to lower borrowing costs through an existing program that hasn’t been used in a while. But this loads up the ECB’s balance sheet with more suspect debt than it already has.

As El-Erian says: “People are realizing that the tranquility that we have is bought rather than earned. It depends on the ECB putting in liquidity in order to calm markets. At the first indication that the ECB may not be committed to this, people get really nervous.”

Editorial / Washington Post

“The continent is still plagued by a profound imbalance between the rich north and the indebted south. The latter could grow, and pay off debt more easily, if countries there could devalue their national currencies, but that’s not an option as long as they use the euro. The south could also grow more quickly if Germany would switch from an export-led growth model to growth driven by consumption. Germany has made some progress in that direction but probably not enough to boost imports from Spain, Italy and the rest significantly in the short term.”

And consider this. In December and February, the ECB floated its two LTROs, 1 trillion euro, $1.3 trillion in three-year loans that led to a big rally in the debt markets. Investment in government debt by Spanish banks climbed to a record 246 billion in February, an increase of 20% from December, ECB figures show.

Jacques Cailloux, chief European economist at Royal Bank of Scotland (RBS) in London best summed it up for Bloomberg:

“Something is wrong when you load up on assets that were considered risky in November and deemed un-risky in January. Now we’re seeing the worst you could have hoped for. As soon as the situation of the sovereign worsens, banks will come under additional market pressure. That’s extremely negative.”

Washington

The presidential campaign kicked off in full force now that we know it is Mitt Romney challenging President Barack Obama. For his part, Obama went after the rich in a speech in Boca Raton, Fla.

“Let me ask you, what’s the better way to make our economy stronger? Do we give…tax breaks to every millionaire and billionaire in the country? Or should we make investments in education and research and health care and our veterans?”

Obama added, “(What) drags our entire economy down” is when “the gap between those at the very, very top and everybody else keeps growing wider and wider and wider and wider.”

Obama then whipped out his Buffett Rule, citing the anecdote about billionaire investor Warren Buffett and his secretary in his speech, saying “now that’s wrong – that’s not fair…We’ve got to choose which direction we want this country to go. Do we want to keep giving those tax breaks to folks like me who don’t need them? Or do we want to keep investing in those things that keep our economy growing and keep us secured? That’s the choice.”

Editorial / Wall Street Journal

“Forget Warren Buffett, or whatever other political prop the White House wants to use for its tax agenda. This week the Administration officially endorsed what in essence is the Obama Rule: Taxes must be high simply to spread the wealth, never mind the impact on the economy or government revenue. It’s all about ‘fairness,’ baby….

“The policy goal is to impose an effective minimum tax of 30% on the income of anyone who makes more than $1 million a year. When President Obama first proposed this new minimum tax he declared that the rule ‘could raise enough money’ so that we ‘stabilize our debt and deficits for the next decade.’

“Then he added: ‘This is not politics; this is math.’ Well, remedial math maybe.

“The Obama Treasury’s own numbers confirm that the tax would raise at most $5 billion a year – or less than 0.5% of the $1.2 trillion fiscal 2012 budget deficit and over the next decade a mere 0.1% of the $45.43 trillion the federal government will spend. When asked about those revenue projections, White House aide Jason Furman backpedaled from Mr. Obama’s rationale by explaining that the tax was never intended ‘to bring the deficit down and the debt under control.’

“Okay. So what is the point?

“The goal, Mr. Furman explained, is to establish ‘a basic issue of tax fairness.’ Millionaires should pay an effective tax rate no lower than a middle-class secretary or a plumber. But wait: IRS data show that middle-class workers on average pay just under 15% of their income in federal taxes, while the richest 0.1% pay almost twice as high a rate on average, or 26%....

“An even greater absurdity is the White House claim that this is a first step to tax reform because it will ensure that the ‘rich don’t take advantage of tax breaks or structure their affairs to pay less taxes.’ Huh?

“A basic principle of any tax reform worth the name is to broaden the tax base in order to lower rates for everyone, not to raise them. The point is to make the tax code more efficient by reducing the incentive for avoidance – legal or illegal.

“The Buffett tax would only make loopholes more valuable. The White House has already carved out one exception to its own Buffett rule: charitable donations. So a billionaire could avoid the 30% effective tax rate by giving away millions of dollars – say, the way Mitt Romney generously does….

“The Buffett rule is really nothing more than a sneaky way for Mr. Obama to justify doubling the capital gains and dividend tax rate to 30% from 15% today. That’s the real spread-the-wealth target. The problem is that this is a tax on capital that is needed for firms to grow and hire more workers. Mr. Obama says he wants an investment-led recovery, not one led by consumption, but how will investment be spurred by doubling the tax on it?

“The only investment and hiring the Buffett rule is likely to spur will be outside the United States – in China, Germany, India, and other competitors with much more investment-friendly tax regimes.”

Charles Krauthammer / Washington Post

“Here we go again.

“At the beginning of his presidency, Barack Obama argued that the country’s spiraling debt was largely the result of exploding health-care costs. That was true. He then said the cure for these exploding costs would he his health-care reform. That was not true.

“It was obvious at the time that it could never be true. If government gives health insurance to 33 million uninsured, that costs. Costs a lot. There is no free lunch.

“Now we know. The Congressional Budget Office’s latest estimate is that Obamacare will add $1.76 trillion in federal expenditures through 2022. And, as one of the Medicare trustees has just made clear, if you don’t double count the $575 billion set aside for the Medicare trust fund, Obamacare adds to the already crushing national debt.”

On the Buffett Rule, Krauthammer notes:

“For Obama, fairness is the supreme social value. And fairness is what he is running on – although he is not prepared to come clean on the price. Or even acknowledge that there is a price. Instead, Obama throws in a free economic lunch for all. ‘This is not just about fairness,’ he insisted on Wednesday. ‘This is also about growth.’

“Growth? The United States has the highest corporate tax rate in the industrialized world. Now, in the middle of a historically weak recovery, Obama wants to raise our capital gains tax to the fourth highest. No better way to discourage investment – and the jobs and growth that come with it. (Except, perhaps, for hyperregulation. But Obama is working on that too.)….

