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11/15/2014

For the week 11/10-11/14

[Posted 10:00 PM ET, Friday]

Edition 814

Washington and Wall Street

I can take a little break on the economic front this week, which is good because I have a lot on China down below. It was an extremely light stretch for data in the U.S. with the only indicator worth reporting, October retail sales, up 0.3%, better than expected. It was also a light week for earnings as well and I cover the major stories in the “Street Bytes” section. In a nutshell, the markets were refreshingly dull.

Save for the real story for weeks now, the rapid decline in the price of oil. U.S. motorists are paying an average of $2.92 a gallon, according to the Lundberg Survey (for the two weeks ended Nov. 7...so probably a further decline with this weekend’s update), or a savings of about $52 billion for U.S. consumers [Bloomberg], which should be music to retailers’ ears.

I keep gas pump receipts so I can look back at the price and end of July at my favorite station (NP Fuel...NP standing for New Providence), the price for regular was $3.59 on July 26 and is now $2.89. Let’s see, 70 cents times 15 gallons...$10.50! Why that’s almost a 12-pack of domestic, sports fans! [Or a couple of containers of blackberries...which I freeze to eat with my cottage cheese at lunch...just to show you it’s not always about the beer.]

Bottom line, the break in oil and gasoline prices is super...as long as it doesn’t go much further and begin to impact production in the U.S., seeing as our energy boom has been a massive job creator...good-paying jobs.

According to the International Energy Agency’s latest monthly report, “Supply and demand balances suggest that the price rout has yet to run its course. Barring any new supply disruption, downward price pressures could build further in the first half of 2015.”

“It is increasingly clear that we have begun a new chapter in the history of the oil markets,” the IEA added.

Now you have to take a sweeping statement like this with a grain of salt. These longer term forecasts are very seldom right. In fact, historically they can be very wrong.

But as Anjli Raval of the Financial Times writes: “Weaker than expected demand has coincided with relentless growth in U.S. production and a surplus of oil in the Atlantic Basin as well as the North Sea. A stronger dollar has also helped to push the price of Brent* [Ed. the global benchmark...I quote West Texas Intermediate, the U.S. barometer] lower.

*Brent finished the week at $79.41; WTI at $75.82 (after hitting $74.50).

Crude prices are down 30% since mid-June.

Antoine Halff, author of the IEA report, added: “In Europe and elsewhere, while there is growth, this is not coinciding with wage growth and consumption growth.

“On the supply side, even if we see disruptions, or a pullback in production, prices will rebound maybe into the $80s or $90s, but there will be more price pressures before we get there.”

As noted the past few weeks, ministers from OPEC are meeting at the end of the month in Vienna to determine a response. There have been conflicting statements out of Venezuela as to the severity of power outages that struck its main oil refining complex on Monday, and whether the refineries are back online.

And we all know how dependent the Russian economy is on crude. Russian President Vladimir Putin was previously quoted by news agency RIA Novosti as saying, “If world prices stay at the level of $80, all production will collapse.” With oil at a four-year low, Prime Minister Dmitry Medvedev said on Thursday, “A serious drop in the price of oil could require us to reconsider the basic tenets of our budget policy.” Not that most of us give a hoot what happens to the Russian economy these days.

Meanwhile, while equity markets have been sanguine after that recent bout of high volatility, stocks are far from cheap and when third-quarter earnings have all been tallied up, FactSet forecasts EPS growth of 7.7%, solid, but that old bugaboo, revenues, will be up only 3.8% [after rising 4.4% in Q2; 4.8% the last five years.] So it remains the same old game: How much more can Corporate America wring out (i.e., cost-cutting) to generate earnings growth without a true pick-up in revenues? How much more financial engineering will occur before reality sets in? Or will revenues finally pick up because, for one, Europe and Asia rebound in 2015? [Not that likely.]

Finally, this could be a tumultuous week in Washington, if President Obama follows through on his threat to use his executive powers to push through changes to the nation’s immigration system. At a news conference in Malaysia (after his trip to China), the president said he had given the House more than a year to come up with a bill but they had failed to do so.

“I said that if in fact Congress failed to act I would use all the lawful authority I possess to try to make the system work better. And that’s going to happen before the end of the year.”

Well no sense in me commenting in any fashion as yet. Should he act in the next few days, as some believe, I’ll cover it all next review. In the meantime, Republicans seem split on how to respond.

Europe and Asia

Some important news for the European Central Bank to digest. First, industrial production for the month of September in the eurozone was up 0.6% over August, which is OK, but some components of the reading were weak.

Then you had a preliminary figure on inflation for the EA-18, up an annualized 0.4% in October (vs. 0.3% in September), still far from the 2% target set by the ECB and just about every other major central bank these days. Greece still has deflation (-1.8% ann.), as does Spain (-0.2%).

But the big data point was the first look at third-quarter GDP for the eurozone and it was up 0.2% over the second quarter (which in turn was up 0.1%), according to Eurostat, the EU’s statistics arm. [GDP is up 0.8% over Q3 2013.]

Germany came in with Q3 GDP up 0.1%, so it avoids recession after a -0.1% performance in the second quarter. France was up a surprising 0.3% (after -0.1% in Q2), but don’t go popping any champagne corks just yet in Gay Paree. Spain was up 0.5%, solid. Greece rebounded to up 0.7%. 

But Italy was down, -0.1%, after -0.2% in Q2, so it remains mired in recession; with GDP falling 11 of the last 13 quarters. This can’t continue, or as I’ve been warning it won’t matter what the ECB does on the bond-buying front, investors will flee Italian paper.

For now, though, Euro bond markets remain quiet, and at historically low levels.

The German 10-year closed the week at 0.78%; France 1.14%; Spain 2.12%; Italy 2.34%; Portugal 3.16% and Greece, the big exception, up a few ticks on the week to 7.83%.

But next month at the ECB’s end of year confab, it will be put up or shut up time. The still weak GDP data for the continent strengthens ECB President Mario Draghi’s hand should he opt to expand his asset purchase program as expected.

A few other EU bits:

Non-euro Britain reported the unemployment rate for the three months thru September came in at 6%, unchanged, with wages up 1.0% annualized.

And the European Court of Justice ruled member states can deny certain payments to unemployed EU citizens who move to that country just to claim benefits, or what is called ‘benefit tourism.’ As reported by the BBC: “The court said Germany was right to deny an unemployed Romanian woman a particular allowance because she showed no sign of seeking work.” 

Wolfgang Munchau / Financial Times

“I do not have the foggiest idea what the probability of a break-up of the euro was during the crisis. But I am certain that the probability is higher today. Two years ago forecasters were hoping for strong economic recovery. Now we know it did not happen, nor is it about to happen. Two years ago, the eurozone was unprepared for a financial crisis, but at least policy makers responded by creating mechanisms to deal with the acute threat.

“Today the eurozone has no mechanism to defend itself against a drawn-out depression. And, unlike two years ago, policy makers have no appetite to create such a mechanism.

“As so often in life, the true threat may not come from where you expect – the bond markets. The main protagonists today are not international investors, but insurrectional electorates more likely to vote for a new generation of leaders and more willing to support regional independence movements.

“In France Marine Le Pen, the leader of the National Front, could expect to win a straight run-off with President Francois Hollande. Beppe Grillo, the leader of the Five Star Movement in Italy, is the only credible alternative to Matteo Renzi, the incumbent prime minister. Both Ms. Le Pen and Mr. Grillo want their countries to leave the eurozone. In Greece, Alexis Tsipras and his Syriza party lead the polls. So does Podemos in Spain, with its formidable young leader Pablo Iglesias.

“The question for voters in crisis-hit countries is at which point does it become rational to leave the eurozone? They might conclude that it is not the case now; they might oppose a break-up for political reasons. Their judgment is prone to shift over time. I doubt it is becoming more favorable as the economy sinks deeper into depression.

“Unlike two years ago, we now have a clearer idea about the long-term policy response. Austerity is here to stay. Fiscal policy will continue to contract as member states fulfil their obligations under new European fiscal rules. Germany’s ‘stimulus program,’ announced last week, is as good as it gets: 0.1 percent of gross domestic product in extra spending, not starting until 2016. Enjoy!”

Speaking of Spain, Catalonia held a non-binding vote on independence last weekend and 80% voted in favor. More than two million out of 5.4 million eligible voters took part.

The government in Madrid called the exercise “fruitless and useless.”

Opinion polls suggest 50% of Catalans are in favor of full independence, with 80% wanting an official referendum.

China: At the Asia-Pacific Economic Cooperation forum (APEC), China’s commerce minister said there was agreement on a study to eventually create a regional free-trade pact. President Xi Jinping then told executives at a CEO gathering in Beijing that outbound investment will total $1.25 trillion over the next 10 years, 500 million Chinese tourists will go abroad, and the government is going to revive the ancient Silk Road trade route between Asia and Europe.

“China’s development will generate huge opportunities and benefits and hold lasting and infinite promise,” Xi said. “As China’s overall national strength grows, China will be both capable and willing to provide more public goods for the Asia Pacific and the world.” [Bloomberg]

The above has been touted as China’s “Marshall Plan.”

President Xi basked in the glow of APEC. But Washington is trumpeting the Trans-Pacific Partnership, a free trade idea that excludes China, while Beijing is pushing for an alternate Free Trade Area of the Asia Pacific. World leaders then agreed to work on China’s proposal.

Then you had the agreement between the U.S. and China to reduce greenhouse gas emissions, with the U.S. agreeing to cut its emissions by 26-28% by 2025, compared with 2005 levels, while China set a target for its emissions to peak by 2030.

“This is a major milestone in the U.S.-China relationship,” President Obama said. “It shows what’s possible when we work together on an urgent global challenge.”

But China agreed to nothing! Nothing specific.

Editorial / Wall Street Journal

“The climate-change campaign against fossil fuels has been having a hard time with democracy. Voters in the U.S. support fracking and the Keystone XL pipeline, Australia repealed its carbon tax, and frustration with green energy costs is rising across Europe. So perhaps it’s not surprising that President Obama has turned to a dictatorship for help with his anti-carbon ambitions.

“In that sense, the emissions accord sealed Tuesday night between the U.S. and China is a perfect reflection of the mindset of Western climate-change activists. Cheap and abundant energy is popular among Americans because it raises living standards and helps the economy grow.

“The romance of the fresh princelings of Beijing is that they needn’t abide such barriers to enlightened governance as elections, a free press, transparency, the rule of law and two political parties. They can simply order economic transformation in the next five-year plan, and censor any dissenters as Al Gore wants to do in the U.S. Thus in China Mr. Obama has found the ideal climate-change partner: A technocratic elite that can instruct the bourgeoisie how they must light their homes and commute to work....

“Under the nonbinding, no-detail agreement, Supreme Leader Xi Jinping promises ‘to intend to achieve the peaking of CO2 emissions around 2030,’ and then maybe after that to decline.”

As in a giant ‘whatever.’ China already had plans to shift from dirty coal to nuclear power over the next 15 years. Like whoopty-damn-do.

As the Journal continues:

“(This) accord is less about China than American climate politics....Mr. Obama will now claim the Middle Kingdom is signed onto his anti-carbon agenda, even if its promises are distant and vague....

“So using the Sino-American deal as cover, Mr. Obama will now say he is obliged to impose a new burst of aggressive carbon regulations, no matter the harm to U.S. growth....

“Mr. Xi must have been delighted to see a U.S. President agree to make America less economically competitive in return for rhetorical bows to doing something someday about climate change.”

Following the announcement the U.S. and China had reached the climate change agreement, Presidents Obama and Xi held a joint press conference, though Xi took offense at the suggestion he was supposed to answer a question from the media.

The Financial Times reported that “After weeks of wrangling, in the end the two sides agreed to take a single question each, with the New York Times told to direct its question to Mr. Obama and the English-language China Daily given a prepared question to ask Mr. Xi.”

Jami Anderlini of the FT notes this is but one example “of the fundamental differences that bedevil the Sino-U.S. relationship.

“The two sides are essentially engaged in a clash of exceptionalisms, with both leaders talking past each other to their own people and trying to prevent very different versions of the relationship.”

The press conference was not broadcast or reported in China and while U.S. officials declared the mini-summit between the two leaders a great success, pointing to the climate change and technology and extended visa agreements, “Chinese media barely mentioned these...and instead focused coverage on something very different.

“According to China, the two presidents had agreed to advance and develop a ‘new type of great-power relationship’ based on mutual respect and collaboration as equal ‘great powers.’” [Jami Anderlini / FT]

Benny Avni / New York Post

“Obama’s plan to revive America’s Asian alliances seems to have fallen by the wayside. Our friends there, increasingly in fear of being left behind while China rises, have no choice but to kiss Beijing’s hand.

“America used to be Asia’s predominant power, something Obama promised to maintain a few years ago in his much-heralded ‘pivot to Asia.’ But the pivot never happened, and Xi is set to capture that top spot. He sure covets it....

“Xi surprised even the most hopeful of greens on Wednesday by signing a non-binding deal with Obama to limit the two countries’ carbon emissions.

“The pact would actually start cutting U.S. carbon emissions now (harm to our economy not yet fully calculated), while China stops the growth of its emissions by 2030....

“Obama and Xi did sign a genuine win-win for both nations, assuming it actually materializes: a $1 trillion information-technology deal that would drop tariffs between the U.S. and China.

“As Obama said in Wednesday’s press conference with Xi, this week’s conversations ‘gave us the opportunity to debunk the notion that our pivot to Asia is about containing China.’

“Wait, what? The fact is the rest of Asia is desperately looking for someone to contain Xi. But time and again Obama has failed to fully side with Japan, the Philippines, South Korea, Vietnam, Taiwan and other U.S. allies as China ratcheted up its territorial disputes with them.”

Well there’s more...the Communist Party mouthpiece, the Global Times, dissed President Obama’s midterm election results in an editorial that read in part:

“U.S. public opinion has downgraded Obama. Former President George W. Bush met with criticism due to his failure in the war on terror.

“Obama always utters ‘Yes, we can,’ which led to the high expectations people had for him. But he has done an insipid job, offering nearly nothing to his supporters. U.S. society has grown tired of his banality....

“What’s worse, Obama is in the midst of a time when partisan politics is becoming more extreme.

“That party interests are placed higher than the interests of the country and its people is an inherent shortcoming of Western political systems. The problem is particularly acute when the U.S. undergoes difficulties. Cohesion in American society is diminishing....

“With China’s rise, we gradually have the ability to have a clear understanding of the U.S. The country is too lazy to reform. U.S. society selected Obama, but there is no great American president in this era.”

Can’t disagree with that last line, even if it is coming from the Chinese Communist Party. It’s been a while since we had a good one, for sure.

---

A few economic notes on China. China is giving investors greater access to its stock market with a link between Shanghai and the Hong Kong exchanges, which will allow all investors to buy shares on the Shanghai Stock Exchange, while also permitting wealthy investors in mainland China to buy stocks listed in Hong Kong. The trading starts this Monday, Nov. 17.

Separately, factory-gate prices (producer prices as we know them) fell a 32nd consecutive month, down 2.2% in October from a year earlier. Consumer prices rose just 1.6%, well below the 3% official target.

Also, factory production rose just 7.7% in the month of October vs. a year ago, the second-weakest pace since 2009. Retail sales were up 11.5% for the month, while fixed asset investment increased 15.9%. In boom times this last figure was consistently in the 20s.

Electricity output grew 1.9% from a year earlier in October, an important barometer, which compared with September’s 4.1% increase, according to the National Bureau of Statistics.

President Xi told an audience of state leaders and business executives that China’s economic downturn was not “scary,” while even annual expansion slowing to 7% would still be fast.

Xi said China’s growth would be supported by innovation and urbanization. Beijing aims to move about 20 million farmers each year to cities in an attempt to raise household incomes and narrow the urban-rural gap. Plus the soil is all tainted anyway.

Speaking of pollution, the government’s massive effort to clear the air prior to all the world leaders showing up in Beijing worked. But you can be sure the tiny particulates that can kill will be returning shortly. There were mandated factory shutdowns and car bans put in place.

Turning to Japan, the big news concerned a handshake between Prime Minister Shinzo Abe and President Xi in Beijing. It wasn’t known until a day or two before if this ice-breaking move (if you can call it that), would take place. The two clearly don’t like each other, or at least Xi can’t stomach Abe.

But they need each other...their economies need each other.

Xi called on Japan to be cautious in its military and security policies and abide by accords reached between the two nations for improving the Sino-Japanese relationship.

For two years it’s been a tension convention over the island dispute in the East China Sea and President Xi’s body language was described as “calculatedly icy.”

As for Japan’s economy, the Nikkei stock index likes Abenomics, climbing another 3.6% this week to the highest levels since 2007, as the expectation is the government will hold off on another hike in the consumption tax next October, while Abe may call for a snap election to strengthen his support.

Japan reports its first reading on third-quarter GDP on Monday and the estimate is for an annualized rate of 2.0%, which is deemed far below what would be necessary for Abe to consider a further sales-tax increase. [Remember, GDP fell 7.1% ann. in the second quarter because of April’s 3% tax hike.]

On the other hand, the consumption (VAT / sales tax) hikes were designed to instill confidence in investors, globally, that Japan is doing something about its all-universe record debt load of 240% of GDP.

