Week in Review

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Week in Review

02/19/2011

For the week 2/14-2/18

Wall Street…Public vs. Private…the Middle East

“As for pension benefits and the public sector…attitudes are changing rapidly…

“And so I…get a kick out of those talking about Obama, the Democrats and class warfare, rich vs. poor. To me the bigger issue is public vs. private…which is its own class warfare…

“When you talk of the pension issue, often it is also about unfunded liabilities, which was the source of many an article in just the past week. ‘Pensions Push Taxes Higher’ read one headline in the Wall Street Journal.

“(What’s) different this time is the (tax) increases are almost solely to fund pensions, because as you’ve seen in your own communities, most school budgets certainly aren’t going up, and services like police and fire are being cut.”

The next day, December 26, the New York area witnessed the blizzard and I ranted that the furor over how poorly the Big Apple took care of the storm was really “about the looming war, public vs. private,” as I wrote in WIR 1/1/11 and reiterated in WIR 1/8/11. 

It was in the 1/8/11 edition of this column that I noted how on 1/2/11, George Will commented on This Week that the “issue of public employees is going to be the dominant issue for years to come.”

I then noted that the cover of the Jan. 8-14 issue of The Economist had the headline:

“The battle ahead: Confronting the public-sector unions”

So you’ve been forewarned by me and others that the public-private debate is going to at times overwhelm all other issues and thus what is happening in Wisconsin should be zero surprise. New Republican Governor Scott Walker is seeking to have most public workers – excluding police, firefighters and state troopers – pay half of their pension costs and at least 12 percent of their health-care costs. They would also then lose their collective bargaining rights for everything but pay. Some 25,000 marched on the state capital at week’s end in protest and then President Obama weighed in. “I think everybody’s got to make some adjustments, but I think it’s also important to recognize that public employees make enormous contributions to our states and our citizens.”

House Speaker John Boehner called on Obama to stop criticizing Gov. Walker.

“This is not the way you begin an ‘adult conversation’ in America about solutions to the fiscal challenges that are destroying jobs in our country. Rather than shouting down those in office who speak honestly about the challenges we face, the president and his advisers should lead.”

The battle lines have been drawn for 2012, already. Republicans will go after the power of public-sector unions, while Democrats will gladly support them, irrespective of how irresponsible this will be in terms of federal, state and local finances. It’s insane…and it has the potential to tear this country apart!

Along these same lines, fiscal irresponsibility, you have the Obama budget, $3.7 trillion for fiscal 2012 (starting 10/1/11), with massive further deficits down the road, including a projected $1.65 trillion deficit in F-2011, 10.9 percent of GDP, the highest since the end of World War II.

The Big Four – Social Security, Medicare/ Medicaid and Defense – comprise 40% of the federal budget and in the case of the first three are growing exponentially, yet Obama’s budget doesn’t touch them. He totally ignores his own fiscal commission and their solid recommendations, but he’s going to hire 5,000 more IRS agents.

Last December, when Obama reached a compromise on extending the Bush tax cuts as well as a stimulus program that included a payroll tax break, the president had built up a ton of good will. I said that he had a tremendous opportunity to then tackle the deficit issue (read entitlements) head on, beginning with the State of the Union address. When he didn’t I called that “an unmitigated disaster.”

Unless action is taken this year, unless President Obama becomes the leader this country needs on an issue that is also tied to the public-private debate, we will meet our Waterloo in 2012.

Of course the president has chosen instead to play his big game of chicken with Republicans, who are loath themselves to touch entitlements while attempting to harvest as much lower-hanging fruit as possible first, but any budget cuts the new Republican House majority approves will be shanghaied in the Democratic Senate. [I hope Republicans who selected Christine O’Donnell and Sharon Angle in Delaware and Nevada are happy…because the rest of us are still livid. A 51-49 deficit would have been a lot easier to overcome than today’s 53-47…but I digress.]

“How unserious is this budget? Although the White House trumpets $2.18 trillion in deficit reduction over the next decade, those savings are so far off in the magical ‘out years’ that you can barely see them from here. More than 95% of the savings would happen after Mr. Obama’s first term in the White House is over, and almost two-thirds of the promised deficit reduction would arrive after 2016. Pretending to cut deficits by pushing all real cuts into the future is Budget Flimflam 101.”

But short term we also have a pending shutdown of the government on March 4 unless Congress passes a continuing resolution to keep the government funded through the rest of the fiscal year. It is truly pathetic that almost a full six months into the budget year Congress has no formal budget. So we’ll see what happens.

Sen. Tom Coburn (R-OK) on the budget/deficit mess in an op-ed for the Washington Post.

“Leaders prepare nations for coming challenges. As elected officials, we cannot expect Americans to make sacrifices if they are unaware of the urgency and magnitude of the problems before us. We also cannot expect them to follow our advice unless we model sacrifice.

“That’s why in the coming budget debate, everything has to be on the table. There can be no sacred cows and pet priorities. Most of all, the American people have to know that we are willing to sacrifice our political careers in order to do the best thing for the country. We have to resist the tendency to play ‘gotcha’ politics and, for once, unite behind the theme, and reality, that our survival depends on the decisions we must make.

“The president had an opportunity to provide leadership in his State of the Union address and in his budget but declined. Without presidential leadership, any serious effort to reduce spending and reform entitlements will fail. Thankfully, the power of the presidency gives him the ability to pivot whenever he chooses.

“For the president, dealing with our debt threat could be his ‘Nixon goes to China’ moment. Only a liberal Democratic president may be able to reform entitlements. Fortunately for the president, those of us who backed his own debt commission’s plan have already gone to China. Sens. Dick Durbin (D-Ill.) and Kent Conrad (D-N.D.) committed the heresy of backing some entitlement reform. Sen. Mike Crapo (R-Idaho) and I backed tax reform that would lower rates dramatically, stimulate economic growth and generate revenue by doing away with dysfunctional subsidies such as that for ethanol.

