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10/04/2014

For the week 9/29-10/3

[Posted 4:15 PM ET, Friday...return figures have been updated.  On the road for a spell.]

Edition 808

Washington and Wall Street

What a week. A week of sheer incompetence, whether it was the latest disclosures from the Secret Service and how our president’s security is in grave doubt, or the gross incompetence of health officials in Dallas in the Ebola scare there.    

It was also a week where Hong Kong jumped to the forefront of the news coverage as well, though I have been anticipating this for some time and this story is far from over.

Aside from the ever-growing terror threat, both here and in Europe, the main potential market movers remain Russia and China and the signs from both (as they give each other a group hug) are not good. In fact, downright distressing.

About the only thing that’s been good in the world these days is the continued rebound in the U.S. economy, with Friday bringing us another solid jobs report for September, nonfarm payrolls growing 248,000 and the unemployment rate falling to 5.9%, the lowest since July 2008. The figures for the prior two months were also revised upwards; from 142,000 to 180,000 in August, and 212,000 to 243,000 for July.

But there were a few negatives from the jobs numbers. Average hourly earnings were unchanged, and remain up just 2% from a year earlier. I’ve been calling for decent wage growth by the end of the year, which would force the Fed’s hand, earlier than expected, but that hasn’t been forthcoming as yet. It will.

And the labor participation rate fell to 62.7% from 62.8%. Before the recession, it was at 66%.

Plus a broader measure of unemployment, U6, which includes those working part-time who seek full-time status, is still at 11.8%, though this is down from 12.2% in two months and is the lowest since October 2008. In a normal expansion, however, it should be in the 8% to 10% range.

So what does this mean for the Federal Reserve and interest rates? There is no inflation and no wage pressures, so it’s easy for the Fed to just stay the course. Plus you have the putrid European outlook and major worries in a slowing China and an uncertain economy in Japan.

Throw in the myriad of geopolitical issues and you can see why most concur with the Fed’s own view, that it will hike around the middle of 2015, but not before.

Or maybe they’ll begin to change their tune when they hold their next Open Market Committee meeting Oct. 28-29. If not then, Dec. 16-17.

In other economic news that all goes into the Fed’s stew, the 20-city S&P/Case-Shiller housing index rose just 0.6% in July over June, up 6.7% year over year, which is the slowest annual pace since Nov. 2012.

Personal income for August came in as expected, up 0.3%, but consumption was a tick better than forecast, up 0.5%, solid.

Then you had various purchasing managers’ indices. Chicago’s number for manufacturing in September was a solid 60.5, while the national ISM data on manufacturing was 56.6, down from the prior month’s 58.5 but still very good, and the ISM service sector reading came in at 58.6 for last month, excellent.

More broadly, the International Monetary Fund said the United States is a rare bright spot in the global economy, which otherwise is stuck on a “new mediocre” growth path with high debt and unemployment, requiring investments in infrastructure and reform of fiscal policies, as head Christine Lagarde warned. So let’s move on to....

Europe and Asia

Ms. Lagarde said the eurozone was at risk of sinking into a morass of low growth with high jobless figures and falling prices that are nearly in deflation territory. The IMF will no doubt downgrade its global economic forecasts when they are released next week.

“Our main job now is to help the global economy shift gears and overcome what has been so far a disappointing recovery: one that is brittle, uneven and beset by risk,” Lagarde said.

The eurozone remains an area of major concern. Eurostat released its data on unemployment for the euro-18 and the rate remained stuck at 11.5% in August, only down slightly from the 12.0% reading of August 2013. Germany’s jobless rate is just 4.9%, but France is at 10.5%, Italy 12.3%, Spain 24.4% and Greece 27.0% (June).

The youth unemployment rate remains at sickening levels, especially in the periphery...53.7% in Spain, 57.5% in Greece (June), 44.2% in Italy and 35.6% in Portugal.

Eurostat’s flash estimate of inflation in September was also not good, up just 0.3% on an annualized basis vs. 1.0% Sept. 2013, down from 0.4% in August. The 0.3% figure is a five-year low.

Markit reported the final September reading on eurozone manufacturing was 50.3, a 14-month low (contrast this with the strong readings in the U.S.). Germany came in at just 49.9, a 15-month low, Greece 48.4 (11-mo. low), Spain 52.6 (but a 7-mo. low) and Italy 50.7, which was a tick up.

A composite PMI for the eurozone (manufacturing and services) was 52.0 in September, down from August’s 52.5. France’s 48.4 was a 3-mo. low; Italy’s 49.5 a 10-mo. low.

Chris Williamson, chief economist at Markit said:

“The PMI suggests the eurozone economy remained stuck in a rut in the third quarter. After GDP stagnated in the second quarter, we can only expect modest growth of 0.2-0.3% in the third quarter based on these survey readings, with momentum being lost as we head into the final quarter of the year.

“There are certainly pockets of growth: Ireland’s economy is recovering strongly, Spain is seeing a still-robust upturn and the German service sector is providing an important prop to growth in the region as a whole. But the overall picture is one of a euro area economy that is struggling against multiple headwinds. These include a lack of domestic demand in many countries, subdued bank lending, sanctions with Russia and a reluctance of companies to expand in the face of an uncertain economic outlook.

“The survey showed growth of new orders sliding to the weakest for almost a year across the region as a whole, suggesting demand for goods and services is barely growing....

“The waning of growth signaled by the PMI will apply further pressure on the ECB to broaden the scope of its planned asset purchases, to not only buy riskier asset-backed securities but to also start purchasing government debt.”

Speaking of the European Central Bank, President Mario Draghi once again disappointed the markets in announcing the ECB would buy bundles of mortgages and business loans in an attempt to kick start the eurozone economy by making it even cheaper than it already is to borrow, but moves of this kind haven’t worked. Draghi said the ECB was unanimous in agreeing to take further steps if needed, code for quantitative easing or QE. But there is stiff internal opposition, especially from Germany, which says it’s illegal.

Draghi also faces criticism for not detailing more fully his asset-backed securities purchases and his comments were downbeat, though the data doesn’t warrant a lot of happy talk, that’s for sure.

A few other euro notes...

The U.K. revised its growth figure for the second quarter to up 0.9%, or up 3.2% year over year, though its manufacturing PMI fell to 51.6 in September from 52.2 the prior month.

In Spain, Catalonia’s regional government announced it would suspend its promotion of a referendum on independence, after Spain’s Constitutional Court blocked the nonbinding vote. The leaders of the movement still hope to hold a vote on Nov. 9, but are not campaigning visibly in order to prevent workers from being subjected to possible legal liability for defying the court.

The central government argues the 1978 constitution requires a majority of all Spaniards be consulted on any issue of sovereignty. Supposedly, the vote cannot be held while the court deliberates, which could take months.

Separately, the government said the economy will grow 1.3% this year, up 2.0% in 2015, though prices fell 0.3% in September.

The Italian government said its economy would contract 0.3% this year after initially forecasting growth of 0.5%. Inflation was down 0.2% last month. So you see in Spain and Italy, as well as Greece, there are persistent signs of outright deflation.

The yield on Greece’s 10-year bond soared to 6.50%, before word the ECB will buy the junk bonds of Greece’s banks, which promptly sent the yield on the government crapola to 6.20%, which is absurd given Greece’s debt to GDP level is 177%, plus there is growing political uncertainty as the leftist Syriza party leads in the polls.

The French government said it would reduce its budget deficit to the EU threshold of 3% of GDP by 2017, two years later than it promised. To do even this much, France has to enact strict budget cuts and the left wing of the ruling Socialist Party is none too pleased. Nor are German officials, who argue France refuses to enact structural reforms.

Finally, Russia’s central bank has been weighing the introduction of temporary capital controls if the flow of money out of the country intensifies, though officially, the central bank denies this. The Economy Ministry projects $100 billion will leave the country this year, up 64% from 2013.

Turning to Asia....

In China, HSBC’s final PMI for September was 50.2, down from an earlier estimate of 50.5 and the same as August’s 50.2 reading. Separately, the National Bureau of Statistics said China’s service sector slowed in September, 54.0 vs. 54.4 in August and an eight-month low. The government’s manufacturing PMI was 51.1.

So it’s on to Hong Kong. On 6/14/14, I wrote the following.

Then there is Hong Kong. Beijing issued a white paper setting the record straight, in its mind, on “one country, two systems.”

The central government holds “comprehensive jurisdiction” over Hong Kong and is the source of its autonomy, Beijing said, stressing that while the city could, in the future, choose its leader through ‘universal suffrage,’ that person must be loyal to the country.

China’s national security and interests were at stake, it added.

This isn’t anything new, but the timing was unexpected, with the State Council saying “many wrong views are currently rife in Hong Kong,” adding: “Some people are confused or lopsided in their understanding of the policy [one country, two systems] and the Basic Law.”

There is an election slated for choosing a chief executive in 2017.

The White Paper said: “The high degree of autonomy enjoyed by Hong Kong is subject to the central government’s authorization. There is no such thing called ‘residual power’ for the special administrative region,” it said.

And it also warned against “outside forces” using the city to interfere in China’s domestic affairs. [South China Morning Post]

This is a huge deal. July 1 is the anniversary of the British handover to China back in 1997 and protests are planned. If riots are sparked, martial law could be declared by Beijing. Whether it is this year or closer to 2017, I can guarantee this is explosive. The central government understands upheaval could spread to cities on the mainland. [At least they better understand this.] 

---

Well, last week, 36 hours before the latest protests got under way, I spelled out for you Beijing’s stance on the democracy movement in Hong Kong. On Sunday, the Occupy Central civil disobedience campaign got underway and the police used tear gas on the peaceful protesters.

At first the Chinese government backed Hong Kong authorities but without naming Chief Executive Cy Leung (chief executive being like the title ‘mayor’). By Thursday, however, Beijing’s position was clear, they “fully trust” Mr. Leung. As put forward in a front-page editorial for The People’s Daily, the Communist party mouthpiece, it was “very satisfied” with his work, and “firmly supported” the way the police handled “illegal activities.”

But after the initial use of force, the police were restrained and you know the orders from Beijing were to wait the protesters out.

But Mr. Leung is showing zero signs of accepting any kind of electoral reform for the 2017 vote, and, we’re talking 2017! He also now knows he has the full support of China’s leadership. So if things are this tense so soon, imagine what the attitudes will be in 2016, let alone 2017.

Chinese President Xi Jinping has a tough choice. He can modify Hong Kong’s electoral system and appear weak, or he uses force, a la 1989’s crackdown in Tiananmen Square.

*As I go to post, leaders of the pro-democracy student group have postponed talks with the Hong Kong government following some scuffles with opponents, apparently those in the business community frustrated over disruptions caused by the protesters.

We have a long ways to go with this topic.   I have told you before I love the energy of Hong Kong, the most fascinating city in the world. But as I wrote in June, that energy can go both ways.

Editorial / Washington Post

“Now that pro-democracy protests have shut large swaths of central Hong Kong, China’s leaders find themselves in a trap of their own making. Denying residents authentic democracy has not led to stability nor peace in the city-state. Crushing the demonstrations would do even more harm to the international reputation for freedom and the rule of law that has allowed Hong Kong to prosper as a semi-autonomous piece of the People’s Republic of China. The future of the city-state – and much more – rests on whether the Chinese central government realizes that its tight grip is ultimately counterproductive.

“China’s leaders could have avoided this dilemma. They had promised Hong Kong’s residents that they could elect their chief executive by 2017. Instead of sticking to the spirit of that pledge, they announced this summer that a pro-Beijing committee would vet every candidate. Beijing’s allies in Hong Kong argue that this is progress. But if only carefully approved pro-Beijing candidates can run, universal suffrage will have limited significance.

“Instead of listening to objections, Beijing and the Hong Kong government let tensions build, and students began protesting last week...

“The response from China’s leaders has been muted, but there are hints that Beijing is nervous. It blocked Instagram...one of the few Western social media applications that was still available to everyday Chinese. It appears to have censored comments about the Hong Kong protests on popular micro-blogging services. And Chinese media have cast blame for the unrest on foreign influences, rather than admitting that Chinese citizens are demanding self-government.”

[See my current “Hot Spots” column for an example of how Beijing is blaming the U.S.]

Editorial / Wall Street Journal

“The experience of Hong Kong under Chinese rule shows that the subsidiary institutions of a free society – rule of law, civil liberties, an independent civil society, free markets – can’t survive long in the face of authoritarian assault. The British colonial government bequeathed the software of freedom to the city. After the handover in 1997, some of us hoped that China would emulate Hong Kong. Instead China is slowly bringing Hong Kong down to its level....

“The good news is that Hong Kong still has a few bulwarks against Beijing’s attempts to rule by fear. The Bar Association condemned the police use of tear gas as excessive and disproportionate, as did the leaders of Hong Kong University.

“Officials have repeatedly called for the judiciary to be ‘patriotic’ and work in tandem with the executive branch, but so far judges have defended their independence....

“Chinese intimidation and cronyism may not bother Hong Kong’s wealthiest residents, who are used to cutting deals and making money in China. But it horrifies ordinary Hong Kong residents, many of whom fled the mainland looking for something better.

“That solidarity may protect Hong Kong. The tighter Beijing squeezes, the more disgusted the city becomes with its tactics.”

One final note. China’s tourism board has barred mainlanders’ group tours to Hong Kong, comprising 8 to 10 percent of Chinese visitors to the city, which also hurts Macau, since many of these folks take the one-hour ferry ride there to place a few wagers.

Street Bytes

--Stocks fell on the week despite a strong Friday rally on the jobs report, with the Dow Jones down 0.6% to 17009, the S&P 500 off 0.8% and Nasdaq an equal amount, down 0.8%.  The Dow is now up just 2.6% on the year.  The small cap Russell 2000 is down 5.1% for 2014.

--U.S. Treasury Yields

6-mo. 0.04% 2-yr. 0.56% 10-yr. 2.43% 30-yr. 3.12%

The departure of Bill Gross continues to reverberate in the fixed-income markets, with $23.5 billion leaving the Total Return Fund in September. While PIMCO tried to reassure its clients that the outflows were slowing by week’s end, if you are a consultant charged with recommending the fund, or a pension fund dealing with various mandates, and you have a high-profile management change such as this one, chances are you’re hitting the exit, so this could go on for some time to come. The track record, after all, is now largely irrelevant. [Mercer, an influential pension consultant, downgraded the Total Return Fund and four other funds Bill Gross was running, which causes Mercer’s clients to rethink their holdings.]

Sanford Bernstein said eventually, PIMCO could lose 30% of its $2 trillion in assets.

Regulators are also examining if there are any systemic risks in the bond market as many of the assets held in the Total Return and other PIMCO funds tumble in price in anticipation they will have to sell them to meet redemptions.

As I noted last week with regards to the SEC investigation into PIMCO for its pricing of assets, many areas of the bond space are illiquid to begin with and it’s tough for an independent valuation firm to come up with a price for a particular security.

--In West Africa, Save the Children warned it was seeing 765 new cases of Ebola in Sierra Leona in just the past week, or about five cases an hour, and there are only 327 beds in the country.

In fact, as we’ve seen throughout the crisis, the world has responded way too slowly. For example, weeks ago, Britain said it would build facilities for 700 new beds in Sierra Leone but the first of these will not be ready for weeks, and the rest may take months.

