Week in Review

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Week in Review

03/16/2013

For the week 3/11-3/15

[Posted 12:00 AM ET]

Washington and Wall Street  / Cyberterrorism

President Barack Obama continued his outreach on the budget front but there is really nothing to say with both sides remaining far apart, having presented their disparate ideas.

As in Republican Congressman Paul Ryan: “The election didn’t go our way. Believe me, I know what that feels like. That means we surrender our principles? That means we stop believing in what we believe in?”

Democratic Senator Tom Harkin: “We’re not willing to go so far as to negotiate away our principles and what we think is best. We’re just not.”

President Obama, in an interview with ABC News, in rejecting Paul Ryan’s Republican plan that cuts the rate of growth in spending from 5.0% to 3.4%, while making significant changes to Medicare and Medicaid. Ryan’s budget achieves balance “on the backs of the poor, the elderly, students who need student loans, families that have disabled kids.”

But I thought the following results from a Washington Post / ABC News poll were enlightening.

In December, on the issue of whom then the public trusted more to deal with the economy, Obama held an 18-point advantage. Today, it is down to four points, 44-40.

47% blame Republicans in Congress for the sequester and 33% blame Obama.

Obama’s overall job approval is down five points to 50. [Gallup last had it at 48%, down from December’s 58%.]

Two months ago, independents favored the president 54-41. Now, 44% approve, 50% disapprove. [There has been a 12-point slide among women as well.]

Of the seven second-term presidents since Harry Truman, only George W. Bush had a positive rating as low as 50% at this stage. Both Bush and Obama were/are leading a nation that remains politically polarized.

Only 16% approve of Congress and 80% disapprove. Democrats register a 34% favorable, 62% unfavorable. Republicans have a 24% favorable, 72% unfavorable.

As to alternatives to spending cuts already in place, 71% reject a reduction in Medicaid, 60% oppose raising the Medicare eligibility age from 65 to 67.

[On immigration, 45% trust Obama, 39% favor the Republican approach, which, as the Post points out, is surprisingly slender given strong Latino support for the president in November.]

On the economic front, however, the news continued to be generally good. Retail sales for February came in better than expected, as did industrial production for the month. Weekly jobless claims came in at a recent low, 332,000, with the four-week moving average at a five-year low. The only fly in the ointment was a poor consumer sentiment reading out of the Univ. of Michigan on Friday.

Add it all up, and combine some of the above with other recent positive economic releases, and Wall Street is ratcheting up its growth forecasts for the first quarter to as high as 2.5% to 3.0% from 2.0% or less.

This would be good. But it could also help obscure the congressional debate over confronting the budget deficit. The figure for February, for example, a deficit of $204 billion vs. the $232 billion registered in Feb. 2012, is emblematic of what’s transpiring these days. Yes, the economy is picking up and revenues are increasing, plus spending is being cut in some respects, such as with fewer government workers.

And it’s true that the Congressional Budget Office, for fiscal 2015, is projecting the deficit would decline to $430 billion from F2013’s projected $845 billion (and down from the $1 trillion+ deficits of the prior four years). That’s with a CBO growth forecast of 3.6% by 2015 as well, realistic but aggressive.

This allows Democrats, such as economist Paul Krugman, to say as he did in one of his New York Times op-eds the other day:

“People still talk as if the deficit were exploding, as if the United States budget were on an unsustainable path; in fact, the deficit is falling more rapidly than it has for generations, it is already down to sustainable levels, and it is too small given the state of the economy.”

Well, Democrats will have a point if the current trajectory remains down in the next few years, but that ignores reality...how entitlement spending will just explode in the ‘out’ years and we are headed to $1 trillion deficits all over again by 2022. [Of course there are all manner of caveats to such projections; like a major military conflict with Iran would obviously cripple any savings from defense.]

It’s why these next few weeks and months, whether it’s congressional wrangling over the looming continuing resolution to fund the government through Sept. 30, or the budget debate for fiscal 2014 and beyond, that is so critical. If Republicans cave and give President Obama what he wants, minimal changes to entitlements, it will kill us down the road. That’s a fact. Republicans must stand firm. But it’s going to be very easy to lose this debate. Though it’s also why I find some of the latest polling data so fascinating. It’s as if the public, despite seeing a soaring stock market and firmer housing sector, may finally be getting it...until you ask them to make a sacrifice themselves.

Speaking of the market, the Dow Jones’ best winning streak since Nov. 1996 was finally broken at ten on Friday, the first Friday the Dow has been down all year, with the Dow hitting eight consecutive all-time highs before then. But the S&P 500 failed to hit its Oct. 2007 high, as I’ll detail further in a bit.

For now...let’s play a little game of what is good about the market, and what can go wrong over say the next 3-6 months.

+’s [potential and actual]

Economy...it continues to improve...
Federal Reserve...easy money continues for foreseeable future...
Stock market...just keeps rising...
Washington...if they just get through the next few weeks and maintain the sequester...another round of fireworks delayed for 3-5 months...
Earnings...reaccelerate...
Geopolitics...nothing happens of major magnitude...
Europe...finally shows signs of authentic stability and then growth...no massive May Day protests by the downtrodden in the southern tier...Italy forms a respectable government...

-‘s

Economy...tax increases and sequester have a delayed impact on retail sales, gas prices head back up in part due to increased tensions, again, in the Middle East...Corporations continue not to hire, chiefly because of the ever-growing uncertainty over ObamaCare...
Stock market...it is no longer undervalued by my measurements...not necessarily overvalued, but not undervalued...so maybe we’ve topped out...
Federal Reserve...solid economic data into May finally forces the Fed to issue some hawkish statements and the bond market goes haywire...we learn of major hedge fund issues by those caught with their pants down...
Washington...Congress does zero to address entitlements and finally the market reacts...which would then get Congress to act, ironically...
Geopolitics...all of the following could easily occur in the next six months...Kim Jong Un in North Korea stupidly decides to attack a South Korean naval vessel as his father did in 2010, only this time Seoul retaliates and all hell breaks loose...China and Japan fire shots at each other when one side miscalculates over the territorial dispute in the East China Sea...the war in Syria spills over into Jordan and Lebanon in a major way...there is a coup in Pakistan, or a major attack on one of its nuclear weapons facilities...
Europe...contagion hits all over again, fed by social unrest...new elections in Italy could be a further disaster thanks to the non-funny comedian...U.S. multinationals suffer major hits to earnings as a result of still sickly Euro operations...
China...transition doesn’t go smoothly...though this could play out longer than 3-6 months....
Cyberattack...who knows...
Earnings...disappoint...still no top-line revenue growth...

