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07/16/2011

For the week 7/11-7/15

[Posted 7:00 AM ET]

Wall Street, Washington and Europe

What a week. The deleveraging of Europe continues and we wait to see to what extent the United States takes the ax to spending, if at all, as part of a plan to avoid default. The ratings agencies are already voting, whether on Greece, now the lowest-rated country in the world, Ireland, or the U.S.

Starting with Greece, they got their $17 billion to tie them through August, but it’s paramount a more extensive Bailout II is approved between the European Union, European Central Bank, and the International Monetary Fund, and the EU is jerking around.

Greek Prime Minister George Papandreou wrote a letter to Jean-Claude Juncker, chairman of the Eurogroup, complaining that European partners had acted too slowly to stem the crisis.

“Crunch time has arrived and there is no room for indecisiveness and errors such as taking decisions that in the end prove ‘too little, too late’ to convince the markets we are serious; (and) making compromises that satisfy our internal political ‘red lines’ that in the end substitute tactical politics for sound management of the crisis.”

For Greece, though, it’s too late. That French rollover plan of a week ago was unacceptable and would have triggered default in the eyes of the ratings agencies. But in failing to come up with a Plan B, the EU is impacting other members such as Italy.

Or the EU should face facts and let Greece default, and for holders of its debt to accept 80% haircuts on their toilet paper as a way to restore solvency and get Greece down to a level of debt it can handle responsibly, because under current conditions it will never get out of its hole.

Meanwhile, Portugal’s situation could be manageable, but, again, only if banks and insurers agree to share the pain. And there’s Ireland, newly reduced to junk by Moody’s because, in the agency’s mind, it doesn’t matter if it is doing all the right things, Ireland’s still going to need massive further help down the road. This shouldn’t be a surprise, even if the EU treated it as such, because when the interest rate on your two-year note goes from 12.80% to over 20% in 8 days, as it did in Ireland, it’s pretty clear the country won’t be able to get private financing anytime soon, which is the issue in Greece and Portugal.

But as I said last time, Italy was going to be in the spotlight this week as its interest rates soared on contagion fears over how the 3rd-largest economy in the eurozone would be able to service a public debt that is 120% of GDP. With Prime Minister Silvio Berlusconi AWOL, it was left up to Economy Minister Giulio Tremonti to play Fire Chief and he warned parliament:

“If we don’t have a balanced budget then public debt – a monster from our past – would devour our future and the future of our children. The country is watching us.”

Tremonti also warned the likes of German Chancellor Angela Merkel.

“There should be no illusions about who will be saved. Like on the Titanic, the first class passengers won’t be able to save themselves. Either we move forward or we go down.”

Thanks to Tremonti’s leadership, the parliament passed a $70 billion, four-year crash austerity plan, including a freeze on public sector salaries and a cut in regional subsidies, all in an attempt to calm the markets; to show potential bond buyers that Italy has its house in order. The initial response was tepid, but Tremonti deserves credit for filling the leadership vacuum.

In Spain, Prime Minister Zapatero’s term ends in March, or earlier. The budget deficit is running at a 9.2% rate when the target was to reduce it to 6% this year, thus further spending cuts are in the cards.

The point of all the above is that none of the steps taken to date, and those yet to come, are conducive to growth and that’s what the region needs more than anything these days, but Europe, as is the case with the United States, made their bed and now it’s got to sleep in it.

It also doesn’t help in terms of credibility that the EU conducted another level of stress tests on its banks, 91 in all, and from a transparency standpoint once again they were lacking because while EU officials said the parameters were more stringent than last year’s test, which didn’t pick up Ireland’s banking crisis that would hit just months later, this one doesn’t begin to take into account reality when it comes to the banks’ exposure to the likes of Greece, Ireland, Portugal, Italy and Spain. Five of the nine banks that failed were in Spain, incidentally, which is no surprise because as I was telling you back in 2005, this nation’s real estate bubble was as bad as any, but what made it worse was the massive corruption on the local level between town and city officials, the developers and then the banks. There is no way anyone really knows what is on the books when it comes to Spain, even as the government the past year has tried to find out as part of a bank consolidation effort. Spain’s financial institutions also remain woefully undercapitalized.

So add it all up, plus the situation in Washington, and it’s no wonder the IMF warned in a note to G20 ministers that “severe financial sector risks” are looming because of the failure of politicians to come to grips with their humongous debts. 

So speaking of Washington

Should Congress fail to meet the Aug. 2 deadline to raise the debt ceiling, the IMF warns:

“A loss of fiscal credibility would be extremely damaging, not only for the U.S. but for the rest of the world, given the role of the U.S. in world capital markets.”

Federal Reserve Chairman Ben Bernanke told a Senate committee that a U.S. default would be a “self-inflicted wound” with calamitous consequences.

“It would create a very severe financial shock that would have effects not only on the U.S. economy but the global economy.”

So this week the two sides squared off. Democratic leader Nancy Pelosi said, “We are not going to balance the budget on the backs of America’s seniors. (Social Security) shouldn’t be a piggybank for giving tax cuts to the wealthiest people in this country.”

House Majority Leader Eric Cantor said no tax increases of any kind.

Republican presidential contender Michele Bachmann said she wouldn’t vote to raise the debt ceiling under any circumstances, at which point I could only shake my head in disgust.

Oh, I know what the polls say…that over 60% of the American people don’t want to raise the debt ceiling. But these are the same people who when you tell them they might have some entitlement benefits cut scream bloody murder! And don’t give me the hackneyed nonsense, “Never short the intelligence of the American people,” as many politicians and pundits love to throw out when they can’t think of anything intelligent themselves. Americans have been making the wrong choices for decades, or we wouldn’t be in this mess. From personal decisions with their own finances, to whom they send to Washington. I’ve said it before and I have to say it again. These days, America is incredibly overrated.

But I guess you can’t put Barack Obama in that category because if your approval ratings are now consistently under 50%, you’re not really overrated, are you? Now if he were to pull a rabbit out of his hat and reach a $4 trillion deficit reduction package that is credible, you could say he was underrated, but I digress.

You see, on Friday I watched our president at what has suddenly become his almost daily press conference and all I could think was if ever there was a time in our history crying out for a viable third party it’s today. Whatever shred of credibility Barack Obama had left, it was scooped up by a dust-buster this week. I mean for him to bring up the Simpson-Bowles deficit-reduction commission as he does now after he threw their good work into the trash bin should make everyone vomit.

On Tuesday, Senate Republican Minority Leader Mitch McConnell said, “After years of discussions and months of negotiations, I have little question that as long as this president is in the Oval Office, a real solution is probably unattainable….

“The president has presented us with three choices: smoke and mirrors, tax hikes, or default. Republicans choose none of the above. I had hoped to do good, but I refuse to do harm. So Republicans will choose a path that actually reflects the will of the people, which is to do the responsible thing and ensure that the government doesn’t default on its obligations.”

And so we’ve arrived at Plan B, which is designed to allow the president to raise the debt ceiling in three increments, unless Congress disapproves by a two-thirds majority, while Obama would be required to propose offsetting spending cuts, though Congress wouldn’t necessarily have to enact them; all of which is designed to get us through the 2012 vote and make the election a referendum on the size of government.

Some opinion….

Mort Zuckerman / Financial Times

“Indeed, the real facts are even worse, for we are also now in the midst of the familiar Washington game of kidding ourselves about the size of the deficit. It is already at $1.645 billion for the next fiscal year. The Congressional Budget Office concludes that President Barack Obama’s most recent budget underestimates spending while also overestimating revenues.

“But for now politics as usual predominates. The Republicans, elected to reduce debt, are struggling to find good reasons to raise the limit. To avoid humiliation in front of their constituents they feel they must secure unprecedented cuts. Tapping into America’s gut sense that getting out of debt means cutting up your credit cards, House Speaker John Boehner feels he is on solid ground insisting on cuts but no tax increases in any deal.

“Mr. Obama’s initial response was just as divisive, attempting to play-off the rest of America against cruel Republicans and the wealthy. Yet his harsh tone then made a rational bipartisan agreement more difficult. And any deal must be bipartisan, so neither party can blame the other for necessarily unpopular action. Both must therefore make concessions.

“Yet cuts and tax increases remain politically treacherous. Senior citizens, in particular, will vote against any changes to healthcare and retirement programs. Both parties hope to keep their bases on side, while seeking support from those independent voters – who are focused on fiscal probity and represent 29% of the electorate – whose views will be crucial during the next year’s presidential election.

“In truth there is no politically viable way to raise sufficient taxes to solve our deficit problem. Given this, the only serious way forward is through long-term spending reductions, especially in entitlement programs. But the Democrats are in hock to the unions, and refuse to cut the two programs that dominate the nation’s long-term balance sheet, Social Security and Medicare. Most conservatives, meanwhile, won’t touch spending on their own pet programs, not least defense and farm subsidies.

“Given we can’t raise taxes enough to cover the scale of our deficit problem, America now has no choice but to enter our own age of austerity, namely long-term spending reductions.”

Robert Samuelson / Washington Post

“Just in case you hadn’t noticed, no one has elected Grover Norquist to anything. Still, he looms as a major obstacle to Congress reaching a deficit-reduction agreement needed to raise the federal debt ceiling. Norquist heads Americans for Tax Reform, a conservative group that has persuaded 41 senators and 236 representatives (all but three of them Republicans) to sign its ‘Taxpayer Protection Pledge’ opposing any tax increase. If Congress eliminates special-interest tax breaks, the pledge requires that they be ‘matched dollar for dollar by further reducing tax rates.’

“To Norquist, a tax increase is not good even if it greases a deal to avoid a federal default. Norquist plugs relentlessly for smaller government. ‘We can reduce the size and scope of government at all levels to make all Americans freer, richer and more independent,’ he wrote in his 2008 book ‘Leave Us Alone.’ But what’s revealing about Norquist’s passionate advocacy is that it virtually ignores the main causes of bigger government: Social Security and Medicare.

“Championing smaller government without coming to grips with these gigantic programs is like playing basketball without a ball. It’s make-believe….

“How misleading is this? Well, all programs for the elderly (including much of Medicaid – health insurance for the poor – and other retirement programs) constitute almost half of non-interest federal spending: roughly $1.6 trillion in 2010 out of $3.3 trillion. Moreover, aging baby boomers and surging health costs account for most future spending growth. Without them, we’d have the smaller government that Norquist craves.”

Pete Peterson / Washington Post

“The immediate benefits of a serious bipartisan deficit-reduction plan would be confidence and jobs. The United States is still struggling to create a meaningful number of jobs. Confidence in our future is crucial to job creation and is seriously lacking in several key quarters, including foreign lenders on whom we have become dangerously dependent; consumers whose big-ticket purchases are being reduced or postponed; and businesses and banks that have trillions of dollars sitting idle. Much of this capital would be put to work sooner if lenders, investors and business leaders believed the federal government was on a more sustainable fiscal path and that another financial crisis is no longer around the corner.

“Over the long term, when the government borrows excessively, it takes capital out of the financial markets and inevitably raises the cost of investment for businesses. Furthermore, if the United States is to become an investment and innovation society that creates jobs, the federal government must have the resources to devote to critical areas such as research and development; education; and infrastructure. How will we make these investments when interest costs, entitlements and defense are projected to make huge claims on future resources?....

