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03/28/2015

For the week 3/23-3/27

[Posted 10:30 PM ET, Friday]

**See below for a Special Announcement**

Edition 833

Washington and Wall Street

It’s a tension convention these days. You have the Iran nuclear talks and the upcoming Tuesday deadline for a draft agreement, the Obama administration desperately wanting a deal, though knowing it can’t possibly cut a truly bad one and get away with it, while the nation of Yemen has become a massive flashpoint with Saudi Arabia going after Iranian-backed rebels that ousted the Western-backed president.

The White House wants to say it was able to cooperate with Iran on one end, but at the same time it backs Saudi Arabia who is battling the Iranians in a proxy war in Yemen. And in Iraq, while it got more complicated this week, the U.S. and Iran are more or less working together to defeat ISIS. Much more on all this below. Just suffice it to say the region is more out of control than ever and it’s not the kind of thing that engenders investor confidence.

Meanwhile, domestically, the final look at fourth-quarter GDP was released on Friday, unchanged at 2.2%, so just a reminder how the last three years look.

2012...2.3%
2013...2.2%
2014...2.4%

There was a big positive in the final Q4 numbers, though, and that was seeing consumer spending revised upward to 4.4%, the quickest pace since 2006.

But once again it would appear first-quarter GDP is going to come in at less than 2%, perhaps substantially so, with the harsh weather deserving its share of the blame as in 2014. Goldman Sachs is calling for 1.4%.

A reading on February durable goods this week wasn’t good, down 1.4%, ex-transportation down 0.8%.

But the numbers on the housing sector were better than previous figures, with existing home sales for February in line with expectations, while new home sales for the month hit their highest annual pace since February 2008, 539,000, which was a pleasant surprise since the week before housing starts were disastrous owing to the weather in the Northeast and Midwest.

That said, prices on existing homes rose 7.5% year over year, the biggest increase in a year, and this is not good. The rise is directly attributable to falling inventory. You don’t want the market getting white hot again.

But now it’s about earnings as the quarter draws to a close and it is going to be very interesting to see what the large multinationals say, and reveal, when it comes to the impact of the strong dollar on their overseas operations. Corporate America was certainly caught off guard by the speed of the dollar’s rise.

Back in September, analysts expected S&P 500 profits to grow 9.5% in the first quarter from a year earlier and at 11.6% for all of 2015, according to FactSet.

Today, analysts expect first-quarter profits to fall by 4.9%, and to grow just 2.1% for all of 2015. As the Wall Street Journal noted, “The last time analysts cut their outlook on annual profit growth by that scale was in the six months leading to March 2009, according to FactSet, as stocks were tumbling to their crisis-era lows.”

On a related issue, falling oil has hit the sector of the economy that led us out of the muck, with capital spending globally by energy companies in the S&P 500 projected to fall 25% this year, “leading to the first annual decline in overall capital investment by big businesses in many sectors since 2009.” [Nick Timiraos / Wall Street Journal]

On the other hand, Tobias Levkovich, chief U.S. equity strategist at Citi, says if you exclude energy, capital spending will grow 4% for S&P 500 companies this year.

Bottom line, the statements accompanying the earnings reports will be quite telling.

Finally, you still have fallout over the Federal Reserve’s removal of “patient” from its last statement. We now know that the Fed is looking to keep rates low for longer than we, or they, first thought, even as they begin to raise them at some point in 2015.

The Fed has said it is focused on inflation and Tuesday’s report on consumer prices for February was good in this regard, + 0.2%, including on the core, ex-food and energy. So year over year the CPI was -0.1%, but +1.7% on core, closer to the Fed’s target of 2%, though Chair Janet Yellen said in a speech on Friday the Fed could raise rates without inflation having hit this figure. It will be more about stability in both prices and the labor market.

Some thoughts on the Fed....

Thomas G. Donlan / Barron’s

“Among the many instructions that the nominally independent Federal Reserve has received from its political bosses are the contradictory ones labeled the ‘dual mandate.’ The Fed is supposed to operate the central-banking system in such a way that provides the country with the greatest possible number of jobs and the least possible amount of inflation.

“In the legislative words of the 1977 amendments to the Federal Reserve Act:

“ ‘The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy’s long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.’

“Of course, employment, prices, and interest rates make three mandates. Congress and the Fed don’t know a bicycle from a tricycle. Or politicians can’t count beyond two....

“Maybe the two mandates are two too many, since the Federal Reserve gets too much credit for its ability to manipulate the economy. As we ought to see in recent economic history, just because stuff happens does not mean the Fed did it.

“For the past eight years, the Fed has been trying to raise inflation, without success. Its easy-money policies also were supposed to goose a recovery that most people considered depressingly slow.

“Inch by inch, however, the U.S. economy crawled up to create more jobs and produce a 5.5% unemployment rate, with inflation under 1%. In its economic report last week, the Fed projected lower unemployment and lower market interest rates to come.

“What’s not to like? Isn’t this the best of all possible worlds?

“This should be the time that interest rates rise. In normal times with these indicators of an even better future, short-term rates should be around 3% or 4%, with long-term rates and mortgages still higher.

“Of course, the Fed knows these are not normal times. No matter how comfortably normal the times may seem, the Fed has injected trillions of dollars into the economy by purchasing – and rolling over – bills, notes, and bonds from every corner of the capital market. The Fed’s economists do not know how to stop, because if they stopped the economy might tank.

“So the new Fed policy is quite simple: another dose of flimflam. By removing the word ‘patient’ from its monetary plan, it threatens to raise rates, but not right away....

“Six years after hitting the bottom of the so-called Great Recession, the recovery is growing whiskers. It’s easier for Fed economists and the rest of us to think of things that could drive the economy down than things that could lift it up. That means the Fed needs higher rates so that it can have room to cut them.”

Robert J. Samuelson / Washington Post

“The Federal Reserve is at a crossroads, and it doesn’t know where it’s going. After holding short-term interest rates near zero for six years, Fed policymakers, led by chair Janet Yellen, are prepared to raise them – but when, how much and with what consequences they haven’t said....

“There was a time when we were more confident. We didn’t pay attention to details, because the experts had matters in hand. During the Alan Greenspan era (1987-2006), the Fed was routinely seen as an economic superman. Its surgical shifts in the federal funds rate seemed to stabilize the economy: Expansions were long, recessions rare and mild. Now the Fed often seems like a 200-pound weakling.

“It’s true that during the 2008-2009 financial crisis, the Fed arguably averted another Great Depression. It supplied credit when frightened private lenders wouldn’t. Since then, it has been less successful. To revive the economy, it unleashed massive amounts of financial stimulus. The federal funds rate has stayed near zero since late 2008, and the Fed bought more than 43 trillion of government and mortgage bonds to reduce long-term rates. For this energetic exercise in money creation, all it got was a sluggish and frustrating recovery.

“Policy has been neither a glorious success nor an abject failure. It’s been a pragmatic muddle....

“The danger in tightening too much or too soon is that it might drive many weak international borrowers – including firms and governments in emerging-market countries such as India and Mexico – to the wall. Already, the prospect of tighter money has raised the dollar’s exchange rate; for many foreign borrowers, this makes repayment more expensive. In the United States, tighter money risks damaging credit-sensitive sectors, led by housing and vehicles. The specter of higher rates could also prompt a preemptive sell-off in the bond market, which would (almost certainly) spill into the stock market.

“At best, confidence would suffer; at worst, panic would ensue. It’s an ugly picture. On the other hand, the danger of not tightening is that more dubious loans will be made – domestically and internationally – and raise the odds of a large financial crackup in the future. The choice seems to be between present pleasure and future prudence, except that future prudence might also inflict present pain....

“Whatever happens, there remains a larger historic question: How did an agency that seemed so powerful and commanding in one era become so limited and tentative in the next?”

Finally, the Senate approved a balanced-budget plan by a near party-line 52-46 margin; a measure that closely mirrors the House version so this guarantees months of wrangling with President Obama over spending and Republican efforts to dismantle the Affordable Care Act. A compromise GOP budget will be hashed out in April and then let the fun begin.

One thing the two sides do agree on is defense spending, proposing $612 billion for next year, a 4.5% boost over current levels. I’ve argued we’ll be forced to spend substantially more than this given the geopolitical picture of today.

Europe and Asia

Eurozone finance ministers and Greece keep kicking the can down the road but as I go to post, the euro-19 is examining the latest reform proposals submitted by the Greek government, Monday having been set as a deadline to rule on same.

Greece is running out of time and cash. It lost a dispute over 1.2bn euro it thought it could access, money that was part of the bank recapitalization efforts of 2012, but the other 18 finance ministers said the cash would stay in the European Financial Stability Facility.

Greece has to come up with 1.7bn for wages and pensions at the end of the month,* and 450m euro for repayment on a bailout loan due the IMF, and it’s been estimated Greece will run out of cash April 9 unless it can convince euro authorities that its latest reform proposals are realistic, thus unlocking more bailout cash. By the middle of April, it has to roll over 2.4bn in T-bills as well.

*Late Friday, the deputy finance minister said pensions and salaries would be paid on time, but he didn’t say anything about the 450m due the IMF.

As for the first meeting in Germany between Greek Prime Minister Alexis Tsipras and German Chancellor Angela Merkel, she pulled out all the stops by welcoming Tsipras with full military honors while insisting this was a chance for a rapprochement. 

By all accounts it went OK, I guess. Tsipras declared: “We must avoid creating new divisions in Europe.” Merkel said there were conciliatory noises from both camps, which was good considering just ten days earlier, Tsipras wrote the chancellor a letter demanding both a debt write-off and a third bailout later this year. [He’s also been screaming about reparations, though held off on the topic in Berlin.]

But Merkel insisted no more funds will be disbursed without a credible reform program and that’s where we stand this weekend. One thing seems clear, Greece has been playing a shell game with various accounts to meet its short-term obligations, such as withholding 150m euros worth of hospital supplies. [Friday, the above-referenced deputy finance minister said the health fund’s coffers will be refilled.]

In an interview with Bloomberg, billionaire investor George Soros said the odds of Greece leaving the euro were 50-50 and the country could go “down the drain.”

“It’s now a lose-lose game and the best that can happen is actually muddling through. Greece is a long-festering problem that was mishandled from the beginning by all parties.”

Turning to the rest of the eurozone, ECB President Mario Draghi told the EU parliament on Monday that “growth is gaining momentum.”

“The easing of lending conditions is progressing hand-in-hand with a resurgent demand for credit to finance business investment. In the longer-term perspective, this will increase potential output.”

Markit’s flash eurozone composite reading for March was 54.1 vs. 53.3 in February, a 46-month high, with the manufacturing PMI at 51.9 vs. 51.0, a 10-month high. There has been a surge in new orders as the weaker euro helps exporters in a big way.

The flash composite looks at just Germany and France on an individual basis. Germany’s comp was 55.3 vs. 53.8 in February, with the manufacturing PMI at 52.4 (51.1 Feb.). The government raised its estimate for growth in 2015 from 1.0% to 1.8%, a significant revision.

France’s comp of 51.7 was down slightly from 52.2 last month, though the manufacturing PMI was 48.2, up from 47 (but still contraction). Business and consumer sentiment in France, however, are rising to multi-year highs.

The Bank of Spain estimated GDP rose 0.8% in the first quarter over the fourth and it has raised its full-year forecast from 2% to 2.8%, which would be terrific.

In the U.K., inflation was zero in February, down from 0.3% in January, but the core was +1.2%. There is real wage growth here and retail sales for February over January rose a better than expected 0.7%. Home prices rose 5.1% nationwide in March, year over year, which was the slowest pace since September 2013 and this is good.

On a different topic, I have long said, growth, say 2% in the eurozone, can marginalize some of the far-right, and far-left, parties. But it’s also about timing.

Gideon Rachman / Financial Times

“Europe is in a race against time. After six years of economic crisis, extremist political parties are well-entrenched across the continent. Set against that, the European economy is in better shape than for some years. The question is whether economic optimism can return quickly enough to prevent the bloc’s politics slithering over the edge.

“The signs of political rot are very evident. In France this weekend the far-right National Front (FN) notched up about 25 percent of the vote in regional elections, confirming its strong performance in last year’s European parliamentary elections. Prime Minister Manuel Valls has warned that Marine le Pen, leader of the FN, could actually win the presidential election in 2017. That same year, Britain could vote to leave the EU. And by then the single currency could also be well on the way to disintegration, with Greece out and Italy heading for the exit.

“But while the political signals are still bleak, there are grounds for economic hope....

“A return to growth might give Europe some breathing space and head off the chance of political disaster. The difficulty is that, although there is clearly a connection between economic hardship and political extremism, the relationship is not precise. The collapse of the political center can be a delayed reaction to economic trouble – and can kick in just as the economy is recovering. To choose a particularly doom-laden example: the Nazis took power in 1933, after the worst of the German depression was over.

“A depression, or a very prolonged recession, does more than create economic hardship. It also serves to discredit mainstream ideologies and to whip up anger against political elites – and those effects can last well beyond the point where the economic figures show some improvement....

“(It) is France that matters most. If Britain left Europe or Greece quit the euro, the European project would stagger on. But the election of Ms. Le Pen as French president would in effect spell the end of the EU...

“(Ultimately) France and the rest of the member states need more than a modest uptick in growth to restore the health of their political systems. They need mainstream politicians that can paint a convincing and optimistic picture of the future. So far, there is not much sign of that.”

Turning to Asia, HSBC released its flash reading on manufacturing for March in China and it was just 49.2 vs. 50.7 in February, an 11-month low.

In Japan, the flash PMI was 50.4 vs. 51.6 in February. Inflation for February also came in at zero with collapsing oil and subdued demand. 0% is the lowest since May 2013 and far from the government’s 2% target. Retail sales last month fell 1.8% year over year, with household spending down 2.9%. Abenomics has largely not been working.

But, the unemployment rate is down to 3.5% and corporations are finally taking some of their record profits and passing it on to their employees in the form of increased wages, which is something Prime Minister Abe has been pounding the table on. This week Finance Minister Taro Aso said the government should consider a tax to prod more businesses into action.

But the specter of a return to deflation is a very real possibility by summer.

Street Bytes

--The market had its worst week since late January, with the Dow Jones losing 2.3% to 17712, the S&P 500 2.2% and Nasdaq 2.7%. With two trading days left in the quarter, the S&P is just three points above its 12/31 close of 2058. The Dow is down for the quarter, Nasdaq up comfortably.

There have been growing concerns over valuation in some sectors, such as biotech, which as measured by the Nasdaq Biotech Index fell over 5% this week.

--U.S. Treasury Yields

6-mo. 0.12% 2-yr. 0.59% 10-yr. 1.96% 30-yr. 2.54%

Quiet week in the bond pits.

--Late in the day on Friday, the Wall Street Journal reported that Intel Corp. is in talks to buy Altera Corp. in a deal that would be the largest in Intel’s history. Altera shares jumped 28%. By acquiring Altera, Intel would be able to reduce its dependence on the PC market, while making further inroads into corporate data centers.

--Brazil’s economy grew 0.3% in the fourth quarter from the previous three months, but just 0.1% for all of 2014 and the concerns are of a recession this year, with economists forecasting a contraction of 0.8%. I have further comments below on the dismal political situation here.

--In the closely followed Ellen Pao gender discrimination case, a jury late Friday returned a verdict, finding that powerful venture capital firm Kleiner Perkins Caulfield & Byers did not discriminate against her because of her gender and did not retaliate when she protested her treatment.

