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12/08/2012

For the week 12/3-12/7

[Posted 12:00 AM ET…from Kiawah, S.C.]

Note: Forgot to mention last time that this is my nearly annual attempt to turn back the clock as 3 of the last 4 years I’ve run a half-marathon down here in Kiawah while playing the Ocean Course (where they held this year’s PGA Championship) the day before. In the race I try and beat the previous year’s time, though I’m not hopeful today. Anyway, this is an abbreviated review as I haven’t been focused as much on the world the past few days due to time constraints. I’ll fill in the gaps next week.

Washington and Europe

The fiscal cliff debate is pretty simple. President Obama is adamant there be higher tax rates for the top 2%, with surrogate Treasury Secretary Timothy Geithner telling Republican leaders that the president is “absolutely” prepared to go over the cliff. By week’s end, some Republicans were seemingly willing to exchange higher rates for serious entitlement reform, but Friday afternoon, while refusing to address the issue of tax rates, House Speaker John Boehner said a lot of things are possible when it comes to revenue, though the president continues to have a “my way or the highway” attitude.

“We’re going to have to see the rates on the top 2 percent go up, and we’re not going to be able to get a deal without it,” the president said at one point this week. “I’m not doing this to punish success or go after folks because they are wealthy. It’s the simple proposition that you can’t raise enough revenue. And if you do not raise enough revenue by closing loopholes and deductions, it’s going to be the middle-class families that make up the difference.   And that would be bad for business.”

No doubt the massive uncertainty created by this debate is impacting growth with International Monetary Fund managing director Christine Lagarde chiming in that “The United States has an economic leadership role in the world…and this uncertainty has to be removed because the uncertainty fuels doubt as to that leadership.”

Then you have the debt ceiling. President Obama said he will not play games over its extension in warning Republicans not to tie this with the fiscal cliff. 

“That is a bad strategy for America,” Obama said, recalling the “catastrophe that happened in August of 2011.” Obama instead is trying to wrestle control of the extension process from Congress, meaning the president could just unilaterally act on it.

Senate Minority Leader Mitch McConnell (R., Ky.) responded: “It may be a good idea if you don’t care about the debt, but it’s a nonstarter for those of us who do. It also represents a dangerous attempt by a president to grab more power over spending, power that Congress must not and will not cede.”

Speaker Boehner said the White House would have to agree to spending cuts of equal or greater value to any increase in the debt ceiling.

“We agree there is no reason for drama surrounding a debt-limit increase,” said Brendan Buck, a Boehner spokesman. “All that is required is the president getting serious about spending cuts.”

Daniel Henninger / Wall Street Journal

“The fiscal cliff negotiation is a train driven by an engineer who doesn’t know how to use the brake, doesn’t know where the brake is and doesn’t care. His idea of politics is giving campaign speeches outside Washington to assemble a Sandy of public sentiment that will blow congressional Republicans off the cliff.

“Politics ain’t beanbag, but it also isn’t just about politics. While Barack Obama may think his election mandate includes the ruin of the Republican Party, Republicans seeking a strategy of self-preservation should assert their refusal to participate in the ruin of the nation. As it is, the fiscal cliff has degenerated into a familiar Beltway melodrama in which the media reduce the whole thing to which party gets shafted. As to the health of the gasping American economy, well, whatever.

“Conventional wisdom holds that the sequester is a mindless anti-spending Godzilla. But the sequester, because it is set in legislative stone, possesses what Washington today lacks with the public: credibility.

“The only issue on the cliff negotiation table held true by every serious person is that the entitlement crisis is going to crush the country. But nothing is dearer to this president than higher taxes on people defined by him as the wealthiest. If the president’s DNA prevents him from a compromise that also includes a sequester-strength commitment to disarming entitlement bombs, much less discretionary spending, take the sequester. Better the fiscal cliff than pitching the American people over the bottomless entitlement cliff.

“Liberal commentators like to cite Ronald Reagan and Tip O’Neill as a case study in political compromise. Barack Obama has become a case study of a president unable to compromise – with John Boehner or anyone else. The sense here is that as the cliff approaches, more people are beginning to understand this grim reality.”

Editorial / Wall Street Journal

“If the fiscal cliff talks make Lindsay Lohan look like a productive member of society, perhaps it’s because President Obama and John Boehner are playing by the dysfunctional Beltway rules. The rules work if you like bigger government, but Republicans need a new strategy, which starts by exposing the rigged game of ‘baseline spending.’

“Both the White House and House Republicans are pretending that their goal is ‘reducing the deficit,’ which they suggest means making real spending choices. They are talking about a ‘$4 trillion plan,’ or something, regardless of how that number is reached.

“Here’s the reality: Those numbers have no real meaning because they are conjured in the wilderness of mirrors that is the federal budget process. Since 1974, Capitol Hill’s ‘baseline’ has automatically increased spending every year according to Congressional Budget Office projections, which means before anyone has submitted a budget or cast a single vote. Tax and spending changes are then measured off that inflated baseline, not in absolute terms.

“The most absurd current example is Mr. Obama’s claim that his ’$4 trillion’ plan reduces the deficit by about $800 billion over 10 years by ending the wars in Iraq and Afghanistan. But those ‘savings,’ as he calls them, are measured against a White House budget office spending baseline that is fictional. Those wars are already being unwound and everyone knows the money will never be spent. But they are called ‘savings’ to gull the public and make the deficit reduction add up to a large-sounding $4 trillion….

“If Republicans really want to slow the growth in spending, they need to stop playing by Beltway rules and start explaining to America why Mr. Obama keeps saying he’s cutting spending even as spending and deficits keep going up and up and up.”

In Europe, the European Central Bank and Bank of England held the line on rates, maintaining their respective key lending figures at 0.75% and 0.50%, respectively. In light of the continent-wide recession, however, many were calling for further cuts with eurozone unemployment at a record 11.7%. A composite purchasing managers’ index report for November rose to 46.5 from 45.7 in October, which is still putrid, while euro-area retail sales in October fell 1.1% over September, worse than expected.

In Germany, retail sales fell 2.8% in October vs. September, while industrial production fell 2.6% in the month. The Bundesbank now estimates GDP in 2013 will be up just 0.4%, compared with a 1.6% estimate in June.

In Italy, Silvio Berlusconi’s center-right party withdrew its support for Prime Minister Mario Monti and Berlusconi, despite being heavily unpopular, has vowed to make a comeback and run against Monti and his technocrats early next year. Talk about a nightmare. Italy’s unemployment rate is 11.1% and consumer confidence is at a record low.

Spain’s unemployment rate came in at 26.2% for October.

Industrial production in Britain fell 1.3% in October over September.

And Greece launched its debt buyback program, looking to finally unlock 43.7 billion euro in bailout funds while at the same time reducing its debt to GDP by 10% come 2020. While I haven’t seen the results as I go to post, the terms had been enhanced to give hedge funds an incentive to sell their positions at a nice profit after buying the Greek paper at last spring’s lows.

Crisis in the Middle East

Egypt…This remains a highly fluid situation, with clashes between the pro-Morsi and opposition demonstrators claiming at least seven lives. Morsi at first delayed addressing the people. Then on Thursday he did so, but behind tanks that had ringed the presidential palace.

While refusing to shelve the referendum on the draft constitution, Morsi did appear to hold out some hope for negotiation in postponing early voting.

But Morsi also said he would never tolerate anyone working for the overthrow of his “legitimate” government. The opposition countered it will never enter into discussions with Morsi until he shelves the constitution and backs off his decrees giving himself absolute power.

Earlier in the week, opposition leader Mohamed ElBaradei accused the president’s supporters of a “vicious and deliberate” attack against peaceful demonstrators. “A regime that is not able to protect its people and is siding with his own sect, (and) thugs is a regime that lost its legitimacy and is leading Egypt into violence and bloodshed.”

