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08/17/2013

For the week 8/12-8/16

[Posted 12:00 AM ET]

Wall Street and Washington

It was a miserable week for Planet Earth, witness the carnage in Egypt, the ongoing civil war in Syria and al-Qaeda’s rapidly growing presence in Iraq, all over again. I was struck how during a second straight losing week on Wall Street, market pros said virtually zero about events in Cairo but just give it more time. My focus on international affairs is largely about what can kill confidence and after a while the drumbeat of depressing pictures will indeed impact sentiment.

Heck, it’s not as if the American people are currently happy with their lot in life, or the state of the economy. A Gallup Poll at week’s end got a lot of coverage as the survey showed President Barack Obama’s approval rating on his handling of the economy having fallen to 35% from 42% in early June. And Gallup collected its data before this past week’s market swoon.

As the Wall Street Journal editorialized:

“(The) Gallup numbers suggest that the most potent indicator is what real people feel living in the real economy. That would be the economy that continues to grow, as it has for more than four years of ‘recovery,’ at about 2%, and well below that for the last nine months.

“The distance between Mr. Obama’s below-2% growth rate and the U.S. economy’s historic growth trend of over 3% explains why the public is so underwhelmed by his stewardship with three-and-a-half years left to go in his Presidency.”

The Journal does offer an antidote: “A clean reform of personal and corporate taxes led by the President. Our expectation that Mr. Obama will embrace this: below 2%.”

As second quarter earnings season winds down, with revenues flat for S&P 500 companies and the bottom line, earnings, reflecting putrid growth of around 2%, with the top line not expecting to improve much if at all in the second half, it is clear many market participants finally got religion on valuation. Forget my belief sentiment will only worsen from here as the Middle East’s conflagration spreads; the fact is any upside for stocks will be limited by corporate fundamentals. 

In fact, look back on the past four weeks’ reports and you’d be hard-pressed to remember more than a handful of companies issuing truly optimistic outlooks.

This week you certainly didn’t get that from the likes of Cisco Systems, Wal-Mart, Macy’s and Nordstrom’s, all of which guided lower for the second half on the revenue front in issuing cautious statements. Wal-Mart’s U.S. same-store sales, for example, actually declined 0.3% in the quarter. There is real uncertainty just how strong the back-to-school season is among all retailers, while in the case of tech bellwether Cisco, CEO John Chambers said the “economic recovery is slower and more inconsistent” than they thought it would be.

Even Deere & Co., in handily beating the Street’s earnings forecast, warned that with reduced prices for crops, in some cases such as with corn significantly lower, agricultural equipment sales going forward will suffer.

But there was some good news. Jobless claims hit a nearly 6-year low, Europe’s economy emerged from recession (more in a bit) and the Treasury Department reported that with two months to go in the fiscal year, the budget deficit was $607 billion, with a Congressional Budget Office estimate of $642 billion for the full year, ending Sept. 30, vs. $1.08 trillion for F-2012, and the smallest since 2008’s $458 billion. Government revenues have risen 14%, while spending has declined due to the sequester.

Yes, the sequester has been a success.

Stephen Moore / Wall Street Journal

“The biggest underreported story out of Washington this year is that the federal budget is shrinking and much more than anyone in either party expected.

“Consider the numbers: According to the Congressional Budget Office, annual outlays peaked at $3.598 trillion in fiscal 2011. After President Obama’s first two years in office, many in Washington expected that number to hit $4 trillion by 2014. Instead, spending fell to $3.537 trillion in fiscal 2012, and is on pace to fall below $3.45 trillion by the end of this fiscal year. The $150 billion budget decline of 4% is the first time federal expenditures have fallen for two consecutive years since the end of the Korean War....

“The sequester cuts in annual budgets for the military, education, transportation and other discretionary programs have also been an underappreciated success, with none of the anticipated negative consequences.

“Discretionary spending soared to $1.347 billion in fiscal 2011, according to the CBO, but was then cut by $62 billion in 2012 and another $72 billion this year. That’s an impressive 10% shrinkage. And these are real cuts, not pixie-dust reductions off some sham baseline....

“But the fiscal story isn’t all rosy. The major entitlements remain on autopilot and are roaring toward insolvency. Thanks in large part to Mr. Obama’s aversion to practical fixes, the Congressional Budget Office calculates that through July of this year Social Security, Medicare and Medicaid spending are up $73 billion from just last year. This doesn’t include Obamacare, which is scheduled to add $1 trillion of new costs over the next decade.

“So the fiscal progress reported here is no excuse for complacency. But it does call into question the wisdom of a government-shutdown confrontation over the budget this fall or a debt-default showdown that runs the risk of suspending the spending caps and sequester and revitalizing an increasingly irrelevant president.”

[In light of the rapidly deteriorating military situation in the Middle East, however, look for further sequester cuts in defense to be questioned in a big way. Defense Secretary Hagel has one plan that would effectively reduce the Army by 110,000, or 1 in 4 active duty troops. (Or you can keep more troops but reduce their capability if the cuts in future years remain in place.) Gen. Ray Odierno, Chief of Staff of the Army, said if he was asked to deploy 20,000 today, he’s not sure they’d be trained to the right level. In other words, we are one crisis away from potential disaster. I have always been one who believes we can slash defense spending, especially because of the outrageous procurement issues and cost overruns on big-ticket items, many of which are simply not needed. But we must maintain a certain force level that allows us to deal with conflicts both East and West. For starters...think Islamists taking out one of Pakistan’s nuclear facilities and gaining control of some nukes, let alone future issues regarding Iran, or a conflict in the South China Sea.]

Looking at all of the above, what does the Federal Reserve do when it next gathers Sept. 17-18? That’s the ultimate question, after all. Does it begin to taper its bond-buying? Some Fed governors have been saying the past few weeks the Fed should; others say there simply isn’t enough data to begin doing so (and won’t be by the time of the FOMC confab).

I think the Fed should begin to taper, but given the poor earnings news this week, particularly in terms of forecasts by leading retailers, I don’t see how the Fed can and keep its credibility. And with interest rates rising anew this week, and mortgage rates to follow, a big pillar of the economic recovery, housing, has to be questioned in terms of the sustainability of its rebound. Certainly Friday’s housing starts figure was lackluster at best and below expectations.

So, yes, the Fed needs more data. But whereas in the past a continuation of the easy money flow would be welcomed by the equity markets, should the Fed stand pat this time it will also be a sign for stock jocks that obviously the Fed’s policies aren’t working. Jobless claims may have hit a five-year low this week, but the makeup of the job market is dreadful.

Europe

As expected, the official statistics arm of the European Union, Eurostat, revealed its flash estimate for second quarter GDP and it came in at 0.3% for both the European Union and the Euro Area 17 compared with Q1. In the first quarter, the numbers were -0.1% and -0.3%, respectively. The eurozone had contracted six consecutive quarters until now.

So the EA is officially out of recession, led by Germany, up 0.7%, and France, up 0.5%. The U.K. saw growth of 0.6%.

But Spain’s economy fell 0.1% in the quarter, Italy’s 0.2%, the Netherland’s 0.2% and Cyprus’ 1.4%.

Portugal’s economy rose 1.1%, though this is but a temporary blip from what I understand.

And back to Germany, everyone believes growth will slow in the second half, blaming slow global growth and lagging domestic investment. It also seems the 0.7% print for Q2 was juiced by inventory rebuilding.

Greece did report a budget picture better than expected, but GDP is still estimated to have declined 4.6% in Q2 (not a Eurostat figure).

So looking at the big picture, there is some cause for optimism in the EA 17 and EU 27, beginning with the July composite for both services and manufacturing already having been reported to be above 50, a good start to Q3.

But unemployment remains sickeningly high, government debts are still rising, banks are not lending (especially to small- and medium-sized businesses on the periphery) and it’s clear the likes of Greece, and probably Portugal, will require further bailouts.

And not to beat a dead horse, which I shamelessly admit to having done on this topic for months and months, but everyone and their mother knows the continent is on hold when it comes to making the really big decisions, such as on a banking union, until after the German election Sept. 22. For example, German Chancellor Merkel, who seems assured of victory even if the composition of her eventual coalition is somewhat hazy, has been accused of misleading the German public when it comes to the topic of Greece and further bailout support, and/or debt relief, writedowns on the paper held by Germany and others.

The Economist

“An orchestrated hush has descended over the euro area as Angela Merkel, the German chancellor who conducts its troubled band of 17 states, campaigns for a third term.....The calm also stems from signs that the eurozone economy may gradually be emerging from recession. But discord will reappear after the poll as it becomes clear that Europe’s bailout programs won’t be unwound harmoniously and that more big bills are on their way.”

And it’s not just about Greece. It is expected that Ireland will be exiting one bailout program for another.

But when it comes to Greece, a leaked report from the Bundesbank reportedly warns of the “extremely high” risks that the current 240 billion euro bailout for the country would fail. Also, as reported by David Charter of the London Times, “The Bundesbank report described as ‘politically motivated’ a decision by the EU and the IMF to approve the latest 5.8 billion installment of Greece’s bailout last month....Greece’s performance was ‘hardly satisfactory’ and there were major doubts about its ability to implement essential reforms, the report added.”

Editorial / London Times

“The eurozone is at last out of recession. It is not, however – or at least not yet – out of its crisis. That will require tackling the structural weaknesses of a currency union that was misconceived in the first place. Mitigating them will at least be easier if the eurozone economy collectively is expanding, as it is now, rather than contracting....

“Currency union was supposed to create convergence and stability. Instead it has created divergence and discord. Southern European economies with historical problems of high inflation and weak growth have been yoked together with economies (notably Germany) that have historically strong public finances and credibility on inflation. Currency union made it, by definition, impossible for high-cost economies to gain competitiveness through devaluation. Yet the architecture of the eurozone lacked a mechanism for fiscal transfers across national boundaries to deal with economic shocks....

“The eurozone is paying a heavy price for these failures of a scheme driven more by politics than by economic rationality. The crisis has no common root, for the weaker economies all have a slightly different mix of problems. Greece, for example, had chaotic public finances, whereas Italy had a long-term problem of weak growth rates. The crisis has, however, had a common outcome for the eurozone periphery: a loss of financial market confidence in these countries’ solvency.

“Lacking the mechanism of devaluation, the eurozone can recover only by moving towards a more centralized fiscal mechanism....That course will be tough but, to borrow a phrase, there is no alternative.”

Christopher Thompson / Financial Times

“Europe’s biggest banks will have to cut 661bn euro of assets and generate 47bn of fresh capital over the next five years to comply with forthcoming regulations aimed at reducing the likelihood of another taxpayer funded bailout.

“The figures form part of an analysis by the UK’s Royal Bank of Scotland – which singles out Deutsche Bank, Credit Agricole and Barclays as the banks most in need of fresh capital – highlighting that five years on since the financial crisis, Europe’s banks are still ‘too big to fail.’....

“The burden is greatest on smaller banks, which need to shed 2.6 trillion euro from their balance sheets, raising fears that lending to the region’s small- and medium-size enterprises will be sharply reduced as a result.”

My point all along is that when Europe’s economy bottoms, that doesn’t mean it’s then back off to the races. Far from it. I submit the above as evidence of why I will be right.

One last item concerning the U.K. I have been promoting the recovery here, saying Britain was easily 6-9 months ahead of the eurozone in getting its act together.

But while an election in the U.K. is still almost two years away, you are beginning to see the shape of the campaign as the opposition Labour Party requested a wage study that showed a decline of 5.5% in average hourly earnings since mid-2010, while Germany’s rose 2.7% over the same period. Labour is thus saying “working people are worse off under the Tories.”

Street Bytes

--Stocks declined across the board for a second straight week, with the Dow Jones, down 2.2% to 15081, having its worst week in 14 months. The S&P 500 lost 2.1% and Nasdaq 1.6%.

Rising interest rates, poor corporate guidance and fears of Fed tapering trumped any good news on the economy such as on the jobless claims front.

--U.S. Treasury Yields

6-mo. 0.07% 2-yr. 0.34% 10-yr. 2.83% 30-yr. 3.85%

At 2.83%, the 10-year is at its highest yield since July 2011.

Producer prices for July were unchanged, up 0.1% ex-food and energy. Year-over-year the PPI is up 2.1%, 1.2% on core. For the month consumer prices rose 0.2%, ditto on core, while for the 12 months ending July, the CPI rose 2.0%, 1.7% ex-food and energy.

--Foreign selling of U.S. long-term portfolio assets rose for a second straight month in June, an outflow of $66.9 billion after a $27 billion net decline in May, according to the Treasury Department.

Private foreign investors were net sellers of all categories of assets – government and corporate bonds and stocks.

Total net selling of Treasuries in June was an all-time high of $40.8 billion, according to data compiled by Bloomberg.

China remains the biggest foreign owner of U.S. Treasuries though its holdings fell $21.5 billion to $1.276 trillion. Japan, the second-largest holder, lowered its holdings by $20.3 billion to $1.083 trillion.

--A study out of Peking University alleges China is overstating the size of its economy by at least $1 trillion and that the country has been churning out “willfully fraudulent” inflation and GDP statistics for more than a decade, as reported by the London Times.

Professor Christopher Balding’s research focused on ways in which Beijing authorities dampened down inflation data that create the overstatement of China’s real GDP. And as Balding points out, officials are then using inaccurate data to set policy.

--Japan’s second quarter GDP rose 2.6% on an annualized basis vs. Q1’s 4.1% rate. 3.6% was expected, so the news makes it harder for Prime Minister Abe to hike the sales tax come next April (decision on same to come in September).

--The Mexican government announced a reform plan to boost investment in its energy industry. The head of Mexico’s state oil monopoly, Pemex, said the goal is to produce another 1 million barrels a day.

“Pemex, the world’s 10th-biggest oil producer, has over $127 billion of revenues a year but also 160,000 employees, a powerful union, pays virtually all its profits to the government in taxes and has onerous pension obligations equivalent to 8 percent of the Mexican gross domestic product.” [Financial Times]

Pemex’s CEO says the reform will create 500,000 jobs by 2018. But in a recent poll, 65% of Mexicans said they opposed foreign investment in Mexico’s petroleum industry.

President Enrique Pena Nieto’s proposal requires a change to the constitution and it isn’t guaranteed he will receive the needed support.

--In a shocker, the Justice Department suddenly moved to block the merger of American Airlines parent AMR Corp. and US Airways Group Inc. For starters, the department’s legal challenge throws a wrench into AMR’s plans to quickly emerge from bankruptcy.

