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11/01/2014

For the week 10/27-10/31

[Posted 10:30 PM ET, Friday]

Edition 812

Washington and Wall Street

Two weeks ago the U.S. stock market nearly hit the official correction level of 10%, with the Nasdaq reaching it on an intraday basis, but in the ensuing period the Street has staged its biggest two-week rally in ages, with the Dow Jones and S&P 500 hitting new highs, Friday, owing to solid fundamentals and massive short-covering, along with a major gift on Friday, the announcement that the Bank of Japan was not only expanding its unprecedented monetary-stimulus program, but it was going to purchase large amounts of overseas stocks and bonds, along with the domestic variety, for its Government Pension Investment Fund, which further juiced both Wall Street and bourses around the world. Tokyo’s Nikkei stock index soared 4.8% in approval. More on Japan in a bit.

As for U.S. economic fundamentals, September durable goods (big-ticket items) fell 1.3%, worse than expected, and September consumption (consumer spending) unexpectedly declined 0.2% when an increase had been forecast, while personal income for the month rose a less than expected 0.2%. 

The big data points, however, were very positive; the prime mover being an initial reading on third-quarter GDP that came in at a better than expected 3.5% when economists were calling for 3.0%. Coupled with a final reading of 4.6% for the second quarter, the back-to-back performance is the best since the final six months of 2003. Granted, all of us recognize the U.S. economy is not just the raw data, it’s about individual lives and median income that has been falling while the 1% reaps the benefits of record asset prices. Otherwise, a majority of Americans would be giving President Obama good marks on his handling of the economy, rather than the reality that most grade him poorly heading into next week’s mid-term elections.

Separately, the S&P/Case-Shiller home price index for August showed prices rose 5.6% year over year for the 20-city index, vs. July’s up 6.7%, which is actually a good thing. The slowdown in price appreciation continues, which, coupled with low mortgage rates (still just 4.00%, or slightly below, on a 30-year fixed) make housing more affordable. If you can get a mortgage, which is an ongoing issue. [For the record, home prices rose the most in Miami, up 10.5% in Aug., y/y, and 10.1% in Vegas.]

You also had the release, Friday, of a Chicago purchasing managers index for October and its 66.2 reading not only exceeded expectations, but it was the best in 12 months.

And corporate profits for the third quarter continue to be generally solid, with earnings tracking to be up about 6%+ for S&P 500 companies; revenues up 4%.

Then there is the Federal Reserve, which closed the books on its latest round of bond-buying, quantitative easing, or QE3, at the Open Market Committee meeting this week, but in doing so it released a confusing statement in terms of gleaning future Fed moves on interest rates.

On one hand the Fed offered, “There has been a substantial improvement in the outlook for the labor market since the inception of [the] current asset-purchase program. Moreover, the [Fed] continues to see sufficient underlying strength in the broader economy to support ongoing progress toward maximum employment in a context of price stability.”

The fed noted “solid job gains” and that labor-market slack is “gradually diminishing,” so you’d read all that and think, hey, the boys and girls are going to hike interest rates sooner than the market currently expects, which is second half of next year, at the earliest.

But then the Fed left in language in its statement that it would keep short-term interest rates near zero for a “considerable time.”

Clearly they can’t have it both ways. We just had two very solid GDP readings and the labor market is indeed firming. I still expect wage gains to follow in short order and the Fed to be left with its pants down as the bond market reacts long before it does (which won’t be good for equities when this happens).

But in the meantime, enjoy the ride. I haven’t been a bear, though I did forecast minimal losses of 2% to 5% for the major indexes this year and as of two weeks ago that looked pretty good. Now I’m back to drinking domestic, while my Japanese friends, after their Friday surge, should be quaffing Kirin, the ‘premium’ domestic over there. But I digress.

Yes, fret not because the Fed put in its statement that “If incoming information indicates faster progress toward the Committee’s employment and inflation objectives than the Committee now expects, then increases in the target range for the federal funds rate are likely to occur sooner than currently anticipated.

“Conversely, if progress proves slower than expected, then increases in the target range are likely to occur later than currently anticipated.”

Even Jameis Winston can read between the lines. If the economy suffered a slowdown for a number of reasons, like a European economy that tips back into recession, punk economic activity in China and Japan, a Russian invasion of a Baltic nation or ISIS taking Baghdad, QE4 would save the day for equity holders.

Editorial / Wall Street Journal

“The best case for QE, when it began amid the financial panic of late 2008, was as an extraordinary tool to provide liquidity and restore confidence. That was needed at the time, and we supported it.

“The evidence of QE’s benefits in its second and third iterations is far more speculative and its full costs still aren’t clear. Those won’t be known until the Fed winds down its balance sheet, if it ever does, and until we see how markets and the economy respond to rising interest rates. For all the market’s anxiety about the end of QE, it seems to be ending without a stir. Maybe that’s because it was never as helpful as advertised.”

Europe and Asia

Across the pond, I get a kick out of those who say the numbers in Europe are improving. I don’t know what the heck they’re looking at but if you want to say in some respects the eurozone is stabilizing, yeah, I guess... stagnation, with a highly disconcerting sidebar I’ll get into in a moment.

But before looking at the bank stress test results from the ECB (and European Banking Authority), Eurostat, the statistical arm of the European Union, said the unemployment rate for the EA18 was the same 11.5% in September as it was in August, which is also just down a smidge from September 2013’s 12.0%, so virtually zero progress on this front.

You still have France at 10.5%, unchanged month over month; Italy, up to 12.6%; Spain at 24.0%, down from 24.2%; and Greece, 26.4% (July...two month lag here).

And the youth unemployment rate remains staggeringly high in Italy (41.8%), Spain (53.7%) and Greece (50.7% / July)

Bottom line, compare the 11.5% for the eurozone with the 5.9% here and it’s yet another reason why investor funds have been flowing to the U.S., much of it from Europe.

A flash reading from Eurostat on October inflation was also released, up 0.4%, annualized, vs. 0.3% in September, while the core rate ticked down from 0.8% to 0.7%. So deflation remains a topic at the top of the list at the European Central Bank. With no domestic demand, there is no pricing power.

Separately, Germany’s business sentiment reading, the Ifo Institute index, fell a sixth month to the lowest reading since Dec. 2012, while September retail sales fell 3.2% over August (though up 2.3% year over year).

Chancellor Angela Merkel also has a problem on her hands with the labor unions and she is proposing legislation that would seriously curb the powers of the smaller ones that can wreak havoc on the economy. The number of companies hit by job actions has been soaring. The unions say they need wage gains to make up for stagnating household incomes, while the companies argue, how the heck can we pay higher wages when the economy is nearing recession?

What happens in Germany is that a smaller union, say for Lufthansa, can have the same impact as the biggest union for the airline and Merkel wants to limit future wage talks to the biggest union for each group of employees, while also giving the courts more power to intervene in disputes. [Bloomberg]

Elsewhere, Italy’s Prime Minister Renzi is counting on the Italian 10-year bond staying well below a target of 2.70% in order to bring down his country’s sky-high debt, second-largest in Europe and 130% of GDP.

Italy’s budget is pegged to this bond level and with the economy back in recession, it desperately needs growth. This week the Italian bond closed at 2.35% on the feeling the ECB will backstop it, but, again, you still need growth and none is to be found here. This is the key bond market to watch the next 12 months.

Speaking of bonds, Greece’s 10-year soared back to 7.87% from 7.13% last week due to continued domestic political volatility. It’s going to be this way until February, at which point the ruling government of Prime Minister Samaras needs to show it has a super majority in parliament in order to avoid snap elections in March that would virtually guarantee a Socialist victory for the Syriza party. Right now, Samaras is about 30 seats short of the goal.

It’s all about the potential for busting the budget and the fragile fiscal gains Greece has made under its bailout.

As for the bank stress tests, talk about a lot of nothing. The European Central Bank, which is taking over as supervisor Nov. 4 from the individual country’s for the eurozone’s largest banks, said 25 of 130 it examined failed a stress test, though only 13 had not raised enough further capital from January until September this year. Four were in Italy, two in Greece, and two in Slovenia, with the others scattered about.

The stress tests looked at what was on the banks’ books as of the close of 2013 to see if they had ample capital to survive a crisis that would have Europe’s economy falling 7% below current forecasts, with unemployment rising to 13%, which some argue isn’t that severe a test in the first place, but, whatever. There simply wasn’t anything earth-shattering in the exercise, ditto that held by the European Banking Authority, which used to be the official supervisor and which looked at non-eurozone banks as part of its own exercise. [The EBA passing all four big British banks – Barclays, HSBC, Lloyds Banking Group and Royal Bank of Scotland – for example.]

Did all this remove a cloud of mistrust, as the New York Times’ Jack Ewing put it, “that has impeded lending in countries like Italy and Greece and left the eurozone struggling to avoid lapsing back into recession”? [My question, not Mr. Ewing’s.] Did the central bank make it easier for the bigger banks to now feel comfortable lending to the critical small- and medium-sized business sectors?

I doubt it. Like take Spain. Prime Minister Mariano Rajoy was ecstatic on Sunday after all its major banks passed the test. I mean, c’mon. Yes, Spain has made progress and has instituted some reforms, but there was no country in Europe with more bad loans on its books due to the housing bubble than this place and you can’t tell me Madrid cleaned up the corruption between the banks, developers and local governments. I was writing about this garbage going back to 2005 and I just don’t believe the balance sheets here are now pristeen.

Following are some thoughts from an Economist editorial, looking at Europe and the eurozone writ large.

“Optimists, both inside and outside Europe, often cite the example of Japan. It fell into deflation in the late-1990s, with unpleasant but not apocalyptic consequences for both itself and the world economy. But the eurozone poses far greater risks. Unlike Japan, the eurozone is not an isolated case: from China to America inflation is worryingly low, and slipping. And, unlike Japan, which has a homogenous, stoic society, the euro area cannot hang together through years of economic sclerosis and falling prices. As debt burdens soar from Italy to Greece, investors will take flight, populist politicians will gain ground, and – sooner rather than later – the euro will collapse.”

Editorial / Wall Street Journal...on Italy’s issues...

“Italy’s labor-market rules have remained largely unreformed since the modern Italian state was established. Spread over some 2,700 pages, the labor code divides the labor force into two parts. Older workers benefit from the full weight of the law, including ironclad protections against being laid off, fired or disciplined, whether for performance or economic reasons. That leaves the remainder of the work force, predominately young, to make do with temporary, freelance and other forms of itinerant work.

“Then there is the Cassa Integrazione Guadagni. Under this income-assistance scheme, businesses that need to downsize can put some workers on ‘standby,’ and the government will cover a significant share of the normal salary until the company can hire back the worker. The program strains the state’s budget, discourages workers from seeking other jobs, and prevents struggling companies from downsizing to stay competitive.

“Need to fire a worker for poor job performance? To do so, businesses must persuade a judge that no alternative short of termination was available – a process of administrative hearings and litigation that can take months and drain company resources. The World Economic Forum in its 2014-15 assessment of labor-market efficiency ranked Italy 141 out of 144 countries for hiring and firing practices, just above Zimbabwe.”

Finally, three stories from different sources that I collected this week point to the trouble now beginning to boil over in Europe.

Sydney Morning Herald / AFP

“Police in Germany used water cannons and pepper spray against protesters after a demonstration organized by far-right groups in the western city of Cologne turned violent on Sunday.... [Ed. I love Cologne...and it’s one of the places with great Christmas markets that I’m warning are a prime terror target this year.]

“About 2,000 people had massed in the heart of Cologne’s historic center for a demonstration ostensibly aimed against Islamic extremism. It was organized by neo-Nazi groups and members of Germany’s football hooligan scene.

“German news agency dpa reported that some protesters were heard chanting ‘foreigners out.’”

Irish Independent

“Three families had to be evacuated from a house in Waterford last night after protesters descended on their home and kicked in a door and all the downstairs windows.

“More than 200 protesters gathered...after a rally organized on Facebook turned ugly.

“The demonstrators targeted a group of 30 people from the local Roma community who were being blamed for a series of alleged crimes in the area....

“Solicitor Gareth Noble told independent.ie that tension has been building in Waterford recently, with anti-Roma Facebook pages being created.”

Maia de la Baume / New York Times...on tensions in Calais, France...

“(Charles Dufeutrelle’s) frustration reflects the resentment and fear that have swept Calais in the last year, along with a new wave of migrants hoping to cross illegally to Britain, which they see as a better place than France to start a new life. The migrants began squatting in vacant buildings and took over shelters in the city center, angering residents and drawing warnings from the local authorities that they could lose control of portions of the city.

“Many people here fear devastating repercussions for Calais, which is already suffering from 16 percent unemployment, one of the highest rates in France. Anti-migrant sentiment here has buoyed far-right groups like the National Front party, whose support surged in elections for the European Parliament this past spring.

“The National Front’s leader, Marine Le Pen, visited Calais on Friday to denounce what she called the ‘scandalous carelessness’ of the government in a city where ‘there is nothing left but survival of the fittest, violence.’....

“ ‘The discontent has turned into a real psychosis,’ said Emmanuel Agius, the deputy mayor of Calais and a member of the conservative Union for a Popular Movement party. ‘The migrants of today no longer fear breaking the laws.’...

The migrants, numbering 2,200 to 2,300 around the city, are mostly men from Afghanistan, Egypt, Eritrea, Ethiopia, Sudan and now Syria. One local police officer said “80 crimes had been reported in the city this summer involving migrants, up from six a year ago.”

A guard at the city’s cemetery padlocked the restrooms after he saw groups of migrants from a nearby camp using them.

So above you have three distinct snapshots of one of the huge underlying issues facing Europe these days. It can turn explosive in a heartbeat. And it’s the last thing the continent needs as it seeks economic growth, while in the eastern part of Europe, they cast a wary eye to the horizon. Mordor and Vladimir Putin.

---

Turning to Asia, China clearly has a problem with fake invoicing again and accurate trade figures between the mainland and Hong Kong, while the government announced it backs growth in the housing sector for the first time in years as stimulus, after encouraging a cooling down of the bubble.