Editorial / The Economist

“Mr. Morsi, like the vast majority of Egyptians, professes to want a stable democracy. He and his party, whose instinctive mistrust for outsiders was ingrained by decades of oppression, must understand that a strong showing in a single election does not entitle the Brotherhood to monopolize the drafting of a constitution that will govern Egypt for years.

“Ideally Mr. Morsi would even now step back from this disastrous path. At the least, he should try to salvage a shred of legitimacy. This means ensuring that the forthcoming constitutional referendum is free and fair. Mr. Morsi can go down in history either as the leader who guided Egypt towards stability, or as the man who scotched its chances of a decent future. Just now it looks as if he has chosen infamy.”

Mohamed ElBaradei, separately, in an op-ed for the Financial Times:

“The country is threatened by four time bombs that have emerged under the leadership of the military and now the Brotherhood. Our economy is in free-fall; at the present pace we will default in six months, especially if the recent instability jeopardizes a loan from the International Monetary Fund. Law and order remain elusive, and the impact on tourism and foreign investment is severe. Northern Sinai is turning into a battleground, threatened by jihadist groups coming from Afghanistan and elsewhere. And now, with the uproar over the draft constitution, the country is dangerously polarized….

“Almost two years ago Egypt experienced an awakening. Incredibly, President Morsi and the Brotherhood believe that, with a few strokes of a pen, they can slide us back into a coma. That will not happen. If they continue to try, they risk an eruption into violence and chaos that will destroy the fabric of Egyptian society.”

In Syria, the Assad regime is weakening and struggling once again to hold onto the main airport in Damascus, which is shut down a second time because of fierce fighting with the rebels who know the airport is critical as it’s through there that Assad gets his supplies.

At the same time the rebels claim they aren’t getting the heavy weapons they need, as Western governments are hesitant to supply them when many of the weapons then end up in the hands of the Islamist terrorist groups.

And then there is the issue of chemical weapons, specifically sarin gas which U.S. experts are convinced Assad’s forces are in the process of weaponizing.

Secretary of State Hillary Clinton said “This is a red line for the United States.” President Obama issued a similar warning. The United States and its NATO allies are doing what they can to prevent the unthinkable, as well as prepare governments in the region for any attacks employing such WMD.

My longstanding concern was the weapons falling into the hands of terrorists like Hizbullah, which I’ve told you established camps near some of the Syrian chemical weapons storage sites.  For its part, the Syrian foreign ministry continues to declare that the Syrians “would not use chemical weapons against its people under any circumstances.”

Lastly, NATO Secretary-General Anders Fogh Rasmussen warned Assad not to mess with Turkey.

“We stand with Turkey in the spirit of strong solidarity. To anyone who would want to attack Turkey, we say, ‘Don’t even think about it!’”

In Israel, Palestinian President Mahmoud Abbas called an Israeli plan to build 3,000 new housing units in the West Bank and East Jerusalem a red line for the Palestinian Authority and Abbas is strongly hinting he will do exactly what Israel and the United States have warned him not to do: lodge a complaint against Israel with the International Criminal Court.

Using his new UN status, Abbas said, “We are an occupied state and the Fourth Geneva Convention applies to us as a non-member observer state in the UN General Assembly.”

Abbas did say he wasn’t trying to isolate Israel should he make such a move.

“Rather, we want to live in security and stability with Israel. Israel used to say that this is a disputed land. We went to the UN to affirm that this is a state under occupation and it is forbidden to change its demographic character.” [Jerusalem Post]

But chief Palestinian negotiator Saeb Erekat used harsher language, describing Israel’s settlement plan as a “war crime.”

Israeli Prime Minister Netanyahu ordered that $115 million in tax revenues that Israel holds for the Palestinians to be used to pay PA salaries instead be confiscated and given to Israel Electric Corp., to pay down their debt.

Earlier, UK minister for the Middle East, Alistair Burt, said, “The settlements plan in particular has the potential to alter the situation on the ground on a scale that threatens the viability of a two-state solution.” Other European governments, including France, offered similar complaints in summoning their ambassadors.

One Israeli government official, however, slammed what he called the disproportionate response in asking where was the EU’s outrage when Abbas praised Hamas’ launching of rockets on Israeli civilian targets.

And so the situation in the region worsens by the day.

Street Bytes

--Stocks finished mixed on the week with the Dow Jones adding 1% to 13155, while the S&P 500 tacked on just two points (0.1%) and Nasdaq declined 1.1% to 2978, owing in no small part to Apple’s performance, discussed further below.

In economic news, the November ISM figure on manufacturing came in at 49.5, the lowest reading since July 2009, though later the ISM service sector figure for the month was strong.

And on the nonfarm payroll front for November, the economy added 146,000 jobs with the unemployment rate dropping to 7.7% from 7.9%. But this was a squirrely report given that the government was claiming there was a negligible impact from Hurricane Sandy, which flat out isn’t true (and should be rectified with the next report’s revisions), while the jobless rate was helped by the fact some 350,000 stopped looking for work, thus taking themselves out of the labor force. That said, no doubt the jobs picture has improved some this year.

--U.S. Treasury Yields

6-mo. 0.14% 2-yr. 0.24% 10-yr. 1.62% 30-yr. 2.81%

Unchanged on the week. Next up…the Federal Reserve’s Open Market Committee, Tues. and Wed., and an announcement on a new and improved bond-buying effort.

--Writing in his monthly investment outlook, PIMCO’s Bill Gross said:

“The biblical metaphor of seven years of fat leading to seven years of lean may be quite apropos in the current case with the observation that the developed world’s growth binge has been decades in the making. We may need at least a decade for the healing.”

Of course Ben Bernanke recently talked of a similar growth rate for the foreseeable future.

Gross added:

“Developed economies have too much debt – pure and simple – and as we attempt to resolve the dilemma, the resultant austerity should lower real growth for years to come.”

--The Energy Information Agency said U.S. crude-oil production reached its highest level in nearly 15 years in September, thanks in no small part to fracking, sports fans. Daily production averaged nearly 6.5 million barrels, according to the EIA, a whopping increase of 16% over September 2011.

--Canada’s unemployment rate for November dropped to 7.2% from 7.4%.

--China’s services purchasing managers index for November came in at 52.1 vs. 53.5 for October according to HSBC, while the Chinese Academy of Social Sciences (CASS), the country’s top think tank, said it expect China’s economic growth may quicken to 8.2% in 2013 from an expected 7.7% in 2012. China has yet to officially issue a GDP forecast for next year, but seeing as the CASS is the premier state-backed center for academic and policy research, you can see where the government’s figure will end up.

The 8.2%, however, is contingent on Europe’s crisis not getting any worse than it already is and the U.S. avoiding the fiscal cliff.

Separately, CASS expects inflation to be about 3% next year, with export growth of 10% and import growth of 13.7%. China’s inflation rate most recently came in at 1.7% on an annualized basis.

--China’s Shanghai Composite Index fell to another four-year low before rallying on talk that an increased emphasis on urbanization will be the focus of the new Xi Jinping regime; urbanization meaning lots of construction, among other things. If you believe China’s accounting is anywhere near being accurate, the Shanghai Comp trades at just 11 times last year’s earnings, the lowest multiple since at least 1997. [South China Morning Post]

--But speaking of Chinese accounting, the Securities and Exchange Commission accused the Chinese affiliates of the Big Four – Deloitte, Ernst & Young, KPMG and PwC – plus one more firm, BDO, of breaking securities laws after they refused to produce paperwork related to investigations into accounting fraud at a number of Chinese companies.

This is an issue I am most familiar with and sometime next year I’ll address in full, though in my personal case it’s as much about a company going “dark” as any fraud.

The thing is the SEC action could lead to a mass delisting of Chinese companies from the U.S. stock market, which obviously does U.S. investors zero good.

