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12/15/2012

For the week 12/10-12/14

[Posted 12:00 AM ET]

The Newtown Massacre

I do not comment at length on tragedies such as the Sandy Hook Elementary School massacre. There is nothing I can add, especially in the immediate aftermath when my adage on such major events is ‘wait 24 hours.’ We had another example today of how authorities and the media botched this dictum in spewing forth a ton of inaccurate information, which continues as I write.

I cried a few times, particularly when I saw the woman collapse upon hearing the fate of her child (which shouldn’t have been shown on television) and when the local monsignor broke down himself.

For me to express any further thoughts of mine tonight would be inappropriate. I mourn like the rest of the nation and offer my prayers down below.

---

Washington…the Fiscal Cliff and the Fed

Edward Luce / Financial Times

“ ‘We like this new President Obama,’ said the liberal Chicago Sun Times last week. And well it might. In contrast to his handling of the August 2011 debt crisis, Mr. Obama has so far stayed resolute on the fiscal cliff. His insistence on a tax increase for the wealthiest 2 percent might look like a victory lap but he is aiming to settle more than old scores. If Mr. Obama manages to get enough Republicans to vote for a tax increase, it could plunge their party into civil war.”

Let’s start with the U.S. government budget deficit. The fiscal year starts October 1st and for the first two months we have run up deficits of $120 billion in October and $172 billion in November, though to be accurate we are told a quirk in the benefits payments schedule pulled $33 billion into November from October. Regardless, we have a two-month average deficit of $146 billion and are well on our way to a fifth straight year of $1 trillion plus. There are some blohards, such as economist Paul Krugman, who are trying to convince us deficits don’t matter. That is insane.

For October and November, revenues actually rose 10%, but spending increased 16%. That’s the real issue in the U.S.

At the same time, no rational person is urging Washington to attempt to balance the books in, say, two years. That’s financial suicide of a different sort. We need a balanced deficit-reduction program such as Simpson-Bowles.

But it’s clear THAT’S NOT HAPPENING! Nothing… nothing…happened on the fiscal cliff front this week except more insipid rhetoric. The two key players, President Obama and House Speaker John Boehner, met one-on-one on Sunday and Thursday, with an exchange of phone calls (and proposals…more of the same) in between.

As Edward Luce notes above, the sticking point for the White House is the tax rate on the top 2 percent. For Republicans it’s entitlement reform.

But it is an outrage that Democrats refuse to accept that entitlements must be reformed and future benefits cut (at least the rate of growth in same).

Instead you have House Minority Leader Nancy Pelosi saying, “One of the things that we object to is raising the Medicare age. Don’t go there!”

Or one of the true nudnicks on the planet, Congresswoman Maxine Waters saying, “I won’t support a single cut to Medicare!”

Republican Senator Bob Corker, a true moderate, echoed my sentiments exactly the other day when he said, essentially, ‘Yeah, we may get a stop-gap down payment, but it won’t be anything I’ll likely support because it will be lite on spending cuts and/or entitlement reform.’

Remember that hiking the top tax rates on the ‘wealthy,’ as President Obama wants to do, would bring in about $80 billion in revenue each year and the budget deficit for fiscal 2012 was $1.1 trillion. If you are confused over the 7% figure that is bandied about, that’s where it comes from….not to insult anyone’s intelligence. [$1.1 trillion divided by $80 billion.] It’s why my favorite Republican senator, Tom Coburn of Oklahoma, says:

“Everybody in this country will have to participate in some discomfort if we’re going to get out of this hole,” and that he is willing to accept tax rate increases as a component of a fiscal cliff deal as long as Democrats put “significant entitlement reform on the table.”

“What we ought to be working on is the other 93 percent, because even if you do what (Obama) wants to do on tax rates, you only affect 7 percent of the deficit,” Coburn said. “What we have done is spend ourselves into a hole, and we’re not going to raise taxes and borrow money and get out of it.”

Of course many Republicans, especially in the House, don’t want to budge on the top rate.

The Washington Post reported on Friday that Senate Republicans “were at work on a fallback plan that would not significantly restrain the national debt but would at least avert widespread economic damage by canceling tax increases scheduled to take effect next year for the vast majority of Americans. That strategy calls for Republicans to capitulate to Obama’s demand to let tax rates rise on wage and salary income for the wealthiest 2 percent of taxpayers.” [Lori Montgomery and Paul Kane]

But this assumes the president and Democratic leaders will focus on both tax and entitlement reform this coming spring, yet soon-to-be front-and-center is the additional issue of the debt ceiling, which President Obama wants the power to raise unilaterally without having to go through Congress, to which Sen. Corker said, “The only way the debt ceiling is given up is that the president comes to the table, and talks to Speaker Boehner about real entitlement reform. Without that there is no way the debt ceiling is going to be given up.”

And so my bottom line remains that any stop-gap deal will offer zero real hope for true reform next year. It is clear that no leader has emerged, including the president, and when it finally gets in the thick skull of the financial markets, equities, around the world, will crash.

Finally, this week Ben Bernanke and the members of the Open Market Committee met and in a follow-up news conference, Chairman Bernanke said, “Clearly, the fiscal cliff is having effects on the economy. This is a major risk factor right now.”

The Fed also said it will keep rates essentially at zero until unemployment drops below 6.5% (it is currently at 7.7%), which by their forecast means 2015.

This was a huge surprise, at least the timing of targeting the unemployment rate for the first time, and the Fed also said that it will let its inflation target rise to 2.5% from the current 2% before taking action (tightening) to curtail it – in order to give the labor outlook more time to improve.

Sounds easy and predictable, right? Not quite. It’s not as simple as just waiting until the unemployment rate hits, say, 6.9%, and then thinking, OK, I’ll just leisurely get out of my bonds and bond funds before it hits 6.5% and the Fed finally begins to take away the punchbowl. And what if we get two horrible inflation numbers (on core, ex-food and energy) back to back?

Plus the Fed announced it will buy $45 billion in longer-term government bonds each month in its ongoing effort to keep long-term interest rates down to stimulate economic activity (including home buying), while the Fed will also continue buying $40 billion per month in mortgage-backed securities.

So $85 billion, or $1 trillion a year, is going to be added to the Fed’s existing balance sheet of $2.9 trillion.

PIMCO’s Bill Gross:

“What really happens, and this is critically important, is that the Treasury issues bonds and the Fed buys them and then it remits interest to the Treasury. It means the Treasury is issuing debt for free. There are complications. Inflation is one of the complications.”

Oh, sure, inflation has been subdued for quite a while now (unless you have to pay tuition, buy gas, meet health care needs, etc.) and, as Gross adds, the Fed is “comforted by that. But ultimately, if you write checks for free and if it’s costless to finance a fiscal policy that is well into a deficit figure, yes, that’s an inflationary moment to the extent that the private sector gets some animal spirits and takes that bait.” [Bloomberg News]

Editorial / Wall Street Journal

“(The) Fed’s near-zero interest rate policy will continue to disguise the real cost of government borrowing. One reason the Obama Administration can keep running trillion-dollar deficits is because it can borrow the money at bargain rates. Stanford economist and Journal contributor John Taylor says the Fed has bought more than 70% of new Treasury debt issuance this year.

“All of this will create a fiscal cliff of its own when interest rates start to rise. The Congressional Budget Office says that every 100 basis-point increase in interest rates adds about $100 billion a year to government borrowing costs. Pity the President and Congress who have to refinance $15 trillion in debt at 6%. If Mr. Bernanke really wants to drive the President and Congress to reduce future spending, he shouldn’t keep bailing them out with easier money.

“The overarching illusion is that ever-easier monetary policy can return the U.S. economy to a durable expansion and broad-based prosperity. The bill for unbridled government spending stimulus is already coming due. Sooner or later the bill for open-ended monetary stimulus will arrive too.”

Further opinion…

Charles Krauthammer / Washington Post

“Obama has never once publicly suggested a structural cut in entitlements. On the contrary, he created an entirely new entitlement – Obamacare – that, according to the Congressional Budget Office, will increase spending by $1.7 trillion over 11 years.

“What’s he thinking? Doesn’t Obama see looming ahead the real economic cliff – a European-like collapse under the burden of unsustainable debt? Perhaps, but he wants to complete his avowedly transformational social-democratic agenda first and let his successors – likely Republican – act as tax collectors on the middle class (where the real money is) and takers of subsidies from the mouths of babes.

“Or possibly Obama will get fiscal religion and undertake tax and entitlement reform in his second term – but only after having destroyed the Republican opposition so that he can carry out the reformation on his own ideological terms.

“What should Republicans do? Stop giving stuff away. If Obama remains intransigent, let him be the one to take us over the cliff. And then let the new House, which is sworn in weeks before the president, immediately introduce and pass a full across-the-board restoration of the George W. Bush tax cuts.

“Obama will counter with the usual all-but-the-rich tax cut – as the markets gyrate and the economy begins to wobble under his feet.

“Result? We’re back to square one, but with a more level playing field. The risk to Obama will be rising and the debt ceiling will be looming. Most important of all, however, Republicans will still be in possession of their unity, their self-respect – and their trousers.”

George Will / Washington Post

“When Sen. Richard Durbin (D-Ill.) said, ‘Social Security has not added one penny to the deficit,’ Charles P. Blahous III, a member of the Social Security board of trustees, wrote to The Post to say that in 2012 this program will add $165 billion to the deficit because benefit expenditures exceed Social Security tax revenue by that amount and ‘this gap is filled entirely by revenue that the federal government borrows.’ The fact that the second-ranking Senate Democrat is off by 16,500,000,000,000 pennies reveals the sort of precise thinking that got the country into its current condition and that supposedly will produce a cure. It is enough to make you want to hop in your Fisker and drive off a fiscal cliff.

“You should know Fisker because you have helped to finance the Anaheim, Calif., company that makes – well, has made a few – electric cars. It’s only model, the Karma – really; Obama administration green investments are beyond satire – costs $110,000. Your subsidy helped Justin Bieber, the fabulously rich Canadian teenager, buy one. No one ever said saving the planet one electric car at a time would be easy.

“The Wall Street Journal reports that despite Fisker’s $192 million in Energy Department loans, the Karma ‘has been hobbled by recalls and quality problems’ and the company has sacked half its employees. But perhaps Fisker’s biggest problem is that its source of batteries, A123 Systems, has gone bankrupt in spite of its $249 million Energy Department grant. The administration that in the fiscal cliff drama is demanding control of much more of the nation’s wealth is the author of many Solyndra-style debacles.

“American politics has generally been about allocating abundance, not scarcity.

“It has, however, occasionally confronted issues not susceptible to compromise – e.g., expansion of slavery into the territories. The fiscal cliff argument is about splittable differences – this or that tax rate or entitlement rule – but also about the proper scope and actual competence of government. This necessary argument should not be truncated until the cliff is even closer.”

Robert Reich / Financial Times

“Why is Washington so obsessed with reducing the federal budget deficit rather than creating jobs and restoring growth? Because so many Americans have come to believe that the way to get jobs back and restore growth is to ‘get our fiscal house in order.’

“That’s been the Republican Party line for over two decades. And even though Republicans lost November’s presidential election and saw their numbers dwindle in both the House and Senate, this view continues to prevail.

“It’s dead wrong.

“Exhibit A is the ‘fiscal cliff’ itself. It’s dangerous to the economy – the Congressional Budget Office and many private economists believe going over it will tip the United States into recession next year – precisely because it requires too much deficit reduction, too quickly. It would suck too much demand out of the economy.

“As it is, America suffers from inadequate demand. Consumers, whose spending comprises 70 percent of economic activity in the U.S., aren’t buying nearly enough to boost the economy. Businesses won’t expand and hire unless consumers spend more. This means government has to spend more to make up for the shortfall.

“In reality, the best way for America to reduce future budget deficits is through more jobs and faster growth. More jobs and faster growth will shrink the deficit as a proportion of the overall economy.”

Yes, but only if you control spending!

Robert Reich continues:

“Recall the 1990s, when the Clinton administration balanced the budget ahead of the schedule it had set with the Congress. That was because of faster job growth than anyone expected – creating more jobs and bringing in more tax revenues than anyone had forecast.”

