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Week in Review

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07/26/2014

For the week 7/21-7/25

[Posted 11:00 PM ET, Friday]

Edition 798

Washington and Wall Street

Geopolitics still isn’t fazing global financial markets in any big way, so we continue with our regularly scheduled programming....

The International Monetary Fund lowered its forecast for global economic growth this year, from 3.7% to 3.4%, owing largely to the weaker start to the year in the U.S., which the IMF says will grow just 1.7%, though it is maintaining its 3% forecast for 2015. [The overall world growth projection for 2015 is also unchanged at 4%.]

Economic indicators on the week were mixed, with existing-home sales in June coming in at their best annualized pace, 5.04 million, since last October, while the median price was up 4.3% from a year ago.

New-home sales, however, were awful. The market was expecting an annualized pace of 480,000 and instead the June figure was 406,000. Plus the crazy May reading of 504,000 that no one believed at the time was revised down to 442,000. Home builder stocks took it on the chin. 

The median price of a new home is $273,500, up 17.6% from two years ago, and 22% higher than the June median price for an existing home so many new homes are clearly being priced out of reach when analyzing the sales pace.

We also had a reading on June durable goods, up a solid 0.7%, but even here, when averaged with revised figures for May, business investment is only so-so.

As for the slew of corporate earnings that were released, I cover the major ones in detail below, but generally they continue to be solid, with earnings for the S&P 500 now forecast to rise in excess of 7% when all 500 come through, maybe as high as 9% vs. an initial forecast of 6% heading into the season, though the top line, revenues, will still come in at a disappointing 3% to 4% pace.

The National Retail Federation revised its forecast for retail sales downward to 3.6% this year from a January projection of 4.1%. Yes, blame the awful winter weather.

The Federal Reserve holds an Open Market Committee meeting next week so more on the general economy then, including the latest inflation outlook (June’s CPI data is covered below), as well as a first look at second-quarter GDP and July’s labor picture.

But I do want to cover a few broader issues.

Ron Wyden (D-Ore.), chairman of the Senate finance committee, warned that up to 25 more U.S. companies are considering relocating overseas to cut their tax bills this year, through merger deals known as inversions.

This week, President Obama called the relocations “wrong” and urged quick-fix legislation, though this is highly unlikely because the inversion issue needs to be part of a broad overhaul of the tax code and nothing is happening before the election. Of course the president had to blame Republicans for the failure to rewrite the tax laws.

But the discussion of inversions is not always an honest one and I have written little of it because the bottom line federal revenue losses are minimal. I’ve known of the figures quoted below and I’m like ‘whatever.’ We need true tax reform.

Robert J. Samuelson / Washington Post

“Corporate America’s latest public relations disaster comes under the banner of ‘tax inversion.’ In an inversion, a U.S. company shifts its legal headquarters to a country with a lower tax rate. Just last week, the U.S. drug maker AbbVie agreed to buy a foreign firm, Shire, in part to reduce its corporate tax rate, which is expected to drop from 22 percent to 13 percent. In most inversions, companies keep their headquarters’ physical activities – the people, the buildings – in the United States, as would AbbVie. Still, the practice has understandably provoked a furious backlash.

“These companies ‘have deserted our country to avoid paying taxes but expect to keep receiving the full benefits that being American confers,’ fumes Fortune magazine writer Allan Sloan in the Washington Post. The tax flight ‘turns my stomach,’ he adds. Treasury Secretary Jack Lew accuses these companies of lacking economic ‘patriotism.’ Millions of Americans probably feel the same way. I certainly do. But we need to balance this revulsion with some stubborn – and now well-understood – realities.

“First, the issue is easy to hype. Companies that shift their legal status abroad will still pay U.S. corporate taxes, based on profits earned in the United States, which – for most U.S. multinational firms – remains the largest market. What’s mainly at issue is taxes on foreign profits. Even here, it’s easy to exaggerate. For example, the White House proposal to curb inversions would save $19.5 billion in taxes from 2015 to 2024, reckons the congressional Joint Committee on Taxation. That’s less than 1 percent of estimated corporate taxes over the same period.”

Overall, corporate taxes today comprise just about 10 percent of federal revenue, as well.

---

In another big issue, two U.S. appeals courts issued conflicting rulings on ObamaCare. In a blow to the administration, the U.S. Court of Appeals for the District of Columbia Circuit, on a 2-1 vote, invalidated an IRS regulation that implemented a piece of the Affordable Care Act. The regulation said subsidies for health insurance were available to middle- and lower-income consumers whether they purchased the policy through the federal or a state exchange.

But then just hours later, a Richmond, Va.-based appeals court reached the opposite conclusion, handing the White House a victory.

If these two courts remain in opposition, then it’s clearly headed to the U.S. Supreme Court, at which point, as the Wall Street Journal reported, “Should the D.C. Circuit’s ruling eventually prevail, it potentially could cripple the law by making subsidies unavailable in as many as 36 states where the federal government has run some or all of the insurance exchanges.”

The two rulings fell along ideological lines.

Before a possible appeal to the Supreme Court, the administration will ask the D.C. appeals court to rehear the case, with all active judges participating in the review. Several new ones who have been appointed by President Obama were not initially involved.

---

There was much talk about President Obama and leadership this week.

Daniel Henninger / Wall Street Journal

“Asked on ‘Meet the Press’ Sunday whether this was the lowest moment in U.S.-Russia relations since the Cold War, America’s robo-Secretary of State John Kerry replied: ‘We live in an extremely complicated world right now, where everybody is working on 10 different things simultaneously.’ Well, not everyone.

“As the world burns, the president spent this week fiddling at fundraisers in the living rooms of five Democratic Party fat cats in Seattle, San Francisco and Los Angeles. As White House communications director Jennifer Palmieri famously explained, changing the president’s fundraising schedule ‘can have the unintended consequence of unduly alarming the American people or creating a false sense of crisis.’

“Alarmed? Who’s alarmed? What false sense of crisis? Vladimir Putin’s masked men in eastern Ukraine shot Malaysia Airlines Flight 17’s 298 people out of the air just about the time Israel and Hamas commenced their death struggle, not long after the Islamic State of Iraq and al-Sham occupied a third of Iraq within seven days. Now ISIS is cleansing Mosul of its Christians.

“If news coverage defined reality, you’d think the civil war in Syria was over. There just isn’t space to fit it all in.”

Charles Krauthammer / Washington Post

“The president’s demeanor is worrying a lot of people. From the immigration crisis on the Mexican border to the Islamic State rising in Mesopotamia, Barack Obama seems totally detached from the world’s convulsions. When he does interrupt his endless rounds of golf, fundraising and photo ops, it’s for some affectless, mechanical, almost forced public statement....

“The preferred explanation for the president’s detachment is psychological. He’s checked out. Given up. Let down and disappointed by the world, he is in withdrawal.

“Perhaps.

“But I’d propose an alternate theory, less psychological than intellectual, that gives him more credit: Obama’s passivity stems from an idea. When Obama says Putin has placed himself on the wrong side of history in Ukraine, he actually believes it. ...

“Remember when, at the beginning of the Ukraine crisis, Obama tried to construct for Putin ‘an offramp’ from Crimea? Absurd as this idea was, I think Obama was sincere. He actually imagined that he’d be saving Putin from himself, that Crimea could only redound against Russia in the long run.

“If you really believe this, then there is no need for forceful, potentially risky U.S. counteractions. Which explains everything since; Obama’s pinprick sanctions; his failure to rally a craven Europe; his refusal to supply Ukraine with the weapons it has been begging for....

“Putin doesn’t give a damn about world opinion. He cares about domestic opinion, which has soared to more than 80% approval since Crimea. If anything, he’s been emboldened. On Wednesday, his proxies shot down two more jets – a finger to the world and a declaration that his campaign continues.

“A real U.S. president would give Kiev the weapons it needs, impose devastating sectoral sanctions on Moscow, reinstate our Central European missile-defense system and make a Reaganesque speech explaining why.

“Obama has done none of these things. Why should he? He’s on the right side of history...

“The world is aflame and our leader is on the 14th green. The arc of history may indeed bend toward justice, Mr. President. But, as you say, the arc is long. The job of a leader is to shorten it, to intervene on behalf of ‘the fierce urgency of now.’ Otherwise, why do we need a president? And why did you seek to become ours?”

Finally, on Sunday I was watching “Meet the Press” and moderator David Gregory asked the following of Secretary of State Kerry.

GREGORY: Mr. Secretary, before I let you go, I want you to answer critics who accuse this president of an uncertain course in his foreign policy. And it harkens back to something the president wrote in his own book Audacity of Hope. He wrote this, critical of the Bush years, “Without a well-articulated strategy that the public supports and the world understands, America will lack the legitimacy and, ultimately, the power it needs to make the world safer than it is today.” Is that the problem President Obama faces?

SECRETARY KERRY: No. Let me tell you. What he faces maybe is a problem with a bunch of critics who want to jump to conclusions without looking at the facts. But the facts could not be more clear. The United States of America has never been more engaged in helping to lead in more places than we are now.

I just came back from China, where we are engaged with the Chinese in dealing with North Korea. And you will notice, since the visit last year, North Korea has been quieter. We haven’t done what we want to do yet with respect to the de-nuclearization. But we are working on that and moving forward.

With respect to Syria, we struck a deal where we got 100% of the chemical weapons out. With respect to Iraq, we are deeply involved now in the process of government formation, helping the Iraqis to be able to choose a government of unity that can reunite it. They’ve elected a speaker. They’re about to elect a president. We believe that’s moving forward.

On Afghanistan, we helped strike a deal recently to help warring parties in the contest of the election to be able to come together and hold Afghanistan together. With respect to Iran, this president has taken the risk of putting together a negotiation. For the first time in ten years, the Iranian nuclear program is actually being rolled backwards. And Israel and the region are safer than they were.

We negotiated a ceasefire in an effort to try to bring troops into south Sudan. We’ve negotiated a disarming of the M-23 rebel group in Democratic Republic of the Congo. We’re negotiating a major economic treaty, a package trade agreement with Europe, 40% of the world’s GDP. Same thing in Asia.

I would tell you something, David. One thing I’ve seen for certain, people aren’t worried about the United States and sitting there saying, ‘We want the United States to leave.” People are worried that the United States might leave. And the fact is that on every fundamental issue of conflict today, the United States is in the center leading and trying to find an effort to make peace where peace is very difficult.

And I think the American people ought to be proud of what this president has done in terms of peaceful, diplomatic engagement, rather than quick trigger deploying troops, starting or engaging in a war of choice. I think the President’s on the right track. And I think we have the facts to prove it.

---

As you’ll read below, there isn’t one major conflict area discussed above that is in better shape since President Obama took office. Those are the facts, Mr. Secretary.

Europe and Asia

The July flash report on manufacturing and the service sector for the eurozone was released by Markit and it was 54.0 vs. 52.8 in June, better than expected, so a good sign. But the flash report breaks down just two individual countries, Germany and France, and once again it’s a tale of two economies headed in opposite directions. Germany’s comp reading was 55.9, with services at 56.6, up from 54.6 in June, while France’s manufacturing PMI was 47.6, down from 48.2 in June, though services rose to 50.4 from the same 48.2.

Overall, manufacturing in the eurozone was at 51.9 vs. 51.8, while services were 54.4 vs. 52.8. Final figures for the euro-18 will be released next week.

While the initial data is encouraging, the figures still aren’t high enough to get manufacturers and corporate executives to go on a hiring binge and you still have the primary problem in Europe, an unemployment rate of 11.6%.

Separately, the bond markets continue to rock, with the yield on Italy’s 10-year closing the week at 2.72% and Spain’s 2.52%.

Italy’s treasury department announced it was canceling debt sales scheduled for August due to a “large cash supply,” while the Bank of Spain pegged GDP growth in the country for the second quarter at 0.5% over the first quarter, which was up 0.4%. The Q2 annualized pace was up 1.1% as household spending is rebounding, led by car sales in June, up 24%.

But as a recent Wall Street Journal article pointed out, the balance sheets for Spain’s banks are highly iffy, lacking transparency and full disclosure; such as the failure to disclose “nonperforming assets” vs. the reporting of nonperforming loans. Nonperforming assets is a more accurate indication of a bank’s health, especially in Spain, which had as big a real estate bubble as anywhere in the world. Nonperforming assets includes foreclosed homes a bank will have to try to sell, as well as loans to property developers or other businesses that are unlikely to be paid...and you know from all the articles I wrote over the years that Spain’s property developers are in dreadful shape.

And I can’t help but note a release this week from Eurostats of government debt as a percentage of GDP among the eurozone set.

Greece is at 174% in the first quarter of 2014. Italy 135.6% and Portugal 132.9%; all higher than Q1 2013. Ditto Spain and France, at 96.8% and 96.6%, respectively.

Germany is at 77.3%, down from 80.5%, while debt to GDP in the U.K. is 91.1%, up from 88.6% a year earlier.

But it’s obviously Greece, Italy and Portugal that are of the most immediate concern. They need growth. If they don’t get it, Europe’s debt crisis will return. It’s inevitable. And that’s yet another reason why Ukraine matters because of its ability to severely impact sentiment.

Britain’s political leadership received some good news on Friday as the Office of National Statistics said GDP in the second quarter rose 0.8%, putting it at an annualized rate of 3.1%, strongest among the developed nations. GDP has now surpassed pre-crisis levels for the first time in the U.K.

But with elections just ten months off, Prime Minister David Cameron’s Conservatives still trail the opposition Labour Party, 38-35, in a YouGov poll published on Friday.

Turning to Asia, in China, HSBC released its flash reading on manufacturing for July and the figure was 52.0 vs. 50.7 in June, far better than expected. As HSBC’s calculations are generally perceived to be a truer barometer than the Chinese government’s national statistics office, this is encouraging. The government has been attempting to speed up some infrastructure projects and it may be bearing fruit.

But the other day the government did have its second straight incomplete sovereign debt auction, which isn’t catastrophic but not the greatest sign.

In Japan, inflation slowed in June, with consumer prices, ex-fresh food (their core), rising 3.3% from a year earlier after a 3.4% gain in May, the statistics bureau said on Friday. The effects of April’s sales-tax increase will continue to slip away later in the year as inflation eases towards the Bank of Japan’s 2% goal.

But Prime Minister Shinzo Abe’s poll numbers continue to decline, with his approval rating falling below 50% for the first time. It seems his harder line on national security is turning off women in particular.

[The IMF upped Japan’s growth forecast for 2014 from 1.3% to 1.6%, while it cut China from 7.6% to 7.4%.]

Street Bytes

--Stocks finished mixed on the week, with the Dow Jones losing 0.8% to 16960, while the S&P 500 was unchanged and Nasdaq picked up 0.4%. Stocks were hit on Friday owing to tensions in Ukraine, but also because of a statement from Visa, which fell hard in announcing it saw no sign yet of an acceleration in economic recovery, domestically or internationally. Amazon’s performance didn’t help.

--U.S. Treasury Yields

6-mo. 0.06% 2-yr. 0.49% 10-yr. 2.46% 30-yr. 3.24%

Consumer prices in June were up 0.3%, 0.1% ex-food and energy. For the 12 months, the CPI was up 2.1%, 1.9% on core. So still not worrisome, because there is no wage inflation, though I maintain that’s coming.

--Shares in Amazon cratered $34.60 on Friday (down 9.7%) after the company reported a much-larger than expected loss of $126 million for the second quarter and warned of slowing sales in the current one. Amazon said sales in the third quarter could grow as little as 15%, after growing 23% in the last one.

Amazon has been investing heavily to build up its business, including $100 million for its own video content, while spending on improving its delivery systems, such as expanding Sunday delivery in the U.S.

But investors, at least for this quarter, have lost some faith in Jeff Bezos. Personally, I stopped trying to figure out this stock, and its valuation, years ago.

--Apple sold 35.2 million iPhones for the three months to June 28, up from 31.2 million a year ago (up nearly 13%). Growth was helped by demand from the BRIC countries – Brazil, Russia, India, and China – where iPhone sales rose 55%. [48% in China.]

But sales of the iPad were down last quarter by 9%, with Apple selling just 13.3 million, about a million fewer than analysts had been expecting. In fact iPad is so out of favor that Apple CEO Tim Cook didn’t mention it in his statement.

“Strong sales of iPhone and Mac and the continued growth of revenue from the Apple ecosystem” were behind the record June-quarter revenues of $39.8 billion and quarterly net profit of $7.7 billion, he said.

It’s been assumed tablets would gradually overtake traditional PCs, but customers are holding onto iPads longer than expected, and longer than they do with their smartphones.

Plus, whereas Apple faced little competition in the tablet sector the first few years, now there are a number of strong competitors, including Samsung, Microsoft and Google. Apple’s market share was 32.5% in the first quarter, down from 40% a year earlier.

Overall, research firm IDC lowered its forecast for 2014 worldwide tablet demand growth to 12.1% - a fraction of the 51.8% expansion of 2013. That’s rather staggering. 

But as I also noted last week, Apple is going to be introducing a larger screen for its iPhone 6, which isn’t that much smaller than an iPad mini. Slated to be delivered in September, Apple is gearing up for its biggest initial run of iPhones.

Meanwhile, Mac sales rose a strong 18% to 4.4 million units, befitting the resurgent PC sector.

Apple’s profit for the quarter was $7.75 billion, up from $6.9 billion. Revenue rose 6% to $37.4 billion.

Back to China, overall sales there rose 26% in the quarter, compared with growth of 1% in the Americas and 6% in Europe.

--Microsoft’s sales rose 22% in the second quarter to $23.38 billion, but that’s because of the inclusion of Nokia, which lost 8 cents a share. Microsoft overall had earnings of 55 cents, below expectations.