Street Bytes

--So it was dullsville on Wall Street, but the Dow Jones rose 0.3% to 17634, hitting a record 17652 on Thursday, while the S&P 500 finished at another record high itself on Friday of 2039.82. I have to note the decimal points because the S&P closed at either 2038 or 2039 all five days this week. Now that’s dull...or maybe spooky.

For its part, Nasdaq rose 1.2% to 4688, it’s high for the year and highest mark since March 2000. The major averages have now risen four straight weeks, after declining in each of the previous four.

--U.S. Treasury Yields

6-mo. 0.06% 2-yr. 0.51% 10-yr. 2.32% 30-yr. 3.05%

As in Europe, the U.S. Treasury market was virtually unchanged on the week.

--On the Ebola front, aside from a heart-wrenching segment on “60 Minutes” last Sunday, there has been little news, which doesn’t necessarily mean things are improving on a broad scale.

Mali confirmed a second outbreak, a potentially threatening one according to global health authorities, and just a reminder, heretofore we’ve been talking almost solely about Liberia, Guinea and Sierra Leone. An imam who fell ill in Guinea, traveled to Mali for better treatment at a private clinic in Bamako, the capital. He then died on Oct. 27.

Donald G. McNeil Jr. / New York Times

“Because of his status, (the imam’s) body was washed at a large mosque and returned to Guinea for burial after a funeral at another mosque.

“The Pasteur Clinic failed to diagnose Ebola as the underlying cause of the kidney failure for which it was treating the imam. Kidney failure is a possible complication of late-stage Ebola.

“The outbreak was detected only after a nurse at the clinic fell ill and died, and the chief WHO  representative in Mali heard from his counterparts in Guinea that members of the imam’s family were dying.

“ ‘It was a real failure by the clinic,’ the WHO representative, Dr. Ibrahima Soce Fall, said in a telephone interview.

“Now the clinic is closed and under quarantine – as are the mosque in Bamako, one or two other Malian clinics where the imam was treated, and the family compound where the nurse lived.”

Alexandra Zavis of the Los Angeles Times added: “(The imam) fell ill on Oct. 17 and was admitted the following day to a private clinic in the Guinean mining town of Siguiri, near the country’s border with Mali, the WHO said. When his condition did not improve, he was transferred to another clinic across the border, then traveled by car with four family members to seek care at the Pasteur Clinic.

“The imam’s first wife, who was in the car with him, died of an undiagnosed disease on Nov. 6, as did his daughter on Monday (Ed. Nov. 10). The other people in the car – the imam’s brother, second wife and a son – are receiving treatment at an Ebola unit in Gueckedou, Guinea.

“The son has tested positive for Ebola, increasing the likelihood that the other deaths in the family were caused by the virus, the WHO said.”

Oh brother. Yes, it only takes one misdiagnosis, one improperly handled body, for all hell to break loose all over again.

Separately, Liberia lifted its three-month-old state of emergency, even as some health officials warn that while the number of Ebola cases has dropped in the capital of Monrovia, it could be moving into new areas of the country, or, as we see above, new countries.

The WHO said this week that the number of cases overall had grown to 14,098; 5,160 of them fatal. But this doesn’t take into account the victims who never make it to a clinic.

Doctors Without Borders says the virus is moving into rural areas as people flee the big cities.

--Regulators in the U.S., Britain and Switzerland have ordered five big banks to pony up $3.3 billion in penalties as part of the global probe into the rigging of key foreign-exchange markets last year. 

Switzerland’s UBS AG was ordered to pay the most at $800 million, Citigroup will pay $668 million, JPMorgan Chase & Co. $662 million, Royal Bank of Scotland $634 million and HSBC is paying a fine of $618 million.

Other banks and individuals could follow, including Barclays, which is still negotiating a settlement, and Deutsche Bank.

The U.S. Justice Department and Britain’s Serious Fraud Office are conducting criminal investigations. Some also believe this is just the beginning in terms of litigation. The Swiss regulator, FINMA, penalized UBS an additional $139 million, for example.

The foreign exchange market, with $5.3 trillion...with a ‘T’...worth of currencies traded daily, dwarfs all other markets. The “fixes” (“spot” market and “spot benchmarks”) are used by a wide variety of businesses, both financial and non-financial, to help value assets, among other things, let alone manage risk. So it’s serious when there’s attempted manipulation of the rates. 

As the Commodity Futures Trading Commission (CFTC) director of enforcement Aitan Goelman noted: “The setting of a benchmark rate is not simply another opportunity for banks to earn a profit. Countless individuals and companies around the world rely on these rates to settle financial contracts.”

Both the CFTC and the U.K.’s Financial Conduct Authority (FCA) found manipulation has been going on for several years, with the FCA saying the failings occurred between January 2008 and October 2013. The CFTC is pinpointing 2009-2012.

As for where this money being collected is all being spent, the Financial Times’ Gillian Tett notes that in the past with “misdemeanor fines,” in the case of the U.K. the money went to worthy causes such as soldier rehabilitation programs.

But “the fines now being imposed by western regulators are dramatically higher than anything seen before, (and) the money is not being spent in a transparent way. That flies in the face of politicians’ demands for finance to become more open. It also risks undermining the search for a sense of justice – and closure.”

In the U.S., fines collected by the likes of the CFTC tend to be handed over to the Treasury where “it vanishes into a general budget pot.”

--In the third quarter, the world’s biggest investment banks continued cutting costs by shedding 4% of their staffs. Much of this comes from European banks Barclays, UBS and Credit Suisse. [Wall Street Journal]

--So you are reading this column on the Internet and on Monday, President Obama urged the Federal Communications Commission to set net neutrality rules ensuring the free flow of content on the Net. “(Neither) the cable company nor the phone company will be able to act as a gatekeeper, restricting what you can do or see online,” said the president.

An open Internet is a win-win for a company like Netflix, and probably for startups working on ways to connect everything from thermostats to cars.

But, who has been paying for the build-out of the Net and broadband? The big companies. You think the small guys can afford this? Of course not.

Yet under Obama’s proposal, Netflix, Amazon.com and YouTube (Google) would be on equal footing with the Internet providers in terms of speed, with the providers unable to give superior service to those who would pay up for it. Startups would benefit, even if they don’t really have the capital because they would have equal access to the pipes.

But we have a long ways to go on this.
 
Editorial / Wall Street Journal

“So much for the will of the voters. Before last Tuesday’s elections, President Obama said that while he wasn’t on the ballot, his policies were. Now that the American people have rebuked those policies, Mr. Obama is attempting another federal power grab over an innovative U.S. industry.

“On Monday he urged the Federal Communications Commission to apply to the Internet century-old telephone regulations designed for public utilities....Mr. Obama endorsed the regulation of Internet access providers under Title II of the Communications Act of 1934.

“These rules weren’t at the cutting edge of innovation even in the 1930s. As former FCC attorney Randolph May notes, this regulatory framework was written into the Interstate Commerce Act of 1887 to oversee monopoly railroads....(Now) Obama has decided, in his market wisdom, that these rules should apply to the Internet.

“When the FCC floated this idea in May, we called it ‘ObamaCare for the Web,’ but that was too kind. The Obama Internet plan would treat cable, telephone and wireless broadband networks as common carriers subject to federal price controls and myriad other regulatory restrictions....

“Mr. Obama is trying to exert in his final two years in office the same political control over the Internet that he has already imposed on health care and banking. If he succeeds he’ll set a terrible precedent for despots around the world who also want to assert political control over cyberspace. The Obama administration is already ceding greater control over the Internet registry ICANN to foreign outfits that could easily become fronts for repressive regimes.

“If the FCC caves under White House pressure, Congress has every right to defund this regulatory overreach before it becomes a clear and present danger to the U.S. economy and global freedom.”

One more note. Regarding Comcast’s acquisition of No. 2 Time Warner Cable, President Obama’s comments have thrown a new wrench into this deal as Comcast continues to seek FCC approval. More concessions will no doubt now be demanded centering around net neutrality.

--The U.S. Postal Service said its computer systems were hacked and that names, Social Security numbers and addresses may have been compromised; namely, more than 800,000 employees, including top directors and regulators. The Chinese are suspected through digital evidence.

--But wait...there’s more! The National Oceanic and Atmospheric Administration (NOAA), which operates the National Weather Service, said on Wednesday that four of its websites had been hacked, with NOAA blaming China. NOAA staff apparently detected the attacks quickly and responded.

--Halliburton Co. is in talks to acquire fellow oil-field services giant Baker Hughes, though if an agreement is reached regulators could step in. After the Journal first broke the news of the talks, shares in both rose sharply and the market valued the combination at $74 billion.

Halliburton and Baker Hughes are the second- and third-largest oil-field services companies in the world by revenue, respectively, behind Schlumberger Ltd.

A merger of the two, amid plunging oil prices, would allow them to better weather the current storm due to the substantial cost savings generated.

--The House of Representatives voted again to approve construction of the Keystone XL pipeline, 252-161. The Senate is expected to vote on Tuesday. To be continued...

--Cisco Systems Inc. profit fell 8.4% in its fiscal first quarter as revenue rose just 1.3%. Cisco, which announced plans in August to cut 6,000 jobs, forecast revenue for the quarter ending in January would rise between 4% and 7%.

The networking equipment giant said it was hurt by slower sales to a number of U.S. telecom carriers. The company also continues to point to weak sales in China, Brazil, Mexico, India and Russia, with sales declining a whopping 33% in China.

--Ford Motor unveiled its aluminum-bodied F150 pick-up truck on Tuesday. It’s a huge gamble, the F150 being the most popular vehicle in North America for the last 32 years and accounting for a lion’s share of the automaker’s profits.

The new body – which has cut the vehicle weight by 700 lbs., is supposed to reduce fuel consumption by between 5% and 20%; important because of Ford’s obligations under the government’s Corporate Average Fuel Efficiency rules that require carmakers to nearly double their fleets’ average fuel efficiency from 2012’s 27.5 mpg to 54.5 in 2025.

But will aluminum sell? Stay tuned.

--The deal with the Takata Corp. air bags is getting worse, as Chairman Shigehisa Takada (sic) hasn’t been in the public eye since last June, and that was at an annual shareholder meeting closed to the media, as reported by Bloomberg.

Takata is an 81-year-old company but if the allegations are true, that top executives knew of the dangers of the air bags and then told others to be silent, that’s life in prison, to me. 

The National Highway Traffic Safety Administration has given Takata until Dec. 1 to answer questions under oath, including details going back to 2000. The devices have been linked to at least four deaths, with Honda saying it discovered a fifth this week, the first death outside the U.S., a case in Malaysia.

A Senate committee is going to be convened next week to question Takata officials. Takata has also been subpoenaed by the U.S. District Court of New York.

--Marc Lifsher / Los Angeles Times:

“A decade ago, many of California’s public pension plans had plenty of money to pay for workers’ retirements.

“All that has changed, according to a far-reaching package of data from the state controller (John Chang)...

“The City of Los Angeles Fire and Police Pension System, for instance, had more than enough funds in 2003 to cover its estimated future bill for workers’ retirement checks. A decade later, it is short $3 billion.

“The state’s pension goliath, the California Public Employees’ Retirement System, had $281 billion to cover the benefits promised to 1.3 million workers and retirees in 2013. Yet it needed an additional $57 billion to meet future obligations.

“The bill at the state teachers’ pension fund is even higher: It has an estimated shortfall of $70 billion.”

Of course this comes at a time “of growing anger from taxpayers over the skyrocketing cost of public workers’ retirements.”

--Alibaba CEO/Founder Jack Ma was interviewed by CNBC’s David Faber and Ma said, “I’m not very happy,” despite being China’s richest man. “Too much pressure. People say, ‘Well, Jack, rich...is good.’”

“It’s a great pain because when you’re [the] richest person in the world, everybody [is] surrounding you for money,” he said. “Today when I walk on the street, people look at you in a different [way]. I want to be myself.”

Meanwhile, Alibaba rang up more than $9 billion in sales during China’s biggest online shopping holiday, Tuesday...what is called “Singles Day.” Back in the 1990s, some college students thought this up as an anti-Valentine’s Day, and you were supposed to buy something for yourself. 11/11 was selected for numerology reasons.

But to put the $9 billion in perspective, in 2012, Alibaba posted sales of $3 billion on Singles Day. Last year it was $5.71 billion. Tuesday was $9.32 bn. Smile, Jack!

The Communist Party mouthpiece, the Global Times, said in an editorial:

“A super shopping holiday that the world has never seen before has taken place....

“The Double Eleven, a ‘festival’ made by Chinese people, is now shoulder to shoulder with Western festivals like Christmas or Valentine’s Day, and perhaps even overpowers them.”

Eegads.

--The Bank of Russia on Monday lowered its growth outlook to just 0.3% this year, while inflation is likely to exceed 8%. The central bank also now expects net capital outflows of $128 billion in 2014, compared to earlier expectations of some $100 billion.

--Wal-Mart Stores Inc. posted earnings and revenues that beat Wall Street’s expectations, with same-store sales rising just 0.5%, though this was the first increase in seven quarters. The company did say it was beginning to see the benefits of lower gas prices. The retailer expects fourth-quarter earnings to come in a little less than the Street had expected.

But the shares rallied on the optimism concerning the consumer.

Separately, Wal-Mart has decided to ditch the one-day-only “Black Friday” sales model and instead will spread out its best offers over a five-day period beginning the last week of November into December. Some of the deepest discounts will also be online.

So no more stampedes.

--Macy’s cut its profit and sales forecasts for the year. Same-store sales declined 1.4% in the third-quarter, though the shares rallied because profit rose 23% to $217 million. 

--Nordstrom reported solid earnings, $142 million, in line with expectations. Same-store sales increased a respectable 3.4%

--Warren Buffett’s Berkshire Hathaway Inc. is acquiring Duracell from Procter & Gamble Co. P&G had previously announced it would split off Duracell as part of its plan to shed up to 100 brands.

Berkshire has owned a large stake in Duracell through its old position in Gillette, which was acquired by P&G in 2005.

--McDonald’s said its October global same-store sales declined 0.5%, better than expected. September’s had fallen 3.8%.

Sales in the Asia/Pacific, Middle East and Africa region fell 4.2%. In the U.S. they were off 1%.

--Pizza Hut announced a total makeover for its menu, “the biggest change the pizza category has ever seen,” pronounced the company, with new specialty pizzas and quality ingredients.

[Pizza Hut’s parent company is Yum Brands...think KFC and Taco Bell.]

--The Southern California housing market continues to show signs of normalization. Sales in the six-county Southland fell 4.4% in October from a year earlier, according to CoreLogic DataQuick, with the median price slipping 0.7% from September to $410,000. Compared with October 2013, the median price rose 6.8%, the smallest 12-month gain since June 2012. In 2013, prices were rising at a 20% clip, which obviously wasn’t sustainable.

But with the economy continuing to improve and still historically low mortgage rates, sales should rebound next spring, but not in a big way unless wage gains pick up.

--PIMCO paid former Chief Investment Officer Bill Gross a bonus of $290 million in 2013, even as his mammoth Total Return Fund trailed its peers, according to documents reviewed by Bloomberg. Mohamed El-Erian, the former CEO who worked with Gross, picked up a cool $230 million last year.

By comparison, Laurence Fink, CEO of BlackRock Inc., the world’s biggest money manager, received $22.9 million in 2013 compensation. A spokesman for PIMCO disputed the figures but declined to specify the firm’s objections.

Oh, I long heard of such riches when I was affiliated on the retail side of the PIMCO operation. The numbers don’t surprise me in the least. I left in 1999 and there were outrageous sums being bandied about then when it came to the West Coast operation. It’s all about the profit sharing plan they have and when you manage $2 trillion, a lot of fees are generated.

--In another downer for Atlantic City, United Airlines is halting service to A.C. International Airport in December after just seven months. United was flying there from Chicago and Houston. Only low-cost airline, Spirit Airlines, will serve A.C.

--The chairman of energy giant Continental Resources Inc., Harold Hamm, was ordered by an Oklahoma judge to pay his ex-wife nearly $1 billion in cash and prizes to end their epic divorce proceedings.

Hamm gets to keep complete control of the oil company, while Sue Ann Hamm receives less than the “$billions” she was seeking.

Gee, Sue Ann...I’m fine with a $billion. And I’ll stay in New Jersey and you can do whatever you want. Whaddya say?

Harold Hamm owns 70% of the company, valued at around $14 billion.

--Finally, we note the passing of Jim Lebenthal, 86. He was a fixture on television in the New York area, a muni-bond showman, with ads touting the benefits of investing in public works that were “built by bonds.” 

Foreign Affairs

Iraq / Syria / ISIS: Islamic State leader Abu Bakr al-Baghdadi re-emerged after rumors of his death or injury in a coalition airstrike, calling, in an audio tape, for attacks against the rulers of Saudi Arabia, while saying his self-declared caliphate was expanding. Baghdadi also said the U.S.-led military campaign was failing and called for “volcanoes of jihad” the world over.

While the speech wasn’t independently confirmed as yet, it did carry a reference to the Nov. 7 announcement by President Obama that the U.S. would send 1,500 more troops to Iraq.

“We announce to you the expansion of the Islamic State to new countries, to the countries of the Haramayn [Saudi Arabia], Yemen, Egypt, Libya, Algeria....

