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01/12/2013

For the week 1/7-1/11

[Posted 12:00 AM ET]

Europe

European Central Bank President Mario Draghi moved the markets higher with more happy talk as the ECB voted to keep interest rates on hold again in a sign that Draghi and the boys are confident of a recovery in the euro economy later in the year. But at his regular monthly press conference he did offer:

“Fragmentation is being gradually repaired but all of this hasn’t found its way through to the real economy yet. We are now back in a normal situation from a financial viewpoint but we are not at all seeing an early and strong (economic) recovery…We observe a normalization of certain conditions….

“We spoke a lot about contagion when things go poorly. But I believe there is a positive contagion when things go well, and I think that’s also what is in play now.”

No doubt there was some decent news with regards to Spain and Italy, which had successful bond auctions this week with yields in those countries at lows not seen in some time.

But Italy, still very much in recession, has a contentious election coming up Feb. 24-25 (more below), while Spain is far from being out of the woods with a 26.6% unemployment rate as of November and a youth rate of 56.5%.

Overall, as published by Eurostats, the eurozone unemployment rate for November hit an all-time high of 11.8%. It was 7.4% in early ’08. [The rate for the full 27-nation European Union was unchanged at 10.7%.]

Aside from Spain’s awful numbers, Greece’s came in at 26.0% for September (57.6% youth rate), as they always lag on the reporting end, and then a few days later the government issued an update for October showing the overall rate had moved up to 26.8%, with many now saying it could hit 30% this year, with a youth rate over 60%. But not to worry.

Elsewhere, Portugal’s unemployment rate is 16.3% with a youth rate of 38.7%, while Italy’s youth unemployment figure is 37.1%. 

In the southern tier – Greece, Spain, Italy and Portugal – you have a lost generation, a tragedy with unthinkable long-term ramifications….like the following.

Max Fisher / Washington Post

“Even after Greek police handcuffed him without giving cause, took his passport and beat him on three separate occasions as they dragged him to the station, South Korean tourist Hyun Young Jung insisted on being sympathetic. ‘I can understand them asking me for ID and I even understand that there may have been a case to justify them hitting me in the first instance,’ he told BBC News. ‘But why did they continue beating me after I was handcuffed?’”

Last summer Greece introduced “Operation Xenios Zeus,” a crackdown on illegal immigrants. Unfortunately, thousands of innocents have been wrongfully swept up in the program. An African American tourist with a U.S. passport was beat unconscious. There is a warning on the State Department Web site specifically about African Americans and the dangers there.

Fisher:

“Xenophobia and ethnic nationalism seem to be rising in the economically devastated country, empowering extremists, including the neo-Nazi ‘Golden Dawn’ party (which has extensive support from among the police). Law enforcement enjoyed special status under Greece’s early 1970s military junta, a far-right government with an ideology not so different from Golden Dawn’s.”

But, again, Mario Draghi tells us all not to worry and that the contagion is only of a positive nature these days.

On a different topic, Patricia Kowsmann of the Wall Street Journal had a piece on fertility rates in the EU. Last “Week in Review” I addressed the topic as it related to Japan and South Korea and their plummeting birth rates and I’ve written of Europe’s situation before.

But as Ms. Kowsmann writes, the fertility rate in Greece is now 1.43 (2.1 being the replacement benchmark), with abortions there rising 50% in 2011 to 300,000. The number of births in Portugal in 2012 is estimated to have been the lowest level in more than 60 years. By 2050, people 65 and older will account for one-third of the populations of Portugal, Spain and Greece, up from 18% today. The obvious conclusion: How do you pay for all the future benefits and entitlements promised the elderly?

Washington and Wall Street

Congress is in recess until Jan. 21, which gives us all a break of sorts, with part of the time for members being taken up by party retreats, where it is assumed they drink good wine and eat the finest food, as well as strategize on how to handle the upcoming three deadlines:

The debt ceiling, which could be hit as soon as Feb. 15 (we’ve already hit it but the Treasury is going through their “extraordinary measures” to keep the United States from defaulting on its obligations); the spending sequester, March 1, which was delayed for two months as part of the tax act; and the continuing resolution (CR), March 27, that would fund the government the remaining six months of the fiscal year through September 30.

I’ve decided I don’t want to mess with the debt ceiling and if I’m the House Republicans I’d prefer they target the sequester or CR to extract needed spending cuts and/or the beginning of true entitlement reform out of President Obama. I’d go with the CR, specifically, and threaten to shut the government down, as long as the Party speaks with a united voice so the American people have an idea what the heck the strategy is!

Now I like to think I’m fair and balanced so in the interest of equal time, I present the New York Times’ Paul Krugman’s explanation on how to handle the debt ceiling, without getting into the topic of the platinum coin which isn’t worth your or my time because it is so ludicrous, even if ‘constitutionally’ viable.

Paul Krugman:

“Let’s talk for a minute about the vile absurdity of the debt-ceiling confrontation.

“Under the Constitution, fiscal decisions rest with Congress, which passes laws specifying tax rates and establishing spending programs. If the revenue brought in by those legally established tax rates falls short of the costs of those legally established programs, the Treasury Department normally borrows the difference.

“Lately, revenue has fallen far short of spending, mainly because of the depressed state of the economy. If you don’t like this, there’s a simple remedy: demand that Congress raise taxes or cut back on spending. And if you’re frustrated by Congress’ failure to act, well, democracy means that you can’t always get what you want.

“Where does the debt ceiling fit into all this? Actually, it doesn’t. Since Congress already determines revenue and spending, and hence the amount the Treasury needs to borrow, we shouldn’t need another vote empowering that borrowing. But for historical reasons any increase in federal debt must be approved by yet another vote. And now Republicans in the House are threatening to deny that approval unless President Obama makes major policy concessions.

“It’s crucial to understand three things about this situation. First, raising the debt ceiling wouldn’t grant the president any new powers; every dollar he spent would still have to be approved by Congress. Second, if the debt ceiling isn’t raised, the president will be forced to break the law, one way or another; either he borrows funds in defiance of Congress, or he fails to spend money Congress has told him to spend.

“Finally, just consider the vileness of that G.O.P. threat. If we were to hit the debt ceiling, the U.S. government would end up defaulting on many of its obligations. This would have disastrous effects on financial markets, the economy, and our standing in the world. Yet Republicans are threatening to trigger this disaster unless they get spending cuts that they weren’t able to enact through normal, Constitutional means.

“Republicans go wild at this analogy, but it’s unavoidable. This is exactly like someone walking into a crowded room, announcing that he has a bomb strapped to his chest, and threatening to set that bomb off unless his demands are met.”

I think all the time, am I being too negative? When it comes to Europe, my answer is always ‘no.’

But while I’ve felt Congress and the White House would fall flat on their face in failing to craft the needed grand bargain to begin to get us out of our fiscal mess, which will eventually send the markets reeling, I’ve also noted that if they ever do get together and come up with an authentic deficit-reduction plan that includes entitlement reform, the U.S. market would soar as capital flooded into this country from all over.

So I took note of a piece by Roger Altman in the Financial Times, Altman being a moderate Democratic voice who is respected among us elephants, and it does make me think twice. In part:

“Critics are transfixed by the bitter negotiations (over the debt crisis), (but) are missing the big picture. It may be happening in stages, but the U.S. is making real progress towards reducing deficits and stabilizing its debt. Indeed, according to the Committee for a Responsible Federal Budget, a Washington-based non-profit organization, the federal debt to gross domestic product ratio – the critical measure of financial health – will be stable at about 73 percent for the next decade. That is because annual deficits are now on track to be halved and, therefore, the debt level will not continue to grow faster than the economy. Yes, this ratio is still too high, but stabilizing it will be a crucial achievement.

“But with all the weeping over deficits and debt, how is this possible? The answer is that, in two months, a course for $3tn of deficit reduction over 10 years will be set. That is about three-quarters of the amount the much-praised bipartisan Simpson-Bowles presidential commission recommended in December 2010. And, using consensus assumptions on economic growth, it is enough to stabilize America’s debt ratio. Without it, the ratio would reach nearly 100 percent, analogous to Italy’s. Yes, after 2022, it will worsen again – reflecting the ageing population and related health costs – and more fiscal tightening will be necessary. But 10 years is enough to find those additional solutions.”

Skeptical we get to $3 trillion? Well, I won’t bore you with the details but thanks to the savings in the sequester that is coming, whether it is out of defense or something else, and coupled with what has already been legislated and the just completed tax act, we’re essentially there, though Altman, like many of us, wants to see true entitlement reform in lieu of the sequester as part of a more balanced package.

So, as he concludes:

“Either way, these rounds of deficit reduction are gradually solving the debt problem. Yes, it is a halting process because that is the way big change occurs in America. And, yes, more reductions will eventually be required. But surprising progress is being made.”

Food for thought, and Friday afternoon we learned the government budget deficit for December shrank almost completely to $260 million from $86 billion in December 2011. Revenue rose 12.3 percent in the month vs. year ago levels, while spending fell 17.2 percent. There was some shift in spending for the month, however.

[Glancing at past years, if there is truly real improvement in the deficit picture, it should be reflected in the months of February and March.]

But now a message from our president…part of his weekly radio address last weekend.

“I believe we can find more places to cut spending without shortchanging things like education, job training, research and technology…But spending cuts must be balanced with more reforms to our tax code. The wealthiest individuals and the biggest corporations shouldn’t be able to take advantage of loopholes and deductions that aren’t available to most Americans.

“And as I said earlier…one thing I will not compromise over is whether or not Congress should pay the tab for a bill they’ve already racked up. If Congress refuses to give the United States the ability to pay its bills on time, the consequences for the entire global economy could be catastrophic. The last time Congress threatened this course of action, our entire economy suffered for it. Our families and our businesses cannot afford that dangerous game again.”

House Speaker John Boehner has been insisting on a dollar-per-dollar match between spending reductions and continued borrowing, Boehner telling his caucus: “The president says he isn’t going to have a debate with us over the debt ceiling. He also says he’s not going to cut spending along with the debt limit hike.”

Senate Minority Leader Mitch McConnell said on ABC’s “This Week,” “The tax issue is finished, over, completed. That’s behind us.”  New tax revenue is “absolutely” off the table as part of upcoming negotiations.

Boehner, in an interview with the Wall Street Journal’s Stephen Moore, said he was stunned a number of weeks ago when President Obama said to him, “We don’t have a spending problem.”

The president’s insistence that Washington doesn’t have a spending problem, Mr. Boehner says, is predicated on the belief that massive federal deficits stem from what Mr. Obama called a “health-care problem.” Mr. Boehner says that after he recovered from his astonishment – “They blame all of the fiscal woes on our health-care system” – he replied: “Clearly we have a health-care problem, which is about to get worse with ObamaCare. But, Mr. President, we have a very serious spending problem.”

Obama became so irritated when Boehner kept repeating this he said, “I’m getting tired of hearing you say that.”

Boehner told Stephen Moore that there are two main points going forward.

“Republicans won’t be agreeing to any more tax increases during the next two years,” and Boehner isn’t going to engage in any more closed-door budget negotiations with the White House.

Well, late Friday afternoon, Senate Democratic leaders sent a letter to President Obama, urging him to bypass Congress if necessary on the debt ceiling issue. Senate Majority Leader Harry Reid and the other top three Democrats encouraged Obama to “take any lawful steps to ensure that America does not break its promises and trigger a global economic crisis – without Congressional approval, if necessary.”

Oh baby…so much for a break from the action. Here comes Round Two.

China: There was some important data out of here this week. December exports rose 14% from a year earlier, fastest in seven months and well above November’s 2.9% pace. Imports, unchanged in November, rose 6% in December, also better than expected. So the combination further eased fears of a hard landing.

