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06/04/2016

For the week 5/30-6/3

[Posted 11:30 PM ET, Friday]

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Edition 895

Washington and Wall Street

So the talk on the Street, egged on by comments from various Fed governors the past month, was that the Federal Reserve was preparing to hike interest rates a second time come its June 14-15 meeting, or, if not then, July.  I’ve been saying they can’t possibly move in June because of the Brexit vote across the pond, June 23, but that I thought July was very much in play.

For its part, the Fed didn’t seem as concerned about global risks as they have been, arguing the U.S. economy was also on much firmer footing than earlier in the year.

The Fed’s Beige Book, which looks at economic activity in the 12 regional Fed districts, was released this week and “tight labor markets were widely noted.”  Wages were growing “modestly.”

The New York district was emblematic of the more positive tone.

“While employment levels have risen only modestly, there have been more indications of labor shortages and some acceleration in wages.”

Other districts made similar comments.  So far so good.

Early in the week, figures on April personal income, up 0.4%, and consumption, up 1.0%, were solid, with the latter figure having its biggest month-on-month gain since Aug. 2009.

The S&P/Case-Shiller national home-price barometer for March (this one has a lag) showed prices in the 20-city index rose 5.4% year-over-year, with the national home-price index (up 5.2% yoy) now just 4% from its 2006 peak, a rise of 30% off the bottom in 2012.

But the Chicago purchasing managers’ index for May was only 49.3 (50 representing the dividing line between growth and contraction), the national ISM reading on manufacturing was better, 51.3, but then the ISM non-manufacturing (services) number for last month, also 51.3, was the lowest since Feb. 2014.

Two other readings....April construction spending, -1.8%, was largely offset by a healthy revision to March to +1.5%, while April factory orders rose a solid 1.9%.

So this would be part of the report card the Fed examined as it approaches its next gathering, except there was one more release on Friday...May’s jobs report.

The market was expecting the addition of 160,000 jobs when, totally out of left field, the economy, according to Labor Department data, added just 38,000 in May, the weakest performance since Sept. 2010.  Compounding this ugly number were revisions to March and April that took away another 59,000, combined, than previously estimated.

The unemployment rate, though, which is obtained from a separate survey of households, fell to 4.7% from 5.0%, the lowest since 2007, but this wasn’t really good news because 458,000 left the work force.  Labor force participation declined a second consecutive month to 62.6%.  [A broad measure of unemployment that includes the underemployed, U6, came in at 9.7%, unchanged from April.]

But there was a bright spot...wage growth.  Average hourly earnings of private-sector workers rose 0.2% and are now up 2.5% year-over-year, higher than the 2.1% average during the roughly seven-year expansion.

So with this being the last major piece of data before they meet, there is no way the Fed is hiking the funds rate, let alone the fact the polls in the U.K. over the Brexit decision took a decided turn for the worse this week (more below).

But if the U.K. votes to stay in the European Union, and we see a rebound in June’s jobs figures, then the Fed will hike in July.  That’s my story and I’m stickin’ to it.

Finally, there has been more talk on the impact of super-low, or negative, interest rates.  The Capital Group – which manages about $1.4 trillion in assets (think American Funds) penned a white paper that, while really nothing new, just reinforces some basics.

Sub-zero rates in Europe and Japan were causing financial and economic dislocations rather than fostering growth.

“The approach, in theory, should boost inflation and economic growth as the money is ultimately put to use by businesses and consumers.  In reality, however, it doesn’t necessarily work that way.”

Instead, zero interest rates distort the flow of capital.

“These policies penalize savers, robbing them of the income they need from savings, and direct capital to what may be unproductive areas of the economy,” said fund manager David Hoag.  “For economies to function normally, they need positive interest rates and they need capital to be allocated efficiently.”

Heck, I was writing four years ago that we should have had a short interest rate of 2% to provide retirees/savers with real income that would have been pumped right back into the economy, especially in the case of the former.  The long end still would have been low enough to support the housing sector, but we’ll never know if this would have been right, will we?

As to the impact of ultra-low rates on pension funds and insurance companies, it’s obviously a killer.  They have to earn solid returns to pay off future liabilities.

Timothy Martin of the Wall Street Journal had a telling piece.  The California Public Employees’ Retirement System (Calpers), the nation’s largest public pension plan, has one-fifth of its assets in bonds and is down 1.3% since July 1.  In 2015, Calpers posted a return of 2.4%, below its target rate of 7.5%.

The second-largest public pension plan, the California State Teachers’ Retirement System (Calstrs), reported a gain of 1.5% in 2015, as the bond portion of the portfolio returned just 0.6%.

This doesn’t work.  Insurance companies, which have far greater percentages of their assets in fixed income securities, are faring even worse, and they are being forced to search for more complex bond deals.

Bill Gross / Barron’s

“Since the inception of the Barclays Capital U.S. Aggregate or Lehman Bond index in 1976, investment grade bond markets have provided conservative investors with a 7.47% compound return with remarkably little volatility.  An observer would be amazed, as was I, at the steady climb of wealth, even during significant bear markets when 30-year Treasury yields reached 15% in the early 80’s and were tagged with the designation of ‘certificates of confiscation.’

“But as bond prices were going down, the higher and higher annual yields smoothed the damage and even led to positive returns during ‘headline’ bear market periods such as 1979-84, or more recently the ‘taper tantrum’ of 2013.  Quite remarkable, isn’t it?  A Sherlock Holmes sleuth interested in disproving this thesis would find few 12-month periods of time where the investment grade bond market produced negative returns.....

“(But)...the bond market’s 7.5% 40-year historical return is just that – history.  In order to duplicate that number, yields would have to drop to -17%!  Tickets to Mars, anyone?”

To be continued....

Europe and Asia

There was a ton of data on the eurozone this week, including all the latest purchasing managers’ survey figures (PMIs) for May, as reported by Markit.

The eurozone composite reading of manufacturing and services activity came in at 53.1 for May vs. 53.0 in April. Manufacturing was 51.5 (vs. 51.7 in April), while services came in at 53.3 (vs. 53.1).

Germany: manufacturing 52.1 in May (51.8 in April); 55.2 services (54.5)
France: 48.4 mfg. (48.0); 51.6 (50.6)
Italy: 52.4 (53.9); 49.8 (52.1)
Spain: 51.8 (53.5); 55.4 (55.1)
Greece: 48.4 mfg. (49.7)
Ireland: 51.5 mfg. (34-month low)
(non-euro) U.K.: 50.1 mfg. (49.2)

A flash estimate on inflation in the eurozone, as provided by Eurostat, was -0.1% annualized, a tick better than April’s -0.2%

On the employment front, the rate for the EA19 was 10.2% in April, which compares with 11.0% April 2015 and is the lowest since Aug. 2011, though still too high.  [The peak was 12.1% in April 2013.]

Germany hit another record low, however, 4.2% (though the government pegs it at 6.1%); France 9.9%; Italy 11.7%; Spain 20.1% (22.7%, 4/15) and Greece 24.2% (Feb.)

The youth rate remains sky-high; 45.0% in Spain, 51.4% in Greece (Feb.) and 36.9% in Italy. [Eurostat]

Add it all up and Chris Williamson, chief economist at Markit, concluded:

“The final PMI numbers for May have come in slightly ahead of the earlier flash readings, but still point to a eurozone economy which seems unable to move out of low gear.

“The survey data are signaling a GDP rise of 0.3% in the second quarter, suggesting the growth spurt seen at the start of the year will prove frustratingly short-lived.

“June looks likely to prove equally disappointing, as inflows of new business slowed in May to the weakest in almost one-and-a-half years.”

European Central Bank President Mario Draghi also cautioned that growth in the euro-area was likely to cool in the current quarter.  Following the ECB’s latest monetary policy decision which was to maintain the status quo, it said it would start buying corporate bonds next week as part of a new stimulus program announced in March as part of the struggle against deflation.  But officials warn that all monetary policy can do is to buy time, and that it is up to governments to implement structural reforms that are critical to getting Europe’s economy out of its low-growth mode.

Draghi also repeated what he has said at past press conferences:

“Low interest rates [for savers] are a symptom of a weak economy, an economy where there’s an excess of savings over investments.”

“Low or negative interest rates are the right monetary policy measures in order to strengthen the recovery and restore growth.  At that point in time, interest rates will rise again.”

“For interest rates to be higher tomorrow, they have to be low today.”

And boy are they low as I write.  Friday, the benchmark German 10-year, the bund, closed at a record low rate of 0.07%.  I have figures of the euro bond market under my desk blotter and back on 3/31/14, just picking a date, the bund had a yield of 1.57%.  France’s 10-year yield back then was 2.08%. Today it’s 0.41%.

The ECB did raise its GDP outlook for the eurozone from 1.4% this year to 1.6%.

Separately, the Organization for Economic Cooperation and Development is increasingly pessimistic about the global economy and is warning that the “low-growth trap” will continue if governments don’t tack on spending and trade.

The Paris-based economic agency also warned a vote for Brexit “would depress growth in Europe and elsewhere substantially.”

Further, the refugee surge to Europe – and lack of a unified response – threatens global financial stability.

Overall, the OECD is forecasting global growth of 3% this year and 3.3% next; both down 0.3 percentage points from its November outlook.

Other tidbits....

Retail sales in Greece were down 4.3% in March (the latest available), the 10th consecutive monthly contraction.

Greece’s parliament approved a number of fiscal adjustments required for the disbursement of the next bailout tranche of 7.5bn euro ($8.4bn).

Italy’s GDP was up 0.3% in the first quarter over the fourth; 1.0% annualized.

As for Britain’s June 23 referendum on staying in or exiting the European Union, Brexit, the polls suddenly shifted in the opposite direction of where they had been trending.  A Daily Telegraph/ORB poll on Monday had 51% in the ‘Remain’ camp, 46% wanting to ‘Leave.’  Just a week earlier the margin was 55-42 to remain and all seemed to be in order.  An ICM poll then had it 45-42 in favor of Leaving.  Suddenly, who the heck knows?

It’s important to remember that if the U.K. votes to leave, Scotland would then revive its push for independence because most Scots want to stay in the EU.  Scotland comprises just 15% of Britain’s population, but it’s 50% of the land mass.  [And it’s home to Britain’s nuclear weapons.  Try figuring out where to move them.]

The Brexit vote is all about migration, the #1 issue in the U.K., and the headlines have been negative on this front.

But the real bottom line with Brexit is that if Britain votes to leave, it would paralyze investment there.

Meanwhile, the Euro 2016 soccer championship begins in France next week, 51 matches at various locales over 30 days.  The weather has been dreadful, witness the non-stop rain delays at the French Open tennis event and the 35-year high waters of the Seine in Paris, and then you have the widespread labor protests across virtually every important sector, including job actions by Air France pilots, air traffic controllers, railway workers, shutdowns of the Paris metro, demonstrations that continue to plague France’s eight oil refineries with greatly reduced supply, and you are setting up for a real mess at a time when France should want to shine.

And then there’s the threat of terrorism during the tournament.

Finally, on the migrant front, Chancellor Angela Merkel is taking even more heat for her open-door policy, Germany having accepted 1.1 million migrants last year.  Police on Thursday arrested three suspected Syrian Islamist terrorists who were allegedly planning a suicide attack in the city of Dusseldorf.

The three, plus a fourth arrested earlier this year in France, are accused of working on behalf of ISIS.  It’s just a matter of time before Germany has its own Paris and Brussels moment.

In Asia...China’s National Bureau of Statistics said the manufacturing PMI for May was 50.1, unchanged from April, while the services figure was 53.1, down from 53.5.