“Some wonder how you can improve our fiscal outlook now without damaging such a fragile recovery. The answer is that we can lock in a long-term plan now but delay its implementation until the economy recovers. Immediate spending cuts and revenue increases could be counterproductive in the context of today’s grim employment outlook, but we need to reach a grand bargain fast to prove to the world that America is back in business.”

Well, on Mr. Peterson’s last statement I certainly agree, but I have consistently said all year that while a grand bargain would be awesome for the United States and its financial markets and economy, my bet has been Congress and the president would come up with a deficit-reduction, debt-ceiling package of $2 trillion over ten years that, to say the least, would be underwhelming.

Further, there will be some kind of event next year that, when coupled with our ongoing profligacy and a further examination of our finances, perhaps as another leg in Europe’s stool is sliced off, will trigger a crash on the order of 30%. I’ll refine this further when I see what emerges the next few weeks.

For now, August is a month that is always full of surprises, negative ones. And come September, as another leg in the Greek debt crisis comes to a head, if not much sooner, I have pinpointed the U.N. General Assembly as a major potential flashpoint. Not only are you going to have an immensely disruptive debate over Palestinian statehood, with Manhattan being Ground Zero for dueling demonstrations that will keep the NYPD’s hands full, but we’re going to learn more about who is really in charge in Iran. While ultimate power rests with the clerics, and Ayatollah Khamenei, if President Ahmadinejad is to be pushed out as rumored, you would think it would be before the General Assembly. A shift in power could also speak volumes about the future direction of Iran’s nuclear weapons program.

[The General Assembly begins mid-September, right after the 10th anniversary of 9/11, but it seems the main debating period is from Sept. 21-30. If at all possible, I would advise business travelers to consider other dates for your appointments in Gotham.]

Finally, a few thoughts on the U.S. economy. June retail sales came in unchanged, ex-autos, which isn’t good, industrial production for the month was up less than expected, and the July Michigan consumer sentiment reading was a shocker, 63.8, the lowest since March 2009, when 72.5 was expected. 

And in China, the long-awaited reading on second quarter GDP came in, up 9.5%, slightly better than expected, with GDP rising over the first quarter 2.2%. So those calling for a hard landing here have to wait another quarter or two or three…hopefully not for awhile given my sizable investment in Fujian province.

But the June inflation data, which hit as I was posting last week, up 6.4%, was disconcerting, though I’m convinced the picture on this front will improve markedly by year end. It better or the government will have serious problems with civil unrest. Food prices rose 14.4% in June, topped off by Porky Pig and his relatives, up 57%, thus spurring the government to release pork from the state’s 200,000 metric ton frozen stockpile. Retail sales in China for June were up a better than expected 17.7%, which is good, but June imports were up 19.3% vs. an increase of 28.4% in May, not good because it could augur more inflation. Industrial production was up a stronger than expected 15.1%. And China’s foreign exchange reserves hit a record $3.2 trillion at the end of June, arguing for authorities in the country to keep monetary policy tight to reduce credit even further. Moves thus far have failed to restrict bank lending.

Street Bytes

--Stocks fell on the uncertainty generated by the debt ceiling debate, the euro crisis, and some so-so earnings, though Google bucked the trend in climbing from $528 to $597 between Thursday and Friday. On the week, the Dow Jones lost 1.4% to close at 12479, the S&P 500 declined 2.1% and Nasdaq tumbled 2.4%. Citigroup reported results for its second quarter and at first blush you saw $1.09 vs. expectations of $0.97. Hey, great. But then you found out that $0.43 was for reduced loan-loss reserves, which is fine, but that the operating results were more like $0.66, not $0.97, which kind of sucks, know what I’m sayin’? And so it is with financials, as discussed further below.

--U.S. Treasury Yields

6-mo. 0.04% 2-yr. 0.35% 10-yr. 2.91% 30-yr. 4.25%

The June inflation data was released and producer prices were down 0.4%, but up 0.3% ex-food and energy. Year over year, the PPI is up a strong 7.0%, though only 2.4% on the core. The consumer price index was down 0.2% for June, up 0.3% ex-the stuff we use, and year over year the CPI is up 3.6%, but the core rate is up only 1.6%. So pick your poison. You can see from the above Treasury yields that the market loves to talk about inflation, but when it comes to actually trading the market, bond ghouls are more concerned with a lousy economy and little prospects for much better the balance of the year, even if inflation is still showing up in items such as gold and food prices.

Thoughts of renewed stimulus from the Federal Reserve as well as the European debt crisis helped lead gold to a new closing high of $1590. Silver rallied big this week, up 7%. Other commodities rebounded, too, with corn rising on the heels of news that the U.S. Dept. of Agriculture is estimating exports to China are growing more than expected.

[Estimates on Russia’s wheat harvest continue to rise; a good thing after last year’s catastrophic drought there and probable shortfalls in the U.S. due to the drought in the Southwest in particular.]

--JPMorgan Chase reported strong second-quarter earnings, better than expected, as investment-banking profit surged 49% and credit conditions improved. But, like others of its ilk, JPM still faces unspecified liabilities in the ongoing mortgage debacle, including $multi-billion settlements with the federal and state governments. CEO Jamie Dimon said, “There have been so many flaws in mortgages that it’s been an unmitigated disaster.”

Some analysts believe JPMorgan has up to $8 billion squirreled away for penalties to come. The bank also faces a $1 billion hit to revenues as a result of new rules limiting the fees it can charge retailers for debit-card transactions.

--In the News of the World scandal, at least nine journalists and three police officers face arrest, according to Scotland Yard. With computers having been secured, no telling where this all will lead. But Scotland Yard itself was forced to apologize to victims for not handling a 2005-06 investigation into phone hacking at the NoW properly. Separately, the FBI launched an investigation into potential wrongdoing in the United States.

As for Rupert Murdoch’s bid for full control of British Sky Broadcasting Group, BSkyB, News Corp. dropped it after it was a certainty to gain approval before the scandal got second life after being largely ignored years ago. Rupert Murdoch will be testifying next week before a parliamentary committee, along with his son, James, and disgraced News International CEO Rebekah Brooks, who finally succumbed to the pressure on Friday and resigned from her post. Also on Friday, Les Hinton resigned as CEO of Dow Jones & Co. He had been at News Corp. for 52 years.

Murdoch’s empire includes…

United States – Dow Jones Newswires, The Wall Street Journal, New York Post, The Daily

United Kingdom – The Times, The Sunday Times, The Sun

Australia – 146 papers, including The Australian

Produces shows such as Glee, The Simpsons, Modern Family

Owns and operates 27 TV stations

Owns Fox Broadcasting Company

Cable channels such as Fox News, Fox Sports Net, FX, Speed, National Geographic

Owns Twentieth Century Fox

Owns HarperCollins

And tons of other stuff…

--Google reported killer earnings, $8.74 per share vs. expectations of $7.86, along with better than expected revenues in CEO Larry Page’s first report card since he took over the helm from Eric Schmidt. And to help carry out an ambitious agenda, including lots of new ventures that Page admits will take years to pay off, the company hired 2,450 employees in the quarter, bringing its total workforce to 28,000.

--Japan’s prime minister, Naoto Kan, has called on his nation to gradually eliminate nuclear power, which, while Kan has vowed to step down at an unspecified date, clearly doesn’t add to confidence in the sector. I would just say to Japan that there’s nothing wrong with nuclear power, people. Rather it’s the fact that your immensely corrupt bureaucracy allowed officials to be bought off, which led to plants being built on fault zones or without walls high enough to prevent tsunami damage!

But, in reality, Kan’s call is unlikely to come to fruition for decades, if at all.

--China’s Oceanic Administration, which oversees offshore oil drilling, has blasted ConocoPhillips for being slack and ineffective in containing two major oil spills I wrote of last time. Evidently the public is furious and ConocoPhillips has been told to cease operations in the nation’s largest offshore oilfield.

The spills off the coast of Shandong are not under control and the areas contaminated even bigger than estimated.

Separately, ConocoPhillips said it would split into two companies: one that focuses on exploration and production of oil, and another that refines it into gasoline and other fuels.

--Saudi Arabia has been keeping its word in boosting oil production. The International Energy Agency said the kingdom had increased production 700,000 barrels a day to 9.7 million, the highest monthly level since early 2006. The Saudis have said they are targeting 10 million in either July or August.

But, much of the extra Saudi production is being consumed domestically. Which is why many OPEC members are trying to get their domestic alternative energy programs in gear so that the oil in the ground can be saved for export.

--Gasoline consumption in the U.S. has dropped for 16 weeks in a row, according to MasterCard SpendingPulse. Even over the Fourth of July holiday, motorists used 1.7% less fuel than they did last year.

--BHP Billiton is acquiring U.S.-based oil company Petrohawk Energy for $11.2 billion, with the Anglo-Aussie giant increasing its exposure to the American energy market.

--Upcoming UAW labor talks will be interesting. Asian automakers pay $44 to $55 per hour for U.S. workers’ wages and benefits, vs. $58 for Ford, $56 for GM, and $49 for Chrysler. So it’s going to be tough for Detroit’s Big Three to keep asking for concessions.

--China’s car sales rose 6.2% in June from a year earlier, reversing a decline in May. But demand is normally tepid in the summer months, according to state-mouthpiece Global Times. Sales in the first half rose 5.8% to 7.22 million units.

--China has had some embarrassing problems with the launch of its high-speed rail line between Beijing and Shanghai, experiencing “several dozen” power outages, with the Railways Ministry blaming thunderstorms and high winds. The top speed has also been cut from a planned 350 km/h to 300.

Despite the problems, though, since the June 30 launch the daily average number of passengers has been 165,000.

--The tough times on Wall Street continue with Credit Suisse Group getting ready to lay off about 3% of its total workforce, or 1,500 jobs, with many of the layoffs coming in Switzerland, where the strong currency is hurting profits.

And Credit Suisse received some bad news on Friday as it has been formally placed under investigation as part of a four-year inquiry by the U.S. government into the alleged role played by some Swiss private banks in helping rich Americans evade taxes. In 2009, Switzerland’s UBS agreed to pay $780 million to settle with the U.S. Thousands of American taxpayers were involved.

--The six-county Southern California housing market rebounded some in June, with sales up 11.6% from May, better than normal in terms of a percentage increase, June being one of the stronger months. But…total sales were still down 14% from June 2010, though recall that was the last month buyers could qualify for the federal tax credit. After the stimulus ended, sales plummeted. The median price for the Southland was $285,000, down 5% from June 2010. The peak in mid-2007 was $505,000. [DataQuick / Los Angeles Times]

--UK housing experts don’t expect Britain’s home prices to get back to their 2007 peak until 2020.

--Deflation Alert: The late television producer Aaron Spelling’s Los Angeles mansion, 57,000-square feet, sold this week for $85,000,000 or 43% off its asking price. It has 14 bedrooms, 27 bathrooms, a bowling alley, beauty salon, and gift-wrapping rooms. I mean, after all, doesn’t everyone dream of having gift-wrapping rooms?

--Cisco Systems Inc., struggling to regain its mojo, is going to be laying off as many as 10,000, or about 14 percent of its workforce, to revive profit growth. 7,000 could be gone by the end of August.

