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10/11/2014

For the week 10/6-10/10

[Posted 11:00 PM ET, Friday]

Edition 809

Washington and Wall Street

Stocks took it on the chin across the globe this week primarily on growth concerns in Europe and Asia, with the likes of the Tokyo Nikkei down 2.5%, London’s FTSE down 2.9% and Frankfurt’s DAX index sliding 4.4%. A broad-based barometer for Europe, the Stoxx 600, fell 4.1% on the week, its worst performance since May 2012. The action in the U.S. was equally bloody, as spelled out below.

The International Monetary Fund lowered its global growth outlook for 2015 from July’s projection of 4.0% to 3.8%, while growth this year is slated to come in at 3.3%.

For the eurozone, the IMF sees its economy expanding just 0.8% this year and only 1.3% in 2015. There are many in Europe who would take these numbers, given how the picture on the continent is worsening.

The IMF, in its statement, said: “In advanced economies, the legacies of the pre-crisis boom and the subsequent crisis, including high private and public debt, still cast a shadow on the recovery. Emerging markets are adjusting to rates of economic growth lower than those reached in the pre-crisis boom and the post-crisis recovery.” 

IMF Managing Director Christine Lagarde called the prolonged period of sluggish growth the “New Mediocre.”

The IMF’s chief economist, Olivier Blanchard, said in an interview with Bloomberg, “We see the major risk in the stalling of the eurozone. The risk of recession is there.”

At least in the U.S. the IMF is calling for 2.2% growth in 2014 and 3.1% next year, while a Wall Street Journal survey of economists has a forecast of 3.2% GDP growth in Q3 and 3% in the current quarter.

Meanwhile, it’s earnings season, with the big crush the next three weeks, and before you know it we’ll be sitting around the Thanksgiving dinner table and watching football (then again, we’re always watching football), which also signifies the official start of the holiday shopping season, that in actuality is the months of November and December when retailers pick up about 20% of their yearly revenues.

So, it’s time for the forecasters to weigh in and the National Retail Federation is projecting holiday sales will come in at 4%, which would be the largest gain since 2011, this despite lackluster summer and back-to-school sales.

The last decade the average increase in holiday receipts has been 2.9% (they were up 3.1% last year). Online shopping is forecast to increase 11% in 2014 over 2013.

But not all are as sanguine as the NRF. A PwC US survey of consumers projects that holiday sales will be 7% less than 2013. [Adrianne Pasquarelli / Crain’s New York Business]

I’ll go with the NRF’s figure, barring a major terrorist attack in this country. I don’t mean to be flippant. It’s just a fact of life these days. The threat grid is full. Heck, we all know if we discovered just ten more cases of Ebola, scattered around the nation, that it could be enough to impact our behavior.

For now, though, let’s look on the bright side.

But then we have the Federal Reserve. Chair Janet Yellen and her merry pranksters were at it again this week, even if it was tape-delayed. As in the release of the minutes from its September meeting, which kind of shocked Wall Street with all the talk last month among the Fed governors that they were scared to rattle the markets and they didn’t know what to do with the pledge of low rates for a “considerable time” phrase. The Fed next gathers end of October and then before Christmas and there is disagreement whether to change the language.

But there was also a focus on the global growth picture: “Some participants expressed concern that the persistent shortfall of economic growth and inflation in the euro area could lead to a further appreciation of the dollar and have adverse effects on the U.S. external sector,” according to the minutes. [A stronger dollar not being good for our exporters, while a weaker euro is what manufacturers across the pond want as it makes their goods cheaper.]

Well, couple the minutes with the recent comments of some Fed governors, such as Chicago Fed President Charles Evans, who said on Wednesday that officials should be “exceptionally patient” before they start to raise rates, and at least that day, with the Dow Jones rallying 274 points, the biggest advance of the year, investors were of the opinion the Fed may not raise rates at all in 2015 so the free money, risk on, party would continue.

Of course less than 24 hours later the focus was back on putrid growth in Europe and elsewhere and the Dow promptly fell 334 points, the worst decline of 2014...and so it goes...

One buzzword is increasingly entering the conversation as well and that is deflation, which isn’t good, sports fans. You basically have it in some euroland countries, with inflation in the entire euro-18 running at just 0.3% on an annualized basis, and now with plunging oil prices, it’s not like there are inflation concerns here in the States, either.

So between weak growth, except in the U.S., and falling, if at best stagnant, prices, bonds rallied anew.

Europe and Asia

As noted above, the picture in Europe continues to worsen amid the threat of yet another recession. Markit released its data on eurozone retail sales for September and the PMI showed the sharpest fall in 17 months, 44.8, with Germany at 47.1 (53-month low) and France at 41.8 (18-month low).

Phil Smith, economist at Markit, commented:

“Consumer spending in the euro area looks to be on the downturn, with the latest retail PMI figures showing sales falling for the third month running.”

A eurozone sentiment index hit a low mark not seen in 16 months.

And then there was Germany. It reported three figures for August that were all awful, and the worst for the group since January 2009. Factory orders fell 5.7% in the month, industrial production was down 4%, and exports declined 5.8%. With each release stocks in Europe, and in the U.S., took a header. Four German think tanks also lowered their growth outlook for 2014 to 1.3%, and just 1.2% in 2015, though frankly I don’t see where Germany gets the 1.3% this year.

The debate in Europe hasn’t changed; growth vs. austerity. The European Central Bank and President Mario Draghi vs. the likes of German Finance Minister Wolfgang Schaeuble.

Draghi this week pledged to keep monetary policy loose and talked of the ECB’s first rate hike being in 2017, while Schaeuble warned against U.S.-style quantitative easing in urging continued budgetary discipline.

Draghi said, “When we look at market expectations, the first hike in interest rates is foreseen by 2017. The Governing Council has repeated many times, even as it was adopting new measures: it is unanimous in its commitment to take additional unconventional measures to address the risks of a too-prolonged period of low inflation.”

But Draghi also stressed there must be reform on the part of the European governments.

“I am uncertain there will be very good times ahead if we do not reform now. While stabilization policies that raise output toward potential are necessary, they are not enough. We need to urgently raise that potential. And that means reform.”

Reform, though, has been slow in coming, particularly in the likes of France and Italy, while for his part, German Finance Minister Schaeuble told the audience in Washington that Draghi’s “writing checks” was no way for the eurozone to increase growth. Italy and France must overhaul their economies.

Alison Smale and Liz Alderman / New York Times

“ ‘After going along with the damaging strategy of austerity in the hopes that Germany would eventually moderate its position, countries are now saying, ‘Enough is enough. We’re going to have to act to arrest the downward spiral in the economy,’’ said Simon Tilford, the deputy director of the Center for European Reform in London....

“Critics of austerity say that more government spending would increase demand for goods and services in Europe and help avert a dangerous fall into deflation... Proponents of austerity say that governments that fail to get their budget deficits and accumulated debt under control risk losing the ability to borrow at affordable rates in the bond markets and sow the seeds of financial instability.”

So back to Italy and France, Italian Prime Minister Matteo Renzi has paired up with France’s President Francois Hollande in calling for Germany to lighten up. Renzi said of his neighbor that has had trouble coming close to its EU mandated budget deficit targets, “I prefer to have a France with 4.4 percent [deficit-to-GDP ratio] today than a France with Marine Le Pen tomorrow. This is very important for Europe.”

Renzi, though, said his country would stay within the EU’s 3 percent deficit target even as it remains in a protracted recession. “Italy has a big problem of reputation (and a 130% debt-to-GDP ratio) so I prefer to respect 3 percent to give a message of stability and credibility,” he said.

But Renzi knows he has to introduce labor reforms for Italy’s economy and this week the Italian senate comfortably passed a package of measures aimed at boosting employment, a big victory for the 39-year-old.

But, typical of Italy, the lower chamber has to still pass it, the government has to actually write the legislation, and it is unlikely to be finalized before the middle of next year!

As for France, here’s the figure you need to understand. Public spending takes up 57% of GDP – by far the highest in the eurozone.  France also hasn’t had a balanced budget in 40 years.

As The Economist opined, France and Italy “are laggards in reform. Whereas Spain has started to come to grips with its structural problems, France’s Socialist president...has not even tried. Instead of reducing taxation, he has raised it. Instead of encouraging business, he has added to its burdens. Instead of promoting reforms, he has avoided them. In Italy, a series of well-meaning prime ministers have been unable to overcome the formidable vested interests that see reforms as a threat to the special deals they have carved out.

“This combination of size and lassitude is dangerous, because France and Italy are at once too big to fail and too big to bail out.” 

But maybe attitudes are changing, if ever so slightly. Chancellor Merkel, at a Berlin news conference on Thursday, hinted she was willing to use government spending to stimulate growth, which would benefit the entire eurozone, potentially.

One thing we do know. Eurozone banks aren’t lending. The IMF said this week lenders were still not in a position to be “athletes” supporting economic recovery six years after the financial crisis.

Many of the 300 banks in advanced economies the IMF examines, as part of its twice-yearly Global Financial Stability Report, do not have adequate capital buffers or profitability to support lending growth of 5 percent a year and most of these institutions are in the eurozone. 

Shortly we’ll find out just how bad a shape some of the eurozone banks are when the ECB releases the results of its stress tests end of the month.

Finally, I’ve written a lot on the euro bond market and how crazy it is for some, such as Italy, with that huge debt-to-GDP ratio, to have a yield on its 10-year bond of 2.32% as of the close on Friday, same as in the U.S. I understand the impact of the ECB’s exceedingly easy money policy and its mantra to do whatever it takes to save the eurozone and the currency.

Yes, for the umpteenth time, if Italy’s economy starts growing at a solid pace, debt service isn’t an issue (though it will be at a higher rate in that scenario). Italy, like Spain and others, is fortunate it has been able to roll over a lot of its debt recently at much lower levels than just two years ago. That helps future debt servicing.

But if these economies don’t grow, and Italy is in recession today, while France (with its 1.25% 10-year yield) is stagnating, then the euro bond market just isn’t dealing in reality.

Case in point, Greece. On Sept. 8, Greece’s 10-year paper yielded 5.52%. This week it closed at 6.46%, a hefty move. The reasoning was clear. There is all manner of political uncertainty, again, in the country and while Greece’s public finances have improved, many aren’t convinced Prime Minister Samaras’ plan for a clean bailout exit at the end of the year is solid. Greece’s debt is 175% of GDP. 

Mohamed El-Erian / Bloomberg

“Judging from the recent remarks by European officials, policy positions are hardening once again in the eurozone. Fueled by disappointing economic performance, the risk is that the deepening difference in views in Europe will further complicate a much-needed recovery. This is regrettable because it need not be so.

“Having flirted with a disorderly disintegration, the eurozone embarked on an impressive period of sustained financial normalization starting in July 2012. The immediate crisis receded as borrowing costs came down, bank deposits stabilized and lending resumed. In the process, the blame game played by member countries gave way to collective relief and more constructive dialogues.

“Despite the valiant efforts of the European Central Bank, this stable period hasn’t been accompanied as yet by a strong overall economic recovery. The improved growth performance of Greece, Ireland and other peripheral countries has been offset by weaknesses in the three largest economies – Germany, France and Italy. The weakness seems to be getting worse as suggested by this week’s disappointing data on industrial production, including a much-worse-than-expected contraction of 4 percent in Germany.

“Economic slippages inevitably fuel disenchantment in policy making, which, in the eurozone, excessively pushes officials to corner solutions – meaning they are unwilling to make policy compromises. As such, much of the narrative is now regressing to the old debate between austerity and growth, with the same advocates on either side. And, once again exaggerated differences among individual governments are spilling over into the ranks of the ECB.”

Turning to China, the World Bank cut its GDP forecast from 7.6% to 7.4% for this year, and to 7.2% in 2015 and 7.1% in 2016, both down from 7.5%. [The IMF has 7.4% in 2014; 7.1% next year.]

As if confirming this new outlook, China’s main government-backed research organization, the Chinese Academy of Social Sciences, forecast 7% growth in 2015, after 7.3% this year, lower than its 7.5% projection in December, which also happened to be the government’s official target.

So look for the government to lower its 2015 outlook while at the same time continuing to emphasize reform over stimulus.

Separately, HSBC said China’s service sector PMI was 52.3 in September, down slightly from August’s 52.8.

Street Bytes

--The Dow Jones lost 2.7% to erase its gains for 2014, now down -0.2% for the year, while the S&P 500, -3.1%, and Nasdaq, -4.5%, each had their worst weeks since May 2012.   The S&P is 5% off its all-time high, while Nasdaq is down 7% from its multi-year high-water mark set just last month.

The Nasdaq had its worst day of the week Friday as Microchip Technology tumbled 12% when it said quarterly revenue was hurt by a decline in China sales, with the semiconductor company warning of an industry correction.

The energy sector has been slammed along with the price of oil, with an index for the group now down over 15% since June.

--U.S. Treasury Yields

6-mo. 0.04% 2-yr. 0.42% 10-yr. 2.28% 30-yr. 3.01%

In a classic flight to safety and the renewed feeling the Federal Reserve wasn’t hiking rates for a long while the 10-year hit its lowest level since June 2013.

--After the death of the first man diagnosed with Ebola in the U.S., Thomas Eric Duncan, on Wednesday in Dallas, those traveling to the United States from West Africa to five airports – New York’s JFK, Newark, Washington, D.C.’s Dulles, Chicago’s O’Hare and Atlanta – will undergo face temperature screening and enhanced questioning. The CDC believes that by screening at these five airports, they will cover over 94% of travelers from the affected countries.

The problem is when you’re questioning someone, they have to tell the truth, which wasn’t the case with Duncan. It also means airport staff must immediately be brought up to speed, quickly.

