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01/08/2011

For the week 1/3-1/7

[Posted 7:00 AM ET]

Wall Street

WIR 12/15/10

“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.”

And then came the blizzard. I knew as I wrote my rant on the topic last time that many of you wondered why I felt it garnered such front page attention. Hopefully you now understand. My bottom line is it was about the looming war, public vs. private, that has been simmering until now.

WIR 1/1/11

“Oh, this storm will reverberate for years to come. And you know that public vs. private debate of mine from last week? This will help increase the heat. The common refrain directed at Mayor Bloomberg, who amazingly didn’t ‘get it’ until Wednesday afternoon [12/29], was ‘We paid our taxes…dig us out!’”

I then wrote that Bloomberg “in turn must go after the sanitation workers who treated their fellow New Yorkers like chumps. Lock ‘em up. Better yet, throw them in a fetid dumpster filled with rats.”

Three days after writing the above the feds launched a criminal probe into allegations some sanitation workers conspired to paralyze Gotham. The Brooklyn U.S. Attorney’s Office is looking into whether Sanitation bosses plotted to thwart cleanup efforts as a way to protest budget and staff cuts. Brooklyn and Queens district attorneys have joined the case.

This is big. How big? Sunday’s New York Times (Jan. 2…a day after my piece) had the front page headline:

“Public Workers Facing Outrage In Budget Crisis…Union Benefits At Issue…Officials Get Support In Seeking Concessions and Wage Freezes”

As reported by Michael Powell:

“Ever since Marie Corfield’s confrontation with Gov. Chris Christie this fall over the state’s education cuts became a YouTube classic, she has received a stream of vituperative e-mails and Facebook postings.

“ ‘People I don’t even know are calling me horrible names,’ said Ms. Corfield, an art teacher who had pleaded the case of struggling teachers. ‘The mantra is that the problem is the unions, the unions, the unions.’

“Across the nation, a rising irritation with public employee unions is palpable, as a wounded economy has blown gaping holes in state, city and town budgets, and revealed that some public pension funds dangle perilously close to bankruptcy. In California, New York, Michigan and New Jersey, states where public unions wield much power and the culture historically tends to be pro-labor, even longtime liberal political leaders have demanded concessions – wage freezes, benefit cuts and tougher work rules.

“It is an angry conversation. Union chiefs, who sometimes persuaded members to take pension sweeteners in lieu of raises, are loath to surrender ground. Taxpayers are split between those who want cuts and those who hope that rising tax receipts might bring easier choices.

“And a growing cadre of political leaders and municipal finance experts argue that much of the edifice of municipal and state finance is jury-rigged and, without new revenue, perhaps unsustainable. Too many political leaders, they argue, acted too irresponsibly, failing to either raise taxes or cut spending.

“A brutal reckoning awaits, they say.”

New Jersey is as much Ground Zero as any other place. Remember those stories I related from last year on some of the sums retired police officers are getting, not just massive pensions, but also staggering one time sums for vacation time not taken…like in excess of $100,000? It has to end. Or as George Will said last Sunday on “This Week,” the “issue of public employees is going to be the dominant issue for years to come.”

I write the opening of “Week in Review” on Friday afternoons and I just picked up the Jan.8-14 issue of The Economist. What does it have on its cover?

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

I don’t have the time to read the accompanying pieces for this column but suffice it to say I’ll cover their take next time.

But back to the snowstorm of Dec. 26. Economist Kevin Hassett had an op-ed in Bloomberg on Jan. 3. Hassett said the reaction of the sanitation workers is a harbinger of things to come. In Europe the public/union workers constantly strike and in most cases telegraph ahead of time when they will, such as in France. That is not America’s history, nor is it likely to be, but instead we’ll increasingly see actions such as those taken in New York.

Kevin Hassett:

“ ‘Sleeping on duty, threatening co-workers, falsifying documents, rudeness, sexual harassment and poor performance would get you fired from most jobs,’ according to a recent analysis of personnel cases in Arizona state agencies and the city of Phoenix. ‘But often that’s not the case for a government worker.’

“Some examples cited in the study were stunning. In one case, it took three years from the time of his arrest to complete the firing of serial killer Dale Hausner from his city job as a custodian at Sky Harbor International Airport in Phoenix.

“Even if the accusations of a work slowdown are accurate, it’s unlikely anyone will lose their job in the New York City snow debacle. [Ed. Bloomberg has disciplined some supervisors thus far.] The same will be true around the country. Government workers can be ineffective and unproductive with impunity.

“So here’s one vision for 2011 in the U.S.: subways slower, lines at airports longer, trash and snow piling up in the streets, visas and other government documents processed less quickly. But no Europe-style riots in the streets – unless fed-up taxpayers are the ones who start them.”

My point in focusing on this topic is not that it’s a market mover, in and of itself, though clearly the ability, or rather inability, of state and local governments to meet their existing pension obligations impedes economic growth and in that respect the public vs. private debate is critical. And no doubt in Europe this spring it will turn deadly.

Ah yes, springtime across Europe. Critical elections in Ireland, where it’s almost a certainty the winner will attempt to roll back some of the austerity program that was enacted in order to ensure Ireland received its needed bailout funds. The winner of the election will also try to take away some of the bank guarantees now in place, thus further convulsing euro financial markets (beginning with those European banks that hold Irish bank paper now being guaranteed). Britain’s labor unions have already scheduled a massive protest for April 27, right between Easter and the royal wedding, that promises to be rather entertaining (or scary) as by then the Cameron government’s austerity program will be biting in earnest (and as I wrote last week we all should pray he’s successful). And then there will be other mass protests across Europe, no doubt, including France and Italy, I suspect. Perhaps the U.S. is the beneficiary in a flight to safety, but it will also just further help shine a light on our own massive debt issues.

So to reemphasize my call last week for 2011, while I won’t repeat all the positives for the U.S. economy I wrote of last time, I believe stocks will finish down 5-7% for the year. The Euro debt crisis will be with us for a long time, well into 2012, European banks have major transparency issues that will again rise to the forefront, France threatens to be a major mess (I will finally discuss why next week…promise), and there are the usual geopolitical concerns that I continue to focus on because these are the ones that can turn a bull into a bear in a heartbeat.

Speaking of which, it was back on 1/2/10 in this space that I said last year would be about “a heavy dose of Pakistan as it hurtles towards collapse, with unfathomable consequences.”

As I admitted last week in looking back at the year, I missed it.

But then in speaking of 2011, last time I wrote this:

“Pakistan is a mess and Islamists want more control of the government. Another high-profile assassination seems a certainty. The equity markets could drop 3% the day it occurs.”

Just three days later the assassination occurred but markets didn’t react because it wasn’t Pakistan’s president or prime minister.

It was, however, the governor of the most populous state, Punjab, Salman Taseer, who was riddled with 29 bullets by one of his bodyguards.

Salman Taseer was a heroic figure, with U.S. and British officials calling him a “champion of tolerance.” Punjab is home to the wealthiest Pakistanis, but also a number of extremist organizations and Taseer was assassinated because he was opposed to a longstanding blasphemy law that carries the death sentence for anyone insulting the Muslim faith.  In the past, judges reverse the convictions and no one has been put to death but the Islamists, of whom the bodyguard is one, are seeking to change this.

So the immediate question, and ongoing concern when discussing Pakistan, is “To what extent are security forces infiltrated by extremists?” We know the army and intelligence services are, but does this mean a coup is a certainty? A coup that would, yes, cause the markets to tank over fears for control of Pakistan’s nuclear weapons and an almost certain war with India. [In that scenario India would fire first. Just my opinion.]

Before Taseer was gunned down at a high-class shopping mall, the story for the week had been the lack of cooperation that Pakistan’s army chief of staff, Gen. Kiyani, was supplying the U.S. in terms of going after the Taliban’s and al-Qaeda’s safe havens. Kiyani was supposed to be a good friend, a man the U.S. could count on, but evidently he’s upset by the WikiLeaks cables showing him as being too chummy with Washington, which doesn’t go over well at home so he needs to be the bad guy now. 

And a few days earlier Pakistan’s 2nd-largest party in the ruling coalition defected to the opposition so there is a chance early elections would have to be called this year, which wouldn’t be good. 

But you know why many in Pakistan’s leadership don’t like the United States and refuse to cooperate in the war on terror? It’s because of the sense that once we leave Afghanistan, we’ll abandon Pakistan. Of course such an opinion is spot on! That’s our history, though I see there is a story in Saturday’s Washington Post on the Obama administration’s “decision to double down on Pakistan,” so I may have more on this next time.

---

Turning to the other news of the week, the 112th Congress assembled with a decidedly Republican hue, especially in the House with John Boehner taking over for Nancy Pelosi as Speaker. There will be plenty of time, like two years, to comment on this chamber but for now the House will pass measures that will likely die in the Senate, including repeal of ObamaCare as the Senate remains 53-47 Democratic. [I still have a hard time seeing Harry Reid as Majority Leader. I keep wanting to put him in the minority. As Charlie Brown is fond of saying, “Drat!”]

But on the issue of health care, the New York Times’ David Brooks had some interesting comments in his op-ed. What is striking, he writes, “is how vulnerable it looks. Several threats have emerged - some of them scarcely discussed before passage – that together or alone could seriously endanger the new system. These include:

The courts. So far, one judge has struck down the individual mandate, the plan’s centerpiece. Future decisions are likely to break down on party lines. Given the makeup of the Supreme Court, this should concern the law’s defenders.

False projections. The new system is based on a series of expert projections on how people will behave. In the first test case, these projections were absurdly off base. According to the Medicare actuary, 375,000 people should have already signed up for the new high-risk pools for the uninsured, but only 8,000 have.

“More seriously, cost projections are way off. For example, New Hampshire’s plan has only about 80 members, but the state has already burned through nearly double the $650,000 that the federal government allotted to help run the program. If other projections are off by this much, the results will be disastrous.

Employee dumping. This is the most serious threat. Companies and unions across America are running the numbers and discovering they would be better off if, after 2014, they induced poorer and sicker employees to move to public insurance exchanges, where subsidies are much higher.

“The number of people in those exchanges could thus skyrocket, especially as startup companies undermine their competitors with uninsured employees and lower costs. The Congressional Budget Office projects that 19 million people will move to the exchanges at a cost of $450 billion between 2014 and 2019. But according to the economists Douglas Holtz-Eakin and James C. Capretta, costs could soar to $1.4 trillion if those who would be better off in the exchanges actually moved to them. The price of the health care law could double.”

Oh, there’s more. 60% of private practice doctors now say the law will force them to close their practices or drastically cut back on who they can see. The bottom line, as Brooks sees it, is:

“Republicans are going to have to move beyond their current ‘Repeal!’ posture and cohere behind a positive alternative.”

They’re out there. But:

“After the trauma of the last two years, many people wish the issue would go away. But it’s not going away, especially since costs will continue to rise.

“Some Congresses achieve health care; members of this Congress or the next one will have health care thrust upon them.”

That was David Brooks.

Another big issue to watch this spring, as early as March 31, is extension of the debt ceiling from its authorized $14.29 trillion. Treasury Secretary Timothy Geithner sent a four-page letter to all members of Congress saying in part that if the government hits the ceiling, it would not be able to pay interest on Treasury bonds and then, default, which would cause “catastrophic damage to the economy, potentially more harmful than the effects of the financial crises of 2008 and 2009,” he wrote.

“Even a very short-term or limited default would have catastrophic economic consequences that would last for decades,” Geithner added.

Speaker Boehner said, “While America cannot default on its debt, we all cannot continue to borrow recklessly, dig ourselves deeper into this hole and mortgage the future of our children and grandchildren.”

So as everyone has noted, it’s becoming a giant game of chicken. Congressmen want to be on the record as being fiscally responsible, but Geithner is right. It would be a disaster.   Republicans have leverage in the House but let’s see how Obama handles the issue in his State of the Union. There is a way out of this looming (interim) crisis, it just requires leadership on all sides.

Speaking of the president, all Republicans are pleased with his selection of William “Bill” Daley as his new chief of staff. Daley was commerce secretary in the Clinton administration and is certainly pro-business. Of course that means many Democrats are upset by the choice. But Obama is thinking of 2012 and his selection of Daley could pay off big dividends towards ensuring a second term.

Turning to Europe, the data points were mixed with a December reading on eurozone manufacturing (ISM) registering a strong 57.3, 58.3 in non-euro Britain, but some of the other data was less exciting, such as Germany’s November retail sales figure which was unexpectedly down (though Nov. factory orders were way up in keeping with the December ISM), while in Britain, Jan. 1 was the day the value-added sales tax (VAT) rose from 17.5% to 20.0%, which in many cases will lead to overall price increases, inflation, as businesses attempt to pass it on, and Britain’s service sector reading for December was below the 50 dividing line between growth and contraction. The government, as part of its austerity measures, also levied higher taxes on gasoline and diesel. And in France, the latest reading on consumer confidence was down.

Meanwhile, 44 of 51 economists surveyed by Reuters believe Portugal is the next to require a bailout like Greece and Ireland and Portugal’s bonds reflected the concerns this week with its 10-year yield rising to above 7.00%, while fellow eurozone member Germany’s closed below 2.90% in another flight to safety.

As for inflation in the eurozone, it came in at an estimated 2.2% rate in December, above the EU’s 2% target. Higher energy costs are the big culprit here.

Elsewhere, China’s official Purchasing Managers Index came in at 53.9 for December (54.3 by HSBC’s measurement), which was down but actually reassuring as China attempts to thread the needle and slow its economy enough to tamp down inflation. China also announced it would let its currency, the yuan, rise 5% as another tool in its inflation fighting efforts as imports would then be cheaper. President Hu Jintao (heading to Washington as discussed below) said strengthening macroeconomic controls, increasing domestic demand and maintaining price stability were among his priorities this year, the start of the latest five-year plan.

In a state-sponsored New Year’s commentary, leadership put forth the following:

“China…is prepared to further deepen reforms in education, health care, housing, public cultural services and enhance investment in people’s livelihoods in the new year.

“More attention…will be given to protecting the legal rights of China’s vulnerable groups and ordinary workers, as well as fulfilling the general public’s expectations for a better life.”

