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08/24/2013

For the week 8/19-8/23

[Posted 12:00 AM ET]

Washington and Wall Street

We are less than four weeks away from the big Federal Reserve Open Market Committee meeting of Sept. 17-18, where the market is on pins and needles as to whether the Fed will begin tapering its $85 billion a month purchase program of mortgage-backed securities and Treasuries. 

But Congress returns in just two weeks (gosh it’s been nice while they’ve been away, hasn’t it?) and President Obama and our other elected representatives have a full plate of issues to tackle in short order, first and foremost being a new budget for the fiscal year beginning October 1, as well as the debt ceiling, an immigration bill, Obamacare and some foreign affairs items of note.

Beforehand, however, President Obama is attending the G20 summit in St. Petersburg, where he may or may not come face to face with Vladimir Putin, who Obama snubbed in canceling Putin’s summit invitation in Moscow prior to the G20 in response to the Edward Snowden debacle (among other issues). Russia has been the major roadblock for the West in the Syrian civil war with its unstinting support of Bashar al-Assad and in light of this week’s developments there, who knows what kind of talks among the major powers will transpire (or maybe they’ll just blow it off).

As to the end of the fiscal year and the start of a new one, House Speaker John Boehner said Thursday that he is hoping to avert a government shutdown by passing a “short-term” budget resolution that would maintain the sequester, the spending cuts.

Addressing Republican lawmakers on a conference call, Boehner said, “When we return, our intent is to move quickly on a short-term continuing resolution that keeps the government running and maintains current sequester spending levels. Our message will remain clear. Until the president agrees to better cuts and reforms that help grow the economy and put us on path to a balanced budget, his sequester – the sequester he himself proposed, insisted on and signed into law – stays in place.”

As reported by Lori Montgomery of the Washington Post, Boehner did not address the issue of using the threat of a shutdown – or dangling the debt-ceiling issue – in order “to try to force President Obama to delay implementation of his signature health insurance initiative.”  Conservatives are demanding a fight on Obamacare. Republicans may attempt to delay the “individual mandate” requirement to purchase insurance beginning in January after Obama’s own decision to delay penalties for businesses that fail to offer insurance to their workers in 2014. So this is a flashpoint in the Republican caucus.

As to the debt ceiling, part of the problem is no one seems to know for sure when the deadline is but it’s probably sometime between mid-October and mid-November. Thursday, Treasury Secretary Jack Lew warned of the dangers of replaying the debate of two years ago that was so damaging.

In a speech, Lew said, “The drawn-out dispute over the debt ceiling caused business uncertainty to jump, consumer confidence to drop, financial markets to fall, and economic growth to falter. We cannot afford a repeat of what happened in 2011.”

Back to the Fed, to be clear (if you’re a new reader), yes, the Fed helped save the system during the financial crisis but it’s extraordinary programs of the past two years in particular have been ineffective and Ben Bernanke and his Band of Merry Pranksters should have been pulling back long ago instead of continuing to pile $1 trillion a year onto the Fed’s balance sheet. I have also said countless times that it verges on criminal to have maintained interest rates at zero, totally screwing savers, namely the elderly, for far too long. The funds rate should be 2%. $2,000 on $100,000 in savings means a lot to many Americans, and of course it would go right back into the economy.

But now that we’ve been stuck with QE3 and since the Fed recently began talk of tapering, a majority of economists are targeting the Sept. 17-18 confab for the Fed to begin pulling back, but Bernanke and many of the Fed governors have said it depends on the data and recent figures on the economy have been anything but stellar. The yield on the 10-year Treasury hit 2.93% on Thursday, its highest yield since July 2011, because the market was convinced the Fed is reversing course shortly, but then Friday morning we had a hideous new home sales figure of 394,000, like 106,000 below estimates, and the bond market rallied because of a renewed feeling that, hey, maybe the Fed will hold off further.

I think the Fed will. I said so last week. I also said it’s about their credibility. They have totally misgauged the strength of the economy and while they remain optimistic on future growth, the kind that would allow them to finally get off their bond-buying addiction, the facts say otherwise.

Like if the consumer is 70% of the U.S. economy and if retailers from Wal-Mart to Macy’s to Nordstrom’s to Target are all issuing disappointing revenue forecasts going forward, I’d say we have a problem. The Fed can’t look at some of these corporate reports and say the economy is strengthening. Where is the evidence?

Yes, July existing home sales, reported earlier in the week, were stronger than expected, but everyone seemed to think much of that activity was a result of people jumping off the fence because they saw rates rising and what would this say about August and beyond, and then we got this putrid new home sales number and everyone said, ah ha! Higher mortgage rates are having an impact. As reported by Freddie Mac this week, the average rate on the 30-year jumped to 4.58%, the highest since July 2011 and way off the recent low of about 3.30%. That’s a big difference, sports fans, a difference maker for many. So barring a big change in rates the next few weeks, this has to give the Fed pause.

There is really only one more big data point that the Fed is waiting for before they get together Sept. 17 and that is the August jobs report, out Sept. 6. If it’s a blockbuster, well in excess of 200,000, tapering is probably back on. If it’s weak, that should seal the case. Tapering would commence in October or later. That’s my thinking.

There is one other potential fly in the ointment. The Fed will at least have had the opportunity to observe Congress for a week to see if a government shutdown is in the cards, and while that isn’t in the thinking today, the Fed needs to be prepared.

Lastly, on an unrelated topic, I enjoyed a piece by James Glanz in the New York Times titled “Is Big Data an Economic Big Dud?”

Yup.

“What is sometimes referred to as the Internet’s first wave – say, from the 1990s until around 2005 – brought completely new services like e-mail, the Web, online search and eventually broadband. For its next act, the industry has pinned its hopes, and its colossal public relations machine, on the power of Big Data itself to supercharge the economy.

“There is just one tiny problem: the economy is, at best, in the doldrums and has stayed there during the latest surge in Web traffic. The rate of productivity growth, whose steady rise from the 1970s well into the 2000s has been credited to earlier phases in the computer and internet revolutions, has actually fallen. The overall economic trends are complex, but an argument could be made that the slowdown began around 2005 – just when Big Data began to make its appearance.”

Responding to the World Economic Forum’s discussion of Big Data as “the new oil” and “a new asset class”:

“Robert J. Gordon, a professor of economics at Northwestern University [Ed. love this guy], said comparing Big Data to oil was promotional nonsense. ‘Gasoline made from oil made possible a transportation revolution as cars replaced horses and as commercial air transportation replaced railroads,’ he said. ‘If anybody thinks that personal data are comparable to real oil and real vehicles, they don’t appreciate the realities of the last century.’”

Europe...and the emerging markets

The end of the recession on the continent has given some hope to the eurozone’s leaders, but weak growth leaves the euro area still highly vulnerable. The bottom line is that banks still aren’t lending and many nations remain susceptible to social unrest.

That said, the data has been better. A flash composite reading on services and manufacturing in the eurozone for August came in at 51.7 vs. 50.5 for July (50 the dividing line between growth and contraction), with manufacturing at 51.3 vs. 50.3 last month, a 26-month high. The composite was also a 26-month high.

Germany’s flash August comp came in at 53.4, up from July’s 52.1, with manufacturing at a solid 55.3, another 26-month high.

But France saw its August composite decline to 47.9 from July’s 49.1, with manufacturing down to 48.6 from 51.4. Not good.

One aside on the U.K. Gross domestic product increased 0.7% in the second quarter over the first, better than the initial estimate of 0.6%.

And then of course you have the German election, Sept. 22. The vote is increasingly about Greece, actually, and whether German Chancellor Angela Merkel, who is still expected to emerge a comfortable winner (though the makeup of her governing coalition is not a certainty), under fire for failing to “come clean,” in the words of her opponent, convinces Germans they will not have to kick in more for another Greece bailout.

Merkel’s finance minister, Wolfgang Schaeuble, did her no favors when he said “there will have to be another program in Greece.” 

The eurozone’s loan disbursements to Athens are set to end mid-2014, after which the IMF steps in for a spell, but the IMF wants Brussels to state where Greece’s funding will come from after the eurozone steps aside. The IMF is not footing the entire bill after all.

The issue is Greece’s public debt is now 176% of GDP and with an IMF target of 120% in 2022, the only thing that seems certain is that Greece will require another debt writedown, which would saddle governments like Germany’s with huge losses, and no doubt upset German taxpayers all over again.

Schaeuble says, however, no debt writedown is necessary. He just wants to cut Greece some slack on the interest rates they are paying on its loans, but this just won’t work. The level of debt is still unsustainable.

I mean consider that the other week when it was announced Greece’s economy probably contracted 4.6% in the second quarter, this was seen as great news because it wasn’t the 5.5% decline forecasted. But it was still a whopping contraction of 4.6%! And tax revenues continue to lag all the projections that the bailout packages were based on.

So, yes, this is a big issue for Germany and others this fall following the vote. Until now, Merkel, and her friends in Brussels, have done their best to keep Greece off the front burner. But it’s coming back. The issue will be can Euro leaders isolate Greece’s problems, or do we see another round of contagion into the likes of Portugal, Italy and Spain.

Finally, a note on the financial storm in the emerging market space.

Ralph Atkins / Financial Times

“With the U.S. economy having successfully avoided possible global upsets and growing steadily, the U.S. Federal Reserve wants to wind down its asset purchases, or ‘quantitative easing,’ from as early as next month. As a result bond prices have fallen, and yields risen correspondingly, in developed markets – and the strong flows of capital into emerging markets that had been attracted by higher yields there have gone firmly into reverse.

“Worst hit have been countries most reliant on capital inflows – those with gaping current account deficits to finance. In India, where the deficit exceeded 5% of gross domestic product last year, the rupee has tumbled to a record low against the dollar. Equity prices have fallen precipitously, while 10-year bond yields have approached 10%, the highest for five years.”

India’s economy is rapidly weakening, the currency collapsing, and the country is increasingly seen as a giant, dysfunctional blob, infected with corruption scandals and high inflation.

But this is just one emerging market that investors are fleeing. Indonesia is another, and its stock market cratered 10% over a two-day period this week. Rising interest rates around the world have indeed lessened the appetite for riskier markets such as these two. Throw in a nation like Thailand and whereas they all had no trouble attracting capital, and as their consumers took on debt to buy imports from the likes of Western Europe and the U.S., their export machines have been suffering due to slowing growth in China and Europe’s recession (as well as the tepid growth in the U.S.)

The concern is that you have a replay of the 1997-98 Asian financial crisis, which had similar underlying problems before things exploded and people were reduced to eating insects (very true...but now we’ve learned of the nutritional value of bugs).

Street Bytes

--Stocks finished mixed with the Dow Jones falling for a third straight week, off 0.5% to 15010, while the S&P 500 gained 0.5% and Nasdaq climbed 1.5%. 

--U.S. Treasury Yields

6-mo. 0.05% 2-yr. 0.38% 10-yr. 2.81% 30-yr. 3.79%

As noted earlier, the 10-year hit 2.93% before falling back on Friday

--Trading on Nasdaq, one of the most prominent exchanges in the world, was halted for more than 3 hours on Thursday due to a “technical issue.” Thankfully, it was a slow news day in August and not a busy one in October.

CEO Robert Greifeld said in an interview on Friday, after not being heard from Thursday, that the exchange halted trading after information from consolidated data feeds stopped functioning. Professional traders could have obtained the same data from private feeds but that would have put them at an advantage to retail investors.

The suspension was the longest period of time that trades on Nasdaq were halted due to a technical outage and comes 15 months after a technical glitch hit Facebook shares on their opening day of trading on Nasdaq.

--Microsoft announced that Steve Ballmer would retire as CEO within the next 12 months, ending a 13-year run at the top, though he first joined the company in 1980.  Microsoft stock, despite a bounce Friday on the news, has lost around 40% since Ballmer assumed the CEO position in January 2000. The company has suffered recently with problems tied to Windows 8 and its failure to introduce a popular product to compete in the tablet space, Microsoft having recently taken a $900 million inventory writedown on the Surface RT tablet.

