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01/26/2013

For the week 1/21-1/25

[Posted 12:00 AM ET]

Europe, Washington and Wall Street

Economist Barry Eichengreen, addressing the World Economic Forum in Davos, Switzerland, said that while European governments and markets have been breathing easier in recent months after years of turmoil, it’s no time for complacency.

“Nothing has been resolved in the eurozone, where markets have swung from undue pessimism to undue optimism. They said all the right things last year…and they’ve been backtracking ever since.”

Eichengreen warns the crisis “is going to heat up again in 2013.”

“None of the underlying problems have been solved. There is no economic growth in Europe. Germany itself is on the verge of recession. The banking union doesn’t exist. There’s less consensus on completing it than we thought last year, so the markets are going to lose patience at some point and the crisis will be back.” [Associated Press / New York Times]

Understand that Eichengreen, a professor at Cal-Berkeley, studied the possibility of a eurozone crisis long before it started. On this topic he has Street cred.

And it shouldn’t come as a surprise to any of you that I agree the eurozone crisis, which has been reduced to a low boil the last few months, will indeed come back.

But let me attempt to lay out the good news on the eurozone front this week first.

European Central Bank President Mario Draghi said, again, “The darkest clouds over the euro area subsided,” while admitting eventually there needs to be deeper political union.

Market participants were pleased the euro-area composite reading of the services and manufacturing economy came in at 48.2 for January, up from 47.2 in December, which still means contraction (50 being the dividing line between growth and the opposite), but at a slower pace. The services PMI was 48.3, up from 47.8; the manufacturing PMI rose to 47.5 from 46.1. The January figures are preliminary numbers.

Portugal held its first bond auction since the 2011 bailout there and it went off very well. 

Spain said it would cover 13% of its planned debt issuance for the year in January as it held some solid auctions, helped by the fact that the yield on the 10-year has fallen to 5.10% from the July 25 peak of 7.75%.

Greece received another bailout tranche of $12.3 billion, most of which goes to further recapitalize its banks. The payout reflects greater European confidence in the Greek government’s ability to enact its austerity program.

Many Euro bourses were at or near two-year highs.
Well that’s all the good news I have…now the bad.

The IMF, which three months ago forecast the eurozone would grow 0.2% in 2013, lowered their forecast to a decline of 0.1%.

Back to Spain, the government announced the official unemployment rate for the fourth quarter, 26%, up from 25% in the third, as the youth rate hit 55.1%. And we learned there are 1.2 million unsold homes in Spain, with just 25,000 being bought in November. 

The Bank of Spain announced the economy shrank 0.6% in the fourth quarter over the third, the sixth straight of contraction. The IMF is looking for Spain’s economy to contract 1.5% this year. It’s also interesting to note that five years ago, only 4% of Spaniards thought the EU was a bad thing to be in. Today, after endless austerity, 37% wish Spain wasn’t in the club.

Slovenia, a euro member in case you forgot, could become the sixth to receive a bailout as it staggers under the weight of a massive corruption scandal involving the prime minister who has been in office just one year. The GDP here fell 3.3% in the third quarter over a year earlier.

And back to Greece, I’ve harped on the threats posed by social unrest and anarchy. In just the past week you’ve had journalists who have defended the government and its austerity program being targeted for violence, there was a bombing of a popular shopping mall (though prior warning for evacuation was given), and the government was forced to act to break up a crippling  eight-day metro strike that was the result of protests over salary cuts. The IMF, while praising the Greek government for implementing its reform agenda, nonetheless warned the biggest risk remains political stability. [The IMF also said despite its supposed progress, Greece may need 10 billion euro more in aid.]

In Italy, a huge scandal at the nation’s third-largest bank, Monte dei Paschi di Siena, forced caretaker Prime Minister Mario Monti to recall Parliament amid questions involving the government’s handling of the crisis. As reported by the Financial Times, shares in the institution  collapsed upon learning just days ago “of derivatives transactions that may force the 500-year-old bank to restate hundreds of millions of euros of losses.”

Understand an election here is just four weeks away and the banking crisis has given a boost to Silvio Berlusconi and his People of Liberty party. The center-left coalition, leading in the polls, has long institutional ties with the bank better known as MPS. As the Financial Times’ Rachel Sanderson reported:

“Il Giornale, a Milan daily owned by the Berlusconi family, ran banner headlines saying the more than 4 billion euro paid by Italians in a widely hated property tax imposed by Mr. Monti was in effect going to prop up a failed bank.”

Ah yes, those messy derivatives…weapons of mass destruction.

Meanwhile, in non-euro Britain, they were the first EU nation to report fourth quarter GDP and it came in down 0.3%, worse than expected, which reignited fears of a triple-dip recession here. [Though to be fair, many of Britain’s fundamentals are superior to those of their EU brethren.]

But before I go back across the pond to the U.S., a few notes on Asia, which ties into a little conclusion involving both Europe and the Far East, specifically Japan.

In China, the head of the National Economic Research Institute told the World Economic Forum in Davos that China should grow faster this year than it did in 2012. Last year’s GDP was 7.8%, with the fourth quarter rate at 7.9%.

Fan Gang said, “Now I can say the ‘soft landing’ has landed last year, and now it’s under way to recovery.” More than half of last year’s growth came from consumption, not exports, and online shopping grew a whopping 100%. The consumer, however, overall, is still just 35% of China’s GDP compared with 70% in the U.S.

HSBC then released its flash purchasing managers index for Chinese manufacturing in January, 51.9, the best pace in two years.

In Japan the government announced exports had fallen 5.8% in December from a year earlier, bolstering the case for Prime Minister Shinzo Abe to weaken the yen to boost exports.

[Exports to China were down 15.8% owing to the ongoing tensions in the East China Sea, while they were off 11.1% to the EU (up 0.8% to the U.S.)]

The Bank of Japan agreed to raise the inflation target to 2% and do open-ended asset purchases beginning in 2014, $145 billion each month for as long as necessary to stimulate growth, though some were disappointed the program wasn’t starting sooner. Consumer prices in December fell 0.2% over a year earlier, the 7th month in 8 of price declines, again confirming Abe’s stance that there must be an aggressive monetary policy, coupled with a big stimulus program, to reflate Japan’s economy.

Japan’s stock market loves all this talk and had its 11th straight up week to its highest close since April 2010. The yen is collapsing, as Abe wanted, which will help exporters get out from under their December (and before that) funk.

But there are victims in such a case. In South Korea, their GDP grew just 1.5% in the fourth quarter from a year earlier, the worst performance in three years. Lee Sung Kwon, an economist at Shinhan Investment Corp. in Seoul, said, “Japan is trying to boost its economy by weakening the currency for exporters at the expense of its consumers and other countries. South Korea will be hit the hardest among others as it is in direct competition with Japan over many products – from cars to electronics.”

Not just South Korea.

Last week I wrote the following (in “Street Bytes”):

“This is just the beginning of this topic…currency wars. I’ve been careful not to use the term until the appropriate time. That time is now.”

This week the rhetoric on the topic was hot and heavy. George Soros, speaking in Davos, said the “biggest danger” the global economy faces these days is a “currency war.”

Jens Weidmann, president of Germany’s Bundesbank, warned on Monday:

“It is already possible to observe alarming infringements, for example in Hungary or in Japan, where the new government is massively involving itself in the affairs of the central bank, is emphatically demanding an even more aggressive monetary policy and is threatening an end to central bank autonomy.

“Whether intended or not, one consequence could be the increased politicization of the exchange rate. Until now the international monetary system got through the crisis without competitive devaluations and I hope very much it stays that way.” [Financial Times]

Japan’s economy minister fired back:

“Germany is the country whose exports have benefited most from the euro area’s fixed exchange rate system. He’s not in a position to criticize.”

The yen is down about 15% against the euro since November.

The European Central Bank said the exchange rate is “not a policy target.” But, yes, the stronger euro threatens to strangle exports, including Germany’s, at the worst possible time.

So German Chancellor Merkel weighed in on Thursday:

“I don’t want to say that I look toward Japan completely without concern at the moment,” she said, adding, “In Germany, we believe that central banks are not there to clean up bad policy decisions and a lack of competitiveness.”

Ouch. Yup, it’s heating up. 

---

Turning to Washington and Wall Street…President Obama received the oath of office for a second term, he gave a partisan inaugural address, House Republicans caved on the debt ceiling, vowing to fight another day, and stocks continued to power higher.

I have a few comments below on President Obama’s address on Monday, but it’s mostly what he didn’t say that caught my attention; namely the seeming complacency on the foreign policy front, though I said he’d ignore the topic in this particular forum. I’d like to think the State of the Union will be different.

As for the debt ceiling, the Republican-controlled House opted to punt and suspend enforcement of the federal debt limit thru May 18, with the vote being 285-144. Senate Majority Leader Harry Reid immediately said the Senate would advance the bill this coming week and President Obama will sign it.

The measure requires both houses to put forward budgets by April 15. If the Democrats in the Senate didn’t come up with one, as has been the case for over three years, then their pay would be placed in escrow. “No budget, no pay.”

On May 19, the debt limit will automatically be reset at a higher level reflecting the additional borrowing beyond the $16.4 trillion that has occurred.

So you still have the March 1 sequester date for the automatic spending cuts, with Democrats not wanting domestic programs touched and Republicans not wanting to cut defense further, while on March 27 you have the deadline for a continuing resolution (CR) to fund the government thru September 30. 

House Budget Committee Chairman Paul Ryan is back, tanned and rested after the disappointment of the election, and he has promised to submit a budget plan in the coming weeks that would erase the annual federal deficit within a decade by cutting government spending and without raising tax revenue further.

“The president got his revenues,” said Ryan the other day.

So now we get a little break until the State of the Union address on Feb. 12, must see television. Oh, it will be boring as hell at times, but this will be the Democrats’ true game plan and I hope the Republicans have lined up someone good for the rebuttal.

For now, Nicholas Eberstadt / Wall Street Journal:

“In President Obama’s second inaugural address, he not only outlined an ambitious agenda for his second term but also seemed intent on shutting down debate about the social-welfare state and its impact on American life.

“ ‘The commitments we make to each other – through Medicare, and Medicaid, and Social Security – these things do not sap our initiative; they strengthen us,’ Mr. Obama said. ‘They do not make us a nation of takers; they free us to take the risks that make this country great.’ In other words, the president is tired of listening to critics of America’s entitlement programs, and as far as he is concerned, the discussion is now over.

“It is not over – and won’t be anytime soon, because the country’s social-welfare spending is generating severe and mounting hazards for the nation. These hazards are not only fiscal but moral….

“Consider:

“—Over the 50-plus years since 1960, according to the Bureau of Economic Analysis, entitlement transfers – government payments of cash, goods and services to citizens – have been growing twice as fast as overall personal income. Government transfers now account for nearly 18% of all personal income in America – up from 6% in 1960.

“—According to the BEA, America’s myriad social-welfare programs (the federal bureaucracy apparently cannot determine exactly how many of these there are) currently dispense entitlement benefits of more than $2.3 trillion annually. Since those entitlements must be paid for – either through taxes or borrowing – the burden of entitlement spending now amounts to over $7,400 per American man, woman and child.

“—In 1960, according to the Office of Management and Budget, social-welfare programs accounted for less than a third of all federal spending. Today, entitlement programs account for nearly two-thirds of federal spending. In other words, welfare spending is nearly twice as much as defense, justice and everything else Washington does – combined. In effect, the federal government has become an entitlements machine.

“—According to the latest data from the U.S. Census Bureau, nearly half (49%) of Americans today live in homes receiving one or more government transfer benefits. That percentage is up almost 20 points from the early 1980s. And contrary to what the Obama White House team suggested during the election campaign, this leap is not due to the aging of the population. In fact, only about one-tenth of the increase is due to upticks in old-age pensions and health-care programs for seniors.

“Instead, the country has seen a long-term expansion in public reliance on ‘means-tested’ programs – that is, benefits intended for the poor, such as Medicaid and food stamps. At this writing, about 35% of Americans (well over 100 million people) are accepting money, goods or services from ‘means-tested’ government programs. This percentage is twice as high as in the early 1980s.”

Well, Mr. Eberstadt goes on. Understand, aside from the fact I respect the heck out of his work, he is the foremost expert in the world on demographics, such as in dissecting the depressing trends in Europe and Japan. [For the record he is resident scholar at the American Enterprise Institute.]

Eberstadt concludes his Journal op-ed:

“According to the trustees…Social Security and Medicare have already made tens of trillions of dollars in future promises that are not covered by their expected funding streams. If and when outside resources are required to honor their promises, these entitlements become transfer programs, not insurance programs.

“The moral hazard embedded in the explosion of social-welfare programs is plain. Transfers funded by other people’s money tend to foster a pernicious ‘something for nothing’ mentality – especially when those transfers seem to be progressively and relentlessly growing, year by year. This ‘taker’ mentality can only weaken civil society – even as it places ever-heavier burdens on taxpayers.

“Generosity is a virtue, on that we can all agree with President Obama. But being generous with other people’s money is not the same thing.”

As for foreign policy, I noted on one of my Nightly Review videos this week that I’ve been writing this column for 14 years (as of next month), 15 ½ going back to my days doing it at PIMCO, and it’s always been 50% financial markets, 50% geopolitics. I’m constantly looking for that hot spot that could upset the apple cart in a big way, change sentiment on a dime, or in a grinding way.

Today, I just feel there are a slew of items, including some rather obvious ones on the terrorism front, quite frankly, wherein you won’t want to be 100% equities at that time.