“The Buffett Rule redistributes deck chairs on the Titanic, ostensibly to make more available for those in steerage. Nice idea, but the iceberg cometh. The enterprise is an exercise in misdirection – a distraction not just from Obama’s dismal record on growth and unemployment but, more important, from his dereliction of duty in failing to this day to address the utterly predictable and devastating debt crisis ahead.”

On the economic front, more and more U.S. CEOs talked about the warm weather in the first quarter potentially pulling forward sales. Home Depot’s CEO put it very simply: “Someone buying a lawn mower in February or March is not buying another one in April or May.”

So we’ll see how the weather plays into future retail sales.

The Federal Reserve released its latest look at the national economy and said expansion in all 12 of its regions continued “at a modest to moderate pace from mid-February through late March.” 

But Federal Reserve Bank of New York President William C. Dudley said “it is still too soon to conclude that we are out of the woods” and the expansion “has yet to be strong enough on a sustained basis to make a big dent in the overall amount of slack in the U.S. economy.” Housing, high gas prices, and government cutbacks at all levels, still provide some significant headwinds.

Janet L. Yellen, the vice chairwoman of the Fed, said that the lackluster pace of growth may require the Fed to continue its policy of easy money, zero interest rates, into 2015, which warmed the stock market’s cockles some, though for the rest of us schmucks it’s not necessarily a great outlook she was talking about.

“In effect there has been a significant shortfall in the overall amount of monetary policy stimulus since early 2009,” while arguing the shortfall doesn’t necessarily call for a new round of stimulus but rather further justification for extending the existing efforts.

But, if the economy improves and growth starts picking up, Yellen added, it might be time to finally start taking away the punchbowl.

As for the federal budget deficit, the Treasury Department reported that the March take on taxes and other revenue, $171 billion, was the highest for the month since 2008. Individual income-tax revenue from October through March, the first half of the 2012 fiscal year, hit $484.1 billion, up from $475.6 billion in the year-earlier period. Like whoopty-damn-do. Just further proof on what a punk recovery it’s been.

And we also learned that the U.S. government spent $369 billion in March, “more than any previous month in U.S. history.” [Wall Street Journal]

The federal deficit is projected to total $1.2 trillion for the fiscal year ending Sept. 30, down from $1.3 trillion for fiscal 2010 and 2011 and $1.4 trillion for fiscal 2009.

But as I’ll be repeating virtually every week from here to the end of the year, partisanship will rule the day through November, and then we wait to see what a lame-duck Congress (and potentially a lame-duck president) do about the expiration of the Bush tax cuts, payroll tax relief, spending cuts previously agreed to that would take effect Jan. 1, and another debt ceiling debate.

And just a word on China, a big reason for Friday’s market decline. GDP came in at 8.1% for the first quarter, slightly worse than expected and the slowest pace in nearly three years.   But while this is down from 8.9% in the fourth-quarter, it is still very much a soft-, not hard-landing figure. Importantly, new loans rose strongly in March as the government urged the banks to begin lending again. Premier Wen Jiabao earlier forecast a 7.5% growth rate for all of 2012, but most analysts, including the World Bank, have growth coming in between 8.0% and 8.5%; the WB having just lowered their forecast from 8.4% to 8.2%. 8% would be fine. 7% would be worrisome.

China’s trade picture for March was also announced and imports were up only 5.3%, less than expected, while exports rose 8.9%, better than forecast. The lower figure on imports does point to slowing domestic demand.

But on the export side, you got a good picture of the global economy these days. China’s exports to Europe fell 1.8% in March, but rose 12.8% to the U.S.

Meanwhile, consumer prices rose 3.6% in March, higher than February’s 3.2% pace but still below the 4% government target. Food prices in March rose 7.5%, hotter than Beijing wants but down from last year’s double-digit norm.

Street Bytes

--Stocks had their worst week of the year even with the biggest 2-day rally of 2012, as the Dow Jones lost 1.6% to 12849, while the S&P 500 lost 2% and Nasdaq 2.3%. Earnings start flooding the system in earnest the next two weeks. Friday, JPMorgan Chase and Wells Fargo beat their respective earnings estimates but the shares in both dropped because of rising expenses and concerns over the quality of the profits.

--And a look at some 10-year return figures thru March 31, 2012.

Large-Cap Growth funds…3.71% annualized return
Small-Cap Growth…5.77%
S&P 500 Index Objective…3.58%
Intermediate Investment Grade Debt…5.31%

[Source: Lipper / Barron’s]

--U.S. Treasury Yields

6-mo. 0.12% 2-yr. 0.27% 10-yr. 1.98% 30-yr. 3.13%

The inflation data for March was released. Producer prices were unchanged, but up 0.3% ex-food and energy. For the last 12 months the two figures are 2.8%, 2.9% on the core.

Consumer prices rose 0.3%, 0.2% ex-food and energy. And for the last 12 months the CPI is up 2.7%, 2.3% on core.

--Rep. Paul Ryan (R-Wis.):

“Treasury Secretary Tim Geithner came to the House Budget Committee about a month ago and said to us: ‘We’re not suggesting we have a solution to the long-term fiscal problem. What we do know is, we don’t like yours.’

“This is the essence of failed leadership. Rather than put out a solution to this very clear and present danger to our country’s future, the president has decided to wait for the Republicans to offer their solution and then attack it.

“If you put a budget plan in place that does deal with the drivers of our debt, that will give us an immediate boost of growth today. The bond markets and businesses are looking to see if leadership is getting this situation under control so that they can take risks, so that they know they will have a certain future to be optimistic about. Until you have a plan like this in place, you can’t reap that kind of a growth dividend.” [New York Post]

--VW’s sales in China rose 13% in the first quarter, with BMW’s up 41%. Mercedes-Benz reported a 24% sales increase on the mainland.

But, total vehicle sales in China fell 3.4% from a year earlier for the quarter (down 1.3% for passenger cars). Sales are still expected to rise this year.

