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07/19/2014

For the week 7/14-7/18

[Posted 12:00 AM ET]

Edition 797

Another Awful Week for Planet Earth

Wall Street’s reaction to the dual geopolitical crises of Thursday was to drop about 1% to 1.5% in the major averages, but the angst lasted all of one day and the market recovered much of its losses on Friday.

This doesn’t surprise me. Israel’s past incursions into Gaza haven’t led to wide-scale conflict across the region and, let’s face it...the region was already in wide-scale conflict mode, what with Syria and Iraq, for starters.

I’m not saying this is right or rational, it’s just the way the market has handled the geopolitical mess since the Arab Spring faded to black, and Russia annexed Crimea.

And so with the shooting down of Malaysia Air Flight 17 over eastern Ukraine, the negative market reaction was short-lived because it seems clear that the Russian separatists (or Russians) who shot it down thought they were going after a Ukrainian military aircraft. It’s a catastrophe, incredibly depressing, but unless Russia decides to full-bore invade Ukraine, Wall Street has already showed it is not that concerned with Moscow having a proxy war with Kiev in eastern Ukraine.

Since day one of StocksandNews it’s been about what can change market sentiment on a dime, with lasting impact, and Thursday’s big events were not enough to do so, as yet.

I am still waiting for the day we learn of dual terror attacks, al-Qaeda-, ISIS-inspired terror that can truly shut down the global economy.

I would also submit that any flare-up in the South or East China Seas, let alone the Korean Peninsula, will have investors hiding under the covers.

But for now we’re left with MH17 and Gaza. One we can make sense of, the other not quite, even if actual responsibility is quickly determined.

President Barack Obama issued a statement on MH17 Friday morning. In part....

“Yesterday Malaysia Airlines Flight MH 17 took off from Amsterdam and was shot down over Ukraine near the Russian border. Nearly 300 innocent lives were taken – men, women, children, infants who had nothing to do with the crisis in Ukraine. Their deaths are an outrage of unspeakable proportions.

“We know at least one American citizen, Quinn Lucas Schansman, was killed. Our thoughts and prayers are with his family for this terrible loss....

“By far the country that lost the most people onboard the plane was the Netherlands. From the days of our founding, the Dutch have been close friends and stalwart allies of the United States of America, and today I want the Dutch people to know that we stand shoulder to shoulder in our grief and in our absolute determination to get to the bottom of what happened.

“Now, here is what we know so far. Evidence indicates that the plane was shot down by a surface-to-air missile that was launched from an area that is controlled by Russian-backed separatists inside of Ukraine.

“We also know that this is not the first time a plane has been shot down in eastern Ukraine....

“Moreover, we know that these separatists have received a steady flow of support from Russia.

“This includes arms and training. It includes heavy weapons. And it includes anti-aircraft weapons.”

An investigation of the gruesome, nine-mile long crash scene is not off to a good start because the plane was blown to pieces over a war zone. It could be some time before experienced investigators have full access and in the meantime the crime scene is being compromised, while from a humanitarian standpoint, it is sickening that the bodies are out in the field, not being treated with respect. 80 children. Loved ones filled with unbearable grief. 

But there is other evidence that is rapidly being collected and according to American military and intelligence officials, it seems clear Ukrainian separatists have been trained on Russian territory in recent weeks to fire anti-aircraft missiles, including the mobile systems suspected of having been used in Thursday’s downing of MH17. The U.S. commander of NATO forces in Europe, Air Force Gen. Philip Breedlove, said as much last month; that the rebels were being trained to operate “vehicle-borne” anti-aircraft batteries. Heretofore, the rebels have been shooting down helicopters and low-flying aircraft with shoulder-fired missiles.

Monday’s shoot down of a Ukrainian AN-26 military cargo plane while flying at 21,000 feet, well above the range of the shoulder-fired MANPADS, was the first sign the long-range “Buk” missile system (SA-11) was being employed.

U.S. officials also claim the separatists were spotted hours before the incident with an SA-11 system at a location close to the site where the plane came down, according to U.S. ambassador to the U.N., Samantha Power.

Among the many critical questions now are who pulled the trigger? Were Russian military advisers actually accompanying the separatists as they have throughout the conflict with Kiev? How culpable is Vladimir Putin?

Late Friday, the Ukrainian Interior Ministry released a video purporting to show rebels moving an SA-11 missile battery out of eastern Ukraine and into Russia. “The launcher appeared to be missing one of its missiles.” [Washington Post]

President Obama learned of the downed airliner while he was on the phone with Putin Thursday morning, with Putin expressing his anger over new sanctions levied on Russian entities. White House Press Secretary Josh Earnest said Obama told Putin the United States and its allies are willing to take additional measures if Russia doesn’t work to de-escalate the conflict. “They could shut down the border and prevent the transfer of heavy weapons and materiel to separatists. They have not done that. President Putin himself could intervene with pro-Russian separatists and encourage them to abide by the ceasefire. He has not done that.”

It seems clear pro-Russian insurgents thought they had shot down a Ukrainian military plane before realizing it was in fact a packed commercial airliner.

Social media posts – most of them hastily removed, were immediately publicized by top Kiev officials in the information war with the Kremlin in the first hours after the incident. The Security Service of Ukraine also released an audio of what it claims are separatists taking responsibility for shooting the plane down.

The social networking page of Igor Strelkov, “defense minister” of the self-proclaimed Donetsk People’s Republic, first announced, “We just downed an AN-26 near (the town of) Torez. And here is a video confirming that a ‘bird fell,’” said the post.

A pro-Kiev news site later posted an audio recording of what it claimed were the intercepted field communications between rebels and a Russian agent discussing the downing.

“We just downed a plane,” a rebel tells an alleged Russian military intelligence officer.

In a second allegedly recorded call, two militants then discuss the plane being shot down.

Major: The plane broke into pieces in the air, close to Petropavlovskaya mine. There is the first 200 (dead). We have found the first 200. It’s a civilian.

Grek: How are things going there?

Major: Well, we are 100% sure that it was a civilian plane.

Grek: Are there a lot of people?

Major: F---! The debris was falling straight into the yards.

Grek: What plane is that?

Major: I haven’t figured it out yet....Now I’m nearby the place where first bodies started falling. Here are remnants of internal brackets, chairs, bodies... [AFP, with Patrick Hatch]

The post was soon removed but not before its screen grab was reportedly captured.

A message on the official Twitter account of the Donetsk People’s Republic had announced hours earlier that insurgents had seized a series of Russian-made Buk systems capable of soaring to 33,000 feet. This tweet was later deleted too.

Ukrainian President Petro Poroshenko quickly called it a “terrorist act.”

But Russian President Vladimir Putin said the incident would never have happened had Poroshenko not ripped up a recent truce agreement and “resumed military activities in southeastern Ukraine.”

Editorial / Wall Street Journal

“This catastrophe brings to mind the Korean Air Lines plane shot down in 1983 by a Soviet military fighter, killing 269. President Reagan called the downing of KAL007 ‘an act of barbarism, born of a society which wantonly disregards individual rights and the value of human life and seeks constantly to expand and dominate others.’ It was a moral turning point in the Cold War.

“Perhaps the downing of MH17 will be a similar turning point in our post-post Cold War era. The Ukrainian crisis has been dismissed too often as a faraway battle in which the West has little stake, and in any case Ukraine is within Russia’s ‘sphere of influence.’

“The deaths of 298 innocents from many countries should put that to rest. The Kremlin’s attack on an independent neighboring state presents the gravest threat to European security since the end of the Cold War. Russia has supported non-state insurgents with the express purpose of sowing chaos. It’s notable that Mr. Putin was the one leader who didn’t show restraint on Thursday. He blamed Ukraine as ‘the government on whose territory this occurred.’ The world should ask why he would be so quick to jump to conclusions.”

Among the victims were 189 from the Netherlands, 29 from Malaysia, and 27 from Australia.

As for the flight path, Ukrainian air traffic control had closed the airspace over eastern Ukraine to civilian air traffic flying below 32,000. Hundreds of flights continued to fly over the war zone, though, like MH17, at 33,000 feet or higher. Before the war, 300-400 jets a day used the popular route. Many used it on Thursday.

Israel and Gaza

Israeli Prime Minister Benjamin Netanyahu authorized a ground invasion into Gaza after Israel agreed to an Egyptian cease-fire proposal, which Hamas rejected. Israel accused Hamas of firing rockets into Israel even during Thursday’s five-hour humanitarian cease-fire. Netanyahu’s statement said:

“In light of Hamas’ continuous criminal aggression, and the dangerous infiltration into Israeli territory, Israel is obligated to act in defense of its citizens.”

The major ground offensive that Israel announced on Friday would be “significantly” expanded, marked a dramatic escalation in the nearly two-week conflict with the Palestinian militants.

The Israel Defense Forces said the goal of the offensive was to destroy tunnels used by the militants to infiltrate into Israel, but warned they could not be taken out by airpower alone.

Israel has called up as many as 68,000 reservists.

One possible trigger for the ground attack was an attempt by Hamas militants to infiltrate into Israel early Thursday morning. The Israeli air force hit the opening of a tunnel used by the militants to sneak under the Gaza border fence, with the opening about 250 yards inside Israel. 13 militants were believed to have been killed in this strike.

Hamas said Israel’s ground campaign into the Gaza Strip would have “dreadful consequences.” Spokesman Sami Abu Zuhri said, “It does not scare the Hamas leaders or the Palestinian people. We warn Netanyahu of the dreadful consequences of such a foolish act.”

As I go to post, more than 260 Palestinians have been killed, two Israelis.

Charles Krauthammer / Washington Post

“Israel accepts an Egyptian-proposed Gaza cease-fire; Hamas keeps firing. Hamas deliberately aims rockets at civilians; Israel painstakingly tries to avoid them, actually telephoning civilians in the area and dropping warning charges, co-called roof knocking.

“ ‘Here’s the difference between us,’ explains the Israeli prime minister. ‘We’re using missile defense to protect our civilians, and they’re using their civilians to protect their missiles.’

“Rarely does international politics present a moment of such moral clarity. Yet we routinely hear this Israel-Gaza fighting described as a morally equivalent ‘cycle of violence.’ This is absurd. What possible interest can Israel have in cross-border fighting? Everyone knows Hamas set off this mini-war. And everyone knows the proudly self-declared raison d’etre of Hamas: the eradication of Israel and its Jews.

“Apologists for Hamas attribute the blood lust to the Israeli occupation and blockade. Occupation? Does no one remember anything? It was less than 10 years ago that worldwide television showed the Israeli army pulling die-hard settlers off synagogue roofs in Gaza as Israel uprooted its settlements, expelled its citizens, withdrew its military and turned every inch of Gaza over to the Palestinians. There was not a soldier, not a settler, not a single Israeli left in Gaza.

“And there was no blockade. On the contrary. Israel wanted this new Palestinian state to succeed....

“(But) instead of building a state with its attendant political and economic institutions, they spent the better part of a decade turning Gaza into a massive military base, brimming with terror weapons, to make ceaseless war on Israel.

“Where are the roads and rail, the industry and infrastructure of the new Palestinian state? Nowhere. Instead, they built mile upon mile of underground tunnels to hide their weapons and, when the going gets tough, their military commanders.”

A few other thoughts. Just as I used to write during the Iraq War that the United States had to be virtually perfect in its conduct (which is impossible), the same holds for Israel if it is to avoid widespread criticism in the eyes of the world. So the killing of the four Palestinian boys on the Gaza beach on Wednesday was troubling.

But imagine the damage to Israel had it not had the Iron Dome missile defense system, which has shot down an estimated 1,000 rockets fired into the country from Gaza with over 90% accuracy.

Built with the cooperation of the United States, a U.S. Senate subcommittee approved a spending bill this week authorizing $351 million more for Iron Dome, double the administration’s request. I’ve seen varying stories on the cost of each interceptor missile - $20,000 to $50,000 – which is a big reason Israel only uses the system when its radars indicate that a rocket seems likely to hit a populated area. 

Finally, the Wall Street Journal had a front-page story in Monday’s paper by Jay Solomon and Carol E. Lee titled “Obama Contends With Arc of Instability Unseen Since ‘70s.”

Nothing you haven’t already seen from me in this space, but it’s a good summary.

“The breadth of global instability now unfolding hasn’t been seen since the late 1970s, U.S. security strategists say, when the Soviet Union invaded Afghanistan, revolutionary Islamists took power in Iran and Southeast Asia was reeling in the wake of the U.S. exit from Vietnam.

“In the past month alone, the U.S. has faced twin civil wars in Iraq and Syria, renewed fighting between Israel and the Palestinians, an electoral crisis in Afghanistan and ethnic strife on the edge of Russia, in Ukraine.

“Off center stage, but high on the minds of U.S. officials, are growing fears that negotiations with Iran over its nuclear program could collapse this month [Ed. see below], and that China is intensifying its territorial claims in East Asia....

“ ‘I think our country acting like such a paper tiger to the world on...so many fronts is doing incredible long-term damage to our nation,’ said Sen. Bob Corker (R-Tenn.) at a hearing last week on Ukraine. ‘And I do hope at some point the administration will actually follow through on the things that it continues to tout publicly.’...

“ ‘Our allies are looking for a quarterback to call some plays here, and our body language sometimes doesn’t show that we’re doing that,’ said Brian Katulis of the left-leaning Center for American Progress. ‘Obama’s always been a look-before-you-leap guy. And I think that leads to some of the confusion here at home, but also abroad.’”

White House press secretary Josh Earnest was asked about the Journal report at Monday’s daily briefing and said “there have been a number of situations in which you’ve seen this administration intervene in a meaningful way that has...substantially improved the – you know, the tranquility of the – of the global community.”

Good god.

Separately, appearing on ABC’s “This Week” last Sunday, Attorney General Eric Holder expressed “extreme, extreme concern” over reports that bomb makers from Yemen responsible for the 2009 underwear-bomb plot are now in Syria cooperating with foreign militants there, possibly to develop new, nearly undetectable explosive devices. The threat of undetectable explosives from Syria is “more frightening than anything” he has experienced in office, said Holder.

Washington and Wall Street

Despite Thursday’s downdraft, stocks finished up on the week as corporate earnings generally came in better than expected, as detailed below, particularly in the banking sector.

But economic data was mixed. June retail sales were up just 0.2%, far less than expected, but ex-autos up a better 0.4%, plus May was revised upward to 0.5%, so the two months taken together are solid.

June industrial production, though, up 0.2%, was far below expectations.

And June housing starts, at 893,000, represented a huge miss off an estimate of 1.02 million. Some are blaming rain in the South.

The Federal Reserve’s Beige Book business survey said economic growth was modest to moderate in all 12 of its districts owing to stronger consumer spending and expanded manufacturing.

