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07/11/2015

For the week 7/6-7/10

[Posted 10:00 PM ET, Friday]

Edition 848

Wall Street and Washington

Once again there is little to write about in this lead segment. Still no resolution to Greece and the Iran nuke talks, either, covered heavily below nonetheless. There was no U.S. economic data of import and third-quarter earnings don’t start in earnest until this coming week, with the real flood of them the following two after.

That said Fed Chair Janet Yellen reiterated in a speech from Cleveland on Friday that the Fed will most likely hike interest rates sometime this year, but the policymakers can’t ignore the issues in Europe and Greece, though she seems less concerned about China and its potential impact on our markets and economy.

Yellen: “I expect that it will be appropriate at some point later this year to take the first step to raise the federal funds rate and thus begin normalizing monetary policy. But I want to emphasize that the course of the economy and inflation remains highly uncertain, and unanticipated developments could delay or accelerate this first step.”

In the minutes from the June 16-17 meeting of the Federal Open Market Committee, while the Fed struck a positive tone about developments in the economy, highlighting stronger consumer spending, corporate hiring, housing market activity and signs of wage growth, the committee remained divided over when the conditions would be right to raise rates off the zero level. A number of members of the FOMC warned against a “premature decision.”

The minutes also noted “uncertainty about whether Greece and its official creditors would reach an agreement and about the likely pace of economic growth abroad, particularly in China and other emerging market economies.”

For now, especially if the Greece situation clears up, at least on an interim basis, it would seem a September rate hike is still in the cards. Should talks collapse, however, and China’s slide resume, all bets are off.

The IMF, through its World Economic Outlook, cut its global growth forecast for 2015 to 3.3% from its 3.5% projection issued in April, owing to the lack of growth in the U.S. in the first quarter. The 3.3% contrasts with 3.4% global growth for 2014, though the IMF looks for this to rebound to 3.8% in 2016.

The U.S. was reduced to 2.5% from an earlier forecast of 3.1%, with the IMF urging the Fed to hold off on raising interest rates until the first half of next year.

The IMF also kept its eurozone growth outlook for the year at 1.5% (France 1.2%, Germany 1.6%), but cut Japan to just 0.8% from 1.0%, and left China unchanged at 6.8%.

Europe and Asia

To set the stage for the tumultuous week over the Greek debt crisis, last Saturday, the day before the referendum on the bailout package, Greek Finance Minister Yanis Varoufakis accused Athens’ creditors of “terrorism,” telling Spain’s El Mundo newspaper that the country’s lenders wanted to “instill fear in people.”

The government urged voters to say ‘No’ to the terms of the last bailout proposal but opponents warned this would see Greece ejected from the eurozone.

Greece’s current bailout program had run out on June 30. Varoufakis said Greece’s banks would reopen on Tuesday, after being closed the prior week, regardless of the vote. That wasn’t to be the case. The banks are still closed...for two weeks now...and then the vote came in on Sunday and it was a stunner.

The polls leading up to the referendum had it too close to call. Virtually all of them at 44-43, 43-42...and then the No camp won by a resounding 61-39 margin; victorious in every region of the country.

It was a remarkable triumph for Greek Prime Minister Alexis Tsipras, and he said afterwards he was ready to resume talks immediately, “but this time the issue of debt will be on the negotiating table.”

Jeroen Dijsselbloem, the Dutch finance minister who chairs the eurogroup committee of his counterparts, warned: “This result is very regrettable for the future of Greece. For recovery of the Greek economy, difficult measures and reforms are inevitable. We will now wait for the initiatives of the Greek authorities.”

Then Varoufakis unexpectedly resigned as he said he was “made aware” he was unwelcome at future finance minister meetings.

Tsipras promised he would reach a better deal with creditors within 48 hours. This wasn’t to be the case.

Negotiations instead broke down. Tsipras was given a new deadline of Sunday when an emergency summit would be held, though he would need to produce a new proposal on Thursday so the finance ministers had time to analyze it before the meeting of eurozone leaders.

Wednesday, in a speech to the European Parliament, Tsipras said years of bailout cash thrown at Greece had actually gone to save “European banks” that had previously owned vast amounts of Greek debt, and that 5 ½ years of enforced austerity had driven the country into the ground.

European Central Bank Governing Council member Christian Noyer said the institution had stretched its rules “to the maximum” to aid Greece, and warned it would need to cut off funds to rapidly failing Greek banks while negotiations continued between Greece and its European creditors.

“In the last six months we maintained the lifeline set up for Greek banks and put enormous sums of money on the table,” Noyer told Europe 1 radio, according to Reuters. “Our rules oblige us to stop immediately at that point when there is no prospect of a political accord ...or at the point when the Greek banking system crumbles – which would happen if it enters generalized default on all its debts.”

Donald Tusk, the European Council president, said, “The stark reality is that we only have five days to find the ultimate agreement. Until now I have avoided talking about deadlines. But tonight I have to say it loud and clear – the final deadline ends this week.”

European Commission President Jean-Claude Juncker pounded the table, announcing he was against Greece’s exit from the eurozone – “Grexit” – but he had to work up plans for delivering humanitarian aid to Athens should this come to pass.

“I’m strongly against Grexit,” he said. “But I can’t prevent it if the Greek government is not doing what we expect the Greek government to do.”

But instead of a formal blueprint for a new proposal, the new Greek finance minister, Euclid Tsakalotos, spoke from handwritten notes about his country’s intentions to rein in costs and prop up its finances, while avoiding some of the tough austerity measures the creditors demanded.

European officials were incredulous.

German Chancellor Angela Merkel was pissed. “We respect the results of the referendum of one country, but we have 18 other countries where political decisions are also discussed. We have only a few days left to find a solution.”

Italian Prime Minister Matteo Renzi said, “The ball is in Greece’s court. Next Sunday the final meeting will take place on Greece...I am not pessimistic.”

Lithuanian President Dalia Grybauskaite complained: “With the Greek government it is every time manana.” And: “You can’t have one country enjoying a feast, overspending and having everyone else pay for it, including our citizens with much lower pensions and wages.”

So the leaders awaited Greece’s new offer on Thursday.

Greece owes the ECB 3.5bn euros on July 20 but has no money with which to pay.

The U.S. began clamoring for European leaders to grant some debt relief to Greece, which is what Tsipras has been angling for, and which has been a non-starter for most European leaders.

So on Thursday, the Greeks presented a package of economic reforms in return for a new cash infusion that appeared to give in to creditors’ demands for realistic spending cuts, pension savings and tax increases. In exchange, Greece is seeking a bailout of 53.5 billion euros, ($59 billion).

But the proposal mirrors that from the creditors on June 26, which was rejected by Greek voters in the referendum! Talk about theater of the absurd.

There is one truth in this whole fiasco. The last six months with the new Greek government have been a total waste of time, while the Greek people have suffered immeasurably.

The only difference between the Greeks’ new proposal and the creditors’ of June 26 is Tsipras continues to insist on debt relief, for which he has support from the U.S., the International Monetary Fund, and European Union President Donald Tusk. Even German Finance Minister Wolfgang Schaeuble conceded Greece would need some debt restructuring as part of any new loan program.

Speaking to a conference in Frankfurt, Schaeuble said: “Debt sustainability is not feasible without a haircut and I think the IMF is correct in saying that. (But) there cannot be a haircut because it would infringe the system of the European Union.”

So as I go to post Friday evening, we wait to see what happens Saturday and Sunday. Any deal still needs to be passed through various national parliaments, most importantly the German parliament, while Tsipras has to get it through his legislative body as well.*

*And he did so early Saturday morning. Tsipras admitted many proposals fell short of his party’s anti-austerity promises. But he said there was a “national duty to keep our people alive and in the eurozone.” [BBC]

If no agreement is reached by Sunday, including the release of some funds allowing Athens to pay back the ECB 3.5bn euro on July 20, it could lead to the collapse of Greek banks.

In the meantime, regardless of the outcome, the Greek economy is likely to continue to seize up. There has been zero consumer buying whatsoever of items such as clothing, but sales of expensive items, such as laptops and tablets, are surging in a kind of use it or lose it mentality among the better off.

Foreign suppliers are demanding upfront payments, while domestic tourism has collapsed. Foreign tourism is beginning to dry up, though anecdotal evidence is that foreigners are able to withdraw more than the 60 euro daily limit Greek citizens are limited to at the ATM.

The performance of European stock markets on Friday (up 2.5% to 3%, generally) tells you an agreement will be reached. Experience, however, warrants you sit back and wait to see what happens. You can’t assume anything.

As for the big issue I’ve been harping, political contagion....

Editorial / Wall Street Journal

“The danger is that if Mr. Tsipras succeeds, voters elsewhere in Europe will conclude there’s no reason to accept difficult economic reforms if creditors always capitulate.

“And sure enough, parties of the left across Europe are emerging as the Syriza Party’s most vociferous allies. Consider Spain, where the Syriza-like Podemos (“We Can”) party supported a ‘no’ vote and in a statement last week praised Mr. Tsipras for reacting to the “ultimatum and blackmail” of Greece’s creditors ‘in an exemplary manner.’

“Podemos added that ‘today in Europe there are two opposing camps: austerity and democracy, the government of the people or the government of markets and non-elected powers. We are with democracy. We are with the Greek people.’

“Spain has scheduled national elections in December, and Podemos is running close in the polls with the center-right People’s Party of Prime Minister Mariano Rajoy.....

“Then there’s Italy, where Beppe Grillo, leader of the anti-euro Five Star Movement, is arguing for a similar referendum on the euro.....

“The populists hope a Syriza negotiating victory will erode political support for the supply-side economic reforms they have long resisted on ideological grounds.

“The greatest threat to European prosperity – and the integrity of the eurozone – would be allowing them to succeed.”

Bret Stephens / Wall Street Journal

“On Sunday, Greece became only the second country in history – Argentina was the first – to make the transition from membership in the developed world to membership in the developing one. Now the question is: Who’s next?....

“Spain and Italy could easily follow. And so could we. The lesson of Greece is that nobody is immune from making it their model.”

Gideon Rachman / Financial Times

“Countries such as Ireland, Portugal, Spain and Italy have all made painful cuts in an effort to restore their public finances. The governments of all four countries have Syriza-style, populist parties breathing down their necks. The last thing they want is for Syriza to be seen to succeed. Indeed, the grim truth is that they actually have a vested interest in seeing Greece suffer – as a warning to their own voters, not to take the route of left-wing populism.”

Philip Stephens / Financial Times

“(The) big risk is of political contagion. Politics saved the euro between when economists everywhere predicted its imminent demise. Such professional gloomsters underestimated the willingness of Germany to bend and, Greece aside, the brutal determination of debtor nations to stay in the euro. Now it is politics that could bring the project crashing down.

“The guiding emotion behind Europe’s present discontents is a pervasive sense of powerlessness. The perception that they had been robbed of all say explains the choice of Greek voters in last weekend’s referendum. Voting No collided with the wish of most Greeks to keep the euro, but, as an act of desperation and defiance, it spoke to the frustrations of citizens across the continent.

“This is the mood that mainstream political leaders should fear. It has disinterred old nationalisms and served as the recruiting sergeant for the parties of the extremes now challenging Europe’s postwar centrist order. Marine Le Pen’s National Front in France, Beppe Grillo’s Five Star Movement in Italy, Podemos in Spain and Pegida in Germany – all peddle populism that feeds off the sense that ordinary citizens have become helpless bystanders in a world run for the benefit of the elites.

“Europe is assailed from all sides – by the revanchism of Russian President Vladimir Putin to the east, by the rise of violent Islamist extremism in the Middle East and by uncontrolled migration through the Maghreb countries on the other side of the Mediterranean. Stir in a few years of anxiety and a rising mistrust of globalization and it is not hard to explain rising nationalism....

“(Holding) on to Greece would be costly. Losing it would be seriously expensive.”

On the issue of immigration, over 63,000 migrants (mainly Syrians) have arrived in Greece this year. As The Economist points out, “the EU relies on ‘frontline’ states like Greece to fingerprint and register as many such people as possible. This cooperation, never solid, could break down entirely.”

---

Some economic tidbits....

--Unemployment in Greece came in at 25.6% in April, slightly lower than the revised rate of 25.8% the previous month. The youth unemployment rate is 53.2%, though this is down from 59.6% in April 2013. Deflation continued in May, with prices down 2.2% year over year.

--In the U.K. average home prices were up 1.7% in June over May, up 9.4% yoy owing mostly to a shortage of properties, according to mortgage lender Halifax.

--Eurostat released data on the population of the European Union...508.2 million as of Jan. 1, 2015. Germany leads at 81.2m, followed by France, 66.4m, the U.K. at 64.8m, and Italy with 60.8m.

Greece is at 10.8m, 2.1% of the EU total.

Turning to Asia and China, I’ve been saying the past few months in both this space and in a “Wall Street History” piece that things would end badly in China and indeed they are.

I wrote the following in WIR, 6/20/15:

“Turning to Asia, China’s Shanghai Composite benchmark index suffered its worst weekly loss, 13.3%, since June 2008. The market has been in a bubble, pure and simple. I’ve written a number of times it will end badly and there is far more damage to come, though I’m not saying it’s straight down further from here. 

“But this economy is headed into the crapper, equaling the color of its waterways and skies, and that will be very dangerous for the world as President Xi feels compelled to play the nationalism card.”

No need to change any of this three weeks later and I’m more convinced than ever that the dangers are greater when it comes to my comment that Xi will feel compelled to do something to distract attention from the market and a falling economy. He is losing face, unless the market stabilizes at higher levels, and that’s not good for anyone.

So some notes on the past week. The benchmark Shanghai Composite closed at 3507 on Wednesday, down 32% from the June 12 peak of 5166. 32% in three weeks! That’s a crash, sports fans. But then the government’s efforts to massively manipulate the market higher finally bore fruit on Thursday and Friday and off Thursday’s intraday low, we’re talking a rally of 15%! Overall, the Shanghai Composite rose 5.8% on Thursday, 4.5% Friday.

The problem has been 90 million individual investors have been making up 80% of the market and according to the Wall Street Journal, 2/3s of these newbies lack a high school diploma. The huge equity bubble that had seen stocks more than double over the course of a year was fueled by the world’s highest rate of margin debt.

Other Asian markets weren’t immune from the price action. Wednesday marked Hong Kong’s Hang Seng index’s worst day since October 2008.

Earlier in the week, Premier Li Keqiang, who is supposed to be in charge of China’s economic performance, was “very angry when he came back from a (European diplomatic initiative) and suddenly had to deal with a major problem of his own,” said one of the people familiar with the trip. [Financial Times]

Li’s return then became the catalyst for a series of emergency measures announced by Chinese brokers, fund managers and listed companies in an unprecedented attempt to support the market. As the FT wrote: “Most controversially, the Securities Association of China said it would launch an Rmb120bn ($19bn) stabilization fund in an attempt to drive the market back up to 4,500.” [The Shanghai closed at 3877 on Friday.]

China’s securities regulator also banned shareholders with large stakes in listed firms from selling for six months, the most drastic step to stem the rout, while “persuading” state-owned companies to buy back shares. The central bank was even buying stock.

Yup, desperate moves. At least 1,331 companies halted trading on mainland exchanges as the Shanghai Comp plunged 5.9% on Wednesday. With another 747 down by the 10 percent daily limit, sellers were thus locked out of 72 percent of the Chinese market.

But in the rally on Thursday, on the Shanghai Composite, 719 stocks rose, 642 of them at least the limit of 9.9 percent, while only seven fell.