--Natural gas traded below $2 for the first time since January 2002. The warm weather in the first quarter kept usage low and in turn has led to record inventories as supplies continue to rise. 

On the crude front, the International Energy Agency said tightness in the oil market is easing, but it’s still largely about Iran.

--The Justice Department announced it was suing five major publishers and Apple on e-book price-fixing charges, and simultaneously settling with three of them, which is a big boon for Amazon, which then announced it was pushing prices down on e-books to as low as $9.99 for some big titles. The publishers and booksellers argue that the ultimate effect of the suit will be to enhance Amazon’s perceived monopoly even further, with Amazon already controlling 60% of the e-book market.

The government said the five plus Apple met secretly to set prices and then sought to hide their discussions.

HarperCollins, Hachette and Simon & Schuster settled, while Penguin, Macmillan and Apple vowed to fight the charges.

--Facebook acquired photo-sharing app maker Instagram for $1 billion in cash in a move that, needless to say, had people buzzing, especially since Instagram has been around for about 18 months, and has all of 13 employees and no revenue, while founder Kevin Systrom just made an estimated $400 million. Facebook, with an estimated value of $100 billion, goes public next month. CEO Mark Zuckerberg promised Systrom that Instagram would be able to operate as an independent company. The two have known each other since 2004.

Among the many amazing parts to this story is the fact that last Friday, Instagram closed a $50 million funding round led by Sequoia Capital, which valued the company at $500 million, and then on Monday, Facebook acquired it for $1 billion.

Holman W. Jenkins, Jr. / Wall Street Journal

“Facebook obviously has learned one lesson of the Internet bubble. If you have a $100 billion market cap and no way to make money, find a way to spend it.

“We’re being mean. The $1 billion Mark Zuckerberg spent on Instagram is pocket change and the deal’s purpose wasn’t handwaving to convince investors he was finding a solution to Facebook’s profits challenge. He’s still trying to please users, God bless him, especially mobile users, who love Instagram to customize the look of photos they snap with their smartphones.

“It’s nice that Mr. Zuckerberg continues to be mostly interested in the happiness of his users, who number a gross 845 million. But how to make money should be the key focus for a company expecting to go public in May….

“Facebook is bursting at the firewalls with unmonetized information. Pathetic are the teensy, inconspicuous promotions for bridal supplies when a female user changes her relationship status to ‘engaged.’ Pitiful are the barely noticeable come-ons for Ted Nugent concert tickets that apparently materialize because a ‘friend’ insists on posting a new music video every day….

“Not exploiting user information is the worst kind of exploitation of all. Facebook would earn no profits. It would gradually fade in significance. Users would lose all the benefit of a powerful, growing Facebook. They’d also lose the untapped, incipient value of the immensely valuable personal data Facebook has been collecting.”

--In another $1 billion deal, Microsoft bought the majority of AOL’s patents for $1.06 billion, covering intellectual property rights to more than 800 innovations. AOL is retaining 300 patents which Microsoft will be granted licensing rights to.   AOL shares rose 40% on the news.

--Google reported earnings that beat expectations, though revenues were in line, but it was a move by billionaire founders Larry Page and Sergey Brin that drew the ire of shareholders. In announcing a two-for-one stock split, Page and Brin said a new class of non-voting shares would be created that ensures the two do not lose power. Coupled with chairman Eric Schmidt’s stake, the three will control about 2/3s of the voting rights.

All shareholders will receive one additional non-voting “C Class” share that will be quoted on Nasdaq. Google tanked $28 on Friday.

--Yahoo’s new CEO Scott Thompson finally unveiled his plans to restructure the company around three core groups: “consumer, regions and technology.”

The goal, according to Thompson, is to “bring some of our best product designers and engineers much, much closer to consumer needs and demands.” Prior to the move, Yahoo had announced plans to dismiss 14% of its workforce. 

--Best Buy CEO Brian Dunn’s resignation was a result of a probe into his “personal conduct,” according to the company, though no details have been released. The retailer said the issues are not linked to Best Buy’s operations or financial controls. G. Mike Mikan, a board member who was named interim CEO, told employees Dunn’s departure was “a surprise.”

--Shares in Nokia hit a 15-year low after reporting its worst quarter for sales since 2006. Finland’s flagship company is having a major issue with its Lumia 900 handset that stops it connecting to the Internet – which isn’t good, especially considering the phone was designed for the American market and launched just days ago with the slogan: “An amazingly fast way to connect.”

Nokia also admitted it lost money on every phone it sold in the first quarter and warned it did not expect an improvement in margins in the second quarter.

--Sony announced it is shedding 10,000 jobs as part of a major reorganization. The cuts will be made over the next 12 months. Earlier, Sony forecast a record annual loss of $6.4 billion for the past financial year, double a previous estimate and due largely to an additional tax expense.

Sony’s television business has lost money for the past eight years, despite selling 20 million sets per annum, so the company is looking to cut costs in the business by 60% by March 2014.

--A survey by the New York Times of CEO compensation finds that among the 100 top-paid execs, overall pay rose 2% in 2011 from 2010, with the median CEO in this group taking home $14.4 million – compared with the average annual American salary of $45,230.

Apple CEO Tim Cook was paid a salary of just $900,000 in 2011, but was granted a one-time stock award that at the end of last week (April 6) was valued at roughly $634 million.

--Credit Suisse estimates that multi-employer pension plans, managed by trade unions on behalf of members working for various employers, are now just 52% funded. The most recent data by the Pension Benefit Guaranty Corporation, which insures U.S. pension programs, puts it at 48%. Both awful.

--The New York Post’s Mark DeCambre reports that Goldman Sachs Chairman and CEO Lloyd Blankfein and President Gary Cohn are not getting along as well as they have in the past, with Cohn frustrated that he hasn’t taken over the top slot yet. One Goldman insider said, “Gary thinks it’s his time [to lead].” Cohn is 51, Blankfein 57, with the latter telling other Wall Street executives he wants to remain CEO for another few years – or as long as it takes to restore the investment bank’s reputation.