I can’t stop thinking about all the loose shoulder-fired missiles from the collapse of Libya, for example, and how it just seems inevitable that a commercial airliner, or two, will be taken out by one. Maybe it’s a softer target, such as in Africa, or parts of the Middle East, and the major equity markets more or less shrug it off. But maybe it’s in Europe, or here.

More conventionally, you still have the wishful thinking of President Obama and the line from his inaugural:

“A decade of war is now ending.”

Editorial / Washington Post

“That would come as news to the Afghan soldiers still dying at Taliban hands; to the families of more than 60,000 people killed in Syria in the past two years; to French soldiers who have taken on, in Mali, al-Qaeda affiliates who are as much enemies of the United States as of France; to the families of American hostages just slain in a terrorist attack in Algeria. America’s adversaries are not in retreat; they will be watching Mr. Obama in his second term to see if the same can be said of the United States.”

Editorial / Wall Street Journal

“Perhaps you’ve heard that ‘the tide of war is receding,’ except apparently where it isn’t, which seems to be much of the world. The latest flash points are in North Africa and the Western Pacific, both of which implicate America regardless of President Obama’s second-term wishes.”

Editorial / The Economist

“Given America’s problems, some emphasis on ‘nation-building at home,’ as Mr. Obama likes to call it, is inevitable. But a world in which America turned inward would be a far less predictable and a less safe one. Mr. Obama also has a lot of unfinished business abroad from his first term. Despite all the grand talk of resets and new understandings, Iran is still a threshold nuclear power, Russia is hostile, Europe neglected and the Middle East as tense as ever. The wars in Iraq and Afghanistan have been wound down leaving neither victory nor stability in their wake.

“That inbox is too much for any man, but two areas where the president should make a real and personal push in his second term stand out. One is China. By January 2017 its economy may be bigger than America’s. No bilateral relationship in the world is now more important. In his first term Mr. Obama avoided any big disasters. Now the odds are raised. On the negative side, a jumpy nationalistic China could become the equivalent of Prussia a century ago: the prospect of a conflict between China and America’s ally, Japan, over the Senkaku islands is real. But he also has the chance to turn a suspicious relationship into something much more useful. Imagine, for instance, what a ‘G2’ climate-change agreement would do for the environment.

“Xi Jinping has now been China’s leader for two months, yet Mr. Obama has not seized the chance to see him (in Europe last year the new president of France rushed to visit the German chancellor the very day of his inauguration). Mr. Xi will be around for the rest of Mr. Obama’s time and for six years after he is gone, so frequent summits and many more bilateral meetings at all levels are essential….

“The final area where Mr. Obama will be judged – and where he could make an enormous difference – is the Arab world. One looming, disastrous Obama legacy could be the death of the two-state solution to the Israeli-Palestinian mess. As for the broader Arab spring, he may not be able to control it, but he can help direct it, in the same way that the older President Bush oversaw the end of the cold war. Syria is out of control. Countries like Egypt and Tunisia may be ruled by Islamists, but they are now democracies and desperate for financial help. If Mr. Obama leaves behind a region of mini Turkeys, that would be a notable achievement. He cannot afford to appear as indifferent, or fearful of failure, towards so dangerous a region in his second term as he did in his first.

“History’s verdict is always hard to predict. But if Mr. Obama fails to grapple with these three things – the budget, China and the Middle East – he will surely be seen harshly. Each requires bravery and resolution, and Mr. Obama needs to start working on them now. We should all wish him well.”

Street Bytes

--Stocks continue to rock and roll at the start of 2013, finishing up a fourth straight week with the Dow Jones and S&P 500 closing at 5-year highs. The Dow now sits at 13895, up 1.8% for the week, 6.0% for January, and just 2% shy of the all-time high of 14164 from Oct. 9, 2007, while the S&P 500, at 1502, up 1.1% for the week and 5.4% for the month, is just 63 points shy of its all-time high of 1565 set the same October day. [Nasdaq was up only 0.5% this week as it continues to be impacted by Apple’s swoon.]

The news on the economy this week wasn’t all good, though. Yes, jobless claims for the week were at a five-year low, the second straight solid week on this front, but the data on housing was disappointing on both existing- and new-home sales for December.

As for earnings, I jotted down 13 companies I gauged to be important at the start of the week – Google, IBM, DuPont, Traveler’s, J&J, Verizon, Apple, McDonald’s, Microsoft, 3M, Celgene (local Summit, N.J., high-flyer), P&G and Honeywell.

Correct me if I’m wrong, but I only thought DuPont, Traveler’s, 3M and P&G were really solid out of this group. Maybe Google. It’s just the revenue growth for so many of them, such as with IBM, is minimal at best.

Or maybe I’m all wet. I have been for some time now, after all, in terms of my market commentary. It’s a long year, though, sports fans. 

--U.S. Treasury Yields
6-mo. 0.11% 2-yr. 0.27% 10-yr. 1.94% 30-yr. 3.13%

The Federal Reserve’s balance sheet is officially over $3 trillion as of Jan. 23 as a result of its ongoing bond-buying program; triple its size before the financial crisis.

--PIMCO’s Bill Gross, as part of the Barron’s roundtable, commenting on earnings:

“Let’s try to analyze why earnings have done so well in recent years. Corporate profits have come at the expense of labor. Wages as a percentage of GDP have declined to 54% from 59% in the past 10 years. That trend would have to continue for earnings to keep going up. Also, 30% to 35% of earnings growth in the past five years has come from lower interest expense. Most of you probably would agree that is coming to an end, as well. Corporations have to sell their products to somebody. They can’t benefit when that somebody has depressed wages and high leverage. At some point the game begins to change.”

Bill Gross on the deficit picture:

“Can I introduce some evidence from the Office of Management and Budget, the Congressional Budget Office, the International Monetary Fund, and the Bank for International Settlements? Four out of four, using different sets of numbers, basically say the U.S. is one of the world’s most grievous offenders in not reducing the level of its deficit relative to GDP. They are talking about a structural deficit that takes into account future payments for Medicare, Medicaid, and Social Security.

“Their numbers suggest this structural deficit continues at 8% a year. The structural deficit needs to be reduced by a trillion dollars a year, not a trillion dollars over 10 years. This country is in deep doo-doo. These numbers aren’t mine or PIMCO’s, but those of government and international authorities. Yet, we continue to deny what is going on.”

--Apple’s total revenues grew 18% to $54.4 billion for the quarter, and it sold a record 47.8 million iPhones in the three months ending December, up 78% on the prior year, but basically in line with expectations. Apple sold 22.9 million iPads in the Christmas quarter, up from 15.4 million a year ago.

Net income of $13.1 billion, and earnings per share of $13.81 beat forecasts, though the profit growth was the slowest since 2003 with the weakest sales increase in 14 quarters.

So the concern is over rising production costs and competition from Samsung, though on the smartphone front, according to Kantar ComTech, Apple increased its share of the market to 51.2% from 44.9% a year earlier in the U.S.

But Apple’s guidance for the current quarter was also below Street estimates. Add it all up and investors concluded the company’s best days were behind it. SELL!!!

The stock is now down 37% from its September high of $705, down to $439, off 17% for the month. On Friday it also surrendered its title as the world’s most valuable company to Exxon Mobil Corp. Apple was No. 1 for 12 months.

--Samsung Electronics reported record net income of $6.6 billion, beating analysts’ estimates. Last year, Samsung became the world’s biggest smartphone maker, overtaking Apple (don’t confuse with above data on U.S.).

Samsung did warn, however, “The furious growth spurt seen in the global smartphone market last year is expected to be pacified by intensifying price competition, compounded by a slew of new products.

“In the first quarter, demand for smartphones in developed countries is expected to decelerate, while their emerging counterparts will see their markets escalate with the introduction of more affordable smartphones and a bigger appetite for tablet PCs throughout the year.”

--After a poor third quarter, Google rebounded in the fourth with profit up 7% on a year earlier and revenues up by more than a third at $14.4 billion. For the year, sales hit $50 billion for the first time. Shares rallied strongly on the news.

--Netflix reported that 27.15 million households in America were subscribers to the streaming service by the end of 2012, up by 2.05 million customers from 25.1 million in the third quarter – the biggest increase in nearly three years. Netflix also reported net income of $7.9 million vs. the loss many expected. Shares skyrocketed on the news from a Wednesday close of $103 prior to the earnings release to finish the week at $169!

Consider it was just 1 ½ years ago that Netflix was ripped to shreds because of a new pricing scheme that met with resounding jeers. The share price, which had skied to around $300, promptly fell to a low of $53 last August.

--Microsoft reported earnings that were in line, which wasn’t good enough for a pop in the share price as the company reported it sold 60 million copies of Windows 8, an unimpressive launch. Revenues for the quarter rose 3% to $21.4 billion compared with the same period a year before, while net profits fell by 3.7%.

Overall, though, the Windows division reported sales rose 24%, very solid, but the Office and business software revenues were down 10%.

Bottom line, Windows 8 is no blockbuster.

--IBM reported net income increased 6.3% to $5.85 billion in the fourth quarter, though overall revenue declined 1%. IBM did say, however, that earnings in 2013 would rise another 8% and the shares rallied on this news.

But you still have this revenue issue and for all of 2012, it declined 2.3%.

--An extensive story by Scott Mayerowitz of the AP concludes that Boeing rushed the Dreamliner. To wit:

It was two years after 9/11, “financially troubled airlines were reluctant to buy new planes. Boeing needed something revolutionary to win back customers…

“But once production started, the gap between vision and reality quickly widened. The jet that was eventually dubbed the Dreamliner became plagued with manufacturing delays, cost overruns and sinking worker morale….

“Adding to the chaos was the company’s never-before-tried plan to build a plane from parts made around the globe.”

Meanwhile, the National Transportation Safety Board said a battery fire on a Japan Airlines Boeing 787 was unprecedented and a “very serious air safety concern.” Then nine days later Japan’s All Nippon Airlines was forced to make an emergency landing because of smoke coming from a battery.

Deborah Hersman, head of the NTSB, said, “The expectation in aviation is to never experience a fire on board an aircraft. In two weeks…we saw two cases of battery failure on a 787 and the grounding of the entire fleet by the FAA.”

It was “all hands on deck” to determine what had gone wrong with the battery. A resolution appears weeks away. Boeing shares, though, have been rock solid following an initial decline on reports of the first battery incident. It’s not as if there are a lot of alternatives for the airlines out there and everyone just assumes whatever the problem is will be fixed in short order.

--McDonald’s forecast a decline in global sales for January, though its December revenues in the U.S. were better than expected, which helped it exceed Street expectations. Total sales rose 1.9%.

Global same-restaurant sales were flat in December, but up slightly in the U.S. owing to both keeping more restaurants open on Christmas Day and the limited-time offering of the McRib.

--53 senators signed a letter urging quick approval of the Keystone XL oil pipeline, putting pressure on President Obama to move ahead with the project after Nebraska Gov. Dave Heineman’s approval of a revised route through his state.

“We urge you to choose jobs, economic development and American energy security,” the letter said, adding that the pipeline “has gone through the most exhaustive environmental scrutiny of any pipeline” in U.S. history. “There is no reason to deny or further delay this long-studied project,” the letter continued.

Nebraska’s approval means all six states along the proposed route now support it.

--Germany’s second-biggest lender Commerzbank is planning on cutting 6,000 jobs, or more than 10% of its workforce, though this will be over the next few years. Commerzbank has been singled out for its exposure to Europe’s periphery.

--The above is not included in a Bloomberg tally of 16,040 announced and expected reductions in the past three weeks from financial-services firms around the world. “Bankers and consultants expect the cuts to accelerate in coming months even as financial stocks gained 26% last year.”

UBS Chairman Axel Weber said in Davos, “Regulators have clearly made up their minds that banks are too big. The future for banks will be quite different.”

According to Bloomberg, “Global cuts at financial firms have exceeded 115,000 since 2012.”

--But wait…there’s more! According to a forecast from the Confederation of British Industry, the U.K.’s financial-services firms will lose 43,000 jobs in six months.

--In a late filing on Friday, Caterpillar Inc. reported the first decline in retail machine sales in more than 2 ½ years owing to a slowdown in Asia; down 7% for the region in the fourth quarter. North American orders were off 6%.

--The S&P 500 rose 85% in President Obama’s first term. But as economist Ed Yardeni told USA TODAY, “I would say that the great performance has a lot more to do with Federal Reserve Chairman Ben Bernanke than Obama.”

--According to the Bureau of Labor Statistics, union membership in the U.S. declined from 11.8 percent to 11.3 percent of the workforce, the lowest level since the 1930s.

More than half the loss, about 234,000, came from government workers including teachers, firefighters and public administrators.

Union membership was 13.2% in 1935 when FDR signed the National Labor Relations Act and peaked at about 33% in the 1950s. By 1983, though, it was down to 20%.

Since August 2008, state government employment has declined by 135,000, while local government employment fell by 546,000. [Sam Hananel / AP]

--From Greg David / Crain’s New York Business…following release of news that Wall Street bonuses would for the most part be down from last year.

“The amount of money Wall Street sends to Albany (in personal and business income taxes and capital gains) declined from more than $12 billion in 2008 to less than $9 billion last year, and is almost certain to fall again…In percentage terms, the Street used to account for 21% of all state revenue; today, the number is 13% and sliding.

“It is the same story for the city, which collected almost $5 billion in 2008 (from personal income, general incorporation and unincorporated business taxes) and now gets less than $3 billion a year.

“The great unknown is where we are headed. If Wall Street shrinks to the size and profitability of 1996, just before the Internet boom really took off, the state revenue it provides will fall by more than half, to $4 billion annually. The city’s take will fall by two-thirds.

