Week in Review

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Week in Review

05/19/2012

For the week 5/14-5/18

Crisis in Europe

Interesting week for President Obama to be hosting a G-8 summit at Camp David, and then a NATO confab in Chicago, what with the chaos in Europe and a new leader in France, President Francois Hollande, who is in conflict with German Chancellor Angela Merkel. Obama will be serving as referee and mediator as he tries to get Britain, Germany, France, Italy, Japan, Canada and Russia to agree on some broad principles; namely that with respects to Europe and Greece, the latter’s potential exit from the eurozone is not good for anyone, nor, Obama will argue, is Chancellor Merkel’s hard-fast stance on austerity over economic stimulus.

[In the case of the NATO summit, it’s about the U.S. convincing its European allies that they must shoulder more of the defense burden, despite their budget difficulties.]

Of immediate concern, though, is Greece. There is simply no way that Greece could exit the eurozone in an orderly fashion. It would be chaos and immediately spread to Spain, Italy, Ireland and Portugal, within about 48-72 hours, max. As I wrote last week, the position held by the likes of economist Nouriel Roubini that Europe is witnessing a slow-motion train wreck couldn’t be more wrong. The crash is coming within days and weeks. And before it’s all over, the United States will witness a market crash of its own, as I’ve predicted would occur in 2012 since I started writing of this last fall.

On Monday alone, Greeks withdrew 700 million euro in savings from Greek banks. Granted, there was no panic, but panic could ensue shortly. Christine Lagarde, head of the IMF, was forced to concede that a Greek exit was likely to be “quite messy” with risks to growth, trade and financial markets. “It is something that would be extremely expensive and would pose great risks but it is part of the options that we must technically consider.”

Greece’s president, Karolos Papoulias, warned that its banks risk running out of money, posing a “threat to our national existence.”

“The extension of political instability will lead to fatal consequences,” Papoulias said. “The absence of government is a serious risk to the financial security of the Greek people.”

But following the May 6 Greek parliamentary vote, three attempts to form a government between the various coalitions failed, and so a new election is to be held June 17, at which time 37-year-old Alexis Tsipras (I’ve also seen ‘38-year-old’ Tsipras), the leader of Syriza, could become the new prime minister.

Syriza is itself a coalition of 11 leftist groups, ranging from Greens to communists. Its manifesto calls for Greece to leave NATO. It is also vehemently against the terms of the 240 billion euro bailout that the EU, European Central Bank and IMF have fashioned in two stages over the past two years.

Syriza won 16.8% of the vote in finishing second May 6, but various polls show it winning anywhere from 22% to 27% on June 17, which would most likely make it first in a highly fragmented field and thus qualify for the stupid 50-seat bonus that goes to the winning party. If, for example, Syriza won 27%, coupled with the bonus it would end up with 125-130 seats in the 300-seat Parliament and almost certainly form an anti-bailout coalition government.

Gabriel Sakellaridis, Syriza’s economic coordinator, told the London Times, “We really believe that at this moment a possible exit of the Greek economy from the eurozone would have a very, very big cost for the eurozone as a whole….We believe that if we have a negotiation we will win some things, because it’s very difficult for them to throw us out.”

Syriza wants a debt moratorium for three to five years so that it can spend bailout funds on promoting jobs and growth. Sakellaridis says, “If they halt the bailout flow, we can stop, on our side, paying the interest. It will be a period of negotiations. We will try to find some way to pay wages and pensions. We do not promise people that wages and pensions will return to the levels of before the crisis. What we say is we need people to stand up with us. That increases our bargaining power.”

Oh brother. On Monday, Chancellor Merkel said she is under increasing pressure in Germany to force the Greeks out of the eurozone to avert several more years of uncertainty.

“I believe it’s better for the Greeks to stay in the euro area, but that also requires that we set out a path on which Greece gets back on its feet step by step. The solidarity for the euro will end only if Greece just says, ‘We’re not keeping to the [austerity] agreement.’   But I don’t expect that to happen. I do think they are making an effort. There are many, many people in Greece who actually want it.”

But as the week went on, Merkel increasingly called for the June 17 vote in Greece to be a referendum on staying in the eurozone, which in actuality is what it will be whether titled that way or not with Alexis Tsipras continuing to threaten not to pay Greece’s debts unless the rest of the eurozone gives in to his demands should he become prime minister.

But what of the European Central Bank? On Thursday, ECB President Mario Draghi said while the bank’s “strong preference” is that Greece stays in the bloc, he will continue to preserve “the integrity of the ECB’s balance sheet.”

So the high-stakes game of chicken increases in intensity with each passing day. 

British Prime Minister David Cameron didn’t make any friends in the EU when he said in a speech, “The eurozone is at a crossroads. It either has to make up or it is looking at a potential break-up.

“Either Europe has a committed, stable, successful eurozone with an effective firewall, well-capitalized and regulated banks, a system of fiscal burden sharing and supportive monetary policy across the eurozone or we are in uncharted territory which carries huge risks for everyone.”

But if Greece leaves, remember, as I’ve long written (for years now), the firewall to prevent the contagion from taking out Spain and Italy is far from sufficient, 700 billion euro, maybe as much as 950 billion in theory. The thing is, I saw all manner of articles this week mention how the firewall isn’t enough to handle both countries (Ireland and Portugal are supposed to be covered by separate, existing pools…but they would require further increased funding of their own), yet no one mentions one of my key points. Where’s the money? It’s supposed to be committed, but it’s not actually sitting anywhere. As in, the people in various euro countries may revolt once they fully realize just how much of their national treasure is going to bailout anyone outside Greece.

And as Simon Nixon of the Wall Street Journal notes on a different aspect of the crisis should contagion engulf Italy and Spain:

“The ECB will also need to deploy its unlimited firepower to stabilize government bond markets. But simply reactivating the Securities Markets Program in its current format is no solution. The ECB’s insistence on being ranked senior to other creditors in Greece means the more bonds the ECB buys, the more likely a country will be permanently shut out of markets. The only way around this problem is for member states to commit to fully indemnify the ECB against losses, putting taxpayers further on the hook.”