And just a word on Japan, whose public debt is a staggering 190%, headed to 210% by 2012, of gross domestic product. The government’s top spokesman said the country’s fiscal situation is “approaching the edge of a cliff.” Japan’s debt is somewhat deceiving because a vast majority of government bonds are purchased internally, by the public and Japanese companies, as compared to the United States which has to rely heavily on China and Japan to finance our obligations. Nonetheless, Japan’s issues aren’t exactly the kind that lead to robust growth.

As for Australia and the historic flooding in Queensland, whose coastline would roughly be equivalent to the distance from New York to Miami, reconstruction costs are $5 billion and counting, understanding that the region’s rainiest month is normally February.

Queensland produces 3/4s of Australia’s coal, with Australia, in turn, meeting about half the world’s supply. The mines have been flooded and it will take weeks and weeks to pump them out once the waters subside. Queensland also is an important cotton, wheat (4th-largest in the world) and sugar producer, as well as fruit, and this has all been severely impacted.

I wrote when I was in Queensland about ten weeks ago that I didn’t believe the Aussie economy was doing as well as some were saying and in fact manufacturing in the country has declined four straight months now (with the mining industry being the big exception). The floods in populous Queensland will only add to the slowing GDP figures in the country and recall how when I was in Cairns (which hasn’t been impacted as far as I can tell), I commented that everyone there was concerned over tourism as it was losing out to Sydney and Melbourne and the floods are thus devastating in this regard as well.

So we wish Australia, our great friend, drier weather and a strong recovery. You’ve seen the pictures. Sometimes stories such as this one can be exaggerated in terms of their long-term impact but that’s not my reading of this particular disaster.

---

Back to the U.S., the data on the week was strong, that is until Friday and the December jobs report. November construction spending was up when a decline was expected, the December ISM reading on manufacturing was a strong 57 (slightly below expectations), while the service-sector reading came in at 57.1. November factory orders were up 0.7%.

But then the December jobs number was released and while the unemployment rate mysteriously declined to 9.4% from 9.8%, only 103,000 jobs were created when the estimate on growth in the labor force had run up to 150,000+ by week’s end (many economists were as high as 190,000). Average hourly earnings, which I focus on, were up just 0.1%, though over the past year they’ve increased 1.8%, which is better than zero. I’m not going to harp on the employment numbers. Had I placed a bet I would have said 150,000 jobs and a 9.7% rate. So I’m going to wait until the next reading to see if some things even out due to various anomalies.

Street Bytes

--Stocks continued to advance the first week of 2011, with the Dow Jones up 0.8% to 11674 and the S&P 500 up 1.1%. The retail sales figures for December were generally disappointing as the likes of Target, Macy’s and Gap came in below expectations, though some luxury retailers did well. Overall, the International Council of Shopping Centers said Dec. sales rose 3.1% vs. November’s 5.6% pace. Combined it comes out to 3.8%. 

But now it’s earnings season, beginning Monday, and the year-over-year comparisons will be much more difficult in 2011 than 2010.

[Note: Due to the length of this week’s piece, I didn’t have a chance to get into Friday’s Massachusetts court ruling on foreclosures, but I’ll cover it next time, as well as give you my rather complicated take on inflation.]

--Because of the timing of the last piece, written on New Year’s Eve before all the final yearend data had come in, following are the returns off the market low, which for the three major indexes was on 3/9/09 (closing figures).

3/9/09-12/31/10

Dow Jones +77% [6547 – 11577]
S&P 500 +86% [676 – 1257]
Nasdaq +109% [1268 – 2652]

Stock fund averages for 2010 (Source: Lipper)

Large Cap Growth +14.8%
Large Cap Value +13.0%
Small Cap Growth +27.6%
Small Cap Value +26.0%
International +10.7%

Some key international market performances in 2010 (local currency terms)

Frankfurt (DAX) +16.1%
London (FTSE-100) +9.0%
Tokyo (Nikkei) -3.0%
Shanghai (Composite) -14.3%

*I have other data points on my “Wall Street History” link.

--U.S. Treasury Yields

6-mo. 0.16% 2-yr. 0.60% 10-yr. 3.32% 30-yr. 4.48%

Strategist Marc Faber: “The worst investment is in U.S. long-term bonds. This is a suicidal investment.” 

PIMCO’s Bill Gross wrote this month: “The problem is that politicians and citizens alike have no clear vision of the costs of a seemingly perpetual trillion dollar annual deficit. As long as the stock market pulsates upward and job growth continues, there is an abiding conviction that all is well and that ‘old normal’ norms have returned. Not likely. There will be pain aplenty.”

--Laszlo Birinyi is one of the better known market strategists on the Street, so it’s worth noting his opinion that the S&P 500 will rally to 2854 by Sept. 2013, or about 125% from today’s levels. Birinyi is basing his forecast on historical precedent and advances that began in 1962, 1982, 1990 and 2002, and given this he sees the rally lasting another 32 months. [Investment News]

--December auto sales rose 11%, while for the year they were up a like amount with GM’s light-vehicle sales for all of 2010 up 7%, Ford’s 20%, Chrysler’s 17%, Honda’s 7%, Hyundai’s 24%, Nissan’s 18%, and Toyota, bucking the trend, down 0.4% as it continues to struggle from its quality issues. As the Wall Street Journal also pointed out, the Big Three (you know who they are) has now become the Gang of Seven.

Toyota’s issues, including recalls on more than 8 million vehicles worldwide last year, the majority of which were in the U.S., caused it to fall behind Ford as No. 2 here, both trailing GM.

Meanwhile, GM announced its sales in China were up 29% in 2010, though various tax incentives expired on Dec. 31, and as I noted last time Beijing city is limiting auto sales due to the existing crush on the road. Should this idea spread, obviously it would have a real impact on GM and everyone else selling cars here. That said, auto sales in China are still expected to be in the 20 million vehicle range this year vs. 17.5-18 million in 2010. [U.S. sales for 2010 totaled 11.6 million. The peak was 17.4 million in 2005, with sales bottoming in the U.S. at 10.6 million in 2009.]

--Serious story out of France involving national automaker Renault. The French Industry Minister Eric Besson warned the country was facing “economic war” after Renault suspended three senior managers following an investigation into possible industrial espionage and the stealing of secrets involving their electric car. Officials fear hundreds of thousands of jobs could be at stake in the country. As a BBC business reporter put it:

“The biggest advantage Western car makers have against rivals with lower labor costs elsewhere is their advanced technology. Hence the talk in France of an economic war.”

Both Renault and its partner Nissan have invested heavily in electric vehicle technology vs. General Motors and Toyota which are focusing more on hybrids.

--In a very important story, Chinese securities regulators on Friday approved the joint ventures of J.P. Morgan Chase and Morgan Stanley, bringing the two investment banks closer towards true operating businesses in China that they, and others, have long sought. This is a good sign. The approval would allow the two to underwrite securities there.

[JPM will hook up with First Capital Securities, a Shenzhen-based brokerage, while MS, which had pulled out of a previous joint venture, will have a new partner, Huaxin Securities, with the new entity based in Shanghai.]

--The final report of the presidential commission on the Gulf of Mexico oil spill is due out in a few days and, while this is zero surprise, it will finger BP, rig owner Transocean and contractor Halliburton as the three main culprits whose “missteps and oversights” were “rooted in systemic failures,” plus it could happen again. Officials from all three operators ignored critical warnings and failed to take precautions that could have averted disaster. Details of the various missteps were previously made public in other reports.

--But at least deep-water drilling is finally set to resume after the May moratorium was lifted in October, though permits weren’t issued for new projects. Now, previously approved projects, prior to the Deepwater Horizon explosion, will be allowed to proceed, including work by Chevron and Royal Dutch Shell.

[A separate federally funded report shows that the naturally occurring bacteria in the Gulf devoured significant amounts of toxic chemicals in natural gas and oil spewing from the Deepwater Horizon. Said microbiologist David Valentine, “Within a matter of months, the bacteria completely removed this methane.” May I suggest we dump these microbes on the Taliban and al-Qaeda, which would then lead to budget savings.]

--Just last week I said Iraq had finally increased its oil production to 2.6 million barrels for the first time in decades. Now the new oil minister says it’s up to 2.7 million. Something smells a little fishy here. Put Abdul-Karim Elaibi under the klieg lights.

--Russia, currently the world’s largest oil producer because Saudi Arabia isn’t operating at full capacity by design, set a post-Soviet record for yearly crude output in 2010, 10.15 million barrels a day. Russia also announced it had begun oil shipments to China via an East Siberian link, thus cementing its hold on the second-largest energy consumer’s market in the world. 

--Health spending now accounts for 17.6% of the U.S. economy (for 2009…the latest data point as released this week by the federal government), but this was up just 4%, the smallest percentage increase in the half-century the figures have been tabulated. Granted, this was also at a time when the economy was in recession. But because the economy lost ground in ’09, the share of GDP that healthcare consumed rose. Federal spending on Medicaid, the health insurance program for the poor, rose 22% in 2009. Of course the preceding was all before health care reform.

--Health insurer Blue Shield of California is seeking cumulative hikes on individual policyholders of as much as 59% effective March 1. Earlier, Anthem Blue Cross applied for a 39% rate increase and was rejected. Blue Shield blames fast-rising healthcare costs and other expenses related to ObamaCare for its request. It says most of the increases will be in the 30% to 35% range. But the Los Angeles Times found a Blue Shield policyholder who learned his monthly bill would rise from $271 to $431…59%. California’s new insurance commissioner is examining the request.

[Meanwhile, your editor has quite an insurance tale of his own but will get around to it next time. Just a hint…I’m now paying much less than I’ve told you before.]

--Thomas G. Donlan / Barron’s

“At the end of 2010, stimulus spending and a tax cut came in the back door in what was said to be a genuinely new development; President Obama and soon-to-be House Speaker John Boehner agreed to settle their policy differences by giving each other what he most wanted. The president received a ‘temporary’ extension of long-term unemployment benefits and a ‘temporary’ cut in the Social Security payroll tax; Boehner received extension of all the tax rates enacted ‘temporarily’ back in 2001-03 and an assortment of ‘temporary’ tax credits for business.

“Economists familiar with American political behavior note that neither side gave up any cherished spending or tax breaks; both sides compromised at the expense of long-term fiscal stability. Peter Morici of the University of Maryland put it bluntly: ‘Instead of each side getting half of what it wanted, Washington feasted – everyone got everything they wanted and more.’

“It was business as usual, and the outlook is for more of the same in 2011.”

--The Census Bureau now calculates that 15.7% of Americans are living in poverty under a new method for measuring the poor that includes medical expenses and government subsidies, with the definition for a family of four ranging from $21,000 to $25,000 annually. Many of the new poor are elderly.

--U.S. consumer bankruptcy filings rose 9 percent last year compared with 2009, reaching 1.53 million, but the pace slowed in October and November.

--There are many who are upset with Bank of America’s settlement with Fannie Mae and Freddie Mac over billions in bad mortgages. Specifically, BofA settled for $2.8 billion when the cost was supposed to be far greater, this as the American taxpayer is on track to prop up the two mortgage giants to the tune of $150 billion.

The settlement is over mortgages purchased by Fannie and Freddie between 2005 and 2007 where BofA (through its Countrywide Financial acquisition) misrepresented the quality.

--Speaking of bad mortgages, online real estate marketplace Zillow estimates the White House, worth $331.5 million at the top of the real estate market, is now down to $253.1 million. Hey, if the country is near bankruptcy then this has to be a bad mortgage, know what I’m sayin’?

But did you know it had 35 bathrooms? I would have figured on 19. 

--Goldman Sachs is facing heat over its $450 million investment in Facebook (potentially up to $1.5 billion) because, among other things, it would then earn fees of as much as $50 million from leading an initial public offering (now slated for spring 2012 at the latest) of the social networker. Other ongoing fees for the investment would follow. Goldman is offering shares of Facebook to its valued clients through a special purpose vehicle and when the 500-shareholder threshold is hit, Facebook would be forced to divulge its financials, though Goldman is trying to skirt this law by claiming it is just ‘one shareholder’ representing the others investing through it. [I need to stress this is a fast-moving situation and by the time you read this the application of the rules may have changed.] 

Another investor in Facebook is Russia’s Digital Sky Technologies. Overall, Goldman’s injection valued Facebook at $50 billion, even though Facebook currently has revenue of around $2 billion.

Facebook, by the way, received 8.9% of all Web visits in the United States between January and November 2010. Google’s main site was second with 7.2%.

--While Facebook gets another huge infusion on the way to IPO riches, one-time competitor Myspace is laying off up to half its workforce, or around 1,100, as its audience fell to 81.5 million in November from 108.1 million in November 2009, while Facebook’s was rising from 350 million to 500 million during the same period. [USA TODAY]

--Casino revenue in Macau soared 58% last year to a record $23.51 billion, thanks to a flood of gamblers from the Chinese mainland as the economy there strengthened. December revenue was up 66.4% to a record monthly high. Macau has left Las Vegas in the dust.

--But this week also saw 89-year-old Stanley Ho step down from his Macau gaming company in favor of his fourth wife, Angela Leong On-kei. The elder Ho, who is known as “The King of Gambling” owing to his 40-year monopoly on gaming in Macau before the business opened up to outsiders, had brain surgery last year following a fall. Oh, the stories he can tell. For example, did I ever tell you about the time I was in his Casino Lisboa and these very attractive… oops, what goes on in Casino Lisboa stays in Casino Lisboa.

--Deflation Alert…Donald Trump has cut the initiation fee at the Trump National Golf Club in Bedminster, N.J., from $300,000 to $150,000.

--The U.S. Mint said silver coin sales rose 20% in 2010 over 2009, but dropped 36% in December. Gold coin sales fell 14% in 2010, and cratered 74% in December. [Doug Foulsham / Strategic Energy Research and Capital]

--Good news…Macy’s, despite its less than expected sales in December, is adding 725 jobs over the next two years in its online business. Macy’s said this part of its operation was up 29% in the first ten months of fiscal 2010.

And Discount-store operator Dollar General plans to open 625 stores and hire more than 6,000 workers in 2011.

--Broadway ticket sales for the last two weeks of the year hit a record $60 million, with 27 shows averaging more than 80% of seat capacity, 32 averaging 70% and 21 shows playing to at least 90% capacity. But for the fall season, there were few big success stories and nine shows closed last Sunday. Surprisingly, “Lombardi” was extended through June 19. [This is the only show I’ve been to in years and it was good…not great…but good.]