So imagine the battle taking place between the two spouses.

“When is Lloyd going to give up the top spot to Gary?”

“Not any time soon, honey. My Lloyd will step down when he’s ready to. Deal with it.”

[Lloyd received a pay cut for 2011 to $12 million, which also didn’t please Lady Blankfein.]

Separately, Goldman agreed to pay $22 million to settle regulatory charges alleging Goldman analysts had weekly “huddles” from 2006 to 2011 where they discussed confidential research on stocks with the firm’s traders. The analysts then passed on the ideas to selected clients, before it was published. This is but one example of why some of us despise Goldman, not because of the New York Times op-ed by the disgruntled former employee. It was July 2010 that Goldman reached a record $550 million settlement of the SEC’s fraud charges it misled buyers of mortgage-related investments.

--This is bad. As the Wall Street Journal reports, the spread of white-nose syndrome among the bat population to Missouri and Alabama for the first time makes 19 states and four Canadian provinces, killing an estimated 5.5 million. The concern is that bats serve as nature’s pest-control and it could have a major impact on agriculture and the battle against crop-eating insects.

--The federal government reached an agreement with 41 American Indian tribes to settle charges it mishandled money and natural resources managed on their behalf. The dispute is decades old.

The Interior Department oversees 50 million acres of land for federally recognized tribes and in the process handles leases for oil and gas production and timber harvesting, among other things.

--If you ever wondered where stolen art ends up, try Serbia. A painting by Paul Cezanne, valued in excess of $100 million that had been stolen from a Swiss museum four years ago, was recovered in Belgrade. Other stolen works have been traced to an art theft ring in Serbia as well.

--Update: Matt Lauer’s new contract with NBC’s “Today” pays him $25 million a year. The network desperately needed him to stay and has granted him a four-day work week and god knows how much vacation. Evidently, he also requested a new co-anchor as rumors swirl Ann Curry will be shunted to roving international correspondent. Savannah Guthrie is a possible replacement. Or, Meredith Vieira may return.

-- “The Lion King” became Broadway’s all-time highest grossing show, replacing “The Phantom of the Opera.” Cumulative gross for ‘Lion’ is $853,846,062 as of Monday. ‘Phantom’ continues but its pace at the box office trails ‘Lion’. I did see where 40% of ‘Phantom’ tickets are sold to repeat customers, and 68% are women, according to music historian Cary Ginell. ‘Phantom’ also remains the longest-running show in Broadway history. 

--We note the passing of painter Thomas Kinkade, 54, the self-styled “Painter of Light” who made a fortune on his work, some $53 million alone between 1997-2005. Early in his career, Kinkade was selling his paintings in parking lots and once rode the rails with another artist, sketching landscapes. But he persevered. He was dismissed in some circles for “mass producing kitsch,” but I kind of liked some of it. Since his death last weekend, business has been booming.

--Finally, on the portfolio front I had some bad news on my main China holding, but I don’t want to say anything more until the company issues a statement this coming week. I promise to tell an ugly story next time concerning this one.

Foreign Affairs

North Korea: The week began with Kim Jong Un receiving the new title of First Secretary of the Workers’ Party, along with chairman of the party’s Central Military Commission and selection as a standing member of the Politburo. At the same time, North Korea was very open with the Western press the past few days, allowing them to see the launch pad for the ballistic missile/rocket that was to take the country’s first communications satellite into orbit, a rare openness. None of it, including the control center, looked the least bit impressive.

Sunday is the 100th anniversary of the birth of Kim Il Sung, founder of the nation, and the rocket launch was to take place anytime between Thursday and then in celebration, so they told us.

So on Friday, Pyongyang time, the North launched the rocket and within one to two minutes it splintered into pieces over the Yellow Sea; an incredibly embarrassing end to what was to be a glorious event for the people to celebrate and admire the regime for. Even state television was forced to admit hours later the satellite that the rocket was carrying failed to enter into orbit. “Scientists, technicians and experts are now looking into the cause of the failure.”

While the North has mastered the technology behind short-range missiles, it appears to have a long ways to go with the longer kind; meaning the United States seemingly has little to worry about on this front.

But what now? What does this say about the leadership of Kim Jong Un and his regent. Who is really in charge?

Is the North preparing a third nuclear test, as South Korea first reported this week? [The previous two tests were in 2006 and 2009.] Aside from a nuke test, which now seems a certainty in light of the missile failure, what other series of provocations does Pyongyang have in mind in an attempt to save face and show Kim is still in charge. [CNN’s Pentagon reporter Barbara Starr had a good point. I wouldn’t want to be the guy who thought it was a brilliant idea to grant the Western press such sweeping access this week.]

One thing is for sure; the February food aid deal with the United States is off, one in which the North was to stop nuclear tests, uranium enrichment and long-range missile launches in return for stale Hostess products.

As for China, they can’t be too pleased that not only did North Korea ignore their pleadings not to go ahead with the launch, but Pyongyang failed to give Beijing any advance notice.

Iran: The five permanent members of the UN Security Council – Britain, France, Russia, China and the United States – plus Germany, will be holding talks in Istanbul with Iran over their nuclear program this weekend. Expectations are low. The P5+1 is supposedly not going to make any initial demands (such demands being widely well known anyway), and instead feel out Iran on whether or not they are serious. Eventually, the U.S. and its allies would demand that Iran stop producing higher-grade enriched uranium, shut down the Fordo underground plant in Qom, and ship any existing highly-enriched uranium out of the country. This is also the least Israel expects, they being a rather interested spectator. China, meanwhile, has been urging restraint and negotiations, as well as Russia, but the patience of the U.S., France and Britain is running thin. For starters, Iran’s history would tell you that if any agreements are reached, they’ll just cheat on them. And if Iran outright rejects any demands presented this weekend or in future talks, President Obama has an election-year crisis on his hands. While he would like negotiations to go through November that just doesn’t seem conceivable.

The latest round of talks in Istanbul broke off in January 2011, when Iranian officials refused to talk about the nuclear program until sanctions were lifted.