Earlier in the afternoon the jury of six men and six women thought it had a verdict, only to find it miscalculated the number needed on one of the four claims.

Nine out of 12 were needed and one juror switched votes after the jury was ordered to deliberate further.

The vote, which didn’t follow gender lines, was 10-2 on three of the four, and 9-3 on the fourth.

Pao, a former junior partner, filed suit against Kleiner Perkins in 2012 and was seeking $16 million in compensatory damages and up to $144 million in punitive damages.

Women have long complained about gender bias in Silicon Valley.   As one female executive of an organization that supports women entrepreneurs put it, “Men in VC firms are breathing a sigh of relief and women in tech are feeling defeated.”

“For its part, Kleiner Perkins contended that Pao was an underperforming, greedy, disgruntled former employee who wasn’t cut out to be a venture capitalist.” [Andrea Chang and Tracey Lien / Los Angeles Times]

--Speaking of the women of Silicon Valley, Morgan Stanley’s chief financial officer, Ruth Porat, left the firm for the same role at Google Inc. She was replaced by Jonathan Pruzan, a 46-year-old investment banker.

Porat is reportedly set to receive cash and prizes (stock awards) worth more than $70m in the first year, including a signing bonus of $5m.

--Schlumberger, the world’s largest oil-services group, pleaded guilty to violating U.S. sanctions on Iran and Sudan and will pay a $233 million penalty, the Justice Department announced on Wednesday. The subsidiary most directly involved will be placed on corporate probation for three years and Schlumberger has to hire an outside consultant to review its sanctions policies as well as compliance.

John Carlin, a U.S. assistant attorney-general, said Schlumberger “took steps to disguise (its) business dealings (from the U.S.), thereby willfully violating the U.S. economic sanctions against those regimes.” [Financial Times]

These guys really acted like dirtballs. You can’t conduct business like this from American soil. End of story.

--I can’t do better than the Lex Team at the Financial Times in describing the merger of Kraft Foods and Heinz, engineered by Warren Buffett and Brazilian private equity firm 3G.

“At its core, the deal – which creates a company with an enterprise value of at least $100bn – is a stock-for-stock merger. Heinz’s backers, 3G and Mr. Buffett, will own just over half the new company. Shareholders in Kraft will own the rest and get a one-time cash dividend of $16.50. On reasonable assumptions about the new company’s valuation, Kraft shareholders are getting $80 in value (which is about where the stock traded on Wednesday), implying a 30 percent premium to the pre-deal share price.”

Well it gets more complicated, including “financial wizardry” as the FT adds. “Kraft has an investment grade credit rating and Heinz expects the new company to be investment grade as well. It anticipates being able to refinance $17bn of Heinz’s existing obligations, including a piece of Buffett-owned preferred stock with a hefty 9 percent coupon.”

Gotta love Warren and his ability to negotiate 9 percent coupons in a zero percent world!

The actual size of the merger was about $46 billion and as Bloomberg noted, the advisers were Lazard and Centerview Partners. As in all the big boys like Goldman and Morgan Stanley were excluded.

--The U.S. Consumer Product Safety Commission is investigating Lumber Liquidators Holdings after the CBS’ “60 Minutes” report earlier in the month on the company’s Chinese-made laminate flooring and allegations it contained higher levels of formaldehyde that is allowed. The retailer’s stock was highly volatile following the news, though the investigation could take weeks, or months. The company said it has already provided significant amounts of testing and safety information to the agency.

--BlackBerry Ltd. reported a surprise profit in the period ended Feb. 28 from a year-earlier loss, but revenue was down 32% as the company struggles with a two-year turnaround effort.

Once the dominant smartphone maker, BlackBerry commands less than 1% of the global market. The company does have a very solid cash position of $3.27 billion which allows it to go after niche providers of mobile security software to help bolster sales.

--Congratulations to PIMCO’s new management team for the Total Return Fund, which, as the Journal’s Min Zeng reported, through Tuesday was ahead of 92% of its peers and its benchmark for the nearly six months since Bill Gross’ exit. In the nine months prior to his departure, the fund trailed 80% of its peers.

Money has continued to flow out of the fund despite the better performance, however, and we’ll soon know if 22 consecutive months of outflows continued in March.

For his part, Gross’ performance at Janus and his Global UnConstrained Bond Fund has been OK, beating 62% of its peers.

--Pepsi-Cola was the No. 2 soda brand in the U.S. by volume last year, according to industry data released this week, supplanting Diet Coke. Full-calorie Coke remains the country’s top-selling soda with a market share of 17.6%. Pepsi-Cola has 8.8% and Diet Coke 8.5%. [Mike Esterl / Wall Street Journal]

Overall soda consumption fell nearly 1%, the 10th straight yearly decline.

--Two years after a major restructuring, Hostess Brands is back, with the comeback faster than expected, though while S&P upgraded the maker of Twinkies and Ding Dongs, the “B” rating is still ‘junk’ or “speculative grade.”

--Starbucks’ campaign of “Race Together” ended as quickly as it started, with CEO Howard Schultz claiming it was only intended to last a week, but that the overall initiative of starting a dialogue on race “is far from over.”

The campaign drew sharp criticism, with many wondering how baristas were equipped to engage customers in discussions about race in the first place.

--With our changing tastes, there have been a number of stories the past few weeks on the declining breakfast cereal industry. Wheaties, for example, has seen sales drop by nearly 80 percent over the past 10 years. Rice Krispies by 32 percent over that time period. Sales of Cheerios, though, have held steady and handily remains No. 1 with nearly $1 billion in annual sales, according to Euromonitor. Frosted Flakes is No. 2, but way back at $453 million.

--California’s unemployment rate is now 6.7%, the lowest level in nearly seven years and down from 8% in February of 2014.

--Meanwhile, on the drought front, the rainy season in Southern California is traditionally December through March. Since Oct. 1, downtown L.A. has recorded about 7.5 inches of rain vs. a normal rate of 13 inches. As a climatologist at the Jet Propulsion Laboratory told the Los Angeles Times, “Let’s get right down to it: We’re done. By April, usually, rainfall drops off dramatically.” Of course the state’s critical snowpack was also far below normal this winter.

--HBO announced a major joint venture with Vice Media whereby Vice will provide a daily newscast and a branded channel on HBO’s soon-to-be-launched Internet streaming service, HBO Now. 

HBO is going after younger viewers who will be consumers of its $15.99-a-month streaming television service; the same audience that Vice has succeeded in attracting.

--The head of the UN Ebola mission told the BBC the current outbreak in West Africa will be over by August.

But Medecins Sans Frontieres (Doctors Without Borders) said a “global coalition of inaction” led to the deaths of more than 10,000, with its early calls for help being ignored by local governments and the World Health Organization.

--As RadioShack went on the auction block this week, among the items up for bid were the names, email addresses and phone numbers of millions of customers. As a loyal customer myself that kind of sucks.

So the other day I was in my New Providence store, where they’ve always had good kids behind the counter, and I asked for help with a computer issue, but I really sounded like an idiot because I had no idea what I was talking about. Anyway, I also asked him in a hushed voice (because there was another person in the store), “How are you hanging in there?”

Well little did I know the other guy in the store was a regional manager, who heard my question and proceeded to tell me the whole story. The guy said his number one mission was to save jobs.

So Standard General, a hedge fund that is one of RadioShack’s creditors, is the favored savior, but Salus Capital Partners is challenging the fairness of the auction. Standard General has said they would try to keep the chain operating on a smaller scale, saving 9,000 jobs by co-branding half the locations with Sprint Corp. But now a U.S. Bankruptcy Court in Wilmington, Del., has to rule whether the bidding process should be reopened for the sweetened Salus offer.

--Moody’s is warning the odds of a default in Atlantic City are growing and it could come to a head March 31 unless a state loan is extended. With four of the city’s 12 casinos shuttered and 8,000 jobs gone, A.C. is out of cash, with the appointed lead emergency manager saying the city also needed to lay off 20 to 30 percent of the 1,150-member workforce.

--In a new study by Bankrate.com, the best state to retire is Wyoming, using a measurement from the Gallup-Healthways Well-Being Index that quantifies how satisfied residents 65 and older are with their surroundings. Others in the top five are Colorado, Utah, Idaho and Virginia.

Foreign Affairs

Yemen: Feeling itself under threat from the chaos in neighboring Yemen, Saudi Arabia launched airstrikes in the rebel-controlled capital of Sanaa and three other provinces this week, hitting military bases and anti-aircraft positions, while Egyptian warships were steaming toward the Yemeni coast as part of an Arab-led offensive against the Houthis, the Shiite rebels who are supported by Iran. 

The Saudis and their allies felt compelled to act after the Houthis moved from their power base in the north, into the south and Sanaa, forcing out the Western-backed president, Abed Rabbo Mansour Hadi. Saudi Arabia and Egypt are threatening a ground offensive as well to wipe out the Houthi threat, though late Friday the Saudis seemed to back down on the idea of sending in the infantry.

To say the least, Iran is not happy, and has been pouring in support. The Houthis also have the backing of powerful former president, Ali Abdullah Saleh, and the country’s military. Iranian Foreign Minister Mohammad Javad Zarif told an Iranian news channel that “we will spare no effort to contain the crisis in Yemen,” though a senior government official told Reuters, “military intervention is not an option for Tehran.”

A ground war would not be a walk in the park for the Saudis and their allies. Up to 10 countries (including the UAE) are said to be part of the coalition. The Saudis have committed 100 fighter jets and 150,000 soldiers with the goal of restoring Hadi to power. Hadi, who had been under house arrest in Yemen, resurfaced this week in Riyadh.

For his part, rebel leader Abdul-Malik al-Houthi accused the United States, Saudi Arabia and Israel of launching a “criminal, unjust, brutal and sinful” campaign aimed at invading and occupying Yemen. The Houthis fired rockets across the northern border into the kingdom in response to the airstrikes, targeting Saudi military positions, though there were no reports of damage

“Yemenis won’t accept such humiliation,” Abdul-Malik said, calling the Saudis “evil.” [Daily Star]

As for the role of the U.S., the administration said it would provide “logistical and intelligence support” to the coalition. Previously, the U.S. abandoned its base where Special Ops Forces coordinated the drone campaign against the likes of al-Qaeda (AQAP) in Yemen.

Editorial / Wall Street Journal

“An abiding goal of President Obama’s foreign policy has been to reduce America’s role in the Middle East, in the belief that it would lead to greater stability and serve U.S. interests. Has a policy ever been so thoroughly repudiated in so short a time? Mr. Obama has succeeded in his retreat, but the vacuum he’s left has produced a region on fire that is becoming a broad Sunni-Shiite war.

“That’s the context for this week’s meltdown in Yemen, which has now escalated with the military intervention of Saudi Arabia and its Sunni Arab allies. This follows the rout of a U.S.-friendly government by Houthi militias that belong to the Zaidi offshoot of Shiite Islam and are backed by Iran. What had been a proxy war is in danger of becoming a direct Saudi-Iran conflict....

“It’s safe to say the Saudis would never take such risks if they hadn’t given up on the U.S. as a stabilizing force in the Middle East. This resembles their intervention into Bahrain in 2011 to put down a rebellion by its Shiite majority against the Sunni government, but the risks are greater in Yemen.

“Iran has denounced the intervention, and Russia has also objected. Tehran probably won’t intervene directly, but you can bet it will supply the Houthis with arms and military advisers. It will try to bleed the Saudis and their allies for as long as possible at a relatively low cost. Tehran’s ultimate goal would be to neutralize if not destabilize the Gulf regimes as part of its plan to dominate the region.

“As for the U.S., it needs to abandon its studied retreat and help the Saudis....

“This should include a warning to Iran that the U.S. will assist the Saudis in stopping Iranian flights that arm the Houthis.* Iranian flights over Iraq to Syria helped Assad survive at a crucial moment, but all the U.S. did was complain. This time Iran’s Revolutionary Guard Corps needs to be told its flights run the risk of being shot down....

“The temptation in some American circles, including in parts of the right, will be to let the Sunnis and Shiites kill each other until they get tired of it. But that’s what the same sages said about Syria’s civil war, which proceeded to spill into Iraq and midwife Islamic State, which is now gaining adherents around the world. The damage to U.S. interests from a radical takeover of the Gulf states, by either Sunni jihadists or Shiites loyal to Iran, would be even worse.

“When the world’s only superpower retreats willy-nilly, bad things happen. Much like Jimmy Carter in 1979 after the Soviets invaded Afghanistan, Mr. Obama needs to reassess his failing foreign policy before the mayhem spreads even further.”

*Late Friday the U.S. military announced it was expanding its aid to Saudi Arabia in its air campaign and the Saudis now claim full control of Yemeni airspace.

Jennifer Rubin / Washington Post

“Naturally the White House press corps wanted the press secretary to acknowledge things had not gone as planned (in Yemen). But no. Josh Earnest had his talking point and was sticking with it (just like the talking point that Obama meant what he said when he called the shooting of innocents in a French kosher market ‘random’). For over three minutes Earnest refused to acknowledge their model was not a mess. Pressed again, he insisted this is still a ‘template that has succeeded.’ An incredulous Jonathan Karl of ABC News continued to press him, but Earnest refused to admit the obvious, namely that the administration had failed in its leading from behind, light footprint.

“It was embarrassing and unbelievable. But it was also instructive. The administration is failing as far as the eye can see. Iraq and Syria are infested with jihadists from the Islamic State. The civil war in Syria has killed 200,000 and, because of our failure to come to their aid in a timely and effective manner, the Free Syrian Army is in dismal shape. Iran is pulling the strings in Syria, Yemen and Lebanon while its fighters are doing what we will not, combating the Islamic State in Iraq. Our Sunni allies and Israel are exasperated with our passivity and willingness to appease Iran. The ‘peace process’ is a joke. So the president bashes our closest ally and tells us Yemen is a success.

“Consider what would have happened if President George W. Bush refused to believe the Iraq War was going poorly, denied any strategy change was necessary and never implemented the surge. Ironically, critics accused him of being stubborn or cut off from reality. Right diagnosis, wrong president.”

One final sidebar...and humiliation. As reported by the Los Angeles Times’ Brian Bennett, the Houthi rebels now have control of “secret intelligence files held by Yemeni security forces and containing details of American intelligence operations in the country....exposing names of informants and plans for U.S.-backed counter-terrorism operations, U.S. officials say.

“U.S. intelligence officials believe additional files were handed directly to Iranian advisors by Yemeni officials who have sided with the Houthi militias....

“For American intelligence networks in Yemen, the damage has been severe.”

Iran: Nuclear negotiations between Tehran and the P5+1 entered their final, critical stages as the parties scramble to secure a draft agreement by the March 31 deadline. Secretary of State John Kerry has been in talks with Iranian Foreign Minister Zarif in Lausanne, Switzerland as the two try to overcome still significant gaps. The other diplomats from Britain, China, France, Russia and Germany will join if the U.S. and Iran are close to an agreement.

The Iranian team seemed upbeat, with one top official saying a “common understanding” on technical issues had been reached. Among the final items to be hammered out are the number of centrifuges Iran would be allowed to maintain, whether enrichment activities could be carried out at the underground Fordow facility, and the extent of nuclear research work it would permitted to do.

The problem is, as the New York Times reported this week, Iran is loath to agree to specifics and seeks a “political declaration of intentions,” as the Times put it, while the U.S. says any agreement would have to contain a “quantifiable dimension.”