The Caixin-Markit independent readings, which focus on small- to mid-size private businesses (while the government data focuses on large state-owned enterprises), put the May manufacturing PMI at 49.2, down from 49.4 the prior month, while the reading on services was 50.5 vs. 50.8.

In Japan, the manufacturing PMI for May was a putrid 47.7, down from April’s 48.2, while the service sector rose a little, 50.4 vs. 49.3.  Manufacturing continues to be hit by the impact of the recent earthquakes in a heavily industrialized region.

April retail sales were unchanged month-to-month, down 0.8% year-on-year.

But the big news was that Prime Minister Shinzo Abe told lawmakers he was delaying a scheduled sales tax hike by 2 ½ years, putting his plans for fiscal reforms on hold as the economy weakens anew.

This is the second time Abe has delayed the increase in the sales tax from 8% to 10%, after a rise in April 2014 from 5% to 8%. 

Abe took office in December 2012 pledging to beat deflation and stimulate the economy, while enacting reforms, a package described as “Abenomics,” but he has made little headway amid slack export demand and a weak consumer.

But this latest delay to Oct. 2019 flies in the face of fiscal discipline and Japan’s massive debt, which is twice the size of the economy.  Hiroshi Shiraishi, senior economist at BNP Paribas Securities, told the New York Times: “We are stepping onto a potentially dangerous path because once you start this policy it is difficult to stop, and once you do, the economy will tank.”

Government officials have maintained Abe is not abandoning a pledge to bring the country’s primary budget balance into the black by 2020, and Bank of Japan Governor Haruhiko Kuroda said the government must achieve this goal.

So Abe needs to convince voters ahead of an upper house election in July that he will make up for a funding gap resulting from lower revenues, while still keeping a pledge to provide more support for the elderly; Japan being in a demographic death spiral.

Finally, just a few other manufacturing PMIs in Asia.

South Korea’s figure for May was 50.1 vs. 50.0 in April; Taiwan’s was 48.5 vs. 49.7; and India’s PMI was 50.7, with export orders falling for the first time in 31 months.  GDP in India was, however, a robust 7.9% ann. in the first quarter vs. 7.3% in Q4.

Street Bytes

--It was an incredibly dull week in the markets.  Stocks went nowhere and finished mixed, with the Dow Jones -0.4% to 17807, the S&P 500 literally unchanged, and Nasdaq +0.2%.  The ECB meeting produced no fireworks, nor did OPEC’s confab, as noted in a bit.  The coming week, there is literally no economic or earnings news of note, either.  A good time to go on a cruise, as billionaire Roger McNamee once told me on the QE2, way back.

--U.S. Treasury Yields

6-mo. 0.41%  2-yr. 0.77%  10-yr. 1.70%  30-yr. 2.51%

The yield on the 10-year cratered following the dismal jobs number and the realization the Fed wasn’t raising interest rates in June, at least.  The yield of 1.70% contrasts with 1.85% the prior week, and is near the double-bottom cycle low of 1.66%.

-- OPEC opted to stick to its policy of unfettered production at its meeting in Vienna this week, with members failing to agree on a new output ceiling, though ministers put a happy face on things and it helps that oil has rebounded from its $26 low in January to the $50 level ($48.62 on West Texas Intermediate at week’s end).

New Saudi Oil Minister Khalid Al-Falih told reporters that market fundamentals have been “highly cooperative.”  Iran’s minister reported “very good unity,” while his Nigerian counterpart spoke of improved relations.  So OPEC is going to bide its time in working out a production ceiling as long as oil stabilizes at current levels.

It would seem that Saudi Arabia’s decision in 2014 not to cut output but to keep pumping away paid off in getting many higher-cost producers, especially in the U.S., to cut back on spending and shut off production.

Separately, the International Energy Agency said the market will be close to balance in the second half of the year, while the Energy Department said crude inventories declined last week, after a sharp fall the prior one, as production drops while demand rises.

--U.S. auto sales fell 6% in May over a year earlier, with Americans purchasing 1.54 million cars and light trucks, according to Autodata Corp.  The drop was largely due to two fewer selling days last month.  But the figures do make one wonder if the market has peaked.  It’s been six years of sales gains, after all.

May’s 17.45 million annualized pace is short of the 18 million+ level set late last year.

Ford posted a 6.1% decline in May, hurt by a 25% slide in passenger car sales, while sales of its F-series pickups rose 9%.

GM’s total sales fell 18%, but this is part of an ongoing trend with the company as it pulls back from deliveries to fleet buyers, which are less profitable and potentially undercut vehicle resale values.

Fait Chrysler’s U.S. sales bucked the trend, up 1.1%, thanks to the Jeep brand’s 14% jump.

Toyota reported a 9.6% decline, Honda was down about 5%, and Nissan reported a 1% drop.

--Tesla Motors said it will likely charge owners of its forthcoming Model 3 sedan to use the company’s network of Supercharging stations, which is free to owners of current models.

CEO Elon Musk said Tuesday during Tesla’s annual shareholders meeting, “Free Supercharging fundamentally has a cost....it will still be very cheap, and far cheaper than gasoline, to drive long-distance with the Model 3, but it will not be free long distance for life unless you purchase that package.”

Package?  What package? mused potential buyers.  Musk did not provide further details as to the cost.

There are 632 Superchargers in the world that are free for customers of the Model S and Model X. These deliver 170 miles of range in 30 minutes.

--A scary story has been unfolding for years in Pasadena, Calif., and health officials there this week said 16 patients were infected by dangerous bacteria from medical scopes at Huntington Hospital from Jan. 2013 to Aug. 2015, including 11 who have now died.  It is not clear, though, exactly how many of the 11 died from their infections.  Only one of the 11 death certificates listed the bacteria as the cause.  The hospital previously said just three patients were infected.

The Los Angeles Times has been covering this story extensively and I have read many of their pieces, and I mentioned in this space how disturbing it was when the story first hit that Olympus Corp.’s scopes weren’t cleaned properly; the scopes being reusable.

Authorities have specifically been focusing on the duodenoscope also used during two other Southern California outbreaks at UCLA Ronald Reagan Medical Center and Cedars Sinai Medical Center.

These are gastrointestinal scopes, with a long snake-like tube and a tiny camera on the tip that is inserted into a patient’s throat and upper gastronintestinal tract; used in treating cancer, gallstones and other bile or pancreatic duct issues.

But they were designed so poorly in terms of cleaning that, disgustingly, scopes were being used that were dirty.  What a nightmare.

--Speaking of nightmares, how bad is it in Brazil?  In the first quarter, the economy contracted 5.4% year-on-year, which was actually not as bad as expected, though the ‘better number’ was largely because of a jump in government spending.

Brazil’s manufacturing PMI in May was 41.6 vs. 42.6 in April, an 87-month low, while the services reading was an equally godawful 37.3 vs. 37.4 the prior month.  [Markit]

--Australia’s GDP rose a solid 1.1 percent in the first quarter over the fourth; 3.1 percent year-on-year, according to the Australian Bureau of Statistics.  But consumer prices were down 0.2 percent for the quarter.

--Gaming revenues at Macau’s casinos fell 9.6% in May over year ago levels, about the same as April’s 9.5% decline, according to Macau’s Statistics Service.

Macau’s GDP declined 13.3% year-on-year in the first quarter, which was better than the record contraction of 26.4% in the second quarter of 2015, as well as the 14.4% in the fourth quarter.  Blame Beijing for all this pain.

--China’s Huawei Technologies Co. said this week at a conference in Hong Kong that it sought to overtake Samsung and Apple within five years to become the world’s biggest smartphone maker with a market share over 25%.

Huawei’s smartphone sales volume increased 59% from a year earlier in the first quarter, while Samsung’s were flat and Apple’s declined 14%, according to research firm Gartner Inc.  Huawei’s market share was 8.3%, behind Samsung’s 23% and Apple’s 15%.  [Wall Street Journal]

--From Ameet Sachdev / Chicago Tribune:

“Illinois residents who buy Blue Cross and Blue Shield health care coverage through the state insurance exchange may be in for ObamaCare sticker shock, if proposed rate hikes by the largest insurers in Texas and Oklahoma are any indication.

“In Texas, Blue Cross and Blue Shield is seeking increases averaging 53.7 percent across its Affordable Care Act plans, according to documents posted online by the federal government.  In Oklahoma, Blue Cross and Blue Shield is seeking rate increases that average 49.2 percent.”

Now these may not get approved, but you get the picture.  How does Hillary run on this?  How does President Obama, in his legacy tour, tout ObamaCare with this kind of news?

--Jeff Bezos, commenting on the emergence of artificial intelligence at a conference this week said the trend is “gigantic.”

“It’s hard to overstate how big of an impact this will have on society over the next 20 years.  It is big. It doesn’t mean phones are going to go away or that voice actions will replace screens. As long as people have eyes, they have screens.”

Amazon has had big success with its Echo connected speaker that can turn on lights and answer various queries, as well as access online music.

“It has been a dream from the early days of sci-fi to have a computer to talk to, and that’s coming true,” said Bezos.

On a different issue, Bezos said he doesn’t support efforts by billionaires, such as venture capitalist Peter Thiel, to fund legal campaigns against the media.

Bezos, alluding to Thiel’s battle with Gawker, said public officials need a thick skin because they will always have critics.  “Move forward, it’s not worth losing any sleep over,” he said.  “If you’re doing anything interesting, you’re going to have critics.”  [Wall Street Journal]

But many of Silicon Valley’s elite are hailing Thiel for his actions.

--In a bizarre situation, Switzerland’s Zurich Insurance Group said its former chief executive, Martin Senn, who ran the company for six years until last December, had killed himself.  That can happen.  But the incident comes three years after the company’s then-chief financial officer also killed himself.  So now it’s a story.

--From Greg David / Crain’s New York

“Broadway just danced its way to another record season with more than 13.3 million theatergoers and gross ticket sales of nearly $1.4 billion.”

But....“The increase over the prior year was minimal: 1.6% in attendance and 0.6% in sales.  As Crain’s pointed out, there would have been no record without the runaway hit Hamilton and its very expensive tickets.”

--Finally, we note the passing of former PepsiCo Inc. CEO Roger Enrico, who nearly toppled Coke’s supremacy during the 1980s cola wars.  He was 71.

While Enrico ended up becoming a longtime chairman at the film studio DreamWorks Animation SKG Inc., he was best known for turning Pepsi into a pop-culture leader through sponsorship deals with Michael Jackson, Madonna and Michael J. Fox.  The Pepsi Challenge taste test helped trigger Coca-Cola’s launch of New Coke, one of the worst moves in marketing history in 1985, which Coke quickly reversed when drinkers rebelled.

Enrico was snorkeling with friends Wednesday off Grand Cayman Island when he became unresponsive.

Foreign Affairs

Iraq/Syria/ISIS/Russia/Turkey: Thousands of U.S.-backed fighters launched a major offensive against an ISIS stronghold in northern Syria that it uses as a logistics base.  The operation is aimed at choking off ISIS’ access to land along the Turkish border that the group uses to funnel fighters back and forth to Europe.  A U.S. military official told Reuters that this is significant because it is the last channel to Europe available to ISIS.  Some U.S. special operations forces are supporting the push.  Unfortunately, according to the Syrian Observatory for Human Rights, at least 15 civilians were killed in U.S.-led air strikes in support of the operation.

A humanitarian aid convoy Wednesday entered the rebel-held Syrian town of Daraya for the first such delivery since a regime siege began in 2012, according to the Red Cross.

