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10/22/2011

For the week 10/17-10/21

[Posted 7:00 AM ET]

Europe, Washington and Wall Street

The European Union was to meet this weekend to come up with a solution to the euro debt crisis that would then be submitted for final approval to the G20 summit on Nov. 3-4, but the politics between Germany and France, in particular, are such that German Chancellor Angela Merkel and French President Nicolas Sarkozy realized they couldn’t agree on anything by Sunday’s summit conclusion, so they said a second summit would be held by next Wednesday evening at the latest.

But to give you as good a sense as any as to how rapidly the situation in Europe is imploding in terms of the economy, one need look no further than new forecasts from the European Bank for Reconstruction and Development, which took a look at its July outlook for growth for Central and Eastern Europe in 2012 and took it down from 3.7% to 1.6%...in just three months! This is staggering, and the numbers are far less than the IMF’s forecast in September, to give you another example of how quickly the region is deteriorating.

Slovakia, for example, was pegged for 4.1% growth by the EBRD in 2012 and now the bank is calling for 1.1%. Romania was expected to grow by 3.8% and is now estimated to also have just 1.1% growth next year.

These aren’t the PIIGS. These were the countries that had already gone through their wrenching changes to join the EU in the first place, but without a Western Europe solution, you have a vivid projection of the spillover into the rest of the area, let alone the U.S. and Asia. Turkey is another, with the EBRD slashing its forecast for GDP in 2012 from 4% to 2%.

But it all starts with Greece. You saw the awful pictures, the riots, leading up to another austerity vote in the parliament. Prime Minister Papandreou begged his people to accept a further round of tax increases and fresh cuts to pensions and wages, along with plans to dismiss 30,000 state workers, or Greece wouldn’t receive a needed 8 billion euro slug from the Troika (IMF, European Central Bank, and European Commission) as part of the first Greek bailout. Without the 8 billion, Greece won’t have funds to pay state workers. [Actually, they were supposed to have gone broke by Oct. 15, remember?]

The thing is, Greece is still headed to inevitable default but Germany, France and the others keep delaying the day of reckoning which only makes matters worse. It was once thought Greece needed about 110 billion euro in bailout funds, through 2020, to give it time to finally get its house in order. Yet the economy is imploding so quickly, its needs are now thought to be as high as, get this, 440 billion by one estimate! That figure, of course, matches the initial European Financial Stability Fund, which I’ve been writing all year was initially thought to be enough to backstop Greece, Ireland and Portugal. I’ve also written about a needed second fund of 500 billion euro and sure enough that was the talk by week’s end (the European Stability Mechanism, which would replace the EFSF in mid-2013). The original theory behind the second fund was to be big enough to backstop Italy and Spain, if necessary, with both funds also being a source of capital for the big banks as needed. The EFSF wasn’t technically to start until mid-2012, but now there is talk of combining the two as rapidly as possible, though it’s my understanding the 17 parliaments haven’t approved the ESM, certainly Germany’s parliament is required to approve it, and so you’d have that mess all over again.

I don’t even know what to write anymore, frankly. I want to get everything down, as it happens each week to lay out the history and give a little opinion, but as I started this section, for the first time during the past 18 months, I really don’t have a clue what the heck is happening. I mean consider one factor about the 440 billion EFSF. Recall that after Slovakia’s parliament became the last to vote to approve the fund, Slovakia was guaranteeing 4 billion of it, the guarantees being proportional to the size of each of the 17 eurozone nations’ economies. 

Well what about Spain and Italy? 200 billion or so is coming from them, meaning troubled countries are lending to each other. It’s why some of us said way back this whole crisis and the supposed solution was nothing more than history’s greatest Ponzi scheme.

So whatever euro leaders come up with the next few days, assuming they do come up with something because the alternative is a global Crash highlighted by old-fashioned runs on the bank that will make Athens’ demonstrations look like a church carnival, any solution must be big enough to, at a minimum, guarantee the bonds of the likes of Italy and Spain, let alone the other PIIGS.

And it has to offer a solution on recapitalizing the banks, which has become the stickiest issue. The EU said only 90 billion was needed to shore up the continent’s big institutions, while others say it is closer to 200 billion, and Goldman Sachs says 300 billion.

These sums never stop amazing. Where is it going to come from? The banks don’t want to have to raise more capital because it reduces their profits and leaves them open to government control. Small business doesn’t want the banks to have to raise more capital because then there will be nothing left to lend to them and thus you have further stagnation (credit availability already being near nil). France doesn’t want to have to use any of its government funds to shore up its banks because then it is guaranteed to lose its Aaa-rating, as Moody’s warned Monday would be the case.

“The deterioration in debt metrics and the potential for further contingent liabilities to emerge are exerting pressure on the stable outlook of the government’s Aaa debt rating,” Moody’s said in a statement. 

If France, or Germany, lose their triple-A status, then the EFSF can’t raise rescue money (it is supposed to through the sale of bonds) at low interest rates, meaning a French downgrade could lead to a collapse of the entire rescue system. [Spain, by the way, suffered another wave of credit downgrades from the three leading agencies, including S&P and Fitch. Spain’s GDP forecast for 2012 has been slashed to 1% from 1.8% by Moody’s.]

And I haven’t even mentioned the ‘haircuts’ Greek debt holders are going to have to take as part of its restructuring. Originally slated at 21% in July, now the talk is 50% to 60%, which kills the banks’ capital ratios further, they being the prime holders of the scrip.

Want more bad news? Greece’s privatization program was supposed to bring in 66 billion euro that was to be used to pay down debt. Now the estimate is it will raise no more than 46 billion. I’d be surprised if they raise 30 billion.

But wait…there’s more! We never talk about little piggy Portugal, but Richard Barley of the Wall Street Journal had a piece this week on the country that is the leader in cork and the economy here is now expected to shrink 5% in 2011-2012, with 2012 seeing a contraction of 2.8%. The government is at least being as transparent as possible, but consider this. In August, 70% of Portugal’s exports went to the EU and 24% to Spain, which has no growth. Citigroup says Portugal will contract 5.7% next year!

As for non-euro Britain, Bank of England Gov. Sir Mervyn King warned that as the austerity program hits in earnest, wages in 2011 would be less than in 2005 (a further dampening of his January expectation they’d be flat over this time period), the worst period for living standards in the U.K. since the 1920s. In Britain, the main culprit these days is utility increases, with gas and electric bills going up 13% and 7%, respectively, at a time when wages are falling.

[The Financial Times has a piece Friday night on how even the Queen is having major problems with the utility increases. After all, the bill for gas and electric is expected to account for 8.2% of her frozen income and she has four palaces and a draughty castle.]

But before we head across the pond to the U.S., a word on China. GDP for the third quarter came in at 9.1% vs. expectations of 9.3%. The trend since the fourth quarter of last year is…9.8%, 9.7%, 9.5% and 9.1%. Troubling to some, but still more than solid.

In fact the consensus GDP forecast for China next year is 8.6%, comfortably ahead of the accepted 8% figure that assures a sufficient level of job creation to keep up with urban migration. So while some continue to call for a hard landing here, I’m staying in the soft landing camp.

Other positive figures this week, industrial production rose 13.8% in September vs. a 13.5% rise in August, and fixed asset investment rose 24.9% for the first nine months of the year, better than expected.  

But China’s key stock market barometer hit its lowest level since March 2009 and the price/earnings multiple (trailing) here is 10.8, the lowest in memory. [If my own large holding in Fujian traded at a 10 multiple, I wouldn’t be writing this column anymore…just sayin’. While I’m on the topic, I exchanged notes with the CFO this week, knowing its quiet time. Like all shareholders I’m extremely frustrated, but I pretty much got the answer I was looking for.]

Two other items of import when trying to read the tea leaves in China and whether there will be a hard or soft landing. China Southern Airlines, the largest domestic carrier, cut its 2012 outlook for passenger demand from up 13% to up 8%. Not cause for concern, but something that needs monitoring.

And a major negative, China has suspended work on some 10,000 kilometers of rail projects due to financing issues. Many of the six million migrant workers employed haven’t been paid in months as state banks have tightened lending. This definitely requires attention.

Washington and Wall Street

Stocks finished mixed with the Dow Jones rising a fourth straight week but Nasdaq declining as reported earnings were generally positive. More on this later. Sentiment at week’s end bordered on absurd, though, as traders took the news that the EU was extending a deadline to resolve the debt crisis as a positive because it meant they wouldn’t have to wait out a potential disappointment Sunday night and deal with a down Monday, ergo, they went into the weekend bullish because they wouldn’t have to deal with any negativity until Tuesday or Wednesday, by this logic; as if whatever the EU comes up with is anywhere near being a long-term solution in the first place.

More importantly for the health of the U.S., we learned the federal government spent a record $3.6 trillion in fiscal 2011 (ending Sept. 30). Isn’t that special? Congratulations to all of us for electing such fine representatives, from the president on down, and congratulations for allowing the unelected power brokers and lobbyists to have their way with us as well!

You know, I was listening to CNBC’s Jim Cramer spout off on Friday about Kelly King, CEO of BB&T, and how great the guy is and how you need to listen to one of his bank’s conference calls where Mr. King (who seems to be a decent sort) talks about how great America is…blah blah blah.

I’m tired of this inane chest-thumping. We are a mess, for the handful of you out there who haven’t noticed, and to just say stuff like “America’s best days are in front of us” is incredibly stupid.

Do you want to see the future of our country? Aside from the staggering debt and entitlement obligations we’ve given ourselves, just look at our kids…the supposed future. 95% are walking around like zombies glued to their FREAKIN’ SMARTPHONES THAT WILL DO NOTHING BUT MAKE THEM DUMBER!!!

So don’t give me this America is great garbage. I only want to deal with the facts. I only want to listen to Republicans like Congressman Paul Ryan or Senator Tom Coburn. They may not be the life of the party if you’re entertaining, but in case you haven’t noticed, the party is over!

The country is so dysfunctional that we’ve stupidly given a protest movement, Occupy Wall Street, a platform when it’s increasingly looking like no more than a bunch of Greek anarchists and communists.

I gave myself the ‘wait 24 hours’ notice when it came to discussing the kinds of kids that are occupying lower Manhattan and while I admit I haven’t been there personally, and won’t have a chance to get there for a few weeks, I’ve seen all the local New York area broadcasts and read the accounts and it’s absurd, as pointed out further below, that these lowlifes (who comprise 90% of the crowd) are even granted a forum. Come up with a real protest movement and I’ll listen. This isn’t one.

Sorry to get off track, but this week the Senate failed to pass even a stripped down jobs bill, $35 billion for teachers, firemen and the like, which highlights the antagonism between Democrats and Republicans, as well as President Obama’s failures in leadership as he runs around playing his class warfare game.

But just a few economic notes. September housing starts came in better than expected but the increase was due to a 51.3% rise in multi-family dwellings as opposed to just a 1.7% increase in single-family home construction. Existing home sales were still at lousy levels.

I saw a piece in USA TODAY that addresses the fact local governments have slashed “535,000 positions since September 2008 to close massive budget deficits resulting largely from sharp declines in property tax receipts. That exceeds the 413,000 local government job cuts from 1980 to 1983, the only other substantial downturn in local government employment, according to federal records that go back to 1955.” [Paul Davidson]

Wells Fargo revealed as part of its earnings report that delinquencies on mortgages and credit cards rose 4% in the third quarter, the first increase since 2009, which isn’t good. Citigroup reported a similar rise in delinquent mortgages, CFO John Gerspach saying the bank was seeing “re-defaults” on mortgages that had been modified to make them more affordable. Capital One saw an increase in credit card delinquencies, which means a future increase in defaults on same.

And remember that congressional supercommittee devoted to debt reduction? You know, the bipartisan group of 12 that has to cut at least $1.2 trillion by Nov. 23, thus giving Congress a full month to vote up or down on the proposal or face automatic draconian cuts, half of which come from defense?

Nothing’s happening. The Washington Post reported they have yet to reach consensus on the most basic elements of a plan to restrain spending. Remember, the $1.2 trillion is nothing. Unless the economy takes off like a rocket ship, and in case you haven’t noticed, with the end of the space shuttle program, NASA doesn’t have a rocket ship and we’re relying on the Russians to take us to the International Space Station, the deficit will continue to grow, so we want this supercommittee to think ‘big,’ like a minimum of $3 trillion in savings. Don’t hold your breath.

Street Bytes

--The Dow Jones rose 1.4% to 11808, while the S&P 500 tacked on 1.1%. But Nasdaq lost 1.1%.

As noted above, earnings were generally positive, with some winners being Citigroup, Morgan Stanley, American Express, Intel, Coke, McDonald’s and Honeywell.

But IBM and Apple disappointed in one form or another, as did Wells Fargo, EBay, Goldman Sachs, and General Electric.

As for my favorite company McDonald’s (not that I eat there that much but just admire the hell out of them), shares rose on Friday as earnings and revenue exceeded expectations. U.S. comp store sales rose 5.0%, and they even rose 4.4% in Europe. Net income rose 9% though the company is dealing with rapidly rising beef prices and higher labor costs. McDonald’s could be raising menu prices a third time this year soon, but the first two increases had no impact.

--U.S. Treasury Yields

6-mo. 0.05% 2-yr. 0.27% 10-yr. 2.22% 30-yr. 3.26%

Bonds were basically unchanged on the week. Inflation data for the month of September revealed that the producer price index rose 0.8%, but only 0.2% on the core, ex-food and energy. For the last 12 months, the PPI is up a whopping 6.9%, but 2.5% on core. The CPI rose 0.3%, 0.1% core, and its 12-month figures are 3.9% and 2.0%, respectively. 

I have refused to cry wolf on inflation and for those screaming about it, obviously the bond market isn’t concerned, yet, plus the Fed has played a role in keeping rates down and uncertainty over the Euro crisis has led to a flight to quality.

But, having said that, where inflation comes in is obviously in the ability, or inability, of consumers to make ends meet and have money left over for discretionary spending when their wages are stagnant, or falling. And that means lower growth than should otherwise be expected. So that’s why the raw PPI and CPI data matters, Charlie Brown, not in their impact on interest rates, the traditional cause for concern.

--In the latest data released by the U.S. Treasury Department, China reduced its holdings of U.S. debt to the lowest level in a year, selling $36.5 billion in Treasuries or bonds, but its overall “official” holdings are still at the $1,137 billion level (China’s holdings purchased through London do not show up immediately in the preceding data). It was in August that S&P cut the U.S.’s credit rating to AA+ from AAA. However, the overall demand for U.S. Treasuries increased in August, and net buying of long-term equities, notes and bonds totaled $57.9 billion, the highest since December 2010, so the U.S. remains the global safe haven of choice.

--As noted by Bloomberg’s Michael J. Moore, “JP Morgan Chase, Bank of America, Citigroup, Goldman Sachs and Morgan Stanley posted $13.5 billion in trading revenue minus accounting gains for the third quarter, down 35% from a year earlier. Investment-banking revenue plunged 41% from the second quarter to $4.47 billion.

“Bank of America posted a roughly 90% drop in fixed-income trading revenue and Goldman Sachs had its lowest debt underwriting quarter since 2003.”

--Citigroup agreed to pay $285 million to resolve SEC claims it misled investors on financial products involving collateralized debt obligations tied to subprime mortgages that imploded during the housing bubble. Earlier, Goldman Sachs agreed to pay $550 million to resolve similar claims, while JPMorgan Chase paid $154 million for its role in peddling crappola to unsuspecting investors.  This is what the Occupy Wall Street folks should be protesting about, demanding justice, not the class warfare / commie propaganda.

