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10/15/2011

For the week 10/10-10/14

[Posted 6:00 AM ET]

Europe, Washington and Wall Street

It was a week that began in Europe with Belgium bailing out bank Dexia for a second time (the other being 2008) for $5.4 billion amid a severe liquidity squeeze. Dexia wasn’t even on the radar until about ten days earlier. It has a mountain of Greek debt and other banks had stopped lending to it.

But on top of the nationalization, the governments of Belgium, France and Luxembourg, the latter two where Dexia also has a presence, provided an additional $121 billion in funding guarantees, with Belgium kicking in 60.5%, France 36.5% and the remaining 3% from Luxembourg. So depositors were secured as part of a good bank / bad bank breakup. 

And remember how Greece was to receive the latest 8 billion euro installment from its first bailout by Oct. 13-14? Now it’s early November, but don’t worry, kids, Greece will get it, according to the troika of the International Monetary Fund, the European Union and European Central Bank. Greece is nowhere near its deficit target for 2011, which was 7.5% of GDP. Now try 9.1% (after just a few weeks ago being upped to 8.6%). Then again, Greece’s debt ratio is basically the same as ours! [8.6% for fiscal 2011, which just ended Sept. 30.]

So now we have two key dates. EU finance ministers meet this weekend to set the table on the debt crisis for the annual EU summit, Oct. 23, at which point the agreement on solving it is supposed to be finalized in time for the G20 summit on Nov. 3-4, where it is expected that all the world’s major players will sign off, the markets will rally further and Christmas will come as scheduled, setting up for a 2012 that will be a year to remember…when all the world joins hands, buys oodles of consumer goods, continues to pay down its debts, and Iran’s nuclear weapons program is dismantled voluntarily as Ayatollah Khamenei tells his people, ‘We had it wrong. The West is the direction we want to take our nation in.’ As Ross Perot would say, it’s just that simple. Or not.

Here’s the reality check. Slovakia, after an initial rejection that allowed parliament to toss out the existing government and form a new one, approved the European Financial Stability Fund of 440 billion euro. Now European leaders need to figure out how to use it. And they need to do so by Oct. 23, or no later than Nov. 3-4. And then they have to set about getting a further fund, or a leveraging of the existing facility. Regardless, it’s still unclear just how the EFSF will be used. Also, remember, with each new EFSF or leveraging of the existing one, all 17 are on the hook for a further amount in guarantees. Slovakia, for example, is now in for 4.4 billion euro, or 9% of its GDP, the highest proportionally of any of the 17 members. [Over 13% of GDP if the fund is leveraged.]

Wolfgang Munchau / Financial Times

“When the EFSF was first agreed last May, it was supposed to be the big bazooka. A shock-and-awe strategy, as one analyst famously called it. But it turned out to be a crisis propagator. The fundamental problem of the EFSF is that everybody guarantees each other in a game of dominoes. Italy’s guarantees make up 18 percent of the system. But this 18 percent lacks credibility. Italy is hardly in a position to pay its own debt, let alone guarantee someone else’s. While France is healthier, its guarantees to Italy also lack credibility. And so do German guarantees for France. If you follow the line to the end, there is no ultimate backstop.

“If you double or treble the size of the EFSF without changing its underlying structure, all you do is double or treble the lack of credibility. If you really want to increase the size of the EFSF without destroying it, then you are left with two options: you have to back it through an unlimited guarantee by the ECB, the only organ in the eurozone that is in a position to give such a commitment. Or you have to change the EFSF’s legal status through the adoption of joint and several liability. This means that member states jointly agree to everybody’s debt. The two options ultimately mean the same. The liabilities of the system will be shared jointly by all of the participants. If you want to annoy certain people, you could also call the latter a Eurobond.

“The fallacy of the national guarantees also applies to a recapitalization of the banking sector. I would strongly favor an across-the-board increase in the core Tier 1 capital ratios for all banks. But if member states end up providing the cash, the overall risk of the system remains the same. That also applies if the EFSF were to recapitalize the banks, since its ultimate liability also rests with member states….”

And on and on…

So here’s the deal…as I noted above there is none. German Chancellor Angela Merkel and French President Nicolas Sarkozy recognize the big banks need to be recapitalized. But there is a huge difference between the two that needs to be resolved shortly.

Merkel wants the banks to attempt to recapitalize themselves first by going into the private market. If that doesn’t work, then the state is to help the banks. And if that’s not possible, then the EFSF could be accessed. Sarkozy wants the banks to be able to use the EFSF first, thus preserving, in his case, France’s sovereign AAA credit rating because the rating agencies won’t see the government with new obligations to the banks. 

Then you have the banks saying, well, if I can’t access the EFSF (not that anyone wants to be first because you’re giving away just how dire your situation is and you could have a little old run on your institution), you’re forcing me to sell assets to increase my Tier 1 capital ratio, but how is that going to help the economy if we have less to lend? You’re only tightening credit further at the worst possible time.

But what’s this? The July 21 agreement on a 21% haircut for Greek paper is now in the trash can? You mean to tell me it’s now going to be a 50% haircut? So that means the banks, the major holders of the crappola, have to raise even more capital!

Or, as some were saying on Friday, just let the IMF handle the mess. We want to enjoy the holidays, after all.

Bottom line, we should learn a lot more about the details by Oct. 23, if not Nov. 3-4. But this will in no shape or form mean the crisis is solved, far from it, though at least the major players in this game, including individual investors, could exhale.

This week Martin Andersson, director-general of Sweden’s Financial Supervisory Authority, said “We don’t see any positive signs” when it comes to the crisis. “Things are getting worse and, of course, then you’re more concerned about liquidity and solvency.”

European Central Bank President Jean-Claude Trichet said the debt crisis has reached “a systemic dimension and must be tackled decisively.”

Or as former deputy treasury secretary Roger Altman put it, “The sovereign debt crisis has metastasized into a bank crisis” and the sad part is it all could have been avoided.

One other item on the eurozone, Spain’s major banks, as well as the sovereign debt of the country itself, all faced downgrades by Fitch and/or S&P in the two cases. Fitch notes that Spain’s banks have about $400 billion in “problematic assets” on the books, many of which will soon shift into the non-performing loan category. No surprise from your editor. 

Washington and Wall Street

Despite all of the above, equity markets around the world have largely staged a nice rally on the feeling Europe would get its act together. Whatever. I can only shake my head, though I have been saying that if you don’t believe the U.S. economy is going to double-dip, stocks could rally big. And that they have…with the Dow Jones up 12% since Oct. 3 and the S&P 500 up 11%. 

In the past week, however, we’ve learned some sobering things about the average American and this awful period we’ve been in. For starters, the National Bureau of Economic Research, which decides when business cycles begin and end, noted long ago that the recession began in December 2007 and ended in June 2009. Since then, while it’s felt like recession, the economy has been growing.

So knowing that, between June 2009, when the recession ended, and June 2011, “inflation-adjusted median household income fell 6.7 percent, to $49,909, according to a study by two former Census Bureau officials. During the recession – from December 2007 to June 2009 – household income fell 3.2 percent.” [Robert Pear / New York Times]

Or a decline of 10% since the start of the recession through June 2011.

The Wall Street Journal notes that according to Census data, “From 2000 to 2010, median income in the U.S. declined 7% after adjusting for inflation. That marks the worst 10-year performance in records going back to 1967.”

The Journal’s survey of 50 economists has the U.S. growing at 1.5% this year and only accelerating to 2.3% next year and 2.7% in 2013, however these guys and gals are always off one way or another. If you believe their employment forecast, though, it is not good. The jobless rate will be at 8.2% at the end of 2013, just one percentage point lower from today in over two years.

And then there’s the deficit, which for fiscal 2011, ending Sept. 30, just came in at $1.3 trillion, making it the second worst deficit year since…2009. 2011 barely edged out 2010 for the silver medal. Plus, we all know that unless the bipartisan supercommittee looking into deficit reduction comes up with a far bigger plan than the $1.2 to $1.5 trillion they are mandated to cut, the picture is just going to get worse.

So, yes, it’s no surprise many in America are fed up, distressed and scared. I wish I had something good to say, but I don’t (stock market rallies aside). Many feel like the 50-year-old Occupy Wall Street protester I saw on NBC News who said of her plight, “My life savings was invested in real estate and the stock market and now I have nothing.”

There’s a lot I could add about this statement, seeing as how I issued one warning after another over the years, but it’s too late. If you didn’t receive trusted advice, or failed to take even a modicum of personal responsibility, you’re screwed.

And, yes, there are many on Wall Street who should be in jail, and on this issue I totally agree with the Occupy Wall Street movement. But I have further comment on the topic below.

Economist Robert Samuelson / Washington Post

“Here are three generalizations (about growing economic inequality).

“First, the increase has been stunning. From 1945 to the late 1970s, the richest 10 percent of Americans accounted for about 33 percent to 35 percent of total income, including capital gains (mostly stock profits), estimate economists Emmanuel Saez and Thomas Piketty. By 2007, their share was 50 percent – equivalent to the late 1920s. Most of the gain went to the richest 1 percent, whose share rose from about 10 percent in 1980 to 24 percent in 2007.

“Second, it’s a global phenomenon. In a 2008 study, the Organization for Economic Cooperation and Development (OECD) found that inequality had increased for 17 out of 22 countries over two decades, though conditions vary dramatically by country. In Sweden and Denmark, the richest 10 percent have incomes about five times greater than those of the poorest 10 percent. In the United States, the ratio is 14-1. The OECD average is 9-1. Mexico has the highest, 27-1.

“Finally, most of America’s rich – however defined – don’t escape taxation. In 2007, the richest 10 percent paid 55 percent of all federal taxes, estimates the Congressional Budget Office. The richest 1 percent paid the lion’s share of that: 28.1 percent of federal taxes. The average tax rate on the top 1 percent was 29.5 percent. Similarly, the richest 3 percent account for 36 percent of charitable contributions.

“There are many theories about why inequality has increased, though no consensus: New technologies reward the highly skilled; globalization depresses factory wages; eroded union power does the same; employer-paid health insurance squeezes take-home pay; a ‘winner-take-all’ society confers huge rewards on an elite of celebrities, sports stars and business leaders….

“The backlash against the rich is the start of debate, not the end. Are the rich to be punished for succeeding or merely asked to pay their ‘fair’ share? Who is wealthy or who’s just well-off? Is $250,000 a reasonable cutoff for couples, as Obama once indicated, or has that been repudiated? If taxes do rise, what approach would best preserve incentives for hard work, investment and risk-taking? Are Obama’s assaults on wealthy business leaders just deserts or political cheap shots? However measured, the rich are besieged; the attacks almost certainly will intensify.”

And a note on China. The battle is on between those who believe China’s economy is about to crash, and those, such as yours truly, who believe a soft landing is in order. Much is being made of the banking sector, as this week the nation’s sovereign wealth fund bought shares of the top banks that have taken such a beating. Morgan Stanley’s Stephen Roach continues to believe China will slow from its current 9.5% growth rate to about 8% but no further. Such a breather could bring “welcome relief” for a nation long vexed by rabid resource consumption, excess liquidity and rampant inflation, Roach writes. [Kopin Tang / Barron’s]

Others, such as short-seller Jim Chanos, say China’s banks have a huge non-performing loan issue, to which I’d say I pointed out a few weeks ago that this is no surprise to the Chinese government. It’s not a huge issue and some smaller financial institutions will simply be allowed to fail, particularly those involved in the real estate loan business. China has the resources to stave off a banking crisis.

No doubt, however, the economy is slowing. Third quarter GDP will be released this coming week and is expected to come in at 9.3%. This week, the government released trade data for September and it showed exports were up 17% year over year when a gain of over 20% was expected. Conversely, imports were up 20.9%, also below expectations. But this is hardly a disaster, though admittedly the speed of decline is worrisome. New loans also hit their lowest level in two years.

But at least the September inflation picture improved ever so slightly as the consumer price index, which had peaked at 6.5% in July, hit 6.1% last month after coming in at 6.2% in August.

On the topic of a potential U.S.-China trade war, thankfully efforts in Congress to force China to manipulate its currency to our liking won’t advance beyond the Senate as the House will not pass a punitive bill some want. Yukon Huang, a former director at the World Bank in China, wrote the following in a Financial Times op-ed.

“Once again the U.S. Congress is finding it more convenient to play the China currency card as the panacea for America’s economic woes, rather than deal with the difficult issues in President Barack Obama’s recent employment bill.

“China’s response to the proposed bill pressuring it into allowing the renminbi to appreciate was predictable, with simultaneous protests from all the relevant agencies. Given the threat to the global economy from problems in the eurozone and the U.S., China’s leadership regards the currency bill as a distraction from the real issues that need to be resolved. At a time when China is one of the few sources of global growth, ratcheting up protectionist sentiments only makes it harder to secure the necessary multilateral cooperation. The country’s government sees the currency debate as yet another sign of why the American political system is broken.”

Street Bytes

--The major market averages extended their winning streak to three as the Dow Jones finished up 4.9% to close at 11644. The S&P 500 rose 6.0%, its best week since July 2009, while Nasdaq, riding the success of Apple’s iPhone 4S launch, as well as Google’s stellar earnings, soared 7.6%. Both the Dow and Nasdaq are now up 0.6% for the year, while the S&P remains in the red to the tune of 2.6%.

The market on Friday also received a boost from the week’s only major economic release, September retail sales, up a better than expected 1.1%. But the earnings out of JPMorgan Chase were far from stellar as revenues fell 11% and CEO Jamie Dimon called the outlook “extremely cautious while navigating through this challenging environment.” At least Dimon said he saw positive trends in the bank’s consumer business.

--U.S. Treasury Yields

6-mo. 0.05% 2-yr. 0.26% 10-yr. 2.25% 30-yr. 3.23%

The long end of the curve continued to inch up in yield as investors pull money out of bonds and put it into stocks, as well as the feeling that the economy is not going to tip back into recession.

--I didn’t have the third quarter mutual fund return figures for last time so herewith are a few key numbers from Lipper.

10-year annualized returns, including dividends and reinvestment, thru 9/30.

S&P 500 Index Fund 2.30%
Large Cap Growth 2.42%
Large Cap Value 2.54%
Small Cap Growth 5.06%
Small Cap Value 6.95%
Intermediate U.S. Government 4.61%

Wow, those are great returns, aren’t they? And to think most pension funds are based on annualized blended returns of 8%. 

--Congress finally passed free trade agreements with South Korea, Colombia and Panama. The agreements will lower or eliminate tariffs that American exporters face in the three.

--Billionaire hedge fund manager Raj Rajaratnam was sentenced to 11 years in prison for the insider trading scandal in which he received $72 million in illegal profits through his Galleon Group operation. Prosecutors indeed have now sent a message when it comes to this kind of activity, aided by 45 audio recordings and vivid testimony from 18 witnesses, including evidence that Rajat Gupta, a Goldman Sachs board member at the time, called Rajaratnam 23 seconds after learning during a board call that the bank would lose money for the first time as a public company. Rajaratnam then called a Galleon employee in Singapore, bragging about the information he had received, and made $5 million on the trade.

--In a solid sign, Wal-Mart announced it had produced its first quarter of rising U.S. sales in more than two years, nine consecutive quarters, as its plans to deepen discounts and improve product selection were finally succeeding in luring back customers. The company also said it would open up to 235 stores in the U.S. next year, while cutting back on remodeling plans. Wal-Mart announces earnings next month.

--Google hit it out of the park in its latest earnings report, far exceeding estimates on both net income and revenues. Plus the company said it had added 2,585 employees in the latest three months, bringing its headcount to 31, 353. Revenues, $7.5 billion, were 37% higher than year ago levels, marking the highest growth rate since the second quarter of 2008. Earnings climbed to $9.72 vs. $7.64 a year earlier. “Paid clicks” rose 28%, while the average cost per click was up  5%.