Fat chance of that happening. Bottomline, the firewall, in theory, could take care of Spain, but hardly Italy.

Spain, by the way, had 16 banks downgraded by Moody’s (Italy had 26 suffer the same fate), while the Spanish government has had one miserable debt auction after another. Oh, sure, they raise the funds required to continue paying services, interest payments and funding pensions, but the costs are soaring, including a 4-year auction that went off with a yield of 5.10% vs. 3.37% last time. Spain’s critical 10-year had a yield over 6.40% this week before closing around 6.20%. 100,000 marched against austerity moves in Spain last weekend, incidentally, as the economy is officially in recession with first-quarter GDP down 0.3%. [It was down 0.8% in Italy and 6.2% in Greece.]   For Spain, recession leads to deeper losses for its banks in mortgages, consumer finance, and corporate debt. One of Spain’s sick banks, the recently nationalized Bankia SA, saw depositors pull 1 billion euro the past week.

Meanwhile, in France, Francois Hollande was sworn in as president, hopped on a plane to go see Angela Merkel, and his aircraft was promptly struck by lightning, forcing him to return and get a new plane. When the two finally got together later that evening, their first meeting was so-so at best; Merkel wanting Greece to stay committed to austerity; Hollande wanting growth measures first for Zorba and Co.

Lastly, in Italy, following a slew of attacks on tax collectors and the shooting of an energy company official last week, the government was forced to increase security for thousands of potential targets. Oh yeah, Italy is ready for labor reform.

“Globalization has magnified the consequences of national strengths and weaknesses. European strength in consumer brands is a golden asset. But many, if not most, European businesses have no distinct advantages and must engage in price competition. Obviously, Europe has a high cost structure and cannot win through price competition. It must shift resources from weak to strong industries. That requires regulatory and labor flexibility that many European countries, especially the ones in trouble, don’t have.

“Globalization has also raised the cost of inputs like energy and decreased the value of manufactured goods in general. Europe should recognize that, if it fails to boost its competitiveness, it must accept lower living standards – in other words, it must work more or spend less. But, supported by a global credit bubble, most European countries did not make that choice and defended their lifestyle by running up national debt. Europe must see that the crisis is about the future, not just the past.

“For example, Germany is in good shape because it made the adjustment years ago, dumping uncompetitive industries and shifting resources to businesses like automobiles and precision equipment. It also cut labor costs and social overheads.

“If countries like France or Italy switch from austerity to fiscal stimulus, the bond market will panic; funding unsustainable growth just digs a deeper hole for bond investors….

“A stimulus is credible if European countries carry out reform to increase growth potential. If a credible growth plan is in place, financial markets would be willing to fund the short-term deficit increase. But a growth strategy based on demand stimulus alone won’t win over the market. To restore growth, it’s necessary to improve labor market flexibility.

“The European labor market is trapped in a vicious cycle. Businesses are unwilling to hire because it is too costly to let anyone go. The resulting high unemployment rate increases worker insecurity, which drives workers to support laws that enhance job security but make employers less willing to hire.”

Turning to Washington and Wall Street…the economic news was mixed, with decent reports on housing starts and industrial production for April offsetting a desultory figure on April retail sales and a poor number on leading economic indicators.

Economist Stephen Roach continued to pound the table that consumer demand is not growing in the U.S. and that the Federal Reserve’s injecting money into the consumer demand equation hasn’t been working because it’s not being spent.

And in its own minutes from its April meeting, the Fed’s Open Market Committee noted, “The possibility of a sharp fiscal tightening in the United States (is) considered a sizable risk,” referring to the “fiscal cliff” everyone is becoming increasingly aware of.

“If agreement is not reached on a plan for the federal budget,” the Fed’s minutes continued, “a sharp fiscal tightening could occur at the start of 2013.

“Uncertainty about the trajectory of future fiscal policy could lead businesses to defer hiring and investment.”

There is zero sign Republicans and Democrats will come together until after the election to address the expiring Bush tax cuts, the expiring payroll tax cut, mandated budget cuts from the 2011 debt-ceiling agreement and a new debt-ceiling deal. I’m still convinced, despite what Treasury Secretary Timothy Geithner said this week, that the debt-ceiling will be a huge issue come September, not after the election or early 2013 as the secretary proclaimed.

So if nothing is done beforehand, it’s just assumed that the Nov. 6 – Jan. 3 lame duck session of Congress will solve everything, or, should Mitt Romney win the election, then a new Romney administration, with a new Congress, will address the issues after Jan. 20 and just make many of the changes retro to Jan. 1. This is ludicrous. The markets won’t just jerk around until then. They’ll crash.

Meanwhile, not for nothing but California’s budget deficit, once thought to be $9.2 billion for this fiscal year, is suddenly $16 billion, as announced by Gov. Jerry Brown. And then on Friday, the Legislative Analyst’s Office said the deficit could be more like $16.6 billion.

“The people who pioneered democracy in Europe and the United States had a low but pretty accurate view of human nature. They knew that if we get the chance, most of us will try to get something for nothing. They knew that people generally prize short-term goodies over long-term prosperity. So, in centuries past, the democratic pioneers built a series of checks to make sure their nations wouldn’t be ruined by their own frailties….

“Though the forms were different, the democracies in Europe and the United States were based on a similar carefully balanced view of human nature: People are naturally selfish and need watching. But democratic self-government is possible because we’re smart enough to design structures to police that selfishness.

“James Madison put it well: ‘As there is a degree of depravity in mankind, which requires a certain degree of circumspection and distrust: So there are other qualities in human nature, which justify a certain portion of esteem and confidence.’

“But, over the years, this balanced wisdom was lost.   Leaders today do not believe their job is to restrain popular will. Their job is to flatter and satisfy it. A gigantic polling apparatus has developed to help leaders anticipate and respond to popular whims. Democratic politicians adopt the mind-set of marketing executives. Give the customer what he wants. The customer is always right.

