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08/02/2014

For the week 7/28-8/1

[Posted 12:00 AM ET]

Edition 799

Washington and Wall Street

Stocks took it on the chin for a myriad of reasons, even as a crush of economic data was largely positive. The Dow Jones lost 2.8%, its worst performance since the week ended Jan. 24, while the S&P 500’s percentage loss of 2.7% was its worst since June 2012.

So why did stocks crater? Clearly geopolitical risks were back in the forefront with the ongoing crises in Ukraine and Gaza, which in the case of the former led to another round of sanctions that will hurt some large corporations, both here in the States and in Europe. Questions about the health of the eurozone economy and its banking system popped up again. And you had an employment-cost index for the second quarter that was up 0.7%, with wages and salaries advancing 0.6%, the fastest rate of increase since Q3 2008. 

The ECI is up 2.0% year-over-year. I’ve been saying wage growth would eventually take hold and that this would force the Federal Reserve to begin raising interest rates sooner than is currently anticipated. So the yield on the 10-year Treasury quickly ran up to 2.61% from the prior week’s 2.47%, before it plunged anew on Friday with a goldilocks employment report that showed job growth in July was solid, but not too hot for the Fed (and with a wage component that was unchanged, though also up 2.0% for the past 12 months).

But let’s run through the numbers more specifically.

Wednesday, we had the first look at second-quarter GDP and it did indeed rebound, to the tune of 4.0%, better than expected, while the first quarter’s contraction was revised up from -2.9% to -2.1%.

But that means growth was at a 1% clip in the first half and with a projected 3% pace in the second, that’s how you come up with 2% for the year. Hardly robust. Plus while consumer spending was up 2.5% in the second quarter, it was clear much of the 4% growth was attributable to aggressive inventory building, begging the question, how fast will the stuff fly off the shelves?

On Friday, the July non-farm payroll figure showed job growth of 209,000 (with upward revisions to May and June adding another 15,000); the sixth straight month of 200,000+ for the first time since 1997. The unemployment rate ticked up to 6.2% from 6.1% because more people were looking, though the labor participation rate is still a putrid 62.9%, near the lowest level since the late 1970s.

The 209,000 matched the monthly average in the 12 months ended in June. A broad measure of unemployment known as U-6, which includes part-timers who want a full-time job but can’t find one, was 12.2% in July, up from 12.1% in June, but down from 13.9% in July 2013.

A few other data points:

The weekly jobless claims figures continue to come in at 14-year lows (at least the revised reading for two weeks ago was).

The July Chicago PMI on manufacturing came in at 52.6, missing the 63.0 target by a mile, which was a shocker, but this can be a highly volatile figure. More importantly, the national ISM was 57.1, far better than expected and the best since April 2011.

Personal income in June rose a solid 0.4%, as did consumption.

June construction spending was down 1.8% when a small gain was expected.

And on the housing front, the S&P/Case-Shiller 20-city index for May saw prices rise 9.3% vs. a year earlier, which was the smallest year to year advance since February 2013. Co-creator Robert Shiller said it was “clear evidence of weakening.” Prices rose in 14 of the 20 on a seasonally adjusted basis for the month.

But then pending home sales fell 1.1% in June over May, worse than expected.

A reading on consumer confidence by the Conference Board, though, was at 90.9 in July, the highest since October 2007, which speaks to an improving job market and a stronger second half (assuming geopolitics doesn’t enter the equation more than it already has).

And auto sales for July were strong (details below).

Back to the topic of inflation, wage growth and the Federal Reserve, the Fed’s Open Market Committee gathered this week and noted in its formal statement: “The likelihood of inflation running persistently below 2 percent has diminished somewhat,” though it spoke of there still being “significant underutilization of labor resources,” which means the Fed isn’t concerned about wage growth, though the next day we had the ECI report that rattled the markets.

The Fed added: “Household spending appears to be rising moderately and business fixed investment is advancing, while the recovery in the housing sector remains slow.”

Bottom line, the Fed offered it will wait a “considerable time” after bond purchases end in October before raising interest rates, a position it has held since late 2012.

Finally, I do have to make note of a conclusion in PIMCO’s latest investment newsletter by Bill Gross where he, via PIMCO economist Paul McCulley, talks of declining structural global growth rates, the issue of the consumer and a “yawning gap of aggregate demand relative to aggregate supply.”

“1) they have too much debt, 2) Boomers are getting older, 3) workers are outdated and outjobbed by technology, and 4) labor is overwhelmed by corporations with the power to contain wages at a lower rate than topline increases.”

The world, say Gross and McCulley, “is demand deficient and supply rich.” I agree, except I still believe wages are headed higher than expected.

Europe and Asia

There was a slew of data for the eurozone, with the final PMI figure on manufacturing for July coming in at 51.8 vs. a flash reading of 51.9.

Spain was 53.9 (vs. 54.6 in June); France 47.8; Germany 52.4; Italy 51.9 (8-month low); and Greece 48.7, the worst since Oct. 2013 and hardly a sign of recovery when a lasting one is desperately needed in Greece to avoid a third bailout.

[In non-euro U.K., the PMI fell from 57.2 in June to 55.4 last month, obviously still robust, though here, house prices rose at their slowest pace in more than a year in July, which is good as authorities try to prick the bubble.]

But while the manufacturing data for the euro-18 as a whole continues to signal recovery, you had a reading on inflation for July and the flash estimate was prices increased just 0.4% on an annualized basis when the reading back in July 2013 was 1.6%. So whiffs of deflation are still in the air. [The final reading for July prices is released Aug. 14.]

And the eurozone unemployment rate came out for June, 11.5%, which was down from May’s 11.6%, but only a slight improvement vs. a year earlier, 12.0%. Nonetheless, the 11.5% reading is the best since September 2012.

A few representative jobless rates, courtesy of Eurostat, the EU’s statistical arm: Germany 5.1% (the official government reading is 6.7%); France 10.2%; Italy 12.3% (it was 12.2% a year ago, though down from May’s 12.6% reading); Portugal 14.1% (down from 16.6% June 2013); Spain 24.5% (down from 26.2% a year earlier); Greece 27.3% (April).

Youth unemployment rates in the periphery remain dreadful: Spain 53.5%; Italy 43.7% (up from 39.4% a year earlier); Portugal 33.5%; Greece 56.3% (April).

As Hugo Dixon of Reuters wrote on Monday, “The euro crisis is sleeping.”

Witness bond yields, which this week hit record lows on 10-year government paper in some of the following:

Germany 1.11%; France 1.50%; Italy 2.64%; Spain 2.46%; Greece 5.76%.

The two I focus on, Spain and Italy, saw their yields rise a bit by week’s end to 2.56% and 2.76%, respectively. Yes, this is still absurd.

Here’s the thing. As I keep pointing out these same nations, including Greece and Portugal, have mammoth debts to service and despite everything the European Central Bank’s Mario Draghi says, there is no guarantee the other members of the eurozone will come rushing to the aid of their euro brethren, forever.

Case in point, Portugal’s second-largest bank, Banco Espirito Santo SA, which I wrote of a while back and this week reported a loss of $4.8 billion, which means it needs to raise gobs of capital to meet regulatory requirements and there’s no guarantee it will be able to do so, though the Bank of Portugal said it is working on it. Banco Espirito’s shares were suspended on Friday after dropping as much as 50% in Lisbon in one day; nearly 80% for the week. 

I’ve argued that the health of neighbor Spain’s banks is not nearly as strong as they want you to believe, either, because losses in the real estate sector haven’t been properly accounted for.

Just a few other notes:

Spain did report growth of 0.6% in the second quarter over the first, while June retail sales rose 0.2%.

Housing starts in France plummeted 19% in the second quarter from a year earlier, owing largely to poor government policy that President Hollande initiated and is now trying to correct.  

But the biggest depressant on European stock markets this past week was uncertainty generated by the war in Ukraine and sanctions the EU imposed on Russia (as alluded to above), with many European companies having large exposures to Russia and some announcing, such as Siemen’s and Adidas, that they are already seeing a negative impact.

BP, for example, has a 20% stake in Russian energy giant Rosneft. Royal Dutch Shell mothballed a $10 billion shale gas venture in eastern Ukraine. Volkswagen reported its sales declined 8% in Russia.

And it wasn’t just companies. Poland said sanctions would knock 0.6% off Poland’s GDP by yearend.

Lastly, with the situation in Gaza, there has been a significant rise in anti-Semitism in parts of Europe, with violent protests in France, for example. I’ve written for years about the rise of the far-right on the continent, some of the groups having an anti-Israel bent, but those European countries with large numbers of immigrants from the Middle East and North Africa are seeing troubles of a different kind.

The head of the Israeli Jewish Congress told the Knesset on Monday that the rise in anti-Semitic incidents accompanying Israel’s invasion of Gaza represents an “SOS situation,” warning that if left unchecked, such behavior could lead to another European genocide.

Vladimir Sloutsker said: “Never before since the Holocaust, have we seen such a situation as today,” referring to the pro-Palestinian demonstrations in Europe. [Jerusalem Post]

Which brings me to Marine Le Pen, leader of France’s far-right National Front, who has been trying to combat the anti-Semitic reputation of a party founded by her racist father, Jean-Marie.

If France were to hold a presidential election today, Marine would win the first round over former president Nicolas Sarkozy, 26% to 24%, according to a new poll. Le Pen was third behind President Hollande and Sarkozy in the 2012 election with 18% of the vote.

But while Le Pen is benefiting from Hollande’s massive economic problems and Sarkozy’s financial scandals, she is also gaining from the Gaza crisis, whether she would admit so publicly or not.

The next election in France is not until 2017, but Le Pen is going to be a factor, of this there seems little doubt.

Turning to China, early in the week the Shanghai Composite hit its highest level since December, before backing off a little, while the official government purchasing managers’ index for manufacturing came in at 51.7 for July vs. 51.0 in June, the best reading in two years. HSBC’s final look at manufacturing was also 51.7 (after a preliminary 52.0). So this is encouraging, especially with HSBC confirming the government’s data.

Meanwhile, Bloomberg had a story on the ongoing problem with China’s trade data, despite the crackdown on fake export-invoicing. Major discrepancies remain. For example, in the last report, China recorded $1.31 of exports to Hong Kong for every $1 in imports Hong Kong tallied from China.

In Japan, the data was poor. Retail sales fell 0.6% in June, year-over-year, with second-quarter sales down 7% from the first quarter.

Industrial production fell 3.3% in June over May, far worse than expected, and June wage growth was up just 0.4% vs. year ago levels, also worse than expected. Adjusted for inflation, wages were down 3.8%.

Here’s the bottom line. After the 3% sales-tax hike in April, Prime Minister Shinzo Abe desperately needs the Japanese consumer to pick up spending, but it’s weak as factories cut back. Wages also must rise nearly as fast as inflation, but that hasn’t been the case as corporations and small- and medium-size businesses hoard cash rather than give a portion to their employees. These next few months are going to be critical for Abe.

Street Bytes

--The Dow Jones, after its 2.8% swoon to 16493, is now down 0.5% for the year. The S&P 500 is still up 4.2%. Nasdaq lost 2.2% on the week, while the Russell 2000 lost another 2.6%.

--U.S. Treasury Yields

6-mo. 0.04% 2-yr. 0.47% 10-yr. 2.49% 30-yr. 3.28%

The 10-year has been stuck in a trading range between 2.44% and 2.66%.

--I placed Ebola in the “Street Bytes” section last week for the simple fact it has the potential to totally cripple the West African economy, and then some, and this past week the outbreak only got worse, with the death toll now over 700.

The World Health Organization’s Margaret Chan told a summit of regional leaders that failure to contain Ebola could be “catastrophic” in terms of lives lost, but that it could be stopped if well managed. That said, the virus was spreading too fast, she added.

Health officials around the world are now warning doctors to watch for signs of the disease, while the death of an American, Patrick Sawyer, in Lagos, Nigeria, has led to fears Ebola could spread beyond Africa. Sawyer had travelled from Minnesota to attend the funeral of his sister, who died from Ebola.

“Despite vomiting and suffering from diarrhea, the employee in the Liberian finance ministry was able to fly from Liberia, via Ghana, and Togo, before arriving in Nigeria, where he died.”

“Experts say he could have passed on the disease to anyone sitting near him or who used the same lavatory on one of the planes.” [Daily Telegraph]

Sierra Leone joined Liberia in introducing sweeping measures to contain the disease, calling on their armies to enforce quarantines in several villages.”

Tom Frieden, chief of the U.S. Centers for Disease Control, said, ‘It is like fighting a forest fire. If you leave behind even one burning ember, once case undetected, it could reignite the epidemic.”

The Peace Corps was among the organizations removing its people, temporarily, from the three nations most affected, some 340 workers.

We now await the arrival of two very sick Americans who will be treated at Emory University Hospital in Atlanta.

--Argentina defaulted on its sovereign debt for the second time in 13 years on Wednesday, with Economy minister Axel Kicillof saying “vulture funds” had rejected a renewed offer from the government to bondholders who accepted debt restructurings after the 2001 default.

The bondholders are demanding a full pay-out of $1.3 billion.

Editorial / Wall Street Journal

“The government of Argentina has done it again. By flouting the rule of law and vilifying foreign investors, President Cristina Kirchner succeeded Wednesday in driving the country into its second default in 13 years. This isn’t the global disaster predicted by some...but it is sad news for the people of Argentina.

“Wednesday’s default suggests the country will remain a pariah to many of the world’s investors, which means increased costs for public and private Argentine borrowers....

“Presiding over a slow-growth, high-inflation economy that her policies have created, and with an election to choose her successor in 14 months, Ms. Kirchner is trying to revive her party’s political fortunes by heaping scorn on U.S. ‘vultures’ – hedge funds – and on the U.S. courts.”

--In their annual report, the trustees of Medicare and Social Security say the former will be able to continue paying full hospital benefits for its elderly or disabled clients without any changes in the law through 2030 – four years later than the last estimate.

But as Damian Paletta points out in the Wall Street Journal, “the Social Security disability-insurance program faces a more pressing conundrum. The report projects it will be able to pay only 81% of benefits starting in late 2016 unless Congress intervenes.”

Get this: “Roughly 11 million Americans collected a total of $140 billion in Social Security disability benefits last year, up from 7.9 million people collecting $78.2 billion in 2004.”

Many of us are flat-out crooks.

As for the improvement in Medicare, some are claiming it’s a result of ObamaCare, while others say it is way too early to know.

What is clear, however, is that we still need entitlement reform, but this topic won’t come up again on Capitol Hill until after the 2016 election, if then.