The UN warned last month that if improvements on aid access to besieged areas by June 1 aren’t forthcoming, it would have the World Food Program carry out air drops of assistance in Syria.

But in the case of Daraya, supposedly the aid was only comprised of medical supplies, not food aid.

Daraya was one of the first towns to erupt in demonstrations against the government and 8,000 people have been under a strict regime siege since late 2012.  People are afraid to go in the streets to await the aid because they fear the government will bomb them.

According to the UN, a total of 592,000 people live under siege in Syria, and another four million live in hard-to-reach areas.

Also this week, Russian airstrikes pounded an al-Qaeda-held city in northwestern Syria, killing 23 civilians, according to the Syrian Observatory.  Russia denied its aircraft carried out the strikes.

And then on Friday, government airstrikes killed dozens of civilians in Aleppo, with the assault including dozens of barrel bombs, according to Agence France Presse.

Ten were killed when their bus was hit.  28 civilians died in government strikes on several neighborhoods in the city.  Said a spokesman for the Observatory, “All movement is targeted, be that buses or bystanders.”

In Iraq, the offensive by the Iraqi army against ISIL-held Fallujah appeared to bog down, though the army has made progress in encircling the city of 50,000.  But, seriously, details are highly sketchy.  What we do know is the fate of at least 20,000 children there is a chief concern of the UN and humanitarian organizations.  An aid official warned of a “human catastrophe” unfolding in the city.  There are also fears of a sectarian backlash, as Shia militias retaliate against the civilian population in areas retaken from ISIL, as Iran, not the U.S., has become the face of the operation to retake Fallujah, which is majority Sunni.  The tens of thousands of Iraqi soldiers, police and Shiite militiamen are backed by Tehran, with Gen. Qassim Suleimani on the ground to assist in the battle.

So we’re back to Sunnis vs. Shiites, though Iraqi Prime Minister Haider al-Abadi has vowed that militias will not participate in the assault on the city.

Meanwhile, ISIS bombings killed at least 20 in Baghdad on Monday.

Iran: Supreme Leader Ayatollah Ali Khamenei urged newly-elected lawmakers to resist “schemes” from the West as parliamentarians met for the first time in Tehran following April elections.

“The turbulent state of the region and the world and the international adventurism of oppressors and their vassals have confronted the Islamic Iran with conditions more complicated than before,” he said.

“It is the revolutionary and legal duty of you to make the parliament a stronghold against the schemes, charms and impudently excessive demands of the Arrogance.”

“Arrogance” is a term first used by Ayatollah Khomeini during the 1979 revolution to describe Western powers, especially the U.S.

Reformists (read ‘sort of moderate’) hold 133 of the 290 seats, which while short of a majority are ahead of conservatives (read ‘dirtballs’), who took 125 seats. Ergo, independent members will be critical.

Friday, in a televised address marking the 27th anniversary of the death of Ayatollah Khomeini, Khamenei ruled out cooperation with America against ISIS, insisting that the United States remains Tehran’s enemy despite the landmark nuclear deal.

Khamenei said U.S. aims in the region were “180 degrees opposed to Iran’s.”  He accused the U.S. of reneging on the nuke deal and said trusting us was a “mistake.”

The “Great Satan” [U.S.] and “evil” Britain were using “pretexts” like human rights abuses and terrorism to avoid fulfilling their commitments.

Benny Avni / New York Post

“What can our next president do about the flawed, and downright dangerous, Iran deal?

“Of course, President Obama and Secretary of State John Kerry will tell you all is well.  Iran is in full compliance. The international community is keeping a vigilant eye.  Worse comes to worse, if Iran violates the deal, sanctions can quickly be ‘snapped back.’

“Really?

“Under the agreement, Iran was supposed to reduce its stockpiles of heavy water, which can be used for making plutonium-based bombs.  Oops – turns out it overproduced and has 70 tons beyond the agreed-on amount.

“No worries.  America will buy some of the excess stock, 32 tons of it, for $8.6 million (even though Iranian access to U.S. currency wasn’t part of the deal).

“But where is that excess stock now?  As Harvard’s Olli Heinonen [Ed. a former top inspector at the International Atomic Energy Agency] told a group of reporters this week, ‘It looks to me that it isn’t in U.S. government possession.’ It might be in or outside Iran – say, in Oman – while the purchase details are finalized.

“If Iran still legally owns that stock today (as is likely), that’s a violation of the deal, while we pretend it’s in full compliance....

“The next president should signal early on that the mullahs will no longer have it as easy as they did with Kerry and Obama.  Getting tough with Tehran won’t only ease some of the Mideast allies’ biggest fears.  It’ll also strengthen America’s stance in the world and perhaps even encourage the people of Iran to stand up to their oppressive rulers.

“Obama’s mantra has been ‘It’s this deal or war.’  But...with an increasingly belligerent Iran and no change of direction, ‘we can get this deal and war’ (according to Mark Dubowitz of the Foundation for Defense of Democracies).

“Perhaps even against nuclear-armed mullahs.”

Israel: Prime Minister Benjamin Netanyahu said Israel is prepared to hold peace talks based on the Arab Peace Initiative; a surprise announcement, especially as it came moments after new hardline Defense Minister Avigdor Lieberman took the oath of office.

“The Arab peace initiative includes positive elements that can help revive constructive negotiations with the Palestinians.”

The initiative calls for normalizing relations between Arab countries and Israel, in exchange for a complete withdrawal by Israel to pre-1967 lines and a solution to the Palestinian refugee problem.  This has long been rejected by Israel.

Just the week before Netanyahu fold French Prime Minister Manuel Valls that Israel opposed the initiative.  Bibi can be strange.

Lebanon: A cabinet member revealed this week the Syrian refugee crisis has cost Lebanon $10 billion....$10bn it doesn’t have.

Afghanistan: The Taliban launched its biggest attack since naming a new leader, killing at least 16 when insurgents dressed in military uniforms stopped a convoy of buses traveling in northern Kunduz province. Apparently, the Taliban took 200 hostages, released 154, and kept more than 30 as hostages.

Somalia: Extremists killed at least 15 people, including two members of parliament, in an attack on a hotel in the Somali capital of Mogadishu.

China: Beijing is preparing an air defense identification zone (ADIZ) in the South China Sea, two years after establishing a similar one in the East China Sea, according to reports out of the People’s Liberation Army.

“If the U.S. military keeps making provocative moves to challenge China’s sovereignty in the region, it will give Beijing a good opportunity to declare an ADIZ in the South China Sea,” a source told the South China Morning Post.

Separately, Taiwanese President Tsai Ing-wen made her first trip to inspect the island’s troops since taking office on May 20, calling on the force to stay alert and defend the territory.  She urged the soldiers responsible for the island’s airspace security to stay alert and defend Taiwan’s democracy and freedom.

“As members of the Air Force of the Republic of China, how can we allow others to flaunt their military prowess over our territorial airspace?” she was quoted as saying.  [South China Morning Post]

North Korea: Pyongyang failed again to fire a ballistic missile off its east coast, according to the South Korean military.  It is unclear what type of missile it was, but this follows three failed tests of the medium-range “Musudan” missile in April.

Russia: Deputy Prime Minister Dmitry Rogozin had to back away from comments he made to reporters, that “Russia will never catch up to the United States in the space race.”

“Our space industry has fallen behind the Americans nine-fold. All of our ambitious projects require us to up productivity 150 percent – and even if we manage that, we will still never catch up with them,” Rogozin originally said to Interfax news agency.

“We will be following the news about NASA and [Elon] Musk and licking our lips while trying to explain ourselves why we don’t need what they are doing.”

Rogozin then took to Facebook later in the day to say he was taken out of context.

Ukraine: With renewed fighting in the east between Ukraine’s army and Russian-backed separatists, a critical water filtration plant is in jeopardy, one that the Washington Post reported could “potentially (trigger) environmental havoc and a humanitarian emergency.”  Water, for one, would be cut off to 400,000 civilians.  But more than a ton of chlorine arrives daily at the plant and shelling of the storage containers could expose tens of thousands to this highly toxic chemical.

Germany: Parliament (the Bundestag) approved a resolution declaring the mass killing of Armenians by Ottoman Turks during World War One was a “genocide.”

Armenians say up to 1.5 million of their people died in the atrocities of 1915. Turkey says the toll was much lower and rejects the term.

The timing couldn’t be worse, seeing as the European Union needs Turkey’s help in stemming the migrant flow.*   Chancellor Angela Merkel was not in the Bundestag for the vote, but her Christian Democrats and coalition partners, as well as the Greens, all supported the resolution.

Ankara recalled its ambassador for consultations.  Foreign Minister Mevlut Cavusoglu tweeted, “The way to close dark pages in [Germany’s] own history is not to defame the history of other countries with irresponsible and baseless parliament decisions.”  [Financial Times]

*Late Friday saw word that Turkey may be close to reaching an agreement with the EU on visa-free travel for Turks to Europe in exchange for Ankara reforming its broadly drafted terrorism laws to meet EU conditions for aid to Turkey in controlling the migrants. But this won’t really come to a head until July.  Many EU governments don’t want to grant such approval to the Turks.

Random Musings

--For Democrats, next week is about California and the polls there show a dead heat.  A Wall Street Journal/NBC News/Marist survey has Hillary Clinton leading Bernie Sanders 49% to 47%.  A Public Policy Institute of California survey puts it at 46-44 Clinton.  An L.A. Times poll had it 44-43 Sanders.

Clinton is just 71 delegates short of the 2,383 needed for the nomination and nearly 700 delegates will be allocated on June 7, including in New Jersey, with 475 of these in the Golden State.

For Sanders, winning in California could bolster his argument with the superdelegates, who are able to switch their allegiance.  It would certainly improve his bargaining position in pushing for a party platform that better reflects his liberal agenda.  [But I don’t believe what I just wrote will occur.]

--In national polls, a Quinnipiac University survey released Wednesday has Clinton with a four-point lead over Trump, 45-41.  This same poll notes that when Libertarian candidate Gary Johnson and Green Party candidate Jill Stein were added, Clinton receives 40%, Trump 38%, Johnson 5% and Stein 3%.  Granted this second poll is rather stupid because I can guarantee 3% in the country don’t know who Jill Stein is...I sure as heck don’t...but I could see Johnson, a former governor of New Mexico, taking 5% if the election were held today.  Maybe a little more just out of protest over this incredibly awful choice Americans have between Trump and Hillary.

--Editorial / Wall Street Journal               

“Donald Trump laid out his energy policy last week, and it drew a sharp and welcome contrast with Hillary Clinton on developing U.S. oil and natural gas.  Too bad few Americans will have noticed because the presumptive GOP presidential nominee spent the days before and since denouncing all and sundry who haven’t embraced his candidacy.  This politics of personal grievance may be the businessman’s biggest obstacle to the White House.

“For a candidate who claims we should all be less easily offended, Mr. Trump may have the thinnest skin in politics.  He seems to think all politics is personal and that his looming nomination means that every Republican should line up, Chris Christie-like, in political deference.  His demand for obeisance is alienating more people than it attracts.

“Start with his now famous attack in New Mexico on that state’s Republican Gov. Susana Martinez.  ‘She’s got to do a better job. She’s not doing the job,’ he declared at a rally in the state last week. His calculation is that Republican Governors need to rally behind his candidacy, so he wanted to make a public example of a holdout.

“ ‘She was not nice. And I was fine – just a little bit of a jab,’ Mr. Trump said at his Tuesday veterans’ event this week.  ‘But she wasn’t nice, and you think I’m going to change?  I’m not changing, including with her.’