“Having lost a sense of their own frailty, many voters have come to regard their desires as entitlements. They become incensed when their leaders are not responsive to their needs. Like any normal set of human beings, they command their politicians to give them benefits without asking them to pay.

“The consequences of this shift are now obvious. In Europe and America, governments have made promises they can’t afford to fulfill. At the same time, the decision-making machinery is breaking down. American and European capitals still have the structures inherited from the past, but without the self-restraining ethos that made them function….

“This is one of the reasons why Europe and the United States are facing debt crises and political dysfunction at the same time. People used to believe that human depravity was self-evident and democratic self-government was fragile. Now they think depravity is nonexistent and they take self-government for granted.

“Neither the United States nor the European model will work again until we rediscover and acknowledge our own natural weaknesses and learn to police rather than lionize our impulses.”

Finally, I’m sick of the apologists for JPMorgan Chase and the $2 billion (and growing) loss it suffered from risky trades and its complicated hedging strategy. ‘Why this is nothing considering how big their balance sheet is,’ say some. ‘JPMorgan will earn $20 billion this year. What’s $2 billion?’ say others.

Bull. It’s about a bank that did not have the controls in place, and when some inside the operation warned executives, including Chairman and CEO Jamie Dimon, they failed to listen, or were scared to ring the alarm (as may have been the case with deposed Chief Investment Officer  Ina Drew, she of the $14 to $15 million pay package last year, and another $30 million in parting gifts).

For his part, Dimon, whom I have not lionized as others have over the years, survived a shareholder meeting and retained the chairman slot, which is absurd.

“This should never have happened,” Dimon told them. “I can’t justify it. Unfortunately the mistakes were self-inflicted.”

But as Peter Skillern, an executive director of an advocacy group said in voting his group’s shares in favor of stripping Dimon of the chairmanship, “There’s a conflict of interest. There’s a lack of independent supervision. You can’t be your own boss.”

Consider that JPMorgan’s initial $2.3 billion in losses were accumulated over just 15 days in late April and early May, and Ina Drew managed a portfolio worth about $375 billion.

According to reports some executives in JPM’s investment banking arm privately told management, including Dimon, that the bank’s Chief Investment Office was an “accident waiting to happen.” 

Bill Winters, former co-CEO of JPMorgan’s investment banking division, evidently told staff that the CIO unit didn’t fully understand the risks it was taking. Who can when you are managing $375 billion in derivative crapola?! They are indeed weapons of mass destruction, as Warren Buffett once famously said.

And guess what? According to the Financial Times, contained in the above-mentioned CIO portfolio of $375 billion is more than $100 billion in highly complex asset-backed securities and structured products that were the kinds of investments at the center of the financial crisis in 2008.   The actual amount of “non-vanilla” items in the portfolio could be over $150 billion. Now that the investment world is focused on JPM and their WMD, how do you unwind it without suffering further massive losses?

“Even at a bank as ostensibly well-run as JPMorgan, the incentives still exist for giant, risky bets to be made that can go very wrong. JPMorgan can withstand a $2 billion hit, but not every bank can – and who’s to say that the next derivatives debacle won’t be $5 billion or $10 billion? Jamie Dimon is undoubtedly a very good bank chieftain, but he’s only one man in a large institution; he can’t oversee every trade. The only way to change incentives industrywide – and get bank risk-taking under better control – is through a combination of tougher rules and more transparency.”

And as Jamie Dimon has admitted, regardless of whether in the grand scheme of things you think JPM’s $3 billion loss (which it really is at this point…heading to $5 billion) is important, the timing of the disclosure could not have been worse. The Volcker rule continues to be hashed out but it’s really irrelevant today whether JPMorgan’s trading fell under it or not, because we simply don’t know what the rules are going to be when it takes effect in July. What’s a trade and what’s a ‘hedge’ is what has yet to be defined, among other issues.

But for now, yes, some of our financial institutions are too big…too big to fail. They must be broken up. And on the campaign front, if you’re a Republican candidate for national office, you might as well join the Occupy Wall Street crowd in picketing Dimon’s home and office this summer because he just made it harder for you to win.

Street Bytes

--It was the worst week of the year on Wall Street as the Dow Jones lost 3.5% to close at 12369, its worst performance since November of last year and with 12 losing sessions in 13, the worst such stretch since Oct. 1974. The S&P 500 lost 4.3% and Nasdaq plummeted 5.3%, the worst for that index since last September.

The market’s performance on Friday wasn’t helped any by Facebook, which sold 421.2 million shares at $38 each to raise $16 billion, thus valuing the company at $104.2 billion, or 107 times trailing 12-month earnings, more than all but two S&P 500 companies. But then the stock, after opening at $42.05 and climbing to $45 in short order, sucked wind the rest of the day on record volume for a stock debut of in excess of 570 million shares to finish right back at $38, $38.23 to be exact.

The debut was also marred by the fact that not only did the shares open 30 minutes later than expected, but some traders didn’t receive confirms on their orders. An investigation is already underway.

So now the pressure is on 28-year-old founder Mark Zuckerberg to deliver and monetize the site’s over 900 million users.

Meanwhile, early in the week, General Motors announced it was pulling back from advertising on Facebook. “We currently do not plan to continue with advertising but we remain committed to an aggressive content strategy,” a person at GM familiar with the situation told the Financial Times, after it was first reported in the Wall Street Journal. GM said it would continue to expand its use of Facebook pages for its brands, but that’s free. I’ve said for about ten years now that online advertising is worthless. And in a poll by the AP and CNBC, 57% said they never click on advertising or sponsored links on Facebook. Separately, about 50% believe Facebook is simply a passing fad.

As for the issue of Facebook billionaire Eduardo Saverin, at first when I heard he was renouncing his U.S. citizenship to move to Singapore and save $hundreds of millions in taxes, I thought, smart move.