“Sens. Saxby Chambliss (R-Ga.) and Mark Warner (D-Va.) are inviting other members to join our delegation. If the president decides to go to China, he’ll find plenty of company. We’re all waiting for him….

“What America needs now is not division and posturing but real leadership. Instead of campaign rhetoric, the president and Congress need to launch a campaign to educate the American people about this seminal moment in our history. How we respond to our looming debt crisis will determine whether we follow the path of previous republics that drowned under a rising tide of debt or whether we cheat history and continue the great and historical claim of American exceptionalism.”

I gave my full outlook on all things economic and financial last time and will try not to repeat a lot the next few weeks and just stick to the news.

This past week was another in which inflation dominated, with the UN talking about dire food shortages for the world’s poor as developing nations pay 20% more for food imports and social instability spreads in some areas. It’s particularly troublesome for those impacted governments who now must lay on new debt to heavily subsidize food to meet their people’s needs. Plus some nations are hoarding foodstuffs, which is never helpful when trying to maintain prices at a true market level. Hoarding is even taking place when it comes to cotton, which hit a record $2 a lb. before backing off slightly on Friday. Cotton normally trades around the $1 level and many are calling for clothing prices to rise 10%.

Here in the United States, we had the release of the January inflation data and producer (wholesale) prices rose a whopping 0.8% (as expected) and a solid 0.5% on the core rate, ex-food and energy. For the last 12 months, the PPI is up 3.6%, with the core up 1.6%. It’s the last few months, though, that is worrisome. On the consumer price side, the CPI rose 0.4%, 0.2% ex-food and energy. For the 12 months it’s up 1.6%, 1.0% core. Again, it’s the 0.4% that stands out and the Federal Reserve can’t just sit back if we get another few months like that. 

It’s an issue many central banks are facing these days, particularly in Britain, where the CPI is running at a 4.4% annual rate, well above the Bank of England’s 2.0% target. But the U.K. just had negative growth in the fourth quarter, and Prime Minister David Cameron’s austerity budget is just beginning to take hold so the central bank doesn’t want to raise rates for fear it will send the British economy back into recession, which is the reason our Federal Reserve gives for not raising interest rates even though the economy is in pretty good shape, save for the jobs picture. Manufacturing is strong, and the consumer is shopping. Plus corporate profits, as best exemplified this week by the likes of Deere, Dell and Nordstrom’s, are strong. Heck, Caterpillar announced on Friday that its January rolling 3-month machinery sales were up 49% from a year ago, including a 58% gain in North America.  And also on Friday, Intel chose the timing of a visit by President Obama to its facility in Oregon to announce its plans to build a $5 billion microprocessor plant in Arizona and hire 4,000 employees in the U.S. this year. [I didn’t see if Intel CEO Paul Otellini gave Obama an apple as well but he probably did.]

Heck, I’ve pooh-poohed some of the earnings reports we’ve seen from the fourth quarter but the news this week from the few biggies reporting who really matter was terrific. And just as in the case of Intel, there are distinct signs Corporate America is beginning to spend some of its huge cash hoard.

But back to inflation, yes, history shows it can be a killer though I’m now on record as saying by May we’ll begin to get some better news on the agriculture front, particularly outside the U.S. Even China is saying the drought in its key northern growing region, while still of major concern, shouldn’t be a cause of a global food shortage in a product such as wheat.   The Chinese government was trying to assure anyone who would listen that it had ample grain reserves, and the impacted drought area did get some needed precipitation this week. [I also can’t help but note that in some important foodstuffs, namely rice, the price is down a full 40% from its 2008 record in this critical product for Asia and Africa, owing almost solely to much better harvests in some key growing areas.] Commodities prices, overall, may be in a significant uptrend, but I maintain this is a final spike and that by yearend we’ll all be in a much better frame of mind when it comes to this topic.

Plus, when one looks at overall consumer prices in the U.S., the Wall Street Journal’s Jon Hilsenrath and Justin Lahart had a good piece on the split in prices.

“The conflicting forces: Soaring commodities costs world-wide are pushing up prices for many goods, while a slowly recuperating U.S. economy, soft housing market and a persistently high unemployment rate are holding down prices for U.S. services.

“Goods prices were up 2.2% from a year earlier, paced by jumps in food and energy prices, according to the Labor Department’s January consumer-price index, and are rising faster than they did before the recession. But services prices were up only 1.2% from a year earlier, far below the 3.4% inflation rate registered for services between 2000 and 2008.”

And then you have a piece by Bloomberg’s Joshua Zumbrun and Shobhana Chandra.

“The improvement in the unemployment rate to 9 percent in January from a two-decade peak of 10.1 percent in October 2009 masks a new reality: Many of the jobs people are taking as the economy rebounds offer lower pay, fewer hours and worse benefits than some of the 8.75 million positions that disappeared because of the recession, according to Paul Ashworth, chief U.S. economist at Capital Economics Ltd. in Toronto….

“Even though the economy began expanding in the third quarter of 2009, private employers continued to cut workers through February 2010. Companies last year eliminated about 550,000 jobs in management and 250,000 in construction, occupations with average hourly salaries of $38.34 and $21.03, according to Ashworth. In the same period, businesses added about 900,000 positions in production and 500,000 in services, which average $16.27 and $11.57.”

