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08/29/2015

For the week 8/24-8/28

[Posted 11:00 PM ET, Friday]

Edition 855

Washington and Wall Street

Another crazy week, to say the least, with the Dow Jones opening Monday morning down 1,090 points in the first ten minutes of trading on the heels of China’s “Black Monday,” with the Shanghai Composite having plunged 8.5%.

But then the Dow recovered virtually all of the loss later Monday, only to tumble anew and end the day down 588 points, followed by another roller-coaster ride Tuesday, the Dow losing 204 points.

Then we had stupendous rallies of 619 and 369 points, Wednesday and Thursday, before things finally calmed down on Friday.

For the week the Dow ended up gaining 1.1%, the S&P 500 0.9% and Nasdaq 2.6%.

Nonetheless, all three were solidly in correction territory after Tuesday:

Dow -14.4%
S&P 500 -12.3%
Nasdaq -13.6%

So what did it all mean? Well I address China’s volatility and economic performance below, but what we do know is that the fundamentals for the U.S. economy continue to be solid. And what does that mean for the Federal Reserve and the path of interest rates when the Open Market Committee next meets on Sept. 16-17?

Thursday saw the first revision to second-quarter GDP, initially pegged at 2.3%, and while everyone expected it to be adjusted upward, few would have said 3.7%. Consumption, business spending, you name it, was up smartly.

Coupled with more good news on the housing front, with July new-home sales +5.4%, as well as a solid July durable goods report, +2.0%, with non-defense capital spending +2.2%, and respectable figures for July personal income (0.4%) and consumption (0.3%), and you’d have to concur the Fed will finally raise interest rates in September, wouldn’t you?

Ah, but that global volatility shook up many inside the Fed, including William Dudley, head of the New York branch, who told an audience this week that recent financial turmoil had made the case for an interest-rate increase next month “less compelling,” though it was “important not to overreact to short term market developments.”

“I really do hope we can raise interest rates this year... But let’s see how the data unfold before we make statements about when that might occur.”

That data will include next Friday’s jobs report for August and if it’s another strong one and global markets have continued to stabilize, it’s going to be awfully difficult for the Fed not to hike in September.

Oh, you have the argument that the Fed wants to see more inflation than there currently is before its comfortable raising rates, but they’ve also said they just need to be convinced prices will eventually rise, not fall.

Dudley, in looking at the big picture, noted, “What we’re seeing is not a U.S. problem. This is very different to the financial crisis. The financial crisis was very much about us. This isn’t about us.”

U.S. GDP (seasonally adjusted at annual rates)

2014

Q1 -0.9%
Q2 4.6%
Q3 4.3%
Q4 2.1%

2015

Q1 0.6%
Q2 3.7%

So another strong Q2 vs. Q1, a la 2014, but the Atlanta Fed’s GDPNow indicator currently pegs Q3 GDP at just 1.2%.

Back to the volatility in the markets, Monday morning exposed some of the flaws in today’s trading products such as exchange-traded funds. As the Wall Street Journal reported:

“Dozens of ETFs traded at sharp discounts to their net asset value – or their components’ worth – leading to outsize losses for investors who entered sell orders at the depth of the panic....

“For example, the $2.5 billion Vanguard Consumer Staples Index ETF and the $5.8 billion Vanguard Health Care Index ETF both plunged 32% within the opening minutes of trading....

“The declines in these and other ETFs were notable in that they exceeded the declines in the prices of their underlying holdings. In the case of the Vanguard Consumer Staples ETF, the value of the underlying holdings in the fund fell only 9%, according to FactSet....

“When the market sold off in the first six minutes of trading, many stocks were halted after triggering circuit breakers, including stocks that are included in popular exchange-traded funds.

“Because this happened so quickly, many ETF market makers, or the broker-dealers who buy and sell those products, were unable to accurately calculate the value of the underlying holdings or properly hedge their trades. That caused them to lowball their buy offers and overprice their sell orders to ensure they didn’t take on too much risk. This sent ETF market values tumbling, too, and caused disruptions in the trading of other assets.”

Look at some of Monday’s prices in the first ten minutes.

Apple...$92...closed the day at $103 (even with Dow down 588)
Disney...$90...closed at $95
McDonald’s...$87.50...closed at $92.40
Twitter...$21...closed at $25.15

Bottom line, the little guy likely got screwed.

Opinion...various topics...

Martin Feldstein / Wall Street Journal

“The unfolding stock-market collapse...is the inevitable result of the Federal Reserve’s policies, namely quantitative easing that produced abnormally low interest rates. The decline on Wall Street has spread to every stock market on the globe, many of which were also weakened by their own policies of excessively easy money.

“When the Obama administration’s poorly designed 2009 stimulus legislation failed to produce a strong economic turnaround, then-Fed Chairman Ben Bernanke announced that the central bank would pursue an ‘unconventional monetary policy’ by purchasing immense amounts of long-term bonds and promising to hold short-term interest rates near zero for an extended period.

“Mr. Bernanke explained that the Fed’s policy was designed to drive down long-term interest rates, inducing portfolio investors to shift from bonds to stocks. This ‘portfolio substitution’ strategy, as he labeled it, would increase share prices, raising household wealth and therefore consumer spending.

“The Fed’s strategy worked, causing household net worth to increase by $10 trillion in 2013....

“(But markets became mispriced and the) market decline will no doubt lead some members of the Fed’s Open Market Committee to argue against beginning the rise in short-term rates in September. But postponing a 25-basis-point rise from September to December or even March would not have any significant effect on aggregate demand and employment.

“Market participants know that the economy is now essentially at full employment, that the consumer-price index is close to 2% and that there is little risk of deflation. They know therefore that interest rates must rise, and that a return to normal levels will reverse the mispricing of assets. The Fed cannot hide that realization by postponing rate hikes for a few months. And so the Fed should get on with the task of normalizing rates, particularly so that investors and lenders are no longer tempted to sink deeper into mispriced assets....

“It’s time to escape the unprecedented monetary policy that for a while stimulated demand – but then distorted prices and brought about the current corrections.”

Lawrence Summers / Washington Post

“There can be no question that tightening policy will adversely affect levels of employment as higher interest rates make holding onto cash more attractive relative to investing. Higher interest rates also will increase the value of the dollar, making U.S. producers less competitive and pressuring the economies of our trading partners. This is especially troubling at a time of rising inequality. Studies of periods of tight labor markets such as the 1960s and the late 1990s make clear that the best social program for disadvantaged workers is an economy where employers are struggling to fill vacancies.

“There may well have been a financial-stability case for raising rates 6 months or 9 months ago, as low interest rates were encouraging investors to take on risk and businesses to borrow money and engage in financial engineering. Even at that time, I believed that the economic costs of a rate increase exceeded the financial-stability benefits, but there were grounds for concern about the medium-term impact of low rates on financial stability. That debate is now moot. With credit spreads significantly increasing, the Chinese outlook clouded at best, emerging markets submerging, the U.S. stock market in a correction, widespread concerns about liquidity and expected volatility having increased at a near record rate, markets are self-correcting any euphoria or over confidence; the Fed does not have to do the job....

“New conditions require new policies. There is much that should be done, like major steps to promote both public and private investment, to raise the level of real interest rates consistent with full employment. But until and unless these new polices are implemented, inflation sharply accelerates or euphoria in markets breaks out, there is no case for the Fed to adjust policy interest rates.”

Robert Samuelson / Washington Post

“First was the dot-com bubble, then the housing bubble. Now comes the commodities bubble. We don’t fully understand the stock market’s current turmoil, but we know it’s driven at least in part by a bubble of raw material prices. Their collapse weighs on world stock markets through fears of slower economic growth and large financial losses.

“All bubbles share similar characteristics. There’s a strong, enthusiastic demand for some object (whether stocks, homes, oil or tulips). High demand pushes up prices, which inspires more demand. Prices ultimately reach unsustainable levels so that when spending slows, the bubble implodes. Commodities have now traced this familiar path.

“As the Economist reminds us, raw material prices respond to different influences. Weather affects crops; technology (a.k.a. ‘fracking’) affects oil recovery. Still, despite these variations, prices of many commodities – not just oil – have followed roughly similar trajectories in recent years. They have dropped steeply, according to figures from the International Monetary Fund.

“Here are declines for five commodities from 2012 through July 1015: oil, down 48 percent; iron ore, 60 percent; copper, 31 percent; palm oil, 39 percent; and wheat, 37 percent. Many commodity prices have continued to fall.

“The bubble formed on hopes that China’s rapid growth would feed an ever-expanding appetite for raw materials... Demand and prices would remain high indefinitely.”

But then China’s growth rate went from 10% to 7%, and probably lower. So now everyone has to adjust to a new level of demand.

“Over-optimism about China caused unneeded investments to be made. It will be harder for commodity exporters to generate jobs for their workers. There are other dangers. The most obvious is that low prices will result in loan defaults or bankruptcies by commodity producers that weaken financial institutions.

“The commodities bust has exposed these problems, not solved them. But unlike the dot-com and housing bubbles, whose effects were mostly negative, the commodities bust has a silver lining: Lower prices, especially lower gasoline prices, may strengthen consumer spending....

“Still, this optimism comes with a caveat. If today’s low commodity prices mainly reflect a surplus of production capacity – oil perhaps being an example – the surplus will need to be gradually worked off. But if the low prices also reflect feeble demand, then the economy may be weaker than we thought.”

Oil touched $37.75 Monday morning, before staging a sharp rebound later in the week. But the Friday close of $45.22 still places it below the July 31 mark of $47.12.

Lastly, Congress is away one more week. Fun and games when they return, including the Iran nuclear agreement to deal with (addressed below). Otherwise, I’ll take a final break myself until next WIR. The budget process is going to be a mess.

Europe and Asia

It is clear the drama in Greece is entering a new chapter as the people will go to the polls, again, in three weeks’ time to attempt to come up with yet another government. The head of the country’s Supreme Court, Vassiliki Thanou Christopoulou has been named caretaker prime minister, the first female to hold the office, with the task of keeping things stable until the vote Sept. 20.

As expected, when outgoing Prime Minister Alexis Tsipras resigned last week as part of his plan to trigger a snap election, the parties who controlled the most seats behind Tsipras’ Syriza party were given the chance to form a new government and none of them could do so since the others didn’t want to include Syriza.

Tsipras said in his last interview before turning over power that he hoped to achieve a slim majority of 151 MPs in the country’s 300-seat parliament, but he won’t remain prime minister if he has to cooperate with the old political parties.

The thing is, Tsipras is popular among the Greek people, with approval ratings consistently over 50 percent, but 25 of Syriza’s 149 members formed a new party last week, torqued off that Tsipras agreed to another austerity-heavy bailout with Greece’s creditors.

Another faction, the Group of 53, is considering whether to stand aside in the electoral battle.

So in a poll released Friday by ProRata and published in a Greek paper, Syriza is the top vote getter, but with just 23 percent, with conservative New Democracy second with 19.5 percent. A previous ProRata poll in July had Syriza at 26 percent and New Democracy at 15 percent. [Popular Unity, by the way, polled just 3.5 percent, while the Independent Greeks, who were part of the Tsipras coalition, scored just 2 percent. You need 3 to gain seats.]

64 percent of Greeks believe Tsipras’ move to call snap elections was wrong, though 68 percent agree that Greece must stay in the eurozone at any cost. And one third of those who supported Tsipras’ party in the January 2015 elections that brought him into office said they were unsure if they will do so again.

I don’t know...seems like election chaos to me.

The European Central Bank’s next meeting and press conference is Sept. 3 and some are wondering if it will adjust its 1trillion euro quantitative easing program. Barclays says in a note:

“Since the last policy meeting in July, there have been several macroeconomic and financial factors that have reduced the near- and medium-term inflation outlook and tightened overall financial conditions.    The ECB staff macroeconomic projections are likely to show a downward revision in inflation forecasts for both 2015 and 2016, resulting from a stronger euro and weaker oil price futures. Therefore, we expect President (Mario) Draghi to maintain an accommodative stance during his introductory statement, likely insisting that the Governing Council still has tools available should monetary and financial conditions tighten further.

“We now expect further easing to be announced before year-end as we believe inflation is unlikely to return to levels consistent with the ECB’s objective of price stability over the next two years. A time extension of the asset purchase program to beyond September 2016 is the most likely option, in our view, and we think it could be decided as early as next week.”

Goldman Sachs believes:

“We expect no change in the ECB’s monetary policy stance...but we expect Mr. Draghi to strike a dovish tone... This will be owed to mounting external risks and may take the form – either in the prepared statement or from Mr. Draghi during the press conference – of a clear signal that the Governing Council stands ready to expand the policy stimulus to counter an ‘unwarranted’ tightening in financial conditions or a downward revision of the inflation outlook.

“That said, we do not think that Mr. Draghi will be very specific in terms of what any potential new easing measures from the ECB would look like.” [Katie Martin / Financial Times]

Europe is concerned with the goings on in China because the eurozone is far more dependent on China than, say, the United States, where exports to China make up just one percent of our GDP. In Germany, for example, the percentage is far higher, 2.6%, but far less so in France.

There was little raw data this week, with Germany reporting its consumer price index for August was unchanged and up just 0.2% year over year. At least it escaped outright deflation.

Spain reported strong July retail sales, 4.1% yoy, much better than expected. But a preliminary reading on inflation for August had it -0.4%.

In non-euro U.K., a second reading on second-quarter GDP confirmed the first estimate, 0.7%, with net trade, business investment and household spending all strong. The Bank of England is still looking at 2.8% growth in 2015, after 3.0% last year.

But before we move on to Asia, a word about the migration crisis in Europe. Friday, 250 bodies were picked up from a capsized boat off Libya (200 saved), while in Austria, the death toll from a freezer truck full of migrants that apparently crossed in from Hungary reached 70 in a horrific crime that has sickened everyone on the continent.

This is the biggest refugee crisis to hit Europe since World War II and I’ve been warning for literally years that it has the potential to change things politically in dramatic ways. No one wants these people, mostly from the likes of North Africa, Syria, Eritrea, Iraq and Afghanistan; many reportedly fleeing ISIS.

Macedonia reopened its border with Greece the other day and thousands from Greece then went through Macedonia and on into the likes of Hungary (if they can get in, Hungary having just constructed a razor-wire fence to block refugees). Eventually the goal is to work their way to Germany, where 800,000 are projected to attempt to gain asylum this year, a full one percent of the German population. [Others, coming up through Italy, think they can get into Britain.]

Police in Germany reported a school sports hall intended as a temporary shelter for asylum seekers had burned down in a suspected arson attack. Far-right protesters had been demonstrating against their presence in the area.

German Chancellor Angela Merkel has described the behavior of such activists as “abhorrent” and “shameful,” but this is just the beginning.

Germans say they are horrified by the attacks but wait ‘til they try to settle in their neighborhoods. For starters, you don’t know if any of them are terrorists. Just how many have been melding into the great migration is unknown.

The issue threatens the very idea of the European Union. The likes of Merkel and French President Hollande are calling for a more equal distribution of asylum seekers across the EU, but many countries simply don’t want them, first and foremost because their resources are already stretched to the max, which is the case in Greece and Macedonia, for starters, let alone poor Italy.

I’ve said this before but I wish everyone in the U.S., for example, could just take the train from Charles de Gaulle Airport outside Paris into the heart of the city (getting off at Notre Dame cathedral) and seeing all the changing neighborhoods and the awful ‘suburbs’...some of them lawless ghettos. It’s this kind of change that is scaring the crap out of many traditional French, who then flock to far-right parties like the National Front.