All of the above can move the market up or down and I’m not trying to show the deck is stacked on the down side. After all, I thought the market would be flat this year (Nasdaq up 5%) so I’m not calling myself a bear. I just think some of the commentary out there is being more than a bit Pollyannish in not even conceding there are serious potential flashpoints. 

There has been a flurry of activity on this front with President Obama broaching the topic with new Chinese President Xi Jinping. Following are some quotes from government officials in various forums, including appearances before congressional committees.

National Security Advisor Thomas Donilon complained of “cyber-intrusions emanating from China on an unprecedented scale,” with China-based attacks on U.S. businesses and institutions “a key point of concern” for the White House.

Director of National Intelligence James R. Clapper said while Russia and China are unlikely to launch a devastating cyberattack against the United States outside a military conflict that they believe threatens their vital interests, computer hackers or organized groups “could access some poorly protected U.S. networks that control core functions, such as power generation” although their ability to cause “high-impact, systematic disruptions will probably be limited.”

Gen. Keith Alexander, who heads the Pentagon’s new U.S. Cyber Command, said the number of attacks is growing.

“It’s getting worse,” citing more than 140 attacks on Wall Street over the last six months. “What we’re seeing with the banks today I am concerned is going to grow significantly throughout the year.”

Alexander also pointed to the attack on Saudi Aramco, Saudi Arabia’s national oil and gas company, that destroyed data on more than 30,000 computers. At what point does an attack of this kind warrant retaliation?

“I think this gets to the heart of...when does the Defense Department step in to defend the country?”

Alexander is adding 40 cyber teams, 13 focused on offense and 27 on training and surveillance, offering that the best defense hinged on being able to monitor incoming traffic through the internet service providers. [Which raises major privacy issues.]

FBI Director Robert Mueller said the cyber threat keeps him up at night, saying at a hearing it “has grown to be right up there” with terrorism. 

Meanwhile, a Chinese Foreign Ministry spokeswoman said, “China is willing, on the basis of the principles of mutual respect and mutual trust, to have constructive dialogue and cooperation on this issue with the international community including the United States to maintain security, openness and peace of the internet. Internet security is a global issue. In fact, China is a marginalized group in this regard, and one of the biggest victims of hacking attacks.” [New York Times, Los Angeles Times, Wall Street Journal, South China Morning Post]

Finally, a new Defense Science Board report concludes the resiliency of most U.S. nuclear systems against a cyber-related attack on U.S. nuclear command and control systems and the weapons themselves is untested. Gen. Robert Kehler, chief of U.S. Strategic Command, didn’t know if the Russians and Chinese have the ability to stop some cyberattack from launching one of their nuclear intercontinental ballistic missiles.

Kehler was less than reassuring in testimony to the Senate Armed Services Committee, even as he said, based on recent piecemeal reviews, he is confident command and control systems “do not have a significant vulnerability.” [Aliya Sternstein / Global Security Newswire]

I imagine you’re not too reassured after all the above.

Another European Union summit was held Thursday and Friday, with many looking to give the likes of Spain, Portugal and Italy, even France, more time to bring down deficits while loosening some of the austerity measures. This is because the economic news from the eurozone continues to be more than troubling.

Such as in industrial production for the month of January was down 0.4% for the eurozone over December, worse than expected. Production was down in Germany, 0.4%; in France, 1.2%; in Finland, 4.1%; in non-euro Britain, 1.2%. There was no news on Italy, but Spain at least saw its industrial production rise 0.6% for the month.

French President Francois Hollande admitted France would miss its deficit target this year.

While in Greece, talks with the troika – International Monetary Fund, European Commission and European Central Bank – broke off over the release of another 2.8 billion euro ($3.6 billion) tranche of bailout funds due to the issue of civil servants and Greece’s pledge to reduce the level by another 150,000 (from 667,000) over the next two years. The troika has dismissed Prime Minister Samaris’ request to modify the austerity program because of deepening social distress. Picture that civil servant wages, among those still employed, have been reduced 20% the past few years.

Talk about a disconnect, though, Euro stocks are near five-year highs even as fourth-quarter profits at European companies fell 5.2% from a year earlier, while revenue inched up just 0.5%, according to Thomson Reuters. Plus analysts expect earnings at Euro blue chips to rise just 5% this year, down from the 15% forecast last fall. And with the above-referenced industrial production data for the start of 2013, even 5% could be too high, yet again.

Lastly, the Italian parliament finally convened on Friday and as expected the parties are deadlocked over the formation of a new government. Members in both the lower house and the Senate failed in their first attempts to elect speakers. Center-left leader Pier Luigi Bersani has not been able to convince anti-establishment Beppe Grillo to form a coalition and Bersani refuses to work out a deal with Silvio Berlusconi, so stalemate. Unless something can be worked out soon, Italy is headed towards new elections, though first the parties would have to come up with a new election law (such as in how seats are apportioned). Grillo would actually have a shot at a full majority the next go ‘round.

Needless to say, the political process is not good for the Italian economy and as Liz Alderman of the New York Times reported, “Businesses of all sizes have been going belly up at the rate of 1,000 a day over the last year; especially hard hit among Italy’s estimated six million companies are the small and midsize companies that represent the backbone of Italy’s $2 trillion economy.

“Economists worry that the pace of business closings may accelerate as long as the country lacks a functioning government.”

Economist Kenneth Rogoff said Italy’s quagmire raises the specter of the European crisis “grinding on and on,” adding it makes it harder for European leaders to cut deals “on the big-picture things that are needed to stabilize Europe.”

Street Byes

--The Dow Jones finished up for a ninth week in eleven, 0.8% to 14514. The S&P 500 added 0.6% to 1560, still five points shy of its record high. But Nasdaq rose a measly 0.1% to 3249 as Google and Amazon continue to come off their highs; Google from $844 to $815...Amazon $284 to $261.

--U.S. Treasury Yields

6-mo. 0.11% 2-yr. 0.25% 10-yr. 1.99% 30-yr. 3.21%

On the inflation front, producer prices for the month of February were up a whopping 0.7%, but this was largely due to rising energy prices, while the core number, ex-food and energy, was up just 0.2%. For the last 12 months the PPI is up 1.8%, ex- 1.7%. Consumer prices for the month were also up 0.7%, ex- 0.2%, and up 2.0% for the last 12 months, including on core.

