Week in Review

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Week in Review

06/02/2012

For the week 5/28-6/1

The European Debt Crisis, continued…

The critical revote in Greece is but two weeks away, June 17, and the polls are all over the board. Wall Street and European markets rallied early in the week on surveys that showed the New Democracy party finishing first with over 25% of the vote vs. its 18.9% tally in the May 6 election. The same polls had anti-bailout Syriza finishing second with 23.4% vs. the 16.7% it received the first go ‘round. But when you combined New Democracy with projected third-place PASOK and the 50-seat bonus for ND finishing first, whereas the New Democracy and PASOK coalition last time could only muster 149 of 300 seats in Parliament, on June 17 the surveys were showing the two, along with a smaller party, would garner 159-165 seats, or enough to push through the austerity mandate so that the nation would continue to receive the 240 billion euro in funding from Greek Bailouts I and II. 65% of Greek voters said they wanted to stay in the eurozone.

So that was Monday and Tuesday. But by week’s end the polling data was changing. A new survey had 77% wanting the terms of the bailout revised and while it showed New Democracy still in the lead, the margin over Syriza was narrowing. 

And then a final poll I saw before posting (VPRC for Epikaira magazine) gave Syriza 30% followed by New Democracy at 26.5%.

The obvious point being, who the heck knows when it comes to June 17? Look how in just the past few weeks the pollsters got the Egyptian presidential election all wrong…in fact not even remotely correct, while pollsters also totally botched the Serbian vote. And while Francois Hollande defeated Nicolas Sarkozy in France as projected, the margin of victory, two points, was far narrower than the numerous prognosticators there had it.

Let’s say for arguments sake that Greece fails to put together a pro-bailout coalition and Greece is allowed in short order to exit the euro. Economists at UBS estimate the cost of an exit might amount to 40-50% of GDP in the first year. That’s not a misprint. That would needless to say be rather catastrophic, not just for the Greeks but planet Earth as contagion and anarchy ruled the day.

Turning to Spain, as the yield on its 10-year government bond neared 7.00%, closing the week at 6.62%, the fourth-largest economy in the eurozone continued to collapse with April retail sales cratering 9.8% compared with a year ago, this after March’s were down 3.8%. Unemployment remains at 24.3% (50% among the young), and the government is yet to come clean on just how serious its banking crisis is.

A classic example is in how Prime Minister Mariano Rajoy is handling the bailout of the country’s third-largest bank, Bankia, wherein Spain first said it would nationalize the institution in supplying 4.5 billion euro in capital, and then a week later saying another 19 billion was necessary. Rather than borrowing money on the open markets, prohibitive given the current rate structure, Rajoy sought to give Bankia government bonds. The bank would then use them as collateral for loans from the European Central Bank.

But the ECB rejected Spain’s plan outright, telling Madrid Bankia required a proper capital injection and not de facto central bank funding of governments, which breaches an EU ban on “monetary financing.”

Further, the Bank of Spain, it’s become clear, has been allowing all manner of non-performing loans on banks’ books to be listed as “performing.” I’ve told you for years of the issues in the ‘regions’ where corruption is rampant between the local governments, the developers and the banks, and there is more and more evidence as the central government finally digs into the regions (which are 50% of the nation’s economy), that banks lend bankrupt developers the money to pay off original loans, which masks delinquency.

Consider this. Spain’s fiscal revenues have fallen 4.8% over the last year, VAT returns are down 14.6%, and debt service costs have risen 18%. [That’s going to be the U.S. one day.]

The European Central Bank blasted Madrid this week after it emerged 100 billion euro in capital had left the country in the first three months of the year, while the International Monetary Fund denied reports it had begun planning a bailout for Spain, though clearly this is where we are headed.

Back to the Bankia debacle, Spain tried to convince the rest of us that it has at least until October to raise the 19 billion euro the bank needs to shore up its capital. In other words, Spain is gambling on the interest rate picture improving in the interim before it goes into the market trying to raise the funds. But it can’t wait until October.   Any schmuck knows this.

And remember how after the ECB offered 1 trillion euro in essentially free 3-year paper that the banks then scarfed up to shore up their balance sheets? At first it worked, with the banks buying sovereign paper, Spanish and Italian government yields plummeting and equity markets rallying. But I warned that when rates rose again the banks would then have huge paper losses on their books through their holdings of the same sovereign debt.

So in the case of Spain, its banks borrowed 300 billion euros from the ECB and bought Spanish government bonds and now these banks own 67% of their own government’s paper. So much for shoring them up.

Meanwhile, with Greece and Spain at the forefront of the crisis, ECB president Mario Draghi said the central bank could not “fill the vacuum” left by governments on creating growth or structural reforms. Speaking to the European Parliament, Draghi said: “Can the ECB fill the vacuum of lack of action by national governments on fiscal growth? The answer is no. Can the ECB fill the vacuum of the lack of action by national governments on the structural problem? The answer is no.

“The next step…is to clarify what is the vision a certain number of years from now. The sooner this is specified, the better it is.”

Ollie Rehn, the European Union’s chief economist, said:

“We need a genuine stability culture and a much upgraded common capacity to contain common contagion.”

Robert Zoellick, president of the World Bank (until June 30) / Financial Times

“Eurozone leaders may be nearing a ‘break the glass’ moment: when one smashes the pane protecting the emergency fire alarm. While those living in the eurozone building, especially those on the executive floors, will not want to hear an alarm, they had best read the instructions. Events in Greece could trigger financial fright in Spain, Italy, and across the eurozone, pushing Europe into a danger zone.

“The summer of 2012 offers an eerie echo of 2008. Markets are signaling anxieties about a major asset class. In this round, eurozone sovereign debt has replaced mortgages as the risky investment. Banks are under stress. Depositors have not yet begun to run, but they are starting to jog. The European Central Bank, like the U.S. Federal Reserve in 2008, has sought to reassure markets by providing generous liquidity, but collateral quality is declining as the better pickings on bank balance sheets are used up….

“If Greece leaves the eurozone, the contagion is impossible to predict, just as Lehman had unexpected consequences. A Greek exit would trigger a hit to confidence in other sovereign euro assets. Eurozone leaders need to be ready. There will not be time for meetings of finance ministers to discuss the outlook and debate the politics of incrementalism. In panicked markets, investors flee to safe assets, sparking other flames….

