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09/27/2014

For the week 9/22-9/26

[Posted 12:00 AM ET]

Edition 807

Washington and Wall Street

It was a volatile week with various cross-currents in the global markets, including fears over slowing growth in Asia and Europe, best seen in the performance of commodities such as iron ore, which is at a five-year low, while at the same time the economic data in the U.S. continued to be solid. Tensions between Europe and Russia also ratcheted up another notch or two due to economic sanctions between the EU and Vlad the Impaler and the impact it was having on the economies in the region.

In the U.S., the housing numbers for August came in and while existing home sales, 5.05 million, were down 1.8% over July, July’s pace was a 10-month high. New-home sales for August then far outpaced expectations, an annualized figure of 504,000 that represented a 6-year high going back to May 2008.

August durable goods plunged 18.2%, a record decline, but this was after July’s record gain of 22.5%. Here it’s all about volatile aircraft sales and when you strip them out, ex-transportation, durable goods actually rose 0.7% in August (down 0.5% in July).

And then we had our final reading on second-quarter GDP and it was revised upward, as expected, to 4.6%, the best performance since Q4 2011, also 4.6%. So a nice rebound after the dreadful first quarter, down 2.1%. 

Business investment increased at a 9.7% annualized rate in Q2, with corporate spending on equipment revised upward to 11.2%, both very solid, though consumer spending was up just 2.5%, the consumer representing 70% of the economy.

Corporate profits rose 8.4% last quarter, the most since the third quarter of 2010.

An inflation component in the GDP report increased at a 2.0% annualized pace compared with 1.2% in the first quarter.

You also had some Fed talk this week from various governors. One, Richard Fisher, was his usual hawkish self, saying the Fed would have to raise rates by early next year, while another, Charles Evans, made it sound like the Fed would be in no hurry to begin normalizing the rate picture until well into the second half of ‘15, especially with iffy growth prospects around the world and abundant geopolitical risks.

And with the U.S. dollar soaring, New York Fed President William Dudley warned this could eventually hamper growth here.

On a totally different topic, one of my favorites, Edward Luce of the Financial Times had the following thoughts on financial engineering, the penchant for stock buybacks in the U.S.

“In the late 1980s, corporate America was turned inside out by the mania for hostile takeovers. The so-called barbarians at the gate upended the typical U.S. chief executive’s outlook. From then on, the only thing that mattered was to keep the share price as high as possible. Today, with stock repurchases running at record levels, their descendants are sitting inside the gates of corporate boardrooms. They are more serene than their disruptive forerunners. Instead of leveraging other people’s money to fund takeovers, they boost share prices with their own company’s revenues. But the effect is much the same. They take from the future to flatter the bottom line today. Other stakeholders be damned.

“At a time of soaring profitability, U.S. companies have piled up huge amounts of cash, much of it parked offshore. Yet investing it in long-term growth is the last thing on their mind. According to Barclays, U.S. companies have lavished more than $500bn in the past year on stock buybacks – a multiple of what most are spending on research and development and other capital investments. In the first six months of the year, buybacks surged to $338.3bn – the largest half-yearly volume since 2007. The rationale is simple. By reducing the volume of outstanding shares, chief executive officers increase earnings per share. That in turn lifts their pay, which is heavily tied to short-term stock performance. If you need an explanation for why the top 0.1 percent is doing so well, start with equity-based compensation....

“The more immediate culprit is the decline in the quality of corporate governance. The average tenure of the U.S. CEO is falling. Buying back shares instead of investing makes sense if you do not expect to be around for the pay-off. It is a no-brainer if you measure the time horizons of most executive reward packages....

“What can be done? The lazy instinct is to blame executive greed. But human avarice is as old as the wheel. If properly aligned, we should all benefit. The problem is that U.S. corporate incentives have become badly out of whack with the interests of society. Since the fashion for buybacks took off, average corporate pay has risen to more than 300 times average earnings (up from a multiple of 20 times in the 1970s), while median wages have stagnated....

“In the past week, consumers have gone wild over the launch of the iPhone 6. It is U.S. innovation at its best. Will Apple still be at the cutting edge a decade from now? Not if you judge by what it does with its cash. The company keeps tens of billions of dollars offshore to avoid paying U.S. corporate taxes. Yet it borrows at home – including a record $17bn bond issue last year – to fund a massive share buyback spree (Apple spends more on equity repurchases than any other U.S. company). The roots of the problem lie with poor governance regulations and a badly outdated tax system. Unless these are fixed, boardrooms will keep on draining their treasuries at the expense of other stakeholders. Greed will always be with us. Dumb laws are optional.”

And some would say, as Luce notes elsewhere, that one of the reasons for the huge buybacks is “secular stagnation,” a phrase coined by former Treasury Secretary Lawrence Summers.

On this topic, Robert J. Samuelson / Washington Post

“We live in the shadow of ‘secular stagnation,’ to use a phrase now fashionable among economists. Even assuming a full recovery from the Great Recession, it’s widely expected that the economy will grow more slowly in the future than in the past. In part, this reflects baby boomers’ retirement, which reduces expansion of the labor force. Pre-recession growth was also artificially boosted by cheap credit. Forecasts have been cut, but they haven’t been cut enough, says economist Robert Gordon.

“If he’s right this could be our next nasty economic surprise.

“Gordon, a respected Northwestern University scholar, contends that mainstream economic growth predictions are wildly optimistic. His own calculations are more restrained. By 2024, he reckons, the economy’s annual output (gross domestic product) will be nearly $2 trillion lower – almost 10 percent – than projected by the Congressional Budget Office (CBO). Government debt will be 87 percent of GDP in 2024 instead of the CBO’s estimate of 78 percent. Disappointing output will also pressure the Federal Reserve to move earlier against inflation by tightening credit, he says.

“The gist of Gordon’s argument is that the nation’s productive capacity – what economists call ‘the supply side’ – will expand only slowly....

“(The) prospect now is for years of modest or, in Europe, possibly nonexistent growth. How will political systems cope? Will class warfare intensify as groups battle harder for bigger shares of a stagnant pie? Without an expanding economy as a shock absorber, will racial, ethnic, religious, generational and ideological conflicts worsen?

“No one denies the reality of slower growth; the question is, how much slower? From 1950 to 1973, the U.S. economy grew almost 4 percent annually; until 2001, growth averaged slightly more than 3 percent a year. By contrast, the CBO’s projection for the next decade is 2.1 percent annually, and Gordon’s baseline estimate is a meager 1.6 percent.”

If Gordon is right, yes, the kinds of conflicts he speaks of will only worsen.

Europe and Asia

Europe’s economy is struggling to get out of neutral. The flash composite PMI reading for the 18-nation eurozone, as published by Markit, ticked down in September to 52.3 vs. 52.5 in August. The manufacturing PMI was 50.5 vs. 50.7. 

Germany’s September flash manufacturing component was 50.3 vs. 51.4 the prior month, barely in growth mode and the weakest since June 2013, though the service reading rose to 55.4 from 54.9. France’s composite was 49.1 vs. 49.5, with manufacturing edging up to 47.9 from 45.8, though still very much in contraction territory. [For new readers, 50 is the dividing line between growth and contraction.]

Chris Williamson, the chief economist at Markit, said the “survey paints a picture of ongoing malaise in the eurozone economy. Prices continue to fall at the factory level.”

The estimate for growth in the euro-18 is 0.3% in the third quarter.

European Central Bank President Mario Draghi said this week that the risks to growth “are clearly on the downside.” He could have added that the policy measures the ECB has taken thus far have had little, if zero, effect.

Separately, Draghi said in a radio interview, “Our monetary policy will stay accommodative for an extended period of time while other countries’ monetary policies may gradually acknowledge that recovery is taking place in their countries.”

The euro currency is heading for its weakest quarterly performance since the peak of the eurozone crisis in 2011, but this is by design as the ECB tries to lift the bloc’s sagging economy; a falling euro being good for Europe’s exporters.

“The exchange rate movement reflects the different path of monetary policies in Europe versus the monetary policies in other important countries,” Draghi said, referring to the fact the U.S. Federal Reserve will be hiking rates earlier than the ECB would contemplate owing to the fact the U.S. economy is far stronger.

Separately, there are renewed rumblings Greece is heading towards more trouble. The yield on the Greek 10-year bond hit 6.00% for the first time in a while and Prime Minister Antonis Samaras is seeking to exit the country’s bailout, which imposed big reform conditions that caused a political, and civil, uproar. Anti-bailout opposition party Syriza is leading in new polls this week.

Turning to Asia, a flash PMI on manufacturing from HSBC for China came in at 50.5 for September, slightly better than August’s 50.2, so global markets reacted positively to this, but earlier they swooned when Finance Minister Lou Jiwei said the economy is stable and he doesn’t see any major policy adjustments, i.e., no new stimulus initiatives, a negative for some.

In Japan, there was a poor inflation reading for August, up just 1.1% when you take April’s 3% sales-tax hike into consideration, still far short of the 2.0% target set by the government. Consumer spending remains weak. It just hasn’t bounced back from the initial shock of the tax hike as fast as Prime Minister Shinzo Abe expected it to. Wages, adjusted for inflation, have been falling.

Street Bytes

--For the first time since June 2013, the Dow Jones had triple-digit moves every day of the week, with Friday’s 167-point rally limiting the overall damage, with the Dow falling 1.0% to 17113, while the S&P 500 lost 1.4% and Nasdaq fell 1.5%. Thursday the Dow plunged 264 points, partly because of reports Russia was prepared to seize the assets of multinationals doing business there.

--U.S. Treasury Yields

6-mo. 0.01% 2-yr. 0.57% 10-yr. 2.53% 30-yr. 3.21%

T-bills had a negative yield this week, not that unusual anymore, including for short-paper in Europe.

Now the fixed income market waits to see the fallout from the big news out of Newport Beach, California...but first...

--The Securities and Exchange Commission is investigating actions taken at $2 trillion fund giant, PIMCO, specifically whether PIMCO improperly inflated the value of some bond holdings in an exchange traded fund (ETF), one personally managed by co-founder Bill Gross.

The ETF was set up to mimic the mammoth Total Return Fund, which despite heavy redemptions the past 18 months is still the largest bond fund in the world at $221 billion.

But the $3.6 billion Total Return Fund ETF reported a gain of 8.7% from March through August 2012, its first six months of operation, while the open-end Total Return Fund had a return of 5.2% for the same period. 

In a statement, PIMCO said, “We take our regulatory obligations and responsibilities to our clients very seriously. We believe our pricing procedures are entirely appropriate and in keeping with industry best practices. [E. Scott Reckard / Los Angeles Times]

Now an ETF could be investing in thinly traded securities, as opposed to the larger fund which wouldn’t be able to acquire them, and you can easily have price discrepancies if there hadn’t been a recent sale in a bond and the independent valuation firm still has to come up with an estimate. Bottom line, the SEC may find PIMCO properly reported the purchase price, as well as the valuation, and thus there would be no violation.

The Wall Street Journal did report, however, that the investigation has been under way for at least a year but appears to have intensified in recent weeks, with regulators interviewing PIMCO executives. Gross himself spent a day with the SEC about six months ago, according to people familiar with the matter.

But the inquiry also comes amidst a tough run overall for PIMCO, with a high-profile clash between Gross and heir apparent, Mohamed El-Erian, resulting in the latter’s departure, let alone the Total Return Fund’s lackluster returns and steady outflows.

Finally, the SEC investigation could spill into the overall ETF industry and how thinly traded securities of all kinds are valued in a fixed income market lacking transparency. Performance begets fund flows, after all.

So that was Thursday. Friday morning brought news that literally stunned Wall Street.

Bill Gross was leaving PIMCO, the company he co-founded in 1971, to run a small bond fund at Janus Capital Group.

According to reports, PIMCO, a unit of German insurer Allianz SE, was getting ready to fire Gross just before he resigned. According to people inside PIMCO, Gross’s behavior was increasingly “erratic” in the wake of El-Erian’s departure and the executive committee had warned him to change his behavior. Several deputy chief investment officers told the firm they would resign if Gross didn’t leave.

The executive committee then began working on succession plans, Gross learned of these and approached Janus, as well as bond superstar Jeffrey Gundlach of DoubleLine Capital LP, to explore opportunities.

Gross settled at Janus, where he will be reunited with their CEO, Dick Weil, who had been chief operating officer at PIMCO before joining Janus in 2010.

In a statement released by Janus, Mr. Gross said, “I look forward to returning my full focus to the fixed income markets and investing, giving up many of the complexities that go with managing a large, complicated organization. I chose Janus as my next home because of my longstanding relationship with and respect for CEO Dick Weil and my desire to get back to spending the bulk of my day managing client assets.”

In a separate statement, Gross later said: “It was not without great thought and deliberation over quite some time that I decided to begin this next chapter.... Janus is the right fit at the right time in my career – and my life.”

Bill Gross is 70. 43 years at PIMCO. A legend in his field. I had the honor of working with him on a few projects. But that was a long, long time ago, having left PIMCO myself in 1999.

Now picture if you were on the sales side as I was, or a portfolio manager at PIMCO, how shell-shocked you would have been at this development, even if no one should have really been that surprised given all that has happened at the firm the past year.

Investment advisers who have parked some of their clients’ assets with Gross and PIMCO have some handholding to do.

As for PIMCO itself, late Friday they named Daniel Ivascyn as group chief investment officer, Ivascyn being named Morningstar bond-fund manager of the year in 2013 for his performance with the $38 billion PIMCO Income fund. Five others, who had been recently serving as deputy chief investment officers, will continue as co-chief investment officers. Mark Kiesel, Scott Mather and Mihir Worah will be the portfolio managers for the $220 billion Total Return Fund that has seen all the redemptions the last 16 months and will likely see far more for months to come.

Bottom line, I wish my remaining friends at PIMCO the best of luck in what will be a wicked period, while we’re all anxious to see how Gross does in the next chapter of his life.

--The Centers for Disease Control and Prevention gave worst- and best-case estimates for the Ebola epidemic in West Africa and under a worst-case scenario, Liberia and Sierra Leone could have 21,000 cases by Sept. 30 and 1.4 million by Jan. 20! The figures estimate that there are actually 2.5 times as many cases as being reported. Guinea cannot be reliably modeled, according to the CDC.

In the best-case scenario, the epidemic would be “almost ended” by Jan. 20.

As of week's end, the official toll, according to the World Health Organization, was over 6,500 cases, including 3,000 deaths. [Denise Grady / New York Times]

The WHO published its own estimate and came up with 20,000 cases by Nov. 2 if preventative measures don’t take hold.

But the CDC and WHO concede case counts are rising faster than hospital beds can be provided. The U.S. promised a surge, but as CDC Director Tom Frieden admits, “delay is extremely costly.”

The actions being taken now clearly should have been put in place at a minimum four weeks ago.

Understand that the previous worst outbreak, in Central Africa, involved only 425 infections in Uganda from October 2000 to January 2001, and here we’re talking as many as 1.4 million?!

By the way, as the Washington Post reports, “Infections are doubling every 20 days in the coastal nations of Liberia and Sierra Leone, the CDC said. Each infected person is infecting roughly two additional people. The epidemic will begin to subside when the reinfection rate of 2.0 becomes lower than 1.0.”

As for Sierra Leone’s national three-day lockdown that ended Sunday, as nearly 30,000 health workers, volunteers and teachers aimed to visit every household in the country, officials confirmed 130 Ebola cases, with 70 others awaiting test results.

The mortality rate in some regions has been nearly 70%.

--What a terrible week for Apple, after launching its new iPhone 6 series the prior week amid much hoopla and booming initial sales.

Apple faced two big issues. First, its iPhone 6 Plus, about the size of a shuttle bus, was found to bend if you sit with the phone in the pants pocket. Videos of people bending the iPhone with their hands quickly went viral, though the company fought back and said they have literally received only “nine” complaints (as of Thursday).

But the fact is it’s an aluminum casing, selected to give the iPhone 6 Plus its thinnest body yet. Apple hasn’t commented on whether customers whose phones had bent would be eligible for a refund or exchange. The one-year warranty on all Apple hardware does not cover “damage caused by accident, abuse, misuse, liquid contact, fire, earthquake or other external cause.”