Finally, a few more overseas items. The key dates for the European Union remain March 11 and March 24-25, with the EU having to decide on expanding the size and mandate of its bailout fund in order to maintain some stability in the euro currency. But before we even get to these gatherings (and another in early March of less import), Portugal could require a bailout. It’s all but certain it will join Greece and Ireland on the disabled list, while this coming Friday, Ireland holds its critical snap election to come up with a new government, which looks certain to be led by Fine Gael, who will then demand a restructuring of its EU/IMF bailout. It was also announced this week that growth in the EU for the fourth quarter was up just 0.3% from Q3. The continent has to do better than this to avoid further fiscal turmoil.

And in China, in announcing its CPI for January was up 4.9%, which isn’t good, with food prices up 10.3% for the month, the government laid on further bank reserve requirements in yet another desperate attempt to cool the economy without bursting a bubble. But here leaders are getting no help from the still red-hot housing sector, with 68 of 70 major cities showing further price rises in January.

Egypt: 60 Minutes interviewed Google exec Wael Ghonim, post the fall of Hosni Mubarak, and he said “It’s not about the food…it’s about our freedom” when it comes to the chief reason for the revolt. So will the Egyptian military leaders now in charge give in to the people’s demands for more freedom? The military council dissolved parliament, vowed to hold elections in six months, said it would revise the constitution shortly, and would honor all existing peace treaties, for which Israel is grateful. But at the same time there are signs of trouble in the Sinai, where Beduin seem to be filling the power vacuum, and the uncertainty that will exist for months, if not a year or more, is of benefit to Hamas, which should find it far easier to obtain more weaponry.

As for the Muslim Brotherhood, they vowed not to field a candidate for the next presidential election, but the military did give them a voice on a legal panel charged with rewriting the constitution. Actions will speak louder than words, particularly when it comes to the treatment of women in Egypt, at least in the eyes of your editor. [More on this below.]

A USA TODAY poll gave President Obama credit for his handling of the Egypt crisis by a 2-to-1 margin, and no doubt the U.S. has major influence going forward with the Egyptian army, given our $1.5 billion in annual aid to them.

But the message that went out between Obama and Secretary of State Hillary Clinton during those 18 days was decidedly mixed and Obama is said to be furious with how Clinton and the State Department muddied the diplomatic effort. Obama was clearly more forceful than State’s public comments.

That said, allies such as Saudi Arabia, Jordan and Israel were hardly enthusiastic about the way in which Mubarak was forced out. And as for Mohamed ElBaradei, the Egyptian military rulers don’t want him involved in any discussions on a new order.

Lastly, social networks work both ways. In the case of Egypt they hastened the fall, but the new leaders can use them to their advantage. Think about how high school kids use the social networks. Often it’s to slander an innocent. Regime leaders can do the same thing, or simply shut them down.

“One of the more obvious lessons of the toppling of Mr. Mubarak’s regime was that the revolution belongs to Egyptians. The experts who assured Obama that the Egyptian president would weather the storm misread events because they saw the world as it used to be. Deals with generals are yesterday’s story. The west now has a bigger audience.

“The spread of popular unrest to Bahrain, Libya and Iran carries the same message. There are big differences between each case. While the U.S. and Europe happily cheer those on the streets of Tehran protesting against the ayatollahs, they are less comfortable about the demonstrations of their Shia cousins in Bahrain. What unites the protests, though, is a demand for human dignity well beyond the control of outsiders.

“A good starting point for Mr. Obama would be recognition that the U.S. can continue to exercise influence only in so far as it accepts it can no longer impose its will. Some of the choices made in Egypt, Tunisia and elsewhere will be unpalatable to Washington. Tough. Mr. Obama should offer the pro-democratic forces help that cannot be mistaken for interference….

“Making the transition from a world of striking deals with autocrats to the much more complex business of building relationships with Arab electorates will be a wrenching business – not least because the unavoidable space between authoritarian and democratic rule could yet be filled with chaos.”

The protests in Bahrain are really about a Shia majority having had enough of a Sunni government. Sunni-led Saudi Arabia is Bahrain’s main sponsor and the Saudis are deathly afraid of Shia Iran leading an overthrow of Bahrain’s monarchy. The two are connected by a 16-mile causeway, but, more importantly, Saudi Arabia’s Shia minority largely inhabits the oil-producing eastern part of the country. No way the Saudis let an uprising on its soil get out of hand and you can be sure they are doing everything they can to help Bahrain’s leadership.

In Libya, ruled by Col. Gaddafi since 1969, the regime should succeed in beating down the protesters, but at a high cost (an estimated 84 dead already as I go to post). I expect the government in Algeria to stand firm as well.

Yemen to me is about the prospects for a military coup, which I would put at 50/50.

And remember Tunisia? Not for nothing but this place is a mess. On Friday a Polish priest was found dead, his throat slit, clearly the work of Islamic extremists who are methodically gaining control of parts of the country, it appears. [More on this hell-hole below.]

The White House, unlike in 2009, has praised the Iranian demonstrators this week but it has yet to call for a change in leadership. Instead, the White House is seeking to toughen economic sanctions against Tehran even more as tens of thousands have protested against the regime in the capital and elsewhere (with further protests slated for Monday). Thus far the Iranian leadership continues to have the upper hand.

But Supreme Leader Ayatollah Khamenei has the final say on what happens to the opposition and, just as in 2009 and the post-election demonstrations that were quashed at that time, Khamenei is loath to arrest the two main opposition leaders, Moussavi and Karroubi. On Thursday, however, it was reported that Moussavi was missing and family members feared he had been taken in. President Ahmadinejad and the Iranian parliament have called for both Moussavi and Karroubi to be executed.