--Retail sales in China rose 12.3% for the months of January and February, combined, which the government does because the week-long Lunar New Year holiday can fall in different months year to year and that significantly impacts numbers. The 12.3, though, was not only less than expected but also the smallest increase since 2004 for the period.  Industrial production came in at 9.9%, also less than forecast.

At the same time, China’s central bank chief, Zhou Xiaochuan, said the country must be “on high alert” against inflation.

“In the past some of us thought it was no big deal if inflation was a little bit high, growth will be a little faster and then we can control inflation afterwards. But international experience and our own experience here shows that this thinking might not be correct. It requires careful attention to maintain low inflation.”

--A new Senate report harshly criticized JPMorgan Chase for ignoring internal controls and manipulating documents as a result of the London Whale trade. CEO Jamie Dimon withheld some information from regulators. As noted by the New York Times:

“(Dimon) is also accused of withholding from regulators details about the investment bank’s daily losses – and then raising ‘his voice in anger’ at a deputy who later turned over the information.”

Senate investigators said the bank was so full of hubris after emerging from the financial crisis in better shape than its rivals, “that an executive once screamed at examiners and called them ‘stupid.’”

Sen. Carl Levin, chairman of the Permanent Subcommittee on Investigations, said, “We found a trading operation that piled on risk, ignored limits on risk taking, hid losses, dodged oversight and misinformed the public.”

JPMorgan managers “pressured” traders to lowball losses by $660 million and then played down the problems to authorities.

Federal investigators now plan to interview trader Bruno Iksil, the whale. Top execs, including Dimon, are going to be interviewed as well. So what was thought to have been a closed issue has opened wide up again.

But on Friday, some JPMorgan execs and former ones testified before a Senate panel and former chief investment officer Ina Drew blamed the $6 billion trading loss on two underlings in the London office. “I did not, and do not, believe I bore personal responsibility for the losses,” Drew said in a statement. But an internal company report had placed most of the responsibility for the failed trades on her.

“I have since come to learn...that valuations for many of the book’s positions were inflated and not calculated or reported in good faith....and that some members of the London team participated in or condoned such conduct and hid from me important information regarding the true risks in the book.”

Since the two individuals she singled out live overseas, the Senate can’t impel them to testify.

Finally, I’m tired of the apologists for JPM. Jim Cramer of CNBC, for example, says the bank made a stupid mistake but nothing more. I say it’s freakin’ fraud if you are purposefully manipulating securities values and/or failing to file proper reports with regulators.

Separately, JPMorgan and Goldman Sachs were informed by the Federal Reserve that they must amend their plans to return capital to investors in order to get its approval as part of the Fed’s annual stress test.

--SAC Capital, the hedge fund run by Steven Cohen, settled civil insider trading charges with the Securities and Exchange Commission for $614 million, the largest payment over an insider trading inquiry. Specifically, SAC is admitting to having profited from trading in shares of Wyeth and Elan in advance of the release of negative clinical drug trials, as well as in trading in advance of Dell earnings results.

--On Wednesday, Ireland sold a larger-than-expected $6.5 billion of 10-year bonds in its official return to the international bond market after Ireland was forced to seek a hefty bailout from the European Union and International Monetary Fund in late 2010. It is a rare success for the eurozone, but the Irish government stuck to its austerity plan despite deep pain across the land. 

Some in the media, though, want to paint a picture that everything is once again hunky-dory. Far from it. Unemployment remains over 14% and housing values in many parts of the country are still 50% from the peak.

But the bonds will yield 4.15%, leaving Ireland’s cost of borrowing below that of Italy and Spain, neither of which have turned to the EU and IMF (Spain is receiving a separate level of help for its banking system).

Some investors made an absolute killing in buying distressed Irish paper over the past few years (as is also the case with Greek debt).

--Australia added 71,500 jobs in February, the biggest rise in total employment in more than a decade. Australia’s unemployment rate is 5.4%.

--Israel’s economy expanded 3.1% last year, down from a 4.6% clip in 2011.

--Boeing is returning to the air in a few weeks and if you had held your shares during the battery crisis, you have been rewarded with new all-time highs.

--From Scott Thurm and Kate Linebaugh / Wall Street Journal

“A Wall Street Journal analysis of 60 big U.S. companies found that, together, they parked a total of $166 billion offshore last year. That shielded more than 40% of their annual profits from U.S. taxes, though it left the money off-limits for paying dividends, buying back shares or making investments in the U.S....

“Untaxed foreign earnings are part of a contentious debate over U.S. fiscal policy and tax code. The current system attracts criticism from many points of view. Business groups want the U.S. to tax profit based on where it is generated, as many countries do, rather than globally, as the U.S. does now. Moreover, they point out, tax rates are higher in the U.S. than in many other nations, putting American companies at a disadvantage.

“Others say that the growing cash hoards often are the result of sophisticated corporate maneuvers to shift profits to low-tax countries....

“The Joint Committee on Taxation estimates that changing the law to fully tax overseas earnings would generate an additional $42 billion for the Treasury this year alone.”

Yes, we desperately need corporate tax reform, but none is forthcoming.

--Large corporations are furious about an essentially heretofore hidden fee of $63 per employee related to ObamaCare that they will have to begin paying next year as part of a plan to create a $25 billion fund for insurance companies to offset the cost of covering people with high medical bills. As the Wall Street Journal reports:

“(Several companies) have been lobbying to change the program, contending the levy is unfair because it subsidizes individually purchased plans that won’t cover their workers.”

Boeing estimates the fee will cost it $25 million in 2014. The company spends $2.5 billion annually in health-related benefits.

Insurance companies helped put the fee into the law. Final regulations for the Affordable Care Act were just published on Monday.

--Median home prices in the bellwether six-county Southern California region rose nearly 21% last month from February 2012, while volume was the highest in six years, according to DataQuick.

--Samsung unveiled its next-generation Galaxy S4 smartphone in its latest attempt to topple Apple as the bestselling smartphone on the market. The S4 goes on sale in April. Samsung plans on spending $150 million globally promoting the new product, which compares to the $108 million spent by Apple on marketing the iPhone 5 last year. Early reviews of the S4 were decidedly mixed.