But I’d be a total hypocrite if I didn’t say I don’t blame them. As I note further below, French authorities are basically helpless...totally overwhelmed.

Leaders like Angela Merkel can decry the fascist tendencies that seem to be returning in some towns and cities in Germany, but things are happening so quickly. What was a trickle when I first started addressing this topic (Turks in Germany), is a full-blown tsunami.

And who deserves a lot of the blame? President Barack Obama.  If you don’t understand why, think back to the summer of 2012, when I was a lonely voice pleading with Obama to cooperate with the Turks on a no-fly zone in Syria. That would have largely stemmed the flow of refugees from that country cold, and certainly impeded the development of ISIS in hindsight. It’s the truth. But you won’t find this statement anywhere else.

On to China, I nailed this one.

WIR 6/6/12

As for the Shanghai Composite stock index, after a 6.5% swoon on May 28, it has recovered and then some to finish above 5000, a 7-year high, despite some clampdowns on margin trading. This is going to end badly.

WIR 6/20/12

Turning to Asia, China’s Shanghai Composite benchmark index suffered its worst weekly loss, 13.3%, since June 2008. The market has been in a bubble, pure and simple. I’ve written a number of times it will end badly and there is far more damage to come, though I’m not saying it’s straight down further from here. 

But this economy is headed into the crapper, equaling the color of its waterways and skies, and that will be very dangerous for the world as President Xi feels compelled to play the nationalism card.

I wouldn’t change a word of the above, especially the last sentence.

China matters for the simple reason it has contributed to half the world’s growth in recent years. But as the market has been collapsing in recent weeks, the government’s “National Team,” consisting of government agencies, state-backed companies and selected stockbrokers, was buying anywhere from $200bn to $300bn in stock trying to prop up the market but to no avail. Investors were forced to sell to cover their margin debt. The government was selling Treasuries to support the yuan.

China has also run through $315bn in foreign exchange reserves in 12 months, a pace it can’t continue.

Then the People’s Bank of China (PBoC) cut its benchmark lending rate a fifth time since November and once again lowered the reserve requirement (level of cash commercial banks must park with the PBoC).

But nothing was working and by midweek the Shanghai Composite was at 2927, off 43% from its June 12 closing high of 5166, and down 22% in four days, before staging rallies of 5.3% and 4.8% Thursday and Friday to end the week at 3232, still off 7.8% for the five days. The “National Team’s” buying was apparently responsible for the rally that many feel was engineered because of an upcoming military parade to celebrate the 70th anniversary of the end of World War II.

Immediately after the latest market collapse, Beijing, though, was looking for scapegoats, with five of the country’s largest brokerages placed under investigation by the securities regulator and police. Even a respected business magazine, Caijing, had one of its journalists placed under arrest.

But at the same time, the government has come under fire for implicitly encouraging the bull run that stoked the bubble before the crash. As reported by Philip Wen of the Sydney Morning Herald, there were concerns the government-backed agency tasked with buying shares to support the market – the China Securities Fund – “had backfired and in fact allowed insider trading and front-running to flourish.

“ ‘To start, the regulator should not have tried to get the stock index to go up,’ Caixin, an influential business magazine – and a rival of Caijing – said in a sharp editorial on Wednesday; direct criticism of government policy and wisdom in China’s state-controlled media is rare.

“ ‘Also, the CSF seemed to have picked stocks randomly, pouring capital into valuable and worthless companies indiscriminately. Critics have questioned the wisdom of these actions, and some voiced concerns about insider trading.’”

China’s Premier Li Keqiang said global economic conditions are bewildering, creating volatility in global markets, but that there was no basis for the continued depreciation in the yuan. “It can remain stable at a reasonable and balanced level,” he said in a statement.

Premier Li, who is supposed to be in charge of the economy (and is rumored to be in trouble by some), said that despite the substantial fluctuations in world markets that have affected China, the country’s economy remains in a “reasonable range.”

Martin Wolf / Financial Times

“According to official figures, gross fixed investment (in China) was 44 percent of gross domestic product in 2014. Figures for investment are more likely to be correct than those for GDP. But does it make economic sense for an economy to invest 44 percent of GDP and yet grow at only 5 percent? No. These data suggest ultra-low, if not, negative marginal returns. If so, investment could fall sharply. That might not lower potential growth, provided wasteful investment were cut first. But it would cause a collapse in demand. Everything the Chinese have been doing suggests they are worried about just that....

“This now leaves the Chinese authorities with three huge economic headaches. The first is cleaning up the legacy of past financial excesses while avoiding a financial crisis. The second is reshaping the economy, so that it is more dependent on private and public consumption and less dependent on extraordinarily high levels of investment. The third is achieving all that while sustaining dynamic growth of aggregate demand.”

As for Japan, there was a slew of data. Core inflation for July, ex-food, was flat year on year, versus a 0.1 percent reading in June. At least it avoided slipping back into deflation.

At the same time, Japan’s jobless rate improved to 3.3 percent, matching the best level since the late 1990s.

But household spending retreated 0.2 percent, better than the 2 percent decline in June. However, retail trade increased 1.6% in July from a year earlier, up from 1.0 percent the previous month. So this data point has been up four months in a row.

Street Bytes

--Assuming the market gets back to fundamentals, the fact is we haven’t been going anywhere this year because companies aren’t generating revenues, and oil’s precipitous fall has created more unease than excitement consumers may save some at the pump.

--U.S. Treasury Yields

6-mo. 0.23% 2-yr. 0.72% 10-yr. 2.18% 30-yr. 2.91%

The yield on the 10-year early Monday was down around 1.94% but gradually rose, especially at week’s end on the GDP report and renewed talk a September rate hike could still be in play after all, let alone the ‘risk on’ trade was back...buy stocks, sell bonds.

--One more note on housing. The S&P/Case-Shiller 20-city home index for June rose 5% year over year, -0.1% over May.

--As noted above, shares in Apple were sliding precipitously Monday morning, down 13%, when CEO Tim Cook emailed CNBC’s Jim Cramer to say the company’s Chinese operations were doing just fine. Cook’s statement “I continue to believe China represents an unprecedented opportunity over the long term” helped turn things around and it finished the week at $113, after opening Monday at $92.

Well you know where I stand. I wouldn’t be so sanguine.

Separately, Apple has scheduled its annual iPhone debut for Wednesday September 9, a year to the day after Apple launched Apple Pay and the Watch.

Some analysts predict iPhone unit sales will grow by just 3 percent next year, compared with 35 percent in the most recent quarter.

Tech research firm IDC reported the Apple Watch leapt into second place behind Fitbit in the second quarter, ahead of smartwatch makers Samsung, LG, Motorola and Pebble. IDC found Apple had taken 20 percent of the global market for wearable devices in its first quarter of availability, just behind Fitbit at 24 percent. [Tim Bradshaw / Financial Times]

--As alluded to above, a computer glitch severely impacted hundreds of mutual and exchange-traded funds from providing proper values of their holdings, the issue originating at Bank of New York Mellon Corp., the largest fund custodian in the world by assets.

As reported by Kirsten Grind and Bradley Hope of the Wall Street Journal:

“Directors and executives at some fund sponsors scrambled to manually sort out pricing data and address any legal ramifications of material mispricings, those in which stated asset values differed from the actual figures by 1% or more....

“Several traders said they were forced to calculate their own net asset value for ETFs and that they widened the spreads, or the difference, between listed buying and selling prices to accommodate for the higher risk of trading.”

BNY Mellon said the problems originated with a SunGard Data Systems Inc. system. The issue wasn’t rectified until Wednesday, forcing fund companies to try to reconcile the numbers with what they had reported earlier in the week.

WSJ:

“Fund industry attorneys said the real challenges would arrive in the coming weeks, as fund companies and BNY Mellon hash out who is liable if investors traded on false pricing.

“If an investor paid a higher net asset value than he should have, for example, some fund companies believe BNY Mellon should pay that difference. BNY Mellon declined to comment about the liability issue.”

--At least through Tuesday, many leading hedge-fund managers were getting shelled this month, though at the same time were generally performing better than the S&P 500 and most were positioned to benefit from the subsequent rally.

--Republican presidential front-runner Donald Trump has a winning issue when it comes to hedge funds, whose managers, Trump said, are nothing more than “paper pushers” who were “getting away with murder” by not paying their fair share of taxes.

Appearing on CBS’ “Face the Nation” Sunday, Trump said, “They are energetic. They are very smart. But a lot them – they are paper-pushers. They make a fortune. They pay no tax. It’s ridiculous, ok?”

Trump is referring to the “carried interest loophole” – a provision in the tax code that allows private equity and hedge fund managers to pay taxes at the cap gains rate instead of the ordinary income rate.

The cap gains rate is only 20%, and even when you add an additional 3.8% surtax on their net investment income, it’s still far lower than the 39.6% rate most of them are paying on ordinary income.

Democratic Sen. Bernie Sanders has also been a major critic of the loophole. But, unlike Trump, most Republicans don’t talk about it.

--Oil rocketed 10% higher on Thursday, posting its biggest one-day rally in over six years, but this was off a 6 ½ year low. The rally was aided by news of drawdowns at Cushing, Oklahoma, and the revision in second quarter U.S. GDP helped.

Otherwise, it was short-covering.

--As reported by the BBC, North Sea oil revenues in the first three months of 2015 were down a whopping 75% on the previous quarter, according to the Scottish government. [Based on tax receipts.]

This is an important issue for those seeking Scottish independence. We’re talking receipts fell from about $1.14bn to $260m.

Ergo, as Scottish Conservative finance spokesman Murdo Fraser said, “Whichever way you look at it...there is just no way an independent Scotland could survive on this. We knew the price of oil was volatile and that this would be a risk. But to see such a radical drop is alarming.”

And that’s a memo. Sean Connery is here...Sean, what say you?

--Schlumberger, the world’s largest oil services group, agreed to buy energy equipment manufacturer Cameron International for $14.8bn. Schlumberger picks up a range of new technologies for use on both land and offshore drilling operations.

The offer represented about a 56% premium to Cameron’s most recent closing share price. But, it is below its peak set in August of 2014, before oil prices collapsed.

Cameron is the world’s largest manufacturer of blowout preventers, along with other valves and equipment.

I’m no expert in this field, but this deal makes eminent sense, allowing Schlumberger to serve its customers from “pore to pipeline,” as the Financial Times’ Ed Crooks and Neil Munshi put it.

--Best Buy reported earnings and revenues that handily exceeded the Street, with same-store sales up a solid 2.7% (3.9% in the U.S.). It would appear the decision to pull out of China was a super call.

The company’s solid domestic performance was a result of demand for TVs and higher prices for mobile phones, offsetting a decline in tablet devices.

Some companies you just like to see do well. For me this is one of them.   Others? CVS, Cisco Systems...actually, I was about to say McDonald’s, but I haven’t been there in ages. You know, there really aren’t that many I give a (hoot) about.

--But I do care about cloud software provider Workday Inc., a good friend being an executive there. The company reported a better-than-expected 51.4 percent jump in quarterly revenue, helped by strong growth in subscriptions to its web-based human resource management software. Subscription revenue rose 55.8 percent in the quarter ending July 31 from a year earlier. Overall revenue rose to $282.7 million, up from $186.8 million, which beat the Street’s expectations. The company reported an adjusted profit of 2 cents per share, also better than expected.

Yet the stock traded all over the place after the news was released, after hours, on Wednesday and the rest of the week as the company issued guidance that was ‘just’ in line with analysts’ expectations. [If I was on the analyst call I’d tell management, ‘Just kick Larry Ellison’s butt.’]

--As of week’s end, average U.S. gas prices were at the lowest levels for this time of year since 2004. As of Thursday, 90 cents lower.

--A rather big story in the local New York area is the bankruptcy of the Great Atlantic and Pacific Tea Company, which operates supermarket chains such as A&P, Pathmark and Superfresh.

According to mandated filings, more than 8,500 employees will be out of a job by Thanksgiving, though at least in some cases, chains such as ACME and Stop & Shop are acquiring a portion of the locations and you’d expect many to be rehired. That said, a vast majority of the 8,500 will hit the streets.

I like the employees at my local A&P where I do the bulk of my shopping and it’s been a tension convention lately. The knives are out. ACME is buying the store but not all of the 102 will survive. [Our Dr. Bortrum knows, however, that the world’s slowest checkout clerk was purged long ago.]

--Retailer Abercrombie & Fitch surprised the Street, reporting better than expected sales, though they were down 8% for the quarter. Profits beat as well and the shares surged as A&F bucked the trend to report “positive comparable sales” in Asia and Canada.

--According to the U.S. Department of Agriculture, U.S. farm incomes will decline 36% this year to the lowest level in nine years. The drop from $91.1 billion in 2014 to $58.3 billion, marks the largest percentage decline since 1983, and reflects the ongoing slump in crop prices and weakness in the dairy and hog markets. Farm incomes reached nominal highs in 2013.

Record corn and soybean crops in the past few years have hit prices hard. For example, the July 2012 drought high on wheat was $9.43 and it closed Thursday at $4.91, while the July 2012 high for corn was $7.93 and it was at $3.77 yesterday. Of course this is doing a number on sales of agricultural equipment, among other things.

I noted the other week that farmland prices have also been falling in much of the farm belt, down 7% in Iowa (7/1/14-7/1/15).

But another big concern for folks in Iowa and other states is a return of bird flu in the fall or next spring (fall would be because of migratory birds flying south for the winter, who then spread the flu through their droppings on chicken and turkey farms).

This past spring, 49.5 million turkeys and chickens were lost in the epidemic, wiping out 3% of the U.S. turkey population, and 10% of hens that lay eggs for human consumption, according to High Plains Journal.

Egg farmers lost $1 billion; turkey producers $530 million. One Iowa commercial farm lost 5.7m laying hens. [I did this research before going to Iowa.]

Iowa is also concerned about the China slowdown and devaluation. Iowa’s overall business with China nearly doubled to $1 billion from 2009 to 2014, with agriculture sales rising from $76.5 million in ’09 to $357 million in 2014.

Iowa has total exports of $4.6 billion to Canada and $2.3 billion to Mexico. [Des Moines Register]

--Speaking of commodities, the slide in prices has pummeled Brazil, with the country’s economy contracting 1.9 percent in the second quarter from the first three months of the year – the fastest pace of contraction since 2009, according to the government statistics agency. Year-over-year, economic activity was 2.6 percent below 2014 levels.

--A study from the Pacific Institute, a think tank, concluded that despite the drought, California farmers have been bringing in record-high revenue from crops such as almonds, pistachios and wine grapes.

But, this is at the expense of unsustainable over-pumping of groundwater.

Heather Cooley, the study’s lead author, said, “One of the reasons that agricultural revenues and employment are as strong as they are is because of groundwater overdraft. It can help insulate the agricultural sector from some of the short-term impacts, but it does create impacts and costs that are borne by others, both in current and future generations.”

NASA researchers recently found that ground in Kings County (Central Valley) has sunk 13 inches in eight months, damaging roads, bridges and canals which can also permanently reduce the water-storage capacity of the aquifer.

But back to the positive, almond and pistachio orchards have been able to take advantage of surging demand for nuts from China and other parts of Asia.

And the drought buster is coming this fall and winter, of this most everyone seems sure. [Ian James / The (Palm Springs) Desert Sun via USA TODAY]

--Meanwhile, Los Angeles residents cut their water use by 21% in July, surpassing the mandatory target set by state regulators; the second straight month Angelenos met it.

[Statewide the amount cut was 31% vs. a mandated 25%.]