--Goldman Sachs is on pace to pay its workers an average of $293,000 this year, less than half the amount workers were paid in 2007 ($661,490). This year’s payout is also lower than the $363,655 paid in 2008, the depths of the financial crisis. Goldman’s revenue in the July-September quarter was just $3.59 billion, down 60% from $8.9 billion a year ago as the investment bank lost $393 million. OWS can complain about this, too, but they fail to then connect the dots and realize that fewer dollars translate into fewer tax dollars and fewer tax dollars lead to layoffs of teachers and firemen, the very people they purport to protest for (when they aren’t smoking pot and keeping the neighborhood up with incessant pounding of drums like some ancient tribe in New Guinea that is trying to keep evil spirits away).

--Bank of America, on the other hand, reported a third quarter profit of $6.2 billion, but owing to a one-time gain of $10.5 billion. At least revenue was up 6%.

--Apple recorded its second best earnings ever but for the first time in 27 quarters, it failed to beat expectations and the stock was hammered, closing the week at $393 after finishing at a record high of $422 before the release. Revenue, $28.3 billion, fell short of analysts’ $29.7 forecast, so it was a shaky start for CEO Tim Cook, the first quarter he was in control after Steve Jobs resigned in August. The sales drop, however, was attributable to consumers shying away from the iPhone 4 prior to the release of the next-generation phone. That model, the iPhone 4S, is flying off the shelves (4 million units the first three days!) after its introduction this week and the company is forecasting overall sales of $37 billion in the current quarter, better than the Street is anticipating.

[Apple did sell 17 million iPhones last quarter, up 21%; 11.12 million iPads, up 166%; and Mac sales hit a record 4.89 million units. By the way, since I mentioned long, long ago I was doing an iPad app for StocksandNews, oh, the stories I could tell…for now let’s just say what was submitted by my tech staff, and approved by Apple, was not run by me first…as in some people don’t know how to spell!!! To be continued…it’s not available yet.]

--Intel reported record quarterly revenues and profits, both ahead of expectations. CFO Stacy Smith said, “We are seeing emerging markets driving significant unit growth and…in the data centers, as we see this explosion of devices that are connecting to the internet driving the build out of the internet cloud, we think we are uniquely positioned to benefit from that trend.”

--Census data for 2010 shows that the Washington, D.C., area is the nation’s highest-income metro region, owing in no small part to the size of government and the resulting armies of consultants, lobbyists and government contractors.

--Some surprisingly good data from Russia, as September retail sales rose a stronger than expected 9.2%, with real wages advancing 6.2% from year earlier levels, this as inflation will not exceed 7% in 2011, the lowest rate since 1991. Interesting. A leader of televisions and computers, M. Video, said its sales for the third quarter were up 24%.

--Foreign direct investment into China jumped 17% in the first nine months of 2011 vs. a year earlier, though September’s pace was up ‘only’ 8% from last year

--Container lines have been struggling with declining volumes of goods going from China to the United States, but traffic going the other way is surging as Chinese consumers are demanding higher quality food…meats, fruits and vegetables. One carrier, Copenhagen-based Maersk, is investing $1 billion in refrigerated containers over two years. It’s all about China’s rising middle class and increased wages.

--Struggling Dutch lighting and consumer electronics group Philips is cutting 4,500 jobs, Philips being the world’s leader in lighting equipment, and Europe’s biggest consumer electronics producer.

--Lowe’s Cos., the world’s second-largest home-improvement chain, is closing 20 stores and laying off about 1,950 workers. Lowe’s will still have 1,700 locations in North America, but it has not been able to grow profits vs. competitor Home Depot, which reported a 14% jump in its most recent quarterly report.

--Ford and the UAW came to agreement on a four-year labor agreement after it looked iffy just a week earlier when several plants rejected it. In the end, workers came to their senses, recognizing, for one, they would be jeopardizing some nice bonuses, such as a $6,000 signing bonus on Nov. 4, along with profit-sharing checks averaging $3,750. As Gary Chaison, a professor of labor relations, told the New York Times, “It’s pretty hard nowadays for a worker to risk not getting a signing bonus and have to explain that to a spouse.”

--California home sales were up 6.7% in September, though the median price, $249,000, was down for a 12th consecutive year-over-year monthly decline. 33.8% of sales were foreclosures, however, and another 18.7% were short sales, in which the bank allows an underwater property to be sold just to get it off the books; both methods necessary if we are to ever clear the inventory and reach a true bottom.

--According to the federal Climate Prediction Center, the drought across the southern Plains is expected to continue through the winter, owing to La Nina, which returned in August and will gradually strengthen. During a typical La Nina (a warming of the water in the Pacific), precipitation is below average in the southern tier of the U.S.

Texas, the epicenter of the drought, experienced its driest 12 months on record from October 2010 through September 2011. It has cost $6.5 billion in economic losses in both Texas and Oklahoma.

--New York City’s unemployment rate remained at 8.7% in September, unchanged from the month before.

--The Global Business Travel Assn. estimates spending in this category will rise 6.9% this year over 2010, but just 4.3% in 2012.

--Social Security recipients will get their first raise in January since 2009, 3.5%. Monthly Social Security payments currently average $1,082, or $13,000 a year, so you’re talking an increase of about $38 a month. Whatever you do, don’t take this and then bet on the Jets.

--The world’s largest gold mine is in eastern Indonesia and the other day gunmen shot and killed three miners in yet another attack on the installation operated by Freeport-McMoran. A labor strike at the mine is complicating things. Strikers are demanding that their pay, which ranges from $2.10 to $3.50 per hour, be increased to $17.50 and higher.

--Kinder Morgan is purchasing El Paso Corp. for $21.1 billion, giving Kinder a pipeline network long enough to circle the Earth more than three times (80,000 miles worth), with the El Paso deal adding pipelines from California to New England that carry about one-fourth of U.S. gas supplies.

[El Paso Corp. CEO Douglas Foshee, who does not plan to stay at the new company, is eligible to receive an exit package of $95 million, $69 million of which comes from stock options granted over his eight-year tenure.]

--A good friend from Wake Forest is one of the top preemie baby doctors in the land and he is currently on his annual teaching trip in Vietnam. So I received a note from him from there and he observed, “Boy, the prices have really gone up here in the last ten years,” Dr. W. then confirming the still mostly anecdotal evidence that U.S. manufacturers who located in Southeast Asia and China will soon be bringing manufacturing back to the States due to skyrocketing labor costs.

--Steve Jobs told his biographer, Walter Isaacson, that he regretted the decision to try alternative therapies for his pancreatic cancer rather than have surgery. Asked why he didn’t agree with his doctors’ suggestion he undergo an operation, Jobs told Isaacson, “I didn’t want my body to be opened…I didn’t want to be violated in that way.”

His wife and friends urged him to get the operation but Jobs waited nine months to do so.

Jobs’ biography is being published Monday and is already a mammoth best-seller.

--This Saturday at Jos. A. Bank, buy one suit at the regular price and get two suits and three silk ties for free; plus six cars, two planes, and the nation of Benin!

--The U.S. Postal Service is looking to add non-traditional revenue sources, which would require congressional approval. I’ll tell you what would really help me out personally, seeing as how I check out two boxes at my local center almost every day. Sell beer. Keep it simple… just domestic, which would fly through Congress far more easily than if foreign, premium brands were offered. And just have a six-pack limit. If this worked, as it inevitably would, then broaden the product mix to include peanuts.

Foreign Affairs

Libya: Comments on the death of dictator Muammar Gaddafi, killed by rebels on Thursday in his hometown of Sirte after French fighter jets went after a convoy containing the leader that was attempting to break out of the siege.

Republican Sen. John McCain: “It is a great day. I think the administration deserves great credit.” McCain had repeatedly pressed the Obama administration to take a more aggressive tack. “Obviously, I had different ideas on the tactical side but…the world is a better place.”

McCain, who was the first American political leader to meet with the rebel leaders during the initial action is convinced they have what it takes to steer the country in the right direction.

Also, as Republican Sen. Marco Rubio commented after traveling to Libya:

“Ultimately, this is about the freedom and liberty of the Libyan people. But let’s give credit where credit is due: it’s the French and British that led on this fight and probably even led on the strike that led to Gaddafi’s capture, or, death. (Obama) did the right things, he just took too long to do it and didn’t do enough of it.”

Hugo Rifkind / London Times

“High up on one of the walls around St. Paul’s Cathedral, where anti-capitalist protesters are camping out next to a quite fortuitously placed branch of the camping shop Blacks, somebody has stuck a sign. It’s a good sign, very well done, in the manner of street markings across the City. ‘Tahrir Square, EC1’ it says. As I hopped past on my bike the other day, I found myself wondering exactly what it was about Tahrir Square, Cairo, that somebody was so keen to emulate.

“Was it, do you think, the brutal sexual assault of a CBS news reporter, which lasted 25 minutes and involved several hundred freedom-loving people? Or was it, maybe, the pitched battles between protesters and newly impoverished tour guides, the latter of whom charged the crowd on camels?   Or maybe it’s the less-remembered, second round of demonstrations in Tahrir Square a few months later, in the new, free Egypt, which were tear-gassed. One of those? Which?....

“I appreciate that this may seem an odd observation to turn up in tandem with Colonel Gaddafi’s corpse. But amid the euphoria maybe it’s worth a reality check on the big picture. Egypt plans parliamentary elections next month and a presidential one early next year. [Ed. unlikely on this latter point…try much later in 2012.] Despite the odd burst of sectarian slaughter, this has to be good news. It’s all happening, though, under the watchful eye of a military regime that throws people in jail for calling it dictatorial. Which seems an odd way, all in all, to prove that you aren’t.

Tunisia is about to hold elections [Ed. this weekend], but it is likely they’ll be won by the Islamist party. Everybody seems surprisingly sanguine about this. Europe has Christian Democrats, the thinking seems to go, and the Middle East has Islamists. Works in Turkey. Which seems reasonable enough, but also a bit…hmmm, sudden. Didn’t Islamism used to be a problem? Wasn’t that why we propped up these dictators in the first place? I’m sure I have a distinct recollection of that being the case. So were we wrong, then? Or are we just not talking about it?....

“If Libya really was so united in wanting Gaddafi gone, who was still supporting him until the bitter end? [Ed. from a purely military standpoint, you have to admit the loyalists put on an amazing fight the last month in particular, on a smaller scale similar to the fall of Berlin.] What’s going to happen to them? On our screens, in our papers, we’ve seen a lot of Libyans these past months. Why, apart from those fruity bodyguards and the occasional Reader’s Wives-style photograph of various Gaddafi spouses, does the country not appear to contain any women? Are we allowed to talk about that?

“In war, we can get away with not doing so. In peace, if that’s what this is, we’re going to have to. Bluntly, what sort of country is Libya going to be?

“History may well group the demonstrations of Tahrir Square with the fall of the Berlin Wall, but we are far from ready to do so now. The Middle East is not Eastern Europe, and a yearning for democracy is not the same thing as having a culture that is going to make it work. I appreciate that that’s bound to sound offensive to some, but if it sounds racist then you haven’t been paying attention. Before the Arab Spring, the Middle East had become a shrill, irrational place; oppressive to women, paranoid about Jews and the West, and entirely inexperienced in the everyday customs that make a free society work.

“Everybody knows this, and for an extended, glorious spring, everybody pretended not to. But it’s not spring any more, and I think we’re kidding ourselves if we think that it’s about to be summer. I reckon they’ve got a pretty nasty winter to get through first.”

Editorial / Washington Post

“What remains (of Libya) is a shattered country piled high with dangerous weapons, lacking legitimate institutions or civil society, and vulnerable to tribal, regional, sectarian and even racial rivalries.

“The good news is that, in the time it took to depose Mr. Gaddafi, the Libyan opposition created a Transitional National Council recognized by 80 governments and prepared an ambitious but reasonable transition plan….

“The threats begin with the more than two dozen rebel militias that participated in the fighting and that now coexist uneasily in Tripoli and other cities. Not all have been integrated into the chain of command under the transitional council; some commanded by Islamists have received their own weapons and funding from the Persian Gulf emirate of Qatar, according to a report by the Wall Street Journal. The often-undisciplined militias have abused and even tortured prisoners and suspected Gaddafi supporters, Human Rights Watch reported. Mr. Gaddafi (was killed) after having been captured. [Ed. look what they did to his body on Friday.]

“Added to this volatile mix are huge stockpiles of weapons, including thousands of surface-to-air missiles and chemical arms, acquired by the Gaddafi regime. Many have been unsecured for weeks, and some have already been smuggled across Libya’s borders….

“The administration should respond positively (to the transitional council that is seeking a more active American role): Libya’s stabilization under a democratic government could help tip the broader wave of change in the Arab Middle East toward those favoring freedom. ‘Would you see the U.S. taking the lead in terms of rebuilding this country and helping?’ a Libyan student asked Ms. Clinton. The answer should be ‘yes.’”

John Podhoretz / New York Post

“Barack Obama didn’t want to become a war president, but – as his triumphalist talk yesterday following the death of Muammar Gaddafi made clear – a war president is what he has become.

“The man who began his presidency with an inaugural address saying, ‘Our security emanates from…the tempering qualities of humility and restraint,’ prematurely declared the Libyan revolution ‘won,’ and gave the United States and NATO credit for having made that victory possible.

“With these remarks, and the ones he made after the assassination of Osama bin Laden, Obama has continued to follow the same path charted by George W. Bush – one of whose key messages during his 2000 campaign was that he would pursue a foreign policy of ‘humility’ and forgo ‘nation building.’

“Like Obama, Bush was promising to do things differently from his predecessor.

“Talk of humility, said Time magazine in 2001, ‘was Bush’s way of criticizing Bill Clinton’s interventionist foreign policy.’

“But Clinton had come to office with absolutely no intention of being an interventionist.

“Indeed, he pulled U.S. forces ignominiously from Somalia during his first year in office after 18 Rangers were massacred in Mogadishu.

“And yet, by 1999, Clinton was unilaterally ordering a relentless 48-day aerial campaign to force Serbia to release Kosovo from its tyranny in 1999….

“Whatever one can say about presidents, love or loathe them, they are men of action, and they lead a country that gives them the tools to act – even when they never thought they would.”

Editorial / Wall Street Journal

“President Obama, Britain’s David Cameron, France’s Nicolas Sarkozy and even the Arab League deserve credit…The Europeans pushed for an intervention to help the rebels, who by March were besieged in western Libya. An initially reluctant White House came around just in time to save Benghazi from a Gaddafi onslaught. The U.S. military led the targeted bombing that turned the tide. Thousands of innocent lives were saved. Gaddafi also wanted to derail the democratic transitions in Tunisia and Egypt, and had he crushed the rebellion he would have been a dangerous rogue.

“There’s a lesson here about America’s global role. U.S. military leadership and stealth bombers, refueling tankers, drones and satellites were indispensable over Libya. But Mr. Obama’s decision to keep a political low profile during the war – to ‘lead from behind’ – hurt the cause. NATO was left without a political general, and at times it wobbled. The U.S. was late in recognizing the Benghazi government, and Mr. Obama’s calculated reticence invited a backlash in Congress over war powers.

