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06/01/2013

For the week 5/27-5/31

[Posted 12:00 AM ET]

Washington and Wall Street

The OECD, a group of 34 mostly developed countries, not including China, issued one of its periodic forecasts on global growth this week and it is calling for 3.1% in 2013 and 4% in 2014.

But among the 34 in the OECD itself, growth of just 1.2% this year, 2.3% next.

The putrid forecast for the 34 is impacted by the eurozone, where the OECD forecasts a contraction of 0.6% in 2013. [Non-euro Britain is now expected to grow 0.8%, as the OECD said the austerity measures taken by the government were needed.]

The OECD added Europe “could evolve into stagnation,” which is certainly how I see it.

As for the U.S., the OECD is forecasting 2% growth for 2013 and on Thursday we had the second reading on first-quarter GDP, up 2.4%, a tick down from the preliminary 2.5% we had been given earlier. Economists are looking for 1.5-1.6% in the second quarter and then 2.0-2.5% for the second half, so basically in line with the OECD’s overall outlook.

In other economic news, there were two very strong consumer sentiment figures out of the Conference Board and the Univ. of Michigan, the former to the best level since Feb. 2008, July 2007 in the case of the latter, while on Friday, a surprisingly (shockingly) strong figure for the Chicago Purchasing Managers survey for May, 58.7 when 50.0 was expected (vs. 49.0 in April), as well as an earlier S&P/Case-Shiller reading on property values for March, up 10.9% over March 2012, the biggest 12-month gain since April 2006, added more ammunition for those believing that perhaps the second half will be stronger than the above consensus. The only real downers were on April personal income, unchanged when a gain was expected, and consumption, down 0.2% when unchanged was forecast. Jobless claims for the week were also slightly worse than projected, with the 4-week average now back down to 347,250.

So I just threw a lot at you, most of it very positive, but stocks finished down on the week thanks to a wicked late-Friday collapse, partly related to index rebalancing, with the Dow Jones falling 208 points, 1.4%. What gives?

For starters, we’ve come a long ways in a short spell so when it comes to the equity market a pause is warranted.

And when it comes to the economy, I thought Neil Irwin of the Washington Post summed it up well.

“In a year when tax increases and spending cuts by the federal government were expected to bleed life out of the economy, the strengthening housing and financial markets are proving to be more powerful than acts of Congress.”

But this was also a volatile week owing to renewed concerns the Fed is likely to begin to pull back on its bond buying with the improving economic data....and assuming this translates into a better jobs picture, the number one key for the Fed. Next Friday’s May reading on the labor force will provide a big clue when gauging the Fed’s next move.

The bond market has the heebie-geebies, with the yield on the 10-year Treasury rising to over 2.20% this week (before closing at 2.16%) compared with 1.63% on May 2. That’s a big percentage move and mortgage rates are back over 4.00%, up from 3.50%, which can make a difference for home buyers even if it is still historically low. Should the Fed then actually announce it was going to start pulling back, tapering, it’s $85 billion a month in purchases of Treasuries and mortgage-backed securities, how much further would rates rise, and how quickly? It’s the speed of any change that can prove deadly for stocks, let alone bond holders. [Speed can crush hedge funds, too, which can create its own reinforcing issues for both equities and credit instruments.]

David Wessel and Victoria McGrane / Wall Street Journal

“The bond market’s month long plunge has pushed long-term interest rates on mortgages and U.S. Treasuries to their highest levels in more than a year, sparking a debate: Is this a bursting bubble, the aftereffect of clumsy Federal Reserve communication or a welcome sign the U.S. economy is, at last, on the mend....

“With stock prices, movements are easy to read: Up is good. Down is bad. Reading the bond market is trickier.

“One camp sees the recent fall in bond prices, which move inversely to yields, as confirmation of a bond-market bubble fueled by the Fed and bound to end badly, retarding an economy whose growth is already painfully slow....

“Another camp sees the same trends as a welcome move toward more normal interest rates and a signal of better times ahead. The anomaly isn’t the recent rise, but the drop in yields at the end of April to levels lower than those recorded during the Depression.”

Me? I have a wimpy answer. I have consistently said I’m not concerned about bonds until the 10-year trades over 2.25%. I’m not sold we will see more than 2% growth for the second half of this year and were that to be the case, employment gains would be on the light side and the Fed won’t be taking away the punch bowl anytime soon.

But if Friday’s labor data is strong, 200,000+, and with a June Fed meeting in less than three weeks, then Katy bar the door...the 10-year will fly through 2.25%, up to 2.40% and higher. And while it would be doing so because the economy is strong, stocks will not like it either...at least initially.

Something tells me I might be twisting myself into a pretzel come next week’s review.  I better stock up on domestic.

Europe’s Economy and the Immigration Issue

The economic news on the continent continued to worsen, with few exceptions. Eurostat, the European Commission’s statistics office, released the latest unemployment data and for the 17-nation eurozone, April saw another record high, 12.2%, up from 12.1% in March and the 24th consecutive month where the rate rose.

The highest jobless rates are in Greece (27.0% in Feb. 2013), Spain (26.8%) and Portugal (17.8%).

France’s rate of 11.0% is a new record. Italy’s, at 12.0%, is a 36-year high.

And in light of the recent Cyprus bailout, it’s jobless rate has risen from 11.2% in April 2012 to 15.6% a year later, with further pain in the offing.

Sickeningly, the youth unemployment rate (under age 25) is now 24.4% for the entire eurozone, but it’s 62.5% in Greece, 56.4% in Spain, 42.5% in Portugal, and 40.5% in Italy.

[Austria has the lowest overall unemployment rate at 4.9%, followed by Germany at 5.4%.]

One ongoing problem for the eurozone is the still dire health of its banks (as opposed to the flipside for America’s financial institutions, detailed below). The European Central Bank warned on Wednesday that a surge in problem loans, owing to the ongoing recession, was raising the risk of a renewed banking crisis. Vitor Constancio, the ECB’s vice president, said, last year “was not a good year for banks at all.”

The resultant credit crunch, when you have all these sick or zombie banks, is killing small- and mid-size businesses in particular, especially on the periphery.

But even Germany’s banks, despite all the happy talk, “are struggling with bad loans to the shipping industry and other problems,” as reported by the New York Times’ Jack Ewing, who added:

“Germany has drawn criticism for lecturing other countries on excessive government debt, while trying to protect its own banks from greater scrutiny. ‘They are very virtuous when they look at national accounts but less so when they are looking at their own banks,’ said Stefano Micossi, an economist who is director general of Assonime, an Italian business group.”

One thing the European Commission did this week to help some member states was to allow them to slow their pace of austerity cuts, amid concerns over growth.

France will get two more years to bring its budget deficit below 3% of GDP.

Spain, Poland and Slovenia will get two more years as well to bring down their deficits through spending cuts and tax increases.

The Netherlands and Portugal are having their timetables extended by one year.

Euro Bits

The inflation rate for the eurozone in April was just 1.4%, far below the 2% target set by the European Central Bank.

German retail sales for the month of April declined 0.4% from March.

Italy’s GDP is forecast to decline 1.8% this year, according to the OECD.

Spain’s government said GDP came in at -0.5% in the first quarter from the fourth, in line with the first estimate. This was an improvement from the fourth quarter’s -0.8% pace. Exports were down 1.3% in Q1. The OECD says Spain’s unemployment rate will hit 28% next year.

Separately, the total volume of mortgage lending for the month of March was down 90% from the peak of the credit boom, Jan. 2007.

Denmark’s economy returned to growth in the first quarter, up 0.2%, after contracting a revised 0.9% in Q4. But the government cut its growth forecast for 2013 to 0.5%.

Greece is seeing record tourist bookings for the summer, especially from Germany and Russia. This is good.

Finally...long, long ago, I warned of the coming explosion in Europe over immigration. But I was way off...by years...only now the fire has been lit and for two reasons. 

First, my original thesis was that when the economy softened (and I was broaching this topic when Europe’s economy was actually growing faster than the U.S.), people would look for scapegoats, citing then the example of Turks becoming targets in Germany. This is now beginning to play out all over the continent, especially with the youth unemployment rates noted above.

Second, the militant Islam issue, fueled by incidents like the terror attack on soldier Lee Rigby in London and the stabbing of a French soldier (by an Islamist as it turned out).

So you have situations like in Sweden, scene of riots in Stockholm and its suburbs, where the far right is saying the country’s borders are too open. Did you know 14% of Sweden’s population is now comprised of immigrants or asylum seekers? [Unemployment among immigrant youth is over 30% here.]

Switzerland is reimposing quotas on immigration.
Italy has had it with the Roma. [I’ve had it with the Roma.]

In Greece, the neo-Nazi Golden Dawn is now polling 10%, making it the third largest party. It already holds 18 of 300 seats in parliament and if a vote were held today would gain more.

On Wednesday night, Golden Dawn marched with torches through Athens, shouting “Blood, honor, Golden Dawn” and “Greece belongs to the Greeks.”

The same poll that has these thugs at 10%, also shows 68% of Greeks feel Golden Dawn poses a threat to democracy. [London Times]

Racist attacks are on the rise in Greece.

And then you have the radical Islam issue, especially in Britain. The brutal slaying of Afghan war vet Rigby in broad daylight, with one of his killers bragging about it before a camera with the body lying nearby, has horrified the Brits. Anti-Muslim sentiment is surging. A group called the English Defense League, EDL, is going to become increasingly featured in the headlines.

The EDL, enraged by the murder in London, has been staging large demonstrations around the country. The EDL claims Islamic law is poised to overthrow British society and calls for Britons to act aggressively to pre-empt it.

A motto on the EDL’s website reads: “If we fail to show courage now, we will leave revolution, civil war or subjugation to our children and our children’s children. Any act of Muslim extremism will now be countered by the EDL.”

This is just a start. The British government is paying the price for decades of lax immigration standards, particularly in the Muslim community. The government has allowed extremist preachers to proliferate, spewing their hate speech, and most in Britain are finally shouting, “Enough!”

You know what I immediately thought of when I heard Rigby was killed while wearing a t-shirt supporting a local wounded warriors’ charity, ‘How is Prince Harry going to stay safe?’ The Prince being a rather high-profile supporter of such noble projects, let alone ‘a killer of Muslims’ in the eyes of the Islamic fanatics.

Ayaan Hirsi Ali / Wall Street Journal

“On both sides of the Atlantic, politicians, academics and the media have shown incredible patience as the drumbeat of Islamist terror attacks continues. When President Obama gave his first statement about the Boston bombings, he didn’t mention Islam at all. This week, Prime Minister David Cameron and London Mayor Boris Johnson have repeated the reassuring statements of the Muslim leaders to the effect that Lee Rigby’s murder has nothing to do with Islam.

“But many ordinary people hear such statements and scratch their heads in bewilderment. A murderer kills a young father while yelling ‘Allahu Akbar’ and it’s got nothing to do with Islam?

“I don’t blame Western leaders. They are doing their best to keep the lid on what could become a meltdown of trust between majority populations and Muslim minority communities.

“But I do blame Muslim leaders. It is time they came up with more credible talking points. Their communities have a serious problem. Young people, some of whom are not born into the faith, are being fired up by preachers using basic Islamic scripture and mobilized to wage jihad by radical imams who represent themselves as legitimate Muslim clergymen.

“I wonder what would happen if Muslim leaders like Julie Siddiqi started a public and persistent campaign to discredit these Islamist advocates of mayhem and murder. Not just uttering the usual laments after another horrifying attack, but making a constant, high-profile effort to show the world that the preachers of hate are illegitimate. After the next zealot has killed the next victim of political Islam, claims about the ‘religion of peace’ would ring truer.”

So to sum up, soaring youth unemployment across Europe is toxic and immigrants are increasingly targeted, while at the same time, ultra-liberal immigration policies in many countries have allowed radical Islam to flourish, right under the eyes of authorities, and the common people have had it. It’s going to be vigilantism run wild. 