American and US Airways said they would mount “a vigorous and strong defense” in their effort to complete the combination that would create the world’s largest airline. Any trial would delay closing the deal until year-end at best.

Attorney General Eric Holder, in a statement, said “This transaction would result in consumers paying the price – in higher airfares, higher fees and fewer choices.”

The Justice Department seemed to focus on how the merger would impact passengers at Reagan National Airport, where the combined airline would control 69% of the takeoff and landing slots.

--Wal-Mart said it expects net sales to grow just 2% to 3% in 2013, compared with a previous range of 5% to 6%.

--Macy’s reported sales fell 0.8% in the quarter and cut its profit forecast for the year. CFO Karen Hoguet said, “We believe much of our weakness is due to the health of the consumer and to the fact that the consumer is choosing to make purchases in non-department store categories such as cars, housing and home improvement.”

--In announcing its earnings for the quarter, Cisco Systems announced that its revenues in the current quarter would be at the lower end of analysts’ forecasts and that it was cutting 4,000 jobs, or about 5% of its workforce.

--Second quarter profits at Dell fell 72%, though earnings beat expectations. The figures came amid Carl Icahn’s bid to oppose founder Michael Dell’s efforts to take the company private. Icahn says Dell’s offer to shareholders significantly undervalues the company.

--As noted above, Deere & Co. forecast a decline in U.S. farm revenue that could easily translate into slower sales of agricultural equipment. The price of corn is a prime example, down 40% in the past year while soybeans have declined 20% on forecasts of higher production.

--Shares in Apple soared with word Carl Icahn had a “nice conversation” with Apple CEO Tim Cook, in Icahn’s own words, and that the investor was amassing a “large position” in Apple in the hopes of a massive share buyback that Icahn believes can push the share price back to $700.

The stock closed Friday, Aug. 9 at $454. It closed yesterday at $502.

Separately, I bopped over to the nearby Mall at Short Hills to see the traffic at the Apple store there and at 1:00 p.m. on a Tuesday, there were more employees than customers.

[Actually, I hadn’t been to this mall since before Christmas, for no particular reason, and didn’t realize there is a Tesla showroom there!]

--AOL CEO Tim Armstrong caught major heat for firing an executive while on a conference call with more than 1,000 employees from the company’s Patch unit. Patch is the troubled network of local news sites that has long been a drag on the company’s stock price and Armstrong, in preparing the troops for a downsizing at the Patch unit, lashed out at Patch’s design director, Abel Lenz, who was videotaping the meeting. “Abel, you’re fired. Out!”

Armstrong apologized in a letter to the entire AOL staff, calling his action a mistake.

400 of 1,000 Patch sites are slated to be shut down. Up to 500 employees will lose their jobs.

--Activist investor Bill Ackman resigned from the board of J.C. Penny after an unusual public rebellion against his fellow directors. Ackman’s Pershing Square Capital management is Penney’s biggest investor with a nearly 18% stake. As an insider, Ackman is prohibited from selling his shares until at least the company’s next earnings release, slated for this coming week.

--Total U.S. household debt, including mortgages, credit cards and auto loans, fell by $78 billion in the second quarter to $11.15 trillion, the lowest level since 2006, according to the Federal Reserve Bank of New York.

Credit-card balances actually increased by $8 billion, suggesting growing confidence in the economic recovery....at least by this metric.

--Federal prosecutors accused two associates of “London Whale” trader Bruno Iksil of attempting to hide hundreds of millions of dollars in losses from the former JPMorgan Chase trader’s derivatives transaction that ended up resulting in a $6.2 billion loss; specifically making false filings with the SEC, conspiracy to falsify books and records, and conspiracy to commit wire fraud.

Phone calls and emails reveal that Iksil was pushing back against his boss, Javier Martin-Artajo. Iksil wasn’t charged with wrongdoing and struck an immunity agreement while cooperating with investigators.

The two associates have not has yet been arrested, with both residing in Europe.

U.S. Attorney Preet Bharara, playing off JPMorgan CEO Jamie Dimon’s initial ill-considered comment, said:

“This was not a tempest in a teapot but rather a perfect storm of individual misconduct and inadequate internal controls.”

Bharara added:

“We happen to live in a time when not just one bank but one trader within one bank can do catastrophic economic harm in practically the blink of an eye. And that is why prosecutors need to be even more aggressive, regulators need to be even more vigilant and...companies themselves need to pay closer attention to the culture that they create.”

Bharara declined to say whether his office has uncovered wrong-doing among some of JPM’s higher-level executives.

--According to DataQuick, Southern California’s housing market took a breather in July, with prices remaining flat from a month earlier. This was after the median price in the six counties rose 4.6% in June over May and 28% year-over-year.

--Separately, an analysis by economists at Goldman Sachs reveals that more than half of all homes sold last year and thus far in 2013 were purchased with cash.

Before the housing crash, the figure is estimated to have been around 20% of all homes sold being “all-cash” sales.

--Interesting piece by Bill Saporito in TIME concerning Las Vegas. Although the number of tourist visits has increased from 39.2 million in 2007 to 39.7 million in 2012, gross gambling revenue declined from $10.9 billion to $9.4 billion over the same period of time.

And due to the addition of adding 13% more rooms during the recession, the average daily room rate has declined from $132 in 2007 to $108 last year.

--Nissan Motor Co. announced it broke ground on a logistics “park” at its Canton, Mississippi, plant that will result in an additional 800 workers between its hiring and that of suppliers as a result of the activity.

--H.J. Heinz Co. is laying off 600, including 350 jobs in Pittsburgh, where the company is based, leaving 800 there.

--KFC parent Yum Brands Inc. reported a further slide in sales in China last month, down a much steeper-than-expected 13% as the company battles a food safety scare and the bird flu outbreak.

--Speaking of bird flu, a Chinese woman infected with the H7N9 virus became the 45th victim this week out of 134 reported cases on the mainland.

--Interesting piece in TIME by Kate Pickert on Obamacare and the scams that are emerging. Experts warn the debut of heath care exchanges “could create a prime moneymaking opportunity for illegal scammers and others looking to capitalize on consumer confusion. ‘There are people licking their chops and saying, ‘A sucker is born every minute,’’ says Elizabeth Abbott of the consumer group Health Access California.”

You will have the outright cons and then “insurance-like plans that give the impression of offering more coverage than they actually provide. Regulatory agencies are already on high alert for fraud.”

Also be wary of “discount medical plans” that promise lower health care costs in exchange for recurring fees. They will imply comprehensive coverage, “but the reality is far more limited.” When people get sick, they’re screwed.

--In a follow-up to its investigation into the Los Angeles Department of Water and Power, the Los Angeles Times reported DPW employees earned $77.3 million in extra pay for things such as overtime, laying cement or working in bad weather in the first six months of the year, or $155 million on an annualized basis, for roughly $15,800 in average extra wages for each DWP worker.

--Websites belonging to the Washington Post, CNN, TIME and the New York Post were attacked by supporters of Syrian President Bashar al-Assad. The New York Times’ website was also down for a spell but the company said it was an “internal issue.”

--The head of Rio de Janeiro’s 2016 Summer Olympics project resigned just two weeks before a visit to Rio by inspectors from the IOC. To state the obvious, plans are hopelessly over budget and behind schedule.

--I love billionaire inventor Elon Musk, but his plans for high-speed transit, a $10 billion Hyperloop between San Francisco and Los Angeles, which would cut transit time to a half-hour, was itself way over-hyped.

Foreign Affairs

Egypt: Let’s review some of the past few weeks’ events.

Week in Review 8/3/13

“Speaking from Pakistan on Thursday, Secretary of State Kerry praised Egypt’s military ouster of President Mohammed Morsi.

“ ‘In effect, they were restoring democracy,’ Kerry said. ‘The military did not take over, to the best of our judgment – so far, so far – to run the country. There’s a civilian government.’ Kerry then mumbled something about being concerned over the violence.

“Egypt’s cabinet ordered a police crackdown on protesters, this after over 100 members of the Muslim Brotherhood have been killed since Morsi’s ouster...

“The cabinet announced protest camps at two Cairo squares posed a ‘threat to national security.’

“ ‘The government has decided to take all necessary measures to confront and end these dangers, and tasks the interior minister to do all that is necessary in this regard, in accordance with the constitution and law,’ read a statement.

“Mohammed Badie, the supreme leader of the Brotherhood who is a fugitive, attacked Gen. al-Sisi, the head of the armed forces, saying he was leading a ‘bloody regime’ and urging his followers to stand fast.”

Week in Review 8/10/13

“Thousands of supporters of ousted Islamist president Mohammed Morsi continue to defy government calls for them to go home, but as I go to post there is no sign as yet the government is preparing to carry out its threat to remove them from their protest camps in Cairo as they continue to demand Morsi’s reinstatement.

“But in talking of an impending showdown with the Muslim Brotherhood, a government daily on Thursday (8/8) ran the headlines ‘Final warning’ and ‘The hour of battle approaches.’....

“U.S. Deputy Secretary of State William Burns left Cairo on Tuesday without having made any progress.

“U.S. Republican Senators John McCain and Lindsey Graham were also in Cairo this week. McCain said in one interview, ‘Oh my God, I didn’t know it was this bad. These folks are just days or weeks away from all-out bloodshed.’....

“Meanwhile, in an interview with the Washington Post...Gen. Abdel Fatah al-Sisi said of the U.S. government:

“ ‘You left the Egyptians. You turned your back on Egyptians, and they won’t forget that. Now you want to continue turning your backs on Egyptians?’

“Gen. Sisi is upset the United States is not fully endorsing what he describes as ‘a free people who rebelled against an unjust political rule.’

“Sisi said Defense Secretary Chuck Hagel calls him ‘almost every day’ but that President Obama has not called since Morsi’s ouster.”

So the stage was set. Wednesday morning the government launched its crackdown on the two main Brotherhood encampments in Cairo. Violence spread to other parts of the country. The Brotherhood was armed, inflicting casualties of its own, but in the end it was a massacre...over 600 dead in Wednesday’s battles. Another 100+ in follow-on attacks Friday. Christian churches around the country were torched by the Brotherhood. 

On Wednesday, Sec. of State Kerry said the following at the State Department: “The promise of the 2011 revolution has simply never been fully realized. And the final outcome of that revolution is not yet decided. It will be shaped in the hours ahead, in the days ahead. It will be shaped by the decisions which all of Egypt’s political leaders make now and in these days ahead.”

Republican Senator John McCain tweeted Wednesday: “As we predicted and feared, chaos in Cairo. Sec. Kerry praising the military takeover didn’t help.”

Republican Sen. Lindsey Graham: “I fear that without a quick reversal of current trends, Egypt may be on its way to becoming a failed state.”

Mohamed ElBaradei, the Nobel laureate who was appointed vice-president for foreign relations after Morsi was forced out, resigned in protest at the violence.

In his letter of resignation, ElBaradei said: “I can no longer bear responsibility for decisions that I do not agree with, and whose repercussions I dread. I cannot be responsible for a single drop of blood before God, my conscience, and my people, especially as I believe the dropping of that blood could have been avoided.”

President Obama, in canceling joint U.S.-Egypt military exercises scheduled for next month, gave no indication on Thursday on whether the U.S. planned to cut off its $1.3 billion in annual military aid to the country.

“While we want to sustain our relationship with Egypt, our traditional cooperation cannot continue as usual when civilians are being killed in the streets and rights are being rolled back,” the president said, speaking from his vacation retreat.

The Egyptian interim government responded saying the country is facing “terrorist actions targeting government and vital institutions” by “violent militant groups.”

The statement also warned that Obama’s position “while it’s not based on facts can empower the violent militant groups and encourage them in its anti-stability discourse.”

Gideon Rachman / Financial Times

“The bloodshed on the streets of Egypt is a disaster for the country. It also creates a desperate dilemma for the West....

“Beyond the immediate tragedy, the killings in Cairo end the prospect of any reconciliation between the military and the Muslim Brotherhood. They also end any hopes for a democratic Egypt, at least in the immediate future. That vision – which seemed almost irresistible after the overthrow of Hosni Mubarak in early 2011 – is now over....

“The U.S. and Europe are also in a huge quandary. Some pose the dilemma as a face-off between principles and interests. According to this theory, Western principles point to support for democracy and a severance of ties with the military government. Western interests point to tacit support for the repression of an Islamist government.

“But, in reality, things are more complicated than that. If the repression leads to a resurgence of al-Qaeda and the Islamist threat, it is emphatically not in western interests. Backing a violent, anti-democratic coup would also rip the coherence out of any western approach to the Middle East – or indeed the world. If the U.S. and Europe do not harshly condemn events in Egypt, how can they continue to condemn the Assad regime’s war in Syria? It is true that there is a question of scale. Around 100,000 may have died in Syria – while the death toll in Egypt so far probably runs into the hundreds. But the principle of violent repression seems similar. A failure to convincingly repudiate the military government in Egypt also creates dilemmas beyond the Middle East. How can the U.S. or Europe condemn milder crackdowns in Russia or China, if they tolerate events in Egypt?

“Yet severing ties with the Egyptian military government would pose its own set of dilemmas. The Egyptian economy is teetering and the country is clearly at risk of severe civil strife – or even civil war. If the West simply backs off now, would it find itself as powerless to influence events as it is in Syria? And if so, who or what would fill the vacuum of outside influence? The Saudis, the Qataris, a revived Brotherhood, al-Qaeda?

“There simply are no easy answers to these questions, which is why all that was heard from western capitals – as events unfolded in Cairo – was confused spluttering.”

Fouad Ajami / Wall Street Journal

“In this Egyptian drama, the United States did not give the best of itself. When the Obama administration could not call the coup d’etat by its name, we put on display our unwillingness to honor our own democratic creed. Egypt has long been in the American strategic orbit. When our secretary of state opined that the army was ‘restoring democracy,’ we gave away the moral and strategic incoherence of an administration that has long lost its way.”

Ralph Peters / New York Post

“With its blundering, fickle, late-in-the-day support for whoever appeared to be gaining the upper hand, the Obama administration has managed the remarkable feat of alienating every faction in Egypt. And it’s a sorry day when an American administration abets religious totalitarianism, as this White House did when the ‘democratically elected’ Morsi regime tried to Islamize Egypt’s government and society for keeps.