Last Sunday, in an interview on CNN, Israeli Defense Minister Ehud Barak said:

“It’s clear that the depth of the sanctions is different from what we had in the past and it has its impact. Both the closing of the SWIFT [electronic transfer] clearing system as well as the sanctions on the oil exports and, of course, the coming negotiations. It probably will encourage them to move. But to tell you the truth, we hope for the best. But I don’t believe that this amount of sanctions and pressure will bring the Iranian leadership to the conclusion that they have to stop their nuclear military program.”

Barak made clear that any negotiations would be a failure if they did not end in Iran not only stopping enrichment to 20%, but agreeing to remove all uranium already enriched to that level to a “trusted” neighboring country.

Lastly, remember how years ago, going back to the George W. Bush administration, I said the United States should be negotiating with former president Ayatollah Rafsanjani? The still influential cleric reportedly has been criticizing President Ahmadinejad for his extremist anti-American rhetoric, though a hardline news agency “categorically denied” Rafsanjani had called on Iranian leaders to resume talks with the U.S. I’m sure he has. 

Stephen Hayes / Wall Street Journal

“Anything that retards Iran’s nuclear progress is helpful. But even if the talks ‘solved’ the nuclear issue – virtually inconceivable, given the measures the Iranians have taken to preserve their program – a bigger problem would remain: the Iranian regime itself. Whatever progress is made in the context of overlapping short-term interests, it will do little to change the long-term strategic problems presented by a hostile Iran. And Iran is hostile.

“It is one of the most underreported stories of the past decade: As we went to war in Afghanistan and Iraq, Iran went to war with us. Tehran has provided weapons to insurgents directly responsible for killing hundreds of American troops in those two countries. It has funded, trained and equipped jihadists – Sunnis and Shiites alike – targeting American forces and interests in the Middle East and beyond. And all along the way it has provided safe haven and support to al Qaeda leaders and those closest to them….

“This weekend’s talks in Istanbul will ignore all of this. Instead, they will, as White House spokesman Jay Carney said, focus on ‘the international community’s concerns with Iranian behavior regarding their nuclear program.’

“Fair enough: The international community isn’t interested in holding Iran accountable for these acts of war, and in preparing for high-level talks it’s easy to separate one problem from another. But the real world doesn’t work that way.”

Syria: Syrian forces clashed with rebels near the Turkish border on Friday in a violation of the cease-fire that went into effect on Thursday. Of course the original cease-fire was to be Tuesday and that didn’t hold. Across the country, at least 160 were killed on Monday. Additionally, this week, a Lebanese cameraman was killed inside the Lebanese border as he was covering the Syrian army across the way. He waved and was met with a hail of bullets. Human Rights Watch and Amnesty International documented hundreds of executions. The death toll stands at 10,000+ and a reported 200,000 have been imprisoned.

Lebanon: Lebanese Forces leader Samir Geagea blamed the March 8 coalition for the attempt on his life the prior week; March 8 having among its members Hizbullah and its allies of Syria, as he put it.

Egypt: A super confusing week as a court in Egypt suspended the 100-member national assembly charged with drafting a new constitution. Several lawsuits had demanded the panel be blocked because it did not reflect the diversity of Egyptian society. Liberals and secularists said Islamists dominated the group.

Meanwhile, hard-core Islamist Hazem Abu Ismail was to be ruled ineligible for the presidential ballot because his late mother was a U.S. citizen, but a court ruled in Ismail’s favor…for now…even though the evidence is clear he should not be eligible. 

And Muslim Brotherhood lead candidate, Khairat el-Shater, may have his own eligibility issues concerning his past imprisonment and whether he was officially pardoned by the ruling military council. Shater said the Brotherhood reneged on its promise not to field a presidential candidate only to stop the “tyranny” of the past.

As for the decision by former Mubarak-era spy chief Omar Suleiman to run for president , Shater said, “We are talking about a nation that was subjected to destruction and plundering under Hosni Mubarak’s leadership, who based his system on tyranny and corruption, which led to backwardness, and Omar Suleiman was one of his main assistants. His nomination is an insult to all the Egyptian people and an attempt to reproduce the old regime in a modified way.”

Shater also said the United States should support the democratic transition in Egypt, while adding, “There is a state of lack of trust between the different fronts. That is a result of the U.S. administration largely supporting the tyranny of the Mubarak regime for a long time. Egypt’s relations with the U.S. must be strong and strategic based on economic cooperation and all other forms of cooperation.”

But it was also revealed this week that Shater gave an address last April 21, 2011, which was just transcribed into English, and in it he says:

“Everywhere, the Brothers are working to restore Islam in its all-encompassing conception to the lives of people. Thus the mission is clear: restoring Islam in its all-encompassing conception, subjugating people to God, instituting the religion of God, the Islamicization of life, empowering of God’s religion, establishing the renaissance of the ummah [worldwide Muslim nation] on the basis of Islam…Every aspect of life is to be Islamicized.” [Jerusalem Post]

For its part, the ruling military council said it would stay neutral and not field a candidate, though most feel Suleiman is favored by the army. The council has been careful not to put Suleiman on trial for the abuses of the old regime.

Pakistan: Parliament on Thursday unanimously approved new guidelines on relations with the United States which include a ban on transporting weapons through the country to Afghanistan. The national security committee also called for an end to drone attacks in Pakistani territory and an unconditional apology for U.S. air strikes in November that killed 24 Pakistani soldiers. Parliament is demanding those responsible for the air strikes be brought to justice.

While it wasn’t revealed if NATO convoys would be allowed, denying use for weapons shipments is a demand several political parties had including opposition Islamists. Prime Minster Gilani told parliament his government would implement the recommendations in “letter and spirit.”

A U.S. State Department spokesperson said, “We respect the seriousness with which parliament’s review of U.S.-Pakistan relations has been conducted. We look forward to discussing these policy recommendations with Pakistan.”