In Spain, a nurse, Teresa Romero, contracted Ebola while caring for a priest who died from it. A doctor at the hospital where the nurse was working says she touched her face with the gloves after having contact with the priest. Supposedly staff have not been sufficiently trained to deal with the virus. And then officials in Madrid got a court order to euthanize the nurse’s dog, a move that was protested widely in the country, though at least one major study suggests dogs can be infected with Ebola without having symptoms. [Daily Telegraph]

The death toll exceeds 4,000 (conservatively) as of Friday and as I’ve written the global response, including from the United States, has been pathetic. I love how President Obama and the administration are encouraging others to chip in quickly when the United States military has yet to set up one of the 17 treatment centers in Liberia they were charged with. This isn’t being treated as an emergency. The president pledged 3,000 or more troops and they are literally trickling in, plus, as we’ve seen from news reports, vital supplies are sitting on docks in the affected countries.

All the while, cases are doubling every three weeks and of course will jump to other nations in Africa that are ill-prepared for such a crisis, let alone the first cases reaching the U.S., Spain, etc.

The World Health Organization warned Ebola has become entrenched in the capital cities of the three most-affected countries, with deputy head Bruce Aylward adding, “70% of the people affected are definitely dying from this disease, and it is accelerating in almost all of the settings.”

Medecins Sans Frontiers reported a sharp increase of Ebola cases in the Guinean capital, Conakry.

Thursday, CDC Director Thomas Frieden said the outbreak in West Africa was unlike anything he had seen since AIDS.

But in a scathing look at the WHO, the Washington Post’s Lenny Bernstein and Juliet Eilperin noted that it wasn’t until Aug. 8, 4 ½ months into the epidemic, that the WHO declared a global emergency. “Its Africa office, which oversees the region, initially did not welcome a robust role by the CDC in the response to the outbreak.

“Previous Ebola outbreaks had been quickly throttled, but that experience proved misleading and officials did not grasp the potential scale of the disaster. Their imaginations were unequal to the virulence of the pathogen.”

The WHO says Liberia and Sierra Leone have a combined 924 hospital beds between them, but they need 4,078. The U.S. military’s effort to build the above noted centers that can hold 100 people each won’t be completed until mid-November.

As I wrote July 26 (notice the date vs. the WHO’s Aug. 8 declaration) in this space, Ebola also has the potential to be an economic catastrophe. The World Bank warned the other day that the cost could exceed $32 billion in West Africa, or 3.3 percent of regional GDP. SARS cost the global economy in excess of $40 billion. I guarantee Ebola will far exceed this. 

By the way, under the World Bank’s worst-case (“High Ebola”) scenario, 100,000 would die in West Africa by the end of 2015.

I can also guarantee that if this toll was reached, that would mean far more than a few isolated cases in Western Europe and North America and there would be untold economic damage (and isolated cases of pure panic).

--According to Morningstar, while investors pulled $23.5 billion out of Bill Gross’ former Total Return Fund for the month of September, only $66.4 million found its way into the Janus Unconstrained Bond fund that he will now be managing for Janus Capital Group. I would expect future flows to be substantial, but it takes time for the consultants and advisors to become comfortable with Gross’ new mandate and his initial positioning of the fund.

Gross himself made his first public pitch for business saying, “It’s been a rough few weeks. It will be a better few months and years going forward. Having been a sailor, there have been some rough seas. I expect my second life at Janus to be a simpler sequel to my first life at PIMCO.”

In his first letter to clients, Gross said the bond markets cannot generate the same returns as the past 30-year bull market. His advice to investors – “retire later, save more [and] accept a revised standard of living.” [Stephen Foley / Financial Times]

--As the New York Times reports, more than three months after the first cyberattacks at JPMorgan Chase, “the source is still unclear and there is no evidence that any money was taken from any institution. But questions are being asked across Wall Street as other targets emerge. At least four companies – Citigroup, E*Trade Financial, HSBC and ADP – found that one of the same web addresses used to penetrate JPMorgan had tried to get into their systems, people briefed on the matter say.”

The Wall Street Journal reported Fidelity Investments was another victim, though authorities don’t believe account information was stolen here either.

--According to research firms Gartner Inc. and International Data Corp., sales of personal computers fell in the third quarter, down 0.5% by Gartner’s estimate, 1.7% for IDC, though the latter had forecast a 4.1% decline.

Both firms agree that U.S. shipments, however, rose 4%.

Market Leader Lenovo saw its shipments rise 11%, according to Gartner and IDC, which increases its market share to 20%.

--The Justice Department apparently isn’t finished with Wall Street and the world’s biggest banks, according to a report in the New York Times.

“With evidence mounting that a number of foreign and American banks colluded to alter the price of foreign currencies, the largest and least regulated financial market, prosecutors are aiming to file charges against at least one bank by the end of the year, according to interviews with lawyers briefed on the matter. Ultimately, several banks are expected to plead guilty.” [Ben Protess, Jessica Silver-Greenberg]

As Leon Cooperman said on CNBC Thursday, it’s hard to lend to businesses when you’re being continuously hit with $billions in fines, or as Protess and Silver-Greenberg write:

“The public lust for charges is at odds with the view on Wall Street, where bankers and lawyers report fatigue with what seems like unrelenting investigations. With each inquiry, the fines have multiplied, stretching to nearly $17 billion for Bank of America.”

--I have zero interest in the AIG hearing brought about by former CEO Hank Greenberg over the $182 billion bailout of the insurer and Greenberg’s attempt to get $40 billion in damages as a result of the government imposing severe terms on AIG that destroyed shareholders. AIG was a mess...a systemic one at that.

Former Fed Chairman Ben Bernanke testified, “Our goal was to minimize the windfall to AIG shareholders,” adding it also was “additional compensation to taxpayers for the risks they were taking.”

AIG ultimately repaid $205 billion to the government, including $22.7 billion in interest.

--Ford said its car sales fell 4% in China in September, the first monthly drop for the automaker there in more than two years. Some are citing a lack of new models, even as Ford ramps up production capacity in China.

--Walmart is no longer providing health insurance to part-timers who work under 30 hours a week, affecting 28,000 workers. Why? Rising costs associated with ObamaCare.

And those who lose their insurance will be required under ObamaCare to buy private insurance on government backed exchanges.

Walmart is doing what it is allowed to do under the law, since coverage is only required for employees who work more than 30 hours a week (the employer mandate). But those under the 30-hour threshold may actually do better by enrolling in Medicaid, if their state allows it, though then this becomes a deficit issue.

--Microsoft CEO Satya Nadella apologized for remarks he made at a women’s forum. Playing the role of village idiot, Nadella told them they didn’t need to ask for a pay raise, but rather should have “faith in the system.” Not asking for a raise, said Nadella, was “good karma.”

While he admitting later he was “inarticulate,” Nadella’s name gets thrown in the December file for “Jerk of the Year” consideration.

--Editorial / Wall Street Journal

“In September (Canadian Prime Minister Stephen) Harper visited London to ballyhoo the trade agreement completed between Canada and the European Union. Most notable, and disconcerting, was a remark Mr. Harper made there about the United States: ‘We know that the United States is unlikely to be a fast-growing economy for many years to come,’ Mr. Harper said. ‘We’re in a globalized economy,’ he added, noting it’s imperative to get Canada’s businesses into the global supply chain.

“Ouch.

“This isn’t just talk. In recent weeks, news has emerged that the Canadians have found a startling alternative to the Obama Keystone XL pipeline refusal: They are going to build a pipeline from the oil sands in Alberta and Saskatchewan to refineries in Saint John, New Brunswick, on the Atlantic Ocean.

“The Energy East project will allow the Canadians to ship oil to Europe and points east. A Bloomberg News report says the Canadians are already lining up customers in India. Energy East hopes to be finished in 2018.

“Good for Canadians. But we never thought we’d see the day that they’d steal a march on America’s entrepreneurs.”

--Hewlett-Packard announced it will spin off its PC and printer arm. When CEO Meg Whitman was brought in three years ago to right the ship, she ditched a proposal to shed the PC division. 

HP Inc. will represent the traditional side of the company, desktop computers and inkjet printers, as well as 3-D printing and what it called “new computing experiences.” Hewlett-Packard Enterprise will deal with growing and future markets of servers, networking and cloud computing. Whitman will lead the enterprise division.

In May, the company announced it would lay off 16,000 as part of its ongoing turnaround, bringing the total number of forecast job cuts to as many as 50,000.

--Samsung Electronics forecast a 60% fall in third quarter profit to $3.8 billion, far below analysts’ expectations, owing to its struggling mobile division. The flagship Galaxy smartphone has been losing market share to cheaper models, though the company vows to introduce a new series of phones to compete in the mid-to-low end market.

--Turner Broadcasting announced plans to eliminate 1,475 jobs – 10% of its total workforce. Turner is parent of CNN, TNT, TBS, and Cartoon Network. No word on which cartoon figures may be out of work.

--Canada’s jobless rate fell to an almost six-year low in September, 6.8%, lowest since December 2008. Celebrate with a Molson or Moosehead, but don’t operate heavy machinery while you do so.

--Yum Brands, which owns KFC, reported third quarter sales at its restaurants in China fell 14%, as the company tries to recover from the latest food-safety scare in China.

--Casino revenue in Macau, always a good economic barometer for China, fell 12% in September, the fourth straight month it’s declined*; the biggest drop since June 2009. Chinese President Xi’s crackdown on corruption** isn’t helping (high rollers being 60% of the city’s gaming revenue), nor are pro-democracy demonstrations in Hong Kong, where many, such as moi, take high-speed ferries to Macau.

*Revenues fell 6.1% in August, 3.6% in July and 3.7% in June, year on year. [South China Morning Post]

**Beijing reported government spending on overseas trips, lavish receptions and official cars has dropped by almost $9 billion over the past year. President Xi Jinping is winding down his campaign against ‘decadent’ practices. This week it was announced 150,000 ‘ghost jobs,’ where people are paid without even showing up, were found as part of the clean-up. Xi has sought to strengthen the Communist Party’s ties to the Chinese population.

--Air France said last month’s two-week pilot strike cost the airline $650 million, wiping out more than a fifth of the parent group’s estimated full-year profits.

--The great grandsons of Anna Short Harrington, who went on to become “Aunt Jemima” in 1933, claim they’re owed a slice of the pancake company’s revenue according to an agreement stretching back to the late-1800s.

As one of the great grandsons said, “Aunt Jemima has become known as one of the most exploited and abused women in American history.” Who knew?

The company was first developed in 1889 and there have been a few Aunt Jemimas, including then-Anna Robinson, hired to portray her in 1933 – while traveling around the country until her death in 1952. 

So the two boys are asking for $2 billion. Good grief. [Nina Golgowski / New York Daily News]

Foreign Affairs

Iraq / Syria / ISIS: This week it’s been all about the Syrian city of Kobane, which lies on the border with Turkey. ISIS fighters have gained a foothold in the place (as of Friday as much as a third to a half), which once housed 400,000, including in surrounding villages, but is now largely deserted, some 200,000 Kurds having crossed into Turkey. The defending Kurdish fighters desperately need heavy weapons and ammunition but Turkish President Erdogan is blocking such supplies from crossing the border, and a limited bombing campaign by the U.S. has had little actual influence on the shape of the battle; taking out a tank here, an armored vehicle there.

The BBC reported that a leading Kurdish general was killed by a suicide bomber in a heavy truck because the Kurds didn’t have the weaponry to take out the truck before it struck.

The fall of Kobane would give ISIS control of a long stretch of the Turkish border.

President Erdogan has been pushing a proposal to establish a buffer zone for refugees along the Syrian-Turkish border. Where have you heard that before? Right here, in this very space...two years ago...as I pointed out again just last week.

But while at first Secretary of State John Kerry said it was “worth looking at very closely,” a Defense Department spokesman was saying mere hours later a buffer zone “is not now on the table as a military option.”

Washington also said that aside from limited airstrikes there was little else it would do in the way of defending Kobane, playing down the strategic importance of it.

Kim Kagan of the Institute for the Study of War, told the Wall Street Journal:

“Any terrain that ISIS takes while we are engaged in an air campaign in Iraq and Syria is strategically significant. ISIS relies on continuing victories in seizing urban areas, military bases and terrain in order to sustain its legitimacy, so the U.S. has an obligation to stop ISIS from achieving further victories.”

A victory in Kobane also provides ISIS with a huge propaganda windfall, a recruiting tool.

So you have the split between Washington and Ankara. Washington wants the Turks to send in ground troops to wipe out ISIS, and then help rout the terrorists in both Syria and Iraq. The Turks want a “no-fly zone” over parts of northern Syria and a military campaign to take out Bashar Assad.

In Iraq this week, ISIS shot down two Iraqi military helicopters with shoulder-fired missiles, another highly worrisome development.

Charles Krauthammer / Washington Post

“During the 1944 Warsaw uprising, Stalin ordered the advancing Red Army to stop at the outskirts of the city while the Nazis, for 63 days, annihilated the non-Communist Polish partisans. Only then did Stalin take Warsaw.

“No one can match Stalin for merciless cynicism, but President Recep Tayyip Erdogan of Turkey is offering a determined echo by ordering Turkish tanks massed on the Syrian border, within sight of the besieged Syrian town of Kobane, to sit and do nothing.

“For almost a month, Kobane Kurds have been trying to hold off Islamic State fighters. Outgunned, outmanned and surrounded on three sides, the defending Kurds have begged Turkey to allow weapons and reinforcements through the border. Erdogan has refused even that, let alone intervening directly. Infuriated Kurds have launched demonstrations throughout Turkey protesting Erdogan’s deadly callousness. At least 29 have been killed.

“Because Turkey has its own Kurdish problem – battling a Kurdish insurgency on and off for decades – Erdogan appears to prefer letting the Islamic State destroy the Kurdish enclave on the Syrian side of the border rather than lift a finger to save it. Perhaps later he will move in to occupy the rubble.

“Moreover, Erdogan entertains a larger vision: making Turkey the hegemonic power over the Sunni Arabs, as in Ottoman times. The Islamic State is too radical and uncontrollable to be an ally in that mission. But it is Sunni. And it fights Shiites, Alawites and Kurds. Erdogan’s main regional adversary is the Shiite-dominated rule of Syria’s Bashar al-Assad. Erdogan demands that the United States take the fight to Assad before Turkey will join the fight against the Islamic State....

“As for Syria, what is Obama doing? First, he gives the enemy 12 days of warning about impending air attacks. We end up hitting empty buildings and evacuated training camps.