After earlier announcing the company would cut 18,000 jobs, most of them in the Nokia handset unit, new CEO Satya Nadella sought to reassure Wall Street he was bringing real discipline to the software company’s strategy, with a core of “productivity and platforms,” as he told staff in a memo, while continuing to back products such as Xbox outside the core.

Microsoft also said revenue from cloud services sold to business customers rose 147%.

--Facebook announced a 138% rise in net income for the second quarter to $791 million, as revenue from advertising surged 67% to $2.68 billion. Mobile ad revenues now account for 62% of the advertising total, which is super given Facebook had virtually zero from this source in 2012.

CEO Mark Zuckerberg said in an accompanying statement, “We had a good second quarter. Our community has continued to grow, and we see a lot of opportunity ahead as we connect the rest of the world.”

Facebook now has 1.32 billion active users every month, up 14% from last year. More than a billion are on mobile devices. [Daily active users are said to be 829 million on average, up 19% year-over-year.]

The firm did acknowledge it would take years to build up solid revenue models around its Whatsapp messaging app and Instagram photo network – which were two expensive acquisitions.

On the week, Facebook shares hit a new high and closed up 10% to $75.20. Zuckerberg’s net worth on paper is $33.3 billion.

--General Motors Co.’s earnings declined 80%, with results hit by a $2.5 billion pretax charge related to vehicle recalls and money set aside for a victims’ compensation fund.

Separately, GM recalled another 718,000 vehicles on Wednesday, including Chevy Camaros and Buick Regals from model years 2011-2012. The bolt for seat-height adjustments may become loose or fall out. The automaker knows of three injuries and no fatalities.

So that brings GM’s total recalls to nearly 30 million vehicles in North America this year.

--Speaking of the Buick Regal, Consumer Reports says the latest model is about the equal of the much more expensive BMW 328 and Mercedes-Benz C250.

--Ford Motor Co. reported second-quarter net income rose 6% to $1.3 billion, driven by record results in North America. It even made its first quarterly profit in Europe in three years. [GM continues to lose money in the region.] Ford did have to take a hefty write-down for an investment in a Russian joint venture, with an economic slowdown and weak ruble there being exacerbated by the tensions in Ukraine.

--Netflix passed the 50 million subscriber barrier in the second quarter as the company doubled profits and announced expansion plans for France and Germany.

Netflix now has more than 36 million subscribers in the U.S., having added 570,000 in the quarter, and almost 14 million international, up 1.12 million.

The company expects total subscribers to grow to 53.74 million in the current quarter.

Revenues were up 25% to $1.34 billion in Q2, with earnings of $1.15 per share.

But with the share price at $421 (down $23 on the week), well, you do the math. Some analysts continue to be concerned as well about Netflix’s free-spending ways in obtaining, and creating, content.

--PepsiCo Inc. handily beat profit forecasts and raised earnings guidance as it prepares for a fight with activist investor Nelson Peltz, who is lobbying to break up the company’s snack and beverage businesses. PepsiCo’s management is against that idea, opting instead to more aggressively cut costs. Revenue only rose 0.5%, but this beat Street expectations as well.

--As for rival Coca-Cola, it reported net revenue fell 1%, though the flagship brand saw volume rise 1% in North America for the quarter, year-over-year. Truly exciting stuff.

--Delta Air Lines Inc. saw second-quarter earnings rise 17% to $801 million. Revenue rose 9.4% to $10.62 billion. Both figures were essentially in line with expectations. Traffic increased 5%, with the load factor rising to 86.3% from 84.8%.

--American Airlines Group Inc. declared its first dividend since 1980 as it reported a record second-quarter profit of $1.5 billion, excluding special items. Following its merger with US Airways, American is now the largest U.S. carrier by traffic. Total revenue rose 76% (again, for the combined operation, the merger going through last December).

--Airline passenger fees continue to rise...$31.5 billion collected from 59 airlines in 2013, according to a Wisconsin-based consultant IdeaWorksCompany, up from $27.1 billion in 2012.

--Boeing’s revenue edged up just 1.1% for the quarter, though it beat on the bottom line and raised guidance for the year. But the company took an unexpected $272 million after-tax charge for issues involved on its new Air Force tanker plane over what executives called “challenges.”

--Dow Chemical reported better than expected earnings and sales, with the latter up 2% over year ago levels.

--The head of Wal-Mart’s U.S. operations, Bill Simon, is retiring after eight years at the company, having been passed over for the CEO position a year ago, the job going to Doug McMillon. Simon has agreed not to work for a competitor for two years. Greg Foran, currently head of the Asia division, will replace Simon.

--Shares in Whirlpool were hit hard as second-quarter profit fell 9.6%, with the appliance maker’s international operations hurting the bottom line, particularly lower sales in Brazil and China. Sales rose 4% in North America for the quarter, but declined 9% in Asia and 4% in Latin America. Whirlpool is in the midst of acquiring a controlling stake in a Chinese appliance maker.

--Qualcomm became the latest U.S. tech company to announce problems in collecting licensing fees on new mobile devices sold in China, as the Chinese government said it was investigating the mobile chipmaker for antitrust issues, which then caused some companies to withhold new licenses for Qualcomm’s technology.

China continues to discourage purchases of U.S. technology in general, owing in no small part to the disclosures by Edward Snowden.

--And then there’s McDonald’s, which reported disappointing results for the second quarter, with overall revenue up just 1%, but U.S. same-store sales down 1.5% (down 3.5% in June). Comp store sales declined 1.0% in Europe.

Meanwhile, Chinese mainland authorities are investigating a major McDonald’s supplier over reports rotten meat had been reprocessed and repacked with new expiration dates at Husi Food Company, which is owned by Illinois-based OSI Group. McDonald’s Hong Kong confirmed it too imported chicken and pork from the same Shanghai food processing plant.

Five Husi executives were detained by Shanghai police on Tuesday, after investigators seized 160 tons of raw meat as well as 1,107 tons of other Husi Food products.

The factory was licensed to export to both Hong Kong and Japan.

McDonald’s Japan admitted it had sourced about a fifth of its “Chicken McNuggets” from the Shanghai plant, and on Friday, McDonald’s announced it had decided to stop selling all chicken products produced in China. This is Japan’s biggest restaurant chain by revenue. The company will use chicken products made in Thailand from here on.

Back on the mainland, McDonald’s China announced by week’s end that it would continue using meat supplier OSI Group because “it is riskier to find another local supplier,” using a different OSI-owned plant in Henan province.

McDonald’s has a 60-year relationship with OSI, with OSI entering China in 1991, a year after McDonald’s opened its first restaurant there.

[Also in China, Yum Brands, parent for both KFC and Pizza Hut, cut all ties with OSI, which is not its major supplier. And Starbucks said some of its cafes previously sold products containing chicken originally sourced from Shanghai Husi.]

Editorial / Wall Street Journal

“Lack of trust is the hallmark of life in China today, which is one reason many rich Chinese choose to move abroad.... 

“New supreme leader Xi Jinping’s anticorruption campaign may bring some temporary improvement. But if he doesn’t build government institutions with integrity, the cheating will resume as soon as the campaign is over....

“The lesson for managers is that they must always distrust and verify what their suppliers tell them. Regularly scheduled inspections are useless as the factory will be spruced up for their visit. Surprise visits and spot checks are the only defense against fraud and fakery. In the wild west of the China market, caveat emptor is the only reliable law.”

Ain’t that the truth.

But wait...there’s more trouble for McDonald’s. On Friday, Russia’s consumer protection agency filed a lawsuit against them in a Moscow court, alleging that certain of the chain’s products – including its chicken burger, Caesar wrap and ice cream parfait – did not meet Russia health standards.

Extensive lab testing had shown many McDonald’s products were rife with “discrepancies in quality and safety” and did not follow “the physical-chemical and microbiological parameters required by [Russian] law.”

Yes, it’s all about Ukraine in this instance.

Vladimir Zhirinovsky, the wacko far-right politician, has called for a national ban on McDonald’s and Pepsi. A pro-Kremlin youth group launched an “eat Russian” viral campaign this week.

In April, McDonald’s announced it was “temporarily” closing its three restaurants in Crimea following Russia’s annexation.  [Courtney Weaver / Financial Times]

--Back to Starbucks, comp store sales in the U.S. rose a solid 7%, with CEO Howard Schultz citing growing food sales. Globally, sales rose 6%. For the quarter, the company earned $512.6 million on $4.15 billion in revenues, up 11%.

Starbucks now has over 20,800 stores across 64 countries.

--As noted the other week, corn prices have been cratering and are now down about 30% in just three months to their lowest point since 2010, off over 55% from the 2012 record high. Ditto soybeans and wheat as growing conditions have been perfect. Not only are farmland values beginning to roll over, but farm equipment makers such as Deere & Co. are seeing falling sales.

And with a second consecutive booming harvest, that doesn’t bode well for prices next year with bulging inventories.

--Speaking of favorable weather, natural gas prices hit their lowest level in eight months before stabilizing at week’s end. Cooler-than-normal temperatures are forecast for much of the Plains and Midwest.

--U.S. orange-juice retail sales fell to the lowest level on record, down 8.3% for the four weeks ended July 5, according to data published by the Florida Department of Citrus. We just aren’t drinking as much of it, especially with a wide variety of alternative beverages, including energy drinks and flavored waters. It doesn’t help the price at the grocery store has been rising due to a bacterial disease that has hurt the crop.

--CIT Group, a lender that ran into trouble during the housing bust, said it would acquire OneWest bank – which rose from the ashes of IndyMac, the failed California lender.

The deal, $3.4 billion in cash and stock, is a coup for former Merrill Lynch executive, John Thain, who sold Merrill during the depths of the financial crisis and was unceremoniously booted, only to reemerge at CIT, a lender to small and midsize businesses that has grown under his leadership.

Shares in CIT jumped nearly 11% on the news.

--An examination by the Federal Reserve Bank of New York found that Deutsche Bank AG’s giant U.S. operations suffer from a myriad of problems, serious ones.

In a letter to executives last December, a senior official with the New York Fed wrote that financial reports produced by some of the bank’s U.S. arms “are of low quality, inaccurate and unreliable. The size and breadth of errors strongly suggest that the firm’s entire U.S. regulatory reporting structure requires wide-ranging remedial action.”

As reported by the Wall Street Journal, which obtained documents related to the investigation, Deutsche Bank had made “no progress” at fixing previously identified problems.

If you are wondering about the timing of the disclosure, the New York Fed doesn’t have to make its actions, or letters, public. But the letter in question shows the Fed has been concerned about DB’s U.S. operations for years, in fact, a decade.

As the letter stated: “Most concerning is the fact that although the root causes of these errors were not eliminated, prior supervisory issues were considered remediated and closed by senior management.”

The bank’s annual report and other filings were signed off on by KPMG.

--Activist investor William Ackman went on CNBC Monday and said the following day he would be releasing the results of his two-year, $50 million investigation into Herbalife, the nutrition-sales company Ackman has bet $1 billion is a pyramid scheme, and that it would be the most important presentation he had ever made. Herbalife would be shown to be a total fraud, once and for all; his report would be a “death blow.”

So the shares rose 25%, $13.75, even as Ackman was telling an audience of 400 investors, “It’s time to shut the company down.”

Herbalife said the claims were “outrageous,” though multiple agencies have opened investigations, including the Federal Trade Commission.

--Some representative state unemployment rates for the month of June.

California 7.4% [9.0% a year earlier]
Florida 6.2%
Nebraska 3.5%
New Jersey 6.6%
New York 6.6%
North Dakota 2.7%
Pennsylvania 5.6%
South Carolina 5.3% [lower jobless rate than it had in the years before the recession.]
South Dakota 3.8%
Texas 5.1%

U.S. 6.1%.

Mississippi and Rhode Island, at 7.9%, have the highest rates.

--Canadian retail sales rose 0.7% in May over April, up 4% year-over-year.

--Russia’s economy grew 0.1% in the second quarter, thus avoiding slipping into recession by the technical definition. GDP had shrunk 0.5% in Q1. The government expects the economy to grow just 0.5% for the full year.

--Saudi Arabia said it would open its stock market to foreign investors in the first half of 2015, allowing foreigners to buy Saudi stocks directly on the main exchange.

--Ebola has killed 660 thus far in West Africa, according to the World Health Organization, and there are fears the current outbreak could spread to the region’s larger countries such as Ivory Coast, Ghana, and Nigeria. About half of the deaths thus far have been in Guinea.

Needless to say the economic impact could be severe if Ebola spreads much further.

--As Dick’s Sporting Goods Inc. struggles along with the industry in selling golf equipment, it announced it is laying off 400 members who were employed as golf instructors, and the chain is going to be taking floor space away from golf merchandise, while expanding women’s and youth apparel.

Same-store sales for its Golf Galaxy unit dropped 10.4% for the most recent quarter, a huge decline as these things go.

--Atlantic City’s mayor said there are six potential buyers of the Revel Casino Hotel, which cost $2.4 billion to build and is up for sale next month at a bankruptcy auction.

At the same time the former Atlantic Club supposedly has a buyer, but no word on whether it would still be operated as a casino. There are no potential buyers for Trump Plaza as yet.

The Atlantic Club closed in January. The Showboat will close on Aug. 31, Trump Plaza on Sept. 16, and the question mark over Revel.

There were/are over 8,000 employees at these four casinos and imagine the knock-on effects on small businesses in the area, let alone the apartment sector.

And as if Atlantic City’s casinos weren’t already suffering enough, two masked men robbed Caesars of more than $180,000 Monday morning, somehow making off with two cash boxes.

--Mexican telecom tycoon and world’s second-richest man, Carlos Slim, said we should be working just three days a week, but work until we are older, say, 70 or 75. We could work “perhaps 11 hours a day” for the three.

At his Telmex phone company in Mexico, workers have the option of working only four days a week.

--We note the passing of Wall Street legend, Alan “Ace” Greenberg, former CEO of Bear Stearns Cos. He was 86.

Greenberg took over Bear in 1978, when it was a private partnership, and grew it for 15 years before turning power over to James “Jimmy” Cayne. Greenberg stayed on as an equities trader and was there when a bank run by clients forced a sale to JPMorgan Chase &Co. in March 2008. Greenberg blamed Cayne for the demise of the firm.

Foreign Affairs

Ukraine: I can’t do a better job of summing up the current situation here than the following Washington Post editorial from Friday.

“Vladimir Putin has responded to the international outrage over the destruction of a Malaysian airliner by his proxies in eastern Ukraine by escalating his aggression. According to U.S. officials, tanks, artillery and other heavy weapons have continued to cross from Russia to Ukraine since the passenger jet was shot down. On Wednesday, two more Ukrainian military jets were hit by anti-aircraft missiles, which Ukrainian officials said had been fired from Russia. The State Department also said Thursday that Russian artillery was firing at Ukrainian positions from across the border.

“The Russian president is clearly not impressed by Western responses to the killing of 298 innocent people and the subsequent attempt by his government and its proxies to deny and cover up the crime. And why should he be? After making a statement Monday that contained no tangible response and only a vague threat that ‘the costs for Russia’s behavior’ will increase, President Obama departed for three days of fundraising on the West Coast. The message to Mr. Putin – not to mention the Israelis, Palestinians and Iraqis fighting their own wars – was that the president was not engaged enough by the crises to set aside the purely political activity of collecting checks from donors.

“In Brussels, European Union officials met Thursday to discuss potential sanctions against Russia, including new measures against the banking, energy and arms industries. But no decisions will be made before next week, and even then Moscow will likely be given a new deadline for meeting a demand that it stop supplying the Ukrainian rebels. Previous deadlines to cease weapons deliveries have passed with no significant action.

“While the West temporizes, a de facto Russian army is rapidly assembling in occupied portions of eastern Ukraine.  A report in the Financial Times, sourced to U.S. intelligence officials, says it includes dozens of T-64 battle tanks, Grad rocket launchers, self-propelled guns, infantry combat vehicles with automatic cannons and armored personnel carriers, in addition to anti-aircraft systems like the one that shot down the Malaysian plane. This force is commanded by Russian citizens who infiltrated Ukraine from Moscow, including a Russian secret police colonel, and made up in large part of fighters from Russia.

“Incredibly, the European Union’s position – tacitly supported by Mr. Obama – is that the Ukrainian government should stop attempting to expel the invaders from its territory and instead negotiate with them about the political future of Ukraine. Fortunately, newly elected President Petro Poroshenko has not capitulated to this appeasement strategy.”

Members of Obama’s own party are increasingly frustrated with him, with heavyweights Dianne Feinstein, Carl Levin and Robert Menendez, all committee chairs, calling on the president to “impose immediate broad sanctions” against Russia’s defense sector.

The Post editorial concludes:

“Mr. Obama has already missed the opportunity for swift action to stop Mr. Putin’s escalation. If he does not act soon, it may be too late to save Ukraine.”

Ukraine’s ruling coalition collapsed on Thursday and Prime Minister Arseniy Yatsenyuk submitted his resignation, which sets the stage for parliamentary elections that should only strengthen President Poroshenko. Recent polls show pro-Russia parties might not attain the 5% threshold necessary for inclusion in parliament.

But to hold elections requires victory over the rebels in the east and now with Russia’s movement of heavy arms, and thousands of personnel on the border, that doesn’t seem likely anytime soon. October is being targeted for a vote and Yatsenyuk is staying on in an interim capacity until a new coalition is formed.

The normally mild-mannered prime minister did blast parliament in a speech announcing he was stepping down for not passing legislation to allow a liberalization of control over Ukraine’s pipeline system. Parliament has also failed to approve expanded funding for the military.

As to the crash site of Malaysia Air Flight 17, it is still not secure, over a week later, with bodies in the field, even as up to 200 of the 298 victims were flown to the Netherlands for identification.