The ongoing closure of the supply routes through Pakistan greatly impedes the U.S. military’s withdrawal from Afghanistan. Prior to the shutdown, one-third of American war supplies moved through there. Since then, coalition forces have relied on a system of supply lines in countries such as Russia, Kyrgyzstan and Uzbekistan.

On a different matter, Pakistani President Zardari went to India for the first visit there by a Pakistani head of state in seven years. Zardari had lunch with Indian Prime Minster Singh, though little of substance came of it.

And up to 135 people, 124 soldiers and 11 citizens, died in the avalanche that crushed a Pakistani military camp in mountainous Kashmir on Saturday.

Afghanistan: President Hamid Karzai said he is thinking of stepping down in 2013 – a year early – due to NATO’s withdrawal in 2014; Karzai knowing that it will be difficult to hold a presidential election without NATO’s presence. His second five-year term is due to expire in 2014 and the constitution forbids him from running a third time. Karzai did say a final decision on the poll will not be made for some time.

An ABC News/Washington Post poll found that 48% of Americans support President Obama’s handling of the war, 43% disapprove. But only 30% now say it has been worth fighting.

China: The Communist Party formally removed Bo Xilai and his wife was arrested on suspicion of murdering British businessman Neil Heywood. In a one-line statement, Chinese state media announced Bo had been suspended from his position on the 25-member Politburo because of “suspected serious violations of discipline.”

Bo’s wife, prominent attorney Gu Kailai, and an orderly who worked at the couple’s residence, were “transferred to judicial authorities.”

Heywood was found dead in a hotel room in Chongqing last November 15 and at the time police informed British consular officials that he had died from “excessive alcohol consumption” and his body was quickly cremated. Heywood had been a close associate of the Bo family.

But a police investigation now concludes Gu and Heywood fell out over a “conflict over economic interests.”

Meanwhile, in terms of the transfer of power at year end, speculation now has it that President Hu Jintao and Premier Wen Jiabao, both of whom held Bo’s Maoist campaigns in Chongqing in contempt, have gained an upper hand in promoting their own supporters.

Others say there are growing calls to cut the key standing committee (of which Bo might have been a member before the purge) from nine to seven to facilitate better and quicker decisions.

The Communist Party’s official People’s Daily urged members to support the decision to remove Bo from his senior party post. According to the front page editorial, the investigation into Bo and his wife’s arrest shows the Party’s “firm determination of maintaining its own purity. Bo has seriously violated Party discipline, causing damage to the cause and the image of the Party and state.”

An editorial in the South China Morning Post (Hong Kong) concludes “Bo seems certain to go to jail.”

“That would be an ignominious end to the career of a populist of nationwide renown. But he was also a man of contradictions. His leadership of Dalian and Chongqing and his crackdown on crime and corruption made him popular with the masses. But a campaign to revive values of the Maoist era stirred painful memories of the Cultural Revolution and rankled fellow leaders of modern China….

“Mao Zedong famously said that upheaval or crisis strikes China once every seven or eight years. This one may be late or early, but if the past is any guide it will pass without serious harm to the solidarity of the leadership or the political legitimacy of the party. Rather, it will spur the leadership to unite and put aside personal differences – not only in their own interests, but because Communist Party rule is at stake. In the wake of the crisis, the emphasis is bound to be on economic and political stability. But that should not be allowed to delay reforms aimed at putting China’s meteoric growth on a sustainable path, safeguarding its achievements and spreading the benefits equitably among its people.”

France: The first round of the presidential vote is a week from Sunday, April 22, and polls still show that Socialist Party candidate Francois Hollande will defeat President Nicolas Sarkozy handily in a runoff, which will be May 6. Hollande is being hurt, however, by far-left candidate Jean-Luc Melenchon, who is attracting some of the biggest crowds so far at rallies blanketed in red communist flags. Hollande vows to focus on education, job support for French youths facing high unemployment rates, equal pay for women, respect for culture and ethnic diversity.

Melenchon, by the way, is beginning to poll ahead of far-right National Front candidate Marine Le Pen. And if you thought Hollande’s 75% top tax rate proposal on millionaires was outrageous, Melenchon is proposing to confiscate all income above $470,000 a year.

Editorial / London Times

“There is something even more disquieting than the possibility that the candidates to be France’s next president are driven by the cynicism of the hustings to make promises to tax the rich, to expand the reach of the State, to safeguard social services and to tighten the free movement of people across EU borders – all at a time when France’s public finances are as precariously balanced as a drunk on a tightrope. What is more disquieting is the possibility that the candidates may genuinely believe they can deliver what they are promising….

“France is in the grip of an election campaign stained by a hostility to the very wealth and industry that has made it the world’s fifth richest country and the second most powerful member of the eurozone, and also by a willful refusal to address its parlous financial book-keeping….

“Mr. Sarkozy, the presidential candidate of 2012, is hard to recognize as the same Mr. Sarkozy who once moaned that France was a country that had ‘never stopped discouraging initiative and punishing success.’ Today, he zealously joins his political rivals in bad-mouthing bankers. Having already increased income and corporate tax, he now aims to squeeze more tax even from those expatriate French who have fled France to escape taxes – a policy that would be comically tricky to pursue.

“Mr. Hollande, meanwhile, is recklessly promising to spend money that France has not yet even borrowed, partially balancing the books by introducing a top rate of income tax of 75%....

“Worryingly, none of these various pledges on the stump is being unduly burdened by the reality of France’s economic plight. No candidate acknowledges that public spending accounts for 56% of GDP, more than in any other eurozone country; or that unemployment is at its highest for a quarter of a century; or that public debt is 90% of GDP; or that social costs for employers are uncompetitively high compared with those of France’s neighbors; or that exports are sluggish. You need not be a diehard doom-monger to worry that the eurozone’s next crisis might be made not in Athens or Rome or Madrid, but in Paris….

“Voters are reluctant to recognize that unless the State starts to live within its means, France is hurtling towards a financial reckoning. So far neither Mr. Sarkozy nor Mr. Hollande has had the courage to serve voters this awkward truth. This threatens to make the inevitable austerity of life after May 6 all the harder to stomach.”