--Tiffany’s fiscal second-quarter performance was pressured by the strong dollar, as the company reported earnings that fell short of expectations, while revenue fell slightly to $990.5 million from $992.9 million, also missing analysts’ forecasts.

Worldwide same-store sales fell 1%, but on a constant exchange rate basis rose 7%, with growth in Japan, Europe and the Asia-Pacific region; so not that bad in actuality.

But Tiffany now sees full-year earnings coming in 2% to 5% below last year’s when it previously forecast minimal growth.

Tourism is still a key for the company, which gets nearly one-quarter of U.S. sales form tourists, including 40% of sales at its flagship Manhattan store. Tiffany said foreign tourists from places like Europe and Japan spent less.

--Shares in Tesla Motors Inc. rose sharply on word its new battery-powered Model S, the P85D, earned a 103 out of a possible 100 in an evaluation by Consumer Reports magazine.

CR said the power and efficiency was so off-the-chart that the group had to recalibrate its ratings methods “to account for the car’s exceptionally strong performance,” according to a statement.

The Tesla sedan is the quickest Consumer Reports ever tested, accelerating from zero to 60 in 3.5 seconds, using the car’s “insane mode.” But CR did criticize the quality of its interior materials, as well as a ride that is firmer and louder than the base Model S. The starting price for a P85D is $105,000.

--Avid Life Media, the parent company of the Ashley Madison dating website, is offering a $500,000 reward for information on the hackers who released detailed records of up to 32 million users.

A superintendent for the Toronto police, where Avid is based, said, “This is affecting all of us. The social impact behind this leak, we’re talking about families, we’re talking about children, we are talking about wives, their male partners.”

Early in the week there were “unconfirmed” reports of two suicides associated to the leak. Several users have become the victims of blackmail.

Meanwhile, lawsuits are being filed against the company, claiming negligence, breach of contract and privacy violations. A large percentage of the email addresses are U.S. government and military ones. Not a lot of comfortable dinner conversations these days. 

Friday, it was announced the CEO of Avid Life Media is stepping down, a move that was “in the best interest of the company.”

--Molycorp Inc., the only U.S. producer of rare earths, announced it was mothballing its mine in California, laying off 500 workers, while continuing to produce at processing plants in Estonia and China.

Rare earths are used in products from cars to iPhones, but the market became way oversupplied and prices collapsed. Molycorp filed for Chapter 11 in June.

The U.S. has a stockpile of the metals and isn’t concerned, even though they are used in military electronics.

--Former Army Chief of Staff Gen. Ray Odierno is going to be a senior adviser to top executives at JPMorgan Chase & Co., including CEO Jamie Dimon.   Not a bad potential rainmaker, either, mused your editor.

“So, John, I encourage you to select JPM to be the lead on your IPO.”

“Yes, yes, General. Anything you say....And go ahead. Hike your fee.”

“I knew you’d come around, John,” replied the General, with a little curl of the lip, the four SEALS accompanying him then securing the hall for his exit.

Meanwhile, at the Four Seasons, Goldman Sachs CEO Lloyd Blankfein’s wife remarked to her friends, while eating the roasted cod with the spring vegetable ragout, “I told my Lloyd, hire Gen. Odierno! Don’t let Jamie get him. But he didn’t listen.”

[From my upcoming blockbuster, “(Unofficial) Wall Street Conversations”...The CEOs, their wives, the mistresses... and lots of menus that will have you drooling like Homer Simpson.]

Foreign Affairs

Iran: The Obama administration continues to gain the Democratic votes it needs to prevent Congress from blocking the Iran nuclear agreement. The president is nearing a veto-proof margin. Some Democrats are hoping there could be enough support to filibuster the resolution against the deal, which would mean Obama wouldn’t have to actually wield his veto pen.

Only two Senate Democrats, New York’s Charles Schumer and New Jersey’s Robert Menendez, have come out against the deal thus far with only a few left to decide.

To override a veto from the president, 67 senators and more than 290 members of the House would need to vote against. 

But if opponents of the deal in the Senate cannot secure 60 votes against the agreement, Democratic leaders can prevent the Senate from having a formal vote.

Meanwhile, Iran warned the U.N.’s International Atomic Energy Agency to “ensure full protection” of the confidential arrangements that some U.S. lawmakers are crying for details of. Iranian Ambassador Reza Najafi told reporters after an IAEA meeting in Vienna that his country refused to disclose any details concerning the agency’s inspectors and access to the Parchin military base where Tehran is alleged to have carried out nuclear trigger tests in the early 2000s.

Brent Scowcroft / Washington Post

“Congress again faces a momentous decision regarding U.S. policy toward the Middle East. The forthcoming vote on the nuclear deal between the P5+1 and Iran (known as the Joint Comprehensive Plan of Action, or JCPOA) will show the world whether the United States has the will and sense of responsibility to help stabilize the Middle East, or whether it will contribute to further turmoil, including the possible spread of nuclear weapons. Strong words perhaps, but clear language is helpful in the cacophony of today’s media.

“In my view, the JCPOA meets the key objective, shared by recent administrations of both parties, that Iran limit itself to a strictly civilian nuclear program with unprecedented verification and monitoring by the International Atomic Energy Agency and the U.N. Security Council. Iran has committed to never developing or acquiring a nuclear weapon; the deal ensures that this will be the case for at least 15 years and likely longer, unless Iran repudiates the inspection regime and its commitments under the Treaty on the Non-Proliferation of Nuclear Weapons and Additional Protocol....

“If the United States could have handed Iran a ‘take it or leave it’ agreement, the terms doubtless would have been more onerous on Iran. But negotiated agreements, the only ones that get signed in times of peace, are compromises by definition. It is what President Reagan did with the Soviet Union on arms control; it is what President Nixon did with China.”

Editorial / Wall Street Journal

“Foreign Secretary Philip Hammond on Sunday reopened Britain’s embassy in Tehran nearly four years after it was shuttered following a mob attack reminiscent of the 1979 assault of the U.S. Embassy. Accompanying Mr. Hammond were European business leaders eager to join the ayatollah gold rush – notwithstanding President Obama’s promise of ‘snap-back’ sanctions if Iran cheats on the nuclear deal.....

“In Tehran Mr. Hammond predicted a quick end to sanctions. ‘We could be talking as early as next spring to start to see sanctions lifting off,’ he told Reuters. ‘There is [a] very clear pitch here not to wait until then. There are things that can’t be done. Investments can’t be made, items can’t be imported or exported or whatever. But the business negotiation can start to take place well ahead of that.’

“As those negotiations intensify, so will the commercial and diplomatic pressure to remove sanctions – and keep them off. These business interests will become a powerful lobby against taking action if evidence is found that Iran is cheating. Iran, Europe and President Obama are trying to present Congress with a fait accompli even before it votes on the deal next month.”

[I said months ago that aside from Parchin, this is the worst part of the deal. Snapback sanctions? Right.]

Separately, Iran’s intelligence minister warned of plots by western spy agencies to undermine stability in the Islamic Republic.

Israeli Defense Minister Moshe Ya’alon countered he bore no responsibility “for the life expectancy of Iranian scientists,” strongly hinting Israel’s intelligence services were behind the rash of killings of Iranian nuclear scientists.

In an interview with German-language Der Spiegel, Ya’alon said:

“Ultimately it is very clear, one way or another, Iran’s military nuclear program must be stopped. We will act in any way and are not willing to tolerate a nuclear-armed Iran. We prefer that this be done by means of sanctions, but in the end, Israel should be able to defend itself.” [Jerusalem Post]

Iraq/ISIS/Syria: Islamic State militants were accused of using chemical weapons in an attack in Syria for the first time. The incident, according to opposition rebels and local residents, occurred near the city of Aleppo. One was killed, 10 wounded. Previously, the U.S. said ISIS had used mustard gas against Kurdish forces in Iraq.

The Syrian regime has been accused in recent months of launching chlorine gas attacks.

After beheading Palmyra’s chief archaeologist, ISIS destroyed the city’s ancient temple of Baalshamin, releasing video of it being blown up on Sunday. The U.K.-based Syrian Observatory for Human Rights reported the temple was destroyed a month ago. IS took control of Palmyra in May.

Editorial / Washington Post

“The destruction of Palmyra is a war crime. So is the Assad government’s indiscriminate deployment of ‘barrel bombs’ in civilian areas and its repeated use of chlorine gas – attacks that have accelerated the displacement of more than 11 million people, about half of Syria’s pre-war population, 4 million of whom have fled to other countries.

“Through it all, Western governments, led by the Obama administration, have shied away from any decisive action.”

An IS suicide bomber killed two Iraqi army generals on Thursday as they led forces against ISIS positions in Anbar province west of Baghdad. The bomber drove his vehicle into advancing troops, killing the two generals and three soldiers.

Government forces and allied Sunni and Shiite militiamen have made minimal progress against IS in Anbar over the past few months. Islamic State holds about one-third of Iraq following its blitz in the north and west in 2014.

Lebanon: The garbage crisis just gets worse and worse, piling up across Beirut and Mount Lebanon (above the city) as garbage truck drivers went on strike. It is an embarrassment the government, using the term loosely, can’t come up with a solution. Prime Minister Salam has threatened to resign. Lebanon hasn’t had a president in more than a year.

The heavily indebted government is also nearing a point where it will be unable to pay salaries.

Afghanistan: Two American service members were killed on Wednesday in an “insider” attack by an Afghan soldier at a base in southwestern Helmand province.

On Saturday, three civilian U.S. contractors were killed in a car-bomb attack in central Kabul. The three worked for McLean, Va.-based DynCorp International, which provides logistical and training support to coalition and Afghan forces. One of the three was a retired U.S. Army colonel.

China: The death toll in the Tianjin explosions has risen to 145, but the South China Morning Post has learned the Communist Party’s top leadership is infuriated with the Tianjin government’s attempts to downplay the toll, this as 11 senior officials and port executives have been detained for alleged negligence. Tianjin Port Group, which is responsible for the port’s operations, was accused of poor management and failing to rectify safety risks at Ruihai, the company that ran the facility that exploded.

17 firefighters remain missing, 63 of them confirmed dead.

Separately, the Pentagon issued a report that stated China has expanded seven of its eight outposts in the South China Sea (Spratly Islands), and as of this June, had reclaimed “more than 2,900 acres of land.” While others such as Vietnam and Malaysia have done this, “China has now reclaimed 17 times more land in 20 months than the other claimants combined over the past 40 years,” the report added.

As the islands become military outposts, it presents a serious challenge to the United States. As the Pentagon report said, it’s allowing China “to establish a more robust power projection presence into the South China Sea.”

China insists what they do should not concern anyone else.

Jerry Hendrix / Defense One

“China’s time to regain its position as a Great Power has nearly run out. Its dramatic economic slowdown, its rapidly aging population, and the quickening flight of capital by Communist Party elites all suggest that the jig is up and everyone in China’s ruling class knows it. President Xi Jinping’s attempts to fan the flames of nationalism by holding a parade celebrating China’s victory over Japan 70 years ago, a victory that the Chinese Communist Party, unlike the government on neighboring Taiwan, has no legitimate claim to.

“It’s time for the United States to puncture the balloon of Chinese arrogance. It should immediately dispatch an American warship, perhaps one of our advanced Aegis destroyers, to pass within 12 nautical miles of one or all of China’s man-made islands to demonstrate in an unambiguous fashion that they are not now, nor ever will be, sovereign Chinese territory....

“To be clear, rules of engagement should be issued to the ship’s commanding officers, but the strategic goal must be the defense of 400 years of legal precedent covering the free seas. To allow China to continue to expand its role and expectations in the South China Sea invites future conflict on a larger scale.”

North and South Korea: After marathon talks, North and South Korea reached an agreement to resolve the showdown between the two, with Pyongyang expressing regret for recent provocations, including a land mine attack that maimed two Southern soldiers.

Seoul, in turn, agreed to turn off the loudspeakers that had angered Pyongyang, which led it to declare a “quasi state of war.”

During the three days of talks, North Korea was moving troops and equipment to the border.

Later, Kim Jong un called the week’s accord “a landmark occasion” paving the way for defused military tension and improved ties, though he added it was the strength of North Korea’s armed forces that made the deal possible.

As reported by Reuters, “Kim noted the accord was reached ‘thanks to the tremendous military muscle with the nuclear deterrent for self-defense built by the great party as a pivot and matchless ranks single-mindedly united around the party,” Pyongyang’s KCNA news agency quoted Kim as saying on Friday in a meeting with military aides.

But now Pyongyang is fuming over the latest U.S.-South Korean war games, while KCNA announced late Friday that some generals were “dismissed.”

Russia: Defense One reports: “NATO is preparing to hold its most complex military drills in decades – perhaps since the Cold War – as it readies allied troops for a range of hybrid combat scenarios that they might face in coming years.

“Tens of thousands of troops, hundreds of aircraft, ships and submarines are expected to participate in the October-November exercises in and around Spain, Portugal and Italy....

“Called Trident Juncture 2015, the exercise will simulate many types of scenarios that have popped up over the past 13 years, including cyberattacks and ballistic missile defense.”

Charles Krauthammer / Washington Post

“Since the end of World War II, Russia has known that what stands in the way of westward expansion was not Europe, living happily in decadent repose, but the United States as guarantor of Western security. Obama’s naivete and ambivalence have put those guarantees in question.

“It began with the reset button, ostentatiously offered less than two months after Obama’s swearing-in. Followed six months later by the unilateral American cancellation of the missile shield the Poles and the Czechs had agreed to install on their territory. Again, lest Putin be upset.

“By 2012, a still clueless Obama mocked Mitt Romney for saying that Russia is ‘without question our No. 1 geopolitical foe,’ quipping oh so cleverly: ‘The 1980s are now calling to ask for their foreign policy back.’ After all, he explained, ‘the Cold War’s been over for 20 years.’

“Turned out it was 2015 calling. Obama’s own top officials have been retroactively vindicating Romney. Last month, Obama’s choice for chairman of the Joint Chiefs of Staff declared that ‘Russia presents the greatest threat to our national security.’ Two weeks ago, the retiring Army chief of staff, Raymond Odierno, called Russia our ‘most dangerous’ military threat. Obama’s own secretary of defense has gone one better: ‘Russia poses an existential threat to the United States.’

“Turns out the Cold War is not over either. Putin is intent on reviving it. Helped immensely by Obama’s epic misjudgment of Russian intentions, the balance of power has shifted – and America’s allies feel it.

“And not just the East Europeans. The president of Egypt, a country estranged from Russia for 40 years and our mainstay Arab ally in the Middle East, has twice visited Moscow within the last four months....

“Even Pakistan, a traditional Chinese ally and Russian adversary, is buying Mi-35 helicopters from Russia, which is building a natural gas pipeline between Karachi and Lahore.

“As John Kerry awaits his upcoming Nobel and Obama plans his presidential library (my suggestion: Havana), Putin is deciding how to best exploit the final 17 months of his Obama bonanza.

“The world sees it. Obama doesn’t.”

On a different issue, last week I mentioned the case of Ukrainian film director Oleg Sentsov who was being tried in a Russian military court for opposing the Kremlin’s seizure of Crimea last year. Sentsov was sentenced on Tuesday to 20 years in a high-security prison after the court found him guilty of masterminding a terrorist campaign.

Amnesty International said in a statement Wednesday that Sentsov’s trial was “patently unfair” and “marred by credible allegations of torture.”

Geoffrey Pyatt, the U.S. ambassador to Ukraine, described the proceeding as a “Russian farce.”