--Oracle became perhaps the poster child for companies looking to accelerate dividend distributions ahead of likely higher tax rates in 2013. The software giant said it would pre-pay $876 million worth of dividends, with CEO and co-founder Larry Ellison the biggest beneficiary with a one-off payment of $205 million from his stake.

--Citigroup’s new CEO Michael Corbat announced 11,000 job cuts, with 6,200 coming at its emerging markets units. [Citi shares rose 9% this week on the news, as devastating as it is for the impacted workers.]

Overall, in the past two years some 300,000 jobs in the financial services industry worldwide have been wiped out. Unless the market picks up for some of the businesses involved, quickly, far more will bite the dust. Investment-banking and trading revenue, for example, will probably finish 2012 at least 30 percent lower than 2009 levels.

--Americans bought 1.1 million cars in November, up 15% from a year earlier and the highest pace since January 2008. It didn’t hurt that car buyers began replacing some of the 250,000 vehicles lost in Hurricane Sandy.

Ford’s sales rose 6.4%, GM’s 3.4%, Chrysler’s were up 14.4%, Toyota’s 17.2%, Honda’s surged 38.9% (an all-time record for the month), Volkswagen Group’s (including Audi) rose 28.2% (its best November since 1973), Nissan’s were up 12.9% and Hyundai’s increased 7.8%.

--GM’s sales in China for November rose 9.7%. The company is looking to invest as much as $7 billion in the five years to 2015 in China.

--Gambling revenues in Macau (my favorite China barometer…assuming no change in government policy in terms of restricting access to the world’s largest casino market) rose 7.9% in November, year-on-year, which was solid for this stage in the economic cycle there. The figure was in line with expectations. Annual revenue of $38 billion in Macau is six times that of Las Vegas.

--Shares in Apple were scorched this week and are now down 25% from its all-time high of $705 in Sept. (to $532). Tax selling was blamed (a 15% tax rate on gains vs. who knows what in 2013), along with some talk among analysts that iPad and iPhone sales wouldn’t be as strong as expected in the current quarter (though others say they will meet or exceed forecasts).

--Freeport-McMoran Copper and Gold (FCX) saw its shares crushed (down 18% for the week) after the miner said on Wednesday it would spend $20 billion on two oil exploration and production companies with operations in the U.S. and the Gulf of Mexico (Plains Exploration & Production and McMoran Exploration). The premiums were hefty; 39 and 74 percent, respectively. As the Wall Street Journal’s “Heard on the Street” column put it, investors could have just bought these two companies themselves without levering up to pay a premium. And, as an opinion piece in the Lex column of the Financial Times added:

“Why would it pay above the odds to diversify away from a business in which it has done well? Freeport’s shares have returned nearly 600 percent in the decade before the deal was announced. The world’s second biggest copper producer by output may simply be bearish on copper prices, which have risen 380 percent over that same decade. The supply-demand picture is firm now, with copper inventories hitting lows in the third quarter. But a soft Chinese economy, and miners’ readiness to go ahead with new projects, makes the long-term outlook drearier.”

So Freeport is looking to diversify and it does so with U.S. assets, which have far less political risk than its current mines in places like Indonesia, Africa and South America. Though now Freeport is subjecting itself to political risk in the U.S. owing to the fracking debate.

Bottom line as to why the shares got shelled…people thought they owned an essentially pure copper play. No longer.

--Morgan Stanley’s chief equity strategist Adam Parker compiled a list of ten companies in the S&P 500 that account for 90% of the profit growth in the index, just 2% of 500 companies.

Apple, Bank of America, AIG, Goldman Sachs, Wells Fargo, JPMorgan, IBM, Citigroup, General Electric and Western Digital.

--Good piece in Bloomberg by Leslie Patton on how, as a Goldman Sachs analyst put it, McDonald’s has “not had anything to talk about of substance” in terms of new products as customers go elsewhere.

Like Burger King. Heck, I received as many notes for my mention about five weeks ago that I made a special trip to BK (which I hadn’t been to in years) to check out their gingerbread shakes (and reintroduce myself to the Whopper) as I have on any other topic I’ve raised and I’ll go back soon (now that my race training is over).

Let’s face it. McDonald’s CEO Don Thompson, who took over in July, is struggling. Some analysts also point to the Dollar Menu. “You can get a double cheeseburger for $1 – why do you want a Quarter Pounder for $3?”

You don’t see beer companies offering two cans for a buck, these days. Just sayin’.

--Pandora Media Inc. has 59 million active users, which is good, but these same folks are generating far more music served than the growth rate in subscribers and Pandora is being killed on royalties as ad revenues also fail to keep pace.

--Netflix became the first Web upstart to score an exclusive to stream movies from a major Hollywood player, Disney, for a reported $350 million a year. The company will be able to stream Disney’s films a few months after they first air in theaters – a distribution window normally reserved for pay-TV channels. Netflix stock soared 14% on the news.

But $350 million is a ton of money, kids.

--After eight days of losses estimated at $1 billion a day, the strike by the clerks union at the ports of Los Angeles and Long Beach, the nation’s busiest, ended. The 10,000-member International Longshore and Warehouse Union local had honored the strike, thus shutting down the facilities.

Until reading a piece in the Los Angeles Times, though, I had no idea that the ports of these two are directly responsible for about 595,000 jobs in Southern California and indirectly support an additional 648,500 jobs.

[14 million cargo containers went through Los Angeles/Long Beach in 2011 vs. New York/New Jersey’s 5.6 million figure; they being second in the nation.]

I didn’t see the final terms, but the employers were offering the clerical workers (who claimed their positions were being outsourced) a wage package worth an average of $195,000 annually. You’re reading that right.

I mean I’m thinking Bob Cratchit would have done well had he been born 170 years later.

And what of Tiny Tim?   Why Tim wouldn’t have had his issues, given modern medicine, and probably would have become a mediocre major league baseball player pulling in $4 million+ himself.

--Inflation Alert: It now costs commuters using the Lincoln and Holland tunnels, and George Washington Bridge and other crossings between New York and New Jersey, $13 at rush-hour, up $1. Blame the Port Authority, which has a terrible reputation for profligate spending, with much of the income now going to debt service rather than on badly needed projects. [Fares will rise again in Dec. 2013 and 2014.]

--Interesting story in Crain’s New York Business by Theresa Agovino on the impact productions of The Nutcracker have on overall revenue at the various ballet companies that stage it. The New York City Ballet, for example, “generates 45% of its yearly revenue, or about $12 million, from the extravaganza.”

In fact, there are 22 different productions in New York City this year, up from 14 in 2010. We seemingly can’t get enough of it.

Foreign Affairs, cont’d…

North Korea: Pyongyang said it would be carrying out its second rocket launch of the year as soon as Monday as Kim Jong-un flexes his muscles.

Seoul’s foreign ministry said the move was a “grave provocation.” Japan’s Prime Minister Noda ordered his military on alert. Ditto the U.S.

Last April’s failed rocket launch was set to coincide with the 100th anniversary of the birth of North Korean founder Kim Il-sung. This latest test, slated for anywhere between Dec. 10 and 22, would honor the date of death of former leader Kim Jong-il (Dec. 17).

South Korea is holding a presidential election on Dec. 19. Japan is holding general elections on Dec. 16.

Iran: Iranian state television showed images of what it says is an unmanned U.S. drone captured in its airspace. The U.S. Naval Forces Central Command in Bahrain said the Navy had accounted for all unmanned air vehicles operating in the Middle East region.

China: Vietnam began setting up patrols to protect its fisheries in the South China Sea after a state company accused China of sabotaging an exploration operation by cutting a seismic cable being towed behind a Vietnamese boat. At the same time, India declared herself ready to defend its energy interests in the disputed waters and will shift some naval assets there.

