For the week 12/13-12/17

Wall Street and Washington

It was a pretty good week. The economic releases were solid as November retail sales, up 0.8%, industrial production, up 0.4%, and the index of leading economic indicators for the month, up 1.1%, all met or exceeded expectations, and the November inflation data was OK. True, the producer price index was up a hot 0.8%, but the core, ex-food and energy, was up just 0.3%, while consumer prices rose only 0.1%, ditto the core rate, so year-over-year the CPI is up 1.1%, up 0.8% without the stuff we actually use. And the earnings news, what little there was of it, was generally solid.

The Federal Reserve held the line on rates again at its Open Market Committee meeting and said it would keep its plan to buy $600 billion of Treasuries through June to “promote a stronger pace of economic recovery” and keep prices stable “over time,” but in the accompanying statement admitted:

“The economic recovery is continuing, though at a rate that has been insufficient to bring down unemployment. Household spending is increasing at a moderate pace, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit.”

On prices, the Fed added, “Measures of underlying inflation have continued to trend downward.”

No one really expects the Fed to raise the funds rate that it controls until 2012 at this point, but why then have interest rates soared since the Fed announced QE2, or a second round of quantitative easing? I thought the Treasury bond purchases would keep rates low, didn’t you?

Ah, but there are two reasons given for the big spike we’ve seen and both are right. With the passage of the stimulus bill (more in a second), we’ve just added another $800 billion or more to the deficit, meaning even further funding requirements and more paper thrown on the market, while at the same time some of the economic indicators have been pretty darn good (except for the two most important ones….jobs and housing). Thus the animal spirits have been fueled to a certain extent and part of the action in the bond pits is simply a move from safer Treasuries to potentially better returns in stocks.

But while suddenly there is a ton of happy talk about 2011, including from the likes of once dour PIMCO, we still don’t have any kind of all clear signal, to say the least, from labor or homebuilders. I’m going to stop this particular discussion here, though, because I want to keep my powder dry for my yearend review on Jan. 1 and my look ahead to 2011 at that time. The next two weeks, as much as I can control myself, when it comes to an economic outlook it’s just the facts.

But for now I will throw this out there from a story in Friday’s USA TODAY that touts stocks for 2011. A separate article is titled: “What could go wrong to derail bullish predictions?”

It’s worth noting what these particular Wall Street titans (like Abby Joseph Cohen and Bob Doll) see as the risks. In full….

The article has a brief discussion under each point but for readers of this column, what should stand out after glancing at the above?

The absence of anything on the geopolitical front, which of course I’ll be covering in depth in two weeks. Yes, I missed it big time this year. That doesn’t mean I’ll let down my guard in 2011.

Meanwhile, in Washington, two good things occurred. The House and Senate passed the tax-cut extension; 277-148 in the former, 81-19 in the latter, so good bipartisan support. Yes, it’s $858 billion and that sucks big time, but President Obama deserves credit for shepherding a fair compromise including the most important item when it comes to juicing the economy, the payroll tax reduction for 2011 as well as incentives for business to write off 100 percent of capital investments through Dec. 31, 2011.

So the extension on existing tax rates goes through 2012 and at least keeps renegotiation out of the election cycle, not that it won’t be debated during the presidential campaign.

The compromise does, however, advance an idea whose time may finally have come…tax reform.

“Actually, this week’s tax debate is merely the second big recent event pushing the country closer toward this rendezvous with real tax reform. The first came in the form of the report issued by the bipartisan deficit-reduction commission Mr. Obama created to deal with Washington’s tide of red ink.

“The commission’s most important contribution in the long run may not be its myriad suggestions for dealing with deficits and debts, but its call for a simpler and more efficient tax system. Last week, Mr. Obama threw himself behind the reform idea, at least rhetorically.”

No doubt this will be part of Obama’s State of the Union Address in January, and this is good.

Also, this past week saw the shelving of a $1.1 trillion spending bill to fund the federal government the remaining nine months of the fiscal year. This would not have been a good thing because of the 6,000 earmarks contained within, many of which were Republican projects that the same senators then voted against. True, the earmarks were small, only $8 billion in this instance, when looking at the size of the overall package, but this is also a topic where Sen. John McCain shines.

“The American people said just 42 days ago, ‘Enough!’…Are we tone deaf? Are we stricken with amnesia?”

Enough senators were shamed to force Majority Leader Harry Reid to pull it and instead Congress will fund the government with another short-term continuing resolution that permits spending at last year’s levels.

Which means one thing, folks. Major fireworks when the new Congress takes their seats in January, and if nothing else it should be highly entertaining, and perhaps infuriating depending on your political view.

Turning to Europe, the European Union approved an amendment to create a new bailout mechanism for countries that are fiscally irresponsible, allowing for a permanent rescue fund in 2013, but did nothing to deal further with the short-term crisis that continues to simmer, threatening to boil over beyond Ireland’s current rescue. The EU ignored the calls from the head of the European Central Bank and International Monetary Fund for a more immediate Europe-wide response as the divisions in the union flared anew; the fiscally responsible vs. those who aren’t…North vs. South. For now, though, the compromise text reads:

“The Member States whose currency is the euro may establish a stability mechanism to be activated if indispensable to safeguard the stability of the euro area as a whole. The granting of any required financial assistance under the mechanism will be made subject to strict conditionality.”

Obviously, details to be worked out as needed, but the bottom line is beginning in 2013, the EU, ECB and IMF will handle each situation on a case by case basis. Until we get there, though, who the heck knows when the next crisis hits in 2011 and 2012?

What we do know today is that Ireland, despite its parliament doing what it needed to do in, first, passing its austerity plan, and, second, voting to accept the EU/IMF bailout package, was downgraded by two ratings agencies as an Ernst & Young report says unemployment will hit 16% in 2011, and, whereas the government is forecasting the economy will grow 1.75% next year, E&Y says it will contract a full 2.3%! That’s a huge disparity, and for the sake of the financial markets, worldwide, we better hope the Irish government is more on the mark, not that I in any way believe their forecast.

This week we also had turmoil in Spain involving a debt auction that came in 80 basis points (0.80%) higher compared to Nov. 18, while there were riots in Greece over its austerity measures.

