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11/24/2012

For the week 11/19-11/23

[Posted 10:00 PM ET, Friday]

Europe, Washington and Wall Street

The eurozone continues to kick the can down the road, in most irritating fashion, and on Friday an EU summit on a new 7-year budget (beginning 2014) collapsed as the U.K. and Germany united to oppose a proposal that didn’t contain as many cuts in spending as they sought. So British Prime Minister David Cameron and German Chancellor Angela Merkel decided to play footsie, with Merkel saying it’s not a problem if budget talks are resumed in early 2013.

The biggest hang-up is over administration and the 55,000 members of the European Union’s staff, including 6,000 translators. It’s only 6% or so of the overall budget but it’s symbolic. Otherwise, most of the EU’s $170 billion annual budget goes to farm subsidies and development grants. Britain wants a budget freeze and has threatened to pull out of the euro bloc altogether. [Only 22% of Brits feel attached to the EU.]

And on the issue of Greece, supposedly on Monday, there will finally be an agreement to advance Greece up to 44 billion euro in aid (31.5 billion due since June as part of Greek Bailout II, plus another 12.5 billion in scheduled payments by yearend).

This past week, after 12 hours of talks between eurozone finance ministers, there was no agreement as the split between the European Commission and the International Monetary Fund remained. The EC wants to give Greece another two years, until 2022, to hit the debt to GDP target of 120% (from a projected 190% in 2013), while the IMF wants to keep the 2020 target date.

The Greeks should have been booted out of the eurozone long ago, but now I sympathize with them after the government of Prime Minister Antonis Samaras did a great job to get the requested latest round of austerity cuts through parliament. Samaras’ coalition held up their part of the deal. As he said, “Our partners, and the IMF, must now assume their responsibilities.” 

But Leftist opposition leader Alexis Tsipras of Syriza said: “Samaras has become an integral part of the pre-election campaign of Ms. Merkel, who does not want to admit to the German people before German elections that she has made serious mistakes, that she is to blame for the oncoming recession and that a haircut is necessary for Greece’s debt.”

One last item on this topic. While neo-Nazi Golden Dawn polls around 10% these days, support among the police is said to be 50%...not good in terms of the prospects for future unrest.

In Spain, this Sunday is the de facto referendum on independence for Catalonia. Should regional leader Artur Mas get a majority in parliament, it would be the first step in a highly complicated process for seeking independence from Madrid, though the central government says a follow-on formal referendum would be illegal and it’s not known if the people would really go for it. As much as a majority say they support independence now, if it meant being excluded from the EU their attitudes change.

Remember, the big hang-up for Catalonia is that it sends the central government $19 billion more in taxes than it receives back in services.

Overall in Spain, bad bank loans hit yet another record as the crash in the housing market continues to wreak havoc on the financial institutions and it will only continue to get worse as long-time readers of this column knew would be the case going back to 2005.

In Italy, industrial orders for the month of September plunged 12.8%, another sign of a deepening recession there.

And in France, Moody’s cut its triple-A rating on its sovereign debt. Earlier in the year, S&P did the same. Both have cited the growing debt to GDP, now 90%, and an “uncertain” fiscal outlook, as Moody’s put it. But…thus far the move has had zero impact on France’s interest rates because the French bond market is both highly liquid and still perceived to be better than most of the alternatives.

Finally, the Markit (sic…last time I’m going to write this) flash composite reading for the 17-nation eurozone, goods and services for November, came in at 45.8 vs. 45.7 in October. Still awful. 

In Germany, the service reading for November was 48.0, down from the prior month, and 46.8 for manufacturing, up from October.

In France, both readings on manufacturing and services rose over October but only to 44.7 and 46.1, respectively.

The Economist opined in its Nov. 17 issue:

“(Set) against the gravity of France’s economic problems, (President) Hollande still seems half-hearted. Why should business believe him when he has already pushed through a string of leftish measures, including a 75% top income-tax rate, increased taxes on companies, wealth, capital gains and dividends, a higher minimum wage and a partial rollback of a previously accepted rise in the pension age? No wonder so many would-be entrepreneurs are talking of leaving the country….

“Unless Mr. Hollande shows that he is genuinely committed to changing the path his country has been on for the past 30 years, France will lose the faith of investors – and of Germany. As several eurozone countries have found, sentiment in the markets can shift quickly. The crisis could hit as early as next year. Previous European currency upheavals have often started elsewhere only to finish by engulfing France – and this time, too, France rather than Italy or Spain could be where the euro’s fate is decided. Mr. Hollande does not have long to defuse the time-bomb at the heart of Europe.”

Not everyone agrees France is the future basket case of the region. The Financial Times’ Wolfgang Munchau notes:

“The relatively robust growth during the third quarter was a fitting example that France is often more resilient than forecasters and commentators generally acknowledge. The French economy has had a relatively good crisis and has often defied negative expectations, especially from commentators who view the universe from a perspective of competitiveness alone….In 1999, by the way, The Economist awarded the title of ‘the sick man of the euro’ to Germany.”

Munchau had a list of things he was not concerned about with regards to the eurozone, including the rise of extremist parties and Greece’s next aid tranche.

But when it comes to things he does worry about, Munchau writes:

“The first…is the impact of austerity on growth. 2013 promises to be an awful year for the eurozone economy that could well derail the current strategy.

“The second on my list is the continued failure to resolve the crisis, and accept the inevitability of an official sector involvement in a future Greek debt restructuring – or direct transfers. Pushing resolution beyond the German elections in September next year is bordering on the insane.

“And finally, the banking union faces further delays and is now subject to a lack of ambition….The debate has degenerated into a typical inter-institutional fight about who gets to do what.”

Washington

With Congress in recess, any talk about an agreement on the “fiscal cliff” was just that…talk. There was no actual negotiating taking place, plus President Obama was off in Southeast Asia for much of the time, but Wall Street chose to celebrate anyway and staged a strong rally, partly on the relief the crisis in Gaza calmed down with a cease-fire, and partly because there is unfounded optimism that a legitimate deal to avert the fiscal cliff will be reached before yearend.

But there was some decent news on the housing front, with October existing home sales coming in better than expected, up 2.1%, while housing starts for the month were up 3.6% to their best level since July 2008 and home builder sentiment reached its best level since June 2006. 

The level of housing starts for October was at an annualized rate of 849,000, which for historical perspective compares to the low of 478,000 in April 2009, and a historical average since 1959 of 1.5 million. So we have a long ways to go but record-low mortgage rates, 3.31% on a 30-year fixed, certainly help.

Meanwhile, on the gloomy side, Federal Reserve Chairman Ben Bernanke, in a speech on Tuesday, lamented the fact that what economists call “the potential growth rate” for the U.S. economy, normally 2.5% to 3%, has been more like 2% owing to the recession and its after-effects. 

Among the reasons given by Bernanke for the reduced growth potential was the “extraordinarily severe job losses that followed the crisis, especially in housing-related industries,” and the epidemic of long-term unemployment which leads “to some loss of skills” and has moved many workers out of the job market forever.

The Fed’s Open Market Committee next meets on Dec. 11 and 12 and it is expected to announce another bond-buying program at that time.

“The unemployment rate is still well above both its level prior to the onset of the recession and the level that my colleagues and I think can be sustained once a full recovery has been achieved,” said Bernanke. The jobless rate of 7.9% needs to be reduced to 6% before the Fed will feel comfortable easing up on the printing press.

Bernanke also warned that if Congress fails to act on the fiscal cliff issue and avoid the automatic spending cuts and tax increases, “A fiscal shock of that size ($500 billion or so) would send the economy toppling back into recession.”

All we’ve been hearing about recently are corporate CEOs talking of cutting back ahead of yearend and possible congressional and White House failure to get a deal done. Investment has been curtailed, of this there is little doubt. Business travel is one sector that is already getting slashed.   The Global Business Travel Association says companies would spend $20 billion less on biz travel through 2014 with no budget-reduction deal. Marriott CEO Arne Sorenson said:

“We’re at a maximum level of uncertainty. It will cause big companies to think twice about meetings. And it will probably cause some of our real estate partners to be slow to commit” to building new hotels, he added.

But Wall Street ended its losing ways in the holiday-shortened week in fine fashion with the Dow Jones breaking a four-week losing streak and Nasdaq a six-week one. In fact all the major averages staged their best one-week performance since the week ending June 8, with the Dow Jones up 3.3% to 13009, the S&P 500 up 3.6%, and Nasdaq roaring back 4% to 2966.

Street Bytes

--Aside from the reasons I listed above, this week’s rally was helped on Friday by the release of stronger than expected manufacturing data out of China, specifically an HSBC flash report for November that came in at 50.4, above the 50 dividing line between growth and contraction. The HSBC reading has traditionally been more conservative than the government’s own calculations and thus this figure was welcomed.

--U.S. Treasury Yields

6-mo. 0.14% 2-yr. 0.29% 10-yr. 1.70% 30-yr. 2.83%

The yield on the 10-year broke out of a narrow 1.58%-1.62% short-term range with cash flowing back to equities and the solid housing data. But if there is no good news on the fiscal cliff, the yield goes back down as stocks plunge.

On the other hand, longer term, as an article in the Wall Street Journal by Spencer Jakab put it, “The Fed’s balance sheet has mushroomed to $2.88 trillion, from less than $900 billion in early 2008.”

It’s going to be some time before the Fed begins throttling back on its bond-buying stimulus, “by which time it could be sitting on $4 trillion of assets if Treasury purchases resume.”

But that makes the inevitable exit most worrisome. How does the Fed do so without having interest rates spike and the economy returning to recession, or worse?

--Hewlett-Packard announced an $8.8 billion writedown, over $5 billion of which was due to alleged “serious accounting improprieties, misrepresentation and disclosure failures” (i.e., revenue recognition) with its Automony acquisition from August 2011. The U.K.-based software maker was acquired for $10.25 billion (another figure I saw put it at $11.1 billion) at a time Oracle was calling the then market value of Autonomy, $6 billion, “extremely over-priced.” Since 2006, H-P has taken $26.1 billion in various restructuring charges and merger-related expenses, including an $8 billion impairment charge earlier this year related to the EDS acquisition, as well as past impairments related to deals for Palm and Compaq.

In the case of Autonomy, H-P first learned something was amiss after Autonomy founder Mike Lynch left H-P in the spring, at which time a senior member of Autonomy’s leadership team presented information that led to an “intense internal investigation” and third-party review of Autonomy’s financial results.

Overall, H-P saw revenues for the quarter ending Oct. 31 decline 7% over last year, with the personal computer segment down 14% and printing revenue down 5%; these two accounting for 50% of the company’s overall revenues. Two, some would say, dying businesses (think tablet sales).

CEO Meg Whitman, who took over about a year ago, said, “Fiscal 2013 is going to be a fix-and-rebuild year for the company, (which) will put pressure on our top-line performance.”

H-P shares plummeted 12% on the news. In the last year, HP stock is down over 50%.

--On Tuesday, federal prosecutors and the Securities and Exchange Commission arrested a former portfolio manager at an affiliate of billionaire hedge fund manager Steve Cohen’s SAC Capital Advisors LP, but thus far the feds have not been able to turn Mathew Martoma against his former boss. In fact, all probes of traders at SAC affiliates have failed to yield a smoking gun when it comes to Cohen.

The case against Martoma, though, is said to be the biggest insider trading prosecution in history, with Martoma trading on confidential information obtained from a neurology professor about drug trial results on two stocks, Elan and Wyeth, back in 2008. The inside info allowed Martoma to earn profits and avoid losses of $276 million, according to prosecutors, who allege Cohen, identified as “Portfolio Manager A” in court filings, placed trades on Martoma’s advice. But thus far prosecutors have been unable to tie Cohen’s trades to actual inside information, even though Martoma became aware of unexpectedly bad results from a clinical trial and allegedly had a 20-minute conversation with Cohen over the topic.

But as a Wayne State University law professor, Peter Henning, told Bloomberg, “If Martoma isn’t willing to say that he told Cohen his recommendation was based on inside information, then the government is stuck. It’s he said-he said.”

For his part, Martoma faces 20 years in prison for each of the three fraud counts he has been charged with.