“Yet the president was a statesman compared with some GOP pretenders to the Commander-in-Chief’s chair. Michele Bachmann, Jon Huntsman and Newt Gingrich opposed U.S. participation as a high-risk intervention, a claim that now looks strategically mistaken and politically opportunistic. John McCain, a Republican who never wavered on Libya, yesterday offered adult advice for the U.S. now ‘to deepen our support’ for Libya’s coming move from dictatorship to something new….

“Gaddafi’s fate will also echo for Syria’s Bashar Assad and Yemen’s Ali Abdulah Saleh….Gaddafi declared war on his people and ended up dead. Mr. Assad has taken the Gaddafi route in response to Syria’s popular uprising, and Mr. Saleh refuses to step aside and is moving that way.

“The U.S. can’t dictate events, but a superpower – and America remains the world’s sole such power, no matter the current declinist vogue – can still shape events for the better. Libya’s successful revolution is the latest proof that liberating the world of a dictator can serve America’s strategic interests and its moral principles.”

Iran: As I alluded to last time, the key for any retaliatory strike against Tehran for its alleged plot to kill the Saudi Ambassador to the U.S. in Washington could be contained in an upcoming report by the International Atomic Energy Agency (mid-November). For its part, Saudi Arabia’s Prince Turki Al-Faisal said, “Somebody in Iran will have to pay the price. The burden of proof and the amount of evidence in the case is overwhelming and clearly shows official Iranian responsibility for it.”

Iran and Saudi Arabia have every reason to be enemies. Saudi Arabia is the standard bearer of Sunni Islam and the defender of the Muslim world’s status quo, while Iran, leader of the Shiites, views itself as the vanguard of Islamic revolution.

The U.S. has been pressing the IAEA to supply more details on Iran’s suspected nuclear weapons program and if the IAEA talks of Iran pursuing nuclear-armed missiles, you might consider that the beginning of the clock ticking down towards action, a strike of some kind…certainly something more powerful than the sanctions regimes that have largely failed thus far. My guess is any military action takes place in the spring. Again, as I noted last week, Obama can’t risk Iran exploding a device at the height of the campaign next fall.

Separately, Supreme Leader Ayatollah Ali Khamaenei, who hasn’t been getting along with President Mahmoud Ahmadinejad, warned that the post of elected president could one day be scrapped. Parliamentary elections are being held in March and Ahmadinejad’s supporters will be further marginalized.

I commented awhile back, when it appeared Ahmadinejad might not last until the UN General Assembly in September, that hard as it may be to believe, he is preferable to being removed by the clerics with their own hand-picked selection and that is more true than ever (though never discussed in the mainstream media). Khamenei’s not so veiled threat, understand, also has the backing of the Iranian Revolutionary Guard, whose Quds force was responsible for the assassination plot against the Saudi ambassador. Ayatollah Khamenei sees what’s happening in Syria and elsewhere and he’s scared, but this is not Libya or Tunisia. Oh, far from it, sports fans. The United States and Iran are on a collision course.

Iraq / Turkey: Early in the week, we learned that the U.S. was abandoning plans to keep U.S. troops in Iraq past a year-end withdrawal deadline, so it was zero surprise that President Obama then confirmed this on Friday with his announcement that all U.S. troops would be out of the country by Dec. 31. Just 160 active-duty soldiers attached to the U.S. Embassy will remain, not a few thousand trainers as originally hoped by some.

As I noted the other day, it came down to immunity for the trainers. Prime Minister Nouri al-Maliki said he didn’t have the votes in parliament to get it through.

So score one for Shia firebrand Moqtada al-Sadr, who warned Maliki that if all U.S. troops weren’t removed by the deadline, his Mahdi Army would wreak havoc.

Meanwhile, as many as 10,000 Turkish forces may now be involved in an offensive against Kurdish militants in northern Iraq and southeastern Turkey; this after the PKK (Kurdistan Workers’ Party) killed 24 Turkish soldiers earlier in the week. At least 1,000 Turks crossed into Iraq, where the PKK has many of its sanctuaries. Turkey launched airstrikes on the area as well. The leadership in Ankara has vowed revenge after one of the worst losses of life suffered by the army since the insurgency began in 1984. More than 40,000 people have died on both sides in the conflict and Prime Minister Erdogan is under immense pressure to appear decisive.

Supposedly, the leader of the PKK’s military wing these days is a Syrian, both Syria and Iran also having their own problems with Kurdish minorities.

Syria: At least 41 were killed on Monday alone, 27 in Homs, according to the Syrian Observatory for Human Rights, most civilians, as the unrest edged closer to an all-out war. Army defectors appear to be organizing rapidly and in one case on Monday, detonated a bomb by remote control as an army vehicle passed, killing four soldiers. Last Saturday, government troops killed a leading activist who had been organizing peaceful demonstrations.

Israel: Sgt. First Class Gilad Shalit was released by Hamas after being held by the terrorists for five years. In return more than 1,000 Palestinian prisoners are being released, the first 400+ this week in a highly-choreographed series of steps.

I have long said Israeli Prime Minister Benjamin Netanyahu is the smartest man in the room, frankly, the smartest leader in the world.

But Netanyahu also has a history of being incredibly sleazy and slimy. This, friends, was simply a politically expedient move by a man desperately trying to hold onto his coalition, knowing that one poll after another showed the Israeli people, owing in no small part to a massive P.R. campaign by Shalit’s parents over the past five years, favored the release, even in this format.

Israel will pay a heavy price for compromising with Hamas. This was one stupid move.

Various opinions…

Editorial / New York Times

“We share the joy of Israelis over the release of (Shalit)…We will leave it to the Israeli people to debate whether the deal – which includes the release of more than 1,000 Palestinian prisoners – will make their country safer or lead to more violence or more abductions of Israeli soldiers or other citizens….

“Mr. Netanyahu twisted himself in an ideological knot to get this deal. Only five months ago, he wanted to cut off tax remittances to the Palestinian Authority and urged the United States to halt aid because Mr. Abbas tried to forge a unity government with Hamas, which controls Gaza.

“One has to ask: If Mr. Netanyahu can negotiate with Hamas – which shoots rockets at Israel, refuses to recognize Israel’s existence and, on Tuesday, vowed to take even more hostages – why won’t he negotiate seriously with the Palestinian Authority, which Israel relies on to help keep the peace in the West Bank?

“Mr. Netanyahu’s backers claim that his coalition is so fragile that he can’t make the compromises needed to help revive peace negotiations. But he was strong enough to go against the grief-stricken families of those Israelis killed by the Palestinian prisoners he just freed. ‘I know that the price is very heavy for you,’ he wrote to them. Why can’t he make a similarly impassioned appeal for a settlement freeze for the sake of Israel’s security?”

Editorial / Wall Street Journal

“The Jewish state’s repeated willingness to pay an exorbitant price for its citizens is a testament to its national and religious values, which stress the obligation to redeem captives….

“But virtues often have their defects, and the line between moral values and moral hazard can be a thin one. The negotiations to return Sgt. Shalit dragged on as long as they did largely because Hamas had reason to believe it could drive the hardest possible bargain. The same logic explains why Israelis will continue to be tempting targets for hostage taking.

“Sooner or later, Israel will learn the name of its next Gilad Shalit. Sooner or later, too, it will learn that the better course is to give its enemies reasons to think twice before taking hostages in the first place.”

Robert Mnookin / Wall Street Journal

“It’s hard to think straight when negotiating with an adversary you claim is evil, and Israel proved it last week. The usual problem is a refusal to negotiate at all. Here the Israelis made what seems to be a crazy deal….

“Israel has always claimed it will not negotiate with what it considers terrorist organizations. Chief among those groups is Hamas, which has repeatedly expressed its commitment to the destruction of the Jewish state….Israel may claim that no one in the government ever met face-to-face with representatives of Hamas, and it is possible that the two adversaries worked out the details by exchanging offers and counteroffers through Egyptian intermediaries. But this fig leaf hardly hides the fact that a deal was negotiated….

“(One) Israeli soldier has regained his freedom. But to free 1,000 prisoners in exchange? Israeli parents may on some unthinking level feel better about their government’s concern for each individual soldier. But the deal jeopardizes the freedom and safety of many Israelis in the future….

“Gilad Shalit is a known individual: what psychologists would call an ‘identifiable being.’ His picture has been plastered throughout Israel. The Israeli press has written hundreds of articles speculating about his well-being. By contrast, the Israelis who are endangered by this deal are mere statistics – an unidentifiable group of people who may die in the future. Psychologists call these ‘statistical lives.’…

“While no expense will be spared to save an identifiable miner trapped in a coal mine, there is often great political reluctance to spend an equal amount on mine safety. Such a response is entirely human, but it is not rational.”

Last week I quoted an Israeli poll showing 69-26 support for Netanyahu’s move. Another one that came out afterwards shows support by a 79-14 margin. I have some readers in Israel. Enjoy the good feeling while you can. As the first 477 Palestinians were being released, there were cries of “We want a new Gilad!” A Gaza woman just freed, a would-be suicide bomber, told cheering schoolchildren in the Gaza Strip the day after her release, “I hope you will walk the same path we took and God willing, we will see some of you as martyrs.” [Jerusalem Post]

Lastly, the Palestinian bid for UN membership is expected to come to a head in about three weeks, when Security Council ambassadors meet to decide their response, possibly Nov. 11. Palestinian President Abbas needs nine of 15 votes of support, which would then oblige the U.S. to use its veto. So it’s nine votes, no veto. Evidently, it is currently 8 ‘for,’ 6 ‘against,’ with everyone waiting on Bosnia. 

Now this is classic. Bosnia has a collective presidency – Muslim, Serb and Croat – and they disagree over which way to vote.

Lebanon: A Lebanese daily, Al-Joumhouria, reported on Wednesday that Hizbullah “is in a state of alert and it anticipates an Israeli attack on Lebanon at any moment,” security sources told the paper. Last spring, Israel’s Haaretz newspaper, citing documents released by WikiLeaks, said Israel expected the next war to last two months during which Hizbullah would likely fire between 24,000 to 36,000 missiles into Israel, about 6,000 aimed at Tel Aviv. According to Al-Joumhouria’s sources, “Israel finds in the deteriorating situation in Syria and other Arab countries an opportunity to wage its third war against Lebanon as counties in the region are occupied with resolving domestic affairs. ‘Israel’s military is preparing a sudden war to protect Israel from Hizbullah’s missiles, which threaten the heart of Israel and its vital institutions,’ the paper quoted a source as saying.” [Daily Star]

Hizbullah supposedly has recruited thousands of suicide bombers since the last war with Israel in 2006.

Pakistan: Secretary of State Hillary Clinton warned Pakistan’s leadership that if they don’t crack down on insurgents staging attacks from Pakistan into Afghanistan, Pakistan will pay a “very big price.” A senior official said the message being conveyed to Pakistan is: “You need to deal with it or we will.”

But this is disturbing. On Thursday the Times of India reported that the head of Pakistan’s army, Gen. Ashfaq Kayani, reportedly offered a warning that the United States better carefully think through the consequences of sending any troops into Pakistan. Kayani said this in a closed-door meeting with a legislative defense committee. While Kayani didn’t say specifically what Pakistan would do in response, the implication was clear. Pakistan has nukes. What would Pakistan target? U.S. personnel in Afghanistan. Or India, which continues to grow closer to Afghanistan. A former CIA official and South Asia specialist, Bruce Riedel, wrote this week that “The generals who run Pakistan have not abandoned their obsession with challenging India.”

Afghanistan: Sec. Clinton, on her trip to Kabul to visit with President Karzai, urged him to restart negotiations with the Taliban after the assassination of former President Rabbani forced Karzai to pull back.

China / Taiwan: Taiwan’s President Ma said his country’s aim is to sign a peace agreement with the mainland within 10 years, provided there is a high level of consensus on the island and sufficient trust on both sides of the Taiwan Strait. Ma made this statement three months before the Jan. 14 presidential election and it could provide ammunition to the opposition pro-independence camp. When the opposition then blasted the idea, more than Ma expected, by week’s end he backtracked and said “We will consider a referendum for the peace treaty” as opposed to simple parliamentary approval.

Meanwhile, China is undergoing some national soul-searching over a Kitty Genovese type moment (the 1964 murder of Genovese in Queens, New York, when neighbors did nothing to help) as a two-year-old girl was struck by a vehicle in a hit-and-run accident, and then as she lay critically injured, some 18 people went by and offered zero assistance until a female street cleaner finally picked up the girl and called for help, with the mother finally tracked down. The girl died on Friday in the hospital.

The video of those who walked or rode by, some staring at the bleeding body, is unbelievably sad and sick. A second van approached and drove over the girl’s legs. A motorcyclist applies the brakes and clearly looks at the girl, lying in the pool of blood, and drives off. It took seven minutes before the street cleaner discovered the girl.

The drivers of both vehicles were found and arrested. The bystanders were also tracked down and claimed they didn’t see the victim. [She had been outside playing with her brother when she ran out in the traffic.]

The street cleaner was given a $3,800 award by the government. She said she only did what was right and did not think she deserved it. However, she also believed people would accuse her of seeking fame if she rejected the reward, so she planned to donate some of it to help with the girl’s expenses (the girl then dying three days later).

Thailand: The new government of Prime Minister Yingluck Shinawatra is under immense pressure as rising flood waters threaten Bangkok, which would lead to a huge economic catastrophe, on top of the already significant impact as many industrial parks are now underwater. Yingluck took the controversial step on Thursday of opening floodgates to speed the flow of water to the sea but this also means parts of the capital could be overrun. Water is already knee-deep in outlying areas.

Yingluck, who had zero political experience before being elected three months ago, totally botched the early handling of the flooding and when it comes to information going out to the people, it’s been a disaster.

Thus far, at least 10% of the rice fields have been damaged or destroyed, while companies from Apple to Toyota face supply disruptions similar to those from the March earthquake that crippled Japan. Western Digital Corp., the world’s largest maker of hard-disk drives, said production won’t return to normal for months.

France:  The Socialist Party selected Francois Hollande to be its standard-bearer in next year’s presidential election, Hollande winning a convincing runoff against Martine Aubry. The latest poll in France shows 63% disapprove of President Sarkozy’s performance.

Spain: The Basque separatist group Eta said it has called for a “definitive cessation” to its decades-long campaign of bombings and shootings that has killed more than 800 in over 40 years of operation. Spain’s government said the move was “a victory for democracy, law and reason.” I’d say we’ve heard this before from Eta.

Japan: The government anticipates spending a minimum of $13 billion to rehabilitate all of the territory exposed to radioactive contaminants from the disabled Fukushima Daiichi nuclear complex, according to Reuters. The final cost is bound to be much greater.

Random Musings

--There is still mass confusion over the Republican primary schedule, thanks to Florida’s decision to move their date up to Jan. 31. South Carolina is now Jan. 21. Nevada’s caucuses Jan. 14 and Iowa announced this week that its caucuses would be Jan. 3. So that leaves New Hampshire.

The problem is the state has certain laws mandating that New Hampshire be the first primary, but that it also be held seven days ahead of the next one or caucuses. New Hampshire could thus hold the primary on Jan. 7, but this doesn’t allow enough time after Iowa. So New Hampshire could move to December, like Dec. 3 and 10 are being thought of.

The easy step would be for Nevada to move to Jan. 17 and allow New Hampshire to hold its primary Jan. 10, but Nevada, like Florida before it, is playing the role of a-hole. On the other hand, New Hampshire should just hold it Jan. 10, retain some goodwill, and be done with it.