“O soldiers of the Islamic State...erupt volcanoes of jihad everywhere. Light the earth with fire against all dictators.”

Lovely. Then, referring to the U.S.-led coalition’s action against ISIS, Baghdadi said: “Despite this Crusade campaign being the most fierce and severe of all, it is the greatest failure.”

“We see America and its allies stumbling in fear, weakness, impotence and failure.” [Associated Press / Reuters / Daily Star]

Well, it was a good week for ISIS on the propaganda front, especially if that was indeed Baghdadi. Al-Qaeda (read Nusra Front) and ISIS agreed at a meeting in northern Syria to stop fighting each other and work together against their opponents, though this is an arrangement of cooperation, not a formal alliance, it would seem. In Egypt, their main terror group pledged its allegiance to ISIS.

And ISIS announced plans to mint its own money. If it’s ever accepted at my Dunkin’ Donuts, I’m guessing that wouldn’t be a good sign for America as we know it.

So this was a week where Defense Secretary Chuck Hagel and Gen. Martin Dempsey, chairman of the Joint Chiefs of Staff, appeared before the House Armed Services Committee, with Gen. Dempsey saying an expanded role for the American advisers is possible, though both Hagel and Dempsey continue to maintain there are no current plans to introduce ground troops for a direct combat role in Iraq.

Hagel also testified that the U.S. and its allies have made advances against ISIS [we learned Friday the Iraqi military retook a key oil refinery], that its advance “has stalled and in some cases been reversed” by U.S.-backed Iraqi, Kurdish and tribal forces backed by the U.S. and the coalition.

The Britain-based Syrian Observatory for Human Rights said U.S.-led coalition airstrikes against the Islamic State and other extremists in Syria have killed more than 860 people, including 746 ISIS militants, while another 68 were from the Nusra Front. At least 50 civilians were killed.

But if the Nusra Front aligns itself with ISIS for the purposes of fighting together in northern Syria, for starters, that means they would be going after the very “moderate” rebel factions the U.S. is attempting to support. The rebels are already weak and now they would have two groups gong after them.

As for Bashar Assad, I wrote weeks ago the U.S. strategy was incoherent. This week Hagel and Dempsey reiterated the U.S. seeks to build a moderate rebel force in Syria, but now they understand it has to be comprised of more like 15,000 fighters rather than 5,000, and that it would take years to put together that size a force, yet they have to know we don’t have years. It’s just stupid.

Editorial / The Economist

“As the world’s attention stays focused on IS, Mr. Assad has increased his attacks. Between October 20th and 31st his regime carried out 850 aerial attacks – including the dropping of indiscriminate barrel bombs – on rebel-held areas, according to the Syrian Observatory for Human Rights. On October 29th the regime bombed a camp for displaced people in Idleb province. Last month it killed six local citizen journalists (compared to one killed by Islamic State), including one who died under torture after two years of detention.

“Although less attention is now being paid to the regime’s atrocities than those of its foes, human rights groups say Mr. Assad’s forces are responsible for more deaths than IS. Torture in jail continues and grows ever more grisly: Amnesty International, a lobby, has documented 31 methods of torture, many of which had not been seen for years.”

So we have ISIS and Nusra Front going after the moderates as well as Assad, Assad bombing the moderates, and for years...years...President Obama did nothing. Now, after finally deciding to act, his own administration knows the “strategy” won’t work.

Meanwhile, Iraqi Prime Minister Haider al-Abadi announced he was removing 36 commanders and installing 18 others as part of a sweeping shake-up of the military, an act to promote professionalism and “combat corruption,” as reported by the New York Times’ David Kirkpatrick. It’s not known as yet whether Abadi was just bringing in his own loyalists, which is what his predecessor, Nouri al-Maliki, did. For example, the constitution requires that top generals be approved by parliament and Abadi didn’t do that.

Finally, the UN’s refugee agency UNHCR said about 13.6 million people have been displaced by the wars in Syria and Iraq, with many going into winter without food or shelter.

The 13.6 million includes 7.2 million displaced within Syria, as well as 3.3 million Syrian refugees abroad.

In Iraq, 1.9 million have been displaced this year, on top of 1 million previously displaced, with another 190,000 leaving the country.

The vast majority of the Syrian refugees are in Lebanon, Turkey, Jordan and Iraq.

Iran: Russia agreed on Tuesday to build two new nuclear-power reactors in Iran, with another six to follow, in a deal greatly expanding nuclear cooperation between the two. Russia sees this as a way of preventing Iran from having nuclear weapons, by supplying civilian power technology that would operate under international monitoring. The U.S. grudgingly accepts this route since the nuclear fuel used at the plants, as is the case at Iran’s first civilian nuclear plant at Bushehr, is to be supplied and reprocessed by Russian companies.

But regarding the Nov. 24 deadline for an agreement on Iran’s nuclear program, all sides are signaling, after three days of talks in Oman, that negotiations could be extended further, though little was accomplished this past week, including in face-to-face meetings between Secretary of State John Kerry and his Iranian counterpart, Foreign Minister Mohammad Javad Zarif.

The key sticking point is said to be the number and type of uranium-enriching centrifuges Iran should be allowed to keep spinning in exchange for sanctions relief and rigorous inspections.

Reuel Marc Gerecht and Mark Dubowitz / Wall Street Journal

“Let’s assume the Iranian nuclear talks in Vienna fail to conclude a final agreement by Nov. 24, the already extended deadline under the interim Joint Plan of Action signed in January. Iran’s clerical regime has refused to give much ground in key areas, and the Obama administration has, so far, been unwilling to meet Iranian demands. If the White House doesn’t end November with a cascade of concessions leading to a deal, there are four paths forward. None is appealing. Two might be effective – but the president is unlikely to choose either one.”

Iran has already gotten its wish “to continue programs for uranium enrichment, long-range ballistic missiles and centrifuge development. Iran further refused to accept intrusive UN or other inspections, balked at dismantling the heavy-water reactor at Arak, and declined to discuss past weaponization research. It also won agreement that any restrictions on its nuclear program would be of limited duration. Tehran has treated the U.S. concessions to its demands as permanent – effectively making further diplomatic advances contingent on greater Western ‘flexibility.’”

So...

“First: The White House could give up on diplomacy and pre-emptively strike Iran’s nuclear sites...(but this) is highly unlikely....

“Second: The administration could give up on the current talks and default back to sanctions, but again trying to undercut their seriousness, as the president attempted to do in 2011 and 2012. Congress imposed the most economically painful measures – targeting Iran’s oil exports, central bank and access to the Swift interbank system – over his objections. The president has always hoped that ‘rationality’ would take hold in Tehran, that the regime would see the economic benefits that come with good behavior....

“Third: New, even more biting sanctions could be enacted, causing Tehran considerable pain....

“We don’t know the Islamic Republic’s timeline for a bomb.” Our intelligence is sorely lacking.

Ayatollah Khamenei could choose to accelerate the nuclear program if further sanctions were employed.

“Which brings us to option four: The White House could try to reinforce new sanctions with a credible show of military force to intimidate the Iranian regime. President Hasan Rohani has rather pleadingly confessed in speeches and in his memoirs that the Anglo-American invasion of Iraq in 2003 scared the clerical regime and led him to advocate, as Tehran’s chief nuclear negotiator between 2003-05, a tactical pause in the regime’s nuclear aspirations.

“To achieve a more lasting impression now would require a significant military operation. Only one target would serve that purpose: Bashar Assad. Syria is Iran’s most helpful ally among Arab states. Taking Mr. Assad down would let Tehran know that America’s withdrawal from the Middle East and President Obama’s dreams of an entente with Iran are over.”

But “it is hard to imagine Mr. Obama taking such action.”

So we’re likely headed to another extension. And as Mr. Gerecht and Mr. Dubowitz conclude:

“This fearful diplomacy will lead inevitably, as it did with North Korea, to the bomb.”

Needless to say, Israel, among others, is rather interested in what comes next.

And now that Congress is back, even in lame-duck fashion, expect a vigorous debate, especially in the Senate, as to what the White House is doing in its negotiations with Tehran and any tie to action against ISIS.

Israel: Tensions continued to rise here as Palestinian President Mahmoud Abbas accused Israel of launching a “religious war” at Jerusalem’s Temple Mount, with Israeli soldiers killing a Palestinian during clashes in the West Bank.

Jailed Palestinian leader Marwan Barghouti said from his cell that it was time for another intifada, “comprehensive armed resistance,” as he put it, “[which is] the shortest way to end the occupation and gain freedom.” [Jerusalem Post]

Palestinians like Abbas argue Jews should not be allowed access to pray at Temple Mount, which Muslims know as the Noble Sanctuary, though Jews are actually restricted from praying there; they just have access on a limited basis.

Prime Minister Benjamin Netanyahu said of Abbas: “He is disseminating lies to the effect that we intend, or are operating in some way, to change the status of the holy places – this is a gross lie,” he said. “Instead of educating his people for peace, Abu Mazen is educating them for terrorism,” the prime minister added, using Abbas’ nickname.

But Netanyahu faces increasing pressure in Europe to reach a peace agreement with the Palestinians as various countries, including Sweden, Britain, Ireland and France either already recognize the state of Palestine or are moving to do so with parliamentary action.

Netanyahu, as I noted last time, also has a huge issue on his border...maintaining the 1994 peace treaty with Jordan. This week he met in Amman with Secretary of State Kerry, both of whom met with Jordan’s King Abdullah (with Kerry and Abdullah in turn meeting separately with Abbas). This treaty cannot collapse, but clerics are stirring up the masses over the Temple Mount issue. 

Russia / Ukraine: Russia sent convoys of tanks, heavy arms and troops into eastern Ukraine this week, initially to bolster the separatists in preparation for a long standoff, what will be known as a “frozen conflict.”

The Organization for Security and Cooperation in Europe (OSCE) has 261 observers in Ukraine, including over 100 in the east, and it has been launching drones for aerial surveillance. But the drones are now being targeted by what the OSCE says is highly sophisticated jamming. The OSCE is most interested in what is happening around the strategic port city of Mariupol. “We’ve gone blind there,” said an OSCE representative.

Editorial / Wall Street Journal

“Russian forces are again on the march in Ukraine, and again the question before President Obama and Europe is how to stop the Napoleon of the Kremlin. Nothing they’ve tried has worked with Vladimir Putin, who has sized up Western leaders as too wobbly to resist.

“NATO Commanding General Philip Breedlove, a rare Western leader who speaks frankly about Moscow, reported Wednesday that Russian forces have again crossed the border into southeast Ukraine....This makes a mockery of September’s Minsk cease-fire accord between the insurgents backed by Mr. Putin and the Kiev government. Washington and the EU had hoped the truce would end this war, but as usual it was merely a pause that refreshes Russian appetites.

“The next steps aren’t hard to imagine. Moscow wants a land bridge from Russia proper to the Crimean peninsula that it annexed in March. ‘It is our first guess that these forces will go in to make this a more contiguous, more whole and capable pocket of land, to then hold on to it long-term,’ said Gen. Breedlove.”

So you’ll be hearing more about Mariupol, located on the main road to Crimea.

“The Western strategy assumes that Mr. Putin is persuadable. In 15 years running Russia, Mr. Putin has never stood down. The former KGB lieutenant colonel came to power on the heels of a war that he provoked against Chechnya in late 1999. He attacked Georgia in 2008. Enraged by anti-government street protests in early 2012, he revved up anti-Americanism and has increased domestic repression. His regime is promoting virulent propaganda that portrays Russia as a victim of the West....

“Above all, the West has to shed its illusions that Mr. Putin can be tamed to follow Western rules of order. He wants to dominate Eastern Europe and reclaim Russia’s status as a great power, and these goals are fast becoming essential to his continued rule. As the economy falters, nationalism and conquest may be the only ways he can maintain public support.”

Separately, Russia continues to send its bombers, fighter jets and surveillance aircraft all over eastern Europe, and elsewhere. Russian Defense Minister Sergey Shoigu said his country’s military will start conducting regular long-range bomber patrols as far as “the Caribbean and in the Gulf of Mexico.”

At week’s end, Putin was attending the G-20 summit in Brisbane, Australia, with Russian warships stationed in waters off the country’s northeastern coast. The Russian embassy on Friday said Russia’s Pacific fleet was testing its range and could be used as security for Putin, as reported by the Associated Press.

Australian Prime Minister Tony Abbott, who once said he’d physically confront Putin over the downing of Malaysia Airlines Flight 17 that killed 298 people, including 38 Australian citizens, is not amused at the Russian presence in his waters. In a press conference on Friday, Abbott said:

“One of the points that I tried to make to President Putin is that Russia would be so much more attractive if it was aspiring to be a superpower for peace and freedom and prosperity...instead of trying to recreate the lost glories of tsarism or the old Soviet Union.”

Gideon Rachman / Financial Times

“Broadly speaking, the Washington consensus seems to be that, of the two immediate crises, the one in the Middle East is more urgent than the one in Ukraine. One U.S. national security official, whose responsibilities include both Russia and the Middle East, looked incredulous when I asked him, last week, which was the more important: ‘The Middle East, by far,’ he replied....

“(For) those who worry most about Vladimir Putin’s Russia, it is the Middle East that is the dangerous distraction. The ‘Russia first’ crowd is stronger in Warsaw and Berlin than in Washington. It worries that the U.S. has been drawn back into the ‘war on terror’ and the conflicts of the Middle East, just as the dangers in Europe are mounting.

“According to this analysis, the U.S. has still not recognized the radicalism of the challenge posed by Russia. The annexation of Crimea and incursions into eastern Ukraine are, it is feared, just the start. At some point, Russia is likely to threaten more of Ukraine, or even the Baltic states. The very fact that America has ruled out military action over Ukraine – which makes the crisis seem less urgent in Washington – has inadvertently raised the stakes. As one senior European diplomat puts it: ‘Putin knows that he can always escalate to places we won’t go.’

“The darkest scenarios, being discussed behind closed doors, include Russian escalation up to and including the use of tactical nuclear weapons. It that were to happen it would, of course, be the biggest international security crisis in decades – far more significant and dangerous than another round in the 25 years of fighting in Iraq....

“Some hope that the growing pressure on the Russian economy and the ruble might dissuade the Kremlin from escalation. But an economic crisis could also make Russian behavior more unpredictable and reckless....

“My own instinct is that Russia is now the most important challenge. The rise of China is hugely significant but, for the moment, it feels like a long-term process – without any immediate risk of conflict with the U.S.

“Failing states in the Middle East and the risk of terrorism are dangers that, sadly, now feel almost normal. But an angry, nuclear-armed Russia, intent on challenging U.S. power, poses risks that we are only beginning to understand. Peace in Europe may depend on Washington striking exactly the right balance between deterrence and diplomacy.”

Andrew Nagorski / Wall Street Journal

“All this brings to mind the Russian story about two peasant farmers. Each has just one cow that is skin and bones. Suddenly, one of the cows begins to rapidly gain weight, allowing its owner to prosper because he has more and more milk to sell. Seeing that the other farmer is increasingly miserable, a fairy comes to him with the offer to fulfill one wish. ‘Kill my neighbor’s cow,’ the farmer replies.

“Vladimir Putin is that farmer. So long as he remains in power, his country is unlikely to afford its citizens the chance to prosper and live in peace.”

Germany: Foreign Minister Frank-Walter Steinmeier said Germany’s Jews were increasingly being subjected to threats and attacks at pro-Palestinian demonstrations and that “hatred of Jews” was on the rise in his country and across Europe, fueled by spiraling violence in the Middle East.

“Bold and brutal anti-Semitism has shown its ugly face again,” Steinmeier told an OSCE gathering.

North Korea: The last two Americans held here, Matthew Todd Miler and Kenneth Bae, were released following a visit by James Clapper, Director of National Intelligence. Clapper did not meet with Kim Jong Un and there was apparently no deal. [I was also incredulous to learn that Clapper, as he tells the Wall Street Journal in a weekend interview, brought along no reading material.]

South Korea: The captain of the South Korean ferry which sank in April, killing more than 300, was found guilty of negligence and sentenced to 36 years in prison.

Nigeria: A suicide bomber disguised in school uniform killed 48 students at a high school assembly in the northeastern city of Potiskum on Monday. A suicide bomb attack in the same city killed 30 one week earlier. Boko Haram is being blamed in both.

Separately, Nigeria is furious that the United States won’t sell the government “lethal” weapons to fight the Islamists. The U.S. reportedly has not done so due to Nigeria’s poor human rights record.

Random Musings

--Defense Secretary Hagel outlined actions to revamp the U.S. nuclear program after an investigation revealed “evidence of systemic problems.” $10 billion is being allocated to “address all of the underlying (issues),” Hagel said, pointing to “sometimes insufficient resources and manpower,” among other things.

An internal review found “inadequate” and “aging” equipment and facilities, as well as “a culture of excessive inspections” to the blurring of the lines “between accountability and perfection in the Air Force,” according to a summary released by the Defense Department.

This is so incredibly dangerous, especially with what Vladimir Putin is doing...probing, provoking.

In what will become the most famous instance of utter dysfunction, a review panel discovered a situation where crews working on the missile fleet relied on one copy of a special wrench, needed to attach warheads, for three bases...one wrench for over 400 missiles between the three, so the wrench was FedEx’d between them.