Nigeria: 50 were killed in an Easter Sunday suicide car bombing near a church in the city of Kaduna. Islamist militant group Boko Haram was suspected.

Zimbabwe: A story was circulating in various places that President Robert Mugabe was near death in a Singapore hospital; the 88-year-old dictator suffering from prostate cancer. While this is great news, there is supposedly a secret “gentleman’s agreement” to hand over power in Zimbabwe to his feared defense minister, Emmerson Mnangagwa, a former spy chief nicknamed “The Crocodile” and known for his ruthless style. [Sydney Morning Herald/The Daily Telegraph]

Random Musings

--Rick Santorum bowed out of the Republican presidential nomination race, leaving Mitt Romney to finally focus on President Obama in what I first wrote last fall will be the ugliest race since 1860. Santorum was behind in the polls in his native Pennsylvania, which holds its primary on April 24, the delegate math wasn’t in his favor, and he is in debt.

Needless to say there remains bad blood between the Romney and Santorum camps and to his credit, Santorum did win 11 states, but that took a toll on Romney, as some of the below polling shows. Romney also had to spend millions beating back Santorum, campaign dollars he had hoped to use in the general election campaign against the president. At the end of February, Romney’s campaign coffers had about $7.2 million to President Obama’s $84 million, though both war chests will now grow, including the ability to tap party resources.

Obama told donors this week, “This election will probably have the biggest contrast that we’ve seen maybe since the Johnson-Goldwater election, maybe before that.”

Romney replied on Tuesday, “This game, this populism of trying to go and divide America, is not only wrong, it’s dangerous.”

John Podhoretz / New York Post

“Mitt Romney’s nomination was certain as long ago as December because he was, when it came right down to it, the only serious candidate in the race – the only candidate who combined intense preparation on issues, an overarching and coherent theme and the necessary fund-raising prowess to prevail in a contest dominated by cringe-inducing silliness.

“Yes, Santorum tied Romney in Iowa and Newt Gingrich blew Romney away in South Carolina – but even then, even serious political types who didn’t want to see Romney as the nominee couldn’t quite envision a way for either of the others to actually win….

“For most of the past year, the political coverage of Romney on both right and left has centered on his weaknesses – how he’s failed to stir Republican passions, how he’s been inconstant in his positions over time, how he put his dog on the roof of his car in 1983, how his profession of a minority faith is problematic.

“But today, perhaps, it’s worth taking a moment to look at Romney’s demonstrable strengths.

“He spent three years patiently building an organization, state by state – which proved exceptionally important with the primary rule changes initiated by the GOP in 2010.

“He became extraordinarily fluent…on the issues. This was notable because, in his 2008 run, he’d been quite ham-fisted and inarticulate on matters that hadn’t been in his wheelhouse as Massachusetts governor.

“In part as a result of his command of material and his understanding of the importance of tone, he was without question the most impressive and strategic performer over the course of the 20 GOP debates….

“And Romney showed a talent for aggressive confrontation without appearing obnoxious. He took Rick Perry out practically single-handedly in their first face-to-face encounter and took Newt Gingrich down in two successive knockouts between South Carolina and Florida.

“Finally, he showed that he could dish it out when he inundated his rivals with well-conceived negative ads that left them sputtering impotently – a mark of the toughness he is going to need to face President Obama in the fall.

“Perhaps even more important, he showed that he could take it – that he could withstand Newtmania and the Santorum Surge without melting down, panicking, losing faith or changing his strategy to satisfy the demands of pundits who didn’t necessarily wish him well.

“That ability to stand his ground and maintain his sangfroid will also stand him in good stead against his formidable Democratic rival.

“Time to get on with it, then.”

--In a Washington Post/ABC News poll, President Obama has double-digit leads over Romney on who would do a better job of protecting the middle class, addressing women’s issues, handling international affairs and dealing with health care. Obama has a better than 2-to-1 advantage as the more likable of the two (64-26). And Romney faces a huge deficit among female voters.

Obama’s overall approval rating remains at 50%, but nearly half of all Americans say his handling of the economy is a major reason to oppose his reelection. 

Romney’s only big advantage is on the issue of who would do a better job dealing with the federal budget deficit (51-38).

In a Romney-Obama matchup, with the poll being held prior to Santorum’s exit, the president holds a 51-44 lead.

Romney trails by 19 among women (Obama won the demographic by 13 points in 2008). The president, on the other hand, loses white men with college degrees by a 57-39 margin.

76% of Americans say the economy is still in recession, even though by definition the recession ended three years ago.

--A story on ten swing states for 2012 in the Wall Street Journal, in conjunction with the Cook Political Report, shows that Obama leads Romney in all ten, though he also won them in 2008…Colorado, Florida, Iowa, Nevada, New Hampshire, North Carolina, Ohio, Pennsylvania, Virginia and Wisconsin.

--Dick Morris & Eileen McGann / New York Post

“The shape of President Obama’s reelection strategy is coming clear. The key elements:

“ 1) Don’t run on your record; run as if there were no incumbent.

“ 2) Stress class warfare; exploit fear of Republican spending cuts. Harp on the negatives.

“ 3) Hide the negatives about your record in a miasma of general pessimism. (Medicare was broken before we got here; headwinds slowed the economy.)….

“Obama’s appeals to fear, envy and class antagonisms haven’t been working lately. But even if they start to, he’s sacrificing the themes of optimism and hope.

“A dour, bitter Obama, lashing out at the rich and peddling fear of the Republicans, can’t compete with a sunny, smiling Mitt Romney. He’s largely stuck talking about who Romney is – an unbecoming attack line that doesn’t inspire faith in a national leader.

“Were we France or Italy, perhaps this rhetoric would fall on receptive ears conditioned by years of discord. Here in America? Not yet.”

--Democrats from President Obama on down were left scrambling after party strategist Hilary Rosen, a CNN contributor, said of Mitt Romney’s wife, Ann, “His wife has actually never worked a day in her life. She’s never really dealt with the kinds of economic issues that a majority of women in this country are facing.”