But you had 765 new cases in one week! Without beds, people are dying at home and continuing to infect their families and the local community. Save the Children’s country director said, “We are facing the frightening prospect of an epidemic which is spreading like wildfire across Sierra Leone.”

As for the U.S. military effort in Liberia, it is progressing far too slowly as well and it seems that details are still being hashed out. Truly pathetic.

The World Health Organization’s latest death toll was 3,338 (through Sept. 28), with 7,178 confirmed cases, but most agree the scale of the disease is “massively unreported” because of the numbers dying anonymously at home or in the streets. [BBC News]

216 of the dead were health-care workers, out of 377 infected. [Wall Street Journal]

There is a small bit of good news. Nigeria has been able to contain its outbreak, with just eight deaths, but it’s a little deceiving because the disease first spread from a single case at the airport, whereas in the main countries at the epicenter, Liberia, Sierra Leone and Guinea, Ebola spread widely in remote provinces before a serious response was mounted. [Donald G. McNeil Jr. / New York Times]

--U.S. new-car sales jumped 9.4% last month over a year earlier to 1.25 million vehicles, according to Autodata Corp. The annualized selling pace was 16.43 million vehicles, still on track for the best year since 2006.

Despite all the bad news on the recall front, General Motors’ sales rose 19% year over year. Chrysler’s were also up 19%, thanks to soaring sales for its Jeep and Ram truck brands, up 47% and 30%, respectively. Ford’s sales, however, declined 3%, blaming lower fleet sales.

Toyota’s sales rose 1.7% over a year earlier, Honda’s were up 12%, Nissan’s rose 19%, Hyundai’s 2%, and Kia Motors’ climbed 7%.

[Note: Most of the time I use two sources for auto sales...the Wall Street Journal and Los Angeles Times. Sometimes the figures between the two vary, which means one of the reporters wasn’t measuring apples to apples, or just looking at truck sales, perhaps. Anyway, occasionally I have to pick and choose, as was the case with Nissan this month. The Journal said up 13%. I went with the Times’ up 19%.]

--On Monday, Ford slashed its full-year profit outlook, owing mostly to a big hit in Russia, and a loss in South America that is $900 million larger than forecast. Ford also said it would lose $1.2 billion in Europe and that the red ink would extend into 2015. I believe GM said it would go positive on the continent next year.

--Thursday, Warren Buffett announced plans to buy the fifth-largest auto dealership in the U.S., Van Tuyl Group, which has operations from Florida to California, with Berkshire Hathaway then planning to use the acquisition to snap up family-owned dealerships elsewhere under the moniker Berkshire Hathaway Automotive.

--In a regulatory filing on Thursday, JPMorgan Chase said the hack attack on its systems was far greater than it has let on before. Like try 76 million household accounts and seven million small-business accounts that were compromised. Anyone visiting the company’s sites, such as Chase.com, or using its mobile app, could be affected. [Chase has heavily promoted its mobile app through countless television spots.]

What mystifies authorities is that there does not appear to be evidence the attackers burrowing deep into JPMorgan’s computer systems, actually looted any customer accounts. So some take this to mean the hackers were sponsored by the likes of Russia or some government in southern Europe. [Russia seems to be the consensus.]

By the time the bank’s security team discovered the breach in July, the hackers had gained access to 90 of JPM’s servers, though the intrusion went on until mid-August, the bank later learned.

But most worrisome is the acquisition of the applications and programs that run on very standard JPM computers. It takes months to not only rid the computers of the vulnerabilities, but renegotiate licensing deals with the technology suppliers, as reported by Reuters.

--The situation with ExxonMobil in Russia is a bit confusing. Two weeks ago I wrote the company was pulling back from its heavy exposure owing to the sanctions levied on Moscow, but then Rosneft, Exxon’s partner in the country, announced it had a major discovery in the Russian Arctic.

But Exxon can’t play any further role in developing the field, until the sanctions imposed by the U.S. and EU on exports of technology have been lifted.

The shame of it all for Exxon is that it was best positioned among all the western oil companies in Russia.

Rosneft CEO, Igor Sechin, Vladimir Putin’s buddy who I still say will one day take Putin out, said he’d love to continue working with Exxon but was prepared to go ahead without them. Exxon is pressuring Washington to water down the sanctions so it can drill in the Arctic next summer. Current CEO Rex Tillerson ran the company’s Russian operations in the late 1990s. 

But Tillerson was a major supporter of Mitt Romney’s, so Obama will do him few favors. [Financial Times]

--According to the International Energy Agency, U.S. production of oil and related liquids such as ethane and propane was neck-and-neck with Saudi Arabia in June and again in August at about 11.5m barrels a day. So it’s expected U.S. production will exceed Saudi Arabia’s in September (or October) when those numbers come in, which would be the first time since 1991.

--Corn futures hit a five-year low this week as the Agriculture Department said stockpiles in U.S. storage bins totaled 1.236 billion bushels on Sept. 1, up from 821 million bushels a year earlier. Good lord. That’s a rather hefty increase.

One reason for the storage boost, aside from perfect growing conditions in key areas, is lower demand from livestock producers than expected, due to both the earlier issue of the pig virus that took the little ones and the drought in the Plains states that continues to impact the cattle numbers.

Wheat futures also continue to suffer due to higher than expected storage numbers and a surplus worldwide. [Wall Street Journal]

--EBay announced it was spinning off its payments arm, PayPal, in 2015; a move long called for by activist shareholder Carl Icahn.

It’s amazing to think eBay acquired PayPal way back in 2002. The unit almost tripled sales in the five years ended in 2012.

--The European Commission threatened to collect large sums of back taxes from Apple because of illegal tax advantages granted it by the Irish government, specifically for the period 1991 to 2007.

Joaquin Almunia, the EU’s departing commissioner for competition, said in a 21-page report that EU law “provides that all unlawful aid may be recovered from the recipient.”

Apple has said Ireland treated it no different from any other company. Ireland told the EC it believes it is acting within the law.

Well of course Apple and Ireland have a very cozy relationship that has broken EU rules. I know that.

--Apple’s iPhone 6, meanwhile, will hit Chinese stores on Oct. 17 after gaining approval from the Chinese government. The delay was due to Chinese security concerns. [Actually, Beijing was just jerking Apple’s chain.]

--Some good news...Macy’s announced it would hire 86,000 seasonal workers this year, up 3.6% over 2013. But Kohl’s is hiring 15% more. Toys R Us and Target are keeping staffing levels the same.

Here at StocksandNews, we’re reducing our workforce from 6,000 to one, moi. For years I’ve told these folks, “Heck, it seems like I’m doing all the work, people. What are you guys doing?” [Admittedly, I should have recognized this fact far earlier.]

--Shellshock, a bug in software known as Bash, which is common to Linux and Unix-based systems and their derivatives, is rated 10 out of 10 by the Department of Homeland Security, when Heartbleed, a similar flaw discovered in April, is rated a five.

Cyber security officials are already seeing intrusions by malware designed to exploit the Shellshock flaw.

The flaw allows attackers unfettered access to a computer system, which means that governments could exploit it for surveillance activity, but now that it’s public, we’re aware just how it can be exploited by truly evil doers.

As the Financial Times notes, though, it should be relatively easy to patch the Shellshock loophole. The problem is “the sheer number of systems in which it is present means it will take months to lock down networks worldwide. Bash is often buried so deeply in operating systems that its existence may not be known.”

--Update: The two-week Air France pilot strike ended on Sunday.

--In Atlantic City, the bankrupt luxury casino-hotel, Revel, which cost $2.4 billion to build, was sold for $110 million to Toronto-based Brookfield US Holdings LLC, which owns casinos in Las Vegas and the Bahamas.

Brookfield said it was looking to reopen Revel as a casino, pending state and court approvals.

This has a ways to go so folks down there shouldn’t get too excited yet, but, if it all went through, yes, Brookfield would have acquired a trophy asset at quite a discount. Personally, I’d make it half condos, half hotel rooms, and then the casino space needs to be placed at ground level.

Foreign Affairs

Iraq / Syria / ISIS:

Just another example of what I was writing in 2012, verbatim.

WIR 12/1/12:

Regarding Syria, I can’t help but note the following passage from a New York Times piece by David E. Sanger and Eric Schmitt.

“In the case of Syria, a far more complex conflict than Libya’s, some (U.S.) officials continue to worry that the risks of intervention – both in American lives and in setting off a broader conflict, potentially involving Turkey – are too great to justify action. Others argue that more aggressive steps are justified in Syria by the loss in life there, the risks that its chemical weapons could get loose, and the opportunity to deal a blow to Iran’s only ally in the region. The debate now coursing through the White House, the Pentagon, the State Department and the C.I.A. resembles a similar one among America’s main allies.

“ ‘Look, let’s be frank, what we’ve done over the last 18 months [Ed. 20] hasn’t been enough,’ Britain’s prime minister, David Cameron, said after visiting a Syrian refugee camp in Jordan. ‘The slaughter continues, the bloodshed is appalling, the bad effects it’s having on the region, the radicalization, but also the humanitarian crisis that is engulfing Syria. So let’s work together on really pushing what more we can do.’ Mr. Cameron has discussed those options directly with Mr. Obama, White House officials say.”

What upsets me about the above two paragraphs, as I expressed in one of my “Nightly Review” videos this week, is that this discussion is absurd. IT’S TOO FREAKIN’ LATE!!!

Some of us were arguing 18 months ago that we needed to take action. I was calling for a move to establish safe zones for refugees, working with our ally, Turkey, who was crying for our help.

Instead, what have you seen? A refugee crisis of humongous proportions that is getting worse by the day, threatening to destabilize governments such as Lebanon and Jordan, and a very pissed off one-time friend, Turkish President Erdogan, who feels slighted and ignored and is now lashing out anew against Israel while he fights for influence in the region with Egyptian President Morsi.

But most importantly, the inaction on the part of the United States unleashed the whirlwind and terrorists have been flooding into Syria. This week I thought one of the most telling incidents was a twin suicide car bombing in a suburb of Damascus that killed at least 34 civilians. There were no Syrian troops that could have been construed as a target. Just a classic al-Qaeda-type attack. Kill as many people as possible.

This isn’t the original opposition rebels of the first days of the Arab Spring, or the Syrian conflict. It has metastasized into Terror Central. The one thing the Assad regime is correct on, as it stated the other day, is it’s fighting al-Qaeda as much as the rebels.

And now, as the rebels get hold of shoulder-fired missiles, which did indeed take down a Syrian fighter jet and helicopter this week, guess who else no doubt is grabbing hold of them? It seems to me it’s just a matter of weeks before a commercial airliner in the region is targeted.

But back to the Sanger/Schmitt piece, the naivety of some when it comes to Syria is astounding.

It’s over. It doesn’t matter if Assad is taken out tomorrow…it’s over. The United States has lost any chance it had to influence the government (or five of ‘em across the country) that follows. And look at the over 750,000 refugees that have fled to the likes of Turkey, Jordan, Lebanon and Iraq. Do you think they are waving American flags?

The one thing the UN does well is supply emergency aid and the UN has been screaming for help and none is forthcoming, despite what the White House and our State Department say. There are no safe havens. There is no secure way to get aid to the 2.5 million inside Syria who need help with winter bearing down on them.

It’s a tragedy of immense proportions. No one cares how this will change the region, forever.

It didn’t have to be this way. The United States and President Obama blew it. What follows is on him…and eventually all of us in one form or another.

---

Pretty prescient, sadly.  Back to today....

In a new Washington Post/ABC News poll, President Obama’s approval rating for his handling of the Islamic State, or ISIS, is up to 50% from 42% in August. Seven in ten support the airstrikes, specifically, up from 65% in early September.

On the warfront, the focus is on the Syrian Kurdish border town of Kobani, which ISIS has been attacking for more than two weeks and has resulted in more than 150,000 Syrian Kurds fleeing to Turkey. Jailed Kurdish militant leader Abdullah Ocalan warned that peace talks between the Ankara government and his group would come to an end if ISIS is allowed to carry out a massacre.

President Erdogan initiated the peace process with Ocalan in 2012 in the hopes of ending a 30-year insurgency that has killed 40,000 in Turkey, mostly Kurds.

So Erdogan warned ISIS against attacking the Kurds who are being guarded by Turkish troops inside Syrian territory. Under an old treaty, Turkey considers the land its own, which contains the tomb of Suleyman Shah – the grandfather of the founder of the Ottoman dynasty Osman I.

Separately, a United Nations report this week found jihadi groups in Iraq have committed human rights atrocities on a “staggering” scale. ISIS and its allies have killed in both a wild and systematic way, concludes the UN, including the massacring of hundreds of Iraqi government soldiers, and ethnic cleansing.

“ISIL (has) attacked and killed female doctors, lawyers, among other professionals,” the report says.

In August, it said, ISIL took 450-500 women and girls to the Tal Afar citadel in Iraq’s Nineveh region where “150 unmarried girls and women, predominantly from the Yazidi and Christian communities, were reportedly transported to Syria, either to be given to ISIL fighters as a reward or to be sold as sex slaves.”

Other crimes include “directly targeting civilians and civilian infrastructure, abductions, rape and other forms of sexual and physical violence perpetrated against women and children, forced recruitment of children, destruction or desecration of places of religious or cultural significance, wanton destruction and looting of property, and denial of fundamental freedoms.”

The UN conducted 500 interviews for its report and at least 9,350 civilians have reportedly been killed so far this year, well over half of them since ISIS seized large parts of northern Iraq in early June. [Ruth Sherlock / Daily Telegraph]

ISIS fighters were reportedly a mile from Baghdad this week, with mortar shells falling inside the Green Zone. There were further reports that ISIS in Syria was forming an alliance with the al-Qaeda linked Nusra Front. Al-Nusra has called U.S. air strikes against ISIS “a war against Islam” and called on jihadists around the world to target Western and Arab countries involved.

What is clear is that U.S. and coalition air strikes are not only not degrading ISIS in any serious way, but ISIS continues to surge in parts of Iraq and Syria. The air strikes are also leading to massive confusion in Syria, in particular, as alliances between rebel factions are roiled. 

Republican Senator John McCain: “I wish the president would stop saying we’re not going to have combat troops on the ground.” McCain is calling for a new resolution in Congress that would allow debate on deploying more troops.

In an interview for “60 Minutes,” President Obama acknowledged the U.S. “underestimated what had been taking place in Syria,” while overestimating the ability or will of the Iraqi army to fight the jihadists.

Philip Stephens / Financial Times

“Not so long ago, Recep Tayyip Erdogan’s government turned eastward. Slighted by a Europe set on locking it out of the EU, Turkey proclaimed its place as the Middle East’s pivotal power. Zero problems with neighbors, the official mantra ran. Turkey would provide the model for the Islamic democracies set to emerge from the Arab uprisings.

“The Syrian refugees on the teeming streets of Istanbul tell a different story. A region of opportunity has become a zone of chaos. Except in Tunisia, where it all started, the lofty hopes of a democratic spring have turned to dust. Egypt has returned to autocracy, Libya is a failed state and Syria a bloody battleground. Mr. Erdogan has problems with all of his neighbors.

“Troubles abroad have been matched by authoritarianism at home. Mr. Erdogan is the most popular politician in Turkey and his summer move from the premiership to the presidency was endorsed by a hefty majority. His allegiance, though, is to majoritarianism rather than to liberal democracy....