Meanwhile, recall that post- Mohamed ElBaradei’s regime at the International Atomic Energy Agency, the new leadership there has been much tougher on Iran and now IAEA records show that while Iran struggled to cope with the Stuxnet computer worm and its impact on its uranium enrichment efforts, the IAEA shows a “feverish – and apparently successful – effort by Iranian scientists to contain the damage and replace broken parts, even while constrained by international sanctions banning Iran from buying nuclear equipment.” [Jerusalem Post]

One Western diplomat said of the confidential IAEA information that Iran has been “working to maintain a constant, stable output” of low-enriched uranium. The question becomes, then, at what point does Iran decide to “break out” and enrich the uranium it has up to bomb grade strength? The IAEA and various intelligence agencies should know when this occurs, as there are tell-tale clues. The final step also takes a lengthy period so the West and Israel have time to respond. 

As for Lebanon, talk about falling under the radar, this is easily the most important, and dangerous, situation today. Najib Mikati, the prime minister-designate, still has not formed a new government after former prime minister Saad Hariri pulled his March 14 coalition into the formal opposition and out of any new government partnership with Hizbullah, which controls Mikati.

But the immediate issue is the war of words that erupted between Hizbullah’s chief Sheikh Nasrallah and Israeli leaders.

“I say to the fighters of the Islamic Resistance: Re ready. If a new war is imposed on Lebanon we may ask you to take Galilee, to free Galilee.”

“Nasrallah declared today that he will conquer the Galilee. I have news for him. He won’t.”

Lebanese President Michel Sleiman said in response to Israeli Defense Minister Ehud Barak’s pronouncement that Israeli soldiers may be “called to enter [Lebanon] again,” that “The Lebanese Army, people, and resistance, are ready to confront any aggression to target Lebanon’s stability and security.”

And remember my initial call back when the Egyptian crisis first hit concerning security? Mary Beth Sheridan and Joby Warrick had the following in the Feb. 13 edition of the Washington Post.

“For decades, Egypt’s government has been a critical partner for U.S. intelligence agencies, sharing information on extremist groups such as al-Qaeda and working hand in glove on counterterrorism operations. Now the future of that cooperation is in question….

“ ‘How will cooperation with the United States on counterterrorism develop in the view of these new constraints? I would argue the space will contract,’ said Aaron David Miller, a former State Department Middle East expert….

“(With) a new government, ‘the comfort level with the United States may not be so high. They will be more distrusting,’ in part because of past U.S. efforts to prop up autocratic regimes, (said Robert Grenier, the former head of the CIA’s counterterrorism center).”

Terrorism expert Bruce Hoffman noted that during the Cold War, the United States had a window into the Soviet Union through Iran, then a strong ally.

“We have the same kind of window into Iran and other countries via the Egyptians. Whatever happens next, this will never be the same.”

Street Bytes

--The rally in equities continued with all three major indices recording gains of 1.0%. The S&P 500, at 1343, has now doubled its intraday low of 666 set on March 6, 2009 (though the closing low was 676 set on March 9). And not for nothing, but the Dow Jones, at 12391, is no longer that far from its all-time high of 14164 set on Oct. 9, 2007, which was also the day the S&P 500 set its closing high of 1565. Not to be outdone, Nasdaq, at 2833 to finish the week, is at levels not seen since Jan. 2001, which was right before its crash went into overdrive. Since its March 9, 2009 closing low of 1268, Nasdaq has advanced a stupendous 123%! As my grandfather would have said, “Gee willickers!” [He was a corny sort.]

For all the hue and cry about rising rates, the key 10-year Treasury, after hitting a 9-month high a few weeks ago at 3.77%, has now backed off again, owing in part to another flight to safety due to the Middle East crisis. The Fed’s Open Market Committee also released its most recent minutes and while it hiked its projected rate of growth for the U.S. economy this year to 3.65%, it continued to maintain inflation would be muted, but there would also be little improvement, if any, in the current 9% unemployment rate.

But of course the warnings on Treasury bonds in particular are warranted. I just don’t see the losses for bond fund holders being too severe, yet. That could come next year if I get the timing of our fiscal crisis right. PIMCO’s Bill Gross significantly slashed his U.S. government securities holdings for his flagship Total Return Fund from 22% to 12% in January, just revealed now.

Two other notes. The Treasury Department said for the month of December, foreign buying of U.S. stocks, bonds and other financial assets fell, though less than forecast, to $65.9 billion compared with net buying of $85.1 billion in November. This is still very good and far from “net selling.”

And on the China front, it reduced its holdings of U.S. Treasury obligations in December from $895.6 billion in November to $891.6 billion. As former NBA star Derrick Coleman would have said, if asked, “Whoopty-damn-do.” [Japan, the second largest foreign holder of U.S. government paper, actually raised its holdings to $883.6 billion.]

--Japan’s economy contracted for the first time in five quarters in the October to December period, down 1.1% on an annualized basis, which means that China officially overtook Japan as the world’s second largest economy for 2010. But Japanese officials believe their economy has clearly bottomed and are looking for a resurgence.

--No doubt there’s good news out there. Americans are putting their financial house in order and since the summer of 2008 when consumer debt peaked, “Americans now have 7 percent less mortgage debt, 12 percent less in auto loans and 15 percent less credit card debt, according to the Federal Reserve Bank of New York. Loan payments last year were at their lowest level in a decade.

“Meanwhile, Americans are saving at nearly triple the rate they did between 2007 and 2009, setting aside 5.3 percent of their disposable income in December, according to the Commerce Department.” [Neil Irwin / Washington Post]

--And there is good news (amongst all the bad) on the real estate front as the delinquency rate is falling significantly, from 5 percent when tallying those more than 90 days overdue at the end of the first quarter of 2010 to 3.6 percent at the end of the fourth quarter, according to the Mortgage Bankers Association. But it’s going to take a long time to clear out the foreclosed homes and excess inventory and it’s only then you’ll see any sustained recovery in home prices.