Turning to China, the government announced it would do all it could to quell inflation, which came in at a 5.1% clip in November (which I believe will be the peak) but for now will not raise interest rates and instead will continue to hike bank reserve requirements. The Chinese consumer is more concerned about inflation than at any time the past decade and the government is petrified that out of control costs, particularly for food, will lead to mass unrest. Food inflation in November was at 11.7%, and that’s not good.

But the reason why the government isn’t hiking interest rates is supposedly because it wants to wait for the December data, which is why I think prices have peaked. The government insists it can hold inflation to 4% in 2011 (which is above its original target of 3%).

[On the data front, exports in November rose another 34.9%, while foreign direct investment in the month rose a strong 38%.]

Street Bytes

–Stocks advanced again with the Dow Jones adding 0.7% to close at 11491, while the S&P 500 tacked on 0.3% (to just shy of its September 2008 level) and Nasdaq 0.2%. Oracle Corp. and Research in Motion Ltd., maker of the BlackBerry, beat earnings expectations handily and guided higher, even as the likes of Intel and Cisco Systems have been talking of sluggish demand from consumers and state governments. In the case of Oracle, CEO Larry Ellison continued to slam now-hated competitor Hewlett-Packard.

It was a wild time in the bond pits as the 10- and 30-year hit 3.56% and 4.62%, respectively, before backing off to essentially unchanged on the week as Treasuries rallied big on Friday owing to continuing problems in Europe, particularly Ireland.

–The Feds nabbed another five in the growing insider trading scandal, accusing one of leaking information about Apple’s iPad months before it was launched. [One of the men had copped a plea earlier this month but the charges were just unsealed, if you’re confused about all the headlines saying ‘four’ were arrested.]

Industrial production for October in the eurozone was up only 0.7%, half that projected.

In the U.K., retail sales rose in November, and as an aside I found it interesting that Internet sales here represent 10.5% of the total, vs. a 7.9% share in 2009. But the unemployment rate in Britain rose to 7.9% and the housing market is sinking as the banks continue to tighten lending requirements. Foreclosures here are expected to rise in 2011.

In Japan, after a stimulus-juiced third quarter, fourth quarter GDP is estimated to have fallen 1.9% on an annualized basis, and manufacturing sentiment fell for the first time since the end of the financial crisis.

South Korea’s unemployment rate fell to 3.2%…we’d kill for 8% these days.

–The housing market in the U.S. will not be helped by rising mortgage rates, now 5.09% on a 30-year fixed according to data tracker HSH Assoc. [Freddie Mac had the 30-year rising to 4.83%. This rate was just 4.16% on Nov. 11.] It’s also clear that after a pause due to the foreclosure documentation crisis and a freezing of activity, the pace of foreclosures, a la Britain, will pick up again early next year

–From a New York Times story on Bank of America and CEO Brian Moynihan:

“The problem facing Bank of America is stunning, both on an economic and on a human scale. Among its 14 million mortgage customers, nearly 1 in 10 is past due. Another 190,000 have not been able to make a payment in at least two years, and one-third of the homes facing foreclosure are vacant, making them harder to maintain and sell. Dealing with customer service, many homeowners say, is frequently infuriating….

“Nor has the company signaled its path out, experts say.”

–Shares in credit card issuers Visa and MasterCard were rocked on Thursday with word the Federal Reserve was proposing a 12-cent cap on the fees banks would be allowed to charge merchants for debit card transactions, which could sharply cut into the revenue of the banks that issue debit cards. The proposal, if approved, would be finalized in April and then take effect three months later but there will be major pushback, to say the least, from the banks.

–A federal district court judge in Virginia ruled that ObamaCare violates the Constitution’s limits on government power, specifically as it pertains to the core enforcement mechanism known as the individual mandate – the regulation requiring everyone to purchase health insurance or face a penalty – exceeding Congress’ authority to regulate our lives.

This is just one step, but a highly significant one, towards rolling back parts of the legislation.

–The Justice Department sued BP and eight other companies in the Gulf oil spill disaster in an effort to recover billions of dollars as the administration argues the companies should be held liable without limitation under the Oil Pollution Act.

But the presidential commission investigating the spill found that a chain of sand berms built by the state of Louisiana captured a “miniscule” amount of oil and were largely a waste of money. This finding won’t help Louisiana Gov. Bobby Jindal, who has presidential aspirations. It was Jindal who publicly blasted President Obama and federal agencies when they were slow to approve the projects. BP paid $360 million for construction of approximately 40 miles of berms. State officials estimate the berms stopped roughly 1,000 barrels of oil from the spill, while BP captured 800,000 barrels at the wellhead, and roughly 270,000 were burned off by Coast Guard vessels offshore. [New York Times]

And in a story by Robert H. Nelson in The Weekly Standard titled “Oil Spill Hysteria,” Nelson, a professor of environmental policy at the University of Maryland, writes:

“(The) ecosystem of the Gulf itself turns out to have suffered remarkably little damage from the continuous gushing of oil into the water from April 20 till July 15, when the leaking well was capped. One group of scientists rated the health of the Gulf’s ecology at 71 on a scale of 100 before the spill and 65 in October.”

The National Oceanic and Atmospheric Administration (NOAA) explained in a report in August:

“It is well known that bacteria that break down the dispersed and weathered surface oil are abundant in the Gulf of Mexico in large part because of the warm water, the favorable nutrient and oxygen levels, and the fact that oil regularly enters the Gulf of Mexico through natural seeps.”

“In other words, the organisms that normally live off the Gulf’s large natural seepage of oil into the water multiplied extremely rapidly and went on a feeding frenzy. Another 25 percent of the spilled oil – the lightest and most toxic part – simply evaporated at the surface or dissolved quickly.”

–Speaking of bacteria, the federal government reached a settlement with Dannon – part of the world’s biggest yogurt maker Danone – on exaggerated health claims for two popular Dannon products, one being Activia, where ads claimed one daily serving of the yogurt relieves irregularity, the other, DanActive, which claims to help people avoid catching colds. The FTC said Dannon’s assertions that both contain beneficial bacteria were bogus. “Yogurt is just food. It’s not a miracle. No food is a superfood.”