--An HSBC flash estimate for August on manufacturing in China rose to 50.1, up from a final 47.7 in July, a good sign things are stabilizing here. But home prices in China rose in July in 69 of 70 major cities as the government’s efforts to dampen the housing bubble continue to meet with failure. Real estate is still seen as the best option for investing one’s savings here but the sector’s rise just isn’t sustainable.

--Japan’s exports jumped sharply in July, up 12.2% from a year earlier after a 7.4% rise in June. Exports to the European Union rose 16.6% after an 8.6% rise in June, while Japan’s exports to the U.S. rose 18.4% year over year, faster than June’s 14.6 increase.

This is good news for Prime Minister Shinzo Abe, who will decide in about a month whether to raise the sales tax to 8% in April from 5% today, with a further increase to 10% in 2015. Bank of Japan Gov. Haruhiko Kuroda said the economy is strong enough to withstand the inevitable short-term impact of the tax hike, which is necessary as a first step to cut Japan’s massive debt, the largest in the world. Kuroda also warned against any delay in implementation, saying “ending deflation and raising the sales tax are achievable at the same time.”

--Mexico’s economy contracted for the first time in nearly four years in the second quarter. GDP shrank 0.7% compared with the first quarter. [GDP was up 2.8% in Q2 vs. a year earlier.]

--Thailand’s economy shrank 0.3% in the second quarter over the first after a fall of 1.7% during Q1. [GDP was up 2.8% in Q2 vs. a year earlier. For 2012, Thailand grew at a rate of more than 6%.]

--Hewlett-Packard’s revenue in its fiscal third quarter declined 8% as PC sales continue to slide and the company’s enterprise computing business dealt with tepid worldwide IT spending. CEO Meg Whitman also warned H-P is “unlikely” to see revenue growth next year.

--Staples is one of those companies suffering from declining PC sales, specifically on the ink and toner end, with sales declining 2% year over year in the second quarter. Shares in the company plunged 15%.

--Wells Fargo is cutting 2,300 jobs from its mortgage unit, though this is less than 1% of its 274,000 total workforce. The bank expects the pace of mortgage lending to slow for the remainder of the year with the advent of higher interest rates.

--Talk about a non-story...the SEC’s inquiry into JPMorgan Chase’s hiring of a son of a former Chinese banking regulator and daughter of a Chinese railway official. The SEC is looking into whether the hirings violated the Foreign Corrupt Practices Act. This is a waste of the SEC’s time and our money.

--Last week I commented on the Goldman Sachs study that estimated more than half of all homes sold last year and so far in 2013 have been all cash purchases, up from around 20% before the housing crash. Reader Bob C. wondered why the change in buying behavior and I’ll just quote the Wall Street Journal’s Nick Timiraos:

“There’s no exact way to know who is responsible for all of these cash purchases, though they are likely to include some combination of investors, foreign buyers, and wealthy homeowners that don’t want to go through the hassle of getting a mortgage before closing on a sale. Mortgage lending standards have sharply tightened up since the housing bubble, with banks scrutinizing borrowers’ tax returns and bank statements to verify their incomes and the source of their down payment.”

I don’t disagree with this. But it’s also about the haves and have nots.

--Jim Puzzanghera / Los Angeles Times

“Record profits from bailed-out Fannie Mae and Freddie Mac have helped reduce the federal budget deficit and put off an increase in the nation’s debt limit, but a new government report raises questions about how the mortgage finance giants are accounting for future losses.

“The two companies, which were seized by the government in 2008, have been avoiding billions of dollars in potential long-term losses by delaying a requirement that they write off more of the delinquent mortgages they own or back, according to the inspector general for the Federal Housing Finance Agency, which oversees the firms.

“The FHFA said more than a year ago that Fannie and Freddie needed to change their accounting procedures to conform with the way banks write off mortgages that are more than 180 days delinquent.”

But implementation of the rule has been delayed until Jan. 1, 2015. Or as Sen. Bob Corker (R-Ten..) said, the situation at the two probably “isn’t quite as rosy as some have come to believe.”

--Steven Greenhouse / New York Times

“United Parcel Service has told its white-collar employees that it will stop providing health care coverage to their spouses who can obtain coverage through their own employers, joining an increasing number of companies that are restricting or eliminating spousal health benefits.

“U.P.S., the world’s largest package delivery company, said its decision was prompted in part by ‘costs associated with’ the federal health care law that is commonly called Obamacare. Several health care experts, however, said they believed the company was motivated by a desire to hold down health care costs, rather than because of cost increases under the law....

“In explaining its move...U.P.S. told employees, ‘Since the Affordable Care Act requires employers to provide affordable coverage, we believe your spouse should be covered by their own employer – just as U.P.S. has a responsibility to offer coverage to you, our employee.’....

“U.P.S. is one of the biggest companies so far to drop spousal coverage for some segment of its work force, and its announcement was viewed by some as a harbinger of a broader trend in employers’ restrictions on health care benefits.”

The new policy does not affect the company’s 250,000 unionized workers.

--Various state unemployment rates for July...

California 8.7%
Nevada 9.5 [highest]
New Jersey 8.6
New York 7.5
North Dakota 3.0 [lowest]
Texas 6.5
Virginia 5.7

--The share of undergraduates who used federal student aid to help pay for college rose from 47% in 2007-08 to 57% in 2011-12, according to the Department of Education. The average federal aid amount came to about $8,200 in 2011-12. But while the federal government has offered more help, state aid has fallen owing to tighter state budgets.

--The mystery coronavirus that originated in Saudi Arabia has now killed 47 of 96 people in the Middle East it has sickened and this week, health officials linked the source to bats. But, a perfect match for the virus was found in only one of 100 bats tested. As reported by the New York Times, this was also an insect-eating bat that normally does not bite people or drool on fruit so it’s unclear how it is leaping to people. It could be spread by inhaling dried up fecal matter, a la Americans who have been infected with hantavirus when dried mouse droppings are swept up.

--From Harro Ten Wolde / Daily Star (Lebanon):

“A German government technology agency has warned that new security technology in computers running Microsoft’s Windows 8 operating system may actually make PCs more vulnerable to cyber threats, including sabotage.

“Germany’s Federal Office for Information Security said in a statement posted on its website Wednesday that federal government agencies and critical infrastructure operators should pay particular attention to the risk.”

It has to do with a chip known as the Trusted Platform Module, or TPM 2.0, which is built into Windows 8 computers.

Microsoft declined to comment.

--Billionaire hedge-fund manager Philip Falcone agreed to be banned from the securities industry for five years in a settlement with the SEC, which accused Falcone of improperly borrowing money from his fund ($113 million) to pay his personal taxes and for favoring some investors over others in returning their money.

--Many apartment owners in New York are miffed about the growing trend for vacation rentals by owner, VRBO, which is an alternative to pricey hotel rooms...an illegal alternative in the Big Apple. I mean imagine seeing strangers all the time on your floor.

Hotel operators are of course very ticked off as well. A big problem is there is little enforcement of the law with a meager staff to investigate complaints.

--Heineken and Carlsberg, the world’s third- and fourth-largest brewers by sales, say their results continue to suffer with slack demand in Western Europe and the U.S., nor do the two expect any improvement the balance of the year.

Heineken’s second-quarter beer volume declined 7% in Western Europe, while Carlsberg’s fell 6% in the region.

--Last weekend at a car auction Pebble Beach, a 1967 Ferrari 275 GTB/Spider was sold for $27.5 million, the second most expensive car ever to be sold at auction.

Foreign Affairs

Syria: Following a suspected poison gas attack on some Damascus suburbs, Syrian troops renewed their artillery assault on the same areas. United Nations Secretary-General Ban Ki-moon and the UN’s chemical weapons inspection team already on the ground in Damascus are powerless to respond, with the latter not being allowed onto the suspected site. Russia’s foreign ministry office initially said Syria pledged “maximum cooperation” with UN experts, but when this proved not to be true, urged the Assad regime to let the inspectors in. French Foreign Minister Laurent Fabius said the world should respond “with force” if the attack is confirmed. Israeli Prime Minister Benjamin Netanyahu said Iran is using Syria as a testing ground and watching how the world responds.

Opposition groups say as many as 1,300 people died in the attack on Wednesday, though it is impossible to verify the toll. Nonetheless, it also seems impossible to stage the videos that have been streaming in. If it was indeed a chemical attack (reports say it was undiluted sarin gas), it is the worst atrocity in a civil war that has claimed well over 100,000 lives, plus it is a war crime.

Iran and Lebanon’s Hizbullah continue to bolster President Bashar al-Assad. Arizona Republican Senator John McCain said it is “long past time” for U.S. allied nations to take limited military action against Syrian government forces. But Chairman of the Joint Chiefs of Staff Gen. Martin Dempsey described potential “limited military options” as being costly and ineffective, including the possibility that Syrian rebels might not promote American interests if they gained control. For his part, President Obama called the attack a “big event” and at week’s end was said to be exploring military action.

Separately, the UN’s refugee agency and UNICEF said one million children have been forced to flee Syria, while a further two million are displaced within the country. About three-quarters of those children fleeing are under the age of 11. The UN said its appeal for Syria is less than 40% funded.

Roger Hearn, Save the Children’s regional director for the Middle East, said: “It is appalling that the world has stood and watched as one million children have been forced from their country, terrified, traumatized and in some cases orphaned.”

The total number of refugees as a result of the war is now more than 1.7 million, and in a new wave, 40,000 Syrians have poured over the border into Iraqi Kurdistan.

Edward Lucas / London Times

“Immediate responsibility for the barbaric chemical weapons attack on Syrian civilians lies with those who used them – the regime, most likely, or possibly rebel groups trying to stoke international outrage. But the deeper responsibility is with the international order that allowed the conflict to escalate into a full-scale and for now unstoppable civil war.

“Similarly, the immediate victims are Syrian children, suffocating before our eyes. But grievous too are the wounds to our own security. As President Obama’s ‘red lines’ against the use of these weapons turn into smears of pink crayon, a big taboo has been breached.

“Weapons of mass destruction are being used repeatedly and on an increasing scale in the most dangerous corner of the world. We do not know what is being used, by whom, why or when the next attack will be. There is nothing much we can do about it.

“Part of the blame rests with Western countries, timid, divided and distracted. America, infamously, has decided to ‘lead from behind’ since the start of the Arab Spring. The EU is still a foreign-policy teenager, uncertain of its own strength. Turkey has its own agenda. Israel decries the Assad regime as dangerous and hostile – but fears chaos or Islamists more.

“The greatest blame lies with Russia. Out of anti-Western spite, it has blocked every attempt to put pressure on the regime of Bashar Assad at a time when deals were still perhaps there to be done. Again and again it has wielded, and threatened to wield, its veto in the United Nations Security Council, with the Foreign Minister, Sergei Lavrov, playing the role of ‘Mr. Nyet’ epitomized by Andrei Gromyko in the Cold War....

“We cannot wish Russia away. But we can drop our wishful thinking that lets the Kremlin skew our decision-making. It may be too late to help Syria. But we are not too late to help ourselves.”

Richard Haass / Financial Times

“With much of the world’s attention fixed on the drama playing out in the streets of Egypt, the civil war in Syria that has claimed as many as 100,000 lives grinds on in the shadows. But new allegations of massive use of chemical weapons by the regime of Bashar al-Assad have once more brought Syria into focus and raised anew the question of what more, if anything, should be done to stop what is going on there....

“Barack Obama’s administration is in a grave predicament, much of its own making. The U.S. president has, on several occasions, declared that Syrian use of chemical weapons would cross a ‘red line,’ constituting a ‘game changer’ that would alter his calculus of what his country was prepared to do.

“What makes all this awkward and more is that the U.S. essentially opted not to do anything when it became clear that the Syrian regime did use chemical weapons against its own citizens several months ago. To be precise, it chose not to respond with military force, but instead to open the possibility that it would supply less radical opposition forces with lethal weaponry. The reality that such support has been more rhetorical than real, and has done nothing to alter the military balance, makes U.S. warnings appear empty.”

Benny Avni / New York Post

“It was last Aug. 21 that Obama said that a red line for him would be if Syria’s vast chemical-arms caches started ‘moving around,’ or ‘being utilized,’ then ‘that would change my calculus; that would change my equation.’

“Well, Obama’s foreign doctrine (benign neglect, or perhaps just hopeless uncertainty) hasn’t changed one iota in the year that passed.