This stuff sickens me. Someone tell Mr. Reich to read what follows, something I referenced just two weeks ago and bears repeating…over and over and over…during this debate.

From Mary Kate Cary / U.S. News Weekly

“Here’s CNN’s Wolf Blitzer asking House Republican Whip Kevin McCarthy why he won’t agree to raising taxes on those making over $250,000 a year: ‘Those families and those small businesses did quite well during the years of the Clinton administration when the rate was 39.6. Why not go back to that?’ What Blitzer failed to mention was that when President Clinton’s top tax rate was 39 percent, government spending was only 18.2 percent of GDP. (Under President George W. Bush spending rose to 20.8 percent; now, under President Obama, spending stands at 24.3 percent of our economy.) Liberals want to return to 1990s tax rates but not 1990s spending levels. Clinton-era tax rates with Obama-era spending won’t bring us back to a balanced budget. Republicans should answer liberals longing for a return to Clinton’s tax policies with a challenge to meet his spending caps as well. Even Clinton might actually agree with conservatives on that.”

Robert Samuelson / Washington Post

“The story behind the story is that ‘tax reform,’ as we know it, is dying. During the 1980s, no major piece of legislation better symbolized bipartisan consensus than the Tax Reform Act of 1986, which was regarded by both liberal and conservative experts as the best tax law since World War II. The basic idea was simple: Reduce tax rates and recover lost revenue by ending (or limiting) tax breaks. The struggle between President Obama and House Speaker John Boehner over the ‘fiscal cliff’ indicates that this beneficial consensus has collapsed.

“Just the opposite is occurring. President Obama insists not only that the rich pay more in taxes (a legitimate demand) but also that their tax rates go up (questionable). This turns traditional tax ‘reform’ on its head. Boehner says the added revenues should come through closing loopholes. The two also disagree on the amount of tax increases: Boehner has offered $800 billion over a decade, about half of what Obama wants. But this difference is amendable to negotiation; the rates-versus-loopholes dispute is less so.

“For Obama, the obsession with raising top rates (from today’s 33 percent and 35 percent to 36 percent and 39.6 percent) seems an exercise in political symbolism. He wants to be seen as vanquishing the rich – and Republicans. Otherwise, why not accept Boehner’s means (loophole closing) to achieve his policy ends (higher taxes on the rich)?

“The White House claims that loophole closing can’t raise enough revenues. This is bogus. The nonpartisan Tax Policy Center has estimated that capping all itemized deductions at $17,000 for couples and $8,500 for singles would produce $1.7 trillion in added taxes over a decade. To be sure, there would be practical problems; some tax increases would fall on households under Obama’s income thresholds of $250,000 for couples and $200,000 for singles. But these could be managed with adequate political will.

“Unfortunately, it’s missing. The itemized deductions most threatened would include those for charitable contributions, interest on home mortgages and state and local taxes. Howls would come from affected groups: churches, universities, hospitals (the charitable deduction); builders, real estate brokers and mortgage bankers (the mortgage interest deduction); and state and local governments (the tax deduction). Obama seems unwilling to spend his political capital opposing these groups….

“After the 1986 law, the top statutory rate was 28 percent and rates were the same on ordinary income and capital gains…The preference for capital gains – they’re now taxed at no more than 15 percent and represent the biggest tax break for the wealthy – was reinstated only after the top rate rose. The 1986 law was better than what we have today and, almost certainly, better than what we will have tomorrow. It depended on bipartisan support and White House leadership. There is now little of either.”

Europe

European Union leaders reached a landmark agreement on centralized supervision of eurozone banks. 150-200 of the biggest banks with assets greater than 30 billion euro, $39 billion, will come under the direct supervision of the European Central Bank, which will act as chief supervisor of all eurozone banks, some 6,000 of them.

But, national supervisors will continue to monitor the smaller institutions, though the ECB retains the power to intervene.

Germany had voiced various concerns but Chancellor Angela Merkel welcomed the agreement, telling parliament and the German people that its “core demands” had been met.

The deal, though, won’t take effect until March 2014 and only at that time can banks, such as those on the periphery in most need, be recapitalized using the European Stability Mechanism (ESM) rescue fund, which will be too late for some.

But the point of putting off the starting date until 2014 is to get it past the German elections next September and thus put off legitimate concerns with German taxpayers being saddled with an “implicit guarantee” for foreign banks.

It is also important to note that the same EU summit failed to reach broader agreement on the future development of the currency union and deeper integration and won’t be addressing these items, many of which involve the contentious issue of national sovereignty, until a June 2013 EU summit, with contractual agreements on things such as taxation and labor market policies not likely to be addressed until mid-2014.

In the meantime, as for the ESM and its use, any loans out of same are to be accompanied by tough rules on budget discipline. Spain, for one, wants to get help for its debt-laden banks right away and I’m not sure how soon this can be accomplished. It would appear to be 2014.

Meanwhile, Greece completed its debt buyback (well, not quite…but close enough) and is finally being rewarded with 34 billion euro in aid it has been waiting on since June, with another 15 billion euro to be paid out early next year.

In Italy, Prime Minister Mario Monti announced he will resign early once a 2013 budget is approved, having lost the support of People of Freedom, Silvio Berlusconi’s party. 

But a few days later, Berlusconi was among those urging Monti to run for prime minister in next February’s snap election as Monti appeared before a group of Europe’s center-right party leaders prior to the EU summit. Berlusconi said:

“All of us have asked him to stay…it is clear that the (European People’s Party…the EU’s center-right grouping) is keen that Italy doesn’t fall in the hands of the left like in France, where everyone is desperate and is running away because of the high taxes.”

Monti hasn’t said if he’ll run, but it’s assumed he will. If not, Berlusconi would probably run but he knows only Monti can unite the moderates at this point, which still doesn’t guarantee that Monti would emerge victorious.

It also needs to be said, in the interest of accuracy, that for all the praise Monti has received after taking over the government from Berlusconi, the Italian economy has done nothing but get worse. And it’s future, in terms of its competitiveness in the EU, does not look good.

Just a few other euro economic tidbits from the past week:

--The eurozone flash purchasing managers index for manufacturing came in at 46.3 for December vs. 46.2 for November, while a composite index, including services, rose to 47.3 from 46.5. All of these figures are still solidly in contraction mode.

--EU car sales dropped 10% in November to a 19-year low.

--U.K. manufacturing fell 1.3% in October over September. But the unemployment rate for Aug.-Oct. dropped to 7.8%.

--October exports in Germany rose a better than expected 0.3% owing to non-eurozone strength.

Street Bytes

--The major averages fell a fraction on the week, marking time, waiting for the White House and Congress to act. The Dow Jones lost just 20 points, 0.1%, to 13135, while the S&P 500 declined 0.3% and Nasdaq fell 0.2% to 2971. Nasdaq was hurt by the performance of Apple, detailed further below.

On the economic front, retail sales for the month of November were up 0.3%, a little below expectations, though some of the components in the data were decent. Industrial production for November was up a solid 1.1%.

--U.S. Treasury Yields

6-mo. 0.09% 2-yr. 0.23% 10-yr. 1.70% 30-yr. 2.86%

Despite the Federal Reserve’s talk of renewed purchases of long-term bonds, the yield on the 10- and 30-year rose.

Inflation data for November was sanguine, with the producer price index falling 0.8%, up 0.1% ex-food and energy. [For the 12 months, PPI is up 1.5%, 2.2% on the core.] The consumer price index for the month was down 0.3%, ex-food and energy up 0.1%. [12 months…1.8%, core 1.9%.]

The Fed also refined its forecasts for 2013…GDP of 2.3% to 3.0%; unemployment 7.4% to 7.7%.

--In China: HSBC’s preliminary reading on manufacturing for December is 50.9, which compares to a final reading of 50.5 for November, which had represented the first time in 13 months it was above the 50 dividing line between growth and contraction. In response, the Shanghai Composite index had its biggest gain in three years, over 4% on Friday, and is now up 9.7% from an almost four-year low reached on December 3.

In earlier China economic news…exports for November were up only 2.9%, year on year, while imports for the month were unchanged, not good on either. But industrial production was up 10.1% for November, with electricity production (a key barometer here) up 7.9% and retail sales up 14.9% for the month. All very solid. The November CPI was up just 2.0%.

A chief economist for Nomura Holdings projects GDP in China may grow 8.4% this quarter, which would be a big gain over the 7.4% pace for the third quarter.

--Ahead of Sunday’s national elections in Japan, a quarterly reading on business sentiment, the Tankan index, hit a level marking the most pessimism in almost three years as the territorial dispute with China over islands in the East China Sea has taken a big toll.  Toyota’s car sales, for one, fell 22% in China from a year earlier in November, after a 44% drop in October and a 49% decline in September. At the same time, Sony, Panasonic and Sharp have announced a total of nearly 30,000 layoffs for the year ending March 31.

It was also reported this week that the economy shrank 0.9% in the third quarter, plus Q2 was revised to down 0.1%, thus Japan is back in recession.

But the market is focused on opposition leader Shinzo Abe, who is expected to become the new leader. Abe is promising an aggressive monetary policy, coupled with sizable stimulus in the form of infrastructure projects in an effort to jumpstart the economy.

--The governors of New York, New Jersey and Connecticut have their work cut out for them as they try and get hold of emergency aid from Congress following Hurricane Sandy. After Hurricane Katrina, Congress immediately approved $62 billion in disaster aid but six weeks after Sandy, the tri-state area has received nothing, even as President Obama asked Congress to approve $60.4 billion. Governors Cuomo, Christie and Malloy wrote in the Washington Post, “Our states have stood with your communities when they suffered and faced devastation. It’s time for Congress to stand with us.”

But it’s a little different budget situation these days, and this is a highly predictable fight. Republicans are balking that the aid request isn’t detailed enough and the item has become a victim of the fiscal cliff debate. Some Republicans want offsetting cuts elsewhere to pay for Sandy relief.

--California’s housing recovery continues with home prices in November reaching a median of $291,000, up 19.3% from November 2011, according to DataQuick. The number of homes sold rose nearly 15%.

--The Wall Street Journal reported that Apple’s iPhone 5 launch in Beijing on Friday was met with a big yawn, a far cry from past launches in the country. Coincidentally, I went to the nearby Short Hills Mall here in New Jersey and while it was early on a Tuesday morning, I was surprised at the lite crowd in the Apple store there, which is notorious for mobs at almost all times of year. [I’ll go back next week to see if there’s a difference.]

Shares in Apple, thanks to the Journal story and a cut in the target price by an influential UBS analyst, fell on Friday to $509, its lowest close since Feb. 17. Apple stock is now off 27% from its $705 Sept. 21 intraday record high.

--HSBC agreed to pay $1.92 billion to settle U.S. probes of money laundering in the largest such accord ever; though Europe’s largest bank will not be prosecuted for allegations pertaining to laundered funds of sanctioned nations such as Iran and Sudan, as well as drug cartels in Mexico.

--UBS is nearing a settlement in the Libor, benchmark interest rate, scandal that could top $1 billion which would be double the previous record penalty paid by Barclays, which settled back in June.

--Speaking of Barclays, they are set to eliminate as many as 2,000 jobs in its investment bank as part of its ongoing restructuring. UBS is in the process of jettisoning 10,000.

--The Treasury Department sold off its remaining shares of AIG, with a final profit to taxpayers of $22.7 billion. CEO Robert Benmosche wrote in an email to company employees, “(This) marks one of the most extraordinary – and what many believed to be the most unlikely – turnarounds in American business history.”

But Phil Angelides, who headed the government’s Financial Crisis Inquiry Commission, said the AIG bailout “was at an enormous cost to this country.” Public confidence in the financial system, for one, plummeted.

--New York State Comptroller Thomas DiNapoli estimates that the average Wall Street bonus will decline 16.5% this year over last, and down 50% from the 2006 record. Some may cheer this…just understand the ripple effect is severe, particularly in the restaurant sector, for example, in the Big Apple.

--The Financial Times named ECB President Mario Draghi its “Person of the Year.”