So now you can sue actress/spokesperson Jamie Lee Curtis who claims eating Activia can help people who suffer from irregularities. Curtis maintains she is proud of her association with Dannon. StocksandNews still likes Ms. Curtis.

–Global spending on mining will surpass pre-crisis levels next year, hitting a record $115 billion to $120 billion in 2011 vs. a peak of $110 billion in 2008.

–Speaking of mining, the United States Energy Department warned the nation is too reliant on China for rare earth minerals, those crucial to new clean energy technologies and other high-tech products. China is responsible for 96% to 99.8% of five key rare elements. Molycorp is one American company that plans to open a large rare earth mine at Mountain Pass, California, in 2012. [I am not recommending the stock…which has been a high-flyer since its August IPO. I do, however, have a small stake in a Canadian-Russian rare earth outfit that I could add to if I get the chance to understand the company better.]

–McDonald’s plans to add 200 new stores in China in 2011, more than any previous year. McDonald’s currently has 1,100 stores there, while KFC has 2,000.

–For all the happy talk concerning Ford Motor Co., sales in Europe fell 10.9% in the year’s first 11 months owing to weak economies there.

–Sales of hybrid cars, for all their hype, will total less than 1 million globally this year and account for barely 2% of the world passenger-vehicle market, according to JD Power and Associates. Sales will reach 934,000 vs. 728,000 in 2009, with half the growth coming in Japan. Sales in the U.S. will hit 315,000 compared to 292,000 in ’09.

–Shares in Best Buy Co. were hammered after the company reported an unexpected drop in third-quarter profit, citing weaker demand for televisions and electronic gadgets. Best Buy is clearly losing out to retailers such as Amazon, Wal-Mart and Target.

–Yahoo continues to struggle and is laying off about 5% of its workforce, or between 600 and 650.

–New York City’s unemployment rate ticked down to 9.1% in November. It peaked last year at 10.5%. Unemployment in Gotham bottomed at 4.6% in February 2007. Seriously, I wonder if in my lifetime (say 20+ years) we’ll ever get back down to that level here.

–Interesting stat from Crain’s New York Business and the Fiscal Policy Institute.

“Fueled largely by a booming Wall Street, the share of income going to the tiny sliver of New York’s wealthiest – the top 1% of households – soared to 44% in 2007 from 17.2% two decades earlier.” The price of entry to this exclusive club was $642,000, with the average income being $3.7 million. Nationally, in 2007 the top 1% earned 23.5% of total income, compared with 12.7% in 1987. To be fair, one reason why the New York City numbers are skewed as they are is because if you have the money, New York is a fun place to live.

–I’m assuming Mark Madoff, the unemployed elder son of swindler Bernie Madoff, was part of the November unemployment data in New York City. When they do December’s calculation, he’ll no longer be on the rolls, seeing as how he offed himself with his dog’s leash. A lawyer for Mark said, “This is a terrible and unnecessary tragedy.” Personally, while I recognize it may impede the search for the truth, I won’t lose any sleep over it. The whole family is scum.

But on Friday, U.S. prosecutors and trustee Irving Picard, who is overseeing the liquidation of Bernie’s firm, announced a settlement in a lawsuit that will pay $7.2 billion from the estate of investor Jeffrey Picower to Madoff’s victims; Picower having invested with Bernie for over 20 years.

–A sign of the times in Ireland. At Dublin Airport, they recently opened a new terminal, Terminal Two, built at a cost of about $800 million. The other day, as reported by the Irish Independent, five check-in desks out of 56 were open with “a handful of lonely passengers wandering about looking lost as staff smiled benignly at them, disguising the fact they must have been bored to tears.”

And an update here from last time: AIB backed down on plans to pay out over $50 million in bonuses after the Government said it wouldn’t support the bank anymore if the payments went ahead. AIB is effectively going to be nationalized shortly after attempts to raise needed capital failed.

–The International Air Transport Association says airlines will see net profits of $15.1 billion in 2010 due to a better-than-expected economic recovery. Just in September, the IATA had predicted profits of $8.9 billion. The group says 2011 will be tougher but still highly profitable.

–The average daily room rate in Las Vegas has fallen to $95 this year vs. $132 in 2007. As for the fellow who apparently stole $1.5 million in casino chips during an armed robbery at the Bellagio resort, I would have been tempted to put it all on ‘red’ before walking out. Then if you win, you go back and get real cash instead of worthless chips, you moron!

[Separately, in my ongoing effort to get some figures on Atlantic City’s casinos down for the archives and future research, monthly revenue there fell 12.5% in November compared with a year ago.]

–French customs agents seized 354 counterfeit Faberge eggs from Russia. Faberge confirmed they weren’t the real thing. So you’ve been warned. Look carefully when you receive one for Christmas. The eggs were brought to France for sale at Paris’ Christmas markets.

Foreign Affairs

Afghanistan: The long-awaited December review of the war took place and the conclusion is that the drawdown in forces President Obama has called for can begin in July of next year, though here’s the key. No one is willing to say just how many troops will be able to come home then because there remains too much uncertainty. Progress has been made on the battlefield but it is uneven. Training of the Afghan Army and security forces is slow and both remain weak, while the government of President Hamid Karzai is still hopelessly corrupt. The White House also deeply misses the input of Ambassador Richard Holbrooke, who passed away this week. Holbrooke had been given the mission of acting as go-between for both Afghanistan and Pakistan and it was Holbrooke who had no problem getting in the two nations’ faces and reading them the riot act, even if this proved to be ineffective.  

The review presented to President Obama also noted that there needed to be more cooperation with Pakistan in tracking down insurgents, but as Holbrooke knew, Pakistan is a total mess and the government is not going after the Taliban and al-Qaeda. A few months ago the Pakistanis could claim the military was needed elsewhere, in flood recovery, but that is no longer the case.

[On Friday, however, 60 suspected militants were killed in U.S. drone attacks in Pakistan, while we learned the CIA’s station chief in Pakistan had to flee due to threats on his life. It appears the nation’s intelligence service, the ISI, ratted him out to the terrorists.]