“Next, we impose rules of engagement so rigid that we can’t make tactical adjustments. Our most reliable, friendly, battle-hardened ‘boots on the ground’ in the region are the Kurds. So what have we done to relieve Kobane? About 20 airstrikes in a little more than 10 days, says Centcom....

“If this were not so tragic, it would be farcical....

“The indecisiveness and ambivalence so devastatingly described by both of Obama’s previous secretaries of defense, Leon Panetta and Bob Gates, are already beginning to characterize the Syrian campaign.

“The Iraqis can see it. The Kurds can feel it. The jihadists are counting on it.”

Jimmy Carter...in an interview for the Fort Worth Star-Telegram:

“(We) waited too long. We let the Islamic State build up its money, capability and strength and weapons while it was still in Syria. Then when [ISIS] moved into Iraq, the Sunni Muslims didn’t object to their being there and about a third of the territory in Iraq was abandoned.”

Sens. John McCain and Lindsey Graham / Wall Street Journal

“The airstrikes and other actions President Obama is taking against Islamic State deserve bipartisan support. They are beginning to degrade the terrorist group, also known as ISIS, but will not destroy it, for one reason above all: The administration still has no effective policy to remove Bashar Assad from power and end the conflict in Syria.

“Administration officials have called their approach ‘ISIS first.’ As for Mr. Assad, in the words of Gen. Martin Dempsey, chairman of the Joint Chiefs, the administration will ‘defer that challenge into the future.’ This is not a luxury we get to choose. And Mr. Obama himself recently said he does ‘recognize the contradiction’ in his own policy – which is that by confronting Islamic State but not Assad, the U.S. may unintentionally benefit the ruler whose ouster he continues, rightly, to demand.

“Unfortunately, this is not the only self-defeating contradiction in the administration’s Syria policy....

“It’s unlikely that the U.S. can maintain public support among Syrians for the fight against Islamic State, or succeed without their support, unless it does more to end Assad’s war against them. Syrians are already asking why America is bombing Islamic State but not stopping Mr. Assad from bombing them. This only hardens their pervasive belief that America cares only for itself. This belief threatens to strengthen Islamic State and discredit our moderate partners among the anti-Assad forces....

“The greatest contradiction of Mr. Obama’s military intervention in Syria is that it appears unconnected to his political goal: a ‘transition’ from Assad to an inclusive, sustainable political order. This goal will require the U.S. to militarily degrade the Assad regime, upgrade the moderate opposition, change the momentum of the conflict and create conditions for a political solution.

“At a minimum, this means a larger role for U.S. military advisers and forward air controllers. It also means declaring safe zones in Syria and telling Mr. Assad that if his forces and aircraft operate there, they will be targeted like Islamic State. Key regional partners realize that we must confront Mr. Assad as well as Islamic State, and they are willing to join America in doing so.”

Editorial / Washington Post

“Two months after the United States began airstrikes in Iraq, and two weeks after they were extended into Syria, the forces of the Islamic State are still advancing. Last week they captured the Iraqi towns of Hit and Kubaisa, northwest of Baghdad. On Tuesday they appeared close to overrunning Kobane, a strategic city on the border between Syria and Turkey that is populated with Kurds. The enemy victories are happening in spite of U.S. and allied airstrikes and resistance from local forces. They suggest that the U.S. air campaign is failing to achieve the minimal aim of stopping the expansion of the Islamic State – much less ‘degrading’ and ‘destroying’ it.”

Gideon Rachman / Financial Times

“The broader problem is that, over the past decade, the west has exhausted all the options when it comes to reshaping the Middle East. In Iraq there was a ground invasion, followed by a huge effort at nation building. But today the state is on the point of collapse. In Libya, there was an air campaign – but no ground invasion and no nation building. But today the state is on the point of collapse. In Syria, the west stood back and there was no intervention of any kind. But today the state is on the point of collapse. The phrase ‘you can’t win’ takes on a literal meaning when one reviews this litany of failure.

“The announcement of a bombing campaign has caused a brief surge of optimism and excitement. It always does. The subsequent disillusionment is, sadly, just as inevitable.”

Michael Young / The Daily Star (Lebanon)

“The Americans must accept that for three years they neglected Syria and allowed the situation to deteriorate to the point where they have to intervene today. Against this backdrop, having narrow objectives there makes little sense. Syria may be a problem from hell, as some commentators have written, but allowing it to remain in order to focus on ISIS is absurd. ISIS grew because the situation in Syria was so bad. Obama gains nothing by curing the symptom while ignoring the illness.”

Editorial / The Daily Star

“The vastly contradictory statements coming from the U.S. government over the last few days are emblematic of a wider problem: that the Obama administration apparently has no coherent strategy when it comes to Syria, and now Iraq, and is playing the whole thing by ear. But this absence of any tangible policy will have ramifications far wider than simply the countries directly involved.

“Despite a campaign of airstrikes against ISIS, backed by a coalition of some 60 countries, the U.S. is confused and confusing. Secretary of State John Kerry said Wednesday that the U.S. was looking closely at the idea of a buffer zone along the border with Turkey, inside Syria. Hours later the Pentagon and the White House said that option was absolutely not on the table.

“This flip-flopping really makes one wonder where decisions are being made, and by whom. Certain people – including the president’s chief foreign policy representative – seem to have no idea what the plan is. How is the rest of the world supposed to know? The Syrians and Iraqis who this terrible war is affecting the most deeply?

“Where once the U.S. appeared as a beacon of strength, of stature, of leadership – and concern for humanitarian suffering – it is now struggling to maintain this image. And while this mask has been slipping for years now, the mistakes of Obama’s administration have done untold and likely irreparable damage.

“And the vacuum that has been left appears to have given oxygen to the most extreme and most dangerous groups around the world. The destruction and loss of life happening now across the Middle East is only the beginning. The aftershocks of current political indecisiveness will be felt for generations.”

Iran: I have long written that all you needed to know about Iran’s nuclear intentions was the failure to grant the International Atomic Energy Agency access to the disputed military compound at Parchin, where it has long been suspected Tehran was conducting tests on items such as nuclear triggers.

So last Sunday, a huge explosion ripped through a production unit there, killing at least two, with a pro-reform website saying the blast was “so intense that windows of buildings (nine miles) away were shattered.” 

Was it an accident or sabotage? No answers as yet, and if it was the latter it is likely we’ll never know.

As for the ongoing nuclear talks between Iran and the P5+1 that have a Nov. 24 deadline, Iran would retain some nuclear-enrichment capability under the latest proposals (which Israel is totally against), while Tehran wants all sanctions lifted.

On Wednesday, Supreme Leader Ayatollah Ali Khamenei reiterated his country’s “red lines’ in negotiations, including a stipulation that Iran be allowed to increase its current processing ability by 20 times, which Iran claims is necessary to produce fuel for its Bushehr reactor. The U.S. and the West want Iran to decrease its enrichment capability.

Khamenei is also insisting the underground Fordo facility be preserved.

In other words, the potential for a ‘bad deal’ is great.

[As an aside, relations between the White House and Israeli Prime Minister Netanyahu have hit a new low...if that was possible.]

Yemen: In announcing the U.S. air campaign in Iraq and Syria, President Obama pointed to past successes in Yemen and Somalia. Oh yeah, they are big successes. Thursday, two suicide bombers killed 67 in Yemen, with one targeting a rally in the capital of Sanaa by Shiite rebels who control the city, escalating sectarian tensions in this chaotic, dirt-poor country. The Sanaa bomber killed 47 just detonating his explosives-laden belt. The other attack was a suicide car bomber killing 20 in Mukalla. Al-Qaeda in the Arabian Peninsula is responsible.

North Korea: In the blink of an eye, this hellhole could vault to the top of the list of global concerns after Kim Jong-un failed to show up to attend the 69th anniversary of the founding of North Korea’s Workers’ Party on Friday, which sent the rumor mill ablaze yet again.

Some say there has been an attempted coup, either by the military or Kim’s sister.

A professor at Tokyo’s Waseda University told The Daily Telegraph that recent events in the country, including reports of a ban on new travel passes, could point towards a coup, or suggest that the authorities there have uncovered “some sort of plot against the leadership.”

“If it is a military-backed coup, then the situation in Pyongyang will be very dangerous and I have heard reports that Kim has been moved out of the capital,” he said.

But others suggest the younger sister, Kim Yo Jong, is already running the country.

Or maybe he’s just recovering from surgery on his knee and ankles. State media, after all, continues to praise him, which would hardly be the case were he deposed. A source close to Kim said he’s simply overweight and injured himself.

The source told the Associated Press, “Kim Jong-un is in total control. There is no split in the top leadership. He injured his ankle and knee around late August or early September...because he is overweight. He limped around in the beginning but the injury worsened.”

38 days and counting since he was last seen.

China: After a largely quiet week, the Hong Kong government called off a meeting with student protest leaders on Thursday, a meeting that was to begin a dialogue on election reform, saying it was unacceptable that protesters were using the occasion to incite more people to join the mass sit-in.

In response, one of the student leaders called for renewed civil disobedience for Friday night. So we are back to a stalemate and assuming massive protests take place again, the threat of a crackdown comes back to the forefront.

As for the impact the protests have had on the local economy, sales at major retailers fell as much as 50% during the bulk of the Chinese National Day holidays, Golden Week. A Hong Kong Retail Management Association said sales dropped at least 15%, with sales at small- to medium-sized companies plummeting as much as 80%, according to the association. [Billy Chan / Bloomberg]

Needless to say the merchants aren’t happy with the pro-democracy demonstrations that have clogged main arteries.

Separately, a Fairfax Media investigation in Australia claims that Hong Kong’s embattled chief executive (mayor), CY Leung, “pocketed millions in secret fees from a listed Australian company in return for supporting its Asian business ambitions.” The arrangement goes back to before he became Hong Kong’s top official. The payments related to the acquisition of a British property services firm Leung was associated with, “whose prospects depended on Mr. Leung’s network of managers and clients in Hong Kong and mainland China.”

Leung’s office claims the payments related to past, not future, services. [Sydney Morning Herald]

On a different issue...Paul Wolfowitz / Wall Street Journal

“Taiwan celebrates its National Day on Friday commemorating the 103rd anniversary of the Wuchang Uprising, which eventually brought down the Qing Dynasty and led in 1912 to the creation of the Republic of China – today more commonly known as Taiwan. Taiwan’s remarkable economic progress was followed by the evolution to what is now a thriving democracy, the first in a Chinese society. It is one of the great success stories of the past 50 years.

“However, Taiwan’s future, and American interests, are imperiled by a lack of U.S. support to counter Taiwanese fears of economic marginalization or to balance the pressure of China’s military buildup and its refusal to renounce the use of force to bring Taiwan under China’s control. If the U.S. doesn’t change course, the next 18 months could witness a significant increase in U.S.-China tensions over Taiwan.

“China has dealt with Taiwan’s democracy with more wisdom than it has shown in Hong Kong, but that should not be taken for granted. The U.S. has a stake in China’s continuing to emphasize carrots rather than sticks in its relations with Taiwan, as well as in encouraging moderation....

“(But) Taiwan faces an ominous and growing military threat from China. The U.S. is legally and historically committed ‘to enable Taiwan to maintain a sufficient self-defense capability,’ yet it has been more than three years since the last U.S. arms sale – the longest period since 1979. Taiwan has asked for fighters to bolster its aging fleet, as well as for U.S. support in asking Congress to approve a plan that would allow for the co-development of a diesel submarine either through the use of a foreign design or of a new U.S. design.

“These requests are entirely reasonable and would already have been processed if not for the U.S. giving in to Chinese objections. This weakens Taiwan while emboldening China and in turn leaves Taiwan more dependent on the U.S. for its security.

“The re-emergence of cross-Strait tensions would threaten stability in East Asia in a more fundamental way than even the current disputes over islands and territorial waters. Recent events in Hong Kong should be a reminder of Beijing’s capacity for miscalculation, and of how free people may react when their freedom is threatened. The U.S. can help avoid this outcome by being more active in supporting Taiwan.”

Remember, should Beijing face internal disorder on any mass scale, for a variety of reasons, President Xi could play the nationalism card and invade Taiwan.

Ukraine: The U.N. reported Wednesday that while there have been no large-scale offensives since the cease-fire went into place Sept. 5, there have been daily exchanges of fire that have claimed hundreds of lives (at least 331), bringing the total death toll in the six-month-old conflict  to more than 3,600. The U.N. also reiterated the humanitarian situation in eastern Ukraine is atrocious.

Editorial / Washington Post

“European Union diplomats are still working to set up a proposed buffer zone between Ukrainian and Russian forces. But many already are expressing relief that their frequently announced objective – ‘deescalation’ – seems to be in reach. By that, they mean that Russian President Vladimir Putin does not appear to be aiming, for now, at sending his forces to capture new cities in eastern Ukraine or to establish a land corridor from Donetsk to occupied Crimea.

“Yet Mr. Putin is on the cusp of achieving all his major objectives. In addition to Crimea, he has captured a strategic slice of territory containing up to 10 percent of Ukraine’s population, creating a ‘frozen conflict’ that he can use to keep the rest of the country permanently destabilized. He has bluffed Ukrainian President Petro Poroshenko and the European Union into postponing the implementation of an economic-association agreement that was the original cause of the conflict. He has pushed Ukraine’s economy into a free fall likely to intensify this winter, especially if Moscow fails to deliver supplies of gas or purchase Ukraine’s goods. If the Kiev government manages to hold successful elections this month and begins to find its footing, Mr. Putin can use his Donetsk clients to restart the war whenever he wishes.

“In the meantime, the Kremlin hopes that its ‘deescalation’ will induce the European Union and United States to lift the economic sanctions they stepped up last month. To her credit, German Chancellor Angela Merkel, a crucial voice in any such decision, said last week that the union was ‘very far away [from] consideration to take back sanctions.’ However, neither E.U. leaders nor the Obama administration have spelled out what conditions Moscow must meet to win a respite.