--Hostess Brands was given a 24-hour stay of execution but then last-ditch talks with unions failed and Hostess will begin laying off 15,000 of 18,500 employees. No doubt, however, some parts of the business can be sold. Hostess had sought protection from its creditors through Chapter 11 bankruptcy in January, but a strike by the Bakers union killed the company; Hostess already being saddled with a huge debt load.

Of the 3,000-3,500 employees that will stay to help shut down operations, only about 200 will survive after March. Buyers of the more iconic brands don’t necessarily have to hire any of Hostess’ workers, thanks to overcapacity in the sector.

--Famed investor Jeremy Grantham told his GMO clients in a quarterly newsletter that growth in the U.S. will be less than 1% the next 40 years. That would be less than desirable. Among his reasons, “If resources increase their costs at 9% a year, the U.S. will reach a point where all of the growth generated by the economy is used up in simply obtaining enough resources to run the system.” He’s also concerned that climate change will lead to constant damage to crops.

--Speaking of crops, according to NOAA’s Climate Prediction Center, the drought in the central U.S. is not going to let up throughout the winter and possibly early spring. The situation had improved for a few weeks but then the drought came back, especially in Oklahoma, Kansas, Nebraska, South Dakota, Colorado and Iowa. One farmer in Brandon, S.D. told USA TODAY, “We had a guy come in with an excavator to dig some holes, and 8 feet down it’s nothing but powder.” Nebraska and Wyoming are enduring their driest year on record. Parts of Oklahoma and Arkansas need a foot of rain to get out of their drought conditions.

--China’s Shanghai Composite Index fell below 2,000 a few times this week before rebounding a bit to 2027 on the solid manufacturing data mentioned above. To give you a sense of how sick this stock market has been, the Shanghai index first broke above 2,000 in July 2000 and tripled to 6092 on Oct. 16, 2007, according to Bloomberg.

--AP Moller-Maersk, the Danish conglomerate, told the Financial Times that the group would no longer invest large sums in its Maersk Line, the world’s biggest operator of container ships with a 16% market share. Instead, CEO Nils Andersen said the company would focus on its oil and port operations.

The weak global economy has led to lots of volatility in the freighter market, with rates fluctuating wildly. The sector is also massively oversupplied due to overbuilding going back to the boom years before 2008.

--Energy expert Daniel Yergin commented in the Financial Times on all the recent talk the United States will pass Saudi Arabia in oil production by 2020.

“It is still far from clear how this shift will affect the strategic balance in the Gulf and the Middle East and U.S. engagement – especially given the rising tension over Iran’s nuclear program and the instability throughout the region. The debate about these considerations will be stirred by America’s future fiscal negotiations. But the question will not really be addressed until the crisis with Iran is resolved.

“One geopolitical impact is already clear. Rising U.S. oil production, along with increased Saudi output, has helped provide offsetting supplies that have made the sanctions on Iranian oil much more successful than anticipated a year ago.

“But U.S. engagement in the Middle East is not simply about oil imports. The U.S. buys only about 12% of its oil from the Gulf. Its interest is less about how many barrels flow to the U.S. and more about the overall accessibility and stability of supplies on which the world economy depends. After all, the U.S. will be affected by any disruptions to the global market that drive up prices.

“The significance of the rebalancing of world oil production goes beyond the Middle East to that most critical 21st century relationship – the U.S. and China. Beijing will see an increasing share of its imports coming from the Middle East. At this point, China is de facto relying upon the U.S. to undergird regional security and to maintain the freedom of the sea lanes on which it depends for its own oil imports. All this will require China and the U.S. to develop a more explicit understanding and a framework for collaboration on oil security. The components of this framework will have profound consequences for the rest of the world. For in spite of the dramatic changes in production even a U.S. that is less dependent on imported energy won’t be able to escape the logic of geopolitics and will still be deeply engaged with the world.”

--Unemployment fell in 37 states in October, with the biggest decline in South Carolina, 9.1% in September to 8.6%. Nevada continued to have the highest unemployment rate at 11.5%, followed by Rhode Island at 10.4% and California at 10.1%. North Dakota, owing to the oil drilling boom there, continues to have the lowest rate at 3.1%.

--You know who’s doing well? Chile. The economy grew 5.7% year-over-year in the third quarter and 5.6% for the first nine months of the year, thus bucking the slowdown in most of Latin America. Peru is also doing well, an estimated 6.5% growth rate in the third quarter.

--Paul Otellini, Intel’s CEO since 2005, announced he is retiring early next May. Intel stock is basically flat with where it was when he took over and the company faces slumping demand for many of its chips as it missed out on the initial wave of mobile technology and is now frantically trying to catch up while the PC business slumps.

--Shares in Research in Motion have been rebounding nicely, up 39% since Nov. 14! Analysts are expressing optimism the BlackBerry maker’s new BB10 launch might actually go pretty well and fuel a comeback. The BB10 is slated for around Jan. 30.

--The first aerial survey of New Jersey’s coast post-Sandy revealed 72,000 damaged buildings, a figure that will keep rising. An estimated 250,000 cars were damaged in the tri-state area (NY, NJ and CT).

[On Friday, Gov. Christie estimated damages in my state are in the neighborhood of $29 billion.]

--In yet another sign of the value of ‘live’ sports programming, ESPN is shelling out a reported $470 million a year for 12 years to broadcast the new Bowl Championship Series college football playoffs that begin after the 2014 season. ESPN also has signed deals with the Rose, Sugar and Orange bowls, giving it access to all the games involved in the new postseason arrangement.

--And along the same lines, News Corp. is acquiring a 49% stake in YES Network which broadcasts Yankees games. YES just obtained rights to keep airing the Yankees through 2042, which cleared the way for the deal, one that values the network at about $3 billion. In three years, News Corp., controlled by Rupert Murdoch, will increase its stake to 80%.   

Foreign Affairs

Israel / Gaza / Egypt: The eight-day war between Israel and Gaza ended with a cease-fire on Wednesday, this after at least 160 Palestinians and six Israelis were killed in the fighting. Hamas, Islamic Jihad and other militant groups fired well in excess of 1,500 rockets and missiles at Israel, some aimed for the first time at Tel Aviv and Jerusalem, while Israel launched a massive counter-attack against multiple targets in Gaza. 

One of the winners was Israel’s Iron Dome defense system which shot down at least 400 of the rockets fired from Gaza. The system can work, though it is also very expensive to operate and  Israel needs more than the six batteries it currently has if it is to be in the least bit useful against Hizbullah and its far more sophisticated missile force. [Production is being ramped up quickly.] 

Egyptian President Mohamed Morsi was also a big winner, if albeit for just a few days, and he won unstinting praise from President Obama and Secretary of State Hillary Clinton.

Israeli Prime Minister Benjamin Netanyahu, on the other hand, has an election coming up on January 22nd and a ground war would have extended into that time period…not good. As I note further below, however, not everyone in Israel is pleased the conflict ended so soon.

The cease-fire terms are vague, such as on what goods Israel will now allow into Gaza through Israeli-controlled crossings. And just what will Egypt’s role be in allowing cargo through a reopened border between it and Gaza. Israel has demanded an end to arms smuggling largely through the tunnels under the Egyptian border.

Morsi was in a box. He had to support Hamas and the Palestinian cause, but he also needed Western aid in the worst way, including the funding of his military by the United States. So while he blasted the Israeli air strikes, recalled his ambassador from Tel Aviv and sent his prime minister to Gaza as a show of support, he used the old channels of communication between the Egyptian and Israeli intelligence services to work out a ceasefire. He also spoke to President Obama numerous times. Obama was said to be impressed by Morsi’s pragmatism.

On Tuesday, the International Monetary Fund and Egyptian finance officials reached agreement on a critical $4.8 billion loan that is needed both to shore up the balance sheet as well as build investor confidence, though it is not formally approved until the IMF board meets on December 19. In return for the funding, Egypt agreed to cut back on fuel subsidies and to raise revenues.

After the cease-fire the following day, it seemed that Morsi would clearly be in line for the United States’ annual support of about $1.5 billion.

Secretary of State Hillary Clinton said, “I want to thank President Morsi for his personal leadership to de-escalate the situation in Gaza and end the violence. This is a critical moment for the region. Egypt’s new government is assuming the responsibility and leadership that has long made this country a cornerstone of regional stability and peace.”

Benjamin Netanyahu expressed his appreciation. Hamas leader Khaled Meshaal said, “May God keep (Morsi) in the presidency.”

But then I always say, ‘Wait 24 hours.’

Morsi, thus basking in such praise, set about granting himself extensive powers on Thursday, including a declaration that the courts are barred from challenging his decisions. He also gave protection to the Islamist-led assembly that is currently writing a new constitution by declaring the court couldn’t touch their efforts either, and gave them a two-month extension to finish writing it, until February (at which point there will be a referendum on same).

So now a large percentage of the population is furious that the Muslim Brotherhood and the president are seizing too much power. Protests in Suez and Alexandria have turned violent as the opposition goes after Muslim Brotherhood offices.

Morsi decreed that he has the power to deal with any “threat” to the revolution or national unity. Morsi is framing his decisions as necessary to protect that which was started with the uprising against former President Hosni Mubarak. Plus Morsi ordered a retrial of Mubarak and top aides on charges of killing protesters during the uprising, even though Mubarak was convicted and sentenced to life in prison in June. Several top police commanders were, however, acquitted then and Mubarak’s sons were found not guilty of corruption charges, so Morsi’s move on this front was a gesture to the protesters who sought the death penalty for Mubarak and/or his top security chief.

Pro-reform leader Mohamed ElBaradei wrote on Twitter: “Morsi today usurped all state powers & appointed himself Egypt’s new pharaoh. A major blow to the revolution that could have dire consequences.”

A leading human rights lawyer, Gamal Eid, told Agence France-Presse: “Morsi has committed a fatal mistake by decreeing his decisions cannot be appealed. The move will trigger more anti-government protests and will increase public frustration. The people don’t need another dictator.”

Meanwhile, back to Israel, Foreign Minister Avigdor Liberman on Thursday said that despite the ceasefire, Israel would “eventually need to overthrow the Hamas regime.” He said a ground operation in Gaza just two months before an election, though, was not the right move today.

“The occupation of Gaza and the overthrow of Hamas is a process that would take more than four months.”

Liberman added that Israel met its three goals for the mission: “stopping rocket fire on the South, regaining Israel’s power of deterrence and destroying Hamas’ stock of long-range Fajr-5 missiles.” [Jerusalem Post]

Defense Minister Ehud Barak rejected claims the conflict ended in a victory for Hamas.

An initial poll released Friday showed 49% of Israelis feel their country should have kept going after those firing rockets into Israel, 31% supported the government’s decision to stop. 20% had no opinion.

Shaul Mofaz, head of the center-Right Kadima party, rival to Netanyahu’s Likud, said “Deterrence was not restored. There was no resolution. Hamas achieved exactly what it wanted. There is no security for the residents of southern Israel and of central Israel.”

A former national security adviser, Giora Eiland, however, said: “There was no decisive victory here, but the situation was managed in the right way and it was clear that Israel enjoyed certain international support.”

Prior to the Gaza crisis, Netanyahu was expected to romp in January’s vote, which was the strategy behind calling early elections…to help build support for a future conflict with Iran, if necessary.

Charles Krauthammer / Washington Post

“Hamas’ new strength comes from two sources.

“First, its new rocketry, especially the Fajr-5, smuggled in from Iran, that can now reach Tel Aviv and Jerusalem, putting 50% of Israel’s population under its guns.

“Second, Hamas has gained strategic strength from changes in the regional environment.   It has acquired the patronage and protection of important Middle Eastern states as a result of the Arab Spring and the Islamist reversal in Turkey.

“For 60 years, non-Arab Turkey has been a reliable ally of Israel. The vicious turnaround instituted by its Islamist prime minister, Recep Tayyip Erdogan, reached its apogee on Monday when he called Israel a terrorist state.

“Egypt is now run by Hamas’ own mother organization, the Muslim Brotherhood, of which Hamas is simply the Palestinian wing. And the emir of Qatar recently visited Gaza, leaving behind a promise of a cool $400 million.

“Hamas’ objective was to guarantee no further attacks on its leaders or on its weaponry, launch sites and other terror and rocket infrastructure. And the lifting of Israel’s military blockade, which would allow a flood of new and even more deadly weapons. In other words, immunity and inviolability during which time Hamas could build unmolested its arsenal of missiles – until it is ready to restart the war on more favorable terms….