As of last Saturday, 10 companies had suspended IPOs on the Shanghai Exchange and 18 others did so at the Shenzen. The move was ordered by the State Council, China’s cabinet.

There was this tidbit from the Wall Street Journal: “The total value of China’s stock market is still less than half that of the U.S. market, but the trading volume on many recent days has exceeded that of the rest of the world’s markets combined. Turnover is 10 times the level seen at the peak of the previous China bubble in 2007.”

Back to President Xi, it was two years ago in a historic party document that he pledged to let the market play a “decisive” role in all aspects of the economy.

As Tom Mitchell writes in the Financial Times: “That pledge lies at the core of Mr. Xi’s carefully crafted public image. It is an image that would have his country and the world believe that he is a transformative strongman – like Deng Xiaoping before him – with the power and the will to push through difficult economic reforms....

“The Chinese government’s response to the market sell-off has been one of the biggest tests of Mr. Xi’s reform credentials. From the evidence so far, they are not very convincing. In keeping with past practice, the Chinese government simply cannot resist the temptation to interfere in the workings of the country’s stock markets.

“As Junheng Li, an analyst with JL Warren Capital put it in a note to clients: ‘Free markets, and in this case a free functioning and independent capital market, are inconsistent with the control that the Communist party is striving for.’”

Two weeks ago the World Bank issued a warning for China and President Xi. As Bloomberg’s William Pesek wrote:

“By urging Beijing to clamp down on wasteful investment, unsustainable debt, and a shadow banking industry run amok, it was delivering a clear enough warning that President Xi should stop fanning China’s giant asset bubble. The World Bank was also implying China should get its own economic house in order before trying to change the global economy.

“ ‘China has reached a critical phase of its economic and social development path,’ the lender said. The economy ‘will need to be transformed to increase the efficiency of new investments and widen access to finance, enabling China to sustain solid growth and rebalance its economy.’”

Speaking of unsustainable debt, a recent McKinsey Global Institute report put total borrowing – by individuals, companies and government – at 282% of GDP in 2014.

Some China/Asia bits...

--According to the China Passenger Car Association, vehicle sales in June were down 3.2% year-on-year.

--China’s consumer price index ticked up to a year-on-year pace of 1.4% in June, from 1.2% in May, according to the government’s statistics office; well below the target of 3%. Producer prices, or what China calls factory-gate prices, fell a 40th consecutive month, 4.8% yoy.

--Machine orders are important for Japan and they came in at their best year-on-year growth since January 2014, up 19.3% from year ago levels in May; good news for Prime Minister Shinzo Abe.

--India’s factory output rose less than expected for May, up 2.7% from a year earlier.

Street Bytes

--Despite up and down days of 200+ points on Wednesday and Friday, stocks were virtually unchanged on the week, with the Dow Jones adding 0.2% to 17760, while the S&P 500 lost 0.16 of a single point, -0.01%, and Nasdaq declined 0.2%. The markets moved intraday on any word on Greece, mostly, after the opening was influenced by the prior night’s action in China.

--The New York Stock Exchange said an outage of more than three hours on Wednesday was caused by problems associated with a software upgrade, which caused communication disruptions between its trading software and other systems.

But while this was a black eye for the NYSE, it just wasn’t as big a deal in the grand scheme of things as it was made out to be by the national media. Trading was conducted on other exchanges and Nasdaq operated normally so investors could execute trades while the NYSE was down. Nonetheless, no doubt the timing was bad, what with United Airlines’ computers going down the same day, the Wall Street Journal’s site was hit, and of course the concerns over Greece and China.

--U.S. Treasury Yields

6-mo. 0.08% 2-yr. 0.64% 10-yr. 2.40% 30-yr. 3.19%

It was a volatile week but in the end, Treasuries, like stocks, were unchanged. The 10-year, for example, traded down to an intraday yield of 2.18%, but finished at the level you see, up 2 basis points on the week.

In the eurozone, like the 10-year Treasury, the 10-year German bund was all over the place, going from 0.79% to 0.64% (closing basis), then finishing the week at 0.89%, depending on whether the action between Greece and its creditors called for ‘risk on’ or ‘risk off.’

What I don’t understand is the enthusiasm for Spanish and Italian debt. The yield on Italy’s 10-year, for example, closed the week at 2.13% on optimism over Greece. It’s just not warranted.

Granted, the ECB was clearly in the market, buying up Italian crapola, but, remember. If we really do receive an ‘all-clear’ signal, that means the euro economy should then continue to improve and in that environment, yields across the board for the eurozone are way too low.

--Commodities have been plunging owing chiefly to concern over China’s economy and slumping demand.  The Bloomberg Commodity Index of 22 commodities from oil to natural gas hit its lowest level on a closing basis since late 2001 this week before rallying some. Copper prices hit a six-year low on Tuesday, with China accounting for 40% of copper demand. The closing low this week was $2.44 a pound, if you want to track it from here.  It finished the week at $2.50...

As for oil, it finished at its lowest weekly close since April 10 at $53.00. The International Energy Agency said in its monthly forecast that the “bottom of the market may still be ahead” and that the process will “extend well into 2016.”

The IEA said the oil market was “massively oversupplied” in the second quarter and remains so today.

Global oil supply surged by 550,000 barrels a day in June to 96.6m b/d, up 3.1m b/d from the same month a year ago.

“The market’s ability to absorb that oversupply is unlikely to last.”

Shale supply growth of 1.7m b/d in 2014 is forecast to slow to 900,000 b/d this year and 300,000 b/d in 2016.

Non-OPEC supply as a whole rose by 200,000 in June to 58.3m b/d.

An Iranian nuclear deal could of course unleash further new supplies onto the market.

--Interesting tidbit from the container ship industry, via consultant Drewry, which predicts it will be “lucky to break even this year” as shipping rates slump due to catastrophic overcapacity.

Drewry warns:

“A toxic mixture of overcapacity, weak demand and aggressive commercial pricing is threatening liner shipping industry profitability for the rest of 2015.”

Earlier in the year Drewry had forecast that container ship carriers like Maersk, China Shipping Container Lines and CMA CGM, would generate total profits of $8bn this year. But as the Financial Times reports, “However, freight rates on the four main East to West container trade routes collapsed 32 percent year on year in the second quarter, eating into profits so fiercely that Drewry says the industry can expect nothing better than to breakeven by the end of the year.”

The big lines have been in a race to increase the size of their fleets, but this is just compounding the “chronic problem of overcapacity and driving down rates to unprofitable levels.”

“Every quarter another 10 to 15 Ultra Large Container Vessels enter the market, each of which carries about 20,000 twenty foot equivalent containers.”

Good gawd, Bullwinkle. That’s a lot of extra capacity!

--Worldwide PC shipments fell 9.5%, year-on-year, in the second quarter, according to research firm Gartner. Rival researcher IDC, which doesn’t include tablets in its tally, pegs the decline at 11.8%.

Lenovo remained the world’s top PC vendor, with 20.3% share, followed by HP (18.5%) and Dell (14.5%), according to IDC.

--In addition to 18,000 job cuts Microsoft announced a year ago, the company said this week another 7,800 would be laid off, victims of the changing tech landscape and, specifically, Microsoft’s hardware group and the crappy smartphone business, which MSFT acquired last year from Nokia for $7.2bn.

In a statement, Satya Nadella, Microsoft’s CEO, said: “We are moving from a strategy to grow a standalone phone business to a strategy to grow and create a vibrant Windows ecosystem including our first-party device family.”

Nadella’s decision to “fundamentally restructure” its struggling smartphone business is a rebuke to the 2013 purchase of Nokia’s phone business under Steve Ballmer’s watch, his predecessor.

Microsoft now plans a $7.6bn write-down on the purchase.

--IBM announced it has made working versions of ultradense computer chips, “with roughly four times the capacity of today’s most powerful chips,” as reported by the New York Times’ John Markoff.

IBM is part of an international consortium manufacturing advanced computer chips in New York’s Hudson Valley, where IBM is investing $3 billion as part of a partnership with New York State, Samsung and equipment vendors.

--Shares in Alcoa, the U.S. aluminum group, kicked off second-quarter earnings on Wednesday with profits that fell short of expectations, though revenues beat, up 1 percent from a year earlier to $5.9bn.

The company has been hit by China’s flooding of the global markets with steel, aluminum and other industrial metals, which is driving down prices, while at the same seeing its sales boom to the auto market as car makers buy aluminum to make their cars lighter to comply with new fuel-efficiency standards.

Alcoa said automotive sheet revenue had increased “approximately 180 percent year-over-year.”

--PepsiCo shares rose as it reported second-quarter profits that topped analysts’ expectations, with strong North American snack and drinks sales lessening some of the impact of the stronger dollar on its overseas businesses.

Net revenue fell 6 percent from the same period last year but the $15.9 billion figure surpassed forecasts.

Developing and emerging market revenue grew 11 percent on an organic level, but owing to unfavorable foreign exchange translation, declined 13 percent, especially in relation to the Russian ruble and Venezuelan bolivar.

--Just the facts...Robert Pear / New York Times:

“Health insurance companies around the country are seeking rate increases of 20 percent to 40 percent or more, saying their new customers under the Affordable Care Act turned out to be sicker than expected. Federal officials say they are determined to see that the requests are scaled back.

“Blue Cross and Blue Shield plans – market leaders in many states – are seeking rate increases that average 23 percent in Illinois, 25 percent in North Carolina, 31 percent in Oklahoma, 36 percent in Tennessee and 54 percent in Minnesota, according to documents posted online by the federal government and state insurance commissioners and interviews with insurance executives.

“The Oregon insurance commissioner, Laura N. Cali, has just approved 2016 rate increases for companies that cover more than 220,000 people. Moda Health Plan, which has the largest enrollment in the state, received a 25 percent increase, and the second-largest plan, LifeWise, received a 33 percent increase.”

--General Motors Co. reported vehicle sales in China were flat for June vs. year ago levels. They dropped the previous two months.

--Ford Motor Co. announced it will assemble its small Ford Focus and C-Max wagon outside the U.S., ending production at a Michigan factory in 2018 in a setback to efforts to create a market for the vehicles in the U.S.

The Wayne, Michigan facility currently used for these models employs 4,400 workers.

Toyota Motor Corp. is shifting production of its Corolla compact to Mexico in coming years after three decades of manufacturing it in Canada. 

Lower gasoline prices are doing a number on demand for small cars and automakers have been cutting back production, which hits profits.

--The Russian car market’s collapse continued in June, with sales down 29.7 percent year-on-year, though this was less than the 37.6 percent fall in May, and 41 and 42.5 percent yoy declines in April and March, respectively.

According to the Association of European Businesses, a Moscow-based lobby group, Russia’s car market will shrink 36 percent this year overall. [Moscow Times]

--Chinese e-commerce giant Alibaba announced its senior executive, Patrick Liu, is in police custody over corruption allegations related to his previous job at internet company Tencent. Tencent said up to six former executives were under investigation in an ongoing graft probe.

Tencent is behind China’s popular messaging app, WeChat, plus it owns China’s largest music streaming service and has a large online gaming business, similar to that of Nintendo’s and Sony’s gaming units.

Alibaba said the arrest of Liu has nothing to do with its operation.

--Saudi Arabia’s prime sovereign wealth fund will invest $10 billion over the next five years, largely in the Russian economy, according to Interfax news agency.

Projects in Russia will target the infrastructure, agriculture, medicine, logistics, retail and real estate.

--Barclays Plc Chairman John McFarlane, just three months into the job, fired CEO Antony Jenkins. McFarlane vowed to tackle a “cumbersome, bureaucratic” bank through deeper cost cuts. Jenkins took over from Bob Diamond in 2012 after the bank was fined for manipulating benchmark interest rates. 

Some say Jenkins did an okay job, but it wasn’t enough for McFarlane.

--If ever there was a case of ‘wait 24 hours,’ it’s that of Jared Fogle of Subway fame. Investigators raided his Indiana home, seizing electronics in a search Subway said might be linked to an earlier arrest of someone who once worked for him.

Fogle has not been arrested or charged with any crime, but Subway said it was parting ways with him. The word used was the two mutually agreed to “suspend” their relationship, with the statement adding, “Jared continues to cooperate with authorities, and he expects no actions to be forthcoming.”

It seems the executive director of the Jared Foundation – Fogle’s organization that aspires to combat childhood obesity – was arrested in Indianapolis on federal child pornography charges. [The guy was charged with seven counts of production of child pornography, according to USA TODAY. He also attempted suicide while in custody and is apparently on life support.]

I like Subway. I wouldn’t expect the chain to suffer much assuming Jared isn’t charged with anything. But if he is, the toll could be considerable.

Of bigger concern to Subway should be the proliferation of regional sub shops like Jersey Mike’s, which just opened one in New Providence, NJ, across the street from the Subway I frequent. Jersey Mike’s has an outstanding product, albeit it’s more expensive.

But it’s the same principle as all the specialty burger chains eating into the likes of McDonald’s.

[After I wrote this up, I received an email from Bloomberg.com with an extensive story on Subway and its issues. I forgot sales in 2014 declined 3% over the previous year. Anyway, it’s easily findable on Bloomberg.com if you want something to read with your sub.]

--Loved this bit out of the New York Post by Kate Sheehy:

“After his computer crashed, a broke Brooklyn rapper spent four months in the Apple store in SoHo – singing his album into a display recorder.

“Prince Harvey, 25, told the website the Daily Beast that he spent every weekday for 16 weeks straight singing, humming and rapping into a floor computer at the Manhattan store on Prince Street.

“Harvey said he managed to pull off the crooning coup with the help of two particularly understanding store employees...

“Harvey said he managed to save his work at the end of each day – dodging the store’s end-of-day policy of wiping its display computers’ memory – by hiding files in the devices’ trash.

“He said he also relied on email and a thumb drive to store his vocals.”

His album is due out July 26. “PHATASS,” for “Prince Harvey At The Apple Store: SoHo.”

--And there’s this. In 2013, Hostess, the bakery giant behind Twinkies, Ding Dongs, and Ho Hos, was bankrupt and on the verge of laying off 18,000 workers, when it was bought for $410 million by a partnership between private-equity giant Apollo Global Management and billionaire turnaround artist, C. Dean Metropoulos, known as “Mr. Shelf Space” for his revival of brands like Vlasic and Chef Boyardee.

But as Drew Harwell of the Washington Post reports, now Hostess Brands is doing so well it’s been turning down offers of $2 billion.

Now Reuters is reporting Hostess could head to Wall Street with an IPO valuing the company around $2.5 billion. Metropoulos, though, is beating back such rumors, saying “it was too early to consider a sale or IPO at this time.”

Sales aren’t back to pre-bankruptcy levels, but jobs have been slashed, while heavy investments in automation have been made, along with an aggressive ad campaign. [For those reading this saying the loss of jobs isn’t right...au contraire...it’s the bloated structure that helped take the company under in the first place. Some of the work rules were nuts, as I know I mentioned in this space, at one point or another.]

--Yahoo announced it is entering the daily fantasy sports market, which has been booming. Yahoo will start with Major League Baseball and expand to other professional sports as their seasons begin.

An estimated 57 million people in the United States and Canada currently participate in fantasy sports.

Yahoo said tens of millions of people already play Yahoo Fantasy Sports, spending an average of 500 minutes a month at the site, with many of these playing daily games elsewhere.

--As reported by Crain’s New York Business, the average sale price for a Brooklyn home reached a record $788,529 during the second quarter, owing to historically low inventory and a lack of new product being built and tight credit conditions.