“The opening of Turkey’s border to the flow of anti-Assad jihadis into Syria has helped turn large tracts of territory in Syria and Iraq into the nightmare that its followers have called the Islamic State. More than a million refugees have fled to Turkey. Elsewhere, Mr. Erdogan has fallen out with Saudi Arabia and the Gulf states over their backing for Egypt’s new strongman Abdel Fattah al-Sisi....

“Old friends in the west have little sympathy. In its eagerness to topple the Syrian regime, Turkey did little to discriminate between the ‘good guys’ of the moderate Syrian opposition and extremists for whom the fight was always about more than Mr. Assad. Even now, after they have signed up to the U.S.-led coalition against the Islamic State of Iraq and the Levant, or ISIS, the Turks are conflicted. The government worries about the export of ISIS terrorism to Istanbul. More importantly, it wants to avoid making a choice between defeating ISIS and removing Mr. Assad....

“To a greater or lesser degree the wealthy Gulf states display the same ambivalence: ISIS should be checked, but not at the expense of handing victory to Mr. Assad’s sponsor in Tehran.

“Here lies the fatal flaw in the west’s promise to destroy ISIS. In military terms, it does not look an absurd proposition. For all their looted cash and military kit the 20,000 or so fighters occupy a landlocked space surrounded by hostile forces. Destroying, ISIS, however, demands more than western air strikes or, for that matter, boots on the ground. It requires a single-minded political as well as a military commitment on the part of the regional powers to a post-ISIS settlement. For Turkey and Saudi Arabia regime change in Damascus and settling scores with Iran take precedence over any such accommodation between Shia and Sunni. Yet the moderate Syrian opposition ready to replace Mr. Assad is a threadbare fiction.

“The west is left leading an intervention that lacks a clearly defined political ambition and a military exit strategy. Stemming the jihadi tide to prevent the collapse of Iraq was one thing; waging an open-ended war against Sunni extremists in Syria quite another.”

Edward Luce / Financial Times

“You go to war with the allies you have, not the ones you wish for, to paraphrase Donald Rumsfeld. President Barack Obama’s war on the Islamic State of Iraq and the Levant (ISIS) is a good example. His Middle East coalition comprises five autocracies, four of which are monarchies. To one degree or another, each represses dissent, Each, indirectly or inadvertently, has helped spawn groups such as ISIS, Khorasan, Jabhat al-Nusra and, of course, al-Qaeda. Each will reap longer-term profit from assisting the U.S. in its hour of emergency. Things have worked this way in the Middle East for decades. At a moment like this, it would be naïve to expect Mr. Obama to change that.

“At the heart of this Faustian pact is Saudi Arabia. Americans have not forgotten that 15 of the 19 hijackers on September 11, 2001 were Saudi citizens. Nor have they forgotten the mistaken 2003 U.S. pivot to Iraq. Today, much like the day the Twin Towers fell, the most direct global threat to the U.S. comes from Islamist terrorism – the Sunni, variety, to be precise. None of the terrorist plots in the U.S. and Europe since 9/11 have been devised by Shia groups. Yet the one ally that is off-limits to Mr. Obama is Iran – Saudi Arabia’s Shia counterpart and its greatest foe....

“There are reasons to worry it could be worse this time. Ejecting the Soviets from Afghanistan and removing Saddam Hussein were conceptually simple. The U.S. followed the old Arab adage: the enemy of my enemy is my friend. But in Syria, as one diplomat recently quipped, the enemy of America’s enemy is often also its enemy....

“Saudi Arabia has done as much as any country to back the military coup against the Muslim Brotherhood in Egypt – the only non-monarchy in Mr. Obama’s coalition. The Saudis are as hostile to Islamic democracy as they are to its secular variety. Both challenge the House of Saud’s legitimacy.

“Yet signs of the Arab street’s alienation keep spreading. The Middle East leads the world in terms of its youth bulge. For growing democracies, such as India, armies of young workers offer a potentially huge dividend. But for stagnant economies, such as Egypt and Pakistan, they spell demographic nightmare. By continuing to suffocate freedom at home and next door, the Saudis only multiply the supply of recruits for groups such as ISIS. This is a trade-off the west cannot afford.”

A few other notes:

The Australian cabinet gave its approval for fighter jets to join the coalition against ISIS targets in Iraq. British warplanes struck IS targets there for the first time on Tuesday.

A pair of bombs in the Syrian city of Homs killed at least 32 people (other reports put the toll at 50), most of them children at a school compound. Antigovernment rebels were suspected of the attacks.

Editorial / Wall Street Week

“Leon Panetta was one of the Obama Administration’s adults, providing good counsel as CIA director and later Secretary of Defense. President Obama could use him now. So Mr. Panetta’s account in his forthcoming memoir about how the White House bungled negotiations over keeping U.S. troops in Iraq past 2011 is a bombshell that explains the real reason Americans must fight again in that country.

“Mr. Obama has repeatedly claimed that he wanted to leave U.S. forces in Iraq but that Iraq’s government wouldn’t agree to reasonable terms. For example, on June 19 the President told CNN’s Jim Acosta:

“ ‘Keep in mind, that wasn’t a decision made by me. That was a decision made by the Iraqi government. We offered a modest residual force to help continue to train and advise Iraqi security forces. We had a core requirement which we require in any situation where we have U.S. troops overseas, and that is that they are provided immunity...The Iraqi government and Prime Minister [Nouri al-] Maliki declined to provide us that immunity.’

“In an excerpt from his memoir published this week on the TIME magazine website, Mr. Panetta tells a different story. He relates that ‘privately, the various leadership factions in Iraq all confided that they wanted some U.S. forces to remain as a bulwark against sectarian violence. But none was willing to take that position publicly, and Prime Minister Nouri al-Maliki concluded that a Status of Forces Agreement, which would give legal protection to those forces, would have to be submitted to the Iraqi parliament for approval.’

“That made negotiations harder, but as Mr. Panetta relates ‘we had leverage,’ such as withdrawing reconstruction aid. The White House refused to use it: ‘My fear, as I voiced to the President and others, was that if the country split apart or slid back into the violence that we’d seen in the years immediately following the U.S. invasion, it could become a new haven for terrorists to plot attacks against the U.S. Iraq’s stability was not only in Iraq’s interest but also in ours. I privately and publicly advocated for a residual force that could provide training and security for Iraq’s military.’

“Mr. Panetta says he and his deputies pressed this argument, ‘but the President’s team at the White House pushed back, and the differences occasionally became heated... [Those] on our side viewed the White House as so eager to rid itself of Iraq that it was willing to withdraw rather than lock in arrangements that would preserve our influence and interests.

“ ‘We debated with al-Maliki even as we debated among ourselves, with time running out...To my frustration, the White House coordinated the negotiations but never really led them’ and ‘without the President’s active advocacy, al-Maliki was allowed to slip away.’

“Mr. Panetta adds that, ‘To this day, I believe that a small U.S. troop presence in Iraq could have effectively advised the Iraqi military on how to deal with al-Qaeda’s resurgence and the sectarian violence that has engulfed the country.’

“All of this comports with our own reporting from 2011, but it is nonetheless distressing to have confirmed how much Mr. Obama and his munchkin Metternichs in the White House put their political desire to withdraw from Iraq above the U.S. national interest.”

Iran: Iranian President Hassan Rohani said nuclear talks with the P5+1 had been “extremely slow,” with “the remaining time (being) extremely short.”

Editorial / Washington Post

“The deadline for completing a nuclear agreement with Iran is now less than eight weeks away, and the omens are not good. U.S. officials had hoped that an intensive week of negotiations at the United Nations last month would open the way to a deal but, by the account of both sides, little headway was made. ‘The gaps are still serous,’ said a U.S. official briefing reporters at the end of the talks. Iranian President Rohani was even blunter: ‘The progress realized thus far has not been significant.’

“The impasse certainly does not reflect a lack of initiative by the Obama administration. On the contrary, U.S. negotiators have responded to Iranian intransigence on key issues with creative but sometimes disturbing counterproposals. Most notably, Iranian Supreme Leader Ali Khamenei has declared that the regime will not dismantle any of the 19,000 centrifuges it has constructed to enrich uranium. So the United States and its allies, which once insisted that most of the machines be eliminated, reportedly have floated a proposal to leave the centrifuges in place but take away the plumbing that connects them.

“If Iran has made similar efforts to bridge the gaps between the two sides, there is no report of them. Instead, Tehran appears to be sticking to its insistence on maintaining and eventually vastly expanding its nuclear infrastructure while offering only a temporary slowdown in uranium enrichment and ‘increased transparency.’ It is refusing to discuss its ballistic missile program and still isn’t cooperating with international inspectors’ probe into its past nuclear weapons design work.

“The Obama administration has a history of responding to Iran’s stonewalling by peeling away its own demands. It gave up an attempt to impose a permanent ban on Iranian enrichment and seems to have dropped a requirement that an underground uranium enrichment plant be closed. Now it seems to be contemplating scenarios under which Iran would not have to dismantle centrifuges that would be the center of any bomb-making effort....

“(By) leaving the nuclear infrastructure intact, it would cede Iran the option of racing to build a nuclear arsenal at a time of its choosing, while removing the sanctions that are pressing the regime. Meanwhile, a concession already made by the United States and its allies – settling a date after which all restrictions on Iran’s nuclear work would lapse – would create a time bomb for the Middle East.”

Israeli Prime Minister Benjamin Netanyahu, in his address to the UN General Assembly this week:

“Ladies and gentlemen, would you let ISIS enrich uranium? Would you let ISIS build a heavy water reactor? Would you let ISIS develop intercontinental ballistic missiles? Of course you wouldn’t. Then you mustn’t let the Islamic state of Iran do those things either, because here’s what will happen. Once Iran produces atomic bombs, all the charms and all the smiles will suddenly disappear. They’ll just vanish. And it’s then that the ayatollahs will show their true face and unleash their aggressive fanaticism on the entire world.

“There’s only one responsible course of action to address this threat. Iran’s nuclear military capabilities must be fully dismantled. Make no mistake: ISIS must be defeated. But to defeat ISIS and leave Iran as a threshold nuclear power is to win the battle and lose the war.

“Ladies and gentlemen, the fight against militant Islam is indivisible. When militant Islam succeeds anywhere, it’s emboldened everywhere. When it suffers a blow in one place, it’s set back in every place. That’s why Israel’s fight against Hamas is not just our fight, it’s your fight. Israel is fighting a fanaticism today that your countries may be forced to fight tomorrow.” [Wall Street Journal]

Israel: While Prime Minister Netanyahu warns on any Iranian nuclear deal, Europe and the United States have demanded Israel cancel its plans to build new settlements in east Jerusalem, some 2,600 homes. French Foreign Minister Laurent Fabius summed up the feeling of the West in a statement: “We urgently call on the Israeli authorities to reverse this decision,” and that the settlements threatened a “two-state solution.”

“One cannot claim to support a solution and at the same time do things against without consequences being drawn, including at the European Union level.”

Netanyahu insists Jews have the right to live in every area of Jerusalem.

Lebanon: There are 1.5 million refugees from the fighting in Syria and officials believe it will surpass 2 million by early next year. To say this nation is stressed to the max is an understatement.

Ukraine: This crisis is getting lost in the pile of geopolitical threats these days, but the ceasefire is over, not that it was ever really in place. Rebels in eastern Ukraine have targeted Donetsk International airport and appear to be on the verge of taking it, which would be a huge victory for the pro-Russian separatists. At least ten people were killed in residential areas near the airport. A school was hit, but those killed were adults.

Earlier, nine Ukrainian soldiers were killed in fighting around the airport.

German Chancellor Angela Merkel warned the European Union and the U.S. are facing a long confrontation with Russia over Ukraine.

“I don’t see any change at the moment regarding Russia’s position. We needed 40 years to overcome East Germany. Sometimes in history one has to be prepared for the long haul, and not ask after four months if it still makes sense to keep up our demand,” she said. [Bloomberg]

Ukraine’s Prime Minister Yatsenyuk said Tuesday, “Rhetorically it’s all fine, but deeds fail to match words,” in concluding Russia has no intention of resolving the conflict.

As for the natural gas issue between Moscow and Kiev, the Kremlin is saying Ukraine must first pay $3.9 billion it owes before Russia would resume gas deliveries. A deal that would have Kiev pay $3.1 billion by end of the year in return for Gazprom resuming some deliveries, but only during the winter months and at above-average prices, has been tentatively agreed to.

Finally, Russian Foreign Minister Sergei Lavrov, addressing the UN General Assembly, said the crisis in Ukraine was the result of a coup d’etat in that country backed by the EU and the U.S. Lavrov added the Russian annexation of Crimea was the choice of the largely Russian-speaking population there.

Russia: The government is determined to beef up security of its Internet against what the Kremlin is saying was an onslaught of western attacks. President Vladimir Putin said, “We need to develop and implement additional measures in the field of information security,” adding that “certain countries” were aiming to use their influence on the Internet to cripple Russia.

Putin did say the government would not try to install a “kill switch” that could allow it to disconnect the Net overnight, but regulatory steps are on the way. Laws already in place allow the government to shut down sites without a court order. Shares in Russian Internet companies fell hard on the news out of the Kremlin.

Russia’s parliament also moved to restrict foreign ownership of Russian media companies to 20%, which forces U.S. and European companies to relinquish control over newspapers, magazines and television networks. The bill passed the lower house of parliament, the Duma, by a 430-2 vote. Various U.S. and European outfits own Russian editions of publications such as Forbes and Vogue. Vedomosti, an influential news outlet that focuses mostly on business, is owned jointly by News Corp’s Dow Jones & Co., and Pearson PLC’s FT Group, publisher of the Financial Times.

And, as I wrote would be the case, a Russian court has seized shares in the oil company, Bashneft, whose billionaire owner, Vladimir Yevtushenkov, is under house arrest. Rosneft (see Igor Sechin) is the likely beneficiary, as was the case with Yukos owner, Mikhail Khodorkovsky, who was arrested in 2003. Rosneft got the bulk of their assets.

Separately, Russia ended a popular exchange program that brought thousands of Russian students to America. 

And the Russian stock market hit bear market territory this week, a decline of over 20% from its June 24 high.

Afghanistan: The new government signed a security deal with Washington that allows U.S. troops to remain in the country beyond 2014. The previous president, Hamid Karzai, refused to sign the bilateral security agreement.

By yearend, 9,800 U.S. troops will remain, along with about 2,500 from NATO for training, as well as “counter-terror operations.” The current plan is to cut in half the U.S. presence by the end of 2015, before a full pullout at the end of 2016.

It’s encouraging the new president, Ghani, moved so quickly to reset relations with Washington.

Meanwhile, a suicide attack on Afghan troops in Kabul killed seven.

China: Taiwan rejected Chinese President Xi’s suggestion that the two sides end six decades of hostile separation and adopt a “one country, two systems” model for reunification, a la Hong Kong; which was curious that Xi would put forward this idea amid the Occupy Central protests in Hong Kong. 70% of Taiwanese people are against China’s proposal.

As for the economic relationship between Washington and Beijing...

Editorial / Washington Post

“For the United States and other democratic capitalist nations, trade with and investment in the People’s Republic of China always posed a dilemma: how to ensure that economic engagement benefits the people of that nation without fortifying the repressive political regime under which they live. The response from supporters of Western economic engagement has been that the dilemma, essentially, will resolve itself, because the more interdependent China and the West become, the more the former will have to play by the rules of the latter. Growth and prosperity will gradually promote freedom and the rule of law.