It does however warrant “against defects in materials and workmanship when used normally in accordance with Apple’s published guidelines.” [Sydney Morning Herald]

Then an iOS software update was botched, with some complaining it disrupted their phone’s ability to make calls and disabled the TouchID fingerprint sensor.

So Apple quickly withdrew the update to its iOS 8 software, recommending that users affected by the glitch “connect their iPhones to a computer running iTunes to reinstall the previous version of iOS 8.” [Daisuke Wakabayashi / Wall Street Journal]

Talk about a pain in the butt. Yet another reason to stick with a landline. [Half kidding.]

Oh, one other issue. The iPhone 6 Plus is very slippery and a lot of users have dropped them.

--BlackBerry launched its first new phone, the Passport, since John Chen took over as president last November. It has a 4.5-inch square screen for viewing and creating content, with the tap keyboard making its return. The company hopes to win back its business customers and the phone received positive reviews.

The screen also uses hard-wearing “Gorilla Glass” alongside stainless steel for strength. 

--On a totally different issue, FBI Director James Comey blasted Apple and Google for developing forms of encryption on their smartphones that are so secure, law enforcement cannot gain access to information stored on the devices – even when they have valid search warrants. Comey added, he couldn’t understand why the two would “market something expressly to allow people to place themselves beyond the law,” and that “There will come a day when it will matter a great deal to the lives of people...that we will be able to gain access” to the devices. 

Apple has said the new encryption isn’t intended to hinder law enforcement but to improve device security against any potential intruder. [Craig Timberg and Greg Miller / Washington Post]

--The White House announced a crackdown on tax avoidance deals known as inversions as President Obama said new treasury department measures would make such mergers less attractive, including making it more difficult for an inverted company to access money made outside the U.S.

Editorial / Wall Street Journal

“Many economists are downgrading their expectations for U.S. growth. So naturally the Obama Treasury this week rolled out a plan to discourage investment in America.

“The regulations are ostensibly to prevent so-called corporate inversions, in which U.S. companies acquire foreign firms and then relocate their legal headquarters offshore for tax purposes. But the practical impact will be to make it harder to make money overseas and then bring it back here....

“Monday’s Treasury announcement clarifies that the point is not to ensure that U.S. business profits will continue to be taxed. Such profits will be taxed under any of the inversion deals that have received so much recent attention. The White House goal is to ensure that the U.S. government can tax the foreign profits of U.S. companies, even though this money has already been taxed by the countries in which it was earned, and even though those countries generally don’t tax their own companies on profits earned in the U.S....

“Inversions are for businesses that want to make money overseas and then bring it back here. But if the changes work as intended, they will make it more difficult and expensive for companies to reinvest foreign earnings in the U.S. Tell us again how this helps American workers....

“ ‘Inversion transactions erode our corporate tax base,’ said Treasury Secretary Jack Lew on Monday. Mr. Lew may be famously ignorant on matters of finance, but now there’s reason to question his command of basic math.

“Corporate income tax revenues have roughly doubled since the recession. Such receipts surged in fiscal year 2013 to $274 billion, up from $138 billion in 2009. Even the White House budget office is expecting corporate income tax revenues for fiscal 2014 to rise above $332 billion and to hit $502 billion by 2016....

“Corporate tax receipts are climbing back from the recession trough to nearly 11% of total tax revenue this year and will hit 14% in 2016. So how are inversions hurting revenues again?

“As for fairness, Mr. Lew said on Monday that inversion transactions ‘may be legal, but they are wrong, and our laws should change.’ It must be fun for corporate executives to get a moral lecture from a guy who took home an $800,000 salary from a nonprofit university and then pocketed a severance payment when he quit to work on Wall Street, even though school policy says only terminated employees are eligible for severance.”

--Oracle Corp. paid Larry Ellison $67.3 million for his final full year in the job, fiscal 2014, with nearly all of the compensation being in the form of stock options, which is always the case with Ellison. In the prior year, Oracle valued his pay at $79.6 million.

Since day one of this column I have commented (negatively) on his pay and from here on, it will be cut as shareholders voice increasing criticism.

--The World Bank concludes that with falling consumption in Russia, owing to tensions over Ukraine, gross domestic product will expand just 0.5% in 2014, and an estimated 0.3 and 0.4 percent in 2015 and 2016, respectively. If the price of oil continues to fall it will be worse.

--ExxonMobil abandoned a drilling campaign in the Russian Arctic, the biggest casualty of sanctions by the U.S. against the Kremlin. It was a $700 million project, a joint venture with Russia’s Rosneft (think Igor Sechin).

--Britain’s biggest retailer, Tesco, has been swept up in an accounting scandal, with the company disclosing it had overstated its first-half profit by $400 million. Four senior executives were suspended and the shares fell 12% the day of the announcement. Just three weeks earlier, Dave Lewis, a former Unilever executive, took over as the new CEO.

The accounting issue was brought to light by a manager in the finance department who questioned the first-half numbers. The general counsel then took the matter to Lewis.

--According to an annual study on data breach preparedness by the Ponemon Institute, a whopping 43% of companies have experienced a breach in the past year, up 10% from the year before. An executive at Experian, which sponsored the report, said the size of the breaches has gone up “exponentially,” pointing to a case from last January, where “40% of South Koreans – a total of 20 million people – had their personal data stolen and credit cards compromised.”

--Speaking of breaches, the huge one at Home Depot Inc. is beginning to ripple across financial institutions “as criminals use stolen card information to buy prepaid cards, electronics and even groceries,” according to people familiar with the impact of the hacking attack. [Robin Sidel / Wall Street Journal]

Home Depot has said 56 million cards may have been exposed over a five-month period.

Julie Creswell and Nicole Perlroth of the New York Times had an extensive article on HD’s issues. In part:

“The risks were clear to computer experts inside Home Depot: The home improvement chain, they warned for years, might be easy prey for hackers.

“But despite alarms as far back as 2008, Home Depot was slow to raise its defenses, according to former employees....

“(Long) before the attack came to light this month, Home Depot’s handling of its computer security was a record of missteps, the former employees said....

“In recent years, Home Depot relied on outdated software to protect its network and scanned systems that handled customer information irregularly, those people said. Some members of its security team left as managers dismissed their concerns. Others wondered how Home Depot met industry standards for protecting customer data. One went so far as to warn friends to use cash, rather than credit cards, at the company’s stores.

“Then, in 2012, Home Depot hired a computer engineer to help oversee security at its 2,200 stores. But this year, as hacks struck other retailers, that engineer was sentenced to four years in prison for deliberately disabling computers at the company where he previously worked.” Oh brother.

--I’m sure many of you saw the “60 Minutes” story on IRS fraud and how easy it is to get tax refunds through identity theft. Very depressing, especially for the victims.

And then there was the New York Times story last weekend by Elisabeth Rosenthal on “an increasingly common practice that some medical experts call drive-by doctoring, (wherein) assistants, consultants and other hospital employees are charging patients or their insurers hefty fees. They may be called in when the need for them is questionable. And patients usually do not realize they have been involved or are charging until the bill arrives.”

For example, one patient had three-hour neck surgery for herniated disks in December at Lenox Hill Hospital in Manhattan and he was blindsided by a bill of about $117,000 from an “assistant surgeon” whom the patient did not recall meeting.

It’s largely about out-of-network providers “who bill 20 to 40 times the usual local rates and often collect the full amount, or a substantial portion.”

Another, Patricia K., had a back operation at a Long Island hospital and among the mystery bills was $250,000 from two plastic surgeons claiming to sew up the incision. Normally a resident does that, in Ms. K’s situation.

Ms. K.’s (I see no reason to use full names, which are contained in the Times story) insurer paid about $10,000 to the plastic surgeons, who then sent a bill for the remainder. Ms. K and her husband refused to pay.

The local hospital here in my home town of Summit, Overlook, was cited in the article for egregious billing, such as $679 in occupational therapy charges involving the delivery of a device to help a patient put on his socks, which he never used.

So between the IRS situation, and this garbage, it’s easy to conclude we can hardly be considered a great nation when this kind of stuff goes on.

--Last week I wrote investors needed to be careful in buying into Alibaba for one reason. It’s a Chinese company.

Monday, the Wall Street Journal’s L. Gordon Crovitz wrote:

“(Alibaba’s) smart business strategy and charismatic leadership come with a massive risk: It’s a Chinese company operating under Chinese law, which does not recognize the ownership rights of its new shareholders.”

It’s about a very complicated ownership structure, with shareholders owning a piece of a shell company in the Cayman Islands with a contractual right to a share of the profits. As I said, this company is going to be a story for years to come...good and bad. [The shares closed the week at $90.50, down $3.50 on the week but well above the $68 offering price.]

--I forgot to note last week that GlaxoSmithKline was fined $500 million by a Chinese court as part of a bribery investigation. It’s another example of the dangers for multinationals these days attempting to do business in a country focused on an anticorruption campaign and rising economic nationalism.

Glaxo admitted its senior managers were guilty of bribe-giving and illegal sales tactics.

As an expert at the Hong Kong University of Science and Technology told the New York Times, “It’s very hard to do business in the Chinese health care and pharmaceutical sectors without doing payoffs. Everyone else pays bribes. Glaxo just got caught.”

--BHP Billiton and Mitsubishi plan to cut 700 jobs at a joint coal mining venture in Australia due to market conditions. The operation in Queensland is the world’s biggest exporter of coal used in steelmaking.

Coking coal mines have been closed or seen production plummet after prices hit a six-year low due to global oversupply, as well as slumping demand from top buyer China.

--Shares in Nike soared 12% after the company reported revenues rose 15% for its fiscal first quarter ended August 31.

--Air France-KLM is suffering through a crippling strike that is costing the company $25.6 million a day. Friday was day 12 as management pleaded with the pilots to accept their latest offer. The big hang-up is over the airline’s plans for a budget carrier and how the unit will be staffed.

--Back in the States, the nation’s airlines posted $3.6 billion in profits for the second quarter, up 64% from the same period last year, according to the Bureau of Transportation Statistics. The airlines collected $900 million in bag fees and $753 million in reservation change fees.

The largest airlines collected $3.3 billion in checked bag fess for 2013, compared with $1.1 billion in 2008. [Hugo Martin / Los Angeles Times]

--What a nightmare in Chicago with the air traffic control center having been sabotaged by a disgruntled employee. No telling how long the issues will remain at O’Hare and Midway airports, with 1,750 flights being canceled the first day. Operations certainly won’t be fully restored to normal for a few days it seems.

Foreign Affairs

Iraq / Syria / ISIS: U.S.-led forces have launched over 200 air strikes on ISIS in Iraq and commenced targeting IS in Syria on Monday, including hits on mobile oil refineries that ISIS uses to raise cash, as well as on an obscure al-Qaeda cell in Syria, Khorasan, that was/still is plotting attacks against Europe and the United States. 

As of Friday, the story is Khorasan’s leadership remains largely intact, so the group has not been dismantled and, let’s face it, these guys are all intertwined. Aaron Zelin, an analyst at the Washington Institute for Near East Policy, told the Washington Post that it was curious the Obama administration was using the term “Khorasan group” as the label because “Jihadis themselves haven’t used it.”

A counterterrorism expert, Brian Fishman, said, “Publicly, there hasn’t been a declaration or any indication that this is a separate organization” in Syria.

Seth Jones of the Rand Corporation told the New York Times. “What core al-Qaeda wanted was some forward-deployed people in Syria, which is an important battlefield for them because it is so close to Europe.”

President Obama touted a Sunni-Arab coalition of Saudi Arabia, Jordan, Bahrain, Qatar and the UAE, all of which are participating in airstrikes to one degree or another in Syria, while Britain joined France in saying it would launch strikes against ISIS targets in Iraq, after Prime Minister David Cameron won support in parliament by a vote of 524 to 43. [The independence vote in Scotland was a big reason for Britain’s delay.]

Britain, like France, will limit its participation to strikes in Iraq, as will be the case with the Netherlands, Denmark and Belgium. Britain could be ready for action by Sunday.

Denmark, by the way, said it would contribute seven F-16s along with 250 pilots and support staff, a significant act by the Danes. So buy a product from there this weekend to express your appreciation.

But as a commander of a moderate rebel group in Syria told the Wall Street Journal’s Sam Dagher, “The only beneficiary of foreign intervention in Syria is the Assad regime, in the absence of any real strategy to topple it.”

Yes, it’s complicated. The rebels are battling both Assad and ISIS. Some of the groups the U.S. is hitting are allied with the Nusra Front, but some Nusra Front factions are working with the moderates to topple Assad.

“Striking the Nusra Front will turn it into a real enemy of all the other forces” such as the Western-backed Free Syrian Army, said Mohammad al-Salloum, an activist from Idlib previously held hostage by ISIS.

Faisal al-Kasim, a Syrian-born broadcaster with Al Jazeera, wrote, “What more can Bashar al-Assad ask for? The U.S. planes targeted first and foremost the strong factions that are fighting him.”

Another anti-regime rebel told the Financial Times, “We asked for Western strikes to come and support our fight to free Syria, not to kill us,” describing how he pulled out the bodies of women and children from the wreckage of a residential building destroyed in the first coalition air strikes.

More than 150,000 Kurds were forced to flee into neighboring Turkey after ISIS militants attacked a Syrian Kurdish town, with many Kurdish fighters saying the United States needed to coordinate its airstrikes with them because they are hitting mostly abandoned bases.

The EU’s anti-terrorism chief told the BBC on Friday that the number of Europeans joining Islamist groups in Syria and Iraq is more than 3,000. Gilles de Kerchove warned Western air strikes would increase the risk of retaliatory attacks in Europe.

Mr. de Kerchove noted “we have to acknowledge” the increased risk of a violent reaction, as in what happened with the French and the beheading of a French tourist kidnapped in Algeria after ISIS issued a statement saying there would be retaliation for France’s bombing of IS in Iraq.

The CIA estimates ISIS has 30,000+ fighters in Iraq and Syria, three times the initial estimate.

Friday, retired Gen. David Petraeus said in a Tokyo presentation that the fight against ISIS will take years and need ground forces to succeed.

“We’re talking about years, many years... What we’re doing right now is disrupting. We are gradually chipping away at the strength” of ISIS, but gains couldn’t be sustained without ground troops.

Also Friday, Joint Chiefs Chairman Gen. Martin Dempsey reiterated he would recommend ground forces if necessary.

On a different front, Egypt accused Turkish leader Tayyip Erdogan of supporting terrorists, after Erdogan used part of his speech at the UN General Assembly to question Egyptian President al-Sisi. The tension between the two countries goes back to the Egyptian army’s ouster of elected President Mohamed Morsi of the Muslim Brotherhood, which Erdogan supports.

“Again, those objecting (to) the murders in Iraq, Syria and the murder of democracy in Egypt rae subjected to certain unfair and groundless accusations and almost immediately accused of supporting terrorism,” said Erdogan.

“The United Nations as well as the democratic countries have done nothing but watch the events such as overthrowing the elected president in Egypt and the killings of thousands of innocent people who want to defend their choice. And the person who carried out this coup [Ed. Sisi] is being legitimized.” [Reuters / New York Times]

Charles Krauthammer / Washington Post

“Late, hesitant and reluctant as he is, President Obama has begun effecting a workable strategy against the Islamic State. True, he’s been driven there by public opinion. Does anyone imagine that without the broadcast beheadings we’d be doing anything more than pinprick strikes within Iraq? If Obama can remain steady through future fluctuations in public opinion, his strategy might succeed.

“But success will not be what he’s articulating publicly. The strategy will not destroy the Islamic State. It’s more containment-plus. Expel the Islamic State from Iraq, contain it in Syria. Because you can’t win from the air. In Iraq, we have potential ground allies. In Syria, we don’t.

“The order of battle in Iraq is straightforward. The Kurds will fight, but not far beyond their own territory. A vigorous air campaign could help them recover territory lost to the Islamic State and perhaps a bit beyond. But they won’t be anyone’s expeditionary force.

“From the Shiites in Iraq we should expect little....

“Our key potential allies are the Sunni tribes. We will have to induce them to change allegiances a second time, joining us again, as they did during the 2007-08 surge, against the jihadists....

“Syria is another matter. Under the current strategy, the cancer will remain. The air power there is unsupported by ground troops. Nor is anyone in Obama’s ‘broad coalition’ going to contribute any....