Defense officials recognize this is a crisis. If the president doesn’t, hopefully these same officials will blow him off and just do what’s right. Ironically, in all sincerity, this could end up being Hagel’s finest hour if he can effort swift change.

--David Brooks / The New York Times

“Twenty-five years after the fall of the Berlin Wall, the biggest surprise is how badly most of the post-communist nations have done since. There was a general expectation back then that most of these countries would step out from tyranny and rejoin the European club of prosperous nations. Most of us did not appreciate the corrosive power of distrust, and how long it would take to heal the mental scars caused by it.

“Branko Milanovic, an economist at the City University of New York, measured the wreckage in a recent essay on his blog, Global Inequality. He looked at the growth rates of post-communist countries and broke them down into four groups.”

Basket-case nations, which would include Ukraine, Georgia, Bosnia and others – about 20% of the post-communist world.

Moderate failures: Russia, Hungary that “continue to fall steadily behind the West – about 40% of the post-communist world by population.”

Third group with modest growth: Czech Republic and Slovenia.

Successes: Poland, Azerbaijan and Kazakhstan, though the last two have oil.

“There are only five countries that have emerged as successful capitalist economies: Albania, Poland, Belarus, Armenia and Estonia. [Ed. “Successful” is in the eye of the beholder.]

Brooks:

“To put it another way, only 10% of the people living in post-communist nations are living in a place that successfully made the transition to capitalism. 90% are living under failed transitions of one sort or another. This fact is already yielding screwed up politics in places like Hungary and Russia and will shape the 21st century.”

Why did some succeed and others fail? Some political leaders just made better decisions. But most important has been “the level of values. A nation’s economy is nestled in its moral ecology. Economic performance is tied to history, culture and psychology.

“Poland, for example, had been invaded throughout its history, yielding a pragmatic, survivor ethos. The Poles had a keen desire to initiate reforms on their own. Poles also had a clear sense of justice and injustice, since they had seen the Russians do things the wrong way on their own territory. They placed a high value on education and social mobility....

“Many of the ailing countries are marked by distant power relationships. Those with power – even in an office or neighborhood – are aloof and domineering. Those without power hanker for security at all costs. They’re nostalgic for the imagined stability of communism. When everything seems arbitrary and crooked, people tolerate strongman rule.

“The lesson of the past 25 years is that democratic prosperity is built on layers of small achievements 10,000 fathoms deep. Communism ripped at all that bottom-up society-making and damaged the psyches of its victims. Healing from those wounds is gradual. Progress is not guaranteed.”

--David Rothkopf / Foreign Policy

“In the wake of Tuesday’s elections, President Barack Obama cuts a lonely figure. In fact, he may end his term of office as the most isolated president since Richard Nixon. If that is the case, it will largely be a plight of his own making.

“The isolation starts with the fact that from the beginning, for the president and his campaign team, it was never about the Democratic Party. It was never about the rest of their team in the administration. It was never about a network of international relationships. It was always about one man who was the product, the messenger, the mission and the raison d’etre all wrapped into one. And for the next two years, it seems highly likely that any brave postelection faces his people try to put on this to the contrary, Obama will reap the results of his political and policy narcissism in a way that will not only be difficult for him personally but will be bad for America and its role in the world....

“(While the Democrats’ crushing defeats) were in part a repudiation of the dysfunctional status quo in Washington, they were also at their heart undeniably a repudiation of the president.

“While some will say this had little to do with Obama’s largely unhappy foreign-policy record, they too easily discount the degree to which his international errors (and the consequent damage done to America’s standing) impacted in a core way the public perception of Obama.

“Setting aside individual debates about individual policy choices, the public wants America and its leaders to appear strong. Whether in Crimea or Syria, Iraq or Afghanistan, in bickering with allies or being manipulated by rivals, Obama has projected anything but such an image. His perceived weakness and ineffectiveness overseas undoubtedly played into the results Tuesday. And it is therefore a reason the next two years are likely to see an America that is like its president, increasingly ineffective internationally – as the world waits for his successor and hopes for a change in the character of U.S. leadership....

“(The) outlook for the president looks very much like the famous photo from ‘Back to the Future’ in which before our eyes we can see his image fading to nothing. In that movie, the only way to reverse the process was to restore history back to its original order....

“(Over) the next two years we may view the world as a shifting tableau involving many familiar actors and a blank space where once there was a president of the United States.”

--Robert Costa and Jose A. Delreal / Washington Post

“The Republican Party’s ardent campaign against President Obama’s health-care law gained new momentum Wednesday as lawmakers reacted angrily to assertions by an architect of the policy that it was crafted in a deliberately deceptive way in order to pass Congress.

“On both sides of the Capitol, leading conservatives said they may call economist Jonathan Gruber to testify about his remarks, which were made last year and surfaced this week in a video on social media. In the video, Gruber suggests that the administration’s signature health-care legislation passed in part because of the ‘stupidity of the American voter’ and a ‘lack of transparency’ over its funding mechanisms.

“ ‘The strategy was to hide the truth from the American people,’ said Sen. Jeff Sessions (R-Ala.), who is slated to chair the Senate Budget Committee next year. ‘That is a threat to the American republic.’”

Kathleen Parker / Washington Post

“(There’s) no denying that the midterms were a referendum on President Obama. The president prefers to say they were a referendum on his policies, which is perhaps an easier pill to swallow. But Obama is his policies, which happen to rub many Republicans (and at least a few Democrats) the wrong way.

“Moreover, people don’t like being insulted and misled, as many feel they have been by this administration. This is not just a feeling but a demonstrable fact, especially vis-à-vis the Affordable Care Act. And it’s not just the far-right fringe who object to the strategic misrepresentations along the way.

“These obfuscations include telling the American people that they could keep the insurance they had if they liked it and also writing the law in such a way that the ACA’s mandate to purchase government-approved insurance was not a ‘tax,’ despite the Internal Revenue Service’s role in policing its compliance.

“The keep-your-insurance ruse is history now, but the memory still lingers in the minds of voters, who, contrary to what the Obama White House thinks, are not stupid....

“Those who feel defrauded by their own government got third-party confirmation recently when remarks by one of the ACA’s chief architects, MIT economist Jonathan Gruber – invoking the stupidity of voters and lauding the political advantage of a lack of transparency in government – went viral....

“The comments were made on a panel about a year ago but were released a week after the midterms. Gruber was making the point that ObamaCare never would have passed if the administration had been honest about the fact that the so-called ‘penalty’ for noncompliance with the mandate was really a tax.

“ ‘And basically, call it ‘the stupidity of the American voter’ or whatever, but basically that was really, really critical to getting the thing [ObamaCare] to pass.’

“The irony is that the very thing the White House was trying to conceal (because the truth was just too complicated for regular folks), the Supreme Court essentially confirmed. Enforcement of the mandate constituted a tax, not a penalty. Thus spake Chief Justice John Roberts.

“This ruling, indeed, was the reason the ACA was able to go forward, which is why so many Republicans were apoplectic with Roberts’ siding with the liberals in a 5 to 4 ruling. In other words, Obama’s obfuscation was simultaneously revealed and rewarded by the court. And the American people were smacked with a health-system overhaul many more would have rejected had they known the truth.

“Or would they? It’s hard to know what might have happened if truth had won the day. But we do know that truth squandered is truth lost.”

--Peggy Noonan / Wall Street Journal

[On President Obama]

“(He) is killing his party. Gallup this week found that the Republicans for the first time in three years beat the Democrats on favorability, and also that respondents would rather have Congress lead the White House than the White House lead Congress.

“A few weeks ago a conservative intellectual asked me: ‘How are we going to get through the next two years?’ It was a rhetorical question; he was just sharing his anxiety. We have a president who actually can’t work with Congress, operating in a capital in which he is resented and disliked and a world increasingly unimpressed by him, and so increasingly predatory.

“Anyway, for those who are young and not sure if what they are seeing is wholly unusual: Yes, it is wholly unusual.”

--According to a review of the recent White House security breach by the Department of Homeland Security, there was a succession of “performance, organizational, technical” and other failures by the Secret Service.

Among the findings, the Secret Service’s alarm systems and radios failed to function properly. The worst was the Secret Service officer who was stationed on the North Lawn with an attack dog. He could have stopped the intruder, only he was in his van talking on his personal cellphone, plus he didn’t have his radio earpiece in.

--Dr. Ben Carson is readying a run for the White House, so Fox News, as is its policy in such situations, dropped him as a contributor.

--For the record...Hillary Clinton’s campaign success/failure in the mid-terms, per David Catanese / U.S. News Weekly:

“Hillary Clinton traveled to 20 states in all, mostly in the final weeks of the campaign. But her win-loss record was middling. Of the 10 U.S. Senate candidates Clinton stumped for, just three clinched victories. She sided with the winning candidate in just five of the 11 governor’s races in which she campaigned.”

--Democratic Sen. Elizabeth Warren (Mass.) / Washington Post

“(For) all the talk of change in Washington and in states where one party is taking over from another, one thing has not changed: The stock market and gross domestic product keep going up, while families are getting squeezed hard by an economy that isn’t working for them.

“The solution to this isn’t a basket of quickly passed laws designed to prove Congress can do something – anything. The solution isn’t for the president to cut deals – any deals – just to show he can do business. The solution requires an honest recognition of the kind of changes needed if families are going to get a shot at building a secure future.

“It’s not about big government or small government. It’s not the size of government that worries people; rather it’s deep-down concern over who government works for. People are ready to work, ready to do their part, ready to fight for their futures and their kids’ futures, but they see a government that bows and scrapes for big corporations, big banks, big oil companies and big political donors – and they know this government does not work for them.

“The American people want a fighting chance to build better lives for their families. They want a government that will stand up to the big banks when they break the law. A government that helps out students who are getting crushed by debt. A government that will protect and expand Social Security for our seniors and raise the minimum wage....

“Yes, we need action. But action must be focused in the right place: on ending tax laws riddled with loopholes that favor giant corporations, on breaking up the financial institutions that continue to threaten our economy, and on giving people struggling with high-interest student loans the same chance to refinance their debt that every Wall Street corporation enjoys. There’s no shortage of work that Congress can do, but the agenda shouldn’t be drawn up by a bunch of corporate lobbyists and lawyers.

“Change is hard, especially when the playing field is already tilted so far in favor of those with money and influence. But this government belongs to the American people, and it’s time to work on America’s agenda. America is ready – Congress should be ready, too.”

So...will Ms. Warren run? It’s still early. The Iowa State Fair isn’t until next August, after all. What if Hillary has another medical episode, for example. But, yes, you need a strong ground game and if Sen. Warren were to go for it, she would need to start doing some things behind the scenes now.

--George Will / Washington Post

“Now that two of the last three Democratic presidencies have been emphatically judged to have been failures, the world’s oldest political party – the primary architect of this nation’s administrative state – has some thinking to do. The accumulating evidence that the Democratic Party is an exhausted volcano includes its fixation with stale ideas, such as the supreme importance of a 23rd increase in the minimum wage. Can this party be so blinkered by the modest success of the third recent presidency, Bill Clinton’s, that it will sleepwalk into the next election behind Hillary Clinton?

“In 2016, she will have won just two elections in her 69 years, the last one 10 years previously. Ronald Reagan went 10 years from his second election to his presidential victory at age 69, but do Democrats want to wager their most precious possession, the presidential nomination, on the proposition that Clinton has political talents akin to Reagan’s?

“In October, Clinton was campaigning, with characteristic futility, for Martha Coakley, the losing candidate for Massachusetts governor, when she said: ‘Don’t let anybody tell you that it’s corporations and businesses that create jobs.’ Watch her on YouTube. When saying this, she glances down, not at a text but at notes, and proceeds with the hesitancy of someone gathering her thoughts. She is not reading a speechwriter’s blunder. When she said those 13 words, she actually was thinking. 

“You may be wondering, to use eight other Clinton words that will reverberate for a long time: ‘What difference at this point does it make?’ This difference: Although she says her 13 words ‘short-handed’ her thinking, what weird thinking can they be shorthand for?”

--According to a new USC Dornsife/Los Angeles Times poll, 59% of registered voters in California said the state would be better off with new candidates for the two Senate seats currently held by Democrats Barbara Boxer and Dianne Feinstein. Boxer, 73, is up for reelection in 2016. Feinstein, 81, in 2018.

Boxer has a 46% favorable, 35% unfavorable rating. Feinstein’s split is 48-32.

--According to a front page story in Friday’s Wall Street Journal: “The Justice Department is scooping up data from thousands of mobile phones through devices deployed on airplanes that mimic cellphone towers, a high-tech hunt for criminal suspects that is snagging a large number of innocent Americans, according to people familiar with the operations.

“The U.S. Marshals Service program...operates Cessna aircraft from at least five metropolitan-area airports, with a flying range covering most of the U.S. population.”

The technology employed on the aircraft “enables investigators to scoop data from tens of thousands of cellphones in a single flight, collecting their identifying information and general location, these people said.”

Supposedly the technology “let’s go” of non-suspect phones.

Well I never use my phone so the rest of you are on your own.

--We note the passing of former Illinois conservative Republican Representative Philip Crane, who served 35 years in the House and made a failed run for the presidency in 1980. He was 84.

In 1980, Crane, leader of the American Conservative Union, thought Ronald Reagan may not run or would falter and that he, Crane, would then emerge as the favorite of conservatives.

I forgot Crane won his House seat in 1969 in a special election to succeed Donald Rumsfeld, who had resigned to work in the Nixon administration.

Crane served until 2004. He was one of my early political heroes, along with Jack Kemp.

--According to a new Monmouth University poll, half of all New Jersey residents say they want to eventually leave the state, with more than a quarter of them saying their future departure is “very likely.” Only 45% say they’d like to live out their lives here.

Patrick Murray, director of the Monmouth University Polling Institute, said the state’s high cost of living is the key factor, particularly “New Jersey’s property tax burden,” the highest in the nation. [Claude Brodesser-Akner / NJ.com]

--Hugo Martin of the Los Angeles Times reported that as of the end of October, the Transportation Security Administration said it had confiscated 1,855 firearms from passengers – more than in all of 2013. 1,471 of the handguns and rifles were loaded, with the greatest number found at Dallas/Fort Worth, Hartsfield-Jackson Atlanta, Phoenix Sky Harbor and Houston George Bush international airports.

--As part of an effort to be more transparent about its history, Mormon leaders acknowledged this week that the church’s founder, Joseph Smith, took as many as 40 wives, some of whom were already married and one that was only 14 years old.

As reported by Laurie Goodstein of the New York Times: “Smith probably did not have sexual relations with all of his wives, because some were ‘sealed’ to him only for the next life, according to the essays posted by the church. But for his first wife, Emma, polygamy was ‘an excruciating ordeal.’...

“The Church of Jesus Christ of Latter-day Saints, as the Mormon Church is formally known, has quietly posted 12 essays on its website over the last year on contentious topics such as the ban on blacks in the priesthood, which was lifted in 1978, and accounts of how Smith translated the Book of Mormon, the church’s sacred scripture.

“Elder Steven E. Snow, the church historian and a member of its senior leadership, said in an interview, ‘There is so much out there on the Internet that we felt we owed our members a safe place where they could go to get reliable, faith-promoting information that was true about some of these more difficult aspects of our history.

“ ‘We need to be truthful, and we need to understand our history,’ Elder Snow said. ‘I believe our history is full of stories of faith and devotion and sacrifice, but these people weren’t perfect.’”

--Congratulations to our European friends for successfully landing the Rosetta spacecraft (its lander, Philae) on a comet, the culmination of a 10-year long mission. It takes 28 minutes for the signal to reach Earth and the first pictures are amazing as scientists hope to learn something about the early evolution of the solar system, including whether comets once “seeded the Earth.”

Rosetta is orbiting above the comet, between the orbits of Mars and Jupiter. A subsidiary of Airbus Defense and Science was the main contractor for the spacecraft, while the European Space Agency has 20 member countries.

As of now no Cometerians have been seen in the shadows. We also hope Philae’s battery holds out.

---

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

God bless America.
---

Gold closed at $1185
Oil $75.82...seventh straight weekly decline

Returns for the week 11/10-11/14

Dow Jones +0.3% [17634...17652 the new high set Thurs.]
S&P 500 +0.4 [2039.82...new high]
S&P MidCap +0.1%
Russell 2000 +0.5%
Nasdaq +1.2% [4688...new high for year...5048 record 3/10/00 closing high]

Returns for the period 1/1/14-11/14/14

Dow Jones +6.4%
S&P 500 +10.4%
S&P MidCap +6.6%
Russell 2000 +0.9%
Nasdaq +12.3%

Bulls 55.5
Bears 14.8 [Source: Investors Intelligence...readings are released Wed. AM, reflecting Tuesday market closes and can lag a bit. Tues. Oct 21 the bull/bear split was 35.3 / 18.2. The market had bottomed Wed. Oct. 15 at 1862. That’s how a contrarian indicator is supposed to work. Now if the bull figure hits 60, we might have a problem.]

Have a great week. I appreciate your support.

I release the bull/bear figures on Twitter, Wed. mornings, as soon as I receive them. @stocksandnews

Happy Birthday, Dale! [I’m the proud godfather.]