--Hey, college students (or soon-to-be). Want a good career path? General Electric CEO Jeff Immelt said Fortune 500 companies should double their hiring of engineers as a down payment on private industry’s efforts to deal with high unemployment.

“More technology creates more revenues which creates more jobs. If every one of the big companies in the U.S. doubled their recruiting of engineers that would send a very powerful message to engineering schools and college kids.”

--Speaking of jobs, in a sign of the times nearly 17,000 showed up in Louisville for the opportunity to apply for 1,800 jobs at Ford, as it reopens an assembly plant.

--Netflix is raising rates by as much as 60 percent for subscribers who want to rent DVDs by mail and watch video on the Net. The company had bundled the two options in a single package and is now separating them. So the total ends up being $16 ($8 for each) vs. a bundled $10, minimum.

Netflix is one of the two or three most controversial stocks out there these days. I’ve never played it, but I tend to believe the analysts who say its costs for content are rising steeply, thus the move to risk alienating existing subscribers in order to generate more cash flow.

Foreign Affairs

Afghanistan: President Karzai’s powerful half-brother Ahmed Wali Karzai was assassinated by his long-time bodyguard. It is a huge blow for the United States, as well as President Karzai, because Wali had rebuilt a reputation as a drug kingpin to become the most influential ally in southern Afghanistan, specifically vital Kandahar province. Just the other week, 170 tribal elders and prominent Kandaharis traveled to Kabul to seek President Karzai’s approval to appoint Wali as governor. President Karzai appointed another brother to replace Wali, one with zero political experience in a region where it’s essential. The Taliban is claiming responsibility for the killing but it’s very murky. [A suicide bomber later killed four at an historic mosque during one of Wali’s funeral services.]

Meanwhile, five French soldiers were killed when a suicide bomber walked up to them as they were standing by their armored vehicles before detonating his explosives.

Pakistan: The White House is suspending about $800 million in military aid and equipment out of an annual $2 billion in security assistance it gives Pakistan in an attempt to get Islamabad to press the fight against the Taliban and al-Qaeda targets. In addition it’s a protest by Washington against Pakistan’s decision to expel 100 U.S. Special Forces trainers. In response, Pakistan’s defense minister said he might withdraw thousands of troops from the border with Afghanistan. To say relations between our two counties are strained would be an understatement.

And an aside on India and a triple bombing in Mumbai that killed at least 18 Wednesday. While it is natural to suspect Pakistani terrorists, the Indian government is being careful not to jump to conclusions. Should it prove to be the group Lashkar-e-Taiba, which was responsible for the 2008 attack in Mumbai that left 166 dead, the Indian government will have to respond militarily in some fashion and events could rapidly spiral out of control. [But it could also be one of any number of domestic groups.]

Lebanon: The prosecutor of the Special Tribunal for Lebanon has authorized Interpol to hunt down the alleged assassins of Rafik Hariri. It is not known where the four Hizbullah-affiliated men named in the indictment are hiding.

On Tuesday, former Prime Minister Saad Hariri blasted Hizbullah and Prime Minister Najib Mikati from his residence in Paris, vowing to topple Mikati through “a strong opposition” by his March 14 coalition.

For the first time, Hariri also blamed Syrian President Assad and Hizbullah leader Sheikh Nasrallah for toppling his Cabinet on Jan. 12 and he vowed not to compromise on the STL.

“[Nasrallah] said recently that the tribunal was an Israeli court, that it had previously issued its decisions and it was infiltrated. What I want to say is that if Sayyed Hasan appeared at 300 press conferences, this will not change anything in the indictment which has issued.”

Regarding Mikati’s role:

“They [Hizbullah] are saying they will not cooperate with the international tribunal. Then, the prime minister, who is Hizbullah’s surrogate, says he is committed to [U.N.] Resolution 1757 [which established the STL]. How is this? How can we believe and whom shall we believe? The international tribunal is existing and no one will remove it.”

And…

“We actually wanted to have a state in Lebanon. Our problem with the government is that it is a government of Hizbullah’s mini-state rather than a government of a state….

“With complete frankness, we can bring down the government. We are a democratic opposition seeking to topple the government. There are several tools. We can take to the street, staging demonstrations.” [Daily Star]

Saad Hariri vowed to return to Beirut despite the death threats, though he dismisses the reports that this is why he is in exile. Members of the Mikati government said Hariri was inciting sectarian violence with his statements.

Separately, Syria “has accelerated its supply of weapons, including advanced ballistic missiles, to Hizbullah militants in Lebanon in a move that could further inflame an already destabilized region,” as reported by the London Times. Coincidentally, in an interview with Kuwaiti newspaper al-Anbaa, Hizbullah MP Hussein Mousawi said his group will keep its arms as long as Israel holds onto its nuclear weapons.

Finally, the seven kidnapped Estonians who were held hostage for nearly four months after they were taken away in the Bekaa Valley were released in Lebanon on Thursday. They appeared to be in good health. The identity of the kidnappers, however, is not known, but it does not appear to have been a Hizbullah operation.

Syria: The government of President Assad made a big mistake when it authorized hundreds of thugs to attack the U.S. and French embassies in Damascus. Secretary of State Hillary Clinton responded, “From our perspective, he has lost legitimacy….President Assad is not indispensable, and we have absolutely nothing invested in him remaining in power.”

The action taken against the embassies was a direct response to U.S. Ambassador Robert Ford’s, as well as his French counterpart’s, courageous display in the Syrian town of Hama, where the two went to lend support to anti-government protesters there. Ford also attacked the Syrian leadership in a Facebook post, wherein he said in part, “how ironic that the Syrian government lets an anti-U.S. demonstration proceed freely while their security thugs beat down olive branch-carrying peaceful protesters elsewhere.”

Syrian security forces gunned down at least 30 protesters across Syria on Friday.

[By the way, I could take you back to the spring of 2005, in the aftermath of the Hariri assassination in Lebanon, and it was then I was railing that George W. Bush wasn’t doing enough to promote the democracy movement and dismantle Hizbullah. I said at the time we should take advantage of France’s long-time influence there and work together. We didn’t. At least in Syria we are standing strong…the United States and France.]

Iran: There are reports Tehran has begun efforts to shift its uranium enrichment program to underground bunkers at a facility deep inside a mountain near Qom, the country’s holiest city.

Christopher Ford, a former U.S. special representative for nuclear nonproliferation, told a gathering of think-tank folks that “Given the scope and depth of Iran’s involvement in international terrorist groups, I think terrorist acquisition of [nuclear] weapons, material and technology could come about either deliberately or inadvertently. One can’t rule out, of course, the possibility of transfers occurring without top-level authorization,” utilizing its “rich network of black- and gray-market ties around the world for the acquisition of nuclear-related technology,” including “remnants” of the A.Q. Khan network and Russian scientists. [Global Security Newswire]

Iraq: Last weekend, the government failed again to reach agreement on the formation of a cabinet or on whether some U.S. troops will be allowed to stay beyond the December deadline. President Talabani said everyone gets another two weeks before reconvening on these critical issues. One thing is clear, though. U.S. troops are going back on the offensive against Iranian-backed insurgents.

On a different topic, Baghdad has started negotiating with Washington to buy fighter jets and air-defense systems, according to the Wall Street Journal, helped out in no small part by surging oil revenues, with a leading U.S. general on the scene saying $10 billion has flowed into the Iraqi government’s coffers in the first six months of the year.

Libya: The United States and 31 other nations have agreed to recognize the rebels as the “legitimate governing authority,” but they have to land on Community Chest in order to access the Gaddafi regime’s $30 billion in frozen assets.

Egypt: The renewed protests at Tahrir Square in Cairo continue, as do terrorist attacks on a natural gas pipeline through the Sinai to Israel, the fourth such incident this year. In the former, authorities agreed to fire 650 senior police officers implicated in the killing of protesters back in February as part of meeting protesters’ demands.

The still-simmering unrest is leading the military council to push back the parliamentary election until November, two months later than planned. This gives the nascent democracy groups more time to organize, thus hurting the chances of the new Muslim Brotherhood-led coalition. It’s assumed the presidential election would then take place a month or two after, rather than the originally planned November.

Turkey: In one of the worst attacks in years, Kurdish rebels in southeastern Turkey ambushed a group of soldiers, killing 13 Turks. The Kurdistan Workers’ Party (P.K.K.) had warned it would start a new wave of attacks if by Friday a tangible plan for resolving the conflict wasn’t produced.

China: Joint Chiefs of Staff Chairman Adm. Mike Mullen has been in China this week for talks with his counterparts, the first such discussions in four years, which Mullen said afterwards were “productive and positive.” But he added that when it comes to efforts to create a working military-to-military relationship, “There is a long way to go. Differences between us are still stark.”

Chinese chief of the General Staff of the People’s Liberation Army, Chen Bingde, chided the U.S. in a joint news conference with Mullen for spending too much on the military during times of economic stress, adding fears of a Chinese threat are overstated. Of course China has been ramping up its own spending and capabilities at a furious pace. For example, as a report in the London Times noted, China’s reconnaissance satellites are nearing par with the United States. A professor at the U.S. Naval War College summed up the importance of this development.

“The United States has always felt that if there was a crisis in Taiwan, we could get our naval forces there before China could act and before they would know we were there. This basically takes that off the table.”

Note: As I go to post, President Obama is slated to meet with the Dalai Lama on Saturday at the White House. Should this prove to be the case, it will be a huge mistake. 

Russia: A “decrepit” Bulgarian riverboat, carrying at least 208 people, capsized in the Volga River in Tatarstan, killing at least 129, including about 30 children. It was Russia’s worst maritime disaster in 25 years and a preliminary investigation said the cause appeared to be a lack of air conditioning – “which prompted the crew to open portholes that were then flooded by an incoming wave.” [Moscow Times] There were also reports that in the immediate aftermath, at least two passing ships ignored survivors. One, the Meteor, was in the vicinity “but its passengers filmed the people in the water on their mobile phones instead of helping them,” according to a Tatar news agency. Unbelievable, but then this is Russia.

Random Musings

--Defense expert Andrew Krepinevich, in an op-ed for the Washington Post.

“With ballistic missile flight times between Iran and Israel less than 10 minutes, warning capability evaporates, greatly increasing the incentive to strike first in a crisis. In these circumstances, regional stability would be severely undermined. While much thought recently has been given to achieving a world without nuclear weapons, more serious consideration should be given to how to prevent – or terminate – a ‘limited’ nuclear war in the Middle East.”

--In the latest Gallup poll, the “Republican Party’s candidate for president” is favored over Barack Obama by a 47% to 39% margin. 

--President Obama raised $86 million in the second quarter (including $38 million from the DNC earmarked for his campaign), far outpacing the $18 million raised by Mitt Romney. Michele Bachmann-Turner Overdrive raised over $2 million in just the first two weeks of her campaign, having formally announced on June 13. [I’m assuming Ms. Bachmann is using BTO’s #1 song from 1974, “You Ain’t Seen Nothing Yet,” as one of her campaign songs…this all-time car tune being a layup for such an occasion.]