But I didn’t realize his background…that at age 13 he was on a list of potential kidnapping targets in his native Brazil, so he fled with his family to Miami for his safety; after which he attended the best prep school, became a citizen in 1998, and went to Harvard where he met Mark Zuckerberg and the other Facebook founders.

As fellow tech-billionaire Mark Cuban said, “This pisses me off.”

In Singapore, sources told the New York Post his “lifestyle is so over-the-top, the billionaire – famed for canceling interviews and speaking engagements at the last minute via text message – attracts the same kind of attention lavished on the Kardashian family in the U.S.”

The 10-year Treasury hit 1.69% intraday on Thursday, or just above the record-low intraday yield of 1.67% set last September, as the U.S. continued to act as the safe haven play with the turmoil in the eurozone, even if this is a bit misguided, given our own looming debt crisis. Overall, the 10-year rallied for a ninth straight week, the best such performance since 1998 as the yield has fallen from 2.29% the week ended March 16.

The consumer price index for April also helped bonds as it came in unchanged, up 0.2% ex-food and energy. For the last 12 months the CPI is up 2.3%, including on core.

--Japan’s economy grew at a solid 1% in the first quarter (an annualized rate of 4.1%), owing in no small part to government spending following last year’s earthquake and tsunami. The 4.1% was better than the 2.2% annualized rate posted by the United States for the same period.

--The news out of China was not so good as the economy continued to decelerate.   Foreign direct investment for April fell 0.7% vs. a year earlier, while Citigroup, Goldman Sachs and others have been lowering their growth forecasts, generally to 7.5% for the second quarter vs. previous estimates of 8.0% or more.

To put things in perspective, China’s worst growth rate in recent years was 6.2% in the first quarter of 2009, the depths of the financial crisis. I have to admit, however, that when I see stories of rapidly increasing car inventories at dealer lots, as well as home prices continuing to fall (though longer-term this is a good thing) I get concerned because of my two holdings there (one of which is transparent, the other not so much).

The one economist I respect as much as any other, Stephen Roach, isn’t quite as sanguine as he has been but he still speaks of China having “plenty of scope for easing” to boost growth with an interest rate cut likely to happen “sooner rather than later.”

And I keep thinking that the government desperately needs a smooth political transition this fall and next winter (it’s a phased process) and must have an economy that is back on track or there could be major turmoil.

--The deceleration in China’s economy is being felt at Southern California ports. In the first three months of this year, container traffic through the ports of Los Angeles and Long Beach was up just 0.6% compared with the first quarter of 2011, largely because of slowing shipments from China.

China is California’s third-largest export market, behind Mexico and Canada, but California exports to China were up only 0.4% in the first quarter from the first three months of 2011.

--China, Japan and South Korea have agreed to begin talks this year on a free-trade agreement. China is the biggest trading partner of both Japan and South Korea.

“The establishment of a free-trade area will unleash the economic vitality of our region and give a strong boost to economic integration in East Asia,” said Chinese Premier Wen Jiabao.

Trade between the three reached $690 billion in 2011, up from only $130 billion in 1999, according to a Chinese government report.

--Chinese gold demand hit a record in the first quarter of 2012, according to the World Gold Council.   But overall, global demand fell 5%, which the WGC blamed on a sharp rise in gold prices. The average price of gold was $1690 per ounce in the quarter, 22% higher than the first quarter of 2011.

--Germany’s 10-year bund traded at a record low yield of 1.40% this week and first-quarter GDP rose 0.5%, better than expected, and thus allowing the country to avoid recession after the economy ticked down 0.2% in the fourth quarter.

--In forming his new cabinet, French President Hollande slashed salaries 30%, including his own.

--North Dakota surpassed Alaska to become the No. 2 oil-producing state in the U.S., behind Texas. In four years, oil output has quadrupled in North Dakota to 575,490 barrels in March, according to preliminary projections. [Texas pumped 1.7 million barrels a day in February.] In Williston, N.D. – the fastest-growing small city in the U.S. – the city issued $358 million worth of building permits last year, up from $45 million in 2009.  

--Shares in J.C. Penney collapsed as the company reported horrendous same-store sales for the first quarter, a worse-than-expected net loss, and the suspension of its dividend. New CEO Ron Johnson’s initiatives have been a dismal failure.

--Yahoo cancelled up to $19 million worth of stock options, bonuses and salary that former CEO Scott Thompson was likely to receive this year, after he was forced out due to the scandal surrounding his inflated resume (and not the health issue he cited, it seems readily apparent).

--According to the Federal Reserve Bank of New York, the amount owed on student loans now stands at $867 billion; exceeding the totals for credit-card debt ($734 billion) and auto loans ($704 billion). As you’ve also seen, according to the Consumer Financial Protection Bureau, student loans outstanding total more than $1 trillion.

From the New York Times’ Andrew Martin and Andrew W. Lehren:

“94% of students who earn a bachelor’s degree borrow to pay for higher education – up from 45% in 1993, according to an analysis by The New York Times of the latest data from the Department of Education. This includes loans from the federal government, private lenders and relatives.

“For all borrowers, the average debt in 2011 was $23,300, with 10% owing more than $54,000 and 3% more than $100,000, the Federal Reserve Bank of New York reports…

“Nearly one in 10 borrowers who started repayment in 2009 defaulted within two years, the latest data available – about double the rate in 2005….

“Ohio’s flagship university, Ohio State, now receives 7% of its budget from the state, down from 15% a decade ago and 25% in 1990. The price of tuition and fees since 2002 increased about 60% in today’s dollars.

“The consequence? Three out of five undergraduates at Ohio State take out loans, and the average debt is $24,840.”

“Of the estimated 37 million Americans with outstanding student loans, nearly 5.5 million are 40 to 49 years old, and more than 6.3 million are 50 or older, according to the Federal Reserve Bank of New York….

“(But) the financial benefits of college still outweigh the costs, according to studies.

“One found that lifetime earnings of college graduates average $650,000 more than that of their counterparts who completed only high school. Another concluded that the average annual take-home pay of college graduates is nearly twice that of high school-only graduates - $38,950 versus $21,500.”