“After Lehman’s collapse, the illiquidity began to choke the corporate sector, too. Major companies feared they could not get bank loans or roll over commercial paper. Bankruptcies loomed.

“Eurozone banks have spent three years under pressure to deleverage, build capital, and reduce risk. I doubt that the first instinct of their executives in a crisis will be to pump out loans to business borrowers. But if we wake up to news of a major corporate bankruptcy, lenders and savers may pull back just as they would from a blow to banks.

“When financial markets get anxious, peril often strikes two or three links down the financing chain.”

For now, the pressure continues to grow on German Chancellor Angela Merkel to allow the euro-area bailout fund to support banks directly instead of channeling the money via governments. But Germany continues to balk because direct European financing for banks would let the governments off the hook in terms of conditions set for full aid programs, such as budget cuts and more European intrusion into economic management, a la what is supposed to be happening in Greece today.

As for the concept of Euro bonds, wherein some of each country’s debt would be placed into a common pool, issued by a new joint European debt agency (outside the ECB), with all members sharing responsibility for repayment, more time has been wasted on this concept than just about any other topic.

It isn’t going to happen! Period. Sure, a bunch of eurocrats sitting around a table can sketch it out on cocktail napkins, but you’ve seen how you can’t get the 17 governments in the eurozone to agree on small concepts so what makes anyone believe Eurobonds, which raise fundamental questions about the European Union and giving up sovereignty, such as control over tax receipts, will ever come to fruition? There would be countless votes and referendums and it will take years to set up. Obviously there is no such time for this. The crisis is now.

Meanwhile, Ireland voted in favor of the EU fiscal pact with 60% voting ‘yes’ in a referendum on Thursday. It was essentially a vote on whether or not Ireland would keep getting funding. As one voter put it, “The treaty will solve nothing, but…we’re going to need European money next year, plain and simple.”  

Dublin-based economist David McWilliams, not a fan of the fiscal pact, wrote in a Financial Times op-ed.

“Many Irish people’s balance sheets are broken because on the one side we have assets – houses, land and apartments – that are falling in value but on the other, we have debts, which are fixed. At a time when income is falling because of rising unemployment and taxes, this means the debt burden is getting heavier every day relative to income.

“As a result, people with savings are saving yet more. Those with debts are trying to pay them down. The same goes for companies. Ireland’s savings ratio has exploded to 17% of income; it was minus 5% in 2007.

“People don’t want to borrow because they have too much debt and banks don’t want to lend because they have too much bad debt. Yet the deleveraging is destroying their capital base too. Again, the paradox is that deleveraging my balance sheet might make my position better, but when we all deleverage at the same time, we drive down asset prices further, demanding yet more deleveraging.

“If everyone is saving, who is spending? The rise in government spending is the logical reaction to, not the cause of, the liquidity trap.

“As demand falls, real wages don’t fall because those with jobs protect themselves and the adjustment comes via unemployment. Irish unemployment has trebled in four years. Youth unemployment is now 29%. This puts more pressure on government finances.

“We are now in the fourth year of austerity and it’s clear the economy is weakening. Someone clever – I’m not sure if it was Albert Einstein or Roy Keane – once said the definition of insanity was doing the same thing over and over again and expecting different results.

“This fiscal treaty offers more of the same. It is being marketed as a fiscal union, but it is a fiscal straitjacket. It punishes weak countries when they most need help. A real fiscal union should work as the U.S. does.”

A gauge of eurozone manufacturing in May came in at 45.1, a 3-year low, with Germany’s PMI at 45.2, France’s at 44.7, Spain’s at 42 and Greece’s 43.1. Non-euro Britain reported a PMI of 45.9.

Eurozone unemployment for the month of April came in at 11%, the highest since 1995. Italy’s rate is now 10.2%, its highest since 2000.

Eurozone confidence in the economy is at the lowest level in 2 ½ years. Loans to households and companies are growing at the slowest pace in 2 years.

Germany’s exports rose in 2012’s first quarter, up 5.8%, but exports to Italy were down 7.6%; to Spain down 7.8%; to Portugal down 14%; and to Greece down 9.8%.

Washington and Wall Street

The race for the White House tightened further with release of an awful jobs report for the month of May with the U.S. economy adding just 69,000 when 150,000 was expected, while April’s tally was revised downward to only 77,000. The jobless rate climbed for the first time since last summer to 8.2%. In response Mitt Romney ripped the president, while Mr. Obama gave a speech touting hiring veterans. Nothing against hiring Vets, it’s just not what the rest of the jobless, or underemployed, want to hear.

Once again we are in the midst of a spring slowdown, just like last year, and sentiment wasn’t helped any by the revision to first quarter GDP, now 1.9% and down from a flash estimate of 2.2%.

2011…Q1…0.4
2011…Q2…1.3
2011…Q3…1.8
2011…Q4…3.0
2012…Q1…1.9

Recovery? What recovery?

So is it any wonder that consumer confidence, as measured by the Conference Board, plummeted in May and that there is growing talk of the potential for plunging corporate profits?

Separately, on the issue of federal spending, the Financial Times had the following editorial.

“The day after Memorial Day in the U.S. is not a bad one to ask how much money the country spends on national defense. It is a simple enough question and, given the state of public finances, certainly an important one. But bureaucratic obfuscation, impenetrable accounting and a dose of serial denial make getting an answer difficult.”

The Financial Times then proceeds to delve into the numbers, including spending on veterans, separate retirement funds, homeland security and such and the total hits $960 billion; not exactly the $531 billion base budget plus $115 billion for overseas contingency operations that is normally what you see when such spending is part of the conversation.

“The consequences are profound. U.S. spending on national defense jumps from about 3% to 6% of forecast GDP and rises from about 14% to about 26% of total federal spending.

“Perhaps the U.S. needs all of that security but voters should be given more data to help decide. A recent report found that how the scale of defense spending is presented has a significant impact on the public’s willingness to cut the relevant budgets. A little information about a lot of money goes a long way.”

The FT didn’t bring up a famous speech from over 50 years ago, Dwight Eisenhower’s warning on the impact of the military-industrial complex.