“As for what’s left of the Free Syrian Army, Obama has finally come around to training and arming it. But very late and very little. The administration admits it won’t be able to field any trained forces for a year. And even then only about 5,000. The Islamic State is already approximately 30,000 strong and growing....

“Obama was right and candid to say this war he’s renewed will take years. This struggle is generational....

“Today’s jihadism is global, its religious and financial institutions ubiquitous and its roots deeply sunk in a world religion of more than a billion people. We are on a path – long, difficult, sober, undoubtedly painful – of long-term, low-intensity rollback/containment.

“Containment-plus. It’s the best of our available strategies. Obama must now demonstrate the steel to carry it through.”

Thomas L. Friedman / New York Times

“The good news: The rise of the Islamic State, also known as ISIS, is triggering some long overdue, brutally honest, soul-searching by Arabs and Muslims about how such a large, murderous Sunni death cult could have emerged in their midst. Look at a few samples, starting with ‘The Barbarians Within Our Gates,” written in Politico last week by Hisham Melhem, the Washington bureau chief of Al-Arabiya, the Arabic satellite channel.

“ ‘With his decision to use force against the violent extremists of the Islamic State, President Obama...is stepping once again – and with understandably great reluctance – into the chaos of an entire civilization that has broken down. Arab civilization, such as we knew it, is all but gone. The Arab world today is more violent, unstable, fragmented and driven by extremism – the extremism of the rulers and those in opposition – than at any time since the collapse of the Ottoman Empire a century ago.

“ ‘Every hope of modern Arab history has been betrayed,’ Melhem added.

“ ‘The promise of political empowerment, the return of politics, the restoration of human dignity heralded by the season of Arab uprisings in their early heydays – all has given way to civil wars, ethnic, sectarian and regional divisions and the reassertion of absolutism, both in its military and atavistic forms. ...The jihadists of the Islamic State, in other words, did not emerge from nowhere. They climbed out of a rotting, empty hulk – what was left of a broken-down civilization.’....

“(ISIS) is a killing machine, and it will take another killing machine to search it out and destroy it on the ground. There is no way the ‘moderate’ Syrians we’re training can alone fight ISIS and the Syrian regime at the same time. Iraqis, Turkey and the nearby Arab states will have to also field troops....

“What’s in the soul of the Arab regimes who are ready to join us in bombing ISIS in Syria, but rule out ground troops?

“This is a civilization in distress, and unless it faces the pathologies that have given birth to an ISIS monster...any victory we achieve from the air or ground will be temporary.”

Editorial / Wall Street Journal

“Much is being made of the coalition of Arab states that participated in the initial bombing run, including Saudi Arabia, the United Arab Emirates and Jordan. This is more important symbolically than it is militarily. Much as in the Libyan air campaign against Moammar Gadhafi, the U.S. will provide nearly all of the air and intelligence muscle. The main significance of the Arab participation is to rebut the attempts by ISIS and al-Qaeda to pitch this as a fight between America and Islam.

“The Arabs will also withdraw if the mission flags or the U.S. looks like it is losing its resolve. Now that it has begun this fight, and persuaded the likes of Jordan to publicly join our side, the Obama Administration must fight until neither jihadist group poses a threat to these Arab states....

“No U.S. president should ever start a war he doesn’t intend to win, and wars rarely go as smoothly as advertised in advance. Now that he has attacked ISIS, Mr. Obama must show that America is the strong horse.”

John Podhoretz / New York Post

“On Tuesday, the president said the United States and five Arab countries had participated in strikes on Syria – to hit at ISIS and to disrupt an imminent terrorist threat to Europe or the American homeland from the al-Qaeda offshoot Khorasan.

“Well, it’s certainly cost-effective to kill two birds with one stone, assuming you kill the birds, of course. But these are not the same thing, not at all.

“First off, it seems like the administration has, as we say in the news business, buried the lead. Its remarks and the focus of its briefings have been dedicated to the fight against ISIS.

“But if it in fact succeeded in preventing an imminent attack through its targeted strikes on the Khorasan group, this will have been without question the Obama administration’s greatest foreign-policy and anti-terror success.

“It’s difficult to prove a negative – like the prevention of something. For years, many of us have said that the Bush administration never got credit for the fact that there was no follow-along attack after 9/11 on the American continent, as was universally expected....

“The only solution is prevention. That is the reason for what people deride as ‘security theater’ and what Snowdenites scream bloody murder about when it comes to the monitoring of communications.

“All of these have had an extraordinary deterrent and/or prophylactic effect. They’re inconvenient, yes, and spooky, yes, and they may have come to seem too disturbing.

“But it’s unquestionable that they’ve raised the difficulty level of staging an attack inside the United States to extraordinarily great heights.

“The Obama administration has followed up on this with an aggressive effort against terrorists themselves, including hits with drone strikes. The conventional attack on Khorasan on Monday night takes this to a new level.”

Iran: In his speech to the UN General Assembly, Iranian President Hassan Rohani said, “Certain intelligence agencies have put blades in the hands of madmen, who now spare no one,” in blaming Western governments for sowing the seeds of the outbreak of extremism that has swept the Middle East.

“Currently our peoples are paying the price. Today’s anti-Westernism is the offspring of yesterday’s colonialism. Today’s anti-Westernism is a reaction to yesterday’s racism.”

“The strategic blunders of the West in the Middle East, Central Asia, and the Caucuses have turned these parts of the world into a haven for terrorists and extremists. Military aggression against Afghanistan and Iraq and improper interference in the developments in Syria are clear examples of this erroneous strategic approach in the Middle East.”

Rohani, who had his first meeting with British Prime Minister Cameron in New York earlier this week, suggested flexibility by the West in the ongoing nuclear talks would open the way to more cooperation in the war against the terrorists, referring to al-Qaeda and ISIS.

If a nuclear agreement is struck, he said, “then an entirely different environment will emerge for cooperation at regional and international levels, allowing for greater focus on some very important regional issues such as combating violence and extremism in the region.”

Speaking of these groups, Rohani said: “They also have a single goal: ‘the destruction of civilization, giving rise to Islamophobia and creating a fertile ground for further intervention of foreign forces in our region,” he said, in scolding Western media for describing their leaders as followers of Islam. [David Usborne / Independent (UK)]

So what about the nuclear talks?

Editorial / Bloomberg

“In their addresses to the United Nations General Assembly this week, the presidents of Iran and the U.S. agreed on only one thing: that the other one should seize the opportunity to strike a deal on Iran’s nuclear fuel program before the deadline, now just two months away.

“Both men, of course, are right. And while President Barack Obama should (and will) ignore President Hassan Rohani’s broad hint that the U.S. should make concessions in the nuclear talks in order to secure Iranian cooperation in fighting Islamic State, there is little doubt that a deal could lead to improved security for everyone – and that failure would create new dangers.

“As the Nov. 24 deadline approaches, the two sides have grown increasingly pessimistic that they will be able to agree on how many centrifuges Iran should be allowed to possess for its uranium enrichment program.

“Negotiators for the so-called P5+1 (China, France, Germany, Russia, the U.K. and the U.S.) want Iran to cut 8,000 of the 10,000 operational centrifuges it has today, thus stretching to nine to 12 months the time it would need to ‘break out’ and enrich enough weapons-grade uranium for a bomb (from two to three months today). Iran, on the other hand, wants to be able to grow its centrifuge capacity to 190,000 by 2021 – to feed its nuclear power plant at Bushehr.

“Obviously the gap in expectations is vast. But it’s a mistake to focus so intently on the centrifuge numbers... when ‘breakout’ depends not only on producing fuel for a bomb, but also on assembling and testing the delivery mechanisms and warheads... to prevent Iran from developing a clandestine program that could put together the whole package, the U.S. and its allies mainly need an intrusive inspection program.”

Benny Avni / New York Post

“(Let’s) not, in the process of fighting ISIS, hand the Mideast over to Iran. We’re dancing dangerously close to outright allowing the rising Shiite powerhouse to become a military nuclear state – and that can’t be good.

“There’s a general unease in the region about America springing to action whenever Sunni extremists, like ISIS, commit horrific acts, while ignoring similar acts by Shiites – as in Iran’s bloodbath during the 2009 Green Revolution, or the atrocities its ally Syria commits....

“Although fighting the Islamic State’s Sunni terrorists is an Iranian strategic imperative, Tehran wants to trade concessions on the nuclear front for engaging in the fight against ISIS.

“If we give on that front, the result could be much more significant to the future of the Mideast than all the hoopla of this week’s General Assembly gabfest....

“The Obama administration is eager to strike a nuclear deal before the latest deadline, Nov. 24. If the public meeting planned for Friday between Zarif, Kerry and other foreign ministers goes ahead,* we’ll know there’s movement toward ‘compromise’ – i.e., further Western capitulation.

“But Sunni powers won’t just roll over and let Tehran dominate the region....They, too, will likely seek nukes – an arms race from hell.

“Despite denials all around, all signs are that Washington is ready to further ease up on Iran’s nuclear program, if only to win against ISIS....

“In his speech...Obama (rightly hailed) his newfound footing in the fight against jihadi terrorists. But he must also address fears about Iran.

“If he doesn’t, the gains we make by fighting Sunni terrorists will be offset by the long-term menace posed by a fanatic, nuclear-armed Shiite power.”

*I didn’t see any real details of the meeting as I went to post. Rohani, prior to the talks, said progress was “extremely slow.”

Bottom line, the two sides must reach agreement soon because it will take weeks to get all parties to sign off on the particular language, including for an inspections regime. Additionally, the length of any agreement is a key, along with the timing of any sanctions relief.

Eric Edelman, Dennis Ross and Ray Takeyh / Washington Post

“As the United States begins its campaign to destroy the Islamic State, many voices can be counted on to call for cooperation with Iran. Among those has been none other than Secretary of State John Kerry, who insisted that Iran’s exclusion from the Paris Conference ‘doesn’t mean that we are opposed to the idea of communicating to find out if they will come on board, or under what circumstances, or whether there is the possibility of a change.’ On the surface, this may seem sensible, as both Washington and Tehran have an interest in defanging a militant Sunni group. But we would be wise to bear in mind two points: first, Kerry’s proviso on the possibility of change, and second, that the essential axiom of Middle East politics is that the enemy of my enemy is sometimes still my enemy. The ebbs and flows of the war on terrorism should not be allowed to conceal the fact that the theocratic Iranian regime and its attempt to upend the regional order remains the United States’ most consequential long-term challenge in the Middle East....

“The United States and Iran stand at opposite ends of the spectrum of Middle East politics. The Islamic republic’s ideological compulsions and sheer opportunism make it an unlikely ally for the West. The coincidence of mutual opposition to a radical Sunni terrorist group should not blind us to the enduring threat that the mullahs represent.”

Israel: Hamas and rival Fatah reached a preliminary agreement on jointly governing the Gaza Strip, this as a senior Palestinian official said President Mahmoud Abbas’ government, which runs the West Bank, will press ahead with a U.N. bid to set a deadline for Israel to end its occupation of lands captured in the 1967 war. The purpose of the resolution is to set the groundwork for the establishment of a Palestinian state.

Egypt is hosting a donors conference for Gaza on Oct. 12, but donors would likely hold back any pledges for the reconstruction effort if Hamas maintained total control of the Strip.

Separately, the military said army and police forces were trying to arrest two suspects in the abduction and killing of three Israeli youths in the West Bank in June and the suspects died in a gun battle. Both were said to be affiliated with Hamas, which initially denied it had anything to do with the June abduction.

Ukraine: Vladimir Putin is demanding the recently-ratified trade pact between the European Union and Ukraine be reopened or he will issue “immediate and appropriate retaliatory measures.”

Putin has been determined not to allow Ukraine to fall into the EU’s orbit, or NATO, even though he has already annexed Crimea and is on the verge of doing the same in the east of the country.

Putin issued his threats in a letter to European Commission President Jose Manuel Barroso. Ukraine and the EU had agreed to delay implementation of the trade pact until 2016 in order to reassure the Kremlin the deal wouldn’t harm economic ties between Moscow and Kiev.

For his part, Ukrainian President Petro Poroshenko said he was proceeding with plans to get Ukraine ready to apply for EU membership by 2020.

Editorial / Washington Post

“In the last week, Ukraine’s parliament has approved far-reaching concessions to appease Mr. Putin, including a formal grant of autonomy to the Russian-controlled regions and a one-year delay in the implementation of a free-trade agreement with the European Union. In return, Ukraine is hoping to claw back a few attributes of sovereignty: the withdrawal of Russian troops from its territory, the sealing of the border and the release of Ukrainians taken prisoner by the Russians or their proxies.

“It’s unlikely that Mr. Putin will meet those terms. While some Russian troops have pulled back, Ukrainian and NATO officials say 1,000 or more remain. Russian forces still control a significant stretch of the border, and both Moscow and its Ukrainian proxies have rejected Mr. Poroshenko’s concessions as inadequate.

“Mr. Poroshenko appears resigned to a ‘frozen conflict’ in eastern Ukraine. His hope is to prevent renewed Russian aggression; that’s why he wants U.S. aid. ‘The weapons will help us to prevent the next war,’ he said in an appearance at the Atlantic Council. Though Ukraine’s army cannot defeat Russia’s, the prospect of significant losses might deter Mr. Putin from another offensive.”

A nine-point ceasefire agreement was reached in Minsk last Saturday, including a 19-mile buffer zone and a ban on overflights of part of eastern Ukraine by military aircraft and the withdrawal of ‘foreign mercenaries’ on both sides.

But hours after the agreement was signed, there was shelling in Donetsk, though since then there has largely been silence.

One other issue came up at week’s end. Hungary suspended delivery of gas to neighboring Ukraine “indefinitely.” Hungarian Prime Minister Viktor Orban has been critical of EU sanctions on Russia and recently met with Gazprom chief, Alexei Miller. Gazprom agreed to boost supplies to Hungary. Hungary, along with Poland and Slovakia, had been supplying gas to Ukraine after Russia cut off supplies to it in June, per an agreement with the European Council.

China: State media reported a “serious terrorist attack” in restive Xinjiang province resulting in at least 50 deaths. The region in China’s far west is home to the Muslim Uighur minority group and tensions have been growing for years between the Uighurs and the Han Chinese. It appears there were suicide bombings at two police stations and an outdoor market.

On the issue of Hong Kong, President Xi Jinping said Beijing’s policies towards it had not changed and would not change.

“We shall firmly adhere to the ‘one country, two systems’ [principle] and the Basic Law. [We shall] firmly push ahead with Hong Kong’s democratic development, and maintain Hong Kong’s prosperity and stability.”

But regarding the upcoming Occupy Central protest, Xi highlighted the role Beijing should play.

“I sincerely hope that Hong Kong, under the leadership of the central government and under the stewardship of the chief executive, can continue to advance and create a better future.”

But here words are extremely important, and as a story in the South China Morning Post noted, Xi told a delegation from Hong Kong, including the city’s richest man, Li Ka-shing, that Hong Kong was a “local administrative region that comes directly under the central people’s government.” As reported by Joyce Ng, “The wording is almost identical to Article 12 of the Basic Law, except that the latter also uses the phrase ‘high degree of autonomy.’

“ ‘ As the president, Mr. Xi would craft his speech very carefully. The omission would not be accidental,’ Chung Kim-wah, a political scientist at Polytechnic University, said.

“Democratic Party chairwoman Emily Lau Wai-hing feared Xi’s omission of the catchphrase ‘Hong Kong people ruling Hong Kong’ signaled Beijing was not paying as much attention to the principles as it had previously.”

As an editorial in The Economist said of Xi in general: “He has become the most powerful Chinese ruler certainly since Deng, and possibly since Mao. Whether this is good or bad for China depends on how Mr. Xi uses his power. Mao pushed China to the brink of social and economic collapse, and Deng steered it on the right economic path but squandered a chance to reform it politically. If Mr. Xi used his power to reform the way power works in China, he could do his country great good. So far, the signs are mixed.”

Xi’s poll numbers are the best of any leader since Mao.

Lastly, on the pollution front, China is now emitting more carbon pollution per person than the EU and U.S. combined, according to a study out of Stockholm’s International Geosphere-Biosphere Program.

China is responsible for 28% of global emissions, followed by the U.S. with 14% and the EU at 10%.

North Korea: Kim Jong-un failed to appear at a key political event and a report on state television said on Thursday that he was in an “uncomfortable physical condition” but gave no details. He hasn’t been seen in public in three weeks.