--Kevyn Orr, a lawyer who worked on restructuring Chrysler after bankruptcy, has been appointed by Michigan Gov. Rick Snyder to oversee Detroit’s finances. Orr will be able to override elected officials. The city is running a $300 million deficit and has debts of some $14 billion. Detroit’s population has plummeted from a peak of 2 million in the 1950s to 700,000 today.

--As a weather radar junkie, I can confirm the U.S. Drought Monitor findings that parts of the Midwest and Southeast are now out of drought after heavy winter precipitation, but it’s been amazing, and distressing, how some areas, such as the Oklahoma Panhandle, eastern Colorado and western Kansas and Nebraska just haven’t seen anywhere near enough to begin to put a dent in their severe drought pictures.

--A report from the Natural Resources Defense Council, an environmental group, concludes nearly two-thirds of once depleted U.S. fish stocks are now thriving or bouncing back, owing to 1996 federal requirements that protected species like monkfish from overfishing. An official with the NRDC said, “We now have the strongest fishery system in the world.”

Cod, however, was overfished during the rebuilding period and remains a problem for New England fishermen.

--KFC parent Yum Brands reported an unexpected 2% rise in February sales in China, easing worries about a food safety scare that drove away customers. I imagine chicken sales in China will be boosted by the site of seeing thousands of dead pigs flowing down a river in Shanghai (see below).

--Meanwhile, Europe’s horsemeat scandal has been good for business for some horse butchers. It seems many consumers, with the spotlight on horsemeat, are curious to try it again, perhaps having had it only as a child. France’s consumption, for example, is up 10% to 15%. But few expect the trend to continue. Horsemeat peaked in the 1950s and 1960s, when children were often fed the lean stuff. I didn’t realize the Catholic church forbid eating it way back in the eighth century. No wonder Mom didn’t serve it growing up, opting for deadly liver instead.

--The Twinkies brand is being sold to Apollo Global Management LLC and Metropoulos & Co., two private equity companies, for $410 million. It is the hope Twinkies will quickly return to store shelves. Any packages with expiration dates after 9/1/09 should be OK for human consumption. The deal includes Suzy Q’s and Cup Cakes. 

Foreign Affairs

North Korea: Pyongyang accused the U.S. and South Korea of massive cyberattacks on its internet servers in a week full of provocations by the North.

Kim Jong Un visited frontline troops, urging them to be on “maximum alert” because war could break out anytime. The next day the North “completely scrapped” the 1953 armistice agreement.

Some analysts think North Korea will hit the South after joint U.S.-South Korean drills are finished because you wouldn’t think the North would strike if extensive U.S. firepower was in the region. Pyongyang also has a history of a military provocation weeks after every South Korean presidential inauguration dating back to 1992.

“The Obama administration’s approach toward North Korea has been described as ‘strategic patience.’ A more accurate evaluation of U.S. policy would be ‘failure.’ The administration has alternately wooed and threatened North Korea for four years, with no discernible effect.

“Here’s what failure looks like: Since President Obama took office, Pyongyang has conducted several missile tests and two nuclear weapons tests, the most recent on Feb. 12. When the international community has tried to hold Pyongyang accountable, the regime has become even more erratic.

“North Korea’s latest reckless action came this week, when it nullified the 60-year-old armistice that ended the Korean War and cut its hotline with U.S. forces in the South. This was Pyongyang’s way of protesting the U.N. Security Council’s unanimous decision to impose new sanctions after last month’s nuclear test. Perhaps it was also a way of hazing South Korea’s President Park Geun-hye, who took office two weeks ago....

“Tom Donilon, President Obama’s national security adviser, had some newly tough words for Pyongyang in a speech Monday to the Asia Society: ‘The United States will not accept North Korea as a nuclear state, nor will we stand by while it seeks to develop a nuclear-armed missile that can target the United States.’ But what does this language mean? The North already is a nuclear state, and it is developing missiles that could strike the United States with miniaturized warheads.”

[Ed. On Friday, the Pentagon said it was beefing up its anti-missile defenses in Alaska and California.]

“ ‘Our intercontinental ballistic missiles are on standby...If we push the button, they will blast off and their barrage will turn Washington, the stronghold of American imperialists and the nest of evil...into a sea of fire.’

“That is the kind of rhetoric that you might expect from a Dr. Evil figure in a Hollywood film. Unfortunately, that threat to incinerate Washington was issued, just last week, by a real person, in a real country, with real nuclear weapons....

“The only thing that could definitively remove the North Korean nuclear threat would be regime change. But the point at which the regime was toppling would also be the moment of maximum danger that it would use nuclear weapons.

“Faced with so many dangers and dead-ends, the Americans and the Chinese need to think together about the most threatening scenarios. The Americans will have contingency plans to try to seize and secure North Korean nuclear weapons, in the event of a catastrophic breakdown of order. Perhaps it is time that they discussed those plans with the Chinese – and maybe even developed them jointly. The idea of a joint Chinese-American operation to deal with North Korea’s nukes sounds like another Hollywood movie. But, then again, so does the idea of a North Korean Dr. Evil threatening to incinerate the U.S.”

“Like others, I’ve dismissed past North Korean threats as pathetic pleas for attention. But things have begun to feel different.

“My greatest concern is that Kim Jong Un, a pampered, sheltered young man, may not have a grip on reality. He may not know how hollow his own regime has become or how limited his strategic reach truly is....

“Here’s a truly frightening scenario: An out-of-touch-with-reality leader surrounded by sycophants hiding strategic weakness; a regime dying of economic and ideological cancer; a growing nuclear arsenal; a huge, if antiquated army; an alluringly wealthy neighbor to the south – and the sense that the United States is in retreat around the world.”

Israel: Finally, late Thursday night, and almost two months after Israel’s election, Prime Minister Benjamin Netanyahu got his coalition together after Yair Lapid of the centrist Yesh Atid party, and Naftali Bennett of the right-wing Jewish Home faction, gave up on their attempts to be named deputy prime ministers and will enter the government with a fourth party, Hatnua, headed by Tzipi Livni.

Netanyahu’s popularity has been plummeting ever since the January 22 vote and as one analyst put it, it’s the start of the end for him.

That said, the new government controls 68 of 120 seats in the Knesset, with Yair Lapid becoming finance minister and Bennett economic and trade minister. Livni will be justice minister and chief negotiator in talks with the Palestinians.