--Overall for 2010, a record 48.7 million people traveled to New York last year, 6.8% more than 2009 and a new record, despite the soft economy. [Leisure travelers were 37.6 million and business travelers were 11.1 million. International was up 13%.] And while still the highest in the nation, hotel room rates are off by as much as 20% from their peak. Budget properties (around $200 a night) are booked solid.

--The flooding in Australia threatens the Great Barrier Reef because of all the sludge pouring into the sea, which aside from being an ecological disaster would also do a huge number on tourism in Queensland. The problem with the sludge is it carries a toxic “cocktail,” including pesticides.

--Serious potential issue in Germany; where authorities have stopped more than 4,700 farms from selling their meat and eggs amid a dioxin scare. While there have been no reports of health issues, it has come to light that for months some 150,000 tons of feed for poultry and pigs contained the cancer-causing chemical. The scandal emerged when excessive levels of dioxin were found in eggs from chickens in western Germany.

--Housing prices in Ireland fell by an average 15% last year and are now officially down 40% from their peak. And get this…Ireland’s domestic banks saw almost $100 billion in deposits flee for safer institutions. Much of the flow was the result of “ratings sensitivity.” When Ireland’s banks were downgraded, the deposits were mandated to find another home.

--But wait…there’s more! Ireland’s unemployment rate rose in December to 13.4%. Officials note the figure would be even worse were it not for the large numbers emigrating, which doesn’t bode well for the future. It also doesn’t help when a large health insurer, VHI, said it was hiking premiums for its most popular plan by 45% in February, or an increase of about $1,300 a year for a typical family.

--And as to the water crisis in Ireland I wrote of last time as a result of the record cold, followed by a brief thaw that burst the pipes, water is slowly being restored but the government announced it would not compensate thousands of businesses affected by the shortages.

--Continental Airlines appears to have reached agreement on a new contract with its 9,300 flight attendants that offers higher wages and profit sharing for a 20-month period, which would take it up to an eventual combined labor agreement with merger partner United Airlines.

--Donald J. Tyson died. He was 80. Tyson took his father’s Arkansas chicken business and built it into a true food empire, Tyson Foods, one of the world’s largest producers of chicken, pork and beef. As noted in an obituary for the New York Times by Robert D. McFadden:

“Tyson Foods became a household name as he popularized the Rock Cornish game hen as a high-profit specialty item; helped develop McDonald’s Chicken McNuggets and KFC’s Rotisserie Gold; and stocked America’s grocery stores with fresh and frozen chickens – killed, cleaned and packaged in his archipelago of processing plants.”

Tyson became a billionaire, and lived the life of one, hobnobbing with presidents and members of Congress, while, some would say, skirting the law, including the famous case of plying President Clinton’s agriculture secretary, Mike Espy, with gifts when Espy’s agency was considering tougher safety and inspection regulations affecting Tyson Foods. The company would later plead guilty to making the gifts and paid a $6 million fine. And there were cases involving the smuggling of illegal immigrants, though these resulted in acquittals. [Donald Tyson didn’t just support Democratic presidents. He lent his support to George W. Bush as well.]

It was his “grow or die” philosophy that led to Tyson’s acquisition of Holly Farms in 1989, which allowed Tyson Foods to leapfrog then larger competitors ConAgra and Perdue.

--Album sales declined for a ninth time in ten years in 2010, down 12.8% from ’09 levels. But Eminem’s “Recovery” sold 3.4 million copies, more than any album since 2007. Digital album sales rose 13% but it wasn’t enough to offset a 20% decline in CD sales.

--I read a story on bottled water that bummed me out. Now I could easily just drink water from the tap but I keep a bottle on the office desk and it’s almost always Poland Spring. Yet a report out of the Environmental Working Group analyzed some 173 brands of bottled water products and looked at factors such as whether the company discloses information on where the water comes from, how or if their water is treated, and whether the results of purity testing are revealed on company Web sites.

Only three brands earned top grades for disclosure and using the most advanced treatment methods available – Gerber Pure Purified Water, Nestle Pure Life Purified Water, and Penta Ultra-Purified Water. Among the six getting the worst grades was Whole Foods Italian Still Mineral Water (the title implying the company drives around looking for pools of still water along the road). 

Among some of the better known brands that received “Ds” were Aquafina, Deer Park and Poland Spring. Crystal Geyser Natural Alpine Spring Water received an F. Shame on you, Crystal Geyser. [As for me…I’m changing to Nestle.]

--Here’s a candidate for the gallows. A Long Island-based stockbroker, Paul George Chironis, has agreed to pay $350,000 to settle civil charges that he churned the account of the Sisters of Charity of The Bronx by charging them “excessive and undisclosed markups and markdowns in riskless principal transactions,” according to the SEC. Chironis has been barred from working in the securities industry.

--ESPN is close to finalizing a new 10-year, $20 billion ($2 billion annually) deal with the NFL for the “Monday Night Football” franchise, which gives the players leverage in their ongoing talks with NFL owners over a new collective bargaining agreement. The owners are crying poverty while asking the players to play an additional two regular season games for no additional pay, plus take a decreased cut of the overall revenues.

--IKEA is no longer stocking incandescent light bulbs in its U.S. stores, which is another reminder to buy them up wherever you can find them, sports fans, just as we do here in the home office of StocksandNews.

--Last week I forgot to include Pennsylvania Gov. Ed Rendell’s statement on the NFL canceling the Eagles-Vikings game in Philadelphia as a result of the snowstorm, but there was a tie-in I wanted to include so do so now for the archives.

Rendell said, as you remember:

“We’ve become a nation of wusses. The Chinese are kicking our butt in everything. If this (the snowstorm) was in China do you think the Chinese would have called off the game? People would have been marching down to the stadium, they would have walked and they would have been doing calculus on the way down.”

Well that certainly was expressing a current national sentiment and a few days after Rendell uttered this statement I saw the following in the South China Morning Post.

“Beijing opens five subway lines; more on way”

“Beijing opened five new subway lines yesterday, an urban planning show of force highlighting the investment the city has thrown behind public transport to curb its notorious air pollution and traffic congestion.

“Costing nearly $9.2 billion, the newly constructed lines – most connecting the distant and dusty suburbs to the city center – bring Beijing’s subway network to 336 kilometers.

“That distance is just a fraction of what the city government has planned….

“Beijing aims to have a 561-kilometer-long subway network by 2015, and is planning for between 700 and 1,000 kilometers by 2020, Li Xiaosong, the deputy director of the commission said. ‘If we are comparing ourselves to London, New York or Tokyo, we are still in the early stages of development,’ Li said.”

Beijing moves 5.3 million daily riders, though the lines can be four trains deep and attendants push you in the cars.

But five lines opened on one day?! A tripling of the network in nine years?! New York can’t even get some of its sanitation workers to honor their contracts and remove snow. It takes like 30 years in New York from planning to finish to get one little subway line completed. We are so screwed.

Foreign Affairs

Iran /Israel: The Jan. 1-7, 2011, cover of The Economist has the headline:

“Please, not again…The threat of war in the Middle East”

The point of the accompanying article is that President Obama should not give up on the peace process because the alternative is war, and the next one, say between Israel and Hizbullah, will not only be far worse in terms of the destruction these two inflict on each other (I totally concur on this), but it would also draw in Syria, and possibly Iran. The Economist adds that Israel should give the Palestinians a state on the West Bank, thus taking away the Palestinians’ justification for going to war. I agree with this as well. My point has been that in this most recent bid at negotiations, Israel lost the moral high ground in not negotiating while freezing further settlement construction, indefinitely, and then if the Palestinians refused to negotiate in good faith, or launched a large terror operation, Israel would be in their rights to say, ‘That’s it. You’re on your own for good.’

But Israel cannot take that position today, and it’s why I constantly harp on issues like the flyovers violating Lebanon’s airspace. If I were the Lebanese government, I’d make a much bigger issue of this at the U.N. and stay on it.

Anyway, there were a number of developments this week on the Iranian front as parliament speaker Ali Larijani said Iran will continue to strongly support Hizbullah and Hamas in their resistance against “the global arrogance and support the oppressed.” Campaigning against the United States and the Zionist regime are the principles of the Islamic Revolution, said Larijani, as stated in the Tehran Times. The nuclear program is also one of the most strategic plans of the country, he added.

So this week on the nuker front, Iran said it would allow some inspectors from the International Atomic Energy Agency, though not from the U.S., Britain, France or Germany, and so the European Union turned down the joke of an offer. Some observers viewed Iran’s gesture as an attempt to split the P5+1, which includes the above four plus Russia and China, and thus weaken the sanctions. The next talks on Iran’s program are slated for Jan. 20 in Istanbul.

But in an interesting development, Mossad Director Meir Dagan, who has just retired, said his assessment is that Iran wouldn’t be capable of producing a nuclear bomb before 2015. Dagan believes sanctions are working to foment domestic dissent and that incidents such as the Stuxnet computer worm have successfully sabotaged key parts of Iran’s uranium enrichment operation. Dagan’s bottom line, there is no reason for preemptive strikes.

Separately, Iran has joined the rest of the Muslim world in going after Christians, who the last I heard, being one myself, haven’t exactly been running around the world launching suicide attacks, but that’s a discussion for another day. Iranian authorities are arresting those who converted to Christianity from Islam or sought to convert others, which is punishable by death in Iran. About 1% of Iran’s population is Christian but heretofore have mostly co-existed peacefully.

And back to Israel and the huge natural gas find off its coast, it seems that visions of huge profits has the government going for an inordinate share of them, with a government committee recommending production profits of as much as 62% for the bureaucrats. Good lord. Needless to say the Israeli and American companies behind the discoveries are none too pleased, warning the higher rate makes the project unfeasible. The government says the new rate (vs. the old 30% one) puts it on par with the 34 member countries of the Organization for Economic Cooperation and Development, a group of free-market economies including the U.S. and Israel, which is said to be about 60%. But as the Los Angeles Times reports, the energy firms say Israel is changing the rules in the middle of the game.

Afghanistan:  The U.S. is adding 1,400 Marines for the spring fighting season even as troop levels are currently slated to begin to decline in July. Defense Secretary Gates wants to solidify gains before any withdrawals take place. Most of the troops would be stationed around Kandahar.

Iraq: There has been a wave of assassinations targeting Iraqi security force members and government employees, at least ten officials since Jan. 1, killed by those using silencers. The government believes it could be the work of organized crime groups as much as terrorists. The killings are taking place in the heart of Baghdad and it’s theorized the stepped up action is part of the jockeying for positions ahead of the U.S. withdrawal at year end.

And then there’s the issue of Moqtada al-Sadr, who after a roughly four year, self-imposed exile in Iran, returned to Iraq and his family home in the southern city of Najaf. His return comes just two weeks after Prime Minister Nouri al-Maliki put together his unity government, including some Sadr loyalists. Sadr himself was to deliver a speech on Wednesday or Thursday, signaling his intentions, but at last word it was postponed to today, Saturday. 

[As I go to post, supposedly Sadr said in the speech that his supporters should resist all occupiers of Iraq, but not necessarily with arms. He then asked them to denounce Israel as well as the U.S. More next week.] 

North / South Korea: Prospects for talks over Pyongyang’s nuclear program are all over the board these days with each player saying something different every 24 hours. For now, South Korea’s President Lee said the North’s idea for bilateral talks was without merit, as Lee doesn’t want to be seen caving to Kim Jong-il’s calls for re-engagement and unconditional dialogue. But Washington has long said inter-Korean talks are a prerequisite for reopening the six-party discussions, and on Thursday, Obama administration envoys met with their Chinese counterparts in Beijing and emerged hopeful talks would be restarted soon, this as Chinese President Hu Jintao is scheduled to arrive in Washington on Jan. 19 for a summit with President Obama and no doubt the situation on the Korean Peninsula will dominate discussions.

The U.S. has been telling North Korea to prove it is abandoning its war-footing and towards that end it was reported on Friday that the North had lowered its military alert status to a pre-crisis level. Also on Friday, the South China Morning Post reported that China has committed to a huge investment, some $2 billion, in a project to build up a North Korean free trade zone into a regional export base near the North’s border with China and Russia (a place called Rason). I’d say if the report is true it represents a rather significant incentive for North Korea to return to its commitment to denuclearize.

China / Taiwan: Taipei, as well as the likes of South Korea and Japan, and the United States, is  among those casting a wary eye on China’s defense strategy, particularly with confirmation that China has a ballistic missile capable of taking out a U.S. aircraft carrier, and then this week’s unveiling of China’s first stealth fighter, well ahead of schedule. Taiwan’s defense ministry said it was keeping a close eye on developments and would keep pushing for advanced aircraft from the U.S., even as Washington maintains it would still be years before China’s plane is operational.

But Taiwan also said it would not deploy its new powerful rocket system on outlying islands near the mainland because of fast-warming ties with Beijing. Taiwan will, however, still mass produce them for the main island defense.

And one reason for the ongoing caution on Taipei’s part comes in the form of an Australian intelligence agency report that found China’s military spending for 2006 was $90 billion – double the $45 billion announced publicly by Beijing. Those putting the report together concluded that China was building a military capability well beyond its priorities of self-defense and preventing Taiwan’s independence.

“China’s longer-term agenda is to develop ‘comprehensive national power,’ including a strong military, that is in keeping with its view of itself as a great power,” says a copy of the secret assessment provided by Foreign Affairs officials to the U.S. embassy in Canberra.

“Arguably China already poses a credible threat to modern militaries operating in the region and will present an even more formidable challenge as its modernization continues,” the report continues. “There is the potential for possible misconceptions which could lead to a serious miscalculation or crisis,” it says.

“(But a) lack of operational experience and faith in asymmetric strategies could lead to China overestimating its military capability. These factors, coupled with rising nationalism, heightened expectations of China’s status, China’s historical predilection for strategic deception, difficulties with Japan, and the Taiwan issue mean that miscalculations and minor events could quickly escalate.” [Sydney Morning Herald]

I totally agree with this conclusion. Just as a small incident on the Israeli-Lebanese border could lead to a wider conflagration, an incident in the South China Sea could escalate rapidly as well. Of course Beijing’s military buildup will be main discussion point #2 between Barack Obama and Hu Jintao. Without broad understandings on the military front, economic cooperation becomes mute; at least so says your editor.