“Riffing on the re-election trail, President Obama often tells crowds that ‘We’ve got to move forward to the future we imagined in 2008.’ An imaginary future from the past – got it. Then there’s the imaginary history of the past that Mr. Obama has been recounting lately, when his first-term spending and debt boom never happened.

“Mitt Romney ‘warned about a ‘prairie fire of debt.’ That’s what he said,’ Mr. Obama said on the Des Moines fairgrounds on Thursday, as if he couldn’t believe it either. ‘He left out some facts. His speech was more like a cow pie of distortion.’ Mr. Obama continued, with the finely shaded eloquence for which he is known. ‘What my opponent didn’t tell you was that federal spending since I took office has risen at the slowest pace of any President in almost 60 years.’…

“Prior to Mr. Obama, the U.S. had not spent more than 23.5% of GDP – that was in 1983, amid the Reagan defense buildup – since the end of World War II. Yet Mr. Obama has managed to exceed that four years in a row: 25.2% in 2009, 24.1% in 2010 and 2011, and an estimated 24.3% in 2012, up from a range between 18%-21% from 1994-2008.

“Democrats try to explain this away by saying that the economy is lousy, so spending’s share of GDP looks larger than it would be with faster growth. But that is hardly an endorsement of Mr. Obama’s economic policies, and in any case the recession officially ended nearly three years ago, in mid-2009….

“As for that prairie fire of debt, Mr. Obama can fairly blame $1 trillion or so of the $5 trillion debt increase of the last four years on Mr. Bush. But what about the other $4 trillion? Debt held by the public now stands at 74.2% of the economy, up from 40.5% at the end of 2008 – and rising rapidly.”

Regarding the deficits, I read the above, and go back to the first-quarter GDP revision down to 1.9%, and what is likely a similar putrid performance in Q2, and picture a budget outlook where the revenues just aren’t going to be coming in as projected, while the expense side of the ledger continues to grow.

It’s why I think talk of a fiscal cliff, while spot on, is also misguided in terms of the timing. The markets will not wait patiently for the election in November and then grant the president, whoever it is, and the new Congress, a little honeymoon to negotiate a ‘grand bargain.’ There will be a Crash beforehand.

Lastly, I have to reiterate what I wrote last week. When looking at dates such as June 17 for the Greek election, and then a huge EU summit June 28-29, you can’t just ignore some critical dates on the foreign policy front, like June 16-17, Egypt’s presidential run-off, or June 18, what I believe could be the final round of talks on Iran’s nuclear program, assuming little progress is made.

During this time North Korea could also conduct its third nuclear weapons test, and Syria is now front and center.

President Obama, particularly in the case of Syria and Iran, has wanted to push them to the back burner until after November 6. He will not have that luxury. 

One other thought with regards to Iran. The price of West Texas Intermediate crude oil has collapsed to $83 a barrel from a high of about $110 in February, and the price of gasoline at your pump is coming down.   This is good.

It’s also been commonly felt that the risk premium from Iran was about $20. I have stayed out of the prediction game when it came to commodities this year (after my great CRB call in 2011), but there is no doubt in my mind Iran’s nuclear facilities will be attacked and I believe downside in crude from today’s levels is limited, though you may want to wait until June 18 or so before placing any bullish bets.

Street Bytes

--It was another lousy week for stocks, capping off an incredibly poor month of May, the worst in two years, as the Dow Jones fell 6.2%, the S&P 500 lost 6.3% and Nasdaq dropped 7.2%. On the week the Dow lost 2.7%, the S&P 3.0% and Nasdaq 3.2%. The Dow’s gains for the year have been wiped out, while the S&P is up just 1.6% and Nasdaq 5.5%. Quite a comedown after the fabulous start to 2012.

As noted above the week was dominated by talk of Europe and a global slowdown, including in the U.S., but there was another prime topic, that being the historic lows in interest rates both here and across the pond as investors sought safe havens in sovereign debt, at least of the United States, German and British varieties, for starters.

The U.S. 10-year Treasury finished the week at a record low yield of 1.45%. Back in June 2007, before the financial crisis, the 10-year was at 5.30%. The average yield is 5.00% for the past 20 years.   [Bloomberg]

Meanwhile, Germany’s 10-year bund traded with a yield below 1.20%, another record, while the German two-year went negative for the first time with a yield of minus 0.12%. The U.K.’s 10-year also hit a record low in yield of 1.49%. At some point bond investors will get smoked, but that doesn’t seem likely in the short run. U.S. Treasuries will have their comeuppance when attention turns to our own debt crisis.

The Federal Reserve’s Open Market Committee next meets June 19-20 and it is now increasingly likely the Fed will announce some kind of quantitative easing, or QE3, seeing as how the economic data is softening again. The manufacturing data from Chicago was worse than expected at 52.7, while the national ISM figure was 53.5.

--U.S. Treasury Yields

6-mo. 0.11% 2-yr.   0.25% 10-yr. 1.45% 30-yr. 2.52%

With rates like the above, savers continue to take it up the butt.

--James Gorman, CEO of Morgan Stanley, the lead underwriter in the Facebook IPO, called investors who had expected immediate gains “naïve” for having “bought it under the wrong pretences.” Gorman also blamed Nasdaq for sowing “confusion” on Facebook’s initial day of trading due to a systems glitch wherein some traders didn’t know for hours if their trades had been executed. Facebook finished the week at $27.70, down from the May 18 IPO price of $38 (and a high that first day of $45).

No doubt the dreadful performance of Facebook thus far has further shattered the confidence of retail investors, who have been pulling out large sums from U.S. stock mutual funds since the FB offering.

According to a Chicago Booth/Kellogg School Financial Trust index, a quarterly survey, just 15% of Americans trust the stock market these days, essentially the level of March 2009 at the market’s bottom.

--U.S. auto sales were up in May but virtually every automaker missed estimates. General Motors’ rose 11%, Chrysler’s climbed 30%, and Ford’s were up 13%. Additionally, Toyota’s surged 87% (another post-tsunami comparison), Nissan’s increased 21%, and Honda’s rose 53%.

--In the latest housing report from the folks at S&P/Case-Shiller, prices fell just 0.03% in March for the 20-city home-price index compared with February, but after adjusting for seasonal factors rose 0.09%, so call it flat; the first such performance for this data set in some time.

But prices hit new lows in Atlanta, Chicago, Las Vegas, New York and Portland, Ore. Phoenix, though, posted a gain of 6.1%, the largest in the index.