Exports to the European Union rose 2.3% from a year earlier in December, compared with an 18% decline in November. Exports to the U.S. rose 10% after falling 2.5% the prior month.

For all of 2012, exports in China increased 7.9%, down from 20% growth in 2011 and short of the government’s 10% target.

Trade for all of 2012 with the EU fell 3.7% despite the December rebound.

Fourth quarter GDP, due out Jan. 18, is expected to come in around 8%, up from 7.4% in the third. 

And on Friday, the government announced inflation spiked to a six-month high in December after record cold temperatures pushed up vegetable prices. Consumer prices were up 2.5% over a year earlier, up from November’s 2% pace. Higher inflation could hamper the government’s efforts to support the economic recovery with easier money.

It was also announced that bank lending rose 15% in the second half of last year, with total credit growing by 20%.

Street Bytes

--For the first five trading days of the year, the S&P 500 was up 2.2%. Historically, the past 40 times since 1950 that U.S. stocks posted positive gains in the first five days, full-year gains followed 34 times, with an average gain of nearly 14%. In the 23 years stocks fell in the first five, the market has finished the year in negative territory nearly half the time. [Stock Trader’s Almanac]

And for the week, the Dow Jones rose 0.4% to 13488, while the S&P 500, also up 0.4%, finished at another 5-year high, 1472. Nasdaq rose 0.8% to 3125.

There was only a smattering of earnings reports this past week, but now they’ll come streaming out, with S&P 500 earnings estimated to have increased somewhere between 1.2% and 2.8% for the quarter, with revenues up about 2% after falling in the third quarter. And of course what transpires in Washington over the coming weeks is rather important.

--Morgan Stanley strategist Adam Parker, who was far too bearish last year, is still just calling for a yearend S&P target of 1434, below where we are today, with S&P earnings of just $99 vs. a consensus of around $110. I’ve noted before I like Parker’s thinking and once again agree with his reasoning. As he puts it, “No one is bearish about earnings right now.”

--U.S. Treasury Yields

6-mo. 0.10% 2-yr. 0.24% 10-yr. 1.86% 30-yr. 3.04%

The Federal Reserve reported it remitted a record $89 billion back to the U.S. Treasury off its $3 trillion balance sheet. The government pays interest to the Fed, and then the Fed sends it back to the government.

As long as the Fed is purchasing $85 billion a month in Treasury and mortgage-backed bonds, the balance sheet will swell to $4 trillion by end of the year, so next year’s payout could top $100 billion. But at some point this circular game will end.

--President Obama nominated his chief of staff, Jack Lew, to replace Timothy Geithner at Treasury. Among his past government experiences, Lew served two stints as head of the Office of Management and Budget.

Republican Senator Jeff Sessions, who heads up the Budget Committee, said he will oppose Lew’s nomination.

“His testimony before the Senate Budget Committee less than two years ago was so outrageous and false that it alone disqualifies,” according to a statement issued by Sessions.

--Bank stocks around the world, particularly in Europe, celebrated a decision by regulators to give financial institutions more time to comply with new liquidity standards, as proposed by the Basel Committee on Banking Supervision, that will be far more flexible than a draft version of more than two years ago.

Plus the requirements will be phased in between 2015 and 2019 rather than all at once. Banks will also now be allowed to count a wider range of assets, including some equities and mortgage-backed securities.

--Ten major banks and mortgage companies agreed to pay $8.5 billion to settle federal complaints that they wrongfully foreclosed on homeowners. The banks, including JPMorgan Chase, Bank of America and Wells Fargo, will pay the funds to homeowners to end a 2011 review mandated by an enforcement action.

Under the latest settlement (I can’t keep track of ‘em all), people may receive from $1,000 to $125,000 if they were wrongfully foreclosed on.

But the settlement also represents the latest retreat from the home mortgage market for Bank of America, which, separately, is in the process of paying Fannie Mae more than $11 billion to settle a dispute over bad mortgages.

At one point, 2009, BofA had 20 percent of the mortgage market. Today it is down to 4%, with Wells Fargo and JPM now dominating.

Bank of America’s problems can be traced to the $4 billion acquisition of Countrywide Financial, the subprime lender, in 2008. That single deal has cost BofA more than $40 billion in losses on real estate, legal costs and settlements. The Fannie Mae settlement goes back to mortgages issued by Countrywide from 2000 to 2008.

Nonetheless, BofA’s shares have soared the past year as it gradually puts all the bad news behind it.

--The Japanese government of Shinzo Abe approved a massive stimulus package of $116 billion in Abe’s attempt to jumpstart the economy. Abe also reiterated his call for the Bank of Japan to pump more money to rid the country of deflation. Aside from measures designed to spur innovation, Abe wants to encourage families to have more children.

Abe’s policies, including during his campaign, have led to a huge rally in the Tokyo Nikkei stock index which finished higher on Friday for a ninth consecutive week, the longest such climb since 1988, as the yen continued to weaken against major currencies, thus supporting exports.

--Car sales in Japan jumped 26% last year as the industry continues to recover from the 2011 earthquake and tsunami.

Sales of Japanese autos in China, however, fell 3% to 5% among Toyota, Nissan and Honda as a result of the territorial dispute between Tokyo and Beijing, though the pace of monthly sales declines are slowing from the height of the crisis in September.

For example, Toyota’s sales in China fell 15.9% in December from a year earlier, but this compares with a 50% decline in September.

--The federal government is going to do a sweeping review of Boeing’s new 787 Dreamliner after a number of incidents, but, Michael Huerta, head of the FAA, said on Friday, “We are confident about the safety of this aircraft,” though the FAA will conduct the review until “we are completely satisfied.”

--More good news on the energy front, this from the Energy Information Administration. U.S. oil production will jump by a quarter by 2014 to its highest level in 26 years. The EIA says U.S. oil imports would fall by a quarter between 2012 and 2014, because of rising production.

Imports have been falling since 2005, when they stood at 12.5 million barrels a day. By 2014, that total will have been halved to six million.

Domestic production will increase from 6.4 million barrels last year to 7.9 million next year, the highest level since 1988, according to the EIA.

--Hong Kong has once again been named the world’s freest economy in the annual survey put out by the Heritage Foundation. Rounding out the top ten are Singapore, Australia, New Zealand, Switzerland, Canada, Chile, Mauritius, Denmark and the U.S.

China is 136. Russia is 139.

--Yum Brands, whose 5,100 restaurants in China contribute more than half of its overall revenue and operating profits, warned sales there fell 6% in the fourth quarter owing to a “significant impact” on KFC the last two weeks in December due to bad publicity resulting from a government review of its chicken supply, which Yum has said is in the past but there is a lingering effect in such cases.

Chinese food authorities said KFC was supplied with chicken that contained excessive amounts of antibiotics.

--U.K. manufacturing production fell 0.3% in November from October, worse than expected. Britain could be headed to a triple-dip recession. [Friday, the National Institute of Economic and Social Research projected the economy shrank 0.3% in the fourth quarter.]

But U.K. car sales rose 5.3% for the year to the highest level since 2008.

--Germany’s November exports fell 3.4% over October, the worst pace in a year. Factory orders also declined 1.8% from the prior month.

--American Express is cutting about 5,400 jobs, half in the U.S. and half abroad after reporting so-so results for the fourth quarter.

--Morgan Stanley is cutting 1,600 employees, focusing on the institutional securities unit – which includes trading and investment banking. Like with Amex, half of Morgan Stanley’s cuts will be outside the U.S.

--Ford, on the other hand, is hiring 2,200 in the U.S. this year, in response to rising car sales. Honda and Nissan also announced recently they are adding extra staff in the U.S.

--World-wide personal-computer shipments fell 6.4% in the fourth quarter, despite the debut of Windows 8, as people continue to shift to tablets and smartphones, as reported by research firm IDC. 

Hewlett-Packard remains the biggest PC company in the world, with shipments down 0.6% from a year earlier, while second place Lenovo Group Ltd., shipped 8.2% more. Third place Dell saw its PC shipments decline a whopping 20.8% from a year ago.

For the full year, PC orders fell 3.2% to 352.4 million units, according to IDC.

--According to the Consumer Electronics Assn., global spending on gadget devices (tablets, smartphones) will hit $1.1 trillion in 2013, up 4% from 2012.

--Speaking of which, everyone loves a comeback story and Nokia is in the midst of one after the Finnish group said phone sales in the fourth quarter exceeded its own expectations. Nokia sold 86.3 million devices, with revenues of $5.2 billion, thanks to the strong reception for its Lumia smartphone. Nokia shares rose 18% in New York on the news. Nokia had been losing market share to Apple and Samsung.

--Samsung Electronics expects a record profit for the quarter ending December due to growing smartphone sales, about $8.3 billion, a 90% jump from the same period a year earlier.

--From Richard Waters / Financial Times

“A serious flaw in the Java software found on most personal computers could expose the machines to being taken over by malicious attacks over the internet, the U.S. agency responsible for policing such vulnerabilities warned on Thursday.

“The vulnerability has already been used to mount attacks, according to security researchers, prompting calls for PC and Mac users to disable Java on their computers until a fix has been developed.”

The flaw was highlighted by US-CERT, part of the Department of Homeland Security.

--California Democratic Gov. Jerry Brown said his state is poised to post an $850 million budget surplus in the year beginning July 1, which would be a helluva turnaround, though at what cost?

Californians in November granted Brown the highest statewide sales tax in the U.S., 7.5%, while boosting taxes on income over $250,000 – with those making $1 million or more getting dinged 13.3%. Add that to the new federal tax act and its 39.6 top rate, plus the ObamaCare surcharge of 3.8%, and, Holy Toledo, Batman!  That’s a lot of taxes!

--Reed Abelson / New York Times

“Health insurance companies across the country are seeking and winning double-digit increases in premiums for some customers, even though one of the biggest objectives of the Obama administration’s health care law was to stem the rapid rise in insurance costs for consumers.

“Particularly vulnerable to the high rates are small businesses and people who do not have employer-provided insurance and must buy it on their own.

“In California, Aetna is proposing rate increases of as much as 22 percent, Anthem Blue Cross 26 percent and Blue Shield of California 20 percent for some of those policy holders…These rate requests are all the more striking after a 39 percent rise sought by Anthem Blue Cross in 2010 helped give impetus to the law, known as the Affordable Care Act….

“In other states, like Florida and Ohio, insurers have been able to raise rates by at least 20 percent for some policy holders.”

I’m scared to get my own insurance renewal.

--Tiffany & Co. reported sales at its Manhattan flagship store, which generates nearly one-tenth of revenue, fell 2% during the holiday season. In Asia outside of Japan, they rose 11%.

--Atlantic City casinos suffered their sixth straight decline in 2012, with winnings down 8%. Of course Hurricane Sandy didn’t help, but business was down for the year even prior to the super storm. 

--CBS sold several 30-second spots for the Super Bowl for more than $4 million, a record. Heck, the local CBS station in New York sold spots for more than $1 million. 

--Fred Turner died. He was CEO of McDonald’s from 1974-87, having started out with the company in 1956 as one of its first employees. As one former company executive told the New York Times, “Ray Kroc founded it, but Fred Turner built it into what it is today.”

Turner was the architect of the company’s “quality, service and cleanliness” model, which exists to this day. In 1961 he created Hamburger University and under his watch, McDonald’s introduced the Happy Meal and the Chicken McNugget.

His biggest success may have been the introduction of a McDonald’s breakfast companywide. In 1975 the Egg McMuffin was placed on the national menu and the rest is history. 

Fred Turner was 80.