Brian Trumbore



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-11/15/2014-      
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Week in Review

11/15/2014

For the week 11/10-11/14

[Posted 10:00 PM ET, Friday]

Edition 814

Washington and Wall Street

I can take a little break on the economic front this week, which is good because I have a lot on China down below. It was an extremely light stretch for data in the U.S. with the only indicator worth reporting, October retail sales, up 0.3%, better than expected. It was also a light week for earnings as well and I cover the major stories in the “Street Bytes” section. In a nutshell, the markets were refreshingly dull.

Save for the real story for weeks now, the rapid decline in the price of oil. U.S. motorists are paying an average of $2.92 a gallon, according to the Lundberg Survey (for the two weeks ended Nov. 7...so probably a further decline with this weekend’s update), or a savings of about $52 billion for U.S. consumers [Bloomberg], which should be music to retailers’ ears.

I keep gas pump receipts so I can look back at the price and end of July at my favorite station (NP Fuel...NP standing for New Providence), the price for regular was $3.59 on July 26 and is now $2.89. Let’s see, 70 cents times 15 gallons...$10.50! Why that’s almost a 12-pack of domestic, sports fans! [Or a couple of containers of blackberries...which I freeze to eat with my cottage cheese at lunch...just to show you it’s not always about the beer.]

Bottom line, the break in oil and gasoline prices is super...as long as it doesn’t go much further and begin to impact production in the U.S., seeing as our energy boom has been a massive job creator...good-paying jobs.

According to the International Energy Agency’s latest monthly report, “Supply and demand balances suggest that the price rout has yet to run its course. Barring any new supply disruption, downward price pressures could build further in the first half of 2015.”

“It is increasingly clear that we have begun a new chapter in the history of the oil markets,” the IEA added.

Now you have to take a sweeping statement like this with a grain of salt. These longer term forecasts are very seldom right. In fact, historically they can be very wrong.

But as Anjli Raval of the Financial Times writes: “Weaker than expected demand has coincided with relentless growth in U.S. production and a surplus of oil in the Atlantic Basin as well as the North Sea. A stronger dollar has also helped to push the price of Brent* [Ed. the global benchmark...I quote West Texas Intermediate, the U.S. barometer] lower.

*Brent finished the week at $79.41; WTI at $75.82 (after hitting $74.50).

Crude prices are down 30% since mid-June.

Antoine Halff, author of the IEA report, added: “In Europe and elsewhere, while there is growth, this is not coinciding with wage growth and consumption growth.

“On the supply side, even if we see disruptions, or a pullback in production, prices will rebound maybe into the $80s or $90s, but there will be more price pressures before we get there.”

As noted the past few weeks, ministers from OPEC are meeting at the end of the month in Vienna to determine a response. There have been conflicting statements out of Venezuela as to the severity of power outages that struck its main oil refining complex on Monday, and whether the refineries are back online.

And we all know how dependent the Russian economy is on crude. Russian President Vladimir Putin was previously quoted by news agency RIA Novosti as saying, “If world prices stay at the level of $80, all production will collapse.” With oil at a four-year low, Prime Minister Dmitry Medvedev said on Thursday, “A serious drop in the price of oil could require us to reconsider the basic tenets of our budget policy.” Not that most of us give a hoot what happens to the Russian economy these days.

Meanwhile, while equity markets have been sanguine after that recent bout of high volatility, stocks are far from cheap and when third-quarter earnings have all been tallied up, FactSet forecasts EPS growth of 7.7%, solid, but that old bugaboo, revenues, will be up only 3.8% [after rising 4.4% in Q2; 4.8% the last five years.] So it remains the same old game: How much more can Corporate America wring out (i.e., cost-cutting) to generate earnings growth without a true pick-up in revenues? How much more financial engineering will occur before reality sets in? Or will revenues finally pick up because, for one, Europe and Asia rebound in 2015? [Not that likely.]

Finally, this could be a tumultuous week in Washington, if President Obama follows through on his threat to use his executive powers to push through changes to the nation’s immigration system. At a news conference in Malaysia (after his trip to China), the president said he had given the House more than a year to come up with a bill but they had failed to do so.

“I said that if in fact Congress failed to act I would use all the lawful authority I possess to try to make the system work better. And that’s going to happen before the end of the year.”

Well no sense in me commenting in any fashion as yet. Should he act in the next few days, as some believe, I’ll cover it all next review. In the meantime, Republicans seem split on how to respond.

Europe and Asia

Some important news for the European Central Bank to digest. First, industrial production for the month of September in the eurozone was up 0.6% over August, which is OK, but some components of the reading were weak.

Then you had a preliminary figure on inflation for the EA-18, up an annualized 0.4% in October (vs. 0.3% in September), still far from the 2% target set by the ECB and just about every other major central bank these days. Greece still has deflation (-1.8% ann.), as does Spain (-0.2%).

But the big data point was the first look at third-quarter GDP for the eurozone and it was up 0.2% over the second quarter (which in turn was up 0.1%), according to Eurostat, the EU’s statistics arm. [GDP is up 0.8% over Q3 2013.]

Germany came in with Q3 GDP up 0.1%, so it avoids recession after a -0.1% performance in the second quarter. France was up a surprising 0.3% (after -0.1% in Q2), but don’t go popping any champagne corks just yet in Gay Paree. Spain was up 0.5%, solid. Greece rebounded to up 0.7%. 

But Italy was down, -0.1%, after -0.2% in Q2, so it remains mired in recession; with GDP falling 11 of the last 13 quarters. This can’t continue, or as I’ve been warning it won’t matter what the ECB does on the bond-buying front, investors will flee Italian paper.

For now, though, Euro bond markets remain quiet, and at historically low levels.

The German 10-year closed the week at 0.78%; France 1.14%; Spain 2.12%; Italy 2.34%; Portugal 3.16% and Greece, the big exception, up a few ticks on the week to 7.83%.

But next month at the ECB’s end of year confab, it will be put up or shut up time. The still weak GDP data for the continent strengthens ECB President Mario Draghi’s hand should he opt to expand his asset purchase program as expected.

A few other EU bits:

Non-euro Britain reported the unemployment rate for the three months thru September came in at 6%, unchanged, with wages up 1.0% annualized.

And the European Court of Justice ruled member states can deny certain payments to unemployed EU citizens who move to that country just to claim benefits, or what is called ‘benefit tourism.’ As reported by the BBC: “The court said Germany was right to deny an unemployed Romanian woman a particular allowance because she showed no sign of seeking work.” 

Wolfgang Munchau / Financial Times

“I do not have the foggiest idea what the probability of a break-up of the euro was during the crisis. But I am certain that the probability is higher today. Two years ago forecasters were hoping for strong economic recovery. Now we know it did not happen, nor is it about to happen. Two years ago, the eurozone was unprepared for a financial crisis, but at least policy makers responded by creating mechanisms to deal with the acute threat.

“Today the eurozone has no mechanism to defend itself against a drawn-out depression. And, unlike two years ago, policy makers have no appetite to create such a mechanism.

“As so often in life, the true threat may not come from where you expect – the bond markets. The main protagonists today are not international investors, but insurrectional electorates more likely to vote for a new generation of leaders and more willing to support regional independence movements.

“In France Marine Le Pen, the leader of the National Front, could expect to win a straight run-off with President Francois Hollande. Beppe Grillo, the leader of the Five Star Movement in Italy, is the only credible alternative to Matteo Renzi, the incumbent prime minister. Both Ms. Le Pen and Mr. Grillo want their countries to leave the eurozone. In Greece, Alexis Tsipras and his Syriza party lead the polls. So does Podemos in Spain, with its formidable young leader Pablo Iglesias.

“The question for voters in crisis-hit countries is at which point does it become rational to leave the eurozone? They might conclude that it is not the case now; they might oppose a break-up for political reasons. Their judgment is prone to shift over time. I doubt it is becoming more favorable as the economy sinks deeper into depression.

“Unlike two years ago, we now have a clearer idea about the long-term policy response. Austerity is here to stay. Fiscal policy will continue to contract as member states fulfil their obligations under new European fiscal rules. Germany’s ‘stimulus program,’ announced last week, is as good as it gets: 0.1 percent of gross domestic product in extra spending, not starting until 2016. Enjoy!”

Speaking of Spain, Catalonia held a non-binding vote on independence last weekend and 80% voted in favor. More than two million out of 5.4 million eligible voters took part.

The government in Madrid called the exercise “fruitless and useless.”

Opinion polls suggest 50% of Catalans are in favor of full independence, with 80% wanting an official referendum.

China: At the Asia-Pacific Economic Cooperation forum (APEC), China’s commerce minister said there was agreement on a study to eventually create a regional free-trade pact. President Xi Jinping then told executives at a CEO gathering in Beijing that outbound investment will total $1.25 trillion over the next 10 years, 500 million Chinese tourists will go abroad, and the government is going to revive the ancient Silk Road trade route between Asia and Europe.

“China’s development will generate huge opportunities and benefits and hold lasting and infinite promise,” Xi said. “As China’s overall national strength grows, China will be both capable and willing to provide more public goods for the Asia Pacific and the world.” [Bloomberg]

The above has been touted as China’s “Marshall Plan.”

President Xi basked in the glow of APEC. But Washington is trumpeting the Trans-Pacific Partnership, a free trade idea that excludes China, while Beijing is pushing for an alternate Free Trade Area of the Asia Pacific. World leaders then agreed to work on China’s proposal.

Then you had the agreement between the U.S. and China to reduce greenhouse gas emissions, with the U.S. agreeing to cut its emissions by 26-28% by 2025, compared with 2005 levels, while China set a target for its emissions to peak by 2030.

“This is a major milestone in the U.S.-China relationship,” President Obama said. “It shows what’s possible when we work together on an urgent global challenge.”

But China agreed to nothing! Nothing specific.

Editorial / Wall Street Journal

“The climate-change campaign against fossil fuels has been having a hard time with democracy. Voters in the U.S. support fracking and the Keystone XL pipeline, Australia repealed its carbon tax, and frustration with green energy costs is rising across Europe. So perhaps it’s not surprising that President Obama has turned to a dictatorship for help with his anti-carbon ambitions.

“In that sense, the emissions accord sealed Tuesday night between the U.S. and China is a perfect reflection of the mindset of Western climate-change activists. Cheap and abundant energy is popular among Americans because it raises living standards and helps the economy grow.

“The romance of the fresh princelings of Beijing is that they needn’t abide such barriers to enlightened governance as elections, a free press, transparency, the rule of law and two political parties. They can simply order economic transformation in the next five-year plan, and censor any dissenters as Al Gore wants to do in the U.S. Thus in China Mr. Obama has found the ideal climate-change partner: A technocratic elite that can instruct the bourgeoisie how they must light their homes and commute to work....

“Under the nonbinding, no-detail agreement, Supreme Leader Xi Jinping promises ‘to intend to achieve the peaking of CO2 emissions around 2030,’ and then maybe after that to decline.”

As in a giant ‘whatever.’ China already had plans to shift from dirty coal to nuclear power over the next 15 years. Like whoopty-damn-do.

As the Journal continues:

“(This) accord is less about China than American climate politics....Mr. Obama will now claim the Middle Kingdom is signed onto his anti-carbon agenda, even if its promises are distant and vague....

“So using the Sino-American deal as cover, Mr. Obama will now say he is obliged to impose a new burst of aggressive carbon regulations, no matter the harm to U.S. growth....

“Mr. Xi must have been delighted to see a U.S. President agree to make America less economically competitive in return for rhetorical bows to doing something someday about climate change.”

Following the announcement the U.S. and China had reached the climate change agreement, Presidents Obama and Xi held a joint press conference, though Xi took offense at the suggestion he was supposed to answer a question from the media.

The Financial Times reported that “After weeks of wrangling, in the end the two sides agreed to take a single question each, with the New York Times told to direct its question to Mr. Obama and the English-language China Daily given a prepared question to ask Mr. Xi.”

Jami Anderlini of the FT notes this is but one example “of the fundamental differences that bedevil the Sino-U.S. relationship.

“The two sides are essentially engaged in a clash of exceptionalisms, with both leaders talking past each other to their own people and trying to prevent very different versions of the relationship.”

The press conference was not broadcast or reported in China and while U.S. officials declared the mini-summit between the two leaders a great success, pointing to the climate change and technology and extended visa agreements, “Chinese media barely mentioned these...and instead focused coverage on something very different.

“According to China, the two presidents had agreed to advance and develop a ‘new type of great-power relationship’ based on mutual respect and collaboration as equal ‘great powers.’” [Jami Anderlini / FT]

Benny Avni / New York Post

“Obama’s plan to revive America’s Asian alliances seems to have fallen by the wayside. Our friends there, increasingly in fear of being left behind while China rises, have no choice but to kiss Beijing’s hand.

“America used to be Asia’s predominant power, something Obama promised to maintain a few years ago in his much-heralded ‘pivot to Asia.’ But the pivot never happened, and Xi is set to capture that top spot. He sure covets it....

“Xi surprised even the most hopeful of greens on Wednesday by signing a non-binding deal with Obama to limit the two countries’ carbon emissions.

“The pact would actually start cutting U.S. carbon emissions now (harm to our economy not yet fully calculated), while China stops the growth of its emissions by 2030....

“Obama and Xi did sign a genuine win-win for both nations, assuming it actually materializes: a $1 trillion information-technology deal that would drop tariffs between the U.S. and China.

“As Obama said in Wednesday’s press conference with Xi, this week’s conversations ‘gave us the opportunity to debunk the notion that our pivot to Asia is about containing China.’

“Wait, what? The fact is the rest of Asia is desperately looking for someone to contain Xi. But time and again Obama has failed to fully side with Japan, the Philippines, South Korea, Vietnam, Taiwan and other U.S. allies as China ratcheted up its territorial disputes with them.”

Well there’s more...the Communist Party mouthpiece, the Global Times, dissed President Obama’s midterm election results in an editorial that read in part:

“U.S. public opinion has downgraded Obama. Former President George W. Bush met with criticism due to his failure in the war on terror.

“Obama always utters ‘Yes, we can,’ which led to the high expectations people had for him. But he has done an insipid job, offering nearly nothing to his supporters. U.S. society has grown tired of his banality....

“What’s worse, Obama is in the midst of a time when partisan politics is becoming more extreme.

“That party interests are placed higher than the interests of the country and its people is an inherent shortcoming of Western political systems. The problem is particularly acute when the U.S. undergoes difficulties. Cohesion in American society is diminishing....

“With China’s rise, we gradually have the ability to have a clear understanding of the U.S. The country is too lazy to reform. U.S. society selected Obama, but there is no great American president in this era.”

Can’t disagree with that last line, even if it is coming from the Chinese Communist Party. It’s been a while since we had a good one, for sure.

---

A few economic notes on China. China is giving investors greater access to its stock market with a link between Shanghai and the Hong Kong exchanges, which will allow all investors to buy shares on the Shanghai Stock Exchange, while also permitting wealthy investors in mainland China to buy stocks listed in Hong Kong. The trading starts this Monday, Nov. 17.

Separately, factory-gate prices (producer prices as we know them) fell a 32nd consecutive month, down 2.2% in October from a year earlier. Consumer prices rose just 1.6%, well below the 3% official target.

Also, factory production rose just 7.7% in the month of October vs. a year ago, the second-weakest pace since 2009. Retail sales were up 11.5% for the month, while fixed asset investment increased 15.9%. In boom times this last figure was consistently in the 20s.

Electricity output grew 1.9% from a year earlier in October, an important barometer, which compared with September’s 4.1% increase, according to the National Bureau of Statistics.

President Xi told an audience of state leaders and business executives that China’s economic downturn was not “scary,” while even annual expansion slowing to 7% would still be fast.

Xi said China’s growth would be supported by innovation and urbanization. Beijing aims to move about 20 million farmers each year to cities in an attempt to raise household incomes and narrow the urban-rural gap. Plus the soil is all tainted anyway.

Speaking of pollution, the government’s massive effort to clear the air prior to all the world leaders showing up in Beijing worked. But you can be sure the tiny particulates that can kill will be returning shortly. There were mandated factory shutdowns and car bans put in place.

Turning to Japan, the big news concerned a handshake between Prime Minister Shinzo Abe and President Xi in Beijing. It wasn’t known until a day or two before if this ice-breaking move (if you can call it that), would take place. The two clearly don’t like each other, or at least Xi can’t stomach Abe.

But they need each other...their economies need each other.

Xi called on Japan to be cautious in its military and security policies and abide by accords reached between the two nations for improving the Sino-Japanese relationship.

For two years it’s been a tension convention over the island dispute in the East China Sea and President Xi’s body language was described as “calculatedly icy.”

As for Japan’s economy, the Nikkei stock index likes Abenomics, climbing another 3.6% this week to the highest levels since 2007, as the expectation is the government will hold off on another hike in the consumption tax next October, while Abe may call for a snap election to strengthen his support.

Japan reports its first reading on third-quarter GDP on Monday and the estimate is for an annualized rate of 2.0%, which is deemed far below what would be necessary for Abe to consider a further sales-tax increase. [Remember, GDP fell 7.1% ann. in the second quarter because of April’s 3% tax hike.]

On the other hand, the consumption (VAT / sales tax) hikes were designed to instill confidence in investors, globally, that Japan is doing something about its all-universe record debt load of 240% of GDP.