“Never mind the red lines. Let Syria burn.

“As the chairman of the joint chiefs, Gen. Martin Dempsey, told the Associated Press yesterday, the United States could easily take out all of Syria’s air assets, and do so essentially by remote control. But it won’t, because by now we believe that if the rebels take power, they won’t support American interests.

“(Would you? After Obama’s red-line fudge? After the West’s two years’ of dithering has allowed al-Qaeda-friendly radicals to take an ever-greater role in leading the rebels?)”

Egypt: The military-backed rulers pressed their crackdown against the Muslim Brotherhood, arresting spiritual leader Mohammed Badie, a day after suspected Islamic militants ambushed two minibuses carrying off-duty policemen in the Sinai Peninsula, forcing them to lie on the sand and shooting 25 of them dead. 

Badie is wanted on charges of inciting murder. Hundreds of the Brotherhood’s former lawmakers, politicians and field operatives are already in custody. Ousted President Mohammed Morsi and his top aides have been held at an unknown location since the July 3 coup. The Brotherhood vowed to continue their protests.

Over 1,000, including at least 100 police, have died since the start of the operation to break up the pro-Morsi sit-ins two weeks ago.

Mohamed ElBaradei, Egypt’s former vice president, fled to Europe rather than face the risk of arrest for his resignation in the face of the coup.

Christians continue to be targeted by Islamists, who believe the Christians played an instrumental role in the ouster of Morsi. At least 30 churches had been either partially or completely destroyed as of last Sunday, according to the Financial Times. Four Coptic Christians have died in suspected religious killings. In many villages, Christians, who overall make up 10% of Egypt’s population, are fleeing (think Iraq).

Senator John McCain is calling for an aid cutoff, saying Egypt’s generals benefit from U.S. military hardware such as Apache helicopters. With “Apache helicopters flying overhead, nothing is more symbolic of the United States of America siding with the generals,” McCain said last weekend.

The U.S. and the European Union said they were reviewing aid to Egypt, but Saudi Arabia, a foe of the Brotherhood, has vowed to make up the difference.

As for Gen. Abdul Fattah al-Sisi, he said in a message to supporters of Morsi that “there is room for everyone,” urging them to help “rebuild the democratic path” and “integrate in the political process.” But then in the same breath he warned, “We will not stand by silently watching the destruction of the country and the people or the torching the nation and terrorizing the citizens.”

And to complete the circle...Arab Spring, fall of Hosni Mubarak, elevation of Morsi in a democratic election, ouster of Morsi in a coup...Mubarak was released from jail to await a retrial under house arrest, as a court ruled there were no grounds to detain him. Many Egyptians feel as if Mubarak has now come back as their president.

Editorial / Washington Post

“Some argue that if aid is suspended the United States will lose influence with the military. But the past seven weeks have clearly shown that maintaining aid has bought the Obama administration no favor with de facto ruler Gen. Sisi, who has repeatedly disregarded U.S. counsel. Some worry that Egypt would react to an aid suspension by backing away from its peace treaty with Israel or its fight against the real Islamist terrorists based in the Sinai Peninsula. But those policies are in the country’s vital interests, and the armed forces will not abandon them.

“In reality, Egypt is far more vulnerable to U.S. and European pressure than is Syria or most any other Arab state. Not only is the military dependent on U.S. weapons, spare parts and training but the economy, based on tourism and foreign investment, also has no chance of recovering without Western support. The billions in cash supplied to the new regime by Saudi Arabia and other Arab supporters is a temporary salve; in the end, any government seeking stability will need to come to terms with the International Monetary Fund, where U.S. influence is strong.

“A forceful and united stand by Western governments against the course the Egyptian military is pursuing could bring the generals to their senses before it is too late. They must be made to understand that a new Egyptian autocracy will never be accepted by the United States or Europe. At the moment, they believe otherwise.”

Bret Stephens / Wall Street Journal

“It would be nice to live in a world in which we could conduct a foreign policy that aims at the realization of our dreams – peace in the Holy Land, a world without nuclear weapons, liberal democracy in the Arab world. A better foreign policy would be conducted to keep our nightmares at bay: stopping Iran’s nuclear bid, preventing Syria’s chemical weapons from falling into terrorist hands, and keeping the Brotherhood out of power in Egypt. But that would require an administration that knew the difference between an attitude and a policy.”

Charles Krauthammer / Washington Post

“What’s the United States to do? Any response demands two considerations: (a) moral, i.e., which outcome offers the better future for Egypt, and (b) strategic, i.e., which outcome offers the better future for U.S. interests and those of the free world.

“As for Egypt’s future, the Brotherhood offered nothing but incompetent, intolerant, increasingly dictatorial rule. In one year, Morsi managed to squander 85 years of Brotherhood prestige garnered in opposition – a place from which one can promise the moon – by persecuting journalists and activists, granting himself the unchallenged power to rule by decree, enshrining a sectarian Islamist constitution and systematically trying to seize the instruments of state power. As if that wasn’t enough, after its overthrow the Brotherhood showed itself to be the party that, when angry, burns churches.

“The military, brutal and bloody, is not a very appealing alternative.   But it does matter what the Egyptian people think. The anti-Morsi demonstrations were the largest in recorded Egyptian history. Revolted by Morsi’s betrayal of a revolution intended as a new opening for individual dignity and democracy, the protesters explicitly demanded Morsi’s overthrow. And the vast majority seem to welcome the military repression aimed at abolishing the Islamist threat. It’s their only hope, however problematic, for an eventual democratic transition....

“What, then should be our policy? The administration is right to deplore excessive violence and urge reconciliation. But let’s not fool ourselves into believing this is possible in any near future. (Gen.) Sisi crossed his Rubicon with the coup. It will either succeed or not. To advocate a middle way is to invite endless civil strife.

“The best outcome would be a victorious military magnanimously offering, at some later date, to reintegrate the more moderate elements of what’s left of the Brotherhood.

“But, for now, we should not be cutting off aid, civilian or military, as many in Congress are demanding. It will have no effect, buy no influence and win no friends on either side of the Egyptian divide. We should instead be urging the quick establishment of a new cabinet of technocrats, rapidly increasing its authority as the soldiers gradually return to their barracks....

“Regarding Egypt, rather than emoting, we should be thinking: what’s best for Egypt, for us and for the possibility of some eventual democratic future.

“Under the Brotherhood, such a possibility is zero. Under the generals, slim.

“Slim trumps zero.”

Roger Boyes / London Times

“The guns of August, usually held to describe Europe’s slide to war in 1914, are now rumbling in Egypt. It is a dangerous moment, not just because a large, influential country is grappling with its own ungovernability, but because the galloping crisis signals a more general collapse of statehood in the Middle East. ‘Things fall apart,’ wrote W.B. Yeats in the aftermath of the First World War. ‘The center cannot hold; mere anarchy is loosed upon the world.’

“The region certainly cannot sustain two wars – Syria’s bloody insurgency and a near-civil war in Egypt – without wrecking established peace treaties and the normal mechanisms for defusing a conflict. If the Egyptian army loses its grip on the Sinai, if a radicalized Muslim Brotherhood seeks to heat up the neighborhood, if Bashar Assad in Syria cannot control jihadist activity on the Golan Heights, then Israel will be drawn into the fire.

“You know it’s bad, really bad, when on a single day four Arab cities, cradles of lost civilizations – Damascus, Beirut, Cairo and Baghdad – are sucked into violence, rocked by car bombs, explosions and shoot-outs. Lebanon in the grip of Hizbullah; Jordan flailing in its attempts to shelter refugees fleeing from Syria; Iraq barely able to lay claim to statehood. More than 4,400 people were killed in Syria during the Ramadan fast....

“William Hague was right to say that the events in the Arab world were as momentous as the financial crisis. That crisis was triggered by our failure to grasp the interconnection between different markets. By the same token, the First World War broke out because of the interconnectivity of the alliance of tired empires, and it is this that contains the true warning. Nobody in the imperial capitals was paying attention to Sarajevo. While Egypt is occupying minds there is a sense in the West that this can only turn nasty for us if Israel is attacked or the Suez Canal is blocked. In August 1914 there was a lot of grouse shooting going on. In August 2013, politicians prefer to read doorstopper biographies in Tuscanny and Cornwall. Yet the spreading Middle East crisis, its multiple flashpoints, is every bit as ominous as the prelude to war in 1914.”

Israel: The Israeli Air Force struck a “terrorist” target near Beirut early Friday in response to four rockets being fired from Lebanon into Northern Israel on Thursday. Israel holds the Lebanese government responsible, even though an al-Qaeda affiliate claimed responsibility. Lebanese President Michel Suleiman denied involvement saying, “the firing of rockets towards Israel is a violation of the UN-regulated ceasefire between Israel and Lebanon.” In a statement, Israeli Prime Minister Benjamin Netanyahu vowed: “Anyone who attacks us, or tries to attack us, should know that we will get him.”

[In another example of the Syrian war officially spilling over into Lebanon, as I long said would be the case, twin car bombs exploded outside mosques in Lebanon’s second city, Tripoli, killing 45 and wounding hundreds on Friday. So in the span of eight days, 75 dead in such attacks in the country, the death toll in the first bombing in Beirut having risen to 30.]

Iran: In case you still had doubts about Iran’s nuclear weapons program, understand that the International Atomic Energy Agency has unsuccessfully sought access to Iran’s Parchin military base since November 2011, suspecting it was used to conduct nuclear-related explosives tests.

It now appears it’s too late. According to analysis of satellite images, Iran has nearly finished paving over the site.

Separately, Iran’s outgoing nuclear chief said last weekend that Iran has installed 18,000 uranium-enrichment centrifuges. They just keep spinning away and new President Rohani will continue his nation’s stall game.

Turkey: Prime Minister Erdogan angered the U.S., as well as leaders in Egypt and Israel, by accusing Israel on Tuesday of helping overthrow Mohammed Morsi.

“What do they say in Egypt? Democracy is not the ballot box. What is behind it? Israel. We have in our hands documentation,” Erdogan said in comments broadcast by state television. An aide to Netanyahu called the claim “Nonsense.”   Egypt’s government spokesman said no one “sane or fair” could accept Erdogan’s allegation. Erdogan didn’t spell out what documentation he had.

Pakistan: Former president and army chief Pervez Musharraf was indicted on murder charges in connection with the 2007 assassination of Pakistani Prime Minister Benazir Bhutto. It is the first time a former army chief in Pakistan has been charged with a crime. Musharraf is currently under house arrest for a separate legal issue.

And in the latest border clash, a Pakistani Army officer was killed when India shelled an area on the Line of Control, the disputed border between Pakistan and India.   Pakistan called the attack “unprovoked.”

Russia: In the latest poll for the Moscow mayoral race, acting Mayor Sergei Sobyanin leads opposition leader Alexei Navalny by a 62-20 margin, 20 being the unofficial goal of Navalny’s supporters.

Dmitry Travin, a professor at European University in St. Petersburg, told the Moscow Times:

“The authorities are confused about what to do with Navalny: whether to put him in prison, or use him to democratize the elections. That’s why they’ve undertaken a number of contradictory actions.”

Recall, Navalny was released from prison while his conviction on embezzlement charges is appealed, which allowed him to campaign for mayor.

China: The country is riveted with the trial of Bo Xilai, the disgraced princeling once thought to be the country’s most powerful rising politician. As his trial on corruption charges began, Bo strongly contested charges that through his wife, Gu Kailai, and son he had amassed $millions in bribes and illicit assets. Bo claimed Gu’s testimony was “comical and ridiculous;” Gu having testified her husband told her to divert public money into his personal accounts.

Meanwhile, the United States and China agreed to expand military exchanges and exercises (such as rescue missions and counter-piracy drills) in an effort to build more stable ties, despite tensions over cybersecurity and territorial disputes.

Japan: The Nuclear Regulation Authority elevated the Fukushima alert level to three on a scale of one to seven, “serious.” Highly radioactive water was found to be leaking from a storage tank into the ground at the plant on Monday.

Australia: Prime Minister Kevin Rudd’s Labor party trails the Tony Abbott-led coalition 54-46, according to a poll ahead of the Sept. 7 snap election. Should the figures pan out, Abbott’s coalition would gain the seats necessary to make him Rudd’s successor.