“Even as other industries grow in the city, they won’t take up the slack because they just aren’t as profitable and don’t pay their employees anywhere near where Wall Street does.”

Can you say jobs? Or lack thereof?

--President Obama selected Mary Jo White, the first female United States attorney in Manhattan, to run the Securities and Exchange Commission. White is good, overseeing the prosecution of John Gotti and those responsible for the 1993 World Trade Center bombing. While she lacks experience in the business of Wall Street, re the finance side, that’s what a staff is for. She’ll be tough. 

--Gillian Tett / Financial Times

“It was at the World Economic Forum meeting in Davos six years ago that I first became seriously worried about the credit bubble….

“But this time my unease does not revolve around any financial threats, but another issue – cyber security. Most notably, after chatting to corporate executives at Davos this year, it is clear many are suffering a deluge of cyberattacks. Some of these emanate from teenage hackers, or opportunists trying to steal money or secrets; but many seem more malign, security experts say, with the potential to disable corporate systems or critical infrastructure….

“In recent months, some companies (such as HSBC, Wells Fargo or Lockheed) have been forced to admit to suffering cyberattacks, after the penetration has become visible. But this is just the tip of a vast iceberg, and the overwhelming majority of companies today are terrified of talking too publicly about the issue, for fear of suffering stigma or sparking panic.

“That means it is tough for any outsider to get precise information about the overall scale of attacks. It is even tougher for shareholders to work out the degree to which individual companies are being targeted.”

--You know what’s in a bubble these day? Burgers. Kaja Whitehouse of the New York Post had a piece last weekend titled “Burger madness takes over NYC metro area.”

“The burger craze sweeping the country has sparked fierce competition in the New York metro area, where a growing pack of chains is looking to cater to the beef-obsessed.”

Chains like Five Guys, Checkers Drive-In, Fatburger, Smashburger, Jake’s Wayback Burger, Shake Shack…these folks aren’t just adding one or two locations…try 20, 23, 45…in the five boroughs, with further expansion on Long Island.

Some will survive. Others won’t.

But…according to industry tracker Technomic, 48% of Americans eat a burger at least once a week, up from 38% in 2009.

--Meanwhile, Ireland was faced with a horsemeat-in-beef-burgers scandal, with in all seriousness the potential damage to the country’s reputation as an international food producer in question.

At Tesco (a grocery chain) “one of its Irish produced ‘Value Range’ burgers had 29% horsemeat.” [Irish Independent]

There are real dangers in that you don’t know if the horses were diseased in any way. The U.K. is Ireland’s main export market for both food and beverage products. 100,000 are employed in Ireland’s food industry.

But there is one good note in the ongoing investigations. Last I saw, of 19 salami products analyzed in Ireland, all tested negative for horse DNA.

Foreign Affairs

Israel: No other way to describe the Israeli vote this week then that it was an embarrassing rebuke to Benjamin Netanyahu. The Likud-Beitenu party will be the largest with 31 seats; not only down from 42 but it is essentially just one-quarter of the 120-seat Knesset.

The big winner was former TV celebrity Yair Lapid, whose new centrist Yesh Atid (“There’s a Future”) party gained 19 seats.

The opposition Labor was third with 15 seats, while Naftali Bennett’s ultra-nationalist Jewish Home came in at 12.

Netanyahu now has six weeks to form a coalition or President Shimon Peres can give someone else the task, but as long as Yair Lapid joins Netanyahu’s Likud Beitenu alliance, as looks certain today, that’s 50 of the 61 seats needed and it would appear Bennett’s Jewish Home party, 12, and centrist Kadima, 2, will be the other partners to get the prime minister his majority.

So a centrist oriented government with perhaps less of a focus on settlement building and more on the economy.

Or as the prime minister put it when discussing coalition building, “The government will be based on five principles: first challenge…to prevent a nuclear Iran.”

As for Lapid, he wants the role of Foreign Minister, while former Foreign Minister Avigdor Lieberman, head of Beitenu, said he would accept the finance slot.

One issue Lapid is adamant about; ultra-Orthodox Jews should no longer be able to skirt military service.

Iran: Former U.S. Secretary of State Henry Kissinger warned that a crisis involving Iran is in the “foreseeable future.” Speaking at the World Economic Forum, Kissinger, now 89, said nuclear proliferation in the region triggered by an armed Iran would increase the chances of an atomic war – “a turning point in human history.”

“For 15 years, the permanent members of the United Nations Security Council have declared that a nuclear Iran is unacceptable, but it has been approaching. In a few years, people will have to come to a determination of how to react, or the consequences of non-reaction. I believe this point will be reached in a very foreseeable future,” Kissinger said.

Kissinger added:

“Unilateral intervention by Israel would be a desperate last resort, but the Iranians have to understand that if they keep using the negotiations to gain time to complete a nuclear program then the situation will become extremely dangerous….

“The danger is that we could be reaching a point where nuclear weapons would become almost conventional, and there will be the possibility of a nuclear conflict at some point…that would be a turning point in human history.” [BBC News]

Syria: A U.N. team that just completed a four-day fact-finding visit here concluded that the war was “destroying” the country. John Ging, operations chief for the U.N.’s humanitarian affairs branch, told reporters Tuesday, “We saw a shocking state of human suffering,” in describing the wrecked homes, factories, shortages of food and water and zero prospect of a political solution.

Also this week, Russia began taking steps to evacuate its citizens in Syria, through Lebanon.

Jordan: Parliamentary elections this week offered more of the same. The Muslim Brotherhood boycotted the vote and those elected were, for the most part, the same old-boy network of corrupt officials. At least international monitors said the election appeared to be relatively clean. Nonetheless, the protest movement will just gather speed, imperiling King Abdullah II.

Also of immediate import here is the burgeoning refugee crisis. In one seven-day period, 20,000 Syrians crossed the border into Jordan, bringing the number in refugee camps up to 300,000. Jordan hasn’t closed its border, and doesn’t want to, but it needs funds for improving the infrastructure of these hellholes.

Mali: Sudarsan Raghavan and Edward Cody / Washington Post

“With no clear exit strategy, the French are encountering a host of problems: Mali’s interim government is weak, its military is disorganized, and a long-promised African intervention force is far from ready. Even as French troops worry about killing civilians, it is unclear who the civilians are and where their sympathies lie. Ethnic, religious and regional rivalries, as well as old and unsettled vendettas, also are posing obstacles.

“The Malian army, which France sought to bolster with its action, has been accused of committing abuses, particularly against the Tuareg ethnic group, some of whose members launched the March rebellion that has divided this West African nation. That could erode popular support for the military intervention here and in France, and it could complicate France’s ability to recruit secular Tuareg militias to battle the Islamists.

“On Thursday, a new Tuareg militia emerged as Ansar Dine, one of three groups fighting in Mali, split. The new group…calls itself the Islamic Movement for the Azawad and says it is ready to negotiate.

“French soldiers also could find themselves caught in the middle of growing tensions between the lighter-skinned Tuaregs, who are from the north, and black Malians from the south, who run the government and the military.”

Editorial / Washington Post

“(We) were struck by the forcefulness and clarity with which (Secretary of State Hillary Clinton) made the case (in her Senate and House hearings) that the United States faces a ‘very serious, ongoing’ and ‘strategic’ threat in North Africa from al-Qaeda affiliates and other jihadists – one that she argued demands a vigorous and comprehensive response.

“ ‘We are in for a struggle,’ Ms. Clinton said. ‘But it is a necessary struggle. We cannot permit northern Mali to become a safe haven…We’ve got to have a better strategy.’

“The outgoing secretary’s statements were particularly striking when compared with President Obama’s inaugural address Monday, which promised to end ‘a decade of war’ in favor of nation-building at home, and with the White House’s current approach to Mali.”

For example, the White House doesn’t believe al-Qaeda in the Islamic Maghreb (AQIM) poses a direct threat to the United States, while the Pentagon, and Clinton, do.

Clinton: “People say to me all the time, well, AQIM hasn’t attacked the United States. Well, before 9/11, 2001, we hadn’t been attacked on our homeland since, I guess, the War of 1812 and Pearl Harbor. So you can’t say, well, because they haven’t done something they are not going to do it.”

Anne Applebaum / Washington Post…on the role the French are playing in Mali.

“If America is to enjoy ‘peace in our time’ – an expression now deployed by both Barack Obama and Neville Chamberlain – while the rest of the world remains at war, then someone else will fill the vacuum. A glance at the other candidates – China, Russia, perhaps Qatar or another Gulf nation – ought to make us all stop giggling about cheese-eating surrender monkeys and start offering logistical and moral support. Europe may not be the best superpower. But it’s the only one we’ve got.”

The United States did finally step up and offer to transport French troops and materiel to the theater. Britain has placed its forces on “high readiness” to deploy if requested to support France.

Prime Minister David Cameron said some of the following in the past week.

“We must frustrate the terrorists with our security, we must beat them militarily, we must address the poisonous narrative they feed on, we must close down the ungoverned space in which they thrive and we must deal with the grievances they use to garner support.

“This is the work our generation faces and we must demonstrate the same resolve and sense of purpose as previous generations have with the challenges that they faced….

“This is a global threat and it will require a global response. It will require a response that is about years, even decades, rather than months.”

Algeria: The army-backed government here has one way of dealing with terrorists, while the West generally has another. With the taking of the natural gas facility at In Amena ten days ago, the West saw how the Algerians respond to such provocations…brutally. If we are to believe the final report of the prime minister (the president, who has the power here, stayed amazingly silent throughout), the death toll ended up being 29 militants (out of 32); 37 foreign workers, including 3 Americans, 6 Brits, and 9 Japanese; and an unknown number of Algerians.

The leader of the Masked Brigade, the al-Qaeda offshoot that carried out the attack, Mokhtar Belmokhtar, said the attack on the plant had been planned long ago and warned of further strikes against western targets in response to the French intervention in Mali.

“We emphasize to our Muslim brothers to stay away from all western companies and complexes for their own safety, especially the French ones.”

Back to the Algerians, remember, they fought a decade-long war with Islamists in the 1990s in which 200,000 died. Mokhtar Belmokhtar was a veteran of those wars, as well as the battle against the Soviets in Afghanistan. Algeria has been relatively stable the last ten years.

Robert F. Worth / New York Times

“As the uprising closed in around him, the Libyan dictator Col. Muammar el-Gaddafi warned that if he fell, chaos and holy war would overtake North Africa. ‘Bin Laden’s people would come to impose ransoms by land and sea,’ he told reporters. ‘We will go back to the time of Redbeard, of pirates, of Ottomans imposing ransoms on boats.’….

“ ‘It’s one of the darker sides of the Arab uprisings,’ said Robert Malley, the Middle East and North Africa director at the International Crisis Group. ‘Their peaceful nature may have damaged Al Qaeda and its allies ideologically, but logistically, in terms of the new porousness of borders, the expansion of ungoverned areas, the proliferation of weapons, the disorganization of police and security services in all these countries – it’s been a real boon to jihadists.’….

“Algeria’s authoritarian government is now seen as a crucial intermediary by France and other Western countries in dealing with Islamist militants in North Africa. But the Algerians have shown reluctance to become too involved in a broad military campaign that could be very risky for them. International action against the Islamist takeover in northern Mali could push the militants back into southern Algeria, where they started. That would undo years of bloody struggle by Algeria’s military forces, which largely succeeded in pushing the jihadists outside their borders.

“The Algerians also have little patience with what they see as Western naivete about the Arab spring, analysts say.

“ ‘Their attitude was, ‘Please don’t intervene in Libya or you will create another Iraq on our border,’’ said Geoff D. Porter, an Algeria expert and founder of North Africa Risk Consulting, which advises investors in the region. ‘And then, ‘Please don’t intervene in Mali or you will create a mess on our other border.’ But they were dismissed as nervous Nellies, and now Algeria says to the West: ‘Goddamn it, we told you so.’’”

Jim Hoagland / Washington Post

“A West African diplomat with whom I discussed U.S., British and French involvement in Libya nearly a year ago put it more succinctly: ‘We saw what you could do militarily in Libya. But we are not impressed by the after-sale service.’”

Libya: Ironically, a day after Sec. of State Hillary Clinton’s testimony before Senate and House committees on her response to the Benghazi attacks that killed four Americans (see more on this below), Britain’s Foreign Office has urged British nationals to leave the Libyan city in response to what it said was a “specific threat to westerners.” Germany and the Netherlands followed Britain’s lead in urging their own citizens to bolt. An international school in Benghazi, with many westerners employed as teachers, would be a prime hostage-taking target.

Iraq: The recent wave of unrest continued with bombings and sectarian shootings on consecutive days claiming 35 and 24 lives. In the former, a crowded tent full of Turkmen mourners, including a number of high-ranking regional dignitaries, was the target of a suicide bomber.

Turkmen leaders demanded international forces provide security for them. The head of one Turkmen tribe told the New York Times: “We are being targeted, and our existence in Iraq is very dangerous, and we are under genocide. The central government is doing nothing for us.”

Egypt: There were mass protests in Cairo and elsewhere on the second anniversary of the launch of the revolution that toppled Hosni Mubarak, only this time protesters are seething with anger at the Muslim Brotherhood.   The same rhetoric is being used as before, only now, as reported by the Jerusalem Post, activists “slam the ruling political party and President Mohamed Morsi, which, they say, have plunged the country into a terrible economic depression.”

Opposition leader, Mohamed El Baradei, in an online post, urged the people to protest “to prove that the revolution must continue and must be completed.”

At least nine were killed in the protests on Friday, most of which were in the city of Suez.