With 189 of the victims being from the Netherlands, Dutch Prime Minister Mark Rutte said he was shocked by the “disrespectful behavior” of the rebels controlling the crash site. “In defiance of all the rules of proper investigation, people have evidently been picking through the personal and recognizable belongings of the victims. This is appalling.”

It was beyond tragic, and pathetic, that the Russian separatists and those in the area of the site robbed the bodies of their dignity, and possessions, while destroying evidence.

Australia is among the nation’s offering teams of police to secure the area, but now the war is closing in on it.

As for the downing on Wednesday of two Sukhoi Su-25 strike aircraft, the Ukrainian military said the two were flying at nearly 17,000 feet – an altitude that is out of the reach of shoulder-fired missiles that the rebels claim they used. Some reports have the missiles being fired from Russian territory.

The pilots of the two Su-25 jets bailed out over rebel-held territory and their conditions and whereabouts are not known.

Earlier in the week, the Obama administration released satellite images and other sensitive intelligence that officials say show Moscow’s involvement in training and equipping rebels in Ukraine responsible for MH17. There is also strong evidence the rebels did not know they were shooting down a civilian airliner.

For their part, the Russian defense ministry and the Kremlin are doing everything they can in the information war to discredit the U.S. version of events. Russia has gone so far as to attempt to edit the Wikipedia page on MH17.

In Russia itself, the people are largely buying Moscow’s lies.

Meanwhile, as the EU dithers on the sanctions front, France is going ahead and selling Russia a helicopter assault ship, but French President Hollande said he was holding off on the delivery of a Mistral warship until he sees Moscow’s attitude to the conflict in Ukraine. Until now, Paris insisted it must honor the contract as 400 Russian sailors have been training to operate the ship at a western French port for three weeks.

Holman W. Jenkins, Jr. / Wall Street Journal

“Perhaps what we’ve been actually watching since the start of 2014 has been the last chapter of Vladimir Putin’s rule. All has inevitably gone pear-shaped for the Russian leader since the popular overthrow of his client and ally Viktor Yanukovych in the strategic next-door nation of Ukraine.

“The Sochi Olympics extravaganza, meant to suggest to Russians they are a world-class country with a world-class president, now looks like $50 billion down the drain. The Russian economy, already weighted down by corruption and cronyism and stunted development outside the government-controlled energy sector, is sinking fast under sanctions and capital flight.

“Mr. Putin enjoyed an extraordinary run on oil prices after coming to power in 1999 – a tenfold increase. That gift won’t be repeated, and the Russian middle class in any case is harder to placate with crumbs from resource extraction whose proceeds mostly flow to Mr. Putin’s nearest and dearest.

“And it’s not just that Mr. Putin is KGB; everyone around him is KGB too, even if their interests don’t perfectly overlap...

“Under the existing Russian constitution, he must face voters again in 2018 and 2024 – each a potential Tiananmen. Then, in theory, he’s done. But Mr. Putin can’t afford to be done. He can’t retire. But neither is he Deng Xiaoping, with deep institutional support to face down a Kiev-style uprising. He can’t count on Russian Army generals, who may be getting conflicting advice from friendly billionaires about where their own interests lie, if confronted with mass demonstrations....

“What Putin fears is not the West but his own people....

“Two years ago, we asked if Mr. Putin might have an act of creative statesmanship in him, fashioning a graceful exit from power and into some lavish tax-haven exile. He evidently doesn’t. Even with the airliner shoot-down, the U.S. and Europe are likely loath to destabilize his regime fatally. The next question is whether the Russian people have a creative act in them, or whether they are prepared supinely and mutely to share whatever fate Mr. Putin, in his selfishness, decides to inflict on his country for his own preservation.”

[In a new CNN/ORC poll of Americans, 78% have an unfavorable opinion of Russia, while 85% believe Russia was directly or indirectly responsible for MH17.]

Israel: The death toll in Operation Protective Edge is well over 800 on the Palestinian side, with at least 33 Israeli soldiers killed and two Israeli citizens, but in terms of a successful cease-fire, beyond a proposed 12-hour humanitarian one for Saturday, Prime Minister Benjamin Netanyahu said Hamas’ conditions for one are a non-starter.

“Hamas has demands from here to Vladivostok,” Netanyahu said. “We are continuing Operation Protective Edge at full strength, in the air and on the ground.

“While there are no guarantees of 100 percent success, IDF soldiers are having important successes in locating and neutralizing the terrorist tunnels. I remind you that the terrorist tunnels were designed to penetrate the State of Israel and allow the enemy to strike at it and perpetuate deadly and large-scale attacks against Israeli civilians.”

A Channel 2 poll in Israel found Israelis split on whether the operation should end after the tunnels were dealt with. “While 41% said the IDF should stop the operation when the tunnels are neutralized, another 46% said the operation should continue until Hamas is toppled.” [Jerusalem Post]

82% said they were satisfied with Netanyahu’s performance during the crisis, and only 10% said they were not. Just a week earlier, 57% said they were satisfied, so the Gaza operation thus far has given the prime minister a huge boost when right before his government was teetering, with the hard-right members of his coalition threatening to break away because Netanyahu wasn’t being forceful enough.

But in terms of world opinion, I said last week that Israel had to wage a perfect war, which was impossible, and this week you had the shelling of a U.N.-run school, filled with women and children seeking refuge from the fighting in the northern part of the Gaza Strip, that left 16 dead and as many as 200 wounded. At first, Israel said it was a Hamas rocket that hit the school, but Israel had been shelling the area. It seems it was another accident, with a senior Israeli military spokesman, Lt. Col. Peter Lerner, saying, “The school was not a target in any way,” admitting it wasn’t suspected of being a storage facility used by Hamas for rockets and other weapons.

More than 140,000 Palestinians have fled their homes because of the fighting, with many seeking refuge in U.N.-related buildings.

Earlier in the week, the U.S. Federal Aviation Authority banned all U.S. airline flights into and out of Tel Aviv’s Ben Gurion airport after a rocket fired from the Gaza Strip on Tuesday landed in a village a mile from the airport. The ban lasted about 36 hours, with the FAA’s European counterpart issuing a “strong recommendation” for airlines to avoid Ben Gurion “until further notice” following the attack.

British Airways never suspended flights to Israel, but Germany’s Lufthansa and Air France were among the carriers opting not to fly there.

Former New York City Mayor Michael Bloomberg flew to Israel on an El Al flight to show his solidarity, meeting with Prime Minister Netanyahu upon landing. In part, Bloomberg said;

“I’ve always been a strong supporter of Israel. When New York City and the United States were attacked on 9/11, the people of Israel stood with us. They know what it’s like to be attacked by terrorists, and they know that one of the best things you can do to defeat the terrorists is to refuse to stop living your life – to refuse to give in to the terrorists.

“Halting flights here – when the airport is safe – hurts Israel and rewards Hamas for attacking Israel. Hamas wants to shut down the airport; we can’t let that happen....

“It was an overreaction for the FAA to halt U.S. flights here – and a mistake they should correct.”

It was Bloomberg’s finest moment.

Editorial / Washington Post

“The distinguishing feature of the latest war between Israel and Hamas is ‘offensive tunnels,’ as the Israeli army calls them. As of early Wednesday, 28 had been uncovered in Gaza, and nearly half extend into Israel, according to Israeli officials. The tunnels are the reason that the government of Benjamin Netanyahu decided last weekend to launch a ground invasion of Gaza, and they explain why that operation has strong support from Israelis in spite of the relatively heavy casualties it has inflicted....

“Hamas’ offensive tunnels should not be confused with the burrows it has dug under Gaza’s border with Egypt to smuggle money, consumer goods and military equipment. The newly discovered structures have only one conceivable purpose: to launch attacks inside Israel. Three times in recent days, Hamas fighters emerged from the tunnels in the vicinity of Israeli civilian communities, which they clearly aimed to attack. The concrete-lined structures are stocked with materials, such as handcuffs and tranquilizers that could be used on hostages. Other tunnels in northern Gaza are designed for the storage and firing of missiles at Israeli cities.

“The resources devoted by Hamas to this project are staggering, particularly in view of Gaza’s extreme poverty. By one Israeli account, the typical tunnel cost $1 million to build over the course of several years, using tons of concrete desperately needed for civilian housing....

“The depravity of Hamas’ strategy seems lost on much of the outside world, which – following the terrorists’ script – blames Israel for the civilian casualties it inflicts while attempting to destroy the tunnels....

“Polls show that (most of Gaza’s population) is fed up with Hamas’ rule and with its use of women and children as cannon fodder in unwinnable wars with Israel. The next government of Gaza should be one that invests in schools, health clinics and houses, not in tunnels.”

U.S. intelligence officials, according to terrorism expert Steven Emerson, believe Hamas has far more tunnels than even Israel estimates. 

Michael Young / Daily Star (Beirut)

“The war in Gaza continues while the outcome remains uncertain. But from the Israeli perspective, the conflict must appear increasingly worrisome, despite the successes of the Iron Dome system. The reason is that few conflicts have better illustrated the void and contradictions at the heart of Israel’s approach to the Palestinians.

“The contradictions first. The Israelis have portrayed the war as an effort to weaken Hamas, but everything they have done has strengthened the movement, after a period in which its popularity had dived domestically and its lucrative, vital tunnel system was closed by a hostile Egyptian government.

“Hamas was also seeking to revive its financial and military relationship with Iran, severed because of their disagreement over Syria. That relationship appears to have been restored, even though it will be tougher to smuggle new weapons into Gaza given Israel’s and Egypt’s controlling access to the territory. However, a complete cutoff of arms to Gaza will be difficult.

“Hamas has benefited in other ways. It has underlined how inconsequential is Mahmoud Abbas, the Palestinian president, advancing its agenda to ultimately remove him and his Fatah movement as the dominant actors in the Palestine Liberation Organization. This does not necessarily displease Benjamin Netanyahu. The Israeli prime minister has time and again discredited his Palestinian interlocutors, in order to avoid giving up occupied land. But the broader consequences of having Hamas lead the Palestinians are serious.

“And Hamas has also gained by showing it can target Israeli cities, regardless of the Iron Dome’s effectiveness. The attacks have altered daily life in Israel, most recently by pushing foreign airlines to suspend their flights to Ben Gurion Airport. Technology is not stationary. If Hamas’ rockets are relatively primitive today, in the future they can, and likely will, be improved. Israel’s ability to conduct wars entirely in the lands of its neighbors is becoming less possible by the day.”

Janet Daily / Daily Telegraph

“(In the Middle East), which the United States used to regard as its particular bailiwick, Israel’s patience has been exhausted. Having withdrawn voluntarily from Gaza, it found itself with a huge refugee camp on its border, which the terrorist organization Hamas could use as a military base.

“With the convenient cover of a helpless civilian population, Hamas could escalate its rocket attacks to target every major Israeli city, knowing that any retaliation would be likely to create a humanitarian crisis.

“What does the West have to say about this?  That of course Israel has a right to defend itself, but that its response to attacks must be ‘proportionate.’

“Proportionate to what? Hamas refuses offers of a ceasefire, and will not desist in its terror attacks: clearly, the Palestinian outrage it represents will have to be addressed, and not purely by Israeli bombardment. What, exactly, is America’s plan? One suspects that it is simply to manufacture enough of its own oil to make dependence on this contentious region a thing of the past. Then it can wash its hands of this problem, too.”

Former Israeli ambassador Michael Oren / Washington Post

“U.N. Secretary General Ban Ki-Moon, Secretary of State John Kerry and the foreign ministers of Great Britain and France are all rushing to achieve a ceasefire between Israel and Hamas. Their motive – to end civilian suffering and restore stability to the area – is noble. The images of the wounded and dead resulting from the conflict are indeed agonizing. However, these senior statesmen can be most helpful now by doing nothing. To preserve the values they cherish and to send an unequivocal message to terrorist organizations and their state sponsors everywhere, Israel must be permitted to crush Hamas in the Gaza Strip....

“Operations Protective Edge may seem small, but it is nevertheless pivotal. To ensure that it concludes with a categorical Israeli win is in the world’s fundamental interest. To guarantee peace, this war must be given a chance.”

Iran: As noted last week, Iran and the six powers (P5+1) extended nuclear talks four months until Nov. 24, in recognition the two sides have significant differences remaining. Last Saturday, Iranian Foreign Minister Mohammad Javad Zarif read a statement in Farsi and didn’t take questions. U.S. Secretary of State John Kerry spoke of “tangible progress,” echoing the same words used by EU foreign policy chief Catherine Ashton.

But Republican Rep. Ed Royce, chairman of the House Foreign Affairs Committee, said, “It looks like the Iranians won extra time with a good cop-bad cop routine.”

French Foreign Minister Laurent Fabius said Iran was expected to cooperate with the U.N. International Atomic Energy Agency (IAEA) over possible military dimensions to its nuclear program.

Iran demands it be allowed to keep its current uranium enrichment program. The United States and its Western allies want deep cuts.

But in the interim, under the deal cut last weekend, the U.S. will give Tehran access over the next four months to an additional $2.8 billion in oil export revenues frozen abroad by American sanctions.

In turn, Iran agreed to curtail the most advanced parts of its nuclear program and will accelerate the conversion of its 20% enriched uranium into fuel for its research reactor, which makes it much harder to reconvert into weapons-grade material. Iran also agreed to dilute its 2% enriched uranium stockpile into natural uranium. Tehran will also allow additional monitoring of its nuclear research work, but here, the IAEA hasn’t seen the cooperation thus far it feels Iran had promised as part of an agreement in May involving the military dimensions that foreign minister Fabius is alluding to.

The key figure, however, is Ayatollah Ali Khamenei and he has signaled no willingness to dial back Iran’s uranium-enrichment efforts in exchange for sanctions relief.

Khamenei also commented on the Israel-Gaza Strip crisis, saying he sought the dismantling of the state of Israel, not the death of Jews.

“Israel’s annihilation is the only real cure, but that doesn’t mean destroying Jews in this region,” part of a speech posted on his website.

There is no apparent date for a resumption of talks.

Ray Takeyh / Washington Post

“There was always something peculiar about segregating Iran’s nuclear pretensions from the region’s raging conflicts. Iran’s supreme leader, Ayatollah Ali Khamenei, has been busy fortifying the Assad dynasty in Syria, ensuring that a pliable regime remains in power in Iraq, nurturing Hizbullah and arming Hamas as it wages war against Israel. In Khamenei’s telling, the United States is a crestfallen imperial state unable to impose its mandates on a defiant region. In a recent speech, he mocked the notion of U.S. military retribution, declaring, ‘There are very few people in today’s world who take these military threats seriously.’ Whatever confidence-building measures his diplomats may be contemplating, Iran’s most consequential decision-maker sees in America’s retreat a rare opportunity to project power in a contested Middle East. Nuclear weapons capability is central to the ambitions of an aspiring hegemon.

“It is indisputable now that in the last round of talks the United States did not possess sufficient leverage to impose a settlement. The existing sanctions regime has been effective in isolating Tehran from the global markets, but more obviously needs to be done. It is time for the White House and Congress to come together and craft a bipartisan sanctions bill that further stresses Iran’s economy. The notion that congressional action would derail an accord is no longer a suitable argument. What prevented an agreement in Vienna was not congressional initiative but Iranian truculence.”

Meanwhile, OPEC data shows that sanctions have nearly halved Iran’s petroleum export revenue in the past two years to $61.92 billion in 2013, down from $114.75 billion in 2011.

Separately, Iran detained four journalists, including a correspondent for the Washington Post, along with his wife, both of whom hold joint U.S.-Iranian nationality, though Iran does not recognize dual citizenship. There are currently 35 journalists in prison in Iran, according to the Committee to Protect Journalists. There are over 750 political prisoners, even as Iran says it is not trying to stifle dissent. So much for President Rohani and hopes he would create a freer society.

Iraq: Lawmakers elected a veteran Kurdish politician Thursday to replace Jalal Talabani as the country’s new president, 76-year-old Fouad Massoum.

The post of Iraq’s president is largely symbolic and brings the country no closer to selecting a prime minister, though Massoum can put forward his own candidate. Nouri al-Maliki is showing no signs of stepping down from the post he has held since 2006, but he is rapidly losing political support. Grand Ayatollah Ali al-Sistani sent a letter directly to Maliki last week making it clear the cleric’s opposition to a third term.

[According to the Iraqi constitution, with the selection of a president, a prime minister is supposed to be chosen within 15 days.]

It was a particularly violent week, even given recent standards, with a double car bombing in Baghdad killing 31, while an attack on an army convoy carrying prisoners that were being evacuated to prevent a jailbreak, left 52 prisoners and eight soldiers dead. It was not immediately clear if the prisoners were killed by soldiers or militants, or if ISIS was involved.

ISIS has vowed to wage an offensive around the capital as Ramadan ends next week and there has been little sign government forces can repel the attacks.

In congressional hearings this week, Brett McGurk, the State Department’s deputy assistant secretary for Iraq and Iran, testified, “ISIL (ISIS) is worse than al-Qaeda. ISIL is no longer simply a terrorist organization. It is now a full-blown army seeking to establish a self-governing state through the Tigris and Euphrates valley in what is now Syria and Iraq.” [Defense One]

Reuters reports that Islamists now coming of age are more frequently dismissing al-Qaeda as a worn down and ineffective organization, voicing admiration on social media for ISIS.

Lastly, you have the depressing stories out of places like Mosul where ISIS is giving Christians a choice, either convert, leave the city or be killed. And so in Mosul, a Christian community that had called the city home for 1,700 years is no longer.

Militants took sledgehammers to the tomb of Jonah and removed the cross from St. Ephrem’s Cathedral, putting up the black ISIS flag in its place.

Throughout Iraq, the U.N. estimates more than 600,000 people were driven from their homes during June alone.