“There was, indeed, a coup. But not all coups involve tanks. The real coup came after Egypt’s premature, badly flawed election, when Morsi and the Brotherhood excluded all non-Brothers from the political process; curtailed media freedoms and jailed journalists; attacked Christians; and rushed toward an Islamist state that the majority of Egyptians did not want.

“Tens of millions of Muslims took to the streets to protest the Brotherhood’s plunge toward tyranny. Only after attempts to persuade an unrepentant Morsi to compromise failed, did the military move against the regime. The people cheered. 

“Yet our breathtakingly inept ambassador backed the Morsi regime right to the end. That isn’t diplomacy. It’s idiocy....

“Is the Egyptian military an ideal ally? Nope. But it’s a far better bet than Obama’s support of the Muslim Brotherhood turned out to be. 

“The danger now is that the administration and naïfs in Congress will cut aid to the Egyptian military and curl up into a snit. That would only make the Egyptians who want a reasonably free, generally tolerant and ultimately democratic Egypt even madder at us. And Egypt’s the most important Arab country.”

Turkish Prime Minister Recep Tayyip Erdogan said, “Those who remain silent in the face of this massacre are as guilty as those who carried it out,” adding, “If the West does not act sincerely, democracy will be questioned throughout the world.”

Syria: The rebels have launched an offensive against President Assad’s forces in his family’s home province of Latakia and have been accused of killing hundreds of civilians in sectarian revenge attacks. After suffering a string of defeats, most recently in the critically strategic city of Homs, the rebels have been looking to hit Assad “where it hurts most,” opposition sources said. Assad’s Alawite sect comprises about 12% of Syria’s population.

The assault on Latakia has been spearheaded by an al-Qaeda affiliate. In response, the Syrian government has been carrying out airstrikes.

Separately, the leader of Iraq’s semi-autonomous Kurdistan region, Massoud Barzani, said that Iraqi Kurdistan was “prepared to defend” the Kurdish population caught up in the Syrian war.  Kurds making up 10% of Syria’s population are largely concentrated towards the Turkish border. The Syrian Kurdish militia has been battling the jihadist anti-Assad al-Nusra Front.

Lebanon: A powerful car bomb, probably a suicide attack, killed 24 and wounded nearly 300 in southern Beirut on Thursday, the deadliest single bombing in the country since the 1975-90 civil war.

The blast trapped residents in apartment blocks that were set on fire in the explosion, the area targeted being an Hizbullah stronghold and a further example of the spillover from the Syrian civil war.

A heretofore unknown group calling itself the Brigades of Aisha Umm al-Moemeneen said there would be more attacks and advised Syrians to leave Hizbullah areas of Lebanon.

Hizbullah’s support of Bashar al-Assad has enraged the mainly Sunni opposition. Shia-populated areas of the northern Bekaa Valley have been struck by rockets fired by Syrian rebels from across the border.

But on Friday, Hizbullah leader Hassan Nasrallah vowed his group would continue to support Assad, telling a crowd in a village near the border with Israel:

“If you think that by killing our women, by killing our children, by killing our innocents” opponents will make Hizbullah stop supporting the Syrian government, “you are wrong,” he said. [New York Times]

Meanwhile, the case of the two kidnapped Turkish Airlines pilots took an ominous turn Monday when the families of the nine Lebanese hostages in Syria threatened to abduct any Turkish citizen in Beirut.

Turkey has urged its citizens to leave Lebanon.

[As you can imagine, tourism in Lebanon, as well as Egypt, has dried up, though in the case of the latter, some 50,000 Russians were said to be touring the country this week, as well as 40,000 Brits. No word on how many Americans are there. All are now scrambling to get the heck out.]

Iraq: Al-Qaeda in Iraq is back in a most depressing way, helped in no small part by a flow of weapons and extremists from neighboring Syria. More than 3,000 Iraqis have been killed in just the past few months, including 69 last weekend in a series of car bombings targeting those celebrating the end of Ramadan.

Jordan: It’s been flying under the radar with everything else going on these days but the U.S. has roughly 1,000 troops stationed here and this week General Martin Dempsey, chairman of the Joint Chiefs of Staff, said the mission to help King Abdullah would last years

Iran: The conservative-dominated parliament rejected just three of President Rohani’s 18 nominees for his Cabinet, while Rohani also appointed his predecessor’s foreign minister as new head of the country’s nuclear agency.

Hardliners in parliament had attacked some of Rohani’s nominees for having Western educations and for being close to the opposition, but rejecting only three in the end is a good sign (as far as these things go).

The new foreign minister, Mohammad Zarif, supposedly did postgraduate work at San Francisco State University and obtained a doctorate in international law at the University of Denver. Zarif said he “will not withdraw one iota” in defending Iran’s “nuclear rights” under his leadership.

In the nuclear post is Ali Akbar Salehi, foreign minister under Mahmoud Ahmadinejad.

Rohani, who during the campaign had promised to create more jobs for women, appointed one as his vice-president for legal affairs.

Israel: The Iron Dome missile defense system intercepted a rocket launched at the resort city of Eilat in southern Israel. It was believed to have been fired by militants in Sinai

Afghanistan: Reading my copy of Army Times, the number of U.S. service members killed in Afghanistan hit 2,250. Seven died between July 25-31, as confirmed by the Pentagon.

India / Pakistan: Pakistani Prime Minister Nawaz Sharif promised “restraint and responsibility” in response to escalating clashes with Indian forces in the disputed region of Kashmir. 

Pakistani military officials said an “unprovoked Indian shelling” into Pakistani-controlled territory resulted in the death of one civilian. India was responding to a recent ambush of five Indian soldiers.

Separately, an explosion and fire on an Indian submarine killed 18 sailors.

And India’s finance minister said the country wants to boost imports of Iranian crude after the U.S. State Department exempted New Delhi from sanctions. Iranian crude shipments to India were down 26.5% in the year ended March 31 owing to the sanctions imposed by the U.S. and European Union.

China: I have been writing extensively on the pollution problem here and how I now believe it could lead to the collapse of the government down the road and the Aug. 10 issue of The Economist had a cover story on this very topic, though it is far more optimistic than I am that the government will be able to tackle the humongous issues it faces.

Last weekend the South China Morning Post ran the headline “Pollution-free days of Beijing Olympics now just a happy memory.”

“Five years on, Beijing is notorious for its winter ‘airpocalypse,’ when thick and choking smog lingers in grey skies for months, only eased by occasional strong wind and rain. Most newcomers develop the ‘Beijing cough,’ a dry cough and itchy throat, usually between December and April.

“In the first half of this year, according to official statistics, Beijing’s air quality was deemed safe on fewer than 40% of days – and that is based on mainland standards, not on more stringent levels recommended by the World Health Organization.

“ ‘Beijing’s fast degradation of air quality since 2008...has evolved into a public crisis, as more people worry about the pollution’s health impact,’ says Li Yan of Greenpeace East Asia....

“Even the city’s tourism commission blamed frequent air pollution for a 14.3% year-on-year drop in the number of visitors to the city during the first half of this year.” [Li Jing / SCMP]

Japan: Prime Minister Shinzo Abe did not personally visit the controversial Yasukuni war shrine to mark the anniversary of Japan’s surrender at the end of the war, but he sent an offering, saying Japan would “engrave deeply in our hearts the lessons that we should learn” from conflict.

However, he did not mention Japan’s wartime aggression, which once again ticked off China and South Korea. They liken Japanese leaders’ visits to Yasukuni to laying a wreath at the tomb of Adolf Hitler.

But, yes, Abe seems to have given in to pleas from China not to personally visit the place.

On a different issue...William Pesek / Bloomberg

“Forget Abenomics. Ignore Shinzo Abe’s efforts to rejuvenate Japan’s diplomatic and military clout. Look past the quest to rewrite the constitution. History will judge this prime minister by one thing alone: what he did, or didn’t do, to end the worst nuclear crisis since Chernobyl....

“Fukushima is a growing embarrassment for Japan on the international stage. Oceans don’t have boundaries. Radioactive traces have been found in Bluefin tuna – not to mention on secondhand cars and auto parts imported by Russia from Japan. Another earthquake – a live possibility – could damage Fukushima anew or take out another reactor between now and the 2020 Summer Olympics that Tokyo hopes to host. The world won’t give Japan a pass twice on what would have been a perfectly preventable disaster.

“Analysts are rating Abe on his success in cleaning up Japan’s finances. Posterity will judge him on whether he cleaned up the mess Tepco and the nuclear village have created.”

Russia: President Putin’s disapproval rating has doubled since 2001, according to the Levada Center, but guess what? It’s only up to 22% from 10%. Any U.S. president would kill for that reading.

As for the Moscow mayoral race, supporters of Alexei Navalny were left wondering why police forced their way into a central Moscow apartment to seize what they said were illegal campaign materials. There were reports four were arrested. This came a day after the Prosecutor General’s Office said Navalny’s election campaign was financed from abroad by more than 300 foreign individuals. Navalny trails acting Mayor Sobyanin badly in the polls for the September vote, 67% to 13%.

Zimbabwe: The U.S. has warned Zimbabwe not to sell uranium to Iran, this after the London Times disclosed a Memorandum of Understanding with Tehran to export the material there.

Random Musings

--I have been writing of what should be a major concern for all Americans, the fact that our missile-defense system is sorely lacking.

This week, on a related topic, the Associated Press reported that an Air Force unit overseeing one-third of America’s land-based nuclear missiles failed a safety and security inspection, the second such serious Minuteman 3 mission readiness problem this year. The latest episode was at Malmstrom Air Force Base, Montana, one of three wings that control 450 Minuteman 3 ICBMs. The earlier issue involved the Minot Air Force Base, N.D.

Eugene Fox and Stanley Orman / Defense News

“Two forms of deterrence create security in this unstable world of nuclear and missile proliferation.

“The traditional concept was to make a potential opponent understand that hostilities could not succeed because it would prompt such an overwhelming response the aggressor would cease to exist.

“Later, President Reagan enhanced the concept to include anti-ballistic missile defense, demonstrating that an attack could not succeed and providing more time for assessment before launching a nuclear response.

“Both elements are equally important because deterrence is far from a precise procedure and is highly dependent on the perception that each side has of the other.

“Our fear for some years has been that nations like North Korea and Iran may not be dissuaded from attacking American facilities by the threat of nuclear retaliation. Certainly, terrorist groups to whom either nation might be tempted to pass on offensive capabilities would not be deterred by such threats.

“It is in this environment that effective missile defense assumes the greatest importance, and why the failure of the July 5 test of the Ground-based Midcourse Defense system has sent the wrong message to those we want to deter.”

Fox and Orman point out that this recent failed test, that I wrote of at the time, finally got the attention of Congress, “but where was it over the past five years when two other tests failed?”

“The problem revealed by the recent test failure and the neglect of adequate testing has effectively nullified the enhancement envisaged by Reagan. This leaves our security resting on our nuclear deterrent – an effectiveness that relies on how hostile nations perceive we might react if attacked.

“The reliability of our warhead stockpile also relies on computer simulation, together with breakdown and reassembly of existing warheads. We have previously expressed our concern on the loss of nuclear expertise and capabilities.

“Congress should know that both systems are too reliant on computer simulation and far too short on demonstrated capability.”

--According to an independent study prepared for the Defense Department, the combined public and private security provided at nuclear power plants “is inadequate to defend against a maximum, credible, non-state adversary,” as noted by the Nuclear Proliferation Prevention Project at the University of Texas at Austin.

Alan Kuperman, project coordinator and co-author of the study, said in a statement, “Our civilian reactors prepare only against a much smaller-scale attack, known as the ‘design-basis threat.’

As reported by Bloomberg’s Brian Wingfield, “Risks include the possibility that an intruder could deactivate a nuclear unit’s security systems, drain the cooling pool to expose radioactive waste, or use rocket-propelled grenades to overcome a facility’s defenses, according to the study. It also said terrorists could fly an airplane or drive an explosive-laden boat into a reactor.”

--George Will / Washington Post

“President Obama’s increasingly grandiose claims for presidential power are inversely proportional to his shriveling presidency. Desperation fuels arrogance as, barely 200 days into the 1,462 days of his second term, his pantry of excuses for failure is bare, his domestic agenda is nonexistent and his foreign policy of empty rhetorical deadlines and red lines is floundering. And at last week’s news conference he offered inconvenience as a justification for illegality.

“Explaining his decision to unilaterally rewrite the Affordable Care Act (ACA), he said: ‘I didn’t simply choose to’ ignore the statutory requirement for beginning in 2014 the employer mandate to provide employees with health care. No, ‘this was in consultation with businesses.’

“He continued: ‘In a normal political environment, it would have been easier for me to simply call up the speaker and say, you know what, this is a tweak that doesn’t go to the essence of the law...It looks like there may be some better ways to do this, let’s make a technical change to the law. That would be the normal thing that I would prefer to do. But we’re not in a normal atmosphere around here when it comes to Obamacare. We did have the executive authority to do so, and we did so.’

“Serving as props in the scripted charade of White House news conferences, journalists did not ask the pertinent question: Where does the Constitution confer upon presidents the ‘executive authority’ to ignore the separation of powers by revising laws?’ The question could have elicited an Obama rarity: brevity. Because there is no such authority.”

--I didn’t have enough time last week to comment on President Obama’s proposals to revamp the National Security Agency’s surveillance programs, announced during a Friday afternoon press conference, but as with many of Mr. Obama’s plans, there were few real details. Basically the president wants to add a new advocate for privacy concerns, suggesting the adversary might have a role when the court is evaluating requests for broad data-collection programs.

But any legislation to change the NSA surveillance must go through House and Senate intelligence committees and both are comprised of staunch defenders of the existing program.

On a different facet of Obama’s news conference, 8/9, Joe Davidson / Washington Post:

“(Obama) gave the impression that his executive order could have protected Edward Snowden against retaliation for disclosing sensitive information had the government contractor just done it the right way.

“That’s not quite correct....

“Here’s what the president said; ‘So the fact is that Mr. Snowden has been charged with three felonies....If the concern was that somehow this was the only way to get this information out to the public, I signed an executive order well before Mr. Snowden leaked this information that provided whistleblower protection to the intelligence community – for the first time.  So there were other avenues available for somebody whose conscience was stirred and thought that they needed to question government actions.’

“Here’s the problem: The document Obama signed, a presidential policy directive, PPD-19, does not cover government contractors. Snowden once was employed by the CIA, but he was working for Booz Allen Hamilton – a private firm with a National Security Agency contract – when he released details of the massive surveillance program to the Washington Post and the Guardian in Britain....