“A respite for rebuilding, until Hamas’ Gaza becomes Hizbullah South, counterpart to the terror group of Israel’s north, with 50,000 Iranian- and Syrian-supplied rockets that effectively deter any Israeli preemptive attack.

“With the declaration of a cease-fire Wednesday, Israel seems to have successfully resisted these demands, although there may be some cosmetic changes to the embargo. Which means that in any future fighting, Israel will retain the upper hand.

“Israel has once again succeeded in defending itself. But, yet again, only until the next round, which, as the night follows day, will come. Hamas will see to that.”

Editorial / Wall Street Journal

“Regarding America’s war in Vietnam, Henry Kissinger once noted that ‘the guerrilla wins if he does not lose. The conventional army loses if it does not win.’ Regarding Israel’s latest war against Hamas in the Gaza Strip, the same considerations apply.

“No wonder Wednesday’s announcement of an Egyptian-brokered cease-fire prompted enthusiastic cheering in the streets of Gaza, with a Gaza TV station calling it ‘victory for the resistance.’ That’s not an idle boast.

“No doubt many Gazans were simply relieved to face no more bombing raids. But the leaders of Hamas also understand that they have emerged politically intact and strategically stronger after eight days of inconclusive fighting….

“Hamas openly dared Israeli Prime Minister Benjamin Netanyahu to invade the Gaza Strip, and by not doing so Mr. Netanyahu let the terror leaders live to strike again….

“Israel has at least degraded Hamas’ ability to attack if there is a war with Iran next year.

“But Iran, whose missiles formed the bulk of Hamas’ arsenal, surely noticed that the Jewish state had an opportunity to strike a decisive military blow but declined to do so under world pressure. That can only embolden the mullahs as they prepare for the next, inevitable, confrontation.”

Lastly, as Tobias Buck wrote in the Financial Times:

“This was supposed to be the moment of Mahmoud Abbas, the veteran leader of the Palestine Liberation Organization and president of the Palestinian Authority.

“After years of failed diplomacy, he was poised to win recognition for an independent Palestinian state in the UN general assembly. A resolution to that effect, asking for an upgrade in the Palestinians’ UN status to that of a non-member ‘observer state,’ could still win a majority in the assembly later this month. But it would be a limp and hollow victory, at a time when Palestinians in Gaza and the West Bank alike are celebrating the ‘resistance’ offered by Hamas and other groups….

“(Palestinians) will not easily forget that their president declined to visit the Gaza Strip when it was under Israeli bombardment. That failure seemed all the more striking given the long list of political leaders and senior officials from the Arab world that did make the trip.”

Lebanon: Ilana Freedman / New York Post

“Hamas’ exchange of rockets and missiles with Israel…was certainly dramatic – but it’s only Act I in Iran’s plan to conquer the region and destroy the Jewish state.

“In Act II, Israel will be squaring off with a much more formidable enemy: Hizbullah, in Lebanon. And the plot will shift decidedly.

“Iran’s use of Hamas as a warm-up act was brilliant. The rocket-launching infrastructure in Gaza was in place – and, indeed, already being used. Hamas’ fighters were willing dupes, eager to expand the battle in whatever way they could.

“And the conflict has served Iran well. The point: to challenge Israel’s resources and test its military responses.

“But Hamas is a rag-tag militia, lacking the organization, discipline and advanced military systems that would make it an existential threat to Israel. It has plenty of determination and a seemingly endless supply of young men ready to die to kill Israelis and destroy Israel. But that isn’t enough.

“When it comes to waging a real battle that can actually challenge Israel’s survivability, Hizbullah, in Lebanon, is simply much better prepared for the job….

“Hizbullah is capable of raining enough terror down on Israel to put Hamas to shame – and overwhelm Israel’s Iron Dome defense system.

“The state is now set for a new Lebanon war, one dramatically larger in scale and more far-reaching than the last one there between Israel and Iran’s proxy….

“(Such a war) will likely be devastating to both Israel and Hizbullah.

“This is the battle to watch for – and anything could start it. All that’s needed is for Iran to give the signal.

“The trouble is that’s not even the scariest part. After Act II comes Act III – in which the mullahs, perhaps with nuclear weapons, make their final move to achieve supremacy in the Muslim Crescent spanning the Middle East.”

Ms. Freedman doesn’t mention the extensive training Hizbullah is now receiving by participating in Syria’s civil war on the side of Bashar Assad, nor does she note how Hizbullah undoubtedly will gain access to some of Syria’s chemical weapons stockpile. It’s already been reported Hizbullah has set up camps near some of Syria’s depots.

Jordan: The Jerusalem Post reported that Iran is making an aggressive push to move Jordan into its orbit, offering free oil and energy for the next 30 years in exchange for goods Iran needs. Jordan has not been receiving needed cash from the likes of Saudi Arabia as it had in the past and you’ve seen the masses stage sometimes violent protests over economic conditions in the country. [A Jordanian official denied his government was interested in such a deal with Iran.]

Syria: According to a leading human rights group, the death toll is now over 40,000 in the 20-month war, half civilians.

Iran: Ayatollah Khamenei is attempting to broker a truce between supporters of President Mahmoud Ahmadinejad and parliament, warning that the infighting was “what the [foreign] enemy seeks.” Khamenei wants parliament to drop its attempts to have Ahmadinejad appear before the body to answer questions about the economy. Parliament, comprised of mostly anti-Ahmadinejad forces, agreed to the supreme leader’s order.

China: At the ASEAN, East Asia summit, Chinese Premier Wen Jiabao (in office until March) strongly defended his nation’s claim to virtually all of the South China Sea, saying:

“China’s act of defending its sovereignty is necessary and legitimate…and we have properly handled the incidents that were not of the making of China.”

Of course virtually every other nation in attendance begged to disagree. Wen also warned President Obama, who showed up at the summit in Cambodia, to stop internationalizing the issues in the South China and East China seas.

It’s Japan who is feeling it economically as a result of its tiff with China in the East China Sea. Exports fell for a fifth straight month in October, 6.5% over a year earlier, with exports to China declining 11.6% (while exports to the EU plunged 20%). There are some signs, though, that the nationalist fever in China, re Japan, has abated a bit. It needs to.

One other note. The Philippines protested an image on newly issued Chinese e-passports that depicts China’s claims over the entire South China Sea. The Philippines’ foreign secretary said China’s claims include an area that is “clearly part of the Philippines’ territory and maritime domain.”

Burma: In the first visit to this nation by a serving U.S. president, Barack Obama addressed students at Rangoon (Yangon) University and in referring to his January 2009 inauguration speech in which he said the U.S. would extend a hand to any country willing to unclench its fist, proclaimed:

“Today I’ve come to keep my promise and extend the hand of friendship. But this remarkable journey has just begun, and has much further to go. Reforms launched from the top of society must meet the aspirations of citizens who form its foundation. The flickers of progress that we have seen must not be extinguished – they must be strengthened; they must become a shining North Star for all this nation’s people.”

Editorial / Wall Street Journal

“(Monday’s speech) was among the best of his presidency. Mr. Obama’s remarks were notable for forthrightly describing the regime’s former sins while praising the Burmese people for persevering….

“Mr. Obama can now reap the strategic benefits of Burma’s opening, and his call for greater freedom left no doubt where America stands.”

Aung San Suu Kyi is disappointed some governments, including Australia’s, are calling her country Myanmar, which is the name chosen by the military rulers, rather than Burma.

Suu Kyi continues to warn, “The outside world has been very supportive and I think now they need to be a little bit more careful about how they support us. What we want is people-centered aid, rather than government-centered help.”

She also wants the constitution amended to allow her to run for president in elections planned for 2015.

Afghanistan: France ended its combat operations here this week. At its peak, France had 4,000 combat troops in Afghanistan and lost 88 soldiers over the course of the war. Former President Nicolas Sarkozy and his successor, Francois Hollande, had vowed to speed up the withdrawal. France will maintain 1,500 troops in 2013 primarily for the purposes of repatriating equipment deployed during the 11-year military role.

Random Musings

--Defense Secretary Leon Pannetta said the United States must press forward in its efforts to eradicate al-Qaeda. Panetta said in Thailand that while the U.S. has scored victories against branches in Somalia and Yemen, now al-Qaeda is increasing its presence in Nigeria, Mali and Libya.

“(The) gains are real (particularly in decimating the ‘core’), but it is important to point out that even with these gains, the threat from al-Qaeda has not been eliminated. We have slowed the primary cancer, but we know that the cancer has metastasized to other parts of the global body.” [Global Security Newswire]

--Benghazi

For the first time since she made her controversial remarks on September 14 concerning the Benghazi attacks days earlier, U.S. ambassador Susan Rice defended her comments that the attacks stemmed from an anti-Islamic film. Speaking at the UN on Wednesday, Rice described some of the comments about her – such as those from Senator John McCain – as “unfounded.”

“As a senior U.S. diplomat, I agreed to a White House request to appear on the Sunday shows to talk about the full range of national security issues of the day.” At that time, those concerns were “primarily and particularly the protests that were enveloping and threatening many diplomatic facilities, American diplomatic facilities around the world, and Iran’s nuclear program.

“When discussing the attack against our facilities in Benghazi, I relied solely and squarely on the information provided to me by the intelligence community.

“I made clear that the information was preliminary, and that our investigations would give us the definitive answers.

“Everyone, particularly the intelligence community, has worked in good faith to provide the best assessment based on the information available.”

Rice added the Benghazi incident was a “heinous terrorist attack.”

Editorial / Wall Street Journal

“For weeks, the Administration has tried to shift blame for Benghazi to the ‘intelligence community.’ Mr. Petraeus’ fall makes him an easy scapegoat, even as Mrs. Clinton takes a valedictory lap at State and sets her sights on a 2016 Presidential run.

“But U.S. Libya policy has been her handiwork, and with the exception of the fall of Gaddafi it is a notable failure. Mrs. Clinton is also a main architect of U.S. policy in Syria, which continues to descend into disorder that may engulf the region. She shouldn’t get a free pass from Congress.”

William McGurn / Wall Street Journal

“When David Petraeus told Congress on Friday that he knew almost from the get-go that Ambassador Chris Stevens was killed in a terror attack in Libya, the former CIA director was contradicting information put out by two prominent Obama appointees.

“The first is United Nations Ambassador Susan Rice. The Sunday after the attack, Ms. Rice took to the talk shows to blame everything, falsely, on an Islamic mob outraged by a blasphemous YouTube video. Mr. Petraeus says the CIA’s original talking points mentioned al-Qaeda. If this was edited out, we ought to know who did it – and why.

“The other person whom Petraeus contradicted on Friday was the Mr. Petraeus who briefed the intel committees in the first days after the killings in Benghazi. Rep. Peter King (R., N.Y.) sadly noted the discrepancy after leaving the latest briefing. Back in September, said Mr. King, Mr. Petraeus had left ‘the clear impression’ that ‘the overwhelming amount of evidence’ was that the atrocity ‘rose out of a spontaneous demonstration and it was not a terrorist attack.’…

“In the end, all we know is this. Four Americans were killed in an al-Qaeda assault on our consulate. A filmmaker falsely accused of inciting that attack is now in prison. A member of Mr. Obama’s cabinet peddled a false account of how they died when the president’s intelligence team knew better. And no one, including Mr. Obama, can tell us what was done to follow his order to ‘do whatever we need to do’ to help those Americans in Benghazi when they were still alive.

“It’s a baffling sequence of events and evasions – one that makes sense only in a place where the No. 1 priority is not so much securing American lives in danger but sustaining the political narrative.”

Editorial / New York Post

“Those who thought David Petraeus’ congressional testimony would clear the air about the Sept. 11 Benghazi attack were wrong.

“Indeed, the ex-CIA director’s closed-door appearance yesterday before the Senate and House intelligence Committees raised even more disturbing questions.

“Questions that the Obama White House needs to answer – urgently, and in detail.

“Members agree that Petraeus insisted that the excision (of the talking points) was made only for security reasons, not to give political cover.

“But he also testified that he still doesn’t know who removed the reference to terrorism and al-Qaeda.

“Which raises the question: How can he be so sure no politics was involved?