Syria: It was a big week for the Islamists, with Islamic State (ISIS) militants launching assaults against the Bashar Assad regime’s forces across three provinces, taking out key government figures, including two brigadier generals, according to the Wall Street Journal. Should ISIS take over two military bases now under attack, they would obtain a huge amount of weapons, including “artillery, tanks and missile launchers,” one activist told the Journal.

[As I go to post, ISIS did supposedly take one of the bases on Friday, releasing photos of captured soldiers being beheaded after the battle. This is so freakin’ depressing.]

Egypt: Militants killed 22 border troops in an area near Libya, with President Sisi vowing “terrorism will be uprooted.”

Afghanistan: The audit of all votes cast in the presidential election which began on July 17 hit a major snag when the two sides couldn’t agree on how to disqualify fraudulent ballots, and while the count resumed after a brief pause last weekend, the two campaign teams still haven’t reached a broader agreement on how to disqualify ballots....and who should adjudicate fraud complaints. One side wants Afghanistan’s election commission to lead, the other wants the international community to play a bigger role.

China: The military sent a surveillance vessel to waters off Hawaii, outside U.S. territorial seas, yet within the 200-nautical mile Exclusive Economic Zone, for the purposes of viewing the largest U.S. naval drill, Rim of the Pacific Exercise, which China is taking part in, though its forces are kept out of most of the exercises’ core combat components, as reported by Bloomberg. So you have four invited Chinese naval vessels in the exercises, and one uninvited fifth ship operating a safe distance away but certainly capable of picking up valuable intelligence.

Meanwhile, analysts are having a hard time deciphering the actions of President Xi Jinping, who increasingly seems like the sole decision-maker in China, including for foreign policy. For example, as Kurt Campbell opines in the Financial Times, the current set of provocations in the East and South China Seas “have been carefully choreographed,” adding, “the centrality of Mr. Xi’s role is yet another reminder of the importance of concentrated, regular, high level diplomacy with China to accurately gauge intent and to send consequential messages. Perhaps nothing in the world is more important.”

On a different issue, China-Vietnam relations, with the recent oil rig dispute in the South China Sea, Chinese tourist arrivals to Vietnam were down 30% in June from the previous month, according to the South China Morning Post. Tourism contributes 6% of GDP in Vietnam.

Nigeria: I’ve lost track of the number of terror attacks by Boko Haram in this country. On Wednesday, two bombs killed 75 in Kaduna and neighboring Kawu, northern Nigeria, hundreds of miles from the Islamist insurgency’s stronghold.

Last Saturday, an estimated 100 were killed in Damboa, with an AP source putting the toll far higher.

As opposed to years of hit-and-run attacks, Boko Haram is starting to hold new ground.

Indonesia: Joko Widodo, the reformist governor of Jakarta, was elected as the next president as the 53-year-old furniture salesman-turned-mayor defeated former general Subianto, 53 percent to 47 percent.

Subianto, though, said he rejected the results because the election was “not fair, not just, not clean.” But his appeal to the Constitutional Court will go nowhere.

Widodo has a corruption-free reputation and humble image, but he has minimal top-level political experience. He also staggered to the finish, having blown a 30-point lead in the polls.

But he’s now in charge of the world’s fourth-most populous country.

Random Musings

--There were no survivors from the Air Algerie passenger jet that crashed in Mali, said French President Hollande. French troops operating in Mali secured the crash site. At least 116 were on board, including 50 French, 10 of which were from one family that was on “the trip of a lifetime,” according to a friend.

While terrible weather conditions are being blamed, French authorities said no theory can be excluded.

--Texas Republican Gov. Rick Perry said he would deploy as many as 1,000 state National Guard troops to try to deter human smugglers and Mexican drug cartels.

“I won’t stand idly by while our citizens are under assault and little children from Central America are detained in squalor.”

According to figures provided by the White House, the number of unaccompanied minors apprehended crossing the U.S.-Mexico border has fallen in recent weeks.

But in a damning report by the Washington Post last weekend, the administration was warned long ago of the problem on the border with minors illegally arriving from Central America shooting up from 3,933 in 2011 to 20,805 in 2013. Federal officials estimated that the total number of minors would soar to 60,000 in 2014.

“And no one knew what to do with them all.”

At the Department of Health and Human Services, “In 2011, HHS’s Office of Refugee Resettlement had a budget of $149 million to shelter and care for the foreign children. By 2013, it had grown to $376 million, and the Obama administration requested $495 million in its fiscal 2014 budget proposal....

“By the time Congress approved an omnibus budget in January, the line-item for the refugee office had increased significantly from Obama’s initial request of $495 million to $868 million – based on the larger projections of minors. In February, then-HHS Secretary Kathleen Sebelius approved an additional $44 million transfer, bringing the office’s budget to $912 million for the year.”

The president’s new $3.7 billion emergency proposal would devote $1.8 billion for HHS to house the children and families. [David Nakamura, Jerry Markon and Manuel Roig-Franzia / Washington Post]

--Back to Rick Perry, who flamed out as a presidential candidate in 2012, finishing fifth in Iowa and sixth in New Hampshire before dropping out after disastrous debate performances, he just paid his fourth visit to Iowa in eight months and seems poised to run again.

--David Perdue, a former CEO of Dollar General, won Tuesday’s Republican runoff in Georgia to become his party’s Senate nominee, defeating 11-term Georgia congressman, Jack Kingston, 51-49. In the general election, Perdue will face Michelle Nunn, the daughter of Sam Nunn, the former Georgia senator. Nunn and Perdue are facing off for the seat being vacated by Republican Senator Saxby Chambliss.

--Paul Kane of the Washington Post reported on the leadership dysfunction in the U.S. Senate. How bad is it? “The Senate went three months this spring without voting on a single legislative amendment, the nitty-gritty kind of work usually at the heart of congressional lawmaking.”

Majority Leader Harry Reid (D-Nev.) and Minority Leader Mitch McConnell (R-Ky.) “so distrust each other, and each is so determined to deny the other even the smallest political success, that their approach to running the Senate has been reduced to a campaign of mutually assured dysfunction.”

Former Senate leaders Thomas Daschle (D-S.D.) and Trent Lott (R-Miss.) recently wrote in a report, “The Senate has degenerated into a polarized mess.”

To a great extent it’s about the midterm elections.

Paul Kane:

“If Reid allowed the free-flowing give-and-take that defined the Senate of the past, his endangered Democratic incumbents would be forced to vote on carefully crafted GOP amendments designed to hurt them in November. He refuses to do that.

“If McConnell were to work with Reid to allow the Senate to function more smoothly and effectively, he would undermine a key component of the Republican campaign argument this fall: that Democrats have mismanaged the Senate and the GOP must take over.”

More and more senators are like Mark Begich (D-Alaska). “Do we want to be in a place where all we’re voting on is ambassadors and political appointments? That’s not what I came to do, and I think a lot of people did not come here to do that.”

In June, senators cast 53 votes, but only seven were related to legislation; the rest were on nominations.

But, Senate leaders agreed to take up the Highway Trust Fund next week, finally, before funding for highway and mass-transit spending dries up. The trust fund accounts for about one-quarter of the nation’s spending in these areas, including maintenance. A House-passed bill keeps the fund going through May 2015. A Senate amendment that will be voted on tightens the authorization to Dec. 19, in order to encourage lawmakers to act on a long-term highway bill before the next Congress takes office in January.

--Michael Goodwin / New York Post

“In Federalist Paper No. 70, Alexander Hamilton argued for an American leader with vast powers, one driven by dual senses of responsibility and accountability.

“He called that quality ‘Energy in the Executive’ and said it was ‘a leading character in the definition of good government.’

“Such a leader, he wrote, ‘is essential to the protection of the community against foreign attacks’ and other dangers, including ‘the enterprises and assaults of ambition, of faction and of anarchy.’

“Hamilton also acknowledged the risks if the unitary executive failed to carry out his duties. ‘A feeble executive implies a feeble execution of the government. A feeble execution is but another phrase for a bad execution; and a government ill executed, whatever it may be in theory, must be, in practice, a bad government.’

“Hmmm, a feeble executive running a bad government. Does that ring a bell?”

--Joe Klein / TIME...on Obama

“There has been a skein of stories indicating he’s thrown in the towel. He’s so tired of head-banging with Republicans that he has taken refuge in late-night dinners with celebrities and intellectuals. Robert Kennedy did a lot of that too. But Kennedy never gave the impression that politics was distasteful, beneath him, as Obama too frequently does. Kennedy was all about passion; Obama seems all about decorum. He needs to go to the border – on a lot of issues. If he’s going to accomplish anything in the last two years of his presidency, he’s going to have to change his style, which will be near impossible for a man as entrenched behind his flacks-in-jackets as the President is. He’s right about photo ops. Enough already. But there are other ‘ops’ – study ops, passion ops, conversation ops. He needs to do something dramatic to win back the country.”

--Sources told the New York Post’s Page Six that David Gregory will step down as moderator of “Meet the Press” after the November midterm elections. Viewership is down 43% compared to when Gregory ascended to the chair in December 2008, after the death of Tim Russert.

Boy, don’t you miss what Russert would be doing with all of today’s topics, including Obama’s performance?

--Some 265 public colleges and private schools are participating in a new study called Student Achievement Measure that reveals “fewer than half of full-time freshmen in 2007 earned bachelor’s degrees after six years at those schools or after switching to other schools,” as reported by the Washington Post’s Nick Anderson.

The new data shines a light on transfer students.

At Indiana University at South Bend, for example, “the data show that about 27% of 2007 freshmen graduated from the school within six years and that an additional 6% graduated elsewhere. Terry L. Allison, the school’s chancellor, said he learned of the data as he was preparing to take office last year. His reaction: ‘Wow, we need to do a lot to improve this picture.’”

“Graduation rates are a function, in part, of selectivity in college admissions. Rates at the University of Virginia, the College of William and Mary and other elite schools exceed 90% no matter how they are analyzed.

“At Virginia Commonwealth University, a less selective school, 64% of 2007 freshmen graduated from VCU or other schools in six years.”

--In another example of just how overrated we can be, you have the stunning security breach at the Brooklyn Bridge, where on Monday night, individuals replaced two giant American flags at the top of both sides of the bridge with bleached Old Glories.

The vandals used large aluminum cooking pans to cover the bridge’s lights while they were switching the flags, according to law enforcement. They climbed a bridge cable and scaled a locked gate to reach the top of the towers. Essentially, the lights on both towers went out around 3:30 a.m. and an officer on duty didn’t report the flags until 5:30 a.m.

The flags were taken down and either painted or bleached.

So the obvious thought is, what if this had been a bomb? The Brooklyn Bridge has already been targeted by al-Qaeda types in the past. Police have made no arrests.

--In the latest Siena College poll, New York Gov. Andrew Cuomo held a 60-23 lead over his Republican challenger, Rob Astorino, and I for one wonder why the Cuomo campaign even bothers running commercials blasting Astorino because it’s only making voters more aware of the candidate when 61% told pollsters they had no opinion of the guy...because no one knows him.

At the same time, Astorino is upset with New Jersey Gov. Chris Christie, because Christie has refused to give Astorino his endorsement, even though Christie is chairman of the Republican Governors Association.

“Clearly he can come across the bridge and not just raise money for himself, but raise money for the Republican candidate here – unless he is unable or unwilling because of an issue that we don’t know about with Andrew Cuomo and the ‘Bridgegate scandal,” Astorino said the other day on a local radio station. “And if that’s the case and he feels he can’t do it, then maybe he should step down as chairman.”

Christie said this week he probably won’t be campaigning for Astoriano.

“I will spend time in places where we have a chance to win, I said that right from the beginning.”

--Christie’s approval rating in New Jersey, by the way, is just 44%, according to a Fairleigh Dickinson University PublicMind poll, with 41% disapproving of his performance. In June, it was 44-44.

Only 39% believe the state is headed in the right direction, 46% say the wrong one.

So much for his ‘effective leadership’ narrative when it comes to Iowa and New Hampshire.

And a Quinnipiac University poll has Christie sixth with Florida voters among potential 2016 Republican presidential candidates. Plus more Florida voters dislike him than like the governor – 36% to 35%.  

Former Gov. Jeb Bush leads in his old state with 21%, while Sen. Marco Rubio is second at 18%. Christie received 6%.

[Hillary had 67% among Florida’s Democratic voters, with Vice President Biden and Sen. Elizabeth at 8% each. Clinton also defeats Bush 49-42; Rubio 53-39.]

--But back to Gov. Cuomo...Frederic U. Dicker / New York Post

“The devastating New York Times story on Gov. Cuomo’s political interference with his Moreland Commission panel’s investigation of public corruption pulled the veil from one of the biggest open secrets at the state Capitol: The governor is a liar and almost anything he promises will turn out to be false.

“Cuomo’s betrayal of major pledges is well known: the promise to cut taxes in a meaningful way, encourage job creation without government handouts, reduce local mandates, conduct public work transparently and have science – not politics – determine if fracking can be done safely.

“But it wasn’t until Cuomo violated his No. 1 pledge to rid New York of the ‘culture of corruption’ that has dominated Albany for decades that the full extent of his betrayal of the public became clear.

“People who have known Cuomo for years, including some who go back to the days he served as the thuggish chief enforcer of his father, then-Gov. Mario Cuomo, say they aren’t surprised Cuomo’s penchant for lying has finally exploded in full public view.”

You see, Cuomo cut a deal with the Legislature and folded the commission, but the law-enforcement professionals employed by Moreland had reputations to protect so they began to talk.

Now U.S. Attorney Preet Bharara’s office is investigating and he’s subpoenaed the Moreland Commission’s evidence to see “whether Cuomo and his aides – by their actions – committed any federal crimes,” as Dicker notes.

--A death row inmate in Arizona took almost two hours to die by lethal injection in yet another botched execution that has many believing the death penalty in this country will eventually be abolished. At the very least the use of lethal injection drugs is under intense scrutiny. The drugs for many states are hard to come by as the manufacturers, many of which are in Europe, refuse to supply them under pressure from human rights campaigners.

--According to a study in the journal Proceedings of the National Academy of Sciences, raising beef does far more damage to the environment than producing pork, poultry, eggs or dairy. 

“Beef produces five times more heat-trapping gases per calorie, puts out six times as much water-polluting nitrogen, takes 11 times more water for irrigation and uses 28 times the land.”

Environmental physics Professor Gidon Eshel of Bard College in New York said in the study, pork, poultry, dairy and eggs all had comparable environmental footprints, but cows were off-the-chart different.

“Cows burp major amounts of methane, a greenhouse gas that is dozens of times more potent than carbon dioxide,” as reported by Seth Borenstein of the AP.

The beef industry is not happy. Professor Eshel recommends switching to pork. I’m a big proponent of pork barbecue, Carolina style.

--New sleep studies show that seven hours is the optimal, not eight, as long believed. Shawn Youngstedt, a professor at Arizona State University Phoenix, said, “Eight hours or more has consistently been shown to be hazardous.”

The Centers for Disease Control and Prevention is helping fund a panel of specialists that will come up with new recommendations by 2015.

Daniel F. Kripke, an emeritus professor of psychiatry at the University of California San Diego, tracked 1.1 million people who participated in a large cancer study over a six-year period and found those reporting sleep of between 6.5 to 7.4 hours had a lower mortality rate than those with shorter or longer sleep. But that was published in 2002.

Another study by Dr. Kripke in 2011, found further evidence the optimal amount of sleep was less than the traditional eight hours.

Then in a study last year, co-authored by Duke University Medical Center, more than seven hours of sleep was not found to be beneficial in cognitive tests. [Sumathi Reddy / Wall Street Journal]

--NASA decided to just reveal that on July 23, 2012, our life as we know it almost ended. That day Earth had a near miss with a solar flare from the most powerful solar storm on the sun in over 150 years. Daniel Baker of the University of Colorado said, “If it had hit, we would still be picking up the pieces.”

We avoided it because the sun’s aim narrowly turned away from Earth. A week earlier and we were hosed.

It’s believed a direct Coronal Mass Ejection (CME) would have the potential to wipe out communication networks, GPS, and electrical grids to cause widespread blackout. A NASA report says it would disable “everything that plugs into a wall socket. Most people wouldn’t even be able to flush their toilet because urban water supplies largely rely on electric pumps.”

The effects would have lasted years.

But here’s the thing. According to physicist Pete Riley, who published a paper on such events, the odds of a solar storm strong enough to disrupt our lives in the next ten years is 12 percent.

Just another reason to sleep with one eye open.

--In accepting the Medal of Honor on Monday at the White House, former Staff Sgt. Ryan M. Pitts said, “The real heroes are the nine men who made the ultimate sacrifice so the rest of us could return home. It is their names, not mine that I want people to know.

“Spc. Sergio Abad, Cpl. Jonathan Ayers, Cpl. Jason Bogar, 1st Lt. Jonathan Brostrom, Sgt. Israel Garcia, Cpl. Jason Hovater, Cpl. Matthew Phillips, Cpl. Pruitt Rainey, and Cpl. Gunnar Zwilling.”

Pitts was awarded the Medal of Honor for his actions on July 13, 2008, when he single-handedly defended his observation post from an attack by more than 200 Taliban militants.

---

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

God bless America.

---

Gold closed at $1305
Oil $102.09

Returns for the week 7/21-7/25

Dow Jones -0.8% [16960]
S&P 500 +0.01% [1978]
S&P MidCap -0.5%
Russell 2000 -0.6%
Nasdaq +0.4% [4449]

Returns for the period 1/1/14-7/25/14

Dow Jones +2.3%
S&P 500 +7.0%
S&P MidCap +4.7%
Russell 2000 -1.6%
Nasdaq +6.5%

Bulls 56.5
Bears 17.2

Have a great week. I appreciate your support.

Catch me on Twitter @stocksandnews.