Ukrainian President Petro Poroshenko posted on his Facebook page: “A time will come when those who set this trial for you will land in the dock themselves,” urging Sentsov to “hang in there.”

Lastly, an announcement was made last week that due to budget cuts and the shrinking economy, police would no longer be posted at Russia’s museums, which has sparked concerns the cultural institutions won’t be able to afford to pay private security firms, and, as the Moscow Times noted, foreign museums could stop lending their national treasures to Russia.

For example, policemen currently guard 135 museums in Moscow alone, Izvestia reported.

This sucks. Private security guards in Russia are worthless and the good ones, employed by the likes of Gazprom and Rosneft, charge huge amounts that museums won’t be able to afford.

So get ready for all kinds of stories of break-ins (strong-arm style).

Ukraine: The Kiev government received a major boost as Ukraine and its international creditors reached a deal that will restore the country to a path of “debt sustainability.” The government and a committee of international investors, including Franklin Templeton, reached a debt restructuring deal as the recession-ravaged country seeks to fulfill the terms of its IMF bailout by lowering its debt costs.

Pakistan: A report by the Carnegie Endowment for International Peace and the Stimson Center concludes that Pakistan is rapidly expanding its nuclear force due to fear of its archrival, India, and the former is now far outpacing the latter in the development of warheads.

Analysts estimate Pakistan has about 120 nuclear warheads and India 100. The report concludes Pakistan could have at least 350 nuclear weapons within five to 10 years, which would leave it third behind the U.S. and Russia. 

France has about 300 and the U.K. around 215, according to the Federation of American Scientists. China has around 250. [Tim Craig / Washington Post]

Boy, doesn’t this give you a warm and fuzzy feeling?

France: No doubt the nation is on edge and French security forces are warning of civil unrest and fear there could be a missile strike on a passenger airliner or a September 11-style attack, as reported by the Daily Telegraph.

A source close to French intelligence told the paper, “Airlines have been warned of a possible attack on a plane with an anti-tank missile. But pilots are unsure how to take evasive action.”

The French army has made contingency plans for the “re-appropriation of national territory,” meaning the winning back of neighborhoods where the population has become hostile to authority and where guns are readily available.

“There are a lot of alienated and angry fourth-generation immigrant kids in the suburbs and the prospect of radicalization is increasingly likely,” the source said.

“The idea that attacks like the one on the train are carried out by individuals acting on their own is not credible.

“We’re dealing with highly organized networks of militant Islamists embarked on a campaign of violence and determined to intensify it.”

Many of the weapons are apparently coming into France from Libya, with organized crime and terrorist groups working together to procure them.

In 2011, France admitted to sending “light weapons” to Libyan rebels but French media reported that consignments of heavier arms, including anti-tank missiles, were also sent. The government doesn’t know where the weapons are now.

France has said its main intelligence agency is essentially powerless to improve surveillance of Islamist militants and it has been “lucky” to have avoided far worse catastrophes than the January attacks in Paris that killed 17.

Random Musings

--Donald Trump continues to dominate the Republican polls.

In a new Quinnipiac University National survey released Thursday, Trump leads the Republican field with 28%, up from 20% in a July 30 poll, the highest tally for any Republican thus far. Ben Carson was way back in second at 12%, while Jeb Bush, Marco Rubio and Ted Cruz were all at just 7%.

Hillary Clinton leads the Democratic field with 45%, down from 55% July 30, with Bernie Sanders at 22% and Joe Biden at 18%.

But among all voters, Biden tops Trump 48-40, Bush 45-39 and Rubio 44-41.

Clinton though only edges Trump 45-41, Bush 42-40, and Rubio 44-43; all of this further ammunition for Biden.

And by a 61-34 margin, voters say Clinton is not honest and trustworthy, her lowest score ever.

In a Public Policy Polling survey of New Hampshire Republicans, Trump received 35%, followed by John Kasich (11%) and Carly Fiorina (10%). Bush and Scott Walker each had 7%.

On the Democratic side, Bernie Sanders is leading Hillary Clinton 42% to 35%.

In South Carolina, a Monmouth University Poll of Republican primary voters has Trump receiving 30%, followed by Carson at 15%. Then it’s Bush (9%), Rubio (6%) and Fiorina (6%). Embarrassingly, South Carolina Sen. Lindsey Graham picks up just 4% of home-state voters.

Carson, by the way, has the best favorable/unfavorable split at 72-9. [Graham has a 35% favorable, 50% unfavorable.]

In Iowa, a Suffolk University Poll of Democratic caucus-goers finds Clinton holding a 54-20 advantage over Bernie Sanders, with Joe Biden at 11%.

--Hillary Clinton, speaking to a group in Cleveland on Thursday:

“Extreme views about women? We expect that from some of the terrorist groups. We expect that from people who don’t want to live in the modern world. But it’s a little hard to take coming from Republicans who want to be the president of the United States.”

Needless to say this drew a rebuke from the Republican National Committee, which said Clinton should apologize for “inflammatory rhetoric” and that “to equate her political opponents to terrorists is a new low for her flailing campaign.”

--GOP pollster Frank Luntz said it is now “totally conceivable” that Trump will become the Republican Party’s nominee.

“The Republican leadership needs to wake up and see that the grass roots has abandoned them,” Luntz said.

“This is a different cat,” he added. “It’s not like Ross Perot in 1992, where people were simply unhappy with the two major parties; they’re choosing Trump affirmatively. Honestly, my legs are shaking looking at these numbers. All those people who think he’s going to implode are wrong. He’s not going away.” [Claude Brodesser-Akner / NJ.com]

--Trump gained press for his treatment of Univision journalist Jorge Ramos at an Iowa event, at first kicking him out of a press conference. When you watch the tape, one thing is clear. Ramos was the prime jerk in this episode. A jerk and totally unprofessional.

--As for Joe Biden, he met with Massachusetts Sen. Elizabeth Warren, darling of the Democratic left, last weekend, and has been holding court with major Democratic advisers and fund-raisers.

Editorial / Wall Street Journal

“White House spokesman Josh Earnest added to the intrigue when he volunteered to reporters on Monday that President Obama thinks his decision to choose Mr. Biden as his running mate was ‘the smartest decision he’s ever made in politics.’ Mr. Earnest is a careful man who wouldn’t say this without clear presidential authorization.

“ ‘The Vice President is somebody who has already run for President twice,’ Mr. Earnest added. ‘So I think you could make the case that there is probably no one in American politics today who has a better understanding of exactly what is required to mount a successful national presidential campaign.’....

“The President is enough of a cold-blooded politician to know that a considerable part of his legacy will depend on whether a Democrat succeeds him in the Oval Office. Above personal feelings, he wants a Democratic nominee who can win in 2016.

“Mr. Biden ran for President in 1988 and 2008 and lost, so why would he be a better candidate now?....

“Which leads us to wonder what Mr. Biden and Mr. Obama know about Mrs. Clinton’s mishandling of classified information on her personal email server while running the State Department. The FBI is now investigating, and it’s hard to believe the White House wouldn’t have some inkling about the seriousness of that probe.

“The FBI pressed investigations that forced two CIA directors, David Petraeus and John Deutch, into pleading guilty to misdemeanors for lesser violations than Mrs. Clinton appears to have committed. FBI Director James Comey and Attorney General Loretta Lynch would be hard-pressed to block an FBI recommendation that sought a misdemeanor plea bargain if it were rooted in solid evidence and consistent enforcement under the law. Such a plea would be devastating to Mrs. Clinton’s credibility even if it didn’t end her campaign.

“All of which is to say that the possibility of a third Joe Biden candidacy is looking more appealing than we ever imagined.”

--Edward Luce / Financial Times...on the Republican race and past flavor of the month poll leaders like Michele Bachmann and Herman Cain.

“Why should this time be any different? Because it already is. Mr. Trump has now consistently topped the polls for several weeks. When people are restless for a new flavor, they do not linger for so long on one. Nor can Trumpmania be attributed to people not paying attention. Quite the opposite: they are gripped....

“Political veterans say some event will occur to bring Mr. Trump’s meteor down to earth. It will have to be something special. Every time he makes a gaffe his numbers seem to improve. Whether he is making derogatory remarks about fellow Republicans, Hispanics, popular female television anchors, or women in general, that bird has flown. In spite of his three marriages and a tendency to talk about women as sex objects, he polls well with Christian conservatives. Mr. Trump’s popularity is based in part on his willing obnoxiousness. His brand subverts all laws of campaign propriety. It is hard to think of what he could say, or do, that would undermine that.

“All of which is confusing. Washington pundits are a bit like those dazed cops in Basic Instinct watching Sharon Stone light up a cigarette. What are we going to do? Arrest him?

“That brings us to the final line of defense – the brokered convention. With 17 candidates competing and none, other than Mr. Trump, having yet sustained a lead, the chances were already tilting towards one....

“Let us suppose Mr. Trump wins a quarter of the delegates in the primaries and the remaining three-quarters are distributed between Jeb Bush, Scott Walker, Marco Rubio – and perhaps Ted Cruz and John Kasich.

“Add them all up and Mr. Trump could easily be ejected. But that supposes the rest have coalesced around one standard bearer....The establishment can only prevail if it agrees.

“Let us suppose it does and Mr. Bush emerges from a bitter few days of horse-trading as the Republican nominee. What will Mr. Trump do then? Admit that the game is up after a fair fight? Or enter the field as a third-party candidate? My money would be on the latter.

“There would be all sorts of technical difficulties in putting his name on the ballot at that late stage. But cash goes a long way and Mr. Trump has plenty.

“More to the point, he has ego....Mr. Trump has always been about Mr. Trump. If he made it to a brokered convention he would not stop there.”

--George Will / Washington Post

“It has come to this: The GOP, formerly the party of Lincoln and ostensibly the party of liberty and limited government, is being defined by clamors for a mass roundup and deportation of millions of human beings. To will an end is to will the means for the end, so the Republican clamors are also for the requisite expansion of government’s size and coercive powers.

“Most of Donald Trump’s normally loquacious rivals are swaggeringly eager to confront Vladimir Putin but are too invertebrate – Lindsey Graham is an honorable exception – to voice robust disgust with Trump and the spirit of, the police measures necessary for and the cruelties that would accompany his policy. The policy is: ‘They’ve got to go.’

“ ‘They,’ the approximately 11.3 million illegal immigrants (down from 12.2 million in 2007), have these attributes: Eighty-eight percent have been here at least five years. Of the 62 percent who have been here at least 10 years, about 45 percent own their own homes. About half have children who were born here and hence are citizens. Dara Lind of Vox reports that at least 4.5 million children who are citizens have at least one parent who is an illegal immigrant....

“About 900,000 of America’s Hispanic citizens reach voting age each year. In 2012, less than half of eligible Hispanics voted, but Republicans have figured out how to increase Hispanic turnout.

“A substantial majority of Americans – majorities in all states – and, in some polls, a narrow majority of Republicans favor a path for illegal immigrants not just to legal status but to citizenship. Less than 20 percent of Americans favor comprehensive deportation....

“If, after November 2016, there are autopsies of Republican presidential hopes, political coroners will stress the immigration-related rhetoric of August 2015. And of course October 1884.

“Then, the Republican presidential nominee, former senator James G. Blaine, returning home to Maine in the campaign’s closing days, attended a New York rally on his behalf, where a prominent Protestant clergyman said Democrats were a party of ‘rum, Romanism and rebellion.’ Catholics, many of them immigrants, noticed. Blaine lost New York, and with it the presidency, by 1,200 votes out of more than 1 million cast.”

--So I got a kick out of the recent brouhaha over the use of the term “anchor babies.” Ah, folks? This is more than a legitimate issue and Jeb Bush, in his incompetence, stumbled on the right description when he said, under fire, “Frankly, it’s more related to Asian people.”

I wrote about it! WIR, 3/7/15...to wit...

“Lastly, U.S. federal agents targeted ‘maternity tourism’ schemes in which pregnant Chinese women travel to the United States, usually on tourist visas, so that their children will be born U.S. citizens, as reported by the Los Angeles Times’ Victoria Kim and Frank Shyong.

“This should tick off every American to no end.

“ ‘Efforts to outlaw or regulate the practice have so far been unsuccessful. A bill in the 2013 Congress to limit birthright citizenship to babies with at least one American parent was never voted on.’

“The purpose is to enable the children to apply to U.S. colleges, as well as make it easier for the parents to then immigrate here.”

--Editorial / Washington Post

“Reports of dangerous drone encounters are multiplying. Aircraft crews, security officials and others say they’ve seen many small, unmanned and unmarked aerial vehicles where they do not belong: over airports, 12,000 feet aloft near a JetBlue airliner, above the White House grounds. The military scrambled fighter jets last week after a Cessna pilot spotted a drone in restricted airspace over Washington. Pilots have reported 700 close encounters with drones to the Federal Aviation Administration so far this year, already tripling last year’s total. Some of these reported drones turn out to be something else, such as birds. But the increasing number of stories about small flying objects that could mangle a jet engine intake, disrupt a propeller or smash a windshield is still scary.

--James Holmes was sentenced to 3,318 years in prison for murdering 12 people and wounding 70 in the Aurora, Colorado movie massacre.

--But from the worst of humanity, including Roanoke, to the best. Details on the heroism of three young Americans – Spencer Stone, Alek Skarlatos and Anthony Sadler – didn’t come in until after I posted last time and so we note their quick actions in averting a probable bloodbath on a Paris-bound train. They represented the best of America and earned the plaudits of the French government and people.

--Lastly, I spent most of last Saturday at the Iowa State Fair and saw Chris Christie at the soapbox. It’s funny. I have not been a supporter of his but in all honesty he was tremendous. He came out, said he didn’t want to use his 20 minutes for a speech and instead just took questions. He answered each one fully and to the large crowd’s satisfaction and it was a reminder; this is why we have long campaigns rather than Euro-type snap elections. It takes a while to get to know the candidates.

I later saw Christie on the grand concourse and introduced myself and shook his hand, telling him he did well, and later followed Iowa Gov. Branstad and my governor around for a while.

Prior to Christie’s speech, I chatted up Amy G., who served in the military and had a Bernie Sanders shirt on. She was like so many others at the fair...tired of classic politicians and just wanting something different.

And I gotta tell ya...most of the folks I talked to at the bar liked Trump. Maybe they weren’t going to vote for him come caucus time, but the support is real.

Bottom line the Iowa State Fair never fails to entertain and inform. I do wish, however, they would have some kind of screening for bags when you go in. It is one giant, symbolic target.

---

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

We pray for the friends and families of Alison Parker and Adam Ward.

God bless America.
---

Gold closed at $1134
Oil $45.22

Returns for the week 8/24-8/28

Dow Jones +1.1% [16643]
S&P 500 +0.9% [1988]
S&P MidCap +0.2%
Russell 2000 +0.5%
Nasdaq +2.6% [4828]

Returns for the period 1/1/15-8/28/15

Dow Jones -6.6%
S&P 500 -3.4%
S&P MidCap -1.8%
Russell 2000 -3.5%
Nasdaq +2.0%

Bulls 31.6
Bears 22.5 [Source: Investors Intelligence...lowest percentage of bulls since summer 2010, which marked a cycle low. 9/3/10, 29.4% bulls, S&P 500 was at 1104. On 2/18/11, the S&P hit 1343. That’s how this contrarian indicator is supposed to work. It comes out before the market opens Wed., and look what happened the rest of this week.]

Thank you for your support. Click on the gofundme link above if you have not already done so, or you can send a check to PO Box 990, New Providence, NJ 07974.

I can’t follow through with my expansion plans without your help.