“That opens the door to letting Mr. Putin off the hook before he takes steps that are essential to preserving what remains of Ukraine’s sovereignty. These include withdrawing all Russian forces and military equipment from Ukraine and sealing the border between the countries, with monitoring by international observers. Ms. Merkel and President Obama should insist on these terms and make them public. Otherwise Mr. Putin will be encouraged to renew the aggression that already has proved fruitful for him.”

Russia: I have long argued the oligarchs would eventually take out President Vladimir Putin, specifically Igor Sechin. [Exile, not necessarily something else.] So I couldn’t help but note two pieces this week.

The first is from Catherine Belton and Neil Buckley of the Financial Times:

“A former close associate of Vladimir Putin has said Russian businessmen were all now ‘serfs’ who belonged to the president, with none of the country’s companies beyond his reach.

“Sergei Pugachev, who was once so close to Mr. Putin that he was known as the ‘Kremlin’s banker,’ made the comments in his first interview since the state seized his multibillion-dollar ship building empire in 2012.

“Speaking to the Financial Times, Mr. Pugachev warned that there were no longer any ‘untouchables’ in a Russian business landscape increasingly dominated by Mr. Putin. The Russian economy, he argued, had been transformed into a feudal system where businessmen were only nominal owners of their assets.

“ ‘Today in Russia there is no private property. There are only serfs who belong to Putin,’ he said....

“ ‘Now there is Putin and there are his lieutenants who carry out his orders – and all cash generated is put on the balance of Putin,’ he said. ‘The country is in a state of war. And therefore big business cannot live as before. It has to live under military rules.’”

Irina Reznik, Evgenia Pismennaya and Ilya Arkhipov / Bloomberg

“Russia’s wheels of power are grinding to a halt.

“That’s the assessment of five officials close to President Vladimir Putin, who say that a struggle at the heart of his inner circle is slowing decision making as sanctions squeeze the economy. With Putin focused on foreign policy, rival factions are battling for influence, said the people, who declined to be identified discussing internal issues.

“One group, centered on Prime Minister Dmitry Medvedev, is concerned about Russia’s increasing alienation from the global financial system, said the officials. The other, which includes heads of state companies such as Igor Sechin of OAO Rosneft and veterans of the security services, favors greater state control over the economy, they said.

“Russia’s ruling elite is convulsing as the economy careens toward recession....

“ ‘The long-running conflict between rival pro-Putin camps has elevated to war,’ said Stanislav Belkovsky, a Kremlin adviser during Putin’s first term who heads Moscow’s Institute for National Strategy. ‘The elite are fighting for a shrinking pool of assets.’”

Meanwhile, opposition leader Alexei Navalny, under house arrest as a result of trumped up charges, was quoted through an aide as saying he was ready to join forces with former oil tycoon Mikhail Khodorkovsky in future parliamentary elections. “We definitely see him as an ally,” Navalny reportedly said. “We find his calls for a broad collaboration of all forces standing for [Russia’s] path to European development very appealing.” 

The next State Duma elections are set for 2016. Recent legislation prohibits both of them from running for office but they have vowed to use other means to influence political life.

As for Khodorkovsky, he said this week, “I fear that Putin is going to bring the country to a crisis much more quickly than many would like, a repeat of 1917 when a person brings the country to an economic crisis, and we are certainly moving right in that direction....

“All authoritarian regimes, especially ones like this that aren’t based on an ideology but on an individual person, are highly unstable. In order to retain power, such authoritarian leaders are forced to burn the field all around themselves, which is what Putin is doing,” Khodorkovsky told Charlie Rose in an interview. [Bloomberg]

India / Pakistan: The Indian government has warned Pakistan to cut the crap...stop “unprovoked firing” in Kashmir. Defense Minister Jaitley said India would make it “unaffordable” for Pakistan if the attacks continued.

At least 19 have been killed amid the exchanges in the disputed region, the worst in a decade. [BBC News]

Britain: The U.K. Independence Party (UKIP) won its first elected seat in Britain’s parliament with 60% of the votes in a by-election on England’s east coast, a big blow for Prime Minister David Cameron with seven months to go before the general elections. UKIP represents growing euroskepticism in the country, with the party wanting Britain to withdraw from the European Union. 

It is commonly thought UKIP takes conservative votes away from Cameron’s Tories.

Brazil: President Dilma Rousseff will face challenger Aecio Neves, leader of Brazil’s center-right opposition, and not Marina Silva, in a presidential election runoff on Oct. 26, after Rousseff received 41% of the first-round vote to Neves’ 34% and Silva’s 21%. [There were eight other candidates picking up the scraps.] Silva’s support collapsed in the final weeks, where her lack of money for campaign ads and general inexperience led voters to look to Neves, believing he has a better chance of upsetting Rousseff in the run-off.

The IMF, by the way, slashed Brazil’s growth outlook to 0.3% in 2014, down from an initial forecast of 1.3%, and now sees 2015 growth of just 1.4%, down from an earlier forecast of 2.0%.

The campaign these next few weeks will be nasty and the outcome is uncertain.

Random Musings

George E. Condon Jr. / Defense One

“Two men told the truth in Washington this week. Both caused problems for President Obama. But one already has been forgiven, while the other has sparked enough anger inside the White House that official absolution could be a long time coming.

“The two men are Vice President Joe Biden and former Defense Secretary Leon Panetta. Both are in the hot seat because of things they said or wrote. Biden, as he often does in public, was way too candid in remarks he made at Harvard about the role several American allies played in unintentionally fueling the growth of Islamic extremists in Iraq and Syria. Panetta, as he rarely is in public, was way too undiplomatic in his assessment of Obama’s leadership and foreign policy, using his new book to give support to some of the president’s harshest critics.

“In both cases, a firestorm was ignited, making the president’s job much more challenging as he tries to build a sustainable coalition in the Muslim world and works to rally domestic political support for what he says will be a long-term war against the extremists....

“(Panetta’s) book stings even more...in large part because Panetta is held in such high bipartisan esteem.”

--According to another report by the Washington Post on the problems at the Secret Service, White House aides knew a presidential advance team member hosted a prostitute in a hotel in Cartagena, Colombia, at the same time almost two dozen members of the military and Secret Service were let go or punished for the scandal at the hotel there in 2012.

The thing is, the White House denied anyone from the administration was involved, even as it’s come to light the Secret Service shared first-hand accounts and hotel documents offering details with administration officials, including then-White House Council Kathryn Ruemmler, according to the Post. Ruemmler interviewed the presidential advance team member and concluded there was no wrongdoing.

The advance team member, Jonathan Dach, was a White House volunteer and Yale University law student who is now with the State Department. His father is a major Democratic donor.

--John Podhoretz / New York Post

“Every serious politico is baffled by the polling on this fall’s elections, in which Democratic Senate candidates across the country are doing a remarkable job of hanging in despite the general consensus that under conventional circumstances this would be a ‘wave’ year for Republicans.

“It should be a wave, experts say, because a) President Obama has a very low approval rating, b) a huge majority of Americans says the country is on the wrong track and c) more Americans say it’s time to replace their own representatives than ever before in modern history.

“The ‘issue environment,’ as they say, also works against the Democrats. ObamaCare remains unpopular. The world is in chaos, and Obama’s foreign policy appears inept at best. There hasn’t been a good piece of news out of Washington in God only knows how long.

“Meanwhile, in the realm of electoral politics, the GOP has cleaned up its act.  In 2010 and 2012, Republican efforts to capture the Senate fell short thanks to the profound weaknesses of certain GOP candidates, who self-destructed spectacularly.

“That’s not the case this year, when by common consent Republicans have a pretty remarkable slate of candidates across the country.”

I couldn’t agree more. So, as Podhoretz and the rest of us wonder, “why aren’t Republicans sitting pretty?’

Podhoretz argues it’s about the Democrats superior advantage “when it comes to the mechanics of American politics,” and it’s been this way for nearly a decade.

“The great triumph of Obama’s re-election was his campaign’s success at turning out so-called ‘unenthusiastic voters’ – people who would, if pressed, pull the lever for the guy but who were unmotivated to do so.”

So can Democrats do this again?

“(This) year Republicans decided this wouldn’t be an issue-based election, in part because the party itself isn’t sure where it stands collectively on a variety of issues – and in part because, having recruited a first-class team of candidates, it was thought they would do better making a case for themselves state by state.”

Again, Podhoretz has laid it out beautifully. But my elephants aren’t closing the sale. However, there may yet still be an October surprise that hurts the Democrats.

And there’s this...the Senate races in Louisiana and Georgia seem headed toward runoffs, with Louisiana’s Dec. 6 and Georgia’s Jan. 6. Ergo, we all know it’s going to be somewhere between 53-47 Republican and 50-50 when all the votes are tallied in November. But it could be as long as two months before we know who really has control.

[A New York Times/CBS News/Battleground poll (tracker) has the GOP taking the Senate 51-49, but “no one should be surprised if they got to 52 or 53 seats, nor is a Democratic hold outside a realistic chance.”]

--The Wall Street Journal pulled out Ronald Reagan’s address to the Veterans of Foreign Wars Convention in Chicago, Aug. 18, 1980. In part:

“Is it only Jimmy Carter’s lack of a coherent policy that is the source of our difficulty? Is it his vacillation and indecision? Or is there another, more frightening possibility – the possibility that this administration is being very consistent, that it is still guided by that same old doctrine that we have nothing to fear from the Soviets – if we just don’t provoke them.

“Well, World War II came about without provocation. It came because nations were weak, not strong, in the face of aggression. Those same lessons of the past surely apply today. Firmness based on a strong defense capability is not provocative. But weakness can be provocative simply because it is tempting to a nation whose imperialist ambitions are virtually unlimited.

“We find ourselves increasingly in a position of dangerous isolation. Our allies are losing confidence in us, and our adversaries no longer respect us.”

--Kathleen Parker / Washington Post

“It is unfair to ascribe nefarious motives to the president, as many on the far right have done. Still, effective leadership requires that one not only speak the truth but speak it with conviction and authentic passions natural to events. Obama’s remarkable dispassion, punctuated occasionally by a brilliant smile that seems attached to a timer, has the effect of no effect whatsoever.

“What is really going on?

“The president’s demeanor conveys a lack of involvement that is disconcerting and potentially dangerous. For whatever reasons, he is resistant to decision-making (destroy, not manage, that JV team the Islamic State), slow on the uptake when conditions are dire (Ebola), dismissive of his own lack of follow-through (the ‘red line’ for Bashar al-Assad), and quick to blame others for his failings (he knew nothing about fill-in-the-blank until he read it in the papers).

“While he brandishes incompetence, America’s friends and foes stroke their chins. Is this guy for real?

“We now have a case of Ebola in the United States despite the president’s assurances that chances of an outbreak are ‘extremely low.’ More beheadings are promised and presumably will continue until we prevail in a battle that is more likely to last decades rather than the two or three years that the administration has suggested. The worst things imaginable aren’t just possible, they’re already happening.

“Not to be a party pooper for End Timers, who are doubtless giddy right now, but we can prevail over the pestilence of savages and the plague of Ebola. But government is only as good as we are, and we have work to do. Next month, vote because you can – and vote only for those who understand what’s really at stake. If Iran gets a nuke, if the Islamic State takes over more territory or is allowed to flourish here at home, it’s everyone’s necks on the line. This is the grisly truth, the meaning of which should be clear.”

--The U.S. Supreme Court let stand lower-court rulings that struck down gay marriage bans in five states; turning away appeals from Indiana, Oklahoma, Utah, Virginia and Wisconsin, all of which had seen their bans on same-sex marriage thrown out by different U.S. appeals courts.

So the five join 19 other states and the District of Columbia in allowing same-sex marriage.

--Californians initially didn’t follow orders to conserve water, but now they are, with water use across the state down 11.5% in August compared with the same month in 2013; the biggest drop of the year but still below Governor Jerry Brown’s goal of a 20% reduction.

--NBC-4 New York reporter Melissa Russo came up with the scoop that Mayor Bill de Blasio had yet to meet with the city’s five district attorneys since he became mayor in January, yet he has found time to hold 15-20 meetings with Al Sharpton. Having been exposed, the mayor’s office quickly tried to set up a meeting with his key crime fighters.

--Meanwhile, Sharpton’s favorite lawyer, high-powered civil rights attorney Sanford Rubenstein, was accused of sexually assaulting a 42-year-old business executive following Sharpton’s 60th birthday bash ten days ago. And what we learned later about the 70-year-old Rubenstein is that he’s a primo dirtball. A disgusting pig....and worse. Sharpton has now distanced himself from him, especially because the woman works for Sharpton’s National Action Network.

Rubenstein was currently representing the family of Eric Garner, the Staten Island man who died in July after a police officer put him in an apparent chokehold. The family dumped him.

--Life expectancy in the USA rose in 2012 to 78.8 years, up 0.1 year from 2011, according to a new report on mortality from the Centers for Disease Control and Prevention’s National Center for Health Statistics. It’s 81.2 years for females, 76.4 for males.

So...what would you do with that extra 0.1 year, or five weeks? Certainly you wouldn’t go to a Jets game. That would be a waste. 

--Finally, congratulations to Malala Yousafzai of Pakistan, who is sharing the Nobel Peace Prize with Kailash Satyarthi of India for their work in helping to promote universal schooling and protecting children worldwide from abuse and exploitation. As I’ve noted often in these pages, now 17-year-old Malala is a true inspiration and to her detractors in Pakistan, get over it. She will lead her country one day.

---

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

God bless America.
---

Gold closed at $1221
Oil $85.82...lowest weekly close since Nov. 2012

Returns for the week 10/6-10/10

Dow Jones -2.7% [16544]
S&P 500 -3.1% [1906]
S&P MidCap -4.4%
Russell 2000 -4.7%
Nasdaq -4.5% [4276]

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

Dow Jones -0.2%
S&P 500 +3.1%
S&P MidCap -2.8%
Russell 2000 -9.5%
Nasdaq +2.4%

Bulls 45.4
Bears 14.1 [Source: Investors Intelligence...last week I had repeat #s from the week before for about 24 hours after posting. If you missed it, the correct figures were then added, 47.5 / 15.1]

Have a great week. I appreciate your support.