Lastly, owing to China’s rising military and uncertain intent, Japanese and South Korean defense officials are meeting next week in Seoul to discuss boosting ties, though there is no guarantee these will go smoothly given historical resentments in South Korea due to Japan’s 1910-45 occupation.

Russia: The Kremlin continues to accuse the West of interference following condemnation of a Moscow court’s decision to sentence Mikhail Khodorkovsky to an additional six years in prison (for a total of 14 years on charges of embezzlement and money laundering). At least 130 protesters were detained in Moscow and St. Petersburg during New Year’s Eve rallies against restrictions on freedom of assembly and the Khodorkovsky decision.

Egypt: The top Muslim cleric criticized Pope Benedict’s call for world leaders to defend Christians as interference in the country’s affairs, according to state media. It’s in the next statement that you see how there can be no coming of the minds here, at least in my lifetime.

Ahmed al-Tayeb said:

“I disagree with the Pope’s view, and I ask why did the Pope not call for the protection of Muslims when they were subjected to killings in Iraq?”

The Vatican said it was not just showing solidarity for the Coptic community, whose church had been bombed the week before, but had shown concern for the consequences of the violence for the entire population. [Agence France-Presse]

As to the New Year’s Eve bombing in Alexandria that killed 21, the reaction exposed the fragility of Egypt’s government. President Hosni Mubarak appeared on national television to condemn the attack and in doing so showed the country just how frail he is. I’ll guess he dies before June, with elections due later this year.

Nigeria: Islamist terrorists set off bombs in the capital city of Abuja that killed at least 34, this after a Dec. 28 series of attacks killed 28 in the city of Jos. The problem for President Goodluck Jonathan is that a new generation of rebel leaders has sprung up to replace older ones who were bought off in a 2009 amnesty. The violence will only increase ahead of an April election that Jonathan seeks to win. [Recall he took over last year on an interim basis when President Yar-Adua died.] Oil production, which is basically the only reason why I’d bring up Nigeria, is running at 2.1 million barrels a day, below the 2005 peak of 2.5 million.

Random Musings

--Defense Secretary Robert Gates said the nation’s “extreme fiscal duress” required him to call for $78 billion (not the $100 billion previously discussed) in cuts to the Pentagon budget, not including the costs of combat operations. Gates is also seeking to increase fees paid by retired veterans under 65 for health insurance, aside from troop cuts and extensive reductions in new weapons systems.

The proposed reduction of 47,000 troops, however, is largely a result of the United States’ withdrawal from Iraq and the cuts would not begin until 2015, just as Afghan forces are supposed to have completed their mission.

Because of the timeline, though, much can change in the interim, but Gates’ proposal means the Army is to begin cutting 27,000 in 2015 and the Marines 20,000.

Admiral Mike Mullen, chairman of the Joint Chiefs of Staff, said all four service chiefs supported the proposals. “We can’t hold ourselves exempt from the belt-tightening. Neither can we allow ourselves to contribute to the very debt that puts our long-term security at risk.”

Both the Army and Marines, even after the cuts, would be larger than when Gates became defense secretary four years ago.

I’ll have more on this topic as I pour through my defense publications but my initial reaction is the cuts seem reasonable, including the shelving of certain weapons systems.

However, for an opposing viewpoint, I did post Mark Helprin’s thoughts on the defense budget on my “Hot Spots” link. I would just add for now that if war broke out on the Korean Peninsula in the next year or two (more so than a conflict over Iran), all the above would be tossed out the window.

--Lots of changes at the White House as press secretary Robert Gibbs is leaving; Gibbs being a critical advisor and friend of the president the past six years, though it is assumed he will have a role in the 2012 campaign after taking a break. But Pete Rouse, the interim chief of staff until the appointment of Bill Daley, is going to remain as White House Counsel.

--Naval Captain Owen Honors was abruptly fired as captain of the USS Enterprise on Tuesday after lewd videos he made in 2006 and 2007, designed to boost morale on board, became public after being released by the Virginian-Pilot in Norfolk. The thing is the videos were first shown back then and obviously some Navy leaders knew about them yet Honors was promoted. 

Now I understand why many have come forward supporting the captain, and I haven’t been stationed on a naval vessel, but the episode shows an amazing lack of judgment. Those superiors who knew of the videos must be disciplined as well (a career-killing demotion would be appropriate).

--Uh oh…Minnesota Republican Congresswoman Michelle Bachmann is making waves about running for president, which would create real problems for Sarah Palin, the woman who quit in the middle of her term as governor of Alaska yet expects us to take her seriously. Beyond that, seeing as both women are Tea Partiers and, you know, err…I need to stop here before I get in more trouble. 

--And what’s this? Rudy Giuliani is gearing up for another run at the White House? Sources told the New York Post that he “thinks the Republican race will be populated with far-right candidates like Mitt Romney, Sarah Palin and Mike Huckabee, and there’s opportunity for a moderate candidate with a background in national security.” Some Giuliani loyalists say the idea is “crazy.” Others say he is just trying to position himself for a cabinet position, or even vice president, because his business opportunities are drying up. “Nobody is paying $100,000 to hear the same warmed-over 9/11 speech.”

Actually, Obama is a lock as long as the economy is showing steady progress and I’ll just go on record as saying he defeats Mitch Daniels 54-46. But this will change. I just want to have fun with it and will give an estimate every two months or so from now to Nov. 2012 as a sort of benchmark.

--Maryland Sen. Barbara Mikulski became the longest-serving female senator when she was sworn in for her fifth term. Someone tell me what she’s done in the first 24 years.

--One congressman who will be in the spotlight big time in the 112th Congress, by his own design, is California Republican Darrell Issa, the incoming chairman of the House Oversight and Government Reform Committee, who plans on holding numerous hearings to expose “one of the most corrupt administrations,” though Issa claims he is approaching it from more of an accounting standpoint rather than a legal one and is looking for $200 billion in savings. Issa will have broad subpoena power and at least for now plans to use it. Issa says he’ll be targeting food and drug safety (specifically recalls), the Financial Crisis Inquiry Commission’s failure to identify the origins of the meltdown, corruption in Afghanistan, business regulations, and Medicare fraud.

“We can save $125 billion in simply not giving out money to Medicare recipients that don’t exist for procedures that didn’t happen. These are real dollars. Ten percent of the deficit goes out in wasted money – money that doesn’t get one person health care in Medicare,” Issa told CNN.

Can’t argue with that.

--New York City Mayor Michael Bloomberg’s approval rating has plummeted as a result of his handling of the blizzard of Dec. 26, just 37%, the lowest since he took office in January 2002 and a big hit for any presidential ambitions he still harbored. Just last October his approval rating was 50%.

Editorial / New York Post

“God delivered unto New York almost two feet of snow 10 days ago, and then in His wisdom he took it away; too bad the same can’t be said for the mountains of garbage still piled curbside all around the city.

“And now another storm is expected, but Mayor Mike promises that all is in readiness, saying: ‘We plan to do a great job.’

“Quite unlike 10 days ago.

“The leadership vacuum in City Hall during the Christmas blizzard was pronounced; the plowing slowdown and other operational failures naturally followed in train.

“Doubtless Bloomberg will see to it that there is a full complement of deputy mayors on duty when the flakes fly today – though the damage to his reputation as a master manager is substantial, and perhaps irreparable.”

The Post ran the front-page headline last weekend:
“Heck of a job! Mike’s Katrina moment: Praises ‘slow-plow’ team”

…referring to Sanitation Commissioner John Doherty. But these days in New York the big issue is the uncollected garbage…on many streets gigantic, rat-infested mounds. Reminder to out-of-towners. If you’re walking down a Manhattan side street and you spot what you think is a cat, it’s a rat. Actually, if you think you just saw a Doberman, that’s probably a rat, too.

And this from the Post:

“Instead of plowing, they got plowed.

“A group of on-duty Sanitation supervisors is under investigation for allegedly buying booze and chilling in their cozy department car for hours Monday night after the blizzard stranded a bus and three snowplows blocks away.”

--And then there’s New Jersey Gov. Christie. Once he took office I’ve supported him. He’s been a breath of fresh air. But, boy, he acted like a total jerk when questioned as to his own handling of the blizzard. 

You know how politicians say before they run for higher office that “I need to take my family’s counsel and talk over the pros and cons before I can make an announcement”?

Well that means that you’re supposed to tell your spouse and kids, “Look, there will be times this won’t be easy, including when we may have to cut short a vacation or two if an emergency pops up.”

That’s what boggles my mind when Christie basically tells us (and he came very close to these actual words), ‘[Blank] you, New Jerseyans. I was handling things down in Disney World and my family comes first.’

No it doesn’t! You ran for this office and you were elected by us, the people, to serve…us! If you don’t want to impact your family in any way then don’t run in the first place. And you also knew full well, Governor, that you were letting your Lt. Gov. take a two-week break of her own during this same time, which was incredibly idiotic in its own right.

[Yes, friends, I’m single and I have a little different perspective on this topic than many of you might, but you will never convince me I am wrong so don’t bother trying.]

--Gov. Christie did sign what some are calling the toughest anti-bullying law in the country, owing in no small part to the death of Tyler Clementi, the Rutgers student whose roommate streamed a video of a romantic encounter between him and another man over the Internet. The new law mandates that all districts form a “school safety team” to review complaints. Administrators who do not investigate reported incidents of bullying would be disciplined, while students who bully could be suspended or expelled.

--But speaking of education, the Star-Ledger had a story on the “achievement gap” between rich and poor students, and among those of different races, in New Jersey, not that this is unique to my state. For example there is a 38.4-point difference in the passing rate in third-grade language arts, between African-American and Asian students.

“On that test, about 60% of black or African-American third-graders failed to achieve proficient scores, compared to 21.4% for Asian students and 31% for whites.”

--This was depressing…from a review of New Jersey’s year in crime and a rising homicide rate in some of our bigger cities.

“Anyone who suggests that our gang problem isn’t growing is naïve,” said Prosecutor Theodore Romankow. “The reality is they are growing, and they are fast becoming the main supplier of drugs and guns throughout the state. They’re the ones who are primarily doing the shootings.” Like 75% of the killings in my county, Romankow adds.

--I wish two new Democratic governors the best…Jerry Brown in California and Andrew Cuomo of New York. The better these two states do the better we all do is my attitude. As I’ve noted before, I don’t have an investment bet against America and its future. [Depending on how we handle the federal deficit discussion this coming year, I may yet place one, however.]

So Cuomo took charge of dysfunctional New York this week and on the public-private debate, understand he’s facing massive state pension funding issues that currently require the taxpayer-financed yearly contributions to the state teachers’ retirement system go from $900 million this year to $4.5 billion by 2015-16. Cuomo has talked of alternatives but it’s an almost impossible task. The unfunded health care benefits for state retirees are $205 billion. The estimated budget deficit for the 2011-12 fiscal year is $10 billion and Cuomo hopes to close it without raising taxes or borrowing. For starters he called for a one-year salary freeze on public employees, but the savings generated with that are relatively minimal. At least it’s the appropriate symbolism.

[Meanwhile New Yorkers are buzzing over the First Girlfriend, the Food Network’s Sandra Lee, who is off to a great start in her own right.]

--This is for “This Week” junkies such as myself. I was very disappointed when Christiane Amanpour took over the show because she’s a humorless nag, but now there are stories the budding dictator wants to move the show to New York from Washington. Understand the main reason to watch “This Week” in the first place is George Will’s participation and I never miss the roundtable when he’s on. I also like Donna Brazile as a representative of the other side. But there is no way I see Will staying on if they move to Gotham. 

In the New York Area, “This Week” airs at 10:00 a.m. and “Meet the Press” at 10:30, so I flip on the latter around 10:45 when the roundtable of the former is finished, but since the death of Tim Russert, “Meet the Press” has been weak. It’s not David Gregory, it’s that their own roundtable normally sucks with some people on it who can’t be taken seriously, such as tomorrow’s inclusion of CNBC’s Erin Burnett.

--You know who is a total fraud? Rapper Wyclef Jean, he of Yele Haiti, his charity to help his native land. The New York Post reported that Jean paid his “alleged mistress” $147,000 last year for god knows what. Jean claimed previously he had cleaned up his charity after stories emerged he was funneling dollars to businesses controlled by the former Fugees rapper and his partner, but this payment screams otherwise.

--Back to the topic of rats, the New York Times reports, “Researchers have found a way of testing for tuberculosis that is fast, cheap and widely available: large rats that can smell the bacteria in a sputum sample.”

Specifically, the Gambian pouched rat can do better than various expensive tests already on the market. So if you see a rat in New York City wearing a lab coat, perhaps you need to treat it with a little more respect.

“Hello, kind sir….What’s that, you say?”

--A Newcastle University study, published in the academic journal “Phytomedicine,” suggests regularly drinking green tea could protect the brain against Alzheimer’s and other forms of dementia.

Dr. Ed Okello, who headed up the research team, said: “What was really exciting about this study was that we found when green tea is digested by enzymes in the gut, the resulting chemicals are actually more effective against key triggers of Alzheimer’s development than the undigested form of the tea. In addition to this, we also found the digested compounds had anti-cancer properties, significantly slowing down the growth of the tumor cells which we were using in our experiments.”

--Calling Roscoe the Bedbug Dog…Roscoe the Bedbug Dog…come in please…

It seems a third woman has sued the Waldort Astoria Hotel in New York claiming she woke up with bedbugs all over her body, which is kind of gross. But the suit is a result of a 2007 stay. C’mon, Svetlana Tendler (no relation to the rather attractive Dr. Tendler of Restasis fame, I’m assuming), you can do better. Claim you found a Gambian pouched rat in a lab coat in the shower, at least.

---

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

God bless America.
---

Gold closed at $1368…decline not a biggie
Oil, $88.03

Returns for the week 1/3-1/7…and 1/1/11-1/7/11

Dow Jones +0.8% [11674]
S&P 500 +1.1% [1271]
S&P MidCap +0.4%
Russell 2000 +0.5%
Nasdaq +1.9% [2703]

Bulls 54.5
Bears 
20.5 [Source: Chartcraft / Investors Intelligence]

Have a great week. I appreciate your support.

*Dr. Bortrum has posted his latest installment.