Doh!

“It was the wrong thing to say,” President Obama declared. “There’s no tougher job than being a mom…That’s work, so, anybody who would argue otherwise probably needs to rethink their statement.” Michelle Obama tweeted her own support for women and mothers.

Ann Romney tweeted for the first time: “I made a choice to stay home and raise five boys. Believe me, it was hard work.”

She later said on Fox News:

“Other women make other choices, to have a career and raise family, which I think Hilary Rosen has actually done herself. I respect that, that’s wonderful. But, you know, there are other people that have a choice. We have to respect women and all those choices that they make. And, by the way, let me give a shout out to all the dads that are at home raising kids.”

Rosen’s communications and public relations firm, SKD Knickerbocker, where she is a managing director, has been paid $120,000 by the Democratic National Committee in this election cycle. She later rethought her stance:

“I apologize to Ann Romney and anyone else who was offended. Let’s declare peace in this phony war and go back to focus on the substance.”

--At a conference in Manhattan, New Jersey Gov. Chris Christie said America has become a couch-potato nation, citing a “paternalistic entitlement society.”

“I’ve never seen a less optimistic time in my lifetime in this country.” Christie added, the government is now telling people, “‘Stop dreaming, stop striving, we’ll take care of you.’ 

“That will not just bankrupt us financially, it will bankrupt us morally, because when the American people no longer believe that this is a place where only their willingness to work hard and to act with honor and integrity and ingenuity determines their success in life, then we’ll have a bunch of people sitting on a couch, waiting for their next government check….

“I think politicians get themselves into the biggest trouble when they care more about being loved than being respected. That’s why we run up these deficits we run up. That’s why we can’t say no to anything, because we care too much about being loved.”

--9/11 mastermind, Khalid Sheik Mohammed, and four of his henchmen will be arraigned on May 5 at a Guantanamo Bay military tribunal. They face the death penalty. Of course some wonder why this wasn’t done sooner.

--George Zimmerman was charged with second-degree murder in the death of Trayvon Martin. Zimmerman told police he was fighting for his life in the altercation with Martin before he fired in self-defense. If convicted of murder in the second degree, Zimmerman would face a maximum sentence of life in prison. Zimmerman pled not guilty. Trayvon’s mother, Sybrina Fulton, admitted on “Today” on Thursday that her son’s death was “an accident.”

--Newsweek conducted an exclusive poll on race relations in America. Among their findings:

Back in 2008, 52% of Americans told Pew Research Center that they expected race relations to get better as a result of Obama’s election; only 9% anticipated a decline.

But today that 43-point gap has vanished. According to the Newsweek survey, only 32% of Americans now think that race relations have improved since the president’s inauguration; 30% believe they have gotten worse.

51% of whites believe Obama’s been unhelpful in bridging the country’s racial divide. 

But…when Newsweek asked: Is racism a big problem today in America? 60% of blacks think yes. Only 19% of whites agree.

Was Trayvon Martin’s death racially motivated? 80% of blacks said yes. 31% of whites agreed.

78% of blacks believe President Obama’s comments about the shooting were appropriate. Only 28% of whites felt they were.

--Interesting story in the Wall Street Journal on the recent surge in priestly ordinations. According to the Vatican, there were 5,000 more Catholic priests world-wide in 2009 than there were in 1999.   The situation in the U.S. is still dire but improving.

--In an interview for Smithsonian magazine, “Simpsons” creator Matt Groening said Homer et al live in Springfield, Oregon, 100 miles south of Portland.

“When I grew up, I realized it was just a fictitious name,” he said. “I also figured out that Springfield was one of the most common names for a city in the U.S.

“In anticipation of the success of the show, I thought, ‘This will be cool; everyone will think it’s their Springfield.’ And they do,’” he told Smithsonian.

Ahead of the “The Simpsons Movie” in 2007, USA TODAY held a contest to pick the Simpsons’ ‘real’ hometown and the Springfield in Vermont beat the Oregon version.

But wait…there’s more! Groening said at week’s end (in TV Guide) that his comments were misinterpreted. 

“I never said Springfield was in Oregon.”

But he did. Executive producer Al Jean told TV Guide: “There is no specific state that Springfield is in, and we will never reveal that secret…except this coming Sunday at 8.”

--Mirlande Wilson, the McDonald’s worker in Maryland who insisted she hit the Mega Millions jackpot, now insists she didn’t lie when she told her lottery pool co-workers – and us – that she won.

“I don’t know who lied. I’m not the liar!” Wilson said after Maryland officials said three others from the state held the winning ticket in an equal partnership. “Let them think what they want, let them say what they want to say. I’m happy.”

Good lord…yet another Sign of the Apocalypse. [The Kansas winner chose to remain anonymous, while no one has come forward in Illinois, where winners have one year to claim a jackpot, though you have to reveal some details about yourself, but not your name.]

--Tim Tebow packed Easter Sunday services at the Celebration Church in Georgetown, Texas (near Austin). Aside from his comments on faith, he took a shot at professional athletes who insist they are not role models.

“Yes you are. You’re just not a good one.”
---

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

God bless America.
---

Gold closed at $1659
Oil, $102.85

Returns for the week 4/9-4/13

Dow Jones -1.6% [12849]
S&P 500 -2.0% [1370]
S&P MidCap -2.0%
Russell 2000 -2.7%
Nasdaq -2.3% [3011]

Returns for the period 1/1/12-4/13/12

Dow Jones +5.2%
S&P 500 +9.0%
S&P MidCap +9.7%
Russell 2000 +7.5%
Nasdaq +15.6%

Bulls 48.4
Bears 21.5 [Source: Investors Intelligence]

Have a great week. I appreciate your support.

*Don’t forget the StocksandNews iPad app [you need an iPad first, as I was reminded this week]. The perfect Administrative Professionals Day gift (April 25).

Next time from somewhere in the Blue Ridge Mountains. Assuming all goes well, I’m forcing lots of history on you as I’ll be touring some Civil War sites and an important WWII memorial.

Brian Trumbore