Brian Trumbore



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Week in Review

10/11/2014

For the week 10/6-10/10

[Posted 11:00 PM ET, Friday]

Edition 809

Washington and Wall Street

Stocks took it on the chin across the globe this week primarily on growth concerns in Europe and Asia, with the likes of the Tokyo Nikkei down 2.5%, London’s FTSE down 2.9% and Frankfurt’s DAX index sliding 4.4%. A broad-based barometer for Europe, the Stoxx 600, fell 4.1% on the week, its worst performance since May 2012. The action in the U.S. was equally bloody, as spelled out below.

The International Monetary Fund lowered its global growth outlook for 2015 from July’s projection of 4.0% to 3.8%, while growth this year is slated to come in at 3.3%.

For the eurozone, the IMF sees its economy expanding just 0.8% this year and only 1.3% in 2015. There are many in Europe who would take these numbers, given how the picture on the continent is worsening.

The IMF, in its statement, said: “In advanced economies, the legacies of the pre-crisis boom and the subsequent crisis, including high private and public debt, still cast a shadow on the recovery. Emerging markets are adjusting to rates of economic growth lower than those reached in the pre-crisis boom and the post-crisis recovery.” 

IMF Managing Director Christine Lagarde called the prolonged period of sluggish growth the “New Mediocre.”

The IMF’s chief economist, Olivier Blanchard, said in an interview with Bloomberg, “We see the major risk in the stalling of the eurozone. The risk of recession is there.”

At least in the U.S. the IMF is calling for 2.2% growth in 2014 and 3.1% next year, while a Wall Street Journal survey of economists has a forecast of 3.2% GDP growth in Q3 and 3% in the current quarter.

Meanwhile, it’s earnings season, with the big crush the next three weeks, and before you know it we’ll be sitting around the Thanksgiving dinner table and watching football (then again, we’re always watching football), which also signifies the official start of the holiday shopping season, that in actuality is the months of November and December when retailers pick up about 20% of their yearly revenues.

So, it’s time for the forecasters to weigh in and the National Retail Federation is projecting holiday sales will come in at 4%, which would be the largest gain since 2011, this despite lackluster summer and back-to-school sales.

The last decade the average increase in holiday receipts has been 2.9% (they were up 3.1% last year). Online shopping is forecast to increase 11% in 2014 over 2013.

But not all are as sanguine as the NRF. A PwC US survey of consumers projects that holiday sales will be 7% less than 2013. [Adrianne Pasquarelli / Crain’s New York Business]

I’ll go with the NRF’s figure, barring a major terrorist attack in this country. I don’t mean to be flippant. It’s just a fact of life these days. The threat grid is full. Heck, we all know if we discovered just ten more cases of Ebola, scattered around the nation, that it could be enough to impact our behavior.

For now, though, let’s look on the bright side.

But then we have the Federal Reserve. Chair Janet Yellen and her merry pranksters were at it again this week, even if it was tape-delayed. As in the release of the minutes from its September meeting, which kind of shocked Wall Street with all the talk last month among the Fed governors that they were scared to rattle the markets and they didn’t know what to do with the pledge of low rates for a “considerable time” phrase. The Fed next gathers end of October and then before Christmas and there is disagreement whether to change the language.

But there was also a focus on the global growth picture: “Some participants expressed concern that the persistent shortfall of economic growth and inflation in the euro area could lead to a further appreciation of the dollar and have adverse effects on the U.S. external sector,” according to the minutes. [A stronger dollar not being good for our exporters, while a weaker euro is what manufacturers across the pond want as it makes their goods cheaper.]

Well, couple the minutes with the recent comments of some Fed governors, such as Chicago Fed President Charles Evans, who said on Wednesday that officials should be “exceptionally patient” before they start to raise rates, and at least that day, with the Dow Jones rallying 274 points, the biggest advance of the year, investors were of the opinion the Fed may not raise rates at all in 2015 so the free money, risk on, party would continue.

Of course less than 24 hours later the focus was back on putrid growth in Europe and elsewhere and the Dow promptly fell 334 points, the worst decline of 2014...and so it goes...

One buzzword is increasingly entering the conversation as well and that is deflation, which isn’t good, sports fans. You basically have it in some euroland countries, with inflation in the entire euro-18 running at just 0.3% on an annualized basis, and now with plunging oil prices, it’s not like there are inflation concerns here in the States, either.

So between weak growth, except in the U.S., and falling, if at best stagnant, prices, bonds rallied anew.

Europe and Asia

As noted above, the picture in Europe continues to worsen amid the threat of yet another recession. Markit released its data on eurozone retail sales for September and the PMI showed the sharpest fall in 17 months, 44.8, with Germany at 47.1 (53-month low) and France at 41.8 (18-month low).

Phil Smith, economist at Markit, commented:

“Consumer spending in the euro area looks to be on the downturn, with the latest retail PMI figures showing sales falling for the third month running.”

A eurozone sentiment index hit a low mark not seen in 16 months.

And then there was Germany. It reported three figures for August that were all awful, and the worst for the group since January 2009. Factory orders fell 5.7% in the month, industrial production was down 4%, and exports declined 5.8%. With each release stocks in Europe, and in the U.S., took a header. Four German think tanks also lowered their growth outlook for 2014 to 1.3%, and just 1.2% in 2015, though frankly I don’t see where Germany gets the 1.3% this year.

The debate in Europe hasn’t changed; growth vs. austerity. The European Central Bank and President Mario Draghi vs. the likes of German Finance Minister Wolfgang Schaeuble.

Draghi this week pledged to keep monetary policy loose and talked of the ECB’s first rate hike being in 2017, while Schaeuble warned against U.S.-style quantitative easing in urging continued budgetary discipline.

Draghi said, “When we look at market expectations, the first hike in interest rates is foreseen by 2017. The Governing Council has repeated many times, even as it was adopting new measures: it is unanimous in its commitment to take additional unconventional measures to address the risks of a too-prolonged period of low inflation.”

But Draghi also stressed there must be reform on the part of the European governments.

“I am uncertain there will be very good times ahead if we do not reform now. While stabilization policies that raise output toward potential are necessary, they are not enough. We need to urgently raise that potential. And that means reform.”

Reform, though, has been slow in coming, particularly in the likes of France and Italy, while for his part, German Finance Minister Schaeuble told the audience in Washington that Draghi’s “writing checks” was no way for the eurozone to increase growth. Italy and France must overhaul their economies.

Alison Smale and Liz Alderman / New York Times

“ ‘After going along with the damaging strategy of austerity in the hopes that Germany would eventually moderate its position, countries are now saying, ‘Enough is enough. We’re going to have to act to arrest the downward spiral in the economy,’’ said Simon Tilford, the deputy director of the Center for European Reform in London....

“Critics of austerity say that more government spending would increase demand for goods and services in Europe and help avert a dangerous fall into deflation... Proponents of austerity say that governments that fail to get their budget deficits and accumulated debt under control risk losing the ability to borrow at affordable rates in the bond markets and sow the seeds of financial instability.”

So back to Italy and France, Italian Prime Minister Matteo Renzi has paired up with France’s President Francois Hollande in calling for Germany to lighten up. Renzi said of his neighbor that has had trouble coming close to its EU mandated budget deficit targets, “I prefer to have a France with 4.4 percent [deficit-to-GDP ratio] today than a France with Marine Le Pen tomorrow. This is very important for Europe.”

Renzi, though, said his country would stay within the EU’s 3 percent deficit target even as it remains in a protracted recession. “Italy has a big problem of reputation (and a 130% debt-to-GDP ratio) so I prefer to respect 3 percent to give a message of stability and credibility,” he said.

But Renzi knows he has to introduce labor reforms for Italy’s economy and this week the Italian senate comfortably passed a package of measures aimed at boosting employment, a big victory for the 39-year-old.

But, typical of Italy, the lower chamber has to still pass it, the government has to actually write the legislation, and it is unlikely to be finalized before the middle of next year!

As for France, here’s the figure you need to understand. Public spending takes up 57% of GDP – by far the highest in the eurozone.  France also hasn’t had a balanced budget in 40 years.

As The Economist opined, France and Italy “are laggards in reform. Whereas Spain has started to come to grips with its structural problems, France’s Socialist president...has not even tried. Instead of reducing taxation, he has raised it. Instead of encouraging business, he has added to its burdens. Instead of promoting reforms, he has avoided them. In Italy, a series of well-meaning prime ministers have been unable to overcome the formidable vested interests that see reforms as a threat to the special deals they have carved out.

“This combination of size and lassitude is dangerous, because France and Italy are at once too big to fail and too big to bail out.” 

But maybe attitudes are changing, if ever so slightly. Chancellor Merkel, at a Berlin news conference on Thursday, hinted she was willing to use government spending to stimulate growth, which would benefit the entire eurozone, potentially.

One thing we do know. Eurozone banks aren’t lending. The IMF said this week lenders were still not in a position to be “athletes” supporting economic recovery six years after the financial crisis.

Many of the 300 banks in advanced economies the IMF examines, as part of its twice-yearly Global Financial Stability Report, do not have adequate capital buffers or profitability to support lending growth of 5 percent a year and most of these institutions are in the eurozone. 

Shortly we’ll find out just how bad a shape some of the eurozone banks are when the ECB releases the results of its stress tests end of the month.

Finally, I’ve written a lot on the euro bond market and how crazy it is for some, such as Italy, with that huge debt-to-GDP ratio, to have a yield on its 10-year bond of 2.32% as of the close on Friday, same as in the U.S. I understand the impact of the ECB’s exceedingly easy money policy and its mantra to do whatever it takes to save the eurozone and the currency.

Yes, for the umpteenth time, if Italy’s economy starts growing at a solid pace, debt service isn’t an issue (though it will be at a higher rate in that scenario). Italy, like Spain and others, is fortunate it has been able to roll over a lot of its debt recently at much lower levels than just two years ago. That helps future debt servicing.

But if these economies don’t grow, and Italy is in recession today, while France (with its 1.25% 10-year yield) is stagnating, then the euro bond market just isn’t dealing in reality.

Case in point, Greece. On Sept. 8, Greece’s 10-year paper yielded 5.52%. This week it closed at 6.46%, a hefty move. The reasoning was clear. There is all manner of political uncertainty, again, in the country and while Greece’s public finances have improved, many aren’t convinced Prime Minister Samaras’ plan for a clean bailout exit at the end of the year is solid. Greece’s debt is 175% of GDP. 

Mohamed El-Erian / Bloomberg

“Judging from the recent remarks by European officials, policy positions are hardening once again in the eurozone. Fueled by disappointing economic performance, the risk is that the deepening difference in views in Europe will further complicate a much-needed recovery. This is regrettable because it need not be so.

“Having flirted with a disorderly disintegration, the eurozone embarked on an impressive period of sustained financial normalization starting in July 2012. The immediate crisis receded as borrowing costs came down, bank deposits stabilized and lending resumed. In the process, the blame game played by member countries gave way to collective relief and more constructive dialogues.

“Despite the valiant efforts of the European Central Bank, this stable period hasn’t been accompanied as yet by a strong overall economic recovery. The improved growth performance of Greece, Ireland and other peripheral countries has been offset by weaknesses in the three largest economies – Germany, France and Italy. The weakness seems to be getting worse as suggested by this week’s disappointing data on industrial production, including a much-worse-than-expected contraction of 4 percent in Germany.

“Economic slippages inevitably fuel disenchantment in policy making, which, in the eurozone, excessively pushes officials to corner solutions – meaning they are unwilling to make policy compromises. As such, much of the narrative is now regressing to the old debate between austerity and growth, with the same advocates on either side. And, once again exaggerated differences among individual governments are spilling over into the ranks of the ECB.”

Turning to China, the World Bank cut its GDP forecast from 7.6% to 7.4% for this year, and to 7.2% in 2015 and 7.1% in 2016, both down from 7.5%. [The IMF has 7.4% in 2014; 7.1% next year.]

As if confirming this new outlook, China’s main government-backed research organization, the Chinese Academy of Social Sciences, forecast 7% growth in 2015, after 7.3% this year, lower than its 7.5% projection in December, which also happened to be the government’s official target.

So look for the government to lower its 2015 outlook while at the same time continuing to emphasize reform over stimulus.

Separately, HSBC said China’s service sector PMI was 52.3 in September, down slightly from August’s 52.8.

Street Bytes

--The Dow Jones lost 2.7% to erase its gains for 2014, now down -0.2% for the year, while the S&P 500, -3.1%, and Nasdaq, -4.5%, each had their worst weeks since May 2012.   The S&P is 5% off its all-time high, while Nasdaq is down 7% from its multi-year high-water mark set just last month.

The Nasdaq had its worst day of the week Friday as Microchip Technology tumbled 12% when it said quarterly revenue was hurt by a decline in China sales, with the semiconductor company warning of an industry correction.

The energy sector has been slammed along with the price of oil, with an index for the group now down over 15% since June.

--U.S. Treasury Yields

6-mo. 0.04% 2-yr. 0.42% 10-yr. 2.28% 30-yr. 3.01%

In a classic flight to safety and the renewed feeling the Federal Reserve wasn’t hiking rates for a long while the 10-year hit its lowest level since June 2013.

--After the death of the first man diagnosed with Ebola in the U.S., Thomas Eric Duncan, on Wednesday in Dallas, those traveling to the United States from West Africa to five airports – New York’s JFK, Newark, Washington, D.C.’s Dulles, Chicago’s O’Hare and Atlanta – will undergo face temperature screening and enhanced questioning. The CDC believes that by screening at these five airports, they will cover over 94% of travelers from the affected countries.

The problem is when you’re questioning someone, they have to tell the truth, which wasn’t the case with Duncan. It also means airport staff must immediately be brought up to speed, quickly.