“This politics of pique is more likely to achieve the opposite.  Mr. Trump’s challenge, if he wants to win in November, includes persuading millions of Republicans who believe he’s too crude and thuggish to build a political majority.  The way to convince them is not to trash a two-term Republican Governor in a swing state with a 67% approval rating who, by the way, is an Hispanic American.

“Mr. Trump followed up later in the week with a rhetorical assault on Gonzalo Curiel, the federal judge presiding over one of the lawsuits alleging fraud by Trump University. The candidate said the judge is ‘a hater,’ is ‘negative, negative, negative,’ was ‘appointed by Barack Obama’ and ‘happens to be, we believe, Mexican, which is great.  I think that’s fine.’

“Judge Curiel is a native Hoosier, and last we heard even Mr. Trump doesn’t want to build a wall around Indiana.  Mr. Trump managed to combine an ethnic slight with an un-presidential attack on an independent judiciary....

“Millions of Americans who might support Mr. Trump in order to shake up Washington are also asking if he has the temperament and character to be a good President.  This means showing respect for the institutions of self-government, such as the judiciary.  It also means not continuing a politics of racial polarization that equates ethnicity with judicial unfairness....

“Mr. Trump and his partisans are highlighting the polls that show he’s caught up to Hillary Clinton in November matchups. But he’s running against one of the worst Democratic candidates in the last 50 years in a year when voters are eager for change.”

Personally, I am sickened by Trump’s attack on Judge Curiel.  The Donald is a freakin’ idiot for thinking this is a positive.

House Speaker Paul Ryan, who had just given Trump his endorsement, was clearly upset as well by Trump’s actions.

And a reminder of the history.  According to the Pew Research Center, in 2004, George W. Bush captured 40% of the Hispanic vote.  In 2008, John McCain took 31%.  In 2012, Mitt Romney received 27%.  Trump is currently polling around 10%.

--Trump called a news conference on Tuesday to lambast the “dishonest” news media.

“I find the press to be extremely dishonest.  I find the political press to be unbelievably dishonest,” he told reporters in a press conference called to discuss the disbursement of funds to veterans groups from a fundraiser earlier in the year.

But instead of answering legitimate questions on the money and the charities selected, Trump took aim at reporters, calling one “a beauty” and another “a sleaze.”

“This sleazy guy from ABC,” Trump said after the station’s reporter Tom Llamas pressed him about the consistency of his statements regarding the veteran funds.  “You’re a sleaze,” he told Llamas.

I thought this was another incredibly stupid move by Trump, but I recognize his base probably liked it.

So here’s my deal come Tuesday and the primary in my state.  I’m not voting for president.  I’m going to the polls simply to cast a ballot for my Republican congressman, Leonard Lance, who has his usual primary challenge.

As for Trump, I have been trying to hold back on my true feelings on the man.  I’ll give you my full assessment next week.

--Editorial / USA TODAY

“Everyone, including Hillary Clinton, now agrees that the newly confirmed secretary of State made a mistake in 2009 when she decided, for the sake of ‘convenience,’ to run her own email system out of her home in Chappaqua, N.Y., rather than use an official State Department email account.

“But a new report by State’s inspector general makes clear that within two years, Clinton’s bad decision had turned into something far worse: a threat to national security, one that she repeatedly ignored despite multiple warnings.

“Warning No. 1: The report, released last week, reveals that in January 2011, hackers were attacking her private server. Twice, the Hillary and Bill Clinton staffer responsible for maintaining the server had to shut it off to protect data held by America’s top diplomat and the former president.  The staffer notified State Department officials of the attempted hack, and Clinton’s top aides there emailed each other to say that ‘sensitive’ matters should not be discussed with Clinton over email.

“Warning No. 2: Two months later, the assistant secretary for diplomatic security sent a memorandum on cybersecurity threats directly to Clinton, warning of a dramatic increase in efforts ‘to compromise the private home email accounts of senior department officials’ in a likely attempt to ‘gain access to policy documents and personal information that could enable technical surveillance and possible blackmail.’  The memo to Clinton warned her that some personal email accounts had already been compromised and had ‘been reconfigured...to automatically forward copies of all composed emails’ to the hackers.

“Warning No. 3: That May, Clinton herself suspected that there might have been another hacking incident when she ‘received an email with a suspicious link.’  Hours after her aides discussed the issue over email, Clinton received another email with a suspect link, this time from the personal account of the ‘under secretary of State for political affairs.’

“Warning No. 4: A month later, the State Department sent a cable to ‘all diplomatic and consular posts’ about the dangers of unsecured personal email accounts. Staffers were ordered to ‘avoid conducting official Department business from your personal e-mail accounts.’  Who signed that cable? Hillary Clinton.

“Those warnings, coming in a span of six months, should have made any responsible public official, even one without Clinton’s access to classified information on cyber threats from the vast U.S. intelligence network, aware of the national security dangers of failing to secure the secretary of State’s email communications.

“Instead, Clinton and several of her top aides continued to use personal email for sensitive State Department business thousands of times....

“While Clinton is under potential criminal investigation by the FBI for the mishandling of classified material sent through her email, remaining silent might be in her best interests and it is certainly her right.   But to be president, she is going to have to convince voters that she can put the national security of the United States above her own short-term self-interest.

“It’s already clear that, in using the private email server, Clinton broke the rules. Now it remains to be seen whether she also broke the law.”

Pretty scathing, considering the source.

--Anne Gearan / Washington Post

“Retired Army Col. Peter Mansoor plans to vote for Hillary Clinton for president this year, but not because the longtime Republican and former top aide to then-Gen. David Petraeus has had a political conversion. He just thinks Republican Donald Trump is too dangerous to be president.

“ ‘It will be the first Democratic presidential candidate I’ve voted for in my adult life,’ said Mansoor, a professor of military history at Ohio State University.”

Philip Zelikow, a University of Virginia history professor who was a State Department official in the George W. Bush administration, told the Post: “I would support a random name in the phone book” over Trump.

Clinton’s campaign is trying to build the case she is the one best-suited to be commander in chief.  In a speech yesterday (Thursday) in San Diego, Clinton presented a stark contrast between her own extensive qualifications to lead American foreign policy (in her mind) and Donald Trump’s recklessness on national security.

Clinton described Trump’s ideas as “dangerously incoherent.”

Trump “doesn’t understand America, or the world,” she said.  “They’re not really ideas, just a series of bizarre rants, personal feuds and outright lies.”

She also called him “temperamentally unfit” to lead the country.

“It’s not hard to imagine Donald Trump leading us into a war just because somebody got under his very thin skin,” she said.

Clinton mocked Trump’s twitter habit, as he fired off a series of tweets, indicating he was watching the speech live.

“Bad performance by Crooked Hillary Clinton!  Reading poorly from the teleprompter!  She doesn’t even look presidential!” he wrote.

For his part, addressing graduates at the Air Force Academy on Thursday, President Obama said: “As we navigate this complex world, America cannot shirk the mantle of leadership.  We can’t be isolationists.  It’s not possible in this globalized, interconnected world.”

What about Syria, Mr. President?!!

Editorial / New York Post

“Hillary Clinton’s folks billed her San Diego speech Thursday as a big deal. And it certainly was a prime opportunity to lay out her views on foreign policy and America’s role in the world.

“But what she delivered was a 45-minute rant against Donald Trump – with nary a clue about her plans for leading America on the international stage.

“Worse, her string of dump-on-Trump quips might’ve worked better if she had substituted her name for his, starting with her attack on Trump’s ‘series of rants’ – a perfect description of her own speech.

“Clinton tried to portray Trump as ‘dangerous.’ But what do you call it when a secretary of state, to shield herself from accountability, stores classified e-mails (some beyond ‘top secret’) on her private, unsecured server, leaving them vulnerable to hackers the world over?

“Or who goes home for the night with a U.S. consulate besieged by al Qaeda-linked terrorists – then later lies to the victims’ families about how a YouTube video was to blame?

“Clinton called Trump ‘temperamentally unfit’ to be commander-in-chief. But how would you describe an ex-top official who continually lies to the public and holds herself above the law?”

--New York Attorney General Eric Schneiderman is confident the case against Donald Trump and Trump University will prove Trump personally took in millions from the now-defunct program.

Trump University is the target of two lawsuits in California and New York.  The Donald argues that Schneiderman is biased, seeing as he sits on the Hillary for New York Leadership Council.

--Trump was rather upset the PGA Tour pulled the 2017 World Golf Championship from his course at Doral in Miami, opting for a Mexico course instead.  Trump said the PGA had “put profit ahead of thousands of American jobs.”

PGA Tour Commissioner Tim Finchem said Trump’s current profile had made it “difficult” to attract sponsors.  “It’s fundamentally a sponsorship issue,” Finchem said.

It is true that Cadillac’s sponsorship deal was expiring and there has been talk for a year they wouldn’t re-up.  Finchem was thus correct in saying:

“Donald Trump is a brand, a big brand, and when you’re asking a company to invest millions of dollars in branding a tournament and they’re going to share that brand with the host, it’s a difficult decision.”

But Finchem insisted the decision wasn’t political and that the PGA Tour has no issues with Trump.  Here he is being disingenuous.

So instead the Tour signed a new seven-year sponsorship deal with Grupo Salinas, and the first WGC-Mexico Championship will be held in March next year.  [Apparently at a club outside Mexico City.]

Trump was right himself when he said the decision marked a “sad day for Miami, the U.S. and the game of golf.”  Golf fans all over always looked forward to Doral each spring.  Of course Trump being Trump, he couldn’t help but add when interviewed by Fox News, “I hope they have kidnapping insurance.”

--Former House speaker Newt Gingrich, seen as a potential running mate for Trump, commented on talk comparing the presidential candidate to fascists such as Hitler and Mussolini.

Gingrich told Peter Baker of the New York Times that he was “deeply offended” by what he called “utterly ignorant” comparisons.

“Trump does not have a political structure in the sense that the fascists did,” said Gingrich.  “He doesn’t have the sort of ideology that they did.  He has nobody who resembles the brownshirts. This is all just garbage.”

On this I agree.

--Kathleen Parker / Washington Post

“It was such a marvelous idea: the United States of America.

“Obviously, we’ve never really pulled it all together under one hat, but it has always seemed that at least we were striving for a more perfect union.

“No more. Something changed – and quickly, as history goes. Actually, everything did.

“Massive immigration has changed the face of the nation in more than metaphorical ways.  Globalization has made us seem or at least feel less unique among nations.  Our hyperpartisanship, augmented by incessant media coverage tied to ratings and greed, has reduced politics to a parking-lot brawl....

“Democracy, freedom, civilization – it all hangs by a thread. America was always just an idea, a dream founded in the faith that men were capable of great good.  It was a belief made real by an implausible convention of brilliant minds and the enduring courage of generations who fought and died. For what?

“Surely, not this.”

---

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

God bless America.

---

Gold  $1244
Oil  $48.62

Returns for the week 5/30-6/3

Dow Jones  -0.4%  [17807]
S&P 500  +0.0%  [2099,...up 0.07 points]
S&P MidCap  +0.6%
Russell 2000  +1.2%
Nasdaq  +0.2%  [4942]

Returns for the period 1/1/16-6/3/16

Dow Jones  +2.2%
S&P 500  +2.7%
S&P MidCap  +7.3%
Russell 2000  +2.5%
Nasdaq  -1.3%

Bulls  45.4 [big jump]
Bears  23.7  [Source: Investors Intelligence]

Dr. Bortrum posted a new column.

Have a great week.