--China bits:

Auto sales rose for a fourth straight month in September as automakers offered discounts and consumers purchased cars ahead of a week-long national holiday. The gain was 8.8 percent to 1.32 million units; this after sales gains of 7.3, 6.7 and 6.2 percent the prior three months.   But the China Association of Automobile Manufacturers reduced its overall forecast for 2011, saying deliveries would grow less than 5 percent. Back in January, the association had estimated growth of 10 to 15 percent. Vehicle sales grew 32 percent in 2010.

Housing prices in China declined for the first time this year in September, while the government cut fuel prices in response to a lower global price environment for crude.

China’s Sinopec agreed to buy Canadian oil and gas company Daylight Energy for about $2.1 billion, the latest in a string of energy deals between the two countries, though this is a very small acquisition by comparison to other ventures. Sinopec is a subsidiary of China Petrochemical Corp., the nation’s largest refiner.

While overall growth in Chinese trade slowed significantly in September, copper imports hit a 16-month high and iron ore imports hit their highest level since January. [For the first time, China revealed the estimated size of its copper inventories and they were far greater than thought at the end of 2010, meaning actual demand may have been lower than some had been projecting.]

--New York State’s comptroller Thomas P. DiNapoli said the Big Apple’s securities industry could lose nearly 10,000 jobs by the end of 2012, a painful blow to government budgets, for one. Since January 2008, the securities industry has lost 22,000 jobs in New York.

--Economist Martin S. Feldstein / New York Times

“Homes are the primary form of wealth for most Americans. Since the housing bubble burst in 2006, the wealth of American homeowners has fallen by some $9 trillion, or nearly 40 percent. In the 12 months ending in June, house values fell by more than $1 trillion, or 8 percent. That sharp fall in wealth means less consumer spending, leading to less business production and fewer jobs.

“But for political reasons, both the Obama administration and Republican leaders in Congress have resisted the only real solution: permanently reducing the mortgage debt hanging over America. The resistance is understandable. Voters don’t want their tax dollars used to help some homeowners who could afford to pay their mortgages but choose not to because they can default instead, and simply walk away. And voters don’t want to provide any more help to the banks that made loans that have gone sour.

“But failure to act means that further declines in home prices will continue, preventing the rise in consumer spending needed for recovery. As costly as it will be to permanently write down mortgages, it will be even costlier to do nothing and run the risk of another recession….

“The Obama administration has tried a variety of programs to reduce monthly interest payments. Those programs failed because they didn’t address the real problem: the size of the mortgage exceeds the value of the home.

“To halt the fall in house prices, the government should reduce mortgage principal when it exceeds 110 percent of the home value. About 11 million of the nearly 15 million homes that are ‘underwater’ are in this category. If everyone eligible participated, the one-time cost would be under $350 billion….

“I cannot agree with those who say we should just let house prices continue to fall until they stop by themselves. Although some forest fires are allowed to burn out naturally, no one lets those fires continue to burn when they threaten residential neighborhoods. The fall in house prices is not just a decline in wealth but a decline that depresses consumer spending, making the economy weaker and the loss of jobs much greater. We all have a stake in preventing that.”

Feldstein is an influential Republican voice. I’d be surprised, though, if anything came of this until after 2012.

--Shares in BlackBerry maker Research in Motion took another hit as BlackBerry service was severely disrupted across much of Europe and North America. As Apple unveiled its new iPhone 4S product, the timing of the BlackBerry outages could not have come at a worse time. As one analyst for Gartner, Ken Dulaney, put it, “Irritants can sometimes turn into infections and we know what happens after that.”

--Billionaire Mark Cuban says that high-frequency traders, or HFTs, are corrupting the market and has called for a tax on it.

“People are going to scream bloody murder, of course. But we have to ask ourselves, what’s the purpose of the stock market? It’s supposed to be a source of capital for growing business. It’s lost that purpose.”

Amen, brother. The SEC is examining ways to deal with the problem, including requiring HFTs to register with regulators. But more is needed beyond this step.

--Harrisburg, Pennsylvania became the second U.S. city to file for bankruptcy this year (Central Falls, R.I. being the other). It now becomes a city vs. state issue and my eyes glaze over reading some of the details. The problems all stem from the city’s trash-burning incinerator that has racked up debt of some $310 million…this on a project that was supposed to be self-sufficient. 

--Ford Motor Co. is having problems as a Chicago Assembly Plant overwhelmingly rejected a contract between the automaker and the UAW, the second such setback. Ford thought it had a four-year agreement and failure to ratify the contract could easily lead to a walkout. The proposed deal had called for Ford to invest $6.2 billion in U.S. plants and add 12,000 jobs through 2015, but veteran workers would see no wage increase (though they would get a $6,000 bonus and an annual inflation payment of $1,500).

--Warren Buffett disclosed that he earned $63 million last year, yet paid less than $7 million in federal income tax. Based on his taxable income of $39.8 million, his effective tax rate was 17.4%. But Buffett left out a lot of detail in his letter to a Republican congressman who had made the request, the biggest being the gap between adjusted gross income and taxable income. One possibility is he made large charitable contributions that are subtracted from adjusted gross.

--The U.S. Department of Agriculture trimmed its projection of the corn harvest a third straight month, but grain prices tumbled initially over reports that foreign producers are growing more corn and wheat, such as in the Black Sea region, which is exactly what I told you weeks ago was the case through my sources in Russia and Ukraine. [Readers of the site.] Russia in particular is shipping it out fast and furiously, despite calls you’ve seen to limit exports there.

--Inflation exceeded 9% for a 10th straight month in India for September. The central bank is expected to raise its key lending rate to 8.5% later this month.

--When I saw a Journal story titled “Peanut-Butter Makers Face Crunch,” I bought some of the product that day, so bring on the peanut butter spike, caused by the drought in places like Georgia. Owing to my actions, my way of life thus won’t be impacted in the least. [Wholesale prices for leading brand Jif, which is gross, are going up 30% starting in November, according to the Journal.]

--Australia’s unemployment rate fell to 5.2% in September. 

--Britain’s jobless rate rose to a new high of 8.1% as Prime Minister David Cameron’s austerity program continues to be blasted by the opposition. Hang in there, David. You’re doing the right thing.

--Hedge fund billionaire John Paulson is having his problems this year. His Recovery fund, which wagers on the U.S., is down 31% through September, while his gold fund is up just 1% even though through Sept. 30, gold was up over 16% for 2011. He was killed across the board last month and assets, through losses and redemptions, are off $8 billion, though Paulson is still managing $30 billion, sources told the Wall Street Journal.

--Venture capital firms raised $1.7 billion in the third quarter vs. $3.5 billion collected in the same period last year, representing the lowest amount since the third quarter of 2003, as reported by Tiffany Hsu of the Los Angeles Times.

--Owing to severe underperformance, PIMCO’s Total Return Fund, managed by Bill Gross, has seen inflows of just $183.5 million this year vs. $57.7 billion in 2009. As the Wall Street Journal pointed out, through Wednesday, the fund was up only 1.1% vs. the 5.7% return for its benchmark, which in bond land means the fund is getting crushed. Gross’ interest rate calls this year, to say the least, have been a little off.

--Netflix reversed gears and said it will keep its DVD-by-mail and online streaming services together under one name and one Web site, after announcing a disastrous plan to break them up just three weeks earlier. It will, however, maintain the 60 percent price increase. Subscribers had been furious over the change and the cancellation rate far exceeded the company’s expectations.

--Americans Thomas J. Sargent and Christopher A. Sims are the winners of the Nobel Prize in Economics for their separate research on the impact of “expectations,” the cause-and-effect relationships in the economy and how sentiment and expectations drive behavior, including policy decisions. Now that’s the kind of Econ course I could get into.

--Clothing retailer Gap said it would close 21 percent of its U.S. stores in the next two years while tripling outlets in China by the end of 2012 (15 to 45).

--Housing, part deux: Court records show comedian Chris Tucker is facing foreclosure on a central Florida mansion he purchased in 2007 for $6 million that is now assessed at $1.6 million.

--Budget airline Ryanair is at it again, this time unveiling plans to have only one lavatory on its aircraft instead of two or three, replacing them with six extra seats. Talk about a disaster waiting to happen. I know most of their flights are just 60-90 minutes, but…up to 200 passengers and six crew using one restroom?! 

--The New York Times reported that the Metropolitan Opera raised a staggering $182 million for its fiscal year ending in July, 50 percent more than it raised the year before. Given the state of the economy, this is awesome. Donor contributions support 43 percent of the Met’s $325 million operating budget. So party down, opera lovers! 

--Scene at the dinner table this weekend as parents Bob and Carol break the following news to their kids Ted and Alice.

“Ted…Alice…we have some bad news.”
“What is it, Mom and Dad?”
“NBA Commissioner David Stern said that if the league doesn’t strike a labor deal with its players by Tuesday, there won’t be any games on Christmas Day.”
“What’s the NBA?”
“Yeah, what’s the NBA? Can we be excused?”

Foreign Affairs

Iran: President Obama directly accused Iran of “dangerous and reckless behavior” in pursuing a plot to assassinate the Saudi ambassador to the United States, Adel al-Jubeir, a well-known figure among the Washington diplomatic set and a leading adviser to the Saudi royal family (as well as a former boyfriend of then NBC news reporter Campbell Brown).

Officials were initially skeptical of the plan until they learned of a $100,000 payment to the alleged plotters that was linked back to Iran’s Quds Force, the foreign operations wing of the Iranian Revolutionary Guard Corps. There is, however, no evidence, as yet, that Ayatollah Khamenei or Iranian President Ahmadinejad knew of the conspiracy, but it’s hard to believe Khamenei hadn’t been briefed.

Al-Jubeir was to have been killed at a Washington restaurant, the assassination carried out by hit men from a Mexican drug cartel who were to be paid $1.5 million. Other plots included bombings of embassies both here and abroad.

Editorial / New York Post

“The Obama administration may finally be coming to terms with the Iranian threat.

“Certainly, President Obama is sounding tougher this week regarding Tehran than he did during his first year in office.

“Yesterday, he vowed to hold Iran ‘accountable’ for its ‘reckless behavior.’ And he refused to ‘take any options off the table in terms of how we operate with Iran.’….

“To his credit, the president insisted on ‘accountability with respect to anybody in the Iranian government engaging in this kind of activity.’

“Nor did he downplay Iran’s bloody record. The latest plot, he said, ‘is part of a pattern of dangerous and reckless behavior by the Iranian government’ – calling it ‘just one example of a series of steps that they’ve taken to create violence.’

“No kidding, there: Most of the world has been painfully aware of Tehran’s mischief – ever since its 1979 revolution.

“It’s been a chief sponsor of global terror, has murdered U.S. soldiers (either directly or through proxies) in Iraq, Afghanistan, Lebanon and elsewhere and seeks Israel’s complete annihilation.

“Oh, yeah: And it’s busily building nukes….

“For now, Obama says he’ll seek ‘the toughest sanctions’ against Iran and step up worldwide efforts to see that it ‘pays a price for this kind of behavior.’

“A State Department aide yesterday said U.S. officials ‘have had direct contact with Iran’ in the wake of the new disclosures, despite the lack of formal relations between Washington and Tehran. Hmm…

“Keeping fully in mind that words can be cheap, we find this all encouraging news.

“For Obama & Co., the proof will be in the follow-through. America’s response – or lack thereof – will have profound consequences…throughout the world.”

Editorial / Washington Post

“The Obama administration’s charge that senior Iranian officials plotted to kill the Saudi ambassador in Washington was greeted with a considerable amount of skepticism in some quarters of Washington and the Middle East. Iran, argued some pundits, was unlikely to have undertaken such a brazen attack; it had little to gain by killing the ambassador; and, anyway, its clandestine operations were known to be far more skilled than the seemingly bumbling attempt to contract the assassination to a Mexican drug cartel.

“Perhaps the doubters are right, and it is certainly prudent to reserve final judgment until all the facts of the case are known. But the FBI’s charging documents outline some substantial evidence, including the transfer of $100,000 to a bank account that the suspect arrested in the case, Mansour Arbabsiar, believed belonged to a Mexican cartel member. The FBI also recorded phone conversations between Mr. Arbabsiar and a man in Tehran he identified as an operative of the Quds Force of the Iranian Revolutionary Guard….

“The Obama administration can hardly be suspected of manufacturing this story to seek out a confrontation with Iran. In fact, its evident eagerness to curtail U.S. military operations abroad and cut the defense budget may have encouraged some in Tehran to believe that an attack on U.S. soil would not risk a serious response. That’s one reason why it’s important that U.S. countermeasures go well beyond the small extensions of sanctions announced Tuesday. The administration is rightly seeking to mobilize new multilateral action against Iran, including through the United Nations. But there are steps that the United States and close allies can take, such as directly sanctioning Iran’s central bank – a measure that already has considerable support in Congress.

“The alleged plot against the ambassador may reflect a splintering of the Iranian regime that allows radical factions to act more autonomously….Whatever the cause, the scheme’s discovery should serve as a warning of the escalating threat posed by Iran – and the need to act more forcefully against it.”

Editorial / Wall Street Journal

“Had it succeeded, this would have constituted an act of terror by the Islamic Republic of Iran on U.S. soil, and arguably an act of war. To those, notably an emerging isolationist wing in the Republican party, who’ve argued lately that the U.S. should pull its efforts back from a waning international terrorist threat to focus on domestic concerns, this event is a wake-up call….

“The good news in yesterday’s announcement, and in earlier successes, is that U.S. law-enforcement and intelligence appear to have taken the lessons of 9/11 to heart. They got serious about terror and are able to thwart potential disasters such as this, though we wonder how many others are in train.

“Less reassuring is the lapsed seriousness by the West’s political leadership about Iran’s threat. The U.S. and its allies have imposed sanction regimes on Iran, but they have allowed legalistic definitions to free Iranian officials with ties to its nuclearization program to flout travel bans and such.

“Mahmoud Ahmadinejad arrives annually to rant from a podium at the United Nations on the East River. Iran is about much more than these antic rants, and its resources are vastly greater than al Qaeda’s. It sees itself as at war with the U.S., Europe, Israel and now obviously Saudi Arabia. As obvious, it sees itself as immune to effective retaliation against its repeated, or planned, offensives. It’s past time for U.S. policy toward Iran to reflect the reality of what it is dealing with.”

One should assume a military strike of some kind is now in the cards, though not soon. The administration wants a forthcoming International Atomic Energy Agency assessment on Iran’s nuclear program to provide more specifics on Tehran’s suspected efforts to produce a nuclear-tipped missile. I think the White House will seek further proof on the weapons front before taking action of any kind.

But the last thing I’d want, if I were President Obama, would be for Iran to test a nuclear device after September of next year, with the campaign in the final stretch, thus exposing Obama to all kinds of charges of failing to take the threat seriously. Thus, perhaps next spring is the time to launch a strike. I would also suspect Iran will be given fair warning, though not told what the actual target is. I’ll game this out further over the coming weeks, including my comments years ago concerning Iran’s intentions on building bases of operations in Latin America, which were essentially borne out by the just announced plot.

Lastly, interesting item that Iran is reportedly cutting its financial support to Hizbullah, according to a Kuwaiti newspaper. The sources say Iran provides Hizbullah with $350 million annually, funds earmarked for members’ salaries, families of martyrs and projects in Beirut’s southern suburbs and the Bekaa Valley. Iran’s suffering economy is largely to blame. This doesn’t mean militarily support is cut off, however.