Random Musings

--I told you from day one of the Edward Snowden disclosures regarding the National Security Agency not to trust our government. In the beginning, though, my main concern was not the collection of phone data, but of emails.

We were told by President Obama, the NSA and members of Congress supposedly with oversight of the NSA’s data-mining programs, ‘Oh, no, we wouldn’t collect emails.’

I kept telling you not to believe this.

Well, lo and behold, what do we learn this week but that the NSA “illegally intercepted communications of Americans for years before being ordered by a secret court to add privacy safeguards, according to legal opinions declassified today.” [Chris Strohm / Bloomberg]

The program that was collecting “tens of thousands of electronic communications by Americans, such as emails,” was ruled unconstitutional by the Foreign Intelligence Surveillance Court on Oct. 3, 2011.

“For the first time, the government has now advised the court that the volume and nature of the information it has been collecting is fundamentally different from what the court had been led to believe,” Judge John Bates wrote.

The NSA then revised the program to segregate the communications of Americans from those of foreigners suspected of terrorism.

The issue for myself and many others has been that clearly the NSA’s programs are primed for abuse. If you were pooh-poohing the issue, hopefully this is a wakeup call. Congress needs better oversight and clearly those with same before these recent revelations were kept in the dark while the emails were being collected.

Understand, a 2008 law requires the NSA to obtain a warrant to collect the communications of Americans.

Bates, a U.S. district judge who was appointed to the oversight court by Chief Justice John Roberts, said the NSA “knowingly acquires tens of thousands of wholly domestic communications each year.”

Robert Litt, general counsel for the director of national intelligence, said, “This was not in any respect an intentional or wholesale breach of the privacy of American persons” and the NSA tells us all emails were deleted.

Peggy Noonan / Wall Street Journal

“The government has the ways and means to do pretty much anything now, and if they can do it they will do it.

“If the citizens of the United States don’t put up a halting hand, the government can’t be expected to: It is in the nature of security professionals to always want more....

“If you believe the information will never be used wrongly or recklessly, you are touchingly innocent. If you assume you can trust the administration on this issue you are not following the bouncing ball, from Director of National Intelligence James Clapper, who told Congress under oath the NSA didn’t gather ‘any type of data at all on millions or hundreds of millions of Americans' (he later had to apologize) to President Obama, who told Jay Leno: ‘We don’t have a domestic program.’ What we do have, the president said, is ‘some mechanism that can track a phone number or an email address that is connected to a terrorist attack.’

“Oh, we have more than that.”

--U.S. Army Maj. Nidal Hasan was found guilty of multiple counts of murder and attempted murder in connection with the Fort Hood shootings in 2009 that killed 13 and injured 30 more. A sentencing hearing begins Monday and prosecutors will seek the death penalty.

--Army Pfc. Bradley Manning was sentenced Wednesday to 35 years in prison for leaking 700,000 military and diplomatic documents and battlefield videos to WikiLeaks. The little creep, who now wants to become a woman, “Chelsea,” is eligible for parole in just seven years. He had faced 90 years in prison but the judge, Army Col. Denise Lind, issued the far lesser sentence without explanation.

So we now wait to see how Chelsea is imprisoned. The Pentagon can’t possibly be stupid enough to pay for his hormone treatments. But expect multiple lawsuits attempting to effort this.

--I loved seeing this headline in the Aug. 19 issue of Army Times, “Purge the generals.” Exactly the topic I’ve been writing of, essentially since the beginning of the Iraq War and the likes of Tommy Franks.

Michelle Tan / Army Times

“An Army officer who called on the military a year ago to come clean about the ‘absence of success on virtually every level’ in Afghanistan, is now calling for a sweeping overhaul of top Army leadership.

“In a new essay titled ‘Purge the generals: What it will take to fix the Army,’ Lt. Col. Daniel Davis writes, ‘The U.S. Army’s generals, as a group, have lost the ability to effectively function at the high level required of those upon whom we place the responsibility for safeguarding our nation. Over the past 20 years, our senior leaders have amassed a record of failure in major organizational, acquisition and strategic efforts.’

“Davis, an armor officer who works on the Army staff, also writes, ‘These failures have been accompanied by the hallmarks of an organization unable and unwilling to fix itself: aggressive resistance to the reporting of problems, suppression of failed test results, public declarations of success where none was justified, and the absence of accountability.

“ ‘Today, and consistent with these patterns, senior Army leaders are poised to reorganize the service into one that is smaller and less capable than the one that existed at the end of the Iraq War in 2011, and just as the threat environment is becoming more unpredictable and potential adversaries more capable.’....

“In his essay, Davis recommends replacing a ‘substantial chunk’ of today’s generals, starting with the three- and four-star ranks, and fixing the promotion system.

“ ‘It is unlikely today’s top leaders – who are products and benefactors of the existing system – have the appropriate motivation or buy-in for substantive change.’”

--New Jersey Gov. Chris Christie leads his Democratic challenger Barbara Buono 56-36 among likely voters, according to a Monmouth University/Asbury Park Press poll. While he hasn’t said so, Christie is hoping to get 60% to further enhance his presidential bid in 2016.

In the race to replace deceased Democratic Sen. Frank Lautenberg, Newark Mayor Cory Booker leads Republican challenger Steve Lonegan 54-38, also according to Monmouth Univ. and the Asbury Park Press.

--I loved how all three New York City newspapers, the Times, Post and Daily News, all supported the Manhattan borough president, Scott Stringer, over Eliot Spitzer for comptroller.

Ordinarily, no one gives a hoot about comptroller, until the holder of the position gets caught up in some corruption scandal, as has often happened in the past, but this time is different, for obvious reasons.

Spitzer wants to take down Wall Street, which as Mayor Bloomberg knows means $100s of millions in lost tax revenues, for starters.

Stringer was praised by The Post as a “sober, honest man.” The Post said of Spitzer, “We would not trust Eliot Spitzer to manage our 401(k), much less take our teenage daughter to the movies, so why should the city trust him with its entire pension fund?”

--New York’s City Council voted to override Mayor Bloomberg’s veto of two bills that create an independent inspector general for the NYPD and one that expands the ability of New Yorkers to sue the police over bias-based profiling.

One idiot Brooklyn Democrat, Councilman Jumaane (sic) Williams, said, “No one on this floor is anti-NYPD. We are antipolicies that are not working.”

Meaning a murder rate at an all-time low? Oh brother. 

Democratic mayoral candidate Bill de Blasio’s campaign line is, “I will end stop-and-frisk and tax the rich.”

Oh yeah...the road to success in New York.

Again, ‘short’ Gotham.

--Separately, the NYPD made the largest gun bust in city history, 254 weapons, in an undercover operation that also led to the arrest of 19 individuals in New York and in North and South Carolina.

--San Diego Mayor Bob Filner is resigning Aug. 30 as a result of an agreement approved by the City Council involving a sexual harassment case brought against Filner and the city by his former director of communications. Since the scandal unfolded, nearly 20 women publicly accused the former congressman of inappropriate behavior.

--According to a New York Times poll, 52% of New Yorkers describe Bloomberg’s 12 years as mayor as fair or poor, with 46% labeling them as excellent or good.

--Camille Paglia, via an interview with Salon.com, as reprinted in the Wall Street Journal:

“It remains baffling how anyone would think that Hillary Clinton is our party’s best chance. She has more sooty baggage than a 90-car freight train. And what exactly has she ever accomplished – beyond bullishly covering for her philandering husband? She’s certainly busy, busy and ever on the move – with the tunnel-vision workaholism of someone trying to blot out uncomfortable private thoughts.”

--Maureen Dowd / New York Times

“Many Israelis were disgusted to learn that Bill Clinton was originally scheduled to scarf up $500,000 to speak at the Israeli president Shimon Peres’ 90th birthday festivities in June. I guess being good friends with Peres and brokering the accord that won Peres the Nobel Peace Prize were not reasons enough for Bill to celebrate. The Israeli branch of the Jewish National Fund had agreed to donate half a mil to the Clinton foundation. Isn’t the J.N.F. ‘supposed to plant trees with donor cash?’ Haaretz chided before the fund pulled back. ‘I guess money does grow on trees.’

“I never thought I’d have to read the words Ira Magaziner again. But the man who helped Hillary torpedo her own health care plan is back.

“In a Times article last week headlined ‘Unease at Clinton Foundation Over Finances and Ambitions,’ Nicholas Confessore and Amy Chozick offered a compelling chronicle about an internal review of the rechristened Bill, Hillary & Chelsea Clinton Foundation that illuminated the fungible finances and tensions between Clinton loyalists and the foundation architects Magaziner and Doug Band, former bag carrier for Bill Clinton.

“You never hear about problems with Jimmy Carter’s foundation; he just quietly goes around the world eradicating Guinea worm disease. But Magaziner continues to be a Gyro Gearloose, the inept inventor of Donald Duck’s Duckburg.”

--Former Nixon speechwriter Ben Stein, in an interview with CNN following release of the final batch of Nixon tapes by the National Archives, was asked to comment on how the president treated Jews, such as Stein. “He treated me great...great, great guy.” Stein also said of Nixon it was about his actions, not his words, and that he was the best American president Israel ever had.

“LBJ didn’t lift a finger for Israel in ’67...Nixon was the only president who stepped in to save Israel, as he did in ’73.”

Mr. Stein is right.

--The death of Aussie Chris Lane, a baseball player at a small college in Oklahoma, is distressing on so many different levels. The town of Duncan, Oklahoma was dumbfounded upon learning that three of its high school students were the killers, picking out Lane, who was out jogging, at random because they were “bored.”  James Edwards, 15, Chancy Luna, 16, and Michael Jones, 17, did it for “the fun of it,” according to Jones. Thankfully, they were arrested just hours after the shooting last weekend or they probably would have killed others, as one of them had posted on their Facebook page. The racial overtones are inescapable. The 15-year-old had recently tweeted things like “90% of white ppl are nasty. #HATE THEM.”

According to James Johnson, the father of a boy who was also allegedly targeted by the three youths, Lane was murdered as part of a gang initiation. Johnson said the three were trying to recruit his 17-year-old son into a gang and that his kid had refused.

This case is big. As an American, I’m sickened by it. It is front page in Australia and is going to do a number on Aussie perceptions of America. There is already talk of boycotting U.S. tourism.

Editorial / Wall Street Journal

“(Part) of the story is what didn’t happen. There was no saturation cable TV coverage, no press conference featuring Al Sharpton or Jesse Jackson, and no statement from the Oval Office. The death of Christopher Lane, while as troubling as that of Trayvon Martin, will not become a national touchstone of racial and cultural debate or reflection.”

Actually, this story ended up getting heavy play on many of the networks I watch.

--Another sickening case was the beating death of an 88-year-old World War II veteran in Spokane, Wash., killed by two 16-year-olds as the victim sat in his car. The Vet was wounded on Okinawa.

--Research out of the University of Rochester Medical Center suggests that copper likely plays a role in initiating and fueling the abnormal protein build-up that is a hallmark of Alzheimer’s disease.

We are talking the copper in amounts readily found in drinking water, the foods we eat and vitamin supplements. Neuroscientist Rashid Deane said what researchers found is “pretty scary.” 

As reported by the Los Angeles Times’ Melissa Healy:

“A steady diet of copper, even at entirely allowable levels, breaks down the barrier that keeps unwanted toxins from entering the brain, and that it fuels an increase in production of beta-amyloid but impedes the performance of proteins that clear the stuff from the brain.”

---

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

God bless America.
---

Gold closed at $1395
Oil, $106.42

Returns for the week 8/19-8/23

Dow Jones -0.5% [15010]
S&P 500 +0.5% [1663]
S&P MidCap +1.0%
Russell 2000 +1.4%
Nasdaq +1.5% [3657]

Returns for the period 1/1/13-8/23/13

Dow Jones +14.5%
S&P 500 +16.6%
S&P MidCap +19.3%
Russell 2000 +22.2%
Nasdaq +21.1%

Bulls 43.3
Bears 
21.6 [Source: Investors Intelligence]

Have a great week. I appreciate your support.

