Week in Review

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Week in Review

12/22/2012

For the week 12/17-12/21

Washington and the Fiscal Cliff

Actually, you know what the word humbug means? I didn’t know how to start this column so I just wrote the line and thought, huh, I’m not sure I really know what the formal definition of humbug is. Better go to the ol’ Webster’s to check it out. Oh sure, Scrooge used it, but anyway, it means hoax, fraud, or nonsense when used as a noun. To use as a verb, like in saying, we’ve been humbugged on Benghazi, means to be deceived. Or to write of Hillary Clinton and her concussion, that’s an example of humbug. 

And so we sit, with Christmas mere days away, many of us stressed to the max for various reasons, yours truly just trying to carve out a few hours to go through magazine articles I’ve ripped out the past few months, and it’s all humbug…nonsense.

In the case of the White House and Congress, it’s humbug for a different reason. We are being humbugged, deceived, and the two branches of government are perpetrating a humbug, fraud, on the American people.

There are some sympathetic folks in Washington, however, like House Speaker John Boehner. I like the guy. I could see having a great time with him on the golf course and sharing a few beers at the nineteenth hole (personally, I’m much better at the nineteenth than I know Speaker Boehner is on the course…but I digress…).

Boehner was embarrassed and humiliated by his own Republican caucus on Thursday night when he couldn’t get the votes for his Plan B on dealing with the fiscal cliff.

In a statement immediately after the House decided not to even schedule a vote on the proposal, Boehner said:

“The House did not take up the tax measure today because it did not have sufficient support from our members to pass. Now it is up to the president to work with Senator (Harry) Reid on legislation to avert the fiscal cliff.”

Paul Kane, Ed O’Keefe and Lori Montgomery / Washington Post

“Plan B was simple: Republicans would vote to permanently extend tax cuts for virtually all taxpayers, while raising rates on millionaires.

“The rationale was to take the tax issue off the table by extending tax breaks to more than 99.8 percent of taxpayers, according to senior GOP aides. Removing the tax issue, one outside Boehner adviser said Thursday, would then put Boehner and House Majority Leader Eric Cantor (R-Va.) in a stronger position to argue for deeper spending cuts. ‘Trench by trench,’ the adviser said.

“Some Republicans defended Boehner even as they suggested they wouldn’t have supported the framework he was pursuing, saying that the White House could not be trusted.

“ ‘There were a lot of gimmicks in the proposals coming from the White House,’ said Rep. Tom Reed (R-N.Y.) ‘Double counting previous counts, [war savings], interest payments. There was a lot of Washington, D.C., maneuvers in there.’

“But to many Republicans, Plan B never made much sense. Why would the party of lower taxes vote to raise them?

“Exiting their regular Tuesday morning meeting, many Republicans seemed to think that Plan B would lead to higher taxes without gaining anything in return….

“On Wednesday, Boehner vowed that Plan B would pass. But the natural glad-hander was also more aggressive in pursuing his colleagues on the House floor, where he was trying to rally support for Plan B, according to his aides….

“On Thursday, it was Cantor who confidently predicted victory.

“But behind the scenes, concern was growing when it became clear that Ohio Republicans – the supposed backbone of Boehner’s strength – were considering opposing Plan B….

“Several senior GOP aides said that many of the Republicans were wary of voting for Plan B because they worried it would lead to a primary challenge.

“By Thursday afternoon, according to a GOP aide familiar with the whip count, it had become clear that the measure was doomed for failure.

“Shortly after 7 p.m., GOP leaders abruptly adjourned the chamber and called an emergency meeting in the same Capitol basement room that they had huddled in Tuesday morning. It lasted less than 10 minutes, as leaders announced they did not have the votes and that the House would not return until after Christmas.”

“The most powerful Republican in Washington has been looking at the calendar and the polls, and what he’s seen is this: 1) On Jan. 1, taxes automatically go up on everyone in America. 2) Everybody is going to blame the GOP if that happens.

“Has anyone ever been in a worse negotiating position?

“Oh, and don’t forget the heat he’s feeling from Republicans and conservatives who are calling him a weakling and a traitor, a monster, a coward, a sellout and whatever nasty adjectives they can come up with that will make the dollars flow from political donors who think ‘fight’ is a winning strategy after you’ve already lost.

“Boehner doesn’t want taxes to go up. His party opposes all the tax hikes now under discussion. He’d like all current tax levels to become permanent.

“Democrats do want taxes to go up – on high earners. Senate Democrats passed a bill hiking taxes for everyone making $250,000 or more. President Obama wants taxes to go up on Americans who make $400,000 or more.

“To secure their goal, Dems are willing to say no to Boehner, who acceded by saying he and the House GOP would pass a bill raising taxes on Americans making $1 million a year or more – the first tax hike supported by Republicans since 1990.

“And Democrats are in a delicious position, too, absolutely delicious. This was exemplified by a cruel tweet yesterday from White House communications director Dan Pfeiffer, who wept crocodile tears of false concern: ‘There is no logical explanation for Boehner’s move. Break their 20-year promise on taxes for nothing?’…

“This is the reality with which Boehner must deal. The Republican Party’s reputation isn’t good; the reputation of Congress is even worse. Meanwhile, the president’s approval rating is up to 56 percent in Gallup, his highest level since 2009.

“So Boehner put forward a proposal on which Republicans could vote so that the argument couldn’t be made that they didn’t act in the face of this looming catastrophe. But enough of his own members wouldn’t deliver the votes that he had to pull the bill.

“The speaker’s doing what little he can with what little he has. Those conservatives who attack him for a sincere effort to manage an unavoidable defeat, or who are trying to raise money by using Boehner as a foil, are making an implicit case for their own marginalization.”

“The Speaker’s miscalculation was that, just as in 2011, he thought he could get into a room with the President and negotiate a grand bargain. His intentions were good but he misjudged the all-or-nothing ideological nature of this Presidency. After the debacle of 2011, Mr. Obama could have treated the negotiations as the art of the bipartisan deal that could set the stage for immigration reform and other second-term achievements. Flush with victory, he could have at least made a gesture on entitlements.