Japan

The Tokyo Nikkei index topped out on May 23, suffered a vicious reversal the same day, and fell 14.7% from its multi-year peak through May 30...one week. Now that’s a correction, the Nikkei having been up 46% for the year before the fall...about 75% since it was clear Prime Minister Shinzo Abe was going to win last December’s election.

The Japanese 10-year government bond (JGB) saw its yield rise to over 1.00% at one point during the week, a huge percentage move from the closing low of 0.44% earlier in the month (it actually hit an intraday low of 0.31%). 

Economic data at the end of the week helped sooth the markets some and the Nikkei rose over 1% on Friday to finish the week at 13774, though with a loss of 0.6% for the month, May was the first down month after nine consecutive monthly gains for the key barometer.

Industrial production for April rose a better than expected 1.7% over March, while the consumer price index declined 0.4% year over year, as deflation continues to rule in Japan, while the jobless rate came in at 4.1% for April.

The above-noted OECD is forecasting growth in Japan of 1.6% this year.

But here’s why there was so much indigestion this week.

The Bank of Japan, following Prime Minister Abe’s wishes, seeks to lower interest rates across the yield curve, pushing investors into riskier assets (sound familiar?) like stocks, while at the same time it aims to achieve a 2% inflation rate after years of deflation, which would pressure interest rates.

As the chief bond strategist at Nomura told the Financial Times (I apologize I forgot to jot down his name), “Eventually, the target is the same, to push up the economy. But en route, they are having contradictory implications for Japanese government bonds.”

Of course it’s essentially the same issue all over the world these days, as alluded to above in the segment on our Federal Reserve. Or as the OECD’s chief economist Pier Carlo Padoan put it in warning about the dangers of monetary-easing programs currently enacted by virtually every major central bank in the world, once you start withdrawing from them, spikes in government bond yields pose a risk to the outlook for the global economy.

“Exit from unconventional monetary policy, when needed, may be difficult to manage and less smooth than desirable, possibly leading to sharp rises in bond yields and serious negative consequences for growth in a number of advanced and emerging economies.”

Street Bytes

--Owing to Friday’s debacle, the Dow Jones declined 1.2% on the week to 15115, while the S&P lost 1.1%. For the month, however, the Dow added 1.9% and the S&P 2.1% as the latter rose a seventh consecutive month. [Six straight for the Dow.] Nasdaq lost only four points on the week, 0.1%, to 3455.   

--U.S. Treasury Yields

6-mo. 0.07% 2-yr. 0.29% 10-yr. 2.16% 30-yr. 3.30%

It was the worst month for U.S. Treasuries in three years. For global government bonds, the worst month since 2004.

--The trustees overseeing Medicare and Social Security issued their annual report on the health of the two programs and in the case of the former, the primary trust fund can meet its primary obligations through 2026, two years later than the trustees projected last year, while in the case of Social Security, it’s supposedly solvent until 2033, the same as the previous forecast.

Once the Soc. Sec. trust funds’ reserves are exhausted, benefits would continue to be paid but they’d be slashed 20-30%...or we’d have to accept higher taxes...or the government would just borrow more money.

Does the above make it easier for Congress to punt on the twin issues? Possibly. Does it change anything us budget alarmists have been saying the past few years? Nope.

--The IMF cut its forecast for growth in China from 8.0% to 7.75% this year, while the OECD cut its China projection from 8.5% to 7.8%, a rather big move. Many private economists have cut their China outlooks to 7.6%.

Remember, the official government forecast for 2013 is 7.5%, but this week, in his first overseas outing since being named premier, Li Keqiang said China would grow just 7% the rest of the decade, so some are wondering if this is the new party line.

--Canada’s economy grew at a 2.5% annualized pace in the first quarter, the fastest rate in six quarters, owing largely to a surge in Canadian oil exports to the U.S. Household consumption in Q1 only grew at an annualized 0.9% pace, however, less than half the 2.2% rate in Q4. Home construction fell a third straight quarter.

--Brazil’s first-quarter GDP came in at a less than expected 1.9% on an annualized basis, up 0.6% quarter over quarter.

--India’s economy grew at its slowest pace in a decade during the 2012-2013 fiscal year ending March 31, up just 5%. Two years ago, India was recording 9% growth. Foreign investors have been staying away due to delays in key reforms, while the manufacturing sector grew at just a 2.6% pace during the latest quarter. The government is forecasting 5% growth for the current year. Prime Minister Manmohan Singh is on thin ice. [He’s also 80!]

--South Korea’s industrial production for April was up 1.7% from a year earlier, after two months of declines. The OECD lowered its GDP forecast for the country to 2.6% from 3.1%.

--Three straight quarters of 7%+ growth for the Philippines...7.8% from a year earlier in the first three months of 2013.

--China’s Shuanghui International is making a $4.7 billion play for pork producer Smithfield Foods. I have no problem with this one. America’s pig farmers will have an extensive, growing market for their product.

But it is a fact we are importing more and more food from China. I know I always try to look at the labels to see where the fish is coming from and avoid fish from there when possible.

California Republican Congressman Dana Rohrabacher recently held a hearing wherein he said, “The health and safety, not only of the United States and Europe but that of people around the world, has come to be dependent on the quality of goods imported from China. Yet the task of inspecting and testing Chinese goods is beyond the ability of governments, considering the magnitude of that challenge.”

As the New York Times notes, however, while consumers can attempt to check food labels for origin, “a substantial portion of imports end up in restaurant and food service meals, where consumers have no idea of their source.”

The Agriculture Department reports that China shipped 4.1 billion pounds of food to the United States last year, including almost half of the apple juice, 80% of the tilapia and more than 10% of the frozen spinach eaten.

Back to the Smithfield acquisition, I do agree that China needs safe meat for their population, and the deal is not to bring Chinese pork to the United States.

Food safety and pollution issues in China can easily bring down the government, and the Communist Party understands this, even if change on these fronts has been painfully slow.

--Panasonic announced it will cut 5,000 jobs over the next three years in order to improve profits.

--Chinese e-commerce giant Alibaba is eyeing a listing on the Hong Kong exchange for its long anticipated IPO, and not in the United Sates because of the stringent disclosures required for U.S.-listed entities. I’m shocked! 

The Financial Times said nothing is set in stone yet but Alibaba management doesn’t seem to want to meet U.S. accounting standards. 

On the other hand, one banker told the FT that senior management wanted to make a “cultural point” by listing solely in Hong Kong.

--America’s banks reported their largest quarterly profit on record in the first three months of the year, according to the FDIC, $40.3 billion in net income, a 15.8% increase from a year earlier. Reduced litigation costs and settlement proceeds helped.

Only 8.4% of the nation’s 7,000+ FDIC-insured banks were unprofitable, down from 10.6% a year ago, with the number of troubled banks falling to 612 from a high of 888 two years ago. Only four banks failed in the quarter, the fewest since mid-2008.

--Britain’s four biggest banks, Royal Bank of Scotland, HSBC, Lloyds and Barclays will have eliminated 189,000 jobs, worldwide, by the end of this year from their peak staffing levels, according to data compiled by Bloomberg; 24% below the peak of 795,000 in 2008.

--A British health study found that patients who have operations in the U.K. on a Friday are almost 50% more likely to die than those who go under the knife on a Monday.

“About 1,600 patients a year die needlessly because surgery becomes steadily more dangerous throughout the working week, the analysis suggests.

“While previous studies have found that patients admitted at the weekend are more likely to die, the latest study is the first to find a similar effect during the week.

“The authors of the report said the root causes were likely to be the same, with patients undergoing surgery on Fridays forced to recuperate over the weekend when senior doctors are often unavailable, nursing staff are fewer and testing services are reduced.” [Chris Smyth / London Times]

--Tiffany & Co. reported revenue rose 10% in the first quarter, far better than expected. Sales for the Asia-Pacific region rose 15% and 6% in the Americas. Even European sales increased 6%.

--Attendance for the 2012-13 Broadway season fell 6%, to 11.3 million, compared with a year ago. The box office came in flat at $1.1 billion.

--A Pew Research Center study found that more than 40% of U.S. women are the breadwinners in the family. Back in 1960, the percentage was 11%. Granted, single mothers now make up a quarter of all U.S. households with children, according to the Pew analysis of U.S. Census Bureau data.

--Shares in Tesla Motors Inc. topped $100 for the first time ever this week. Tesla reported its first quarterly profit in the company’s 10-year history in April, and repaid the federal government $451.8 million from a loan program designed to spur development of alternative-fuel vehicles – the same Energy Department program that was used by now bankrupt Fisker Automotive and Solyndra.

--Israeli electric car company Better Place, which raised $800 million on a plan to revolutionize the auto industry, filed for bankruptcy last weekend.

--A 65-year-old French man died of the SARS-like coronavirus that has killed 23 of the 44 people confirmed infected since September, most of them in Saudi Arabia. The man is believed to have been infected while vacationing in Dubai in April.

--From the South China Morning Post:

“From faking marriage certificates to get honeymoon discounts in the Maldives to letting children defecate on the floor of a Taiwan airport, Chinese tourists have recently found themselves at the center of controversy and anger.

“Thanks to microblogging sites in China, accounts of tourists behaving badly spread like wildfire across the country, provoking disgust, ire and soul-searching.

“While in the past such reports might have been dismissed as attacks on the good nature of Chinese travelers, people in the world’s second-largest economy are starting to ask why their countrymen and women are so badly behaved.

“ ‘Objectively speaking, our tourists are relatively low-civilized characters,’ said Liu Simin, researcher with the Tourism Research Center of Chinese Academy of Social Sciences.”

Recently, it was revealed a 15-year-old Chinese boy had scratched his name into a 3,500-year-old temple in Egypt’s Luxor.

Oh, and the defecation incident? This occurred just meters from a restroom. But at least the mother “did put newspaper down first.”

Chinese tourists do spend an average of $2,932 per visit to California, compared with $1,883 for other overseas visitors, according to the U.S. Office of Travel and Tourism Industries. 33% of this amount goes for gifts and souvenirs. [Hugo Martin / Los Angeles Times]

--Meanwhile, there have been a slew of reports on robberies of tourists, including Chinese, in Paris in just the past few weeks. An aide to Bill Clinton was robbed the other day by two kids after he withdrew money from an ATM. And the Chinese embassy in Paris is reporting a 10% increase in robberies of its citizens. On Tuesday, a crew of China Central Television reporters covering the French Open tennis tournament had their car windows smashed and their wallets, phones and passports grabbed.

Remember, the French economy is awful these days and the French newspaper, Le Figaro, reported that the number of reported thefts in January had risen 50% year over year.

So you’ve been warned if you are traveling there this summer. Be wary of the Roma on the Champs-Elysees. The kids are incredible scum.

--Mokhtar Belmokhtar, the Algerian-born terrorist whose fighters killed 38 people at the In Amenas gas plant in Algeria in January, said he supervised an attack in Niger, targeted because of its support for France in fighting Islamic militants in Mali, that killed 26. It also badly damaged a French-owned uranium mine. France, heavily dependent on nuclear power, gets almost a third of its uranium from mines in Niger.

--Two men carrying $1.2 million in cash from Beirut airport were robbed on Thursday. Gunmen intercepted Ali Qandil and Fouad Matar on the airport highway and forced them into Beirut’s southern suburbs. [Hizbullah territory.]

The robbed men said the cash came from a Lebanese person in Africa, according to the Daily Star. Travelers entering Lebanon may bring any amount of cash to the country as long as they declare it with customs.

--Preparations for the 2014 World Cup in Brazil have been going miserably. And this Sunday, England is supposed to play Brazil in a friendly at Maracana stadium, which underwent about $400 million in renovations but is not ready. As in this week turnstiles were just being installed and loose flooring fixed.

You may be thinking, so what, the World Cup is a year away. But just understand this is symptomatic of the entire construction effort, including for the 2016 Olympics, which is way behind schedule.