--Two Chinese women have died of the H1N1 swine flu virus in Beijing, the first such reported deaths in the city since 2010. Here in the States, your editor is doing all he can to avoid getting the flu that is wreaking havoc on our hospitals’ emergency rooms.

--ABC’s Jimmy Kimmel went head to head with David Letterman and Jay Leno for the first time on Tuesday in the 11:35 p.m. time slot and Kimmel beat Letterman handily while just falling short of Leno the first night.

Leno…3.27 million
Kimmel…3.1
Letterman…2.88

[Source: Nielsen / Wall Street Journal]

Foreign Affairs

Syria: President Bashar al-Assad gave his first big speech since June at the Damascus Opera House before cheering supporters.

Assad called for national mobilization in a “war to defend the nation,” describing rebels fighting him as terrorists and foreign agents with whom it was impossible to negotiate, exactly what the UN and West didn’t want to hear.

He called for a new initiative, a reconciliation conference, but one that would exclude “those who have betrayed Syria.”

At the same time, ally Russia is assembling its largest force in the Eastern Mediterranean in 40 years. Five landing ships carrying hundreds of marines and military vehicles are aimed at deterring western intervention. The force is converging on the Syrian port of Tartus, where Russia has maintained a military base since 1971.

This is the heartland of Assad’s Alawite sect and is the winter hub of the Black Sea fleet. One Israeli source told the Sunday Times of London: “If necessary, I can envisage a Russian ground force stepping in to defend the Alawite corridor stretched between the Lebanese border in the south and the Turkish border in the north.”

According to the Pentagon, Syria has “dozens of 500 lb. bombs” armed with Sarin nerve gas that are being loaded on to vehicles near Syrian air bases and can be airborne within two hours if Assad gave the order. President Obama was apprised in early December, according to the New York Times, which is why he issued the warning of “consequences” should Assad be stupid enough to use them. Some activists with sources in the government told the Daily Telegraph that Assad was prepared to use the weapons in parts of Aleppo from which civilians have fled.

On a separate topic, the Financial Times reported that nuclear experts have raised concerns Syria may have up to 50 tons of enriched uranium going back to the Assad regime’s attempt to build a nuclear reactor, with help from North Korea, before it was destroyed by Israel in 2007.

The International Atomic Energy Agency believes such a reactor required the large amount of uranium fuel and 50 tons could be turned into enough weapons grade fuel for five nuclear devices.

IF such a stockpile exists then there is no doubt Iran would be trying to get its hands on it.

The 2.5 million that have been displaced in Syria, as well as the hundreds of thousands in refugee camps in Turkey, Jordan and Lebanon, have been dealing this week with some of the worst winter weather to hit the region in decades, with up to a foot of snow in parts of Jordan, this after four days of torrential rain. You are going to start hearing stories of disease, on top of starvation for those inside Syria in particular.

Israel: The Jan. 22 election is fast-approaching and the Benjamin Netanyahu-Avigdor Lieberman coalition continues to struggle in the polls as voters flock to rising star Naftali Bennett’s far-right party. Certainly looks like Bennett gets a senior post in what should still be a Netanyahu government, though I admit to often being confused by some of the Israeli coalition lineups.

Bennett, remember, opposes the creation of a Palestinian state, which Netanyahu’s Likud still favors, and Bennett goes further in calling for an annexation of parts of the West Bank (like all of it).

The latest Jerusalem Post poll has Likud-Beiteinu winning just 34 of 120 seats in the Knesset, down from the 47 projected when the joint ticket was formed, but up two from a prior survey. Channel 10 has the Netanyahu-Lieberman combination winning 35 seats, Labor 17, and Bennett 14.

At a foreign policy debate on Tuesday, Bennett said:

“I believe that if a Palestinian state would be founded just a few hundred meters from here…it would ensure the Hobbesian lifestyle of eternal strife and miserable life for the next 200 years between us and the Palestinians.”

For his part, Netanyahu dismissed concerns expressed by the EU, the United States and the Palestinians about Israel’s settlement construction. “It’s time for the rest of the world to wake up – the great challenge that we face, the great danger to the world is not from Jews building in our ancestral capital in Jerusalem. It’s from nuclear weapons in Iran…it’s chemical weapons in Syria falling into the wrong hands. That’s the danger we have to focus on.”

[One side bar on Syria: A positive is the fact the greatly weakened government is unlikely to join Iran in a war against Israel, though if chemical weapons got in the hands of Hizbullah, actual Syrian participation wouldn’t matter. At the same time there are some who say Hizbullah has been greatly weakened by the Syrian conflict because it hasn’t been able to replenish its arms. This theory, as espoused in Lebanon’s Daily Star, I do not agree with.]

On the Palestinian front, jailed Fatah leader Marwan Barghouti is calling for Fatah and Hamas to end their dispute and last weekend Hamas allowed a huge rally in support of Fatah in Gaza.

Both Palestinian leader Mahmoud Abbas and Hamas leader Ismail Haniya, have seen a boost in their approval ratings to 54 and 56 percent, respectively, according to the Palestinian Center for Survey Research, so there is growing optimism unity between Gaza and the West Bank will be restored.

Iran: A senior lawmaker admitted oil and gas exports have dropped 45% due to sanctions over the nuclear program. Oil exports were down 40% in the last nine months. [Such exports account for 80% of Iran’s foreign revenues.]

The International Energy Agency says Iran’s oil exports plunged to 1 million barrels a day in July last year from 1.74 million in June after the EU embargo took hold. But then exports picked back up to 1.3mmbd in November and the senior official sees exports recovering to 1.5mmbd over the next year. Turkey, for one, is no longer telling the IEA where it is getting its oil from.

On the nuclear front, a new round of talks is supposedly slated to start next week with the P5+1 (Russia, China, the U.S., France, Britain and Germany) and Iran, but I’ve seen conflicting reports on this. Both Supreme Leader Ali Khamenei and President Ahmadinejad are positioning themselves for success, it would seem, success meaning just talking, but of course Khamenei has the ultimate say on the program in general. Ahmadinejad just wants a diplomatic success before he leaves office, as noted by expert Amir Taheri.

But at the end of the day, Iran’s brilliant, four corners stall game will continue.

One last item. I saw an item in the Daily Star that air pollution in Tehran kills 4,460 people a year, according to health officials there, due to the high level of carcinogens in domestically-made petrol. The problem is acute in the winter with temperature inversions and Tehran sitting in a bowl, surrounded by mountains, which then traps the putrid air that largely emanates from the lower grade fuel. 

Turkey: The government has been negotiating with the Kurds, the separatist PKK, but then on Thursday in Paris, three Kurdish women activists, including a co-founder of the PKK, were executed at the Kurdish Institute.

40,000 have died in the 25-year conflict between Turkey and the Kurds, so imagine if the Turkish government was involved in the killings as Kurds in France are saying.

The Turks claim, however, it was a dispute between Kurdish factions, citing the recent peace process.

Pakistan: In a series of horrific bombings on Thursday, at least 120 were killed, including over 80 in a billiard hall located in a Shiite neighborhood in Quetta, the capital of Baluchistan province, with a Sunni militant group claiming responsibility. Another attack claimed at least 22 at a Sunni mosque.

India/Pakistan: India accused Pakistan of killing two of its soldiers in the disputed territory of Kashmir. One of the two was supposedly beheaded and the body of the other mutilated. India blamed the Pakistani army rather than militants. Pakistan denied the charges.

Afghanistan: As President Obama and Afghan President Hamid Karzai met in Washington on Friday, some in the White House are arguing for a force post-2014’s formal end to the combat mission of just 2,500, which is absurd. As some experts such as Max Boot have pointed out, such a force level wouldn’t allow the U.S. to do anything outside of Kabul and the Taliban’s heartland is in the southern part of the country, Kandahar, which was the focus of Obama’s surge in 2009 and 2010.

The New York Times reported that Obama may be preparing to leave zero American troops after 2014, while Karzai is anticipating a residual force of as many as 15,000 troops, with the mission of advising Afghan security forces in the fight against the insurgency and to carry out raids against Al Qaeda. Karzai also wants tanks and fighter planes. Obama wants to cut defense spending so he can use the funds elsewhere.

At a news conference with Karzai, Friday, Obama said that when it comes to specifics of the withdrawal, “I can’t give you a precise number at this point.”   But he did say U.S. troops will assume a “support role” starting this spring, though will still engage in battlefield fighting as needed. Afghan forces, however, are to take the lead in the security of their country.

Iraq: Not for nothing but there is a real political crisis here as Ayad Allawi, leader of Iraqiya, the largely Sunni bloc of legislators (though Allawi himself is a secular Shiite), calls for early elections to replace Prime Minister Nouri al-Maliki, a Shiite, who is under fire for measures taken against political rivals. Allawi is the man I wanted to emerge in Iraq, only to have the 2010 election stolen from him (it was complicated).

And remember Moqtada al-Sadr? He is now blaming Maliki for recent unrest.

Japan/China: These two came closer than ever to a military conflict as both sides scrambled fighter jets in the East China Sea. The incident started when a Chinese research plane entered the disputed area between the two, Japan sent two F-15s to investigate, and then the People’s Liberation Army Air Force sent two of its own to monitor the Japanese planes. 

Japanese Prime Minister Shinzo Abe said on Friday that Japan would not negotiate with Beijing over the islands in the East China Sea claimed by both (and Taiwan) and that Beijing was “wrong” for allowing violent protests last fall, which hurt the Japanese economy (see above on Japanese auto sales to China).

At a press conference, Abe was asked how he could maintain his staunch stance on the territorial issue while at the same time protecting Japan’s business interests in China and he said:

“It was wrong for China, as a country responsible to the international community, to achieve a political goal by allowing damages to Japanese-affiliated companies and Japanese nationals that have made contributions to Chinese economy.” [South China Morning Post]

Editorial / The Economist

“Calling (Abe’s new) cabinet conservative misses its revisionist obsessions. It is far from meritocratic, with half the positions going to MPs who inherited Diet seats from their families. Worse, its members are gripped by a backward-looking, distorted view of history that paints Japan as a victim. The great majority of cabinet members favor visits to Yasukuni, the controversial Tokyo shrine that honors war criminals among the soldiers, and reject Japan’s ‘apology diplomacy’ for its wartime atrocities. Almost half of them want school textbooks (which already downplay Japanese atrocities) to be rewritten in ways that obscure the militarism still further. Mr. Abe is, alas, steeped in this stuff: his grandfather oversaw occupied Manchuria’s development in the 1930s.

“The revisionists’ real argument over perceptions of Japan’s wartime conduct is that their country was treated to victor’s justice. They reject the pacifist constitution that America imposed. Japan was cast as a junior partner, they maintain, and neutered at home and abroad. The education minister, Hakubun Shimomura, says that the years since the war have been a ‘history of Japan’s destruction;’ he and Mr. Abe talk about overturning a despised ‘post-war regime.’ This is a baffling portrayal of the economic miracle – overseen by the LDP (Abe’s party), no less – that brought peace and prosperity to the region.

“In a part of the world that specializes in victimhood, this is dangerous. If Mr. Abe rescinds Japan’s 20-year-old apology to wartime ‘comfort women,’ he will provoke South Korea. The stakes are even higher with China, whose own idea of victimhood is also nourished by its manipulation of history. China is now stoking tensions over the Senkakus….

“This puts America in an awkward spot. Mr. Abe, despite his views on the constitution, wants to cultivate closer ties. When China is aggressive, Mr. Abe needs its full support. But that should not extend to rewriting history or provoking China (let alone South Korea). This cabinet is a bad start.”

For its part, on Monday, China announced it was putting a stop to labor camps, “re-education through labor,” a practice in place for decades.