Meanwhile, Fed Chair Janet Yellen gave her semi-annual congressional testimony on the economy and Fed policy and said interest rates could rise earlier than expected, or maybe later. It’s all due to “considerable uncertainty.”

Among her statements before House and Senate committees, Yellen said the jobs market had “registered notable improvements” this year but the pace of economic growth “bears close watching.”

“If the labor market continues to improve more quickly than anticipated by the committee, resulting in faster convergence toward our dual objectives, then increases in the federal funds rate target likely would occur sooner and be more rapid than currently envisioned.

“Conversely, if economic performance is disappointing, then the future path of interest rates likely would be more accommodative than currently anticipated.”

Asked by Sen. Tom Coburn (R-Okla.) why the Fed seems to have a policy that creates bubbles, Chair Yellen responded:

“The reason we have low interest rates is to deal with a very real problem, namely the economy is operating significantly short of its potential. Employment is suppressed well below its maximum sustainable level and inflation is running below our objectives. That’s why we are holding interest rates low.”

Yellen added on the topic of market valuation:

“My general assessment at this point is that threats to financial stability are at a moderate level and not a very high level.” While some asset values “may be on the high side and there may be some pockets where we see valuations becoming stretched,” in general “price equity ratios and other measures are not outside of historical norms. In that sense I’m not seeing alarming warning signals.”

[The Fed’s accompanying semiannual report for Congress for some reason highlighted the biotech and social media sectors as being overvalued, to which everyone on Wall Street said, well, that might be the case, but who is the Fed to tell us which stocks to invest in or not?]

St. Louis Fed President James Bullard said the Fed may have to raise rates more quickly than planned as unemployment falls and inflation quickens. Bullard said, “I want to make sure there’s a bounce-back in the second quarter and that things look like they are on track to grow at 3% or better in the second half of the year, which is what I am expecting.”

“Normalization will take a long time,” Bullard added, “and current policy settings are far from normal, suggesting an earlier start” to tightening. [Bloomberg]

According to the Wall Street Journal’s latest survey of economists, 79% said the greater risk is that the Fed will raise rates too late, versus 21% who cited the greater risk as the Fed moving too soon.

The same economists also now estimate GDP will grow just 1.6% this year after the first quarter’s deep contraction – 2.9%. The forecasters estimate GDP grew at an annual rate of 3.1% in the second quarter, with 3% growth in the second half.

Europe and Asia

IMF head Christine Lagarde warned financial markets may be too upbeat given economic fundamentals in Europe, as well as persistently high unemployment. In a speech in Paris on Friday, she said, “Obstinately low inflation can seriously undermine growth.”

“Monetary policy should remain supportive until private demand has fully recovered” and the ECB “has achieved its price stability objective.”

According to a Bloomberg Global Poll, international investors say the eurozone economy is in its worst shape in more than a year and in danger of dropping into deflation, with many believing the European Central Bank has been too timid.

This week we learned eurozone inflation was at the same 0.5% annualized rate in June as it was in May, down from 1.6% a year earlier. Spain was unchanged, France 0.6%, Germany 1.0%, Italy 0.2%, Portugal -0.2% and Greece -1.5%...not good.

Industrial production for the euro-18 fell 1.1% in May vs. April, down 3.6% in Portugal. Previously, the figures had been announced for France (down 1.3%), Italy (down 1.2%) Germany (down 1.4%) and Spain (down 0.9%).

So it should probably be no great surprise that bond yields in many countries hit their lowest in recorded history. The French 10-year hit a record low 1.57%, Germany 1.15%, Austria 1.41%, Belgium 1.57%, Netherlands 1.36%, Finland 1.31%, Spain 2.59% and Italy 2.78%.

Even Portugal’s 10-year bond is back down to 3.64%, while Greece sits at 6.13%, even though by all accounts it will require a third bailout.

Turning to China, the long-awaited report on second-quarter GDP came in...up 7.5%, better than the first quarter’s 7.4% and in keeping with recent statements by Premier Li Keqiang. How conveeenient.

Fixed asset investment was up 17.3% in the first half, industrial production up 9.2% in June from a year earlier, and retail sales were up 12.4% year over year.

The government has increased spending on the rail network, cut some taxes, especially to small business, and reduced reserve requirements for lenders.

But the housing market continues to stumble. For the first time, the National Bureau of Statistics said new-home prices in June fell in 55 of 70 cities, with prices declining in Shanghai 0.6% over May. Year over year, prices were up 6.4% in Beijing and 7% in Shanghai, much slower increases. The government is telling developers to do something, anything to fill their inventory.

Street Bytes

--Despite Thursday’s big down day, the Dow Jones gained 0.9% on the week to close at 17100, the S&P 500 added 0.5%, and Nasdaq gained 0.4%. But the small-cap Russell 2000 lost 0.7% and is down 1.0% for the year, while the S&P is up 7.0%.

Thursday also marked the first time the S&P rose or fell more than 1% since April 16, the longest stretch of calm trading since 1995 (in this case the S&P losing 1.2%), while the day before the Dow Jones had notched another record closing high, 17138.

--U.S. Treasury Yields

6-mo. 0.05% 2-yr. 0.48% 10-yr. 2.48% 30-yr. 3.29%

The long end of the curve picked up a flight to quality trade at week’s end over Ukraine and Gaza.

Producer price data for June was released, up 0.4%, ex-food and energy up 0.2%. For the 12 months, the PPI is up 1.9%, up 1.8% on core.

It was revealed this week that China had boosted its holdings of U.S. Treasury debt maturing in more than a year by $107.21 billion for the first five months of 2014, the biggest five-month increase since record keeping began in 1977. It also surpasses the net $81 billion bought by China for all of 2013. [Min Zeng / Wall Street Journal]

Including T’bills, which mature in a year or less, China now holds $1.2709 trillion of Treasury debt as of end of May.

So in case you were wondering why U.S. bond yields have been falling since the start of the year, there’s one big reason for you.

--The leaders of the five Brics countries – Brazil, Russia, India, China and South Africa – signed a deal in Fortaleza, Brazil, to create a new $100 billion development bank and emergency reserve fund. The capital for the bank will be split equally among the five participating countries. The bank will have a headquarters in Shanghai and the first president for the bank will come from India.

This could be, over time, major competition for the World Bank. Brics nations have criticized it and the IMF for not giving developing nations enough voting rights.

What I didn’t like, and what made my skin crawl in light of recent events, was seeing a picture of the five leaders, with Chinese President Xi and Russian President Putin grinning like Cheshire cats.

Xi also pledged more than $8.6 billion in investments and loans in Brazil, including $3.2 billion for jet planes from aircraft manufacturer Embraer SA.

--It seems unfathomable that Malaysia Airlines could suffer two catastrophic blows in four months...MH17 and MH370. It had been struggling financially before the MH370 disappearance in the Pacific, having lost $1.5 billion since the start of 2011.

--The Obama administration is reopening the Eastern Seaboard, Delaware to Florida, to offshore oil and gas exploration, approving seismic surveys using sonic cannons that can pinpoint energy deposits. Environmentalists and those owing their livelihoods to fisheries and tourism are not happy.

The cannons create noise pollution, sending sound waves 100 times louder than a jet engine reverberating every ten seconds for weeks at a time.

Energy companies need this data from the outer continental shelf to apply for drilling leases in 2018, when current congressional limits expire.

New Jersey to Maine is off limits for now. [Jason Dearen / AP]

--Goldman Sachs and JPMorgan Chase reported healthier than expected revenues from the banks’ fixed income desks, where they trade bonds, commodities and currencies (FICC) on behalf of clients. Revenues from FICC fell 10% at Goldman and 15% at JPM, but earlier JPM and Citigroup warned second-quarter revenues from their trading businesses could fall by as much as 20-25%. [Citi’s FICC was down 12%.]

Goldman’s net income climbed 5% to $2.04 billion as investment banking revenue rose 15%.

--Bank of America continues to negotiate with the Justice Department on a mortgage-securities settlement but while BofA is offering $13 billion, including cash and consumer relief, the Justice Department is looking for more cash and there’s no guarantee a deal between the two will be reached.

For the quarter, Bank of America reported a profit of $2.29 billion, compared with $4.01 billion a year earlier. Revenue dropped 4%, slightly better than expectations. [BofA’s FICC was up 5%.]

Separately, client assets at the Merrill Lynch Wealth Management division crossed the $2 trillion mark.

--The Justice Department announced that Citigroup agreed to pay $7 billion in fines for misleading investors about how toxic its home loans were.  Of the total, $2.5 billion is to go to homeowner relief, though as the Wall Street Journal opined, “the premise of this case involves harm done to bond investors, not mortgage borrowers.”

For the second quarter, Citigroup’s overall revenue fell 5.6% but beat expectations, ditto earnings.

--Morgan Stanley beat on both earnings and revenues for the quarter, the latter up 1.1%. Both investment banking and the wealth-management divisions reported solid gains, even as FICC revenue fell 12%, which Morgan Stanley has been aggressive in reducing its focus on.

--BNY Mellon beat on the bottom line, but top line revenues fell 7% year over year.

--Microsoft CEO Satya Nadella announced that up to 18,000 will be laid off over the coming year, with most of the cuts coming at its newly acquired Nokia division. Microsoft’s mobile efforts haven’t panned out compared to the success of Apple and Google (Android).

Nokia is slated to lose 12,500 of the 18,000 affected positions after Microsoft paid $7.2 billion for the Finland-based company and this is creating real problems there, with Prime Minister Alexander Stuff saying he found the lay-offs “very, very difficult from a human point of view.” Just last September, then-CEO Steve Ballmer seemed to assure workers their Finnish jobs were safe.

“There are no significant plans to shift where work is done in the world as we integrate,” he said in an e-mail to Nokia employees, “so we expect the Nokia teams to stay largely in place, geographically.”

But now a quarter of Nokia workers are facing the prospect of losing their job. Finland is a country of only 5.5 million to begin with. But it’s up to Nokia to come up with new businesses and products.

For his part, Nadella replaced Ballmer last February with the mission of turning Microsoft into a more nimble operation in a world dominated by mobile, with the mantra “Mobile-first, cloud-first,” which has meant a focus on products like the Surface tablet.

And as Paresh Dave of the Los Angeles Times noted, “A look at profit-per-employee figures makes clear the need to drastically reduce head count. In 1999, just before the Gates-to-Ballmer transition, each of the company’s 31,400 employees represented $248,120 in net income. In 2013, each of the 99,000 employees accounted for $220,808 in net income, an 11% drop.”

Microsoft shares are at their highest level since January 2000, when founder Bill Gates stepped down as CEO.

--Intel beat expectations and raised its full-year forecast as the market for personal computers continued to firm after years of decline due to growth of smartphones and tablets. Revenue rose 8% from the prior year, with earnings per share up 41%. For the full year, Intel is forecasting revenue growth of 5%, up from a flat forecast in April.

Separately, the PC industry just had its best quarter since 2012 and in a recent interview with USA TODAY, Michael Dell had some answers.

“The world got enamored with smartphones and tablets, but what’s interesting is those devices don’t do everything that needs to be done. 3-D printing, virtual-reality computing, robotics are all controlled by PCs. Productivity is grounded in the PC. 

“Where does the computing power come from?” Dell said. “How would you run a hospital without PCs?”

Another explanation is simpler. Once service for the defunct Windows XP ended in April, many consumers and businesses were in need of upgrades.

Smartphones with larger screens are also slicing into the tablet market. Apple’s forthcoming iPhone 6 is expected to have a larger screen, for example.

--Google reported a 22% jump in revenue in the second quarter to $16 billion, with profits up 6% to $3.4 billion, both above expectations.

But the price that advertisers pay each time someone clicks on an add – “cost per click” – dropped 6% from a year ago in the quarter as more advertising shifts to less profitable mobile.

Google also announced it added about 2,200 employees, bringing the overall number to 52,000.

Google shares gained $21 Friday after the earnings release.

--Yahoo reported revenue fell 4% in the recently completed quarter, missing earnings expectations by a penny. Digital display advertising plunged 8%. But investors are focused on the 24% stake Yahoo has in Alibaba, which is valuing itself at $133 billion as it prepares for its IPO, rather than focusing on issues with Yahoo’s core business. It continues to have trouble winning over advertisers, though CEO Marissa Mayer says this is being addressed, along with a push towards more mobile apps.

Back to Alibaba, it is now looking to go public after Labor Day as the e-commerce giant realized there wasn’t enough time to complete all the required steps in time for what was thought to be an Aug. 7 launch.

--General Electric Co. reported earnings that were in line, with revenue up 3%, though as it restructures the gross revenue figure can be deceiving. It’s also spinning off its $20 billion North American consumer finance business, Synchrony Financial, which will offer retail financing and back store-branded credit cards at the likes of Wal-Mart and Lowe’s.

--Industrial conglomerate Honeywell exceeded expectations on both the top and bottom line, revenue up 5%.

--Time Warner rejected a takeover approach from rival 21st Century Fox estimated at $80 billion. The Rupert Murdoch owned company said it is not currently in any discussion with Time Warner but most believe Murdoch won’t let this go. According to the New York Times, Fox had offered to sell Time Warner-owned CNN as part of a takeover proposal in order to clear objections U.S. regulators might have had.

--Apple and IBM sealed a groundbreaking alliance that would turn IBM’s gadgets into business-friendly devices. The partnership, intended to increase the security and functionality of Apple’s mobile devices for corporate users, is a result of workers bringing their devices from their personal lives to the office.

The big loser in this is Microsoft, which has relied on winning business owners over to its Windows 8 software on touchscreen devices.

While Apple says 98% of Fortune 500 companies use its devices, the partnership with IBM is an acknowledgement its salesforce lacks the expertise to tackle large corporate customers.

--In its most recent quarter, IBM’s revenue declined 2.2%, the ninth straight quarter it failed to boost sales, though recent cost-cutting boosted the bottom line.

Actually, IBM has had nine straight quarters with revenue declines in its largest business – services.

--Apple agreed to pay as much as $400 million to settle a lawsuit alleging it colluded with publishers to fix the price of e-books, though it maintains it did not engage in any wrongdoing. If a judge approves, the $400 million will go to consumers. The five publishers who are accused of colluding with Apple – Hachette, HarperCollins, Penguin, Macmillan and Simon & Schuster – have already settled for $166 million in a separate suit.

--EBay Inc. posted a 13% rise in quarterly revenue, but this is due to its fast-growing PayPal division (rev. up 20%), not the online retailing division (up 8.6%), which has suffered from increasing competition from Amazon.com, as well as the continuing fallout from a well-publicized cyberattack.

Pressure is growing on the company to spin off PayPal.