It was last July, amid speculation the eurozone was breaking up, that Draghi issued a two-sentence declaration.

“Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.”

So does he go down in history as the man who saved the euro?

“This year will in my view be remembered as the year when the long-term vision for the euro and the euro area was relaunched.”

This is not an inaccurate statement. I would just say 2013 is the key year as I’ll spell out more fully in two weeks.

--Molycorp, the rare earth minerals giant, fired its CEO Mark Smith on Tuesday. The company announced last month it was under formal investigation by the SEC for “the accuracy of the company’s public disclosures.”

Back on 3/17/12 in this space, I wrote the following:

“Molycorp acquired a key processor of rare earth minerals, Neo Material Technologies, which will pave the way for Molycorp to ship minerals from its California mine to Neo’s Chinese operations. I don’t like this deal, partly because I’m not a fan of Molycorp CEO Mark Smith. Maybe someday I’ll give you other reasons.”

Well, I never did, but I couldn’t stand him from the first time I saw him on CNBC. He struck me as a snake. 

--Delta Air Lines announced it would buy Singapore Airlines’ 49% stake in Virgin Atlantic for $360 million with Virgin Group and Sir Richard Branson retaining 51%. This is all about Heathrow, with the carriers expected to operate 31 peak-day round trips between the UK and North America. For its part, Singapore Airlines is going to use the cash to bolster its low-cost carrier business.

--Republican lawmakers in Michigan passed right to work legislation, thus banning the requirement that workers pay union dues as a condition of employment. The measures were then signed by Gov. Rick Snyder.

Proponents say the bill will bring more jobs and economic benefits to the state, while opponents say it is designed to weaken unions and will eventually lower wages.

--Cybersecurity firm McAfee said hackers may stage a massive fraud attack on 30 U.S. national, investment and regional banks early next year. Hackers could create fake bank transactions, or skim a portion of high-dollar bank transfers, a report said.

The Russian-based program is called Project Blitzkrieg, which hackers say has been in development since 2008 and has already netted $5 million. McAfee says the threat is accelerating.

[By the way, regarding the plight of McAfee founder John McAfee, who was deported to the U.S. from Guatemala this week after evading police in Belize, the whole story bores the hell out of me.]

--Bloomberg reports that Wal-Mart Stores and Kroger Co. are among the bidders for assets of Hostess Brands. It would make total sense for Wal-Mart to acquire them, though I would then launch a major ad campaign for the underrated Funny Bones product.

--WebMD is cutting 250 jobs, or 14% of its workforce.

--Avon Products is laying off 1,500 globally.

--Peugeot is also eliminating 1,500 jobs, though in this case by 2014. This is on top of 8,000 job cuts previously announced this year. Peugeot will be reducing its operations in France by 17% when all is said and done.

--McDonald’s rebounded some this week as it reported better than expected sales for November, up 2.4% globally on a same-store basis after the company shocked the Street by reporting October comps were down 2% in all areas.

--I missed this late last Friday…the Canadian government’s approval of the sale of oil company Nexen to state-owned Chinese firm CNOOC, though Ottawa said it would likely block any such future takeovers.

Canadian Prime Minister Stephen Harper said: “Foreign state control of oil sands development has reached the point at which further such foreign state control would not be of net benefit to Canada.

“Therefore, going forward, the minister [of industry] will find the acquisition of control of a Canadian oil sands business by a foreign state-owned enterprise to be of net benefit only in an exceptional circumstance.”

--Sports costs as a component of cable bills are skyrocketing as regional and national networks buy up live programming. For example, a story in the New York Post notes that “New Yorkers could end up paying an additional $44.28 next year, or a total of $314.04, for sports channels that come packaged with most pay-TV services. That’s up 16.4% in just two years.”

Providing sports channels on a typical basic package costs distributors as much as $14.76 a month per household, or $177.12 a year, according to SNL Kagan.

Yup, if you don’t watch sports programming, you’re not a happy camper.

--One of my favorite topics is fish mislabeling and a new study by the environmental group Oceana found that in New York City, 39% of 142 fish bought from 81 retail outlets were mislabeled. Further, all 16 sushi bars tested were found to have used mislabeled fish. Earlier studies showed 48% of fish in Boston were mislabeled, while 55% was mislabeled in Los Angeles.

Foreign Affairs

Syria: The Russian Foreign Ministry denied that deputy foreign minister Mikhail Bogdanov had said President Bashar Assad was losing control of his country, saying he “has not made any statements or special interviews recently” on Syria but was simply citing the stance of the Syrian opposition while giving a speech.

Well Bogdanov sure fooled everyone else around the world, I hasten to add, as the United States was among those commending Russia for “waking up to the reality” of the situation.

And in a major development on Friday, U.S. Defense Secretary Leon Panetta, in Turkey, ordered the deployment of two batteries of Patriot air-defense systems along the Syrian border. The move involves 400 American troops to man them in the kind of move that should have been made long ago. No doubt the U.S. was influenced by recent moves by the Assad regime to assemble chemical weapons, according to intelligence sources. This week it was revealed Assad has begun using Scud missiles against the rebels and these can easily be fitted with chemical shells.

Netherlands and Germany are supplying another four Patriot batteries to the Turkish theater.

Regarding the Scuds, an editorial in the Washington Post:

“After Saddam Hussein fired Scud missiles at Israel during the Persian Gulf War, the United States reacted strongly. Classing those weapons with Baghdad’s chemical and biological arms when it sought a postwar arms-control regime. U.N. Security Council Resolution 687 banned Iraq from possessing missiles with ranges of more than 150 kilometers (93 miles), and with good reason: Capable of carrying warheads of 2,000 pounds, Scuds can inflict massive damage. For years afterward, U.S. and U.N. spokesmen routinely described the Scuds as part of Iraq’s arsenal of ‘weapons of mass destruction.’

“Now, for the first time since 1991, Scuds have been launched – by the Syrian government of Bashar al-Assad against its own people…

“The Obama administration’s reaction? None, so far…. [Ed. the Patriot missile deployment is hardly the kind of response needed.]

“The regime is believed to possess hundreds of the missiles. Meanwhile, the Lebanese militia Hizbullah, which reportedly acquired Scuds from Syria in 2010 for possible use against Israel, will likely draw its own lessons from Mr. Obama’s passivity….

“If there is a missile-borne chemical attack, will the United States be prepared to quickly respond, in order to prevent further atrocities? If so, Mr. Obama has given no public indication of it.”

President Obama said on Tuesday the U.S. would formally recognize a coalition of Syrian opposition groups, finally joining France, the UK, Turkey and Gulf States.

“The recognition is designed as a political shot in the arm for the opposition,” said Andrew J. Tabler, a senior fellow and Syrian expert at the Washington Institute for Near East Policy. “But it’s happening in the context of resentment among the Syrian opposition, especially armed elements, of the White House’s lack of assistance during the Syrian people’s hour of need. This is especially true among armed groups.” [New York Times]

The fighting in Aleppo and Damascus this week was fierce, with at least 91 killed alone on Wednesday. In the northern province of Deir el-Zour there were reports “tens of thousands…many of them wounded, are trapped due to intense fighting and bombing.” [AP] Doctors there say it is impossible to obtain medical supplies.

In Aleppo there is starvation. As Andrew Lloyd reported from the scene for the Times of London, “In its every ingredient Aleppo is now primed to enter the shadows beyond disaster.”

The December 17 issue of Newsweek asked some experts to comment on the topic, “How to Save Syria?”

Leslie H. Gelb: “The United States can’t save Syria, but it can save Syrians and Americans…If the U.S. intervenes directly in the fighting, we’d only prolong the bloodshed and at considerable cost to ourselves. But we can and should set up a safe haven for Syrians inside Syria, especially on borders with Turkey and Jordan, and protect the refugees with U.S. airpower.” [I was saying that 18 months ago.]

Bruce Riedel: “The international community with U.S. leadership needs urgently to prepare a stabilization force to save Syria once Assad finally falls….When Assad falls, it will splinter on Sunni-Alawite and Arab-Kurd lines. Al Qaeda and Hizbullah will grab chemical and other deadly weapons. Lebanon and Jordan may be engulfed in the chaos. To save Syria, NATO should plan and lead the force, the Arab League should provide legitimacy, and Turkey should provide the bulk of the troops with token Arab and Pakistani contingents….The Saudis, Qataris, and UAE can pay. But the time to organize is now, not when the crisis breaks upon us.”

Egypt: In preparation for this weekend’s vote on the draft constitution (more voting next weekend as well), President Mohamed Morsi deployed the military as large pro- and anti-government demonstrations took place on Tuesday near the presidential palace. In effect, martial law was declared.

On Sunday, Morsi withdrew almost all the provisions of a decree granting himself sweeping powers and out of the reach of judicial review, but then he went ahead with the draft constitution that was written by a heavily Islamist assembly charged with the task.

It’s unclear just what exactly is the opposition’s position on the vote, whether to boycott or vote ‘no,’ but no doubt the referendum passes, after which parliamentary elections are to take place in about two months.

Editorial / Wall Street Journal

“The danger is that the Brotherhood will take Egypt back to Mubarak-era authoritarianism, but this time with an Islamist vanguard that will slowly crush the rights of women, non-Muslims, the media and political opposition.

“Little of this bodes well for U.S. interests. The Obama Administration has been restrained in its criticism, grateful that Mr. Morsi helped mediate a ceasefire to last month’s Gaza conflict. Mr. Morsi needs the roughly $2 billion in annual U.S. aid as well as IMF loans to keep the economy from deteriorating further. President Obama called Mr. Morsi last week, but his influence is undetectable.

“The Egyptian people aren’t as politically cowed as they long were, so perhaps they will be able to defeat the constitution and forge a better political consensus. But the present trend is toward Mubarak with a beard.”

Israel: Last Saturday, Hamas leader Khaled Meshaal, in his first visit to Gaza after 45 years in exile, said some of the following:

“Palestine is ours, from the river to the sea and from the south to the north. There will be no concession on an inch of the land….

“We will never recognize the legitimacy of the Israeli occupation and therefore there is no legitimacy for Israel, no matter how long it will take.”

Israeli Prime Minister Benjamin Netanyahu said Sunday that Meshaal’s comments exposed “our enemies’ true face” once again.

“They have no intention of compromising with us; they want to destroy the state. They will fail, of course; in the annals of the history of our people, we – the Jewish People – have overcome such enemies.”

Netanyahu also noted that Palestinian Authority President Mahmoud Abbas did not condemn Meshaal’s remarks, “just as previously he did not condemn the missiles that were fired at Israel.”

The next day, Monday, Netanyahu wondered why Palestinian diplomats were not summoned in European capitals to explain why Abbas not only had failed to condemn Meshaal’s remarks but instead was talking of reconciliation with Hamas, which Israel, the United States and the European Union regard as a terrorist organization.

Foreign Minister Avidgor Lieberman told a conference of foreign diplomats in Israel, “When push comes to shove, many key leaders would be willing to sacrifice Israel without batting an eyelid in order to appease Islamic radicals and ensure quiet for themselves…We are not willing to become a second Czechoslovakia [Ed. alluding to 1938 before the Nazi invasion] and sacrifice vital security interests.”

But then Lieberman resigned on Friday after prosecutors charged him with breach of trust. He also resigned as deputy prime minister, vowing to clear his name. Israel’s attorney general had dropped more serious money-laundering charges from an investigation into a financial scandal dating back more than a decade. Lieberman is hoping to be able to settle the case before the election slated for Jan. 22.

Lebanon: The war in Syria continues to spill across the border as in heavy fighting in Lebanon’s second city, Tripoli, 17 died in clashes between pro- and anti-Assad supporters. The Lebanese Army was able to bring some order by week’s end.

North Korea: Hundreds of thousands of North Koreans held a rally on Friday to celebrate the country’s long-range ballistic rocket launch two days earlier, with leader Kim Jong-Un vowing to hold further launches in defiance of UN and U.S. outrage.

Kim and his rocket boys defied the world by successfully launching a 3-stage rocket with an unknown cargo, supposedly a satellite, that appears to have achieved a stable orbit. This is a legitimately huge step after four previous failed long-range ballistic missile tests. 