“Recent events must give pause to even the most optimistic believers in capitalism’s power to induce more transparent government in China. Beijing is in the midst of not only an intensifying crackdown on its own citizens but also in what appears to be systematic harassment of U.S., Japanese and European multinational companies in the form of stepped-up enforcement of a 2008 antitrust law....

“As is now evident...in China there is nothing deterministic about the relationship between economics and politics. The communist authorities are bent on preventing political liberalization from flowing in with foreign capital, and, indeed, on ensuring that foreign involvement in the economy serves their policy goals, domestic and international, among which ‘security’ is paramount. Meanwhile, U.S. markets for both goods and financial services remain wide open to China, as shown by the recent Wall Street initial public offering of a Chinese online retailer with close government ties, Alibaba.

“Openness, not only to China but to all nations, remains in America’s best interest. The question, though, is whether either U.S. multinationals or the U.S. government are making the best use of their leverage in the Chinese market. No doubt China believes it can always exploit competition among U.S. firms, and among firms from this country and its rivals – especially given the stagnant European and Japanese economies’ dependence on export sales. Perhaps it’s time that the capitalist West showed that it, too, can present a united front.”

Hear, hear.

Brazil: Two polls released on Tuesday show President Dilma Rousseff widening her lead against socialist party candidate Marina Silva in elections set for Sunday. Should neither candidate achieve 50%, a run-off will be held Oct. 26.

But Silva is sliding precipitously and now she’s in a race for second with third-place candidate Aecio Neves.

Rousseff would win a second round vote 49-41 over Silva, according to the Datafolha poll, which had it 47-43 Rousseff five days earlier. Another survey by Ibope has Rousseff winning the second round 42-38, when a week earlier this survey had it 41-41.

Silva had surged owing to a sympathy vote following the death of presidential candidate Eduardo Campos in a plane crash, Silva’s running mate.

But Rousseff has the funding and she’s launched a negative campaign against Silva that the latter doesn’t have the resources to combat.

India: Prime Minister Narendra Modi and President Obama met in Washington for extensive talks in an attempt to repair relations that have become strained. But there were no resolutions on disputes including taxes, trade and civilian nuclear energy cooperation.

And as the New York Times described it, there was a protocol nightmare on Monday night when Obama hosted a small dinner in the White House Blue Room, with Modi being in the middle of a nine-day fast to observe a Hindu festival, but he insisted his hosts go ahead and eat. Modi had warm water, “while Mr. Obama and the two leaders’ entourages ate avocados and goat cheese, crisped halibut and basmati rice, a pumpkin crème brulee and a California chardonnay.”

Geezuz, that sounds absolutely delicious. Pumpkin crème brulee?! I’m there.

North Korea: It seems that dictator Kim Jong-un has become so obese, he fractured both of his ankles, according to South Korea’s Chosun Ilbo newspaper. So he had surgery on both...at least that is the rumor du jour concerning Kim’s health and his weeks long disappearance.

Separately, a senior North Korean envoy said Pyongyang was prepared to resume six-party talks on its nuclear program. The ambassador to the United Nations also said his country was not preparing any nuclear tests and he tried to shoot down “fabricated rumors” that Kim Jong-un was ill.

Austria: Parliament passed a bill that would overhaul a 1912 law governing the status of Austrian Muslims that will call for standardized German-language translations of the Koran, while moving to prohibit foreign funding of Muslim organizations on its soil. This is about the growing support for the far-right in Austria and reports some Austrian Muslims are joining up with Islamists in the Middle East.

Muslims represent about 6% of the Austrian population. I haven’t been able to ascertain whether the bill has enough support to become law, however.

Random Musings

--One of my friends, John G., observed the other day that he was surprised President Obama’s poll numbers were as high as they are given the myriad of serious issues that he has totally mishandled, which means a lot of folks simply don’t give a damn. We all know that.

But Military Times did its annual survey of active-duty soldiers and the results are quite telling. Back in 2009, only 35% approved of the way Obama was “handling his job as commander in chief.” Today? Try 15%.

[On a different topic, in 2011, 63.8% of active-duty members thought the Iraq war was very or somewhat successful. Today that percentage is 30%.]

--Martin Feldstein / Financial Times

“As a result of our defense policies, America’s enemies do not fear us and our friends do not trust us. We have disappointed the Ukrainians, alienated the Israelis and the Egyptians, and left our allies in eastern Europe and in east Asia wondering how we would deal with future threats from Russia, North Korea or China.

“Mr. Obama is not likely to change his attitude about the effective use of America’s armed forces or his willingness to increase defense spending. But the next president should make it a central priority to rebuild our military budget and use it to strengthen our role in Europe, the Middle East and Asia.”

--Editorial / Washington Post

“Secret Service Director Julia Pierson promised a congressional committee that her agency would conduct a vigorous and comprehensive review of security lapses at the White House. ‘It will never happen again,’ she pledged. But her halting performance at Tuesday’s special hearing was far from reassuring given recent revelations of embarrassing, and potentially disastrous, incidents involving this critical agency.

“Internal reviews are no longer sufficient; it is time for independent analysis of what went wrong and what that says about the protection afforded to the president, his family and their historic residence....

“(Lawmakers) were not wrong in decrying the lack of candor, even the duplicity, in Secret Service accounts of the Sept. 19 incursion by a fence-jumper into the White House and an earlier 2011 incident in which the service failed to properly investigate shots fired at the White House. Why, for instance, did the Secret Service report that the intruder was unarmed when he had a knife? Why imply he was apprehended just inside the entrance when he actually had raced through several rooms?

“Nor were lawmakers wrong to wonder whether there are systemic problems at the agency. Consider the Virginia couple who crashed a state dinner in 2009; the agents who allegedly visited prostitutes in Cartagena, Colombia, while preparing for a presidential visit in 2012; the agent sent home from a Netherlands assignment in March after reportedly passing out drunk in a hotel hallway. The first intrusion into 1600 Pennsylvania Ave. in modern times – by a man who had previously been arrested with multiple guns and a map to the White House. And now, reports that a man with a gun and criminal record was allowed by a clueless Secret Service onto an elevator with President Obama.”

Editorial / Wall Street Journal

“This month’s astonishing breach of the White House, supposedly one of the world’s most secure complexes, has exposed a culture of incompetence and duplicity. Government failures are legion, but rarely are they so dangerous.

“The core mission of the Secret Service is to prevent an attack on the chief executive’s person and that includes defending the White House. Yet this crude intrusion would be implausible in an airport thriller. The guy waltzed in the front door....

“Ms. Pierson lamented ‘the difficulty in trying to operate a critical federal agency in times of fiscal constraint,’ but the truth is that the Secret Service budget of $1.7 billion for 2014 has doubled in real terms since 1998. In the four decades since the Ford Presidency, the U.S. has invested billions of dollars (the totals are classified) in fortifying the White House and Old Executive Office Building, and Pennsylvania Avenue has been closed to traffic in front of the White House for half as long. Yet the Secret Service was no more prepared for this most unsophisticated of infiltrators than for the 16 other people who have come over the fence in the last five years.

“The larger danger is that these embarrassments advertise security vulnerabilities in Vegas-strip neon. The more they happen, the more likely more dangerous individuals or organizations will try again, and a team with tactical training or advanced weapons could do great damage against an evidently hapless Naked Gun 2 ½ patrol.

“On Monday the Administration expressed ‘full confidence’ in Ms. Pierson, and perhaps even a threat to Mr. Obama’s personal safety is not enough to disabuse his excessive faith in government. Yet she got the job in March 2013 after her predecessor was canned when agents engaged the less-than-secret services of Cartagena hookers while doing advance work for a Presidential visit to Colombia....

“The latest episode marks a new nadir in the decline of government, and the start of rebuilding professionalism is accountability. That should include firing Ms. Pierson and anyone else who lies to the public. The Secret Service also ought to respond to White House invaders with lethal force. The next Omar Gonzales or Chester Plummer may be a terrorist strapped to a bomb.”

Back to the man on the elevator, Carol Leonnig / Washington Post:

“A security contractor with a gun and three prior convictions for assault was allowed on a lift with President Barack Obama during a trip to Atlanta last month, violating Secret Service protocols, according to three people familiar with the incident.

“Mr. Obama was not told of the lapse in his security, these people said. The Secret Service director, Julia Pierson, asked a top agency manager to review the matter, but did not refer it to an investigative unit that was created to review violations of protocol and standards, according to two people familiar with the handling of the case, who spoke on condition of anonymity.

“The incident, which took place as Mr. Obama visited the Centers for Disease Control and Prevention to discuss the U.S. response to the Ebola crisis, rattled Secret Service agents assigned to the president’s protective detail.”

The contractor was acting oddly, but let’s stop here. Why was any stranger allowed on the elevator in the first place?

So when Obama got off, some of the security detail stayed behind to interview the man, using a national database check to learn of his criminal history, a supervisor from the firm providing security at the CDC showed up, discovered the agents’ concerns, the contractor was fired on the spot, and then the guy turns over his gun – “surprising agents, who had not realized he was armed during his encounter with Obama....

“A White House spokesman declined to comment on the incident, or say when, or if, the president had been informed of it.”

Julia Pierson resigned Wednesday.

--Ms. Leonnig had a busy week, with some superb reporting on all aspects of the bumbling Secret Service. On the 2011 incident where the gunman hit the White House residence:

“The gunman parked his black Honda directly south of the White House, in the dark of a November night, in a closed lane of Constitution Avenue.  He pointed his semiautomatic rifle out of the passenger window, aimed directly at the home of the president of the United States, and pulled the trigger.

“A bullet smashed a window on the second floor, just steps from the first family’s formal living room. Another lodged in a window frame, and more pinged off the roof, sending bits of wood and concrete to the ground. At least seven bullets struck the upstairs residence of the White House, flying some 700 yards across the South Lawn.

“President Obama and his wife were out of town on that evening of Nov. 11, 2011, but their younger daughter, Sasha, and Michelle Obama’s mother, Marian Robinson, were inside, while older daughter Malia was expected back any moment from an outing with friends.

“Secret Service officers initially rushed to respond....

“Then came an order that surprised some of the officers. ‘No shots have been fired...Stand down,’ a supervisor called over his radio. He said the noise was the backfire from a nearby construction vehicle.”

That was the first of many lapses.

“It took the Secret Service four days to realize that shots had hit the White House residence, a discovery that came about only because a housekeeper noticed broken glass and a chunk of cement on the floor.”

Needless to say the first lady and president were fuming.

--Editorial / Wall Street Journal

“President Obama rode to the White House in part by assailing George W. Bush for believing faulty intelligence about Saddam Hussein’s weapons of mass destruction. So there is no small irony in his claim now that America’s spooks missed the rise of the Islamic State. The difference is that U.S. intelligence did warn about the threat from ISIS. Mr. Obama chose not to listen.

“Asked on CBS’ ’60 Minutes’ Sunday if ISIS’ march into Iraq was a ‘complete surprise,’ Mr. Obama replied, ‘Well I think our head of the intelligence community, Jim Clapper, has acknowledged that I think they underestimated what had been taking place in Syria.’

“Mr. Clapper is the presidential appointee who coordinates U.S. intelligence messaging. Perhaps he does think his agencies misjudged ISIS. But we doubt he missed the Feb. 11, 2014 Senate testimony of Lt. Gen. Michael Flynn, who was director of the Defense Intelligence Agency at the time:

“ ‘Al-Qaeda in Iraq (AQI), also known as the Islamic State of Iraq and Levant (ISIL): AQI/ISIL probably will attempt to take territory in Iraq and Syria to exhibit its strength in 2014, as demonstrated recently in Ramadi and Fallujah, and the group’s ability to concurrently maintain multiple safe havens in Syria.’

“That was five months before the fall of Mosul and a couple of months after Mr. Obama had compared ISIS and various al-Qaeda offshoots to the junior varsity....

“The failure to confront ISIS sooner wasn’t an intelligence failure. It was a failure by policy makers to act on events that were becoming so obvious that the Iraqis were asking for American help for months before Mosul fell. Mr. Obama declined to offer more than token assistance.”

--Federal Aviation Administration contractor Brian Howard, the man who set the fire at the Chicago air traffic center that has wreaked havoc on the air transportation system, posted a Facebook message on Friday, Sept. 26, saying he planned to ‘take out’ the regional center and commit suicide, according to local CBS and ABC affiliates.

It will take weeks to reconstruct the center, the damage was that bad, and the incident raises questions about the federal government, again, and its ability to screen security risks.

As the Washington Post’s Josh Hicks notes, Navy Yard shooter Aaron Alexis, who killed 12 people during a rampage in September 2013, “maintained his security clearance despite troubling police records and signs of mental illness.”

--New Jersey’s public worker retirement system has $90 billion in unfunded pension and health benefit liabilities, according to a report issued by a special commission called for by Gov. Chris Christie. This is about three times the state’s budget of $33 billion. Christie has been warning the state must make more changes or risk financial ruin.

But the report offers no solutions.

--We note the passing of nine-term Ohio Congressman James A. Traficant Jr., who was convicted on corruption charges in 2002, becoming the second member of Congress to be expelled since the Civil War.

Traficant, who covered a district that included gritty Youngstown, was known for his outrageous behavior, skinny ties, out-of-date polyester suits and a bouffant mound of hair that the Los Angeles Times described as a “Planet of the Apes sort of hair helmet.”

Traficant was also known for his fiery speeches on the House floor that often ended with a “Star Trek” reference: “Beam me up, Mr. Speaker.”

--Chelsea Clinton gave birth to a girl, Charlotte Clinton Mezvinsky. NBC News hired Baby Charlotte on the spot for $600,000 a year to do puff pieces on their “award-winning Making a Difference” segments, as Brian Williams announced.

--According to a study by the London Zoological Society (ZSL), world wildlife populations have been halved in 40 years. Populations of mammals, birds, reptiles, amphibians and fish have declined by an average of 52%. Freshwater species have fallen 76%.

As reported by the BBC’s Roger Harrabin:

“The society’s report, in conjunction with the pressure group WWF, says humans are cutting down trees more quickly than they can re-grow, harvesting more fish than the oceans can re-stock, pumping water from rivers and aquifers faster than rainfall can replenish them, and emitting more carbon than oceans and forests can absorb.”

Forest felling is a huge issue. I read a piece in the Moscow Times this week on just how bad it is in Russia where, as reported by Alexey Eremenko, “Only 3 percent of replanted forests in Russia are maintained.” WWF Russia said up to 60 percent of their trees thus wither and die.

“The Russian logging industry still follows mid-20th-century templates of extensive management, when loggers clear a forest and move on.

“The state-of-the-art practice is intensive forest management [Ed. such as that employed in the U.S.], where trees are replanted and only partially harvested, allowing forests to recuperate.” 

---

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

God bless America.
---

Gold $1192...lowest since 12/31
Oil $89.74...lowest since April 2013

Returns for the week 9/29-10/3

Dow Jones  -0.6%  [17009]
S&P 500  -0.8%  [1967]
S&P MidCap  -1.6%
Russell 2000  -1.3%
Nasdaq  -0.8%  [4475]

Returns for the period 1/1/14-10/3/14

Dow Jones  +2.6%
S&P 500  +6.5%
S&P MidCap  +1.6%
Russell 2000  -5.1%
Nasdaq  +7.2%

Bulls 47.5
Bears 15.1 [Source: Investors Intelligence]

Dr. Bortrum has a new column posted.

Have a great week. I appreciate your support.