Additionally, Yukiya Amano, who heads the International Atomic Energy Agency, told the Wall Street Journal this week that when it comes to Tehran’s cooperation in the IAEA’s investigation into Iran’s past efforts on the nuclear front, “Progress has been very limited.” It seems impossible for the P5+1 to agree to a comprehensive agreement when Iran has failed to cooperate with the IAEA’s very basic demands, including access to sites where suspected weapons-related tests may have been conducted, such as at Parchin, where limited access was granted but not where the IAEA believes weapons testing took place. France, in particular, has been playing hardball on this front.

Both President Obama and Ayatollah Ali Khamenei have said there will not be a third extension of the talks. Iranian President Rohani wrote a letter to Obama and the leaders of the other five countries urging them to overcome their differences, while saying the action in Yemen would not stand in the way of the nuke talks.

Standing on the sidelines is Congress, which has threatened new sanctions if the talks break down, while also vowing to have a say in any final agreement.

Kerry, addressing critics, said that if the U.S. abandoned a deal that the other members of the P5+1 considered reasonable, the sanctions regime would collapse and the nuclear threat would grow.

“The talks would collapse,” he said. “Iran would have the ability to go right back to spinning its centrifuges and enriching [uranium] to the degree they want.” [Paul Richter / Los Angeles Times]

For his part, Ayatollah Khamenei, in a speech last Saturday, said there would be no nuclear deal unless it resulted in an immediate end to sanctions and allowed the country’s nuclear program to progress, though he basically threw his support behind his negotiating team. He then led the crowd in a chant of “Death to America.”

Michael Hayden, Olli Heinonen and Ray Takeyh / Washington Post

“As negotiations between Iran and the great powers press forward, Sec. of State John Kerry seems to have settled on this defense of any agreement: The terms will leave Iran at least a year away from obtaining a nuclear bomb, thus giving the world plenty of time to react to infractions. The argument is meant to reassure, particularly when a sizable enrichment capacity and a sunset clause appear to have already been conceded. A careful assessment, however, reveals that a one-year breakout time may not be sufficient to detect and reverse Iranian violations.

“Once the United States had an indication that Iran was violating an agreement, a bureaucratic process would be necessary to validate the information. It could be months before the director of national intelligence would be confident enough to present a case for action to the president. Several U.S. intelligence agencies, the Energy Department and national nuclear laboratories would need a chance to sniff the data to be convinced that a technical breach had occurred. Only after this methodical review was finished could the director go to the White House with conclusions and recommendations....

“History suggests the Iranians would engage in protracted negotiations and much arcane questioning of the evidence. Iran could eventually offer some access while holding back key data and personnel. It would be only after tortured discussions that the IAEA could proclaim itself dissatisfied with Iran’s reaction. This process also could take months.”

What a nightmare.

Iraq / Syria / ISIS: As noted last time, the battle to retake Tikrit bogged down so this week American warplanes, at the request of the Iraqi government, attempted to help out in bombing ISIS positions.

But this move backfired when three major Shiite militia groups that were fighting alongside the Iraqi military pulled out, complaining the Americans were not needed. [American officials countered they demanded the Shiite militias backed by Iran be barred from the fight ahead.]

The three groups represent about 10,000 of the 30,000-strong force.

A spokesman for one of the groups told the New York Times, “We don’t trust the American-led coalition in combatting ISIS. In the past they have targeted our security forces and dropped aid to ISIS by mistake,” said Naeem al-Uboudi. A leader for the Badr Organization, one of the bigger militias, added, “Tikrit is an easy battle, we can win it ourselves.”

Moktada al-Sadr’s Peace Brigade (formerly the Mahdi Army) pulled out, with Sadr himself saying the “so-called international alliance” protects ISIS, “on the one hand, and (confiscates) the achievements of the Iraqis, on the other hand.” [New York Times]

The militias that withdrew from the front lines could still return. U.S. officials, though, say Iraq’s request for air support was a real positive and shows that Iran’s Maj.-Gen. Qasem Soleimani was unable to deliver a swift victory that the militias promised. One U.S. military official told the Wall Street Journal, “It’s a helpful wedge. The Iraqis have to decide who they want to partner with.”

Editorial / Washington Post

“An offensive to drive the Islamic State out of the Iraqi city of Tikrit, nominally ordered by the Iraq government but spearheaded by Iranian-backed Shiite militias, has been stalled for a week, with the attackers reportedly suffering heavy casualties. For those who hope Iraq still can be reconstructed under a unified and non-sectarian government, that is half-bad news.

“The resilience of the Islamic State’s defenses in the hometown of Saddam Hussein suggests that liberating larger cities across northern and western Iraq, including Mosul, might be tougher than some Iraqi officials have anticipated. On the other hand, the checking of the Shiite militias in their attempt to overrun a Sunni territory might ultimately have some positive results. The growing power of the militias, with their brutal tactics, sectarian ideology and allegiance to Iran’s most militant faction, has become as large an impediment to the goal of stabilizing Iraq as the Islamic State.

“The Obama administration, focused on completing a nuclear deal with Iran and eager to minimize direct U.S. involvement in the latest Iraq war, has played down the militia menace....that a force including commanders and units on the State Department’s global terrorism list and steered by an Iranian general who previously directed attacks on U.S. troops will somehow advance the aim of reconstructing a multiethnic Iraq.

“In fact, a new report from Human Rights Watch documents how Shiite militias have pursued a brutal scorched-earth policy in areas already liberated from the Islamic State.”

Finally, Canada said it would join the U.S. and Arab allies in launching airstrikes against ISIS in Syria. So far, Canada has participated in coalition strikes in Iraq. A motion in parliament extends Canada’s participation in the coalition to March 30, 2016, but stops short of committing ground troops. Canada has national elections in October and Prime Minister Stephen Harper is making terrorism a primary theme of his campaign.

Israel: U.S.-Israeli tensions were exacerbated this week when the Wall Street Journal reported Israel spied on closed-door talks on Iran’s nuclear program, though this isn’t unusual as the two spy on each other all the time.

What upset the Obama administration, though, was the sharing of details on the Iranian negotiations with U.S. lawmakers in order to undermine support for the talks.

An unnamed senior White House official said in the story, “It is one thing for the U.S. and Israel to spy on each other. It is another thing for Israel to steal U.S. secrets and play them back to U.S. legislators to undermine U.S. diplomacy.”

Israeli officials denied they learned of details of the talks through spying, but said they found them out through other channels, including monitoring of Iranian leaders.

Then you had the Palestinian issue....

Editorial / Washington Post

“President Obama’s assessment this week of the prospects for Middle East peace was sobering but realistic. For now, he said, ‘there still does not appear to be a prospect of a meaningful framework that would lead to a Palestinian state’; consequently, ‘that could end up leading to a downward spiral of relations that will be dangerous for everybody.’

“Mr. Obama said this risk requires him to ‘evaluate honestly how we manage Israeli-Palestinian relations over the next several years’ without pretending that a two-state peace settlement can be reached. He said: ‘We can’t continue to premise our public diplomacy based on something that everybody knows is not going to happen.’ For those who have criticized the administration for its unwarranted conviction that a peace deal was within reach, that is a welcome change.

“The curious thing about Mr. Obama’s statement is that he portrayed this state of affairs as a recent development, attributing it to an election-eve statement made by Israeli Prime Minister Benjamin Netanyahu. The premier said pretty much what the president did: For now, the conditions don’t exist for creating a Palestinian state. Mr. Obama’s conceit was that this heat-of-the-campaign declaration somehow created this lamentable situation – and that Mr. Netanyahu’s subsequent clarifications, in which he said he continues to favor a two-state solution, were irrelevant....

“We’d like to believe the campaign the White House has waged against Mr. Netanyahu for the past week reflects a strategy for heading off the ‘downward spiral’ Mr. Obama warned of, as opposed to pique or vindictiveness. Preventing Israeli-Palestinian relations from deteriorating to the point where they provoke the collapse of the Palestinian Authority or the eruption of another bloody uprising in the West Bank ought to be one of the administration’s Middle East priorities.”

Editorial / Wall Street Journal

“(Even) if you believe the main challenge in the region is getting Israel to cede more territory to the Palestinians, that day won’t happen until Israelis feel secure. But Israelis can be forgiven for feeling the opposite with a raging civil war in Syria, Islamic State and an offshoot of al-Qaeda operating near the Golan Heights, Iranian General Qasem Soleimani leading Shiite militias in Iraq, and a U.S. administration sounding and acting as if Iran can be a more constructive partner for peace than Israel.

“The main threat to Middle Eastern peace today – even beyond Islamic State – is the rise of an imperial Iran using its own troops or proxies effectively to colonize Arab capitals. The prospect of an imperial Iran on the cusp of becoming a nuclear power has all of America’s traditional Arab friends in the region now closer to Mr. Netanyahu’s position on the Middle East than to Mr. Obama’s.

“ ‘We cannot simply pretend that those comments were never made.’ These were the words (Chief of Staff Denis) McDonough used in his speech about Mr. Netanyahu’s election comments.

“But Mr. McDonough’s words might be easily turned around. In a day when the President’s chief of staff invokes the lexicon of Palestinian terrorists to describe Israel’s democracy, Americans and the world are left to wonder whose side the leader of the free world is on.”

Israel did announce on Friday it was releasing three months’ worth of tax revenue it collects for the Palestinian Authority. The Israelis had suspended the payments in response to the Palestinian move to join the International Criminal Court. The move reflected Netanyahu’s desire to ease tensions with not just the Palestinians, but also the Obama administration.

In a statement the prime minister said, “Given the deteriorating situation in the Middle East, one must act responsibly and with due consideration alongside a determined struggle against extremist elements.”

The revenue, about $100 million a month, makes up a substantial portion of the Palestinian budget. [Isabel Kershner / New York Times]

Russia: In his first major speech since his 10-day disappearance, as well as the murder of opposition leader Boris Nemtsov, President Vladimir Putin described Russia as a country besieged by hostile forces, but that Russia will not yield to attempts at military containment and of destabilization from within.

Addressing the Federal Security Bureau, the KGB successor, Putin said the situation around Russia “Will not change for the better if we succumb and yield at every step. It will only change for the better if we become stronger.”

Further: “Attempts by western special services at using social, non-governmental organizations and politicized associations for their goals are continuing without pause, especially to discredit the government and destabilize the internal situation in Russia.” [Kathrin Hille / Financial Times]

As for Ukraine, the ceasefire is largely holding though it seems only a matter of time before Putin looks to extend his gains.

David Ignatius / Washington Post

“The NATO alliance seems stuck at a crossroads on Ukraine, unsure whether to move toward greater confrontation with Russia or accept the deadlocked ‘frozen conflict’ that has emerged there.

“It’s a unified morass, at least, with President Obama sharing the reluctance of European leaders to escalate the crisis by providing defensive weapons to Ukraine or tightening sanctions against Russia. The United States tacitly backs the decision made by European leaders last week to maintain the status quo – and link any easing of sanctions to implementation of the Minsk agreement that has brought a shaky truce in Ukraine.

“The policy impasse was illustrated by Gen. Philip Breedlove, the NATO commander. I asked him Sunday at a conference (in Brussels) whether arming Kiev, which he reportedly favors, would be stabilizing or destabilizing. He indicated that he favored sending weapons, saying: ‘I do not think that any tool of U.S....power should necessarily be off the table.’

“But Breedlove noted the ambiguity of the policy choice: ‘Could it be destabilizing? The answer is yes. Also, inaction is destabilizing.’ That answer was a snapshot of the alliance’s dilemma....

“The problem is that it’s hard to see how current sanctions policy will lead to a true de-escalation, unless Russian President Vladimir Putin has a sudden conversion. Russian analysts say it could take years for sanctions to bite so much that they force a policy change.

“Leaving aside whether a Russian economic breakdown would really be in the West’s interest, sanctions may have a perverse outcome in the near term: Rather than encouraging Putin and his cronies to change course, they may instead empower the most corrupt and conservative forces in Russia.”

According to a survey by independent pollster the Levada Center, Russians have grown increasingly skeptical with regard to the consequences of Russia’s annexation of Crimea a year ago.

Last May, 79% said the annexation would have positive political and economic consequences for Russia, but today only 69% agree with this.

Further, 57% say they want Russia to retain its current borders, though 34% still say Russia has the right to absorb former Soviet territories if the rights of ethnic Russians are under threat.

Meanwhile, Russia’s ambassador to Denmark wrote in a newspaper opinion piece that should Denmark take part in NATO’s missile shield, “then Danish warships will be targets for Russia’s nuclear weapons. Denmark will be part of the threat to Russia,” wrote Mikhail Vanin. 

This comes a week after Swedish intelligence claimed that one in three Russian diplomats in the country were spies. Wilhelm Unge, chief counter-espionage analyst at Sweden’s Sapo intelligence agency, said: “We see Russian intelligence operations in Sweden – we can’t interpret this in any other way – as preparation for military operations against Sweden.” [Richard Milne / Financial Times]

And one more...Russia is preparing to lease 12 Su-24 long-range bombers to Argentina in exchange for beef and wheat; part of an effort, some fear, to prepare Argentina for a showdown with Britain over the Falkland Islands. British Prime Minister David Cameron said: “The assurance that I can give the Falkland Islands is that we will always be there for them, we will always defend them.”

Afghanistan: New Afghan President Ashraf Ghani met with President Obama in Washington and the U.S. agreed to keep about 9,800 troops in the country through the end of this year, slowing the planned withdrawal. Obama did vow, however, to close remaining American bases and consolidate U.S. forces in Kabul by the end of 2016.

“Afghanistan is still a dangerous place,” Obama said, but it must be Afghan security forces and police providing the security. “That is not going to happen if foreign forces are continually relied upon.” [Washington Post]

I watched the press conference after their meeting and I was impressed by Ghani. Certainly, at least for now, the Afghan-U.S. relationship is much better than it had been under Ghani’s predecessor, the prickly Hamid Karzai.

The U.S. renewed its commitment to support the Afghan military financially through 2017 at a cost of $4.1 billion. Obama also promised $800 million in economic and development assistance.

Ghani suggested true peace could only come through reconciliation with elements of the Taliban and we learned later in the week, Afghan and Taliban officials have been meeting in Norway.

China: Affluent Chinese parents are increasingly sending their children abroad to study at a younger age, according to the South China Morning Post.

“In the United States, one of the top three countries preferred by Chinese students, nearly 24,000 mainland pupils were enrolled at private high schools in 2013, compared to just 65 in 2005,” according to a study by Eol.cn, China’s largest education portal website.

Brazil: A majority of Brazilians favor impeaching President Dilma Rousseff owing to the burgeoning corruption scandal at state-run oil company Petrobras, as well as the punk economy alluded to above. The survey by polling firm MDA showed that 59.7 percent of respondents favor impeachment, and 68.9 percent believe Rousseff is responsible for the corruption at the oil giant. Only 10.8 percent of Brazilians rate her government positively. That said, opposition leaders say impeachment is unlikely. [Reuters]

France: As noted above, Marine Le Pen’s far-right Front National scored big gains in local elections, though as a percentage of the vote nationwide finished third with an estimated 27 percent of votes cast. Former president Nicolas Sarkozy’s center-right party, UMP, finished first with 37 percent, and the Socialist party of President Francois Hollande was second with 29 percent.

I’ll have more on this following Sunday’s second round, where Le Pen seems destined to gain a sizable number of county (departements) councilors.

For now, it was a very nice comeback for Sarkozy.