The rocket went 6,200 miles, so long enough to reach the U.S. west coast, a worrisome development once North Korea learns how to miniaturize its warheads.

Of perhaps more immediate concern is the possibility Pyongyang will conduct its third nuclear test, the first two taking place in 2006 and 2009.

Lastly, Wednesday’s launch was preceded by a Reuters report just hours before that read as follows.

“North Korea has begun taking apart the space rocket it plans to launch later this month in an effort to gain access to a malfunctioning module on the rocket’s first stage.”

Err, not quite.

Japan: As noted above, Shinzo Abe and his Liberal Democratic Party will win this weekend’s national (lower house of parliament) elections, crushing Prime Minister Noda’s Democratic Party of Japan in the process. Abe will be given a second chance to lead the country, having done so briefly five years ago. But he has just seven months to make a difference or he faces another round of elections in July when the upper house holds a vote.

China / Japan: China sent a small propeller plane marked “State Oceanic Administration” over contested islands in the East China Sea, claimed by both Beijing and Tokyo (as well as Taipei), a highly provocative act as it marked the first time ever that a Chinese aircraft invaded Japanese airspace. Japan scrambled eight fighter jets in response.

Once again, this is a dispute over what Japan calls the Senkaku islands and China calls the Diaoyus. Beijing has long contested Japan’s claim to the uninhabited islands and when a Japanese patrol ship warned the plane not to enter Japan’s air space, the Chinese aircraft responded “This is Chinese airspace.” A Chinese Foreign Ministry spokesman said the flight is “completely normal.”

This came just three days before Japan’s election.

Also, understand, as Yuka Hayashi best summarized in a piece for the Wall Street Journal:

“International law forbids entering another nation’s airspace without permission and gives countries the right to expel unauthorized aircraft with force immediately. In contrast, foreign ships are able to sail through a nation’s territorial waters as long as it is considered ‘innocent passage.’”

And in an interview with the Financial Times this week, Philippine Foreign Minister Albert del Rosario made the very unusual statement that his nation would strongly support a rearmed Japan as a counterweight to the growing aggressiveness of China.

“We are looking for balancing factors in the region and Japan could be a significant balancing factor.”

Russia: The British government has evidence the Russian state was involved in the poisoning of dissident Alexander Litvinenko. A hearing this week found that Litvinenko, 43, who died in agony in November 2006 after being poisoned with highly radioactive Polonium-210 in London, was working with the Spanish secret service as well as with British intelligence…and his ex-KGB pals. So he was a triple agent, the mere thought of which makes my brain hurt.

There is “high-level” evidence that the Russian government ordered Litvinenko’s assassination to silence him from revealing more secrets. Russia denies having a role.

Mali: According to Sen. Christopher Coons (D-Del.), chairman of the Senate Foreign Relations subcommittee on Africa, Mali has become “the largest territory controlled by Islamic extremists in the world.”

The Washington Post editorializes:

“A Taliban-style rule of stonings and amputations has been imposed, and a dire emergency is unfolding: 400,000 civilians have fled their homes, and, the United Nations says, 600,000 children under the age of 5 are threatened by severe malnutrition.”

From the AP:

“Mali’s prime minister resigned on state television early Tuesday, hours after soldiers who led a recent coup burst into his home and arrested him, in the latest sign of the volatile political situation in this once-stable West African nation.”

Memo to self…avoid Mali in 2013.

Venezuela: President Hugo Chavez’s fourth cancer operation was “complex and difficult,” according to his hand-picked successor, Vice President Nicolas Maduro.

Chavez’s inauguration is to be on Jan. 10 and it does not appear he will make it. Under the constitution, an election would have to be held in 30 days. Maduro doesn’t have anywhere near the coalition support that Chavez has, particularly with moderates and the military, so this could cause some chaos.

Random Musings

--Polls:

In an NBC/Wall Street Journal survey, 68% say President Obama has a mandate on cutting taxes for families earning less than $250,000 per year. 65% say he has a mandate on reducing the deficit by both increasing taxes on the wealthy and reducing federal spending. And 59% say he has a mandate on eliminating the Bush-era tax cuts for household income over $250,000 a year.”

President Obama’s approval rating jumped to 53%, its highest since January 2011, even as only four in 10 Americans say the country is on the right track.

In a Bloomberg national survey, Obama’s job approval also came in at 53%, up from 49% in September and the highest for this survey since December 2009.

In the Bloomberg poll, 59% of Americans and 81% of Democrats rate Hillary Clinton an “excellent” or “good” potential nominee for president in 2016. Only 48% have a positive ‘overall’ view of Joe Biden, while just 32% have a positive rating for him as a prospective nominee.

James Carville, Democratic strategist, said, “Every Democrat I know says, ‘God, I hope (Hillary) runs. We don’t need a primary. Let’s just go to post with this thing. We don’t want to fight with anybody over anything.”

--U.N. Ambassador Susan Rice succumbed to the pressure and withdrew her name as President Obama’s leading candidate to replace Hillary Clinton as secretary of state, saying in a letter to Obama the White House could not afford a “lengthy, disruptive and costly” confirmation fight over statements she made about the attacks in Benghazi that killed four Americans.

Rice said in an interview on Thursday that “after a long, grueling battle, in all likelihood, I would be confirmed.”

What Ms. Rice doesn’t understand, though, is that her track record is abysmal, as documented in these pages for years, including recent columns by the likes of the Wall Street Journal’s Bret Stephens detailing her ineptness in various African assignments for the state department that, frankly, led to tens of thousands (or more) deaths. It’s a fact.   I do not like her, I don’t respect her.   

I do have to add that in her comments with NBC’s Brian Williams, Rice in essence threw Hillary Clinton under the bus, as only Rice can, in talking about how Rice, not Clinton, was told to go on the five Sunday talk shows to defend the administration’s actions in Benghazi.

Jennifer Rubin / Washington Post

“To be frank, (Rice) should never have been floated as a possible nominee. Her consideration for all intents and purposes was a political payback for her loyalty in the campaign and in the first term. Her reputation in the Clinton administration was poor; her record on Africa was dreadful. She was needlessly antagonistic in rhetoric and proved to be her own worst advocate. Liberals became squeamish not only about the prospect of her dragging the Senate through more Benghazi interrogation but about her investment portfolio in companies that engaged in business in Iran.

“Even Hillary Clinton, whose husband’s administration found Rice mediocre at best, was rumored to prefer another pick. Whether that influenced President Obama is unknown, but if so it might have been (in addition to Libya) her most influential moment in a term in which she was not the mover of events nor the maker of policy.

“Her undoing was her excessive eagerness to provide political cover to the president on a matter of grave national security. Whether she lied intentionally or merely agreed not to ask too many hard questions, it is a lesson for the ambitious in Washington: Credibility counts, at least sometimes.”

[The Journal’s Bret Stephens wrote another column this week on Rice’s “diplomatic misadventures in Africa,” in this case her ineptness in Sierra Leone in the late 90s, but to detail it here would only be piling on.]

--Susan Rice’s withdrawal leaves Sen. John Kerry as the choice at State, while former senator Chuck Hagel (R-Neb.) appears to be the pick to run the Pentagon. That would be a good selection. I like Hagel a lot and once thought he would be the perfect third party presidential candidate, only he has a charisma deficit that would be tough to overcome in today’s media-crazed world.

--The U.S. National Intelligence Council, which is out of the Director of National Intelligence office, in its first assessment in four years aimed at shaping U.S. strategic thinking, said that China will surpass the United States as the largest economy in the 2020s, no surprise, but that the United States, while weaker, will remain the top player in two decades thanks to its role in resolving global crises, its technological prowess and its “soft power” that attracts outsiders.

“Nevertheless, with the rapid rise of other countries,” the report reads, “the ‘unipolar moment’ is over and Pax Americana – the era of American ascendancy in international politics that began in 1945 – is fast winding down.”

One of the projected megatrends reads as follows:

“Demand for resources will increase owing to an increase in global population from 7.1 billion today to about 8 billion by 2030. Demand for food set to rise 35 percent; energy 50 percent over the next 15-20 years. Nearly half of world population will live in areas with severe water stress. Fragile states most at risk, but China and India are vulnerable to volatility of key resources.”

--The Washington Post’s Jennifer Rubin on the legacy of Jack Kemp.

“Ronald Reagan remains the icon of modern conservatives, as slayer of the Evil Empire and restorer of American confidence and prosperity. But it is Kemp whose persona and message seem a better fit in an era in which voters want empathy, conservatives need some warm-bloodedness and fiscal conservatives need a reminder of why it is that we favor free markets. (Psst: It’s the freedom, which allows every individual to find fulfillment and personal expression according to his merit and character). Kemp was the ultimate big-tent man, making his case to anyone who would listen and devoted to broadening the reach of the Republican Party. As a passionate advocate for ending apartheid in South Africa, the defense of Israel and human rights everywhere, he understood the lamp of freedom should shine beyond the water’s edge.

“In the Obama era, Kemp’s legacy is the perfect antidote to the grumpy, unimaginative and finger-wagging brand of conservatism and the scolds who want to purify the Republican Party.  Kemp and his family who keeps his vision alive deserve our ongoing gratitude.”

--New York Gov. Andrew Cuomo has seen his approval rating climb to a record 74%, according to a Quinnipiac University poll.

--Barbara Walters, as part of an interview with New Jersey Gov. Chris Christie, said some people say he is too heavy to be president one day.

“That’s ridiculous,” Christie responded. “I don’t know what the basis for that is.”

Well you’re too heavy! As in most of us don’t want our president dropping dead while giving his inauguration address.

That said, Walters could have found a better way to broach the topic rather than leading with it.

--New Jersey Democratic Senator Frank Lautenberg would be 90 years old if he stands for reelection in 2014, which is absurd, so I’m thinking that with Christie doing extraordinarily well in the polls these days, especially for a Republican in the Garden State, as the governor stands for his own reelection in 2013, that Newark Mayor Cory Booker will opt not to run for governor and instead go after Lautenberg’s seat, if only party leaders can convince Lautenberg by early next year to announce his retirement effective Jan. 2015. No reason why Booker should have to go through a messy primary battle.

--From the Wall Street Journal (prior to the Newtown tragedy): “The number of U.S. homicides has been falling for two decades, but America has become no less violent.

“Crime experts who attribute the drop in killings to better policing or an aging population fail to square the image of a more tranquil nation with this statistic: The reported number of people treated for gunshot attacks from 2001 to 2011 has grown by nearly half….

“In other words, more people in the U.S. are getting shot, but doctors have gotten better at patching them up.” [And there are more trauma centers that specialize in treating severe injuries, better training of first responders and lessons gleaned from the battlefields of Iraq and Afghanistan.]

--I did beat my 2011 half-marathon time down in Kiawah, S.C. last Saturday by two minutes. But I haven’t struggled like that since I ran my last marathon, also in Kiawah, 1999. I just have to commend the organizers for continuing to put on a terrific event.

---

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

God bless America.

We pray for the families of the victims, and survivors, as well as for the first responders to the Newtown massacre.

---

Gold closed at $1697
Oil, $86.87

Returns for the week 12/10-12/14

Dow Jones -0.1% [13135]
S&P 500 -0.3% [1413]
S&P MidCap -0.1%
Russell 2000 +0.2%
Nasdaq -0.2% [2971]

Returns for the period 1/1/12-12/14/12

Dow Jones +7.5%
S&P 500 +12.4%
S&P MidCap +13.9%
Russell 2000 +11.2%
Nasdaq   +14.1%

Bulls 45.7
Bears 23.4 [Source: Investors Intelligence]

Have a great week. I appreciate your support.

*While I’m not publicizing my Mon. thru Thurs. “Nightly Review” video yet (which you can access on the home page), the four I did this past week were superior in content to the network newscasts….just sayin’. I tape these around 4:00 PM, after the market closes, but due to the vagaries of producing a lengthy tape on YouTube, they aren’t up for viewing until around 5:45 PM. I’ll crank these out in earnest around mid-January after taking some days off over the holidays. I’m committed to this project.