Brian Trumbore



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Week in Review

10/04/2014

For the week 9/29-10/3

[Posted 4:15 PM ET, Friday...return figures have been updated.  On the road for a spell.]

Edition 808

Washington and Wall Street

What a week. A week of sheer incompetence, whether it was the latest disclosures from the Secret Service and how our president’s security is in grave doubt, or the gross incompetence of health officials in Dallas in the Ebola scare there.    

It was also a week where Hong Kong jumped to the forefront of the news coverage as well, though I have been anticipating this for some time and this story is far from over.

Aside from the ever-growing terror threat, both here and in Europe, the main potential market movers remain Russia and China and the signs from both (as they give each other a group hug) are not good. In fact, downright distressing.

About the only thing that’s been good in the world these days is the continued rebound in the U.S. economy, with Friday bringing us another solid jobs report for September, nonfarm payrolls growing 248,000 and the unemployment rate falling to 5.9%, the lowest since July 2008. The figures for the prior two months were also revised upwards; from 142,000 to 180,000 in August, and 212,000 to 243,000 for July.

But there were a few negatives from the jobs numbers. Average hourly earnings were unchanged, and remain up just 2% from a year earlier. I’ve been calling for decent wage growth by the end of the year, which would force the Fed’s hand, earlier than expected, but that hasn’t been forthcoming as yet. It will.

And the labor participation rate fell to 62.7% from 62.8%. Before the recession, it was at 66%.

Plus a broader measure of unemployment, U6, which includes those working part-time who seek full-time status, is still at 11.8%, though this is down from 12.2% in two months and is the lowest since October 2008. In a normal expansion, however, it should be in the 8% to 10% range.

So what does this mean for the Federal Reserve and interest rates? There is no inflation and no wage pressures, so it’s easy for the Fed to just stay the course. Plus you have the putrid European outlook and major worries in a slowing China and an uncertain economy in Japan.

Throw in the myriad of geopolitical issues and you can see why most concur with the Fed’s own view, that it will hike around the middle of 2015, but not before.

Or maybe they’ll begin to change their tune when they hold their next Open Market Committee meeting Oct. 28-29. If not then, Dec. 16-17.

In other economic news that all goes into the Fed’s stew, the 20-city S&P/Case-Shiller housing index rose just 0.6% in July over June, up 6.7% year over year, which is the slowest annual pace since Nov. 2012.

Personal income for August came in as expected, up 0.3%, but consumption was a tick better than forecast, up 0.5%, solid.

Then you had various purchasing managers’ indices. Chicago’s number for manufacturing in September was a solid 60.5, while the national ISM data on manufacturing was 56.6, down from the prior month’s 58.5 but still very good, and the ISM service sector reading came in at 58.6 for last month, excellent.

More broadly, the International Monetary Fund said the United States is a rare bright spot in the global economy, which otherwise is stuck on a “new mediocre” growth path with high debt and unemployment, requiring investments in infrastructure and reform of fiscal policies, as head Christine Lagarde warned. So let’s move on to....

Europe and Asia

Ms. Lagarde said the eurozone was at risk of sinking into a morass of low growth with high jobless figures and falling prices that are nearly in deflation territory. The IMF will no doubt downgrade its global economic forecasts when they are released next week.

“Our main job now is to help the global economy shift gears and overcome what has been so far a disappointing recovery: one that is brittle, uneven and beset by risk,” Lagarde said.

The eurozone remains an area of major concern. Eurostat released its data on unemployment for the euro-18 and the rate remained stuck at 11.5% in August, only down slightly from the 12.0% reading of August 2013. Germany’s jobless rate is just 4.9%, but France is at 10.5%, Italy 12.3%, Spain 24.4% and Greece 27.0% (June).

The youth unemployment rate remains at sickening levels, especially in the periphery...53.7% in Spain, 57.5% in Greece (June), 44.2% in Italy and 35.6% in Portugal.

Eurostat’s flash estimate of inflation in September was also not good, up just 0.3% on an annualized basis vs. 1.0% Sept. 2013, down from 0.4% in August. The 0.3% figure is a five-year low.

Markit reported the final September reading on eurozone manufacturing was 50.3, a 14-month low (contrast this with the strong readings in the U.S.). Germany came in at just 49.9, a 15-month low, Greece 48.4 (11-mo. low), Spain 52.6 (but a 7-mo. low) and Italy 50.7, which was a tick up.

A composite PMI for the eurozone (manufacturing and services) was 52.0 in September, down from August’s 52.5. France’s 48.4 was a 3-mo. low; Italy’s 49.5 a 10-mo. low.

Chris Williamson, chief economist at Markit said:

“The PMI suggests the eurozone economy remained stuck in a rut in the third quarter. After GDP stagnated in the second quarter, we can only expect modest growth of 0.2-0.3% in the third quarter based on these survey readings, with momentum being lost as we head into the final quarter of the year.

“There are certainly pockets of growth: Ireland’s economy is recovering strongly, Spain is seeing a still-robust upturn and the German service sector is providing an important prop to growth in the region as a whole. But the overall picture is one of a euro area economy that is struggling against multiple headwinds. These include a lack of domestic demand in many countries, subdued bank lending, sanctions with Russia and a reluctance of companies to expand in the face of an uncertain economic outlook.

“The survey showed growth of new orders sliding to the weakest for almost a year across the region as a whole, suggesting demand for goods and services is barely growing....

“The waning of growth signaled by the PMI will apply further pressure on the ECB to broaden the scope of its planned asset purchases, to not only buy riskier asset-backed securities but to also start purchasing government debt.”

Speaking of the European Central Bank, President Mario Draghi once again disappointed the markets in announcing the ECB would buy bundles of mortgages and business loans in an attempt to kick start the eurozone economy by making it even cheaper than it already is to borrow, but moves of this kind haven’t worked. Draghi said the ECB was unanimous in agreeing to take further steps if needed, code for quantitative easing or QE. But there is stiff internal opposition, especially from Germany, which says it’s illegal.

Draghi also faces criticism for not detailing more fully his asset-backed securities purchases and his comments were downbeat, though the data doesn’t warrant a lot of happy talk, that’s for sure.

A few other euro notes...

The U.K. revised its growth figure for the second quarter to up 0.9%, or up 3.2% year over year, though its manufacturing PMI fell to 51.6 in September from 52.2 the prior month.

In Spain, Catalonia’s regional government announced it would suspend its promotion of a referendum on independence, after Spain’s Constitutional Court blocked the nonbinding vote. The leaders of the movement still hope to hold a vote on Nov. 9, but are not campaigning visibly in order to prevent workers from being subjected to possible legal liability for defying the court.

The central government argues the 1978 constitution requires a majority of all Spaniards be consulted on any issue of sovereignty. Supposedly, the vote cannot be held while the court deliberates, which could take months.

Separately, the government said the economy will grow 1.3% this year, up 2.0% in 2015, though prices fell 0.3% in September.

The Italian government said its economy would contract 0.3% this year after initially forecasting growth of 0.5%. Inflation was down 0.2% last month. So you see in Spain and Italy, as well as Greece, there are persistent signs of outright deflation.

The yield on Greece’s 10-year bond soared to 6.50%, before word the ECB will buy the junk bonds of Greece’s banks, which promptly sent the yield on the government crapola to 6.20%, which is absurd given Greece’s debt to GDP level is 177%, plus there is growing political uncertainty as the leftist Syriza party leads in the polls.

The French government said it would reduce its budget deficit to the EU threshold of 3% of GDP by 2017, two years later than it promised. To do even this much, France has to enact strict budget cuts and the left wing of the ruling Socialist Party is none too pleased. Nor are German officials, who argue France refuses to enact structural reforms.

Finally, Russia’s central bank has been weighing the introduction of temporary capital controls if the flow of money out of the country intensifies, though officially, the central bank denies this. The Economy Ministry projects $100 billion will leave the country this year, up 64% from 2013.

Turning to Asia....

In China, HSBC’s final PMI for September was 50.2, down from an earlier estimate of 50.5 and the same as August’s 50.2 reading. Separately, the National Bureau of Statistics said China’s service sector slowed in September, 54.0 vs. 54.4 in August and an eight-month low. The government’s manufacturing PMI was 51.1.

So it’s on to Hong Kong. On 6/14/14, I wrote the following.

Then there is Hong Kong. Beijing issued a white paper setting the record straight, in its mind, on “one country, two systems.”

The central government holds “comprehensive jurisdiction” over Hong Kong and is the source of its autonomy, Beijing said, stressing that while the city could, in the future, choose its leader through ‘universal suffrage,’ that person must be loyal to the country.

China’s national security and interests were at stake, it added.

This isn’t anything new, but the timing was unexpected, with the State Council saying “many wrong views are currently rife in Hong Kong,” adding: “Some people are confused or lopsided in their understanding of the policy [one country, two systems] and the Basic Law.”

There is an election slated for choosing a chief executive in 2017.

The White Paper said: “The high degree of autonomy enjoyed by Hong Kong is subject to the central government’s authorization. There is no such thing called ‘residual power’ for the special administrative region,” it said.

And it also warned against “outside forces” using the city to interfere in China’s domestic affairs. [South China Morning Post]

This is a huge deal. July 1 is the anniversary of the British handover to China back in 1997 and protests are planned. If riots are sparked, martial law could be declared by Beijing. Whether it is this year or closer to 2017, I can guarantee this is explosive. The central government understands upheaval could spread to cities on the mainland. [At least they better understand this.] 

---

Well, last week, 36 hours before the latest protests got under way, I spelled out for you Beijing’s stance on the democracy movement in Hong Kong. On Sunday, the Occupy Central civil disobedience campaign got underway and the police used tear gas on the peaceful protesters.

At first the Chinese government backed Hong Kong authorities but without naming Chief Executive Cy Leung (chief executive being like the title ‘mayor’). By Thursday, however, Beijing’s position was clear, they “fully trust” Mr. Leung. As put forward in a front-page editorial for The People’s Daily, the Communist party mouthpiece, it was “very satisfied” with his work, and “firmly supported” the way the police handled “illegal activities.”

But after the initial use of force, the police were restrained and you know the orders from Beijing were to wait the protesters out.

But Mr. Leung is showing zero signs of accepting any kind of electoral reform for the 2017 vote, and, we’re talking 2017! He also now knows he has the full support of China’s leadership. So if things are this tense so soon, imagine what the attitudes will be in 2016, let alone 2017.

Chinese President Xi Jinping has a tough choice. He can modify Hong Kong’s electoral system and appear weak, or he uses force, a la 1989’s crackdown in Tiananmen Square.

*As I go to post, leaders of the pro-democracy student group have postponed talks with the Hong Kong government following some scuffles with opponents, apparently those in the business community frustrated over disruptions caused by the protesters.

We have a long ways to go with this topic.   I have told you before I love the energy of Hong Kong, the most fascinating city in the world. But as I wrote in June, that energy can go both ways.

Editorial / Washington Post

“Now that pro-democracy protests have shut large swaths of central Hong Kong, China’s leaders find themselves in a trap of their own making. Denying residents authentic democracy has not led to stability nor peace in the city-state. Crushing the demonstrations would do even more harm to the international reputation for freedom and the rule of law that has allowed Hong Kong to prosper as a semi-autonomous piece of the People’s Republic of China. The future of the city-state – and much more – rests on whether the Chinese central government realizes that its tight grip is ultimately counterproductive.

“China’s leaders could have avoided this dilemma. They had promised Hong Kong’s residents that they could elect their chief executive by 2017. Instead of sticking to the spirit of that pledge, they announced this summer that a pro-Beijing committee would vet every candidate. Beijing’s allies in Hong Kong argue that this is progress. But if only carefully approved pro-Beijing candidates can run, universal suffrage will have limited significance.

“Instead of listening to objections, Beijing and the Hong Kong government let tensions build, and students began protesting last week...

“The response from China’s leaders has been muted, but there are hints that Beijing is nervous. It blocked Instagram...one of the few Western social media applications that was still available to everyday Chinese. It appears to have censored comments about the Hong Kong protests on popular micro-blogging services. And Chinese media have cast blame for the unrest on foreign influences, rather than admitting that Chinese citizens are demanding self-government.”

[See my current “Hot Spots” column for an example of how Beijing is blaming the U.S.]

Editorial / Wall Street Journal

“The experience of Hong Kong under Chinese rule shows that the subsidiary institutions of a free society – rule of law, civil liberties, an independent civil society, free markets – can’t survive long in the face of authoritarian assault. The British colonial government bequeathed the software of freedom to the city. After the handover in 1997, some of us hoped that China would emulate Hong Kong. Instead China is slowly bringing Hong Kong down to its level....

“The good news is that Hong Kong still has a few bulwarks against Beijing’s attempts to rule by fear. The Bar Association condemned the police use of tear gas as excessive and disproportionate, as did the leaders of Hong Kong University.

“Officials have repeatedly called for the judiciary to be ‘patriotic’ and work in tandem with the executive branch, but so far judges have defended their independence....

“Chinese intimidation and cronyism may not bother Hong Kong’s wealthiest residents, who are used to cutting deals and making money in China. But it horrifies ordinary Hong Kong residents, many of whom fled the mainland looking for something better.

“That solidarity may protect Hong Kong. The tighter Beijing squeezes, the more disgusted the city becomes with its tactics.”

One final note. China’s tourism board has barred mainlanders’ group tours to Hong Kong, comprising 8 to 10 percent of Chinese visitors to the city, which also hurts Macau, since many of these folks take the one-hour ferry ride there to place a few wagers.

Street Bytes

--Stocks fell on the week despite a strong Friday rally on the jobs report, with the Dow Jones down 0.6% to 17009, the S&P 500 off 0.8% and Nasdaq an equal amount, down 0.8%.  The Dow is now up just 2.6% on the year.  The small cap Russell 2000 is down 5.1% for 2014.

--U.S. Treasury Yields

6-mo. 0.04% 2-yr. 0.56% 10-yr. 2.43% 30-yr. 3.12%

The departure of Bill Gross continues to reverberate in the fixed-income markets, with $23.5 billion leaving the Total Return Fund in September. While PIMCO tried to reassure its clients that the outflows were slowing by week’s end, if you are a consultant charged with recommending the fund, or a pension fund dealing with various mandates, and you have a high-profile management change such as this one, chances are you’re hitting the exit, so this could go on for some time to come. The track record, after all, is now largely irrelevant. [Mercer, an influential pension consultant, downgraded the Total Return Fund and four other funds Bill Gross was running, which causes Mercer’s clients to rethink their holdings.]

Sanford Bernstein said eventually, PIMCO could lose 30% of its $2 trillion in assets.

Regulators are also examining if there are any systemic risks in the bond market as many of the assets held in the Total Return and other PIMCO funds tumble in price in anticipation they will have to sell them to meet redemptions.

As I noted last week with regards to the SEC investigation into PIMCO for its pricing of assets, many areas of the bond space are illiquid to begin with and it’s tough for an independent valuation firm to come up with a price for a particular security.

--In West Africa, Save the Children warned it was seeing 765 new cases of Ebola in Sierra Leona in just the past week, or about five cases an hour, and there are only 327 beds in the country.

In fact, as we’ve seen throughout the crisis, the world has responded way too slowly. For example, weeks ago, Britain said it would build facilities for 700 new beds in Sierra Leone but the first of these will not be ready for weeks, and the rest may take months.