--According to the OECD’s Better Life Index of the world’s developed economies, Australia remains the happiest nation for a third year running, ahead of Sweden, using criteria such as jobs, income, environment and health. The United States ranks sixth among the 34 nations ranked. [Canada is third. And it has better beer...which at the end of the day...]

Foreign Affairs

Syria: Russian news agency Interfax said on Friday that Moscow was unlikely to deliver a shipment of S-300 anti-aircraft missiles to Syria before the autumn. Other reports say perhaps not until next spring. Israel’s defense minister said earlier in the week he saw no signs the game-changing S-300 system had been delivered, even as Syrian President Bashar al-Assad tried to hint otherwise. Should they be delivered at some point, Israel will take them out.

The S-300 poses a significant threat not only to Israel, but also to any efforts by the West to institute a no-fly zone. As Russia’s deputy foreign minister Sergei Ryabkov said:

“In our opinion, these deliveries [Ed. should they come to pass] play a stabilizing role. We believe that such steps will largely help stop certain hotheads from turning it into a possible international conflict, from considering a scenario that would make this conflict international, with the involvement of external forces that are not averse to such ideas.”

President Assad, in an interview with Hizbullah’s TV station Al-Manar that aired Thursday night, said, “We are confident that victory is certain,” this as the U.S. and Russia work on organizing peace talks for later this month in Geneva.

For its part, the Syrian Opposition Coalition said after days of meetings in Istanbul it would not attend the conference if representatives from the Assad regime are there, and that Iran and Hizbullah must also end their military roles in Syria.

But the opposition is still squabbling over who should speak for the group, while Assad reiterated that “They are wasting their time” if they think he is going to step down and transfer power to a transitional government.

In his TV interview, Assad also threatened Israel, saying his regime would respond to any further Israeli airstrikes.

The key military battle these days is over the strategic city, and rebel stronghold, of Qusair, where thousands of Hizbullah fighters (up to 7,000 by one estimate) are supporting the regime. Qusair is near the Lebanese-Syrian border and opposition groups and humanitarian organizations say conditions for the civilians and the wounded are dire, with doctors having run out of medical supplies.

Gen. Selim Idriss, military chief of the main umbrella group of rebels and the man Sen. John McCain secretly met with inside Syria last weekend, said more than 50,000 residents of Qusair are trapped and a “massacre” would occur if the city fell.

Editorial / Washington Post

“The Obama administration has gotten some grim signals this week in response to its effort to ‘change the calculation’ of Syrian ruler Bashar al-Assad...

“Clearly, the strategy that Secretary of State John F. Kerry announced in February has failed. The idea was that the United States would, by providing additional support to the opposition, persuade the Assad clique that its cause was lost, opening the way to a negotiated process in which Mr. Assad would yield power. But Mr. Assad doesn’t believe he is losing – and he is not wrong in claiming that his fortunes have risen in the past several months....

“Meanwhile, the United States has yet to provide the rebels with the lethal aid it was said to be considering months ago. Nor has it taken any other substantial steps to strengthen them. Instead it has chosen to go along with a Russian proposal to convene another peace conference in Geneva....

“What’s (hard) to understand is why Mr. Kerry continues to vigorously pursue the conference, having failed to accomplish the necessary predicate of changing the balance of power on the ground. Unfortunately, the most plausible answer is that the administration has allowed itself to be played by Russian President Vladimir Putin, who is seeking to restore Moscow’s influence in the Middle East by thwarting the U.S. goal of regime change in Syria. Not for the first time, President Obama and his aides appear to have bet that Mr. Putin would turn on Mr. Assad and help force him from power. In doing so, they have fundamentally misread the Russian ruler and his intentions.

“As we have written previously, the only hope for an acceptable political settlement in Syria lies in an intervention that would decisively shift the balance of Syria’s war – through arms supplies to the rebels and airstrikes to eliminate the regime’s air power. If Mr. Obama is unwilling to take such steps, he ought also to eschew diplomacy that makes his administration appear foolish as well as weak.”

Regarding the opposition, Michael Young / Daily Star

“We are near the stage where the Syrian opposition, thanks to an effective campaign by the Syrian regime and its allies, but also a pervasive lack of unity or direction, may lose much of the support it needs to defeat President Bashar Assad’s regime. Nor has the opposition grasped the deepening anxiety in neighboring countries who fear being destabilized by the conflict in Syria....

“Meanwhile, the opposition has yet to decide whether it will be present in Geneva. A refusal to attend risks alienating the opposition’s supporters in the West.   If it accepts, Geneva could prove to be its undoing, given the likely internal discord over what is agreed. Worse, there are no guarantees the National Coalition has much influence inside Syria, and Geneva may only highlight this if the groups on the ground reject political arrangements reached at the conference.

"The Syrian opposition has failed to appreciate the shifting political context in which it is functioning, while the Assad regime and its Russian and Iranian backers have. For instance there has been no planning for Geneva and the very real risks that the conference holds for the opposition whether it participates or not.

“Russia and the United States are going to Geneva with very different agendas, none of which favors Assad’s adversaries. For the Obama administration, Geneva provides an opportunity to begin a political process permitting America to evade a larger role in Syria. President Barack Obama had feared being pushed into such a role after reports came out that the Syrian regime used chemical weapons against the rebels, crossing Obama’s red lines for American intervention. The president sent Secretary of State John Kerry to Moscow and the accord over a conference bought Obama time to stay clear of Syria.

“In other words, the Obama administration is going to Geneva largely to avoid Syria....

“The Syrian opposition cannot be blamed for the shameful American performance...but it can be blamed for failing to consider possible post-Geneva outcomes. Nor has it adequately addressed the very real doubts that have emerged over the participation in the Syrian uprising of the Nusra Front, an affiliate of Al-Qaeda. The fact is that there are profound doubts that the opposition can fill the vacuum in Syria if Assad goes, which can only favor jihadist groups.

“No one in the West, particularly the U.S., much cares that it was Western indecision over Syria that created an opening for the militant Islamists. As they see the opposition in disarray, one thing they do not want is a new Afghanistan in the Levant, which will destabilize Syria’s neighbors. And the neighbors are beginning to agree. Recall that associating the opposition with Al-Qaeda has long been the line of the Assad regime, which then made it a self-fulfilling prophecy.

“Syria’s opposition must regroup quickly, or else all will be lost. The tens of thousands of Syrians who have died at the hands of a barbaric leadership deserve better. But the chances are they will not get better.”

Lebanon: The Syrian war continued to bleed into Lebanon. Three Lebanese government soldiers were killed at a checkpoint near the border, while at least 26 have been killed in Sunni vs. Shia fighting in Tripoli.

And the sectarian violence came to Beirut as two rockets slammed into a Hizbullah neighborhood, following Hizbullah chief Hassan Nasrallah’s declaration his group was all-in with its support of Bashar Assad.

“It is our battle, and we are up to it....If we do not go there to fight them, they will come here.”

Former Lebanese Prime Minister Saad Hariri said what Hizbullah was doing in Syria was “political and military suicide.”

Separately, the government postponed the parliamentary election slated for this month until November 2014, due to the spillover from the Syrian war, as well as political deadlock. This is not good at all. And downright distressing.

Iran: Longtime diplomat Ryan Crocker, as respected as they come, says Presidents Bush and Obama are fumbling the most worrisome threat to America: Iran’s nuclear program.

In an interview with the Los Angeles Times’ Paul Richter, Crocker said tougher sanctions won’t persuade Iran to stop enriching uranium.

“Sanctions are easy to do, and afterwards we can tell ourselves that, ‘By God, we’ve really stuck it to them. But it seems to me that the more you press this regime, the more they dig in.”

Crocker isn’t saying sanctions should be immediately dropped, but he said history shows that Tehran won’t yield to anything less than the all-out war it faced from Iraq in the 1980s. The mullahs, he argues instead, may be open to compromise if it’s in their best interest.

This is exactly why long ago I said the U.S. should have been back-channeling Rafsanjani when he still had the clout.

But from Michael Oren, Israel’s ambassador to the United States, in an op-ed for the Washington Post.

“(The) ayatollahs are taking no chances and trying to protect their nuclear assets. Iran has collaborated with Assad to supply Hizbullah with precision-guided missiles. If successful, the terrorists could target Israeli jets, vital installations and population centers. The goal is to deter Israel from defending itself against an imminent Iranian nuclear threat designed to wipe us off the map.

“But Israel will not remain passive. We will prevent these sophisticated missiles from reaching Hizbullah. We will closely monitor the movement of chemical and other game-changing weapons in Syria. Together with the United States, we will develop more advanced anti-ballistic systems. Yet we can never lose sight of the ultimate threat.

“If Iran gets the bomb, so too will a number of Middle Eastern states that can pose not only regional chemical but also global nuclear threats. An Iran with military nuclear capabilities will dominate the Persian Gulf and its vast oil deposits, driving oil prices to extortionary highs. And Iran can transfer nuclear weapons to terrorists who can launch them at foreign ports in shipping containers. The entire world will be endangered.

“The images emerging from the Middle East, though agonizing, must not camouflage Iran’s nuclear designs. These, we still believe, may yet be thwarted by a combination of escalating sanctions and a credible military threat. Iranian rulers must not only hear about the policy of all options on the table, they must fear it. Iranian nuclear installations may make for bland photographs, especially when compared with the region’s lurid scenes, but they foreshadow a cataclysmic picture.”

Separately, the Iranian presidential election is June 14. A hardliner is going to win, probably current nuclear negotiator Saeed Jalili, a protégé of Ayatollah Khamenei. I hope the Obama administration is ‘gaming this out.’ Jalili hates the West.

Lastly, an Argentine prosecutor has accused Iran of trying to infiltrate the likes of Brazil, Paraguay, Uruguay, Chile, Colombia, and others. Alberto Nisman is investigating the 1994 bomb attack on a Jewish center in Buenos Aires that killed 85, Iran having always been suspected of involvement (which it has denied). In an indictment handed to a judge in Buenos Aires, Nisman repeated the often-made claim:

“I legally accuse Iran of infiltrating several South American countries to install intelligence stations – in other words espionage bases – destined to commit, encourage and sponsor terror attacks like the one that took place against Amia,” referring to the Jewish center.

Your editor began discussing Iran’s tentacles in South America over ten years ago.

Iraq: The sectarian violence in this country is the worst since 2007, with well over 350 having been killed in just the last ten days of May. Incredibly, three years after he formed his government, Prime Minister Nouri al-Maliki also has no defense or interior minister.

Pakistan: A U.S. drone strike took out the Pakistani Taliban’s deputy leader this week, but then the Taliban, after confirming the death of Wali ur Rehman, called off peace talks with the country’s newly elected government. The Taliban spokesman said, “The government is killing our leadership in collusion with the U.S.   And yet it speaks of peace talks.” [Saeed Shah / Wall Street Journal]

Nawaz Sharif, who takes over as prime minister shortly, has said he wants to negotiate, though the Pakistani army has expressed its skepticism over any discussions. The Pakistani Taliban, after all, is responsible for thousands of army deaths in Pakistan over the years.

China: President Xi Jinping and President Obama hold their two-day summit outside Palm Springs on June 7-8. Xi told National Security Adviser Tom Donilon, who was in Beijing to help set an agenda, that relations between our two countries were at a “critical juncture.”

At the top of the list will be cyberespionage.
Ellen Nakashima / Washington Post

“Designs for many of the nation’s most sensitive advanced weapons systems have been compromised by Chinese hackers, according to a report prepared for the Pentagon and to officials from government and the defense industry.

“Among more than two dozen major weapons systems whose designs were breached were programs critical to U.S. missile defenses and combat aircraft and ships, according to a previously undisclosed section of a confidential report prepared for Pentagon leaders by the Defense Science Board.

“Experts warn that the electronic intrusions gave China access to advanced technology that could accelerate the development of its weapons systems and weaken the U.S. military advantage in a future conflict.

“The Defense Science Board, a senior advisory group made up of government and civilian experts, did not accuse the Chinese of stealing the designs. But senior military and industry officials with knowledge of the breaches said the vast majority were part of a widening Chinese campaign of espionage against U.S. defense contractors and government agencies.....