“Instead, he has treated the talks as an extension of the election campaign, traveling around the country at rally-style events at which he berates Republicans for not accepting his terms of surrender. Grant gave Lee more at Appomattox….

“With a narrow deal on taxes, Mr. Boehner figured he could live to fight another day on spending. But it is a measure of the mistrust the President has engendered that many Republicans didn’t want to give up even this much on taxes in return for nothing at all.

“The best scenario for the economy now would be for Mr. Obama to offer to extend all the tax rates for six months and start negotiating anew in January. That would give everyone the chance to decompress and back down from the barricades.

“The alternative is a de minimis deal, perhaps negotiated in the Senate, that lessened some of the tax-increase damage and then the House might follow. But that still means a big tax increase and months of trench warfare on spending. The media can revel in the GOP’s woes, but the buck still stops with the President.”

So what now? The Senate doesn’t return until next Thursday. The House Thursday or Friday. What is clear and has been all along for months to yours truly is that any compromise, be it a stop-gap deal by Jan. 1 with a timetable for further negotiations, or going off the cliff for a period before crafting a bill that all can agree to, will miss the point. To put it more bluntly, anything our elected leaders come up with will, I repeat, suck.

Notice, this week there wasn’t even perfunctory talk of entitlement reform. And here Americans share the blame…in a big way.

A recent McClatchy-Marist Poll found overwhelming opposition to every option mentioned to cut spending. 85% oppose any reductions in Medicare. 59% oppose raising the eligibility age for Medicare. It’s both parties, with a majority of Republicans lining up with Democrats in opposing cuts to Medicare and Medicaid.

It hasn’t sunk into our thick skulls that entitlement spending, including for items such as food stamps, consumes more than 60% of the federal budget today and will continue to skyrocket. As Erskine Bowles, of Bowles-Simpson fame, put it, “Everybody is like my mama,” who wants the problem fixed without touching Medicare. Politicians say they want to trim spending, “except the thing that’s important to them,” he said. “This doesn’t get easier; it gets harder when you let every interest group say, ‘Don’t touch my thing.’” [Lesley Clark / MCT News Service]

[In President Obama’s statement on the fiscal cliff issue late Friday afternoon, he said the following:

“(The) challenge that we’ve got right now is that the American people are a lot more sensible and a lot more thoughtful and much more willing to compromise, and give, and sacrifice, and act responsibly than their elected representatives are. And that’s a problem.”

Ah, Earth to President Obama…Earth to President Obama! See above poll numbers regarding “sacrifice” and the American people. I don’t think so.]

Of course related to the above, as I bring up every week, is the debt ceiling debate. Some say it doesn’t matter if the credit of the United States is downgraded again. I say it does.

More importantly, while I can’t imagine there are more than a handful of folks that actually believe economist Paul Krugman when he says deficits don’t matter, understand that part of his defense, and that of many Democrats who refuse to face facts, is that while the interest expense component of our deficit is currently relatively low, though still outrageous, $260 billion, thanks to record low interest rates, it is slated to soar, as even the Congressional Budget Office admits, and it’s facts like these that will change market sentiment…which can happen in a flash when it finally hits everyone that any budget compromise our clowns in Washington come up with will not in any serious way address the entitlement issue because the spoiled stiff American people, their president, and Democratic representatives on Capitol Hill won’t allow it. Increase the eligibility age on Medicare from 65 to 67, over years, and not impact anyone currently at the Medicare trough in any way the rest of their life? Are you kidding me? Why I won’t allow that!!

We’re getting what we deserve. Enjoy the handouts while you can. You know that interest expense figure? Try $800 billion, not $260 billion, by just 2020, or sooner. That’s according to the CBO.

I continue to maintain that one day, soon, the brilliant traders and computers on Wall Street will hit the panic button, spurred on, perhaps, by a foreign conflict that will quickly take away any “peace dividend” the president and his wonks are counting on.

Wait…did your editor just try to inject foreign policy into the debate? 

There was President Obama, Friday afternoon, announcing he had tabbed Sen. John Kerry to replace Hillary Clinton and the president was touting his first term foreign policy successes, of which I can count on one hand, maybe three fingers, while totally ignoring how the Middle East is close to blowing sky high, how North Korea is very much a rogue nation with nuclear weapons and how Iran is soon to become one, and how our best friend in the Middle East, Israel, is encircled and faces a very real threat of a chemical weapons attack in the next year or two, let alone the threats Iran poses, both existing and soon-to-come…and this is success?

Some notes on the current state of the U.S. economy. The final revision on third quarter GDP came in at 3.1%, which is good, but it was largely because of a one-time jump in business inventories and a burst of defense spending. A poll of economists by the Wall Street Journal has fourth quarter GDP coming in at 1.3% and only 1.7% in the first quarter of 2013, barring a cliff disaster. 

If the economists are correct this would then be the pattern when measuring GDP…

Q1…0.4 percent growth
Q2…1.3
Q3…1.8
Q4…3.0

Q1…2.0
Q2…1.3
Q3…3.1
Q4…1.3 [est]

The estimate for all of 2013 is 2.3% growth. Sure, you’d get some increase in revenues at that level, as is the case today. But as I pointed out last week, and was echoed verbatim by one GOP leader the other day, in the third quarter, revenues into government coffers increased 10% but spending rose 16%.

And while a figure on personal consumption (consumer spending) rose 0.4% in November, which is solid, there are all kinds of signs the end of the Christmas shopping season is tepid at best and that we will do well to hit the original 4.1% increase in holiday sales (November and December) as established by the National Retail Federation. The fiscal cliff debate has not improved sentiment late in the year, it's safe to say, nor did this week’s wicked storm in the Midwest lead to joyous trips to the mall in that region.

The one legitimate bright spot in the economy is housing and November existing home sales came in at the best annualized pace in three years, with the median home price up 10% over year ago levels. So this is good. But even housing maven and noted economist Robert Shiller said upon seeing the news that he is still not convinced we have really hit bottom in the cycle. [I think we have…a while ago.]