Brian Trumbore



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Week in Review

08/24/2013

For the week 8/19-8/23

[Posted 12:00 AM ET]

Washington and Wall Street

We are less than four weeks away from the big Federal Reserve Open Market Committee meeting of Sept. 17-18, where the market is on pins and needles as to whether the Fed will begin tapering its $85 billion a month purchase program of mortgage-backed securities and Treasuries. 

But Congress returns in just two weeks (gosh it’s been nice while they’ve been away, hasn’t it?) and President Obama and our other elected representatives have a full plate of issues to tackle in short order, first and foremost being a new budget for the fiscal year beginning October 1, as well as the debt ceiling, an immigration bill, Obamacare and some foreign affairs items of note.

Beforehand, however, President Obama is attending the G20 summit in St. Petersburg, where he may or may not come face to face with Vladimir Putin, who Obama snubbed in canceling Putin’s summit invitation in Moscow prior to the G20 in response to the Edward Snowden debacle (among other issues). Russia has been the major roadblock for the West in the Syrian civil war with its unstinting support of Bashar al-Assad and in light of this week’s developments there, who knows what kind of talks among the major powers will transpire (or maybe they’ll just blow it off).

As to the end of the fiscal year and the start of a new one, House Speaker John Boehner said Thursday that he is hoping to avert a government shutdown by passing a “short-term” budget resolution that would maintain the sequester, the spending cuts.

Addressing Republican lawmakers on a conference call, Boehner said, “When we return, our intent is to move quickly on a short-term continuing resolution that keeps the government running and maintains current sequester spending levels. Our message will remain clear. Until the president agrees to better cuts and reforms that help grow the economy and put us on path to a balanced budget, his sequester – the sequester he himself proposed, insisted on and signed into law – stays in place.”

As reported by Lori Montgomery of the Washington Post, Boehner did not address the issue of using the threat of a shutdown – or dangling the debt-ceiling issue – in order “to try to force President Obama to delay implementation of his signature health insurance initiative.”  Conservatives are demanding a fight on Obamacare. Republicans may attempt to delay the “individual mandate” requirement to purchase insurance beginning in January after Obama’s own decision to delay penalties for businesses that fail to offer insurance to their workers in 2014. So this is a flashpoint in the Republican caucus.

As to the debt ceiling, part of the problem is no one seems to know for sure when the deadline is but it’s probably sometime between mid-October and mid-November. Thursday, Treasury Secretary Jack Lew warned of the dangers of replaying the debate of two years ago that was so damaging.

In a speech, Lew said, “The drawn-out dispute over the debt ceiling caused business uncertainty to jump, consumer confidence to drop, financial markets to fall, and economic growth to falter. We cannot afford a repeat of what happened in 2011.”

Back to the Fed, to be clear (if you’re a new reader), yes, the Fed helped save the system during the financial crisis but it’s extraordinary programs of the past two years in particular have been ineffective and Ben Bernanke and his Band of Merry Pranksters should have been pulling back long ago instead of continuing to pile $1 trillion a year onto the Fed’s balance sheet. I have also said countless times that it verges on criminal to have maintained interest rates at zero, totally screwing savers, namely the elderly, for far too long. The funds rate should be 2%. $2,000 on $100,000 in savings means a lot to many Americans, and of course it would go right back into the economy.

But now that we’ve been stuck with QE3 and since the Fed recently began talk of tapering, a majority of economists are targeting the Sept. 17-18 confab for the Fed to begin pulling back, but Bernanke and many of the Fed governors have said it depends on the data and recent figures on the economy have been anything but stellar. The yield on the 10-year Treasury hit 2.93% on Thursday, its highest yield since July 2011, because the market was convinced the Fed is reversing course shortly, but then Friday morning we had a hideous new home sales figure of 394,000, like 106,000 below estimates, and the bond market rallied because of a renewed feeling that, hey, maybe the Fed will hold off further.

I think the Fed will. I said so last week. I also said it’s about their credibility. They have totally misgauged the strength of the economy and while they remain optimistic on future growth, the kind that would allow them to finally get off their bond-buying addiction, the facts say otherwise.

Like if the consumer is 70% of the U.S. economy and if retailers from Wal-Mart to Macy’s to Nordstrom’s to Target are all issuing disappointing revenue forecasts going forward, I’d say we have a problem. The Fed can’t look at some of these corporate reports and say the economy is strengthening. Where is the evidence?

Yes, July existing home sales, reported earlier in the week, were stronger than expected, but everyone seemed to think much of that activity was a result of people jumping off the fence because they saw rates rising and what would this say about August and beyond, and then we got this putrid new home sales number and everyone said, ah ha! Higher mortgage rates are having an impact. As reported by Freddie Mac this week, the average rate on the 30-year jumped to 4.58%, the highest since July 2011 and way off the recent low of about 3.30%. That’s a big difference, sports fans, a difference maker for many. So barring a big change in rates the next few weeks, this has to give the Fed pause.

There is really only one more big data point that the Fed is waiting for before they get together Sept. 17 and that is the August jobs report, out Sept. 6. If it’s a blockbuster, well in excess of 200,000, tapering is probably back on. If it’s weak, that should seal the case. Tapering would commence in October or later. That’s my thinking.

There is one other potential fly in the ointment. The Fed will at least have had the opportunity to observe Congress for a week to see if a government shutdown is in the cards, and while that isn’t in the thinking today, the Fed needs to be prepared.

Lastly, on an unrelated topic, I enjoyed a piece by James Glanz in the New York Times titled “Is Big Data an Economic Big Dud?”

Yup.

“What is sometimes referred to as the Internet’s first wave – say, from the 1990s until around 2005 – brought completely new services like e-mail, the Web, online search and eventually broadband. For its next act, the industry has pinned its hopes, and its colossal public relations machine, on the power of Big Data itself to supercharge the economy.

“There is just one tiny problem: the economy is, at best, in the doldrums and has stayed there during the latest surge in Web traffic. The rate of productivity growth, whose steady rise from the 1970s well into the 2000s has been credited to earlier phases in the computer and internet revolutions, has actually fallen. The overall economic trends are complex, but an argument could be made that the slowdown began around 2005 – just when Big Data began to make its appearance.”

Responding to the World Economic Forum’s discussion of Big Data as “the new oil” and “a new asset class”:

“Robert J. Gordon, a professor of economics at Northwestern University [Ed. love this guy], said comparing Big Data to oil was promotional nonsense. ‘Gasoline made from oil made possible a transportation revolution as cars replaced horses and as commercial air transportation replaced railroads,’ he said. ‘If anybody thinks that personal data are comparable to real oil and real vehicles, they don’t appreciate the realities of the last century.’”

Europe...and the emerging markets

The end of the recession on the continent has given some hope to the eurozone’s leaders, but weak growth leaves the euro area still highly vulnerable. The bottom line is that banks still aren’t lending and many nations remain susceptible to social unrest.

That said, the data has been better. A flash composite reading on services and manufacturing in the eurozone for August came in at 51.7 vs. 50.5 for July (50 the dividing line between growth and contraction), with manufacturing at 51.3 vs. 50.3 last month, a 26-month high. The composite was also a 26-month high.

Germany’s flash August comp came in at 53.4, up from July’s 52.1, with manufacturing at a solid 55.3, another 26-month high.

But France saw its August composite decline to 47.9 from July’s 49.1, with manufacturing down to 48.6 from 51.4. Not good.

One aside on the U.K. Gross domestic product increased 0.7% in the second quarter over the first, better than the initial estimate of 0.6%.

And then of course you have the German election, Sept. 22. The vote is increasingly about Greece, actually, and whether German Chancellor Angela Merkel, who is still expected to emerge a comfortable winner (though the makeup of her governing coalition is not a certainty), under fire for failing to “come clean,” in the words of her opponent, convinces Germans they will not have to kick in more for another Greece bailout.

Merkel’s finance minister, Wolfgang Schaeuble, did her no favors when he said “there will have to be another program in Greece.” 

The eurozone’s loan disbursements to Athens are set to end mid-2014, after which the IMF steps in for a spell, but the IMF wants Brussels to state where Greece’s funding will come from after the eurozone steps aside. The IMF is not footing the entire bill after all.

The issue is Greece’s public debt is now 176% of GDP and with an IMF target of 120% in 2022, the only thing that seems certain is that Greece will require another debt writedown, which would saddle governments like Germany’s with huge losses, and no doubt upset German taxpayers all over again.

Schaeuble says, however, no debt writedown is necessary. He just wants to cut Greece some slack on the interest rates they are paying on its loans, but this just won’t work. The level of debt is still unsustainable.

I mean consider that the other week when it was announced Greece’s economy probably contracted 4.6% in the second quarter, this was seen as great news because it wasn’t the 5.5% decline forecasted. But it was still a whopping contraction of 4.6%! And tax revenues continue to lag all the projections that the bailout packages were based on.

So, yes, this is a big issue for Germany and others this fall following the vote. Until now, Merkel, and her friends in Brussels, have done their best to keep Greece off the front burner. But it’s coming back. The issue will be can Euro leaders isolate Greece’s problems, or do we see another round of contagion into the likes of Portugal, Italy and Spain.

Finally, a note on the financial storm in the emerging market space.

Ralph Atkins / Financial Times

“With the U.S. economy having successfully avoided possible global upsets and growing steadily, the U.S. Federal Reserve wants to wind down its asset purchases, or ‘quantitative easing,’ from as early as next month. As a result bond prices have fallen, and yields risen correspondingly, in developed markets – and the strong flows of capital into emerging markets that had been attracted by higher yields there have gone firmly into reverse.

“Worst hit have been countries most reliant on capital inflows – those with gaping current account deficits to finance. In India, where the deficit exceeded 5% of gross domestic product last year, the rupee has tumbled to a record low against the dollar. Equity prices have fallen precipitously, while 10-year bond yields have approached 10%, the highest for five years.”

India’s economy is rapidly weakening, the currency collapsing, and the country is increasingly seen as a giant, dysfunctional blob, infected with corruption scandals and high inflation.

But this is just one emerging market that investors are fleeing. Indonesia is another, and its stock market cratered 10% over a two-day period this week. Rising interest rates around the world have indeed lessened the appetite for riskier markets such as these two. Throw in a nation like Thailand and whereas they all had no trouble attracting capital, and as their consumers took on debt to buy imports from the likes of Western Europe and the U.S., their export machines have been suffering due to slowing growth in China and Europe’s recession (as well as the tepid growth in the U.S.)

The concern is that you have a replay of the 1997-98 Asian financial crisis, which had similar underlying problems before things exploded and people were reduced to eating insects (very true...but now we’ve learned of the nutritional value of bugs).

Street Bytes

--Stocks finished mixed with the Dow Jones falling for a third straight week, off 0.5% to 15010, while the S&P 500 gained 0.5% and Nasdaq climbed 1.5%. 

--U.S. Treasury Yields

6-mo. 0.05% 2-yr. 0.38% 10-yr. 2.81% 30-yr. 3.79%

As noted earlier, the 10-year hit 2.93% before falling back on Friday

--Trading on Nasdaq, one of the most prominent exchanges in the world, was halted for more than 3 hours on Thursday due to a “technical issue.” Thankfully, it was a slow news day in August and not a busy one in October.

CEO Robert Greifeld said in an interview on Friday, after not being heard from Thursday, that the exchange halted trading after information from consolidated data feeds stopped functioning. Professional traders could have obtained the same data from private feeds but that would have put them at an advantage to retail investors.

The suspension was the longest period of time that trades on Nasdaq were halted due to a technical outage and comes 15 months after a technical glitch hit Facebook shares on their opening day of trading on Nasdaq.

--Microsoft announced that Steve Ballmer would retire as CEO within the next 12 months, ending a 13-year run at the top, though he first joined the company in 1980.  Microsoft stock, despite a bounce Friday on the news, has lost around 40% since Ballmer assumed the CEO position in January 2000. The company has suffered recently with problems tied to Windows 8 and its failure to introduce a popular product to compete in the tablet space, Microsoft having recently taken a $900 million inventory writedown on the Surface RT tablet.