The bottom is in. Assuming we avoid a Europe-related depression, it’s a good time to buy given the further collapse in mortgage rates.

--China and India added to talk of a global slowdown with China’s PMI in May officially coming in at 50.4, down from 53.3 in April. The government needs to take more decisive action and Beijing, despite issuing a statement through the official New China News Agency that “The Chinese government’s intention is very clear, it will not issue another large-scale stimulus plan to boost robust growth,” clearly is targeting special projects and tax incentives. It just doesn’t want to say so in public because the 2008-09 stimulus left China with soaring debt levels and inflation that the government spent 2011 trying to clean up.

Separately, China’s home prices fell to a 16-month low in May though here officials refuse to panic as they keep property curbs in place…for now. Many expect the curbs to be relaxed later in the year.

And India’s first-quarter GDP came in at a dismal 5.3%, the lowest such pace in 9 years and off of last year’s 9.2% growth rate.

--Macau casino revenue rose 7.3% in May, the slowest pace since July 2009, though this matched estimates. Total revenue for the six casino operators hit $3.3 billion.

--Taiwan’s government said it will allow the export of hundreds of strategic hi-tech goods to the mainland if exporters can prove that North Korea or Iran will not be their final destinations. 

--Retail sales in Australia declined in April when a gain had been expected.

--Go Poland! First quarter GDP grew 3.5% year over year as consumer demand remains strong in an economy that is less reliant on trade than some of its neighbors.

--In a good sign of a slowdown in Brazil, Mercedes-Benz, Latin America’s largest manufacturer of commercial vehicles, laid off more than 10% of its workforce in the country owing to a fall in demand for trucks and buses. 

--The U.S. Department of Agriculture is now forecasting that the U.S. wheat harvest will be one of the biggest in the past decade, owing to strong yields in Kansas and Oklahoma. It was just two weeks ago there were fears a drought in Russia could result in a repeat of 2010, but U.S. weather has been favorable and projected yield more than offsets any shortfalls in Russia and the rest of Europe. 

--Wall Street Journal: “Since 2009, the Obama administration has awarded more than $1 billion to American companies to make advanced batteries for electric vehicles. Halfway to a six-year goal of producing one million electric and plug-in hybrid vehicles, auto makers are barely at 50,000 cars.”

Less than a third of the jobs promised by 2015 have been created.

--Speaking of batteries, as reported by the South China Morning Post (Hong Kong), “A fatal road accident in Shenzhen at the weekend has raised concerns about the safety of electric cars developed on the mainland amid an ongoing central government push for them to be more widely used.

“At about 3am on Saturday, a speeding sports car rear-ended a BYD E6 electric taxi, causing the cab to catch fire, killing the driver and two passengers.”

“Lo Kok-keung, an engineer with the Department of Mechanical Engineering at Hong Kong Polytechnic University, said that a fully charged lithium battery could explode in a serious crash.

“ ‘The crash could result in a short circuit, which, in turn, could make the battery hot and eventually explode within a matter of seconds,’ Lo said. ‘This is the major hidden danger of electric cars that doesn’t exist in vehicles that consume petrol.’”

BYD has been the recipient of $hundreds of millions in support from the central government, while the government has offered $thousands in rebates for buyers.

Lo suggested that makers of electric cars install circuit breakers on each battery to help avoid future explosions in accidents.

--The Financial Times had a good piece on the state of the corporate bond market, as in liquidity has dried up, a real problem if you have large positions and need to exit quickly.

--BlackBerry manufacturer Research In Motion will be announcing up to 6,000 job cuts in the not too distant future as RIM now says it will be reporting an operating loss in the current quarter vs. expectations for a gain. The loss will be the first in eight years as RIM also said it hired two investment banks to pursue strategic options.   Among the company’s myriad problems is the expected delivery date of the new BlackBerry 10 smartphone…not until the fall at the earliest.

--In one of the largest law-firm failure in U.S. history, New York’s Dewey & LeBoeuf LLP filed for bankruptcy protection, the end for a 1,300-lawyer global behemoth. The Manhattan District Attorney’s Office launched a criminal investigation into activities at the heavily debt-laden firm. Dewey owes in excess of $300 million to more than 5,000 creditors.

--New York City Mayor Michael Bloomberg is seeking to implement the nation’s first ban on oversized cups/bottles of sugary drinks in restaurants, delis and sports arenas, and of course there was the usual outrage over another example of the mayor’s sought after “nanny” state. Bloomberg wants to ban cups larger than 16 ounces, but wouldn’t prevent one from getting two or three 16-ouncers. A statement from McDonald’s described the ban as “misguided.”

But the chances of his proposal being implemented are virtually nil, despite what most are saying to the contrary. One thing is clear, though. Americans could stand to drink less soda and sales of the product have indeed been sliding since 1998.

--Meanwhile, the American Heart Association announced plans to expand its “Heart-Check” food certification program from grocery stores to restaurant meals and the first beneficiary of the latter is Subway. As reported by Bruce Horovitz of USA TODAY, “Up to 42% of Subway’s food sales meet the heart group’s requirements that limit cholesterol, fat, saturated fat and sodium,” according to company officials.

--Scientists are startled that Pacific bluefin tuna migrating last year from waters off Japan to Southern California contain radioactive isotopes from the disabled Fukushima nuclear plant. Not to worry, however, as the levels are just one-tenth what the U.S. and Japan consider dangerous. But it was amazing how the traces of radioactive elements crossed such vast distances.

--You’d think the tumbling euro would provide a boost to tourism this summer as the dollar buys more, but that is not likely to be the case owing to soaring airfares. A spokesman for Priceline told USA TODAY that European summer airfares “are at a 10-year high,” while hotel rates haven’t fallen noticeably. 

As for Greece tourism, bookings are off 1/3 compared to last summer, with German bookings off a like amount…thus far. Close to four million Germans visit Greece each year – more than any other EU member state. One in five Greeks work in the tourism industry so the percentage decline is devastating.

--In the 8,020th game in franchise history, Johan Santana of the New York Mets threw the team’s first no-hitter Friday night.