“And if, as some Democratic members said, the change was made simply ‘to protect classified information,’ then why did the CIA’s unclassified talking points – the ones parroted by UN Ambassador Susan Rice on five national TV shows at the White House’s insistence – contain something entirely different?

“Because that version painted Benghazi as an attack ‘spontaneously inspired by the protests’ over an anti-Muslim video.

“This is a scenario that Petraeus says he not only knew was wrong, but that he’d privately told Congress – and, reportedly, President Obama – was inaccurate.

“So why did Petraeus allow a false version to be made public?...

“Beyond the question of misinformation – or deliberate disinformation – lies the critical question of the military response.

“As Sen. Marco Rubio (R., Fla.) said yesterday, Petraeus’ testimony underscored that ‘clearly the security measures were inadequate.’ To say the least….

“Benghazi, unresolved, will poison American politics for years.

“Congress can’t let that happen.”

Lucian K. Trustcott IV / New York Times

“The genius of General Petraeus was to recognize early on that the war he had been sent to fight in Iraq wasn’t a real war at all. This is what the public and the news media – lamenting the fall of the brilliant hero undone by a tawdry affair – have failed to see. He wasn’t the military magician portrayed in the press; he was a self-constructed hologram, emitting an aura of preening heroism for the ever eager cameras.

“I spent part of the fall of 2003 with General Petraeus and the 101st Airborne Division in and around Mosul, Iraq. One of the first questions I asked him was what his order had been. Was he ordered to ‘take Mosul,’ I asked. No answer. How about ‘Find Mosul and report back’? No answer. Finally I asked him if his orders were something along the lines of ‘Go to Mosul!’ He gave me an almost imperceptible nod. It must have been the first time an American combat infantry division had been ordered into battle so casually.

“General Petraeus is very, very clever, which is quite different from stating that he is the brilliant tactician he has been described as. He figured if he hadn’t actually been given the mission to ‘win’ the ‘war’ he found himself in, he could at least look good in the meantime. And the truth is he did a lot of good things, like conceiving of the idea of basically buying the loyalties of various factions in Iraq. But they weren’t the kinds of things that win wars. In fact, they were the kinds of things that prolong wars, which for the general had the useful side effect of putting him on ever grander stages so he could be seen doing ever grander things, culminating in his appointment last year as the director of the C.I.A….

“The generals who won World War II were the kind of men who, as it was said at the time, chewed nails for breakfast, spit tacks at lunch and picked their teeth with their pistol barrels. General Petraeus probably flosses. He didn’t chew nails and spit tacks, but rather challenged privates to push-up contests and went out on five-mile reveille runs with biographers.

“His greatest accomplishment was merely personal: he transformed himself from an intellectual nerd into a rock star military man. The problem was that he got so lost among his hangers-on and handlers and roadies and groupies that he finally had his head turned by a West Point babe in a sleeveless top.

“If only our political leadership, not to mention the Iraqi and Afghan insurgencies, had known how quickly and hard he would fall over such a petty, ignominious affair. Think of how many tens of thousands of lives could have been saved by ending those conflicts much earlier and sending Dave and his merry band of Doonesbury generals to the showers.”

Editorial / Financial Times…on Rice’s potential appointment to replace Clinton.

“Ms. Rice is close to the president. But this alone cannot be a reason to recommend her. She has won a reputation for being blunt and abrasive with U.S. and foreign officials. Throughout her career, she has been driven by concern about humanitarian issues in foreign policy. But the next secretary of state needs a more sweeping world view.

“Over the decades, the state department has been headed by giants of the American political stage – figures such as James Baker and George Shultz. Mr. Obama could spend valuable political capital fighting Ms. Rice’s nomination. But he would do better to choose a heavyweight with the stature and experience to be the nation’s top diplomat.”

Maureen Dowd / New York Times

“Some have wondered if Rice, who has a bull-in-a-china-shop reputation, is diplomatic enough for the top diplomatic job. But she would have been wise to be more bull-in-a-china-shop and vet her talking points, given that members of the intelligence and diplomatic communities and sources in news accounts considered it a terrorist attack days before Rice went on the shows. (The president and his spokesman also clung to the video story for too long.)

“Rice should have been wary of a White House staff with a tendency to gild the lily, with her pal Valerie Jarrett and other staffers zealous about casting the president in a more flattering light, like national security officials filigreeing the story of the raid on Osama to say Bin Laden fought back. Did administration officials foolishly assume that if affiliates of al-Qaeda were to blame, it would dilute the credit the president got for decimating al-Qaeda? Were aides overeager to keep Mitt Romney, who had stumbled after the Benghazi attack by accusing the president of appeasing Islamic extremists, on the defensive?

“Writing in a 2002 book about President Clinton’s failure to intervene in the genocide in Rwanda, Samantha Power, now a National Security Council official, suggested that Rice was swayed by domestic politics when, as a rising star at the N.S.C. who would soon become Clinton’s director for African affairs, she mused about the ’94 midterms, ‘If we use the word ‘genocide’ and are seen as doing nothing, what will be the effect on the November election?’

“An Africa expert, Rice should have realized that when a gang showed up with R.P.G.’s and mortars in a place known as a hotbed of Qaeda sympathizers and Islamic extremist training camps, it was not anger over a movie. She should have been savvy enough to wonder why the wily Hillary was avoiding the talk shows.

“The president’s fierce defense of Rice had virile flare. But he might have been better off leaving it to aides, so he did not end up going mano a mano with his nemesis John McCain on an appointment he hasn’t even made (though now Obama might feel compelled to, just to prove that he can’t be pushed around), and so he could focus on fiscal cliff bipartisanship.

“His argument that Rice ‘had nothing to do with Benghazi,’ raises the question: Then why was she the point person?

“The president’s protecting a diplomatic damsel in distress made Rice look more vulnerable, when her reason for doing those shows in the first place was to look more venerable.”

--A Rutgers-Eagleton poll found that 67 percent of registered voters in New Jersey now view Republican Gov. Chris Christie favorably – a 19-point jump from October.

“It’s unbelievable, frankly,” David Redlawsk, the director of the poll, said. “I’ve never seen anything like it.”

Ninety percent of New Jersey voters said Christie handled the crisis created by Hurricane Sandy either “very well” or “somewhat well.” 81 percent said they thought Christie was right to work closely and publicly with President Obama.

Half of Democrats, 49 percent, now view Christie favorably, up from 22 percent just the month before. Yes, I’d say that’s remarkable.

And a Quinnipiac University poll found that New Yorkers gave Christie higher marks than even Gov. Andrew Cuomo.

--Once Congress, either the lame-duck one or the new one in January, begins to focus on federal aid for areas impacted by Hurricane Sandy, the issue of beach replenishment is bound to be at the forefront of discussion in these belt-tightening days. From 1986 to 2011, nearly $700 million was spent placing sand on about 55 percent of the New Jersey coast. Just before Sandy hit, the U.S. Army Corps of Engineers awarded nearly $28 million worth of contracts for new replenishment projects in southern New Jersey.

Now, post Sandy, the average New Jersey beach, according to a report by Wayne Parry of the AP, “is 30 to 40 feet narrower.” One of the hardest hit, Mantoloking, lost 150 feet of beach.

New Jersey has a $35.5 billion tourism industry and its beaches fuel much of it. But now the debate begins.

--Former New Hampshire Republican Sen. Warren Rudman died. He was 82. He is perhaps best known as co-sponsor of the Gramm-Rudman-Hollings budget-cutting law, approved in 1985, that was designed to end federal deficits by 1991 and required automatic spending cuts if deficit targets were missed. 

Unfortunately, Congress then rolled back the target every year.

Rudman left the Senate in 1993, disgusted that Gramm-Rudman never achieved its potential. Later he remarked:

“Had we stuck to that plan, had the Congress not failed to follow it through – in fact, had presidents not failed to follow through – we would not be where we are today.”

In 2001, Rudman co-authored a report with former Colorado Sen. Gary Hart that warned of a major terrorist attack on American soil, months before 9/11. One suggestion from the report was then adopted…forming a Homeland Security Department.

--Illinois Congressman Jesse Jackson Jr. finally resigned. Good riddance. What a disgrace. Jackson is under multiple investigations for misuse of campaign funds as well as a serious congressional ethics probe. No doubt his resignation is part of a plea deal. Of course the voters in his Chicago district are such numbskulls they re-elected the dirtball on Nov. 6. [And no, I don’t feel in the least bit sorry about his “medical issues.”]

--According to a survey conducted by Nielsen, when asked who they would like to have as a Thanksgiving dinner guest, more Americans preferred Tim Tebow to President Obama…and it wasn’t even close. 23% chose Tebow. 5% Obama. Actually, Obama was beaten out by Big Bird and Lady Gaga.

I’d go with Arnold Palmer.

--Terrific effort by my Jets Thanksgiving Night….beyond pathetic.

--Pope Benedict XVI just published his third and final volume on the life of Jesus and says the Christian calendar is wrong on Jesus’ birth. Benedict and other historians agree Jesus was born anytime between 7BC and 2BC. Benedict also argues there were no animals like oxen and donkeys at the nativity. “There is no mention of animals in the Gospels.”

But not to worry, kids. The Pope said that the tradition of donkeys or oxen beside the manger was so deeply entrenched that it would doubtless survive his skepticism.

--Timothy Cardinal Dolan of New York…in an op-ed for the New York Post.

“(My) prayer this Thursday will be not first one of praise, but of petition. I will ask the Lord to keep us a culture where personal friendship, genuine conversation and family unity can be a high priority. I’ll beg God to keep those values constant in our society.

“Why? Because I’m fearful they’re disappearing.

“Experts in behavioral sciences and sociology seem to share my apprehension. These scholars write that personal contact – verbal, face-to-face quality conversation and healthy leisure where we simply ‘spend time’ as family or friends – is going the way of the rotary telephone. Now we prefer to text, e-mail, Facebook or Twitter – with a personal phone call or letter even becoming quaint, and quality time in each other’s company rare.

“And now the days that a classic, civil culture sets aside for such lofty projects as visiting, conversing or sharing a meal together – such as the weekly Sabbath and holidays such as Thanksgiving – are in jeopardy.

“The stores, we hear, will open on Thanksgiving. Isn’t that a sign of progress and liberation? Sorry, but no – it’s a sign of a further descent into a highly privatized, impersonal, keep-people-at-a-distance culture, one that values having stuff and doing things over just being with people whom we love, cherish and appreciate.

“While a student in Europe, I once spent New Year’s Eve in Holland with two other classmates. We stayed at a simple pension run by a cheerful elderly couple, and our rate included breakfast and supper. That morning, the owners explained that New Year’s Eve was for the Dutch a solemn, quiet evening with family and friends.

“Thus, they explained, the meal in the hotel dining room would not be available, and, they warned, nothing – no restaurant, bar or store – nothing in the city would be open. ‘This evening is for us,’ they said, ‘like we understand Thanksgiving is for you. Everybody is with family or friends.’

“Just as the three of us were about to conclude that we’d have a lonely, boring, hungry evening ahead of us, the couple exclaimed, ‘So, tonight, you are not customers. You are family. You join us, our children, grandchildren and close friends for supper.’

“The three of us were near tears. And that evening of conversation, good food, song and even prayer before the meal was ever-memorable.

“The lesson was clear: For the Dutch culture, time with family and friends was the highest priority.

“That was 37 years ago. I wonder if the stores are now open in Holland on New Year’s Eve? Because, now, sadly, that’s what Thanksgiving is becoming here in America.

“Maybe it’s fitting they’re calling it ‘black Thursday.’”

---

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

God bless America.
---

Gold closed at $1753
Oil, $88.28

Returns for the week 11/19-11/23

Dow Jones +3.3%
S&P 500 +3.6%
S&P MidCap +3.9%
Russell 2000 +4.0%
Nasdaq +4.0%

Returns for the period 1/1/12-11/23/12

Dow Jones +6.5%
S&P 500 +12.0%
S&P MidCap +12.6%
Russell 2000 +8.9%
Nasdaq +13.9%

Bulls 37.2
Bears 27.7 [Source: Investors Intelligence]

Don’t forget the StocksandNews iPad app. Recommended by beer distributors the world over.

Have a great week. I appreciate your support.