Street Bytes

--So it was dullsville on Wall Street, but the Dow Jones rose 0.3% to 17634, hitting a record 17652 on Thursday, while the S&P 500 finished at another record high itself on Friday of 2039.82. I have to note the decimal points because the S&P closed at either 2038 or 2039 all five days this week. Now that’s dull...or maybe spooky.

For its part, Nasdaq rose 1.2% to 4688, it’s high for the year and highest mark since March 2000. The major averages have now risen four straight weeks, after declining in each of the previous four.

--U.S. Treasury Yields

6-mo. 0.06% 2-yr. 0.51% 10-yr. 2.32% 30-yr. 3.05%

As in Europe, the U.S. Treasury market was virtually unchanged on the week.

--On the Ebola front, aside from a heart-wrenching segment on “60 Minutes” last Sunday, there has been little news, which doesn’t necessarily mean things are improving on a broad scale.

Mali confirmed a second outbreak, a potentially threatening one according to global health authorities, and just a reminder, heretofore we’ve been talking almost solely about Liberia, Guinea and Sierra Leone. An imam who fell ill in Guinea, traveled to Mali for better treatment at a private clinic in Bamako, the capital. He then died on Oct. 27.

Donald G. McNeil Jr. / New York Times

“Because of his status, (the imam’s) body was washed at a large mosque and returned to Guinea for burial after a funeral at another mosque.

“The Pasteur Clinic failed to diagnose Ebola as the underlying cause of the kidney failure for which it was treating the imam. Kidney failure is a possible complication of late-stage Ebola.

“The outbreak was detected only after a nurse at the clinic fell ill and died, and the chief WHO  representative in Mali heard from his counterparts in Guinea that members of the imam’s family were dying.

“ ‘It was a real failure by the clinic,’ the WHO representative, Dr. Ibrahima Soce Fall, said in a telephone interview.

“Now the clinic is closed and under quarantine – as are the mosque in Bamako, one or two other Malian clinics where the imam was treated, and the family compound where the nurse lived.”

Alexandra Zavis of the Los Angeles Times added: “(The imam) fell ill on Oct. 17 and was admitted the following day to a private clinic in the Guinean mining town of Siguiri, near the country’s border with Mali, the WHO said. When his condition did not improve, he was transferred to another clinic across the border, then traveled by car with four family members to seek care at the Pasteur Clinic.

“The imam’s first wife, who was in the car with him, died of an undiagnosed disease on Nov. 6, as did his daughter on Monday (Ed. Nov. 10). The other people in the car – the imam’s brother, second wife and a son – are receiving treatment at an Ebola unit in Gueckedou, Guinea.

“The son has tested positive for Ebola, increasing the likelihood that the other deaths in the family were caused by the virus, the WHO said.”

Oh brother. Yes, it only takes one misdiagnosis, one improperly handled body, for all hell to break loose all over again.

Separately, Liberia lifted its three-month-old state of emergency, even as some health officials warn that while the number of Ebola cases has dropped in the capital of Monrovia, it could be moving into new areas of the country, or, as we see above, new countries.

The WHO said this week that the number of cases overall had grown to 14,098; 5,160 of them fatal. But this doesn’t take into account the victims who never make it to a clinic.

Doctors Without Borders says the virus is moving into rural areas as people flee the big cities.

--Regulators in the U.S., Britain and Switzerland have ordered five big banks to pony up $3.3 billion in penalties as part of the global probe into the rigging of key foreign-exchange markets last year. 

Switzerland’s UBS AG was ordered to pay the most at $800 million, Citigroup will pay $668 million, JPMorgan Chase & Co. $662 million, Royal Bank of Scotland $634 million and HSBC is paying a fine of $618 million.

Other banks and individuals could follow, including Barclays, which is still negotiating a settlement, and Deutsche Bank.

The U.S. Justice Department and Britain’s Serious Fraud Office are conducting criminal investigations. Some also believe this is just the beginning in terms of litigation. The Swiss regulator, FINMA, penalized UBS an additional $139 million, for example.

The foreign exchange market, with $5.3 trillion...with a ‘T’...worth of currencies traded daily, dwarfs all other markets. The “fixes” (“spot” market and “spot benchmarks”) are used by a wide variety of businesses, both financial and non-financial, to help value assets, among other things, let alone manage risk. So it’s serious when there’s attempted manipulation of the rates. 

As the Commodity Futures Trading Commission (CFTC) director of enforcement Aitan Goelman noted: “The setting of a benchmark rate is not simply another opportunity for banks to earn a profit. Countless individuals and companies around the world rely on these rates to settle financial contracts.”

Both the CFTC and the U.K.’s Financial Conduct Authority (FCA) found manipulation has been going on for several years, with the FCA saying the failings occurred between January 2008 and October 2013. The CFTC is pinpointing 2009-2012.

As for where this money being collected is all being spent, the Financial Times’ Gillian Tett notes that in the past with “misdemeanor fines,” in the case of the U.K. the money went to worthy causes such as soldier rehabilitation programs.

But “the fines now being imposed by western regulators are dramatically higher than anything seen before, (and) the money is not being spent in a transparent way. That flies in the face of politicians’ demands for finance to become more open. It also risks undermining the search for a sense of justice – and closure.”

In the U.S., fines collected by the likes of the CFTC tend to be handed over to the Treasury where “it vanishes into a general budget pot.”

--In the third quarter, the world’s biggest investment banks continued cutting costs by shedding 4% of their staffs. Much of this comes from European banks Barclays, UBS and Credit Suisse. [Wall Street Journal]

--So you are reading this column on the Internet and on Monday, President Obama urged the Federal Communications Commission to set net neutrality rules ensuring the free flow of content on the Net. “(Neither) the cable company nor the phone company will be able to act as a gatekeeper, restricting what you can do or see online,” said the president.

An open Internet is a win-win for a company like Netflix, and probably for startups working on ways to connect everything from thermostats to cars.

But, who has been paying for the build-out of the Net and broadband? The big companies. You think the small guys can afford this? Of course not.

Yet under Obama’s proposal, Netflix, Amazon.com and YouTube (Google) would be on equal footing with the Internet providers in terms of speed, with the providers unable to give superior service to those who would pay up for it. Startups would benefit, even if they don’t really have the capital because they would have equal access to the pipes.

But we have a long ways to go on this.
 
Editorial / Wall Street Journal

“So much for the will of the voters. Before last Tuesday’s elections, President Obama said that while he wasn’t on the ballot, his policies were. Now that the American people have rebuked those policies, Mr. Obama is attempting another federal power grab over an innovative U.S. industry.

“On Monday he urged the Federal Communications Commission to apply to the Internet century-old telephone regulations designed for public utilities....Mr. Obama endorsed the regulation of Internet access providers under Title II of the Communications Act of 1934.

“These rules weren’t at the cutting edge of innovation even in the 1930s. As former FCC attorney Randolph May notes, this regulatory framework was written into the Interstate Commerce Act of 1887 to oversee monopoly railroads....(Now) Obama has decided, in his market wisdom, that these rules should apply to the Internet.

“When the FCC floated this idea in May, we called it ‘ObamaCare for the Web,’ but that was too kind. The Obama Internet plan would treat cable, telephone and wireless broadband networks as common carriers subject to federal price controls and myriad other regulatory restrictions....

“Mr. Obama is trying to exert in his final two years in office the same political control over the Internet that he has already imposed on health care and banking. If he succeeds he’ll set a terrible precedent for despots around the world who also want to assert political control over cyberspace. The Obama administration is already ceding greater control over the Internet registry ICANN to foreign outfits that could easily become fronts for repressive regimes.

“If the FCC caves under White House pressure, Congress has every right to defund this regulatory overreach before it becomes a clear and present danger to the U.S. economy and global freedom.”

One more note. Regarding Comcast’s acquisition of No. 2 Time Warner Cable, President Obama’s comments have thrown a new wrench into this deal as Comcast continues to seek FCC approval. More concessions will no doubt now be demanded centering around net neutrality.

--The U.S. Postal Service said its computer systems were hacked and that names, Social Security numbers and addresses may have been compromised; namely, more than 800,000 employees, including top directors and regulators. The Chinese are suspected through digital evidence.

--But wait...there’s more! The National Oceanic and Atmospheric Administration (NOAA), which operates the National Weather Service, said on Wednesday that four of its websites had been hacked, with NOAA blaming China. NOAA staff apparently detected the attacks quickly and responded.

--Halliburton Co. is in talks to acquire fellow oil-field services giant Baker Hughes, though if an agreement is reached regulators could step in. After the Journal first broke the news of the talks, shares in both rose sharply and the market valued the combination at $74 billion.

Halliburton and Baker Hughes are the second- and third-largest oil-field services companies in the world by revenue, respectively, behind Schlumberger Ltd.

A merger of the two, amid plunging oil prices, would allow them to better weather the current storm due to the substantial cost savings generated.

--The House of Representatives voted again to approve construction of the Keystone XL pipeline, 252-161. The Senate is expected to vote on Tuesday. To be continued...

--Cisco Systems Inc. profit fell 8.4% in its fiscal first quarter as revenue rose just 1.3%. Cisco, which announced plans in August to cut 6,000 jobs, forecast revenue for the quarter ending in January would rise between 4% and 7%.

The networking equipment giant said it was hurt by slower sales to a number of U.S. telecom carriers. The company also continues to point to weak sales in China, Brazil, Mexico, India and Russia, with sales declining a whopping 33% in China.

--Ford Motor unveiled its aluminum-bodied F150 pick-up truck on Tuesday. It’s a huge gamble, the F150 being the most popular vehicle in North America for the last 32 years and accounting for a lion’s share of the automaker’s profits.

The new body – which has cut the vehicle weight by 700 lbs., is supposed to reduce fuel consumption by between 5% and 20%; important because of Ford’s obligations under the government’s Corporate Average Fuel Efficiency rules that require carmakers to nearly double their fleets’ average fuel efficiency from 2012’s 27.5 mpg to 54.5 in 2025.

But will aluminum sell? Stay tuned.

--The deal with the Takata Corp. air bags is getting worse, as Chairman Shigehisa Takada (sic) hasn’t been in the public eye since last June, and that was at an annual shareholder meeting closed to the media, as reported by Bloomberg.

Takata is an 81-year-old company but if the allegations are true, that top executives knew of the dangers of the air bags and then told others to be silent, that’s life in prison, to me. 

The National Highway Traffic Safety Administration has given Takata until Dec. 1 to answer questions under oath, including details going back to 2000. The devices have been linked to at least four deaths, with Honda saying it discovered a fifth this week, the first death outside the U.S., a case in Malaysia.

A Senate committee is going to be convened next week to question Takata officials. Takata has also been subpoenaed by the U.S. District Court of New York.

--Marc Lifsher / Los Angeles Times:

“A decade ago, many of California’s public pension plans had plenty of money to pay for workers’ retirements.

“All that has changed, according to a far-reaching package of data from the state controller (John Chang)...

“The City of Los Angeles Fire and Police Pension System, for instance, had more than enough funds in 2003 to cover its estimated future bill for workers’ retirement checks. A decade later, it is short $3 billion.

“The state’s pension goliath, the California Public Employees’ Retirement System, had $281 billion to cover the benefits promised to 1.3 million workers and retirees in 2013. Yet it needed an additional $57 billion to meet future obligations.

“The bill at the state teachers’ pension fund is even higher: It has an estimated shortfall of $70 billion.”

Of course this comes at a time “of growing anger from taxpayers over the skyrocketing cost of public workers’ retirements.”

--Alibaba CEO/Founder Jack Ma was interviewed by CNBC’s David Faber and Ma said, “I’m not very happy,” despite being China’s richest man. “Too much pressure. People say, ‘Well, Jack, rich...is good.’”

“It’s a great pain because when you’re [the] richest person in the world, everybody [is] surrounding you for money,” he said. “Today when I walk on the street, people look at you in a different [way]. I want to be myself.”

Meanwhile, Alibaba rang up more than $9 billion in sales during China’s biggest online shopping holiday, Tuesday...what is called “Singles Day.” Back in the 1990s, some college students thought this up as an anti-Valentine’s Day, and you were supposed to buy something for yourself. 11/11 was selected for numerology reasons.

But to put the $9 billion in perspective, in 2012, Alibaba posted sales of $3 billion on Singles Day. Last year it was $5.71 billion. Tuesday was $9.32 bn. Smile, Jack!

The Communist Party mouthpiece, the Global Times, said in an editorial:

“A super shopping holiday that the world has never seen before has taken place....

“The Double Eleven, a ‘festival’ made by Chinese people, is now shoulder to shoulder with Western festivals like Christmas or Valentine’s Day, and perhaps even overpowers them.”

Eegads.

--The Bank of Russia on Monday lowered its growth outlook to just 0.3% this year, while inflation is likely to exceed 8%. The central bank also now expects net capital outflows of $128 billion in 2014, compared to earlier expectations of some $100 billion.

--Wal-Mart Stores Inc. posted earnings and revenues that beat Wall Street’s expectations, with same-store sales rising just 0.5%, though this was the first increase in seven quarters. The company did say it was beginning to see the benefits of lower gas prices. The retailer expects fourth-quarter earnings to come in a little less than the Street had expected.

But the shares rallied on the optimism concerning the consumer.

Separately, Wal-Mart has decided to ditch the one-day-only “Black Friday” sales model and instead will spread out its best offers over a five-day period beginning the last week of November into December. Some of the deepest discounts will also be online.

So no more stampedes.

--Macy’s cut its profit and sales forecasts for the year. Same-store sales declined 1.4% in the third-quarter, though the shares rallied because profit rose 23% to $217 million. 

--Nordstrom reported solid earnings, $142 million, in line with expectations. Same-store sales increased a respectable 3.4%

--Warren Buffett’s Berkshire Hathaway Inc. is acquiring Duracell from Procter & Gamble Co. P&G had previously announced it would split off Duracell as part of its plan to shed up to 100 brands.

Berkshire has owned a large stake in Duracell through its old position in Gillette, which was acquired by P&G in 2005.

--McDonald’s said its October global same-store sales declined 0.5%, better than expected. September’s had fallen 3.8%.

Sales in the Asia/Pacific, Middle East and Africa region fell 4.2%. In the U.S. they were off 1%.

--Pizza Hut announced a total makeover for its menu, “the biggest change the pizza category has ever seen,” pronounced the company, with new specialty pizzas and quality ingredients.

[Pizza Hut’s parent company is Yum Brands...think KFC and Taco Bell.]

--The Southern California housing market continues to show signs of normalization. Sales in the six-county Southland fell 4.4% in October from a year earlier, according to CoreLogic DataQuick, with the median price slipping 0.7% from September to $410,000. Compared with October 2013, the median price rose 6.8%, the smallest 12-month gain since June 2012. In 2013, prices were rising at a 20% clip, which obviously wasn’t sustainable.

But with the economy continuing to improve and still historically low mortgage rates, sales should rebound next spring, but not in a big way unless wage gains pick up.

--PIMCO paid former Chief Investment Officer Bill Gross a bonus of $290 million in 2013, even as his mammoth Total Return Fund trailed its peers, according to documents reviewed by Bloomberg. Mohamed El-Erian, the former CEO who worked with Gross, picked up a cool $230 million last year.

By comparison, Laurence Fink, CEO of BlackRock Inc., the world’s biggest money manager, received $22.9 million in 2013 compensation. A spokesman for PIMCO disputed the figures but declined to specify the firm’s objections.

Oh, I long heard of such riches when I was affiliated on the retail side of the PIMCO operation. The numbers don’t surprise me in the least. I left in 1999 and there were outrageous sums being bandied about then when it came to the West Coast operation. It’s all about the profit sharing plan they have and when you manage $2 trillion, a lot of fees are generated.

--In another downer for Atlantic City, United Airlines is halting service to A.C. International Airport in December after just seven months. United was flying there from Chicago and Houston. Only low-cost airline, Spirit Airlines, will serve A.C.

--The chairman of energy giant Continental Resources Inc., Harold Hamm, was ordered by an Oklahoma judge to pay his ex-wife nearly $1 billion in cash and prizes to end their epic divorce proceedings.

Hamm gets to keep complete control of the oil company, while Sue Ann Hamm receives less than the “$billions” she was seeking.

Gee, Sue Ann...I’m fine with a $billion. And I’ll stay in New Jersey and you can do whatever you want. Whaddya say?

Harold Hamm owns 70% of the company, valued at around $14 billion.

--Finally, we note the passing of Jim Lebenthal, 86. He was a fixture on television in the New York area, a muni-bond showman, with ads touting the benefits of investing in public works that were “built by bonds.” 

Foreign Affairs

Iraq / Syria / ISIS: Islamic State leader Abu Bakr al-Baghdadi re-emerged after rumors of his death or injury in a coalition airstrike, calling, in an audio tape, for attacks against the rulers of Saudi Arabia, while saying his self-declared caliphate was expanding. Baghdadi also said the U.S.-led military campaign was failing and called for “volcanoes of jihad” the world over.

While the speech wasn’t independently confirmed as yet, it did carry a reference to the Nov. 7 announcement by President Obama that the U.S. would send 1,500 more troops to Iraq.

“We announce to you the expansion of the Islamic State to new countries, to the countries of the Haramayn [Saudi Arabia], Yemen, Egypt, Libya, Algeria....