“The confidential list of compromised weapons system designs and technologies [Ed. obtained by the Post] represents the clearest look at what the Chinese are suspected of targeting. When the list was read to independent defense experts, they said they were shocked by the extent of the cyber-espionage and the potential for compromising U.S. defenses.

“ ‘That’s staggering,’ said Mark Stokes, executive director of the Project 2049 Institute, a think tank that focuses on Asia security issues. ‘These are all very critical weapons systems, critical to our national security. When I hear this in totality, it’s breathtaking.’”

Friday, Secretary of Defense Chuck Hagel called for honest dialogue with his Chinese counterparts about cyber threats and online spying.

“There’s only one way to deal with these issues: that’s straight up,” he said.

Hagel, prior to a security conference in Singapore, said the U.S. and China must develop “rules of the road” to mitigate the threat.

Random Musings

--Editorial / The Economist...on the president...

“The danger is that Mr. Obama will achieve little in his second term. Congress remains gridlocked. Democrats and Republicans could spend the next four years squabbling and issuing subpoenas. To avoid this, Mr. Obama needs to keep his eyes on the big picture. Even as Republicans pepper his administration with probes, he needs to keep pushing for solutions to America’s main domestic problems. He may believe it is impossible to work with congressional Republicans, but his legacy depends on him trying. He will lose leverage if he delays. Next year Washington’s attention will be on the mid-term elections; after that Mr. Obama will be a lame duck.”

Immigration, entitlements and tax reform. Domestically, he could still have a successful second term. I just think he’s going to be totally overwhelmed on the foreign affairs front. Actually, he already is...he just doesn’t know it yet.

--A new Quinnipiac University national survey (May 30) has President Obama with just a 45% approval rating, compared to 48% in their May 1 poll. Only 37% of independents approve of the president’s job performance. [By an 87-8 margin, Democrats do approve. 9-86 among Republicans.]

--Peggy Noonan / Wall Street Journal...on the IRS scandal

“(This) scandal is different and distinctive. The abuse was systemic – from the sheer number of targets and the extent of each targeting we know many workers had to be involved, many higher-ups, multiple offices. It was ideological and partisan – only those presumed to be of one political view were targeted. It has a single unifying pattern: The most vivid abuses took place in the years leading up to the president’s 2012 re-election effort. And in the end several were trying to cover it all up, including the head of the IRS, who lied to Congress about it, and the head of the tax-exempt unit, Lois Lerner, who managed to lie even in her public acknowledgement of impropriety.

“It wasn’t a one-off. It wasn’t a president losing his temper with some steel executives. There was no enemies list, unless you consider half the country to be your enemies.

“It is considered a bit of a faux pas to point this out, but what we are talking about in part is a Democratic president, a largely Democratic professional administrative class in Washington, and an IRS whose workers belong to a union whose political action committee gave roughly 95% of its political contributions last year to Democrats. Tim Carney had a remarkable piece in the Washington Examiner this week in which he looked for campaign contributions from the IRS Cincinnati office. ‘In the 2012 election, every donation traceable to this office went to President Obama or liberal Sen. Sherrod Brown.’ An IRS employee said in an e-mail to Mr. Carney, ‘Do you think people willing to sacrifice lucrative private sector careers to work in tax administration...are genuinely going to support the party directed by Grover Norquist?’....

“Because people think the IRS has always, in various past cases, been used as a political tool, they think we’ll glide through this scandal too. We’ll muddle through, we’ll investigate, the IRS will right itself, no biggie.

“But when a scandal is systemic, ideological and focused on political ends, it will not just magically end. Agencies such as the IRS are part of what Jonathan Turley this week called a ‘massive administrative state,’ one built with many protections and much autonomy.”

--It really is amazing IRS Commissioner Douglas Shulman visited the White House at least 157 times during the Obama administration, more recorded visits than even the most trusted members of the president’s Cabinet.

By contrast, according to The Daily Caller, Shulman’s predecessor Mark Everson only visited the White House once during four years of service in the George W. Bush administration and compared the IRS’s remoteness from the president to “Siberia.”

Shulman’s visits also compare to DHS Secretary Janet Napolitano’s 34, and Defense Secretary Robert Gates’ 17.

--Maureen Dowd / New York Times...on Jonathan Alter’s second history of the Barack Obama era, “The Center Holds.”

“At East Room events, Alter writes, Obama’s vibe was clearly: ‘I’ll flash a smile, then, please, someone get me the hell out of here. It wasn’t that he had to be back in the Oval Office for something urgent. He just didn’t want to hang out for an instant longer than he had to, even with long-lost Chicago friends.’ The president sometimes ‘exuded an unspoken exasperation: I saved Detroit, the Dow is up, we avoided a depression – I have to explain this to all of you again?’ That attitude caused him to tank in his first debate with Mitt Romney.”

--Stephen Flynn is one of the foremost experts on terrorism in the U.S. and he’s now a professor at Northeastern University. Flynn appeared on a panel Wednesday, discussing a new cargo checking technology, and he talked about the Boston Marathon bombing and the possible economic devastation that could result if authorities launched a similarly overwhelming response to a dirty bomb strike.

As reported by Diane Barnes of the Global Security Newswire:

“The United States is nearly certain to freeze all inbound U.S. sea cargo if such a weapon were smuggled into the country and then detonated, he asserted, adding that work-arounds exist that could enable terrorists to skirt nearly all security measures instituted since the Sept. 11 attacks. Such a freeze would ‘gridlock’ land- and sea-based commerce around the world in two weeks, and shipping would likely require at least a month to restart, Flynn said.”

--President Obama is going to nominate James Comey to lead the FBI, following the retirement of Robert Mueller in September. Comey, a Republican, was deputy attorney general (and then acting attorney general) when his boss, John Ashcroft, and Comey, resisted President George W. Bush’s plan to wiretap Americans’ phone calls without warrants. Bush was forced to make changes after Comey, Ashcroft and Mueller threatened to resign over the policy.

Bush had named Comey as U.S. attorney for the Southern District of New York, which includes Manhattan. He’s a solid choice.

--Editorial / Washington Post

“The Obama administration already has pursued more criminal leak investigations than all of its predecessors. There is a worrisome trend here, also recently evident in the government’s pursuit of Associated Press telephone records in a different leak investigation. Yes, the government must have secrets in order to function. But overclassification is so rampant that to criminalize the disclosure of all secret information would come close to paralyzing the flow of information.

“Perhaps prosecutors failed to read the Justice Department’s policy on this, which declares: ‘Because freedom of the press can be no broader than the freedom of reporters to investigate and report the news, the prosecutorial power of the government should not be used in such a way that it impairs a reporter’s responsibility to cover as broadly as possible controversial public issues.’ That statement goes back four decades. The Obama administration should recommit to its spirit.”

--Minnesota Republican Congresswoman Michele Bachmann said “Eight is enough” in announcing she would not seek a fifth term. This is more than a bit disingenuous, seeing as she had already raised $678,000 for her 2014 reelection bid during the first quarter of this year, and has $1.9 million in the bank as of March 31. She had also started running campaign spots.

But she only won her race last fall by 1,000 votes in a district Mitt Romney carried by 15 points, plus there have been ethics issues involving the Bachmann campaign.

So look for Michele on Fox.

--Regarding the latest get together at the Jersey Shore between Gov. Chris Christie and Barack Obama, which once again led to some consternation among conservatives, remember what I said back when the two first got together in Sandy’s aftermath. As a Rutgers professor and expert on the local political scene noted at the time, Christie is the smartest politician in the country. He is three or four steps ahead of everyone in his thinking. What he needs to do now is get 60%+ in his reelection bid this fall, keep the federal funds flowing so he can say he was successful in rebuilding New Jersey, and that he was able to work with the other side for the good of the state, which will play well nationally, and as long as he doesn’t get crushed in Iowa, he’ll do just fine the rest of the way.

That is...assuming his health holds up.

--Republican South Carolina Sen. Lindsey Graham had this message for the military concerning the sexual assault issue.

“I want to salute the women who serve and are putting up with too much crap,” he said on ‘Fox News Sunday.’ “This needs to end. When a victim comes forward, they should have an advocate to walk them through the military justice system. And commanders who allow this to continue to flourish, quite frankly, should be fired.”

--Tamara Lush of the Associated Press had a piece on the U.S. vs. European hurricane models. The European model gained everlasting fame for correctly forecasting Hurricane Sandy eight days before the landfall, including the hook back to the coast that most of us had never seen before. The American model finally agreed four days later and while this was plenty of time for preparation, “It left some meteorologists fuming.”

“ ‘Let me be blunt: the state of operational U.S. numerical weather prediction is an embarrassment to the nation and it does not have to be this way,’ wrote Cliff Maas, a professor of atmospheric sciences at the University of Washington on his weather blog.

“Meteorologists agree that the two American supercomputers that provide storm models are underpowered – which is why the National Weather Service plans on upgrading those computers in the next two years.”

Like $25 million worth in upgrades, sports fans.

The fact is the Euro model is better able to pick up extreme weather events. But on the other hand, it really doesn’t matter because our weather folks have access to both models. 

--Incredibly, or maybe not given the intelligence of many New York City voters, Anthony Weiner polls at 19% in the latest Marist survey vs. front-runner and City Council President Christine Quinn’s 24% in the race to replace Mayor Bloomberg. [You need 40% to avoid a run-off.]

Then again, the Democratic primary field is absolutely pathetic, as is the Republican’s.

I’ve said this before and it bears repeating. When it comes to New York, what really matters is who is police commissioner and Gotham has been blessed to have Ray Kelly. If he goes, unless William Bratton returns (a possibility), I will never step foot in the City again.

--When I heard the first details of the Oregon teenager who was planning a Columbine scale attack on his high school, my initial thought was, ‘Bet I’ve been there.’

Sure enough, Grant Acord, 17, was planning an attack on West Albany High School. Back in 2008, while attending the U.S. Olympic Trials in Eugene, I spent two weeks in Albany, and then last summer I went back a few times (while staying in a town a little closer to the action).

Albany does have one of the best eating establishments I’ve been to; Novak’s Hungarian Restaurant. Oh yeah, I became a regular...lots of veal cutlet and spaetzle, washed down with Pilsner Urquell.

Thankfully, authorities caught this kid in the nick of time. He was the real deal. Acord had already made six bombs.

By the way, the reason why Acord is named despite the fact he is a juvenile is because he is going to be tried as an adult.

--Finally, I made a major error last week. In my retelling of my day in Maud, Oklahoma, 1978, I said the bartender was an “ex-Marine.” 

Well, a good friend from way back, one of the better pitchers in my high school’s history, Bobby C., reminded me there is no such thing as an “ex-Marine.” “Once a Marine, always a Marine,” he being one.

I should have known better, especially given my extensive study of the military, and paying my respects to our war dead, all over the world.

Anyway, Bob, I owe you a few rounds next time at Marco Polo. [Bob’s father was also one of Summit’s all-time great coaches...Art C. Art is in possession of a rarity...an autograph of Bill Dickey, from his playing days. And now you know...the rest of the story....]

---

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

We mourn the loss of the firefighters in Houston on Friday.

God bless America.

---

Gold closed at $1392
Oil, $91.97

Returns for the week 5/27-5/31

Dow Jones -1.2% [15115]
S&P 500 -1.1% [1630]
S&P MidCap -0.3%
Russell 2000 -0.0%
Nasdaq -0.1% [3455]

Returns for the period 1/1/13-5/31/13

Dow Jones +15.3%
S&P 500 +14.3%
S&P MidCap +16.1%
Russell 2000 +15.9%
Nasdaq +14.4%

Bulls 52.1
Bears 19.8 [Source: Investors Intelligence]

Dr. Bortrum has a new column....cicadas and monarch butterflies.

Nightly Review video schedule, Tues. thru Thurs. (not Monday this time), posted around 5:30 PM ET.

Have a great week. I appreciate your support.