On ObamaCare and premium increases for the first renewals since the exchanges went into place, California said the 1.2 million in the state-run insurance exchange can expect modest price increases of 4.2% on average next year, as reported by the Los Angeles Times.

But, this is deceiving. Anthem Blue Cross said its rates were rising 6% on average statewide, though with increases of as much as 14% in San Francisco. That’s what you’ll have around the country. Supporters will harp on headlines highlighting reasonable increases, while detractors will point to, say, Anthem and San Francisco.

--Auto sales for the month of July were strong, with the Big 3, Toyota and Nissan reporting sizable gains. General Motors Co. said sales were up 9% from a year ago, GM’s best July sales total since 2007, despite all its issues. Ford Motor’s sales were up 10%, its best July in eight years, while Chrysler Group reported U.S. sales soared 20% from the same month year-over-year, the best July for it since 2005.

Toyota Motor Corp. saw its U.S. sales increase 12%, and Nissan’s rose 11% for a July record; ditto Hyundai, up 2%.

But Honda’s U.S. sales fell 4% for the month.

Overall, it was the best July for the industry since 2006 and sales, running at about a 16.5 million annualized pace for 2014, according to Autodata Corp., could hit the historical peak of 17 million, reached in 2000.

--Tesla CEO Elon Musk laid out plans for a massive expansion in China, while saying its next vehicle, an SUV called Model X, would represent half of its 100,000 deliveries by the end of 2015.

“We can drive demand up at will,” Musk declared on an analyst call. Tesla is on track to hit its internal target of 35,000 vehicle deliveries in 2014. Revenues for the quarter were $769 million, short of the Street’s expectations though up 90% from the year before, and net income (adjusted for various expenses) was 11 cents a share vs. the 4 cents analysts had been expecting.

Tesla’s eventual goal is to produce 300,000 vehicles, but for that it needs to greatly expand its battery supply, so it needs a $5 billion battery plant to be built over the next three years and you can imagine the fierce competition to be a site for this, though a decision won’t be made for a few more months.

The plant will be a joint venture with Panasonic and is expected to create 6,500 jobs.

--Twitter handily beat Wall Street’s expectations and the stock soared 30% immediately after the release of the results, though fell back some by week’s end. Revenues were $310 million, double last year, while the company raised full year sales guidance 8% to $1.3 billion, though its loss was $145 million. User numbers rose to 271 million (compared with Facebook’s 1.3 billion), an increase of 6% sequentially, up 24% from a year ago.

But user growth is slowing, and the number of times each user viewed their Twitter feed, on average, fell 7% year on year.

And I haven’t mentioned that Twitter’s results have been enhanced by both the Olympics and World Cup thus far in 2014 and there are no big events of this kind to drive traffic the second half.

--Shares in Adidas AG tumbled 10% as the sporting-goods company that was a big sponsor of the World Cup cut its 2014 outlook and postponed 2015 targets amid challenges in its golf business, as well as risks related to Russia.

“The recent trend change in the Russian ruble as well as increasing risks to consumer sentiment and consumer spending from current tensions in the region point to higher risks to the short-term profitability contribution from Russia/CIS,” the company said.

--Procter & Gamble announced it would shed more than half its brands in an effort to speed sales growth. P&G will focus on 70 to 80 consumer brands, including Tide detergent and Pampers, and will divest itself of 90 to 100 smaller brands that only account for about 10% of the company’s overall sales.

Of the brands the company will now focus on, 23 have sales of $1 billion to $10 billion.

P&G reported net sales grew just 1% to $83 billion in the year ended June 30. Net income rose 3% to $11.6 billion. [Serena Ng / Wall Street Journal]

--Samsung Electronics announced profits fell 20% in the second quarter, though it still took in $6.1 billion. While Samsung is the world’s biggest maker of mobile phones, the company said a global slowdown in the sales of smartphones and tablets hurt results. Samsung, like Apple, faces increasing competition.

--Sony Corp. reported profit rose to $261 million, when a loss had been expected, as sales climbed 6% to $17.6 billion. Sony did well in its video games, movie and camera businesses, after selling off its Vaio computer unit.

--Exxon Mobil Corp. reported second-quarter earnings of $8.78 billion, better than expected, on revenue of $111.65 billion, though it announced it was cutting capital spending 4% to $9.8 billion as production fell 5.7%. Exxon didn’t say if it would push ahead with plans to drill in Russia’s Arctic seas given tensions between the Russian and U.S. governments over Ukraine.

--UPS missed earnings expectations and lowered its full-year outlook, as it invests more to avoid another disaster at holiday time, including paying more for employees to work on Black Friday.

U.S. revenue did rise 5.2% to $8.67 billion, as daily package volume advanced 7.4%. International small package revenue grew 6.2%.

--A National Labor Relations Board decision handed labor a big victory in ruling that McDonald’s corporate apparatus must address workers’ complaints that they were fired or disciplined for participating in protests for higher wages. So for liability purposes, corporate operations can be lumped in with thousands of franchises.

McDonald’s recent string of bad news continued as Russia’s food safety watchdog said it opened an investigation into the cheese used by the chain, after earlier questioning the nutrition labeling; part of Russia’s retaliatory efforts in the face of Western sanctions over Ukraine.

McDonald’s mostly imports cheese from German and Czech suppliers for its outlets in Russia.

[Separately, Wendy’s Co. announced it was leaving the Russian market because of a dispute with its local partners. Wendy’s had been in Russia three years. McDonald’s opened its first franchise in Russia in 1990 and has 430 outlets in the country.]

--Yum Brands admitted its KFC unit is suffering in China due to the ‘rotten food’ scandal involving its supplier, Husi, owned by the U.S.-based OSI Group. In a filing Yum said, “The result has been a significant, negative impact to same-store sales at both KFC and Pizza Hut in China over the past 10 days. If the significant sales impact is sustained, it will have a material effect on full-year earnings per share.”

Yum is China’s biggest restaurant operator in China, with more than 4,600 KFC outlets and 1,200 Pizza Huts.

--Microsoft became the latest U.S. company to be targeted by an antitrust investigation in China. This comes days after the announcement of a separate probe of Qualcomm, where the Chinese government determined the mobile chip company had used monopoly power in setting licensing fees.

Recently, the Chinese government banned purchases of Microsoft’s Windows 8 PC software.

--Former shareholders of defunct oil giant Yukos received two favorable rulings this week that say Russia owes over $52 billion in compensation by Jan. 15, 2015. Russia is appealing the award.

The European Court of Human Rights ruled that tax proceedings that stripped Yukos of 300 billion rubles in 2004 and 2005 were “unlawful” and that Russian authorities had “failed to strike a fair balance” in their dealings with the company.

Mikhail Khodorkovsky, the former head of Yukos, served 10 years in a Russia prison on fraud charges that were politically motivated.

--Real estate information website Zillow is acquiring rival Trulia in a $3.5 billion deal.

--Dollar Tree Inc. agreed to buy rival Family Dollar Stores Inc. for about $8.5 billion, combining the No. 2 and No. 3 companies in the dollar-store category. No. 1 is Dollar General Corp. The combined operation would have more than $18 billion in annual sales.

Dollar focuses mainly on the suburban market, while Family Dollar has an emphasis on the urban and rural poor.

--According to a study from the Urban Institute, 35% of Americans have debt in collections, which typically occurs after the bill hasn’t been paid for 180 days. This includes debt from credit card bills, child support, medical bills, utility bills, parking tickets or membership fees. [Hadley Malcolm / USA TODAY]

--A Johnson & Johnson subsidiary, Ethicon, withdrew a hysterectomy tool from the market that is suspected of inadvertently spreading cancer. Ethicon made the move after a U.S. Food and Drug Administration hearing, but the company stressed it wasn’t a recall and argues its minimally invasive laparoscopic power morcellator is not defective.

--Amgen Inc. said it plans to cut up to 15% of its workers, 2,400 to 2,900, as part of a restructuring, with most of the cuts taking place in Washington state and Colorado, though Amgen plans to expand its research-and-development in the biotechnology hubs of South San Francisco and Cambridge, Mass.

--On Monday, Herbalife reported earnings that were below expectations, breaking a 21-quarter record of surpassing analysts’ forecasts as it announced earnings declined 15% in the second quarter vs. a year earlier. The company’s shares tanked as it gave up all the gains following hedge fund operator Bill Ackman’s presentation on nutrition clubs the prior week, Ackman having a $1 billion bet on Herbalife being a fraud.

Ackman apologized for his long-winded dissertation, saying “My bad.” But the share price finished the week at $52.50 (after having surged to $67), or $1.50 lower than before Ackman took the stage ten days earlier.

Foreign Affairs

Russia / Ukraine: Tensions between Ukraine and Russia continued to rise, as separatist rebels battle government troops in Donetsk region, amid a possible full-scale invasion by the Ukrainian army into the city of Donetsk, which would be an incredibly bloody bout of urban warfare.

On Thursday, the rebels ambushed a government troop column, killing at least 10 soldiers, near where flight MH17 crashed.

Dutch and Australian forensic teams visited the crash site that day for the first time, a full two weeks since the July 17 shoot down. Previously, fighting in the vicinity prevented teams of investigators from getting in, with Australia believing at least 80 bodies remain at the site.   

Earlier, the U.S. stepped up its accusations of direct Russian military involvement, publishing satellite images that show a significant buildup on the border, as well as evidence of Russian artillery firing on Ukrainian forces.

“At a time when some folks could have convinced themselves that (Russian President Vladimir) Putin would be looking for a reason to de-escalate, he has actually taken a decision to escalate,” said General Martin Dempsey, chairman of the joint chiefs of staff.

Speaking at a forum in Aspen, Gen. Dempsey said that Russia had “made the conscious decision to use its military force inside of another sovereign nation to achieve its objectives for the first time, I think, probably, since 1939.” [Financial Times]

Putin and the separatists suffered some major battlefield losses on Monday as the Ukrainian military sought to drive a wedge between the rebel strongholds of Donetsk and Luhansk and cut off supply lines between the two.

And then the United States and the European Union decided to announce a new round of tougher economic sanctions against Moscow, with the feeling particularly in the EU being that the crash of MH17 created “a completely new situation that makes further-reaching measures necessary,” in the words of a spokeswoman for German Chancellor Angela Merkel.

Another European diplomat said that while sanctions would in some respect be “a disaster,” economically and politically, for both sides, “we cannot be indifferent. We had to react.”

The sanctions target the oil and defense sectors, as well as sensitive technologies, while restricting Russian state banks’ access to capital.

As reported by the Wall Street Journal, “Pro-Kremlin commentators have warned in recent days that backing down now in Ukraine would lead the West to turn its focus to returning Crimea... the threat of a sudden collapse of the separatist forces under pressure from Kiev could also prove intolerable for the Kremlin, spurring even deeper intervention.”

Dmitry Trenin, noted Russia expert at the Moscow Carnegie Center, wrote in a commentary:

“Expecting Putin to back off, or his close friends to persuade him to change tack or else the ‘oligarchs’ to pressure the Kremlin into beating a retreat betrays a lack of understanding of the gravity of the situation. It is no longer the struggle for Ukraine but a battle for Russia.”

Separately, the United Nations’ Office of the High Commissioner for Human Rights warned of a “total breakdown of law and order and a reign of fear and terror” in eastern Ukraine.

Luhansk city, for example, was completely without power after recent fighting damaged power lines, while the U.N. report said, “With the economic life of Donetsk and Luhansk now crippled, the impact on the rest of the country will be severe.” [Moscow Times]

At least 1,150 have been killed in the conflict since mid-April, according to the U.N.

The Irish Independent reported that Merkel and Putin were working on a secret deal that would stabilize the borders of Ukraine and provide the struggling country with a strong economic boost, particularly a new energy agreement with Russia’s Gazprom, for future gas supplies and pricing.

But, supposedly it would call on the international community to recognize Crimea’s annexation by Russia. And, it would appear, the peace deal was put on the back-burner following the shooting down of MH17. One assumes, though, it is still on the table.

Some of Germany’s biggest companies have large operations in Russia, and, as noted above, the financial impact on the likes of Siemen’s and Adidas is already being felt, while in the U.S., Visa and MasterCard are among those facing tighter restrictions on the way they can operate in Russia.

In Kiev, parliament voted Thursday to keep Arseny Yatsenyuk as prime minister, even though a week earlier he had offered his resignation. According to the Constitution, the parliament must accept the resignation for it to take effect. As reported by the Los Angeles Times’ Steven Zeitchik, “Yatsenyuk will now almost certainly stay...with some analysts believing he was never committed to exiting the post and had offered his resignation to make a statement about a legislative logjam.”

Editorial / Washington Post

“A month ago, Russian President Vladimir Putin appeared to be successfully executing his campaign to destabilize Ukraine. While Russian-backed insurgents consolidated a breakaway republic, weak and divided Western governments ignored their own deadlines for imposing sanctions. Now, suddenly, Mr. Putin faces twin reversals: relatively tough sanctions from the United States and European Union on Russian banks and oil companies, and a string of military defeats that have pushed back his proxy forces. It’s a dangerous moment for Mr. Putin – and, perhaps, an opportunity for Ukraine and its allies....

“It’s not yet clear how Mr. Putin will react to these reversals. He is capable of surprising shifts of direction – such as his sudden offer last summer to help strip his ally Syria of chemical weapons. Ukrainian officials, like some of their counterparts in the West, worry about a reckless lashing out by a ruler who feels cornered. Mr. Putin, they counsel, still should be offered a face-saving way of retreating from Ukraine....

“While such initiatives are worth trying, the reality is that Mr. Putin is more likely to escalate than back down. Ukraine and the West must be prepared for a more forceful and overt Russian military intervention. That should mean more support for the Ukrainian military, which is seeking drones and better communications equipment from the West, and more economic support for the new government... Russia should not be allowed to permanently entrench its proxy forces in eastern Ukraine, creating a ‘frozen conflict.’

“The West also should not shrink from the destabilization of Mr. Putin’s regime. Once considered a partner, this Kremlin ruler has evolved into a dangerous rogue who threatens the stability and peace of Europe. If he can be undermined through sanctions and the restoration of order in eastern Ukraine, he should be.”

Editorial / Financial Times

“An improvement in the international climate is...unlikely without political change in Russia. For what makes Mr. Putin so confrontational on the world stage is, at bottom, an awareness that Russia’s post-communist attempt at building a modern state and society is running into the sands. It is no accident that Mr. Putin became more aggressive, against his internal critics and in Ukraine, after the pro-democracy street protests that preceded his managed re-election as president in 2012. As with the Soviet politburo, so with Mr. Putin and his entourage: an insecure power apparatus adopts a resentful anti-Americanism in its foreign policy because its only consistent domestic policy is suppression of political freedom.