Finally, this kind of got buried in the news of the week but a report put out by the United Nations, authored by Robert Vos, director of the Development Policy and Analysis Division of the UN’s Department of Economic Analysis and Social Affairs (just being accurate, folks), forecast world growth for 2013 at just 2.4%, “a significant downgrade” from the UN’s midyear forecast of 3.1%. Vos said the 2012 growth rate was 2.2%.

“I’m afraid this time around we’re not very optimistic about how things are moving. A worsening of the euro area crisis, the ‘fiscal cliff’ in the United States and a hard landing in China could cause a new global recession.” Vos added the forecast growth was “far from sufficient to overcome the continued jobs crisis that many countries are still facing.”

One final thought on the short term. We are facing a longshoremen’s strike at 15 ports from Boston to Houston as early as Dec. 30, with contract talks breaking off Tuesday. The International Longshoremen’s Association hasn’t gone on strike at East Coast ports since 1977.

As reported by the Wall Street Journal, the National Retail Federation, in a letter to the White House, stated that a strike “could prove devastating for the U.S. economy.”

Street Bytes

--Stocks shook off the fiscal cliff talk to register gains for the week with the Dow Jones adding 0.4% to 13190, while the S&P 500 gained 1.2% and Nasdaq 1.7%. Just five more trading sessions in the year.

--U.S. Treasury Yields

6-mo. 0.12% 2-yr. 0.27% 10-yr. 1.76% 30-yr. 2.93%

The yield on the 10-year hit 1.83% before backing off during Friday’s downdraft.

--China…While the government doesn’t formally announce its growth target for the year until March, if past precedent holds true, it is reported the government is targeting GDP growth of 7.5% for a second year in 2013. The World Bank, though, raised its expectations for growth in China next year to 8.4% from an earlier projection of 8.1%. That is good! 

China’s housing market appears to be firming with prices rising in 53 of 70 cities in November, the most showing an increase in 18 months. Residential real estate makes up 12% of GDP here.

But foreign direct investment fell 5.4% in November from year earlier levels, the 12th such decline in 13 months.

--Europe…Italian Prime Minister Mario Monti formally stepped down on Friday and will announce on Sunday if he is going to run or not in February’s election. At first I thought he would. Now I’ll guess he doesn’t.

Spain said it will struggle to meet its 2012 deficit target, and clearly won’t next year either, but the yield on Spain’s 10-year is 5.25% vs. a euro-era high of 7.75% on July 25, a day before European Central Bank President Mario Draghi pledged to defend the euro. It was reported that house prices fell on average 15.2% in the third quarter from the year-earlier period, compared with the 14.4% decline in the second quarter. Gee, who has told you this would be the pattern for some time to come despite all the happy talk? Separately, Spain’s two main separatist parties in Catalonia signed an agreement to form a government and to hold a vote in the region in 2014 on whether to secede.

Yannis Stournaras, Greece’s finance minister, said next year will be “a make or break” one for Greece’s future as a member of the eurozone, warning Europe’s leaders that Athens still faces ‘the possible risk’ of crashing out of the currency bloc.

In an interview with the Financial Times, Stournaras said “the break would be if the political system finds the situation too difficult to handle,” referring to the danger of social unrest over austerity that could force the two left-of-center parties to bring down the government. That should sound familiar, too.

--German Chancellor Angela Merkel on the issue of maintaining the most generous welfare system in the world while remaining globally competitive:

“If Europe today accounts for just over 7% of the world’s population, produces around 25% of global GDP and has to finance 50% of global social spending, then it’s obvious that it will have to work very hard to maintain its prosperity and way of life.

“All of us have to stop spending more than we earn every year.” [Financial Times]

--November exports in Japan fell 4.1% from a year earlier, continuing a depressing trend, though this was better than expected. Owing to the ongoing territorial dispute with China, exports to China dropped another 14.5%, but also 19.9% to the European Union, while rising 5.3% to the United States. I address the political situation here, and related monetary policy, down below.

--The World Bank raised its growth projection for next year in the Philippines to 6.2% from 5.0%.

--The unemployment rate fell in 45 of 50 states in the month of November, including a drop from 11.5% to 10.8% in Nevada, though it still has the highest rate in the country. California’s fell to 9.8%, the lowest in almost four years. North Dakota continues to have the lowest rate, 3.1%, as a result of its oil boom.

--The parent company of the 220-year-old New York Stock Exchange is being acquired for $8.2 billion by 12-year-old InterContinentalExchange, ICE, which specializes in commodities, futures and derivatives trading. It’s all about the rapidly changing global exchange business and the reduced need for human traders, while you have the creation of ever-sophisticated trading strategies.   ICE acquired the NYSE’s parent NYSE Euronext for a 38% premium above the prior share price. The New York Stock Exchange building on Wall Street will remain as is.

--The Treasury Department is selling off its 500 million shares of General Motors stock over the next 12 to 15 months, with the company buying back the first 200 million shares at $27.50 a share. If the government sold all of its shares at that level, the final loss would be about $12 billion. For GM it allows them to finally get out from under the “Government Motors” tag.

Treasury lost $1.3 billion on Chrysler (already disposed) and is still on the hook for $11.4 billion by Ally Financial, formerly GM’s financing arm.

Overall, Treasury has recouped about 90% of the $418 billion it invested in banks and auto firms.

--There is no better example of the total dysfunction in Congress than the fact that nearly two months after Hurricane Sandy, Washington has failed to act on the aid requests of both New York and New Jersey, with New Jersey Gov. Chris Christie saying on Thursday that the state’s rebuilding efforts totally hinge on a full funding of Obama’s $60.4 billion request for the two.

But of course the House and Senate are now off without taking any action and with the fiscal cliff obviously occupying center stage the final days of the year upon their return, movement on the aid request remains weeks away. After Hurricane Katrina, Congress acted in full in two weeks.

[Though to be balanced, many are criticizing Obama’s $60.4 billion request due to it being loaded with pork, including $13 billion for “mitigation” projects to prepare for future storms.]