Netanyahu’s Likud-Yisrael Beitenu party will occupy the foreign ministry and interior posts, with Likud member Moshe Yaalon, in charge of defense. Netanyahu will also act as foreign minister until the former holder of that office, Avigdor Lieberman, addresses his legal issues.

The government will be installed on Monday and then on Wednesday, Barack Obama shows up for his first visit since becoming president. Aside from some sightseeing, Obama and Netanyahu will hold a scheduled 5 ½ hours of talks, focusing on Iran, Syria and the Palestinians, while Obama is slated to meet for a similar amount of time with Palestinian President Mahmoud Abbas.

President Obama told an Israeli television audience, days before his visit, that his administration believed it would take Iran “over a year or so” to develop a nuclear weapon, vowing to do everything to prevent that from happening.

Obama also argued, “obviously we don’t want to cut it too close,” saying his message to Prime Minister Netanyahu remains the same: “If we can resolve it diplomatically that is a more lasting solution. But if not, I continue to keep all options on the table.”

Separately, the selection of Pope Francis I was very well received by Jewish leaders around the world. Rabbi David Rosen of the American Jewish Committee noted that Bergoglio “showed solidarity with the Jewish community” following the bombing of the Jewish community center in Buenos Aires in 1994, which killed 85, and:

“Those who said Benedict was the last pope who would be a pope that lived through the Shoah, or that said there would not be another pope who had a personal connection to the Jewish people, they were wrong.”

Syria: As the Syrian civil war reaches its second anniversary, the London Times reports that Iran and Hizbullah “are building a new paramilitary force of tens of thousands of Syrian fighters, Israeli officials have warned, as the Syrian government army withers under the strain of a two-year civil war.

“The head of Israeli Military Intelligence described the Iranian-Hizbullah operation as Britain and France joined forces in Brussels to override German and other EU objections and ship arms swiftly to the beleaguered Syrian opposition. It was time to stop the massacre, said David Cameron and President Hollande.

“Major-General Aviv Kochavi said that Iran and Hizbullah were preparing the new force to protect their interests in a chaotic post-Assad Syria.”

Kochavi said Iran’s goal is to build the force to 100,000.

An Israeli military source told the Times, “If Assad falls and Hizbullah tries to put its hands on Syrian weapons, we will bomb Hizbullah. Israel cannot allow advanced military systems to fall into the hands of terrorists in Lebanon.”

Back to British and French support for arming the rebels, French Foreign Minister Laurent Fabius warned that Europe must back moderate forces:

“Otherwise the killing will continue, with no other likely outcome than the strengthening of the most extremist groups and the collapse of Syria – with devastating consequences for that country and the whole region.”

As you can imagine, Russian Foreign Minister Sergei Lavrov warned Wednesday that arming Syrian rebels would breach international law.

In Lebanon, President Michel Sleiman said the number of Syrians in his country, both registered refugees and unregistered, is now one million, or equal to a quarter of the entire population of Lebanon. Staggering...and incredibly dangerous. The government has received a whopping $87 million in aid from donors; about $100 million less than what was requested.

“Two years ago this week, protests erupted against the Syrian regime of Bashar al-Assad in Damascus and the southern city of Daraa. Since then, two unchanging factors have propelled the most horrific bloodshed to take place in the Middle East since the beginning of the Arab revolutions. One is the absolute and ruthless determination of the Assad regime and its allies in Iran to crush the rebellion by force alone. The other is the reluctance of the United States to recognize that reality and respond accordingly....

“The product of this confluence of brutality and bad judgment has been a tragic transformation of what was once a mass pro-democracy movement. First the peaceful marchers morphed into disorganized groups of fighters, then to increasingly hardened and radicalized militias – of which one of the strongest is an affiliate of al-Qaeda. One of the Middle East’s most strategically important countries has been wrecked....

“A year ago, when Syrian deaths were estimated at 7,000 and al-Qaeda had yet to establish a foothold, President Obama objected to proposals for U.S. intervention on the grounds that it could lead to the militarization of the conflict and play into the hands of extremists. Today the extremists are ascendant, the fighting is spilling over into Iraq and Lebanon, and the estimated death toll surpasses 70,000. Yet the administration persists in its wishful thinking and defeatist excuse-making....

“Key U.S. allies, including Britain, France, Turkey, Saudi Arabia and Israel, have quietly pleaded with the White House to act. It has been 18 months since Mr. Obama first claimed that time was running out for the Assad regime. Now it is running out for him. His continued refusal to intervene in Syria will invite an even greater catastrophe that will indelibly stain his presidency.”

Egypt: The IMF expressed reservations over Egypt’s economic plan and is not ready to grant it a desperately needed $4.8 billion loan; this as unrest spreads in many parts of the country, particularly Cairo and Port Said. In the latter, dozens have been killed in recent months as a result of court rulings pertaining to the Feb. 2012 soccer riots that killed 74. The death sentences of 21 fans of one club were upheld this week, while a court acquitted 7 of 9 police officials on trial for their role.

Plus you have the fact the Election Committee scrapped President Morsi’s election timetable and there is growing concern over the terror threat in Sinai with its many tourist resorts.

China: Xi Jinping formally became the country’s new president on Thursday (Li Keqiang became premier on Friday), giving Xi all three big posts – party and military chief, and now the presidency. As one China expert told the South China Morning Post, “In recent memory there is no comparable figure who has such power in his hands (so quickly).”

So we wait to see what Xi’s first moves will be. One thing is clear. He has good relations with the military, his father having been a top general, and there is little doubt China will be spending even more heavily on defense in the coming years, some say even surpassing the U.S.

But Xi must immediately address issues of corruption, severe income inequality and environmental destruction on a massive scale. An example of this last issue is a current crisis in a Shanghai river that provides drinking water to the financial hub as over 7,500 dead pigs have been found, dumped by farmers upstream The municipal government has repeatedly assured the city’s 23 million residents that tap water remains safe, but you can imagine locals are more than worried.

Back to the election, the Washington Post ran the following.

97.62 percent – Bashar al-Assad’s reported share in the 2007 Syrian presidential election

99.98 percent – Kim Jong Il’s share in the 2009 North Korean election

20 – Number of black Audi sedans, the unofficial vehicle of the Chinese Communist Party, visible through a single window at the ceremony.

I saw this photo. These were the only cars in view; this after the government said it wanted members of the party to buy Chinese made vehicles.