Foreign Affairs

Syria: As I went to post last weekend, the death toll from the massacre in Houla was about 50, but shortly thereafter we learned 108 had died, including 49 children and 34 women in an incident of “stomach churning savagery.” We then learned of other massacres during the week and Britain said the death toll from the 14-month uprising is closer to 15,000 than the 9,000 to 10,000 the UN talks about. Imagine the refugee crisis, too, as the Red Cross found 5,000 who had left the killing in Houla, all without food or water.

In response to the massacre, the U.S., U.K., Germany, France, Italy, Australia, Canada, Spain, Netherlands, Switzerland, Japan and Turkey expelled Syrian diplomats from their countries. Calls for an armed intervention are now growing, while Iranian Parliament Speaker Ali Larijani warned that a military intervention in Syria would engulf Israel.

I said back on 2/25/12 in this space that the appointment of Kofi Annan as special mediator for the crisis would be a disaster and it has proved to be so. As in past positions that he has held (see Rwanda), he has hardly been effective. His peace plan is now in tatters, also as predicted.

As for the UN Security Council, it too has been a joke; powerless to employ tougher sanctions on the Bashar Assad regime with Russia continuing to support its chief client in the region. President Vladimir Putin’s prime concern is keeping Russia’s Syrian port of Tarsus for its navy. On Friday, Putin rebuffed European efforts to take a harder line on his ally, saying at a press conference after meeting with French President Hollande: “Why are we thinking that if we push the current leadership from power, then tomorrow general wellbeing will begin there? What is happening in Libya? What is happening in Iraq? Has it become safer there? We propose to act in an accurate, balanced manner at least in Syria.”

Even U.S. ambassador to the United Nations Susan Rice has been forced to conclude:

“There seems to me to be only one other alternative, and that is indeed the worst case, which seems unfortunately at the present to be the most probable.

“And that is that the violence escalates, the conflict spreads and intensifies, it reaches a higher degree of severity, it involves countries in the region, and it takes on increasingly sectarian forms, and we have a major crisis not only in Syria but in the region.”

In that outcome, Rice added, “The Council’s unity is exploded, the Annan plan is dead and this becomes a proxy conflict with arms flowing in from all sides.”

Secretary of State Hillary Clinton said, “[The Russians] are telling me they don’t want to see a civil war. I have been telling them their policy is going to help to contribute to a civil war.”

Peter Baker of the New York Times wrote this week, “If the president considered Libya a model of humanitarian intervention, Syria increasingly looks like Mr. Obama’s Bosnia.”

The White House does not want to act before the election, and probably won’t if the violence is limited to Syria, but should it spread to Lebanon, Turkey or Jordan, it won’t have a choice.

But what is pathetic is that the United States has refused to work with the likes of Turkey and Jordan to create safe zones along Syria’s borders. The Turkish government has long expressed support for the idea.

“For months, we’ve been told that the U.S. and the West can’t intervene in Syria because it might lead to civil war, because the turmoil might spread in the region, and because we don’t know who might replace Mr. Assad. Well, civil war is breaking out anyway, the mayhem is spreading to Lebanon, and the bloodier things get the more likely that Syria will descend into a chaos that empowers the most radical elements on either side.

“At least in Libya, Mr. Obama eventually led from behind. In Syria, he’s following from behind a United Nations that has become an accomplice of Bashar Assad.”

“Mr. Annan’s mission has become one of the most costly diplomatic failures in U.N. history. It has allowed the Syrian regime to go on slaughtering civilians and pushed the country down the path to a full-scale sectarian war. But Mr. Annan persists: On Tuesday, he met Mr. Assad in Damascus to renew feckless appeals for steps that the dictator will never take.

“The Obama administration persists, too, in declining to exercise the U.S. leadership that would be required to stop the massacres. For the past two months it hid behind Mr. Annan. Now that his plan has become an embarrassment, it is floating a new idea: a Syrian political transition modeled after that of Yemen, where a strongman was pressured into stepping down. The ‘Yemensky variant’ is called that because the key to the new White House figment is none other than Vladimir Putin – the Russian strongman who has been struggling to squelch pro-democracy protesters in his own country…

“The reality is that the killing in Syria will continue, and the threat to vital U.S. interests across the Middle East will grow, until Mr. Obama stops counting on the likes of Kofi Annan and Vladimir Putin to spare him from the responsibility that should be shouldered by a U.S. president. The longer he waits, the greater the cost – in children’s lives, among other things.”

Lastly, a senior Iranian general conceded for the first time that Tehran has special forces inside Syria assisting in Assad’s crackdown; this coming, as reported by the London Times, as the result of “an apparent slip by one of Iran’s semi-official news agencies.” The agency that reported on an interview with the general quickly removed the comments that served as an admission but not before it was picked up by other news outlets.

Iran: Satellite photos clearly show more “ground-scraping activities” aimed at concealing material at the military installation of Parchin, where inspectors from the International Atomic Energy Agency have been waiting to be allowed in to get answers to longstanding questions of theirs. Two structures have disappeared from earlier photos; this as the next round of talks on Iran’s nuclear program are about two weeks away, June 18, in Moscow.

Israeli Defense Minister Ehud Barak said Wednesday, “We have no illusions about the talks.” Barak warned that the inability to stop Assad in Syria was a lesson regarding Iran.

“The difficulty the international community is having in generating the ability to act even in such a clear-cut case…must tell us something about other areas as well.”

Barak then added that in recognizing Israel and the United States have different timetables for assessing Iran’s nuclear efforts, “Our clock is ticking faster.”

“Iran’s (nuclear) policy is casting a shadow over the whole region. They are actually building a nuclear weapon. This weapon is a threat for the whole world….Iran’s President (Ahmadinejad) is threatening a new (Holocaust). We cannot ignore that.”

For his part Israeli Prime Minister Benjamin Netanyahu reiterated his past position in a speech also on Tuesday:

“Iran must stop all enrichment of nuclear material, it must remove from its territory all the material that has been enriched so far, and it must dismantle the underground nuclear facility at Qom. Only an explicit Iranian commitment to implement these three demands, and explicit verification of their implementation, can stop the Iranian nuclear program.”

Netanyahu is concerned that while he believes demands on Iran should be ratcheted up, “Instead…demands are being lowered.”

Iran’s Atomic Energy Organization head Fereidoun Abbasi said this past week, “We have no reason to retreat from producing the 20% (enriched uranium), because we need 20% uranium just as much to meet our needs.” Not exactly the kind of flexible stance the P5+1 is looking for.