--As part of a deal on the Libor-rate fixing scandal, a British trader, Tom Alexander William Hayes, faces extradition to the United States with UBS agreeing to pay a record $1.5 billion fine after admitting to fraud and bribery.

The U.S. Justice Department laid out the extent of the fraud, the worldwide manipulation of Libor in Britain, Switzerland, Europe and the United States.

UBS admitted its traders tried to move the key rate (used to price more than $350 trillion in contracts worldwide) up and down to make money on derivatives, while the bank understated its reported borrowing rates during the financial crisis to make the bank’s books appear stronger. And that, sports fans, is fraud.

--Related to the above, mortgage lenders Fannie Mae and Freddie Mac estimate they lost $3 billion as a result of the Libor scandal, which related to holdings of more than $1 trillion in mortgage-linked securities, interest rate swaps and other assets.

--BlackBerry maker Research in Motion reported revenues for the quarter ending in December fell by 5% to $2.7 billion from $2.9 billion in the previous quarter and by 47% from $5.2 billion in the same quarter of fiscal 2012. It also lost one million subscribers quarter over quarter.

The company’s future hinges on the next generation BlackBerry 10, which is being introduced end of January. Shares in RIM collapsed $3.20 to $10.90 on Friday amid subscription concerns.

--Hedge fund king Bill Ackman accused Herbalife of running a “pyramid scheme,” saying the company paid its sales staff far more money to recruit new distributors than to actually sell its products. 2.6 million distributors at the bottom make little or nothing, while a few at the top rake in millions.  [CEO Michael Johnson was the highest paid executive in the United States last year, according to GMI Ratings, taking in more than $89 million in cash and prizes.]

“This is the best-managed pyramid scheme in the history of the world,” Ackman said. The company vigorously denied the accusations.

Shares in Herbalife have declined from a high of $73 in April and were $42.50 on Monday before Ackman leveled his charges publicly (though it had been known for some time he was ‘short’ the stock). The stock then finished the week at $27.25, including a $6 decline on Friday.

--Software giant Oracle reported a solid jump in fiscal second-quarter profit, up 18%, while revenue grew just 3%, owing to falling hardware sales for the period ending Nov. 30.

--Pilots at United Continental Holdings Inc. finally ratified a labor agreement covering the crews brought together by the 2010 merger of the two airlines. Both United and Continental pilots had agreed to deep givebacks when the two experienced severe financial distress over the past decade, but now pay rates will jump between 12% and 38% immediately, depending on which aircraft a pilot flies. “By early 2017, when the pact is open for renewal, the pilots will earn between 32% and 63% more than they do today, with the largest gains coming on the United side….

“The hourly pay of a Boeing 777 captain with 12 years of seniority will jump to $235 an hour once the signing bonus kicks in, from $190 an hour now at United, according to J.P. Morgan. A 777 captain from Continental currently makes $193 an hour.

“For a pilot flying 84 hours a month – the maximum average contemplated in the new contract – the 777 captain would earn $237,000 a year.” [Susan Carey / Wall Street Journal]

It’s about time pilots started earning real money again. [The two groups of pilots, though, still have to hammer out a seniority list so they can begin working together and allow the parent to achieve the savings once envisioned by the merger.]

--According to Morningstar Inc., investors pulled a net $99.6 billion out of U.S. stock mutual funds the first eleven months of 2012, already exceeding the record $97 billion of outflows in 2008. Rather remarkable considering the solid performance for equities this year.

--Chinese consumers are buying one quarter of the world’s luxury goods, according to a Bain & Co. study. Right now many in China have a “show-off” mentality, note the authors of the report, but “Brands will face greater pressure in the Chinese market in the future. They need to provide more relevant products to Chinese consumers in order to stay competitive, rather than relying solely on their luxury status.” [South China Morning Post]

--President Obama is endorsing sweeping gun restrictions in the wake of the Sandy Hook Massacre, but Wal-Mart said it would continue to sell guns, including rifles like the one used at Newtown, while Dick’s Sporting Goods suspended sales of similar guns.

Wal-Mart doesn’t disclose how many guns it sells, though at an analysts’ meeting in October the company said gun revenue gained 76% in the first half of the fiscal year. [Bloomberg]

--Yikes…did you see the crash tests for the Toyota Camry? Not exactly reassuring. The Camry, along with the Toyota Prius v wagon, were the only two to fail an important new test conducted by the Insurance Institute for Highway Safety…front end collisions on the driver’s side at 40 mph into a barrier or car…like you ain’t playing golf anytime soon after one.

Which is why I have a Honda Accord! The Accord tied for top safety rating with the Suzuki Kizashi, a car that isn’t even going to be sold much longer in the U.S. The redesigned Ford Fusion also scored well.

--Third-quarter advertising expenditures rose 7.1% from a year earlier, according to Kantar Media, thanks to the London Olympics and political campaign ads. Total ad spending for the first nine months of the year increased 3.8%.

But, spending for ads in local newspapers was flat while national newspapers suffered a 17.2% decline for the third quarter.

“TheStreet.com and three former executives settled a Securities and Exchange Commission probe into accounting fraud at the company yesterday.

“The SEC said the fraud occurred from 2008 to 2009 while slapstick CNBC stock picker Jim Cramer served as chairman of the financial website.

“The SEC’s lawsuit claims the accounting fraud was aimed at making Cramer’s online darling at the time appear more successful….

--Bloomberg News did a pay study and one California Highway Patrol division chief retired last year as the best-paid officer in the 12 most-populous states, collecting $483,581 in salary, pension and other compensation. This fellow (whose name I’m purposefully leaving out), received $280,259 for accrued leave and vacation time. Boy, that’s my pet peeve.

By the way, the base pay for a California Highway Patrol officer starts at $67,764, with 5% annual increases until reaching $84,036, while in North Carolina, a trooper’s starting salary is just $34,000 a year; in case you were wondering how one state can be perennially sick, financially, while the other one isn’t. Plus one state has Carolina barbecue and the other doesn’t.