Singapore: We note the passing of a giant figure from the 20th century, Lee Kuan Yew, the founding father of the state of Singapore. He was 91. 

Lee oversaw Singapore’s independence from Britain and separation from Malaysia, becoming Singapore’s first prime minister, driving the nation to prosperity, though he was unapologetic about the repressive measures he used to impose order. It was called “authoritarian capitalism” and his influence extended throughout Asia and the Gulf states.    He liked to say western liberal democracy was unsuitable to Asian societies.

Mr. Lee set about creating a highly educated work force fluent in English, and then reached out to foreign investors to turn Singapore into a manufacturing hub. The city-state later grew into a major financial center.

The average per capita income on the small island was just $550 in the 1950s and today is about $60,000. 

Richard Nixon once described Lee as a big man on a small stage who, “in other times and other places, might have attained the world stature of a Churchill, a Disraeli or a Gladstone.”

Lee said of Nixon: “But for the misfortune of Watergate, I would say Richard Nixon (was the greatest U.S. president). He had a realistic view of the world. He was a great analyst, realistic, but also a tactician to get things done. But this need with wanting to know everything and to make sure he got re-elected became obsessive.” Lee called Jimmy Carter the worst U.S. president. [South China Morning Post]

Editorial / Washington Post

“As prime minister he created a public administration renowned for its efficiency and lack of corruption, which became the foundation of Singapore’s economic takeoff....

“But Mr. Lee also persecuted anyone who violated his hidebound notions of public order, from gum chewers to gay people, media critics and opposition political leaders.”

Henry Kissinger / Washington Post

“He did not exhort; he was never emotional; he was not a Cold Warrior; he was a pilgrim in quest of world order and responsible leadership. He understood the relevance of China and its looming potential and often contributed to the enlightenment of the world on this subject. But in the end, he insisted that without the United States there could be no stability.”

Random Musings

--Thank god the voice recorder for Germanwings flight # 4U 9525 was found as quickly as it was, and all praise for French and German authorities in getting the story out as quickly as they did. We all know what happened, how the pilot took a break and left the cockpit once the plane hit cruising altitude. The cockpit doors that have been reinforced since 9/11 proved to be the undoing of the 150 passengers and crew as the co-pilot, German Andreas Lubitz, 27, prevented the pilot from getting back in.

We also have learned the co-pilot was undergoing a “personal crisis” involving his girlfriend and was being treated for depression going back to 2009, according to German media reports. Lubitz hid his condition from the airline as investigators discovered a doctor had recently declared him “unfit to work.”

Of immediate concern for today’s flying public is the idea that there must be two people in the cockpit at all times, as is the rule in the U.S. 

This hadn’t been the case with most airlines in the European Union and many of them scrambled on Thursday to change their regulations.

But how do you regulate the mental state of flight crews? Each airline has its own protocols in terms of physical and mental examinations.

--Editorial / New York Post

“The Army has now charged Sgt. Bowe Bergdahl, swapped last spring from captivity in Afghanistan for five top Taliban commanders, as a deserter who endangered his fellow soldiers’ safety.

“Five of the worst of the worst, for a deserter. And that was President Obama’s idea of a trade worth celebrating in a Rose Garden ceremony.

“So how can the nation possibly trust this president to make a deal over Iran’s drive to build nuclear weapons?

 “Even as he insists that no one else – not the Senate, not the Israelis, not any of our allies in the region – should have the least say in the matter.

“Congress needs to take a long, hard look at the naïve exchange that won Bergdahl’s release after five years’ captivity in Afghanistan. And it need to move fast to prevent a far more disastrous ‘trade’ with Tehran.

“The Army on Wednesday filed charges of desertion and misbehavior before the enemy against Bergdahl – whom National Security Adviser Susan Rice claimed a year ago had been ‘captured on the battlefield’ after serving ‘with honor and distinction.’

“The White House, eager for a diplomatic victory, plainly didn’t even try to check the facts on Bergdahl’s capture.

“For, from the moment he was freed, his ex-comrades were telling the world that he was a deserter who’d walked off his post. Moreover, they said, at least six soldiers died trying to track Bergdahl down.

“Obama answered those reports by insisting he would make ‘no apologies for bringing a soldier home to his parents.’....

“Notably, Obama went ahead with it without even notifying Congress – as the law clearly required him to do when freeing Taliban prisoners from Guantanamo Bay.

“Which brings us back to his stated determination to end-run Congress on the Iran deal.

“This president just doesn’t want to even hear anything that might get in the way of what he imagines to be triumphs.”

Editorial / Wall Street Journal

“(The) bigger story is the extravagant price the U.S. has paid because President Obama wanted to score political points....

“The Associated Press has reported that an internal Pentagon investigation in 2010 found ‘incontrovertible’ evidence that (Bergdahl) had walked away from his post (in June 2009). Journalists also uncovered an exchange of letters in which the soldier wrote to his father ‘the title of U.S. soldier is just the lie of fools,’ that he was ‘ashamed to even be american (sic),’ and that ‘the future is too good to waste on lies.’ Replied father Robert: ‘OBEY YOUR CONSCIENCE!’

“All of this would have been known to President Obama and National Security Adviser Susan Rice when the administration decided to swap Sgt. Bergdahl for five Guantanamo Bay detainees – all top Taliban leaders – in May 2014....

“The Bergdahl swap unleashed a torrent of criticism at the time, including from Senate Democrats, so it’s not surprising that the charges against the soldier are only being unveiled now, five months after the midterm elections. There was no Rose Garden ceremony, and Ms. Rice issued no statement that we saw....

“Sgt. Bergdahl will now face a court martial, but we already know that the White House is guilty of deserting its obligations to U.S. security.”

--Senator Harry Reid announced he will not seek re-election next year, bringing an end to a three-decade congressional career. Reid, 75, said he had been contemplating retiring from the Senate for months and that it had nothing to do with the serious exercise accident at his Las Vegas home, nor his demotion to minority leader after Democrats lost the Senate in last November’s midterm elections.

Reid said, “I want to be able to go out at the top of my game. I don’t want to be a 42-year-old trying to become a designated hitter.”

In an interview with the Washington Post, Reid tabbed New York Senator Charles Schumer to be his successor. “Schumer, in 22 months if he plays his cards right, should be able to do it. I told him if you need my help, you got it,” said Reid.

--Michael S. Schmidt / New York Times

“The roughly 300 emails from (Hillary Clinton’s) private account that were turned over last month to a House committee investigating the (Benghazi) attack showed the secretary and her aides closely monitoring the fallout from the tragedy, which threatened to damage her image and reflect poorly on the State Department.

“They provided no evidence that Mrs. Clinton, as the most incendiary Republican attacks have suggested, issued a ‘stand down’ order to halt American forces responding to the violence in Benghazi, or took part in a broad cover-up of the administration’s response, according to senior American officials.

“But they did show that Mrs. Clinton’s top aides at times corresponded with her about State Department matters from their personal email accounts, raising questions about her recent assertions that she made it her practice to email aides at their government addresses so the messages would be preserved, in compliance with federal record-keeping regulations.

“The emails have not been made public, and the New York Times was not permitted to review them. But four senior government officials offered descriptions of some of the key messages, on the condition of anonymity because they did not want to jeopardize their access to secret information.”

So basically four senior dirtballs.

--Senator Ted Cruz of Texas became the first Republican to formally announce his candidacy for president in 2016. During a speech at Liberty University in Lynchburg, Va., Cruz said: “The power of the American people as we stand up and fight for liberty knows no bounds,” promising a campaign that would be about “re-igniting the promise of America.”

Cruz vowed to repeal ObamaCare, abolish the IRS, secure the border and forbid same-sex marriage. And he took issue with the administration’s foreign policy.

But while it made sense for Cruz to get out early in order to build his profile – he being well known in Washington and policy circles, but certainly not with the average voter – the biggest issue he faces is raising money and the likes of Wisconsin Gov. Scott Walker and former Gov. Jeb Bush are already hooking up with some of the biggest Republican donors.

Peggy Noonan / Wall Street Journal

“(Aside from his age, 44, and lack of experience), Mr. Cruz’s second problem has to do with words like sincerity, earnestness, ingenuousness. His conservatism is serious – fully thought through, studied, internalized. But who is he? I think of the comment of one of his fellow conservative senators: ‘He’s a complete charlatan, you know.’ He did the shutdown, said that senator, not because it might work or help but because it served his breakout plan: be the guy who convinces the base he’s the only one they can trust. The senator’s implication: It’s a game to this guy.

“It is not hard to notice that every Cruz conversation, every interview, seems to be the rote performance of a speech. In public, and often in private, he moves his hands and face and modulates his voice like a TV pro. Politicians have to be actors but the trick is to be an actor without being a phony.

“Slickness is not a virtue in a politician, and obvious oiliness is a drawback. Mr. Cruz needs some awkward lessons. Maybe he can call Rick Perry.”

--A new Suffolk University survey of likely Republican voters in New Hampshire has Jeb Bush leading the pack at 19%, followed by Scott Walker with 14% and Rand Paul at 7%. Chris Christie trails even Donald Trump (6%) with just 5%, well off the 11% he garnered in Suffolk’s last survey of the state back in June.

--Back to email issues, Anne Applebaum had an op-ed piece in the Washington Post building the case for quitting email.

“Certainly it is no longer possible to argue that information controlled by the federal government is somehow safe because the people devoted to taking care of it are determined to keep it that way. WikiLeaks taught us that low-level Army officers with personal issues are capable of accessing, and distributing, classified diplomatic cables in vast quantities. The Snowden affair taught us that a low-level government contractor with a dubious employment history can easily steal vast quantities of data and then disappear with it to Russia.

“But these spectacular stories are nothing beside the humdrum, everyday theft of data that goes on all the time. Last week, even while Clinton was defending her decision to delete her email, the State Department was quietly shutting down its servers in an attempt to clean them, once and for all, of the Russian malware that has plagued the whole system for months. Although the department’s deliberately low-key statement framed this as a ‘planned outage,’ other sources told ABC News that it was dealing with one of the most serious security breaches in the department’s history. Maybe it would have been marginally easier for foreign governments to read Clinton’s email on a private server, but it doesn’t sound like they would have had that much more trouble if she’d been using the same system as everybody else.”

And as Ms. Applebaum points out, in the recent past the White House has admitted it is subject to frequent cyberattacks, you have the Sony and JPMorgan Chase cases, I’d add the likes of Target. So....

“What to do? Increasingly, the answer – not just for government officials but for all of us – is going to be: don’t use email. Or at least don’t use email for anything that you wouldn’t put on a postcard....it’s just become too easy to steal and will only become more so.”

--Indiana’s legislature and governor approved a bill that would allow businesses to refuse service to gay and lesbian patrons on the grounds of “religious freedom,” an act that is opposed by many of the state’s largest corporations. Gov. Mike Pence, a potential 2016 Republican presidential contender, said he signed the bill because “many people of faith feel their religious liberty is under attack by government action.”

Pence added: “If I thought it legalized discrimination in any way in Indiana, I would have vetoed it.”

But it seems to do just that. Executives from the likes of Salesforce.com and Eli Lilly are outraged and vowing to cut back business in the state.

--Michael Goodwin / New York Post

“A friend who is no fan of Mayor de Blasio’s summarizes the headlines. ‘What a week!’ he writes. ‘Monday we learned murders are up 20 percent this year.

“Now we learn that subway delays are up 45 percent. So here’s my question: Which movie should I rent for the weekend: ‘Taxi Driver,’ ‘Midnight Cowboy’ or “Back to the Future’?’

“Good choices all – if you want to relive Gotham’s bad old days. Then again, you might not need a movie. Real mayhem could be coming to a corner near you.

“New restrictions on school suspensions will make it harder for teachers and principals to keep order in the classroom.

“The Bad Kids Lobby convinced the educrats that the rights of troublemakers to disrupt an entire class, including cursing out the teacher, are as important as the rights of the good kids trying to learn.

“And even as he keeps opposing high-performing charter schools, the mayor moved to reward failing district schools. Refusing to close any of the city’s 91 persistent losers or accept a state takeover, de Blasio instead promises to spend $150 million more on those schools, as if more money is the answer.

“Perhaps most troubling, new restrictions on stop-and-frisk make it harder for cops to keep the streets safe. Carrying an illegal handgun just got easier because cops are no longer allowed to act on ‘furtive movements’ or a ‘hunch.’ It’s also easier for the perps to avoid arrest for an earlier crime because race must be downplayed in describing suspects.”

Depressing, especially the Bad Kids Lobby.

As Goodwin adds: “City’s’ Hall’s movement to handcuff authority, both in schools and on the streets, falls under what I call ‘Breaking Broken Windows.’ The guiding light of civic order for two decades was the theory that a broken window left unrepaired was an invitation to break more windows, and worse. In police terms, a broken window could be turnstile jumping, public urination, vandalism and refusing to listen to teachers.”

So now de Blasio’s “breaking the Broken Windows philosophy in what amounts to a giant social experiment. He is either assuming New Yorkers will not take advantage of lax enforcement, or he’s ready to accept more crime and misbehavior.”

Like I said last week, it’s going to be an interesting summer in Gotham. 

--Charlottesville, Va., police said Monday they had found no evidence that a woman was gang raped at a University of Virginia fraternity house in 2012, and they were suspending their investigation. This comes four months after a now-discredited lengthy report in Rolling Stone magazine, titled “A Rape on Campus,” featuring a student, Jackie, detailed the brutal rape that most are in agreement never occurred. Of course there was no waiting 24 hours on this one. That Rolling Stone allowed this article into its publication was an utter disgrace.

Pathetically, Rolling Stone commissioned a team of investigators, led by the dean of the Columbia University Graduate School of Journalism, to examine its report, with the review to be published “in the next couple of weeks,” according to the magazine’s managing editor.

--Nathan Koppel / Wall Street Journal

“The University of Oklahoma said on Friday that an investigation into a racist chant caught on video earlier this month found that some fraternity members had learned the song four years earlier at a national leadership cruise sponsored by the fraternity.”

The chant “became part of the ‘institutionalized culture’ of the chapter, where it was taught to new initiates as part of the pledge process, said David Boren, the president of the university.”

The executive director of SAE said they had not yet uncovered evidence that the chant is widespread across the fraternity’s 237 chapters.

---

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

God bless America.
---

Gold closed at $1200
Oil $48.87...climbed above $50 on Middle East turmoil, then fell back.

Returns for the week 3/23-3/27

Dow Jones -2.3% [17712]
S&P 500 -2.2% [2061]
S&P MidCap -2.0%
Russell 2000 -2.0%
Nasdaq -2.7% [4891]

Returns for the period 1/1/15-3/27/15

Dow Jones -0.6%
S&P 500 +0.1%
S&P MidCap +3.9%
Russell 2000 +3.0%
Nasdaq +3.3%

Bulls 56.6
Bears 14.1 [Source: Investors Intelligence]

**Special Announcement**

For over 16 years I have closed my column thanking you, dear readers, for your support. Some of you have commented, “But you don’t ask us for anything.” Well, today I am.

Recently, I noted that a 15-year relationship with BuyandHold.com ended as they were folded into another operation and this impacted me on a number of levels.

Here’s the bottom line. Believe it or not, there are some major costs associated with S&N, including for subscriptions to all the periodicals I cull through. These days, the likes of the New York Times, Wall Street Journal, Financial Times, Los Angeles Times, Sydney Morning Herald, Washington Post, South China Morning Post, to name a few, are not free but I subscribe to them all to bring you the best. There are other substantial costs, of course, including on the tech front.