Commentator George Will says that in the case of Afghanistan, with the American public already being against the war, we are susceptible to a Tet offensive type operation that may force Obama’s hand and hasten departure, even as the Taliban, like the North Vietnamese back then, suffer big losses of their own. 

For his part, you can be sure Obama wants Afghanistan largely off the table by the summer of 2012 when his reelection campaign will be kicking into high gear. Most of the opposition comes from his own party and in 2011 this will come to a head whenever funding for the war goes before Congress.

Lebanon: Governance came to a screeching halt this week over the trumped up issue of “false witnesses,” those suspected of misleading the probe into former prime minister Rafik Hariri’s 2005 assassination. Hizbullah has threatened force if Prime Minister Saad Hariri (Rafik’s son) doesn’t withdraw his support for the UN-backed Special Tribunal for Lebanon that is preparing to indict members of Hizbullah for the crime, while Hizbullah wants to be able to prosecute those it decides ratted out its members. The Hariri supporters say investigating “false witnesses” would hinder the STL’s work. In the end, the topic was tabled.

“This means the business of government is now in the freezer, not just on the back burner, until further notice. It tells the Lebanese, and the country’s neighbors, and foreign investors that Lebanon is headed for the holidays, and 2011, in a state of paralysis….Politicians want only their view to prevail, while the current set of constitutional institutions and other mechanisms offer no way out.”

So we’re headed for an attempted overthrow and probable violence, the question is just one of timing. Of course it also seems inevitable that eventually Israel will become involved. This week, a senior Israeli Army commander said, “Hizbullah knows that if another war breaks out, the [2006 summer] war would look like a picnic.” Israel alleges Hizbullah has long range missiles capable of hitting Tel Aviv. But an ex-general in the Israeli Army who served as national security adviser to Ariel Sharon and Ehud Olmert, Giora Eiland, said this week that “Israel does not know how to beat Hizbullah. Therefore a war waged only as Israel vs. Hizbullah might yield better damage on Hizbullah, but Hizbullah would inflict far worse damage on the Israeli home front than it did 4 ½ years ago,” he told Israel Radio.

On the issue of Israel and the Palestinians, I’ve been saying for years that we should cut off aid to Israel if they don’t comply with our wishes. In his Sunday op-ed for the New York Times, Thomas Friedman, commenting on the latest impasse in peace talks tied to the failure to reach agreement on a new settlements moratorium, concludes:

“You can’t want peace more than the parties themselves, and that is exactly where America is today. The people running Israel and Palestine have other priorities. It is time we left them alone to pursue them – and to live with the consequences.” 

If Americans really gave it some thought, we’d all reach the same conclusion.

Iran: In a week where 39 were killed in a suicide bombing of a Shiite mosque near the Iranian border with Pakistan, President Ahmadinejad fired long-time Foreign Minister Mottaki, who, while close to Supreme Leader Ayatollah Khamenei, was seen as a relative moderate and at least one steeped in diplomatic dignities. Ahmadinejad infuriated many conservatives as he replaced Mottaki on an interim basis with the nuclear chief Salahi. So you have friction between Ahmadinejad and Khamenei, as well as between Ahmadinejad and parliament; all while the economy continues to tank. What made the whole episode even worse was that Ahmadinejad fired Mottaki while on a diplomatic mission, a total insult.

On the issue of Iran’s suspected nuclear weapons program, everyone seems to agree Iran was dealt a real blow at the key Natanz facility by the Stuxnet computer worm. Ralph Langner, a German cybersecurity consultant who has been on the case with Stuxnet since it first broke into the open, told FoxNews.com:

“The Iranians didn’t have the depth of knowledge to handle the worm or understand its complexity,” raising the possibility that they may never succeed in eliminating it.

“Here is their problem. They should throw out every personal computer involved with the nuclear program and start over, but they can’t do that. Moreover, they are completely dependent on outside companies for the construction and maintenance of their nuclear facilities. They should throw out their computers as well. But they can’t. They will just continually reinfect themselves.”

North Korea: Pyongyang once again threatened war, including of the nuclear variety, as Seoul conducted live-fire drills on disputed islands. President Lee of South Korea is urgently reforming the military after the sinking of the warship that killed 46 as well as the shelling that claimed four lives which was met by a timid response from the South and called into question the preparedness of the armed forces.

Meanwhile, the U.S. and the South have concluded that North Korea’s nuclear program is not only technically superior to anything Iran has, but it is now suspected Pyongyang has up to another four secret facilities for enriching uranium, which, if true, takes this crisis up about ten-fold. For one, this is the kind of material that could be passed on to Iran and then it wouldn’t really matter how infected, or ineffective, Tehran’s own facilities are.

This week, even Russia’s Foreign Minister Sergei Lavrov expressed “deep concern,” urging North Korea to abandon its nuclear program as he met with Pyongyang’s foreign minister in Moscow, while New Mexico Gov. Bill Richardson, on an “unofficial/official” mission to North Korea, called the situation on the peninsula a “tinderbox.”

Russia is thus acting far more in our own interests than China is. Beijing increasingly acts as if North Korea is a colony. The North is dependent on China for 50% of its food and 70-80% of its energy, yet Beijing refuses to come down hard on its neighbor.

Former U.S. National Intelligence Director Dennis Blair, who recently returned from a trip to South Korea, predicted on CNN that Seoul is running out of patience and that any further low-level military conflict could quickly escalate though stop short of all-out war because the North Koreans recognize full-scale war would mean the end of their regime. I disagree, but my opinion is shaded by my conclusion that the North’s military capabilities are far better than we’re giving them credit for.

China: Excepting its inaction on the North Korean front, this wasn’t that bad a week as the U.S. and China reached agreement on a number of trade issues and, while there were no major breakthroughs, it’s good the talks were amicable. It’s possible the stage will be set for something “more impressive,” in Commerce Secretary Gary Locke’s terms, when President Hu Jintao comes to Washington next month.

Prime Minister Wen Jiabao was in India this week for the first time in five years and talks here went well, which is good, sports fans. Wen said, “The 21st century is the Asian century. It’s also the century in which China and India can make great achievements.”