But in Japan, first you had a slew of data. September retail sales rose 2.7% over August, which had risen 1.9%, so this is better following the crash precipitated by April’s 3% sales-tax hike. Industrial production in the month also rose 2.7% over August, but was down 1.9% for the third quarter after a 3.8% decline in the second.

But in a further sign of how far Prime Minister Shinzo Abe’s economic policies have to go, household spending in September fell 5.6% year over year, while September core inflation rose just 1.0%, well below the 2.0% target set by the government and the Bank of Japan.

So with all that as backdrop, as noted up above, the BoJ decided to act in a bold way, raising the annual target for enlarging the monetary base to 80 trillion yen ($724 billion), up from 60 to 70 trillion, while greatly expanding its asset purchases, both foreign and domestic.

Cue U2... “It’s a beautiful dayyyyyyyyyyyyyy!!!”

At the same time, though, the Bank of Japan, specifically Governor Haruhiko Kuroda, is telling Prime Minister Abe he must go ahead with a further 2% hike in the sales tax (value-added tax if you prefer) from 8% to 10% October 2015, saying that failure to do so would severely hurt confidence in the fiscal sustainability of Japan which, in case you forgot, has the highest debt in the solar system.

Ebola

I have consistently said the issue of Ebola is not here, but at the source in West Africa, so while some U.S. governors battle it out with the White House, and the courts, on policy and how to handle returning healthcare workers, I remain focused on the epidemic itself.

This week the World Health Organization announced there had been a decline in the spread of Ebola in Liberia, the country hardest hit. The WHO’s Bruce Aylward added the new number of cases globally was 13,703 (as of Wednesday) and that the death toll was over 5,000.

But Liberia’s Red Cross said its teams collected 117 bodies last week, down from a high of 315 in September. Just understand that prior to this outbreak, the highest death toll for any Ebola epidemic was less than 300, total. So we still have a long ways to go before authorities can say it’s under control.

What does seem to be working in Liberia, and I’m assuming in Sierra Leone and Guinea, is the massive effort to inform the public may finally be bearing fruit and changing behaviors, especially when it comes to the handling of bodies.

But the infection rates are still volatile and an area that is deemed clear of the disease could easily become re-infected.

Aylward said: “I am terrified that the information will be misinterpreted and people will start to think, ‘Oh, great, this is under control.’”

Just a few mishandled burials, Aylward noted, could “start a whole new transmission chain and the disease starts trending upward again.”

There was a study out of Yale University and Liberia’s health ministry that predicted up to 67,000 deaths in Liberia’s Montserrado County, which includes the capital Monrovia, by December 15.

And remember last week when I said Mali had its first Ebola case, a two-year-old who died? Health officials there are monitoring 111 who came into contact with the kid, who contracted the disease in Guinea and then rode a bus with his grandmother to Mali, the child having lost his mother to the virus. Mali apparently has virtually zero trained health workers.

Meanwhile, I got a kick out of President Obama’s little speech on Wednesday from the East Room of the White House where he was flanked by medical workers wearing lab coats; some of whom were still in a 21-day monitoring period after treating Ebola patients in West Africa.

Obama said in part: “The truth is that until we stop this outbreak in West Africa, we may continue to see individual cases in America in the weeks and months ahead, because that’s the nature of today’s world.”

But then he talked of America’s “leadership,” multiple times, and my thoughts turned to Syria and how we showed zero leadership in the first two years of that crisis and now it’s too late. [We were also exceedingly slow with our Ebola response.]

Finally, one of the scientists who discovered Ebola, Peter Piot, warned that China is under threat because of the huge numbers of Chinese workers in Africa. Piot, now director of the London School of Hygiene and Tropical Medicine, said, “I assume that one day [an outbreak of Ebola in China] will happen.”

OK...one more. From Jonathan V. Last / The Weekly Standard:

“Do you really want to be scared? What’s to stop a jihadist from going to Liberia, getting himself infected, and then flying to New York and riding the subway until he keels over? This is just the biological warfare version of a suicide bomb. Can you imagine the consequences if someone with Ebola vomited in a New York City subway car? A flight from Roberts International in Monrovia to JFK in New York is less than $2,000, meaning that the planning and infrastructure needed for such an attack is relatively trivial. This scenario may be highly unlikely. But so were the September 11 attacks and the Richard Reid attempted shoe bombing, both of which resulted in the creation of a permanent security apparatus around airports. We take drastic precautions all the time, if the potential losses are serious enough, so long as officials are paying attention to the threat.”

Street Bytes

--After hitting cycle lows on Oct. 15, stocks have roared back. Friday, the Dow Jones hit a new high of 17390, up 3.5% on the week, while the S&P 500 made a new high of its own, 2018, up 2.7% for the five days. Nasdaq added 3.3% to 4630 and now sits a little over 400 points from its March 2000 all-time record.

For the month of October, despite all the volatility, the Dow gained 2%, the S&P 2.3%, and Nasdaq 3.1%. The small-cap Russell 2000 soared 6.5% for the month, its best performance since July 2013.

--U.S. Treasury Yields

6-mo. 0.05% 2-yr. 0.49% 10-yr. 2.34% 30-yr. 3.07%

Just two weeks ago the 10-year Treasury hit an intraday low of 1.86%, so quite a move back up since then. The 2-year, most sensitive to interest rate projections, rose 10 basis points on the week, a huge move for it, on expectations the Fed will have to hike sooner than currently forecast.

--As reported by the Wall Street Journal (and others): “Big banks in the U.S. and Europe are stockpiling billions to pay for a potential trans-Atlantic settlement of allegations that they manipulated foreign-exchange rates as talks heat up with regulators on both continents.”

But some are skeptical U.S. regulators will go along with what their U.K. counterparts propose.

On Thursday, Citigroup announced in a filing it had set aside an extra $600 million as a result of “rapidly-evolving regulatory inquiries and investigations.”

Some banks have been told their individual settlements would be in the $500 million to $1 billion range.

--On Tuesday, I was watching the local NBC news and anchor Chuck Scarborough suddenly threw it to a live shot of the rocket launch from Virginia, saying something like, ‘this should be dramatic,’ and within seconds the rocket was lifting off, and then another few seconds later, all of us watching were thinking, ‘Well that sucks,’ as the Antares rocket exploded, thankfully being an unmanned mission to the International Space Station that didn’t hurt anyone on the ground as it crashed and exploded (a second time).

This was a product of Orbital Sciences Corp., part of the private sector initiative to get the U.S. back in space after the retirement of NASA’s space shuttle.

So this also left Elon Musk’s SpaceX as the only U.S. company able to fly cargo to the ISS, with SpaceX having its own big moment from Cape Canaveral, Fla., on Dec. 9 (at the earliest).

Further, the Antares rocket was powered by a 1970s style Soviet-era engine (actually, the initial model goes back to the 60s), refurbished in the U.S., since we don’t have our own engines yet (SpaceX and Boeing are contracted by NASA to come up with a new one for future manned missions).

The rocket and spacecraft that exploded were said to be worth more than $200 million and was Orbital’s third of eight planned under a $1.9 billion NASA resupply contract.

[Orbital Sciences stock dropped from $30.37 to $25.27 the first day of trading after the failure, but recovered a little the balance of the week to finish at $26.30.]

Meanwhile, don’t worry about the astronauts on the space station. A Russian resupply vehicle successfully docked with it on Wednesday, about 15 hours after the Antares disaster. They always have a 4-6 month supply of stuff up there. 

--Friday, though, just two days after the Antares disaster, saw a catastrophe of a different sort for the nascent commercial space program....Virgin Galactic’s SpaceShipTwo craft crashed in the Mojave desert, killing one test pilot and injuring another (condition not known as I go to post). During a flight, the craft experienced what the company described as “a serious anomaly.”

SpaceShipTwo is carried aloft by a jet, then launched into sub-orbit.

Sir Richard Branson put together Virgin Galactic to be a pioneer in space tourism. Over 700 celebrities and millionaires had signed up for their first flight. Now, who knows when the company and its spacecraft will be certified.

--Andrew Khouri / Los Angeles Times:

“The twin ports of Los Angeles and Long Beach are experiencing a logistical nightmare as they struggle to ease a bottleneck that could undermine retailers’ all-important holiday shopping season and threaten the competitiveness of the region’s economic engine.

“In the worst shipping crisis in a decade, mammoth vessels loaded with products destined for the nation’s stores are sitting idle just off the coast, waiting for cargo languishing on the docks to clear.”

Retailers have begun rerouting their goods to other locations.

One of the major reasons for the congestion is a shortage of trailers that truckers use to haul the cargo from the ports to giant warehouses in the Inland Empire. L.A.-Long Beach handles about 40% of U.S. imports, but no doubt unless the situation is rectified, quickly, this market share could plummet.

--Facebook reported third-quarter revenue grew 59%, while earning 43 cents, ex-costs, both beating Wall Street’s expectations. But the stock fell $5 on the news, admittedly from record levels, because some analysts and investors are a little concerned about the expense side of the ledger.

Vindu Goel of the New York Times summed up some of the issues very well:

“(In) a conference call...with investors, (Mark Zuckerberg) focused more on his vision for the company over the next three, five and 10 years.

“He talked about his recent $21.8 billion acquisition of WhatsApp and how he wanted to take the mobile messaging app quickly to a billion users from 600 million. (‘For us, products really don’t get that interesting to turn into businesses until they have about one billion people using them,’ he said.)

“He mused about the potential of Oculus VR, the virtual reality company that Facebook bought for $2 billion, which will need ‘a bunch of years’ to sell enough of its still-unfinished headsets to contribute to Facebook’s bottom line.

“And he waxed eloquent about the prospect of bringing people in poor countries like Zambia onto the Internet, an almost charitable endeavor that won’t reap financial returns for a long time.

“Not once did he utter the word profit.”

--Twitter reported revenue doubled in the third quarter to $361 million, surpassing expectations, but the stock fell hard as user growth slowed again. Twitter said it added 13 million monthly active users for the three months through September, up 4.8%, which is a slower pace than the prior quarter’s 6.3%.

It’s also unclear just how ‘engaged’ users are on the site. The shares fell about $8.50 on the week to $41.50.

--As of Thursday, the U.S. retail gasoline price at the pump had plunged 32 cents in October to $3.01 as a national average, the lowest since December 2010. The monthly drop is the biggest since 2008.

Separately, the Energy Information Agency said this week that U.S. crude production rose 0.4% in the prior week to 8.97 million barrels a day, the highest since 1986.

--ExxonMobil and Chevron reported stronger than expected profits for the quarter, with solid performances from their refining operations offsetting the weaker performance of their oil and gas production business. The shares rose in response for both.

--In the latest Consumer Reports’ annual reliability rankings, Toyota and its Lexus brand topped the survey, the eighth year in a row a Toyota brand has led the rankings.

Toyota also announced this week it is on track to be the world’s top-selling automaker for 2014.

--Sony reported a huge third-quarter loss as it wrote down its struggling smartphone business that China’s Xiaomi has been taking advantage of; Xiaomi now being the third-largest smartphone provider, with a 5.3% market share. Samsung is at 23.8% and Apple 12.0%, according to IDC.

--German exports to Russia fell by more than 26% on the year in August due to sanctions, the sharpest fall since the financial crisis in 2009.

Meanwhile, with the shocking slide in crude oil from $115 to around $85 (Brent), Russian President Vladimir Putin was quoted by Russian news agency RIA Novosti as saying, “If world oil prices stay at $80, all production will be ruined. No major market participant is interested [in this].” [Russia’s oil brand, Urals crude, trades around $2-$3 below the Brent price.]

According to the head of the Moscow Oil and Gas Center at Ernst & Young, Denis Borisov, each $10 decrease in the price of oil cuts the revenues of oil companies by about $2-$3 per barrel. “Last year Russia exported 237 million tons of oil, or 1.7 billion barrels, meaning that the country’s oil sector will lose about $4 billion per year for each $10 fall in price.” [Alexander Panin / Moscow Times]

The government skims a whopping 70% off the export revenues of oil companies through taxation, so you can see the number $80-$85 oil is doing on the budget and Russia’s finances in general.

--OPEC expects a sharp reduction in U.S. shale oil if the price remains below $85 a barrel. Newer shale oil developments are economic at $70 to $75 per barrel (West Texas Intermediate), according to Wood Mackenzie, a consultancy.

But OPEC still sees growing demand, and growing supply, worldwide, and it is not about to cut production when it meets in Vienna in a few weeks.

--Fiat Chrysler Automobiles, FCA, is spinning off the Ferrari division, as announced by CEO Sergio Marchionne. The move to list 10% of the shares next year would leave the remaining 90% to the group’s shareholders.

--HBO is laying off about 7% of its 2,400 employees, according to the Wall Street Journal. The cost-cutting plans were announced to employees on Tuesday. Parent Time Warner Inc. previously said it would eliminate 10% of the 15,000 employees at Turner Broadcasting, which includes CNN, TNT and TBS.

--There are reports Madison Square Garden Co. will split into two publicly traded entities, one for the Knicks, Rangers and MSG Network, and the other for the venue, which generates a lot of concert revenue, for starters.

Of course the Knicks could not suck more, and have sucked for years, so you’re on your own with this one. [Though they did beat the Cavaliers in LeBron’s return home on Thursday.]

But clearly, after CEO Jim Dolan saw what Steve Ballmer paid for the Clippers ($2 billion), he is banking on similar riches, for the basketball portion alone, while some say the arena, the busiest in the nation, is worth the same amount.

Famed money manager Mario Gabelli said MSG Network, which broadcasts the Knicks and Rangers games, is worth $4 billion.

So, on the news, MSG stock rose 11%.

--Terry Keenan passed away at the all too young age of 53. Keenan was a pioneering business journalist, getting her big break on Lou Dobbs’ CNN show, “Moneyline,” when it was the only competition for CNBC. She later worked for Fox News and then the New York Post. She’ll be missed.

--Amgen Inc., the biotech giant, is increasing the number of positions it is eliminating another 1,100 to about 4,000, or 20% of its global workforce. Hedge fund operator Daniel Loeb has been pressuring Amgen to do more, such as split the company in two, to boost shareholder value.