“Obama ‘badly misled the American people,’ said Stephen M. Kohn, executive director of the National Whistleblowers Center.’”

But then at week’s end, the Washington Post broke a scathing story alleging the NSA broke privacy rules or overstepped its legal bounds thousands of times each year since Congress granted it broad new powers in 2008.

As reported by the Post’s Barton Gelman, an internal audit turned up some 2,800 incidents within a year, the majority involving unauthorized spying on Americans or foreign intelligence targets in the United States.

Documents had been provided to the Post by Edward Snowden earlier this summer.

“In one instance, the NSA decided that it need not report the unintended surveillance of Americans....

“In another case, the Foreign Intelligence Surveillance Court, which has authority over some NSA operations, did not learn about a new collection method until it had been in operation for many months. The court ruled it unconstitutional.

“The Obama administration has provided almost no public information about the NSA’s compliance record.”

As I’ve been opining, you’re nuts if you trust the government.

--Peggy Noonan / Wall Street Journal

“What is privacy? Why should we want to hold onto it? Why is it important, necessary, precious?

“Is it just some prissy relic of the pretechnological past?

“We talk about this now because of Edward Snowden, the National Security Agency revelations, and new fears that we are operating, all of us, within what has become or is becoming a massive surveillance state. They log your calls here, they can listen in, they can read your emails. They keep the data in mammoth machines that contain a huge collection of information about you and yours. This of course is in pursuit of a laudable goal, security in the age of terror.

“Is it excessive? It certainly appears to be. Does that matter? Yes. Among other reasons: The end of the expectation that citizens’ communications are and will remain private will probably change us as a people, and a country.”

--Daniel Henninger / Wall Street Journal

“Sometimes the planets of politics align. Within days of President Obama’s decision last week to appoint a civil-liberties ‘adversary’ inside the U.S.’s antiterrorism surveillance program, a federal judge created a ‘monitor’ to oversee the New York Police Department’s stop-and-frisk anticrime program. Both these decisions, if allowed to take full effect, run a significant risk that violence will return or increases – as the terrorism of al-Qaeda or as murder and assault in New York City.

“If that happens – and don’t bet against it – a liberal president and a liberal federal judge will have brought back to life one of modern liberalism’s worst nightmares: the belief that Democrats can’t be trusted with national security or the control of violent crime. They’re soft on security.”

--Regarding the NYPD, this week U.S. Judge Shira Scheindlin issued a highly predictable order that New York’s stop-and-frisk tactic had violated the constitutional rights of tens of thousands of New Yorkers.

For someone who is not a resident of the Big Apple, I have written as much as anyone about the city’s crime issue over the past 14 ½ years of ‘Week in Review.’ It’s important. Those of us in the New York suburbs get our news from New York, we head into Gotham all the time for entertainment, and crime, or lack thereof, is at the forefront of discussion.

I have also chronicled in these pages how under the 20-year leadership of Rudy Giuliani and Michael Bloomberg, crime and murder rates have plummeted compared to the crack cocaine horror era of their predecessor, David Dinkins.

Under Mayor Bloomberg, who I explained, again, last week has done an outstanding job in this paramount objective (which is why I disregard his soda jerk stuff, as well as the fact he stole a third term), New York City’s murder rate is at an all-time low.

Enter Judge Scheindlin, who ordered an outside monitor be brought in to oversee the Police Department’s stop-and-frisk methods.

Mayor Bloomberg said: “This is a very dangerous decision made by a judge that I think just does not understand how policing works, and what is compliant with the U.S. Constitution as determined by the Supreme Court.”

Yes, stop-and-frisk targets blacks and Latinos, to the tune of about 87%, because those are the ones committing the serious crime that is occurring in predominantly black and Latino neighborhoods. [97% of the victims are black or Hispanic.]

Liberals in New York decry the policy, saying, incredibly, that the stops are disproportionate.

But Police Commissioner Ray Kelly, who is truly one of the handful of great Americans today, knows to go where the crime is! 

Mayor Bloomberg: “It’s worth remembering that as recently as 1990, New York City averaged more than six murders a day. Today, we’ve driven that down to less than one murder a day. Think about what that change really means: if murder rates over the last 11 years had been the same as the previous 11 years, more than 7,300 people who today are alive would be dead.”

And of course 90% or more of those would have been black or Latino.

Ray Kelly, on Judge Scheindlin’s opinion that the NYPD “adopted a policy of indirect racial profiling.”

“What I find most disturbing and offensive about this decision is the notion that the NYPD engages in racial profiling. That simply is recklessly untrue. We do not engage in racial profiling. It is prohibited by law, it is prohibited by our own regulations. We train our officers that they need reasonable suspicion to make a stop, and I can assure you that race is never a reason to conduct a stop. The NYPD is the most racially and ethnically diverse Police Department in the world.”

Bloomberg has five months to go. You know he wants to go out with the lowest murder rate in modern times for 2013, but while the city is appealing the judge’s decision, this puts that goal at risk.

--Related to all the above, the latest Quinnipiac poll of Democratic New York City primary voters has Public Advocate Bill de Blasio surging into the lead at 30%, with Council Speaker Christine Quinn at 24%, Bill Thompson 22% and A. Weiner with 10%. But a new NBC/Wall Street Journal/Marist survey has Quinn ahead of de Blasio 24-21, which is within the margin of error, with Thompson at 16 and A. Weiner at 12.

De Blasio would be an outright disaster, not that the others wouldn’t either. For starters, he has done absolutely nothing in his political career....nothing!

But he came out with an effective campaign spot featuring his 15-year-old son Dante. De Blasio is married to a black woman, Dante has an expansive afro and talks of his dad. It clearly is influencing voters, both polls having been taken after the ad began airing.

The primary is Sept. 10 and if no one wins 40%, the top two face off three weeks later.

Regarding the Scheindlin ruling, de Blasio said, “Under the Bloomberg administration, with the acquiescence of Ms. Quinn, millions of innocent New Yorkers, overwhelmingly young men of color, have been illegally stopped.”

Oh, please. 

Finally, back to Mayor Bloomberg.

“I worry for my kids and I worry for your kids. I worry for you and I worry for me. Crime will come back anytime the criminals think they’re going to get away with things. We just cannot let that happen.”

As I wrote two weeks ago, ‘short’ New York.

--Kathleen Parker / Washington Post

“Three years out and you’d think the deed was done: Madame President Hillary Diane Rodham Clinton.

“She’s everywhere these days because; (a) It’s August; (b) reporters are bored with President Obama; (c) reporters are bored with Joe Biden; (d) Clintons are never boring.

“Correct.

“Op-ed columns are filled with advice about what Hillary needs to do. She needs a narrative. A message. It can’t be that she’s a Clinton or a woman. It has to be...

“What?

“Here’s a thought: She can save the world.

“Yes, all right, perhaps that’s a trifle hyperbolic, but hear me out. And keep in mind that this works only as a long game. We may not live to see salvation but one has to start somewhere. Thus far invasions, bunker-busting mega-bombs and killer drones seem not to be having the desired effect....

“Whether one likes or dislikes Hillary, few dispute that she has matured in her public role. Her resume can be topped by few and the symbolic power of electing a woman president – especially this woman – can’t be overestimated. Many doubtless shudder at the prospect of Hillary Clinton as the most powerful person in the world, but we’ve done worse. For what it’s worth, many in the Bush White House said privately they hoped Hillary would win because they felt she was better prepared to handle international challenges.

“Whatever transpires during the next three years, we can be sure the world’s women are watching closely. In 2007 when I traveled through the Middle East with then-first lady Laura Bush, every woman I met was riveted by the U.S. presidential election and wanted to talk about only this question: Will Hillary win? 

“In 2008, it seemed possible. In 2016, barring a Benghazi surprise, it seems probable.”

Oh, a lot can happen between now and 2016. Vice President Biden just needs to keep his nose clean.

--My state of New Jersey held its special primary election to begin the process of replacing the late Sen. Frank Lautenberg and from a rhetoric standpoint, it’s going to be an explosive faceoff between Democrat Cory Booker and Republican Steve Lonegan following runaway victories. Booker, though, will win handily, but not before Lonegan brands him as a tool of the “Hollywood elites” and “the third senator from California,” given Booker’s celebrity status and fundraising prowess out in Silicon Valley.

The vote is October 16, Gov. Chris Christie having made sure Booker isn’t on the ballot in November when Christie is running for reelection. 

--Addressing a gathering of the American Bar Assn., Atty. Gen. Eric Holder said federal prosecutors will no longer seek long, “mandatory minimum” sentences for many low-level, nonviolent drug offenders.

“Too many Americans go to too many prisons for far too long, and for no good law enforcement reason. While the aggressive enforcement of federal criminal statutes remains necessary, we cannot simply prosecute or incarcerate our way to becoming a safer nation.”

A lot of this is about reducing prison populations, but I have been for such a move for years, like many conservatives. Many states have already begun to implement such a policy. 

--Former Rep. Jesse Jackson Jr. was sentenced to 2 ½ years in prison for treating his campaign fund like a ‘personal piggy bank’ – siphoning off $750,000 over the years to pay for personal items. Jackson’s wife, Sandi, was sentenced to a year for tax evasion.

The judge agreed to stagger the two sentences so one parent can remain outside to raise their two children, ages 9 and 13.

Why there are such good role models!

The judge blasted Mrs. Jackson for seeking leniency almost solely based on the kids. “You knew what you were doing, and you knew what you were doing was wrong,” said the judge.

The couple stole from the campaign fund for seven years. 

--Sign of the Apocalypse: In a zoo in Luohe, China, “a cage marked ‘African lions’ actually contained a Tibetan mastiff, a breed of domestic dog with fluffy brown fur around its face...

“A zoo administrator tried desperately to explain. ‘The wolves are there,’ he told an Oriental Daily reporter.

“ ‘But the wolf is somewhere else in the pen and the dog is a pet. The African lions will be back. They went to another zoo to breed.’

“But the zoo had no explanation for abnormalities such as ‘fox-like creatures’ in the leopard’s pen.” [Joanna Chiu / South China Morning Post]

--Sign of the Apocalypse, part deux: New Jersey’s education department allows absences for almost 130 holidays in the 2013-14 school year, nearly triple the number that was accepted in the 1990s.

The list, according to the Star-Ledger, “includes Church of Scientology founder L. Ron Hubbard’s birthday on March 13 and a Wiccan spring fertility festival on May 1.”

--Here’s a scary thought...from Roberta Kwok in U.S. News Weekly:

In February, we had that surprise meteor explode over Chelyabinsk, Russia, and the fact is as much as we try to track asteroids (which become meteors as they fall to Earth), we miss a ton of them.

“A rock 30 to 50 meters across, the kind that hits Earth every few hundred years, could flatten a large city with the force of a nuclear blast. A 1.5 kilometer-wide asteroid, a size that strikes roughly every million years, could kick up dust clouds that block the sun, triggering massive crop failures.”

The meteor that led to the end of the dinosaurs was roughly 10-kilometers wide, crashing into the Gulf of Mexico.

“Earth has 182 known impact craters, including one 1.2 kilometers wide in Arizona formed about 50,000 years ago by an iron asteroid tens of meters across. That impact unleashed a devastating shock wave and 1,350 mph winds, likely killing mammoths, mastodons, and other animals within about 10 miles. In 1908, an asteroid or comet impact in central Siberia flattened tens of millions of trees, ignited forest fires and reportedly blew a farmer off the steps of his house more than 30 miles away.”

But this is troubling.

“A 2010 National Research council report concluded that current surveys (of asteroids) will not be able to find 90 percent of all 140-meter or larger objects by 2020, as ordered by Congress....

“In the meantime, the sky survey teams continue their work. Though the quest for asteroids can mean enduring hours of monotony, they know the consequences of letting down their guard could be incalculable. ‘When the next one gets here, if it’s a couple hundred meters across, it’ll be a really bad day for someone somewhere,’ says Robert Arentz, advanced systems manager for NEO (Near-Earth Object) Survey at Ball Aerospace. It’s the job of these observers to push that day off as long as they can.”

--But let’s talk about the real Apocalypse.

From Robert Irion / National Geographic

[Just got around to reading this from the July issue]

“Forecasting the solar system is like forecasting the weather. There’s so much randomness in the system, says theorist Greg Laughlin of the University of California, Santa Cruz, that the forecast – as well as any historical reconstruction – has to be given in probabilities. Scientists are as certain as they can be that the four giant planets have finished wandering and will still be on the same orbits five billion years from now, when the aging sun is expected to balloon outward and engulf the inner planets. It’s a little bit less certain that the inner planets – Mercury, Venus, Earth, and Mars – will still be round to die that way.

“ ‘There is a one percent chance the inner solar system will go dramatically unstable during the next five billion years,’ says Laughlin. The problem is a weird long-distance connection between Jupiter and Mercury. When Jupiter’s closest approach to the sun lines up with Mercury’s noticeably squashed orbit in just the right way, Jupiter exerts a slight but steady tug. Over billions of years this gives Mercury a 1-in-100 chance of crossing the orbit of Venus. There is a further 1-in-500 chance that if Mercury goes nuts, it will also perturb the orbit of Venus or Mars enough for one of them to hit Earth – or miss it by several thousand miles, which would be almost as bad. ‘The entire Earth would get stretched and melted like taffy,’ says Laughlin, eagerly demonstrating with his hands.

“That faint risk of apocalypse – a 1-in-50,000 chance that the Earth will succumb to orbital chaos before the sun incinerates it – is our legacy of the solar system’s youth, when it turned inside out. ‘If you give gravity enough time,’ says Levison, ‘it will do stuff like this.’”

Let’s see. You have a 1-in-175,000,000 chance of winning PowerBall, but a 1-in-50,000 chance the Earth is stretched like taffy, which I imagine would do a number on the glassware in your kitchen cabinets.

Adjust your portfolios accordingly.

---

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

God bless America.
---

Gold closed at $1371
Oil, $107.46

Returns for the week 8/12-8/16

Dow Jones -2.2% [15081]
S&P 500 -2.1% [1655]
S&P MidCap -2.6%
Russell 2000 -2.3%
Nasdaq -1.6% [3602]

Returns for the period 1/1/13-8/16/13

Dow Jones +15.1%
S&P 500 +16.1%
S&P MidCap +18.2%
Russell 2000 +20.6%
Nasdaq +19.3%

Bulls 47.4
Bears 20.6 [Source: Investors Intelligence]

Have a great week. I appreciate your support.