Iraq: What a frustrating stretch for the Obama administration as Iraq has continued to support President Assad of Syria, hosting official visits from Damascus and signing business pacts. While it appears the dollar aid is minimal, it is the moral support that is important to Assad’s survival. Iraqi Prime Minister Nouri al-Maliki has spoken out against regime change. “We believe that Syria will be able to overcome its crisis through reforms,” the same line adopted by Iranian President Ahmadinejad.

Both Maliki and Ahmadinejad have criticized Assad’s brutality, but they have not called for his ouster, nor are they accepting Syrian refugees. The Syrian opposition gets zero recognition. Meanwhile, cleric Moqtada al-Sadr has publicly called Assad his “brother.”

Then you have the issue of U.S. military trainers staying beyond the 2011 withdrawal date. 44,000 U.S. troops are scheduled to leave end of the year and initially Iraq requested 3,000 remain behind to continue to train the Iraqi security forces and army. But now Maliki says, “We do not need such a large number” in saying talks will be concluded by mid-November.

The sticking point, aside from Maliki being pulled to the side by Sadr, who is telling him no troops get to stay, is the issue of immunity. Washington insists U.S. troops be granted immunity from prosecution if they commit crimes. A majority in the Iraqi parliament are adamantly against it. One lawmaker told the Washington Post:

“Americans misuse immunity. They’ve had it for eight years. They made a lot of violations…Sometimes they killed people, attacked people, captured people, and no one could tell them anything. Iraq doesn’t want a repeat of that.”

This is where something like Abu Ghraib hurts U.S. efforts immensely. It will be interesting to see what the final solution is as the Pentagon works on an alternative, more private contractors.

Separately, while violence is certainly down over the pace of 2006-07, insurgents are still capable of widespread attacks, such as Wednesday’s suicide and car bombings that resulted in at least 25 deaths in Baghdad.

Egypt: Some two dozen Coptic Christians were killed by Egyptian security forces on Sunday night which most believe marks a worrisome turn in the revolution, not that there wasn’t already reason to worry with the postponement of presidential elections until well into 2012. Just eight months after the removal of President Hosni Mubarak, it’s open season on the Christian minority. The public also now understands once and for all that the ruling military council is nothing but a gang of thugs.

A political laeder, Ayman Nour, told journalists, “The credit that the military received from the people in Tahrir Square just ran out yesterday. There is no partnership between us and the council now that the blood of our brothers stands between us.”

The military failed to explain its actions, only issuing an apology for “unfortunate events” that “transformed peaceful protests to bloody ones.” Expressing “deepest condolences to the families of the victims,” the military reiterated its determination to refuse “attempts to cause a rift between the armed forces and the Egyptian people.” [David D. Kirkpatrick / New York Times]

I’ve written on many occasions that it has been war on Christians throughout the Middle East. There are but a few pockets remaining in Iraq, which at one time had a healthy Christian segment; Christians are not welcome in Iran; and now Christians are being killed in Egypt. 

Bret Stephens / Wall Street Journal

“What is true is that Egypt is in the early stages of Thomas Hobbes’ bellum omnium contra omnes, the war of all against all….(Gone) is the Arab Spring narrative of tech-savvy, pro-democracy protesters standing tall and proud against the dinosaur Mubarak regime. Gone even is the narrative of the liberal secularists versus the Muslim Brotherhood.

“Instead, picture Egypt as a vacant lot in which a dozen or so combustible elements – a leaking oil can here; some dry wood over there; patches of dessicated grass – sit in varying degrees of proximity to one another, while the boys who play in the lot light cigarettes. Chances are something will catch fire. Chances are that if something does, all of it will….

“Egypt today is in need of a savior in the mold of Muhammad Ali Pasha, its first great modernizer. But the nearer historical precedent is an opportunistic officer in the mold of Gamal Abdel Nasser – or a religious messianist like Iran’s Ayatollah Khomeini. Either possibility would be a calamity for the Middle East, and for the United States. But Egyptians will think otherwise when confronted by the specter of anarchy. Just ask Thomas Hobbes.”

Syria: The government warned the international community not to recognize a new opposition council, threatening “tough measures” against any country that did so, though this is mostly bluster. Foreign Minister Walid al-Moallem did say that countries that do not protect Syrian missions will have their embassies treated in the same way.

The Assad regime is definitely concerned, however, that the new Syrian National Council does begin to gain recognition, a la Libya’s rebels in the early days of the revolution there.

Meanwhile, at least another 19 were killed in two towns as the U.N. says the death toll nears 3,000 since the protests started in March. Virtually all foreign media has been banned from Syria.

And this just in…Syria has been sending troops across the border with Lebanon, in the Bekaa Valley, under the pretense of stopping the flow of weapons into Syria that are destined for the opposition. In one case last week, Syrian tanks penetrated four miles into Lebanon and a farmer was killed. What a bunch of bastards. Assad needs to be assassinated, and don’t give me this, ‘Well what follows could be worse.’ Let Turkey take the country over. “Here, Erdogan. Make peace with Israel and Syria is yours.” [The pressure on Iran would also then be immense. The people could very well topple the regime knowing the West, and NATO, is at their doorstep.]

Israel: Hamas and the Israeli government have engineered a prisoner swap whereby Israel is releasing 1,027 prisoners (beginning with 450 within days) while Israel gets Sgt. Gilad Schalit. Nice percentages. 300 of the Palestinians being released had received life sentences, though the 40 most dangerous will be deported to other countries such as Turkey. Israeli Prime Minister Benjamin Netanyahu said he got “the best deal we could get” given the turmoil in the region. Schalit could come home on Tuesday. In the first poll, by a 69-26 margin, Israelis support the move, but 62% believe Israel’s security situation will worsen.

Afghanistan: According to a U.N. report, “systematic torture” is the order of the day during interrogations by Afghan intelligence and police officials. The report doesn’t determine if U.S. officials are aware of the abuses, even as American and other Western backers provide the funding and training for the Afghans running detention centers.

Ukraine: In a move that has outraged the West, and Russia, former Prime Minister Yuliya Tymoshenko was sentenced Tuesday to seven years in prison (and fined $188 million) for exceeding her authority in brokering a gas contract with Russia in 2009, ending a dispute that had left parts of Europe freezing in the dead of winter. President Viktor Yanukovych has sought to renegotiate the deal, arguing Ukraine’s Naftogaz was paying too high a price to Gazprom for Russian gas. 

[Tymoshenko’s daughter believes her mother will be released shortly, even as Ukraine’s intelligence service opened a new criminal case against Tymoshenko, less than 48 hours after her sentencing. This time the charge involves the reassigning of $405 million in debt owed by a private energy company she headed in the 1990s to Ukraine’s federal budget.]

White House spokesman Jay Carney said: “The charges against Mrs. Tymoshenko and the conduct of her trial, as well as the prosecution of other opposition leaders and members of the preceding government, have raised serious concerns about the government of Ukraine’s commitment to democracy and rule of law.”

For his part, Russian Prime Minister Vladimir Putin warned that efforts to tear up the 2009 contract would hurt ties between the two countries. European Union officials say Ukraine’s move toward EU membership may have just come to a grinding halt.

Yanukovych is to meet Russian President Medvedev on Oct. 18 to discuss the gas agreement. Yanukovych will say the court decision proves the contract is null and void.

Tymoshenko claims Yanukovych, who lost in 2004 to Viktor Yushchenko when Tymoshenko was a leader in the Orange Revolution, is trying to silence the opposition ahead of parliamentary elections next year.

Editorial / London Times

“Ukraine marked 20 years of independence this summer. Yet the jailing this week of Yuliya Tymoshenko, the former Prime Minister, showed that what was once widely regarded as the most democratic of the former Soviet republics has not, after all, moved far from a model of arbitrary arrest and political show trials.

“The outcome might be counted a farce but for the costs to Mrs. Ymoshenko and the damage to Ukraine’s diplomatic reputation. If Ukraine retains hope of an eventual accession to the EU, it must operate according to European standards of justice and due process. And European policymakers should impose costs on a failure to observe those principles….

“Mr. Yanukovych is a small-minded mediocrity of the type that used to serve as compliant heads of government in Soviet satellite states. Yet his obduracy and repression appear to worry even his former allies in Russia. Though Vladimir Putin seeks to create a new Eurasian union of former Soviet republics, he too has voiced opposition to Mrs. Tymoshenko’s treatment. EU governments should be unrestrained in their outrage.”

Russia: Prime Minister Putin traveled to China for a two-day visit and he was able to announce a series of energy deals between the two. Both Putin and Chinese President Hu Jintao took the opportunity to slam the United States, specifically the U.S. dollar, the dominance of which Putin called “parasitic.”

And it was last week I wrote of actress Hilary Swank’s appearance at Chechen leader Ramzan Kadyrov’s birthday, “someone please explain to me why U.S. film star Hilary Swank was there?!” It wasn’t until five days later, Wed. p.m./Thurs. a.m., that the major U.S. networks picked up on what I told you, including Thursday’s “Today” program. I’ve told you Kadyrov is one of the truly awful people on the planet for years. On Wednesday, Human Rights Watch (also after your editor) condemned the appearance of Swank and fellow actor Jean Claude Van Damme, saying in a statement:

“Ramzan Kadyrov is linked to a grim record of abuse. When stars get paid to turn up to party with (Kadyrov), it trivializes the suffering of countless victims of human rights abuses.”

Swank apologized on Wednesday night, issuing a statement saying:

“I deeply regret attending this event. If I had a full understanding of what this event was apparently intended to be, I would have never gone.”

What a freakin’ idiot! Yoh, Hilary. Read a damn newspaper now and then, would ya? You would have known this guy is a son of Satan.

China: October 10, 1911, marked the start of the uprising against the Qing dynasty, led by Dr. Sun Yat-sen, and a revolution that ended 2,000 years of imperial Chinese rule, so both Taiwanese president Ma and Chinese President Hu marked the anniversary; with Ma urging China’s government to pursue democracy and respect his island’s self-governance, while Hu made an appeal in Beijing for both sides to move beyond the history that divides them (Taiwan and China split in 1949 amid a civil war) and work towards reunification. Most Taiwanese are wary of such calls, especially when they are being targeted by at least 1,000 missiles these days.

The problem is Taiwan’s presidential election in January. President Ma has been responsible for great strides in Taiwan-Chinese relations, primarily on the economic front, but some on Taiwan believe he is going too far so as the campaign heats up, he is seeking to reassure his people he can still be tough, but the rhetoric could backfire.

For its part, for years now, Beijing has been awaiting the result of the election. If Ma wins another term, relations should continue to improve. Should the opponent win, however, all hell could break loose.

Separately, I posted a Chinese state editorial on my “Hot Spots” link concerning the potential for military conflict in the South China Sea over energy and mineral rights, but this week China and Vietnam, the two most likely to go to war in this matter (secondarily the Philippines), announced agreement on a series of steps designed to reduce tensions. Among other things a hot line was established between the two.

Thailand: The country floods during monsoon season all the time, except what is going on today is the worst flooding in decades as the megalopolis of Bangkok itself is now threatened for the first time in recent memory. As I go to post, suburbs are being inundated and it’s a guess as to whether the floodgates will operate properly. The Flood Relief Center didn’t help matters when it erroneously reported on Thursday that the water had broken through, so the government called for an urgent evacuation, only to learn the gates had held. Over 280 have been killed thus far and as I mentioned the other day, some key crops, such as rice, have been severely impacted.

Burma: The president granted amnesty to more than 6,300 prisoners in what is a highly significant step in a series of reforms undertaken by the newly elected government (you’ll recall there were cries of ‘foul’ in this one). It’s not known how many of the nation’s 2,000 political prisoners would be included in the release.

France: Martine Aubry and Francois Hollande are squaring off on Sunday in the second round of Socialist Party voting to determine the challenger to President Sarkozy in next spring’s election. Hollande won the first round 39-30. The Socialists last won with Francois Mitterand in 1988.

Britain: There is a bizarre story here, as there always seem to be when it comes to British politics, but Defense Secretary Liam Fox just resigned under fire for allowing a friend of his, Adam Werrity, access to the Ministry of Defense 14 times in 16 months. Werrity had been handing out two different business cards bearing the House of Commons crest, in both cases claiming a connection to Fox as an employee or adviser when both claims were false. The main concern is over an intelligence breach. Werrity was best man at Fox’s wedding. Prime Minister Cameron demanded a report on Monday but Fox saved the prime minister further embarrassment. The investigation continues.

Mexico: So many people are being killed here in the drug war, I can’t keep up. 30 here, 35 bodies there…

Central America: …but a U.N. study says the highest murder rates are in Honduras and El Salvador. Honduras had 6,200 killings out of a population of 7.7 million (roughly the population of New York City, which had about 500 homicides by comparison…and peaked in the crack years at 2,100). El Salvador, with a population of 6.1 million had 4,000 homicides.

Honduras’ homicide rate of 82 per 100,000 people compares to the United States’ 5 per 100,000. So I just crossed Honduras off my bucket list.

Central African Republic: Friday night I watched NBC Nightly News and anchor Brian Williams had one of his made up leads, “Later…the story of Michelle Obama’s dress that has the world buzzing,” or something to that effect. So as is his wont, Williams totally lies that the world cares about a freakin’ dress the First Lady wore at a State Dinner for South Korea’s leader (which I’m glad was held, in all sincerity…South Korea being a great and important ally).

Anyway, afterwards I’m skimming through some headlines before I begin to proof this column (which takes all Friday night, by the way) and I see this headline from the AP:

“Obama sending troops to aid Africa anti-insurgency”

Wha?! On Friday, Obama, with little consultation from Congress, it would seem, beforehand, sent the first of eventually 100 U.S. troops to Uganda, with others to go to the Central African Republic and the Democratic Republic of the Congo. They will act as fully combat ready advisers in the long-running battle against the Lord’s Resistance Army, the notorious rebel group headed by Joseph Kony. I mean these guys are some of the worst actors in the history of the world so I have no problem that Obama has taken this step.

It’s just that this is a big story! The U.S. seldom acts in this region in this fashion, especially since our history in Somalia. [I’m not counting the basing of troops in places like Djibouti where the mission is to hunt down al-Qaeda.]

So earth to Brian Williams. Do a real news program, will ya? Save Michelle’s dress for “Extra!”

Otherwise…Go U.S.A. Kill Kony!

New Zealand: Potential environmental disaster here as a container ship ran aground 100 miles southeast of Auckland. The ship is carrying 1,700 metric tons of fuel oil and potentially dangerous chemicals. The crew had to abandon ship due to bad weather and massive waves. A significant amount of oil has leaked as crews now try to siphon it out. Pristine beaches in the country are now being fouled. The poor residents. They are trying to clean it up themselves while the government urges them to leave it to professionals.

Random Musings

--I watched the Bloomberg/Washington Post debate on Tuesday and, yes, former Gov. Mitt Romney was impressive. Not real likable, not warm and fuzzy, but seemingly highly competent. Herman Cain also seemed more than competent, which is all he needs to do the next few weeks until Iowa and New Hampshire to lock up third place or better finishes that would enable him to move on.   As everyone knows by now, Cain took the lead among likely Republican primary voters with 27% to Romney’s 23%, according to the latest NBC News/Wall Street Journal survey. Just six weeks ago, Cain had only 5%, while Romney registered the exact 23% in both. As for Rick Perry, he plummeted from 38% in the NBC/WSJ survey six weeks ago to 16% today. [Ron Paul was fourth at 11%.]

So is Cain real? Here’s my take. I like the guy, but like everyone else believe it is still early and Cain could stumble as others have, whereas Romney’s performance has been consistent from day one and he shows few signs of being the kind that would make a major mistake after so many years of practice.