North/South Korea: North Korea threatened to attack South Korea if Seoul joined in on new UN sanctions approved this week. For three straight days, Pyongyang has fired off a verbal barrage, saying: “ ‘Sanctions’ mean a war and a declaration of war against us.”

Referring to the South, the North said, “If the puppet group of traitors takes a direct part in the UN ‘sanctions,’ the DPRK will take strong physical counter-measures against it.”

The North also said it would carry out further rocket launches and a nuclear test, calling out the United States as its “sworn enemy.”

Defense Secretary Leon Panetta said, “We are very concerned with North Korea’s continuing provocative behavior.”

For its part, China repeated its call for calm on the Korean peninsula. The Global Times, a party mouthpiece, also opined, “If North Korea engages in further nuclear tests, China will not hesitate to reduce its assistance to North Korea.”

Next week, Jan. 30, South Korea will make another attempt to send a long-range rocket into space. The launch has been delayed on two separate occasions due to technical issues.

China/Japan: A special envoy for Japan, Natsuo Yamaguchi, after meeting with president-in-waiting Xi Jinping in Beijing, said he believed tensions with China fanned by a dispute in the East China Sea can be resolved.

“Japan wishes to pursue ties with China while looking at the big picture,” Yamaguchi told reporters after the meeting. But he also said he didn’t directly discuss the islands issue with Xi.

For his part, Xi said he would consider a summit between leaders of the two nations if there was a “proper environment.” Nothing will happen any time soon. Beijing doesn’t want to anger nationalists who have urged tough action against Tokyo. Ditto, Tokyo and Shinzo Abe.

Editorial / The Economist

“China and Japan are sliding towards war. In the waters and skies around disputed islands, China is escalating actions designed to challenge decades of Japanese control. It is accompanying its campaign with increasingly blood-curdling rhetoric. Japan, says the China Daily, is the ‘real danger and threat to the world.’ A military clash, says Global Times, is now ‘more likely…We need to prepare for the worst.’ China appears to be preparing for the first armed confrontation between the two countries in seven decades…

“East Asian parallels from a century ago are hard to ignore. Then, as justification for continental expansion, a bullying Japan drank from a dangerous brew of nationalism and a manufactured sense of foreign aggression and victimhood. As China pursues a policy of maritime expansion, the rhetoric of victimization is remarkably similar. The coming clash that China now talks about could be as calamitous as that previous one was. It would imperil not just China’s but the region’s peace and its momentous economic advances.

“The world, including America, has a duty to warn China before it is too late, though warnings will be interpreted as conspiracies. So who in China will speak out against this unfolding madness?”

Japan is threatening to have its aircraft fire tracer bullets at Chinese jets in the disputed region as warning shots but China said these will be viewed as “combat.”

Britain: In a major speech, British Prime Minister David Cameron promised an in/out referendum on the European Union if the conservatives win the next election in 2015. Cameron wants to renegotiate the U.K.’s relationship with the EU before calling the vote, which would be no later than Nov. 2017, but probably a lot sooner.

Cameron has been under pressure from many of his MPs to give a binding commitment to a vote on Europe, but he notes holding the referendum today would be a “false choice” because Europe is set to change following the eurozone crisis.

The prime minister is attempting to thread the needle in saying that he wants Britain to play a committed and active part in the EU, that the EU is better for Britain being in it, but that the EU must change, specifically send more power back to national capitals.

Without such change, Britain risks “drifting towards the exit.”

If a referendum were held today on leaving or staying in the European Union, a poll for the Times of London shows 40% would vote to leave, 37% to stay and 23% don’t know how they would vote. So there’s an indication of the gamble Cameron could be taking down the road.

Boris Johnson, the Mayor of London who would like to be prime minister one day, commented on the topic, “I can’t say now. But my overwhelming instinct would be that we can get sufficient changes, reforms and improvements to the treaty to make it sensible, for most people in my country to vote to stay in the single market.”

German Chancellor Merkel did not make reference to Cameron’s pitch for a reformed EU in her speech in Davos, which was interpreted by some as a snub for Cameron. The day before, Merkel had said she was happy to talk about his ideas, calling for a “fair compromise” between the wishes of Britain and other EU states.

George Soros, who made $1 billion betting against sterling in 1992, said in Davos that a referendum was dangerous. “Britain is in the best of all possible positions because it is a member of the EU but not the euro, and any change in that status will be detrimental. Britain is opting out of decision-making.”

Germany: Chancellor Merkel saw her coalition lose its fourth straight state election on Sunday, which doesn’t augur well for the national vote in September. Merkel is favored by 65% of Germans, but her party, the Christian Democrats, won only 36% in Lower Saxony. Merkel will hold serve but not without a fight. [Good thing her main opponent sounds like a real jerk.]

Russia: President Obama highlighted gay rights in his inaugural address on Monday. By contrast, legislation being pushed by the Kremlin and the Russian Orthodox Church would crack down on gay rights, including bans on holding public events promoting same. For example, a “public kiss” could bring a fine of up to $16,000.

Russia’s hostility to homosexuality is widespread and shared by both the political and religious elite.

Random Musings

--Charles Krauthammer / Washington Post

“The media herd is stunned to discover that Barack Obama is a man of the left. After 699 teleprompted presidential speeches, the commentariat was apparently still oblivious. Until Monday’s inaugural address, that is.

“Where has everyone been these four years? The only surprise is that Obama chose his second inaugural, generally an occasion for ‘malice toward none’ ecumenism, to unveil so uncompromising a left-liberal manifesto.

“But the substance was no surprise. After all, Obama had unveiled his transformational agenda in his first address to Congress, four years ago. It was, I wrote at the time, ‘the boldest social democratic manifesto ever issued by a U.S. president.’

“Nor was it mere talk. Obama went on to essentially nationalize health care, 18 percent of the U.S. economy – after passing an $833 billion stimulus that precipitated an unprecedented expansion of government spending. By the White House’s own reckoning, Washington now spends 24 percent of GDP, fully one-fifth higher than the postwar norm of 20 percent….

“Monday’s address also served to disabuse the fantasists of any Obama interest in fiscal reform or debt reduction. This speech was spectacularly devoid of any acknowledgement of the central threat to the postindustrial democracies (as already seen in Europe) – the crisis of an increasingly insolvent entitlement state….

“(Obama’s) mission is to redeem and resurrect the 50-year pre-Reagan liberal ascendancy. Accordingly, his second inaugural address, ideologically unapologetic and aggressive, is his historical marker, his self-proclamation as the Reagan of the left. If he succeeds in these next four years, he will have earned the title.”

--“In many ways, we’re at square one,” said Glenn McCall, a (Republican) South Carolina committeeman (of the party’s main steering organization, the Republican National Committee) who is part of a task force on a new way forward for the party. “There are large portions of the population – African-Americans, Hispanics, Asians, young voters – who simply don’t know us. We have to change that.” [Neil King Jr. / Wall Street Journal]

Unfortunately, spot on, and very depressing for some of us elephants. We are so off track it’s pathetic. Mitch Daniels…why didn’t you run?!!!

--Peggy Noonan / Wall Street Journal

“Two lessons on how conservatives and Republicans might approach the future, and a look at the meaning of Obama.

“Lesson one: Golf star Phil Mickelson this week complained about taxes – ‘I happen to be in that zone that has been targeted both federally and by the state’ – and suggested he may leave California. Before anyone could jump down his throat, he abjectly apologized: He didn’t mean to hurt anyone, he shouldn’t have said it, taxes are a ‘personal’ issue.

“Actually they’re pretty public. The American Revolution started as a tax revolt. It is not remarkable that a man might protest a 50% to 60% tax rate that means he has to work from January through July or August for the government, and only gets to keep for himself and his family what he earns from then through December….

“(Mickelson’s) complaint came as kind of a relief. It was politically incorrect. It was based on actual numbers and facts and not grounded in abstractions, as most of our public pronouncements are. And it was unusual: Most people in his position are clever enough not to sound aggrieved….

“Lesson two came from Republicans on Capitol Hill. Conservatives on the ground are angry with them after the Benghazi hearings. Members of the Senate and the House have huffed and puffed for months: ‘It’s worse than Watergate, Americans died.’ Just wait till they question the secretary of state, they’ll get to the bottom of it.

“Wednesday they questioned Hillary Clinton. It was a dud.

“The senators weren’t organized or focused, they didn’t coordinate questions, follow up, have any coherent or discernible strategy. The only senator who really tried to bore in was Ron Johnson of Wisconsin, who asked a pointed question that was never answered: If you wanted to find out what happened when the consulate was attacked, why didn’t you pick up the phone the next day and call those who’d been there? John McCain made a spirited, scattered speech – really, it was just like him – that couldn’t find the energy to end in serious questions.

“Some conservatives are saying Mrs. Clinton looked unhinged, angry. In their dreams. She came across as human and indignant, and emerged untouched. What air there was in the Benghazi balloon leaked out. Someday we’ll find out what happened when somebody good writes a book.

“All this looked like another example of the mindless personal entrepreneurialism of the Republicans on the Hill: They’re all in business for themselves. They make their speech, ask their question, and it’s not connected to anyone else’s speech or question. They aren’t part of something that moves and makes progress….

“Hill Republicans continue not to understand that they are the face of the party when the cameras are trained on Washington. They don’t understand how they look, which is like ants on a sugar cube.”

--Differing viewpoints from Ms. Noonan’s on the Benghazi hearings.

John Podhoretz / New York Post

“An exasperated Hillary Rodham Clinton made Washington history yesterday at a Senate hearing when she spoke with naked honesty about a question she had no inclination to answer.

“ ‘What difference, at this point, does it make?’ she actually hollered at Sen. Ron Johnson (R-Wis.) when he had the temerity to ask her repeatedly about the immediate causes of the Sept. 11 attack on our mission in Benghazi.

“ ‘With all due respect,’ Secretary of State Clinton said, using the phrase that indicates the speaker is about to show the opposite of respect, ‘the fact is we had four dead Americans.’ In a breathtaking display of chutzpah and brazen tastelessness, she used their bodies as a shield against criticisms of her and the administration.

“So what if the purpose of the hearing was to examine and discuss the causes of the assault in which four Americans were killed, and the problems with the Obama administration’s response to it?

“Mrs. Clinton couldn’t stand to hear Johnson’s questions, didn’t have a good answer for them, and so she let loose with her interior monologue: They’re dead, we all feel awful about it, so why do we have to go over this again and again?

“Oh, here’s one reason why: It appears that several of those directly involved in the Benghazi attack – who’ve gone unpunished – moved on to Algeria, where they participated in the seizure of the natural-gas plant last week that resulted in the deaths of nearly 40 hostages. Including at least three Americans….

“(But) between the secretary’s diversionary tactics and the long-winded blathering of those who should’ve been asking her short and clear questions that she couldn’t evade, Clinton prevailed – if the question was, ‘Who won the day, Hillary or the GOP?’

“But it doesn’t make what she said, or what the administration has done, any less of a scandal.”

And I do have to note the comments of Republican Sen. Rand Paul, who said:

“Had I been president at the time and I found that you did not read the cables from Benghazi, you did not read the cables from Ambassador Stevens, I would have relieved you of your post. I think it’s inexcusable.”

It was a real tension convention; and while the odds today are small, a potential look into the future and a 2016 race between Hillary Clinton and Rand Paul.

--The Senate approved two modest changes to the filibuster. One provision allows bills to be brought up for debate more quickly, while the other limits debate on some White House nominations.

Filibusters only come to an end with a 60-vote supermajority, which is virtually impossible with today’s (or past) makeups in the Senate.

In exchange for moving bills more quickly to the Senate floor, both sides were guaranteed the right to offer two amendments to a piece of legislation.

--As one of his last moves as secretary of defense, Leon Panetta lifted the ban on female service members in combat roles, a watershed policy change. Panetta said he made the decision “upon the recommendation of the Joint Chiefs of Staff,” according to defense officials. Senior commanders have until January 2016 to ask for exceptions.

An official told the Washington Post, “The onus is going to be on them to justify why a woman can’t serve in a particular role.”

Female veterans applauded the move. Sen. Carl Levin (D-Mich.), the head of the Senate Armed Services Committee, said, “The reality is that so many women have been, in effect, in combat or quasi-combat. This is catching up with reality.”

Women will receive no break when it comes to the physical standards demanded for various positions, such as for special forces units.

--Prince Harry was interviewed in Afghanistan prior to his return from a 20-week posting there:

Asked if he had killed enemy fighters during his first tour of duty as a co-pilot gunner, Captain Wales said:

“Yeah, so lots of people have. The squadron’s been out here. Everyone’s fired a certain amount.

“Take a life to save a life. That’s what we revolve around, I suppose.

“If there’s people trying to do bad stuff to our guys, then we’ll take them out of the game, I suppose.”

You rock, Prince Harry. [All he’s ever wanted to do was do his job.]
---

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

God bless America.
---

Gold closed at $1659
Oil, $96.00

Returns for the week 1/21-1/25

Dow Jones +1.8% [13895]
S&P 500 +1.1% [1502]
S&P MidCap +2.1%
Russell 2000 +1.4%
Nasdaq +0.5% [3149]

Returns for the period 1/1/13-1/25/13

Dow Jones +6.0%
S&P 500 +5.4%
S&P MidCap +7.5%
Russell 2000 +6.6%
Nasdaq +4.3%

Bulls 53.2
Bears 22.3 [Source: Investors Intelligence…both unchanged but still at 30-point spread danger level.]

Have a great week. I appreciate your support.

Nightly Review video schedule, Mon.-Thurs., 5:30 PM ET.  Click on home page.  [Sorry about the lighting last week.]