--The Justice Department charged FedEx Corp. with conspiracy to distribute controlled substances for its alleged role in transporting prescription drugs that had been sold illegally. The charges result from an investigation that goes back to 2004. Prosecutors say FedEx made at least $820 million shipping the drugs. If found guilty, the company could face a fine of as much as twice that amount. FedEx denies any wrongdoing.

The indictment states FedEx knowingly knew it was shipping products from some online pharmacies that had had their licenses suspended.

--California officials have approved fines of up to $500 a day for residents who waste water, as the worst drought in four decades continues. The measures are designed to stop water being wasted on lawns, landscaping and car washing.

Water consumption rose by 1% in the year up to May, despite calls for a 20% reduction. About 75% of water used in California is for agriculture, and it’s estimated the drought will cost the state $2.2 billion this year in losses and added expenses for the industry. Some 17,000 jobs could also be lost.

Agriculture is holding up reasonably well, however, owing to the ability of many farmers being able to tap groundwater reserves.

--Growth in Southern California’s home prices grew at their slowest pace in two years in June, with the median price of a home sold in the six-county Southland hitting $415,000, according to DataQuick, which is the highest in four years, but 18% below the market’s peak in mid-2007. Most agree this is good...a much more balanced market with prices rising 8% the past 12 months.

At the end of the first quarter, 8% of home loans in metro Los Angeles remained underwater, according to CoreLogic, while that figure is 17% in the Inland Empire.

--China’s summer grain production will hit an all-time high after 10 straight years of growth, though analysts have warned of the toll farming is taking on the environment. The National Bureau of Statistics said grain (mostly wheat) was up 3.6% from last year. 

But productivity is only 5% of that in the United States, according to a researcher at the Chinese Academy of Social Sciences, while Chinese farmers use three times the amount of fertilizer that Americans do, thus the environmental concerns. 

According to the International Fertilizer Industry Association, China uses 58 million tons, with the global total being 176 million in 2011. [South China Morning Post]

--Yum Brands reported that sales and margins in its China operations, primarily KFC, had improved, with Yum’s same-store sales there rising 15%, including 21% at KFC. In the U.S., same-store sales fell 2% at KFC, dropped 4% at Pizza Hut, but grew 2% at Taco Bell.

Over 50% of Yum’s sales come from China and the improvement comes after KFC had major issues with a chicken supplier more than a year ago that torpedoed business for a spell.

--Singapore’s economy unexpectedly declined in the second quarter at an annualized 0.8% from the previous quarter.

--New York City-area commuters and travelers were spared a debilitating strike as the Long Island Rail Road and its unions reached an agreement three days before a planned walkout. In an apparently well-orchestrated political coup in an election year, Gov. Andrew Cuomo was able to say he basically saved the day.

The unions received raises of 17 percent over 6 ½ years, though employees for the first time will begin contributing a portion of their pay, 2%, toward their health coverage.

--Inflation alert: Hershey Co. is hiking its chocolate prices for the first time in three years, 8%, after a year-long surge in cocoa prices.

--“Dawn of the Planet of the Apes” opened to a strong $73 million last weekend, but I have to note “Transformers: Age of Extinction,” which as of last weekend had taken in $209 million domestically, but $543.5 million internationally, of which $262.6 million was in China – a record for the country.

--The Macau government is dealing with calls for tighter controls on its casino industry, amid accusations operators are unfairly withholding prize money from winners. As reported by the South China Morning Post, the casinos have refused to pay 133 gamblers their winnings on slot machines, claiming their wins are the result of “mechanical errors” – a practice that is bound to deal a blow to Macau’s tourism image.

--Atlantic City is preparing to lose its third casino in less than nine months, the Trump Plaza, which expects to close in mid-September. Revel could be a fourth to close this year if a buyer cannot be found in bankruptcy court. 

Foreign Affairs, part II

Ukraine: Prior to the shoot down of MH17, the United States and European Union bolstered sanctions against Russia over its ongoing support for separatists fighting in Ukraine. The U.S. targeted major banks, including Gazprombank, the nation’s third-largest lender, preventing it from accessing U.S. debt markets for financing with maturities above 90 days. Energy giant Rosneft was also targeted and its bonds tumbled as it has the equivalent of $14 billion of debt coming due in 2014, and another $19 billion next year.

The goal is to get President Putin to de-escalate his actions in Ukraine, but the Pentagon has seen an increase in Russian troops at the border with as many as 12,000, after Russia had pulled back for a spell.

Responding to the U.S. moves, the Russian Foreign Ministry said in a statement: “We consider the new set of American sanctions on Russia as a primitive attempt to avenge the fact that developments in Ukraine are not following Washington’s scenario....It is widely known that sanctions are a double-edged sword.”

Prior to Thursday, it had already been a bloody week, with the number of civilian and combatant deaths now at more than 1,000 since mid-April. On Wednesday, the insurgents claimed to have hit two Su-25 attack jets in the Donetsk region. On Tuesday they claimed to have downed another Su-25 in the same area. Monday, it was the transport plane. Sunday, Moscow accused Ukraine of lobbing a shell over the border and killing a Russian civilian.

Whether the separatists’ claims were accurate or not as to the Su-25 and other aircraft, a Ukrainian government spokesman did say the military had only ten helicopters left as of Wednesday.

In a different issue, Ukraine’s interior minister announced hundreds of police officers in Donetsk were fired, having been accused of siding with pro-Russian rebels and breaking their oath.

Editorial / Wall Street Journal...prior to MH17

“Only last month the Russian President’s order to pull forces back from the Ukraine border was hailed in EU capitals as a conciliatory act. But in recent days Russia has redeployed some 10,000 to 12,000 troops along the border, according to NATO. It has moved heavy weaponry and possibly missile systems across the border to insurgents who control the cities of Donetsk and Luhansk. The leaders of the separatists are Russian citizens from Russia.

“Casualties are rising. A Ukrainian air force transport plane flying at 21,000 feet was shot down Monday ‘probably’ by a rocket fired from Russian territory, according to Ukraine’s defense minister. The Ukrainians blamed Russia for an airstrike Tuesday on a border town that killed four civilians. President Petro Poroshenko says ‘Russian staff officers are taking part in military operations against Ukrainian forces’ on Ukrainian territory....

“All of this fits with the new Russian military tactics of ‘deception and strategic ambiguity’ that General Phil Breedlove, NATO’s supreme allied commander, (has described). Mr. Putin is attempting to disguise his use of force to achieve his strategic goals while limiting the Western response.”

Neil Buckley / Financial Times

“President Vladimir Putin...is riding a wave of popularity as Russia’s leader after the annexation of Crimea in March. The propaganda machine that Russia television has become is still serving up a relentless diet of alleged Ukrainian atrocities against Russian-speakers in the east.

“So Mr. Putin cannot afford a rout of the rebels that would appear a personal defeat, without achieving at least some of Russia’s broader, underlying goals in Ukraine. Those are guarantees that Ukraine will not join NATO, slower EU integration, and/or a shift by Ukraine to a looser, federal structure that would give Russia continuing influence and a form of veto on Kiev’s absorption into Europe-Atlantic structures.

“Destabilizing eastern Ukraine is Moscow’s principal lever of pressure in trying to achieve those aims.

“Russia can choose to keep it as a simmering conflict, producing thousands of refugees, wrecking Ukraine’s industrial heartland, and sapping Kiev’s ability to tackle the country’s wider economic and governance problems.

“Moscow seems to have kept open the outright invasion of east Ukraine, in part as a form of psychological warfare against Kiev....

“But it appears, too, to have concluded the potential costs of direct intervention – in body bags coming home to Russia, the economic burden of taking charge of eastern Ukraine, and in further western sanctions – are dangerously high.”

Iran: It has seemed clear for a while now that the two sides in the nuclear talks between Iran and the P5+1 (U.S., Britain, France, Russia, China and Germany) still had deep differences and that talks would be extended past Sunday’s July 20 deadline. Friday, we learned talks had indeed been extended four months, though it’s not clear exactly as I go to post how existing sanctions will be handled during this time. [Four months takes the issue beyond the mid-term election.]

Iran needs a long-term deal in exchange for a full lifting of economic sanctions. But with the Ukraine issue once again taking center stage, cooperation between Russia and the rest of the P5+1, save for China, will not be good.

On Monday, Iran’s chief negotiator, Foreign Minister Mohammad Javad Zarif, made a proposal that would leave centrifuges spinning in place, leaving Iran with a “breakout capability” to race for a bomb should it decide to do so. Zarif contends it would lengthen that period to over a year, which Secretary of State John Kerry has said is the minimum. But U.S. officials are doubtful.

Iran wants restrictions on its program to be no longer than seven years, while the United States says the period must be in the “double digits,” or at least a decade. After the agreement expired, Iran would become a signatory of the Nuclear Nonproliferation Treaty, as long as it abided by the treaty’s inspection rules.

Congress, however, wants severe restrictions on Iran’s development of next-generation centrifuges, in return for lifting American sanctions.

Zarif says no “freeze” is acceptable and Iran will not be subject to any permanent limits.

Iran currently has 22,000 nuclear centrifuges (I’ve also seen 19,000), of which half are working, but the U.S. doesn’t want a situation where Iran throws out the inspectors, a la North Korea, and turns the centrifuges back on. [David Sanger / New York Times]

President Obama said on Wednesday that negotiators had made “real progress in several areas,” and have produced a “credible way forward.”

Although “significant gaps” remain, Iran has met its commitments under the interim deal reached in November, according to Obama.

But it really does seem to come down to how much uranium enrichment equipment Iran will be allowed to retain.

Meanwhile, New Jersey Democratic Senator Robert Menendez is the leader in Congress on the nuclear issue and has garnered respect from both sides of the aisle. As the Washington Post’s Jennifer Rubin noted the other day, even Sen. Ted Cruz (R-Tex.) paused to commend Menendez.

Rubin:

“First, (Menendez) aptly expressed the real anxiety on the Hill and elsewhere in the responsible foreign policy community that a bad deal may be in the offing. He said: ‘I am convinced that we should only relieve pressure on Iran in exchange for verifiable concessions that will fundamentally dismantle Iran’s illicit nuclear program and that any deal be structured in such a way that alarm bells will sound – from Vienna to Washington, to Moscow and Beijing – should Iran restart its program anytime in the next 20 or 30 years.’ Instead Iran seems to be offering fool’s gold – a ‘freeze.’ Menendez ably explained why this is a nonstarter:

“ ‘It is the same obfuscation – the same Iranian tactics that we have seen for years, for decades. Iran puts offers on the table that appear to be concessions but, in reality, are designed to preserve Iranian illicit nuclear infrastructure and enrichment so that the capacity, the capacity to break out and rush toward a nuclear weapon is still very much within reach. That is not an endgame. It’s a non-starter... Essentially, what Zarif is offering is the same concessions as what Iran made for the interim agreement over six months ago. And in exchange, Iran gets sanction relief. Except we know that Iran is not like any other nation, and its history of cheating, lying and evading inspections proves it.’

“Second, Menendez bluntly rebuked Secretary of State John Kerry, who seems to have adopted Iran’s negotiating posture on a key point. ‘Secretary Kerry said this morning that ‘the U.S. believes Iran has the right to a peaceful nuclear program under the NPT.’ Let’s remind ourselves of first principles here. No country has a right to enrichment. They may have the ability to enrich – the desire to enrich, but they do not have the right to enrich – and certainly not Iran given its past behavior. Let’s remember how we reached this point. Iran – over a period of decades – has deceived the international community about its nuclear program, breaching its international commitment in what everyone agrees was an attempt to make Iran a nuclear weapons state – or at least a threshold state.’ In other words, don’t expect transparency and verification to be the linchpin of a deal; the linchpin is dismantling Iran’s illicit program....

“I was most struck by the degree to which a mainstream Democrat in a key leadership position shares the same qualms, distrust of the president and wariness that a bad deal is afoot as Republicans do. On this, bipartisanship prevails, and both houses of Congress should demonstrate that when it comes to a nuclear Iran, crossing a weak and failing president may be a small price to pay to prevent the greatest and most preventable national security calamity of our time.”

Iraq: The Iraqi parliament finally did something, electing a new speaker, Salim al-Jabouri, breaking weeks of political deadlock. The main Sunni Arab bloc had nominated the moderate Islamist for the position. But it does not appear parliament will act with speed in selecting a president and prime minister. A Sunni Arab traditionally gets the Speaker post, while a Kurd is selected for president and a Shia Arab for prime minister.

Two key Shiite blocs in parliament have agreed on a single candidate to replace Prime Minister Nouri al-Maliki – Ahmad Chalabi. His faction, along with the other two, one led by Muqtada al-Sadr, account for almost 40% of the seats in parliament, while Maliki’s faction, the State of Law, controls about a quarter of the seats, according to Amir Taheri.

Meanwhile, government forces launched an offensive to retake the city of Tikrit, though I have not seen what success there has been, if any.

In fact there has been little reporting from Iraq in recent weeks. Last Sunday, gunmen in Baghdad launched an attack on a housing complex that killed at least 33, including 29 women. Responsibility for the incident wasn’t clear.

Human Rights Watch said it appeared Iraqi security forces and government-affiliated militias executed at least 255 prisoners since June 9, apparently in retaliation for attacks by ISIS.

Here’s what we do know. Five weeks after ISIS stormed into the country from bases in Syria, it retains control of virtually all the territory it captured. It was also reported this week by McClatchy that ISIS captured as many as 52 U.S.-supplied artillery pieces with GPS aiming systems. The guns have a range of 20 miles.

American advisers placed on the ground, supposedly in five teams of 90, have nothing good to say about the performance of the Iraqi military. Plus a majority of the brigades are infiltrated by either Sunni extremists or Shiite militias.

Syria: President Bashar Assad took the oath of office Wednesday for a new seven-year term.

“They did not spare a dirty measure to use, and they failed. Syrians with their votes forced the collapse of terrorist groups and their Syrian agents.”

Assad thanked Syria’s allies for their support during the war, including Russia, Iran, China and Lebanon’s Hizbullah.

Lebanese Forces leader Samir Geagea ridiculed Assad, saying he was detached from reality.

“I do not know whether I should laugh or cry over what they called today the swearing in of Syrian President Bashar Assad,” Geagea said.

“This person, who is completely detached from reality, took to the podium to swear for a nonexistent republic, according to a nonexistent constitution, and claim presidency over people who he has been attacking for three years using all kinds of weaponry: long and medium-range missiles, artillery, barrel bombs on residential areas and chemical weapons.”

On Friday, ISIS killed at least 115 Syrian troops, guards and workers as they captured a gas field in central Syria. More than 20 militants also died, according to activists; the deadliest battle between ISIS and forces loyal to Assad.