Separately, it was reported on Friday that Chinese doctors have performed more than 530 million abortions and sterilizations since the government began a family planning policy 40 years ago, an indication of the impact of the one-child policy amid debate a relaxation is in order to prevent lasting economic damage.

Lastly, it will be interesting to see how Xi uses his wife, First Lady Peng Liyuan, who is a very popular singer in the country. It’s assumed she will be front and center during his global travels, for one, as part of his charm offensive. This would be the first time since the days of Madame Chiang Kai-shek that a Chinese leader’s wife was put out front in such a way.

Afghanistan: Defense Secretary Chuck Hagel was rudely greeted on his first trip to the country since taking over at the Pentagon. Two suicide bombings in Kabul and eastern Khost province killed 19. Earlier, a U.S. contractor was killed when attackers thought to be Afghan soldiers stormed their base. Then a few days later, two U.S. soldiers were killed in an insider attack at a base in Wardak province, near Kabul.

With Hagel on the ground, President Hamid Karzai made the outrageous statement that the “explosions in Kabul and Khost...showed that they (the Taliban) are at the service of America and at the service of this phrase: 2014. They are trying to frighten us into thinking that if the foreigners are not in Afghanistan, we would be facing these sorts of incidents.”

In an email leaked to the New York Times, U.S. and NATO forces commander Gen. Joseph Dunford says Karzai’s statements had put international troops at risk.

“(Karzai’s inflammatory speech) could be a catalyst for some to lash out against our forces,” said Dunford. “President Karzai may issue orders that put our forces at risk,” he wrote in the alert, known as a command threat advisory.

Karzai said later in the week that when he was last in Washington, the U.S. had said it considered al-Qaeda, rather than the Taliban, as the real enemy.

“If you consider al-Qaeda as enemy, they are not in Afghanistan and they are in their safe havens, outside Afghanistan,” he said.

Also this week, a Black Hawk helicopter went down in bad weather, killing five U.S. service members.

Pakistan: A U.S. Congressional Research Service report concludes Pakistan has 90 to 110 nuclear weapons; India has 60 to 80 warheads in its arsenal.

Nigeria: Islamists killed seven foreign hostages from Britain, Italy, Lebanon and Greece, abducted from a construction site operated by a Lebanese company in Nigeria’s north.

Venezuela: Acting President Nicolas Maduro said it is too late to embalm for permanent viewing the body of Hugo Chavez. Experts say a body needs to be chemically treated within hours of death and the thought to embalm Chavez didn’t come until two days after he died.

The election has been set for April 14, with Henrique Capriles opting to oppose Maduro after losing to Chavez in October. Maduro will win handily, being Chavez’ hand-picked successor and with the Chavistas in mourning. The people will want to fulfill Chavez’ wishes.

Britain: A new poll in Britain offers distressing news for the ruling Tories. Only 7% of them believe that David Cameron will win an overall majority in the next election, May 2015, and 3/4s believe Labour will be in office either alone or in coalition with the Liberal Democrats. Just 8% see a second coalition between Tories and Lib Dems.

The Tories lost a recent by-election very badly, finishing third, over fears of a “triple dip” recession.

Austria: I’ve told you of how much I love Vienna in my trips there, but also that the one time I took a train out into the suburbs, the end of the line, walking around some quiet neighborhoods, I felt a certain sense of foreboding. It was creepy. I then popped my head into a bar and thought I was back in the late 1930s following Germany’s annexation of Austria (1938).

So I couldn’t help but note the release last weekend of archives from the Vienna Philharmonic Orchestra, one of the nation’s foremost cultural institutions and a favorite of many of us here on New Year’s Day with their annual Strauss concert shown on PBS.

The orchestra was forced to admit its Nazi past as the Philharmonic allowed three historians to research its history in the period before, during and after the Second World War.

The historians found that by 1942, 60 of the 123 active members of the orchestra were members of the Nazi party. Even before 1938, 20% were already members. After the war, only 10 musicians had to leave the orchestra due to their affiliation with the Nazis, while all the orchestra’s Jewish members had to leave in 1938. Four subsequently died in concentration camps, and a fifth in the Jewish ghetto in Lodz.

This past Tuesday was the 75th anniversary of the Anschluss.

And this is a bit unsettling. In a poll commissioned by the newspaper Der Standard to coincide with the date, 42% of those surveyed said that “not everything” was bad under Hitler. A bit high, I think some of you would agree. 57% said that the Nazi period had “no good points.” [James Shotter / Financial Times]

Random Musings

--New Jersey Democratic Senator Robert Menendez is being investigated by a Miami federal grand jury for his role in advocating for the business interests of a wealthy donor and friend, Florida ophthalmologist Salomon Melgen.

--Rajiv Chandrasekaran of the Washington Post had an extensive piece last weekend on the F-35 fighter jet; specifically how it has become the costliest weapons system in U.S. history, now nearly $400 billion, which “is years behind schedule and 70% over its initial price tag.”

I have always said defense spending could be slashed without impacting the fighting force and pieces like this just confirm it. I have railed against the generals and how they then move on to the defense industry, or become lobbyists for same, and while Chandrasekaran’s piece isn’t about these topics, it’s about how the F-35 has become immune to budgetary forces, such as the sequester, with the likes of Lockheed Martin spreading work across 45 states – “political engineering” – that in turn generates broad bipartisan support on Capitol Hill. Plus, “Any reduction in the planned U.S. purchase risks antagonizing the eight other nations that have committed to buying the aircraft by increasing their per-plane costs.

“By the time all...is finished – in 2017, by the Pentagon’s estimates – it will be too late to pull the plug. The military will own 365 of them.” [On the way to taking delivery of far more in succeeding years.]

Well the story is 8 pages long but if you want to learn about the dysfunction in the process, look it up. There have been tremendous design issues and now the worry is “the jet has serious sustainability problems. Chief among them are a greater need for maintenance and replacement parts than projected,” according to Air Force Lt. Gen. Christopher Bogdan, who oversees F-35 development for the Pentagon.

For its part, Lockheed has repeatedly emphasized to legislators that the F-35 is a jobs program, like in supporting 133,000 of them.

--I loved this anecdote from Politico’s Jim VandeHei and Mike Allen.