--Bachmann, incidentally, comes out ahead in a new Iowa Republic poll, 25-21 over Romney. But a closer look shows that among those voters who described themselves as the “most attentive,” Bachmann leads by 14 points…32% to 18%. The caucus system in Iowa is tailor made for her. Herman Cain, by the way, gets a bump too in the “more attentive” category, going from 9% to 12% in the Iowa GOP poll. [Aaron Blake / Washington Post]

--Republican Congressman Ron Paul (TX) said he would not run for his seat in 2012 and instead will focus on his presidential campaign. I admire the 74-year-old for saying that it was also time for new blood in his district, but basing a run for the highest office on what monetary policy should be doesn’t cut it. Oh, to be sure he’s for a much smaller government and exiting our many foreign adventures, but he keeps going back to the Fed.

I like the guy because he’s different. But he’s really more tailored to be a third party candidate and I suspect he could get as much as 7% of the vote in 2012…say if it was Obama vs. Romney.  This would not be the kind of ‘legitimate’ third party effort I referred to above.

--President Obama’s outreach to the Arab world is failing miserably. According to a new poll by Zogby International for the Arab-American Institute Foundation, favorable ratings of the United States have plummeted in the Middle East to levels lower than they were during the last year of the Bush administration. The killing of bin Laden also worsened attitudes.

In Saudi Arabia, for example, 30% of respondents said they had a favorable view of the U.S. (compared with 41% in 2009), while roughly 5%...5%...said the same in Egypt (compared with 30% in 2009).

Fewer than 10% described themselves as having a favorable view of Obama. [Washington Post]

--Democratic New York Gov. Andrew Cuomo’s approval rating rose to a whopping 71% in a Siena Research Institute survey. Just 21% view him unfavorably. But by a 51-39 margin, voters say they oppose the idea of Cuomo running for vice president should President Obama replace Joe Biden on the ticket.    83% say it’s premature to be talking about Cuomo as a potential candidate in 2016. 

No it’s not.

--Word broke Sunday night that Tiger Woods was giving a press conference at 11:00 AM ET on Monday. Since Tiger had already announced he wasn’t playing in the British Open, there was all kinds of conjecture rushing around the Web and in emails between friends. I personally thought he was going to announce he wouldn’t play the rest of the year, have one more surgery, and hope to be ready for Augusta next spring. Others thought he was going to announce his retirement.

And then Monday morning, we learned that Tiger wasn’t holding a press conference. In fact he never planned to. It seems his Twitter account was hacked and the fake press release thrown out there. This stuff (including the fake Obama assassination feeds on a Fox site on July 4th) has to stop. But it’s only going to get worse.

To wit:

In an interview for Defense News with retiring (Sept. 30) Chairman of the Joint Chiefs of Staff Adm. Michael Mullen, he was asked…

“What are the threats that keep you awake at night?”

Mullen: “The single biggest existential threat that’s out there, I think, is cyber. I think we’re going to have to focus a lot more on it. We’re going to have to put more resources against it. We’re going to have to train people better. Because cyber actually, more than theoretically, can attack our infrastructure, our financial systems, etc. It’s a space that has no boundaries. It has no rules, and there are people who are very good at it. There are countries who are very good at it.”

Another example of the above came out this week in what was dubbed “military meltdown Monday,” where a hacking collective published the email addresses and passwords of 90,000 members of the military stolen from U.S. contractor, Booz Allen Hamilton.

And, you guessed it; the hacker group was a spin-off of Anonymous that includes members of the now defunct Lulz Sec. Ironically, Booz Allen is led by several former National Security Agency and CIA staffers.

But there was even more on this front this week. On Thursday, the Pentagon revealed it suffered one of its largest losses ever of sensitive data in an attack by a foreign government; 24,000 files containing data were stolen in a single intrusion in March. Deputy Sec. of Defense William Lynn gave no further details, including which nation was involved, though he said “We have a pretty good idea.”

The Pentagon is still working on an offensive strategy to counter the attacks, though for now Mr. Lynn said:

“(The) United States reserves the right, under the laws of armed conflict, to respond to serious cyber attacks with a proportional and justified military response at the time and place of our choosing.”

--My first thought when I heard how government prosecutors screwed up the Roger Clemens perjury trial was, now you know why some of us wouldn’t want to see the Guantanamo detainees get jury trials and prefer they be tried before a military tribunal (if at all). One screw-up, as was the case here, and the judge has no other option than to dismiss the case or rule a mistrial.

--Over the years I’ve read a lot about the topic of drinking water; specifically how much one should consume. I always felt like during the day I didn’t drink enough, certainly not the generally recommended “six to eight glasses a day,” and then in the past few years I’ve seen a lot of stories on long distance runners (of which I resemble one from time to time) drinking way too much and dying from hyponatraemia (low salt levels) and water intoxication. My own rule of thumb when doing something like a half marathon is drink when thirsty. Don’t feel like you have to drink X cups at the water stops.

So I bring this up because I was reading a piece by Jeremy Laurance in the Irish Independent who writes thusly.

“The benefits of drinking water have become so exaggerated that people who follow official advice may even do themselves harm, a doctor warns.

“In fact the official advice to ‘try to drink six to eight glasses of water a day’ is unsupported by scientific evidence and simply used by bottled water companies to boost their sales, according to Scottish GP Margaret McCartney….

“(The) warnings about maintaining fluid levels are ‘not only nonsense, but thoroughly debunked nonsense,’ she said….

“The idea that we are all short of water is thought to derive from a 1945 recommendation that adults should consume 2.5 liters of water daily, 1 ml for every calorie consumed, though this advice has only caught on in the last decade.

“But the crucial part of the recommendation is usually ignored – that ‘most of this quantity is contained in prepared foods.’”

Oh, there’s more, but just understand that campaigns such as “Hydration for Health” are sponsored by the likes of Danone, the French maker of Evian.

--Historian David McCullough, in an op-ed for the New York Times, on the “ties that bind America and France,” McCullough choosing Bastille Day, July 14, to celebrate them.

“Consider that the war that gave birth to the nation, our war for independence, would almost certainly have failed had it not been for heavy French financial backing and military support, on both land and sea. At the crucial surrender of the British at Yorktown, for example, the French army under Rochambeau was larger than our own commanded by Washington. The British commander, Cornwallis, was left with no escape and no choice but to surrender only because a French fleet sailed into the Chesapeake Bay at exactly the right moment.

“The all-important treaty ending the Revolutionary War, wherein King George III recognized the United States to be ‘free, sovereign and independent,’ was signed in Paris.   The plan for our new capital city on the Potomac was designed by a French engineer, Pierre Charles L’Enfant. The first great statue of our first president was the work of a French sculptor, Jean-Antoine Houdon. The first major study of us as a people, ‘Democracy in America,’ was written by a French historian, Alexis de Tocqueville. Published in 1835, it remains one of the wisest books ever written about us.

“To be sure, our relations with France have not always been smooth….

“But the rewards of our ties with France have far exceeded any difficulties there have been. With the purchase of the Louisiana Territory from France, the size of the country was more than doubled. The Statue of Liberty, one of our most treasured symbols, was a gift from France….

“Times continue to change, yet we remain conspicuously fond of all manner of things French….

“And there is a further reason France should hold a prominent place in our memories and in our hearts. More American history has unfolded in France and more Americans are buried there than in any other country but our own.

“During World War I more than two million American soldiers served ‘Over There.’ In World War II another generation of American soldiers numbering more than 800,000 served in France. In all, more than 60,000 Americans are buried in French soil, at Meuse-Argonne, Normandy and nine other cemeteries. At the Meuse-Argonne, the largest, lie fully 14,246 American dead. The grave markers are a sight never to be forgotten.

“Though I love France and greatly value the friends I have made there, I am not an overboard Francophile. But as an American I think it is well past time to get back to respect and affection between our countries, on all fronts and with all possible good will.

“For my part this Bastille Day, I intend to raise a glass or two of Veuve Clicquot in a heartfelt toast: ‘Vive la France!’”

A lot of us celebrate France by spending our tourist dollars there, as I did in April.

--New York Gov. Cuomo signed one of the strictest measures in the nation banning texting and driving. If you are caught now in New York State, you get three points against your license (suspended if you get 11 points in 18 months) and fined $150. If the police just see the device in your hand, the presumption now is you’re using it.

The National Highway Traffic Safety Administration reported that one of every six fatal accidents in 2009 was caused by distracted driving. 20% of crashes that resulted in injuries involved drivers using hand-held devices.

--I was amused with some of the wedding day photos of Prince Albert II and Princess Charlene of Monaco from their July 1 ceremony, with Charlene looking none too pleased amid stories she was basically held hostage to make sure she showed up.

But then I was struck by a story on their honeymoon in South Africa from the Sydney Morning Herald.

“Instead of staying together in a (A$3400) per night presidential suite at the luxury Oyster Box Hotel in Umhlanga, just south of Durban, the newly married royal couple slept in separate hotels 16 km from each other, South African newspaper the City Press reported.”

Charlene was at the Oyster Box. Prince Albert stayed at a Hilton in Durban.

“The pair also left their honeymoon early, returning to Monaco so Prince Albert could undergo DNA tests to counter claims by at least one woman that he fathered another illegitimate child, the Daily Mail reported.

“The Prince already has a daughter, 19, with an American tourist and a son, 6, with a Togolese flight attendant.

“The latest revelations come a week after French newspapers reported that Princess Charlene, a 33-year-old former Olympic swimmer, tried to flee home to South Africa three times before her marriage….

“The royal family wants a male heir to the throne in the traditional Catholic city state, despite a change to its constitution which allows a female to assume the crown.”

--We have a “Dirtball of the Year” candidate, Icelandic whaling tycoon Kristjan Loftsson. As reported by Rupert Murdoch’s Sunday Times of London, Loftsson’s firm, Hvalur, “has killed 273 fin whales and exported more than 1,200 tons of their meat and blubber to Japan since 2008,” according to two environmental groups. Hvalur intends to catch 150 fin whales this year.

But wait, isn’t there a longstanding moratorium on commercial whaling?

Yes, but Hvalur uses a loophole that allows its boats to take whales for “scientific research.” “However, exporting the meat and blubber to Japan breaks international treaties.”

Iceland now has a “mountain” of whale meat in cold storage…2,500 tons! There are believed to be about 30,000 fin whales left, it being the second-longest next to the blue whale.

No word on whether Murdoch’s reporters hacked into the fin whales’ cellphones.

--And a hearty round of applause for restaurant owner Mike Vuick of McDain’s Restaurant in Monroeville, Pa. (I have relatives there) for his decision to ban children under the age of 6 after regular customers were complaining on their meals being disrupted. Mr. Vuick says the emails are running 11-1 in favor of his decision, though I saw a poll that had it more like 64-26 in favor. So, I probably just ticked off 26% of you.

---

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

God bless America.
---

Gold closed at $1590…up from $1482 two weeks ago
Oil, $97.24

Returns for the week 7/11-7/15

Dow Jones -1.4% [12479]
S&P 500 -2.1% [1316]
S&P MidCap -2.9%
Russell 2000 -2.8%
Nasdaq -2.4% [2789]

Returns for the period 1/1/11-7/15/11

Dow Jones +7.8%
S&P 500 +4.6%
S&P MidCap +7.6%
Russell 2000 +5.8%
Nasdaq +5.2%

Bulls 44.1
Bears 22.6 [Source: Chartcraft / Investors Intelligence]

Have a great week. I appreciate your support.