Brian Trumbore



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Week in Review

06/04/2016

For the week 5/30-6/3

[Posted 11:30 PM ET, Friday]

Note: StocksandNews has significant ongoing cost.  Your support is greatly appreciated.  Click on the gofundme link or send a check to PO Box 990, New Providence, NJ 07974.

Edition 895

Washington and Wall Street

So the talk on the Street, egged on by comments from various Fed governors the past month, was that the Federal Reserve was preparing to hike interest rates a second time come its June 14-15 meeting, or, if not then, July.  I’ve been saying they can’t possibly move in June because of the Brexit vote across the pond, June 23, but that I thought July was very much in play.

For its part, the Fed didn’t seem as concerned about global risks as they have been, arguing the U.S. economy was also on much firmer footing than earlier in the year.

The Fed’s Beige Book, which looks at economic activity in the 12 regional Fed districts, was released this week and “tight labor markets were widely noted.”  Wages were growing “modestly.”

The New York district was emblematic of the more positive tone.

“While employment levels have risen only modestly, there have been more indications of labor shortages and some acceleration in wages.”

Other districts made similar comments.  So far so good.

Early in the week, figures on April personal income, up 0.4%, and consumption, up 1.0%, were solid, with the latter figure having its biggest month-on-month gain since Aug. 2009.

The S&P/Case-Shiller national home-price barometer for March (this one has a lag) showed prices in the 20-city index rose 5.4% year-over-year, with the national home-price index (up 5.2% yoy) now just 4% from its 2006 peak, a rise of 30% off the bottom in 2012.

But the Chicago purchasing managers’ index for May was only 49.3 (50 representing the dividing line between growth and contraction), the national ISM reading on manufacturing was better, 51.3, but then the ISM non-manufacturing (services) number for last month, also 51.3, was the lowest since Feb. 2014.

Two other readings....April construction spending, -1.8%, was largely offset by a healthy revision to March to +1.5%, while April factory orders rose a solid 1.9%.

So this would be part of the report card the Fed examined as it approaches its next gathering, except there was one more release on Friday...May’s jobs report.

The market was expecting the addition of 160,000 jobs when, totally out of left field, the economy, according to Labor Department data, added just 38,000 in May, the weakest performance since Sept. 2010.  Compounding this ugly number were revisions to March and April that took away another 59,000, combined, than previously estimated.

The unemployment rate, though, which is obtained from a separate survey of households, fell to 4.7% from 5.0%, the lowest since 2007, but this wasn’t really good news because 458,000 left the work force.  Labor force participation declined a second consecutive month to 62.6%.  [A broad measure of unemployment that includes the underemployed, U6, came in at 9.7%, unchanged from April.]

But there was a bright spot...wage growth.  Average hourly earnings of private-sector workers rose 0.2% and are now up 2.5% year-over-year, higher than the 2.1% average during the roughly seven-year expansion.

So with this being the last major piece of data before they meet, there is no way the Fed is hiking the funds rate, let alone the fact the polls in the U.K. over the Brexit decision took a decided turn for the worse this week (more below).

But if the U.K. votes to stay in the European Union, and we see a rebound in June’s jobs figures, then the Fed will hike in July.  That’s my story and I’m stickin’ to it.

Finally, there has been more talk on the impact of super-low, or negative, interest rates.  The Capital Group – which manages about $1.4 trillion in assets (think American Funds) penned a white paper that, while really nothing new, just reinforces some basics.

Sub-zero rates in Europe and Japan were causing financial and economic dislocations rather than fostering growth.

“The approach, in theory, should boost inflation and economic growth as the money is ultimately put to use by businesses and consumers.  In reality, however, it doesn’t necessarily work that way.”

Instead, zero interest rates distort the flow of capital.

“These policies penalize savers, robbing them of the income they need from savings, and direct capital to what may be unproductive areas of the economy,” said fund manager David Hoag.  “For economies to function normally, they need positive interest rates and they need capital to be allocated efficiently.”

Heck, I was writing four years ago that we should have had a short interest rate of 2% to provide retirees/savers with real income that would have been pumped right back into the economy, especially in the case of the former.  The long end still would have been low enough to support the housing sector, but we’ll never know if this would have been right, will we?

As to the impact of ultra-low rates on pension funds and insurance companies, it’s obviously a killer.  They have to earn solid returns to pay off future liabilities.

Timothy Martin of the Wall Street Journal had a telling piece.  The California Public Employees’ Retirement System (Calpers), the nation’s largest public pension plan, has one-fifth of its assets in bonds and is down 1.3% since July 1.  In 2015, Calpers posted a return of 2.4%, below its target rate of 7.5%.

The second-largest public pension plan, the California State Teachers’ Retirement System (Calstrs), reported a gain of 1.5% in 2015, as the bond portion of the portfolio returned just 0.6%.

This doesn’t work.  Insurance companies, which have far greater percentages of their assets in fixed income securities, are faring even worse, and they are being forced to search for more complex bond deals.

Bill Gross / Barron’s

“Since the inception of the Barclays Capital U.S. Aggregate or Lehman Bond index in 1976, investment grade bond markets have provided conservative investors with a 7.47% compound return with remarkably little volatility.  An observer would be amazed, as was I, at the steady climb of wealth, even during significant bear markets when 30-year Treasury yields reached 15% in the early 80’s and were tagged with the designation of ‘certificates of confiscation.’

“But as bond prices were going down, the higher and higher annual yields smoothed the damage and even led to positive returns during ‘headline’ bear market periods such as 1979-84, or more recently the ‘taper tantrum’ of 2013.  Quite remarkable, isn’t it?  A Sherlock Holmes sleuth interested in disproving this thesis would find few 12-month periods of time where the investment grade bond market produced negative returns.....

“(But)...the bond market’s 7.5% 40-year historical return is just that – history.  In order to duplicate that number, yields would have to drop to -17%!  Tickets to Mars, anyone?”

To be continued....

Europe and Asia

There was a ton of data on the eurozone this week, including all the latest purchasing managers’ survey figures (PMIs) for May, as reported by Markit.

The eurozone composite reading of manufacturing and services activity came in at 53.1 for May vs. 53.0 in April. Manufacturing was 51.5 (vs. 51.7 in April), while services came in at 53.3 (vs. 53.1).

Germany: manufacturing 52.1 in May (51.8 in April); 55.2 services (54.5)
France: 48.4 mfg. (48.0); 51.6 (50.6)
Italy: 52.4 (53.9); 49.8 (52.1)
Spain: 51.8 (53.5); 55.4 (55.1)
Greece: 48.4 mfg. (49.7)
Ireland: 51.5 mfg. (34-month low)
(non-euro) U.K.: 50.1 mfg. (49.2)

A flash estimate on inflation in the eurozone, as provided by Eurostat, was -0.1% annualized, a tick better than April’s -0.2%

On the employment front, the rate for the EA19 was 10.2% in April, which compares with 11.0% April 2015 and is the lowest since Aug. 2011, though still too high.  [The peak was 12.1% in April 2013.]

Germany hit another record low, however, 4.2% (though the government pegs it at 6.1%); France 9.9%; Italy 11.7%; Spain 20.1% (22.7%, 4/15) and Greece 24.2% (Feb.)

The youth rate remains sky-high; 45.0% in Spain, 51.4% in Greece (Feb.) and 36.9% in Italy. [Eurostat]

Add it all up and Chris Williamson, chief economist at Markit, concluded:

“The final PMI numbers for May have come in slightly ahead of the earlier flash readings, but still point to a eurozone economy which seems unable to move out of low gear.

“The survey data are signaling a GDP rise of 0.3% in the second quarter, suggesting the growth spurt seen at the start of the year will prove frustratingly short-lived.

“June looks likely to prove equally disappointing, as inflows of new business slowed in May to the weakest in almost one-and-a-half years.”

European Central Bank President Mario Draghi also cautioned that growth in the euro-area was likely to cool in the current quarter.  Following the ECB’s latest monetary policy decision which was to maintain the status quo, it said it would start buying corporate bonds next week as part of a new stimulus program announced in March as part of the struggle against deflation.  But officials warn that all monetary policy can do is to buy time, and that it is up to governments to implement structural reforms that are critical to getting Europe’s economy out of its low-growth mode.

Draghi also repeated what he has said at past press conferences:

“Low interest rates [for savers] are a symptom of a weak economy, an economy where there’s an excess of savings over investments.”

“Low or negative interest rates are the right monetary policy measures in order to strengthen the recovery and restore growth.  At that point in time, interest rates will rise again.”

“For interest rates to be higher tomorrow, they have to be low today.”

And boy are they low as I write.  Friday, the benchmark German 10-year, the bund, closed at a record low rate of 0.07%.  I have figures of the euro bond market under my desk blotter and back on 3/31/14, just picking a date, the bund had a yield of 1.57%.  France’s 10-year yield back then was 2.08%. Today it’s 0.41%.

The ECB did raise its GDP outlook for the eurozone from 1.4% this year to 1.6%.

Separately, the Organization for Economic Cooperation and Development is increasingly pessimistic about the global economy and is warning that the “low-growth trap” will continue if governments don’t tack on spending and trade.

The Paris-based economic agency also warned a vote for Brexit “would depress growth in Europe and elsewhere substantially.”

Further, the refugee surge to Europe – and lack of a unified response – threatens global financial stability.

Overall, the OECD is forecasting global growth of 3% this year and 3.3% next; both down 0.3 percentage points from its November outlook.

Other tidbits....

Retail sales in Greece were down 4.3% in March (the latest available), the 10th consecutive monthly contraction.

Greece’s parliament approved a number of fiscal adjustments required for the disbursement of the next bailout tranche of 7.5bn euro ($8.4bn).

Italy’s GDP was up 0.3% in the first quarter over the fourth; 1.0% annualized.

As for Britain’s June 23 referendum on staying in or exiting the European Union, Brexit, the polls suddenly shifted in the opposite direction of where they had been trending.  A Daily Telegraph/ORB poll on Monday had 51% in the ‘Remain’ camp, 46% wanting to ‘Leave.’  Just a week earlier the margin was 55-42 to remain and all seemed to be in order.  An ICM poll then had it 45-42 in favor of Leaving.  Suddenly, who the heck knows?

It’s important to remember that if the U.K. votes to leave, Scotland would then revive its push for independence because most Scots want to stay in the EU.  Scotland comprises just 15% of Britain’s population, but it’s 50% of the land mass.  [And it’s home to Britain’s nuclear weapons.  Try figuring out where to move them.]

The Brexit vote is all about migration, the #1 issue in the U.K., and the headlines have been negative on this front.

But the real bottom line with Brexit is that if Britain votes to leave, it would paralyze investment there.

Meanwhile, the Euro 2016 soccer championship begins in France next week, 51 matches at various locales over 30 days.  The weather has been dreadful, witness the non-stop rain delays at the French Open tennis event and the 35-year high waters of the Seine in Paris, and then you have the widespread labor protests across virtually every important sector, including job actions by Air France pilots, air traffic controllers, railway workers, shutdowns of the Paris metro, demonstrations that continue to plague France’s eight oil refineries with greatly reduced supply, and you are setting up for a real mess at a time when France should want to shine.

And then there’s the threat of terrorism during the tournament.

Finally, on the migrant front, Chancellor Angela Merkel is taking even more heat for her open-door policy, Germany having accepted 1.1 million migrants last year.  Police on Thursday arrested three suspected Syrian Islamist terrorists who were allegedly planning a suicide attack in the city of Dusseldorf.

The three, plus a fourth arrested earlier this year in France, are accused of working on behalf of ISIS.  It’s just a matter of time before Germany has its own Paris and Brussels moment.