So for the first time, I’m asking for donations by launching my version of a Kickstarter campaign. Donations to StocksandNews will be gladly accepted. This is no different than a PBS pledge drive, or Wikipedia’s donation requests.

If you would like to make a donation checks should be made payable to StocksandNews.com. *Please include your email address so I can acknowledge receipt. 

Brian Trumbore
StocksandNews.com
PO Box 990
New Providence, NJ 07974

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Week in Review

03/28/2015

For the week 3/23-3/27

[Posted 10:30 PM ET, Friday]

**See below for a Special Announcement**

Edition 833

Washington and Wall Street

It’s a tension convention these days. You have the Iran nuclear talks and the upcoming Tuesday deadline for a draft agreement, the Obama administration desperately wanting a deal, though knowing it can’t possibly cut a truly bad one and get away with it, while the nation of Yemen has become a massive flashpoint with Saudi Arabia going after Iranian-backed rebels that ousted the Western-backed president.

The White House wants to say it was able to cooperate with Iran on one end, but at the same time it backs Saudi Arabia who is battling the Iranians in a proxy war in Yemen. And in Iraq, while it got more complicated this week, the U.S. and Iran are more or less working together to defeat ISIS. Much more on all this below. Just suffice it to say the region is more out of control than ever and it’s not the kind of thing that engenders investor confidence.

Meanwhile, domestically, the final look at fourth-quarter GDP was released on Friday, unchanged at 2.2%, so just a reminder how the last three years look.

2012...2.3%
2013...2.2%
2014...2.4%

There was a big positive in the final Q4 numbers, though, and that was seeing consumer spending revised upward to 4.4%, the quickest pace since 2006.

But once again it would appear first-quarter GDP is going to come in at less than 2%, perhaps substantially so, with the harsh weather deserving its share of the blame as in 2014. Goldman Sachs is calling for 1.4%.

A reading on February durable goods this week wasn’t good, down 1.4%, ex-transportation down 0.8%.

But the numbers on the housing sector were better than previous figures, with existing home sales for February in line with expectations, while new home sales for the month hit their highest annual pace since February 2008, 539,000, which was a pleasant surprise since the week before housing starts were disastrous owing to the weather in the Northeast and Midwest.

That said, prices on existing homes rose 7.5% year over year, the biggest increase in a year, and this is not good. The rise is directly attributable to falling inventory. You don’t want the market getting white hot again.

But now it’s about earnings as the quarter draws to a close and it is going to be very interesting to see what the large multinationals say, and reveal, when it comes to the impact of the strong dollar on their overseas operations. Corporate America was certainly caught off guard by the speed of the dollar’s rise.

Back in September, analysts expected S&P 500 profits to grow 9.5% in the first quarter from a year earlier and at 11.6% for all of 2015, according to FactSet.

Today, analysts expect first-quarter profits to fall by 4.9%, and to grow just 2.1% for all of 2015. As the Wall Street Journal noted, “The last time analysts cut their outlook on annual profit growth by that scale was in the six months leading to March 2009, according to FactSet, as stocks were tumbling to their crisis-era lows.”

On a related issue, falling oil has hit the sector of the economy that led us out of the muck, with capital spending globally by energy companies in the S&P 500 projected to fall 25% this year, “leading to the first annual decline in overall capital investment by big businesses in many sectors since 2009.” [Nick Timiraos / Wall Street Journal]

On the other hand, Tobias Levkovich, chief U.S. equity strategist at Citi, says if you exclude energy, capital spending will grow 4% for S&P 500 companies this year.

Bottom line, the statements accompanying the earnings reports will be quite telling.

Finally, you still have fallout over the Federal Reserve’s removal of “patient” from its last statement. We now know that the Fed is looking to keep rates low for longer than we, or they, first thought, even as they begin to raise them at some point in 2015.

The Fed has said it is focused on inflation and Tuesday’s report on consumer prices for February was good in this regard, + 0.2%, including on the core, ex-food and energy. So year over year the CPI was -0.1%, but +1.7% on core, closer to the Fed’s target of 2%, though Chair Janet Yellen said in a speech on Friday the Fed could raise rates without inflation having hit this figure. It will be more about stability in both prices and the labor market.

Some thoughts on the Fed....

Thomas G. Donlan / Barron’s

“Among the many instructions that the nominally independent Federal Reserve has received from its political bosses are the contradictory ones labeled the ‘dual mandate.’ The Fed is supposed to operate the central-banking system in such a way that provides the country with the greatest possible number of jobs and the least possible amount of inflation.

“In the legislative words of the 1977 amendments to the Federal Reserve Act:

“ ‘The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy’s long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.’

“Of course, employment, prices, and interest rates make three mandates. Congress and the Fed don’t know a bicycle from a tricycle. Or politicians can’t count beyond two....

“Maybe the two mandates are two too many, since the Federal Reserve gets too much credit for its ability to manipulate the economy. As we ought to see in recent economic history, just because stuff happens does not mean the Fed did it.

“For the past eight years, the Fed has been trying to raise inflation, without success. Its easy-money policies also were supposed to goose a recovery that most people considered depressingly slow.

“Inch by inch, however, the U.S. economy crawled up to create more jobs and produce a 5.5% unemployment rate, with inflation under 1%. In its economic report last week, the Fed projected lower unemployment and lower market interest rates to come.

“What’s not to like? Isn’t this the best of all possible worlds?

“This should be the time that interest rates rise. In normal times with these indicators of an even better future, short-term rates should be around 3% or 4%, with long-term rates and mortgages still higher.

“Of course, the Fed knows these are not normal times. No matter how comfortably normal the times may seem, the Fed has injected trillions of dollars into the economy by purchasing – and rolling over – bills, notes, and bonds from every corner of the capital market. The Fed’s economists do not know how to stop, because if they stopped the economy might tank.

“So the new Fed policy is quite simple: another dose of flimflam. By removing the word ‘patient’ from its monetary plan, it threatens to raise rates, but not right away....

“Six years after hitting the bottom of the so-called Great Recession, the recovery is growing whiskers. It’s easier for Fed economists and the rest of us to think of things that could drive the economy down than things that could lift it up. That means the Fed needs higher rates so that it can have room to cut them.”

Robert J. Samuelson / Washington Post

“The Federal Reserve is at a crossroads, and it doesn’t know where it’s going. After holding short-term interest rates near zero for six years, Fed policymakers, led by chair Janet Yellen, are prepared to raise them – but when, how much and with what consequences they haven’t said....

“There was a time when we were more confident. We didn’t pay attention to details, because the experts had matters in hand. During the Alan Greenspan era (1987-2006), the Fed was routinely seen as an economic superman. Its surgical shifts in the federal funds rate seemed to stabilize the economy: Expansions were long, recessions rare and mild. Now the Fed often seems like a 200-pound weakling.

“It’s true that during the 2008-2009 financial crisis, the Fed arguably averted another Great Depression. It supplied credit when frightened private lenders wouldn’t. Since then, it has been less successful. To revive the economy, it unleashed massive amounts of financial stimulus. The federal funds rate has stayed near zero since late 2008, and the Fed bought more than 43 trillion of government and mortgage bonds to reduce long-term rates. For this energetic exercise in money creation, all it got was a sluggish and frustrating recovery.

“Policy has been neither a glorious success nor an abject failure. It’s been a pragmatic muddle....

“The danger in tightening too much or too soon is that it might drive many weak international borrowers – including firms and governments in emerging-market countries such as India and Mexico – to the wall. Already, the prospect of tighter money has raised the dollar’s exchange rate; for many foreign borrowers, this makes repayment more expensive. In the United States, tighter money risks damaging credit-sensitive sectors, led by housing and vehicles. The specter of higher rates could also prompt a preemptive sell-off in the bond market, which would (almost certainly) spill into the stock market.

“At best, confidence would suffer; at worst, panic would ensue. It’s an ugly picture. On the other hand, the danger of not tightening is that more dubious loans will be made – domestically and internationally – and raise the odds of a large financial crackup in the future. The choice seems to be between present pleasure and future prudence, except that future prudence might also inflict present pain....

“Whatever happens, there remains a larger historic question: How did an agency that seemed so powerful and commanding in one era become so limited and tentative in the next?”

Finally, the Senate approved a balanced-budget plan by a near party-line 52-46 margin; a measure that closely mirrors the House version so this guarantees months of wrangling with President Obama over spending and Republican efforts to dismantle the Affordable Care Act. A compromise GOP budget will be hashed out in April and then let the fun begin.

One thing the two sides do agree on is defense spending, proposing $612 billion for next year, a 4.5% boost over current levels. I’ve argued we’ll be forced to spend substantially more than this given the geopolitical picture of today.

Europe and Asia

Eurozone finance ministers and Greece keep kicking the can down the road but as I go to post, the euro-19 is examining the latest reform proposals submitted by the Greek government, Monday having been set as a deadline to rule on same.

Greece is running out of time and cash. It lost a dispute over 1.2bn euro it thought it could access, money that was part of the bank recapitalization efforts of 2012, but the other 18 finance ministers said the cash would stay in the European Financial Stability Facility.

Greece has to come up with 1.7bn for wages and pensions at the end of the month,* and 450m euro for repayment on a bailout loan due the IMF, and it’s been estimated Greece will run out of cash April 9 unless it can convince euro authorities that its latest reform proposals are realistic, thus unlocking more bailout cash. By the middle of April, it has to roll over 2.4bn in T-bills as well.

*Late Friday, the deputy finance minister said pensions and salaries would be paid on time, but he didn’t say anything about the 450m due the IMF.

As for the first meeting in Germany between Greek Prime Minister Alexis Tsipras and German Chancellor Angela Merkel, she pulled out all the stops by welcoming Tsipras with full military honors while insisting this was a chance for a rapprochement. 

By all accounts it went OK, I guess. Tsipras declared: “We must avoid creating new divisions in Europe.” Merkel said there were conciliatory noises from both camps, which was good considering just ten days earlier, Tsipras wrote the chancellor a letter demanding both a debt write-off and a third bailout later this year. [He’s also been screaming about reparations, though held off on the topic in Berlin.]

But Merkel insisted no more funds will be disbursed without a credible reform program and that’s where we stand this weekend. One thing seems clear, Greece has been playing a shell game with various accounts to meet its short-term obligations, such as withholding 150m euros worth of hospital supplies. [Friday, the above-referenced deputy finance minister said the health fund’s coffers will be refilled.]

In an interview with Bloomberg, billionaire investor George Soros said the odds of Greece leaving the euro were 50-50 and the country could go “down the drain.”

“It’s now a lose-lose game and the best that can happen is actually muddling through. Greece is a long-festering problem that was mishandled from the beginning by all parties.”

Turning to the rest of the eurozone, ECB President Mario Draghi told the EU parliament on Monday that “growth is gaining momentum.”

“The easing of lending conditions is progressing hand-in-hand with a resurgent demand for credit to finance business investment. In the longer-term perspective, this will increase potential output.”

Markit’s flash eurozone composite reading for March was 54.1 vs. 53.3 in February, a 46-month high, with the manufacturing PMI at 51.9 vs. 51.0, a 10-month high. There has been a surge in new orders as the weaker euro helps exporters in a big way.

The flash composite looks at just Germany and France on an individual basis. Germany’s comp was 55.3 vs. 53.8 in February, with the manufacturing PMI at 52.4 (51.1 Feb.). The government raised its estimate for growth in 2015 from 1.0% to 1.8%, a significant revision.

France’s comp of 51.7 was down slightly from 52.2 last month, though the manufacturing PMI was 48.2, up from 47 (but still contraction). Business and consumer sentiment in France, however, are rising to multi-year highs.

The Bank of Spain estimated GDP rose 0.8% in the first quarter over the fourth and it has raised its full-year forecast from 2% to 2.8%, which would be terrific.

In the U.K., inflation was zero in February, down from 0.3% in January, but the core was +1.2%. There is real wage growth here and retail sales for February over January rose a better than expected 0.7%. Home prices rose 5.1% nationwide in March, year over year, which was the slowest pace since September 2013 and this is good.

On a different topic, I have long said, growth, say 2% in the eurozone, can marginalize some of the far-right, and far-left, parties. But it’s also about timing.

Gideon Rachman / Financial Times

“Europe is in a race against time. After six years of economic crisis, extremist political parties are well-entrenched across the continent. Set against that, the European economy is in better shape than for some years. The question is whether economic optimism can return quickly enough to prevent the bloc’s politics slithering over the edge.

“The signs of political rot are very evident. In France this weekend the far-right National Front (FN) notched up about 25 percent of the vote in regional elections, confirming its strong performance in last year’s European parliamentary elections. Prime Minister Manuel Valls has warned that Marine le Pen, leader of the FN, could actually win the presidential election in 2017. That same year, Britain could vote to leave the EU. And by then the single currency could also be well on the way to disintegration, with Greece out and Italy heading for the exit.

“But while the political signals are still bleak, there are grounds for economic hope....

“A return to growth might give Europe some breathing space and head off the chance of political disaster. The difficulty is that, although there is clearly a connection between economic hardship and political extremism, the relationship is not precise. The collapse of the political center can be a delayed reaction to economic trouble – and can kick in just as the economy is recovering. To choose a particularly doom-laden example: the Nazis took power in 1933, after the worst of the German depression was over.

“A depression, or a very prolonged recession, does more than create economic hardship. It also serves to discredit mainstream ideologies and to whip up anger against political elites – and those effects can last well beyond the point where the economic figures show some improvement....

“(It) is France that matters most. If Britain left Europe or Greece quit the euro, the European project would stagger on. But the election of Ms. Le Pen as French president would in effect spell the end of the EU...

“(Ultimately) France and the rest of the member states need more than a modest uptick in growth to restore the health of their political systems. They need mainstream politicians that can paint a convincing and optimistic picture of the future. So far, there is not much sign of that.”

Turning to Asia, HSBC released its flash reading on manufacturing for March in China and it was just 49.2 vs. 50.7 in February, an 11-month low.

In Japan, the flash PMI was 50.4 vs. 51.6 in February. Inflation for February also came in at zero with collapsing oil and subdued demand. 0% is the lowest since May 2013 and far from the government’s 2% target. Retail sales last month fell 1.8% year over year, with household spending down 2.9%. Abenomics has largely not been working.

But, the unemployment rate is down to 3.5% and corporations are finally taking some of their record profits and passing it on to their employees in the form of increased wages, which is something Prime Minister Abe has been pounding the table on. This week Finance Minister Taro Aso said the government should consider a tax to prod more businesses into action.

But the specter of a return to deflation is a very real possibility by summer.

Street Bytes

--The market had its worst week since late January, with the Dow Jones losing 2.3% to 17712, the S&P 500 2.2% and Nasdaq 2.7%. With two trading days left in the quarter, the S&P is just three points above its 12/31 close of 2058. The Dow is down for the quarter, Nasdaq up comfortably.

There have been growing concerns over valuation in some sectors, such as biotech, which as measured by the Nasdaq Biotech Index fell over 5% this week.

--U.S. Treasury Yields

6-mo. 0.12% 2-yr. 0.59% 10-yr. 1.96% 30-yr. 2.54%

Quiet week in the bond pits.

--Late in the day on Friday, the Wall Street Journal reported that Intel Corp. is in talks to buy Altera Corp. in a deal that would be the largest in Intel’s history. Altera shares jumped 28%. By acquiring Altera, Intel would be able to reduce its dependence on the PC market, while making further inroads into corporate data centers.