--In a new AP-GfK poll, Mitt Romney was the choice of 30% of Republicans, with Herman Cain next at 26% and Rick Perry at just 13%. Among all adults surveyed, half said President Obama should not be re-elected, while 46% said he should be. In hypothetical head-to-head matchups, Obama edges Romney, 48-45, while the president takes Cain 49-43, and Perry 51-42. [Obama has an overall job approval rating in the poll of 46%.]

Significantly, among all adults, Romney’s favorability rating has risen ten points since August to 49%. 

The above polling data was taken in the days before this week’s Nevada GOP debate.

John Podhoretz / New York Post

“At the moment about half an hour into last night’s Republican candidate kerfuffle when it looked (seriously) like Mitt Romney and Rick Perry might haul off and start busting each other in the bazoo, it became clear that the Emmy for Best New Television Drama should go to the weekly series called ‘The Republican Presidential Debates.’….

“Those who are still in mourning for the series ‘Lost’ have finally found their new obsession: The story of eight mysterious strangers trapped in an alternate reality trying to figure out how to escape an endless series of convention centers and cable channels by finally getting transported to the snows of Iowa and New Hampshire for judgment by the most mysterious force of all: The Republican primary voter….

“As for Herman Cain, the first 20 minutes of the debate was taken up with the glaring difficulties with his 9-9-9 tax plan, which he himself could not defend. Later he seemed unaware of or unclear about something he had said earlier in the day about prisoner swaps.

“Cain’s moment is fast coming to an end. Perry got himself a second wind – a faint one.

“And Mitt Romney is still the name above the title. The next debate isn’t until November. I’m speaking without irony as a television watcher when I say I’m very, very sad about that.”

Economist Arthur B. Laffer / Wall Street Journal…on Herman Cain’s 9-9-9.

“The whole purpose of a flat tax, a la 9-9-9, is to lower marginal tax rates and simplify the tax code. With lower marginal tax rates (and boy will marginal tax rates be lower with the 9-9-9 plan), both the demand for and the supply of labor and capital will increase. Output will soar, as will jobs. Tax revenues will also increase enormously – not because tax rates have increased, but because marginal tax rates have decreased.

“By making the tax code a lot simpler, we’d allow individuals and businesses to spend a lot less on maintaining tax records; filing taxes; hiring lawyers, accountants and tax-deferral experts; and lobbying Congress….

“Still, a number of my fellow economists don’t like the retail sales component of the 9-9-9 plan. They argue that, once in place, the retail rate could be raised to the moon. They are correct, but what they miss is that any tax could be instituted in the future at a higher rate. If I could figure a way to stop future Congresses from ever raising taxes I’d do it every day of the week and twice on Sunday. Until then, let’s not make the perfect the enemy of the good.”

[On Friday, Cain began tweaking his plan to exempt those below the poverty level from the 9% income tax, or 9-0-9. I was so frustrated watching Cain during the Nevada debate because he didn’t come close to spelling out the positives. It’s clear from the polls the people want the system blown up. He has a winning issue, Cain just needs a good adviser to show him how to sell it.]

--Speaking of the Nevada debate, where Rick Santorum lambasted Mitt Romney for his health-care record as Massachusetts governor, the Wall Street Journal opined:

“(Mr. Romney) did previously promote his plan as a model until Democrats took his advice. ‘How much of our health-care plan applies to other states? A lot,’ he wrote in these pages in 2006. Mr. Romney repeated those sentiments in the hardcover version of his book ‘No Apology,’ though he cut them from the paperback.

“But the larger and more important point is that Mr. Romney continues to defend his Massachusetts plan as a success for precisely the same reasons that President Obama says it should be imposed on all states. In reality, the Massachusetts plan is not a success and its problems are the best refutation of the duo’s arguments.

“Here’s Mr. Romney Tuesday night: ‘What we do is rely on private insurers, and people – 93% of our people who are already insured, nothing changed. For the people who didn’t have insurance, they get private insurance, not government insurance.’

“Here’s Mr. Obama in his health-care speech to Congress in 2009: ‘If you are among the hundreds of millions of Americans who already have health insurance through your job, Medicare, Medicaid, or the VA, nothing in this plan will require you or your employer to change the coverage or the doctor you have.’ And the uninsured, Mr. Obama continued, would simply receive ‘affordable choices’ from ‘private insurers.’

“The trouble with the Obama-Romney definition of ‘affordable’ is that in practice it means subsidies, and once the government provides ‘free’ health care, the private sector and entitlement state are fungible. Government inevitably dictates choices that used to be left to markets, as Mr. Santorum and Newt Gingrich pointed out. And, sure enough, due to the subsidy gusher that Mr. Romney opened, Massachusetts is now moving to impose price controls on private insurance and tightly regulate the type of care patients can receive….

“Mr. Romney has every right to cling to theories that were flawed in conception and have proven false in practice, though the rest of the GOP field has the responsibility to challenge his canned answers. The mental contortions that his health-care record requires need to be dissected – the way Mr. Obama will do if Mr. Romney is the nominee – to give GOP voters a chance to weigh the political liabilities that his candidacy might pose in 2012….

“Mr. Obama’s unbridled expansion of government means that the election will present the electorate with the largest philosophical choice since 1980: To continue the trend toward a larger and growing government and the ever-higher taxes to pay for it, or to modernize the 20th century’s broken government institutions. Republicans do not want to wake up in 2012 to discover that they have nominated someone who is unprepared, and maybe unwilling, to lead the reform of government that America needs.”

--Bye-bye Michele Bachmann as her New Hampshire staff quit on Friday, citing frustration with her lack of commitment to campaigning there.

--In a CNN/Opinion Research poll just 42% of Democrats said they were either “extremely” or “very” enthusiastic about the 2012 vote. In the spring and summer, the same CNN surveys had 56% and 55% of Democrats, respectively, in the “extremely” or “very” enthusiastic categories. Not a good sign for the donkeys.

Contrast that with Republicans, who in the same two categories registered 64% in the spring, and then an equal 64% this month. So the enthusiasm gap between Republicans and Democrats went from 8 points in the spring to 22 points today.

--Mort Zuckerman, publisher of U.S. News and World Report, told the Wall Street Journal’s James Freeman of his experience dealing with President Ronald Reagan after one of U.S. News’ correspondents, Nicholas Daniloff, was seized without warning by the KGB.

“I worked in the White House for the next four weeks virtually every day and through that I met Reagan,” says Mr. Zuckerman. Reagan secured Mr. Daniloff’s release in a swap that included a Soviet spy held in the U.S.

“Reagan surprised me,” says Mr. Zuckerman. “He got the point of every argument…He was very decisive. And everybody loved working for him. They followed his lead because they really respected his decisiveness and his instincts.

“I was not a Republican and I was not an admirer of his before I knew him, and you know, Harry Truman had a wonderful definition for the presidency. He said the president has to be someone who can persuade the American people to do what they don’t want to do and to like it. And that’s what you have to do. Somebody like Reagan had that authority. He was liked so much and he had a kind of moral authority. That’s what this president (Obama) has lost.

“Democracy does not work without the right leadership, and you can’t play politics. The country has got to come to the conclusion at some point that what you’re doing is not just because of an ideology or politics but for the interests of the country.”

--Robert Samuelson / Washington Post

“A specter haunts America: downward mobility. Every generation, we believe, should live better than its predecessor. By and large, Americans still embrace that promise. A Pew survey earlier this year found that 48% of respondents felt that their children’s living standards would exceed their own. Although that’s down from 61% in 2002, it’s on a par with the mid-1990s. But these expectations could be dashed. For young Americans, the future could be dimmer….

“In the Pew poll, 54% of respondents with a high-school diploma or less felt their children would do better; only 35% of graduate school alums agreed. ‘A kind of depression has set in,’ writes Washington Post columnist Richard Cohen. ‘We’ve lost our mojo, our groove.’

“It can be argued that all this glumness repeats a historical error: projecting the present onto the future. Just because the economy is rotten today doesn’t mean that it will always be. After World War II, the Nobel Prize-winning economist Robert Fogel has recalled, there was widespread ‘alarm about massive unemployment.’ Eleven million veterans and 9 million defense industry workers had to be re-employed. People feared a new Depression. It didn’t happen, because pent-up demand for homes, cars and appliances fueled a hiring boom.

“Unfortunately, this caveat is only half relevant now. Our future would certainly be brighter if the economy resumed strong growth, but that wouldn’t automatically ensure higher living standards. A society generates those through productivity – increases in efficiency, technology or business organization that lower costs or enable firms to pay higher wages. Without higher productivity, broad living standards won’t rise. But even with it, the young may not enjoy gains.

“The explanation is that productivity improvements have already been committed to demographic trends we can’t alter (aging) or problems we haven’t addressed (runaway health costs, deteriorating infrastructure). Future productivity and income gains will be diverted to these uses: higher taxes to pay for an older population; health spending; and taxes and fees to repair roads, schools and water systems.

“It’s already happening. ‘A decade of health care cost growth has wiped out real income gains for an average U.S. family,’ report two Rand Corp. researchers in the journal Health Affairs….

“Meanwhile, spendable incomes – what people consider their living standards – stagnate. The squeeze will continue. In 1990, there were 32 million Americans 65 and over; by 2040, that’s reckoned at 80 million. Rising costs for Social Security and Medicare have created a new political dynamic: If benefits for the elderly aren’t cut, burdens on the young will go up. Decaying infrastructure poses similar choices. Either pay for repairs or tolerate substandard roads and dilapidated schools.

“Our children’s futures have been heavily mortgaged….If today’s weak recovery persists, the outlook darkens….

“America is a competitive society. It’s not guaranteed that children achieve their parents’ relative economic status: The children of parents in the richest 20% won’t automatically stay in the richest 20%. Some children advance; some fall. But if overall incomes are rising, even those who don’t advance relatively often have higher absolute incomes than their parents. Studies by the Pew Economic Mobility Project confirm this. Two-thirds of Americans have higher incomes than their parents…

“Generational gains tempered individual setbacks. We may now lose this comforting cushion. Our leaders might try to avoid that by boosting economic growth, controlling health spending and trimming benefits for the elderly. But we aren’t sure how to do the first and lack the political will to do the second and third. The future is never entirely predictable, but downward mobility is not just a scary sound bite. It’s a real possibility.”

--Michael Goodwin / New York Post…on the Occupy Wall Street movement:

“Each day, about 3.7 million people go to work in New York City. For the last month, fewer than 500 people have been sleeping in a park near Wall Street so they can curse the economy that produces all those jobs for all those people.

“Guess which group is getting expressions of sympathy and even solidarity from the president to the mayor?

“The demonstrators include open anti-Semites, homeless people and anarchists, along with students, trust-fund babies and the terminally bored. They are supported by municipal unions and other leftist groups, whose agendas run the gamut from higher taxes to higher taxes….

“When times are tough, the tough don’t quit work so they can complain. And the people who really want a job aren’t playing drums in a park, getting stoned and taunting cops.

“Too many protesters, with their gauzy demands for an end to capitalism and more free stuff, feel entitled to be supported by others. If they ruled the world, we’d all be living in mud huts and begging for handouts.

“And yet, as befits a culture that lacks the courage to fight for its own values, this tiniest faction is taking Gotham hostage. They are wreaking havoc on local businesses and residents while breaking numerous laws, including the open use of drugs. Civic appeasement has emboldened them.”

--I thought my friend Liz S. had a great point in talking about the OWS crowd. 

“This is the generation that received medals for participating because everyone is a winner!

“Well guess what? They’re finding out not everyone is a winner.

“It’s this non-stop sense of entitlement that drives some of us crazy.”

--The Washington Post reports that the tale Sen. Marco Rubio tells of his family’s history is embellished, as a review of documents “show that Rubio’s parents came to the United States and were admitted for permanent residence more than 2 ½ years before (Fidel) Castro’s forces overthrew the Cuban government and took power on New Year’s Day 1959.”

Rubio has continually said he was the “son of exiles,” Cuban Americans forced off the island after “a thug” took power.

In response to the new information, Rubio said his accounts have been based on family lore. “I’m going off the oral history of my family,” he told the Post. “All of these documents and passports are not things that I carried around with me.”

Bottom line, there are numerous times that Rubio dramatically stretched the truth in his accounts of his family’s life that went unchallenged, until now.

--In catching up on some reading, I finally got around to a piece in the September issue of Smithsonian by Lynnell Hancock on Finland’s superior, No. 1 in the world educational system. Among the many surprising bits I picked up:

“There are no mandated standardized tests in Finland, apart from one exam at the end of students’ senior year in high school. There are no rankings, no comparisons or competition between students, schools or regions. Finland’s schools are publicly funded. The people in the government agencies running them, from national officials to local authorities, are educators, not business people, military leaders or career politicians. Every school has the same national goals and draws from the same pool of university-trained educators. The result is that a Finnish child has a good shot at getting the same quality education no matter whether he or she lives in a rural village or a university town. The differences between weakest and strongest students are the smallest in the world….

“Ninety-three percent of Finns graduate from academic or vocational high schools, 17.5 percentage points higher than the United States, and 66 percent go on to higher education, the highest rate in the European Union. Yet Finland spends about 30 percent less per student than the United States….

“It’s almost unheard of for a child to show up hungry or homeless. Finland provides three years of maternity leave and subsidized day care to parents, and preschool for all 5-year-olds, where the emphasis is on play and socializing. In addition, the state subsidizes parents, paying them around 150 euros per month for every child until he or she turns 17….

“Finnish educators have a hard time understanding the United States’ fascination with standardized tests. ‘Americans like all these bars and graphs and colored charts,’ (school principal Kari) Louhivuori teased… ‘It’s nonsense. We know much more about the children than these tests can tell us.’”

--In a study of 360,000 cellphone users in Denmark, investigators found no increased risk of brain tumors with long-term use. However, the study focused on cellphone subscriptions, not actual use…so it does not settle the debate about cellphone safety. As reported by Tara Parker-Pope of the New York Times, “A small to moderate increase in risk of cancer among heavy users of cellphones for 10 to 15 years or longer still ‘cannot be ruled out,’ the investigators wrote.”

--Divers found the carcasses of about 2,000 sharks, slaughtered for their fins, in a Pacific Ocean marine sanctuary 300 miles off the coast of Colombia. The discovery was made when divers saw 10 fishing trawlers – flying the Costa Rican flag – entering the zone illegally. When the divers dove, they began finding a large number of sharks without their fins, none of them alive. Yes, it was about shark fin soup and appetites in Asia. Man plummets further on the All-Species List.

--But this just in… “A great white shark has killed an American diver in the second fatal shark attack off Western Australia in 12 days.

“Police Sgt. Gerry Cassidy says the man was below water Saturday when a witness on the dive boat ‘saw a large amount of bubbles.’ The body soon surfaced with fatal injuries.”

The sharks have had enough. It’s payback time.
---

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

God bless America.
---

Gold closed at $1642
Oil, $87.62

Returns for the week 10/17-10/24

Dow Jones +1.4% [11808]
S&P 500 +1.1% [1238]
S&P MidCap +0.6%
Russell 2000 -0.01
Nasdaq -1.1% [2637]

Returns for the period 1/1/11-10/24/11

Dow Jones +2.0%
S&P 500 -1.5%
S&P MidCap -5.1%
Russell 2000 -9.1%
Nasdaq -0.6%

Bulls 35.8
Bears 41.0 [Source: Chartcraft /Investors Intelligence]

Have a great week. I appreciate your support.