“The potential for a showdown between the west and Russia over Ukraine was implicit in Moscow’s post-Soviet conception of its neighbors to the west and south as states that are less than fully sovereign and belong to a Russian sphere of influence. But Russia under the late Boris Yeltsin did not go to war outside its borders.

“Mr. Putin lured Georgia into a short war in 2008 and recognized the breakaway regions of Abkhazia and South Ossetia as independent states. Mr. Putin annexed Crimea in March. Now it is Mr. Putin who is fomenting the pre-Russian rebellion in eastern Ukraine. Western governments must apply the new sanctions and be on guard against any further Russian misconduct.”

Meanwhile, a Russian defense ministry photograph appears to show soldiers handling an Iskander-K cruise missile canister about 75 miles from Estonia, according to a nuclear-arms expert, Hans Kristensen. The image went public days before the United States formally accused Moscow of breaking the Intermediate-Range Nuclear Forces Treaty of 1987 by test-firing a ground-launched cruise missile with capabilities similar to the Iskander-K.

The INF Treaty banned both Russia and the United States from testing or deploying cruise and ballistic missiles with ranges between 310 and 3,400 miles. An unidentified Obama administration official said in a statement released to the media:

“This is a very serious matter which we have attempted to address with Russia for some time now,” Reuters reported. “We encourage Russia to return to compliance with its obligations under the treaty and to eliminate any prohibited items in a verifiable manner.”

The New York Times’ Michael R. Gordon reported Russia first started testing the cruise missile as far back as 2008.

NATO’s top commander, Gen. Philip M. Breedlove, said the violation requires a response if it cannot be resolved. One such response could be the deployment of sea-launched and air-launched cruise missiles, which would be allowable under the accord.

Israel: U.S. Secretary of State John Kerry and U.N. Secretary General Ban Ki-moon negotiated a 72-hour humanitarian cease-fire in Gaza, that took effect 8:00 a.m. Jerusalem time on Friday and just 90 minutes later was in a shambles. The IDF was dismantling a tunnel, as it was allowed to do during the cease-fire, when three Hamas terrorists emerged, one set off a suicide belt, killing two Israeli soldiers, and a third Israeli was captured, thus ensuring a massive manhunt and further violence.

Initially, it appeared that Kerry had won back support from the Israelis after he was severely rebuffed by their cabinet a week ago when his efforts to broker a seven-day cease-fire went up in flames, as many across Israel thought the deal was tilted heavily in favor of Hamas.

On Thursday, Israeli Prime Minister Benjamin Netanyahu had vowed to destroy Hamas’ tunnel network “with or without a cease-fire.”

Over 1,600 Palestinians and 66 Israelis have been killed. A poll of Israelis released on Sunday had 86.5% opposing a cease-fire because “not all the tunnels have been found, and Hamas has not surrendered.” Only 9.7% said it was time to stop Operation Protective Edge.

George Will / Washington Post

“With metronomic regularity, there is a choreographed minuet of carnage. Israel is attacked. Israel defends itself. Perfunctory affirmations of Israel’s right of self-defense are quickly followed by accusations that Israel’s military measures are disproportionate. Then come demands for a cease-fire, and the attackers replenish their arsenals.

“The accusations and demands are ascribed to something fictitious, the ‘international community.’ The world ‘community’ connotes a certain cement of shared values and aspirations. So, what community includes Denmark and Yemen, Canada and Iran, New Zealand and Congo, Italy and North Korea? ‘International community’ is empty cant that bewitches the minds of earnest diplomats such as John Kerry but does not interest Israeli Prime Minister Benjamin Netanyahu.

“He surely has told Kerry what he has told others: The point of Israel is that Jews shall never again, like Blanche DuBois in ‘A Streetcar Named Desire,’ depend on the kindness of strangers. Such dependency did not work out well for Jews, so Israel exists for Jewish self-defense.”

Charles Krauthammer / Washington Post

“John Kerry is upset by heavy criticism from Israelis – left, right and center – of his recent cease-fire diplomacy. But that’s only half the story. More significant is the consternation of America’s Arab partners, starting with the president of the Palestinian Authority. Mahmoud Abbas was stunned that Kerry would fly off to Paris to negotiate with Hamas allies Qatar and Turkey in talks that excluded the PA and Egypt.

“The talks also undermined Egypt’s cease-fire proposal, which Israel had accepted and Hamas rejected (and would have prevented the vast majority of the casualties on both sides). ‘Kerry tried through his latest plan to destroy the Egyptian bid,’ charged a senior Palestinian official quoted in the Arab daily Asharq Al-Awsat – a peace plan that the PA itself had supported.

“It gets worse. Kerry did not just trample an Egyptian initiative. It was backed by the entire Arab League and specifically praised by Saudi Arabia. With the exception of Qatar – more a bank than a country – the Arabs are unanimous in wanting to see Hamas weakened, if not overthrown. The cease-fire-in-place they backed would have denied Hamas any reward for starting this war, while what Kerry brought back from Paris granted practically all of its demands.

“Which is what provoked the severe criticism Kerry received at home. When as respected and scrupulously independent a national security expert as David Ignatius calls Kerry’s intervention a blunder, you know this is not partisan carping from the usual suspects. This is general amazement at Kerry’s cluelessness....

“Forget about Israeli interests. Forget about Arab interests. The American interest is to endorse and solidify this emerging axis of moderate pro-American partners (Israel, Egypt, Jordan, Saudi Arabia, the United Arab Emirates and other Gulf states, and the Palestinian Authority) intent on seeing Islamist radicalism blunted and ultimately defanged.

“Yet America’s secretary of state doesn’t see it. Speaking of Hamas-run Gaza, Kerry actually said in Paris: ‘The Palestinians can’t have a cease-fire in which they think the status quo is going to stay.’ What must change? Gazans need ‘goods that can come in and out...a life that is free from the current restraints.’

“But the only reason for those ‘restraints,’ why goods are unable to go in and out, is that for a decade Hamas has used this commerce to import and develop weapons for making war on Israel.”

David Ignatius / Washington Post

“Secretary of State John Kerry has made a significant mistake in how he’s pursuing a Gaza cease-fire – and it’s not surprising that he has upset both the Israelis and some moderate Palestinians.

“Kerry’s error has been to put so much emphasis on achieving a quick halt to the bloodshed that he has solidified the role of Hamas, the intractable, unpopular Islamist group that leads Gaza, along with the two hardline Islamist nations that are its key supporters, Qatar and Turkey. In the process, he has undercut not simply the Israelis but also the Egyptians and the Fatah movement that runs the Palestinian Authority, all of which want to see an end to Hamas rule in Gaza.”

Gerald F. Seib / Wall Street Journal

“When Israel accepted an Egyptian cease-fire proposal and Hamas rejected it, White House acceptance of Israel’s military actions was clear.

“That began to change when Israel moved from an aerial offensive to a ground incursion into Gaza. American and Israeli analyses fell out of sync. U.S. officials began to fear that the deaths of hundreds of Palestinians were stirring up enough anger in the Gaza Strip and West Bank to put the longer-term U.S. quest for peace out of reach for a long, long time.

“So Mr. Kerry jumped in. Tensions grew as Israelis felt his proposals for a cease-fire didn’t give sufficient security guarantees, seemed to equate the state of Israel and radicals in Hamas, and empowered Hamas’ backers in the governments of Turkey and Qatar. A temporary ban on American airline flights into Israel on safety grounds infuriated Israelis.

“American officials, meantime, chafed at the open Israeli hostility toward what they considered a good-faith effort by Mr. Kerry to end a nasty fight that they feel can harm Israel in the long run.

“This diplomatic dance isn’t occurring in a vacuum, however. Israelis consider Hamas a problem, but they regard Iran’s nuclear program an existential threat. Those nuclear talks with Iran resume soon. American officials actually aren’t optimistic about reaching a long-term deal, but Israelis are nervous. Which is why more tensions lie ahead.”

Iran: In line with the above, we learned this week that Iran’s legislature wants to take a more active role in the nuclear talks, with parliament ratifying any accord Tehran’s negotiating team comes up with. Days earlier, a group of U.S. lawmakers moved to require congressional approval of any long-term nuclear agreement.

A major concern of those analyzing what could be in a final agreement is the “sunset clause.” Ray Takeyh of the Council on Foreign Relations says this envisions a time when Iran will be “like any other nation” and free to enrich with no sanctions or observers. As the Washington Post’s Jennifer Rubin writes:

“This, to many of us, seems mind boggling that in 5 or 10 or even 15 years Iran could be going full tilt, putting its nuclear weapons on ICBMs and be in violation of no agreement or sanctions regime. Former Bush State Department official for arms control and nonproliferation Stephen Rademaker says there is a misnomer that the terms of a final deal are underway. In fact, under the sunset clause, ‘The final step is treating Iran like any other country.’ If the attitude is let ‘bygones be bygones,’ he says Iran need only wait out the current negotiations to have a nuclear arsenal accepted by the international community. Moreover, if not explicitly saying that Iran has a right to enrich, the interim deal envisions a time when Iran can operate with no sanctions. Rademaker says bluntly, ‘That is a huge victory for Iran.’”

Iraq: ISIS (the Islamic State) continues to edge its way toward Baghdad, particularly from the south, as reported by the Wall Street Journal. Government troops have stopped the Islamic State’s drive beyond Tikrit to the north.

On Friday the U.N. announced more than 1,700 people were killed in Iraq in July, down from 2,400 in June, when ISIS launched its lightning blitz, seizing much of the northern and western parts of the country. Prior to ISIS’ big arrival, 800 were killed in May.

Syria: ISIS militants made further gains against President Bashar Assad’s forces, after days earlier taking over the sprawling army complex in Raqqa in the northeast. According to the Observatory for Human Rights, at least 85 regime troops were killed during the ISIS takeover, 50 of whom were summarily executed.

“Some of the executed troops were beheaded, and their bodies and severed heads put on display in Raqqa city,” an ISIS stronghold, according to the Observatory. [AFP]

The regime did, however, apparently recapture the Shaar gas field in Homs province from ISIS.

Separately, according to the director of the National Counterterrorism Center, Matt Olsen, Syria is now the “predominant battleground for extremists” plotting to attack the United States, with the number of foreign fighters exceeding 12,000 and rising rapidly. [Kevin Baron / Defense One] A year ago, the figure was put at 800.

Michael Gerson / Washington Post

“The Syrian conflict will be remembered as a strategic watershed for American foreign policy. When the rebellion was a broad, non-radical uprising...President Obama did almost nothing to help. When radical groups gained momentum, it became an excuse for further inaction, because America didn’t want to create jihadists. We got the jihadists anyway, who are now causing regional havoc. At every stage, Obama defended his policy with false choices and flanking attacks on straw men: Any critics of his minimalism wanted Marines in Damascus. And when he eventually adopted the policy recommended by many of his critics – aid to the responsible rebels – it was very late. Obama has consistently complained about American powerlessness in Syria and, through risk aversion and delay, has ensured that powerlessness.

“This is both a strategic and moral disaster.”

Libya: Well over 250 people have died in the capital Tripoli and second-city Benghazi in two weeks of fighting between Libyan special forces and Islamist militants. The United States, France, Germany, the U.K., U.N. and Turkey are among those pulling their diplomats out of the country.

A large fuel storage site near Tripoli’s airport was hit by rocket fire and it posed a huge environmental disaster as the government asked for international assistance in putting the fire out. The airport itself has been virtually destroyed in fighting between rival militias.

By week’s end, Islamists claimed to have taken control of Benghazi. China chartered a Greek vessel to evacuate hundreds of Chinese citizens, and the Philippines is working to get out some 13,000 Filipino workers inside Libya.

China: As reported by the Financial Times’ Jamil Anderlini, “The number of people joining the Chinese Communist party has fallen for the first time in a decade as President Xi Jinping’s anti-corruption campaign reduces the allure of working for the authoritarian state.

“For many young Chinese, joining the party and landing a government job with good benefits and the chance to make a bit on the side was the ultimate dream.

“But last year, just 2.4m people joined – a quarter fewer than in 2012 – marking the smallest number of new members since 2003 and bringing total membership to 86.7m by the end of 2013.”

Xi’s crackdown took out another heavyweight, the most senior cadre yet, Zhou Yongkang, the former security chief and member of the all-powerful Politburo Standing Committee. Zhou retired from the Politburo in 2012, with the South China Morning Post first reporting he was under investigation in 2013.

Zhou’s son, Zhou Bin, apparently enriched himself through his father’s connections.

Xi has consolidated his position to the point where he is the most powerful Chinese leader since Deng Xiaoping.

Meanwhile, China held more military drills across the East and South China Seas that proved to be a huge disruption for domestic air travel, as the military takes up the air space. Capacity at Shanghai’s two airports, for example, was cut 75%. I see that flights out of my favorite airport in Fujian (cough cough) were suspended for hours the other day. Last weekend, between airports in Shanghai and Beijing, some 800 flights were delayed or canceled. 

Separately, the military held live-fire drills near Vietnam.

Finally, China acknowledged the existence of a new intercontinental ballistic missile capable of carrying multiple warheads as far as the United States, as reported by state-run media. They are to be called Dongfeng-41 (DF-41), according to the Global Times. Let’s hope this name does not become too familiar to all of us.

North Korea: The head of Pyongyang’s General Political Bureau for the military said, “If the U.S. imperialists threaten our sovereignty and survival...our troops will fire our nuclear-armed rockets at the White House and the Pentagon – the sources of all evil.” [AFP]

Well that’s not very nice.

Perhaps of more immediate importance, however, is the testimony by former CIA Director James Woolsey before the House Armed Services this week that the North is on track to acquire the capability to carry out an electromagnetic pulse strike on the U.S. That would involve detonating a nuclear warhead in the atmosphere with the intention of frying the electrical grids of countries below.

Woolsey said the U.S. government must move quickly to strengthen the electrical grid to survive an electromagnetic pulse attack.

South Korea’s defense ministry did not believe Pyongyang could carry out such an EMP attack because it hasn’t developed the bombs required for such a mission. [National Journal]

Foreign Policy and the lessons of history...

Daniel Henninger / Wall Street Journal

“The revisiting of (World War I’s) dark history may be why so many people today are asking if our own world – tense or aflame in so many places – resembles 1914, or 1938...
“(A) revealing stop in the years just before Munich, (was) when in 1935 Benito Mussolini’s Italy invaded Ethiopia.