But you had 765 new cases in one week! Without beds, people are dying at home and continuing to infect their families and the local community. Save the Children’s country director said, “We are facing the frightening prospect of an epidemic which is spreading like wildfire across Sierra Leone.”

As for the U.S. military effort in Liberia, it is progressing far too slowly as well and it seems that details are still being hashed out. Truly pathetic.

The World Health Organization’s latest death toll was 3,338 (through Sept. 28), with 7,178 confirmed cases, but most agree the scale of the disease is “massively unreported” because of the numbers dying anonymously at home or in the streets. [BBC News]

216 of the dead were health-care workers, out of 377 infected. [Wall Street Journal]

There is a small bit of good news. Nigeria has been able to contain its outbreak, with just eight deaths, but it’s a little deceiving because the disease first spread from a single case at the airport, whereas in the main countries at the epicenter, Liberia, Sierra Leone and Guinea, Ebola spread widely in remote provinces before a serious response was mounted. [Donald G. McNeil Jr. / New York Times]

--U.S. new-car sales jumped 9.4% last month over a year earlier to 1.25 million vehicles, according to Autodata Corp. The annualized selling pace was 16.43 million vehicles, still on track for the best year since 2006.

Despite all the bad news on the recall front, General Motors’ sales rose 19% year over year. Chrysler’s were also up 19%, thanks to soaring sales for its Jeep and Ram truck brands, up 47% and 30%, respectively. Ford’s sales, however, declined 3%, blaming lower fleet sales.

Toyota’s sales rose 1.7% over a year earlier, Honda’s were up 12%, Nissan’s rose 19%, Hyundai’s 2%, and Kia Motors’ climbed 7%.

[Note: Most of the time I use two sources for auto sales...the Wall Street Journal and Los Angeles Times. Sometimes the figures between the two vary, which means one of the reporters wasn’t measuring apples to apples, or just looking at truck sales, perhaps. Anyway, occasionally I have to pick and choose, as was the case with Nissan this month. The Journal said up 13%. I went with the Times’ up 19%.]

--On Monday, Ford slashed its full-year profit outlook, owing mostly to a big hit in Russia, and a loss in South America that is $900 million larger than forecast. Ford also said it would lose $1.2 billion in Europe and that the red ink would extend into 2015. I believe GM said it would go positive on the continent next year.

--Thursday, Warren Buffett announced plans to buy the fifth-largest auto dealership in the U.S., Van Tuyl Group, which has operations from Florida to California, with Berkshire Hathaway then planning to use the acquisition to snap up family-owned dealerships elsewhere under the moniker Berkshire Hathaway Automotive.

--In a regulatory filing on Thursday, JPMorgan Chase said the hack attack on its systems was far greater than it has let on before. Like try 76 million household accounts and seven million small-business accounts that were compromised. Anyone visiting the company’s sites, such as Chase.com, or using its mobile app, could be affected. [Chase has heavily promoted its mobile app through countless television spots.]

What mystifies authorities is that there does not appear to be evidence the attackers burrowing deep into JPMorgan’s computer systems, actually looted any customer accounts. So some take this to mean the hackers were sponsored by the likes of Russia or some government in southern Europe. [Russia seems to be the consensus.]

By the time the bank’s security team discovered the breach in July, the hackers had gained access to 90 of JPM’s servers, though the intrusion went on until mid-August, the bank later learned.

But most worrisome is the acquisition of the applications and programs that run on very standard JPM computers. It takes months to not only rid the computers of the vulnerabilities, but renegotiate licensing deals with the technology suppliers, as reported by Reuters.

--The situation with ExxonMobil in Russia is a bit confusing. Two weeks ago I wrote the company was pulling back from its heavy exposure owing to the sanctions levied on Moscow, but then Rosneft, Exxon’s partner in the country, announced it had a major discovery in the Russian Arctic.

But Exxon can’t play any further role in developing the field, until the sanctions imposed by the U.S. and EU on exports of technology have been lifted.

The shame of it all for Exxon is that it was best positioned among all the western oil companies in Russia.

Rosneft CEO, Igor Sechin, Vladimir Putin’s buddy who I still say will one day take Putin out, said he’d love to continue working with Exxon but was prepared to go ahead without them. Exxon is pressuring Washington to water down the sanctions so it can drill in the Arctic next summer. Current CEO Rex Tillerson ran the company’s Russian operations in the late 1990s. 

But Tillerson was a major supporter of Mitt Romney’s, so Obama will do him few favors. [Financial Times]

--According to the International Energy Agency, U.S. production of oil and related liquids such as ethane and propane was neck-and-neck with Saudi Arabia in June and again in August at about 11.5m barrels a day. So it’s expected U.S. production will exceed Saudi Arabia’s in September (or October) when those numbers come in, which would be the first time since 1991.

--Corn futures hit a five-year low this week as the Agriculture Department said stockpiles in U.S. storage bins totaled 1.236 billion bushels on Sept. 1, up from 821 million bushels a year earlier. Good lord. That’s a rather hefty increase.

One reason for the storage boost, aside from perfect growing conditions in key areas, is lower demand from livestock producers than expected, due to both the earlier issue of the pig virus that took the little ones and the drought in the Plains states that continues to impact the cattle numbers.

Wheat futures also continue to suffer due to higher than expected storage numbers and a surplus worldwide. [Wall Street Journal]

--EBay announced it was spinning off its payments arm, PayPal, in 2015; a move long called for by activist shareholder Carl Icahn.

It’s amazing to think eBay acquired PayPal way back in 2002. The unit almost tripled sales in the five years ended in 2012.

--The European Commission threatened to collect large sums of back taxes from Apple because of illegal tax advantages granted it by the Irish government, specifically for the period 1991 to 2007.

Joaquin Almunia, the EU’s departing commissioner for competition, said in a 21-page report that EU law “provides that all unlawful aid may be recovered from the recipient.”

Apple has said Ireland treated it no different from any other company. Ireland told the EC it believes it is acting within the law.

Well of course Apple and Ireland have a very cozy relationship that has broken EU rules. I know that.

--Apple’s iPhone 6, meanwhile, will hit Chinese stores on Oct. 17 after gaining approval from the Chinese government. The delay was due to Chinese security concerns. [Actually, Beijing was just jerking Apple’s chain.]

--Some good news...Macy’s announced it would hire 86,000 seasonal workers this year, up 3.6% over 2013. But Kohl’s is hiring 15% more. Toys R Us and Target are keeping staffing levels the same.

Here at StocksandNews, we’re reducing our workforce from 6,000 to one, moi. For years I’ve told these folks, “Heck, it seems like I’m doing all the work, people. What are you guys doing?” [Admittedly, I should have recognized this fact far earlier.]

--Shellshock, a bug in software known as Bash, which is common to Linux and Unix-based systems and their derivatives, is rated 10 out of 10 by the Department of Homeland Security, when Heartbleed, a similar flaw discovered in April, is rated a five.

Cyber security officials are already seeing intrusions by malware designed to exploit the Shellshock flaw.

The flaw allows attackers unfettered access to a computer system, which means that governments could exploit it for surveillance activity, but now that it’s public, we’re aware just how it can be exploited by truly evil doers.

As the Financial Times notes, though, it should be relatively easy to patch the Shellshock loophole. The problem is “the sheer number of systems in which it is present means it will take months to lock down networks worldwide. Bash is often buried so deeply in operating systems that its existence may not be known.”

--Update: The two-week Air France pilot strike ended on Sunday.

--In Atlantic City, the bankrupt luxury casino-hotel, Revel, which cost $2.4 billion to build, was sold for $110 million to Toronto-based Brookfield US Holdings LLC, which owns casinos in Las Vegas and the Bahamas.

Brookfield said it was looking to reopen Revel as a casino, pending state and court approvals.

This has a ways to go so folks down there shouldn’t get too excited yet, but, if it all went through, yes, Brookfield would have acquired a trophy asset at quite a discount. Personally, I’d make it half condos, half hotel rooms, and then the casino space needs to be placed at ground level.

Foreign Affairs

Iraq / Syria / ISIS:

Just another example of what I was writing in 2012, verbatim.

WIR 12/1/12:

Regarding Syria, I can’t help but note the following passage from a New York Times piece by David E. Sanger and Eric Schmitt.

“In the case of Syria, a far more complex conflict than Libya’s, some (U.S.) officials continue to worry that the risks of intervention – both in American lives and in setting off a broader conflict, potentially involving Turkey – are too great to justify action. Others argue that more aggressive steps are justified in Syria by the loss in life there, the risks that its chemical weapons could get loose, and the opportunity to deal a blow to Iran’s only ally in the region. The debate now coursing through the White House, the Pentagon, the State Department and the C.I.A. resembles a similar one among America’s main allies.

“ ‘Look, let’s be frank, what we’ve done over the last 18 months [Ed. 20] hasn’t been enough,’ Britain’s prime minister, David Cameron, said after visiting a Syrian refugee camp in Jordan. ‘The slaughter continues, the bloodshed is appalling, the bad effects it’s having on the region, the radicalization, but also the humanitarian crisis that is engulfing Syria. So let’s work together on really pushing what more we can do.’ Mr. Cameron has discussed those options directly with Mr. Obama, White House officials say.”

What upsets me about the above two paragraphs, as I expressed in one of my “Nightly Review” videos this week, is that this discussion is absurd. IT’S TOO FREAKIN’ LATE!!!

Some of us were arguing 18 months ago that we needed to take action. I was calling for a move to establish safe zones for refugees, working with our ally, Turkey, who was crying for our help.

Instead, what have you seen? A refugee crisis of humongous proportions that is getting worse by the day, threatening to destabilize governments such as Lebanon and Jordan, and a very pissed off one-time friend, Turkish President Erdogan, who feels slighted and ignored and is now lashing out anew against Israel while he fights for influence in the region with Egyptian President Morsi.

But most importantly, the inaction on the part of the United States unleashed the whirlwind and terrorists have been flooding into Syria. This week I thought one of the most telling incidents was a twin suicide car bombing in a suburb of Damascus that killed at least 34 civilians. There were no Syrian troops that could have been construed as a target. Just a classic al-Qaeda-type attack. Kill as many people as possible.

This isn’t the original opposition rebels of the first days of the Arab Spring, or the Syrian conflict. It has metastasized into Terror Central. The one thing the Assad regime is correct on, as it stated the other day, is it’s fighting al-Qaeda as much as the rebels.

And now, as the rebels get hold of shoulder-fired missiles, which did indeed take down a Syrian fighter jet and helicopter this week, guess who else no doubt is grabbing hold of them? It seems to me it’s just a matter of weeks before a commercial airliner in the region is targeted.

But back to the Sanger/Schmitt piece, the naivety of some when it comes to Syria is astounding.

It’s over. It doesn’t matter if Assad is taken out tomorrow…it’s over. The United States has lost any chance it had to influence the government (or five of ‘em across the country) that follows. And look at the over 750,000 refugees that have fled to the likes of Turkey, Jordan, Lebanon and Iraq. Do you think they are waving American flags?

The one thing the UN does well is supply emergency aid and the UN has been screaming for help and none is forthcoming, despite what the White House and our State Department say. There are no safe havens. There is no secure way to get aid to the 2.5 million inside Syria who need help with winter bearing down on them.

It’s a tragedy of immense proportions. No one cares how this will change the region, forever.

It didn’t have to be this way. The United States and President Obama blew it. What follows is on him…and eventually all of us in one form or another.

---

Pretty prescient, sadly.  Back to today....

In a new Washington Post/ABC News poll, President Obama’s approval rating for his handling of the Islamic State, or ISIS, is up to 50% from 42% in August. Seven in ten support the airstrikes, specifically, up from 65% in early September.

On the warfront, the focus is on the Syrian Kurdish border town of Kobani, which ISIS has been attacking for more than two weeks and has resulted in more than 150,000 Syrian Kurds fleeing to Turkey. Jailed Kurdish militant leader Abdullah Ocalan warned that peace talks between the Ankara government and his group would come to an end if ISIS is allowed to carry out a massacre.

President Erdogan initiated the peace process with Ocalan in 2012 in the hopes of ending a 30-year insurgency that has killed 40,000 in Turkey, mostly Kurds.

So Erdogan warned ISIS against attacking the Kurds who are being guarded by Turkish troops inside Syrian territory. Under an old treaty, Turkey considers the land its own, which contains the tomb of Suleyman Shah – the grandfather of the founder of the Ottoman dynasty Osman I.

Separately, a United Nations report this week found jihadi groups in Iraq have committed human rights atrocities on a “staggering” scale. ISIS and its allies have killed in both a wild and systematic way, concludes the UN, including the massacring of hundreds of Iraqi government soldiers, and ethnic cleansing.

“ISIL (has) attacked and killed female doctors, lawyers, among other professionals,” the report says.

In August, it said, ISIL took 450-500 women and girls to the Tal Afar citadel in Iraq’s Nineveh region where “150 unmarried girls and women, predominantly from the Yazidi and Christian communities, were reportedly transported to Syria, either to be given to ISIL fighters as a reward or to be sold as sex slaves.”

Other crimes include “directly targeting civilians and civilian infrastructure, abductions, rape and other forms of sexual and physical violence perpetrated against women and children, forced recruitment of children, destruction or desecration of places of religious or cultural significance, wanton destruction and looting of property, and denial of fundamental freedoms.”

The UN conducted 500 interviews for its report and at least 9,350 civilians have reportedly been killed so far this year, well over half of them since ISIS seized large parts of northern Iraq in early June. [Ruth Sherlock / Daily Telegraph]

ISIS fighters were reportedly a mile from Baghdad this week, with mortar shells falling inside the Green Zone. There were further reports that ISIS in Syria was forming an alliance with the al-Qaeda linked Nusra Front. Al-Nusra has called U.S. air strikes against ISIS “a war against Islam” and called on jihadists around the world to target Western and Arab countries involved.

What is clear is that U.S. and coalition air strikes are not only not degrading ISIS in any serious way, but ISIS continues to surge in parts of Iraq and Syria. The air strikes are also leading to massive confusion in Syria, in particular, as alliances between rebel factions are roiled. 

Republican Senator John McCain: “I wish the president would stop saying we’re not going to have combat troops on the ground.” McCain is calling for a new resolution in Congress that would allow debate on deploying more troops.

In an interview for “60 Minutes,” President Obama acknowledged the U.S. “underestimated what had been taking place in Syria,” while overestimating the ability or will of the Iraqi army to fight the jihadists.

Philip Stephens / Financial Times

“Not so long ago, Recep Tayyip Erdogan’s government turned eastward. Slighted by a Europe set on locking it out of the EU, Turkey proclaimed its place as the Middle East’s pivotal power. Zero problems with neighbors, the official mantra ran. Turkey would provide the model for the Islamic democracies set to emerge from the Arab uprisings.

“The Syrian refugees on the teeming streets of Istanbul tell a different story. A region of opportunity has become a zone of chaos. Except in Tunisia, where it all started, the lofty hopes of a democratic spring have turned to dust. Egypt has returned to autocracy, Libya is a failed state and Syria a bloody battleground. Mr. Erdogan has problems with all of his neighbors.

“Troubles abroad have been matched by authoritarianism at home. Mr. Erdogan is the most popular politician in Turkey and his summer move from the premiership to the presidency was endorsed by a hefty majority. His allegiance, though, is to majoritarianism rather than to liberal democracy....