Brian Trumbore



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-07/26/2014-      
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Week in Review

07/26/2014

For the week 7/21-7/25

[Posted 11:00 PM ET, Friday]

Edition 798

Washington and Wall Street

Geopolitics still isn’t fazing global financial markets in any big way, so we continue with our regularly scheduled programming....

The International Monetary Fund lowered its forecast for global economic growth this year, from 3.7% to 3.4%, owing largely to the weaker start to the year in the U.S., which the IMF says will grow just 1.7%, though it is maintaining its 3% forecast for 2015. [The overall world growth projection for 2015 is also unchanged at 4%.]

Economic indicators on the week were mixed, with existing-home sales in June coming in at their best annualized pace, 5.04 million, since last October, while the median price was up 4.3% from a year ago.

New-home sales, however, were awful. The market was expecting an annualized pace of 480,000 and instead the June figure was 406,000. Plus the crazy May reading of 504,000 that no one believed at the time was revised down to 442,000. Home builder stocks took it on the chin. 

The median price of a new home is $273,500, up 17.6% from two years ago, and 22% higher than the June median price for an existing home so many new homes are clearly being priced out of reach when analyzing the sales pace.

We also had a reading on June durable goods, up a solid 0.7%, but even here, when averaged with revised figures for May, business investment is only so-so.

As for the slew of corporate earnings that were released, I cover the major ones in detail below, but generally they continue to be solid, with earnings for the S&P 500 now forecast to rise in excess of 7% when all 500 come through, maybe as high as 9% vs. an initial forecast of 6% heading into the season, though the top line, revenues, will still come in at a disappointing 3% to 4% pace.

The National Retail Federation revised its forecast for retail sales downward to 3.6% this year from a January projection of 4.1%. Yes, blame the awful winter weather.

The Federal Reserve holds an Open Market Committee meeting next week so more on the general economy then, including the latest inflation outlook (June’s CPI data is covered below), as well as a first look at second-quarter GDP and July’s labor picture.

But I do want to cover a few broader issues.

Ron Wyden (D-Ore.), chairman of the Senate finance committee, warned that up to 25 more U.S. companies are considering relocating overseas to cut their tax bills this year, through merger deals known as inversions.

This week, President Obama called the relocations “wrong” and urged quick-fix legislation, though this is highly unlikely because the inversion issue needs to be part of a broad overhaul of the tax code and nothing is happening before the election. Of course the president had to blame Republicans for the failure to rewrite the tax laws.

But the discussion of inversions is not always an honest one and I have written little of it because the bottom line federal revenue losses are minimal. I’ve known of the figures quoted below and I’m like ‘whatever.’ We need true tax reform.

Robert J. Samuelson / Washington Post

“Corporate America’s latest public relations disaster comes under the banner of ‘tax inversion.’ In an inversion, a U.S. company shifts its legal headquarters to a country with a lower tax rate. Just last week, the U.S. drug maker AbbVie agreed to buy a foreign firm, Shire, in part to reduce its corporate tax rate, which is expected to drop from 22 percent to 13 percent. In most inversions, companies keep their headquarters’ physical activities – the people, the buildings – in the United States, as would AbbVie. Still, the practice has understandably provoked a furious backlash.

“These companies ‘have deserted our country to avoid paying taxes but expect to keep receiving the full benefits that being American confers,’ fumes Fortune magazine writer Allan Sloan in the Washington Post. The tax flight ‘turns my stomach,’ he adds. Treasury Secretary Jack Lew accuses these companies of lacking economic ‘patriotism.’ Millions of Americans probably feel the same way. I certainly do. But we need to balance this revulsion with some stubborn – and now well-understood – realities.

“First, the issue is easy to hype. Companies that shift their legal status abroad will still pay U.S. corporate taxes, based on profits earned in the United States, which – for most U.S. multinational firms – remains the largest market. What’s mainly at issue is taxes on foreign profits. Even here, it’s easy to exaggerate. For example, the White House proposal to curb inversions would save $19.5 billion in taxes from 2015 to 2024, reckons the congressional Joint Committee on Taxation. That’s less than 1 percent of estimated corporate taxes over the same period.”

Overall, corporate taxes today comprise just about 10 percent of federal revenue, as well.

---

In another big issue, two U.S. appeals courts issued conflicting rulings on ObamaCare. In a blow to the administration, the U.S. Court of Appeals for the District of Columbia Circuit, on a 2-1 vote, invalidated an IRS regulation that implemented a piece of the Affordable Care Act. The regulation said subsidies for health insurance were available to middle- and lower-income consumers whether they purchased the policy through the federal or a state exchange.

But then just hours later, a Richmond, Va.-based appeals court reached the opposite conclusion, handing the White House a victory.

If these two courts remain in opposition, then it’s clearly headed to the U.S. Supreme Court, at which point, as the Wall Street Journal reported, “Should the D.C. Circuit’s ruling eventually prevail, it potentially could cripple the law by making subsidies unavailable in as many as 36 states where the federal government has run some or all of the insurance exchanges.”

The two rulings fell along ideological lines.

Before a possible appeal to the Supreme Court, the administration will ask the D.C. appeals court to rehear the case, with all active judges participating in the review. Several new ones who have been appointed by President Obama were not initially involved.

---

There was much talk about President Obama and leadership this week.

Daniel Henninger / Wall Street Journal

“Asked on ‘Meet the Press’ Sunday whether this was the lowest moment in U.S.-Russia relations since the Cold War, America’s robo-Secretary of State John Kerry replied: ‘We live in an extremely complicated world right now, where everybody is working on 10 different things simultaneously.’ Well, not everyone.

“As the world burns, the president spent this week fiddling at fundraisers in the living rooms of five Democratic Party fat cats in Seattle, San Francisco and Los Angeles. As White House communications director Jennifer Palmieri famously explained, changing the president’s fundraising schedule ‘can have the unintended consequence of unduly alarming the American people or creating a false sense of crisis.’

“Alarmed? Who’s alarmed? What false sense of crisis? Vladimir Putin’s masked men in eastern Ukraine shot Malaysia Airlines Flight 17’s 298 people out of the air just about the time Israel and Hamas commenced their death struggle, not long after the Islamic State of Iraq and al-Sham occupied a third of Iraq within seven days. Now ISIS is cleansing Mosul of its Christians.

“If news coverage defined reality, you’d think the civil war in Syria was over. There just isn’t space to fit it all in.”

Charles Krauthammer / Washington Post

“The president’s demeanor is worrying a lot of people. From the immigration crisis on the Mexican border to the Islamic State rising in Mesopotamia, Barack Obama seems totally detached from the world’s convulsions. When he does interrupt his endless rounds of golf, fundraising and photo ops, it’s for some affectless, mechanical, almost forced public statement....

“The preferred explanation for the president’s detachment is psychological. He’s checked out. Given up. Let down and disappointed by the world, he is in withdrawal.

“Perhaps.

“But I’d propose an alternate theory, less psychological than intellectual, that gives him more credit: Obama’s passivity stems from an idea. When Obama says Putin has placed himself on the wrong side of history in Ukraine, he actually believes it. ...

“Remember when, at the beginning of the Ukraine crisis, Obama tried to construct for Putin ‘an offramp’ from Crimea? Absurd as this idea was, I think Obama was sincere. He actually imagined that he’d be saving Putin from himself, that Crimea could only redound against Russia in the long run.

“If you really believe this, then there is no need for forceful, potentially risky U.S. counteractions. Which explains everything since; Obama’s pinprick sanctions; his failure to rally a craven Europe; his refusal to supply Ukraine with the weapons it has been begging for....

“Putin doesn’t give a damn about world opinion. He cares about domestic opinion, which has soared to more than 80% approval since Crimea. If anything, he’s been emboldened. On Wednesday, his proxies shot down two more jets – a finger to the world and a declaration that his campaign continues.

“A real U.S. president would give Kiev the weapons it needs, impose devastating sectoral sanctions on Moscow, reinstate our Central European missile-defense system and make a Reaganesque speech explaining why.

“Obama has done none of these things. Why should he? He’s on the right side of history...

“The world is aflame and our leader is on the 14th green. The arc of history may indeed bend toward justice, Mr. President. But, as you say, the arc is long. The job of a leader is to shorten it, to intervene on behalf of ‘the fierce urgency of now.’ Otherwise, why do we need a president? And why did you seek to become ours?”

Finally, on Sunday I was watching “Meet the Press” and moderator David Gregory asked the following of Secretary of State Kerry.

GREGORY: Mr. Secretary, before I let you go, I want you to answer critics who accuse this president of an uncertain course in his foreign policy. And it harkens back to something the president wrote in his own book Audacity of Hope. He wrote this, critical of the Bush years, “Without a well-articulated strategy that the public supports and the world understands, America will lack the legitimacy and, ultimately, the power it needs to make the world safer than it is today.” Is that the problem President Obama faces?

SECRETARY KERRY: No. Let me tell you. What he faces maybe is a problem with a bunch of critics who want to jump to conclusions without looking at the facts. But the facts could not be more clear. The United States of America has never been more engaged in helping to lead in more places than we are now.

I just came back from China, where we are engaged with the Chinese in dealing with North Korea. And you will notice, since the visit last year, North Korea has been quieter. We haven’t done what we want to do yet with respect to the de-nuclearization. But we are working on that and moving forward.

With respect to Syria, we struck a deal where we got 100% of the chemical weapons out. With respect to Iraq, we are deeply involved now in the process of government formation, helping the Iraqis to be able to choose a government of unity that can reunite it. They’ve elected a speaker. They’re about to elect a president. We believe that’s moving forward.

On Afghanistan, we helped strike a deal recently to help warring parties in the contest of the election to be able to come together and hold Afghanistan together. With respect to Iran, this president has taken the risk of putting together a negotiation. For the first time in ten years, the Iranian nuclear program is actually being rolled backwards. And Israel and the region are safer than they were.

We negotiated a ceasefire in an effort to try to bring troops into south Sudan. We’ve negotiated a disarming of the M-23 rebel group in Democratic Republic of the Congo. We’re negotiating a major economic treaty, a package trade agreement with Europe, 40% of the world’s GDP. Same thing in Asia.

I would tell you something, David. One thing I’ve seen for certain, people aren’t worried about the United States and sitting there saying, ‘We want the United States to leave.” People are worried that the United States might leave. And the fact is that on every fundamental issue of conflict today, the United States is in the center leading and trying to find an effort to make peace where peace is very difficult.

And I think the American people ought to be proud of what this president has done in terms of peaceful, diplomatic engagement, rather than quick trigger deploying troops, starting or engaging in a war of choice. I think the President’s on the right track. And I think we have the facts to prove it.

---

As you’ll read below, there isn’t one major conflict area discussed above that is in better shape since President Obama took office. Those are the facts, Mr. Secretary.

Europe and Asia

The July flash report on manufacturing and the service sector for the eurozone was released by Markit and it was 54.0 vs. 52.8 in June, better than expected, so a good sign. But the flash report breaks down just two individual countries, Germany and France, and once again it’s a tale of two economies headed in opposite directions. Germany’s comp reading was 55.9, with services at 56.6, up from 54.6 in June, while France’s manufacturing PMI was 47.6, down from 48.2 in June, though services rose to 50.4 from the same 48.2.

Overall, manufacturing in the eurozone was at 51.9 vs. 51.8, while services were 54.4 vs. 52.8. Final figures for the euro-18 will be released next week.

While the initial data is encouraging, the figures still aren’t high enough to get manufacturers and corporate executives to go on a hiring binge and you still have the primary problem in Europe, an unemployment rate of 11.6%.

Separately, the bond markets continue to rock, with the yield on Italy’s 10-year closing the week at 2.72% and Spain’s 2.52%.

Italy’s treasury department announced it was canceling debt sales scheduled for August due to a “large cash supply,” while the Bank of Spain pegged GDP growth in the country for the second quarter at 0.5% over the first quarter, which was up 0.4%. The Q2 annualized pace was up 1.1% as household spending is rebounding, led by car sales in June, up 24%.

But as a recent Wall Street Journal article pointed out, the balance sheets for Spain’s banks are highly iffy, lacking transparency and full disclosure; such as the failure to disclose “nonperforming assets” vs. the reporting of nonperforming loans. Nonperforming assets is a more accurate indication of a bank’s health, especially in Spain, which had as big a real estate bubble as anywhere in the world. Nonperforming assets includes foreclosed homes a bank will have to try to sell, as well as loans to property developers or other businesses that are unlikely to be paid...and you know from all the articles I wrote over the years that Spain’s property developers are in dreadful shape.

And I can’t help but note a release this week from Eurostats of government debt as a percentage of GDP among the eurozone set.

Greece is at 174% in the first quarter of 2014. Italy 135.6% and Portugal 132.9%; all higher than Q1 2013. Ditto Spain and France, at 96.8% and 96.6%, respectively.

Germany is at 77.3%, down from 80.5%, while debt to GDP in the U.K. is 91.1%, up from 88.6% a year earlier.

But it’s obviously Greece, Italy and Portugal that are of the most immediate concern. They need growth. If they don’t get it, Europe’s debt crisis will return. It’s inevitable. And that’s yet another reason why Ukraine matters because of its ability to severely impact sentiment.

Britain’s political leadership received some good news on Friday as the Office of National Statistics said GDP in the second quarter rose 0.8%, putting it at an annualized rate of 3.1%, strongest among the developed nations. GDP has now surpassed pre-crisis levels for the first time in the U.K.

But with elections just ten months off, Prime Minister David Cameron’s Conservatives still trail the opposition Labour Party, 38-35, in a YouGov poll published on Friday.

Turning to Asia, in China, HSBC released its flash reading on manufacturing for July and the figure was 52.0 vs. 50.7 in June, far better than expected. As HSBC’s calculations are generally perceived to be a truer barometer than the Chinese government’s national statistics office, this is encouraging. The government has been attempting to speed up some infrastructure projects and it may be bearing fruit.

But the other day the government did have its second straight incomplete sovereign debt auction, which isn’t catastrophic but not the greatest sign.

In Japan, inflation slowed in June, with consumer prices, ex-fresh food (their core), rising 3.3% from a year earlier after a 3.4% gain in May, the statistics bureau said on Friday. The effects of April’s sales-tax increase will continue to slip away later in the year as inflation eases towards the Bank of Japan’s 2% goal.

But Prime Minister Shinzo Abe’s poll numbers continue to decline, with his approval rating falling below 50% for the first time. It seems his harder line on national security is turning off women in particular.

[The IMF upped Japan’s growth forecast for 2014 from 1.3% to 1.6%, while it cut China from 7.6% to 7.4%.]

Street Bytes

--Stocks finished mixed on the week, with the Dow Jones losing 0.8% to 16960, while the S&P 500 was unchanged and Nasdaq picked up 0.4%. Stocks were hit on Friday owing to tensions in Ukraine, but also because of a statement from Visa, which fell hard in announcing it saw no sign yet of an acceleration in economic recovery, domestically or internationally. Amazon’s performance didn’t help.

--U.S. Treasury Yields

6-mo. 0.06% 2-yr. 0.49% 10-yr. 2.46% 30-yr. 3.24%

Consumer prices in June were up 0.3%, 0.1% ex-food and energy. For the 12 months, the CPI was up 2.1%, 1.9% on core. So still not worrisome, because there is no wage inflation, though I maintain that’s coming.

--Shares in Amazon cratered $34.60 on Friday (down 9.7%) after the company reported a much-larger than expected loss of $126 million for the second quarter and warned of slowing sales in the current one. Amazon said sales in the third quarter could grow as little as 15%, after growing 23% in the last one.

Amazon has been investing heavily to build up its business, including $100 million for its own video content, while spending on improving its delivery systems, such as expanding Sunday delivery in the U.S.

But investors, at least for this quarter, have lost some faith in Jeff Bezos. Personally, I stopped trying to figure out this stock, and its valuation, years ago.

--Apple sold 35.2 million iPhones for the three months to June 28, up from 31.2 million a year ago (up nearly 13%). Growth was helped by demand from the BRIC countries – Brazil, Russia, India, and China – where iPhone sales rose 55%. [48% in China.]

But sales of the iPad were down last quarter by 9%, with Apple selling just 13.3 million, about a million fewer than analysts had been expecting. In fact iPad is so out of favor that Apple CEO Tim Cook didn’t mention it in his statement.

“Strong sales of iPhone and Mac and the continued growth of revenue from the Apple ecosystem” were behind the record June-quarter revenues of $39.8 billion and quarterly net profit of $7.7 billion, he said.

It’s been assumed tablets would gradually overtake traditional PCs, but customers are holding onto iPads longer than expected, and longer than they do with their smartphones.

Plus, whereas Apple faced little competition in the tablet sector the first few years, now there are a number of strong competitors, including Samsung, Microsoft and Google. Apple’s market share was 32.5% in the first quarter, down from 40% a year earlier.

Overall, research firm IDC lowered its forecast for 2014 worldwide tablet demand growth to 12.1% - a fraction of the 51.8% expansion of 2013. That’s rather staggering. 

But as I also noted last week, Apple is going to be introducing a larger screen for its iPhone 6, which isn’t that much smaller than an iPad mini. Slated to be delivered in September, Apple is gearing up for its biggest initial run of iPhones.

Meanwhile, Mac sales rose a strong 18% to 4.4 million units, befitting the resurgent PC sector.

Apple’s profit for the quarter was $7.75 billion, up from $6.9 billion. Revenue rose 6% to $37.4 billion.

Back to China, overall sales there rose 26% in the quarter, compared with growth of 1% in the Americas and 6% in Europe.

--Microsoft’s sales rose 22% in the second quarter to $23.38 billion, but that’s because of the inclusion of Nokia, which lost 8 cents a share. Microsoft overall had earnings of 55 cents, below expectations.