--In another prime example of how technology is killing jobs, the Lloyds Banking Group said Tuesday it would cut 9,000 jobs and close up to 150 branches over the next three years as more customers conduct their banking online or by mobile phone. [You will never get me to do either. I like my Wells Fargo tellers.]

--Oh, and Apple CEO Tim Cook says he’s “proud to be gay,” the first CEO of a Fortune 500 to make such a public announcement, though it had long been rumored this was the case. 

In an essay for BloombergBusinessweek, Cook wrote: “I don’t consider myself an activist, but I realize how much I’ve benefited from the sacrifice of others. So if hearing that the CEO of Apple is gay can help someone struggling to come to terms with who he or she is, or bring comfort to anyone who feels alone, or inspire people to insist on their equality, then it’s worth the trade-off with my own privacy.”

Foreign Affairs

Iraq/Syria/ISIS: In the strategic battle of Kobane in Syria, on the Turkish border, 160 Iraqi Kurdish Peshmerga fighters were allowed by Turkey to cross into Syria to help fight ISIS. The death toll in the battle is said to be more than 800, and the fighting has forced more than 200,000 to flee across the border into Turkey.

Turkey is now hosting 1.5 million Syrian refugees. President Tayyip Erdogan said the other day, “Where was the world when 300,000 people have been killed in Syria thus far? Why are they so keen on Kobane, but not on the whole of Syria? That’s a question to ask.”

I couldn’t agree more with Erdogan. After all, in 2012 I was writing we needed to work with him on a no-fly zone. We didn’t. We will pay the price for generations to come. 

Meanwhile, the al-Qaeda-linked Nusra Front and other Syrian rebel factions have been battling the Syrian government in the northwest, Idlib, in the biggest offensive on that city in two years. But as is so often the case here, both sides are claiming victory.

In Iraq, a suicide bomber killed at least 27 Shiite militiamen Monday outside the Iraqi town of Jurf al-Sakhar, while a car bomb in Baghdad killed 15. ISIS then slaughtered 228! Sunni tribesmen in Anbar who had sided with the Iraqi government against IS.

Iraqis are bracing for more sectarian attacks on Shiites, who are preparing for the religious festival of Ashoura, an event that defines Shiism and defines its split with the Sunnis.

[Actually, I was reading in the Daily Star that the festival commemorates the slaying of Prophet Mohammad’s grandson Hussein at the battle of Kerbala in 680 A.D.]

Remember, ISIS sees Shiites as infidels, while Iraqi Prime Minister Haider al-Abadi, a Shiite, must win over Sunnis, especially from Anbar province.

David Ignatius / Washington Post

“A glimpse of the anxiety sweeping the Arab world surfaced last week when an Arab woman complained during a talk in Amman at the Columbia Global Center for the Middle East. She said my speech’s title about the ‘crisis’ in the region wasn’t accurate. The correct word was ‘disintegration.’ The audience cheered loudly.

“The Arab world is suffering a sense of vertigo these days. Extremists from the Islamic State, who have seemingly arisen out of nowhere, have burst through the gates of power. Political elites are confused and frightened. They’re angry at the United States (as always). But at the same time, they want the United States to explain a strategy for combating a group that threatens every structure of stability, including borders.”

Lebanon: There is no doubt the civil war in Syria has come to Lebanon when one views the fighting in the country’s second city, Tripoli, with the Lebanese Army involved in battles with Sunni militants. At the same time, Sunni insurgents from Syria have been firing rockets into Lebanon in retaliation for the Lebanese Army’s operations in Tripoli. At least 30 have been killed in the fighting between the Army and jihadists and the Army pledged to press on with its offensive until all the militants are crushed.

Hizbullah leader Sheikh Nasrallah said last weekend, “There is a huge, dangerous plan to fuel strife that was being cooked in Tripoli and the north. We ask God to help [officials] and the military, security and political leaders to cooperate and collaborate to confront the threat of strife.” [Daily Star]

So in the above you see the battle lines. Hizbullah, supporters of Bashar Assad, which fought ISIS in Syria, will be helping the Lebanese Army fight ISIS and its acolytes at home as they begin to pour across from Syria. The Wall Street Journal reported U.S. intelligence officials are tipping off Lebanese law-enforcement bodies close to Hizbullah about threats posed to Beirut by the Nusra Front and parent al-Qaeda.

Iran: As the Nov. 24 deadline for an agreement on Iran’s nuclear program nears, there is growing speculation that Ayatollah Ali Khamenei, who underwent prostate surgery in September, is terminally ill. Photos were recently sent out, showing him resuming his weekly hikes in the hills surrounding Tehran, but it’s unclear if he is truly recovering, or on his last legs. He’s 75, and his death would set up one heckuva power struggle. As reported by Ramin Mostaghim of the Los Angeles Times, the Assembly of Experts, a council of clerics who appoint the supreme leader, is holding secret meetings in preparation for Khamenei’s departure.

As for the talks, expect a flurry of action right after Tuesday’s election, with the Obama administration appearing to make major concessions, which won’t go down well in Congress, let alone Israel. But I’m also guessing the talks get extended for another three months.

Separately, Iran caught major heat internationally for executing a woman who killed a man she said was trying to sexually assault her. The murder victim was a former employee of Iran’s ministry of intelligence.

Israel: The situation is heating up again here, and confrontation with the U.S. doesn’t help. In an article by Jeffrey Goldberg published in The Atlantic, Goldberg begins his essay thusly:

“The other day I was talking to a senior Obama administration official about the foreign leader who seems to frustrate the White House and the State Department the most. ‘The thing about Bibi is, he’s a chickens---,’ this official said, referring to the Israeli prime minister, Benjamin Netanyahu, by his nickname.

“This comment is representative of the gloves-off manner in which American and Israeli officials now talk about each other behind closed doors, and is yet another sign that relations between the Obama and Netanyahu governments have moved toward a full-blown crisis. The relationship between these two administrations – dual guarantors of the putatively ‘unbreakable’ bond between the U.S. and Israel – is now the worst it’s ever been, and it stands to get significantly worse after the November midterm elections. By next year, the Obama administration may actually withdraw diplomatic cover for Israel at the United Nations, but even before that, both sides are expecting a showdown over Iran, should an agreement be reached about the future of its nuclear program.

“The fault for this breakdown in relations can be assigned in good part to the junior partner in the relationship, Netanyahu, and in particular, to the behavior of his cabinet. Netanyahu has told several people I’ve spoken to in recent days that he has ‘written off’ the Obama administration, and plans to speak directly to Congress and to the American people should an Iran nuclear deal be reached. For their part, Obama administration officials express, in the words of one official, a ‘red-hot anger’ at Netanyahu for pursuing settlement policies on the West Bank, and building policies in Jerusalem, that they believe have fatally undermined Secretary of State John Kerry’s peace process.”

So why the use of the term chickens---? An official told Goldberg, “The good thing about Netanyahu is that he’s scared to launch wars. The bad thing about him is that he won’t do anything to reach an accommodation with the Palestinians or with the Sunni Arab states. The only thing he’s interested in is protecting himself from political defeat. He’s not [Yitzhak] Rabin, he’s not [Ariel] Sharon, he’s certainly no [Menachem] Begin. He’s got no guts.”

Well, I’ve written over the years the main criticism of Netanyahu, who I’ve called the smartest man in the world (and I stand by that), is that he’s afraid to pull the trigger (which others would call just being responsible).

But I disagree he isn’t willing to reach an accommodation with the Sunni Arab states. I do agree, though, that today there is zero chance of accommodation with the Palestinians for one simple reason...how can you deal with Hamas, part of the Palestinian government, which seeks your destruction?

Isi Leibler / Jerusalem Post

“(The Obama administration has been acting vindictively) because Israel has dared to reject its diktats. Nothing illustrates President Obama’s contemptuous attitude toward Israel more than his directive to withhold arms to Israel during wartime because Israel had rejected Kerry’s initiative to engage Qatar as the mediator to end the Gaza hostilities.

“As virtually every foreign policy initiative by Obama has proven to be disastrous, his recommendations or directives must be viewed with skepticism. After all, it is we who will have to live with the consequences.

“This administration adamantly insists that the Israel-Palestine status quo is untenable. Yet it remains silent as Hamas boasts of efforts to restore its tunnel network; barely reacts to the mayhem in Syria and Iraq where close to a quarter million people have been butchered; ignores the Qatari funding of Hamas and other terrorist entities including Islamic State; fails to castigate Turkish President Recep Tayyip Erdogan for enabling jihadists to traverse Turkey’s territory to fight in Syria, while standing by and allowing the massacre of the Kurds on his border.

“Palestinian Authority President Mahmoud Abbas humiliated the U.S. administration by merging with Hamas without prior consultation. But the U.S. failed to criticize this move, has not responded to Abbas’ stated policy of ethnic cleansing, nor condemned him for executing any Palestinian found selling land to an Israeli.

“The U.S. did not reprimand him for failing to denounce the act of terror in which a baby and a young woman were killed last week in Jerusalem. Yet when an Arab teenager was shot to death while hurling potentially lethal firebombs at Israeli automobiles, the U.S. immediately conveyed its condolences to the family and urged Israelis to initiate an investigation.

“Israel, the principal regional ally of the U.S., is the only country consistently facing criticism and has become the punching bag for the inept Obama administration, even being denunciated for opposing a nuclear agreement with the Islamic Republic of Iran. Only recently, Kerry again conveyed to an Arab audience the absurd allegation that the Arab-Israel conflict fanned IS and Islamic extremism. Yet the U.S. assiduously avoids condemning or responding to rogue states guilty of criminal bloodletting, out of fear of being further humiliated and exposed as lacking leadership.”

As for Netanyahu himself, responding to U.S. and EU criticism of plans to move forward with another 1,000+ units in Jerusalem, the prime minister said, “I heard the claim that our building in Jewish neighborhoods in Jerusalem makes peace more distant, but its the criticism itself that makes peace more distant,” as it is “detached from reality” and feeds false Palestinian hopes.

In a speech to parliament, Netanyahu said: “The French build in Paris, the English build in London, and the Israelis build in Jerusalem. Why come and tell the Jews not to live in Jerusalem? Because it will heat up the atmosphere? We are building like we’ve built since the establishment of the state....Violence is not the result of building in Jerusalem.” [Wall Street Journal]

U.S. State Department spokeswoman Jen Psaki said: “We view settlement activity as illegitimate and unequivocally oppose unilateral steps that prejudge the future of Jerusalem. Israel’s leaders have said they would support a pathway to a two-state solution, but moving forward with this type of action would be incompatible with the pursuit of peace.”

Also in response to the Israeli move, Jordan’s ambassador to Israel said, “All such acts are incompatible with international law and international humanitarian law and if allowed to continue will ultimately imperil the (20-year-old peace) treaty between the two nations.”

Then you had Wednesday’s assassination attempt against Yehuda Glick, a prominent Israeli-American right-wing activist who has called for more access to the Temple Mount, where Al Aksa Mosque is and which is administered by Muslim authorities. Glick was shot and seriously wounded by a lone gunman on a motorcycle. Israeli police then shot and killed a Jerusalem resident responsible for the shooting, with an Israeli police spokesman saying the man was “an active terrorist who was involved in a number of previous incidents." [Jerusalem Post]

Egypt: The National Defense Council declared a three-month state of emergency in areas near the Israeli border and Gaza Strip following a coordinated attack by militants on an Egyptian army checkpoint last weekend that killed 31 soldiers, the deadliest single attack on the military in decades. 

President Abdel al-Sissi vowed the Army would take “revenge for the shedding of dear blood.”    He added, “Egypt is fighting a war of existence.”

Egypt is considering evicting people living in small northern Sinai villages that are considered the “most dangerous” militant bastions and declaring certain areas to be closed military zones.

Since Islamist President Morsi was deposed, jihadists in the peninsula have killed scores of policemen and soldiers. The attacks have also dealt a further blow to tourism in the area.

Russia/Ukraine: The two sides reached agreement on restoring natural-gas exports to Ukraine, just as winter is about to hit, all while pro-Russian rebels have been stepping up attacks on government forces. The European Union, which brokered the deal, at the same time blasted Russian Foreign Minister Sergei Lavrov for recognizing separatist elections planned for Nov. 2 in Ukraine’s rebel-held territories.

This situation is so mucked up, though I readily admit 0.04% of Americans probably have a clue, let alone understand what Russia has done this year in blatantly seizing large swaths of Ukraine, or its actions in and near the Baltics, and Poland’s fears of an invasion.

But for now, at least Ukrainians might not freeze to death, as Kiev agreed to pay $3.1 billion to Russia by the end of the year, a down payment on the $5.3 billion it owes Russian energy giant Gazprom. $1.45 billion is to be paid within days.

On Thursday, seven Ukrainian soldiers were killed as fighting at Donetsk Airport intensified again.

As for the recent Ukrainian parliamentary elections, pro-European parties won enough seats for a 2/3s majority.

Meanwhile, Russian warplanes have been carrying out exercises in European airspace at an increasing rate and what is even more disturbing is the pilots aren’t communicating with air traffic controllers, which is highly confrontational and dangerous for commercial aircraft as flight plans aren’t being filed. NATO has spoken of an “unusual” increase in such flights just this week.

As one expert, Igor Sutyagin, told BBC News, Russia is “trying to intimidate the West and raise fears.”

There is also growing speculation that recent tensions with Russia will force Finland and Sweden to join NATO.

Mark Seip (senior fellow at the Atlantic Council) / Defense One

“The U.S. footprint in Europe once numbered over 250,000 troops, but now only 30,000 remain within two combat brigades, U.S. battle tanks number in the dozens where they once numbered in the hundreds, and F-15 fighter aircraft reductions are scheduled for later this year. Meanwhile, European states have cut almost 160,000 troops since 2010. Great Britain, the second-largest military force in NATO after the United States, is cutting 30,000 personnel for an end-strength of 147,000 by 2020.

“Russia by comparison has 130,000 troops near its European border alone, plus approximately 700 aircraft, 1,200 tanks, and large numbers of heavy mechanized equipment, according to an International Institute of Strategic Studies report. During the height of the crisis in Ukraine, Putin mobilized as many as 150,000 soldiers along the border within weeks to demonstrate his resolve. President Barack Obama’s response: mustering a 700-person company to the Baltics.”