Another report on state TV showed footage of Kim limping during one of his inspection tours. A South Korean newspaper said Kim was “suffering from gout, along with...obesity, diabetes and high blood pressure.” Gout runs in Kim’s family.

Russia: The State Duma approved a bill to expedite a new set of Internet regulations that, experts say, would allow for the banning of sites such as Facebook, Twitter and Amazon. A law requiring all online companies to store users’ personal data on Russian territory as of September 2016 was passed in July. Now lawmakers want to move the deadline forward by more than a year, to Jan. 1, 2015, though Russia simply doesn’t have the storage nor the infrastructure to accomplish this in that timeframe.

President Putin, who ignored the Internet for years, allowing it to flourish in Russia, began cracking down in late 2011, when opposition against him was growing, with protests coordinated online.

At the same time, Putin has launched a crackdown on Russia’s oligarchs.

Meanwhile, the Baltic countries have seen a dramatic increase in Russian military provocations, with NATO fighters policing Baltic airspace having been scrambled 68 times along Lithuania’s borders this year, while Latvia has registered 150 “close incidents” where Russian aircraft were found approaching and observed for risky behavior, as reported by the Financial Times.

Edward Lucas / Wall Street Journal

“Having humiliated the West in Ukraine, Vladimir Putin’s Russia is turning to the Baltic states. It has sent four powerful signals, none of which have met a proper response.

“No sooner had President Obama earlier this month delivered a ringing message of support to Europe’s beleaguered front line in Tallinn, the Estonian capital, than Russia abducted an Estonian security official, Eston Kohver, near the countries’ shared border. He awaits trial in Moscow, on espionage charges – and a 20-year jail sentence if convicted.

“Next, Russia asked Lithuania to extradite an estimated 1,500 citizens who allegedly failed to complete their military service in the final years of the Soviet Union. That is as sinister and repellent as if modern Germany wanted Dutch or Danish help in prosecuting deserters from Hitler’s army. And on Sept. 19, Russia seized a Lithuanian fishing vessel, which Moscow said was poaching in Russia’s territorial waters. The ship and its crew have been detained in Murmansk, prompting a furious protest from authorities in Vilnius.

“Meanwhile, Konstantin Dolgov, a senior Russian official, issued a chilling warning earlier this month during a conference in Riga, the Latvian capital. He accused the Baltic states of fostering neo-Nazism, discriminating against ethnic Russians and the Russian language, and gross violations of human rights. The West, he said, had instigated these abuses....

“(Tactics such as these) could all too easily destabilize one or more of the Baltic states, forcing a change in government and destroying collective security in Europe forever. Yet so far NATO’s placid political masters show no sign of willingness to forestall the looming disaster.”

Back in Moscow, anywhere from 5,000 to 26,000 (depending on who was giving the estimate) marched last weekend to protest the Ukraine conflict. These will only grow, especially if the ceasefire breaks down.

And former tycoon Mikhail Khodorkovsky, who spent a decade in jail after challenging the Kremlin, announced he would be ready, if called upon, to lead Russia in times of crisis, specifically an online movement dubbed Open Russia that is designed to unite pro-European Russians in a bid to challenge Putin. This is not a political party, per se, nor is Khodorkovsky standing for election in Russia, but he is seeking to support fundamental change.

Hope he can keep the website up.

Russia is reeling from economic sanctions and Khodorkovsky can take advantage of this. His supporters hope his action will help the people see through the Kremlin’s propaganda machine.

Afghanistan: An election commission ruled that Ashraf Ghani had won the nearly six-month election process, hours after he and Abdullah Abdullah signed a power-sharing deal following weeks of negotiations, wherein Abdullah will have the newly created role of chief executive (prime minister) in a national unity government.

The election commission, though, never did release vote totals of the June runoff. Leaked results had it 55 for Ghani and 45 for Abdullah.

The new president-elect, Ashraf Ghani, said he is committed to ensuring that women are well represented in government and the education and economic sectors.

“The victory isn’t just about winning an election. It’s a victory for democracy, for our constitution and for our future. Together, we have turned the page and written a new chapter in our long and proud history – the first peaceful democratic transition between one elected president and another.”

Separately, the Taliban beheaded 12 civilians and torched 60 homes in an assault on security forces in the eastern part of the country. The 12 were family members of local and national police.

Now we wait to see how Afghanistan holds together with a fragile power-sharing arrangement and an army that is about to be all on its own. Both leaders are beholden to former warlords, with Ghani’s power base being the ethnic Pashtuns, and Abdullah’s being the Tajiks and Hazaras.

Finally, outgoing President Hamid Karzai took a parting shot at the U.S.

“America pursued its own interests and did not want peace in Afghanistan.”

Karzai, in his farewell speech, thanked India, China and Iran, but didn’t thank the U.S., by far Afghanistan’s biggest donor, for one.

The U.S. ambassador to Kabul, James Cunningham, responded: “It makes me kind of sad. I think his remarks, which were uncalled for, do a disservice to the American people, and dishonor the sacrifices Americans have made here.” [Margherita Stancati / Wall Street Journal]

2,360 U.S. service members gave their lives in the war and Washington has spent over $100 billion to fund Afghanistan’s government, security forces and infrastructure projects.

Britain: London’s Metropolitan Police arrested nine men, including radical Muslim preacher Anjem Choudary, in one of the biggest antiterrorism operations in some time. Individuals in Choudary’s banned Al-Muhajiroun organization have been linked to convicted terrorists and terrorism plots.

On a different topic, the No vote on Scottish independence, Niall Ferguson / Financial Times:

“Most commentary has been focused on UK politics. This is too parochial. The real significance of the No lies at the European level. The result dents the hopes of other separatist movements in Spain, Italy and Belgium. The less obvious point is that we have witnessed another defeat for populism at the hands of the emergent Europe-wide grand coalition.

“The Yes campaign was more than just the Scottish National party. Its unexpected late gains in the polls reflected the mobilization of young voters and previous non-voters, especially in the underclass of Glasgow and its environs. What attracted those people was not the rather intricate proposition of political independence plus monetary union. It was an emotional appeal....

“Populism has been popping up all over Europe since the financial crisis. England’s version is the United Kingdom independence party. Last Sunday, the anti-immigrant Sweden Democrats doubled their share in the national parliament, while the anti-European Alternative for Germany party won seats in two more regional parliaments. In France, opinion polls suggest that the National Front’s Marine Le Pen has a serious shot at the presidency in 2017. The Dutch have Geert Wilders, Greece has Golden Dawn.

“What all these different populists have in common is nationalism – along with a rather fishy admiration for Vladimir Putin...

“Populism is back; it is not about to go away. The wrong response is for mainstream parties to pander to the populists. The right response is for the centrists to join forces, hard though it is to bury their ancestral rivalries. I have long been identified with conservatism, though on many issues I am in fact a liberal. The advent of a new era of grand coalitions is good news for me. From now on, I no longer need to deny my allegiance to the extreme center.”

France: Former President Nicolas Sarkozy noted he has never seen such “despair” in France as he announced his comeback.

“I have never seen such anger in this country, such a lack of perspective,” he said on French television in his first interview since announcing he was running to lead his political party.

Sarkozy said he wasn’t concerned by the various legal woes he faces, and two days later a Paris appeals court decided on Tuesday to freeze a corruption and influence-peddling investigation that had been launched against Sarkozy back in July; the court now reviewing his request to have the case dismissed.

Brazil: In the last ‘runoff’ poll I saw in this nation’s presidential race, Oct. 5, Marina Silva leads incumbent Dilma Rousseff 46% to 44%. I say runoff because with a solid third candidate in the race, neither is likely to gain the required 50% in the first round so the runoff would be held Oct. 26.

Random Musings

--Attorney General Eric Holder announced he was resigning after six years but will stay on until a replacement is named. Among those mentioned as possible successors is former White House counsel Kathryn Ruemmler. Manhattan U.S. Attorney Preet Bharara has also been mentioned, which would be an interesting choice. The nominee will not face any confirmation hearings until after the election.

As for Holder’s legacy, there will be time to dissect it, but as Devlin Barrett wrote in the Wall Street Journal, “Holder extracted record-setting penalties from big banks, expanded benefits for same-sex couples and took on racial disparities in criminal sentencing and voting. He has also played a key role in some of the more controversial parts of the administration’s counterterrorism policy. His department wrote a legal justification for killing American citizens overseas if it is determined they pose a threat to U.S. lives and can’t be apprehended through traditional means.”

And the Justice Department has played a key role in overseeing the National Security Agency’s surveillance programs, which in the wake of Edward Snowden’s revelations, were heavily criticized.

--Peggy Noonan / Wall Street Journal

“In a year when Republicans are operating in such an enviable political environment, why aren’t their U.S. Senate candidates holding big and impressive leads? Why does it look close? Why are party professionals getting worried?

“The Democratic president is unpopular. What progress can be claimed in the economy is tentative, uneven, feels temporary. True unemployment is bad and people who have jobs feel stressed and hammered by costs. Americans are less optimistic than they’ve ever been in the modern era, with right-track/wrong-track numbers upside down. Scandals, war, uncertain leadership – all this has yielded a sense the whole enterprise of the past six years just did not work.

“But Republicans aren’t achieving lift-off. The metaphor used most often is the wave. If Republicans can’t make, catch and ride a wave in an environment like this, they’ve gone from being the stupid party to the stupid loser party....

“Republicans need to say what they’re for. They need to make it new and true – not something defensive but something equal to the moment.”

--Gov. Chris Christie’s approval rating has dipped to 46%, according to a Monmouth University/Asbury Park Press poll, down from 50% in June. The poll director at Monmouth said New Jerseyans are tiring of the amount of time Christie is spending out of state. Bridgegate is not the reason the number dropped.

--I like Democratic West Virginia Sen. Joe Manchin and believe he would be the perfect third party presidential candidate, and then I saw in a piece in U.S. News Weekly that he has a partnership with former GOP presidential candidate Jon Huntsman called No Labels, that tries to get Capitol Hill Republicans and Democrats to work together. 

--Peggy Noonan / Wall Street Journal

“(President Obama’s) essential problem is that he has very poor judgment.

“And we don’t say this because he’s so famously bright – academically credentialed, smooth, facile with words, quick with concepts. (That’s the sort of intelligence the press and popular historians most prize and celebrate, because it’s exactly the sort they possess.) But brightness is not the same as judgment, which has to do with discernment, instinct, the ability to see the big picture, wisdom that is earned or natural....

“You can run down the list. His famous ‘red line’ comment was poor judgment. He shouldn’t have put himself or his country in that position, threatening action if a foreign leader did something. He misjudged the indelible impression his crawl-back would make on the world.

“Last month it was the ‘I don’t have a strategy’ statement on the Islamic State. That’s not something an American president attempting to rouse the public and impress the world can say. But he didn’t know....

“The other night, at the end of his Syria speech, he sang a long, off-point aria to the economy. Supposedly it would be ringing and rousing, but viewers looked at each other and scratched their heads. It didn’t belong there. It showed a classic misjudging of his position. The president thinks people are depressed because they don’t understand how good the economy is. Actually right now they are depressed because he is president. It was like Jimmy Carter’s malaise speech. It wasn’t a bad speech, but he wasn’t the person who could give it because voters weren’t thinking malaise was the problem, they were thinking Mr. Carter was....

“Libya? Poor judgment. A nation run by a nut was turned into a nation run by many nuts, some more vicious than the dictator they toppled. Russia? The president misread it, which would only have been a mistake, if a serious one, if it hadn’t been for his snotty high-handedness toward those who’d made warnings. To Mitt Romney, in debate, in October 2012: ‘The 1980s – they’re now calling to ask for their foreign policy back.’

“He misjudged public reaction to the Snowden revelations, did not understand Americans were increasingly alarmed about privacy and the government....

“Maybe all this is the president’s clever way of letting time pass, letting things play out, so that in a few months the public fever to do something – he always thinks the public has a fever – will be over. And will then be able to do little, which perhaps is what he wants.

“But none of this looks clever. It looks like poor judgment beginning to end.”

--David Brooks / New York Times

“The scope of the problems we face (today) are way below historic averages. We face nothing like the slavery fights of the 1860s, the brutality of child labor and industrialization of the 1880s, or a civilization-threatening crisis like World War I, the great Depression, World War II or the Cold War. Even next to the 1970s – which witnessed Watergate, stagflation, social decay and rising crime – we are living in a golden age.

“Our global enemies are not exactly impressive. We have the Islamic State, a bunch of barbarians riding around in pickup trucks, and President Vladimir Putin of Russia, a lone thug sitting atop a failing regime. These folks thrive only because of the failed states and vacuums around them.

“I mention all of this because of the despondency and passivity and talk of unraveling that floated around this summer. Now there is a mood of pessimism and fatalism evident in the polls and in conversations – a lack of faith in ourselves.

“It’s important in times like these to step back and get clarity. The truest thing to say is this: We are living in an amazingly fortunate time. But we also happen to be living during a leadership crisis, and a time when few people have faith in elites to govern from the top. We live in a vibrant society that is not being led.

“We don’t suffer from an abuse of power as much as a nonuse of power. It’s been years since a major piece of legislation was passed, and there’s little prospect that one will get passed in the next two....

“(It’s about) rejuvenating ailing institutions. Fighting barbarians to preserve world order. Today is nothing new. Instead of sliding into fatalism, it might be a good idea to address our problems without exaggerating our plight.”

--Editorial / Washington Post...on the pathetic security breach at the White House where an intruder got through the front door.

“Surely there is a way to secure the safety of the first family without closing more streets and fencing off more sidewalks. It is not just the convenience of D.C. residents and visitors that is at stake. It is the character of American government – still meant, the last time we checked, to be of, by and for the people....

“(Making) more of Washington off-limits should itself be off-limits. People come to 1600 Pennsylvania Ave. not only to see a part of history but also to express their First Amendment rights. Washington cannot be allowed to become any more of an armed camp.”

[The intruder, Omar Gonzalez, had 800 rounds of ammunition in his car, and had been previously arrested over the summer after a high-speed chase with Virginia troopers, whereupon police found the car filled with weapons and a map with the White House circled. Gonzalez is now being held without bail.]

--According to the Census Bureau, there are 41.3 million legal and illegal immigrants in the U.S., the highest percentage in 93 years...13% of the country’s population.

Most of the immigrants who fled to the U.S. over the past three years did not come from Latin America, but rather Asia, the Caribbean and the Middle East.

--Pope Francis had a successful one-day trip to Albania last weekend (this was a security nightmare), meeting with Muslim, Orthodox Christian and Catholic communities in Tirana.

Francis said religious intolerance was a “particularly insidious enemy” that was evident in many parts of the world today.

“All believers must be particularly vigilant so that, in living out with conviction our religious and ethical code, we may always express the mystery we intend to honor,” he said.

“This means that all those forms which present a distorted use of religion must be firmly refuted as false since they are unworthy of God or humanity.”

--NASA’s Maven spacecraft slipped into Martian orbit on Monday, designed to circle the planet for a year, but not land.   The cost for the Maven mission is $671 million.

But also this week, India placed a satellite in Mars orbit, becoming only the fourth nation to succeed in a scientific mission to the red planet, and it did so at a cost of just $72 million, which, as Indian Prime Minister Narendra Modi boasted, is less than the $100 million cost of making the film Gravity, starring Sandra Bullock and George Clooney.

At first the mission was criticized in India for being a waste of money, but now it’s a source of national pride.

NASA now has three satellites orbiting Mars and two rovers on the surface, while Europe has one orbiter. No word on the number of Martians that are lining up to get visas. I want to tell them, “Go to Neptune, we’re overrated.”

---

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

God bless America.

---

Gold closed at $1215
Oil $93.54

Returns for the week 9/22-9/26

Dow Jones -1.0% [17113]
S&P 500 -1.4% [1982]
S&P MidCap -2.3%
Russell 2000 -2.4%
Nasdaq -1.5% [4512]

Returns for the period 1/1/14-9/26/14

Dow Jones +3.2%
S&P 500 +7.3%
S&P MidCap +3.3%
Russell 2000 -3.8%
Nasdaq +8.0%

Bulls 48.0
Bears 15.3 [Source: Investors Intelligence]

Have a great week. I appreciate your support.

*For new readers, I do have an iPad app.