As for Cain’s signature “9-9-9” tax overhaul plan, hey, it is indeed bold! Good! Anyone happy with our current tax system is an outright fool.

The thing is the experts and supporters of the other Republican candidates are shooting holes in 9-9-9, which would tax sales transactions at 9 percent, and the same rate for individuals and business, eliminating virtually all loopholes save for charitable deductions. It would also eliminate the standard deduction, personal exemption or earned-income tax credit, meaning 9-9-9 is a big tax hike for the working poor.

Defenders say the plan encourages production, not consumption; risk-taking. It’s also simple, transparent, efficient, fair and revenue-neutral, as his chief economic adviser put it to Bloomberg News the other day.

Editorial / Washington Post

“Mr. Cain’s plan is problematic, but not for the reasons his fellow presidential contenders claim. Rather than putting the country on a sustainable fiscal path, it risks not producing enough revenue to fund the government’s needs. It would turn the current progressivity of the tax code upside-down, giving a windfall to the wealthy and hiking the tax burden for the least well-off.

“Mr. Cain would junk the existing, Byzantine structure of rates and deductions in the individual income tax code. He would end the estate tax, the payroll tax to fund Social Security and Medicare, and the capital gains tax. Instead, individuals would pay a flat tax rate of 9 percent; the only deduction that would remain would be for charitable giving. Businesses would pay corporate taxes at the same 9 percent, instead of the current 35 percent. And there would be a new national sales tax set at…9 percent….

“Mr. Cain’s plan would (generate revenue) on the backs of the least well-off – and to the benefit of the wealthiest taxpayers. The 47 percent of households that do not pay federal income tax because their earnings are too low would be subject to a new 9 percent tax on their income – plus the impact of the 9 percent sales tax, with no exceptions for spending on basic needs such as food, clothing and shelter. Getting rid of the payroll tax won’t help them because Mr. Cain would also eliminate the earned-income tax credit and other benefits targeted at lower-income taxpayers.”

The thing is, what I like is that Cain wants to totally blow the current system up and start over. Great! So maybe it’s not 9-9-9, maybe it’s 15-15-5 (sales tax). If I were Herman Cain, I’d “pivot,” a word he likes to employ, when the attacks come and say, ‘Look, as president I am blowing up the tax code…period. And it’s going to have three, simple, easy to understand components. My people tell me 9-9-9 is revenue neutral, fair and transparent. But once elected, I’ll immediately set to work with Congress and maybe it’s 15-15-5, or 20-20-3 with a minimum level before you are taxed in the first place when it comes to ordinary income. But we will have a system that eliminates virtually all loopholes, period! If you don’t want this, vote for Mitt Romney who will continue with the existing mess.”

Now that’s just my advice. I’m not saying that if New Jersey had a primary today, I’d vote for Herman Cain. I simply respect he’s the only one really willing to say ‘the current system has to be junked!’ and would do it.

What’s clear is that there is a growing segment of the Republican Party that likes Cain’s plainspoken platform and manner. I also look at the guy and think, this is the man who could be a realistic third party candidate.

And let’s face it. How amazing is it that this Republican black man can get the legitimate attention and support he is garnering? I understand the following will touch a nerve with some of you, but it was just about two months ago that many of my ilk were saying, if not out loud, that there will never be another black president in America in our lifetimes after the mess we’re in. But then along comes Herman Cain and there is zero discussion among Republicans, that I’ve heard, about his color. The discussion is simply on his ideas. That’s great; and frankly cause to raise a glass to all of us.

But this brings us back to Romney, who this week received a kick-ass endorsement from New Jersey Gov. Christ Christie, as if the race was over, even though Romney hasn’t polled above the low- to mid-20s among Republican primary voters as yet in any nationwide survey. I complained last week that with Florida’s decision to move their primary to Jan. 31, and Iowa, New Hampshire, South Carolina and Nevada forced to then accelerate their own timetables, Republicans may have their nominee by February. And this is good? No, it isn’t.

Daniel Henninger / Wall Street Journal

“Mitt Romney has undoubted gifts. He could be president. But in the current Obama morass, so could 100 other people. What voters, including Republican voters, want for the United States now is the best president possible. Mr. Romney isn’t there yet. Only more competition or criticism will get him there.”

But a Romney-Christie ticket could be awful strong, no doubt.

John Podhoretz / New York Post

“To say that Mitt Romney dominated last night’s Republican presidential debate…wouldn’t quite do his performance justice. By the end of the evening, he seemed to be the only even remotely plausible presidential candidate on the stage.

“In part that was due to the failure of the seven other candidates to rise to the occasion.

“Rick Perry came into last night on life support, having fallen from the lead to third place in polls behind the gadfly Herman Cain. Midway through a lifeless and passionless performance, it became clear that before Perry stepped out on the stage he had signed a ‘Do Not Resuscitate’ order for his campaign and then began to sink gently into the national political twilight.

“It wasn’t a towering disaster for him the way his performance in the Fox debate three weeks ago was. He was trying hard in that contest, and the pain then came from how badly his efforts had failed. Last night Perry wasn’t even trying, so it just wasn’t as difficult to watch.

“Even his effort to go after Romney on the former Massachusetts governor’s most vulnerable issue, health care, was hesitant and lifeless. That’s better than spluttering and incoherent, as it turns out, but only when it comes to levels of debate-viewer embarrassment, not the plausibility of his candidacy.

“And Romney, as is his wont in these situations, simply spewed forth blizzards of words to fog the minds of listeners about his Massachusetts health-care plan and its similarity to the hated ObamaCare. It’s dazzling to watch, though substantively it’s rather shocking just how disingenuous Romney is on this key matter of his own policy record and what it means.

“If authentic and fidelity to ideological principles were truly the benchmarks for judging a debate performance, Romney would be mired at 4 percent in the polls. But they’re not.”

--A Quinnipiac poll of New Jersey voters shows that after Gov. Christie decided not to run for the presidency, he garnered a 58% approval rating, up from 47% in its last survey in August. In a Monmouth University/NJ Press Media Poll, Christie received a 55% approval rating, the highest for this survey since he became governor in 2009.

Like I keep saying…focus on getting re-elected and the rest will take care of itself, Governor… that is assuming he isn’t Romney’s running mate.

--Barack Obama raised $70 million in the third quarter despite all his problems, or more than double the combined total of the two biggest Republicans on this front, Mitt Romney and Rick Perry, who took in about $30 million. [Obama raised $86 million in the second quarter.]

--Charles Krauthammer / Washington Post

“After three years, Obama’s self-proclaimed transformative social policies have yielded a desperately weak economy. What to do? Take the low road: Plutocrats are bleeding the country, and I shall rescue you from them.

“Problem is, this kind of populist demagoguery is more than intellectually dishonest. It’s dangerous. Obama is opening a Pandora’s box. Popular resentment, easily stoked, is less easily controlled, especially when the basest of instincts are granted legitimacy by the nation’s leader.

“Exhibit A: On Tuesday, the Democratic-controlled Senate passed punitive legislation over China’s currency. If not stopped by House Speaker John Boehner, it might have led to a trade war – a 21st-century Smoot-Hawley. Obama knows this. He has shown no appetite for a reckless tariff war. But he set the tone. Once you start hunting for villains, they can be found anywhere, particularly if they are conveniently foreign.”

--Noemie Emery / The Weekly Standard

“Good politicians are in sync with their times, understand them, and deal with their challenges. But Obama is at odds, and often at war, with his own. In an age when debt is a problem, he is a big spender; when government has to cut back, he wants to expand both its expense and its reach. Nothing that happens appears to deter him, not the massive pushback from the American people in the 2009 and 2010 elections; not the crisis in Europe, kicked off by the collapse of Greece’s finances in April 2010, which caused an austerity panic all over Europe, and should have driven home the most cogent of lessons: that exactly as he was trying to turn his country into a social democracy like those of old Europe, which the American left had long admired, the European social democracies had been forced to admit that their model could not be sustained.”

--Michael Goodwin / New York Post

“The reports are not good, disturbing even. I have heard basically the same story four times in the last 10 days, and the people doing the talking are in New York and Washington and are spread across the political spectrum.

“The gist is this: President Obama has become a lone wolf, a stranger to his own government. He talks mostly, and sometimes only, to friend and adviser Valerie Jarrett and to David Axelrod, his political strategist.

“Everybody else, including members of his Cabinet, have little face time with him except for brief meetings that serve as photo ops. Secretary of State Hillary Rodham Clinton and Treasury Secretary Tim Geithner both have complained, according to people who have talked to them, that they are shut out of important decisions.

“The president’s workdays are said to end early, often at 4 p.m. He usually has dinner in the family residence with his wife and daughters, then retreats to a private office. One person said he takes a stack of briefing books. Others aren’t sure what he does.”

--Scott Wilson / Washington Post

“Beyond the economy, the wars and the polls, President Obama has a problem: people.

“This president endures with little joy the small talk and back-slapping of retail politics, rarely spends more than a few minutes on a rope line, refuses to coddle even his biggest donors. His relationship with Democrats on Capitol Hill is frosty, to be generous. Personal lobbying on behalf of legislation? He prefers to leave that to Vice President Biden, an old-school political charmer.

“Obama’s circle of close advisers is as small as the cluster of personal friends that predates his presidency. There is no entourage, no Friends of Barack to explain or defend a politician who has confounded many supporters with his cool personality and penchant for compromise.

“Obama is, in short, a political loner who prefers policy over the people who make politics in this country work.”

--George Will / Washington Post…on “Occupy Wall Street.”

“OWS’s defenders correctly say it represents progressivism’s spirit and intellect. Because it embraces spontaneity and deplores elitism, it eschews deliberation and leadership. Hence its agenda, beyond eliminating one of the seven deadly sins (avarice), is opaque. Its meta-theory is, however, clear: Washington is grotesquely corrupt and insufficiently powerful.

“Unfortunately for OWS, big government’s scandal du jour, the Obama administration’s Solyndra episode of crony capitalism, does not validate progressivism’s indignation; it refutes progressivism’s aspiration, which is for more minute government supervision of society. Solyndra got to the government trough with the help of a former bundler of Obama campaign contributions who was an Energy Department bureaucrat helping to dispense taxpayers’ money to politically favored companies. His wife’s law firm represented Solyndra. But, then, government of the sort progressives demand – supposed ‘experts,’ wiser than the market, allocating wealth and opportunity by supposedly disinterested decisions – is not just susceptible to corruption, it is corruption. It is political favoritism with a clean (even green) conscience.

“Demands posted in OWS’s name include a ‘guaranteed living wage income regardless of employment’; a $20-an-hour minimum wage (above the $16 entry wage the United Auto Workers just negotiated with GM); ending ‘the fossil fuel economy’; ‘open borders’ so ‘anyone can travel anywhere to work and live’; $1 trillion for infrastructure; $1 trillion for ‘ecological restoration’ (e.g., re-establishing ‘the natural flow of river systems’); ‘free college education.’

“And forgiveness of ‘all debt on the entire planet period.’ Progressivism’s battle cry is: ‘Mulligan!’ It demands the ultimate entitlement – emancipation from the ruinous results of all prior claims of entitlement.”

--Herman Cain / New York Post op-ed

“Visiting New York this week, I found the organized street protests against Wall Street were the talk of the town. But I’m sorry – they lost me at hello.

“Their rants to the media and those unfortunate enough to cross their paths have been all over the map – from tirades over big business, to 9/11 conspiracy theories, to admitting not even knowing why they’re there – but a common theme is that they’ve set their sights on rich people.

“It’s ironic that protesters who have uniformly attacked the rich and corporate CEOs happen to sport iPods, iPhones and other innovative technological tools that entrepreneurs have worked so hard to invent, build and distribute to consumers….

“I have a hard time imagining what these protesters think will come of this – that Wall Street execs will come running out of their offices to write them a check?

“Rather than protest against Wall Street, those camped out in the streets should examine their own failures and take a hard look in the mirror.

“When I grew up in the South during the era of segregation, my family had little money. But my father Luther and mother Lenora were rich in ideas, faith and love. They were hard workers and family oriented, and instilled those same values in their children….

“Though their circumstances were tough, they never played the victim card.  They never made excuses.

“From what I’ve seen of these protesters…it seems they would rather have a handout than work….

“So to those asking for a handout on Wall Street, my message is this: ‘If you’re not rich, don’t blame the rich – get out there and work for it. You have to earn it.”

--Umar Farouk Abdulmutallab, the son of a Nigerian banker who loaded his shorts with explosives and tried to bring down an airliner on Christmas Day, 2009, pleaded guilty in Detroit this week on the second day of his trial, not having given any prior notice he was about to confess. Abdulmutallab then said in court:

“I am guilty of this count in U.S. law but not in the Koran. The United States should be warned that if they continue to persist and promote the blasphemy of Mohammed and the prophets…the United States should await a great calamity that will befall them through the hands of the Mujahidin soon.”

Prosecutors were ready to show Abdulmutallab had been in contact with Anwar al-Awlaki, the radical cleric recently having been blown into a million pieces (it is hoped here) by a U.S. drone attack in Yemen. Abdulmutallab will now spend the rest of his days behind bars. He needs to be “accidentally” placed in an exercise yard with some Blood gang members and spare us taxpayers a few bucks.

--Speaking of the death penalty, according to a Gallup Poll, 35% of Americans now oppose it, the highest level in 40 years. 

--Health beat…all kinds of news this week.

According to a study published in the Journal of the American Medical Association, large daily doses of Vitamin E, long thought to be a wonder drug when it comes to protecting against cancer and heart disease, may actually increase the risk for prostate cancer among middle-aged men, like 17 percent more for those taking large doses typically sold in drug and grocery stores.

Of course this study comes a week after an influential federal panel concluded that the risks of routine PSA screening for prostate cancer outweighed the benefits.

Meanwhile, a study published in the Archives of Internal Medicine concludes that multivitamins and other dietary supplements provide little benefit for most people and could lead to a slightly higher risk of death among older women. An exception was calcium supplements.

Bottom line, a normal diet of beer, wine and….oops, that’s mine. Let me start over.

Bottom line, a normal diet supplies all the vitamins and minerals you need.  Exercise and don’t smoke!

A new study in the Journal of Investigative Dermatology finds that the main type of ultraviolet rays used in tanning beds could penetrate to a deep layer of skin that is most vulnerable to the cancer-causing changes caused by the rays. In a nutshell, the U.S. Food and Drug Administration is considering banning the use of tanning beds among children under 18. England and Wales have already done the same.

Finally, a study of more than 33,000 Swedish women found that those who ate the most chocolate had the lowest chance of stroke. A single chocolate bar a week could reduce the risk by 20 percent.  

---

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

God bless America.
---

Gold closed at $1683…highest in four weeks after the crash
Oil, $86.80…ditto

Returns for the week 10/10-10/14

Dow Jones +4.9% [11644]
S&P 500 +6.0% [1224]
S&P MidCap +7.1%
Russell 2000 +8.6%
Nasdaq +7.6% [2667]

Returns for the period 1/1/11-10/14/11

Dow Jones +0.6%
S&P 500 -2.6%
S&P MidCap -5.7%
Russell 2000 -9.1%
Nasdaq +0.6%

Bulls 34.4 unch.
Bears 46.3 [Source: Chartcraft / Investors Intelligence…as I pointed out last time, bear reading is highest since March 2009…the bottom; just as you’d expect a contrarian indicator to work. Also, reminder… these numbers go out first thing Wednesday morning so it’s the sentiment among newsletter writers as of Tuesday.]

Have a great week. I appreciate your support.