Bloomberg also found that Ohio State University President E. Gordon Gee is the highest-paid public university president in the U.S., taking home $1.9 million last year. Additionally, he logged $1.7 million in expenses in fiscal 2011, including airfare for trips in private jets, country club dues and fundraising parties at his residence. Some of the students in Columbus, with debt loads of $90,000, aren’t exactly doing cartwheels knowing their president is making so much.

--PATH service from Hoboken, N.J. to midtown New York has finally reopened seven weeks after Sandy. I may venture into Manhattan again.

Foreign Affairs

Syria: UN Human Rights investigators confirmed that members of Hizbullah are fighting for Bashar Assad. Not that this is any surprise to readers of this column, but it was important for this to formally come out of the UN. So you have Hizbullah, members of Iran’s Revolutionary Guards (which Tehran confirmed in September) and new reports that Iraqi Shias are moving in. It’s for good reason that Israel fears Assad’s chemical weapons will fall into terrorists hands. A UN report, issued Thursday, added the war is breaking down increasingly along sectarian lines, like the ruling Alawites against the majority Sunnis.

“Reports from inside two Syrian chemical weapons facilities offer chilling new evidence that President Bashar al-Assad’s regime developed special vehicles last year for moving and mixing the weapons – and an unconfirmed allegation that Lebanese allies of the regime, presumably Hizbullah, may have been trained 11 months ago in the weapons’ use….

“What should we make of these reports? First, the Syrian chemical-warfare capability may be even more dangerous than people had thought, because the weapons can be moved to other locations and mixed en route. And, second, there’s a significant risk of proliferation to other groups, such as Hizbullah, which could pose a global terrorist threat.

“This new information underlines that the war in Syria contains seeds of a wider and more dangerous conflict. The warning light is flashing: Handle urgently, and with care.”

Separately, Assad’s biggest supporter, Russia, is facing facts these days with President Vladimir Putin saying on Thursday: “We are not preoccupied that much with the fate of the Assad regime; we realize what’s going on there and that the family has been in power for 40 years. Undoubtedly, there is a call for changes.”

For his part, there are growing reports Assad may flee to his Alawite homeland on the shores of the Mediterranean to make a last stand. Supposedly, seven Alawite commando battalions and at least one ballistic missile battalion were redeployed there earlier this month, according to the Sunday Times of London. Sources said one of the commando battalions and the missile one had chemical weapons. Sunni villages on the Alawite stronghold border have been cleansed.

Egypt: The second half of the voting on the draft constitution takes place today, Saturday, with the unofficial tally showing backers with 57% in the first half of the vote which included Egypt’s two most populous cities, Cairo and Alexandria, which also happen to be the strongholds of the opposition. Ergo the margin of victory for the Muslim Brotherhood and Salafists who wrote the draft should be greater this weekend.

Turnout last Saturday was only 32%, so just how legitimate is the vote considering it is a constitutional referendum? Plus there were widespread allegations of fraud, coupled with minimal judicial oversight, most of the judges being on strike.

Iraq: After suffering a stroke, Iraqi President Jalal Talabani is in Germany for further treatment. Talabani, the senior Kurd leader, has been an important symbol of stability; about the only one in the country these days.

“In the past two days, it has been strange, though not unexpected, to see the Obama administration reacting with little public interest toward the hospitalization of Jalal Talabani. On Tuesday, the Iraqi president reportedly died in a Baghdad hospital, although his heart started beating again, leaving him in a state of clinical death. Talabani’s rise to the presidency of Iraq was a foundational moment in the post-2003 period in Iraq, and a triumph for the United States. But it’s a success that President Barack Obama is not particularly eager to highlight, he who built his victory in 2008 on disillusionment with President George W. Bush’s Iraq war. Recall how Obama admitted in his much-admired Cairo speech in 2009 that Iraqis were ‘ultimately better off without the tyranny of Saddam Hussein,’ before qualifying this by saying the war had also shown why diplomacy and international consensus were preferable.

“Talabani, along with Massoud Barzani, the other principal Kurdish leader, knew this was nonsense. Had the United States awaited an international consensus over Iraq, Saddam Hussein would still be in power and Talabani still maneuvering to stay alive. Nor would he have been elevated to the presidency, an act affirming the transcendent irony of history. No one could fail to remark, when Talabani took office, that if one thing was good about the Iraq war, it was that the victims were now in charge.

“However, this seems lost on Obama, who views Iraq as an issue best walked away from. For a president engaged in a regional struggle for influence with Iran, or compelled to engage in that struggle, indifference to Iraq is incomprehensible. Iraq is the main battleground, a truism grasped far better by the Gulf states than by the country that removed Saddam Hussein in the first place. Rather, Obama’s primary war is with Bush’s legacy, and it is a rare contest to which this most standoffish of leaders seems deeply committed.”

Iran: Charles Robb, Dennis Ross and Michael Makovsky wrote an op-ed in the Wall Street Journal on the potential economic costs of a nuclear Iran, which needless to say is a topic that will be front and center all 2013. In part:

“After the looming fiscal cliff, the next major challenge facing the United States will be preventing Iran from obtaining a nuclear weapons capability. Living with a nuclear Iran is strategically untenable. Like the fiscal cliff, this is a matter of both economic and national security. Preventing Iran from acquiring nuclear weapons carries various risks, but inaction has its costs, too – especially to the price of oil and, in turn, to the U.S. economy….

“Oil prices could rise by 10% to 25% in the first year (or $11 to $27 more per barrel). As instability and tensions remain high, so will prices, even rising as much as 30% to 50% ($30 to $55 per barrel) within three years.

“Consequently, gasoline prices could jump 10% to 20% in the first year. Within three years, the cost of gas could rise more than 30% (or more than $1.40 per gallon). Such sustained price increases would have a pronounced negative impact on the U.S. economy.

“U.S. gross domestic product could fall by about 0.6% in the first year – costing the economy some $90 billion – and by up to 2.5% (or $360 billion) by the third year. This is enough, at current growth rates, to send the country into recession.

“The unemployment rate could also rise by 0.3 percentage points in the first year and by nearly 1% two years later, resulting in some 1.5 million more Americans becoming jobless.