If you’re worried about the fact the militaries of both China and India are growing apace, the two will act as checks on each other as India has already been aggressively seeking better relations with South Korea and Japan and there remain serious border issues between Beijing and New Delhi, plus India has never been happy with China’s backing of Pakistan, so, fret not, no one has to worry about some grand military alliance between China and India that would severely impact Washington’s influence in the region.

But, when it comes to Beijing, Major General Luo Yuan, deputy secretary general of the China Academy of Military Science (so I guess he has some influence) wrote in an essay published in state media that being rich was not enough to make China a strong nation. A powerful army was also needed.

“The future society should be not only extremely abundant in material riches, but also have a very healthy legal system, and a prevailing toughness and militaristic spirit.”

Luo continued: “If soldiers don’t talk about war, who will? If all soldiers become dovish, what is the point for ordinary people to pay so much money to keep the army? Why don’t we save the money to improve the livelihood of people and change the name of the army to the Peace Association?” [South China Morning Post]

Japan: A new national defense policy was unveiled that calls Beijing’s military build-up one of global concern. Japan also said it would strengthen its missile defenses against North Korea, while at the same time shifting its forces to better deal with the China threat vs. the threat of an invasion from Russia, the old Cold War policy.

Russia: Speaking of militaristic, Constitutional Court chief justice Valery Zorkin said that Russians may seek a “dictatorship” to protect themselves from rampant crime if ties between criminals and officials continue to deepen. There’s a critical mass of evildoers in government nationwide that threatens to turn Russia from a “criminalized into a criminal” country, he said.

Sound familiar? It should. It’s why I’ve talked of a third force in the government that could yet emerge and overthrow both Putin and Medvedev. [Igor Sechin…who some in Russia call “the scariest person on Earth.”]

And after all I’ve written on the topic of ethnic violence here, last Saturday there was major rioting near the Kremlin’s walls as a mob of 5,500 football fans shouted racist phrases and attacked North Caucasus natives. The mob was demanding an investigation into the killing of a football fan on Dec. 5. The mood was tense then on Sunday in Moscow as Internet rumors spread that Caucasus natives were planning counterstrikes. During Saturday’s rally, chants of “Russia for Russians” and “[F—] the Caucasus” echoed around the Kremlin. Then on Wednesday, police rounded up 1,000 individuals in Moscow and other Russian cities, including young men and teenagers who were seen in the subway stations giving the Nazi salute. The neo-Nazi, ultranationalist movement is said to have 70,000 members.

Appearing on one of his marathon question-and-answer sessions, one that went on for four hours and 29 minutes, when questioned about the ability of the security forces to protect members of ethnic minorities from attacks, Prime Minister Putin said, “The state exists in order to provide for the interests of the majority” and warned against maligning the police.

“These bodies of power carry out the state’s most important function,” he said. “Otherwise, our liberal intelligentsia will have to shave off their goatees and put on helmets themselves and go out to the square to fight radicals themselves.” [Ellen Barry / New York Times]

On a different topic, another that doesn’t put Russia in the best light, on Wednesday, former Yukos Oil Co. billionaire Mikhail Khodorkovsky and former partner Platon Lebedev were to hear the verdict on their second fraud trial, but the court suddenly delayed a reading (which can take two weeks!) to Dec. 27. There was no explanation and the two weren’t informed about the postponement. Both men, already serving eight years, face another 14. Sen. John McCain has called the case against Khodorkovsky an “assault on democracy and political freedom” but the Obama administration has said nothing. On his Q&A program, Putin said of Khodorkovsky, “A thief should sit in jail,” comparing Khodorkovsky to Bernie Madoff and his 150-year sentence. [Khodorkovsky’s defense lawyers responded that Putin was pronouncing their client guilty ahead of the verdict. Classic Russia.]

Sweden: Two explosions in central Stockholm were clearly an act of terrorism by a suicide bomber, who killed himself and injured two people. Ten minutes before the blasts, a Swedish news agency received an e-mail that read, “The time has come to take action,” referring to Sweden’s silence in condemning a cartoonist’s 2007 drawing of Muhammad as a dog. “Now your children, daughters and sisters shall die like our brothers and sisters and children are dying.”

Italy: Prime Minister Silvio Berlusconi, beset by sex scandals, survived a confidence vote in parliament by the slimmest of margins, 314-311, which prompted riots in the streets of Rome that left 50 police officers injured. But having lost the support of his closest political ally, Gianfranco Fini, Berlusconi will have to bring in new blood to the coalition and elections could be held early next year, two years ahead of schedule. There are charges the prime minister bought some votes as two opposition deputies switched sides at the last minute.

Kosovo: Talk about a mess, Kosovars voted in the first general poll since the country’s declaration of independence from Serbia in 2008 and already there is talk of a split between the ethnic Albanian majority and Kosovo’s Serb minority.    Prime Minister Hashim Thaci claimed victory with 31% of the vote, meaning he needs support from other parties to form a government, but then days after the election, former Kosovo Liberation Army (KLA) commanders were accused by the Council of Europe with organ and drug trafficking. And none other than Hashim Thaci, the KLA’s wartime leader, is named.

Whereas I couldn’t care less, yet, about the problems in the Ivory Coast these days, the reason why you need to just keep your eyes and ears open when it comes to a place like Kosovo is because it’s the Balkans. A little history there, after all.

Ukraine: And this place is in an uproar as prosecutors announced they are going after Yulia Tymoshenko, the former prime minister and opposition leader, supposedly for misuse of government funds….taking money from the sale of carbon credit units to pay pensions in 2009 when Ukraine’s finances were stretched to the limit.

Mexico: The toll in the 4-year drug war now exceeds 30,000, with 12,000 having died this year, the government announced this week. To put this in perspective, the United States has lost about 5,500 in Iraq and Afghanistan combined. Officials do claim that the arrests and killings of some of the leading cartel figures is having an impact, but the proof will be in the numbers for 2011.

Friday, the Wall Street Journal had a story on the number of companies that are opting to leave Mexico due to the violence; the latest being Swedish appliance maker Electrolux AB, which just announced it had selected Memphis, Tenn., over locations in Mexico for a $190 million appliance factory that will employ 1,200.