Brian Trumbore



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-07/16/2011-      
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Week in Review

07/16/2011

For the week 7/11-7/15

[Posted 7:00 AM ET]

Wall Street, Washington and Europe

What a week. The deleveraging of Europe continues and we wait to see to what extent the United States takes the ax to spending, if at all, as part of a plan to avoid default. The ratings agencies are already voting, whether on Greece, now the lowest-rated country in the world, Ireland, or the U.S.

Starting with Greece, they got their $17 billion to tie them through August, but it’s paramount a more extensive Bailout II is approved between the European Union, European Central Bank, and the International Monetary Fund, and the EU is jerking around.

Greek Prime Minister George Papandreou wrote a letter to Jean-Claude Juncker, chairman of the Eurogroup, complaining that European partners had acted too slowly to stem the crisis.

“Crunch time has arrived and there is no room for indecisiveness and errors such as taking decisions that in the end prove ‘too little, too late’ to convince the markets we are serious; (and) making compromises that satisfy our internal political ‘red lines’ that in the end substitute tactical politics for sound management of the crisis.”

For Greece, though, it’s too late. That French rollover plan of a week ago was unacceptable and would have triggered default in the eyes of the ratings agencies. But in failing to come up with a Plan B, the EU is impacting other members such as Italy.

Or the EU should face facts and let Greece default, and for holders of its debt to accept 80% haircuts on their toilet paper as a way to restore solvency and get Greece down to a level of debt it can handle responsibly, because under current conditions it will never get out of its hole.

Meanwhile, Portugal’s situation could be manageable, but, again, only if banks and insurers agree to share the pain. And there’s Ireland, newly reduced to junk by Moody’s because, in the agency’s mind, it doesn’t matter if it is doing all the right things, Ireland’s still going to need massive further help down the road. This shouldn’t be a surprise, even if the EU treated it as such, because when the interest rate on your two-year note goes from 12.80% to over 20% in 8 days, as it did in Ireland, it’s pretty clear the country won’t be able to get private financing anytime soon, which is the issue in Greece and Portugal.

But as I said last time, Italy was going to be in the spotlight this week as its interest rates soared on contagion fears over how the 3rd-largest economy in the eurozone would be able to service a public debt that is 120% of GDP. With Prime Minister Silvio Berlusconi AWOL, it was left up to Economy Minister Giulio Tremonti to play Fire Chief and he warned parliament:

“If we don’t have a balanced budget then public debt – a monster from our past – would devour our future and the future of our children. The country is watching us.”

Tremonti also warned the likes of German Chancellor Angela Merkel.

“There should be no illusions about who will be saved. Like on the Titanic, the first class passengers won’t be able to save themselves. Either we move forward or we go down.”

Thanks to Tremonti’s leadership, the parliament passed a $70 billion, four-year crash austerity plan, including a freeze on public sector salaries and a cut in regional subsidies, all in an attempt to calm the markets; to show potential bond buyers that Italy has its house in order. The initial response was tepid, but Tremonti deserves credit for filling the leadership vacuum.

In Spain, Prime Minister Zapatero’s term ends in March, or earlier. The budget deficit is running at a 9.2% rate when the target was to reduce it to 6% this year, thus further spending cuts are in the cards.

The point of all the above is that none of the steps taken to date, and those yet to come, are conducive to growth and that’s what the region needs more than anything these days, but Europe, as is the case with the United States, made their bed and now it’s got to sleep in it.

It also doesn’t help in terms of credibility that the EU conducted another level of stress tests on its banks, 91 in all, and from a transparency standpoint once again they were lacking because while EU officials said the parameters were more stringent than last year’s test, which didn’t pick up Ireland’s banking crisis that would hit just months later, this one doesn’t begin to take into account reality when it comes to the banks’ exposure to the likes of Greece, Ireland, Portugal, Italy and Spain. Five of the nine banks that failed were in Spain, incidentally, which is no surprise because as I was telling you back in 2005, this nation’s real estate bubble was as bad as any, but what made it worse was the massive corruption on the local level between town and city officials, the developers and then the banks. There is no way anyone really knows what is on the books when it comes to Spain, even as the government the past year has tried to find out as part of a bank consolidation effort. Spain’s financial institutions also remain woefully undercapitalized.

So add it all up, plus the situation in Washington, and it’s no wonder the IMF warned in a note to G20 ministers that “severe financial sector risks” are looming because of the failure of politicians to come to grips with their humongous debts. 

So speaking of Washington

Should Congress fail to meet the Aug. 2 deadline to raise the debt ceiling, the IMF warns:

“A loss of fiscal credibility would be extremely damaging, not only for the U.S. but for the rest of the world, given the role of the U.S. in world capital markets.”

Federal Reserve Chairman Ben Bernanke told a Senate committee that a U.S. default would be a “self-inflicted wound” with calamitous consequences.

“It would create a very severe financial shock that would have effects not only on the U.S. economy but the global economy.”

So this week the two sides squared off. Democratic leader Nancy Pelosi said, “We are not going to balance the budget on the backs of America’s seniors. (Social Security) shouldn’t be a piggybank for giving tax cuts to the wealthiest people in this country.”

House Majority Leader Eric Cantor said no tax increases of any kind.

Republican presidential contender Michele Bachmann said she wouldn’t vote to raise the debt ceiling under any circumstances, at which point I could only shake my head in disgust.

Oh, I know what the polls say…that over 60% of the American people don’t want to raise the debt ceiling. But these are the same people who when you tell them they might have some entitlement benefits cut scream bloody murder! And don’t give me the hackneyed nonsense, “Never short the intelligence of the American people,” as many politicians and pundits love to throw out when they can’t think of anything intelligent themselves. Americans have been making the wrong choices for decades, or we wouldn’t be in this mess. From personal decisions with their own finances, to whom they send to Washington. I’ve said it before and I have to say it again. These days, America is incredibly overrated.

But I guess you can’t put Barack Obama in that category because if your approval ratings are now consistently under 50%, you’re not really overrated, are you? Now if he were to pull a rabbit out of his hat and reach a $4 trillion deficit reduction package that is credible, you could say he was underrated, but I digress.

You see, on Friday I watched our president at what has suddenly become his almost daily press conference and all I could think was if ever there was a time in our history crying out for a viable third party it’s today. Whatever shred of credibility Barack Obama had left, it was scooped up by a dust-buster this week. I mean for him to bring up the Simpson-Bowles deficit-reduction commission as he does now after he threw their good work into the trash bin should make everyone vomit.

On Tuesday, Senate Republican Minority Leader Mitch McConnell said, “After years of discussions and months of negotiations, I have little question that as long as this president is in the Oval Office, a real solution is probably unattainable….

“The president has presented us with three choices: smoke and mirrors, tax hikes, or default. Republicans choose none of the above. I had hoped to do good, but I refuse to do harm. So Republicans will choose a path that actually reflects the will of the people, which is to do the responsible thing and ensure that the government doesn’t default on its obligations.”

And so we’ve arrived at Plan B, which is designed to allow the president to raise the debt ceiling in three increments, unless Congress disapproves by a two-thirds majority, while Obama would be required to propose offsetting spending cuts, though Congress wouldn’t necessarily have to enact them; all of which is designed to get us through the 2012 vote and make the election a referendum on the size of government.

Some opinion….

Mort Zuckerman / Financial Times

“Indeed, the real facts are even worse, for we are also now in the midst of the familiar Washington game of kidding ourselves about the size of the deficit. It is already at $1.645 billion for the next fiscal year. The Congressional Budget Office concludes that President Barack Obama’s most recent budget underestimates spending while also overestimating revenues.

“But for now politics as usual predominates. The Republicans, elected to reduce debt, are struggling to find good reasons to raise the limit. To avoid humiliation in front of their constituents they feel they must secure unprecedented cuts. Tapping into America’s gut sense that getting out of debt means cutting up your credit cards, House Speaker John Boehner feels he is on solid ground insisting on cuts but no tax increases in any deal.

“Mr. Obama’s initial response was just as divisive, attempting to play-off the rest of America against cruel Republicans and the wealthy. Yet his harsh tone then made a rational bipartisan agreement more difficult. And any deal must be bipartisan, so neither party can blame the other for necessarily unpopular action. Both must therefore make concessions.

“Yet cuts and tax increases remain politically treacherous. Senior citizens, in particular, will vote against any changes to healthcare and retirement programs. Both parties hope to keep their bases on side, while seeking support from those independent voters – who are focused on fiscal probity and represent 29% of the electorate – whose views will be crucial during the next year’s presidential election.

“In truth there is no politically viable way to raise sufficient taxes to solve our deficit problem. Given this, the only serious way forward is through long-term spending reductions, especially in entitlement programs. But the Democrats are in hock to the unions, and refuse to cut the two programs that dominate the nation’s long-term balance sheet, Social Security and Medicare. Most conservatives, meanwhile, won’t touch spending on their own pet programs, not least defense and farm subsidies.

“Given we can’t raise taxes enough to cover the scale of our deficit problem, America now has no choice but to enter our own age of austerity, namely long-term spending reductions.”

Robert Samuelson / Washington Post

“Just in case you hadn’t noticed, no one has elected Grover Norquist to anything. Still, he looms as a major obstacle to Congress reaching a deficit-reduction agreement needed to raise the federal debt ceiling. Norquist heads Americans for Tax Reform, a conservative group that has persuaded 41 senators and 236 representatives (all but three of them Republicans) to sign its ‘Taxpayer Protection Pledge’ opposing any tax increase. If Congress eliminates special-interest tax breaks, the pledge requires that they be ‘matched dollar for dollar by further reducing tax rates.’

“To Norquist, a tax increase is not good even if it greases a deal to avoid a federal default. Norquist plugs relentlessly for smaller government. ‘We can reduce the size and scope of government at all levels to make all Americans freer, richer and more independent,’ he wrote in his 2008 book ‘Leave Us Alone.’ But what’s revealing about Norquist’s passionate advocacy is that it virtually ignores the main causes of bigger government: Social Security and Medicare.

“Championing smaller government without coming to grips with these gigantic programs is like playing basketball without a ball. It’s make-believe….

“How misleading is this? Well, all programs for the elderly (including much of Medicaid – health insurance for the poor – and other retirement programs) constitute almost half of non-interest federal spending: roughly $1.6 trillion in 2010 out of $3.3 trillion. Moreover, aging baby boomers and surging health costs account for most future spending growth. Without them, we’d have the smaller government that Norquist craves.”

Pete Peterson / Washington Post

“The immediate benefits of a serious bipartisan deficit-reduction plan would be confidence and jobs. The United States is still struggling to create a meaningful number of jobs. Confidence in our future is crucial to job creation and is seriously lacking in several key quarters, including foreign lenders on whom we have become dangerously dependent; consumers whose big-ticket purchases are being reduced or postponed; and businesses and banks that have trillions of dollars sitting idle. Much of this capital would be put to work sooner if lenders, investors and business leaders believed the federal government was on a more sustainable fiscal path and that another financial crisis is no longer around the corner.

“Over the long term, when the government borrows excessively, it takes capital out of the financial markets and inevitably raises the cost of investment for businesses. Furthermore, if the United States is to become an investment and innovation society that creates jobs, the federal government must have the resources to devote to critical areas such as research and development; education; and infrastructure. How will we make these investments when interest costs, entitlements and defense are projected to make huge claims on future resources?....

