Week in Review

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Week in Review

03/23/2013

For the week 3/18-3/22

[Posted 12:00 AM ET]

Crisis in Cyprus

It has been known since June that eurozone member Cyprus (admitted 2004) needed a bailout and it seemed last weekend there would finally be a resolution and given Cyprus’ size it wouldn’t be that big a deal.

But then some of us woke Saturday to news that overnight, a deal had been hammered out whereby Cyprus would receive 10 billion euro from the EU, as part of a 17-billion bailout, but that Cyprus was responsible for the rest, including 5.8 billion that the eurozone, and IMF, said had to be taken out of depositors. Specifically, a one-time tax of 6.75% on accounts with less than 100,000 euro, and 9.9% on those greater than that.

This was shocking. For the first time in the eurozone, the sacrosanct 100,000 euro insured deposit limit was being breached. The limit was put in place as a result of the Lehman Brothers collapse as a confidence-building measure and technically is insured by national governments. But Cyprus admitted it did not have the money to backstop 30 billion euros of guaranteed bank deposits, so this bond of trust between the government and its people was broken.

People throughout Europe immediately thought if the government can go into a Cypriot’s bank account and extract a tax, who’s to say the government in Spain or Italy wouldn’t do the same in a similar crisis scenario. It was a recipe, if followed through, for bank runs, not just in Cyprus but also the struggling southern periphery of the eurozone.

For its part, eurozone finance officials said they could only backstop and front so much of the money needed to recapitalize Cyprus’ banks and, further, much of the money deposited in Cyprus’ banks is Russian oligarch money...some of it ‘hot’...due to Cyprus’ low taxes, lax rules, and no questions asked (perfect for laundering).

So on Monday morning, after Asian markets had tanked, European bourses did the same over fears of contagion to the likes of Italy and Spain, but Euro markets bounced back and cut their losses. The major U.S. averages declined slightly.

Megan Greene of Bloomberg explained some of the logic behind the first bailout plan.

“The one-off deposit levy was agreed to as part of the Cyprus bailout for two reasons. First, Germany’s main opposition party, the Social Democrats, demanded that depositors participate in the bailout so that German funds wouldn’t be used to bail out Russian oligarchs with money of questionable origin in Cypriot banks. The German government can’t pass the Cyprus bailout in the Bundestag without the Social Democrats’ support, so it had to cater to this demand.

“Second, the International Monetary Fund insisted that Cyprus’ debt burden would be unsustainable if the country received all of the 17 billion euros it needs in the form of bailout loans. To reduce the size of the bailout, policy makers had three options: write down sovereign debt, write down bank debt or raid deposits....

“Raiding deposits seemed the most expedient way to shrink the size of the bailout, but in reality this just ensures that additional money will have to be stumped up for Cyprus, or that Cyprus will have to restructure its debt, or both.”

For their part, Germans are proud that Chancellor Angela Merkel is standing up to the likes of Cyprus. As a columnist for mass circulation Bild weekly, Hugo Muller-Vogg, wrote on Wednesday: “Without German guarantees, there would be no rescue fund, yet these countries direct their criticism, open hatred even, at us Germans. If this weren’t about the future of Europe there would be only one appropriate response: Clean up your own mess.” [Matthew Karnitschnig / Wall Street Journal]

German Finance Minister Wolfgang Schauble said after Cyprus parliament rejected the bailout deal on Tuesday: “Cyprus lives off of a banking sector with low taxes and lax regulation that is completely out of whack. As a result, Cyprus is insolvent and no one outside of Cyprus is responsible for that.”

As it turned out, with the uproar among the Cypriot people on Monday, a holiday, and with banks scheduled to reopen on Tuesday, the government kept the banks closed (and they were to remain so until next Tuesday, at least) while voting down Plan A. The finance minister then flew off to Moscow for days of talks that would prove fruitless as Cyprus was looking for new terms on the 2.5 billion euro loan it has outstanding with Russia. Officials in the Kremlin, including President Putin and Prime Minister Medvedev, took advantage of the chaos to blast the European Union for its handling of it. Medvedev labeled it an “unprecedented” confiscation of assets. Putin called it “dangerous.”

On Thursday, the ECB told Cyprus it had to agree on a plan to raise the 5.8 billion euro by Monday or see emergency lending to its two biggest banks cut off. Speaking in Brussels, Jeroen Dijsselbloem, the chair of the committee of 17 eurozone finance ministers who negotiated the weekend bailout that taxed small accounts, said Cyprus represented a systemic threat to the eurozone.

“Over the past three years the EU has shown a remarkable facility for turning problems into crises and crises into catastrophes. Last summer it seemed that a new leaf had been turned. Mario Draghi, the European Central Bank president, pledged to do ‘whatever it takes’ to stabilize the euro, and the fairly rapid agreement to establish a banking union seemed to be another positive step forward.

“But it now seems this dawn was false. The Cyprus crisis has caused the rock to roll back down the hill. Like Sisyphus, the eurozone’s policy makers must now begin pushing it back up.

“The Germans are absolutely right in logic – as they often are – that Cyprus has for years been pursuing a very dangerous strategy. Its banking system is too large – not quite Icelandic in scale, but close enough. Banking assets are about eight times gross domestic product, too big to be credibly supported by the Central Bank of Cyprus. The close links developed with Russia are another high risk factor. Limassol now looks like a Black Sea resort. By no means all of the Russian money is ‘hot’ in the legal sense, but a situation in which Cyprus appears to be the largest overseas investor in Russia, intermediating funds from Russian companies domiciled in Caribbean offshore centers, does not look logical or sustainable. And it has certainly generated hostility in the rest of the EU, causing politicians and officials elsewhere to ask just who is benefiting from an expensive rescue package....

“Plan C, or gamma in Cyprus I suppose, involves creating a ‘bad bank.’ That may make sense in the medium term, but in itself does not create new money. And it is time-consuming to separate good assets from bad. There is also a risk of knock-on impacts on Greece. Many of the Cypriot banks’ bad assets are in Greece....

“Beyond the weekend, the Cypriots have shown that banking union, as currently defined, is no such thing. We may have a single supervisor, or are about to have. But without a mutually guaranteed, eurozone-wide deposit protection scheme, and a centrally funded resolution authority, Europe is still a long way from financial stability.”