China: On Tuesday, China announced it had completed drilling in a disputed area of the South China Sea claimed by both China and Vietnam, and was withdrawing the rig from the waters, though the foreign ministry office left the door open for future exploration there.

The same day, China told the United States to stay out of disputes over the South China Sea and leave countries in the region to solve the issues themselves, the U.S. State Department having reiterated the view that “provocative and unilateral” behavior by China had raised questions about its willingness to abide by international law.

Reminder...China claims 90% of the South China Sea.

Meanwhile, a new Pew Research Center global survey reveals that more than 90% of Chinese had confidence in President Xi Jinping, but just 28% in the United States do and only 6% in Japan.

Overall, in the U.S., back in 2011 half the respondents gave China a positive rating, but only 35% do today.

And a Chinese businessman in Canada was charged with hacking into Boeing’s computers and stealing information about U.S. military aircraft and weapons, the Justice Department announced. Su Bin spent years taking data from Boeing, according to the FBI. The U.S. still must extradite him to face trial here.

Afghanistan: At least 89 people were killed in a suicide attack at a busy market in eastern Paktika province. The attacker drove a vehicle into the market and detonated the explosives. The Taliban said they did not carry it out.

The attack came days after Afghanistan’s two presidential candidates, Abdullah Abdullah and Ashraf Ghani, reached an agreement to resolve a dispute over the results of last month’s presidential election. Thanks to the efforts of Sec. of State Kerry, a full audit of the vote will be conducted and the candidates have agreed to abide by the findings.

Russia: State investigators arrested two Moscow metro workers suspected of safety breaches that may have caused a horrific subway crash during Tuesday’s morning rush hour that killed at least 21. The two were suspected of failing to properly monitor work carried out on a track switch mechanism. What made the accident more horrifying is that it occurred at the deepest part of the metro system, making rescue even more difficult.

Germany: Chancellor Angela Merkel backed off some with her rhetoric after the latest espionage allegations against the U.S. She dismissed talk of scrapping negotiations for the Transatlantic Trade and Investment Partnership between the European Union and the U.S.

“We have differing perceptions on the work of intelligence services, but other political areas like the free-trade agreement are absolutely in our interest,” she said. “We work very close together with the Americans. I want that to continue,” Merkel told a German broadcaster. “Germany, of course, profits from this cooperation.”

I’ve chosen to also lighten up this week when it comes to Merkel.

Italy: Former Prime Minister Silvio Berlusconi has won an appeal against his conviction for paying for sex with an underage prostitute. His seven-year prison sentence was thrown out by judges in Milan, in the so-called “Ruby” case...aka “Ruby the Heartstealer.”

Berlusconi is doing community service after being sentenced in a different case for tax fraud.

Britain: Prime Minister David Cameron reshuffled his cabinet in an attempt to get younger and add more women. Foreign Secretary William Hague, who had also served in the cabinet under Margaret Thatcher and John Major, 20 of his 44 years in the House of Commons, will yield to defense secretary, Philip Hammond.

Nigeria: Boko Haram continues its reign of terror, killing 44 ‘vigilantes’ it said were tipping off authorities as to their movements. In six months, Boko Haram has killed over 2,050 civilians, according to Human Rights Watch, many of them slaughtered for being members of – or simply close to – those vigilante groups.

Australia: The government repealed laws requiring large companies to pay for carbon emissions, fulfilling a key campaign promise of Prime Minister Tony Abbott.

Abbott, who took office last year, said the tax, meant to penalize hundreds of Australia’s biggest polluters, was a “useless destructive tax, which damaged jobs, which hurt families’ cost of living and which didn’t actually help the environment.”

Brazil: So much for the World Cup. The nation didn’t see the violence and protests of a year earlier during last summer’s Confederations Cup, but most in Brazil seem to think that for the four weeks, the good outweighed the bad. 10 people died during World Cup-related construction projects, but now it’s about the 2016 Olympics, and in October, the presidential election. The question of the day is, how much will leader Dilma Rousseff suffer for the shocking meltdown of Brazil’s football team, let alone the huge costs of staging the World Cup.

Random Musings

--Robert Samuelson / Washington Post

“The White House recently put out a 40-page report arguing that the 24 states that have not expanded Medicaid coverage under the Affordable Care Act (ACA or ‘Obamacare’) are hurting their poor and themselves. It’s an easy case to make, but it’s incomplete and misleading. The further truth is that Medicaid also threatens to crowd out spending for many traditional state and local functions: schools, police, roads, libraries and more.

“Indeed, this has been happening for decades. From 1989 to 2013, the share of states’ general funds devoted to Medicaid has risen from 9 percent to 19 percent, reports the National Association of State Budget Officers. Under present law, the squeeze will worsen. The White House report doesn’t discourse this. The paradox is that a progressive program also has unprogressive consequences....

“(Medicaid) is health insurance for the poor. In 2012, it covered almost 58 million people and spent $432 billion, with costs split between the federal government (about 58 percent) and the states (42 percent). The ACA expanded eligibility for Medicaid to people with incomes below 138 percent of the federal poverty line. In 2014, that’s $16,105 for a single adult and $32,913 for a family of four.

“In June 2012, the Supreme Court, while upholding most of the ACA, threw out the Medicaid provisions. The court ruled that the Obama administration couldn’t force all states to accept the Medicaid expansion. It had to give them a choice. Ever since, there’s been a running battle between the administration and the states that have declined. The White House report, done by its Council of Economic Advisors (CEA), is the latest salvo.

“To the White House, the right-wing anti-Obamacare crusade is mean-spirited partisanship at its worst. The 24 non-participating states are sacrificing huge amounts of almost-free money and condemning an estimated 5.7 million people – who would qualify for the new Medicaid – to being uninsured....Under the ACA, the federal government pays all the cost of the Medicaid expansion through 2016 and, after that, the reimbursement rate drops gradually to a still-generous 90 percent in 2020.

“Through 2016, abstaining states are losing $88 billion in federal funds, estimates the CEA...

“Opposition – or support – is worn as a badge of honor. Still, two aspects of the White House report suggest opposition to the Medicaid expansion isn’t just rabid partisanship.

“One is the assumption that the 90 percent reimbursement rate remains permanently. Why should it? To curb budget deficits, Congress might cut it. ‘The ACA says what it says. Future Congresses can repeal or modify it,’ says Matt Salo of the National Association of Medicaid Directors. Could the favorable reimbursement be bait-and-switch? States’ actual costs could be higher than assumed. Why make a bad problem worse?

“Even if this doesn’t happen, demographic trends – also ignored by the White House report – are devastating for states....

“What this means is that, as the population ages, states’ Medicaid spending will rise inexorably. The competition between nursing homes and home health care – on the one hand – and classroom teachers, higher education, police and other governmental services – on the other – will intensify. Medicaid becomes a vise squeezing other public services or requiring continuous tax increases. More spending goes toward meeting past obligations and not present and future needs. Underfunded state and local pensions compound the effect....

“This has already occurred at the national level, where Social Security, Medicare and (to a lesser extent) Medicaid...dominate the federal budget. Other spending is slowly shrinking as a share of the economy. We could minimize this process for states and localities by transferring all Medicaid costs to Washington (or at least the costs of the elderly and disabled). To pay for it, Washington would reduce transportation and education grants to states.

“Let Washington mediate among generations. Let states and localities concentrate on their traditional roles of education, public safety and roads. Spare them the swamp of escalating health costs. This is the bargain we need – and probably won’t get.”

--A new Washington Post-ABC News poll found that 58% disapprove of President Obama’s handling of the immigration crisis and the influx of unaccompanied foreign children, including 54% of Latinos.

But lest Republicans see a major gain in this for them, 66% disapprove of congressional Republicans and their handling of the matter.

Nonetheless, yes, President Obama received 71% of the Latino vote in 2012 and their support has been sliding ever since on all manner of issues.

--Data from new NBC News/Marist polls of Iowa and New Hampshire shows Hillary Clinton crushes Vice President Biden among Democratic voters in a hypothetical matchup – 70% to 20% in Iowa, and 74% to 18% in New Hampshire.

Further, Iowa Democrats view Clinton positively by a whopping 89% to 6%; 94% to 4% in New Hampshire (favorable/unfavorable).

Among other potential matchups, Clinton is tied with Sen. Rand Paul in Iowa, 45-45, and leads New Jersey Gov. Chris Christie by just 1 point, 44-43.

In New Hampshire, Clinton leads Paul, 46-43, and Christie and Jeb Bush by 5 points, 47-42.

In Iowa, among the GOP candidates, Bush and Paul receive 12%; Paul Ryan 11%; Rick Santorum 9%; Christie 8%.

Christie has a major problem in that he has high unfavorability ratings of 31% and 33% in New Hampshire and Iowa, respectively, vs. Rand Paul’s 15% and 18%.

--In a new book, “Clinton, Inc.: The Audacious Rebuilding of a Political Machine,” author Daniel Halper notes that New York Democratic Sen. Charles Schumer was not thrilled at the prospect of Hillary Clinton running for the U.S. Senate from New York, fearing it would upstage him. So he coached Rep. Rick Lazio (R-LI), Clinton’s eventual Republican opponent, on his 2000 campaign, according to Lazio.

“I thought he was generally...he was supportive,” Lazio said of Schumer. “Quite helpful to me behind the scenes and encouraging.”

Love it. Of course I imagine Schumer will vehemently deny this (the book comes out officially July 22).

Former ambassador Bill Richardson, who served under Bill Clinton, is still frozen out for daring to back Barack Obama over Hillary.

“Every relationship he has is mainly about him and not about the other person,” Richardson told the author.

But Daniel Halper notes that Hillary tended to relationships with former critics in the Senate and built a “virtual dossier of praise and support” from top Republicans who might be prone to criticize her. To this day, for example, John McCain refuses to unload on her.

--Maureen Dowd / New York Times

“Chelsea Clinton never acted out during the eight years she came of age as America’s first daughter.

“No ditching of her Secret Service detail. No fake IDs for underage tippling. No drug scandal. No court appearance in tank top and toe ring. Not even any dirty dancing....

“So it’s strange to see her acting out in a sense now, joining her parents in cashing in to help feed the rapacious, gaping maw of Clinton Inc.

“With her 1 percenter mother under fire for disingenuously calling herself ‘dead broke’ when she left the White House, why would Chelsea want to open herself up to criticism that she is gobbling whopping paychecks not commensurate with her skills, experience or role in life?...

“She is commanding, as The Times’ Amy Chozick reported, up to $75,000 per appearance...

“There’s something unseemly about it, making one wonder: Why on earth is she worth that much money? Why, given her dabbling in management consulting, hedge-funding and coattail-riding, is an hour of her time valued at an amount that most Americans her age don’t make in a year? (Median household income in the United States is $53,046.)....

“There was disgust over Politico’s revelation that before she switched to a month-to-month contract, Chelsea was getting wildly overpaid at $600,000 annually – or over $25,000 per minute on air – for a nepotistic job as a soft-focus correspondent for NBC News....

“The Clintons keep acting as though all they care about is selfless public service. So why does it keep coming back to gross money grabs? It’s gone from two-for-the-price-of-one to three-for-the-price-of-20....

“The Clintons were fiercely protective of Chelsea when she was a teenager, insisting on respect from the media and getting it. They need to protect their daughter again, this time from their wanton acquisitiveness.”

--We learned this week that the situation at the National Institutes for Health goes far beyond the discovery of long-forgotten smallpox samples recently found in a storage room at a Bethesda, Md., campus. 12 other boxes and 327 vials holding an array of pathogens were uncovered.

And these guys are supposed to be the best in the world.

--The Energy Department has given the Los Alamos National Laboratory an “inadequate” rating for its latest safety record on “nuclear criticality,” a measure of atomic stability, though a report released last week said the performance is getting better! We’re Number 87! We’re Number 87!

--There was a very disturbing reaction to a police officer being gunned down in Jersey City the other day. The family and friends of the killer, who himself was dispatched with in the ensuing gun battle, created a “cop killer memorial.” It stayed up at least 12 hours, before being torn down by police, with the killer’s wife initially saying she wished her husband had killed more police, before she apologized for the statement. Others in the killer’s neighborhood defended the man. Just sickening.

The shooter, incidentally, told a witness that he would be famous before he ambushed Officer Melvin Santiago. The killer walked into a 24-hour Walgreens at 4 a.m., assaulted a security guard and took his gun. He then proceeded to wait for the police to arrive, firing into the first car that arrived.

Jersey City has a new mayor, Steven Fulop, who is totally out of his league, not ready for prime time, and violent crime has been rising rapidly since he came into office.

--Army Sgt. Bowe Bergdahl has returned to regular duty following completion of a “reintegration process” after five years as a Taliban captive in Afghanistan. A Pentagon spokesman said Bergdahl “will essentially be doing a desk job.” Bergdahl did hire an attorney.

The Army said he still hasn’t spoken to his family, which is beyond bizarre. You could, maybe, understand for the first week or so, but beyond then?

--The British Journal of Nutrition published research that disputed the notion that organic foods are essentially no more healthful than conventional foods.

“After reviewing 343 studies on the topic, researchers in Europe and the United States concluded that organic crops and organic-crop-based foods contained higher concentrations of antioxidants on average than conventionally grown foods.” [Monte Morin / L.A. Times]

Researchers also found conventional foods contained greater concentrations of residual pesticides and the toxic metal cadmium, as you’d imagine when measured against organic.

However, a study author, Professor Charles Benbrook of Washington State University, adds, while organic grown fruits “deliver tangible nutrition and food safety benefits, the first and foremost message is people need to eat more fruits and vegetables.”

--I liked this bit from Pat Garofalo in U.S. News Weekly:

“America has a pair of summer vacation problems, and they have nothing to do with the heat or hurricanes. First, the U.S. education system is still built around a months-long summer break that loads of research shows does students – particularly those coming from low-income families – no favors. Then, once those students have joined the workforce, they see fewer vacation days than their counterparts in the rest of the developed world. Essentially, U.S. policy revolves around providing students with a break that hurts them, while denying one to workers who would be helped by some time away from the job.”

---

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

We pray for the victims of MH17.

God bless America.
---

Gold closed at $1309
Oil $103.13

Returns for the week 7/14-7/18

Dow Jones +0.9% [17100]
S&P 500 +0.5% [1978]
S&P MidCap +0.1%
Russell 2000 -0.7%
Nasdaq +0.4% [4432]

Returns for the period 1/1/14-7/18/14

Dow Jones +3.2%
S&P 500 +7.0%
S&P MidCap +5.2%
Russell 2000 -1.0%
Nasdaq +6.1%

Bulls 56.6
Bears 15.1 [Source: Investors Intelligence]

Have a great week. I appreciate your support.