Brian Trumbore



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Week in Review

08/17/2013

For the week 8/12-8/16

[Posted 12:00 AM ET]

Wall Street and Washington

It was a miserable week for Planet Earth, witness the carnage in Egypt, the ongoing civil war in Syria and al-Qaeda’s rapidly growing presence in Iraq, all over again. I was struck how during a second straight losing week on Wall Street, market pros said virtually zero about events in Cairo but just give it more time. My focus on international affairs is largely about what can kill confidence and after a while the drumbeat of depressing pictures will indeed impact sentiment.

Heck, it’s not as if the American people are currently happy with their lot in life, or the state of the economy. A Gallup Poll at week’s end got a lot of coverage as the survey showed President Barack Obama’s approval rating on his handling of the economy having fallen to 35% from 42% in early June. And Gallup collected its data before this past week’s market swoon.

As the Wall Street Journal editorialized:

“(The) Gallup numbers suggest that the most potent indicator is what real people feel living in the real economy. That would be the economy that continues to grow, as it has for more than four years of ‘recovery,’ at about 2%, and well below that for the last nine months.

“The distance between Mr. Obama’s below-2% growth rate and the U.S. economy’s historic growth trend of over 3% explains why the public is so underwhelmed by his stewardship with three-and-a-half years left to go in his Presidency.”

The Journal does offer an antidote: “A clean reform of personal and corporate taxes led by the President. Our expectation that Mr. Obama will embrace this: below 2%.”

As second quarter earnings season winds down, with revenues flat for S&P 500 companies and the bottom line, earnings, reflecting putrid growth of around 2%, with the top line not expecting to improve much if at all in the second half, it is clear many market participants finally got religion on valuation. Forget my belief sentiment will only worsen from here as the Middle East’s conflagration spreads; the fact is any upside for stocks will be limited by corporate fundamentals. 

In fact, look back on the past four weeks’ reports and you’d be hard-pressed to remember more than a handful of companies issuing truly optimistic outlooks.

This week you certainly didn’t get that from the likes of Cisco Systems, Wal-Mart, Macy’s and Nordstrom’s, all of which guided lower for the second half on the revenue front in issuing cautious statements. Wal-Mart’s U.S. same-store sales, for example, actually declined 0.3% in the quarter. There is real uncertainty just how strong the back-to-school season is among all retailers, while in the case of tech bellwether Cisco, CEO John Chambers said the “economic recovery is slower and more inconsistent” than they thought it would be.

Even Deere & Co., in handily beating the Street’s earnings forecast, warned that with reduced prices for crops, in some cases such as with corn significantly lower, agricultural equipment sales going forward will suffer.

But there was some good news. Jobless claims hit a nearly 6-year low, Europe’s economy emerged from recession (more in a bit) and the Treasury Department reported that with two months to go in the fiscal year, the budget deficit was $607 billion, with a Congressional Budget Office estimate of $642 billion for the full year, ending Sept. 30, vs. $1.08 trillion for F-2012, and the smallest since 2008’s $458 billion. Government revenues have risen 14%, while spending has declined due to the sequester.

Yes, the sequester has been a success.

Stephen Moore / Wall Street Journal

“The biggest underreported story out of Washington this year is that the federal budget is shrinking and much more than anyone in either party expected.

“Consider the numbers: According to the Congressional Budget Office, annual outlays peaked at $3.598 trillion in fiscal 2011. After President Obama’s first two years in office, many in Washington expected that number to hit $4 trillion by 2014. Instead, spending fell to $3.537 trillion in fiscal 2012, and is on pace to fall below $3.45 trillion by the end of this fiscal year. The $150 billion budget decline of 4% is the first time federal expenditures have fallen for two consecutive years since the end of the Korean War....

“The sequester cuts in annual budgets for the military, education, transportation and other discretionary programs have also been an underappreciated success, with none of the anticipated negative consequences.

“Discretionary spending soared to $1.347 billion in fiscal 2011, according to the CBO, but was then cut by $62 billion in 2012 and another $72 billion this year. That’s an impressive 10% shrinkage. And these are real cuts, not pixie-dust reductions off some sham baseline....

“But the fiscal story isn’t all rosy. The major entitlements remain on autopilot and are roaring toward insolvency. Thanks in large part to Mr. Obama’s aversion to practical fixes, the Congressional Budget Office calculates that through July of this year Social Security, Medicare and Medicaid spending are up $73 billion from just last year. This doesn’t include Obamacare, which is scheduled to add $1 trillion of new costs over the next decade.

“So the fiscal progress reported here is no excuse for complacency. But it does call into question the wisdom of a government-shutdown confrontation over the budget this fall or a debt-default showdown that runs the risk of suspending the spending caps and sequester and revitalizing an increasingly irrelevant president.”

[In light of the rapidly deteriorating military situation in the Middle East, however, look for further sequester cuts in defense to be questioned in a big way. Defense Secretary Hagel has one plan that would effectively reduce the Army by 110,000, or 1 in 4 active duty troops. (Or you can keep more troops but reduce their capability if the cuts in future years remain in place.) Gen. Ray Odierno, Chief of Staff of the Army, said if he was asked to deploy 20,000 today, he’s not sure they’d be trained to the right level. In other words, we are one crisis away from potential disaster. I have always been one who believes we can slash defense spending, especially because of the outrageous procurement issues and cost overruns on big-ticket items, many of which are simply not needed. But we must maintain a certain force level that allows us to deal with conflicts both East and West. For starters...think Islamists taking out one of Pakistan’s nuclear facilities and gaining control of some nukes, let alone future issues regarding Iran, or a conflict in the South China Sea.]

Looking at all of the above, what does the Federal Reserve do when it next gathers Sept. 17-18? That’s the ultimate question, after all. Does it begin to taper its bond-buying? Some Fed governors have been saying the past few weeks the Fed should; others say there simply isn’t enough data to begin doing so (and won’t be by the time of the FOMC confab).

I think the Fed should begin to taper, but given the poor earnings news this week, particularly in terms of forecasts by leading retailers, I don’t see how the Fed can and keep its credibility. And with interest rates rising anew this week, and mortgage rates to follow, a big pillar of the economic recovery, housing, has to be questioned in terms of the sustainability of its rebound. Certainly Friday’s housing starts figure was lackluster at best and below expectations.

So, yes, the Fed needs more data. But whereas in the past a continuation of the easy money flow would be welcomed by the equity markets, should the Fed stand pat this time it will also be a sign for stock jocks that obviously the Fed’s policies aren’t working. Jobless claims may have hit a five-year low this week, but the makeup of the job market is dreadful.

Europe

As expected, the official statistics arm of the European Union, Eurostat, revealed its flash estimate for second quarter GDP and it came in at 0.3% for both the European Union and the Euro Area 17 compared with Q1. In the first quarter, the numbers were -0.1% and -0.3%, respectively. The eurozone had contracted six consecutive quarters until now.

So the EA is officially out of recession, led by Germany, up 0.7%, and France, up 0.5%. The U.K. saw growth of 0.6%.

But Spain’s economy fell 0.1% in the quarter, Italy’s 0.2%, the Netherland’s 0.2% and Cyprus’ 1.4%.

Portugal’s economy rose 1.1%, though this is but a temporary blip from what I understand.

And back to Germany, everyone believes growth will slow in the second half, blaming slow global growth and lagging domestic investment. It also seems the 0.7% print for Q2 was juiced by inventory rebuilding.

Greece did report a budget picture better than expected, but GDP is still estimated to have declined 4.6% in Q2 (not a Eurostat figure).

So looking at the big picture, there is some cause for optimism in the EA 17 and EU 27, beginning with the July composite for both services and manufacturing already having been reported to be above 50, a good start to Q3.

But unemployment remains sickeningly high, government debts are still rising, banks are not lending (especially to small- and medium-sized businesses on the periphery) and it’s clear the likes of Greece, and probably Portugal, will require further bailouts.

And not to beat a dead horse, which I shamelessly admit to having done on this topic for months and months, but everyone and their mother knows the continent is on hold when it comes to making the really big decisions, such as on a banking union, until after the German election Sept. 22. For example, German Chancellor Merkel, who seems assured of victory even if the composition of her eventual coalition is somewhat hazy, has been accused of misleading the German public when it comes to the topic of Greece and further bailout support, and/or debt relief, writedowns on the paper held by Germany and others.

The Economist

“An orchestrated hush has descended over the euro area as Angela Merkel, the German chancellor who conducts its troubled band of 17 states, campaigns for a third term.....The calm also stems from signs that the eurozone economy may gradually be emerging from recession. But discord will reappear after the poll as it becomes clear that Europe’s bailout programs won’t be unwound harmoniously and that more big bills are on their way.”

And it’s not just about Greece. It is expected that Ireland will be exiting one bailout program for another.

But when it comes to Greece, a leaked report from the Bundesbank reportedly warns of the “extremely high” risks that the current 240 billion euro bailout for the country would fail. Also, as reported by David Charter of the London Times, “The Bundesbank report described as ‘politically motivated’ a decision by the EU and the IMF to approve the latest 5.8 billion installment of Greece’s bailout last month....Greece’s performance was ‘hardly satisfactory’ and there were major doubts about its ability to implement essential reforms, the report added.”

Editorial / London Times

“The eurozone is at last out of recession. It is not, however – or at least not yet – out of its crisis. That will require tackling the structural weaknesses of a currency union that was misconceived in the first place. Mitigating them will at least be easier if the eurozone economy collectively is expanding, as it is now, rather than contracting....

“Currency union was supposed to create convergence and stability. Instead it has created divergence and discord. Southern European economies with historical problems of high inflation and weak growth have been yoked together with economies (notably Germany) that have historically strong public finances and credibility on inflation. Currency union made it, by definition, impossible for high-cost economies to gain competitiveness through devaluation. Yet the architecture of the eurozone lacked a mechanism for fiscal transfers across national boundaries to deal with economic shocks....

“The eurozone is paying a heavy price for these failures of a scheme driven more by politics than by economic rationality. The crisis has no common root, for the weaker economies all have a slightly different mix of problems. Greece, for example, had chaotic public finances, whereas Italy had a long-term problem of weak growth rates. The crisis has, however, had a common outcome for the eurozone periphery: a loss of financial market confidence in these countries’ solvency.

“Lacking the mechanism of devaluation, the eurozone can recover only by moving towards a more centralized fiscal mechanism....That course will be tough but, to borrow a phrase, there is no alternative.”

Christopher Thompson / Financial Times

“Europe’s biggest banks will have to cut 661bn euro of assets and generate 47bn of fresh capital over the next five years to comply with forthcoming regulations aimed at reducing the likelihood of another taxpayer funded bailout.

“The figures form part of an analysis by the UK’s Royal Bank of Scotland – which singles out Deutsche Bank, Credit Agricole and Barclays as the banks most in need of fresh capital – highlighting that five years on since the financial crisis, Europe’s banks are still ‘too big to fail.’....

“The burden is greatest on smaller banks, which need to shed 2.6 trillion euro from their balance sheets, raising fears that lending to the region’s small- and medium-size enterprises will be sharply reduced as a result.”

My point all along is that when Europe’s economy bottoms, that doesn’t mean it’s then back off to the races. Far from it. I submit the above as evidence of why I will be right.

One last item concerning the U.K. I have been promoting the recovery here, saying Britain was easily 6-9 months ahead of the eurozone in getting its act together.

But while an election in the U.K. is still almost two years away, you are beginning to see the shape of the campaign as the opposition Labour Party requested a wage study that showed a decline of 5.5% in average hourly earnings since mid-2010, while Germany’s rose 2.7% over the same period. Labour is thus saying “working people are worse off under the Tories.”

Street Bytes

--Stocks declined across the board for a second straight week, with the Dow Jones, down 2.2% to 15081, having its worst week in 14 months. The S&P 500 lost 2.1% and Nasdaq 1.6%.

Rising interest rates, poor corporate guidance and fears of Fed tapering trumped any good news on the economy such as on the jobless claims front.

--U.S. Treasury Yields

6-mo. 0.07% 2-yr. 0.34% 10-yr. 2.83% 30-yr. 3.85%

At 2.83%, the 10-year is at its highest yield since July 2011.

Producer prices for July were unchanged, up 0.1% ex-food and energy. Year-over-year the PPI is up 2.1%, 1.2% on core. For the month consumer prices rose 0.2%, ditto on core, while for the 12 months ending July, the CPI rose 2.0%, 1.7% ex-food and energy.

--Foreign selling of U.S. long-term portfolio assets rose for a second straight month in June, an outflow of $66.9 billion after a $27 billion net decline in May, according to the Treasury Department.

Private foreign investors were net sellers of all categories of assets – government and corporate bonds and stocks.

Total net selling of Treasuries in June was an all-time high of $40.8 billion, according to data compiled by Bloomberg.

China remains the biggest foreign owner of U.S. Treasuries though its holdings fell $21.5 billion to $1.276 trillion. Japan, the second-largest holder, lowered its holdings by $20.3 billion to $1.083 trillion.

--A study out of Peking University alleges China is overstating the size of its economy by at least $1 trillion and that the country has been churning out “willfully fraudulent” inflation and GDP statistics for more than a decade, as reported by the London Times.

Professor Christopher Balding’s research focused on ways in which Beijing authorities dampened down inflation data that create the overstatement of China’s real GDP. And as Balding points out, officials are then using inaccurate data to set policy.

--Japan’s second quarter GDP rose 2.6% on an annualized basis vs. Q1’s 4.1% rate. 3.6% was expected, so the news makes it harder for Prime Minister Abe to hike the sales tax come next April (decision on same to come in September).

--The Mexican government announced a reform plan to boost investment in its energy industry. The head of Mexico’s state oil monopoly, Pemex, said the goal is to produce another 1 million barrels a day.

“Pemex, the world’s 10th-biggest oil producer, has over $127 billion of revenues a year but also 160,000 employees, a powerful union, pays virtually all its profits to the government in taxes and has onerous pension obligations equivalent to 8 percent of the Mexican gross domestic product.” [Financial Times]

Pemex’s CEO says the reform will create 500,000 jobs by 2018. But in a recent poll, 65% of Mexicans said they opposed foreign investment in Mexico’s petroleum industry.

President Enrique Pena Nieto’s proposal requires a change to the constitution and it isn’t guaranteed he will receive the needed support.

--In a shocker, the Justice Department suddenly moved to block the merger of American Airlines parent AMR Corp. and US Airways Group Inc. For starters, the department’s legal challenge throws a wrench into AMR’s plans to quickly emerge from bankruptcy.