Brian Trumbore



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Week in Review

09/27/2014

For the week 9/22-9/26

[Posted 12:00 AM ET]

Edition 807

Washington and Wall Street

It was a volatile week with various cross-currents in the global markets, including fears over slowing growth in Asia and Europe, best seen in the performance of commodities such as iron ore, which is at a five-year low, while at the same time the economic data in the U.S. continued to be solid. Tensions between Europe and Russia also ratcheted up another notch or two due to economic sanctions between the EU and Vlad the Impaler and the impact it was having on the economies in the region.

In the U.S., the housing numbers for August came in and while existing home sales, 5.05 million, were down 1.8% over July, July’s pace was a 10-month high. New-home sales for August then far outpaced expectations, an annualized figure of 504,000 that represented a 6-year high going back to May 2008.

August durable goods plunged 18.2%, a record decline, but this was after July’s record gain of 22.5%. Here it’s all about volatile aircraft sales and when you strip them out, ex-transportation, durable goods actually rose 0.7% in August (down 0.5% in July).

And then we had our final reading on second-quarter GDP and it was revised upward, as expected, to 4.6%, the best performance since Q4 2011, also 4.6%. So a nice rebound after the dreadful first quarter, down 2.1%. 

Business investment increased at a 9.7% annualized rate in Q2, with corporate spending on equipment revised upward to 11.2%, both very solid, though consumer spending was up just 2.5%, the consumer representing 70% of the economy.

Corporate profits rose 8.4% last quarter, the most since the third quarter of 2010.

An inflation component in the GDP report increased at a 2.0% annualized pace compared with 1.2% in the first quarter.

You also had some Fed talk this week from various governors. One, Richard Fisher, was his usual hawkish self, saying the Fed would have to raise rates by early next year, while another, Charles Evans, made it sound like the Fed would be in no hurry to begin normalizing the rate picture until well into the second half of ‘15, especially with iffy growth prospects around the world and abundant geopolitical risks.

And with the U.S. dollar soaring, New York Fed President William Dudley warned this could eventually hamper growth here.

On a totally different topic, one of my favorites, Edward Luce of the Financial Times had the following thoughts on financial engineering, the penchant for stock buybacks in the U.S.

“In the late 1980s, corporate America was turned inside out by the mania for hostile takeovers. The so-called barbarians at the gate upended the typical U.S. chief executive’s outlook. From then on, the only thing that mattered was to keep the share price as high as possible. Today, with stock repurchases running at record levels, their descendants are sitting inside the gates of corporate boardrooms. They are more serene than their disruptive forerunners. Instead of leveraging other people’s money to fund takeovers, they boost share prices with their own company’s revenues. But the effect is much the same. They take from the future to flatter the bottom line today. Other stakeholders be damned.

“At a time of soaring profitability, U.S. companies have piled up huge amounts of cash, much of it parked offshore. Yet investing it in long-term growth is the last thing on their mind. According to Barclays, U.S. companies have lavished more than $500bn in the past year on stock buybacks – a multiple of what most are spending on research and development and other capital investments. In the first six months of the year, buybacks surged to $338.3bn – the largest half-yearly volume since 2007. The rationale is simple. By reducing the volume of outstanding shares, chief executive officers increase earnings per share. That in turn lifts their pay, which is heavily tied to short-term stock performance. If you need an explanation for why the top 0.1 percent is doing so well, start with equity-based compensation....

“The more immediate culprit is the decline in the quality of corporate governance. The average tenure of the U.S. CEO is falling. Buying back shares instead of investing makes sense if you do not expect to be around for the pay-off. It is a no-brainer if you measure the time horizons of most executive reward packages....

“What can be done? The lazy instinct is to blame executive greed. But human avarice is as old as the wheel. If properly aligned, we should all benefit. The problem is that U.S. corporate incentives have become badly out of whack with the interests of society. Since the fashion for buybacks took off, average corporate pay has risen to more than 300 times average earnings (up from a multiple of 20 times in the 1970s), while median wages have stagnated....

“In the past week, consumers have gone wild over the launch of the iPhone 6. It is U.S. innovation at its best. Will Apple still be at the cutting edge a decade from now? Not if you judge by what it does with its cash. The company keeps tens of billions of dollars offshore to avoid paying U.S. corporate taxes. Yet it borrows at home – including a record $17bn bond issue last year – to fund a massive share buyback spree (Apple spends more on equity repurchases than any other U.S. company). The roots of the problem lie with poor governance regulations and a badly outdated tax system. Unless these are fixed, boardrooms will keep on draining their treasuries at the expense of other stakeholders. Greed will always be with us. Dumb laws are optional.”

And some would say, as Luce notes elsewhere, that one of the reasons for the huge buybacks is “secular stagnation,” a phrase coined by former Treasury Secretary Lawrence Summers.

On this topic, Robert J. Samuelson / Washington Post

“We live in the shadow of ‘secular stagnation,’ to use a phrase now fashionable among economists. Even assuming a full recovery from the Great Recession, it’s widely expected that the economy will grow more slowly in the future than in the past. In part, this reflects baby boomers’ retirement, which reduces expansion of the labor force. Pre-recession growth was also artificially boosted by cheap credit. Forecasts have been cut, but they haven’t been cut enough, says economist Robert Gordon.

“If he’s right this could be our next nasty economic surprise.

“Gordon, a respected Northwestern University scholar, contends that mainstream economic growth predictions are wildly optimistic. His own calculations are more restrained. By 2024, he reckons, the economy’s annual output (gross domestic product) will be nearly $2 trillion lower – almost 10 percent – than projected by the Congressional Budget Office (CBO). Government debt will be 87 percent of GDP in 2024 instead of the CBO’s estimate of 78 percent. Disappointing output will also pressure the Federal Reserve to move earlier against inflation by tightening credit, he says.

“The gist of Gordon’s argument is that the nation’s productive capacity – what economists call ‘the supply side’ – will expand only slowly....

“(The) prospect now is for years of modest or, in Europe, possibly nonexistent growth. How will political systems cope? Will class warfare intensify as groups battle harder for bigger shares of a stagnant pie? Without an expanding economy as a shock absorber, will racial, ethnic, religious, generational and ideological conflicts worsen?

“No one denies the reality of slower growth; the question is, how much slower? From 1950 to 1973, the U.S. economy grew almost 4 percent annually; until 2001, growth averaged slightly more than 3 percent a year. By contrast, the CBO’s projection for the next decade is 2.1 percent annually, and Gordon’s baseline estimate is a meager 1.6 percent.”

If Gordon is right, yes, the kinds of conflicts he speaks of will only worsen.

Europe and Asia

Europe’s economy is struggling to get out of neutral. The flash composite PMI reading for the 18-nation eurozone, as published by Markit, ticked down in September to 52.3 vs. 52.5 in August. The manufacturing PMI was 50.5 vs. 50.7. 

Germany’s September flash manufacturing component was 50.3 vs. 51.4 the prior month, barely in growth mode and the weakest since June 2013, though the service reading rose to 55.4 from 54.9. France’s composite was 49.1 vs. 49.5, with manufacturing edging up to 47.9 from 45.8, though still very much in contraction territory. [For new readers, 50 is the dividing line between growth and contraction.]

Chris Williamson, the chief economist at Markit, said the “survey paints a picture of ongoing malaise in the eurozone economy. Prices continue to fall at the factory level.”

The estimate for growth in the euro-18 is 0.3% in the third quarter.

European Central Bank President Mario Draghi said this week that the risks to growth “are clearly on the downside.” He could have added that the policy measures the ECB has taken thus far have had little, if zero, effect.

Separately, Draghi said in a radio interview, “Our monetary policy will stay accommodative for an extended period of time while other countries’ monetary policies may gradually acknowledge that recovery is taking place in their countries.”

The euro currency is heading for its weakest quarterly performance since the peak of the eurozone crisis in 2011, but this is by design as the ECB tries to lift the bloc’s sagging economy; a falling euro being good for Europe’s exporters.

“The exchange rate movement reflects the different path of monetary policies in Europe versus the monetary policies in other important countries,” Draghi said, referring to the fact the U.S. Federal Reserve will be hiking rates earlier than the ECB would contemplate owing to the fact the U.S. economy is far stronger.

Separately, there are renewed rumblings Greece is heading towards more trouble. The yield on the Greek 10-year bond hit 6.00% for the first time in a while and Prime Minister Antonis Samaras is seeking to exit the country’s bailout, which imposed big reform conditions that caused a political, and civil, uproar. Anti-bailout opposition party Syriza is leading in new polls this week.

Turning to Asia, a flash PMI on manufacturing from HSBC for China came in at 50.5 for September, slightly better than August’s 50.2, so global markets reacted positively to this, but earlier they swooned when Finance Minister Lou Jiwei said the economy is stable and he doesn’t see any major policy adjustments, i.e., no new stimulus initiatives, a negative for some.

In Japan, there was a poor inflation reading for August, up just 1.1% when you take April’s 3% sales-tax hike into consideration, still far short of the 2.0% target set by the government. Consumer spending remains weak. It just hasn’t bounced back from the initial shock of the tax hike as fast as Prime Minister Shinzo Abe expected it to. Wages, adjusted for inflation, have been falling.

Street Bytes

--For the first time since June 2013, the Dow Jones had triple-digit moves every day of the week, with Friday’s 167-point rally limiting the overall damage, with the Dow falling 1.0% to 17113, while the S&P 500 lost 1.4% and Nasdaq fell 1.5%. Thursday the Dow plunged 264 points, partly because of reports Russia was prepared to seize the assets of multinationals doing business there.

--U.S. Treasury Yields

6-mo. 0.01% 2-yr. 0.57% 10-yr. 2.53% 30-yr. 3.21%

T-bills had a negative yield this week, not that unusual anymore, including for short-paper in Europe.

Now the fixed income market waits to see the fallout from the big news out of Newport Beach, California...but first...

--The Securities and Exchange Commission is investigating actions taken at $2 trillion fund giant, PIMCO, specifically whether PIMCO improperly inflated the value of some bond holdings in an exchange traded fund (ETF), one personally managed by co-founder Bill Gross.

The ETF was set up to mimic the mammoth Total Return Fund, which despite heavy redemptions the past 18 months is still the largest bond fund in the world at $221 billion.

But the $3.6 billion Total Return Fund ETF reported a gain of 8.7% from March through August 2012, its first six months of operation, while the open-end Total Return Fund had a return of 5.2% for the same period. 

In a statement, PIMCO said, “We take our regulatory obligations and responsibilities to our clients very seriously. We believe our pricing procedures are entirely appropriate and in keeping with industry best practices. [E. Scott Reckard / Los Angeles Times]

Now an ETF could be investing in thinly traded securities, as opposed to the larger fund which wouldn’t be able to acquire them, and you can easily have price discrepancies if there hadn’t been a recent sale in a bond and the independent valuation firm still has to come up with an estimate. Bottom line, the SEC may find PIMCO properly reported the purchase price, as well as the valuation, and thus there would be no violation.

The Wall Street Journal did report, however, that the investigation has been under way for at least a year but appears to have intensified in recent weeks, with regulators interviewing PIMCO executives. Gross himself spent a day with the SEC about six months ago, according to people familiar with the matter.

But the inquiry also comes amidst a tough run overall for PIMCO, with a high-profile clash between Gross and heir apparent, Mohamed El-Erian, resulting in the latter’s departure, let alone the Total Return Fund’s lackluster returns and steady outflows.

Finally, the SEC investigation could spill into the overall ETF industry and how thinly traded securities of all kinds are valued in a fixed income market lacking transparency. Performance begets fund flows, after all.

So that was Thursday. Friday morning brought news that literally stunned Wall Street.

Bill Gross was leaving PIMCO, the company he co-founded in 1971, to run a small bond fund at Janus Capital Group.

According to reports, PIMCO, a unit of German insurer Allianz SE, was getting ready to fire Gross just before he resigned. According to people inside PIMCO, Gross’s behavior was increasingly “erratic” in the wake of El-Erian’s departure and the executive committee had warned him to change his behavior. Several deputy chief investment officers told the firm they would resign if Gross didn’t leave.

The executive committee then began working on succession plans, Gross learned of these and approached Janus, as well as bond superstar Jeffrey Gundlach of DoubleLine Capital LP, to explore opportunities.

Gross settled at Janus, where he will be reunited with their CEO, Dick Weil, who had been chief operating officer at PIMCO before joining Janus in 2010.

In a statement released by Janus, Mr. Gross said, “I look forward to returning my full focus to the fixed income markets and investing, giving up many of the complexities that go with managing a large, complicated organization. I chose Janus as my next home because of my longstanding relationship with and respect for CEO Dick Weil and my desire to get back to spending the bulk of my day managing client assets.”

In a separate statement, Gross later said: “It was not without great thought and deliberation over quite some time that I decided to begin this next chapter.... Janus is the right fit at the right time in my career – and my life.”

Bill Gross is 70. 43 years at PIMCO. A legend in his field. I had the honor of working with him on a few projects. But that was a long, long time ago, having left PIMCO myself in 1999.

Now picture if you were on the sales side as I was, or a portfolio manager at PIMCO, how shell-shocked you would have been at this development, even if no one should have really been that surprised given all that has happened at the firm the past year.

Investment advisers who have parked some of their clients’ assets with Gross and PIMCO have some handholding to do.

As for PIMCO itself, late Friday they named Daniel Ivascyn as group chief investment officer, Ivascyn being named Morningstar bond-fund manager of the year in 2013 for his performance with the $38 billion PIMCO Income fund. Five others, who had been recently serving as deputy chief investment officers, will continue as co-chief investment officers. Mark Kiesel, Scott Mather and Mihir Worah will be the portfolio managers for the $220 billion Total Return Fund that has seen all the redemptions the last 16 months and will likely see far more for months to come.

Bottom line, I wish my remaining friends at PIMCO the best of luck in what will be a wicked period, while we’re all anxious to see how Gross does in the next chapter of his life.

--The Centers for Disease Control and Prevention gave worst- and best-case estimates for the Ebola epidemic in West Africa and under a worst-case scenario, Liberia and Sierra Leone could have 21,000 cases by Sept. 30 and 1.4 million by Jan. 20! The figures estimate that there are actually 2.5 times as many cases as being reported. Guinea cannot be reliably modeled, according to the CDC.

In the best-case scenario, the epidemic would be “almost ended” by Jan. 20.

As of week's end, the official toll, according to the World Health Organization, was over 6,500 cases, including 3,000 deaths. [Denise Grady / New York Times]

The WHO published its own estimate and came up with 20,000 cases by Nov. 2 if preventative measures don’t take hold.

But the CDC and WHO concede case counts are rising faster than hospital beds can be provided. The U.S. promised a surge, but as CDC Director Tom Frieden admits, “delay is extremely costly.”

The actions being taken now clearly should have been put in place at a minimum four weeks ago.

Understand that the previous worst outbreak, in Central Africa, involved only 425 infections in Uganda from October 2000 to January 2001, and here we’re talking as many as 1.4 million?!

By the way, as the Washington Post reports, “Infections are doubling every 20 days in the coastal nations of Liberia and Sierra Leone, the CDC said. Each infected person is infecting roughly two additional people. The epidemic will begin to subside when the reinfection rate of 2.0 becomes lower than 1.0.”

As for Sierra Leone’s national three-day lockdown that ended Sunday, as nearly 30,000 health workers, volunteers and teachers aimed to visit every household in the country, officials confirmed 130 Ebola cases, with 70 others awaiting test results.

The mortality rate in some regions has been nearly 70%.

--What a terrible week for Apple, after launching its new iPhone 6 series the prior week amid much hoopla and booming initial sales.

Apple faced two big issues. First, its iPhone 6 Plus, about the size of a shuttle bus, was found to bend if you sit with the phone in the pants pocket. Videos of people bending the iPhone with their hands quickly went viral, though the company fought back and said they have literally received only “nine” complaints (as of Thursday).

But the fact is it’s an aluminum casing, selected to give the iPhone 6 Plus its thinnest body yet. Apple hasn’t commented on whether customers whose phones had bent would be eligible for a refund or exchange. The one-year warranty on all Apple hardware does not cover “damage caused by accident, abuse, misuse, liquid contact, fire, earthquake or other external cause.”