Last Friday, Putin declared, “the Cold War is over. But it did not end in peace.”

Seip:

“His desire to reassert Russian dominance is clear and Russia is once again a distinct threat on NATO’s doorstep. Despite sanctions and pointed diplomatic language, it continues to harass those in its neighborhood, creating tension and doubt among allies and partners. An aversion to a new Cold War should not equal a lack of firm, credible action in the face of unchecked aggression. Therefore, the leaders of the United States and Europe must show the political will to commit greater forces now to NATO’s eastern European members.”

For its part, Poland is moving thousands of troops toward its eastern borders. Defense Minister Tomasz Siemoniak said, “The geopolitical situation has changed, we have the biggest crisis of security since the Cold War and we must draw conclusions from that.”

I posted excerpts of Vladimir Putin’s Oct. 24 speech on my “Hot Spots” link. I urge you to read it, as Putin talks of the United States supporting “dubious” groups ranging from “open neo-fascists to Islamic radicals.” Putin argued the United States wants a unipolar world where its interests go unchallenged.

Cliff Kupchan, chairman of the Eurasia Group, told the New York Times, “I think it is on a new level of acrimony. I think this is a genuine message that ‘Enough is enough, and I don’t like being grouped with Ebola and I don’t like these sanctions.’”

China: Beijing has warned Hong Kong delegates to the nation’s top political advisory body that they can “say freely whatever they want,” but they cannot call for Hong Kong’s CEO to resign or criticize local government in a manner that is not “constructive.”

On the defense front, the Wall Street Journal’s Jeremy Page had an extensive report on China’s new nuclear-missile capable submarines that are altering the strategic balance in the region.

Soon China will be launching a new type of sub – a “boomer,” carrying nuclear missiles that will have the range to hit Hawaii and Alaska from East Asia and the continental U.S. from the mid-Pacific.

“This is a trump card that makes our motherland proud and our adversaries terrified,” China’s navy chief wrote in a Communist Party magazine in December.

Jeremy Page:

“China’s nuclear attack subs...are integral to what Washington sees as an emerging strategy to prevent the U.S. from intervening in a conflict over Taiwan, or with Japan and the Philippines.”

On the pollution front, Beijing has been under siege for weeks. Two weeks ago they ran the Beijing Marathon in heavy, dangerous smog, much to the consternation of health officials and runners, and this week you had the case of a Beijing-bound passenger plane that diverted because of smog, yet Chinese aviation authorities refused permission to land by two alternative airports and the plane ran dangerously low on fuel, as it later emerged. It was finally forced to circle Beijing for 40 minutes before pilots declared an emergency as the plane flew to Qingdao airport.

Beijing is hosting a big Apec summit and it has revived anti-pollution measures used for the 2008 Olympics.

North Korea: As the charm offensive in the North Korean press continues, with lots of photos of a smiling Kim Jong-un, who has emerged, at least in print, from isolation, South Korean intelligence is convinced Kim had surgery to remove a cyst from his ankle. An intelligence official told the BBC Kim was treated by a European medical team, but wouldn’t identify the  country.

Meanwhile, speaking to reporters at the Pentagon, Gen. Curtis Scaparotti, commander of U.S. forces on the Korean peninsula, said North Korea is capable of building a miniaturized nuclear warhead; if true, a needed development on the way to a ballistic nuclear-tipped missile. He also said Kim Jong-un “is clearly in control of the country.”

Tunisia: A secularist party won the most seats in the country’s parliamentary elections, with the governing Islamist party taking second. A coalition government between the two is likely to be the result.

Brazil: Dilma Rousseff scored a narrow 51.6 to 48.4 victory over challenger Aecio Neves in Brazil’s presidential run-off on Sunday. The nation is more divided than ever, with an economy on life support and a corruption scandal involving its biggest company, state energy giant Petrobras.

Random Musings

--Charles Krauthammer / Washington Post

“Is this election really about nothing? Democrats might like to think so, but it’s not.

“First, like all U.S. elections, it’s about the economy. The effect of the weakest recovery in two generations is reflected in President Obama’s 13-point underwater ratings for his handling of the economy.

“Moreover, here is a president who proclaims the reduction of inequality to be the great cause of his administration. Yet it has radically worsened in his six years. The 1 percent are doing splendidly in the Fed-fueled stock market, even as median income has fallen.

“Second is the question of competence. The list of disasters is long, highlighted by the ObamaCare rollout, the Veterans Affairs scandal and the pratfalls of the once-lionized Secret Service. Beyond mere incompetence is government intrusiveness and corruption, as in the overreach of national security surveillance and IRS targeting of politically disfavored advocacy groups.

“Ebola has crystallized the collapse of trust in state authorities....

“Obama’s clumsy attempt to restore confidence by appointing an Ebola czar has turned farcical....

“Most voters don’t care about the details of Ukraine, the factions in Libya or the precise battle lines of the Islamic State. But they do have a palpable sense of American weakness....

“The stage is set for a major Republican victory. If they cannot pull it off under conditions so politically favorable, perhaps they might consider looking for another line of work.”

--So regarding the mid-term elections, most Republicans seem to think the race to take back the Senate is a lock, albeit that Republicans end up with just 51 or 52. Senate races in the likes of Alaska, Georgia and Iowa are too close to call and a lot can happen even over the weekend, and Monday, to change sentiment. 

It’s also a case where Republicans have been exceedingly cautious, and it’s not like they have given the electorate a compelling reason to vote for them.

But according to a new Washington Post/ABC News poll, as reported by Dan Balz and Peyton M. Craighill, “Driving attitudes is a pervasive sense of a nation in trouble. Overwhelming majorities say the country is badly off track and give the economy negative ratings. Economic expectations are little better today than they were at this time four years ago....

“The survey highlights that there is less interest in this midterm campaign than there was in the 2010 and 2006 elections....

“(But) Republicans appear to have more enthusiasm about voting, based on those who say they are certain to vote. And more people who voted for Republican presidential nominee Mitt Romney in 2012 say they are closely following the midterms, compared with those who say they voted for Obama. Democrats are hoping to counter that enthusiasm gap with a get-out-the-vote operation that is aimed at persuading sporadic voters to cast ballots.”

The survey also found that in nine states with competitive Senate races [Alaska, Arkansas, Colorado, Georgia, Iowa, Kansas, Louisiana, New Hampshire and North Carolina] 57% of voters express a preference for Republicans in the House elections, compared with 39% for Democrats. 

The Post/ABC survey also has Obama’s overall job approval rating at 43%, up 3 points from two weeks ago but not statistically significant. His disapproval remains unchanged at 51%.

Of course some of us got a kick out of Obama’s statement in an interview the other day with Al Sharpton wherein the president said, he may not be running but his “policies are on the ballot.” Further, on the issue of Democratic candidates distancing themselves from him, Obama said he’s not hurt because they’re all “folks who vote with me. They have supported my agenda in Congress.”

As Peggy Noonan observed in her Wall Street Journal op-ed: “That’s what their Republican opponents accuse them of. That’s why they’re struggling! Talk about throwing the drowning man an anvil.”

--Speaking of Sharpton...Heather MacDonald / Wall Street Journal:

“The Rev. Al Sharpton once epitomized New York’s bad old days of the 1980s, when the then-corpulent, gold-medallion-bedecked tub thumper inflamed racial hatred and courted violence. Today, against all expectations and at least 100 pounds lighter, he has been rehabilitated into the Democratic Party’s civil-rights leader of choice. Has Mr. Sharpton changed or simply outlasted his critics?

“President Obama’s embrace of Mr. Sharpton has been particularly intense this year. On Monday he called Mr. Sharpton’s radio show to discuss the Nov. 4 elections. In April the president appeared at a political rally organized by Mr. Sharpton’s National Action Network. Mr. Obama’s closest adviser, Valerie Jarrett, conferred with Mr. Sharpton in August about the police killing of an unarmed black teenager in Ferguson, Mo., as Mr. Sharpton led protests against the Ferguson police.”

But then there’s the partnership between New York City Mayor Bill de Blasio and Sharpton. “The mayor’s alliance with the racial provocateur is now creating the biggest crisis of his mayoralty,” writes MacDonald.

“So far Mr. de Blasio is pretending not to notice. As the crisis escalated, involving a former Sharpton aide now working for the mayor’s wife, Mr. de Blasio ladled on the praise at the Four Seasons. ‘Al Sharpton has been a blessing for this city,’ the mayor enthused. ‘He’s been a blessing for this nation. And the more people criticize him, the more I want to hang out with him. Because a lot of times, just look who’s doing the criticizing and the way they’re saying it – it makes you realize the Rev must be doing something right. You know, sometimes, your enemies are the best endorsers of the righteousness of your actions.’”

I won’t rehash for the umpteenth time Sharpton’s being a “blessing,” from Tawana Brawley forward as MacDonald does in her piece. It’s just beyond belief that the likes of Obama and de Blasio worship at the Rev’s altar.

I mean it’s enough to make you sick...but over time, the relationship with Sharpton will bring de Blasio down. As for Obama, nothing we can do about it. He’s no longer on the ballot.

--New Jersey Gov. Chris Christie once again made an ass of himself in taking down a protester at the Jersey Shore on Wednesday, telling the sign holder to “shut up!” and other stuff, as is Christie’s wont. 

Earlier a Stockton Polling Institute survey found that Christie and President Obama both garnered only 43% approval ratings from likely New Jersey voters. 56% gave Christie a fair or poor job rating, and 57% gave Obama the same.

--A report from the Pew Internet and American Life Project revealed that more than 60% of technology experts interviewed for the study expect a major cyberattack between now and 2025 that will be large enough to cause “significant loss of life or property losses/damage/theft at the levels of tens of billions of dollars.”

Others, though, believe the preoccupation with cyberattacks is more about hyping product from software merchants, looking to take advantage of public anxiety against an eternally unconquerable threat.

As reported by Patrick Tucker of Defense One:

“A key concern for many of the experts Pew interviewed is infrastructure, where very real vulnerabilities do exist and are growing. Stewart Baker, former general counsel for the National Security Agency and a partner at Washington, D.C.-based law firm Steptoe & Johnson told Pew, “Cyberwar just plain makes sense. Attacking the power grid or other industrial control systems is asymmetrical and deniable and devilishly effective. Plus, it gets easier every year. We used to worry about Russia and China taking down our infrastructure. Now we have to worry about Iran and Syria and North Korea. Next up: Hizbullah and Anonymous.”

Rep. Mike Rogers, R-Mich., chairman of the House Intelligence Committee, said private businesses were increasingly asking government to take action. “Most of the offensive talk is from the private sector, they say we’ve had enough.”

Stowe Boyd, lead researcher for GigaOM Research, say the growing capabilities of the likes of China promise the potential for attacks of growing international importance.

“A bellicose China might ‘cyber invade’ the military capabilities of Japan and South Korea as part of the conflict around the China sea, leading to the need to reconfigure their electronics, at huge cost. Israel and the United States have already created the Stuxnet computer worm to damage Iran’s nuclear refinement centrifuges, for example. Imagine a world dependent on robotic farm vehicles, delivery drones, and AI-managed transport, and how one country might opt to disrupt the spring harvest as a means to damage a neighboring opponent,” Boyd said.   [Patrick Tucker]

--We note the passing of Boston’s longest-serving mayor, Thomas Menino, 71. The Democrat served five terms, but due to failing health didn’t seek re-election a year ago. He did a good job, by all accounts, and once said, “I have no other ambition. I don’t want to be governor or anything else. I like being mayor.”

--I stumbled on this op-ed by Sam de Brito in the Sydney Morning Herald titled “We’re living in a First World bubble.”

In part:

“A common criticism of our political leaders is they’re ‘out of touch’ with the general public yet, if you examine the preoccupations of average Australians, they suggest we’re the blinkered ones.

“As forces both destructive and constructive, powerful almost beyond comprehension, roil across the globe – be they religious, geopolitical, environmental or technological – the unruly rump of our population is more focused on silly TV shows, sport, their smartphone, sandwich fillings and property prices.

“Why? Because this is their defining reality, living in the gilded First World bubble enveloping this country....

“When we do get angry, it’s not about people starving or going insane in offshore detention – it’s over a poorly phrased tweet on Q&A, a stupid T-shirt in Woolworths or bicycle lanes....

“We have access to more information than ever, yet the majority of us remain willfully ignorant of the forces shaping the headlines – power and money – and the inescapable fact that – on a world level – we’re the fattest, smuggest cats of all.

“The concept of the ‘global village’ we’ve been sold since the ‘60s seems rather farcical when a good slice of its population never even bother to look out their window.”

--Can’t say I’m a big Johann Sebastian Bach fan...being partial to Tchaikovsky, Rachmaninoff and Chopin, if given a choice...but according to a new documentary, Bach’s wife, Anna Magdalena, deserves credit for composing some of her husband’s greatest works, not the big guy.

As reported by Kate Seamons of Newser and USA TODAY, “Music professor Martin Jarvis, whose authorship suspicions were first aroused more than three decades ago, describes the evidence as ‘circumstantial’ but ‘strong.’”

Anyway, some of ‘Bach’s’ works are quite different from his other works from a structural and technical perspective. In fact, one of the manuscripts actually has on one page “written by Mrs. Bach” in French.

Zut alors! Sorry to ruin your day. I’m back to Rachmaninoff’s Piano Concerto No. 2. 

---

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

God bless America.
---

Gold closed at $1171...lowest weekly close since April 2010
Oil $80.54...lowest weekly close since June 2012

Returns for the week 10/27-10/31

Dow Jones +3.5% [17390]
S&P 500 +2.7% [2018]
S&P MidCap +3.0%
Russell 2000 +4.9%
Nasdaq +3.3% [4630]

Returns for the period 1/1/14-10/31/14

Dow Jones +4.9%
S&P 500 +9.2%
S&P MidCap +5.7%
Russell 2000 +0.9%
Nasdaq +10.9%

Bulls 47.0
Bears 16.3 [Source: Investors Intelligence]

Have a great week. I appreciate your support.