Venezuela: The Supreme Court endorsed a delay in Hugo Chavez’s inauguration for his fourth term, which was to be Thursday, due to his ongoing recovery from his fourth cancer surgery in Cuba. He has not been seen or heard from in over a month.

The constitution is clear. If he is incapacitated, elections are to be held within 30 days, with the National Assembly president, Diosdado Cabello, being in charge in the interim.

But with the declaration that the inauguration has been postponed indefinitely to allow Chavez time to recover, that means Vice President Nicolas Maduro, Chavez’ hand-picked successor, is in charge.

The opposition says Cabello should be leading the country now, with an election to follow in short order.

Britain: The Cameron government is once again planning for a referendum on staying in the European Union, as Cameron seeks to renegotiate Britain’s terms of membership. But the White House is strongly urging Cameron to set aside such plans.

Assistant secretary for European affairs, Philip Gordon, said, “We have a growing relationship with the EU as an institution, which has an increasing voice in the world, and we want to see a strong British voice in that EU.”

Germany warned Cameron not to “blackmail” the rest of Europe with threats as he tries to win opt-outs from EU treaties.

Cameron wants to stay in the union, but he seeks a looser relationship with the eurozone, of which Britain is not part, and wants Britain to be able to set more of its own terms, such as with labor laws. The referendum, though, would only take place after Cameron won the election in 2015, which would spur treaty changes.

Meanwhile, tensions in Northern Ireland have been sky high, with rioting a number of nights in Belfast over the flying of the Union flag at city hall, which is being restricted. The police have come under fire and there are sinister warnings coming from loyalist paramilitary groups.

At the same time, the “Continuity IRA” said British armed forces are a “legitimate target.” A plot was uncovered before Christmas to kill a British soldier on a visit home to Limerick. The individual was prevented from traveling for his own safety.

Italy: Silvio Berlusconi agreed to an electoral pact with the rightwing Northern League, making it even harder for an outright winner to emerge in the February elections. [Berlusconi announced, however, he would not be prime minister should they win.]

The latest poll shows the center-left Democrats and their allies with 42% to the Berlusconi alliance’s 28. Mario Monti’s new centrist coalition has 15% and comedian-activist Beppe Grillo also has 15.

Germany: In the latest polling ahead of September’s election, Chancellor Merkel’s conservatives poll at 42%, while the opposition Social Democrats are at 25% and their Green partners at 15%. With Merkel’s current coalition partner, the Free Democrats, in, err, free fall with just 2%, Merkel is going to need some other partners and could resurrect her grand coalition with the Social Democrats that was in existence from 2005-09.

Mali: Friday, French President Francois Hollande announced he was sending troops in response to a plea from the Malian government for urgent military assistance against al-Qaeda led rebels that are threatening the former French colony. It should be assumed U.S. special forces are there as well.

Hollande came into office and immediately pulled French troops from Afghanistan, so this is a big step for him, one with great political risks.

“We are faced with a blatant aggression that is threatening Mali’s very existence,” Mr. Hollande told reporters. “We will be ready to stop the terrorists’ offensive if it continues.”

France has a large Malian community and Mali has been rapidly becoming a base for al-Qaeda activities that threaten France itself. At least seven French hostages are also being held in the region by Islamist groups.

And late word as I go to post…French air strikes have already helped big time.

Random Musings

--Editorial / Washington Post…on Obama’s second-term Cabinet:

“So far Mr. Obama seems to be assembling a team of Washington insiders who are personally close to him – and thoroughly in sync with his left-of-center views and those of the Democratic Party’s base. (Yes, that applies also to Mr. Hagel, who, despite being a nominal Republican, shares the Democratic left’s skepticism toward the Pentagon budget.) That may seem the obvious thing for a president to do. But we’re struck by the contrast with Mr. Obama’s first-term Cabinet, which included his former rival for the Democratic nomination (Hillary Rodham Clinton), a seasoned moderate Republican of independent stature (Robert M. Gates) and an apolitical financial technocrat (Timothy Geithner). The president was much praised then, and rightly, for assembling a team that could challenge and question him as he formulated policy.

“Mr. Obama seems to have decided that it’s time to close ranks and present a united front to the Republican opposition. This, too, may be understandable, in response to a GOP that in his first term showed little inclination for compromise. In girding openly for battle, however, the president may be closing off a range of perspectives and experiences, including some from outside his personal and political comfort zones – not to mention from outside the Beltway.”

--Charles Krauthammer / Washington Post

“The puzzle of the Chuck Hagel nomination for defense secretary is that you normally choose someone of the other party for your Cabinet to indicate a move to the center, but, as The Post’s editorial board pointed out, Hagel’s foreign policy views are to the left of Barack Obama’s, let alone the GOP’s. Indeed, they are at the fringe of the entire Senate.

“So what’s going on? Message-sending. Obama won reelection. He no longer has to trim, to appear more moderate than his true instincts. He has the ‘flexibility’ to be authentically Obama….

“Hagel is a man of no independent stature. He’s no George Marshall or Henry Kissinger. A fringe senator who left no trace behind, Hagel matters only because of what his nomination says about Obama.

“However the Senate votes on confirmation, the signal has already been sent. Before Election Day, Obama could only whisper it to his friend Dmitry. Now, with Hagel, he’s told the world.”

--South Carolina Republican Senator Lindsey Graham on the selection of Chuck Hagel:

“This is an in-your-face nomination by the president for all those who are supportive of Israel.”

In another statement:

“During these dangerous times, there is no more important cabinet position than secretary of defense. I fear (Mr. Hagel’s) views, particularly toward Iran, send the worst possible signal at the worst time to the Iranians, our Israeli allies, and the world.”

--Richard McGregor / Financial Times

“With the nomination of Chuck Hagel to run the Pentagon, Barack Obama has done more than assemble his second-term national security team – he has also sealed the abandonment of much of George W. Bush’s foreign policy….

“ ‘This does not look like a let’s-invade-Iran team,’ said Bruce Riedel, a longtime CIA officer who has also advised presidents on counterterrorism. ‘It looks to me like a find-an-alternative-to-military action team, preferably a diplomatic solution.’”

--David Brooks / New York Times

“Chuck Hagel has been nominated to supervise the beginning of this generation-long process of defense cutbacks. If a Democratic president is going to slash defense, he probably wants a Republican at the Pentagon to give him political cover, and he probably wants a decorated war hero to boot.

“All the charges about Hagel’s views on Israel or Iran are secondary. The real question is, how will he begin this long cutting process? How will he balance modernizing the military and paying current personnel? How will he recalibrate American defense strategy with, say, 455,000 fewer service members?

“How, in short, will Hagel supervise the beginning of America’s military decline? If members of Congress don’t want America to decline militarily, well, they have no one to blame but the voters and themselves.”

I’m on record as liking Hagel, but I agree with those who don’t understand why Obama is so willing to expend political capital with the pick just right now.

I also eagerly await his confirmation hearing to see if my feelings towards the man change.

--The White House is preparing a broad gun violence agenda that would include a ban on high-capacity magazines and universal background checks, as well as the funding of more police officers in public schools. On this last issue, federal dollars would be made available to those communities who want to hire police officers and install surveillance equipment, though not as sweeping as the National Rifle Association’s proposal for armed guards in every school.

For its part, the NRA said it would have nothing more to do with Biden’s task force after a meeting with the White House.

“It is unfortunate that this administration continues to insist on pushing failed solutions to our nation’s most pressing problems,” the NRA said in a statement. “We will not allow law-abiding gun owners to be blamed for the acts of criminals and madmen.”

Biden’s focus appears to be on strengthening background checks, including closing a loophole that exempts some private firearms sales, such as at gun shows.

--New Jersey Gov. Chris Christie, in a matchup with Hillary Clinton for 2016, is the most “threatening” opponent, according to a Public Policy Polling survey, losing 44-42. Jeb Bush, Marco Rubio and Paul Ryan all trail Clinton by double-digits.

But Rubio leads among potential GOP primary voters, with 21 percent to Ryan’s 16. Bush and Christie are at 14.

Clinton receives 57 percent of Democratic primary voters, with Joe Biden at 16. Andrew Cuomo received just 4 percent.

Oh, we’ve got a long, long way to go. Personally, I’m just hoping the New York Jets have a real quarterback by 2016.

--Back to Christie, in the latest Fairleigh Dickinson University PublicMind poll, 73% of New Jersey voters approve of the governor, including 62% of Democrats and 69% of non-whites. Unbelievable.

--Meanwhile, New Jersey Democratic Senator Frank Lautenberg, who turns 89 this month, apparently has decided not to run in 2014 when his term expires. He has been in ill health recently. Democratic Newark Mayor Cory Booker filed papers for the race this week. Good for him. I have no problem having him represent us.

--In his Washington Post column, George Will points out that Republicans will be defending 13 Senate seats in 2014 and Democrats 20 seats, as the former seek the six needed to gain control of the body. “Six Democratic incumbents represent states in which Barack Obama received less than 42 percent of the 2012 vote – Montana’s Max Baucus (41.7), Alaska’s Mark Begich (40.8), Louisiana’s Mary Landrieu (40.6), South Dakota’s Tim Johnson (39.9), Arkansas’s Mark Pryor (36.9) and West Virginia’s Jay Rockefeller (35.5).” 

Friday, Rockefeller announced he would not seek a sixth term in 2014. Rep. Shelly Moore Capito, the odds-on Republican favorite for the race, is now the frontrunner.

--Sarah Lyall / New York Times…on the extreme weather in the world right now:

“China is enduring its coldest winter in nearly 30 years. Brazil is in the grip of a dreadful heat spell. Eastern Russia is so freezing – minus 50 degrees Fahrenheit, and counting – that the traffic lights recently stopped working in the city of Yakutsk.

“Bush fires are raging across Australia, fueled by a record-shattering heat wave. Pakistan was inundated by unexpected flooding in September. A vicious storm bringing rain, snow and floods just struck the Middle East. And in the United States, scientists confirmed this week what people could have figured out simply by going outside: last year was the hottest since records began.”

[Australia has reported temperatures in excess of 122 degrees F., with the Bureau of Meteorology describing the latest heat wave there as totally “unprecedented.”]

Omar Baddour, chief of the data management applications division at the World Meteorological Association, in Geneva, said, of course, you have extreme events every year, but such events are increasing in intensity as well as frequency. Call it climate change, or what I prefer, the results of global pollution, but it’s a fact.

--Another Sign of the Apocalypse:

“A row over an unpaid restaurant bill in a western Indian city has escalated into a riot between Hindus and Muslims that’s left four people dead and 175 injured.” [Sydney Morning Herald]

--Finally, as reported by the BBC’s Jason Palmer:

“Astronomers say that one in six stars hosts an Earth-sized planet in a close orbit – suggesting a total of 17 billion such planets in our galaxy.”

Goodness gracious. There has to be one better than what we’re turning this place into.

---

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

God bless America.
---

Gold closed at $1662
Oil, $93.72

Returns for the week 1/7-1/11

Dow Jones +0.4% [13488]
S&P 500 +0.4% [1472]
S&P MidCap +0.2%
Russell 2000 +0.2%
Nasdaq  +0.8% [3125]

Returns for the period 1/1/13-1/11/13

Dow Jones +2.9%
S&P 500 +3.2%
S&P MidCap +3.7%
Russell 2000 +3.7%
Nasdaq +3.5%

Bulls 51.1
Bears 23.4 [Source: Investors Intelligence…this is a contrarian indicator, remember. Bull/Bear spread nearing 30-point danger zone.]

Nightly Review video schedule: Monday thru Thursday… accessible through home page.

Have a great week. I appreciate your support.