“Before the invasion, Ethiopia’s emperor, Haile Selassie, did what the civilized world expected one to do in the post-World War I world: He appealed for help to the League of Nations. The League imposed on Italy limited sanctions, which were ineffectual.

“One might say this was one of history’s earlier ‘red lines.’ Mussolini blew by it, invading Ethiopia and using mustard gas on its army, as Bashar Assad has done to Syria’s rebel population. Mussolini merged Ethiopia with Italy’s colonies in east Africa. The League condemned Italy – and dropped its sanctions.

“In defeat, Haile Selassie delivered a famous speech to the League in Geneva. He knew they wouldn’t help. As he stepped from the podium, he remarked: ‘It is us today. Tomorrow it will be you.’

“In 1938, British Prime Minister Neville Chamberlain, not unlike John Kerry today, shuttled tirelessly between London and wherever Adolf Hitler consented to meet him to discuss a nonviolent solution to Hitler’s intention to annex the Sudetenland, the part of Czechoslovakia inhabited by ethnic Germans. Hitler earlier in the year had annexed Austria, with nary a peep from the world ‘community.’ Many said the forced absorption of Austria was perfectly understandable.

“One may hope Mr. Kerry and President Obama have more success with their stop-the-violence missions to Vladimir Putin, Kiev, Gaza, Iraq, Syria, Tehran, Afghanistan and the South China Sea than Neville Chamberlain had with Hitler, who pocketed eastern Ukraine – excuse me, the Sudetenland – and then swallowed the rest of Czechoslovakia, which ceased to exist....

“After returning from Munich, Neville Chamberlain told the British to ‘go home, and sleep quietly in your beds.’ After 1914 and 1938, one wishes it could be so now. Wars, in their causes and timing, are unpredictable. What is not impossible is recognizing the winds of war. Doing less than enough, we should have learned, allows these destructive winds to gain strength.”

Random Musings

--Texas Republican Sen. Ted Cruz urged House Republicans to oppose leadership’s $659 million border plan and enough of them balked, forcing cancellation of what was to be Thursday’s scheduled vote for lack of support.

But while as discussed further below, the House eventually passed a plan on Friday, it has no chance of becoming law and now Congress leaves for a five-week recess without agreeing on legislation to address the border crisis; the Senate having passed a $2.7 billion plan, which was less than the $3.7 billion President Obama had requested.

Republicans seem determined to snatch defeat from the jaws of victory come November.

Editorial / Washington Post

“Opting for the preposterous when summoned to do the practical, House Republicans rallied Wednesday behind a measure to sue President Obama, then threw up their hands Thursday when called on to resolve the crisis of tens of thousands of unaccompanied minors streaming across the southwestern border. Having postponed its planned Friday adjournment, the House now faces the choice of redeeming itself by acting on the humanitarian emergency or slinking away in disgrace.

“The Republican immigration effort in the House was derailed by tea party backbenchers who, at the behest of their champion, Sen. Ted Cruz, refused to support any bill that did not also preemptively bar President Obama from shielding more undocumented immigrants from deportation. In service to partisan warfare against the president, conservatives opted to do nothing for the Central American children who continue to risk their lives crossing Mexico and entering the United States.

“Senate Democrats did not look much more determined to deal with the immediate problem. What they had in mind, according to Senate Majority Leader Harry Reid (D-Nev.), was to use any legislation that passed the House as a vehicle to force negotiations over broader immigration reform legislation that the Senate approved last year.

“That was a good bill, and it deserves to become law. But Mr. Reid knows full well that, as a matter of political reality, it’s a non-starter with House Republicans. By injecting last year’s immigration bill into the current attempt to stanch the flow of underage border-crossers, Mr. Reid seemed intent on denying Republicans the chance to claim credit for anything constructive on immigration.”

House Republicans did finally pass a measure, 223-189 (four Republicans voting against, one Democrat for), providing emergency funding to deal with the border crisis and speed the deportations of most border-crossers. But this and another bill rescinding President Obama’s authority to decide whether to deport certain illegal immigrants, have no sign of becoming law.

But at least House Republicans have proof they attempted to address the border issue

At an impromptu mini-press conference, Friday, where the president just rambled on and on, he did say of the immigration crisis, “I’m going to have to act alone. We’ve run out of money.”

The Washington Post’s David Nakamura is reporting Friday night that Obama “is preparing to announce new measures that would potentially allow millions of illegal immigrants to remain in the United States without fear of deportation, a politically explosive decision that could jolt Washington just weeks before the midterm elections, according to people who have been in touch with the White House....

“Though politically charged, such a move would allow Obama to present a sharp contrast with Republicans – who have remained staunchly opposed to loosening immigration enforcement – and cement Hispanic support for the Democratic Party for years to come, supporters said.”

--House Republicans voted to proceed with a lawsuit against President Obama (225-201...all Democrats voted against it, all but five Republicans voted for), saying his executive actions violate the Constitution.

So both sides are using the polarizing action to try to rally support ahead of the mid-term elections. As the Washington Post reported, “Obama almost gloated at the prospect of being sued.”

“ ‘They’re going to sue me for taking executive actions to help people. So they’re mad I’m doing my job,’ Obama said in an economics speech in Kansas City, Mo. ‘And by the way, I’ve told them I’d be happy to do it with you. The only reason I’m doing it on my own is because you’re not doing anything,’ he said of Congress.”

House Speaker John Boehner said impeachment is off the table, but that he brought the suit because of executive orders that Obama issued on climate change, immigration, ObamaCare and raising the minimum wage for federal contractors. [But now House Republicans told Obama to go ahead and act on his own re: immigration.]

If the federal courts were to take up the case, it could take years to resolve.

In the meantime, both sides will pivot around it over the next three months, but it’s a loser for Republicans.

I nonetheless note the editorial board of the Wall Street Journal, which has called “the travelling ‘impeachment’ carnival” a farce, but supports the suit against the president.

“Liberals claim that Mr. Obama’s pose as law giver is necessary because Republicans are obstructionist, and, anyhow, the Constitution’s limits are the dusty artifacts of the 18th century unsuited to modern times. One irony is that they dismiss the House suit even as they claim to be troubled by national security surveillance that has always been grounded in both statute and the Constitution, with no evidence of abuse.

“Yet Mr. Obama’s claim that he can pick and choose which laws to enforce is far more offensive to the American tradition than anything the government has done in the name of antiterrorism. The House challenge is an opportunity to vindicate the genius of the Framers to prevent the exercise of arbitrary and centralized power.”

--Virginia Republican Congressman Eric Cantor’s last day as House majority leader was Thursday, and on Friday he announced he would resign his seat effective Aug. 18 so that his successor, David Bratt, who defeated Cantor in the Republican primary, can participate in the lame-duck session after the November elections.

Cantor is calling for a special election for his seat on Nov. 4 – the same day as the general election – which would allow the winner to take the seat immediately rather than wait for January and the next Congress.

--House and Senate negotiators reached a deal to help the troubled Department of Veterans Affairs in a rare display of bipartisanship. Sen. Bernie Sanders (I-Vt.) and Rep. Jeff Miller (R-Fla.) both scaled back their competing legislation aimed at improving VA wait times to make them less expensive.

The legislation provides a “Veterans Choice Card” that allows veterans to seek care from non-VA clinics, and the law would prevent the VA from using scheduling and wait-time metrics as factors in determining performance, among other things. [Josh Hicks / Washington Post]

In a story from Defense One, the $17 billion deal would also allocate some $5 billion to add doctors and other medical personnel as part of addressing the wait time issue and overcrowding. Of the $17 billion cost, $12 billion comes from new, emergency funding and $5 billion offset from within the VA. 

--CIA Director John Brennan was forced to apologize to key senators after an internal agency report concluded CIA officers improperly accessed computers used by a Senate committee investigating the agency’s interrogation program.

Sen. Dianne Feinstein (D-Calif.) has asserted that the CIA’s search of the computers violated the Constitution’s separation of powers, while Sen. Mark Udall (D-Colo.) believes the CIA’s search constituted domestic spying, which is illegal.

Many are now calling for Director Brennan to resign; Brennan having previously testified: “A lot of people who are claiming that there has been this tremendous sort of spying and monitoring and hacking will be proved wrong.”

American Civil Liberties Union counsel Christopher Anders commented: “An apology is not enough. It is hard to imagine a greater threat to the Constitution’s system of checks and balances than having the CIA spy on the computers used by the very Senate staff carrying out the Senate’s constitutional duty of oversight over the executive branch.” [Siobhan Gorman / Wall Street Journal]

On Friday, President Obama said of the Senate report on the CIA’s interrogation program that is to be released soon: “We tortured some folks. We did some things that were contrary to our values.”

--In an extensive report by the New York Times’ Rukmini Callilmachi, “Kidnapping Europeans for ransom has become a global business for Al Qaeda, bankrolling its operations across the globe.

“While European governments deny paying ransoms, an investigation by the New York Times found that Al Qaeda and its direct affiliates have taken in at least $125 million in revenue from kidnappings since 2008, of which $66 million was paid just last year.

“In news releases and statements, the United States Treasury Department has cited ransom amounts that, taken together, put the total at around $165 million over the same period.

“These payments were made almost exclusively by European governments, who funneled the money through a network of proxies, sometimes masking it as development aid...

“In its early years, Al Qaeda received most of its money from deep-pocketed donors, but counterterrorism officials now believe the group finances the bulk of its recruitment, training and arms purchases from ransoms paid to free Europeans.

“Put more bluntly, Europe has become an inadvertent underwriter of Al Qaeda....

“And business is booming: While in 2003 the kidnappers received around $200,000 per hostage, now they are netting up to $10 million.”

Al Qaeda outsources the actual job of taking of hostages to criminal gangs who work on commission, in order to protect Al Qaeda fighters.

--From the National Journal: “The Energy Department, in a secret May 2013 report, laid out a plan to ramp up efforts to finish securing and disposing of vulnerable stockpiles of nuclear material around the planet by December 2016. However, the White House in its fiscal 2015 budget plan ultimately decided to cut back its nuclear nonproliferation spending in order to make certain monies were available to update the U.S. nuclear stockpile, the Center for Public Integrity reported.” Good.

--The confrontation between U.S. attorney in Manhattan, Preet Bharara, and New York Gov. Andrew Cuomo appears to be escalating, as reported by the New York Times. Bharara “has threatened to investigate the Cuomo administration for possible obstruction of justice or witness tampering.”

As I noted last week, Cuomo created the Moreland Commission a year ago with the promise it would help clean up corruption in state politics, but he abruptly shut it down. Several panel members have now defended the governor’s handling of it, while others have begun to take the opposite side, as first reported by the Times. So Bharara’s office sent a letter to the Cuomo administration, threatening action.

Clearly it seems members of the Cuomo administration are pressuring panel members to make positive statements about its actions.

The letter from prosecutors, which was read to the Times, says, “We have reason to believe a number of commissioners recently have been contacted about the commission’s work, and some commissioners have been asked to issue public statements characterizing events and facts regarding the commission’s operation.”

“To the extent anyone attempts to influence or tamper with a witness’s recollection of events relevant to our investigation, including the recollection of a commissioner or one of the commission’s employees, we request that you advise our office immediately, as we must consider whether such actions constitute obstruction of justice or tampering with witnesses that violate federal law.”

The Times reported last week that Mr. Cuomo’s office had deeply compromised the panel’s work.

This is the worst crisis of Cuomo’s administration and his initial attempts at damage control, after days of silence, only made the matter worse.

The Times deserves major credit for uncovering and going after this issue.

--According to the National Center for Health Statistics, a division of the Centers for Disease Control and Prevention, winter cold kills more than twice as many Americans as does summer heat.

--Acting Surgeon General Boris Lushniak issued a call to action on the topic of skin cancer, calling it a “major public health problem” and that too much exposure to indoor and outdoor ultraviolet light is a major cause.

Unlike other cancers, the incidence of skin cancer in the United States is rising. Nearly 5 million people are treated each year at a cost of $8.1 billion, the surgeon general’s report says.

Without a doubt, Lushniak said it’s time to have a total ban on indoor tanning for minors.

--From the Editorial Board of the New York Times:

“It took 13 years for the United States to come to its senses and end Prohibition, 13 years in which people kept drinking, otherwise law-abiding citizens became criminals and crime syndicates arose and flourished. It has been more than 40 years since Congress passed the current ban on marijuana, inflicting great harm on society just to prohibit a substance far less dangerous than alcohol.

“The federal government should repeal the ban on marijuana....

“That will put decisions on whether to allow recreational or medicinal production and use where it belongs – at the state level....

“The social costs of the marijuana laws are vast. There were 658,000 arrests for marijuana possession in 2012, according to FBI figures, compared with 256,000 for cocaine, heroin and their derivatives. Even worse, the result is racist, falling disproportionately on young black men, ruining their lives and creating new generations of career criminals.

“There is honest debate among scientists about the health effects of marijuana, but we believe that the evidence is overwhelming that addiction and dependence are relatively minor problems, especially compared with alcohol and tobacco....

“There are legitimate concerns about marijuana on the development of adolescent brains. For that reason, we advocate the prohibition of sales to people under 21.

“Creating systems for regulating manufacture, sale and marketing will be complex. But those problems are solvable, and would have long been dealt with had we as a nation not clung to the decision to make marijuana production and use a federal crime....

“We recognize that this Congress is as unlikely to take action on marijuana as it has been on other big issues. But it is long past time to repeal this version of Prohibition.”

Discuss amongst yourselves.

--Nothing like being in the midst of an historic drought, and then having a 90-year-old water main break, spewing about 12 million gallons of water in 3 ½ hours before it’s shut off. Such was Los Angeles this week, with the UCLA campus suffering major damage.

---

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

God bless America.
---

Gold closed at $1294
Oil $97.88...lowest in six months

Returns for the week 7/28-8/1

Dow Jones -2.8% [16493]
S&P 500 -2.7% [1925]
S&P MidCap -2.7%
Russell 2000 -2.6%
Nasdaq -2.2% [4352]

Returns for the period 1/1/14-8/1/14

Dow Jones -0.5%
S&P 500 +4.2%
S&P MidCap +1.8%
Russell 2000 -4.2%
Nasdaq +4.2%

Bulls 55.6
Bears 16.2 [Source: Investors Intelligence]

Have a great week. I appreciate your support.

New readers...I do have an iPad app. Go ahead...take the plunge.