In Asia...China’s National Bureau of Statistics said the manufacturing PMI for May was 50.1, unchanged from April, while the services figure was 53.1, down from 53.5.

The Caixin-Markit independent readings, which focus on small- to mid-size private businesses (while the government data focuses on large state-owned enterprises), put the May manufacturing PMI at 49.2, down from 49.4 the prior month, while the reading on services was 50.5 vs. 50.8.

In Japan, the manufacturing PMI for May was a putrid 47.7, down from April’s 48.2, while the service sector rose a little, 50.4 vs. 49.3.  Manufacturing continues to be hit by the impact of the recent earthquakes in a heavily industrialized region.

April retail sales were unchanged month-to-month, down 0.8% year-on-year.

But the big news was that Prime Minister Shinzo Abe told lawmakers he was delaying a scheduled sales tax hike by 2 ½ years, putting his plans for fiscal reforms on hold as the economy weakens anew.

This is the second time Abe has delayed the increase in the sales tax from 8% to 10%, after a rise in April 2014 from 5% to 8%. 

Abe took office in December 2012 pledging to beat deflation and stimulate the economy, while enacting reforms, a package described as “Abenomics,” but he has made little headway amid slack export demand and a weak consumer.

But this latest delay to Oct. 2019 flies in the face of fiscal discipline and Japan’s massive debt, which is twice the size of the economy.  Hiroshi Shiraishi, senior economist at BNP Paribas Securities, told the New York Times: “We are stepping onto a potentially dangerous path because once you start this policy it is difficult to stop, and once you do, the economy will tank.”

Government officials have maintained Abe is not abandoning a pledge to bring the country’s primary budget balance into the black by 2020, and Bank of Japan Governor Haruhiko Kuroda said the government must achieve this goal.

So Abe needs to convince voters ahead of an upper house election in July that he will make up for a funding gap resulting from lower revenues, while still keeping a pledge to provide more support for the elderly; Japan being in a demographic death spiral.

Finally, just a few other manufacturing PMIs in Asia.

South Korea’s figure for May was 50.1 vs. 50.0 in April; Taiwan’s was 48.5 vs. 49.7; and India’s PMI was 50.7, with export orders falling for the first time in 31 months.  GDP in India was, however, a robust 7.9% ann. in the first quarter vs. 7.3% in Q4.

Street Bytes

--It was an incredibly dull week in the markets.  Stocks went nowhere and finished mixed, with the Dow Jones -0.4% to 17807, the S&P 500 literally unchanged, and Nasdaq +0.2%.  The ECB meeting produced no fireworks, nor did OPEC’s confab, as noted in a bit.  The coming week, there is literally no economic or earnings news of note, either.  A good time to go on a cruise, as billionaire Roger McNamee once told me on the QE2, way back.

--U.S. Treasury Yields

6-mo. 0.41%  2-yr. 0.77%  10-yr. 1.70%  30-yr. 2.51%

The yield on the 10-year cratered following the dismal jobs number and the realization the Fed wasn’t raising interest rates in June, at least.  The yield of 1.70% contrasts with 1.85% the prior week, and is near the double-bottom cycle low of 1.66%.

-- OPEC opted to stick to its policy of unfettered production at its meeting in Vienna this week, with members failing to agree on a new output ceiling, though ministers put a happy face on things and it helps that oil has rebounded from its $26 low in January to the $50 level ($48.62 on West Texas Intermediate at week’s end).

New Saudi Oil Minister Khalid Al-Falih told reporters that market fundamentals have been “highly cooperative.”  Iran’s minister reported “very good unity,” while his Nigerian counterpart spoke of improved relations.  So OPEC is going to bide its time in working out a production ceiling as long as oil stabilizes at current levels.

It would seem that Saudi Arabia’s decision in 2014 not to cut output but to keep pumping away paid off in getting many higher-cost producers, especially in the U.S., to cut back on spending and shut off production.

Separately, the International Energy Agency said the market will be close to balance in the second half of the year, while the Energy Department said crude inventories declined last week, after a sharp fall the prior one, as production drops while demand rises.

--U.S. auto sales fell 6% in May over a year earlier, with Americans purchasing 1.54 million cars and light trucks, according to Autodata Corp.  The drop was largely due to two fewer selling days last month.  But the figures do make one wonder if the market has peaked.  It’s been six years of sales gains, after all.

May’s 17.45 million annualized pace is short of the 18 million+ level set late last year.

Ford posted a 6.1% decline in May, hurt by a 25% slide in passenger car sales, while sales of its F-series pickups rose 9%.

GM’s total sales fell 18%, but this is part of an ongoing trend with the company as it pulls back from deliveries to fleet buyers, which are less profitable and potentially undercut vehicle resale values.

Fait Chrysler’s U.S. sales bucked the trend, up 1.1%, thanks to the Jeep brand’s 14% jump.

Toyota reported a 9.6% decline, Honda was down about 5%, and Nissan reported a 1% drop.

--Tesla Motors said it will likely charge owners of its forthcoming Model 3 sedan to use the company’s network of Supercharging stations, which is free to owners of current models.

CEO Elon Musk said Tuesday during Tesla’s annual shareholders meeting, “Free Supercharging fundamentally has a cost....it will still be very cheap, and far cheaper than gasoline, to drive long-distance with the Model 3, but it will not be free long distance for life unless you purchase that package.”

Package?  What package? mused potential buyers.  Musk did not provide further details as to the cost.

There are 632 Superchargers in the world that are free for customers of the Model S and Model X. These deliver 170 miles of range in 30 minutes.

--A scary story has been unfolding for years in Pasadena, Calif., and health officials there this week said 16 patients were infected by dangerous bacteria from medical scopes at Huntington Hospital from Jan. 2013 to Aug. 2015, including 11 who have now died.  It is not clear, though, exactly how many of the 11 died from their infections.  Only one of the 11 death certificates listed the bacteria as the cause.  The hospital previously said just three patients were infected.

The Los Angeles Times has been covering this story extensively and I have read many of their pieces, and I mentioned in this space how disturbing it was when the story first hit that Olympus Corp.’s scopes weren’t cleaned properly; the scopes being reusable.

Authorities have specifically been focusing on the duodenoscope also used during two other Southern California outbreaks at UCLA Ronald Reagan Medical Center and Cedars Sinai Medical Center.

These are gastrointestinal scopes, with a long snake-like tube and a tiny camera on the tip that is inserted into a patient’s throat and upper gastronintestinal tract; used in treating cancer, gallstones and other bile or pancreatic duct issues.

But they were designed so poorly in terms of cleaning that, disgustingly, scopes were being used that were dirty.  What a nightmare.

--Speaking of nightmares, how bad is it in Brazil?  In the first quarter, the economy contracted 5.4% year-on-year, which was actually not as bad as expected, though the ‘better number’ was largely because of a jump in government spending.

Brazil’s manufacturing PMI in May was 41.6 vs. 42.6 in April, an 87-month low, while the services reading was an equally godawful 37.3 vs. 37.4 the prior month.  [Markit]

--Australia’s GDP rose a solid 1.1 percent in the first quarter over the fourth; 3.1 percent year-on-year, according to the Australian Bureau of Statistics.  But consumer prices were down 0.2 percent for the quarter.

--Gaming revenues at Macau’s casinos fell 9.6% in May over year ago levels, about the same as April’s 9.5% decline, according to Macau’s Statistics Service.

Macau’s GDP declined 13.3% year-on-year in the first quarter, which was better than the record contraction of 26.4% in the second quarter of 2015, as well as the 14.4% in the fourth quarter.  Blame Beijing for all this pain.

--China’s Huawei Technologies Co. said this week at a conference in Hong Kong that it sought to overtake Samsung and Apple within five years to become the world’s biggest smartphone maker with a market share over 25%.

Huawei’s smartphone sales volume increased 59% from a year earlier in the first quarter, while Samsung’s were flat and Apple’s declined 14%, according to research firm Gartner Inc.  Huawei’s market share was 8.3%, behind Samsung’s 23% and Apple’s 15%.  [Wall Street Journal]

--From Ameet Sachdev / Chicago Tribune:

“Illinois residents who buy Blue Cross and Blue Shield health care coverage through the state insurance exchange may be in for ObamaCare sticker shock, if proposed rate hikes by the largest insurers in Texas and Oklahoma are any indication.

“In Texas, Blue Cross and Blue Shield is seeking increases averaging 53.7 percent across its Affordable Care Act plans, according to documents posted online by the federal government.  In Oklahoma, Blue Cross and Blue Shield is seeking rate increases that average 49.2 percent.”

Now these may not get approved, but you get the picture.  How does Hillary run on this?  How does President Obama, in his legacy tour, tout ObamaCare with this kind of news?

--Jeff Bezos, commenting on the emergence of artificial intelligence at a conference this week said the trend is “gigantic.”

“It’s hard to overstate how big of an impact this will have on society over the next 20 years.  It is big. It doesn’t mean phones are going to go away or that voice actions will replace screens. As long as people have eyes, they have screens.”

Amazon has had big success with its Echo connected speaker that can turn on lights and answer various queries, as well as access online music.

“It has been a dream from the early days of sci-fi to have a computer to talk to, and that’s coming true,” said Bezos.

On a different issue, Bezos said he doesn’t support efforts by billionaires, such as venture capitalist Peter Thiel, to fund legal campaigns against the media.

Bezos, alluding to Thiel’s battle with Gawker, said public officials need a thick skin because they will always have critics.  “Move forward, it’s not worth losing any sleep over,” he said.  “If you’re doing anything interesting, you’re going to have critics.”  [Wall Street Journal]

But many of Silicon Valley’s elite are hailing Thiel for his actions.

--In a bizarre situation, Switzerland’s Zurich Insurance Group said its former chief executive, Martin Senn, who ran the company for six years until last December, had killed himself.  That can happen.  But the incident comes three years after the company’s then-chief financial officer also killed himself.  So now it’s a story.

--From Greg David / Crain’s New York

“Broadway just danced its way to another record season with more than 13.3 million theatergoers and gross ticket sales of nearly $1.4 billion.”

But....“The increase over the prior year was minimal: 1.6% in attendance and 0.6% in sales.  As Crain’s pointed out, there would have been no record without the runaway hit Hamilton and its very expensive tickets.”

--Finally, we note the passing of former PepsiCo Inc. CEO Roger Enrico, who nearly toppled Coke’s supremacy during the 1980s cola wars.  He was 71.

While Enrico ended up becoming a longtime chairman at the film studio DreamWorks Animation SKG Inc., he was best known for turning Pepsi into a pop-culture leader through sponsorship deals with Michael Jackson, Madonna and Michael J. Fox.  The Pepsi Challenge taste test helped trigger Coca-Cola’s launch of New Coke, one of the worst moves in marketing history in 1985, which Coke quickly reversed when drinkers rebelled.

Enrico was snorkeling with friends Wednesday off Grand Cayman Island when he became unresponsive.

Foreign Affairs

Iraq/Syria/ISIS/Russia/Turkey: Thousands of U.S.-backed fighters launched a major offensive against an ISIS stronghold in northern Syria that it uses as a logistics base.  The operation is aimed at choking off ISIS’ access to land along the Turkish border that the group uses to funnel fighters back and forth to Europe.  A U.S. military official told Reuters that this is significant because it is the last channel to Europe available to ISIS.  Some U.S. special operations forces are supporting the push.  Unfortunately, according to the Syrian Observatory for Human Rights, at least 15 civilians were killed in U.S.-led air strikes in support of the operation.

A humanitarian aid convoy Wednesday entered the rebel-held Syrian town of Daraya for the first such delivery since a regime siege began in 2012, according to the Red Cross.