It does however warrant “against defects in materials and workmanship when used normally in accordance with Apple’s published guidelines.” [Sydney Morning Herald]

Then an iOS software update was botched, with some complaining it disrupted their phone’s ability to make calls and disabled the TouchID fingerprint sensor.

So Apple quickly withdrew the update to its iOS 8 software, recommending that users affected by the glitch “connect their iPhones to a computer running iTunes to reinstall the previous version of iOS 8.” [Daisuke Wakabayashi / Wall Street Journal]

Talk about a pain in the butt. Yet another reason to stick with a landline. [Half kidding.]

Oh, one other issue. The iPhone 6 Plus is very slippery and a lot of users have dropped them.

--BlackBerry launched its first new phone, the Passport, since John Chen took over as president last November. It has a 4.5-inch square screen for viewing and creating content, with the tap keyboard making its return. The company hopes to win back its business customers and the phone received positive reviews.

The screen also uses hard-wearing “Gorilla Glass” alongside stainless steel for strength. 

--On a totally different issue, FBI Director James Comey blasted Apple and Google for developing forms of encryption on their smartphones that are so secure, law enforcement cannot gain access to information stored on the devices – even when they have valid search warrants. Comey added, he couldn’t understand why the two would “market something expressly to allow people to place themselves beyond the law,” and that “There will come a day when it will matter a great deal to the lives of people...that we will be able to gain access” to the devices. 

Apple has said the new encryption isn’t intended to hinder law enforcement but to improve device security against any potential intruder. [Craig Timberg and Greg Miller / Washington Post]

--The White House announced a crackdown on tax avoidance deals known as inversions as President Obama said new treasury department measures would make such mergers less attractive, including making it more difficult for an inverted company to access money made outside the U.S.

Editorial / Wall Street Journal

“Many economists are downgrading their expectations for U.S. growth. So naturally the Obama Treasury this week rolled out a plan to discourage investment in America.

“The regulations are ostensibly to prevent so-called corporate inversions, in which U.S. companies acquire foreign firms and then relocate their legal headquarters offshore for tax purposes. But the practical impact will be to make it harder to make money overseas and then bring it back here....

“Monday’s Treasury announcement clarifies that the point is not to ensure that U.S. business profits will continue to be taxed. Such profits will be taxed under any of the inversion deals that have received so much recent attention. The White House goal is to ensure that the U.S. government can tax the foreign profits of U.S. companies, even though this money has already been taxed by the countries in which it was earned, and even though those countries generally don’t tax their own companies on profits earned in the U.S....

“Inversions are for businesses that want to make money overseas and then bring it back here. But if the changes work as intended, they will make it more difficult and expensive for companies to reinvest foreign earnings in the U.S. Tell us again how this helps American workers....

“ ‘Inversion transactions erode our corporate tax base,’ said Treasury Secretary Jack Lew on Monday. Mr. Lew may be famously ignorant on matters of finance, but now there’s reason to question his command of basic math.

“Corporate income tax revenues have roughly doubled since the recession. Such receipts surged in fiscal year 2013 to $274 billion, up from $138 billion in 2009. Even the White House budget office is expecting corporate income tax revenues for fiscal 2014 to rise above $332 billion and to hit $502 billion by 2016....

“Corporate tax receipts are climbing back from the recession trough to nearly 11% of total tax revenue this year and will hit 14% in 2016. So how are inversions hurting revenues again?

“As for fairness, Mr. Lew said on Monday that inversion transactions ‘may be legal, but they are wrong, and our laws should change.’ It must be fun for corporate executives to get a moral lecture from a guy who took home an $800,000 salary from a nonprofit university and then pocketed a severance payment when he quit to work on Wall Street, even though school policy says only terminated employees are eligible for severance.”

--Oracle Corp. paid Larry Ellison $67.3 million for his final full year in the job, fiscal 2014, with nearly all of the compensation being in the form of stock options, which is always the case with Ellison. In the prior year, Oracle valued his pay at $79.6 million.

Since day one of this column I have commented (negatively) on his pay and from here on, it will be cut as shareholders voice increasing criticism.

--The World Bank concludes that with falling consumption in Russia, owing to tensions over Ukraine, gross domestic product will expand just 0.5% in 2014, and an estimated 0.3 and 0.4 percent in 2015 and 2016, respectively. If the price of oil continues to fall it will be worse.

--ExxonMobil abandoned a drilling campaign in the Russian Arctic, the biggest casualty of sanctions by the U.S. against the Kremlin. It was a $700 million project, a joint venture with Russia’s Rosneft (think Igor Sechin).

--Britain’s biggest retailer, Tesco, has been swept up in an accounting scandal, with the company disclosing it had overstated its first-half profit by $400 million. Four senior executives were suspended and the shares fell 12% the day of the announcement. Just three weeks earlier, Dave Lewis, a former Unilever executive, took over as the new CEO.

The accounting issue was brought to light by a manager in the finance department who questioned the first-half numbers. The general counsel then took the matter to Lewis.

--According to an annual study on data breach preparedness by the Ponemon Institute, a whopping 43% of companies have experienced a breach in the past year, up 10% from the year before. An executive at Experian, which sponsored the report, said the size of the breaches has gone up “exponentially,” pointing to a case from last January, where “40% of South Koreans – a total of 20 million people – had their personal data stolen and credit cards compromised.”

--Speaking of breaches, the huge one at Home Depot Inc. is beginning to ripple across financial institutions “as criminals use stolen card information to buy prepaid cards, electronics and even groceries,” according to people familiar with the impact of the hacking attack. [Robin Sidel / Wall Street Journal]

Home Depot has said 56 million cards may have been exposed over a five-month period.

Julie Creswell and Nicole Perlroth of the New York Times had an extensive article on HD’s issues. In part:

“The risks were clear to computer experts inside Home Depot: The home improvement chain, they warned for years, might be easy prey for hackers.

“But despite alarms as far back as 2008, Home Depot was slow to raise its defenses, according to former employees....

“(Long) before the attack came to light this month, Home Depot’s handling of its computer security was a record of missteps, the former employees said....

“In recent years, Home Depot relied on outdated software to protect its network and scanned systems that handled customer information irregularly, those people said. Some members of its security team left as managers dismissed their concerns. Others wondered how Home Depot met industry standards for protecting customer data. One went so far as to warn friends to use cash, rather than credit cards, at the company’s stores.

“Then, in 2012, Home Depot hired a computer engineer to help oversee security at its 2,200 stores. But this year, as hacks struck other retailers, that engineer was sentenced to four years in prison for deliberately disabling computers at the company where he previously worked.” Oh brother.

--I’m sure many of you saw the “60 Minutes” story on IRS fraud and how easy it is to get tax refunds through identity theft. Very depressing, especially for the victims.

And then there was the New York Times story last weekend by Elisabeth Rosenthal on “an increasingly common practice that some medical experts call drive-by doctoring, (wherein) assistants, consultants and other hospital employees are charging patients or their insurers hefty fees. They may be called in when the need for them is questionable. And patients usually do not realize they have been involved or are charging until the bill arrives.”

For example, one patient had three-hour neck surgery for herniated disks in December at Lenox Hill Hospital in Manhattan and he was blindsided by a bill of about $117,000 from an “assistant surgeon” whom the patient did not recall meeting.

It’s largely about out-of-network providers “who bill 20 to 40 times the usual local rates and often collect the full amount, or a substantial portion.”

Another, Patricia K., had a back operation at a Long Island hospital and among the mystery bills was $250,000 from two plastic surgeons claiming to sew up the incision. Normally a resident does that, in Ms. K’s situation.

Ms. K.’s (I see no reason to use full names, which are contained in the Times story) insurer paid about $10,000 to the plastic surgeons, who then sent a bill for the remainder. Ms. K and her husband refused to pay.

The local hospital here in my home town of Summit, Overlook, was cited in the article for egregious billing, such as $679 in occupational therapy charges involving the delivery of a device to help a patient put on his socks, which he never used.

So between the IRS situation, and this garbage, it’s easy to conclude we can hardly be considered a great nation when this kind of stuff goes on.

--Last week I wrote investors needed to be careful in buying into Alibaba for one reason. It’s a Chinese company.

Monday, the Wall Street Journal’s L. Gordon Crovitz wrote:

“(Alibaba’s) smart business strategy and charismatic leadership come with a massive risk: It’s a Chinese company operating under Chinese law, which does not recognize the ownership rights of its new shareholders.”

It’s about a very complicated ownership structure, with shareholders owning a piece of a shell company in the Cayman Islands with a contractual right to a share of the profits. As I said, this company is going to be a story for years to come...good and bad. [The shares closed the week at $90.50, down $3.50 on the week but well above the $68 offering price.]

--I forgot to note last week that GlaxoSmithKline was fined $500 million by a Chinese court as part of a bribery investigation. It’s another example of the dangers for multinationals these days attempting to do business in a country focused on an anticorruption campaign and rising economic nationalism.

Glaxo admitted its senior managers were guilty of bribe-giving and illegal sales tactics.

As an expert at the Hong Kong University of Science and Technology told the New York Times, “It’s very hard to do business in the Chinese health care and pharmaceutical sectors without doing payoffs. Everyone else pays bribes. Glaxo just got caught.”

--BHP Billiton and Mitsubishi plan to cut 700 jobs at a joint coal mining venture in Australia due to market conditions. The operation in Queensland is the world’s biggest exporter of coal used in steelmaking.

Coking coal mines have been closed or seen production plummet after prices hit a six-year low due to global oversupply, as well as slumping demand from top buyer China.

--Shares in Nike soared 12% after the company reported revenues rose 15% for its fiscal first quarter ended August 31.

--Air France-KLM is suffering through a crippling strike that is costing the company $25.6 million a day. Friday was day 12 as management pleaded with the pilots to accept their latest offer. The big hang-up is over the airline’s plans for a budget carrier and how the unit will be staffed.

--Back in the States, the nation’s airlines posted $3.6 billion in profits for the second quarter, up 64% from the same period last year, according to the Bureau of Transportation Statistics. The airlines collected $900 million in bag fees and $753 million in reservation change fees.

The largest airlines collected $3.3 billion in checked bag fess for 2013, compared with $1.1 billion in 2008. [Hugo Martin / Los Angeles Times]

--What a nightmare in Chicago with the air traffic control center having been sabotaged by a disgruntled employee. No telling how long the issues will remain at O’Hare and Midway airports, with 1,750 flights being canceled the first day. Operations certainly won’t be fully restored to normal for a few days it seems.

Foreign Affairs

Iraq / Syria / ISIS: U.S.-led forces have launched over 200 air strikes on ISIS in Iraq and commenced targeting IS in Syria on Monday, including hits on mobile oil refineries that ISIS uses to raise cash, as well as on an obscure al-Qaeda cell in Syria, Khorasan, that was/still is plotting attacks against Europe and the United States. 

As of Friday, the story is Khorasan’s leadership remains largely intact, so the group has not been dismantled and, let’s face it, these guys are all intertwined. Aaron Zelin, an analyst at the Washington Institute for Near East Policy, told the Washington Post that it was curious the Obama administration was using the term “Khorasan group” as the label because “Jihadis themselves haven’t used it.”

A counterterrorism expert, Brian Fishman, said, “Publicly, there hasn’t been a declaration or any indication that this is a separate organization” in Syria.

Seth Jones of the Rand Corporation told the New York Times. “What core al-Qaeda wanted was some forward-deployed people in Syria, which is an important battlefield for them because it is so close to Europe.”

President Obama touted a Sunni-Arab coalition of Saudi Arabia, Jordan, Bahrain, Qatar and the UAE, all of which are participating in airstrikes to one degree or another in Syria, while Britain joined France in saying it would launch strikes against ISIS targets in Iraq, after Prime Minister David Cameron won support in parliament by a vote of 524 to 43. [The independence vote in Scotland was a big reason for Britain’s delay.]

Britain, like France, will limit its participation to strikes in Iraq, as will be the case with the Netherlands, Denmark and Belgium. Britain could be ready for action by Sunday.

Denmark, by the way, said it would contribute seven F-16s along with 250 pilots and support staff, a significant act by the Danes. So buy a product from there this weekend to express your appreciation.

But as a commander of a moderate rebel group in Syria told the Wall Street Journal’s Sam Dagher, “The only beneficiary of foreign intervention in Syria is the Assad regime, in the absence of any real strategy to topple it.”

Yes, it’s complicated. The rebels are battling both Assad and ISIS. Some of the groups the U.S. is hitting are allied with the Nusra Front, but some Nusra Front factions are working with the moderates to topple Assad.

“Striking the Nusra Front will turn it into a real enemy of all the other forces” such as the Western-backed Free Syrian Army, said Mohammad al-Salloum, an activist from Idlib previously held hostage by ISIS.

Faisal al-Kasim, a Syrian-born broadcaster with Al Jazeera, wrote, “What more can Bashar al-Assad ask for? The U.S. planes targeted first and foremost the strong factions that are fighting him.”

Another anti-regime rebel told the Financial Times, “We asked for Western strikes to come and support our fight to free Syria, not to kill us,” describing how he pulled out the bodies of women and children from the wreckage of a residential building destroyed in the first coalition air strikes.

More than 150,000 Kurds were forced to flee into neighboring Turkey after ISIS militants attacked a Syrian Kurdish town, with many Kurdish fighters saying the United States needed to coordinate its airstrikes with them because they are hitting mostly abandoned bases.

The EU’s anti-terrorism chief told the BBC on Friday that the number of Europeans joining Islamist groups in Syria and Iraq is more than 3,000. Gilles de Kerchove warned Western air strikes would increase the risk of retaliatory attacks in Europe.

Mr. de Kerchove noted “we have to acknowledge” the increased risk of a violent reaction, as in what happened with the French and the beheading of a French tourist kidnapped in Algeria after ISIS issued a statement saying there would be retaliation for France’s bombing of IS in Iraq.

The CIA estimates ISIS has 30,000+ fighters in Iraq and Syria, three times the initial estimate.

Friday, retired Gen. David Petraeus said in a Tokyo presentation that the fight against ISIS will take years and need ground forces to succeed.

“We’re talking about years, many years... What we’re doing right now is disrupting. We are gradually chipping away at the strength” of ISIS, but gains couldn’t be sustained without ground troops.

Also Friday, Joint Chiefs Chairman Gen. Martin Dempsey reiterated he would recommend ground forces if necessary.

On a different front, Egypt accused Turkish leader Tayyip Erdogan of supporting terrorists, after Erdogan used part of his speech at the UN General Assembly to question Egyptian President al-Sisi. The tension between the two countries goes back to the Egyptian army’s ouster of elected President Mohamed Morsi of the Muslim Brotherhood, which Erdogan supports.

“Again, those objecting (to) the murders in Iraq, Syria and the murder of democracy in Egypt rae subjected to certain unfair and groundless accusations and almost immediately accused of supporting terrorism,” said Erdogan.

“The United Nations as well as the democratic countries have done nothing but watch the events such as overthrowing the elected president in Egypt and the killings of thousands of innocent people who want to defend their choice. And the person who carried out this coup [Ed. Sisi] is being legitimized.” [Reuters / New York Times]

Charles Krauthammer / Washington Post

“Late, hesitant and reluctant as he is, President Obama has begun effecting a workable strategy against the Islamic State. True, he’s been driven there by public opinion. Does anyone imagine that without the broadcast beheadings we’d be doing anything more than pinprick strikes within Iraq? If Obama can remain steady through future fluctuations in public opinion, his strategy might succeed.

“But success will not be what he’s articulating publicly. The strategy will not destroy the Islamic State. It’s more containment-plus. Expel the Islamic State from Iraq, contain it in Syria. Because you can’t win from the air. In Iraq, we have potential ground allies. In Syria, we don’t.

“The order of battle in Iraq is straightforward. The Kurds will fight, but not far beyond their own territory. A vigorous air campaign could help them recover territory lost to the Islamic State and perhaps a bit beyond. But they won’t be anyone’s expeditionary force.

“From the Shiites in Iraq we should expect little....

“Our key potential allies are the Sunni tribes. We will have to induce them to change allegiances a second time, joining us again, as they did during the 2007-08 surge, against the jihadists....

“Syria is another matter. Under the current strategy, the cancer will remain. The air power there is unsupported by ground troops. Nor is anyone in Obama’s ‘broad coalition’ going to contribute any....