Hungary: Prime Minister Viktor Orban took a while but finally condemned a call by a far-right Jobbik lawmaker to draw up lists of Jews as “unworthy” of his country, promising he would protect all civilians from discrimination.

The offending Jobbik lawmaker, Marton Gyongyosi, has refused to resign, saying his remarks were “misunderstood.”

Greece / Afghanistan: Transparency International came out with its annual Corruptions Perceptions Index of 176 countries worldwide and Greece was last among the 27 EU nations, No. 94 overall.

But the last three on the list, all with an 8 score out of 100, were North Korea, Somalia and Afghanistan. $billions of American taxpayer dollars to Afghanistan going down a rat hole, even as President Karzai continues to bitch about U.S. actions.

Meanwhile, the United States is No. 19 on the list. We are soooo good!

Denmark, Finland and Sweden are the top three.

Mexico: Enrique Pena Nieto took the oath of office last weekend as Mexico’s new president. Pena Nieto’s elevation marks the return of the PRI, the Institutional Revolutionary Party, after a 12-year hiatus.  The PRI had ruled for 71 years beforehand and was not loved among many in the country for ruling with an iron fist, massive corruption and rigged elections. Pena Nieto has promised to govern democratically with transparency. He has also vowed to reform struggling state-oil giant Petroleos Mexicanos, or Pemex.

Britain: As reported by the Sunday Times of London, “The British Army has been ordered to take an extended 25-day Christmas holiday or ‘work from home’ in an attempt to cut its gas and electricity bills.

“In a move that former military commanders say is unprecedented, a leaked memo from a general says all military and civilian personnel in land forces…are to take ‘block leave’ for 25 days from December 14 until January 7.”

Some retired officers said this was beyond satire. ‘What are they supposed to do? Shooting in the back garden? An improvised bayonet assault course at the local play park?”

Random Musings

--South Carolina Republican Senator Jim DeMint shocked the locals here, and many Republicans nationally, by announcing he was resigning the Senate in January, just two years into his second term, to become president of the Heritage Foundation, a conservative think tank. South Carolina’s Rep. Gov. Nikki Haley gets to appoint a replacement and then a special election will be held in 2014, with the winner facing another vote in 2016.

Understand DeMint is likely to make about six times what he did in the Senate at Heritage, but the Tea Party movement lost a major advocate, with DeMint largely responsible for the election success of Marco Rubio in Florida and Ted Cruz in Texas. DeMint can also be blamed for some major clunkers.

--On Friday, President Obama put forward an emergency spending bill in the amount of $60.4 billion for Hurricane Sandy relief and the needs of New York, New Jersey and Connecticut. While the figure doesn’t match the $80 billion+ requested by the three, you aren’t likely to hear many complaints. The big issue, however, is how the bill is treated in Congress

--More fallout on Susan Rice and her potential nomination to replace Hillary Clinton as secretary of state.

David Ignatius / Washington Post

“Rice would be a high-risk, high-reward nominee…she would represent a gambler’s choice for Obama, a sign that his second term really would be different from the cautious style of the first….

“Rice’s problem, to be blunt, is that some people don’t like her. They find her abrasive, self-promoting, mercurial. Some have argued that this critique is sexist, but Rice’s defects are similar to those of the abrasive, self-promoting Richard Holbrooke, an immensely talented diplomat who never became secretary of state.”

Bret Stephens / Wall Street Journal

“Long before Susan Rice became a household name…she was building a career from the ruins of other African fiascoes.

“To some of these she merely contributed. Others were of her own making.

“Ms. Rice’s misadventures in Africa began nearly two decades ago when, as a 28 year-old McKinsey consultant with an Oxford Ph.D. (her dissertation was on Zimbabwe), she joined Bill Clinton’s National Security Council. The president, who had been badly burned by the Black Hawk Down episode in October 1993, was eager to avoid further African entanglements.

“So when a genocide began in Rwanda the following April, the administration went to great lengths to avoid any involvement – beginning with the refusal to use the world ‘genocide’ at all. Giving voice to that sentiment was none other than Ms. Rice:

“ ‘At an interagency teleconference in late April [1994],’ writes Samantha Power in her book ‘A Problem From Hell,’ Ms. Rice ‘stunned a few officials present when she asked, ‘If we use the word ‘genocide’ and are seen as doing nothing, what will the effects be on the November [congressional] election?’ Lieutenant Colonel [Tony] Marley remembers the incredulity of his colleagues at the State Department. ‘We could believe that people would wonder that,’ he says, ‘but not that they would actually voice it.’”

Stephens goes on to write about 1998, when Rice was sent to mediate a peace plan between warring Ethiopia and Eritrea. She botched it so badly, Secretary of State Madeleine Albright “was furious,” as noted in a piece for Current History written in 2002 by Peter Rosenblum of Columbia University. 

Stephens:

“According to one, Rice was essentially ‘put on probation,’ kept in Washington where the secretary could keep an eye on her. ‘Susan had misread the situation completely,’ according to one State Department insider who observed the conflict with Albright. ‘She came in like a scoutmaster, lecturing them on how to behave and having a public tantrum when they didn’t act the way she wanted.’

“An estimated 100,000 people would perish in the war that Ms. Rice so ineptly failed to end.”

Prof. Rosenblum:

“Rice proved herself brilliant, over time, in working the machinery of government. But along the way she burned bridges liberally, alienating and often antagonizing many potential allies…Susan Rice seems not to have convinced colleagues that her real interest was Africa, or even foreign policy.”

--An ABC News/Washington Post poll reveals 57% of Americans want Hillary Clinton to run for president. 66% of women say she should run.

--George Will / Washington Post

“Even Jonathan Swift, who said that promises and pie crusts are made to be broken, might have marveled at the limited shelf life of Barack Obama’s promise of a ‘balanced’ deficit-reduction plan – substantial spending cuts to accompany revenue increases. Obama made short shrift of that promise when he demanded $1.6 trillion in immediate tax increases and mostly unspecified domestic cuts. He also promised to cut $800 billion from 10 years of war spending that will end in two years, which is like ‘cutting’ $800 billion by deciding not to build a ski resort on Mars.

“Year after year, the Democratic-controlled Senate, ignoring the law, refuses to pass budgets. Year after year, Washington makes big government cheap by charging Americans only $6 for every $10 of government services, borrowing the difference. And the biggest purchaser of U.S. government debt is not China but…the U.S. government, largely through the Federal Reserve. Yet what supposedly is horrifying is a sequester that would cut less than 3 percent of federal spending over the next decade?”

--This week a new AP-GfK poll showed President Obama’s overall approval rating at 57%, the highest since May 2011 and the killing of bin Laden. [45% say Democrats are better at handling the economy; 39% favor Republicans.]

--An Aussie-based research effort forecasts the world is on track to see “an unrecognizable planet” that is between 4 and 6 degrees hotter by the end of this century, with greenhouse gas emissions climbing too quickly to stave off the effects of dangerous climate change. Plus, the researchers’ forecast does not include recent revelations about the effects of thawing permafrost, which is starting to release large amounts of methane from the Arctic, making the need to cut emissions even more urgent, say the scientists. [Sydney Morning Herald]

I won’t be around. I’ll let the rest of you deal with it.
---

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

God bless America.
---

Gold closed at $1704
Oil, $86.04

Returns for the week 12/3-12/7

Dow Jones +1.0% [13155]
S&P 500 +0.1% [1418]
S&P MidCap +0.3%
Russell 2000 +0.0%
Nasdaq -1.1% [2978]

Returns for the period 1/1/12-12/7/12

Dow Jones +7.7%
S&P 500 +12.8%
S&P MidCap +14.0%
Russell 2000 +11.0%
Nasdaq +14.3%

Bulls 43.6
Bears 25.5

Dr. Bortrum has a new column up on his link.

Have a great week. I appreciate your support.