“This economic pain could result even if the oil supply is never disrupted. Should Iranian-Saudi, Iranian-Israeli or other tension cause an actual disruption, the resulting economic dislocations could be dramatically worse. They could involve a doubling in the price of oil, gasoline soaring by as much as $2.75 more per gallon, U.S. GDP plummeting by 8% in one year, and five million Americans losing their jobs….

“As American and other policy makers contemplate what it will take to thwart Iran’s nuclear ambitions, they must not dwell exclusively on the potential short-term impacts of economic pressure or military action. Over the medium and long term, the economic costs of a nuclear Iran may be no less real and far more enduring.”

Pakistan: The UN is scaling back an anti-polio campaign after a total of six health workers were killed within days, gunned down by the Taliban who have issued threats against the UN’s anti-polio program. Pakistan, along with Afghanistan and Nigeria, are the only countries where polio is still endemic.

Japan: Shinzo Abe captured a huge majority of the seats in Japan’s lower parliament as his Liberal Democratic Party stormed to victory in Sunday’s election. Together with a coalition partner, Abe will have a supermajority, 2/3s, and be able to overcome any objections in the upper house of the Diet. Abe also faces an immediate issue with China, the territorial dispute in the East China Sea.

The Bank of Japan (BOJ) has boosted its key stimulus measure in an attempt to revive growth. Recall, the current quarter will most likely be the third straight of contraction. The central bank also left interest rates unchanged between zero and 0.1%.

Some were expecting the central bank to announce a much bigger expansion of the program as well as raising its inflation target, currently 1%, which is what incoming prime minister Abe wants.

“Masaaki Shirakawa, BoJ governor, has repeatedly warned that aggressive bond buying by a central bank without fiscal discipline would cause a loss of market trust and spikes in long-term interest rates. Japan has a gross debt to GDP ratio of more than 200%, the highest in the developed world.

“Before the election Mr. Shirakawa hit back at political pressure on the bank, saying that calls for more aggressive easing could hurt financial conditions in the world’s third-largest economy.”

However, it appears the BoJ will allow its inflation target to slide up to help Abe early next year at its annual meeting late January, with Shirakawa saying the topic was under review.

South Korea: The people here elected the first female president in their history, Park Geun-hye, daughter of former military strongman Park Chung-hee, by a 52-48 margin. Madame Park said in her first speech that South Korea faced a “grave” security challenge from North Korea, but “I will keep the promise I made to you to open a new era on the Korean peninsula, based on strong security and trust-based diplomacy.”

Alluding to Japan, Park said, “I will try to work for greater reconciliation, cooperation and peace in Northeast Asia based on a correct perception of history,” a none too subtle shot at Tokyo, which Seoul maintains has never come to terms with its harsh past rule of Korea, though Japan would say it has paid compensation.

Russia: President Putin finally held his annual hours long press conference on Thursday, specifically 4 ½ hours, with reporters being locked in and unable to take a break. So it would appear Putin is back and healthy after his two-month disappearance from public view.

Putin struck a hawkish tone, saying he regretted new U.S. legislation that will punish Russians accused of violating human rights by refusing them visas and freezing their assets in the United States; what is known as the Magnitsky rule…named for the anti-corruption lawyer, Sergei Magnitsky, who died in police custody in 2009. Putin said he will sign into law a lower house of parliament bill that would stop Americans from adopting Russian children in retaliation.

Putin also strongly hinted former Yukos head Mikhail Khodorkovsky, and his former business partner, Platon Lebedev, could be released from prison in 2014, as currently scheduled.

“May God bless him,” said Putin during his press conference, adding he held no grudge against one of his biggest critics.

Venezuela: According to the country’s vice president, Nicolas Maduro, the former bus driver who is President Hugo Chavez’s hand-picked successor, Chavez remains on the path to recovery from his fourth cancer surgery. “He is well, and he is conscious.”

I doubt this. He may be conscious, but I can’t imagine he is well. Regardless, the key is will Chavez be able to make his inauguration, Jan. 10, or can it legally be postponed? The opposition is ready to pounce.

Random Musings

--Four officials at the State Department were disciplined (fired/resigned) as a result of a brutal internal investigation into the attack on the U.S. consulate in Benghazi, Libya that killed four Americans including Ambassador Chris Stevens.

The panel concluded the State Department suffered from “systemic failures” in its response to the threat in general in Benghazi and was woefully short on security personnel, “profoundly weak” as the report put it. The report also confirms that the administration’s initial claims the assault sprang from a protest against a U.S. made anti-Islamic video were in error. It also blasts Libyan security forces, who Obama praised a day after the attack.

“Secretary of State Hillary Clinton, UN Ambassador Susan Rice and President Obama, on whose desk the buck putatively stops – are unscathed by the fog of lies that has shrouded Benghazi ever since the outrage….

“In fact, Clinton – preserving her political viability for a possible 2016 White House run – is so loath to take the fall for the disaster on her watch that she’s suffered a miraculous concussion and ‘just can’t’ testify before the congressional panels looking into the fiasco.

“Sure, she’s ‘accepted responsibility’ in a generic way, the same way Attorney General Janet Reno ‘accepted responsibility’ for the fatally botched 1993 assault on the Branch Davidians in Waco.

“Nowadays, ‘accepting responsibility’ means never having to say you’re sorry, much less resign – or even show up in front of Congress.

“So this is how Benghazi ends – with a few bureaucrats shuffled into retirement or re-assigned elsewhere in the vast Foggy Bottom sinkhole, there to collect their pensions and paychecks at taxpayer expense.

“This bloodless report adds next to nothing to what we already knew – or suspected – about Benghazi. Nor does it honor the memories of those who died there defending a patch in the desert that was nevertheless sovereign American soil.

“Mistakes were made. We’ll try to do better next time.

“Ambassador Stevens and the others – Sean Smith, Glen Doherty, and Tyrone Woods – deserve better than this.”

“Clinton’s story beggars belief: While traveling in Europe, she contracted a stomach virus…which made her dehydrated…which made her faint at home…which caused her to fall and hit her head…which gave her a nasty concussion.