--Brazil’s economy grew 0.3% in the fourth quarter from the previous three months, but just 0.1% for all of 2014 and the concerns are of a recession this year, with economists forecasting a contraction of 0.8%. I have further comments below on the dismal political situation here.

--In the closely followed Ellen Pao gender discrimination case, a jury late Friday returned a verdict, finding that powerful venture capital firm Kleiner Perkins Caulfield & Byers did not discriminate against her because of her gender and did not retaliate when she protested her treatment.

Earlier in the afternoon the jury of six men and six women thought it had a verdict, only to find it miscalculated the number needed on one of the four claims.

Nine out of 12 were needed and one juror switched votes after the jury was ordered to deliberate further.

The vote, which didn’t follow gender lines, was 10-2 on three of the four, and 9-3 on the fourth.

Pao, a former junior partner, filed suit against Kleiner Perkins in 2012 and was seeking $16 million in compensatory damages and up to $144 million in punitive damages.

Women have long complained about gender bias in Silicon Valley.   As one female executive of an organization that supports women entrepreneurs put it, “Men in VC firms are breathing a sigh of relief and women in tech are feeling defeated.”

“For its part, Kleiner Perkins contended that Pao was an underperforming, greedy, disgruntled former employee who wasn’t cut out to be a venture capitalist.” [Andrea Chang and Tracey Lien / Los Angeles Times]

--Speaking of the women of Silicon Valley, Morgan Stanley’s chief financial officer, Ruth Porat, left the firm for the same role at Google Inc. She was replaced by Jonathan Pruzan, a 46-year-old investment banker.

Porat is reportedly set to receive cash and prizes (stock awards) worth more than $70m in the first year, including a signing bonus of $5m.

--Schlumberger, the world’s largest oil-services group, pleaded guilty to violating U.S. sanctions on Iran and Sudan and will pay a $233 million penalty, the Justice Department announced on Wednesday. The subsidiary most directly involved will be placed on corporate probation for three years and Schlumberger has to hire an outside consultant to review its sanctions policies as well as compliance.

John Carlin, a U.S. assistant attorney-general, said Schlumberger “took steps to disguise (its) business dealings (from the U.S.), thereby willfully violating the U.S. economic sanctions against those regimes.” [Financial Times]

These guys really acted like dirtballs. You can’t conduct business like this from American soil. End of story.

--I can’t do better than the Lex Team at the Financial Times in describing the merger of Kraft Foods and Heinz, engineered by Warren Buffett and Brazilian private equity firm 3G.

“At its core, the deal – which creates a company with an enterprise value of at least $100bn – is a stock-for-stock merger. Heinz’s backers, 3G and Mr. Buffett, will own just over half the new company. Shareholders in Kraft will own the rest and get a one-time cash dividend of $16.50. On reasonable assumptions about the new company’s valuation, Kraft shareholders are getting $80 in value (which is about where the stock traded on Wednesday), implying a 30 percent premium to the pre-deal share price.”

Well it gets more complicated, including “financial wizardry” as the FT adds. “Kraft has an investment grade credit rating and Heinz expects the new company to be investment grade as well. It anticipates being able to refinance $17bn of Heinz’s existing obligations, including a piece of Buffett-owned preferred stock with a hefty 9 percent coupon.”

Gotta love Warren and his ability to negotiate 9 percent coupons in a zero percent world!

The actual size of the merger was about $46 billion and as Bloomberg noted, the advisers were Lazard and Centerview Partners. As in all the big boys like Goldman and Morgan Stanley were excluded.

--The U.S. Consumer Product Safety Commission is investigating Lumber Liquidators Holdings after the CBS’ “60 Minutes” report earlier in the month on the company’s Chinese-made laminate flooring and allegations it contained higher levels of formaldehyde that is allowed. The retailer’s stock was highly volatile following the news, though the investigation could take weeks, or months. The company said it has already provided significant amounts of testing and safety information to the agency.

--BlackBerry Ltd. reported a surprise profit in the period ended Feb. 28 from a year-earlier loss, but revenue was down 32% as the company struggles with a two-year turnaround effort.

Once the dominant smartphone maker, BlackBerry commands less than 1% of the global market. The company does have a very solid cash position of $3.27 billion which allows it to go after niche providers of mobile security software to help bolster sales.

--Congratulations to PIMCO’s new management team for the Total Return Fund, which, as the Journal’s Min Zeng reported, through Tuesday was ahead of 92% of its peers and its benchmark for the nearly six months since Bill Gross’ exit. In the nine months prior to his departure, the fund trailed 80% of its peers.

Money has continued to flow out of the fund despite the better performance, however, and we’ll soon know if 22 consecutive months of outflows continued in March.

For his part, Gross’ performance at Janus and his Global UnConstrained Bond Fund has been OK, beating 62% of its peers.

--Pepsi-Cola was the No. 2 soda brand in the U.S. by volume last year, according to industry data released this week, supplanting Diet Coke. Full-calorie Coke remains the country’s top-selling soda with a market share of 17.6%. Pepsi-Cola has 8.8% and Diet Coke 8.5%. [Mike Esterl / Wall Street Journal]

Overall soda consumption fell nearly 1%, the 10th straight yearly decline.

--Two years after a major restructuring, Hostess Brands is back, with the comeback faster than expected, though while S&P upgraded the maker of Twinkies and Ding Dongs, the “B” rating is still ‘junk’ or “speculative grade.”

--Starbucks’ campaign of “Race Together” ended as quickly as it started, with CEO Howard Schultz claiming it was only intended to last a week, but that the overall initiative of starting a dialogue on race “is far from over.”

The campaign drew sharp criticism, with many wondering how baristas were equipped to engage customers in discussions about race in the first place.

--With our changing tastes, there have been a number of stories the past few weeks on the declining breakfast cereal industry. Wheaties, for example, has seen sales drop by nearly 80 percent over the past 10 years. Rice Krispies by 32 percent over that time period. Sales of Cheerios, though, have held steady and handily remains No. 1 with nearly $1 billion in annual sales, according to Euromonitor. Frosted Flakes is No. 2, but way back at $453 million.

--California’s unemployment rate is now 6.7%, the lowest level in nearly seven years and down from 8% in February of 2014.

--Meanwhile, on the drought front, the rainy season in Southern California is traditionally December through March. Since Oct. 1, downtown L.A. has recorded about 7.5 inches of rain vs. a normal rate of 13 inches. As a climatologist at the Jet Propulsion Laboratory told the Los Angeles Times, “Let’s get right down to it: We’re done. By April, usually, rainfall drops off dramatically.” Of course the state’s critical snowpack was also far below normal this winter.

--HBO announced a major joint venture with Vice Media whereby Vice will provide a daily newscast and a branded channel on HBO’s soon-to-be-launched Internet streaming service, HBO Now. 

HBO is going after younger viewers who will be consumers of its $15.99-a-month streaming television service; the same audience that Vice has succeeded in attracting.

--The head of the UN Ebola mission told the BBC the current outbreak in West Africa will be over by August.

But Medecins Sans Frontieres (Doctors Without Borders) said a “global coalition of inaction” led to the deaths of more than 10,000, with its early calls for help being ignored by local governments and the World Health Organization.

--As RadioShack went on the auction block this week, among the items up for bid were the names, email addresses and phone numbers of millions of customers. As a loyal customer myself that kind of sucks.

So the other day I was in my New Providence store, where they’ve always had good kids behind the counter, and I asked for help with a computer issue, but I really sounded like an idiot because I had no idea what I was talking about. Anyway, I also asked him in a hushed voice (because there was another person in the store), “How are you hanging in there?”

Well little did I know the other guy in the store was a regional manager, who heard my question and proceeded to tell me the whole story. The guy said his number one mission was to save jobs.

So Standard General, a hedge fund that is one of RadioShack’s creditors, is the favored savior, but Salus Capital Partners is challenging the fairness of the auction. Standard General has said they would try to keep the chain operating on a smaller scale, saving 9,000 jobs by co-branding half the locations with Sprint Corp. But now a U.S. Bankruptcy Court in Wilmington, Del., has to rule whether the bidding process should be reopened for the sweetened Salus offer.

--Moody’s is warning the odds of a default in Atlantic City are growing and it could come to a head March 31 unless a state loan is extended. With four of the city’s 12 casinos shuttered and 8,000 jobs gone, A.C. is out of cash, with the appointed lead emergency manager saying the city also needed to lay off 20 to 30 percent of the 1,150-member workforce.

--In a new study by Bankrate.com, the best state to retire is Wyoming, using a measurement from the Gallup-Healthways Well-Being Index that quantifies how satisfied residents 65 and older are with their surroundings. Others in the top five are Colorado, Utah, Idaho and Virginia.

Foreign Affairs

Yemen: Feeling itself under threat from the chaos in neighboring Yemen, Saudi Arabia launched airstrikes in the rebel-controlled capital of Sanaa and three other provinces this week, hitting military bases and anti-aircraft positions, while Egyptian warships were steaming toward the Yemeni coast as part of an Arab-led offensive against the Houthis, the Shiite rebels who are supported by Iran. 

The Saudis and their allies felt compelled to act after the Houthis moved from their power base in the north, into the south and Sanaa, forcing out the Western-backed president, Abed Rabbo Mansour Hadi. Saudi Arabia and Egypt are threatening a ground offensive as well to wipe out the Houthi threat, though late Friday the Saudis seemed to back down on the idea of sending in the infantry.

To say the least, Iran is not happy, and has been pouring in support. The Houthis also have the backing of powerful former president, Ali Abdullah Saleh, and the country’s military. Iranian Foreign Minister Mohammad Javad Zarif told an Iranian news channel that “we will spare no effort to contain the crisis in Yemen,” though a senior government official told Reuters, “military intervention is not an option for Tehran.”

A ground war would not be a walk in the park for the Saudis and their allies. Up to 10 countries (including the UAE) are said to be part of the coalition. The Saudis have committed 100 fighter jets and 150,000 soldiers with the goal of restoring Hadi to power. Hadi, who had been under house arrest in Yemen, resurfaced this week in Riyadh.

For his part, rebel leader Abdul-Malik al-Houthi accused the United States, Saudi Arabia and Israel of launching a “criminal, unjust, brutal and sinful” campaign aimed at invading and occupying Yemen. The Houthis fired rockets across the northern border into the kingdom in response to the airstrikes, targeting Saudi military positions, though there were no reports of damage

“Yemenis won’t accept such humiliation,” Abdul-Malik said, calling the Saudis “evil.” [Daily Star]

As for the role of the U.S., the administration said it would provide “logistical and intelligence support” to the coalition. Previously, the U.S. abandoned its base where Special Ops Forces coordinated the drone campaign against the likes of al-Qaeda (AQAP) in Yemen.

Editorial / Wall Street Journal

“An abiding goal of President Obama’s foreign policy has been to reduce America’s role in the Middle East, in the belief that it would lead to greater stability and serve U.S. interests. Has a policy ever been so thoroughly repudiated in so short a time? Mr. Obama has succeeded in his retreat, but the vacuum he’s left has produced a region on fire that is becoming a broad Sunni-Shiite war.

“That’s the context for this week’s meltdown in Yemen, which has now escalated with the military intervention of Saudi Arabia and its Sunni Arab allies. This follows the rout of a U.S.-friendly government by Houthi militias that belong to the Zaidi offshoot of Shiite Islam and are backed by Iran. What had been a proxy war is in danger of becoming a direct Saudi-Iran conflict....

“It’s safe to say the Saudis would never take such risks if they hadn’t given up on the U.S. as a stabilizing force in the Middle East. This resembles their intervention into Bahrain in 2011 to put down a rebellion by its Shiite majority against the Sunni government, but the risks are greater in Yemen.

“Iran has denounced the intervention, and Russia has also objected. Tehran probably won’t intervene directly, but you can bet it will supply the Houthis with arms and military advisers. It will try to bleed the Saudis and their allies for as long as possible at a relatively low cost. Tehran’s ultimate goal would be to neutralize if not destabilize the Gulf regimes as part of its plan to dominate the region.

“As for the U.S., it needs to abandon its studied retreat and help the Saudis....

“This should include a warning to Iran that the U.S. will assist the Saudis in stopping Iranian flights that arm the Houthis.* Iranian flights over Iraq to Syria helped Assad survive at a crucial moment, but all the U.S. did was complain. This time Iran’s Revolutionary Guard Corps needs to be told its flights run the risk of being shot down....

“The temptation in some American circles, including in parts of the right, will be to let the Sunnis and Shiites kill each other until they get tired of it. But that’s what the same sages said about Syria’s civil war, which proceeded to spill into Iraq and midwife Islamic State, which is now gaining adherents around the world. The damage to U.S. interests from a radical takeover of the Gulf states, by either Sunni jihadists or Shiites loyal to Iran, would be even worse.

“When the world’s only superpower retreats willy-nilly, bad things happen. Much like Jimmy Carter in 1979 after the Soviets invaded Afghanistan, Mr. Obama needs to reassess his failing foreign policy before the mayhem spreads even further.”

*Late Friday the U.S. military announced it was expanding its aid to Saudi Arabia in its air campaign and the Saudis now claim full control of Yemeni airspace.

Jennifer Rubin / Washington Post

“Naturally the White House press corps wanted the press secretary to acknowledge things had not gone as planned (in Yemen). But no. Josh Earnest had his talking point and was sticking with it (just like the talking point that Obama meant what he said when he called the shooting of innocents in a French kosher market ‘random’). For over three minutes Earnest refused to acknowledge their model was not a mess. Pressed again, he insisted this is still a ‘template that has succeeded.’ An incredulous Jonathan Karl of ABC News continued to press him, but Earnest refused to admit the obvious, namely that the administration had failed in its leading from behind, light footprint.

“It was embarrassing and unbelievable. But it was also instructive. The administration is failing as far as the eye can see. Iraq and Syria are infested with jihadists from the Islamic State. The civil war in Syria has killed 200,000 and, because of our failure to come to their aid in a timely and effective manner, the Free Syrian Army is in dismal shape. Iran is pulling the strings in Syria, Yemen and Lebanon while its fighters are doing what we will not, combating the Islamic State in Iraq. Our Sunni allies and Israel are exasperated with our passivity and willingness to appease Iran. The ‘peace process’ is a joke. So the president bashes our closest ally and tells us Yemen is a success.

“Consider what would have happened if President George W. Bush refused to believe the Iraq War was going poorly, denied any strategy change was necessary and never implemented the surge. Ironically, critics accused him of being stubborn or cut off from reality. Right diagnosis, wrong president.”

One final sidebar...and humiliation. As reported by the Los Angeles Times’ Brian Bennett, the Houthi rebels now have control of “secret intelligence files held by Yemeni security forces and containing details of American intelligence operations in the country....exposing names of informants and plans for U.S.-backed counter-terrorism operations, U.S. officials say.

“U.S. intelligence officials believe additional files were handed directly to Iranian advisors by Yemeni officials who have sided with the Houthi militias....

“For American intelligence networks in Yemen, the damage has been severe.”

Iran: Nuclear negotiations between Tehran and the P5+1 entered their final, critical stages as the parties scramble to secure a draft agreement by the March 31 deadline. Secretary of State John Kerry has been in talks with Iranian Foreign Minister Zarif in Lausanne, Switzerland as the two try to overcome still significant gaps. The other diplomats from Britain, China, France, Russia and Germany will join if the U.S. and Iran are close to an agreement.