“House Majority Whip Kevin McCarthy (R-Calif.), the third-ranking House Republican, told us about an exchange he had with Obama at Saturday night’s white-tie Gridiron dinner. During a break in the program, McCarthy saw an empty chair next to Obama and decided to seize the chance. Surprised Obama wasn’t working the room, and thinking the president really is a loner, McCarthy walked up to the head table. He found the president was reading his BlackBerry.”

--More on Newark Airport and how unsafe it is. A former Newark TSA screener, who recently left the agency, told the New York Post:

“I’ve had to screen small children and explain to their parents I had no choice but to ‘check’ them. I would only place my hands on their arms and bottom half of their legs, and the entire ‘pat-down’ lasted 10 seconds. This goes completely against TSA procedure.

“Because the cameras are recording our every move, we have to do something. If someone isn’t checked or even screened properly, the entire terminal would shut down, as this constitutes a security breach.

“But since most TSA supervisors are too daft to actually supervise, bending the rules is easy to do.

“Did you know you don’t need a high-school diploma or GED to work as a security screener?...

“Goofing off and half-hour-long bathroom breaks are the only way to break up the monotony....

“(Incidentally, the flap over the new rule allowing small pocketknives is overblown. Most of the public doesn’t realize it, but you are already allowed to bring scissors, screwdrivers, tweezers, knitting needles and any number of sharp instruments on board.)”

--According to the World Health Organization, Europeans are the world’s biggest smokers and drinkers. On average, 27% of people over 15 smoke. “More than half of men smoke in Armenia, Belarus, Ukraine, Moldova and Turkey.”

And...“While average life expectancy increased by five years to 76 between 1980 and 2010, it declined for men in eastern Europe, the report said.” [Bloomberg News] I mean I knew this was the case in Russia, but didn’t know how widespread it was. Life expectancy for men in Russia is all of 62.8 years. Life expectancy for women in Spain is 85! That Mediterranean Diet, sports fans!

But Spain’s severe economic crisis is going to knock down some of the numbers. The WHO  says that for every 3 percent increase in unemployment, there is an almost 5 percent increase in suicides and self-inflicted injuries. Spain’s jobless rate is 27 percent.

--According to a Washington Post-ABC News poll, six in 10 Catholics in the U.S. characterize the church as not in sync with their attitudes and lifestyles, 86 percent said it remains relevant. And more than two-thirds of the Catholics polled praised Benedict, saying he did a “good” or “excellent” job.

--And so it was that the first pope from the Americas – Argentine Cardinal Jorge Mario Bergoglio – was selected by the conclave to replace Benedict. He took the name Francis, drawing a connection to the 13th century St. Francis of Assisi, who saw his calling as trying to rebuild the church in a time of turmoil. It also evokes images of Francis Xavier, one of the founders of the Jesuit order that is known for scholarship and outreach. Bergoglio is the first Jesuit to become pope. He was elected on the fifth overall ballot.

By now you’ve already heard the stories of how humble Pope Francis is. His experience with the poor back home in his native Buenos Aires. The man who has always refused the trappings of his position. The man who often rode the bus to work, cooked his own meals, and regularly visited the worst slums.

Bergoglio has accused fellow church leaders of hypocrisy.

“Jesus teaches us another way: Go out. Go out and share your testimony. Go out and interact with your brothers. Go out and share. Go out and ask. Become the Word in body as well as spirit,” he told Argentina’s priests last year.

“In our ecclesiastical region there are priests who don’t baptize the children of single mothers because they weren’t conceived in the sanctity of marriage. These are today’s hypocrites. Those who clericalize the Church. Those who separate the people of God from salvation. And this poor girl who, rather than returning the child to sender, had the courage to carry it into the world, must wander from parish to parish so that it’s baptized!” [Brian Murphy and Michael Warren / AP]

There is no doubt, Bergoglio is about rebuilding the flock through pastoral work.

“If there is one dogma left in our world, it’s the belief by our media elites that the Catholic church is doomed to irrelevance until it repudiates its approach to human sexuality and gets with the new thinking.

“One of our press illuminati gave us an example in a comment tweeted shortly after Argentine Jorge Mario Bergoglio greeted the Roman crowd as new pope yesterday.

“ ‘Sadly traditional on sexuality and contraception,’ ran the tweet.

“A sadly tiresome reaction, we might say. And all too typical of the reflexive provincialism of our progressive class when it comes to all things religious.

“You might have thought that the joy-filled faces of the people cheering Pope Francis would occasion some second thoughts about relevance. Or maybe the diversity of the cardinals who elected him – representing communities as different as urban Paris and rural Nigeria. Not to mention the irony that the world’s TV cameras all converged on Rome to transmit images of white smoke billowing out of a chapel and a new pope greeting the world.

“Rather than contemplating what these facts might mean for some assumptions about relevance, our press gives us the obligatory sentence about how ‘the new pope inherits a church in crisis.’

“Certainly as Pope Francis looks out at the world, he sees a church rent by sexual abuse by its priests. He sees the faithful persecuted by Communists in China, murdered by Islamists in Somalia and harassed by their government in the United States....

“Still, in some ways there’s no news here. For from its first days, the church has been in crisis. The faithful would tell you: How could it be otherwise for an institution that believes it has a charge to speak the truth about God and man even when the world doesn’t like hearing it?...

“We know little about Pope Francis. But if 2,000 years of history is any guide, popes have a way of remaining relevant long after their critics have faded into oblivion.”

“The election of Pope Francis may prove to be not only a turning point for the Catholic Church, but for all humanity. For the first time in a millennium, the most venerable institution on earth will be led by a man from outside Europe, the Argentine son of an Italian.

“Jorge Mario Bergoglio told the multitudes after the announcement of his elevation on Wednesday that he would lead them on ‘the path of love’ – a reference, surely, to Francis of Assisi, the great 13th-century saint from whom he has borrowed his pontifical name. The daring novelty and profound symbolism of the new pope’s name cannot be overstated. Just as Benedict XVI named himself after the great founder of Western monasticism and preserver of Western civilization during the Dark Ages, so Francis has named himself after the founder of the Franciscans in order to signal the church’s humility, poverty and charity....

“The ‘path of love’ of Pope Francis will be a momentous journey for 1.2 billion Catholics. After so many scandals, so many souls who have abandoned the faith, here is a chance for a cleansing of the Vatican stables, a root-and-branch reform of the Curia, the Papal administration, and a radical new emphasis on the core mission of the church: to reach out to the world.