And as I go to post, European officials (the troika...EU, IMF and ECB) were locked in talks with the Cypriot government. Germany is arguing the two largest banks – Laiki and the Bank of Cyprus – are already insolvent “and can only be recapitalized with a ‘bail-in’ of their largest uninsured depositors, many of whom are foreign account holders, especially from Russia.” [Financial Times]

Meanwhile, if Cyprus is just 0.2% of eurozone GDP, what about the economic state of the other 16 countries? This week, Markit released its flash PMI for March on the eurozone composite, manufacturing and services, and it came in at 46.5 vs. 47.9 in February...awful.

The flash reading on German manufacturing for March was 48.9 vs. 50.3 in February. France’s manufacturing PMI was 43.9, unchanged from last month. The composite reading, including services, in France was 42.1, down from 43.1.

Washington and Wall Street

While President Obama focused on the Middle East this week, there was some good news, as in a drama-free conclusion to the issue of the Continuing Resolution, CR, to fund the government through Sept. 30. The March 27 deadline has been met as the Senate voted 73-26 (51 Democrats, 20 Republicans and two independents) to lock in the $85 billion in sequester cuts, while providing cabinet agencies new flexibility in administering the pain. That said, White House tours remain closed, but tuition assistance to service members was reinstated and federal meat inspectors will not be furloughed. But 140+ small and medium air traffic facilities were left exposed to possible closure, as we learned on Friday.

The House then passed the bill 318-109 and President Obama will sign it.

But now it’s about the fiscal 2014 budget that is for the year beginning Oct. 1. Here the two parties remain far apart. The House passed Republican Budget Committee Chairman Paul Ryan’s 10-year game plan for a balanced budget, 221-207, without a single Democrat and 10 Republicans voting ‘no.’ Ryan’s budget incorporates the tax hike from the New Year’s fiscal cliff resolution, plus it overhauls Medicaid and Medicare and cuts almost $5 trillion in spending over a decade, though, remember, we are talking about cutting the rate of growth. The Senate version will be about raising more revenues and so the next few months the debate will be about whether the two sides can work out any kind of compromise, with a new debt-ceiling debate part of the equation during the summer. For his part, President Obama won’t unveil his own budget until around April 8, we are told.

What was positive about the week, though, is the sequester cuts are now in place. It’s a major step, albeit a painful one for those impacted, in getting a handle on spending.

What is depressing is you can see there is virtually zero chance of sweeping tax reform, both for corporations and individuals, let alone true entitlement reform. This is the window of opportunity. Come Labor Day it’s closed until 2015.

I’ve said this many times but I can’t help but repeat it. Yes, the deficit picture is going to look better for the foreseeable future. It’s going to be very easy for the administration to claim victory, and for Republicans to pull back and focus on other issues to ensure the House stays in Republican control in 2014. Everyone will say the debt crisis passed...or Paul Krugman will declare, again, there never was a crisis. And it will all be so deceiving.

It doesn’t help when House Speaker John Boehner said on ABC’s “This Week” last Sunday that the debt doesn’t present “an immediate crisis.” Realizing his mistake, Boehner quickly added, “We all know that we have one looming. And we have one looming because we have entitlement programs that are not sustainable in their current form. They’re going to go bankrupt....The fact that the government continues to spend more than a trillion dollars every year that it doesn’t have scares investors, scares businesspeople, makes them less willing to hire people.”

But that’s not all true. The deficit is heading down to below $500 billion, not $1 trillion in two years (unless a new military conflict explodes spending all over again). Businesses may hold off on hiring because of ObamaCare, but it’s not going to scare investors.

“We want to get a down payment on deficit and debt reduction. We think that’s good for the economy, we think that’s good for the credit markets, we think that’s good for confidence – and that is where we hope to end up at the end of the day here. We understand the president’s not going to take all of our entitlement reforms.”

Actually, I just realized the Ryan budget’s Medicare cuts are only about 2%, let alone he does nothing with Social Security.

“What frustrates constructive debate is muddled public opinion. Americans hate deficits but desire more spending and reject higher taxes. In a Pew poll, 87% of respondents favored present or greater Social Security spending; only 10% backed cuts. Results were similar for 18 of 19 programs, foreign aid being the exception.

“Only the occupant of the bully pulpit can yank public opinion back to reality. This requires acknowledging that an aging America needs a new social compact: one recognizing that longer life expectancies justify gradual increases in Social Security’s and Medicare’s eligibility ages; one accepting that sizable numbers of well-off retirees can afford to pay more for their benefits or receive less; one that improves generational fairness by concentrating help for the elderly more on the needy and poor to lighten the burdens – in higher taxes and fewer public services – on workers; and one that limits health costs. 

“Obama hasn’t talked intelligently or openly about America’s aging. In budget negotiations, the administration has made some proposals (a different inflation adjustment for Social Security benefits, a higher Medicare eligibility age) that broach the subject. But Obama hasn’t put these modest steps into the larger context of social change; nor is it clear how much the administration supports them. It’s true that Republicans should also accept higher taxes – but only after the White House engages retirement spending.

“Little is possible while public opinion remains frozen in contradiction. The mistake lies in thinking that the apparent paralysis isn’t policy. It is. Government is being slowly transformed into a vast old-age home, with everything else devalued and degraded.”

This week also saw the Federal Reserve’s Open Market Committee hold a two-day meeting, with Chairman Ben Bernanke saying in a press conference after, the Fed “could vary the pace of (its $85 billion a month asset) purchases as progress is made towards its economic objectives or if its assessment of the efficacy and costs of the program changes.”

Bernanke offered: “Spending by households and businesses has continued to expand, and the housing sector has seen further gains. The jobs market has also shown signs of improvement over the past six months or so. Private payrolls are growing more rapidly.”

The Fed updated its economic outlook and now sees GDP growth of 2.3% to 2.8% this year followed by 2.9%-3.4% in 2014 and 2.9%-3.7% in 2015.

The Fed also lowered its expectations for the unemployment rate at the end of the year to a range of 7.3% to 7.5% from the current 7.7%. And it looks for a jobless rate of 6.0%-6.5% by 2015, so 13 of the 19 FOMC participants estimate the first increase in the funds rate from its current range of zero to 0.25% will occur that year.

And on a different topic, the Wall Street Journal had a front page story on Friday titled “Health Insurers Warn on Premiums.”

“Health insurers are privately warning brokers that premiums for many individuals and small businesses could increase sharply next year because of the health-care overhaul law, with the nation’s biggest firm projecting that rates could more than double for some consumers buying their own plans....