“Some wonder how you can improve our fiscal outlook now without damaging such a fragile recovery. The answer is that we can lock in a long-term plan now but delay its implementation until the economy recovers. Immediate spending cuts and revenue increases could be counterproductive in the context of today’s grim employment outlook, but we need to reach a grand bargain fast to prove to the world that America is back in business.”

Well, on Mr. Peterson’s last statement I certainly agree, but I have consistently said all year that while a grand bargain would be awesome for the United States and its financial markets and economy, my bet has been Congress and the president would come up with a deficit-reduction, debt-ceiling package of $2 trillion over ten years that, to say the least, would be underwhelming.

Further, there will be some kind of event next year that, when coupled with our ongoing profligacy and a further examination of our finances, perhaps as another leg in Europe’s stool is sliced off, will trigger a crash on the order of 30%. I’ll refine this further when I see what emerges the next few weeks.

For now, August is a month that is always full of surprises, negative ones. And come September, as another leg in the Greek debt crisis comes to a head, if not much sooner, I have pinpointed the U.N. General Assembly as a major potential flashpoint. Not only are you going to have an immensely disruptive debate over Palestinian statehood, with Manhattan being Ground Zero for dueling demonstrations that will keep the NYPD’s hands full, but we’re going to learn more about who is really in charge in Iran. While ultimate power rests with the clerics, and Ayatollah Khamenei, if President Ahmadinejad is to be pushed out as rumored, you would think it would be before the General Assembly. A shift in power could also speak volumes about the future direction of Iran’s nuclear weapons program.

[The General Assembly begins mid-September, right after the 10th anniversary of 9/11, but it seems the main debating period is from Sept. 21-30. If at all possible, I would advise business travelers to consider other dates for your appointments in Gotham.]

Finally, a few thoughts on the U.S. economy. June retail sales came in unchanged, ex-autos, which isn’t good, industrial production for the month was up less than expected, and the July Michigan consumer sentiment reading was a shocker, 63.8, the lowest since March 2009, when 72.5 was expected. 

And in China, the long-awaited reading on second quarter GDP came in, up 9.5%, slightly better than expected, with GDP rising over the first quarter 2.2%. So those calling for a hard landing here have to wait another quarter or two or three…hopefully not for awhile given my sizable investment in Fujian province.

But the June inflation data, which hit as I was posting last week, up 6.4%, was disconcerting, though I’m convinced the picture on this front will improve markedly by year end. It better or the government will have serious problems with civil unrest. Food prices rose 14.4% in June, topped off by Porky Pig and his relatives, up 57%, thus spurring the government to release pork from the state’s 200,000 metric ton frozen stockpile. Retail sales in China for June were up a better than expected 17.7%, which is good, but June imports were up 19.3% vs. an increase of 28.4% in May, not good because it could augur more inflation. Industrial production was up a stronger than expected 15.1%. And China’s foreign exchange reserves hit a record $3.2 trillion at the end of June, arguing for authorities in the country to keep monetary policy tight to reduce credit even further. Moves thus far have failed to restrict bank lending.

Street Bytes

--Stocks fell on the uncertainty generated by the debt ceiling debate, the euro crisis, and some so-so earnings, though Google bucked the trend in climbing from $528 to $597 between Thursday and Friday. On the week, the Dow Jones lost 1.4% to close at 12479, the S&P 500 declined 2.1% and Nasdaq tumbled 2.4%. Citigroup reported results for its second quarter and at first blush you saw $1.09 vs. expectations of $0.97. Hey, great. But then you found out that $0.43 was for reduced loan-loss reserves, which is fine, but that the operating results were more like $0.66, not $0.97, which kind of sucks, know what I’m sayin’? And so it is with financials, as discussed further below.

--U.S. Treasury Yields

6-mo. 0.04% 2-yr. 0.35% 10-yr. 2.91% 30-yr. 4.25%

The June inflation data was released and producer prices were down 0.4%, but up 0.3% ex-food and energy. Year over year, the PPI is up a strong 7.0%, though only 2.4% on the core. The consumer price index was down 0.2% for June, up 0.3% ex-the stuff we use, and year over year the CPI is up 3.6%, but the core rate is up only 1.6%. So pick your poison. You can see from the above Treasury yields that the market loves to talk about inflation, but when it comes to actually trading the market, bond ghouls are more concerned with a lousy economy and little prospects for much better the balance of the year, even if inflation is still showing up in items such as gold and food prices.

Thoughts of renewed stimulus from the Federal Reserve as well as the European debt crisis helped lead gold to a new closing high of $1590. Silver rallied big this week, up 7%. Other commodities rebounded, too, with corn rising on the heels of news that the U.S. Dept. of Agriculture is estimating exports to China are growing more than expected.

[Estimates on Russia’s wheat harvest continue to rise; a good thing after last year’s catastrophic drought there and probable shortfalls in the U.S. due to the drought in the Southwest in particular.]

--JPMorgan Chase reported strong second-quarter earnings, better than expected, as investment-banking profit surged 49% and credit conditions improved. But, like others of its ilk, JPM still faces unspecified liabilities in the ongoing mortgage debacle, including $multi-billion settlements with the federal and state governments. CEO Jamie Dimon said, “There have been so many flaws in mortgages that it’s been an unmitigated disaster.”

Some analysts believe JPMorgan has up to $8 billion squirreled away for penalties to come. The bank also faces a $1 billion hit to revenues as a result of new rules limiting the fees it can charge retailers for debit-card transactions.

--In the News of the World scandal, at least nine journalists and three police officers face arrest, according to Scotland Yard. With computers having been secured, no telling where this all will lead. But Scotland Yard itself was forced to apologize to victims for not handling a 2005-06 investigation into phone hacking at the NoW properly. Separately, the FBI launched an investigation into potential wrongdoing in the United States.

As for Rupert Murdoch’s bid for full control of British Sky Broadcasting Group, BSkyB, News Corp. dropped it after it was a certainty to gain approval before the scandal got second life after being largely ignored years ago. Rupert Murdoch will be testifying next week before a parliamentary committee, along with his son, James, and disgraced News International CEO Rebekah Brooks, who finally succumbed to the pressure on Friday and resigned from her post. Also on Friday, Les Hinton resigned as CEO of Dow Jones & Co. He had been at News Corp. for 52 years.

Murdoch’s empire includes…

United States – Dow Jones Newswires, The Wall Street Journal, New York Post, The Daily

United Kingdom – The Times, The Sunday Times, The Sun

Australia – 146 papers, including The Australian

Produces shows such as Glee, The Simpsons, Modern Family

Owns and operates 27 TV stations

Owns Fox Broadcasting Company

Cable channels such as Fox News, Fox Sports Net, FX, Speed, National Geographic

Owns Twentieth Century Fox

Owns HarperCollins

And tons of other stuff…

--Google reported killer earnings, $8.74 per share vs. expectations of $7.86, along with better than expected revenues in CEO Larry Page’s first report card since he took over the helm from Eric Schmidt. And to help carry out an ambitious agenda, including lots of new ventures that Page admits will take years to pay off, the company hired 2,450 employees in the quarter, bringing its total workforce to 28,000.

--Japan’s prime minister, Naoto Kan, has called on his nation to gradually eliminate nuclear power, which, while Kan has vowed to step down at an unspecified date, clearly doesn’t add to confidence in the sector. I would just say to Japan that there’s nothing wrong with nuclear power, people. Rather it’s the fact that your immensely corrupt bureaucracy allowed officials to be bought off, which led to plants being built on fault zones or without walls high enough to prevent tsunami damage!

But, in reality, Kan’s call is unlikely to come to fruition for decades, if at all.

--China’s Oceanic Administration, which oversees offshore oil drilling, has blasted ConocoPhillips for being slack and ineffective in containing two major oil spills I wrote of last time. Evidently the public is furious and ConocoPhillips has been told to cease operations in the nation’s largest offshore oilfield.

The spills off the coast of Shandong are not under control and the areas contaminated even bigger than estimated.

Separately, ConocoPhillips said it would split into two companies: one that focuses on exploration and production of oil, and another that refines it into gasoline and other fuels.

--Saudi Arabia has been keeping its word in boosting oil production. The International Energy Agency said the kingdom had increased production 700,000 barrels a day to 9.7 million, the highest monthly level since early 2006. The Saudis have said they are targeting 10 million in either July or August.

But, much of the extra Saudi production is being consumed domestically. Which is why many OPEC members are trying to get their domestic alternative energy programs in gear so that the oil in the ground can be saved for export.

--Gasoline consumption in the U.S. has dropped for 16 weeks in a row, according to MasterCard SpendingPulse. Even over the Fourth of July holiday, motorists used 1.7% less fuel than they did last year.

--BHP Billiton is acquiring U.S.-based oil company Petrohawk Energy for $11.2 billion, with the Anglo-Aussie giant increasing its exposure to the American energy market.

--Upcoming UAW labor talks will be interesting. Asian automakers pay $44 to $55 per hour for U.S. workers’ wages and benefits, vs. $58 for Ford, $56 for GM, and $49 for Chrysler. So it’s going to be tough for Detroit’s Big Three to keep asking for concessions.

--China’s car sales rose 6.2% in June from a year earlier, reversing a decline in May. But demand is normally tepid in the summer months, according to state-mouthpiece Global Times. Sales in the first half rose 5.8% to 7.22 million units.

--China has had some embarrassing problems with the launch of its high-speed rail line between Beijing and Shanghai, experiencing “several dozen” power outages, with the Railways Ministry blaming thunderstorms and high winds. The top speed has also been cut from a planned 350 km/h to 300.

Despite the problems, though, since the June 30 launch the daily average number of passengers has been 165,000.

--The tough times on Wall Street continue with Credit Suisse Group getting ready to lay off about 3% of its total workforce, or 1,500 jobs, with many of the layoffs coming in Switzerland, where the strong currency is hurting profits.

And Credit Suisse received some bad news on Friday as it has been formally placed under investigation as part of a four-year inquiry by the U.S. government into the alleged role played by some Swiss private banks in helping rich Americans evade taxes. In 2009, Switzerland’s UBS agreed to pay $780 million to settle with the U.S. Thousands of American taxpayers were involved.

--The six-county Southern California housing market rebounded some in June, with sales up 11.6% from May, better than normal in terms of a percentage increase, June being one of the stronger months. But…total sales were still down 14% from June 2010, though recall that was the last month buyers could qualify for the federal tax credit. After the stimulus ended, sales plummeted. The median price for the Southland was $285,000, down 5% from June 2010. The peak in mid-2007 was $505,000. [DataQuick / Los Angeles Times]

--UK housing experts don’t expect Britain’s home prices to get back to their 2007 peak until 2020.

--Deflation Alert: The late television producer Aaron Spelling’s Los Angeles mansion, 57,000-square feet, sold this week for $85,000,000 or 43% off its asking price. It has 14 bedrooms, 27 bathrooms, a bowling alley, beauty salon, and gift-wrapping rooms. I mean, after all, doesn’t everyone dream of having gift-wrapping rooms?

--Cisco Systems Inc., struggling to regain its mojo, is going to be laying off as many as 10,000, or about 14 percent of its workforce, to revive profit growth. 7,000 could be gone by the end of August.