Foreign Affairs

Iran: No agreement on Iran’s nuclear agreement was reached by the latest deadline as Washington refused to budge on Tehran’s demands for immediate sanctions relief. What had been a June 30 deadline, morphed into a July 7 deadline, then July 9, and now July 13.

U.S. Secretary of State John Kerry threatened to walk away from the talks as he signaled an agreement wouldn’t be concluded by Friday – which could impede American efforts to quickly implement any deal.

“This is not open-ended,” Kerry told reporters on Thursday outside the Viennese palace hosting the negotiations. “We can’t wait forever for the decision to be made. If the tough decisions don’t get made, we are absolutely prepared to call an end to this process.”

On Tuesday, President Obama promised Senate Democrats the same response to Iranian intransigence, that time was running out.

Under U.S. law, the seven nations negotiating in Vienna needed to complete the accord by early Friday to avoid invoking a 60-day congressional review period during which President Obama cannot waive sanctions on Iran. Had they met the target, the review period was just 30 days.

It’s possible the talks could be pushed off until September.

“We will not rush and we will not be rushed,” Kerry said. “We would not be here continuing to negotiate just for the sake of negotiating. We’re here because we believe we are making real progress toward a comprehensive deal,” he said. But “we are not going to sit at the negotiating table forever.”

Fars, Iran’s semi-official news agency, quoted an unnamed source as saying, “While the Iranian team is showing flexibility, the Americans are refusing to accept Iran’s obvious right, particularly on sanctions.”

Iran is demanding prompt easing of sanctions for nuclear concessions.

But there is also the critical issue surrounding the future inspection regime for Iran’s nuclear facilities – to be overseen by the International Atomic Energy Agency.

And as discussions dragged on this week, both Russia and China said they were open to the arms embargo being lifted, while others in the P5+1 (that being the U.S., Britain, France and Germany) are not.

Russian Foreign Minister Sergei Lavrov told reporters Thursday, the arms embargo “should be among the first steps taken in lifting the sanctions regime. We advocate the removal of the weapons embargo as soon as possible, especially as Iran is a supporter of the fight against Islamic State.”

Talk about a non-starter with Congress. Russia has already announced plans to start supplying S-300 anti-aircraft defense systems to Iran this year over the objections of the U.S. and Israel, ending a self-imposed ban from 2010.

According to one estimate, Russia stands to take in $7 billion from arms sales to Iran over the next decade.

Bottom line, at week’s end the position of the hawks in Washington has been strengthened.

Reuel Marc Gerecht and Mark Dubowitz / Wall Street Journal

“The lines are clearly drawn in Washington on President Obama’s plan for a nuclear deal with Iran. As negotiations for a final agreement continue well past their June 30 deadline, most Republicans oppose the deal and Democrats will not block it.

“Many critics claim to believe that a ‘good deal,’ which would permanently dismantle the clerical regime’s capacity to construct nuclear weapons, is still possible if Mr. Obama would augment diplomacy with the threat of more sanctions and the use of force. Although these critics accurately highlight the framework’s serious faults, they also make a mistake: More sanctions and threats of military raids now are unlikely to thwart the mullahs’ nuclear designs. We will never know whether more crippling sanctions and force could have cracked the clerical regime. We do know that the president sought the opposite path even before American and Iranian diplomats began negotiating in Europe.

“But hawks who believe that airstrikes are the only possible option for stopping an Iranian nuke should welcome a deal perhaps more than anyone. This is because the Joint Comprehensive Plan of Action is tailor-made to set Washington on a collision course with Tehran. The plan leaves the Islamic Republic as a threshold nuclear-weapons state and in the short-term insulates the mullahs’ regional behavior from serious American reproach.

“To imagine such a deal working is to imagine the Islamic Republic without its revolutionary faith. So Mr. Obama’s deal-making is in effect establishing the necessary conditions for military action after January 2017, when a new president takes office.”

Iranian Foreign Minister Javad Zarif / Financial Times

“We have come a long way over the past 21 months of negotiations over my country’s nuclear energy program. A very long way. Never have Iran and its counterparts been this close to a final accord. But success is far from assured....

“To move forward, sincerity – and changed mindsets – must prevail. Getting to ‘yes’ necessitates the courage to take the higher ground, sufficient fortitude to be flexible, the audacity to shatter old habits, and most of all, a vision for a better future....

“There is growing acknowledgement that attempting to coerce a proud civilization into submission only leads to further conflict, resentment and hostility. This particularly applies in the case of the unjust and illegal sanctions imposed on the Iranian people, ostensibly to put a halt to their aspiration to enjoy peaceful nuclear energy. This sanctions regime – the most indiscriminate imposed on any nation in human history – has been met with unwavering determination. At the outset of this crisis, Iran had less than 200 centrifuges; today, it has 20,000. And so, my counterparts have rightfully opted for the negotiating table. But they still need to make the critical choice between an agreement and coercion.”

Oh brother. World blows. Film at eleven.

Iraq/ISIS/Syria: The United Nations updated the refugee picture resulting from Syria’s civil war and more than 4 million have now fled the country.

“This is the biggest refugee population from a single conflict in a generation,” U.N. High Commissioner for Refugees Antonio Guterres said in a statement. “It is a population that needs the support of the world but is instead living in dire conditions and sinking deeper into poverty.”

More than 24,000 arrived in Turkey from Syria in June alone, driving that country’s refugee population to more than 1.8 million, the largest in the world.

1.1 million Syrian refugees are in Lebanon, which represents 20% of that nation’s total population; 629,000 are in Jordan; nearly 250,000 in Iraq; 132,000 in Egypt; and 24,000 elsewhere in Northern Africa.

And all the above doesn’t include the 7.6 million displaced within Syria, according to U.N. estimates.

Further, less than a quarter of the $5.5 billion that UNHCR estimates is needed for programs supporting refugees has been raised. Think donor fatigue. [Alexandra Zavins / Los Angeles Times]

This is all on President Obama, as I’ve said for years. I’ve documented it every step of the way and correctly said in August 2012, “we lost.”

Meanwhile, a video apparently released by ISIS showed 25 men being shot dead in the ancient city of Palmyra, in Syria. IS said the men were soldiers captured in the city of Homs. They were shot dead inside Palmyra’s amphitheater. [ISIS also destroyed more artifacts in Palmyra and elsewhere.]

We also learned that the slaughter perpetrated by ISIS in Kobane about ten days ago resulted in the deaths of 262 civilians, not the last reported estimate of 200. It was one of the worst massacres of the war. Some attackers killed entire families in their homes.

The U.N. now estimates 235,000 have been killed in Syria’s civil war.

Republican presidential candidate Sen. Lindsey Graham (S.C.), while a true longshot, does continue to have influence in the Senate on the foreign policy front and he said this week some 20,000 U.S. troops are needed in Iraq and Syria, alongside a regional army from Saudi Arabia, Turkey and Egypt, to defeat the Islamic State.

“Not because I like war, [or] because I want war... I’ve learned a lot from [President George W. Bush’s] mistakes, my mistakes, Obama’s mistakes,” Graham said in a speech on Wednesday. But he said there’s no other way to defeat the “religious Nazis” of ISIS. “There is no alternative to going in on the ground and pulling the caliphate up by the roots. If that scares you, don’t vote for me.” [Molly O’Toole / Defense One]

But while Graham is on one end of the debate in the U.S., the other extreme is represented by what we learned this week; that the $500 million program to train and equip some 15,000 Syrian fighters over three years has only found 60...60...suitable for training.

Monday, in an appearance at the Pentagon, President Obama gave an upbeat progress report on the fight against Islamic State, promising an intensified campaign against ISIS leadership in the likes of Raqqa, its de facto capital in Syria.

But Gen. Martin Dempsey, chairman of the Joint Chiefs of Staff, testified this week that Israel and Jordan “very much believe [in] the possibility” that the Assad regime could soon collapse, touching off “a foot race” of al-Qaeda and Islamic State forces “converging on Damascus.”

Editorial / Wall Street Journal

“Mr. Obama concluded by observing that the U.S. has faced ‘more formidable challenges’ in the past, including fascism and communism. Yes it has, especially when emerging threats were left to fester by Presidents who lacked the political will to confront them. By continuing to underrate the threat of Islamic radicalism, Mr. Obama risks repeating that history.”

Benny Avni / New York Post

“ ‘Ideologies are not defeated with guns; they’re defeated by better ideas.’

“Add that, along with ‘leading from behind’ and disappearing ‘red lines,’ to the list of gems that will forever define President Obama’s era in national security.

“That line, from Obama’s televised Pentagon visit Monday on his administration’s anti-ISIS strategy, quickly became a social-media meme.

“Can we beat ISIS by presenting ‘a more attractive and more compelling vision’? That’s how Obama put it while assessing progress in our undeclared, undefined non-war against a nonstate that has nothing to do with Islam (and yet kicks our ass all over the place).

“Come on. This isn’t Debate Club.

“ISIS is about mass executions, throat-slashing, flesh-burning or pool-drowning in steel cages. They’re not into contests that can be resolved in a West Side Story-type dance-off between the Jets and the Sharks.

“We can’t bring a mouth to a knife fight.

“Nor should we....

“Obama isn’t the first U.S. president who shies away from foreign wars. Sooner or later, as the menace from Islamists of all stripes grows, America will be forced to join the battle. The longer we make up excuses for not doing so, the more difficult that future battle will be.”

Egypt: Egyptian warplanes killed 25 Islamist militants in North Sinai last weekend, as President Sisi visited the province following a major escalation of the conflict there.

Tunisia: All British nationals have been urged to leave here because “a further terrorist attack is highly likely,” Foreign Secretary Philip Hammond said. 30 Britons were among the 38 tourists killed in an attack in Tunisia last month.

The Foreign Office estimates 2,500 to 3,000 UK tourists are currently in Tunisia and a few hundred British residents.

Saudi Arabia: Prince Saud al Faisal, who was the world’s longest-serving foreign minister with 40 years in the post, died Thursday. He was 75. Faisal had retired in April.

His tenure spanned from Lebanon’s civil war in the 1970s and 1980s, to the 1990 Iraqi invasion of Kuwait, on through 9/11, the U.S.-led invasion of Iraq, the Arab Spring uprisings, Syria’s civil war and the spread of ISIS.

China: Last weekend, on the campaign trail, Hillary Clinton made the statement: “China’s military is growing very quickly, and they are establishing military installations that again threaten countries we have treaties with....Make no mistake, [the Chinese] know they’re in competition. And they’re going to do everything they can to win.”

Two senior Chinese military leaders called on the People’s Liberation Army to beef up its naval capacity and combat readiness amid a higher risk of “warfare on the doorstep.”

In an article published in People’s Daily, the Communist Party’s flagship mouthpiece, General Cai Yingting and General Zheng Weiping said the PLA should learn lessons from the war with Japan that ended 70 years ago.

“The risk of chaos and warfare on our doorstep has increased. We should be more vigilant...and put combat preparedness at the front of our minds.”

On a different topic, Nectar Gan / South China Morning Post:

“China’s top legislature has published a draft cybersecurity law that would cement government control over the internet and data, rules analysts said could further limit online debate and affect multinational companies doing business in China.

“The 68-article law was drafted to ‘safeguard cyberspace sovereignty and national security’ from the threat of cyberattack, cybercrime and the spread of ‘harmful’ information online, according to a statement by the National People’s Congress.”

The draft “grants the government the right to restrict internet access in places where public security is threatened....

“If the draft goes through, censors would have the right to delete information that was counter to laws and regulations, and to stop that information from entering China.”

Operators would require users to log in with their real names or face substantial fines.

I’ll log in as Barry Bonds. If they then mistakenly go after him, sorry, Barry.

North Korea: South Korean officials estimate Kim Jong Un has executed 70 officials since taking power in late 2011 in a “reign of terror” that far exceeds that of his father’s rule. South Korea’s foreign minister said Kim Jong Il executed just 10 during his first years in power.

Bosnia: The president of the Serb-run part of Bosnia claimed Saturday that the Srebrenica genocide was a “lie,” a week ahead of the 20th anniversary of the slaughter of over 8,000. Milorad Dodik denounced a British bid to pass a United Nations resolution on the genocidal killing of the area’s male Muslim population in 1995.

“The goal is to register at the U.N., on the base of false declarations and reports, that a genocide was committed against Muslims,” Dodik, the leader of Republika Srpska, told hundreds of people gathered at the village of Bratunac near Srebrenica.

“Everything is a recurrent lie.” His speech was broadcast live on the Bosnian Serb public television channel.

Srebrenica was the worst atrocity in Europe since World War II and has been qualified as a genocide by two international courts.

Russia vetoed the U.N. resolution calling it a genocide...in case you wanted another example of just how awful relations are between Moscow and the West these days. British envoy Peter Wilson said, “Denial is the final insult to the victims.”

The anniversary is Saturday. It was genocide, Dodik!

Russia: In his confirmation hearing, Gen. Joseph Dunford, who is slated to replace Gen. Martin Dempsey as chairman of the Joint Chiefs of Staff, said the prime existential threat to the U.S. was Russia. The State Department tried to dial this back.

Random Musings

--How do you handle a problem like The Do-nald? How do you keep him out of the de-bates?

Not easily, is the answer to both. As reported by the Washington Post, the head of the Republican National Committee, Chairman Reince Priebus, called Trump on Wednesday and the two apparently spent nearly an hour on the phone, as Priebus urged Trump to tone down his inflammatory rhetoric about immigration. [Trump’s account of the call was far different.] 

Look, I’ve long been amused by Trump, and when he brings up topics like China and the deteriorating U.S. nuclear deterrent, I say, ‘great...glad someone is talking about these issues.’

But I want to win an election in 2016 and Republicans aren’t going anywhere without capturing more of the Hispanic vote than Mitt Romney did...27%. The next few decades of presidential elections are all about demographics and if you’re a Republican, the trends are very much against you. That’s a fact. [It would also be helpful if the Republican nominee could capture 11-12% of the African-American vote rather than 8% or 9%.]

Trump’s comment on Mexicans is indeed deeply hurting the GOP brand, let alone the RNC’s outreach program.

As noted in the Washington Post Thursday, “One GOP state party chairman, speaking on the condition of anonymity so he could be frank, said of Trump: ‘He’s already done some damage, and it could be substantial going forward. He could be one of the reasons we lose. It’s that serious. There’s nothing we can do about it, and that’s what’s so scary.’”

My best friend in the building where I live, the ‘super,’ Luis, is from Ecuador. I’ve been living here over five years and we have many a political discussion, Luis knowing what I do.

Needless to say, he was ticked by Trump’s comments and said not one of his friends would obviously support Trump after this, but it’s unclear if they would contemplate voting for, say, Jeb Bush or Marco Rubio. There is still time, but The Donald is going to be around at least into next winter, it seems.

For his part, Jeb Bush wasn’t happy. “To make these extraordinarily ugly kind of comments is not reflective of the Republican Party. He’s doing this...to inflame and incite and to draw attention, which seems to be the organizing principle of his campaign.”

Asked if he took Trump’s comments personally, given his wife is Mexican, Bush said, “Yeah, of course it – absolutely – and a lot of other people But politically, we’re going to win when we’re hopeful and optimistic and big and broad rather than, grrrr, just angry all the time.”

Trump then fired back in a statement: “Today, Jeb Bush once again proves that he is out of touch with the American people....In fact, Jeb believe illegal immigrants who break our laws when they cross our border come ‘out of love.’”

There is no doubting Trump’s clout. An analysis by Zignal labs for the Washington Post found that 48 percent of all social-media and traditional-media conversation about politics last week was about The Donald.