“In a private presentation to brokers late last month, UnitedHealth Group Inc., the nation’s largest carrier, said premiums for some consumers buying their own plans could go up as much as 116%, and small business rates as much as 25% to 50%....

“Insurers are ‘not being shy that premiums are going to increase in 2014,’ and are urging brokers to ‘brace our clients,’ said John Lacy, vice president of group benefits at Bouchard Insurance, a brokerage in Clearwater, Fla. His firm has been hearing from carrier representatives that individual premiums in Florida could go up 35% to 50%, on average, and small-business rates around 30%....

“Aetna Inc., in a presentation last fall to the national broker advisory council, suggested rates on individual plans not being grandfathered under the law could go up 55%, on average, and gave a figure of 29% for small business rates.”

Street Bytes

--Three leading strategists, Adam Parker of Morgan Stanley, David Bianco of Deutsche Bank and David Kostin of Goldman Sachs all raised their S&P 500 yearend targets (to 1600 in Parker’s case and 1625 from the current 1556 for the other two). 

So with that backdrop, and despite the uncertainty over Cyprus, and poor earnings or sales trends from Oracle, FedEx and Caterpillar (all detailed below), the major averages finished essentially unchanged on the week, though in the cases of the Dow, S&P 500 and Nasdaq, officially with fractional losses. The S&P still hasn’t cracked its all-time high of 1565.

The long end of the curve rallied on the safe haven trade given the situation in Cyprus which rocked the euro.

--Data on housing starts and existing home sales for February were very solid and in line with expectations. The national median home price was up 11.6% from February 2012.

--BlackRock Inc. CEO Laurence Fink said U.S. equities will rise 20% in 2013, this despite his claim we are only in the “third inning” of the European debt crisis; Fink just doesn’t see Europe being a major issue for the U.S.

--According to the OECD, China’s economy will rebound to 8.5% growth this year and 8.9% next, with growth averaging 8% this decade.

--HSBC’s flash reading on manufacturing in China for March came in at 51.7 vs. 50.4 in February. This is good.

--Japan’s exports fell 2.9% in February from a year earlier despite the aggressive monetary policy being pursued by the government through the Bank of Japan. Exports to China fell 15.8%, dropped 9.6% to the European Union, but rose 5.7% to the U.S.

--Chinese solar company Suntech Power Holdings filed for bankruptcy in China. In a classic example of the relationship between China and the United States, Suntech raised $1.28 billion in the States, between two stock offerings and principal on convertible bonds that matured March 15, but U.S. investors will likely see nothing with the shares down 99% from their high of December 2007. By filing in China, it’s Western bondholders versus Chinese banks fighting for the assets and we know who the foremost loser will be.

--It’s been a brutal winter in Britain and suddenly the country finds itself with only two days’ worth of gas left in reserve amid the latest cold spell and snows. Demand is 20% higher than normal. Britain is frantically importing as much gas as it can from Europe.

Britain is vulnerable to gas shortages because of its heavy reliance on the North Sea, where production has been dwindling.

--Speaking of the North Sea, a survey of North Sea oil wages has them rising 15% over the next year to about $110,000. For good reason, companies are concerned that at this level operations become too expensive.

It’s all about a skills shortage in the industry. Pensions and benefits are also rising. [BBC News]

--Software giant Oracle blamed its rapidly expanding sales force for a huge miss in fiscal third-quarter revenues and earnings. The CFO said, “What we really saw was the lack of urgency we sometimes see in the sales force, as Q3 deals fall into Q4. Since we’ve been adding literally thousands of new sales reps around the world, the problem was largely sales execution, especially with the new reps as they ran out of runway in Q3.” Ouch.

The fact is Oracle is facing greater competition from everyone from IBM and SAP to Salesforce and Workday.

Oracle’s hardware division sales have fallen every quarter since it closed the acquisition of Sun Microsystems in 2010.

--Bellwether Caterpillar said its global retail machine sales fell 13% during a three-month period ended in February, with Asia-Pacific sales for the period declining 26% from the prior year. North America sales fell 12%. Latin America was up 3%.

--And another bellwether, FedEx Corp., reported earnings that were down sharply from year ago levels. Fred Smith, chairman and CEO, said: “The third quarter was very challenging due to continued weakness in international air freight markets, pressure on yields due to industry overcapacity and customers selecting less expensive and slower-transit services.” Shares plunged $10 in two days following the news.

--The Federal Housing Finance Agency reported U.S. house prices rose 6.5% in the year through January, the biggest jump since 2006. Prices jumped 14.1% in the Mountain area, which includes Arizona, Nevada, Montana and New Mexico. In the Pacific region, including Washington and California, the gain was 13.7%. The Middle Atlantic – New York, New Jersey and Pennsylvania – saw only a 0.4% rise.

--Ryanair is planning to increase its aircraft fleet by a third to 400 planes after placing an order with Boeing for 175 aircraft worth $15.6 billion. Airbus had received a $24 billion order a few days earlier from Indonesia’s Lion Air.

--A new report examining the Air France flight that crashed into the Atlantic in June 2009 has revealed that the flight crew was dangerously tired – with captain, Marc Dubois, having had just one hour of sleep.

In case you forgot, what is truly remarkable is that the flight data recorder was recovered two years after the crash, deep in the Atlantic, and it has just been revealed that Dubois says on the recording, “I didn’t sleep enough last night. One hour – it’s not enough.”

He began complaining about being tired shortly after take-off. His co-pilots admitted they had been out late in Rio with their wives and girlfriends.

Dubois was on a rest break when the plane flew straight into a tropical thunderstorm. It took the groggy Dubois one minute to respond and his co-pilots were too agitated to properly communicate what went wrong.

“When AF447 started stalling, standard procedure called for the pilots to lower the plane’s nose. Acting on faulty data from the plane’s sensors, the pilots raised it.”

The plane and its 228 passengers plunged into the ocean. Air France was ordered to pay victim’s families around $181,000. [Carol Kuruvilla / New York Daily News]

--Denmark is facing a housing crisis as property prices have fallen 20% from their peak and more than 100,000 households need their mortgage terms renegotiated if they are to avoid foreclosure, according to a university study. It seems Denmark was swept up in the interest-only mortgage craze along with many others and largely as a result of housing, Denmark’s economy remains mired in recession

--Nike blew through expectations as the sportswear maker’s net income rose 16% in the quarter to February 28, with revenues up 9% to $6.2 billion, in line with the Street’s forecasts. But sales in China fell 9% to $635 million as it grappled with excess inventory and a slowing economy there.