Brian Trumbore



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Week in Review

12/08/2012

For the week 12/3-12/7

[Posted 12:00 AM ET…from Kiawah, S.C.]

Note: Forgot to mention last time that this is my nearly annual attempt to turn back the clock as 3 of the last 4 years I’ve run a half-marathon down here in Kiawah while playing the Ocean Course (where they held this year’s PGA Championship) the day before. In the race I try and beat the previous year’s time, though I’m not hopeful today. Anyway, this is an abbreviated review as I haven’t been focused as much on the world the past few days due to time constraints. I’ll fill in the gaps next week.

Washington and Europe

The fiscal cliff debate is pretty simple. President Obama is adamant there be higher tax rates for the top 2%, with surrogate Treasury Secretary Timothy Geithner telling Republican leaders that the president is “absolutely” prepared to go over the cliff. By week’s end, some Republicans were seemingly willing to exchange higher rates for serious entitlement reform, but Friday afternoon, while refusing to address the issue of tax rates, House Speaker John Boehner said a lot of things are possible when it comes to revenue, though the president continues to have a “my way or the highway” attitude.

“We’re going to have to see the rates on the top 2 percent go up, and we’re not going to be able to get a deal without it,” the president said at one point this week. “I’m not doing this to punish success or go after folks because they are wealthy. It’s the simple proposition that you can’t raise enough revenue. And if you do not raise enough revenue by closing loopholes and deductions, it’s going to be the middle-class families that make up the difference.   And that would be bad for business.”

No doubt the massive uncertainty created by this debate is impacting growth with International Monetary Fund managing director Christine Lagarde chiming in that “The United States has an economic leadership role in the world…and this uncertainty has to be removed because the uncertainty fuels doubt as to that leadership.”

Then you have the debt ceiling. President Obama said he will not play games over its extension in warning Republicans not to tie this with the fiscal cliff. 

“That is a bad strategy for America,” Obama said, recalling the “catastrophe that happened in August of 2011.” Obama instead is trying to wrestle control of the extension process from Congress, meaning the president could just unilaterally act on it.

Senate Minority Leader Mitch McConnell (R., Ky.) responded: “It may be a good idea if you don’t care about the debt, but it’s a nonstarter for those of us who do. It also represents a dangerous attempt by a president to grab more power over spending, power that Congress must not and will not cede.”

Speaker Boehner said the White House would have to agree to spending cuts of equal or greater value to any increase in the debt ceiling.

“We agree there is no reason for drama surrounding a debt-limit increase,” said Brendan Buck, a Boehner spokesman. “All that is required is the president getting serious about spending cuts.”

Daniel Henninger / Wall Street Journal

“The fiscal cliff negotiation is a train driven by an engineer who doesn’t know how to use the brake, doesn’t know where the brake is and doesn’t care. His idea of politics is giving campaign speeches outside Washington to assemble a Sandy of public sentiment that will blow congressional Republicans off the cliff.

“Politics ain’t beanbag, but it also isn’t just about politics. While Barack Obama may think his election mandate includes the ruin of the Republican Party, Republicans seeking a strategy of self-preservation should assert their refusal to participate in the ruin of the nation. As it is, the fiscal cliff has degenerated into a familiar Beltway melodrama in which the media reduce the whole thing to which party gets shafted. As to the health of the gasping American economy, well, whatever.

“Conventional wisdom holds that the sequester is a mindless anti-spending Godzilla. But the sequester, because it is set in legislative stone, possesses what Washington today lacks with the public: credibility.

“The only issue on the cliff negotiation table held true by every serious person is that the entitlement crisis is going to crush the country. But nothing is dearer to this president than higher taxes on people defined by him as the wealthiest. If the president’s DNA prevents him from a compromise that also includes a sequester-strength commitment to disarming entitlement bombs, much less discretionary spending, take the sequester. Better the fiscal cliff than pitching the American people over the bottomless entitlement cliff.

“Liberal commentators like to cite Ronald Reagan and Tip O’Neill as a case study in political compromise. Barack Obama has become a case study of a president unable to compromise – with John Boehner or anyone else. The sense here is that as the cliff approaches, more people are beginning to understand this grim reality.”

Editorial / Wall Street Journal

“If the fiscal cliff talks make Lindsay Lohan look like a productive member of society, perhaps it’s because President Obama and John Boehner are playing by the dysfunctional Beltway rules. The rules work if you like bigger government, but Republicans need a new strategy, which starts by exposing the rigged game of ‘baseline spending.’

“Both the White House and House Republicans are pretending that their goal is ‘reducing the deficit,’ which they suggest means making real spending choices. They are talking about a ‘$4 trillion plan,’ or something, regardless of how that number is reached.

“Here’s the reality: Those numbers have no real meaning because they are conjured in the wilderness of mirrors that is the federal budget process. Since 1974, Capitol Hill’s ‘baseline’ has automatically increased spending every year according to Congressional Budget Office projections, which means before anyone has submitted a budget or cast a single vote. Tax and spending changes are then measured off that inflated baseline, not in absolute terms.

“The most absurd current example is Mr. Obama’s claim that his ’$4 trillion’ plan reduces the deficit by about $800 billion over 10 years by ending the wars in Iraq and Afghanistan. But those ‘savings,’ as he calls them, are measured against a White House budget office spending baseline that is fictional. Those wars are already being unwound and everyone knows the money will never be spent. But they are called ‘savings’ to gull the public and make the deficit reduction add up to a large-sounding $4 trillion….

“If Republicans really want to slow the growth in spending, they need to stop playing by Beltway rules and start explaining to America why Mr. Obama keeps saying he’s cutting spending even as spending and deficits keep going up and up and up.”

In Europe, the European Central Bank and Bank of England held the line on rates, maintaining their respective key lending figures at 0.75% and 0.50%, respectively. In light of the continent-wide recession, however, many were calling for further cuts with eurozone unemployment at a record 11.7%. A composite purchasing managers’ index report for November rose to 46.5 from 45.7 in October, which is still putrid, while euro-area retail sales in October fell 1.1% over September, worse than expected.

In Germany, retail sales fell 2.8% in October vs. September, while industrial production fell 2.6% in the month. The Bundesbank now estimates GDP in 2013 will be up just 0.4%, compared with a 1.6% estimate in June.

In Italy, Silvio Berlusconi’s center-right party withdrew its support for Prime Minister Mario Monti and Berlusconi, despite being heavily unpopular, has vowed to make a comeback and run against Monti and his technocrats early next year. Talk about a nightmare. Italy’s unemployment rate is 11.1% and consumer confidence is at a record low.

Spain’s unemployment rate came in at 26.2% for October.

Industrial production in Britain fell 1.3% in October over September.

And Greece launched its debt buyback program, looking to finally unlock 43.7 billion euro in bailout funds while at the same time reducing its debt to GDP by 10% come 2020. While I haven’t seen the results as I go to post, the terms had been enhanced to give hedge funds an incentive to sell their positions at a nice profit after buying the Greek paper at last spring’s lows.

Crisis in the Middle East

Egypt…This remains a highly fluid situation, with clashes between the pro-Morsi and opposition demonstrators claiming at least seven lives. Morsi at first delayed addressing the people. Then on Thursday he did so, but behind tanks that had ringed the presidential palace.

While refusing to shelve the referendum on the draft constitution, Morsi did appear to hold out some hope for negotiation in postponing early voting.

But Morsi also said he would never tolerate anyone working for the overthrow of his “legitimate” government. The opposition countered it will never enter into discussions with Morsi until he shelves the constitution and backs off his decrees giving himself absolute power.

Earlier in the week, opposition leader Mohamed ElBaradei accused the president’s supporters of a “vicious and deliberate” attack against peaceful demonstrators. “A regime that is not able to protect its people and is siding with his own sect, (and) thugs is a regime that lost its legitimacy and is leading Egypt into violence and bloodshed.”