Brian Trumbore



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-11/01/2014-      
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Week in Review

11/01/2014

For the week 10/27-10/31

[Posted 10:30 PM ET, Friday]

Edition 812

Washington and Wall Street

Two weeks ago the U.S. stock market nearly hit the official correction level of 10%, with the Nasdaq reaching it on an intraday basis, but in the ensuing period the Street has staged its biggest two-week rally in ages, with the Dow Jones and S&P 500 hitting new highs, Friday, owing to solid fundamentals and massive short-covering, along with a major gift on Friday, the announcement that the Bank of Japan was not only expanding its unprecedented monetary-stimulus program, but it was going to purchase large amounts of overseas stocks and bonds, along with the domestic variety, for its Government Pension Investment Fund, which further juiced both Wall Street and bourses around the world. Tokyo’s Nikkei stock index soared 4.8% in approval. More on Japan in a bit.

As for U.S. economic fundamentals, September durable goods (big-ticket items) fell 1.3%, worse than expected, and September consumption (consumer spending) unexpectedly declined 0.2% when an increase had been forecast, while personal income for the month rose a less than expected 0.2%. 

The big data points, however, were very positive; the prime mover being an initial reading on third-quarter GDP that came in at a better than expected 3.5% when economists were calling for 3.0%. Coupled with a final reading of 4.6% for the second quarter, the back-to-back performance is the best since the final six months of 2003. Granted, all of us recognize the U.S. economy is not just the raw data, it’s about individual lives and median income that has been falling while the 1% reaps the benefits of record asset prices. Otherwise, a majority of Americans would be giving President Obama good marks on his handling of the economy, rather than the reality that most grade him poorly heading into next week’s mid-term elections.

Separately, the S&P/Case-Shiller home price index for August showed prices rose 5.6% year over year for the 20-city index, vs. July’s up 6.7%, which is actually a good thing. The slowdown in price appreciation continues, which, coupled with low mortgage rates (still just 4.00%, or slightly below, on a 30-year fixed) make housing more affordable. If you can get a mortgage, which is an ongoing issue. [For the record, home prices rose the most in Miami, up 10.5% in Aug., y/y, and 10.1% in Vegas.]

You also had the release, Friday, of a Chicago purchasing managers index for October and its 66.2 reading not only exceeded expectations, but it was the best in 12 months.

And corporate profits for the third quarter continue to be generally solid, with earnings tracking to be up about 6%+ for S&P 500 companies; revenues up 4%.

Then there is the Federal Reserve, which closed the books on its latest round of bond-buying, quantitative easing, or QE3, at the Open Market Committee meeting this week, but in doing so it released a confusing statement in terms of gleaning future Fed moves on interest rates.

On one hand the Fed offered, “There has been a substantial improvement in the outlook for the labor market since the inception of [the] current asset-purchase program. Moreover, the [Fed] continues to see sufficient underlying strength in the broader economy to support ongoing progress toward maximum employment in a context of price stability.”

The fed noted “solid job gains” and that labor-market slack is “gradually diminishing,” so you’d read all that and think, hey, the boys and girls are going to hike interest rates sooner than the market currently expects, which is second half of next year, at the earliest.

But then the Fed left in language in its statement that it would keep short-term interest rates near zero for a “considerable time.”

Clearly they can’t have it both ways. We just had two very solid GDP readings and the labor market is indeed firming. I still expect wage gains to follow in short order and the Fed to be left with its pants down as the bond market reacts long before it does (which won’t be good for equities when this happens).

But in the meantime, enjoy the ride. I haven’t been a bear, though I did forecast minimal losses of 2% to 5% for the major indexes this year and as of two weeks ago that looked pretty good. Now I’m back to drinking domestic, while my Japanese friends, after their Friday surge, should be quaffing Kirin, the ‘premium’ domestic over there. But I digress.

Yes, fret not because the Fed put in its statement that “If incoming information indicates faster progress toward the Committee’s employment and inflation objectives than the Committee now expects, then increases in the target range for the federal funds rate are likely to occur sooner than currently anticipated.

“Conversely, if progress proves slower than expected, then increases in the target range are likely to occur later than currently anticipated.”

Even Jameis Winston can read between the lines. If the economy suffered a slowdown for a number of reasons, like a European economy that tips back into recession, punk economic activity in China and Japan, a Russian invasion of a Baltic nation or ISIS taking Baghdad, QE4 would save the day for equity holders.

Editorial / Wall Street Journal

“The best case for QE, when it began amid the financial panic of late 2008, was as an extraordinary tool to provide liquidity and restore confidence. That was needed at the time, and we supported it.

“The evidence of QE’s benefits in its second and third iterations is far more speculative and its full costs still aren’t clear. Those won’t be known until the Fed winds down its balance sheet, if it ever does, and until we see how markets and the economy respond to rising interest rates. For all the market’s anxiety about the end of QE, it seems to be ending without a stir. Maybe that’s because it was never as helpful as advertised.”

Europe and Asia

Across the pond, I get a kick out of those who say the numbers in Europe are improving. I don’t know what the heck they’re looking at but if you want to say in some respects the eurozone is stabilizing, yeah, I guess... stagnation, with a highly disconcerting sidebar I’ll get into in a moment.

But before looking at the bank stress test results from the ECB (and European Banking Authority), Eurostat, the statistical arm of the European Union, said the unemployment rate for the EA18 was the same 11.5% in September as it was in August, which is also just down a smidge from September 2013’s 12.0%, so virtually zero progress on this front.

You still have France at 10.5%, unchanged month over month; Italy, up to 12.6%; Spain at 24.0%, down from 24.2%; and Greece, 26.4% (July...two month lag here).

And the youth unemployment rate remains staggeringly high in Italy (41.8%), Spain (53.7%) and Greece (50.7% / July)

Bottom line, compare the 11.5% for the eurozone with the 5.9% here and it’s yet another reason why investor funds have been flowing to the U.S., much of it from Europe.

A flash reading from Eurostat on October inflation was also released, up 0.4%, annualized, vs. 0.3% in September, while the core rate ticked down from 0.8% to 0.7%. So deflation remains a topic at the top of the list at the European Central Bank. With no domestic demand, there is no pricing power.

Separately, Germany’s business sentiment reading, the Ifo Institute index, fell a sixth month to the lowest reading since Dec. 2012, while September retail sales fell 3.2% over August (though up 2.3% year over year).

Chancellor Angela Merkel also has a problem on her hands with the labor unions and she is proposing legislation that would seriously curb the powers of the smaller ones that can wreak havoc on the economy. The number of companies hit by job actions has been soaring. The unions say they need wage gains to make up for stagnating household incomes, while the companies argue, how the heck can we pay higher wages when the economy is nearing recession?

What happens in Germany is that a smaller union, say for Lufthansa, can have the same impact as the biggest union for the airline and Merkel wants to limit future wage talks to the biggest union for each group of employees, while also giving the courts more power to intervene in disputes. [Bloomberg]

Elsewhere, Italy’s Prime Minister Renzi is counting on the Italian 10-year bond staying well below a target of 2.70% in order to bring down his country’s sky-high debt, second-largest in Europe and 130% of GDP.

Italy’s budget is pegged to this bond level and with the economy back in recession, it desperately needs growth. This week the Italian bond closed at 2.35% on the feeling the ECB will backstop it, but, again, you still need growth and none is to be found here. This is the key bond market to watch the next 12 months.

Speaking of bonds, Greece’s 10-year soared back to 7.87% from 7.13% last week due to continued domestic political volatility. It’s going to be this way until February, at which point the ruling government of Prime Minister Samaras needs to show it has a super majority in parliament in order to avoid snap elections in March that would virtually guarantee a Socialist victory for the Syriza party. Right now, Samaras is about 30 seats short of the goal.

It’s all about the potential for busting the budget and the fragile fiscal gains Greece has made under its bailout.

As for the bank stress tests, talk about a lot of nothing. The European Central Bank, which is taking over as supervisor Nov. 4 from the individual country’s for the eurozone’s largest banks, said 25 of 130 it examined failed a stress test, though only 13 had not raised enough further capital from January until September this year. Four were in Italy, two in Greece, and two in Slovenia, with the others scattered about.

The stress tests looked at what was on the banks’ books as of the close of 2013 to see if they had ample capital to survive a crisis that would have Europe’s economy falling 7% below current forecasts, with unemployment rising to 13%, which some argue isn’t that severe a test in the first place, but, whatever. There simply wasn’t anything earth-shattering in the exercise, ditto that held by the European Banking Authority, which used to be the official supervisor and which looked at non-eurozone banks as part of its own exercise. [The EBA passing all four big British banks – Barclays, HSBC, Lloyds Banking Group and Royal Bank of Scotland – for example.]

Did all this remove a cloud of mistrust, as the New York Times’ Jack Ewing put it, “that has impeded lending in countries like Italy and Greece and left the eurozone struggling to avoid lapsing back into recession”? [My question, not Mr. Ewing’s.] Did the central bank make it easier for the bigger banks to now feel comfortable lending to the critical small- and medium-sized business sectors?

I doubt it. Like take Spain. Prime Minister Mariano Rajoy was ecstatic on Sunday after all its major banks passed the test. I mean, c’mon. Yes, Spain has made progress and has instituted some reforms, but there was no country in Europe with more bad loans on its books due to the housing bubble than this place and you can’t tell me Madrid cleaned up the corruption between the banks, developers and local governments. I was writing about this garbage going back to 2005 and I just don’t believe the balance sheets here are now pristeen.

Following are some thoughts from an Economist editorial, looking at Europe and the eurozone writ large.

“Optimists, both inside and outside Europe, often cite the example of Japan. It fell into deflation in the late-1990s, with unpleasant but not apocalyptic consequences for both itself and the world economy. But the eurozone poses far greater risks. Unlike Japan, the eurozone is not an isolated case: from China to America inflation is worryingly low, and slipping. And, unlike Japan, which has a homogenous, stoic society, the euro area cannot hang together through years of economic sclerosis and falling prices. As debt burdens soar from Italy to Greece, investors will take flight, populist politicians will gain ground, and – sooner rather than later – the euro will collapse.”

Editorial / Wall Street Journal...on Italy’s issues...

“Italy’s labor-market rules have remained largely unreformed since the modern Italian state was established. Spread over some 2,700 pages, the labor code divides the labor force into two parts. Older workers benefit from the full weight of the law, including ironclad protections against being laid off, fired or disciplined, whether for performance or economic reasons. That leaves the remainder of the work force, predominately young, to make do with temporary, freelance and other forms of itinerant work.

“Then there is the Cassa Integrazione Guadagni. Under this income-assistance scheme, businesses that need to downsize can put some workers on ‘standby,’ and the government will cover a significant share of the normal salary until the company can hire back the worker. The program strains the state’s budget, discourages workers from seeking other jobs, and prevents struggling companies from downsizing to stay competitive.

“Need to fire a worker for poor job performance? To do so, businesses must persuade a judge that no alternative short of termination was available – a process of administrative hearings and litigation that can take months and drain company resources. The World Economic Forum in its 2014-15 assessment of labor-market efficiency ranked Italy 141 out of 144 countries for hiring and firing practices, just above Zimbabwe.”

Finally, three stories from different sources that I collected this week point to the trouble now beginning to boil over in Europe.

Sydney Morning Herald / AFP

“Police in Germany used water cannons and pepper spray against protesters after a demonstration organized by far-right groups in the western city of Cologne turned violent on Sunday.... [Ed. I love Cologne...and it’s one of the places with great Christmas markets that I’m warning are a prime terror target this year.]

“About 2,000 people had massed in the heart of Cologne’s historic center for a demonstration ostensibly aimed against Islamic extremism. It was organized by neo-Nazi groups and members of Germany’s football hooligan scene.

“German news agency dpa reported that some protesters were heard chanting ‘foreigners out.’”

Irish Independent

“Three families had to be evacuated from a house in Waterford last night after protesters descended on their home and kicked in a door and all the downstairs windows.

“More than 200 protesters gathered...after a rally organized on Facebook turned ugly.

“The demonstrators targeted a group of 30 people from the local Roma community who were being blamed for a series of alleged crimes in the area....

“Solicitor Gareth Noble told independent.ie that tension has been building in Waterford recently, with anti-Roma Facebook pages being created.”

Maia de la Baume / New York Times...on tensions in Calais, France...

“(Charles Dufeutrelle’s) frustration reflects the resentment and fear that have swept Calais in the last year, along with a new wave of migrants hoping to cross illegally to Britain, which they see as a better place than France to start a new life. The migrants began squatting in vacant buildings and took over shelters in the city center, angering residents and drawing warnings from the local authorities that they could lose control of portions of the city.

“Many people here fear devastating repercussions for Calais, which is already suffering from 16 percent unemployment, one of the highest rates in France. Anti-migrant sentiment here has buoyed far-right groups like the National Front party, whose support surged in elections for the European Parliament this past spring.

“The National Front’s leader, Marine Le Pen, visited Calais on Friday to denounce what she called the ‘scandalous carelessness’ of the government in a city where ‘there is nothing left but survival of the fittest, violence.’....

“ ‘The discontent has turned into a real psychosis,’ said Emmanuel Agius, the deputy mayor of Calais and a member of the conservative Union for a Popular Movement party. ‘The migrants of today no longer fear breaking the laws.’...

The migrants, numbering 2,200 to 2,300 around the city, are mostly men from Afghanistan, Egypt, Eritrea, Ethiopia, Sudan and now Syria. One local police officer said “80 crimes had been reported in the city this summer involving migrants, up from six a year ago.”

A guard at the city’s cemetery padlocked the restrooms after he saw groups of migrants from a nearby camp using them.

So above you have three distinct snapshots of one of the huge underlying issues facing Europe these days. It can turn explosive in a heartbeat. And it’s the last thing the continent needs as it seeks economic growth, while in the eastern part of Europe, they cast a wary eye to the horizon. Mordor and Vladimir Putin.

---

Turning to Asia, China clearly has a problem with fake invoicing again and accurate trade figures between the mainland and Hong Kong, while the government announced it backs growth in the housing sector for the first time in years as stimulus, after encouraging a cooling down of the bubble.