“How many times can the West allow itself to be fleeced in this bazaar?

“Iran’s guess: plenty more. The regime’s tactical gamble is that the Obama administration has its own reasons to drag out the talks at least through November’s election. That’s probably right.

“The Iranians may also be gambling that any Israeli strike will prove costly, unpopular and ineffectual, thereby tagging Israel as the aggressor while crippling its deterrent power in the long run. That’s more of a gamble, but from the Iranian perspective it may be one well-worth taking.

“The larger question is why the U.S. continues to believe that there’s a grand bargain to be struck with the mullahs, and that it lies just inches out of reach. Western analysts have become experts in explaining why Tehran has rejected every diplomatic overture made to it – bad timing, bad mood music, niggardly terms – without ever alighting on what (New York Times reporter John)  Kifner noted in 1981: The mullahs believe they have a cause worth fighting for.   They take our concessions as evidence of weakness, and our pragmatism as proof of corruption. They’re not entirely mistaken.

“For 33 years, Iran has dealt with us as an enemy. Until we return the favor, we will be fooled again.”

Separately, Iran and other countries in the Middle East have been hit by a new computer virus, Flame, which is more of an espionage tool that as one researcher put it, “can be used to spy on everything that a user is doing.”

It seems a virtual certainty that Israel is behind it, though it’s not known if any Western governments are also involved. Israeli Vice Premier Moshe Yaalon did little to dispel the notion his nation is employing it.

“Israel is blessed with high technology, and we boast tools that open all sorts of opportunities for us.”

The U.N. issued its most serious cyber warning ever, urging member nations to secure their national infrastructures.

Egypt: The final results of the first round of the presidential election showed Muslim Brotherhood candidate Mohammed Morsi in first with 25%, while former air force commander and Hosni Mubarak’s last prime minister, Ahmed Shafiq, came in second with 24%. The two face off in the June 16-17 runoff. Finishing third was leftist Hamdeen Sabahi with 21%.

The above means that 50% of the Egyptian people did not vote for either one, and to pit a Brotherhood candidate against what most view as an extension of the Mubarak regime is the most polarizing combination possible.

Both candidates, as you can imagine, are racing to broaden their appeal. Morsi vows to be a “president for all Egyptians” including minority Christians, it is assumed.

But many believe after the election the Brotherhood would show its true colors. Morsi has always maintained a tough stance on Israel and has referred to Zionists as “vampires.” Morsi also wants a review of the Camp David accords, though he claims he will stick to the peace treaty as long as Israel doesn’t violate it.

For his part, Shafiq’s Cairo headquarters were torched.   He has expressed a zero-tolerance policy toward protests, while also trying to distance himself from association with Mubarak.

Whoever wins, the first thing the new president has to deal with is the writing of a new constitution; a document that will both spell out the president’s powers, as well as those of the military.

But as the Wall Street Journal editorialized, “If the final vote is seen to be fair, at least whoever emerges will have some democratic legitimacy. That’s more than Mr. Mubarak had.”

And this just in as I go to post…Mubarak has been sentenced to life in prison after a court convicted him on charges of complicity in the killing of protesters during last year’s uprising that forced him from power. We now wait to see the public’s reaction.

Lebanon:  Last week, the latest word I had was that 11 Lebanese (I had seen reports of as high as 16) taken hostage by Syrian rebels had been released. 24 hours later we learned they were still being held. The rebels are calling for Hizbullah leader Sheikh Nasrallah to apologize for a speech in which he condemned the kidnapping and said it would not change his party’s stance on the crisis in Syria, President Assad being a major ally of Nasrallah’s.

Russia: U.S. Ambassador to Russia Michael McFaul faced heavy criticism from the Kremlin and the Foreign Ministry after suggesting that Russia had “bribed” officials in Kyrgyzstan to pressure them to close a base used by U.S. forces in its Afghanistan operation.

The Foreign Ministry said in a statement that an “ambassador’s job, as we understand it, is to improve bilateral ties, not to spread blatant falsehoods through the media sphere.”

McFaul made his comments during a talk at a university. The guy’s an embarrassment.

On the topic of Igor Sechin, new head of oil giant Rosneft, and Prime Minister Dmitry Medvedev, I’ve told you Sechin could eventually topple Putin, his buddy, while Medvedev may resign. This week Yulia Latynina, who hosts a radio talk show in Moscow, wrote in the Moscow Times:

“On paper, Medvedev is the second-most powerful man in the government, but in reality it is Sechin. That is why many had predicted that Sechin would not be appointed to Medvedev’s Cabinet. After all, how could a minister carry more political weight than the prime minister himself?”

And last week I wrote: “The Russian Mob is firmly in control.”

This week, economist Alexei Bayer, opined in the Moscow Times:

“Over the past 12 years, Russia has become a full-fledged mafia state. One day, historians will chart its exact structure, but it seems clear that it consists of several large families headed by President Vladimir Putin’s close associates and loyal oligarchs. Alongside them, countless crews of siloviki, bureaucrats, gangsters and affiliated businessmen work on their own, their networks varying from local to nationwide.

“A friend recently had her car stolen. She reported it to the local police and soon got a call from a man, who, using the description of the car she had given the cops, demanded ransom….She tried calling internal affairs investigators at the Moscow police, but they hung up on her.”

But Tadic looks set to become prime minister as his Democratic Party heads up a new governing coalition. Ironically, Tadic would end up with the more powerful position, so this will be interesting to watch.

North Korea: Amnesty International reported that 30 officials involved in talks with South Korea were executed or died in “staged traffic accidents.” AI investigators say another 200 were rounded up and executed or sent to political prison camps. The victims are being considered scapegoats for failure to improve relations.

Canada: A porn actor is being sought in connection with a gruesome murder. Luka Rocco Magnotta is suspected of sending body parts to the offices of Prime Minister Stephen Harper and the Liberal Party’s offices. One contained a human foot, the other a hand. A headless torso was then found behind Magnotta’s Montreal residence and it’s feared he fled to France, as I go to post.

Random Musings

--Mitt Romney officially clinched the Republican presidential nomination when he won the Texas primary, thus becoming the first Mormon to win a major party’s nomination, but his economic message was overshadowed somewhat by the presence of Donald Trump, who was helping the former governor raise money in Las Vegas. Trump decided it was a good time to resurrect the issue of Obama’s place of birth.