[And this won’t help…on Friday, 140 prisoners walked out the front entrance of a facility near Monterrey, a key commercial and industrial center.]

Random Musings

–According to a Washington Post-ABC News poll, despite the Republicans election gains, the public trusts President Obama more than congressional elephants by a 43-38 margin. What should be discomfiting to Republicans is that after big changes in 1994 and 2006, it was as you’d expect. In 1994, following the GOP’s landslide, people expressed far more confidence in Republicans than they did in President Clinton. In 2006, after the Democrats won back the House and Senate, they had a double-digit lead over President George W. Bush.

On the issue of the economy, 45% trust the GOP, 44% side with Obama. Back in 1994, Republicans had a 23-point advantage.

In terms of his overall job approval, in the Post/ABC survey the president comes in at 49%. In a NBC/Wall Street Journal poll, Obama’s approval rating is 45% [it was 60% in this one in 2/09.] In a Bloomberg survey it’s 52%! [Hillary Clinton is at 65%, George W. Bush 39%.]

But then the poll reveals 8 in 10 oppose raising federal gasoline taxes, and 2/3s are against cutting yearly Social Security benefit increases or eliminating the tax credit for children younger than 18. They oppose raising the capital gains tax, reducing farm subsidies, cutting defense spending or gradually bumping up the qualifying age for Social Security payouts. The Bloomberg survey had essentially the same results for all the preceding, but 59% are in favor of getting rid of tax cuts for the wealthiest Americans while 67% are in favor of means testing for Social Security and Medicare.

By the way, in the NBC/WSJ poll, the majority in this one also doesn’t want to reduce defense spending. I respectfully submit that when it comes to this category the majority has no freakin’ clue the amount of waste in the defense budget.   We need to support the grunts, and make sure with the looming China threat that we do not fail to modernize, but those who just blindly say defense can’t be cut in time of war, blah blah blah, have clearly never done their homework, or learned from President Eisenhower, who continues to rocket up my own list of great presidents. Washington, Lincoln, Polk, Eisenhower, Reagan….

–Two opinions on President Obama from conservative commentators.

“The tax deal is reasonable policy, supported by majorities of Republicans, Democrats and independents – an easy sell by presidential standards. And still President Obama managed to blow the politics of the thing.

“Rather than explaining the economic benefits of the bill and taking quiet credit for a moment of bipartisanship, Obama launched into an assault on partners and opponents. Republicans are ‘hostage-takers’ who worship the ‘Holy Grail’ of trickle-down economics. Liberal opponents are ‘sanctimonious,’ preferring their own purity to the interests of the poor. The president did not just attack the policy positions of nearly everyone in the political class. He publicly questioned their motives.

“It is difficult to imagine the president’s advisers sitting in the Oval Office and urging this approach: ‘Mr. President, the best course here would be to savage likely supporters of the bill and to embitter your political base. This will show just how principled you are, in contrast to the corruption and fanaticism all around you.’ There can be little doubt this communications strategy was Obama’s own.

“It is the president’s favorite rhetorical pose: the hectorer in chief. He is alternately defiant, defensive, exasperated, resentful, harsh, scolding, prickly. He is both the smartest kid in class and the schoolyard bully.

“There are many problems with this mode of presidential communication, but mainly its supreme self-regard. The tax deal, in Obama’s presentation, was not about the economy or the country. It was about him. It was about the absurd concessions he was forced to make, the absurd opposition he was forced to endure, the universally insufficient deference to his wisdom….

“At this point in the Obama presidency, even Democrats must be asking: Is he really this bad at politics? The list of miscalculations grows longer. To pass the stimulus package, the administration predicts 8 percent unemployment – a prediction that became an indictment. It pledges the closing of the Guantanamo Bay prison – without a realistic plan to do so. It sends the president to secure the Chicago Olympics – and comes away empty-handed. It announces a ‘summer of recovery’ – which becomes a source of ridicule. It unveils a Manhattan trial for Khalid Sheik Mohammed – which nearly every New York official promptly turns against. Press secretary Robert Gibbs picks fights with both conservative talk radio hosts and the ‘professional left’ – which uniformly backfire. The president seems to endorse the Ground Zero mosque – before retreating 24 hours later. He suggests that Republicans are ‘enemies’ of Latinos – apparently unable to distinguish between hardball and trash talk….

“(Obama) doesn’t suffer fools gladly. Unfortunately, he seems to put just about everyone who disagrees with him in that category.”

“If Barack Obama wins reelection in 2012, as is now more likely than not, historians will mark his comeback as beginning on Dec. 6, the day of the Great Tax Cut Deal of 2010.

“Obama had a bad November. Self-confessedly shellacked in the midterm election, he fled the scene to Asia and various unsuccessful meetings, only to return to a sad-sack lame-duck Congress with ghostly dozens of defeated Democrats wandering the halls.

“Now, with his stunning tax deal, Obama is back. Holding no high cards, he nonetheless managed to resurface suddenly not just as a player but as orchestrator, dealmaker and central actor in a high $1 trillion drama….

“Despite this, some on the right are gloating that Obama had been maneuvered into forfeiting his liberal base. Nonsense. He will never lose his base. Where do they go? Liberals will never have a president as ideologically kindred – and they know it. For the left, Obama is as good as it gets in a country that is barely 20 percent liberal….

“The greatest mistake Ronald Reagan’s opponents ever made – and they made it over and over again – was to underestimate him. Same with Obama. The difference is that Reagan was so deeply self-assured that he invited underestimation – low expectations are a priceless political asset – whereas Obama’s vanity makes him always needing to appear the smartest guy in the room. Hence that display of prickliness in his disastrous post-deal news conference last week.

“But don’t be fooled by defensive style or thin-skinned temperament. The president is a very smart man. How smart? His comeback is already a year ahead of Clinton’s.”

I agree wholeheartedly with Krauthammer. Just look at the above approval ratings for the president. Barring a national security crisis, today’s environment is as bad as it gets and he’s still hanging in there around 45% in most polls. He’ll be consistently back over 50%, probably 55%, by summer, and from there he wins reelection.