Brian Trumbore



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Week in Review

01/26/2013

For the week 1/21-1/25

[Posted 12:00 AM ET]

Europe, Washington and Wall Street

Economist Barry Eichengreen, addressing the World Economic Forum in Davos, Switzerland, said that while European governments and markets have been breathing easier in recent months after years of turmoil, it’s no time for complacency.

“Nothing has been resolved in the eurozone, where markets have swung from undue pessimism to undue optimism. They said all the right things last year…and they’ve been backtracking ever since.”

Eichengreen warns the crisis “is going to heat up again in 2013.”

“None of the underlying problems have been solved. There is no economic growth in Europe. Germany itself is on the verge of recession. The banking union doesn’t exist. There’s less consensus on completing it than we thought last year, so the markets are going to lose patience at some point and the crisis will be back.” [Associated Press / New York Times]

Understand that Eichengreen, a professor at Cal-Berkeley, studied the possibility of a eurozone crisis long before it started. On this topic he has Street cred.

And it shouldn’t come as a surprise to any of you that I agree the eurozone crisis, which has been reduced to a low boil the last few months, will indeed come back.

But let me attempt to lay out the good news on the eurozone front this week first.

European Central Bank President Mario Draghi said, again, “The darkest clouds over the euro area subsided,” while admitting eventually there needs to be deeper political union.

Market participants were pleased the euro-area composite reading of the services and manufacturing economy came in at 48.2 for January, up from 47.2 in December, which still means contraction (50 being the dividing line between growth and the opposite), but at a slower pace. The services PMI was 48.3, up from 47.8; the manufacturing PMI rose to 47.5 from 46.1. The January figures are preliminary numbers.

Portugal held its first bond auction since the 2011 bailout there and it went off very well. 

Spain said it would cover 13% of its planned debt issuance for the year in January as it held some solid auctions, helped by the fact that the yield on the 10-year has fallen to 5.10% from the July 25 peak of 7.75%.

Greece received another bailout tranche of $12.3 billion, most of which goes to further recapitalize its banks. The payout reflects greater European confidence in the Greek government’s ability to enact its austerity program.

Many Euro bourses were at or near two-year highs.
Well that’s all the good news I have…now the bad.

The IMF, which three months ago forecast the eurozone would grow 0.2% in 2013, lowered their forecast to a decline of 0.1%.

Back to Spain, the government announced the official unemployment rate for the fourth quarter, 26%, up from 25% in the third, as the youth rate hit 55.1%. And we learned there are 1.2 million unsold homes in Spain, with just 25,000 being bought in November. 

The Bank of Spain announced the economy shrank 0.6% in the fourth quarter over the third, the sixth straight of contraction. The IMF is looking for Spain’s economy to contract 1.5% this year. It’s also interesting to note that five years ago, only 4% of Spaniards thought the EU was a bad thing to be in. Today, after endless austerity, 37% wish Spain wasn’t in the club.

Slovenia, a euro member in case you forgot, could become the sixth to receive a bailout as it staggers under the weight of a massive corruption scandal involving the prime minister who has been in office just one year. The GDP here fell 3.3% in the third quarter over a year earlier.

And back to Greece, I’ve harped on the threats posed by social unrest and anarchy. In just the past week you’ve had journalists who have defended the government and its austerity program being targeted for violence, there was a bombing of a popular shopping mall (though prior warning for evacuation was given), and the government was forced to act to break up a crippling  eight-day metro strike that was the result of protests over salary cuts. The IMF, while praising the Greek government for implementing its reform agenda, nonetheless warned the biggest risk remains political stability. [The IMF also said despite its supposed progress, Greece may need 10 billion euro more in aid.]

In Italy, a huge scandal at the nation’s third-largest bank, Monte dei Paschi di Siena, forced caretaker Prime Minister Mario Monti to recall Parliament amid questions involving the government’s handling of the crisis. As reported by the Financial Times, shares in the institution  collapsed upon learning just days ago “of derivatives transactions that may force the 500-year-old bank to restate hundreds of millions of euros of losses.”

Understand an election here is just four weeks away and the banking crisis has given a boost to Silvio Berlusconi and his People of Liberty party. The center-left coalition, leading in the polls, has long institutional ties with the bank better known as MPS. As the Financial Times’ Rachel Sanderson reported:

“Il Giornale, a Milan daily owned by the Berlusconi family, ran banner headlines saying the more than 4 billion euro paid by Italians in a widely hated property tax imposed by Mr. Monti was in effect going to prop up a failed bank.”

Ah yes, those messy derivatives…weapons of mass destruction.

Meanwhile, in non-euro Britain, they were the first EU nation to report fourth quarter GDP and it came in down 0.3%, worse than expected, which reignited fears of a triple-dip recession here. [Though to be fair, many of Britain’s fundamentals are superior to those of their EU brethren.]

But before I go back across the pond to the U.S., a few notes on Asia, which ties into a little conclusion involving both Europe and the Far East, specifically Japan.

In China, the head of the National Economic Research Institute told the World Economic Forum in Davos that China should grow faster this year than it did in 2012. Last year’s GDP was 7.8%, with the fourth quarter rate at 7.9%.

Fan Gang said, “Now I can say the ‘soft landing’ has landed last year, and now it’s under way to recovery.” More than half of last year’s growth came from consumption, not exports, and online shopping grew a whopping 100%. The consumer, however, overall, is still just 35% of China’s GDP compared with 70% in the U.S.

HSBC then released its flash purchasing managers index for Chinese manufacturing in January, 51.9, the best pace in two years.

In Japan the government announced exports had fallen 5.8% in December from a year earlier, bolstering the case for Prime Minister Shinzo Abe to weaken the yen to boost exports.

[Exports to China were down 15.8% owing to the ongoing tensions in the East China Sea, while they were off 11.1% to the EU (up 0.8% to the U.S.)]

The Bank of Japan agreed to raise the inflation target to 2% and do open-ended asset purchases beginning in 2014, $145 billion each month for as long as necessary to stimulate growth, though some were disappointed the program wasn’t starting sooner. Consumer prices in December fell 0.2% over a year earlier, the 7th month in 8 of price declines, again confirming Abe’s stance that there must be an aggressive monetary policy, coupled with a big stimulus program, to reflate Japan’s economy.

Japan’s stock market loves all this talk and had its 11th straight up week to its highest close since April 2010. The yen is collapsing, as Abe wanted, which will help exporters get out from under their December (and before that) funk.

But there are victims in such a case. In South Korea, their GDP grew just 1.5% in the fourth quarter from a year earlier, the worst performance in three years. Lee Sung Kwon, an economist at Shinhan Investment Corp. in Seoul, said, “Japan is trying to boost its economy by weakening the currency for exporters at the expense of its consumers and other countries. South Korea will be hit the hardest among others as it is in direct competition with Japan over many products – from cars to electronics.”

Not just South Korea.

Last week I wrote the following (in “Street Bytes”):

“This is just the beginning of this topic…currency wars. I’ve been careful not to use the term until the appropriate time. That time is now.”

This week the rhetoric on the topic was hot and heavy. George Soros, speaking in Davos, said the “biggest danger” the global economy faces these days is a “currency war.”

Jens Weidmann, president of Germany’s Bundesbank, warned on Monday:

“It is already possible to observe alarming infringements, for example in Hungary or in Japan, where the new government is massively involving itself in the affairs of the central bank, is emphatically demanding an even more aggressive monetary policy and is threatening an end to central bank autonomy.

“Whether intended or not, one consequence could be the increased politicization of the exchange rate. Until now the international monetary system got through the crisis without competitive devaluations and I hope very much it stays that way.” [Financial Times]

Japan’s economy minister fired back:

“Germany is the country whose exports have benefited most from the euro area’s fixed exchange rate system. He’s not in a position to criticize.”

The yen is down about 15% against the euro since November.

The European Central Bank said the exchange rate is “not a policy target.” But, yes, the stronger euro threatens to strangle exports, including Germany’s, at the worst possible time.

So German Chancellor Merkel weighed in on Thursday:

“I don’t want to say that I look toward Japan completely without concern at the moment,” she said, adding, “In Germany, we believe that central banks are not there to clean up bad policy decisions and a lack of competitiveness.”

Ouch. Yup, it’s heating up. 

---

Turning to Washington and Wall Street…President Obama received the oath of office for a second term, he gave a partisan inaugural address, House Republicans caved on the debt ceiling, vowing to fight another day, and stocks continued to power higher.

I have a few comments below on President Obama’s address on Monday, but it’s mostly what he didn’t say that caught my attention; namely the seeming complacency on the foreign policy front, though I said he’d ignore the topic in this particular forum. I’d like to think the State of the Union will be different.

As for the debt ceiling, the Republican-controlled House opted to punt and suspend enforcement of the federal debt limit thru May 18, with the vote being 285-144. Senate Majority Leader Harry Reid immediately said the Senate would advance the bill this coming week and President Obama will sign it.

The measure requires both houses to put forward budgets by April 15. If the Democrats in the Senate didn’t come up with one, as has been the case for over three years, then their pay would be placed in escrow. “No budget, no pay.”

On May 19, the debt limit will automatically be reset at a higher level reflecting the additional borrowing beyond the $16.4 trillion that has occurred.

So you still have the March 1 sequester date for the automatic spending cuts, with Democrats not wanting domestic programs touched and Republicans not wanting to cut defense further, while on March 27 you have the deadline for a continuing resolution (CR) to fund the government thru September 30. 

House Budget Committee Chairman Paul Ryan is back, tanned and rested after the disappointment of the election, and he has promised to submit a budget plan in the coming weeks that would erase the annual federal deficit within a decade by cutting government spending and without raising tax revenue further.

“The president got his revenues,” said Ryan the other day.

So now we get a little break until the State of the Union address on Feb. 12, must see television. Oh, it will be boring as hell at times, but this will be the Democrats’ true game plan and I hope the Republicans have lined up someone good for the rebuttal.

For now, Nicholas Eberstadt / Wall Street Journal:

“In President Obama’s second inaugural address, he not only outlined an ambitious agenda for his second term but also seemed intent on shutting down debate about the social-welfare state and its impact on American life.

“ ‘The commitments we make to each other – through Medicare, and Medicaid, and Social Security – these things do not sap our initiative; they strengthen us,’ Mr. Obama said. ‘They do not make us a nation of takers; they free us to take the risks that make this country great.’ In other words, the president is tired of listening to critics of America’s entitlement programs, and as far as he is concerned, the discussion is now over.

“It is not over – and won’t be anytime soon, because the country’s social-welfare spending is generating severe and mounting hazards for the nation. These hazards are not only fiscal but moral….

“Consider:

“—Over the 50-plus years since 1960, according to the Bureau of Economic Analysis, entitlement transfers – government payments of cash, goods and services to citizens – have been growing twice as fast as overall personal income. Government transfers now account for nearly 18% of all personal income in America – up from 6% in 1960.

“—According to the BEA, America’s myriad social-welfare programs (the federal bureaucracy apparently cannot determine exactly how many of these there are) currently dispense entitlement benefits of more than $2.3 trillion annually. Since those entitlements must be paid for – either through taxes or borrowing – the burden of entitlement spending now amounts to over $7,400 per American man, woman and child.

“—In 1960, according to the Office of Management and Budget, social-welfare programs accounted for less than a third of all federal spending. Today, entitlement programs account for nearly two-thirds of federal spending. In other words, welfare spending is nearly twice as much as defense, justice and everything else Washington does – combined. In effect, the federal government has become an entitlements machine.

“—According to the latest data from the U.S. Census Bureau, nearly half (49%) of Americans today live in homes receiving one or more government transfer benefits. That percentage is up almost 20 points from the early 1980s. And contrary to what the Obama White House team suggested during the election campaign, this leap is not due to the aging of the population. In fact, only about one-tenth of the increase is due to upticks in old-age pensions and health-care programs for seniors.

“Instead, the country has seen a long-term expansion in public reliance on ‘means-tested’ programs – that is, benefits intended for the poor, such as Medicaid and food stamps. At this writing, about 35% of Americans (well over 100 million people) are accepting money, goods or services from ‘means-tested’ government programs. This percentage is twice as high as in the early 1980s.”

Well, Mr. Eberstadt goes on. Understand, aside from the fact I respect the heck out of his work, he is the foremost expert in the world on demographics, such as in dissecting the depressing trends in Europe and Japan. [For the record he is resident scholar at the American Enterprise Institute.]

Eberstadt concludes his Journal op-ed:

“According to the trustees…Social Security and Medicare have already made tens of trillions of dollars in future promises that are not covered by their expected funding streams. If and when outside resources are required to honor their promises, these entitlements become transfer programs, not insurance programs.

“The moral hazard embedded in the explosion of social-welfare programs is plain. Transfers funded by other people’s money tend to foster a pernicious ‘something for nothing’ mentality – especially when those transfers seem to be progressively and relentlessly growing, year by year. This ‘taker’ mentality can only weaken civil society – even as it places ever-heavier burdens on taxpayers.

“Generosity is a virtue, on that we can all agree with President Obama. But being generous with other people’s money is not the same thing.”

As for foreign policy, I noted on one of my Nightly Review videos this week that I’ve been writing this column for 14 years (as of next month), 15 ½ going back to my days doing it at PIMCO, and it’s always been 50% financial markets, 50% geopolitics. I’m constantly looking for that hot spot that could upset the apple cart in a big way, change sentiment on a dime, or in a grinding way.

Today, I just feel there are a slew of items, including some rather obvious ones on the terrorism front, quite frankly, wherein you won’t want to be 100% equities at that time.