Editorial / The Economist

“Mr. Morsi, like the vast majority of Egyptians, professes to want a stable democracy. He and his party, whose instinctive mistrust for outsiders was ingrained by decades of oppression, must understand that a strong showing in a single election does not entitle the Brotherhood to monopolize the drafting of a constitution that will govern Egypt for years.

“Ideally Mr. Morsi would even now step back from this disastrous path. At the least, he should try to salvage a shred of legitimacy. This means ensuring that the forthcoming constitutional referendum is free and fair. Mr. Morsi can go down in history either as the leader who guided Egypt towards stability, or as the man who scotched its chances of a decent future. Just now it looks as if he has chosen infamy.”

Mohamed ElBaradei, separately, in an op-ed for the Financial Times:

“The country is threatened by four time bombs that have emerged under the leadership of the military and now the Brotherhood. Our economy is in free-fall; at the present pace we will default in six months, especially if the recent instability jeopardizes a loan from the International Monetary Fund. Law and order remain elusive, and the impact on tourism and foreign investment is severe. Northern Sinai is turning into a battleground, threatened by jihadist groups coming from Afghanistan and elsewhere. And now, with the uproar over the draft constitution, the country is dangerously polarized….

“Almost two years ago Egypt experienced an awakening. Incredibly, President Morsi and the Brotherhood believe that, with a few strokes of a pen, they can slide us back into a coma. That will not happen. If they continue to try, they risk an eruption into violence and chaos that will destroy the fabric of Egyptian society.”

In Syria, the Assad regime is weakening and struggling once again to hold onto the main airport in Damascus, which is shut down a second time because of fierce fighting with the rebels who know the airport is critical as it’s through there that Assad gets his supplies.

At the same time the rebels claim they aren’t getting the heavy weapons they need, as Western governments are hesitant to supply them when many of the weapons then end up in the hands of the Islamist terrorist groups.

And then there is the issue of chemical weapons, specifically sarin gas which U.S. experts are convinced Assad’s forces are in the process of weaponizing.

Secretary of State Hillary Clinton said “This is a red line for the United States.” President Obama issued a similar warning. The United States and its NATO allies are doing what they can to prevent the unthinkable, as well as prepare governments in the region for any attacks employing such WMD.

My longstanding concern was the weapons falling into the hands of terrorists like Hizbullah, which I’ve told you established camps near some of the Syrian chemical weapons storage sites.  For its part, the Syrian foreign ministry continues to declare that the Syrians “would not use chemical weapons against its people under any circumstances.”

Lastly, NATO Secretary-General Anders Fogh Rasmussen warned Assad not to mess with Turkey.

“We stand with Turkey in the spirit of strong solidarity. To anyone who would want to attack Turkey, we say, ‘Don’t even think about it!’”

In Israel, Palestinian President Mahmoud Abbas called an Israeli plan to build 3,000 new housing units in the West Bank and East Jerusalem a red line for the Palestinian Authority and Abbas is strongly hinting he will do exactly what Israel and the United States have warned him not to do: lodge a complaint against Israel with the International Criminal Court.

Using his new UN status, Abbas said, “We are an occupied state and the Fourth Geneva Convention applies to us as a non-member observer state in the UN General Assembly.”

Abbas did say he wasn’t trying to isolate Israel should he make such a move.

“Rather, we want to live in security and stability with Israel. Israel used to say that this is a disputed land. We went to the UN to affirm that this is a state under occupation and it is forbidden to change its demographic character.” [Jerusalem Post]

But chief Palestinian negotiator Saeb Erekat used harsher language, describing Israel’s settlement plan as a “war crime.”

Israeli Prime Minister Netanyahu ordered that $115 million in tax revenues that Israel holds for the Palestinians to be used to pay PA salaries instead be confiscated and given to Israel Electric Corp., to pay down their debt.

Earlier, UK minister for the Middle East, Alistair Burt, said, “The settlements plan in particular has the potential to alter the situation on the ground on a scale that threatens the viability of a two-state solution.” Other European governments, including France, offered similar complaints in summoning their ambassadors.

One Israeli government official, however, slammed what he called the disproportionate response in asking where was the EU’s outrage when Abbas praised Hamas’ launching of rockets on Israeli civilian targets.

And so the situation in the region worsens by the day.

Street Bytes

--Stocks finished mixed on the week with the Dow Jones adding 1% to 13155, while the S&P 500 tacked on just two points (0.1%) and Nasdaq declined 1.1% to 2978, owing in no small part to Apple’s performance, discussed further below.

In economic news, the November ISM figure on manufacturing came in at 49.5, the lowest reading since July 2009, though later the ISM service sector figure for the month was strong.

And on the nonfarm payroll front for November, the economy added 146,000 jobs with the unemployment rate dropping to 7.7% from 7.9%. But this was a squirrely report given that the government was claiming there was a negligible impact from Hurricane Sandy, which flat out isn’t true (and should be rectified with the next report’s revisions), while the jobless rate was helped by the fact some 350,000 stopped looking for work, thus taking themselves out of the labor force. That said, no doubt the jobs picture has improved some this year.

--U.S. Treasury Yields

6-mo. 0.14% 2-yr. 0.24% 10-yr. 1.62% 30-yr. 2.81%

Unchanged on the week. Next up…the Federal Reserve’s Open Market Committee, Tues. and Wed., and an announcement on a new and improved bond-buying effort.

--Writing in his monthly investment outlook, PIMCO’s Bill Gross said:

“The biblical metaphor of seven years of fat leading to seven years of lean may be quite apropos in the current case with the observation that the developed world’s growth binge has been decades in the making. We may need at least a decade for the healing.”

Of course Ben Bernanke recently talked of a similar growth rate for the foreseeable future.

Gross added:

“Developed economies have too much debt – pure and simple – and as we attempt to resolve the dilemma, the resultant austerity should lower real growth for years to come.”

--The Energy Information Agency said U.S. crude-oil production reached its highest level in nearly 15 years in September, thanks in no small part to fracking, sports fans. Daily production averaged nearly 6.5 million barrels, according to the EIA, a whopping increase of 16% over September 2011.

--Canada’s unemployment rate for November dropped to 7.2% from 7.4%.

--China’s services purchasing managers index for November came in at 52.1 vs. 53.5 for October according to HSBC, while the Chinese Academy of Social Sciences (CASS), the country’s top think tank, said it expect China’s economic growth may quicken to 8.2% in 2013 from an expected 7.7% in 2012. China has yet to officially issue a GDP forecast for next year, but seeing as the CASS is the premier state-backed center for academic and policy research, you can see where the government’s figure will end up.

The 8.2%, however, is contingent on Europe’s crisis not getting any worse than it already is and the U.S. avoiding the fiscal cliff.

Separately, CASS expects inflation to be about 3% next year, with export growth of 10% and import growth of 13.7%. China’s inflation rate most recently came in at 1.7% on an annualized basis.

--China’s Shanghai Composite Index fell to another four-year low before rallying on talk that an increased emphasis on urbanization will be the focus of the new Xi Jinping regime; urbanization meaning lots of construction, among other things. If you believe China’s accounting is anywhere near being accurate, the Shanghai Comp trades at just 11 times last year’s earnings, the lowest multiple since at least 1997. [South China Morning Post]

--But speaking of Chinese accounting, the Securities and Exchange Commission accused the Chinese affiliates of the Big Four – Deloitte, Ernst & Young, KPMG and PwC – plus one more firm, BDO, of breaking securities laws after they refused to produce paperwork related to investigations into accounting fraud at a number of Chinese companies.

This is an issue I am most familiar with and sometime next year I’ll address in full, though in my personal case it’s as much about a company going “dark” as any fraud.

The thing is the SEC action could lead to a mass delisting of Chinese companies from the U.S. stock market, which obviously does U.S. investors zero good.