“The opening of Turkey’s border to the flow of anti-Assad jihadis into Syria has helped turn large tracts of territory in Syria and Iraq into the nightmare that its followers have called the Islamic State. More than a million refugees have fled to Turkey. Elsewhere, Mr. Erdogan has fallen out with Saudi Arabia and the Gulf states over their backing for Egypt’s new strongman Abdel Fattah al-Sisi....

“Old friends in the west have little sympathy. In its eagerness to topple the Syrian regime, Turkey did little to discriminate between the ‘good guys’ of the moderate Syrian opposition and extremists for whom the fight was always about more than Mr. Assad. Even now, after they have signed up to the U.S.-led coalition against the Islamic State of Iraq and the Levant, or ISIS, the Turks are conflicted. The government worries about the export of ISIS terrorism to Istanbul. More importantly, it wants to avoid making a choice between defeating ISIS and removing Mr. Assad....

“To a greater or lesser degree the wealthy Gulf states display the same ambivalence: ISIS should be checked, but not at the expense of handing victory to Mr. Assad’s sponsor in Tehran.

“Here lies the fatal flaw in the west’s promise to destroy ISIS. In military terms, it does not look an absurd proposition. For all their looted cash and military kit the 20,000 or so fighters occupy a landlocked space surrounded by hostile forces. Destroying, ISIS, however, demands more than western air strikes or, for that matter, boots on the ground. It requires a single-minded political as well as a military commitment on the part of the regional powers to a post-ISIS settlement. For Turkey and Saudi Arabia regime change in Damascus and settling scores with Iran take precedence over any such accommodation between Shia and Sunni. Yet the moderate Syrian opposition ready to replace Mr. Assad is a threadbare fiction.

“The west is left leading an intervention that lacks a clearly defined political ambition and a military exit strategy. Stemming the jihadi tide to prevent the collapse of Iraq was one thing; waging an open-ended war against Sunni extremists in Syria quite another.”

Edward Luce / Financial Times

“You go to war with the allies you have, not the ones you wish for, to paraphrase Donald Rumsfeld. President Barack Obama’s war on the Islamic State of Iraq and the Levant (ISIS) is a good example. His Middle East coalition comprises five autocracies, four of which are monarchies. To one degree or another, each represses dissent, Each, indirectly or inadvertently, has helped spawn groups such as ISIS, Khorasan, Jabhat al-Nusra and, of course, al-Qaeda. Each will reap longer-term profit from assisting the U.S. in its hour of emergency. Things have worked this way in the Middle East for decades. At a moment like this, it would be naïve to expect Mr. Obama to change that.

“At the heart of this Faustian pact is Saudi Arabia. Americans have not forgotten that 15 of the 19 hijackers on September 11, 2001 were Saudi citizens. Nor have they forgotten the mistaken 2003 U.S. pivot to Iraq. Today, much like the day the Twin Towers fell, the most direct global threat to the U.S. comes from Islamist terrorism – the Sunni, variety, to be precise. None of the terrorist plots in the U.S. and Europe since 9/11 have been devised by Shia groups. Yet the one ally that is off-limits to Mr. Obama is Iran – Saudi Arabia’s Shia counterpart and its greatest foe....

“There are reasons to worry it could be worse this time. Ejecting the Soviets from Afghanistan and removing Saddam Hussein were conceptually simple. The U.S. followed the old Arab adage: the enemy of my enemy is my friend. But in Syria, as one diplomat recently quipped, the enemy of America’s enemy is often also its enemy....

“Saudi Arabia has done as much as any country to back the military coup against the Muslim Brotherhood in Egypt – the only non-monarchy in Mr. Obama’s coalition. The Saudis are as hostile to Islamic democracy as they are to its secular variety. Both challenge the House of Saud’s legitimacy.

“Yet signs of the Arab street’s alienation keep spreading. The Middle East leads the world in terms of its youth bulge. For growing democracies, such as India, armies of young workers offer a potentially huge dividend. But for stagnant economies, such as Egypt and Pakistan, they spell demographic nightmare. By continuing to suffocate freedom at home and next door, the Saudis only multiply the supply of recruits for groups such as ISIS. This is a trade-off the west cannot afford.”

A few other notes:

The Australian cabinet gave its approval for fighter jets to join the coalition against ISIS targets in Iraq. British warplanes struck IS targets there for the first time on Tuesday.

A pair of bombs in the Syrian city of Homs killed at least 32 people (other reports put the toll at 50), most of them children at a school compound. Antigovernment rebels were suspected of the attacks.

Editorial / Wall Street Week

“Leon Panetta was one of the Obama Administration’s adults, providing good counsel as CIA director and later Secretary of Defense. President Obama could use him now. So Mr. Panetta’s account in his forthcoming memoir about how the White House bungled negotiations over keeping U.S. troops in Iraq past 2011 is a bombshell that explains the real reason Americans must fight again in that country.

“Mr. Obama has repeatedly claimed that he wanted to leave U.S. forces in Iraq but that Iraq’s government wouldn’t agree to reasonable terms. For example, on June 19 the President told CNN’s Jim Acosta:

“ ‘Keep in mind, that wasn’t a decision made by me. That was a decision made by the Iraqi government. We offered a modest residual force to help continue to train and advise Iraqi security forces. We had a core requirement which we require in any situation where we have U.S. troops overseas, and that is that they are provided immunity...The Iraqi government and Prime Minister [Nouri al-] Maliki declined to provide us that immunity.’

“In an excerpt from his memoir published this week on the TIME magazine website, Mr. Panetta tells a different story. He relates that ‘privately, the various leadership factions in Iraq all confided that they wanted some U.S. forces to remain as a bulwark against sectarian violence. But none was willing to take that position publicly, and Prime Minister Nouri al-Maliki concluded that a Status of Forces Agreement, which would give legal protection to those forces, would have to be submitted to the Iraqi parliament for approval.’

“That made negotiations harder, but as Mr. Panetta relates ‘we had leverage,’ such as withdrawing reconstruction aid. The White House refused to use it: ‘My fear, as I voiced to the President and others, was that if the country split apart or slid back into the violence that we’d seen in the years immediately following the U.S. invasion, it could become a new haven for terrorists to plot attacks against the U.S. Iraq’s stability was not only in Iraq’s interest but also in ours. I privately and publicly advocated for a residual force that could provide training and security for Iraq’s military.’

“Mr. Panetta says he and his deputies pressed this argument, ‘but the President’s team at the White House pushed back, and the differences occasionally became heated... [Those] on our side viewed the White House as so eager to rid itself of Iraq that it was willing to withdraw rather than lock in arrangements that would preserve our influence and interests.

“ ‘We debated with al-Maliki even as we debated among ourselves, with time running out...To my frustration, the White House coordinated the negotiations but never really led them’ and ‘without the President’s active advocacy, al-Maliki was allowed to slip away.’

“Mr. Panetta adds that, ‘To this day, I believe that a small U.S. troop presence in Iraq could have effectively advised the Iraqi military on how to deal with al-Qaeda’s resurgence and the sectarian violence that has engulfed the country.’

“All of this comports with our own reporting from 2011, but it is nonetheless distressing to have confirmed how much Mr. Obama and his munchkin Metternichs in the White House put their political desire to withdraw from Iraq above the U.S. national interest.”

Iran: Iranian President Hassan Rohani said nuclear talks with the P5+1 had been “extremely slow,” with “the remaining time (being) extremely short.”

Editorial / Washington Post

“The deadline for completing a nuclear agreement with Iran is now less than eight weeks away, and the omens are not good. U.S. officials had hoped that an intensive week of negotiations at the United Nations last month would open the way to a deal but, by the account of both sides, little headway was made. ‘The gaps are still serous,’ said a U.S. official briefing reporters at the end of the talks. Iranian President Rohani was even blunter: ‘The progress realized thus far has not been significant.’

“The impasse certainly does not reflect a lack of initiative by the Obama administration. On the contrary, U.S. negotiators have responded to Iranian intransigence on key issues with creative but sometimes disturbing counterproposals. Most notably, Iranian Supreme Leader Ali Khamenei has declared that the regime will not dismantle any of the 19,000 centrifuges it has constructed to enrich uranium. So the United States and its allies, which once insisted that most of the machines be eliminated, reportedly have floated a proposal to leave the centrifuges in place but take away the plumbing that connects them.

“If Iran has made similar efforts to bridge the gaps between the two sides, there is no report of them. Instead, Tehran appears to be sticking to its insistence on maintaining and eventually vastly expanding its nuclear infrastructure while offering only a temporary slowdown in uranium enrichment and ‘increased transparency.’ It is refusing to discuss its ballistic missile program and still isn’t cooperating with international inspectors’ probe into its past nuclear weapons design work.

“The Obama administration has a history of responding to Iran’s stonewalling by peeling away its own demands. It gave up an attempt to impose a permanent ban on Iranian enrichment and seems to have dropped a requirement that an underground uranium enrichment plant be closed. Now it seems to be contemplating scenarios under which Iran would not have to dismantle centrifuges that would be the center of any bomb-making effort....

“(By) leaving the nuclear infrastructure intact, it would cede Iran the option of racing to build a nuclear arsenal at a time of its choosing, while removing the sanctions that are pressing the regime. Meanwhile, a concession already made by the United States and its allies – settling a date after which all restrictions on Iran’s nuclear work would lapse – would create a time bomb for the Middle East.”

Israeli Prime Minister Benjamin Netanyahu, in his address to the UN General Assembly this week:

“Ladies and gentlemen, would you let ISIS enrich uranium? Would you let ISIS build a heavy water reactor? Would you let ISIS develop intercontinental ballistic missiles? Of course you wouldn’t. Then you mustn’t let the Islamic state of Iran do those things either, because here’s what will happen. Once Iran produces atomic bombs, all the charms and all the smiles will suddenly disappear. They’ll just vanish. And it’s then that the ayatollahs will show their true face and unleash their aggressive fanaticism on the entire world.

“There’s only one responsible course of action to address this threat. Iran’s nuclear military capabilities must be fully dismantled. Make no mistake: ISIS must be defeated. But to defeat ISIS and leave Iran as a threshold nuclear power is to win the battle and lose the war.

“Ladies and gentlemen, the fight against militant Islam is indivisible. When militant Islam succeeds anywhere, it’s emboldened everywhere. When it suffers a blow in one place, it’s set back in every place. That’s why Israel’s fight against Hamas is not just our fight, it’s your fight. Israel is fighting a fanaticism today that your countries may be forced to fight tomorrow.” [Wall Street Journal]

Israel: While Prime Minister Netanyahu warns on any Iranian nuclear deal, Europe and the United States have demanded Israel cancel its plans to build new settlements in east Jerusalem, some 2,600 homes. French Foreign Minister Laurent Fabius summed up the feeling of the West in a statement: “We urgently call on the Israeli authorities to reverse this decision,” and that the settlements threatened a “two-state solution.”

“One cannot claim to support a solution and at the same time do things against without consequences being drawn, including at the European Union level.”

Netanyahu insists Jews have the right to live in every area of Jerusalem.

Lebanon: There are 1.5 million refugees from the fighting in Syria and officials believe it will surpass 2 million by early next year. To say this nation is stressed to the max is an understatement.

Ukraine: This crisis is getting lost in the pile of geopolitical threats these days, but the ceasefire is over, not that it was ever really in place. Rebels in eastern Ukraine have targeted Donetsk International airport and appear to be on the verge of taking it, which would be a huge victory for the pro-Russian separatists. At least ten people were killed in residential areas near the airport. A school was hit, but those killed were adults.

Earlier, nine Ukrainian soldiers were killed in fighting around the airport.

German Chancellor Angela Merkel warned the European Union and the U.S. are facing a long confrontation with Russia over Ukraine.

“I don’t see any change at the moment regarding Russia’s position. We needed 40 years to overcome East Germany. Sometimes in history one has to be prepared for the long haul, and not ask after four months if it still makes sense to keep up our demand,” she said. [Bloomberg]

Ukraine’s Prime Minister Yatsenyuk said Tuesday, “Rhetorically it’s all fine, but deeds fail to match words,” in concluding Russia has no intention of resolving the conflict.

As for the natural gas issue between Moscow and Kiev, the Kremlin is saying Ukraine must first pay $3.9 billion it owes before Russia would resume gas deliveries. A deal that would have Kiev pay $3.1 billion by end of the year in return for Gazprom resuming some deliveries, but only during the winter months and at above-average prices, has been tentatively agreed to.

Finally, Russian Foreign Minister Sergei Lavrov, addressing the UN General Assembly, said the crisis in Ukraine was the result of a coup d’etat in that country backed by the EU and the U.S. Lavrov added the Russian annexation of Crimea was the choice of the largely Russian-speaking population there.

Russia: The government is determined to beef up security of its Internet against what the Kremlin is saying was an onslaught of western attacks. President Vladimir Putin said, “We need to develop and implement additional measures in the field of information security,” adding that “certain countries” were aiming to use their influence on the Internet to cripple Russia.

Putin did say the government would not try to install a “kill switch” that could allow it to disconnect the Net overnight, but regulatory steps are on the way. Laws already in place allow the government to shut down sites without a court order. Shares in Russian Internet companies fell hard on the news out of the Kremlin.

Russia’s parliament also moved to restrict foreign ownership of Russian media companies to 20%, which forces U.S. and European companies to relinquish control over newspapers, magazines and television networks. The bill passed the lower house of parliament, the Duma, by a 430-2 vote. Various U.S. and European outfits own Russian editions of publications such as Forbes and Vogue. Vedomosti, an influential news outlet that focuses mostly on business, is owned jointly by News Corp’s Dow Jones & Co., and Pearson PLC’s FT Group, publisher of the Financial Times.

And, as I wrote would be the case, a Russian court has seized shares in the oil company, Bashneft, whose billionaire owner, Vladimir Yevtushenkov, is under house arrest. Rosneft (see Igor Sechin) is the likely beneficiary, as was the case with Yukos owner, Mikhail Khodorkovsky, who was arrested in 2003. Rosneft got the bulk of their assets.

Separately, Russia ended a popular exchange program that brought thousands of Russian students to America. 

And the Russian stock market hit bear market territory this week, a decline of over 20% from its June 24 high.

Afghanistan: The new government signed a security deal with Washington that allows U.S. troops to remain in the country beyond 2014. The previous president, Hamid Karzai, refused to sign the bilateral security agreement.

By yearend, 9,800 U.S. troops will remain, along with about 2,500 from NATO for training, as well as “counter-terror operations.” The current plan is to cut in half the U.S. presence by the end of 2015, before a full pullout at the end of 2016.

It’s encouraging the new president, Ghani, moved so quickly to reset relations with Washington.

Meanwhile, a suicide attack on Afghan troops in Kabul killed seven.

China: Taiwan rejected Chinese President Xi’s suggestion that the two sides end six decades of hostile separation and adopt a “one country, two systems” model for reunification, a la Hong Kong; which was curious that Xi would put forward this idea amid the Occupy Central protests in Hong Kong. 70% of Taiwanese people are against China’s proposal.

As for the economic relationship between Washington and Beijing...

Editorial / Washington Post

“For the United States and other democratic capitalist nations, trade with and investment in the People’s Republic of China always posed a dilemma: how to ensure that economic engagement benefits the people of that nation without fortifying the repressive political regime under which they live. The response from supporters of Western economic engagement has been that the dilemma, essentially, will resolve itself, because the more interdependent China and the West become, the more the former will have to play by the rules of the latter. Growth and prosperity will gradually promote freedom and the rule of law.