Brian Trumbore



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Week in Review

07/19/2014

For the week 7/14-7/18

[Posted 12:00 AM ET]

Edition 797

Another Awful Week for Planet Earth

Wall Street’s reaction to the dual geopolitical crises of Thursday was to drop about 1% to 1.5% in the major averages, but the angst lasted all of one day and the market recovered much of its losses on Friday.

This doesn’t surprise me. Israel’s past incursions into Gaza haven’t led to wide-scale conflict across the region and, let’s face it...the region was already in wide-scale conflict mode, what with Syria and Iraq, for starters.

I’m not saying this is right or rational, it’s just the way the market has handled the geopolitical mess since the Arab Spring faded to black, and Russia annexed Crimea.

And so with the shooting down of Malaysia Air Flight 17 over eastern Ukraine, the negative market reaction was short-lived because it seems clear that the Russian separatists (or Russians) who shot it down thought they were going after a Ukrainian military aircraft. It’s a catastrophe, incredibly depressing, but unless Russia decides to full-bore invade Ukraine, Wall Street has already showed it is not that concerned with Moscow having a proxy war with Kiev in eastern Ukraine.

Since day one of StocksandNews it’s been about what can change market sentiment on a dime, with lasting impact, and Thursday’s big events were not enough to do so, as yet.

I am still waiting for the day we learn of dual terror attacks, al-Qaeda-, ISIS-inspired terror that can truly shut down the global economy.

I would also submit that any flare-up in the South or East China Seas, let alone the Korean Peninsula, will have investors hiding under the covers.

But for now we’re left with MH17 and Gaza. One we can make sense of, the other not quite, even if actual responsibility is quickly determined.

President Barack Obama issued a statement on MH17 Friday morning. In part....

“Yesterday Malaysia Airlines Flight MH 17 took off from Amsterdam and was shot down over Ukraine near the Russian border. Nearly 300 innocent lives were taken – men, women, children, infants who had nothing to do with the crisis in Ukraine. Their deaths are an outrage of unspeakable proportions.

“We know at least one American citizen, Quinn Lucas Schansman, was killed. Our thoughts and prayers are with his family for this terrible loss....

“By far the country that lost the most people onboard the plane was the Netherlands. From the days of our founding, the Dutch have been close friends and stalwart allies of the United States of America, and today I want the Dutch people to know that we stand shoulder to shoulder in our grief and in our absolute determination to get to the bottom of what happened.

“Now, here is what we know so far. Evidence indicates that the plane was shot down by a surface-to-air missile that was launched from an area that is controlled by Russian-backed separatists inside of Ukraine.

“We also know that this is not the first time a plane has been shot down in eastern Ukraine....

“Moreover, we know that these separatists have received a steady flow of support from Russia.

“This includes arms and training. It includes heavy weapons. And it includes anti-aircraft weapons.”

An investigation of the gruesome, nine-mile long crash scene is not off to a good start because the plane was blown to pieces over a war zone. It could be some time before experienced investigators have full access and in the meantime the crime scene is being compromised, while from a humanitarian standpoint, it is sickening that the bodies are out in the field, not being treated with respect. 80 children. Loved ones filled with unbearable grief. 

But there is other evidence that is rapidly being collected and according to American military and intelligence officials, it seems clear Ukrainian separatists have been trained on Russian territory in recent weeks to fire anti-aircraft missiles, including the mobile systems suspected of having been used in Thursday’s downing of MH17. The U.S. commander of NATO forces in Europe, Air Force Gen. Philip Breedlove, said as much last month; that the rebels were being trained to operate “vehicle-borne” anti-aircraft batteries. Heretofore, the rebels have been shooting down helicopters and low-flying aircraft with shoulder-fired missiles.

Monday’s shoot down of a Ukrainian AN-26 military cargo plane while flying at 21,000 feet, well above the range of the shoulder-fired MANPADS, was the first sign the long-range “Buk” missile system (SA-11) was being employed.

U.S. officials also claim the separatists were spotted hours before the incident with an SA-11 system at a location close to the site where the plane came down, according to U.S. ambassador to the U.N., Samantha Power.

Among the many critical questions now are who pulled the trigger? Were Russian military advisers actually accompanying the separatists as they have throughout the conflict with Kiev? How culpable is Vladimir Putin?

Late Friday, the Ukrainian Interior Ministry released a video purporting to show rebels moving an SA-11 missile battery out of eastern Ukraine and into Russia. “The launcher appeared to be missing one of its missiles.” [Washington Post]

President Obama learned of the downed airliner while he was on the phone with Putin Thursday morning, with Putin expressing his anger over new sanctions levied on Russian entities. White House Press Secretary Josh Earnest said Obama told Putin the United States and its allies are willing to take additional measures if Russia doesn’t work to de-escalate the conflict. “They could shut down the border and prevent the transfer of heavy weapons and materiel to separatists. They have not done that. President Putin himself could intervene with pro-Russian separatists and encourage them to abide by the ceasefire. He has not done that.”

It seems clear pro-Russian insurgents thought they had shot down a Ukrainian military plane before realizing it was in fact a packed commercial airliner.

Social media posts – most of them hastily removed, were immediately publicized by top Kiev officials in the information war with the Kremlin in the first hours after the incident. The Security Service of Ukraine also released an audio of what it claims are separatists taking responsibility for shooting the plane down.

The social networking page of Igor Strelkov, “defense minister” of the self-proclaimed Donetsk People’s Republic, first announced, “We just downed an AN-26 near (the town of) Torez. And here is a video confirming that a ‘bird fell,’” said the post.

A pro-Kiev news site later posted an audio recording of what it claimed were the intercepted field communications between rebels and a Russian agent discussing the downing.

“We just downed a plane,” a rebel tells an alleged Russian military intelligence officer.

In a second allegedly recorded call, two militants then discuss the plane being shot down.

Major: The plane broke into pieces in the air, close to Petropavlovskaya mine. There is the first 200 (dead). We have found the first 200. It’s a civilian.

Grek: How are things going there?

Major: Well, we are 100% sure that it was a civilian plane.

Grek: Are there a lot of people?

Major: F---! The debris was falling straight into the yards.

Grek: What plane is that?

Major: I haven’t figured it out yet....Now I’m nearby the place where first bodies started falling. Here are remnants of internal brackets, chairs, bodies... [AFP, with Patrick Hatch]

The post was soon removed but not before its screen grab was reportedly captured.

A message on the official Twitter account of the Donetsk People’s Republic had announced hours earlier that insurgents had seized a series of Russian-made Buk systems capable of soaring to 33,000 feet. This tweet was later deleted too.

Ukrainian President Petro Poroshenko quickly called it a “terrorist act.”

But Russian President Vladimir Putin said the incident would never have happened had Poroshenko not ripped up a recent truce agreement and “resumed military activities in southeastern Ukraine.”

Editorial / Wall Street Journal

“This catastrophe brings to mind the Korean Air Lines plane shot down in 1983 by a Soviet military fighter, killing 269. President Reagan called the downing of KAL007 ‘an act of barbarism, born of a society which wantonly disregards individual rights and the value of human life and seeks constantly to expand and dominate others.’ It was a moral turning point in the Cold War.

“Perhaps the downing of MH17 will be a similar turning point in our post-post Cold War era. The Ukrainian crisis has been dismissed too often as a faraway battle in which the West has little stake, and in any case Ukraine is within Russia’s ‘sphere of influence.’

“The deaths of 298 innocents from many countries should put that to rest. The Kremlin’s attack on an independent neighboring state presents the gravest threat to European security since the end of the Cold War. Russia has supported non-state insurgents with the express purpose of sowing chaos. It’s notable that Mr. Putin was the one leader who didn’t show restraint on Thursday. He blamed Ukraine as ‘the government on whose territory this occurred.’ The world should ask why he would be so quick to jump to conclusions.”

Among the victims were 189 from the Netherlands, 29 from Malaysia, and 27 from Australia.

As for the flight path, Ukrainian air traffic control had closed the airspace over eastern Ukraine to civilian air traffic flying below 32,000. Hundreds of flights continued to fly over the war zone, though, like MH17, at 33,000 feet or higher. Before the war, 300-400 jets a day used the popular route. Many used it on Thursday.

Israel and Gaza

Israeli Prime Minister Benjamin Netanyahu authorized a ground invasion into Gaza after Israel agreed to an Egyptian cease-fire proposal, which Hamas rejected. Israel accused Hamas of firing rockets into Israel even during Thursday’s five-hour humanitarian cease-fire. Netanyahu’s statement said:

“In light of Hamas’ continuous criminal aggression, and the dangerous infiltration into Israeli territory, Israel is obligated to act in defense of its citizens.”

The major ground offensive that Israel announced on Friday would be “significantly” expanded, marked a dramatic escalation in the nearly two-week conflict with the Palestinian militants.

The Israel Defense Forces said the goal of the offensive was to destroy tunnels used by the militants to infiltrate into Israel, but warned they could not be taken out by airpower alone.

Israel has called up as many as 68,000 reservists.

One possible trigger for the ground attack was an attempt by Hamas militants to infiltrate into Israel early Thursday morning. The Israeli air force hit the opening of a tunnel used by the militants to sneak under the Gaza border fence, with the opening about 250 yards inside Israel. 13 militants were believed to have been killed in this strike.

Hamas said Israel’s ground campaign into the Gaza Strip would have “dreadful consequences.” Spokesman Sami Abu Zuhri said, “It does not scare the Hamas leaders or the Palestinian people. We warn Netanyahu of the dreadful consequences of such a foolish act.”

As I go to post, more than 260 Palestinians have been killed, two Israelis.

Charles Krauthammer / Washington Post

“Israel accepts an Egyptian-proposed Gaza cease-fire; Hamas keeps firing. Hamas deliberately aims rockets at civilians; Israel painstakingly tries to avoid them, actually telephoning civilians in the area and dropping warning charges, co-called roof knocking.

“ ‘Here’s the difference between us,’ explains the Israeli prime minister. ‘We’re using missile defense to protect our civilians, and they’re using their civilians to protect their missiles.’

“Rarely does international politics present a moment of such moral clarity. Yet we routinely hear this Israel-Gaza fighting described as a morally equivalent ‘cycle of violence.’ This is absurd. What possible interest can Israel have in cross-border fighting? Everyone knows Hamas set off this mini-war. And everyone knows the proudly self-declared raison d’etre of Hamas: the eradication of Israel and its Jews.

“Apologists for Hamas attribute the blood lust to the Israeli occupation and blockade. Occupation? Does no one remember anything? It was less than 10 years ago that worldwide television showed the Israeli army pulling die-hard settlers off synagogue roofs in Gaza as Israel uprooted its settlements, expelled its citizens, withdrew its military and turned every inch of Gaza over to the Palestinians. There was not a soldier, not a settler, not a single Israeli left in Gaza.

“And there was no blockade. On the contrary. Israel wanted this new Palestinian state to succeed....

“(But) instead of building a state with its attendant political and economic institutions, they spent the better part of a decade turning Gaza into a massive military base, brimming with terror weapons, to make ceaseless war on Israel.

“Where are the roads and rail, the industry and infrastructure of the new Palestinian state? Nowhere. Instead, they built mile upon mile of underground tunnels to hide their weapons and, when the going gets tough, their military commanders.”

A few other thoughts. Just as I used to write during the Iraq War that the United States had to be virtually perfect in its conduct (which is impossible), the same holds for Israel if it is to avoid widespread criticism in the eyes of the world. So the killing of the four Palestinian boys on the Gaza beach on Wednesday was troubling.

But imagine the damage to Israel had it not had the Iron Dome missile defense system, which has shot down an estimated 1,000 rockets fired into the country from Gaza with over 90% accuracy.

Built with the cooperation of the United States, a U.S. Senate subcommittee approved a spending bill this week authorizing $351 million more for Iron Dome, double the administration’s request. I’ve seen varying stories on the cost of each interceptor missile - $20,000 to $50,000 – which is a big reason Israel only uses the system when its radars indicate that a rocket seems likely to hit a populated area. 

Finally, the Wall Street Journal had a front-page story in Monday’s paper by Jay Solomon and Carol E. Lee titled “Obama Contends With Arc of Instability Unseen Since ‘70s.”

Nothing you haven’t already seen from me in this space, but it’s a good summary.

“The breadth of global instability now unfolding hasn’t been seen since the late 1970s, U.S. security strategists say, when the Soviet Union invaded Afghanistan, revolutionary Islamists took power in Iran and Southeast Asia was reeling in the wake of the U.S. exit from Vietnam.

“In the past month alone, the U.S. has faced twin civil wars in Iraq and Syria, renewed fighting between Israel and the Palestinians, an electoral crisis in Afghanistan and ethnic strife on the edge of Russia, in Ukraine.

“Off center stage, but high on the minds of U.S. officials, are growing fears that negotiations with Iran over its nuclear program could collapse this month [Ed. see below], and that China is intensifying its territorial claims in East Asia....

“ ‘I think our country acting like such a paper tiger to the world on...so many fronts is doing incredible long-term damage to our nation,’ said Sen. Bob Corker (R-Tenn.) at a hearing last week on Ukraine. ‘And I do hope at some point the administration will actually follow through on the things that it continues to tout publicly.’...

“ ‘Our allies are looking for a quarterback to call some plays here, and our body language sometimes doesn’t show that we’re doing that,’ said Brian Katulis of the left-leaning Center for American Progress. ‘Obama’s always been a look-before-you-leap guy. And I think that leads to some of the confusion here at home, but also abroad.’”

White House press secretary Josh Earnest was asked about the Journal report at Monday’s daily briefing and said “there have been a number of situations in which you’ve seen this administration intervene in a meaningful way that has...substantially improved the – you know, the tranquility of the – of the global community.”

Good god.

Separately, appearing on ABC’s “This Week” last Sunday, Attorney General Eric Holder expressed “extreme, extreme concern” over reports that bomb makers from Yemen responsible for the 2009 underwear-bomb plot are now in Syria cooperating with foreign militants there, possibly to develop new, nearly undetectable explosive devices. The threat of undetectable explosives from Syria is “more frightening than anything” he has experienced in office, said Holder.

Washington and Wall Street

Despite Thursday’s downdraft, stocks finished up on the week as corporate earnings generally came in better than expected, as detailed below, particularly in the banking sector.

But economic data was mixed. June retail sales were up just 0.2%, far less than expected, but ex-autos up a better 0.4%, plus May was revised upward to 0.5%, so the two months taken together are solid.

June industrial production, though, up 0.2%, was far below expectations.

And June housing starts, at 893,000, represented a huge miss off an estimate of 1.02 million. Some are blaming rain in the South.

The Federal Reserve’s Beige Book business survey said economic growth was modest to moderate in all 12 of its districts owing to stronger consumer spending and expanded manufacturing.