And in a Public Policy Polling survey of North Carolina Republicans, Trump leads there with 16 percent.

As for the business opportunities Trump is losing out on, I submit the biggest hit he could take, and the one that would get the most publicity, would be for the PGA Tour, in conjunction with the World Golf Championships, to pull the WGC event in March at Trump Doral in Miami. That’s a huge tournament, as opposed to the minor ones yanked thus far. I’ve thought a lot about this one...how NBC could possibly save face while having the event there...such as working out a deal where Trump himself is perhaps shown on camera, with Johnny Miller and Dan Hicks in the booth just acknowledging his presence but nothing else. I mean the whole thing would be immensely sensitive, especially if Trump is still in the race.

Super Tuesday, for example, is tentatively slated for March 1 and normally Doral would be the following weekend.

For the Tour to back out...and sponsor Cadillac is probably the deciding factor...you are talking about scrambling big time to find a new venue. This isn’t changing the Grand Slam of Golf event, or some ESPN celebrity tournament. It’s much more complicated in terms of staging.

So we should know soon on this one. It’s huge.

And back to the politics of Trump, yes, there is a big fear he could run as an independent and pick up 8 to 10 percent (more John Anderson-like rather than Ross Perot-like, the latter taking 19% in 1992, killing George H.W. Bush). But Trump’s 8-10 would be enough to take down the Republican nominee, unless you tell me Hillary is not the Democratic nominee because she is shortly overwhelmed by scandals prior to primary season.

[In 1992, recall the popular vote was Clinton 43%, Bush 37%, Perot 19%; though Perot won no electoral votes. In 1980, Reagan defeated Carter 51-41 in the popular vote, with Anderson getting just 7%. But forget who the players may be in 2016 and the geopolitical backdrop. The demographics are drastically different today than in 1980 and Trump taking just 8-10 percent would kill the elephants’ candidate.]

--Hillary Clinton gave her first national interview of 2015 to CNN’s Brianna Keilar and told Keilar that “People should and do trust me.” Clinton blamed the “barrage of attacks that are largely fomented by and coming from the right” for fueling a perception that trust is an area of vulnerability for her.

Talking about the email controversy, Clinton claimed that “everything I did was permitted” because “there was no law...there was no regulation.” She also threw Colin Powell under the bus, saying he did the same thing in using a personal email account, but there is absolutely no comparison I’m aware of with what Powell was doing and Clinton’s actions.

Glenn Kessler / Washington Post

“In 2009, just eight months after Clinton became secretary of state, the U.S. Code of federal regulations on handling electronic records was updated: ‘Agencies that allow employees to send and receive official electronic mail messages using a system not operated by the agency must ensure that Federal records sent or received on such systems are preserved in the appropriate agency record-keeping system.’ The responsibility for making and preserving the records is assigned to ‘the head of each federal agency.’

“On top of that, when Clinton was secretary, a cable went out under her signature warning employees to ‘avoid conducting official Department business from your personal e-mail accounts.’

“The issue thus becomes whether Clinton cooperated in the spirit of the laws and rules in place at the time. Clinton suggests that ‘when I mailed anybody in the government, it would go into the government system’ and so that signified compliance with the requirement to maintain federal records. But her practice made it difficult to locate records in response to specific requests, because Clinton’s e-mail would be in another official’s inbox – but would not exist in the federal system as part of Clinton’s outbox. An official’s outbox would be the first place that people seeking records would look.

“In fact, let’s recall that the State Department contacted Clinton, seeking copies of her e-mails, precisely because officials were unable to locate e-mails in response to queries from the House Select Committee on Benghazi....

“In reality, Clinton’s decision to use a private e-mail system for official business was highly unusual and flouted State Department procedures, even if not expressly prohibited by law at the time. Moreover, while she claims ‘everything I did was permitted,’ she appears to have not complied with the requirement to turn over her business-related e-mails before she left government service. That’s a major misstep that she has not acknowledged.”

--Back to the immigration issue, Clinton said in her CNN interview that the entire GOP field was in essence anti-immigrant. “They’re on a spectrum of hostility, which I think is really regrettable in a nation of immigrants like ours.” C’mon. That’s just not true, beyond two of the 19 or so declared and soon-to-declare candidates.

As for the trust issue, A Quinnipiac University Swing State poll* found in Florida, for example, 51% of voters hold a negative view of Clinton, compared to 43% who feel she is trustworthy. In Ohio the margin is 53% don’t find her trustworthy, only 40% do. In Pennsylvania the gap is 54-40.

*I cited this one before but in light of her interview, it bears repeating.

--Michael Goodwin of the New York Post had an interesting take on Vermont Sen. Bernie Sanders and his insurgent candidacy for the Democratic nomination. It reminds Goodwin of Eugene McCarthy in 1968, and that is indeed a good analogy, at least as of July.

“LBJ looked certain to be re-elected in 1968, until a Minnesota senator with a penchant for poetry named Eugene McCarthy shocked the world by getting 42 percent in the New Hampshire primary, against Johnson’s 49 percent. Less than three weeks later, the president famously declared that ‘I shall not seek, and I will not accept, the nomination of my party for another term as your president.’....

“The news that Sanders is surging in polls in Iowa and New Hampshire must be sending shivers through Clinton’s camp. Even though Hillary still leads in the 2016 first states, the gap has narrowed so much that her surrogates are lowering expectations, saying Sanders might win some showdowns.

“That’s amazing enough, but her problem could be even more serious. Echoing the Mark Twain line that ‘history doesn’t repeat itself, but it does rhyme.’....

“Sanders, a self-described democrat socialist, doesn’t need to win the nomination – and he probably won’t – to block Clinton. He only need show that she’s not inevitable, and that there is a motivated, significant piece of the party that rejects her.

“That is exactly what he’s doing, as large enthusiastic crowds greet him wherever he goes. If she looks beatable, more viable candidates will find the courage to run.”

Remember, McCarthy’s candidacy soon flamed out in ’68, but his early performance, and LBJ’s declaration, had Hubert Humphrey and Robert Kennedy entering the race.

Goodwin doesn’t mention Joe Biden, but he didn’t need to. Biden can’t wait to next February to see the numbers roll in in Iowa and New Hampshire, but those clamoring for the vice president to enter the race have been given more than enough ammunition through the early poll data on Sanders to convince their favored son to go for it.

--Jeb Bush has raised more than $114 million for his 2016 presidential run; $11.4 million for his official campaign fund, and $103 million for the super-PAC supporting his candidacy, Right To Rise USA. Super-PACS, as opposed to direct campaign donations, which are capped, can accept unlimited amounts of money so long as they don’t coordinate directly with the campaign.

--One thing seems clear in the case of Juan Francisco Lopez Sanchez killing Kate Steinle on a San Francisco pier. City officials released Sanchez, the Mexican national, from jail in April, ignoring an Immigration and Customs Enforcement request to detain him so deportation proceedings could begin. California Sen. Dianne Feinstein was among those harshly criticizing the city’s policy of refusing to cooperate with federal immigration officials when they request help in detaining a suspect thought to be in the country illegally.

Sanchez has served more than 17 years in prison for entering the country illegally and also has four felony drug convictions.

Feinstein said: “I strongly believe that an undocumented individual, convicted of multiple felonies and with a detainer request from ICE, should not have been released. We should focus on deporting convicted criminals, not setting them loose on our streets.”

San Francisco Sheriff Ross Mirkarimi said he will continue to ignore ICE detainer requests, and that instead ICE could have obtained a warrant or court order to keep Sanchez in custody.

--FBI Director James Comey conceded the breach of the Office of Personnel Management was “enormous” and that the White House would be announcing that “millions and millions” of government background investigation records – dating back 20 years – were stolen by hackers.

The next day the OPM disclosed hackers stole 19.7 million background investigation forms and 1.1 million fingerprint records. Just a wee bit more than the initial estimate of 4.2 million personnel files we were first told had been compromised.

Comey told the Senate Intelligence Committee his own personal data was stolen. Previously, James Clapper, director of National Intelligence, said the cyberattack was likely carried out by Chinese hackers.

Editorial / Washington Post

“President Obama ought to be far more steamed about the break-ins than he appears. The OPM director, Katherine Archuleta*...confronted with questions on Capitol Hill, refused to shoulder any blame. ‘I don’t believe anyone’ at the agency ‘is personally responsible,’ she said. ‘If there is anyone to blame, it is the perpetrators.’...

“The Chinese would like to have a smooth, harmonious summit when presidents Xi Jinping and Obama meet in September. Mr. Obama should put China on notice today that such theft is inconsistent with harmony at the table – and he’s mad as hell about it. If that doesn’t get Beijing’s attention, the United States should begin preparations for retaliation aimed specifically at the alleged Chinese attackers. Not all of the broad U.S.-China bilateral relationship needs to be put at risk, but the thieves must feel the heat. It is the only way to deter future attacks.”

*Archuleta handed in her resignation today.

Even Hillary said last weekend, China seemed intent on “hacking into everything that doesn’t move in America.”

--The U.S. Army is planning to reduce the size of its force by 40,000 soldiers over the next two years, which would see the U.S. troop level drop to 450,000 at the end of 2017 from a recent high of 570,000 in 2012.

The timing of this couldn’t be worse. Cut weapons systems, not troops.

--South Carolina’s Senate passed a bill to remove the Confederate flag from the state capitol in Columbia by a 36-3 margin on Monday.   The House then authorized its removal by a comfortable margin, 94-20, and the flag was removed on Friday. 

But the battle over the Confederate flag exploded in the U.S. House as Democrats accused Republicans of catering to their southern conservative bloc in initially promoting an amendment that some viewed as pro-Confederate; the ability to fly the “Battle Flag” in federal cemeteries for veterans.

It’s also now become about the removal of statues of Jefferson Davis and other Confederates that are prominently displayed in some corners of the Capitol, and it will just spread from there.

Yes, this debate in actuality is just getting started and I’ll be weighing in as I see fit. Hint: I’ve been to the place where J.E.B. Stuart was killed. If that memorial was removed, I’d be rather upset. It’s about history, folks.

For now I can’t help but note the observations of William McGurn, writing in the Wall Street Journal.

To wit, it wasn’t Republicans who gave states’ rights a bad name.

“Start with the Old South itself: Even the most cursory glance at history confirms that those who met the civil-rights movement with pickax handles or fire hoses were almost to a man Democrats, from Govs. George Wallace (Alabama), Lester Maddox (Georgia), Ross Barnett (Mississippi), and Orval Faubus (Arkansas) to Bull Connor (commissioner of public safety in Birmingham, Ala.) and Jim Clark (an Alabama county sheriff).

“That was the past, of course. But the present also offers little comfort. Because it is becoming ever clearer that the pet government programs favored by liberal Democrats for African-Americans simply aren’t working.

“Meanwhile, the Republican South is working. No one would claim it has eliminated racism. But a recent study by the Center for Opportunity Urbanism, for example, is striking. The study reports that of the 15 best cities for minorities (Asian-Americans and Hispanic Americans as well as African-Americans), 13 are in states of the old Confederacy.

“Black migration reflects this reality. While black Americans may not be pulling the Republican lever inside the voting booth, in their great reverse migration back to the South they are voting with their feet for Republican policies.”

--Baltimore Mayor Stephanie Rawlings-Blake replaced her police commissioner, Anthony Batts, citing “utmost urgency” to stop a surge in violence.

“We cannot grow Baltimore without making our city a safer place to live,” she said on Thursday. “We need a change.... The people of Baltimore deserve better.”

Deputy Police Commissioner Kevin Davis was named interim commissioner.

Baltimore saw the highest number of murders in May in 25 years, 42, and it has seen another 31 in the past month.

--The death rate from heroin and prescription opioid pain-killers overdoses nearly quadrupled between 2002 and 2013, the Centers for Disease Control and Prevention reported Tuesday.

This week, Baltimore officials said there have been “39 overdose deaths in the city linked to fentanyl-laced heroin in the first quarter of the year, up from 14 in the same time last year, according to the city health department." [Meredith Cohn / Baltimore Sun]

--Gun violence last weekend in Chicago left a staggering 10 dead, (50 wounded!), including a 7-year-old boy, Amari Brown. A gang member was targeting Brown’s father, also a gang member, when he was hit in the chest and killed.

But last year over the holiday weekend, according to the Chicago Tribune, 16 were shot dead. Why that’s terrific progress, typed the editor, sarcastically.

--Boy, this is one headache President Obama doesn’t want. A sexual assault awareness group called on Obama to strip Bill Cosby of his Presidential Medal of Freedom after this week’s revelations.

No president has ever revoked the award, though Obama could do it with the stroke of a pen. But there are all kinds of legal ramifications.

President George W. Bush awarded the medal to Cosby in 2002 in a class that included Hank Aaron, Fred Rogers and Nancy Reagan. [USA TODAY]

--The town of Kitzingen, northern Bavaria, hit 104 Fahrenheit on Sunday, which represents the highest temperature in Germany since measurements began in 1881. 

But in Australia, Saturday is bringing some of the coldest weather in 60 years; seriously, the “Antarctic vortex.” Snow in the mountains, 40s in Sydney.

--Congratulations to our own Dr. Bortrum, 87 years young, who shot a sterling 33 at Trump Summit’s par-3. [Err, Summit Municipal.] This is not a pitch-and-putt course. Damn good job. His best in a few years, he says.

--Finally, Charles Krauthammer / Washington Post:

“We need a pick-me-up. Amid the vandalizing of Palmyra, the imminent extinction of the northern white rhino, the disarray threatening Europe’s most ambitious attempt ever at peaceful unification – amid plague and pestilence and, by God, in the middle of Shark Week – where can humanity turn for uplift?

“Meet New Horizons, arriving at Pluto on July 14. Small and light, the fastest spacecraft ever launched, it left Earth with such velocity that it shot past our moon in nine hours. A speeding bullet the size of a Steinway, it has flown 9 ½ years to the outer edges of the solar system.

“To Pluto, the now-demoted ‘dwarf planet’ that lives beyond the Original Eight in the far distant ‘third zone’ of the solar system – the Kuiper Belt, an unimaginably huge ring of rocks and ice and sundry debris where the dwarf is king.

“After 3 billion miles, New Horizons will on Tuesday shoot right through Pluto’s mini-planetary system of five moons...

“The Pluto fly-by caps a half-century of solar system exploration that has yielded staggering new wonders. Such as Europa, one of Jupiter’s moons, with its vast subterranean ocean under a crust of surface ice, the most inviting potential habitat for extraterrestrial life that human beings will ever reach....

“For the wretched race of beings we surely are, we do, on occasion, manage to soar.”

‘Man’ is still No. 328 on the All-Species List, however. ‘Dog’ remains No. 1.

---

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

God bless America.
---

Gold closed at $1157...lowest weekly close since 3/13
Oil $52.74...lowest weekly close since 4/10

Returns for the week 7/6-7/10

Dow Jones +0.2% [17760]
S&P 500 -0.01% [2076]
S&P MidCap -0.1%
Russell 2000 +0.3%
Nasdaq -0.2% [4997]

Returns for the period 1/1/15-7/10/15

Dow Jones -0.3%
S&P 500 +0.9%
S&P MidCap +3.5%
Russell 2000 +3.9%
Nasdaq +5.5%

Bulls 44.8
Bears 15.6 [Source: Investors Intelligence]

Have a great week. Click on the gofundme link above or send a check to PO Box 990, New Providence, NJ 07974. [Thank you, Sherry and Andrew.]