The UN warned last month that if improvements on aid access to besieged areas by June 1 aren’t forthcoming, it would have the World Food Program carry out air drops of assistance in Syria.

But in the case of Daraya, supposedly the aid was only comprised of medical supplies, not food aid.

Daraya was one of the first towns to erupt in demonstrations against the government and 8,000 people have been under a strict regime siege since late 2012.  People are afraid to go in the streets to await the aid because they fear the government will bomb them.

According to the UN, a total of 592,000 people live under siege in Syria, and another four million live in hard-to-reach areas.

Also this week, Russian airstrikes pounded an al-Qaeda-held city in northwestern Syria, killing 23 civilians, according to the Syrian Observatory.  Russia denied its aircraft carried out the strikes.

And then on Friday, government airstrikes killed dozens of civilians in Aleppo, with the assault including dozens of barrel bombs, according to Agence France Presse.

Ten were killed when their bus was hit.  28 civilians died in government strikes on several neighborhoods in the city.  Said a spokesman for the Observatory, “All movement is targeted, be that buses or bystanders.”

In Iraq, the offensive by the Iraqi army against ISIL-held Fallujah appeared to bog down, though the army has made progress in encircling the city of 50,000.  But, seriously, details are highly sketchy.  What we do know is the fate of at least 20,000 children there is a chief concern of the UN and humanitarian organizations.  An aid official warned of a “human catastrophe” unfolding in the city.  There are also fears of a sectarian backlash, as Shia militias retaliate against the civilian population in areas retaken from ISIL, as Iran, not the U.S., has become the face of the operation to retake Fallujah, which is majority Sunni.  The tens of thousands of Iraqi soldiers, police and Shiite militiamen are backed by Tehran, with Gen. Qassim Suleimani on the ground to assist in the battle.

So we’re back to Sunnis vs. Shiites, though Iraqi Prime Minister Haider al-Abadi has vowed that militias will not participate in the assault on the city.

Meanwhile, ISIS bombings killed at least 20 in Baghdad on Monday.

Iran: Supreme Leader Ayatollah Ali Khamenei urged newly-elected lawmakers to resist “schemes” from the West as parliamentarians met for the first time in Tehran following April elections.

“The turbulent state of the region and the world and the international adventurism of oppressors and their vassals have confronted the Islamic Iran with conditions more complicated than before,” he said.

“It is the revolutionary and legal duty of you to make the parliament a stronghold against the schemes, charms and impudently excessive demands of the Arrogance.”

“Arrogance” is a term first used by Ayatollah Khomeini during the 1979 revolution to describe Western powers, especially the U.S.

Reformists (read ‘sort of moderate’) hold 133 of the 290 seats, which while short of a majority are ahead of conservatives (read ‘dirtballs’), who took 125 seats. Ergo, independent members will be critical.

Friday, in a televised address marking the 27th anniversary of the death of Ayatollah Khomeini, Khamenei ruled out cooperation with America against ISIS, insisting that the United States remains Tehran’s enemy despite the landmark nuclear deal.

Khamenei said U.S. aims in the region were “180 degrees opposed to Iran’s.”  He accused the U.S. of reneging on the nuke deal and said trusting us was a “mistake.”

The “Great Satan” [U.S.] and “evil” Britain were using “pretexts” like human rights abuses and terrorism to avoid fulfilling their commitments.

Benny Avni / New York Post

“What can our next president do about the flawed, and downright dangerous, Iran deal?

“Of course, President Obama and Secretary of State John Kerry will tell you all is well.  Iran is in full compliance. The international community is keeping a vigilant eye.  Worse comes to worse, if Iran violates the deal, sanctions can quickly be ‘snapped back.’

“Really?

“Under the agreement, Iran was supposed to reduce its stockpiles of heavy water, which can be used for making plutonium-based bombs.  Oops – turns out it overproduced and has 70 tons beyond the agreed-on amount.

“No worries.  America will buy some of the excess stock, 32 tons of it, for $8.6 million (even though Iranian access to U.S. currency wasn’t part of the deal).

“But where is that excess stock now?  As Harvard’s Olli Heinonen [Ed. a former top inspector at the International Atomic Energy Agency] told a group of reporters this week, ‘It looks to me that it isn’t in U.S. government possession.’ It might be in or outside Iran – say, in Oman – while the purchase details are finalized.

“If Iran still legally owns that stock today (as is likely), that’s a violation of the deal, while we pretend it’s in full compliance....

“The next president should signal early on that the mullahs will no longer have it as easy as they did with Kerry and Obama.  Getting tough with Tehran won’t only ease some of the Mideast allies’ biggest fears.  It’ll also strengthen America’s stance in the world and perhaps even encourage the people of Iran to stand up to their oppressive rulers.

“Obama’s mantra has been ‘It’s this deal or war.’  But...with an increasingly belligerent Iran and no change of direction, ‘we can get this deal and war’ (according to Mark Dubowitz of the Foundation for Defense of Democracies).

“Perhaps even against nuclear-armed mullahs.”

Israel: Prime Minister Benjamin Netanyahu said Israel is prepared to hold peace talks based on the Arab Peace Initiative; a surprise announcement, especially as it came moments after new hardline Defense Minister Avigdor Lieberman took the oath of office.

“The Arab peace initiative includes positive elements that can help revive constructive negotiations with the Palestinians.”

The initiative calls for normalizing relations between Arab countries and Israel, in exchange for a complete withdrawal by Israel to pre-1967 lines and a solution to the Palestinian refugee problem.  This has long been rejected by Israel.

Just the week before Netanyahu fold French Prime Minister Manuel Valls that Israel opposed the initiative.  Bibi can be strange.

Lebanon: A cabinet member revealed this week the Syrian refugee crisis has cost Lebanon $10 billion....$10bn it doesn’t have.

Afghanistan: The Taliban launched its biggest attack since naming a new leader, killing at least 16 when insurgents dressed in military uniforms stopped a convoy of buses traveling in northern Kunduz province. Apparently, the Taliban took 200 hostages, released 154, and kept more than 30 as hostages.

Somalia: Extremists killed at least 15 people, including two members of parliament, in an attack on a hotel in the Somali capital of Mogadishu.

China: Beijing is preparing an air defense identification zone (ADIZ) in the South China Sea, two years after establishing a similar one in the East China Sea, according to reports out of the People’s Liberation Army.

“If the U.S. military keeps making provocative moves to challenge China’s sovereignty in the region, it will give Beijing a good opportunity to declare an ADIZ in the South China Sea,” a source told the South China Morning Post.

Separately, Taiwanese President Tsai Ing-wen made her first trip to inspect the island’s troops since taking office on May 20, calling on the force to stay alert and defend the territory.  She urged the soldiers responsible for the island’s airspace security to stay alert and defend Taiwan’s democracy and freedom.

“As members of the Air Force of the Republic of China, how can we allow others to flaunt their military prowess over our territorial airspace?” she was quoted as saying.  [South China Morning Post]

North Korea: Pyongyang failed again to fire a ballistic missile off its east coast, according to the South Korean military.  It is unclear what type of missile it was, but this follows three failed tests of the medium-range “Musudan” missile in April.

Russia: Deputy Prime Minister Dmitry Rogozin had to back away from comments he made to reporters, that “Russia will never catch up to the United States in the space race.”

“Our space industry has fallen behind the Americans nine-fold. All of our ambitious projects require us to up productivity 150 percent – and even if we manage that, we will still never catch up with them,” Rogozin originally said to Interfax news agency.

“We will be following the news about NASA and [Elon] Musk and licking our lips while trying to explain ourselves why we don’t need what they are doing.”

Rogozin then took to Facebook later in the day to say he was taken out of context.

Ukraine: With renewed fighting in the east between Ukraine’s army and Russian-backed separatists, a critical water filtration plant is in jeopardy, one that the Washington Post reported could “potentially (trigger) environmental havoc and a humanitarian emergency.”  Water, for one, would be cut off to 400,000 civilians.  But more than a ton of chlorine arrives daily at the plant and shelling of the storage containers could expose tens of thousands to this highly toxic chemical.

Germany: Parliament (the Bundestag) approved a resolution declaring the mass killing of Armenians by Ottoman Turks during World War One was a “genocide.”

Armenians say up to 1.5 million of their people died in the atrocities of 1915. Turkey says the toll was much lower and rejects the term.

The timing couldn’t be worse, seeing as the European Union needs Turkey’s help in stemming the migrant flow.*   Chancellor Angela Merkel was not in the Bundestag for the vote, but her Christian Democrats and coalition partners, as well as the Greens, all supported the resolution.

Ankara recalled its ambassador for consultations.  Foreign Minister Mevlut Cavusoglu tweeted, “The way to close dark pages in [Germany’s] own history is not to defame the history of other countries with irresponsible and baseless parliament decisions.”  [Financial Times]

*Late Friday saw word that Turkey may be close to reaching an agreement with the EU on visa-free travel for Turks to Europe in exchange for Ankara reforming its broadly drafted terrorism laws to meet EU conditions for aid to Turkey in controlling the migrants. But this won’t really come to a head until July.  Many EU governments don’t want to grant such approval to the Turks.

Random Musings

--For Democrats, next week is about California and the polls there show a dead heat.  A Wall Street Journal/NBC News/Marist survey has Hillary Clinton leading Bernie Sanders 49% to 47%.  A Public Policy Institute of California survey puts it at 46-44 Clinton.  An L.A. Times poll had it 44-43 Sanders.

Clinton is just 71 delegates short of the 2,383 needed for the nomination and nearly 700 delegates will be allocated on June 7, including in New Jersey, with 475 of these in the Golden State.

For Sanders, winning in California could bolster his argument with the superdelegates, who are able to switch their allegiance.  It would certainly improve his bargaining position in pushing for a party platform that better reflects his liberal agenda.  [But I don’t believe what I just wrote will occur.]

--In national polls, a Quinnipiac University survey released Wednesday has Clinton with a four-point lead over Trump, 45-41.  This same poll notes that when Libertarian candidate Gary Johnson and Green Party candidate Jill Stein were added, Clinton receives 40%, Trump 38%, Johnson 5% and Stein 3%.  Granted this second poll is rather stupid because I can guarantee 3% in the country don’t know who Jill Stein is...I sure as heck don’t...but I could see Johnson, a former governor of New Mexico, taking 5% if the election were held today.  Maybe a little more just out of protest over this incredibly awful choice Americans have between Trump and Hillary.

--Editorial / Wall Street Journal               

“Donald Trump laid out his energy policy last week, and it drew a sharp and welcome contrast with Hillary Clinton on developing U.S. oil and natural gas.  Too bad few Americans will have noticed because the presumptive GOP presidential nominee spent the days before and since denouncing all and sundry who haven’t embraced his candidacy.  This politics of personal grievance may be the businessman’s biggest obstacle to the White House.

“For a candidate who claims we should all be less easily offended, Mr. Trump may have the thinnest skin in politics.  He seems to think all politics is personal and that his looming nomination means that every Republican should line up, Chris Christie-like, in political deference.  His demand for obeisance is alienating more people than it attracts.

“Start with his now famous attack in New Mexico on that state’s Republican Gov. Susana Martinez.  ‘She’s got to do a better job. She’s not doing the job,’ he declared at a rally in the state last week. His calculation is that Republican Governors need to rally behind his candidacy, so he wanted to make a public example of a holdout.

“ ‘She was not nice. And I was fine – just a little bit of a jab,’ Mr. Trump said at his Tuesday veterans’ event this week.  ‘But she wasn’t nice, and you think I’m going to change?  I’m not changing, including with her.’