“As for what’s left of the Free Syrian Army, Obama has finally come around to training and arming it. But very late and very little. The administration admits it won’t be able to field any trained forces for a year. And even then only about 5,000. The Islamic State is already approximately 30,000 strong and growing....

“Obama was right and candid to say this war he’s renewed will take years. This struggle is generational....

“Today’s jihadism is global, its religious and financial institutions ubiquitous and its roots deeply sunk in a world religion of more than a billion people. We are on a path – long, difficult, sober, undoubtedly painful – of long-term, low-intensity rollback/containment.

“Containment-plus. It’s the best of our available strategies. Obama must now demonstrate the steel to carry it through.”

Thomas L. Friedman / New York Times

“The good news: The rise of the Islamic State, also known as ISIS, is triggering some long overdue, brutally honest, soul-searching by Arabs and Muslims about how such a large, murderous Sunni death cult could have emerged in their midst. Look at a few samples, starting with ‘The Barbarians Within Our Gates,” written in Politico last week by Hisham Melhem, the Washington bureau chief of Al-Arabiya, the Arabic satellite channel.

“ ‘With his decision to use force against the violent extremists of the Islamic State, President Obama...is stepping once again – and with understandably great reluctance – into the chaos of an entire civilization that has broken down. Arab civilization, such as we knew it, is all but gone. The Arab world today is more violent, unstable, fragmented and driven by extremism – the extremism of the rulers and those in opposition – than at any time since the collapse of the Ottoman Empire a century ago.

“ ‘Every hope of modern Arab history has been betrayed,’ Melhem added.

“ ‘The promise of political empowerment, the return of politics, the restoration of human dignity heralded by the season of Arab uprisings in their early heydays – all has given way to civil wars, ethnic, sectarian and regional divisions and the reassertion of absolutism, both in its military and atavistic forms. ...The jihadists of the Islamic State, in other words, did not emerge from nowhere. They climbed out of a rotting, empty hulk – what was left of a broken-down civilization.’....

“(ISIS) is a killing machine, and it will take another killing machine to search it out and destroy it on the ground. There is no way the ‘moderate’ Syrians we’re training can alone fight ISIS and the Syrian regime at the same time. Iraqis, Turkey and the nearby Arab states will have to also field troops....

“What’s in the soul of the Arab regimes who are ready to join us in bombing ISIS in Syria, but rule out ground troops?

“This is a civilization in distress, and unless it faces the pathologies that have given birth to an ISIS monster...any victory we achieve from the air or ground will be temporary.”

Editorial / Wall Street Journal

“Much is being made of the coalition of Arab states that participated in the initial bombing run, including Saudi Arabia, the United Arab Emirates and Jordan. This is more important symbolically than it is militarily. Much as in the Libyan air campaign against Moammar Gadhafi, the U.S. will provide nearly all of the air and intelligence muscle. The main significance of the Arab participation is to rebut the attempts by ISIS and al-Qaeda to pitch this as a fight between America and Islam.

“The Arabs will also withdraw if the mission flags or the U.S. looks like it is losing its resolve. Now that it has begun this fight, and persuaded the likes of Jordan to publicly join our side, the Obama Administration must fight until neither jihadist group poses a threat to these Arab states....

“No U.S. president should ever start a war he doesn’t intend to win, and wars rarely go as smoothly as advertised in advance. Now that he has attacked ISIS, Mr. Obama must show that America is the strong horse.”

John Podhoretz / New York Post

“On Tuesday, the president said the United States and five Arab countries had participated in strikes on Syria – to hit at ISIS and to disrupt an imminent terrorist threat to Europe or the American homeland from the al-Qaeda offshoot Khorasan.

“Well, it’s certainly cost-effective to kill two birds with one stone, assuming you kill the birds, of course. But these are not the same thing, not at all.

“First off, it seems like the administration has, as we say in the news business, buried the lead. Its remarks and the focus of its briefings have been dedicated to the fight against ISIS.

“But if it in fact succeeded in preventing an imminent attack through its targeted strikes on the Khorasan group, this will have been without question the Obama administration’s greatest foreign-policy and anti-terror success.

“It’s difficult to prove a negative – like the prevention of something. For years, many of us have said that the Bush administration never got credit for the fact that there was no follow-along attack after 9/11 on the American continent, as was universally expected....

“The only solution is prevention. That is the reason for what people deride as ‘security theater’ and what Snowdenites scream bloody murder about when it comes to the monitoring of communications.

“All of these have had an extraordinary deterrent and/or prophylactic effect. They’re inconvenient, yes, and spooky, yes, and they may have come to seem too disturbing.

“But it’s unquestionable that they’ve raised the difficulty level of staging an attack inside the United States to extraordinarily great heights.

“The Obama administration has followed up on this with an aggressive effort against terrorists themselves, including hits with drone strikes. The conventional attack on Khorasan on Monday night takes this to a new level.”

Iran: In his speech to the UN General Assembly, Iranian President Hassan Rohani said, “Certain intelligence agencies have put blades in the hands of madmen, who now spare no one,” in blaming Western governments for sowing the seeds of the outbreak of extremism that has swept the Middle East.

“Currently our peoples are paying the price. Today’s anti-Westernism is the offspring of yesterday’s colonialism. Today’s anti-Westernism is a reaction to yesterday’s racism.”

“The strategic blunders of the West in the Middle East, Central Asia, and the Caucuses have turned these parts of the world into a haven for terrorists and extremists. Military aggression against Afghanistan and Iraq and improper interference in the developments in Syria are clear examples of this erroneous strategic approach in the Middle East.”

Rohani, who had his first meeting with British Prime Minister Cameron in New York earlier this week, suggested flexibility by the West in the ongoing nuclear talks would open the way to more cooperation in the war against the terrorists, referring to al-Qaeda and ISIS.

If a nuclear agreement is struck, he said, “then an entirely different environment will emerge for cooperation at regional and international levels, allowing for greater focus on some very important regional issues such as combating violence and extremism in the region.”

Speaking of these groups, Rohani said: “They also have a single goal: ‘the destruction of civilization, giving rise to Islamophobia and creating a fertile ground for further intervention of foreign forces in our region,” he said, in scolding Western media for describing their leaders as followers of Islam. [David Usborne / Independent (UK)]

So what about the nuclear talks?

Editorial / Bloomberg

“In their addresses to the United Nations General Assembly this week, the presidents of Iran and the U.S. agreed on only one thing: that the other one should seize the opportunity to strike a deal on Iran’s nuclear fuel program before the deadline, now just two months away.

“Both men, of course, are right. And while President Barack Obama should (and will) ignore President Hassan Rohani’s broad hint that the U.S. should make concessions in the nuclear talks in order to secure Iranian cooperation in fighting Islamic State, there is little doubt that a deal could lead to improved security for everyone – and that failure would create new dangers.

“As the Nov. 24 deadline approaches, the two sides have grown increasingly pessimistic that they will be able to agree on how many centrifuges Iran should be allowed to possess for its uranium enrichment program.

“Negotiators for the so-called P5+1 (China, France, Germany, Russia, the U.K. and the U.S.) want Iran to cut 8,000 of the 10,000 operational centrifuges it has today, thus stretching to nine to 12 months the time it would need to ‘break out’ and enrich enough weapons-grade uranium for a bomb (from two to three months today). Iran, on the other hand, wants to be able to grow its centrifuge capacity to 190,000 by 2021 – to feed its nuclear power plant at Bushehr.

“Obviously the gap in expectations is vast. But it’s a mistake to focus so intently on the centrifuge numbers... when ‘breakout’ depends not only on producing fuel for a bomb, but also on assembling and testing the delivery mechanisms and warheads... to prevent Iran from developing a clandestine program that could put together the whole package, the U.S. and its allies mainly need an intrusive inspection program.”

Benny Avni / New York Post

“(Let’s) not, in the process of fighting ISIS, hand the Mideast over to Iran. We’re dancing dangerously close to outright allowing the rising Shiite powerhouse to become a military nuclear state – and that can’t be good.

“There’s a general unease in the region about America springing to action whenever Sunni extremists, like ISIS, commit horrific acts, while ignoring similar acts by Shiites – as in Iran’s bloodbath during the 2009 Green Revolution, or the atrocities its ally Syria commits....

“Although fighting the Islamic State’s Sunni terrorists is an Iranian strategic imperative, Tehran wants to trade concessions on the nuclear front for engaging in the fight against ISIS.

“If we give on that front, the result could be much more significant to the future of the Mideast than all the hoopla of this week’s General Assembly gabfest....

“The Obama administration is eager to strike a nuclear deal before the latest deadline, Nov. 24. If the public meeting planned for Friday between Zarif, Kerry and other foreign ministers goes ahead,* we’ll know there’s movement toward ‘compromise’ – i.e., further Western capitulation.

“But Sunni powers won’t just roll over and let Tehran dominate the region....They, too, will likely seek nukes – an arms race from hell.

“Despite denials all around, all signs are that Washington is ready to further ease up on Iran’s nuclear program, if only to win against ISIS....

“In his speech...Obama (rightly hailed) his newfound footing in the fight against jihadi terrorists. But he must also address fears about Iran.

“If he doesn’t, the gains we make by fighting Sunni terrorists will be offset by the long-term menace posed by a fanatic, nuclear-armed Shiite power.”

*I didn’t see any real details of the meeting as I went to post. Rohani, prior to the talks, said progress was “extremely slow.”

Bottom line, the two sides must reach agreement soon because it will take weeks to get all parties to sign off on the particular language, including for an inspections regime. Additionally, the length of any agreement is a key, along with the timing of any sanctions relief.

Eric Edelman, Dennis Ross and Ray Takeyh / Washington Post

“As the United States begins its campaign to destroy the Islamic State, many voices can be counted on to call for cooperation with Iran. Among those has been none other than Secretary of State John Kerry, who insisted that Iran’s exclusion from the Paris Conference ‘doesn’t mean that we are opposed to the idea of communicating to find out if they will come on board, or under what circumstances, or whether there is the possibility of a change.’ On the surface, this may seem sensible, as both Washington and Tehran have an interest in defanging a militant Sunni group. But we would be wise to bear in mind two points: first, Kerry’s proviso on the possibility of change, and second, that the essential axiom of Middle East politics is that the enemy of my enemy is sometimes still my enemy. The ebbs and flows of the war on terrorism should not be allowed to conceal the fact that the theocratic Iranian regime and its attempt to upend the regional order remains the United States’ most consequential long-term challenge in the Middle East....

“The United States and Iran stand at opposite ends of the spectrum of Middle East politics. The Islamic republic’s ideological compulsions and sheer opportunism make it an unlikely ally for the West. The coincidence of mutual opposition to a radical Sunni terrorist group should not blind us to the enduring threat that the mullahs represent.”

Israel: Hamas and rival Fatah reached a preliminary agreement on jointly governing the Gaza Strip, this as a senior Palestinian official said President Mahmoud Abbas’ government, which runs the West Bank, will press ahead with a U.N. bid to set a deadline for Israel to end its occupation of lands captured in the 1967 war. The purpose of the resolution is to set the groundwork for the establishment of a Palestinian state.

Egypt is hosting a donors conference for Gaza on Oct. 12, but donors would likely hold back any pledges for the reconstruction effort if Hamas maintained total control of the Strip.

Separately, the military said army and police forces were trying to arrest two suspects in the abduction and killing of three Israeli youths in the West Bank in June and the suspects died in a gun battle. Both were said to be affiliated with Hamas, which initially denied it had anything to do with the June abduction.

Ukraine: Vladimir Putin is demanding the recently-ratified trade pact between the European Union and Ukraine be reopened or he will issue “immediate and appropriate retaliatory measures.”

Putin has been determined not to allow Ukraine to fall into the EU’s orbit, or NATO, even though he has already annexed Crimea and is on the verge of doing the same in the east of the country.

Putin issued his threats in a letter to European Commission President Jose Manuel Barroso. Ukraine and the EU had agreed to delay implementation of the trade pact until 2016 in order to reassure the Kremlin the deal wouldn’t harm economic ties between Moscow and Kiev.

For his part, Ukrainian President Petro Poroshenko said he was proceeding with plans to get Ukraine ready to apply for EU membership by 2020.

Editorial / Washington Post

“In the last week, Ukraine’s parliament has approved far-reaching concessions to appease Mr. Putin, including a formal grant of autonomy to the Russian-controlled regions and a one-year delay in the implementation of a free-trade agreement with the European Union. In return, Ukraine is hoping to claw back a few attributes of sovereignty: the withdrawal of Russian troops from its territory, the sealing of the border and the release of Ukrainians taken prisoner by the Russians or their proxies.

“It’s unlikely that Mr. Putin will meet those terms. While some Russian troops have pulled back, Ukrainian and NATO officials say 1,000 or more remain. Russian forces still control a significant stretch of the border, and both Moscow and its Ukrainian proxies have rejected Mr. Poroshenko’s concessions as inadequate.

“Mr. Poroshenko appears resigned to a ‘frozen conflict’ in eastern Ukraine. His hope is to prevent renewed Russian aggression; that’s why he wants U.S. aid. ‘The weapons will help us to prevent the next war,’ he said in an appearance at the Atlantic Council. Though Ukraine’s army cannot defeat Russia’s, the prospect of significant losses might deter Mr. Putin from another offensive.”

A nine-point ceasefire agreement was reached in Minsk last Saturday, including a 19-mile buffer zone and a ban on overflights of part of eastern Ukraine by military aircraft and the withdrawal of ‘foreign mercenaries’ on both sides.

But hours after the agreement was signed, there was shelling in Donetsk, though since then there has largely been silence.

One other issue came up at week’s end. Hungary suspended delivery of gas to neighboring Ukraine “indefinitely.” Hungarian Prime Minister Viktor Orban has been critical of EU sanctions on Russia and recently met with Gazprom chief, Alexei Miller. Gazprom agreed to boost supplies to Hungary. Hungary, along with Poland and Slovakia, had been supplying gas to Ukraine after Russia cut off supplies to it in June, per an agreement with the European Council.

China: State media reported a “serious terrorist attack” in restive Xinjiang province resulting in at least 50 deaths. The region in China’s far west is home to the Muslim Uighur minority group and tensions have been growing for years between the Uighurs and the Han Chinese. It appears there were suicide bombings at two police stations and an outdoor market.

On the issue of Hong Kong, President Xi Jinping said Beijing’s policies towards it had not changed and would not change.

“We shall firmly adhere to the ‘one country, two systems’ [principle] and the Basic Law. [We shall] firmly push ahead with Hong Kong’s democratic development, and maintain Hong Kong’s prosperity and stability.”

But regarding the upcoming Occupy Central protest, Xi highlighted the role Beijing should play.

“I sincerely hope that Hong Kong, under the leadership of the central government and under the stewardship of the chief executive, can continue to advance and create a better future.”

But here words are extremely important, and as a story in the South China Morning Post noted, Xi told a delegation from Hong Kong, including the city’s richest man, Li Ka-shing, that Hong Kong was a “local administrative region that comes directly under the central people’s government.” As reported by Joyce Ng, “The wording is almost identical to Article 12 of the Basic Law, except that the latter also uses the phrase ‘high degree of autonomy.’

“ ‘ As the president, Mr. Xi would craft his speech very carefully. The omission would not be accidental,’ Chung Kim-wah, a political scientist at Polytechnic University, said.

“Democratic Party chairwoman Emily Lau Wai-hing feared Xi’s omission of the catchphrase ‘Hong Kong people ruling Hong Kong’ signaled Beijing was not paying as much attention to the principles as it had previously.”

As an editorial in The Economist said of Xi in general: “He has become the most powerful Chinese ruler certainly since Deng, and possibly since Mao. Whether this is good or bad for China depends on how Mr. Xi uses his power. Mao pushed China to the brink of social and economic collapse, and Deng steered it on the right economic path but squandered a chance to reform it politically. If Mr. Xi used his power to reform the way power works in China, he could do his country great good. So far, the signs are mixed.”

Xi’s poll numbers are the best of any leader since Mao.

Lastly, on the pollution front, China is now emitting more carbon pollution per person than the EU and U.S. combined, according to a study out of Stockholm’s International Geosphere-Biosphere Program.

China is responsible for 28% of global emissions, followed by the U.S. with 14% and the EU at 10%.

North Korea: Kim Jong-un failed to appear at a key political event and a report on state television said on Thursday that he was in an “uncomfortable physical condition” but gave no details. He hasn’t been seen in public in three weeks.