In Spain, a nurse, Teresa Romero, contracted Ebola while caring for a priest who died from it. A doctor at the hospital where the nurse was working says she touched her face with the gloves after having contact with the priest. Supposedly staff have not been sufficiently trained to deal with the virus. And then officials in Madrid got a court order to euthanize the nurse’s dog, a move that was protested widely in the country, though at least one major study suggests dogs can be infected with Ebola without having symptoms. [Daily Telegraph]

The death toll exceeds 4,000 (conservatively) as of Friday and as I’ve written the global response, including from the United States, has been pathetic. I love how President Obama and the administration are encouraging others to chip in quickly when the United States military has yet to set up one of the 17 treatment centers in Liberia they were charged with. This isn’t being treated as an emergency. The president pledged 3,000 or more troops and they are literally trickling in, plus, as we’ve seen from news reports, vital supplies are sitting on docks in the affected countries.

All the while, cases are doubling every three weeks and of course will jump to other nations in Africa that are ill-prepared for such a crisis, let alone the first cases reaching the U.S., Spain, etc.

The World Health Organization warned Ebola has become entrenched in the capital cities of the three most-affected countries, with deputy head Bruce Aylward adding, “70% of the people affected are definitely dying from this disease, and it is accelerating in almost all of the settings.”

Medecins Sans Frontiers reported a sharp increase of Ebola cases in the Guinean capital, Conakry.

Thursday, CDC Director Thomas Frieden said the outbreak in West Africa was unlike anything he had seen since AIDS.

But in a scathing look at the WHO, the Washington Post’s Lenny Bernstein and Juliet Eilperin noted that it wasn’t until Aug. 8, 4 ½ months into the epidemic, that the WHO declared a global emergency. “Its Africa office, which oversees the region, initially did not welcome a robust role by the CDC in the response to the outbreak.

“Previous Ebola outbreaks had been quickly throttled, but that experience proved misleading and officials did not grasp the potential scale of the disaster. Their imaginations were unequal to the virulence of the pathogen.”

The WHO says Liberia and Sierra Leone have a combined 924 hospital beds between them, but they need 4,078. The U.S. military’s effort to build the above noted centers that can hold 100 people each won’t be completed until mid-November.

As I wrote July 26 (notice the date vs. the WHO’s Aug. 8 declaration) in this space, Ebola also has the potential to be an economic catastrophe. The World Bank warned the other day that the cost could exceed $32 billion in West Africa, or 3.3 percent of regional GDP. SARS cost the global economy in excess of $40 billion. I guarantee Ebola will far exceed this. 

By the way, under the World Bank’s worst-case (“High Ebola”) scenario, 100,000 would die in West Africa by the end of 2015.

I can also guarantee that if this toll was reached, that would mean far more than a few isolated cases in Western Europe and North America and there would be untold economic damage (and isolated cases of pure panic).

--According to Morningstar, while investors pulled $23.5 billion out of Bill Gross’ former Total Return Fund for the month of September, only $66.4 million found its way into the Janus Unconstrained Bond fund that he will now be managing for Janus Capital Group. I would expect future flows to be substantial, but it takes time for the consultants and advisors to become comfortable with Gross’ new mandate and his initial positioning of the fund.

Gross himself made his first public pitch for business saying, “It’s been a rough few weeks. It will be a better few months and years going forward. Having been a sailor, there have been some rough seas. I expect my second life at Janus to be a simpler sequel to my first life at PIMCO.”

In his first letter to clients, Gross said the bond markets cannot generate the same returns as the past 30-year bull market. His advice to investors – “retire later, save more [and] accept a revised standard of living.” [Stephen Foley / Financial Times]

--As the New York Times reports, more than three months after the first cyberattacks at JPMorgan Chase, “the source is still unclear and there is no evidence that any money was taken from any institution. But questions are being asked across Wall Street as other targets emerge. At least four companies – Citigroup, E*Trade Financial, HSBC and ADP – found that one of the same web addresses used to penetrate JPMorgan had tried to get into their systems, people briefed on the matter say.”

The Wall Street Journal reported Fidelity Investments was another victim, though authorities don’t believe account information was stolen here either.

--According to research firms Gartner Inc. and International Data Corp., sales of personal computers fell in the third quarter, down 0.5% by Gartner’s estimate, 1.7% for IDC, though the latter had forecast a 4.1% decline.

Both firms agree that U.S. shipments, however, rose 4%.

Market Leader Lenovo saw its shipments rise 11%, according to Gartner and IDC, which increases its market share to 20%.

--The Justice Department apparently isn’t finished with Wall Street and the world’s biggest banks, according to a report in the New York Times.

“With evidence mounting that a number of foreign and American banks colluded to alter the price of foreign currencies, the largest and least regulated financial market, prosecutors are aiming to file charges against at least one bank by the end of the year, according to interviews with lawyers briefed on the matter. Ultimately, several banks are expected to plead guilty.” [Ben Protess, Jessica Silver-Greenberg]

As Leon Cooperman said on CNBC Thursday, it’s hard to lend to businesses when you’re being continuously hit with $billions in fines, or as Protess and Silver-Greenberg write:

“The public lust for charges is at odds with the view on Wall Street, where bankers and lawyers report fatigue with what seems like unrelenting investigations. With each inquiry, the fines have multiplied, stretching to nearly $17 billion for Bank of America.”

--I have zero interest in the AIG hearing brought about by former CEO Hank Greenberg over the $182 billion bailout of the insurer and Greenberg’s attempt to get $40 billion in damages as a result of the government imposing severe terms on AIG that destroyed shareholders. AIG was a mess...a systemic one at that.

Former Fed Chairman Ben Bernanke testified, “Our goal was to minimize the windfall to AIG shareholders,” adding it also was “additional compensation to taxpayers for the risks they were taking.”

AIG ultimately repaid $205 billion to the government, including $22.7 billion in interest.

--Ford said its car sales fell 4% in China in September, the first monthly drop for the automaker there in more than two years. Some are citing a lack of new models, even as Ford ramps up production capacity in China.

--Walmart is no longer providing health insurance to part-timers who work under 30 hours a week, affecting 28,000 workers. Why? Rising costs associated with ObamaCare.

And those who lose their insurance will be required under ObamaCare to buy private insurance on government backed exchanges.

Walmart is doing what it is allowed to do under the law, since coverage is only required for employees who work more than 30 hours a week (the employer mandate). But those under the 30-hour threshold may actually do better by enrolling in Medicaid, if their state allows it, though then this becomes a deficit issue.

--Microsoft CEO Satya Nadella apologized for remarks he made at a women’s forum. Playing the role of village idiot, Nadella told them they didn’t need to ask for a pay raise, but rather should have “faith in the system.” Not asking for a raise, said Nadella, was “good karma.”

While he admitting later he was “inarticulate,” Nadella’s name gets thrown in the December file for “Jerk of the Year” consideration.

--Editorial / Wall Street Journal

“In September (Canadian Prime Minister Stephen) Harper visited London to ballyhoo the trade agreement completed between Canada and the European Union. Most notable, and disconcerting, was a remark Mr. Harper made there about the United States: ‘We know that the United States is unlikely to be a fast-growing economy for many years to come,’ Mr. Harper said. ‘We’re in a globalized economy,’ he added, noting it’s imperative to get Canada’s businesses into the global supply chain.

“Ouch.

“This isn’t just talk. In recent weeks, news has emerged that the Canadians have found a startling alternative to the Obama Keystone XL pipeline refusal: They are going to build a pipeline from the oil sands in Alberta and Saskatchewan to refineries in Saint John, New Brunswick, on the Atlantic Ocean.

“The Energy East project will allow the Canadians to ship oil to Europe and points east. A Bloomberg News report says the Canadians are already lining up customers in India. Energy East hopes to be finished in 2018.

“Good for Canadians. But we never thought we’d see the day that they’d steal a march on America’s entrepreneurs.”

--Hewlett-Packard announced it will spin off its PC and printer arm. When CEO Meg Whitman was brought in three years ago to right the ship, she ditched a proposal to shed the PC division. 

HP Inc. will represent the traditional side of the company, desktop computers and inkjet printers, as well as 3-D printing and what it called “new computing experiences.” Hewlett-Packard Enterprise will deal with growing and future markets of servers, networking and cloud computing. Whitman will lead the enterprise division.

In May, the company announced it would lay off 16,000 as part of its ongoing turnaround, bringing the total number of forecast job cuts to as many as 50,000.

--Samsung Electronics forecast a 60% fall in third quarter profit to $3.8 billion, far below analysts’ expectations, owing to its struggling mobile division. The flagship Galaxy smartphone has been losing market share to cheaper models, though the company vows to introduce a new series of phones to compete in the mid-to-low end market.

--Turner Broadcasting announced plans to eliminate 1,475 jobs – 10% of its total workforce. Turner is parent of CNN, TNT, TBS, and Cartoon Network. No word on which cartoon figures may be out of work.

--Canada’s jobless rate fell to an almost six-year low in September, 6.8%, lowest since December 2008. Celebrate with a Molson or Moosehead, but don’t operate heavy machinery while you do so.

--Yum Brands, which owns KFC, reported third quarter sales at its restaurants in China fell 14%, as the company tries to recover from the latest food-safety scare in China.

--Casino revenue in Macau, always a good economic barometer for China, fell 12% in September, the fourth straight month it’s declined*; the biggest drop since June 2009. Chinese President Xi’s crackdown on corruption** isn’t helping (high rollers being 60% of the city’s gaming revenue), nor are pro-democracy demonstrations in Hong Kong, where many, such as moi, take high-speed ferries to Macau.

*Revenues fell 6.1% in August, 3.6% in July and 3.7% in June, year on year. [South China Morning Post]

**Beijing reported government spending on overseas trips, lavish receptions and official cars has dropped by almost $9 billion over the past year. President Xi Jinping is winding down his campaign against ‘decadent’ practices. This week it was announced 150,000 ‘ghost jobs,’ where people are paid without even showing up, were found as part of the clean-up. Xi has sought to strengthen the Communist Party’s ties to the Chinese population.

--Air France said last month’s two-week pilot strike cost the airline $650 million, wiping out more than a fifth of the parent group’s estimated full-year profits.

--The great grandsons of Anna Short Harrington, who went on to become “Aunt Jemima” in 1933, claim they’re owed a slice of the pancake company’s revenue according to an agreement stretching back to the late-1800s.

As one of the great grandsons said, “Aunt Jemima has become known as one of the most exploited and abused women in American history.” Who knew?

The company was first developed in 1889 and there have been a few Aunt Jemimas, including then-Anna Robinson, hired to portray her in 1933 – while traveling around the country until her death in 1952. 

So the two boys are asking for $2 billion. Good grief. [Nina Golgowski / New York Daily News]

Foreign Affairs

Iraq / Syria / ISIS: This week it’s been all about the Syrian city of Kobane, which lies on the border with Turkey. ISIS fighters have gained a foothold in the place (as of Friday as much as a third to a half), which once housed 400,000, including in surrounding villages, but is now largely deserted, some 200,000 Kurds having crossed into Turkey. The defending Kurdish fighters desperately need heavy weapons and ammunition but Turkish President Erdogan is blocking such supplies from crossing the border, and a limited bombing campaign by the U.S. has had little actual influence on the shape of the battle; taking out a tank here, an armored vehicle there.

The BBC reported that a leading Kurdish general was killed by a suicide bomber in a heavy truck because the Kurds didn’t have the weaponry to take out the truck before it struck.

The fall of Kobane would give ISIS control of a long stretch of the Turkish border.

President Erdogan has been pushing a proposal to establish a buffer zone for refugees along the Syrian-Turkish border. Where have you heard that before? Right here, in this very space...two years ago...as I pointed out again just last week.

But while at first Secretary of State John Kerry said it was “worth looking at very closely,” a Defense Department spokesman was saying mere hours later a buffer zone “is not now on the table as a military option.”

Washington also said that aside from limited airstrikes there was little else it would do in the way of defending Kobane, playing down the strategic importance of it.

Kim Kagan of the Institute for the Study of War, told the Wall Street Journal:

“Any terrain that ISIS takes while we are engaged in an air campaign in Iraq and Syria is strategically significant. ISIS relies on continuing victories in seizing urban areas, military bases and terrain in order to sustain its legitimacy, so the U.S. has an obligation to stop ISIS from achieving further victories.”

A victory in Kobane also provides ISIS with a huge propaganda windfall, a recruiting tool.

So you have the split between Washington and Ankara. Washington wants the Turks to send in ground troops to wipe out ISIS, and then help rout the terrorists in both Syria and Iraq. The Turks want a “no-fly zone” over parts of northern Syria and a military campaign to take out Bashar Assad.

In Iraq this week, ISIS shot down two Iraqi military helicopters with shoulder-fired missiles, another highly worrisome development.

Charles Krauthammer / Washington Post

“During the 1944 Warsaw uprising, Stalin ordered the advancing Red Army to stop at the outskirts of the city while the Nazis, for 63 days, annihilated the non-Communist Polish partisans. Only then did Stalin take Warsaw.

“No one can match Stalin for merciless cynicism, but President Recep Tayyip Erdogan of Turkey is offering a determined echo by ordering Turkish tanks massed on the Syrian border, within sight of the besieged Syrian town of Kobane, to sit and do nothing.

“For almost a month, Kobane Kurds have been trying to hold off Islamic State fighters. Outgunned, outmanned and surrounded on three sides, the defending Kurds have begged Turkey to allow weapons and reinforcements through the border. Erdogan has refused even that, let alone intervening directly. Infuriated Kurds have launched demonstrations throughout Turkey protesting Erdogan’s deadly callousness. At least 29 have been killed.

“Because Turkey has its own Kurdish problem – battling a Kurdish insurgency on and off for decades – Erdogan appears to prefer letting the Islamic State destroy the Kurdish enclave on the Syrian side of the border rather than lift a finger to save it. Perhaps later he will move in to occupy the rubble.

“Moreover, Erdogan entertains a larger vision: making Turkey the hegemonic power over the Sunni Arabs, as in Ottoman times. The Islamic State is too radical and uncontrollable to be an ally in that mission. But it is Sunni. And it fights Shiites, Alawites and Kurds. Erdogan’s main regional adversary is the Shiite-dominated rule of Syria’s Bashar al-Assad. Erdogan demands that the United States take the fight to Assad before Turkey will join the fight against the Islamic State....

“As for Syria, what is Obama doing? First, he gives the enemy 12 days of warning about impending air attacks. We end up hitting empty buildings and evacuated training camps.