After earlier announcing the company would cut 18,000 jobs, most of them in the Nokia handset unit, new CEO Satya Nadella sought to reassure Wall Street he was bringing real discipline to the software company’s strategy, with a core of “productivity and platforms,” as he told staff in a memo, while continuing to back products such as Xbox outside the core.

Microsoft also said revenue from cloud services sold to business customers rose 147%.

--Facebook announced a 138% rise in net income for the second quarter to $791 million, as revenue from advertising surged 67% to $2.68 billion. Mobile ad revenues now account for 62% of the advertising total, which is super given Facebook had virtually zero from this source in 2012.

CEO Mark Zuckerberg said in an accompanying statement, “We had a good second quarter. Our community has continued to grow, and we see a lot of opportunity ahead as we connect the rest of the world.”

Facebook now has 1.32 billion active users every month, up 14% from last year. More than a billion are on mobile devices. [Daily active users are said to be 829 million on average, up 19% year-over-year.]

The firm did acknowledge it would take years to build up solid revenue models around its Whatsapp messaging app and Instagram photo network – which were two expensive acquisitions.

On the week, Facebook shares hit a new high and closed up 10% to $75.20. Zuckerberg’s net worth on paper is $33.3 billion.

--General Motors Co.’s earnings declined 80%, with results hit by a $2.5 billion pretax charge related to vehicle recalls and money set aside for a victims’ compensation fund.

Separately, GM recalled another 718,000 vehicles on Wednesday, including Chevy Camaros and Buick Regals from model years 2011-2012. The bolt for seat-height adjustments may become loose or fall out. The automaker knows of three injuries and no fatalities.

So that brings GM’s total recalls to nearly 30 million vehicles in North America this year.

--Speaking of the Buick Regal, Consumer Reports says the latest model is about the equal of the much more expensive BMW 328 and Mercedes-Benz C250.

--Ford Motor Co. reported second-quarter net income rose 6% to $1.3 billion, driven by record results in North America. It even made its first quarterly profit in Europe in three years. [GM continues to lose money in the region.] Ford did have to take a hefty write-down for an investment in a Russian joint venture, with an economic slowdown and weak ruble there being exacerbated by the tensions in Ukraine.

--Netflix passed the 50 million subscriber barrier in the second quarter as the company doubled profits and announced expansion plans for France and Germany.

Netflix now has more than 36 million subscribers in the U.S., having added 570,000 in the quarter, and almost 14 million international, up 1.12 million.

The company expects total subscribers to grow to 53.74 million in the current quarter.

Revenues were up 25% to $1.34 billion in Q2, with earnings of $1.15 per share.

But with the share price at $421 (down $23 on the week), well, you do the math. Some analysts continue to be concerned as well about Netflix’s free-spending ways in obtaining, and creating, content.

--PepsiCo Inc. handily beat profit forecasts and raised earnings guidance as it prepares for a fight with activist investor Nelson Peltz, who is lobbying to break up the company’s snack and beverage businesses. PepsiCo’s management is against that idea, opting instead to more aggressively cut costs. Revenue only rose 0.5%, but this beat Street expectations as well.

--As for rival Coca-Cola, it reported net revenue fell 1%, though the flagship brand saw volume rise 1% in North America for the quarter, year-over-year. Truly exciting stuff.

--Delta Air Lines Inc. saw second-quarter earnings rise 17% to $801 million. Revenue rose 9.4% to $10.62 billion. Both figures were essentially in line with expectations. Traffic increased 5%, with the load factor rising to 86.3% from 84.8%.

--American Airlines Group Inc. declared its first dividend since 1980 as it reported a record second-quarter profit of $1.5 billion, excluding special items. Following its merger with US Airways, American is now the largest U.S. carrier by traffic. Total revenue rose 76% (again, for the combined operation, the merger going through last December).

--Airline passenger fees continue to rise...$31.5 billion collected from 59 airlines in 2013, according to a Wisconsin-based consultant IdeaWorksCompany, up from $27.1 billion in 2012.

--Boeing’s revenue edged up just 1.1% for the quarter, though it beat on the bottom line and raised guidance for the year. But the company took an unexpected $272 million after-tax charge for issues involved on its new Air Force tanker plane over what executives called “challenges.”

--Dow Chemical reported better than expected earnings and sales, with the latter up 2% over year ago levels.

--The head of Wal-Mart’s U.S. operations, Bill Simon, is retiring after eight years at the company, having been passed over for the CEO position a year ago, the job going to Doug McMillon. Simon has agreed not to work for a competitor for two years. Greg Foran, currently head of the Asia division, will replace Simon.

--Shares in Whirlpool were hit hard as second-quarter profit fell 9.6%, with the appliance maker’s international operations hurting the bottom line, particularly lower sales in Brazil and China. Sales rose 4% in North America for the quarter, but declined 9% in Asia and 4% in Latin America. Whirlpool is in the midst of acquiring a controlling stake in a Chinese appliance maker.

--Qualcomm became the latest U.S. tech company to announce problems in collecting licensing fees on new mobile devices sold in China, as the Chinese government said it was investigating the mobile chipmaker for antitrust issues, which then caused some companies to withhold new licenses for Qualcomm’s technology.

China continues to discourage purchases of U.S. technology in general, owing in no small part to the disclosures by Edward Snowden.

--And then there’s McDonald’s, which reported disappointing results for the second quarter, with overall revenue up just 1%, but U.S. same-store sales down 1.5% (down 3.5% in June). Comp store sales declined 1.0% in Europe.

Meanwhile, Chinese mainland authorities are investigating a major McDonald’s supplier over reports rotten meat had been reprocessed and repacked with new expiration dates at Husi Food Company, which is owned by Illinois-based OSI Group. McDonald’s Hong Kong confirmed it too imported chicken and pork from the same Shanghai food processing plant.

Five Husi executives were detained by Shanghai police on Tuesday, after investigators seized 160 tons of raw meat as well as 1,107 tons of other Husi Food products.

The factory was licensed to export to both Hong Kong and Japan.

McDonald’s Japan admitted it had sourced about a fifth of its “Chicken McNuggets” from the Shanghai plant, and on Friday, McDonald’s announced it had decided to stop selling all chicken products produced in China. This is Japan’s biggest restaurant chain by revenue. The company will use chicken products made in Thailand from here on.

Back on the mainland, McDonald’s China announced by week’s end that it would continue using meat supplier OSI Group because “it is riskier to find another local supplier,” using a different OSI-owned plant in Henan province.

McDonald’s has a 60-year relationship with OSI, with OSI entering China in 1991, a year after McDonald’s opened its first restaurant there.

[Also in China, Yum Brands, parent for both KFC and Pizza Hut, cut all ties with OSI, which is not its major supplier. And Starbucks said some of its cafes previously sold products containing chicken originally sourced from Shanghai Husi.]

Editorial / Wall Street Journal

“Lack of trust is the hallmark of life in China today, which is one reason many rich Chinese choose to move abroad.... 

“New supreme leader Xi Jinping’s anticorruption campaign may bring some temporary improvement. But if he doesn’t build government institutions with integrity, the cheating will resume as soon as the campaign is over....

“The lesson for managers is that they must always distrust and verify what their suppliers tell them. Regularly scheduled inspections are useless as the factory will be spruced up for their visit. Surprise visits and spot checks are the only defense against fraud and fakery. In the wild west of the China market, caveat emptor is the only reliable law.”

Ain’t that the truth.

But wait...there’s more trouble for McDonald’s. On Friday, Russia’s consumer protection agency filed a lawsuit against them in a Moscow court, alleging that certain of the chain’s products – including its chicken burger, Caesar wrap and ice cream parfait – did not meet Russia health standards.

Extensive lab testing had shown many McDonald’s products were rife with “discrepancies in quality and safety” and did not follow “the physical-chemical and microbiological parameters required by [Russian] law.”

Yes, it’s all about Ukraine in this instance.

Vladimir Zhirinovsky, the wacko far-right politician, has called for a national ban on McDonald’s and Pepsi. A pro-Kremlin youth group launched an “eat Russian” viral campaign this week.

In April, McDonald’s announced it was “temporarily” closing its three restaurants in Crimea following Russia’s annexation.  [Courtney Weaver / Financial Times]

--Back to Starbucks, comp store sales in the U.S. rose a solid 7%, with CEO Howard Schultz citing growing food sales. Globally, sales rose 6%. For the quarter, the company earned $512.6 million on $4.15 billion in revenues, up 11%.

Starbucks now has over 20,800 stores across 64 countries.

--As noted the other week, corn prices have been cratering and are now down about 30% in just three months to their lowest point since 2010, off over 55% from the 2012 record high. Ditto soybeans and wheat as growing conditions have been perfect. Not only are farmland values beginning to roll over, but farm equipment makers such as Deere & Co. are seeing falling sales.

And with a second consecutive booming harvest, that doesn’t bode well for prices next year with bulging inventories.

--Speaking of favorable weather, natural gas prices hit their lowest level in eight months before stabilizing at week’s end. Cooler-than-normal temperatures are forecast for much of the Plains and Midwest.

--U.S. orange-juice retail sales fell to the lowest level on record, down 8.3% for the four weeks ended July 5, according to data published by the Florida Department of Citrus. We just aren’t drinking as much of it, especially with a wide variety of alternative beverages, including energy drinks and flavored waters. It doesn’t help the price at the grocery store has been rising due to a bacterial disease that has hurt the crop.

--CIT Group, a lender that ran into trouble during the housing bust, said it would acquire OneWest bank – which rose from the ashes of IndyMac, the failed California lender.

The deal, $3.4 billion in cash and stock, is a coup for former Merrill Lynch executive, John Thain, who sold Merrill during the depths of the financial crisis and was unceremoniously booted, only to reemerge at CIT, a lender to small and midsize businesses that has grown under his leadership.

Shares in CIT jumped nearly 11% on the news.

--An examination by the Federal Reserve Bank of New York found that Deutsche Bank AG’s giant U.S. operations suffer from a myriad of problems, serious ones.

In a letter to executives last December, a senior official with the New York Fed wrote that financial reports produced by some of the bank’s U.S. arms “are of low quality, inaccurate and unreliable. The size and breadth of errors strongly suggest that the firm’s entire U.S. regulatory reporting structure requires wide-ranging remedial action.”

As reported by the Wall Street Journal, which obtained documents related to the investigation, Deutsche Bank had made “no progress” at fixing previously identified problems.

If you are wondering about the timing of the disclosure, the New York Fed doesn’t have to make its actions, or letters, public. But the letter in question shows the Fed has been concerned about DB’s U.S. operations for years, in fact, a decade.

As the letter stated: “Most concerning is the fact that although the root causes of these errors were not eliminated, prior supervisory issues were considered remediated and closed by senior management.”

The bank’s annual report and other filings were signed off on by KPMG.

--Activist investor William Ackman went on CNBC Monday and said the following day he would be releasing the results of his two-year, $50 million investigation into Herbalife, the nutrition-sales company Ackman has bet $1 billion is a pyramid scheme, and that it would be the most important presentation he had ever made. Herbalife would be shown to be a total fraud, once and for all; his report would be a “death blow.”

So the shares rose 25%, $13.75, even as Ackman was telling an audience of 400 investors, “It’s time to shut the company down.”

Herbalife said the claims were “outrageous,” though multiple agencies have opened investigations, including the Federal Trade Commission.

--Some representative state unemployment rates for the month of June.

California 7.4% [9.0% a year earlier]
Florida 6.2%
Nebraska 3.5%
New Jersey 6.6%
New York 6.6%
North Dakota 2.7%
Pennsylvania 5.6%
South Carolina 5.3% [lower jobless rate than it had in the years before the recession.]
South Dakota 3.8%
Texas 5.1%

U.S. 6.1%.

Mississippi and Rhode Island, at 7.9%, have the highest rates.

--Canadian retail sales rose 0.7% in May over April, up 4% year-over-year.

--Russia’s economy grew 0.1% in the second quarter, thus avoiding slipping into recession by the technical definition. GDP had shrunk 0.5% in Q1. The government expects the economy to grow just 0.5% for the full year.

--Saudi Arabia said it would open its stock market to foreign investors in the first half of 2015, allowing foreigners to buy Saudi stocks directly on the main exchange.

--Ebola has killed 660 thus far in West Africa, according to the World Health Organization, and there are fears the current outbreak could spread to the region’s larger countries such as Ivory Coast, Ghana, and Nigeria. About half of the deaths thus far have been in Guinea.

Needless to say the economic impact could be severe if Ebola spreads much further.

--As Dick’s Sporting Goods Inc. struggles along with the industry in selling golf equipment, it announced it is laying off 400 members who were employed as golf instructors, and the chain is going to be taking floor space away from golf merchandise, while expanding women’s and youth apparel.

Same-store sales for its Golf Galaxy unit dropped 10.4% for the most recent quarter, a huge decline as these things go.

--Atlantic City’s mayor said there are six potential buyers of the Revel Casino Hotel, which cost $2.4 billion to build and is up for sale next month at a bankruptcy auction.

At the same time the former Atlantic Club supposedly has a buyer, but no word on whether it would still be operated as a casino. There are no potential buyers for Trump Plaza as yet.

The Atlantic Club closed in January. The Showboat will close on Aug. 31, Trump Plaza on Sept. 16, and the question mark over Revel.

There were/are over 8,000 employees at these four casinos and imagine the knock-on effects on small businesses in the area, let alone the apartment sector.

And as if Atlantic City’s casinos weren’t already suffering enough, two masked men robbed Caesars of more than $180,000 Monday morning, somehow making off with two cash boxes.

--Mexican telecom tycoon and world’s second-richest man, Carlos Slim, said we should be working just three days a week, but work until we are older, say, 70 or 75. We could work “perhaps 11 hours a day” for the three.

At his Telmex phone company in Mexico, workers have the option of working only four days a week.

--We note the passing of Wall Street legend, Alan “Ace” Greenberg, former CEO of Bear Stearns Cos. He was 86.

Greenberg took over Bear in 1978, when it was a private partnership, and grew it for 15 years before turning power over to James “Jimmy” Cayne. Greenberg stayed on as an equities trader and was there when a bank run by clients forced a sale to JPMorgan Chase &Co. in March 2008. Greenberg blamed Cayne for the demise of the firm.

Foreign Affairs

Ukraine: I can’t do a better job of summing up the current situation here than the following Washington Post editorial from Friday.

“Vladimir Putin has responded to the international outrage over the destruction of a Malaysian airliner by his proxies in eastern Ukraine by escalating his aggression. According to U.S. officials, tanks, artillery and other heavy weapons have continued to cross from Russia to Ukraine since the passenger jet was shot down. On Wednesday, two more Ukrainian military jets were hit by anti-aircraft missiles, which Ukrainian officials said had been fired from Russia. The State Department also said Thursday that Russian artillery was firing at Ukrainian positions from across the border.

“The Russian president is clearly not impressed by Western responses to the killing of 298 innocent people and the subsequent attempt by his government and its proxies to deny and cover up the crime. And why should he be? After making a statement Monday that contained no tangible response and only a vague threat that ‘the costs for Russia’s behavior’ will increase, President Obama departed for three days of fundraising on the West Coast. The message to Mr. Putin – not to mention the Israelis, Palestinians and Iraqis fighting their own wars – was that the president was not engaged enough by the crises to set aside the purely political activity of collecting checks from donors.

“In Brussels, European Union officials met Thursday to discuss potential sanctions against Russia, including new measures against the banking, energy and arms industries. But no decisions will be made before next week, and even then Moscow will likely be given a new deadline for meeting a demand that it stop supplying the Ukrainian rebels. Previous deadlines to cease weapons deliveries have passed with no significant action.

“While the West temporizes, a de facto Russian army is rapidly assembling in occupied portions of eastern Ukraine.  A report in the Financial Times, sourced to U.S. intelligence officials, says it includes dozens of T-64 battle tanks, Grad rocket launchers, self-propelled guns, infantry combat vehicles with automatic cannons and armored personnel carriers, in addition to anti-aircraft systems like the one that shot down the Malaysian plane. This force is commanded by Russian citizens who infiltrated Ukraine from Moscow, including a Russian secret police colonel, and made up in large part of fighters from Russia.

“Incredibly, the European Union’s position – tacitly supported by Mr. Obama – is that the Ukrainian government should stop attempting to expel the invaders from its territory and instead negotiate with them about the political future of Ukraine. Fortunately, newly elected President Petro Poroshenko has not capitulated to this appeasement strategy.”

Members of Obama’s own party are increasingly frustrated with him, with heavyweights Dianne Feinstein, Carl Levin and Robert Menendez, all committee chairs, calling on the president to “impose immediate broad sanctions” against Russia’s defense sector.

The Post editorial concludes:

“Mr. Obama has already missed the opportunity for swift action to stop Mr. Putin’s escalation. If he does not act soon, it may be too late to save Ukraine.”

Ukraine’s ruling coalition collapsed on Thursday and Prime Minister Arseniy Yatsenyuk submitted his resignation, which sets the stage for parliamentary elections that should only strengthen President Poroshenko. Recent polls show pro-Russia parties might not attain the 5% threshold necessary for inclusion in parliament.

But to hold elections requires victory over the rebels in the east and now with Russia’s movement of heavy arms, and thousands of personnel on the border, that doesn’t seem likely anytime soon. October is being targeted for a vote and Yatsenyuk is staying on in an interim capacity until a new coalition is formed.

The normally mild-mannered prime minister did blast parliament in a speech announcing he was stepping down for not passing legislation to allow a liberalization of control over Ukraine’s pipeline system. Parliament has also failed to approve expanded funding for the military.

As to the crash site of Malaysia Air Flight 17, it is still not secure, over a week later, with bodies in the field, even as up to 200 of the 298 victims were flown to the Netherlands for identification.