Brian Trumbore



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-01/08/2011-      
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Week in Review

01/08/2011

For the week 1/3-1/7

[Posted 7:00 AM ET]

Wall Street

WIR 12/15/10

“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.”

And then came the blizzard. I knew as I wrote my rant on the topic last time that many of you wondered why I felt it garnered such front page attention. Hopefully you now understand. My bottom line is it was about the looming war, public vs. private, that has been simmering until now.

WIR 1/1/11

“Oh, this storm will reverberate for years to come. And you know that public vs. private debate of mine from last week? This will help increase the heat. The common refrain directed at Mayor Bloomberg, who amazingly didn’t ‘get it’ until Wednesday afternoon [12/29], was ‘We paid our taxes…dig us out!’”

I then wrote that Bloomberg “in turn must go after the sanitation workers who treated their fellow New Yorkers like chumps. Lock ‘em up. Better yet, throw them in a fetid dumpster filled with rats.”

Three days after writing the above the feds launched a criminal probe into allegations some sanitation workers conspired to paralyze Gotham. The Brooklyn U.S. Attorney’s Office is looking into whether Sanitation bosses plotted to thwart cleanup efforts as a way to protest budget and staff cuts. Brooklyn and Queens district attorneys have joined the case.

This is big. How big? Sunday’s New York Times (Jan. 2…a day after my piece) had the front page headline:

“Public Workers Facing Outrage In Budget Crisis…Union Benefits At Issue…Officials Get Support In Seeking Concessions and Wage Freezes”

As reported by Michael Powell:

“Ever since Marie Corfield’s confrontation with Gov. Chris Christie this fall over the state’s education cuts became a YouTube classic, she has received a stream of vituperative e-mails and Facebook postings.

“ ‘People I don’t even know are calling me horrible names,’ said Ms. Corfield, an art teacher who had pleaded the case of struggling teachers. ‘The mantra is that the problem is the unions, the unions, the unions.’

“Across the nation, a rising irritation with public employee unions is palpable, as a wounded economy has blown gaping holes in state, city and town budgets, and revealed that some public pension funds dangle perilously close to bankruptcy. In California, New York, Michigan and New Jersey, states where public unions wield much power and the culture historically tends to be pro-labor, even longtime liberal political leaders have demanded concessions – wage freezes, benefit cuts and tougher work rules.

“It is an angry conversation. Union chiefs, who sometimes persuaded members to take pension sweeteners in lieu of raises, are loath to surrender ground. Taxpayers are split between those who want cuts and those who hope that rising tax receipts might bring easier choices.

“And a growing cadre of political leaders and municipal finance experts argue that much of the edifice of municipal and state finance is jury-rigged and, without new revenue, perhaps unsustainable. Too many political leaders, they argue, acted too irresponsibly, failing to either raise taxes or cut spending.

“A brutal reckoning awaits, they say.”

New Jersey is as much Ground Zero as any other place. Remember those stories I related from last year on some of the sums retired police officers are getting, not just massive pensions, but also staggering one time sums for vacation time not taken…like in excess of $100,000? It has to end. Or as George Will said last Sunday on “This Week,” the “issue of public employees is going to be the dominant issue for years to come.”

I write the opening of “Week in Review” on Friday afternoons and I just picked up the Jan.8-14 issue of The Economist. What does it have on its cover?

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

I don’t have the time to read the accompanying pieces for this column but suffice it to say I’ll cover their take next time.

But back to the snowstorm of Dec. 26. Economist Kevin Hassett had an op-ed in Bloomberg on Jan. 3. Hassett said the reaction of the sanitation workers is a harbinger of things to come. In Europe the public/union workers constantly strike and in most cases telegraph ahead of time when they will, such as in France. That is not America’s history, nor is it likely to be, but instead we’ll increasingly see actions such as those taken in New York.

Kevin Hassett:

“ ‘Sleeping on duty, threatening co-workers, falsifying documents, rudeness, sexual harassment and poor performance would get you fired from most jobs,’ according to a recent analysis of personnel cases in Arizona state agencies and the city of Phoenix. ‘But often that’s not the case for a government worker.’

“Some examples cited in the study were stunning. In one case, it took three years from the time of his arrest to complete the firing of serial killer Dale Hausner from his city job as a custodian at Sky Harbor International Airport in Phoenix.

“Even if the accusations of a work slowdown are accurate, it’s unlikely anyone will lose their job in the New York City snow debacle. [Ed. Bloomberg has disciplined some supervisors thus far.] The same will be true around the country. Government workers can be ineffective and unproductive with impunity.

“So here’s one vision for 2011 in the U.S.: subways slower, lines at airports longer, trash and snow piling up in the streets, visas and other government documents processed less quickly. But no Europe-style riots in the streets – unless fed-up taxpayers are the ones who start them.”

My point in focusing on this topic is not that it’s a market mover, in and of itself, though clearly the ability, or rather inability, of state and local governments to meet their existing pension obligations impedes economic growth and in that respect the public vs. private debate is critical. And no doubt in Europe this spring it will turn deadly.

Ah yes, springtime across Europe. Critical elections in Ireland, where it’s almost a certainty the winner will attempt to roll back some of the austerity program that was enacted in order to ensure Ireland received its needed bailout funds. The winner of the election will also try to take away some of the bank guarantees now in place, thus further convulsing euro financial markets (beginning with those European banks that hold Irish bank paper now being guaranteed). Britain’s labor unions have already scheduled a massive protest for April 27, right between Easter and the royal wedding, that promises to be rather entertaining (or scary) as by then the Cameron government’s austerity program will be biting in earnest (and as I wrote last week we all should pray he’s successful). And then there will be other mass protests across Europe, no doubt, including France and Italy, I suspect. Perhaps the U.S. is the beneficiary in a flight to safety, but it will also just further help shine a light on our own massive debt issues.

So to reemphasize my call last week for 2011, while I won’t repeat all the positives for the U.S. economy I wrote of last time, I believe stocks will finish down 5-7% for the year. The Euro debt crisis will be with us for a long time, well into 2012, European banks have major transparency issues that will again rise to the forefront, France threatens to be a major mess (I will finally discuss why next week…promise), and there are the usual geopolitical concerns that I continue to focus on because these are the ones that can turn a bull into a bear in a heartbeat.

Speaking of which, it was back on 1/2/10 in this space that I said last year would be about “a heavy dose of Pakistan as it hurtles towards collapse, with unfathomable consequences.”

As I admitted last week in looking back at the year, I missed it.

But then in speaking of 2011, last time I wrote this:

“Pakistan is a mess and Islamists want more control of the government. Another high-profile assassination seems a certainty. The equity markets could drop 3% the day it occurs.”

Just three days later the assassination occurred but markets didn’t react because it wasn’t Pakistan’s president or prime minister.

It was, however, the governor of the most populous state, Punjab, Salman Taseer, who was riddled with 29 bullets by one of his bodyguards.

Salman Taseer was a heroic figure, with U.S. and British officials calling him a “champion of tolerance.” Punjab is home to the wealthiest Pakistanis, but also a number of extremist organizations and Taseer was assassinated because he was opposed to a longstanding blasphemy law that carries the death sentence for anyone insulting the Muslim faith.  In the past, judges reverse the convictions and no one has been put to death but the Islamists, of whom the bodyguard is one, are seeking to change this.

So the immediate question, and ongoing concern when discussing Pakistan, is “To what extent are security forces infiltrated by extremists?” We know the army and intelligence services are, but does this mean a coup is a certainty? A coup that would, yes, cause the markets to tank over fears for control of Pakistan’s nuclear weapons and an almost certain war with India. [In that scenario India would fire first. Just my opinion.]

Before Taseer was gunned down at a high-class shopping mall, the story for the week had been the lack of cooperation that Pakistan’s army chief of staff, Gen. Kiyani, was supplying the U.S. in terms of going after the Taliban’s and al-Qaeda’s safe havens. Kiyani was supposed to be a good friend, a man the U.S. could count on, but evidently he’s upset by the WikiLeaks cables showing him as being too chummy with Washington, which doesn’t go over well at home so he needs to be the bad guy now. 

And a few days earlier Pakistan’s 2nd-largest party in the ruling coalition defected to the opposition so there is a chance early elections would have to be called this year, which wouldn’t be good. 

But you know why many in Pakistan’s leadership don’t like the United States and refuse to cooperate in the war on terror? It’s because of the sense that once we leave Afghanistan, we’ll abandon Pakistan. Of course such an opinion is spot on! That’s our history, though I see there is a story in Saturday’s Washington Post on the Obama administration’s “decision to double down on Pakistan,” so I may have more on this next time.

---

Turning to the other news of the week, the 112th Congress assembled with a decidedly Republican hue, especially in the House with John Boehner taking over for Nancy Pelosi as Speaker. There will be plenty of time, like two years, to comment on this chamber but for now the House will pass measures that will likely die in the Senate, including repeal of ObamaCare as the Senate remains 53-47 Democratic. [I still have a hard time seeing Harry Reid as Majority Leader. I keep wanting to put him in the minority. As Charlie Brown is fond of saying, “Drat!”]

But on the issue of health care, the New York Times’ David Brooks had some interesting comments in his op-ed. What is striking, he writes, “is how vulnerable it looks. Several threats have emerged - some of them scarcely discussed before passage – that together or alone could seriously endanger the new system. These include:

The courts. So far, one judge has struck down the individual mandate, the plan’s centerpiece. Future decisions are likely to break down on party lines. Given the makeup of the Supreme Court, this should concern the law’s defenders.

False projections. The new system is based on a series of expert projections on how people will behave. In the first test case, these projections were absurdly off base. According to the Medicare actuary, 375,000 people should have already signed up for the new high-risk pools for the uninsured, but only 8,000 have.

“More seriously, cost projections are way off. For example, New Hampshire’s plan has only about 80 members, but the state has already burned through nearly double the $650,000 that the federal government allotted to help run the program. If other projections are off by this much, the results will be disastrous.

Employee dumping. This is the most serious threat. Companies and unions across America are running the numbers and discovering they would be better off if, after 2014, they induced poorer and sicker employees to move to public insurance exchanges, where subsidies are much higher.

“The number of people in those exchanges could thus skyrocket, especially as startup companies undermine their competitors with uninsured employees and lower costs. The Congressional Budget Office projects that 19 million people will move to the exchanges at a cost of $450 billion between 2014 and 2019. But according to the economists Douglas Holtz-Eakin and James C. Capretta, costs could soar to $1.4 trillion if those who would be better off in the exchanges actually moved to them. The price of the health care law could double.”

Oh, there’s more. 60% of private practice doctors now say the law will force them to close their practices or drastically cut back on who they can see. The bottom line, as Brooks sees it, is:

“Republicans are going to have to move beyond their current ‘Repeal!’ posture and cohere behind a positive alternative.”

They’re out there. But:

“After the trauma of the last two years, many people wish the issue would go away. But it’s not going away, especially since costs will continue to rise.

“Some Congresses achieve health care; members of this Congress or the next one will have health care thrust upon them.”

That was David Brooks.

Another big issue to watch this spring, as early as March 31, is extension of the debt ceiling from its authorized $14.29 trillion. Treasury Secretary Timothy Geithner sent a four-page letter to all members of Congress saying in part that if the government hits the ceiling, it would not be able to pay interest on Treasury bonds and then, default, which would cause “catastrophic damage to the economy, potentially more harmful than the effects of the financial crises of 2008 and 2009,” he wrote.

“Even a very short-term or limited default would have catastrophic economic consequences that would last for decades,” Geithner added.

Speaker Boehner said, “While America cannot default on its debt, we all cannot continue to borrow recklessly, dig ourselves deeper into this hole and mortgage the future of our children and grandchildren.”

So as everyone has noted, it’s becoming a giant game of chicken. Congressmen want to be on the record as being fiscally responsible, but Geithner is right. It would be a disaster.   Republicans have leverage in the House but let’s see how Obama handles the issue in his State of the Union. There is a way out of this looming (interim) crisis, it just requires leadership on all sides.

Speaking of the president, all Republicans are pleased with his selection of William “Bill” Daley as his new chief of staff. Daley was commerce secretary in the Clinton administration and is certainly pro-business. Of course that means many Democrats are upset by the choice. But Obama is thinking of 2012 and his selection of Daley could pay off big dividends towards ensuring a second term.

Turning to Europe, the data points were mixed with a December reading on eurozone manufacturing (ISM) registering a strong 57.3, 58.3 in non-euro Britain, but some of the other data was less exciting, such as Germany’s November retail sales figure which was unexpectedly down (though Nov. factory orders were way up in keeping with the December ISM), while in Britain, Jan. 1 was the day the value-added sales tax (VAT) rose from 17.5% to 20.0%, which in many cases will lead to overall price increases, inflation, as businesses attempt to pass it on, and Britain’s service sector reading for December was below the 50 dividing line between growth and contraction. The government, as part of its austerity measures, also levied higher taxes on gasoline and diesel. And in France, the latest reading on consumer confidence was down.

Meanwhile, 44 of 51 economists surveyed by Reuters believe Portugal is the next to require a bailout like Greece and Ireland and Portugal’s bonds reflected the concerns this week with its 10-year yield rising to above 7.00%, while fellow eurozone member Germany’s closed below 2.90% in another flight to safety.

As for inflation in the eurozone, it came in at an estimated 2.2% rate in December, above the EU’s 2% target. Higher energy costs are the big culprit here.

Elsewhere, China’s official Purchasing Managers Index came in at 53.9 for December (54.3 by HSBC’s measurement), which was down but actually reassuring as China attempts to thread the needle and slow its economy enough to tamp down inflation. China also announced it would let its currency, the yuan, rise 5% as another tool in its inflation fighting efforts as imports would then be cheaper. President Hu Jintao (heading to Washington as discussed below) said strengthening macroeconomic controls, increasing domestic demand and maintaining price stability were among his priorities this year, the start of the latest five-year plan.

In a state-sponsored New Year’s commentary, leadership put forth the following:

“China…is prepared to further deepen reforms in education, health care, housing, public cultural services and enhance investment in people’s livelihoods in the new year.

“More attention…will be given to protecting the legal rights of China’s vulnerable groups and ordinary workers, as well as fulfilling the general public’s expectations for a better life.”