Brian Trumbore



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Week in Review

08/02/2014

For the week 7/28-8/1

[Posted 12:00 AM ET]

Edition 799

Washington and Wall Street

Stocks took it on the chin for a myriad of reasons, even as a crush of economic data was largely positive. The Dow Jones lost 2.8%, its worst performance since the week ended Jan. 24, while the S&P 500’s percentage loss of 2.7% was its worst since June 2012.

So why did stocks crater? Clearly geopolitical risks were back in the forefront with the ongoing crises in Ukraine and Gaza, which in the case of the former led to another round of sanctions that will hurt some large corporations, both here in the States and in Europe. Questions about the health of the eurozone economy and its banking system popped up again. And you had an employment-cost index for the second quarter that was up 0.7%, with wages and salaries advancing 0.6%, the fastest rate of increase since Q3 2008. 

The ECI is up 2.0% year-over-year. I’ve been saying wage growth would eventually take hold and that this would force the Federal Reserve to begin raising interest rates sooner than is currently anticipated. So the yield on the 10-year Treasury quickly ran up to 2.61% from the prior week’s 2.47%, before it plunged anew on Friday with a goldilocks employment report that showed job growth in July was solid, but not too hot for the Fed (and with a wage component that was unchanged, though also up 2.0% for the past 12 months).

But let’s run through the numbers more specifically.

Wednesday, we had the first look at second-quarter GDP and it did indeed rebound, to the tune of 4.0%, better than expected, while the first quarter’s contraction was revised up from -2.9% to -2.1%.

But that means growth was at a 1% clip in the first half and with a projected 3% pace in the second, that’s how you come up with 2% for the year. Hardly robust. Plus while consumer spending was up 2.5% in the second quarter, it was clear much of the 4% growth was attributable to aggressive inventory building, begging the question, how fast will the stuff fly off the shelves?

On Friday, the July non-farm payroll figure showed job growth of 209,000 (with upward revisions to May and June adding another 15,000); the sixth straight month of 200,000+ for the first time since 1997. The unemployment rate ticked up to 6.2% from 6.1% because more people were looking, though the labor participation rate is still a putrid 62.9%, near the lowest level since the late 1970s.

The 209,000 matched the monthly average in the 12 months ended in June. A broad measure of unemployment known as U-6, which includes part-timers who want a full-time job but can’t find one, was 12.2% in July, up from 12.1% in June, but down from 13.9% in July 2013.

A few other data points:

The weekly jobless claims figures continue to come in at 14-year lows (at least the revised reading for two weeks ago was).

The July Chicago PMI on manufacturing came in at 52.6, missing the 63.0 target by a mile, which was a shocker, but this can be a highly volatile figure. More importantly, the national ISM was 57.1, far better than expected and the best since April 2011.

Personal income in June rose a solid 0.4%, as did consumption.

June construction spending was down 1.8% when a small gain was expected.

And on the housing front, the S&P/Case-Shiller 20-city index for May saw prices rise 9.3% vs. a year earlier, which was the smallest year to year advance since February 2013. Co-creator Robert Shiller said it was “clear evidence of weakening.” Prices rose in 14 of the 20 on a seasonally adjusted basis for the month.

But then pending home sales fell 1.1% in June over May, worse than expected.

A reading on consumer confidence by the Conference Board, though, was at 90.9 in July, the highest since October 2007, which speaks to an improving job market and a stronger second half (assuming geopolitics doesn’t enter the equation more than it already has).

And auto sales for July were strong (details below).

Back to the topic of inflation, wage growth and the Federal Reserve, the Fed’s Open Market Committee gathered this week and noted in its formal statement: “The likelihood of inflation running persistently below 2 percent has diminished somewhat,” though it spoke of there still being “significant underutilization of labor resources,” which means the Fed isn’t concerned about wage growth, though the next day we had the ECI report that rattled the markets.

The Fed added: “Household spending appears to be rising moderately and business fixed investment is advancing, while the recovery in the housing sector remains slow.”

Bottom line, the Fed offered it will wait a “considerable time” after bond purchases end in October before raising interest rates, a position it has held since late 2012.

Finally, I do have to make note of a conclusion in PIMCO’s latest investment newsletter by Bill Gross where he, via PIMCO economist Paul McCulley, talks of declining structural global growth rates, the issue of the consumer and a “yawning gap of aggregate demand relative to aggregate supply.”

“1) they have too much debt, 2) Boomers are getting older, 3) workers are outdated and outjobbed by technology, and 4) labor is overwhelmed by corporations with the power to contain wages at a lower rate than topline increases.”

The world, say Gross and McCulley, “is demand deficient and supply rich.” I agree, except I still believe wages are headed higher than expected.

Europe and Asia

There was a slew of data for the eurozone, with the final PMI figure on manufacturing for July coming in at 51.8 vs. a flash reading of 51.9.

Spain was 53.9 (vs. 54.6 in June); France 47.8; Germany 52.4; Italy 51.9 (8-month low); and Greece 48.7, the worst since Oct. 2013 and hardly a sign of recovery when a lasting one is desperately needed in Greece to avoid a third bailout.

[In non-euro U.K., the PMI fell from 57.2 in June to 55.4 last month, obviously still robust, though here, house prices rose at their slowest pace in more than a year in July, which is good as authorities try to prick the bubble.]

But while the manufacturing data for the euro-18 as a whole continues to signal recovery, you had a reading on inflation for July and the flash estimate was prices increased just 0.4% on an annualized basis when the reading back in July 2013 was 1.6%. So whiffs of deflation are still in the air. [The final reading for July prices is released Aug. 14.]

And the eurozone unemployment rate came out for June, 11.5%, which was down from May’s 11.6%, but only a slight improvement vs. a year earlier, 12.0%. Nonetheless, the 11.5% reading is the best since September 2012.

A few representative jobless rates, courtesy of Eurostat, the EU’s statistical arm: Germany 5.1% (the official government reading is 6.7%); France 10.2%; Italy 12.3% (it was 12.2% a year ago, though down from May’s 12.6% reading); Portugal 14.1% (down from 16.6% June 2013); Spain 24.5% (down from 26.2% a year earlier); Greece 27.3% (April).

Youth unemployment rates in the periphery remain dreadful: Spain 53.5%; Italy 43.7% (up from 39.4% a year earlier); Portugal 33.5%; Greece 56.3% (April).

As Hugo Dixon of Reuters wrote on Monday, “The euro crisis is sleeping.”

Witness bond yields, which this week hit record lows on 10-year government paper in some of the following:

Germany 1.11%; France 1.50%; Italy 2.64%; Spain 2.46%; Greece 5.76%.

The two I focus on, Spain and Italy, saw their yields rise a bit by week’s end to 2.56% and 2.76%, respectively. Yes, this is still absurd.

Here’s the thing. As I keep pointing out these same nations, including Greece and Portugal, have mammoth debts to service and despite everything the European Central Bank’s Mario Draghi says, there is no guarantee the other members of the eurozone will come rushing to the aid of their euro brethren, forever.

Case in point, Portugal’s second-largest bank, Banco Espirito Santo SA, which I wrote of a while back and this week reported a loss of $4.8 billion, which means it needs to raise gobs of capital to meet regulatory requirements and there’s no guarantee it will be able to do so, though the Bank of Portugal said it is working on it. Banco Espirito’s shares were suspended on Friday after dropping as much as 50% in Lisbon in one day; nearly 80% for the week. 

I’ve argued that the health of neighbor Spain’s banks is not nearly as strong as they want you to believe, either, because losses in the real estate sector haven’t been properly accounted for.

Just a few other notes:

Spain did report growth of 0.6% in the second quarter over the first, while June retail sales rose 0.2%.

Housing starts in France plummeted 19% in the second quarter from a year earlier, owing largely to poor government policy that President Hollande initiated and is now trying to correct.  

But the biggest depressant on European stock markets this past week was uncertainty generated by the war in Ukraine and sanctions the EU imposed on Russia (as alluded to above), with many European companies having large exposures to Russia and some announcing, such as Siemen’s and Adidas, that they are already seeing a negative impact.

BP, for example, has a 20% stake in Russian energy giant Rosneft. Royal Dutch Shell mothballed a $10 billion shale gas venture in eastern Ukraine. Volkswagen reported its sales declined 8% in Russia.

And it wasn’t just companies. Poland said sanctions would knock 0.6% off Poland’s GDP by yearend.

Lastly, with the situation in Gaza, there has been a significant rise in anti-Semitism in parts of Europe, with violent protests in France, for example. I’ve written for years about the rise of the far-right on the continent, some of the groups having an anti-Israel bent, but those European countries with large numbers of immigrants from the Middle East and North Africa are seeing troubles of a different kind.

The head of the Israeli Jewish Congress told the Knesset on Monday that the rise in anti-Semitic incidents accompanying Israel’s invasion of Gaza represents an “SOS situation,” warning that if left unchecked, such behavior could lead to another European genocide.

Vladimir Sloutsker said: “Never before since the Holocaust, have we seen such a situation as today,” referring to the pro-Palestinian demonstrations in Europe. [Jerusalem Post]

Which brings me to Marine Le Pen, leader of France’s far-right National Front, who has been trying to combat the anti-Semitic reputation of a party founded by her racist father, Jean-Marie.

If France were to hold a presidential election today, Marine would win the first round over former president Nicolas Sarkozy, 26% to 24%, according to a new poll. Le Pen was third behind President Hollande and Sarkozy in the 2012 election with 18% of the vote.

But while Le Pen is benefiting from Hollande’s massive economic problems and Sarkozy’s financial scandals, she is also gaining from the Gaza crisis, whether she would admit so publicly or not.

The next election in France is not until 2017, but Le Pen is going to be a factor, of this there seems little doubt.

Turning to China, early in the week the Shanghai Composite hit its highest level since December, before backing off a little, while the official government purchasing managers’ index for manufacturing came in at 51.7 for July vs. 51.0 in June, the best reading in two years. HSBC’s final look at manufacturing was also 51.7 (after a preliminary 52.0). So this is encouraging, especially with HSBC confirming the government’s data.

Meanwhile, Bloomberg had a story on the ongoing problem with China’s trade data, despite the crackdown on fake export-invoicing. Major discrepancies remain. For example, in the last report, China recorded $1.31 of exports to Hong Kong for every $1 in imports Hong Kong tallied from China.

In Japan, the data was poor. Retail sales fell 0.6% in June, year-over-year, with second-quarter sales down 7% from the first quarter.

Industrial production fell 3.3% in June over May, far worse than expected, and June wage growth was up just 0.4% vs. year ago levels, also worse than expected. Adjusted for inflation, wages were down 3.8%.

Here’s the bottom line. After the 3% sales-tax hike in April, Prime Minister Shinzo Abe desperately needs the Japanese consumer to pick up spending, but it’s weak as factories cut back. Wages also must rise nearly as fast as inflation, but that hasn’t been the case as corporations and small- and medium-size businesses hoard cash rather than give a portion to their employees. These next few months are going to be critical for Abe.

Street Bytes

--The Dow Jones, after its 2.8% swoon to 16493, is now down 0.5% for the year. The S&P 500 is still up 4.2%. Nasdaq lost 2.2% on the week, while the Russell 2000 lost another 2.6%.

--U.S. Treasury Yields

6-mo. 0.04% 2-yr. 0.47% 10-yr. 2.49% 30-yr. 3.28%

The 10-year has been stuck in a trading range between 2.44% and 2.66%.

--I placed Ebola in the “Street Bytes” section last week for the simple fact it has the potential to totally cripple the West African economy, and then some, and this past week the outbreak only got worse, with the death toll now over 700.

The World Health Organization’s Margaret Chan told a summit of regional leaders that failure to contain Ebola could be “catastrophic” in terms of lives lost, but that it could be stopped if well managed. That said, the virus was spreading too fast, she added.

Health officials around the world are now warning doctors to watch for signs of the disease, while the death of an American, Patrick Sawyer, in Lagos, Nigeria, has led to fears Ebola could spread beyond Africa. Sawyer had travelled from Minnesota to attend the funeral of his sister, who died from Ebola.

“Despite vomiting and suffering from diarrhea, the employee in the Liberian finance ministry was able to fly from Liberia, via Ghana, and Togo, before arriving in Nigeria, where he died.”

“Experts say he could have passed on the disease to anyone sitting near him or who used the same lavatory on one of the planes.” [Daily Telegraph]

Sierra Leone joined Liberia in introducing sweeping measures to contain the disease, calling on their armies to enforce quarantines in several villages.”

Tom Frieden, chief of the U.S. Centers for Disease Control, said, ‘It is like fighting a forest fire. If you leave behind even one burning ember, once case undetected, it could reignite the epidemic.”

The Peace Corps was among the organizations removing its people, temporarily, from the three nations most affected, some 340 workers.

We now await the arrival of two very sick Americans who will be treated at Emory University Hospital in Atlanta.

--Argentina defaulted on its sovereign debt for the second time in 13 years on Wednesday, with Economy minister Axel Kicillof saying “vulture funds” had rejected a renewed offer from the government to bondholders who accepted debt restructurings after the 2001 default.

The bondholders are demanding a full pay-out of $1.3 billion.

Editorial / Wall Street Journal

“The government of Argentina has done it again. By flouting the rule of law and vilifying foreign investors, President Cristina Kirchner succeeded Wednesday in driving the country into its second default in 13 years. This isn’t the global disaster predicted by some...but it is sad news for the people of Argentina.

“Wednesday’s default suggests the country will remain a pariah to many of the world’s investors, which means increased costs for public and private Argentine borrowers....

“Presiding over a slow-growth, high-inflation economy that her policies have created, and with an election to choose her successor in 14 months, Ms. Kirchner is trying to revive her party’s political fortunes by heaping scorn on U.S. ‘vultures’ – hedge funds – and on the U.S. courts.”

--In their annual report, the trustees of Medicare and Social Security say the former will be able to continue paying full hospital benefits for its elderly or disabled clients without any changes in the law through 2030 – four years later than the last estimate.

But as Damian Paletta points out in the Wall Street Journal, “the Social Security disability-insurance program faces a more pressing conundrum. The report projects it will be able to pay only 81% of benefits starting in late 2016 unless Congress intervenes.”

Get this: “Roughly 11 million Americans collected a total of $140 billion in Social Security disability benefits last year, up from 7.9 million people collecting $78.2 billion in 2004.”

Many of us are flat-out crooks.

As for the improvement in Medicare, some are claiming it’s a result of ObamaCare, while others say it is way too early to know.

What is clear, however, is that we still need entitlement reform, but this topic won’t come up again on Capitol Hill until after the 2016 election, if then.