Brian Trumbore



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Week in Review

06/01/2013

For the week 5/27-5/31

[Posted 12:00 AM ET]

Washington and Wall Street

The OECD, a group of 34 mostly developed countries, not including China, issued one of its periodic forecasts on global growth this week and it is calling for 3.1% in 2013 and 4% in 2014.

But among the 34 in the OECD itself, growth of just 1.2% this year, 2.3% next.

The putrid forecast for the 34 is impacted by the eurozone, where the OECD forecasts a contraction of 0.6% in 2013. [Non-euro Britain is now expected to grow 0.8%, as the OECD said the austerity measures taken by the government were needed.]

The OECD added Europe “could evolve into stagnation,” which is certainly how I see it.

As for the U.S., the OECD is forecasting 2% growth for 2013 and on Thursday we had the second reading on first-quarter GDP, up 2.4%, a tick down from the preliminary 2.5% we had been given earlier. Economists are looking for 1.5-1.6% in the second quarter and then 2.0-2.5% for the second half, so basically in line with the OECD’s overall outlook.

In other economic news, there were two very strong consumer sentiment figures out of the Conference Board and the Univ. of Michigan, the former to the best level since Feb. 2008, July 2007 in the case of the latter, while on Friday, a surprisingly (shockingly) strong figure for the Chicago Purchasing Managers survey for May, 58.7 when 50.0 was expected (vs. 49.0 in April), as well as an earlier S&P/Case-Shiller reading on property values for March, up 10.9% over March 2012, the biggest 12-month gain since April 2006, added more ammunition for those believing that perhaps the second half will be stronger than the above consensus. The only real downers were on April personal income, unchanged when a gain was expected, and consumption, down 0.2% when unchanged was forecast. Jobless claims for the week were also slightly worse than projected, with the 4-week average now back down to 347,250.

So I just threw a lot at you, most of it very positive, but stocks finished down on the week thanks to a wicked late-Friday collapse, partly related to index rebalancing, with the Dow Jones falling 208 points, 1.4%. What gives?

For starters, we’ve come a long ways in a short spell so when it comes to the equity market a pause is warranted.

And when it comes to the economy, I thought Neil Irwin of the Washington Post summed it up well.

“In a year when tax increases and spending cuts by the federal government were expected to bleed life out of the economy, the strengthening housing and financial markets are proving to be more powerful than acts of Congress.”

But this was also a volatile week owing to renewed concerns the Fed is likely to begin to pull back on its bond buying with the improving economic data....and assuming this translates into a better jobs picture, the number one key for the Fed. Next Friday’s May reading on the labor force will provide a big clue when gauging the Fed’s next move.

The bond market has the heebie-geebies, with the yield on the 10-year Treasury rising to over 2.20% this week (before closing at 2.16%) compared with 1.63% on May 2. That’s a big percentage move and mortgage rates are back over 4.00%, up from 3.50%, which can make a difference for home buyers even if it is still historically low. Should the Fed then actually announce it was going to start pulling back, tapering, it’s $85 billion a month in purchases of Treasuries and mortgage-backed securities, how much further would rates rise, and how quickly? It’s the speed of any change that can prove deadly for stocks, let alone bond holders. [Speed can crush hedge funds, too, which can create its own reinforcing issues for both equities and credit instruments.]

David Wessel and Victoria McGrane / Wall Street Journal

“The bond market’s month long plunge has pushed long-term interest rates on mortgages and U.S. Treasuries to their highest levels in more than a year, sparking a debate: Is this a bursting bubble, the aftereffect of clumsy Federal Reserve communication or a welcome sign the U.S. economy is, at last, on the mend....

“With stock prices, movements are easy to read: Up is good. Down is bad. Reading the bond market is trickier.

“One camp sees the recent fall in bond prices, which move inversely to yields, as confirmation of a bond-market bubble fueled by the Fed and bound to end badly, retarding an economy whose growth is already painfully slow....

“Another camp sees the same trends as a welcome move toward more normal interest rates and a signal of better times ahead. The anomaly isn’t the recent rise, but the drop in yields at the end of April to levels lower than those recorded during the Depression.”

Me? I have a wimpy answer. I have consistently said I’m not concerned about bonds until the 10-year trades over 2.25%. I’m not sold we will see more than 2% growth for the second half of this year and were that to be the case, employment gains would be on the light side and the Fed won’t be taking away the punch bowl anytime soon.

But if Friday’s labor data is strong, 200,000+, and with a June Fed meeting in less than three weeks, then Katy bar the door...the 10-year will fly through 2.25%, up to 2.40% and higher. And while it would be doing so because the economy is strong, stocks will not like it either...at least initially.

Something tells me I might be twisting myself into a pretzel come next week’s review.  I better stock up on domestic.

Europe’s Economy and the Immigration Issue

The economic news on the continent continued to worsen, with few exceptions. Eurostat, the European Commission’s statistics office, released the latest unemployment data and for the 17-nation eurozone, April saw another record high, 12.2%, up from 12.1% in March and the 24th consecutive month where the rate rose.

The highest jobless rates are in Greece (27.0% in Feb. 2013), Spain (26.8%) and Portugal (17.8%).

France’s rate of 11.0% is a new record. Italy’s, at 12.0%, is a 36-year high.

And in light of the recent Cyprus bailout, it’s jobless rate has risen from 11.2% in April 2012 to 15.6% a year later, with further pain in the offing.

Sickeningly, the youth unemployment rate (under age 25) is now 24.4% for the entire eurozone, but it’s 62.5% in Greece, 56.4% in Spain, 42.5% in Portugal, and 40.5% in Italy.

[Austria has the lowest overall unemployment rate at 4.9%, followed by Germany at 5.4%.]

One ongoing problem for the eurozone is the still dire health of its banks (as opposed to the flipside for America’s financial institutions, detailed below). The European Central Bank warned on Wednesday that a surge in problem loans, owing to the ongoing recession, was raising the risk of a renewed banking crisis. Vitor Constancio, the ECB’s vice president, said, last year “was not a good year for banks at all.”

The resultant credit crunch, when you have all these sick or zombie banks, is killing small- and mid-size businesses in particular, especially on the periphery.

But even Germany’s banks, despite all the happy talk, “are struggling with bad loans to the shipping industry and other problems,” as reported by the New York Times’ Jack Ewing, who added:

“Germany has drawn criticism for lecturing other countries on excessive government debt, while trying to protect its own banks from greater scrutiny. ‘They are very virtuous when they look at national accounts but less so when they are looking at their own banks,’ said Stefano Micossi, an economist who is director general of Assonime, an Italian business group.”

One thing the European Commission did this week to help some member states was to allow them to slow their pace of austerity cuts, amid concerns over growth.

France will get two more years to bring its budget deficit below 3% of GDP.

Spain, Poland and Slovenia will get two more years as well to bring down their deficits through spending cuts and tax increases.

The Netherlands and Portugal are having their timetables extended by one year.

Euro Bits

The inflation rate for the eurozone in April was just 1.4%, far below the 2% target set by the European Central Bank.

German retail sales for the month of April declined 0.4% from March.

Italy’s GDP is forecast to decline 1.8% this year, according to the OECD.

Spain’s government said GDP came in at -0.5% in the first quarter from the fourth, in line with the first estimate. This was an improvement from the fourth quarter’s -0.8% pace. Exports were down 1.3% in Q1. The OECD says Spain’s unemployment rate will hit 28% next year.

Separately, the total volume of mortgage lending for the month of March was down 90% from the peak of the credit boom, Jan. 2007.

Denmark’s economy returned to growth in the first quarter, up 0.2%, after contracting a revised 0.9% in Q4. But the government cut its growth forecast for 2013 to 0.5%.

Greece is seeing record tourist bookings for the summer, especially from Germany and Russia. This is good.

Finally...long, long ago, I warned of the coming explosion in Europe over immigration. But I was way off...by years...only now the fire has been lit and for two reasons. 

First, my original thesis was that when the economy softened (and I was broaching this topic when Europe’s economy was actually growing faster than the U.S.), people would look for scapegoats, citing then the example of Turks becoming targets in Germany. This is now beginning to play out all over the continent, especially with the youth unemployment rates noted above.

Second, the militant Islam issue, fueled by incidents like the terror attack on soldier Lee Rigby in London and the stabbing of a French soldier (by an Islamist as it turned out).

So you have situations like in Sweden, scene of riots in Stockholm and its suburbs, where the far right is saying the country’s borders are too open. Did you know 14% of Sweden’s population is now comprised of immigrants or asylum seekers? [Unemployment among immigrant youth is over 30% here.]

Switzerland is reimposing quotas on immigration.
Italy has had it with the Roma. [I’ve had it with the Roma.]

In Greece, the neo-Nazi Golden Dawn is now polling 10%, making it the third largest party. It already holds 18 of 300 seats in parliament and if a vote were held today would gain more.

On Wednesday night, Golden Dawn marched with torches through Athens, shouting “Blood, honor, Golden Dawn” and “Greece belongs to the Greeks.”

The same poll that has these thugs at 10%, also shows 68% of Greeks feel Golden Dawn poses a threat to democracy. [London Times]

Racist attacks are on the rise in Greece.

And then you have the radical Islam issue, especially in Britain. The brutal slaying of Afghan war vet Rigby in broad daylight, with one of his killers bragging about it before a camera with the body lying nearby, has horrified the Brits. Anti-Muslim sentiment is surging. A group called the English Defense League, EDL, is going to become increasingly featured in the headlines.

The EDL, enraged by the murder in London, has been staging large demonstrations around the country. The EDL claims Islamic law is poised to overthrow British society and calls for Britons to act aggressively to pre-empt it.

A motto on the EDL’s website reads: “If we fail to show courage now, we will leave revolution, civil war or subjugation to our children and our children’s children. Any act of Muslim extremism will now be countered by the EDL.”

This is just a start. The British government is paying the price for decades of lax immigration standards, particularly in the Muslim community. The government has allowed extremist preachers to proliferate, spewing their hate speech, and most in Britain are finally shouting, “Enough!”

You know what I immediately thought of when I heard Rigby was killed while wearing a t-shirt supporting a local wounded warriors’ charity, ‘How is Prince Harry going to stay safe?’ The Prince being a rather high-profile supporter of such noble projects, let alone ‘a killer of Muslims’ in the eyes of the Islamic fanatics.

Ayaan Hirsi Ali / Wall Street Journal

“On both sides of the Atlantic, politicians, academics and the media have shown incredible patience as the drumbeat of Islamist terror attacks continues. When President Obama gave his first statement about the Boston bombings, he didn’t mention Islam at all. This week, Prime Minister David Cameron and London Mayor Boris Johnson have repeated the reassuring statements of the Muslim leaders to the effect that Lee Rigby’s murder has nothing to do with Islam.

“But many ordinary people hear such statements and scratch their heads in bewilderment. A murderer kills a young father while yelling ‘Allahu Akbar’ and it’s got nothing to do with Islam?

“I don’t blame Western leaders. They are doing their best to keep the lid on what could become a meltdown of trust between majority populations and Muslim minority communities.

“But I do blame Muslim leaders. It is time they came up with more credible talking points. Their communities have a serious problem. Young people, some of whom are not born into the faith, are being fired up by preachers using basic Islamic scripture and mobilized to wage jihad by radical imams who represent themselves as legitimate Muslim clergymen.

“I wonder what would happen if Muslim leaders like Julie Siddiqi started a public and persistent campaign to discredit these Islamist advocates of mayhem and murder. Not just uttering the usual laments after another horrifying attack, but making a constant, high-profile effort to show the world that the preachers of hate are illegitimate. After the next zealot has killed the next victim of political Islam, claims about the ‘religion of peace’ would ring truer.”

So to sum up, soaring youth unemployment across Europe is toxic and immigrants are increasingly targeted, while at the same time, ultra-liberal immigration policies in many countries have allowed radical Islam to flourish, right under the eyes of authorities, and the common people have had it. It’s going to be vigilantism run wild. 