Brian Trumbore



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-11/24/2012-      
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Week in Review

11/24/2012

For the week 11/19-11/23

[Posted 10:00 PM ET, Friday]

Europe, Washington and Wall Street

The eurozone continues to kick the can down the road, in most irritating fashion, and on Friday an EU summit on a new 7-year budget (beginning 2014) collapsed as the U.K. and Germany united to oppose a proposal that didn’t contain as many cuts in spending as they sought. So British Prime Minister David Cameron and German Chancellor Angela Merkel decided to play footsie, with Merkel saying it’s not a problem if budget talks are resumed in early 2013.

The biggest hang-up is over administration and the 55,000 members of the European Union’s staff, including 6,000 translators. It’s only 6% or so of the overall budget but it’s symbolic. Otherwise, most of the EU’s $170 billion annual budget goes to farm subsidies and development grants. Britain wants a budget freeze and has threatened to pull out of the euro bloc altogether. [Only 22% of Brits feel attached to the EU.]

And on the issue of Greece, supposedly on Monday, there will finally be an agreement to advance Greece up to 44 billion euro in aid (31.5 billion due since June as part of Greek Bailout II, plus another 12.5 billion in scheduled payments by yearend).

This past week, after 12 hours of talks between eurozone finance ministers, there was no agreement as the split between the European Commission and the International Monetary Fund remained. The EC wants to give Greece another two years, until 2022, to hit the debt to GDP target of 120% (from a projected 190% in 2013), while the IMF wants to keep the 2020 target date.

The Greeks should have been booted out of the eurozone long ago, but now I sympathize with them after the government of Prime Minister Antonis Samaras did a great job to get the requested latest round of austerity cuts through parliament. Samaras’ coalition held up their part of the deal. As he said, “Our partners, and the IMF, must now assume their responsibilities.” 

But Leftist opposition leader Alexis Tsipras of Syriza said: “Samaras has become an integral part of the pre-election campaign of Ms. Merkel, who does not want to admit to the German people before German elections that she has made serious mistakes, that she is to blame for the oncoming recession and that a haircut is necessary for Greece’s debt.”

One last item on this topic. While neo-Nazi Golden Dawn polls around 10% these days, support among the police is said to be 50%...not good in terms of the prospects for future unrest.

In Spain, this Sunday is the de facto referendum on independence for Catalonia. Should regional leader Artur Mas get a majority in parliament, it would be the first step in a highly complicated process for seeking independence from Madrid, though the central government says a follow-on formal referendum would be illegal and it’s not known if the people would really go for it. As much as a majority say they support independence now, if it meant being excluded from the EU their attitudes change.

Remember, the big hang-up for Catalonia is that it sends the central government $19 billion more in taxes than it receives back in services.

Overall in Spain, bad bank loans hit yet another record as the crash in the housing market continues to wreak havoc on the financial institutions and it will only continue to get worse as long-time readers of this column knew would be the case going back to 2005.

In Italy, industrial orders for the month of September plunged 12.8%, another sign of a deepening recession there.

And in France, Moody’s cut its triple-A rating on its sovereign debt. Earlier in the year, S&P did the same. Both have cited the growing debt to GDP, now 90%, and an “uncertain” fiscal outlook, as Moody’s put it. But…thus far the move has had zero impact on France’s interest rates because the French bond market is both highly liquid and still perceived to be better than most of the alternatives.

Finally, the Markit (sic…last time I’m going to write this) flash composite reading for the 17-nation eurozone, goods and services for November, came in at 45.8 vs. 45.7 in October. Still awful. 

In Germany, the service reading for November was 48.0, down from the prior month, and 46.8 for manufacturing, up from October.

In France, both readings on manufacturing and services rose over October but only to 44.7 and 46.1, respectively.

The Economist opined in its Nov. 17 issue:

“(Set) against the gravity of France’s economic problems, (President) Hollande still seems half-hearted. Why should business believe him when he has already pushed through a string of leftish measures, including a 75% top income-tax rate, increased taxes on companies, wealth, capital gains and dividends, a higher minimum wage and a partial rollback of a previously accepted rise in the pension age? No wonder so many would-be entrepreneurs are talking of leaving the country….

“Unless Mr. Hollande shows that he is genuinely committed to changing the path his country has been on for the past 30 years, France will lose the faith of investors – and of Germany. As several eurozone countries have found, sentiment in the markets can shift quickly. The crisis could hit as early as next year. Previous European currency upheavals have often started elsewhere only to finish by engulfing France – and this time, too, France rather than Italy or Spain could be where the euro’s fate is decided. Mr. Hollande does not have long to defuse the time-bomb at the heart of Europe.”

Not everyone agrees France is the future basket case of the region. The Financial Times’ Wolfgang Munchau notes:

“The relatively robust growth during the third quarter was a fitting example that France is often more resilient than forecasters and commentators generally acknowledge. The French economy has had a relatively good crisis and has often defied negative expectations, especially from commentators who view the universe from a perspective of competitiveness alone….In 1999, by the way, The Economist awarded the title of ‘the sick man of the euro’ to Germany.”

Munchau had a list of things he was not concerned about with regards to the eurozone, including the rise of extremist parties and Greece’s next aid tranche.

But when it comes to things he does worry about, Munchau writes:

“The first…is the impact of austerity on growth. 2013 promises to be an awful year for the eurozone economy that could well derail the current strategy.

“The second on my list is the continued failure to resolve the crisis, and accept the inevitability of an official sector involvement in a future Greek debt restructuring – or direct transfers. Pushing resolution beyond the German elections in September next year is bordering on the insane.

“And finally, the banking union faces further delays and is now subject to a lack of ambition….The debate has degenerated into a typical inter-institutional fight about who gets to do what.”

Washington

With Congress in recess, any talk about an agreement on the “fiscal cliff” was just that…talk. There was no actual negotiating taking place, plus President Obama was off in Southeast Asia for much of the time, but Wall Street chose to celebrate anyway and staged a strong rally, partly on the relief the crisis in Gaza calmed down with a cease-fire, and partly because there is unfounded optimism that a legitimate deal to avert the fiscal cliff will be reached before yearend.

But there was some decent news on the housing front, with October existing home sales coming in better than expected, up 2.1%, while housing starts for the month were up 3.6% to their best level since July 2008 and home builder sentiment reached its best level since June 2006. 

The level of housing starts for October was at an annualized rate of 849,000, which for historical perspective compares to the low of 478,000 in April 2009, and a historical average since 1959 of 1.5 million. So we have a long ways to go but record-low mortgage rates, 3.31% on a 30-year fixed, certainly help.

Meanwhile, on the gloomy side, Federal Reserve Chairman Ben Bernanke, in a speech on Tuesday, lamented the fact that what economists call “the potential growth rate” for the U.S. economy, normally 2.5% to 3%, has been more like 2% owing to the recession and its after-effects. 

Among the reasons given by Bernanke for the reduced growth potential was the “extraordinarily severe job losses that followed the crisis, especially in housing-related industries,” and the epidemic of long-term unemployment which leads “to some loss of skills” and has moved many workers out of the job market forever.

The Fed’s Open Market Committee next meets on Dec. 11 and 12 and it is expected to announce another bond-buying program at that time.

“The unemployment rate is still well above both its level prior to the onset of the recession and the level that my colleagues and I think can be sustained once a full recovery has been achieved,” said Bernanke. The jobless rate of 7.9% needs to be reduced to 6% before the Fed will feel comfortable easing up on the printing press.

Bernanke also warned that if Congress fails to act on the fiscal cliff issue and avoid the automatic spending cuts and tax increases, “A fiscal shock of that size ($500 billion or so) would send the economy toppling back into recession.”

All we’ve been hearing about recently are corporate CEOs talking of cutting back ahead of yearend and possible congressional and White House failure to get a deal done. Investment has been curtailed, of this there is little doubt. Business travel is one sector that is already getting slashed.   The Global Business Travel Association says companies would spend $20 billion less on biz travel through 2014 with no budget-reduction deal. Marriott CEO Arne Sorenson said:

“We’re at a maximum level of uncertainty. It will cause big companies to think twice about meetings. And it will probably cause some of our real estate partners to be slow to commit” to building new hotels, he added.

But Wall Street ended its losing ways in the holiday-shortened week in fine fashion with the Dow Jones breaking a four-week losing streak and Nasdaq a six-week one. In fact all the major averages staged their best one-week performance since the week ending June 8, with the Dow Jones up 3.3% to 13009, the S&P 500 up 3.6%, and Nasdaq roaring back 4% to 2966.

Street Bytes

--Aside from the reasons I listed above, this week’s rally was helped on Friday by the release of stronger than expected manufacturing data out of China, specifically an HSBC flash report for November that came in at 50.4, above the 50 dividing line between growth and contraction. The HSBC reading has traditionally been more conservative than the government’s own calculations and thus this figure was welcomed.

--U.S. Treasury Yields

6-mo. 0.14% 2-yr. 0.29% 10-yr. 1.70% 30-yr. 2.83%

The yield on the 10-year broke out of a narrow 1.58%-1.62% short-term range with cash flowing back to equities and the solid housing data. But if there is no good news on the fiscal cliff, the yield goes back down as stocks plunge.

On the other hand, longer term, as an article in the Wall Street Journal by Spencer Jakab put it, “The Fed’s balance sheet has mushroomed to $2.88 trillion, from less than $900 billion in early 2008.”

It’s going to be some time before the Fed begins throttling back on its bond-buying stimulus, “by which time it could be sitting on $4 trillion of assets if Treasury purchases resume.”

But that makes the inevitable exit most worrisome. How does the Fed do so without having interest rates spike and the economy returning to recession, or worse?

--Hewlett-Packard announced an $8.8 billion writedown, over $5 billion of which was due to alleged “serious accounting improprieties, misrepresentation and disclosure failures” (i.e., revenue recognition) with its Automony acquisition from August 2011. The U.K.-based software maker was acquired for $10.25 billion (another figure I saw put it at $11.1 billion) at a time Oracle was calling the then market value of Autonomy, $6 billion, “extremely over-priced.” Since 2006, H-P has taken $26.1 billion in various restructuring charges and merger-related expenses, including an $8 billion impairment charge earlier this year related to the EDS acquisition, as well as past impairments related to deals for Palm and Compaq.

In the case of Autonomy, H-P first learned something was amiss after Autonomy founder Mike Lynch left H-P in the spring, at which time a senior member of Autonomy’s leadership team presented information that led to an “intense internal investigation” and third-party review of Autonomy’s financial results.

Overall, H-P saw revenues for the quarter ending Oct. 31 decline 7% over last year, with the personal computer segment down 14% and printing revenue down 5%; these two accounting for 50% of the company’s overall revenues. Two, some would say, dying businesses (think tablet sales).

CEO Meg Whitman, who took over about a year ago, said, “Fiscal 2013 is going to be a fix-and-rebuild year for the company, (which) will put pressure on our top-line performance.”

H-P shares plummeted 12% on the news. In the last year, HP stock is down over 50%.

--On Tuesday, federal prosecutors and the Securities and Exchange Commission arrested a former portfolio manager at an affiliate of billionaire hedge fund manager Steve Cohen’s SAC Capital Advisors LP, but thus far the feds have not been able to turn Mathew Martoma against his former boss. In fact, all probes of traders at SAC affiliates have failed to yield a smoking gun when it comes to Cohen.

The case against Martoma, though, is said to be the biggest insider trading prosecution in history, with Martoma trading on confidential information obtained from a neurology professor about drug trial results on two stocks, Elan and Wyeth, back in 2008. The inside info allowed Martoma to earn profits and avoid losses of $276 million, according to prosecutors, who allege Cohen, identified as “Portfolio Manager A” in court filings, placed trades on Martoma’s advice. But thus far prosecutors have been unable to tie Cohen’s trades to actual inside information, even though Martoma became aware of unexpectedly bad results from a clinical trial and allegedly had a 20-minute conversation with Cohen over the topic.

But as a Wayne State University law professor, Peter Henning, told Bloomberg, “If Martoma isn’t willing to say that he told Cohen his recommendation was based on inside information, then the government is stuck. It’s he said-he said.”

For his part, Martoma faces 20 years in prison for each of the three fraud counts he has been charged with.