--For the fiscal year ended Feb. 2, JCPenney’s revenue declined 24.8%, but in a regulatory filing it was just revealed the number of employees was reduced by 27%, 43,000 less than a year earlier, or more than twice previously released jobs numbers.

--According to a study by the Employee Benefit Research Institute, 57% of U.S. workers surveyed reported less than $25,000 in total household savings and investments excluding their homes. 28% of Americans have no confidence they will have enough money to retire comfortably – the highest level in the study’s 23-year history.

--California and Rhode Island are tied with the highest unemployment rate as of January, 9.8%. Nevada is down to 9.7%, a drop of 2.3% from January 2012. North Dakota continues to have the lowest rate at 3.3%. Texas had the largest payroll growth for the one-year period adding 332,400 jobs, according to the Bureau of Labor Statistics.

--Global movie ticket sales soared to $34.7 billion last year, up 6%, according to the Motion Picture Assn. of America. International ticket sales are up 32% over five years ago to $23.9 billion, driven by growth in Russia, Brazil and China. China surpassed Japan as the world’s largest international box office market.

--The Red River is slated to have one of its top five floods in history, according to the weather experts. Near record cold temperatures have delayed the snowmelt.

--Despite ongoing drought in many parts of the United States, the global wheat crop is slated to be the second-largest on record this year as drought conditions in other parts of the world have lessened considerably. The UN is also forecasting a record rice harvest and the U.S. government the biggest-ever corn and soybean crops.

Separately, the winter wheat crop in the U.S. is still slated to be poor.

--Google announced that its YouTube video site has hit a billion regular visitors. Facebook reached a billion last October. YouTube now receives the second-most search queries of any site in the world, behind only Google’s own search page.

--China’s “one-child” policy has had many consequences, one of which is the growing labor shortage. The working age population, defined as being between 15 and 59, fell by 3.5 million last year to 937 million. As reported by the Financial Times, factories are struggling not only to find new workers, but also to retain them. So some employers are creating family-friendly dormitories, with schools on-site.

--NBC is moving “The Tonight Show” to New York and replacing Jay Leno with Jimmy Fallon sometime in 2014. For his part, Leno has been taking some vicious shots at NBC regarding the failure of its prime-time schedule, which is not ingratiating himself with executives there.

“Tonight” originated in New York in 1954 and then Johnny Carson moved it to Burbank in 1972.

--Lululemon Athletica Inc. reported that it was removing some of its popular yoga pants because of a glitch involving a synthetic fabric that made the pants too see-through. Never just buy the pants off the rack, girls. You’re supposed to try them on and then bend over, according to the company itself. A single source in Taiwan is responsible.

--So I’m reading a piece in Crain’s New York Business by Matt Chaban and take a guess how much insurance cost for major construction projects like the soon-to-be-built new Tappan Zee bridge connecting New Jersey and New York state? Try $400 million. Construction insurance now accounts for as much as 12% of the total cost of building in New York state these days, up from just 3% a few years ago. It’s complicated but it goes back to what is known as the scaffold law, a 19th-century state statute. “As written, if a worker on a site is injured by a fall on faulty scaffolding, stairs or ladders, the contractor is liable, even if the worker might be responsible. Settlements have reached a level now that only a handful of insurers will even consider working on construction sites in New York.”

--According to the American Consumer Satisfaction Index, nine retailers have the worst customer service.

9. Walgreen
8. TJX Companies
7. The Gap
6. Supervalu
5. Sears
4. CVS Caremark
3. Safeway
2. Netflix
1. Wal-Mart

Personally, I buy my heroin and opiates at CVS and they have this one woman in particular behind the counter who is without a doubt the world’s worst sales clerk. Just an awful attitude.  

--The Statue of Liberty is finally reopening on July 4 after extensive damage caused by Hurricane Sandy. Imagine the hundreds of jobs that have been impacted between ferry service operators and concessionaires.

--The Fukushima Daiichi nuclear-power plant was down for a full day this week, a worrisome development because if the outage had lasted about four days, the fuel rods would have been in danger of overheating as the cooling system was compromised.

But it’s what caused the outage that is worrisome. Investigators believe a rat, that was found inside the electricity supply system, lying, singed, around the switchboard, created the mess.

So that gives you an idea of how vulnerable the stricken reactors remain two years after the earthquake and tsunami.

Foreign Affairs

Israel: The week started with Prime Minister Netanyahu presenting the 33rd government in the Knesset, stating its first priority remained protecting Israel from exterior threats.

“As prime minister, I don’t have the privilege to abandon the external challenges to Israel. We must ensure the existence of the State of Israel. Therefore, the first priority will be the defense of the country and its citizens.”

He also stated the new government would be ready to make “a historic compromise” for the sake of a peace agreement with the Palestinians, that is if the Palestinians were willing to compromise too.

Then President Obama arrived on Wednesday and at their first joint press conference, Obama gave Netanyahu exactly what he wanted to hear.

“Each country has to make its own decisions when it comes to the awesome decision to engage in any kind of military action,” said the president. “And Israel is differently situated than the United States.”

Netanyahu then emphasized that Israel “cannot cede the right to defend ourselves to others,” possibly referring to a go-it-alone plan to attack Iran’s nuclear facilities.

Obama said “all options remain on the table,” though both seemed to agree Iran was still a ways off from having a nuclear weapon.

“Has Obama arrived in Israel to dissuade Netanyahu from unilaterally striking Iran’s nuclear sites? Quite possibly. That goal may only be achievable, however, if Obama privately tells Netanyahu what America’s red line on Iran is.

“If the red line is significantly behind Israel’s, Netanyahu may conclude that he cannot betray the ethos at the heart of the country’s defense doctrine, which holds that the Jewish people’s fate cannot ever again depend on other powers – even the most important of allies.

“If, however, Obama’s red line is close to Israel’s, Netanyahu may choose to stand down and let America complete its experiment to see if sanctions might change the minds of Iran’s rulers, before the U.S. resorts to military action.”

On Thursday, Obama delivered his much-anticipated speech to a group of university students (some would say a rather carefully selected audience).