Japan

The Tokyo Nikkei index topped out on May 23, suffered a vicious reversal the same day, and fell 14.7% from its multi-year peak through May 30...one week. Now that’s a correction, the Nikkei having been up 46% for the year before the fall...about 75% since it was clear Prime Minister Shinzo Abe was going to win last December’s election.

The Japanese 10-year government bond (JGB) saw its yield rise to over 1.00% at one point during the week, a huge percentage move from the closing low of 0.44% earlier in the month (it actually hit an intraday low of 0.31%). 

Economic data at the end of the week helped sooth the markets some and the Nikkei rose over 1% on Friday to finish the week at 13774, though with a loss of 0.6% for the month, May was the first down month after nine consecutive monthly gains for the key barometer.

Industrial production for April rose a better than expected 1.7% over March, while the consumer price index declined 0.4% year over year, as deflation continues to rule in Japan, while the jobless rate came in at 4.1% for April.

The above-noted OECD is forecasting growth in Japan of 1.6% this year.

But here’s why there was so much indigestion this week.

The Bank of Japan, following Prime Minister Abe’s wishes, seeks to lower interest rates across the yield curve, pushing investors into riskier assets (sound familiar?) like stocks, while at the same time it aims to achieve a 2% inflation rate after years of deflation, which would pressure interest rates.

As the chief bond strategist at Nomura told the Financial Times (I apologize I forgot to jot down his name), “Eventually, the target is the same, to push up the economy. But en route, they are having contradictory implications for Japanese government bonds.”

Of course it’s essentially the same issue all over the world these days, as alluded to above in the segment on our Federal Reserve. Or as the OECD’s chief economist Pier Carlo Padoan put it in warning about the dangers of monetary-easing programs currently enacted by virtually every major central bank in the world, once you start withdrawing from them, spikes in government bond yields pose a risk to the outlook for the global economy.

“Exit from unconventional monetary policy, when needed, may be difficult to manage and less smooth than desirable, possibly leading to sharp rises in bond yields and serious negative consequences for growth in a number of advanced and emerging economies.”

Street Bytes

--Owing to Friday’s debacle, the Dow Jones declined 1.2% on the week to 15115, while the S&P lost 1.1%. For the month, however, the Dow added 1.9% and the S&P 2.1% as the latter rose a seventh consecutive month. [Six straight for the Dow.] Nasdaq lost only four points on the week, 0.1%, to 3455.   

--U.S. Treasury Yields

6-mo. 0.07% 2-yr. 0.29% 10-yr. 2.16% 30-yr. 3.30%

It was the worst month for U.S. Treasuries in three years. For global government bonds, the worst month since 2004.

--The trustees overseeing Medicare and Social Security issued their annual report on the health of the two programs and in the case of the former, the primary trust fund can meet its primary obligations through 2026, two years later than the trustees projected last year, while in the case of Social Security, it’s supposedly solvent until 2033, the same as the previous forecast.

Once the Soc. Sec. trust funds’ reserves are exhausted, benefits would continue to be paid but they’d be slashed 20-30%...or we’d have to accept higher taxes...or the government would just borrow more money.

Does the above make it easier for Congress to punt on the twin issues? Possibly. Does it change anything us budget alarmists have been saying the past few years? Nope.

--The IMF cut its forecast for growth in China from 8.0% to 7.75% this year, while the OECD cut its China projection from 8.5% to 7.8%, a rather big move. Many private economists have cut their China outlooks to 7.6%.

Remember, the official government forecast for 2013 is 7.5%, but this week, in his first overseas outing since being named premier, Li Keqiang said China would grow just 7% the rest of the decade, so some are wondering if this is the new party line.

--Canada’s economy grew at a 2.5% annualized pace in the first quarter, the fastest rate in six quarters, owing largely to a surge in Canadian oil exports to the U.S. Household consumption in Q1 only grew at an annualized 0.9% pace, however, less than half the 2.2% rate in Q4. Home construction fell a third straight quarter.

--Brazil’s first-quarter GDP came in at a less than expected 1.9% on an annualized basis, up 0.6% quarter over quarter.

--India’s economy grew at its slowest pace in a decade during the 2012-2013 fiscal year ending March 31, up just 5%. Two years ago, India was recording 9% growth. Foreign investors have been staying away due to delays in key reforms, while the manufacturing sector grew at just a 2.6% pace during the latest quarter. The government is forecasting 5% growth for the current year. Prime Minister Manmohan Singh is on thin ice. [He’s also 80!]

--South Korea’s industrial production for April was up 1.7% from a year earlier, after two months of declines. The OECD lowered its GDP forecast for the country to 2.6% from 3.1%.

--Three straight quarters of 7%+ growth for the Philippines...7.8% from a year earlier in the first three months of 2013.

--China’s Shuanghui International is making a $4.7 billion play for pork producer Smithfield Foods. I have no problem with this one. America’s pig farmers will have an extensive, growing market for their product.

But it is a fact we are importing more and more food from China. I know I always try to look at the labels to see where the fish is coming from and avoid fish from there when possible.

California Republican Congressman Dana Rohrabacher recently held a hearing wherein he said, “The health and safety, not only of the United States and Europe but that of people around the world, has come to be dependent on the quality of goods imported from China. Yet the task of inspecting and testing Chinese goods is beyond the ability of governments, considering the magnitude of that challenge.”

As the New York Times notes, however, while consumers can attempt to check food labels for origin, “a substantial portion of imports end up in restaurant and food service meals, where consumers have no idea of their source.”

The Agriculture Department reports that China shipped 4.1 billion pounds of food to the United States last year, including almost half of the apple juice, 80% of the tilapia and more than 10% of the frozen spinach eaten.

Back to the Smithfield acquisition, I do agree that China needs safe meat for their population, and the deal is not to bring Chinese pork to the United States.

Food safety and pollution issues in China can easily bring down the government, and the Communist Party understands this, even if change on these fronts has been painfully slow.

--Panasonic announced it will cut 5,000 jobs over the next three years in order to improve profits.

--Chinese e-commerce giant Alibaba is eyeing a listing on the Hong Kong exchange for its long anticipated IPO, and not in the United Sates because of the stringent disclosures required for U.S.-listed entities. I’m shocked! 

The Financial Times said nothing is set in stone yet but Alibaba management doesn’t seem to want to meet U.S. accounting standards. 

On the other hand, one banker told the FT that senior management wanted to make a “cultural point” by listing solely in Hong Kong.

--America’s banks reported their largest quarterly profit on record in the first three months of the year, according to the FDIC, $40.3 billion in net income, a 15.8% increase from a year earlier. Reduced litigation costs and settlement proceeds helped.

Only 8.4% of the nation’s 7,000+ FDIC-insured banks were unprofitable, down from 10.6% a year ago, with the number of troubled banks falling to 612 from a high of 888 two years ago. Only four banks failed in the quarter, the fewest since mid-2008.

--Britain’s four biggest banks, Royal Bank of Scotland, HSBC, Lloyds and Barclays will have eliminated 189,000 jobs, worldwide, by the end of this year from their peak staffing levels, according to data compiled by Bloomberg; 24% below the peak of 795,000 in 2008.

--A British health study found that patients who have operations in the U.K. on a Friday are almost 50% more likely to die than those who go under the knife on a Monday.

“About 1,600 patients a year die needlessly because surgery becomes steadily more dangerous throughout the working week, the analysis suggests.

“While previous studies have found that patients admitted at the weekend are more likely to die, the latest study is the first to find a similar effect during the week.

“The authors of the report said the root causes were likely to be the same, with patients undergoing surgery on Fridays forced to recuperate over the weekend when senior doctors are often unavailable, nursing staff are fewer and testing services are reduced.” [Chris Smyth / London Times]

--Tiffany & Co. reported revenue rose 10% in the first quarter, far better than expected. Sales for the Asia-Pacific region rose 15% and 6% in the Americas. Even European sales increased 6%.

--Attendance for the 2012-13 Broadway season fell 6%, to 11.3 million, compared with a year ago. The box office came in flat at $1.1 billion.

--A Pew Research Center study found that more than 40% of U.S. women are the breadwinners in the family. Back in 1960, the percentage was 11%. Granted, single mothers now make up a quarter of all U.S. households with children, according to the Pew analysis of U.S. Census Bureau data.

--Shares in Tesla Motors Inc. topped $100 for the first time ever this week. Tesla reported its first quarterly profit in the company’s 10-year history in April, and repaid the federal government $451.8 million from a loan program designed to spur development of alternative-fuel vehicles – the same Energy Department program that was used by now bankrupt Fisker Automotive and Solyndra.

--Israeli electric car company Better Place, which raised $800 million on a plan to revolutionize the auto industry, filed for bankruptcy last weekend.

--A 65-year-old French man died of the SARS-like coronavirus that has killed 23 of the 44 people confirmed infected since September, most of them in Saudi Arabia. The man is believed to have been infected while vacationing in Dubai in April.

--From the South China Morning Post:

“From faking marriage certificates to get honeymoon discounts in the Maldives to letting children defecate on the floor of a Taiwan airport, Chinese tourists have recently found themselves at the center of controversy and anger.

“Thanks to microblogging sites in China, accounts of tourists behaving badly spread like wildfire across the country, provoking disgust, ire and soul-searching.

“While in the past such reports might have been dismissed as attacks on the good nature of Chinese travelers, people in the world’s second-largest economy are starting to ask why their countrymen and women are so badly behaved.

“ ‘Objectively speaking, our tourists are relatively low-civilized characters,’ said Liu Simin, researcher with the Tourism Research Center of Chinese Academy of Social Sciences.”

Recently, it was revealed a 15-year-old Chinese boy had scratched his name into a 3,500-year-old temple in Egypt’s Luxor.

Oh, and the defecation incident? This occurred just meters from a restroom. But at least the mother “did put newspaper down first.”

Chinese tourists do spend an average of $2,932 per visit to California, compared with $1,883 for other overseas visitors, according to the U.S. Office of Travel and Tourism Industries. 33% of this amount goes for gifts and souvenirs. [Hugo Martin / Los Angeles Times]

--Meanwhile, there have been a slew of reports on robberies of tourists, including Chinese, in Paris in just the past few weeks. An aide to Bill Clinton was robbed the other day by two kids after he withdrew money from an ATM. And the Chinese embassy in Paris is reporting a 10% increase in robberies of its citizens. On Tuesday, a crew of China Central Television reporters covering the French Open tennis tournament had their car windows smashed and their wallets, phones and passports grabbed.

Remember, the French economy is awful these days and the French newspaper, Le Figaro, reported that the number of reported thefts in January had risen 50% year over year.

So you’ve been warned if you are traveling there this summer. Be wary of the Roma on the Champs-Elysees. The kids are incredible scum.

--Mokhtar Belmokhtar, the Algerian-born terrorist whose fighters killed 38 people at the In Amenas gas plant in Algeria in January, said he supervised an attack in Niger, targeted because of its support for France in fighting Islamic militants in Mali, that killed 26. It also badly damaged a French-owned uranium mine. France, heavily dependent on nuclear power, gets almost a third of its uranium from mines in Niger.

--Two men carrying $1.2 million in cash from Beirut airport were robbed on Thursday. Gunmen intercepted Ali Qandil and Fouad Matar on the airport highway and forced them into Beirut’s southern suburbs. [Hizbullah territory.]

The robbed men said the cash came from a Lebanese person in Africa, according to the Daily Star. Travelers entering Lebanon may bring any amount of cash to the country as long as they declare it with customs.

--Preparations for the 2014 World Cup in Brazil have been going miserably. And this Sunday, England is supposed to play Brazil in a friendly at Maracana stadium, which underwent about $400 million in renovations but is not ready. As in this week turnstiles were just being installed and loose flooring fixed.

You may be thinking, so what, the World Cup is a year away. But just understand this is symptomatic of the entire construction effort, including for the 2016 Olympics, which is way behind schedule.