With 189 of the victims being from the Netherlands, Dutch Prime Minister Mark Rutte said he was shocked by the “disrespectful behavior” of the rebels controlling the crash site. “In defiance of all the rules of proper investigation, people have evidently been picking through the personal and recognizable belongings of the victims. This is appalling.”

It was beyond tragic, and pathetic, that the Russian separatists and those in the area of the site robbed the bodies of their dignity, and possessions, while destroying evidence.

Australia is among the nation’s offering teams of police to secure the area, but now the war is closing in on it.

As for the downing on Wednesday of two Sukhoi Su-25 strike aircraft, the Ukrainian military said the two were flying at nearly 17,000 feet – an altitude that is out of the reach of shoulder-fired missiles that the rebels claim they used. Some reports have the missiles being fired from Russian territory.

The pilots of the two Su-25 jets bailed out over rebel-held territory and their conditions and whereabouts are not known.

Earlier in the week, the Obama administration released satellite images and other sensitive intelligence that officials say show Moscow’s involvement in training and equipping rebels in Ukraine responsible for MH17. There is also strong evidence the rebels did not know they were shooting down a civilian airliner.

For their part, the Russian defense ministry and the Kremlin are doing everything they can in the information war to discredit the U.S. version of events. Russia has gone so far as to attempt to edit the Wikipedia page on MH17.

In Russia itself, the people are largely buying Moscow’s lies.

Meanwhile, as the EU dithers on the sanctions front, France is going ahead and selling Russia a helicopter assault ship, but French President Hollande said he was holding off on the delivery of a Mistral warship until he sees Moscow’s attitude to the conflict in Ukraine. Until now, Paris insisted it must honor the contract as 400 Russian sailors have been training to operate the ship at a western French port for three weeks.

Holman W. Jenkins, Jr. / Wall Street Journal

“Perhaps what we’ve been actually watching since the start of 2014 has been the last chapter of Vladimir Putin’s rule. All has inevitably gone pear-shaped for the Russian leader since the popular overthrow of his client and ally Viktor Yanukovych in the strategic next-door nation of Ukraine.

“The Sochi Olympics extravaganza, meant to suggest to Russians they are a world-class country with a world-class president, now looks like $50 billion down the drain. The Russian economy, already weighted down by corruption and cronyism and stunted development outside the government-controlled energy sector, is sinking fast under sanctions and capital flight.

“Mr. Putin enjoyed an extraordinary run on oil prices after coming to power in 1999 – a tenfold increase. That gift won’t be repeated, and the Russian middle class in any case is harder to placate with crumbs from resource extraction whose proceeds mostly flow to Mr. Putin’s nearest and dearest.

“And it’s not just that Mr. Putin is KGB; everyone around him is KGB too, even if their interests don’t perfectly overlap...

“Under the existing Russian constitution, he must face voters again in 2018 and 2024 – each a potential Tiananmen. Then, in theory, he’s done. But Mr. Putin can’t afford to be done. He can’t retire. But neither is he Deng Xiaoping, with deep institutional support to face down a Kiev-style uprising. He can’t count on Russian Army generals, who may be getting conflicting advice from friendly billionaires about where their own interests lie, if confronted with mass demonstrations....

“What Putin fears is not the West but his own people....

“Two years ago, we asked if Mr. Putin might have an act of creative statesmanship in him, fashioning a graceful exit from power and into some lavish tax-haven exile. He evidently doesn’t. Even with the airliner shoot-down, the U.S. and Europe are likely loath to destabilize his regime fatally. The next question is whether the Russian people have a creative act in them, or whether they are prepared supinely and mutely to share whatever fate Mr. Putin, in his selfishness, decides to inflict on his country for his own preservation.”

[In a new CNN/ORC poll of Americans, 78% have an unfavorable opinion of Russia, while 85% believe Russia was directly or indirectly responsible for MH17.]

Israel: The death toll in Operation Protective Edge is well over 800 on the Palestinian side, with at least 33 Israeli soldiers killed and two Israeli citizens, but in terms of a successful cease-fire, beyond a proposed 12-hour humanitarian one for Saturday, Prime Minister Benjamin Netanyahu said Hamas’ conditions for one are a non-starter.

“Hamas has demands from here to Vladivostok,” Netanyahu said. “We are continuing Operation Protective Edge at full strength, in the air and on the ground.

“While there are no guarantees of 100 percent success, IDF soldiers are having important successes in locating and neutralizing the terrorist tunnels. I remind you that the terrorist tunnels were designed to penetrate the State of Israel and allow the enemy to strike at it and perpetuate deadly and large-scale attacks against Israeli civilians.”

A Channel 2 poll in Israel found Israelis split on whether the operation should end after the tunnels were dealt with. “While 41% said the IDF should stop the operation when the tunnels are neutralized, another 46% said the operation should continue until Hamas is toppled.” [Jerusalem Post]

82% said they were satisfied with Netanyahu’s performance during the crisis, and only 10% said they were not. Just a week earlier, 57% said they were satisfied, so the Gaza operation thus far has given the prime minister a huge boost when right before his government was teetering, with the hard-right members of his coalition threatening to break away because Netanyahu wasn’t being forceful enough.

But in terms of world opinion, I said last week that Israel had to wage a perfect war, which was impossible, and this week you had the shelling of a U.N.-run school, filled with women and children seeking refuge from the fighting in the northern part of the Gaza Strip, that left 16 dead and as many as 200 wounded. At first, Israel said it was a Hamas rocket that hit the school, but Israel had been shelling the area. It seems it was another accident, with a senior Israeli military spokesman, Lt. Col. Peter Lerner, saying, “The school was not a target in any way,” admitting it wasn’t suspected of being a storage facility used by Hamas for rockets and other weapons.

More than 140,000 Palestinians have fled their homes because of the fighting, with many seeking refuge in U.N.-related buildings.

Earlier in the week, the U.S. Federal Aviation Authority banned all U.S. airline flights into and out of Tel Aviv’s Ben Gurion airport after a rocket fired from the Gaza Strip on Tuesday landed in a village a mile from the airport. The ban lasted about 36 hours, with the FAA’s European counterpart issuing a “strong recommendation” for airlines to avoid Ben Gurion “until further notice” following the attack.

British Airways never suspended flights to Israel, but Germany’s Lufthansa and Air France were among the carriers opting not to fly there.

Former New York City Mayor Michael Bloomberg flew to Israel on an El Al flight to show his solidarity, meeting with Prime Minister Netanyahu upon landing. In part, Bloomberg said;

“I’ve always been a strong supporter of Israel. When New York City and the United States were attacked on 9/11, the people of Israel stood with us. They know what it’s like to be attacked by terrorists, and they know that one of the best things you can do to defeat the terrorists is to refuse to stop living your life – to refuse to give in to the terrorists.

“Halting flights here – when the airport is safe – hurts Israel and rewards Hamas for attacking Israel. Hamas wants to shut down the airport; we can’t let that happen....

“It was an overreaction for the FAA to halt U.S. flights here – and a mistake they should correct.”

It was Bloomberg’s finest moment.

Editorial / Washington Post

“The distinguishing feature of the latest war between Israel and Hamas is ‘offensive tunnels,’ as the Israeli army calls them. As of early Wednesday, 28 had been uncovered in Gaza, and nearly half extend into Israel, according to Israeli officials. The tunnels are the reason that the government of Benjamin Netanyahu decided last weekend to launch a ground invasion of Gaza, and they explain why that operation has strong support from Israelis in spite of the relatively heavy casualties it has inflicted....

“Hamas’ offensive tunnels should not be confused with the burrows it has dug under Gaza’s border with Egypt to smuggle money, consumer goods and military equipment. The newly discovered structures have only one conceivable purpose: to launch attacks inside Israel. Three times in recent days, Hamas fighters emerged from the tunnels in the vicinity of Israeli civilian communities, which they clearly aimed to attack. The concrete-lined structures are stocked with materials, such as handcuffs and tranquilizers that could be used on hostages. Other tunnels in northern Gaza are designed for the storage and firing of missiles at Israeli cities.

“The resources devoted by Hamas to this project are staggering, particularly in view of Gaza’s extreme poverty. By one Israeli account, the typical tunnel cost $1 million to build over the course of several years, using tons of concrete desperately needed for civilian housing....

“The depravity of Hamas’ strategy seems lost on much of the outside world, which – following the terrorists’ script – blames Israel for the civilian casualties it inflicts while attempting to destroy the tunnels....

“Polls show that (most of Gaza’s population) is fed up with Hamas’ rule and with its use of women and children as cannon fodder in unwinnable wars with Israel. The next government of Gaza should be one that invests in schools, health clinics and houses, not in tunnels.”

U.S. intelligence officials, according to terrorism expert Steven Emerson, believe Hamas has far more tunnels than even Israel estimates. 

Michael Young / Daily Star (Beirut)

“The war in Gaza continues while the outcome remains uncertain. But from the Israeli perspective, the conflict must appear increasingly worrisome, despite the successes of the Iron Dome system. The reason is that few conflicts have better illustrated the void and contradictions at the heart of Israel’s approach to the Palestinians.

“The contradictions first. The Israelis have portrayed the war as an effort to weaken Hamas, but everything they have done has strengthened the movement, after a period in which its popularity had dived domestically and its lucrative, vital tunnel system was closed by a hostile Egyptian government.

“Hamas was also seeking to revive its financial and military relationship with Iran, severed because of their disagreement over Syria. That relationship appears to have been restored, even though it will be tougher to smuggle new weapons into Gaza given Israel’s and Egypt’s controlling access to the territory. However, a complete cutoff of arms to Gaza will be difficult.

“Hamas has benefited in other ways. It has underlined how inconsequential is Mahmoud Abbas, the Palestinian president, advancing its agenda to ultimately remove him and his Fatah movement as the dominant actors in the Palestine Liberation Organization. This does not necessarily displease Benjamin Netanyahu. The Israeli prime minister has time and again discredited his Palestinian interlocutors, in order to avoid giving up occupied land. But the broader consequences of having Hamas lead the Palestinians are serious.

“And Hamas has also gained by showing it can target Israeli cities, regardless of the Iron Dome’s effectiveness. The attacks have altered daily life in Israel, most recently by pushing foreign airlines to suspend their flights to Ben Gurion Airport. Technology is not stationary. If Hamas’ rockets are relatively primitive today, in the future they can, and likely will, be improved. Israel’s ability to conduct wars entirely in the lands of its neighbors is becoming less possible by the day.”

Janet Daily / Daily Telegraph

“(In the Middle East), which the United States used to regard as its particular bailiwick, Israel’s patience has been exhausted. Having withdrawn voluntarily from Gaza, it found itself with a huge refugee camp on its border, which the terrorist organization Hamas could use as a military base.

“With the convenient cover of a helpless civilian population, Hamas could escalate its rocket attacks to target every major Israeli city, knowing that any retaliation would be likely to create a humanitarian crisis.

“What does the West have to say about this?  That of course Israel has a right to defend itself, but that its response to attacks must be ‘proportionate.’

“Proportionate to what? Hamas refuses offers of a ceasefire, and will not desist in its terror attacks: clearly, the Palestinian outrage it represents will have to be addressed, and not purely by Israeli bombardment. What, exactly, is America’s plan? One suspects that it is simply to manufacture enough of its own oil to make dependence on this contentious region a thing of the past. Then it can wash its hands of this problem, too.”

Former Israeli ambassador Michael Oren / Washington Post

“U.N. Secretary General Ban Ki-Moon, Secretary of State John Kerry and the foreign ministers of Great Britain and France are all rushing to achieve a ceasefire between Israel and Hamas. Their motive – to end civilian suffering and restore stability to the area – is noble. The images of the wounded and dead resulting from the conflict are indeed agonizing. However, these senior statesmen can be most helpful now by doing nothing. To preserve the values they cherish and to send an unequivocal message to terrorist organizations and their state sponsors everywhere, Israel must be permitted to crush Hamas in the Gaza Strip....

“Operations Protective Edge may seem small, but it is nevertheless pivotal. To ensure that it concludes with a categorical Israeli win is in the world’s fundamental interest. To guarantee peace, this war must be given a chance.”

Iran: As noted last week, Iran and the six powers (P5+1) extended nuclear talks four months until Nov. 24, in recognition the two sides have significant differences remaining. Last Saturday, Iranian Foreign Minister Mohammad Javad Zarif read a statement in Farsi and didn’t take questions. U.S. Secretary of State John Kerry spoke of “tangible progress,” echoing the same words used by EU foreign policy chief Catherine Ashton.

But Republican Rep. Ed Royce, chairman of the House Foreign Affairs Committee, said, “It looks like the Iranians won extra time with a good cop-bad cop routine.”

French Foreign Minister Laurent Fabius said Iran was expected to cooperate with the U.N. International Atomic Energy Agency (IAEA) over possible military dimensions to its nuclear program.

Iran demands it be allowed to keep its current uranium enrichment program. The United States and its Western allies want deep cuts.

But in the interim, under the deal cut last weekend, the U.S. will give Tehran access over the next four months to an additional $2.8 billion in oil export revenues frozen abroad by American sanctions.

In turn, Iran agreed to curtail the most advanced parts of its nuclear program and will accelerate the conversion of its 20% enriched uranium into fuel for its research reactor, which makes it much harder to reconvert into weapons-grade material. Iran also agreed to dilute its 2% enriched uranium stockpile into natural uranium. Tehran will also allow additional monitoring of its nuclear research work, but here, the IAEA hasn’t seen the cooperation thus far it feels Iran had promised as part of an agreement in May involving the military dimensions that foreign minister Fabius is alluding to.

The key figure, however, is Ayatollah Ali Khamenei and he has signaled no willingness to dial back Iran’s uranium-enrichment efforts in exchange for sanctions relief.

Khamenei also commented on the Israel-Gaza Strip crisis, saying he sought the dismantling of the state of Israel, not the death of Jews.

“Israel’s annihilation is the only real cure, but that doesn’t mean destroying Jews in this region,” part of a speech posted on his website.

There is no apparent date for a resumption of talks.

Ray Takeyh / Washington Post

“There was always something peculiar about segregating Iran’s nuclear pretensions from the region’s raging conflicts. Iran’s supreme leader, Ayatollah Ali Khamenei, has been busy fortifying the Assad dynasty in Syria, ensuring that a pliable regime remains in power in Iraq, nurturing Hizbullah and arming Hamas as it wages war against Israel. In Khamenei’s telling, the United States is a crestfallen imperial state unable to impose its mandates on a defiant region. In a recent speech, he mocked the notion of U.S. military retribution, declaring, ‘There are very few people in today’s world who take these military threats seriously.’ Whatever confidence-building measures his diplomats may be contemplating, Iran’s most consequential decision-maker sees in America’s retreat a rare opportunity to project power in a contested Middle East. Nuclear weapons capability is central to the ambitions of an aspiring hegemon.

“It is indisputable now that in the last round of talks the United States did not possess sufficient leverage to impose a settlement. The existing sanctions regime has been effective in isolating Tehran from the global markets, but more obviously needs to be done. It is time for the White House and Congress to come together and craft a bipartisan sanctions bill that further stresses Iran’s economy. The notion that congressional action would derail an accord is no longer a suitable argument. What prevented an agreement in Vienna was not congressional initiative but Iranian truculence.”

Meanwhile, OPEC data shows that sanctions have nearly halved Iran’s petroleum export revenue in the past two years to $61.92 billion in 2013, down from $114.75 billion in 2011.

Separately, Iran detained four journalists, including a correspondent for the Washington Post, along with his wife, both of whom hold joint U.S.-Iranian nationality, though Iran does not recognize dual citizenship. There are currently 35 journalists in prison in Iran, according to the Committee to Protect Journalists. There are over 750 political prisoners, even as Iran says it is not trying to stifle dissent. So much for President Rohani and hopes he would create a freer society.

Iraq: Lawmakers elected a veteran Kurdish politician Thursday to replace Jalal Talabani as the country’s new president, 76-year-old Fouad Massoum.

The post of Iraq’s president is largely symbolic and brings the country no closer to selecting a prime minister, though Massoum can put forward his own candidate. Nouri al-Maliki is showing no signs of stepping down from the post he has held since 2006, but he is rapidly losing political support. Grand Ayatollah Ali al-Sistani sent a letter directly to Maliki last week making it clear the cleric’s opposition to a third term.

[According to the Iraqi constitution, with the selection of a president, a prime minister is supposed to be chosen within 15 days.]

It was a particularly violent week, even given recent standards, with a double car bombing in Baghdad killing 31, while an attack on an army convoy carrying prisoners that were being evacuated to prevent a jailbreak, left 52 prisoners and eight soldiers dead. It was not immediately clear if the prisoners were killed by soldiers or militants, or if ISIS was involved.

ISIS has vowed to wage an offensive around the capital as Ramadan ends next week and there has been little sign government forces can repel the attacks.

In congressional hearings this week, Brett McGurk, the State Department’s deputy assistant secretary for Iraq and Iran, testified, “ISIL (ISIS) is worse than al-Qaeda. ISIL is no longer simply a terrorist organization. It is now a full-blown army seeking to establish a self-governing state through the Tigris and Euphrates valley in what is now Syria and Iraq.” [Defense One]

Reuters reports that Islamists now coming of age are more frequently dismissing al-Qaeda as a worn down and ineffective organization, voicing admiration on social media for ISIS.

Lastly, you have the depressing stories out of places like Mosul where ISIS is giving Christians a choice, either convert, leave the city or be killed. And so in Mosul, a Christian community that had called the city home for 1,700 years is no longer.

Militants took sledgehammers to the tomb of Jonah and removed the cross from St. Ephrem’s Cathedral, putting up the black ISIS flag in its place.

Throughout Iraq, the U.N. estimates more than 600,000 people were driven from their homes during June alone.