The Iranian team seemed upbeat, with one top official saying a “common understanding” on technical issues had been reached. Among the final items to be hammered out are the number of centrifuges Iran would be allowed to maintain, whether enrichment activities could be carried out at the underground Fordow facility, and the extent of nuclear research work it would permitted to do.

The problem is, as the New York Times reported this week, Iran is loath to agree to specifics and seeks a “political declaration of intentions,” as the Times put it, while the U.S. says any agreement would have to contain a “quantifiable dimension.”

Additionally, Yukiya Amano, who heads the International Atomic Energy Agency, told the Wall Street Journal this week that when it comes to Tehran’s cooperation in the IAEA’s investigation into Iran’s past efforts on the nuclear front, “Progress has been very limited.” It seems impossible for the P5+1 to agree to a comprehensive agreement when Iran has failed to cooperate with the IAEA’s very basic demands, including access to sites where suspected weapons-related tests may have been conducted, such as at Parchin, where limited access was granted but not where the IAEA believes weapons testing took place. France, in particular, has been playing hardball on this front.

Both President Obama and Ayatollah Ali Khamenei have said there will not be a third extension of the talks. Iranian President Rohani wrote a letter to Obama and the leaders of the other five countries urging them to overcome their differences, while saying the action in Yemen would not stand in the way of the nuke talks.

Standing on the sidelines is Congress, which has threatened new sanctions if the talks break down, while also vowing to have a say in any final agreement.

Kerry, addressing critics, said that if the U.S. abandoned a deal that the other members of the P5+1 considered reasonable, the sanctions regime would collapse and the nuclear threat would grow.

“The talks would collapse,” he said. “Iran would have the ability to go right back to spinning its centrifuges and enriching [uranium] to the degree they want.” [Paul Richter / Los Angeles Times]

For his part, Ayatollah Khamenei, in a speech last Saturday, said there would be no nuclear deal unless it resulted in an immediate end to sanctions and allowed the country’s nuclear program to progress, though he basically threw his support behind his negotiating team. He then led the crowd in a chant of “Death to America.”

Michael Hayden, Olli Heinonen and Ray Takeyh / Washington Post

“As negotiations between Iran and the great powers press forward, Sec. of State John Kerry seems to have settled on this defense of any agreement: The terms will leave Iran at least a year away from obtaining a nuclear bomb, thus giving the world plenty of time to react to infractions. The argument is meant to reassure, particularly when a sizable enrichment capacity and a sunset clause appear to have already been conceded. A careful assessment, however, reveals that a one-year breakout time may not be sufficient to detect and reverse Iranian violations.

“Once the United States had an indication that Iran was violating an agreement, a bureaucratic process would be necessary to validate the information. It could be months before the director of national intelligence would be confident enough to present a case for action to the president. Several U.S. intelligence agencies, the Energy Department and national nuclear laboratories would need a chance to sniff the data to be convinced that a technical breach had occurred. Only after this methodical review was finished could the director go to the White House with conclusions and recommendations....

“History suggests the Iranians would engage in protracted negotiations and much arcane questioning of the evidence. Iran could eventually offer some access while holding back key data and personnel. It would be only after tortured discussions that the IAEA could proclaim itself dissatisfied with Iran’s reaction. This process also could take months.”

What a nightmare.

Iraq / Syria / ISIS: As noted last time, the battle to retake Tikrit bogged down so this week American warplanes, at the request of the Iraqi government, attempted to help out in bombing ISIS positions.

But this move backfired when three major Shiite militia groups that were fighting alongside the Iraqi military pulled out, complaining the Americans were not needed. [American officials countered they demanded the Shiite militias backed by Iran be barred from the fight ahead.]

The three groups represent about 10,000 of the 30,000-strong force.

A spokesman for one of the groups told the New York Times, “We don’t trust the American-led coalition in combatting ISIS. In the past they have targeted our security forces and dropped aid to ISIS by mistake,” said Naeem al-Uboudi. A leader for the Badr Organization, one of the bigger militias, added, “Tikrit is an easy battle, we can win it ourselves.”

Moktada al-Sadr’s Peace Brigade (formerly the Mahdi Army) pulled out, with Sadr himself saying the “so-called international alliance” protects ISIS, “on the one hand, and (confiscates) the achievements of the Iraqis, on the other hand.” [New York Times]

The militias that withdrew from the front lines could still return. U.S. officials, though, say Iraq’s request for air support was a real positive and shows that Iran’s Maj.-Gen. Qasem Soleimani was unable to deliver a swift victory that the militias promised. One U.S. military official told the Wall Street Journal, “It’s a helpful wedge. The Iraqis have to decide who they want to partner with.”

Editorial / Washington Post

“An offensive to drive the Islamic State out of the Iraqi city of Tikrit, nominally ordered by the Iraq government but spearheaded by Iranian-backed Shiite militias, has been stalled for a week, with the attackers reportedly suffering heavy casualties. For those who hope Iraq still can be reconstructed under a unified and non-sectarian government, that is half-bad news.

“The resilience of the Islamic State’s defenses in the hometown of Saddam Hussein suggests that liberating larger cities across northern and western Iraq, including Mosul, might be tougher than some Iraqi officials have anticipated. On the other hand, the checking of the Shiite militias in their attempt to overrun a Sunni territory might ultimately have some positive results. The growing power of the militias, with their brutal tactics, sectarian ideology and allegiance to Iran’s most militant faction, has become as large an impediment to the goal of stabilizing Iraq as the Islamic State.

“The Obama administration, focused on completing a nuclear deal with Iran and eager to minimize direct U.S. involvement in the latest Iraq war, has played down the militia menace....that a force including commanders and units on the State Department’s global terrorism list and steered by an Iranian general who previously directed attacks on U.S. troops will somehow advance the aim of reconstructing a multiethnic Iraq.

“In fact, a new report from Human Rights Watch documents how Shiite militias have pursued a brutal scorched-earth policy in areas already liberated from the Islamic State.”

Finally, Canada said it would join the U.S. and Arab allies in launching airstrikes against ISIS in Syria. So far, Canada has participated in coalition strikes in Iraq. A motion in parliament extends Canada’s participation in the coalition to March 30, 2016, but stops short of committing ground troops. Canada has national elections in October and Prime Minister Stephen Harper is making terrorism a primary theme of his campaign.

Israel: U.S.-Israeli tensions were exacerbated this week when the Wall Street Journal reported Israel spied on closed-door talks on Iran’s nuclear program, though this isn’t unusual as the two spy on each other all the time.

What upset the Obama administration, though, was the sharing of details on the Iranian negotiations with U.S. lawmakers in order to undermine support for the talks.

An unnamed senior White House official said in the story, “It is one thing for the U.S. and Israel to spy on each other. It is another thing for Israel to steal U.S. secrets and play them back to U.S. legislators to undermine U.S. diplomacy.”

Israeli officials denied they learned of details of the talks through spying, but said they found them out through other channels, including monitoring of Iranian leaders.

Then you had the Palestinian issue....

Editorial / Washington Post

“President Obama’s assessment this week of the prospects for Middle East peace was sobering but realistic. For now, he said, ‘there still does not appear to be a prospect of a meaningful framework that would lead to a Palestinian state’; consequently, ‘that could end up leading to a downward spiral of relations that will be dangerous for everybody.’

“Mr. Obama said this risk requires him to ‘evaluate honestly how we manage Israeli-Palestinian relations over the next several years’ without pretending that a two-state peace settlement can be reached. He said: ‘We can’t continue to premise our public diplomacy based on something that everybody knows is not going to happen.’ For those who have criticized the administration for its unwarranted conviction that a peace deal was within reach, that is a welcome change.

“The curious thing about Mr. Obama’s statement is that he portrayed this state of affairs as a recent development, attributing it to an election-eve statement made by Israeli Prime Minister Benjamin Netanyahu. The premier said pretty much what the president did: For now, the conditions don’t exist for creating a Palestinian state. Mr. Obama’s conceit was that this heat-of-the-campaign declaration somehow created this lamentable situation – and that Mr. Netanyahu’s subsequent clarifications, in which he said he continues to favor a two-state solution, were irrelevant....

“We’d like to believe the campaign the White House has waged against Mr. Netanyahu for the past week reflects a strategy for heading off the ‘downward spiral’ Mr. Obama warned of, as opposed to pique or vindictiveness. Preventing Israeli-Palestinian relations from deteriorating to the point where they provoke the collapse of the Palestinian Authority or the eruption of another bloody uprising in the West Bank ought to be one of the administration’s Middle East priorities.”

Editorial / Wall Street Journal

“(Even) if you believe the main challenge in the region is getting Israel to cede more territory to the Palestinians, that day won’t happen until Israelis feel secure. But Israelis can be forgiven for feeling the opposite with a raging civil war in Syria, Islamic State and an offshoot of al-Qaeda operating near the Golan Heights, Iranian General Qasem Soleimani leading Shiite militias in Iraq, and a U.S. administration sounding and acting as if Iran can be a more constructive partner for peace than Israel.

“The main threat to Middle Eastern peace today – even beyond Islamic State – is the rise of an imperial Iran using its own troops or proxies effectively to colonize Arab capitals. The prospect of an imperial Iran on the cusp of becoming a nuclear power has all of America’s traditional Arab friends in the region now closer to Mr. Netanyahu’s position on the Middle East than to Mr. Obama’s.

“ ‘We cannot simply pretend that those comments were never made.’ These were the words (Chief of Staff Denis) McDonough used in his speech about Mr. Netanyahu’s election comments.

“But Mr. McDonough’s words might be easily turned around. In a day when the President’s chief of staff invokes the lexicon of Palestinian terrorists to describe Israel’s democracy, Americans and the world are left to wonder whose side the leader of the free world is on.”

Israel did announce on Friday it was releasing three months’ worth of tax revenue it collects for the Palestinian Authority. The Israelis had suspended the payments in response to the Palestinian move to join the International Criminal Court. The move reflected Netanyahu’s desire to ease tensions with not just the Palestinians, but also the Obama administration.

In a statement the prime minister said, “Given the deteriorating situation in the Middle East, one must act responsibly and with due consideration alongside a determined struggle against extremist elements.”

The revenue, about $100 million a month, makes up a substantial portion of the Palestinian budget. [Isabel Kershner / New York Times]

Russia: In his first major speech since his 10-day disappearance, as well as the murder of opposition leader Boris Nemtsov, President Vladimir Putin described Russia as a country besieged by hostile forces, but that Russia will not yield to attempts at military containment and of destabilization from within.

Addressing the Federal Security Bureau, the KGB successor, Putin said the situation around Russia “Will not change for the better if we succumb and yield at every step. It will only change for the better if we become stronger.”

Further: “Attempts by western special services at using social, non-governmental organizations and politicized associations for their goals are continuing without pause, especially to discredit the government and destabilize the internal situation in Russia.” [Kathrin Hille / Financial Times]

As for Ukraine, the ceasefire is largely holding though it seems only a matter of time before Putin looks to extend his gains.

David Ignatius / Washington Post

“The NATO alliance seems stuck at a crossroads on Ukraine, unsure whether to move toward greater confrontation with Russia or accept the deadlocked ‘frozen conflict’ that has emerged there.

“It’s a unified morass, at least, with President Obama sharing the reluctance of European leaders to escalate the crisis by providing defensive weapons to Ukraine or tightening sanctions against Russia. The United States tacitly backs the decision made by European leaders last week to maintain the status quo – and link any easing of sanctions to implementation of the Minsk agreement that has brought a shaky truce in Ukraine.

“The policy impasse was illustrated by Gen. Philip Breedlove, the NATO commander. I asked him Sunday at a conference (in Brussels) whether arming Kiev, which he reportedly favors, would be stabilizing or destabilizing. He indicated that he favored sending weapons, saying: ‘I do not think that any tool of U.S....power should necessarily be off the table.’

“But Breedlove noted the ambiguity of the policy choice: ‘Could it be destabilizing? The answer is yes. Also, inaction is destabilizing.’ That answer was a snapshot of the alliance’s dilemma....

“The problem is that it’s hard to see how current sanctions policy will lead to a true de-escalation, unless Russian President Vladimir Putin has a sudden conversion. Russian analysts say it could take years for sanctions to bite so much that they force a policy change.

“Leaving aside whether a Russian economic breakdown would really be in the West’s interest, sanctions may have a perverse outcome in the near term: Rather than encouraging Putin and his cronies to change course, they may instead empower the most corrupt and conservative forces in Russia.”

According to a survey by independent pollster the Levada Center, Russians have grown increasingly skeptical with regard to the consequences of Russia’s annexation of Crimea a year ago.

Last May, 79% said the annexation would have positive political and economic consequences for Russia, but today only 69% agree with this.

Further, 57% say they want Russia to retain its current borders, though 34% still say Russia has the right to absorb former Soviet territories if the rights of ethnic Russians are under threat.

Meanwhile, Russia’s ambassador to Denmark wrote in a newspaper opinion piece that should Denmark take part in NATO’s missile shield, “then Danish warships will be targets for Russia’s nuclear weapons. Denmark will be part of the threat to Russia,” wrote Mikhail Vanin. 

This comes a week after Swedish intelligence claimed that one in three Russian diplomats in the country were spies. Wilhelm Unge, chief counter-espionage analyst at Sweden’s Sapo intelligence agency, said: “We see Russian intelligence operations in Sweden – we can’t interpret this in any other way – as preparation for military operations against Sweden.” [Richard Milne / Financial Times]

And one more...Russia is preparing to lease 12 Su-24 long-range bombers to Argentina in exchange for beef and wheat; part of an effort, some fear, to prepare Argentina for a showdown with Britain over the Falkland Islands. British Prime Minister David Cameron said: “The assurance that I can give the Falkland Islands is that we will always be there for them, we will always defend them.”

Afghanistan: New Afghan President Ashraf Ghani met with President Obama in Washington and the U.S. agreed to keep about 9,800 troops in the country through the end of this year, slowing the planned withdrawal. Obama did vow, however, to close remaining American bases and consolidate U.S. forces in Kabul by the end of 2016.

“Afghanistan is still a dangerous place,” Obama said, but it must be Afghan security forces and police providing the security. “That is not going to happen if foreign forces are continually relied upon.” [Washington Post]

I watched the press conference after their meeting and I was impressed by Ghani. Certainly, at least for now, the Afghan-U.S. relationship is much better than it had been under Ghani’s predecessor, the prickly Hamid Karzai.

The U.S. renewed its commitment to support the Afghan military financially through 2017 at a cost of $4.1 billion. Obama also promised $800 million in economic and development assistance.

Ghani suggested true peace could only come through reconciliation with elements of the Taliban and we learned later in the week, Afghan and Taliban officials have been meeting in Norway.

China: Affluent Chinese parents are increasingly sending their children abroad to study at a younger age, according to the South China Morning Post.

“In the United States, one of the top three countries preferred by Chinese students, nearly 24,000 mainland pupils were enrolled at private high schools in 2013, compared to just 65 in 2005,” according to a study by Eol.cn, China’s largest education portal website.