Meanwhile, Fed Chair Janet Yellen gave her semi-annual congressional testimony on the economy and Fed policy and said interest rates could rise earlier than expected, or maybe later. It’s all due to “considerable uncertainty.”

Among her statements before House and Senate committees, Yellen said the jobs market had “registered notable improvements” this year but the pace of economic growth “bears close watching.”

“If the labor market continues to improve more quickly than anticipated by the committee, resulting in faster convergence toward our dual objectives, then increases in the federal funds rate target likely would occur sooner and be more rapid than currently envisioned.

“Conversely, if economic performance is disappointing, then the future path of interest rates likely would be more accommodative than currently anticipated.”

Asked by Sen. Tom Coburn (R-Okla.) why the Fed seems to have a policy that creates bubbles, Chair Yellen responded:

“The reason we have low interest rates is to deal with a very real problem, namely the economy is operating significantly short of its potential. Employment is suppressed well below its maximum sustainable level and inflation is running below our objectives. That’s why we are holding interest rates low.”

Yellen added on the topic of market valuation:

“My general assessment at this point is that threats to financial stability are at a moderate level and not a very high level.” While some asset values “may be on the high side and there may be some pockets where we see valuations becoming stretched,” in general “price equity ratios and other measures are not outside of historical norms. In that sense I’m not seeing alarming warning signals.”

[The Fed’s accompanying semiannual report for Congress for some reason highlighted the biotech and social media sectors as being overvalued, to which everyone on Wall Street said, well, that might be the case, but who is the Fed to tell us which stocks to invest in or not?]

St. Louis Fed President James Bullard said the Fed may have to raise rates more quickly than planned as unemployment falls and inflation quickens. Bullard said, “I want to make sure there’s a bounce-back in the second quarter and that things look like they are on track to grow at 3% or better in the second half of the year, which is what I am expecting.”

“Normalization will take a long time,” Bullard added, “and current policy settings are far from normal, suggesting an earlier start” to tightening. [Bloomberg]

According to the Wall Street Journal’s latest survey of economists, 79% said the greater risk is that the Fed will raise rates too late, versus 21% who cited the greater risk as the Fed moving too soon.

The same economists also now estimate GDP will grow just 1.6% this year after the first quarter’s deep contraction – 2.9%. The forecasters estimate GDP grew at an annual rate of 3.1% in the second quarter, with 3% growth in the second half.

Europe and Asia

IMF head Christine Lagarde warned financial markets may be too upbeat given economic fundamentals in Europe, as well as persistently high unemployment. In a speech in Paris on Friday, she said, “Obstinately low inflation can seriously undermine growth.”

“Monetary policy should remain supportive until private demand has fully recovered” and the ECB “has achieved its price stability objective.”

According to a Bloomberg Global Poll, international investors say the eurozone economy is in its worst shape in more than a year and in danger of dropping into deflation, with many believing the European Central Bank has been too timid.

This week we learned eurozone inflation was at the same 0.5% annualized rate in June as it was in May, down from 1.6% a year earlier. Spain was unchanged, France 0.6%, Germany 1.0%, Italy 0.2%, Portugal -0.2% and Greece -1.5%...not good.

Industrial production for the euro-18 fell 1.1% in May vs. April, down 3.6% in Portugal. Previously, the figures had been announced for France (down 1.3%), Italy (down 1.2%) Germany (down 1.4%) and Spain (down 0.9%).

So it should probably be no great surprise that bond yields in many countries hit their lowest in recorded history. The French 10-year hit a record low 1.57%, Germany 1.15%, Austria 1.41%, Belgium 1.57%, Netherlands 1.36%, Finland 1.31%, Spain 2.59% and Italy 2.78%.

Even Portugal’s 10-year bond is back down to 3.64%, while Greece sits at 6.13%, even though by all accounts it will require a third bailout.

Turning to China, the long-awaited report on second-quarter GDP came in...up 7.5%, better than the first quarter’s 7.4% and in keeping with recent statements by Premier Li Keqiang. How conveeenient.

Fixed asset investment was up 17.3% in the first half, industrial production up 9.2% in June from a year earlier, and retail sales were up 12.4% year over year.

The government has increased spending on the rail network, cut some taxes, especially to small business, and reduced reserve requirements for lenders.

But the housing market continues to stumble. For the first time, the National Bureau of Statistics said new-home prices in June fell in 55 of 70 cities, with prices declining in Shanghai 0.6% over May. Year over year, prices were up 6.4% in Beijing and 7% in Shanghai, much slower increases. The government is telling developers to do something, anything to fill their inventory.

Street Bytes

--Despite Thursday’s big down day, the Dow Jones gained 0.9% on the week to close at 17100, the S&P 500 added 0.5%, and Nasdaq gained 0.4%. But the small-cap Russell 2000 lost 0.7% and is down 1.0% for the year, while the S&P is up 7.0%.

Thursday also marked the first time the S&P rose or fell more than 1% since April 16, the longest stretch of calm trading since 1995 (in this case the S&P losing 1.2%), while the day before the Dow Jones had notched another record closing high, 17138.

--U.S. Treasury Yields

6-mo. 0.05% 2-yr. 0.48% 10-yr. 2.48% 30-yr. 3.29%

The long end of the curve picked up a flight to quality trade at week’s end over Ukraine and Gaza.

Producer price data for June was released, up 0.4%, ex-food and energy up 0.2%. For the 12 months, the PPI is up 1.9%, up 1.8% on core.

It was revealed this week that China had boosted its holdings of U.S. Treasury debt maturing in more than a year by $107.21 billion for the first five months of 2014, the biggest five-month increase since record keeping began in 1977. It also surpasses the net $81 billion bought by China for all of 2013. [Min Zeng / Wall Street Journal]

Including T’bills, which mature in a year or less, China now holds $1.2709 trillion of Treasury debt as of end of May.

So in case you were wondering why U.S. bond yields have been falling since the start of the year, there’s one big reason for you.

--The leaders of the five Brics countries – Brazil, Russia, India, China and South Africa – signed a deal in Fortaleza, Brazil, to create a new $100 billion development bank and emergency reserve fund. The capital for the bank will be split equally among the five participating countries. The bank will have a headquarters in Shanghai and the first president for the bank will come from India.

This could be, over time, major competition for the World Bank. Brics nations have criticized it and the IMF for not giving developing nations enough voting rights.

What I didn’t like, and what made my skin crawl in light of recent events, was seeing a picture of the five leaders, with Chinese President Xi and Russian President Putin grinning like Cheshire cats.

Xi also pledged more than $8.6 billion in investments and loans in Brazil, including $3.2 billion for jet planes from aircraft manufacturer Embraer SA.

--It seems unfathomable that Malaysia Airlines could suffer two catastrophic blows in four months...MH17 and MH370. It had been struggling financially before the MH370 disappearance in the Pacific, having lost $1.5 billion since the start of 2011.

--The Obama administration is reopening the Eastern Seaboard, Delaware to Florida, to offshore oil and gas exploration, approving seismic surveys using sonic cannons that can pinpoint energy deposits. Environmentalists and those owing their livelihoods to fisheries and tourism are not happy.

The cannons create noise pollution, sending sound waves 100 times louder than a jet engine reverberating every ten seconds for weeks at a time.

Energy companies need this data from the outer continental shelf to apply for drilling leases in 2018, when current congressional limits expire.

New Jersey to Maine is off limits for now. [Jason Dearen / AP]

--Goldman Sachs and JPMorgan Chase reported healthier than expected revenues from the banks’ fixed income desks, where they trade bonds, commodities and currencies (FICC) on behalf of clients. Revenues from FICC fell 10% at Goldman and 15% at JPM, but earlier JPM and Citigroup warned second-quarter revenues from their trading businesses could fall by as much as 20-25%. [Citi’s FICC was down 12%.]

Goldman’s net income climbed 5% to $2.04 billion as investment banking revenue rose 15%.

--Bank of America continues to negotiate with the Justice Department on a mortgage-securities settlement but while BofA is offering $13 billion, including cash and consumer relief, the Justice Department is looking for more cash and there’s no guarantee a deal between the two will be reached.

For the quarter, Bank of America reported a profit of $2.29 billion, compared with $4.01 billion a year earlier. Revenue dropped 4%, slightly better than expectations. [BofA’s FICC was up 5%.]

Separately, client assets at the Merrill Lynch Wealth Management division crossed the $2 trillion mark.

--The Justice Department announced that Citigroup agreed to pay $7 billion in fines for misleading investors about how toxic its home loans were.  Of the total, $2.5 billion is to go to homeowner relief, though as the Wall Street Journal opined, “the premise of this case involves harm done to bond investors, not mortgage borrowers.”

For the second quarter, Citigroup’s overall revenue fell 5.6% but beat expectations, ditto earnings.

--Morgan Stanley beat on both earnings and revenues for the quarter, the latter up 1.1%. Both investment banking and the wealth-management divisions reported solid gains, even as FICC revenue fell 12%, which Morgan Stanley has been aggressive in reducing its focus on.

--BNY Mellon beat on the bottom line, but top line revenues fell 7% year over year.

--Microsoft CEO Satya Nadella announced that up to 18,000 will be laid off over the coming year, with most of the cuts coming at its newly acquired Nokia division. Microsoft’s mobile efforts haven’t panned out compared to the success of Apple and Google (Android).

Nokia is slated to lose 12,500 of the 18,000 affected positions after Microsoft paid $7.2 billion for the Finland-based company and this is creating real problems there, with Prime Minister Alexander Stuff saying he found the lay-offs “very, very difficult from a human point of view.” Just last September, then-CEO Steve Ballmer seemed to assure workers their Finnish jobs were safe.

“There are no significant plans to shift where work is done in the world as we integrate,” he said in an e-mail to Nokia employees, “so we expect the Nokia teams to stay largely in place, geographically.”

But now a quarter of Nokia workers are facing the prospect of losing their job. Finland is a country of only 5.5 million to begin with. But it’s up to Nokia to come up with new businesses and products.

For his part, Nadella replaced Ballmer last February with the mission of turning Microsoft into a more nimble operation in a world dominated by mobile, with the mantra “Mobile-first, cloud-first,” which has meant a focus on products like the Surface tablet.

And as Paresh Dave of the Los Angeles Times noted, “A look at profit-per-employee figures makes clear the need to drastically reduce head count. In 1999, just before the Gates-to-Ballmer transition, each of the company’s 31,400 employees represented $248,120 in net income. In 2013, each of the 99,000 employees accounted for $220,808 in net income, an 11% drop.”

Microsoft shares are at their highest level since January 2000, when founder Bill Gates stepped down as CEO.

--Intel beat expectations and raised its full-year forecast as the market for personal computers continued to firm after years of decline due to growth of smartphones and tablets. Revenue rose 8% from the prior year, with earnings per share up 41%. For the full year, Intel is forecasting revenue growth of 5%, up from a flat forecast in April.

Separately, the PC industry just had its best quarter since 2012 and in a recent interview with USA TODAY, Michael Dell had some answers.

“The world got enamored with smartphones and tablets, but what’s interesting is those devices don’t do everything that needs to be done. 3-D printing, virtual-reality computing, robotics are all controlled by PCs. Productivity is grounded in the PC. 

“Where does the computing power come from?” Dell said. “How would you run a hospital without PCs?”

Another explanation is simpler. Once service for the defunct Windows XP ended in April, many consumers and businesses were in need of upgrades.

Smartphones with larger screens are also slicing into the tablet market. Apple’s forthcoming iPhone 6 is expected to have a larger screen, for example.

--Google reported a 22% jump in revenue in the second quarter to $16 billion, with profits up 6% to $3.4 billion, both above expectations.

But the price that advertisers pay each time someone clicks on an add – “cost per click” – dropped 6% from a year ago in the quarter as more advertising shifts to less profitable mobile.

Google also announced it added about 2,200 employees, bringing the overall number to 52,000.

Google shares gained $21 Friday after the earnings release.

--Yahoo reported revenue fell 4% in the recently completed quarter, missing earnings expectations by a penny. Digital display advertising plunged 8%. But investors are focused on the 24% stake Yahoo has in Alibaba, which is valuing itself at $133 billion as it prepares for its IPO, rather than focusing on issues with Yahoo’s core business. It continues to have trouble winning over advertisers, though CEO Marissa Mayer says this is being addressed, along with a push towards more mobile apps.

Back to Alibaba, it is now looking to go public after Labor Day as the e-commerce giant realized there wasn’t enough time to complete all the required steps in time for what was thought to be an Aug. 7 launch.

--General Electric Co. reported earnings that were in line, with revenue up 3%, though as it restructures the gross revenue figure can be deceiving. It’s also spinning off its $20 billion North American consumer finance business, Synchrony Financial, which will offer retail financing and back store-branded credit cards at the likes of Wal-Mart and Lowe’s.

--Industrial conglomerate Honeywell exceeded expectations on both the top and bottom line, revenue up 5%.

--Time Warner rejected a takeover approach from rival 21st Century Fox estimated at $80 billion. The Rupert Murdoch owned company said it is not currently in any discussion with Time Warner but most believe Murdoch won’t let this go. According to the New York Times, Fox had offered to sell Time Warner-owned CNN as part of a takeover proposal in order to clear objections U.S. regulators might have had.

--Apple and IBM sealed a groundbreaking alliance that would turn IBM’s gadgets into business-friendly devices. The partnership, intended to increase the security and functionality of Apple’s mobile devices for corporate users, is a result of workers bringing their devices from their personal lives to the office.

The big loser in this is Microsoft, which has relied on winning business owners over to its Windows 8 software on touchscreen devices.

While Apple says 98% of Fortune 500 companies use its devices, the partnership with IBM is an acknowledgement its salesforce lacks the expertise to tackle large corporate customers.

--In its most recent quarter, IBM’s revenue declined 2.2%, the ninth straight quarter it failed to boost sales, though recent cost-cutting boosted the bottom line.

Actually, IBM has had nine straight quarters with revenue declines in its largest business – services.

--Apple agreed to pay as much as $400 million to settle a lawsuit alleging it colluded with publishers to fix the price of e-books, though it maintains it did not engage in any wrongdoing. If a judge approves, the $400 million will go to consumers. The five publishers who are accused of colluding with Apple – Hachette, HarperCollins, Penguin, Macmillan and Simon & Schuster – have already settled for $166 million in a separate suit.

--EBay Inc. posted a 13% rise in quarterly revenue, but this is due to its fast-growing PayPal division (rev. up 20%), not the online retailing division (up 8.6%), which has suffered from increasing competition from Amazon.com, as well as the continuing fallout from a well-publicized cyberattack.

Pressure is growing on the company to spin off PayPal.