But in Japan, first you had a slew of data. September retail sales rose 2.7% over August, which had risen 1.9%, so this is better following the crash precipitated by April’s 3% sales-tax hike. Industrial production in the month also rose 2.7% over August, but was down 1.9% for the third quarter after a 3.8% decline in the second.

But in a further sign of how far Prime Minister Shinzo Abe’s economic policies have to go, household spending in September fell 5.6% year over year, while September core inflation rose just 1.0%, well below the 2.0% target set by the government and the Bank of Japan.

So with all that as backdrop, as noted up above, the BoJ decided to act in a bold way, raising the annual target for enlarging the monetary base to 80 trillion yen ($724 billion), up from 60 to 70 trillion, while greatly expanding its asset purchases, both foreign and domestic.

Cue U2... “It’s a beautiful dayyyyyyyyyyyyyy!!!”

At the same time, though, the Bank of Japan, specifically Governor Haruhiko Kuroda, is telling Prime Minister Abe he must go ahead with a further 2% hike in the sales tax (value-added tax if you prefer) from 8% to 10% October 2015, saying that failure to do so would severely hurt confidence in the fiscal sustainability of Japan which, in case you forgot, has the highest debt in the solar system.

Ebola

I have consistently said the issue of Ebola is not here, but at the source in West Africa, so while some U.S. governors battle it out with the White House, and the courts, on policy and how to handle returning healthcare workers, I remain focused on the epidemic itself.

This week the World Health Organization announced there had been a decline in the spread of Ebola in Liberia, the country hardest hit. The WHO’s Bruce Aylward added the new number of cases globally was 13,703 (as of Wednesday) and that the death toll was over 5,000.

But Liberia’s Red Cross said its teams collected 117 bodies last week, down from a high of 315 in September. Just understand that prior to this outbreak, the highest death toll for any Ebola epidemic was less than 300, total. So we still have a long ways to go before authorities can say it’s under control.

What does seem to be working in Liberia, and I’m assuming in Sierra Leone and Guinea, is the massive effort to inform the public may finally be bearing fruit and changing behaviors, especially when it comes to the handling of bodies.

But the infection rates are still volatile and an area that is deemed clear of the disease could easily become re-infected.

Aylward said: “I am terrified that the information will be misinterpreted and people will start to think, ‘Oh, great, this is under control.’”

Just a few mishandled burials, Aylward noted, could “start a whole new transmission chain and the disease starts trending upward again.”

There was a study out of Yale University and Liberia’s health ministry that predicted up to 67,000 deaths in Liberia’s Montserrado County, which includes the capital Monrovia, by December 15.

And remember last week when I said Mali had its first Ebola case, a two-year-old who died? Health officials there are monitoring 111 who came into contact with the kid, who contracted the disease in Guinea and then rode a bus with his grandmother to Mali, the child having lost his mother to the virus. Mali apparently has virtually zero trained health workers.

Meanwhile, I got a kick out of President Obama’s little speech on Wednesday from the East Room of the White House where he was flanked by medical workers wearing lab coats; some of whom were still in a 21-day monitoring period after treating Ebola patients in West Africa.

Obama said in part: “The truth is that until we stop this outbreak in West Africa, we may continue to see individual cases in America in the weeks and months ahead, because that’s the nature of today’s world.”

But then he talked of America’s “leadership,” multiple times, and my thoughts turned to Syria and how we showed zero leadership in the first two years of that crisis and now it’s too late. [We were also exceedingly slow with our Ebola response.]

Finally, one of the scientists who discovered Ebola, Peter Piot, warned that China is under threat because of the huge numbers of Chinese workers in Africa. Piot, now director of the London School of Hygiene and Tropical Medicine, said, “I assume that one day [an outbreak of Ebola in China] will happen.”

OK...one more. From Jonathan V. Last / The Weekly Standard:

“Do you really want to be scared? What’s to stop a jihadist from going to Liberia, getting himself infected, and then flying to New York and riding the subway until he keels over? This is just the biological warfare version of a suicide bomb. Can you imagine the consequences if someone with Ebola vomited in a New York City subway car? A flight from Roberts International in Monrovia to JFK in New York is less than $2,000, meaning that the planning and infrastructure needed for such an attack is relatively trivial. This scenario may be highly unlikely. But so were the September 11 attacks and the Richard Reid attempted shoe bombing, both of which resulted in the creation of a permanent security apparatus around airports. We take drastic precautions all the time, if the potential losses are serious enough, so long as officials are paying attention to the threat.”

Street Bytes

--After hitting cycle lows on Oct. 15, stocks have roared back. Friday, the Dow Jones hit a new high of 17390, up 3.5% on the week, while the S&P 500 made a new high of its own, 2018, up 2.7% for the five days. Nasdaq added 3.3% to 4630 and now sits a little over 400 points from its March 2000 all-time record.

For the month of October, despite all the volatility, the Dow gained 2%, the S&P 2.3%, and Nasdaq 3.1%. The small-cap Russell 2000 soared 6.5% for the month, its best performance since July 2013.

--U.S. Treasury Yields

6-mo. 0.05% 2-yr. 0.49% 10-yr. 2.34% 30-yr. 3.07%

Just two weeks ago the 10-year Treasury hit an intraday low of 1.86%, so quite a move back up since then. The 2-year, most sensitive to interest rate projections, rose 10 basis points on the week, a huge move for it, on expectations the Fed will have to hike sooner than currently forecast.

--As reported by the Wall Street Journal (and others): “Big banks in the U.S. and Europe are stockpiling billions to pay for a potential trans-Atlantic settlement of allegations that they manipulated foreign-exchange rates as talks heat up with regulators on both continents.”

But some are skeptical U.S. regulators will go along with what their U.K. counterparts propose.

On Thursday, Citigroup announced in a filing it had set aside an extra $600 million as a result of “rapidly-evolving regulatory inquiries and investigations.”

Some banks have been told their individual settlements would be in the $500 million to $1 billion range.

--On Tuesday, I was watching the local NBC news and anchor Chuck Scarborough suddenly threw it to a live shot of the rocket launch from Virginia, saying something like, ‘this should be dramatic,’ and within seconds the rocket was lifting off, and then another few seconds later, all of us watching were thinking, ‘Well that sucks,’ as the Antares rocket exploded, thankfully being an unmanned mission to the International Space Station that didn’t hurt anyone on the ground as it crashed and exploded (a second time).

This was a product of Orbital Sciences Corp., part of the private sector initiative to get the U.S. back in space after the retirement of NASA’s space shuttle.

So this also left Elon Musk’s SpaceX as the only U.S. company able to fly cargo to the ISS, with SpaceX having its own big moment from Cape Canaveral, Fla., on Dec. 9 (at the earliest).

Further, the Antares rocket was powered by a 1970s style Soviet-era engine (actually, the initial model goes back to the 60s), refurbished in the U.S., since we don’t have our own engines yet (SpaceX and Boeing are contracted by NASA to come up with a new one for future manned missions).

The rocket and spacecraft that exploded were said to be worth more than $200 million and was Orbital’s third of eight planned under a $1.9 billion NASA resupply contract.

[Orbital Sciences stock dropped from $30.37 to $25.27 the first day of trading after the failure, but recovered a little the balance of the week to finish at $26.30.]

Meanwhile, don’t worry about the astronauts on the space station. A Russian resupply vehicle successfully docked with it on Wednesday, about 15 hours after the Antares disaster. They always have a 4-6 month supply of stuff up there. 

--Friday, though, just two days after the Antares disaster, saw a catastrophe of a different sort for the nascent commercial space program....Virgin Galactic’s SpaceShipTwo craft crashed in the Mojave desert, killing one test pilot and injuring another (condition not known as I go to post). During a flight, the craft experienced what the company described as “a serious anomaly.”

SpaceShipTwo is carried aloft by a jet, then launched into sub-orbit.

Sir Richard Branson put together Virgin Galactic to be a pioneer in space tourism. Over 700 celebrities and millionaires had signed up for their first flight. Now, who knows when the company and its spacecraft will be certified.

--Andrew Khouri / Los Angeles Times:

“The twin ports of Los Angeles and Long Beach are experiencing a logistical nightmare as they struggle to ease a bottleneck that could undermine retailers’ all-important holiday shopping season and threaten the competitiveness of the region’s economic engine.

“In the worst shipping crisis in a decade, mammoth vessels loaded with products destined for the nation’s stores are sitting idle just off the coast, waiting for cargo languishing on the docks to clear.”

Retailers have begun rerouting their goods to other locations.

One of the major reasons for the congestion is a shortage of trailers that truckers use to haul the cargo from the ports to giant warehouses in the Inland Empire. L.A.-Long Beach handles about 40% of U.S. imports, but no doubt unless the situation is rectified, quickly, this market share could plummet.

--Facebook reported third-quarter revenue grew 59%, while earning 43 cents, ex-costs, both beating Wall Street’s expectations. But the stock fell $5 on the news, admittedly from record levels, because some analysts and investors are a little concerned about the expense side of the ledger.

Vindu Goel of the New York Times summed up some of the issues very well:

“(In) a conference call...with investors, (Mark Zuckerberg) focused more on his vision for the company over the next three, five and 10 years.

“He talked about his recent $21.8 billion acquisition of WhatsApp and how he wanted to take the mobile messaging app quickly to a billion users from 600 million. (‘For us, products really don’t get that interesting to turn into businesses until they have about one billion people using them,’ he said.)

“He mused about the potential of Oculus VR, the virtual reality company that Facebook bought for $2 billion, which will need ‘a bunch of years’ to sell enough of its still-unfinished headsets to contribute to Facebook’s bottom line.

“And he waxed eloquent about the prospect of bringing people in poor countries like Zambia onto the Internet, an almost charitable endeavor that won’t reap financial returns for a long time.

“Not once did he utter the word profit.”

--Twitter reported revenue doubled in the third quarter to $361 million, surpassing expectations, but the stock fell hard as user growth slowed again. Twitter said it added 13 million monthly active users for the three months through September, up 4.8%, which is a slower pace than the prior quarter’s 6.3%.

It’s also unclear just how ‘engaged’ users are on the site. The shares fell about $8.50 on the week to $41.50.

--As of Thursday, the U.S. retail gasoline price at the pump had plunged 32 cents in October to $3.01 as a national average, the lowest since December 2010. The monthly drop is the biggest since 2008.

Separately, the Energy Information Agency said this week that U.S. crude production rose 0.4% in the prior week to 8.97 million barrels a day, the highest since 1986.

--ExxonMobil and Chevron reported stronger than expected profits for the quarter, with solid performances from their refining operations offsetting the weaker performance of their oil and gas production business. The shares rose in response for both.

--In the latest Consumer Reports’ annual reliability rankings, Toyota and its Lexus brand topped the survey, the eighth year in a row a Toyota brand has led the rankings.

Toyota also announced this week it is on track to be the world’s top-selling automaker for 2014.

--Sony reported a huge third-quarter loss as it wrote down its struggling smartphone business that China’s Xiaomi has been taking advantage of; Xiaomi now being the third-largest smartphone provider, with a 5.3% market share. Samsung is at 23.8% and Apple 12.0%, according to IDC.

--German exports to Russia fell by more than 26% on the year in August due to sanctions, the sharpest fall since the financial crisis in 2009.

Meanwhile, with the shocking slide in crude oil from $115 to around $85 (Brent), Russian President Vladimir Putin was quoted by Russian news agency RIA Novosti as saying, “If world oil prices stay at $80, all production will be ruined. No major market participant is interested [in this].” [Russia’s oil brand, Urals crude, trades around $2-$3 below the Brent price.]

According to the head of the Moscow Oil and Gas Center at Ernst & Young, Denis Borisov, each $10 decrease in the price of oil cuts the revenues of oil companies by about $2-$3 per barrel. “Last year Russia exported 237 million tons of oil, or 1.7 billion barrels, meaning that the country’s oil sector will lose about $4 billion per year for each $10 fall in price.” [Alexander Panin / Moscow Times]

The government skims a whopping 70% off the export revenues of oil companies through taxation, so you can see the number $80-$85 oil is doing on the budget and Russia’s finances in general.

--OPEC expects a sharp reduction in U.S. shale oil if the price remains below $85 a barrel. Newer shale oil developments are economic at $70 to $75 per barrel (West Texas Intermediate), according to Wood Mackenzie, a consultancy.

But OPEC still sees growing demand, and growing supply, worldwide, and it is not about to cut production when it meets in Vienna in a few weeks.

--Fiat Chrysler Automobiles, FCA, is spinning off the Ferrari division, as announced by CEO Sergio Marchionne. The move to list 10% of the shares next year would leave the remaining 90% to the group’s shareholders.

--HBO is laying off about 7% of its 2,400 employees, according to the Wall Street Journal. The cost-cutting plans were announced to employees on Tuesday. Parent Time Warner Inc. previously said it would eliminate 10% of the 15,000 employees at Turner Broadcasting, which includes CNN, TNT and TBS.

--There are reports Madison Square Garden Co. will split into two publicly traded entities, one for the Knicks, Rangers and MSG Network, and the other for the venue, which generates a lot of concert revenue, for starters.

Of course the Knicks could not suck more, and have sucked for years, so you’re on your own with this one. [Though they did beat the Cavaliers in LeBron’s return home on Thursday.]

But clearly, after CEO Jim Dolan saw what Steve Ballmer paid for the Clippers ($2 billion), he is banking on similar riches, for the basketball portion alone, while some say the arena, the busiest in the nation, is worth the same amount.

Famed money manager Mario Gabelli said MSG Network, which broadcasts the Knicks and Rangers games, is worth $4 billion.

So, on the news, MSG stock rose 11%.

--Terry Keenan passed away at the all too young age of 53. Keenan was a pioneering business journalist, getting her big break on Lou Dobbs’ CNN show, “Moneyline,” when it was the only competition for CNBC. She later worked for Fox News and then the New York Post. She’ll be missed.

--Amgen Inc., the biotech giant, is increasing the number of positions it is eliminating another 1,100 to about 4,000, or 20% of its global workforce. Hedge fund operator Daniel Loeb has been pressuring Amgen to do more, such as split the company in two, to boost shareholder value.