Brian Trumbore



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Week in Review

08/29/2015

For the week 8/24-8/28

[Posted 11:00 PM ET, Friday]

Edition 855

Washington and Wall Street

Another crazy week, to say the least, with the Dow Jones opening Monday morning down 1,090 points in the first ten minutes of trading on the heels of China’s “Black Monday,” with the Shanghai Composite having plunged 8.5%.

But then the Dow recovered virtually all of the loss later Monday, only to tumble anew and end the day down 588 points, followed by another roller-coaster ride Tuesday, the Dow losing 204 points.

Then we had stupendous rallies of 619 and 369 points, Wednesday and Thursday, before things finally calmed down on Friday.

For the week the Dow ended up gaining 1.1%, the S&P 500 0.9% and Nasdaq 2.6%.

Nonetheless, all three were solidly in correction territory after Tuesday:

Dow -14.4%
S&P 500 -12.3%
Nasdaq -13.6%

So what did it all mean? Well I address China’s volatility and economic performance below, but what we do know is that the fundamentals for the U.S. economy continue to be solid. And what does that mean for the Federal Reserve and the path of interest rates when the Open Market Committee next meets on Sept. 16-17?

Thursday saw the first revision to second-quarter GDP, initially pegged at 2.3%, and while everyone expected it to be adjusted upward, few would have said 3.7%. Consumption, business spending, you name it, was up smartly.

Coupled with more good news on the housing front, with July new-home sales +5.4%, as well as a solid July durable goods report, +2.0%, with non-defense capital spending +2.2%, and respectable figures for July personal income (0.4%) and consumption (0.3%), and you’d have to concur the Fed will finally raise interest rates in September, wouldn’t you?

Ah, but that global volatility shook up many inside the Fed, including William Dudley, head of the New York branch, who told an audience this week that recent financial turmoil had made the case for an interest-rate increase next month “less compelling,” though it was “important not to overreact to short term market developments.”

“I really do hope we can raise interest rates this year... But let’s see how the data unfold before we make statements about when that might occur.”

That data will include next Friday’s jobs report for August and if it’s another strong one and global markets have continued to stabilize, it’s going to be awfully difficult for the Fed not to hike in September.

Oh, you have the argument that the Fed wants to see more inflation than there currently is before its comfortable raising rates, but they’ve also said they just need to be convinced prices will eventually rise, not fall.

Dudley, in looking at the big picture, noted, “What we’re seeing is not a U.S. problem. This is very different to the financial crisis. The financial crisis was very much about us. This isn’t about us.”

U.S. GDP (seasonally adjusted at annual rates)

2014

Q1 -0.9%
Q2 4.6%
Q3 4.3%
Q4 2.1%

2015

Q1 0.6%
Q2 3.7%

So another strong Q2 vs. Q1, a la 2014, but the Atlanta Fed’s GDPNow indicator currently pegs Q3 GDP at just 1.2%.

Back to the volatility in the markets, Monday morning exposed some of the flaws in today’s trading products such as exchange-traded funds. As the Wall Street Journal reported:

“Dozens of ETFs traded at sharp discounts to their net asset value – or their components’ worth – leading to outsize losses for investors who entered sell orders at the depth of the panic....

“For example, the $2.5 billion Vanguard Consumer Staples Index ETF and the $5.8 billion Vanguard Health Care Index ETF both plunged 32% within the opening minutes of trading....

“The declines in these and other ETFs were notable in that they exceeded the declines in the prices of their underlying holdings. In the case of the Vanguard Consumer Staples ETF, the value of the underlying holdings in the fund fell only 9%, according to FactSet....

“When the market sold off in the first six minutes of trading, many stocks were halted after triggering circuit breakers, including stocks that are included in popular exchange-traded funds.

“Because this happened so quickly, many ETF market makers, or the broker-dealers who buy and sell those products, were unable to accurately calculate the value of the underlying holdings or properly hedge their trades. That caused them to lowball their buy offers and overprice their sell orders to ensure they didn’t take on too much risk. This sent ETF market values tumbling, too, and caused disruptions in the trading of other assets.”

Look at some of Monday’s prices in the first ten minutes.

Apple...$92...closed the day at $103 (even with Dow down 588)
Disney...$90...closed at $95
McDonald’s...$87.50...closed at $92.40
Twitter...$21...closed at $25.15

Bottom line, the little guy likely got screwed.

Opinion...various topics...

Martin Feldstein / Wall Street Journal

“The unfolding stock-market collapse...is the inevitable result of the Federal Reserve’s policies, namely quantitative easing that produced abnormally low interest rates. The decline on Wall Street has spread to every stock market on the globe, many of which were also weakened by their own policies of excessively easy money.

“When the Obama administration’s poorly designed 2009 stimulus legislation failed to produce a strong economic turnaround, then-Fed Chairman Ben Bernanke announced that the central bank would pursue an ‘unconventional monetary policy’ by purchasing immense amounts of long-term bonds and promising to hold short-term interest rates near zero for an extended period.

“Mr. Bernanke explained that the Fed’s policy was designed to drive down long-term interest rates, inducing portfolio investors to shift from bonds to stocks. This ‘portfolio substitution’ strategy, as he labeled it, would increase share prices, raising household wealth and therefore consumer spending.

“The Fed’s strategy worked, causing household net worth to increase by $10 trillion in 2013....

“(But markets became mispriced and the) market decline will no doubt lead some members of the Fed’s Open Market Committee to argue against beginning the rise in short-term rates in September. But postponing a 25-basis-point rise from September to December or even March would not have any significant effect on aggregate demand and employment.

“Market participants know that the economy is now essentially at full employment, that the consumer-price index is close to 2% and that there is little risk of deflation. They know therefore that interest rates must rise, and that a return to normal levels will reverse the mispricing of assets. The Fed cannot hide that realization by postponing rate hikes for a few months. And so the Fed should get on with the task of normalizing rates, particularly so that investors and lenders are no longer tempted to sink deeper into mispriced assets....

“It’s time to escape the unprecedented monetary policy that for a while stimulated demand – but then distorted prices and brought about the current corrections.”

Lawrence Summers / Washington Post

“There can be no question that tightening policy will adversely affect levels of employment as higher interest rates make holding onto cash more attractive relative to investing. Higher interest rates also will increase the value of the dollar, making U.S. producers less competitive and pressuring the economies of our trading partners. This is especially troubling at a time of rising inequality. Studies of periods of tight labor markets such as the 1960s and the late 1990s make clear that the best social program for disadvantaged workers is an economy where employers are struggling to fill vacancies.

“There may well have been a financial-stability case for raising rates 6 months or 9 months ago, as low interest rates were encouraging investors to take on risk and businesses to borrow money and engage in financial engineering. Even at that time, I believed that the economic costs of a rate increase exceeded the financial-stability benefits, but there were grounds for concern about the medium-term impact of low rates on financial stability. That debate is now moot. With credit spreads significantly increasing, the Chinese outlook clouded at best, emerging markets submerging, the U.S. stock market in a correction, widespread concerns about liquidity and expected volatility having increased at a near record rate, markets are self-correcting any euphoria or over confidence; the Fed does not have to do the job....

“New conditions require new policies. There is much that should be done, like major steps to promote both public and private investment, to raise the level of real interest rates consistent with full employment. But until and unless these new polices are implemented, inflation sharply accelerates or euphoria in markets breaks out, there is no case for the Fed to adjust policy interest rates.”

Robert Samuelson / Washington Post

“First was the dot-com bubble, then the housing bubble. Now comes the commodities bubble. We don’t fully understand the stock market’s current turmoil, but we know it’s driven at least in part by a bubble of raw material prices. Their collapse weighs on world stock markets through fears of slower economic growth and large financial losses.

“All bubbles share similar characteristics. There’s a strong, enthusiastic demand for some object (whether stocks, homes, oil or tulips). High demand pushes up prices, which inspires more demand. Prices ultimately reach unsustainable levels so that when spending slows, the bubble implodes. Commodities have now traced this familiar path.

“As the Economist reminds us, raw material prices respond to different influences. Weather affects crops; technology (a.k.a. ‘fracking’) affects oil recovery. Still, despite these variations, prices of many commodities – not just oil – have followed roughly similar trajectories in recent years. They have dropped steeply, according to figures from the International Monetary Fund.

“Here are declines for five commodities from 2012 through July 1015: oil, down 48 percent; iron ore, 60 percent; copper, 31 percent; palm oil, 39 percent; and wheat, 37 percent. Many commodity prices have continued to fall.

“The bubble formed on hopes that China’s rapid growth would feed an ever-expanding appetite for raw materials... Demand and prices would remain high indefinitely.”

But then China’s growth rate went from 10% to 7%, and probably lower. So now everyone has to adjust to a new level of demand.

“Over-optimism about China caused unneeded investments to be made. It will be harder for commodity exporters to generate jobs for their workers. There are other dangers. The most obvious is that low prices will result in loan defaults or bankruptcies by commodity producers that weaken financial institutions.

“The commodities bust has exposed these problems, not solved them. But unlike the dot-com and housing bubbles, whose effects were mostly negative, the commodities bust has a silver lining: Lower prices, especially lower gasoline prices, may strengthen consumer spending....

“Still, this optimism comes with a caveat. If today’s low commodity prices mainly reflect a surplus of production capacity – oil perhaps being an example – the surplus will need to be gradually worked off. But if the low prices also reflect feeble demand, then the economy may be weaker than we thought.”

Oil touched $37.75 Monday morning, before staging a sharp rebound later in the week. But the Friday close of $45.22 still places it below the July 31 mark of $47.12.

Lastly, Congress is away one more week. Fun and games when they return, including the Iran nuclear agreement to deal with (addressed below). Otherwise, I’ll take a final break myself until next WIR. The budget process is going to be a mess.

Europe and Asia

It is clear the drama in Greece is entering a new chapter as the people will go to the polls, again, in three weeks’ time to attempt to come up with yet another government. The head of the country’s Supreme Court, Vassiliki Thanou Christopoulou has been named caretaker prime minister, the first female to hold the office, with the task of keeping things stable until the vote Sept. 20.

As expected, when outgoing Prime Minister Alexis Tsipras resigned last week as part of his plan to trigger a snap election, the parties who controlled the most seats behind Tsipras’ Syriza party were given the chance to form a new government and none of them could do so since the others didn’t want to include Syriza.

Tsipras said in his last interview before turning over power that he hoped to achieve a slim majority of 151 MPs in the country’s 300-seat parliament, but he won’t remain prime minister if he has to cooperate with the old political parties.

The thing is, Tsipras is popular among the Greek people, with approval ratings consistently over 50 percent, but 25 of Syriza’s 149 members formed a new party last week, torqued off that Tsipras agreed to another austerity-heavy bailout with Greece’s creditors.

Another faction, the Group of 53, is considering whether to stand aside in the electoral battle.

So in a poll released Friday by ProRata and published in a Greek paper, Syriza is the top vote getter, but with just 23 percent, with conservative New Democracy second with 19.5 percent. A previous ProRata poll in July had Syriza at 26 percent and New Democracy at 15 percent. [Popular Unity, by the way, polled just 3.5 percent, while the Independent Greeks, who were part of the Tsipras coalition, scored just 2 percent. You need 3 to gain seats.]

64 percent of Greeks believe Tsipras’ move to call snap elections was wrong, though 68 percent agree that Greece must stay in the eurozone at any cost. And one third of those who supported Tsipras’ party in the January 2015 elections that brought him into office said they were unsure if they will do so again.

I don’t know...seems like election chaos to me.

The European Central Bank’s next meeting and press conference is Sept. 3 and some are wondering if it will adjust its 1trillion euro quantitative easing program. Barclays says in a note:

“Since the last policy meeting in July, there have been several macroeconomic and financial factors that have reduced the near- and medium-term inflation outlook and tightened overall financial conditions.    The ECB staff macroeconomic projections are likely to show a downward revision in inflation forecasts for both 2015 and 2016, resulting from a stronger euro and weaker oil price futures. Therefore, we expect President (Mario) Draghi to maintain an accommodative stance during his introductory statement, likely insisting that the Governing Council still has tools available should monetary and financial conditions tighten further.

“We now expect further easing to be announced before year-end as we believe inflation is unlikely to return to levels consistent with the ECB’s objective of price stability over the next two years. A time extension of the asset purchase program to beyond September 2016 is the most likely option, in our view, and we think it could be decided as early as next week.”

Goldman Sachs believes:

“We expect no change in the ECB’s monetary policy stance...but we expect Mr. Draghi to strike a dovish tone... This will be owed to mounting external risks and may take the form – either in the prepared statement or from Mr. Draghi during the press conference – of a clear signal that the Governing Council stands ready to expand the policy stimulus to counter an ‘unwarranted’ tightening in financial conditions or a downward revision of the inflation outlook.

“That said, we do not think that Mr. Draghi will be very specific in terms of what any potential new easing measures from the ECB would look like.” [Katie Martin / Financial Times]

Europe is concerned with the goings on in China because the eurozone is far more dependent on China than, say, the United States, where exports to China make up just one percent of our GDP. In Germany, for example, the percentage is far higher, 2.6%, but far less so in France.

There was little raw data this week, with Germany reporting its consumer price index for August was unchanged and up just 0.2% year over year. At least it escaped outright deflation.

Spain reported strong July retail sales, 4.1% yoy, much better than expected. But a preliminary reading on inflation for August had it -0.4%.

In non-euro U.K., a second reading on second-quarter GDP confirmed the first estimate, 0.7%, with net trade, business investment and household spending all strong. The Bank of England is still looking at 2.8% growth in 2015, after 3.0% last year.

But before we move on to Asia, a word about the migration crisis in Europe. Friday, 250 bodies were picked up from a capsized boat off Libya (200 saved), while in Austria, the death toll from a freezer truck full of migrants that apparently crossed in from Hungary reached 70 in a horrific crime that has sickened everyone on the continent.

This is the biggest refugee crisis to hit Europe since World War II and I’ve been warning for literally years that it has the potential to change things politically in dramatic ways. No one wants these people, mostly from the likes of North Africa, Syria, Eritrea, Iraq and Afghanistan; many reportedly fleeing ISIS.

Macedonia reopened its border with Greece the other day and thousands from Greece then went through Macedonia and on into the likes of Hungary (if they can get in, Hungary having just constructed a razor-wire fence to block refugees). Eventually the goal is to work their way to Germany, where 800,000 are projected to attempt to gain asylum this year, a full one percent of the German population. [Others, coming up through Italy, think they can get into Britain.]

Police in Germany reported a school sports hall intended as a temporary shelter for asylum seekers had burned down in a suspected arson attack. Far-right protesters had been demonstrating against their presence in the area.

German Chancellor Angela Merkel has described the behavior of such activists as “abhorrent” and “shameful,” but this is just the beginning.

Germans say they are horrified by the attacks but wait ‘til they try to settle in their neighborhoods. For starters, you don’t know if any of them are terrorists. Just how many have been melding into the great migration is unknown.

The issue threatens the very idea of the European Union. The likes of Merkel and French President Hollande are calling for a more equal distribution of asylum seekers across the EU, but many countries simply don’t want them, first and foremost because their resources are already stretched to the max, which is the case in Greece and Macedonia, for starters, let alone poor Italy.

I’ve said this before but I wish everyone in the U.S., for example, could just take the train from Charles de Gaulle Airport outside Paris into the heart of the city (getting off at Notre Dame cathedral) and seeing all the changing neighborhoods and the awful ‘suburbs’...some of them lawless ghettos. It’s this kind of change that is scaring the crap out of many traditional French, who then flock to far-right parties like the National Front.