Brian Trumbore



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Week in Review

01/12/2013

For the week 1/7-1/11

[Posted 12:00 AM ET]

Europe

European Central Bank President Mario Draghi moved the markets higher with more happy talk as the ECB voted to keep interest rates on hold again in a sign that Draghi and the boys are confident of a recovery in the euro economy later in the year. But at his regular monthly press conference he did offer:

“Fragmentation is being gradually repaired but all of this hasn’t found its way through to the real economy yet. We are now back in a normal situation from a financial viewpoint but we are not at all seeing an early and strong (economic) recovery…We observe a normalization of certain conditions….

“We spoke a lot about contagion when things go poorly. But I believe there is a positive contagion when things go well, and I think that’s also what is in play now.”

No doubt there was some decent news with regards to Spain and Italy, which had successful bond auctions this week with yields in those countries at lows not seen in some time.

But Italy, still very much in recession, has a contentious election coming up Feb. 24-25 (more below), while Spain is far from being out of the woods with a 26.6% unemployment rate as of November and a youth rate of 56.5%.

Overall, as published by Eurostats, the eurozone unemployment rate for November hit an all-time high of 11.8%. It was 7.4% in early ’08. [The rate for the full 27-nation European Union was unchanged at 10.7%.]

Aside from Spain’s awful numbers, Greece’s came in at 26.0% for September (57.6% youth rate), as they always lag on the reporting end, and then a few days later the government issued an update for October showing the overall rate had moved up to 26.8%, with many now saying it could hit 30% this year, with a youth rate over 60%. But not to worry.

Elsewhere, Portugal’s unemployment rate is 16.3% with a youth rate of 38.7%, while Italy’s youth unemployment figure is 37.1%. 

In the southern tier – Greece, Spain, Italy and Portugal – you have a lost generation, a tragedy with unthinkable long-term ramifications….like the following.

Max Fisher / Washington Post

“Even after Greek police handcuffed him without giving cause, took his passport and beat him on three separate occasions as they dragged him to the station, South Korean tourist Hyun Young Jung insisted on being sympathetic. ‘I can understand them asking me for ID and I even understand that there may have been a case to justify them hitting me in the first instance,’ he told BBC News. ‘But why did they continue beating me after I was handcuffed?’”

Last summer Greece introduced “Operation Xenios Zeus,” a crackdown on illegal immigrants. Unfortunately, thousands of innocents have been wrongfully swept up in the program. An African American tourist with a U.S. passport was beat unconscious. There is a warning on the State Department Web site specifically about African Americans and the dangers there.

Fisher:

“Xenophobia and ethnic nationalism seem to be rising in the economically devastated country, empowering extremists, including the neo-Nazi ‘Golden Dawn’ party (which has extensive support from among the police). Law enforcement enjoyed special status under Greece’s early 1970s military junta, a far-right government with an ideology not so different from Golden Dawn’s.”

But, again, Mario Draghi tells us all not to worry and that the contagion is only of a positive nature these days.

On a different topic, Patricia Kowsmann of the Wall Street Journal had a piece on fertility rates in the EU. Last “Week in Review” I addressed the topic as it related to Japan and South Korea and their plummeting birth rates and I’ve written of Europe’s situation before.

But as Ms. Kowsmann writes, the fertility rate in Greece is now 1.43 (2.1 being the replacement benchmark), with abortions there rising 50% in 2011 to 300,000. The number of births in Portugal in 2012 is estimated to have been the lowest level in more than 60 years. By 2050, people 65 and older will account for one-third of the populations of Portugal, Spain and Greece, up from 18% today. The obvious conclusion: How do you pay for all the future benefits and entitlements promised the elderly?

Washington and Wall Street

Congress is in recess until Jan. 21, which gives us all a break of sorts, with part of the time for members being taken up by party retreats, where it is assumed they drink good wine and eat the finest food, as well as strategize on how to handle the upcoming three deadlines:

The debt ceiling, which could be hit as soon as Feb. 15 (we’ve already hit it but the Treasury is going through their “extraordinary measures” to keep the United States from defaulting on its obligations); the spending sequester, March 1, which was delayed for two months as part of the tax act; and the continuing resolution (CR), March 27, that would fund the government the remaining six months of the fiscal year through September 30.

I’ve decided I don’t want to mess with the debt ceiling and if I’m the House Republicans I’d prefer they target the sequester or CR to extract needed spending cuts and/or the beginning of true entitlement reform out of President Obama. I’d go with the CR, specifically, and threaten to shut the government down, as long as the Party speaks with a united voice so the American people have an idea what the heck the strategy is!

Now I like to think I’m fair and balanced so in the interest of equal time, I present the New York Times’ Paul Krugman’s explanation on how to handle the debt ceiling, without getting into the topic of the platinum coin which isn’t worth your or my time because it is so ludicrous, even if ‘constitutionally’ viable.

Paul Krugman:

“Let’s talk for a minute about the vile absurdity of the debt-ceiling confrontation.

“Under the Constitution, fiscal decisions rest with Congress, which passes laws specifying tax rates and establishing spending programs. If the revenue brought in by those legally established tax rates falls short of the costs of those legally established programs, the Treasury Department normally borrows the difference.

“Lately, revenue has fallen far short of spending, mainly because of the depressed state of the economy. If you don’t like this, there’s a simple remedy: demand that Congress raise taxes or cut back on spending. And if you’re frustrated by Congress’ failure to act, well, democracy means that you can’t always get what you want.

“Where does the debt ceiling fit into all this? Actually, it doesn’t. Since Congress already determines revenue and spending, and hence the amount the Treasury needs to borrow, we shouldn’t need another vote empowering that borrowing. But for historical reasons any increase in federal debt must be approved by yet another vote. And now Republicans in the House are threatening to deny that approval unless President Obama makes major policy concessions.

“It’s crucial to understand three things about this situation. First, raising the debt ceiling wouldn’t grant the president any new powers; every dollar he spent would still have to be approved by Congress. Second, if the debt ceiling isn’t raised, the president will be forced to break the law, one way or another; either he borrows funds in defiance of Congress, or he fails to spend money Congress has told him to spend.

“Finally, just consider the vileness of that G.O.P. threat. If we were to hit the debt ceiling, the U.S. government would end up defaulting on many of its obligations. This would have disastrous effects on financial markets, the economy, and our standing in the world. Yet Republicans are threatening to trigger this disaster unless they get spending cuts that they weren’t able to enact through normal, Constitutional means.

“Republicans go wild at this analogy, but it’s unavoidable. This is exactly like someone walking into a crowded room, announcing that he has a bomb strapped to his chest, and threatening to set that bomb off unless his demands are met.”

I think all the time, am I being too negative? When it comes to Europe, my answer is always ‘no.’

But while I’ve felt Congress and the White House would fall flat on their face in failing to craft the needed grand bargain to begin to get us out of our fiscal mess, which will eventually send the markets reeling, I’ve also noted that if they ever do get together and come up with an authentic deficit-reduction plan that includes entitlement reform, the U.S. market would soar as capital flooded into this country from all over.

So I took note of a piece by Roger Altman in the Financial Times, Altman being a moderate Democratic voice who is respected among us elephants, and it does make me think twice. In part:

“Critics are transfixed by the bitter negotiations (over the debt crisis), (but) are missing the big picture. It may be happening in stages, but the U.S. is making real progress towards reducing deficits and stabilizing its debt. Indeed, according to the Committee for a Responsible Federal Budget, a Washington-based non-profit organization, the federal debt to gross domestic product ratio – the critical measure of financial health – will be stable at about 73 percent for the next decade. That is because annual deficits are now on track to be halved and, therefore, the debt level will not continue to grow faster than the economy. Yes, this ratio is still too high, but stabilizing it will be a crucial achievement.

“But with all the weeping over deficits and debt, how is this possible? The answer is that, in two months, a course for $3tn of deficit reduction over 10 years will be set. That is about three-quarters of the amount the much-praised bipartisan Simpson-Bowles presidential commission recommended in December 2010. And, using consensus assumptions on economic growth, it is enough to stabilize America’s debt ratio. Without it, the ratio would reach nearly 100 percent, analogous to Italy’s. Yes, after 2022, it will worsen again – reflecting the ageing population and related health costs – and more fiscal tightening will be necessary. But 10 years is enough to find those additional solutions.”

Skeptical we get to $3 trillion? Well, I won’t bore you with the details but thanks to the savings in the sequester that is coming, whether it is out of defense or something else, and coupled with what has already been legislated and the just completed tax act, we’re essentially there, though Altman, like many of us, wants to see true entitlement reform in lieu of the sequester as part of a more balanced package.

So, as he concludes:

“Either way, these rounds of deficit reduction are gradually solving the debt problem. Yes, it is a halting process because that is the way big change occurs in America. And, yes, more reductions will eventually be required. But surprising progress is being made.”

Food for thought, and Friday afternoon we learned the government budget deficit for December shrank almost completely to $260 million from $86 billion in December 2011. Revenue rose 12.3 percent in the month vs. year ago levels, while spending fell 17.2 percent. There was some shift in spending for the month, however.

[Glancing at past years, if there is truly real improvement in the deficit picture, it should be reflected in the months of February and March.]

But now a message from our president…part of his weekly radio address last weekend.

“I believe we can find more places to cut spending without shortchanging things like education, job training, research and technology…But spending cuts must be balanced with more reforms to our tax code. The wealthiest individuals and the biggest corporations shouldn’t be able to take advantage of loopholes and deductions that aren’t available to most Americans.

“And as I said earlier…one thing I will not compromise over is whether or not Congress should pay the tab for a bill they’ve already racked up. If Congress refuses to give the United States the ability to pay its bills on time, the consequences for the entire global economy could be catastrophic. The last time Congress threatened this course of action, our entire economy suffered for it. Our families and our businesses cannot afford that dangerous game again.”

House Speaker John Boehner has been insisting on a dollar-per-dollar match between spending reductions and continued borrowing, Boehner telling his caucus: “The president says he isn’t going to have a debate with us over the debt ceiling. He also says he’s not going to cut spending along with the debt limit hike.”

Senate Minority Leader Mitch McConnell said on ABC’s “This Week,” “The tax issue is finished, over, completed. That’s behind us.”  New tax revenue is “absolutely” off the table as part of upcoming negotiations.

Boehner, in an interview with the Wall Street Journal’s Stephen Moore, said he was stunned a number of weeks ago when President Obama said to him, “We don’t have a spending problem.”

The president’s insistence that Washington doesn’t have a spending problem, Mr. Boehner says, is predicated on the belief that massive federal deficits stem from what Mr. Obama called a “health-care problem.” Mr. Boehner says that after he recovered from his astonishment – “They blame all of the fiscal woes on our health-care system” – he replied: “Clearly we have a health-care problem, which is about to get worse with ObamaCare. But, Mr. President, we have a very serious spending problem.”

Obama became so irritated when Boehner kept repeating this he said, “I’m getting tired of hearing you say that.”

Boehner told Stephen Moore that there are two main points going forward.

“Republicans won’t be agreeing to any more tax increases during the next two years,” and Boehner isn’t going to engage in any more closed-door budget negotiations with the White House.

Well, late Friday afternoon, Senate Democratic leaders sent a letter to President Obama, urging him to bypass Congress if necessary on the debt ceiling issue. Senate Majority Leader Harry Reid and the other top three Democrats encouraged Obama to “take any lawful steps to ensure that America does not break its promises and trigger a global economic crisis – without Congressional approval, if necessary.”

Oh baby…so much for a break from the action. Here comes Round Two.

China: There was some important data out of here this week. December exports rose 14% from a year earlier, fastest in seven months and well above November’s 2.9% pace. Imports, unchanged in November, rose 6% in December, also better than expected. So the combination further eased fears of a hard landing.