On ObamaCare and premium increases for the first renewals since the exchanges went into place, California said the 1.2 million in the state-run insurance exchange can expect modest price increases of 4.2% on average next year, as reported by the Los Angeles Times.

But, this is deceiving. Anthem Blue Cross said its rates were rising 6% on average statewide, though with increases of as much as 14% in San Francisco. That’s what you’ll have around the country. Supporters will harp on headlines highlighting reasonable increases, while detractors will point to, say, Anthem and San Francisco.

--Auto sales for the month of July were strong, with the Big 3, Toyota and Nissan reporting sizable gains. General Motors Co. said sales were up 9% from a year ago, GM’s best July sales total since 2007, despite all its issues. Ford Motor’s sales were up 10%, its best July in eight years, while Chrysler Group reported U.S. sales soared 20% from the same month year-over-year, the best July for it since 2005.

Toyota Motor Corp. saw its U.S. sales increase 12%, and Nissan’s rose 11% for a July record; ditto Hyundai, up 2%.

But Honda’s U.S. sales fell 4% for the month.

Overall, it was the best July for the industry since 2006 and sales, running at about a 16.5 million annualized pace for 2014, according to Autodata Corp., could hit the historical peak of 17 million, reached in 2000.

--Tesla CEO Elon Musk laid out plans for a massive expansion in China, while saying its next vehicle, an SUV called Model X, would represent half of its 100,000 deliveries by the end of 2015.

“We can drive demand up at will,” Musk declared on an analyst call. Tesla is on track to hit its internal target of 35,000 vehicle deliveries in 2014. Revenues for the quarter were $769 million, short of the Street’s expectations though up 90% from the year before, and net income (adjusted for various expenses) was 11 cents a share vs. the 4 cents analysts had been expecting.

Tesla’s eventual goal is to produce 300,000 vehicles, but for that it needs to greatly expand its battery supply, so it needs a $5 billion battery plant to be built over the next three years and you can imagine the fierce competition to be a site for this, though a decision won’t be made for a few more months.

The plant will be a joint venture with Panasonic and is expected to create 6,500 jobs.

--Twitter handily beat Wall Street’s expectations and the stock soared 30% immediately after the release of the results, though fell back some by week’s end. Revenues were $310 million, double last year, while the company raised full year sales guidance 8% to $1.3 billion, though its loss was $145 million. User numbers rose to 271 million (compared with Facebook’s 1.3 billion), an increase of 6% sequentially, up 24% from a year ago.

But user growth is slowing, and the number of times each user viewed their Twitter feed, on average, fell 7% year on year.

And I haven’t mentioned that Twitter’s results have been enhanced by both the Olympics and World Cup thus far in 2014 and there are no big events of this kind to drive traffic the second half.

--Shares in Adidas AG tumbled 10% as the sporting-goods company that was a big sponsor of the World Cup cut its 2014 outlook and postponed 2015 targets amid challenges in its golf business, as well as risks related to Russia.

“The recent trend change in the Russian ruble as well as increasing risks to consumer sentiment and consumer spending from current tensions in the region point to higher risks to the short-term profitability contribution from Russia/CIS,” the company said.

--Procter & Gamble announced it would shed more than half its brands in an effort to speed sales growth. P&G will focus on 70 to 80 consumer brands, including Tide detergent and Pampers, and will divest itself of 90 to 100 smaller brands that only account for about 10% of the company’s overall sales.

Of the brands the company will now focus on, 23 have sales of $1 billion to $10 billion.

P&G reported net sales grew just 1% to $83 billion in the year ended June 30. Net income rose 3% to $11.6 billion. [Serena Ng / Wall Street Journal]

--Samsung Electronics announced profits fell 20% in the second quarter, though it still took in $6.1 billion. While Samsung is the world’s biggest maker of mobile phones, the company said a global slowdown in the sales of smartphones and tablets hurt results. Samsung, like Apple, faces increasing competition.

--Sony Corp. reported profit rose to $261 million, when a loss had been expected, as sales climbed 6% to $17.6 billion. Sony did well in its video games, movie and camera businesses, after selling off its Vaio computer unit.

--Exxon Mobil Corp. reported second-quarter earnings of $8.78 billion, better than expected, on revenue of $111.65 billion, though it announced it was cutting capital spending 4% to $9.8 billion as production fell 5.7%. Exxon didn’t say if it would push ahead with plans to drill in Russia’s Arctic seas given tensions between the Russian and U.S. governments over Ukraine.

--UPS missed earnings expectations and lowered its full-year outlook, as it invests more to avoid another disaster at holiday time, including paying more for employees to work on Black Friday.

U.S. revenue did rise 5.2% to $8.67 billion, as daily package volume advanced 7.4%. International small package revenue grew 6.2%.

--A National Labor Relations Board decision handed labor a big victory in ruling that McDonald’s corporate apparatus must address workers’ complaints that they were fired or disciplined for participating in protests for higher wages. So for liability purposes, corporate operations can be lumped in with thousands of franchises.

McDonald’s recent string of bad news continued as Russia’s food safety watchdog said it opened an investigation into the cheese used by the chain, after earlier questioning the nutrition labeling; part of Russia’s retaliatory efforts in the face of Western sanctions over Ukraine.

McDonald’s mostly imports cheese from German and Czech suppliers for its outlets in Russia.

[Separately, Wendy’s Co. announced it was leaving the Russian market because of a dispute with its local partners. Wendy’s had been in Russia three years. McDonald’s opened its first franchise in Russia in 1990 and has 430 outlets in the country.]

--Yum Brands admitted its KFC unit is suffering in China due to the ‘rotten food’ scandal involving its supplier, Husi, owned by the U.S.-based OSI Group. In a filing Yum said, “The result has been a significant, negative impact to same-store sales at both KFC and Pizza Hut in China over the past 10 days. If the significant sales impact is sustained, it will have a material effect on full-year earnings per share.”

Yum is China’s biggest restaurant operator in China, with more than 4,600 KFC outlets and 1,200 Pizza Huts.

--Microsoft became the latest U.S. company to be targeted by an antitrust investigation in China. This comes days after the announcement of a separate probe of Qualcomm, where the Chinese government determined the mobile chip company had used monopoly power in setting licensing fees.

Recently, the Chinese government banned purchases of Microsoft’s Windows 8 PC software.

--Former shareholders of defunct oil giant Yukos received two favorable rulings this week that say Russia owes over $52 billion in compensation by Jan. 15, 2015. Russia is appealing the award.

The European Court of Human Rights ruled that tax proceedings that stripped Yukos of 300 billion rubles in 2004 and 2005 were “unlawful” and that Russian authorities had “failed to strike a fair balance” in their dealings with the company.

Mikhail Khodorkovsky, the former head of Yukos, served 10 years in a Russia prison on fraud charges that were politically motivated.

--Real estate information website Zillow is acquiring rival Trulia in a $3.5 billion deal.

--Dollar Tree Inc. agreed to buy rival Family Dollar Stores Inc. for about $8.5 billion, combining the No. 2 and No. 3 companies in the dollar-store category. No. 1 is Dollar General Corp. The combined operation would have more than $18 billion in annual sales.

Dollar focuses mainly on the suburban market, while Family Dollar has an emphasis on the urban and rural poor.

--According to a study from the Urban Institute, 35% of Americans have debt in collections, which typically occurs after the bill hasn’t been paid for 180 days. This includes debt from credit card bills, child support, medical bills, utility bills, parking tickets or membership fees. [Hadley Malcolm / USA TODAY]

--A Johnson & Johnson subsidiary, Ethicon, withdrew a hysterectomy tool from the market that is suspected of inadvertently spreading cancer. Ethicon made the move after a U.S. Food and Drug Administration hearing, but the company stressed it wasn’t a recall and argues its minimally invasive laparoscopic power morcellator is not defective.

--Amgen Inc. said it plans to cut up to 15% of its workers, 2,400 to 2,900, as part of a restructuring, with most of the cuts taking place in Washington state and Colorado, though Amgen plans to expand its research-and-development in the biotechnology hubs of South San Francisco and Cambridge, Mass.

--On Monday, Herbalife reported earnings that were below expectations, breaking a 21-quarter record of surpassing analysts’ forecasts as it announced earnings declined 15% in the second quarter vs. a year earlier. The company’s shares tanked as it gave up all the gains following hedge fund operator Bill Ackman’s presentation on nutrition clubs the prior week, Ackman having a $1 billion bet on Herbalife being a fraud.

Ackman apologized for his long-winded dissertation, saying “My bad.” But the share price finished the week at $52.50 (after having surged to $67), or $1.50 lower than before Ackman took the stage ten days earlier.

Foreign Affairs

Russia / Ukraine: Tensions between Ukraine and Russia continued to rise, as separatist rebels battle government troops in Donetsk region, amid a possible full-scale invasion by the Ukrainian army into the city of Donetsk, which would be an incredibly bloody bout of urban warfare.

On Thursday, the rebels ambushed a government troop column, killing at least 10 soldiers, near where flight MH17 crashed.

Dutch and Australian forensic teams visited the crash site that day for the first time, a full two weeks since the July 17 shoot down. Previously, fighting in the vicinity prevented teams of investigators from getting in, with Australia believing at least 80 bodies remain at the site.   

Earlier, the U.S. stepped up its accusations of direct Russian military involvement, publishing satellite images that show a significant buildup on the border, as well as evidence of Russian artillery firing on Ukrainian forces.

“At a time when some folks could have convinced themselves that (Russian President Vladimir) Putin would be looking for a reason to de-escalate, he has actually taken a decision to escalate,” said General Martin Dempsey, chairman of the joint chiefs of staff.

Speaking at a forum in Aspen, Gen. Dempsey said that Russia had “made the conscious decision to use its military force inside of another sovereign nation to achieve its objectives for the first time, I think, probably, since 1939.” [Financial Times]

Putin and the separatists suffered some major battlefield losses on Monday as the Ukrainian military sought to drive a wedge between the rebel strongholds of Donetsk and Luhansk and cut off supply lines between the two.

And then the United States and the European Union decided to announce a new round of tougher economic sanctions against Moscow, with the feeling particularly in the EU being that the crash of MH17 created “a completely new situation that makes further-reaching measures necessary,” in the words of a spokeswoman for German Chancellor Angela Merkel.

Another European diplomat said that while sanctions would in some respect be “a disaster,” economically and politically, for both sides, “we cannot be indifferent. We had to react.”

The sanctions target the oil and defense sectors, as well as sensitive technologies, while restricting Russian state banks’ access to capital.

As reported by the Wall Street Journal, “Pro-Kremlin commentators have warned in recent days that backing down now in Ukraine would lead the West to turn its focus to returning Crimea... the threat of a sudden collapse of the separatist forces under pressure from Kiev could also prove intolerable for the Kremlin, spurring even deeper intervention.”

Dmitry Trenin, noted Russia expert at the Moscow Carnegie Center, wrote in a commentary:

“Expecting Putin to back off, or his close friends to persuade him to change tack or else the ‘oligarchs’ to pressure the Kremlin into beating a retreat betrays a lack of understanding of the gravity of the situation. It is no longer the struggle for Ukraine but a battle for Russia.”

Separately, the United Nations’ Office of the High Commissioner for Human Rights warned of a “total breakdown of law and order and a reign of fear and terror” in eastern Ukraine.

Luhansk city, for example, was completely without power after recent fighting damaged power lines, while the U.N. report said, “With the economic life of Donetsk and Luhansk now crippled, the impact on the rest of the country will be severe.” [Moscow Times]

At least 1,150 have been killed in the conflict since mid-April, according to the U.N.

The Irish Independent reported that Merkel and Putin were working on a secret deal that would stabilize the borders of Ukraine and provide the struggling country with a strong economic boost, particularly a new energy agreement with Russia’s Gazprom, for future gas supplies and pricing.

But, supposedly it would call on the international community to recognize Crimea’s annexation by Russia. And, it would appear, the peace deal was put on the back-burner following the shooting down of MH17. One assumes, though, it is still on the table.

Some of Germany’s biggest companies have large operations in Russia, and, as noted above, the financial impact on the likes of Siemen’s and Adidas is already being felt, while in the U.S., Visa and MasterCard are among those facing tighter restrictions on the way they can operate in Russia.

In Kiev, parliament voted Thursday to keep Arseny Yatsenyuk as prime minister, even though a week earlier he had offered his resignation. According to the Constitution, the parliament must accept the resignation for it to take effect. As reported by the Los Angeles Times’ Steven Zeitchik, “Yatsenyuk will now almost certainly stay...with some analysts believing he was never committed to exiting the post and had offered his resignation to make a statement about a legislative logjam.”

Editorial / Washington Post

“A month ago, Russian President Vladimir Putin appeared to be successfully executing his campaign to destabilize Ukraine. While Russian-backed insurgents consolidated a breakaway republic, weak and divided Western governments ignored their own deadlines for imposing sanctions. Now, suddenly, Mr. Putin faces twin reversals: relatively tough sanctions from the United States and European Union on Russian banks and oil companies, and a string of military defeats that have pushed back his proxy forces. It’s a dangerous moment for Mr. Putin – and, perhaps, an opportunity for Ukraine and its allies....

“It’s not yet clear how Mr. Putin will react to these reversals. He is capable of surprising shifts of direction – such as his sudden offer last summer to help strip his ally Syria of chemical weapons. Ukrainian officials, like some of their counterparts in the West, worry about a reckless lashing out by a ruler who feels cornered. Mr. Putin, they counsel, still should be offered a face-saving way of retreating from Ukraine....

“While such initiatives are worth trying, the reality is that Mr. Putin is more likely to escalate than back down. Ukraine and the West must be prepared for a more forceful and overt Russian military intervention. That should mean more support for the Ukrainian military, which is seeking drones and better communications equipment from the West, and more economic support for the new government... Russia should not be allowed to permanently entrench its proxy forces in eastern Ukraine, creating a ‘frozen conflict.’

“The West also should not shrink from the destabilization of Mr. Putin’s regime. Once considered a partner, this Kremlin ruler has evolved into a dangerous rogue who threatens the stability and peace of Europe. If he can be undermined through sanctions and the restoration of order in eastern Ukraine, he should be.”

Editorial / Financial Times

“An improvement in the international climate is...unlikely without political change in Russia. For what makes Mr. Putin so confrontational on the world stage is, at bottom, an awareness that Russia’s post-communist attempt at building a modern state and society is running into the sands. It is no accident that Mr. Putin became more aggressive, against his internal critics and in Ukraine, after the pro-democracy street protests that preceded his managed re-election as president in 2012. As with the Soviet politburo, so with Mr. Putin and his entourage: an insecure power apparatus adopts a resentful anti-Americanism in its foreign policy because its only consistent domestic policy is suppression of political freedom.