I can’t stop thinking about all the loose shoulder-fired missiles from the collapse of Libya, for example, and how it just seems inevitable that a commercial airliner, or two, will be taken out by one. Maybe it’s a softer target, such as in Africa, or parts of the Middle East, and the major equity markets more or less shrug it off. But maybe it’s in Europe, or here.

More conventionally, you still have the wishful thinking of President Obama and the line from his inaugural:

“A decade of war is now ending.”

Editorial / Washington Post

“That would come as news to the Afghan soldiers still dying at Taliban hands; to the families of more than 60,000 people killed in Syria in the past two years; to French soldiers who have taken on, in Mali, al-Qaeda affiliates who are as much enemies of the United States as of France; to the families of American hostages just slain in a terrorist attack in Algeria. America’s adversaries are not in retreat; they will be watching Mr. Obama in his second term to see if the same can be said of the United States.”

Editorial / Wall Street Journal

“Perhaps you’ve heard that ‘the tide of war is receding,’ except apparently where it isn’t, which seems to be much of the world. The latest flash points are in North Africa and the Western Pacific, both of which implicate America regardless of President Obama’s second-term wishes.”

Editorial / The Economist

“Given America’s problems, some emphasis on ‘nation-building at home,’ as Mr. Obama likes to call it, is inevitable. But a world in which America turned inward would be a far less predictable and a less safe one. Mr. Obama also has a lot of unfinished business abroad from his first term. Despite all the grand talk of resets and new understandings, Iran is still a threshold nuclear power, Russia is hostile, Europe neglected and the Middle East as tense as ever. The wars in Iraq and Afghanistan have been wound down leaving neither victory nor stability in their wake.

“That inbox is too much for any man, but two areas where the president should make a real and personal push in his second term stand out. One is China. By January 2017 its economy may be bigger than America’s. No bilateral relationship in the world is now more important. In his first term Mr. Obama avoided any big disasters. Now the odds are raised. On the negative side, a jumpy nationalistic China could become the equivalent of Prussia a century ago: the prospect of a conflict between China and America’s ally, Japan, over the Senkaku islands is real. But he also has the chance to turn a suspicious relationship into something much more useful. Imagine, for instance, what a ‘G2’ climate-change agreement would do for the environment.

“Xi Jinping has now been China’s leader for two months, yet Mr. Obama has not seized the chance to see him (in Europe last year the new president of France rushed to visit the German chancellor the very day of his inauguration). Mr. Xi will be around for the rest of Mr. Obama’s time and for six years after he is gone, so frequent summits and many more bilateral meetings at all levels are essential….

“The final area where Mr. Obama will be judged – and where he could make an enormous difference – is the Arab world. One looming, disastrous Obama legacy could be the death of the two-state solution to the Israeli-Palestinian mess. As for the broader Arab spring, he may not be able to control it, but he can help direct it, in the same way that the older President Bush oversaw the end of the cold war. Syria is out of control. Countries like Egypt and Tunisia may be ruled by Islamists, but they are now democracies and desperate for financial help. If Mr. Obama leaves behind a region of mini Turkeys, that would be a notable achievement. He cannot afford to appear as indifferent, or fearful of failure, towards so dangerous a region in his second term as he did in his first.

“History’s verdict is always hard to predict. But if Mr. Obama fails to grapple with these three things – the budget, China and the Middle East – he will surely be seen harshly. Each requires bravery and resolution, and Mr. Obama needs to start working on them now. We should all wish him well.”

Street Bytes

--Stocks continue to rock and roll at the start of 2013, finishing up a fourth straight week with the Dow Jones and S&P 500 closing at 5-year highs. The Dow now sits at 13895, up 1.8% for the week, 6.0% for January, and just 2% shy of the all-time high of 14164 from Oct. 9, 2007, while the S&P 500, at 1502, up 1.1% for the week and 5.4% for the month, is just 63 points shy of its all-time high of 1565 set the same October day. [Nasdaq was up only 0.5% this week as it continues to be impacted by Apple’s swoon.]

The news on the economy this week wasn’t all good, though. Yes, jobless claims for the week were at a five-year low, the second straight solid week on this front, but the data on housing was disappointing on both existing- and new-home sales for December.

As for earnings, I jotted down 13 companies I gauged to be important at the start of the week – Google, IBM, DuPont, Traveler’s, J&J, Verizon, Apple, McDonald’s, Microsoft, 3M, Celgene (local Summit, N.J., high-flyer), P&G and Honeywell.

Correct me if I’m wrong, but I only thought DuPont, Traveler’s, 3M and P&G were really solid out of this group. Maybe Google. It’s just the revenue growth for so many of them, such as with IBM, is minimal at best.

Or maybe I’m all wet. I have been for some time now, after all, in terms of my market commentary. It’s a long year, though, sports fans. 

--U.S. Treasury Yields
6-mo. 0.11% 2-yr. 0.27% 10-yr. 1.94% 30-yr. 3.13%

The Federal Reserve’s balance sheet is officially over $3 trillion as of Jan. 23 as a result of its ongoing bond-buying program; triple its size before the financial crisis.

--PIMCO’s Bill Gross, as part of the Barron’s roundtable, commenting on earnings:

“Let’s try to analyze why earnings have done so well in recent years. Corporate profits have come at the expense of labor. Wages as a percentage of GDP have declined to 54% from 59% in the past 10 years. That trend would have to continue for earnings to keep going up. Also, 30% to 35% of earnings growth in the past five years has come from lower interest expense. Most of you probably would agree that is coming to an end, as well. Corporations have to sell their products to somebody. They can’t benefit when that somebody has depressed wages and high leverage. At some point the game begins to change.”

Bill Gross on the deficit picture:

“Can I introduce some evidence from the Office of Management and Budget, the Congressional Budget Office, the International Monetary Fund, and the Bank for International Settlements? Four out of four, using different sets of numbers, basically say the U.S. is one of the world’s most grievous offenders in not reducing the level of its deficit relative to GDP. They are talking about a structural deficit that takes into account future payments for Medicare, Medicaid, and Social Security.

“Their numbers suggest this structural deficit continues at 8% a year. The structural deficit needs to be reduced by a trillion dollars a year, not a trillion dollars over 10 years. This country is in deep doo-doo. These numbers aren’t mine or PIMCO’s, but those of government and international authorities. Yet, we continue to deny what is going on.”

--Apple’s total revenues grew 18% to $54.4 billion for the quarter, and it sold a record 47.8 million iPhones in the three months ending December, up 78% on the prior year, but basically in line with expectations. Apple sold 22.9 million iPads in the Christmas quarter, up from 15.4 million a year ago.

Net income of $13.1 billion, and earnings per share of $13.81 beat forecasts, though the profit growth was the slowest since 2003 with the weakest sales increase in 14 quarters.

So the concern is over rising production costs and competition from Samsung, though on the smartphone front, according to Kantar ComTech, Apple increased its share of the market to 51.2% from 44.9% a year earlier in the U.S.

But Apple’s guidance for the current quarter was also below Street estimates. Add it all up and investors concluded the company’s best days were behind it. SELL!!!

The stock is now down 37% from its September high of $705, down to $439, off 17% for the month. On Friday it also surrendered its title as the world’s most valuable company to Exxon Mobil Corp. Apple was No. 1 for 12 months.

--Samsung Electronics reported record net income of $6.6 billion, beating analysts’ estimates. Last year, Samsung became the world’s biggest smartphone maker, overtaking Apple (don’t confuse with above data on U.S.).

Samsung did warn, however, “The furious growth spurt seen in the global smartphone market last year is expected to be pacified by intensifying price competition, compounded by a slew of new products.

“In the first quarter, demand for smartphones in developed countries is expected to decelerate, while their emerging counterparts will see their markets escalate with the introduction of more affordable smartphones and a bigger appetite for tablet PCs throughout the year.”

--After a poor third quarter, Google rebounded in the fourth with profit up 7% on a year earlier and revenues up by more than a third at $14.4 billion. For the year, sales hit $50 billion for the first time. Shares rallied strongly on the news.

--Netflix reported that 27.15 million households in America were subscribers to the streaming service by the end of 2012, up by 2.05 million customers from 25.1 million in the third quarter – the biggest increase in nearly three years. Netflix also reported net income of $7.9 million vs. the loss many expected. Shares skyrocketed on the news from a Wednesday close of $103 prior to the earnings release to finish the week at $169!

Consider it was just 1 ½ years ago that Netflix was ripped to shreds because of a new pricing scheme that met with resounding jeers. The share price, which had skied to around $300, promptly fell to a low of $53 last August.

--Microsoft reported earnings that were in line, which wasn’t good enough for a pop in the share price as the company reported it sold 60 million copies of Windows 8, an unimpressive launch. Revenues for the quarter rose 3% to $21.4 billion compared with the same period a year before, while net profits fell by 3.7%.

Overall, though, the Windows division reported sales rose 24%, very solid, but the Office and business software revenues were down 10%.

Bottom line, Windows 8 is no blockbuster.

--IBM reported net income increased 6.3% to $5.85 billion in the fourth quarter, though overall revenue declined 1%. IBM did say, however, that earnings in 2013 would rise another 8% and the shares rallied on this news.

But you still have this revenue issue and for all of 2012, it declined 2.3%.

--An extensive story by Scott Mayerowitz of the AP concludes that Boeing rushed the Dreamliner. To wit:

It was two years after 9/11, “financially troubled airlines were reluctant to buy new planes. Boeing needed something revolutionary to win back customers…

“But once production started, the gap between vision and reality quickly widened. The jet that was eventually dubbed the Dreamliner became plagued with manufacturing delays, cost overruns and sinking worker morale….

“Adding to the chaos was the company’s never-before-tried plan to build a plane from parts made around the globe.”

Meanwhile, the National Transportation Safety Board said a battery fire on a Japan Airlines Boeing 787 was unprecedented and a “very serious air safety concern.” Then nine days later Japan’s All Nippon Airlines was forced to make an emergency landing because of smoke coming from a battery.

Deborah Hersman, head of the NTSB, said, “The expectation in aviation is to never experience a fire on board an aircraft. In two weeks…we saw two cases of battery failure on a 787 and the grounding of the entire fleet by the FAA.”

It was “all hands on deck” to determine what had gone wrong with the battery. A resolution appears weeks away. Boeing shares, though, have been rock solid following an initial decline on reports of the first battery incident. It’s not as if there are a lot of alternatives for the airlines out there and everyone just assumes whatever the problem is will be fixed in short order.

--McDonald’s forecast a decline in global sales for January, though its December revenues in the U.S. were better than expected, which helped it exceed Street expectations. Total sales rose 1.9%.

Global same-restaurant sales were flat in December, but up slightly in the U.S. owing to both keeping more restaurants open on Christmas Day and the limited-time offering of the McRib.

--53 senators signed a letter urging quick approval of the Keystone XL oil pipeline, putting pressure on President Obama to move ahead with the project after Nebraska Gov. Dave Heineman’s approval of a revised route through his state.

“We urge you to choose jobs, economic development and American energy security,” the letter said, adding that the pipeline “has gone through the most exhaustive environmental scrutiny of any pipeline” in U.S. history. “There is no reason to deny or further delay this long-studied project,” the letter continued.

Nebraska’s approval means all six states along the proposed route now support it.

--Germany’s second-biggest lender Commerzbank is planning on cutting 6,000 jobs, or more than 10% of its workforce, though this will be over the next few years. Commerzbank has been singled out for its exposure to Europe’s periphery.

--The above is not included in a Bloomberg tally of 16,040 announced and expected reductions in the past three weeks from financial-services firms around the world. “Bankers and consultants expect the cuts to accelerate in coming months even as financial stocks gained 26% last year.”

UBS Chairman Axel Weber said in Davos, “Regulators have clearly made up their minds that banks are too big. The future for banks will be quite different.”

According to Bloomberg, “Global cuts at financial firms have exceeded 115,000 since 2012.”

--But wait…there’s more! According to a forecast from the Confederation of British Industry, the U.K.’s financial-services firms will lose 43,000 jobs in six months.

--In a late filing on Friday, Caterpillar Inc. reported the first decline in retail machine sales in more than 2 ½ years owing to a slowdown in Asia; down 7% for the region in the fourth quarter. North American orders were off 6%.

--The S&P 500 rose 85% in President Obama’s first term. But as economist Ed Yardeni told USA TODAY, “I would say that the great performance has a lot more to do with Federal Reserve Chairman Ben Bernanke than Obama.”

--According to the Bureau of Labor Statistics, union membership in the U.S. declined from 11.8 percent to 11.3 percent of the workforce, the lowest level since the 1930s.

More than half the loss, about 234,000, came from government workers including teachers, firefighters and public administrators.

Union membership was 13.2% in 1935 when FDR signed the National Labor Relations Act and peaked at about 33% in the 1950s. By 1983, though, it was down to 20%.

Since August 2008, state government employment has declined by 135,000, while local government employment fell by 546,000. [Sam Hananel / AP]

--From Greg David / Crain’s New York Business…following release of news that Wall Street bonuses would for the most part be down from last year.

“The amount of money Wall Street sends to Albany (in personal and business income taxes and capital gains) declined from more than $12 billion in 2008 to less than $9 billion last year, and is almost certain to fall again…In percentage terms, the Street used to account for 21% of all state revenue; today, the number is 13% and sliding.

“It is the same story for the city, which collected almost $5 billion in 2008 (from personal income, general incorporation and unincorporated business taxes) and now gets less than $3 billion a year.

“The great unknown is where we are headed. If Wall Street shrinks to the size and profitability of 1996, just before the Internet boom really took off, the state revenue it provides will fall by more than half, to $4 billion annually. The city’s take will fall by two-thirds.