Exports to the European Union rose 2.3% from a year earlier in December, compared with an 18% decline in November. Exports to the U.S. rose 10% after falling 2.5% the prior month.

For all of 2012, exports in China increased 7.9%, down from 20% growth in 2011 and short of the government’s 10% target.

Trade for all of 2012 with the EU fell 3.7% despite the December rebound.

Fourth quarter GDP, due out Jan. 18, is expected to come in around 8%, up from 7.4% in the third. 

And on Friday, the government announced inflation spiked to a six-month high in December after record cold temperatures pushed up vegetable prices. Consumer prices were up 2.5% over a year earlier, up from November’s 2% pace. Higher inflation could hamper the government’s efforts to support the economic recovery with easier money.

It was also announced that bank lending rose 15% in the second half of last year, with total credit growing by 20%.

Street Bytes

--For the first five trading days of the year, the S&P 500 was up 2.2%. Historically, the past 40 times since 1950 that U.S. stocks posted positive gains in the first five days, full-year gains followed 34 times, with an average gain of nearly 14%. In the 23 years stocks fell in the first five, the market has finished the year in negative territory nearly half the time. [Stock Trader’s Almanac]

And for the week, the Dow Jones rose 0.4% to 13488, while the S&P 500, also up 0.4%, finished at another 5-year high, 1472. Nasdaq rose 0.8% to 3125.

There was only a smattering of earnings reports this past week, but now they’ll come streaming out, with S&P 500 earnings estimated to have increased somewhere between 1.2% and 2.8% for the quarter, with revenues up about 2% after falling in the third quarter. And of course what transpires in Washington over the coming weeks is rather important.

--Morgan Stanley strategist Adam Parker, who was far too bearish last year, is still just calling for a yearend S&P target of 1434, below where we are today, with S&P earnings of just $99 vs. a consensus of around $110. I’ve noted before I like Parker’s thinking and once again agree with his reasoning. As he puts it, “No one is bearish about earnings right now.”

--U.S. Treasury Yields

6-mo. 0.10% 2-yr. 0.24% 10-yr. 1.86% 30-yr. 3.04%

The Federal Reserve reported it remitted a record $89 billion back to the U.S. Treasury off its $3 trillion balance sheet. The government pays interest to the Fed, and then the Fed sends it back to the government.

As long as the Fed is purchasing $85 billion a month in Treasury and mortgage-backed bonds, the balance sheet will swell to $4 trillion by end of the year, so next year’s payout could top $100 billion. But at some point this circular game will end.

--President Obama nominated his chief of staff, Jack Lew, to replace Timothy Geithner at Treasury. Among his past government experiences, Lew served two stints as head of the Office of Management and Budget.

Republican Senator Jeff Sessions, who heads up the Budget Committee, said he will oppose Lew’s nomination.

“His testimony before the Senate Budget Committee less than two years ago was so outrageous and false that it alone disqualifies,” according to a statement issued by Sessions.

--Bank stocks around the world, particularly in Europe, celebrated a decision by regulators to give financial institutions more time to comply with new liquidity standards, as proposed by the Basel Committee on Banking Supervision, that will be far more flexible than a draft version of more than two years ago.

Plus the requirements will be phased in between 2015 and 2019 rather than all at once. Banks will also now be allowed to count a wider range of assets, including some equities and mortgage-backed securities.

--Ten major banks and mortgage companies agreed to pay $8.5 billion to settle federal complaints that they wrongfully foreclosed on homeowners. The banks, including JPMorgan Chase, Bank of America and Wells Fargo, will pay the funds to homeowners to end a 2011 review mandated by an enforcement action.

Under the latest settlement (I can’t keep track of ‘em all), people may receive from $1,000 to $125,000 if they were wrongfully foreclosed on.

But the settlement also represents the latest retreat from the home mortgage market for Bank of America, which, separately, is in the process of paying Fannie Mae more than $11 billion to settle a dispute over bad mortgages.

At one point, 2009, BofA had 20 percent of the mortgage market. Today it is down to 4%, with Wells Fargo and JPM now dominating.

Bank of America’s problems can be traced to the $4 billion acquisition of Countrywide Financial, the subprime lender, in 2008. That single deal has cost BofA more than $40 billion in losses on real estate, legal costs and settlements. The Fannie Mae settlement goes back to mortgages issued by Countrywide from 2000 to 2008.

Nonetheless, BofA’s shares have soared the past year as it gradually puts all the bad news behind it.

--The Japanese government of Shinzo Abe approved a massive stimulus package of $116 billion in Abe’s attempt to jumpstart the economy. Abe also reiterated his call for the Bank of Japan to pump more money to rid the country of deflation. Aside from measures designed to spur innovation, Abe wants to encourage families to have more children.

Abe’s policies, including during his campaign, have led to a huge rally in the Tokyo Nikkei stock index which finished higher on Friday for a ninth consecutive week, the longest such climb since 1988, as the yen continued to weaken against major currencies, thus supporting exports.

--Car sales in Japan jumped 26% last year as the industry continues to recover from the 2011 earthquake and tsunami.

Sales of Japanese autos in China, however, fell 3% to 5% among Toyota, Nissan and Honda as a result of the territorial dispute between Tokyo and Beijing, though the pace of monthly sales declines are slowing from the height of the crisis in September.

For example, Toyota’s sales in China fell 15.9% in December from a year earlier, but this compares with a 50% decline in September.

--The federal government is going to do a sweeping review of Boeing’s new 787 Dreamliner after a number of incidents, but, Michael Huerta, head of the FAA, said on Friday, “We are confident about the safety of this aircraft,” though the FAA will conduct the review until “we are completely satisfied.”

--More good news on the energy front, this from the Energy Information Administration. U.S. oil production will jump by a quarter by 2014 to its highest level in 26 years. The EIA says U.S. oil imports would fall by a quarter between 2012 and 2014, because of rising production.

Imports have been falling since 2005, when they stood at 12.5 million barrels a day. By 2014, that total will have been halved to six million.

Domestic production will increase from 6.4 million barrels last year to 7.9 million next year, the highest level since 1988, according to the EIA.

--Hong Kong has once again been named the world’s freest economy in the annual survey put out by the Heritage Foundation. Rounding out the top ten are Singapore, Australia, New Zealand, Switzerland, Canada, Chile, Mauritius, Denmark and the U.S.

China is 136. Russia is 139.

--Yum Brands, whose 5,100 restaurants in China contribute more than half of its overall revenue and operating profits, warned sales there fell 6% in the fourth quarter owing to a “significant impact” on KFC the last two weeks in December due to bad publicity resulting from a government review of its chicken supply, which Yum has said is in the past but there is a lingering effect in such cases.

Chinese food authorities said KFC was supplied with chicken that contained excessive amounts of antibiotics.

--U.K. manufacturing production fell 0.3% in November from October, worse than expected. Britain could be headed to a triple-dip recession. [Friday, the National Institute of Economic and Social Research projected the economy shrank 0.3% in the fourth quarter.]

But U.K. car sales rose 5.3% for the year to the highest level since 2008.

--Germany’s November exports fell 3.4% over October, the worst pace in a year. Factory orders also declined 1.8% from the prior month.

--American Express is cutting about 5,400 jobs, half in the U.S. and half abroad after reporting so-so results for the fourth quarter.

--Morgan Stanley is cutting 1,600 employees, focusing on the institutional securities unit – which includes trading and investment banking. Like with Amex, half of Morgan Stanley’s cuts will be outside the U.S.

--Ford, on the other hand, is hiring 2,200 in the U.S. this year, in response to rising car sales. Honda and Nissan also announced recently they are adding extra staff in the U.S.

--World-wide personal-computer shipments fell 6.4% in the fourth quarter, despite the debut of Windows 8, as people continue to shift to tablets and smartphones, as reported by research firm IDC. 

Hewlett-Packard remains the biggest PC company in the world, with shipments down 0.6% from a year earlier, while second place Lenovo Group Ltd., shipped 8.2% more. Third place Dell saw its PC shipments decline a whopping 20.8% from a year ago.

For the full year, PC orders fell 3.2% to 352.4 million units, according to IDC.

--According to the Consumer Electronics Assn., global spending on gadget devices (tablets, smartphones) will hit $1.1 trillion in 2013, up 4% from 2012.

--Speaking of which, everyone loves a comeback story and Nokia is in the midst of one after the Finnish group said phone sales in the fourth quarter exceeded its own expectations. Nokia sold 86.3 million devices, with revenues of $5.2 billion, thanks to the strong reception for its Lumia smartphone. Nokia shares rose 18% in New York on the news. Nokia had been losing market share to Apple and Samsung.

--Samsung Electronics expects a record profit for the quarter ending December due to growing smartphone sales, about $8.3 billion, a 90% jump from the same period a year earlier.

--From Richard Waters / Financial Times

“A serious flaw in the Java software found on most personal computers could expose the machines to being taken over by malicious attacks over the internet, the U.S. agency responsible for policing such vulnerabilities warned on Thursday.

“The vulnerability has already been used to mount attacks, according to security researchers, prompting calls for PC and Mac users to disable Java on their computers until a fix has been developed.”

The flaw was highlighted by US-CERT, part of the Department of Homeland Security.

--California Democratic Gov. Jerry Brown said his state is poised to post an $850 million budget surplus in the year beginning July 1, which would be a helluva turnaround, though at what cost?

Californians in November granted Brown the highest statewide sales tax in the U.S., 7.5%, while boosting taxes on income over $250,000 – with those making $1 million or more getting dinged 13.3%. Add that to the new federal tax act and its 39.6 top rate, plus the ObamaCare surcharge of 3.8%, and, Holy Toledo, Batman!  That’s a lot of taxes!

--Reed Abelson / New York Times

“Health insurance companies across the country are seeking and winning double-digit increases in premiums for some customers, even though one of the biggest objectives of the Obama administration’s health care law was to stem the rapid rise in insurance costs for consumers.

“Particularly vulnerable to the high rates are small businesses and people who do not have employer-provided insurance and must buy it on their own.

“In California, Aetna is proposing rate increases of as much as 22 percent, Anthem Blue Cross 26 percent and Blue Shield of California 20 percent for some of those policy holders…These rate requests are all the more striking after a 39 percent rise sought by Anthem Blue Cross in 2010 helped give impetus to the law, known as the Affordable Care Act….

“In other states, like Florida and Ohio, insurers have been able to raise rates by at least 20 percent for some policy holders.”

I’m scared to get my own insurance renewal.

--Tiffany & Co. reported sales at its Manhattan flagship store, which generates nearly one-tenth of revenue, fell 2% during the holiday season. In Asia outside of Japan, they rose 11%.

--Atlantic City casinos suffered their sixth straight decline in 2012, with winnings down 8%. Of course Hurricane Sandy didn’t help, but business was down for the year even prior to the super storm. 

--CBS sold several 30-second spots for the Super Bowl for more than $4 million, a record. Heck, the local CBS station in New York sold spots for more than $1 million. 

--Fred Turner died. He was CEO of McDonald’s from 1974-87, having started out with the company in 1956 as one of its first employees. As one former company executive told the New York Times, “Ray Kroc founded it, but Fred Turner built it into what it is today.”

Turner was the architect of the company’s “quality, service and cleanliness” model, which exists to this day. In 1961 he created Hamburger University and under his watch, McDonald’s introduced the Happy Meal and the Chicken McNugget.

His biggest success may have been the introduction of a McDonald’s breakfast companywide. In 1975 the Egg McMuffin was placed on the national menu and the rest is history. 

Fred Turner was 80.