“O soldiers of the Islamic State...erupt volcanoes of jihad everywhere. Light the earth with fire against all dictators.”

Lovely. Then, referring to the U.S.-led coalition’s action against ISIS, Baghdadi said: “Despite this Crusade campaign being the most fierce and severe of all, it is the greatest failure.”

“We see America and its allies stumbling in fear, weakness, impotence and failure.” [Associated Press / Reuters / Daily Star]

Well, it was a good week for ISIS on the propaganda front, especially if that was indeed Baghdadi. Al-Qaeda (read Nusra Front) and ISIS agreed at a meeting in northern Syria to stop fighting each other and work together against their opponents, though this is an arrangement of cooperation, not a formal alliance, it would seem. In Egypt, their main terror group pledged its allegiance to ISIS.

And ISIS announced plans to mint its own money. If it’s ever accepted at my Dunkin’ Donuts, I’m guessing that wouldn’t be a good sign for America as we know it.

So this was a week where Defense Secretary Chuck Hagel and Gen. Martin Dempsey, chairman of the Joint Chiefs of Staff, appeared before the House Armed Services Committee, with Gen. Dempsey saying an expanded role for the American advisers is possible, though both Hagel and Dempsey continue to maintain there are no current plans to introduce ground troops for a direct combat role in Iraq.

Hagel also testified that the U.S. and its allies have made advances against ISIS [we learned Friday the Iraqi military retook a key oil refinery], that its advance “has stalled and in some cases been reversed” by U.S.-backed Iraqi, Kurdish and tribal forces backed by the U.S. and the coalition.

The Britain-based Syrian Observatory for Human Rights said U.S.-led coalition airstrikes against the Islamic State and other extremists in Syria have killed more than 860 people, including 746 ISIS militants, while another 68 were from the Nusra Front. At least 50 civilians were killed.

But if the Nusra Front aligns itself with ISIS for the purposes of fighting together in northern Syria, for starters, that means they would be going after the very “moderate” rebel factions the U.S. is attempting to support. The rebels are already weak and now they would have two groups gong after them.

As for Bashar Assad, I wrote weeks ago the U.S. strategy was incoherent. This week Hagel and Dempsey reiterated the U.S. seeks to build a moderate rebel force in Syria, but now they understand it has to be comprised of more like 15,000 fighters rather than 5,000, and that it would take years to put together that size a force, yet they have to know we don’t have years. It’s just stupid.

Editorial / The Economist

“As the world’s attention stays focused on IS, Mr. Assad has increased his attacks. Between October 20th and 31st his regime carried out 850 aerial attacks – including the dropping of indiscriminate barrel bombs – on rebel-held areas, according to the Syrian Observatory for Human Rights. On October 29th the regime bombed a camp for displaced people in Idleb province. Last month it killed six local citizen journalists (compared to one killed by Islamic State), including one who died under torture after two years of detention.

“Although less attention is now being paid to the regime’s atrocities than those of its foes, human rights groups say Mr. Assad’s forces are responsible for more deaths than IS. Torture in jail continues and grows ever more grisly: Amnesty International, a lobby, has documented 31 methods of torture, many of which had not been seen for years.”

So we have ISIS and Nusra Front going after the moderates as well as Assad, Assad bombing the moderates, and for years...years...President Obama did nothing. Now, after finally deciding to act, his own administration knows the “strategy” won’t work.

Meanwhile, Iraqi Prime Minister Haider al-Abadi announced he was removing 36 commanders and installing 18 others as part of a sweeping shake-up of the military, an act to promote professionalism and “combat corruption,” as reported by the New York Times’ David Kirkpatrick. It’s not known as yet whether Abadi was just bringing in his own loyalists, which is what his predecessor, Nouri al-Maliki, did. For example, the constitution requires that top generals be approved by parliament and Abadi didn’t do that.

Finally, the UN’s refugee agency UNHCR said about 13.6 million people have been displaced by the wars in Syria and Iraq, with many going into winter without food or shelter.

The 13.6 million includes 7.2 million displaced within Syria, as well as 3.3 million Syrian refugees abroad.

In Iraq, 1.9 million have been displaced this year, on top of 1 million previously displaced, with another 190,000 leaving the country.

The vast majority of the Syrian refugees are in Lebanon, Turkey, Jordan and Iraq.

Iran: Russia agreed on Tuesday to build two new nuclear-power reactors in Iran, with another six to follow, in a deal greatly expanding nuclear cooperation between the two. Russia sees this as a way of preventing Iran from having nuclear weapons, by supplying civilian power technology that would operate under international monitoring. The U.S. grudgingly accepts this route since the nuclear fuel used at the plants, as is the case at Iran’s first civilian nuclear plant at Bushehr, is to be supplied and reprocessed by Russian companies.

But regarding the Nov. 24 deadline for an agreement on Iran’s nuclear program, all sides are signaling, after three days of talks in Oman, that negotiations could be extended further, though little was accomplished this past week, including in face-to-face meetings between Secretary of State John Kerry and his Iranian counterpart, Foreign Minister Mohammad Javad Zarif.

The key sticking point is said to be the number and type of uranium-enriching centrifuges Iran should be allowed to keep spinning in exchange for sanctions relief and rigorous inspections.

Reuel Marc Gerecht and Mark Dubowitz / Wall Street Journal

“Let’s assume the Iranian nuclear talks in Vienna fail to conclude a final agreement by Nov. 24, the already extended deadline under the interim Joint Plan of Action signed in January. Iran’s clerical regime has refused to give much ground in key areas, and the Obama administration has, so far, been unwilling to meet Iranian demands. If the White House doesn’t end November with a cascade of concessions leading to a deal, there are four paths forward. None is appealing. Two might be effective – but the president is unlikely to choose either one.”

Iran has already gotten its wish “to continue programs for uranium enrichment, long-range ballistic missiles and centrifuge development. Iran further refused to accept intrusive UN or other inspections, balked at dismantling the heavy-water reactor at Arak, and declined to discuss past weaponization research. It also won agreement that any restrictions on its nuclear program would be of limited duration. Tehran has treated the U.S. concessions to its demands as permanent – effectively making further diplomatic advances contingent on greater Western ‘flexibility.’”

So...

“First: The White House could give up on diplomacy and pre-emptively strike Iran’s nuclear sites...(but this) is highly unlikely....

“Second: The administration could give up on the current talks and default back to sanctions, but again trying to undercut their seriousness, as the president attempted to do in 2011 and 2012. Congress imposed the most economically painful measures – targeting Iran’s oil exports, central bank and access to the Swift interbank system – over his objections. The president has always hoped that ‘rationality’ would take hold in Tehran, that the regime would see the economic benefits that come with good behavior....

“Third: New, even more biting sanctions could be enacted, causing Tehran considerable pain....

“We don’t know the Islamic Republic’s timeline for a bomb.” Our intelligence is sorely lacking.

Ayatollah Khamenei could choose to accelerate the nuclear program if further sanctions were employed.

“Which brings us to option four: The White House could try to reinforce new sanctions with a credible show of military force to intimidate the Iranian regime. President Hasan Rohani has rather pleadingly confessed in speeches and in his memoirs that the Anglo-American invasion of Iraq in 2003 scared the clerical regime and led him to advocate, as Tehran’s chief nuclear negotiator between 2003-05, a tactical pause in the regime’s nuclear aspirations.

“To achieve a more lasting impression now would require a significant military operation. Only one target would serve that purpose: Bashar Assad. Syria is Iran’s most helpful ally among Arab states. Taking Mr. Assad down would let Tehran know that America’s withdrawal from the Middle East and President Obama’s dreams of an entente with Iran are over.”

But “it is hard to imagine Mr. Obama taking such action.”

So we’re likely headed to another extension. And as Mr. Gerecht and Mr. Dubowitz conclude:

“This fearful diplomacy will lead inevitably, as it did with North Korea, to the bomb.”

Needless to say, Israel, among others, is rather interested in what comes next.

And now that Congress is back, even in lame-duck fashion, expect a vigorous debate, especially in the Senate, as to what the White House is doing in its negotiations with Tehran and any tie to action against ISIS.

Israel: Tensions continued to rise here as Palestinian President Mahmoud Abbas accused Israel of launching a “religious war” at Jerusalem’s Temple Mount, with Israeli soldiers killing a Palestinian during clashes in the West Bank.

Jailed Palestinian leader Marwan Barghouti said from his cell that it was time for another intifada, “comprehensive armed resistance,” as he put it, “[which is] the shortest way to end the occupation and gain freedom.” [Jerusalem Post]

Palestinians like Abbas argue Jews should not be allowed access to pray at Temple Mount, which Muslims know as the Noble Sanctuary, though Jews are actually restricted from praying there; they just have access on a limited basis.

Prime Minister Benjamin Netanyahu said of Abbas: “He is disseminating lies to the effect that we intend, or are operating in some way, to change the status of the holy places – this is a gross lie,” he said. “Instead of educating his people for peace, Abu Mazen is educating them for terrorism,” the prime minister added, using Abbas’ nickname.

But Netanyahu faces increasing pressure in Europe to reach a peace agreement with the Palestinians as various countries, including Sweden, Britain, Ireland and France either already recognize the state of Palestine or are moving to do so with parliamentary action.

Netanyahu, as I noted last time, also has a huge issue on his border...maintaining the 1994 peace treaty with Jordan. This week he met in Amman with Secretary of State Kerry, both of whom met with Jordan’s King Abdullah (with Kerry and Abdullah in turn meeting separately with Abbas). This treaty cannot collapse, but clerics are stirring up the masses over the Temple Mount issue. 

Russia / Ukraine: Russia sent convoys of tanks, heavy arms and troops into eastern Ukraine this week, initially to bolster the separatists in preparation for a long standoff, what will be known as a “frozen conflict.”

The Organization for Security and Cooperation in Europe (OSCE) has 261 observers in Ukraine, including over 100 in the east, and it has been launching drones for aerial surveillance. But the drones are now being targeted by what the OSCE says is highly sophisticated jamming. The OSCE is most interested in what is happening around the strategic port city of Mariupol. “We’ve gone blind there,” said an OSCE representative.

Editorial / Wall Street Journal

“Russian forces are again on the march in Ukraine, and again the question before President Obama and Europe is how to stop the Napoleon of the Kremlin. Nothing they’ve tried has worked with Vladimir Putin, who has sized up Western leaders as too wobbly to resist.

“NATO Commanding General Philip Breedlove, a rare Western leader who speaks frankly about Moscow, reported Wednesday that Russian forces have again crossed the border into southeast Ukraine....This makes a mockery of September’s Minsk cease-fire accord between the insurgents backed by Mr. Putin and the Kiev government. Washington and the EU had hoped the truce would end this war, but as usual it was merely a pause that refreshes Russian appetites.

“The next steps aren’t hard to imagine. Moscow wants a land bridge from Russia proper to the Crimean peninsula that it annexed in March. ‘It is our first guess that these forces will go in to make this a more contiguous, more whole and capable pocket of land, to then hold on to it long-term,’ said Gen. Breedlove.”

So you’ll be hearing more about Mariupol, located on the main road to Crimea.

“The Western strategy assumes that Mr. Putin is persuadable. In 15 years running Russia, Mr. Putin has never stood down. The former KGB lieutenant colonel came to power on the heels of a war that he provoked against Chechnya in late 1999. He attacked Georgia in 2008. Enraged by anti-government street protests in early 2012, he revved up anti-Americanism and has increased domestic repression. His regime is promoting virulent propaganda that portrays Russia as a victim of the West....

“Above all, the West has to shed its illusions that Mr. Putin can be tamed to follow Western rules of order. He wants to dominate Eastern Europe and reclaim Russia’s status as a great power, and these goals are fast becoming essential to his continued rule. As the economy falters, nationalism and conquest may be the only ways he can maintain public support.”

Separately, Russia continues to send its bombers, fighter jets and surveillance aircraft all over eastern Europe, and elsewhere. Russian Defense Minister Sergey Shoigu said his country’s military will start conducting regular long-range bomber patrols as far as “the Caribbean and in the Gulf of Mexico.”

At week’s end, Putin was attending the G-20 summit in Brisbane, Australia, with Russian warships stationed in waters off the country’s northeastern coast. The Russian embassy on Friday said Russia’s Pacific fleet was testing its range and could be used as security for Putin, as reported by the Associated Press.

Australian Prime Minister Tony Abbott, who once said he’d physically confront Putin over the downing of Malaysia Airlines Flight 17 that killed 298 people, including 38 Australian citizens, is not amused at the Russian presence in his waters. In a press conference on Friday, Abbott said:

“One of the points that I tried to make to President Putin is that Russia would be so much more attractive if it was aspiring to be a superpower for peace and freedom and prosperity...instead of trying to recreate the lost glories of tsarism or the old Soviet Union.”

Gideon Rachman / Financial Times

“Broadly speaking, the Washington consensus seems to be that, of the two immediate crises, the one in the Middle East is more urgent than the one in Ukraine. One U.S. national security official, whose responsibilities include both Russia and the Middle East, looked incredulous when I asked him, last week, which was the more important: ‘The Middle East, by far,’ he replied....

“(For) those who worry most about Vladimir Putin’s Russia, it is the Middle East that is the dangerous distraction. The ‘Russia first’ crowd is stronger in Warsaw and Berlin than in Washington. It worries that the U.S. has been drawn back into the ‘war on terror’ and the conflicts of the Middle East, just as the dangers in Europe are mounting.

“According to this analysis, the U.S. has still not recognized the radicalism of the challenge posed by Russia. The annexation of Crimea and incursions into eastern Ukraine are, it is feared, just the start. At some point, Russia is likely to threaten more of Ukraine, or even the Baltic states. The very fact that America has ruled out military action over Ukraine – which makes the crisis seem less urgent in Washington – has inadvertently raised the stakes. As one senior European diplomat puts it: ‘Putin knows that he can always escalate to places we won’t go.’

“The darkest scenarios, being discussed behind closed doors, include Russian escalation up to and including the use of tactical nuclear weapons. It that were to happen it would, of course, be the biggest international security crisis in decades – far more significant and dangerous than another round in the 25 years of fighting in Iraq....

“Some hope that the growing pressure on the Russian economy and the ruble might dissuade the Kremlin from escalation. But an economic crisis could also make Russian behavior more unpredictable and reckless....

“My own instinct is that Russia is now the most important challenge. The rise of China is hugely significant but, for the moment, it feels like a long-term process – without any immediate risk of conflict with the U.S.

“Failing states in the Middle East and the risk of terrorism are dangers that, sadly, now feel almost normal. But an angry, nuclear-armed Russia, intent on challenging U.S. power, poses risks that we are only beginning to understand. Peace in Europe may depend on Washington striking exactly the right balance between deterrence and diplomacy.”

Andrew Nagorski / Wall Street Journal

“All this brings to mind the Russian story about two peasant farmers. Each has just one cow that is skin and bones. Suddenly, one of the cows begins to rapidly gain weight, allowing its owner to prosper because he has more and more milk to sell. Seeing that the other farmer is increasingly miserable, a fairy comes to him with the offer to fulfill one wish. ‘Kill my neighbor’s cow,’ the farmer replies.

“Vladimir Putin is that farmer. So long as he remains in power, his country is unlikely to afford its citizens the chance to prosper and live in peace.”

Germany: Foreign Minister Frank-Walter Steinmeier said Germany’s Jews were increasingly being subjected to threats and attacks at pro-Palestinian demonstrations and that “hatred of Jews” was on the rise in his country and across Europe, fueled by spiraling violence in the Middle East.

“Bold and brutal anti-Semitism has shown its ugly face again,” Steinmeier told an OSCE gathering.

North Korea: The last two Americans held here, Matthew Todd Miler and Kenneth Bae, were released following a visit by James Clapper, Director of National Intelligence. Clapper did not meet with Kim Jong Un and there was apparently no deal. [I was also incredulous to learn that Clapper, as he tells the Wall Street Journal in a weekend interview, brought along no reading material.]

South Korea: The captain of the South Korean ferry which sank in April, killing more than 300, was found guilty of negligence and sentenced to 36 years in prison.

Nigeria: A suicide bomber disguised in school uniform killed 48 students at a high school assembly in the northeastern city of Potiskum on Monday. A suicide bomb attack in the same city killed 30 one week earlier. Boko Haram is being blamed in both.

Separately, Nigeria is furious that the United States won’t sell the government “lethal” weapons to fight the Islamists. The U.S. reportedly has not done so due to Nigeria’s poor human rights record.

Random Musings

--Defense Secretary Hagel outlined actions to revamp the U.S. nuclear program after an investigation revealed “evidence of systemic problems.” $10 billion is being allocated to “address all of the underlying (issues),” Hagel said, pointing to “sometimes insufficient resources and manpower,” among other things.

An internal review found “inadequate” and “aging” equipment and facilities, as well as “a culture of excessive inspections” to the blurring of the lines “between accountability and perfection in the Air Force,” according to a summary released by the Defense Department.

This is so incredibly dangerous, especially with what Vladimir Putin is doing...probing, provoking.

In what will become the most famous instance of utter dysfunction, a review panel discovered a situation where crews working on the missile fleet relied on one copy of a special wrench, needed to attach warheads, for three bases...one wrench for over 400 missiles between the three, so the wrench was FedEx’d between them.