“Even as other industries grow in the city, they won’t take up the slack because they just aren’t as profitable and don’t pay their employees anywhere near where Wall Street does.”

Can you say jobs? Or lack thereof?

--President Obama selected Mary Jo White, the first female United States attorney in Manhattan, to run the Securities and Exchange Commission. White is good, overseeing the prosecution of John Gotti and those responsible for the 1993 World Trade Center bombing. While she lacks experience in the business of Wall Street, re the finance side, that’s what a staff is for. She’ll be tough. 

--Gillian Tett / Financial Times

“It was at the World Economic Forum meeting in Davos six years ago that I first became seriously worried about the credit bubble….

“But this time my unease does not revolve around any financial threats, but another issue – cyber security. Most notably, after chatting to corporate executives at Davos this year, it is clear many are suffering a deluge of cyberattacks. Some of these emanate from teenage hackers, or opportunists trying to steal money or secrets; but many seem more malign, security experts say, with the potential to disable corporate systems or critical infrastructure….

“In recent months, some companies (such as HSBC, Wells Fargo or Lockheed) have been forced to admit to suffering cyberattacks, after the penetration has become visible. But this is just the tip of a vast iceberg, and the overwhelming majority of companies today are terrified of talking too publicly about the issue, for fear of suffering stigma or sparking panic.

“That means it is tough for any outsider to get precise information about the overall scale of attacks. It is even tougher for shareholders to work out the degree to which individual companies are being targeted.”

--You know what’s in a bubble these day? Burgers. Kaja Whitehouse of the New York Post had a piece last weekend titled “Burger madness takes over NYC metro area.”

“The burger craze sweeping the country has sparked fierce competition in the New York metro area, where a growing pack of chains is looking to cater to the beef-obsessed.”

Chains like Five Guys, Checkers Drive-In, Fatburger, Smashburger, Jake’s Wayback Burger, Shake Shack…these folks aren’t just adding one or two locations…try 20, 23, 45…in the five boroughs, with further expansion on Long Island.

Some will survive. Others won’t.

But…according to industry tracker Technomic, 48% of Americans eat a burger at least once a week, up from 38% in 2009.

--Meanwhile, Ireland was faced with a horsemeat-in-beef-burgers scandal, with in all seriousness the potential damage to the country’s reputation as an international food producer in question.

At Tesco (a grocery chain) “one of its Irish produced ‘Value Range’ burgers had 29% horsemeat.” [Irish Independent]

There are real dangers in that you don’t know if the horses were diseased in any way. The U.K. is Ireland’s main export market for both food and beverage products. 100,000 are employed in Ireland’s food industry.

But there is one good note in the ongoing investigations. Last I saw, of 19 salami products analyzed in Ireland, all tested negative for horse DNA.

Foreign Affairs

Israel: No other way to describe the Israeli vote this week then that it was an embarrassing rebuke to Benjamin Netanyahu. The Likud-Beitenu party will be the largest with 31 seats; not only down from 42 but it is essentially just one-quarter of the 120-seat Knesset.

The big winner was former TV celebrity Yair Lapid, whose new centrist Yesh Atid (“There’s a Future”) party gained 19 seats.

The opposition Labor was third with 15 seats, while Naftali Bennett’s ultra-nationalist Jewish Home came in at 12.

Netanyahu now has six weeks to form a coalition or President Shimon Peres can give someone else the task, but as long as Yair Lapid joins Netanyahu’s Likud Beitenu alliance, as looks certain today, that’s 50 of the 61 seats needed and it would appear Bennett’s Jewish Home party, 12, and centrist Kadima, 2, will be the other partners to get the prime minister his majority.

So a centrist oriented government with perhaps less of a focus on settlement building and more on the economy.

Or as the prime minister put it when discussing coalition building, “The government will be based on five principles: first challenge…to prevent a nuclear Iran.”

As for Lapid, he wants the role of Foreign Minister, while former Foreign Minister Avigdor Lieberman, head of Beitenu, said he would accept the finance slot.

One issue Lapid is adamant about; ultra-Orthodox Jews should no longer be able to skirt military service.

Iran: Former U.S. Secretary of State Henry Kissinger warned that a crisis involving Iran is in the “foreseeable future.” Speaking at the World Economic Forum, Kissinger, now 89, said nuclear proliferation in the region triggered by an armed Iran would increase the chances of an atomic war – “a turning point in human history.”

“For 15 years, the permanent members of the United Nations Security Council have declared that a nuclear Iran is unacceptable, but it has been approaching. In a few years, people will have to come to a determination of how to react, or the consequences of non-reaction. I believe this point will be reached in a very foreseeable future,” Kissinger said.

Kissinger added:

“Unilateral intervention by Israel would be a desperate last resort, but the Iranians have to understand that if they keep using the negotiations to gain time to complete a nuclear program then the situation will become extremely dangerous….

“The danger is that we could be reaching a point where nuclear weapons would become almost conventional, and there will be the possibility of a nuclear conflict at some point…that would be a turning point in human history.” [BBC News]

Syria: A U.N. team that just completed a four-day fact-finding visit here concluded that the war was “destroying” the country. John Ging, operations chief for the U.N.’s humanitarian affairs branch, told reporters Tuesday, “We saw a shocking state of human suffering,” in describing the wrecked homes, factories, shortages of food and water and zero prospect of a political solution.

Also this week, Russia began taking steps to evacuate its citizens in Syria, through Lebanon.

Jordan: Parliamentary elections this week offered more of the same. The Muslim Brotherhood boycotted the vote and those elected were, for the most part, the same old-boy network of corrupt officials. At least international monitors said the election appeared to be relatively clean. Nonetheless, the protest movement will just gather speed, imperiling King Abdullah II.

Also of immediate import here is the burgeoning refugee crisis. In one seven-day period, 20,000 Syrians crossed the border into Jordan, bringing the number in refugee camps up to 300,000. Jordan hasn’t closed its border, and doesn’t want to, but it needs funds for improving the infrastructure of these hellholes.

Mali: Sudarsan Raghavan and Edward Cody / Washington Post

“With no clear exit strategy, the French are encountering a host of problems: Mali’s interim government is weak, its military is disorganized, and a long-promised African intervention force is far from ready. Even as French troops worry about killing civilians, it is unclear who the civilians are and where their sympathies lie. Ethnic, religious and regional rivalries, as well as old and unsettled vendettas, also are posing obstacles.

“The Malian army, which France sought to bolster with its action, has been accused of committing abuses, particularly against the Tuareg ethnic group, some of whose members launched the March rebellion that has divided this West African nation. That could erode popular support for the military intervention here and in France, and it could complicate France’s ability to recruit secular Tuareg militias to battle the Islamists.

“On Thursday, a new Tuareg militia emerged as Ansar Dine, one of three groups fighting in Mali, split. The new group…calls itself the Islamic Movement for the Azawad and says it is ready to negotiate.

“French soldiers also could find themselves caught in the middle of growing tensions between the lighter-skinned Tuaregs, who are from the north, and black Malians from the south, who run the government and the military.”

Editorial / Washington Post

“(We) were struck by the forcefulness and clarity with which (Secretary of State Hillary Clinton) made the case (in her Senate and House hearings) that the United States faces a ‘very serious, ongoing’ and ‘strategic’ threat in North Africa from al-Qaeda affiliates and other jihadists – one that she argued demands a vigorous and comprehensive response.

“ ‘We are in for a struggle,’ Ms. Clinton said. ‘But it is a necessary struggle. We cannot permit northern Mali to become a safe haven…We’ve got to have a better strategy.’

“The outgoing secretary’s statements were particularly striking when compared with President Obama’s inaugural address Monday, which promised to end ‘a decade of war’ in favor of nation-building at home, and with the White House’s current approach to Mali.”

For example, the White House doesn’t believe al-Qaeda in the Islamic Maghreb (AQIM) poses a direct threat to the United States, while the Pentagon, and Clinton, do.

Clinton: “People say to me all the time, well, AQIM hasn’t attacked the United States. Well, before 9/11, 2001, we hadn’t been attacked on our homeland since, I guess, the War of 1812 and Pearl Harbor. So you can’t say, well, because they haven’t done something they are not going to do it.”

Anne Applebaum / Washington Post…on the role the French are playing in Mali.

“If America is to enjoy ‘peace in our time’ – an expression now deployed by both Barack Obama and Neville Chamberlain – while the rest of the world remains at war, then someone else will fill the vacuum. A glance at the other candidates – China, Russia, perhaps Qatar or another Gulf nation – ought to make us all stop giggling about cheese-eating surrender monkeys and start offering logistical and moral support. Europe may not be the best superpower. But it’s the only one we’ve got.”

The United States did finally step up and offer to transport French troops and materiel to the theater. Britain has placed its forces on “high readiness” to deploy if requested to support France.

Prime Minister David Cameron said some of the following in the past week.

“We must frustrate the terrorists with our security, we must beat them militarily, we must address the poisonous narrative they feed on, we must close down the ungoverned space in which they thrive and we must deal with the grievances they use to garner support.

“This is the work our generation faces and we must demonstrate the same resolve and sense of purpose as previous generations have with the challenges that they faced….

“This is a global threat and it will require a global response. It will require a response that is about years, even decades, rather than months.”

Algeria: The army-backed government here has one way of dealing with terrorists, while the West generally has another. With the taking of the natural gas facility at In Amena ten days ago, the West saw how the Algerians respond to such provocations…brutally. If we are to believe the final report of the prime minister (the president, who has the power here, stayed amazingly silent throughout), the death toll ended up being 29 militants (out of 32); 37 foreign workers, including 3 Americans, 6 Brits, and 9 Japanese; and an unknown number of Algerians.

The leader of the Masked Brigade, the al-Qaeda offshoot that carried out the attack, Mokhtar Belmokhtar, said the attack on the plant had been planned long ago and warned of further strikes against western targets in response to the French intervention in Mali.

“We emphasize to our Muslim brothers to stay away from all western companies and complexes for their own safety, especially the French ones.”

Back to the Algerians, remember, they fought a decade-long war with Islamists in the 1990s in which 200,000 died. Mokhtar Belmokhtar was a veteran of those wars, as well as the battle against the Soviets in Afghanistan. Algeria has been relatively stable the last ten years.

Robert F. Worth / New York Times

“As the uprising closed in around him, the Libyan dictator Col. Muammar el-Gaddafi warned that if he fell, chaos and holy war would overtake North Africa. ‘Bin Laden’s people would come to impose ransoms by land and sea,’ he told reporters. ‘We will go back to the time of Redbeard, of pirates, of Ottomans imposing ransoms on boats.’….

“ ‘It’s one of the darker sides of the Arab uprisings,’ said Robert Malley, the Middle East and North Africa director at the International Crisis Group. ‘Their peaceful nature may have damaged Al Qaeda and its allies ideologically, but logistically, in terms of the new porousness of borders, the expansion of ungoverned areas, the proliferation of weapons, the disorganization of police and security services in all these countries – it’s been a real boon to jihadists.’….

“Algeria’s authoritarian government is now seen as a crucial intermediary by France and other Western countries in dealing with Islamist militants in North Africa. But the Algerians have shown reluctance to become too involved in a broad military campaign that could be very risky for them. International action against the Islamist takeover in northern Mali could push the militants back into southern Algeria, where they started. That would undo years of bloody struggle by Algeria’s military forces, which largely succeeded in pushing the jihadists outside their borders.

“The Algerians also have little patience with what they see as Western naivete about the Arab spring, analysts say.

“ ‘Their attitude was, ‘Please don’t intervene in Libya or you will create another Iraq on our border,’’ said Geoff D. Porter, an Algeria expert and founder of North Africa Risk Consulting, which advises investors in the region. ‘And then, ‘Please don’t intervene in Mali or you will create a mess on our other border.’ But they were dismissed as nervous Nellies, and now Algeria says to the West: ‘Goddamn it, we told you so.’’”

Jim Hoagland / Washington Post

“A West African diplomat with whom I discussed U.S., British and French involvement in Libya nearly a year ago put it more succinctly: ‘We saw what you could do militarily in Libya. But we are not impressed by the after-sale service.’”

Libya: Ironically, a day after Sec. of State Hillary Clinton’s testimony before Senate and House committees on her response to the Benghazi attacks that killed four Americans (see more on this below), Britain’s Foreign Office has urged British nationals to leave the Libyan city in response to what it said was a “specific threat to westerners.” Germany and the Netherlands followed Britain’s lead in urging their own citizens to bolt. An international school in Benghazi, with many westerners employed as teachers, would be a prime hostage-taking target.

Iraq: The recent wave of unrest continued with bombings and sectarian shootings on consecutive days claiming 35 and 24 lives. In the former, a crowded tent full of Turkmen mourners, including a number of high-ranking regional dignitaries, was the target of a suicide bomber.

Turkmen leaders demanded international forces provide security for them. The head of one Turkmen tribe told the New York Times: “We are being targeted, and our existence in Iraq is very dangerous, and we are under genocide. The central government is doing nothing for us.”

Egypt: There were mass protests in Cairo and elsewhere on the second anniversary of the launch of the revolution that toppled Hosni Mubarak, only this time protesters are seething with anger at the Muslim Brotherhood.   The same rhetoric is being used as before, only now, as reported by the Jerusalem Post, activists “slam the ruling political party and President Mohamed Morsi, which, they say, have plunged the country into a terrible economic depression.”

Opposition leader, Mohamed El Baradei, in an online post, urged the people to protest “to prove that the revolution must continue and must be completed.”

At least nine were killed in the protests on Friday, most of which were in the city of Suez.