--An HSBC flash estimate for August on manufacturing in China rose to 50.1, up from a final 47.7 in July, a good sign things are stabilizing here. But home prices in China rose in July in 69 of 70 major cities as the government’s efforts to dampen the housing bubble continue to meet with failure. Real estate is still seen as the best option for investing one’s savings here but the sector’s rise just isn’t sustainable.

--Japan’s exports jumped sharply in July, up 12.2% from a year earlier after a 7.4% rise in June. Exports to the European Union rose 16.6% after an 8.6% rise in June, while Japan’s exports to the U.S. rose 18.4% year over year, faster than June’s 14.6 increase.

This is good news for Prime Minister Shinzo Abe, who will decide in about a month whether to raise the sales tax to 8% in April from 5% today, with a further increase to 10% in 2015. Bank of Japan Gov. Haruhiko Kuroda said the economy is strong enough to withstand the inevitable short-term impact of the tax hike, which is necessary as a first step to cut Japan’s massive debt, the largest in the world. Kuroda also warned against any delay in implementation, saying “ending deflation and raising the sales tax are achievable at the same time.”

--Mexico’s economy contracted for the first time in nearly four years in the second quarter. GDP shrank 0.7% compared with the first quarter. [GDP was up 2.8% in Q2 vs. a year earlier.]

--Thailand’s economy shrank 0.3% in the second quarter over the first after a fall of 1.7% during Q1. [GDP was up 2.8% in Q2 vs. a year earlier. For 2012, Thailand grew at a rate of more than 6%.]

--Hewlett-Packard’s revenue in its fiscal third quarter declined 8% as PC sales continue to slide and the company’s enterprise computing business dealt with tepid worldwide IT spending. CEO Meg Whitman also warned H-P is “unlikely” to see revenue growth next year.

--Staples is one of those companies suffering from declining PC sales, specifically on the ink and toner end, with sales declining 2% year over year in the second quarter. Shares in the company plunged 15%.

--Wells Fargo is cutting 2,300 jobs from its mortgage unit, though this is less than 1% of its 274,000 total workforce. The bank expects the pace of mortgage lending to slow for the remainder of the year with the advent of higher interest rates.

--Talk about a non-story...the SEC’s inquiry into JPMorgan Chase’s hiring of a son of a former Chinese banking regulator and daughter of a Chinese railway official. The SEC is looking into whether the hirings violated the Foreign Corrupt Practices Act. This is a waste of the SEC’s time and our money.

--Last week I commented on the Goldman Sachs study that estimated more than half of all homes sold last year and so far in 2013 have been all cash purchases, up from around 20% before the housing crash. Reader Bob C. wondered why the change in buying behavior and I’ll just quote the Wall Street Journal’s Nick Timiraos:

“There’s no exact way to know who is responsible for all of these cash purchases, though they are likely to include some combination of investors, foreign buyers, and wealthy homeowners that don’t want to go through the hassle of getting a mortgage before closing on a sale. Mortgage lending standards have sharply tightened up since the housing bubble, with banks scrutinizing borrowers’ tax returns and bank statements to verify their incomes and the source of their down payment.”

I don’t disagree with this. But it’s also about the haves and have nots.

--Jim Puzzanghera / Los Angeles Times

“Record profits from bailed-out Fannie Mae and Freddie Mac have helped reduce the federal budget deficit and put off an increase in the nation’s debt limit, but a new government report raises questions about how the mortgage finance giants are accounting for future losses.

“The two companies, which were seized by the government in 2008, have been avoiding billions of dollars in potential long-term losses by delaying a requirement that they write off more of the delinquent mortgages they own or back, according to the inspector general for the Federal Housing Finance Agency, which oversees the firms.

“The FHFA said more than a year ago that Fannie and Freddie needed to change their accounting procedures to conform with the way banks write off mortgages that are more than 180 days delinquent.”

But implementation of the rule has been delayed until Jan. 1, 2015. Or as Sen. Bob Corker (R-Ten..) said, the situation at the two probably “isn’t quite as rosy as some have come to believe.”

--Steven Greenhouse / New York Times

“United Parcel Service has told its white-collar employees that it will stop providing health care coverage to their spouses who can obtain coverage through their own employers, joining an increasing number of companies that are restricting or eliminating spousal health benefits.

“U.P.S., the world’s largest package delivery company, said its decision was prompted in part by ‘costs associated with’ the federal health care law that is commonly called Obamacare. Several health care experts, however, said they believed the company was motivated by a desire to hold down health care costs, rather than because of cost increases under the law....

“In explaining its move...U.P.S. told employees, ‘Since the Affordable Care Act requires employers to provide affordable coverage, we believe your spouse should be covered by their own employer – just as U.P.S. has a responsibility to offer coverage to you, our employee.’....

“U.P.S. is one of the biggest companies so far to drop spousal coverage for some segment of its work force, and its announcement was viewed by some as a harbinger of a broader trend in employers’ restrictions on health care benefits.”

The new policy does not affect the company’s 250,000 unionized workers.

--Various state unemployment rates for July...

California 8.7%
Nevada 9.5 [highest]
New Jersey 8.6
New York 7.5
North Dakota 3.0 [lowest]
Texas 6.5
Virginia 5.7

--The share of undergraduates who used federal student aid to help pay for college rose from 47% in 2007-08 to 57% in 2011-12, according to the Department of Education. The average federal aid amount came to about $8,200 in 2011-12. But while the federal government has offered more help, state aid has fallen owing to tighter state budgets.

--The mystery coronavirus that originated in Saudi Arabia has now killed 47 of 96 people in the Middle East it has sickened and this week, health officials linked the source to bats. But, a perfect match for the virus was found in only one of 100 bats tested. As reported by the New York Times, this was also an insect-eating bat that normally does not bite people or drool on fruit so it’s unclear how it is leaping to people. It could be spread by inhaling dried up fecal matter, a la Americans who have been infected with hantavirus when dried mouse droppings are swept up.

--From Harro Ten Wolde / Daily Star (Lebanon):

“A German government technology agency has warned that new security technology in computers running Microsoft’s Windows 8 operating system may actually make PCs more vulnerable to cyber threats, including sabotage.

“Germany’s Federal Office for Information Security said in a statement posted on its website Wednesday that federal government agencies and critical infrastructure operators should pay particular attention to the risk.”

It has to do with a chip known as the Trusted Platform Module, or TPM 2.0, which is built into Windows 8 computers.

Microsoft declined to comment.

--Billionaire hedge-fund manager Philip Falcone agreed to be banned from the securities industry for five years in a settlement with the SEC, which accused Falcone of improperly borrowing money from his fund ($113 million) to pay his personal taxes and for favoring some investors over others in returning their money.

--Many apartment owners in New York are miffed about the growing trend for vacation rentals by owner, VRBO, which is an alternative to pricey hotel rooms...an illegal alternative in the Big Apple. I mean imagine seeing strangers all the time on your floor.

Hotel operators are of course very ticked off as well. A big problem is there is little enforcement of the law with a meager staff to investigate complaints.

--Heineken and Carlsberg, the world’s third- and fourth-largest brewers by sales, say their results continue to suffer with slack demand in Western Europe and the U.S., nor do the two expect any improvement the balance of the year.

Heineken’s second-quarter beer volume declined 7% in Western Europe, while Carlsberg’s fell 6% in the region.

--Last weekend at a car auction Pebble Beach, a 1967 Ferrari 275 GTB/Spider was sold for $27.5 million, the second most expensive car ever to be sold at auction.

Foreign Affairs

Syria: Following a suspected poison gas attack on some Damascus suburbs, Syrian troops renewed their artillery assault on the same areas. United Nations Secretary-General Ban Ki-moon and the UN’s chemical weapons inspection team already on the ground in Damascus are powerless to respond, with the latter not being allowed onto the suspected site. Russia’s foreign ministry office initially said Syria pledged “maximum cooperation” with UN experts, but when this proved not to be true, urged the Assad regime to let the inspectors in. French Foreign Minister Laurent Fabius said the world should respond “with force” if the attack is confirmed. Israeli Prime Minister Benjamin Netanyahu said Iran is using Syria as a testing ground and watching how the world responds.

Opposition groups say as many as 1,300 people died in the attack on Wednesday, though it is impossible to verify the toll. Nonetheless, it also seems impossible to stage the videos that have been streaming in. If it was indeed a chemical attack (reports say it was undiluted sarin gas), it is the worst atrocity in a civil war that has claimed well over 100,000 lives, plus it is a war crime.

Iran and Lebanon’s Hizbullah continue to bolster President Bashar al-Assad. Arizona Republican Senator John McCain said it is “long past time” for U.S. allied nations to take limited military action against Syrian government forces. But Chairman of the Joint Chiefs of Staff Gen. Martin Dempsey described potential “limited military options” as being costly and ineffective, including the possibility that Syrian rebels might not promote American interests if they gained control. For his part, President Obama called the attack a “big event” and at week’s end was said to be exploring military action.

Separately, the UN’s refugee agency and UNICEF said one million children have been forced to flee Syria, while a further two million are displaced within the country. About three-quarters of those children fleeing are under the age of 11. The UN said its appeal for Syria is less than 40% funded.

Roger Hearn, Save the Children’s regional director for the Middle East, said: “It is appalling that the world has stood and watched as one million children have been forced from their country, terrified, traumatized and in some cases orphaned.”

The total number of refugees as a result of the war is now more than 1.7 million, and in a new wave, 40,000 Syrians have poured over the border into Iraqi Kurdistan.

Edward Lucas / London Times

“Immediate responsibility for the barbaric chemical weapons attack on Syrian civilians lies with those who used them – the regime, most likely, or possibly rebel groups trying to stoke international outrage. But the deeper responsibility is with the international order that allowed the conflict to escalate into a full-scale and for now unstoppable civil war.

“Similarly, the immediate victims are Syrian children, suffocating before our eyes. But grievous too are the wounds to our own security. As President Obama’s ‘red lines’ against the use of these weapons turn into smears of pink crayon, a big taboo has been breached.

“Weapons of mass destruction are being used repeatedly and on an increasing scale in the most dangerous corner of the world. We do not know what is being used, by whom, why or when the next attack will be. There is nothing much we can do about it.

“Part of the blame rests with Western countries, timid, divided and distracted. America, infamously, has decided to ‘lead from behind’ since the start of the Arab Spring. The EU is still a foreign-policy teenager, uncertain of its own strength. Turkey has its own agenda. Israel decries the Assad regime as dangerous and hostile – but fears chaos or Islamists more.

“The greatest blame lies with Russia. Out of anti-Western spite, it has blocked every attempt to put pressure on the regime of Bashar Assad at a time when deals were still perhaps there to be done. Again and again it has wielded, and threatened to wield, its veto in the United Nations Security Council, with the Foreign Minister, Sergei Lavrov, playing the role of ‘Mr. Nyet’ epitomized by Andrei Gromyko in the Cold War....

“We cannot wish Russia away. But we can drop our wishful thinking that lets the Kremlin skew our decision-making. It may be too late to help Syria. But we are not too late to help ourselves.”

Richard Haass / Financial Times

“With much of the world’s attention fixed on the drama playing out in the streets of Egypt, the civil war in Syria that has claimed as many as 100,000 lives grinds on in the shadows. But new allegations of massive use of chemical weapons by the regime of Bashar al-Assad have once more brought Syria into focus and raised anew the question of what more, if anything, should be done to stop what is going on there....

“Barack Obama’s administration is in a grave predicament, much of its own making. The U.S. president has, on several occasions, declared that Syrian use of chemical weapons would cross a ‘red line,’ constituting a ‘game changer’ that would alter his calculus of what his country was prepared to do.

“What makes all this awkward and more is that the U.S. essentially opted not to do anything when it became clear that the Syrian regime did use chemical weapons against its own citizens several months ago. To be precise, it chose not to respond with military force, but instead to open the possibility that it would supply less radical opposition forces with lethal weaponry. The reality that such support has been more rhetorical than real, and has done nothing to alter the military balance, makes U.S. warnings appear empty.”

Benny Avni / New York Post

“It was last Aug. 21 that Obama said that a red line for him would be if Syria’s vast chemical-arms caches started ‘moving around,’ or ‘being utilized,’ then ‘that would change my calculus; that would change my equation.’

“Well, Obama’s foreign doctrine (benign neglect, or perhaps just hopeless uncertainty) hasn’t changed one iota in the year that passed.