--In another prime example of how technology is killing jobs, the Lloyds Banking Group said Tuesday it would cut 9,000 jobs and close up to 150 branches over the next three years as more customers conduct their banking online or by mobile phone. [You will never get me to do either. I like my Wells Fargo tellers.]

--Oh, and Apple CEO Tim Cook says he’s “proud to be gay,” the first CEO of a Fortune 500 to make such a public announcement, though it had long been rumored this was the case. 

In an essay for BloombergBusinessweek, Cook wrote: “I don’t consider myself an activist, but I realize how much I’ve benefited from the sacrifice of others. So if hearing that the CEO of Apple is gay can help someone struggling to come to terms with who he or she is, or bring comfort to anyone who feels alone, or inspire people to insist on their equality, then it’s worth the trade-off with my own privacy.”

Foreign Affairs

Iraq/Syria/ISIS: In the strategic battle of Kobane in Syria, on the Turkish border, 160 Iraqi Kurdish Peshmerga fighters were allowed by Turkey to cross into Syria to help fight ISIS. The death toll in the battle is said to be more than 800, and the fighting has forced more than 200,000 to flee across the border into Turkey.

Turkey is now hosting 1.5 million Syrian refugees. President Tayyip Erdogan said the other day, “Where was the world when 300,000 people have been killed in Syria thus far? Why are they so keen on Kobane, but not on the whole of Syria? That’s a question to ask.”

I couldn’t agree more with Erdogan. After all, in 2012 I was writing we needed to work with him on a no-fly zone. We didn’t. We will pay the price for generations to come. 

Meanwhile, the al-Qaeda-linked Nusra Front and other Syrian rebel factions have been battling the Syrian government in the northwest, Idlib, in the biggest offensive on that city in two years. But as is so often the case here, both sides are claiming victory.

In Iraq, a suicide bomber killed at least 27 Shiite militiamen Monday outside the Iraqi town of Jurf al-Sakhar, while a car bomb in Baghdad killed 15. ISIS then slaughtered 228! Sunni tribesmen in Anbar who had sided with the Iraqi government against IS.

Iraqis are bracing for more sectarian attacks on Shiites, who are preparing for the religious festival of Ashoura, an event that defines Shiism and defines its split with the Sunnis.

[Actually, I was reading in the Daily Star that the festival commemorates the slaying of Prophet Mohammad’s grandson Hussein at the battle of Kerbala in 680 A.D.]

Remember, ISIS sees Shiites as infidels, while Iraqi Prime Minister Haider al-Abadi, a Shiite, must win over Sunnis, especially from Anbar province.

David Ignatius / Washington Post

“A glimpse of the anxiety sweeping the Arab world surfaced last week when an Arab woman complained during a talk in Amman at the Columbia Global Center for the Middle East. She said my speech’s title about the ‘crisis’ in the region wasn’t accurate. The correct word was ‘disintegration.’ The audience cheered loudly.

“The Arab world is suffering a sense of vertigo these days. Extremists from the Islamic State, who have seemingly arisen out of nowhere, have burst through the gates of power. Political elites are confused and frightened. They’re angry at the United States (as always). But at the same time, they want the United States to explain a strategy for combating a group that threatens every structure of stability, including borders.”

Lebanon: There is no doubt the civil war in Syria has come to Lebanon when one views the fighting in the country’s second city, Tripoli, with the Lebanese Army involved in battles with Sunni militants. At the same time, Sunni insurgents from Syria have been firing rockets into Lebanon in retaliation for the Lebanese Army’s operations in Tripoli. At least 30 have been killed in the fighting between the Army and jihadists and the Army pledged to press on with its offensive until all the militants are crushed.

Hizbullah leader Sheikh Nasrallah said last weekend, “There is a huge, dangerous plan to fuel strife that was being cooked in Tripoli and the north. We ask God to help [officials] and the military, security and political leaders to cooperate and collaborate to confront the threat of strife.” [Daily Star]

So in the above you see the battle lines. Hizbullah, supporters of Bashar Assad, which fought ISIS in Syria, will be helping the Lebanese Army fight ISIS and its acolytes at home as they begin to pour across from Syria. The Wall Street Journal reported U.S. intelligence officials are tipping off Lebanese law-enforcement bodies close to Hizbullah about threats posed to Beirut by the Nusra Front and parent al-Qaeda.

Iran: As the Nov. 24 deadline for an agreement on Iran’s nuclear program nears, there is growing speculation that Ayatollah Ali Khamenei, who underwent prostate surgery in September, is terminally ill. Photos were recently sent out, showing him resuming his weekly hikes in the hills surrounding Tehran, but it’s unclear if he is truly recovering, or on his last legs. He’s 75, and his death would set up one heckuva power struggle. As reported by Ramin Mostaghim of the Los Angeles Times, the Assembly of Experts, a council of clerics who appoint the supreme leader, is holding secret meetings in preparation for Khamenei’s departure.

As for the talks, expect a flurry of action right after Tuesday’s election, with the Obama administration appearing to make major concessions, which won’t go down well in Congress, let alone Israel. But I’m also guessing the talks get extended for another three months.

Separately, Iran caught major heat internationally for executing a woman who killed a man she said was trying to sexually assault her. The murder victim was a former employee of Iran’s ministry of intelligence.

Israel: The situation is heating up again here, and confrontation with the U.S. doesn’t help. In an article by Jeffrey Goldberg published in The Atlantic, Goldberg begins his essay thusly:

“The other day I was talking to a senior Obama administration official about the foreign leader who seems to frustrate the White House and the State Department the most. ‘The thing about Bibi is, he’s a chickens---,’ this official said, referring to the Israeli prime minister, Benjamin Netanyahu, by his nickname.

“This comment is representative of the gloves-off manner in which American and Israeli officials now talk about each other behind closed doors, and is yet another sign that relations between the Obama and Netanyahu governments have moved toward a full-blown crisis. The relationship between these two administrations – dual guarantors of the putatively ‘unbreakable’ bond between the U.S. and Israel – is now the worst it’s ever been, and it stands to get significantly worse after the November midterm elections. By next year, the Obama administration may actually withdraw diplomatic cover for Israel at the United Nations, but even before that, both sides are expecting a showdown over Iran, should an agreement be reached about the future of its nuclear program.

“The fault for this breakdown in relations can be assigned in good part to the junior partner in the relationship, Netanyahu, and in particular, to the behavior of his cabinet. Netanyahu has told several people I’ve spoken to in recent days that he has ‘written off’ the Obama administration, and plans to speak directly to Congress and to the American people should an Iran nuclear deal be reached. For their part, Obama administration officials express, in the words of one official, a ‘red-hot anger’ at Netanyahu for pursuing settlement policies on the West Bank, and building policies in Jerusalem, that they believe have fatally undermined Secretary of State John Kerry’s peace process.”

So why the use of the term chickens---? An official told Goldberg, “The good thing about Netanyahu is that he’s scared to launch wars. The bad thing about him is that he won’t do anything to reach an accommodation with the Palestinians or with the Sunni Arab states. The only thing he’s interested in is protecting himself from political defeat. He’s not [Yitzhak] Rabin, he’s not [Ariel] Sharon, he’s certainly no [Menachem] Begin. He’s got no guts.”

Well, I’ve written over the years the main criticism of Netanyahu, who I’ve called the smartest man in the world (and I stand by that), is that he’s afraid to pull the trigger (which others would call just being responsible).

But I disagree he isn’t willing to reach an accommodation with the Sunni Arab states. I do agree, though, that today there is zero chance of accommodation with the Palestinians for one simple reason...how can you deal with Hamas, part of the Palestinian government, which seeks your destruction?

Isi Leibler / Jerusalem Post

“(The Obama administration has been acting vindictively) because Israel has dared to reject its diktats. Nothing illustrates President Obama’s contemptuous attitude toward Israel more than his directive to withhold arms to Israel during wartime because Israel had rejected Kerry’s initiative to engage Qatar as the mediator to end the Gaza hostilities.

“As virtually every foreign policy initiative by Obama has proven to be disastrous, his recommendations or directives must be viewed with skepticism. After all, it is we who will have to live with the consequences.

“This administration adamantly insists that the Israel-Palestine status quo is untenable. Yet it remains silent as Hamas boasts of efforts to restore its tunnel network; barely reacts to the mayhem in Syria and Iraq where close to a quarter million people have been butchered; ignores the Qatari funding of Hamas and other terrorist entities including Islamic State; fails to castigate Turkish President Recep Tayyip Erdogan for enabling jihadists to traverse Turkey’s territory to fight in Syria, while standing by and allowing the massacre of the Kurds on his border.

“Palestinian Authority President Mahmoud Abbas humiliated the U.S. administration by merging with Hamas without prior consultation. But the U.S. failed to criticize this move, has not responded to Abbas’ stated policy of ethnic cleansing, nor condemned him for executing any Palestinian found selling land to an Israeli.

“The U.S. did not reprimand him for failing to denounce the act of terror in which a baby and a young woman were killed last week in Jerusalem. Yet when an Arab teenager was shot to death while hurling potentially lethal firebombs at Israeli automobiles, the U.S. immediately conveyed its condolences to the family and urged Israelis to initiate an investigation.

“Israel, the principal regional ally of the U.S., is the only country consistently facing criticism and has become the punching bag for the inept Obama administration, even being denunciated for opposing a nuclear agreement with the Islamic Republic of Iran. Only recently, Kerry again conveyed to an Arab audience the absurd allegation that the Arab-Israel conflict fanned IS and Islamic extremism. Yet the U.S. assiduously avoids condemning or responding to rogue states guilty of criminal bloodletting, out of fear of being further humiliated and exposed as lacking leadership.”

As for Netanyahu himself, responding to U.S. and EU criticism of plans to move forward with another 1,000+ units in Jerusalem, the prime minister said, “I heard the claim that our building in Jewish neighborhoods in Jerusalem makes peace more distant, but its the criticism itself that makes peace more distant,” as it is “detached from reality” and feeds false Palestinian hopes.

In a speech to parliament, Netanyahu said: “The French build in Paris, the English build in London, and the Israelis build in Jerusalem. Why come and tell the Jews not to live in Jerusalem? Because it will heat up the atmosphere? We are building like we’ve built since the establishment of the state....Violence is not the result of building in Jerusalem.” [Wall Street Journal]

U.S. State Department spokeswoman Jen Psaki said: “We view settlement activity as illegitimate and unequivocally oppose unilateral steps that prejudge the future of Jerusalem. Israel’s leaders have said they would support a pathway to a two-state solution, but moving forward with this type of action would be incompatible with the pursuit of peace.”

Also in response to the Israeli move, Jordan’s ambassador to Israel said, “All such acts are incompatible with international law and international humanitarian law and if allowed to continue will ultimately imperil the (20-year-old peace) treaty between the two nations.”

Then you had Wednesday’s assassination attempt against Yehuda Glick, a prominent Israeli-American right-wing activist who has called for more access to the Temple Mount, where Al Aksa Mosque is and which is administered by Muslim authorities. Glick was shot and seriously wounded by a lone gunman on a motorcycle. Israeli police then shot and killed a Jerusalem resident responsible for the shooting, with an Israeli police spokesman saying the man was “an active terrorist who was involved in a number of previous incidents." [Jerusalem Post]

Egypt: The National Defense Council declared a three-month state of emergency in areas near the Israeli border and Gaza Strip following a coordinated attack by militants on an Egyptian army checkpoint last weekend that killed 31 soldiers, the deadliest single attack on the military in decades. 

President Abdel al-Sissi vowed the Army would take “revenge for the shedding of dear blood.”    He added, “Egypt is fighting a war of existence.”

Egypt is considering evicting people living in small northern Sinai villages that are considered the “most dangerous” militant bastions and declaring certain areas to be closed military zones.

Since Islamist President Morsi was deposed, jihadists in the peninsula have killed scores of policemen and soldiers. The attacks have also dealt a further blow to tourism in the area.

Russia/Ukraine: The two sides reached agreement on restoring natural-gas exports to Ukraine, just as winter is about to hit, all while pro-Russian rebels have been stepping up attacks on government forces. The European Union, which brokered the deal, at the same time blasted Russian Foreign Minister Sergei Lavrov for recognizing separatist elections planned for Nov. 2 in Ukraine’s rebel-held territories.

This situation is so mucked up, though I readily admit 0.04% of Americans probably have a clue, let alone understand what Russia has done this year in blatantly seizing large swaths of Ukraine, or its actions in and near the Baltics, and Poland’s fears of an invasion.

But for now, at least Ukrainians might not freeze to death, as Kiev agreed to pay $3.1 billion to Russia by the end of the year, a down payment on the $5.3 billion it owes Russian energy giant Gazprom. $1.45 billion is to be paid within days.

On Thursday, seven Ukrainian soldiers were killed as fighting at Donetsk Airport intensified again.

As for the recent Ukrainian parliamentary elections, pro-European parties won enough seats for a 2/3s majority.

Meanwhile, Russian warplanes have been carrying out exercises in European airspace at an increasing rate and what is even more disturbing is the pilots aren’t communicating with air traffic controllers, which is highly confrontational and dangerous for commercial aircraft as flight plans aren’t being filed. NATO has spoken of an “unusual” increase in such flights just this week.

As one expert, Igor Sutyagin, told BBC News, Russia is “trying to intimidate the West and raise fears.”

There is also growing speculation that recent tensions with Russia will force Finland and Sweden to join NATO.

Mark Seip (senior fellow at the Atlantic Council) / Defense One

“The U.S. footprint in Europe once numbered over 250,000 troops, but now only 30,000 remain within two combat brigades, U.S. battle tanks number in the dozens where they once numbered in the hundreds, and F-15 fighter aircraft reductions are scheduled for later this year. Meanwhile, European states have cut almost 160,000 troops since 2010. Great Britain, the second-largest military force in NATO after the United States, is cutting 30,000 personnel for an end-strength of 147,000 by 2020.

“Russia by comparison has 130,000 troops near its European border alone, plus approximately 700 aircraft, 1,200 tanks, and large numbers of heavy mechanized equipment, according to an International Institute of Strategic Studies report. During the height of the crisis in Ukraine, Putin mobilized as many as 150,000 soldiers along the border within weeks to demonstrate his resolve. President Barack Obama’s response: mustering a 700-person company to the Baltics.”