--According to a new Washington Post/ABC News poll, Mitt Romney’s favorability rating still trails President Obama’s, but whereas a month ago Obama had a 56% to 35% advantage, that margin has now shrunk to a 52% favorability rating for Obama and a 41% number for Romney.

Among independents Obama gets a 49% favorable, while 48% hold negative views. For Romney, it is 44% on both sides of the question, the first time it has not tilted away from him.

Republican women are driving the increased support for Romney. 80% of them now have a favorable view of him, up from 59% last month. Some analysts credit the rapid improvement among this group to the remarks by Hilary Rosen on Ann Romney.

--In the Wisconsin recall vote next Tuesday (only the third for a sitting governor in U.S. history), Republican Gov. Scott Walker has widened his lead over Milwaukee Democratic Mayor Tom Barrett, with Walker leading 52% to 45% among likely voters; this according to a Marquette University poll.

Obama leads Romney in this key state, 51% to 43%. Republicans obviously need Walker to beat back the challenge if they are to also have a chance in November.

--According to an AP analysis, if the election were held today, Obama would likely win 247 electoral votes to Romney’s 206. [270 needed for victory.]   Seven states, offering a combined 85 electoral votes, are viewed as too close to give either candidate a meaningful advantage: Colorado, Florida, Iowa, Nevada, New Hampshire, Ohio and Virginia.

--The Wall Street Journal’s Gerald Seib builds a strong case for Ohio Republican Sen. Rob Portman as Mitt Romney’s running mate.

“His resume is sterling. There is no chance his credentials would be questioned, little chance he would hurt the ticket and only a slim chance he would commit a distracting gaffe….

“The case for Rob Portman starts with that resume. He served in the House for a dozen years before being elected to the Senate. He was head of White House legislative affairs for President George H.W. Bush, and held two cabinet-level positions – U.S. trade representative and director of the Office of Management and Budget – in the George W. Bush administration. He was part of the congressional supercommittee that tried – and failed – last year to come up with a master deficit-cutting plan.

“He has practiced law and has helped run two family businesses in Ohio. He’s moderate in style but generally well-liked by his party’s conservative wing.”

Portman also has a history of crossing party lines to get things done in both the House and Senate.

And you have the not so small issue of Ohio’s importance in the presidential race. No Republican has ever won the presidency without carrying it. Portman received 70% to 77% in his House races, and won his Senate race 57% to 39% over an opponent who was very well-known in the state, Lt. Gov. Lee Fisher.

Oh, there are arguments against him, namely that he was budget director in the latter stages of the George W. Bush administration, and deficits soared (not that they haven’t risen even further under the current president), and the second argument against Portman is that he is too much like Romney.

“On the other hand, Mr. Portman may prove more intriguing than he seems at first glance. He speaks fluent Spanish, for example, and is an accomplished hunter and kayaker. Besides, lots of Republicans figure they got enough vice presidential excitement in 2008 to last a lifetime.”

--On Tuesday, President Obama awarded the Medal of Freedom posthumously to Jan Karski, a Polish resistance fighter who died in 2000.

In giving short prepared remarks for a dozen recipients, including Madeleine Albright and Bob Dylan, Obama described Nazi concentration camps inside Poland as “Polish”. Administration aides then issued a statement that evening saying Obama misspoke.

But Polish Prime Minister Donald Tusk called on the White House to issue a stronger correction, saying the president’s inaccurate words “touched all Poles. We always react in the same way when ignorance, lack of knowledge, bad intentions lead to such a distortion of history, so painful for us here in Poland, in a country which suffered like no other in Europe during World War II…This is something that we cannot ignore.”

I can speak to this issue myself. Back in 1999, I hired out a driver to take me to Treblinka while I was on a trip to Warsaw. I’ve described the faces of the old women I saw as we approached the camp, now just marked by a memorial, driving on what had been the railroad tracks that brought hundreds of thousands into Treblinka for extermination…at least 800,000.

I received mean looks from the locals, but my reaction was ‘you knew what was going on.’

It is inconceivable that President Obama could not read the words “Polish death camps” and not correct himself (on a second reference he said Nazi camps). At the same time, as a council member for a group representing the history of Polish Jews said, the mistake had no malicious intent.

Ironically, the same day, Mitt Romney’s campaign released an iPhone application that misspelled the country’s name as “Amercia.”

“Mr. Romney has to give us a plan. He has to tell us his priorities. To lead is to prioritize, to choose: ‘We will take this path, at this speed, toward this end.’ He hasn’t done this yet. He told me last week of some immediate intentions – repeal ObamaCare, and move boldly to unleash America’s energy resources – he called them ‘newly discovered and extraordinary.’

“Fine. But afterward I realized these issues are immediately and personally associated with President Obama. They are not associated with the president I suspect Mr. Romney really has on his mind, George W. Bush.

“Mr. Romney should be talking about the big things, taxing and spending, and offering a plan on both, a hierarchal declaration of needs. But taxes and spending are issues that are associated with Mr. Bush, and not happily. That, I suspect, is a reason Mr. Romney avoids addressing them at length or in a way that’s easily understood. He doesn’t want the Obama campaign to accuse him of being ‘just more Bush,’ of peddling the same medicine that helped make us sick. That was Ronald Reagan’s 1984 charge against Walter Mondale, that all he offered was the empty, warmed-over liberalism of the past.

“The Romney camp doesn’t want to be accused of warmed-over Bushism. So they shy away from clarity on central issues. But you can’t avoid central issues. If you try, your candidacy and message will be robbed of vividness, made a blur.

“Mr. Romney should face what didn’t work the past 12 years. Republicans took some wrong turns, and they know it. Centrists and independents know it, too. Candor here, delivered in a spirit of honesty, without animus, would seem not like a repudiation but a refreshment. And this would be deeply undercutting of Mr. Obama, who needs this race to be a fight between two parties, not a fight between a past that didn’t work and a future that can.”

--Charles Krauthammer / Washington Post…on the recent portrayal of Barack Obama as a “Drone Warrior.”