“Never mind the red lines. Let Syria burn.

“As the chairman of the joint chiefs, Gen. Martin Dempsey, told the Associated Press yesterday, the United States could easily take out all of Syria’s air assets, and do so essentially by remote control. But it won’t, because by now we believe that if the rebels take power, they won’t support American interests.

“(Would you? After Obama’s red-line fudge? After the West’s two years’ of dithering has allowed al-Qaeda-friendly radicals to take an ever-greater role in leading the rebels?)”

Egypt: The military-backed rulers pressed their crackdown against the Muslim Brotherhood, arresting spiritual leader Mohammed Badie, a day after suspected Islamic militants ambushed two minibuses carrying off-duty policemen in the Sinai Peninsula, forcing them to lie on the sand and shooting 25 of them dead. 

Badie is wanted on charges of inciting murder. Hundreds of the Brotherhood’s former lawmakers, politicians and field operatives are already in custody. Ousted President Mohammed Morsi and his top aides have been held at an unknown location since the July 3 coup. The Brotherhood vowed to continue their protests.

Over 1,000, including at least 100 police, have died since the start of the operation to break up the pro-Morsi sit-ins two weeks ago.

Mohamed ElBaradei, Egypt’s former vice president, fled to Europe rather than face the risk of arrest for his resignation in the face of the coup.

Christians continue to be targeted by Islamists, who believe the Christians played an instrumental role in the ouster of Morsi. At least 30 churches had been either partially or completely destroyed as of last Sunday, according to the Financial Times. Four Coptic Christians have died in suspected religious killings. In many villages, Christians, who overall make up 10% of Egypt’s population, are fleeing (think Iraq).

Senator John McCain is calling for an aid cutoff, saying Egypt’s generals benefit from U.S. military hardware such as Apache helicopters. With “Apache helicopters flying overhead, nothing is more symbolic of the United States of America siding with the generals,” McCain said last weekend.

The U.S. and the European Union said they were reviewing aid to Egypt, but Saudi Arabia, a foe of the Brotherhood, has vowed to make up the difference.

As for Gen. Abdul Fattah al-Sisi, he said in a message to supporters of Morsi that “there is room for everyone,” urging them to help “rebuild the democratic path” and “integrate in the political process.” But then in the same breath he warned, “We will not stand by silently watching the destruction of the country and the people or the torching the nation and terrorizing the citizens.”

And to complete the circle...Arab Spring, fall of Hosni Mubarak, elevation of Morsi in a democratic election, ouster of Morsi in a coup...Mubarak was released from jail to await a retrial under house arrest, as a court ruled there were no grounds to detain him. Many Egyptians feel as if Mubarak has now come back as their president.

Editorial / Washington Post

“Some argue that if aid is suspended the United States will lose influence with the military. But the past seven weeks have clearly shown that maintaining aid has bought the Obama administration no favor with de facto ruler Gen. Sisi, who has repeatedly disregarded U.S. counsel. Some worry that Egypt would react to an aid suspension by backing away from its peace treaty with Israel or its fight against the real Islamist terrorists based in the Sinai Peninsula. But those policies are in the country’s vital interests, and the armed forces will not abandon them.

“In reality, Egypt is far more vulnerable to U.S. and European pressure than is Syria or most any other Arab state. Not only is the military dependent on U.S. weapons, spare parts and training but the economy, based on tourism and foreign investment, also has no chance of recovering without Western support. The billions in cash supplied to the new regime by Saudi Arabia and other Arab supporters is a temporary salve; in the end, any government seeking stability will need to come to terms with the International Monetary Fund, where U.S. influence is strong.

“A forceful and united stand by Western governments against the course the Egyptian military is pursuing could bring the generals to their senses before it is too late. They must be made to understand that a new Egyptian autocracy will never be accepted by the United States or Europe. At the moment, they believe otherwise.”

Bret Stephens / Wall Street Journal

“It would be nice to live in a world in which we could conduct a foreign policy that aims at the realization of our dreams – peace in the Holy Land, a world without nuclear weapons, liberal democracy in the Arab world. A better foreign policy would be conducted to keep our nightmares at bay: stopping Iran’s nuclear bid, preventing Syria’s chemical weapons from falling into terrorist hands, and keeping the Brotherhood out of power in Egypt. But that would require an administration that knew the difference between an attitude and a policy.”

Charles Krauthammer / Washington Post

“What’s the United States to do? Any response demands two considerations: (a) moral, i.e., which outcome offers the better future for Egypt, and (b) strategic, i.e., which outcome offers the better future for U.S. interests and those of the free world.

“As for Egypt’s future, the Brotherhood offered nothing but incompetent, intolerant, increasingly dictatorial rule. In one year, Morsi managed to squander 85 years of Brotherhood prestige garnered in opposition – a place from which one can promise the moon – by persecuting journalists and activists, granting himself the unchallenged power to rule by decree, enshrining a sectarian Islamist constitution and systematically trying to seize the instruments of state power. As if that wasn’t enough, after its overthrow the Brotherhood showed itself to be the party that, when angry, burns churches.

“The military, brutal and bloody, is not a very appealing alternative.   But it does matter what the Egyptian people think. The anti-Morsi demonstrations were the largest in recorded Egyptian history. Revolted by Morsi’s betrayal of a revolution intended as a new opening for individual dignity and democracy, the protesters explicitly demanded Morsi’s overthrow. And the vast majority seem to welcome the military repression aimed at abolishing the Islamist threat. It’s their only hope, however problematic, for an eventual democratic transition....

“What, then should be our policy? The administration is right to deplore excessive violence and urge reconciliation. But let’s not fool ourselves into believing this is possible in any near future. (Gen.) Sisi crossed his Rubicon with the coup. It will either succeed or not. To advocate a middle way is to invite endless civil strife.

“The best outcome would be a victorious military magnanimously offering, at some later date, to reintegrate the more moderate elements of what’s left of the Brotherhood.

“But, for now, we should not be cutting off aid, civilian or military, as many in Congress are demanding. It will have no effect, buy no influence and win no friends on either side of the Egyptian divide. We should instead be urging the quick establishment of a new cabinet of technocrats, rapidly increasing its authority as the soldiers gradually return to their barracks....

“Regarding Egypt, rather than emoting, we should be thinking: what’s best for Egypt, for us and for the possibility of some eventual democratic future.

“Under the Brotherhood, such a possibility is zero. Under the generals, slim.

“Slim trumps zero.”

Roger Boyes / London Times

“The guns of August, usually held to describe Europe’s slide to war in 1914, are now rumbling in Egypt. It is a dangerous moment, not just because a large, influential country is grappling with its own ungovernability, but because the galloping crisis signals a more general collapse of statehood in the Middle East. ‘Things fall apart,’ wrote W.B. Yeats in the aftermath of the First World War. ‘The center cannot hold; mere anarchy is loosed upon the world.’

“The region certainly cannot sustain two wars – Syria’s bloody insurgency and a near-civil war in Egypt – without wrecking established peace treaties and the normal mechanisms for defusing a conflict. If the Egyptian army loses its grip on the Sinai, if a radicalized Muslim Brotherhood seeks to heat up the neighborhood, if Bashar Assad in Syria cannot control jihadist activity on the Golan Heights, then Israel will be drawn into the fire.

“You know it’s bad, really bad, when on a single day four Arab cities, cradles of lost civilizations – Damascus, Beirut, Cairo and Baghdad – are sucked into violence, rocked by car bombs, explosions and shoot-outs. Lebanon in the grip of Hizbullah; Jordan flailing in its attempts to shelter refugees fleeing from Syria; Iraq barely able to lay claim to statehood. More than 4,400 people were killed in Syria during the Ramadan fast....

“William Hague was right to say that the events in the Arab world were as momentous as the financial crisis. That crisis was triggered by our failure to grasp the interconnection between different markets. By the same token, the First World War broke out because of the interconnectivity of the alliance of tired empires, and it is this that contains the true warning. Nobody in the imperial capitals was paying attention to Sarajevo. While Egypt is occupying minds there is a sense in the West that this can only turn nasty for us if Israel is attacked or the Suez Canal is blocked. In August 1914 there was a lot of grouse shooting going on. In August 2013, politicians prefer to read doorstopper biographies in Tuscanny and Cornwall. Yet the spreading Middle East crisis, its multiple flashpoints, is every bit as ominous as the prelude to war in 1914.”

Israel: The Israeli Air Force struck a “terrorist” target near Beirut early Friday in response to four rockets being fired from Lebanon into Northern Israel on Thursday. Israel holds the Lebanese government responsible, even though an al-Qaeda affiliate claimed responsibility. Lebanese President Michel Suleiman denied involvement saying, “the firing of rockets towards Israel is a violation of the UN-regulated ceasefire between Israel and Lebanon.” In a statement, Israeli Prime Minister Benjamin Netanyahu vowed: “Anyone who attacks us, or tries to attack us, should know that we will get him.”

[In another example of the Syrian war officially spilling over into Lebanon, as I long said would be the case, twin car bombs exploded outside mosques in Lebanon’s second city, Tripoli, killing 45 and wounding hundreds on Friday. So in the span of eight days, 75 dead in such attacks in the country, the death toll in the first bombing in Beirut having risen to 30.]

Iran: In case you still had doubts about Iran’s nuclear weapons program, understand that the International Atomic Energy Agency has unsuccessfully sought access to Iran’s Parchin military base since November 2011, suspecting it was used to conduct nuclear-related explosives tests.

It now appears it’s too late. According to analysis of satellite images, Iran has nearly finished paving over the site.

Separately, Iran’s outgoing nuclear chief said last weekend that Iran has installed 18,000 uranium-enrichment centrifuges. They just keep spinning away and new President Rohani will continue his nation’s stall game.

Turkey: Prime Minister Erdogan angered the U.S., as well as leaders in Egypt and Israel, by accusing Israel on Tuesday of helping overthrow Mohammed Morsi.

“What do they say in Egypt? Democracy is not the ballot box. What is behind it? Israel. We have in our hands documentation,” Erdogan said in comments broadcast by state television. An aide to Netanyahu called the claim “Nonsense.”   Egypt’s government spokesman said no one “sane or fair” could accept Erdogan’s allegation. Erdogan didn’t spell out what documentation he had.

Pakistan: Former president and army chief Pervez Musharraf was indicted on murder charges in connection with the 2007 assassination of Pakistani Prime Minister Benazir Bhutto. It is the first time a former army chief in Pakistan has been charged with a crime. Musharraf is currently under house arrest for a separate legal issue.

And in the latest border clash, a Pakistani Army officer was killed when India shelled an area on the Line of Control, the disputed border between Pakistan and India.   Pakistan called the attack “unprovoked.”

Russia: In the latest poll for the Moscow mayoral race, acting Mayor Sergei Sobyanin leads opposition leader Alexei Navalny by a 62-20 margin, 20 being the unofficial goal of Navalny’s supporters.

Dmitry Travin, a professor at European University in St. Petersburg, told the Moscow Times:

“The authorities are confused about what to do with Navalny: whether to put him in prison, or use him to democratize the elections. That’s why they’ve undertaken a number of contradictory actions.”

Recall, Navalny was released from prison while his conviction on embezzlement charges is appealed, which allowed him to campaign for mayor.

China: The country is riveted with the trial of Bo Xilai, the disgraced princeling once thought to be the country’s most powerful rising politician. As his trial on corruption charges began, Bo strongly contested charges that through his wife, Gu Kailai, and son he had amassed $millions in bribes and illicit assets. Bo claimed Gu’s testimony was “comical and ridiculous;” Gu having testified her husband told her to divert public money into his personal accounts.

Meanwhile, the United States and China agreed to expand military exchanges and exercises (such as rescue missions and counter-piracy drills) in an effort to build more stable ties, despite tensions over cybersecurity and territorial disputes.

Japan: The Nuclear Regulation Authority elevated the Fukushima alert level to three on a scale of one to seven, “serious.” Highly radioactive water was found to be leaking from a storage tank into the ground at the plant on Monday.

Australia: Prime Minister Kevin Rudd’s Labor party trails the Tony Abbott-led coalition 54-46, according to a poll ahead of the Sept. 7 snap election. Should the figures pan out, Abbott’s coalition would gain the seats necessary to make him Rudd’s successor.