“As long as there is a United States of America, you are not alone,” Obama told the students.

The president then stressed the importance of making peace with the Palestinians if it is to ensure its survival.

“Given the frustration in the international community, Israel must reverse an undertow of isolation. Whereas once Israel could feel at ease by keeping good relations with Arab autocrats, the revolutions sweeping the Middle East and North Africa have made broader outreach, especially on the Palestinian issue, an imperative,” he added.

“Just as Israelis built a state in their homeland, Palestinians have a right to be a free people in their own land,” Obama said. “The Palestinian people’s right to self-determination and their justice must also be recognized. Put yourself in their shoes, look at the world through their eyes. It is not fair that a Palestinian child cannot grow up in a state of their own, living their entire lives with the presence of a foreign army that controls the movements...every single day.”

“Israelis must recognize that continued settlement activity is counterproductive to the cause of peace, and that an independent Palestine must be viable with real borders that have to be drawn. No single step is going to erase years of history and propaganda, but progress with the Palestinians is a powerful way to begin, while sidelining extremists who thrive on conflict and thrive on division. It would make a difference.”

But earlier, in a meeting with Palestinian Authority President Mahmoud Abbas, Obama said:

“If the expectation is that we can only have direct negotiations when everything is settled ahead of time, then there is no point for negotiations, so I think it is important to work through this process even if there are irritants on both sides,” i.e., Obama abandoned his previous support for the Palestinian demand that settlement activity end before talks resume.

“We require the Israeli government to stop settlements in order to discuss all our issues and their concerns. It’s the duty of the Israeli government to stop the settlement activities to enable us to talk about the issues in the negotiations.”

Back to Obama’s speech to the university students and what I said had to be a carefully selected audience, the Los Angeles Times’ Edmund Sanders and Batsheva Sobelman had some of the following.

“Obama’s political magnetism may prove less effective with the broader masses of Israeli youth.

“Reared on suicide bombings, failed peace initiatives and segregation from Palestinians, Israel’s younger generation is generally more conservative, more religious, less tolerant and less supportive of a two-state plan than their parents or grandparents....

“Overall, most Israelis still favor a two-state solution, but support is weakest among the young. A survey by the Jewish organization B’nai B’rith found only 40% of those ages 18 to 24 favored a Palestinian state, compared with 59% of those ages 35 to 44 and 67% of those ages 55 to 64....

“Recent studies have shown that about half of Jewish Israeli high school students don’t believe Arabs should receive equal rights, such as serving in the parliament. A 2011 survey of Israelis ages 15 to 18 found 60% preferred ‘strong leaders’ to the rule of law and 70% said security concerns trump democratic values....

“Of Israel’s 840,523 Jewish citizens ages 15 to 24, more than 15% are identified as ultra-Orthodox, compared with about 10% of the overall population, according to government figures. Nearly a third of Jewish first-graders are ultra-Orthodox. Religious Israelis tend to be more conservative politically than those who are more secular.”

“(When) it came to policy, Obama simply jettisoned his signal demand from 2009 – the insistence that Israel freeze ‘settlement activity’ as a precondition for peace talks with the Palestinians.

“This was a remarkable turnabout, by any reckoning, because the settlement freeze was the Obama administration’s only Mideast peace policy innovation.

“The freeze had first been proposed in the so-called ‘road map’ of 2002, but Israel had rejected it outright. And, in any case, it was only to be implemented in tandem with the conclusion of Palestinian violence against Israel – which has never ceased, as the rocket attacks from Gaza on the town of Sderot during Obama’s visit demonstrated.

“Obama revived the settlement freeze as a not-so-tacit message to the Arab and Muslim world that he was tilting away from George W. Bush’s inarguable tilt toward Israel.

“Acting on genuinely dreadful advice from Rahm Emanuel and David Axelrod, two ‘smart Jews’ (as he called them) among his senior White House staff, Obama tried a ‘tough love’ approach toward Israel with the delusion that there was an enthusiastic majority for his critical attitude among American and Israeli Jews.

“It was instantly clear that, like a lot of ‘tough love’ approaches, his was far more tough than it was loving. Mix in the chafing personality of Israeli Premier Bibi Netanyahu and the ‘special relationship’ between Israel and the United States quickly became toxic.

“Except for one thing. As the political connection came under deep strain, the military and high-tech relationship between the Israel Defense Forces and the Pentagon (and CIA) that had begun under the Bush administration was functioning with growing intimacy and rapport.”

“The best news from this trip is that it seems to reflect Mr. Obama’s recognition that America’s friends have to trust him before he can broker a peace with adversaries. The president spent his first term trying to put distance between himself and Israeli Prime Minister Benjamin Netanyahu, and the result was mutual disappointment and discord.

“This week Mr. Obama has sought to reassure Israelis about U.S. commitments even as he coaxes them to take risks for peace. From his reference to Mr. Netanyahu as ‘my friend Bibi’ to his tough language on Iran’s nuclear program and his determination to stop it, the president put on a charm offensive designed to woo his skeptical Israeli hosts.

“All this is to the good. The president even came around to Mr. Netanyahu’s position that negotiations between Israel and the Palestinians should proceed without preconditions. That’s another break from the first term’s rancor....

“Mr. Obama assured Israelis that they have a willing peace partner in Mr. Abbas and Prime Minister Salam Fayyad. But you wouldn’t know it from Mr. Abbas’ remarks Thursday. The man who is supposed to represent the moderate side of local politics delivered a verbal salvo against Israel’s alleged ‘violence, occupation, settlements, arrests, siege and denial of refugee rights,’ which isn’t mood music for negotiations to resume....

“On the streets of Ramallah, meanwhile, protestors gathered to denounce America – ‘the head of the snake’ – and Mr. Abbas, too....

“History shows that a generation of militants can give way to a generation of pacifists. It happened in Germany and Japan, and nobody should give up hope that such a change will eventually come to Palestinians, whenever they tire of nationalist or religious slogans. Until then, Israel will have to negotiate as best it can with eyes firmly on its security. Mr. Obama’s best intentions can’t deliver peace until enough Palestinians decide they want it too.”

Lastly, on Friday, President Obama organized a phone call between Turkish Prime Minister Erdogan and Netanyahu over the 2010 incident in which Israeli commandos, seeking to block a ship bound from Turkey for the Gaza Strip with a delivery of humanitarian aid, killed eight Turkish citizens and one American of dual nationality on board.