--The Justice Department charged FedEx Corp. with conspiracy to distribute controlled substances for its alleged role in transporting prescription drugs that had been sold illegally. The charges result from an investigation that goes back to 2004. Prosecutors say FedEx made at least $820 million shipping the drugs. If found guilty, the company could face a fine of as much as twice that amount. FedEx denies any wrongdoing.

The indictment states FedEx knowingly knew it was shipping products from some online pharmacies that had had their licenses suspended.

--California officials have approved fines of up to $500 a day for residents who waste water, as the worst drought in four decades continues. The measures are designed to stop water being wasted on lawns, landscaping and car washing.

Water consumption rose by 1% in the year up to May, despite calls for a 20% reduction. About 75% of water used in California is for agriculture, and it’s estimated the drought will cost the state $2.2 billion this year in losses and added expenses for the industry. Some 17,000 jobs could also be lost.

Agriculture is holding up reasonably well, however, owing to the ability of many farmers being able to tap groundwater reserves.

--Growth in Southern California’s home prices grew at their slowest pace in two years in June, with the median price of a home sold in the six-county Southland hitting $415,000, according to DataQuick, which is the highest in four years, but 18% below the market’s peak in mid-2007. Most agree this is good...a much more balanced market with prices rising 8% the past 12 months.

At the end of the first quarter, 8% of home loans in metro Los Angeles remained underwater, according to CoreLogic, while that figure is 17% in the Inland Empire.

--China’s summer grain production will hit an all-time high after 10 straight years of growth, though analysts have warned of the toll farming is taking on the environment. The National Bureau of Statistics said grain (mostly wheat) was up 3.6% from last year. 

But productivity is only 5% of that in the United States, according to a researcher at the Chinese Academy of Social Sciences, while Chinese farmers use three times the amount of fertilizer that Americans do, thus the environmental concerns. 

According to the International Fertilizer Industry Association, China uses 58 million tons, with the global total being 176 million in 2011. [South China Morning Post]

--Yum Brands reported that sales and margins in its China operations, primarily KFC, had improved, with Yum’s same-store sales there rising 15%, including 21% at KFC. In the U.S., same-store sales fell 2% at KFC, dropped 4% at Pizza Hut, but grew 2% at Taco Bell.

Over 50% of Yum’s sales come from China and the improvement comes after KFC had major issues with a chicken supplier more than a year ago that torpedoed business for a spell.

--Singapore’s economy unexpectedly declined in the second quarter at an annualized 0.8% from the previous quarter.

--New York City-area commuters and travelers were spared a debilitating strike as the Long Island Rail Road and its unions reached an agreement three days before a planned walkout. In an apparently well-orchestrated political coup in an election year, Gov. Andrew Cuomo was able to say he basically saved the day.

The unions received raises of 17 percent over 6 ½ years, though employees for the first time will begin contributing a portion of their pay, 2%, toward their health coverage.

--Inflation alert: Hershey Co. is hiking its chocolate prices for the first time in three years, 8%, after a year-long surge in cocoa prices.

--“Dawn of the Planet of the Apes” opened to a strong $73 million last weekend, but I have to note “Transformers: Age of Extinction,” which as of last weekend had taken in $209 million domestically, but $543.5 million internationally, of which $262.6 million was in China – a record for the country.

--The Macau government is dealing with calls for tighter controls on its casino industry, amid accusations operators are unfairly withholding prize money from winners. As reported by the South China Morning Post, the casinos have refused to pay 133 gamblers their winnings on slot machines, claiming their wins are the result of “mechanical errors” – a practice that is bound to deal a blow to Macau’s tourism image.

--Atlantic City is preparing to lose its third casino in less than nine months, the Trump Plaza, which expects to close in mid-September. Revel could be a fourth to close this year if a buyer cannot be found in bankruptcy court. 

Foreign Affairs, part II

Ukraine: Prior to the shoot down of MH17, the United States and European Union bolstered sanctions against Russia over its ongoing support for separatists fighting in Ukraine. The U.S. targeted major banks, including Gazprombank, the nation’s third-largest lender, preventing it from accessing U.S. debt markets for financing with maturities above 90 days. Energy giant Rosneft was also targeted and its bonds tumbled as it has the equivalent of $14 billion of debt coming due in 2014, and another $19 billion next year.

The goal is to get President Putin to de-escalate his actions in Ukraine, but the Pentagon has seen an increase in Russian troops at the border with as many as 12,000, after Russia had pulled back for a spell.

Responding to the U.S. moves, the Russian Foreign Ministry said in a statement: “We consider the new set of American sanctions on Russia as a primitive attempt to avenge the fact that developments in Ukraine are not following Washington’s scenario....It is widely known that sanctions are a double-edged sword.”

Prior to Thursday, it had already been a bloody week, with the number of civilian and combatant deaths now at more than 1,000 since mid-April. On Wednesday, the insurgents claimed to have hit two Su-25 attack jets in the Donetsk region. On Tuesday they claimed to have downed another Su-25 in the same area. Monday, it was the transport plane. Sunday, Moscow accused Ukraine of lobbing a shell over the border and killing a Russian civilian.

Whether the separatists’ claims were accurate or not as to the Su-25 and other aircraft, a Ukrainian government spokesman did say the military had only ten helicopters left as of Wednesday.

In a different issue, Ukraine’s interior minister announced hundreds of police officers in Donetsk were fired, having been accused of siding with pro-Russian rebels and breaking their oath.

Editorial / Wall Street Journal...prior to MH17

“Only last month the Russian President’s order to pull forces back from the Ukraine border was hailed in EU capitals as a conciliatory act. But in recent days Russia has redeployed some 10,000 to 12,000 troops along the border, according to NATO. It has moved heavy weaponry and possibly missile systems across the border to insurgents who control the cities of Donetsk and Luhansk. The leaders of the separatists are Russian citizens from Russia.

“Casualties are rising. A Ukrainian air force transport plane flying at 21,000 feet was shot down Monday ‘probably’ by a rocket fired from Russian territory, according to Ukraine’s defense minister. The Ukrainians blamed Russia for an airstrike Tuesday on a border town that killed four civilians. President Petro Poroshenko says ‘Russian staff officers are taking part in military operations against Ukrainian forces’ on Ukrainian territory....

“All of this fits with the new Russian military tactics of ‘deception and strategic ambiguity’ that General Phil Breedlove, NATO’s supreme allied commander, (has described). Mr. Putin is attempting to disguise his use of force to achieve his strategic goals while limiting the Western response.”

Neil Buckley / Financial Times

“President Vladimir Putin...is riding a wave of popularity as Russia’s leader after the annexation of Crimea in March. The propaganda machine that Russia television has become is still serving up a relentless diet of alleged Ukrainian atrocities against Russian-speakers in the east.

“So Mr. Putin cannot afford a rout of the rebels that would appear a personal defeat, without achieving at least some of Russia’s broader, underlying goals in Ukraine. Those are guarantees that Ukraine will not join NATO, slower EU integration, and/or a shift by Ukraine to a looser, federal structure that would give Russia continuing influence and a form of veto on Kiev’s absorption into Europe-Atlantic structures.

“Destabilizing eastern Ukraine is Moscow’s principal lever of pressure in trying to achieve those aims.

“Russia can choose to keep it as a simmering conflict, producing thousands of refugees, wrecking Ukraine’s industrial heartland, and sapping Kiev’s ability to tackle the country’s wider economic and governance problems.

“Moscow seems to have kept open the outright invasion of east Ukraine, in part as a form of psychological warfare against Kiev....

“But it appears, too, to have concluded the potential costs of direct intervention – in body bags coming home to Russia, the economic burden of taking charge of eastern Ukraine, and in further western sanctions – are dangerously high.”

Iran: It has seemed clear for a while now that the two sides in the nuclear talks between Iran and the P5+1 (U.S., Britain, France, Russia, China and Germany) still had deep differences and that talks would be extended past Sunday’s July 20 deadline. Friday, we learned talks had indeed been extended four months, though it’s not clear exactly as I go to post how existing sanctions will be handled during this time. [Four months takes the issue beyond the mid-term election.]

Iran needs a long-term deal in exchange for a full lifting of economic sanctions. But with the Ukraine issue once again taking center stage, cooperation between Russia and the rest of the P5+1, save for China, will not be good.

On Monday, Iran’s chief negotiator, Foreign Minister Mohammad Javad Zarif, made a proposal that would leave centrifuges spinning in place, leaving Iran with a “breakout capability” to race for a bomb should it decide to do so. Zarif contends it would lengthen that period to over a year, which Secretary of State John Kerry has said is the minimum. But U.S. officials are doubtful.

Iran wants restrictions on its program to be no longer than seven years, while the United States says the period must be in the “double digits,” or at least a decade. After the agreement expired, Iran would become a signatory of the Nuclear Nonproliferation Treaty, as long as it abided by the treaty’s inspection rules.

Congress, however, wants severe restrictions on Iran’s development of next-generation centrifuges, in return for lifting American sanctions.

Zarif says no “freeze” is acceptable and Iran will not be subject to any permanent limits.

Iran currently has 22,000 nuclear centrifuges (I’ve also seen 19,000), of which half are working, but the U.S. doesn’t want a situation where Iran throws out the inspectors, a la North Korea, and turns the centrifuges back on. [David Sanger / New York Times]

President Obama said on Wednesday that negotiators had made “real progress in several areas,” and have produced a “credible way forward.”

Although “significant gaps” remain, Iran has met its commitments under the interim deal reached in November, according to Obama.

But it really does seem to come down to how much uranium enrichment equipment Iran will be allowed to retain.

Meanwhile, New Jersey Democratic Senator Robert Menendez is the leader in Congress on the nuclear issue and has garnered respect from both sides of the aisle. As the Washington Post’s Jennifer Rubin noted the other day, even Sen. Ted Cruz (R-Tex.) paused to commend Menendez.

Rubin:

“First, (Menendez) aptly expressed the real anxiety on the Hill and elsewhere in the responsible foreign policy community that a bad deal may be in the offing. He said: ‘I am convinced that we should only relieve pressure on Iran in exchange for verifiable concessions that will fundamentally dismantle Iran’s illicit nuclear program and that any deal be structured in such a way that alarm bells will sound – from Vienna to Washington, to Moscow and Beijing – should Iran restart its program anytime in the next 20 or 30 years.’ Instead Iran seems to be offering fool’s gold – a ‘freeze.’ Menendez ably explained why this is a nonstarter:

“ ‘It is the same obfuscation – the same Iranian tactics that we have seen for years, for decades. Iran puts offers on the table that appear to be concessions but, in reality, are designed to preserve Iranian illicit nuclear infrastructure and enrichment so that the capacity, the capacity to break out and rush toward a nuclear weapon is still very much within reach. That is not an endgame. It’s a non-starter... Essentially, what Zarif is offering is the same concessions as what Iran made for the interim agreement over six months ago. And in exchange, Iran gets sanction relief. Except we know that Iran is not like any other nation, and its history of cheating, lying and evading inspections proves it.’

“Second, Menendez bluntly rebuked Secretary of State John Kerry, who seems to have adopted Iran’s negotiating posture on a key point. ‘Secretary Kerry said this morning that ‘the U.S. believes Iran has the right to a peaceful nuclear program under the NPT.’ Let’s remind ourselves of first principles here. No country has a right to enrichment. They may have the ability to enrich – the desire to enrich, but they do not have the right to enrich – and certainly not Iran given its past behavior. Let’s remember how we reached this point. Iran – over a period of decades – has deceived the international community about its nuclear program, breaching its international commitment in what everyone agrees was an attempt to make Iran a nuclear weapons state – or at least a threshold state.’ In other words, don’t expect transparency and verification to be the linchpin of a deal; the linchpin is dismantling Iran’s illicit program....

“I was most struck by the degree to which a mainstream Democrat in a key leadership position shares the same qualms, distrust of the president and wariness that a bad deal is afoot as Republicans do. On this, bipartisanship prevails, and both houses of Congress should demonstrate that when it comes to a nuclear Iran, crossing a weak and failing president may be a small price to pay to prevent the greatest and most preventable national security calamity of our time.”

Iraq: The Iraqi parliament finally did something, electing a new speaker, Salim al-Jabouri, breaking weeks of political deadlock. The main Sunni Arab bloc had nominated the moderate Islamist for the position. But it does not appear parliament will act with speed in selecting a president and prime minister. A Sunni Arab traditionally gets the Speaker post, while a Kurd is selected for president and a Shia Arab for prime minister.

Two key Shiite blocs in parliament have agreed on a single candidate to replace Prime Minister Nouri al-Maliki – Ahmad Chalabi. His faction, along with the other two, one led by Muqtada al-Sadr, account for almost 40% of the seats in parliament, while Maliki’s faction, the State of Law, controls about a quarter of the seats, according to Amir Taheri.

Meanwhile, government forces launched an offensive to retake the city of Tikrit, though I have not seen what success there has been, if any.

In fact there has been little reporting from Iraq in recent weeks. Last Sunday, gunmen in Baghdad launched an attack on a housing complex that killed at least 33, including 29 women. Responsibility for the incident wasn’t clear.

Human Rights Watch said it appeared Iraqi security forces and government-affiliated militias executed at least 255 prisoners since June 9, apparently in retaliation for attacks by ISIS.

Here’s what we do know. Five weeks after ISIS stormed into the country from bases in Syria, it retains control of virtually all the territory it captured. It was also reported this week by McClatchy that ISIS captured as many as 52 U.S.-supplied artillery pieces with GPS aiming systems. The guns have a range of 20 miles.

American advisers placed on the ground, supposedly in five teams of 90, have nothing good to say about the performance of the Iraqi military. Plus a majority of the brigades are infiltrated by either Sunni extremists or Shiite militias.

Syria: President Bashar Assad took the oath of office Wednesday for a new seven-year term.

“They did not spare a dirty measure to use, and they failed. Syrians with their votes forced the collapse of terrorist groups and their Syrian agents.”

Assad thanked Syria’s allies for their support during the war, including Russia, Iran, China and Lebanon’s Hizbullah.

Lebanese Forces leader Samir Geagea ridiculed Assad, saying he was detached from reality.

“I do not know whether I should laugh or cry over what they called today the swearing in of Syrian President Bashar Assad,” Geagea said.

“This person, who is completely detached from reality, took to the podium to swear for a nonexistent republic, according to a nonexistent constitution, and claim presidency over people who he has been attacking for three years using all kinds of weaponry: long and medium-range missiles, artillery, barrel bombs on residential areas and chemical weapons.”

On Friday, ISIS killed at least 115 Syrian troops, guards and workers as they captured a gas field in central Syria. More than 20 militants also died, according to activists; the deadliest battle between ISIS and forces loyal to Assad.