American and US Airways said they would mount “a vigorous and strong defense” in their effort to complete the combination that would create the world’s largest airline. Any trial would delay closing the deal until year-end at best.

Attorney General Eric Holder, in a statement, said “This transaction would result in consumers paying the price – in higher airfares, higher fees and fewer choices.”

The Justice Department seemed to focus on how the merger would impact passengers at Reagan National Airport, where the combined airline would control 69% of the takeoff and landing slots.

--Wal-Mart said it expects net sales to grow just 2% to 3% in 2013, compared with a previous range of 5% to 6%.

--Macy’s reported sales fell 0.8% in the quarter and cut its profit forecast for the year. CFO Karen Hoguet said, “We believe much of our weakness is due to the health of the consumer and to the fact that the consumer is choosing to make purchases in non-department store categories such as cars, housing and home improvement.”

--In announcing its earnings for the quarter, Cisco Systems announced that its revenues in the current quarter would be at the lower end of analysts’ forecasts and that it was cutting 4,000 jobs, or about 5% of its workforce.

--Second quarter profits at Dell fell 72%, though earnings beat expectations. The figures came amid Carl Icahn’s bid to oppose founder Michael Dell’s efforts to take the company private. Icahn says Dell’s offer to shareholders significantly undervalues the company.

--As noted above, Deere & Co. forecast a decline in U.S. farm revenue that could easily translate into slower sales of agricultural equipment. The price of corn is a prime example, down 40% in the past year while soybeans have declined 20% on forecasts of higher production.

--Shares in Apple soared with word Carl Icahn had a “nice conversation” with Apple CEO Tim Cook, in Icahn’s own words, and that the investor was amassing a “large position” in Apple in the hopes of a massive share buyback that Icahn believes can push the share price back to $700.

The stock closed Friday, Aug. 9 at $454. It closed yesterday at $502.

Separately, I bopped over to the nearby Mall at Short Hills to see the traffic at the Apple store there and at 1:00 p.m. on a Tuesday, there were more employees than customers.

[Actually, I hadn’t been to this mall since before Christmas, for no particular reason, and didn’t realize there is a Tesla showroom there!]

--AOL CEO Tim Armstrong caught major heat for firing an executive while on a conference call with more than 1,000 employees from the company’s Patch unit. Patch is the troubled network of local news sites that has long been a drag on the company’s stock price and Armstrong, in preparing the troops for a downsizing at the Patch unit, lashed out at Patch’s design director, Abel Lenz, who was videotaping the meeting. “Abel, you’re fired. Out!”

Armstrong apologized in a letter to the entire AOL staff, calling his action a mistake.

400 of 1,000 Patch sites are slated to be shut down. Up to 500 employees will lose their jobs.

--Activist investor Bill Ackman resigned from the board of J.C. Penny after an unusual public rebellion against his fellow directors. Ackman’s Pershing Square Capital management is Penney’s biggest investor with a nearly 18% stake. As an insider, Ackman is prohibited from selling his shares until at least the company’s next earnings release, slated for this coming week.

--Total U.S. household debt, including mortgages, credit cards and auto loans, fell by $78 billion in the second quarter to $11.15 trillion, the lowest level since 2006, according to the Federal Reserve Bank of New York.

Credit-card balances actually increased by $8 billion, suggesting growing confidence in the economic recovery....at least by this metric.

--Federal prosecutors accused two associates of “London Whale” trader Bruno Iksil of attempting to hide hundreds of millions of dollars in losses from the former JPMorgan Chase trader’s derivatives transaction that ended up resulting in a $6.2 billion loss; specifically making false filings with the SEC, conspiracy to falsify books and records, and conspiracy to commit wire fraud.

Phone calls and emails reveal that Iksil was pushing back against his boss, Javier Martin-Artajo. Iksil wasn’t charged with wrongdoing and struck an immunity agreement while cooperating with investigators.

The two associates have not has yet been arrested, with both residing in Europe.

U.S. Attorney Preet Bharara, playing off JPMorgan CEO Jamie Dimon’s initial ill-considered comment, said:

“This was not a tempest in a teapot but rather a perfect storm of individual misconduct and inadequate internal controls.”

Bharara added:

“We happen to live in a time when not just one bank but one trader within one bank can do catastrophic economic harm in practically the blink of an eye. And that is why prosecutors need to be even more aggressive, regulators need to be even more vigilant and...companies themselves need to pay closer attention to the culture that they create.”

Bharara declined to say whether his office has uncovered wrong-doing among some of JPM’s higher-level executives.

--According to DataQuick, Southern California’s housing market took a breather in July, with prices remaining flat from a month earlier. This was after the median price in the six counties rose 4.6% in June over May and 28% year-over-year.

--Separately, an analysis by economists at Goldman Sachs reveals that more than half of all homes sold last year and thus far in 2013 were purchased with cash.

Before the housing crash, the figure is estimated to have been around 20% of all homes sold being “all-cash” sales.

--Interesting piece by Bill Saporito in TIME concerning Las Vegas. Although the number of tourist visits has increased from 39.2 million in 2007 to 39.7 million in 2012, gross gambling revenue declined from $10.9 billion to $9.4 billion over the same period of time.

And due to the addition of adding 13% more rooms during the recession, the average daily room rate has declined from $132 in 2007 to $108 last year.

--Nissan Motor Co. announced it broke ground on a logistics “park” at its Canton, Mississippi, plant that will result in an additional 800 workers between its hiring and that of suppliers as a result of the activity.

--H.J. Heinz Co. is laying off 600, including 350 jobs in Pittsburgh, where the company is based, leaving 800 there.

--KFC parent Yum Brands Inc. reported a further slide in sales in China last month, down a much steeper-than-expected 13% as the company battles a food safety scare and the bird flu outbreak.

--Speaking of bird flu, a Chinese woman infected with the H7N9 virus became the 45th victim this week out of 134 reported cases on the mainland.

--Interesting piece in TIME by Kate Pickert on Obamacare and the scams that are emerging. Experts warn the debut of heath care exchanges “could create a prime moneymaking opportunity for illegal scammers and others looking to capitalize on consumer confusion. ‘There are people licking their chops and saying, ‘A sucker is born every minute,’’ says Elizabeth Abbott of the consumer group Health Access California.”

You will have the outright cons and then “insurance-like plans that give the impression of offering more coverage than they actually provide. Regulatory agencies are already on high alert for fraud.”

Also be wary of “discount medical plans” that promise lower health care costs in exchange for recurring fees. They will imply comprehensive coverage, “but the reality is far more limited.” When people get sick, they’re screwed.

--In a follow-up to its investigation into the Los Angeles Department of Water and Power, the Los Angeles Times reported DPW employees earned $77.3 million in extra pay for things such as overtime, laying cement or working in bad weather in the first six months of the year, or $155 million on an annualized basis, for roughly $15,800 in average extra wages for each DWP worker.

--Websites belonging to the Washington Post, CNN, TIME and the New York Post were attacked by supporters of Syrian President Bashar al-Assad. The New York Times’ website was also down for a spell but the company said it was an “internal issue.”

--The head of Rio de Janeiro’s 2016 Summer Olympics project resigned just two weeks before a visit to Rio by inspectors from the IOC. To state the obvious, plans are hopelessly over budget and behind schedule.

--I love billionaire inventor Elon Musk, but his plans for high-speed transit, a $10 billion Hyperloop between San Francisco and Los Angeles, which would cut transit time to a half-hour, was itself way over-hyped.

Foreign Affairs

Egypt: Let’s review some of the past few weeks’ events.

Week in Review 8/3/13

“Speaking from Pakistan on Thursday, Secretary of State Kerry praised Egypt’s military ouster of President Mohammed Morsi.

“ ‘In effect, they were restoring democracy,’ Kerry said. ‘The military did not take over, to the best of our judgment – so far, so far – to run the country. There’s a civilian government.’ Kerry then mumbled something about being concerned over the violence.

“Egypt’s cabinet ordered a police crackdown on protesters, this after over 100 members of the Muslim Brotherhood have been killed since Morsi’s ouster...

“The cabinet announced protest camps at two Cairo squares posed a ‘threat to national security.’

“ ‘The government has decided to take all necessary measures to confront and end these dangers, and tasks the interior minister to do all that is necessary in this regard, in accordance with the constitution and law,’ read a statement.

“Mohammed Badie, the supreme leader of the Brotherhood who is a fugitive, attacked Gen. al-Sisi, the head of the armed forces, saying he was leading a ‘bloody regime’ and urging his followers to stand fast.”

Week in Review 8/10/13

“Thousands of supporters of ousted Islamist president Mohammed Morsi continue to defy government calls for them to go home, but as I go to post there is no sign as yet the government is preparing to carry out its threat to remove them from their protest camps in Cairo as they continue to demand Morsi’s reinstatement.

“But in talking of an impending showdown with the Muslim Brotherhood, a government daily on Thursday (8/8) ran the headlines ‘Final warning’ and ‘The hour of battle approaches.’....

“U.S. Deputy Secretary of State William Burns left Cairo on Tuesday without having made any progress.

“U.S. Republican Senators John McCain and Lindsey Graham were also in Cairo this week. McCain said in one interview, ‘Oh my God, I didn’t know it was this bad. These folks are just days or weeks away from all-out bloodshed.’....

“Meanwhile, in an interview with the Washington Post...Gen. Abdel Fatah al-Sisi said of the U.S. government:

“ ‘You left the Egyptians. You turned your back on Egyptians, and they won’t forget that. Now you want to continue turning your backs on Egyptians?’

“Gen. Sisi is upset the United States is not fully endorsing what he describes as ‘a free people who rebelled against an unjust political rule.’

“Sisi said Defense Secretary Chuck Hagel calls him ‘almost every day’ but that President Obama has not called since Morsi’s ouster.”

So the stage was set. Wednesday morning the government launched its crackdown on the two main Brotherhood encampments in Cairo. Violence spread to other parts of the country. The Brotherhood was armed, inflicting casualties of its own, but in the end it was a massacre...over 600 dead in Wednesday’s battles. Another 100+ in follow-on attacks Friday. Christian churches around the country were torched by the Brotherhood. 

On Wednesday, Sec. of State Kerry said the following at the State Department: “The promise of the 2011 revolution has simply never been fully realized. And the final outcome of that revolution is not yet decided. It will be shaped in the hours ahead, in the days ahead. It will be shaped by the decisions which all of Egypt’s political leaders make now and in these days ahead.”

Republican Senator John McCain tweeted Wednesday: “As we predicted and feared, chaos in Cairo. Sec. Kerry praising the military takeover didn’t help.”

Republican Sen. Lindsey Graham: “I fear that without a quick reversal of current trends, Egypt may be on its way to becoming a failed state.”

Mohamed ElBaradei, the Nobel laureate who was appointed vice-president for foreign relations after Morsi was forced out, resigned in protest at the violence.

In his letter of resignation, ElBaradei said: “I can no longer bear responsibility for decisions that I do not agree with, and whose repercussions I dread. I cannot be responsible for a single drop of blood before God, my conscience, and my people, especially as I believe the dropping of that blood could have been avoided.”

President Obama, in canceling joint U.S.-Egypt military exercises scheduled for next month, gave no indication on Thursday on whether the U.S. planned to cut off its $1.3 billion in annual military aid to the country.

“While we want to sustain our relationship with Egypt, our traditional cooperation cannot continue as usual when civilians are being killed in the streets and rights are being rolled back,” the president said, speaking from his vacation retreat.

The Egyptian interim government responded saying the country is facing “terrorist actions targeting government and vital institutions” by “violent militant groups.”

The statement also warned that Obama’s position “while it’s not based on facts can empower the violent militant groups and encourage them in its anti-stability discourse.”

Gideon Rachman / Financial Times

“The bloodshed on the streets of Egypt is a disaster for the country. It also creates a desperate dilemma for the West....

“Beyond the immediate tragedy, the killings in Cairo end the prospect of any reconciliation between the military and the Muslim Brotherhood. They also end any hopes for a democratic Egypt, at least in the immediate future. That vision – which seemed almost irresistible after the overthrow of Hosni Mubarak in early 2011 – is now over....

“The U.S. and Europe are also in a huge quandary. Some pose the dilemma as a face-off between principles and interests. According to this theory, Western principles point to support for democracy and a severance of ties with the military government. Western interests point to tacit support for the repression of an Islamist government.

“But, in reality, things are more complicated than that. If the repression leads to a resurgence of al-Qaeda and the Islamist threat, it is emphatically not in western interests. Backing a violent, anti-democratic coup would also rip the coherence out of any western approach to the Middle East – or indeed the world. If the U.S. and Europe do not harshly condemn events in Egypt, how can they continue to condemn the Assad regime’s war in Syria? It is true that there is a question of scale. Around 100,000 may have died in Syria – while the death toll in Egypt so far probably runs into the hundreds. But the principle of violent repression seems similar. A failure to convincingly repudiate the military government in Egypt also creates dilemmas beyond the Middle East. How can the U.S. or Europe condemn milder crackdowns in Russia or China, if they tolerate events in Egypt?

“Yet severing ties with the Egyptian military government would pose its own set of dilemmas. The Egyptian economy is teetering and the country is clearly at risk of severe civil strife – or even civil war. If the West simply backs off now, would it find itself as powerless to influence events as it is in Syria? And if so, who or what would fill the vacuum of outside influence? The Saudis, the Qataris, a revived Brotherhood, al-Qaeda?

“There simply are no easy answers to these questions, which is why all that was heard from western capitals – as events unfolded in Cairo – was confused spluttering.”

Fouad Ajami / Wall Street Journal

“In this Egyptian drama, the United States did not give the best of itself. When the Obama administration could not call the coup d’etat by its name, we put on display our unwillingness to honor our own democratic creed. Egypt has long been in the American strategic orbit. When our secretary of state opined that the army was ‘restoring democracy,’ we gave away the moral and strategic incoherence of an administration that has long lost its way.”

Ralph Peters / New York Post

“With its blundering, fickle, late-in-the-day support for whoever appeared to be gaining the upper hand, the Obama administration has managed the remarkable feat of alienating every faction in Egypt. And it’s a sorry day when an American administration abets religious totalitarianism, as this White House did when the ‘democratically elected’ Morsi regime tried to Islamize Egypt’s government and society for keeps.