Brian Trumbore



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Week in Review

12/15/2012

For the week 12/10-12/14

[Posted 12:00 AM ET]

The Newtown Massacre

I do not comment at length on tragedies such as the Sandy Hook Elementary School massacre. There is nothing I can add, especially in the immediate aftermath when my adage on such major events is ‘wait 24 hours.’ We had another example today of how authorities and the media botched this dictum in spewing forth a ton of inaccurate information, which continues as I write.

I cried a few times, particularly when I saw the woman collapse upon hearing the fate of her child (which shouldn’t have been shown on television) and when the local monsignor broke down himself.

For me to express any further thoughts of mine tonight would be inappropriate. I mourn like the rest of the nation and offer my prayers down below.

---

Washington…the Fiscal Cliff and the Fed

Edward Luce / Financial Times

“ ‘We like this new President Obama,’ said the liberal Chicago Sun Times last week. And well it might. In contrast to his handling of the August 2011 debt crisis, Mr. Obama has so far stayed resolute on the fiscal cliff. His insistence on a tax increase for the wealthiest 2 percent might look like a victory lap but he is aiming to settle more than old scores. If Mr. Obama manages to get enough Republicans to vote for a tax increase, it could plunge their party into civil war.”

Let’s start with the U.S. government budget deficit. The fiscal year starts October 1st and for the first two months we have run up deficits of $120 billion in October and $172 billion in November, though to be accurate we are told a quirk in the benefits payments schedule pulled $33 billion into November from October. Regardless, we have a two-month average deficit of $146 billion and are well on our way to a fifth straight year of $1 trillion plus. There are some blohards, such as economist Paul Krugman, who are trying to convince us deficits don’t matter. That is insane.

For October and November, revenues actually rose 10%, but spending increased 16%. That’s the real issue in the U.S.

At the same time, no rational person is urging Washington to attempt to balance the books in, say, two years. That’s financial suicide of a different sort. We need a balanced deficit-reduction program such as Simpson-Bowles.

But it’s clear THAT’S NOT HAPPENING! Nothing… nothing…happened on the fiscal cliff front this week except more insipid rhetoric. The two key players, President Obama and House Speaker John Boehner, met one-on-one on Sunday and Thursday, with an exchange of phone calls (and proposals…more of the same) in between.

As Edward Luce notes above, the sticking point for the White House is the tax rate on the top 2 percent. For Republicans it’s entitlement reform.

But it is an outrage that Democrats refuse to accept that entitlements must be reformed and future benefits cut (at least the rate of growth in same).

Instead you have House Minority Leader Nancy Pelosi saying, “One of the things that we object to is raising the Medicare age. Don’t go there!”

Or one of the true nudnicks on the planet, Congresswoman Maxine Waters saying, “I won’t support a single cut to Medicare!”

Republican Senator Bob Corker, a true moderate, echoed my sentiments exactly the other day when he said, essentially, ‘Yeah, we may get a stop-gap down payment, but it won’t be anything I’ll likely support because it will be lite on spending cuts and/or entitlement reform.’

Remember that hiking the top tax rates on the ‘wealthy,’ as President Obama wants to do, would bring in about $80 billion in revenue each year and the budget deficit for fiscal 2012 was $1.1 trillion. If you are confused over the 7% figure that is bandied about, that’s where it comes from….not to insult anyone’s intelligence. [$1.1 trillion divided by $80 billion.] It’s why my favorite Republican senator, Tom Coburn of Oklahoma, says:

“Everybody in this country will have to participate in some discomfort if we’re going to get out of this hole,” and that he is willing to accept tax rate increases as a component of a fiscal cliff deal as long as Democrats put “significant entitlement reform on the table.”

“What we ought to be working on is the other 93 percent, because even if you do what (Obama) wants to do on tax rates, you only affect 7 percent of the deficit,” Coburn said. “What we have done is spend ourselves into a hole, and we’re not going to raise taxes and borrow money and get out of it.”

Of course many Republicans, especially in the House, don’t want to budge on the top rate.

The Washington Post reported on Friday that Senate Republicans “were at work on a fallback plan that would not significantly restrain the national debt but would at least avert widespread economic damage by canceling tax increases scheduled to take effect next year for the vast majority of Americans. That strategy calls for Republicans to capitulate to Obama’s demand to let tax rates rise on wage and salary income for the wealthiest 2 percent of taxpayers.” [Lori Montgomery and Paul Kane]

But this assumes the president and Democratic leaders will focus on both tax and entitlement reform this coming spring, yet soon-to-be front-and-center is the additional issue of the debt ceiling, which President Obama wants the power to raise unilaterally without having to go through Congress, to which Sen. Corker said, “The only way the debt ceiling is given up is that the president comes to the table, and talks to Speaker Boehner about real entitlement reform. Without that there is no way the debt ceiling is going to be given up.”

And so my bottom line remains that any stop-gap deal will offer zero real hope for true reform next year. It is clear that no leader has emerged, including the president, and when it finally gets in the thick skull of the financial markets, equities, around the world, will crash.

Finally, this week Ben Bernanke and the members of the Open Market Committee met and in a follow-up news conference, Chairman Bernanke said, “Clearly, the fiscal cliff is having effects on the economy. This is a major risk factor right now.”

The Fed also said it will keep rates essentially at zero until unemployment drops below 6.5% (it is currently at 7.7%), which by their forecast means 2015.

This was a huge surprise, at least the timing of targeting the unemployment rate for the first time, and the Fed also said that it will let its inflation target rise to 2.5% from the current 2% before taking action (tightening) to curtail it – in order to give the labor outlook more time to improve.

Sounds easy and predictable, right? Not quite. It’s not as simple as just waiting until the unemployment rate hits, say, 6.9%, and then thinking, OK, I’ll just leisurely get out of my bonds and bond funds before it hits 6.5% and the Fed finally begins to take away the punchbowl. And what if we get two horrible inflation numbers (on core, ex-food and energy) back to back?

Plus the Fed announced it will buy $45 billion in longer-term government bonds each month in its ongoing effort to keep long-term interest rates down to stimulate economic activity (including home buying), while the Fed will also continue buying $40 billion per month in mortgage-backed securities.

So $85 billion, or $1 trillion a year, is going to be added to the Fed’s existing balance sheet of $2.9 trillion.

PIMCO’s Bill Gross:

“What really happens, and this is critically important, is that the Treasury issues bonds and the Fed buys them and then it remits interest to the Treasury. It means the Treasury is issuing debt for free. There are complications. Inflation is one of the complications.”

Oh, sure, inflation has been subdued for quite a while now (unless you have to pay tuition, buy gas, meet health care needs, etc.) and, as Gross adds, the Fed is “comforted by that. But ultimately, if you write checks for free and if it’s costless to finance a fiscal policy that is well into a deficit figure, yes, that’s an inflationary moment to the extent that the private sector gets some animal spirits and takes that bait.” [Bloomberg News]

Editorial / Wall Street Journal

“(The) Fed’s near-zero interest rate policy will continue to disguise the real cost of government borrowing. One reason the Obama Administration can keep running trillion-dollar deficits is because it can borrow the money at bargain rates. Stanford economist and Journal contributor John Taylor says the Fed has bought more than 70% of new Treasury debt issuance this year.

“All of this will create a fiscal cliff of its own when interest rates start to rise. The Congressional Budget Office says that every 100 basis-point increase in interest rates adds about $100 billion a year to government borrowing costs. Pity the President and Congress who have to refinance $15 trillion in debt at 6%. If Mr. Bernanke really wants to drive the President and Congress to reduce future spending, he shouldn’t keep bailing them out with easier money.

“The overarching illusion is that ever-easier monetary policy can return the U.S. economy to a durable expansion and broad-based prosperity. The bill for unbridled government spending stimulus is already coming due. Sooner or later the bill for open-ended monetary stimulus will arrive too.”

Further opinion…

Charles Krauthammer / Washington Post

“Obama has never once publicly suggested a structural cut in entitlements. On the contrary, he created an entirely new entitlement – Obamacare – that, according to the Congressional Budget Office, will increase spending by $1.7 trillion over 11 years.

“What’s he thinking? Doesn’t Obama see looming ahead the real economic cliff – a European-like collapse under the burden of unsustainable debt? Perhaps, but he wants to complete his avowedly transformational social-democratic agenda first and let his successors – likely Republican – act as tax collectors on the middle class (where the real money is) and takers of subsidies from the mouths of babes.

“Or possibly Obama will get fiscal religion and undertake tax and entitlement reform in his second term – but only after having destroyed the Republican opposition so that he can carry out the reformation on his own ideological terms.

“What should Republicans do? Stop giving stuff away. If Obama remains intransigent, let him be the one to take us over the cliff. And then let the new House, which is sworn in weeks before the president, immediately introduce and pass a full across-the-board restoration of the George W. Bush tax cuts.

“Obama will counter with the usual all-but-the-rich tax cut – as the markets gyrate and the economy begins to wobble under his feet.

“Result? We’re back to square one, but with a more level playing field. The risk to Obama will be rising and the debt ceiling will be looming. Most important of all, however, Republicans will still be in possession of their unity, their self-respect – and their trousers.”

George Will / Washington Post

“When Sen. Richard Durbin (D-Ill.) said, ‘Social Security has not added one penny to the deficit,’ Charles P. Blahous III, a member of the Social Security board of trustees, wrote to The Post to say that in 2012 this program will add $165 billion to the deficit because benefit expenditures exceed Social Security tax revenue by that amount and ‘this gap is filled entirely by revenue that the federal government borrows.’ The fact that the second-ranking Senate Democrat is off by 16,500,000,000,000 pennies reveals the sort of precise thinking that got the country into its current condition and that supposedly will produce a cure. It is enough to make you want to hop in your Fisker and drive off a fiscal cliff.

“You should know Fisker because you have helped to finance the Anaheim, Calif., company that makes – well, has made a few – electric cars. It’s only model, the Karma – really; Obama administration green investments are beyond satire – costs $110,000. Your subsidy helped Justin Bieber, the fabulously rich Canadian teenager, buy one. No one ever said saving the planet one electric car at a time would be easy.

“The Wall Street Journal reports that despite Fisker’s $192 million in Energy Department loans, the Karma ‘has been hobbled by recalls and quality problems’ and the company has sacked half its employees. But perhaps Fisker’s biggest problem is that its source of batteries, A123 Systems, has gone bankrupt in spite of its $249 million Energy Department grant. The administration that in the fiscal cliff drama is demanding control of much more of the nation’s wealth is the author of many Solyndra-style debacles.

“American politics has generally been about allocating abundance, not scarcity.

“It has, however, occasionally confronted issues not susceptible to compromise – e.g., expansion of slavery into the territories. The fiscal cliff argument is about splittable differences – this or that tax rate or entitlement rule – but also about the proper scope and actual competence of government. This necessary argument should not be truncated until the cliff is even closer.”

Robert Reich / Financial Times

“Why is Washington so obsessed with reducing the federal budget deficit rather than creating jobs and restoring growth? Because so many Americans have come to believe that the way to get jobs back and restore growth is to ‘get our fiscal house in order.’

“That’s been the Republican Party line for over two decades. And even though Republicans lost November’s presidential election and saw their numbers dwindle in both the House and Senate, this view continues to prevail.

“It’s dead wrong.

“Exhibit A is the ‘fiscal cliff’ itself. It’s dangerous to the economy – the Congressional Budget Office and many private economists believe going over it will tip the United States into recession next year – precisely because it requires too much deficit reduction, too quickly. It would suck too much demand out of the economy.

“As it is, America suffers from inadequate demand. Consumers, whose spending comprises 70 percent of economic activity in the U.S., aren’t buying nearly enough to boost the economy. Businesses won’t expand and hire unless consumers spend more. This means government has to spend more to make up for the shortfall.

“In reality, the best way for America to reduce future budget deficits is through more jobs and faster growth. More jobs and faster growth will shrink the deficit as a proportion of the overall economy.”

Yes, but only if you control spending!

Robert Reich continues:

“Recall the 1990s, when the Clinton administration balanced the budget ahead of the schedule it had set with the Congress. That was because of faster job growth than anyone expected – creating more jobs and bringing in more tax revenues than anyone had forecast.”