--Oracle became perhaps the poster child for companies looking to accelerate dividend distributions ahead of likely higher tax rates in 2013. The software giant said it would pre-pay $876 million worth of dividends, with CEO and co-founder Larry Ellison the biggest beneficiary with a one-off payment of $205 million from his stake.

--Citigroup’s new CEO Michael Corbat announced 11,000 job cuts, with 6,200 coming at its emerging markets units. [Citi shares rose 9% this week on the news, as devastating as it is for the impacted workers.]

Overall, in the past two years some 300,000 jobs in the financial services industry worldwide have been wiped out. Unless the market picks up for some of the businesses involved, quickly, far more will bite the dust. Investment-banking and trading revenue, for example, will probably finish 2012 at least 30 percent lower than 2009 levels.

--Americans bought 1.1 million cars in November, up 15% from a year earlier and the highest pace since January 2008. It didn’t hurt that car buyers began replacing some of the 250,000 vehicles lost in Hurricane Sandy.

Ford’s sales rose 6.4%, GM’s 3.4%, Chrysler’s were up 14.4%, Toyota’s 17.2%, Honda’s surged 38.9% (an all-time record for the month), Volkswagen Group’s (including Audi) rose 28.2% (its best November since 1973), Nissan’s were up 12.9% and Hyundai’s increased 7.8%.

--GM’s sales in China for November rose 9.7%. The company is looking to invest as much as $7 billion in the five years to 2015 in China.

--Gambling revenues in Macau (my favorite China barometer…assuming no change in government policy in terms of restricting access to the world’s largest casino market) rose 7.9% in November, year-on-year, which was solid for this stage in the economic cycle there. The figure was in line with expectations. Annual revenue of $38 billion in Macau is six times that of Las Vegas.

--Shares in Apple were scorched this week and are now down 25% from its all-time high of $705 in Sept. (to $532). Tax selling was blamed (a 15% tax rate on gains vs. who knows what in 2013), along with some talk among analysts that iPad and iPhone sales wouldn’t be as strong as expected in the current quarter (though others say they will meet or exceed forecasts).

--Freeport-McMoran Copper and Gold (FCX) saw its shares crushed (down 18% for the week) after the miner said on Wednesday it would spend $20 billion on two oil exploration and production companies with operations in the U.S. and the Gulf of Mexico (Plains Exploration & Production and McMoran Exploration). The premiums were hefty; 39 and 74 percent, respectively. As the Wall Street Journal’s “Heard on the Street” column put it, investors could have just bought these two companies themselves without levering up to pay a premium. And, as an opinion piece in the Lex column of the Financial Times added:

“Why would it pay above the odds to diversify away from a business in which it has done well? Freeport’s shares have returned nearly 600 percent in the decade before the deal was announced. The world’s second biggest copper producer by output may simply be bearish on copper prices, which have risen 380 percent over that same decade. The supply-demand picture is firm now, with copper inventories hitting lows in the third quarter. But a soft Chinese economy, and miners’ readiness to go ahead with new projects, makes the long-term outlook drearier.”

So Freeport is looking to diversify and it does so with U.S. assets, which have far less political risk than its current mines in places like Indonesia, Africa and South America. Though now Freeport is subjecting itself to political risk in the U.S. owing to the fracking debate.

Bottom line as to why the shares got shelled…people thought they owned an essentially pure copper play. No longer.

--Morgan Stanley’s chief equity strategist Adam Parker compiled a list of ten companies in the S&P 500 that account for 90% of the profit growth in the index, just 2% of 500 companies.

Apple, Bank of America, AIG, Goldman Sachs, Wells Fargo, JPMorgan, IBM, Citigroup, General Electric and Western Digital.

--Good piece in Bloomberg by Leslie Patton on how, as a Goldman Sachs analyst put it, McDonald’s has “not had anything to talk about of substance” in terms of new products as customers go elsewhere.

Like Burger King. Heck, I received as many notes for my mention about five weeks ago that I made a special trip to BK (which I hadn’t been to in years) to check out their gingerbread shakes (and reintroduce myself to the Whopper) as I have on any other topic I’ve raised and I’ll go back soon (now that my race training is over).

Let’s face it. McDonald’s CEO Don Thompson, who took over in July, is struggling. Some analysts also point to the Dollar Menu. “You can get a double cheeseburger for $1 – why do you want a Quarter Pounder for $3?”

You don’t see beer companies offering two cans for a buck, these days. Just sayin’.

--Pandora Media Inc. has 59 million active users, which is good, but these same folks are generating far more music served than the growth rate in subscribers and Pandora is being killed on royalties as ad revenues also fail to keep pace.

--Netflix became the first Web upstart to score an exclusive to stream movies from a major Hollywood player, Disney, for a reported $350 million a year. The company will be able to stream Disney’s films a few months after they first air in theaters – a distribution window normally reserved for pay-TV channels. Netflix stock soared 14% on the news.

But $350 million is a ton of money, kids.

--After eight days of losses estimated at $1 billion a day, the strike by the clerks union at the ports of Los Angeles and Long Beach, the nation’s busiest, ended. The 10,000-member International Longshore and Warehouse Union local had honored the strike, thus shutting down the facilities.

Until reading a piece in the Los Angeles Times, though, I had no idea that the ports of these two are directly responsible for about 595,000 jobs in Southern California and indirectly support an additional 648,500 jobs.

[14 million cargo containers went through Los Angeles/Long Beach in 2011 vs. New York/New Jersey’s 5.6 million figure; they being second in the nation.]

I didn’t see the final terms, but the employers were offering the clerical workers (who claimed their positions were being outsourced) a wage package worth an average of $195,000 annually. You’re reading that right.

I mean I’m thinking Bob Cratchit would have done well had he been born 170 years later.

And what of Tiny Tim?   Why Tim wouldn’t have had his issues, given modern medicine, and probably would have become a mediocre major league baseball player pulling in $4 million+ himself.

--Inflation Alert: It now costs commuters using the Lincoln and Holland tunnels, and George Washington Bridge and other crossings between New York and New Jersey, $13 at rush-hour, up $1. Blame the Port Authority, which has a terrible reputation for profligate spending, with much of the income now going to debt service rather than on badly needed projects. [Fares will rise again in Dec. 2013 and 2014.]

--Interesting story in Crain’s New York Business by Theresa Agovino on the impact productions of The Nutcracker have on overall revenue at the various ballet companies that stage it. The New York City Ballet, for example, “generates 45% of its yearly revenue, or about $12 million, from the extravaganza.”

In fact, there are 22 different productions in New York City this year, up from 14 in 2010. We seemingly can’t get enough of it.

Foreign Affairs, cont’d…

North Korea: Pyongyang said it would be carrying out its second rocket launch of the year as soon as Monday as Kim Jong-un flexes his muscles.

Seoul’s foreign ministry said the move was a “grave provocation.” Japan’s Prime Minister Noda ordered his military on alert. Ditto the U.S.

Last April’s failed rocket launch was set to coincide with the 100th anniversary of the birth of North Korean founder Kim Il-sung. This latest test, slated for anywhere between Dec. 10 and 22, would honor the date of death of former leader Kim Jong-il (Dec. 17).

South Korea is holding a presidential election on Dec. 19. Japan is holding general elections on Dec. 16.

Iran: Iranian state television showed images of what it says is an unmanned U.S. drone captured in its airspace. The U.S. Naval Forces Central Command in Bahrain said the Navy had accounted for all unmanned air vehicles operating in the Middle East region.

China: Vietnam began setting up patrols to protect its fisheries in the South China Sea after a state company accused China of sabotaging an exploration operation by cutting a seismic cable being towed behind a Vietnamese boat. At the same time, India declared herself ready to defend its energy interests in the disputed waters and will shift some naval assets there.