Brian Trumbore



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-10/22/2011-      
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Week in Review

10/22/2011

For the week 10/17-10/21

[Posted 7:00 AM ET]

Europe, Washington and Wall Street

The European Union was to meet this weekend to come up with a solution to the euro debt crisis that would then be submitted for final approval to the G20 summit on Nov. 3-4, but the politics between Germany and France, in particular, are such that German Chancellor Angela Merkel and French President Nicolas Sarkozy realized they couldn’t agree on anything by Sunday’s summit conclusion, so they said a second summit would be held by next Wednesday evening at the latest.

But to give you as good a sense as any as to how rapidly the situation in Europe is imploding in terms of the economy, one need look no further than new forecasts from the European Bank for Reconstruction and Development, which took a look at its July outlook for growth for Central and Eastern Europe in 2012 and took it down from 3.7% to 1.6%...in just three months! This is staggering, and the numbers are far less than the IMF’s forecast in September, to give you another example of how quickly the region is deteriorating.

Slovakia, for example, was pegged for 4.1% growth by the EBRD in 2012 and now the bank is calling for 1.1%. Romania was expected to grow by 3.8% and is now estimated to also have just 1.1% growth next year.

These aren’t the PIIGS. These were the countries that had already gone through their wrenching changes to join the EU in the first place, but without a Western Europe solution, you have a vivid projection of the spillover into the rest of the area, let alone the U.S. and Asia. Turkey is another, with the EBRD slashing its forecast for GDP in 2012 from 4% to 2%.

But it all starts with Greece. You saw the awful pictures, the riots, leading up to another austerity vote in the parliament. Prime Minister Papandreou begged his people to accept a further round of tax increases and fresh cuts to pensions and wages, along with plans to dismiss 30,000 state workers, or Greece wouldn’t receive a needed 8 billion euro slug from the Troika (IMF, European Central Bank, and European Commission) as part of the first Greek bailout. Without the 8 billion, Greece won’t have funds to pay state workers. [Actually, they were supposed to have gone broke by Oct. 15, remember?]

The thing is, Greece is still headed to inevitable default but Germany, France and the others keep delaying the day of reckoning which only makes matters worse. It was once thought Greece needed about 110 billion euro in bailout funds, through 2020, to give it time to finally get its house in order. Yet the economy is imploding so quickly, its needs are now thought to be as high as, get this, 440 billion by one estimate! That figure, of course, matches the initial European Financial Stability Fund, which I’ve been writing all year was initially thought to be enough to backstop Greece, Ireland and Portugal. I’ve also written about a needed second fund of 500 billion euro and sure enough that was the talk by week’s end (the European Stability Mechanism, which would replace the EFSF in mid-2013). The original theory behind the second fund was to be big enough to backstop Italy and Spain, if necessary, with both funds also being a source of capital for the big banks as needed. The EFSF wasn’t technically to start until mid-2012, but now there is talk of combining the two as rapidly as possible, though it’s my understanding the 17 parliaments haven’t approved the ESM, certainly Germany’s parliament is required to approve it, and so you’d have that mess all over again.

I don’t even know what to write anymore, frankly. I want to get everything down, as it happens each week to lay out the history and give a little opinion, but as I started this section, for the first time during the past 18 months, I really don’t have a clue what the heck is happening. I mean consider one factor about the 440 billion EFSF. Recall that after Slovakia’s parliament became the last to vote to approve the fund, Slovakia was guaranteeing 4 billion of it, the guarantees being proportional to the size of each of the 17 eurozone nations’ economies. 

Well what about Spain and Italy? 200 billion or so is coming from them, meaning troubled countries are lending to each other. It’s why some of us said way back this whole crisis and the supposed solution was nothing more than history’s greatest Ponzi scheme.

So whatever euro leaders come up with the next few days, assuming they do come up with something because the alternative is a global Crash highlighted by old-fashioned runs on the bank that will make Athens’ demonstrations look like a church carnival, any solution must be big enough to, at a minimum, guarantee the bonds of the likes of Italy and Spain, let alone the other PIIGS.

And it has to offer a solution on recapitalizing the banks, which has become the stickiest issue. The EU said only 90 billion was needed to shore up the continent’s big institutions, while others say it is closer to 200 billion, and Goldman Sachs says 300 billion.

These sums never stop amazing. Where is it going to come from? The banks don’t want to have to raise more capital because it reduces their profits and leaves them open to government control. Small business doesn’t want the banks to have to raise more capital because then there will be nothing left to lend to them and thus you have further stagnation (credit availability already being near nil). France doesn’t want to have to use any of its government funds to shore up its banks because then it is guaranteed to lose its Aaa-rating, as Moody’s warned Monday would be the case.

“The deterioration in debt metrics and the potential for further contingent liabilities to emerge are exerting pressure on the stable outlook of the government’s Aaa debt rating,” Moody’s said in a statement. 

If France, or Germany, lose their triple-A status, then the EFSF can’t raise rescue money (it is supposed to through the sale of bonds) at low interest rates, meaning a French downgrade could lead to a collapse of the entire rescue system. [Spain, by the way, suffered another wave of credit downgrades from the three leading agencies, including S&P and Fitch. Spain’s GDP forecast for 2012 has been slashed to 1% from 1.8% by Moody’s.]

And I haven’t even mentioned the ‘haircuts’ Greek debt holders are going to have to take as part of its restructuring. Originally slated at 21% in July, now the talk is 50% to 60%, which kills the banks’ capital ratios further, they being the prime holders of the scrip.

Want more bad news? Greece’s privatization program was supposed to bring in 66 billion euro that was to be used to pay down debt. Now the estimate is it will raise no more than 46 billion. I’d be surprised if they raise 30 billion.

But wait…there’s more! We never talk about little piggy Portugal, but Richard Barley of the Wall Street Journal had a piece this week on the country that is the leader in cork and the economy here is now expected to shrink 5% in 2011-2012, with 2012 seeing a contraction of 2.8%. The government is at least being as transparent as possible, but consider this. In August, 70% of Portugal’s exports went to the EU and 24% to Spain, which has no growth. Citigroup says Portugal will contract 5.7% next year!

As for non-euro Britain, Bank of England Gov. Sir Mervyn King warned that as the austerity program hits in earnest, wages in 2011 would be less than in 2005 (a further dampening of his January expectation they’d be flat over this time period), the worst period for living standards in the U.K. since the 1920s. In Britain, the main culprit these days is utility increases, with gas and electric bills going up 13% and 7%, respectively, at a time when wages are falling.

[The Financial Times has a piece Friday night on how even the Queen is having major problems with the utility increases. After all, the bill for gas and electric is expected to account for 8.2% of her frozen income and she has four palaces and a draughty castle.]

But before we head across the pond to the U.S., a word on China. GDP for the third quarter came in at 9.1% vs. expectations of 9.3%. The trend since the fourth quarter of last year is…9.8%, 9.7%, 9.5% and 9.1%. Troubling to some, but still more than solid.

In fact the consensus GDP forecast for China next year is 8.6%, comfortably ahead of the accepted 8% figure that assures a sufficient level of job creation to keep up with urban migration. So while some continue to call for a hard landing here, I’m staying in the soft landing camp.

Other positive figures this week, industrial production rose 13.8% in September vs. a 13.5% rise in August, and fixed asset investment rose 24.9% for the first nine months of the year, better than expected.  

But China’s key stock market barometer hit its lowest level since March 2009 and the price/earnings multiple (trailing) here is 10.8, the lowest in memory. [If my own large holding in Fujian traded at a 10 multiple, I wouldn’t be writing this column anymore…just sayin’. While I’m on the topic, I exchanged notes with the CFO this week, knowing its quiet time. Like all shareholders I’m extremely frustrated, but I pretty much got the answer I was looking for.]

Two other items of import when trying to read the tea leaves in China and whether there will be a hard or soft landing. China Southern Airlines, the largest domestic carrier, cut its 2012 outlook for passenger demand from up 13% to up 8%. Not cause for concern, but something that needs monitoring.

And a major negative, China has suspended work on some 10,000 kilometers of rail projects due to financing issues. Many of the six million migrant workers employed haven’t been paid in months as state banks have tightened lending. This definitely requires attention.

Washington and Wall Street

Stocks finished mixed with the Dow Jones rising a fourth straight week but Nasdaq declining as reported earnings were generally positive. More on this later. Sentiment at week’s end bordered on absurd, though, as traders took the news that the EU was extending a deadline to resolve the debt crisis as a positive because it meant they wouldn’t have to wait out a potential disappointment Sunday night and deal with a down Monday, ergo, they went into the weekend bullish because they wouldn’t have to deal with any negativity until Tuesday or Wednesday, by this logic; as if whatever the EU comes up with is anywhere near being a long-term solution in the first place.

More importantly for the health of the U.S., we learned the federal government spent a record $3.6 trillion in fiscal 2011 (ending Sept. 30). Isn’t that special? Congratulations to all of us for electing such fine representatives, from the president on down, and congratulations for allowing the unelected power brokers and lobbyists to have their way with us as well!

You know, I was listening to CNBC’s Jim Cramer spout off on Friday about Kelly King, CEO of BB&T, and how great the guy is and how you need to listen to one of his bank’s conference calls where Mr. King (who seems to be a decent sort) talks about how great America is…blah blah blah.

I’m tired of this inane chest-thumping. We are a mess, for the handful of you out there who haven’t noticed, and to just say stuff like “America’s best days are in front of us” is incredibly stupid.

Do you want to see the future of our country? Aside from the staggering debt and entitlement obligations we’ve given ourselves, just look at our kids…the supposed future. 95% are walking around like zombies glued to their FREAKIN’ SMARTPHONES THAT WILL DO NOTHING BUT MAKE THEM DUMBER!!!

So don’t give me this America is great garbage. I only want to deal with the facts. I only want to listen to Republicans like Congressman Paul Ryan or Senator Tom Coburn. They may not be the life of the party if you’re entertaining, but in case you haven’t noticed, the party is over!

The country is so dysfunctional that we’ve stupidly given a protest movement, Occupy Wall Street, a platform when it’s increasingly looking like no more than a bunch of Greek anarchists and communists.

I gave myself the ‘wait 24 hours’ notice when it came to discussing the kinds of kids that are occupying lower Manhattan and while I admit I haven’t been there personally, and won’t have a chance to get there for a few weeks, I’ve seen all the local New York area broadcasts and read the accounts and it’s absurd, as pointed out further below, that these lowlifes (who comprise 90% of the crowd) are even granted a forum. Come up with a real protest movement and I’ll listen. This isn’t one.

Sorry to get off track, but this week the Senate failed to pass even a stripped down jobs bill, $35 billion for teachers, firemen and the like, which highlights the antagonism between Democrats and Republicans, as well as President Obama’s failures in leadership as he runs around playing his class warfare game.

But just a few economic notes. September housing starts came in better than expected but the increase was due to a 51.3% rise in multi-family dwellings as opposed to just a 1.7% increase in single-family home construction. Existing home sales were still at lousy levels.

I saw a piece in USA TODAY that addresses the fact local governments have slashed “535,000 positions since September 2008 to close massive budget deficits resulting largely from sharp declines in property tax receipts. That exceeds the 413,000 local government job cuts from 1980 to 1983, the only other substantial downturn in local government employment, according to federal records that go back to 1955.” [Paul Davidson]

Wells Fargo revealed as part of its earnings report that delinquencies on mortgages and credit cards rose 4% in the third quarter, the first increase since 2009, which isn’t good. Citigroup reported a similar rise in delinquent mortgages, CFO John Gerspach saying the bank was seeing “re-defaults” on mortgages that had been modified to make them more affordable. Capital One saw an increase in credit card delinquencies, which means a future increase in defaults on same.

And remember that congressional supercommittee devoted to debt reduction? You know, the bipartisan group of 12 that has to cut at least $1.2 trillion by Nov. 23, thus giving Congress a full month to vote up or down on the proposal or face automatic draconian cuts, half of which come from defense?

Nothing’s happening. The Washington Post reported they have yet to reach consensus on the most basic elements of a plan to restrain spending. Remember, the $1.2 trillion is nothing. Unless the economy takes off like a rocket ship, and in case you haven’t noticed, with the end of the space shuttle program, NASA doesn’t have a rocket ship and we’re relying on the Russians to take us to the International Space Station, the deficit will continue to grow, so we want this supercommittee to think ‘big,’ like a minimum of $3 trillion in savings. Don’t hold your breath.

Street Bytes

--The Dow Jones rose 1.4% to 11808, while the S&P 500 tacked on 1.1%. But Nasdaq lost 1.1%.

As noted above, earnings were generally positive, with some winners being Citigroup, Morgan Stanley, American Express, Intel, Coke, McDonald’s and Honeywell.

But IBM and Apple disappointed in one form or another, as did Wells Fargo, EBay, Goldman Sachs, and General Electric.

As for my favorite company McDonald’s (not that I eat there that much but just admire the hell out of them), shares rose on Friday as earnings and revenue exceeded expectations. U.S. comp store sales rose 5.0%, and they even rose 4.4% in Europe. Net income rose 9% though the company is dealing with rapidly rising beef prices and higher labor costs. McDonald’s could be raising menu prices a third time this year soon, but the first two increases had no impact.

--U.S. Treasury Yields

6-mo. 0.05% 2-yr. 0.27% 10-yr. 2.22% 30-yr. 3.26%

Bonds were basically unchanged on the week. Inflation data for the month of September revealed that the producer price index rose 0.8%, but only 0.2% on the core, ex-food and energy. For the last 12 months, the PPI is up a whopping 6.9%, but 2.5% on core. The CPI rose 0.3%, 0.1% core, and its 12-month figures are 3.9% and 2.0%, respectively. 

I have refused to cry wolf on inflation and for those screaming about it, obviously the bond market isn’t concerned, yet, plus the Fed has played a role in keeping rates down and uncertainty over the Euro crisis has led to a flight to quality.

But, having said that, where inflation comes in is obviously in the ability, or inability, of consumers to make ends meet and have money left over for discretionary spending when their wages are stagnant, or falling. And that means lower growth than should otherwise be expected. So that’s why the raw PPI and CPI data matters, Charlie Brown, not in their impact on interest rates, the traditional cause for concern.

--In the latest data released by the U.S. Treasury Department, China reduced its holdings of U.S. debt to the lowest level in a year, selling $36.5 billion in Treasuries or bonds, but its overall “official” holdings are still at the $1,137 billion level (China’s holdings purchased through London do not show up immediately in the preceding data). It was in August that S&P cut the U.S.’s credit rating to AA+ from AAA. However, the overall demand for U.S. Treasuries increased in August, and net buying of long-term equities, notes and bonds totaled $57.9 billion, the highest since December 2010, so the U.S. remains the global safe haven of choice.

--As noted by Bloomberg’s Michael J. Moore, “JP Morgan Chase, Bank of America, Citigroup, Goldman Sachs and Morgan Stanley posted $13.5 billion in trading revenue minus accounting gains for the third quarter, down 35% from a year earlier. Investment-banking revenue plunged 41% from the second quarter to $4.47 billion.

“Bank of America posted a roughly 90% drop in fixed-income trading revenue and Goldman Sachs had its lowest debt underwriting quarter since 2003.”

--Citigroup agreed to pay $285 million to resolve SEC claims it misled investors on financial products involving collateralized debt obligations tied to subprime mortgages that imploded during the housing bubble. Earlier, Goldman Sachs agreed to pay $550 million to resolve similar claims, while JPMorgan Chase paid $154 million for its role in peddling crappola to unsuspecting investors.  This is what the Occupy Wall Street folks should be protesting about, demanding justice, not the class warfare / commie propaganda.