--Pioz, a town of 3,800 residents in the Guadalajara province of Castilla-La Mancha in Spain, racked up such huge debts during the boom years as developers stampeded to put up housing projects that the town owes 16 million euro in outstanding bills to suppliers. So, seeing as the best estimate is it could put aside 2,000 euro a year to pay outstanding debts after meeting the bare minimum of operating costs, it’s estimated it could pay off its entire debt in…7,058 years. 

“Some three miles from the historic town center, a gleaming 11 million euro water-purification plant squats between fields of wheat, lying abandoned because the council has no money left to operate the electric pumps to supply the plant or to pay the employees. As a result, the water supply to the town frequently cuts out.

“A recycling center next door, funded in part by a grant from the EU, likewise stands gleaming and vacant. ‘We couldn’t finish the road to allow the trucks to reach the site with the rubbish. The whole project is useless,’ said a local.

“So too is the swimming pool, which was opened in 2008 and came with a price tag of 2.3 million euro.”

--Hewlett-Packard is looking to cut anywhere from 25,000 to 30,000 jobs in one of the biggest mass layoffs in recent memory. Many of those impacted will be offered early retirement packages as CEO Meg Whitman deals with the company’s tumbling fortunes.

--The U.S. Postal Service has decided it can no longer wait for Congress to act and will begin closing nearly 250 mail processing centers as originally planned, including 48 this summer, but will stretch out the remainder over a longer time frame, with 90 shutting next January and February so as not to impact both the election and holiday season too much. The Senate last month passed a bill that would halt many of the closings, while the House is jerking off.

But the USPS still needs some sort of action by lawmakers to address the issues of Saturday delivery and reducing health and labor costs. For example, if the House doesn’t get its act together, postal officials say they face a cash crunch in August and September because the agency owes the Treasury more than $11 billion for future retiree health benefits.

--According to a study by the Employee Benefit Research Institute, nearly 50% of U.S. workers do not have health care coverage through their own employers.

--The median home price in Southern California rose 3.6% in April from a year earlier to $290,000, according to DataQuick, as the market continues to stabilize. [The median fell, however, in pricier Orange and Los Angeles counties.] The percentage of sales that are foreclosures is dropping rapidly.

--Well this is good. New York City added 12,000 private-sector jobs in April, bringing the total to 60,000 for the year, the best four-month performance since the 1950s, according to the state Department of Labor. The unemployment rate fell to 9.5% from 9.7% in March. Wall Street employment for April, however, was flat. [Crain’s New York Business]

--So I’m reading a local obituary on a man I was aware of but didn’t know personally and because of what he did, I thought New York/New Jersey area readers may be interested.

His name was Edward “Ted” Olcott and he lived in Summit, age 86. He was a councilman here, which is how I knew of him. But…

“Ted’s first, and last, employer was the Port Authority of New York and New Jersey. He began as the supervisor of the bolt-tightening crew for the George Washington Bridge, and concluded his career in 1984 as the Port Authority’s Director of Planning and Development.

“During that long career he ran the PATH system for a time, influenced the location and later development of the World Trade Center, helped with the design and implementation of the lower deck of the George Washington Bridge, lobbied for waste-burning energy generation, the creation of one-way tolls, and the establishment of dedicated commuter bus lanes through the Lincoln Tunnel, among many other projects. He had a pragmatic but also visionary sense of how the New York metropolitan area could work and dedicated his life to making that vision a reality.”

I know from here on as I travel through the area I’ll remember him from time to time. That’s a life of accomplishment.

--There is a bit of an uproar in the U.K. over a plan by Whitehall (British government) to allow civil servants based in Central London to work from home for a staggering seven weeks this summer during the Olympics and Paralympics, starting six days before the opening ceremony; a period July 21-Sept. 9. Mail and package deliveries will be suspended or diverted, raising questions over whether Whitehall will grind to a halt. The impression this gives to the private sector is not the best.

--According to a study funded by the National Cancer Institute and AARP and published in the New England Journal of Medicine, drinking two to three cups of coffee a day lowered the overall risk of death 10%. But cardiologist Steve Nissen of the Cleveland Clinic said the study wasn’t “scientifically sound” because it didn’t include vital information that affects longevity, such as cholesterol or blood pressure levels.

Foreign Affairs

Iran: As the second round of talks on Iran’s nuclear program convene in Baghdad on Wednesday, according to a May report by OPEC, Iranian oil production fell by 12% in the first three months of the year, far worse than the nation’s Oil Ministry wants us to believe. So the sanctions are biting. The P5+1 (the U.S., Britain, France, Russia, China and Germany) hope that news such as this gets Iran to yield.

But on the oil front, slashing production can harm the fields so Iran is forced to stash its production on supertankers anchored at its terminals in the Persian Gulf. China is slated to deliver 12 new supertankers to Iran this month.

Meanwhile, U.S. ambassador to Israel Dan Shapiro told the Israel Bar Association forum that Washington has plans in place to attack Iran if necessary.

“But that doesn’t mean that option is not fully available. Not just available, but it’s ready. The necessary planning has been done to ensure that it’s ready.”

Shapiro continued, “We do believe there is time. Some time, not an unlimited amount of time. But at a certain point, we may have to make a judgment that the diplomacy will not work.”

For their part, Iran’s top nuclear negotiator Saeed Jalili said Tehran will not yield to any “pressure strategy.”

“Cooperation is what we can talk about in Baghdad. Talks based on the definite rights of the Iranian nation. Some say time is running out for the talks. I say time for the (West’s) pressure strategy is running out.”

Earlier, the Jerusalem Post reported that according to an Iranian opposition group (MEK), “Iran is accelerating its nuclear weapons program,” which, if true, “sharply contradicts the assessment by some that Iran has not yet made the decision to go forward, as well as the observation by others who suggest that the Supreme Leader Ali Khamenei has forbidden the development of a nuclear bomb, because it would be a ‘sin’ to do so,” MEK’s report said.