Brian Trumbore



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Week in Review

10/15/2011

For the week 10/10-10/14

[Posted 6:00 AM ET]

Europe, Washington and Wall Street

It was a week that began in Europe with Belgium bailing out bank Dexia for a second time (the other being 2008) for $5.4 billion amid a severe liquidity squeeze. Dexia wasn’t even on the radar until about ten days earlier. It has a mountain of Greek debt and other banks had stopped lending to it.

But on top of the nationalization, the governments of Belgium, France and Luxembourg, the latter two where Dexia also has a presence, provided an additional $121 billion in funding guarantees, with Belgium kicking in 60.5%, France 36.5% and the remaining 3% from Luxembourg. So depositors were secured as part of a good bank / bad bank breakup. 

And remember how Greece was to receive the latest 8 billion euro installment from its first bailout by Oct. 13-14? Now it’s early November, but don’t worry, kids, Greece will get it, according to the troika of the International Monetary Fund, the European Union and European Central Bank. Greece is nowhere near its deficit target for 2011, which was 7.5% of GDP. Now try 9.1% (after just a few weeks ago being upped to 8.6%). Then again, Greece’s debt ratio is basically the same as ours! [8.6% for fiscal 2011, which just ended Sept. 30.]

So now we have two key dates. EU finance ministers meet this weekend to set the table on the debt crisis for the annual EU summit, Oct. 23, at which point the agreement on solving it is supposed to be finalized in time for the G20 summit on Nov. 3-4, where it is expected that all the world’s major players will sign off, the markets will rally further and Christmas will come as scheduled, setting up for a 2012 that will be a year to remember…when all the world joins hands, buys oodles of consumer goods, continues to pay down its debts, and Iran’s nuclear weapons program is dismantled voluntarily as Ayatollah Khamenei tells his people, ‘We had it wrong. The West is the direction we want to take our nation in.’ As Ross Perot would say, it’s just that simple. Or not.

Here’s the reality check. Slovakia, after an initial rejection that allowed parliament to toss out the existing government and form a new one, approved the European Financial Stability Fund of 440 billion euro. Now European leaders need to figure out how to use it. And they need to do so by Oct. 23, or no later than Nov. 3-4. And then they have to set about getting a further fund, or a leveraging of the existing facility. Regardless, it’s still unclear just how the EFSF will be used. Also, remember, with each new EFSF or leveraging of the existing one, all 17 are on the hook for a further amount in guarantees. Slovakia, for example, is now in for 4.4 billion euro, or 9% of its GDP, the highest proportionally of any of the 17 members. [Over 13% of GDP if the fund is leveraged.]

Wolfgang Munchau / Financial Times

“When the EFSF was first agreed last May, it was supposed to be the big bazooka. A shock-and-awe strategy, as one analyst famously called it. But it turned out to be a crisis propagator. The fundamental problem of the EFSF is that everybody guarantees each other in a game of dominoes. Italy’s guarantees make up 18 percent of the system. But this 18 percent lacks credibility. Italy is hardly in a position to pay its own debt, let alone guarantee someone else’s. While France is healthier, its guarantees to Italy also lack credibility. And so do German guarantees for France. If you follow the line to the end, there is no ultimate backstop.

“If you double or treble the size of the EFSF without changing its underlying structure, all you do is double or treble the lack of credibility. If you really want to increase the size of the EFSF without destroying it, then you are left with two options: you have to back it through an unlimited guarantee by the ECB, the only organ in the eurozone that is in a position to give such a commitment. Or you have to change the EFSF’s legal status through the adoption of joint and several liability. This means that member states jointly agree to everybody’s debt. The two options ultimately mean the same. The liabilities of the system will be shared jointly by all of the participants. If you want to annoy certain people, you could also call the latter a Eurobond.

“The fallacy of the national guarantees also applies to a recapitalization of the banking sector. I would strongly favor an across-the-board increase in the core Tier 1 capital ratios for all banks. But if member states end up providing the cash, the overall risk of the system remains the same. That also applies if the EFSF were to recapitalize the banks, since its ultimate liability also rests with member states….”

And on and on…

So here’s the deal…as I noted above there is none. German Chancellor Angela Merkel and French President Nicolas Sarkozy recognize the big banks need to be recapitalized. But there is a huge difference between the two that needs to be resolved shortly.

Merkel wants the banks to attempt to recapitalize themselves first by going into the private market. If that doesn’t work, then the state is to help the banks. And if that’s not possible, then the EFSF could be accessed. Sarkozy wants the banks to be able to use the EFSF first, thus preserving, in his case, France’s sovereign AAA credit rating because the rating agencies won’t see the government with new obligations to the banks. 

Then you have the banks saying, well, if I can’t access the EFSF (not that anyone wants to be first because you’re giving away just how dire your situation is and you could have a little old run on your institution), you’re forcing me to sell assets to increase my Tier 1 capital ratio, but how is that going to help the economy if we have less to lend? You’re only tightening credit further at the worst possible time.

But what’s this? The July 21 agreement on a 21% haircut for Greek paper is now in the trash can? You mean to tell me it’s now going to be a 50% haircut? So that means the banks, the major holders of the crappola, have to raise even more capital!

Or, as some were saying on Friday, just let the IMF handle the mess. We want to enjoy the holidays, after all.

Bottom line, we should learn a lot more about the details by Oct. 23, if not Nov. 3-4. But this will in no shape or form mean the crisis is solved, far from it, though at least the major players in this game, including individual investors, could exhale.

This week Martin Andersson, director-general of Sweden’s Financial Supervisory Authority, said “We don’t see any positive signs” when it comes to the crisis. “Things are getting worse and, of course, then you’re more concerned about liquidity and solvency.”

European Central Bank President Jean-Claude Trichet said the debt crisis has reached “a systemic dimension and must be tackled decisively.”

Or as former deputy treasury secretary Roger Altman put it, “The sovereign debt crisis has metastasized into a bank crisis” and the sad part is it all could have been avoided.

One other item on the eurozone, Spain’s major banks, as well as the sovereign debt of the country itself, all faced downgrades by Fitch and/or S&P in the two cases. Fitch notes that Spain’s banks have about $400 billion in “problematic assets” on the books, many of which will soon shift into the non-performing loan category. No surprise from your editor. 

Washington and Wall Street

Despite all of the above, equity markets around the world have largely staged a nice rally on the feeling Europe would get its act together. Whatever. I can only shake my head, though I have been saying that if you don’t believe the U.S. economy is going to double-dip, stocks could rally big. And that they have…with the Dow Jones up 12% since Oct. 3 and the S&P 500 up 11%. 

In the past week, however, we’ve learned some sobering things about the average American and this awful period we’ve been in. For starters, the National Bureau of Economic Research, which decides when business cycles begin and end, noted long ago that the recession began in December 2007 and ended in June 2009. Since then, while it’s felt like recession, the economy has been growing.

So knowing that, between June 2009, when the recession ended, and June 2011, “inflation-adjusted median household income fell 6.7 percent, to $49,909, according to a study by two former Census Bureau officials. During the recession – from December 2007 to June 2009 – household income fell 3.2 percent.” [Robert Pear / New York Times]

Or a decline of 10% since the start of the recession through June 2011.

The Wall Street Journal notes that according to Census data, “From 2000 to 2010, median income in the U.S. declined 7% after adjusting for inflation. That marks the worst 10-year performance in records going back to 1967.”

The Journal’s survey of 50 economists has the U.S. growing at 1.5% this year and only accelerating to 2.3% next year and 2.7% in 2013, however these guys and gals are always off one way or another. If you believe their employment forecast, though, it is not good. The jobless rate will be at 8.2% at the end of 2013, just one percentage point lower from today in over two years.

And then there’s the deficit, which for fiscal 2011, ending Sept. 30, just came in at $1.3 trillion, making it the second worst deficit year since…2009. 2011 barely edged out 2010 for the silver medal. Plus, we all know that unless the bipartisan supercommittee looking into deficit reduction comes up with a far bigger plan than the $1.2 to $1.5 trillion they are mandated to cut, the picture is just going to get worse.

So, yes, it’s no surprise many in America are fed up, distressed and scared. I wish I had something good to say, but I don’t (stock market rallies aside). Many feel like the 50-year-old Occupy Wall Street protester I saw on NBC News who said of her plight, “My life savings was invested in real estate and the stock market and now I have nothing.”

There’s a lot I could add about this statement, seeing as how I issued one warning after another over the years, but it’s too late. If you didn’t receive trusted advice, or failed to take even a modicum of personal responsibility, you’re screwed.

And, yes, there are many on Wall Street who should be in jail, and on this issue I totally agree with the Occupy Wall Street movement. But I have further comment on the topic below.

Economist Robert Samuelson / Washington Post

“Here are three generalizations (about growing economic inequality).

“First, the increase has been stunning. From 1945 to the late 1970s, the richest 10 percent of Americans accounted for about 33 percent to 35 percent of total income, including capital gains (mostly stock profits), estimate economists Emmanuel Saez and Thomas Piketty. By 2007, their share was 50 percent – equivalent to the late 1920s. Most of the gain went to the richest 1 percent, whose share rose from about 10 percent in 1980 to 24 percent in 2007.

“Second, it’s a global phenomenon. In a 2008 study, the Organization for Economic Cooperation and Development (OECD) found that inequality had increased for 17 out of 22 countries over two decades, though conditions vary dramatically by country. In Sweden and Denmark, the richest 10 percent have incomes about five times greater than those of the poorest 10 percent. In the United States, the ratio is 14-1. The OECD average is 9-1. Mexico has the highest, 27-1.

“Finally, most of America’s rich – however defined – don’t escape taxation. In 2007, the richest 10 percent paid 55 percent of all federal taxes, estimates the Congressional Budget Office. The richest 1 percent paid the lion’s share of that: 28.1 percent of federal taxes. The average tax rate on the top 1 percent was 29.5 percent. Similarly, the richest 3 percent account for 36 percent of charitable contributions.

“There are many theories about why inequality has increased, though no consensus: New technologies reward the highly skilled; globalization depresses factory wages; eroded union power does the same; employer-paid health insurance squeezes take-home pay; a ‘winner-take-all’ society confers huge rewards on an elite of celebrities, sports stars and business leaders….

“The backlash against the rich is the start of debate, not the end. Are the rich to be punished for succeeding or merely asked to pay their ‘fair’ share? Who is wealthy or who’s just well-off? Is $250,000 a reasonable cutoff for couples, as Obama once indicated, or has that been repudiated? If taxes do rise, what approach would best preserve incentives for hard work, investment and risk-taking? Are Obama’s assaults on wealthy business leaders just deserts or political cheap shots? However measured, the rich are besieged; the attacks almost certainly will intensify.”

And a note on China. The battle is on between those who believe China’s economy is about to crash, and those, such as yours truly, who believe a soft landing is in order. Much is being made of the banking sector, as this week the nation’s sovereign wealth fund bought shares of the top banks that have taken such a beating. Morgan Stanley’s Stephen Roach continues to believe China will slow from its current 9.5% growth rate to about 8% but no further. Such a breather could bring “welcome relief” for a nation long vexed by rabid resource consumption, excess liquidity and rampant inflation, Roach writes. [Kopin Tang / Barron’s]

Others, such as short-seller Jim Chanos, say China’s banks have a huge non-performing loan issue, to which I’d say I pointed out a few weeks ago that this is no surprise to the Chinese government. It’s not a huge issue and some smaller financial institutions will simply be allowed to fail, particularly those involved in the real estate loan business. China has the resources to stave off a banking crisis.

No doubt, however, the economy is slowing. Third quarter GDP will be released this coming week and is expected to come in at 9.3%. This week, the government released trade data for September and it showed exports were up 17% year over year when a gain of over 20% was expected. Conversely, imports were up 20.9%, also below expectations. But this is hardly a disaster, though admittedly the speed of decline is worrisome. New loans also hit their lowest level in two years.

But at least the September inflation picture improved ever so slightly as the consumer price index, which had peaked at 6.5% in July, hit 6.1% last month after coming in at 6.2% in August.

On the topic of a potential U.S.-China trade war, thankfully efforts in Congress to force China to manipulate its currency to our liking won’t advance beyond the Senate as the House will not pass a punitive bill some want. Yukon Huang, a former director at the World Bank in China, wrote the following in a Financial Times op-ed.

“Once again the U.S. Congress is finding it more convenient to play the China currency card as the panacea for America’s economic woes, rather than deal with the difficult issues in President Barack Obama’s recent employment bill.

“China’s response to the proposed bill pressuring it into allowing the renminbi to appreciate was predictable, with simultaneous protests from all the relevant agencies. Given the threat to the global economy from problems in the eurozone and the U.S., China’s leadership regards the currency bill as a distraction from the real issues that need to be resolved. At a time when China is one of the few sources of global growth, ratcheting up protectionist sentiments only makes it harder to secure the necessary multilateral cooperation. The country’s government sees the currency debate as yet another sign of why the American political system is broken.”

Street Bytes

--The major market averages extended their winning streak to three as the Dow Jones finished up 4.9% to close at 11644. The S&P 500 rose 6.0%, its best week since July 2009, while Nasdaq, riding the success of Apple’s iPhone 4S launch, as well as Google’s stellar earnings, soared 7.6%. Both the Dow and Nasdaq are now up 0.6% for the year, while the S&P remains in the red to the tune of 2.6%.

The market on Friday also received a boost from the week’s only major economic release, September retail sales, up a better than expected 1.1%. But the earnings out of JPMorgan Chase were far from stellar as revenues fell 11% and CEO Jamie Dimon called the outlook “extremely cautious while navigating through this challenging environment.” At least Dimon said he saw positive trends in the bank’s consumer business.

--U.S. Treasury Yields

6-mo. 0.05% 2-yr. 0.26% 10-yr. 2.25% 30-yr. 3.23%

The long end of the curve continued to inch up in yield as investors pull money out of bonds and put it into stocks, as well as the feeling that the economy is not going to tip back into recession.

--I didn’t have the third quarter mutual fund return figures for last time so herewith are a few key numbers from Lipper.

10-year annualized returns, including dividends and reinvestment, thru 9/30.

S&P 500 Index Fund 2.30%
Large Cap Growth 2.42%
Large Cap Value 2.54%
Small Cap Growth 5.06%
Small Cap Value 6.95%
Intermediate U.S. Government 4.61%

Wow, those are great returns, aren’t they? And to think most pension funds are based on annualized blended returns of 8%. 

--Congress finally passed free trade agreements with South Korea, Colombia and Panama. The agreements will lower or eliminate tariffs that American exporters face in the three.

--Billionaire hedge fund manager Raj Rajaratnam was sentenced to 11 years in prison for the insider trading scandal in which he received $72 million in illegal profits through his Galleon Group operation. Prosecutors indeed have now sent a message when it comes to this kind of activity, aided by 45 audio recordings and vivid testimony from 18 witnesses, including evidence that Rajat Gupta, a Goldman Sachs board member at the time, called Rajaratnam 23 seconds after learning during a board call that the bank would lose money for the first time as a public company. Rajaratnam then called a Galleon employee in Singapore, bragging about the information he had received, and made $5 million on the trade.

--In a solid sign, Wal-Mart announced it had produced its first quarter of rising U.S. sales in more than two years, nine consecutive quarters, as its plans to deepen discounts and improve product selection were finally succeeding in luring back customers. The company also said it would open up to 235 stores in the U.S. next year, while cutting back on remodeling plans. Wal-Mart announces earnings next month.