“The potential for a showdown between the west and Russia over Ukraine was implicit in Moscow’s post-Soviet conception of its neighbors to the west and south as states that are less than fully sovereign and belong to a Russian sphere of influence. But Russia under the late Boris Yeltsin did not go to war outside its borders.

“Mr. Putin lured Georgia into a short war in 2008 and recognized the breakaway regions of Abkhazia and South Ossetia as independent states. Mr. Putin annexed Crimea in March. Now it is Mr. Putin who is fomenting the pre-Russian rebellion in eastern Ukraine. Western governments must apply the new sanctions and be on guard against any further Russian misconduct.”

Meanwhile, a Russian defense ministry photograph appears to show soldiers handling an Iskander-K cruise missile canister about 75 miles from Estonia, according to a nuclear-arms expert, Hans Kristensen. The image went public days before the United States formally accused Moscow of breaking the Intermediate-Range Nuclear Forces Treaty of 1987 by test-firing a ground-launched cruise missile with capabilities similar to the Iskander-K.

The INF Treaty banned both Russia and the United States from testing or deploying cruise and ballistic missiles with ranges between 310 and 3,400 miles. An unidentified Obama administration official said in a statement released to the media:

“This is a very serious matter which we have attempted to address with Russia for some time now,” Reuters reported. “We encourage Russia to return to compliance with its obligations under the treaty and to eliminate any prohibited items in a verifiable manner.”

The New York Times’ Michael R. Gordon reported Russia first started testing the cruise missile as far back as 2008.

NATO’s top commander, Gen. Philip M. Breedlove, said the violation requires a response if it cannot be resolved. One such response could be the deployment of sea-launched and air-launched cruise missiles, which would be allowable under the accord.

Israel: U.S. Secretary of State John Kerry and U.N. Secretary General Ban Ki-moon negotiated a 72-hour humanitarian cease-fire in Gaza, that took effect 8:00 a.m. Jerusalem time on Friday and just 90 minutes later was in a shambles. The IDF was dismantling a tunnel, as it was allowed to do during the cease-fire, when three Hamas terrorists emerged, one set off a suicide belt, killing two Israeli soldiers, and a third Israeli was captured, thus ensuring a massive manhunt and further violence.

Initially, it appeared that Kerry had won back support from the Israelis after he was severely rebuffed by their cabinet a week ago when his efforts to broker a seven-day cease-fire went up in flames, as many across Israel thought the deal was tilted heavily in favor of Hamas.

On Thursday, Israeli Prime Minister Benjamin Netanyahu had vowed to destroy Hamas’ tunnel network “with or without a cease-fire.”

Over 1,600 Palestinians and 66 Israelis have been killed. A poll of Israelis released on Sunday had 86.5% opposing a cease-fire because “not all the tunnels have been found, and Hamas has not surrendered.” Only 9.7% said it was time to stop Operation Protective Edge.

George Will / Washington Post

“With metronomic regularity, there is a choreographed minuet of carnage. Israel is attacked. Israel defends itself. Perfunctory affirmations of Israel’s right of self-defense are quickly followed by accusations that Israel’s military measures are disproportionate. Then come demands for a cease-fire, and the attackers replenish their arsenals.

“The accusations and demands are ascribed to something fictitious, the ‘international community.’ The world ‘community’ connotes a certain cement of shared values and aspirations. So, what community includes Denmark and Yemen, Canada and Iran, New Zealand and Congo, Italy and North Korea? ‘International community’ is empty cant that bewitches the minds of earnest diplomats such as John Kerry but does not interest Israeli Prime Minister Benjamin Netanyahu.

“He surely has told Kerry what he has told others: The point of Israel is that Jews shall never again, like Blanche DuBois in ‘A Streetcar Named Desire,’ depend on the kindness of strangers. Such dependency did not work out well for Jews, so Israel exists for Jewish self-defense.”

Charles Krauthammer / Washington Post

“John Kerry is upset by heavy criticism from Israelis – left, right and center – of his recent cease-fire diplomacy. But that’s only half the story. More significant is the consternation of America’s Arab partners, starting with the president of the Palestinian Authority. Mahmoud Abbas was stunned that Kerry would fly off to Paris to negotiate with Hamas allies Qatar and Turkey in talks that excluded the PA and Egypt.

“The talks also undermined Egypt’s cease-fire proposal, which Israel had accepted and Hamas rejected (and would have prevented the vast majority of the casualties on both sides). ‘Kerry tried through his latest plan to destroy the Egyptian bid,’ charged a senior Palestinian official quoted in the Arab daily Asharq Al-Awsat – a peace plan that the PA itself had supported.

“It gets worse. Kerry did not just trample an Egyptian initiative. It was backed by the entire Arab League and specifically praised by Saudi Arabia. With the exception of Qatar – more a bank than a country – the Arabs are unanimous in wanting to see Hamas weakened, if not overthrown. The cease-fire-in-place they backed would have denied Hamas any reward for starting this war, while what Kerry brought back from Paris granted practically all of its demands.

“Which is what provoked the severe criticism Kerry received at home. When as respected and scrupulously independent a national security expert as David Ignatius calls Kerry’s intervention a blunder, you know this is not partisan carping from the usual suspects. This is general amazement at Kerry’s cluelessness....

“Forget about Israeli interests. Forget about Arab interests. The American interest is to endorse and solidify this emerging axis of moderate pro-American partners (Israel, Egypt, Jordan, Saudi Arabia, the United Arab Emirates and other Gulf states, and the Palestinian Authority) intent on seeing Islamist radicalism blunted and ultimately defanged.

“Yet America’s secretary of state doesn’t see it. Speaking of Hamas-run Gaza, Kerry actually said in Paris: ‘The Palestinians can’t have a cease-fire in which they think the status quo is going to stay.’ What must change? Gazans need ‘goods that can come in and out...a life that is free from the current restraints.’

“But the only reason for those ‘restraints,’ why goods are unable to go in and out, is that for a decade Hamas has used this commerce to import and develop weapons for making war on Israel.”

David Ignatius / Washington Post

“Secretary of State John Kerry has made a significant mistake in how he’s pursuing a Gaza cease-fire – and it’s not surprising that he has upset both the Israelis and some moderate Palestinians.

“Kerry’s error has been to put so much emphasis on achieving a quick halt to the bloodshed that he has solidified the role of Hamas, the intractable, unpopular Islamist group that leads Gaza, along with the two hardline Islamist nations that are its key supporters, Qatar and Turkey. In the process, he has undercut not simply the Israelis but also the Egyptians and the Fatah movement that runs the Palestinian Authority, all of which want to see an end to Hamas rule in Gaza.”

Gerald F. Seib / Wall Street Journal

“When Israel accepted an Egyptian cease-fire proposal and Hamas rejected it, White House acceptance of Israel’s military actions was clear.

“That began to change when Israel moved from an aerial offensive to a ground incursion into Gaza. American and Israeli analyses fell out of sync. U.S. officials began to fear that the deaths of hundreds of Palestinians were stirring up enough anger in the Gaza Strip and West Bank to put the longer-term U.S. quest for peace out of reach for a long, long time.

“So Mr. Kerry jumped in. Tensions grew as Israelis felt his proposals for a cease-fire didn’t give sufficient security guarantees, seemed to equate the state of Israel and radicals in Hamas, and empowered Hamas’ backers in the governments of Turkey and Qatar. A temporary ban on American airline flights into Israel on safety grounds infuriated Israelis.

“American officials, meantime, chafed at the open Israeli hostility toward what they considered a good-faith effort by Mr. Kerry to end a nasty fight that they feel can harm Israel in the long run.

“This diplomatic dance isn’t occurring in a vacuum, however. Israelis consider Hamas a problem, but they regard Iran’s nuclear program an existential threat. Those nuclear talks with Iran resume soon. American officials actually aren’t optimistic about reaching a long-term deal, but Israelis are nervous. Which is why more tensions lie ahead.”

Iran: In line with the above, we learned this week that Iran’s legislature wants to take a more active role in the nuclear talks, with parliament ratifying any accord Tehran’s negotiating team comes up with. Days earlier, a group of U.S. lawmakers moved to require congressional approval of any long-term nuclear agreement.

A major concern of those analyzing what could be in a final agreement is the “sunset clause.” Ray Takeyh of the Council on Foreign Relations says this envisions a time when Iran will be “like any other nation” and free to enrich with no sanctions or observers. As the Washington Post’s Jennifer Rubin writes:

“This, to many of us, seems mind boggling that in 5 or 10 or even 15 years Iran could be going full tilt, putting its nuclear weapons on ICBMs and be in violation of no agreement or sanctions regime. Former Bush State Department official for arms control and nonproliferation Stephen Rademaker says there is a misnomer that the terms of a final deal are underway. In fact, under the sunset clause, ‘The final step is treating Iran like any other country.’ If the attitude is let ‘bygones be bygones,’ he says Iran need only wait out the current negotiations to have a nuclear arsenal accepted by the international community. Moreover, if not explicitly saying that Iran has a right to enrich, the interim deal envisions a time when Iran can operate with no sanctions. Rademaker says bluntly, ‘That is a huge victory for Iran.’”

Iraq: ISIS (the Islamic State) continues to edge its way toward Baghdad, particularly from the south, as reported by the Wall Street Journal. Government troops have stopped the Islamic State’s drive beyond Tikrit to the north.

On Friday the U.N. announced more than 1,700 people were killed in Iraq in July, down from 2,400 in June, when ISIS launched its lightning blitz, seizing much of the northern and western parts of the country. Prior to ISIS’ big arrival, 800 were killed in May.

Syria: ISIS militants made further gains against President Bashar Assad’s forces, after days earlier taking over the sprawling army complex in Raqqa in the northeast. According to the Observatory for Human Rights, at least 85 regime troops were killed during the ISIS takeover, 50 of whom were summarily executed.

“Some of the executed troops were beheaded, and their bodies and severed heads put on display in Raqqa city,” an ISIS stronghold, according to the Observatory. [AFP]

The regime did, however, apparently recapture the Shaar gas field in Homs province from ISIS.

Separately, according to the director of the National Counterterrorism Center, Matt Olsen, Syria is now the “predominant battleground for extremists” plotting to attack the United States, with the number of foreign fighters exceeding 12,000 and rising rapidly. [Kevin Baron / Defense One] A year ago, the figure was put at 800.

Michael Gerson / Washington Post

“The Syrian conflict will be remembered as a strategic watershed for American foreign policy. When the rebellion was a broad, non-radical uprising...President Obama did almost nothing to help. When radical groups gained momentum, it became an excuse for further inaction, because America didn’t want to create jihadists. We got the jihadists anyway, who are now causing regional havoc. At every stage, Obama defended his policy with false choices and flanking attacks on straw men: Any critics of his minimalism wanted Marines in Damascus. And when he eventually adopted the policy recommended by many of his critics – aid to the responsible rebels – it was very late. Obama has consistently complained about American powerlessness in Syria and, through risk aversion and delay, has ensured that powerlessness.

“This is both a strategic and moral disaster.”

Libya: Well over 250 people have died in the capital Tripoli and second-city Benghazi in two weeks of fighting between Libyan special forces and Islamist militants. The United States, France, Germany, the U.K., U.N. and Turkey are among those pulling their diplomats out of the country.

A large fuel storage site near Tripoli’s airport was hit by rocket fire and it posed a huge environmental disaster as the government asked for international assistance in putting the fire out. The airport itself has been virtually destroyed in fighting between rival militias.

By week’s end, Islamists claimed to have taken control of Benghazi. China chartered a Greek vessel to evacuate hundreds of Chinese citizens, and the Philippines is working to get out some 13,000 Filipino workers inside Libya.

China: As reported by the Financial Times’ Jamil Anderlini, “The number of people joining the Chinese Communist party has fallen for the first time in a decade as President Xi Jinping’s anti-corruption campaign reduces the allure of working for the authoritarian state.

“For many young Chinese, joining the party and landing a government job with good benefits and the chance to make a bit on the side was the ultimate dream.

“But last year, just 2.4m people joined – a quarter fewer than in 2012 – marking the smallest number of new members since 2003 and bringing total membership to 86.7m by the end of 2013.”

Xi’s crackdown took out another heavyweight, the most senior cadre yet, Zhou Yongkang, the former security chief and member of the all-powerful Politburo Standing Committee. Zhou retired from the Politburo in 2012, with the South China Morning Post first reporting he was under investigation in 2013.

Zhou’s son, Zhou Bin, apparently enriched himself through his father’s connections.

Xi has consolidated his position to the point where he is the most powerful Chinese leader since Deng Xiaoping.

Meanwhile, China held more military drills across the East and South China Seas that proved to be a huge disruption for domestic air travel, as the military takes up the air space. Capacity at Shanghai’s two airports, for example, was cut 75%. I see that flights out of my favorite airport in Fujian (cough cough) were suspended for hours the other day. Last weekend, between airports in Shanghai and Beijing, some 800 flights were delayed or canceled. 

Separately, the military held live-fire drills near Vietnam.

Finally, China acknowledged the existence of a new intercontinental ballistic missile capable of carrying multiple warheads as far as the United States, as reported by state-run media. They are to be called Dongfeng-41 (DF-41), according to the Global Times. Let’s hope this name does not become too familiar to all of us.

North Korea: The head of Pyongyang’s General Political Bureau for the military said, “If the U.S. imperialists threaten our sovereignty and survival...our troops will fire our nuclear-armed rockets at the White House and the Pentagon – the sources of all evil.” [AFP]

Well that’s not very nice.

Perhaps of more immediate importance, however, is the testimony by former CIA Director James Woolsey before the House Armed Services this week that the North is on track to acquire the capability to carry out an electromagnetic pulse strike on the U.S. That would involve detonating a nuclear warhead in the atmosphere with the intention of frying the electrical grids of countries below.

Woolsey said the U.S. government must move quickly to strengthen the electrical grid to survive an electromagnetic pulse attack.

South Korea’s defense ministry did not believe Pyongyang could carry out such an EMP attack because it hasn’t developed the bombs required for such a mission. [National Journal]

Foreign Policy and the lessons of history...

Daniel Henninger / Wall Street Journal

“The revisiting of (World War I’s) dark history may be why so many people today are asking if our own world – tense or aflame in so many places – resembles 1914, or 1938...
“(A) revealing stop in the years just before Munich, (was) when in 1935 Benito Mussolini’s Italy invaded Ethiopia.