Hungary: Prime Minister Viktor Orban took a while but finally condemned a call by a far-right Jobbik lawmaker to draw up lists of Jews as “unworthy” of his country, promising he would protect all civilians from discrimination.

The offending Jobbik lawmaker, Marton Gyongyosi, has refused to resign, saying his remarks were “misunderstood.”

Greece / Afghanistan: Transparency International came out with its annual Corruptions Perceptions Index of 176 countries worldwide and Greece was last among the 27 EU nations, No. 94 overall.

But the last three on the list, all with an 8 score out of 100, were North Korea, Somalia and Afghanistan. $billions of American taxpayer dollars to Afghanistan going down a rat hole, even as President Karzai continues to bitch about U.S. actions.

Meanwhile, the United States is No. 19 on the list. We are soooo good!

Denmark, Finland and Sweden are the top three.

Mexico: Enrique Pena Nieto took the oath of office last weekend as Mexico’s new president. Pena Nieto’s elevation marks the return of the PRI, the Institutional Revolutionary Party, after a 12-year hiatus.  The PRI had ruled for 71 years beforehand and was not loved among many in the country for ruling with an iron fist, massive corruption and rigged elections. Pena Nieto has promised to govern democratically with transparency. He has also vowed to reform struggling state-oil giant Petroleos Mexicanos, or Pemex.

Britain: As reported by the Sunday Times of London, “The British Army has been ordered to take an extended 25-day Christmas holiday or ‘work from home’ in an attempt to cut its gas and electricity bills.

“In a move that former military commanders say is unprecedented, a leaked memo from a general says all military and civilian personnel in land forces…are to take ‘block leave’ for 25 days from December 14 until January 7.”

Some retired officers said this was beyond satire. ‘What are they supposed to do? Shooting in the back garden? An improvised bayonet assault course at the local play park?”

Random Musings

--South Carolina Republican Senator Jim DeMint shocked the locals here, and many Republicans nationally, by announcing he was resigning the Senate in January, just two years into his second term, to become president of the Heritage Foundation, a conservative think tank. South Carolina’s Rep. Gov. Nikki Haley gets to appoint a replacement and then a special election will be held in 2014, with the winner facing another vote in 2016.

Understand DeMint is likely to make about six times what he did in the Senate at Heritage, but the Tea Party movement lost a major advocate, with DeMint largely responsible for the election success of Marco Rubio in Florida and Ted Cruz in Texas. DeMint can also be blamed for some major clunkers.

--On Friday, President Obama put forward an emergency spending bill in the amount of $60.4 billion for Hurricane Sandy relief and the needs of New York, New Jersey and Connecticut. While the figure doesn’t match the $80 billion+ requested by the three, you aren’t likely to hear many complaints. The big issue, however, is how the bill is treated in Congress

--More fallout on Susan Rice and her potential nomination to replace Hillary Clinton as secretary of state.

David Ignatius / Washington Post

“Rice would be a high-risk, high-reward nominee…she would represent a gambler’s choice for Obama, a sign that his second term really would be different from the cautious style of the first….

“Rice’s problem, to be blunt, is that some people don’t like her. They find her abrasive, self-promoting, mercurial. Some have argued that this critique is sexist, but Rice’s defects are similar to those of the abrasive, self-promoting Richard Holbrooke, an immensely talented diplomat who never became secretary of state.”

Bret Stephens / Wall Street Journal

“Long before Susan Rice became a household name…she was building a career from the ruins of other African fiascoes.

“To some of these she merely contributed. Others were of her own making.

“Ms. Rice’s misadventures in Africa began nearly two decades ago when, as a 28 year-old McKinsey consultant with an Oxford Ph.D. (her dissertation was on Zimbabwe), she joined Bill Clinton’s National Security Council. The president, who had been badly burned by the Black Hawk Down episode in October 1993, was eager to avoid further African entanglements.

“So when a genocide began in Rwanda the following April, the administration went to great lengths to avoid any involvement – beginning with the refusal to use the world ‘genocide’ at all. Giving voice to that sentiment was none other than Ms. Rice:

“ ‘At an interagency teleconference in late April [1994],’ writes Samantha Power in her book ‘A Problem From Hell,’ Ms. Rice ‘stunned a few officials present when she asked, ‘If we use the word ‘genocide’ and are seen as doing nothing, what will the effects be on the November [congressional] election?’ Lieutenant Colonel [Tony] Marley remembers the incredulity of his colleagues at the State Department. ‘We could believe that people would wonder that,’ he says, ‘but not that they would actually voice it.’”

Stephens goes on to write about 1998, when Rice was sent to mediate a peace plan between warring Ethiopia and Eritrea. She botched it so badly, Secretary of State Madeleine Albright “was furious,” as noted in a piece for Current History written in 2002 by Peter Rosenblum of Columbia University. 

Stephens:

“According to one, Rice was essentially ‘put on probation,’ kept in Washington where the secretary could keep an eye on her. ‘Susan had misread the situation completely,’ according to one State Department insider who observed the conflict with Albright. ‘She came in like a scoutmaster, lecturing them on how to behave and having a public tantrum when they didn’t act the way she wanted.’

“An estimated 100,000 people would perish in the war that Ms. Rice so ineptly failed to end.”

Prof. Rosenblum:

“Rice proved herself brilliant, over time, in working the machinery of government. But along the way she burned bridges liberally, alienating and often antagonizing many potential allies…Susan Rice seems not to have convinced colleagues that her real interest was Africa, or even foreign policy.”

--An ABC News/Washington Post poll reveals 57% of Americans want Hillary Clinton to run for president. 66% of women say she should run.

--George Will / Washington Post

“Even Jonathan Swift, who said that promises and pie crusts are made to be broken, might have marveled at the limited shelf life of Barack Obama’s promise of a ‘balanced’ deficit-reduction plan – substantial spending cuts to accompany revenue increases. Obama made short shrift of that promise when he demanded $1.6 trillion in immediate tax increases and mostly unspecified domestic cuts. He also promised to cut $800 billion from 10 years of war spending that will end in two years, which is like ‘cutting’ $800 billion by deciding not to build a ski resort on Mars.

“Year after year, the Democratic-controlled Senate, ignoring the law, refuses to pass budgets. Year after year, Washington makes big government cheap by charging Americans only $6 for every $10 of government services, borrowing the difference. And the biggest purchaser of U.S. government debt is not China but…the U.S. government, largely through the Federal Reserve. Yet what supposedly is horrifying is a sequester that would cut less than 3 percent of federal spending over the next decade?”

--This week a new AP-GfK poll showed President Obama’s overall approval rating at 57%, the highest since May 2011 and the killing of bin Laden. [45% say Democrats are better at handling the economy; 39% favor Republicans.]

--An Aussie-based research effort forecasts the world is on track to see “an unrecognizable planet” that is between 4 and 6 degrees hotter by the end of this century, with greenhouse gas emissions climbing too quickly to stave off the effects of dangerous climate change. Plus, the researchers’ forecast does not include recent revelations about the effects of thawing permafrost, which is starting to release large amounts of methane from the Arctic, making the need to cut emissions even more urgent, say the scientists. [Sydney Morning Herald]

I won’t be around. I’ll let the rest of you deal with it.
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Pray for the men and women of our armed forces…and all the fallen.

God bless America.
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Gold closed at $1704
Oil, $86.04

Returns for the week 12/3-12/7

Dow Jones +1.0% [13155]
S&P 500 +0.1% [1418]
S&P MidCap +0.3%
Russell 2000 +0.0%
Nasdaq -1.1% [2978]

Returns for the period 1/1/12-12/7/12

Dow Jones +7.7%
S&P 500 +12.8%
S&P MidCap +14.0%
Russell 2000 +11.0%
Nasdaq +14.3%

Bulls 43.6
Bears 25.5

Dr. Bortrum has a new column up on his link.

Have a great week. I appreciate your support.

Brian Trumbore