“There was, indeed, a coup. But not all coups involve tanks. The real coup came after Egypt’s premature, badly flawed election, when Morsi and the Brotherhood excluded all non-Brothers from the political process; curtailed media freedoms and jailed journalists; attacked Christians; and rushed toward an Islamist state that the majority of Egyptians did not want.

“Tens of millions of Muslims took to the streets to protest the Brotherhood’s plunge toward tyranny. Only after attempts to persuade an unrepentant Morsi to compromise failed, did the military move against the regime. The people cheered. 

“Yet our breathtakingly inept ambassador backed the Morsi regime right to the end. That isn’t diplomacy. It’s idiocy....

“Is the Egyptian military an ideal ally? Nope. But it’s a far better bet than Obama’s support of the Muslim Brotherhood turned out to be. 

“The danger now is that the administration and naïfs in Congress will cut aid to the Egyptian military and curl up into a snit. That would only make the Egyptians who want a reasonably free, generally tolerant and ultimately democratic Egypt even madder at us. And Egypt’s the most important Arab country.”

Turkish Prime Minister Recep Tayyip Erdogan said, “Those who remain silent in the face of this massacre are as guilty as those who carried it out,” adding, “If the West does not act sincerely, democracy will be questioned throughout the world.”

Syria: The rebels have launched an offensive against President Assad’s forces in his family’s home province of Latakia and have been accused of killing hundreds of civilians in sectarian revenge attacks. After suffering a string of defeats, most recently in the critically strategic city of Homs, the rebels have been looking to hit Assad “where it hurts most,” opposition sources said. Assad’s Alawite sect comprises about 12% of Syria’s population.

The assault on Latakia has been spearheaded by an al-Qaeda affiliate. In response, the Syrian government has been carrying out airstrikes.

Separately, the leader of Iraq’s semi-autonomous Kurdistan region, Massoud Barzani, said that Iraqi Kurdistan was “prepared to defend” the Kurdish population caught up in the Syrian war.  Kurds making up 10% of Syria’s population are largely concentrated towards the Turkish border. The Syrian Kurdish militia has been battling the jihadist anti-Assad al-Nusra Front.

Lebanon: A powerful car bomb, probably a suicide attack, killed 24 and wounded nearly 300 in southern Beirut on Thursday, the deadliest single bombing in the country since the 1975-90 civil war.

The blast trapped residents in apartment blocks that were set on fire in the explosion, the area targeted being an Hizbullah stronghold and a further example of the spillover from the Syrian civil war.

A heretofore unknown group calling itself the Brigades of Aisha Umm al-Moemeneen said there would be more attacks and advised Syrians to leave Hizbullah areas of Lebanon.

Hizbullah’s support of Bashar al-Assad has enraged the mainly Sunni opposition. Shia-populated areas of the northern Bekaa Valley have been struck by rockets fired by Syrian rebels from across the border.

But on Friday, Hizbullah leader Hassan Nasrallah vowed his group would continue to support Assad, telling a crowd in a village near the border with Israel:

“If you think that by killing our women, by killing our children, by killing our innocents” opponents will make Hizbullah stop supporting the Syrian government, “you are wrong,” he said. [New York Times]

Meanwhile, the case of the two kidnapped Turkish Airlines pilots took an ominous turn Monday when the families of the nine Lebanese hostages in Syria threatened to abduct any Turkish citizen in Beirut.

Turkey has urged its citizens to leave Lebanon.

[As you can imagine, tourism in Lebanon, as well as Egypt, has dried up, though in the case of the latter, some 50,000 Russians were said to be touring the country this week, as well as 40,000 Brits. No word on how many Americans are there. All are now scrambling to get the heck out.]

Iraq: Al-Qaeda in Iraq is back in a most depressing way, helped in no small part by a flow of weapons and extremists from neighboring Syria. More than 3,000 Iraqis have been killed in just the past few months, including 69 last weekend in a series of car bombings targeting those celebrating the end of Ramadan.

Jordan: It’s been flying under the radar with everything else going on these days but the U.S. has roughly 1,000 troops stationed here and this week General Martin Dempsey, chairman of the Joint Chiefs of Staff, said the mission to help King Abdullah would last years

Iran: The conservative-dominated parliament rejected just three of President Rohani’s 18 nominees for his Cabinet, while Rohani also appointed his predecessor’s foreign minister as new head of the country’s nuclear agency.

Hardliners in parliament had attacked some of Rohani’s nominees for having Western educations and for being close to the opposition, but rejecting only three in the end is a good sign (as far as these things go).

The new foreign minister, Mohammad Zarif, supposedly did postgraduate work at San Francisco State University and obtained a doctorate in international law at the University of Denver. Zarif said he “will not withdraw one iota” in defending Iran’s “nuclear rights” under his leadership.

In the nuclear post is Ali Akbar Salehi, foreign minister under Mahmoud Ahmadinejad.

Rohani, who during the campaign had promised to create more jobs for women, appointed one as his vice-president for legal affairs.

Israel: The Iron Dome missile defense system intercepted a rocket launched at the resort city of Eilat in southern Israel. It was believed to have been fired by militants in Sinai

Afghanistan: Reading my copy of Army Times, the number of U.S. service members killed in Afghanistan hit 2,250. Seven died between July 25-31, as confirmed by the Pentagon.

India / Pakistan: Pakistani Prime Minister Nawaz Sharif promised “restraint and responsibility” in response to escalating clashes with Indian forces in the disputed region of Kashmir. 

Pakistani military officials said an “unprovoked Indian shelling” into Pakistani-controlled territory resulted in the death of one civilian. India was responding to a recent ambush of five Indian soldiers.

Separately, an explosion and fire on an Indian submarine killed 18 sailors.

And India’s finance minister said the country wants to boost imports of Iranian crude after the U.S. State Department exempted New Delhi from sanctions. Iranian crude shipments to India were down 26.5% in the year ended March 31 owing to the sanctions imposed by the U.S. and European Union.

China: I have been writing extensively on the pollution problem here and how I now believe it could lead to the collapse of the government down the road and the Aug. 10 issue of The Economist had a cover story on this very topic, though it is far more optimistic than I am that the government will be able to tackle the humongous issues it faces.

Last weekend the South China Morning Post ran the headline “Pollution-free days of Beijing Olympics now just a happy memory.”

“Five years on, Beijing is notorious for its winter ‘airpocalypse,’ when thick and choking smog lingers in grey skies for months, only eased by occasional strong wind and rain. Most newcomers develop the ‘Beijing cough,’ a dry cough and itchy throat, usually between December and April.

“In the first half of this year, according to official statistics, Beijing’s air quality was deemed safe on fewer than 40% of days – and that is based on mainland standards, not on more stringent levels recommended by the World Health Organization.

“ ‘Beijing’s fast degradation of air quality since 2008...has evolved into a public crisis, as more people worry about the pollution’s health impact,’ says Li Yan of Greenpeace East Asia....

“Even the city’s tourism commission blamed frequent air pollution for a 14.3% year-on-year drop in the number of visitors to the city during the first half of this year.” [Li Jing / SCMP]

Japan: Prime Minister Shinzo Abe did not personally visit the controversial Yasukuni war shrine to mark the anniversary of Japan’s surrender at the end of the war, but he sent an offering, saying Japan would “engrave deeply in our hearts the lessons that we should learn” from conflict.

However, he did not mention Japan’s wartime aggression, which once again ticked off China and South Korea. They liken Japanese leaders’ visits to Yasukuni to laying a wreath at the tomb of Adolf Hitler.

But, yes, Abe seems to have given in to pleas from China not to personally visit the place.

On a different issue...William Pesek / Bloomberg

“Forget Abenomics. Ignore Shinzo Abe’s efforts to rejuvenate Japan’s diplomatic and military clout. Look past the quest to rewrite the constitution. History will judge this prime minister by one thing alone: what he did, or didn’t do, to end the worst nuclear crisis since Chernobyl....

“Fukushima is a growing embarrassment for Japan on the international stage. Oceans don’t have boundaries. Radioactive traces have been found in Bluefin tuna – not to mention on secondhand cars and auto parts imported by Russia from Japan. Another earthquake – a live possibility – could damage Fukushima anew or take out another reactor between now and the 2020 Summer Olympics that Tokyo hopes to host. The world won’t give Japan a pass twice on what would have been a perfectly preventable disaster.

“Analysts are rating Abe on his success in cleaning up Japan’s finances. Posterity will judge him on whether he cleaned up the mess Tepco and the nuclear village have created.”

Russia: President Putin’s disapproval rating has doubled since 2001, according to the Levada Center, but guess what? It’s only up to 22% from 10%. Any U.S. president would kill for that reading.

As for the Moscow mayoral race, supporters of Alexei Navalny were left wondering why police forced their way into a central Moscow apartment to seize what they said were illegal campaign materials. There were reports four were arrested. This came a day after the Prosecutor General’s Office said Navalny’s election campaign was financed from abroad by more than 300 foreign individuals. Navalny trails acting Mayor Sobyanin badly in the polls for the September vote, 67% to 13%.

Zimbabwe: The U.S. has warned Zimbabwe not to sell uranium to Iran, this after the London Times disclosed a Memorandum of Understanding with Tehran to export the material there.

Random Musings

--I have been writing of what should be a major concern for all Americans, the fact that our missile-defense system is sorely lacking.

This week, on a related topic, the Associated Press reported that an Air Force unit overseeing one-third of America’s land-based nuclear missiles failed a safety and security inspection, the second such serious Minuteman 3 mission readiness problem this year. The latest episode was at Malmstrom Air Force Base, Montana, one of three wings that control 450 Minuteman 3 ICBMs. The earlier issue involved the Minot Air Force Base, N.D.

Eugene Fox and Stanley Orman / Defense News

“Two forms of deterrence create security in this unstable world of nuclear and missile proliferation.

“The traditional concept was to make a potential opponent understand that hostilities could not succeed because it would prompt such an overwhelming response the aggressor would cease to exist.

“Later, President Reagan enhanced the concept to include anti-ballistic missile defense, demonstrating that an attack could not succeed and providing more time for assessment before launching a nuclear response.

“Both elements are equally important because deterrence is far from a precise procedure and is highly dependent on the perception that each side has of the other.

“Our fear for some years has been that nations like North Korea and Iran may not be dissuaded from attacking American facilities by the threat of nuclear retaliation. Certainly, terrorist groups to whom either nation might be tempted to pass on offensive capabilities would not be deterred by such threats.

“It is in this environment that effective missile defense assumes the greatest importance, and why the failure of the July 5 test of the Ground-based Midcourse Defense system has sent the wrong message to those we want to deter.”

Fox and Orman point out that this recent failed test, that I wrote of at the time, finally got the attention of Congress, “but where was it over the past five years when two other tests failed?”

“The problem revealed by the recent test failure and the neglect of adequate testing has effectively nullified the enhancement envisaged by Reagan. This leaves our security resting on our nuclear deterrent – an effectiveness that relies on how hostile nations perceive we might react if attacked.

“The reliability of our warhead stockpile also relies on computer simulation, together with breakdown and reassembly of existing warheads. We have previously expressed our concern on the loss of nuclear expertise and capabilities.

“Congress should know that both systems are too reliant on computer simulation and far too short on demonstrated capability.”

--According to an independent study prepared for the Defense Department, the combined public and private security provided at nuclear power plants “is inadequate to defend against a maximum, credible, non-state adversary,” as noted by the Nuclear Proliferation Prevention Project at the University of Texas at Austin.

Alan Kuperman, project coordinator and co-author of the study, said in a statement, “Our civilian reactors prepare only against a much smaller-scale attack, known as the ‘design-basis threat.’

As reported by Bloomberg’s Brian Wingfield, “Risks include the possibility that an intruder could deactivate a nuclear unit’s security systems, drain the cooling pool to expose radioactive waste, or use rocket-propelled grenades to overcome a facility’s defenses, according to the study. It also said terrorists could fly an airplane or drive an explosive-laden boat into a reactor.”

--George Will / Washington Post

“President Obama’s increasingly grandiose claims for presidential power are inversely proportional to his shriveling presidency. Desperation fuels arrogance as, barely 200 days into the 1,462 days of his second term, his pantry of excuses for failure is bare, his domestic agenda is nonexistent and his foreign policy of empty rhetorical deadlines and red lines is floundering. And at last week’s news conference he offered inconvenience as a justification for illegality.

“Explaining his decision to unilaterally rewrite the Affordable Care Act (ACA), he said: ‘I didn’t simply choose to’ ignore the statutory requirement for beginning in 2014 the employer mandate to provide employees with health care. No, ‘this was in consultation with businesses.’

“He continued: ‘In a normal political environment, it would have been easier for me to simply call up the speaker and say, you know what, this is a tweak that doesn’t go to the essence of the law...It looks like there may be some better ways to do this, let’s make a technical change to the law. That would be the normal thing that I would prefer to do. But we’re not in a normal atmosphere around here when it comes to Obamacare. We did have the executive authority to do so, and we did so.’

“Serving as props in the scripted charade of White House news conferences, journalists did not ask the pertinent question: Where does the Constitution confer upon presidents the ‘executive authority’ to ignore the separation of powers by revising laws?’ The question could have elicited an Obama rarity: brevity. Because there is no such authority.”

--I didn’t have enough time last week to comment on President Obama’s proposals to revamp the National Security Agency’s surveillance programs, announced during a Friday afternoon press conference, but as with many of Mr. Obama’s plans, there were few real details. Basically the president wants to add a new advocate for privacy concerns, suggesting the adversary might have a role when the court is evaluating requests for broad data-collection programs.

But any legislation to change the NSA surveillance must go through House and Senate intelligence committees and both are comprised of staunch defenders of the existing program.

On a different facet of Obama’s news conference, 8/9, Joe Davidson / Washington Post:

“(Obama) gave the impression that his executive order could have protected Edward Snowden against retaliation for disclosing sensitive information had the government contractor just done it the right way.

“That’s not quite correct....

“Here’s what the president said; ‘So the fact is that Mr. Snowden has been charged with three felonies....If the concern was that somehow this was the only way to get this information out to the public, I signed an executive order well before Mr. Snowden leaked this information that provided whistleblower protection to the intelligence community – for the first time.  So there were other avenues available for somebody whose conscience was stirred and thought that they needed to question government actions.’

“Here’s the problem: The document Obama signed, a presidential policy directive, PPD-19, does not cover government contractors. Snowden once was employed by the CIA, but he was working for Booz Allen Hamilton – a private firm with a National Security Agency contract – when he released details of the massive surveillance program to the Washington Post and the Guardian in Britain....