--Two Chinese women have died of the H1N1 swine flu virus in Beijing, the first such reported deaths in the city since 2010. Here in the States, your editor is doing all he can to avoid getting the flu that is wreaking havoc on our hospitals’ emergency rooms.

--ABC’s Jimmy Kimmel went head to head with David Letterman and Jay Leno for the first time on Tuesday in the 11:35 p.m. time slot and Kimmel beat Letterman handily while just falling short of Leno the first night.

Leno…3.27 million
Kimmel…3.1
Letterman…2.88

[Source: Nielsen / Wall Street Journal]

Foreign Affairs

Syria: President Bashar al-Assad gave his first big speech since June at the Damascus Opera House before cheering supporters.

Assad called for national mobilization in a “war to defend the nation,” describing rebels fighting him as terrorists and foreign agents with whom it was impossible to negotiate, exactly what the UN and West didn’t want to hear.

He called for a new initiative, a reconciliation conference, but one that would exclude “those who have betrayed Syria.”

At the same time, ally Russia is assembling its largest force in the Eastern Mediterranean in 40 years. Five landing ships carrying hundreds of marines and military vehicles are aimed at deterring western intervention. The force is converging on the Syrian port of Tartus, where Russia has maintained a military base since 1971.

This is the heartland of Assad’s Alawite sect and is the winter hub of the Black Sea fleet. One Israeli source told the Sunday Times of London: “If necessary, I can envisage a Russian ground force stepping in to defend the Alawite corridor stretched between the Lebanese border in the south and the Turkish border in the north.”

According to the Pentagon, Syria has “dozens of 500 lb. bombs” armed with Sarin nerve gas that are being loaded on to vehicles near Syrian air bases and can be airborne within two hours if Assad gave the order. President Obama was apprised in early December, according to the New York Times, which is why he issued the warning of “consequences” should Assad be stupid enough to use them. Some activists with sources in the government told the Daily Telegraph that Assad was prepared to use the weapons in parts of Aleppo from which civilians have fled.

On a separate topic, the Financial Times reported that nuclear experts have raised concerns Syria may have up to 50 tons of enriched uranium going back to the Assad regime’s attempt to build a nuclear reactor, with help from North Korea, before it was destroyed by Israel in 2007.

The International Atomic Energy Agency believes such a reactor required the large amount of uranium fuel and 50 tons could be turned into enough weapons grade fuel for five nuclear devices.

IF such a stockpile exists then there is no doubt Iran would be trying to get its hands on it.

The 2.5 million that have been displaced in Syria, as well as the hundreds of thousands in refugee camps in Turkey, Jordan and Lebanon, have been dealing this week with some of the worst winter weather to hit the region in decades, with up to a foot of snow in parts of Jordan, this after four days of torrential rain. You are going to start hearing stories of disease, on top of starvation for those inside Syria in particular.

Israel: The Jan. 22 election is fast-approaching and the Benjamin Netanyahu-Avigdor Lieberman coalition continues to struggle in the polls as voters flock to rising star Naftali Bennett’s far-right party. Certainly looks like Bennett gets a senior post in what should still be a Netanyahu government, though I admit to often being confused by some of the Israeli coalition lineups.

Bennett, remember, opposes the creation of a Palestinian state, which Netanyahu’s Likud still favors, and Bennett goes further in calling for an annexation of parts of the West Bank (like all of it).

The latest Jerusalem Post poll has Likud-Beiteinu winning just 34 of 120 seats in the Knesset, down from the 47 projected when the joint ticket was formed, but up two from a prior survey. Channel 10 has the Netanyahu-Lieberman combination winning 35 seats, Labor 17, and Bennett 14.

At a foreign policy debate on Tuesday, Bennett said:

“I believe that if a Palestinian state would be founded just a few hundred meters from here…it would ensure the Hobbesian lifestyle of eternal strife and miserable life for the next 200 years between us and the Palestinians.”

For his part, Netanyahu dismissed concerns expressed by the EU, the United States and the Palestinians about Israel’s settlement construction. “It’s time for the rest of the world to wake up – the great challenge that we face, the great danger to the world is not from Jews building in our ancestral capital in Jerusalem. It’s from nuclear weapons in Iran…it’s chemical weapons in Syria falling into the wrong hands. That’s the danger we have to focus on.”

[One side bar on Syria: A positive is the fact the greatly weakened government is unlikely to join Iran in a war against Israel, though if chemical weapons got in the hands of Hizbullah, actual Syrian participation wouldn’t matter. At the same time there are some who say Hizbullah has been greatly weakened by the Syrian conflict because it hasn’t been able to replenish its arms. This theory, as espoused in Lebanon’s Daily Star, I do not agree with.]

On the Palestinian front, jailed Fatah leader Marwan Barghouti is calling for Fatah and Hamas to end their dispute and last weekend Hamas allowed a huge rally in support of Fatah in Gaza.

Both Palestinian leader Mahmoud Abbas and Hamas leader Ismail Haniya, have seen a boost in their approval ratings to 54 and 56 percent, respectively, according to the Palestinian Center for Survey Research, so there is growing optimism unity between Gaza and the West Bank will be restored.

Iran: A senior lawmaker admitted oil and gas exports have dropped 45% due to sanctions over the nuclear program. Oil exports were down 40% in the last nine months. [Such exports account for 80% of Iran’s foreign revenues.]

The International Energy Agency says Iran’s oil exports plunged to 1 million barrels a day in July last year from 1.74 million in June after the EU embargo took hold. But then exports picked back up to 1.3mmbd in November and the senior official sees exports recovering to 1.5mmbd over the next year. Turkey, for one, is no longer telling the IEA where it is getting its oil from.

On the nuclear front, a new round of talks is supposedly slated to start next week with the P5+1 (Russia, China, the U.S., France, Britain and Germany) and Iran, but I’ve seen conflicting reports on this. Both Supreme Leader Ali Khamenei and President Ahmadinejad are positioning themselves for success, it would seem, success meaning just talking, but of course Khamenei has the ultimate say on the program in general. Ahmadinejad just wants a diplomatic success before he leaves office, as noted by expert Amir Taheri.

But at the end of the day, Iran’s brilliant, four corners stall game will continue.

One last item. I saw an item in the Daily Star that air pollution in Tehran kills 4,460 people a year, according to health officials there, due to the high level of carcinogens in domestically-made petrol. The problem is acute in the winter with temperature inversions and Tehran sitting in a bowl, surrounded by mountains, which then traps the putrid air that largely emanates from the lower grade fuel. 

Turkey: The government has been negotiating with the Kurds, the separatist PKK, but then on Thursday in Paris, three Kurdish women activists, including a co-founder of the PKK, were executed at the Kurdish Institute.

40,000 have died in the 25-year conflict between Turkey and the Kurds, so imagine if the Turkish government was involved in the killings as Kurds in France are saying.

The Turks claim, however, it was a dispute between Kurdish factions, citing the recent peace process.

Pakistan: In a series of horrific bombings on Thursday, at least 120 were killed, including over 80 in a billiard hall located in a Shiite neighborhood in Quetta, the capital of Baluchistan province, with a Sunni militant group claiming responsibility. Another attack claimed at least 22 at a Sunni mosque.

India/Pakistan: India accused Pakistan of killing two of its soldiers in the disputed territory of Kashmir. One of the two was supposedly beheaded and the body of the other mutilated. India blamed the Pakistani army rather than militants. Pakistan denied the charges.

Afghanistan: As President Obama and Afghan President Hamid Karzai met in Washington on Friday, some in the White House are arguing for a force post-2014’s formal end to the combat mission of just 2,500, which is absurd. As some experts such as Max Boot have pointed out, such a force level wouldn’t allow the U.S. to do anything outside of Kabul and the Taliban’s heartland is in the southern part of the country, Kandahar, which was the focus of Obama’s surge in 2009 and 2010.

The New York Times reported that Obama may be preparing to leave zero American troops after 2014, while Karzai is anticipating a residual force of as many as 15,000 troops, with the mission of advising Afghan security forces in the fight against the insurgency and to carry out raids against Al Qaeda. Karzai also wants tanks and fighter planes. Obama wants to cut defense spending so he can use the funds elsewhere.

At a news conference with Karzai, Friday, Obama said that when it comes to specifics of the withdrawal, “I can’t give you a precise number at this point.”   But he did say U.S. troops will assume a “support role” starting this spring, though will still engage in battlefield fighting as needed. Afghan forces, however, are to take the lead in the security of their country.

Iraq: Not for nothing but there is a real political crisis here as Ayad Allawi, leader of Iraqiya, the largely Sunni bloc of legislators (though Allawi himself is a secular Shiite), calls for early elections to replace Prime Minister Nouri al-Maliki, a Shiite, who is under fire for measures taken against political rivals. Allawi is the man I wanted to emerge in Iraq, only to have the 2010 election stolen from him (it was complicated).

And remember Moqtada al-Sadr? He is now blaming Maliki for recent unrest.

Japan/China: These two came closer than ever to a military conflict as both sides scrambled fighter jets in the East China Sea. The incident started when a Chinese research plane entered the disputed area between the two, Japan sent two F-15s to investigate, and then the People’s Liberation Army Air Force sent two of its own to monitor the Japanese planes. 

Japanese Prime Minister Shinzo Abe said on Friday that Japan would not negotiate with Beijing over the islands in the East China Sea claimed by both (and Taiwan) and that Beijing was “wrong” for allowing violent protests last fall, which hurt the Japanese economy (see above on Japanese auto sales to China).

At a press conference, Abe was asked how he could maintain his staunch stance on the territorial issue while at the same time protecting Japan’s business interests in China and he said:

“It was wrong for China, as a country responsible to the international community, to achieve a political goal by allowing damages to Japanese-affiliated companies and Japanese nationals that have made contributions to Chinese economy.” [South China Morning Post]

Editorial / The Economist

“Calling (Abe’s new) cabinet conservative misses its revisionist obsessions. It is far from meritocratic, with half the positions going to MPs who inherited Diet seats from their families. Worse, its members are gripped by a backward-looking, distorted view of history that paints Japan as a victim. The great majority of cabinet members favor visits to Yasukuni, the controversial Tokyo shrine that honors war criminals among the soldiers, and reject Japan’s ‘apology diplomacy’ for its wartime atrocities. Almost half of them want school textbooks (which already downplay Japanese atrocities) to be rewritten in ways that obscure the militarism still further. Mr. Abe is, alas, steeped in this stuff: his grandfather oversaw occupied Manchuria’s development in the 1930s.

“The revisionists’ real argument over perceptions of Japan’s wartime conduct is that their country was treated to victor’s justice. They reject the pacifist constitution that America imposed. Japan was cast as a junior partner, they maintain, and neutered at home and abroad. The education minister, Hakubun Shimomura, says that the years since the war have been a ‘history of Japan’s destruction;’ he and Mr. Abe talk about overturning a despised ‘post-war regime.’ This is a baffling portrayal of the economic miracle – overseen by the LDP (Abe’s party), no less – that brought peace and prosperity to the region.

“In a part of the world that specializes in victimhood, this is dangerous. If Mr. Abe rescinds Japan’s 20-year-old apology to wartime ‘comfort women,’ he will provoke South Korea. The stakes are even higher with China, whose own idea of victimhood is also nourished by its manipulation of history. China is now stoking tensions over the Senkakus….

“This puts America in an awkward spot. Mr. Abe, despite his views on the constitution, wants to cultivate closer ties. When China is aggressive, Mr. Abe needs its full support. But that should not extend to rewriting history or provoking China (let alone South Korea). This cabinet is a bad start.”

For its part, on Monday, China announced it was putting a stop to labor camps, “re-education through labor,” a practice in place for decades.