--Hey, college students (or soon-to-be). Want a good career path? General Electric CEO Jeff Immelt said Fortune 500 companies should double their hiring of engineers as a down payment on private industry’s efforts to deal with high unemployment.

“More technology creates more revenues which creates more jobs. If every one of the big companies in the U.S. doubled their recruiting of engineers that would send a very powerful message to engineering schools and college kids.”

--Speaking of jobs, in a sign of the times nearly 17,000 showed up in Louisville for the opportunity to apply for 1,800 jobs at Ford, as it reopens an assembly plant.

--Netflix is raising rates by as much as 60 percent for subscribers who want to rent DVDs by mail and watch video on the Net. The company had bundled the two options in a single package and is now separating them. So the total ends up being $16 ($8 for each) vs. a bundled $10, minimum.

Netflix is one of the two or three most controversial stocks out there these days. I’ve never played it, but I tend to believe the analysts who say its costs for content are rising steeply, thus the move to risk alienating existing subscribers in order to generate more cash flow.

Foreign Affairs

Afghanistan: President Karzai’s powerful half-brother Ahmed Wali Karzai was assassinated by his long-time bodyguard. It is a huge blow for the United States, as well as President Karzai, because Wali had rebuilt a reputation as a drug kingpin to become the most influential ally in southern Afghanistan, specifically vital Kandahar province. Just the other week, 170 tribal elders and prominent Kandaharis traveled to Kabul to seek President Karzai’s approval to appoint Wali as governor. President Karzai appointed another brother to replace Wali, one with zero political experience in a region where it’s essential. The Taliban is claiming responsibility for the killing but it’s very murky. [A suicide bomber later killed four at an historic mosque during one of Wali’s funeral services.]

Meanwhile, five French soldiers were killed when a suicide bomber walked up to them as they were standing by their armored vehicles before detonating his explosives.

Pakistan: The White House is suspending about $800 million in military aid and equipment out of an annual $2 billion in security assistance it gives Pakistan in an attempt to get Islamabad to press the fight against the Taliban and al-Qaeda targets. In addition it’s a protest by Washington against Pakistan’s decision to expel 100 U.S. Special Forces trainers. In response, Pakistan’s defense minister said he might withdraw thousands of troops from the border with Afghanistan. To say relations between our two counties are strained would be an understatement.

And an aside on India and a triple bombing in Mumbai that killed at least 18 Wednesday. While it is natural to suspect Pakistani terrorists, the Indian government is being careful not to jump to conclusions. Should it prove to be the group Lashkar-e-Taiba, which was responsible for the 2008 attack in Mumbai that left 166 dead, the Indian government will have to respond militarily in some fashion and events could rapidly spiral out of control. [But it could also be one of any number of domestic groups.]

Lebanon: The prosecutor of the Special Tribunal for Lebanon has authorized Interpol to hunt down the alleged assassins of Rafik Hariri. It is not known where the four Hizbullah-affiliated men named in the indictment are hiding.

On Tuesday, former Prime Minister Saad Hariri blasted Hizbullah and Prime Minister Najib Mikati from his residence in Paris, vowing to topple Mikati through “a strong opposition” by his March 14 coalition.

For the first time, Hariri also blamed Syrian President Assad and Hizbullah leader Sheikh Nasrallah for toppling his Cabinet on Jan. 12 and he vowed not to compromise on the STL.

“[Nasrallah] said recently that the tribunal was an Israeli court, that it had previously issued its decisions and it was infiltrated. What I want to say is that if Sayyed Hasan appeared at 300 press conferences, this will not change anything in the indictment which has issued.”

Regarding Mikati’s role:

“They [Hizbullah] are saying they will not cooperate with the international tribunal. Then, the prime minister, who is Hizbullah’s surrogate, says he is committed to [U.N.] Resolution 1757 [which established the STL]. How is this? How can we believe and whom shall we believe? The international tribunal is existing and no one will remove it.”

And…

“We actually wanted to have a state in Lebanon. Our problem with the government is that it is a government of Hizbullah’s mini-state rather than a government of a state….

“With complete frankness, we can bring down the government. We are a democratic opposition seeking to topple the government. There are several tools. We can take to the street, staging demonstrations.” [Daily Star]

Saad Hariri vowed to return to Beirut despite the death threats, though he dismisses the reports that this is why he is in exile. Members of the Mikati government said Hariri was inciting sectarian violence with his statements.

Separately, Syria “has accelerated its supply of weapons, including advanced ballistic missiles, to Hizbullah militants in Lebanon in a move that could further inflame an already destabilized region,” as reported by the London Times. Coincidentally, in an interview with Kuwaiti newspaper al-Anbaa, Hizbullah MP Hussein Mousawi said his group will keep its arms as long as Israel holds onto its nuclear weapons.

Finally, the seven kidnapped Estonians who were held hostage for nearly four months after they were taken away in the Bekaa Valley were released in Lebanon on Thursday. They appeared to be in good health. The identity of the kidnappers, however, is not known, but it does not appear to have been a Hizbullah operation.

Syria: The government of President Assad made a big mistake when it authorized hundreds of thugs to attack the U.S. and French embassies in Damascus. Secretary of State Hillary Clinton responded, “From our perspective, he has lost legitimacy….President Assad is not indispensable, and we have absolutely nothing invested in him remaining in power.”

The action taken against the embassies was a direct response to U.S. Ambassador Robert Ford’s, as well as his French counterpart’s, courageous display in the Syrian town of Hama, where the two went to lend support to anti-government protesters there. Ford also attacked the Syrian leadership in a Facebook post, wherein he said in part, “how ironic that the Syrian government lets an anti-U.S. demonstration proceed freely while their security thugs beat down olive branch-carrying peaceful protesters elsewhere.”

Syrian security forces gunned down at least 30 protesters across Syria on Friday.

[By the way, I could take you back to the spring of 2005, in the aftermath of the Hariri assassination in Lebanon, and it was then I was railing that George W. Bush wasn’t doing enough to promote the democracy movement and dismantle Hizbullah. I said at the time we should take advantage of France’s long-time influence there and work together. We didn’t. At least in Syria we are standing strong…the United States and France.]

Iran: There are reports Tehran has begun efforts to shift its uranium enrichment program to underground bunkers at a facility deep inside a mountain near Qom, the country’s holiest city.

Christopher Ford, a former U.S. special representative for nuclear nonproliferation, told a gathering of think-tank folks that “Given the scope and depth of Iran’s involvement in international terrorist groups, I think terrorist acquisition of [nuclear] weapons, material and technology could come about either deliberately or inadvertently. One can’t rule out, of course, the possibility of transfers occurring without top-level authorization,” utilizing its “rich network of black- and gray-market ties around the world for the acquisition of nuclear-related technology,” including “remnants” of the A.Q. Khan network and Russian scientists. [Global Security Newswire]

Iraq: Last weekend, the government failed again to reach agreement on the formation of a cabinet or on whether some U.S. troops will be allowed to stay beyond the December deadline. President Talabani said everyone gets another two weeks before reconvening on these critical issues. One thing is clear, though. U.S. troops are going back on the offensive against Iranian-backed insurgents.

On a different topic, Baghdad has started negotiating with Washington to buy fighter jets and air-defense systems, according to the Wall Street Journal, helped out in no small part by surging oil revenues, with a leading U.S. general on the scene saying $10 billion has flowed into the Iraqi government’s coffers in the first six months of the year.

Libya: The United States and 31 other nations have agreed to recognize the rebels as the “legitimate governing authority,” but they have to land on Community Chest in order to access the Gaddafi regime’s $30 billion in frozen assets.

Egypt: The renewed protests at Tahrir Square in Cairo continue, as do terrorist attacks on a natural gas pipeline through the Sinai to Israel, the fourth such incident this year. In the former, authorities agreed to fire 650 senior police officers implicated in the killing of protesters back in February as part of meeting protesters’ demands.

The still-simmering unrest is leading the military council to push back the parliamentary election until November, two months later than planned. This gives the nascent democracy groups more time to organize, thus hurting the chances of the new Muslim Brotherhood-led coalition. It’s assumed the presidential election would then take place a month or two after, rather than the originally planned November.

Turkey: In one of the worst attacks in years, Kurdish rebels in southeastern Turkey ambushed a group of soldiers, killing 13 Turks. The Kurdistan Workers’ Party (P.K.K.) had warned it would start a new wave of attacks if by Friday a tangible plan for resolving the conflict wasn’t produced.

China: Joint Chiefs of Staff Chairman Adm. Mike Mullen has been in China this week for talks with his counterparts, the first such discussions in four years, which Mullen said afterwards were “productive and positive.” But he added that when it comes to efforts to create a working military-to-military relationship, “There is a long way to go. Differences between us are still stark.”

Chinese chief of the General Staff of the People’s Liberation Army, Chen Bingde, chided the U.S. in a joint news conference with Mullen for spending too much on the military during times of economic stress, adding fears of a Chinese threat are overstated. Of course China has been ramping up its own spending and capabilities at a furious pace. For example, as a report in the London Times noted, China’s reconnaissance satellites are nearing par with the United States. A professor at the U.S. Naval War College summed up the importance of this development.

“The United States has always felt that if there was a crisis in Taiwan, we could get our naval forces there before China could act and before they would know we were there. This basically takes that off the table.”

Note: As I go to post, President Obama is slated to meet with the Dalai Lama on Saturday at the White House. Should this prove to be the case, it will be a huge mistake. 

Russia: A “decrepit” Bulgarian riverboat, carrying at least 208 people, capsized in the Volga River in Tatarstan, killing at least 129, including about 30 children. It was Russia’s worst maritime disaster in 25 years and a preliminary investigation said the cause appeared to be a lack of air conditioning – “which prompted the crew to open portholes that were then flooded by an incoming wave.” [Moscow Times] There were also reports that in the immediate aftermath, at least two passing ships ignored survivors. One, the Meteor, was in the vicinity “but its passengers filmed the people in the water on their mobile phones instead of helping them,” according to a Tatar news agency. Unbelievable, but then this is Russia.

Random Musings

--Defense expert Andrew Krepinevich, in an op-ed for the Washington Post.

“With ballistic missile flight times between Iran and Israel less than 10 minutes, warning capability evaporates, greatly increasing the incentive to strike first in a crisis. In these circumstances, regional stability would be severely undermined. While much thought recently has been given to achieving a world without nuclear weapons, more serious consideration should be given to how to prevent – or terminate – a ‘limited’ nuclear war in the Middle East.”

--In the latest Gallup poll, the “Republican Party’s candidate for president” is favored over Barack Obama by a 47% to 39% margin. 

--President Obama raised $86 million in the second quarter (including $38 million from the DNC earmarked for his campaign), far outpacing the $18 million raised by Mitt Romney. Michele Bachmann-Turner Overdrive raised over $2 million in just the first two weeks of her campaign, having formally announced on June 13. [I’m assuming Ms. Bachmann is using BTO’s #1 song from 1974, “You Ain’t Seen Nothing Yet,” as one of her campaign songs…this all-time car tune being a layup for such an occasion.]