Brian Trumbore



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Week in Review

07/11/2015

For the week 7/6-7/10

[Posted 10:00 PM ET, Friday]

Edition 848

Wall Street and Washington

Once again there is little to write about in this lead segment. Still no resolution to Greece and the Iran nuke talks, either, covered heavily below nonetheless. There was no U.S. economic data of import and third-quarter earnings don’t start in earnest until this coming week, with the real flood of them the following two after.

That said Fed Chair Janet Yellen reiterated in a speech from Cleveland on Friday that the Fed will most likely hike interest rates sometime this year, but the policymakers can’t ignore the issues in Europe and Greece, though she seems less concerned about China and its potential impact on our markets and economy.

Yellen: “I expect that it will be appropriate at some point later this year to take the first step to raise the federal funds rate and thus begin normalizing monetary policy. But I want to emphasize that the course of the economy and inflation remains highly uncertain, and unanticipated developments could delay or accelerate this first step.”

In the minutes from the June 16-17 meeting of the Federal Open Market Committee, while the Fed struck a positive tone about developments in the economy, highlighting stronger consumer spending, corporate hiring, housing market activity and signs of wage growth, the committee remained divided over when the conditions would be right to raise rates off the zero level. A number of members of the FOMC warned against a “premature decision.”

The minutes also noted “uncertainty about whether Greece and its official creditors would reach an agreement and about the likely pace of economic growth abroad, particularly in China and other emerging market economies.”

For now, especially if the Greece situation clears up, at least on an interim basis, it would seem a September rate hike is still in the cards. Should talks collapse, however, and China’s slide resume, all bets are off.

The IMF, through its World Economic Outlook, cut its global growth forecast for 2015 to 3.3% from its 3.5% projection issued in April, owing to the lack of growth in the U.S. in the first quarter. The 3.3% contrasts with 3.4% global growth for 2014, though the IMF looks for this to rebound to 3.8% in 2016.

The U.S. was reduced to 2.5% from an earlier forecast of 3.1%, with the IMF urging the Fed to hold off on raising interest rates until the first half of next year.

The IMF also kept its eurozone growth outlook for the year at 1.5% (France 1.2%, Germany 1.6%), but cut Japan to just 0.8% from 1.0%, and left China unchanged at 6.8%.

Europe and Asia

To set the stage for the tumultuous week over the Greek debt crisis, last Saturday, the day before the referendum on the bailout package, Greek Finance Minister Yanis Varoufakis accused Athens’ creditors of “terrorism,” telling Spain’s El Mundo newspaper that the country’s lenders wanted to “instill fear in people.”

The government urged voters to say ‘No’ to the terms of the last bailout proposal but opponents warned this would see Greece ejected from the eurozone.

Greece’s current bailout program had run out on June 30. Varoufakis said Greece’s banks would reopen on Tuesday, after being closed the prior week, regardless of the vote. That wasn’t to be the case. The banks are still closed...for two weeks now...and then the vote came in on Sunday and it was a stunner.

The polls leading up to the referendum had it too close to call. Virtually all of them at 44-43, 43-42...and then the No camp won by a resounding 61-39 margin; victorious in every region of the country.

It was a remarkable triumph for Greek Prime Minister Alexis Tsipras, and he said afterwards he was ready to resume talks immediately, “but this time the issue of debt will be on the negotiating table.”

Jeroen Dijsselbloem, the Dutch finance minister who chairs the eurogroup committee of his counterparts, warned: “This result is very regrettable for the future of Greece. For recovery of the Greek economy, difficult measures and reforms are inevitable. We will now wait for the initiatives of the Greek authorities.”

Then Varoufakis unexpectedly resigned as he said he was “made aware” he was unwelcome at future finance minister meetings.

Tsipras promised he would reach a better deal with creditors within 48 hours. This wasn’t to be the case.

Negotiations instead broke down. Tsipras was given a new deadline of Sunday when an emergency summit would be held, though he would need to produce a new proposal on Thursday so the finance ministers had time to analyze it before the meeting of eurozone leaders.

Wednesday, in a speech to the European Parliament, Tsipras said years of bailout cash thrown at Greece had actually gone to save “European banks” that had previously owned vast amounts of Greek debt, and that 5 ½ years of enforced austerity had driven the country into the ground.

European Central Bank Governing Council member Christian Noyer said the institution had stretched its rules “to the maximum” to aid Greece, and warned it would need to cut off funds to rapidly failing Greek banks while negotiations continued between Greece and its European creditors.

“In the last six months we maintained the lifeline set up for Greek banks and put enormous sums of money on the table,” Noyer told Europe 1 radio, according to Reuters. “Our rules oblige us to stop immediately at that point when there is no prospect of a political accord ...or at the point when the Greek banking system crumbles – which would happen if it enters generalized default on all its debts.”

Donald Tusk, the European Council president, said, “The stark reality is that we only have five days to find the ultimate agreement. Until now I have avoided talking about deadlines. But tonight I have to say it loud and clear – the final deadline ends this week.”

European Commission President Jean-Claude Juncker pounded the table, announcing he was against Greece’s exit from the eurozone – “Grexit” – but he had to work up plans for delivering humanitarian aid to Athens should this come to pass.

“I’m strongly against Grexit,” he said. “But I can’t prevent it if the Greek government is not doing what we expect the Greek government to do.”

But instead of a formal blueprint for a new proposal, the new Greek finance minister, Euclid Tsakalotos, spoke from handwritten notes about his country’s intentions to rein in costs and prop up its finances, while avoiding some of the tough austerity measures the creditors demanded.

European officials were incredulous.

German Chancellor Angela Merkel was pissed. “We respect the results of the referendum of one country, but we have 18 other countries where political decisions are also discussed. We have only a few days left to find a solution.”

Italian Prime Minister Matteo Renzi said, “The ball is in Greece’s court. Next Sunday the final meeting will take place on Greece...I am not pessimistic.”

Lithuanian President Dalia Grybauskaite complained: “With the Greek government it is every time manana.” And: “You can’t have one country enjoying a feast, overspending and having everyone else pay for it, including our citizens with much lower pensions and wages.”

So the leaders awaited Greece’s new offer on Thursday.

Greece owes the ECB 3.5bn euros on July 20 but has no money with which to pay.

The U.S. began clamoring for European leaders to grant some debt relief to Greece, which is what Tsipras has been angling for, and which has been a non-starter for most European leaders.

So on Thursday, the Greeks presented a package of economic reforms in return for a new cash infusion that appeared to give in to creditors’ demands for realistic spending cuts, pension savings and tax increases. In exchange, Greece is seeking a bailout of 53.5 billion euros, ($59 billion).

But the proposal mirrors that from the creditors on June 26, which was rejected by Greek voters in the referendum! Talk about theater of the absurd.

There is one truth in this whole fiasco. The last six months with the new Greek government have been a total waste of time, while the Greek people have suffered immeasurably.

The only difference between the Greeks’ new proposal and the creditors’ of June 26 is Tsipras continues to insist on debt relief, for which he has support from the U.S., the International Monetary Fund, and European Union President Donald Tusk. Even German Finance Minister Wolfgang Schaeuble conceded Greece would need some debt restructuring as part of any new loan program.

Speaking to a conference in Frankfurt, Schaeuble said: “Debt sustainability is not feasible without a haircut and I think the IMF is correct in saying that. (But) there cannot be a haircut because it would infringe the system of the European Union.”

So as I go to post Friday evening, we wait to see what happens Saturday and Sunday. Any deal still needs to be passed through various national parliaments, most importantly the German parliament, while Tsipras has to get it through his legislative body as well.*

*And he did so early Saturday morning. Tsipras admitted many proposals fell short of his party’s anti-austerity promises. But he said there was a “national duty to keep our people alive and in the eurozone.” [BBC]

If no agreement is reached by Sunday, including the release of some funds allowing Athens to pay back the ECB 3.5bn euro on July 20, it could lead to the collapse of Greek banks.

In the meantime, regardless of the outcome, the Greek economy is likely to continue to seize up. There has been zero consumer buying whatsoever of items such as clothing, but sales of expensive items, such as laptops and tablets, are surging in a kind of use it or lose it mentality among the better off.

Foreign suppliers are demanding upfront payments, while domestic tourism has collapsed. Foreign tourism is beginning to dry up, though anecdotal evidence is that foreigners are able to withdraw more than the 60 euro daily limit Greek citizens are limited to at the ATM.

The performance of European stock markets on Friday (up 2.5% to 3%, generally) tells you an agreement will be reached. Experience, however, warrants you sit back and wait to see what happens. You can’t assume anything.

As for the big issue I’ve been harping, political contagion....

Editorial / Wall Street Journal

“The danger is that if Mr. Tsipras succeeds, voters elsewhere in Europe will conclude there’s no reason to accept difficult economic reforms if creditors always capitulate.

“And sure enough, parties of the left across Europe are emerging as the Syriza Party’s most vociferous allies. Consider Spain, where the Syriza-like Podemos (“We Can”) party supported a ‘no’ vote and in a statement last week praised Mr. Tsipras for reacting to the “ultimatum and blackmail” of Greece’s creditors ‘in an exemplary manner.’

“Podemos added that ‘today in Europe there are two opposing camps: austerity and democracy, the government of the people or the government of markets and non-elected powers. We are with democracy. We are with the Greek people.’

“Spain has scheduled national elections in December, and Podemos is running close in the polls with the center-right People’s Party of Prime Minister Mariano Rajoy.....

“Then there’s Italy, where Beppe Grillo, leader of the anti-euro Five Star Movement, is arguing for a similar referendum on the euro.....

“The populists hope a Syriza negotiating victory will erode political support for the supply-side economic reforms they have long resisted on ideological grounds.

“The greatest threat to European prosperity – and the integrity of the eurozone – would be allowing them to succeed.”

Bret Stephens / Wall Street Journal

“On Sunday, Greece became only the second country in history – Argentina was the first – to make the transition from membership in the developed world to membership in the developing one. Now the question is: Who’s next?....

“Spain and Italy could easily follow. And so could we. The lesson of Greece is that nobody is immune from making it their model.”

Gideon Rachman / Financial Times

“Countries such as Ireland, Portugal, Spain and Italy have all made painful cuts in an effort to restore their public finances. The governments of all four countries have Syriza-style, populist parties breathing down their necks. The last thing they want is for Syriza to be seen to succeed. Indeed, the grim truth is that they actually have a vested interest in seeing Greece suffer – as a warning to their own voters, not to take the route of left-wing populism.”

Philip Stephens / Financial Times

“(The) big risk is of political contagion. Politics saved the euro between when economists everywhere predicted its imminent demise. Such professional gloomsters underestimated the willingness of Germany to bend and, Greece aside, the brutal determination of debtor nations to stay in the euro. Now it is politics that could bring the project crashing down.

“The guiding emotion behind Europe’s present discontents is a pervasive sense of powerlessness. The perception that they had been robbed of all say explains the choice of Greek voters in last weekend’s referendum. Voting No collided with the wish of most Greeks to keep the euro, but, as an act of desperation and defiance, it spoke to the frustrations of citizens across the continent.

“This is the mood that mainstream political leaders should fear. It has disinterred old nationalisms and served as the recruiting sergeant for the parties of the extremes now challenging Europe’s postwar centrist order. Marine Le Pen’s National Front in France, Beppe Grillo’s Five Star Movement in Italy, Podemos in Spain and Pegida in Germany – all peddle populism that feeds off the sense that ordinary citizens have become helpless bystanders in a world run for the benefit of the elites.

“Europe is assailed from all sides – by the revanchism of Russian President Vladimir Putin to the east, by the rise of violent Islamist extremism in the Middle East and by uncontrolled migration through the Maghreb countries on the other side of the Mediterranean. Stir in a few years of anxiety and a rising mistrust of globalization and it is not hard to explain rising nationalism....

“(Holding) on to Greece would be costly. Losing it would be seriously expensive.”

On the issue of immigration, over 63,000 migrants (mainly Syrians) have arrived in Greece this year. As The Economist points out, “the EU relies on ‘frontline’ states like Greece to fingerprint and register as many such people as possible. This cooperation, never solid, could break down entirely.”

---

Some economic tidbits....

--Unemployment in Greece came in at 25.6% in April, slightly lower than the revised rate of 25.8% the previous month. The youth unemployment rate is 53.2%, though this is down from 59.6% in April 2013. Deflation continued in May, with prices down 2.2% year over year.

--In the U.K. average home prices were up 1.7% in June over May, up 9.4% yoy owing mostly to a shortage of properties, according to mortgage lender Halifax.

--Eurostat released data on the population of the European Union...508.2 million as of Jan. 1, 2015. Germany leads at 81.2m, followed by France, 66.4m, the U.K. at 64.8m, and Italy with 60.8m.

Greece is at 10.8m, 2.1% of the EU total.

Turning to Asia and China, I’ve been saying the past few months in both this space and in a “Wall Street History” piece that things would end badly in China and indeed they are.

I wrote the following in WIR, 6/20/15:

“Turning to Asia, China’s Shanghai Composite benchmark index suffered its worst weekly loss, 13.3%, since June 2008. The market has been in a bubble, pure and simple. I’ve written a number of times it will end badly and there is far more damage to come, though I’m not saying it’s straight down further from here. 

“But this economy is headed into the crapper, equaling the color of its waterways and skies, and that will be very dangerous for the world as President Xi feels compelled to play the nationalism card.”

No need to change any of this three weeks later and I’m more convinced than ever that the dangers are greater when it comes to my comment that Xi will feel compelled to do something to distract attention from the market and a falling economy. He is losing face, unless the market stabilizes at higher levels, and that’s not good for anyone.

So some notes on the past week. The benchmark Shanghai Composite closed at 3507 on Wednesday, down 32% from the June 12 peak of 5166. 32% in three weeks! That’s a crash, sports fans. But then the government’s efforts to massively manipulate the market higher finally bore fruit on Thursday and Friday and off Thursday’s intraday low, we’re talking a rally of 15%! Overall, the Shanghai Composite rose 5.8% on Thursday, 4.5% Friday.

The problem has been 90 million individual investors have been making up 80% of the market and according to the Wall Street Journal, 2/3s of these newbies lack a high school diploma. The huge equity bubble that had seen stocks more than double over the course of a year was fueled by the world’s highest rate of margin debt.

Other Asian markets weren’t immune from the price action. Wednesday marked Hong Kong’s Hang Seng index’s worst day since October 2008.

Earlier in the week, Premier Li Keqiang, who is supposed to be in charge of China’s economic performance, was “very angry when he came back from a (European diplomatic initiative) and suddenly had to deal with a major problem of his own,” said one of the people familiar with the trip. [Financial Times]

Li’s return then became the catalyst for a series of emergency measures announced by Chinese brokers, fund managers and listed companies in an unprecedented attempt to support the market. As the FT wrote: “Most controversially, the Securities Association of China said it would launch an Rmb120bn ($19bn) stabilization fund in an attempt to drive the market back up to 4,500.” [The Shanghai closed at 3877 on Friday.]

China’s securities regulator also banned shareholders with large stakes in listed firms from selling for six months, the most drastic step to stem the rout, while “persuading” state-owned companies to buy back shares. The central bank was even buying stock.

Yup, desperate moves. At least 1,331 companies halted trading on mainland exchanges as the Shanghai Comp plunged 5.9% on Wednesday. With another 747 down by the 10 percent daily limit, sellers were thus locked out of 72 percent of the Chinese market.

But in the rally on Thursday, on the Shanghai Composite, 719 stocks rose, 642 of them at least the limit of 9.9 percent, while only seven fell.