Ever since, Erdogan has demanded an apology before resuming what were once warm relations between the two countries.

In what is an unqualified success for President Obama, Netanyahu apologized to Erdogan and the two have agreed to restore normal relations, with Israel paying reparations. Secretary of State Kerry deserves some credit as well for telling Erdogan last month on his first trip in his new position that the prime minister needed to cool it with the incendiary anti-Semitic rhetoric and to rebuild ties with Israel.

Iran: According to a report by the Christian Science Monitor, the draft agreement on Iran’s nuclear program from a team representing the five permanent U.N. Security Council members and Germany (P5+1) is being dismissed by Tehran as not realistic. An Iranian insider told the paper “(the proposed) relief of the sanctions is not proportionate with what they are asking Iran to do.”

“They are asking Iran to suspend 20% [uranium] enrichment, and reduce readiness of [Qom], which from our point of view is (the same as) shutting [Qom] down. We argued that there is no balance between what they are asking, and what they are offering,” the source added.

Syria: The Bashar Assad regime suffered a big blow on Thursday when a suicide attack on a mosque inside Damascus killed 42, including a senior pro-government Muslim cleric. While attacks in the capital have become commonplace, the attack on the mosque was shocking. The cleric was reviled by the Syrian opposition and normally delivered the official weekly Friday mosque sermons on state television. In one of his televised speeches, he described the opposition as “scum.” [Daily Star]

President Assad then issued a statement that his forces will “wipe out” and “clean our country” of the attackers.

Regarding the reported use of chemical weapons this week, it’s still not clear if they were indeed used and the U.N. has launched an investigation. If the regime did use them, then President Obama’s red line has been crossed.

As for arming the rebels, the French and British have said they will ignore an EU arms embargo to send weapons to rebel fighters, while U.S. Secretary of State Kerry said the Obama administration wouldn’t stand in the way if they did.

Meanwhile, the conflict continues to spill over into Lebanon, with Syrian warplanes bombing Lebanese territory. Fighting between Sunnis and Shias (anti-Assad and pro-Assad groups) in Lebanon’s second city, Tripoli, erupted again, with at least three killed on Thursday.

And then on Friday, compounding matters, Lebanese Prime Minister Mikati resigned, thus dissolving the government. In a national television address, Mikati said:

“The region is heading toward the unknown and the regional fires are hitting us with their heat. The domestic divisions have left deep wounds and economic pressures are increasing from all sides.”

Needless to say, having one million Syrian refugees in the country isn’t helping matters. Mikati serves as caretaker until a new prime minister is selected but this is no easy task.

Iraq: This week marked the 10-year anniversary of the Iraq War. What began with “shock and awe” ended for the United States nine years later with almost 4,500 dead and 32,000 wounded. Over 100,000 Iraqi civilians died. The price tag was by most accounts $1 trillion, perhaps double that when you include the coming decades of veterans benefits and other costs including medical treatment and job retraining for wounded soldiers.

[The Financial Times conservatively estimates the costs of private security, logistics and reconstruction contractors alone at $138 billion.]

The new Iraq is also hardly the stable ally the United States envisioned.

“The American disappointment with Iraq helped propel Barack Obama to power. There were strategic gains that the war had secured in Iraq, but Mr. Obama had no interest in them. Iraq was the ‘war of choice’ that had to be brought to a ‘responsible close,’ he said. The focus instead would be on that ‘war of necessity’ in Afghanistan.

“A skilled politician, Mr. Obama made the Iraqi government an offer meant to be turned down – a residual American force that could hardly defend itself, let alone provide meaningful protection for the fledgling new order in Baghdad. Predictably, Iraq’s rulers decided to go it alone as 2011 drew to a close. They had been navigating a difficult course between Iran and the U.S. The choice was made easy for them, the Iranian supreme leader was next door, the liberal superpower was in retreat.

“Heading for the exits, Mr. Obama praised Iraqi Prime Minister Nouri al-Maliki as ‘the elected leader of a sovereign, self-reliant and democratic Iraq.’ The praise came even as Mr. Maliki was beginning to erect a dictatorship bent on marginalizing the country’s Kurds and Sunni Arabs and even those among the Shiites who questioned his writ.”

“Today’s conventional wisdom is that the Iraq war was an unmitigated fiasco that squandered American lives and treasure for the sake of a goal that wasn’t worth the price. It’s certainly true the Iraq war is a cautionary tale about the difficulty democracies have in sustaining lengthy military campaigns for any goal short of national survival.

“What’s also true, however, is that the war came about because the crisis of Iraq was allowed to fester for a decade, because Saddam was a real menace, and because a world in which he had been allowed to survive would have been far worse for America and the region. The men and women who fought and died removed a grave threat to the Middle East and to America.

“As long as the U.S. remains a great power, it will eventually have to fight such a war again. When that day comes, let’s hope our political and military leaders will have learned the right lessons from this bitter but necessary war.”

“With the growing drumbeat of bombings and assassinations that the Maliki government has blamed on cells of Sunni extremists, like the attacks on Tuesday that killed dozens of people in Baghdad [Ed. at least 65, for which al-Qaeda in Iraq claimed responsibility], there are many Iraqis who fear that the country is headed back toward civil war. They remember with horror the bloody struggles between Shiite and Sunni factions that swept the country’s heartland before the steadying impact of the American military surge of 2007 that set the stage, ultimately, for the withdrawal in 2011.

“So far the violence...is a long way from the 3,000 who were dying every month at the nadir of the American occupation. But there are ominous portents, not least in Syria, that things could get very much worse.

“For Iraq, the events in Syria have deep repercussions, centering on the fact that the Syrian opposition forces are seeking to achieve a mirror image of what occurred a decade ago in Iraq. This time, the surging revolt is mostly Sunni, and its hated target is President Bashar al-Assad, a member of the Alawite offshoot of Shiism and standard-bearer for Syria’s minority Shiites.

“With Iraq’s Sunnis concentrated in two provinces, Anbar and Nineveh, that share a lengthy desert border with Syria, Mr. Maliki himself has warned that a Sunni government in Damascus could be enough to encourage a Sunni attempt to seize back power in Baghdad.

“Should that occur, it might mean that the 2003 invasion did not, after all, end the centuries of political primacy Iraq’s Sunnis had enjoyed, and history would be all the more likely to consign the American occupation to the roll-call of imperial ventures – by the Macedonians, the Persians, the Ottoman Turks and the British, among others – that have disappeared over the millenniums beneath the sands of Iraq.”