Of course I also agree with Gerson’s conclusions, but for some reason while the public may disagree with most of the president’s policies, they still find him likeable. 

–We note the passing of Ambassador Richard Holbrooke, longtime diplomat, a giant in his field, architect of the Dayton accords that ended the Bosnian war, only because he bullied three Balkan presidents after 21 days of negotiations on an air force base in Ohio.

“American patriotism and American liberalism were still tethered together as Holbrooke made his way. There may have been hubris in that outlook. Our country would be bloodied in distant places, it would learn that the world wouldn’t always bend to our will. But the lodestar remained that essential belief that American power could be a force for good in the world beyond our shores.

“It was in the Balkans, in the 1990s, where the truths he had taken in as a young man would be redeemed. Two administrations – that of George H.W. Bush and Bill Clinton – had been keen to avert their gaze from the unraveling of Yugoslavia and the Bosnian slaughter that followed. ‘Tell me again what this is all about,’ President Bush would ask his secretary of state on a weekly basis. ‘We have no dog in this fight,’ James A. Baker famously put it.

“For 30 long, cruel months, Mr. Clinton’s Bosnia policy fared no better. The cavalry was always on the way; it would be there after the next massacre. There was Secretary of State Warren Christopher, eager to ‘shut down’ the Bosnia policy, to ‘get it off the front pages,’ all the while covering this retreat with talk of ‘atrocities on all sides.’

“Holbrooke was the principal agitator for the change that pulled the U.S. into the fight in 1995. He had convinced a ‘pragmatic’ Bill Clinton that American power could secure a reasonable peace at tolerable costs. The peace of Dayton that rescued the Bosnians bore Holbrooke’s signature. He didn’t deliver a perfect peace – such a peace cannot be had in such places. But he rescued it from a campaign of great evil. In a just world, I always told him, and not in jest, there would be a monument for him in Sarajevo. He had called the bluff of the Serbian strongman Slobodan Milosevic, and American power would provide sustenance, first to the Bosnians, then to the Kosovars. This was Europe’s backyard, but it had been the United States that had done the work of rescue and mercy.

“In the aftermath of Holbrooke’s death, untold dozens will claim friendship and intimacy with him, and untold dozens will be right. It was his way, his physicality, the way he took in, and charmed, and worked over, people he met. He was eager to be loved, eager to share what he knew, and who he was. He was drawn to power, to be sure. But he was ready, at the drop of a hat, to journey into lands of grief and slaughter, to refugee camps the world over. His sympathy for people in desperate places suffused his life.”

“The 1995 Dayton Accords that ended the war in Bosnia were helped along by (Holbrooke’s) canny, relentless mediation. But the peacemaking would not have been possible had he not helped persuade Bill Clinton to use U.S. air power against Serb troops. Military force, as he saw it, was often the indispensable ally of diplomacy, not merely its alternative.

“That’s a lesson Holbrooke took to his final assignment in Pakistan and Afghanistan as a proponent of President Obama’s surge. In August, he wrote us personally about the task ahead. His counsel is worth sharing: ‘We face an extraordinary challenge – and our greatest enemy is time. Americans are by nature impatient and driven by election cycles and screaming cable guys; Afghans see time differently and everything moves more slowly than we expect.   If [the mission] is as important as we say it is, we must give it time.’

“Holbrooke’s energy and intellect made him America’s best-known diplomat, but we’ll remember him in particular as a diplomat who never doubted America as a force for good in the world.”

–Julian Assange was released on bail, and then placed under house arrest, and while I’d like to think his 15 minutes of fame are almost over, that’s probably not the case. It’s Army Pfc. Bradley Manning that should be made an example of, however, and quickly.

On the broader issue of WikiLeaks and others of its ilk, the Financial Times interviewed another group in the Internet subculture, “Anonymous,” a “group of anarchists and idealists with no identifiable leader, membership or nationality.”

“Having no command structure in Anonymous, we are not vulnerable to having that command structure taken down,” one said. “If someone starts trying to be a ringleader, everyone tells them to shut up. If you jump behind a leader and that leader is taken down, the entire movement is vulnerable.”

Anonymous is also merciless to those who get left behind, like the 16-year-old Dutch member arrested last week.

“Everyone knows the risks when they step into this,” the Anon said, claiming that he would not be upset if his own bank account details ended up on WikiLeaks. “If my information gets out in the public, that’s my fault….

“The Internet is something sacred – don’t screw with it, leave it alone,” he said. “If [authorities] are willing to gun down WikiLeaks in broad daylight, they will come down on you as well. If you join us, you have a voice…Nobody is going to stop Anonymous unless you pull the plug on the Internet.”

“Thanks to WikiLeaks, even Vlad the Putin can raise an eyebrow and presume to know more about founding American principles, democracy and free speech.

“It is convenient to blame poor little Julian Assange, the cyberkind who published the leaks that someone stole.

“He is now a martyr to the brat brigades who occupy basements and attics, keeping the company of others similarly occupied with virtual life.

“Assange is the king brat, but only du jour. He will be displaced soon enough by more ambitious hacks whose delinquent and, worse, sinister inclinations are enabled by technology. Alas, we are at the mercy of giddy, power-hungry nerds operating beyond the burden of responsibility or accountability.

“Do I want to hunt down Assange as we do al-Qaeda, as one famous caribou hunter suggested?  Uh, no. Assange, who is in custody awaiting extradition on (dubious) rape charges, may be a naughty boy. But he is an irresponsible publisher, a conduit, not the perpetrator of the originating offense. Whatever culpability we may assign to him ultimately will have to be determined in the way that we (but not so much the Russians and those who can see Russia on a clear day) prefer: due process.”

Meanwhile, the world sees America as weak and whining, witness the U.S. Congress.

–Ms. Parker above alludes to Sarah Palin, as you can see; Parker, like myself, not being a fan of the woman who quit midway through her term as governor, yet we’re supposed to take her seriously…at least that is what some pundits say of us Republicans. But this week Palin went to Haiti.