But I’d be a total hypocrite if I didn’t say I don’t blame them. As I note further below, French authorities are basically helpless...totally overwhelmed.

Leaders like Angela Merkel can decry the fascist tendencies that seem to be returning in some towns and cities in Germany, but things are happening so quickly. What was a trickle when I first started addressing this topic (Turks in Germany), is a full-blown tsunami.

And who deserves a lot of the blame? President Barack Obama.  If you don’t understand why, think back to the summer of 2012, when I was a lonely voice pleading with Obama to cooperate with the Turks on a no-fly zone in Syria. That would have largely stemmed the flow of refugees from that country cold, and certainly impeded the development of ISIS in hindsight. It’s the truth. But you won’t find this statement anywhere else.

On to China, I nailed this one.

WIR 6/6/12

As for the Shanghai Composite stock index, after a 6.5% swoon on May 28, it has recovered and then some to finish above 5000, a 7-year high, despite some clampdowns on margin trading. This is going to end badly.

WIR 6/20/12

Turning to Asia, China’s Shanghai Composite benchmark index suffered its worst weekly loss, 13.3%, since June 2008. The market has been in a bubble, pure and simple. I’ve written a number of times it will end badly and there is far more damage to come, though I’m not saying it’s straight down further from here. 

But this economy is headed into the crapper, equaling the color of its waterways and skies, and that will be very dangerous for the world as President Xi feels compelled to play the nationalism card.

I wouldn’t change a word of the above, especially the last sentence.

China matters for the simple reason it has contributed to half the world’s growth in recent years. But as the market has been collapsing in recent weeks, the government’s “National Team,” consisting of government agencies, state-backed companies and selected stockbrokers, was buying anywhere from $200bn to $300bn in stock trying to prop up the market but to no avail. Investors were forced to sell to cover their margin debt. The government was selling Treasuries to support the yuan.

China has also run through $315bn in foreign exchange reserves in 12 months, a pace it can’t continue.

Then the People’s Bank of China (PBoC) cut its benchmark lending rate a fifth time since November and once again lowered the reserve requirement (level of cash commercial banks must park with the PBoC).

But nothing was working and by midweek the Shanghai Composite was at 2927, off 43% from its June 12 closing high of 5166, and down 22% in four days, before staging rallies of 5.3% and 4.8% Thursday and Friday to end the week at 3232, still off 7.8% for the five days. The “National Team’s” buying was apparently responsible for the rally that many feel was engineered because of an upcoming military parade to celebrate the 70th anniversary of the end of World War II.

Immediately after the latest market collapse, Beijing, though, was looking for scapegoats, with five of the country’s largest brokerages placed under investigation by the securities regulator and police. Even a respected business magazine, Caijing, had one of its journalists placed under arrest.

But at the same time, the government has come under fire for implicitly encouraging the bull run that stoked the bubble before the crash. As reported by Philip Wen of the Sydney Morning Herald, there were concerns the government-backed agency tasked with buying shares to support the market – the China Securities Fund – “had backfired and in fact allowed insider trading and front-running to flourish.

“ ‘To start, the regulator should not have tried to get the stock index to go up,’ Caixin, an influential business magazine – and a rival of Caijing – said in a sharp editorial on Wednesday; direct criticism of government policy and wisdom in China’s state-controlled media is rare.

“ ‘Also, the CSF seemed to have picked stocks randomly, pouring capital into valuable and worthless companies indiscriminately. Critics have questioned the wisdom of these actions, and some voiced concerns about insider trading.’”

China’s Premier Li Keqiang said global economic conditions are bewildering, creating volatility in global markets, but that there was no basis for the continued depreciation in the yuan. “It can remain stable at a reasonable and balanced level,” he said in a statement.

Premier Li, who is supposed to be in charge of the economy (and is rumored to be in trouble by some), said that despite the substantial fluctuations in world markets that have affected China, the country’s economy remains in a “reasonable range.”

Martin Wolf / Financial Times

“According to official figures, gross fixed investment (in China) was 44 percent of gross domestic product in 2014. Figures for investment are more likely to be correct than those for GDP. But does it make economic sense for an economy to invest 44 percent of GDP and yet grow at only 5 percent? No. These data suggest ultra-low, if not, negative marginal returns. If so, investment could fall sharply. That might not lower potential growth, provided wasteful investment were cut first. But it would cause a collapse in demand. Everything the Chinese have been doing suggests they are worried about just that....

“This now leaves the Chinese authorities with three huge economic headaches. The first is cleaning up the legacy of past financial excesses while avoiding a financial crisis. The second is reshaping the economy, so that it is more dependent on private and public consumption and less dependent on extraordinarily high levels of investment. The third is achieving all that while sustaining dynamic growth of aggregate demand.”

As for Japan, there was a slew of data. Core inflation for July, ex-food, was flat year on year, versus a 0.1 percent reading in June. At least it avoided slipping back into deflation.

At the same time, Japan’s jobless rate improved to 3.3 percent, matching the best level since the late 1990s.

But household spending retreated 0.2 percent, better than the 2 percent decline in June. However, retail trade increased 1.6% in July from a year earlier, up from 1.0 percent the previous month. So this data point has been up four months in a row.

Street Bytes

--Assuming the market gets back to fundamentals, the fact is we haven’t been going anywhere this year because companies aren’t generating revenues, and oil’s precipitous fall has created more unease than excitement consumers may save some at the pump.

--U.S. Treasury Yields

6-mo. 0.23% 2-yr. 0.72% 10-yr. 2.18% 30-yr. 2.91%

The yield on the 10-year early Monday was down around 1.94% but gradually rose, especially at week’s end on the GDP report and renewed talk a September rate hike could still be in play after all, let alone the ‘risk on’ trade was back...buy stocks, sell bonds.

--One more note on housing. The S&P/Case-Shiller 20-city home index for June rose 5% year over year, -0.1% over May.

--As noted above, shares in Apple were sliding precipitously Monday morning, down 13%, when CEO Tim Cook emailed CNBC’s Jim Cramer to say the company’s Chinese operations were doing just fine. Cook’s statement “I continue to believe China represents an unprecedented opportunity over the long term” helped turn things around and it finished the week at $113, after opening Monday at $92.

Well you know where I stand. I wouldn’t be so sanguine.

Separately, Apple has scheduled its annual iPhone debut for Wednesday September 9, a year to the day after Apple launched Apple Pay and the Watch.

Some analysts predict iPhone unit sales will grow by just 3 percent next year, compared with 35 percent in the most recent quarter.

Tech research firm IDC reported the Apple Watch leapt into second place behind Fitbit in the second quarter, ahead of smartwatch makers Samsung, LG, Motorola and Pebble. IDC found Apple had taken 20 percent of the global market for wearable devices in its first quarter of availability, just behind Fitbit at 24 percent. [Tim Bradshaw / Financial Times]

--As alluded to above, a computer glitch severely impacted hundreds of mutual and exchange-traded funds from providing proper values of their holdings, the issue originating at Bank of New York Mellon Corp., the largest fund custodian in the world by assets.

As reported by Kirsten Grind and Bradley Hope of the Wall Street Journal:

“Directors and executives at some fund sponsors scrambled to manually sort out pricing data and address any legal ramifications of material mispricings, those in which stated asset values differed from the actual figures by 1% or more....

“Several traders said they were forced to calculate their own net asset value for ETFs and that they widened the spreads, or the difference, between listed buying and selling prices to accommodate for the higher risk of trading.”

BNY Mellon said the problems originated with a SunGard Data Systems Inc. system. The issue wasn’t rectified until Wednesday, forcing fund companies to try to reconcile the numbers with what they had reported earlier in the week.

WSJ:

“Fund industry attorneys said the real challenges would arrive in the coming weeks, as fund companies and BNY Mellon hash out who is liable if investors traded on false pricing.

“If an investor paid a higher net asset value than he should have, for example, some fund companies believe BNY Mellon should pay that difference. BNY Mellon declined to comment about the liability issue.”

--At least through Tuesday, many leading hedge-fund managers were getting shelled this month, though at the same time were generally performing better than the S&P 500 and most were positioned to benefit from the subsequent rally.

--Republican presidential front-runner Donald Trump has a winning issue when it comes to hedge funds, whose managers, Trump said, are nothing more than “paper pushers” who were “getting away with murder” by not paying their fair share of taxes.

Appearing on CBS’ “Face the Nation” Sunday, Trump said, “They are energetic. They are very smart. But a lot them – they are paper-pushers. They make a fortune. They pay no tax. It’s ridiculous, ok?”

Trump is referring to the “carried interest loophole” – a provision in the tax code that allows private equity and hedge fund managers to pay taxes at the cap gains rate instead of the ordinary income rate.

The cap gains rate is only 20%, and even when you add an additional 3.8% surtax on their net investment income, it’s still far lower than the 39.6% rate most of them are paying on ordinary income.

Democratic Sen. Bernie Sanders has also been a major critic of the loophole. But, unlike Trump, most Republicans don’t talk about it.

--Oil rocketed 10% higher on Thursday, posting its biggest one-day rally in over six years, but this was off a 6 ½ year low. The rally was aided by news of drawdowns at Cushing, Oklahoma, and the revision in second quarter U.S. GDP helped.

Otherwise, it was short-covering.

--As reported by the BBC, North Sea oil revenues in the first three months of 2015 were down a whopping 75% on the previous quarter, according to the Scottish government. [Based on tax receipts.]

This is an important issue for those seeking Scottish independence. We’re talking receipts fell from about $1.14bn to $260m.

Ergo, as Scottish Conservative finance spokesman Murdo Fraser said, “Whichever way you look at it...there is just no way an independent Scotland could survive on this. We knew the price of oil was volatile and that this would be a risk. But to see such a radical drop is alarming.”

And that’s a memo. Sean Connery is here...Sean, what say you?

--Schlumberger, the world’s largest oil services group, agreed to buy energy equipment manufacturer Cameron International for $14.8bn. Schlumberger picks up a range of new technologies for use on both land and offshore drilling operations.

The offer represented about a 56% premium to Cameron’s most recent closing share price. But, it is below its peak set in August of 2014, before oil prices collapsed.

Cameron is the world’s largest manufacturer of blowout preventers, along with other valves and equipment.

I’m no expert in this field, but this deal makes eminent sense, allowing Schlumberger to serve its customers from “pore to pipeline,” as the Financial Times’ Ed Crooks and Neil Munshi put it.

--Best Buy reported earnings and revenues that handily exceeded the Street, with same-store sales up a solid 2.7% (3.9% in the U.S.). It would appear the decision to pull out of China was a super call.

The company’s solid domestic performance was a result of demand for TVs and higher prices for mobile phones, offsetting a decline in tablet devices.

Some companies you just like to see do well. For me this is one of them.   Others? CVS, Cisco Systems...actually, I was about to say McDonald’s, but I haven’t been there in ages. You know, there really aren’t that many I give a (hoot) about.

--But I do care about cloud software provider Workday Inc., a good friend being an executive there. The company reported a better-than-expected 51.4 percent jump in quarterly revenue, helped by strong growth in subscriptions to its web-based human resource management software. Subscription revenue rose 55.8 percent in the quarter ending July 31 from a year earlier. Overall revenue rose to $282.7 million, up from $186.8 million, which beat the Street’s expectations. The company reported an adjusted profit of 2 cents per share, also better than expected.

Yet the stock traded all over the place after the news was released, after hours, on Wednesday and the rest of the week as the company issued guidance that was ‘just’ in line with analysts’ expectations. [If I was on the analyst call I’d tell management, ‘Just kick Larry Ellison’s butt.’]

--As of week’s end, average U.S. gas prices were at the lowest levels for this time of year since 2004. As of Thursday, 90 cents lower.

--A rather big story in the local New York area is the bankruptcy of the Great Atlantic and Pacific Tea Company, which operates supermarket chains such as A&P, Pathmark and Superfresh.

According to mandated filings, more than 8,500 employees will be out of a job by Thanksgiving, though at least in some cases, chains such as ACME and Stop & Shop are acquiring a portion of the locations and you’d expect many to be rehired. That said, a vast majority of the 8,500 will hit the streets.

I like the employees at my local A&P where I do the bulk of my shopping and it’s been a tension convention lately. The knives are out. ACME is buying the store but not all of the 102 will survive. [Our Dr. Bortrum knows, however, that the world’s slowest checkout clerk was purged long ago.]

--Retailer Abercrombie & Fitch surprised the Street, reporting better than expected sales, though they were down 8% for the quarter. Profits beat as well and the shares surged as A&F bucked the trend to report “positive comparable sales” in Asia and Canada.

--According to the U.S. Department of Agriculture, U.S. farm incomes will decline 36% this year to the lowest level in nine years. The drop from $91.1 billion in 2014 to $58.3 billion, marks the largest percentage decline since 1983, and reflects the ongoing slump in crop prices and weakness in the dairy and hog markets. Farm incomes reached nominal highs in 2013.

Record corn and soybean crops in the past few years have hit prices hard. For example, the July 2012 drought high on wheat was $9.43 and it closed Thursday at $4.91, while the July 2012 high for corn was $7.93 and it was at $3.77 yesterday. Of course this is doing a number on sales of agricultural equipment, among other things.

I noted the other week that farmland prices have also been falling in much of the farm belt, down 7% in Iowa (7/1/14-7/1/15).

But another big concern for folks in Iowa and other states is a return of bird flu in the fall or next spring (fall would be because of migratory birds flying south for the winter, who then spread the flu through their droppings on chicken and turkey farms).

This past spring, 49.5 million turkeys and chickens were lost in the epidemic, wiping out 3% of the U.S. turkey population, and 10% of hens that lay eggs for human consumption, according to High Plains Journal.

Egg farmers lost $1 billion; turkey producers $530 million. One Iowa commercial farm lost 5.7m laying hens. [I did this research before going to Iowa.]

Iowa is also concerned about the China slowdown and devaluation. Iowa’s overall business with China nearly doubled to $1 billion from 2009 to 2014, with agriculture sales rising from $76.5 million in ’09 to $357 million in 2014.

Iowa has total exports of $4.6 billion to Canada and $2.3 billion to Mexico. [Des Moines Register]

--Speaking of commodities, the slide in prices has pummeled Brazil, with the country’s economy contracting 1.9 percent in the second quarter from the first three months of the year – the fastest pace of contraction since 2009, according to the government statistics agency. Year-over-year, economic activity was 2.6 percent below 2014 levels.

--A study from the Pacific Institute, a think tank, concluded that despite the drought, California farmers have been bringing in record-high revenue from crops such as almonds, pistachios and wine grapes.

But, this is at the expense of unsustainable over-pumping of groundwater.

Heather Cooley, the study’s lead author, said, “One of the reasons that agricultural revenues and employment are as strong as they are is because of groundwater overdraft. It can help insulate the agricultural sector from some of the short-term impacts, but it does create impacts and costs that are borne by others, both in current and future generations.”

NASA researchers recently found that ground in Kings County (Central Valley) has sunk 13 inches in eight months, damaging roads, bridges and canals which can also permanently reduce the water-storage capacity of the aquifer.

But back to the positive, almond and pistachio orchards have been able to take advantage of surging demand for nuts from China and other parts of Asia.

And the drought buster is coming this fall and winter, of this most everyone seems sure. [Ian James / The (Palm Springs) Desert Sun via USA TODAY]

--Meanwhile, Los Angeles residents cut their water use by 21% in July, surpassing the mandatory target set by state regulators; the second straight month Angelenos met it.

[Statewide the amount cut was 31% vs. a mandated 25%.]