Another report on state TV showed footage of Kim limping during one of his inspection tours. A South Korean newspaper said Kim was “suffering from gout, along with...obesity, diabetes and high blood pressure.” Gout runs in Kim’s family.

Russia: The State Duma approved a bill to expedite a new set of Internet regulations that, experts say, would allow for the banning of sites such as Facebook, Twitter and Amazon. A law requiring all online companies to store users’ personal data on Russian territory as of September 2016 was passed in July. Now lawmakers want to move the deadline forward by more than a year, to Jan. 1, 2015, though Russia simply doesn’t have the storage nor the infrastructure to accomplish this in that timeframe.

President Putin, who ignored the Internet for years, allowing it to flourish in Russia, began cracking down in late 2011, when opposition against him was growing, with protests coordinated online.

At the same time, Putin has launched a crackdown on Russia’s oligarchs.

Meanwhile, the Baltic countries have seen a dramatic increase in Russian military provocations, with NATO fighters policing Baltic airspace having been scrambled 68 times along Lithuania’s borders this year, while Latvia has registered 150 “close incidents” where Russian aircraft were found approaching and observed for risky behavior, as reported by the Financial Times.

Edward Lucas / Wall Street Journal

“Having humiliated the West in Ukraine, Vladimir Putin’s Russia is turning to the Baltic states. It has sent four powerful signals, none of which have met a proper response.

“No sooner had President Obama earlier this month delivered a ringing message of support to Europe’s beleaguered front line in Tallinn, the Estonian capital, than Russia abducted an Estonian security official, Eston Kohver, near the countries’ shared border. He awaits trial in Moscow, on espionage charges – and a 20-year jail sentence if convicted.

“Next, Russia asked Lithuania to extradite an estimated 1,500 citizens who allegedly failed to complete their military service in the final years of the Soviet Union. That is as sinister and repellent as if modern Germany wanted Dutch or Danish help in prosecuting deserters from Hitler’s army. And on Sept. 19, Russia seized a Lithuanian fishing vessel, which Moscow said was poaching in Russia’s territorial waters. The ship and its crew have been detained in Murmansk, prompting a furious protest from authorities in Vilnius.

“Meanwhile, Konstantin Dolgov, a senior Russian official, issued a chilling warning earlier this month during a conference in Riga, the Latvian capital. He accused the Baltic states of fostering neo-Nazism, discriminating against ethnic Russians and the Russian language, and gross violations of human rights. The West, he said, had instigated these abuses....

“(Tactics such as these) could all too easily destabilize one or more of the Baltic states, forcing a change in government and destroying collective security in Europe forever. Yet so far NATO’s placid political masters show no sign of willingness to forestall the looming disaster.”

Back in Moscow, anywhere from 5,000 to 26,000 (depending on who was giving the estimate) marched last weekend to protest the Ukraine conflict. These will only grow, especially if the ceasefire breaks down.

And former tycoon Mikhail Khodorkovsky, who spent a decade in jail after challenging the Kremlin, announced he would be ready, if called upon, to lead Russia in times of crisis, specifically an online movement dubbed Open Russia that is designed to unite pro-European Russians in a bid to challenge Putin. This is not a political party, per se, nor is Khodorkovsky standing for election in Russia, but he is seeking to support fundamental change.

Hope he can keep the website up.

Russia is reeling from economic sanctions and Khodorkovsky can take advantage of this. His supporters hope his action will help the people see through the Kremlin’s propaganda machine.

Afghanistan: An election commission ruled that Ashraf Ghani had won the nearly six-month election process, hours after he and Abdullah Abdullah signed a power-sharing deal following weeks of negotiations, wherein Abdullah will have the newly created role of chief executive (prime minister) in a national unity government.

The election commission, though, never did release vote totals of the June runoff. Leaked results had it 55 for Ghani and 45 for Abdullah.

The new president-elect, Ashraf Ghani, said he is committed to ensuring that women are well represented in government and the education and economic sectors.

“The victory isn’t just about winning an election. It’s a victory for democracy, for our constitution and for our future. Together, we have turned the page and written a new chapter in our long and proud history – the first peaceful democratic transition between one elected president and another.”

Separately, the Taliban beheaded 12 civilians and torched 60 homes in an assault on security forces in the eastern part of the country. The 12 were family members of local and national police.

Now we wait to see how Afghanistan holds together with a fragile power-sharing arrangement and an army that is about to be all on its own. Both leaders are beholden to former warlords, with Ghani’s power base being the ethnic Pashtuns, and Abdullah’s being the Tajiks and Hazaras.

Finally, outgoing President Hamid Karzai took a parting shot at the U.S.

“America pursued its own interests and did not want peace in Afghanistan.”

Karzai, in his farewell speech, thanked India, China and Iran, but didn’t thank the U.S., by far Afghanistan’s biggest donor, for one.

The U.S. ambassador to Kabul, James Cunningham, responded: “It makes me kind of sad. I think his remarks, which were uncalled for, do a disservice to the American people, and dishonor the sacrifices Americans have made here.” [Margherita Stancati / Wall Street Journal]

2,360 U.S. service members gave their lives in the war and Washington has spent over $100 billion to fund Afghanistan’s government, security forces and infrastructure projects.

Britain: London’s Metropolitan Police arrested nine men, including radical Muslim preacher Anjem Choudary, in one of the biggest antiterrorism operations in some time. Individuals in Choudary’s banned Al-Muhajiroun organization have been linked to convicted terrorists and terrorism plots.

On a different topic, the No vote on Scottish independence, Niall Ferguson / Financial Times:

“Most commentary has been focused on UK politics. This is too parochial. The real significance of the No lies at the European level. The result dents the hopes of other separatist movements in Spain, Italy and Belgium. The less obvious point is that we have witnessed another defeat for populism at the hands of the emergent Europe-wide grand coalition.

“The Yes campaign was more than just the Scottish National party. Its unexpected late gains in the polls reflected the mobilization of young voters and previous non-voters, especially in the underclass of Glasgow and its environs. What attracted those people was not the rather intricate proposition of political independence plus monetary union. It was an emotional appeal....

“Populism has been popping up all over Europe since the financial crisis. England’s version is the United Kingdom independence party. Last Sunday, the anti-immigrant Sweden Democrats doubled their share in the national parliament, while the anti-European Alternative for Germany party won seats in two more regional parliaments. In France, opinion polls suggest that the National Front’s Marine Le Pen has a serious shot at the presidency in 2017. The Dutch have Geert Wilders, Greece has Golden Dawn.

“What all these different populists have in common is nationalism – along with a rather fishy admiration for Vladimir Putin...

“Populism is back; it is not about to go away. The wrong response is for mainstream parties to pander to the populists. The right response is for the centrists to join forces, hard though it is to bury their ancestral rivalries. I have long been identified with conservatism, though on many issues I am in fact a liberal. The advent of a new era of grand coalitions is good news for me. From now on, I no longer need to deny my allegiance to the extreme center.”

France: Former President Nicolas Sarkozy noted he has never seen such “despair” in France as he announced his comeback.

“I have never seen such anger in this country, such a lack of perspective,” he said on French television in his first interview since announcing he was running to lead his political party.

Sarkozy said he wasn’t concerned by the various legal woes he faces, and two days later a Paris appeals court decided on Tuesday to freeze a corruption and influence-peddling investigation that had been launched against Sarkozy back in July; the court now reviewing his request to have the case dismissed.

Brazil: In the last ‘runoff’ poll I saw in this nation’s presidential race, Oct. 5, Marina Silva leads incumbent Dilma Rousseff 46% to 44%. I say runoff because with a solid third candidate in the race, neither is likely to gain the required 50% in the first round so the runoff would be held Oct. 26.

Random Musings

--Attorney General Eric Holder announced he was resigning after six years but will stay on until a replacement is named. Among those mentioned as possible successors is former White House counsel Kathryn Ruemmler. Manhattan U.S. Attorney Preet Bharara has also been mentioned, which would be an interesting choice. The nominee will not face any confirmation hearings until after the election.

As for Holder’s legacy, there will be time to dissect it, but as Devlin Barrett wrote in the Wall Street Journal, “Holder extracted record-setting penalties from big banks, expanded benefits for same-sex couples and took on racial disparities in criminal sentencing and voting. He has also played a key role in some of the more controversial parts of the administration’s counterterrorism policy. His department wrote a legal justification for killing American citizens overseas if it is determined they pose a threat to U.S. lives and can’t be apprehended through traditional means.”

And the Justice Department has played a key role in overseeing the National Security Agency’s surveillance programs, which in the wake of Edward Snowden’s revelations, were heavily criticized.

--Peggy Noonan / Wall Street Journal

“In a year when Republicans are operating in such an enviable political environment, why aren’t their U.S. Senate candidates holding big and impressive leads? Why does it look close? Why are party professionals getting worried?

“The Democratic president is unpopular. What progress can be claimed in the economy is tentative, uneven, feels temporary. True unemployment is bad and people who have jobs feel stressed and hammered by costs. Americans are less optimistic than they’ve ever been in the modern era, with right-track/wrong-track numbers upside down. Scandals, war, uncertain leadership – all this has yielded a sense the whole enterprise of the past six years just did not work.

“But Republicans aren’t achieving lift-off. The metaphor used most often is the wave. If Republicans can’t make, catch and ride a wave in an environment like this, they’ve gone from being the stupid party to the stupid loser party....

“Republicans need to say what they’re for. They need to make it new and true – not something defensive but something equal to the moment.”

--Gov. Chris Christie’s approval rating has dipped to 46%, according to a Monmouth University/Asbury Park Press poll, down from 50% in June. The poll director at Monmouth said New Jerseyans are tiring of the amount of time Christie is spending out of state. Bridgegate is not the reason the number dropped.

--I like Democratic West Virginia Sen. Joe Manchin and believe he would be the perfect third party presidential candidate, and then I saw in a piece in U.S. News Weekly that he has a partnership with former GOP presidential candidate Jon Huntsman called No Labels, that tries to get Capitol Hill Republicans and Democrats to work together. 

--Peggy Noonan / Wall Street Journal

“(President Obama’s) essential problem is that he has very poor judgment.

“And we don’t say this because he’s so famously bright – academically credentialed, smooth, facile with words, quick with concepts. (That’s the sort of intelligence the press and popular historians most prize and celebrate, because it’s exactly the sort they possess.) But brightness is not the same as judgment, which has to do with discernment, instinct, the ability to see the big picture, wisdom that is earned or natural....

“You can run down the list. His famous ‘red line’ comment was poor judgment. He shouldn’t have put himself or his country in that position, threatening action if a foreign leader did something. He misjudged the indelible impression his crawl-back would make on the world.

“Last month it was the ‘I don’t have a strategy’ statement on the Islamic State. That’s not something an American president attempting to rouse the public and impress the world can say. But he didn’t know....

“The other night, at the end of his Syria speech, he sang a long, off-point aria to the economy. Supposedly it would be ringing and rousing, but viewers looked at each other and scratched their heads. It didn’t belong there. It showed a classic misjudging of his position. The president thinks people are depressed because they don’t understand how good the economy is. Actually right now they are depressed because he is president. It was like Jimmy Carter’s malaise speech. It wasn’t a bad speech, but he wasn’t the person who could give it because voters weren’t thinking malaise was the problem, they were thinking Mr. Carter was....

“Libya? Poor judgment. A nation run by a nut was turned into a nation run by many nuts, some more vicious than the dictator they toppled. Russia? The president misread it, which would only have been a mistake, if a serious one, if it hadn’t been for his snotty high-handedness toward those who’d made warnings. To Mitt Romney, in debate, in October 2012: ‘The 1980s – they’re now calling to ask for their foreign policy back.’

“He misjudged public reaction to the Snowden revelations, did not understand Americans were increasingly alarmed about privacy and the government....

“Maybe all this is the president’s clever way of letting time pass, letting things play out, so that in a few months the public fever to do something – he always thinks the public has a fever – will be over. And will then be able to do little, which perhaps is what he wants.

“But none of this looks clever. It looks like poor judgment beginning to end.”

--David Brooks / New York Times

“The scope of the problems we face (today) are way below historic averages. We face nothing like the slavery fights of the 1860s, the brutality of child labor and industrialization of the 1880s, or a civilization-threatening crisis like World War I, the great Depression, World War II or the Cold War. Even next to the 1970s – which witnessed Watergate, stagflation, social decay and rising crime – we are living in a golden age.

“Our global enemies are not exactly impressive. We have the Islamic State, a bunch of barbarians riding around in pickup trucks, and President Vladimir Putin of Russia, a lone thug sitting atop a failing regime. These folks thrive only because of the failed states and vacuums around them.

“I mention all of this because of the despondency and passivity and talk of unraveling that floated around this summer. Now there is a mood of pessimism and fatalism evident in the polls and in conversations – a lack of faith in ourselves.

“It’s important in times like these to step back and get clarity. The truest thing to say is this: We are living in an amazingly fortunate time. But we also happen to be living during a leadership crisis, and a time when few people have faith in elites to govern from the top. We live in a vibrant society that is not being led.

“We don’t suffer from an abuse of power as much as a nonuse of power. It’s been years since a major piece of legislation was passed, and there’s little prospect that one will get passed in the next two....

“(It’s about) rejuvenating ailing institutions. Fighting barbarians to preserve world order. Today is nothing new. Instead of sliding into fatalism, it might be a good idea to address our problems without exaggerating our plight.”

--Editorial / Washington Post...on the pathetic security breach at the White House where an intruder got through the front door.

“Surely there is a way to secure the safety of the first family without closing more streets and fencing off more sidewalks. It is not just the convenience of D.C. residents and visitors that is at stake. It is the character of American government – still meant, the last time we checked, to be of, by and for the people....

“(Making) more of Washington off-limits should itself be off-limits. People come to 1600 Pennsylvania Ave. not only to see a part of history but also to express their First Amendment rights. Washington cannot be allowed to become any more of an armed camp.”

[The intruder, Omar Gonzalez, had 800 rounds of ammunition in his car, and had been previously arrested over the summer after a high-speed chase with Virginia troopers, whereupon police found the car filled with weapons and a map with the White House circled. Gonzalez is now being held without bail.]

--According to the Census Bureau, there are 41.3 million legal and illegal immigrants in the U.S., the highest percentage in 93 years...13% of the country’s population.

Most of the immigrants who fled to the U.S. over the past three years did not come from Latin America, but rather Asia, the Caribbean and the Middle East.

--Pope Francis had a successful one-day trip to Albania last weekend (this was a security nightmare), meeting with Muslim, Orthodox Christian and Catholic communities in Tirana.

Francis said religious intolerance was a “particularly insidious enemy” that was evident in many parts of the world today.

“All believers must be particularly vigilant so that, in living out with conviction our religious and ethical code, we may always express the mystery we intend to honor,” he said.

“This means that all those forms which present a distorted use of religion must be firmly refuted as false since they are unworthy of God or humanity.”

--NASA’s Maven spacecraft slipped into Martian orbit on Monday, designed to circle the planet for a year, but not land.   The cost for the Maven mission is $671 million.

But also this week, India placed a satellite in Mars orbit, becoming only the fourth nation to succeed in a scientific mission to the red planet, and it did so at a cost of just $72 million, which, as Indian Prime Minister Narendra Modi boasted, is less than the $100 million cost of making the film Gravity, starring Sandra Bullock and George Clooney.

At first the mission was criticized in India for being a waste of money, but now it’s a source of national pride.

NASA now has three satellites orbiting Mars and two rovers on the surface, while Europe has one orbiter. No word on the number of Martians that are lining up to get visas. I want to tell them, “Go to Neptune, we’re overrated.”

---

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

God bless America.

---

Gold closed at $1215
Oil $93.54

Returns for the week 9/22-9/26

Dow Jones -1.0% [17113]
S&P 500 -1.4% [1982]
S&P MidCap -2.3%
Russell 2000 -2.4%
Nasdaq -1.5% [4512]

Returns for the period 1/1/14-9/26/14

Dow Jones +3.2%
S&P 500 +7.3%
S&P MidCap +3.3%
Russell 2000 -3.8%
Nasdaq +8.0%

Bulls 48.0
Bears 15.3 [Source: Investors Intelligence]

Have a great week. I appreciate your support.

*For new readers, I do have an iPad app.

Brian Trumbore