And just a word on Japan, whose public debt is a staggering 190%, headed to 210% by 2012, of gross domestic product. The government’s top spokesman said the country’s fiscal situation is “approaching the edge of a cliff.” Japan’s debt is somewhat deceiving because a vast majority of government bonds are purchased internally, by the public and Japanese companies, as compared to the United States which has to rely heavily on China and Japan to finance our obligations. Nonetheless, Japan’s issues aren’t exactly the kind that lead to robust growth.

As for Australia and the historic flooding in Queensland, whose coastline would roughly be equivalent to the distance from New York to Miami, reconstruction costs are $5 billion and counting, understanding that the region’s rainiest month is normally February.

Queensland produces 3/4s of Australia’s coal, with Australia, in turn, meeting about half the world’s supply. The mines have been flooded and it will take weeks and weeks to pump them out once the waters subside. Queensland also is an important cotton, wheat (4th-largest in the world) and sugar producer, as well as fruit, and this has all been severely impacted.

I wrote when I was in Queensland about ten weeks ago that I didn’t believe the Aussie economy was doing as well as some were saying and in fact manufacturing in the country has declined four straight months now (with the mining industry being the big exception). The floods in populous Queensland will only add to the slowing GDP figures in the country and recall how when I was in Cairns (which hasn’t been impacted as far as I can tell), I commented that everyone there was concerned over tourism as it was losing out to Sydney and Melbourne and the floods are thus devastating in this regard as well.

So we wish Australia, our great friend, drier weather and a strong recovery. You’ve seen the pictures. Sometimes stories such as this one can be exaggerated in terms of their long-term impact but that’s not my reading of this particular disaster.

---

Back to the U.S., the data on the week was strong, that is until Friday and the December jobs report. November construction spending was up when a decline was expected, the December ISM reading on manufacturing was a strong 57 (slightly below expectations), while the service-sector reading came in at 57.1. November factory orders were up 0.7%.

But then the December jobs number was released and while the unemployment rate mysteriously declined to 9.4% from 9.8%, only 103,000 jobs were created when the estimate on growth in the labor force had run up to 150,000+ by week’s end (many economists were as high as 190,000). Average hourly earnings, which I focus on, were up just 0.1%, though over the past year they’ve increased 1.8%, which is better than zero. I’m not going to harp on the employment numbers. Had I placed a bet I would have said 150,000 jobs and a 9.7% rate. So I’m going to wait until the next reading to see if some things even out due to various anomalies.

Street Bytes

--Stocks continued to advance the first week of 2011, with the Dow Jones up 0.8% to 11674 and the S&P 500 up 1.1%. The retail sales figures for December were generally disappointing as the likes of Target, Macy’s and Gap came in below expectations, though some luxury retailers did well. Overall, the International Council of Shopping Centers said Dec. sales rose 3.1% vs. November’s 5.6% pace. Combined it comes out to 3.8%. 

But now it’s earnings season, beginning Monday, and the year-over-year comparisons will be much more difficult in 2011 than 2010.

[Note: Due to the length of this week’s piece, I didn’t have a chance to get into Friday’s Massachusetts court ruling on foreclosures, but I’ll cover it next time, as well as give you my rather complicated take on inflation.]

--Because of the timing of the last piece, written on New Year’s Eve before all the final yearend data had come in, following are the returns off the market low, which for the three major indexes was on 3/9/09 (closing figures).

3/9/09-12/31/10

Dow Jones +77% [6547 – 11577]
S&P 500 +86% [676 – 1257]
Nasdaq +109% [1268 – 2652]

Stock fund averages for 2010 (Source: Lipper)

Large Cap Growth +14.8%
Large Cap Value +13.0%
Small Cap Growth +27.6%
Small Cap Value +26.0%
International +10.7%

Some key international market performances in 2010 (local currency terms)

Frankfurt (DAX) +16.1%
London (FTSE-100) +9.0%
Tokyo (Nikkei) -3.0%
Shanghai (Composite) -14.3%

*I have other data points on my “Wall Street History” link.

--U.S. Treasury Yields

6-mo. 0.16% 2-yr. 0.60% 10-yr. 3.32% 30-yr. 4.48%

Strategist Marc Faber: “The worst investment is in U.S. long-term bonds. This is a suicidal investment.” 

PIMCO’s Bill Gross wrote this month: “The problem is that politicians and citizens alike have no clear vision of the costs of a seemingly perpetual trillion dollar annual deficit. As long as the stock market pulsates upward and job growth continues, there is an abiding conviction that all is well and that ‘old normal’ norms have returned. Not likely. There will be pain aplenty.”

--Laszlo Birinyi is one of the better known market strategists on the Street, so it’s worth noting his opinion that the S&P 500 will rally to 2854 by Sept. 2013, or about 125% from today’s levels. Birinyi is basing his forecast on historical precedent and advances that began in 1962, 1982, 1990 and 2002, and given this he sees the rally lasting another 32 months. [Investment News]

--December auto sales rose 11%, while for the year they were up a like amount with GM’s light-vehicle sales for all of 2010 up 7%, Ford’s 20%, Chrysler’s 17%, Honda’s 7%, Hyundai’s 24%, Nissan’s 18%, and Toyota, bucking the trend, down 0.4% as it continues to struggle from its quality issues. As the Wall Street Journal also pointed out, the Big Three (you know who they are) has now become the Gang of Seven.

Toyota’s issues, including recalls on more than 8 million vehicles worldwide last year, the majority of which were in the U.S., caused it to fall behind Ford as No. 2 here, both trailing GM.

Meanwhile, GM announced its sales in China were up 29% in 2010, though various tax incentives expired on Dec. 31, and as I noted last time Beijing city is limiting auto sales due to the existing crush on the road. Should this idea spread, obviously it would have a real impact on GM and everyone else selling cars here. That said, auto sales in China are still expected to be in the 20 million vehicle range this year vs. 17.5-18 million in 2010. [U.S. sales for 2010 totaled 11.6 million. The peak was 17.4 million in 2005, with sales bottoming in the U.S. at 10.6 million in 2009.]

--Serious story out of France involving national automaker Renault. The French Industry Minister Eric Besson warned the country was facing “economic war” after Renault suspended three senior managers following an investigation into possible industrial espionage and the stealing of secrets involving their electric car. Officials fear hundreds of thousands of jobs could be at stake in the country. As a BBC business reporter put it:

“The biggest advantage Western car makers have against rivals with lower labor costs elsewhere is their advanced technology. Hence the talk in France of an economic war.”

Both Renault and its partner Nissan have invested heavily in electric vehicle technology vs. General Motors and Toyota which are focusing more on hybrids.

--In a very important story, Chinese securities regulators on Friday approved the joint ventures of J.P. Morgan Chase and Morgan Stanley, bringing the two investment banks closer towards true operating businesses in China that they, and others, have long sought. This is a good sign. The approval would allow the two to underwrite securities there.

[JPM will hook up with First Capital Securities, a Shenzhen-based brokerage, while MS, which had pulled out of a previous joint venture, will have a new partner, Huaxin Securities, with the new entity based in Shanghai.]

--The final report of the presidential commission on the Gulf of Mexico oil spill is due out in a few days and, while this is zero surprise, it will finger BP, rig owner Transocean and contractor Halliburton as the three main culprits whose “missteps and oversights” were “rooted in systemic failures,” plus it could happen again. Officials from all three operators ignored critical warnings and failed to take precautions that could have averted disaster. Details of the various missteps were previously made public in other reports.

--But at least deep-water drilling is finally set to resume after the May moratorium was lifted in October, though permits weren’t issued for new projects. Now, previously approved projects, prior to the Deepwater Horizon explosion, will be allowed to proceed, including work by Chevron and Royal Dutch Shell.

[A separate federally funded report shows that the naturally occurring bacteria in the Gulf devoured significant amounts of toxic chemicals in natural gas and oil spewing from the Deepwater Horizon. Said microbiologist David Valentine, “Within a matter of months, the bacteria completely removed this methane.” May I suggest we dump these microbes on the Taliban and al-Qaeda, which would then lead to budget savings.]

--Just last week I said Iraq had finally increased its oil production to 2.6 million barrels for the first time in decades. Now the new oil minister says it’s up to 2.7 million. Something smells a little fishy here. Put Abdul-Karim Elaibi under the klieg lights.

--Russia, currently the world’s largest oil producer because Saudi Arabia isn’t operating at full capacity by design, set a post-Soviet record for yearly crude output in 2010, 10.15 million barrels a day. Russia also announced it had begun oil shipments to China via an East Siberian link, thus cementing its hold on the second-largest energy consumer’s market in the world. 

--Health spending now accounts for 17.6% of the U.S. economy (for 2009…the latest data point as released this week by the federal government), but this was up just 4%, the smallest percentage increase in the half-century the figures have been tabulated. Granted, this was also at a time when the economy was in recession. But because the economy lost ground in ’09, the share of GDP that healthcare consumed rose. Federal spending on Medicaid, the health insurance program for the poor, rose 22% in 2009. Of course the preceding was all before health care reform.

--Health insurer Blue Shield of California is seeking cumulative hikes on individual policyholders of as much as 59% effective March 1. Earlier, Anthem Blue Cross applied for a 39% rate increase and was rejected. Blue Shield blames fast-rising healthcare costs and other expenses related to ObamaCare for its request. It says most of the increases will be in the 30% to 35% range. But the Los Angeles Times found a Blue Shield policyholder who learned his monthly bill would rise from $271 to $431…59%. California’s new insurance commissioner is examining the request.

[Meanwhile, your editor has quite an insurance tale of his own but will get around to it next time. Just a hint…I’m now paying much less than I’ve told you before.]

--Thomas G. Donlan / Barron’s

“At the end of 2010, stimulus spending and a tax cut came in the back door in what was said to be a genuinely new development; President Obama and soon-to-be House Speaker John Boehner agreed to settle their policy differences by giving each other what he most wanted. The president received a ‘temporary’ extension of long-term unemployment benefits and a ‘temporary’ cut in the Social Security payroll tax; Boehner received extension of all the tax rates enacted ‘temporarily’ back in 2001-03 and an assortment of ‘temporary’ tax credits for business.

“Economists familiar with American political behavior note that neither side gave up any cherished spending or tax breaks; both sides compromised at the expense of long-term fiscal stability. Peter Morici of the University of Maryland put it bluntly: ‘Instead of each side getting half of what it wanted, Washington feasted – everyone got everything they wanted and more.’

“It was business as usual, and the outlook is for more of the same in 2011.”

--The Census Bureau now calculates that 15.7% of Americans are living in poverty under a new method for measuring the poor that includes medical expenses and government subsidies, with the definition for a family of four ranging from $21,000 to $25,000 annually. Many of the new poor are elderly.

--U.S. consumer bankruptcy filings rose 9 percent last year compared with 2009, reaching 1.53 million, but the pace slowed in October and November.

--There are many who are upset with Bank of America’s settlement with Fannie Mae and Freddie Mac over billions in bad mortgages. Specifically, BofA settled for $2.8 billion when the cost was supposed to be far greater, this as the American taxpayer is on track to prop up the two mortgage giants to the tune of $150 billion.

The settlement is over mortgages purchased by Fannie and Freddie between 2005 and 2007 where BofA (through its Countrywide Financial acquisition) misrepresented the quality.

--Speaking of bad mortgages, online real estate marketplace Zillow estimates the White House, worth $331.5 million at the top of the real estate market, is now down to $253.1 million. Hey, if the country is near bankruptcy then this has to be a bad mortgage, know what I’m sayin’?

But did you know it had 35 bathrooms? I would have figured on 19. 

--Goldman Sachs is facing heat over its $450 million investment in Facebook (potentially up to $1.5 billion) because, among other things, it would then earn fees of as much as $50 million from leading an initial public offering (now slated for spring 2012 at the latest) of the social networker. Other ongoing fees for the investment would follow. Goldman is offering shares of Facebook to its valued clients through a special purpose vehicle and when the 500-shareholder threshold is hit, Facebook would be forced to divulge its financials, though Goldman is trying to skirt this law by claiming it is just ‘one shareholder’ representing the others investing through it. [I need to stress this is a fast-moving situation and by the time you read this the application of the rules may have changed.] 

Another investor in Facebook is Russia’s Digital Sky Technologies. Overall, Goldman’s injection valued Facebook at $50 billion, even though Facebook currently has revenue of around $2 billion.

Facebook, by the way, received 8.9% of all Web visits in the United States between January and November 2010. Google’s main site was second with 7.2%.

--While Facebook gets another huge infusion on the way to IPO riches, one-time competitor Myspace is laying off up to half its workforce, or around 1,100, as its audience fell to 81.5 million in November from 108.1 million in November 2009, while Facebook’s was rising from 350 million to 500 million during the same period. [USA TODAY]

--Casino revenue in Macau soared 58% last year to a record $23.51 billion, thanks to a flood of gamblers from the Chinese mainland as the economy there strengthened. December revenue was up 66.4% to a record monthly high. Macau has left Las Vegas in the dust.

--But this week also saw 89-year-old Stanley Ho step down from his Macau gaming company in favor of his fourth wife, Angela Leong On-kei. The elder Ho, who is known as “The King of Gambling” owing to his 40-year monopoly on gaming in Macau before the business opened up to outsiders, had brain surgery last year following a fall. Oh, the stories he can tell. For example, did I ever tell you about the time I was in his Casino Lisboa and these very attractive… oops, what goes on in Casino Lisboa stays in Casino Lisboa.

--Deflation Alert…Donald Trump has cut the initiation fee at the Trump National Golf Club in Bedminster, N.J., from $300,000 to $150,000.

--The U.S. Mint said silver coin sales rose 20% in 2010 over 2009, but dropped 36% in December. Gold coin sales fell 14% in 2010, and cratered 74% in December. [Doug Foulsham / Strategic Energy Research and Capital]

--Good news…Macy’s, despite its less than expected sales in December, is adding 725 jobs over the next two years in its online business. Macy’s said this part of its operation was up 29% in the first ten months of fiscal 2010.

And Discount-store operator Dollar General plans to open 625 stores and hire more than 6,000 workers in 2011.

--Broadway ticket sales for the last two weeks of the year hit a record $60 million, with 27 shows averaging more than 80% of seat capacity, 32 averaging 70% and 21 shows playing to at least 90% capacity. But for the fall season, there were few big success stories and nine shows closed last Sunday. Surprisingly, “Lombardi” was extended through June 19. [This is the only show I’ve been to in years and it was good…not great…but good.]