So we wait to see what happens on Wednesday. The Iranians know what the P5+1 expects of them; ship its already enriched uranium out of the country, for starters, and to stop enriching any more uranium above the safe 5% level. In return, Iran would get processed fuel from someone like Russia, while Iran would want the EU to squelch its full embargo on Iranian oil purchases come July 1.

The International Atomic Energy Agency also has an interest in the talks, having held a separate round with Iran in Vienna, May 14-15, where it pressed Iran again to give it access to the military site at Parchin, where it is suspected Iran has been conducting high-explosives tests that the IAEA says are “strong indicators of possible (nuclear) weapon development.”

For his part, President Obama would love Iran to be off the radar until after the election, though this is highly unlikely.

But another issue is will Iran come up with an offer that divides the P5+1…Russia and China on one side, accepting the Iranian proposal, while the other four oppose it because it doesn’t go far enough (such as including the underground facility at Qom).

Lastly, there was this depressing note from Martin Fletcher of the London Times this week:

“An Iranian who was hanged yesterday for allegedly murdering a nuclear scientist on behalf of Israel might have lost his life because of a confidential U.S. Embassy cable that was published by WikiLeaks, analysts said yesterday. As one Iranian academic at the University of St. Andrews put it, ‘I have always considered the release of the WikiLeaks files, without consideration for those consciously or unconsciously named in them, to be grotesquely irresponsible.’” Amen.

Syria: At least 20 were killed when Syrian security forces opened fire on a funeral procession during a visit by UN observers, with three of the monitors’ cars being damaged by a bomb blast, though none of the observers were hurt. In a separate attack, 23 soldiers were supposedly among at least 30 victims in clashes in central Syria. 

But in perhaps the most important development, violence broke out in Tripoli, Lebanon’s second-largest city, which was directly related to the conflict in Syria as gunmen loyal to President Bashar Assad fought those opposed to him. At least five were killed in the initial clashes, with further casualties later in the week. The same thing could easily happen in Beirut.

Separately, there are reports the U.S. has begun supporting Syrian rebels through backchannels such as Saudi Arabia and Qatar to augment their efforts to get weapons into the hands of those attempting to overthrow Assad.

Lastly, back to crude oil, the Financial Times reported that Iran’s state-owned shipping line “has been switching flags and using multiple companies to transport crude from Syria to Iran, illustrating how Tehran is helping sidestep international efforts to choke the finances of Bashar al-Assad, Syrian president.”

Syria used to ship 95% of its oil to the EU, with the sector accounting for 20% of GDP before the uprising began.

Israel: For those who are ill-informed and harbor thoughts of optimism when it comes to the future of the Middle East, understand that in a BBC survey of global attitudes, out of 22 countries polled, the majority in 17 of them view Israel negatively, while only three (the U.S., Nigeria and Kenya) view Israel positively.

Some of these figures are amazing, and distressing for Israel. In Spain, 74% now view Israel negatively, 65% in France. Germany and Britain register negative marks of 69% and 68%, respectively.

The ratio in the U.S. is 50% positive / 35% negative.

Egypt: A Pew Research Center poll showed 61% of Egyptians want to cancel the 1979 Israeli-Egyptian peace treaty. While none of Egypt’s main presidential contenders have called for this, all are saying the Camp David accords must be reexamined as knocking Israel is of course a good applause line on the Egyptian campaign trail.

Regarding the election, which is May 23-24, with a likely runoff on June 16-17, nationalist former foreign minister Amr Moussa remains the frontrunner, with independent Islamist Abdel Abol Fotouh second, and the formal Muslim Brotherhood contender, Mohammed Morsi, third.

Some are disappointed that the Brotherhood, after gaining the largest bloc in the new parliament last January, has accomplished little, but I look at the Pew Research survey and see 70% of Egyptians still have a positive view of the Brotherhood, albeit down from 75% last year. So the first round of voting could yet yield a surprise or two.

Afghanistan: A top member of the Afghan peace council was assassinated in Kabul on Sunday, a former Taliban official-turned negotiator. The former head of the council was killed by a suicide bomber back on September 20. And gunmen wearing Afghan police uniforms shot dead two British servicemen, bringing the number of British soldiers killed in Afghanistan since 2001 to 414. One of the gunmen got away. The other was killed. Two other NATO soldiers were killed the same day.

Separately, I’ve written how the U.S. military is not telling the truth regarding operations in Afghanistan, and on Wednesday, the Wall Street Journal’s Yaroslav Trofimov reported: “Taliban attacks are jumping in the southern Afghan areas that were the focus of the 2010 U.S. troop surge, posing a renewed challenge to the American-led coalition that hoped to pacify the critical region before withdrawing from the country.”

NATO has been gradually turning over operations to the Afghans in the region that includes the vital city of Kandahar.

Yemen: According to reports, about 20 U.S. special operations troops are aiding the Yemeni government’s forces in targeting Al Qaeda and other insurgents in the restive south. There have been at least three drone strikes in the last week.

Russia: Money managers have told Bloomberg that investors are fleeing as demonstrators dig in against Vladimir Putin. Russia-focused equity funds saw $251 million of outflows in the seven days to May 9, the most this year, according to EPFR Global data. [China lost $127 million, India $148 million and Brazil $167 million.]

According to the Levada Center in Moscow, Putin’s attractiveness to the public is not only shrinking, but the damage is irreversible. In a May 15 poll, 39% of Russians said they considered a strong suit of Putin to be that he is “business-like” at the beginning of his third presidential term, compared to 49% in 2000 and 62% at the end of his second term. Only 11% said they didn’t believe Putin was guilty of the abuse of power alleged by political opponents.

China: Blind dissident Chen Guangcheng is supposedly on his way to the U.S. as I go to post, which would be two weeks earlier than the timetable established by the government. A smart move by Beijing, as it would steal some of the headlines from the G-8 and NATO summits.