--According to the OECD’s Better Life Index of the world’s developed economies, Australia remains the happiest nation for a third year running, ahead of Sweden, using criteria such as jobs, income, environment and health. The United States ranks sixth among the 34 nations ranked. [Canada is third. And it has better beer...which at the end of the day...]

Foreign Affairs

Syria: Russian news agency Interfax said on Friday that Moscow was unlikely to deliver a shipment of S-300 anti-aircraft missiles to Syria before the autumn. Other reports say perhaps not until next spring. Israel’s defense minister said earlier in the week he saw no signs the game-changing S-300 system had been delivered, even as Syrian President Bashar al-Assad tried to hint otherwise. Should they be delivered at some point, Israel will take them out.

The S-300 poses a significant threat not only to Israel, but also to any efforts by the West to institute a no-fly zone. As Russia’s deputy foreign minister Sergei Ryabkov said:

“In our opinion, these deliveries [Ed. should they come to pass] play a stabilizing role. We believe that such steps will largely help stop certain hotheads from turning it into a possible international conflict, from considering a scenario that would make this conflict international, with the involvement of external forces that are not averse to such ideas.”

President Assad, in an interview with Hizbullah’s TV station Al-Manar that aired Thursday night, said, “We are confident that victory is certain,” this as the U.S. and Russia work on organizing peace talks for later this month in Geneva.

For its part, the Syrian Opposition Coalition said after days of meetings in Istanbul it would not attend the conference if representatives from the Assad regime are there, and that Iran and Hizbullah must also end their military roles in Syria.

But the opposition is still squabbling over who should speak for the group, while Assad reiterated that “They are wasting their time” if they think he is going to step down and transfer power to a transitional government.

In his TV interview, Assad also threatened Israel, saying his regime would respond to any further Israeli airstrikes.

The key military battle these days is over the strategic city, and rebel stronghold, of Qusair, where thousands of Hizbullah fighters (up to 7,000 by one estimate) are supporting the regime. Qusair is near the Lebanese-Syrian border and opposition groups and humanitarian organizations say conditions for the civilians and the wounded are dire, with doctors having run out of medical supplies.

Gen. Selim Idriss, military chief of the main umbrella group of rebels and the man Sen. John McCain secretly met with inside Syria last weekend, said more than 50,000 residents of Qusair are trapped and a “massacre” would occur if the city fell.

Editorial / Washington Post

“The Obama administration has gotten some grim signals this week in response to its effort to ‘change the calculation’ of Syrian ruler Bashar al-Assad...

“Clearly, the strategy that Secretary of State John F. Kerry announced in February has failed. The idea was that the United States would, by providing additional support to the opposition, persuade the Assad clique that its cause was lost, opening the way to a negotiated process in which Mr. Assad would yield power. But Mr. Assad doesn’t believe he is losing – and he is not wrong in claiming that his fortunes have risen in the past several months....

“Meanwhile, the United States has yet to provide the rebels with the lethal aid it was said to be considering months ago. Nor has it taken any other substantial steps to strengthen them. Instead it has chosen to go along with a Russian proposal to convene another peace conference in Geneva....

“What’s (hard) to understand is why Mr. Kerry continues to vigorously pursue the conference, having failed to accomplish the necessary predicate of changing the balance of power on the ground. Unfortunately, the most plausible answer is that the administration has allowed itself to be played by Russian President Vladimir Putin, who is seeking to restore Moscow’s influence in the Middle East by thwarting the U.S. goal of regime change in Syria. Not for the first time, President Obama and his aides appear to have bet that Mr. Putin would turn on Mr. Assad and help force him from power. In doing so, they have fundamentally misread the Russian ruler and his intentions.

“As we have written previously, the only hope for an acceptable political settlement in Syria lies in an intervention that would decisively shift the balance of Syria’s war – through arms supplies to the rebels and airstrikes to eliminate the regime’s air power. If Mr. Obama is unwilling to take such steps, he ought also to eschew diplomacy that makes his administration appear foolish as well as weak.”

Regarding the opposition, Michael Young / Daily Star

“We are near the stage where the Syrian opposition, thanks to an effective campaign by the Syrian regime and its allies, but also a pervasive lack of unity or direction, may lose much of the support it needs to defeat President Bashar Assad’s regime. Nor has the opposition grasped the deepening anxiety in neighboring countries who fear being destabilized by the conflict in Syria....

“Meanwhile, the opposition has yet to decide whether it will be present in Geneva. A refusal to attend risks alienating the opposition’s supporters in the West.   If it accepts, Geneva could prove to be its undoing, given the likely internal discord over what is agreed. Worse, there are no guarantees the National Coalition has much influence inside Syria, and Geneva may only highlight this if the groups on the ground reject political arrangements reached at the conference.

"The Syrian opposition has failed to appreciate the shifting political context in which it is functioning, while the Assad regime and its Russian and Iranian backers have. For instance there has been no planning for Geneva and the very real risks that the conference holds for the opposition whether it participates or not.

“Russia and the United States are going to Geneva with very different agendas, none of which favors Assad’s adversaries. For the Obama administration, Geneva provides an opportunity to begin a political process permitting America to evade a larger role in Syria. President Barack Obama had feared being pushed into such a role after reports came out that the Syrian regime used chemical weapons against the rebels, crossing Obama’s red lines for American intervention. The president sent Secretary of State John Kerry to Moscow and the accord over a conference bought Obama time to stay clear of Syria.

“In other words, the Obama administration is going to Geneva largely to avoid Syria....

“The Syrian opposition cannot be blamed for the shameful American performance...but it can be blamed for failing to consider possible post-Geneva outcomes. Nor has it adequately addressed the very real doubts that have emerged over the participation in the Syrian uprising of the Nusra Front, an affiliate of Al-Qaeda. The fact is that there are profound doubts that the opposition can fill the vacuum in Syria if Assad goes, which can only favor jihadist groups.

“No one in the West, particularly the U.S., much cares that it was Western indecision over Syria that created an opening for the militant Islamists. As they see the opposition in disarray, one thing they do not want is a new Afghanistan in the Levant, which will destabilize Syria’s neighbors. And the neighbors are beginning to agree. Recall that associating the opposition with Al-Qaeda has long been the line of the Assad regime, which then made it a self-fulfilling prophecy.

“Syria’s opposition must regroup quickly, or else all will be lost. The tens of thousands of Syrians who have died at the hands of a barbaric leadership deserve better. But the chances are they will not get better.”

Lebanon: The Syrian war continued to bleed into Lebanon. Three Lebanese government soldiers were killed at a checkpoint near the border, while at least 26 have been killed in Sunni vs. Shia fighting in Tripoli.

And the sectarian violence came to Beirut as two rockets slammed into a Hizbullah neighborhood, following Hizbullah chief Hassan Nasrallah’s declaration his group was all-in with its support of Bashar Assad.

“It is our battle, and we are up to it....If we do not go there to fight them, they will come here.”

Former Lebanese Prime Minister Saad Hariri said what Hizbullah was doing in Syria was “political and military suicide.”

Separately, the government postponed the parliamentary election slated for this month until November 2014, due to the spillover from the Syrian war, as well as political deadlock. This is not good at all. And downright distressing.

Iran: Longtime diplomat Ryan Crocker, as respected as they come, says Presidents Bush and Obama are fumbling the most worrisome threat to America: Iran’s nuclear program.

In an interview with the Los Angeles Times’ Paul Richter, Crocker said tougher sanctions won’t persuade Iran to stop enriching uranium.

“Sanctions are easy to do, and afterwards we can tell ourselves that, ‘By God, we’ve really stuck it to them. But it seems to me that the more you press this regime, the more they dig in.”

Crocker isn’t saying sanctions should be immediately dropped, but he said history shows that Tehran won’t yield to anything less than the all-out war it faced from Iraq in the 1980s. The mullahs, he argues instead, may be open to compromise if it’s in their best interest.

This is exactly why long ago I said the U.S. should have been back-channeling Rafsanjani when he still had the clout.

But from Michael Oren, Israel’s ambassador to the United States, in an op-ed for the Washington Post.

“(The) ayatollahs are taking no chances and trying to protect their nuclear assets. Iran has collaborated with Assad to supply Hizbullah with precision-guided missiles. If successful, the terrorists could target Israeli jets, vital installations and population centers. The goal is to deter Israel from defending itself against an imminent Iranian nuclear threat designed to wipe us off the map.

“But Israel will not remain passive. We will prevent these sophisticated missiles from reaching Hizbullah. We will closely monitor the movement of chemical and other game-changing weapons in Syria. Together with the United States, we will develop more advanced anti-ballistic systems. Yet we can never lose sight of the ultimate threat.

“If Iran gets the bomb, so too will a number of Middle Eastern states that can pose not only regional chemical but also global nuclear threats. An Iran with military nuclear capabilities will dominate the Persian Gulf and its vast oil deposits, driving oil prices to extortionary highs. And Iran can transfer nuclear weapons to terrorists who can launch them at foreign ports in shipping containers. The entire world will be endangered.

“The images emerging from the Middle East, though agonizing, must not camouflage Iran’s nuclear designs. These, we still believe, may yet be thwarted by a combination of escalating sanctions and a credible military threat. Iranian rulers must not only hear about the policy of all options on the table, they must fear it. Iranian nuclear installations may make for bland photographs, especially when compared with the region’s lurid scenes, but they foreshadow a cataclysmic picture.”

Separately, the Iranian presidential election is June 14. A hardliner is going to win, probably current nuclear negotiator Saeed Jalili, a protégé of Ayatollah Khamenei. I hope the Obama administration is ‘gaming this out.’ Jalili hates the West.

Lastly, an Argentine prosecutor has accused Iran of trying to infiltrate the likes of Brazil, Paraguay, Uruguay, Chile, Colombia, and others. Alberto Nisman is investigating the 1994 bomb attack on a Jewish center in Buenos Aires that killed 85, Iran having always been suspected of involvement (which it has denied). In an indictment handed to a judge in Buenos Aires, Nisman repeated the often-made claim:

“I legally accuse Iran of infiltrating several South American countries to install intelligence stations – in other words espionage bases – destined to commit, encourage and sponsor terror attacks like the one that took place against Amia,” referring to the Jewish center.

Your editor began discussing Iran’s tentacles in South America over ten years ago.

Iraq: The sectarian violence in this country is the worst since 2007, with well over 350 having been killed in just the last ten days of May. Incredibly, three years after he formed his government, Prime Minister Nouri al-Maliki also has no defense or interior minister.

Pakistan: A U.S. drone strike took out the Pakistani Taliban’s deputy leader this week, but then the Taliban, after confirming the death of Wali ur Rehman, called off peace talks with the country’s newly elected government. The Taliban spokesman said, “The government is killing our leadership in collusion with the U.S.   And yet it speaks of peace talks.” [Saeed Shah / Wall Street Journal]

Nawaz Sharif, who takes over as prime minister shortly, has said he wants to negotiate, though the Pakistani army has expressed its skepticism over any discussions. The Pakistani Taliban, after all, is responsible for thousands of army deaths in Pakistan over the years.

China: President Xi Jinping and President Obama hold their two-day summit outside Palm Springs on June 7-8. Xi told National Security Adviser Tom Donilon, who was in Beijing to help set an agenda, that relations between our two countries were at a “critical juncture.”

At the top of the list will be cyberespionage.
Ellen Nakashima / Washington Post

“Designs for many of the nation’s most sensitive advanced weapons systems have been compromised by Chinese hackers, according to a report prepared for the Pentagon and to officials from government and the defense industry.

“Among more than two dozen major weapons systems whose designs were breached were programs critical to U.S. missile defenses and combat aircraft and ships, according to a previously undisclosed section of a confidential report prepared for Pentagon leaders by the Defense Science Board.

“Experts warn that the electronic intrusions gave China access to advanced technology that could accelerate the development of its weapons systems and weaken the U.S. military advantage in a future conflict.

“The Defense Science Board, a senior advisory group made up of government and civilian experts, did not accuse the Chinese of stealing the designs. But senior military and industry officials with knowledge of the breaches said the vast majority were part of a widening Chinese campaign of espionage against U.S. defense contractors and government agencies.....