“This politics of pique is more likely to achieve the opposite.  Mr. Trump’s challenge, if he wants to win in November, includes persuading millions of Republicans who believe he’s too crude and thuggish to build a political majority.  The way to convince them is not to trash a two-term Republican Governor in a swing state with a 67% approval rating who, by the way, is an Hispanic American.

“Mr. Trump followed up later in the week with a rhetorical assault on Gonzalo Curiel, the federal judge presiding over one of the lawsuits alleging fraud by Trump University. The candidate said the judge is ‘a hater,’ is ‘negative, negative, negative,’ was ‘appointed by Barack Obama’ and ‘happens to be, we believe, Mexican, which is great.  I think that’s fine.’

“Judge Curiel is a native Hoosier, and last we heard even Mr. Trump doesn’t want to build a wall around Indiana.  Mr. Trump managed to combine an ethnic slight with an un-presidential attack on an independent judiciary....

“Millions of Americans who might support Mr. Trump in order to shake up Washington are also asking if he has the temperament and character to be a good President.  This means showing respect for the institutions of self-government, such as the judiciary.  It also means not continuing a politics of racial polarization that equates ethnicity with judicial unfairness....

“Mr. Trump and his partisans are highlighting the polls that show he’s caught up to Hillary Clinton in November matchups. But he’s running against one of the worst Democratic candidates in the last 50 years in a year when voters are eager for change.”

Personally, I am sickened by Trump’s attack on Judge Curiel.  The Donald is a freakin’ idiot for thinking this is a positive.

House Speaker Paul Ryan, who had just given Trump his endorsement, was clearly upset as well by Trump’s actions.

And a reminder of the history.  According to the Pew Research Center, in 2004, George W. Bush captured 40% of the Hispanic vote.  In 2008, John McCain took 31%.  In 2012, Mitt Romney received 27%.  Trump is currently polling around 10%.

--Trump called a news conference on Tuesday to lambast the “dishonest” news media.

“I find the press to be extremely dishonest.  I find the political press to be unbelievably dishonest,” he told reporters in a press conference called to discuss the disbursement of funds to veterans groups from a fundraiser earlier in the year.

But instead of answering legitimate questions on the money and the charities selected, Trump took aim at reporters, calling one “a beauty” and another “a sleaze.”

“This sleazy guy from ABC,” Trump said after the station’s reporter Tom Llamas pressed him about the consistency of his statements regarding the veteran funds.  “You’re a sleaze,” he told Llamas.

I thought this was another incredibly stupid move by Trump, but I recognize his base probably liked it.

So here’s my deal come Tuesday and the primary in my state.  I’m not voting for president.  I’m going to the polls simply to cast a ballot for my Republican congressman, Leonard Lance, who has his usual primary challenge.

As for Trump, I have been trying to hold back on my true feelings on the man.  I’ll give you my full assessment next week.

--Editorial / USA TODAY

“Everyone, including Hillary Clinton, now agrees that the newly confirmed secretary of State made a mistake in 2009 when she decided, for the sake of ‘convenience,’ to run her own email system out of her home in Chappaqua, N.Y., rather than use an official State Department email account.

“But a new report by State’s inspector general makes clear that within two years, Clinton’s bad decision had turned into something far worse: a threat to national security, one that she repeatedly ignored despite multiple warnings.

“Warning No. 1: The report, released last week, reveals that in January 2011, hackers were attacking her private server. Twice, the Hillary and Bill Clinton staffer responsible for maintaining the server had to shut it off to protect data held by America’s top diplomat and the former president.  The staffer notified State Department officials of the attempted hack, and Clinton’s top aides there emailed each other to say that ‘sensitive’ matters should not be discussed with Clinton over email.

“Warning No. 2: Two months later, the assistant secretary for diplomatic security sent a memorandum on cybersecurity threats directly to Clinton, warning of a dramatic increase in efforts ‘to compromise the private home email accounts of senior department officials’ in a likely attempt to ‘gain access to policy documents and personal information that could enable technical surveillance and possible blackmail.’  The memo to Clinton warned her that some personal email accounts had already been compromised and had ‘been reconfigured...to automatically forward copies of all composed emails’ to the hackers.

“Warning No. 3: That May, Clinton herself suspected that there might have been another hacking incident when she ‘received an email with a suspicious link.’  Hours after her aides discussed the issue over email, Clinton received another email with a suspect link, this time from the personal account of the ‘under secretary of State for political affairs.’

“Warning No. 4: A month later, the State Department sent a cable to ‘all diplomatic and consular posts’ about the dangers of unsecured personal email accounts. Staffers were ordered to ‘avoid conducting official Department business from your personal e-mail accounts.’  Who signed that cable? Hillary Clinton.

“Those warnings, coming in a span of six months, should have made any responsible public official, even one without Clinton’s access to classified information on cyber threats from the vast U.S. intelligence network, aware of the national security dangers of failing to secure the secretary of State’s email communications.

“Instead, Clinton and several of her top aides continued to use personal email for sensitive State Department business thousands of times....

“While Clinton is under potential criminal investigation by the FBI for the mishandling of classified material sent through her email, remaining silent might be in her best interests and it is certainly her right.   But to be president, she is going to have to convince voters that she can put the national security of the United States above her own short-term self-interest.

“It’s already clear that, in using the private email server, Clinton broke the rules. Now it remains to be seen whether she also broke the law.”

Pretty scathing, considering the source.

--Anne Gearan / Washington Post

“Retired Army Col. Peter Mansoor plans to vote for Hillary Clinton for president this year, but not because the longtime Republican and former top aide to then-Gen. David Petraeus has had a political conversion. He just thinks Republican Donald Trump is too dangerous to be president.

“ ‘It will be the first Democratic presidential candidate I’ve voted for in my adult life,’ said Mansoor, a professor of military history at Ohio State University.”

Philip Zelikow, a University of Virginia history professor who was a State Department official in the George W. Bush administration, told the Post: “I would support a random name in the phone book” over Trump.

Clinton’s campaign is trying to build the case she is the one best-suited to be commander in chief.  In a speech yesterday (Thursday) in San Diego, Clinton presented a stark contrast between her own extensive qualifications to lead American foreign policy (in her mind) and Donald Trump’s recklessness on national security.

Clinton described Trump’s ideas as “dangerously incoherent.”

Trump “doesn’t understand America, or the world,” she said.  “They’re not really ideas, just a series of bizarre rants, personal feuds and outright lies.”

She also called him “temperamentally unfit” to lead the country.

“It’s not hard to imagine Donald Trump leading us into a war just because somebody got under his very thin skin,” she said.

Clinton mocked Trump’s twitter habit, as he fired off a series of tweets, indicating he was watching the speech live.

“Bad performance by Crooked Hillary Clinton!  Reading poorly from the teleprompter!  She doesn’t even look presidential!” he wrote.

For his part, addressing graduates at the Air Force Academy on Thursday, President Obama said: “As we navigate this complex world, America cannot shirk the mantle of leadership.  We can’t be isolationists.  It’s not possible in this globalized, interconnected world.”

What about Syria, Mr. President?!!

Editorial / New York Post

“Hillary Clinton’s folks billed her San Diego speech Thursday as a big deal. And it certainly was a prime opportunity to lay out her views on foreign policy and America’s role in the world.

“But what she delivered was a 45-minute rant against Donald Trump – with nary a clue about her plans for leading America on the international stage.

“Worse, her string of dump-on-Trump quips might’ve worked better if she had substituted her name for his, starting with her attack on Trump’s ‘series of rants’ – a perfect description of her own speech.

“Clinton tried to portray Trump as ‘dangerous.’ But what do you call it when a secretary of state, to shield herself from accountability, stores classified e-mails (some beyond ‘top secret’) on her private, unsecured server, leaving them vulnerable to hackers the world over?

“Or who goes home for the night with a U.S. consulate besieged by al Qaeda-linked terrorists – then later lies to the victims’ families about how a YouTube video was to blame?

“Clinton called Trump ‘temperamentally unfit’ to be commander-in-chief. But how would you describe an ex-top official who continually lies to the public and holds herself above the law?”

--New York Attorney General Eric Schneiderman is confident the case against Donald Trump and Trump University will prove Trump personally took in millions from the now-defunct program.

Trump University is the target of two lawsuits in California and New York.  The Donald argues that Schneiderman is biased, seeing as he sits on the Hillary for New York Leadership Council.

--Trump was rather upset the PGA Tour pulled the 2017 World Golf Championship from his course at Doral in Miami, opting for a Mexico course instead.  Trump said the PGA had “put profit ahead of thousands of American jobs.”

PGA Tour Commissioner Tim Finchem said Trump’s current profile had made it “difficult” to attract sponsors.  “It’s fundamentally a sponsorship issue,” Finchem said.

It is true that Cadillac’s sponsorship deal was expiring and there has been talk for a year they wouldn’t re-up.  Finchem was thus correct in saying:

“Donald Trump is a brand, a big brand, and when you’re asking a company to invest millions of dollars in branding a tournament and they’re going to share that brand with the host, it’s a difficult decision.”

But Finchem insisted the decision wasn’t political and that the PGA Tour has no issues with Trump.  Here he is being disingenuous.

So instead the Tour signed a new seven-year sponsorship deal with Grupo Salinas, and the first WGC-Mexico Championship will be held in March next year.  [Apparently at a club outside Mexico City.]

Trump was right himself when he said the decision marked a “sad day for Miami, the U.S. and the game of golf.”  Golf fans all over always looked forward to Doral each spring.  Of course Trump being Trump, he couldn’t help but add when interviewed by Fox News, “I hope they have kidnapping insurance.”

--Former House speaker Newt Gingrich, seen as a potential running mate for Trump, commented on talk comparing the presidential candidate to fascists such as Hitler and Mussolini.

Gingrich told Peter Baker of the New York Times that he was “deeply offended” by what he called “utterly ignorant” comparisons.

“Trump does not have a political structure in the sense that the fascists did,” said Gingrich.  “He doesn’t have the sort of ideology that they did.  He has nobody who resembles the brownshirts. This is all just garbage.”

On this I agree.

--Kathleen Parker / Washington Post

“It was such a marvelous idea: the United States of America.

“Obviously, we’ve never really pulled it all together under one hat, but it has always seemed that at least we were striving for a more perfect union.

“No more. Something changed – and quickly, as history goes. Actually, everything did.

“Massive immigration has changed the face of the nation in more than metaphorical ways.  Globalization has made us seem or at least feel less unique among nations.  Our hyperpartisanship, augmented by incessant media coverage tied to ratings and greed, has reduced politics to a parking-lot brawl....

“Democracy, freedom, civilization – it all hangs by a thread. America was always just an idea, a dream founded in the faith that men were capable of great good.  It was a belief made real by an implausible convention of brilliant minds and the enduring courage of generations who fought and died. For what?

“Surely, not this.”

---

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

God bless America.

---

Gold  $1244
Oil  $48.62

Returns for the week 5/30-6/3

Dow Jones  -0.4%  [17807]
S&P 500  +0.0%  [2099,...up 0.07 points]
S&P MidCap  +0.6%
Russell 2000  +1.2%
Nasdaq  +0.2%  [4942]

Returns for the period 1/1/16-6/3/16

Dow Jones  +2.2%
S&P 500  +2.7%
S&P MidCap  +7.3%
Russell 2000  +2.5%
Nasdaq  -1.3%

Bulls  45.4 [big jump]
Bears  23.7  [Source: Investors Intelligence]

Dr. Bortrum posted a new column.

Have a great week.

Brian Trumbore