This stuff sickens me. Someone tell Mr. Reich to read what follows, something I referenced just two weeks ago and bears repeating…over and over and over…during this debate.

From Mary Kate Cary / U.S. News Weekly

“Here’s CNN’s Wolf Blitzer asking House Republican Whip Kevin McCarthy why he won’t agree to raising taxes on those making over $250,000 a year: ‘Those families and those small businesses did quite well during the years of the Clinton administration when the rate was 39.6. Why not go back to that?’ What Blitzer failed to mention was that when President Clinton’s top tax rate was 39 percent, government spending was only 18.2 percent of GDP. (Under President George W. Bush spending rose to 20.8 percent; now, under President Obama, spending stands at 24.3 percent of our economy.) Liberals want to return to 1990s tax rates but not 1990s spending levels. Clinton-era tax rates with Obama-era spending won’t bring us back to a balanced budget. Republicans should answer liberals longing for a return to Clinton’s tax policies with a challenge to meet his spending caps as well. Even Clinton might actually agree with conservatives on that.”

Robert Samuelson / Washington Post

“The story behind the story is that ‘tax reform,’ as we know it, is dying. During the 1980s, no major piece of legislation better symbolized bipartisan consensus than the Tax Reform Act of 1986, which was regarded by both liberal and conservative experts as the best tax law since World War II. The basic idea was simple: Reduce tax rates and recover lost revenue by ending (or limiting) tax breaks. The struggle between President Obama and House Speaker John Boehner over the ‘fiscal cliff’ indicates that this beneficial consensus has collapsed.

“Just the opposite is occurring. President Obama insists not only that the rich pay more in taxes (a legitimate demand) but also that their tax rates go up (questionable). This turns traditional tax ‘reform’ on its head. Boehner says the added revenues should come through closing loopholes. The two also disagree on the amount of tax increases: Boehner has offered $800 billion over a decade, about half of what Obama wants. But this difference is amendable to negotiation; the rates-versus-loopholes dispute is less so.

“For Obama, the obsession with raising top rates (from today’s 33 percent and 35 percent to 36 percent and 39.6 percent) seems an exercise in political symbolism. He wants to be seen as vanquishing the rich – and Republicans. Otherwise, why not accept Boehner’s means (loophole closing) to achieve his policy ends (higher taxes on the rich)?

“The White House claims that loophole closing can’t raise enough revenues. This is bogus. The nonpartisan Tax Policy Center has estimated that capping all itemized deductions at $17,000 for couples and $8,500 for singles would produce $1.7 trillion in added taxes over a decade. To be sure, there would be practical problems; some tax increases would fall on households under Obama’s income thresholds of $250,000 for couples and $200,000 for singles. But these could be managed with adequate political will.

“Unfortunately, it’s missing. The itemized deductions most threatened would include those for charitable contributions, interest on home mortgages and state and local taxes. Howls would come from affected groups: churches, universities, hospitals (the charitable deduction); builders, real estate brokers and mortgage bankers (the mortgage interest deduction); and state and local governments (the tax deduction). Obama seems unwilling to spend his political capital opposing these groups….

“After the 1986 law, the top statutory rate was 28 percent and rates were the same on ordinary income and capital gains…The preference for capital gains – they’re now taxed at no more than 15 percent and represent the biggest tax break for the wealthy – was reinstated only after the top rate rose. The 1986 law was better than what we have today and, almost certainly, better than what we will have tomorrow. It depended on bipartisan support and White House leadership. There is now little of either.”

Europe

European Union leaders reached a landmark agreement on centralized supervision of eurozone banks. 150-200 of the biggest banks with assets greater than 30 billion euro, $39 billion, will come under the direct supervision of the European Central Bank, which will act as chief supervisor of all eurozone banks, some 6,000 of them.

But, national supervisors will continue to monitor the smaller institutions, though the ECB retains the power to intervene.

Germany had voiced various concerns but Chancellor Angela Merkel welcomed the agreement, telling parliament and the German people that its “core demands” had been met.

The deal, though, won’t take effect until March 2014 and only at that time can banks, such as those on the periphery in most need, be recapitalized using the European Stability Mechanism (ESM) rescue fund, which will be too late for some.

But the point of putting off the starting date until 2014 is to get it past the German elections next September and thus put off legitimate concerns with German taxpayers being saddled with an “implicit guarantee” for foreign banks.

It is also important to note that the same EU summit failed to reach broader agreement on the future development of the currency union and deeper integration and won’t be addressing these items, many of which involve the contentious issue of national sovereignty, until a June 2013 EU summit, with contractual agreements on things such as taxation and labor market policies not likely to be addressed until mid-2014.

In the meantime, as for the ESM and its use, any loans out of same are to be accompanied by tough rules on budget discipline. Spain, for one, wants to get help for its debt-laden banks right away and I’m not sure how soon this can be accomplished. It would appear to be 2014.

Meanwhile, Greece completed its debt buyback (well, not quite…but close enough) and is finally being rewarded with 34 billion euro in aid it has been waiting on since June, with another 15 billion euro to be paid out early next year.

In Italy, Prime Minister Mario Monti announced he will resign early once a 2013 budget is approved, having lost the support of People of Freedom, Silvio Berlusconi’s party. 

But a few days later, Berlusconi was among those urging Monti to run for prime minister in next February’s snap election as Monti appeared before a group of Europe’s center-right party leaders prior to the EU summit. Berlusconi said:

“All of us have asked him to stay…it is clear that the (European People’s Party…the EU’s center-right grouping) is keen that Italy doesn’t fall in the hands of the left like in France, where everyone is desperate and is running away because of the high taxes.”

Monti hasn’t said if he’ll run, but it’s assumed he will. If not, Berlusconi would probably run but he knows only Monti can unite the moderates at this point, which still doesn’t guarantee that Monti would emerge victorious.

It also needs to be said, in the interest of accuracy, that for all the praise Monti has received after taking over the government from Berlusconi, the Italian economy has done nothing but get worse. And it’s future, in terms of its competitiveness in the EU, does not look good.

Just a few other euro economic tidbits from the past week:

--The eurozone flash purchasing managers index for manufacturing came in at 46.3 for December vs. 46.2 for November, while a composite index, including services, rose to 47.3 from 46.5. All of these figures are still solidly in contraction mode.

--EU car sales dropped 10% in November to a 19-year low.

--U.K. manufacturing fell 1.3% in October over September. But the unemployment rate for Aug.-Oct. dropped to 7.8%.

--October exports in Germany rose a better than expected 0.3% owing to non-eurozone strength.

Street Bytes

--The major averages fell a fraction on the week, marking time, waiting for the White House and Congress to act. The Dow Jones lost just 20 points, 0.1%, to 13135, while the S&P 500 declined 0.3% and Nasdaq fell 0.2% to 2971. Nasdaq was hurt by the performance of Apple, detailed further below.

On the economic front, retail sales for the month of November were up 0.3%, a little below expectations, though some of the components in the data were decent. Industrial production for November was up a solid 1.1%.

--U.S. Treasury Yields

6-mo. 0.09% 2-yr. 0.23% 10-yr. 1.70% 30-yr. 2.86%

Despite the Federal Reserve’s talk of renewed purchases of long-term bonds, the yield on the 10- and 30-year rose.

Inflation data for November was sanguine, with the producer price index falling 0.8%, up 0.1% ex-food and energy. [For the 12 months, PPI is up 1.5%, 2.2% on the core.] The consumer price index for the month was down 0.3%, ex-food and energy up 0.1%. [12 months…1.8%, core 1.9%.]

The Fed also refined its forecasts for 2013…GDP of 2.3% to 3.0%; unemployment 7.4% to 7.7%.

--In China: HSBC’s preliminary reading on manufacturing for December is 50.9, which compares to a final reading of 50.5 for November, which had represented the first time in 13 months it was above the 50 dividing line between growth and contraction. In response, the Shanghai Composite index had its biggest gain in three years, over 4% on Friday, and is now up 9.7% from an almost four-year low reached on December 3.

In earlier China economic news…exports for November were up only 2.9%, year on year, while imports for the month were unchanged, not good on either. But industrial production was up 10.1% for November, with electricity production (a key barometer here) up 7.9% and retail sales up 14.9% for the month. All very solid. The November CPI was up just 2.0%.

A chief economist for Nomura Holdings projects GDP in China may grow 8.4% this quarter, which would be a big gain over the 7.4% pace for the third quarter.

--Ahead of Sunday’s national elections in Japan, a quarterly reading on business sentiment, the Tankan index, hit a level marking the most pessimism in almost three years as the territorial dispute with China over islands in the East China Sea has taken a big toll.  Toyota’s car sales, for one, fell 22% in China from a year earlier in November, after a 44% drop in October and a 49% decline in September. At the same time, Sony, Panasonic and Sharp have announced a total of nearly 30,000 layoffs for the year ending March 31.

It was also reported this week that the economy shrank 0.9% in the third quarter, plus Q2 was revised to down 0.1%, thus Japan is back in recession.

But the market is focused on opposition leader Shinzo Abe, who is expected to become the new leader. Abe is promising an aggressive monetary policy, coupled with sizable stimulus in the form of infrastructure projects in an effort to jumpstart the economy.

--The governors of New York, New Jersey and Connecticut have their work cut out for them as they try and get hold of emergency aid from Congress following Hurricane Sandy. After Hurricane Katrina, Congress immediately approved $62 billion in disaster aid but six weeks after Sandy, the tri-state area has received nothing, even as President Obama asked Congress to approve $60.4 billion. Governors Cuomo, Christie and Malloy wrote in the Washington Post, “Our states have stood with your communities when they suffered and faced devastation. It’s time for Congress to stand with us.”

But it’s a little different budget situation these days, and this is a highly predictable fight. Republicans are balking that the aid request isn’t detailed enough and the item has become a victim of the fiscal cliff debate. Some Republicans want offsetting cuts elsewhere to pay for Sandy relief.

--California’s housing recovery continues with home prices in November reaching a median of $291,000, up 19.3% from November 2011, according to DataQuick. The number of homes sold rose nearly 15%.

--The Wall Street Journal reported that Apple’s iPhone 5 launch in Beijing on Friday was met with a big yawn, a far cry from past launches in the country. Coincidentally, I went to the nearby Short Hills Mall here in New Jersey and while it was early on a Tuesday morning, I was surprised at the lite crowd in the Apple store there, which is notorious for mobs at almost all times of year. [I’ll go back next week to see if there’s a difference.]

Shares in Apple, thanks to the Journal story and a cut in the target price by an influential UBS analyst, fell on Friday to $509, its lowest close since Feb. 17. Apple stock is now off 27% from its $705 Sept. 21 intraday record high.

--HSBC agreed to pay $1.92 billion to settle U.S. probes of money laundering in the largest such accord ever; though Europe’s largest bank will not be prosecuted for allegations pertaining to laundered funds of sanctioned nations such as Iran and Sudan, as well as drug cartels in Mexico.

--UBS is nearing a settlement in the Libor, benchmark interest rate, scandal that could top $1 billion which would be double the previous record penalty paid by Barclays, which settled back in June.

--Speaking of Barclays, they are set to eliminate as many as 2,000 jobs in its investment bank as part of its ongoing restructuring. UBS is in the process of jettisoning 10,000.

--The Treasury Department sold off its remaining shares of AIG, with a final profit to taxpayers of $22.7 billion. CEO Robert Benmosche wrote in an email to company employees, “(This) marks one of the most extraordinary – and what many believed to be the most unlikely – turnarounds in American business history.”

But Phil Angelides, who headed the government’s Financial Crisis Inquiry Commission, said the AIG bailout “was at an enormous cost to this country.” Public confidence in the financial system, for one, plummeted.

--New York State Comptroller Thomas DiNapoli estimates that the average Wall Street bonus will decline 16.5% this year over last, and down 50% from the 2006 record. Some may cheer this…just understand the ripple effect is severe, particularly in the restaurant sector, for example, in the Big Apple.

--The Financial Times named ECB President Mario Draghi its “Person of the Year.”