“The year 2010 has been absolute crap for Haiti, one in which the crises have mounted with near-hysterical acceleration. A 7.0 magnitude earthquake killed as many as 300,000 people and destroyed much of the capital. Then came hurricane season, exposing more than a million tent-dwellers to life-threatening torrents and winds. Then came cholera, which continues to kill Haitians with no access to clean water or decent sanitation. Then came corruption at the polls and a political crisis that this week brought the country to a standstill. Schools and shops are shuttered, aid workers are on lockdown, and, until this morning, few but the fearless and flack-jacketed dared go out.

“And now comes Palin, threatening to grace this beleaguered country with an awesomely ill-timed, insultingly opportunistic visit. At this point, some might prefer a plague of locusts to Palin poverty porn.”

Rev. Franklin Graham, who brought Palin to Haiti, said, “I believe Gov. Palin will be a great encouragement to the people of Haiti and to the organizations, both government and private, working so hard to provide desperately needed relief.”

“It is hard to imagine Palin’s presence encouraging anyone in this country. A quick canvassing of relief-worker friends indicates their most prevalent reaction is along the lines of ‘WTF?’ Much more importantly, most Haitians have no idea who she is. Even my friend James Beltis, a political activist at the State University who lives in a tent on its grounds, had never heard of her. (I guess he hasn’t seen ‘Sarah Palin’s Alaska.’) For James, Palin would be yet another middling celebrity alighting Haiti ‘to profit from our misery,’ he said.”

So Sarah spent last weekend there, urging Americans not to forget the place, adding her fellow citizens should “get out of your comfort zone and volunteer to help.” Spare me.

In remarks while on the ground, Sarah talked of a “military airlift to come bring supplies that are so needed,” whereupon everyone scratched their head, seeing as no such airlift aside from the normal flow of humanitarian aid is planned.

“Certainly I have a better understanding of the problems facing the country now, being here,” Palin said.

Good for you, Sarah. Trust me. Don’t include Haiti on your platform when you run for president.

–Back to my implied use of the death penalty in the case of Bradley Manning, the New York Times editorialized on retired Justice John Paul Stevens’ argument for abolishing capital punishment.

“The justice says that endorsing capital punishment is touted as a commitment to law and order ….Its cultural power is demonstrated by Americans’ appetite for mysteries about murder and revenge.

“While these forces need to be recognized, Justice Stevens is right that they are ‘woefully inadequate justifications’ for a penalty that is a brutal anachronism.”

To me it’s always been about right and wrong…and premeditation. It’s also simply about how there are some who walk this Earth who no longer deserve the privilege to do so. Like the serial killer in Los Angeles who we’ve learned may be responsible for far more than the ten deaths we already know of.

–England has seen record-breaking cold, including in the Scottish Highlands where an 1879 record was broken. Back then, the London Times reported, the lake at Regent’s Park was frozen up to 6-feet thick. The other day, another place in the Highlands recorded -23.1F. As I write, Northern Ireland is in the grip of its worst weather in 25 years.

By the way, December 1879 was the coldest month of the 19th century in France and Central Europe. The canals in the Netherlands remained frozen for two months.

–I watched Larry King sign off on Thursday, not having viewed him in years but remembering his better days, of which Thursday night was not one of them.

“Lurching awkwardly between classy gestures and underwhelming torpor, ‘Larry King Live’ breathed its last on CNN Thursday night, even if its star and founding father kept reminding viewers that though his program was ending, ‘you’re not going to see me go away.’

“Whew. That was a close one.”

It was painful television, though former President Bill Clinton handled an incredibly embarrassing “zipper club” reference by King with grace and humor.

What I will choose to remember about Larry King was his contribution to political dialogue and giving the likes of Ross Perot a forum. 

–Oprah is in Australia, in case you didn’t know, and the Aussie government paid four to five million dollars to lure her Down Under, though while some there are complaining that state money should not have been used, no doubt the exposure will be worth more than ten times what the government put in.

–I can guarantee one thing. On Feb. 10, the U.S. Postal Service’s newest 44-cent stamp will be unveiled, an image of Ronald Reagan, and this will become the biggest selling stamp of all time. Heck, I may camp out…throw a tailgate party, or somethin’.

This is actually the third Reagan stamp but this one will become available just days before what would have been his 100th birthday, making it even more special.

–Finally, with one or two exceptions I haven’t promoted charities on this site, but I have to make an exception with the “Can People,” who have shipped out almost 18,000 pounds of supplies to our troops in Afghanistan and Iraq. A friend, Josh P., became involved with the charity started by his father (a retired Marine) after 9/11 and through my small contributions I have been kept in the loop. I’ve seen the hundreds of thank you notes from troops in the field and you can be assured your money is being put to the best use. Plus, as Josh just informed me, Can People received its 501(c)(3) designation so donations are now tax deductible. EIN# 90-0518036. I just mailed another contribution. Remember, while Congress sees a need to rush home for Christmas, our troops in Iraq and Afghanistan are working their butts off for all of us through the holidays.

Can People
c/o EMWD
PO Box 8300
Perris, CA 92572-8300

[EMWD stands for Eastern Municipal Water District…some of its employees do the hard work of putting the care packages together. As Josh notes, the moniker “Can People” was given by the first artillery battery because the majority of the original supplies were shipped in recycled coffee cans.]

Pray for the men and women of our armed forces, and all the fallen. And a special RIP for baseball Hall of Famer Bob Feller, a truly great American, a patriot, and also one helluva pitcher. Feller died this week at age 92.

Gold closed at $1379
Oil, $88.02

Returns for the week 12/13-12/17

Dow Jones +0.7% [11491]
S&P 500 +0.3% [1243]
S&P MidCap +0.4% 
Russell 2000 +0.3%
Nasdaq +0.2% [2642]

Returns for the period 1/1/10-12/17/10

Dow Jones +10.2%
S&P 500 +11.5%
S&P MidCap +24.2%
Russell 2000 +24.6%
Nasdaq +16.5%

Bulls 56.8
Bears 20.5 [Source: Chartcraft / Investors Intelligence…contrarians take note. 62% is the record bull level that accompanied the all-time market high of Oct. 2007]

And I will be posting Christmas morning…HOWEVER… probably around 10:00 a.m. because I have to go through what Santa brought me first. At least I think he’s coming…. weather permitting.