“We’ve chided the Obama administration in the past for its lack of transparency – but this looks like one of the most transparent dodges in the history of diplomacy.”

“Secretary of State Hillary Clinton was scheduled to testify in Thursday’s open hearings. She came down with a stomach virus last week, cancelling a foreign trip.

“On Saturday, as the media were consumed by the Newtown massacre, a Clinton spokesman released a statement saying that earlier in the week Mrs. Clinton had fainted and sustained a concussion. On the advice of her doctors, she won’t be able to appear on the Hill. The statement didn’t explain why her injury wasn’t made public earlier.

“Health comes first, and we wish Mrs. Clinton a speedy recovery. In a letter for House Foreign Affairs Chairman Ileana Ros-Lehtinen, Mrs. Clinton sent her regrets and said she looks forward ‘to engaging your committee in January so that we can address the tragic events that occurred in Libya and the measures that the State Department is taking in response.’ Mrs. Clinton copied Senate Foreign Relations Chairman John Kerry.

“By January, however, Mrs. Clinton’s likely successor (Senator Kerry) will be nominated and probably on his way to confirmation. Hill sources say it’ll be hard to schedule another hearing and call her back. Congress should insist on it.”

--The potential nomination of former Sen. Chuck Hagel as secretary of defense is drawing fire from some Senate Republicans, as well as complaints from Democrats on President Obama’s failure to ask for input on major cabinet posts. As the Wall Street Journal notes, this “has put Mr. Hagel in an uncomfortable spot: He is being attacked by critics but has gotten little public support from the White House, since he isn’t yet a nominee.”

Hagel is being pilloried in some quarters for his stances on Iran and Israel. Republican Sen. Marco Rubio (Fla.) has also said he may put a hold on Hagel’s nomination because of his position on relations with Cuba. Hagel wants to open things up, describing the decades-old embargo as outdated and “senseless.” It is!

I noted the other week that I always liked Hagel. If he gets the nomination (which certainly looks iffy now), I’ll comment further on the Iran/Israel issues. Except for now I just have to say that the time Hagel was calling for dialogue with Iran was the same time I was writing we should have a back channel to Hashemi Rafsanjani. I think we were both right.

--South Carolina Republican Gov. Nikki Haley made an enlightened choice in announcing on Monday that she will appoint Rep. Tim Scott to the Senate to fill the seat being vacated by Sen. Jim DeMint.   Sen.-designate Scott, 47, thus becomes the only African-American currently serving in the Senate and the first black Republican to serve in the upper chamber since the 1970s. He will also be the first black senator from the South since Reconstruction.

As the Washington Post’s Jennifer Rubin comments, “Scott is a rarity: a Republican liked by tea partyers and inside-the-Beltway Republicans. And at a time the GOP is suffering from a diversity problem, it is helpful to have Scott join the Senate on the Republican side.”

Senate Minority Leader Mitch McConnell and DeMint often clashed, but McConnell was ecstatic about the selection of Scott. Sen. Marco Rubio was effusive in his praise as well.

Frankly, in a week when Republicans otherwise looked awful, Gov. Haley deserves a ton of credit for thinking outside the box and naming Scott. 

--President Obama launched a new drive to combat gun violence in the wake of the Sandy Hook Massacre, appointing Vice President Joe Biden to come up with a comprehensive plan that can be enacted by end of January.

Of course the president for four years did nothing. Asked at a press conference why he hadn’t, the president responded, with disdain, “I don’t think I’ve been on vacation,” citing the worst economy since the Great Depression, two wars, yada yada yada…If you saw Obama’s performance, specifically his response to ABC’s Jake Tapper’s question, you’ll understand why I thought the president was an ass.

--In a Pew Research Center survey released Thursday, 49% of Americans now believe that controlling gun ownership is a bigger priority than protecting the right to own firearms, while 42% said the opposite. A CBS News poll released on Monday found a 10-point jump since last spring among Americans who believe stricter gun control is needed.

In the Pew study, 65% said that allowing assault weapons ownership makes the country more dangerous, while just 21% said it made the country safer.

On the other hand, 67% of those surveyed say handguns should remain legal. 35% of those questioned told Pew that they kept either a pistol or a rifle in their homes.

Independents, by the way, are divided…47% support gun rights, 42% favor gun control.

And, not surprisingly, by a 51-41 margin, men want to protect the right to own guns, while women by a 57-33 margin want to control ownership.

“We live in an entertainment culture soaked in graphic, often sadistic, violence. Older folks find themselves stunned by what a desensitized youth finds routine, often amusing. It’s not just movies. Young men sit for hours pulling video-game triggers, mowing down human beings en masse without pain or consequence. And we profess shock when a small cadre of unstable, deeply deranged, dangerously isolated young men go out and enact the overlearned narrative.

“If we’re serious about curtailing future Columbines and Newtowns, everything – guns, commitment, culture – must be on the table. It’s not hard for President Obama to call out the NRA. But will he call out the ACLU? And will he call out his Hollywood friends?

“The irony is that over the last 30 years, the U.S. homicide rate has declined by 50 percent. Gun murders as well. We’re living not through an epidemic of gun violence but through a historic decline.

“Except for these unfathomable mass murders. But these are infinitely more difficult to prevent. While law deters the rational, it has far less effect on the psychotic. The best we can do is to try to detain them, disarm them and discourage ‘entertainment’ that can intensify already murderous impulses.

“But there’s a cost. Gun control impinges upon the Second Amendment; involuntary commitment impinges upon the liberty clause of the Fifth Amendment; curbing ‘entertainment’ violence impinges upon First Amendment free speech.

“That’s a lot of impingement, a lot of amendments. But there’s no free lunch. Increasing public safety almost always means restricting liberties.

“We made that trade after 9/11. We make it every time the Transportation Security Administration invades your body at an airport. How much are we prepared to trade away after Newtown?”

--The NRA’s executive vice president, Wayne LaPierre, in his group’s first comments following Newtown, said “The only thing that stops a bad guy with a gun is a good guy with a gun” in calling for having an armed police officer in every school.