--Home sales in California fell 0.5% in January from year ago levels, with the median home price down 3.2% to $239,000 (also from Jan. 2010). In the key six-county Southern California home market, sales hit the lowest level for a January in three years and the median price dropped year over year for the first time since fall 2009. Also, 29.5% of sales were all cash, while foreclosure sales accounted for 37% of the resale market in So-Cal., according to DataQuick. [Los Angeles Times]

--The National Retail Federation said it expects retail sales to rise 4% this year, the biggest increase since 2006. Spending rose 3.5% in January from year ago levels.

--Federal agents rounded up at least 114 suspects in nine cities, including doctors, nurses and company owners, in another effort to crack down on Medicare fraud. This was the most ever nabbed in one day. Strike forces with the Justice Department and Health and Human Services have charged nearly 1,000 people since 2007 with falsely billing Medicare for more than $2.3 billion. Ringleaders deserve life in prison without parole because of the premeditated nature of the crimes. That would put an end to it.

--The damage from Cyclone Yasi and other natural disasters in Queensland, Australia is now estimated at $20 billion, with the banana and sugar cane industries being particularly hard hit. Australia is the third biggest exporter of raw sugar behind Brazil and Thailand [I had no idea Thailand was number two], which is fueling sugar prices.

--The number of international visitors to Singapore rose 20% in 2010 with tourism spending up 49%! That’s what adding a few spectacular casinos will do.

--The National Weather Service is predicting major flooding in the north-central U.S. this spring due to the excessive snowpack. The worst is expected from mid-March to mid-April. Fargo, N.D., looks to be under the gun in particular, having received far above normal snowfall.

--Silver prices hit a new 31-year high, $32.29 an ounce, the highest since the infamous Hunt brothers cornered the market. The U.S. Mint said it sold 6.4 million ounces of American Eagle silver coins to dealers in January, up 78% from January 2010 levels.

--Following a 70% increase in gold demand in 2010, the World Gold Council projects demand in China for gold investment could be another 40%-50% this year.

[At the same time, investors are not piling into gold ETFs like they had been.]

--CBS Corp. reported strong fourth-quarter earnings with revenue up 11% to $3.9 billion. CEO Leslie Moonves said “The resurgence in local advertising was the story,” with TV station ad spending up 28%.

--As part of its own solid earnings report, Dell Inc. reported that revenue from large enterprises and from small and medium-sized businesses rose 12% each, which more than offset sluggish ongoing consumer demand.

--The deputy CEO of natural gas giant Gazprom has likened the shale gas boom to the Internet bubble, “which first blew up enormously and then flattened itself out to some rational and logical size.” Nat gas has been floundering in the $4 per million British Thermal Units range but Alexander Medvedev says it would reach $6-$8 within five years. It’s the surge in drilling in the U.S. that has hurt Gazprom’s profits.   The massive production, though, is going to force many companies out of the business because it’s just not economical. At the same time, the rising price of coal, which competes with nat gas, could also impact the price picture for gas to the plus side.

--Longtime energy analyst Charles T. Maxwell, in an interview with Barron’s, on his projection for the price of benchmark West Texas Intermediate crude. $85 on average in 2011, then $95 in 2012 and $115 in 2013. “The following year, 2014, we see the price going to $140 a barrel, followed by $180 in 2015. And then, by 2020, it’s at $300, or roughly $225 discounted back to the present.”

Maxwell’s point is simply that around demand of 95 million barrels per day (we’re currently at 87-88 million), which could be reached around 2015, it will become apparent we can’t go much above that production level…or Peak Oil. I don’t necessarily disagree with this, being a Peak Oil adherent myself, but there is no way the price approaches $300. The global economy would be killed long before then.

--An Ecuadorean court has ruled that Chevron Corp. was responsible for oil drilling contamination in Ecuador’s northern jungle and has been ordered to pay $9.5 billion in damages in a long-running lawsuit, believed to the biggest award ever of its kind. Initially, the recommendation of a court-appointed expert was $27.3 billion. Plaintiffs, including indigenous groups, say their hunting and fishing grounds in Amazon River headwaters were decimated by toxic wastewater. Chevron has zero plans to pay, calling the decision “illegitimate and unenforceable” while saying it would appeal. This case has been going on for 17 years.

[The largest known jury award was the $5 billion originally granted to victims of 1989’s Exxon Valdez spill, which was later reduced to $507.5 million. Union Carbide paid $470 million to the Indian government for the Bhopal leak. BP set up a $20 billion oil spill compensation fund on its own after last year’s Gulf of Mexico debacle.]

--General Motors Co. will be awarding hourly workers bonuses of more than $4,000 to 45,000 in its factories due to its strong performance in 2010; more than double the previous record payment of $1,775 in 1999. This is good. GM is not giving annual pay raises, and new workers coming in are making far less in salary than their predecessors, but this is the way it should work. I hope they are getting $20,000 bonuses in the future. That would be a great sign for all of us.

[Ford’s 40,600 U.S. factory workers will receive a bonus of $5,000.]

--One of the huge issues in the proposed $10 billion merger between Deutsche Borse and New York Stock Exchange parent NYSE Euronext is what to call what will be the world’s largest exchange operator, even as political leaders said they need more details before deciding whether to support or oppose the deal. Among the names floating around, “NYSE Deutsche Borse” makes the most sense, even if it’s not too exciting.