Turkey: Jailed Kurdish leader Abdullah Ocalan ordered his fighters to stand down, withdraw from Turkish soil and move into politics in a bid to finally end a conflict that has left 40,000 dead.

Ocalan, who has been jailed since 1999, said in a statement: “Let the guns fall silent, let ideas speak. The time has come for our armed elements to withdraw beyond the border...This does not mean giving up this struggle. It means starting a new phase.”

China: Xi Jinping wasted no time in taking his first foreign trip and he significantly chose Russia, where he is expected to push for increased oil and gas supplies and reaffirm warm bilateral ties on the three-day state visit. Dozens of agreements on the energy front are to be signed as Xi meets with both President Putin and Prime Minister Medvedev. Trade between the two hit a record $88.2 billion last year, up 11.2%. 

China and Russia hold similar views on issues from Syria to North Korea and Iran. As one Russian analyst told the Moscow Times, “Politically, Russia and China don’t have any problems right now. Absolutely none.”

When I posted last time I hadn’t seen all the stories on Xi’s first speech as head of state to the National People’s Congress last weekend.

Xi said he would fight for “the great renaissance of the Chinese nation,” calling for greater national unity and stressing that economic development would remain the ruling Communist party’s priority.

Xi also told the country’s military it needed to improve its ability to “win battles and...firmly protect national sovereignty and security.”

As for new Premier Li Keqiang, who under China’s system is supposed to have primary responsibility for the economy, in his first news conference he declared hacking and cyberattacks “a world-wide problem....China itself is a main target of such attacks. I think we shouldn’t make groundless accusations against each other, and spend more time doing practical things that will contribute to cybersecurity.”

In other comments, Li stressed: “Reform concerns the destiny of our country and the future of our nation.”

He vowed stronger support for migrant workers in the cities and to strip power from the government and spread the benefits of the nation’s expansion.

In his first overseas trip since becoming U.S. Treasury Secretary, Jack Lew met with both Xi and Li in Beijing in what were described as constructive talks. Xi was quoted as saying:

“I attach great important to China-U.S. relations, and am willing to work with the U.S. side to jointly advance the cooperative partnership.”

Separately, a senior Chinese military official told Tokyo’s Kyodo News agency that China had indeed locked its radar on a Japanese destroyer during a dispute in the East China Sea earlier this year. The official said it was an “emergency decision” and not a planned action and was taken by the commander of the frigate.

North / South Korea: Officials in Seoul traced a major hack attack on the South’s three major television networks and three banks to a server in China, that while not as yet proved, certainly appears to have been used by North Korean hackers.

As reported by the South China Morning Post and Reuters:

“Jang Se-yul, a former North Korean soldier who went to a military college in Pyongyang to groom hackers and who defected to the South in 2008, estimates the North has some 3,000 troops including 600 professional hackers in its cyber unit....

“The North’s professional ‘cyber-warriors’ enjoy perks such as luxury apartments for their role in what Pyongyang has defined as a new front in its ‘war’ against the South, Jang said.

“ ‘I don’t think they will stop at a temporary malfunction. North Korea can easily bring down another country in a cyber-warfare attack,’ Jang said.”

Lee Dong-hoon, a security expert at Korea University in Seoul, summed it up.

“North Korea is able to carry out much bigger attacks than this incident such as stopping broadcasts or erasing all financial data that could panic South Korea.”

France: Former President Nicolas Sarkozy has been placed under formal investigation over claims his 2007 election campaign received illegal donations from L’Oreal heiress Liliane Bettencourt, now aged 90. Sarkozy is accused of taking advantage of the “vulnerable” Bettencourt. It is alleged she gave 15,000 euros in cash to Sarkozy’s aides during his campaign to become president.

And IMF managing director Christine Lagarde’s home was raided as part of an investigation into her time as a French politician and her role in approving a 403 million euro payment to controversial businessman Bernard Tapie, who apparently agreed to support Sarkozy in the 2007 election in return for help with a lawsuit he had launched against the State. Lagarde was finance minister at the time. My cursory reading of the case leads me to believe Lagarde will be forced to step down from the IMF.

Random Musings

--From Army Times, March 25... “About 45% of today’s veterans are filing disability claims with the VA, far more than veterans of past wars. Moreover, today’s vets are filing much more complex claims. On average, today’s vets claim eight specific disabling conditions; the average is three for Vietnam-era veterans. Although its health care budget has grown significantly in recent years, VA still struggles to keep up with the influx of claims. The average time to complete a claim rose to 262 days last year; in 2009, it was 161 days.” [Emphasis mine.]

Research from Harvard University “suggests the two wars may ultimately cost an additional $600 billion to $1 trillion in veterans’ benefits alone.”

We are doing a spectacular job of saving troops on the battlefield, “but those advances also mean more troops return home with life-altering disabilities that will require millions of dollars in care for decades to come.”

--A CNN/ORC International poll indicates President Obama’s job approval rating is just 47%, the lowest since September.

“Please, let us be protectors of creation, protectors of God’s plan inscribed in nature, protectors of one another and of the environment.”

“Today, amid so much darkness we need to see the light of hope and to be men and women who bring hope to others. To protect creation, to protect every man and every woman, to look upon them with tenderness and love, is to open up a horizon of hope. It is to let a shaft of light break through the heavy clouds.”

“A pope cannot choose with whom he wishes to do business. ‘Tragically in every period of history,’ Francis said in his homily, ‘there are ‘Herods’ who plot death, wreak havoc, and mar the countenance of men and women.’

“China has perhaps eight to 12 million Catholics, though the government’s active suppression makes a census difficult. The Chinese put out a statement last week that congratulated Francis then demanded he break diplomatic relations with Taiwan and stop meddling in China ‘in the name of religion.’ In other words, self-deport his institutional authority. It won’t happen.

“I’m happy to have a pope named after Francis of Assisi. Still, let no one doubt that the first pope from the Society of Jesus is acutely aware of how Jesuit superstar Francis Xavier in the 16th century carried Catholicism to India, Japan and China. Four centuries later, a Wikipedia historian of this effort cuts to the chase in the entry’s first sentence: ‘The history of the missions of the Jesuits in China is part of the history of relations between China and the Western world.’