“Recent events must give pause to even the most optimistic believers in capitalism’s power to induce more transparent government in China. Beijing is in the midst of not only an intensifying crackdown on its own citizens but also in what appears to be systematic harassment of U.S., Japanese and European multinational companies in the form of stepped-up enforcement of a 2008 antitrust law....

“As is now evident...in China there is nothing deterministic about the relationship between economics and politics. The communist authorities are bent on preventing political liberalization from flowing in with foreign capital, and, indeed, on ensuring that foreign involvement in the economy serves their policy goals, domestic and international, among which ‘security’ is paramount. Meanwhile, U.S. markets for both goods and financial services remain wide open to China, as shown by the recent Wall Street initial public offering of a Chinese online retailer with close government ties, Alibaba.

“Openness, not only to China but to all nations, remains in America’s best interest. The question, though, is whether either U.S. multinationals or the U.S. government are making the best use of their leverage in the Chinese market. No doubt China believes it can always exploit competition among U.S. firms, and among firms from this country and its rivals – especially given the stagnant European and Japanese economies’ dependence on export sales. Perhaps it’s time that the capitalist West showed that it, too, can present a united front.”

Hear, hear.

Brazil: Two polls released on Tuesday show President Dilma Rousseff widening her lead against socialist party candidate Marina Silva in elections set for Sunday. Should neither candidate achieve 50%, a run-off will be held Oct. 26.

But Silva is sliding precipitously and now she’s in a race for second with third-place candidate Aecio Neves.

Rousseff would win a second round vote 49-41 over Silva, according to the Datafolha poll, which had it 47-43 Rousseff five days earlier. Another survey by Ibope has Rousseff winning the second round 42-38, when a week earlier this survey had it 41-41.

Silva had surged owing to a sympathy vote following the death of presidential candidate Eduardo Campos in a plane crash, Silva’s running mate.

But Rousseff has the funding and she’s launched a negative campaign against Silva that the latter doesn’t have the resources to combat.

India: Prime Minister Narendra Modi and President Obama met in Washington for extensive talks in an attempt to repair relations that have become strained. But there were no resolutions on disputes including taxes, trade and civilian nuclear energy cooperation.

And as the New York Times described it, there was a protocol nightmare on Monday night when Obama hosted a small dinner in the White House Blue Room, with Modi being in the middle of a nine-day fast to observe a Hindu festival, but he insisted his hosts go ahead and eat. Modi had warm water, “while Mr. Obama and the two leaders’ entourages ate avocados and goat cheese, crisped halibut and basmati rice, a pumpkin crème brulee and a California chardonnay.”

Geezuz, that sounds absolutely delicious. Pumpkin crème brulee?! I’m there.

North Korea: It seems that dictator Kim Jong-un has become so obese, he fractured both of his ankles, according to South Korea’s Chosun Ilbo newspaper. So he had surgery on both...at least that is the rumor du jour concerning Kim’s health and his weeks long disappearance.

Separately, a senior North Korean envoy said Pyongyang was prepared to resume six-party talks on its nuclear program. The ambassador to the United Nations also said his country was not preparing any nuclear tests and he tried to shoot down “fabricated rumors” that Kim Jong-un was ill.

Austria: Parliament passed a bill that would overhaul a 1912 law governing the status of Austrian Muslims that will call for standardized German-language translations of the Koran, while moving to prohibit foreign funding of Muslim organizations on its soil. This is about the growing support for the far-right in Austria and reports some Austrian Muslims are joining up with Islamists in the Middle East.

Muslims represent about 6% of the Austrian population. I haven’t been able to ascertain whether the bill has enough support to become law, however.

Random Musings

--One of my friends, John G., observed the other day that he was surprised President Obama’s poll numbers were as high as they are given the myriad of serious issues that he has totally mishandled, which means a lot of folks simply don’t give a damn. We all know that.

But Military Times did its annual survey of active-duty soldiers and the results are quite telling. Back in 2009, only 35% approved of the way Obama was “handling his job as commander in chief.” Today? Try 15%.

[On a different topic, in 2011, 63.8% of active-duty members thought the Iraq war was very or somewhat successful. Today that percentage is 30%.]

--Martin Feldstein / Financial Times

“As a result of our defense policies, America’s enemies do not fear us and our friends do not trust us. We have disappointed the Ukrainians, alienated the Israelis and the Egyptians, and left our allies in eastern Europe and in east Asia wondering how we would deal with future threats from Russia, North Korea or China.

“Mr. Obama is not likely to change his attitude about the effective use of America’s armed forces or his willingness to increase defense spending. But the next president should make it a central priority to rebuild our military budget and use it to strengthen our role in Europe, the Middle East and Asia.”

--Editorial / Washington Post

“Secret Service Director Julia Pierson promised a congressional committee that her agency would conduct a vigorous and comprehensive review of security lapses at the White House. ‘It will never happen again,’ she pledged. But her halting performance at Tuesday’s special hearing was far from reassuring given recent revelations of embarrassing, and potentially disastrous, incidents involving this critical agency.

“Internal reviews are no longer sufficient; it is time for independent analysis of what went wrong and what that says about the protection afforded to the president, his family and their historic residence....

“(Lawmakers) were not wrong in decrying the lack of candor, even the duplicity, in Secret Service accounts of the Sept. 19 incursion by a fence-jumper into the White House and an earlier 2011 incident in which the service failed to properly investigate shots fired at the White House. Why, for instance, did the Secret Service report that the intruder was unarmed when he had a knife? Why imply he was apprehended just inside the entrance when he actually had raced through several rooms?

“Nor were lawmakers wrong to wonder whether there are systemic problems at the agency. Consider the Virginia couple who crashed a state dinner in 2009; the agents who allegedly visited prostitutes in Cartagena, Colombia, while preparing for a presidential visit in 2012; the agent sent home from a Netherlands assignment in March after reportedly passing out drunk in a hotel hallway. The first intrusion into 1600 Pennsylvania Ave. in modern times – by a man who had previously been arrested with multiple guns and a map to the White House. And now, reports that a man with a gun and criminal record was allowed by a clueless Secret Service onto an elevator with President Obama.”

Editorial / Wall Street Journal

“This month’s astonishing breach of the White House, supposedly one of the world’s most secure complexes, has exposed a culture of incompetence and duplicity. Government failures are legion, but rarely are they so dangerous.

“The core mission of the Secret Service is to prevent an attack on the chief executive’s person and that includes defending the White House. Yet this crude intrusion would be implausible in an airport thriller. The guy waltzed in the front door....

“Ms. Pierson lamented ‘the difficulty in trying to operate a critical federal agency in times of fiscal constraint,’ but the truth is that the Secret Service budget of $1.7 billion for 2014 has doubled in real terms since 1998. In the four decades since the Ford Presidency, the U.S. has invested billions of dollars (the totals are classified) in fortifying the White House and Old Executive Office Building, and Pennsylvania Avenue has been closed to traffic in front of the White House for half as long. Yet the Secret Service was no more prepared for this most unsophisticated of infiltrators than for the 16 other people who have come over the fence in the last five years.

“The larger danger is that these embarrassments advertise security vulnerabilities in Vegas-strip neon. The more they happen, the more likely more dangerous individuals or organizations will try again, and a team with tactical training or advanced weapons could do great damage against an evidently hapless Naked Gun 2 ½ patrol.

“On Monday the Administration expressed ‘full confidence’ in Ms. Pierson, and perhaps even a threat to Mr. Obama’s personal safety is not enough to disabuse his excessive faith in government. Yet she got the job in March 2013 after her predecessor was canned when agents engaged the less-than-secret services of Cartagena hookers while doing advance work for a Presidential visit to Colombia....

“The latest episode marks a new nadir in the decline of government, and the start of rebuilding professionalism is accountability. That should include firing Ms. Pierson and anyone else who lies to the public. The Secret Service also ought to respond to White House invaders with lethal force. The next Omar Gonzales or Chester Plummer may be a terrorist strapped to a bomb.”

Back to the man on the elevator, Carol Leonnig / Washington Post:

“A security contractor with a gun and three prior convictions for assault was allowed on a lift with President Barack Obama during a trip to Atlanta last month, violating Secret Service protocols, according to three people familiar with the incident.

“Mr. Obama was not told of the lapse in his security, these people said. The Secret Service director, Julia Pierson, asked a top agency manager to review the matter, but did not refer it to an investigative unit that was created to review violations of protocol and standards, according to two people familiar with the handling of the case, who spoke on condition of anonymity.

“The incident, which took place as Mr. Obama visited the Centers for Disease Control and Prevention to discuss the U.S. response to the Ebola crisis, rattled Secret Service agents assigned to the president’s protective detail.”

The contractor was acting oddly, but let’s stop here. Why was any stranger allowed on the elevator in the first place?

So when Obama got off, some of the security detail stayed behind to interview the man, using a national database check to learn of his criminal history, a supervisor from the firm providing security at the CDC showed up, discovered the agents’ concerns, the contractor was fired on the spot, and then the guy turns over his gun – “surprising agents, who had not realized he was armed during his encounter with Obama....

“A White House spokesman declined to comment on the incident, or say when, or if, the president had been informed of it.”

Julia Pierson resigned Wednesday.

--Ms. Leonnig had a busy week, with some superb reporting on all aspects of the bumbling Secret Service. On the 2011 incident where the gunman hit the White House residence:

“The gunman parked his black Honda directly south of the White House, in the dark of a November night, in a closed lane of Constitution Avenue.  He pointed his semiautomatic rifle out of the passenger window, aimed directly at the home of the president of the United States, and pulled the trigger.

“A bullet smashed a window on the second floor, just steps from the first family’s formal living room. Another lodged in a window frame, and more pinged off the roof, sending bits of wood and concrete to the ground. At least seven bullets struck the upstairs residence of the White House, flying some 700 yards across the South Lawn.

“President Obama and his wife were out of town on that evening of Nov. 11, 2011, but their younger daughter, Sasha, and Michelle Obama’s mother, Marian Robinson, were inside, while older daughter Malia was expected back any moment from an outing with friends.

“Secret Service officers initially rushed to respond....

“Then came an order that surprised some of the officers. ‘No shots have been fired...Stand down,’ a supervisor called over his radio. He said the noise was the backfire from a nearby construction vehicle.”

That was the first of many lapses.

“It took the Secret Service four days to realize that shots had hit the White House residence, a discovery that came about only because a housekeeper noticed broken glass and a chunk of cement on the floor.”

Needless to say the first lady and president were fuming.

--Editorial / Wall Street Journal

“President Obama rode to the White House in part by assailing George W. Bush for believing faulty intelligence about Saddam Hussein’s weapons of mass destruction. So there is no small irony in his claim now that America’s spooks missed the rise of the Islamic State. The difference is that U.S. intelligence did warn about the threat from ISIS. Mr. Obama chose not to listen.

“Asked on CBS’ ’60 Minutes’ Sunday if ISIS’ march into Iraq was a ‘complete surprise,’ Mr. Obama replied, ‘Well I think our head of the intelligence community, Jim Clapper, has acknowledged that I think they underestimated what had been taking place in Syria.’

“Mr. Clapper is the presidential appointee who coordinates U.S. intelligence messaging. Perhaps he does think his agencies misjudged ISIS. But we doubt he missed the Feb. 11, 2014 Senate testimony of Lt. Gen. Michael Flynn, who was director of the Defense Intelligence Agency at the time:

“ ‘Al-Qaeda in Iraq (AQI), also known as the Islamic State of Iraq and Levant (ISIL): AQI/ISIL probably will attempt to take territory in Iraq and Syria to exhibit its strength in 2014, as demonstrated recently in Ramadi and Fallujah, and the group’s ability to concurrently maintain multiple safe havens in Syria.’

“That was five months before the fall of Mosul and a couple of months after Mr. Obama had compared ISIS and various al-Qaeda offshoots to the junior varsity....

“The failure to confront ISIS sooner wasn’t an intelligence failure. It was a failure by policy makers to act on events that were becoming so obvious that the Iraqis were asking for American help for months before Mosul fell. Mr. Obama declined to offer more than token assistance.”

--Federal Aviation Administration contractor Brian Howard, the man who set the fire at the Chicago air traffic center that has wreaked havoc on the air transportation system, posted a Facebook message on Friday, Sept. 26, saying he planned to ‘take out’ the regional center and commit suicide, according to local CBS and ABC affiliates.

It will take weeks to reconstruct the center, the damage was that bad, and the incident raises questions about the federal government, again, and its ability to screen security risks.

As the Washington Post’s Josh Hicks notes, Navy Yard shooter Aaron Alexis, who killed 12 people during a rampage in September 2013, “maintained his security clearance despite troubling police records and signs of mental illness.”

--New Jersey’s public worker retirement system has $90 billion in unfunded pension and health benefit liabilities, according to a report issued by a special commission called for by Gov. Chris Christie. This is about three times the state’s budget of $33 billion. Christie has been warning the state must make more changes or risk financial ruin.

But the report offers no solutions.

--We note the passing of nine-term Ohio Congressman James A. Traficant Jr., who was convicted on corruption charges in 2002, becoming the second member of Congress to be expelled since the Civil War.

Traficant, who covered a district that included gritty Youngstown, was known for his outrageous behavior, skinny ties, out-of-date polyester suits and a bouffant mound of hair that the Los Angeles Times described as a “Planet of the Apes sort of hair helmet.”

Traficant was also known for his fiery speeches on the House floor that often ended with a “Star Trek” reference: “Beam me up, Mr. Speaker.”

--Chelsea Clinton gave birth to a girl, Charlotte Clinton Mezvinsky. NBC News hired Baby Charlotte on the spot for $600,000 a year to do puff pieces on their “award-winning Making a Difference” segments, as Brian Williams announced.

--According to a study by the London Zoological Society (ZSL), world wildlife populations have been halved in 40 years. Populations of mammals, birds, reptiles, amphibians and fish have declined by an average of 52%. Freshwater species have fallen 76%.

As reported by the BBC’s Roger Harrabin:

“The society’s report, in conjunction with the pressure group WWF, says humans are cutting down trees more quickly than they can re-grow, harvesting more fish than the oceans can re-stock, pumping water from rivers and aquifers faster than rainfall can replenish them, and emitting more carbon than oceans and forests can absorb.”

Forest felling is a huge issue. I read a piece in the Moscow Times this week on just how bad it is in Russia where, as reported by Alexey Eremenko, “Only 3 percent of replanted forests in Russia are maintained.” WWF Russia said up to 60 percent of their trees thus wither and die.

“The Russian logging industry still follows mid-20th-century templates of extensive management, when loggers clear a forest and move on.

“The state-of-the-art practice is intensive forest management [Ed. such as that employed in the U.S.], where trees are replanted and only partially harvested, allowing forests to recuperate.” 

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

God bless America.
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Gold $1192...lowest since 12/31
Oil $89.74...lowest since April 2013

Returns for the week 9/29-10/3

Dow Jones  -0.6%  [17009]
S&P 500  -0.8%  [1967]
S&P MidCap  -1.6%
Russell 2000  -1.3%
Nasdaq  -0.8%  [4475]

Returns for the period 1/1/14-10/3/14

Dow Jones  +2.6%
S&P 500  +6.5%
S&P MidCap  +1.6%
Russell 2000  -5.1%
Nasdaq  +7.2%

Bulls 47.5
Bears 15.1 [Source: Investors Intelligence]

Dr. Bortrum has a new column posted.

Have a great week. I appreciate your support.

Brian Trumbore