It was last July, amid speculation the eurozone was breaking up, that Draghi issued a two-sentence declaration.

“Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.”

So does he go down in history as the man who saved the euro?

“This year will in my view be remembered as the year when the long-term vision for the euro and the euro area was relaunched.”

This is not an inaccurate statement. I would just say 2013 is the key year as I’ll spell out more fully in two weeks.

--Molycorp, the rare earth minerals giant, fired its CEO Mark Smith on Tuesday. The company announced last month it was under formal investigation by the SEC for “the accuracy of the company’s public disclosures.”

Back on 3/17/12 in this space, I wrote the following:

“Molycorp acquired a key processor of rare earth minerals, Neo Material Technologies, which will pave the way for Molycorp to ship minerals from its California mine to Neo’s Chinese operations. I don’t like this deal, partly because I’m not a fan of Molycorp CEO Mark Smith. Maybe someday I’ll give you other reasons.”

Well, I never did, but I couldn’t stand him from the first time I saw him on CNBC. He struck me as a snake. 

--Delta Air Lines announced it would buy Singapore Airlines’ 49% stake in Virgin Atlantic for $360 million with Virgin Group and Sir Richard Branson retaining 51%. This is all about Heathrow, with the carriers expected to operate 31 peak-day round trips between the UK and North America. For its part, Singapore Airlines is going to use the cash to bolster its low-cost carrier business.

--Republican lawmakers in Michigan passed right to work legislation, thus banning the requirement that workers pay union dues as a condition of employment. The measures were then signed by Gov. Rick Snyder.

Proponents say the bill will bring more jobs and economic benefits to the state, while opponents say it is designed to weaken unions and will eventually lower wages.

--Cybersecurity firm McAfee said hackers may stage a massive fraud attack on 30 U.S. national, investment and regional banks early next year. Hackers could create fake bank transactions, or skim a portion of high-dollar bank transfers, a report said.

The Russian-based program is called Project Blitzkrieg, which hackers say has been in development since 2008 and has already netted $5 million. McAfee says the threat is accelerating.

[By the way, regarding the plight of McAfee founder John McAfee, who was deported to the U.S. from Guatemala this week after evading police in Belize, the whole story bores the hell out of me.]

--Bloomberg reports that Wal-Mart Stores and Kroger Co. are among the bidders for assets of Hostess Brands. It would make total sense for Wal-Mart to acquire them, though I would then launch a major ad campaign for the underrated Funny Bones product.

--WebMD is cutting 250 jobs, or 14% of its workforce.

--Avon Products is laying off 1,500 globally.

--Peugeot is also eliminating 1,500 jobs, though in this case by 2014. This is on top of 8,000 job cuts previously announced this year. Peugeot will be reducing its operations in France by 17% when all is said and done.

--McDonald’s rebounded some this week as it reported better than expected sales for November, up 2.4% globally on a same-store basis after the company shocked the Street by reporting October comps were down 2% in all areas.

--I missed this late last Friday…the Canadian government’s approval of the sale of oil company Nexen to state-owned Chinese firm CNOOC, though Ottawa said it would likely block any such future takeovers.

Canadian Prime Minister Stephen Harper said: “Foreign state control of oil sands development has reached the point at which further such foreign state control would not be of net benefit to Canada.

“Therefore, going forward, the minister [of industry] will find the acquisition of control of a Canadian oil sands business by a foreign state-owned enterprise to be of net benefit only in an exceptional circumstance.”

--Sports costs as a component of cable bills are skyrocketing as regional and national networks buy up live programming. For example, a story in the New York Post notes that “New Yorkers could end up paying an additional $44.28 next year, or a total of $314.04, for sports channels that come packaged with most pay-TV services. That’s up 16.4% in just two years.”

Providing sports channels on a typical basic package costs distributors as much as $14.76 a month per household, or $177.12 a year, according to SNL Kagan.

Yup, if you don’t watch sports programming, you’re not a happy camper.

--One of my favorite topics is fish mislabeling and a new study by the environmental group Oceana found that in New York City, 39% of 142 fish bought from 81 retail outlets were mislabeled. Further, all 16 sushi bars tested were found to have used mislabeled fish. Earlier studies showed 48% of fish in Boston were mislabeled, while 55% was mislabeled in Los Angeles.

Foreign Affairs

Syria: The Russian Foreign Ministry denied that deputy foreign minister Mikhail Bogdanov had said President Bashar Assad was losing control of his country, saying he “has not made any statements or special interviews recently” on Syria but was simply citing the stance of the Syrian opposition while giving a speech.

Well Bogdanov sure fooled everyone else around the world, I hasten to add, as the United States was among those commending Russia for “waking up to the reality” of the situation.

And in a major development on Friday, U.S. Defense Secretary Leon Panetta, in Turkey, ordered the deployment of two batteries of Patriot air-defense systems along the Syrian border. The move involves 400 American troops to man them in the kind of move that should have been made long ago. No doubt the U.S. was influenced by recent moves by the Assad regime to assemble chemical weapons, according to intelligence sources. This week it was revealed Assad has begun using Scud missiles against the rebels and these can easily be fitted with chemical shells.

Netherlands and Germany are supplying another four Patriot batteries to the Turkish theater.

Regarding the Scuds, an editorial in the Washington Post:

“After Saddam Hussein fired Scud missiles at Israel during the Persian Gulf War, the United States reacted strongly. Classing those weapons with Baghdad’s chemical and biological arms when it sought a postwar arms-control regime. U.N. Security Council Resolution 687 banned Iraq from possessing missiles with ranges of more than 150 kilometers (93 miles), and with good reason: Capable of carrying warheads of 2,000 pounds, Scuds can inflict massive damage. For years afterward, U.S. and U.N. spokesmen routinely described the Scuds as part of Iraq’s arsenal of ‘weapons of mass destruction.’

“Now, for the first time since 1991, Scuds have been launched – by the Syrian government of Bashar al-Assad against its own people…

“The Obama administration’s reaction? None, so far…. [Ed. the Patriot missile deployment is hardly the kind of response needed.]

“The regime is believed to possess hundreds of the missiles. Meanwhile, the Lebanese militia Hizbullah, which reportedly acquired Scuds from Syria in 2010 for possible use against Israel, will likely draw its own lessons from Mr. Obama’s passivity….

“If there is a missile-borne chemical attack, will the United States be prepared to quickly respond, in order to prevent further atrocities? If so, Mr. Obama has given no public indication of it.”

President Obama said on Tuesday the U.S. would formally recognize a coalition of Syrian opposition groups, finally joining France, the UK, Turkey and Gulf States.

“The recognition is designed as a political shot in the arm for the opposition,” said Andrew J. Tabler, a senior fellow and Syrian expert at the Washington Institute for Near East Policy. “But it’s happening in the context of resentment among the Syrian opposition, especially armed elements, of the White House’s lack of assistance during the Syrian people’s hour of need. This is especially true among armed groups.” [New York Times]

The fighting in Aleppo and Damascus this week was fierce, with at least 91 killed alone on Wednesday. In the northern province of Deir el-Zour there were reports “tens of thousands…many of them wounded, are trapped due to intense fighting and bombing.” [AP] Doctors there say it is impossible to obtain medical supplies.

In Aleppo there is starvation. As Andrew Lloyd reported from the scene for the Times of London, “In its every ingredient Aleppo is now primed to enter the shadows beyond disaster.”

The December 17 issue of Newsweek asked some experts to comment on the topic, “How to Save Syria?”

Leslie H. Gelb: “The United States can’t save Syria, but it can save Syrians and Americans…If the U.S. intervenes directly in the fighting, we’d only prolong the bloodshed and at considerable cost to ourselves. But we can and should set up a safe haven for Syrians inside Syria, especially on borders with Turkey and Jordan, and protect the refugees with U.S. airpower.” [I was saying that 18 months ago.]

Bruce Riedel: “The international community with U.S. leadership needs urgently to prepare a stabilization force to save Syria once Assad finally falls….When Assad falls, it will splinter on Sunni-Alawite and Arab-Kurd lines. Al Qaeda and Hizbullah will grab chemical and other deadly weapons. Lebanon and Jordan may be engulfed in the chaos. To save Syria, NATO should plan and lead the force, the Arab League should provide legitimacy, and Turkey should provide the bulk of the troops with token Arab and Pakistani contingents….The Saudis, Qataris, and UAE can pay. But the time to organize is now, not when the crisis breaks upon us.”

Egypt: In preparation for this weekend’s vote on the draft constitution (more voting next weekend as well), President Mohamed Morsi deployed the military as large pro- and anti-government demonstrations took place on Tuesday near the presidential palace. In effect, martial law was declared.

On Sunday, Morsi withdrew almost all the provisions of a decree granting himself sweeping powers and out of the reach of judicial review, but then he went ahead with the draft constitution that was written by a heavily Islamist assembly charged with the task.

It’s unclear just what exactly is the opposition’s position on the vote, whether to boycott or vote ‘no,’ but no doubt the referendum passes, after which parliamentary elections are to take place in about two months.

Editorial / Wall Street Journal

“The danger is that the Brotherhood will take Egypt back to Mubarak-era authoritarianism, but this time with an Islamist vanguard that will slowly crush the rights of women, non-Muslims, the media and political opposition.

“Little of this bodes well for U.S. interests. The Obama Administration has been restrained in its criticism, grateful that Mr. Morsi helped mediate a ceasefire to last month’s Gaza conflict. Mr. Morsi needs the roughly $2 billion in annual U.S. aid as well as IMF loans to keep the economy from deteriorating further. President Obama called Mr. Morsi last week, but his influence is undetectable.

“The Egyptian people aren’t as politically cowed as they long were, so perhaps they will be able to defeat the constitution and forge a better political consensus. But the present trend is toward Mubarak with a beard.”

Israel: Last Saturday, Hamas leader Khaled Meshaal, in his first visit to Gaza after 45 years in exile, said some of the following:

“Palestine is ours, from the river to the sea and from the south to the north. There will be no concession on an inch of the land….

“We will never recognize the legitimacy of the Israeli occupation and therefore there is no legitimacy for Israel, no matter how long it will take.”

Israeli Prime Minister Benjamin Netanyahu said Sunday that Meshaal’s comments exposed “our enemies’ true face” once again.

“They have no intention of compromising with us; they want to destroy the state. They will fail, of course; in the annals of the history of our people, we – the Jewish People – have overcome such enemies.”

Netanyahu also noted that Palestinian Authority President Mahmoud Abbas did not condemn Meshaal’s remarks, “just as previously he did not condemn the missiles that were fired at Israel.”

The next day, Monday, Netanyahu wondered why Palestinian diplomats were not summoned in European capitals to explain why Abbas not only had failed to condemn Meshaal’s remarks but instead was talking of reconciliation with Hamas, which Israel, the United States and the European Union regard as a terrorist organization.

Foreign Minister Avidgor Lieberman told a conference of foreign diplomats in Israel, “When push comes to shove, many key leaders would be willing to sacrifice Israel without batting an eyelid in order to appease Islamic radicals and ensure quiet for themselves…We are not willing to become a second Czechoslovakia [Ed. alluding to 1938 before the Nazi invasion] and sacrifice vital security interests.”

But then Lieberman resigned on Friday after prosecutors charged him with breach of trust. He also resigned as deputy prime minister, vowing to clear his name. Israel’s attorney general had dropped more serious money-laundering charges from an investigation into a financial scandal dating back more than a decade. Lieberman is hoping to be able to settle the case before the election slated for Jan. 22.

Lebanon: The war in Syria continues to spill across the border as in heavy fighting in Lebanon’s second city, Tripoli, 17 died in clashes between pro- and anti-Assad supporters. The Lebanese Army was able to bring some order by week’s end.

North Korea: Hundreds of thousands of North Koreans held a rally on Friday to celebrate the country’s long-range ballistic rocket launch two days earlier, with leader Kim Jong-Un vowing to hold further launches in defiance of UN and U.S. outrage.

Kim and his rocket boys defied the world by successfully launching a 3-stage rocket with an unknown cargo, supposedly a satellite, that appears to have achieved a stable orbit. This is a legitimately huge step after four previous failed long-range ballistic missile tests. 