Brazil: A majority of Brazilians favor impeaching President Dilma Rousseff owing to the burgeoning corruption scandal at state-run oil company Petrobras, as well as the punk economy alluded to above. The survey by polling firm MDA showed that 59.7 percent of respondents favor impeachment, and 68.9 percent believe Rousseff is responsible for the corruption at the oil giant. Only 10.8 percent of Brazilians rate her government positively. That said, opposition leaders say impeachment is unlikely. [Reuters]

France: As noted above, Marine Le Pen’s far-right Front National scored big gains in local elections, though as a percentage of the vote nationwide finished third with an estimated 27 percent of votes cast. Former president Nicolas Sarkozy’s center-right party, UMP, finished first with 37 percent, and the Socialist party of President Francois Hollande was second with 29 percent.

I’ll have more on this following Sunday’s second round, where Le Pen seems destined to gain a sizable number of county (departements) councilors.

For now, it was a very nice comeback for Sarkozy.

Singapore: We note the passing of a giant figure from the 20th century, Lee Kuan Yew, the founding father of the state of Singapore. He was 91. 

Lee oversaw Singapore’s independence from Britain and separation from Malaysia, becoming Singapore’s first prime minister, driving the nation to prosperity, though he was unapologetic about the repressive measures he used to impose order. It was called “authoritarian capitalism” and his influence extended throughout Asia and the Gulf states.    He liked to say western liberal democracy was unsuitable to Asian societies.

Mr. Lee set about creating a highly educated work force fluent in English, and then reached out to foreign investors to turn Singapore into a manufacturing hub. The city-state later grew into a major financial center.

The average per capita income on the small island was just $550 in the 1950s and today is about $60,000. 

Richard Nixon once described Lee as a big man on a small stage who, “in other times and other places, might have attained the world stature of a Churchill, a Disraeli or a Gladstone.”

Lee said of Nixon: “But for the misfortune of Watergate, I would say Richard Nixon (was the greatest U.S. president). He had a realistic view of the world. He was a great analyst, realistic, but also a tactician to get things done. But this need with wanting to know everything and to make sure he got re-elected became obsessive.” Lee called Jimmy Carter the worst U.S. president. [South China Morning Post]

Editorial / Washington Post

“As prime minister he created a public administration renowned for its efficiency and lack of corruption, which became the foundation of Singapore’s economic takeoff....

“But Mr. Lee also persecuted anyone who violated his hidebound notions of public order, from gum chewers to gay people, media critics and opposition political leaders.”

Henry Kissinger / Washington Post

“He did not exhort; he was never emotional; he was not a Cold Warrior; he was a pilgrim in quest of world order and responsible leadership. He understood the relevance of China and its looming potential and often contributed to the enlightenment of the world on this subject. But in the end, he insisted that without the United States there could be no stability.”

Random Musings

--Thank god the voice recorder for Germanwings flight # 4U 9525 was found as quickly as it was, and all praise for French and German authorities in getting the story out as quickly as they did. We all know what happened, how the pilot took a break and left the cockpit once the plane hit cruising altitude. The cockpit doors that have been reinforced since 9/11 proved to be the undoing of the 150 passengers and crew as the co-pilot, German Andreas Lubitz, 27, prevented the pilot from getting back in.

We also have learned the co-pilot was undergoing a “personal crisis” involving his girlfriend and was being treated for depression going back to 2009, according to German media reports. Lubitz hid his condition from the airline as investigators discovered a doctor had recently declared him “unfit to work.”

Of immediate concern for today’s flying public is the idea that there must be two people in the cockpit at all times, as is the rule in the U.S. 

This hadn’t been the case with most airlines in the European Union and many of them scrambled on Thursday to change their regulations.

But how do you regulate the mental state of flight crews? Each airline has its own protocols in terms of physical and mental examinations.

--Editorial / New York Post

“The Army has now charged Sgt. Bowe Bergdahl, swapped last spring from captivity in Afghanistan for five top Taliban commanders, as a deserter who endangered his fellow soldiers’ safety.

“Five of the worst of the worst, for a deserter. And that was President Obama’s idea of a trade worth celebrating in a Rose Garden ceremony.

“So how can the nation possibly trust this president to make a deal over Iran’s drive to build nuclear weapons?

 “Even as he insists that no one else – not the Senate, not the Israelis, not any of our allies in the region – should have the least say in the matter.

“Congress needs to take a long, hard look at the naïve exchange that won Bergdahl’s release after five years’ captivity in Afghanistan. And it need to move fast to prevent a far more disastrous ‘trade’ with Tehran.

“The Army on Wednesday filed charges of desertion and misbehavior before the enemy against Bergdahl – whom National Security Adviser Susan Rice claimed a year ago had been ‘captured on the battlefield’ after serving ‘with honor and distinction.’

“The White House, eager for a diplomatic victory, plainly didn’t even try to check the facts on Bergdahl’s capture.

“For, from the moment he was freed, his ex-comrades were telling the world that he was a deserter who’d walked off his post. Moreover, they said, at least six soldiers died trying to track Bergdahl down.

“Obama answered those reports by insisting he would make ‘no apologies for bringing a soldier home to his parents.’....

“Notably, Obama went ahead with it without even notifying Congress – as the law clearly required him to do when freeing Taliban prisoners from Guantanamo Bay.

“Which brings us back to his stated determination to end-run Congress on the Iran deal.

“This president just doesn’t want to even hear anything that might get in the way of what he imagines to be triumphs.”

Editorial / Wall Street Journal

“(The) bigger story is the extravagant price the U.S. has paid because President Obama wanted to score political points....

“The Associated Press has reported that an internal Pentagon investigation in 2010 found ‘incontrovertible’ evidence that (Bergdahl) had walked away from his post (in June 2009). Journalists also uncovered an exchange of letters in which the soldier wrote to his father ‘the title of U.S. soldier is just the lie of fools,’ that he was ‘ashamed to even be american (sic),’ and that ‘the future is too good to waste on lies.’ Replied father Robert: ‘OBEY YOUR CONSCIENCE!’

“All of this would have been known to President Obama and National Security Adviser Susan Rice when the administration decided to swap Sgt. Bergdahl for five Guantanamo Bay detainees – all top Taliban leaders – in May 2014....

“The Bergdahl swap unleashed a torrent of criticism at the time, including from Senate Democrats, so it’s not surprising that the charges against the soldier are only being unveiled now, five months after the midterm elections. There was no Rose Garden ceremony, and Ms. Rice issued no statement that we saw....

“Sgt. Bergdahl will now face a court martial, but we already know that the White House is guilty of deserting its obligations to U.S. security.”

--Senator Harry Reid announced he will not seek re-election next year, bringing an end to a three-decade congressional career. Reid, 75, said he had been contemplating retiring from the Senate for months and that it had nothing to do with the serious exercise accident at his Las Vegas home, nor his demotion to minority leader after Democrats lost the Senate in last November’s midterm elections.

Reid said, “I want to be able to go out at the top of my game. I don’t want to be a 42-year-old trying to become a designated hitter.”

In an interview with the Washington Post, Reid tabbed New York Senator Charles Schumer to be his successor. “Schumer, in 22 months if he plays his cards right, should be able to do it. I told him if you need my help, you got it,” said Reid.

--Michael S. Schmidt / New York Times

“The roughly 300 emails from (Hillary Clinton’s) private account that were turned over last month to a House committee investigating the (Benghazi) attack showed the secretary and her aides closely monitoring the fallout from the tragedy, which threatened to damage her image and reflect poorly on the State Department.

“They provided no evidence that Mrs. Clinton, as the most incendiary Republican attacks have suggested, issued a ‘stand down’ order to halt American forces responding to the violence in Benghazi, or took part in a broad cover-up of the administration’s response, according to senior American officials.

“But they did show that Mrs. Clinton’s top aides at times corresponded with her about State Department matters from their personal email accounts, raising questions about her recent assertions that she made it her practice to email aides at their government addresses so the messages would be preserved, in compliance with federal record-keeping regulations.

“The emails have not been made public, and the New York Times was not permitted to review them. But four senior government officials offered descriptions of some of the key messages, on the condition of anonymity because they did not want to jeopardize their access to secret information.”

So basically four senior dirtballs.

--Senator Ted Cruz of Texas became the first Republican to formally announce his candidacy for president in 2016. During a speech at Liberty University in Lynchburg, Va., Cruz said: “The power of the American people as we stand up and fight for liberty knows no bounds,” promising a campaign that would be about “re-igniting the promise of America.”

Cruz vowed to repeal ObamaCare, abolish the IRS, secure the border and forbid same-sex marriage. And he took issue with the administration’s foreign policy.

But while it made sense for Cruz to get out early in order to build his profile – he being well known in Washington and policy circles, but certainly not with the average voter – the biggest issue he faces is raising money and the likes of Wisconsin Gov. Scott Walker and former Gov. Jeb Bush are already hooking up with some of the biggest Republican donors.

Peggy Noonan / Wall Street Journal

“(Aside from his age, 44, and lack of experience), Mr. Cruz’s second problem has to do with words like sincerity, earnestness, ingenuousness. His conservatism is serious – fully thought through, studied, internalized. But who is he? I think of the comment of one of his fellow conservative senators: ‘He’s a complete charlatan, you know.’ He did the shutdown, said that senator, not because it might work or help but because it served his breakout plan: be the guy who convinces the base he’s the only one they can trust. The senator’s implication: It’s a game to this guy.

“It is not hard to notice that every Cruz conversation, every interview, seems to be the rote performance of a speech. In public, and often in private, he moves his hands and face and modulates his voice like a TV pro. Politicians have to be actors but the trick is to be an actor without being a phony.

“Slickness is not a virtue in a politician, and obvious oiliness is a drawback. Mr. Cruz needs some awkward lessons. Maybe he can call Rick Perry.”

--A new Suffolk University survey of likely Republican voters in New Hampshire has Jeb Bush leading the pack at 19%, followed by Scott Walker with 14% and Rand Paul at 7%. Chris Christie trails even Donald Trump (6%) with just 5%, well off the 11% he garnered in Suffolk’s last survey of the state back in June.

--Back to email issues, Anne Applebaum had an op-ed piece in the Washington Post building the case for quitting email.

“Certainly it is no longer possible to argue that information controlled by the federal government is somehow safe because the people devoted to taking care of it are determined to keep it that way. WikiLeaks taught us that low-level Army officers with personal issues are capable of accessing, and distributing, classified diplomatic cables in vast quantities. The Snowden affair taught us that a low-level government contractor with a dubious employment history can easily steal vast quantities of data and then disappear with it to Russia.

“But these spectacular stories are nothing beside the humdrum, everyday theft of data that goes on all the time. Last week, even while Clinton was defending her decision to delete her email, the State Department was quietly shutting down its servers in an attempt to clean them, once and for all, of the Russian malware that has plagued the whole system for months. Although the department’s deliberately low-key statement framed this as a ‘planned outage,’ other sources told ABC News that it was dealing with one of the most serious security breaches in the department’s history. Maybe it would have been marginally easier for foreign governments to read Clinton’s email on a private server, but it doesn’t sound like they would have had that much more trouble if she’d been using the same system as everybody else.”

And as Ms. Applebaum points out, in the recent past the White House has admitted it is subject to frequent cyberattacks, you have the Sony and JPMorgan Chase cases, I’d add the likes of Target. So....

“What to do? Increasingly, the answer – not just for government officials but for all of us – is going to be: don’t use email. Or at least don’t use email for anything that you wouldn’t put on a postcard....it’s just become too easy to steal and will only become more so.”

--Indiana’s legislature and governor approved a bill that would allow businesses to refuse service to gay and lesbian patrons on the grounds of “religious freedom,” an act that is opposed by many of the state’s largest corporations. Gov. Mike Pence, a potential 2016 Republican presidential contender, said he signed the bill because “many people of faith feel their religious liberty is under attack by government action.”

Pence added: “If I thought it legalized discrimination in any way in Indiana, I would have vetoed it.”

But it seems to do just that. Executives from the likes of Salesforce.com and Eli Lilly are outraged and vowing to cut back business in the state.

--Michael Goodwin / New York Post

“A friend who is no fan of Mayor de Blasio’s summarizes the headlines. ‘What a week!’ he writes. ‘Monday we learned murders are up 20 percent this year.

“Now we learn that subway delays are up 45 percent. So here’s my question: Which movie should I rent for the weekend: ‘Taxi Driver,’ ‘Midnight Cowboy’ or “Back to the Future’?’

“Good choices all – if you want to relive Gotham’s bad old days. Then again, you might not need a movie. Real mayhem could be coming to a corner near you.

“New restrictions on school suspensions will make it harder for teachers and principals to keep order in the classroom.

“The Bad Kids Lobby convinced the educrats that the rights of troublemakers to disrupt an entire class, including cursing out the teacher, are as important as the rights of the good kids trying to learn.

“And even as he keeps opposing high-performing charter schools, the mayor moved to reward failing district schools. Refusing to close any of the city’s 91 persistent losers or accept a state takeover, de Blasio instead promises to spend $150 million more on those schools, as if more money is the answer.

“Perhaps most troubling, new restrictions on stop-and-frisk make it harder for cops to keep the streets safe. Carrying an illegal handgun just got easier because cops are no longer allowed to act on ‘furtive movements’ or a ‘hunch.’ It’s also easier for the perps to avoid arrest for an earlier crime because race must be downplayed in describing suspects.”

Depressing, especially the Bad Kids Lobby.

As Goodwin adds: “City’s’ Hall’s movement to handcuff authority, both in schools and on the streets, falls under what I call ‘Breaking Broken Windows.’ The guiding light of civic order for two decades was the theory that a broken window left unrepaired was an invitation to break more windows, and worse. In police terms, a broken window could be turnstile jumping, public urination, vandalism and refusing to listen to teachers.”

So now de Blasio’s “breaking the Broken Windows philosophy in what amounts to a giant social experiment. He is either assuming New Yorkers will not take advantage of lax enforcement, or he’s ready to accept more crime and misbehavior.”

Like I said last week, it’s going to be an interesting summer in Gotham. 

--Charlottesville, Va., police said Monday they had found no evidence that a woman was gang raped at a University of Virginia fraternity house in 2012, and they were suspending their investigation. This comes four months after a now-discredited lengthy report in Rolling Stone magazine, titled “A Rape on Campus,” featuring a student, Jackie, detailed the brutal rape that most are in agreement never occurred. Of course there was no waiting 24 hours on this one. That Rolling Stone allowed this article into its publication was an utter disgrace.

Pathetically, Rolling Stone commissioned a team of investigators, led by the dean of the Columbia University Graduate School of Journalism, to examine its report, with the review to be published “in the next couple of weeks,” according to the magazine’s managing editor.

--Nathan Koppel / Wall Street Journal

“The University of Oklahoma said on Friday that an investigation into a racist chant caught on video earlier this month found that some fraternity members had learned the song four years earlier at a national leadership cruise sponsored by the fraternity.”

The chant “became part of the ‘institutionalized culture’ of the chapter, where it was taught to new initiates as part of the pledge process, said David Boren, the president of the university.”

The executive director of SAE said they had not yet uncovered evidence that the chant is widespread across the fraternity’s 237 chapters.

---

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

God bless America.
---

Gold closed at $1200
Oil $48.87...climbed above $50 on Middle East turmoil, then fell back.

Returns for the week 3/23-3/27

Dow Jones -2.3% [17712]
S&P 500 -2.2% [2061]
S&P MidCap -2.0%
Russell 2000 -2.0%
Nasdaq -2.7% [4891]

Returns for the period 1/1/15-3/27/15

Dow Jones -0.6%
S&P 500 +0.1%
S&P MidCap +3.9%
Russell 2000 +3.0%
Nasdaq +3.3%

Bulls 56.6
Bears 14.1 [Source: Investors Intelligence]

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