“Next, we impose rules of engagement so rigid that we can’t make tactical adjustments. Our most reliable, friendly, battle-hardened ‘boots on the ground’ in the region are the Kurds. So what have we done to relieve Kobane? About 20 airstrikes in a little more than 10 days, says Centcom....

“If this were not so tragic, it would be farcical....

“The indecisiveness and ambivalence so devastatingly described by both of Obama’s previous secretaries of defense, Leon Panetta and Bob Gates, are already beginning to characterize the Syrian campaign.

“The Iraqis can see it. The Kurds can feel it. The jihadists are counting on it.”

Jimmy Carter...in an interview for the Fort Worth Star-Telegram:

“(We) waited too long. We let the Islamic State build up its money, capability and strength and weapons while it was still in Syria. Then when [ISIS] moved into Iraq, the Sunni Muslims didn’t object to their being there and about a third of the territory in Iraq was abandoned.”

Sens. John McCain and Lindsey Graham / Wall Street Journal

“The airstrikes and other actions President Obama is taking against Islamic State deserve bipartisan support. They are beginning to degrade the terrorist group, also known as ISIS, but will not destroy it, for one reason above all: The administration still has no effective policy to remove Bashar Assad from power and end the conflict in Syria.

“Administration officials have called their approach ‘ISIS first.’ As for Mr. Assad, in the words of Gen. Martin Dempsey, chairman of the Joint Chiefs, the administration will ‘defer that challenge into the future.’ This is not a luxury we get to choose. And Mr. Obama himself recently said he does ‘recognize the contradiction’ in his own policy – which is that by confronting Islamic State but not Assad, the U.S. may unintentionally benefit the ruler whose ouster he continues, rightly, to demand.

“Unfortunately, this is not the only self-defeating contradiction in the administration’s Syria policy....

“It’s unlikely that the U.S. can maintain public support among Syrians for the fight against Islamic State, or succeed without their support, unless it does more to end Assad’s war against them. Syrians are already asking why America is bombing Islamic State but not stopping Mr. Assad from bombing them. This only hardens their pervasive belief that America cares only for itself. This belief threatens to strengthen Islamic State and discredit our moderate partners among the anti-Assad forces....

“The greatest contradiction of Mr. Obama’s military intervention in Syria is that it appears unconnected to his political goal: a ‘transition’ from Assad to an inclusive, sustainable political order. This goal will require the U.S. to militarily degrade the Assad regime, upgrade the moderate opposition, change the momentum of the conflict and create conditions for a political solution.

“At a minimum, this means a larger role for U.S. military advisers and forward air controllers. It also means declaring safe zones in Syria and telling Mr. Assad that if his forces and aircraft operate there, they will be targeted like Islamic State. Key regional partners realize that we must confront Mr. Assad as well as Islamic State, and they are willing to join America in doing so.”

Editorial / Washington Post

“Two months after the United States began airstrikes in Iraq, and two weeks after they were extended into Syria, the forces of the Islamic State are still advancing. Last week they captured the Iraqi towns of Hit and Kubaisa, northwest of Baghdad. On Tuesday they appeared close to overrunning Kobane, a strategic city on the border between Syria and Turkey that is populated with Kurds. The enemy victories are happening in spite of U.S. and allied airstrikes and resistance from local forces. They suggest that the U.S. air campaign is failing to achieve the minimal aim of stopping the expansion of the Islamic State – much less ‘degrading’ and ‘destroying’ it.”

Gideon Rachman / Financial Times

“The broader problem is that, over the past decade, the west has exhausted all the options when it comes to reshaping the Middle East. In Iraq there was a ground invasion, followed by a huge effort at nation building. But today the state is on the point of collapse. In Libya, there was an air campaign – but no ground invasion and no nation building. But today the state is on the point of collapse. In Syria, the west stood back and there was no intervention of any kind. But today the state is on the point of collapse. The phrase ‘you can’t win’ takes on a literal meaning when one reviews this litany of failure.

“The announcement of a bombing campaign has caused a brief surge of optimism and excitement. It always does. The subsequent disillusionment is, sadly, just as inevitable.”

Michael Young / The Daily Star (Lebanon)

“The Americans must accept that for three years they neglected Syria and allowed the situation to deteriorate to the point where they have to intervene today. Against this backdrop, having narrow objectives there makes little sense. Syria may be a problem from hell, as some commentators have written, but allowing it to remain in order to focus on ISIS is absurd. ISIS grew because the situation in Syria was so bad. Obama gains nothing by curing the symptom while ignoring the illness.”

Editorial / The Daily Star

“The vastly contradictory statements coming from the U.S. government over the last few days are emblematic of a wider problem: that the Obama administration apparently has no coherent strategy when it comes to Syria, and now Iraq, and is playing the whole thing by ear. But this absence of any tangible policy will have ramifications far wider than simply the countries directly involved.

“Despite a campaign of airstrikes against ISIS, backed by a coalition of some 60 countries, the U.S. is confused and confusing. Secretary of State John Kerry said Wednesday that the U.S. was looking closely at the idea of a buffer zone along the border with Turkey, inside Syria. Hours later the Pentagon and the White House said that option was absolutely not on the table.

“This flip-flopping really makes one wonder where decisions are being made, and by whom. Certain people – including the president’s chief foreign policy representative – seem to have no idea what the plan is. How is the rest of the world supposed to know? The Syrians and Iraqis who this terrible war is affecting the most deeply?

“Where once the U.S. appeared as a beacon of strength, of stature, of leadership – and concern for humanitarian suffering – it is now struggling to maintain this image. And while this mask has been slipping for years now, the mistakes of Obama’s administration have done untold and likely irreparable damage.

“And the vacuum that has been left appears to have given oxygen to the most extreme and most dangerous groups around the world. The destruction and loss of life happening now across the Middle East is only the beginning. The aftershocks of current political indecisiveness will be felt for generations.”

Iran: I have long written that all you needed to know about Iran’s nuclear intentions was the failure to grant the International Atomic Energy Agency access to the disputed military compound at Parchin, where it has long been suspected Tehran was conducting tests on items such as nuclear triggers.

So last Sunday, a huge explosion ripped through a production unit there, killing at least two, with a pro-reform website saying the blast was “so intense that windows of buildings (nine miles) away were shattered.” 

Was it an accident or sabotage? No answers as yet, and if it was the latter it is likely we’ll never know.

As for the ongoing nuclear talks between Iran and the P5+1 that have a Nov. 24 deadline, Iran would retain some nuclear-enrichment capability under the latest proposals (which Israel is totally against), while Tehran wants all sanctions lifted.

On Wednesday, Supreme Leader Ayatollah Ali Khamenei reiterated his country’s “red lines’ in negotiations, including a stipulation that Iran be allowed to increase its current processing ability by 20 times, which Iran claims is necessary to produce fuel for its Bushehr reactor. The U.S. and the West want Iran to decrease its enrichment capability.

Khamenei is also insisting the underground Fordo facility be preserved.

In other words, the potential for a ‘bad deal’ is great.

[As an aside, relations between the White House and Israeli Prime Minister Netanyahu have hit a new low...if that was possible.]

Yemen: In announcing the U.S. air campaign in Iraq and Syria, President Obama pointed to past successes in Yemen and Somalia. Oh yeah, they are big successes. Thursday, two suicide bombers killed 67 in Yemen, with one targeting a rally in the capital of Sanaa by Shiite rebels who control the city, escalating sectarian tensions in this chaotic, dirt-poor country. The Sanaa bomber killed 47 just detonating his explosives-laden belt. The other attack was a suicide car bomber killing 20 in Mukalla. Al-Qaeda in the Arabian Peninsula is responsible.

North Korea: In the blink of an eye, this hellhole could vault to the top of the list of global concerns after Kim Jong-un failed to show up to attend the 69th anniversary of the founding of North Korea’s Workers’ Party on Friday, which sent the rumor mill ablaze yet again.

Some say there has been an attempted coup, either by the military or Kim’s sister.

A professor at Tokyo’s Waseda University told The Daily Telegraph that recent events in the country, including reports of a ban on new travel passes, could point towards a coup, or suggest that the authorities there have uncovered “some sort of plot against the leadership.”

“If it is a military-backed coup, then the situation in Pyongyang will be very dangerous and I have heard reports that Kim has been moved out of the capital,” he said.

But others suggest the younger sister, Kim Yo Jong, is already running the country.

Or maybe he’s just recovering from surgery on his knee and ankles. State media, after all, continues to praise him, which would hardly be the case were he deposed. A source close to Kim said he’s simply overweight and injured himself.

The source told the Associated Press, “Kim Jong-un is in total control. There is no split in the top leadership. He injured his ankle and knee around late August or early September...because he is overweight. He limped around in the beginning but the injury worsened.”

38 days and counting since he was last seen.

China: After a largely quiet week, the Hong Kong government called off a meeting with student protest leaders on Thursday, a meeting that was to begin a dialogue on election reform, saying it was unacceptable that protesters were using the occasion to incite more people to join the mass sit-in.

In response, one of the student leaders called for renewed civil disobedience for Friday night. So we are back to a stalemate and assuming massive protests take place again, the threat of a crackdown comes back to the forefront.

As for the impact the protests have had on the local economy, sales at major retailers fell as much as 50% during the bulk of the Chinese National Day holidays, Golden Week. A Hong Kong Retail Management Association said sales dropped at least 15%, with sales at small- to medium-sized companies plummeting as much as 80%, according to the association. [Billy Chan / Bloomberg]

Needless to say the merchants aren’t happy with the pro-democracy demonstrations that have clogged main arteries.

Separately, a Fairfax Media investigation in Australia claims that Hong Kong’s embattled chief executive (mayor), CY Leung, “pocketed millions in secret fees from a listed Australian company in return for supporting its Asian business ambitions.” The arrangement goes back to before he became Hong Kong’s top official. The payments related to the acquisition of a British property services firm Leung was associated with, “whose prospects depended on Mr. Leung’s network of managers and clients in Hong Kong and mainland China.”

Leung’s office claims the payments related to past, not future, services. [Sydney Morning Herald]

On a different issue...Paul Wolfowitz / Wall Street Journal

“Taiwan celebrates its National Day on Friday commemorating the 103rd anniversary of the Wuchang Uprising, which eventually brought down the Qing Dynasty and led in 1912 to the creation of the Republic of China – today more commonly known as Taiwan. Taiwan’s remarkable economic progress was followed by the evolution to what is now a thriving democracy, the first in a Chinese society. It is one of the great success stories of the past 50 years.

“However, Taiwan’s future, and American interests, are imperiled by a lack of U.S. support to counter Taiwanese fears of economic marginalization or to balance the pressure of China’s military buildup and its refusal to renounce the use of force to bring Taiwan under China’s control. If the U.S. doesn’t change course, the next 18 months could witness a significant increase in U.S.-China tensions over Taiwan.

“China has dealt with Taiwan’s democracy with more wisdom than it has shown in Hong Kong, but that should not be taken for granted. The U.S. has a stake in China’s continuing to emphasize carrots rather than sticks in its relations with Taiwan, as well as in encouraging moderation....

“(But) Taiwan faces an ominous and growing military threat from China. The U.S. is legally and historically committed ‘to enable Taiwan to maintain a sufficient self-defense capability,’ yet it has been more than three years since the last U.S. arms sale – the longest period since 1979. Taiwan has asked for fighters to bolster its aging fleet, as well as for U.S. support in asking Congress to approve a plan that would allow for the co-development of a diesel submarine either through the use of a foreign design or of a new U.S. design.

“These requests are entirely reasonable and would already have been processed if not for the U.S. giving in to Chinese objections. This weakens Taiwan while emboldening China and in turn leaves Taiwan more dependent on the U.S. for its security.

“The re-emergence of cross-Strait tensions would threaten stability in East Asia in a more fundamental way than even the current disputes over islands and territorial waters. Recent events in Hong Kong should be a reminder of Beijing’s capacity for miscalculation, and of how free people may react when their freedom is threatened. The U.S. can help avoid this outcome by being more active in supporting Taiwan.”

Remember, should Beijing face internal disorder on any mass scale, for a variety of reasons, President Xi could play the nationalism card and invade Taiwan.

Ukraine: The U.N. reported Wednesday that while there have been no large-scale offensives since the cease-fire went into place Sept. 5, there have been daily exchanges of fire that have claimed hundreds of lives (at least 331), bringing the total death toll in the six-month-old conflict  to more than 3,600. The U.N. also reiterated the humanitarian situation in eastern Ukraine is atrocious.

Editorial / Washington Post

“European Union diplomats are still working to set up a proposed buffer zone between Ukrainian and Russian forces. But many already are expressing relief that their frequently announced objective – ‘deescalation’ – seems to be in reach. By that, they mean that Russian President Vladimir Putin does not appear to be aiming, for now, at sending his forces to capture new cities in eastern Ukraine or to establish a land corridor from Donetsk to occupied Crimea.

“Yet Mr. Putin is on the cusp of achieving all his major objectives. In addition to Crimea, he has captured a strategic slice of territory containing up to 10 percent of Ukraine’s population, creating a ‘frozen conflict’ that he can use to keep the rest of the country permanently destabilized. He has bluffed Ukrainian President Petro Poroshenko and the European Union into postponing the implementation of an economic-association agreement that was the original cause of the conflict. He has pushed Ukraine’s economy into a free fall likely to intensify this winter, especially if Moscow fails to deliver supplies of gas or purchase Ukraine’s goods. If the Kiev government manages to hold successful elections this month and begins to find its footing, Mr. Putin can use his Donetsk clients to restart the war whenever he wishes.

“In the meantime, the Kremlin hopes that its ‘deescalation’ will induce the European Union and United States to lift the economic sanctions they stepped up last month. To her credit, German Chancellor Angela Merkel, a crucial voice in any such decision, said last week that the union was ‘very far away [from] consideration to take back sanctions.’ However, neither E.U. leaders nor the Obama administration have spelled out what conditions Moscow must meet to win a respite.