--Tiffany’s fiscal second-quarter performance was pressured by the strong dollar, as the company reported earnings that fell short of expectations, while revenue fell slightly to $990.5 million from $992.9 million, also missing analysts’ forecasts.

Worldwide same-store sales fell 1%, but on a constant exchange rate basis rose 7%, with growth in Japan, Europe and the Asia-Pacific region; so not that bad in actuality.

But Tiffany now sees full-year earnings coming in 2% to 5% below last year’s when it previously forecast minimal growth.

Tourism is still a key for the company, which gets nearly one-quarter of U.S. sales form tourists, including 40% of sales at its flagship Manhattan store. Tiffany said foreign tourists from places like Europe and Japan spent less.

--Shares in Tesla Motors Inc. rose sharply on word its new battery-powered Model S, the P85D, earned a 103 out of a possible 100 in an evaluation by Consumer Reports magazine.

CR said the power and efficiency was so off-the-chart that the group had to recalibrate its ratings methods “to account for the car’s exceptionally strong performance,” according to a statement.

The Tesla sedan is the quickest Consumer Reports ever tested, accelerating from zero to 60 in 3.5 seconds, using the car’s “insane mode.” But CR did criticize the quality of its interior materials, as well as a ride that is firmer and louder than the base Model S. The starting price for a P85D is $105,000.

--Avid Life Media, the parent company of the Ashley Madison dating website, is offering a $500,000 reward for information on the hackers who released detailed records of up to 32 million users.

A superintendent for the Toronto police, where Avid is based, said, “This is affecting all of us. The social impact behind this leak, we’re talking about families, we’re talking about children, we are talking about wives, their male partners.”

Early in the week there were “unconfirmed” reports of two suicides associated to the leak. Several users have become the victims of blackmail.

Meanwhile, lawsuits are being filed against the company, claiming negligence, breach of contract and privacy violations. A large percentage of the email addresses are U.S. government and military ones. Not a lot of comfortable dinner conversations these days. 

Friday, it was announced the CEO of Avid Life Media is stepping down, a move that was “in the best interest of the company.”

--Molycorp Inc., the only U.S. producer of rare earths, announced it was mothballing its mine in California, laying off 500 workers, while continuing to produce at processing plants in Estonia and China.

Rare earths are used in products from cars to iPhones, but the market became way oversupplied and prices collapsed. Molycorp filed for Chapter 11 in June.

The U.S. has a stockpile of the metals and isn’t concerned, even though they are used in military electronics.

--Former Army Chief of Staff Gen. Ray Odierno is going to be a senior adviser to top executives at JPMorgan Chase & Co., including CEO Jamie Dimon.   Not a bad potential rainmaker, either, mused your editor.

“So, John, I encourage you to select JPM to be the lead on your IPO.”

“Yes, yes, General. Anything you say....And go ahead. Hike your fee.”

“I knew you’d come around, John,” replied the General, with a little curl of the lip, the four SEALS accompanying him then securing the hall for his exit.

Meanwhile, at the Four Seasons, Goldman Sachs CEO Lloyd Blankfein’s wife remarked to her friends, while eating the roasted cod with the spring vegetable ragout, “I told my Lloyd, hire Gen. Odierno! Don’t let Jamie get him. But he didn’t listen.”

[From my upcoming blockbuster, “(Unofficial) Wall Street Conversations”...The CEOs, their wives, the mistresses... and lots of menus that will have you drooling like Homer Simpson.]

Foreign Affairs

Iran: The Obama administration continues to gain the Democratic votes it needs to prevent Congress from blocking the Iran nuclear agreement. The president is nearing a veto-proof margin. Some Democrats are hoping there could be enough support to filibuster the resolution against the deal, which would mean Obama wouldn’t have to actually wield his veto pen.

Only two Senate Democrats, New York’s Charles Schumer and New Jersey’s Robert Menendez, have come out against the deal thus far with only a few left to decide.

To override a veto from the president, 67 senators and more than 290 members of the House would need to vote against. 

But if opponents of the deal in the Senate cannot secure 60 votes against the agreement, Democratic leaders can prevent the Senate from having a formal vote.

Meanwhile, Iran warned the U.N.’s International Atomic Energy Agency to “ensure full protection” of the confidential arrangements that some U.S. lawmakers are crying for details of. Iranian Ambassador Reza Najafi told reporters after an IAEA meeting in Vienna that his country refused to disclose any details concerning the agency’s inspectors and access to the Parchin military base where Tehran is alleged to have carried out nuclear trigger tests in the early 2000s.

Brent Scowcroft / Washington Post

“Congress again faces a momentous decision regarding U.S. policy toward the Middle East. The forthcoming vote on the nuclear deal between the P5+1 and Iran (known as the Joint Comprehensive Plan of Action, or JCPOA) will show the world whether the United States has the will and sense of responsibility to help stabilize the Middle East, or whether it will contribute to further turmoil, including the possible spread of nuclear weapons. Strong words perhaps, but clear language is helpful in the cacophony of today’s media.

“In my view, the JCPOA meets the key objective, shared by recent administrations of both parties, that Iran limit itself to a strictly civilian nuclear program with unprecedented verification and monitoring by the International Atomic Energy Agency and the U.N. Security Council. Iran has committed to never developing or acquiring a nuclear weapon; the deal ensures that this will be the case for at least 15 years and likely longer, unless Iran repudiates the inspection regime and its commitments under the Treaty on the Non-Proliferation of Nuclear Weapons and Additional Protocol....

“If the United States could have handed Iran a ‘take it or leave it’ agreement, the terms doubtless would have been more onerous on Iran. But negotiated agreements, the only ones that get signed in times of peace, are compromises by definition. It is what President Reagan did with the Soviet Union on arms control; it is what President Nixon did with China.”

Editorial / Wall Street Journal

“Foreign Secretary Philip Hammond on Sunday reopened Britain’s embassy in Tehran nearly four years after it was shuttered following a mob attack reminiscent of the 1979 assault of the U.S. Embassy. Accompanying Mr. Hammond were European business leaders eager to join the ayatollah gold rush – notwithstanding President Obama’s promise of ‘snap-back’ sanctions if Iran cheats on the nuclear deal.....

“In Tehran Mr. Hammond predicted a quick end to sanctions. ‘We could be talking as early as next spring to start to see sanctions lifting off,’ he told Reuters. ‘There is [a] very clear pitch here not to wait until then. There are things that can’t be done. Investments can’t be made, items can’t be imported or exported or whatever. But the business negotiation can start to take place well ahead of that.’

“As those negotiations intensify, so will the commercial and diplomatic pressure to remove sanctions – and keep them off. These business interests will become a powerful lobby against taking action if evidence is found that Iran is cheating. Iran, Europe and President Obama are trying to present Congress with a fait accompli even before it votes on the deal next month.”

[I said months ago that aside from Parchin, this is the worst part of the deal. Snapback sanctions? Right.]

Separately, Iran’s intelligence minister warned of plots by western spy agencies to undermine stability in the Islamic Republic.

Israeli Defense Minister Moshe Ya’alon countered he bore no responsibility “for the life expectancy of Iranian scientists,” strongly hinting Israel’s intelligence services were behind the rash of killings of Iranian nuclear scientists.

In an interview with German-language Der Spiegel, Ya’alon said:

“Ultimately it is very clear, one way or another, Iran’s military nuclear program must be stopped. We will act in any way and are not willing to tolerate a nuclear-armed Iran. We prefer that this be done by means of sanctions, but in the end, Israel should be able to defend itself.” [Jerusalem Post]

Iraq/ISIS/Syria: Islamic State militants were accused of using chemical weapons in an attack in Syria for the first time. The incident, according to opposition rebels and local residents, occurred near the city of Aleppo. One was killed, 10 wounded. Previously, the U.S. said ISIS had used mustard gas against Kurdish forces in Iraq.

The Syrian regime has been accused in recent months of launching chlorine gas attacks.

After beheading Palmyra’s chief archaeologist, ISIS destroyed the city’s ancient temple of Baalshamin, releasing video of it being blown up on Sunday. The U.K.-based Syrian Observatory for Human Rights reported the temple was destroyed a month ago. IS took control of Palmyra in May.

Editorial / Washington Post

“The destruction of Palmyra is a war crime. So is the Assad government’s indiscriminate deployment of ‘barrel bombs’ in civilian areas and its repeated use of chlorine gas – attacks that have accelerated the displacement of more than 11 million people, about half of Syria’s pre-war population, 4 million of whom have fled to other countries.

“Through it all, Western governments, led by the Obama administration, have shied away from any decisive action.”

An IS suicide bomber killed two Iraqi army generals on Thursday as they led forces against ISIS positions in Anbar province west of Baghdad. The bomber drove his vehicle into advancing troops, killing the two generals and three soldiers.

Government forces and allied Sunni and Shiite militiamen have made minimal progress against IS in Anbar over the past few months. Islamic State holds about one-third of Iraq following its blitz in the north and west in 2014.

Lebanon: The garbage crisis just gets worse and worse, piling up across Beirut and Mount Lebanon (above the city) as garbage truck drivers went on strike. It is an embarrassment the government, using the term loosely, can’t come up with a solution. Prime Minister Salam has threatened to resign. Lebanon hasn’t had a president in more than a year.

The heavily indebted government is also nearing a point where it will be unable to pay salaries.

Afghanistan: Two American service members were killed on Wednesday in an “insider” attack by an Afghan soldier at a base in southwestern Helmand province.

On Saturday, three civilian U.S. contractors were killed in a car-bomb attack in central Kabul. The three worked for McLean, Va.-based DynCorp International, which provides logistical and training support to coalition and Afghan forces. One of the three was a retired U.S. Army colonel.

China: The death toll in the Tianjin explosions has risen to 145, but the South China Morning Post has learned the Communist Party’s top leadership is infuriated with the Tianjin government’s attempts to downplay the toll, this as 11 senior officials and port executives have been detained for alleged negligence. Tianjin Port Group, which is responsible for the port’s operations, was accused of poor management and failing to rectify safety risks at Ruihai, the company that ran the facility that exploded.

17 firefighters remain missing, 63 of them confirmed dead.

Separately, the Pentagon issued a report that stated China has expanded seven of its eight outposts in the South China Sea (Spratly Islands), and as of this June, had reclaimed “more than 2,900 acres of land.” While others such as Vietnam and Malaysia have done this, “China has now reclaimed 17 times more land in 20 months than the other claimants combined over the past 40 years,” the report added.

As the islands become military outposts, it presents a serious challenge to the United States. As the Pentagon report said, it’s allowing China “to establish a more robust power projection presence into the South China Sea.”

China insists what they do should not concern anyone else.

Jerry Hendrix / Defense One

“China’s time to regain its position as a Great Power has nearly run out. Its dramatic economic slowdown, its rapidly aging population, and the quickening flight of capital by Communist Party elites all suggest that the jig is up and everyone in China’s ruling class knows it. President Xi Jinping’s attempts to fan the flames of nationalism by holding a parade celebrating China’s victory over Japan 70 years ago, a victory that the Chinese Communist Party, unlike the government on neighboring Taiwan, has no legitimate claim to.

“It’s time for the United States to puncture the balloon of Chinese arrogance. It should immediately dispatch an American warship, perhaps one of our advanced Aegis destroyers, to pass within 12 nautical miles of one or all of China’s man-made islands to demonstrate in an unambiguous fashion that they are not now, nor ever will be, sovereign Chinese territory....

“To be clear, rules of engagement should be issued to the ship’s commanding officers, but the strategic goal must be the defense of 400 years of legal precedent covering the free seas. To allow China to continue to expand its role and expectations in the South China Sea invites future conflict on a larger scale.”

North and South Korea: After marathon talks, North and South Korea reached an agreement to resolve the showdown between the two, with Pyongyang expressing regret for recent provocations, including a land mine attack that maimed two Southern soldiers.

Seoul, in turn, agreed to turn off the loudspeakers that had angered Pyongyang, which led it to declare a “quasi state of war.”

During the three days of talks, North Korea was moving troops and equipment to the border.

Later, Kim Jong un called the week’s accord “a landmark occasion” paving the way for defused military tension and improved ties, though he added it was the strength of North Korea’s armed forces that made the deal possible.

As reported by Reuters, “Kim noted the accord was reached ‘thanks to the tremendous military muscle with the nuclear deterrent for self-defense built by the great party as a pivot and matchless ranks single-mindedly united around the party,” Pyongyang’s KCNA news agency quoted Kim as saying on Friday in a meeting with military aides.

But now Pyongyang is fuming over the latest U.S.-South Korean war games, while KCNA announced late Friday that some generals were “dismissed.”

Russia: Defense One reports: “NATO is preparing to hold its most complex military drills in decades – perhaps since the Cold War – as it readies allied troops for a range of hybrid combat scenarios that they might face in coming years.

“Tens of thousands of troops, hundreds of aircraft, ships and submarines are expected to participate in the October-November exercises in and around Spain, Portugal and Italy....

“Called Trident Juncture 2015, the exercise will simulate many types of scenarios that have popped up over the past 13 years, including cyberattacks and ballistic missile defense.”

Charles Krauthammer / Washington Post

“Since the end of World War II, Russia has known that what stands in the way of westward expansion was not Europe, living happily in decadent repose, but the United States as guarantor of Western security. Obama’s naivete and ambivalence have put those guarantees in question.

“It began with the reset button, ostentatiously offered less than two months after Obama’s swearing-in. Followed six months later by the unilateral American cancellation of the missile shield the Poles and the Czechs had agreed to install on their territory. Again, lest Putin be upset.

“By 2012, a still clueless Obama mocked Mitt Romney for saying that Russia is ‘without question our No. 1 geopolitical foe,’ quipping oh so cleverly: ‘The 1980s are now calling to ask for their foreign policy back.’ After all, he explained, ‘the Cold War’s been over for 20 years.’

“Turned out it was 2015 calling. Obama’s own top officials have been retroactively vindicating Romney. Last month, Obama’s choice for chairman of the Joint Chiefs of Staff declared that ‘Russia presents the greatest threat to our national security.’ Two weeks ago, the retiring Army chief of staff, Raymond Odierno, called Russia our ‘most dangerous’ military threat. Obama’s own secretary of defense has gone one better: ‘Russia poses an existential threat to the United States.’

“Turns out the Cold War is not over either. Putin is intent on reviving it. Helped immensely by Obama’s epic misjudgment of Russian intentions, the balance of power has shifted – and America’s allies feel it.

“And not just the East Europeans. The president of Egypt, a country estranged from Russia for 40 years and our mainstay Arab ally in the Middle East, has twice visited Moscow within the last four months....

“Even Pakistan, a traditional Chinese ally and Russian adversary, is buying Mi-35 helicopters from Russia, which is building a natural gas pipeline between Karachi and Lahore.

“As John Kerry awaits his upcoming Nobel and Obama plans his presidential library (my suggestion: Havana), Putin is deciding how to best exploit the final 17 months of his Obama bonanza.

“The world sees it. Obama doesn’t.”

On a different issue, last week I mentioned the case of Ukrainian film director Oleg Sentsov who was being tried in a Russian military court for opposing the Kremlin’s seizure of Crimea last year. Sentsov was sentenced on Tuesday to 20 years in a high-security prison after the court found him guilty of masterminding a terrorist campaign.

Amnesty International said in a statement Wednesday that Sentsov’s trial was “patently unfair” and “marred by credible allegations of torture.”

Geoffrey Pyatt, the U.S. ambassador to Ukraine, described the proceeding as a “Russian farce.”