--Bachmann, incidentally, comes out ahead in a new Iowa Republic poll, 25-21 over Romney. But a closer look shows that among those voters who described themselves as the “most attentive,” Bachmann leads by 14 points…32% to 18%. The caucus system in Iowa is tailor made for her. Herman Cain, by the way, gets a bump too in the “more attentive” category, going from 9% to 12% in the Iowa GOP poll. [Aaron Blake / Washington Post]

--Republican Congressman Ron Paul (TX) said he would not run for his seat in 2012 and instead will focus on his presidential campaign. I admire the 74-year-old for saying that it was also time for new blood in his district, but basing a run for the highest office on what monetary policy should be doesn’t cut it. Oh, to be sure he’s for a much smaller government and exiting our many foreign adventures, but he keeps going back to the Fed.

I like the guy because he’s different. But he’s really more tailored to be a third party candidate and I suspect he could get as much as 7% of the vote in 2012…say if it was Obama vs. Romney.  This would not be the kind of ‘legitimate’ third party effort I referred to above.

--President Obama’s outreach to the Arab world is failing miserably. According to a new poll by Zogby International for the Arab-American Institute Foundation, favorable ratings of the United States have plummeted in the Middle East to levels lower than they were during the last year of the Bush administration. The killing of bin Laden also worsened attitudes.

In Saudi Arabia, for example, 30% of respondents said they had a favorable view of the U.S. (compared with 41% in 2009), while roughly 5%...5%...said the same in Egypt (compared with 30% in 2009).

Fewer than 10% described themselves as having a favorable view of Obama. [Washington Post]

--Democratic New York Gov. Andrew Cuomo’s approval rating rose to a whopping 71% in a Siena Research Institute survey. Just 21% view him unfavorably. But by a 51-39 margin, voters say they oppose the idea of Cuomo running for vice president should President Obama replace Joe Biden on the ticket.    83% say it’s premature to be talking about Cuomo as a potential candidate in 2016. 

No it’s not.

--Word broke Sunday night that Tiger Woods was giving a press conference at 11:00 AM ET on Monday. Since Tiger had already announced he wasn’t playing in the British Open, there was all kinds of conjecture rushing around the Web and in emails between friends. I personally thought he was going to announce he wouldn’t play the rest of the year, have one more surgery, and hope to be ready for Augusta next spring. Others thought he was going to announce his retirement.

And then Monday morning, we learned that Tiger wasn’t holding a press conference. In fact he never planned to. It seems his Twitter account was hacked and the fake press release thrown out there. This stuff (including the fake Obama assassination feeds on a Fox site on July 4th) has to stop. But it’s only going to get worse.

To wit:

In an interview for Defense News with retiring (Sept. 30) Chairman of the Joint Chiefs of Staff Adm. Michael Mullen, he was asked…

“What are the threats that keep you awake at night?”

Mullen: “The single biggest existential threat that’s out there, I think, is cyber. I think we’re going to have to focus a lot more on it. We’re going to have to put more resources against it. We’re going to have to train people better. Because cyber actually, more than theoretically, can attack our infrastructure, our financial systems, etc. It’s a space that has no boundaries. It has no rules, and there are people who are very good at it. There are countries who are very good at it.”

Another example of the above came out this week in what was dubbed “military meltdown Monday,” where a hacking collective published the email addresses and passwords of 90,000 members of the military stolen from U.S. contractor, Booz Allen Hamilton.

And, you guessed it; the hacker group was a spin-off of Anonymous that includes members of the now defunct Lulz Sec. Ironically, Booz Allen is led by several former National Security Agency and CIA staffers.

But there was even more on this front this week. On Thursday, the Pentagon revealed it suffered one of its largest losses ever of sensitive data in an attack by a foreign government; 24,000 files containing data were stolen in a single intrusion in March. Deputy Sec. of Defense William Lynn gave no further details, including which nation was involved, though he said “We have a pretty good idea.”

The Pentagon is still working on an offensive strategy to counter the attacks, though for now Mr. Lynn said:

“(The) United States reserves the right, under the laws of armed conflict, to respond to serious cyber attacks with a proportional and justified military response at the time and place of our choosing.”

--My first thought when I heard how government prosecutors screwed up the Roger Clemens perjury trial was, now you know why some of us wouldn’t want to see the Guantanamo detainees get jury trials and prefer they be tried before a military tribunal (if at all). One screw-up, as was the case here, and the judge has no other option than to dismiss the case or rule a mistrial.

--Over the years I’ve read a lot about the topic of drinking water; specifically how much one should consume. I always felt like during the day I didn’t drink enough, certainly not the generally recommended “six to eight glasses a day,” and then in the past few years I’ve seen a lot of stories on long distance runners (of which I resemble one from time to time) drinking way too much and dying from hyponatraemia (low salt levels) and water intoxication. My own rule of thumb when doing something like a half marathon is drink when thirsty. Don’t feel like you have to drink X cups at the water stops.

So I bring this up because I was reading a piece by Jeremy Laurance in the Irish Independent who writes thusly.

“The benefits of drinking water have become so exaggerated that people who follow official advice may even do themselves harm, a doctor warns.

“In fact the official advice to ‘try to drink six to eight glasses of water a day’ is unsupported by scientific evidence and simply used by bottled water companies to boost their sales, according to Scottish GP Margaret McCartney….

“(The) warnings about maintaining fluid levels are ‘not only nonsense, but thoroughly debunked nonsense,’ she said….

“The idea that we are all short of water is thought to derive from a 1945 recommendation that adults should consume 2.5 liters of water daily, 1 ml for every calorie consumed, though this advice has only caught on in the last decade.

“But the crucial part of the recommendation is usually ignored – that ‘most of this quantity is contained in prepared foods.’”

Oh, there’s more, but just understand that campaigns such as “Hydration for Health” are sponsored by the likes of Danone, the French maker of Evian.

--Historian David McCullough, in an op-ed for the New York Times, on the “ties that bind America and France,” McCullough choosing Bastille Day, July 14, to celebrate them.

“Consider that the war that gave birth to the nation, our war for independence, would almost certainly have failed had it not been for heavy French financial backing and military support, on both land and sea. At the crucial surrender of the British at Yorktown, for example, the French army under Rochambeau was larger than our own commanded by Washington. The British commander, Cornwallis, was left with no escape and no choice but to surrender only because a French fleet sailed into the Chesapeake Bay at exactly the right moment.

“The all-important treaty ending the Revolutionary War, wherein King George III recognized the United States to be ‘free, sovereign and independent,’ was signed in Paris.   The plan for our new capital city on the Potomac was designed by a French engineer, Pierre Charles L’Enfant. The first great statue of our first president was the work of a French sculptor, Jean-Antoine Houdon. The first major study of us as a people, ‘Democracy in America,’ was written by a French historian, Alexis de Tocqueville. Published in 1835, it remains one of the wisest books ever written about us.

“To be sure, our relations with France have not always been smooth….

“But the rewards of our ties with France have far exceeded any difficulties there have been. With the purchase of the Louisiana Territory from France, the size of the country was more than doubled. The Statue of Liberty, one of our most treasured symbols, was a gift from France….

“Times continue to change, yet we remain conspicuously fond of all manner of things French….

“And there is a further reason France should hold a prominent place in our memories and in our hearts. More American history has unfolded in France and more Americans are buried there than in any other country but our own.

“During World War I more than two million American soldiers served ‘Over There.’ In World War II another generation of American soldiers numbering more than 800,000 served in France. In all, more than 60,000 Americans are buried in French soil, at Meuse-Argonne, Normandy and nine other cemeteries. At the Meuse-Argonne, the largest, lie fully 14,246 American dead. The grave markers are a sight never to be forgotten.

“Though I love France and greatly value the friends I have made there, I am not an overboard Francophile. But as an American I think it is well past time to get back to respect and affection between our countries, on all fronts and with all possible good will.

“For my part this Bastille Day, I intend to raise a glass or two of Veuve Clicquot in a heartfelt toast: ‘Vive la France!’”

A lot of us celebrate France by spending our tourist dollars there, as I did in April.

--New York Gov. Cuomo signed one of the strictest measures in the nation banning texting and driving. If you are caught now in New York State, you get three points against your license (suspended if you get 11 points in 18 months) and fined $150. If the police just see the device in your hand, the presumption now is you’re using it.

The National Highway Traffic Safety Administration reported that one of every six fatal accidents in 2009 was caused by distracted driving. 20% of crashes that resulted in injuries involved drivers using hand-held devices.

--I was amused with some of the wedding day photos of Prince Albert II and Princess Charlene of Monaco from their July 1 ceremony, with Charlene looking none too pleased amid stories she was basically held hostage to make sure she showed up.

But then I was struck by a story on their honeymoon in South Africa from the Sydney Morning Herald.

“Instead of staying together in a (A$3400) per night presidential suite at the luxury Oyster Box Hotel in Umhlanga, just south of Durban, the newly married royal couple slept in separate hotels 16 km from each other, South African newspaper the City Press reported.”

Charlene was at the Oyster Box. Prince Albert stayed at a Hilton in Durban.

“The pair also left their honeymoon early, returning to Monaco so Prince Albert could undergo DNA tests to counter claims by at least one woman that he fathered another illegitimate child, the Daily Mail reported.

“The Prince already has a daughter, 19, with an American tourist and a son, 6, with a Togolese flight attendant.

“The latest revelations come a week after French newspapers reported that Princess Charlene, a 33-year-old former Olympic swimmer, tried to flee home to South Africa three times before her marriage….

“The royal family wants a male heir to the throne in the traditional Catholic city state, despite a change to its constitution which allows a female to assume the crown.”

--We have a “Dirtball of the Year” candidate, Icelandic whaling tycoon Kristjan Loftsson. As reported by Rupert Murdoch’s Sunday Times of London, Loftsson’s firm, Hvalur, “has killed 273 fin whales and exported more than 1,200 tons of their meat and blubber to Japan since 2008,” according to two environmental groups. Hvalur intends to catch 150 fin whales this year.

But wait, isn’t there a longstanding moratorium on commercial whaling?

Yes, but Hvalur uses a loophole that allows its boats to take whales for “scientific research.” “However, exporting the meat and blubber to Japan breaks international treaties.”

Iceland now has a “mountain” of whale meat in cold storage…2,500 tons! There are believed to be about 30,000 fin whales left, it being the second-longest next to the blue whale.

No word on whether Murdoch’s reporters hacked into the fin whales’ cellphones.

--And a hearty round of applause for restaurant owner Mike Vuick of McDain’s Restaurant in Monroeville, Pa. (I have relatives there) for his decision to ban children under the age of 6 after regular customers were complaining on their meals being disrupted. Mr. Vuick says the emails are running 11-1 in favor of his decision, though I saw a poll that had it more like 64-26 in favor. So, I probably just ticked off 26% of you.

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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 $1590…up from $1482 two weeks ago
Oil, $97.24

Returns for the week 7/11-7/15

Dow Jones -1.4% [12479]
S&P 500 -2.1% [1316]
S&P MidCap -2.9%
Russell 2000 -2.8%
Nasdaq -2.4% [2789]

Returns for the period 1/1/11-7/15/11

Dow Jones +7.8%
S&P 500 +4.6%
S&P MidCap +7.6%
Russell 2000 +5.8%
Nasdaq +5.2%

Bulls 44.1
Bears 22.6 [Source: Chartcraft / Investors Intelligence]

Have a great week. I appreciate your support.

Brian Trumbore