--Hostess Brands was given a 24-hour stay of execution but then last-ditch talks with unions failed and Hostess will begin laying off 15,000 of 18,500 employees. No doubt, however, some parts of the business can be sold. Hostess had sought protection from its creditors through Chapter 11 bankruptcy in January, but a strike by the Bakers union killed the company; Hostess already being saddled with a huge debt load.

Of the 3,000-3,500 employees that will stay to help shut down operations, only about 200 will survive after March. Buyers of the more iconic brands don’t necessarily have to hire any of Hostess’ workers, thanks to overcapacity in the sector.

--Famed investor Jeremy Grantham told his GMO clients in a quarterly newsletter that growth in the U.S. will be less than 1% the next 40 years. That would be less than desirable. Among his reasons, “If resources increase their costs at 9% a year, the U.S. will reach a point where all of the growth generated by the economy is used up in simply obtaining enough resources to run the system.” He’s also concerned that climate change will lead to constant damage to crops.

--Speaking of crops, according to NOAA’s Climate Prediction Center, the drought in the central U.S. is not going to let up throughout the winter and possibly early spring. The situation had improved for a few weeks but then the drought came back, especially in Oklahoma, Kansas, Nebraska, South Dakota, Colorado and Iowa. One farmer in Brandon, S.D. told USA TODAY, “We had a guy come in with an excavator to dig some holes, and 8 feet down it’s nothing but powder.” Nebraska and Wyoming are enduring their driest year on record. Parts of Oklahoma and Arkansas need a foot of rain to get out of their drought conditions.

--China’s Shanghai Composite Index fell below 2,000 a few times this week before rebounding a bit to 2027 on the solid manufacturing data mentioned above. To give you a sense of how sick this stock market has been, the Shanghai index first broke above 2,000 in July 2000 and tripled to 6092 on Oct. 16, 2007, according to Bloomberg.

--AP Moller-Maersk, the Danish conglomerate, told the Financial Times that the group would no longer invest large sums in its Maersk Line, the world’s biggest operator of container ships with a 16% market share. Instead, CEO Nils Andersen said the company would focus on its oil and port operations.

The weak global economy has led to lots of volatility in the freighter market, with rates fluctuating wildly. The sector is also massively oversupplied due to overbuilding going back to the boom years before 2008.

--Energy expert Daniel Yergin commented in the Financial Times on all the recent talk the United States will pass Saudi Arabia in oil production by 2020.

“It is still far from clear how this shift will affect the strategic balance in the Gulf and the Middle East and U.S. engagement – especially given the rising tension over Iran’s nuclear program and the instability throughout the region. The debate about these considerations will be stirred by America’s future fiscal negotiations. But the question will not really be addressed until the crisis with Iran is resolved.

“One geopolitical impact is already clear. Rising U.S. oil production, along with increased Saudi output, has helped provide offsetting supplies that have made the sanctions on Iranian oil much more successful than anticipated a year ago.

“But U.S. engagement in the Middle East is not simply about oil imports. The U.S. buys only about 12% of its oil from the Gulf. Its interest is less about how many barrels flow to the U.S. and more about the overall accessibility and stability of supplies on which the world economy depends. After all, the U.S. will be affected by any disruptions to the global market that drive up prices.

“The significance of the rebalancing of world oil production goes beyond the Middle East to that most critical 21st century relationship – the U.S. and China. Beijing will see an increasing share of its imports coming from the Middle East. At this point, China is de facto relying upon the U.S. to undergird regional security and to maintain the freedom of the sea lanes on which it depends for its own oil imports. All this will require China and the U.S. to develop a more explicit understanding and a framework for collaboration on oil security. The components of this framework will have profound consequences for the rest of the world. For in spite of the dramatic changes in production even a U.S. that is less dependent on imported energy won’t be able to escape the logic of geopolitics and will still be deeply engaged with the world.”

--Unemployment fell in 37 states in October, with the biggest decline in South Carolina, 9.1% in September to 8.6%. Nevada continued to have the highest unemployment rate at 11.5%, followed by Rhode Island at 10.4% and California at 10.1%. North Dakota, owing to the oil drilling boom there, continues to have the lowest rate at 3.1%.

--You know who’s doing well? Chile. The economy grew 5.7% year-over-year in the third quarter and 5.6% for the first nine months of the year, thus bucking the slowdown in most of Latin America. Peru is also doing well, an estimated 6.5% growth rate in the third quarter.

--Paul Otellini, Intel’s CEO since 2005, announced he is retiring early next May. Intel stock is basically flat with where it was when he took over and the company faces slumping demand for many of its chips as it missed out on the initial wave of mobile technology and is now frantically trying to catch up while the PC business slumps.

--Shares in Research in Motion have been rebounding nicely, up 39% since Nov. 14! Analysts are expressing optimism the BlackBerry maker’s new BB10 launch might actually go pretty well and fuel a comeback. The BB10 is slated for around Jan. 30.

--The first aerial survey of New Jersey’s coast post-Sandy revealed 72,000 damaged buildings, a figure that will keep rising. An estimated 250,000 cars were damaged in the tri-state area (NY, NJ and CT).

[On Friday, Gov. Christie estimated damages in my state are in the neighborhood of $29 billion.]

--In yet another sign of the value of ‘live’ sports programming, ESPN is shelling out a reported $470 million a year for 12 years to broadcast the new Bowl Championship Series college football playoffs that begin after the 2014 season. ESPN also has signed deals with the Rose, Sugar and Orange bowls, giving it access to all the games involved in the new postseason arrangement.

--And along the same lines, News Corp. is acquiring a 49% stake in YES Network which broadcasts Yankees games. YES just obtained rights to keep airing the Yankees through 2042, which cleared the way for the deal, one that values the network at about $3 billion. In three years, News Corp., controlled by Rupert Murdoch, will increase its stake to 80%.   

Foreign Affairs

Israel / Gaza / Egypt: The eight-day war between Israel and Gaza ended with a cease-fire on Wednesday, this after at least 160 Palestinians and six Israelis were killed in the fighting. Hamas, Islamic Jihad and other militant groups fired well in excess of 1,500 rockets and missiles at Israel, some aimed for the first time at Tel Aviv and Jerusalem, while Israel launched a massive counter-attack against multiple targets in Gaza. 

One of the winners was Israel’s Iron Dome defense system which shot down at least 400 of the rockets fired from Gaza. The system can work, though it is also very expensive to operate and  Israel needs more than the six batteries it currently has if it is to be in the least bit useful against Hizbullah and its far more sophisticated missile force. [Production is being ramped up quickly.] 

Egyptian President Mohamed Morsi was also a big winner, if albeit for just a few days, and he won unstinting praise from President Obama and Secretary of State Hillary Clinton.

Israeli Prime Minister Benjamin Netanyahu, on the other hand, has an election coming up on January 22nd and a ground war would have extended into that time period…not good. As I note further below, however, not everyone in Israel is pleased the conflict ended so soon.

The cease-fire terms are vague, such as on what goods Israel will now allow into Gaza through Israeli-controlled crossings. And just what will Egypt’s role be in allowing cargo through a reopened border between it and Gaza. Israel has demanded an end to arms smuggling largely through the tunnels under the Egyptian border.

Morsi was in a box. He had to support Hamas and the Palestinian cause, but he also needed Western aid in the worst way, including the funding of his military by the United States. So while he blasted the Israeli air strikes, recalled his ambassador from Tel Aviv and sent his prime minister to Gaza as a show of support, he used the old channels of communication between the Egyptian and Israeli intelligence services to work out a ceasefire. He also spoke to President Obama numerous times. Obama was said to be impressed by Morsi’s pragmatism.

On Tuesday, the International Monetary Fund and Egyptian finance officials reached agreement on a critical $4.8 billion loan that is needed both to shore up the balance sheet as well as build investor confidence, though it is not formally approved until the IMF board meets on December 19. In return for the funding, Egypt agreed to cut back on fuel subsidies and to raise revenues.

After the cease-fire the following day, it seemed that Morsi would clearly be in line for the United States’ annual support of about $1.5 billion.

Secretary of State Hillary Clinton said, “I want to thank President Morsi for his personal leadership to de-escalate the situation in Gaza and end the violence. This is a critical moment for the region. Egypt’s new government is assuming the responsibility and leadership that has long made this country a cornerstone of regional stability and peace.”

Benjamin Netanyahu expressed his appreciation. Hamas leader Khaled Meshaal said, “May God keep (Morsi) in the presidency.”

But then I always say, ‘Wait 24 hours.’

Morsi, thus basking in such praise, set about granting himself extensive powers on Thursday, including a declaration that the courts are barred from challenging his decisions. He also gave protection to the Islamist-led assembly that is currently writing a new constitution by declaring the court couldn’t touch their efforts either, and gave them a two-month extension to finish writing it, until February (at which point there will be a referendum on same).

So now a large percentage of the population is furious that the Muslim Brotherhood and the president are seizing too much power. Protests in Suez and Alexandria have turned violent as the opposition goes after Muslim Brotherhood offices.

Morsi decreed that he has the power to deal with any “threat” to the revolution or national unity. Morsi is framing his decisions as necessary to protect that which was started with the uprising against former President Hosni Mubarak. Plus Morsi ordered a retrial of Mubarak and top aides on charges of killing protesters during the uprising, even though Mubarak was convicted and sentenced to life in prison in June. Several top police commanders were, however, acquitted then and Mubarak’s sons were found not guilty of corruption charges, so Morsi’s move on this front was a gesture to the protesters who sought the death penalty for Mubarak and/or his top security chief.

Pro-reform leader Mohamed ElBaradei wrote on Twitter: “Morsi today usurped all state powers & appointed himself Egypt’s new pharaoh. A major blow to the revolution that could have dire consequences.”

A leading human rights lawyer, Gamal Eid, told Agence France-Presse: “Morsi has committed a fatal mistake by decreeing his decisions cannot be appealed. The move will trigger more anti-government protests and will increase public frustration. The people don’t need another dictator.”

Meanwhile, back to Israel, Foreign Minister Avigdor Liberman on Thursday said that despite the ceasefire, Israel would “eventually need to overthrow the Hamas regime.” He said a ground operation in Gaza just two months before an election, though, was not the right move today.

“The occupation of Gaza and the overthrow of Hamas is a process that would take more than four months.”

Liberman added that Israel met its three goals for the mission: “stopping rocket fire on the South, regaining Israel’s power of deterrence and destroying Hamas’ stock of long-range Fajr-5 missiles.” [Jerusalem Post]

Defense Minister Ehud Barak rejected claims the conflict ended in a victory for Hamas.

An initial poll released Friday showed 49% of Israelis feel their country should have kept going after those firing rockets into Israel, 31% supported the government’s decision to stop. 20% had no opinion.

Shaul Mofaz, head of the center-Right Kadima party, rival to Netanyahu’s Likud, said “Deterrence was not restored. There was no resolution. Hamas achieved exactly what it wanted. There is no security for the residents of southern Israel and of central Israel.”

A former national security adviser, Giora Eiland, however, said: “There was no decisive victory here, but the situation was managed in the right way and it was clear that Israel enjoyed certain international support.”

Prior to the Gaza crisis, Netanyahu was expected to romp in January’s vote, which was the strategy behind calling early elections…to help build support for a future conflict with Iran, if necessary.

Charles Krauthammer / Washington Post

“Hamas’ new strength comes from two sources.

“First, its new rocketry, especially the Fajr-5, smuggled in from Iran, that can now reach Tel Aviv and Jerusalem, putting 50% of Israel’s population under its guns.

“Second, Hamas has gained strategic strength from changes in the regional environment.   It has acquired the patronage and protection of important Middle Eastern states as a result of the Arab Spring and the Islamist reversal in Turkey.

“For 60 years, non-Arab Turkey has been a reliable ally of Israel. The vicious turnaround instituted by its Islamist prime minister, Recep Tayyip Erdogan, reached its apogee on Monday when he called Israel a terrorist state.

“Egypt is now run by Hamas’ own mother organization, the Muslim Brotherhood, of which Hamas is simply the Palestinian wing. And the emir of Qatar recently visited Gaza, leaving behind a promise of a cool $400 million.

“Hamas’ objective was to guarantee no further attacks on its leaders or on its weaponry, launch sites and other terror and rocket infrastructure. And the lifting of Israel’s military blockade, which would allow a flood of new and even more deadly weapons. In other words, immunity and inviolability during which time Hamas could build unmolested its arsenal of missiles – until it is ready to restart the war on more favorable terms….