--Overall for 2010, a record 48.7 million people traveled to New York last year, 6.8% more than 2009 and a new record, despite the soft economy. [Leisure travelers were 37.6 million and business travelers were 11.1 million. International was up 13%.] And while still the highest in the nation, hotel room rates are off by as much as 20% from their peak. Budget properties (around $200 a night) are booked solid.

--The flooding in Australia threatens the Great Barrier Reef because of all the sludge pouring into the sea, which aside from being an ecological disaster would also do a huge number on tourism in Queensland. The problem with the sludge is it carries a toxic “cocktail,” including pesticides.

--Serious potential issue in Germany; where authorities have stopped more than 4,700 farms from selling their meat and eggs amid a dioxin scare. While there have been no reports of health issues, it has come to light that for months some 150,000 tons of feed for poultry and pigs contained the cancer-causing chemical. The scandal emerged when excessive levels of dioxin were found in eggs from chickens in western Germany.

--Housing prices in Ireland fell by an average 15% last year and are now officially down 40% from their peak. And get this…Ireland’s domestic banks saw almost $100 billion in deposits flee for safer institutions. Much of the flow was the result of “ratings sensitivity.” When Ireland’s banks were downgraded, the deposits were mandated to find another home.

--But wait…there’s more! Ireland’s unemployment rate rose in December to 13.4%. Officials note the figure would be even worse were it not for the large numbers emigrating, which doesn’t bode well for the future. It also doesn’t help when a large health insurer, VHI, said it was hiking premiums for its most popular plan by 45% in February, or an increase of about $1,300 a year for a typical family.

--And as to the water crisis in Ireland I wrote of last time as a result of the record cold, followed by a brief thaw that burst the pipes, water is slowly being restored but the government announced it would not compensate thousands of businesses affected by the shortages.

--Continental Airlines appears to have reached agreement on a new contract with its 9,300 flight attendants that offers higher wages and profit sharing for a 20-month period, which would take it up to an eventual combined labor agreement with merger partner United Airlines.

--Donald J. Tyson died. He was 80. Tyson took his father’s Arkansas chicken business and built it into a true food empire, Tyson Foods, one of the world’s largest producers of chicken, pork and beef. As noted in an obituary for the New York Times by Robert D. McFadden:

“Tyson Foods became a household name as he popularized the Rock Cornish game hen as a high-profit specialty item; helped develop McDonald’s Chicken McNuggets and KFC’s Rotisserie Gold; and stocked America’s grocery stores with fresh and frozen chickens – killed, cleaned and packaged in his archipelago of processing plants.”

Tyson became a billionaire, and lived the life of one, hobnobbing with presidents and members of Congress, while, some would say, skirting the law, including the famous case of plying President Clinton’s agriculture secretary, Mike Espy, with gifts when Espy’s agency was considering tougher safety and inspection regulations affecting Tyson Foods. The company would later plead guilty to making the gifts and paid a $6 million fine. And there were cases involving the smuggling of illegal immigrants, though these resulted in acquittals. [Donald Tyson didn’t just support Democratic presidents. He lent his support to George W. Bush as well.]

It was his “grow or die” philosophy that led to Tyson’s acquisition of Holly Farms in 1989, which allowed Tyson Foods to leapfrog then larger competitors ConAgra and Perdue.

--Album sales declined for a ninth time in ten years in 2010, down 12.8% from ’09 levels. But Eminem’s “Recovery” sold 3.4 million copies, more than any album since 2007. Digital album sales rose 13% but it wasn’t enough to offset a 20% decline in CD sales.

--I read a story on bottled water that bummed me out. Now I could easily just drink water from the tap but I keep a bottle on the office desk and it’s almost always Poland Spring. Yet a report out of the Environmental Working Group analyzed some 173 brands of bottled water products and looked at factors such as whether the company discloses information on where the water comes from, how or if their water is treated, and whether the results of purity testing are revealed on company Web sites.

Only three brands earned top grades for disclosure and using the most advanced treatment methods available – Gerber Pure Purified Water, Nestle Pure Life Purified Water, and Penta Ultra-Purified Water. Among the six getting the worst grades was Whole Foods Italian Still Mineral Water (the title implying the company drives around looking for pools of still water along the road). 

Among some of the better known brands that received “Ds” were Aquafina, Deer Park and Poland Spring. Crystal Geyser Natural Alpine Spring Water received an F. Shame on you, Crystal Geyser. [As for me…I’m changing to Nestle.]

--Here’s a candidate for the gallows. A Long Island-based stockbroker, Paul George Chironis, has agreed to pay $350,000 to settle civil charges that he churned the account of the Sisters of Charity of The Bronx by charging them “excessive and undisclosed markups and markdowns in riskless principal transactions,” according to the SEC. Chironis has been barred from working in the securities industry.

--ESPN is close to finalizing a new 10-year, $20 billion ($2 billion annually) deal with the NFL for the “Monday Night Football” franchise, which gives the players leverage in their ongoing talks with NFL owners over a new collective bargaining agreement. The owners are crying poverty while asking the players to play an additional two regular season games for no additional pay, plus take a decreased cut of the overall revenues.

--IKEA is no longer stocking incandescent light bulbs in its U.S. stores, which is another reminder to buy them up wherever you can find them, sports fans, just as we do here in the home office of StocksandNews.

--Last week I forgot to include Pennsylvania Gov. Ed Rendell’s statement on the NFL canceling the Eagles-Vikings game in Philadelphia as a result of the snowstorm, but there was a tie-in I wanted to include so do so now for the archives.

Rendell said, as you remember:

“We’ve become a nation of wusses. The Chinese are kicking our butt in everything. If this (the snowstorm) was in China do you think the Chinese would have called off the game? People would have been marching down to the stadium, they would have walked and they would have been doing calculus on the way down.”

Well that certainly was expressing a current national sentiment and a few days after Rendell uttered this statement I saw the following in the South China Morning Post.

“Beijing opens five subway lines; more on way”

“Beijing opened five new subway lines yesterday, an urban planning show of force highlighting the investment the city has thrown behind public transport to curb its notorious air pollution and traffic congestion.

“Costing nearly $9.2 billion, the newly constructed lines – most connecting the distant and dusty suburbs to the city center – bring Beijing’s subway network to 336 kilometers.

“That distance is just a fraction of what the city government has planned….

“Beijing aims to have a 561-kilometer-long subway network by 2015, and is planning for between 700 and 1,000 kilometers by 2020, Li Xiaosong, the deputy director of the commission said. ‘If we are comparing ourselves to London, New York or Tokyo, we are still in the early stages of development,’ Li said.”

Beijing moves 5.3 million daily riders, though the lines can be four trains deep and attendants push you in the cars.

But five lines opened on one day?! A tripling of the network in nine years?! New York can’t even get some of its sanitation workers to honor their contracts and remove snow. It takes like 30 years in New York from planning to finish to get one little subway line completed. We are so screwed.

Foreign Affairs

Iran /Israel: The Jan. 1-7, 2011, cover of The Economist has the headline:

“Please, not again…The threat of war in the Middle East”

The point of the accompanying article is that President Obama should not give up on the peace process because the alternative is war, and the next one, say between Israel and Hizbullah, will not only be far worse in terms of the destruction these two inflict on each other (I totally concur on this), but it would also draw in Syria, and possibly Iran. The Economist adds that Israel should give the Palestinians a state on the West Bank, thus taking away the Palestinians’ justification for going to war. I agree with this as well. My point has been that in this most recent bid at negotiations, Israel lost the moral high ground in not negotiating while freezing further settlement construction, indefinitely, and then if the Palestinians refused to negotiate in good faith, or launched a large terror operation, Israel would be in their rights to say, ‘That’s it. You’re on your own for good.’

But Israel cannot take that position today, and it’s why I constantly harp on issues like the flyovers violating Lebanon’s airspace. If I were the Lebanese government, I’d make a much bigger issue of this at the U.N. and stay on it.

Anyway, there were a number of developments this week on the Iranian front as parliament speaker Ali Larijani said Iran will continue to strongly support Hizbullah and Hamas in their resistance against “the global arrogance and support the oppressed.” Campaigning against the United States and the Zionist regime are the principles of the Islamic Revolution, said Larijani, as stated in the Tehran Times. The nuclear program is also one of the most strategic plans of the country, he added.

So this week on the nuker front, Iran said it would allow some inspectors from the International Atomic Energy Agency, though not from the U.S., Britain, France or Germany, and so the European Union turned down the joke of an offer. Some observers viewed Iran’s gesture as an attempt to split the P5+1, which includes the above four plus Russia and China, and thus weaken the sanctions. The next talks on Iran’s program are slated for Jan. 20 in Istanbul.

But in an interesting development, Mossad Director Meir Dagan, who has just retired, said his assessment is that Iran wouldn’t be capable of producing a nuclear bomb before 2015. Dagan believes sanctions are working to foment domestic dissent and that incidents such as the Stuxnet computer worm have successfully sabotaged key parts of Iran’s uranium enrichment operation. Dagan’s bottom line, there is no reason for preemptive strikes.

Separately, Iran has joined the rest of the Muslim world in going after Christians, who the last I heard, being one myself, haven’t exactly been running around the world launching suicide attacks, but that’s a discussion for another day. Iranian authorities are arresting those who converted to Christianity from Islam or sought to convert others, which is punishable by death in Iran. About 1% of Iran’s population is Christian but heretofore have mostly co-existed peacefully.

And back to Israel and the huge natural gas find off its coast, it seems that visions of huge profits has the government going for an inordinate share of them, with a government committee recommending production profits of as much as 62% for the bureaucrats. Good lord. Needless to say the Israeli and American companies behind the discoveries are none too pleased, warning the higher rate makes the project unfeasible. The government says the new rate (vs. the old 30% one) puts it on par with the 34 member countries of the Organization for Economic Cooperation and Development, a group of free-market economies including the U.S. and Israel, which is said to be about 60%. But as the Los Angeles Times reports, the energy firms say Israel is changing the rules in the middle of the game.

Afghanistan:  The U.S. is adding 1,400 Marines for the spring fighting season even as troop levels are currently slated to begin to decline in July. Defense Secretary Gates wants to solidify gains before any withdrawals take place. Most of the troops would be stationed around Kandahar.

Iraq: There has been a wave of assassinations targeting Iraqi security force members and government employees, at least ten officials since Jan. 1, killed by those using silencers. The government believes it could be the work of organized crime groups as much as terrorists. The killings are taking place in the heart of Baghdad and it’s theorized the stepped up action is part of the jockeying for positions ahead of the U.S. withdrawal at year end.

And then there’s the issue of Moqtada al-Sadr, who after a roughly four year, self-imposed exile in Iran, returned to Iraq and his family home in the southern city of Najaf. His return comes just two weeks after Prime Minister Nouri al-Maliki put together his unity government, including some Sadr loyalists. Sadr himself was to deliver a speech on Wednesday or Thursday, signaling his intentions, but at last word it was postponed to today, Saturday. 

[As I go to post, supposedly Sadr said in the speech that his supporters should resist all occupiers of Iraq, but not necessarily with arms. He then asked them to denounce Israel as well as the U.S. More next week.] 

North / South Korea: Prospects for talks over Pyongyang’s nuclear program are all over the board these days with each player saying something different every 24 hours. For now, South Korea’s President Lee said the North’s idea for bilateral talks was without merit, as Lee doesn’t want to be seen caving to Kim Jong-il’s calls for re-engagement and unconditional dialogue. But Washington has long said inter-Korean talks are a prerequisite for reopening the six-party discussions, and on Thursday, Obama administration envoys met with their Chinese counterparts in Beijing and emerged hopeful talks would be restarted soon, this as Chinese President Hu Jintao is scheduled to arrive in Washington on Jan. 19 for a summit with President Obama and no doubt the situation on the Korean Peninsula will dominate discussions.

The U.S. has been telling North Korea to prove it is abandoning its war-footing and towards that end it was reported on Friday that the North had lowered its military alert status to a pre-crisis level. Also on Friday, the South China Morning Post reported that China has committed to a huge investment, some $2 billion, in a project to build up a North Korean free trade zone into a regional export base near the North’s border with China and Russia (a place called Rason). I’d say if the report is true it represents a rather significant incentive for North Korea to return to its commitment to denuclearize.

China / Taiwan: Taipei, as well as the likes of South Korea and Japan, and the United States, is  among those casting a wary eye on China’s defense strategy, particularly with confirmation that China has a ballistic missile capable of taking out a U.S. aircraft carrier, and then this week’s unveiling of China’s first stealth fighter, well ahead of schedule. Taiwan’s defense ministry said it was keeping a close eye on developments and would keep pushing for advanced aircraft from the U.S., even as Washington maintains it would still be years before China’s plane is operational.

But Taiwan also said it would not deploy its new powerful rocket system on outlying islands near the mainland because of fast-warming ties with Beijing. Taiwan will, however, still mass produce them for the main island defense.

And one reason for the ongoing caution on Taipei’s part comes in the form of an Australian intelligence agency report that found China’s military spending for 2006 was $90 billion – double the $45 billion announced publicly by Beijing. Those putting the report together concluded that China was building a military capability well beyond its priorities of self-defense and preventing Taiwan’s independence.

“China’s longer-term agenda is to develop ‘comprehensive national power,’ including a strong military, that is in keeping with its view of itself as a great power,” says a copy of the secret assessment provided by Foreign Affairs officials to the U.S. embassy in Canberra.

“Arguably China already poses a credible threat to modern militaries operating in the region and will present an even more formidable challenge as its modernization continues,” the report continues. “There is the potential for possible misconceptions which could lead to a serious miscalculation or crisis,” it says.

“(But a) lack of operational experience and faith in asymmetric strategies could lead to China overestimating its military capability. These factors, coupled with rising nationalism, heightened expectations of China’s status, China’s historical predilection for strategic deception, difficulties with Japan, and the Taiwan issue mean that miscalculations and minor events could quickly escalate.” [Sydney Morning Herald]

I totally agree with this conclusion. Just as a small incident on the Israeli-Lebanese border could lead to a wider conflagration, an incident in the South China Sea could escalate rapidly as well. Of course Beijing’s military buildup will be main discussion point #2 between Barack Obama and Hu Jintao. Without broad understandings on the military front, economic cooperation becomes mute; at least so says your editor.