North Korea: According to an analysis by the U.S.-Korea Institute at Johns Hopkins University, North Korea has resumed work on a new building at Yongbyon after months of inactivity, though it “may take another one to two years before the facility becomes operational,” a statement from the organization said. Nonetheless, this would give the North yet another source for weapons grade material.

Ukraine: Former prime minister Yulia Tymoshenko, already in prison for seven years for abuse of power, is to face a murder charge that could see her serve an additional 25 years. Prosecutors indicated they will formally charge Tymoshenko with complicity in the killing of an MP in 1996. Tymoshenko rejected the allegation. “Linking me to this case is absurd.”

The fresh charge strengthens the view that Tymoshenko is the victim of a personal vendetta ordered by President Viktor Yanukovych.

Mexico: Just when you think it couldn’t get worse, it does. Last weekend, 49 bodies, including six women, were dumped on a road near the city of Monterrey. The mutilated victims had their remains wrapped in plastic bags. This came just two days after 18 decapitated bodies were found in abandoned vehicles in western Mexico. More than 47,000 people have been killed in the drug violence since President Calderon launched a crackdown six years ago.

Random Musings

71% rate economic conditions as poor, but 58% predict they will be good a year from now.

By a 56-36 margin, those surveyed predict Obama will defeat Romney, even though the latest Gallup tracking poll had it 46-45 Obama; the reason seemingly being that Americans recognize the powers of the incumbent.

But Romney’s favorable-unfavorable rating has jumped to 50%-41%, his best ever. And 55% say the economy would get better over the next four years if Romney was elected, compared with 46% who say it would improve if Obama was re-elected. This is huge, in the mind of your editor.

For the first time during this campaign cycle, the GOP also has an advantage in congressional elections. By 50%-44%, those surveyed say they’re likely to vote for the Republican congressional candidate.

In the first poll conducted since President Obama came out in favor of gay marriage, 46% of registered voters now say they would vote for Romney, while 43% prefer Obama. Three months ago, Obama had a 48-42 lead.

67% thought the president made the gay marriage announcement “mostly for political reasons.”

And while more than half of voters said Obama’s views on same-sex marriage would not affect their voting, 25% said they were less likely to vote for him because of it, while only 16% were more likely to back him.

Overall on the topic, 38% of Americans support same-sex marriage, 24% favor civil unions short of formal marriage, and 33% oppose any form of legal recognition.

46% of Americans say they had a favorable impression of the president’s announcement on legalizing same-sex marriages, while 47% say they had an unfavorable response.

--In what is bound to be a main theme for the campaign, Mitt Romney went after the president on the issue of the debt.

“A prairie fire of debt is sweeping across Iowa (he said in Des Moines) and our nation and every day we fail to act we feed that fire with our own lack of resolve….

“As president, I will approach debt and spending differently. My time spent building businesses and leading state government taught me that we need to hold every department and agency to a simple test: If something can be done better and more efficiently outside the federal government, then that’s where it belongs.”

“One of President Obama’s campaign themes is that government spending – he calls it ‘investment’ – is the source of most American economic progress. So eager is he to make this point that, well, let’s just say he sometimes wanders beyond his area of expertise, as he did last Thursday in Seattle.

“ ‘When I hear people talk about the free enterprise system and entrepreneurship, I try to remind them, you know, all of us made that investment in Darpa [the Department of Defense Advanced Research Projects Agency] that helped to get the Internet started,’ said Mr. Obama. ‘So there’s no Facebook, there’s no Microsoft, there’s no Google if we hadn’t made this common investment in our future.’

“Microsoft – a product of the Internet? That may surprise Bill Gates and Paul Allen, who founded the software company in 1975. The company didn’t introduce its first Internet browser for another 20 years, and in the meantime it became the dominant computer software company long before the Internet became economically important. The irony of Mr. Obama’s error is that for much of Microsoft’s history the Internet was seen as a threat to its desktop dominance….

“The problem here is less Mr. Obama’s historical errors than his emphasis. He really does believe that prosperity flows from government, which is why all of his policies promote more government.”

--Who would your editor like to see Mitt Romney select to be his running mate? Gotta tell ya, the little I’ve seen of New Hampshire Sen. Kelly Ayotte, I really like her. But realistically, I hope Romney goes with Ohio Sen. Rob Portman. If Romney was way behind, then you’d want him rolling the dice with Chris Christie. [I’d also rather see Paul Ryan stay in Congress for the budget battles to come.]

--Since I’m doing a running history of our times, I guess I have to note that Ron Paul said he would stop spending money in the states with upcoming primaries, but he wasn’t ending his campaign. Huh? Guess he’s hitchhiking as he continues trawling for delegates. Let’s face it. He did far worse than most expected, not winning one primary or state caucus.

But he also didn’t hurt his son, Sen. Rand Paul, who has major potential in my mind, having seen him earlier in the year in New Hampshire. 

--And the group led by former New Jersey Gov. Christie Whitman, Americans Elect, said it would not file a candidate for president because its candidates failed to meet the threshold to enter its online convention in June. I saw her speak on this a few months ago and was unimpressed, writing on 2/11/12 in this space that I “didn’t see how they’ll attract a top-shelf ticket.” The group had intended to get on the ballot of all 50 states but it made it to only 29 before calling it quits.

--For about a week in these parts, there has been this story circulating that, amazingly, New York City Police Commissioner Raymond Kelly had not been informed of the details of the foiled Yemeni underwear bomb plot. I mean this was stunning. The FBI was blowing him off. 

So I was going to comment on this, though assumed that by week’s end the FBI had gotten together with Kelly, only on Wednesday, FBI chief Robert Mueller, in the words of the Daily News, showed an incredible lack of intelligence “when he blithely told a Senate panel that he still hasn’t bothered calling NYPD’s top cop about the latest terror threat.

“Never mind that New York lost thousands of people on 9/11 and the city remains the nation’s No. 1 terror threat.”

Mueller then proceeds to say that if Kelly wanted more details he could have picked up the phone and called!

Excuse my French, but what a d---! It turns out the FBI did brief NYPD brass, but Mueller made zero effort to contact Kelly himself.