--The bankruptcy filing by Borders Group Inc. leaves a long list of publishers with huge losses. One expert said they’ll be lucky to receive 25 cents on the dollar. The publishers had been scaling back on deliveries as Borders’ problems mounted but you still have the likes of Penguin Group being owed $41.1 million. Borders plans on closing 30% of its stores (200 in all) and will come up with a plan for publishers in 30 days.

--Deflation Watch: The University of the South (Sewanee, Tenn.) said it will slash tuition and fees for the coming school year by 10%. Said the university’s president, John M. McCardell Jr., “Higher education is on the verge of pricing itself beyond the reach of more and more families.” It will be interesting to see what the impact is on the competition.

--So I’m watching The Grammys the other night and I see Jennifer Hudson, who was lookin’ mighty fine. I had read that Ms. Hudson had lost a ton of weight but was startled by just how much. Later she had a commercial for Weight Watchers that was on the air.

I then exchanged notes on the topic with reader, and long-time work buddy, Liz S., who told me she heard Hudson was on Oprah a while back and talked of spreading the gospel on Weight Watchers to “256” family members. So Liz and I were incredulous. We were more so later in the week.

You see, on Thursday, Weight Watchers reported spectacular earnings and the stock soared 35% that day alone! The idea was staring us in the face. All we had to do was a little research. Peter Lynch would be very disappointed.

--This is exciting. Lloyd’s of London and other insurers in the City are finalizing plans for a private navy of armed patrol boats to protect shipping in the Gulf of Aden off Somalia and thus reduce the soaring costs of insuring the vessels against pirate attacks.

[I just saw where four American sailors were taken hostage in the same area.]

--This is a typical headline for the times, from New Jersey’s Star-Ledger.

“Middlesex County expects to lay off up to 50 employees”

This is on top of 120 positions eliminated through attrition, with pension contributions increasing $3.3 million and health insurance costs jumping $1.9 million.

--The attorneys and consultants helping recover funds in the Bernie Madoff Ponzi scheme may earn up to $1.3 billion in fees, according to the Financial Times. About $730 million of this will go to Baker Hostetler, the firm where court-appointed trustee Irving Picard is a partner. Thus far Picard has collected $7.6 billion off Madoff’s victims.

Meanwhile, in an interview with the New York Times, Madoff said many of the banks and hedge funds involved in his scheme “had to know” what was going on. “But the attitude was sort of, ‘If you’re doing something wrong, we don’t want to know,’” he told the paper in his first jailhouse interview. Madoff absolved ownership of the New York Mets, however, which is a crock. He also didn’t name any specific banks or hedge funds as having been an accomplice.

--The European Parliament ratified a free-trade pact between the EU and South Korea, which is expected to double trade between the two as most tariffs are removed. This follows Seoul’s agreement with Washington. Ergo, South Korea’s leadership appears to have its country well-positioned for the future.

--For the archives (and future research), Atlantic City’s casino revenues in January fell 13.2 percent from year ago levels. Weather played a huge role, even more so than competition from Pennsylvania and other neighboring states, but this continues a disastrous overall trend.

--My portfolio: Two weeks ago I sold my small holding in the China travel company at a solid profit. I wasn’t going to invest more in it without going over there and seeing as I’m not anytime soon, I just jettisoned it. I also reduced my uranium play to just 1/6th of what I started out with. This has been one of my better investments ever. I just don’t want to get too greedy.

I am greedy, however, on my Canada/Russia rare earths play, which is still up big but way off the highs.

As for the big one, the specialty chemical/biodiesel play in Fujian, it’s floundering along with just about everything else affiliated with China these days. Sentiment in the smaller companies is awful, and the economic uncertainty doesn’t help. But earnings will be coming out in a few weeks and I remain optimistic. I’m also prepared to hold it until well into 2013 if necessary.

Foreign Affairs, part II

Iraq: There were more bomb attacks, including one last Saturday that killed at least 26, as Prime Minister Nouri al-Maliki filled another eight cabinet positions, but still hasn’t done anything about the three most sensitive ones; the ministries of defense, national security, and the interior. Clearly, the lack of any leadership in these slots is hurting the security effort in a major way.

Afghanistan: A leading U.S. commander here, Maj. Gen. Richard Mills, said the Taliban had been routed from its stronghold in Helmand province, which is good, but the gains can only stick with a continued massive U.S. presence and the U.S. is slated to begin pulling out this summer. 

But now some in Washington are talking of any drawdown being modest as U.S. and NATO commander Gen. David Petraeus has acted as if the July date will come and go with only minimal numbers going home.

China / Taiwan: Taiwanese President Ma renewed his calls for the United States to sell his island advanced fighter jets, arguing Taiwan’s survival was at stake even as economic relations between Taiwan and the mainland have improved.

“We oppose the use of military force to resolve cross-strait disputes. However, this is not to say that we cannot maintain a military capability necessary for Taiwan’s security,” Ma said.

This week Taipei also announced at least 10 moles from Beijing are believed to have penetrated Taiwan’s national security units, this after Taiwan arrested a top army major general on espionage charges.

Separately, Japan is furious over plans for Chinese and Russian companies to explore an island chain that is under the control of Moscow but also claimed by Tokyo, the Kuril Islands, which Japan calls the Northern Territories.

Lastly, Canada was hit by an unprecedented Chinese-based cyberattack that penetrated two key economic ministries, the Finance Department and Treasury Board. The hackers were attempting to steal passwords that unlock entire government data systems. Canadian authorities said no data was compromised.

North Korea: Kim Jong-un has been promoted to a senior defense position, effectively making him number two behind his father, Kim Jong-il.

There were also reports this week that North Korea was close to completing a second long-range missile launch site, though South Korea said the North wasn’t preparing any specific missile test.