“Obama ‘badly misled the American people,’ said Stephen M. Kohn, executive director of the National Whistleblowers Center.’”

But then at week’s end, the Washington Post broke a scathing story alleging the NSA broke privacy rules or overstepped its legal bounds thousands of times each year since Congress granted it broad new powers in 2008.

As reported by the Post’s Barton Gelman, an internal audit turned up some 2,800 incidents within a year, the majority involving unauthorized spying on Americans or foreign intelligence targets in the United States.

Documents had been provided to the Post by Edward Snowden earlier this summer.

“In one instance, the NSA decided that it need not report the unintended surveillance of Americans....

“In another case, the Foreign Intelligence Surveillance Court, which has authority over some NSA operations, did not learn about a new collection method until it had been in operation for many months. The court ruled it unconstitutional.

“The Obama administration has provided almost no public information about the NSA’s compliance record.”

As I’ve been opining, you’re nuts if you trust the government.

--Peggy Noonan / Wall Street Journal

“What is privacy? Why should we want to hold onto it? Why is it important, necessary, precious?

“Is it just some prissy relic of the pretechnological past?

“We talk about this now because of Edward Snowden, the National Security Agency revelations, and new fears that we are operating, all of us, within what has become or is becoming a massive surveillance state. They log your calls here, they can listen in, they can read your emails. They keep the data in mammoth machines that contain a huge collection of information about you and yours. This of course is in pursuit of a laudable goal, security in the age of terror.

“Is it excessive? It certainly appears to be. Does that matter? Yes. Among other reasons: The end of the expectation that citizens’ communications are and will remain private will probably change us as a people, and a country.”

--Daniel Henninger / Wall Street Journal

“Sometimes the planets of politics align. Within days of President Obama’s decision last week to appoint a civil-liberties ‘adversary’ inside the U.S.’s antiterrorism surveillance program, a federal judge created a ‘monitor’ to oversee the New York Police Department’s stop-and-frisk anticrime program. Both these decisions, if allowed to take full effect, run a significant risk that violence will return or increases – as the terrorism of al-Qaeda or as murder and assault in New York City.

“If that happens – and don’t bet against it – a liberal president and a liberal federal judge will have brought back to life one of modern liberalism’s worst nightmares: the belief that Democrats can’t be trusted with national security or the control of violent crime. They’re soft on security.”

--Regarding the NYPD, this week U.S. Judge Shira Scheindlin issued a highly predictable order that New York’s stop-and-frisk tactic had violated the constitutional rights of tens of thousands of New Yorkers.

For someone who is not a resident of the Big Apple, I have written as much as anyone about the city’s crime issue over the past 14 ½ years of ‘Week in Review.’ It’s important. Those of us in the New York suburbs get our news from New York, we head into Gotham all the time for entertainment, and crime, or lack thereof, is at the forefront of discussion.

I have also chronicled in these pages how under the 20-year leadership of Rudy Giuliani and Michael Bloomberg, crime and murder rates have plummeted compared to the crack cocaine horror era of their predecessor, David Dinkins.

Under Mayor Bloomberg, who I explained, again, last week has done an outstanding job in this paramount objective (which is why I disregard his soda jerk stuff, as well as the fact he stole a third term), New York City’s murder rate is at an all-time low.

Enter Judge Scheindlin, who ordered an outside monitor be brought in to oversee the Police Department’s stop-and-frisk methods.

Mayor Bloomberg said: “This is a very dangerous decision made by a judge that I think just does not understand how policing works, and what is compliant with the U.S. Constitution as determined by the Supreme Court.”

Yes, stop-and-frisk targets blacks and Latinos, to the tune of about 87%, because those are the ones committing the serious crime that is occurring in predominantly black and Latino neighborhoods. [97% of the victims are black or Hispanic.]

Liberals in New York decry the policy, saying, incredibly, that the stops are disproportionate.

But Police Commissioner Ray Kelly, who is truly one of the handful of great Americans today, knows to go where the crime is! 

Mayor Bloomberg: “It’s worth remembering that as recently as 1990, New York City averaged more than six murders a day. Today, we’ve driven that down to less than one murder a day. Think about what that change really means: if murder rates over the last 11 years had been the same as the previous 11 years, more than 7,300 people who today are alive would be dead.”

And of course 90% or more of those would have been black or Latino.

Ray Kelly, on Judge Scheindlin’s opinion that the NYPD “adopted a policy of indirect racial profiling.”

“What I find most disturbing and offensive about this decision is the notion that the NYPD engages in racial profiling. That simply is recklessly untrue. We do not engage in racial profiling. It is prohibited by law, it is prohibited by our own regulations. We train our officers that they need reasonable suspicion to make a stop, and I can assure you that race is never a reason to conduct a stop. The NYPD is the most racially and ethnically diverse Police Department in the world.”

Bloomberg has five months to go. You know he wants to go out with the lowest murder rate in modern times for 2013, but while the city is appealing the judge’s decision, this puts that goal at risk.

--Related to all the above, the latest Quinnipiac poll of Democratic New York City primary voters has Public Advocate Bill de Blasio surging into the lead at 30%, with Council Speaker Christine Quinn at 24%, Bill Thompson 22% and A. Weiner with 10%. But a new NBC/Wall Street Journal/Marist survey has Quinn ahead of de Blasio 24-21, which is within the margin of error, with Thompson at 16 and A. Weiner at 12.

De Blasio would be an outright disaster, not that the others wouldn’t either. For starters, he has done absolutely nothing in his political career....nothing!

But he came out with an effective campaign spot featuring his 15-year-old son Dante. De Blasio is married to a black woman, Dante has an expansive afro and talks of his dad. It clearly is influencing voters, both polls having been taken after the ad began airing.

The primary is Sept. 10 and if no one wins 40%, the top two face off three weeks later.

Regarding the Scheindlin ruling, de Blasio said, “Under the Bloomberg administration, with the acquiescence of Ms. Quinn, millions of innocent New Yorkers, overwhelmingly young men of color, have been illegally stopped.”

Oh, please. 

Finally, back to Mayor Bloomberg.

“I worry for my kids and I worry for your kids. I worry for you and I worry for me. Crime will come back anytime the criminals think they’re going to get away with things. We just cannot let that happen.”

As I wrote two weeks ago, ‘short’ New York.

--Kathleen Parker / Washington Post

“Three years out and you’d think the deed was done: Madame President Hillary Diane Rodham Clinton.

“She’s everywhere these days because; (a) It’s August; (b) reporters are bored with President Obama; (c) reporters are bored with Joe Biden; (d) Clintons are never boring.

“Correct.

“Op-ed columns are filled with advice about what Hillary needs to do. She needs a narrative. A message. It can’t be that she’s a Clinton or a woman. It has to be...

“What?

“Here’s a thought: She can save the world.

“Yes, all right, perhaps that’s a trifle hyperbolic, but hear me out. And keep in mind that this works only as a long game. We may not live to see salvation but one has to start somewhere. Thus far invasions, bunker-busting mega-bombs and killer drones seem not to be having the desired effect....

“Whether one likes or dislikes Hillary, few dispute that she has matured in her public role. Her resume can be topped by few and the symbolic power of electing a woman president – especially this woman – can’t be overestimated. Many doubtless shudder at the prospect of Hillary Clinton as the most powerful person in the world, but we’ve done worse. For what it’s worth, many in the Bush White House said privately they hoped Hillary would win because they felt she was better prepared to handle international challenges.

“Whatever transpires during the next three years, we can be sure the world’s women are watching closely. In 2007 when I traveled through the Middle East with then-first lady Laura Bush, every woman I met was riveted by the U.S. presidential election and wanted to talk about only this question: Will Hillary win? 

“In 2008, it seemed possible. In 2016, barring a Benghazi surprise, it seems probable.”

Oh, a lot can happen between now and 2016. Vice President Biden just needs to keep his nose clean.

--My state of New Jersey held its special primary election to begin the process of replacing the late Sen. Frank Lautenberg and from a rhetoric standpoint, it’s going to be an explosive faceoff between Democrat Cory Booker and Republican Steve Lonegan following runaway victories. Booker, though, will win handily, but not before Lonegan brands him as a tool of the “Hollywood elites” and “the third senator from California,” given Booker’s celebrity status and fundraising prowess out in Silicon Valley.

The vote is October 16, Gov. Chris Christie having made sure Booker isn’t on the ballot in November when Christie is running for reelection. 

--Addressing a gathering of the American Bar Assn., Atty. Gen. Eric Holder said federal prosecutors will no longer seek long, “mandatory minimum” sentences for many low-level, nonviolent drug offenders.

“Too many Americans go to too many prisons for far too long, and for no good law enforcement reason. While the aggressive enforcement of federal criminal statutes remains necessary, we cannot simply prosecute or incarcerate our way to becoming a safer nation.”

A lot of this is about reducing prison populations, but I have been for such a move for years, like many conservatives. Many states have already begun to implement such a policy. 

--Former Rep. Jesse Jackson Jr. was sentenced to 2 ½ years in prison for treating his campaign fund like a ‘personal piggy bank’ – siphoning off $750,000 over the years to pay for personal items. Jackson’s wife, Sandi, was sentenced to a year for tax evasion.

The judge agreed to stagger the two sentences so one parent can remain outside to raise their two children, ages 9 and 13.

Why there are such good role models!

The judge blasted Mrs. Jackson for seeking leniency almost solely based on the kids. “You knew what you were doing, and you knew what you were doing was wrong,” said the judge.

The couple stole from the campaign fund for seven years. 

--Sign of the Apocalypse: In a zoo in Luohe, China, “a cage marked ‘African lions’ actually contained a Tibetan mastiff, a breed of domestic dog with fluffy brown fur around its face...

“A zoo administrator tried desperately to explain. ‘The wolves are there,’ he told an Oriental Daily reporter.

“ ‘But the wolf is somewhere else in the pen and the dog is a pet. The African lions will be back. They went to another zoo to breed.’

“But the zoo had no explanation for abnormalities such as ‘fox-like creatures’ in the leopard’s pen.” [Joanna Chiu / South China Morning Post]

--Sign of the Apocalypse, part deux: New Jersey’s education department allows absences for almost 130 holidays in the 2013-14 school year, nearly triple the number that was accepted in the 1990s.

The list, according to the Star-Ledger, “includes Church of Scientology founder L. Ron Hubbard’s birthday on March 13 and a Wiccan spring fertility festival on May 1.”

--Here’s a scary thought...from Roberta Kwok in U.S. News Weekly:

In February, we had that surprise meteor explode over Chelyabinsk, Russia, and the fact is as much as we try to track asteroids (which become meteors as they fall to Earth), we miss a ton of them.

“A rock 30 to 50 meters across, the kind that hits Earth every few hundred years, could flatten a large city with the force of a nuclear blast. A 1.5 kilometer-wide asteroid, a size that strikes roughly every million years, could kick up dust clouds that block the sun, triggering massive crop failures.”

The meteor that led to the end of the dinosaurs was roughly 10-kilometers wide, crashing into the Gulf of Mexico.

“Earth has 182 known impact craters, including one 1.2 kilometers wide in Arizona formed about 50,000 years ago by an iron asteroid tens of meters across. That impact unleashed a devastating shock wave and 1,350 mph winds, likely killing mammoths, mastodons, and other animals within about 10 miles. In 1908, an asteroid or comet impact in central Siberia flattened tens of millions of trees, ignited forest fires and reportedly blew a farmer off the steps of his house more than 30 miles away.”

But this is troubling.

“A 2010 National Research council report concluded that current surveys (of asteroids) will not be able to find 90 percent of all 140-meter or larger objects by 2020, as ordered by Congress....

“In the meantime, the sky survey teams continue their work. Though the quest for asteroids can mean enduring hours of monotony, they know the consequences of letting down their guard could be incalculable. ‘When the next one gets here, if it’s a couple hundred meters across, it’ll be a really bad day for someone somewhere,’ says Robert Arentz, advanced systems manager for NEO (Near-Earth Object) Survey at Ball Aerospace. It’s the job of these observers to push that day off as long as they can.”

--But let’s talk about the real Apocalypse.

From Robert Irion / National Geographic

[Just got around to reading this from the July issue]

“Forecasting the solar system is like forecasting the weather. There’s so much randomness in the system, says theorist Greg Laughlin of the University of California, Santa Cruz, that the forecast – as well as any historical reconstruction – has to be given in probabilities. Scientists are as certain as they can be that the four giant planets have finished wandering and will still be on the same orbits five billion years from now, when the aging sun is expected to balloon outward and engulf the inner planets. It’s a little bit less certain that the inner planets – Mercury, Venus, Earth, and Mars – will still be round to die that way.

“ ‘There is a one percent chance the inner solar system will go dramatically unstable during the next five billion years,’ says Laughlin. The problem is a weird long-distance connection between Jupiter and Mercury. When Jupiter’s closest approach to the sun lines up with Mercury’s noticeably squashed orbit in just the right way, Jupiter exerts a slight but steady tug. Over billions of years this gives Mercury a 1-in-100 chance of crossing the orbit of Venus. There is a further 1-in-500 chance that if Mercury goes nuts, it will also perturb the orbit of Venus or Mars enough for one of them to hit Earth – or miss it by several thousand miles, which would be almost as bad. ‘The entire Earth would get stretched and melted like taffy,’ says Laughlin, eagerly demonstrating with his hands.

“That faint risk of apocalypse – a 1-in-50,000 chance that the Earth will succumb to orbital chaos before the sun incinerates it – is our legacy of the solar system’s youth, when it turned inside out. ‘If you give gravity enough time,’ says Levison, ‘it will do stuff like this.’”

Let’s see. You have a 1-in-175,000,000 chance of winning PowerBall, but a 1-in-50,000 chance the Earth is stretched like taffy, which I imagine would do a number on the glassware in your kitchen cabinets.

Adjust your portfolios accordingly.

---

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

God bless America.
---

Gold closed at $1371
Oil, $107.46

Returns for the week 8/12-8/16

Dow Jones -2.2% [15081]
S&P 500 -2.1% [1655]
S&P MidCap -2.6%
Russell 2000 -2.3%
Nasdaq -1.6% [3602]

Returns for the period 1/1/13-8/16/13

Dow Jones +15.1%
S&P 500 +16.1%
S&P MidCap +18.2%
Russell 2000 +20.6%
Nasdaq +19.3%

Bulls 47.4
Bears 20.6 [Source: Investors Intelligence]

Have a great week. I appreciate your support.

Brian Trumbore