--Goldman Sachs is on pace to pay its workers an average of $293,000 this year, less than half the amount workers were paid in 2007 ($661,490). This year’s payout is also lower than the $363,655 paid in 2008, the depths of the financial crisis. Goldman’s revenue in the July-September quarter was just $3.59 billion, down 60% from $8.9 billion a year ago as the investment bank lost $393 million. OWS can complain about this, too, but they fail to then connect the dots and realize that fewer dollars translate into fewer tax dollars and fewer tax dollars lead to layoffs of teachers and firemen, the very people they purport to protest for (when they aren’t smoking pot and keeping the neighborhood up with incessant pounding of drums like some ancient tribe in New Guinea that is trying to keep evil spirits away).

--Bank of America, on the other hand, reported a third quarter profit of $6.2 billion, but owing to a one-time gain of $10.5 billion. At least revenue was up 6%.

--Apple recorded its second best earnings ever but for the first time in 27 quarters, it failed to beat expectations and the stock was hammered, closing the week at $393 after finishing at a record high of $422 before the release. Revenue, $28.3 billion, fell short of analysts’ $29.7 forecast, so it was a shaky start for CEO Tim Cook, the first quarter he was in control after Steve Jobs resigned in August. The sales drop, however, was attributable to consumers shying away from the iPhone 4 prior to the release of the next-generation phone. That model, the iPhone 4S, is flying off the shelves (4 million units the first three days!) after its introduction this week and the company is forecasting overall sales of $37 billion in the current quarter, better than the Street is anticipating.

[Apple did sell 17 million iPhones last quarter, up 21%; 11.12 million iPads, up 166%; and Mac sales hit a record 4.89 million units. By the way, since I mentioned long, long ago I was doing an iPad app for StocksandNews, oh, the stories I could tell…for now let’s just say what was submitted by my tech staff, and approved by Apple, was not run by me first…as in some people don’t know how to spell!!! To be continued…it’s not available yet.]

--Intel reported record quarterly revenues and profits, both ahead of expectations. CFO Stacy Smith said, “We are seeing emerging markets driving significant unit growth and…in the data centers, as we see this explosion of devices that are connecting to the internet driving the build out of the internet cloud, we think we are uniquely positioned to benefit from that trend.”

--Census data for 2010 shows that the Washington, D.C., area is the nation’s highest-income metro region, owing in no small part to the size of government and the resulting armies of consultants, lobbyists and government contractors.

--Some surprisingly good data from Russia, as September retail sales rose a stronger than expected 9.2%, with real wages advancing 6.2% from year earlier levels, this as inflation will not exceed 7% in 2011, the lowest rate since 1991. Interesting. A leader of televisions and computers, M. Video, said its sales for the third quarter were up 24%.

--Foreign direct investment into China jumped 17% in the first nine months of 2011 vs. a year earlier, though September’s pace was up ‘only’ 8% from last year

--Container lines have been struggling with declining volumes of goods going from China to the United States, but traffic going the other way is surging as Chinese consumers are demanding higher quality food…meats, fruits and vegetables. One carrier, Copenhagen-based Maersk, is investing $1 billion in refrigerated containers over two years. It’s all about China’s rising middle class and increased wages.

--Struggling Dutch lighting and consumer electronics group Philips is cutting 4,500 jobs, Philips being the world’s leader in lighting equipment, and Europe’s biggest consumer electronics producer.

--Lowe’s Cos., the world’s second-largest home-improvement chain, is closing 20 stores and laying off about 1,950 workers. Lowe’s will still have 1,700 locations in North America, but it has not been able to grow profits vs. competitor Home Depot, which reported a 14% jump in its most recent quarterly report.

--Ford and the UAW came to agreement on a four-year labor agreement after it looked iffy just a week earlier when several plants rejected it. In the end, workers came to their senses, recognizing, for one, they would be jeopardizing some nice bonuses, such as a $6,000 signing bonus on Nov. 4, along with profit-sharing checks averaging $3,750. As Gary Chaison, a professor of labor relations, told the New York Times, “It’s pretty hard nowadays for a worker to risk not getting a signing bonus and have to explain that to a spouse.”

--California home sales were up 6.7% in September, though the median price, $249,000, was down for a 12th consecutive year-over-year monthly decline. 33.8% of sales were foreclosures, however, and another 18.7% were short sales, in which the bank allows an underwater property to be sold just to get it off the books; both methods necessary if we are to ever clear the inventory and reach a true bottom.

--According to the federal Climate Prediction Center, the drought across the southern Plains is expected to continue through the winter, owing to La Nina, which returned in August and will gradually strengthen. During a typical La Nina (a warming of the water in the Pacific), precipitation is below average in the southern tier of the U.S.

Texas, the epicenter of the drought, experienced its driest 12 months on record from October 2010 through September 2011. It has cost $6.5 billion in economic losses in both Texas and Oklahoma.

--New York City’s unemployment rate remained at 8.7% in September, unchanged from the month before.

--The Global Business Travel Assn. estimates spending in this category will rise 6.9% this year over 2010, but just 4.3% in 2012.

--Social Security recipients will get their first raise in January since 2009, 3.5%. Monthly Social Security payments currently average $1,082, or $13,000 a year, so you’re talking an increase of about $38 a month. Whatever you do, don’t take this and then bet on the Jets.

--The world’s largest gold mine is in eastern Indonesia and the other day gunmen shot and killed three miners in yet another attack on the installation operated by Freeport-McMoran. A labor strike at the mine is complicating things. Strikers are demanding that their pay, which ranges from $2.10 to $3.50 per hour, be increased to $17.50 and higher.

--Kinder Morgan is purchasing El Paso Corp. for $21.1 billion, giving Kinder a pipeline network long enough to circle the Earth more than three times (80,000 miles worth), with the El Paso deal adding pipelines from California to New England that carry about one-fourth of U.S. gas supplies.

[El Paso Corp. CEO Douglas Foshee, who does not plan to stay at the new company, is eligible to receive an exit package of $95 million, $69 million of which comes from stock options granted over his eight-year tenure.]

--A good friend from Wake Forest is one of the top preemie baby doctors in the land and he is currently on his annual teaching trip in Vietnam. So I received a note from him from there and he observed, “Boy, the prices have really gone up here in the last ten years,” Dr. W. then confirming the still mostly anecdotal evidence that U.S. manufacturers who located in Southeast Asia and China will soon be bringing manufacturing back to the States due to skyrocketing labor costs.

--Steve Jobs told his biographer, Walter Isaacson, that he regretted the decision to try alternative therapies for his pancreatic cancer rather than have surgery. Asked why he didn’t agree with his doctors’ suggestion he undergo an operation, Jobs told Isaacson, “I didn’t want my body to be opened…I didn’t want to be violated in that way.”

His wife and friends urged him to get the operation but Jobs waited nine months to do so.

Jobs’ biography is being published Monday and is already a mammoth best-seller.

--This Saturday at Jos. A. Bank, buy one suit at the regular price and get two suits and three silk ties for free; plus six cars, two planes, and the nation of Benin!

--The U.S. Postal Service is looking to add non-traditional revenue sources, which would require congressional approval. I’ll tell you what would really help me out personally, seeing as how I check out two boxes at my local center almost every day. Sell beer. Keep it simple… just domestic, which would fly through Congress far more easily than if foreign, premium brands were offered. And just have a six-pack limit. If this worked, as it inevitably would, then broaden the product mix to include peanuts.

Foreign Affairs

Libya: Comments on the death of dictator Muammar Gaddafi, killed by rebels on Thursday in his hometown of Sirte after French fighter jets went after a convoy containing the leader that was attempting to break out of the siege.

Republican Sen. John McCain: “It is a great day. I think the administration deserves great credit.” McCain had repeatedly pressed the Obama administration to take a more aggressive tack. “Obviously, I had different ideas on the tactical side but…the world is a better place.”

McCain, who was the first American political leader to meet with the rebel leaders during the initial action is convinced they have what it takes to steer the country in the right direction.

Also, as Republican Sen. Marco Rubio commented after traveling to Libya:

“Ultimately, this is about the freedom and liberty of the Libyan people. But let’s give credit where credit is due: it’s the French and British that led on this fight and probably even led on the strike that led to Gaddafi’s capture, or, death. (Obama) did the right things, he just took too long to do it and didn’t do enough of it.”

Hugo Rifkind / London Times

“High up on one of the walls around St. Paul’s Cathedral, where anti-capitalist protesters are camping out next to a quite fortuitously placed branch of the camping shop Blacks, somebody has stuck a sign. It’s a good sign, very well done, in the manner of street markings across the City. ‘Tahrir Square, EC1’ it says. As I hopped past on my bike the other day, I found myself wondering exactly what it was about Tahrir Square, Cairo, that somebody was so keen to emulate.

“Was it, do you think, the brutal sexual assault of a CBS news reporter, which lasted 25 minutes and involved several hundred freedom-loving people? Or was it, maybe, the pitched battles between protesters and newly impoverished tour guides, the latter of whom charged the crowd on camels?   Or maybe it’s the less-remembered, second round of demonstrations in Tahrir Square a few months later, in the new, free Egypt, which were tear-gassed. One of those? Which?....

“I appreciate that this may seem an odd observation to turn up in tandem with Colonel Gaddafi’s corpse. But amid the euphoria maybe it’s worth a reality check on the big picture. Egypt plans parliamentary elections next month and a presidential one early next year. [Ed. unlikely on this latter point…try much later in 2012.] Despite the odd burst of sectarian slaughter, this has to be good news. It’s all happening, though, under the watchful eye of a military regime that throws people in jail for calling it dictatorial. Which seems an odd way, all in all, to prove that you aren’t.

Tunisia is about to hold elections [Ed. this weekend], but it is likely they’ll be won by the Islamist party. Everybody seems surprisingly sanguine about this. Europe has Christian Democrats, the thinking seems to go, and the Middle East has Islamists. Works in Turkey. Which seems reasonable enough, but also a bit…hmmm, sudden. Didn’t Islamism used to be a problem? Wasn’t that why we propped up these dictators in the first place? I’m sure I have a distinct recollection of that being the case. So were we wrong, then? Or are we just not talking about it?....

“If Libya really was so united in wanting Gaddafi gone, who was still supporting him until the bitter end? [Ed. from a purely military standpoint, you have to admit the loyalists put on an amazing fight the last month in particular, on a smaller scale similar to the fall of Berlin.] What’s going to happen to them? On our screens, in our papers, we’ve seen a lot of Libyans these past months. Why, apart from those fruity bodyguards and the occasional Reader’s Wives-style photograph of various Gaddafi spouses, does the country not appear to contain any women? Are we allowed to talk about that?

“In war, we can get away with not doing so. In peace, if that’s what this is, we’re going to have to. Bluntly, what sort of country is Libya going to be?

“History may well group the demonstrations of Tahrir Square with the fall of the Berlin Wall, but we are far from ready to do so now. The Middle East is not Eastern Europe, and a yearning for democracy is not the same thing as having a culture that is going to make it work. I appreciate that that’s bound to sound offensive to some, but if it sounds racist then you haven’t been paying attention. Before the Arab Spring, the Middle East had become a shrill, irrational place; oppressive to women, paranoid about Jews and the West, and entirely inexperienced in the everyday customs that make a free society work.

“Everybody knows this, and for an extended, glorious spring, everybody pretended not to. But it’s not spring any more, and I think we’re kidding ourselves if we think that it’s about to be summer. I reckon they’ve got a pretty nasty winter to get through first.”

Editorial / Washington Post

“What remains (of Libya) is a shattered country piled high with dangerous weapons, lacking legitimate institutions or civil society, and vulnerable to tribal, regional, sectarian and even racial rivalries.

“The good news is that, in the time it took to depose Mr. Gaddafi, the Libyan opposition created a Transitional National Council recognized by 80 governments and prepared an ambitious but reasonable transition plan….

“The threats begin with the more than two dozen rebel militias that participated in the fighting and that now coexist uneasily in Tripoli and other cities. Not all have been integrated into the chain of command under the transitional council; some commanded by Islamists have received their own weapons and funding from the Persian Gulf emirate of Qatar, according to a report by the Wall Street Journal. The often-undisciplined militias have abused and even tortured prisoners and suspected Gaddafi supporters, Human Rights Watch reported. Mr. Gaddafi (was killed) after having been captured. [Ed. look what they did to his body on Friday.]

“Added to this volatile mix are huge stockpiles of weapons, including thousands of surface-to-air missiles and chemical arms, acquired by the Gaddafi regime. Many have been unsecured for weeks, and some have already been smuggled across Libya’s borders….

“The administration should respond positively (to the transitional council that is seeking a more active American role): Libya’s stabilization under a democratic government could help tip the broader wave of change in the Arab Middle East toward those favoring freedom. ‘Would you see the U.S. taking the lead in terms of rebuilding this country and helping?’ a Libyan student asked Ms. Clinton. The answer should be ‘yes.’”

John Podhoretz / New York Post

“Barack Obama didn’t want to become a war president, but – as his triumphalist talk yesterday following the death of Muammar Gaddafi made clear – a war president is what he has become.

“The man who began his presidency with an inaugural address saying, ‘Our security emanates from…the tempering qualities of humility and restraint,’ prematurely declared the Libyan revolution ‘won,’ and gave the United States and NATO credit for having made that victory possible.

“With these remarks, and the ones he made after the assassination of Osama bin Laden, Obama has continued to follow the same path charted by George W. Bush – one of whose key messages during his 2000 campaign was that he would pursue a foreign policy of ‘humility’ and forgo ‘nation building.’

“Like Obama, Bush was promising to do things differently from his predecessor.

“Talk of humility, said Time magazine in 2001, ‘was Bush’s way of criticizing Bill Clinton’s interventionist foreign policy.’

“But Clinton had come to office with absolutely no intention of being an interventionist.

“Indeed, he pulled U.S. forces ignominiously from Somalia during his first year in office after 18 Rangers were massacred in Mogadishu.

“And yet, by 1999, Clinton was unilaterally ordering a relentless 48-day aerial campaign to force Serbia to release Kosovo from its tyranny in 1999….

“Whatever one can say about presidents, love or loathe them, they are men of action, and they lead a country that gives them the tools to act – even when they never thought they would.”

Editorial / Wall Street Journal

“President Obama, Britain’s David Cameron, France’s Nicolas Sarkozy and even the Arab League deserve credit…The Europeans pushed for an intervention to help the rebels, who by March were besieged in western Libya. An initially reluctant White House came around just in time to save Benghazi from a Gaddafi onslaught. The U.S. military led the targeted bombing that turned the tide. Thousands of innocent lives were saved. Gaddafi also wanted to derail the democratic transitions in Tunisia and Egypt, and had he crushed the rebellion he would have been a dangerous rogue.

“There’s a lesson here about America’s global role. U.S. military leadership and stealth bombers, refueling tankers, drones and satellites were indispensable over Libya. But Mr. Obama’s decision to keep a political low profile during the war – to ‘lead from behind’ – hurt the cause. NATO was left without a political general, and at times it wobbled. The U.S. was late in recognizing the Benghazi government, and Mr. Obama’s calculated reticence invited a backlash in Congress over war powers.