--Google hit it out of the park in its latest earnings report, far exceeding estimates on both net income and revenues. Plus the company said it had added 2,585 employees in the latest three months, bringing its headcount to 31, 353. Revenues, $7.5 billion, were 37% higher than year ago levels, marking the highest growth rate since the second quarter of 2008. Earnings climbed to $9.72 vs. $7.64 a year earlier. “Paid clicks” rose 28%, while the average cost per click was up  5%.

--China bits:

Auto sales rose for a fourth straight month in September as automakers offered discounts and consumers purchased cars ahead of a week-long national holiday. The gain was 8.8 percent to 1.32 million units; this after sales gains of 7.3, 6.7 and 6.2 percent the prior three months.   But the China Association of Automobile Manufacturers reduced its overall forecast for 2011, saying deliveries would grow less than 5 percent. Back in January, the association had estimated growth of 10 to 15 percent. Vehicle sales grew 32 percent in 2010.

Housing prices in China declined for the first time this year in September, while the government cut fuel prices in response to a lower global price environment for crude.

China’s Sinopec agreed to buy Canadian oil and gas company Daylight Energy for about $2.1 billion, the latest in a string of energy deals between the two countries, though this is a very small acquisition by comparison to other ventures. Sinopec is a subsidiary of China Petrochemical Corp., the nation’s largest refiner.

While overall growth in Chinese trade slowed significantly in September, copper imports hit a 16-month high and iron ore imports hit their highest level since January. [For the first time, China revealed the estimated size of its copper inventories and they were far greater than thought at the end of 2010, meaning actual demand may have been lower than some had been projecting.]

--New York State’s comptroller Thomas P. DiNapoli said the Big Apple’s securities industry could lose nearly 10,000 jobs by the end of 2012, a painful blow to government budgets, for one. Since January 2008, the securities industry has lost 22,000 jobs in New York.

--Economist Martin S. Feldstein / New York Times

“Homes are the primary form of wealth for most Americans. Since the housing bubble burst in 2006, the wealth of American homeowners has fallen by some $9 trillion, or nearly 40 percent. In the 12 months ending in June, house values fell by more than $1 trillion, or 8 percent. That sharp fall in wealth means less consumer spending, leading to less business production and fewer jobs.

“But for political reasons, both the Obama administration and Republican leaders in Congress have resisted the only real solution: permanently reducing the mortgage debt hanging over America. The resistance is understandable. Voters don’t want their tax dollars used to help some homeowners who could afford to pay their mortgages but choose not to because they can default instead, and simply walk away. And voters don’t want to provide any more help to the banks that made loans that have gone sour.

“But failure to act means that further declines in home prices will continue, preventing the rise in consumer spending needed for recovery. As costly as it will be to permanently write down mortgages, it will be even costlier to do nothing and run the risk of another recession….

“The Obama administration has tried a variety of programs to reduce monthly interest payments. Those programs failed because they didn’t address the real problem: the size of the mortgage exceeds the value of the home.

“To halt the fall in house prices, the government should reduce mortgage principal when it exceeds 110 percent of the home value. About 11 million of the nearly 15 million homes that are ‘underwater’ are in this category. If everyone eligible participated, the one-time cost would be under $350 billion….

“I cannot agree with those who say we should just let house prices continue to fall until they stop by themselves. Although some forest fires are allowed to burn out naturally, no one lets those fires continue to burn when they threaten residential neighborhoods. The fall in house prices is not just a decline in wealth but a decline that depresses consumer spending, making the economy weaker and the loss of jobs much greater. We all have a stake in preventing that.”

Feldstein is an influential Republican voice. I’d be surprised, though, if anything came of this until after 2012.

--Shares in BlackBerry maker Research in Motion took another hit as BlackBerry service was severely disrupted across much of Europe and North America. As Apple unveiled its new iPhone 4S product, the timing of the BlackBerry outages could not have come at a worse time. As one analyst for Gartner, Ken Dulaney, put it, “Irritants can sometimes turn into infections and we know what happens after that.”

--Billionaire Mark Cuban says that high-frequency traders, or HFTs, are corrupting the market and has called for a tax on it.

“People are going to scream bloody murder, of course. But we have to ask ourselves, what’s the purpose of the stock market? It’s supposed to be a source of capital for growing business. It’s lost that purpose.”

Amen, brother. The SEC is examining ways to deal with the problem, including requiring HFTs to register with regulators. But more is needed beyond this step.

--Harrisburg, Pennsylvania became the second U.S. city to file for bankruptcy this year (Central Falls, R.I. being the other). It now becomes a city vs. state issue and my eyes glaze over reading some of the details. The problems all stem from the city’s trash-burning incinerator that has racked up debt of some $310 million…this on a project that was supposed to be self-sufficient. 

--Ford Motor Co. is having problems as a Chicago Assembly Plant overwhelmingly rejected a contract between the automaker and the UAW, the second such setback. Ford thought it had a four-year agreement and failure to ratify the contract could easily lead to a walkout. The proposed deal had called for Ford to invest $6.2 billion in U.S. plants and add 12,000 jobs through 2015, but veteran workers would see no wage increase (though they would get a $6,000 bonus and an annual inflation payment of $1,500).

--Warren Buffett disclosed that he earned $63 million last year, yet paid less than $7 million in federal income tax. Based on his taxable income of $39.8 million, his effective tax rate was 17.4%. But Buffett left out a lot of detail in his letter to a Republican congressman who had made the request, the biggest being the gap between adjusted gross income and taxable income. One possibility is he made large charitable contributions that are subtracted from adjusted gross.

--The U.S. Department of Agriculture trimmed its projection of the corn harvest a third straight month, but grain prices tumbled initially over reports that foreign producers are growing more corn and wheat, such as in the Black Sea region, which is exactly what I told you weeks ago was the case through my sources in Russia and Ukraine. [Readers of the site.] Russia in particular is shipping it out fast and furiously, despite calls you’ve seen to limit exports there.

--Inflation exceeded 9% for a 10th straight month in India for September. The central bank is expected to raise its key lending rate to 8.5% later this month.

--When I saw a Journal story titled “Peanut-Butter Makers Face Crunch,” I bought some of the product that day, so bring on the peanut butter spike, caused by the drought in places like Georgia. Owing to my actions, my way of life thus won’t be impacted in the least. [Wholesale prices for leading brand Jif, which is gross, are going up 30% starting in November, according to the Journal.]

--Australia’s unemployment rate fell to 5.2% in September. 

--Britain’s jobless rate rose to a new high of 8.1% as Prime Minister David Cameron’s austerity program continues to be blasted by the opposition. Hang in there, David. You’re doing the right thing.

--Hedge fund billionaire John Paulson is having his problems this year. His Recovery fund, which wagers on the U.S., is down 31% through September, while his gold fund is up just 1% even though through Sept. 30, gold was up over 16% for 2011. He was killed across the board last month and assets, through losses and redemptions, are off $8 billion, though Paulson is still managing $30 billion, sources told the Wall Street Journal.

--Venture capital firms raised $1.7 billion in the third quarter vs. $3.5 billion collected in the same period last year, representing the lowest amount since the third quarter of 2003, as reported by Tiffany Hsu of the Los Angeles Times.

--Owing to severe underperformance, PIMCO’s Total Return Fund, managed by Bill Gross, has seen inflows of just $183.5 million this year vs. $57.7 billion in 2009. As the Wall Street Journal pointed out, through Wednesday, the fund was up only 1.1% vs. the 5.7% return for its benchmark, which in bond land means the fund is getting crushed. Gross’ interest rate calls this year, to say the least, have been a little off.

--Netflix reversed gears and said it will keep its DVD-by-mail and online streaming services together under one name and one Web site, after announcing a disastrous plan to break them up just three weeks earlier. It will, however, maintain the 60 percent price increase. Subscribers had been furious over the change and the cancellation rate far exceeded the company’s expectations.

--Americans Thomas J. Sargent and Christopher A. Sims are the winners of the Nobel Prize in Economics for their separate research on the impact of “expectations,” the cause-and-effect relationships in the economy and how sentiment and expectations drive behavior, including policy decisions. Now that’s the kind of Econ course I could get into.

--Clothing retailer Gap said it would close 21 percent of its U.S. stores in the next two years while tripling outlets in China by the end of 2012 (15 to 45).

--Housing, part deux: Court records show comedian Chris Tucker is facing foreclosure on a central Florida mansion he purchased in 2007 for $6 million that is now assessed at $1.6 million.

--Budget airline Ryanair is at it again, this time unveiling plans to have only one lavatory on its aircraft instead of two or three, replacing them with six extra seats. Talk about a disaster waiting to happen. I know most of their flights are just 60-90 minutes, but…up to 200 passengers and six crew using one restroom?! 

--The New York Times reported that the Metropolitan Opera raised a staggering $182 million for its fiscal year ending in July, 50 percent more than it raised the year before. Given the state of the economy, this is awesome. Donor contributions support 43 percent of the Met’s $325 million operating budget. So party down, opera lovers! 

--Scene at the dinner table this weekend as parents Bob and Carol break the following news to their kids Ted and Alice.

“Ted…Alice…we have some bad news.”
“What is it, Mom and Dad?”
“NBA Commissioner David Stern said that if the league doesn’t strike a labor deal with its players by Tuesday, there won’t be any games on Christmas Day.”
“What’s the NBA?”
“Yeah, what’s the NBA? Can we be excused?”

Foreign Affairs

Iran: President Obama directly accused Iran of “dangerous and reckless behavior” in pursuing a plot to assassinate the Saudi ambassador to the United States, Adel al-Jubeir, a well-known figure among the Washington diplomatic set and a leading adviser to the Saudi royal family (as well as a former boyfriend of then NBC news reporter Campbell Brown).

Officials were initially skeptical of the plan until they learned of a $100,000 payment to the alleged plotters that was linked back to Iran’s Quds Force, the foreign operations wing of the Iranian Revolutionary Guard Corps. There is, however, no evidence, as yet, that Ayatollah Khamenei or Iranian President Ahmadinejad knew of the conspiracy, but it’s hard to believe Khamenei hadn’t been briefed.

Al-Jubeir was to have been killed at a Washington restaurant, the assassination carried out by hit men from a Mexican drug cartel who were to be paid $1.5 million. Other plots included bombings of embassies both here and abroad.

Editorial / New York Post

“The Obama administration may finally be coming to terms with the Iranian threat.

“Certainly, President Obama is sounding tougher this week regarding Tehran than he did during his first year in office.

“Yesterday, he vowed to hold Iran ‘accountable’ for its ‘reckless behavior.’ And he refused to ‘take any options off the table in terms of how we operate with Iran.’….

“To his credit, the president insisted on ‘accountability with respect to anybody in the Iranian government engaging in this kind of activity.’

“Nor did he downplay Iran’s bloody record. The latest plot, he said, ‘is part of a pattern of dangerous and reckless behavior by the Iranian government’ – calling it ‘just one example of a series of steps that they’ve taken to create violence.’

“No kidding, there: Most of the world has been painfully aware of Tehran’s mischief – ever since its 1979 revolution.

“It’s been a chief sponsor of global terror, has murdered U.S. soldiers (either directly or through proxies) in Iraq, Afghanistan, Lebanon and elsewhere and seeks Israel’s complete annihilation.

“Oh, yeah: And it’s busily building nukes….

“For now, Obama says he’ll seek ‘the toughest sanctions’ against Iran and step up worldwide efforts to see that it ‘pays a price for this kind of behavior.’

“A State Department aide yesterday said U.S. officials ‘have had direct contact with Iran’ in the wake of the new disclosures, despite the lack of formal relations between Washington and Tehran. Hmm…

“Keeping fully in mind that words can be cheap, we find this all encouraging news.

“For Obama & Co., the proof will be in the follow-through. America’s response – or lack thereof – will have profound consequences…throughout the world.”

Editorial / Washington Post

“The Obama administration’s charge that senior Iranian officials plotted to kill the Saudi ambassador in Washington was greeted with a considerable amount of skepticism in some quarters of Washington and the Middle East. Iran, argued some pundits, was unlikely to have undertaken such a brazen attack; it had little to gain by killing the ambassador; and, anyway, its clandestine operations were known to be far more skilled than the seemingly bumbling attempt to contract the assassination to a Mexican drug cartel.

“Perhaps the doubters are right, and it is certainly prudent to reserve final judgment until all the facts of the case are known. But the FBI’s charging documents outline some substantial evidence, including the transfer of $100,000 to a bank account that the suspect arrested in the case, Mansour Arbabsiar, believed belonged to a Mexican cartel member. The FBI also recorded phone conversations between Mr. Arbabsiar and a man in Tehran he identified as an operative of the Quds Force of the Iranian Revolutionary Guard….

“The Obama administration can hardly be suspected of manufacturing this story to seek out a confrontation with Iran. In fact, its evident eagerness to curtail U.S. military operations abroad and cut the defense budget may have encouraged some in Tehran to believe that an attack on U.S. soil would not risk a serious response. That’s one reason why it’s important that U.S. countermeasures go well beyond the small extensions of sanctions announced Tuesday. The administration is rightly seeking to mobilize new multilateral action against Iran, including through the United Nations. But there are steps that the United States and close allies can take, such as directly sanctioning Iran’s central bank – a measure that already has considerable support in Congress.

“The alleged plot against the ambassador may reflect a splintering of the Iranian regime that allows radical factions to act more autonomously….Whatever the cause, the scheme’s discovery should serve as a warning of the escalating threat posed by Iran – and the need to act more forcefully against it.”

Editorial / Wall Street Journal

“Had it succeeded, this would have constituted an act of terror by the Islamic Republic of Iran on U.S. soil, and arguably an act of war. To those, notably an emerging isolationist wing in the Republican party, who’ve argued lately that the U.S. should pull its efforts back from a waning international terrorist threat to focus on domestic concerns, this event is a wake-up call….

“The good news in yesterday’s announcement, and in earlier successes, is that U.S. law-enforcement and intelligence appear to have taken the lessons of 9/11 to heart. They got serious about terror and are able to thwart potential disasters such as this, though we wonder how many others are in train.

“Less reassuring is the lapsed seriousness by the West’s political leadership about Iran’s threat. The U.S. and its allies have imposed sanction regimes on Iran, but they have allowed legalistic definitions to free Iranian officials with ties to its nuclearization program to flout travel bans and such.

“Mahmoud Ahmadinejad arrives annually to rant from a podium at the United Nations on the East River. Iran is about much more than these antic rants, and its resources are vastly greater than al Qaeda’s. It sees itself as at war with the U.S., Europe, Israel and now obviously Saudi Arabia. As obvious, it sees itself as immune to effective retaliation against its repeated, or planned, offensives. It’s past time for U.S. policy toward Iran to reflect the reality of what it is dealing with.”

One should assume a military strike of some kind is now in the cards, though not soon. The administration wants a forthcoming International Atomic Energy Agency assessment on Iran’s nuclear program to provide more specifics on Tehran’s suspected efforts to produce a nuclear-tipped missile. I think the White House will seek further proof on the weapons front before taking action of any kind.

But the last thing I’d want, if I were President Obama, would be for Iran to test a nuclear device after September of next year, with the campaign in the final stretch, thus exposing Obama to all kinds of charges of failing to take the threat seriously. Thus, perhaps next spring is the time to launch a strike. I would also suspect Iran will be given fair warning, though not told what the actual target is. I’ll game this out further over the coming weeks, including my comments years ago concerning Iran’s intentions on building bases of operations in Latin America, which were essentially borne out by the just announced plot.

Lastly, interesting item that Iran is reportedly cutting its financial support to Hizbullah, according to a Kuwaiti newspaper. The sources say Iran provides Hizbullah with $350 million annually, funds earmarked for members’ salaries, families of martyrs and projects in Beirut’s southern suburbs and the Bekaa Valley. Iran’s suffering economy is largely to blame. This doesn’t mean militarily support is cut off, however.