“A respite for rebuilding, until Hamas’ Gaza becomes Hizbullah South, counterpart to the terror group of Israel’s north, with 50,000 Iranian- and Syrian-supplied rockets that effectively deter any Israeli preemptive attack.

“With the declaration of a cease-fire Wednesday, Israel seems to have successfully resisted these demands, although there may be some cosmetic changes to the embargo. Which means that in any future fighting, Israel will retain the upper hand.

“Israel has once again succeeded in defending itself. But, yet again, only until the next round, which, as the night follows day, will come. Hamas will see to that.”

Editorial / Wall Street Journal

“Regarding America’s war in Vietnam, Henry Kissinger once noted that ‘the guerrilla wins if he does not lose. The conventional army loses if it does not win.’ Regarding Israel’s latest war against Hamas in the Gaza Strip, the same considerations apply.

“No wonder Wednesday’s announcement of an Egyptian-brokered cease-fire prompted enthusiastic cheering in the streets of Gaza, with a Gaza TV station calling it ‘victory for the resistance.’ That’s not an idle boast.

“No doubt many Gazans were simply relieved to face no more bombing raids. But the leaders of Hamas also understand that they have emerged politically intact and strategically stronger after eight days of inconclusive fighting….

“Hamas openly dared Israeli Prime Minister Benjamin Netanyahu to invade the Gaza Strip, and by not doing so Mr. Netanyahu let the terror leaders live to strike again….

“Israel has at least degraded Hamas’ ability to attack if there is a war with Iran next year.

“But Iran, whose missiles formed the bulk of Hamas’ arsenal, surely noticed that the Jewish state had an opportunity to strike a decisive military blow but declined to do so under world pressure. That can only embolden the mullahs as they prepare for the next, inevitable, confrontation.”

Lastly, as Tobias Buck wrote in the Financial Times:

“This was supposed to be the moment of Mahmoud Abbas, the veteran leader of the Palestine Liberation Organization and president of the Palestinian Authority.

“After years of failed diplomacy, he was poised to win recognition for an independent Palestinian state in the UN general assembly. A resolution to that effect, asking for an upgrade in the Palestinians’ UN status to that of a non-member ‘observer state,’ could still win a majority in the assembly later this month. But it would be a limp and hollow victory, at a time when Palestinians in Gaza and the West Bank alike are celebrating the ‘resistance’ offered by Hamas and other groups….

“(Palestinians) will not easily forget that their president declined to visit the Gaza Strip when it was under Israeli bombardment. That failure seemed all the more striking given the long list of political leaders and senior officials from the Arab world that did make the trip.”

Lebanon: Ilana Freedman / New York Post

“Hamas’ exchange of rockets and missiles with Israel…was certainly dramatic – but it’s only Act I in Iran’s plan to conquer the region and destroy the Jewish state.

“In Act II, Israel will be squaring off with a much more formidable enemy: Hizbullah, in Lebanon. And the plot will shift decidedly.

“Iran’s use of Hamas as a warm-up act was brilliant. The rocket-launching infrastructure in Gaza was in place – and, indeed, already being used. Hamas’ fighters were willing dupes, eager to expand the battle in whatever way they could.

“And the conflict has served Iran well. The point: to challenge Israel’s resources and test its military responses.

“But Hamas is a rag-tag militia, lacking the organization, discipline and advanced military systems that would make it an existential threat to Israel. It has plenty of determination and a seemingly endless supply of young men ready to die to kill Israelis and destroy Israel. But that isn’t enough.

“When it comes to waging a real battle that can actually challenge Israel’s survivability, Hizbullah, in Lebanon, is simply much better prepared for the job….

“Hizbullah is capable of raining enough terror down on Israel to put Hamas to shame – and overwhelm Israel’s Iron Dome defense system.

“The state is now set for a new Lebanon war, one dramatically larger in scale and more far-reaching than the last one there between Israel and Iran’s proxy….

“(Such a war) will likely be devastating to both Israel and Hizbullah.

“This is the battle to watch for – and anything could start it. All that’s needed is for Iran to give the signal.

“The trouble is that’s not even the scariest part. After Act II comes Act III – in which the mullahs, perhaps with nuclear weapons, make their final move to achieve supremacy in the Muslim Crescent spanning the Middle East.”

Ms. Freedman doesn’t mention the extensive training Hizbullah is now receiving by participating in Syria’s civil war on the side of Bashar Assad, nor does she note how Hizbullah undoubtedly will gain access to some of Syria’s chemical weapons stockpile. It’s already been reported Hizbullah has set up camps near some of Syria’s depots.

Jordan: The Jerusalem Post reported that Iran is making an aggressive push to move Jordan into its orbit, offering free oil and energy for the next 30 years in exchange for goods Iran needs. Jordan has not been receiving needed cash from the likes of Saudi Arabia as it had in the past and you’ve seen the masses stage sometimes violent protests over economic conditions in the country. [A Jordanian official denied his government was interested in such a deal with Iran.]

Syria: According to a leading human rights group, the death toll is now over 40,000 in the 20-month war, half civilians.

Iran: Ayatollah Khamenei is attempting to broker a truce between supporters of President Mahmoud Ahmadinejad and parliament, warning that the infighting was “what the [foreign] enemy seeks.” Khamenei wants parliament to drop its attempts to have Ahmadinejad appear before the body to answer questions about the economy. Parliament, comprised of mostly anti-Ahmadinejad forces, agreed to the supreme leader’s order.

China: At the ASEAN, East Asia summit, Chinese Premier Wen Jiabao (in office until March) strongly defended his nation’s claim to virtually all of the South China Sea, saying:

“China’s act of defending its sovereignty is necessary and legitimate…and we have properly handled the incidents that were not of the making of China.”

Of course virtually every other nation in attendance begged to disagree. Wen also warned President Obama, who showed up at the summit in Cambodia, to stop internationalizing the issues in the South China and East China seas.

It’s Japan who is feeling it economically as a result of its tiff with China in the East China Sea. Exports fell for a fifth straight month in October, 6.5% over a year earlier, with exports to China declining 11.6% (while exports to the EU plunged 20%). There are some signs, though, that the nationalist fever in China, re Japan, has abated a bit. It needs to.

One other note. The Philippines protested an image on newly issued Chinese e-passports that depicts China’s claims over the entire South China Sea. The Philippines’ foreign secretary said China’s claims include an area that is “clearly part of the Philippines’ territory and maritime domain.”

Burma: In the first visit to this nation by a serving U.S. president, Barack Obama addressed students at Rangoon (Yangon) University and in referring to his January 2009 inauguration speech in which he said the U.S. would extend a hand to any country willing to unclench its fist, proclaimed:

“Today I’ve come to keep my promise and extend the hand of friendship. But this remarkable journey has just begun, and has much further to go. Reforms launched from the top of society must meet the aspirations of citizens who form its foundation. The flickers of progress that we have seen must not be extinguished – they must be strengthened; they must become a shining North Star for all this nation’s people.”

Editorial / Wall Street Journal

“(Monday’s speech) was among the best of his presidency. Mr. Obama’s remarks were notable for forthrightly describing the regime’s former sins while praising the Burmese people for persevering….

“Mr. Obama can now reap the strategic benefits of Burma’s opening, and his call for greater freedom left no doubt where America stands.”

Aung San Suu Kyi is disappointed some governments, including Australia’s, are calling her country Myanmar, which is the name chosen by the military rulers, rather than Burma.

Suu Kyi continues to warn, “The outside world has been very supportive and I think now they need to be a little bit more careful about how they support us. What we want is people-centered aid, rather than government-centered help.”

She also wants the constitution amended to allow her to run for president in elections planned for 2015.

Afghanistan: France ended its combat operations here this week. At its peak, France had 4,000 combat troops in Afghanistan and lost 88 soldiers over the course of the war. Former President Nicolas Sarkozy and his successor, Francois Hollande, had vowed to speed up the withdrawal. France will maintain 1,500 troops in 2013 primarily for the purposes of repatriating equipment deployed during the 11-year military role.

Random Musings

--Defense Secretary Leon Pannetta said the United States must press forward in its efforts to eradicate al-Qaeda. Panetta said in Thailand that while the U.S. has scored victories against branches in Somalia and Yemen, now al-Qaeda is increasing its presence in Nigeria, Mali and Libya.

“(The) gains are real (particularly in decimating the ‘core’), but it is important to point out that even with these gains, the threat from al-Qaeda has not been eliminated. We have slowed the primary cancer, but we know that the cancer has metastasized to other parts of the global body.” [Global Security Newswire]

--Benghazi

For the first time since she made her controversial remarks on September 14 concerning the Benghazi attacks days earlier, U.S. ambassador Susan Rice defended her comments that the attacks stemmed from an anti-Islamic film. Speaking at the UN on Wednesday, Rice described some of the comments about her – such as those from Senator John McCain – as “unfounded.”

“As a senior U.S. diplomat, I agreed to a White House request to appear on the Sunday shows to talk about the full range of national security issues of the day.” At that time, those concerns were “primarily and particularly the protests that were enveloping and threatening many diplomatic facilities, American diplomatic facilities around the world, and Iran’s nuclear program.

“When discussing the attack against our facilities in Benghazi, I relied solely and squarely on the information provided to me by the intelligence community.

“I made clear that the information was preliminary, and that our investigations would give us the definitive answers.

“Everyone, particularly the intelligence community, has worked in good faith to provide the best assessment based on the information available.”

Rice added the Benghazi incident was a “heinous terrorist attack.”

Editorial / Wall Street Journal

“For weeks, the Administration has tried to shift blame for Benghazi to the ‘intelligence community.’ Mr. Petraeus’ fall makes him an easy scapegoat, even as Mrs. Clinton takes a valedictory lap at State and sets her sights on a 2016 Presidential run.

“But U.S. Libya policy has been her handiwork, and with the exception of the fall of Gaddafi it is a notable failure. Mrs. Clinton is also a main architect of U.S. policy in Syria, which continues to descend into disorder that may engulf the region. She shouldn’t get a free pass from Congress.”

William McGurn / Wall Street Journal

“When David Petraeus told Congress on Friday that he knew almost from the get-go that Ambassador Chris Stevens was killed in a terror attack in Libya, the former CIA director was contradicting information put out by two prominent Obama appointees.

“The first is United Nations Ambassador Susan Rice. The Sunday after the attack, Ms. Rice took to the talk shows to blame everything, falsely, on an Islamic mob outraged by a blasphemous YouTube video. Mr. Petraeus says the CIA’s original talking points mentioned al-Qaeda. If this was edited out, we ought to know who did it – and why.

“The other person whom Petraeus contradicted on Friday was the Mr. Petraeus who briefed the intel committees in the first days after the killings in Benghazi. Rep. Peter King (R., N.Y.) sadly noted the discrepancy after leaving the latest briefing. Back in September, said Mr. King, Mr. Petraeus had left ‘the clear impression’ that ‘the overwhelming amount of evidence’ was that the atrocity ‘rose out of a spontaneous demonstration and it was not a terrorist attack.’…

“In the end, all we know is this. Four Americans were killed in an al-Qaeda assault on our consulate. A filmmaker falsely accused of inciting that attack is now in prison. A member of Mr. Obama’s cabinet peddled a false account of how they died when the president’s intelligence team knew better. And no one, including Mr. Obama, can tell us what was done to follow his order to ‘do whatever we need to do’ to help those Americans in Benghazi when they were still alive.

“It’s a baffling sequence of events and evasions – one that makes sense only in a place where the No. 1 priority is not so much securing American lives in danger but sustaining the political narrative.”

Editorial / New York Post

“Those who thought David Petraeus’ congressional testimony would clear the air about the Sept. 11 Benghazi attack were wrong.

“Indeed, the ex-CIA director’s closed-door appearance yesterday before the Senate and House intelligence Committees raised even more disturbing questions.

“Questions that the Obama White House needs to answer – urgently, and in detail.

“Members agree that Petraeus insisted that the excision (of the talking points) was made only for security reasons, not to give political cover.

“But he also testified that he still doesn’t know who removed the reference to terrorism and al-Qaeda.

“Which raises the question: How can he be so sure no politics was involved?