Lastly, owing to China’s rising military and uncertain intent, Japanese and South Korean defense officials are meeting next week in Seoul to discuss boosting ties, though there is no guarantee these will go smoothly given historical resentments in South Korea due to Japan’s 1910-45 occupation.

Russia: The Kremlin continues to accuse the West of interference following condemnation of a Moscow court’s decision to sentence Mikhail Khodorkovsky to an additional six years in prison (for a total of 14 years on charges of embezzlement and money laundering). At least 130 protesters were detained in Moscow and St. Petersburg during New Year’s Eve rallies against restrictions on freedom of assembly and the Khodorkovsky decision.

Egypt: The top Muslim cleric criticized Pope Benedict’s call for world leaders to defend Christians as interference in the country’s affairs, according to state media. It’s in the next statement that you see how there can be no coming of the minds here, at least in my lifetime.

Ahmed al-Tayeb said:

“I disagree with the Pope’s view, and I ask why did the Pope not call for the protection of Muslims when they were subjected to killings in Iraq?”

The Vatican said it was not just showing solidarity for the Coptic community, whose church had been bombed the week before, but had shown concern for the consequences of the violence for the entire population. [Agence France-Presse]

As to the New Year’s Eve bombing in Alexandria that killed 21, the reaction exposed the fragility of Egypt’s government. President Hosni Mubarak appeared on national television to condemn the attack and in doing so showed the country just how frail he is. I’ll guess he dies before June, with elections due later this year.

Nigeria: Islamist terrorists set off bombs in the capital city of Abuja that killed at least 34, this after a Dec. 28 series of attacks killed 28 in the city of Jos. The problem for President Goodluck Jonathan is that a new generation of rebel leaders has sprung up to replace older ones who were bought off in a 2009 amnesty. The violence will only increase ahead of an April election that Jonathan seeks to win. [Recall he took over last year on an interim basis when President Yar-Adua died.] Oil production, which is basically the only reason why I’d bring up Nigeria, is running at 2.1 million barrels a day, below the 2005 peak of 2.5 million.

Random Musings

--Defense Secretary Robert Gates said the nation’s “extreme fiscal duress” required him to call for $78 billion (not the $100 billion previously discussed) in cuts to the Pentagon budget, not including the costs of combat operations. Gates is also seeking to increase fees paid by retired veterans under 65 for health insurance, aside from troop cuts and extensive reductions in new weapons systems.

The proposed reduction of 47,000 troops, however, is largely a result of the United States’ withdrawal from Iraq and the cuts would not begin until 2015, just as Afghan forces are supposed to have completed their mission.

Because of the timeline, though, much can change in the interim, but Gates’ proposal means the Army is to begin cutting 27,000 in 2015 and the Marines 20,000.

Admiral Mike Mullen, chairman of the Joint Chiefs of Staff, said all four service chiefs supported the proposals. “We can’t hold ourselves exempt from the belt-tightening. Neither can we allow ourselves to contribute to the very debt that puts our long-term security at risk.”

Both the Army and Marines, even after the cuts, would be larger than when Gates became defense secretary four years ago.

I’ll have more on this topic as I pour through my defense publications but my initial reaction is the cuts seem reasonable, including the shelving of certain weapons systems.

However, for an opposing viewpoint, I did post Mark Helprin’s thoughts on the defense budget on my “Hot Spots” link. I would just add for now that if war broke out on the Korean Peninsula in the next year or two (more so than a conflict over Iran), all the above would be tossed out the window.

--Lots of changes at the White House as press secretary Robert Gibbs is leaving; Gibbs being a critical advisor and friend of the president the past six years, though it is assumed he will have a role in the 2012 campaign after taking a break. But Pete Rouse, the interim chief of staff until the appointment of Bill Daley, is going to remain as White House Counsel.

--Naval Captain Owen Honors was abruptly fired as captain of the USS Enterprise on Tuesday after lewd videos he made in 2006 and 2007, designed to boost morale on board, became public after being released by the Virginian-Pilot in Norfolk. The thing is the videos were first shown back then and obviously some Navy leaders knew about them yet Honors was promoted. 

Now I understand why many have come forward supporting the captain, and I haven’t been stationed on a naval vessel, but the episode shows an amazing lack of judgment. Those superiors who knew of the videos must be disciplined as well (a career-killing demotion would be appropriate).

--Uh oh…Minnesota Republican Congresswoman Michelle Bachmann is making waves about running for president, which would create real problems for Sarah Palin, the woman who quit in the middle of her term as governor of Alaska yet expects us to take her seriously. Beyond that, seeing as both women are Tea Partiers and, you know, err…I need to stop here before I get in more trouble. 

--And what’s this? Rudy Giuliani is gearing up for another run at the White House? Sources told the New York Post that he “thinks the Republican race will be populated with far-right candidates like Mitt Romney, Sarah Palin and Mike Huckabee, and there’s opportunity for a moderate candidate with a background in national security.” Some Giuliani loyalists say the idea is “crazy.” Others say he is just trying to position himself for a cabinet position, or even vice president, because his business opportunities are drying up. “Nobody is paying $100,000 to hear the same warmed-over 9/11 speech.”

Actually, Obama is a lock as long as the economy is showing steady progress and I’ll just go on record as saying he defeats Mitch Daniels 54-46. But this will change. I just want to have fun with it and will give an estimate every two months or so from now to Nov. 2012 as a sort of benchmark.

--Maryland Sen. Barbara Mikulski became the longest-serving female senator when she was sworn in for her fifth term. Someone tell me what she’s done in the first 24 years.

--One congressman who will be in the spotlight big time in the 112th Congress, by his own design, is California Republican Darrell Issa, the incoming chairman of the House Oversight and Government Reform Committee, who plans on holding numerous hearings to expose “one of the most corrupt administrations,” though Issa claims he is approaching it from more of an accounting standpoint rather than a legal one and is looking for $200 billion in savings. Issa will have broad subpoena power and at least for now plans to use it. Issa says he’ll be targeting food and drug safety (specifically recalls), the Financial Crisis Inquiry Commission’s failure to identify the origins of the meltdown, corruption in Afghanistan, business regulations, and Medicare fraud.

“We can save $125 billion in simply not giving out money to Medicare recipients that don’t exist for procedures that didn’t happen. These are real dollars. Ten percent of the deficit goes out in wasted money – money that doesn’t get one person health care in Medicare,” Issa told CNN.

Can’t argue with that.

--New York City Mayor Michael Bloomberg’s approval rating has plummeted as a result of his handling of the blizzard of Dec. 26, just 37%, the lowest since he took office in January 2002 and a big hit for any presidential ambitions he still harbored. Just last October his approval rating was 50%.

Editorial / New York Post

“God delivered unto New York almost two feet of snow 10 days ago, and then in His wisdom he took it away; too bad the same can’t be said for the mountains of garbage still piled curbside all around the city.

“And now another storm is expected, but Mayor Mike promises that all is in readiness, saying: ‘We plan to do a great job.’

“Quite unlike 10 days ago.

“The leadership vacuum in City Hall during the Christmas blizzard was pronounced; the plowing slowdown and other operational failures naturally followed in train.

“Doubtless Bloomberg will see to it that there is a full complement of deputy mayors on duty when the flakes fly today – though the damage to his reputation as a master manager is substantial, and perhaps irreparable.”

The Post ran the front-page headline last weekend:
“Heck of a job! Mike’s Katrina moment: Praises ‘slow-plow’ team”

…referring to Sanitation Commissioner John Doherty. But these days in New York the big issue is the uncollected garbage…on many streets gigantic, rat-infested mounds. Reminder to out-of-towners. If you’re walking down a Manhattan side street and you spot what you think is a cat, it’s a rat. Actually, if you think you just saw a Doberman, that’s probably a rat, too.

And this from the Post:

“Instead of plowing, they got plowed.

“A group of on-duty Sanitation supervisors is under investigation for allegedly buying booze and chilling in their cozy department car for hours Monday night after the blizzard stranded a bus and three snowplows blocks away.”

--And then there’s New Jersey Gov. Christie. Once he took office I’ve supported him. He’s been a breath of fresh air. But, boy, he acted like a total jerk when questioned as to his own handling of the blizzard. 

You know how politicians say before they run for higher office that “I need to take my family’s counsel and talk over the pros and cons before I can make an announcement”?

Well that means that you’re supposed to tell your spouse and kids, “Look, there will be times this won’t be easy, including when we may have to cut short a vacation or two if an emergency pops up.”

That’s what boggles my mind when Christie basically tells us (and he came very close to these actual words), ‘[Blank] you, New Jerseyans. I was handling things down in Disney World and my family comes first.’

No it doesn’t! You ran for this office and you were elected by us, the people, to serve…us! If you don’t want to impact your family in any way then don’t run in the first place. And you also knew full well, Governor, that you were letting your Lt. Gov. take a two-week break of her own during this same time, which was incredibly idiotic in its own right.

[Yes, friends, I’m single and I have a little different perspective on this topic than many of you might, but you will never convince me I am wrong so don’t bother trying.]

--Gov. Christie did sign what some are calling the toughest anti-bullying law in the country, owing in no small part to the death of Tyler Clementi, the Rutgers student whose roommate streamed a video of a romantic encounter between him and another man over the Internet. The new law mandates that all districts form a “school safety team” to review complaints. Administrators who do not investigate reported incidents of bullying would be disciplined, while students who bully could be suspended or expelled.

--But speaking of education, the Star-Ledger had a story on the “achievement gap” between rich and poor students, and among those of different races, in New Jersey, not that this is unique to my state. For example there is a 38.4-point difference in the passing rate in third-grade language arts, between African-American and Asian students.

“On that test, about 60% of black or African-American third-graders failed to achieve proficient scores, compared to 21.4% for Asian students and 31% for whites.”

--This was depressing…from a review of New Jersey’s year in crime and a rising homicide rate in some of our bigger cities.

“Anyone who suggests that our gang problem isn’t growing is naïve,” said Prosecutor Theodore Romankow. “The reality is they are growing, and they are fast becoming the main supplier of drugs and guns throughout the state. They’re the ones who are primarily doing the shootings.” Like 75% of the killings in my county, Romankow adds.

--I wish two new Democratic governors the best…Jerry Brown in California and Andrew Cuomo of New York. The better these two states do the better we all do is my attitude. As I’ve noted before, I don’t have an investment bet against America and its future. [Depending on how we handle the federal deficit discussion this coming year, I may yet place one, however.]

So Cuomo took charge of dysfunctional New York this week and on the public-private debate, understand he’s facing massive state pension funding issues that currently require the taxpayer-financed yearly contributions to the state teachers’ retirement system go from $900 million this year to $4.5 billion by 2015-16. Cuomo has talked of alternatives but it’s an almost impossible task. The unfunded health care benefits for state retirees are $205 billion. The estimated budget deficit for the 2011-12 fiscal year is $10 billion and Cuomo hopes to close it without raising taxes or borrowing. For starters he called for a one-year salary freeze on public employees, but the savings generated with that are relatively minimal. At least it’s the appropriate symbolism.

[Meanwhile New Yorkers are buzzing over the First Girlfriend, the Food Network’s Sandra Lee, who is off to a great start in her own right.]

--This is for “This Week” junkies such as myself. I was very disappointed when Christiane Amanpour took over the show because she’s a humorless nag, but now there are stories the budding dictator wants to move the show to New York from Washington. Understand the main reason to watch “This Week” in the first place is George Will’s participation and I never miss the roundtable when he’s on. I also like Donna Brazile as a representative of the other side. But there is no way I see Will staying on if they move to Gotham. 

In the New York Area, “This Week” airs at 10:00 a.m. and “Meet the Press” at 10:30, so I flip on the latter around 10:45 when the roundtable of the former is finished, but since the death of Tim Russert, “Meet the Press” has been weak. It’s not David Gregory, it’s that their own roundtable normally sucks with some people on it who can’t be taken seriously, such as tomorrow’s inclusion of CNBC’s Erin Burnett.

--You know who is a total fraud? Rapper Wyclef Jean, he of Yele Haiti, his charity to help his native land. The New York Post reported that Jean paid his “alleged mistress” $147,000 last year for god knows what. Jean claimed previously he had cleaned up his charity after stories emerged he was funneling dollars to businesses controlled by the former Fugees rapper and his partner, but this payment screams otherwise.

--Back to the topic of rats, the New York Times reports, “Researchers have found a way of testing for tuberculosis that is fast, cheap and widely available: large rats that can smell the bacteria in a sputum sample.”

Specifically, the Gambian pouched rat can do better than various expensive tests already on the market. So if you see a rat in New York City wearing a lab coat, perhaps you need to treat it with a little more respect.

“Hello, kind sir….What’s that, you say?”

--A Newcastle University study, published in the academic journal “Phytomedicine,” suggests regularly drinking green tea could protect the brain against Alzheimer’s and other forms of dementia.

Dr. Ed Okello, who headed up the research team, said: “What was really exciting about this study was that we found when green tea is digested by enzymes in the gut, the resulting chemicals are actually more effective against key triggers of Alzheimer’s development than the undigested form of the tea. In addition to this, we also found the digested compounds had anti-cancer properties, significantly slowing down the growth of the tumor cells which we were using in our experiments.”

--Calling Roscoe the Bedbug Dog…Roscoe the Bedbug Dog…come in please…

It seems a third woman has sued the Waldort Astoria Hotel in New York claiming she woke up with bedbugs all over her body, which is kind of gross. But the suit is a result of a 2007 stay. C’mon, Svetlana Tendler (no relation to the rather attractive Dr. Tendler of Restasis fame, I’m assuming), you can do better. Claim you found a Gambian pouched rat in a lab coat in the shower, at least.

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

God bless America.
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Gold closed at $1368…decline not a biggie
Oil, $88.03

Returns for the week 1/3-1/7…and 1/1/11-1/7/11

Dow Jones +0.8% [11674]
S&P 500 +1.1% [1271]
S&P MidCap +0.4%
Russell 2000 +0.5%
Nasdaq +1.9% [2703]

Bulls 54.5
Bears 
20.5 [Source: Chartcraft / Investors Intelligence]

Have a great week. I appreciate your support.

*Dr. Bortrum has posted his latest installment.

Brian Trumbore