Iraq: What a frustrating stretch for the Obama administration as Iraq has continued to support President Assad of Syria, hosting official visits from Damascus and signing business pacts. While it appears the dollar aid is minimal, it is the moral support that is important to Assad’s survival. Iraqi Prime Minister Nouri al-Maliki has spoken out against regime change. “We believe that Syria will be able to overcome its crisis through reforms,” the same line adopted by Iranian President Ahmadinejad.

Both Maliki and Ahmadinejad have criticized Assad’s brutality, but they have not called for his ouster, nor are they accepting Syrian refugees. The Syrian opposition gets zero recognition. Meanwhile, cleric Moqtada al-Sadr has publicly called Assad his “brother.”

Then you have the issue of U.S. military trainers staying beyond the 2011 withdrawal date. 44,000 U.S. troops are scheduled to leave end of the year and initially Iraq requested 3,000 remain behind to continue to train the Iraqi security forces and army. But now Maliki says, “We do not need such a large number” in saying talks will be concluded by mid-November.

The sticking point, aside from Maliki being pulled to the side by Sadr, who is telling him no troops get to stay, is the issue of immunity. Washington insists U.S. troops be granted immunity from prosecution if they commit crimes. A majority in the Iraqi parliament are adamantly against it. One lawmaker told the Washington Post:

“Americans misuse immunity. They’ve had it for eight years. They made a lot of violations…Sometimes they killed people, attacked people, captured people, and no one could tell them anything. Iraq doesn’t want a repeat of that.”

This is where something like Abu Ghraib hurts U.S. efforts immensely. It will be interesting to see what the final solution is as the Pentagon works on an alternative, more private contractors.

Separately, while violence is certainly down over the pace of 2006-07, insurgents are still capable of widespread attacks, such as Wednesday’s suicide and car bombings that resulted in at least 25 deaths in Baghdad.

Egypt: Some two dozen Coptic Christians were killed by Egyptian security forces on Sunday night which most believe marks a worrisome turn in the revolution, not that there wasn’t already reason to worry with the postponement of presidential elections until well into 2012. Just eight months after the removal of President Hosni Mubarak, it’s open season on the Christian minority. The public also now understands once and for all that the ruling military council is nothing but a gang of thugs.

A political laeder, Ayman Nour, told journalists, “The credit that the military received from the people in Tahrir Square just ran out yesterday. There is no partnership between us and the council now that the blood of our brothers stands between us.”

The military failed to explain its actions, only issuing an apology for “unfortunate events” that “transformed peaceful protests to bloody ones.” Expressing “deepest condolences to the families of the victims,” the military reiterated its determination to refuse “attempts to cause a rift between the armed forces and the Egyptian people.” [David D. Kirkpatrick / New York Times]

I’ve written on many occasions that it has been war on Christians throughout the Middle East. There are but a few pockets remaining in Iraq, which at one time had a healthy Christian segment; Christians are not welcome in Iran; and now Christians are being killed in Egypt. 

Bret Stephens / Wall Street Journal

“What is true is that Egypt is in the early stages of Thomas Hobbes’ bellum omnium contra omnes, the war of all against all….(Gone) is the Arab Spring narrative of tech-savvy, pro-democracy protesters standing tall and proud against the dinosaur Mubarak regime. Gone even is the narrative of the liberal secularists versus the Muslim Brotherhood.

“Instead, picture Egypt as a vacant lot in which a dozen or so combustible elements – a leaking oil can here; some dry wood over there; patches of dessicated grass – sit in varying degrees of proximity to one another, while the boys who play in the lot light cigarettes. Chances are something will catch fire. Chances are that if something does, all of it will….

“Egypt today is in need of a savior in the mold of Muhammad Ali Pasha, its first great modernizer. But the nearer historical precedent is an opportunistic officer in the mold of Gamal Abdel Nasser – or a religious messianist like Iran’s Ayatollah Khomeini. Either possibility would be a calamity for the Middle East, and for the United States. But Egyptians will think otherwise when confronted by the specter of anarchy. Just ask Thomas Hobbes.”

Syria: The government warned the international community not to recognize a new opposition council, threatening “tough measures” against any country that did so, though this is mostly bluster. Foreign Minister Walid al-Moallem did say that countries that do not protect Syrian missions will have their embassies treated in the same way.

The Assad regime is definitely concerned, however, that the new Syrian National Council does begin to gain recognition, a la Libya’s rebels in the early days of the revolution there.

Meanwhile, at least another 19 were killed in two towns as the U.N. says the death toll nears 3,000 since the protests started in March. Virtually all foreign media has been banned from Syria.

And this just in…Syria has been sending troops across the border with Lebanon, in the Bekaa Valley, under the pretense of stopping the flow of weapons into Syria that are destined for the opposition. In one case last week, Syrian tanks penetrated four miles into Lebanon and a farmer was killed. What a bunch of bastards. Assad needs to be assassinated, and don’t give me this, ‘Well what follows could be worse.’ Let Turkey take the country over. “Here, Erdogan. Make peace with Israel and Syria is yours.” [The pressure on Iran would also then be immense. The people could very well topple the regime knowing the West, and NATO, is at their doorstep.]

Israel: Hamas and the Israeli government have engineered a prisoner swap whereby Israel is releasing 1,027 prisoners (beginning with 450 within days) while Israel gets Sgt. Gilad Schalit. Nice percentages. 300 of the Palestinians being released had received life sentences, though the 40 most dangerous will be deported to other countries such as Turkey. Israeli Prime Minister Benjamin Netanyahu said he got “the best deal we could get” given the turmoil in the region. Schalit could come home on Tuesday. In the first poll, by a 69-26 margin, Israelis support the move, but 62% believe Israel’s security situation will worsen.

Afghanistan: According to a U.N. report, “systematic torture” is the order of the day during interrogations by Afghan intelligence and police officials. The report doesn’t determine if U.S. officials are aware of the abuses, even as American and other Western backers provide the funding and training for the Afghans running detention centers.

Ukraine: In a move that has outraged the West, and Russia, former Prime Minister Yuliya Tymoshenko was sentenced Tuesday to seven years in prison (and fined $188 million) for exceeding her authority in brokering a gas contract with Russia in 2009, ending a dispute that had left parts of Europe freezing in the dead of winter. President Viktor Yanukovych has sought to renegotiate the deal, arguing Ukraine’s Naftogaz was paying too high a price to Gazprom for Russian gas. 

[Tymoshenko’s daughter believes her mother will be released shortly, even as Ukraine’s intelligence service opened a new criminal case against Tymoshenko, less than 48 hours after her sentencing. This time the charge involves the reassigning of $405 million in debt owed by a private energy company she headed in the 1990s to Ukraine’s federal budget.]

White House spokesman Jay Carney said: “The charges against Mrs. Tymoshenko and the conduct of her trial, as well as the prosecution of other opposition leaders and members of the preceding government, have raised serious concerns about the government of Ukraine’s commitment to democracy and rule of law.”

For his part, Russian Prime Minister Vladimir Putin warned that efforts to tear up the 2009 contract would hurt ties between the two countries. European Union officials say Ukraine’s move toward EU membership may have just come to a grinding halt.

Yanukovych is to meet Russian President Medvedev on Oct. 18 to discuss the gas agreement. Yanukovych will say the court decision proves the contract is null and void.

Tymoshenko claims Yanukovych, who lost in 2004 to Viktor Yushchenko when Tymoshenko was a leader in the Orange Revolution, is trying to silence the opposition ahead of parliamentary elections next year.

Editorial / London Times

“Ukraine marked 20 years of independence this summer. Yet the jailing this week of Yuliya Tymoshenko, the former Prime Minister, showed that what was once widely regarded as the most democratic of the former Soviet republics has not, after all, moved far from a model of arbitrary arrest and political show trials.

“The outcome might be counted a farce but for the costs to Mrs. Ymoshenko and the damage to Ukraine’s diplomatic reputation. If Ukraine retains hope of an eventual accession to the EU, it must operate according to European standards of justice and due process. And European policymakers should impose costs on a failure to observe those principles….

“Mr. Yanukovych is a small-minded mediocrity of the type that used to serve as compliant heads of government in Soviet satellite states. Yet his obduracy and repression appear to worry even his former allies in Russia. Though Vladimir Putin seeks to create a new Eurasian union of former Soviet republics, he too has voiced opposition to Mrs. Tymoshenko’s treatment. EU governments should be unrestrained in their outrage.”

Russia: Prime Minister Putin traveled to China for a two-day visit and he was able to announce a series of energy deals between the two. Both Putin and Chinese President Hu Jintao took the opportunity to slam the United States, specifically the U.S. dollar, the dominance of which Putin called “parasitic.”

And it was last week I wrote of actress Hilary Swank’s appearance at Chechen leader Ramzan Kadyrov’s birthday, “someone please explain to me why U.S. film star Hilary Swank was there?!” It wasn’t until five days later, Wed. p.m./Thurs. a.m., that the major U.S. networks picked up on what I told you, including Thursday’s “Today” program. I’ve told you Kadyrov is one of the truly awful people on the planet for years. On Wednesday, Human Rights Watch (also after your editor) condemned the appearance of Swank and fellow actor Jean Claude Van Damme, saying in a statement:

“Ramzan Kadyrov is linked to a grim record of abuse. When stars get paid to turn up to party with (Kadyrov), it trivializes the suffering of countless victims of human rights abuses.”

Swank apologized on Wednesday night, issuing a statement saying:

“I deeply regret attending this event. If I had a full understanding of what this event was apparently intended to be, I would have never gone.”

What a freakin’ idiot! Yoh, Hilary. Read a damn newspaper now and then, would ya? You would have known this guy is a son of Satan.

China: October 10, 1911, marked the start of the uprising against the Qing dynasty, led by Dr. Sun Yat-sen, and a revolution that ended 2,000 years of imperial Chinese rule, so both Taiwanese president Ma and Chinese President Hu marked the anniversary; with Ma urging China’s government to pursue democracy and respect his island’s self-governance, while Hu made an appeal in Beijing for both sides to move beyond the history that divides them (Taiwan and China split in 1949 amid a civil war) and work towards reunification. Most Taiwanese are wary of such calls, especially when they are being targeted by at least 1,000 missiles these days.

The problem is Taiwan’s presidential election in January. President Ma has been responsible for great strides in Taiwan-Chinese relations, primarily on the economic front, but some on Taiwan believe he is going too far so as the campaign heats up, he is seeking to reassure his people he can still be tough, but the rhetoric could backfire.

For its part, for years now, Beijing has been awaiting the result of the election. If Ma wins another term, relations should continue to improve. Should the opponent win, however, all hell could break loose.

Separately, I posted a Chinese state editorial on my “Hot Spots” link concerning the potential for military conflict in the South China Sea over energy and mineral rights, but this week China and Vietnam, the two most likely to go to war in this matter (secondarily the Philippines), announced agreement on a series of steps designed to reduce tensions. Among other things a hot line was established between the two.

Thailand: The country floods during monsoon season all the time, except what is going on today is the worst flooding in decades as the megalopolis of Bangkok itself is now threatened for the first time in recent memory. As I go to post, suburbs are being inundated and it’s a guess as to whether the floodgates will operate properly. The Flood Relief Center didn’t help matters when it erroneously reported on Thursday that the water had broken through, so the government called for an urgent evacuation, only to learn the gates had held. Over 280 have been killed thus far and as I mentioned the other day, some key crops, such as rice, have been severely impacted.

Burma: The president granted amnesty to more than 6,300 prisoners in what is a highly significant step in a series of reforms undertaken by the newly elected government (you’ll recall there were cries of ‘foul’ in this one). It’s not known how many of the nation’s 2,000 political prisoners would be included in the release.

France: Martine Aubry and Francois Hollande are squaring off on Sunday in the second round of Socialist Party voting to determine the challenger to President Sarkozy in next spring’s election. Hollande won the first round 39-30. The Socialists last won with Francois Mitterand in 1988.

Britain: There is a bizarre story here, as there always seem to be when it comes to British politics, but Defense Secretary Liam Fox just resigned under fire for allowing a friend of his, Adam Werrity, access to the Ministry of Defense 14 times in 16 months. Werrity had been handing out two different business cards bearing the House of Commons crest, in both cases claiming a connection to Fox as an employee or adviser when both claims were false. The main concern is over an intelligence breach. Werrity was best man at Fox’s wedding. Prime Minister Cameron demanded a report on Monday but Fox saved the prime minister further embarrassment. The investigation continues.

Mexico: So many people are being killed here in the drug war, I can’t keep up. 30 here, 35 bodies there…

Central America: …but a U.N. study says the highest murder rates are in Honduras and El Salvador. Honduras had 6,200 killings out of a population of 7.7 million (roughly the population of New York City, which had about 500 homicides by comparison…and peaked in the crack years at 2,100). El Salvador, with a population of 6.1 million had 4,000 homicides.

Honduras’ homicide rate of 82 per 100,000 people compares to the United States’ 5 per 100,000. So I just crossed Honduras off my bucket list.

Central African Republic: Friday night I watched NBC Nightly News and anchor Brian Williams had one of his made up leads, “Later…the story of Michelle Obama’s dress that has the world buzzing,” or something to that effect. So as is his wont, Williams totally lies that the world cares about a freakin’ dress the First Lady wore at a State Dinner for South Korea’s leader (which I’m glad was held, in all sincerity…South Korea being a great and important ally).

Anyway, afterwards I’m skimming through some headlines before I begin to proof this column (which takes all Friday night, by the way) and I see this headline from the AP:

“Obama sending troops to aid Africa anti-insurgency”

Wha?! On Friday, Obama, with little consultation from Congress, it would seem, beforehand, sent the first of eventually 100 U.S. troops to Uganda, with others to go to the Central African Republic and the Democratic Republic of the Congo. They will act as fully combat ready advisers in the long-running battle against the Lord’s Resistance Army, the notorious rebel group headed by Joseph Kony. I mean these guys are some of the worst actors in the history of the world so I have no problem that Obama has taken this step.

It’s just that this is a big story! The U.S. seldom acts in this region in this fashion, especially since our history in Somalia. [I’m not counting the basing of troops in places like Djibouti where the mission is to hunt down al-Qaeda.]

So earth to Brian Williams. Do a real news program, will ya? Save Michelle’s dress for “Extra!”

Otherwise…Go U.S.A. Kill Kony!

New Zealand: Potential environmental disaster here as a container ship ran aground 100 miles southeast of Auckland. The ship is carrying 1,700 metric tons of fuel oil and potentially dangerous chemicals. The crew had to abandon ship due to bad weather and massive waves. A significant amount of oil has leaked as crews now try to siphon it out. Pristine beaches in the country are now being fouled. The poor residents. They are trying to clean it up themselves while the government urges them to leave it to professionals.

Random Musings

--I watched the Bloomberg/Washington Post debate on Tuesday and, yes, former Gov. Mitt Romney was impressive. Not real likable, not warm and fuzzy, but seemingly highly competent. Herman Cain also seemed more than competent, which is all he needs to do the next few weeks until Iowa and New Hampshire to lock up third place or better finishes that would enable him to move on.   As everyone knows by now, Cain took the lead among likely Republican primary voters with 27% to Romney’s 23%, according to the latest NBC News/Wall Street Journal survey. Just six weeks ago, Cain had only 5%, while Romney registered the exact 23% in both. As for Rick Perry, he plummeted from 38% in the NBC/WSJ survey six weeks ago to 16% today. [Ron Paul was fourth at 11%.]