Last Friday, Putin declared, “the Cold War is over. But it did not end in peace.”

Seip:

“His desire to reassert Russian dominance is clear and Russia is once again a distinct threat on NATO’s doorstep. Despite sanctions and pointed diplomatic language, it continues to harass those in its neighborhood, creating tension and doubt among allies and partners. An aversion to a new Cold War should not equal a lack of firm, credible action in the face of unchecked aggression. Therefore, the leaders of the United States and Europe must show the political will to commit greater forces now to NATO’s eastern European members.”

For its part, Poland is moving thousands of troops toward its eastern borders. Defense Minister Tomasz Siemoniak said, “The geopolitical situation has changed, we have the biggest crisis of security since the Cold War and we must draw conclusions from that.”

I posted excerpts of Vladimir Putin’s Oct. 24 speech on my “Hot Spots” link. I urge you to read it, as Putin talks of the United States supporting “dubious” groups ranging from “open neo-fascists to Islamic radicals.” Putin argued the United States wants a unipolar world where its interests go unchallenged.

Cliff Kupchan, chairman of the Eurasia Group, told the New York Times, “I think it is on a new level of acrimony. I think this is a genuine message that ‘Enough is enough, and I don’t like being grouped with Ebola and I don’t like these sanctions.’”

China: Beijing has warned Hong Kong delegates to the nation’s top political advisory body that they can “say freely whatever they want,” but they cannot call for Hong Kong’s CEO to resign or criticize local government in a manner that is not “constructive.”

On the defense front, the Wall Street Journal’s Jeremy Page had an extensive report on China’s new nuclear-missile capable submarines that are altering the strategic balance in the region.

Soon China will be launching a new type of sub – a “boomer,” carrying nuclear missiles that will have the range to hit Hawaii and Alaska from East Asia and the continental U.S. from the mid-Pacific.

“This is a trump card that makes our motherland proud and our adversaries terrified,” China’s navy chief wrote in a Communist Party magazine in December.

Jeremy Page:

“China’s nuclear attack subs...are integral to what Washington sees as an emerging strategy to prevent the U.S. from intervening in a conflict over Taiwan, or with Japan and the Philippines.”

On the pollution front, Beijing has been under siege for weeks. Two weeks ago they ran the Beijing Marathon in heavy, dangerous smog, much to the consternation of health officials and runners, and this week you had the case of a Beijing-bound passenger plane that diverted because of smog, yet Chinese aviation authorities refused permission to land by two alternative airports and the plane ran dangerously low on fuel, as it later emerged. It was finally forced to circle Beijing for 40 minutes before pilots declared an emergency as the plane flew to Qingdao airport.

Beijing is hosting a big Apec summit and it has revived anti-pollution measures used for the 2008 Olympics.

North Korea: As the charm offensive in the North Korean press continues, with lots of photos of a smiling Kim Jong-un, who has emerged, at least in print, from isolation, South Korean intelligence is convinced Kim had surgery to remove a cyst from his ankle. An intelligence official told the BBC Kim was treated by a European medical team, but wouldn’t identify the  country.

Meanwhile, speaking to reporters at the Pentagon, Gen. Curtis Scaparotti, commander of U.S. forces on the Korean peninsula, said North Korea is capable of building a miniaturized nuclear warhead; if true, a needed development on the way to a ballistic nuclear-tipped missile. He also said Kim Jong-un “is clearly in control of the country.”

Tunisia: A secularist party won the most seats in the country’s parliamentary elections, with the governing Islamist party taking second. A coalition government between the two is likely to be the result.

Brazil: Dilma Rousseff scored a narrow 51.6 to 48.4 victory over challenger Aecio Neves in Brazil’s presidential run-off on Sunday. The nation is more divided than ever, with an economy on life support and a corruption scandal involving its biggest company, state energy giant Petrobras.

Random Musings

--Charles Krauthammer / Washington Post

“Is this election really about nothing? Democrats might like to think so, but it’s not.

“First, like all U.S. elections, it’s about the economy. The effect of the weakest recovery in two generations is reflected in President Obama’s 13-point underwater ratings for his handling of the economy.

“Moreover, here is a president who proclaims the reduction of inequality to be the great cause of his administration. Yet it has radically worsened in his six years. The 1 percent are doing splendidly in the Fed-fueled stock market, even as median income has fallen.

“Second is the question of competence. The list of disasters is long, highlighted by the ObamaCare rollout, the Veterans Affairs scandal and the pratfalls of the once-lionized Secret Service. Beyond mere incompetence is government intrusiveness and corruption, as in the overreach of national security surveillance and IRS targeting of politically disfavored advocacy groups.

“Ebola has crystallized the collapse of trust in state authorities....

“Obama’s clumsy attempt to restore confidence by appointing an Ebola czar has turned farcical....

“Most voters don’t care about the details of Ukraine, the factions in Libya or the precise battle lines of the Islamic State. But they do have a palpable sense of American weakness....

“The stage is set for a major Republican victory. If they cannot pull it off under conditions so politically favorable, perhaps they might consider looking for another line of work.”

--So regarding the mid-term elections, most Republicans seem to think the race to take back the Senate is a lock, albeit that Republicans end up with just 51 or 52. Senate races in the likes of Alaska, Georgia and Iowa are too close to call and a lot can happen even over the weekend, and Monday, to change sentiment. 

It’s also a case where Republicans have been exceedingly cautious, and it’s not like they have given the electorate a compelling reason to vote for them.

But according to a new Washington Post/ABC News poll, as reported by Dan Balz and Peyton M. Craighill, “Driving attitudes is a pervasive sense of a nation in trouble. Overwhelming majorities say the country is badly off track and give the economy negative ratings. Economic expectations are little better today than they were at this time four years ago....

“The survey highlights that there is less interest in this midterm campaign than there was in the 2010 and 2006 elections....

“(But) Republicans appear to have more enthusiasm about voting, based on those who say they are certain to vote. And more people who voted for Republican presidential nominee Mitt Romney in 2012 say they are closely following the midterms, compared with those who say they voted for Obama. Democrats are hoping to counter that enthusiasm gap with a get-out-the-vote operation that is aimed at persuading sporadic voters to cast ballots.”

The survey also found that in nine states with competitive Senate races [Alaska, Arkansas, Colorado, Georgia, Iowa, Kansas, Louisiana, New Hampshire and North Carolina] 57% of voters express a preference for Republicans in the House elections, compared with 39% for Democrats. 

The Post/ABC survey also has Obama’s overall job approval rating at 43%, up 3 points from two weeks ago but not statistically significant. His disapproval remains unchanged at 51%.

Of course some of us got a kick out of Obama’s statement in an interview the other day with Al Sharpton wherein the president said, he may not be running but his “policies are on the ballot.” Further, on the issue of Democratic candidates distancing themselves from him, Obama said he’s not hurt because they’re all “folks who vote with me. They have supported my agenda in Congress.”

As Peggy Noonan observed in her Wall Street Journal op-ed: “That’s what their Republican opponents accuse them of. That’s why they’re struggling! Talk about throwing the drowning man an anvil.”

--Speaking of Sharpton...Heather MacDonald / Wall Street Journal:

“The Rev. Al Sharpton once epitomized New York’s bad old days of the 1980s, when the then-corpulent, gold-medallion-bedecked tub thumper inflamed racial hatred and courted violence. Today, against all expectations and at least 100 pounds lighter, he has been rehabilitated into the Democratic Party’s civil-rights leader of choice. Has Mr. Sharpton changed or simply outlasted his critics?

“President Obama’s embrace of Mr. Sharpton has been particularly intense this year. On Monday he called Mr. Sharpton’s radio show to discuss the Nov. 4 elections. In April the president appeared at a political rally organized by Mr. Sharpton’s National Action Network. Mr. Obama’s closest adviser, Valerie Jarrett, conferred with Mr. Sharpton in August about the police killing of an unarmed black teenager in Ferguson, Mo., as Mr. Sharpton led protests against the Ferguson police.”

But then there’s the partnership between New York City Mayor Bill de Blasio and Sharpton. “The mayor’s alliance with the racial provocateur is now creating the biggest crisis of his mayoralty,” writes MacDonald.

“So far Mr. de Blasio is pretending not to notice. As the crisis escalated, involving a former Sharpton aide now working for the mayor’s wife, Mr. de Blasio ladled on the praise at the Four Seasons. ‘Al Sharpton has been a blessing for this city,’ the mayor enthused. ‘He’s been a blessing for this nation. And the more people criticize him, the more I want to hang out with him. Because a lot of times, just look who’s doing the criticizing and the way they’re saying it – it makes you realize the Rev must be doing something right. You know, sometimes, your enemies are the best endorsers of the righteousness of your actions.’”

I won’t rehash for the umpteenth time Sharpton’s being a “blessing,” from Tawana Brawley forward as MacDonald does in her piece. It’s just beyond belief that the likes of Obama and de Blasio worship at the Rev’s altar.

I mean it’s enough to make you sick...but over time, the relationship with Sharpton will bring de Blasio down. As for Obama, nothing we can do about it. He’s no longer on the ballot.

--New Jersey Gov. Chris Christie once again made an ass of himself in taking down a protester at the Jersey Shore on Wednesday, telling the sign holder to “shut up!” and other stuff, as is Christie’s wont. 

Earlier a Stockton Polling Institute survey found that Christie and President Obama both garnered only 43% approval ratings from likely New Jersey voters. 56% gave Christie a fair or poor job rating, and 57% gave Obama the same.

--A report from the Pew Internet and American Life Project revealed that more than 60% of technology experts interviewed for the study expect a major cyberattack between now and 2025 that will be large enough to cause “significant loss of life or property losses/damage/theft at the levels of tens of billions of dollars.”

Others, though, believe the preoccupation with cyberattacks is more about hyping product from software merchants, looking to take advantage of public anxiety against an eternally unconquerable threat.

As reported by Patrick Tucker of Defense One:

“A key concern for many of the experts Pew interviewed is infrastructure, where very real vulnerabilities do exist and are growing. Stewart Baker, former general counsel for the National Security Agency and a partner at Washington, D.C.-based law firm Steptoe & Johnson told Pew, “Cyberwar just plain makes sense. Attacking the power grid or other industrial control systems is asymmetrical and deniable and devilishly effective. Plus, it gets easier every year. We used to worry about Russia and China taking down our infrastructure. Now we have to worry about Iran and Syria and North Korea. Next up: Hizbullah and Anonymous.”

Rep. Mike Rogers, R-Mich., chairman of the House Intelligence Committee, said private businesses were increasingly asking government to take action. “Most of the offensive talk is from the private sector, they say we’ve had enough.”

Stowe Boyd, lead researcher for GigaOM Research, say the growing capabilities of the likes of China promise the potential for attacks of growing international importance.

“A bellicose China might ‘cyber invade’ the military capabilities of Japan and South Korea as part of the conflict around the China sea, leading to the need to reconfigure their electronics, at huge cost. Israel and the United States have already created the Stuxnet computer worm to damage Iran’s nuclear refinement centrifuges, for example. Imagine a world dependent on robotic farm vehicles, delivery drones, and AI-managed transport, and how one country might opt to disrupt the spring harvest as a means to damage a neighboring opponent,” Boyd said.   [Patrick Tucker]

--We note the passing of Boston’s longest-serving mayor, Thomas Menino, 71. The Democrat served five terms, but due to failing health didn’t seek re-election a year ago. He did a good job, by all accounts, and once said, “I have no other ambition. I don’t want to be governor or anything else. I like being mayor.”

--I stumbled on this op-ed by Sam de Brito in the Sydney Morning Herald titled “We’re living in a First World bubble.”

In part:

“A common criticism of our political leaders is they’re ‘out of touch’ with the general public yet, if you examine the preoccupations of average Australians, they suggest we’re the blinkered ones.

“As forces both destructive and constructive, powerful almost beyond comprehension, roil across the globe – be they religious, geopolitical, environmental or technological – the unruly rump of our population is more focused on silly TV shows, sport, their smartphone, sandwich fillings and property prices.

“Why? Because this is their defining reality, living in the gilded First World bubble enveloping this country....

“When we do get angry, it’s not about people starving or going insane in offshore detention – it’s over a poorly phrased tweet on Q&A, a stupid T-shirt in Woolworths or bicycle lanes....

“We have access to more information than ever, yet the majority of us remain willfully ignorant of the forces shaping the headlines – power and money – and the inescapable fact that – on a world level – we’re the fattest, smuggest cats of all.

“The concept of the ‘global village’ we’ve been sold since the ‘60s seems rather farcical when a good slice of its population never even bother to look out their window.”

--Can’t say I’m a big Johann Sebastian Bach fan...being partial to Tchaikovsky, Rachmaninoff and Chopin, if given a choice...but according to a new documentary, Bach’s wife, Anna Magdalena, deserves credit for composing some of her husband’s greatest works, not the big guy.

As reported by Kate Seamons of Newser and USA TODAY, “Music professor Martin Jarvis, whose authorship suspicions were first aroused more than three decades ago, describes the evidence as ‘circumstantial’ but ‘strong.’”

Anyway, some of ‘Bach’s’ works are quite different from his other works from a structural and technical perspective. In fact, one of the manuscripts actually has on one page “written by Mrs. Bach” in French.

Zut alors! Sorry to ruin your day. I’m back to Rachmaninoff’s Piano Concerto No. 2. 

---

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

God bless America.
---

Gold closed at $1171...lowest weekly close since April 2010
Oil $80.54...lowest weekly close since June 2012

Returns for the week 10/27-10/31

Dow Jones +3.5% [17390]
S&P 500 +2.7% [2018]
S&P MidCap +3.0%
Russell 2000 +4.9%
Nasdaq +3.3% [4630]

Returns for the period 1/1/14-10/31/14

Dow Jones +4.9%
S&P 500 +9.2%
S&P MidCap +5.7%
Russell 2000 +0.9%
Nasdaq +10.9%

Bulls 47.0
Bears 16.3 [Source: Investors Intelligence]

Have a great week. I appreciate your support.

Brian Trumbore