“Why? To portray Obama as tough guy. And why now? Because in crisis after recent crisis, Obama has looked particularly weak: standing helplessly by as thousands are massacred in Syria; being played by Iran in nuclear negotiations, now reeling with the collapse of the latest round in Baghdad; being treated with contempt by Vladimir Putin, who blocks any action on Syria or Iran and adds personal insult by standing up Obama at the latter’s G-8 and NATO summits.

“The Obama camp thought that any political problem with foreign policy would be cured by the Osama bin Laden operation. But the administration’s attempt to politically exploit the raid’s one-year anniversary backfired, earning ridicule and condemnation for its crude appropriation of the heroic acts of others….

“Obama only compounded the self-aggrandizement problem when he spoke…later about the military ‘fighting on my behalf.’

“The Osama-slayer card having been vastly overplayed, what to do? A new card: Obama, drone warrior, steely and solitary, delivering death with cool dispatch to the rest of the al-Qaeda depth chart….

“A rather strange ethic. You go around the world preening about how America has turned a new moral page by electing a president profoundly offended by George W. Bush’s belligerence and prisoner maltreatment, and now you’re ostentatiously telling the world that you personally play judge, jury and executioner to unseen combatants of your choosing and whatever innocents happen to be in their company….

“You festoon your prisoners with rights – but you take no prisoners. The morality is perverse. Which is why the results are so mixed. We do kill terror operatives, an important part of the war on terror, but we gratuitously forfeit potentially life-saving intelligence.

“But that will cost us later. For now, we are to bask in the moral seriousness and cool purpose of our drone warrior president.”

--Not for nothing, but has anyone thought about the fact the Republican Convention in Tampa, end of August, is at the height of hurricane season? A storm forming in the Gulf about that time could hurt us elephants big time in terms of media coverage.

--Former senator and presidential candidate John Edwards was acquitted on one of six charges in his campaign finance fraud case, after which the judge called a mistrial when jurors were unable to decide whether he misused money from two wealthy donors to hide his pregnant mistress during the 2008 campaign. 

Edwards, in admitting his sins, added, “I don’t think God’s through with me. I really believe He thinks there’s still some good things I can do.”

Frankly, God has more important things to do than worry about Edwards’ redemption.

--WikiLeaks founder Julian Assange lost his appeal to Britain’s Supreme Court against extradition to Sweden, where he faces allegations of sexual assault. Five of the seven judges voted in favor. However, the highest court in the land also stayed extradition for 14 days until the legal team makes its appeal to the court. The Supreme Court will then decide whether to reopen the case. If that fails, Assange can still appeal to the European Court of Human Rights, which has to respond in 14 days as well.

--Those who leaked documents at the Vatican are despicable. Those responsible should be smote. [Always wanted to use ‘smote’ in a sentence.]  

--A USC Dornsife/Los Angeles Times poll found that 80% of California voters support doctor-recommended use of marijuana for severe illness. But only 46% said they support legalization of “general or recreational use by adults,” while 50% oppose it. The survey found attitudes have not changed much since voters defeated the legalization initiative Prop. 19 in 2010 by similar margins.

A Gallup poll in October showed support nationwide for legalizing pot at 50% for the first time since the pollster began asking the question in 1969, when only 12% of Americans supported it. [Joe Mozingo / Los Angeles Times]

By the way, the same above-noted survey has President Obama ahead of Mitt Romney among registered voters in California by a 56% to 37% margin. “Latinos” in the state go for Obama 74% to 18%.

Hmmm…something tells me the Romney campaign will spend its dollars elsewhere, don’t you think?

--Idiotic statement of the week, from Vice President Joe Biden at West Point.

“I’m convinced the 9/11 generation will go down in history as the finest generation this nation has ever produced.”

--Congratulations again to SpaceX, this time for successfully bringing the Dragon capsule back from its journey to the International Space Station as it splashed down in the Pacific Ocean on Thursday. Company founder and CEO Elon Musk said the mission was “more success than we had a reasonable right to expect…There’s not much to fix.” Heck, it appears it landed within a mile of its target, too, which is pretty good as these things go.

No doubt SpaceX’s success is a boost for the White House as it has changed NASA’s direction with a focus on providing seed money to companies looking to develop commercially built spacecraft to ferry astronauts back and forth to the space station.

I meant to mention last time that SpaceX received $400 million in seed money from NASA, but could earn $1.6 billion from a contract to haul cargo in 12 flights to the space station for the agency.

Another company, Orbital Sciences, has a $1.9 billion hauling contract with NASA once it gets going.

--Uh oh…looks like Man is screwed. As reported in BBC News, “The largest volcanoes on our planet may take as little as a few hundred years to form and erupt.”

This isn’t good, sports fans. You see, these “supervolcanoes” had been thought to exist for as much as 200,000 years before releasing their vast underground pools of molten rock. But now, as one scientist put it, “The fact that the process of magma body formation occurs in historical time, instead of geological time, completely changes the nature of the problem.”

I’ll say. Scientists have been studying the supervolcano site of Long Valley in California. It’s felt that eruptions from supervolcanoes can influence weather for “years,” and the Lake Toba eruption in Indonesia about 70,000 years ago “had long-term effects that nearly wiped out humans altogether.”

So time to get your things in order. Take that dream vacation, stock up on Chex Mix and domestic (one advantage of domestic beer over the premium variety is it has a longer shelf life).

--Finally, congratulations to Queen Elizabeth II, who is celebrating 60 years on the throne this weekend. She’s gotten the monarchy back in her countrymen’s good graces. God Save the Queen!

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

Gold closed at $1626…up $62 on Friday on renewed QE3 talk
Oil, $83.23…lowest since 10/7/11

Returns for the week 5/28-6/1

Dow Jones -2.7% [12118]
S&P 500 -3.0% [1278]
S&P MidCap -4.1%
Russell 2000 -3.8%
Nasdaq -3.2% [2747]

Returns for the period 1/1/12-6/1/12

Dow Jones -0.8%
S&P 500 +1.6%
S&P MidCap +1.9%
Russell 2000 -0.5%
Nasdaq +5.5%

Bulls 39.3
Bears 24.5 [Source: Investors Intelligence]

Father’s Day is around the corner. Why not buy him a StocksandNews iPad app? He’ll keep you in the will if you do.  Otherwise, good luck…

Have a great week. I appreciate your support.

Brian Trumbore

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