So is Cain real? Here’s my take. I like the guy, but like everyone else believe it is still early and Cain could stumble as others have, whereas Romney’s performance has been consistent from day one and he shows few signs of being the kind that would make a major mistake after so many years of practice.

As for Cain’s signature “9-9-9” tax overhaul plan, hey, it is indeed bold! Good! Anyone happy with our current tax system is an outright fool.

The thing is the experts and supporters of the other Republican candidates are shooting holes in 9-9-9, which would tax sales transactions at 9 percent, and the same rate for individuals and business, eliminating virtually all loopholes save for charitable deductions. It would also eliminate the standard deduction, personal exemption or earned-income tax credit, meaning 9-9-9 is a big tax hike for the working poor.

Defenders say the plan encourages production, not consumption; risk-taking. It’s also simple, transparent, efficient, fair and revenue-neutral, as his chief economic adviser put it to Bloomberg News the other day.

Editorial / Washington Post

“Mr. Cain’s plan is problematic, but not for the reasons his fellow presidential contenders claim. Rather than putting the country on a sustainable fiscal path, it risks not producing enough revenue to fund the government’s needs. It would turn the current progressivity of the tax code upside-down, giving a windfall to the wealthy and hiking the tax burden for the least well-off.

“Mr. Cain would junk the existing, Byzantine structure of rates and deductions in the individual income tax code. He would end the estate tax, the payroll tax to fund Social Security and Medicare, and the capital gains tax. Instead, individuals would pay a flat tax rate of 9 percent; the only deduction that would remain would be for charitable giving. Businesses would pay corporate taxes at the same 9 percent, instead of the current 35 percent. And there would be a new national sales tax set at…9 percent….

“Mr. Cain’s plan would (generate revenue) on the backs of the least well-off – and to the benefit of the wealthiest taxpayers. The 47 percent of households that do not pay federal income tax because their earnings are too low would be subject to a new 9 percent tax on their income – plus the impact of the 9 percent sales tax, with no exceptions for spending on basic needs such as food, clothing and shelter. Getting rid of the payroll tax won’t help them because Mr. Cain would also eliminate the earned-income tax credit and other benefits targeted at lower-income taxpayers.”

The thing is, what I like is that Cain wants to totally blow the current system up and start over. Great! So maybe it’s not 9-9-9, maybe it’s 15-15-5 (sales tax). If I were Herman Cain, I’d “pivot,” a word he likes to employ, when the attacks come and say, ‘Look, as president I am blowing up the tax code…period. And it’s going to have three, simple, easy to understand components. My people tell me 9-9-9 is revenue neutral, fair and transparent. But once elected, I’ll immediately set to work with Congress and maybe it’s 15-15-5, or 20-20-3 with a minimum level before you are taxed in the first place when it comes to ordinary income. But we will have a system that eliminates virtually all loopholes, period! If you don’t want this, vote for Mitt Romney who will continue with the existing mess.”

Now that’s just my advice. I’m not saying that if New Jersey had a primary today, I’d vote for Herman Cain. I simply respect he’s the only one really willing to say ‘the current system has to be junked!’ and would do it.

What’s clear is that there is a growing segment of the Republican Party that likes Cain’s plainspoken platform and manner. I also look at the guy and think, this is the man who could be a realistic third party candidate.

And let’s face it. How amazing is it that this Republican black man can get the legitimate attention and support he is garnering? I understand the following will touch a nerve with some of you, but it was just about two months ago that many of my ilk were saying, if not out loud, that there will never be another black president in America in our lifetimes after the mess we’re in. But then along comes Herman Cain and there is zero discussion among Republicans, that I’ve heard, about his color. The discussion is simply on his ideas. That’s great; and frankly cause to raise a glass to all of us.

But this brings us back to Romney, who this week received a kick-ass endorsement from New Jersey Gov. Christ Christie, as if the race was over, even though Romney hasn’t polled above the low- to mid-20s among Republican primary voters as yet in any nationwide survey. I complained last week that with Florida’s decision to move their primary to Jan. 31, and Iowa, New Hampshire, South Carolina and Nevada forced to then accelerate their own timetables, Republicans may have their nominee by February. And this is good? No, it isn’t.

Daniel Henninger / Wall Street Journal

“Mitt Romney has undoubted gifts. He could be president. But in the current Obama morass, so could 100 other people. What voters, including Republican voters, want for the United States now is the best president possible. Mr. Romney isn’t there yet. Only more competition or criticism will get him there.”

But a Romney-Christie ticket could be awful strong, no doubt.

John Podhoretz / New York Post

“To say that Mitt Romney dominated last night’s Republican presidential debate…wouldn’t quite do his performance justice. By the end of the evening, he seemed to be the only even remotely plausible presidential candidate on the stage.

“In part that was due to the failure of the seven other candidates to rise to the occasion.

“Rick Perry came into last night on life support, having fallen from the lead to third place in polls behind the gadfly Herman Cain. Midway through a lifeless and passionless performance, it became clear that before Perry stepped out on the stage he had signed a ‘Do Not Resuscitate’ order for his campaign and then began to sink gently into the national political twilight.

“It wasn’t a towering disaster for him the way his performance in the Fox debate three weeks ago was. He was trying hard in that contest, and the pain then came from how badly his efforts had failed. Last night Perry wasn’t even trying, so it just wasn’t as difficult to watch.

“Even his effort to go after Romney on the former Massachusetts governor’s most vulnerable issue, health care, was hesitant and lifeless. That’s better than spluttering and incoherent, as it turns out, but only when it comes to levels of debate-viewer embarrassment, not the plausibility of his candidacy.

“And Romney, as is his wont in these situations, simply spewed forth blizzards of words to fog the minds of listeners about his Massachusetts health-care plan and its similarity to the hated ObamaCare. It’s dazzling to watch, though substantively it’s rather shocking just how disingenuous Romney is on this key matter of his own policy record and what it means.

“If authentic and fidelity to ideological principles were truly the benchmarks for judging a debate performance, Romney would be mired at 4 percent in the polls. But they’re not.”

--A Quinnipiac poll of New Jersey voters shows that after Gov. Christie decided not to run for the presidency, he garnered a 58% approval rating, up from 47% in its last survey in August. In a Monmouth University/NJ Press Media Poll, Christie received a 55% approval rating, the highest for this survey since he became governor in 2009.

Like I keep saying…focus on getting re-elected and the rest will take care of itself, Governor… that is assuming he isn’t Romney’s running mate.

--Barack Obama raised $70 million in the third quarter despite all his problems, or more than double the combined total of the two biggest Republicans on this front, Mitt Romney and Rick Perry, who took in about $30 million. [Obama raised $86 million in the second quarter.]

--Charles Krauthammer / Washington Post

“After three years, Obama’s self-proclaimed transformative social policies have yielded a desperately weak economy. What to do? Take the low road: Plutocrats are bleeding the country, and I shall rescue you from them.

“Problem is, this kind of populist demagoguery is more than intellectually dishonest. It’s dangerous. Obama is opening a Pandora’s box. Popular resentment, easily stoked, is less easily controlled, especially when the basest of instincts are granted legitimacy by the nation’s leader.

“Exhibit A: On Tuesday, the Democratic-controlled Senate passed punitive legislation over China’s currency. If not stopped by House Speaker John Boehner, it might have led to a trade war – a 21st-century Smoot-Hawley. Obama knows this. He has shown no appetite for a reckless tariff war. But he set the tone. Once you start hunting for villains, they can be found anywhere, particularly if they are conveniently foreign.”

--Noemie Emery / The Weekly Standard

“Good politicians are in sync with their times, understand them, and deal with their challenges. But Obama is at odds, and often at war, with his own. In an age when debt is a problem, he is a big spender; when government has to cut back, he wants to expand both its expense and its reach. Nothing that happens appears to deter him, not the massive pushback from the American people in the 2009 and 2010 elections; not the crisis in Europe, kicked off by the collapse of Greece’s finances in April 2010, which caused an austerity panic all over Europe, and should have driven home the most cogent of lessons: that exactly as he was trying to turn his country into a social democracy like those of old Europe, which the American left had long admired, the European social democracies had been forced to admit that their model could not be sustained.”

--Michael Goodwin / New York Post

“The reports are not good, disturbing even. I have heard basically the same story four times in the last 10 days, and the people doing the talking are in New York and Washington and are spread across the political spectrum.

“The gist is this: President Obama has become a lone wolf, a stranger to his own government. He talks mostly, and sometimes only, to friend and adviser Valerie Jarrett and to David Axelrod, his political strategist.

“Everybody else, including members of his Cabinet, have little face time with him except for brief meetings that serve as photo ops. Secretary of State Hillary Rodham Clinton and Treasury Secretary Tim Geithner both have complained, according to people who have talked to them, that they are shut out of important decisions.

“The president’s workdays are said to end early, often at 4 p.m. He usually has dinner in the family residence with his wife and daughters, then retreats to a private office. One person said he takes a stack of briefing books. Others aren’t sure what he does.”

--Scott Wilson / Washington Post

“Beyond the economy, the wars and the polls, President Obama has a problem: people.

“This president endures with little joy the small talk and back-slapping of retail politics, rarely spends more than a few minutes on a rope line, refuses to coddle even his biggest donors. His relationship with Democrats on Capitol Hill is frosty, to be generous. Personal lobbying on behalf of legislation? He prefers to leave that to Vice President Biden, an old-school political charmer.

“Obama’s circle of close advisers is as small as the cluster of personal friends that predates his presidency. There is no entourage, no Friends of Barack to explain or defend a politician who has confounded many supporters with his cool personality and penchant for compromise.

“Obama is, in short, a political loner who prefers policy over the people who make politics in this country work.”

--George Will / Washington Post…on “Occupy Wall Street.”

“OWS’s defenders correctly say it represents progressivism’s spirit and intellect. Because it embraces spontaneity and deplores elitism, it eschews deliberation and leadership. Hence its agenda, beyond eliminating one of the seven deadly sins (avarice), is opaque. Its meta-theory is, however, clear: Washington is grotesquely corrupt and insufficiently powerful.

“Unfortunately for OWS, big government’s scandal du jour, the Obama administration’s Solyndra episode of crony capitalism, does not validate progressivism’s indignation; it refutes progressivism’s aspiration, which is for more minute government supervision of society. Solyndra got to the government trough with the help of a former bundler of Obama campaign contributions who was an Energy Department bureaucrat helping to dispense taxpayers’ money to politically favored companies. His wife’s law firm represented Solyndra. But, then, government of the sort progressives demand – supposed ‘experts,’ wiser than the market, allocating wealth and opportunity by supposedly disinterested decisions – is not just susceptible to corruption, it is corruption. It is political favoritism with a clean (even green) conscience.

“Demands posted in OWS’s name include a ‘guaranteed living wage income regardless of employment’; a $20-an-hour minimum wage (above the $16 entry wage the United Auto Workers just negotiated with GM); ending ‘the fossil fuel economy’; ‘open borders’ so ‘anyone can travel anywhere to work and live’; $1 trillion for infrastructure; $1 trillion for ‘ecological restoration’ (e.g., re-establishing ‘the natural flow of river systems’); ‘free college education.’

“And forgiveness of ‘all debt on the entire planet period.’ Progressivism’s battle cry is: ‘Mulligan!’ It demands the ultimate entitlement – emancipation from the ruinous results of all prior claims of entitlement.”

--Herman Cain / New York Post op-ed

“Visiting New York this week, I found the organized street protests against Wall Street were the talk of the town. But I’m sorry – they lost me at hello.

“Their rants to the media and those unfortunate enough to cross their paths have been all over the map – from tirades over big business, to 9/11 conspiracy theories, to admitting not even knowing why they’re there – but a common theme is that they’ve set their sights on rich people.

“It’s ironic that protesters who have uniformly attacked the rich and corporate CEOs happen to sport iPods, iPhones and other innovative technological tools that entrepreneurs have worked so hard to invent, build and distribute to consumers….

“I have a hard time imagining what these protesters think will come of this – that Wall Street execs will come running out of their offices to write them a check?

“Rather than protest against Wall Street, those camped out in the streets should examine their own failures and take a hard look in the mirror.

“When I grew up in the South during the era of segregation, my family had little money. But my father Luther and mother Lenora were rich in ideas, faith and love. They were hard workers and family oriented, and instilled those same values in their children….

“Though their circumstances were tough, they never played the victim card.  They never made excuses.

“From what I’ve seen of these protesters…it seems they would rather have a handout than work….

“So to those asking for a handout on Wall Street, my message is this: ‘If you’re not rich, don’t blame the rich – get out there and work for it. You have to earn it.”

--Umar Farouk Abdulmutallab, the son of a Nigerian banker who loaded his shorts with explosives and tried to bring down an airliner on Christmas Day, 2009, pleaded guilty in Detroit this week on the second day of his trial, not having given any prior notice he was about to confess. Abdulmutallab then said in court:

“I am guilty of this count in U.S. law but not in the Koran. The United States should be warned that if they continue to persist and promote the blasphemy of Mohammed and the prophets…the United States should await a great calamity that will befall them through the hands of the Mujahidin soon.”

Prosecutors were ready to show Abdulmutallab had been in contact with Anwar al-Awlaki, the radical cleric recently having been blown into a million pieces (it is hoped here) by a U.S. drone attack in Yemen. Abdulmutallab will now spend the rest of his days behind bars. He needs to be “accidentally” placed in an exercise yard with some Blood gang members and spare us taxpayers a few bucks.

--Speaking of the death penalty, according to a Gallup Poll, 35% of Americans now oppose it, the highest level in 40 years. 

--Health beat…all kinds of news this week.

According to a study published in the Journal of the American Medical Association, large daily doses of Vitamin E, long thought to be a wonder drug when it comes to protecting against cancer and heart disease, may actually increase the risk for prostate cancer among middle-aged men, like 17 percent more for those taking large doses typically sold in drug and grocery stores.

Of course this study comes a week after an influential federal panel concluded that the risks of routine PSA screening for prostate cancer outweighed the benefits.

Meanwhile, a study published in the Archives of Internal Medicine concludes that multivitamins and other dietary supplements provide little benefit for most people and could lead to a slightly higher risk of death among older women. An exception was calcium supplements.

Bottom line, a normal diet of beer, wine and….oops, that’s mine. Let me start over.

Bottom line, a normal diet supplies all the vitamins and minerals you need.  Exercise and don’t smoke!

A new study in the Journal of Investigative Dermatology finds that the main type of ultraviolet rays used in tanning beds could penetrate to a deep layer of skin that is most vulnerable to the cancer-causing changes caused by the rays. In a nutshell, the U.S. Food and Drug Administration is considering banning the use of tanning beds among children under 18. England and Wales have already done the same.

Finally, a study of more than 33,000 Swedish women found that those who ate the most chocolate had the lowest chance of stroke. A single chocolate bar a week could reduce the risk by 20 percent.  

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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 $1683…highest in four weeks after the crash
Oil, $86.80…ditto

Returns for the week 10/10-10/14

Dow Jones +4.9% [11644]
S&P 500 +6.0% [1224]
S&P MidCap +7.1%
Russell 2000 +8.6%
Nasdaq +7.6% [2667]

Returns for the period 1/1/11-10/14/11

Dow Jones +0.6%
S&P 500 -2.6%
S&P MidCap -5.7%
Russell 2000 -9.1%
Nasdaq +0.6%

Bulls 34.4 unch.
Bears 46.3 [Source: Chartcraft / Investors Intelligence…as I pointed out last time, bear reading is highest since March 2009…the bottom; just as you’d expect a contrarian indicator to work. Also, reminder… these numbers go out first thing Wednesday morning so it’s the sentiment among newsletter writers as of Tuesday.]

Have a great week. I appreciate your support.

Brian Trumbore