Ukrainian President Petro Poroshenko posted on his Facebook page: “A time will come when those who set this trial for you will land in the dock themselves,” urging Sentsov to “hang in there.”

Lastly, an announcement was made last week that due to budget cuts and the shrinking economy, police would no longer be posted at Russia’s museums, which has sparked concerns the cultural institutions won’t be able to afford to pay private security firms, and, as the Moscow Times noted, foreign museums could stop lending their national treasures to Russia.

For example, policemen currently guard 135 museums in Moscow alone, Izvestia reported.

This sucks. Private security guards in Russia are worthless and the good ones, employed by the likes of Gazprom and Rosneft, charge huge amounts that museums won’t be able to afford.

So get ready for all kinds of stories of break-ins (strong-arm style).

Ukraine: The Kiev government received a major boost as Ukraine and its international creditors reached a deal that will restore the country to a path of “debt sustainability.” The government and a committee of international investors, including Franklin Templeton, reached a debt restructuring deal as the recession-ravaged country seeks to fulfill the terms of its IMF bailout by lowering its debt costs.

Pakistan: A report by the Carnegie Endowment for International Peace and the Stimson Center concludes that Pakistan is rapidly expanding its nuclear force due to fear of its archrival, India, and the former is now far outpacing the latter in the development of warheads.

Analysts estimate Pakistan has about 120 nuclear warheads and India 100. The report concludes Pakistan could have at least 350 nuclear weapons within five to 10 years, which would leave it third behind the U.S. and Russia. 

France has about 300 and the U.K. around 215, according to the Federation of American Scientists. China has around 250. [Tim Craig / Washington Post]

Boy, doesn’t this give you a warm and fuzzy feeling?

France: No doubt the nation is on edge and French security forces are warning of civil unrest and fear there could be a missile strike on a passenger airliner or a September 11-style attack, as reported by the Daily Telegraph.

A source close to French intelligence told the paper, “Airlines have been warned of a possible attack on a plane with an anti-tank missile. But pilots are unsure how to take evasive action.”

The French army has made contingency plans for the “re-appropriation of national territory,” meaning the winning back of neighborhoods where the population has become hostile to authority and where guns are readily available.

“There are a lot of alienated and angry fourth-generation immigrant kids in the suburbs and the prospect of radicalization is increasingly likely,” the source said.

“The idea that attacks like the one on the train are carried out by individuals acting on their own is not credible.

“We’re dealing with highly organized networks of militant Islamists embarked on a campaign of violence and determined to intensify it.”

Many of the weapons are apparently coming into France from Libya, with organized crime and terrorist groups working together to procure them.

In 2011, France admitted to sending “light weapons” to Libyan rebels but French media reported that consignments of heavier arms, including anti-tank missiles, were also sent. The government doesn’t know where the weapons are now.

France has said its main intelligence agency is essentially powerless to improve surveillance of Islamist militants and it has been “lucky” to have avoided far worse catastrophes than the January attacks in Paris that killed 17.

Random Musings

--Donald Trump continues to dominate the Republican polls.

In a new Quinnipiac University National survey released Thursday, Trump leads the Republican field with 28%, up from 20% in a July 30 poll, the highest tally for any Republican thus far. Ben Carson was way back in second at 12%, while Jeb Bush, Marco Rubio and Ted Cruz were all at just 7%.

Hillary Clinton leads the Democratic field with 45%, down from 55% July 30, with Bernie Sanders at 22% and Joe Biden at 18%.

But among all voters, Biden tops Trump 48-40, Bush 45-39 and Rubio 44-41.

Clinton though only edges Trump 45-41, Bush 42-40, and Rubio 44-43; all of this further ammunition for Biden.

And by a 61-34 margin, voters say Clinton is not honest and trustworthy, her lowest score ever.

In a Public Policy Polling survey of New Hampshire Republicans, Trump received 35%, followed by John Kasich (11%) and Carly Fiorina (10%). Bush and Scott Walker each had 7%.

On the Democratic side, Bernie Sanders is leading Hillary Clinton 42% to 35%.

In South Carolina, a Monmouth University Poll of Republican primary voters has Trump receiving 30%, followed by Carson at 15%. Then it’s Bush (9%), Rubio (6%) and Fiorina (6%). Embarrassingly, South Carolina Sen. Lindsey Graham picks up just 4% of home-state voters.

Carson, by the way, has the best favorable/unfavorable split at 72-9. [Graham has a 35% favorable, 50% unfavorable.]

In Iowa, a Suffolk University Poll of Democratic caucus-goers finds Clinton holding a 54-20 advantage over Bernie Sanders, with Joe Biden at 11%.

--Hillary Clinton, speaking to a group in Cleveland on Thursday:

“Extreme views about women? We expect that from some of the terrorist groups. We expect that from people who don’t want to live in the modern world. But it’s a little hard to take coming from Republicans who want to be the president of the United States.”

Needless to say this drew a rebuke from the Republican National Committee, which said Clinton should apologize for “inflammatory rhetoric” and that “to equate her political opponents to terrorists is a new low for her flailing campaign.”

--GOP pollster Frank Luntz said it is now “totally conceivable” that Trump will become the Republican Party’s nominee.

“The Republican leadership needs to wake up and see that the grass roots has abandoned them,” Luntz said.

“This is a different cat,” he added. “It’s not like Ross Perot in 1992, where people were simply unhappy with the two major parties; they’re choosing Trump affirmatively. Honestly, my legs are shaking looking at these numbers. All those people who think he’s going to implode are wrong. He’s not going away.” [Claude Brodesser-Akner / NJ.com]

--Trump gained press for his treatment of Univision journalist Jorge Ramos at an Iowa event, at first kicking him out of a press conference. When you watch the tape, one thing is clear. Ramos was the prime jerk in this episode. A jerk and totally unprofessional.

--As for Joe Biden, he met with Massachusetts Sen. Elizabeth Warren, darling of the Democratic left, last weekend, and has been holding court with major Democratic advisers and fund-raisers.

Editorial / Wall Street Journal

“White House spokesman Josh Earnest added to the intrigue when he volunteered to reporters on Monday that President Obama thinks his decision to choose Mr. Biden as his running mate was ‘the smartest decision he’s ever made in politics.’ Mr. Earnest is a careful man who wouldn’t say this without clear presidential authorization.

“ ‘The Vice President is somebody who has already run for President twice,’ Mr. Earnest added. ‘So I think you could make the case that there is probably no one in American politics today who has a better understanding of exactly what is required to mount a successful national presidential campaign.’....

“The President is enough of a cold-blooded politician to know that a considerable part of his legacy will depend on whether a Democrat succeeds him in the Oval Office. Above personal feelings, he wants a Democratic nominee who can win in 2016.

“Mr. Biden ran for President in 1988 and 2008 and lost, so why would he be a better candidate now?....

“Which leads us to wonder what Mr. Biden and Mr. Obama know about Mrs. Clinton’s mishandling of classified information on her personal email server while running the State Department. The FBI is now investigating, and it’s hard to believe the White House wouldn’t have some inkling about the seriousness of that probe.

“The FBI pressed investigations that forced two CIA directors, David Petraeus and John Deutch, into pleading guilty to misdemeanors for lesser violations than Mrs. Clinton appears to have committed. FBI Director James Comey and Attorney General Loretta Lynch would be hard-pressed to block an FBI recommendation that sought a misdemeanor plea bargain if it were rooted in solid evidence and consistent enforcement under the law. Such a plea would be devastating to Mrs. Clinton’s credibility even if it didn’t end her campaign.

“All of which is to say that the possibility of a third Joe Biden candidacy is looking more appealing than we ever imagined.”

--Edward Luce / Financial Times...on the Republican race and past flavor of the month poll leaders like Michele Bachmann and Herman Cain.

“Why should this time be any different? Because it already is. Mr. Trump has now consistently topped the polls for several weeks. When people are restless for a new flavor, they do not linger for so long on one. Nor can Trumpmania be attributed to people not paying attention. Quite the opposite: they are gripped....

“Political veterans say some event will occur to bring Mr. Trump’s meteor down to earth. It will have to be something special. Every time he makes a gaffe his numbers seem to improve. Whether he is making derogatory remarks about fellow Republicans, Hispanics, popular female television anchors, or women in general, that bird has flown. In spite of his three marriages and a tendency to talk about women as sex objects, he polls well with Christian conservatives. Mr. Trump’s popularity is based in part on his willing obnoxiousness. His brand subverts all laws of campaign propriety. It is hard to think of what he could say, or do, that would undermine that.

“All of which is confusing. Washington pundits are a bit like those dazed cops in Basic Instinct watching Sharon Stone light up a cigarette. What are we going to do? Arrest him?

“That brings us to the final line of defense – the brokered convention. With 17 candidates competing and none, other than Mr. Trump, having yet sustained a lead, the chances were already tilting towards one....

“Let us suppose Mr. Trump wins a quarter of the delegates in the primaries and the remaining three-quarters are distributed between Jeb Bush, Scott Walker, Marco Rubio – and perhaps Ted Cruz and John Kasich.

“Add them all up and Mr. Trump could easily be ejected. But that supposes the rest have coalesced around one standard bearer....The establishment can only prevail if it agrees.

“Let us suppose it does and Mr. Bush emerges from a bitter few days of horse-trading as the Republican nominee. What will Mr. Trump do then? Admit that the game is up after a fair fight? Or enter the field as a third-party candidate? My money would be on the latter.

“There would be all sorts of technical difficulties in putting his name on the ballot at that late stage. But cash goes a long way and Mr. Trump has plenty.

“More to the point, he has ego....Mr. Trump has always been about Mr. Trump. If he made it to a brokered convention he would not stop there.”

--George Will / Washington Post

“It has come to this: The GOP, formerly the party of Lincoln and ostensibly the party of liberty and limited government, is being defined by clamors for a mass roundup and deportation of millions of human beings. To will an end is to will the means for the end, so the Republican clamors are also for the requisite expansion of government’s size and coercive powers.

“Most of Donald Trump’s normally loquacious rivals are swaggeringly eager to confront Vladimir Putin but are too invertebrate – Lindsey Graham is an honorable exception – to voice robust disgust with Trump and the spirit of, the police measures necessary for and the cruelties that would accompany his policy. The policy is: ‘They’ve got to go.’

“ ‘They,’ the approximately 11.3 million illegal immigrants (down from 12.2 million in 2007), have these attributes: Eighty-eight percent have been here at least five years. Of the 62 percent who have been here at least 10 years, about 45 percent own their own homes. About half have children who were born here and hence are citizens. Dara Lind of Vox reports that at least 4.5 million children who are citizens have at least one parent who is an illegal immigrant....

“About 900,000 of America’s Hispanic citizens reach voting age each year. In 2012, less than half of eligible Hispanics voted, but Republicans have figured out how to increase Hispanic turnout.

“A substantial majority of Americans – majorities in all states – and, in some polls, a narrow majority of Republicans favor a path for illegal immigrants not just to legal status but to citizenship. Less than 20 percent of Americans favor comprehensive deportation....

“If, after November 2016, there are autopsies of Republican presidential hopes, political coroners will stress the immigration-related rhetoric of August 2015. And of course October 1884.

“Then, the Republican presidential nominee, former senator James G. Blaine, returning home to Maine in the campaign’s closing days, attended a New York rally on his behalf, where a prominent Protestant clergyman said Democrats were a party of ‘rum, Romanism and rebellion.’ Catholics, many of them immigrants, noticed. Blaine lost New York, and with it the presidency, by 1,200 votes out of more than 1 million cast.”

--So I got a kick out of the recent brouhaha over the use of the term “anchor babies.” Ah, folks? This is more than a legitimate issue and Jeb Bush, in his incompetence, stumbled on the right description when he said, under fire, “Frankly, it’s more related to Asian people.”

I wrote about it! WIR, 3/7/15...to wit...

“Lastly, U.S. federal agents targeted ‘maternity tourism’ schemes in which pregnant Chinese women travel to the United States, usually on tourist visas, so that their children will be born U.S. citizens, as reported by the Los Angeles Times’ Victoria Kim and Frank Shyong.

“This should tick off every American to no end.

“ ‘Efforts to outlaw or regulate the practice have so far been unsuccessful. A bill in the 2013 Congress to limit birthright citizenship to babies with at least one American parent was never voted on.’

“The purpose is to enable the children to apply to U.S. colleges, as well as make it easier for the parents to then immigrate here.”

--Editorial / Washington Post

“Reports of dangerous drone encounters are multiplying. Aircraft crews, security officials and others say they’ve seen many small, unmanned and unmarked aerial vehicles where they do not belong: over airports, 12,000 feet aloft near a JetBlue airliner, above the White House grounds. The military scrambled fighter jets last week after a Cessna pilot spotted a drone in restricted airspace over Washington. Pilots have reported 700 close encounters with drones to the Federal Aviation Administration so far this year, already tripling last year’s total. Some of these reported drones turn out to be something else, such as birds. But the increasing number of stories about small flying objects that could mangle a jet engine intake, disrupt a propeller or smash a windshield is still scary.

--James Holmes was sentenced to 3,318 years in prison for murdering 12 people and wounding 70 in the Aurora, Colorado movie massacre.

--But from the worst of humanity, including Roanoke, to the best. Details on the heroism of three young Americans – Spencer Stone, Alek Skarlatos and Anthony Sadler – didn’t come in until after I posted last time and so we note their quick actions in averting a probable bloodbath on a Paris-bound train. They represented the best of America and earned the plaudits of the French government and people.

--Lastly, I spent most of last Saturday at the Iowa State Fair and saw Chris Christie at the soapbox. It’s funny. I have not been a supporter of his but in all honesty he was tremendous. He came out, said he didn’t want to use his 20 minutes for a speech and instead just took questions. He answered each one fully and to the large crowd’s satisfaction and it was a reminder; this is why we have long campaigns rather than Euro-type snap elections. It takes a while to get to know the candidates.

I later saw Christie on the grand concourse and introduced myself and shook his hand, telling him he did well, and later followed Iowa Gov. Branstad and my governor around for a while.

Prior to Christie’s speech, I chatted up Amy G., who served in the military and had a Bernie Sanders shirt on. She was like so many others at the fair...tired of classic politicians and just wanting something different.

And I gotta tell ya...most of the folks I talked to at the bar liked Trump. Maybe they weren’t going to vote for him come caucus time, but the support is real.

Bottom line the Iowa State Fair never fails to entertain and inform. I do wish, however, they would have some kind of screening for bags when you go in. It is one giant, symbolic target.

---

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

We pray for the friends and families of Alison Parker and Adam Ward.

God bless America.
---

Gold closed at $1134
Oil $45.22

Returns for the week 8/24-8/28

Dow Jones +1.1% [16643]
S&P 500 +0.9% [1988]
S&P MidCap +0.2%
Russell 2000 +0.5%
Nasdaq +2.6% [4828]

Returns for the period 1/1/15-8/28/15

Dow Jones -6.6%
S&P 500 -3.4%
S&P MidCap -1.8%
Russell 2000 -3.5%
Nasdaq +2.0%

Bulls 31.6
Bears 22.5 [Source: Investors Intelligence...lowest percentage of bulls since summer 2010, which marked a cycle low. 9/3/10, 29.4% bulls, S&P 500 was at 1104. On 2/18/11, the S&P hit 1343. That’s how this contrarian indicator is supposed to work. It comes out before the market opens Wed., and look what happened the rest of this week.]

Thank you for your support. Click on the gofundme link above if you have not already done so, or you can send a check to PO Box 990, New Providence, NJ 07974.

I can’t follow through with my expansion plans without your help.

Brian Trumbore