Random Musings

--I told you from day one of the Edward Snowden disclosures regarding the National Security Agency not to trust our government. In the beginning, though, my main concern was not the collection of phone data, but of emails.

We were told by President Obama, the NSA and members of Congress supposedly with oversight of the NSA’s data-mining programs, ‘Oh, no, we wouldn’t collect emails.’

I kept telling you not to believe this.

Well, lo and behold, what do we learn this week but that the NSA “illegally intercepted communications of Americans for years before being ordered by a secret court to add privacy safeguards, according to legal opinions declassified today.” [Chris Strohm / Bloomberg]

The program that was collecting “tens of thousands of electronic communications by Americans, such as emails,” was ruled unconstitutional by the Foreign Intelligence Surveillance Court on Oct. 3, 2011.

“For the first time, the government has now advised the court that the volume and nature of the information it has been collecting is fundamentally different from what the court had been led to believe,” Judge John Bates wrote.

The NSA then revised the program to segregate the communications of Americans from those of foreigners suspected of terrorism.

The issue for myself and many others has been that clearly the NSA’s programs are primed for abuse. If you were pooh-poohing the issue, hopefully this is a wakeup call. Congress needs better oversight and clearly those with same before these recent revelations were kept in the dark while the emails were being collected.

Understand, a 2008 law requires the NSA to obtain a warrant to collect the communications of Americans.

Bates, a U.S. district judge who was appointed to the oversight court by Chief Justice John Roberts, said the NSA “knowingly acquires tens of thousands of wholly domestic communications each year.”

Robert Litt, general counsel for the director of national intelligence, said, “This was not in any respect an intentional or wholesale breach of the privacy of American persons” and the NSA tells us all emails were deleted.

Peggy Noonan / Wall Street Journal

“The government has the ways and means to do pretty much anything now, and if they can do it they will do it.

“If the citizens of the United States don’t put up a halting hand, the government can’t be expected to: It is in the nature of security professionals to always want more....

“If you believe the information will never be used wrongly or recklessly, you are touchingly innocent. If you assume you can trust the administration on this issue you are not following the bouncing ball, from Director of National Intelligence James Clapper, who told Congress under oath the NSA didn’t gather ‘any type of data at all on millions or hundreds of millions of Americans' (he later had to apologize) to President Obama, who told Jay Leno: ‘We don’t have a domestic program.’ What we do have, the president said, is ‘some mechanism that can track a phone number or an email address that is connected to a terrorist attack.’

“Oh, we have more than that.”

--U.S. Army Maj. Nidal Hasan was found guilty of multiple counts of murder and attempted murder in connection with the Fort Hood shootings in 2009 that killed 13 and injured 30 more. A sentencing hearing begins Monday and prosecutors will seek the death penalty.

--Army Pfc. Bradley Manning was sentenced Wednesday to 35 years in prison for leaking 700,000 military and diplomatic documents and battlefield videos to WikiLeaks. The little creep, who now wants to become a woman, “Chelsea,” is eligible for parole in just seven years. He had faced 90 years in prison but the judge, Army Col. Denise Lind, issued the far lesser sentence without explanation.

So we now wait to see how Chelsea is imprisoned. The Pentagon can’t possibly be stupid enough to pay for his hormone treatments. But expect multiple lawsuits attempting to effort this.

--I loved seeing this headline in the Aug. 19 issue of Army Times, “Purge the generals.” Exactly the topic I’ve been writing of, essentially since the beginning of the Iraq War and the likes of Tommy Franks.

Michelle Tan / Army Times

“An Army officer who called on the military a year ago to come clean about the ‘absence of success on virtually every level’ in Afghanistan, is now calling for a sweeping overhaul of top Army leadership.

“In a new essay titled ‘Purge the generals: What it will take to fix the Army,’ Lt. Col. Daniel Davis writes, ‘The U.S. Army’s generals, as a group, have lost the ability to effectively function at the high level required of those upon whom we place the responsibility for safeguarding our nation. Over the past 20 years, our senior leaders have amassed a record of failure in major organizational, acquisition and strategic efforts.’

“Davis, an armor officer who works on the Army staff, also writes, ‘These failures have been accompanied by the hallmarks of an organization unable and unwilling to fix itself: aggressive resistance to the reporting of problems, suppression of failed test results, public declarations of success where none was justified, and the absence of accountability.

“ ‘Today, and consistent with these patterns, senior Army leaders are poised to reorganize the service into one that is smaller and less capable than the one that existed at the end of the Iraq War in 2011, and just as the threat environment is becoming more unpredictable and potential adversaries more capable.’....

“In his essay, Davis recommends replacing a ‘substantial chunk’ of today’s generals, starting with the three- and four-star ranks, and fixing the promotion system.

“ ‘It is unlikely today’s top leaders – who are products and benefactors of the existing system – have the appropriate motivation or buy-in for substantive change.’”

--New Jersey Gov. Chris Christie leads his Democratic challenger Barbara Buono 56-36 among likely voters, according to a Monmouth University/Asbury Park Press poll. While he hasn’t said so, Christie is hoping to get 60% to further enhance his presidential bid in 2016.

In the race to replace deceased Democratic Sen. Frank Lautenberg, Newark Mayor Cory Booker leads Republican challenger Steve Lonegan 54-38, also according to Monmouth Univ. and the Asbury Park Press.

--I loved how all three New York City newspapers, the Times, Post and Daily News, all supported the Manhattan borough president, Scott Stringer, over Eliot Spitzer for comptroller.

Ordinarily, no one gives a hoot about comptroller, until the holder of the position gets caught up in some corruption scandal, as has often happened in the past, but this time is different, for obvious reasons.

Spitzer wants to take down Wall Street, which as Mayor Bloomberg knows means $100s of millions in lost tax revenues, for starters.

Stringer was praised by The Post as a “sober, honest man.” The Post said of Spitzer, “We would not trust Eliot Spitzer to manage our 401(k), much less take our teenage daughter to the movies, so why should the city trust him with its entire pension fund?”

--New York’s City Council voted to override Mayor Bloomberg’s veto of two bills that create an independent inspector general for the NYPD and one that expands the ability of New Yorkers to sue the police over bias-based profiling.

One idiot Brooklyn Democrat, Councilman Jumaane (sic) Williams, said, “No one on this floor is anti-NYPD. We are antipolicies that are not working.”

Meaning a murder rate at an all-time low? Oh brother. 

Democratic mayoral candidate Bill de Blasio’s campaign line is, “I will end stop-and-frisk and tax the rich.”

Oh yeah...the road to success in New York.

Again, ‘short’ Gotham.

--Separately, the NYPD made the largest gun bust in city history, 254 weapons, in an undercover operation that also led to the arrest of 19 individuals in New York and in North and South Carolina.

--San Diego Mayor Bob Filner is resigning Aug. 30 as a result of an agreement approved by the City Council involving a sexual harassment case brought against Filner and the city by his former director of communications. Since the scandal unfolded, nearly 20 women publicly accused the former congressman of inappropriate behavior.

--According to a New York Times poll, 52% of New Yorkers describe Bloomberg’s 12 years as mayor as fair or poor, with 46% labeling them as excellent or good.

--Camille Paglia, via an interview with Salon.com, as reprinted in the Wall Street Journal:

“It remains baffling how anyone would think that Hillary Clinton is our party’s best chance. She has more sooty baggage than a 90-car freight train. And what exactly has she ever accomplished – beyond bullishly covering for her philandering husband? She’s certainly busy, busy and ever on the move – with the tunnel-vision workaholism of someone trying to blot out uncomfortable private thoughts.”

--Maureen Dowd / New York Times

“Many Israelis were disgusted to learn that Bill Clinton was originally scheduled to scarf up $500,000 to speak at the Israeli president Shimon Peres’ 90th birthday festivities in June. I guess being good friends with Peres and brokering the accord that won Peres the Nobel Peace Prize were not reasons enough for Bill to celebrate. The Israeli branch of the Jewish National Fund had agreed to donate half a mil to the Clinton foundation. Isn’t the J.N.F. ‘supposed to plant trees with donor cash?’ Haaretz chided before the fund pulled back. ‘I guess money does grow on trees.’

“I never thought I’d have to read the words Ira Magaziner again. But the man who helped Hillary torpedo her own health care plan is back.

“In a Times article last week headlined ‘Unease at Clinton Foundation Over Finances and Ambitions,’ Nicholas Confessore and Amy Chozick offered a compelling chronicle about an internal review of the rechristened Bill, Hillary & Chelsea Clinton Foundation that illuminated the fungible finances and tensions between Clinton loyalists and the foundation architects Magaziner and Doug Band, former bag carrier for Bill Clinton.

“You never hear about problems with Jimmy Carter’s foundation; he just quietly goes around the world eradicating Guinea worm disease. But Magaziner continues to be a Gyro Gearloose, the inept inventor of Donald Duck’s Duckburg.”

--Former Nixon speechwriter Ben Stein, in an interview with CNN following release of the final batch of Nixon tapes by the National Archives, was asked to comment on how the president treated Jews, such as Stein. “He treated me great...great, great guy.” Stein also said of Nixon it was about his actions, not his words, and that he was the best American president Israel ever had.

“LBJ didn’t lift a finger for Israel in ’67...Nixon was the only president who stepped in to save Israel, as he did in ’73.”

Mr. Stein is right.

--The death of Aussie Chris Lane, a baseball player at a small college in Oklahoma, is distressing on so many different levels. The town of Duncan, Oklahoma was dumbfounded upon learning that three of its high school students were the killers, picking out Lane, who was out jogging, at random because they were “bored.”  James Edwards, 15, Chancy Luna, 16, and Michael Jones, 17, did it for “the fun of it,” according to Jones. Thankfully, they were arrested just hours after the shooting last weekend or they probably would have killed others, as one of them had posted on their Facebook page. The racial overtones are inescapable. The 15-year-old had recently tweeted things like “90% of white ppl are nasty. #HATE THEM.”

According to James Johnson, the father of a boy who was also allegedly targeted by the three youths, Lane was murdered as part of a gang initiation. Johnson said the three were trying to recruit his 17-year-old son into a gang and that his kid had refused.

This case is big. As an American, I’m sickened by it. It is front page in Australia and is going to do a number on Aussie perceptions of America. There is already talk of boycotting U.S. tourism.

Editorial / Wall Street Journal

“(Part) of the story is what didn’t happen. There was no saturation cable TV coverage, no press conference featuring Al Sharpton or Jesse Jackson, and no statement from the Oval Office. The death of Christopher Lane, while as troubling as that of Trayvon Martin, will not become a national touchstone of racial and cultural debate or reflection.”

Actually, this story ended up getting heavy play on many of the networks I watch.

--Another sickening case was the beating death of an 88-year-old World War II veteran in Spokane, Wash., killed by two 16-year-olds as the victim sat in his car. The Vet was wounded on Okinawa.

--Research out of the University of Rochester Medical Center suggests that copper likely plays a role in initiating and fueling the abnormal protein build-up that is a hallmark of Alzheimer’s disease.

We are talking the copper in amounts readily found in drinking water, the foods we eat and vitamin supplements. Neuroscientist Rashid Deane said what researchers found is “pretty scary.” 

As reported by the Los Angeles Times’ Melissa Healy:

“A steady diet of copper, even at entirely allowable levels, breaks down the barrier that keeps unwanted toxins from entering the brain, and that it fuels an increase in production of beta-amyloid but impedes the performance of proteins that clear the stuff from the brain.”

---

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

God bless America.
---

Gold closed at $1395
Oil, $106.42

Returns for the week 8/19-8/23

Dow Jones -0.5% [15010]
S&P 500 +0.5% [1663]
S&P MidCap +1.0%
Russell 2000 +1.4%
Nasdaq +1.5% [3657]

Returns for the period 1/1/13-8/23/13

Dow Jones +14.5%
S&P 500 +16.6%
S&P MidCap +19.3%
Russell 2000 +22.2%
Nasdaq +21.1%

Bulls 43.3
Bears 
21.6 [Source: Investors Intelligence]

Have a great week. I appreciate your support.

Brian Trumbore