Venezuela: The Supreme Court endorsed a delay in Hugo Chavez’s inauguration for his fourth term, which was to be Thursday, due to his ongoing recovery from his fourth cancer surgery in Cuba. He has not been seen or heard from in over a month.

The constitution is clear. If he is incapacitated, elections are to be held within 30 days, with the National Assembly president, Diosdado Cabello, being in charge in the interim.

But with the declaration that the inauguration has been postponed indefinitely to allow Chavez time to recover, that means Vice President Nicolas Maduro, Chavez’ hand-picked successor, is in charge.

The opposition says Cabello should be leading the country now, with an election to follow in short order.

Britain: The Cameron government is once again planning for a referendum on staying in the European Union, as Cameron seeks to renegotiate Britain’s terms of membership. But the White House is strongly urging Cameron to set aside such plans.

Assistant secretary for European affairs, Philip Gordon, said, “We have a growing relationship with the EU as an institution, which has an increasing voice in the world, and we want to see a strong British voice in that EU.”

Germany warned Cameron not to “blackmail” the rest of Europe with threats as he tries to win opt-outs from EU treaties.

Cameron wants to stay in the union, but he seeks a looser relationship with the eurozone, of which Britain is not part, and wants Britain to be able to set more of its own terms, such as with labor laws. The referendum, though, would only take place after Cameron won the election in 2015, which would spur treaty changes.

Meanwhile, tensions in Northern Ireland have been sky high, with rioting a number of nights in Belfast over the flying of the Union flag at city hall, which is being restricted. The police have come under fire and there are sinister warnings coming from loyalist paramilitary groups.

At the same time, the “Continuity IRA” said British armed forces are a “legitimate target.” A plot was uncovered before Christmas to kill a British soldier on a visit home to Limerick. The individual was prevented from traveling for his own safety.

Italy: Silvio Berlusconi agreed to an electoral pact with the rightwing Northern League, making it even harder for an outright winner to emerge in the February elections. [Berlusconi announced, however, he would not be prime minister should they win.]

The latest poll shows the center-left Democrats and their allies with 42% to the Berlusconi alliance’s 28. Mario Monti’s new centrist coalition has 15% and comedian-activist Beppe Grillo also has 15.

Germany: In the latest polling ahead of September’s election, Chancellor Merkel’s conservatives poll at 42%, while the opposition Social Democrats are at 25% and their Green partners at 15%. With Merkel’s current coalition partner, the Free Democrats, in, err, free fall with just 2%, Merkel is going to need some other partners and could resurrect her grand coalition with the Social Democrats that was in existence from 2005-09.

Mali: Friday, French President Francois Hollande announced he was sending troops in response to a plea from the Malian government for urgent military assistance against al-Qaeda led rebels that are threatening the former French colony. It should be assumed U.S. special forces are there as well.

Hollande came into office and immediately pulled French troops from Afghanistan, so this is a big step for him, one with great political risks.

“We are faced with a blatant aggression that is threatening Mali’s very existence,” Mr. Hollande told reporters. “We will be ready to stop the terrorists’ offensive if it continues.”

France has a large Malian community and Mali has been rapidly becoming a base for al-Qaeda activities that threaten France itself. At least seven French hostages are also being held in the region by Islamist groups.

And late word as I go to post…French air strikes have already helped big time.

Random Musings

--Editorial / Washington Post…on Obama’s second-term Cabinet:

“So far Mr. Obama seems to be assembling a team of Washington insiders who are personally close to him – and thoroughly in sync with his left-of-center views and those of the Democratic Party’s base. (Yes, that applies also to Mr. Hagel, who, despite being a nominal Republican, shares the Democratic left’s skepticism toward the Pentagon budget.) That may seem the obvious thing for a president to do. But we’re struck by the contrast with Mr. Obama’s first-term Cabinet, which included his former rival for the Democratic nomination (Hillary Rodham Clinton), a seasoned moderate Republican of independent stature (Robert M. Gates) and an apolitical financial technocrat (Timothy Geithner). The president was much praised then, and rightly, for assembling a team that could challenge and question him as he formulated policy.

“Mr. Obama seems to have decided that it’s time to close ranks and present a united front to the Republican opposition. This, too, may be understandable, in response to a GOP that in his first term showed little inclination for compromise. In girding openly for battle, however, the president may be closing off a range of perspectives and experiences, including some from outside his personal and political comfort zones – not to mention from outside the Beltway.”

--Charles Krauthammer / Washington Post

“The puzzle of the Chuck Hagel nomination for defense secretary is that you normally choose someone of the other party for your Cabinet to indicate a move to the center, but, as The Post’s editorial board pointed out, Hagel’s foreign policy views are to the left of Barack Obama’s, let alone the GOP’s. Indeed, they are at the fringe of the entire Senate.

“So what’s going on? Message-sending. Obama won reelection. He no longer has to trim, to appear more moderate than his true instincts. He has the ‘flexibility’ to be authentically Obama….

“Hagel is a man of no independent stature. He’s no George Marshall or Henry Kissinger. A fringe senator who left no trace behind, Hagel matters only because of what his nomination says about Obama.

“However the Senate votes on confirmation, the signal has already been sent. Before Election Day, Obama could only whisper it to his friend Dmitry. Now, with Hagel, he’s told the world.”

--South Carolina Republican Senator Lindsey Graham on the selection of Chuck Hagel:

“This is an in-your-face nomination by the president for all those who are supportive of Israel.”

In another statement:

“During these dangerous times, there is no more important cabinet position than secretary of defense. I fear (Mr. Hagel’s) views, particularly toward Iran, send the worst possible signal at the worst time to the Iranians, our Israeli allies, and the world.”

--Richard McGregor / Financial Times

“With the nomination of Chuck Hagel to run the Pentagon, Barack Obama has done more than assemble his second-term national security team – he has also sealed the abandonment of much of George W. Bush’s foreign policy….

“ ‘This does not look like a let’s-invade-Iran team,’ said Bruce Riedel, a longtime CIA officer who has also advised presidents on counterterrorism. ‘It looks to me like a find-an-alternative-to-military action team, preferably a diplomatic solution.’”

--David Brooks / New York Times

“Chuck Hagel has been nominated to supervise the beginning of this generation-long process of defense cutbacks. If a Democratic president is going to slash defense, he probably wants a Republican at the Pentagon to give him political cover, and he probably wants a decorated war hero to boot.

“All the charges about Hagel’s views on Israel or Iran are secondary. The real question is, how will he begin this long cutting process? How will he balance modernizing the military and paying current personnel? How will he recalibrate American defense strategy with, say, 455,000 fewer service members?

“How, in short, will Hagel supervise the beginning of America’s military decline? If members of Congress don’t want America to decline militarily, well, they have no one to blame but the voters and themselves.”

I’m on record as liking Hagel, but I agree with those who don’t understand why Obama is so willing to expend political capital with the pick just right now.

I also eagerly await his confirmation hearing to see if my feelings towards the man change.

--The White House is preparing a broad gun violence agenda that would include a ban on high-capacity magazines and universal background checks, as well as the funding of more police officers in public schools. On this last issue, federal dollars would be made available to those communities who want to hire police officers and install surveillance equipment, though not as sweeping as the National Rifle Association’s proposal for armed guards in every school.

For its part, the NRA said it would have nothing more to do with Biden’s task force after a meeting with the White House.

“It is unfortunate that this administration continues to insist on pushing failed solutions to our nation’s most pressing problems,” the NRA said in a statement. “We will not allow law-abiding gun owners to be blamed for the acts of criminals and madmen.”

Biden’s focus appears to be on strengthening background checks, including closing a loophole that exempts some private firearms sales, such as at gun shows.

--New Jersey Gov. Chris Christie, in a matchup with Hillary Clinton for 2016, is the most “threatening” opponent, according to a Public Policy Polling survey, losing 44-42. Jeb Bush, Marco Rubio and Paul Ryan all trail Clinton by double-digits.

But Rubio leads among potential GOP primary voters, with 21 percent to Ryan’s 16. Bush and Christie are at 14.

Clinton receives 57 percent of Democratic primary voters, with Joe Biden at 16. Andrew Cuomo received just 4 percent.

Oh, we’ve got a long, long way to go. Personally, I’m just hoping the New York Jets have a real quarterback by 2016.

--Back to Christie, in the latest Fairleigh Dickinson University PublicMind poll, 73% of New Jersey voters approve of the governor, including 62% of Democrats and 69% of non-whites. Unbelievable.

--Meanwhile, New Jersey Democratic Senator Frank Lautenberg, who turns 89 this month, apparently has decided not to run in 2014 when his term expires. He has been in ill health recently. Democratic Newark Mayor Cory Booker filed papers for the race this week. Good for him. I have no problem having him represent us.

--In his Washington Post column, George Will points out that Republicans will be defending 13 Senate seats in 2014 and Democrats 20 seats, as the former seek the six needed to gain control of the body. “Six Democratic incumbents represent states in which Barack Obama received less than 42 percent of the 2012 vote – Montana’s Max Baucus (41.7), Alaska’s Mark Begich (40.8), Louisiana’s Mary Landrieu (40.6), South Dakota’s Tim Johnson (39.9), Arkansas’s Mark Pryor (36.9) and West Virginia’s Jay Rockefeller (35.5).” 

Friday, Rockefeller announced he would not seek a sixth term in 2014. Rep. Shelly Moore Capito, the odds-on Republican favorite for the race, is now the frontrunner.

--Sarah Lyall / New York Times…on the extreme weather in the world right now:

“China is enduring its coldest winter in nearly 30 years. Brazil is in the grip of a dreadful heat spell. Eastern Russia is so freezing – minus 50 degrees Fahrenheit, and counting – that the traffic lights recently stopped working in the city of Yakutsk.

“Bush fires are raging across Australia, fueled by a record-shattering heat wave. Pakistan was inundated by unexpected flooding in September. A vicious storm bringing rain, snow and floods just struck the Middle East. And in the United States, scientists confirmed this week what people could have figured out simply by going outside: last year was the hottest since records began.”

[Australia has reported temperatures in excess of 122 degrees F., with the Bureau of Meteorology describing the latest heat wave there as totally “unprecedented.”]

Omar Baddour, chief of the data management applications division at the World Meteorological Association, in Geneva, said, of course, you have extreme events every year, but such events are increasing in intensity as well as frequency. Call it climate change, or what I prefer, the results of global pollution, but it’s a fact.

--Another Sign of the Apocalypse:

“A row over an unpaid restaurant bill in a western Indian city has escalated into a riot between Hindus and Muslims that’s left four people dead and 175 injured.” [Sydney Morning Herald]

--Finally, as reported by the BBC’s Jason Palmer:

“Astronomers say that one in six stars hosts an Earth-sized planet in a close orbit – suggesting a total of 17 billion such planets in our galaxy.”

Goodness gracious. There has to be one better than what we’re turning this place into.

---

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

God bless America.
---

Gold closed at $1662
Oil, $93.72

Returns for the week 1/7-1/11

Dow Jones +0.4% [13488]
S&P 500 +0.4% [1472]
S&P MidCap +0.2%
Russell 2000 +0.2%
Nasdaq  +0.8% [3125]

Returns for the period 1/1/13-1/11/13

Dow Jones +2.9%
S&P 500 +3.2%
S&P MidCap +3.7%
Russell 2000 +3.7%
Nasdaq +3.5%

Bulls 51.1
Bears 23.4 [Source: Investors Intelligence…this is a contrarian indicator, remember. Bull/Bear spread nearing 30-point danger zone.]

Nightly Review video schedule: Monday thru Thursday… accessible through home page.

Have a great week. I appreciate your support.

Brian Trumbore