“And if, as some Democratic members said, the change was made simply ‘to protect classified information,’ then why did the CIA’s unclassified talking points – the ones parroted by UN Ambassador Susan Rice on five national TV shows at the White House’s insistence – contain something entirely different?

“Because that version painted Benghazi as an attack ‘spontaneously inspired by the protests’ over an anti-Muslim video.

“This is a scenario that Petraeus says he not only knew was wrong, but that he’d privately told Congress – and, reportedly, President Obama – was inaccurate.

“So why did Petraeus allow a false version to be made public?...

“Beyond the question of misinformation – or deliberate disinformation – lies the critical question of the military response.

“As Sen. Marco Rubio (R., Fla.) said yesterday, Petraeus’ testimony underscored that ‘clearly the security measures were inadequate.’ To say the least….

“Benghazi, unresolved, will poison American politics for years.

“Congress can’t let that happen.”

Lucian K. Trustcott IV / New York Times

“The genius of General Petraeus was to recognize early on that the war he had been sent to fight in Iraq wasn’t a real war at all. This is what the public and the news media – lamenting the fall of the brilliant hero undone by a tawdry affair – have failed to see. He wasn’t the military magician portrayed in the press; he was a self-constructed hologram, emitting an aura of preening heroism for the ever eager cameras.

“I spent part of the fall of 2003 with General Petraeus and the 101st Airborne Division in and around Mosul, Iraq. One of the first questions I asked him was what his order had been. Was he ordered to ‘take Mosul,’ I asked. No answer. How about ‘Find Mosul and report back’? No answer. Finally I asked him if his orders were something along the lines of ‘Go to Mosul!’ He gave me an almost imperceptible nod. It must have been the first time an American combat infantry division had been ordered into battle so casually.

“General Petraeus is very, very clever, which is quite different from stating that he is the brilliant tactician he has been described as. He figured if he hadn’t actually been given the mission to ‘win’ the ‘war’ he found himself in, he could at least look good in the meantime. And the truth is he did a lot of good things, like conceiving of the idea of basically buying the loyalties of various factions in Iraq. But they weren’t the kinds of things that win wars. In fact, they were the kinds of things that prolong wars, which for the general had the useful side effect of putting him on ever grander stages so he could be seen doing ever grander things, culminating in his appointment last year as the director of the C.I.A….

“The generals who won World War II were the kind of men who, as it was said at the time, chewed nails for breakfast, spit tacks at lunch and picked their teeth with their pistol barrels. General Petraeus probably flosses. He didn’t chew nails and spit tacks, but rather challenged privates to push-up contests and went out on five-mile reveille runs with biographers.

“His greatest accomplishment was merely personal: he transformed himself from an intellectual nerd into a rock star military man. The problem was that he got so lost among his hangers-on and handlers and roadies and groupies that he finally had his head turned by a West Point babe in a sleeveless top.

“If only our political leadership, not to mention the Iraqi and Afghan insurgencies, had known how quickly and hard he would fall over such a petty, ignominious affair. Think of how many tens of thousands of lives could have been saved by ending those conflicts much earlier and sending Dave and his merry band of Doonesbury generals to the showers.”

Editorial / Financial Times…on Rice’s potential appointment to replace Clinton.

“Ms. Rice is close to the president. But this alone cannot be a reason to recommend her. She has won a reputation for being blunt and abrasive with U.S. and foreign officials. Throughout her career, she has been driven by concern about humanitarian issues in foreign policy. But the next secretary of state needs a more sweeping world view.

“Over the decades, the state department has been headed by giants of the American political stage – figures such as James Baker and George Shultz. Mr. Obama could spend valuable political capital fighting Ms. Rice’s nomination. But he would do better to choose a heavyweight with the stature and experience to be the nation’s top diplomat.”

Maureen Dowd / New York Times

“Some have wondered if Rice, who has a bull-in-a-china-shop reputation, is diplomatic enough for the top diplomatic job. But she would have been wise to be more bull-in-a-china-shop and vet her talking points, given that members of the intelligence and diplomatic communities and sources in news accounts considered it a terrorist attack days before Rice went on the shows. (The president and his spokesman also clung to the video story for too long.)

“Rice should have been wary of a White House staff with a tendency to gild the lily, with her pal Valerie Jarrett and other staffers zealous about casting the president in a more flattering light, like national security officials filigreeing the story of the raid on Osama to say Bin Laden fought back. Did administration officials foolishly assume that if affiliates of al-Qaeda were to blame, it would dilute the credit the president got for decimating al-Qaeda? Were aides overeager to keep Mitt Romney, who had stumbled after the Benghazi attack by accusing the president of appeasing Islamic extremists, on the defensive?

“Writing in a 2002 book about President Clinton’s failure to intervene in the genocide in Rwanda, Samantha Power, now a National Security Council official, suggested that Rice was swayed by domestic politics when, as a rising star at the N.S.C. who would soon become Clinton’s director for African affairs, she mused about the ’94 midterms, ‘If we use the word ‘genocide’ and are seen as doing nothing, what will be the effect on the November election?’

“An Africa expert, Rice should have realized that when a gang showed up with R.P.G.’s and mortars in a place known as a hotbed of Qaeda sympathizers and Islamic extremist training camps, it was not anger over a movie. She should have been savvy enough to wonder why the wily Hillary was avoiding the talk shows.

“The president’s fierce defense of Rice had virile flare. But he might have been better off leaving it to aides, so he did not end up going mano a mano with his nemesis John McCain on an appointment he hasn’t even made (though now Obama might feel compelled to, just to prove that he can’t be pushed around), and so he could focus on fiscal cliff bipartisanship.

“His argument that Rice ‘had nothing to do with Benghazi,’ raises the question: Then why was she the point person?

“The president’s protecting a diplomatic damsel in distress made Rice look more vulnerable, when her reason for doing those shows in the first place was to look more venerable.”

--A Rutgers-Eagleton poll found that 67 percent of registered voters in New Jersey now view Republican Gov. Chris Christie favorably – a 19-point jump from October.

“It’s unbelievable, frankly,” David Redlawsk, the director of the poll, said. “I’ve never seen anything like it.”

Ninety percent of New Jersey voters said Christie handled the crisis created by Hurricane Sandy either “very well” or “somewhat well.” 81 percent said they thought Christie was right to work closely and publicly with President Obama.

Half of Democrats, 49 percent, now view Christie favorably, up from 22 percent just the month before. Yes, I’d say that’s remarkable.

And a Quinnipiac University poll found that New Yorkers gave Christie higher marks than even Gov. Andrew Cuomo.

--Once Congress, either the lame-duck one or the new one in January, begins to focus on federal aid for areas impacted by Hurricane Sandy, the issue of beach replenishment is bound to be at the forefront of discussion in these belt-tightening days. From 1986 to 2011, nearly $700 million was spent placing sand on about 55 percent of the New Jersey coast. Just before Sandy hit, the U.S. Army Corps of Engineers awarded nearly $28 million worth of contracts for new replenishment projects in southern New Jersey.

Now, post Sandy, the average New Jersey beach, according to a report by Wayne Parry of the AP, “is 30 to 40 feet narrower.” One of the hardest hit, Mantoloking, lost 150 feet of beach.

New Jersey has a $35.5 billion tourism industry and its beaches fuel much of it. But now the debate begins.

--Former New Hampshire Republican Sen. Warren Rudman died. He was 82. He is perhaps best known as co-sponsor of the Gramm-Rudman-Hollings budget-cutting law, approved in 1985, that was designed to end federal deficits by 1991 and required automatic spending cuts if deficit targets were missed. 

Unfortunately, Congress then rolled back the target every year.

Rudman left the Senate in 1993, disgusted that Gramm-Rudman never achieved its potential. Later he remarked:

“Had we stuck to that plan, had the Congress not failed to follow it through – in fact, had presidents not failed to follow through – we would not be where we are today.”

In 2001, Rudman co-authored a report with former Colorado Sen. Gary Hart that warned of a major terrorist attack on American soil, months before 9/11. One suggestion from the report was then adopted…forming a Homeland Security Department.

--Illinois Congressman Jesse Jackson Jr. finally resigned. Good riddance. What a disgrace. Jackson is under multiple investigations for misuse of campaign funds as well as a serious congressional ethics probe. No doubt his resignation is part of a plea deal. Of course the voters in his Chicago district are such numbskulls they re-elected the dirtball on Nov. 6. [And no, I don’t feel in the least bit sorry about his “medical issues.”]

--According to a survey conducted by Nielsen, when asked who they would like to have as a Thanksgiving dinner guest, more Americans preferred Tim Tebow to President Obama…and it wasn’t even close. 23% chose Tebow. 5% Obama. Actually, Obama was beaten out by Big Bird and Lady Gaga.

I’d go with Arnold Palmer.

--Terrific effort by my Jets Thanksgiving Night….beyond pathetic.

--Pope Benedict XVI just published his third and final volume on the life of Jesus and says the Christian calendar is wrong on Jesus’ birth. Benedict and other historians agree Jesus was born anytime between 7BC and 2BC. Benedict also argues there were no animals like oxen and donkeys at the nativity. “There is no mention of animals in the Gospels.”

But not to worry, kids. The Pope said that the tradition of donkeys or oxen beside the manger was so deeply entrenched that it would doubtless survive his skepticism.

--Timothy Cardinal Dolan of New York…in an op-ed for the New York Post.

“(My) prayer this Thursday will be not first one of praise, but of petition. I will ask the Lord to keep us a culture where personal friendship, genuine conversation and family unity can be a high priority. I’ll beg God to keep those values constant in our society.

“Why? Because I’m fearful they’re disappearing.

“Experts in behavioral sciences and sociology seem to share my apprehension. These scholars write that personal contact – verbal, face-to-face quality conversation and healthy leisure where we simply ‘spend time’ as family or friends – is going the way of the rotary telephone. Now we prefer to text, e-mail, Facebook or Twitter – with a personal phone call or letter even becoming quaint, and quality time in each other’s company rare.

“And now the days that a classic, civil culture sets aside for such lofty projects as visiting, conversing or sharing a meal together – such as the weekly Sabbath and holidays such as Thanksgiving – are in jeopardy.

“The stores, we hear, will open on Thanksgiving. Isn’t that a sign of progress and liberation? Sorry, but no – it’s a sign of a further descent into a highly privatized, impersonal, keep-people-at-a-distance culture, one that values having stuff and doing things over just being with people whom we love, cherish and appreciate.

“While a student in Europe, I once spent New Year’s Eve in Holland with two other classmates. We stayed at a simple pension run by a cheerful elderly couple, and our rate included breakfast and supper. That morning, the owners explained that New Year’s Eve was for the Dutch a solemn, quiet evening with family and friends.

“Thus, they explained, the meal in the hotel dining room would not be available, and, they warned, nothing – no restaurant, bar or store – nothing in the city would be open. ‘This evening is for us,’ they said, ‘like we understand Thanksgiving is for you. Everybody is with family or friends.’

“Just as the three of us were about to conclude that we’d have a lonely, boring, hungry evening ahead of us, the couple exclaimed, ‘So, tonight, you are not customers. You are family. You join us, our children, grandchildren and close friends for supper.’

“The three of us were near tears. And that evening of conversation, good food, song and even prayer before the meal was ever-memorable.

“The lesson was clear: For the Dutch culture, time with family and friends was the highest priority.

“That was 37 years ago. I wonder if the stores are now open in Holland on New Year’s Eve? Because, now, sadly, that’s what Thanksgiving is becoming here in America.

“Maybe it’s fitting they’re calling it ‘black Thursday.’”

---

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

God bless America.
---

Gold closed at $1753
Oil, $88.28

Returns for the week 11/19-11/23

Dow Jones +3.3%
S&P 500 +3.6%
S&P MidCap +3.9%
Russell 2000 +4.0%
Nasdaq +4.0%

Returns for the period 1/1/12-11/23/12

Dow Jones +6.5%
S&P 500 +12.0%
S&P MidCap +12.6%
Russell 2000 +8.9%
Nasdaq +13.9%

Bulls 37.2
Bears 27.7 [Source: Investors Intelligence]

Don’t forget the StocksandNews iPad app. Recommended by beer distributors the world over.

Have a great week. I appreciate your support.

Brian Trumbore