Syria: It was a big week for the Islamists, with Islamic State (ISIS) militants launching assaults against the Bashar Assad regime’s forces across three provinces, taking out key government figures, including two brigadier generals, according to the Wall Street Journal. Should ISIS take over two military bases now under attack, they would obtain a huge amount of weapons, including “artillery, tanks and missile launchers,” one activist told the Journal.

[As I go to post, ISIS did supposedly take one of the bases on Friday, releasing photos of captured soldiers being beheaded after the battle. This is so freakin’ depressing.]

Egypt: Militants killed 22 border troops in an area near Libya, with President Sisi vowing “terrorism will be uprooted.”

Afghanistan: The audit of all votes cast in the presidential election which began on July 17 hit a major snag when the two sides couldn’t agree on how to disqualify fraudulent ballots, and while the count resumed after a brief pause last weekend, the two campaign teams still haven’t reached a broader agreement on how to disqualify ballots....and who should adjudicate fraud complaints. One side wants Afghanistan’s election commission to lead, the other wants the international community to play a bigger role.

China: The military sent a surveillance vessel to waters off Hawaii, outside U.S. territorial seas, yet within the 200-nautical mile Exclusive Economic Zone, for the purposes of viewing the largest U.S. naval drill, Rim of the Pacific Exercise, which China is taking part in, though its forces are kept out of most of the exercises’ core combat components, as reported by Bloomberg. So you have four invited Chinese naval vessels in the exercises, and one uninvited fifth ship operating a safe distance away but certainly capable of picking up valuable intelligence.

Meanwhile, analysts are having a hard time deciphering the actions of President Xi Jinping, who increasingly seems like the sole decision-maker in China, including for foreign policy. For example, as Kurt Campbell opines in the Financial Times, the current set of provocations in the East and South China Seas “have been carefully choreographed,” adding, “the centrality of Mr. Xi’s role is yet another reminder of the importance of concentrated, regular, high level diplomacy with China to accurately gauge intent and to send consequential messages. Perhaps nothing in the world is more important.”

On a different issue, China-Vietnam relations, with the recent oil rig dispute in the South China Sea, Chinese tourist arrivals to Vietnam were down 30% in June from the previous month, according to the South China Morning Post. Tourism contributes 6% of GDP in Vietnam.

Nigeria: I’ve lost track of the number of terror attacks by Boko Haram in this country. On Wednesday, two bombs killed 75 in Kaduna and neighboring Kawu, northern Nigeria, hundreds of miles from the Islamist insurgency’s stronghold.

Last Saturday, an estimated 100 were killed in Damboa, with an AP source putting the toll far higher.

As opposed to years of hit-and-run attacks, Boko Haram is starting to hold new ground.

Indonesia: Joko Widodo, the reformist governor of Jakarta, was elected as the next president as the 53-year-old furniture salesman-turned-mayor defeated former general Subianto, 53 percent to 47 percent.

Subianto, though, said he rejected the results because the election was “not fair, not just, not clean.” But his appeal to the Constitutional Court will go nowhere.

Widodo has a corruption-free reputation and humble image, but he has minimal top-level political experience. He also staggered to the finish, having blown a 30-point lead in the polls.

But he’s now in charge of the world’s fourth-most populous country.

Random Musings

--There were no survivors from the Air Algerie passenger jet that crashed in Mali, said French President Hollande. French troops operating in Mali secured the crash site. At least 116 were on board, including 50 French, 10 of which were from one family that was on “the trip of a lifetime,” according to a friend.

While terrible weather conditions are being blamed, French authorities said no theory can be excluded.

--Texas Republican Gov. Rick Perry said he would deploy as many as 1,000 state National Guard troops to try to deter human smugglers and Mexican drug cartels.

“I won’t stand idly by while our citizens are under assault and little children from Central America are detained in squalor.”

According to figures provided by the White House, the number of unaccompanied minors apprehended crossing the U.S.-Mexico border has fallen in recent weeks.

But in a damning report by the Washington Post last weekend, the administration was warned long ago of the problem on the border with minors illegally arriving from Central America shooting up from 3,933 in 2011 to 20,805 in 2013. Federal officials estimated that the total number of minors would soar to 60,000 in 2014.

“And no one knew what to do with them all.”

At the Department of Health and Human Services, “In 2011, HHS’s Office of Refugee Resettlement had a budget of $149 million to shelter and care for the foreign children. By 2013, it had grown to $376 million, and the Obama administration requested $495 million in its fiscal 2014 budget proposal....

“By the time Congress approved an omnibus budget in January, the line-item for the refugee office had increased significantly from Obama’s initial request of $495 million to $868 million – based on the larger projections of minors. In February, then-HHS Secretary Kathleen Sebelius approved an additional $44 million transfer, bringing the office’s budget to $912 million for the year.”

The president’s new $3.7 billion emergency proposal would devote $1.8 billion for HHS to house the children and families. [David Nakamura, Jerry Markon and Manuel Roig-Franzia / Washington Post]

--Back to Rick Perry, who flamed out as a presidential candidate in 2012, finishing fifth in Iowa and sixth in New Hampshire before dropping out after disastrous debate performances, he just paid his fourth visit to Iowa in eight months and seems poised to run again.

--David Perdue, a former CEO of Dollar General, won Tuesday’s Republican runoff in Georgia to become his party’s Senate nominee, defeating 11-term Georgia congressman, Jack Kingston, 51-49. In the general election, Perdue will face Michelle Nunn, the daughter of Sam Nunn, the former Georgia senator. Nunn and Perdue are facing off for the seat being vacated by Republican Senator Saxby Chambliss.

--Paul Kane of the Washington Post reported on the leadership dysfunction in the U.S. Senate. How bad is it? “The Senate went three months this spring without voting on a single legislative amendment, the nitty-gritty kind of work usually at the heart of congressional lawmaking.”

Majority Leader Harry Reid (D-Nev.) and Minority Leader Mitch McConnell (R-Ky.) “so distrust each other, and each is so determined to deny the other even the smallest political success, that their approach to running the Senate has been reduced to a campaign of mutually assured dysfunction.”

Former Senate leaders Thomas Daschle (D-S.D.) and Trent Lott (R-Miss.) recently wrote in a report, “The Senate has degenerated into a polarized mess.”

To a great extent it’s about the midterm elections.

Paul Kane:

“If Reid allowed the free-flowing give-and-take that defined the Senate of the past, his endangered Democratic incumbents would be forced to vote on carefully crafted GOP amendments designed to hurt them in November. He refuses to do that.

“If McConnell were to work with Reid to allow the Senate to function more smoothly and effectively, he would undermine a key component of the Republican campaign argument this fall: that Democrats have mismanaged the Senate and the GOP must take over.”

More and more senators are like Mark Begich (D-Alaska). “Do we want to be in a place where all we’re voting on is ambassadors and political appointments? That’s not what I came to do, and I think a lot of people did not come here to do that.”

In June, senators cast 53 votes, but only seven were related to legislation; the rest were on nominations.

But, Senate leaders agreed to take up the Highway Trust Fund next week, finally, before funding for highway and mass-transit spending dries up. The trust fund accounts for about one-quarter of the nation’s spending in these areas, including maintenance. A House-passed bill keeps the fund going through May 2015. A Senate amendment that will be voted on tightens the authorization to Dec. 19, in order to encourage lawmakers to act on a long-term highway bill before the next Congress takes office in January.

--Michael Goodwin / New York Post

“In Federalist Paper No. 70, Alexander Hamilton argued for an American leader with vast powers, one driven by dual senses of responsibility and accountability.

“He called that quality ‘Energy in the Executive’ and said it was ‘a leading character in the definition of good government.’

“Such a leader, he wrote, ‘is essential to the protection of the community against foreign attacks’ and other dangers, including ‘the enterprises and assaults of ambition, of faction and of anarchy.’

“Hamilton also acknowledged the risks if the unitary executive failed to carry out his duties. ‘A feeble executive implies a feeble execution of the government. A feeble execution is but another phrase for a bad execution; and a government ill executed, whatever it may be in theory, must be, in practice, a bad government.’

“Hmmm, a feeble executive running a bad government. Does that ring a bell?”

--Joe Klein / TIME...on Obama

“There has been a skein of stories indicating he’s thrown in the towel. He’s so tired of head-banging with Republicans that he has taken refuge in late-night dinners with celebrities and intellectuals. Robert Kennedy did a lot of that too. But Kennedy never gave the impression that politics was distasteful, beneath him, as Obama too frequently does. Kennedy was all about passion; Obama seems all about decorum. He needs to go to the border – on a lot of issues. If he’s going to accomplish anything in the last two years of his presidency, he’s going to have to change his style, which will be near impossible for a man as entrenched behind his flacks-in-jackets as the President is. He’s right about photo ops. Enough already. But there are other ‘ops’ – study ops, passion ops, conversation ops. He needs to do something dramatic to win back the country.”

--Sources told the New York Post’s Page Six that David Gregory will step down as moderator of “Meet the Press” after the November midterm elections. Viewership is down 43% compared to when Gregory ascended to the chair in December 2008, after the death of Tim Russert.

Boy, don’t you miss what Russert would be doing with all of today’s topics, including Obama’s performance?

--Some 265 public colleges and private schools are participating in a new study called Student Achievement Measure that reveals “fewer than half of full-time freshmen in 2007 earned bachelor’s degrees after six years at those schools or after switching to other schools,” as reported by the Washington Post’s Nick Anderson.

The new data shines a light on transfer students.

At Indiana University at South Bend, for example, “the data show that about 27% of 2007 freshmen graduated from the school within six years and that an additional 6% graduated elsewhere. Terry L. Allison, the school’s chancellor, said he learned of the data as he was preparing to take office last year. His reaction: ‘Wow, we need to do a lot to improve this picture.’”

“Graduation rates are a function, in part, of selectivity in college admissions. Rates at the University of Virginia, the College of William and Mary and other elite schools exceed 90% no matter how they are analyzed.

“At Virginia Commonwealth University, a less selective school, 64% of 2007 freshmen graduated from VCU or other schools in six years.”

--In another example of just how overrated we can be, you have the stunning security breach at the Brooklyn Bridge, where on Monday night, individuals replaced two giant American flags at the top of both sides of the bridge with bleached Old Glories.

The vandals used large aluminum cooking pans to cover the bridge’s lights while they were switching the flags, according to law enforcement. They climbed a bridge cable and scaled a locked gate to reach the top of the towers. Essentially, the lights on both towers went out around 3:30 a.m. and an officer on duty didn’t report the flags until 5:30 a.m.

The flags were taken down and either painted or bleached.

So the obvious thought is, what if this had been a bomb? The Brooklyn Bridge has already been targeted by al-Qaeda types in the past. Police have made no arrests.

--In the latest Siena College poll, New York Gov. Andrew Cuomo held a 60-23 lead over his Republican challenger, Rob Astorino, and I for one wonder why the Cuomo campaign even bothers running commercials blasting Astorino because it’s only making voters more aware of the candidate when 61% told pollsters they had no opinion of the guy...because no one knows him.

At the same time, Astorino is upset with New Jersey Gov. Chris Christie, because Christie has refused to give Astorino his endorsement, even though Christie is chairman of the Republican Governors Association.

“Clearly he can come across the bridge and not just raise money for himself, but raise money for the Republican candidate here – unless he is unable or unwilling because of an issue that we don’t know about with Andrew Cuomo and the ‘Bridgegate scandal,” Astorino said the other day on a local radio station. “And if that’s the case and he feels he can’t do it, then maybe he should step down as chairman.”

Christie said this week he probably won’t be campaigning for Astoriano.

“I will spend time in places where we have a chance to win, I said that right from the beginning.”

--Christie’s approval rating in New Jersey, by the way, is just 44%, according to a Fairleigh Dickinson University PublicMind poll, with 41% disapproving of his performance. In June, it was 44-44.

Only 39% believe the state is headed in the right direction, 46% say the wrong one.

So much for his ‘effective leadership’ narrative when it comes to Iowa and New Hampshire.

And a Quinnipiac University poll has Christie sixth with Florida voters among potential 2016 Republican presidential candidates. Plus more Florida voters dislike him than like the governor – 36% to 35%.  

Former Gov. Jeb Bush leads in his old state with 21%, while Sen. Marco Rubio is second at 18%. Christie received 6%.

[Hillary had 67% among Florida’s Democratic voters, with Vice President Biden and Sen. Elizabeth at 8% each. Clinton also defeats Bush 49-42; Rubio 53-39.]

--But back to Gov. Cuomo...Frederic U. Dicker / New York Post

“The devastating New York Times story on Gov. Cuomo’s political interference with his Moreland Commission panel’s investigation of public corruption pulled the veil from one of the biggest open secrets at the state Capitol: The governor is a liar and almost anything he promises will turn out to be false.

“Cuomo’s betrayal of major pledges is well known: the promise to cut taxes in a meaningful way, encourage job creation without government handouts, reduce local mandates, conduct public work transparently and have science – not politics – determine if fracking can be done safely.

“But it wasn’t until Cuomo violated his No. 1 pledge to rid New York of the ‘culture of corruption’ that has dominated Albany for decades that the full extent of his betrayal of the public became clear.

“People who have known Cuomo for years, including some who go back to the days he served as the thuggish chief enforcer of his father, then-Gov. Mario Cuomo, say they aren’t surprised Cuomo’s penchant for lying has finally exploded in full public view.”

You see, Cuomo cut a deal with the Legislature and folded the commission, but the law-enforcement professionals employed by Moreland had reputations to protect so they began to talk.

Now U.S. Attorney Preet Bharara’s office is investigating and he’s subpoenaed the Moreland Commission’s evidence to see “whether Cuomo and his aides – by their actions – committed any federal crimes,” as Dicker notes.

--A death row inmate in Arizona took almost two hours to die by lethal injection in yet another botched execution that has many believing the death penalty in this country will eventually be abolished. At the very least the use of lethal injection drugs is under intense scrutiny. The drugs for many states are hard to come by as the manufacturers, many of which are in Europe, refuse to supply them under pressure from human rights campaigners.

--According to a study in the journal Proceedings of the National Academy of Sciences, raising beef does far more damage to the environment than producing pork, poultry, eggs or dairy. 

“Beef produces five times more heat-trapping gases per calorie, puts out six times as much water-polluting nitrogen, takes 11 times more water for irrigation and uses 28 times the land.”

Environmental physics Professor Gidon Eshel of Bard College in New York said in the study, pork, poultry, dairy and eggs all had comparable environmental footprints, but cows were off-the-chart different.

“Cows burp major amounts of methane, a greenhouse gas that is dozens of times more potent than carbon dioxide,” as reported by Seth Borenstein of the AP.

The beef industry is not happy. Professor Eshel recommends switching to pork. I’m a big proponent of pork barbecue, Carolina style.

--New sleep studies show that seven hours is the optimal, not eight, as long believed. Shawn Youngstedt, a professor at Arizona State University Phoenix, said, “Eight hours or more has consistently been shown to be hazardous.”

The Centers for Disease Control and Prevention is helping fund a panel of specialists that will come up with new recommendations by 2015.

Daniel F. Kripke, an emeritus professor of psychiatry at the University of California San Diego, tracked 1.1 million people who participated in a large cancer study over a six-year period and found those reporting sleep of between 6.5 to 7.4 hours had a lower mortality rate than those with shorter or longer sleep. But that was published in 2002.

Another study by Dr. Kripke in 2011, found further evidence the optimal amount of sleep was less than the traditional eight hours.

Then in a study last year, co-authored by Duke University Medical Center, more than seven hours of sleep was not found to be beneficial in cognitive tests. [Sumathi Reddy / Wall Street Journal]

--NASA decided to just reveal that on July 23, 2012, our life as we know it almost ended. That day Earth had a near miss with a solar flare from the most powerful solar storm on the sun in over 150 years. Daniel Baker of the University of Colorado said, “If it had hit, we would still be picking up the pieces.”

We avoided it because the sun’s aim narrowly turned away from Earth. A week earlier and we were hosed.

It’s believed a direct Coronal Mass Ejection (CME) would have the potential to wipe out communication networks, GPS, and electrical grids to cause widespread blackout. A NASA report says it would disable “everything that plugs into a wall socket. Most people wouldn’t even be able to flush their toilet because urban water supplies largely rely on electric pumps.”

The effects would have lasted years.

But here’s the thing. According to physicist Pete Riley, who published a paper on such events, the odds of a solar storm strong enough to disrupt our lives in the next ten years is 12 percent.

Just another reason to sleep with one eye open.

--In accepting the Medal of Honor on Monday at the White House, former Staff Sgt. Ryan M. Pitts said, “The real heroes are the nine men who made the ultimate sacrifice so the rest of us could return home. It is their names, not mine that I want people to know.

“Spc. Sergio Abad, Cpl. Jonathan Ayers, Cpl. Jason Bogar, 1st Lt. Jonathan Brostrom, Sgt. Israel Garcia, Cpl. Jason Hovater, Cpl. Matthew Phillips, Cpl. Pruitt Rainey, and Cpl. Gunnar Zwilling.”

Pitts was awarded the Medal of Honor for his actions on July 13, 2008, when he single-handedly defended his observation post from an attack by more than 200 Taliban militants.

---

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

God bless America.

---

Gold closed at $1305
Oil $102.09

Returns for the week 7/21-7/25

Dow Jones -0.8% [16960]
S&P 500 +0.01% [1978]
S&P MidCap -0.5%
Russell 2000 -0.6%
Nasdaq +0.4% [4449]

Returns for the period 1/1/14-7/25/14

Dow Jones +2.3%
S&P 500 +7.0%
S&P MidCap +4.7%
Russell 2000 -1.6%
Nasdaq +6.5%

Bulls 56.5
Bears 17.2

Have a great week. I appreciate your support.

Catch me on Twitter @stocksandnews.

Brian Trumbore