North/South Korea: North Korea threatened to attack South Korea if Seoul joined in on new UN sanctions approved this week. For three straight days, Pyongyang has fired off a verbal barrage, saying: “ ‘Sanctions’ mean a war and a declaration of war against us.”

Referring to the South, the North said, “If the puppet group of traitors takes a direct part in the UN ‘sanctions,’ the DPRK will take strong physical counter-measures against it.”

The North also said it would carry out further rocket launches and a nuclear test, calling out the United States as its “sworn enemy.”

Defense Secretary Leon Panetta said, “We are very concerned with North Korea’s continuing provocative behavior.”

For its part, China repeated its call for calm on the Korean peninsula. The Global Times, a party mouthpiece, also opined, “If North Korea engages in further nuclear tests, China will not hesitate to reduce its assistance to North Korea.”

Next week, Jan. 30, South Korea will make another attempt to send a long-range rocket into space. The launch has been delayed on two separate occasions due to technical issues.

China/Japan: A special envoy for Japan, Natsuo Yamaguchi, after meeting with president-in-waiting Xi Jinping in Beijing, said he believed tensions with China fanned by a dispute in the East China Sea can be resolved.

“Japan wishes to pursue ties with China while looking at the big picture,” Yamaguchi told reporters after the meeting. But he also said he didn’t directly discuss the islands issue with Xi.

For his part, Xi said he would consider a summit between leaders of the two nations if there was a “proper environment.” Nothing will happen any time soon. Beijing doesn’t want to anger nationalists who have urged tough action against Tokyo. Ditto, Tokyo and Shinzo Abe.

Editorial / The Economist

“China and Japan are sliding towards war. In the waters and skies around disputed islands, China is escalating actions designed to challenge decades of Japanese control. It is accompanying its campaign with increasingly blood-curdling rhetoric. Japan, says the China Daily, is the ‘real danger and threat to the world.’ A military clash, says Global Times, is now ‘more likely…We need to prepare for the worst.’ China appears to be preparing for the first armed confrontation between the two countries in seven decades…

“East Asian parallels from a century ago are hard to ignore. Then, as justification for continental expansion, a bullying Japan drank from a dangerous brew of nationalism and a manufactured sense of foreign aggression and victimhood. As China pursues a policy of maritime expansion, the rhetoric of victimization is remarkably similar. The coming clash that China now talks about could be as calamitous as that previous one was. It would imperil not just China’s but the region’s peace and its momentous economic advances.

“The world, including America, has a duty to warn China before it is too late, though warnings will be interpreted as conspiracies. So who in China will speak out against this unfolding madness?”

Japan is threatening to have its aircraft fire tracer bullets at Chinese jets in the disputed region as warning shots but China said these will be viewed as “combat.”

Britain: In a major speech, British Prime Minister David Cameron promised an in/out referendum on the European Union if the conservatives win the next election in 2015. Cameron wants to renegotiate the U.K.’s relationship with the EU before calling the vote, which would be no later than Nov. 2017, but probably a lot sooner.

Cameron has been under pressure from many of his MPs to give a binding commitment to a vote on Europe, but he notes holding the referendum today would be a “false choice” because Europe is set to change following the eurozone crisis.

The prime minister is attempting to thread the needle in saying that he wants Britain to play a committed and active part in the EU, that the EU is better for Britain being in it, but that the EU must change, specifically send more power back to national capitals.

Without such change, Britain risks “drifting towards the exit.”

If a referendum were held today on leaving or staying in the European Union, a poll for the Times of London shows 40% would vote to leave, 37% to stay and 23% don’t know how they would vote. So there’s an indication of the gamble Cameron could be taking down the road.

Boris Johnson, the Mayor of London who would like to be prime minister one day, commented on the topic, “I can’t say now. But my overwhelming instinct would be that we can get sufficient changes, reforms and improvements to the treaty to make it sensible, for most people in my country to vote to stay in the single market.”

German Chancellor Merkel did not make reference to Cameron’s pitch for a reformed EU in her speech in Davos, which was interpreted by some as a snub for Cameron. The day before, Merkel had said she was happy to talk about his ideas, calling for a “fair compromise” between the wishes of Britain and other EU states.

George Soros, who made $1 billion betting against sterling in 1992, said in Davos that a referendum was dangerous. “Britain is in the best of all possible positions because it is a member of the EU but not the euro, and any change in that status will be detrimental. Britain is opting out of decision-making.”

Germany: Chancellor Merkel saw her coalition lose its fourth straight state election on Sunday, which doesn’t augur well for the national vote in September. Merkel is favored by 65% of Germans, but her party, the Christian Democrats, won only 36% in Lower Saxony. Merkel will hold serve but not without a fight. [Good thing her main opponent sounds like a real jerk.]

Russia: President Obama highlighted gay rights in his inaugural address on Monday. By contrast, legislation being pushed by the Kremlin and the Russian Orthodox Church would crack down on gay rights, including bans on holding public events promoting same. For example, a “public kiss” could bring a fine of up to $16,000.

Russia’s hostility to homosexuality is widespread and shared by both the political and religious elite.

Random Musings

--Charles Krauthammer / Washington Post

“The media herd is stunned to discover that Barack Obama is a man of the left. After 699 teleprompted presidential speeches, the commentariat was apparently still oblivious. Until Monday’s inaugural address, that is.

“Where has everyone been these four years? The only surprise is that Obama chose his second inaugural, generally an occasion for ‘malice toward none’ ecumenism, to unveil so uncompromising a left-liberal manifesto.

“But the substance was no surprise. After all, Obama had unveiled his transformational agenda in his first address to Congress, four years ago. It was, I wrote at the time, ‘the boldest social democratic manifesto ever issued by a U.S. president.’

“Nor was it mere talk. Obama went on to essentially nationalize health care, 18 percent of the U.S. economy – after passing an $833 billion stimulus that precipitated an unprecedented expansion of government spending. By the White House’s own reckoning, Washington now spends 24 percent of GDP, fully one-fifth higher than the postwar norm of 20 percent….

“Monday’s address also served to disabuse the fantasists of any Obama interest in fiscal reform or debt reduction. This speech was spectacularly devoid of any acknowledgement of the central threat to the postindustrial democracies (as already seen in Europe) – the crisis of an increasingly insolvent entitlement state….

“(Obama’s) mission is to redeem and resurrect the 50-year pre-Reagan liberal ascendancy. Accordingly, his second inaugural address, ideologically unapologetic and aggressive, is his historical marker, his self-proclamation as the Reagan of the left. If he succeeds in these next four years, he will have earned the title.”

--“In many ways, we’re at square one,” said Glenn McCall, a (Republican) South Carolina committeeman (of the party’s main steering organization, the Republican National Committee) who is part of a task force on a new way forward for the party. “There are large portions of the population – African-Americans, Hispanics, Asians, young voters – who simply don’t know us. We have to change that.” [Neil King Jr. / Wall Street Journal]

Unfortunately, spot on, and very depressing for some of us elephants. We are so off track it’s pathetic. Mitch Daniels…why didn’t you run?!!!

--Peggy Noonan / Wall Street Journal

“Two lessons on how conservatives and Republicans might approach the future, and a look at the meaning of Obama.

“Lesson one: Golf star Phil Mickelson this week complained about taxes – ‘I happen to be in that zone that has been targeted both federally and by the state’ – and suggested he may leave California. Before anyone could jump down his throat, he abjectly apologized: He didn’t mean to hurt anyone, he shouldn’t have said it, taxes are a ‘personal’ issue.

“Actually they’re pretty public. The American Revolution started as a tax revolt. It is not remarkable that a man might protest a 50% to 60% tax rate that means he has to work from January through July or August for the government, and only gets to keep for himself and his family what he earns from then through December….

“(Mickelson’s) complaint came as kind of a relief. It was politically incorrect. It was based on actual numbers and facts and not grounded in abstractions, as most of our public pronouncements are. And it was unusual: Most people in his position are clever enough not to sound aggrieved….

“Lesson two came from Republicans on Capitol Hill. Conservatives on the ground are angry with them after the Benghazi hearings. Members of the Senate and the House have huffed and puffed for months: ‘It’s worse than Watergate, Americans died.’ Just wait till they question the secretary of state, they’ll get to the bottom of it.

“Wednesday they questioned Hillary Clinton. It was a dud.

“The senators weren’t organized or focused, they didn’t coordinate questions, follow up, have any coherent or discernible strategy. The only senator who really tried to bore in was Ron Johnson of Wisconsin, who asked a pointed question that was never answered: If you wanted to find out what happened when the consulate was attacked, why didn’t you pick up the phone the next day and call those who’d been there? John McCain made a spirited, scattered speech – really, it was just like him – that couldn’t find the energy to end in serious questions.

“Some conservatives are saying Mrs. Clinton looked unhinged, angry. In their dreams. She came across as human and indignant, and emerged untouched. What air there was in the Benghazi balloon leaked out. Someday we’ll find out what happened when somebody good writes a book.

“All this looked like another example of the mindless personal entrepreneurialism of the Republicans on the Hill: They’re all in business for themselves. They make their speech, ask their question, and it’s not connected to anyone else’s speech or question. They aren’t part of something that moves and makes progress….

“Hill Republicans continue not to understand that they are the face of the party when the cameras are trained on Washington. They don’t understand how they look, which is like ants on a sugar cube.”

--Differing viewpoints from Ms. Noonan’s on the Benghazi hearings.

John Podhoretz / New York Post

“An exasperated Hillary Rodham Clinton made Washington history yesterday at a Senate hearing when she spoke with naked honesty about a question she had no inclination to answer.

“ ‘What difference, at this point, does it make?’ she actually hollered at Sen. Ron Johnson (R-Wis.) when he had the temerity to ask her repeatedly about the immediate causes of the Sept. 11 attack on our mission in Benghazi.

“ ‘With all due respect,’ Secretary of State Clinton said, using the phrase that indicates the speaker is about to show the opposite of respect, ‘the fact is we had four dead Americans.’ In a breathtaking display of chutzpah and brazen tastelessness, she used their bodies as a shield against criticisms of her and the administration.

“So what if the purpose of the hearing was to examine and discuss the causes of the assault in which four Americans were killed, and the problems with the Obama administration’s response to it?

“Mrs. Clinton couldn’t stand to hear Johnson’s questions, didn’t have a good answer for them, and so she let loose with her interior monologue: They’re dead, we all feel awful about it, so why do we have to go over this again and again?

“Oh, here’s one reason why: It appears that several of those directly involved in the Benghazi attack – who’ve gone unpunished – moved on to Algeria, where they participated in the seizure of the natural-gas plant last week that resulted in the deaths of nearly 40 hostages. Including at least three Americans….

“(But) between the secretary’s diversionary tactics and the long-winded blathering of those who should’ve been asking her short and clear questions that she couldn’t evade, Clinton prevailed – if the question was, ‘Who won the day, Hillary or the GOP?’

“But it doesn’t make what she said, or what the administration has done, any less of a scandal.”

And I do have to note the comments of Republican Sen. Rand Paul, who said:

“Had I been president at the time and I found that you did not read the cables from Benghazi, you did not read the cables from Ambassador Stevens, I would have relieved you of your post. I think it’s inexcusable.”

It was a real tension convention; and while the odds today are small, a potential look into the future and a 2016 race between Hillary Clinton and Rand Paul.

--The Senate approved two modest changes to the filibuster. One provision allows bills to be brought up for debate more quickly, while the other limits debate on some White House nominations.

Filibusters only come to an end with a 60-vote supermajority, which is virtually impossible with today’s (or past) makeups in the Senate.

In exchange for moving bills more quickly to the Senate floor, both sides were guaranteed the right to offer two amendments to a piece of legislation.

--As one of his last moves as secretary of defense, Leon Panetta lifted the ban on female service members in combat roles, a watershed policy change. Panetta said he made the decision “upon the recommendation of the Joint Chiefs of Staff,” according to defense officials. Senior commanders have until January 2016 to ask for exceptions.

An official told the Washington Post, “The onus is going to be on them to justify why a woman can’t serve in a particular role.”

Female veterans applauded the move. Sen. Carl Levin (D-Mich.), the head of the Senate Armed Services Committee, said, “The reality is that so many women have been, in effect, in combat or quasi-combat. This is catching up with reality.”

Women will receive no break when it comes to the physical standards demanded for various positions, such as for special forces units.

--Prince Harry was interviewed in Afghanistan prior to his return from a 20-week posting there:

Asked if he had killed enemy fighters during his first tour of duty as a co-pilot gunner, Captain Wales said:

“Yeah, so lots of people have. The squadron’s been out here. Everyone’s fired a certain amount.

“Take a life to save a life. That’s what we revolve around, I suppose.

“If there’s people trying to do bad stuff to our guys, then we’ll take them out of the game, I suppose.”

You rock, Prince Harry. [All he’s ever wanted to do was do his job.]
---

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

God bless America.
---

Gold closed at $1659
Oil, $96.00

Returns for the week 1/21-1/25

Dow Jones +1.8% [13895]
S&P 500 +1.1% [1502]
S&P MidCap +2.1%
Russell 2000 +1.4%
Nasdaq +0.5% [3149]

Returns for the period 1/1/13-1/25/13

Dow Jones +6.0%
S&P 500 +5.4%
S&P MidCap +7.5%
Russell 2000 +6.6%
Nasdaq +4.3%

Bulls 53.2
Bears 22.3 [Source: Investors Intelligence…both unchanged but still at 30-point spread danger level.]

Have a great week. I appreciate your support.

Nightly Review video schedule, Mon.-Thurs., 5:30 PM ET.  Click on home page.  [Sorry about the lighting last week.]

Brian Trumbore