As of last Saturday, 10 companies had suspended IPOs on the Shanghai Exchange and 18 others did so at the Shenzen. The move was ordered by the State Council, China’s cabinet.

There was this tidbit from the Wall Street Journal: “The total value of China’s stock market is still less than half that of the U.S. market, but the trading volume on many recent days has exceeded that of the rest of the world’s markets combined. Turnover is 10 times the level seen at the peak of the previous China bubble in 2007.”

Back to President Xi, it was two years ago in a historic party document that he pledged to let the market play a “decisive” role in all aspects of the economy.

As Tom Mitchell writes in the Financial Times: “That pledge lies at the core of Mr. Xi’s carefully crafted public image. It is an image that would have his country and the world believe that he is a transformative strongman – like Deng Xiaoping before him – with the power and the will to push through difficult economic reforms....

“The Chinese government’s response to the market sell-off has been one of the biggest tests of Mr. Xi’s reform credentials. From the evidence so far, they are not very convincing. In keeping with past practice, the Chinese government simply cannot resist the temptation to interfere in the workings of the country’s stock markets.

“As Junheng Li, an analyst with JL Warren Capital put it in a note to clients: ‘Free markets, and in this case a free functioning and independent capital market, are inconsistent with the control that the Communist party is striving for.’”

Two weeks ago the World Bank issued a warning for China and President Xi. As Bloomberg’s William Pesek wrote:

“By urging Beijing to clamp down on wasteful investment, unsustainable debt, and a shadow banking industry run amok, it was delivering a clear enough warning that President Xi should stop fanning China’s giant asset bubble. The World Bank was also implying China should get its own economic house in order before trying to change the global economy.

“ ‘China has reached a critical phase of its economic and social development path,’ the lender said. The economy ‘will need to be transformed to increase the efficiency of new investments and widen access to finance, enabling China to sustain solid growth and rebalance its economy.’”

Speaking of unsustainable debt, a recent McKinsey Global Institute report put total borrowing – by individuals, companies and government – at 282% of GDP in 2014.

Some China/Asia bits...

--According to the China Passenger Car Association, vehicle sales in June were down 3.2% year-on-year.

--China’s consumer price index ticked up to a year-on-year pace of 1.4% in June, from 1.2% in May, according to the government’s statistics office; well below the target of 3%. Producer prices, or what China calls factory-gate prices, fell a 40th consecutive month, 4.8% yoy.

--Machine orders are important for Japan and they came in at their best year-on-year growth since January 2014, up 19.3% from year ago levels in May; good news for Prime Minister Shinzo Abe.

--India’s factory output rose less than expected for May, up 2.7% from a year earlier.

Street Bytes

--Despite up and down days of 200+ points on Wednesday and Friday, stocks were virtually unchanged on the week, with the Dow Jones adding 0.2% to 17760, while the S&P 500 lost 0.16 of a single point, -0.01%, and Nasdaq declined 0.2%. The markets moved intraday on any word on Greece, mostly, after the opening was influenced by the prior night’s action in China.

--The New York Stock Exchange said an outage of more than three hours on Wednesday was caused by problems associated with a software upgrade, which caused communication disruptions between its trading software and other systems.

But while this was a black eye for the NYSE, it just wasn’t as big a deal in the grand scheme of things as it was made out to be by the national media. Trading was conducted on other exchanges and Nasdaq operated normally so investors could execute trades while the NYSE was down. Nonetheless, no doubt the timing was bad, what with United Airlines’ computers going down the same day, the Wall Street Journal’s site was hit, and of course the concerns over Greece and China.

--U.S. Treasury Yields

6-mo. 0.08% 2-yr. 0.64% 10-yr. 2.40% 30-yr. 3.19%

It was a volatile week but in the end, Treasuries, like stocks, were unchanged. The 10-year, for example, traded down to an intraday yield of 2.18%, but finished at the level you see, up 2 basis points on the week.

In the eurozone, like the 10-year Treasury, the 10-year German bund was all over the place, going from 0.79% to 0.64% (closing basis), then finishing the week at 0.89%, depending on whether the action between Greece and its creditors called for ‘risk on’ or ‘risk off.’

What I don’t understand is the enthusiasm for Spanish and Italian debt. The yield on Italy’s 10-year, for example, closed the week at 2.13% on optimism over Greece. It’s just not warranted.

Granted, the ECB was clearly in the market, buying up Italian crapola, but, remember. If we really do receive an ‘all-clear’ signal, that means the euro economy should then continue to improve and in that environment, yields across the board for the eurozone are way too low.

--Commodities have been plunging owing chiefly to concern over China’s economy and slumping demand.  The Bloomberg Commodity Index of 22 commodities from oil to natural gas hit its lowest level on a closing basis since late 2001 this week before rallying some. Copper prices hit a six-year low on Tuesday, with China accounting for 40% of copper demand. The closing low this week was $2.44 a pound, if you want to track it from here.  It finished the week at $2.50...

As for oil, it finished at its lowest weekly close since April 10 at $53.00. The International Energy Agency said in its monthly forecast that the “bottom of the market may still be ahead” and that the process will “extend well into 2016.”

The IEA said the oil market was “massively oversupplied” in the second quarter and remains so today.

Global oil supply surged by 550,000 barrels a day in June to 96.6m b/d, up 3.1m b/d from the same month a year ago.

“The market’s ability to absorb that oversupply is unlikely to last.”

Shale supply growth of 1.7m b/d in 2014 is forecast to slow to 900,000 b/d this year and 300,000 b/d in 2016.

Non-OPEC supply as a whole rose by 200,000 in June to 58.3m b/d.

An Iranian nuclear deal could of course unleash further new supplies onto the market.

--Interesting tidbit from the container ship industry, via consultant Drewry, which predicts it will be “lucky to break even this year” as shipping rates slump due to catastrophic overcapacity.

Drewry warns:

“A toxic mixture of overcapacity, weak demand and aggressive commercial pricing is threatening liner shipping industry profitability for the rest of 2015.”

Earlier in the year Drewry had forecast that container ship carriers like Maersk, China Shipping Container Lines and CMA CGM, would generate total profits of $8bn this year. But as the Financial Times reports, “However, freight rates on the four main East to West container trade routes collapsed 32 percent year on year in the second quarter, eating into profits so fiercely that Drewry says the industry can expect nothing better than to breakeven by the end of the year.”

The big lines have been in a race to increase the size of their fleets, but this is just compounding the “chronic problem of overcapacity and driving down rates to unprofitable levels.”

“Every quarter another 10 to 15 Ultra Large Container Vessels enter the market, each of which carries about 20,000 twenty foot equivalent containers.”

Good gawd, Bullwinkle. That’s a lot of extra capacity!

--Worldwide PC shipments fell 9.5%, year-on-year, in the second quarter, according to research firm Gartner. Rival researcher IDC, which doesn’t include tablets in its tally, pegs the decline at 11.8%.

Lenovo remained the world’s top PC vendor, with 20.3% share, followed by HP (18.5%) and Dell (14.5%), according to IDC.

--In addition to 18,000 job cuts Microsoft announced a year ago, the company said this week another 7,800 would be laid off, victims of the changing tech landscape and, specifically, Microsoft’s hardware group and the crappy smartphone business, which MSFT acquired last year from Nokia for $7.2bn.

In a statement, Satya Nadella, Microsoft’s CEO, said: “We are moving from a strategy to grow a standalone phone business to a strategy to grow and create a vibrant Windows ecosystem including our first-party device family.”

Nadella’s decision to “fundamentally restructure” its struggling smartphone business is a rebuke to the 2013 purchase of Nokia’s phone business under Steve Ballmer’s watch, his predecessor.

Microsoft now plans a $7.6bn write-down on the purchase.

--IBM announced it has made working versions of ultradense computer chips, “with roughly four times the capacity of today’s most powerful chips,” as reported by the New York Times’ John Markoff.

IBM is part of an international consortium manufacturing advanced computer chips in New York’s Hudson Valley, where IBM is investing $3 billion as part of a partnership with New York State, Samsung and equipment vendors.

--Shares in Alcoa, the U.S. aluminum group, kicked off second-quarter earnings on Wednesday with profits that fell short of expectations, though revenues beat, up 1 percent from a year earlier to $5.9bn.

The company has been hit by China’s flooding of the global markets with steel, aluminum and other industrial metals, which is driving down prices, while at the same seeing its sales boom to the auto market as car makers buy aluminum to make their cars lighter to comply with new fuel-efficiency standards.

Alcoa said automotive sheet revenue had increased “approximately 180 percent year-over-year.”

--PepsiCo shares rose as it reported second-quarter profits that topped analysts’ expectations, with strong North American snack and drinks sales lessening some of the impact of the stronger dollar on its overseas businesses.

Net revenue fell 6 percent from the same period last year but the $15.9 billion figure surpassed forecasts.

Developing and emerging market revenue grew 11 percent on an organic level, but owing to unfavorable foreign exchange translation, declined 13 percent, especially in relation to the Russian ruble and Venezuelan bolivar.

--Just the facts...Robert Pear / New York Times:

“Health insurance companies around the country are seeking rate increases of 20 percent to 40 percent or more, saying their new customers under the Affordable Care Act turned out to be sicker than expected. Federal officials say they are determined to see that the requests are scaled back.

“Blue Cross and Blue Shield plans – market leaders in many states – are seeking rate increases that average 23 percent in Illinois, 25 percent in North Carolina, 31 percent in Oklahoma, 36 percent in Tennessee and 54 percent in Minnesota, according to documents posted online by the federal government and state insurance commissioners and interviews with insurance executives.

“The Oregon insurance commissioner, Laura N. Cali, has just approved 2016 rate increases for companies that cover more than 220,000 people. Moda Health Plan, which has the largest enrollment in the state, received a 25 percent increase, and the second-largest plan, LifeWise, received a 33 percent increase.”

--General Motors Co. reported vehicle sales in China were flat for June vs. year ago levels. They dropped the previous two months.

--Ford Motor Co. announced it will assemble its small Ford Focus and C-Max wagon outside the U.S., ending production at a Michigan factory in 2018 in a setback to efforts to create a market for the vehicles in the U.S.

The Wayne, Michigan facility currently used for these models employs 4,400 workers.

Toyota Motor Corp. is shifting production of its Corolla compact to Mexico in coming years after three decades of manufacturing it in Canada. 

Lower gasoline prices are doing a number on demand for small cars and automakers have been cutting back production, which hits profits.

--The Russian car market’s collapse continued in June, with sales down 29.7 percent year-on-year, though this was less than the 37.6 percent fall in May, and 41 and 42.5 percent yoy declines in April and March, respectively.

According to the Association of European Businesses, a Moscow-based lobby group, Russia’s car market will shrink 36 percent this year overall. [Moscow Times]

--Chinese e-commerce giant Alibaba announced its senior executive, Patrick Liu, is in police custody over corruption allegations related to his previous job at internet company Tencent. Tencent said up to six former executives were under investigation in an ongoing graft probe.

Tencent is behind China’s popular messaging app, WeChat, plus it owns China’s largest music streaming service and has a large online gaming business, similar to that of Nintendo’s and Sony’s gaming units.

Alibaba said the arrest of Liu has nothing to do with its operation.

--Saudi Arabia’s prime sovereign wealth fund will invest $10 billion over the next five years, largely in the Russian economy, according to Interfax news agency.

Projects in Russia will target the infrastructure, agriculture, medicine, logistics, retail and real estate.

--Barclays Plc Chairman John McFarlane, just three months into the job, fired CEO Antony Jenkins. McFarlane vowed to tackle a “cumbersome, bureaucratic” bank through deeper cost cuts. Jenkins took over from Bob Diamond in 2012 after the bank was fined for manipulating benchmark interest rates. 

Some say Jenkins did an okay job, but it wasn’t enough for McFarlane.

--If ever there was a case of ‘wait 24 hours,’ it’s that of Jared Fogle of Subway fame. Investigators raided his Indiana home, seizing electronics in a search Subway said might be linked to an earlier arrest of someone who once worked for him.

Fogle has not been arrested or charged with any crime, but Subway said it was parting ways with him. The word used was the two mutually agreed to “suspend” their relationship, with the statement adding, “Jared continues to cooperate with authorities, and he expects no actions to be forthcoming.”

It seems the executive director of the Jared Foundation – Fogle’s organization that aspires to combat childhood obesity – was arrested in Indianapolis on federal child pornography charges. [The guy was charged with seven counts of production of child pornography, according to USA TODAY. He also attempted suicide while in custody and is apparently on life support.]

I like Subway. I wouldn’t expect the chain to suffer much assuming Jared isn’t charged with anything. But if he is, the toll could be considerable.

Of bigger concern to Subway should be the proliferation of regional sub shops like Jersey Mike’s, which just opened one in New Providence, NJ, across the street from the Subway I frequent. Jersey Mike’s has an outstanding product, albeit it’s more expensive.

But it’s the same principle as all the specialty burger chains eating into the likes of McDonald’s.

[After I wrote this up, I received an email from Bloomberg.com with an extensive story on Subway and its issues. I forgot sales in 2014 declined 3% over the previous year. Anyway, it’s easily findable on Bloomberg.com if you want something to read with your sub.]

--Loved this bit out of the New York Post by Kate Sheehy:

“After his computer crashed, a broke Brooklyn rapper spent four months in the Apple store in SoHo – singing his album into a display recorder.

“Prince Harvey, 25, told the website the Daily Beast that he spent every weekday for 16 weeks straight singing, humming and rapping into a floor computer at the Manhattan store on Prince Street.

“Harvey said he managed to pull off the crooning coup with the help of two particularly understanding store employees...

“Harvey said he managed to save his work at the end of each day – dodging the store’s end-of-day policy of wiping its display computers’ memory – by hiding files in the devices’ trash.

“He said he also relied on email and a thumb drive to store his vocals.”

His album is due out July 26. “PHATASS,” for “Prince Harvey At The Apple Store: SoHo.”

--And there’s this. In 2013, Hostess, the bakery giant behind Twinkies, Ding Dongs, and Ho Hos, was bankrupt and on the verge of laying off 18,000 workers, when it was bought for $410 million by a partnership between private-equity giant Apollo Global Management and billionaire turnaround artist, C. Dean Metropoulos, known as “Mr. Shelf Space” for his revival of brands like Vlasic and Chef Boyardee.

But as Drew Harwell of the Washington Post reports, now Hostess Brands is doing so well it’s been turning down offers of $2 billion.

Now Reuters is reporting Hostess could head to Wall Street with an IPO valuing the company around $2.5 billion. Metropoulos, though, is beating back such rumors, saying “it was too early to consider a sale or IPO at this time.”

Sales aren’t back to pre-bankruptcy levels, but jobs have been slashed, while heavy investments in automation have been made, along with an aggressive ad campaign. [For those reading this saying the loss of jobs isn’t right...au contraire...it’s the bloated structure that helped take the company under in the first place. Some of the work rules were nuts, as I know I mentioned in this space, at one point or another.]

--Yahoo announced it is entering the daily fantasy sports market, which has been booming. Yahoo will start with Major League Baseball and expand to other professional sports as their seasons begin.

An estimated 57 million people in the United States and Canada currently participate in fantasy sports.

Yahoo said tens of millions of people already play Yahoo Fantasy Sports, spending an average of 500 minutes a month at the site, with many of these playing daily games elsewhere.

--As reported by Crain’s New York Business, the average sale price for a Brooklyn home reached a record $788,529 during the second quarter, owing to historically low inventory and a lack of new product being built and tight credit conditions.