The rocket went 6,200 miles, so long enough to reach the U.S. west coast, a worrisome development once North Korea learns how to miniaturize its warheads.

Of perhaps more immediate concern is the possibility Pyongyang will conduct its third nuclear test, the first two taking place in 2006 and 2009.

Lastly, Wednesday’s launch was preceded by a Reuters report just hours before that read as follows.

“North Korea has begun taking apart the space rocket it plans to launch later this month in an effort to gain access to a malfunctioning module on the rocket’s first stage.”

Err, not quite.

Japan: As noted above, Shinzo Abe and his Liberal Democratic Party will win this weekend’s national (lower house of parliament) elections, crushing Prime Minister Noda’s Democratic Party of Japan in the process. Abe will be given a second chance to lead the country, having done so briefly five years ago. But he has just seven months to make a difference or he faces another round of elections in July when the upper house holds a vote.

China / Japan: China sent a small propeller plane marked “State Oceanic Administration” over contested islands in the East China Sea, claimed by both Beijing and Tokyo (as well as Taipei), a highly provocative act as it marked the first time ever that a Chinese aircraft invaded Japanese airspace. Japan scrambled eight fighter jets in response.

Once again, this is a dispute over what Japan calls the Senkaku islands and China calls the Diaoyus. Beijing has long contested Japan’s claim to the uninhabited islands and when a Japanese patrol ship warned the plane not to enter Japan’s air space, the Chinese aircraft responded “This is Chinese airspace.” A Chinese Foreign Ministry spokesman said the flight is “completely normal.”

This came just three days before Japan’s election.

Also, understand, as Yuka Hayashi best summarized in a piece for the Wall Street Journal:

“International law forbids entering another nation’s airspace without permission and gives countries the right to expel unauthorized aircraft with force immediately. In contrast, foreign ships are able to sail through a nation’s territorial waters as long as it is considered ‘innocent passage.’”

And in an interview with the Financial Times this week, Philippine Foreign Minister Albert del Rosario made the very unusual statement that his nation would strongly support a rearmed Japan as a counterweight to the growing aggressiveness of China.

“We are looking for balancing factors in the region and Japan could be a significant balancing factor.”

Russia: The British government has evidence the Russian state was involved in the poisoning of dissident Alexander Litvinenko. A hearing this week found that Litvinenko, 43, who died in agony in November 2006 after being poisoned with highly radioactive Polonium-210 in London, was working with the Spanish secret service as well as with British intelligence…and his ex-KGB pals. So he was a triple agent, the mere thought of which makes my brain hurt.

There is “high-level” evidence that the Russian government ordered Litvinenko’s assassination to silence him from revealing more secrets. Russia denies having a role.

Mali: According to Sen. Christopher Coons (D-Del.), chairman of the Senate Foreign Relations subcommittee on Africa, Mali has become “the largest territory controlled by Islamic extremists in the world.”

The Washington Post editorializes:

“A Taliban-style rule of stonings and amputations has been imposed, and a dire emergency is unfolding: 400,000 civilians have fled their homes, and, the United Nations says, 600,000 children under the age of 5 are threatened by severe malnutrition.”

From the AP:

“Mali’s prime minister resigned on state television early Tuesday, hours after soldiers who led a recent coup burst into his home and arrested him, in the latest sign of the volatile political situation in this once-stable West African nation.”

Memo to self…avoid Mali in 2013.

Venezuela: President Hugo Chavez’s fourth cancer operation was “complex and difficult,” according to his hand-picked successor, Vice President Nicolas Maduro.

Chavez’s inauguration is to be on Jan. 10 and it does not appear he will make it. Under the constitution, an election would have to be held in 30 days. Maduro doesn’t have anywhere near the coalition support that Chavez has, particularly with moderates and the military, so this could cause some chaos.

Random Musings

--Polls:

In an NBC/Wall Street Journal survey, 68% say President Obama has a mandate on cutting taxes for families earning less than $250,000 per year. 65% say he has a mandate on reducing the deficit by both increasing taxes on the wealthy and reducing federal spending. And 59% say he has a mandate on eliminating the Bush-era tax cuts for household income over $250,000 a year.”

President Obama’s approval rating jumped to 53%, its highest since January 2011, even as only four in 10 Americans say the country is on the right track.

In a Bloomberg national survey, Obama’s job approval also came in at 53%, up from 49% in September and the highest for this survey since December 2009.

In the Bloomberg poll, 59% of Americans and 81% of Democrats rate Hillary Clinton an “excellent” or “good” potential nominee for president in 2016. Only 48% have a positive ‘overall’ view of Joe Biden, while just 32% have a positive rating for him as a prospective nominee.

James Carville, Democratic strategist, said, “Every Democrat I know says, ‘God, I hope (Hillary) runs. We don’t need a primary. Let’s just go to post with this thing. We don’t want to fight with anybody over anything.”

--U.N. Ambassador Susan Rice succumbed to the pressure and withdrew her name as President Obama’s leading candidate to replace Hillary Clinton as secretary of state, saying in a letter to Obama the White House could not afford a “lengthy, disruptive and costly” confirmation fight over statements she made about the attacks in Benghazi that killed four Americans.

Rice said in an interview on Thursday that “after a long, grueling battle, in all likelihood, I would be confirmed.”

What Ms. Rice doesn’t understand, though, is that her track record is abysmal, as documented in these pages for years, including recent columns by the likes of the Wall Street Journal’s Bret Stephens detailing her ineptness in various African assignments for the state department that, frankly, led to tens of thousands (or more) deaths. It’s a fact.   I do not like her, I don’t respect her.   

I do have to add that in her comments with NBC’s Brian Williams, Rice in essence threw Hillary Clinton under the bus, as only Rice can, in talking about how Rice, not Clinton, was told to go on the five Sunday talk shows to defend the administration’s actions in Benghazi.

Jennifer Rubin / Washington Post

“To be frank, (Rice) should never have been floated as a possible nominee. Her consideration for all intents and purposes was a political payback for her loyalty in the campaign and in the first term. Her reputation in the Clinton administration was poor; her record on Africa was dreadful. She was needlessly antagonistic in rhetoric and proved to be her own worst advocate. Liberals became squeamish not only about the prospect of her dragging the Senate through more Benghazi interrogation but about her investment portfolio in companies that engaged in business in Iran.

“Even Hillary Clinton, whose husband’s administration found Rice mediocre at best, was rumored to prefer another pick. Whether that influenced President Obama is unknown, but if so it might have been (in addition to Libya) her most influential moment in a term in which she was not the mover of events nor the maker of policy.

“Her undoing was her excessive eagerness to provide political cover to the president on a matter of grave national security. Whether she lied intentionally or merely agreed not to ask too many hard questions, it is a lesson for the ambitious in Washington: Credibility counts, at least sometimes.”

[The Journal’s Bret Stephens wrote another column this week on Rice’s “diplomatic misadventures in Africa,” in this case her ineptness in Sierra Leone in the late 90s, but to detail it here would only be piling on.]

--Susan Rice’s withdrawal leaves Sen. John Kerry as the choice at State, while former senator Chuck Hagel (R-Neb.) appears to be the pick to run the Pentagon. That would be a good selection. I like Hagel a lot and once thought he would be the perfect third party presidential candidate, only he has a charisma deficit that would be tough to overcome in today’s media-crazed world.

--The U.S. National Intelligence Council, which is out of the Director of National Intelligence office, in its first assessment in four years aimed at shaping U.S. strategic thinking, said that China will surpass the United States as the largest economy in the 2020s, no surprise, but that the United States, while weaker, will remain the top player in two decades thanks to its role in resolving global crises, its technological prowess and its “soft power” that attracts outsiders.

“Nevertheless, with the rapid rise of other countries,” the report reads, “the ‘unipolar moment’ is over and Pax Americana – the era of American ascendancy in international politics that began in 1945 – is fast winding down.”

One of the projected megatrends reads as follows:

“Demand for resources will increase owing to an increase in global population from 7.1 billion today to about 8 billion by 2030. Demand for food set to rise 35 percent; energy 50 percent over the next 15-20 years. Nearly half of world population will live in areas with severe water stress. Fragile states most at risk, but China and India are vulnerable to volatility of key resources.”

--The Washington Post’s Jennifer Rubin on the legacy of Jack Kemp.

“Ronald Reagan remains the icon of modern conservatives, as slayer of the Evil Empire and restorer of American confidence and prosperity. But it is Kemp whose persona and message seem a better fit in an era in which voters want empathy, conservatives need some warm-bloodedness and fiscal conservatives need a reminder of why it is that we favor free markets. (Psst: It’s the freedom, which allows every individual to find fulfillment and personal expression according to his merit and character). Kemp was the ultimate big-tent man, making his case to anyone who would listen and devoted to broadening the reach of the Republican Party. As a passionate advocate for ending apartheid in South Africa, the defense of Israel and human rights everywhere, he understood the lamp of freedom should shine beyond the water’s edge.

“In the Obama era, Kemp’s legacy is the perfect antidote to the grumpy, unimaginative and finger-wagging brand of conservatism and the scolds who want to purify the Republican Party.  Kemp and his family who keeps his vision alive deserve our ongoing gratitude.”

--New York Gov. Andrew Cuomo has seen his approval rating climb to a record 74%, according to a Quinnipiac University poll.

--Barbara Walters, as part of an interview with New Jersey Gov. Chris Christie, said some people say he is too heavy to be president one day.

“That’s ridiculous,” Christie responded. “I don’t know what the basis for that is.”

Well you’re too heavy! As in most of us don’t want our president dropping dead while giving his inauguration address.

That said, Walters could have found a better way to broach the topic rather than leading with it.

--New Jersey Democratic Senator Frank Lautenberg would be 90 years old if he stands for reelection in 2014, which is absurd, so I’m thinking that with Christie doing extraordinarily well in the polls these days, especially for a Republican in the Garden State, as the governor stands for his own reelection in 2013, that Newark Mayor Cory Booker will opt not to run for governor and instead go after Lautenberg’s seat, if only party leaders can convince Lautenberg by early next year to announce his retirement effective Jan. 2015. No reason why Booker should have to go through a messy primary battle.

--From the Wall Street Journal (prior to the Newtown tragedy): “The number of U.S. homicides has been falling for two decades, but America has become no less violent.

“Crime experts who attribute the drop in killings to better policing or an aging population fail to square the image of a more tranquil nation with this statistic: The reported number of people treated for gunshot attacks from 2001 to 2011 has grown by nearly half….

“In other words, more people in the U.S. are getting shot, but doctors have gotten better at patching them up.” [And there are more trauma centers that specialize in treating severe injuries, better training of first responders and lessons gleaned from the battlefields of Iraq and Afghanistan.]

--I did beat my 2011 half-marathon time down in Kiawah, S.C. last Saturday by two minutes. But I haven’t struggled like that since I ran my last marathon, also in Kiawah, 1999. I just have to commend the organizers for continuing to put on a terrific event.

---

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

God bless America.

We pray for the families of the victims, and survivors, as well as for the first responders to the Newtown massacre.

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Gold closed at $1697
Oil, $86.87

Returns for the week 12/10-12/14

Dow Jones -0.1% [13135]
S&P 500 -0.3% [1413]
S&P MidCap -0.1%
Russell 2000 +0.2%
Nasdaq -0.2% [2971]

Returns for the period 1/1/12-12/14/12

Dow Jones +7.5%
S&P 500 +12.4%
S&P MidCap +13.9%
Russell 2000 +11.2%
Nasdaq   +14.1%

Bulls 45.7
Bears 23.4 [Source: Investors Intelligence]

Have a great week. I appreciate your support.

*While I’m not publicizing my Mon. thru Thurs. “Nightly Review” video yet (which you can access on the home page), the four I did this past week were superior in content to the network newscasts….just sayin’. I tape these around 4:00 PM, after the market closes, but due to the vagaries of producing a lengthy tape on YouTube, they aren’t up for viewing until around 5:45 PM. I’ll crank these out in earnest around mid-January after taking some days off over the holidays. I’m committed to this project.

Brian Trumbore