Tunisia: Italy is furious at the wave of immigration coming from the North African state, as coastguards intercepted another 1,000 last Sunday. Italy has announced it will use force to intervene. Italian Interior Minister Roberto Maroni said “The Tunisian system is collapsing…the Maghreb is exploding,” referring to the North African region in general. “Europe is not doing anything…as usual we’re on our own.”

Picture that the tiny Italian island of Lampedusa, which usually has just 6,000 residents, was suddenly inundated with 5,000 Tunisian migrants. What would you do? I know what I would; I just can’t print it. Yes, some are fleeing poverty, but as Maroni added, there were also escaped convicts and “figures from terrorist organizations” among them. [Once again, I was all over this last point…the terrorist threat…at the outset of the Middle East crisis.] This is an important side note to the upheaval in the region and will lead to more angst and violence across all of Europe.

Pakistan: A story I first picked up on as being highly important, that of American Raymond Davis, threatens the U.S.-Pakistani relationship as the White House is urging he be released from custody, while officials in Lahore say Davis must stand trial for killing two Pakistanis he says were trying to rob him. But Davis is a diplomat, and has a diplomatic passport, and thus under the Vienna Convention, he is to be released.

As the Wall Street Journal’s editorial board points out, however, “With all the attention around the case in Pakistan now, it’ll be a brave judge who frees Mr. Davis and becomes a target himself.”

The Pakistanis claim he was a spy, but “Diplomatic immunity is sacrosanct among countries in good international standing,” notes the Journal. Pakistan better comply soon or $3.5 billion in aid it receives from the U.S. will be withdrawn.

The Pakistan government also issued an arrest warrant for former President Pervez Musharraf, saying he was aware of Taliban plans to assassinate opposition leader Benazir Bhutto in 2007. Musharraf is being accused of failing to provide adequate security for the former prime minister.

Italy: Hundreds of thousands of women took to the streets of Italy last Sunday to tell Prime Minister Silvio Berlusconi just what they think of him as he heads to trial, possibly in April, to answer for his behavior, including the allegation he paid for sex with a 17-year-old prostitute nicknamed Ruby the Heartstealer. But aside from the fact there could be endless delays in the judicial proceedings, Berlusconi may never have to make a personal appearance at his trial.

Random Musings

--Peggy Noonan / Wall Street Journal…on Indiana Gov. Mitch Daniels.

[And his speech to the Conservative Political Action Conference, CPAC]

“Mr. Daniels began with first principles – the role and purpose of government – and went to what he has done to keep his state’s books in the black in spite of ‘the recent unpleasantness.’ He turned to the challenge of our era: catastrophic spending, the red ink that is becoming ‘the red menace.’ He said: ‘No enterprise, small or large, public or private, can remain self-governing, let alone successful, so deeply in hock to others as we are about to be.’ If a foreign army invaded, we would set aside all secondary disputes and run to the ramparts. We must bring that air of urgency to the spending crisis. It is ‘our generational assignment…Forgive the pun when I call it our ‘raison debt.’

“He argued for cuts and sunsetting, for new arrangements and ‘compacts’ with the young. What followed has become controversial with a few conservatives, though it was the single most obvious thing Daniels said: ‘We have learned in Indiana, big change requires big majorities. We will need people who never tune in to Rush or Glenn or Laura or Sean,’ who don’t fall asleep at night to C-Span, who are not necessarily engaged or aligned.

“Rush Limbaugh…saw Mr. Daniels’ remarks as disrespectful. Radio listeners aren’t ‘irrelevant or unnecessary.’

“Of course they’re not. Nor are they sufficient. If you really want to change your country, you cannot do it from a political base alone. You must win over centrists, moderates, members of the other party, and those who are not preoccupied with politics. This doesn’t mean ‘be less conservative,’ it means broadening the appeal of conservative thinking and approaches….

“You know the phrase Reagan Democrats? It exists because Reagan reached out to Democrats! He put out his hand to them and said, literally, ‘Come walk with me.’ He lauded Truman, JFK and Scoop Jackson. He argued in his first great political speech, in 1964, that the choice wasn’t right or left, it was up or down.

“That’s what Mr. Daniels was saying. ‘We can search for villains on ideological grounds,’ but it’s a waste of time. Compromise and flexibility are necessary, ‘purity in martyrdom is for suicide bombers.’ We must work together. You’ve got to convince the other guy.”

It’s for the above that Mitch Daniels is my personal favorite these days.

--Congressman Ron Paul won last weekend’s straw poll at CPAC with 30% of the vote to 23% for former Gov. Mitt Romney. Sarah Palin received a whopping 3%.

--An editorial in the Washington Post questioned President Obama’s mission of building high-speed rail lines to the tune of $53 billion over six years, as proposed in his fiscal 2012 budget. “China is building faster trains and newer airports,” the president warned in his State of the Union address. But…

“China would seem to be an especially dubious role model, given the problems its high-speed rail system has been going through of late. Beijing just fired its railway minister amid corruption allegations; this is the sort of thing that can happen when a government suddenly starts throwing $100 billion at a gargantuan public works project, as China did with rail in 2008. Sleek as they may be, China’s new fast trains are too expensive for ordinary workers to ride, so they are not achieving their ostensible goal of moving passengers from the roads to the rails. Last year, the Chinese Academy of Sciences asked the government to reconsider its high-speed rail plans because of the system’s huge debts….

“A recent World Bank report on high-speed rail systems around the world noted that ridership forecasts rarely materialize and warned that ‘governments contemplating the benefits of a new high-speed railway, whether procured by public or private or combined public-private project structures, should also contemplate the near-certainty of copious and continuing budget support for the debt.’”