“Pope John XXIII opened a new chapter when he convened the Second Vatican Council in 1962, declaring: ‘I want to throw open the windows of the church so that we can see out and the people can see in.’ John Paul II did the same when he vanquished the church’s communist persecutors: ‘I gave the tree a good shake and the rotten apples fell.’ Benedict XI took on the ‘dictatorship of relativism’ and grappled with the threat of Islamist persecution, before setting an example of self-abnegation by retiring into a life of prayer.

“Now a new pilgrim pope promises to lead the church into the next phase of its history, a phase that threatens to be more perilous even than the past century. The cardinals have taken into account the possibility that, without embracing the whole of humanity, Rome may once again decline and fall.”

“I’ll tell you how it looks: like one big unexpected gift for the church and the world.

“Everything about Cardinal Jorge Mario Bergoglio’s election was a surprise – his age, the name he took, his mien as he was presented to the world. He was plainly dressed, a simple white cassock, no regalia, no finery. He stood there on the balcony like a straight soft pillar and looked out at the crowd. There were no grand gestures, not even, at first, a smile. He looked tentative, even overwhelmed. I thought, as I watched, ‘My God – he’s shy.’

“Then the telling moment about the prayer. Before he gave a blessing he asked for a blessing: He asked the crowd to pray for him. He bent his head down and the raucous, cheering square suddenly became silent, as everyone prayed. I thought, ‘My God – he’s humble.’...

“Yes. This is a kind of public leadership we are no longer used to – unassuming, self-effacing. Leaders of the world now are garish and brazen. You can think of half a dozen of their names in less than a minute. They’re good at showbiz, they find the light and flash the smile.

“But this man wasn’t trying to act like anything else....

“And so, as they’re saying in Europe, Francis the Humble. May he be a living antidote....

“The Catholic Church in 2013 is falling into ruin. The church has been damaged by scandal and the scandals arose from arrogance, conceit, clubbiness and an assumption that the special can act in particular ways, that they may make mistakes but it’s understandable, and if it causes problems the church will take care of it.

“Pope Francis already seems, in small ways rich in symbolism, to be moving the Vatican away from arrogance. His actions in just his first 24 hours are suggestive.

“He picks up his own luggage, pays his own hotel bill, shuns security, refuses a limousine, gets on a minibus with the cardinals. That doesn’t sound like a prince, or a pope. He goes to visit a church in a modest car in rush-hour traffic. He pointedly refuses to sit on a throne after his election, it is reported, and meets his fellow cardinals standing, on equal footing....

“The church’s grandeur is beautiful, but Francis seems to be saying he himself won’t be grand. This will mean something in that old Vatican. It will mean something to the curia....

“I viewed it all initially with hope, doubt and detachment. And then the white smoke, and the bells, and the people came running, and once again as many times before my eyes filled with tears, and my throat tightened. That in the end is how so many Catholics, whatever their level of engagement with the church, felt. ‘I was more loyal than I meant to be.’”

Personally, I had the same reaction as Ms. Noonan in watching the unfolding drama with the appearance of the white smoke. If you want to see how emotional, watch the first five minutes of my “Nightly Review” video for March 13. Unfortunately, I had to film just an hour after the announcement of Bergoglio and as a Catholic who has struggled with his Church for years now, my head was spinning.

Long-time readers know of my connection to the Jesuits and thus I was absolutely thrilled to see one be elected for the first time.

It was in the mid-1990s when, wanting to do something good, I was directed in a roundabout way to the Jesuit Mission Bureau in midtown Manhattan. I walked in one day, asked the receptionist if I could speak to a priest, and an hour later I was committed to building a church on the island of Yap in Micronesia. [At least my funds did.] I’ve been there four times now and have regular contact with friends on the island. [Out of nowhere, last weekend’s Wall Street Journal had a big spread on Yap...owing to a debate whether a Chinese investor should be allowed to build a resort on the island, which I had heard rumors of. More on this some other time.]

So over the years I would get together with Father Bill of the Mission Bureau in New York, we’d have lunch or dinner, talk about life, our trips (he spent extensive time in Nigeria ministering to lepers...next time you complain about being in a gas line), and through Father Bill I was invited to the Consistory of the Cardinals in Rome, February 2001, specifically as a guest of Cardinal Avery Dulles (the first American Jesuit to become cardinal...and, boy, he didn’t want the honor at all). I got the chance to meet Cardinal Theodore McCarrick as well, with whom I had had a mail correspondence when he was Archbishop of Newark over his trips to the Balkans during the wars there.

But then the scandals hit and my faith plummeted, which I know many of you can identify with. Oh, I continued to give generously to my friends on Yap, and help certain individuals in the U.S., but I stopped going to Mass save once or twice a year.

One day I was having lunch with Father Bill, he knew of my distress, and he said, “Well take back your church!”

Since then I haven’t done anything in this regard, but it’s what really hit me when I saw the new pope was Jorge Mario Bergoglio (whose elevation to cardinal I also witnessed in 2001). This was a Jesuit! A man who takes the vow of poverty. This would be a different pope and as Peggy Noonan and the others allude to above, it just felt that way immediately.

No doubt, Pope Francis is conservative, and he’s 76, but I know in my heart that if he can just give us all, and the Lord, a few good years, this man is a difference maker. Do the right things on the sexual abuse scandal. Clean up the corruption inside the curia. And maintain that humility that is already shining through.

Pope Francis, I pray, is a man who will ‘give us back our church.’

And one final thought. I was struck, and touched, by the tremendous faith displayed in St. Peter’s Square on Wednesday. So I thought of Joseph Stalin and his sarcastic comment during his years leading the Soviet Union, killing tens of millions of his own citizens.

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

Gold closed at $1590
Oil, $93.52

Returns for the week 3/11-3/15

Dow Jones +0.8% [14514]
S&P 500 +0.6% [1560]
S&P MidCap +0.9%
Russell 2000 +1.1%
Nasdaq +0.1% [3249]

Returns for the period 1/1/13-3/15/13

Dow Jones +10.8%
S&P 500 +9.4%
S&P MidCap +11.9%
Russell 2000 +12.1%
Nasdaq +7.6%

Bulls 50.0
Bears 18.8 [Source: Investors Intelligence...big drop for bears...throwing in the towel? Remember, contrarian indicator...]

Nightly Review video schedule, Mon. thru Thurs., posted around 5:30 PM ET.

Happy St. Patrick’s Day!!!

Brian Trumbore

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