“The practice of religion – sometimes called the freedom of religion – is unavoidably an issue of public policy. Governments either allow it or suppress it....

“The pope has a political base. Don’t be misled by stories that overstate Catholicism’s internal fractures over what’s permissible along the spectrum of sexual behavior. Across the globe, the papacy draws on a 2,000-year-old reservoir of institutional loyalty. The challenge for any pope in our times is to choose where and how to deploy such power....

“John Paul II’s biographer, George Weigel, describes in detail how Karol Wojtyla, on becoming pope in 1978, pushed the Vatican’s never-make-waves bureaucracy to mount a direct challenge to Soviet communism’s claims of moral authority. He won....

“The new pope, famously humble, radiates human warmth. Note well, however, that what Karol Wojtyla and Jorge Bergoglio held in common before the papacy was experience with hostile governments. Give Francis space to get his bearings. The world in time will discover an astute political participant.”

“The Latin American left is still in shock: An apostle of reform and church renewal, Pope Francis is a genuine champion of the poor, offering an inspiring alternative to the demagoguery of South America’s new breed of old Marxists and jackboot Socialists. So leftists rushed to do what they always do: Defame any good man or woman who threatens their power.

“The accusation? That almost four decades ago, under Argentina’s right-wing junta, then-Fr. Bergoglio, a Jesuit administrator, ‘did not do enough’ to free two priests kidnapped by the security services. Spearheaded by a government-backed newspaper, Pagina/12, the leftists imply that he must have been a collaborator.

“That lie was discredited years ago. But it’s all the left has with which to attack this saintly man.

“In fact, Fr. Bergoglio worked behind the scenes to have the two priests released. And they were freed, not ‘disappeared.’....

“Now breaking news from Argentina claims that the government waged a smear campaign among cardinals to prevent Bergoglio’s election as pope.

“Why is Argentina’s dragon-lady president, Cristina Fernandez de Kirchner, so outraged by the choice of a pope from her country, when she should be proud? Because Bergoglio, while shunning party politics, took an uncompromising stand against corruption. And the current Argentine regime is a paragon of thievery, lies and fraud....

“Argentine opinion polls run hugely in favor of the new pope, while the numbers for the president and her economically incompetent and increasingly dictatorial government have been plummeting....

“The new generation of leftist regimes pocking Latin America...dread the possibility that Pope Francis will be as disastrous for Latin leftist regimes as Pope John Paul II was for the Soviet Bloc.

“And they have reason to worry. Not because this pope’s going to play politics, but because he’s a man of authentic faith and integrity....

“Suddenly, there’s a shining alternative vision for the ‘wretched of the earth,’ especially those in still-feudal Latin America. If I were a leftist, I’d be worried, too.

“The lies won’t stop, of course. But none of the left’s propaganda can alter the fact that the rest of us have witnessed the world-shaking elevation to the papacy of a man who loves the lowest of the low and believes that the poor are blessed in spirit.

“You don’t have to be Roman Catholic to be inspired.”

--Kentucky Republican Sen. Rand Paul announced he would grant legal status to illegal immigrants and an eventual pathway to citizenship as he positions himself for 2016. The guy is fascinating. He is determined to keep his name in the news the next two years before most begin to even think about the next presidential election. He is ticking off some conservatives but Paul knows where the party electorate is headed.

“We aren’t going to deport 12 million illegal immigrants. If you wish to work, if you wish to live and work in America, then we will find a place for you.”

“Growing up in Texas, I never met a Latino who wasn’t working. I’ve never met an immigrant looking for a free lunch.”

--Three women were paid to falsely claim in videotaped interviews that they had sex with New Jersey Democratic Sen. Robert Menendez, apparently hired by a Dominican attorney to make the accusations. A motive has not been determined. As for the Daily Caller alleged connection, with a Dominican law enforcement official saying Friday that the lawyer has reported being paid by the Web site to find prostitutes who would lie, the Daily Caller, run by Tucker Carlson, denies they ever paid anyone.

--Former South Carolina Gov. Mark Sanford came out on top of a large field of Republican candidates in the special election for a South Carolina congressional seat. In his first race since leaving the governor’s office two years ago, Sanford had three times as many votes as his nearest competitor in a 16-person field.

But he has a primary runoff on April 2. The winner of that contest faces Democratic nominee Elizabeth Colbert Busch in the May 7 general election; Ms. Busch being Stephen Colbert’s sister.

The House seat is that of Republican Rep. Tim Scott who was appointed to fill the seat of Sen. Jim DeMint, who resigned to head the Heritage Foundation in Washington.

--Support for same-sex marriage among Americans is at an all-time high of 58%, according to a new Washington Post-ABC News poll. As recently as 2010, opponents of same-sex marriage outnumbered supporters. As recently as 2006, they outnumbered them by a double-digit margin, 58% to 36%, a startling reversal. 81% of adults between the ages of 18 and 29 support such unions.

Even among Republicans, a slim majority of those younger than 50 now support it.

--New observations from the European Space Agency’s $900 million Planck space probe indicate the universe is 80 million years older than previously thought. As reported by the AP:

“The findings bolster a key theory called inflation, which says the universe burst from subatomic size to its now-observable expanse in a fraction of a second.”

Good lord! Here I thought inflation was New York Jets tickets rising from $75 to $80!

Anyway, the universe is now gauged to be 13.81 billion years old.

--NASA administrator Charles Bolden said this week, “We are making marked progress in assessing the risk to our planet from smaller objects that could produce regional disasters.” Testifying before a House committee, Bolden added, “(Still), smaller objects, such as the recent impact in Russia will always be difficult to detect and provide adequate warning.”

So I recommend you continue to sleep with one eye open.

Pray for the men and women of our armed forces...and all the fallen. Our thoughts and prayers go out to the families of the seven Marines killed in a training exercise in Nevada.

Gold closed at $1606
Oil, $93.85

Returns for the week 3/18-3/22

Dow Jones -0.01% [14512...down 2 points]
S&P 500 -0.2% [1556]
S&P MidCap -0.2%
Russell 2000 -0.6%
Nasdaq -0.1% [3245]

Returns for the period 1/1/13-3/22/13

Dow Jones +10.7%
S&P 500 +9.2%
S&P MidCap +11.7%
Russell 2000 +11.4%
Nasdaq +7.5%

Bulls 47.4
Bears 18.6 [Source: Investors Intelligence]

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

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Brian Trumbore

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