“That opens the door to letting Mr. Putin off the hook before he takes steps that are essential to preserving what remains of Ukraine’s sovereignty. These include withdrawing all Russian forces and military equipment from Ukraine and sealing the border between the countries, with monitoring by international observers. Ms. Merkel and President Obama should insist on these terms and make them public. Otherwise Mr. Putin will be encouraged to renew the aggression that already has proved fruitful for him.”

Russia: I have long argued the oligarchs would eventually take out President Vladimir Putin, specifically Igor Sechin. [Exile, not necessarily something else.] So I couldn’t help but note two pieces this week.

The first is from Catherine Belton and Neil Buckley of the Financial Times:

“A former close associate of Vladimir Putin has said Russian businessmen were all now ‘serfs’ who belonged to the president, with none of the country’s companies beyond his reach.

“Sergei Pugachev, who was once so close to Mr. Putin that he was known as the ‘Kremlin’s banker,’ made the comments in his first interview since the state seized his multibillion-dollar ship building empire in 2012.

“Speaking to the Financial Times, Mr. Pugachev warned that there were no longer any ‘untouchables’ in a Russian business landscape increasingly dominated by Mr. Putin. The Russian economy, he argued, had been transformed into a feudal system where businessmen were only nominal owners of their assets.

“ ‘Today in Russia there is no private property. There are only serfs who belong to Putin,’ he said....

“ ‘Now there is Putin and there are his lieutenants who carry out his orders – and all cash generated is put on the balance of Putin,’ he said. ‘The country is in a state of war. And therefore big business cannot live as before. It has to live under military rules.’”

Irina Reznik, Evgenia Pismennaya and Ilya Arkhipov / Bloomberg

“Russia’s wheels of power are grinding to a halt.

“That’s the assessment of five officials close to President Vladimir Putin, who say that a struggle at the heart of his inner circle is slowing decision making as sanctions squeeze the economy. With Putin focused on foreign policy, rival factions are battling for influence, said the people, who declined to be identified discussing internal issues.

“One group, centered on Prime Minister Dmitry Medvedev, is concerned about Russia’s increasing alienation from the global financial system, said the officials. The other, which includes heads of state companies such as Igor Sechin of OAO Rosneft and veterans of the security services, favors greater state control over the economy, they said.

“Russia’s ruling elite is convulsing as the economy careens toward recession....

“ ‘The long-running conflict between rival pro-Putin camps has elevated to war,’ said Stanislav Belkovsky, a Kremlin adviser during Putin’s first term who heads Moscow’s Institute for National Strategy. ‘The elite are fighting for a shrinking pool of assets.’”

Meanwhile, opposition leader Alexei Navalny, under house arrest as a result of trumped up charges, was quoted through an aide as saying he was ready to join forces with former oil tycoon Mikhail Khodorkovsky in future parliamentary elections. “We definitely see him as an ally,” Navalny reportedly said. “We find his calls for a broad collaboration of all forces standing for [Russia’s] path to European development very appealing.” 

The next State Duma elections are set for 2016. Recent legislation prohibits both of them from running for office but they have vowed to use other means to influence political life.

As for Khodorkovsky, he said this week, “I fear that Putin is going to bring the country to a crisis much more quickly than many would like, a repeat of 1917 when a person brings the country to an economic crisis, and we are certainly moving right in that direction....

“All authoritarian regimes, especially ones like this that aren’t based on an ideology but on an individual person, are highly unstable. In order to retain power, such authoritarian leaders are forced to burn the field all around themselves, which is what Putin is doing,” Khodorkovsky told Charlie Rose in an interview. [Bloomberg]

India / Pakistan: The Indian government has warned Pakistan to cut the crap...stop “unprovoked firing” in Kashmir. Defense Minister Jaitley said India would make it “unaffordable” for Pakistan if the attacks continued.

At least 19 have been killed amid the exchanges in the disputed region, the worst in a decade. [BBC News]

Britain: The U.K. Independence Party (UKIP) won its first elected seat in Britain’s parliament with 60% of the votes in a by-election on England’s east coast, a big blow for Prime Minister David Cameron with seven months to go before the general elections. UKIP represents growing euroskepticism in the country, with the party wanting Britain to withdraw from the European Union. 

It is commonly thought UKIP takes conservative votes away from Cameron’s Tories.

Brazil: President Dilma Rousseff will face challenger Aecio Neves, leader of Brazil’s center-right opposition, and not Marina Silva, in a presidential election runoff on Oct. 26, after Rousseff received 41% of the first-round vote to Neves’ 34% and Silva’s 21%. [There were eight other candidates picking up the scraps.] Silva’s support collapsed in the final weeks, where her lack of money for campaign ads and general inexperience led voters to look to Neves, believing he has a better chance of upsetting Rousseff in the run-off.

The IMF, by the way, slashed Brazil’s growth outlook to 0.3% in 2014, down from an initial forecast of 1.3%, and now sees 2015 growth of just 1.4%, down from an earlier forecast of 2.0%.

The campaign these next few weeks will be nasty and the outcome is uncertain.

Random Musings

George E. Condon Jr. / Defense One

“Two men told the truth in Washington this week. Both caused problems for President Obama. But one already has been forgiven, while the other has sparked enough anger inside the White House that official absolution could be a long time coming.

“The two men are Vice President Joe Biden and former Defense Secretary Leon Panetta. Both are in the hot seat because of things they said or wrote. Biden, as he often does in public, was way too candid in remarks he made at Harvard about the role several American allies played in unintentionally fueling the growth of Islamic extremists in Iraq and Syria. Panetta, as he rarely is in public, was way too undiplomatic in his assessment of Obama’s leadership and foreign policy, using his new book to give support to some of the president’s harshest critics.

“In both cases, a firestorm was ignited, making the president’s job much more challenging as he tries to build a sustainable coalition in the Muslim world and works to rally domestic political support for what he says will be a long-term war against the extremists....

“(Panetta’s) book stings even more...in large part because Panetta is held in such high bipartisan esteem.”

--According to another report by the Washington Post on the problems at the Secret Service, White House aides knew a presidential advance team member hosted a prostitute in a hotel in Cartagena, Colombia, at the same time almost two dozen members of the military and Secret Service were let go or punished for the scandal at the hotel there in 2012.

The thing is, the White House denied anyone from the administration was involved, even as it’s come to light the Secret Service shared first-hand accounts and hotel documents offering details with administration officials, including then-White House Council Kathryn Ruemmler, according to the Post. Ruemmler interviewed the presidential advance team member and concluded there was no wrongdoing.

The advance team member, Jonathan Dach, was a White House volunteer and Yale University law student who is now with the State Department. His father is a major Democratic donor.

--John Podhoretz / New York Post

“Every serious politico is baffled by the polling on this fall’s elections, in which Democratic Senate candidates across the country are doing a remarkable job of hanging in despite the general consensus that under conventional circumstances this would be a ‘wave’ year for Republicans.

“It should be a wave, experts say, because a) President Obama has a very low approval rating, b) a huge majority of Americans says the country is on the wrong track and c) more Americans say it’s time to replace their own representatives than ever before in modern history.

“The ‘issue environment,’ as they say, also works against the Democrats. ObamaCare remains unpopular. The world is in chaos, and Obama’s foreign policy appears inept at best. There hasn’t been a good piece of news out of Washington in God only knows how long.

“Meanwhile, in the realm of electoral politics, the GOP has cleaned up its act.  In 2010 and 2012, Republican efforts to capture the Senate fell short thanks to the profound weaknesses of certain GOP candidates, who self-destructed spectacularly.

“That’s not the case this year, when by common consent Republicans have a pretty remarkable slate of candidates across the country.”

I couldn’t agree more. So, as Podhoretz and the rest of us wonder, “why aren’t Republicans sitting pretty?’

Podhoretz argues it’s about the Democrats superior advantage “when it comes to the mechanics of American politics,” and it’s been this way for nearly a decade.

“The great triumph of Obama’s re-election was his campaign’s success at turning out so-called ‘unenthusiastic voters’ – people who would, if pressed, pull the lever for the guy but who were unmotivated to do so.”

So can Democrats do this again?

“(This) year Republicans decided this wouldn’t be an issue-based election, in part because the party itself isn’t sure where it stands collectively on a variety of issues – and in part because, having recruited a first-class team of candidates, it was thought they would do better making a case for themselves state by state.”

Again, Podhoretz has laid it out beautifully. But my elephants aren’t closing the sale. However, there may yet still be an October surprise that hurts the Democrats.

And there’s this...the Senate races in Louisiana and Georgia seem headed toward runoffs, with Louisiana’s Dec. 6 and Georgia’s Jan. 6. Ergo, we all know it’s going to be somewhere between 53-47 Republican and 50-50 when all the votes are tallied in November. But it could be as long as two months before we know who really has control.

[A New York Times/CBS News/Battleground poll (tracker) has the GOP taking the Senate 51-49, but “no one should be surprised if they got to 52 or 53 seats, nor is a Democratic hold outside a realistic chance.”]

--The Wall Street Journal pulled out Ronald Reagan’s address to the Veterans of Foreign Wars Convention in Chicago, Aug. 18, 1980. In part:

“Is it only Jimmy Carter’s lack of a coherent policy that is the source of our difficulty? Is it his vacillation and indecision? Or is there another, more frightening possibility – the possibility that this administration is being very consistent, that it is still guided by that same old doctrine that we have nothing to fear from the Soviets – if we just don’t provoke them.

“Well, World War II came about without provocation. It came because nations were weak, not strong, in the face of aggression. Those same lessons of the past surely apply today. Firmness based on a strong defense capability is not provocative. But weakness can be provocative simply because it is tempting to a nation whose imperialist ambitions are virtually unlimited.

“We find ourselves increasingly in a position of dangerous isolation. Our allies are losing confidence in us, and our adversaries no longer respect us.”

--Kathleen Parker / Washington Post

“It is unfair to ascribe nefarious motives to the president, as many on the far right have done. Still, effective leadership requires that one not only speak the truth but speak it with conviction and authentic passions natural to events. Obama’s remarkable dispassion, punctuated occasionally by a brilliant smile that seems attached to a timer, has the effect of no effect whatsoever.

“What is really going on?

“The president’s demeanor conveys a lack of involvement that is disconcerting and potentially dangerous. For whatever reasons, he is resistant to decision-making (destroy, not manage, that JV team the Islamic State), slow on the uptake when conditions are dire (Ebola), dismissive of his own lack of follow-through (the ‘red line’ for Bashar al-Assad), and quick to blame others for his failings (he knew nothing about fill-in-the-blank until he read it in the papers).

“While he brandishes incompetence, America’s friends and foes stroke their chins. Is this guy for real?

“We now have a case of Ebola in the United States despite the president’s assurances that chances of an outbreak are ‘extremely low.’ More beheadings are promised and presumably will continue until we prevail in a battle that is more likely to last decades rather than the two or three years that the administration has suggested. The worst things imaginable aren’t just possible, they’re already happening.

“Not to be a party pooper for End Timers, who are doubtless giddy right now, but we can prevail over the pestilence of savages and the plague of Ebola. But government is only as good as we are, and we have work to do. Next month, vote because you can – and vote only for those who understand what’s really at stake. If Iran gets a nuke, if the Islamic State takes over more territory or is allowed to flourish here at home, it’s everyone’s necks on the line. This is the grisly truth, the meaning of which should be clear.”

--The U.S. Supreme Court let stand lower-court rulings that struck down gay marriage bans in five states; turning away appeals from Indiana, Oklahoma, Utah, Virginia and Wisconsin, all of which had seen their bans on same-sex marriage thrown out by different U.S. appeals courts.

So the five join 19 other states and the District of Columbia in allowing same-sex marriage.

--Californians initially didn’t follow orders to conserve water, but now they are, with water use across the state down 11.5% in August compared with the same month in 2013; the biggest drop of the year but still below Governor Jerry Brown’s goal of a 20% reduction.

--NBC-4 New York reporter Melissa Russo came up with the scoop that Mayor Bill de Blasio had yet to meet with the city’s five district attorneys since he became mayor in January, yet he has found time to hold 15-20 meetings with Al Sharpton. Having been exposed, the mayor’s office quickly tried to set up a meeting with his key crime fighters.

--Meanwhile, Sharpton’s favorite lawyer, high-powered civil rights attorney Sanford Rubenstein, was accused of sexually assaulting a 42-year-old business executive following Sharpton’s 60th birthday bash ten days ago. And what we learned later about the 70-year-old Rubenstein is that he’s a primo dirtball. A disgusting pig....and worse. Sharpton has now distanced himself from him, especially because the woman works for Sharpton’s National Action Network.

Rubenstein was currently representing the family of Eric Garner, the Staten Island man who died in July after a police officer put him in an apparent chokehold. The family dumped him.

--Life expectancy in the USA rose in 2012 to 78.8 years, up 0.1 year from 2011, according to a new report on mortality from the Centers for Disease Control and Prevention’s National Center for Health Statistics. It’s 81.2 years for females, 76.4 for males.

So...what would you do with that extra 0.1 year, or five weeks? Certainly you wouldn’t go to a Jets game. That would be a waste. 

--Finally, congratulations to Malala Yousafzai of Pakistan, who is sharing the Nobel Peace Prize with Kailash Satyarthi of India for their work in helping to promote universal schooling and protecting children worldwide from abuse and exploitation. As I’ve noted often in these pages, now 17-year-old Malala is a true inspiration and to her detractors in Pakistan, get over it. She will lead her country one day.

---

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

God bless America.
---

Gold closed at $1221
Oil $85.82...lowest weekly close since Nov. 2012

Returns for the week 10/6-10/10

Dow Jones -2.7% [16544]
S&P 500 -3.1% [1906]
S&P MidCap -4.4%
Russell 2000 -4.7%
Nasdaq -4.5% [4276]

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

Dow Jones -0.2%
S&P 500 +3.1%
S&P MidCap -2.8%
Russell 2000 -9.5%
Nasdaq +2.4%

Bulls 45.4
Bears 14.1 [Source: Investors Intelligence...last week I had repeat #s from the week before for about 24 hours after posting. If you missed it, the correct figures were then added, 47.5 / 15.1]

Have a great week. I appreciate your support.

Brian Trumbore