“Yet the president was a statesman compared with some GOP pretenders to the Commander-in-Chief’s chair. Michele Bachmann, Jon Huntsman and Newt Gingrich opposed U.S. participation as a high-risk intervention, a claim that now looks strategically mistaken and politically opportunistic. John McCain, a Republican who never wavered on Libya, yesterday offered adult advice for the U.S. now ‘to deepen our support’ for Libya’s coming move from dictatorship to something new….

“Gaddafi’s fate will also echo for Syria’s Bashar Assad and Yemen’s Ali Abdulah Saleh….Gaddafi declared war on his people and ended up dead. Mr. Assad has taken the Gaddafi route in response to Syria’s popular uprising, and Mr. Saleh refuses to step aside and is moving that way.

“The U.S. can’t dictate events, but a superpower – and America remains the world’s sole such power, no matter the current declinist vogue – can still shape events for the better. Libya’s successful revolution is the latest proof that liberating the world of a dictator can serve America’s strategic interests and its moral principles.”

Iran: As I alluded to last time, the key for any retaliatory strike against Tehran for its alleged plot to kill the Saudi Ambassador to the U.S. in Washington could be contained in an upcoming report by the International Atomic Energy Agency (mid-November). For its part, Saudi Arabia’s Prince Turki Al-Faisal said, “Somebody in Iran will have to pay the price. The burden of proof and the amount of evidence in the case is overwhelming and clearly shows official Iranian responsibility for it.”

Iran and Saudi Arabia have every reason to be enemies. Saudi Arabia is the standard bearer of Sunni Islam and the defender of the Muslim world’s status quo, while Iran, leader of the Shiites, views itself as the vanguard of Islamic revolution.

The U.S. has been pressing the IAEA to supply more details on Iran’s suspected nuclear weapons program and if the IAEA talks of Iran pursuing nuclear-armed missiles, you might consider that the beginning of the clock ticking down towards action, a strike of some kind…certainly something more powerful than the sanctions regimes that have largely failed thus far. My guess is any military action takes place in the spring. Again, as I noted last week, Obama can’t risk Iran exploding a device at the height of the campaign next fall.

Separately, Supreme Leader Ayatollah Ali Khamaenei, who hasn’t been getting along with President Mahmoud Ahmadinejad, warned that the post of elected president could one day be scrapped. Parliamentary elections are being held in March and Ahmadinejad’s supporters will be further marginalized.

I commented awhile back, when it appeared Ahmadinejad might not last until the UN General Assembly in September, that hard as it may be to believe, he is preferable to being removed by the clerics with their own hand-picked selection and that is more true than ever (though never discussed in the mainstream media). Khamenei’s not so veiled threat, understand, also has the backing of the Iranian Revolutionary Guard, whose Quds force was responsible for the assassination plot against the Saudi ambassador. Ayatollah Khamenei sees what’s happening in Syria and elsewhere and he’s scared, but this is not Libya or Tunisia. Oh, far from it, sports fans. The United States and Iran are on a collision course.

Iraq / Turkey: Early in the week, we learned that the U.S. was abandoning plans to keep U.S. troops in Iraq past a year-end withdrawal deadline, so it was zero surprise that President Obama then confirmed this on Friday with his announcement that all U.S. troops would be out of the country by Dec. 31. Just 160 active-duty soldiers attached to the U.S. Embassy will remain, not a few thousand trainers as originally hoped by some.

As I noted the other day, it came down to immunity for the trainers. Prime Minister Nouri al-Maliki said he didn’t have the votes in parliament to get it through.

So score one for Shia firebrand Moqtada al-Sadr, who warned Maliki that if all U.S. troops weren’t removed by the deadline, his Mahdi Army would wreak havoc.

Meanwhile, as many as 10,000 Turkish forces may now be involved in an offensive against Kurdish militants in northern Iraq and southeastern Turkey; this after the PKK (Kurdistan Workers’ Party) killed 24 Turkish soldiers earlier in the week. At least 1,000 Turks crossed into Iraq, where the PKK has many of its sanctuaries. Turkey launched airstrikes on the area as well. The leadership in Ankara has vowed revenge after one of the worst losses of life suffered by the army since the insurgency began in 1984. More than 40,000 people have died on both sides in the conflict and Prime Minister Erdogan is under immense pressure to appear decisive.

Supposedly, the leader of the PKK’s military wing these days is a Syrian, both Syria and Iran also having their own problems with Kurdish minorities.

Syria: At least 41 were killed on Monday alone, 27 in Homs, according to the Syrian Observatory for Human Rights, most civilians, as the unrest edged closer to an all-out war. Army defectors appear to be organizing rapidly and in one case on Monday, detonated a bomb by remote control as an army vehicle passed, killing four soldiers. Last Saturday, government troops killed a leading activist who had been organizing peaceful demonstrations.

Israel: Sgt. First Class Gilad Shalit was released by Hamas after being held by the terrorists for five years. In return more than 1,000 Palestinian prisoners are being released, the first 400+ this week in a highly-choreographed series of steps.

I have long said Israeli Prime Minister Benjamin Netanyahu is the smartest man in the room, frankly, the smartest leader in the world.

But Netanyahu also has a history of being incredibly sleazy and slimy. This, friends, was simply a politically expedient move by a man desperately trying to hold onto his coalition, knowing that one poll after another showed the Israeli people, owing in no small part to a massive P.R. campaign by Shalit’s parents over the past five years, favored the release, even in this format.

Israel will pay a heavy price for compromising with Hamas. This was one stupid move.

Various opinions…

Editorial / New York Times

“We share the joy of Israelis over the release of (Shalit)…We will leave it to the Israeli people to debate whether the deal – which includes the release of more than 1,000 Palestinian prisoners – will make their country safer or lead to more violence or more abductions of Israeli soldiers or other citizens….

“Mr. Netanyahu twisted himself in an ideological knot to get this deal. Only five months ago, he wanted to cut off tax remittances to the Palestinian Authority and urged the United States to halt aid because Mr. Abbas tried to forge a unity government with Hamas, which controls Gaza.

“One has to ask: If Mr. Netanyahu can negotiate with Hamas – which shoots rockets at Israel, refuses to recognize Israel’s existence and, on Tuesday, vowed to take even more hostages – why won’t he negotiate seriously with the Palestinian Authority, which Israel relies on to help keep the peace in the West Bank?

“Mr. Netanyahu’s backers claim that his coalition is so fragile that he can’t make the compromises needed to help revive peace negotiations. But he was strong enough to go against the grief-stricken families of those Israelis killed by the Palestinian prisoners he just freed. ‘I know that the price is very heavy for you,’ he wrote to them. Why can’t he make a similarly impassioned appeal for a settlement freeze for the sake of Israel’s security?”

Editorial / Wall Street Journal

“The Jewish state’s repeated willingness to pay an exorbitant price for its citizens is a testament to its national and religious values, which stress the obligation to redeem captives….

“But virtues often have their defects, and the line between moral values and moral hazard can be a thin one. The negotiations to return Sgt. Shalit dragged on as long as they did largely because Hamas had reason to believe it could drive the hardest possible bargain. The same logic explains why Israelis will continue to be tempting targets for hostage taking.

“Sooner or later, Israel will learn the name of its next Gilad Shalit. Sooner or later, too, it will learn that the better course is to give its enemies reasons to think twice before taking hostages in the first place.”

Robert Mnookin / Wall Street Journal

“It’s hard to think straight when negotiating with an adversary you claim is evil, and Israel proved it last week. The usual problem is a refusal to negotiate at all. Here the Israelis made what seems to be a crazy deal….

“Israel has always claimed it will not negotiate with what it considers terrorist organizations. Chief among those groups is Hamas, which has repeatedly expressed its commitment to the destruction of the Jewish state….Israel may claim that no one in the government ever met face-to-face with representatives of Hamas, and it is possible that the two adversaries worked out the details by exchanging offers and counteroffers through Egyptian intermediaries. But this fig leaf hardly hides the fact that a deal was negotiated….

“(One) Israeli soldier has regained his freedom. But to free 1,000 prisoners in exchange? Israeli parents may on some unthinking level feel better about their government’s concern for each individual soldier. But the deal jeopardizes the freedom and safety of many Israelis in the future….

“Gilad Shalit is a known individual: what psychologists would call an ‘identifiable being.’ His picture has been plastered throughout Israel. The Israeli press has written hundreds of articles speculating about his well-being. By contrast, the Israelis who are endangered by this deal are mere statistics – an unidentifiable group of people who may die in the future. Psychologists call these ‘statistical lives.’…

“While no expense will be spared to save an identifiable miner trapped in a coal mine, there is often great political reluctance to spend an equal amount on mine safety. Such a response is entirely human, but it is not rational.”

Last week I quoted an Israeli poll showing 69-26 support for Netanyahu’s move. Another one that came out afterwards shows support by a 79-14 margin. I have some readers in Israel. Enjoy the good feeling while you can. As the first 477 Palestinians were being released, there were cries of “We want a new Gilad!” A Gaza woman just freed, a would-be suicide bomber, told cheering schoolchildren in the Gaza Strip the day after her release, “I hope you will walk the same path we took and God willing, we will see some of you as martyrs.” [Jerusalem Post]

Lastly, the Palestinian bid for UN membership is expected to come to a head in about three weeks, when Security Council ambassadors meet to decide their response, possibly Nov. 11. Palestinian President Abbas needs nine of 15 votes of support, which would then oblige the U.S. to use its veto. So it’s nine votes, no veto. Evidently, it is currently 8 ‘for,’ 6 ‘against,’ with everyone waiting on Bosnia. 

Now this is classic. Bosnia has a collective presidency – Muslim, Serb and Croat – and they disagree over which way to vote.

Lebanon: A Lebanese daily, Al-Joumhouria, reported on Wednesday that Hizbullah “is in a state of alert and it anticipates an Israeli attack on Lebanon at any moment,” security sources told the paper. Last spring, Israel’s Haaretz newspaper, citing documents released by WikiLeaks, said Israel expected the next war to last two months during which Hizbullah would likely fire between 24,000 to 36,000 missiles into Israel, about 6,000 aimed at Tel Aviv. According to Al-Joumhouria’s sources, “Israel finds in the deteriorating situation in Syria and other Arab countries an opportunity to wage its third war against Lebanon as counties in the region are occupied with resolving domestic affairs. ‘Israel’s military is preparing a sudden war to protect Israel from Hizbullah’s missiles, which threaten the heart of Israel and its vital institutions,’ the paper quoted a source as saying.” [Daily Star]

Hizbullah supposedly has recruited thousands of suicide bombers since the last war with Israel in 2006.

Pakistan: Secretary of State Hillary Clinton warned Pakistan’s leadership that if they don’t crack down on insurgents staging attacks from Pakistan into Afghanistan, Pakistan will pay a “very big price.” A senior official said the message being conveyed to Pakistan is: “You need to deal with it or we will.”

But this is disturbing. On Thursday the Times of India reported that the head of Pakistan’s army, Gen. Ashfaq Kayani, reportedly offered a warning that the United States better carefully think through the consequences of sending any troops into Pakistan. Kayani said this in a closed-door meeting with a legislative defense committee. While Kayani didn’t say specifically what Pakistan would do in response, the implication was clear. Pakistan has nukes. What would Pakistan target? U.S. personnel in Afghanistan. Or India, which continues to grow closer to Afghanistan. A former CIA official and South Asia specialist, Bruce Riedel, wrote this week that “The generals who run Pakistan have not abandoned their obsession with challenging India.”

Afghanistan: Sec. Clinton, on her trip to Kabul to visit with President Karzai, urged him to restart negotiations with the Taliban after the assassination of former President Rabbani forced Karzai to pull back.

China / Taiwan: Taiwan’s President Ma said his country’s aim is to sign a peace agreement with the mainland within 10 years, provided there is a high level of consensus on the island and sufficient trust on both sides of the Taiwan Strait. Ma made this statement three months before the Jan. 14 presidential election and it could provide ammunition to the opposition pro-independence camp. When the opposition then blasted the idea, more than Ma expected, by week’s end he backtracked and said “We will consider a referendum for the peace treaty” as opposed to simple parliamentary approval.

Meanwhile, China is undergoing some national soul-searching over a Kitty Genovese type moment (the 1964 murder of Genovese in Queens, New York, when neighbors did nothing to help) as a two-year-old girl was struck by a vehicle in a hit-and-run accident, and then as she lay critically injured, some 18 people went by and offered zero assistance until a female street cleaner finally picked up the girl and called for help, with the mother finally tracked down. The girl died on Friday in the hospital.

The video of those who walked or rode by, some staring at the bleeding body, is unbelievably sad and sick. A second van approached and drove over the girl’s legs. A motorcyclist applies the brakes and clearly looks at the girl, lying in the pool of blood, and drives off. It took seven minutes before the street cleaner discovered the girl.

The drivers of both vehicles were found and arrested. The bystanders were also tracked down and claimed they didn’t see the victim. [She had been outside playing with her brother when she ran out in the traffic.]

The street cleaner was given a $3,800 award by the government. She said she only did what was right and did not think she deserved it. However, she also believed people would accuse her of seeking fame if she rejected the reward, so she planned to donate some of it to help with the girl’s expenses (the girl then dying three days later).

Thailand: The new government of Prime Minister Yingluck Shinawatra is under immense pressure as rising flood waters threaten Bangkok, which would lead to a huge economic catastrophe, on top of the already significant impact as many industrial parks are now underwater. Yingluck took the controversial step on Thursday of opening floodgates to speed the flow of water to the sea but this also means parts of the capital could be overrun. Water is already knee-deep in outlying areas.

Yingluck, who had zero political experience before being elected three months ago, totally botched the early handling of the flooding and when it comes to information going out to the people, it’s been a disaster.

Thus far, at least 10% of the rice fields have been damaged or destroyed, while companies from Apple to Toyota face supply disruptions similar to those from the March earthquake that crippled Japan. Western Digital Corp., the world’s largest maker of hard-disk drives, said production won’t return to normal for months.

France:  The Socialist Party selected Francois Hollande to be its standard-bearer in next year’s presidential election, Hollande winning a convincing runoff against Martine Aubry. The latest poll in France shows 63% disapprove of President Sarkozy’s performance.

Spain: The Basque separatist group Eta said it has called for a “definitive cessation” to its decades-long campaign of bombings and shootings that has killed more than 800 in over 40 years of operation. Spain’s government said the move was “a victory for democracy, law and reason.” I’d say we’ve heard this before from Eta.

Japan: The government anticipates spending a minimum of $13 billion to rehabilitate all of the territory exposed to radioactive contaminants from the disabled Fukushima Daiichi nuclear complex, according to Reuters. The final cost is bound to be much greater.

Random Musings

--There is still mass confusion over the Republican primary schedule, thanks to Florida’s decision to move their date up to Jan. 31. South Carolina is now Jan. 21. Nevada’s caucuses Jan. 14 and Iowa announced this week that its caucuses would be Jan. 3. So that leaves New Hampshire.

The problem is the state has certain laws mandating that New Hampshire be the first primary, but that it also be held seven days ahead of the next one or caucuses. New Hampshire could thus hold the primary on Jan. 7, but this doesn’t allow enough time after Iowa. So New Hampshire could move to December, like Dec. 3 and 10 are being thought of.

The easy step would be for Nevada to move to Jan. 17 and allow New Hampshire to hold its primary Jan. 10, but Nevada, like Florida before it, is playing the role of a-hole. On the other hand, New Hampshire should just hold it Jan. 10, retain some goodwill, and be done with it.