Foreign Affairs

Iran: No agreement on Iran’s nuclear agreement was reached by the latest deadline as Washington refused to budge on Tehran’s demands for immediate sanctions relief. What had been a June 30 deadline, morphed into a July 7 deadline, then July 9, and now July 13.

U.S. Secretary of State John Kerry threatened to walk away from the talks as he signaled an agreement wouldn’t be concluded by Friday – which could impede American efforts to quickly implement any deal.

“This is not open-ended,” Kerry told reporters on Thursday outside the Viennese palace hosting the negotiations. “We can’t wait forever for the decision to be made. If the tough decisions don’t get made, we are absolutely prepared to call an end to this process.”

On Tuesday, President Obama promised Senate Democrats the same response to Iranian intransigence, that time was running out.

Under U.S. law, the seven nations negotiating in Vienna needed to complete the accord by early Friday to avoid invoking a 60-day congressional review period during which President Obama cannot waive sanctions on Iran. Had they met the target, the review period was just 30 days.

It’s possible the talks could be pushed off until September.

“We will not rush and we will not be rushed,” Kerry said. “We would not be here continuing to negotiate just for the sake of negotiating. We’re here because we believe we are making real progress toward a comprehensive deal,” he said. But “we are not going to sit at the negotiating table forever.”

Fars, Iran’s semi-official news agency, quoted an unnamed source as saying, “While the Iranian team is showing flexibility, the Americans are refusing to accept Iran’s obvious right, particularly on sanctions.”

Iran is demanding prompt easing of sanctions for nuclear concessions.

But there is also the critical issue surrounding the future inspection regime for Iran’s nuclear facilities – to be overseen by the International Atomic Energy Agency.

And as discussions dragged on this week, both Russia and China said they were open to the arms embargo being lifted, while others in the P5+1 (that being the U.S., Britain, France and Germany) are not.

Russian Foreign Minister Sergei Lavrov told reporters Thursday, the arms embargo “should be among the first steps taken in lifting the sanctions regime. We advocate the removal of the weapons embargo as soon as possible, especially as Iran is a supporter of the fight against Islamic State.”

Talk about a non-starter with Congress. Russia has already announced plans to start supplying S-300 anti-aircraft defense systems to Iran this year over the objections of the U.S. and Israel, ending a self-imposed ban from 2010.

According to one estimate, Russia stands to take in $7 billion from arms sales to Iran over the next decade.

Bottom line, at week’s end the position of the hawks in Washington has been strengthened.

Reuel Marc Gerecht and Mark Dubowitz / Wall Street Journal

“The lines are clearly drawn in Washington on President Obama’s plan for a nuclear deal with Iran. As negotiations for a final agreement continue well past their June 30 deadline, most Republicans oppose the deal and Democrats will not block it.

“Many critics claim to believe that a ‘good deal,’ which would permanently dismantle the clerical regime’s capacity to construct nuclear weapons, is still possible if Mr. Obama would augment diplomacy with the threat of more sanctions and the use of force. Although these critics accurately highlight the framework’s serious faults, they also make a mistake: More sanctions and threats of military raids now are unlikely to thwart the mullahs’ nuclear designs. We will never know whether more crippling sanctions and force could have cracked the clerical regime. We do know that the president sought the opposite path even before American and Iranian diplomats began negotiating in Europe.

“But hawks who believe that airstrikes are the only possible option for stopping an Iranian nuke should welcome a deal perhaps more than anyone. This is because the Joint Comprehensive Plan of Action is tailor-made to set Washington on a collision course with Tehran. The plan leaves the Islamic Republic as a threshold nuclear-weapons state and in the short-term insulates the mullahs’ regional behavior from serious American reproach.

“To imagine such a deal working is to imagine the Islamic Republic without its revolutionary faith. So Mr. Obama’s deal-making is in effect establishing the necessary conditions for military action after January 2017, when a new president takes office.”

Iranian Foreign Minister Javad Zarif / Financial Times

“We have come a long way over the past 21 months of negotiations over my country’s nuclear energy program. A very long way. Never have Iran and its counterparts been this close to a final accord. But success is far from assured....

“To move forward, sincerity – and changed mindsets – must prevail. Getting to ‘yes’ necessitates the courage to take the higher ground, sufficient fortitude to be flexible, the audacity to shatter old habits, and most of all, a vision for a better future....

“There is growing acknowledgement that attempting to coerce a proud civilization into submission only leads to further conflict, resentment and hostility. This particularly applies in the case of the unjust and illegal sanctions imposed on the Iranian people, ostensibly to put a halt to their aspiration to enjoy peaceful nuclear energy. This sanctions regime – the most indiscriminate imposed on any nation in human history – has been met with unwavering determination. At the outset of this crisis, Iran had less than 200 centrifuges; today, it has 20,000. And so, my counterparts have rightfully opted for the negotiating table. But they still need to make the critical choice between an agreement and coercion.”

Oh brother. World blows. Film at eleven.

Iraq/ISIS/Syria: The United Nations updated the refugee picture resulting from Syria’s civil war and more than 4 million have now fled the country.

“This is the biggest refugee population from a single conflict in a generation,” U.N. High Commissioner for Refugees Antonio Guterres said in a statement. “It is a population that needs the support of the world but is instead living in dire conditions and sinking deeper into poverty.”

More than 24,000 arrived in Turkey from Syria in June alone, driving that country’s refugee population to more than 1.8 million, the largest in the world.

1.1 million Syrian refugees are in Lebanon, which represents 20% of that nation’s total population; 629,000 are in Jordan; nearly 250,000 in Iraq; 132,000 in Egypt; and 24,000 elsewhere in Northern Africa.

And all the above doesn’t include the 7.6 million displaced within Syria, according to U.N. estimates.

Further, less than a quarter of the $5.5 billion that UNHCR estimates is needed for programs supporting refugees has been raised. Think donor fatigue. [Alexandra Zavins / Los Angeles Times]

This is all on President Obama, as I’ve said for years. I’ve documented it every step of the way and correctly said in August 2012, “we lost.”

Meanwhile, a video apparently released by ISIS showed 25 men being shot dead in the ancient city of Palmyra, in Syria. IS said the men were soldiers captured in the city of Homs. They were shot dead inside Palmyra’s amphitheater. [ISIS also destroyed more artifacts in Palmyra and elsewhere.]

We also learned that the slaughter perpetrated by ISIS in Kobane about ten days ago resulted in the deaths of 262 civilians, not the last reported estimate of 200. It was one of the worst massacres of the war. Some attackers killed entire families in their homes.

The U.N. now estimates 235,000 have been killed in Syria’s civil war.

Republican presidential candidate Sen. Lindsey Graham (S.C.), while a true longshot, does continue to have influence in the Senate on the foreign policy front and he said this week some 20,000 U.S. troops are needed in Iraq and Syria, alongside a regional army from Saudi Arabia, Turkey and Egypt, to defeat the Islamic State.

“Not because I like war, [or] because I want war... I’ve learned a lot from [President George W. Bush’s] mistakes, my mistakes, Obama’s mistakes,” Graham said in a speech on Wednesday. But he said there’s no other way to defeat the “religious Nazis” of ISIS. “There is no alternative to going in on the ground and pulling the caliphate up by the roots. If that scares you, don’t vote for me.” [Molly O’Toole / Defense One]

But while Graham is on one end of the debate in the U.S., the other extreme is represented by what we learned this week; that the $500 million program to train and equip some 15,000 Syrian fighters over three years has only found 60...60...suitable for training.

Monday, in an appearance at the Pentagon, President Obama gave an upbeat progress report on the fight against Islamic State, promising an intensified campaign against ISIS leadership in the likes of Raqqa, its de facto capital in Syria.

But Gen. Martin Dempsey, chairman of the Joint Chiefs of Staff, testified this week that Israel and Jordan “very much believe [in] the possibility” that the Assad regime could soon collapse, touching off “a foot race” of al-Qaeda and Islamic State forces “converging on Damascus.”

Editorial / Wall Street Journal

“Mr. Obama concluded by observing that the U.S. has faced ‘more formidable challenges’ in the past, including fascism and communism. Yes it has, especially when emerging threats were left to fester by Presidents who lacked the political will to confront them. By continuing to underrate the threat of Islamic radicalism, Mr. Obama risks repeating that history.”

Benny Avni / New York Post

“ ‘Ideologies are not defeated with guns; they’re defeated by better ideas.’

“Add that, along with ‘leading from behind’ and disappearing ‘red lines,’ to the list of gems that will forever define President Obama’s era in national security.

“That line, from Obama’s televised Pentagon visit Monday on his administration’s anti-ISIS strategy, quickly became a social-media meme.

“Can we beat ISIS by presenting ‘a more attractive and more compelling vision’? That’s how Obama put it while assessing progress in our undeclared, undefined non-war against a nonstate that has nothing to do with Islam (and yet kicks our ass all over the place).

“Come on. This isn’t Debate Club.

“ISIS is about mass executions, throat-slashing, flesh-burning or pool-drowning in steel cages. They’re not into contests that can be resolved in a West Side Story-type dance-off between the Jets and the Sharks.

“We can’t bring a mouth to a knife fight.

“Nor should we....

“Obama isn’t the first U.S. president who shies away from foreign wars. Sooner or later, as the menace from Islamists of all stripes grows, America will be forced to join the battle. The longer we make up excuses for not doing so, the more difficult that future battle will be.”

Egypt: Egyptian warplanes killed 25 Islamist militants in North Sinai last weekend, as President Sisi visited the province following a major escalation of the conflict there.

Tunisia: All British nationals have been urged to leave here because “a further terrorist attack is highly likely,” Foreign Secretary Philip Hammond said. 30 Britons were among the 38 tourists killed in an attack in Tunisia last month.

The Foreign Office estimates 2,500 to 3,000 UK tourists are currently in Tunisia and a few hundred British residents.

Saudi Arabia: Prince Saud al Faisal, who was the world’s longest-serving foreign minister with 40 years in the post, died Thursday. He was 75. Faisal had retired in April.

His tenure spanned from Lebanon’s civil war in the 1970s and 1980s, to the 1990 Iraqi invasion of Kuwait, on through 9/11, the U.S.-led invasion of Iraq, the Arab Spring uprisings, Syria’s civil war and the spread of ISIS.

China: Last weekend, on the campaign trail, Hillary Clinton made the statement: “China’s military is growing very quickly, and they are establishing military installations that again threaten countries we have treaties with....Make no mistake, [the Chinese] know they’re in competition. And they’re going to do everything they can to win.”

Two senior Chinese military leaders called on the People’s Liberation Army to beef up its naval capacity and combat readiness amid a higher risk of “warfare on the doorstep.”

In an article published in People’s Daily, the Communist Party’s flagship mouthpiece, General Cai Yingting and General Zheng Weiping said the PLA should learn lessons from the war with Japan that ended 70 years ago.

“The risk of chaos and warfare on our doorstep has increased. We should be more vigilant...and put combat preparedness at the front of our minds.”

On a different topic, Nectar Gan / South China Morning Post:

“China’s top legislature has published a draft cybersecurity law that would cement government control over the internet and data, rules analysts said could further limit online debate and affect multinational companies doing business in China.

“The 68-article law was drafted to ‘safeguard cyberspace sovereignty and national security’ from the threat of cyberattack, cybercrime and the spread of ‘harmful’ information online, according to a statement by the National People’s Congress.”

The draft “grants the government the right to restrict internet access in places where public security is threatened....

“If the draft goes through, censors would have the right to delete information that was counter to laws and regulations, and to stop that information from entering China.”

Operators would require users to log in with their real names or face substantial fines.

I’ll log in as Barry Bonds. If they then mistakenly go after him, sorry, Barry.

North Korea: South Korean officials estimate Kim Jong Un has executed 70 officials since taking power in late 2011 in a “reign of terror” that far exceeds that of his father’s rule. South Korea’s foreign minister said Kim Jong Il executed just 10 during his first years in power.

Bosnia: The president of the Serb-run part of Bosnia claimed Saturday that the Srebrenica genocide was a “lie,” a week ahead of the 20th anniversary of the slaughter of over 8,000. Milorad Dodik denounced a British bid to pass a United Nations resolution on the genocidal killing of the area’s male Muslim population in 1995.

“The goal is to register at the U.N., on the base of false declarations and reports, that a genocide was committed against Muslims,” Dodik, the leader of Republika Srpska, told hundreds of people gathered at the village of Bratunac near Srebrenica.

“Everything is a recurrent lie.” His speech was broadcast live on the Bosnian Serb public television channel.

Srebrenica was the worst atrocity in Europe since World War II and has been qualified as a genocide by two international courts.

Russia vetoed the U.N. resolution calling it a genocide...in case you wanted another example of just how awful relations are between Moscow and the West these days. British envoy Peter Wilson said, “Denial is the final insult to the victims.”

The anniversary is Saturday. It was genocide, Dodik!

Russia: In his confirmation hearing, Gen. Joseph Dunford, who is slated to replace Gen. Martin Dempsey as chairman of the Joint Chiefs of Staff, said the prime existential threat to the U.S. was Russia. The State Department tried to dial this back.

Random Musings

--How do you handle a problem like The Do-nald? How do you keep him out of the de-bates?

Not easily, is the answer to both. As reported by the Washington Post, the head of the Republican National Committee, Chairman Reince Priebus, called Trump on Wednesday and the two apparently spent nearly an hour on the phone, as Priebus urged Trump to tone down his inflammatory rhetoric about immigration. [Trump’s account of the call was far different.] 

Look, I’ve long been amused by Trump, and when he brings up topics like China and the deteriorating U.S. nuclear deterrent, I say, ‘great...glad someone is talking about these issues.’

But I want to win an election in 2016 and Republicans aren’t going anywhere without capturing more of the Hispanic vote than Mitt Romney did...27%. The next few decades of presidential elections are all about demographics and if you’re a Republican, the trends are very much against you. That’s a fact. [It would also be helpful if the Republican nominee could capture 11-12% of the African-American vote rather than 8% or 9%.]

Trump’s comment on Mexicans is indeed deeply hurting the GOP brand, let alone the RNC’s outreach program.

As noted in the Washington Post Thursday, “One GOP state party chairman, speaking on the condition of anonymity so he could be frank, said of Trump: ‘He’s already done some damage, and it could be substantial going forward. He could be one of the reasons we lose. It’s that serious. There’s nothing we can do about it, and that’s what’s so scary.’”

My best friend in the building where I live, the ‘super,’ Luis, is from Ecuador. I’ve been living here over five years and we have many a political discussion, Luis knowing what I do.

Needless to say, he was ticked by Trump’s comments and said not one of his friends would obviously support Trump after this, but it’s unclear if they would contemplate voting for, say, Jeb Bush or Marco Rubio. There is still time, but The Donald is going to be around at least into next winter, it seems.

For his part, Jeb Bush wasn’t happy. “To make these extraordinarily ugly kind of comments is not reflective of the Republican Party. He’s doing this...to inflame and incite and to draw attention, which seems to be the organizing principle of his campaign.”

Asked if he took Trump’s comments personally, given his wife is Mexican, Bush said, “Yeah, of course it – absolutely – and a lot of other people But politically, we’re going to win when we’re hopeful and optimistic and big and broad rather than, grrrr, just angry all the time.”

Trump then fired back in a statement: “Today, Jeb Bush once again proves that he is out of touch with the American people....In fact, Jeb believe illegal immigrants who break our laws when they cross our border come ‘out of love.’”

There is no doubting Trump’s clout. An analysis by Zignal labs for the Washington Post found that 48 percent of all social-media and traditional-media conversation about politics last week was about The Donald.