“The confidential list of compromised weapons system designs and technologies [Ed. obtained by the Post] represents the clearest look at what the Chinese are suspected of targeting. When the list was read to independent defense experts, they said they were shocked by the extent of the cyber-espionage and the potential for compromising U.S. defenses.

“ ‘That’s staggering,’ said Mark Stokes, executive director of the Project 2049 Institute, a think tank that focuses on Asia security issues. ‘These are all very critical weapons systems, critical to our national security. When I hear this in totality, it’s breathtaking.’”

Friday, Secretary of Defense Chuck Hagel called for honest dialogue with his Chinese counterparts about cyber threats and online spying.

“There’s only one way to deal with these issues: that’s straight up,” he said.

Hagel, prior to a security conference in Singapore, said the U.S. and China must develop “rules of the road” to mitigate the threat.

Random Musings

--Editorial / The Economist...on the president...

“The danger is that Mr. Obama will achieve little in his second term. Congress remains gridlocked. Democrats and Republicans could spend the next four years squabbling and issuing subpoenas. To avoid this, Mr. Obama needs to keep his eyes on the big picture. Even as Republicans pepper his administration with probes, he needs to keep pushing for solutions to America’s main domestic problems. He may believe it is impossible to work with congressional Republicans, but his legacy depends on him trying. He will lose leverage if he delays. Next year Washington’s attention will be on the mid-term elections; after that Mr. Obama will be a lame duck.”

Immigration, entitlements and tax reform. Domestically, he could still have a successful second term. I just think he’s going to be totally overwhelmed on the foreign affairs front. Actually, he already is...he just doesn’t know it yet.

--A new Quinnipiac University national survey (May 30) has President Obama with just a 45% approval rating, compared to 48% in their May 1 poll. Only 37% of independents approve of the president’s job performance. [By an 87-8 margin, Democrats do approve. 9-86 among Republicans.]

--Peggy Noonan / Wall Street Journal...on the IRS scandal

“(This) scandal is different and distinctive. The abuse was systemic – from the sheer number of targets and the extent of each targeting we know many workers had to be involved, many higher-ups, multiple offices. It was ideological and partisan – only those presumed to be of one political view were targeted. It has a single unifying pattern: The most vivid abuses took place in the years leading up to the president’s 2012 re-election effort. And in the end several were trying to cover it all up, including the head of the IRS, who lied to Congress about it, and the head of the tax-exempt unit, Lois Lerner, who managed to lie even in her public acknowledgement of impropriety.

“It wasn’t a one-off. It wasn’t a president losing his temper with some steel executives. There was no enemies list, unless you consider half the country to be your enemies.

“It is considered a bit of a faux pas to point this out, but what we are talking about in part is a Democratic president, a largely Democratic professional administrative class in Washington, and an IRS whose workers belong to a union whose political action committee gave roughly 95% of its political contributions last year to Democrats. Tim Carney had a remarkable piece in the Washington Examiner this week in which he looked for campaign contributions from the IRS Cincinnati office. ‘In the 2012 election, every donation traceable to this office went to President Obama or liberal Sen. Sherrod Brown.’ An IRS employee said in an e-mail to Mr. Carney, ‘Do you think people willing to sacrifice lucrative private sector careers to work in tax administration...are genuinely going to support the party directed by Grover Norquist?’....

“Because people think the IRS has always, in various past cases, been used as a political tool, they think we’ll glide through this scandal too. We’ll muddle through, we’ll investigate, the IRS will right itself, no biggie.

“But when a scandal is systemic, ideological and focused on political ends, it will not just magically end. Agencies such as the IRS are part of what Jonathan Turley this week called a ‘massive administrative state,’ one built with many protections and much autonomy.”

--It really is amazing IRS Commissioner Douglas Shulman visited the White House at least 157 times during the Obama administration, more recorded visits than even the most trusted members of the president’s Cabinet.

By contrast, according to The Daily Caller, Shulman’s predecessor Mark Everson only visited the White House once during four years of service in the George W. Bush administration and compared the IRS’s remoteness from the president to “Siberia.”

Shulman’s visits also compare to DHS Secretary Janet Napolitano’s 34, and Defense Secretary Robert Gates’ 17.

--Maureen Dowd / New York Times...on Jonathan Alter’s second history of the Barack Obama era, “The Center Holds.”

“At East Room events, Alter writes, Obama’s vibe was clearly: ‘I’ll flash a smile, then, please, someone get me the hell out of here. It wasn’t that he had to be back in the Oval Office for something urgent. He just didn’t want to hang out for an instant longer than he had to, even with long-lost Chicago friends.’ The president sometimes ‘exuded an unspoken exasperation: I saved Detroit, the Dow is up, we avoided a depression – I have to explain this to all of you again?’ That attitude caused him to tank in his first debate with Mitt Romney.”

--Stephen Flynn is one of the foremost experts on terrorism in the U.S. and he’s now a professor at Northeastern University. Flynn appeared on a panel Wednesday, discussing a new cargo checking technology, and he talked about the Boston Marathon bombing and the possible economic devastation that could result if authorities launched a similarly overwhelming response to a dirty bomb strike.

As reported by Diane Barnes of the Global Security Newswire:

“The United States is nearly certain to freeze all inbound U.S. sea cargo if such a weapon were smuggled into the country and then detonated, he asserted, adding that work-arounds exist that could enable terrorists to skirt nearly all security measures instituted since the Sept. 11 attacks. Such a freeze would ‘gridlock’ land- and sea-based commerce around the world in two weeks, and shipping would likely require at least a month to restart, Flynn said.”

--President Obama is going to nominate James Comey to lead the FBI, following the retirement of Robert Mueller in September. Comey, a Republican, was deputy attorney general (and then acting attorney general) when his boss, John Ashcroft, and Comey, resisted President George W. Bush’s plan to wiretap Americans’ phone calls without warrants. Bush was forced to make changes after Comey, Ashcroft and Mueller threatened to resign over the policy.

Bush had named Comey as U.S. attorney for the Southern District of New York, which includes Manhattan. He’s a solid choice.

--Editorial / Washington Post

“The Obama administration already has pursued more criminal leak investigations than all of its predecessors. There is a worrisome trend here, also recently evident in the government’s pursuit of Associated Press telephone records in a different leak investigation. Yes, the government must have secrets in order to function. But overclassification is so rampant that to criminalize the disclosure of all secret information would come close to paralyzing the flow of information.

“Perhaps prosecutors failed to read the Justice Department’s policy on this, which declares: ‘Because freedom of the press can be no broader than the freedom of reporters to investigate and report the news, the prosecutorial power of the government should not be used in such a way that it impairs a reporter’s responsibility to cover as broadly as possible controversial public issues.’ That statement goes back four decades. The Obama administration should recommit to its spirit.”

--Minnesota Republican Congresswoman Michele Bachmann said “Eight is enough” in announcing she would not seek a fifth term. This is more than a bit disingenuous, seeing as she had already raised $678,000 for her 2014 reelection bid during the first quarter of this year, and has $1.9 million in the bank as of March 31. She had also started running campaign spots.

But she only won her race last fall by 1,000 votes in a district Mitt Romney carried by 15 points, plus there have been ethics issues involving the Bachmann campaign.

So look for Michele on Fox.

--Regarding the latest get together at the Jersey Shore between Gov. Chris Christie and Barack Obama, which once again led to some consternation among conservatives, remember what I said back when the two first got together in Sandy’s aftermath. As a Rutgers professor and expert on the local political scene noted at the time, Christie is the smartest politician in the country. He is three or four steps ahead of everyone in his thinking. What he needs to do now is get 60%+ in his reelection bid this fall, keep the federal funds flowing so he can say he was successful in rebuilding New Jersey, and that he was able to work with the other side for the good of the state, which will play well nationally, and as long as he doesn’t get crushed in Iowa, he’ll do just fine the rest of the way.

That is...assuming his health holds up.

--Republican South Carolina Sen. Lindsey Graham had this message for the military concerning the sexual assault issue.

“I want to salute the women who serve and are putting up with too much crap,” he said on ‘Fox News Sunday.’ “This needs to end. When a victim comes forward, they should have an advocate to walk them through the military justice system. And commanders who allow this to continue to flourish, quite frankly, should be fired.”

--Tamara Lush of the Associated Press had a piece on the U.S. vs. European hurricane models. The European model gained everlasting fame for correctly forecasting Hurricane Sandy eight days before the landfall, including the hook back to the coast that most of us had never seen before. The American model finally agreed four days later and while this was plenty of time for preparation, “It left some meteorologists fuming.”

“ ‘Let me be blunt: the state of operational U.S. numerical weather prediction is an embarrassment to the nation and it does not have to be this way,’ wrote Cliff Maas, a professor of atmospheric sciences at the University of Washington on his weather blog.

“Meteorologists agree that the two American supercomputers that provide storm models are underpowered – which is why the National Weather Service plans on upgrading those computers in the next two years.”

Like $25 million worth in upgrades, sports fans.

The fact is the Euro model is better able to pick up extreme weather events. But on the other hand, it really doesn’t matter because our weather folks have access to both models. 

--Incredibly, or maybe not given the intelligence of many New York City voters, Anthony Weiner polls at 19% in the latest Marist survey vs. front-runner and City Council President Christine Quinn’s 24% in the race to replace Mayor Bloomberg. [You need 40% to avoid a run-off.]

Then again, the Democratic primary field is absolutely pathetic, as is the Republican’s.

I’ve said this before and it bears repeating. When it comes to New York, what really matters is who is police commissioner and Gotham has been blessed to have Ray Kelly. If he goes, unless William Bratton returns (a possibility), I will never step foot in the City again.

--When I heard the first details of the Oregon teenager who was planning a Columbine scale attack on his high school, my initial thought was, ‘Bet I’ve been there.’

Sure enough, Grant Acord, 17, was planning an attack on West Albany High School. Back in 2008, while attending the U.S. Olympic Trials in Eugene, I spent two weeks in Albany, and then last summer I went back a few times (while staying in a town a little closer to the action).

Albany does have one of the best eating establishments I’ve been to; Novak’s Hungarian Restaurant. Oh yeah, I became a regular...lots of veal cutlet and spaetzle, washed down with Pilsner Urquell.

Thankfully, authorities caught this kid in the nick of time. He was the real deal. Acord had already made six bombs.

By the way, the reason why Acord is named despite the fact he is a juvenile is because he is going to be tried as an adult.

--Finally, I made a major error last week. In my retelling of my day in Maud, Oklahoma, 1978, I said the bartender was an “ex-Marine.” 

Well, a good friend from way back, one of the better pitchers in my high school’s history, Bobby C., reminded me there is no such thing as an “ex-Marine.” “Once a Marine, always a Marine,” he being one.

I should have known better, especially given my extensive study of the military, and paying my respects to our war dead, all over the world.

Anyway, Bob, I owe you a few rounds next time at Marco Polo. [Bob’s father was also one of Summit’s all-time great coaches...Art C. Art is in possession of a rarity...an autograph of Bill Dickey, from his playing days. And now you know...the rest of the story....]

---

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

We mourn the loss of the firefighters in Houston on Friday.

God bless America.

---

Gold closed at $1392
Oil, $91.97

Returns for the week 5/27-5/31

Dow Jones -1.2% [15115]
S&P 500 -1.1% [1630]
S&P MidCap -0.3%
Russell 2000 -0.0%
Nasdaq -0.1% [3455]

Returns for the period 1/1/13-5/31/13

Dow Jones +15.3%
S&P 500 +14.3%
S&P MidCap +16.1%
Russell 2000 +15.9%
Nasdaq +14.4%

Bulls 52.1
Bears 19.8 [Source: Investors Intelligence]

Dr. Bortrum has a new column....cicadas and monarch butterflies.

Nightly Review video schedule, Tues. thru Thurs. (not Monday this time), posted around 5:30 PM ET.

Have a great week. I appreciate your support.

Brian Trumbore