--In a new AP-GfK poll, Mitt Romney was the choice of 30% of Republicans, with Herman Cain next at 26% and Rick Perry at just 13%. Among all adults surveyed, half said President Obama should not be re-elected, while 46% said he should be. In hypothetical head-to-head matchups, Obama edges Romney, 48-45, while the president takes Cain 49-43, and Perry 51-42. [Obama has an overall job approval rating in the poll of 46%.]

Significantly, among all adults, Romney’s favorability rating has risen ten points since August to 49%. 

The above polling data was taken in the days before this week’s Nevada GOP debate.

John Podhoretz / New York Post

“At the moment about half an hour into last night’s Republican candidate kerfuffle when it looked (seriously) like Mitt Romney and Rick Perry might haul off and start busting each other in the bazoo, it became clear that the Emmy for Best New Television Drama should go to the weekly series called ‘The Republican Presidential Debates.’….

“Those who are still in mourning for the series ‘Lost’ have finally found their new obsession: The story of eight mysterious strangers trapped in an alternate reality trying to figure out how to escape an endless series of convention centers and cable channels by finally getting transported to the snows of Iowa and New Hampshire for judgment by the most mysterious force of all: The Republican primary voter….

“As for Herman Cain, the first 20 minutes of the debate was taken up with the glaring difficulties with his 9-9-9 tax plan, which he himself could not defend. Later he seemed unaware of or unclear about something he had said earlier in the day about prisoner swaps.

“Cain’s moment is fast coming to an end. Perry got himself a second wind – a faint one.

“And Mitt Romney is still the name above the title. The next debate isn’t until November. I’m speaking without irony as a television watcher when I say I’m very, very sad about that.”

Economist Arthur B. Laffer / Wall Street Journal…on Herman Cain’s 9-9-9.

“The whole purpose of a flat tax, a la 9-9-9, is to lower marginal tax rates and simplify the tax code. With lower marginal tax rates (and boy will marginal tax rates be lower with the 9-9-9 plan), both the demand for and the supply of labor and capital will increase. Output will soar, as will jobs. Tax revenues will also increase enormously – not because tax rates have increased, but because marginal tax rates have decreased.

“By making the tax code a lot simpler, we’d allow individuals and businesses to spend a lot less on maintaining tax records; filing taxes; hiring lawyers, accountants and tax-deferral experts; and lobbying Congress….

“Still, a number of my fellow economists don’t like the retail sales component of the 9-9-9 plan. They argue that, once in place, the retail rate could be raised to the moon. They are correct, but what they miss is that any tax could be instituted in the future at a higher rate. If I could figure a way to stop future Congresses from ever raising taxes I’d do it every day of the week and twice on Sunday. Until then, let’s not make the perfect the enemy of the good.”

[On Friday, Cain began tweaking his plan to exempt those below the poverty level from the 9% income tax, or 9-0-9. I was so frustrated watching Cain during the Nevada debate because he didn’t come close to spelling out the positives. It’s clear from the polls the people want the system blown up. He has a winning issue, Cain just needs a good adviser to show him how to sell it.]

--Speaking of the Nevada debate, where Rick Santorum lambasted Mitt Romney for his health-care record as Massachusetts governor, the Wall Street Journal opined:

“(Mr. Romney) did previously promote his plan as a model until Democrats took his advice. ‘How much of our health-care plan applies to other states? A lot,’ he wrote in these pages in 2006. Mr. Romney repeated those sentiments in the hardcover version of his book ‘No Apology,’ though he cut them from the paperback.

“But the larger and more important point is that Mr. Romney continues to defend his Massachusetts plan as a success for precisely the same reasons that President Obama says it should be imposed on all states. In reality, the Massachusetts plan is not a success and its problems are the best refutation of the duo’s arguments.

“Here’s Mr. Romney Tuesday night: ‘What we do is rely on private insurers, and people – 93% of our people who are already insured, nothing changed. For the people who didn’t have insurance, they get private insurance, not government insurance.’

“Here’s Mr. Obama in his health-care speech to Congress in 2009: ‘If you are among the hundreds of millions of Americans who already have health insurance through your job, Medicare, Medicaid, or the VA, nothing in this plan will require you or your employer to change the coverage or the doctor you have.’ And the uninsured, Mr. Obama continued, would simply receive ‘affordable choices’ from ‘private insurers.’

“The trouble with the Obama-Romney definition of ‘affordable’ is that in practice it means subsidies, and once the government provides ‘free’ health care, the private sector and entitlement state are fungible. Government inevitably dictates choices that used to be left to markets, as Mr. Santorum and Newt Gingrich pointed out. And, sure enough, due to the subsidy gusher that Mr. Romney opened, Massachusetts is now moving to impose price controls on private insurance and tightly regulate the type of care patients can receive….

“Mr. Romney has every right to cling to theories that were flawed in conception and have proven false in practice, though the rest of the GOP field has the responsibility to challenge his canned answers. The mental contortions that his health-care record requires need to be dissected – the way Mr. Obama will do if Mr. Romney is the nominee – to give GOP voters a chance to weigh the political liabilities that his candidacy might pose in 2012….

“Mr. Obama’s unbridled expansion of government means that the election will present the electorate with the largest philosophical choice since 1980: To continue the trend toward a larger and growing government and the ever-higher taxes to pay for it, or to modernize the 20th century’s broken government institutions. Republicans do not want to wake up in 2012 to discover that they have nominated someone who is unprepared, and maybe unwilling, to lead the reform of government that America needs.”

--Bye-bye Michele Bachmann as her New Hampshire staff quit on Friday, citing frustration with her lack of commitment to campaigning there.

--In a CNN/Opinion Research poll just 42% of Democrats said they were either “extremely” or “very” enthusiastic about the 2012 vote. In the spring and summer, the same CNN surveys had 56% and 55% of Democrats, respectively, in the “extremely” or “very” enthusiastic categories. Not a good sign for the donkeys.

Contrast that with Republicans, who in the same two categories registered 64% in the spring, and then an equal 64% this month. So the enthusiasm gap between Republicans and Democrats went from 8 points in the spring to 22 points today.

--Mort Zuckerman, publisher of U.S. News and World Report, told the Wall Street Journal’s James Freeman of his experience dealing with President Ronald Reagan after one of U.S. News’ correspondents, Nicholas Daniloff, was seized without warning by the KGB.

“I worked in the White House for the next four weeks virtually every day and through that I met Reagan,” says Mr. Zuckerman. Reagan secured Mr. Daniloff’s release in a swap that included a Soviet spy held in the U.S.

“Reagan surprised me,” says Mr. Zuckerman. “He got the point of every argument…He was very decisive. And everybody loved working for him. They followed his lead because they really respected his decisiveness and his instincts.

“I was not a Republican and I was not an admirer of his before I knew him, and you know, Harry Truman had a wonderful definition for the presidency. He said the president has to be someone who can persuade the American people to do what they don’t want to do and to like it. And that’s what you have to do. Somebody like Reagan had that authority. He was liked so much and he had a kind of moral authority. That’s what this president (Obama) has lost.

“Democracy does not work without the right leadership, and you can’t play politics. The country has got to come to the conclusion at some point that what you’re doing is not just because of an ideology or politics but for the interests of the country.”

--Robert Samuelson / Washington Post

“A specter haunts America: downward mobility. Every generation, we believe, should live better than its predecessor. By and large, Americans still embrace that promise. A Pew survey earlier this year found that 48% of respondents felt that their children’s living standards would exceed their own. Although that’s down from 61% in 2002, it’s on a par with the mid-1990s. But these expectations could be dashed. For young Americans, the future could be dimmer….

“In the Pew poll, 54% of respondents with a high-school diploma or less felt their children would do better; only 35% of graduate school alums agreed. ‘A kind of depression has set in,’ writes Washington Post columnist Richard Cohen. ‘We’ve lost our mojo, our groove.’

“It can be argued that all this glumness repeats a historical error: projecting the present onto the future. Just because the economy is rotten today doesn’t mean that it will always be. After World War II, the Nobel Prize-winning economist Robert Fogel has recalled, there was widespread ‘alarm about massive unemployment.’ Eleven million veterans and 9 million defense industry workers had to be re-employed. People feared a new Depression. It didn’t happen, because pent-up demand for homes, cars and appliances fueled a hiring boom.

“Unfortunately, this caveat is only half relevant now. Our future would certainly be brighter if the economy resumed strong growth, but that wouldn’t automatically ensure higher living standards. A society generates those through productivity – increases in efficiency, technology or business organization that lower costs or enable firms to pay higher wages. Without higher productivity, broad living standards won’t rise. But even with it, the young may not enjoy gains.

“The explanation is that productivity improvements have already been committed to demographic trends we can’t alter (aging) or problems we haven’t addressed (runaway health costs, deteriorating infrastructure). Future productivity and income gains will be diverted to these uses: higher taxes to pay for an older population; health spending; and taxes and fees to repair roads, schools and water systems.

“It’s already happening. ‘A decade of health care cost growth has wiped out real income gains for an average U.S. family,’ report two Rand Corp. researchers in the journal Health Affairs….

“Meanwhile, spendable incomes – what people consider their living standards – stagnate. The squeeze will continue. In 1990, there were 32 million Americans 65 and over; by 2040, that’s reckoned at 80 million. Rising costs for Social Security and Medicare have created a new political dynamic: If benefits for the elderly aren’t cut, burdens on the young will go up. Decaying infrastructure poses similar choices. Either pay for repairs or tolerate substandard roads and dilapidated schools.

“Our children’s futures have been heavily mortgaged….If today’s weak recovery persists, the outlook darkens….

“America is a competitive society. It’s not guaranteed that children achieve their parents’ relative economic status: The children of parents in the richest 20% won’t automatically stay in the richest 20%. Some children advance; some fall. But if overall incomes are rising, even those who don’t advance relatively often have higher absolute incomes than their parents. Studies by the Pew Economic Mobility Project confirm this. Two-thirds of Americans have higher incomes than their parents…

“Generational gains tempered individual setbacks. We may now lose this comforting cushion. Our leaders might try to avoid that by boosting economic growth, controlling health spending and trimming benefits for the elderly. But we aren’t sure how to do the first and lack the political will to do the second and third. The future is never entirely predictable, but downward mobility is not just a scary sound bite. It’s a real possibility.”

--Michael Goodwin / New York Post…on the Occupy Wall Street movement:

“Each day, about 3.7 million people go to work in New York City. For the last month, fewer than 500 people have been sleeping in a park near Wall Street so they can curse the economy that produces all those jobs for all those people.

“Guess which group is getting expressions of sympathy and even solidarity from the president to the mayor?

“The demonstrators include open anti-Semites, homeless people and anarchists, along with students, trust-fund babies and the terminally bored. They are supported by municipal unions and other leftist groups, whose agendas run the gamut from higher taxes to higher taxes….

“When times are tough, the tough don’t quit work so they can complain. And the people who really want a job aren’t playing drums in a park, getting stoned and taunting cops.

“Too many protesters, with their gauzy demands for an end to capitalism and more free stuff, feel entitled to be supported by others. If they ruled the world, we’d all be living in mud huts and begging for handouts.

“And yet, as befits a culture that lacks the courage to fight for its own values, this tiniest faction is taking Gotham hostage. They are wreaking havoc on local businesses and residents while breaking numerous laws, including the open use of drugs. Civic appeasement has emboldened them.”

--I thought my friend Liz S. had a great point in talking about the OWS crowd. 

“This is the generation that received medals for participating because everyone is a winner!

“Well guess what? They’re finding out not everyone is a winner.

“It’s this non-stop sense of entitlement that drives some of us crazy.”

--The Washington Post reports that the tale Sen. Marco Rubio tells of his family’s history is embellished, as a review of documents “show that Rubio’s parents came to the United States and were admitted for permanent residence more than 2 ½ years before (Fidel) Castro’s forces overthrew the Cuban government and took power on New Year’s Day 1959.”

Rubio has continually said he was the “son of exiles,” Cuban Americans forced off the island after “a thug” took power.

In response to the new information, Rubio said his accounts have been based on family lore. “I’m going off the oral history of my family,” he told the Post. “All of these documents and passports are not things that I carried around with me.”

Bottom line, there are numerous times that Rubio dramatically stretched the truth in his accounts of his family’s life that went unchallenged, until now.

--In catching up on some reading, I finally got around to a piece in the September issue of Smithsonian by Lynnell Hancock on Finland’s superior, No. 1 in the world educational system. Among the many surprising bits I picked up:

“There are no mandated standardized tests in Finland, apart from one exam at the end of students’ senior year in high school. There are no rankings, no comparisons or competition between students, schools or regions. Finland’s schools are publicly funded. The people in the government agencies running them, from national officials to local authorities, are educators, not business people, military leaders or career politicians. Every school has the same national goals and draws from the same pool of university-trained educators. The result is that a Finnish child has a good shot at getting the same quality education no matter whether he or she lives in a rural village or a university town. The differences between weakest and strongest students are the smallest in the world….

“Ninety-three percent of Finns graduate from academic or vocational high schools, 17.5 percentage points higher than the United States, and 66 percent go on to higher education, the highest rate in the European Union. Yet Finland spends about 30 percent less per student than the United States….

“It’s almost unheard of for a child to show up hungry or homeless. Finland provides three years of maternity leave and subsidized day care to parents, and preschool for all 5-year-olds, where the emphasis is on play and socializing. In addition, the state subsidizes parents, paying them around 150 euros per month for every child until he or she turns 17….

“Finnish educators have a hard time understanding the United States’ fascination with standardized tests. ‘Americans like all these bars and graphs and colored charts,’ (school principal Kari) Louhivuori teased… ‘It’s nonsense. We know much more about the children than these tests can tell us.’”

--In a study of 360,000 cellphone users in Denmark, investigators found no increased risk of brain tumors with long-term use. However, the study focused on cellphone subscriptions, not actual use…so it does not settle the debate about cellphone safety. As reported by Tara Parker-Pope of the New York Times, “A small to moderate increase in risk of cancer among heavy users of cellphones for 10 to 15 years or longer still ‘cannot be ruled out,’ the investigators wrote.”

--Divers found the carcasses of about 2,000 sharks, slaughtered for their fins, in a Pacific Ocean marine sanctuary 300 miles off the coast of Colombia. The discovery was made when divers saw 10 fishing trawlers – flying the Costa Rican flag – entering the zone illegally. When the divers dove, they began finding a large number of sharks without their fins, none of them alive. Yes, it was about shark fin soup and appetites in Asia. Man plummets further on the All-Species List.

--But this just in… “A great white shark has killed an American diver in the second fatal shark attack off Western Australia in 12 days.

“Police Sgt. Gerry Cassidy says the man was below water Saturday when a witness on the dive boat ‘saw a large amount of bubbles.’ The body soon surfaced with fatal injuries.”

The sharks have had enough. It’s payback time.
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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 $1642
Oil, $87.62

Returns for the week 10/17-10/24

Dow Jones +1.4% [11808]
S&P 500 +1.1% [1238]
S&P MidCap +0.6%
Russell 2000 -0.01
Nasdaq -1.1% [2637]

Returns for the period 1/1/11-10/24/11

Dow Jones +2.0%
S&P 500 -1.5%
S&P MidCap -5.1%
Russell 2000 -9.1%
Nasdaq -0.6%

Bulls 35.8
Bears 41.0 [Source: Chartcraft /Investors Intelligence]

Have a great week. I appreciate your support.

Brian Trumbore