And in a Public Policy Polling survey of North Carolina Republicans, Trump leads there with 16 percent.

As for the business opportunities Trump is losing out on, I submit the biggest hit he could take, and the one that would get the most publicity, would be for the PGA Tour, in conjunction with the World Golf Championships, to pull the WGC event in March at Trump Doral in Miami. That’s a huge tournament, as opposed to the minor ones yanked thus far. I’ve thought a lot about this one...how NBC could possibly save face while having the event there...such as working out a deal where Trump himself is perhaps shown on camera, with Johnny Miller and Dan Hicks in the booth just acknowledging his presence but nothing else. I mean the whole thing would be immensely sensitive, especially if Trump is still in the race.

Super Tuesday, for example, is tentatively slated for March 1 and normally Doral would be the following weekend.

For the Tour to back out...and sponsor Cadillac is probably the deciding factor...you are talking about scrambling big time to find a new venue. This isn’t changing the Grand Slam of Golf event, or some ESPN celebrity tournament. It’s much more complicated in terms of staging.

So we should know soon on this one. It’s huge.

And back to the politics of Trump, yes, there is a big fear he could run as an independent and pick up 8 to 10 percent (more John Anderson-like rather than Ross Perot-like, the latter taking 19% in 1992, killing George H.W. Bush). But Trump’s 8-10 would be enough to take down the Republican nominee, unless you tell me Hillary is not the Democratic nominee because she is shortly overwhelmed by scandals prior to primary season.

[In 1992, recall the popular vote was Clinton 43%, Bush 37%, Perot 19%; though Perot won no electoral votes. In 1980, Reagan defeated Carter 51-41 in the popular vote, with Anderson getting just 7%. But forget who the players may be in 2016 and the geopolitical backdrop. The demographics are drastically different today than in 1980 and Trump taking just 8-10 percent would kill the elephants’ candidate.]

--Hillary Clinton gave her first national interview of 2015 to CNN’s Brianna Keilar and told Keilar that “People should and do trust me.” Clinton blamed the “barrage of attacks that are largely fomented by and coming from the right” for fueling a perception that trust is an area of vulnerability for her.

Talking about the email controversy, Clinton claimed that “everything I did was permitted” because “there was no law...there was no regulation.” She also threw Colin Powell under the bus, saying he did the same thing in using a personal email account, but there is absolutely no comparison I’m aware of with what Powell was doing and Clinton’s actions.

Glenn Kessler / Washington Post

“In 2009, just eight months after Clinton became secretary of state, the U.S. Code of federal regulations on handling electronic records was updated: ‘Agencies that allow employees to send and receive official electronic mail messages using a system not operated by the agency must ensure that Federal records sent or received on such systems are preserved in the appropriate agency record-keeping system.’ The responsibility for making and preserving the records is assigned to ‘the head of each federal agency.’

“On top of that, when Clinton was secretary, a cable went out under her signature warning employees to ‘avoid conducting official Department business from your personal e-mail accounts.’

“The issue thus becomes whether Clinton cooperated in the spirit of the laws and rules in place at the time. Clinton suggests that ‘when I mailed anybody in the government, it would go into the government system’ and so that signified compliance with the requirement to maintain federal records. But her practice made it difficult to locate records in response to specific requests, because Clinton’s e-mail would be in another official’s inbox – but would not exist in the federal system as part of Clinton’s outbox. An official’s outbox would be the first place that people seeking records would look.

“In fact, let’s recall that the State Department contacted Clinton, seeking copies of her e-mails, precisely because officials were unable to locate e-mails in response to queries from the House Select Committee on Benghazi....

“In reality, Clinton’s decision to use a private e-mail system for official business was highly unusual and flouted State Department procedures, even if not expressly prohibited by law at the time. Moreover, while she claims ‘everything I did was permitted,’ she appears to have not complied with the requirement to turn over her business-related e-mails before she left government service. That’s a major misstep that she has not acknowledged.”

--Back to the immigration issue, Clinton said in her CNN interview that the entire GOP field was in essence anti-immigrant. “They’re on a spectrum of hostility, which I think is really regrettable in a nation of immigrants like ours.” C’mon. That’s just not true, beyond two of the 19 or so declared and soon-to-declare candidates.

As for the trust issue, A Quinnipiac University Swing State poll* found in Florida, for example, 51% of voters hold a negative view of Clinton, compared to 43% who feel she is trustworthy. In Ohio the margin is 53% don’t find her trustworthy, only 40% do. In Pennsylvania the gap is 54-40.

*I cited this one before but in light of her interview, it bears repeating.

--Michael Goodwin of the New York Post had an interesting take on Vermont Sen. Bernie Sanders and his insurgent candidacy for the Democratic nomination. It reminds Goodwin of Eugene McCarthy in 1968, and that is indeed a good analogy, at least as of July.

“LBJ looked certain to be re-elected in 1968, until a Minnesota senator with a penchant for poetry named Eugene McCarthy shocked the world by getting 42 percent in the New Hampshire primary, against Johnson’s 49 percent. Less than three weeks later, the president famously declared that ‘I shall not seek, and I will not accept, the nomination of my party for another term as your president.’....

“The news that Sanders is surging in polls in Iowa and New Hampshire must be sending shivers through Clinton’s camp. Even though Hillary still leads in the 2016 first states, the gap has narrowed so much that her surrogates are lowering expectations, saying Sanders might win some showdowns.

“That’s amazing enough, but her problem could be even more serious. Echoing the Mark Twain line that ‘history doesn’t repeat itself, but it does rhyme.’....

“Sanders, a self-described democrat socialist, doesn’t need to win the nomination – and he probably won’t – to block Clinton. He only need show that she’s not inevitable, and that there is a motivated, significant piece of the party that rejects her.

“That is exactly what he’s doing, as large enthusiastic crowds greet him wherever he goes. If she looks beatable, more viable candidates will find the courage to run.”

Remember, McCarthy’s candidacy soon flamed out in ’68, but his early performance, and LBJ’s declaration, had Hubert Humphrey and Robert Kennedy entering the race.

Goodwin doesn’t mention Joe Biden, but he didn’t need to. Biden can’t wait to next February to see the numbers roll in in Iowa and New Hampshire, but those clamoring for the vice president to enter the race have been given more than enough ammunition through the early poll data on Sanders to convince their favored son to go for it.

--Jeb Bush has raised more than $114 million for his 2016 presidential run; $11.4 million for his official campaign fund, and $103 million for the super-PAC supporting his candidacy, Right To Rise USA. Super-PACS, as opposed to direct campaign donations, which are capped, can accept unlimited amounts of money so long as they don’t coordinate directly with the campaign.

--One thing seems clear in the case of Juan Francisco Lopez Sanchez killing Kate Steinle on a San Francisco pier. City officials released Sanchez, the Mexican national, from jail in April, ignoring an Immigration and Customs Enforcement request to detain him so deportation proceedings could begin. California Sen. Dianne Feinstein was among those harshly criticizing the city’s policy of refusing to cooperate with federal immigration officials when they request help in detaining a suspect thought to be in the country illegally.

Sanchez has served more than 17 years in prison for entering the country illegally and also has four felony drug convictions.

Feinstein said: “I strongly believe that an undocumented individual, convicted of multiple felonies and with a detainer request from ICE, should not have been released. We should focus on deporting convicted criminals, not setting them loose on our streets.”

San Francisco Sheriff Ross Mirkarimi said he will continue to ignore ICE detainer requests, and that instead ICE could have obtained a warrant or court order to keep Sanchez in custody.

--FBI Director James Comey conceded the breach of the Office of Personnel Management was “enormous” and that the White House would be announcing that “millions and millions” of government background investigation records – dating back 20 years – were stolen by hackers.

The next day the OPM disclosed hackers stole 19.7 million background investigation forms and 1.1 million fingerprint records. Just a wee bit more than the initial estimate of 4.2 million personnel files we were first told had been compromised.

Comey told the Senate Intelligence Committee his own personal data was stolen. Previously, James Clapper, director of National Intelligence, said the cyberattack was likely carried out by Chinese hackers.

Editorial / Washington Post

“President Obama ought to be far more steamed about the break-ins than he appears. The OPM director, Katherine Archuleta*...confronted with questions on Capitol Hill, refused to shoulder any blame. ‘I don’t believe anyone’ at the agency ‘is personally responsible,’ she said. ‘If there is anyone to blame, it is the perpetrators.’...

“The Chinese would like to have a smooth, harmonious summit when presidents Xi Jinping and Obama meet in September. Mr. Obama should put China on notice today that such theft is inconsistent with harmony at the table – and he’s mad as hell about it. If that doesn’t get Beijing’s attention, the United States should begin preparations for retaliation aimed specifically at the alleged Chinese attackers. Not all of the broad U.S.-China bilateral relationship needs to be put at risk, but the thieves must feel the heat. It is the only way to deter future attacks.”

*Archuleta handed in her resignation today.

Even Hillary said last weekend, China seemed intent on “hacking into everything that doesn’t move in America.”

--The U.S. Army is planning to reduce the size of its force by 40,000 soldiers over the next two years, which would see the U.S. troop level drop to 450,000 at the end of 2017 from a recent high of 570,000 in 2012.

The timing of this couldn’t be worse. Cut weapons systems, not troops.

--South Carolina’s Senate passed a bill to remove the Confederate flag from the state capitol in Columbia by a 36-3 margin on Monday.   The House then authorized its removal by a comfortable margin, 94-20, and the flag was removed on Friday. 

But the battle over the Confederate flag exploded in the U.S. House as Democrats accused Republicans of catering to their southern conservative bloc in initially promoting an amendment that some viewed as pro-Confederate; the ability to fly the “Battle Flag” in federal cemeteries for veterans.

It’s also now become about the removal of statues of Jefferson Davis and other Confederates that are prominently displayed in some corners of the Capitol, and it will just spread from there.

Yes, this debate in actuality is just getting started and I’ll be weighing in as I see fit. Hint: I’ve been to the place where J.E.B. Stuart was killed. If that memorial was removed, I’d be rather upset. It’s about history, folks.

For now I can’t help but note the observations of William McGurn, writing in the Wall Street Journal.

To wit, it wasn’t Republicans who gave states’ rights a bad name.

“Start with the Old South itself: Even the most cursory glance at history confirms that those who met the civil-rights movement with pickax handles or fire hoses were almost to a man Democrats, from Govs. George Wallace (Alabama), Lester Maddox (Georgia), Ross Barnett (Mississippi), and Orval Faubus (Arkansas) to Bull Connor (commissioner of public safety in Birmingham, Ala.) and Jim Clark (an Alabama county sheriff).

“That was the past, of course. But the present also offers little comfort. Because it is becoming ever clearer that the pet government programs favored by liberal Democrats for African-Americans simply aren’t working.

“Meanwhile, the Republican South is working. No one would claim it has eliminated racism. But a recent study by the Center for Opportunity Urbanism, for example, is striking. The study reports that of the 15 best cities for minorities (Asian-Americans and Hispanic Americans as well as African-Americans), 13 are in states of the old Confederacy.

“Black migration reflects this reality. While black Americans may not be pulling the Republican lever inside the voting booth, in their great reverse migration back to the South they are voting with their feet for Republican policies.”

--Baltimore Mayor Stephanie Rawlings-Blake replaced her police commissioner, Anthony Batts, citing “utmost urgency” to stop a surge in violence.

“We cannot grow Baltimore without making our city a safer place to live,” she said on Thursday. “We need a change.... The people of Baltimore deserve better.”

Deputy Police Commissioner Kevin Davis was named interim commissioner.

Baltimore saw the highest number of murders in May in 25 years, 42, and it has seen another 31 in the past month.

--The death rate from heroin and prescription opioid pain-killers overdoses nearly quadrupled between 2002 and 2013, the Centers for Disease Control and Prevention reported Tuesday.

This week, Baltimore officials said there have been “39 overdose deaths in the city linked to fentanyl-laced heroin in the first quarter of the year, up from 14 in the same time last year, according to the city health department." [Meredith Cohn / Baltimore Sun]

--Gun violence last weekend in Chicago left a staggering 10 dead, (50 wounded!), including a 7-year-old boy, Amari Brown. A gang member was targeting Brown’s father, also a gang member, when he was hit in the chest and killed.

But last year over the holiday weekend, according to the Chicago Tribune, 16 were shot dead. Why that’s terrific progress, typed the editor, sarcastically.

--Boy, this is one headache President Obama doesn’t want. A sexual assault awareness group called on Obama to strip Bill Cosby of his Presidential Medal of Freedom after this week’s revelations.

No president has ever revoked the award, though Obama could do it with the stroke of a pen. But there are all kinds of legal ramifications.

President George W. Bush awarded the medal to Cosby in 2002 in a class that included Hank Aaron, Fred Rogers and Nancy Reagan. [USA TODAY]

--The town of Kitzingen, northern Bavaria, hit 104 Fahrenheit on Sunday, which represents the highest temperature in Germany since measurements began in 1881. 

But in Australia, Saturday is bringing some of the coldest weather in 60 years; seriously, the “Antarctic vortex.” Snow in the mountains, 40s in Sydney.

--Congratulations to our own Dr. Bortrum, 87 years young, who shot a sterling 33 at Trump Summit’s par-3. [Err, Summit Municipal.] This is not a pitch-and-putt course. Damn good job. His best in a few years, he says.

--Finally, Charles Krauthammer / Washington Post:

“We need a pick-me-up. Amid the vandalizing of Palmyra, the imminent extinction of the northern white rhino, the disarray threatening Europe’s most ambitious attempt ever at peaceful unification – amid plague and pestilence and, by God, in the middle of Shark Week – where can humanity turn for uplift?

“Meet New Horizons, arriving at Pluto on July 14. Small and light, the fastest spacecraft ever launched, it left Earth with such velocity that it shot past our moon in nine hours. A speeding bullet the size of a Steinway, it has flown 9 ½ years to the outer edges of the solar system.

“To Pluto, the now-demoted ‘dwarf planet’ that lives beyond the Original Eight in the far distant ‘third zone’ of the solar system – the Kuiper Belt, an unimaginably huge ring of rocks and ice and sundry debris where the dwarf is king.

“After 3 billion miles, New Horizons will on Tuesday shoot right through Pluto’s mini-planetary system of five moons...

“The Pluto fly-by caps a half-century of solar system exploration that has yielded staggering new wonders. Such as Europa, one of Jupiter’s moons, with its vast subterranean ocean under a crust of surface ice, the most inviting potential habitat for extraterrestrial life that human beings will ever reach....

“For the wretched race of beings we surely are, we do, on occasion, manage to soar.”

‘Man’ is still No. 328 on the All-Species List, however. ‘Dog’ remains No. 1.

---

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

God bless America.
---

Gold closed at $1157...lowest weekly close since 3/13
Oil $52.74...lowest weekly close since 4/10

Returns for the week 7/6-7/10

Dow Jones +0.2% [17760]
S&P 500 -0.01% [2076]
S&P MidCap -0.1%
Russell 2000 +0.3%
Nasdaq -0.2% [4997]

Returns for the period 1/1/15-7/10/15

Dow Jones -0.3%
S&P 500 +0.9%
S&P MidCap +3.5%
Russell 2000 +3.9%
Nasdaq +5.5%

Bulls 44.8
Bears 15.6 [Source: Investors Intelligence]

Have a great week. Click on the gofundme link above or send a check to PO Box 990, New Providence, NJ 07974. [Thank you, Sherry and Andrew.]

Brian Trumbore