--2012 is going to be New York City’s warmest year on record, besting 1991’s record average temperature of 57.2 degrees. Since records began being kept at Central Park in 1869, eight of the 10 warmest years have occurred since 1990.

--In a new AP-GfK poll, 4 in 5 Americans said climate change will be a serious problem for the United States if nothing is done. That’s up from 73% when the same question was asked in 2009. 78% believe temperatures are rising.

--According to a Monitoring the Future survey of 45,449 students, nearly 80% of high school seniors don’t consider occasional marijuana use harmful – the highest rate since 1983 – and one in 15 smoke nearly every day.

Most eighth-graders don’t see the harm of occasional use as well, the survey found.

Nora Volkow of the National Institutes of Health said, “I think that’s the bad news in the survey – the significant increases in the regular use of marijuana. It’s not just the occasional use. You have a very high rate of daily use. That’s really a huge number.”

--World War II war hero and Medal of Honor winner, Hawaii Senator Daniel Inouye, died. He was 88. 

Inouye was also president pro tempore of the Senate, a slot that traditionally goes to the senator with the most seniority.

The problem is the President Pro Temp is 3rd in line to the presidency behind the vice president and Speaker of the House. While I realize it is a time to honor Inouye’s enormous legacy, it is absurd that in this time of terrorism and no one being safe, anywhere, that an 88-year-old, not in good health, could have become president. [Sen. Patrick Leahy, just 72, now fills the spot because of his 38 years in the senate.]

--Robert Bork, the U.S. judge and legal scholar whose nomination to the U.S. Supreme Court turned into one of the most contentious battles in Senate history, one that he would lose, 58-42 and result in the term “borking” entering the political lexicon, died at the age of 85.

Even the Washington Post, which was against Bork, nonetheless editorialized on the confirmation hearings that the campaign against Bork “did not resemble an argument so much as a lynching.” 

Eventually, Anthony Kennedy got the nod and all he’s done is become the pivotal swing vote for two decades.

Back in 1973, Robert Bork was solicitor general under President Richard Nixon and by the end of that year, Bork played a role in the Saturday Night Massacre of Oct. 20 that led to the dismissal of the independent Watergate prosecutor, Archibald Cox, and the resignation of Attorney General Elliot Richardson and his deputy, William Ruckelshaus, leaving Bork as acting attorney general, so it was Bork who carried out the firing of Cox while ensuring that a new special prosecutor, Leon Jaworski, was appointed in his stead.

--150 years ago, December 1862, was the Battle of Fredericksburg. The New York Times has been running some good pieces on the clash, if you’re interested in such things [go to the opinion section]. I toured the battlefield way back in 1990 and need to return.

It was at Fredericksburg where a Confederate commander watched as the battle played out.

“It is well that war is so terrible,” said Robert E. Lee. “We should grow too fond of it.”

The Union got its butt kicked by Lee’s army, taking some 12,653 casualties, more than twice Lee’s ranks, this after General McClellan failed to roll up the Confederates following their defeat at Antietam months earlier. [I disagree with those calling Antietam a draw.] McClellan was then removed and replaced by Gen. Ambrose Burnside just in time for the Fredericksburg debacle.

--Finally, Timothy Cardinal Dolan / New York Daily News:

“It’s perhaps the most frequent comment one hears from people when asked about the Newtown massacre: ‘I just don’t what to say…’

“That’s actually a rather profound observation. As Pope Benedict remarked during a 2006 visit to Auschwitz, ‘In a place like this, words fail. In the end, there can only be a dread silence – a silence which is itself a heartfelt cry to God: ‘Why, Lord, did you remain silent? How could you tolerate all this?...Yet our silence becomes in turn a plea for forgiveness and reconciliation, a plea to the living God never to let this happen again.’

“In fact, we’ve said a lot about the tragedy. It’s just that we haven’t used many words. St. Francis of Assisi used to remind his followers, ‘Preach always. And, only if you have to, use words.’

“Yes, that blessed, stricken town has said a lot, as have all of us, even though, ‘We don’t know what to say.’ Tears, embraces, silence and whispered, clumsy prayers really all speak louder than words….

“We Catholics traditionally recall a rather eerie, somber, chilling episode from the Bible every year in an otherwise upbeat, radiant, joyful Christmas holiday season. It’s found in the Gospel of St. Matthew, where the sinful, jealous, paranoid King Herod ordered the death of all the baby boys in the quiet neighborhood of Bethlehem, plotting to murder this rumored ‘newborn king’ who could, he feared, be a rival to his power. We refer to those little babies as ‘the Holy Innocents,’ and reverently recall them every Dec. 28, their feast day. St. Matthew the Evangelist, in relating this chilling episode, himself recalls the words of the prophet Jeremiah, ‘A voice was heard…sobbing and loudly lamenting: It was Rachel weeping for her children, refusing to be comforted, because they were no more.’

“The hundreds of ‘Rachels’ in Newtown weep for their ‘Holy Innocents,’ and we stand with Mary at the foot of their cross. ‘We don’t know what to say,’ so we simply pray with and for them, we emotionally embrace them, and admit that perhaps what we all need most right now is that ‘Silent Night,’ when the piercing cold became warm with love and the darkness radiant with angelic light, and a baby was born to bring peace and eternal life.”

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

Gold closed at $1660…lowest weekly close since mid-August
Oil, $88.93

Returns for the week 12/17-12/21

Dow Jones +0.4% [13190]
S&P 500 +1.2% [1430]
S&P MidCap +2.1%
Russell 2000 +2.9%
Nasdaq +1.7% [3021]

Returns for the period 1/1/12-12/21/12

Dow Jones +8.0%
S&P 500 +13.7%
S&P MidCap +16.3%
Russell 2000 +14.4%
Nasdaq +16.0%

Bulls 46.8
Bears 24.5 [Source: Investors Intelligence]

“Nightly Review” broadcasts just 12/26 and 12/27 next week.

And next time my 2013 outlook and predictions. Plus my “Person of the Year” (if I can find one and right now I can’t), as well as my “Dirtball of the Year”…a no-brainer in that category.

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