“Donald Rumsfeld, best known and remembered as President George W. Bush’s secretary of Defense before and during the Iraq war, has penned an 815-page book released this week titled Known and Unknown. It should remind us of how little we knew about Iraq and how Rumsfeld, Vice President Cheney, Bush and others pulled the wool over our eyes.

“Bush, Cheney, Rumsfeld and their pro-war crowd warned us Iraq’s Saddam Hussein was harboring weapons of mass destruction that he might use against neighboring countries.

“But they said fixing the problem would be simple. Before the invasion, Rumsfeld told troops, ‘It could last, you know, six days, six weeks. I doubt six months.’

“Cheney said the conflict would be ‘weeks rather than months.’

“Appearing on ABC’s This Week two weeks after the invasion (March 30, 2003), Rumsfeld said, ‘We know where the (weapons of mass destruction) are. They’re in the area around Tikrit and Baghdad and east, west, south and north somewhat.’

“They still haven’t been found anywhere. Because there weren’t any. Now, Rumsfeld has written a book not only to clarify the misinformation and mistakes made in Iraq, but to try to salvage his reputation.

“In doing so, he takes some hard hits against two key administration officials who were on the right side rather than the wrong side of the many Bush misadventures – Secretary of State Condoleezza Rice and her predecessor, Colin Powell.

“Rumsfeld’s book is worth reading. If you do, it will help you understand how and why some politicians will do almost anything to pull the wool over our eyes in order to push their pet projects.”

--The sexual assault on CBS correspondent Lara Logan during the ‘celebration’ of the fall of Egyptian President Hosni Mubarak in Cairo’s main square was as appalling as you can get, with the thugs yelling “Jew! Jew!” [Logan is not Jewish.]

Logan had been separated from the rest of her crew when she was descended upon and was finally rescued by some heroic Egyptian women and what the network described as 20 soldiers. CBS was forced to go public with the story after it was clear other news outlets were on to it. She was just one of countless journalists, including many females, who were harassed, groped, and detained.

The bigger story is how women throughout the Middle East are constantly mistreated due to pathetic and archaic “social mores.” Rights campaigners in Egypt are concerned that after their brief uprising, the old ways will return and they will once again be suppressed.

--Virginia Democratic Sen. Jim Webb announced he wasn’t running for reelection in 2012 but said he would spend his remaining time pushing for passage of criminal justice reform legislation. Webb believes the current system incarcerates too many people at too high a cost, with poor results, as reported by Bob Lewis of the AP.

Webb has tried this before with his National Criminal Justice Commission Act which he has just reintroduced, which would create a panel that would make recommendations. It had bipartisan support last year. Here’s hoping he’s successful and we can release the millions in prison for minor drug offenses.

--I took my brother and his family to see “Spider-Man” on Broadway last weekend and it was as bad as all the reviews you’ve read said it was. I told you of how way back I got tickets the night the story of the production was featured on 60 Minutes but because opening night has been delayed three times by accidents and injuries my February 12 show was still a preview. This week it was announced that the play might undergo a script rewrite.

And if you’re thinking the aerial act must at least be good, understand there is zero danger with all the safety changes that have been made and that you or I could easily do what the actors do in flying around the theater.  Cirque du Soleil it’s not. When’s the next revival of “Oklahoma”?

--Newsweek had a bit titled “Are Dogs Stealing Our Jobs?” by Jesse Ellison. For example:

Labradors can detect colorectal and bowel cancer with 98 percent accuracy by examining stool samples, according to a recent study, while the current technology is correct only 10 percent of the time.

German shepherds: They remain the best at detecting roadside bombs, more so than any technology we have come up with.

Jack Russell terriers: Can sniff out bed bugs with 95 percent accuracy, three times greater than sight detection.

--In yet another Sign of the Apocalypse, “Watson” the IBM computer kicked two former Jeopardy! champions’ butts in a three-day match, tallying $77,147 to $24,000 and $21,600 for the two humans. Oren Etzioni, a professor of computer science at the University of Washington, told the New York Post that despite the fears of some, “The day where robots will keep us as pets is still very far away.” All I know is I have yet another reason to sleep with one eye open.

[Another expert, Richard Doherty, described the event as “the most significant breakthrough of this century.”]

--Goodness gracious. It was just revealed that on Jan. 29, USC University Hospital (Los Angeles) accidentally transplanted a kidney into the wrong patient. The hospital offered no details on the nature of the error and only said that in suspending transplants, pending an investigation, the patient who received the wrong kidney escaped harm because it was an acceptable match. The Los Angeles Times got a comment from Dr. Goran Klintmalm of Baylor’s Regional Transplant Institute in Dallas.

“The safeguards are very substantial. I can’t even imagine how this mistake could have happened.”

Geezuz, you could go in for a colonoscopy and end up with a new kidney.

Did you see the film of the solar storm on our most essential utility, the Sun? I’m amazed how quickly the impact can reach the Earth, like just two days.

“Researchers say the Sun has been awakening after a period of several years of low activity.”

Uh oh. Better treat it with more respect and start doing some special sun dances, know what I’m sayin’? Or maybe have Jay-Z and Alicia Keys collaborate again.

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

Gold closed at $1388…still down for the year
Oil, $86.20…ditto

Returns for the week 2/14-2/18

Dow Jones +1.0% [12391]
S&P 500 +1.0% [1343]
S&P MidCap +1.3%
Russell 2000 +1.5%
Nasdaq +0.9% [2833]

Returns for the period 1/1/11-2/18/11

Dow Jones +7.0%
S&P 500 +6.8%
S&P MidCap +8.3%
Russell 2000 +6.5%
Nasdaq +6.8%

Bulls  52.1
Bears 19.6 [Source: Chartcraft / Investors Intelligence]

Next time from San Diego.

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