“Before the invasion, Ethiopia’s emperor, Haile Selassie, did what the civilized world expected one to do in the post-World War I world: He appealed for help to the League of Nations. The League imposed on Italy limited sanctions, which were ineffectual.

“One might say this was one of history’s earlier ‘red lines.’ Mussolini blew by it, invading Ethiopia and using mustard gas on its army, as Bashar Assad has done to Syria’s rebel population. Mussolini merged Ethiopia with Italy’s colonies in east Africa. The League condemned Italy – and dropped its sanctions.

“In defeat, Haile Selassie delivered a famous speech to the League in Geneva. He knew they wouldn’t help. As he stepped from the podium, he remarked: ‘It is us today. Tomorrow it will be you.’

“In 1938, British Prime Minister Neville Chamberlain, not unlike John Kerry today, shuttled tirelessly between London and wherever Adolf Hitler consented to meet him to discuss a nonviolent solution to Hitler’s intention to annex the Sudetenland, the part of Czechoslovakia inhabited by ethnic Germans. Hitler earlier in the year had annexed Austria, with nary a peep from the world ‘community.’ Many said the forced absorption of Austria was perfectly understandable.

“One may hope Mr. Kerry and President Obama have more success with their stop-the-violence missions to Vladimir Putin, Kiev, Gaza, Iraq, Syria, Tehran, Afghanistan and the South China Sea than Neville Chamberlain had with Hitler, who pocketed eastern Ukraine – excuse me, the Sudetenland – and then swallowed the rest of Czechoslovakia, which ceased to exist....

“After returning from Munich, Neville Chamberlain told the British to ‘go home, and sleep quietly in your beds.’ After 1914 and 1938, one wishes it could be so now. Wars, in their causes and timing, are unpredictable. What is not impossible is recognizing the winds of war. Doing less than enough, we should have learned, allows these destructive winds to gain strength.”

Random Musings

--Texas Republican Sen. Ted Cruz urged House Republicans to oppose leadership’s $659 million border plan and enough of them balked, forcing cancellation of what was to be Thursday’s scheduled vote for lack of support.

But while as discussed further below, the House eventually passed a plan on Friday, it has no chance of becoming law and now Congress leaves for a five-week recess without agreeing on legislation to address the border crisis; the Senate having passed a $2.7 billion plan, which was less than the $3.7 billion President Obama had requested.

Republicans seem determined to snatch defeat from the jaws of victory come November.

Editorial / Washington Post

“Opting for the preposterous when summoned to do the practical, House Republicans rallied Wednesday behind a measure to sue President Obama, then threw up their hands Thursday when called on to resolve the crisis of tens of thousands of unaccompanied minors streaming across the southwestern border. Having postponed its planned Friday adjournment, the House now faces the choice of redeeming itself by acting on the humanitarian emergency or slinking away in disgrace.

“The Republican immigration effort in the House was derailed by tea party backbenchers who, at the behest of their champion, Sen. Ted Cruz, refused to support any bill that did not also preemptively bar President Obama from shielding more undocumented immigrants from deportation. In service to partisan warfare against the president, conservatives opted to do nothing for the Central American children who continue to risk their lives crossing Mexico and entering the United States.

“Senate Democrats did not look much more determined to deal with the immediate problem. What they had in mind, according to Senate Majority Leader Harry Reid (D-Nev.), was to use any legislation that passed the House as a vehicle to force negotiations over broader immigration reform legislation that the Senate approved last year.

“That was a good bill, and it deserves to become law. But Mr. Reid knows full well that, as a matter of political reality, it’s a non-starter with House Republicans. By injecting last year’s immigration bill into the current attempt to stanch the flow of underage border-crossers, Mr. Reid seemed intent on denying Republicans the chance to claim credit for anything constructive on immigration.”

House Republicans did finally pass a measure, 223-189 (four Republicans voting against, one Democrat for), providing emergency funding to deal with the border crisis and speed the deportations of most border-crossers. But this and another bill rescinding President Obama’s authority to decide whether to deport certain illegal immigrants, have no sign of becoming law.

But at least House Republicans have proof they attempted to address the border issue

At an impromptu mini-press conference, Friday, where the president just rambled on and on, he did say of the immigration crisis, “I’m going to have to act alone. We’ve run out of money.”

The Washington Post’s David Nakamura is reporting Friday night that Obama “is preparing to announce new measures that would potentially allow millions of illegal immigrants to remain in the United States without fear of deportation, a politically explosive decision that could jolt Washington just weeks before the midterm elections, according to people who have been in touch with the White House....

“Though politically charged, such a move would allow Obama to present a sharp contrast with Republicans – who have remained staunchly opposed to loosening immigration enforcement – and cement Hispanic support for the Democratic Party for years to come, supporters said.”

--House Republicans voted to proceed with a lawsuit against President Obama (225-201...all Democrats voted against it, all but five Republicans voted for), saying his executive actions violate the Constitution.

So both sides are using the polarizing action to try to rally support ahead of the mid-term elections. As the Washington Post reported, “Obama almost gloated at the prospect of being sued.”

“ ‘They’re going to sue me for taking executive actions to help people. So they’re mad I’m doing my job,’ Obama said in an economics speech in Kansas City, Mo. ‘And by the way, I’ve told them I’d be happy to do it with you. The only reason I’m doing it on my own is because you’re not doing anything,’ he said of Congress.”

House Speaker John Boehner said impeachment is off the table, but that he brought the suit because of executive orders that Obama issued on climate change, immigration, ObamaCare and raising the minimum wage for federal contractors. [But now House Republicans told Obama to go ahead and act on his own re: immigration.]

If the federal courts were to take up the case, it could take years to resolve.

In the meantime, both sides will pivot around it over the next three months, but it’s a loser for Republicans.

I nonetheless note the editorial board of the Wall Street Journal, which has called “the travelling ‘impeachment’ carnival” a farce, but supports the suit against the president.

“Liberals claim that Mr. Obama’s pose as law giver is necessary because Republicans are obstructionist, and, anyhow, the Constitution’s limits are the dusty artifacts of the 18th century unsuited to modern times. One irony is that they dismiss the House suit even as they claim to be troubled by national security surveillance that has always been grounded in both statute and the Constitution, with no evidence of abuse.

“Yet Mr. Obama’s claim that he can pick and choose which laws to enforce is far more offensive to the American tradition than anything the government has done in the name of antiterrorism. The House challenge is an opportunity to vindicate the genius of the Framers to prevent the exercise of arbitrary and centralized power.”

--Virginia Republican Congressman Eric Cantor’s last day as House majority leader was Thursday, and on Friday he announced he would resign his seat effective Aug. 18 so that his successor, David Bratt, who defeated Cantor in the Republican primary, can participate in the lame-duck session after the November elections.

Cantor is calling for a special election for his seat on Nov. 4 – the same day as the general election – which would allow the winner to take the seat immediately rather than wait for January and the next Congress.

--House and Senate negotiators reached a deal to help the troubled Department of Veterans Affairs in a rare display of bipartisanship. Sen. Bernie Sanders (I-Vt.) and Rep. Jeff Miller (R-Fla.) both scaled back their competing legislation aimed at improving VA wait times to make them less expensive.

The legislation provides a “Veterans Choice Card” that allows veterans to seek care from non-VA clinics, and the law would prevent the VA from using scheduling and wait-time metrics as factors in determining performance, among other things. [Josh Hicks / Washington Post]

In a story from Defense One, the $17 billion deal would also allocate some $5 billion to add doctors and other medical personnel as part of addressing the wait time issue and overcrowding. Of the $17 billion cost, $12 billion comes from new, emergency funding and $5 billion offset from within the VA. 

--CIA Director John Brennan was forced to apologize to key senators after an internal agency report concluded CIA officers improperly accessed computers used by a Senate committee investigating the agency’s interrogation program.

Sen. Dianne Feinstein (D-Calif.) has asserted that the CIA’s search of the computers violated the Constitution’s separation of powers, while Sen. Mark Udall (D-Colo.) believes the CIA’s search constituted domestic spying, which is illegal.

Many are now calling for Director Brennan to resign; Brennan having previously testified: “A lot of people who are claiming that there has been this tremendous sort of spying and monitoring and hacking will be proved wrong.”

American Civil Liberties Union counsel Christopher Anders commented: “An apology is not enough. It is hard to imagine a greater threat to the Constitution’s system of checks and balances than having the CIA spy on the computers used by the very Senate staff carrying out the Senate’s constitutional duty of oversight over the executive branch.” [Siobhan Gorman / Wall Street Journal]

On Friday, President Obama said of the Senate report on the CIA’s interrogation program that is to be released soon: “We tortured some folks. We did some things that were contrary to our values.”

--In an extensive report by the New York Times’ Rukmini Callilmachi, “Kidnapping Europeans for ransom has become a global business for Al Qaeda, bankrolling its operations across the globe.

“While European governments deny paying ransoms, an investigation by the New York Times found that Al Qaeda and its direct affiliates have taken in at least $125 million in revenue from kidnappings since 2008, of which $66 million was paid just last year.

“In news releases and statements, the United States Treasury Department has cited ransom amounts that, taken together, put the total at around $165 million over the same period.

“These payments were made almost exclusively by European governments, who funneled the money through a network of proxies, sometimes masking it as development aid...

“In its early years, Al Qaeda received most of its money from deep-pocketed donors, but counterterrorism officials now believe the group finances the bulk of its recruitment, training and arms purchases from ransoms paid to free Europeans.

“Put more bluntly, Europe has become an inadvertent underwriter of Al Qaeda....

“And business is booming: While in 2003 the kidnappers received around $200,000 per hostage, now they are netting up to $10 million.”

Al Qaeda outsources the actual job of taking of hostages to criminal gangs who work on commission, in order to protect Al Qaeda fighters.

--From the National Journal: “The Energy Department, in a secret May 2013 report, laid out a plan to ramp up efforts to finish securing and disposing of vulnerable stockpiles of nuclear material around the planet by December 2016. However, the White House in its fiscal 2015 budget plan ultimately decided to cut back its nuclear nonproliferation spending in order to make certain monies were available to update the U.S. nuclear stockpile, the Center for Public Integrity reported.” Good.

--The confrontation between U.S. attorney in Manhattan, Preet Bharara, and New York Gov. Andrew Cuomo appears to be escalating, as reported by the New York Times. Bharara “has threatened to investigate the Cuomo administration for possible obstruction of justice or witness tampering.”

As I noted last week, Cuomo created the Moreland Commission a year ago with the promise it would help clean up corruption in state politics, but he abruptly shut it down. Several panel members have now defended the governor’s handling of it, while others have begun to take the opposite side, as first reported by the Times. So Bharara’s office sent a letter to the Cuomo administration, threatening action.

Clearly it seems members of the Cuomo administration are pressuring panel members to make positive statements about its actions.

The letter from prosecutors, which was read to the Times, says, “We have reason to believe a number of commissioners recently have been contacted about the commission’s work, and some commissioners have been asked to issue public statements characterizing events and facts regarding the commission’s operation.”

“To the extent anyone attempts to influence or tamper with a witness’s recollection of events relevant to our investigation, including the recollection of a commissioner or one of the commission’s employees, we request that you advise our office immediately, as we must consider whether such actions constitute obstruction of justice or tampering with witnesses that violate federal law.”

The Times reported last week that Mr. Cuomo’s office had deeply compromised the panel’s work.

This is the worst crisis of Cuomo’s administration and his initial attempts at damage control, after days of silence, only made the matter worse.

The Times deserves major credit for uncovering and going after this issue.

--According to the National Center for Health Statistics, a division of the Centers for Disease Control and Prevention, winter cold kills more than twice as many Americans as does summer heat.

--Acting Surgeon General Boris Lushniak issued a call to action on the topic of skin cancer, calling it a “major public health problem” and that too much exposure to indoor and outdoor ultraviolet light is a major cause.

Unlike other cancers, the incidence of skin cancer in the United States is rising. Nearly 5 million people are treated each year at a cost of $8.1 billion, the surgeon general’s report says.

Without a doubt, Lushniak said it’s time to have a total ban on indoor tanning for minors.

--From the Editorial Board of the New York Times:

“It took 13 years for the United States to come to its senses and end Prohibition, 13 years in which people kept drinking, otherwise law-abiding citizens became criminals and crime syndicates arose and flourished. It has been more than 40 years since Congress passed the current ban on marijuana, inflicting great harm on society just to prohibit a substance far less dangerous than alcohol.

“The federal government should repeal the ban on marijuana....

“That will put decisions on whether to allow recreational or medicinal production and use where it belongs – at the state level....

“The social costs of the marijuana laws are vast. There were 658,000 arrests for marijuana possession in 2012, according to FBI figures, compared with 256,000 for cocaine, heroin and their derivatives. Even worse, the result is racist, falling disproportionately on young black men, ruining their lives and creating new generations of career criminals.

“There is honest debate among scientists about the health effects of marijuana, but we believe that the evidence is overwhelming that addiction and dependence are relatively minor problems, especially compared with alcohol and tobacco....

“There are legitimate concerns about marijuana on the development of adolescent brains. For that reason, we advocate the prohibition of sales to people under 21.

“Creating systems for regulating manufacture, sale and marketing will be complex. But those problems are solvable, and would have long been dealt with had we as a nation not clung to the decision to make marijuana production and use a federal crime....

“We recognize that this Congress is as unlikely to take action on marijuana as it has been on other big issues. But it is long past time to repeal this version of Prohibition.”

Discuss amongst yourselves.

--Nothing like being in the midst of an historic drought, and then having a 90-year-old water main break, spewing about 12 million gallons of water in 3 ½ hours before it’s shut off. Such was Los Angeles this week, with the UCLA campus suffering major damage.

---

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

God bless America.
---

Gold closed at $1294
Oil $97.88...lowest in six months

Returns for the week 7/28-8/1

Dow Jones -2.8% [16493]
S&P 500 -2.7% [1925]
S&P MidCap -2.7%
Russell 2000 -2.6%
Nasdaq -2.2% [4352]

Returns for the period 1/1/14-8/1/14

Dow Jones -0.5%
S&P 500 +4.2%
S&P MidCap +1.8%
Russell 2000 -4.2%
Nasdaq +4.2%

Bulls 55.6
Bears 16.2 [Source: Investors Intelligence]

Have a great week. I appreciate your support.

New readers...I do have an iPad app. Go ahead...take the plunge.

Brian Trumbore