China: On Tuesday, China announced it had completed drilling in a disputed area of the South China Sea claimed by both China and Vietnam, and was withdrawing the rig from the waters, though the foreign ministry office left the door open for future exploration there.

The same day, China told the United States to stay out of disputes over the South China Sea and leave countries in the region to solve the issues themselves, the U.S. State Department having reiterated the view that “provocative and unilateral” behavior by China had raised questions about its willingness to abide by international law.

Reminder...China claims 90% of the South China Sea.

Meanwhile, a new Pew Research Center global survey reveals that more than 90% of Chinese had confidence in President Xi Jinping, but just 28% in the United States do and only 6% in Japan.

Overall, in the U.S., back in 2011 half the respondents gave China a positive rating, but only 35% do today.

And a Chinese businessman in Canada was charged with hacking into Boeing’s computers and stealing information about U.S. military aircraft and weapons, the Justice Department announced. Su Bin spent years taking data from Boeing, according to the FBI. The U.S. still must extradite him to face trial here.

Afghanistan: At least 89 people were killed in a suicide attack at a busy market in eastern Paktika province. The attacker drove a vehicle into the market and detonated the explosives. The Taliban said they did not carry it out.

The attack came days after Afghanistan’s two presidential candidates, Abdullah Abdullah and Ashraf Ghani, reached an agreement to resolve a dispute over the results of last month’s presidential election. Thanks to the efforts of Sec. of State Kerry, a full audit of the vote will be conducted and the candidates have agreed to abide by the findings.

Russia: State investigators arrested two Moscow metro workers suspected of safety breaches that may have caused a horrific subway crash during Tuesday’s morning rush hour that killed at least 21. The two were suspected of failing to properly monitor work carried out on a track switch mechanism. What made the accident more horrifying is that it occurred at the deepest part of the metro system, making rescue even more difficult.

Germany: Chancellor Angela Merkel backed off some with her rhetoric after the latest espionage allegations against the U.S. She dismissed talk of scrapping negotiations for the Transatlantic Trade and Investment Partnership between the European Union and the U.S.

“We have differing perceptions on the work of intelligence services, but other political areas like the free-trade agreement are absolutely in our interest,” she said. “We work very close together with the Americans. I want that to continue,” Merkel told a German broadcaster. “Germany, of course, profits from this cooperation.”

I’ve chosen to also lighten up this week when it comes to Merkel.

Italy: Former Prime Minister Silvio Berlusconi has won an appeal against his conviction for paying for sex with an underage prostitute. His seven-year prison sentence was thrown out by judges in Milan, in the so-called “Ruby” case...aka “Ruby the Heartstealer.”

Berlusconi is doing community service after being sentenced in a different case for tax fraud.

Britain: Prime Minister David Cameron reshuffled his cabinet in an attempt to get younger and add more women. Foreign Secretary William Hague, who had also served in the cabinet under Margaret Thatcher and John Major, 20 of his 44 years in the House of Commons, will yield to defense secretary, Philip Hammond.

Nigeria: Boko Haram continues its reign of terror, killing 44 ‘vigilantes’ it said were tipping off authorities as to their movements. In six months, Boko Haram has killed over 2,050 civilians, according to Human Rights Watch, many of them slaughtered for being members of – or simply close to – those vigilante groups.

Australia: The government repealed laws requiring large companies to pay for carbon emissions, fulfilling a key campaign promise of Prime Minister Tony Abbott.

Abbott, who took office last year, said the tax, meant to penalize hundreds of Australia’s biggest polluters, was a “useless destructive tax, which damaged jobs, which hurt families’ cost of living and which didn’t actually help the environment.”

Brazil: So much for the World Cup. The nation didn’t see the violence and protests of a year earlier during last summer’s Confederations Cup, but most in Brazil seem to think that for the four weeks, the good outweighed the bad. 10 people died during World Cup-related construction projects, but now it’s about the 2016 Olympics, and in October, the presidential election. The question of the day is, how much will leader Dilma Rousseff suffer for the shocking meltdown of Brazil’s football team, let alone the huge costs of staging the World Cup.

Random Musings

--Robert Samuelson / Washington Post

“The White House recently put out a 40-page report arguing that the 24 states that have not expanded Medicaid coverage under the Affordable Care Act (ACA or ‘Obamacare’) are hurting their poor and themselves. It’s an easy case to make, but it’s incomplete and misleading. The further truth is that Medicaid also threatens to crowd out spending for many traditional state and local functions: schools, police, roads, libraries and more.

“Indeed, this has been happening for decades. From 1989 to 2013, the share of states’ general funds devoted to Medicaid has risen from 9 percent to 19 percent, reports the National Association of State Budget Officers. Under present law, the squeeze will worsen. The White House report doesn’t discourse this. The paradox is that a progressive program also has unprogressive consequences....

“(Medicaid) is health insurance for the poor. In 2012, it covered almost 58 million people and spent $432 billion, with costs split between the federal government (about 58 percent) and the states (42 percent). The ACA expanded eligibility for Medicaid to people with incomes below 138 percent of the federal poverty line. In 2014, that’s $16,105 for a single adult and $32,913 for a family of four.

“In June 2012, the Supreme Court, while upholding most of the ACA, threw out the Medicaid provisions. The court ruled that the Obama administration couldn’t force all states to accept the Medicaid expansion. It had to give them a choice. Ever since, there’s been a running battle between the administration and the states that have declined. The White House report, done by its Council of Economic Advisors (CEA), is the latest salvo.

“To the White House, the right-wing anti-Obamacare crusade is mean-spirited partisanship at its worst. The 24 non-participating states are sacrificing huge amounts of almost-free money and condemning an estimated 5.7 million people – who would qualify for the new Medicaid – to being uninsured....Under the ACA, the federal government pays all the cost of the Medicaid expansion through 2016 and, after that, the reimbursement rate drops gradually to a still-generous 90 percent in 2020.

“Through 2016, abstaining states are losing $88 billion in federal funds, estimates the CEA...

“Opposition – or support – is worn as a badge of honor. Still, two aspects of the White House report suggest opposition to the Medicaid expansion isn’t just rabid partisanship.

“One is the assumption that the 90 percent reimbursement rate remains permanently. Why should it? To curb budget deficits, Congress might cut it. ‘The ACA says what it says. Future Congresses can repeal or modify it,’ says Matt Salo of the National Association of Medicaid Directors. Could the favorable reimbursement be bait-and-switch? States’ actual costs could be higher than assumed. Why make a bad problem worse?

“Even if this doesn’t happen, demographic trends – also ignored by the White House report – are devastating for states....

“What this means is that, as the population ages, states’ Medicaid spending will rise inexorably. The competition between nursing homes and home health care – on the one hand – and classroom teachers, higher education, police and other governmental services – on the other – will intensify. Medicaid becomes a vise squeezing other public services or requiring continuous tax increases. More spending goes toward meeting past obligations and not present and future needs. Underfunded state and local pensions compound the effect....

“This has already occurred at the national level, where Social Security, Medicare and (to a lesser extent) Medicaid...dominate the federal budget. Other spending is slowly shrinking as a share of the economy. We could minimize this process for states and localities by transferring all Medicaid costs to Washington (or at least the costs of the elderly and disabled). To pay for it, Washington would reduce transportation and education grants to states.

“Let Washington mediate among generations. Let states and localities concentrate on their traditional roles of education, public safety and roads. Spare them the swamp of escalating health costs. This is the bargain we need – and probably won’t get.”

--A new Washington Post-ABC News poll found that 58% disapprove of President Obama’s handling of the immigration crisis and the influx of unaccompanied foreign children, including 54% of Latinos.

But lest Republicans see a major gain in this for them, 66% disapprove of congressional Republicans and their handling of the matter.

Nonetheless, yes, President Obama received 71% of the Latino vote in 2012 and their support has been sliding ever since on all manner of issues.

--Data from new NBC News/Marist polls of Iowa and New Hampshire shows Hillary Clinton crushes Vice President Biden among Democratic voters in a hypothetical matchup – 70% to 20% in Iowa, and 74% to 18% in New Hampshire.

Further, Iowa Democrats view Clinton positively by a whopping 89% to 6%; 94% to 4% in New Hampshire (favorable/unfavorable).

Among other potential matchups, Clinton is tied with Sen. Rand Paul in Iowa, 45-45, and leads New Jersey Gov. Chris Christie by just 1 point, 44-43.

In New Hampshire, Clinton leads Paul, 46-43, and Christie and Jeb Bush by 5 points, 47-42.

In Iowa, among the GOP candidates, Bush and Paul receive 12%; Paul Ryan 11%; Rick Santorum 9%; Christie 8%.

Christie has a major problem in that he has high unfavorability ratings of 31% and 33% in New Hampshire and Iowa, respectively, vs. Rand Paul’s 15% and 18%.

--In a new book, “Clinton, Inc.: The Audacious Rebuilding of a Political Machine,” author Daniel Halper notes that New York Democratic Sen. Charles Schumer was not thrilled at the prospect of Hillary Clinton running for the U.S. Senate from New York, fearing it would upstage him. So he coached Rep. Rick Lazio (R-LI), Clinton’s eventual Republican opponent, on his 2000 campaign, according to Lazio.

“I thought he was generally...he was supportive,” Lazio said of Schumer. “Quite helpful to me behind the scenes and encouraging.”

Love it. Of course I imagine Schumer will vehemently deny this (the book comes out officially July 22).

Former ambassador Bill Richardson, who served under Bill Clinton, is still frozen out for daring to back Barack Obama over Hillary.

“Every relationship he has is mainly about him and not about the other person,” Richardson told the author.

But Daniel Halper notes that Hillary tended to relationships with former critics in the Senate and built a “virtual dossier of praise and support” from top Republicans who might be prone to criticize her. To this day, for example, John McCain refuses to unload on her.

--Maureen Dowd / New York Times

“Chelsea Clinton never acted out during the eight years she came of age as America’s first daughter.

“No ditching of her Secret Service detail. No fake IDs for underage tippling. No drug scandal. No court appearance in tank top and toe ring. Not even any dirty dancing....

“So it’s strange to see her acting out in a sense now, joining her parents in cashing in to help feed the rapacious, gaping maw of Clinton Inc.

“With her 1 percenter mother under fire for disingenuously calling herself ‘dead broke’ when she left the White House, why would Chelsea want to open herself up to criticism that she is gobbling whopping paychecks not commensurate with her skills, experience or role in life?...

“She is commanding, as The Times’ Amy Chozick reported, up to $75,000 per appearance...

“There’s something unseemly about it, making one wonder: Why on earth is she worth that much money? Why, given her dabbling in management consulting, hedge-funding and coattail-riding, is an hour of her time valued at an amount that most Americans her age don’t make in a year? (Median household income in the United States is $53,046.)....

“There was disgust over Politico’s revelation that before she switched to a month-to-month contract, Chelsea was getting wildly overpaid at $600,000 annually – or over $25,000 per minute on air – for a nepotistic job as a soft-focus correspondent for NBC News....

“The Clintons keep acting as though all they care about is selfless public service. So why does it keep coming back to gross money grabs? It’s gone from two-for-the-price-of-one to three-for-the-price-of-20....

“The Clintons were fiercely protective of Chelsea when she was a teenager, insisting on respect from the media and getting it. They need to protect their daughter again, this time from their wanton acquisitiveness.”

--We learned this week that the situation at the National Institutes for Health goes far beyond the discovery of long-forgotten smallpox samples recently found in a storage room at a Bethesda, Md., campus. 12 other boxes and 327 vials holding an array of pathogens were uncovered.

And these guys are supposed to be the best in the world.

--The Energy Department has given the Los Alamos National Laboratory an “inadequate” rating for its latest safety record on “nuclear criticality,” a measure of atomic stability, though a report released last week said the performance is getting better! We’re Number 87! We’re Number 87!

--There was a very disturbing reaction to a police officer being gunned down in Jersey City the other day. The family and friends of the killer, who himself was dispatched with in the ensuing gun battle, created a “cop killer memorial.” It stayed up at least 12 hours, before being torn down by police, with the killer’s wife initially saying she wished her husband had killed more police, before she apologized for the statement. Others in the killer’s neighborhood defended the man. Just sickening.

The shooter, incidentally, told a witness that he would be famous before he ambushed Officer Melvin Santiago. The killer walked into a 24-hour Walgreens at 4 a.m., assaulted a security guard and took his gun. He then proceeded to wait for the police to arrive, firing into the first car that arrived.

Jersey City has a new mayor, Steven Fulop, who is totally out of his league, not ready for prime time, and violent crime has been rising rapidly since he came into office.

--Army Sgt. Bowe Bergdahl has returned to regular duty following completion of a “reintegration process” after five years as a Taliban captive in Afghanistan. A Pentagon spokesman said Bergdahl “will essentially be doing a desk job.” Bergdahl did hire an attorney.

The Army said he still hasn’t spoken to his family, which is beyond bizarre. You could, maybe, understand for the first week or so, but beyond then?

--The British Journal of Nutrition published research that disputed the notion that organic foods are essentially no more healthful than conventional foods.

“After reviewing 343 studies on the topic, researchers in Europe and the United States concluded that organic crops and organic-crop-based foods contained higher concentrations of antioxidants on average than conventionally grown foods.” [Monte Morin / L.A. Times]

Researchers also found conventional foods contained greater concentrations of residual pesticides and the toxic metal cadmium, as you’d imagine when measured against organic.

However, a study author, Professor Charles Benbrook of Washington State University, adds, while organic grown fruits “deliver tangible nutrition and food safety benefits, the first and foremost message is people need to eat more fruits and vegetables.”

--I liked this bit from Pat Garofalo in U.S. News Weekly:

“America has a pair of summer vacation problems, and they have nothing to do with the heat or hurricanes. First, the U.S. education system is still built around a months-long summer break that loads of research shows does students – particularly those coming from low-income families – no favors. Then, once those students have joined the workforce, they see fewer vacation days than their counterparts in the rest of the developed world. Essentially, U.S. policy revolves around providing students with a break that hurts them, while denying one to workers who would be helped by some time away from the job.”

---

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

We pray for the victims of MH17.

God bless America.
---

Gold closed at $1309
Oil $103.13

Returns for the week 7/14-7/18

Dow Jones +0.9% [17100]
S&P 500 +0.5% [1978]
S&P MidCap +0.1%
Russell 2000 -0.7%
Nasdaq +0.4% [4432]

Returns for the period 1/1/14-7/18/14

Dow Jones +3.2%
S&P 500 +7.0%
S&P MidCap +5.2%
Russell 2000 -1.0%
Nasdaq +6.1%

Bulls 56.6
Bears 15.1 [Source: Investors Intelligence]

Have a great week. I appreciate your support.

Brian Trumbore