New York Sen. Chuck Schumer then had this exchange with Mueller at a Senate hearing.

Schumer: “Just a suggestion for the continued good operation, give him a call on this. He didn’t ask me to ask you to, I am. Do that. Thanks.”

As the Daily News put it, “Finally, a light bulb went on. ‘I’m happy to do it,’ Mueller replied.”

--New York City Mayor Michael Bloomberg on the issue of truancy:

“We have a lot of kids who unfortunately don’t have parents at home when they leave in the morning or get home in the afternoon and it’s harder to supervise kids. And then maybe, you know, some people don’t care. Some people don’t understand the value of education.”

So some parents’ leaders got all bent out of shape, calling the mayor insensitive.

Of course Bloomberg is right in thinking many parents are less than caring when it comes to ensuring their kids actually go to school.

--Separately in the Big Apple, in the first quarter, police officers stopped folks on the city’s streets more than 200,000 times, putting the Bloomberg administration on a course that would shatter last year’s record for street stops. The 203,500 stops compare with 183,000 in the same quarter in 2011.

So guess what? Homicides are way down, again. In fact they are on track for the lowest tally since the record in 2009 of just 471 since records started being kept in the early 1960s. “Stop, Question, Frisk” removes both criminals and guns.

But you’ve got your a-holes from the New York Civil Liberties Union and the likes of Al Sharpton arguing that too many innocents suffer from the policy; as in 41.6 percent of stops in 2011 were young blacks and Hispanics (age 14-24) that made up just 4.7 percent of the population.

Overall, 54 percent of the people stopped were black, 33 percent were Hispanic, 9 percent were white and 3 percent were Asian. 

96 percent of all shooting victims in the city were black or Hispanic last year.

Police Commissioner Kelly said critics of the policy “never have an answer” about how to tackle the disproportionate levels of crime in certain city neighborhoods. “I would submit that our strategies are saving lives,” he said.   [Al Baker / New York Times]

On Thursday, however, Kelly backed off a little and said his force would undergo new training, promising a “more civilized experience.”

--In a classic case of my “wait 24 hours” rule, newly-released photographs of George Zimmerman show that he was clearly injured in his altercation with Trayvon Martin, while a toxicology report revealed there were traces of marijuana in Martin’s system.   A new witness account revealed that he saw “a black male, wearing a dark colored hoodie,” on top of a white or Hispanic male who was yelling for help. Zimmerman will get off, eventually.

--For the first time in our nation’s history, the number of babies born to white parents has dropped below 50% of the total, with African-American, Hispanic, Asian and mixed-race births accounting for 50.4% of all American babies in the year ending July 2011, according to the latest census figures. In Hawaii, California, New Mexico, Texas and Washington, D.C., non-whites are already in the majority.   The Census Bureau projects that the Hispanic population will overtake the white population in 2045. 

--The National Oceanic and Atmospheric Administration’s official summer weather forecast was released and three-fourths of the country – from the Southwest to the Mid-Atlantic – faces above-average temperatures. The unusually dry winter, combined with the forecast, is sparking wildfire fears.

Earlier, AccuWeather said the worst of the heat will be in the Rockies and over the western and central Plains.

Want a cool vacation destination to check out? Go to Scottsbluff, Nebraska…home of the Oregon Trail. Your editor has been there twice.

--According to the 2012 World Wildlife Fund’s “Living Planet Report,” humans are depleting natural resources like forests, air and water 50% faster than the planet can renew, as reported by the New York Daily News.

“If we just do business as usual…we’re just going to continue moving in this direction. At some point, the earth’s going to just give out. We don’t know when. But that’s a pretty scary thing to think about,” said Colby Loucks, director of conservation science at WWF. “The question is, we don’t know what the tipping point is.”

In terms of using up resources, the report named Qatar, Kuwait, United Arab Emirates, Denmark, USA, Belgium, Australia, Canada, Netherlands and Ireland as the top ten offending nations.

In defense of Canada, they have the best beer and good beer trumps using up resources. Everyone knows that.

And, if it was about pollution, China would be the biggest offender, hands down.

--The May 21 issue of Newsweek had a depressing piece titled “The Sorrow Beneath the Sea,” detailing how “the oceans have changed more in the last 30 years than in all of human history before. In most places, the seas have lost upwards of 75 percent of their megafauna – large animals such as whales, dolphins, sharks, rays, and turtles – as fishing and hunting spread in waves across the face of the planet. For some species, like whitetip sharks, American sawfish, or the once ‘common’ skate, numbers are down as much as 99 percent. By the end of the 20th century, almost nowhere shallower than 3,000 feet remained untouched by commercial fishing.   Some places are now fished down to 10,000 feet.”

Speaking of skate, for the best “skate wing” in the world, go to “Fish” restaurant in Philadelphia. Mark R. and I drooled over it in February there, served with truffled spaetzle, melted leeks, parmesan broth, and winter truffle. Mmmmm. But I digress.

Get this…the Newsweek piece details the average catch in Key West over the years.

1950s…the average catch, dominated by huge grouper and sharks, was 44 lbs.
1980s…overfishing eliminates larger fish…20 lbs. is average haul.
2007… the average size of Key West’s fish had decreased by 88 percent. Avg. catch, 5 lbs.

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

Gold closed at $1591…after earlier going negative for the year
Oil, $91.48…lowest weekly close since 10/21/11

Returns for the week 5/14-5/18

Dow Jones -3.5% [12369]
S&P 500 -4.3% [1295]
S&P MidCap -6.1%
Russell 2000 -5.4%
Nasdaq -5.3% [2778]

Returns for the period 1/1/12-5/18/12

Dow Jones +1.2%
S&P 500 +3.0%
S&P MidCap +3.0%
Russell 2000 +0.9%
Nasdaq   +6.7%

Bulls 39.4
Bears 22.3 [Source: Investors Intelligence]

Have a great week. I appreciate your support.

Brian Trumbore

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