Defense officials recognize this is a crisis. If the president doesn’t, hopefully these same officials will blow him off and just do what’s right. Ironically, in all sincerity, this could end up being Hagel’s finest hour if he can effort swift change.

--David Brooks / The New York Times

“Twenty-five years after the fall of the Berlin Wall, the biggest surprise is how badly most of the post-communist nations have done since. There was a general expectation back then that most of these countries would step out from tyranny and rejoin the European club of prosperous nations. Most of us did not appreciate the corrosive power of distrust, and how long it would take to heal the mental scars caused by it.

“Branko Milanovic, an economist at the City University of New York, measured the wreckage in a recent essay on his blog, Global Inequality. He looked at the growth rates of post-communist countries and broke them down into four groups.”

Basket-case nations, which would include Ukraine, Georgia, Bosnia and others – about 20% of the post-communist world.

Moderate failures: Russia, Hungary that “continue to fall steadily behind the West – about 40% of the post-communist world by population.”

Third group with modest growth: Czech Republic and Slovenia.

Successes: Poland, Azerbaijan and Kazakhstan, though the last two have oil.

“There are only five countries that have emerged as successful capitalist economies: Albania, Poland, Belarus, Armenia and Estonia. [Ed. “Successful” is in the eye of the beholder.]

Brooks:

“To put it another way, only 10% of the people living in post-communist nations are living in a place that successfully made the transition to capitalism. 90% are living under failed transitions of one sort or another. This fact is already yielding screwed up politics in places like Hungary and Russia and will shape the 21st century.”

Why did some succeed and others fail? Some political leaders just made better decisions. But most important has been “the level of values. A nation’s economy is nestled in its moral ecology. Economic performance is tied to history, culture and psychology.

“Poland, for example, had been invaded throughout its history, yielding a pragmatic, survivor ethos. The Poles had a keen desire to initiate reforms on their own. Poles also had a clear sense of justice and injustice, since they had seen the Russians do things the wrong way on their own territory. They placed a high value on education and social mobility....

“Many of the ailing countries are marked by distant power relationships. Those with power – even in an office or neighborhood – are aloof and domineering. Those without power hanker for security at all costs. They’re nostalgic for the imagined stability of communism. When everything seems arbitrary and crooked, people tolerate strongman rule.

“The lesson of the past 25 years is that democratic prosperity is built on layers of small achievements 10,000 fathoms deep. Communism ripped at all that bottom-up society-making and damaged the psyches of its victims. Healing from those wounds is gradual. Progress is not guaranteed.”

--David Rothkopf / Foreign Policy

“In the wake of Tuesday’s elections, President Barack Obama cuts a lonely figure. In fact, he may end his term of office as the most isolated president since Richard Nixon. If that is the case, it will largely be a plight of his own making.

“The isolation starts with the fact that from the beginning, for the president and his campaign team, it was never about the Democratic Party. It was never about the rest of their team in the administration. It was never about a network of international relationships. It was always about one man who was the product, the messenger, the mission and the raison d’etre all wrapped into one. And for the next two years, it seems highly likely that any brave postelection faces his people try to put on this to the contrary, Obama will reap the results of his political and policy narcissism in a way that will not only be difficult for him personally but will be bad for America and its role in the world....

“(While the Democrats’ crushing defeats) were in part a repudiation of the dysfunctional status quo in Washington, they were also at their heart undeniably a repudiation of the president.

“While some will say this had little to do with Obama’s largely unhappy foreign-policy record, they too easily discount the degree to which his international errors (and the consequent damage done to America’s standing) impacted in a core way the public perception of Obama.

“Setting aside individual debates about individual policy choices, the public wants America and its leaders to appear strong. Whether in Crimea or Syria, Iraq or Afghanistan, in bickering with allies or being manipulated by rivals, Obama has projected anything but such an image. His perceived weakness and ineffectiveness overseas undoubtedly played into the results Tuesday. And it is therefore a reason the next two years are likely to see an America that is like its president, increasingly ineffective internationally – as the world waits for his successor and hopes for a change in the character of U.S. leadership....

“(The) outlook for the president looks very much like the famous photo from ‘Back to the Future’ in which before our eyes we can see his image fading to nothing. In that movie, the only way to reverse the process was to restore history back to its original order....

“(Over) the next two years we may view the world as a shifting tableau involving many familiar actors and a blank space where once there was a president of the United States.”

--Robert Costa and Jose A. Delreal / Washington Post

“The Republican Party’s ardent campaign against President Obama’s health-care law gained new momentum Wednesday as lawmakers reacted angrily to assertions by an architect of the policy that it was crafted in a deliberately deceptive way in order to pass Congress.

“On both sides of the Capitol, leading conservatives said they may call economist Jonathan Gruber to testify about his remarks, which were made last year and surfaced this week in a video on social media. In the video, Gruber suggests that the administration’s signature health-care legislation passed in part because of the ‘stupidity of the American voter’ and a ‘lack of transparency’ over its funding mechanisms.

“ ‘The strategy was to hide the truth from the American people,’ said Sen. Jeff Sessions (R-Ala.), who is slated to chair the Senate Budget Committee next year. ‘That is a threat to the American republic.’”

Kathleen Parker / Washington Post

“(There’s) no denying that the midterms were a referendum on President Obama. The president prefers to say they were a referendum on his policies, which is perhaps an easier pill to swallow. But Obama is his policies, which happen to rub many Republicans (and at least a few Democrats) the wrong way.

“Moreover, people don’t like being insulted and misled, as many feel they have been by this administration. This is not just a feeling but a demonstrable fact, especially vis-à-vis the Affordable Care Act. And it’s not just the far-right fringe who object to the strategic misrepresentations along the way.

“These obfuscations include telling the American people that they could keep the insurance they had if they liked it and also writing the law in such a way that the ACA’s mandate to purchase government-approved insurance was not a ‘tax,’ despite the Internal Revenue Service’s role in policing its compliance.

“The keep-your-insurance ruse is history now, but the memory still lingers in the minds of voters, who, contrary to what the Obama White House thinks, are not stupid....

“Those who feel defrauded by their own government got third-party confirmation recently when remarks by one of the ACA’s chief architects, MIT economist Jonathan Gruber – invoking the stupidity of voters and lauding the political advantage of a lack of transparency in government – went viral....

“The comments were made on a panel about a year ago but were released a week after the midterms. Gruber was making the point that ObamaCare never would have passed if the administration had been honest about the fact that the so-called ‘penalty’ for noncompliance with the mandate was really a tax.

“ ‘And basically, call it ‘the stupidity of the American voter’ or whatever, but basically that was really, really critical to getting the thing [ObamaCare] to pass.’

“The irony is that the very thing the White House was trying to conceal (because the truth was just too complicated for regular folks), the Supreme Court essentially confirmed. Enforcement of the mandate constituted a tax, not a penalty. Thus spake Chief Justice John Roberts.

“This ruling, indeed, was the reason the ACA was able to go forward, which is why so many Republicans were apoplectic with Roberts’ siding with the liberals in a 5 to 4 ruling. In other words, Obama’s obfuscation was simultaneously revealed and rewarded by the court. And the American people were smacked with a health-system overhaul many more would have rejected had they known the truth.

“Or would they? It’s hard to know what might have happened if truth had won the day. But we do know that truth squandered is truth lost.”

--Peggy Noonan / Wall Street Journal

[On President Obama]

“(He) is killing his party. Gallup this week found that the Republicans for the first time in three years beat the Democrats on favorability, and also that respondents would rather have Congress lead the White House than the White House lead Congress.

“A few weeks ago a conservative intellectual asked me: ‘How are we going to get through the next two years?’ It was a rhetorical question; he was just sharing his anxiety. We have a president who actually can’t work with Congress, operating in a capital in which he is resented and disliked and a world increasingly unimpressed by him, and so increasingly predatory.

“Anyway, for those who are young and not sure if what they are seeing is wholly unusual: Yes, it is wholly unusual.”

--According to a review of the recent White House security breach by the Department of Homeland Security, there was a succession of “performance, organizational, technical” and other failures by the Secret Service.

Among the findings, the Secret Service’s alarm systems and radios failed to function properly. The worst was the Secret Service officer who was stationed on the North Lawn with an attack dog. He could have stopped the intruder, only he was in his van talking on his personal cellphone, plus he didn’t have his radio earpiece in.

--Dr. Ben Carson is readying a run for the White House, so Fox News, as is its policy in such situations, dropped him as a contributor.

--For the record...Hillary Clinton’s campaign success/failure in the mid-terms, per David Catanese / U.S. News Weekly:

“Hillary Clinton traveled to 20 states in all, mostly in the final weeks of the campaign. But her win-loss record was middling. Of the 10 U.S. Senate candidates Clinton stumped for, just three clinched victories. She sided with the winning candidate in just five of the 11 governor’s races in which she campaigned.”

--Democratic Sen. Elizabeth Warren (Mass.) / Washington Post

“(For) all the talk of change in Washington and in states where one party is taking over from another, one thing has not changed: The stock market and gross domestic product keep going up, while families are getting squeezed hard by an economy that isn’t working for them.

“The solution to this isn’t a basket of quickly passed laws designed to prove Congress can do something – anything. The solution isn’t for the president to cut deals – any deals – just to show he can do business. The solution requires an honest recognition of the kind of changes needed if families are going to get a shot at building a secure future.

“It’s not about big government or small government. It’s not the size of government that worries people; rather it’s deep-down concern over who government works for. People are ready to work, ready to do their part, ready to fight for their futures and their kids’ futures, but they see a government that bows and scrapes for big corporations, big banks, big oil companies and big political donors – and they know this government does not work for them.

“The American people want a fighting chance to build better lives for their families. They want a government that will stand up to the big banks when they break the law. A government that helps out students who are getting crushed by debt. A government that will protect and expand Social Security for our seniors and raise the minimum wage....

“Yes, we need action. But action must be focused in the right place: on ending tax laws riddled with loopholes that favor giant corporations, on breaking up the financial institutions that continue to threaten our economy, and on giving people struggling with high-interest student loans the same chance to refinance their debt that every Wall Street corporation enjoys. There’s no shortage of work that Congress can do, but the agenda shouldn’t be drawn up by a bunch of corporate lobbyists and lawyers.

“Change is hard, especially when the playing field is already tilted so far in favor of those with money and influence. But this government belongs to the American people, and it’s time to work on America’s agenda. America is ready – Congress should be ready, too.”

So...will Ms. Warren run? It’s still early. The Iowa State Fair isn’t until next August, after all. What if Hillary has another medical episode, for example. But, yes, you need a strong ground game and if Sen. Warren were to go for it, she would need to start doing some things behind the scenes now.

--George Will / Washington Post

“Now that two of the last three Democratic presidencies have been emphatically judged to have been failures, the world’s oldest political party – the primary architect of this nation’s administrative state – has some thinking to do. The accumulating evidence that the Democratic Party is an exhausted volcano includes its fixation with stale ideas, such as the supreme importance of a 23rd increase in the minimum wage. Can this party be so blinkered by the modest success of the third recent presidency, Bill Clinton’s, that it will sleepwalk into the next election behind Hillary Clinton?

“In 2016, she will have won just two elections in her 69 years, the last one 10 years previously. Ronald Reagan went 10 years from his second election to his presidential victory at age 69, but do Democrats want to wager their most precious possession, the presidential nomination, on the proposition that Clinton has political talents akin to Reagan’s?

“In October, Clinton was campaigning, with characteristic futility, for Martha Coakley, the losing candidate for Massachusetts governor, when she said: ‘Don’t let anybody tell you that it’s corporations and businesses that create jobs.’ Watch her on YouTube. When saying this, she glances down, not at a text but at notes, and proceeds with the hesitancy of someone gathering her thoughts. She is not reading a speechwriter’s blunder. When she said those 13 words, she actually was thinking. 

“You may be wondering, to use eight other Clinton words that will reverberate for a long time: ‘What difference at this point does it make?’ This difference: Although she says her 13 words ‘short-handed’ her thinking, what weird thinking can they be shorthand for?”

--According to a new USC Dornsife/Los Angeles Times poll, 59% of registered voters in California said the state would be better off with new candidates for the two Senate seats currently held by Democrats Barbara Boxer and Dianne Feinstein. Boxer, 73, is up for reelection in 2016. Feinstein, 81, in 2018.

Boxer has a 46% favorable, 35% unfavorable rating. Feinstein’s split is 48-32.

--According to a front page story in Friday’s Wall Street Journal: “The Justice Department is scooping up data from thousands of mobile phones through devices deployed on airplanes that mimic cellphone towers, a high-tech hunt for criminal suspects that is snagging a large number of innocent Americans, according to people familiar with the operations.

“The U.S. Marshals Service program...operates Cessna aircraft from at least five metropolitan-area airports, with a flying range covering most of the U.S. population.”

The technology employed on the aircraft “enables investigators to scoop data from tens of thousands of cellphones in a single flight, collecting their identifying information and general location, these people said.”

Supposedly the technology “let’s go” of non-suspect phones.

Well I never use my phone so the rest of you are on your own.

--We note the passing of former Illinois conservative Republican Representative Philip Crane, who served 35 years in the House and made a failed run for the presidency in 1980. He was 84.

In 1980, Crane, leader of the American Conservative Union, thought Ronald Reagan may not run or would falter and that he, Crane, would then emerge as the favorite of conservatives.

I forgot Crane won his House seat in 1969 in a special election to succeed Donald Rumsfeld, who had resigned to work in the Nixon administration.

Crane served until 2004. He was one of my early political heroes, along with Jack Kemp.

--According to a new Monmouth University poll, half of all New Jersey residents say they want to eventually leave the state, with more than a quarter of them saying their future departure is “very likely.” Only 45% say they’d like to live out their lives here.

Patrick Murray, director of the Monmouth University Polling Institute, said the state’s high cost of living is the key factor, particularly “New Jersey’s property tax burden,” the highest in the nation. [Claude Brodesser-Akner / NJ.com]

--Hugo Martin of the Los Angeles Times reported that as of the end of October, the Transportation Security Administration said it had confiscated 1,855 firearms from passengers – more than in all of 2013. 1,471 of the handguns and rifles were loaded, with the greatest number found at Dallas/Fort Worth, Hartsfield-Jackson Atlanta, Phoenix Sky Harbor and Houston George Bush international airports.

--As part of an effort to be more transparent about its history, Mormon leaders acknowledged this week that the church’s founder, Joseph Smith, took as many as 40 wives, some of whom were already married and one that was only 14 years old.

As reported by Laurie Goodstein of the New York Times: “Smith probably did not have sexual relations with all of his wives, because some were ‘sealed’ to him only for the next life, according to the essays posted by the church. But for his first wife, Emma, polygamy was ‘an excruciating ordeal.’...

“The Church of Jesus Christ of Latter-day Saints, as the Mormon Church is formally known, has quietly posted 12 essays on its website over the last year on contentious topics such as the ban on blacks in the priesthood, which was lifted in 1978, and accounts of how Smith translated the Book of Mormon, the church’s sacred scripture.

“Elder Steven E. Snow, the church historian and a member of its senior leadership, said in an interview, ‘There is so much out there on the Internet that we felt we owed our members a safe place where they could go to get reliable, faith-promoting information that was true about some of these more difficult aspects of our history.

“ ‘We need to be truthful, and we need to understand our history,’ Elder Snow said. ‘I believe our history is full of stories of faith and devotion and sacrifice, but these people weren’t perfect.’”

--Congratulations to our European friends for successfully landing the Rosetta spacecraft (its lander, Philae) on a comet, the culmination of a 10-year long mission. It takes 28 minutes for the signal to reach Earth and the first pictures are amazing as scientists hope to learn something about the early evolution of the solar system, including whether comets once “seeded the Earth.”

Rosetta is orbiting above the comet, between the orbits of Mars and Jupiter. A subsidiary of Airbus Defense and Science was the main contractor for the spacecraft, while the European Space Agency has 20 member countries.

As of now no Cometerians have been seen in the shadows. We also hope Philae’s battery holds out.

---

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

God bless America.
---

Gold closed at $1185
Oil $75.82...seventh straight weekly decline

Returns for the week 11/10-11/14

Dow Jones +0.3% [17634...17652 the new high set Thurs.]
S&P 500 +0.4 [2039.82...new high]
S&P MidCap +0.1%
Russell 2000 +0.5%
Nasdaq +1.2% [4688...new high for year...5048 record 3/10/00 closing high]

Returns for the period 1/1/14-11/14/14

Dow Jones +6.4%
S&P 500 +10.4%
S&P MidCap +6.6%
Russell 2000 +0.9%
Nasdaq +12.3%

Bulls 55.5
Bears 14.8 [Source: Investors Intelligence...readings are released Wed. AM, reflecting Tuesday market closes and can lag a bit. Tues. Oct 21 the bull/bear split was 35.3 / 18.2. The market had bottomed Wed. Oct. 15 at 1862. That’s how a contrarian indicator is supposed to work. Now if the bull figure hits 60, we might have a problem.]

Have a great week. I appreciate your support.

I release the bull/bear figures on Twitter, Wed. mornings, as soon as I receive them. @stocksandnews

Happy Birthday, Dale! [I’m the proud godfather.]

Brian Trumbore